Sunday, January 3, 2016

Top Investments for 2016

2015 Year in Review

The story of 2015 was the carnage in commodities and the weak Canadian Dollar.  This has been a reoccurring theme on this blog.  This is what I said last year.

"Fellow Canadians could have benefited from the fall in commodities by not owning Canadian Dollars.  Canadians who invested in the US not only realized out sized gains this year, they also realized foreign currency gains that contributed an additional 7% to their returns.
I figured it was only a matter of time before oil fell and boy did it in fall off a cliff in 2014.  Similarly, the falling Canadian dollar was another theme that continued in 2014.  As I have said before this is a great way to be short commodities since the Canadian dollar is very closely tied to commodity prices."

By owning USD assets, the gain for Canadians was 19% this past year.  Here is what happened to commodities in 2015. 


2015 Market Returns





Market returns were mostly flat with the commodity heavy TSX falling the most.  As most Canadians are now aware, it was a fantastic year to own USD assets.   


2015 Stock Recommendations

So how did the stock recommendations for 2015 turn out?  Total returns include dividends and I also included what the total returns were in Canadian dollars (CAD).  Overall the results were terrible but were helped greatly by the falling Canadian dollar.   




Despite the very poor returns, I still like many of the names on the list.  They are cheap and some got really cheap this year.  That is the way it goes some times. 

Since I have been at this blog for 5 years now, I thought I would include the following graph.  Picks on this blog have soundly trounced the Canadian market. 

 


Top Investments for 2016

IBM (NYSE – IBM, $137.58)

Ezcorp (NASDAQ - EZPW, $4.99)

POSCO (NYSE - PKX (ADR), $35.36)

Peyto Exploration (TSX - PEY, $24.87)

Russel Metals (TSX - RUS, $16.07)


I still like IBM, EZPW, and POSCO.  See what I said about them last year for more information.  During the past year I have purchased more IBM and EZPW. 

The two new names on the list are Canadian companies.  The benefit from owning USD assets is nearly over, however the Canadian dollar will likely weaken further in the coming year.  These two new companies will add some energy exposure while both being very low risk.  The are both still profitable.  All of the companies on the list have large upside potential.

Peyto is a natural gas company.  They earned $37 million CAD in Q3 2015, more than every other oil and gas company in Canada except the major integrated oils.  Peyto is the lowest cost gas producer in Canada, and with hedges they are still profitable.  That said, if now isn't the time to buy natural gas assets, I don't know when is.  Nearly every natural gas company is Canada is losing money big time.  If gas prices stay low this year, expect numerous bankruptcies.  Natural gas prices have only one direction to go, and that is up. 

Russel Metals is one of the largest steel service centers in Canada.  Russel earns half of it's revenue from the oil patch, so it is somewhat tied to the energy market.  Energy activity has been extremely slow so half of their business is struggling.  I still don't expect a strong recovery from the energy market but overall the company will be fine.   The second headwind the company has faced this year is falling steel prices.  As a result, they had to take some write downs of inventory this year.  Steel prices in recent weeks appear to have bottomed.  If steel prices rebound, this headwind will turn into a tailwind and their inventory will appreciate in value.  Service centers, like any other wholesaler, isn't a difficult business to run.  They buy steel for a dollar, mark it up 20% and sell it.  The key is to maximize sales and inventory turns.  

If the markets tank this year, I might be back to comment.  The markets are more than fairly valued as the Russell 2000 and the S&P 500 are selling for 153 times and 23 times earnings on a trailing basis.  That isn't cheap.  The market breadth for both the S&P and the Russell has not been strong recently.  This is usually an early warning sign.  Shorting the Russell 2000 may prove to be a good trade for 2016. 

Cheers to another great year!


Best Regards,

Kevin


Disclosure – I own IBM, EZPW, PEY and RUS. 

7 comments:

  1. Dear Kevin,

    Thank you for the update. First ,as a consistant reader , I wish you could write more (now that you graduate your MBA). secondly , please kindly share your thoughts regarding EZPW and why you think it is so cheap.

    Thank you

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  2. Whats your opinion on the housing market up in Canada? Seems to be a lot of people calling for a drop. When I look at news headlines, I see a lot of the same thing that was talked about down in the US. Do you think housing will correct back to the mean?

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  3. Hi Kevin,

    very interesting, contrain and bold investment portfolio! I wish you good luck with this.

    kind regards,
    valuetradeblog

    ReplyDelete
    Replies
    1. Thanks for the comment. Average gain to date is 22%. S&P 500 is flat for the year. Not bad relative to the market. After commodities being down for 2 years, it was time to go long. The picks also had lower risk relative to industry.

      Best Regards,
      Kevin

      Delete
  4. We miss your wisdom , Kevin. Come back.

    ReplyDelete