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      « April 2005 | Main | June 2005 »

      May 31, 2005

      No Market Cap Requirements Here

      Since you've read here that the CG portfolio can invest in undervalued companies in any country, I should add that there are no market capitalization requirements for a holding. The quest here is for value. It may be a company with a large cap, mid cap or small cap. That probably makes my portfolio "multi cap" for those categorizing such things.

      The definitions for each of these might vary somewhat depending on whom you’re talking to, but usually they are as follows:

      Large cap: market cap valued at more than $10 billion
      Mid cap: market cap valued between $1 billion and $10 billion
      Small cap: market cap valued at less than $1 billion

      Some analysts break down the classifications even further to include such categores as mega cap for companies at the large end and micro cap for those at the small end.

      CG takes the view that market cap definitions are largely the function of the marketing departments in mutual fund companies. They're also a neat way of differentiating between funds for services such as Morningstar.

      I've found that, over the years, value tends to be found in different areas at different times. You'll find a bunch of opportunities in the small cap universe for a while, and in the large cap arena at other times. Some markets have loads of undervalued companies at all levels. And in others, like now, it's hard to find enough compelling buys to fill a portfolio anywhere.

      May 27, 2005

      The Long Weekend

      In the short history of this site, CG has offered up four picks. One each headquartered in the US (GM), Canada (Fairfax Financial), the UK (3i Group) and Japan (Nikko Cordial). That wasn't planned. It's just the way things worked out. They could have easily all been American companies or Japanese companies or whatever.

      Before heading off and relaxing during the long Memorial Day weekend here in the US, now is a good time to quickly review a few points essential for anyone following this site.

      First, the CG portfolio, once it's fully established, will have somewhere around 20-25 positions. So the first four companies discussed here are just the beginning.

      Second, this site discusses investing in stocks, not trading them. The average holding period for stocks discussed here runs years -- not hours, days or weeks.

      Third, no one can pick the bottom. Be prepared for any stock discussed here to go down before heading up.

      Fourth, I will get some stock picks WRONG. Every investor worth his or her salt does. Sir John Templeton, one of the best ever, said successful investors get 6 out of 10 picks right. Remember that.

      Fifth, I eat my own cooking by owning EVERY stock discussed on this site. If you follow my thinking and I make money on a stock selection, you do, too. If you lose money on one of the stocks discussed here, you at least have the satisfaction of knowing I feel your pain.

      Well, that's it for now. If you're reading this in the US, here's wishing you a great Memorial Day weekend. Let's spare a thought for those who sacrificed to make this country the beacon for freedom and capitalism that it is.

      Stay well and, for readers everywhere, the hunt for value continues into the summer.

      May 26, 2005

      Buying Nikko Cordial

      Nikko Cordial Corporation (NIKOY/OTC) is the Japanese financial company I've mentioned buying recently. The order was completed yesterday. I purchased the ADRs (each ADR represents 10 common shares), trading over the counter in the “pink sheets.” The common shares trade in Japan under ticker symbol 8603.

      Nikko Cordial is Japan’s third-largest brokerage and investment banking firm. The market capitalization is roughly $8.26 billion. It has a major joint venture with Citigroup, which has a stake in the company. I've owned the ADRs for a while now. But the shares have fallen over the past year, and I decided to add to my holdings for three reasons.

      First, Nikko Cordial is a fine company with a strong balance sheet and shareholder-friendly management (important in Japan). The ADRs closed yesterday at $43.20. The book value as of 3/31/05 was $42.90 per ADR. But Nikko Cordial states its book value conservatively. I estimate the company is worth approximately $64 per ADR on a liquidation basis.

      Second, the company is a potential takeover target. The most likely acquirer appears to be the Japanese behemoth Mizuho Financial, which already owns a stake.

      And third, Nikko Cordial is a play on Japan’s continuing progress in restructuring their corporate landscape with shareholder friendly management styles taking root. One of the biggest changes in the Japanese market is how much foreign ownership there is, and that this foreign presence is increasingly welcomed by managements. But the country still has a long way to go, so progress sometimes seems painfully slow.

      CAUTION: Even though Nikko Cordial has a market cap of about $8.26 billion, its ADRs trade thinly in the US in the “pink sheets.” They can also be very volatile. I placed a “good until canceled” limit order of $44. Part of the order was filled at $43 but before the remainder could be purchased, the ADRs suddenly shot up over $50 for no apparent reason (there was no news on the company). I waited a couple of days and the ADRs fell back and we got the rest of our order filled at $43.25.

