Friday, December 30, 2005

Starting 2006 With Some (Hopefully) Interesting Ideas

It was interesting few months for the picks in our fledging blog. Not much activity since SAL's post in mid-November. There have been some great calls. Tony was right on (almost scary how good his call was) with PCA and ECA trading down before he would consider getting in. They hit his entry targets almost bang on! I continue to hold both. SAL's Newmont has made a nice move. And TX, how about VIA.TO! Nice call chief! As for me, maybe I should have stayed away from retail. But I still like SHLD. PIR on the other hand got clobbered. They are still struggling and things don't look so great. But I still think they will turn it around. It will be interesting to see if Buffett held on to the remainder of his shares after he dumped a bunch last quarter.

I thought I would get '06 started with a few picks that may be of interest.

Value - Tyco (NYSE: TYC)
Price: &28.86

This stock has been battered and still remains a turnaround story after the scandal. But the new CEO has had some success and has shed some non-core businesses. The sum of the parts seems worth more than what the stock is trading at. Buffett has taken a large position. TYC is also Legg Mason's Bill Miller's largest holding in his Value Trust fund.

GARP (Growth at a Reasonable Price) - Morningstar (Nasdaq: MORN)
Price: $34.64

You may have heard of MORN. They are the company that gives mutual funds their star ratings. They are well-respected and have a good brand. With calls for more independent research, they are well positioned to leverage their expertise to serve investors. What you may not know is that MORN also has some assets under management through Morningstar Retirement Manager as well as Morningstar Managed Portfolios. These assets are growing quickly and may be the hidden gem here. I also like the fact that the founder owns a huge chunk of shares and their customer service is top notch. Plus, nobody on Wall Street follows the stock yet.

Spin-off - Chaparral Steel (Nasdaq: CHAP)
Price: $30.25

Sound familiar? Yes, we did a case on these guys. I suppose at some point they must have been acquired by Texas Industries. But earlier this year, TXI decided to spin CHAP off and distributed shares to existing TXI shareholders. Unfortunately I missed this news. Since then, the stock is up 50%. But I think there is more upside. First, we know how this company is run. They have an awesome culture and all employees are shareholders. Second, the fact that they have remained solidly profitable through a downturn in non-residential construction shows how resilient this company is. Management is pretty much signaling that they see a turnaround coming. Hey, there is even talk of a few new office towers here in Toronto! By the way, in general, let's keep our eyes open for spin-offs. These can be quite lucrative if we cherry pick. Examples include GNW, HSP, AMP and FTI.

Financials/Insurance - Canadian Western Bank (CWB.TO) and ING Canada (IIC.LV.TO)
Price: $35.81 and ~ $51

You will see CWB branches if you travel to Western Canada. They are thriving. The bank doesn't pay much of a dividend. But they are extremely conservative when setting aside reserves for bad loans. Maybe too conservative. So you could say this is a value play. They continue to execute well and I think there is more growth to come. I don't think there is much downside at these levels. As for ING Canada, I missed this one too. Maybe you guys had noticed their IPO last year? Anyway, the stock has doubled in that time. My brother noticed Fidelity Canada has added significant position of ING Canada to its top 10 holdings in various funds. I am looking to accumulate positions in both these companies.

Hope to see you guys in the New Year.


Thursday, November 17, 2005

Sears Holdings and Pier 1

Ok, so I am talking about the un-sexy world of retail. I am not sure if you guys know much about the Sears story. To make a long story short, Eddie Lampert, a well known hedge fund manager ended up as the largest Kmart shareholder when that company emerged from bankruptcy. Soon after he engineered a merger with Sears to create Sears Holdings (Nasdaq: SHLD). The stock has come off its highs as people are starting to get nervous that Lampert may be a good investor, but he does not have the operational expertise to turn Sears around. A recent New York times article tried to argue that even as a real estate play the stock is overvalued. However, the article's reasoning was quite flawed. Plus, insiders, including a director, have recently been buyers of the stock. Meanwhile, Lampert has been plouhing through the share buyback program and retiring stock to the tune of $500 million. Sears has a good, albeit, tired brand. It has a vast underlying real estate empire, a Canadian operation, as well as well-known brands such as Kenmore and Craftsman. As for the operational side of things, Lampert has been emphasizing margins as opposed to top line growth. This is an unusual approach for a retailer, but it's all about cash flow for Lampert. On top of all this, Sears' cash pile is growing by the day and stands at around $3 billion. Lampert has been given free reign to use this cash as he sees fit by the board of directors. There has been talk that Lampert will eventually turn Sears Holding into an investment vehicle a la Warren Buffett's Berkshire Hathaway. If anything, buying Sears is giving you a rare opportunity to invest alongside one the most successful investors of our time. His ESL Investments hedge fund has had annual returns in excess of 25% since the late 80's! He has many billions under managment and has been entrusted with capital from the rich and famous including Michael Dell. I would say the downside is somewhat limited, but the upside could be huge. You can nibble at these prices (around $119 today) and load the truck below $110. This is a long-term play and a bet on Lampert.
Now onto Pier 1 (NYSE: PIR). This stock has been hammered. The company is getting its ass handed to it by the likes of Wal-Mart and Target. I was excited that Warren Buffett had added 8 million shares to his portfolio in Q2 at around $18. However, during Q3 he unloaded 5 million of those shares. The stock is now trading at $12 and a price to sales ratio of 0.6. It has a 3.5% yield. They have recently mailed their first national catalog in the US. They are also trying new ads on TV. Their balance sheet looks clean, although continued struggle could put the dividend at risk. Meanwhile, management has been buying back shares. The CEO has been at the helm for 30 years. So he has been through these cycles before. He may have his hands full this time though. A few more quarters of this and he may be sacked. As with Sears, I think the downside is somewhat mitigated here. It has bounced off of $10 twice in recent months and might be stuck at these levels for a while. But if there is a whiff of a turnaround, this stock has lots of room to the upside. I believe the stock is undervalued.