Saturday, August 26, 2006

Insider Ownership & Long Management Tenure

When management and insiders have significant economic ownership and management has longer tenure ... (see illustration, left).

I recently recieved one of those ubiquitous The Motley Fool ads in my hotmail box recently, and I found the message they conveyed worth contemplating ...

10-Bagger Tenures
By Tim Hanson (TMF Mmbop)

More than 700 CEOs have already resigned this year, putting 2006 well ahead of pace to break the record (set in 2005) of 1,322 CEO exits in one year. That statistic, published in Fortune, should be worrisome for investors. Why? Because companies that do not have steady leadership at the top get lapped by companies who do.

Seriously. It's true ...
Need evidence? I found that of the 100 top-performing small caps from 1996 to 2005, 84 of them had either a founder at the helm or a CEO with more than five years of experience at the company -- far greater than the market average.

And the trend continues across the best-performing stocks of any size. Fully 164 of the 308 stocks that returned more than 20% annually, from June 1996 through June 2006, continue to have insider ownership of more than 5% today. That's 53% frequency. Now let's compare that to the broader market. According to Capital IQ, there are 21,959 companies trading on U.S. exchanges. Of that enormous number, just 3,550 have insider ownership of 5% or more -- a measly 16%.

Clearly, then, there's correlation between long-term shareholder rewards and insider commitment to the company they're running.
While I sometimes find the frequency of these ads irritating, it's worth thinking about this.

In fact, this is one of the things that I look at, when I analyze a stock in my small and microcap blog: a consideration of insider ownership. Perhaps I'll start considering the tenure of the CEO hereafter too ...


The Confused Capitalist

Wednesday, August 23, 2006

Investing via themes ... or via financial statements

Over at Random Rogers, (Roger Nusbaum), a fellow blogger I read nearly every day, he's really big on investing in themes.

Given that Roger is a big proponent of ETF investing, that stands to reason. Roger's forte is obviously trying to enhance returns by not just investing in low-cost investment vehicles like ETFs, but then trying to sweeten those returns by looking at other big sweeping factors that'll influence values: investment themes.

I've learned a considerable amount from Roger and using his ideas to broaden my own thinking, portfolio holdings, and returns; in fact, my propensity to recommend emerging markets as a huge, long-term and reasonably-priced theme, owes much to Roger's thinking style.

Having said that, however, I also think that thematic investing requires a certain amount of patience and isn't necessarily suited to every investor. For instance, being right about the theme of commodities being underinvested in, in the late 1980s and early 1990s, would have been completely right, but far too early to make any money from it.

Sometimes, the theme is right, but the market is wrong: a situation of theoretical low risk, but also of low/no/negative returns. By the time the market realizes you were right - you could well have exited the theme: who's got the patience to wait ten years to be proven right?

For some investors with the appropriate skill set (an ability to read financial statements chief amongst them), an idea needing less patience is investing by value situations. What "value" means is finding the right combination of value and growth, at a favorable price. In fact, at a price that you think is completely unfair to the seller. Hence, you become a buyer.

When you can find appropriate situations like that, you don't have to wait around for the theme to unfold.

For instance, the legendary value investor Marty Whitman discusses in his book, The Aggressive Conservative Investor, investing in Japanese non-life insurance companies for years during the brutal Nikkei decline from 1997 to 2004 (a decline in the index that cut the index value in half). Yet, because of his ability to ferret out value, his Third Avenue fund was able to earn an annual 10% compound return on those Japanese assets over that period. No need for the "Japanese" theme to unfold. Instead, a hunt for value provided a decent return, without requiring the patience of Job.

At times, value investors are able to combine the idea of thematic investing with ordinary value investing to achieve extraordinary results.

So don't forget to check your own toolbox as an investor, and attempt to put more tools in there that you can use during your investing years. Thematic and value investing: a potent (but infrequent) combination.


The Confused Capitalist

Monday, August 21, 2006

Will this high dividend, low PE stock portfolio outperform?

I have used the Globe Investor stock screen to come up with a group of TSX-listed common stocks that have both a high dividend yield, above 4% and a a relatively low PE (15 or lower). To make sure I'm not getting ones that have dubious cash-flow/earnings issues or accounting practices, I've also added a cash-flow filter, ensuring that the price/cash-flow is also 15 or lower.

