Value Library
The following is an excerpt from the ABC Perspective - October 2008 - Pg. 4-5
A Portfolio's Hidden Values...In a Chaotic Market
The international financial system is in disarray. Securities markets have been volatile and chaotic. The spreading worldwide financial problems relating to subprime mortgages, shaky financial institutions, falling commodity prices and declining investor confidence has virtually eliminated all previous stock market enthusiasm. Suddenly common share buyers are nowhere to be found and panicky investors motivated by margin calls, hedge fund difficulties or extreme pessimism are selling the market down to inconceivably low levels.
No doubt the global financial problems are extremely serious and the gravity of the present situation is being felt everywhere. Moreover, with the constant flow of newspaper headlines informing the masses of pending doom and gloom relating to the economy and investments, this negativity is enervating investors’ stamina. In consequence, numerous stocks have fallen to extraordinarily dirt-cheap levels --- below book value or net asset value and with low price to earnings or cash flow multiples. But more importantly, in certain cases, wild swings in the marketplace have taken stocks to even lower than dirt-cheap valuations.
Central banks are presently supplying massive liquidity, as they should, but more importantly, a group of major central banks including our Bank of Canada have, in concert, reduced world wide short-term administered rates by ½%. This event was important for at least two reasons:
- the fact that the US Fed, Bank of Canada, ECB et al acted in a coordinated fashion demonstrated their unified common purpose and cooperation
and
- the lowering of short-term administered interest rates by ½% will steepen the yield curve (i.e. short term rates significantly lower than long rates) and this will eventually be positive for economic growth and common share prices
No doubt a worldwide economic slowdown is already taking place as business, consumer and investment pessimism grows in crescendo. The net result is that this negativity has already affected common share prices largely due to a highly emotional sell-off of securities. Many undervalued stocks have been tossed out with those that are extremely overvalued. In consequence many investment fund portfolios, including our ABC Funds, have declined considerably in price despite a meaningful number of dirt-cheap stocks. Clearly, deeply discounted value stocks have not held up any better than growth or momentum shares largely due to massive, across the board emotional selling.
While it is disappointing to see many dirt-cheap value stocks get cheaper and cheaper the fact is that these holdings, particularly in our ABC Funds, represent a portfolio’s hidden values within a chaotic market. Many of our value favourites are trading significantly below book or net asset value with low price to earnings and cash flow multiples.
Examples include:
Onex, a private equity and asset manager, traded as low as 62% of net asset value. At the bottom, the stock was valued at only 3.5 times its net cash position. The Company is well suited to take advantage of the current market turmoil and has been aggressively buying back its own stock. |
Stock Symbol |
52-Week Low |
52-Week High |
Decline from High |
Net Asset Value |
P/NAV |
Cash Per Share |
Price to Cash |
TSX:OCX |
$ 19.38 |
$ 40.20 |
-52% |
$ 31.50 |
62% |
$ 5.49 |
3.5 |
| |
Nexen and Talisman, two large cap oil and gas producers, traded as low as 37% and 35% of net asset value. During the sell-off, they were priced below 2 times trailing twelve month cash flow. |
Stock Symbol |
52-Week Low |
52-Week High |
Decline from High |
Net Asset Value |
P/NAV |
CF TTM |
P/CF TTM |
TSX:NXY |
$ 13.33 |
$ 43.45 |
-69% |
$ 36.27 |
37% |
$ 7.43 |
1.8 |
TSX:TLM |
$ 9.27 |
$ 25.40 |
-64% |
$ 26.74 |
35% |
$ 4.97 |
1.9 |
|
Western Goldfields, a small cap gold producer, was valued at only 29% of net asset value despite having hedges at $801 per ounce. The stock changed hands at 3.6 times 2008 expected cash flow. |
Stock Symbol |
52-Week Low |
52-Week High |
Decline from High |
Net Asset Value |
P/NAV |
2008 CF |
P/CF |
TSX:WGI |
$ 0.98 |
$ 4.13 |
-76% |
$ 3.40 |
29% |
$ 0.27 |
3.6 |
|
Our favourite industrial and special situation stocks traded between 47% and 86% of book value and between 3.8 and 6.4 times trailing twelve month earnings. This segment includes Canam Group, a steel joist, decking and bridge manufacturer, Equitable Group, a niche mortgage lender, Fortress Paper, a currency and specialty printer and Migao Corporation, a fertilizer manufacturer and supplier. |
Stock Symbol |
52-Week Low |
52-Week High |
Decline from High |
Book Value |
P/BV |
EPS TTM |
P/E TTM |
TSX:CAM |
$ 3.73 |
$ 15.98 |
-77% |
$ 7.86 |
47% |
$ 0.97 |
3.8 |
TSX:ETC |
$ 14.69 |
$ 2.00 |
-54% |
$ 17.03 |
86% |
$ 2.75 |
5.3 |
TSX:FTP |
$ 4.80 |
$ 11.98 |
-60% |
$ 6.58 |
73% |
$ 0.99 |
4.8 |
TSX:MGO |
$ 2.76 |
$ 11.97 |
-77% |
$ 3.43 |
80% |
$ 0.43 |
6.4 |
| |
Precision Drilling, the leading Canadian land driller, was valued at less than half of replacement value and only 4.6 times trailing twelve month earnings. At the trough of the market, it yielded 14.7%. |
Stock Symbol |
52-Week Low |
52-Week High |
Decline from High |
Replacement Value |
P/R |
EPS TTM |
P/E TTM |
TSX:PD.UN |
$ 10.64 |
$ 28.93 |
-63% |
$ 22.00 |
48% |
$ 2.31 |
4.6 |
In summary, while our ABC Funds’ values have declined meaningfully in 2008, we believe that our portfolios retain a significant number of hidden values which have been punished by recent indiscriminant selling. Although we cannot be certain when a price recovery will take place we are very patient and comfortable with the majority of our ABC securities.
Irwin A. Michael, CFA
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