Showing posts from 2017

A Look at Tripadvisor (TRIP) and its Two Problems

It's hard to find anything that seems cheap in the current bull market but as in any market, some stocks do sell off for various reasons. One of the ones that attracts me is Tripadvisor (TRIP*). As the chart below illustrates, the stock is trading near a 5-year low and is down about 70% from its 2014 peak (share count hasn't changed much and no major return of capital to shareholders). (* You can also own TripAdvisor indirectly through John Malone's holding company, Liberty TripAdvisor, with ticker symbols LTRPA/LTRPB. You should evaluate this option as well. Sometimes holding companies, especially if it is well run like most Malone companies have historically been, are better; sometimes they are not (there may be additional overhead/fees for the holding company, may have worse shareholder rights (doesn't favour minority shareholders) and market generally places a holding company discount on such shares and they may be illiquid)) I remember looking briefly at Tr

First Look: Chipotle Mexican Grill (CMG)

This isn't my type of company. It isn't in my circle of competence...but I've been researching and studying the industry. It doesn't have the valuation I like... but that depends on what one thinks is normal earnings. What it is, is a contrarian, broken, growth stock with very good backward-looking numbers and uncertain future. Overview Chipotle Mexican Grill (CMG) is a restaurant chain that apparently pioneered and popularized "fast casual" dining--basically a cross between fast-food (e.g. McDonald's, KFC) and casual (eg. TGI Friday's, Chili's, Boston Pizza). The food is Mexican, prepared similar to fast-food restaurants and priced in between fast-food and casual (a burger at a fast-food place might be $4 whereas a burrito at Chipotle will be something like $6). I don't know much about restaurants and am not really into food--sometimes I wonder if I should even be looking at this company--but from reading numerous articles, it se

Sold: Cabela's (CAB) Merger Successfully Closed

I haven't had much time to blog and the highly-valued markets are frustrating for any contrarian or anyone waiting for low valuations. I have continued to research some companies and hope to write something up soon but the valuations are not compelling. If anyone has some stock ideas I should investigate, leave a message below or email me (If I am interested in them, I'll research it and write it up). In any case, the Cabela's (CAB) merger went through. This was a low return, short time-frame, situation and it worked out as expected although it went through a turbulent period. The stock sold off quite a bit after I bought it, possibly due to risk of the financial division sale not going through. That would have been the best time to enter this risk arbitrage position. It kind of seemed like this deal might not close and I would take a loss but fortunately it didn't turn out that way. As is usually the case with risk arbitrage, in hindsight the market always looks like

Warren Buffett's Timeless Investing Advice

Even if we are familiar with it or even if it seems blatantly obvious, it is always good to remind ourselves of fundamentals. Here is a short clip I ran across that captures Warren Buffett's timeless advice on his investing philosophy. Pretty much captures the key tenets of his approach: circle of competence, patience, and concentrated portfolio .

Purchase: Cabela's (CAB) - Risk Arbitrage Position

Cabela's (CAB) is being bought out by Bass Pro Shops (private) in a cash deal and I took a position in Cabela's. Deal is expected to close by end of Q3. The spread is around 4% and my expected return (based on my probabilities and downside) is about 2%. Not that great but if the deal closes within 3 months, then return is ok. This deal is a bit risky since it is a buyout of a retailer that has seen declining revenue and profits in the last few quarters. The whole retail industry is getting clobbered--the street blames Amazon and emergence of online retailing but I think the core problem is a likely decline in consumer spending (consumers have too much debt and have been living outside their means for a decade or more and we may be seeing an adjustment--and Cabela's is no exception. It has been so bad that the buyout price was revised down--goes to show the risk in these arbitrage situations; good thing I didn't take a position earlier--so things are definitely not goo

Bought: Monsanto (MON)

I bought Monsanto (MON) as a risk arbitrage position a few days ago. Potential return is pretty good if you believe the risk is low (spread of about 9%, my expected return of around 7.7%). Deal expected to close by end of this year (maybe worst case Q1 2018). I find it really hard to invest in this environment. Everything just looks highly valued and there aren't too many areas that are beaten down or appears cheap. I have been researching some out-of-favour industries (like retail, radio broadcasting, oil & gas) but they are not good industries in the long run. I hope my impatience doesn't end up hurting me but I took a really large position in this deal. I was researching the position for almost an year when the merger spread was much higher (18% as recently as January of 2017). In fact, it looked like an attractive position ever since Berkshire Hathaway took a small position late last year (likely as a risk arbitrage position but with spreads likely more than 20% at

Sunday Spectacle CCXXIX

Central Bank Money Printing Central banks generally increase assets by printing money and buying them, so the charts below are indicative of their money printing. Historically, increase in central bank balance sheet (i.e. increase in money printing and supply of money) has led to inflation in goods and services (this is offset by deflation or wealth destruction and a bunch of other factors). Recently most of the money printing has been used to buy financial assets--for instance, the JCB is a big owner of Japanese stocks--so it is not clear to me if the situation will be similar to the inflationary busts we have seen in the past. Beyond inflation, too much central bank asset purchases also distorts the market and crowds out the private sector--not a good thing from a capitalist point of view (private sector makes better capital allocation decisions than the government). It's interesting how the main 3 developed country central banks have behaved over the last decade.

Sunday Spectacle CCXXVIII

Decline in American C Corporations and the Rise of Pass-through Entities Catherine Mulbrandon from always does good work on economics and business graphics and this is another great one on American corporations and tax collections. It clearly shows something that is not widely understood by the public at large. Namely, the number of American C corporations--these are the ones that pay corporate taxes*--have declined significantly in the last few decades. The number of pass-through entities--these are ones that don't pay corporate taxes but instead the owner is taxed directly*--has risen. The biggest impact from all this is the reduction in corporate double-taxation (which benefits owners of such companies) and the decline in taxes being collected from corporations (which hurts government/society**). * I'm being very simplistic here and there is more complexity to the notion of how corporate taxes are paid ** This is only true if you believe go

Sold: Syngenta (SYT) -- Tender Offer Accepted

The Syngenta (SYT) buyout successfully closed about a week ago and ChemChina cashed out all shareholders that tendered the shares near the end of last week. If you haven't tendered your shares, you should do so immediately in the next round where they are accepting the shares; who knows how the untendered shares will be treated once the offer ends and you don't want to be in that situation (this is a Swiss company and is an ADR so squeeze-out rules may not be what a typical American or Canadian investor encounters). Overall, I'm very satisfied with this deal. The returns weren't that great--about 10% from the initial October 2016 position and about 3.6% from the April 2017 position--and the deal got delayed by about a quarter for regulatory reasons but it was a low-risk position and turned out as I was anticipating. This is the kind of risk arbitrage position I would like to take on. You learn a lot from deals like these. You don't get to see it reading this blo

Sunday Spectacle CCXXVII

Real Estate Contribution to Canadian Provincial GDP (source: " In Home Capital’s Mortgage Mess, Blame the ‘Unlucky’ Brokers " by Katia Dmitrieva, Bloomberg, May 23 2017)

Sunday Spectacle CCXXVI

Rise of Indexes vs Stocks Not sure what is counted as stocks in this graphic by Bloomberg but it's amazing that indexes outnumber stocks. That's beyond crazy. The number one function of stock markets, according to some theorists, is price discovery and wonder how much of that is lost due to the rise of indexes. Wonder how these indexes are going to behave during a market correction or a crash. source: " There Are Now More Indexes Than Stocks ," Bloomberg, May 12 2017

Sunday Spectacle CCXXV

American Business Creation/Termination I'm shocked to see such a low number of businesses (overall net) being created in the last decade. I don't know if the data is bad or something is being missed. This is probably good for existing companies but bad for society (since it implies less dynamic and less innovative economy). (source: 1Q 2017 GMO Quarterly Letter, GMO. URL direct link ; URL main website )

Sunday Spectacle CCXXIV

American Diet from 1971-2014 Here are some interesting facts about food consumption in America. Several other Western countries probably have similar trends, although the actual foods may differ somewhat (I expect Canada to be at least 90% identical to USA). The following charts depict various types of food consumption from 1971 to 2014 (there is also some data for Britain here ). I'm sure there are investment implications but I'm not sure how easy it is to predict such trends. When reading these charts do keep in mind that comparisons are complicated given that there is quantity but there is also price (not shown) i.e. some item may cost 2x what something else does. Some trends are driven by changing economics of the business. For instance, Americans used to consume less chicken (in terms of weight) in 1971 than beef but now they consume 2x as much chicken. Consumption of chicken has gone up around 2x while beef has declined and this is mostly due to cheaper cost of pr

Howard Marks: Markets Richly Valued but You Don't Have a Choice

Howard Marks gave his opinion on the markets and I thought it succinctly captured the current state quite nicely. His area of expertise is the credit market but given how stocks and bonds are all at high valuations, the views are applicable across the whole investment universe in my opinion. He basically says the market is richly valued but does not think it is overvalued or in a bubble. He thinks high-yield spreads--this is the spread between junk bonds and treasuries--needs to be smaller for it to be a bubble, at least in bonds. I also like how he thinks about the market and talks about how it is what it is and you don't get to pick how you want it to be. He states the market can be highly valued, fairly valued, or undervalued and right now it is highly valued--but you don't really pick how it is. If you are a professional investor or money manager, you kind of have to be invested in something so it comes down to earning the best out of the various possibilities. I

