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« November 2006 | Main | January 2007 »

December 31, 2006

Happy New Year!

Here's wishing all Controlled Greed.com readers everywhere a Happy New Year!

I know 2007 has already arrived for some of you while it's still a few hours away for others, depending on where you reside around the globe. I hear the year has gotten of with a real bang in Bangkok. Or a few bangs, though not the kind certain districts of the city are famous for. Let's cross our fingers that won't be an omen of things to come.

I hope the past 12 months were great for you and those you care about and that the next dozen will prove even better in every respect.

I'll spend New Year's Day indulging in the Southern tradition of feasting on black-eyed peas with stewed tomatoes. I think doing this is supposed to bring good luck. Or at least that's what I've always been told. Regardless, the hunt for value will continue in 2007 when the markets reopen.

In the meantime, you might enjoy Mark Steyn's consideration of New Year's songs -- especially Auld Lang Syne.

Happy New Year, folks.

December 30, 2006

More on Molson's Turnaround

On the heels of my post the other day about portfolio holding Molson Coors (TAP/NYSE), comes this Associated Press story about the company:

While Molson Coors investors may not have seen spectacular gains in 2006, the world's fifth-largest brewer did improve profitability and sales amid a weak domestic beer market.

The AP report, courtesy of the Houston Chronicle, describes the challenges the company faced this year. Then things started to turn:

The company weathered flat sales volume in the third quarter and reported a 25.5 percent increase in profit. After excise taxes, net sales totaled $1.58 billion, beating Wall Street expectations. President and CEO Leo Kiely told analysts the company expects to achieve the $175 million of cost savings promised when Adolph Coors Co. and Molson Inc. merged in 2005.

"Overall, we believe our third-quarter results demonstrate we're making consistent progress and strengthening the fundamentals of our company, even while we face tough competitive and cost pressures in all of our markets," Kiely said.

Like I said in the earlier post, things could always go wrong with this holding. Or any holding, for that matter. But it looks like Molson Coors will be a steady (if not spectacular) contributor to the portfolio.

Then again, since I'm confident of that, who knows how far south it will go? ;-)

December 29, 2006

Wagoner and Lutz Keeping Their Heads

In his Forbes column, Jerry Flint ponders the state of Detroit auto executives and their hold on their jobs.

Because I own stock in General Motors (GM/NYSE), I found this bit interesting:

If there's an exception to the head-rolling, it's General Motors . Despite all its troubles over the past dozen years the GM management has been amazingly stable. The board of directors has been willing to accept any disaster without shaking the management tree. Even Captain Kirk (meaning Kirk Kerkorian, who owned 10% of the stock) wasn't able to shake the tree.

And this part further down the piece also catches my eye:

Which brings us to the questions I am always asked: Will General Motors and Ford survive? GM's chief executive is the financial type. Costs are his strengths. But he is ably assisted by that well-traveled car guy, Robert Lutz. GM is doing better. It has arrived, if not at a turnaround, at a solid improvement. If there is no real slowdown in the industry--a really big "if"--the GM revival should continue.

You know I think the GM revival will continue. And, as I keep reminding people, for GM to work as an investment does not depend on it regaining its dominant status of several decades ago.

If I'm right about the company, the investment will work because of the price paid for its stock. I know I bought early. Whether or not I bought too early remains to be seen. I bought GM in 2005. We're at the end of 2006. I anticipate holding it for a while yet. If that changes, you'll read about it here.

Can Buffett-Style Value Investing Be Applied in Malaysia?

Yes it can, according to Tan Teng Boo, CEO of Capital Dynamics in Malaysia, in his opinion column in the Malaysia Star Online. His article gives a good overview of Warren Buffett and the influence of Charlie Munger, and points out that their approach has evolved from that of Benjamin Graham.

So, in that respect, Tan's column isn't telling us anything we value folks don't know already.

But let's keep in mind that he's writing for a primarily Malaysian audience -- one that I gather isn't overly familiar with value investing. Or is wondering whether the value approach can be applied to Malaysian stocks. That's why this part pops out at me:

Can we apply the Buffett-Graham-Munger approach to Bursa Malaysia? Yes, except that one has to be very patient, disciplined and do the necessary homework. For whatever reasons, many claim to be a follower or non-follower of Buffett without really knowing his philosophy and methodology. 

Many investors have blamed the Bursa Malaysia for losses or poor returns. Many have said that the Buffett-Graham-Munger investing style cannot be successfully applied to Bursa. Many investors do not realise that the real culprit of their losses or poor performance is themselves. Do not get us wrong. i Capital is not saying that Bursa and the listed companies are perfect. There is an endless list of things that can be improved and there are plenty of companies (probably the majority of them) that do not deserve an inch of support from genuine investors. But part of the fault also lies with the investing style of investors. Have they ever asked how they would perform if they had used the same method and invested in Tokyo, London or New York? Would they have the patience or the discipline?

December 28, 2006

Nigerian Oil and ArmorGroup

The "Nigerian Oil" section of the Breakingviews column (scroll down) in today's Wall Street Journal Europe doesn't mention portfolio holding ArmorGroup International (ARG/LN).

But it's relevant to us shareholders:

The explosion of a pipeline in Nigeria that took at least 265 lives hasn't moved the oil price, or the shares of foreign oil companies that do business there. It turns out that the pipeline supplied petrol for domestic consumption, and wasn't used for foreign energy exports. But as foreign companies increasingly bet on Nigeria to expand their bottom lines, the blast is a reminder that doing business in the country is risky.

The piece, which I encourage you to read, ends with this:

The tragedy in Lagos highlights the dangers of doing business in a country where the people are so poor that they are prepared to take extraordinary risks to make some petty cash. But if political and social instability gets any worse, foreign oil companies could find the costs of investing in Nigeria don't justify the returns.

Well, sure. And that's why firms like ArmorGroup are finding work outside supporting the US and UK military. If the much-anticipated long-term commodities boom is underway, ArmorGroup is positioned to benefit. That doesn't guarantee anything, of course. But it's a nice add-on to the business of helping over-stretched armies and providing security to NGO humanitarian missions.

You can see a case study of ArmorGroup's activities in Nigeria on the company's website.

BCE Enters 2007 in Good Shape

Catherine McLean writes in the Globe and Mail about portfolio holding BCE Inc. (BCE/NYSE):

Bell forecast revenue growth of between 3 and 5 per cent next year, accelerating from 1 to 3 per cent in 2006. Bell is also targeting 2007 earnings before interest, tax, depreciation, and amortization (EBITDA) growth of between 4 and 6 per cent. BCE opted at the same time to boost its annual dividend by 11 per cent to $1.46 a share.

Analysts from Genuity, Haywood Securities Inc., RBC Dominion Securities Inc., and UBS Securities Canada Inc. responded by raising their price targets for BCE's stock.

They believe rate increases for various services will play a key role in helping Bell meet its higher-than-expected forecasts.

It's all part of a strategy, headed by Bell's chief operating officer George Cope, aimed at boosting profitability. At the conference, Mr. Cope outlined areas where prices will rise next year, including long-distance plans and the ExpressVu satellite service.

BCE will become known as Bell Canada in early 2007. It recently sold its satellite business for more than anticipated. But its legacy phone business will decline -- as it will for all legacy phone companies. The key will be how well Cope and his team take advantage of high growth opportunities. Such as its wireless, high-speed internet and video services business.

We're still really early with this pick. Let's see where we are with it a year from now.

Molson Coors: Like Watching Beer Dry

You've heard the old saying about value investing being like watching grass grow or paint dry. When it comes to portfolio holding Molson Coors (TAP/NYSE), we can add that value investing can be like watching beer dry.

Molson Coors was recommended on Controlled Greed.com in June 2005 at $60.35. The stock had dropped because the merger between Coors and Molson wasn't going as smoothly as planned. Beer sales in the US were flat (pun intended) and a price war between Coors, Budweiser and SABMiller was looming and would hurt profits. Molson, which is hugely popular in Canada, had slower sales due to the NHL being on strike (Molson is a big sponsor of hockey). The company also had some problems with its UK assets and a lousy-performing beer business in Brazil (which it subsequently sold).

