Sneak Peek Into Value II:

It’s been just over six months since I wrote my first post providing some insight into my Value Portfolio, so I wanted to provide an update in order to shed some light on what I’ve been up to and what I’ve been concentrating my attention towards with all of the recent market turmoil.

Largely I haven’t been that inspired by much of what’s been going on recently in the markets. I haven’t paid much attention to the doom and gloom of some or fanatics surrounding commodities and agriculture. The more time I spend examining the rational fundamentals of those sectors the more I become concerned that a credit bubble and slowing US economy shouldn’t be the markets sole concerns. Value at the moment appears to be fairly scarce despite all of the acknowledgements by portfolio managers and retail investors supporting their own positions. There are certainly companies in sectors that look intriguing, but the absence of an essential margin of safety or my lack of confidence in fundamentals have prevented me from taking a slew of new positions I’ve examined. What I have concentrated on has been a focus on being paid to wait (dividends), focusing on high quality forward earnings (below 15x 2009), maintaining my current investing themes and applying my Value Rules in my fundamental analysis.

As I outlined in my previous post on Loblaw, I initiated a position in the company with the strong belief that I am buying their entire retail and grocery business for pennies per share after I evaluate the value of their current real estate. Many will discount this with a time factor (how long it takes to turn things around), but nonetheless the value of their retail segment when compared to competitors in Canada and the US make them an attractive investment for the long-term at this moment. Obviously recent changes in management were not what I had anticipated or would have liked with the dismissal of Mark Foote and continued faith in their present pre-school CEO (GWJ). Patience may reward me for identifying the value in this stock once operations are turned around or potentially acquired, but I still collect a decent dividend while I wait which I’ve already outlined as safe for a few reasons.

What I have managed to do for the moment is avoid what I outlined in my Outlook 2008 pertaining to the dreaded and formidable Value Trap. Any position I hold may find itself categorized as such in the future, but hopefully my due diligence has been sufficient enough to avoid such missteps that other investors have fell into. I have the strong opinion that some US financials will continue to give the false impression of being value stocks as they continue to struggle with balance sheet issues and massive write downs of debt. Consolidation is needed for this segmented market and to date I have not seen one single or group of stocks who appear to be capitalized enough with strong balance sheets to take on US acquisitions other than some large Canadian financials such as BNS and MFC. I’ve also been scouting some European ADR’s in recent months after my recent trip there in February and March, but have the view that an existing credit bubble present there is likely to swell to the surface in the future.

My cash position has come down in recent months from a high of 24% to its current level just above 9% as I’ve added to some long-term holdings and re-initiated positions in WNC and WIRE (which I had taken tax losses on in late 2007). I currently hold 29 stocks in a 50/50 split between CDN and US equities with my largest holding currently being KEYN (5.0%) and my smallest being TIBX (1.8%). Being paid to wait certainly helps your portfolio in almost any market environment as recent volatility has demonstrated. At a current yield of 3.50% (pre-tax) I’m gaining conservative cashflow even if the equities I hold and the market trades sideways over the short to medium-term.

I’ve also switched some stocks along my long-term strategy within the portfolio as I begin to view my role more as a portfolio manager of an equity portfolio rather than an independent investor. In recent months this has led me to include a balance among sectors incorporating exposure to gold, energy, consumer staples, financials, transportation and technology. The reduced turnover that I mentioned in my prior posts has also allowed me to enjoy a more conservative and hopefully sustainable appreciation within the portfolio as I try to avoid micromanaging my holdings and gain a more long-term view of my different strategies within the portfolio. These themes remain as transportation of commodities to EM’s regardless of their volatile prices, a focus on the need for more efficient technologies for networking and intellectual property by large institutions, depressed business trusts that offer compelling cashflow and deeply undervalued equities.

An interesting move that I made recently was purchasing common shares of FirstService Corp and then an equal weighting of their preferred shares to gain a splitshare exposure and yield of 4.6%. This stock isn’t something I would normally find in a screen or through direct experience but came upon it through a recommendation by a peer. After some tedious research I found that it provided an excellent opportunity for value as the company is mispriced and I gain exposure to a very attractive yield. Recently I’ve been spending a good deal of time researching preferred shares on the recommendation of this same peer investor and someone I admire as a mentor. It would appear that there are times when providing liquidity to investors wishing to vacate their preferred positions can yield a surprising opportunity for both dividend yield and capital appreciation once you understand the debt structure and mechanics of the specific issue and health of the balance sheet. Although this is my first venture into preferreds my intention at the moment is to continue to study the market and to add issues when they appear to be mispriced to either my Value or DivG portfolios when opportunities arise.

I’ll also be providing an update on my other portfolios shortly to shed some light on what restructuring I’ve been doing in the past three months in reference to my post on Rethinking My RSP.