Sunday Spectacle CCXXIII

Cannabis (Marijuana) Stock Perfor mance Still not fully legal and market likely to be limited for a few years more but the Bloomberg Intelligence Global Cannabis Competitive Peers Index is worth around $55 billion. Not all stocks are 100% marijuana-related and most of the value is so far in the bio-pharma sector but still indicates market pricing for this emerging industry. source: " 54 Stocks Deep in the Weeds ," Laurie Meisler, Bloomberg, April 20, 2017

Sold: Khan Resources (KRI)

Some third party is making an offer (approved by Board) for $0.05 for remaining shares of Khan Resources and I figured the deal was going to be approved by shareholders so I sold out at $0.055. Overall I'm satisfied with this return given how most of the capital was returned very quickly last year. This is an ideal liquidation situation and I would invest most of my money in these situations if I could. Unfortunately the stock was lightly traded and hard to acquire many shares so couldn't build up any meaningful position. Sale Price: $0.055 Total Return: 5.1% (annualized approx. 10% -- meaningless since less than 1  year holding period)

Graham and Doddsville 2013 Li Lu Interview

The game of investing is a process of discovering: who you are, what you’re interested in, what you’re good at, what you love to do, then magnifying that until you gain a sizable edge over all the other people. -- Li Lu, Graham & Doddsville newsletter , Spring 2013 When I first encountered him many years ago, I didn't know how good of an investor Li Lu was. Now, it seems like he is one of the top ones. I don't consider him a superinvestor (yet) but that's partly because his record and his stockpicking is unclear to me. In any case, Charlie Munger is a big fan of him so Li Lu is definitely in the top 25% of the investing world. I ran across a very good interview with him in the Spring 2013 Graham & Doddsville newsletter (Columbia Business School). Some of you may have seen it already but it was the first time I read it--I was away from investing the last few years around the time of this report--and it is an excellent interview. If you haven't read it bef

Sunday Spectacle CCXXII

Source of American Government Funding (1873-1940) Ever wondered how taxation has changed in America over the last 100+ years? Following charts show the sources of government revenue in America from 1873 to 1940. Other developed countries are somewhat similar from a long-term perspective. Until the early 1900's, there was really no personal income taxes or corporate income taxes. Most of the revenue in the distant past was through customs levies and tobacco/liquor taxes. So basically nearly all government tax was consumption tax. The amount government collected was very small by modern standards (US government collected no more than 800 million in taxes in the 1800's whereas it generated 3+ billion by 1918). Government wasn't large and it didn't provide much in the 1800's (there was no standing armies for a long time, not to mention any notion of social welfare, public education, large-scale healthcare, no major public infrastructure projects, and so for

Sunday Spectacle CCXXI

American Retail Bankruptcies (to Q1 2017) So far, retail industry is on pace to set a post-financial-crisis peak. Retail is definitely overbuilt in America and consumer debt is also too high, so the shrinking of the industry is not a huge surprise to me (the industry is growing overall but most of it is in Internet sales and the number of retailers are shrinking). Internet cannibalization is also hurting retail but I think that is a slow long-term threat; the real issue is overbuilt retail with way too many retail chains, not to mention malls/shopping centers/etc. Retail is a tough industry for investors--generally no barrier to industry of any kind, and driven a lot by unpredictable hits, fads and trends (sort of like the consumer technology industry)--but I wonder if the current situation presents an opportunity. source: " Retail bankruptcies march toward post-recession high ," CNBC, March 31 2017 .

Purchase: Syngenta (SYT)

Added more to my risk arbitrage position in Syngenta (SYT). American and more importantly, European regulators approved the buyout a few days ago and I think this deal will close (a few other countries like China and India still need to approve but they generally don't challenge such deals). There is still a spread of a few percent and I figure it is a low risk bet. I think the spread should be smaller and not sure why it still exists (there is the possibility that this deal is too big and all risk arbitrage firms are tapped out; it's also complicated by the fact that the underlying shares trade in Switzerland). Purchase Price: $89.70

Sunday Spectacle CCXX

Forbes 2000 Largest Companies in the World (2016) Top public companies in the world according to Forbes, which uses a combination of revenue, profits, assets, and market value. source: " The World's Largest Companies 2016 ,", May 25, 2016.