All of these were short-term challenges. Molson Coors has good management under CEO Leo Kiely. The company wasn't going to go out of business. It was unloved on Wall Street, but so what.

The stock closed yesterday at $76.76. That's a gain of more than 28%, not including dividends. No, that's not a homerun. But it is a respectable, if not spectacular, return on investment. And if every stock would do as well I'd be delighted. I should point out that Molson Coors has been in the portfolio for 18 months, and with my 3-to-5 year time horizon there's still plenty of time for things to go wrong.

I don't expect that to happen. Yet with the shares recently hitting new highs, we could always see a pullback.

I'm writing about Molson Coors because, well, I haven't mentioned it much since buying it. This is a case of a company and its management quietly working things out and growing the bottom line over time. It may not be exciting. But it sure is profitable.

December 27, 2006

3i Group Keeps Doing Deals

Ben Harrington of Britain's Daily Telegraph writes of 3i Group (III/LN):

Private equity firm 3i has capped a flurry of high-profile deals by snapping up transportation group Dockwise Transport for more than $700m (£357m).

3i, which recently made a £940m recommended offer for estate agent group Countrywide, has bought Dockwise Transport from Dutch shipping companies Heerema Group and Wilh. Wilhelmsen.

The linked article reports tht Dockwise has a fleet of 15 semi-submersible vessels. These are used to transport oil rigs, bridges and cranes around the world. Which makes these investments good plays on energy and infrastructure themes.

Harrington ends the piece with this:

The deal comes as 3i strives to do larger leverage buyouts. Earlier this month, it bought VNU's European business magazines, including Accountancy Age, Computing and IT Week, for £215m.

Regular readers of Controlled Greed.com know I like this company -- and its management -- a lot. That last paragraph says 3i "strives" to do larger buyouts. I'll need to keep an eye on that. One of the things I like about the company is that it excels in doing small-to-medium sized deals. My hunch is that 3i's increased assets make that somewhat of a necessity.

And that's entirely apart from the fact that Phil Yea and his team may see bigger deals as the way to go strategically.

You can read my original rationale for owning 3i Group here, though it's not the bargain it was in the first half of 2005.

December 26, 2006

Nikko Cordial Executives Step Down

Portfolio holding Nikko Cordial (NIKOY/OTC) said its top executives are stepping down and the company named a new president after improper accounting forced an earnings restatement.

The company stated that President Junichi Arimura and Chairman Masashi Kaneko were to step down yesterday. Shoji Kuwashima, chief information-technology officer and a director, was taking over as President at that time.

Nikko's shares have fallen roughly 15% since this scandal broke a week or so ago. It may be delisted from the Tokyo Stock Exchange. I don't think that will happen -- but it could. You know I own the ADRs trading OTC. The ADRs can be somewhat illiquid and subject to sharp price movements. Last I checked this afternoon they were back up over $10.

I'm holding my Nikko Cordial position (I sold part of my stake previously, reported on this blog) and would recommend anyone else do the same. But you have to do your own due diligence and make up your own mind.

My thinking is that the company will survive, remain listed in Tokyo and continue benefiting from Japan's resurgence. I may be wrong. I may change my mind and dump the company. All I can say right now is that any moves made in this position will be reported on Controlled Greed.com. Like everything else I do.

December 24, 2006

Merry Christmas

I wish all of you a very Merry Christmas. And I hope that you and all you care about enjoy the good cheer and blessings this special time of year offers.

I plan on posting the week between Christmas and New Year's, so please visit the blog if you get the opportunity.

In the meantime, have a great holiday and Season's Greetings.

December 22, 2006

The Dynamic David Taylor

Andrew Allentuck profiles Canadian fund manager David Taylor in the Globe and Mail:

His Dynamic Canadian Value Class Fund turned in a 37.8-per-cent return for the period to Nov. 30, putting it in the top 1 per cent of all Canadian equity portfolios. What's more, its 29-per-cent average annual compound return for the three years ended Nov. 30, also put it into the top 1 per cent of the 663 mutual funds in the Canadian equity sector.

Taylor recently won the award for the top Canadian Equity Fund of the year at the Canadian Investment Awards. I haven't been familiar with Taylor until coming across Allentuck's article. But his method will be familiar to value investors:

How does he do it? He buys stuff that other investors shun.

"I buy when others sell," he said. "If I can be reasonably confident that a company will revive, I will buy its stock even if it's being sold by others who are panicking. The world does not move in straight lines. That is just group think. Once other investors have played on their emotions, I am there to pick up money they have left on the table."

More:

Dan Hallett, who heads Dan Hallett & Associates Inc. a Windsor, Ont.-based mutual fund research company, said: "Mr. Taylor's fund is not a one-trick pony. He looks for companies that are drowning in bad news. That might scare some people, but it is appealing to me because that is where you find great value."

Taylor's fund has more than C$2 billion. Read the linked article for more and his reasoning for three stock picks.

His funds top five positions are (as of November 30):

Goldcorp 5.2%
EnCana 4.1%
Petro-Canada 3.9%
Trican Well Service 3.6%
Altria Group 3.1%

December 21, 2006

ArmorGroup Making Gains

You know I normally spend a fair amount of time -- to me it often seems like most of the time ;-) -- posting about the portfolios losers. Or the "bad newsmakers" I own -- even with its recent problems, Nikko Cordial (NIKOY/OTC) is still a profitable investment. Though nothing like it was, that's for sure.

And I can't think of anything to say about Takefuji Corp. (8564/JP or TAKAF/OTC) or Media General (MEG/NYSE). Except that I remain cautiously optimistic they will turn out to be money makers over time.

I could make myself feel better by talking about the media-related stocks. But I don't feel like it -- and, besides, the end of the year is coming up and I'll update the entire portfolio shortly after that.

I will mention ArmorGroup International PLC (ARG/LN), the security firm listed in London. I bought the stock in September and the shares have gained 15% since then. Now, we're still in very early innings with this pick. And there are risks with the company and the business it is in (and where it does most of its business). But the stock was trading at about its tangible net asset value and a substantial discount to its stated book value.

One of the keys to ArmorGroup's success is its ability to win contracts. ArmorGroup has recently won three:

  • A protective security contract in Louisiana valued at $2.5 million per annum, with an expected duration of three years.
  • A further $3 million training contract from the Department of Defense in conjunction with a company called Hazard Management Solutions.
  • And a $30 million per annum contract for the provision of security services to the UK Government across Afghanistan.

Remember, the pipeline of contracts could dry up -- though the company's balance sheet should be able to weather most potential downturns in business. Yet management appears to be successful in running the business, marketing its competitive advantages and closing deals.

And let's fact it. The world doesn't look like its getting any safer.

December 20, 2006

Bolton Anticipating Market Correction

You've read me post before about famed UK fund manager Anthony Bolton. According to this Reuters' report filed by Laurence Fletcher, Bolton is taking some defensive measures:

"We're in the greedy stage. Their (investors') hand has to be burnt, then they'll go back to more normal behaviour," said Anthony Bolton, one of the most influential fund managers who has recently taken out a put option and expects a market setback.

Personally, I don't play the options game. My way is to just put money in stocks and if I can't find enough to be fully invested -- just leave the funds in cash.

Later in the piece:

"This bull market is very long in the tooth," Bolton, who was also one of the first managers to call the start of this bull market, told the annual general meeting of his Fidelity Special Values trust last week. We're definitely now in a lean period. I'm not finding a lot of things as a value investor that I want to buy ... I think there will be another stage to the market correction."

I try not to have opinions on the broad market -- though I have nowhere near Bolton's experience. Longtime readers of Controlled Greed.com know that I've been saying bargains aren't plentiful since this site was launched in April 2005. The exception would be the undervalued media-related sector in 2005 and earlier in 2006. Other than that, for the most part, I agree with Bolton that there's not a lot to buy.

That's my feeling yet it hasn't kept me from being mostly invested in stocks. I have enough cash in the portfolio to establish two new positions (and I anticipate more cash coming in the portfolio next year). I want to eventually become fully invested, which would be holding about 25 stocks.

December 19, 2006

More on Nikko Cordial

Andrew Morse of The Wall Street Journal writes on the impact of Nikko Cordial (NIKOY/OTC) potentially being delisted from the Tokyo Stock Exchange:

A delisting could make it difficult for Nikko Cordial to raise cash, the lifeblood of the brokerage business. Investment banks need to have fat balance sheets in order to buy shares and bonds from corporate clients, which they sell to institutional and retail customers.

As mentioned in my previous post, I doubt Nikko Cordial will be delisted -- as long as any wrongdoing is found to be limited in scope. But I could be wrong about that. I could be wrong in thinking the reporting problems are not widespread. Or I could be wrong in forecasting what Japanese regulators will do. They could decide to make an example of Nikko Cordial as proof their "crack down" on irregularities designed to boost investor confidence.

Hey, if you're a longtime reader of Controlled Greed.com, you've read plenty of posts referencing Japan's changing business climate. I have and continue to think the change is positive. But it would be ironic if that change sank one of my favorite investments of the past few years. Oh well.

December 18, 2006

Nikko Cordial: Going From Fine to Fined?

Portfolio holding Nikko Cordial (NIKOY/OTC) may be fined $4.2 million for accounting irregularities that inflated the broker's net profit for the year ended March 2005 by 33%. The company will also be restating its financial statements for 2005 and 2006. Nikko is Japan's third-largest broker and also has significant investment banking operations. Company officials deny any intentional wrongdoing.

Japanese regulators are saying that criminal penalities cannot be ruled out. Nikko could face being delisted from the Tokyo Stock Exchange.

From the linked Bloomberg report:

Hirofumi Hirano, an executive officer at the firm, will resign, Nikko said in a statement today. Chairman Masashi Kaneko and President Junichi Arimura will take 50 percent pay cuts for six months, the statement said.

"I'm a little bit surprised by the magnitude of this although Japan has been very nervous over accounting errors,'' said Patrick Lemmens, who helps manage $3.5 billion at ABN Amro Asset Management in Amsterdam. "This looks like a one-off mistake though and not a pattern of deception like Fannie Mae and maybe Japan is taking a cannon to a mosquito here.''

I like to think Lemmens is right -- though I have no way of knowing. I have been very happy as a Nikko shareholder (I own the ADRs, which can trade VERY THINLY over-the-counter in the US).

Nikko Cordial was recommended on Controlled Greed.com in May 2005 at the split-adjusted price of $8.64. I subsequently sold one-third of my stake for $16.30 in March 2006. The ADRs closed Monday at $11.20.

I'm holding my remaining stake -- because, again, my hunch is the accounting errors aren't criminal. And I continue holding conviction that Nikko is a great play on Japan and even the region. And, the company could be a takeover target.

All that, and management has been boosting its dividend. So let's stay tuned to what happens.

Festival of Stocks Reminder

The 15th installment of the Festival of Stocks is being hosted by the SINLetter. Asif is presenting a great collection of posts from various bloggers concerning matters of interest to stock investors.

My contribution is my post from last week about General Motors (GM/NYSE) being viewed more favorably now than a year ago. There's lots more great stuff, so stop by the SINLetter and join in the fun.

Templeton's Everett in Barron's

Neil Martin has a fine interview with Jeff Everett, Chief Investment Officer for Templeton, in this week's Barron's. I think a fair amount of Templeton managers have left since Sir John sold the firm to Franklin Resources in the early 1990s. But Everett is among those who've stayed, and I've been told he's a great guy.

According to the Barron's article, his funds are performing well. Everett manages the $9.2-billion Templeton Word Fund (which invests globally) and the $18-billion Templeton Foreign Fund (which invests in non-US markets). The piece doesn't say it but funds that size mean he pretty much has to stick with large and mega cap companies.

That's not a put-down, just an observation. And, besides, I'd love to have that "problem." ;-)

A couple of thing Everett's interview reminds me of. One, that the Templeton folks have largely eschewed hedging currencies. Their reasoning is that as long term investors currency fluctuations will even out over time. That's true from my reading of the subject. And besides, hedging currencies isn't economical for me personally.

The second thing the Barron's article reminds me of is the Templeton approach to global investing itself. They do things bottom up -- by having their analysts cover industries, not countries. They perform secondary coverage on countries.

That approach makes sense to me, like it surely does to most value investors. I can't imagine saying to myself, or anyone, that a portfolio should have a set percentage in this region or that country. I just try to find bargains, and I have a few holdings in Japan, two in the UK, a couple in Canada. You get the idea.

I also see in the interview that Everett has been a sizable investor in media-related companies, which sounds familiar to regular readers of Controlled Greed.com. He says the three biggest holdings in his funds are News Corp., DirecTV and Comcast. You know I own those last two. Here's what he says about the sector:

About 18 months ago, there was a lot of uncertainty about the future of the business in the light of changing viewer habits, alternative distribution channels underscored by iTunes and new content, all of which represented an opportunity for us. We felt very comfortable with the cash flows, managements and long-term opportunities and valuations of those three companies. So we made significant investments in those three and it worked out.

A couple of readers told me last year that I should have bought News Corp. I stated then that I could be making a mistake by not buying it, and maybe I did.

Lastly, Everett talked up several telecom stocks. I was a bit surprised he didn't mention BCE Inc. (BCE/NYSE). I don't know why, except that I own it. ;-)

Well, a quick check of WSJ.com reveals that Templeton Investment Counsel ranks as the fourth largest institutional investor in BCE and that Templeton Foreign Fund is the largest mutual fund investing in the company. Both show selling some shares as of 9/30/06.

Good interview. This is the stuff Barron's excels at -- interviewing money managers and letting them explain their stock picks.

December 15, 2006

Philip Richards, Meet John Templeton

Judi Bevan writes in The Spectator:

Philip Richards is an extreme investor. His willingness to bet against the crowd has turned his initial £150,000 investment in his hedge fund company RAB Capital into £150 million since 1999. In particular, his Special Situations Fund, which he manages personally with the credo ‘to maximise returns with minimal restrictions’, has performed spectacularly. Since he started the fund in January 2003, with a big bet on an obscure Russian gold mine, it has made the handful of investors who were in at the beginning almost 40 times their money.

‘I believe it’s the best performing fund in the world,’ says Richards, an avowed Christian not averse to preaching his own book. This early success grabbed investor attention, enabling him and his partner Michael Alen-Buckley, who is married to Rocco Forte’s sister Gianni, to build RAB into one of Britain’s highest-profile hedge fund groups, attracting shareholders such as the steel tycoon Lakshmi Mittal. Listed on Aim in March 2004, RAB was only the second hedge fund group to be publicly quoted, after the much larger Man Group. Recent acquisitions have brought total funds under management to £2.4 billion — still tiny compared with the big players, but not bad from a standing start six years ago.

Richards is also an extreme philanthropist. He gave £3.2 million of his £8 million earnings to charity in 2005, including £1 million to a church youth club in Tonbridge near his home. He sees no conflict between serious boodle and his Christian faith and has no qualms about flying first class or staying in luxury hotels. ‘If you’re a Christian, you should reflect on some of the aspects of God such as creativity and love,’ he says. ‘We have backed a number of new technology companies that simply would not exist if we had not put money in.’

Then at the end of the article:

Giving money away is fundamental to his beliefs. Even at James Capel, where he claims to have ‘earned less than the secretaries’, he gave away 10 per cent of his income. ‘There is a dynamic where God blesses people who give,’ he says. ‘An awful lot of the men of God in the Bible were actually pretty prosperous.’

Strangely, Richards has barely heard of Sir John Templeton, the legendary Amer­ican value investor who launched his flagship Templeton Growth fund in 1954: $100,000 invested in it then would have grown, with dividends reinvested, to $55 million by 1999. Also a devout Christian, and now 94, Templeton has given away hundreds of millions of dollars to good causes. Richards might do well to read Templeton’s best-known book. It’s called The Humble Approach.

Templeton's The Humble Approach is among the books listed in the "Essential Reading" menu at the right.

Gold and Goldbugs

I've never thought of myself as a goldbug. I do favor having currency backed by some sort of commodity standard. And that commodity should probably be gold.

But then again, maybe I am a goldbug.

As Gary North writes:

The case for gold is the case against government control over the money supply. It is the case against experts who invariably substitute their judgment of what is best for society in place of the decisions of individuals regarding what is best for themselves. The case for gold is the case against the civil government’s manipulation of the money supply.

On a side note, I remember during the Asian crisis in the late 1990s that Mark Mobius penned an op-ed piece in The Wall Street Journal, where he made the case for a pan-Asian currency backed by gold. Or at least that's how I recall it. I've tried searching the column on WSJ.com but haven't been successful. If anyone reading this can provide a link, please post it in the comment section or shoot me an email.

More on 3i's Activist Investment Team

I recently posted about 3i Group (III/LN) creating an activist investment team -- that would buy stakes in publicly-traded companies.

My previous post linked a report in Britain's Daily Telegraph. Then yesterday I received an email from a reader with a linked story from The Times of London:

The move is a radical departure for 3i, which has concentrated on buying out quoted companies or investing in start up firms and floating them. It mirrors that of SVG Capital under Tony Dalwood, which specialises in taking positions in public companies and successfully agitated to oust Andrew Flanagan as chief executive of SMG this summer. Mr MacKay sits on SVG’s advisory board and 3i is a co- investor in some of its deals.

Philip Yea, the chief executive of 3i, said that the idea was to buy influential stakes in companies with a market capitalisation of about €1 billion (£670 million) in the industrial and consumer sectors. He emphasised that the aim was to work with the management of companies on an agreed change programme to reinvent their strategy rather than to take an adversarial role.

Dividend Deliberations

I've followed one of the late Philip Carret's rules: keep at least half of the portfolio in stocks that pay some sort of dividend. It's one of those things that just struck me as a good thing to do, so I've always done it.

But it's a rule of thumb. If "only" 49% of my stocks paid dividends, I wouldn't lose sleep.

I'm happy to own companies that don't pay dividends -- examples include DirecTV (DTV/NYSE), Deckers Outdoor (DECK/NASDAQ) and Comcast (CMCSK/NASDAQ).

And yet, you know I also love companies that make it a priority to return money to shareholders. Examples here include 3i Group (III/LN) and USA Mobility (USMO/NASDAQ), and also CBS (CBS/NYSE) and most recently BCE (BCE/NYSE).

The fact is, a mixture is good -- but focus your efforts on whether or not the company is a bargain. Whether or not it pays a dividend is a secondary consideration.

Lastly, Dan Caplinger of The Motley Fool.com presents an even-handed discussion of dividends here.

December 14, 2006

Jim Grant on Housing

James Grant pens yet another must-read piece in Forbes:

By a margin of almost 2-to-1, economists surveyed by WSJ.com last month judged that the worst of the residential real estate slump was history. House prices will soften in 2007, the sages predicted, but by only a little bit. In fact, 20 of the 49 respondents forecast a rise.

Ebenezer Scrooge was a mortgage banker, and the arguments I am about to marshal for a hard landing in housing might sound un-Christmaslike. But during the just-pricked bubble, it wasn't the Scrooges and the Marleys who lent more than 100% of the purchase price of a house without bothering to verify the income or employment of the applicant, or even to insist that he or she pay down a little bit of the principal now and then. House prices soared on the wings of the modern, optimistic, growth-obsessed mortgage industry.

And he offers some ways to play this:

Investment strategies to deal with this predicament could involve two exchange-traded funds. Bears on residential real estate could sell (if they own it) or short (if they don't) the StreetTracks SPDR Homebuilders (XHB) or buy the puts thereon.

To profit from a housing-induced drop in short-term rates, buy the iShares Lehman 1-3 Year Treasury Bond Fund (SHY) or its call option.

I need to point out that I am not invested in any of these moves, and I have no idea whether or not his views of housing will prove true. But I always find Jim Grant worth reading -- and his opinions worth considering.

Rogers: Dollar Down, Commodities Up

Tom Stevenson writes in the Daily Telegraph of Jim Rogers addressing the minesite.com conference in London:

Jim Rogers has told a packed audience of natural resources investors to "get out of the dollar, teach your children Chinese and buy as many commodities as you can".

In a hard-hitting defence of the raw materials bull market, the globe-trotting investor also warned that Russia faced continued disintegration, that the world's stock markets were overpriced and concluded that the US economy was probably in recession.

This further down the article:

Agricultural commodities are the next hot investment, Rogers told yesterday's minesite.com conference in London. "Wheat, soya, corn, orange juice are all far below their all-time highs. In bull markets everything eventually makes an all-time high and invariably it's multiples of the previous peak. There'll be some huge moves in agriculture."

He said he believed the commodity bull market could continue for another 15 years or more, but there would be setbacks along the way. "I expect the US economy is already in recession now and if it is not it will be within a year. You may have a consolidation in commodities next year if that happens, but it's just a normal correction."

Flint: GM and Ford Quitting Minivans

In his latest Forbes column, Jerry Flint writes of General Motors (GM/NYSE) and Ford getting out of the minivan business. He notes this news is unofficial -- though he has no doubts the news is true.

He reaches this conclusion:

Yes, this is sad, but as the saying goes: “He who runs away, lives to fight another day.” Ford and GM do not have much choice. They must adjust the lines. The only question is: Where will GM and Ford stand up and fight?

GM: More Popular Than A Year Ago

You know the old saying that goes something like this: stocks are probably the only merchandise that gains in popularity as they get marked up in price.

I thought about that when reading Mark Hulbert's latest MarketWatch column. He notes that General Motors (GM/NYSE) is up approximately 60% this year:

Though, with the benefit of hindsight, investing in GM stock a year ago looks like a no-brainer, at the time it was thought to be anything but. The buzz among investors was more focused on if and when GM would declare bankruptcy than on whether its stock represented an attractive turnaround play. In fact, as I pointed out in a column one year ago, just three of the investment newsletters I monitor were recommending GM.

The three newsletters? They are the Prudent Speculator, the Buyback Letter, and the Turnaround Letter. Hulbert says all three have excellent long-term records.

Well, Controlled Greed.com has only been around since April 2005. Hardly long enough to have any sort of long-term record -- good or bad. But based on Hulbert's column, it looks like I'm in good company in holding GM.

And, let me tell ya, GM gets way better press now than a year ago. If you've been a GM shareholder as long as me (early 2005) you know we're not out of the woods yet. But you also know the headwinds -- at least the journalistic ones -- are nowhere near as strong as last Christmas.

December 13, 2006

Motley Fool Reviews The Little Book of Value Investing

Ryan Fuhrmann of The Motley Fool.com reviews Christopher Browne's The Little Book of Value Investing.

It's a largely favorable review, and I believe Fuhrmann makes a good point here:

I wouldn't characterize the material in this book as groundbreaking, but I found it beneficial to read the ideas of an individual whose lineage goes back to the days when value investing was creating the first vintage of superinvestors. I personally enjoy reading any book on the subject and believe that Fools would be well-served to place The Little Book of Value Investing on their holiday shopping lists.

Need an extra stocking stuffer or two? Buy the book here.

An Ecore for Encore Wire

Last week, I mentioned that Bloomberg columnist and professional manager likes Encore Wire. Which also happens to be a big holding of Bill Thomas and Capital Southwest. You'll see that Dorfman again lists Encore Wire among the stocks he likes in his latest piece:

Encore Wire Corp. of Mckinney, Texas, makes electrical wire and cable for homes and commercial buildings. In the past five years it has increased earnings at a 44 percent annual clip. One risk for Encore is that copper prices will keep rising. A more profound risk is that new wireless technologies will reduce the need for wire and cable.

On balance, I think the potential rewards in Encore outweigh the risks. The shares sell for only four times earnings, 1.8 times book value (assets minus liabilities per share) and 0.47 times revenue.

I point out here that I don't own Encore Wire. But it does have appeal. If I do become a buyer, you'll read about it here.

Festival of Stocks #14

The 14th installment of the Festival of Stocks is up and running at the Endless Gibberish Personal Finance Blog. My post about tracking money managers is among the fine submissions you'll enjoy reading (or re-reading).

Stop by and check out the fun.

Third Avenue's Winer: Home Builders Not Cheap Enough to Buy

Michael Winer, manager of the Third Avenue Real Estate Fund Value Fund, tells the Reuters Investment Outlook Summit:

"We thought there might be an opportunity to start investing in home builder stocks if they got cheap enough ... but they are not there yet."

