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.
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.
As
evidence that the “market” is not “efficient” you may wish
to sample the writings of some other very successful investors.
http://www.forbes.com/sites/steveschaefer/2013/06/26/beyond-buffett-four-other-investor-letters-the-pros-are-reading/
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:
