November 2013
The
Financial Passage Maker
The
Voyage
In recent
months, I've been occupied in some deep research on potential
investments and will report on that activity in future editions. I'm
especially interested in companies which have the capacity to manage
infrastructure development and renewal. I'm also looking for
well-managed small companies with leading edge technologies and/or
services. An example is Questor Technology Inc., a company which I
discovered about three years ago. I refrained from mentioning it in
The Financial Passage Maker
due to the small size of the company. I figure that the stock has
yet more room to run as the company's technology becomes more well
known. You can read about Questor here: http://www.questortech.com
1.
The Financial Log Book
I've
reduced my exposure to precious metals and locked in some nice gains.
The recent performance of the portfolio has been quite satisfying:
several holdings have increased significantly since the beginning of
the year, recording gains of more than 50 percent. I also rail
against proposals to extend pipelines to the west coast of Canada =
bad idea.
2.
View From the Masthead
I am still looking at establishing
a position in Cervus Equipment (CVL) a company with a business model
similar to Rocky Mountain Equipment.
I have invested in Oak Tree
Capital, largely on the basis of its cadre of able managers,
something which simply cannot be captured by quantitative metrics,
the value of which, in my opinion, is often over-rated by investors.
3.
View From the Gun Port
Investing in “fallen knives”.
4.
Recommended Reading for the Moorings
Howard
Marks pens some great “memos”.
1.
The Financial Log Book
| Entity |
Initial Price/ Purchase
Date
|
Price
2013-11-01 |
Gain/Loss
year to date
% |
Gain/Loss
Since Purchase
% |
Central
Fund of Canada (CEF.A)
|
9.77
2007-09-04
|
15.35
|
-26.6
|
57.1
|
Silver
Wheaton
(SLW)
|
12.37
2007-09-04
|
22.96
|
-35.1
|
85.6
|
| Polaris Minerals (PLS) |
10.70
2007-06-01
|
1.69
|
69
|
-84.2
|
| Cenovus (CVE) |
32.39
2010-07-27
|
30.54
|
-6.1
|
-5.7
|
| Canadian National Railway
(CN) |
48.88
2009-04-14
|
115.86
|
29.8
|
140.1
|
| North West Company (NWF) |
16.23
2009-05-07
|
25.5
|
19.2
|
57.1
|
| Powell Industries (POWL)
|
36.75
2009-11-12
|
62.13
|
49.6
|
69.1
|
| Waterfurnace Renewable
Energy (WFI)
|
28.62
2010-04-12
|
22.99
|
65.9
|
-19.7
|
| ABB (ABB-N)
|
20.18
2012-12-13
|
25.21
|
29
|
24.9
|
Oceaneering International
(OII-N) |
52.95
2012-12-13
|
86.14
|
64.1
|
62.7
|
| Deere & Company (DE)
|
88.07
2013-01-03
|
81.64
|
-5.6
|
-7.3
|
| Rocky Mountain Dealerships
(RME)
|
11.89
2013-01-03
|
11.83
|
2
|
-0.5
|
| HollyFrontier (HFC) |
47.95
2013-01-28
|
46.54
|
2.2
|
-2.9
|
| Titan Logix (TLA) |
1.25
2013-09-11
|
1.2
|
-3.8
|
-0.04
|
| Kelso Technologies Inc.
(KLS) |
2.20
2013-09-11
|
2.59
|
17.7
|
17.7
|
| U.S. Silica Holdings
(SLCA) |
25.15
2013-09-11
|
34.51
|
37.2
|
37.2
|
| Oak Tree Capital Group
(OAK) |
56.45
2013-10-28
|
|
|
|
Precious
Metals
I
have reduced positions in SLW and the Central Fund of Canada,
continuing a trend over the past three years during which I have
taken profits in several junior/intermediate producers of gold and
silver. Given depressed metals prices and high operating and
development costs, it is very difficult for companies to secure
financing at reasonable rates (if even lenders are inclined to
provide terms). Exploration has been curtailed drastically in light
of this. Adding further to the woes of some major companies is
political risk - especially in South America where local populations
are restive and governments are cash-strapped and in search of
increasing their revenue streams.
I
have maintained a small position in bullion (Central Fund) and in
SLW, a company which has been prudent in restricting its investments
mostly to stable countries and in its use of financial instruments
where operational risks are borne by producers. I will keep most of
the profits from the trimmed positions in cash for the time being.
(I am conducting a major review of our portfolios at the present
time. The review will revisit the families' financial plan and, more
important, a direction-setting strategy for our life over the next
five years or so. I will speak to this framework for this approach
in a future issue.)