      My advice for anyone wanting to buy the ADRs is to use a limit order and patience -- otherwise you could get whipsawed. (As stated previously, I use limit orders for every stock purchased.) The company’s common shares trading in Japan are much more liquid, so that’s another option.

      May 25, 2005

      Wall Street Suddenly Notices GMAC

      Stop the presses.

      Wall Street has figured out that GMAC -- GM's highly-profitable finance arm -- is worth big bucks. In fact, it could be spun off all or in part and fund the turnaround of GM's North American auto business -- or even raise cash for a special payout to shareholders.

      It's all in the "Heard on the Street" column (subscription required) by Lee Hawkins Jr. in this morning's The Wall Street Journal. It's an excellent piece presenting the various scenarious of how GM could use its most valuable asset. CG's hunch is that GMAC will either stay within GM or be a partial spin-off. But that's just a hunch. I could always be wrong.

      Remember, the price you pay for a stock can be hugely important. An investor can do well buying a mediocre (some would say "lousy") business at a great price. It's beginning to look like those investors who bought GM stock under $30 a share could be sitting pretty a few years from now (collecting a nice fat dividend in the meantime). But, hey, I could be wrong about that, too.

      Note: new readers can read the original posting on my rationale for buying GM by clicking on the menu in the upper right hand corner.

      The Qwest for MCI Ends

      This site's first posting mentioned I own MCI (MCIP/NASDAQ). It was purchased at $17 a share before CG was launched. I cited the company as an example of the types of investments you'll be reading about here. It was then, and has been since, consistently trading in the mid $20s. MCI was being pursued by Verizon Communications and Qwest Communications.

      Yesterday, Qwest officially ended its pursuit of MCI. Qwest Chairman and Chief Executive Officer Richard Notebaert broke this (not entirely unexpected) news to shareholders at the company's annual meeting in Denver.

      Earlier this month, MCI all but ended a furious three-month long bidding war by turning down a $9.74 billion takeover offer from Qwest in favor of a $8.44 billion offer from Verizon. It's understandable that MCI would rather be bought by Verizon -- it's financially stronger. But I think that Verizon's bid should at least match that of Qwest. Some of MCI's largest shareholders were encouraging Qwest to persist, and openly criticized MCI accepting a lower bid. I would have voted my shares with those shareholders in any proxy fight.

      Yet Notebaert said it would be an increasingly expensive battle that seemed futile.

      In all, I'm not getting everything I want, but the portfolio does stand to get a very decent gain on this investment.

      May 23, 2005

      New Order Update

      The new order placed late last week has been partially filled. When the remainder gets bought, you'll read about it here plus the rationale for owning the company.

      May 20, 2005

      More on Currencies Impacting Portfolios

      This article by Barbara Kollmeyer of MarketWatch (via link by Investor's Business Daily) echos CG's previously-stated attitude on hedging stock portfolios -- that it's not needed over the long term.

      This gets to the heart of the matter:

      "Does hedging pay? Studies have shown that over a decade or more, hedged positions offer no real advantage, but that's a divisive issue.

      "'Over the long term, there's pretty good evidence that hedging doesn't make a big difference in a portfolio,' said Brad Sorenson, head of sector analysis at Charles Schwab & Co. 'It's a split camp, but studies that we've looked at over a 10 to 15 year period show the returns are roughly the same between 1980 and 1999.'"

      Good stuff.

      New Order Placed

      I placed a limit order yesterday morning to purchase stock in a Japanese financial company. Actually, this would add to an existing position. If the order is filled in the next day or so, you'll read about it here along with CG's rationale for holding the company.

      I own stock in several Japanese companies. I may increase our exposure there -- either by increasing existing positions (as I'm trying to do with the financial company mentioned) or establishing new ones as valuations warrant.

      Why? Because there are more undervalued companies in Japan than any other single developed market. CG takes the view that, over time, the value in Japanese companies will be realized as the old way of doing things changes and western style corporate governance takes root. If you've been reading the financial press over the past couple of years or so, chances are you've noticed an increasing number of stories about mergers, buyouts and even attempted takeovers in the country.

