Saturday, March 24, 2012

2012 Top Investments - On Fire

So far my 2012 Top Investments are on fire, mostly due to the strong rally in financial stocks (Read 2012 Top Investments).

top 2012 investments canada














Click on the image to make it larger. 

Year to date the S&P 500 is up 11% while my top 5 investment picks are up 34% on average.  Best performers are Bank of America (+77%), Goldman Sachs (+40%), & Sears Canada (+31%).  Laggards are First Niagara Financial (+15%) and Speedway Motor Sports (+9%).  My safe & cheap pick for the year, Wells Fargo, is up 22% year to date. 

Personally I don't find the results all that exciting yet, as Bank of America and Goldman Sachs are still both about 25% underwater from when I first recommended them in 2011.  To make a long story short, they are still undervalued by a substantial value. 

For those who have invested in financials, the fall in prices last year can be seen as either negative or a positive, depending on how you look at it.  Negative if you bought in 2011 have held on and are still underwater.  Positive on the other hand, if you took advantage of the situation to buy even more at even better prices, like I did. 

If you were able to separate your emotions from your thinking late last year, you're likely making out like a bandit this year. 

Current Commentary

As I have said before, you must constantly be on alert for investment risks.  Generally this means I am constantly on the lookout for those who have opposing viewpoints or see different risks than I do.  Risks in 2012 definitely are the Chinese real estate bubble (bursting) and the current bond bubble.  Beyond those two items, another huge risk is the Economic Cycle Research Institute (ECRI) is standing behind their recession call from September last year (Read Here). 

Who knows if the ECRI will be right or not on their recession call, but either way I'm not going to be ignorant.  Basically the argument from ECRI rests on the fact that the consumer is tapped out.  Given the recent uplift in the economy it's getting harder and harder for ECRI to justify that position. 

The bond bubble and commodity bubble (China) definitely represent actionable ideas.  I am actively looking at ways to go short commodities in a shotgun approach.  I haven't reached any conclusions yet.  My recommendation to anyone from Canada is get out of the TSX since Energy, Materials and Financials make up 26%, 20% and 31% of the index respectively (78% of total).  Needless to say I expect some carnage in the Energy and Materials sectors over the next few years. 

Anyone have any suggestions for any overvalued and over leveraged Energy or Material companies in Canada? 

Besides avoiding Canada I would suggest investing in the US markets for a couple reason.  First, the US markets are fairly valued with high quality large caps representing decent value.  Secondly, coming fall in commodities will make the Canadian Dollar fall relative to the US Dollar.  Theoretically this should add to you Canadian Dollar returns by holding US dollar denominated assets. 

If you absolutely must invest in Canada I would recommend Fairfax Financial or natural gas producers.  Fairfax, let by Prem Watsa, seems to have a handle on these numerous issues in the global economy.  Natural gas (NG) producers have fallen on hard times due to the warm winter.  This has caused current gas prices of less than $2/mcf in Canada, and have averaged $2.20/mcf year to date. 

Natural Gas

I finally took my head out of the sand and sold the majority of my natural gas related stocks last year when I changed my mind on the supply and demand situation.  The timing, while definitely a fluke, couldn't have been better (thank goodness for falling financials). 

NG is very oversupplied and those who think a quick return to $4-5/mcf gas prices will occur anytime in the near future need to recheck their assumptions.  Many NG producers are realizing the majority of their revenue from "wet" gas by stripping out the liquids which realize much higher prices.  For Peyto Exploration, the lowest cost producer in Canada, this means that even if NG prices went to zero ($0.00/mcf) they would still realize $2/mcfe from the liquids production.  Given that their cash lifting costs are $1.35/mcfe, they haven't shut in production although they just announced $1/mcf NG prices will be when they start shutting in production. 

