Wednesday, April 27, 2011

Jewett Cameron: Buybacks Pay Off

About one year ago, a company by the name of Jewett Cameron was brought up on this site as a potential value investment. At that time, the stock traded around $7/share, but over the last few weeks it has approached $11/share, offering investors the opportunity to exit at a return of approximately 50%.

Of course, there many stocks that have generated this kind of return (or more) in the last year. But what made Jewett a terrific investment was the limited downside risk to investors. That is, even if the economy or the market tanked, investors would likely have been protected. This is something you likely cannot say about the vast majority of securities that have returned 50% in the last year. If we look at some of the key elements that made Jewett's stock a low-risk, high-return type of investment, it can perhaps help us identify stocks that are undervalued right now:

1) Despite depressed earnings as a result of the recession, the company's P/E was under 10
ROE averaged 15% over the last 5 years

2) The company traded for its book value, despite strong ROE (above) and large land amounts carried at historical cost

3) Management had been in place for 25 years, and held a significant stake in the company relative to his salary

4) The company had no debt but lots of cash

Notably absent from these attributes is a "story" of why the shares should rise (predicting future market sentiment on a particular stock is practically impossible) and a known catalyst event that is expected to vault the stock upwards (if a catalyst is known, it's usually too late to buy the shares).

There's nothing overly complex about these attributes. All they signify is that the company was cheap and solvent, generated strong returns on capital, and had an experienced management team with incentives that were aligned with those of shareholders. And that's really all you need!

Disclosure: None


Dominic Nadeau said...


Why aren't you long anymore on this stock? You think value was realised?

Saj Karsan said...

Hi Dominic,

Yeah I felt like Mr. Market offered me a fair price on it.

Dominic Nadeau said...

Oh. Okay! may the future says you're wrong... I'm still long! hhahahha

You may check why here...