SLW is suffering from low precious metals prices. My reason for holding on is that I like the company's business model and its management. I must confess to having fallen in love the company for a reason: I first bought in when the share price was $3.90. It's like an old dog: you simply don't love 'em and leave 'em. And who knows ... old dogs have the capacity to surprise owners with their vigour. Case in point: for a short period of two weeks this fall, Hunter (our aged Standard Schnauzer who suffers from congestive heart failure) renewed his love interest in other dogs, despite being neutered. He also extended his amorous attentions to the legs of two male neighbours ... much to their amusement.
In
a few years, I will again focus on explorers and junior companies as
the "mining cycle" repeats itself once again. Here is a brief synopsis of the mining cycle: Mining Cycle
I will monitor fallen angels with special attention to the following:
- great management with a proven track record
- high quality reserves which can be extracted readily using existing or tweaked technology
- good supporting infrastructure: power, water, transportation, labour
- location in a jurisdiction with the rule of law
- operations which can be restarted or ramped up reasonably quickly
The big question in all of this is, "Are we there yet?" No one knows. I'll play the waiting game in the company of my old dogs, Silver Wheaton and the Central Fund of Canada ... and they don't come with high vet bills.
Railway
Holdings
CN
continues to power ahead and the outlook for a new union agreement
looks positive. There are concerns that regulatory agencies will
impose stricter rules governing the movement of petroleum products by
rail and that costs will rise. However, in today's environment, it
is likely that increased costs can be passed on to customers, thereby
minimizing negative impacts on CN's bottom line, especially as all
carriers will be affected and that additional pipeline capacity will
not be on line until several years.
In
anticipation of the demand for new tanker cars, I purchased Trinity
Industries (not in the Log Book) at the start of the year and have
done well with a gain of about 45 percent. The company reported
recently on its quarterly earnings which are significantly above last
year's quarter. Its order backlog for rail cars is growing faster
than the rate at which completed railcars roll out of its
manufacturing facilities. With this and other railcar manufacturers,
there is some concern on part of the investment community that this
cyclical industry is reaching a peak; however, if more stringent
regulations for tanker cars are brought into effect, the company
could prosper even more.
The
Association of American Railroads has recently cleared the Kelso
Klincher® Manway (KKM) for unrestricted commercial use and this has
been reflected in the recent uptick in Kelso Technologies' share
price. The new manway is faster to use and more secure in the event
of a tanker roll-over caused by a derailment than older model
manways. (Protruding manways and the propensity of older model
tanker cars to rupture during derailments have received greater
attention from regulators in the aftermath of several highly
publicized derailments over the past several months.) As noted in
previous postings, Kelso has deep connections with some of the major
tanker car manufacturers.
Petroleum
Services
companies such as Oceaneering have been on a roll. Ditto for U.S.
Silica Holdings which provides sand for fracking operations. I
figure that Oceaneering International has some room yet to grow due
to superior technology and the inexorable trend for oil companies to
operate in deep water environments for a variety of reasons including
the paucity of opportunities for land-based operations as various
countries assert their resource sovereignty.
Sadly,
Canada has squandered some great opportunities for resource revenue
and the cultivation of technology and talent as a result of its past
and present resource policies .... but mine is a minority opinion
among investors. Further, the development of the oil sands
(sanitized by the spin doctors from the former term “tarsands) can
be characterized as the “gold rush frontier” approach during
which environmental safeguards e.g. monitoring, have been woefully
inadequate. Further, the development of oil sands technologies has
suffered as a result of past practices of companies not jointly
developing/sharing new technologies ... although this seems to be
changing. Luminaries such as Peter Lougheed, former Premier of
Alberta and one of the most admired politicians in Canada's history,
opined:
Revisiting
the oil royalty scheme that he helped create, he said: “I hope the
new government in Alberta will reassess this and come to the
conclusion that the mess, and I call it a mess, that is Fort McMurray
and the tarsands will be revisited… [Living conditions] are very,
very poor. I was just up there on a trip, just helicoptering around,
and it is just a moonscape… I keep trying to see who the
beneficiaries are.”
http://news.nationalpost.com/2012/09/14/a-legacy-rich-as-oil-ex-alberta-premier-peter-lougheeds-ideas-imprinted-on-party-still-in-power-41-years-later/
The
oil sands remain as a very attractive investment for major oil
companies and sovereign wealth funds. Within reason, costs are
known. Canada is politically stable and supports policies which are
"friendly" to investment.
