Wednesday, February 29, 2012

Insight Into A Buffett Moat

Buffett's annual shareholder letter always makes for great reading, and 2011's edition, which came out a few days ago, was no exception. One thing that stood out for me this year was his discussion of one of Berkshire's expanding businesses; this discussion offers numerous lessons for investors looking to better understand "the moat" of this particular business.

Tuesday, February 28, 2012

Vancouver Housing Bubble: Part 2

Two weeks ago, we looked at the possibility of a Canadian housing bubble, and saw that Vancouver looked particularly bubble-icious in terms of new inventory. This is often a good indicator, as builders in a free, capitalist society should only overbuild if they are getting a strong price signal to do so. But of course, it is possible that builders are just irrationally overbuilding for some reason (e.g. government stimulus, tax credits, expectations of price increases etc.), so it does make sense to look at more metrics than just new home inventory before concluding that there is a price bubble.

The ratio of house prices to income levels is another useful metric for judging how expensive houses are relative to a historical standard. Canada-wide, this ratio is elevated, but perhaps not dramatically so. Recall from last week, however, that there is considerable variability with respect to housing data within the country. It, therefore, makes sense to look at this ratio for specific regions in order to identify trouble spots.

Considering Vancouver has the highest house prices in the country, it makes sense to start there.

Monday, February 27, 2012

OfficeMax's Price Up, Value Down

OfficeMax was discussed on this site just two months ago as a potential value investment. Since then, it's price is up some 40% while its value is (in my opinion, at least) down. As a result, OMX now makes the migration from the Stock Ideas page to the Value In Action page, and taught us a couple of lessons in the process.

Sunday, February 26, 2012

Competition Demystified: Chapter 4

The author of the excellent book for beginners, Value Investing: From Graham to Buffett..., is back, this time with a book about how to understand and analyze competitive advantages. Investors interested in better understanding what gives a company a competitive advantage must give this book a read.

Saturday, February 25, 2012

Competition Demystified: Chapter 3

The author of the excellent book for beginners, Value Investing: From Graham to Buffett..., is back, this time with a book about how to understand and analyze competitive advantages. Investors interested in better understanding what gives a company a competitive advantage must give this book a read.

Friday, February 24, 2012

Regulator Warns Auditors

In the continuing saga that is the prevalence of fraud by Chinese companies in the North American stock markets, Canadian regulators found that independent auditors are doing "disappointing" work. This is scary for investors, as the work of the independent auditors is a key component of the investor's ability to trust a company's financial statements.

Thursday, February 23, 2012

Your Valuation Affected By Government

The political bickering that takes place in Washington can usually be ignored by the bottom-up value investor. But not always. Yesterday, US President Obama announced a plan to reduce corporate tax rates from 35% to 28%, along with the cancellation of several tax deductions. It's worth it for investors to keep an eye on this situation, for if this plan (or some variation of it) makes it into law, it will have a dramatic effect on the intrinsic value of a number of companies!

Wednesday, February 22, 2012

Build-A-Bear Or Run Away From It?

Shares of Build-A-Bear (BBW) fell 30% last week after the company reported a lower-than-expected operating profit in its all important Christmas quarter. As a result, the company now trades for just a shade over $100 million despite a net cash balance of $46 million and decent operating cash flow over the last few years.

Tuesday, February 21, 2012

Advice From Schloss

Yesterday, investing legend Walter Schloss passed away. He had a superb 45-year investing record. Want to know his advice for beating the market? Here are his 16 Golden Rules, as summarized by Business Insider and as also discussed at frankvoisin.com last week:

Monday, February 20, 2012

Competition Demystified: Chapter 2

The author of the excellent book for beginners, Value Investing: From Graham to Buffett..., is back, this time with a book about how to understand and analyze competitive advantages. Investors interested in better understanding what gives a company a competitive advantage must give this book a read.

Sunday, February 19, 2012

Competition Demystified: Chapter 1

The author of the excellent book for beginners, Value Investing: From Graham to Buffett..., is back, this time with a book about how to understand and analyze competitive advantages. Investors interested in better understanding what gives a company a competitive advantage must give this book a read.

Saturday, February 18, 2012

The Upside Of Irrationality: Chapter 11

Through a series of experiments, Dan Ariely documents the many ways in which humans behave irrationally. By understanding these human tendencies, we can both learn to behave more rationally when it is to our benefit, and better understand why those around us are behaving in the way they are.

Friday, February 17, 2012

Canadian Housing Bubble, or Vancouver Housing Bubble?

When the US underwent its housing bubble (and subsequent burst) a few years ago, there were a few signs of trouble. New home inventories were high, as expectations were through the roof (never a good sign). Home builders traded several times their book values, suggesting extreme optimism and over-building (to capitalize on unsustainably high profit margins). Price to rent and price to income ratios skyrocketed.

Today, many are saying similar residential real estate bubbles are occurring in China, Australia and Canada to name a few. As a home owner in Canada, I'm interested in studying this phenomenon so as to ensure I don't end up on the wrong side of it

Thursday, February 16, 2012

Danier: That's A Lot Of Leather

Yesterday, Oddball Stocks had a great write-up of Danier Leather as a potential value investment. I wrote about Danier almost a year ago, but since then it has had a successful few quarters, accumulating cash while improving margins. At the same time, its price has actually fallen some 20%, making it much more attractive. If you're interested, go ahead and read the post at Oddball. The only thing I would add is that there is a dual-class share structure, and so the incentive for management may be skewed towards growing the company rather than returning the company's substantial cash hoard ($32 million in cash versus a market cap of $50 million) to shareholders.

