Thursday, April 17, 2014

My Current Reading List

Exposure by Michael Woodford. About the whistleblower Olympus president who exposed how how the company covered up its investment losses. I think it gives great insight into Japanese corporate culture and problems.

The Shipping Man by Matthew McCleery. It's a funny fiction about a hedge fund manager who gets swallowed up by the shipping world.

Quality of Earnings by Thornton L. O'glove. Studying financial reports is by far the biggest task for an investor like me. This books points out some common and important gotchas to watch out for.

A good article that says you have to dare to run away from the herd to get superior returns.

A refreshing view of China's unusual economy; i.e. things aren't as bad as some would have you believe.

How the Economy Works by Ray Dalio. It is a neat explanation of the deflationary world that we live in. It may be a bit too simplistic but it  certainly helps my understanding.

The Greatest Predictor of Future Stock Market Returns. A very well thought out article, and I am still absorbing it.

Tuesday, April 15, 2014

Why I Bought Putprop

PriceZAR $ 7.00
Market CapZAR $ 201.60 M
($ 19 M USD)
P/E TTM *7.7 x
Div yield5.1 %
ROE7.7 %
While searching the world for cheap stocks, I typically choose a country and then do my research and run a screener looking for anything that strikes my interest. Last week, I decided to look at South Africa, which is a country I have never previously paid attention to.

South Africa a country with 50 million people. Its unemployment rate is high at about 25%. It has a 5.8% inflation rate, and it has about $50 bil USD in gold and foreign exchange reserves. In the last several years the South African Rand (ZAR) has dropped by a third. Today 1 ZAR is worth $0.095 USD. I guess this was in part due to the general decline of emerging markets all over the world. Interestingly, South Africa ranks quite high in corporate governance. Its corporate governance is higher than Singapore, Hong Kong and Germany.

So I looked at South Africa stocks and I was lucky enough to find a cheap smallcap that suits my style. The company is Putprop. Putprop is in the real estate rental business. It is not a REIT as far as I can see. I like the company because it has little debt, is very profitable, and sells for less than book.

So far it is all great news. But as with every great stock story, there usually are some skeletons there also lying in the closet.

Putprop gets 85% of its rental business by renting bus terminals and garages to Putco. Putco is South Africa's largest bus service that serves many disadvantaged areas. I am not an expert on South Africa, but for me cheap buses conjures up images of an integral segregation tool. The poor black population can work in areas where whites run businesses. But after work, they are forced to leave on crowded, rundown and dangerous buses. And Putco has a long history going back to the heyday of Apartheid. At that time it was run by Albino Carleos. At some point Albino Carleo also created Putprop.

Today Putco is still a rundown bus service. But it has less ridership than during the Apartheid days. Taxis and better shuttle services have cut into Putco's business. Putco has also changed ownership. I believe it is now mostly owned by blacks. Albino Carleo is no longer the CEO. And it has delisted eleven years ago. But Putprop still remains in the family. It is run by Bruno Carleo which I presume is related to Albino Carleo's, possibly his son, although I cannot confirm that.

Putco is obviously important to Putprop's well-being. But I think Putco's image also depresses Putprop's stock price. And I think the image portrays a bleaker picture than the reality. Therefore, Putprop is my kind of contrarian stock. The Putprop management says it wants to diversify its customer base. But considering that Putco is 85% of revenue, either management isn't trying very hard or management is very conservative. Still, I would want the company to err on the side of being too conservative rather than rush into reckless expansion. I also think Putco ridership can improve, no matter how bad the buses, South Africans are desperate for jobs, when the jobs come they will put up with the buses.

Putprop is a company with only a $19M USD marketcap. However, the South African Rand is cheap compared to the USD. Therefore, Putprop can be considered a much bigger company than a company with similar marketcap in the US. The company has great earnings power. However, they account for it strangely. The company assesses the value of its properties annually, and counts the unrealized gains or losses in the income statement. I am not used to seeing gains treated this way. I always used to see it as part of comprehensive income, but not regular income. This treatment has greatly exaggerated their reported income. The stock is 4x their 2013 income! For my purposes, I backed out the unrealized gains, and the caption box shows their adjusted earning and numbers.

In addition to the great earnings, the company pays a high dividend. And the company can easily keep this up as it trades at half of book, with no long-term debt.

A final issue to consider is the value of the Rand. South Africa has a slight trade deficit but the country is not desperate for foreign cash. So the currency is not at risk of devaluation. However, the Rand has depreciated by about a third compared to just five years ago. The Rand is at almost the all time lows. Of course, the flip side is that the Rand is low and can only go up.

That is about all I know about this company now, if I find any more info I will update.

Sunday, April 13, 2014

Why I Bought Hanover Foods

Price$ 122.00
Market Cap$ 91.5 M
P/E (2012)6.7 x
Div yield0.9 %
ROE6.2 %
LT Debt/TBV 0.11
Recently, I bought shares in an obscure U.S. food company I had known for about a year. I first heard about it from Oddballstocks — one of the best investment blogs out there, by the way.  The company is Hanover Foods (OTC:HNFSA). The company is not really public so it doesn't have to file with SEC. I took a while to invest with the company because I couldn't get access to their financials. I also wasn't sure how I could get access to the financials once I became a shareholder.

