Tuesday, January 1, 2013

Top Investments for 2013

2012 Year in Review

Well 2012 was a fairly strong year for negative news yet surprisingly the markets were strong.  If this year taught me anything it was to avoid the headline news and just buy cheap stocks.  There was negative news regarding Europe most of the year and China has been a major drag on commodities. Interestingly enough, despite the negativity, the S&P 500 was up just over 13% and the Dow Jones Industrial Average was up just over 7% for the year. Here in Canada the TSX Composite index was up 2% for the year.  

So how did this compare to the stock recommended for 2012?  On average, they strongly outperformed the broader markets.  Due to my overweight in financials (stated at the beginning of 2012) contributed to very strong returns in my personal portfolio. 


Company  Ticker Return Return (w/Div)
Bank of America BAC 109% 110%
Goldman Sachs GS 41% 43%
First Niagara Financial Group FNFG -8% -4%
Sears Canada SCC -4% 6%
Speedway Motorsports TRK 16% 20%
Average Gain 31% 35%

Here is the graphical performance (click on image to see it better).



Now these five stocks soundly trounced the market as a whole.  It doesn't surprise me that the financials led the way with BAC powering ahead.  It was so cheap at the beginning of 2012 it was like shooting fish in a barrel.  Goldman Sachs performed much as expected but surprisingly it is still very cheap on a Net working capital basis (current assets less all liabilities including long term debt and preferred stock). 

I found the First Niagara results quite interesting but not overly surprising.  I find it amazing how many stocks sell on a price to earnings (P/E) basis while the underlying earnings capability is much higher.  For First Niagara, it's earnings are masked by large integration costs due to acquisition of the HSBC assets earlier in the year.  This reduced HSBC's profitability by 135 million in 2012.  I still consider FNFG to be cheap. 

Sears Canada's result was also interesting.  It was up strongly early in the year but ended flat.  They did pay a special $1/share dividend from it's cash hoard, so the return was still satisfactory. 

Speedway Motorsports benefited from the improvement in the economy.  This trend should benefit the company in 2013 as well.

Top Investments for 2013

Bank of America (NYSE – BAC, $11.61)

Berkshire Hathaway (NYSE - BRK.b, $89.70)

Sony Corporation (NYSE - SNE (ADR), $11.20)

Wellpoint (NYSE - WLP, $60.92)

POSCO (NYSE - PKX (ADR), $82.15)

Click Here for Investment Commentary 

Safe and Very Cheap (New Category)

Wells Fargo (NYSE –WFC, $34.18) & Microsoft (NYSE - MSFT, $26.71)

Wells Fargo was in the Safe and Cheap last year and it stays there again for this year.  I also decided to add MSFT this year because of the recent price decline.  To me the recent price decline make the investment even more safer.  As a shareholder I am very thankful that the shares are low and I hope they stay there.  Why you might ask?  So they can repurchase more shares at a cheaper price. 

Warren Buffett explained this well in his 2011 letter to shareholders.  While discussing his investment in IBM & share buybacks this is what he had to say. 

"...Today, IBM has 1.16 billion shares outstanding, of which we own about 63.9 million or 5.5%.  Naturally, what happens to the company’s earnings over the next five years is of enormous importance to us.  Beyond that, the company will likely spend $50 billion or so in those years to repurchase shares.  Our quiz for the day: What should a long-term shareholder (in IBM stock), such as Berkshire, cheer for during that period? 

I won’t keep you in suspense. We should wish for IBM’s stock price to languish throughout the five years...

The logic is simple: If you are going to be a net buyer of stocks in the future, either directly with your own money or indirectly (through your ownership of a company that is repurchasing shares), you are hurt when stocks rise. You benefit when stocks swoon.  Emotions, however, too often complicate the matter: Most people, including those who will be net buyers in the future, take comfort in seeing stock prices advance. These shareholders resemble a commuter who rejoices after the price of gas increases, simply because his tank contains a day’s supply. 

Charlie and I don’t expect to win many of you over to our way of thinking – we’ve observed enough human behavior to know the futility of that – but we do want you to be aware of our personal calculus. And here a confession is in order: In my early days I, too, rejoiced when the market rose. Then I read Chapter Eight of Ben Graham’s The Intelligent Investor, the chapter dealing with how investors should view fluctuations in stock prices. Immediately the scales fell from my eyes, and low prices became my friend. Picking up that book was one of the luckiest moments in my life."

I couldn't agree more.   

Some Honorable Mentions – Research in Motion (TSE - RIM, $11.80), Hewlett Packard (NYSE - HPQ, $14.25), Teva Pharmaceuticals (NYSE - TEVA (ADR), $37.34), Prudential Financial (NYSE - PRU, $53.33), Arkansas Best (NASDAQ - ABFS, $9.55) & a small Canadian energy company which I cannot disclose at this time (but perhaps in the near future)

Again for these stocks you will have to do your own homework. All I will say is that they all have wide appreciation potential but results will depend on the operating results of each company. Many of these companies have their own issues or problems that make the near future cloudy. That is why people avoid them but without uncertainty they wouldn't be cheap. Remember fear is your friend.

Cheers to another great year!


Best Regards,

Kevin

Disclosure – I own BAC Class A warrants, WFC, GS, BRK.b,  and MSFT. 

3 comments:

  1. Thank you for your insightful post.

    Yours is one of a handful of Blogs i thoroughly enjoy.

    ReplyDelete
  2. CVI - I have frequented your blog several times since discovering it a few months back. I enjoy your perspective, even when it does not run parallel to mine. I started my own blog about a month ago, but noted on it that I would likely stay away from stock analysis, reasoning that other blogs (such as yours) already provide this function, and not sure that is where my strength lies.
    Keep up the good work. I have you bookmarked and will continue to stop by.

    ReplyDelete
  3. Good stuff---waiting for commentary on WLP. Also, have been looking at MBIA which is one of Berkowitz Fairholme funds best ideas. The problem I have is not enough $ to invest when opportunity arrives-I regret not buying more BAC when it was $5 and C at $23, but I did get a few shares. Another one I wanted but didn't have the extra cash last year was WHR when it was at $55, and now i see it's $100+. I never would borrow $ to buy stock.

    ReplyDelete