The
oil sands territory has a good infrastructure for supporting field
operations and the transportation network will eventually be improved
with the result that producer revenues will increase. These factors
have been reflected in a new wave of investment in the area - this
despite rising costs for labour and materials.
A
major concern is the inconsistency in the Harper Government's foreign
investment policy which seems to be invented on the fly. Nowhere is
there a notion that Canada might want to embark on developing a
national energy strategy despite the fact that this is an area where
Canada has an international competitive advantage. Shameful. This is
a government, like its Tory predecessor, which has accomplished the
feat of shifting the country's balance sheet from black to red. This
is also a government which has the ability to pursue policies in
ignorance of the facts (e.g. advocating “tough on crime” measures
and more prisons in the face of declining crime rates) and gutting
internationally respected agencies (Statistics Canada and Environment
Canada) which provide much-needed data which is vital to resource
management and economic decision-making ... but enough of the rant
...
While
there is a need to improve the transportation network to move bitumen
from the oil sands to refineries, I do not support a pipeline to the
west coast. The risks are too high, especially in light of a looming
"Big Quake" which could devastate coastal areas and where
it would be impossible to implement pollution control measures in the
chaos of the aftermath. As one who has sailed those coastal waters
for five weeks, I have an appreciation of the complexity of this
sensitive marine environment and the operational difficulties that
would be incurred in the event of a spill. Even if substantial
resources were developed and positioned for pollution spill control
along the coast, it is very likely that they would be severely
impaired in the event of a tsunami or liquefaction events in valleys
and coastal areas. A look at various seismic maps will cause concern
on the part of any thoughtful person.
While
this map provides a geographic portrayal of the distribution of risk,
it is well worth reading about the implications of a major quake.
You can start your reading by visiting the following
sites:
http://commons.bcit.ca/civil/students/earthquakes/unit1_02.htm
http://www.scq.ubc.ca/the-big-one-understanding-why-the-big-earthquake-is-predicted-for-vancouver/
http://www.vancouversun.com/news/Monster+earthquake+threat+looms+over+coastal+communities/6279087/story.html
Rushed
"environmental assessments" will simply not "do the
job" in light of the severity of the threat posed by seismic
activity along the BC coast. As the Vancouver
Sun
article suggests, Canadians have not invested equivalent resources in
understanding the nature of the threat as have our American cousins.
Further, in light of the continued cut-backs in funding for
scientific inventories and basic research on the part of the federal
government, one must reach the conclusion that Canada is simply not
positioned to undertake a prudent assessment of the risk posed by
shipments of oil to and along coastal reaches in BC. It will take
decades to assemble data bases and gain a more robust scientific
understanding of the risks. It will not be in our national interest
to rush pell mell into building more pipelines to the coast.
Thankfully, we have several First Nations in BC with a long
experience of living in this environment and the constitutional power
to insist that a more prudent course is taken.
Agricultural
Holdings
They
say "nothing runs like a Deere". If you are in the race
for the "latest and fastest moving hot stock" you will not
invest in this company. However, if you are of the mindset that you
are willing to invest in a company with the following attributes and
the following strategic assessment of agriculture, then you will hold
the company dear to your heart:
leading
edge innovator
well
developed distribution system with a tradition of customer loyalty
continued
trend to the use of machinery in a more intensive way to save on
labour and maximize yields through the implementation of new
techniques
a
continued increase in the need for food
my
contention that climate change will be disproportionately less
severe in Deere's key market areas and further, that those countries
will have the resources, infrastructure and trained people to adjust
to the impact of change (as opposed to impoverished small holders in
countries such as India and much of Asia and Africa)
I
purchased Rocky Mountain primarily for its dividend. I like its
business model and the company management. It is a long-term
holding. While farm gate prices will fluctuate from year to year and
be reflected in sales by dealerships, I figure that the company will
be in my portfolios for many years. I do have a concern about the
difficulty of recruitment of staff in a highly competitive job market
in the Canadian west and will investigate this further. It may not
always be easy for the company to pass on increased costs to farmers
in all years, so it is reasonable to expect that there will be
variation in yearly profits. However, the financial condition of the
company is such that dividends should be maintained and, hopefully,
increased over time.
2.
View From the Masthead
A
Note About Adding to Positions When Stocks are Down – “Investing
in Fallen Knives”
Conventional
wisdom has it that one should never invest in a "falling knife".
An unquestioned adherence to this dictum would have left me deeply
in the hole with my investments in Waterfurnace and Polaris Minerals.
My additional investment in these companies could be characterized
as “investing in fallen knives”.
I
first established positions in these companies in the belief that
they were undervalued: Polaris in the sense that it has significant
reserves of high quality aggregate which could be moved cheaply to
coastal markets in vibrant areas along the west coast; Waterfurnace
in the sense that it has great management, a good balance sheet, good
and improving technology and that it was well positioned to deliver
energy efficient heating/cooling to residential and commercial
markets. My opinion did not change when share prices collapsed.
Instead,
I invested more, to the point where I doubled my original $ position
with Polaris. The results have been gratifying, especially as the
add-on investment was made near the bottom of the price chart. In a
sense, I got lucky ... but as they say, "luck accrues to those
who are prepared".
Other
than speculative activity (which I indulge in from time to time),
investing is a long-term activity. It literally pays to have
patience. I try to keep this in mind when looking at the performance
of my portfolios. Also ... to remember to take the time to do my due
diligence before I enter into a "investment marriage contract"
with potential members of my financial harem. The "love 'em and
leave 'em" philosophy yields only grief in investing and other
aspects of life. I much prefer to "run like a Deere".
3.
View From the Gun Port
Oak
Tree Capital Management LPP has been added.
See
Recommended Reading for the Moorings
for a brief discussion.
4.
Recommended Reading for the Moorings
Oaktree
Capital Management - Memos
From Our Chairman
While
browsing the net several months ago, I stumbled across a real
treasure: Memos
From Our Chairman,
a series of essays by Howard Marks, Chairman of Oaktree Capital. See
link below.Memos
From Our Chairman
He
has an elegant writing style. It is excelled, however, by the power
of his insights into all manner of things which affect the world of
investors ... and they are many. The insights are the product of a
distinguished academic background and, more important, experience
gained through more than four decades of managing money.
His
memos address a variety of topics ranging from The
Role of Confidence to
Assessing
Performance Records to
On
Regulation.
I especially appreciate Mr. Marks' ability to explore the
relationship between the "institutional view" and the
"individual view" (my characterization) and to arrive at
some conclusions which have practical application for investors like
me.
You
can subscribe to the memo series and receive updates via e-mail by
accessing the above-noted link.
I was so impressed by the
quality of his writing and the strategies of the company that I
decided to invest, especially after reviewing the resumes of key
members of staff and checking them out further through a search on
the Internet. So far my faith has been supported. Since the
original purchase in early March 2013, the shares have risen in
price by 10 percent. This has been supplemented nicely by a
dividend yield which is currently slightly north of 10 percent.
I'll leave it for you to undertake your own due diligence and arrive
at your own conclusions. Oak Tree occupies a spot in our RRSPs for
reasons of tax efficiency. (There is no withholding tax on
dividends from American-listed companies if held within RRSPs.) My
sense is that the company may be somewhat “market neutral” by
the nature of its investment strategies; however, I am a bit
hesitant to advance this as a major reason for establishing a
position in the company as my past experience with “market
neutral” investments has not been all that positive. (I dabbled
with the notion early in my investment career and learned to focus
on simpler, easier-to-understand businesses.)
In addition to
the company's regulatory filings, you can find a wealth of material
about the company. For example: insidermonkey.
A snapshot of the company is provided here: snapshot.
You
may wish to read one of Mr. Marks' most recent memos, The
Outlook For Equities.
I am conducting an annual review of our portfolios and have
incorporated some of the thinking in the memo as part of the
process.
Purpose
of the Newsletter
The
Financial Passage Maker provides ideas for people interested in
building wealth. It is aimed at thinking people who have decided to
take on personal responsibility for their financial well-being.
The
newsletter is issued more or less quarterly, a reflection of the fact
that good investment ideas are not all that plentiful ... certainly
not sufficient to justify a monthly or bi-weekly report. All ideas
presented in this newsletter are ones that I have invested in
personally. I am not interested in filling space with observations
about stocks I do not own. I eat my own cooking.
The
Financial Passage Maker chronicles the messy process of building
the equity portion of a financial portfolio. I hope that it will
provide some useful insights and enable readers to think critically
for themselves. As in all things, however, the path to financial
well-being takes consistent effort coupled with humility and a
knowledge of self. This can only be developed through practice over
many years.
The
Financial Passage Maker chronicles
my voyage in the investment world. In no way do I recommend that you
base your personal investment decisions on the contents of the
newsletter unless you are prepared either to consult a financial
adviser qualified in your area of interest or undertake due
diligence on
the basis of your own research - or both. Remember, in the final
analysis, you are responsible for your own financial well-being.
Would you have it any other way?
The
Financial Passage Maker can also be accessed here where posts are
added on a more frequent basis:
