Posted by Davy Bui on March 12th, 2010 in Worth Reading (links to articles, etc.)
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Following up on the last post regarding peak oil and the demise of easy oil, today’s Wall Street Journal has several articles spotlighting the plight of oil majors:
While the details differ, the general theme remains the same — oil majors are forced to settle for 2nd tier projects due to being locked out of the best prospects, which themselves pale in comparison to the giant fields of Saudi Arabia or the once mighty Canterell Field in Mexico once you take into account the effort needed to exploit these new opportunities.
BP is buying Devon’s energy deep water assets at a fair price with little boost expected in their production profile for a few years. While Exxon’s deal to buy XTO will have more an immediate impact on production rates, analysts fear it to be a lower-return venture then the oil major has traditionally pursued. While US natural gas may be plentiful and repeatedly exploitable, it is also landlocked and subject to domestic pricing pressures.
Both instances confirm the days of easy oil are over.
Posted by Davy Bui on March 10th, 2010 in Worth Reading (links to articles, etc.)
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Many people have a misconception behind the basic premise of peak oil — they think it postulates that the world is running out of oil. Of course, the peak oil theory does not postulate that the world will soon have no oil. The world will always have oil.
Peak oil relates specifically to our ability to produce oil and the evidence grows clearer by the day that the low-hanging fruit — the gushing giant fields –are increasingly becoming a thing of the past.
Bloomberg published an article detailing the plight of major oil companies like ExxonMobil as they struggle with this new reality, coupled with the unwelcoming attitude of many relatively oil-rich countries.
Despite a worldwide recession and low utilization rates across the economy, gas prices here in California tread near $3/gallon, levels which would have spurred nightly news features bemoaning the profits of the oil companies only a few years ago. But we humans are nothing if not remarkably adaptive and do not seem to object to this “new normal” as it were, despite massive unemployment and stagnant real wages.
At some point, energy constraints will reassert themselves into the headlines. In what form or circumstance, we can not know but energy is the fundamental building block of modern society. Some might say tech but until we can transform hard goods into bytes, don’t believe it. While today may not be the most opportune moment, investors should look to build into energy positions when the time is right.
Posted by Davy Bui on March 4th, 2010 in Investment Strategies, Worth Reading (links to articles, etc.)
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Yesterday’s Wall Street Journal carried a good article questioning the status of the Baltic Dry Index (BDI) as a barometer of global economic health. The theory goes that dry bulk shipping rates are a good indicator of demand for materials. As the article points out, shipping rates can also be affected by a supply glut of tankers, which means investors should be wary of putting too much stock into the BDI when evaluating the global economy.
This article reminded me of other popular indicators investors often follow without examining the underlying fundamentals. One example is the VIX index, Wall Street’s supposed fear gauge. Before the 2008 meltdown, a VIX reading above 30 signified heightened levels of fear and possible panic — the proverbial prelude to “blood in the streets.” Those who staked contrarian positions once the VIX raced past 30-40 must have been dumbstruck (and poorer) when it eventually topped 80 in 2008.
My caution against blind reliance on indicators extends to nearly all investment metrics. Even my beloved free cash flow (FCF = operating cash flow – maintenance capital expenditures) can be misleading. Ideally, high levels of free cash flow signify a strong company with a reliable business position but it is possible to goose FCF by starving capex, which would eventually undermine the company’s ability to continue generating high or even normalized earnings.
Hence my repetitive admonition that further research is always warranted when evaluating investment opportunities. Just because a metric has never failed you in the past does not mean it won’t fail in the future. Investors must always be on guard against our own ingrained assumptions and beliefs.
Posted by Davy Bui on March 3rd, 2010 in stock screen
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Barron’s recently spotlighted Yahoo! Finance’s new Java-powered stock screener. As members know, I am regularly looking for new prospects so a new screening tool is of utmost interest. I am pleased to report that Yahoo’s screener works beautifully, with optimal user functionality and relevant stock metrics.