      Of course, between my cash level and other holdings, most of my portfolio assets are outside Japan. I'm content with most of the portfolio's holdings, three of which were mentioned in this site's first posting, but there's still not a lot to do.

      CG continues searching and waiting. Thanks for staying tuned.

      May 19, 2005

      How Much Will Currencies Impact An Unhedged Stock Portfolio?

      In the short term, the answer is: "noticeably for the better," "noticeably for the worse," or "pretty much not at all."

      In the long term, the answer is "pretty much not at all."

      I bring up this subject because I own several foreign stocks and I don't hedge. Admittedly, it's probably not practical for a portfolio my size, but I don't lose any sleep over it. And over the long haul I haven't noticed making or losing much money due to currency fluctuations.

      Some value-oriented managers running international portfolios that CG respects and admires do hedge. Their hedging policies helped them in the mid-to-late 1990s and the first few years of the new century. But they are finding that not hedging would have been more favorable at times since then. This is no big deal, because the purpose of hedging is to make sure that currency movements have a neutral impact on the overall performance of a portfolio.

      This site takes the view that currency fluctuations also have the same impact on unhedged portfolios -- in the long run.

      The folks at Templeton agree. And Templeton has been investing globally much, much longer than anyone. In fact, Templeton has studied this extensively and finds that over the long term -- ten years or more -- currency movements tend to average out. Does ten years sound like a long time? It isn't. Especially when you consider that investing isn't something you do for a year or two . . . but over the course of your lifetime.

      Stated simply:

      • If your portfolio is unhedged there will be times it seems a smart thing to do and other times it seems a dumb thing to do.
      • If your portfolio is hedged there will be times it seems a smart thing to do and other times it seems a dumb thing to do.

      And no one can predict when currency movements will hurt you or help you. At the beginning of 2005, the business news media was full of stories about how to take advantage of the falling dollar. Guess what? The dollar hasn't had such a bad year. (Clearly, the dollar did lose value before this year, and some of my holdings benefited.) So much for conventional wisdom.

      By far, the MOST IMPORTANT factor impacting any stock over the (here's that term again) long term is the performance of the company's business. Not any currency.

      May 17, 2005

      How We "Found" 3i Group PLC

      I've received a couple of questions about how this site "found" 3i Group PLC. These are from residents of the US, and the questions probably stem from 3i not being listed on the NYSE or NASDAQ, which means it's not mentioned on CNBC in America, FOX, CNN, MSNBC or PBS. The company is, however, occasionally reported on in publications like The Wall Street Journal and Barron's (more in a moment).

      What's more, 3i is widely known in the UK and on the European continent, as it is a member of the FTSE 100 and Europe's largest publicly-traded buyout firm.

      Your humble editor first heard of 3i in 1994 when it was going public and received fairly extensive coverage in the Financial Times. The company had originally been founded as Investors in Industry in 1945 by Prime Minister Clement Atlee's Labour Party government to meet demand for capital for small and mid-sized businesses in the UK following World War II. It was owned by the Bank of England and Britain's major banks before being floated on the London Stock Exchange.

      3i's management in the later 1990s held a significant number of investments in the technology sector -- with its price peaking at 1,011 pence per share in September 2000. Of course, the tech boom ended and the company slumped for the next several years. New management has since come in, which emphasizes rewarding shareholders (see the previous post for more about the strategy 3i has been following recently under CEO Philip Yea).

      I first explored the possibility of 3i as a value investment after reading Meryl Witmer's favorable comments about the company in the Barron's issue dated January 31 of this year. Witmer is with Eagle Capital Partners in New York and is an excellent stock picker.

      I researched the company, and concluded the stock was undervalued at current prices. I also like the idea of management being prepared to walk away from business it feels does not maximize the chances of profit for shareholders, and will thus return capital to shareholders and repurchase company stock in lieu of attractive opportunities. All this, and 3i's strategic move into Asia -- especially India and China -- presents interesting growth possibilities.


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        • All information posted on this web site has been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. Under no circumstances is this an offer to sell or a solicitation to buy securities discussed on this site. Past performance is no guarantee of future success. Any investments, trades, and/or speculations made in light of the ideas, opinions, and/or forecasts, expressed or implied herein, are committed at your own risk, financial or otherwise. CONTROLLED, its editor and/or related parties have positions in companies discussed. All data, information and opinions are subject to change without notice.