For those long Oil, you should realize that NG will change the game in the long term.  If the US converted all 8 million heavy duty trucks from diesel to NG, US consumption of oil would fall by 3 million barrels a day.  The US currently imports 8 million barrels per day and 5 million barrels per day from OPEC.  This NG conversion would reduce 60% of OPEC daily imports, and account for 4% of worldwide demand.  For those who don't believe this is possible, you should be aware that the US has 3 times the amount of NG than Saudi Arabia has oil on an energy equivalency basis. 

Anyway, enough for now.  Back to my favorite pastime, reading. 


Best Regards,

Kevin Graham

Disclosure: Long: FFH, WFC, GS, BAC Warrants Class A, PEY

Books Recently Read - The Big Short (Michael Lewis), 7 Habits of Highly Effective People (Stephen Covey)
Books Currently Reading - Six Pillars of Self Esteem ***highly recommended*** (Nathaniel Brandon), & The Relentless Revolution (Joyce Applyby)
Books In the Cue - Predictably Irrational (Dan Ariely)

13 comments:

  1. As for overvalued energy companies in Canada:
    Try CPG.TO. Trading close to NAV, issuing stock hand over fist. Good yield that will work until it doesn't. Way more downside than upside if oil ticks lower. I agree, that you don't want to be too exposed to Canadian materials and energy. If you want energy exposure you can by it in the U.S. market at much better valuations.

    Andre DesRoches

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  2. Hey Andre,

    I would totally agree with you about CPG. They don't make money and keep issuing expensive stock to support the unsustainable dividend which in turn keeps the stock price high and the ponzi scheme running.

    CLL is another that will likely be a zero in a few years. Management is the worst and the heavy oilsands assets are among the worst.

    Regards,
    Kevin

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  3. Hey,

    Congrats so far on your performance to date. I started looking at super regionals today ie Comerica, Suntrust etc. I was just curious if you have any that you like, other then First Niagara? Or do you feel that the larger national banks are superior. Just curious its been a while since I've looked at financials.

    Thanks,

    Locke

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  4. I often wonder what I'm "missing" with regard to CPG, as many analysts, whom I respect, just LOVE CPG. Maybe they are enamoured by the payout, and don't care about long-term value creation.

    Andre

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  5. What you missing is how much money the Investment bankers are making from issuing CPG stock over and over again. Don't think for a second the anaysts are there to tell "the truth" inless they are self delusional.

    I'm sure you know how the game works.

    As for comment the regional banks, I don't like Suntrusts and have never looked at Comerica. I like Wells Fargo and it's the only bank I plan on holding long term.

    Kevin

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  6. Hey Kevin,

    Their is a stock raiffeisen bank i was wondering what your analyze is on this stock. To me the stock looks wonderfull, their is only one catch it has a npl ratio of 8%. Is this a problem for a bank?

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  7. Never heard of it. 8% non performing loans, is that a problem? Yes, especially considering that a bank typically has under 10% in equity. 8% NPL will make a bank insolvent real fast.

    Regards,
    Kevin

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  8. Kevin,

    Could you do an analyse of AIG? I am very curious about it.

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  9. Any new thoughts on Peyto given decade low NG prices?

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  10. Hi Anonymous,

    I might look at AIG in the future. As of right now, I am not interested. AIG appears to be cheap, however I don't want to be a partner with the governement. Too unpredictable. If someone like Warren Buffett bought a large state I might change my mind.

    New thoughts on Peyto? I like Peyto, I would recommend reading every president's letter. NG prices are not sustainable in the long term, but in the short term they may go lower.

    Regards,
    Kevin

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  11. Are you as a long-term investor buying Peyto then, given their depressed stock price as a relation to unsustainable low NG prices?

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  12. Hi Anon,

    Everyone will have to make their own decision. I really (really) like Peyto at these levels. Peyto may be the only profitable gas company in Q1. That said, their profit will be very, very small.

    Kevin

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  13. Does it not bother you that these same US banks were bailed out at taxpayers expense only to give their bosses big bonuses, when these banks are the very ones that created the mess in the US economy?

    ReplyDelete