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BUY: DOREL INDUSTRIES INC (DII.B)

NOVEMBER 23, 2019, BUY 40,000 SHARES OF DOREL INDUSTRIES (DII.B) @ CAD$5.35/shr

Dorel is a Montreal-based Furniture, Bike and Children’s toy producer. Established in the 60s, the firm is controlled by the founding family who maintain a 15% economic interest in the firm, exercising control through multiple-voting shares. The current market value for the business is CAD$181 million. Sales for 2019 are running at about CAD$3.5 billion and debt is approximately $CAD$650 million. Dorel’s business is fairly consistent and simple enough to understand. From a global-foot-print of facilities, they manufacture ready-to-assemble furniture (the likes of which you may find at Walmart, Staples, Home Depot, etc.), Car seats, and bicycles. These products are sold at large-scale mass-merchants, specialty retailers, local distributors and increasingly, on-line. Sales have been very steady over the past five years, mostly hovering around USD$2.6 billion.

However, there are pressures on the business. Obviously, internet commerce is taking a larger share of consumer spend and as such sales through “Brick and Mortar” mass merchant and specialty shops, 60% of revenues, are generally declining. As well, Dorel suffers when a chain goes bankrupt (Toys”R”Us cost them USD$20 million in losses). Dorel has done a decent job of increasing sales through the internet channel, however, only their Furniture business (Dorel Home) sells the majority of their product through this channel. Another major headwind is the US-Government’s various tariffs they have slapped on imports from China and other countries. Because Dorel is a global player and 60% of their sales are in the USA, they and their customers have been impacted by the uncertainty caused by the tariff-battle. Dorel has recently had to increase prices to their retail-customers. While the price increases have stuck, some customers opted for lower-cost items or differing items, some of which Dorel did not have handy in the warehouse. As such, sales, margins, working-capital have all been variously impacted.

Dorel is still generating profits, albeit at a lower level. The first nine months of the year (2019) brought in USD$14 million in adjusted profits. Sales are holding up and they believe they will have a decent Q4. They have spent USD$21 million on severance costs this year as they “right-size” the company for the new environment which may see more sales via e-commerce.

I purchased Dorel because I like the value. I have followed the company for over 4 years and have never pulled the trigger in a meaningful way. After management decided to drop their dividend, a lot of investors through in the towel. The share price, at $5.00 is off 80% from 2016. Where the share price ends up from here, I am not 100% sure, however, I feel pretty good that the business is worth more than $5.40 per share.

ADD: LINAMAR CORPORATION (TSX:LNR)

NOVEMBER 9, 2018, BUY 2000 SHARES OF LNR @ CAD$49.85

Today I bought 2000 shares of LNR on the TSX. Earnings came out yesterday and as expected, there was margin compression in the important auto parts business (over 50% of the overall business). However, revenues conitnue to increase and sales prospects continue to be strong. The Transportation Division (ie, auto parts business) tends to have lower margins on new programs they are developing with their various clients (GM, Ford, VW, etc.) and higher margins on established programs. The division aims for 8.5% on revenues, however, due to business mix this quarter and due to slower sales in Europe, margins slipped into the 7% range this past quarter. Still, revenues will continue to ramp next year and likely into the 2022 period on new programs already sold. LNR’s Skyjack business and new MacDon business performed well and are businesses, which if valued on a stand alone basis, are worth $40 per share.

I now have about $200,000 invested in LNR or about 22.5% of the portfolio. Despite the poor performance of the share price, LNR will provide cash earnings of $23,000 – this is $23,000 which the company will earn after capital ivestments. It’s a good cash flow return on the current share price. Management is dialed in and I believe the market will one day see the value in this thing, and we’ll see some positive share price movement.

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November 15, 2017 – UPDATE

Linamar (TSX:LNR) reported another solid quarter…earnings of CAD$1.62/shr. on strong sales growth of 6% (sales were CAD$1.55 billion, about CAD$23.50/shr.). LNR will likely earn CAD$8.00/shr. during 2017, giving them a current Price-to-earnings ratio of 9. LNR remains a very well-run and well-priced business. LNR consists of their large and growing Powertrain/Driveline autoparts business (75% of profits) and their profitable and well-regarded Industrial unit which manufactures the popular SkyJack industrial lifts (25% of profits).

Like all auto suppliers and auto manufacturers, Linamar’s share price has suffered from concerns about the rise of electric vehicles and also concerns over the North American Free Trade Agreement. Notably, electric cars will not need the drive train and motor assemblies which Linamar manufactures. Therefore, the bear case goes that LNR’s growth profile will disappear as we move into the next decade. Management at Linamar, led by the daughtar of the founder, feels there is ample growth in the market over the next few years. Auto manufacturers are looking to reduce their OEM foot-print and are heavy to assign more work to Linamar, Magna and other auto parts manufacturers. As well, LNR feels well-positioned to transition to other areas of the parts supply-chain, and, given their track-record, I am more than happy to invest along with this team. In general, it is good to own growing businesses with proven, long-term managers in place. I’ll continue to keep invested in LNR and may buy more if shares continue to languish. LNR is currently about 3% of the portfolio and is part of the Auto Sector in which we have about 10-12% invested currently.

http://www.linamar.com/

ADD: AIG WARRANTS (AIG.WT)

NOVEMBER 9, 2018, (TRYING TO) BUY 3000 WARRANTS OF AIG @ USD$9.10

Today I (TRIED TO) purchase 3000 WARRANTS of AIG INSURANCE. AIG is one of the world’s largest insurers. Over the past few years they have un-reserved against their policies and have had to correct this, multiple times, over the past few years. Investors hold their breath every quarter for further adverse developments on their policies. Q3 earnings were somewhat disappointing, however, there were no reserve surprises and the business overall continues to throw off tons of cash. My warrants allow me to buy AIG common shares at $43 per share at anytime over the next 26 months. The current share price is $44/shr. So, should the AIG common shares trade at $44 in 26 months, these warrants won’t have a lot of value. AIG book value is currently around $55/shr and I believe we will see $70/sh.

NOTE: THE AVAILABLE FLOAT IS SMALL AND AS SUCH, IT TAKES SOME TIME TO PURCHASE THESE WARRANTS.  I HAVE A BID IN JUST OVER $9.00.

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JANUARY 13, 2018 – BUY, 2000 Warrants @ USD $19.65

I’ll admit, this is not the first time I have owned a little piece of AIG.  I wasn’t a holder when it went bust in 2008, however, I’ve owned it a few times here and there over the years.  I like insurance – I’ve always liked insurance.  It’s a relatively simple business: you take annual premiums and pay out when your customer suffers a loss; before you pay out, if you ever have to pay out, you invest the premiums.  During periods of low interest rates, the return on the invested premiums suffers.  Insurers usually are investing in bonds, hopefully matching the terms of their potential liabilities.  AIG’s $300 billion ($330 per share) in assets earn a few percentage points a year.  At the height of the low interest rate environment in 2015, some folks were discussing the inevitability of mass bankruptcies among insurers and pension funds as returns on investable assets continued to plummet.

In addition to the pain caused by a low interest rate environment, insurers who price their policies too low get creamed.  Usually the pain on these policies isn’t felt for a year or two, however, if you’ve been selling insurance at premiums which are far below expected losses, you will need to up your reserves against losses, directly hitting your bottom line.  During 2008, AIG was done in by selling insurance against collateralized debt obligations (bad mortgages) for what turned out to be far less than what they needed to be getting.

