Holding on For the Long Term

Sometimes, it makes sense to hold on for the longer term if a company's fundamentals are sound. 

Two companies in the Financial Log Book are rebounding from rather breath-taking declines: Polaris Minerals Corp (PLS) and WaterFurnace Renewable Energy (WFI).

Polaris is a young company and, therefore, can be expected to suffer up's and down's as business develops.  Significantly, the company has large reserves of high quality aggregate and is well positioned to supply the west coast market via low cost marine transport.  Now that the economy is recovering, Polaris should see some significant improvement to its bottom line.  Although I was somewhat disheartened by the major loss (at one point the share price declined by 90 percent from the initial purchase price), I also saw it as an opportunity to load up once I sensed that a bottom was established. The fundamentals of the company remain attractive even though its shares had been diluted as a result of refinancing activity.  As mentioned in the previous posting, I am almost even and anticipate good things over the next several years.  While I would prefer to hold this stock for many years, it may not be possible as the company would be a great take-over candidate by virtue of its outstanding attributes. The only caveat is that acquisitors would have to be sensitive to agreements with First Nations.

WaterFurnace is a sound company with good management, product offerings which are well regarded in the community, and a stellar balance sheet.  The company has undertaken some cost savings measures, but I'm pleased to note that it has maintained and even increased its research and development budget - company management is in it for the long term. Further, it pays out a handsome quarterly dividend and has increased it substantially.  It is now $0.25 U.S. per share.  

With economic recovery underway in the U.S., I am optimistic that its earnings will increase as a result of new construction activity and the upgrading of home heating/cooling systems by private homeowners.  Initial reports look good.  My only reservation is with the company's operations in China and the potential impact of a slowing of its economy.  If the buzz about China is to be believed, China has a huge overhang of commercial and residential inventory and it faces the prospect of a major correction in the real estate market.  As noted in an earlier posting (Financial Kowtow Hanfeng Style - March 16/13), I am reluctant to invest in China, having been burned on a few occasions.  The rule of law is suspect and company security is somewhat tenuous.  The situation is akin to Russia.  A Russian friend once opined:  "In Russia three parties could steal my business and I would have no recourse." (business partners, the mafia or the state).  He left Russia and brought his considerable talents elsewhere as he did not want to raise a family in such circumstances.  

The share price of WaterFurnace declined by about half, reaching a low in December 2012.  Similar to Polaris, I added to my position as the share price rose and have been pleased with the results.  As further consolation, the accumulated dividends have ameliorated the decline in the share price to the extent that they have covered 50 percent of the difference in the current share price (22.76 as of July 26/13 ) versus the original purchase price of $28.44 ... yet another benefit of investing in dividend stocks.  

I will leave it up to readers to do their own due diligence and attend to the financial metrics of these companies.  A good start would be to read their recent annual reports.  

In future postings, I will address the topic of "When to Sell".  The first posting will focus on reasons to sell - they're not all spurred by a desire to take profits or minimize losses.  

Interesting Tool for Visualizing a Company's Business

During a review of Silver Wheaton (SLW), I came across this site:  Trefis

http://www.trefis.com

The site features some powerful graphics which do an admirable job of describing a company's business - perhaps its best attribute. The "graphic snapshots" provide an excellent frame of reference for delving more deeply into companies which may interest you.  

The site also features a modelling capability which predicts the impact of changing product prices (or product mixes) on the stock price.  As readers may appreciate, I am always somewhat leery about long-range predictions on stock prices as there are so many variables which can confound computer models.  

I will visit this site as part of my future investigations into potential companies.  

Here is what the site has to say about Silver Wheaton:

http://www.trefis.com/company?hm=SLW.trefis#


Too bad that SLW did not hedge its forward sales.  With the expectation that the good times would roll on forever, precious metals companies unwound their hedges ... with disastrous consequences.  As the saying goes,  "Pigs get slaughtered." 

Yes, there will be some forced retirements from some of the majors ... and some of the juniors will be consigned to the "delisting track" as the value of their enterprises falls below the hurdles for listings on major exchanges.  Further, the survivors will find it difficult to obtain financing.  

There is a bright side to this.  In a few years, it may be worth looking at companies with excellent reserves.  As always, there will be a few far-sighted managers who will quietly acquire high quality properties at fire sale prices ... and so, the cycle will begin again.  

Polaris Minerals Corporation (PLS)

The first edition of The Financial Passage Maker (2007) presented a commentary on this company. 

My reasons for investing in the company were simple:

• a large resource of high quality aggregate to supply the "high end" of the market for aggregates
• agreements in place with local First Nations to ensure community support
• a strategic location which has the strategic advantage of low cost marine transport to large markets along the west coast of Canada and the U.S.
• the difficulty of opening new quarries in areas where it may be economically feasible to transport materials to markets served (or potentially to be served) by Polaris. 

The stock went into the proverbial pits as a result of various factors, including:

• the meltdown of the U.S. housing market
• financial difficulties on the part of cash-strapped, overextended state governments
• fear on the part of short to intermediate term investors. 

I bemoaned this state of affairs as I experienced a 90 percent loss on my position. However, I held on in the belief that I could, at the very least, eventually recoup a substantial part of my original investment.  My reasoning for holding the position never changed.  

In fact, I added substantially to my position when the stock price fell to $0.67 a share.  The valuation was too attractive,  even considering the potential for a dilution of stock as a result of the company's efforts to obtain new financing.  I am now almost "even" as a result of the follow-on purchase.  The share price is now valued at $1.89.  

http://www.polarmin.com/news/release?id=1020

If this news release is to be believed, the company is now debt free. The prospects of an increase in demand for its products should make future financing much easier than in the past, albeit at the risk of further dilution of its shares.  

The resurgence of the construction market in the U.S., coupled with an improvement in California's fiscal state has reawakened an interest in aggregate plays on the part of investors:

http://resourceinvestingnews.com/54060-opportunities-juniors-aggregate-highbank-sand-stone-gravel.html

You can expect more articles of this nature in the future.  I anticipate that the share price will increase .... it's been a long wait. It may yet be a case of delayed gratification writ large.   

Recently, I have been exploring potential investments in the "high end" of the aggregates market; namely, cement companies which focus on the commercial construction.  I have yet to find a compelling company, although there is one which has "turned the corner" and is now profitable.  To my mind, investing in aggregates makes a lot of sense, especially as there are few alternatives which are cost effective and accepted widely by the community.  At some point, when the cost of aggregates increases substantially, it might be worth investigating alternative sources/technologies ... but not yet.  The industry is inherently very conservative: regulations change at a glacial pace; and, many companies are risk averse, especially during these early days of the economic recovery. 

The Financial Passage Maker Returns

After a brief hiatus, I will renew The Financial Passage Maker via e-mail and postings on this blog.  I am now resuming the "hunt". 

A three week bicycle trip through some of the more depressed areas of the eastern U.S. has confirmed my impression that the American economy is improving.  As a result, I have renewed my search for investments, especially along the themes of infrastructure renewal and manufacturing with an emphasis on small companies.  

During the bike trip, I got to meet a wide variety of people, mostly in small towns and villages.  Many of them had suffered from the hollowing out of the manufacturing sector, the dislocation caused by the machinations of Wall Street operatives, and 9/11. 

American people are tremendously resilient.  

In almost all instances, people did not feel sorry for themselves or consider that they were "entitled" to state benefits.  Instead, they economized, scrambled by working at whatever they could and learned new ways to make a living.  Many of them were by no means well off, but there was a tremendous element of pride and, above all, self reliance and a sense of community.  This bodes well for the country. From waitresses and hotel keepers, to farmers and roadside workers and retirees meeting to have coffee in the early morning, there was a sense that things are starting to improve. Now, if only the rot at the top of the system could be addressed ....

While the hunt for new investments is exciting and often rewarding, the greatest financial rewards are achieved by establishing a strong strategic base: a financial plan (which has been addressed in earlier editions of The Financial Passage Maker) and  prudent asset allocation (which some people contend is more important to portfolio performance than stock selection). 

Much has been written about asset allocation, most of it in eye glazing prose.  Here is one treatise which is well worth reading. Make sure to follow the internal links for more detail. 

http://www.marketwatch.com/story/the-ultimate-buy-and-hold-strategy-2013-07-17?link=MW_story_popular

By following the basic guidelines Merriman sets out, the average investor can, in most instances, "do better" than most fund managers or financial advisors ... IF ... he/she has the self-discipline to be undeterred by the lagging performance of some asset classes in their portfolios.  

The American Association of Individual Investors offers some useful insights into asset allocation - this in addition to some great stock screeners to assist with the selection of equities.  I joined several months ago and the membership has been worthwhile in many ways.  http://www.aaii.com

A few remarks on my recent cycling trip with a old canoe buddy. After more than 30 years of annual spring canoe trips, we decided to do something different: take a three week cycling trip.  We flew to Washington DC and cycled north along the Chesapeake and Ohio Canal.  It was pure bliss, cycling through a wooded corridor carpeted with spring flowers ... and no cars as the towpath was restricted to non-motorized traffic.  We had no final destination in mind (could have been Chicago, Kansas City .. anywhere).  Upon learning about massive flooding along the Mississippi system, we decided to continue northward from Cumberland, Maryland to Pittsburgh along the Great Allegheny Passage, a spectacular rail trail.  We gradually made our way to Kingston, Ontario by following the shorelines of Lakes Erie and Ontario for a total journey of 800 miles.  We decided to make a bike trip an annual event.  

The C&O Canal is especially well suited to family travel and leisurely cycling as the towpath is level and well sheltered and served about every 15 - 20 miles by towns with services and accommodations which cater to cyclists.  For more information you can look at these sites:

http://www.nps.gov/choh/index.htm

http://www.traillink.com/

The Rails-to-Trails Conservancy is an American non-profit organization which promotes the development and use of rail trails. Its site is very rich.  Whatever some people may think of George Bush Jr., during his era a tremendous amount of funding went into cycle trails as a natural outcome of his personal interest in mountain biking.  (At least that is what a Democratically inclined cycle shop owner told me ... he sold a mountain bike to one of JW's body guards.)