Using the Yahoo screener, I formulated this week’s stock screen. Free cash flow (FCF) is a metric often neglected by simple stock screeners but Yahoo! includes it. Unlike Morningstar, Yahoo also makes it simple and straightforward to screen for stocks selling cheaply relative to FCF and it is this criteria which forms the basis of our screen.
- Exchange-traded stock
- Enterprise value-to-FCF <= 10x
- Dividend yield >= 1%
Members should be keen to the fact that I am rather partial to dividends, hence the yield criteria to narrow our search. I excluded OTC and pink sheet stocks. I also had to adjust the results to exclude two stocks with negative FCFs, which turned the EV/FCF ratio negative and thus less than 10. The following six stocks made the list:
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Posted by Davy Bui on March 1st, 2010 in Enlightened-American Portfolio
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THE ENLIGHTENED-AMERICAN PORTFOLIO SPREADSHEET
- Enlightened-American Portfolio: +0.8% through Feb, 2010 (my actual IRR, including cash balance)
- DJIA: -1.0%
- Nasdaq: -1.4%
- S&P 500: -1.0%
- DJ Wilshire 5000: -0.4%
- Russell 2000 (smallcap): -0.9%
February was a sedentary month for us here at Enlightened American. Sometimes, indeed most times when dealing with investing, doing nothing is the best course of action and for that, we are in positive territory for the year, a feat not managed by any of the major indices we track.
Most of our companies have reported year-end results. I must stress again that we strive to pick stocks which will induce the least hand-wringing possible. As a result, I do not wait with baited breath for each earnings release — if our investment is so tenuous as to require constant monitoring, an exit is most likely in order. There have been a few such stocks in our portfolio in the past and almost all of them affirm this sentiment.
I reserve much of my commentary for members of EA-Premium (find out more about it here) but will make some comments on a few key holdings. For our current core holdings, Chesapeake Energy (CHK-D), Brookfield Asset Management (BAM) and our gold positions, we retain bullish sentiments. While I await companies’ annual reports to make a full report to members, here are brief summaries:
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Posted by Davy Bui on February 24th, 2010 in Pro's Picks
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The current issue of Barron’s carries a brief article on activist hedge funds[$] and makes brief mention of ValueAct Capital as being one of the elite activist funds, who as a group averaged gains of 144% in companies where they filed 13D forms. Readers can scan ValueAct’s holdings in spreadsheet form here but be warned that the 13F-HR filing does not disclose any information as to which companies they are mounting campaigns against. ValueAct doesn’t typically come into a new position with guns blazing but they will take a more active stance if the situation warrants.
- Three new positions include Kar Auction Services (KAR), Snap-On Inc (SNA) and Warner Chilcott PLC (WCRX).
- Divestitures include Equifax (EFX), Gen-Probe (GPRO) and Thomson Reuters (TRI).
- Strong conviction moves include an 80% re-up on CR Bard (BRC) and selling a quarter of the stake in Alliance Data Systems (ADS).
ValueAct also runs a small-cap operation, which lists their holdings in a separate 13F-HR filing. For smaller investors, this ground may be more fertile but requires more research and vigilance as some of the names are obscure. You can view their holdings in spreadsheet form and read on for a quick summary.
- The two largest new positions were Masimo (MASI), a medical devices company and Microsemi (MSCC), a semiconductor company.
- ValueAct Small Cap divested several, relatively small positions including tech companies, ValueClick (VCLK) and Cymer (CYMI).
- They added substantially to Immucor (BLUD), which is now the third largest holding by value shown in the filing. The fund also doubled down on Transdigm Group (TDG), which operates in the aerospace industry.
- Two previously substantial stakes were greatly reduced — Global Cash Access Holdings (GCA) and Bway Holdings (BWY).
View both filings in spreadsheet format:
See other managers’ 13F-HR filings here.