Since coming out of bankruptcy, AIG has done a good job or righting the ship.  The company now sports a book value of $75-$80/per share or around $70 billion.  In addition, earnings have approached $10 billion per year.  In addition, AIG has purchased 900 million of their own shares, returning nearly $50 billion to shareholders.

Recently, the share price has been taken down to about 80% of book value (the simple value of all assets less all debts).   This has been caused by additional reserves against policies written over the past two years.  There is a valid concern that insurance business has been written at rates too low in their Property and Casualty business.  However, I would also point out that there were major hurricanes in the US in Q3 2017, and many many insurers suffered losses.  Investors, however, have grown tired by what has been a regular drumb beat of increased reserves over the past few years.

During management’s talk with shareholders in announcing the Q3 2017 numbers, the CEO went to great lengths to assure shareholders that careful attention is being paid to writing profitable business.  We will have to see how they do.

Why am I buying?  I’m a value guy and I see value.  I have a strong conviction that interest rates are on the way up.  I believe the US is gradually shifting from a supply-focused economy to a demand-focused economy and as this continues to roll-out, we should see increasing interest rates.  How much?  No clue.  But if we see 10 year rates of 4%, up from Q3 2017’s 2.4%, AIG’s $300 billion portfolio is worth an extra $4.5 billion per year ($5 per share a year) and we could easily see earnings of $12 billion ($13 per share).  More or less.

In addition, AIG has these warrants.  I am less excited buying AIG’s common shares; I do like the warrants.  The Warrants allow the holder to purchase 1 share of AIG at $44.10 per share anytime before January 2021.  Therefore, since AIG’s current share price is $61/share, the warrants are in the money and are worth $17 each ($61-$44).  I bought them for about $19.75.  I am simply calculating that AIG’s portfolio will be worth much more in a few years than it is now AND that they will not continue to suffer under-reserving issues.

November 9, 2018

ADD – PWF.TO – POWER FINANCIAL CORPORATION ($28.75 per share)

I am buying more of PWF today.  Their largest holding, Great-West Life, came out with earning yesterday and the general theme is that we’ll see $4.00 per share in earnings before seeing $2.75 again.  It’s un-loved, and boring, but yields 5% and I trust management.  I’ll add another 1500 shares here so we have 2000 shares now.

Decision

BUY
Power Financial (TSX:PWF), $32.33 CDN

I am buying more shares of Power Financial this week. I’ve owned PWF and it’s parent, Power Corp (TSX:POW) several times over the years and it’s never really disappointed. The folks that control and operate PWF are skilled operators with a conservative leaning, and a long-term approach to growing net equity. PWF owns controlling stakes in Great-West Financial, Investors Group, McKenzie Financial and a large stake in a diversified conglomerate in Europe, which trickles down to PWF in having economic interests of about 1-3% stakes in names like Addidas, Lafarge, SGS and Pernod Ricard. The math is pretty simple on this one.

At the price I am buying PWF right now, I am technically paying $23.5 billion for the business. For that $23.5 billion, you get 68% of Great-West Life (worth $23 billion, publicly-listed shares), 60% of IGM (Investors Gorup/McKenzie Financial/Putnum, etc) worth $5.5 billion, 25% of Pargesa Holdings (the European conglomerate) worth about $2 billion. That adds up to about $30.5 billion. Deduct from this PWF’s obligations of $700 million in debt and various obligations, $2.5 billion in preferred shares which are ahead of me, plus $800 million in cash, and I am buying net assets of about $28 billion for $23.5 billion (ie, I’m paying $32.33 per share for net assets of about $39.25. Of course, it’s not like PWF is going to sell these assets and return me cash of $39.25 so this is all theoretical, as well, such sales would leave PWF with huge capital gain tax bills wiping out the value I’m buying.

I’m buying PWF because the shares are generally beaten up….despite the value, PWF’s exceptional job of growing equity over the years, Great-West’s very strong insurance presence in Canada and the US and IGM’s strong wealth management franchise, PWF’s shares are laggards. The company is boring and the businesses are boring. In fact, I’m falling a sleep as I write this. As well, the IGM business is under threat because now people can simply buy ETFs to buy the market and use robots to make decisions (PWF also owns one of the leading purveyors of robo-investing, Wealth Simple) so maybe that $5.5 billion holding is at risk. Yeah, maybe. I guess we’ll see. In the meantime, I’ll take the value, take the dividend, and wait for interest rates to step up a bit….I think all those insurance assets will start looking a little better as rates normalize.

I’m buying shares in PWF which approximate 2% of the portfolio.

October 10, 2018

Added 8000 shares in THO at CAD$3.70 per share.  Like all gold miners, THO has been clobbered by rising interest rates, the rising US dollar and reduced profits.  In addition, THO has suffered the shutdown of one of their major mines in Guatamala.  The company is debt free and has other properties which are performing well.  I like the value here and I believe the US dollar may not be on an upward trajectory for ever….

October 11, 2018

Added to the holding in GLRE at USD $12.80.  GLRE trades for 75% of book value and they have large holdings in General Motors (a favourite of mine) and short interests in Tesla (another favourite of mine :)).

APRIL 25, 2018

Greenlight Capital Re, Ltd. (NASDAQ:GLRE) is a Cayman Islands based re-insurer. They take risk off the hands of insurance companies who would like to reduce their exposure to certain types of insurance policies. Like all insurance companies, GLRE attempts to keep their insurance claim expenses to under 100% of their yearly policy fee income, and earn a decent return on their “float” – the float being the large, required, cash and investment pool they maintain on their balance sheet in order to pay off future claims.

As an added bonus, GLRE is run by a legendary value investor, David Einhorn. David has had a brutal run over the last few years and his performance has badly trailed the market. I know the feeling. However, I also have the strong belief that what has worked for years and years and years (value investing) will indeed work again. Mr. Einhorn has the GLRE portfolio invested in his top holdings such as General Motors, Apple and Twitter, among other holdings. I am buying GLRE at 70% of book value and this purchase comprises 2% of the portfolio.

OCTOBER 2018 – BUY – BEAZER HOMES (NYSE:BZH)

There is no mistaking it….I like the home builders in the States.  Earnings will increase over the next few years, values at Beazer Homes and Hovnanian are still hovering below book value and we will see some good  earnings growth over the next 24 months.  I am buying BZH at 75% of my estimate of Book Value and 50% off recent levels.  Average price is just over USD $10.00 per share.

BUY: CEMEX S.A.B. ADS (NYSE:CX)

JUNE 13, 2018, BUY 1000 SHARES OF CX @ USD$6.13 (less than 1% of the portfolio)

Cemex S.A.B. (NYSE:CX) is a leading global producer of cement products. Based in Mexico, revenues are global, derived from the U.S. (30%), Northern Europe (23%), the Mediterranean (10%) and South America and the Caribbean, 12%.

During the boom times of 2006-2007, CX’s share price was around $30/shr, and in 2011 debt levels peaked at over USD$16 billion, while net equity went as low as USD$8 billion in 2015.  I’ve bought 1000 shares of Cemex at about USD$6.00/shr, which is just slightly higher than book value and less than 10x earnings. In short, I believe CX is a solid bargain.  CX is punished for their Mexican-heritage. Not a day goes by without the leader of the largest global economy threatening economic penalties on Mexican firms.  Given that CX derives 30% of its sales from the US, I acknowledge that the threat is real. However, cement products are mainly produced and sold within the market it serves, and, given the high barriers to entry (NIMBY-ism makes it real tough to set up quarries) I expect CX’s pricing power to improve. To wit, CX margins have improved in each of the past 4 years and are approaching 23%, still a few percentage points off their pre-recession levels of 26%. Debt continues to get worked off and is expected to be below USD$9 billion by the end of 2018; the company produces over USD$1/shr in free cash flow.

Currently, CX represents 0.5% of the portfolio, however, I may increase it.

June 5, 2018

SELL – 1500 shares of ASNA at USD$3.95/share

Continuing to sell ASNA.  I am selling shares purchased for USD$2.06 earlier in the year.  ASNA remains about 4% of the portfolio.

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Feb 26, 2018

SELL – 8000 shares of ASNA @ USD $2.31/share; 12000 shares remaining or about 3% of the portfolio.

WOW, that was quick.  I am taking a bit of money off the table in order to raise cash for some other ideas.  I like ASNA for the value, it is still incredibly cheap.  The only reason it’s moved up 13% since I bought it is because investors can’t ignore the value.  I am selling only because there are even better bargains so I am taking the gain on 8000 shares and we now have cash equaling about 17% of the portfolio.  More to come.

February 2, 2018

BUY – 20000 shares of ASNA @ USD $2.06/share or about 5% of the portfolio.

Ascena Retail Group owns 4600 stores in the United States and Canada, under banners such as Dress Barn, Ann Taylor, LOFT, Justice and Lane Bryant.  ASNA shares are down 90% over the past few years.  The company incurred about $1.55 billion in debt in purchasing Ann Taylor and LOFT for $2.1 billion in 2015.  Since then, sales growth has slowed to a trickle and some fashion missteps resulted in 5-10% sales declines at Dress Barn and Justice.

During 2017, a challenging year for all bricks and mortar retailers, ASNA earned about $500 million before taxes and interest.  After paying for new store additions/closures, new IT investments, Distribution Centre adjustments and interest, the firm generated about $150 million.  2018 is hard to predict, however, I am expecting similar numbers.  The company has a market cap of $400 million – it is incredibly cheap.  Adding the market value and the debt the owe, this works out to about $300,000 per store, and 95% of their stores are profitable.  They plan to continue to take costs out of the business by merging purchasing and distribution, and to continue to close stores.

The market is concerned about their debt and the threat posed by Amazon.  Both concerns are valid.  I think their debt, at $1.55 billion, net debt of $1.3 billion after deducting the cash they have on their balance sheet, is manageable.  This is a business with $6.5 billion in sales and earnings of around $500 million.  Same store sales are down heavily at Dress Barn (the founding brand, representing 16% of stores), down at Ann’s but stabilizing elsewhere or growing again in the case of Justice (19% of stores).  Revenues will definitely be down, however, I think the market is assigning this firm an unreasonably low value and I’d expect a more reasonable $1 billion valuation over the next 18 months, implying a 150% gain from where we are now.

REDUCE: WTS AMBAC FINANCIAL GROUP INC (NASDAQ:AMBC-W)

JUNE 5, 2018 – SELL 1000 AMBC-W @ USD$9.99 per warrant

I still like AMBAC and the AMBAC Warrants….however, I am taking some money off the table to insure (no pun intended) that I have at least 25% of the portfolio in cash.  I still feel AMBAC is undervalued and I plan on keeping over 5% of the portfolio invested in AMBAC for the foreseeable future.  I am selling warrants purchased in late 2017 at USD$5.90, proving that averaging down is not a bad use of money sometimes.

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Dec 4, 2017 – ADD

I again added to the portfolio’s investment in AMBAC Financial Group Warrants.  These Warrants entitle me to purchase AMBC common shares (NASDAQ:AMBC) at USD$16.67 anytime until April 30th, 2023.  With this purchase of 4,000 warrants, the portfolio now owns 12,000 warrants purchased for an average price of USD$10.26, bringing the total investment to USD$123,120.  Current market value of the warrants is USD$5.90, and after currency conversion, currently represents 9% of the portfolio.  AMBC-W (AMBAC Warrants) is the portfolio’s biggest loss position, with losses running about CAD$100,000 currently.  AMBC and AMBC-W have traded down this year as AMBC has had to increase reserves against the insurance they’ve provided to investors on bonds issued by Peurto Rico.  AMBC book value has taken a hit this year and now sits at about USD$24.50.

There are several other overhangs on the stock, including a long-running lawsuit AMBC has with Bank America, whereby AMBC seeks $1.8 billion in damages, and very confusing financials as AMBC owns Ambac Assurance which is currently in “run-off” (Ambac Assurance does not currently sell new insurance business, rather it simply manages its current book of business) and that business is also split up into a separate, Segregated operation, which is closely monitored by the Commissioner of Insurance in Wisconsin.  AMBC itself consists of about $100 million in cash and securities ($2 per share), another $200 million in loans receivable from Ambac Assurance ($4 per share), another $100 million ($2 per share) in residual equity in other loans provided to Ambac Assurance, 100% ownership in Ambac Assurance, and $1.4 billion in Net Operating Losses which can be used to shelter a corresponding amount in taxable income.  Unfortunately, it is hard to obtain a firm grasp on the value of Ambac Assurance.  I believe it is somewhere around the USD$15 per share plus further Net Operating Losses which add another USD$10 per share.

BUY: SUPERVALU INC COMMON STOCK (NYSE:SVU)

JUNE 5, 2018, BUY 500 SHARES OF SVU @ USD$19.09 (1% of the portfolio)

Today I purchased 500 shares of Supervalu Inc.  Supervalu is a grocery wholesaler, supplying major grocery chains such as IGA.  My investment in SVU continues my interest in the battered retail sector.  I see value in the retail sector since many investors have sold down shares in retail companies due to the real-threat that various on-line retailers, namely Amazon, pose to the status-quo of the retailing industry.  While I believe the threat posed by the on-line retailers is real, I also know that management at many retailers have time to adjust to the threat.  SVU’s business is somewhat protected by immediate attack from on-line retailers.  SVU operates in the wholesale space, with a limited exposure to direct consumer sales.  The business offers very low margins (3% on USD$16 billion in sales), however, the margin is stable and the business generates reliable free cash flow.

I am purchasing SVU at a market capitalization of USD$650 million; the business carries a large debt-load of USD$1.8 billion, however, I expect this to come down about USD$100 million per year from generated free cash flow.  I expect SVU to earn about USD$2.75 per share in 2018, and a bit higher in 2019.  They have very rarely ever lost money in any economic cycle and I feel good at buying in at these levels.  We will see how it goes…the investment is just slightly more than 1% of the portfolio.