Winer reopened the fund last July. It has $3.3 billion in assets andcurrently has a very small exposure to home building stocks. It is now invested about 60% in real estate operating companies and about 30% in real estate investment trusts.

BCE Making Bullish Moves

Portfolio holding BCE Inc. (BCE/NYSE) was going to become an income trust, until the Canadian government changed the tax implications of such a move. So now the company has scrapped its planned income trust conversion, and is instead boosting its dividend by 11% and repurchasing 5% of its stock.

Catherine McLean writes in the Globe and Mail:

George Cope, president of BCE's main Bell Canada unit, will lead the charge to improve the former phone monopoly's performance by accelerating revenue growth and wringing more profit from a competitive market.

“Yes, we're asking the management team to step up to an aggressive execution in terms of our revenue growth,” Mr. Cope told investors at a conference Tuesday in Toronto. “Probably we knew [it was] greater revenue growth than a lot of people expected. It's now up to us to execute on this.”

And this:

“They hit all the right buttons this time on what makes the market like a stock,” said Greg Eckel, senior vice-president at Morgan Meighen & Associates in Toronto, which holds BCE shares. “They've definitely turned the beast around,” said Jonathan Popper, a portfolio manager at MFC Global Investment Management, which also holds shares in BCE. “It's got the foundation to head in the right direction.”

We're in very early innings with this pick. But I like the company -- an unloved legacy phone company -- and its management. Nothing is guaranteed, yet I am cautiously optimistic this will be a very nice investment.

December 12, 2006

Mobius in the Gulf

My last post mentioned that Templeton's Mark Mobius was speaking to the Reuters conference in New York from Dubai.

Here's a Gulf News article on Mobius' view of the region:

There have been several stock market listings this year in the Middle East but there need to be more. That was the message of Mark Mobius, one of the world's best-known emerging markets fund managers, who said that there are not enough initial public offerings (IPOs) coming in to keep prices at reasonable levels.

More:

Even with the corrections that regional stock markets have suffered this year, he believes share prices in the region remain high.

There was too much money chasing too few stocks," Mobius remarked. "But as the market begins to become more reasonable, people start to give up the crazy valuations that they had come to expect. It's very important for people to know that you cannot expect 30 or 50 times earnings that's not conducive to a healthy market. It's a good lesson and a lesson that everybody has to learn, whatever market they are in."

Interestingly, Templeton has opened an office in Dubai with analysts studying the region. But will he be buying stocks in the Gulf:

It really depends on price. We want to buy at a lower price. But, it also depends on earnings. If the earnings are moving up, we might consider coming in." he said.

Mark Mobius: 2007 Good Year for International Equity

Well, it's the time of year when the press is full of predictions for the next one. Some are more worthy of our interest than others.

One guy I enjoy reading is, as you know, Mark Mobius. Not because I'm big into emerging markets investing. I'm not. But because he applies a bottom-up, value approach to an area populated by momentum players.

Mobius addressed the Reuters Investment Outlook 2007 Summit in New York from Dubai. He said a flood of money being sent overseas by American investors, reasonable equity valuations and worldwide optimism all point to 2007 being another good year for international markets.

Mobius also stated that hedge funds, private equity money and institutions have supplied international markets with plenty of liquidity. He believes global markets on the whole haven't reached bubble territory -- though India's software and drug sectors are among the exceptions.

And, as we'd expect, concerns about the US Dollar also pushes American investors abroad:

"We are seeing now increased international interest in non-dollar assets. That is why we are seeing more money in emerging markets," Mobius said. If the perception of the international investor is that the United States is cleaning up its house regarding the government's debt load and the balance of payments, "we will see a reversal pretty fast."

According to the linked Reuters report, Mobius remains invested in oil companies and mining stocks. He believes oil companies would continue making money even if oil went to $30 a barrel.

He has been favorable on Russia for a long time now. Even with reports of Putin's strong-armed tactics growing over time, Mobius is still not bailing on the country:

Mobius said the Russian government wants to gain control of key parts of the economy, but "I don't think the Russians are interested in driving these people (Shell) away. I'm not that pessimistic about the situation in Russia."

"No One Who Can Be Bought Is Worth Buying"

Food for thought from Ben Stein:

Not one relative or friend who genuinely cares about you wants you to put yourself in extremis by spending too much on him or her. No one who really wishes you well wants you to overspend on him or her.

If you know anyone like that, he or she is not a real or close friend. Any real friend wants an expression of remembrance and affection from you -- not an encumbrance upon you. Every person who cares about you still cares just as much if you send them a heartfelt card as if you spent real money.

It's Madison Ave.'s task to make you think you can spend your way into someone's heart at Christmas. That's fine, but it's not true. No one who can be bought is worth buying. That's especially true where romantic love is concerned. Besides, this is the season of peace. For any real friend or lover or relative, your peace of mind comes first.

Excellent advice for this time -- or any time --  of year.

Drug Stocks, Warren Buffett and Me

Long-time readers of Controlled Greed.com know I've freely stated that I may have made a mistake not owning Merck and Pfizer. I looked at them last year, but never pulled the trigger because I couldn't get a feel for them.

Michael P. Cecil, M.D., pens an interesting Motley Fool.com piece asking, "Why Doesn't Buffett Buy Drug Companies?"

Doctor Cecil speculates on the reasons, which largely ring true. And when Charlie Rose interviewed Buffett on his PBS show earlier this year, Buffett reminded Rose that when Berkshire buys a company it has to be a big one.

Buffett chuckled saying he was looking for elephants. And Pfizer certainly qualifies on that account.

Then again, perhaps he's worried that litigation and government regulations threaten to turn these giants into dinosaurs.

DirecTV Keeps Getting Some Love

For us shareholders of DirecTV Group (DTV/NYSE), it's nice to see the stock making new highs. Yesterday, the stock moved higher apparently because the thinking of at least one analyst is that John Malone will be more aggressive in building the business.

I don't know if that's the case -- though I'd never complain if that turned out to be the case.

As you know, I was never unhappy with the Murdoch people running the company.

When I bought DirecTV last year, Wall Street didn't care of the company for two reasons. First, that the company basically subsidized subscriber's costs during the first year and the cash flow was masked. And second, that General Motors owned so much stock it was willing to dump that the "overhang" would hamper the stock price for the foreseeable future.

Both of those concerns are gone. In the first case, because customer churn is better. And in the second, because DirecTV bought GM's shares.

These days people are worried about satellite companies' ability to compete against cable companies that bundle services including digital phone service and high-speed internet. I agree that's a concern, but let's not get ready to dance on DirecTV's grave any time soon.

After all, my hunch is that Murdoch gave up DirecTV because it means ensuring his family's control of News Corp. -- NOT because he's down on the satellite company. And I bet Malone accepted DirecTV because he wants an operating business -- AND he believes DirecTV is an excellent asset.

December 11, 2006

Bloomberg's Currier Considers Emerging Markets Risk

Chet Currier discusses the risks of emerging markets investing in his latest Bloomberg column:

It's always nice to see patience rewarded in investing -- and even nicer if it happens without a long wait.                

Just ask investors, myself included, in mutual funds and exchange-traded funds that specialize in emerging-markets stocks. We have enjoyed just such a happy experience in 2006.

A knockout punch of selling in May and June wiped out about 25 percent of our money. But as a timely Bloomberg News story noted on Tuesday of this week, by early December we got it all back.

This further down the piece:

Lists of the top-performing U.S. mutual funds in 2006 bristle with single-country and regional funds from within the emerging-markets realm. A Bloomberg screen I looked at recently of the top 15 funds through early December included four China funds, two Russia, and one each from Mexico, the Caribbean Basin and Singapore.

One of the top gainers, the closed-end Greater China Fund managed by Baring Asset Management Inc., sported a return of 89 percent since last New Year's.

More David Winters

Coming on the heels of my previous post comes this article on David Winters from Morningstar in Canada. His Wintergreen Advisors is running a Canadian fund called Talvest Global Markets:

The Talvest fund is concentrated, with the top 15 names accounting for 80% of the portfolio. Winters limits single holdings to about 6%. As a long-term investor, he intends to keep turnover low. "We're owners of businesses--not traders of pieces of paper."