Hanover Foods makes the food products shown above. I do not ever recall buying their products or even seeing it at the grocery store. But I am not a person that studies a companies products when I invest. I focus on financial statements to make investment decisions.

Hanover Foods was a pretty straightforward decision once I had access to the financials. The company like many of my smallcaps, is in a staid business, trades at less than ten times earnings, and less than tangible book value.

In addition, the company is "dark", which could be a plus as well as a minus. When a smallcap company is dark it is under the radar of most investors. This could mean I can build a position at a low price. But of course someone can argue that the company can stay that way indefinitely. But I have faith in the markets and all securities will reach their fair values sooner or later.

Given the great numbers for the company the reader may ask what is the catch, other than the fact that the company is an obscure smallcap. Some internet sources especially Oddballstocks have explained the ownership strife and analyzed the company here and here. The company was founded by Harry Warehime. His descendants are still in control of the company. His grandson John Warehime is the current CEO, and half the board seats are held by the Warehimes. However, the family members are bickering incessantly. And some of their dirty laundry is even documented in lawsuits. From what I can gather there are people who second hand knowledge of the family and for them it appears that issue is about control and not money. As a minority shareholder, I want to ensure that those in control do not cheat the minority, and that the family bickering does not destroy the company. Regarding the first point, the family does not seem to be united so they can't be working together to take away value from minority shareholders. And regarding the second point, this has been going on for decades and in that time the company has grown earnings and equity. For details, the reader can refer to Oddballstocks.

A final issue is the lack of transparency regarding the actual diluted shares out there. The company has various stock option and incentive plans. But from what I have read, it appears to be in the range of 700-800k. So I'll use the mid-point: 750k.

Overall, this company is pretty simple and straightforward and I trust others' research. However, because this company isn't that transparent, I don't have a huge position. But if the reader wants to invest in this stock, she should do her own research! Don't do what I did, which is to rely on information in blogs like this one.

Friday, April 4, 2014

Inflation Is Back in Japan

Japanese companies said in a recent survey that they expect inflation to be 1.5% in the coming year. If true that would be an end to 15 years of deflation that has dragged down the Japanese economy. Though this is lower than the BOJ's stated target of 2%, I think the BOJ target was really using the target as a device to increase people's inflation expectations. I doubt that the BOJ really thought the 2% target was achievable.

The Yen is now at 103.8 to the dollar, which is around a high for the last five years. With this depreciation, may companies will now be able to turn a profit after years of losses, and hence pay taxes. Short term, I think this is great news. My Japanese holdings which I first began to buy 13 months ago are up about 20% in USD, including dividends. It is a decent result but not spectacular considering the current raging US market. It looks like I need to think more long term. I confess I was hoping for a relatively quick profit. I feel my Japanese netnet investments deserve to gain 50%, at least, so I'll keep waiting.

To read about my three Japanese investments, look for them under labels, on the right.

Wednesday, April 2, 2014

Betting Against Headlines

We have reached just a momentous milestone. Yesterday was the deadline for Obamacare's individual mandate. As it stands, Obamacare enrollment met its 7 million original goal, despite a lot of heckling from its detractors. And possible more will be tallied in the coming weeks. However, it isn't clear to me what these numbers mean. It could consist of a lot people who lost their existing insurance plans and who turned to Obamacare. In any case, it looks like Obamacare is here to stay.

WLP, my largest holding, has invested more than any other MCO in Obamacare. WLP shares have broken over the $100 barrier recently. That is a 20% rise from just 2 months ago at least in part because Obamacare has turned out reasonably well at this critical juncture,

As I have said before. Obamacare is huge and unprecedented, so it is almost impossible to predict. And I don't try. I just took the bet for WLP and Obamacare because I felt the market was overreacting. Every little glitch or complaint seemed to be magnified by the media. If I was wrong I don't think I would lose much. But if I turned out right like it now appears, I could make some good money. This is an asymmetric bet.

Also, Obamacare became law because Obama shoved his plan down the Republican's throats — not a single Republican voted for it in Congress. He needs all the cooperation from the people and the MCOs. I don't think of insurance companies under Obamacare as a traditional regulated industry. Obamacare is asking the MCO's to take on the risks but the government will backstop the MCO losses. Each MCO can freely enter the market in whichever state it chooses. US healthcare cannot work well if the MCOs are hobbled by the government.

As I described in 2012 when WLP was low, every year or two some crisis appears in the headlines that takes some stock to attractive lows. That's when I try to be brave and buy. This year the headline victim is Russia. As we all know, Ukraine had some political turmoil that forced out a pro-Russian leader. Russia's Putin then used the situation as a pretext for annexing the Crimea, which before the crisis was a part of Ukraine, but which 60 years ago was part of Russia.

I then read that the crisis has caused the entire Russia stock market to trade at about 5 times earnings! So I decided, based on my best estimate of the geopolitical situations and Putin's intentions, to make a bet on Russia. I bought some ERUS, the iShares' Russian ETF. As it has so far turned out, the situation has calmed down and it appears Putin has no more territorial ambitions. It also appears that the West is going to let Russia get away with it. I hope that the Russian market will return to the highs of 2013. If that happens I can make a 40% profit. I don't expect this to happen overnight. I expect it to take a year or two if it happens.