BUY: SCORPIO BULKERS INC COM (NASDAQ:SALT)

MAY 25, 2018, BUY  500 SHARES @ USD$7.49/p.shr

Today I purchased 500 shares of Scorpio Bulkers Inc., a large shipping firm specialized in carrying bulk dry goods (iron ore, coal, grains) through international waters.  SALT, like all of their competitors in global shipping has been hammered since 2013 due to over capacity in the shipping industry.  Orders for new large bulk ships made during the last commodity boom in 2008 overshot demand by a large stretch as those ships were delivered and flooded the market in 2012-2017.  Happily, Chinese consumption of dry-bulk commodities has increased further since 2013 and are now again hitting record levels.  In addition, this growth has done a good job of absorbing the excess capacity in the market; this coupled with several years of low-levels of new ship orders has right-sized the market, and, touch-wood, may have tipped it into a tight-market.

I am buying SALT at a market capitalization of about USD$560 million, or 60% of book value.  SALT continues to lose money, however, the deficit ran only USD$25 million in 2017 and a minor upturn in the industry will result in outsized profits for SALT.  The balance sheet is reasonably healthy with debt of $650 million, or about 70% of equity.  I may be wrong…I have committed less than 1% of the portfolio to this investment.

BUY – GEOSPACE TECHNOLOGIES CORPORATION (NASDAQ:GEOS)

JUNE 1, 2018 – BUY 800 SHARES @ USD$11.05/p.shr (1% of portfolio)

Today I bought shares in Geospace Technologies Corporation, a provider of siesmic data to oil and gas companies interested in prospecting for oil, much of it offshore.  It probably comes as no surprise that GEOS trades over 90% off it’s all time highs, reached in 2013.  I am buying GEOS at a market capitalization of USD$150 million; the business has no debt, USD$40 million in cash and earns revenues of USD$70 million.  Unfortunately, GEOS has not made a penny in 5 years, and in fact has racked up losses of over USD$100 million over that time period.  Things are bleak.  However, GEOS has maintained a large market-share in providing siesmic data products – revenues reached their nadir in 2016 (USD$62 million) and reached USD$73 million in 2017.  This level of revenues is still a money losing situation with GEOS as they have not cut their operating expenses enough to reach profits at this depressed level of revenue.  Management is maintaining elevated spending in the hopes that a turnaround in revenues is just around the corner.  I feel pretty good about jumping in at these levels and annual revenues of USD$100 million may not be too far off – at that level the firm is marginally profitable.  I like GEOS at these levels and feel that it is a reasonable value with a good prospect of a jump in market value with any upturn in revenues.  I invested about 1% of the portfolio in this firm.

BUY: DHX MEDIA LTD COMMON AND VARIABLE VOTING SHARES (TSX:DHX)

MAY 18, 2018, BOUGHT 2000 SHARES @ CAD$3.50/SHR

Today I purchased shares in DHX Media Ltd representing less than 1% of the portfolio.  This continues my recent theme of purchasing media businesses whose shares have been whacked recently.   DHX is a large producer of children’s content and owns the Family Channel.  Brands include Teletebies and they are the distributor of Caillou, Inspector Gadget, Degrassi and Peanuts.  They recently sold about half of their stake in Peanuts for several hundred million dollars to Sony Networks.  They retained almost 50% of this important franchise and they hope Sony will be able to use their experience in the Chinese market to introduce Charlie Brown to hundreds of millions of Chinese kids.

Like other media outfits, investors worry that DHX will be made irrelevant by new streaming providers such as Netflix.  I take another view and believe that management at DHX will successfully drive viewers on platforms such at Youtube and more high-value distribution platform.  In general, as the internet has grown and reshaped how people view content, the bottom line is that content has remained king. If you develop good content, you have a good library of old content, and you know how to distribute and build partnerships, you are going to make more money than you did before the internet.

However, given the uncertainty, I have chose to take minor positions in a number of players, spreading the risk, however, still investing with value in mind.

BUY – AMC NETWORKS INC CL A (NASDAQ:AMCX)

MAY 29, 2018

100 SHARES @ USD$57.09 (less than 1% of the portfolio)

I bought some shares of AMC Networks for the value.  This is the company which produces hit shows such as Mad Men and The Walking Dead.  Shares are seriously depressed for a couple of reasons:

1) The Walking Dead, a television show responsible for 20% of AMC’s revenues, is winding down this season and investors worry about a replacement show.

2) In general, investors worry about competition from Netflix against traditional networks deliver over cable/satellite.

AMCX also owns Sundance Channel and WE Network and they continue to produce winning shows – the critics like the new shows and the audience seems to be enjoying them as well.  AMCX continues to be strongly profitable and while I expect some softness caused by the decline of The Walking Dead, I believe the value of the content is not being recognized by the market.  Given the competitive threat from Netflix, we will see ongoing consolidation of content providers such as AMCX – either AMCX is purchased or they will enjoy decent prospects to raise as new streaming entrants sign AMCX as content producers.

Given the uncertainty in the industry, I have chosen to put a little bit into names such as AMCX and other related producers.  There seems to be strong value in the industry, given the uncertainty of the competitive backdrop.

APRIL 25, 2018 – BUY – DUNDEE CORPORATION (TSX:DC.A)

Not for the first time, I am investing in Dundee Corporation. Similar to previous occasions when I have owned this company, the share price is depressed. DC.A is currently valued at about $100 million ($2.00 per share). Several years ago, new management set upon a strategy to become sort of a private equity financier… and management has blown through hundreds of millions of dollars on ill-conceived investments in over 100 portfolio companies. Reading through the annual report and quarterly updates, one wonders why these guys are still collecting a paycheque. Well, the reason is simple, the Goodman’s control the company and the CEO is a Goodman.

Recently, brother Michael has taken back the helm (Michael is also the CEO of Dundee Precious Metals (TSX:DPM)) and from what I understand, he will look to liquidate as many investments as he can. Hopefully, Michael can bring some focus to Dundee, sell the investments, and focus dollars on the core business: metals and real estate. The value of Dundee’s assets are a big question mark. So many investments have been written off and so many are struggling. However, I would also venture that some which were written off due to low oil and gas prices and low metals prices, may yet reward as markets recover. My investment in Dundee is risky, however, there is strong risk-reward, in my opinion. The investment should not exceed 1% of the portfolio.

April 25, 2018

Edgewell Personal Care Company (NYSE:EPC) is one of the largest manufacturer of personal care products. Key brands include Schick, Wilkinson Sword, EDGE, Playtex, Banana Boat and O.B. Revenues run about $2.3 billion (about $44 per share) and earnings are expected to come in at $3.75 per share in 2018. I purchased the shares at about $44/shr representing under 2% of the portfolio. Edgewell, like many others in the Household Products sector, has suffered from rising raw material costs and currency headwinds. Since Edgewell derives a high percentage of its sales from overseas, the rising US Dollar tends to dampen profits. Raw material costs have increased and will likely remain elevated as the US economy continues to chug along. EPC is raising prices and adjusting their product mix to overcome these obstacles.

I see the issues as temporary and stuff we have seen in the past. It typically takes a firm like EPC several quarters to adjust to raw material price inflation and they will raise prices as their competitors also make similar adjustments. There is significant pressure in the grocery aisle and Wal-Mart represents 18% of annual sales. As such, margins are pressured, however, I expect EPC management to make the necessary changes to maintain a 15% margin (up from 13.9% in 2017, and around the 10 year average).

April 25, 2018 – BUY – GT

Goodyear Tire & Rubber likely needs no introduction. Goodyear (NYSE:GT) is one of the world’s largest tire manufacturers, operating 48 manufacturing facilities and marketing key brands Goodyear and Dunlop. 2018 revenues are expected to be $16 billion (USD) and I expect about $3.50 per share in earnings. I purchased the shares for $26/shr and it comprises about 2% of the portfolio.