Canadian Real Estate Lender, Home Capital Group, Terminates CEO

Not sure if this an isolated event or a symptom of a possible Canadian housing bubble, but Home Capital Group (TSX: HCG), just terminated its CEO. I don't follow Canadian financials so not sure but I think HCG may be the largest alternative real estate lender in Canada. CBC News reports  (Mar 28 2017): Home Capital announced Monday after stock markets had closed that that Martin Reid, its president and CEO, was out, effective immediately. Investors responded by sending shares of Home Capital down $2.66 to finish at $25.06 on the TSX. Reid has been replaced by Bonita Then, a member of Home Capital's board of directors, until a new permanent CEO can be hired. "Home Capital requires leadership that can bring to bear a renewed operational discipline, emphasis on risk management and controls, and focus on improving performance," said Kevin P.D. Smith, the chair of company's board, in a statement. In February, Home Capital said it had received an enforcement n

Sold: BCE (via MBT merger)

BCE (TSX: BCE) buyout of Manitoba Telecom Services (TSX: MBT) was successfully completed. I ended up with a return of about 1.8%, which is satisfactory. The best case outcome (if payment was 100% cash) of about 2.1% didn't materialize; instead, I ended up with a mix of cash and stock (original expectation was 0.7% but BCE shares rose (and I didn't hedge) so I gained about a percent from it). I wouldn't entertain these situations in the past but my portfolio is a little bit larger and transaction costs have come down a lot in a decade, so it is worthwhile for the time being. Sold: $59.06

Is the Market Overvalued?

We are in a very unusual time in my opinion. Presently valuations are high--whether you look at P/E (or the inverse, earnings yield), P/Sales, stock market valuation to GDP, Q ratio, or whatever else you want to use--but many argue it is not a bubble. Generally, the majority can make seemingly plausible arguments for high valuations during the bubble (otherwise you wouldn't end up in a bubble in the first place) so the fact that consensus says there is no bubble doesn't mean much. However, what is different right now, is that the contrarians and those that believe we are in a bubble, can't seem to make a strong case. I think the reason is due to there being no psychological or behavioural elements that are driving the bubble--the mania is missing. I think what is happening is that the mania is not in stocks but in bonds. The bond market, which is larger than the stock market, has a big bubble. Investors are literally buying bonds without any regard for yield, with big c

Sunday Spectacle CCXIX

Plastics & Pollution A new environmental scourage created over the last 50 years has arisen due to the invention of plastics. Very useful and unique but plastics don't degrade in nature very easily. Unfortunately, they are starting to pollute the oceans on a large scale... source: " The World's Oceans Are Infested With Plastic " (Niall McCarthy,, Mar 22, 2017)

The Thing About Healthcare...

Adam Davidson of The New Yorker had a good opinion piece about why healthcare is so important and unlike anything else and I thought I would highlight some of his points here. I struggle with healthcare spending and government policy because, on the one hand, healthcare is spiraling out of control and growing way beyond inflation or economic growth (not just in USA but in Canada and most of the developed world actually); but on the other hand, it is so important that as Davidson alludes to below, it should really be thought of more as an investment in the long-run future of the country rather than an expenditure per se. Titled " What the G.O.P. Doesn't Get about Who Pays for Healthcare " (Mar 23 2017) and directly addressing the Republican Party in USA, Adam Davidson writes (as usual, bolds are by me): In economics, when a person has some money, they can do one of two things: invest it or use it to buy something they want to consume. Most of the time, they consume. T

The Bizarre Case of Sears Holdings

Concerns that Sears (SHLD) is headed toward bankruptcy have been reignited. The company's shares closed Wednesday down more than 12 percent, falling below $8, after the struggling department store expressed doubt about its future as a retailer. "Our historical operating results indicate substantial doubt exists related to the company's ability to continue as a going concern," Sears said in an annual filing with the Securities and Exchange Commission. (source: " Sears tells investors nothing's changed, despite 'going concern' statement ," Krystina Gustafson, CNBC, Mar 22 2017) Headed for bankruptcy, right? Yet... Hopes raised by a chairman’s letter on future strategy March 9 were crushed Wednesday when Sears Holdings listed a “going concern” statement in its annual report. The same day, Bruce Berkowitz increased his position in the dying retailer 2.05% in his third purchase of the month. (source: " Bruce Berkowitz Buys More Shares of Sea

Don't Blindly Accept SEC Filings

Matt Levine of Bloomberg highlights how anyone can file anything on EDGAR , the SEC online report dissemination system (same thing probably can happen in other countries as well?). The person may still be criminally liable depending on what they file but that is after-the-fact, so one shouldn't blindly accept regulatory filings: The Securities and Exchange Commission's Edgar system for making securities filings is notoriously prone to hacking. "Hacking" maybe isn't the word; it's very low-tech. You submit an application to the SEC, have a notary stamp it, and get back your Edgar ID. Then you can just make whatever filings you want on Edgar. Want to say that you just bought Facebook Inc.? Sure, whatever, go right ahead, knock yourself out. Want to buy stock in a smallish public company, make an Edgar filing claiming that it's being taken over, and then sell your stock on the reaction to the fake news? Yeah that can sometimes work, though not as well as yo