Stalking Value: Q1 2008

The past few months have certainly been interesting in the markets with abundant change and volatility. But change seems to be in the wind for this value investor. Nothing has changed about my approach, discipline or belief that value wins out over the long-term for my specific capabilities, but maybe how I invest structurally is something that I’ve needed to re-evaluate for some time. More on that later…

The first quarter held some of the wildest swings in valuations that I’ve witnessed since becoming a DIY investor in early 2006. Although I was a student of the past Tech Bubble and other corrections, much of this behaviour was anticipated. What did surprise me was the sheer number and volume that participated in drops during January’s slide. A detailed watchlist, host of target prices, limit orders and significant cash on hand (at times in excess of 20%) didn’t help much when I consider that I missed out on many more stocks than I secured positions in. All of this leaves me with the nagging question of, “What that it?” I remember the monumental drops in valuation of technology companies, the heartbreak of investors who lost their livelihoods after Enron and Worldcom and I can’t help but be left with the thought that this can’t be over just yet. I don’t want to be pessimistic on the markets because after all we all have equity invested within it somehow, but I expected more doom & gloom, tears of sorrow and blood in the streets before all of this ended. Maybe I was over anticipating the value that might be created or which financial institutions would fall on their own sword, but all of this in time will serve as an important lesson in my still short DIY experience.

When I look back to the Value Portfolio at the end of Q4 2007 I don’t notice much change in the overall holdings or themes I remain invested in. The foundation of the portfolio still remains and most of my activity revolved around adding to existing stocks at depressed prices such as KEYN, WNC, WGI and PZA.UN. Of course some stocks continue to suffer and test my patience as an investor on almost a daily basis; specifically NBD, BPF.UN & MGO. Not a lot has changed in these stocks from my fundamental assessment of where they will be in future quarters, but it remains discouraging as a young investor to continue to witness the markets beating them down into submission regardless of my correct or flawed perceptions.

As of March 31st, the portfolio returned 6.5% during Q1 and sits on a cash buffer of 7.5% that is well below the 20% that I entered into the quarter with. There were some new additions with initial entries into positions of LEG, BDK, CB, ESEA & ORCL. ECA and LB take the place of two Canadian dividend stocks that were sold just prior to Christmas and help to generate some cashflow for the portfolio. LEG, BDK and CB were opportunities that I couldn’t avoid, while ESEA and ORCL follow strategies I’ve maintained in global transportation stocks and B2B technology companies.

There was also one surprise that I added of a well known Canadian laggard. After my numerous rants that as a business you should Never Compete on Price I added an initial position in Canadian grocer Loblaw after careful study of their real estate holdings and possible alternative routes the corporation may take. I’ll discuss this in a future post, but at some point in the future this stock will have a catalyst ignited beneath it from a frustrated investor base and sometimes you find adequate value in a stock that defies traditional logic for a sustained period of time.

The questions that continue to linger in the back of my mind largely revolve around the problems that continue to exist that can affect the markets. Housing losses have yet to settle into a bottom, writedowns are likely to continue over the next 8-12 months by large financial institutions, high energy costs persist and although it might appear that large systemic chaos has been averted by the US Federal Reserve in response to the collapse of Bear Stearns inflation has to be at the forefront of any longer-term view of those overseeing monetary policy.

It’s well documented that US consumers used their mortgages as an ATM to sustain purchasing well beyond the rise in annual incomes or savings. Is subprime where it all ends? If housing prices have dropped 20% on all mortgages and homeowners purchased their homes with less than 20% equity within the past 3-4 years, does that not present a problem regardless of what interest rate environment we find ourselves in? There has to be an effect to consumer spending from all this that demonstrates the massive personal debt load that Americans carry. Someone has to pay for all of this and I highly doubt that banks will take this all on the chin for everyone else. True they orchestrated this mess with ill-advised lending practices, but at some point they either express their true exposure to the ischemic debt and write it all off or find other ways of replacing losses by increasing fees, more stringent lending practices and focusing on their own survival instead of others. This leaves the consumer in a very bad spot with few or no options.

With all this in mind my current attention is focused towards sectors such as manufacturing, financials, international transportation and companies of high quality trading at low forward P/E’s neglected by the recent market upswing.

As I approach the One Year Anniversary of TMWTFS in Q2 I will have just turned twenty-seven and likely entered a more mature phase as a blog author. I still intend to post as often as I can, but my focus will largely come from topics of quality in comparison to quantity. By no means will I be avoiding posting for long periods of time, but as a maturing investor I will take the time to go more indepth in my analysis of companies for my own benefit and that of readers. I encourage frequent readers to utilize the RSS feed option I’ve included on the blog which can send posts via email or a RSS reader if one is used.