I have been watching GT for quite a few months now and I was feeling good about it at $31/shr so I feel pretty good grabbing it at $26. Like other large manufacturers operating with mid-range margins (15%), investors have hammered GT shares due to rising raw material costs and currency concerns. The former is due to rising oil prices, and the latter to the generally rising US dollar which reduces GT’s profits when foreign earnings are expressed in US dollars. I think management has done a good job in the face of these pressures and profits are likely going to bounce back in 2018 to 15% margins from 2017’s 13.9%. GT produces about $4/shr in free cash flow which they will use to buy back shares.

Over the past 3 years, GT has re-purchased 10% of their own stock. It is a slow-growth business, however, it is healthy and free-cash flow producing. I think the purchase price is reasonable. However, if oil prices rise to $90/barrel, GT may be hit again from rising material costs, and reduced demand as consumers spend more for gasoline and less on tires.

APRIL 25, 2018

I have purchased shares in Walgreens Boots Alliance (NYSE:WBA), the second largest pharmacy in the U.S.. WBA, like its pharmacy competitors,  has seen their share price fall due to concerns that Amazon will take their market share. That is a valid threat, no doubt about it – it is indeed likely that more consumers will purchase their pharmaceuticals online, and some of this business may go to Amazon. However, I have a lot of confidence in WBA’s management to adjust their business to hold their market share.

WBA is reasonably priced: at $64 per share, I am paying about 10.5x 2018 earnings. This for a business with a huge market-share in a quickly growing industry. Amazon is a powerful store and its growth has reduced the share prices of everyone involved in the retail industry. I am not so sure the share price declines are warranted in every case and I believe there are going to be many retailers who learn to thrive in the new environment. WBA is a 2% holding in the portfolio.

April 25, 2018 – UPDATE

Sherritt International (TSX:S), announced Q1 2018 earnings this week. Earnings were quite good. Despite production issues in Moa Cuba, and in Ambatovy in Madagascar the company generated cash. Moa is truly an outstanding asset and if Nickel prices continue to hold or even increase, the real value in this mine will shine. Ambatovy, a 12% owned mine, is still working through technical issues, however, again, if Nickel and Cobalt prices hold, Sherritt will be generate strong cash flow from this holding. The Partnership which owns Ambatovy (12% owned by Sherritt) owes Sherritt over $1.00 per share; if Ambatovy produces cash, these loans will be repaid, dramatically improving Sherritt’s balance sheet.

On that note, Sherritt’s balance sheet is looking better and better with each passing quarter. I feel pretty good about Nickel prices, so I was not too enthused when Sherritt sold off 28% of Ambatovy during a down-time in the commodity cycle. However, by selling their interest down to 12%, Sherritt dramatically improved the balance sheet and they now have only $600 million in debt, and hold about $200 million in cash. With the loans receivable held on the balance sheet, we can now see a time when Sherritt may be debt free in the near future.

As such, I’ve added another 5000 shares and this holding may increase to something like 5% of the portfolio.

February 13, 2018 – UPDATE

Sherritt International (TSX:S) comprises about 3% of the portfolio and is what I would call a deeply discounted mining firm. If you feel pretty good about global demand for Nickel (stainless steel appliances) and Cobalt (electric car batteries) then this is an interesting one. I bought my shares of Sherritt at CAD$1.34/shr. and it has lately been trading at around CAD$1.20/shr. Sherritt’s share price, has been on a long downward spiral brought about by their very large investment and construction of the Ambatovy Nickel (and Cobalt) Mine in Madagascar. Built for about USD$6 billion (their 40% share of this investment works out to something like CAD$8.00/shr.), much of it borrowed, the mine, which opened 3 years ago, has never reached desired capacity. As well, once it did start mining operations, nickel prices tanked. The only credit I can give management is that they’ve managed to save the company despite this really large noose around their necks.

As it stands today, Sherritt comprises a 12% interest in Ambatovy (worth nothing currently), about CAD$.60/shr. in loans receivable from Ambatovy to Sherritt, 50% of a large and successful Nickel/Cobalt mine in Cuba (Moa Nickel, worth CAD$1/shr., handily) and, Oil and Gas Operations in Cuba (worth CAD$.75/shr.) and 33% of Energy Producing (Power Gen) assets in Cuba (worth CAD$.75/shr.). The company owes $800 million in Debt (about CAD$2.00/shr.), however, offsetting this is about $350 million in cash, and receivables of about $450 million from their Joint Ventures (basically, Sherritt loans money to their joint venture partners (the Nickel and Power assets in Cuba) to fund expansion, due to the fact that the Cuban government is prevented from borrowing from damn near anyone because of the Americans), which is repayed from profits.

Adding this all up, I believe Sherritt is worth CAD$3.10/shr.  The big risk here is that Ambatovy never reaches planned capacity which would impair it’s ability to pay back Sherritt CAD$250 million in advances the latter has provided (noted as CAD$.60/shr. above). However, if all goes well, Nickel continues it upward trend, and cobalt turns out to be as important to electric cars as oil is to gasoline, then, Ambatovy and Moa Nickel may be worth much more. Indeed, Sherritt recently sold another $135 million in shares to the public with attached warrants hinged to the price of cobalt – there is strong interest in cobalt currently and a cursory on the internet will extol it’s virtues for battery production.

In summary, I like the investment and I believe it is a candidate to double and we can see CAD$2.50/shr. quite easily here.

http://www.sherritt.com/English/Home/default.aspx

April 20, 2018

BUY – 2000 shares of AVDL @ USD $7.43/share or about 2% of the portfolio.

AVDL (Avadel Pharmaceuticals PLC) is a drug maker based in Ireland but with substantial operations in the United States.  They are a leading developer of medication for sleep disorders.  The market cap for the entire business is $285 million (all figures in USD).  For this $285 million, we get a business generating revenues of $115 million (2018 expectation), Selling and General Administrative costs of $90 million and R+D spending of $45 million (again, expected for 2018), and interest costs of about $6 million.  As such, 2018 should see an operating loss of something like $25 million.

Hmmm, why did I undertake an investment in a business worth with a value of $285 million which will be producing a loss of $25 million?  A few reasons:

1. They are actively marketing a drub called NOCTIVA which is the only solution for people with Nocturia, a condition which causes folks to wake up two or three times a night to “void.”  Did you know there are about 40 million people in the U.S. who wake up during their sleep regularly, in order to go pee?  NOCTIVA is supposed to help this condition and it is easy to take (it is a nasal spray – don’t ask…..I have no idea…..).  AVDL paid $50 million to license and sell the drug (plus royalties) and they figure it is a $2 billion market.  So, now they need to see if they can sell it.  They are spending $50 million in marketing this year (included in the SGA costs of $90 million I mention above) and expect 2018 revenues of $15 million.  I think it has some potential.
2. They have another product, FT218 (what a catchy name) which is in Phase III trials in the U.S. – they are close to gaining approvals.  FT218 is a once nightly medication which helps people who are dealing with narcolepsy.  They figure this is a $750 million market and because the current best selling drug is a twice-nightly medication, they have a good shot at supplanting the leader and also in expanding the market (they figure some folks with Narcolepsy can’t handle waking up in the middle of the night to take their medication again…I’d agree, that does not sound like fun).  AVDL stock is down because the Phase III is taking quite a while as it is difficult to find patients to participate in the trial.
3. The balance sheet has $90 million in cash and debt is manageable at around $100 million and $6 million a year in interest.  The balance sheet and low debt payments give AVDL time to develop these two drugs.