One stock he names is Consolidated Tomoka Land, which has been a longtime holding of Marty Whitman (though I haven't checked recently):

The firm has 12,000 acres of land close to Daytona Beach, Fl., as well as investment properties. A market favourite in 2005, its stock dropped almost 40% this year. "The stock had come down quite a bit because there is so much pessimism about residential real estate in that state," Winters says.

But he reckons that the company, which is debt-free, will benefit from continued population growth and the construction of two local hospitals. "The property is valuable today and hopefully time will be our friend," he says, adding that the stock is trading at a significant discount to its intrinsic value.

Another stock he likes is HSBC:

"It's a super-successful company that is globally diversified, conservatively managed and has a nice 4% dividend," says Winters, noting that the stock has been under pressure because of deteriorating loan quality in the U.S. "Over time, the underlying value of the bank grows," he says. "You get paid to wait--and get the future for free. It's a comfortable place to put your money."

IHT Investing Round Table

The International Herald Tribune just held its 10th global investing round table. The four participants are:

  • William Fries, co-portfolio manager of the Thornburg International Value Fund
  • Amit Wadhwaney, portfolio manager of the Third Avenue International Value Fund
  • William Wilby, director of equities at Oppenheimer Funds
  • David Winters, portfolio manager of the Wintergreen Fund

Wilby's apparently a growth guy, with the other three in the value camp. Asked what lies ahead in 2007, Winters says:

It's probably going to be tougher going forward just because you've had big runs in the markets and you have this confluence of factors of what is going on in the U.S., the weakening dollar, potential inflation. You have, "Is China going to continue to grow?" and "What's going on in Europe?" Along the way there will be some ups and downs, and that's what we kind of count on to buy some wonderful things at really attractive prices.

Third Avenue's Wadhwaney offers:

Three observations. One is this whole India-China madness that is going on. I think that is going to have a fairly ugly ending, or at least an ugly intermission. The second is, Bill Wilby talked about leadership change. There are so many aspects in the world of commodities that it is not obvious that that has ended. There is decrepit infrastructure in agriculture, mining and energy. The third is just a very naïve observation. I look around at the kinds of things we see as attractive. What frightens me is the absence of fear.

The linked article includes each participant giving stock picks. Winters names Anglo American and Imperial Tobacco in the UK among his selections, while Wadhwaney's favorites include Gigabyte Technologies in Taiwan and Saskatchewan Wheat Pool in Canada. Everyone on the panel likes UBS.

I don't own any of the names, but the article makes an interesting read.

DirecTV/News Corp.

A friend told me that Jim Cramer said Rupert Murdoch got the better of John Malone in the DirecTV Group swap. I didn't hear that first hand, and I don't really care. As a shareholder of DirecTV (DTV/NYSE), I was happy that the Murdoch people ran the company because they know about operating satellite businesses. And I'm equally content with John Malone gaining control, because he's a top-notch operator himself.

Like I said the other day, some of the share price increase in DirecTV has probably been due to the Murdoch-Malone swap. So it could come back down a bit. But I still think we will see more upside over time.

On a side note, both Breakingviews and The Lex Column note Murdoch's desire to ensure his family's control of News Corp. for future generations.

This from Breakingviews in The Wall Street Journal Europe:

Why would Mr. Murdoch be willing to forgo this premium from Liberty? For starters, by treating the transaction essentially as a buyback, and retiring Liberty's 188 million shares, Mr. Murdoch increases his control of the company to almost 40%. That's great for him and his children, but it isn't necessarily a win for minority shareholders.

And this from The Lex Column in the Financial Times:

For Mr Murdoch, it is about family control. A deal, which would not have happened otherwise, should make the Murdoch voting stake in News Corp pretty invincible. There is, however, a fig leaf for minority shareholders. News Corp earnings will rise significantly after what is effectively a huge buy-back, the capital gain on selling out of DirecTV is tax free and uncertainty is removed overall.

The Lex editors than consider Malone:

Mr Malone, meanwhile, also avoids serious tax on his News Corp stake. In all, the two sides could save billions in tax on the roughly $11bn swap, while each getting something they want: control.

Mr Murdoch secures News Corp for future generations. Mr Malone gets a serious media asset that he can try to run better, gear up or sell on in another tax-free deal. It won’t happen immediately. But it feels like only a matter of time before he tests regulators by attempting a merger with Echostar or a sale to AT&T. Only then would News Corp shareholders get an inkling of what their DirecTV stake might have been worth in a competitive auction.

December 09, 2006

Christopher Browne Audio Interview

Jim Puplava's Financial Sense Online interviews Christopher Browne, partner with Tweedy Browne and author of The Little Book of Value Investing.

You don't often get to see or hear interviews with the guys at Tweedy Browne. Of course, Browne is promoting his book, but this is still something of a rare treat nonetheless. Give him a listen.

December 08, 2006

BusinessWeek Offers up Gift Ideas for Stock Pickers

Alex Halperin of BusinessWeek lists holiday gift ideas for us stock pickers. Aside from Christopher Browne's The Little Book of Value Investing, I'm not too big on most of these. But big deal.

You see, for me, the best thing about these "list" types of articles -- "10 Books to read this summer", "Five mutual funds for the next decade", "Best places to retire in style", etc. -- is that they're fun. You have a good time agreeing and disagreeing with them. You spend a few minutes mentally making your own list and than go on about the day.

Getting back to the linked article. Here's what Halperin says about my favorite of his picks:

Some stock pickers prefer words to numbers. In the category of more typical investing books you might want to check out is The Little Book of Value Investing. Written by Christopher H. Browne, managing director at investing firm Tweedy, Browne, the book received strong reviews for taking a breezy tone as it describes the strategy that catapulted Buffett, among others, to riches.

Jonathan Davis Considers Risk

The Spectator in Britain recently expanded its business coverage. Resulting in more quality writing being added to the world's output of financial journalism.

The current edition offers up this column from Jonathan Davis:

A good general rule for investors is to take no notice of consensus predictions about what is going to happen in the next 12 months. The track record of year-end investment punditry is consistently poor. That makes the Christmas and New Year period particularly hazardous for the unwary investor, as the demand for forecasts is at its peak, and the capacity for misdirection consequently also high.

This is especially so for those who are not aware of J.K. Galbraith’s adage that economists forecast ‘not because they know, but because they are asked’.

Good stuff. You or I might not agree with every point made. But we value practitioners can certainly agree with this:

If investors look three to five years ahead, rather than to the fog of uncertainty that is 12 months ahead, future returns become more predictable.

Capital Southwest Shares Head North

As a friendly emailer pointed out to me yesterday, shares in Capital Southwest shot up bigtime. They rose more than 15% during the day -- a huge move for what is in many ways a closed-end fund. The stock has gain more than 70% in the past 12 months, according to Bloomberg.

Why the big move yesterday?

Because Capital Southwest owned 46% of Heelys, the novelty shoemaker, that went public raising $134.9 million, 20% more than planned. Capital Southwest owns 35% of Heelys after the IPO.

Reports I've scanned say that Bill Thomas, Chairman and President of Capital Southwest, is on Heelys board.

Motley Fool: Walter Industries "Best Small Cap for 2007"

Shannon Zimmerman of The Motley Fool pens this about Walter Industries (WLT/NYSE):

For the 10-year period that ended with November, this multifaceted industrial-goods player delivered an industry- and market-beating annualized return of 14.5%. Put in dollar-and-cents terms, an investor who plunked down $1,000 at the beginning of that period would have seen his or her money nearly quadruple by the time Turkey Day 2006 rolled around. Impressive, no?

Further down the article, Zimmerman refers to Walter's spinning off Mueller Water Products, and perhaps even its homebuilding division in the future:

In the assessment of my colleague Bill Mann, though, going that route would likely "unlock substantial value." I concur with Bill's take and think that, with a forward price-to-earnings (P/E) ratio that looks as scrawny as the company's current P/E looks rich, it's only a matter of time before everyone loves Walter again.

Well, of course I think he's right about that. As of now, Walter is doing well for the portfolio. It was bought in September at $43.21 per share and closed yesterday at $51.13. That's a gain of more than 18% in under three months.

Yes,that's a nice gain -- but regular readers will know that I've spent a good amount of time actually being underwater with this position. So Walter has moved up and down a lot in a short period to time.

And I'm willing to see it continue doing so.

I do have conviction that at the end of the day, it will be up and not down. But there are no guarantees. No guarantee that The Motley Fool is right about Walter being THE small cap of 2007. Or that I'm right that the company will turn out to be a profitable investment.

Anyway, I think Walter Industries -- and Mueller Water, for that matter -- are like a lot of value stocks: you establish your position at what you believe is a good price. And then just ride out the noise (and price swings) until the value gets realized.

December 07, 2006

The DirecTV Swap

As you know, DirecTV Group (DTV/NYSE) stock has been doing very well. I've maintained my complete position in the company, established last year.

The run-up in the stock is due at least in part to the long talked about swap between Rupert Murdoch and John Malone -- which has apparently now been done.

So don't be surprised if the stock sells off a bit. That's not a prediction. Anything can (and often will) happen in the short term.

I anticipate continuing to hold the stock, because I like John Malone as a business operator as much as the Murdoch people.

Age and the Portfolio Manager

Thought-provoking post on Paul Kedrosky's excellent Infectious Greed blog:

Portfolio managers are creatures, in large part, of their times. It's worth considering, therefore, that today's typical 40-year-old U.S. portfolio manager was ...

  • ... 31 years old in 1997 during the Asian financial crisis
  • ... 24 years old in 1991 when the Japanese real estate bubble imploded and the longest peacetime economic boom in U.S. history began
  • ... 14 years old in 1980 when the last commodity boom ended
  • ... 7 tears old in 1973 during the oil crisis when prices quadrupled

I might add the 1987 crash to the mix. Then again, maybe not.

A Bill Thomas Encore

In his latest Bloomberg column, John Dorfman writes of Encore Wire as an attractive small cap stock:

Encore Wire Corp. (WIRE) of Mckinney, Texas, is exactly what it sounds like: a maker of electrical wire and cable. It has been publicly traded for 14 years and has posted a profit every year except 1995. At four times earnings and 0.46 times revenue, the stock seems attractively cheap.

I don't own Encore but know it's a significant holding of Capital Southwest Corp., run by Bill Thomas. I've written before about Bill Thomas. And how I foolishly never bought the shares of Capital Southwest -- despite having more than one opportunity to buy the shares at bargain prices over the years.

My post about Mr. Thomas was written last summer and was popular with many readers. If you're a newer reader, be sure to check it out.

Oh, and one more thing going back to Dorfman's piece. He also mentions one of my holdings, Deckers Outdoor (DECK/NASDAQ):

Last year's selections gained more than 40 percent from Dec. 6, 2005, through Dec. 1, 2006, paced by a 115 percent advance in Decker's Outdoor Corp. (DECK).

Deckers has been a big winner for me personally. But I've sold part of my original holding, getting my original capital out. The stock is now a free ride.

December 06, 2006

John Ellis Changes His Mind

John Ellis used to write one of the best blogs around -- discussing everything from business and media to politics and even golf. Sadly, he hasn't been blogging much for the past couple of years. But when he pens an article for a publication he will often re-post it on his blog.

Ellis recently wrote a column for The Wall Street Journal saying The New York Times would be foolish to sell The Boston Globe. True to form, he's posted the Journal piece for all to read for free on his "inactive" blog -- but with a new intro:

I no longer believe that. I now think he should sell all of the "New England assets" (The Globe, the Worcester paper, the Red Sox stake and the NESN stake), and gather up $1 billion-plus. This would enable the Times company to enter the next (2009-2010?) recession loaded with cash.

The fact is that the Globe is doomed. Without union concessions, the cost structure doesn't work. And the unions will never concede anything, ever. So the NYT might as well get $600 million for it now, rather than $300 million for it in 2010.

I don't know if John Ellis is right or wrong -- but I always enjoy reading him.

Foreign Stocks Refresher

With recent mentions of 3i Group (III/LN), ArmorGroup International (ARG/LN or AMGPF/OTC) and Takefuji Corp. (8564/JP or TAKAF/OTC), now is a good time to remind readers of two previous posts concerning foreign stocks.

How to Buy Stocks Listed on Foreign Exchanges explains how I go about executing trades for shares not trading on US exchanges.

How to Research Foreign Stocks covers how I find and then get information on companies not listed on major US exchanges.

I offer these up with the following qualifier: these methods work for me. You may find them lacking, or have better options available to you. If so, great. If not, what I do may be of help to you in your search for bargains.

Also, if you're new to Controlled Greed.com, the two links above take you to very long articles. So you may want to bookmark them for future reference.

Kirk Kerkorian Lost (for now, at least) Because he's Kirk Kerkorian

Paul Ingrassia used to cover Detroit for The Wall Street Journal. He's written some excellent op-ed pieces for the Journal dealing with General Motors (GM/NYSE) over time. His latest is another fine piece of writing.

I agree with the thrust of what he says: CEO Rich Wagoner has won the battle against Kirk Kerkorian. Tracinda Corp. could always come back in, but for now Wagoner is the winner.

Just how did Kerkorian lose? According to Ingrassia:

Partly, it seems, just by being Kirk Kerkorian. Imagine if the avuncular Warren Buffett, instead of the reclusive and enigmatic Mr. Kerkorian, had purchased a big chunk of GM stock and pushed for an urgent transformation of the company. Such moves, of course, aren't Mr. Buffett's style. But had it happened, the dynamic would have been different. It would have been billed as America's most revered investor riding to the rescue, in the view of the press and public, instead of a "corporate raider" and "Las Vegas billionaire" out for a fast buck. But Mr. Kerkorian became the issue, instead of GM's chairman and CEO, Rick Wagoner, which is ironic. During Mr. Wagoner's first five years as the shareholders' chief steward, the stock went from more than $70 a share to less than $19 a share -- despite strong car sales, industry-wide, for the most part.

This further down the column:

GM's stock has recovered somewhat from a year ago, closing Friday at $29.69 a share, up 46 cents despite the previous day's news that Mr. Kerkorian was cashing out. So somebody, besides the GM directors, believes that Mr. Wagoner can turn around General Motors.

Like I've said previously, one likely reason Kerkorian walked away was because he -- apparently -- could get any of GM's major shareholder to join the fight.

CORRECTION: That last sentence should read that Kerkorian walked away because he -- apparently -- COULDN'T get any of GM's major shareholders to join the fight.

December 05, 2006

Times of London Writer: Search for Value can be Hell

This from the Sunday Times in the UK:

It is not the sliding dollar that concerns me, or any of the other big economic issues — it is valuations. As I mentioned here a month ago, I have taken a lot more cash out of the portfolio than I have reinvested in the past year. In part that is down to the fact that I can’t find value stocks — those offering high dividend yields, good asset backing, strong cashflow — at attractive prices. These are the kind of shares that have traditionally populated my Heaven portfolio.

Yeah, the writer is based in Britain and is talking about investing from the viewpoint of someone across the pond from me.

But I think he's essentially correct. I see bargains in the stock market here in the US as largely rare and believe the same is true in most markets globally.

I do own two UK stocks -- 3i Group (III/LN) and ArmorGroup International (ARG/LN or AMGPF/OTC).

I've kept my entire 3i position intact. But it's not the bargain it was when I bought it in the Spring of 2005. ArmorGroup is a recent addition to the portfolio and is up a tiny bit since being bought. I think it's dirt cheap and will be a rewarding investment over the next few year. But -- but -- it is in a risky sector and subject to crippling regulation (though I don't expect any to come about). So do your own due diligence before buying.

Bruce Teele: Value Man Down Under

The Age newspaper in Australia profiles Bruce Teele, a 69-year-old value investor in the country. He is manages AU$5.5 billion, most of it for the 80,000 shareholders of the Australian Foundation Investment Company, where he serves as chairman:

Over the decades, through many bull and bear markets, cycles and fads, his investment thinking became finely honed; mostly directed towards big companies and always on the lookout for shares that were out of favour.

Companies whose share prices had been knocked down, often in panic although the underlying business was basically sound.

He is the real McCoy value investor rather than a growth investor who buys relatively high-priced shares and chases whichever industry happens to be fashionable.

Like most successful value managers, Teele exemplifies humility:

"I'm not a program man. I'm not an index man. I'm really interested in trying to identify value because value ultimately becomes the reality," he says.

He sounds very much like the man with whom a great many fund managers like to publicly identify — Warren Buffett.

But the modest, quietly spoken Mr Teele is reluctant to mention himself in the same breath.

"I'd like to think I'm a little bit like Warren Buffett," he says, " but I'm very reserved about throwing his name around. But he's a value man."

Teele seems like a great guy. Nice article.

USA Today Reviews Browne's Little Book

Courtesy of VInvesting, I see that USA Today has reviewed The Little Book of Value Investing by Christopher Browne. Reviewer Kerry Hannon writes:

There is something heartening about a serious investing book that is sharply written, gets you fired up about buying stocks — and that you can read in one sitting.

Christopher Browne, managing director of Tweedy Browne Co., considered the oldest value-investing firm on Wall Street, has written just that.

In The Little Book of Value Investing, Browne begins by sharing the history of Tweedy Browne, founded by his father, Howard Browne, in 1945. Two of the brokerage's early clients: Benjamin Graham, who essentially created the discipline of value investing, and his young associate named Warren Buffett.

Today, Browne and his partners still adhere to Graham's core investment strategy. Value investing "requires the mettle to buy those stocks that the majority of investors don't want to own," he explains. "They have warts. They are out of favor."

Moreover, it requires "more effort than brains," he writes. And that means solid research, patience and ignoring all the noise that is swelling around what everyone else is buying. There is no instant gratification in this seemingly stodgy world of value investing.

You've read me say before, and I'll say again here, that Browne's book will be enjoyed by anyone new to the value investing approach as well as seasoned value players. He also devotes a good amount of space to applying the approach globally.

The last time I was in my nearest Barnes & Noble, there was a whole table devoted to the book. You could easily thumb through a copy in a bookstore and see if you like it. It is, after all, a little book. ;-)

Festival of Stocks Reminder

This week's Festival of Stocks is being hosted by My 1st Million At 33. Frugal was kind enough to include my post about Kirk Kerkorian unloading his entire position in General Motors (GM/NYSE). You'll find lots more stuff of interest -- so stop by and check it out.

December 04, 2006

UBS Bullish on Japanese Mergers

Piero Novelli, co-head of global Mergers & Acquisitions at UBS says M&A activity will extend into 2007 and prompt more consolidation in Japan, Asia and the rest of the world, according to this report in The Wall Street Journal:

"We want to maintain our market leadership in Japan and Asia," Mr. Novelli said, adding that the brokerage is looking for younger staff to train in M&A practices. "Japan is a market where we want to expand."

This year, UBS has been involved in some high-profile deals in Asia. It advised Vodafone Group PLC on the $15.6 billion sale of its Japanese mobile-phone operations to Internet conglomerate Softbank Corp. It also advised an investor group that helped take restaurant operator Skylark Co. private in a $2.2 billion management buyout, Japan's largest ever.

You'll want to read the entire piece. But this at the end pops out:

"We are very bullish on Japan," Mr. Novelli said. For M&A, "it could be the fastest-growing market in the world" in three to five years.

That may or may not help my Japanese stocks -- but it would be a great thing for Japan and the country's stock market investors.

Diggin' DirecTV

Portfolio holding DirecTV Group (DTV/NYSE) is mentioned in Barron's "Follow Up" column this week (scroll down to the bottom). I bought DirecTV in July 2005 at $15.50 a share and it closed Friday at $22.70 -- a nice gain of more than 46%.

Barron's noted the stock is up more than 60% this year -- as usual, I bought early -- and argues investors still might not sell, despite the run-up in price. I've kept my entire position intact, thinking we've got more upside.

Back to Barron's:

Indeed, DirecTV generated about $1 billion of free cash flow before interest and taxes this year, doubling last year's output, and analysts expect earnings per share to jump 21% next year, to $1.31.

In the third quarter, DirecTV's customer churn rate was a higher-than-expected 1.8%, and the company added fewer new subscribers than expected. But it was able to boost its percentage of higher-quality customers while containing subscriber-acquisition costs. Also, satellite-TV players continue to win "eyeballs," despite intensifying competition from cable. DirecTV has 15.68 million subscribers, up from 14.9 million last spring.

Barron's Donlan on Mutual Funds

Thomas G. Donlan in Barron's has been my favorite editorial writer for several years. I've never linked to him before because his editorials usually deal with political issues, which are irrelevant to this blog.

Or at least not directly related.

Anyway, his latest editorial (scroll down) touches on something relevant to my previous post about money managers. Specifically about many of them managing portfolios with billions of dollars in assets. And it reminds us that too many mutual fund families are marketing operations first.

Donlan writes:

Investors will crowd into successful mutual funds until they aren't successful anymore, indeed until all the success has been converted into management fees.

Johnsen asks us to imagine ourselves to be shareholders of a mutual fund of 100 shares, with a net asset value of $101 and a 1% management fee. If we shareholders expect that there will be no excess market return, we might pay the fee just for the manager to do paperwork and be satisfied. But if the manager can increase the value of the fund by $10 more than the market return, the fee schedule says we will pay 1% of $111, or $1.11, and the net asset value of each share will be $1.0989.

Not so fast: We win only if the fund is closed to new investors. If our skilled fund manager is widely expected to beat the market by 10%, many investors will buy shares at the beginning of the period for $1.

This is one reason why folks like Mason Hawkins and Staley Cates and the guys at Tweedy Browne are worthy of respect. In addition to being excellent investors with top-notch long-term records, they will close their funds to new investors when conditions warrant.

These people have significant portions of their personal net worth invested alongside their shareholders. So their interests are aligned with their funds' investors.

Tracking Money Managers

Andrew Bary in Barron's writes about something readers of sites like Controlled Greed.com are familiar with: tracking the holdings of successful money managers.

Of the investors mentioned in Bary's piece, Mason Hawkins and Staley Cates of Southeastern Asset Management are most familiar to me and my readers. Though, make no mistake, everyone named in this Barron's piece ranks as a more-than-noteworthy investor.

This is a fine article -- typical of Barron's in general and Bary in particular. And I'll only add these points:

  • Following the holdings of successful investors is something EVERY portfolio manager does and you should, too, if you're managing own money.
  • This is a great time-saver for individual investors, because you can piggyback off the research departments everyone from Mason Hawkins to Peter Cundill to Marty Whitman. And on and on.
  • This is a great starting point, but shouldn't be an end-all in an investor's search for stock market bargains. Read, read and read some more. If you're not naturally a reader in your daily life, you might consider hiring someone to manage your money, or check out mutual funds.
  • When reviewing a money manager's holdings, find out what price he or she paid in establishing the positions. Many times the price they paid is much lower than the price the stock is trading for by the time it's reported.
  • Always remember that most of these successful investors are managing portfolios worth BILLIONS of dollars. This means they can't take advantage of many smaller companies that might be bargain investments. But you and I can.

Like anything else in investing or life, tracking the moves of successful money managers isn't a Silver Bullet. But it can be an excellent tool in finding investment opportunities.

December 01, 2006

Kerkorian Unloads all of GM

Last week I speculated Kirk Kerkorian was unloading his position in General Motors (GM/NYSE).

Now he has.

The Wall Street Journal has an excellent feature article on this development -- and recaps the entire Kerkorian-GM saga.

Kerkorian's Tracinda Corp. reportedly sold its remaining 28 million shares to the Bank of America for $29.25 a share. The previous two stakes sold -- 14 million shares each -- were in private transactions for $33 and $28.75 a share, respectively.

This news, along with the GMAC deal closing, clearly has CEO Rick Wagoner and GM management popping corks and howling with delight. Whether their celebration will be short-lived or not remains to be seen.

For this GM shareholder, nothing changes. I am still holding my stock. I don't know what the stock price will do in the near term, but am confident it will appreciate over the long term.

I've held the stock for less than two years, though with the relentless GM-is-falling-and-it-can't-get-up news reporting it seems like forever. Let's see what the price turns out to be in 2007, 2008, 2009.

My bet is that the road for GM and its shareholders will be much smoother then.

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