Disclosure: No position

Wednesday, February 15, 2012

Shareholder Interests Aren't All The Same

Management will act in its own best interests, and for this reason investors should ensure that management's interests are aligned with theirs. Sometimes, however, management may be swayed to act in the interests of major shareholders, whether under the threat of a hostile takeover or as part of a courtship process for a friendly merger. Investors armed with this knowledge are in a position to better understand what is about to take place, and may thus make investment decisions that are in tune with their investment strategies.

Tuesday, February 14, 2012

Does Dacha Deserve To Be Your Valentine?

Rare earth metals are used in all sorts of applications from lightbulbs to hybrid cars. Their prices are rather volatile, and have swung dramatically in recent quarters on supply/demand issues and export restriction news out of China. Value investors may not be interested in buying rare earth metals at market prices...but what if they could be purchased at a major discount?

Monday, February 13, 2012

Amtech Trades Like It's Broke

You probably won't find a lot of value investors in the solar industry. As a relatively nascent industry, it hasn't yet proved its economic viability. Moreover, that viability is based on the prices of substitutes (e.g. natural gas, wind power etc.) and perhaps the support of the agents of taxpayers (i.e. politicians). Finally, there is a commodity-like element to this industry, as companies fight to provide relatively undifferentiated products to customers only interested in price.

This introduces a ton of risk into the equation for anyone trying to value a solar stock to any reasonable degree of certainty. But sometimes, could a balance sheet be so pristine that it trumps many of the downside risks, leaving only the upside potential of this volatile industry to the investor?

Sunday, February 12, 2012

The Upside Of Irrationality: Chapter 10

Through a series of experiments, Dan Ariely documents the many ways in which humans behave irrationally. By understanding these human tendencies, we can both learn to behave more rationally when it is to our benefit, and better understand why those around us are behaving in the way they are.

Saturday, February 11, 2012

The Upside Of Irrationality: Chapter 9

Through a series of experiments, Dan Ariely documents the many ways in which humans behave irrationally. By understanding these human tendencies, we can both learn to behave more rationally when it is to our benefit, and better understand why those around us are behaving in the way they are.

Friday, February 10, 2012

Western Union's Moat

Western Union's (WU) P/E fell below 10 the other day as a weaker than expected outlook resulted in a share price fall of almost 10%. The stock now trades some 30% lower than it did in 2008 even though the company's profits are higher now than they were then as the company has clearly benefited from having a moat.

Thursday, February 9, 2012

Find Local Advantages

I recently read a paper on competitive advantages in which many value investors will be interested. It's from 2005, so it does talk about Apple as being a company with no competitive advantage, but I think it has many useful elements nonetheless. The paper whet my appetite for Competition Demystified, which I look forward to reading very soon.

What do you think about the paper's conclusions? Do you buy this take on competitive advantages?

Wednesday, February 8, 2012

Follow Your Companies Full-Time

Many value investors tend to favour quantitative over qualitative factors when evaluating stocks. Nevertheless, it is absolutely imperative that investors go beyond the quarterly reports in evaluating a company's prospects.

Tuesday, February 7, 2012

An mPad Is Cheaper Than An iPad

Micropac Industries (MPAD) looks cheap...very cheap! It trades for $13.5 million despite net cash of $10 million and a profitable history: in the last four years it has total income of around $7 million. I read about this idea at Whopper Investments. If you don't already subscribe to that site, you should, as it has a number of actionable value ideas weekly.

Rather than just repeat everything he says about Micropac, I'll link just to his write-up of the company.

Disclosure: No position

Monday, February 6, 2012

I Don't Know

What makes these three words (the title of this post) so hard to say? Does it suggest ignorance, incompetence or lack of intelligence? In the investing world, the phrase is probably not used enough, which may lead to the very dangerous state whereby one thinks one knows something, but really doesn't.

Sunday, February 5, 2012

The Upside Of Irrationality: Chapter 8

Through a series of experiments, Dan Ariely documents the many ways in which humans behave irrationally. By understanding these human tendencies, we can both learn to behave more rationally when it is to our benefit, and better understand why those around us are behaving in the way they are.

Saturday, February 4, 2012

The Upside Of Irrationality: Chapter 7

Through a series of experiments, Dan Ariely documents the many ways in which humans behave irrationally. By understanding these human tendencies, we can both learn to behave more rationally when it is to our benefit, and better understand why those around us are behaving in the way they are.

Friday, February 3, 2012

Virco Manufacturing Gets Smoked

Virco Manufacturing's market cap has fallen from $50 million a few months ago to about $24 million today, giving it a P/B ratio of under 0.6. The company manufactures and distributes desks, tables, chairs and other furniture for the education sector. It is the largest such manufacturer for the preschool through grade 12 market in the US, and offers a range of services from installation to classroom design capabilities.

Thursday, February 2, 2012

Demystifying Advantages

On this blog, you will mostly find discussion of low multiple stocks, as far as investment discussions go. That is, a company undergoing some temporary difficulty that trades at a low P/E or low P/S or low P/B will be discussed, with the hope or expectation that it will eventually return an average return on capital, thus rewarding shareholders.

While Warren Buffett has made money in this type of investing, he no longer practices it. Instead, he focuses on finding companies with competitive advantages. These companies generate superior returns on capital. But as a result, they don't trade as cheaply, prompting this quote from Buffett:

Wednesday, February 1, 2012

LS Starrett Shows Jump

Almost two years ago, LS Starrett (SCX) was discussed on this site as a potential value investment. Having appreciated some 50% since that time, the stock now trades much closer to its intrinsic value than it did before. In so doing, it becomes the latest stock to join the Value In Action page, providing the following lessons along the way:

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