In general, I like the risk-reward here.  It is conceivable that AVDL can grow revenues to $500 million with just one of these drugs.

CONTINUING HOLDING: CLEVELAND CLIFFS INC. (NYSE:CLF)

I’m holding on to CLF for now.  I bought it along with other mining firms back in 2016 when mining was collapsing.  I’ve sold most of the others off and I only have 1000 shares of CLF left.  No reason to sell right now – I am watching the quarterly earnings and I would not be opposed to adding more shares.  CLF is the United States largest iron ore miner and CLF sells most of their output to domestic steel producers.  They are a low-cost, high-quality provider in the domestic and Canadian market.  They also own assets around the world.  Despite their strong business in the US, CLFs fortunes rise and fall with Chinese demand, real or imagined, for metals.  China is the 800-pound gorilla in the jungle, purchasing 50% of most global minerals.  So, when Chinese demands slips, or, people worry it may slip, Iron Ore prices can get hammered.  With regard to supply, Iron Ore is controlled by 5-6 global players – they can either turn off the taps or open them up.

So far, Chinese demand is holding up just fine (actually, they are buying more and more each year).

https://www.reuters.com/article/china-economy-trade-ironore/update-2-china-iron-ore-imports-hit-2nd-highest-on-record-on-restocking-idUSL4N1PY203

On the supply side, big new mines in Australia are selling into the demand.  If China’s demand slows, the market could quickly come out of balance.

In my opinion, CLF still seems dramatically undervalued.   The entire business is currently valued at about USD $3.2 billion, earns $500 million before tax/interest/depreciation and we are still in a bit of a down market for metals.  Any pop in Iron Ore prices, driven by continued health in the global economy, will lead to strong earnings years for CLF.

February 2, 2018

Today I sold off 600 shares of GM (NYSE:GM) at USD$41.78 for Canadian proceeds of $30,721, earning a small return of CAD$2,239.  I still like GM as an investment, and I retain 900 shares or about CAD$45,000 or 5% of the portfolio.  I am selling to free up cash for an investment in a business with even lower current valuations (in my opinion).

 October 6, 2017

I’ve bought 1500 shares of GM at around USD$35/p.shr. and the investment represents about 7% of the portfolio.  Add this holding to shares in Linamar (TSX:LNR) and about 10% of portfolio is in Auto Makers and Parts Suppliers.

The auto companies have come under share-price pressure for a number of reasons:

a) US auto sales are at record highs and most don’t think there will be more growth in the auto market for a number of years

b) US auto makers have traditionally suffered from very high fixed-costs, murdering their bottom line when sales dropped

c) Tesla is a leader in electric cars and there isn’t a lot of clarity on what kind of answers GM and the other car makers have in response.

d) Trump’s trade policies

All fair concerns.  However, I’m a value investor and let’s not let all the negatives detract from all of the lovely positives:

a) Domestic auto sales are at record highs, and will decline, however, the economy is healthy and a 5%, even 10% drop is not a disaster.  Consider that GM now earns 40% of its sales from overseas (outside North America).

b) GM, like the other big 3 automakers renegotiated labour contracts after bankruptcy in 2009 and their fixed-costs are dramatically lower than conditions in the 90’s and 2000’s.  Management feels strongly that GM’s domestic operations remain profitable even if domestic sales fall 30%.

c) Tesla gets all the headlines, however, make no mistake that GM, Ford, FIAT/Chrysler and everyone else will have a response.

d) Trump may destroy NAFTA, and it will inconvenience the auto makers (all of them), however, it’s just an inconvenience.

e) GM has a solid Balance Sheet with just about 10% of their capital funded by debt related to the auto company (the rest relates to the finance unit which is backed by auto loans).   The firm has about $25 billion in cash, or about $18 per share.

f) GM will likely earn $6 per share in 2017, and $6 per share in 2018.  GM trades at 7x earnings.

In short, I love GM right now.

HOV is an interesting one. Although much maligned, I give management good marks for not-diluting shareholders and navigating a real debt/maturity squeeze during 2015-2016. Despite dramatically cutting back on land purchases, they have maintained a decent business with great leverage.Here’s what I see here with HOV:

*Break-even business at the low-point of communities – communities will be growing during 2018 as land acquisitions continue to ramp

*Absorption is key in home builder profitability. Absorption is finally picking up again; last quarter, sales ran about 3 per community, and are approaching 3.5; Beazer also recently reported 3.4 (up 14%); the long-term average is 44 per year (3.7 per month) and if this metric keeps improving, much of the home sales gross margin falls to the bottom-line….the difference between 3.0 contracts per month and 3.8 contracts per month is $550 million in revenues and even at a GM of 17%, we are talking $95 million in addition GM with very low SG+A required. That’s $95 million on only 150 communities – HOV will have more late in 2018. HOV may be on the cusp of a major improvement of profitability. Home Builders spin major cash when absorption increases (or in this case, just gets back to 2002 numbers).

*Liquidity is solid – running $280 million; they have the money to land bank and no maturities for several years*Beazer is selling for 85% of Equity and HOV is trading at 60% of Equity, with greater leverage.

I expect the best is yet to come for the homebuilders. I guess we will see.

August 1, 2017

Today I purchased 5,000 shares in HCG; about 7% of the portfolio. HCG is a major lender to home buyers in Ontario and to a lesser extent, other areas in Canada. HCG is an alternative mortgage lender. The company faces headwinds, namely, a slow-down in home sales and home prices in Southern Ontario, brought about largely by recent legistlative changes designed to cool an overheated real estate market. As well, due to the same concerns about an overheated market, the federal government is rumoured to be tightening mortgage qualifications for Home Capital’s targetted clientele. In addition to this, recent ethical concerns around HCG’s business practices caused a “run on the bank” as investors who deposit their money with HCG in the form of high-interest GICs, pulled their money out, leaving HCG without enough money to lend our or to redeem maturing GICs. As such, with slower mortgage originations (new mortgages provided to purchasers), lower GIC balances in which to lend to mortgage borrowers, and higher interest paid in order to attract GICs or lending capital, HCG has been suffering losses since May.

Recently, HCG received an investment from Warren Buffett’s Berkshire Hathaway. In addition to buying 20% of the company at $10/share (I’m in at $13.50), Berkshire has also offered a loan facility at decent interest, providing HCG enough capital to lend to mortgage seekers until such time as their GIC levels get back up to healthy levels. Berkshire is looking to buy another 20% at $10/shr and shareholders are due to vote on this in September.

HCG’s share price is backstopped by about $15/shr in net value. They own most of the mortgages they originate and I believe profits will return as GIC balances return, increasing the spread between GIC interest paid, and mortgage interest received. HCG may indeed face further origination pressures (as will all alternative lenders) should the government tighten qualification rules further, or alter the way mortgages are funded. I beleive some accomodation will be made at the end of the day, to allow this valuable segment of the mortgage market to continue on, albeit with more conservative lending practices.

Buying 5000 shares @ 9.50/shr (5% of portfolio)

Today I am buying 5000 shares of Cenovus Energy (TSC:CVE). Cenovus is a major oil and gas producer in Canada, and is based in Calgary. The shares have been blown apart recently due to a number of factors:

a) low oil and gas prices….and a downward trend in same
b) a rather large $17 billion acquisition of Conoco-Phillips Canadian operations. The $17 billion was funded by issuing $6.5 billion in stock (annoying) and taking on $10.5 billion in debt (worrisome given declining oil prices).
c) some of the assets they have purchased in Canada from Conoco are of questionable value, particularly in the hands of a firm who does ont have much experience developing hildings in the “deep basin” region of Canada
d) the heavy debt load which needs to be repaid, in part, via asset sales. Investors worry asset disposition in the current depressed oil and gas market may not yield the $4-$5 billion expected.

OK, so, that’s all the bad news. The shares are off 50% over the past few months since the acquisition. As you know, I prefer to buy low. Hopefully I am not catching a falling knife here.

Here’s what I see.

a) Cenovus owns oil sands operations producing 350,000 barrels of oil a day at about $20 a barrel. After royalties and transmission, maybe they earn about $15 a barrel if oil is around $45 a barrel. That’s $1.9 billion a year or so. They are spending much of that $1.9 billion on capital expenditures (some expansion, some maintenance), however, it’s a valuable asset. To build this kind of production costs about $95,000 a barrel (this is what Suncor is spending to build Fort Hills and what Imperial spent, at least, on building Kearl). In my mind, Cenovus’ Oil Sands operations are the crown jewel and worth the $24 billion Cenovus is worth today (Cenovus’ market cap is about $12 billion and there is another $12-$13 billion in debt).

b) Cenovus owns Convention Oil and Gas operations valued at $4-$5 billion.

c) Cenovus purchased some interesting assets from Conoco in the Deep Basin which I sort of think are worth a good chunk of change – maybe not right at the moment, but, I think there is some sizeable value here. We’ll see.

d) Cenovus owns 50% of two refinery’s in the US – maybe these holdings are worth $3 billion, a bit under their book value.

I think Cenovus’ value is quite abit higher than today’s share price so I am buying some of their shares. If oil drops 20% from here to the $30s, watch out below.

Dec 4, 2017 – SOLD

Today I sold the portfolio’s 2000 shares of Cameco Corporation (TSX:CCO) for net proceeds of $27,820, or $13.91 per share.  This is a 14% return for the portfolio.  I have no real problem with CCO as an investment, however, I decided to sell in order to keep portfolio CASH at about 20%.

NOVEMBER 7, 2017

NEW BUY

Today I purchased 1000 shares of Discovery Communications Inc. (NASDAQ:DISCA).  DISCA owns the Discovery Channel along with other names such as TLC, Eurosport, Animal Planet and OWN Network.  The company is a cash flow machine, earning about $2.00 per share in 2016, after tax.  The shares are down about 40% this year and I purchased at USD $18/shr.  The shares have traded down over concerns, including:

1. Cord Cutting.   DISCA earns money from Cable Networks who include their channels in their Cable bundle.  DISCA earns a few dollars per 91 million subscribers a month.  In addition to advertising which is sold on their channels.  However, investors are concerned that as consumers cancel their cable and or are able to pick and chose channels they want to buy, subscribers will decline – indeed, subscribers are down 5% year over year.
2. DISCA has agreed to purchase Scripps Network – owner of HGTV, Food Network, Cooking Channel and the DIY Network.  They paid fair value (after close there won’t be any big bump in earnings) but they can take out about $.50 per share in costs from the combined company.  Investors are worried that DISCA is doubling down in an uncertain sector.
3. Lastly, I think they’ve been trading down because of a general lack of interest in anything to do with traditional broadcast/media.  Let’s face it, all the action is with Facebook, Google, Netflix, etc.

Of course, I have a different take on it.  It’s rare to get a business like DISCA for 9x earnings.  It’s rarer too to get a business for 9x earnings which sort of just spins off cash – they don’t really have a lot of capital expenditures.  Agreed, there is some uncertainty with the traditional model.  However, won’t consumers pay for a bundle of Discovery, Animal Planet, HGTV, Food Network, etc.?  Would $4 per month be worth it?  $4/month x 90 million people is $4.5 billion a year (the market cap for the combined firm will be something like $15 billion).  And that is just for the US….these networks earn billions from subscribers in Europe.

I’m a value guy and the value is good on this one, I believe.

NOVEMBER 7, 2017 – Cash is sitting at about 22% of the portfolio.  Given opportunities I am seeing I would imagine this will come down to about 17% over the next month.

NOVEMBER 7, 2017

SOLD OUT

November 7, 2017

SOLD OUT – 1500 shares at $36.75/shr.

Today I sold out of PWF at $36.75 per share.  I still like PWF a lot, however, I like to have a 15% cash balance in the portfolio and the investment in PWF has served it’s purpose for the time being.  Proceeds, equating to about 5% of the portfolio, will be used to boost cash holdings and for investments in new holdings such as DISCA (Discovery Networks) and top-ups on others (AMBAC).  I still own PWF in other accounts and like the investment.

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I am buying more shares of Power Financial this week. I’ve owned PWF and it’s parent, Power Corp (TSX:POW) several times over the years and it’s never really disappointed. The folks that control and operate PWF are skilled operators with a conservative leaning, and a long-term approach to growing net equity. PWF owns controlling stakes in Great-West Financial, Investors Group, McKenzie Financial and a large stake in a diversified conglomerate in Europe, which trickles down to PWF in having economic interests of about 1-3% stakes in names like Addidas, Lafarge, SGS and Pernod Ricard. The math is pretty simple on this one.

At the price I am buying PWF right now, I am technically paying $23.5 billion for the business. For that $23.5 billion, you get 68% of Great-West Life (worth $23 billion, publicly-listed shares), 60% of IGM (Investors Gorup/McKenzie Financial/Putnum, etc) worth $5.5 billion, 25% of Pargesa Holdings (the European conglomerate) worth about $2 billion. That adds up to about $30.5 billion. Deduct from this PWF’s obligations of $700 million in debt and various obligations, $2.5 billion in preferred shares which are ahead of me, plus $800 million in cash, and I am buying net assets of about $28 billion for $23.5 billion (ie, I’m paying $32.33 per share for net assets of about $39.25. Of course, it’s not like PWF is going to sell these assets and return me cash of $39.25 so this is all theoretical, as well, such sales would leave PWF with huge capital gain tax bills wiping out the value I’m buying.

I’m buying PWF because the shares are generally beaten up….despite the value, PWF’s exceptional job of growing equity over the years, Great-West’s very strong insurance presence in Canada and the US and IGM’s strong wealth management franchise, PWF’s shares are laggards. The company is boring and the businesses are boring. In fact, I’m falling a sleep as I write this. As well, the IGM business is under threat because now people can simply buy ETFs to buy the market and use robots to make decisions (PWF also owns one of the leading purveyors of robo-investing, Wealth Simple) so maybe that $5.5 billion holding is at risk. Yeah, maybe. I guess we’ll see. In the meantime, I’ll take the value, take the dividend, and wait for interest rates to step up a bit….I think all those insurance assets will start looking a little better as rates normalize. I’m buying shares in PWF which approximate 8% of the portfolio.

SOLD OUT

November 7, 2017 – I sold out of BW today, selling the remainder of the shares at USD $4.15/shr.  The total loss on this investment is about 8.5% of the portfolio.  While this investment was not a good one, some of the damage was mitigated by purchasing more at it’s low-point, and reducing some of the holding to make way for increased investments in other names which have performed well.  As a result, the portfolio is -4.5% YTD versus 15+% for the S&P and 5% for the TSX.  I decided to sell out of BW because I am still concerned that projects may suffer cost overruns, and more importantly, that BW will have to provide the client liquidated damages (paying a large penalty for each day the plant is not up and running).  As well, I believe there are other options for the money and it is being deployed…..

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Buying 10000 shares @ 10.90/shr (15% of portfolio)

Today I am buying 10000 shares of Babcock & Wilcox (NYSE:BW), a major provider of manufactured products and technical services for the power industry. The business should do about $1.6 billion in sales this year and is valued at about $550 million plus another $75 million in debt. Sale and profits are down as BW depends on coal fired power plants for about 40% of its sales. As the US and other leading countries de-emphasize coal-fired power plants in their energy mix, sales of boilders and technical services sold by BW are well off. In response, BW has ventured into providing services to the renewable sector (waste-to-energy projects, for example) and exectution in this market has been poor. Whilst sales in Renewables represent 25% of total sales, the division has produced losses. Lastly, BW, as an old-line manufacturer, is burdened with pension and retiree expenses. Currently, BW estimates their pension plan is underfunded by about $300 million or $6.00 per share. The past three years has seen BW expense over $100 million to cover this deficit.

What I see and why I’m investing now:

a) Coal-fired power is definitely on the down-swing. However, BW is a major player in natural gas power plants, nuclear power plants and large industrial plants where BW’s boilers are required. I also don’t think Coal is dead. Right now, Natural Gas is the obvious choice for environmentaly conscious consumers and politicians – it doesn’t hurt that natural gas prices are extremely low right now. Not sure that will be the case three years out.

b) Power consumption took a big hit after 2008 and it’s only recently back to pre-recession levels. I think power consumption will steadily climb over the next couple of decades.

c) BW appears fairly cheap. The business expects to earn $.75 per share in 2017, and this is on pretty depressed sales. They’ve been buying back their stock and insiders are also buying. All stuff I sort of like to see.

Of course, I don’t like the pension obligations, but, I think as interest rates rise, these obligations will reduce or at least moderate. As well, BW may spend another $50-$100 million on an acquisition – there’s always some risk management buys a garbage business and blows the money. Anyhow, there’s risks with everything and I’ll make this investment and jump on board.

Cameco Corp. (TSX:CCO) is a leading supplier of uranium.  I have bought these shares at levels it has not seen since 2004 ($12.25 per share).  CCO has gotten crushed as the price of uranium has fallen to the floor.  I’m buying these shares for below book value ($13.50 per share) and I believe it would cost at least $22 per share to recreate the business, if possible.  CCO owns the highest quality, large-size uranium mine in the world, Cigar Lake, in Saskatchewan.   So prolific is Cigar Lake, that the company has stopped large-scale mining at their legacy mines in Saskatchewan.  Cigar Lake offers tremendous quality and very low mining costs.  However, Uranium prices are hovering where they were in 2005, about $20 per pound, a far cry from the $60 per pound it was commanding in 2012.

Uranium demand is driven by Nuclear Power.  I am generally of the belief that more nuclear power will be needed in 20 years, not less.  It would not surprise me at all if the Uranium price doubled in a couple of years.  It is difficult to mine and very expensive to build the mine.  Once demand picks up, the commodity may fly.  Global production is around 160 million pounds (2017) and demand is similar.  Given the 40+ nuclear plants under construction, adding about 10% to capacity, we should start seeing some demand around the turn of the decade.

CCO is about 2% of the portfolio and I may buy more over the next 12-24 months.

Brampton Brick Ltd. (TSX:BBL.A)is Canada’s second largest brick manufacturer.  Headquartered in Brampton, Ontario, they also have a large landscape products business in the US, covering most of the Great Lake States.  I’ve owned BBL.A for years – probably 15 years, on and off.  The last time I acquired shares was after the Great Recession and my average price is around $4.75 per share.  BBL.A is a solid firm, with a stable growth profile.  They have slowly but surely grown the business through steady market-share gains driven by good quality and a determined focus on driving efficiency.  The firm has a market-value of about $90 million, and book value is $150 million.  As BBL.A is a “small-cap” business on the TSX, and because shares are majority owned by the founding partners (the firm traces its routes back to the 1960s), it is not widely followed by analyst or the public.  I expect BBL.A’s book value will hit $20 per share sometime over the next three to four years and the share price will follow upwards, although I assume the discount will remain until such time as the Kerbel family (the CEO is Jeff Kerbel) take the firm private.  I will likely add more anytime the share price dips below $8.00, and there is cash available.

I bought 2000 shares of CECO at USD$10.42/ps costing about CDN$26,065 or about 2.8% of the portfolio.  This is a much smaller position than a couple of the larger ones such as HOV (26%) and GM (9%).  This is a toe in the water, so to speak.  I really like the business – I’ve followed CECO for nearly 5 years and have owned it on at least one occasion at around $3.50/ps.  CECO is a for-profit University in the US; the corporation owns two major schools in the US, American International University and Colorado Technical.  The Obama Administration took a very skeptical view of many in the for-profit industry, particularly as reports surfaced that the schools had tricked prospective students in believing some of their courses were worth much more than they were.  Since the US government funds about 90% of the students in the form of interest-free study loans, they were very disappointed to learn that the degrees these students paid thousands for had no career prospects at all, and therefor no way to repay the loans.

Fast forward to 2017, several high-profile schools (for example, ITT Education, Corinthian Colleges) lost their Education Department status and their students were unable to obtain loans from the Feds.  As such, the schools closed.  The survivors, quickly caught religion and closed any of their Schools who offered crappy courses and at the schools they kept, dramatically altered the coursework to ensure better outcomes.  Gone were schools like Cordon Blu (a culinary school).  Problem is, the schools have already taken the money for programs they want to cancel.  As such, the Schools need to “teach out” the programs….basically pay the teachers, keep the school’s physical locations and pay all the costs without bringing in any new students.  As such, in years 2 and 3, the schools get killed – it’s all expenses and rapidly declining revenues.  Happily, this all started a few years ago.  CECO dropped from $60 to $3 in a few years and since touching its low a couple of years ago, has slowly been on the mend, as the business has stabilized.

I like CECO now because AIU and CTC are both adding students, and the programs they offer are relevant.  CECO has about $2.50 in net cash and will earn about $1.20 in pre-tax income this year.  The reason the share price isn’t at $20 is because there are still concerns that US Politicians will cut these schools access to student loans (still representing 90% of student funding).  It’s possible but I think the school’s best days are ahead of it.  The last time I looked, the economy is very dynamic and the workforce is constantly challenged to upgrade.  I think the for-profits are very responsive and I expect them to continue to quickly latch on to new programs of interest and put the bums in the seats.  And, so coming back to why I only allocated 3% to this one, it could see $3 if the US Government proves me wrong.