Sunday, September 8, 2013

My 2nd Annual Schedule of Investments

It has been a year since I listed my holdings. So it is time to update. Below is a list of my 12 largest holdings, in order of size.

Position Category
Cash and equivalents
Wellpoint (WLP) US Large cap
McRea Industries (MCRAA) US Microcap
Seaboard (SEB) US Mid cap
Chevron (CVX) US Large cap
Tachibana Eletech (TSE:8159) Japanese Small cap
Philip Morris International (PM) US Large cap
AIG (AIG) US Large cap
Petsmart (PETM) US Large cap
Oi SABrazilian Mid cap
Installux SA French microcap
Bruce Fund (BRUFX) Mutual fund
Berkshire Hathaway (Brk.b) US Large cap

The big change from a year ago is a big allocation to small and microcap stocks. Up to a year ago, I had never bought an small cap, OTC or foreign exchange stock. I purchased my first two small/microcap stocks almost exactly a year ago. MCRAA has gone up 55% since then. But it isn't all that great for me as I slowly built up my large position in the last year. Globus Maritime (GLBS) has dropped -8% in a year. However I sold about three months ago when it was lower. If I had kept it, I would have a 10% gain.

The other big change is that I sold virtually all my tech holdings. I felt that in the last few years tech was simply too undervalued. But now it has probably reached reasonable levels. I don't believe tech is something to hold unless it is really undervalued. I think tech is structured too much for the benefit of employees. Even today, some thirteen years after the dotcom bust, Cisco still reports and focuses on the non-GAAP earnings. In the Q3 announcement, earnings were $0.46 GAAP and $0.51 non-GAAP. The non-GAAP is higher because it strips out the cost of stock options and amortization of goodwill, among other things. But like Warren Buffett says, if stock options isn't an expense, then what is it? And Cisco has been a serial acquirer. If the company doesn't write down goodwill, then it must stay in the books. But doing so would totally distort the equity value versus market cap. And the value of goodwill doesn't stay forever, it dies down many years after the acquisition.

I also bought a few cheap Japanese stocks within the last 12 months. These stocks have not budged much in USD terms. They are trading considerably lower than my estimate of their intrinsic value. I just don't get why. Tachibana Eletech for example trades well below net-net and has 8% ROE. Why? But despite my bewilderment, I am ready to stick with them for two or three years. I am not a believer of catalysts. I prefer to put my faith in the efficiency of markets. If the companies' fundamentals and the Japanese economy and monetary policy stay on track, the companies' stock price will eventually get to my value.

Speaking of efficiencies, IEHC reported first quarter earnings recently. When the company reported year end results, the stock price didn't budge. But on the first quarter results, the stock price jumped some 15%, for good reason. Earnings were up 64% yoy ($0.23 vs. $0.14), and revenue was up 11%. I could not find any insightful explanation for the increase in revenue and profits. However they did say that:

The circular product line of connectors introduced several years ago for the medical industry continues to be very rewarding for the Company. The line has been expanded to include connector cable assemblies utilizing the circular connectors.

A new product line featuring high density connectors is being added to the Company’s product offering. This offering should be available within the next few months. The Company expects the new product line to bring additional revenue.

The sudden price movement taught me a lot. IEHC is a $9 M market cap company. For its stock to move like that means the market can be efficient even for such a tiny company; investors like me are watching the stock.