Of the 1,075 common stocks that this screen picks up without any defined parameters (except for common stocks), the aforementioned screening yields some 15 securities, meaning this screen is picking up well under 2% of those common stocks. I'm going to track over the next while, so see if they outperform the broader index, the S&P/TSX60 index, which is currently at 12,044.83. We'll track the performance of this model portfolio, over time.

Here is the list of the 15 stocks, name, followed by symbol, and latest price (market close August 18, 2006):
  • Amerigo Resources, ARG, $2.26
  • BCE Inc., BCE, $27.48
  • Circa Enterprises, CTO, $1.30
  • Destiny Resource Services, DSC, $9.90
  • Goodfellow Inc., GDL $26.50
  • MCAP, MKP, $10.05
  • Norbord, NBD, $9.09
  • Pacific Northern Gas, PNG, $17.44
  • Revenure Properties Company, RPC, $14.00
  • Rothmans, ROC, $20.10
  • Russell Metals, RUS, $27.88
  • Seamark Asset Management, SM, $6.50
  • Taiga Building Products, TBL, $2.03
  • Viceroy Homes, VLH.A, $5.17
  • Weyerhaeuser, WYL, $65.63
We'll check back in anywhere from a month or longer, to see how they're all doing ..


The Confused Capitalist

Sunday, August 20, 2006

Call for feedback ... thanks

One usual signature to my blogging posts is that I accompany the text with an image, one that somehow relates to, aids, or adds a humorous tact to the posting. Obviously, it takes some time to find these, but I'm wondering whether readers here appreciate these, or consider them a distraction or waste of time.

I'm also wondering whether there's anything in particular that readers would like to see more or less of ... or any other suggestions ... please feel free to leave your comments ... all types are appreciated ...

thank you ...


The Confused Capitalist

Thursday, August 17, 2006

News from the Alberta Oil Front

I have written before (1, 2, 3) about the booming economy in Canada, led by oil-rich Alberta. Of course, it's one thing to read an article or two, and then it's entirely different when a friend returns from the oil-rich lands of the fair-skinned sheikhs and tells you what it's really like out there.

This bloggering here was inspired by that recent visit, and also a report a couple of days ago from Canada's national housing agency, CMHC, that housing starts in Canada are projected to once again reach near record levels, led by price gains, and starts, in Alberta. There, starts are projected to rise about 20% over 2005 - a great year also - and prices to rise about 28% year-over-year.

Led by the booming economy, things are rolling along wonderfully, many say.

My friend dropped by on the way back to Calgary, for an evening. Here are some of her tales:
  1. She recently purchased a townhouse, less than a year ago, in a pretty standard area for $156,000 Cdn (about $140,000 US) - and she recently had it appraised for a re-financing, and it was valued at $300,000 Cdn. A near doubling of value in under a year;
  2. Stores everywhere have help wanted signs, but are still short of staff;
  3. On her way out of town over the July long-weekend, she noticed that a gas-station owned by some friends was closed: odd she thought - one of the busiest weekends of the year and no one home. Later, she talked to her friends, the owners, and found out that they'd worked about three weeks straight in the gas station, without a break, because they'd been unable to fill staff positions. They'd finally had to close the station, just to get a break themselves.
So, while things are rolling along great, everything is moving up in price; labor, real estate etc.

In fact, I recently was examining the financials for a small-cap company, perhaps to invest in, or report out on on my small-cap blog, by as soon as I saw a recent quarterly loss, and their production headquarters for their non-oil related industrial business were in Alberta, I quickly gave it a pass. Too much present and anticipated future competition for skilled industrial labor, made this an easy one to quickly pass on.

I wonder how many more investors will be looking at the same thing in the future?


The Confused Capitalist

Wednesday, August 16, 2006

Analysts "Hot Buys" falling way, way behind their "Dump It" stocks

Back in March, here and here, I detailed two model portfolios, one of which analysts said was going to underperform, while the other portfolio was the subject of numerous "strong buy" analyst recommendations.

As originally suggested, these look like they have turned into valid contra-indicators, with the "strong buy" portfolio, now displaying an average loss of -20.0% (similar median loss), and with only 4 of the stocks having any type of positive return. (Prices measured at market close on Friday Aug 11, 2006)

On the other side of the coin, the underperform portfolios, both in the Canadian and US versions, have both produced a positive average return. This has amounted to an average gain of +5.6% (median of +5.7%) for the Canadian stocks, and +3.7% average (+7.5% median), for the US stocks.

This again suggests that "value" stocks remain consistently underestimated, even (especially?) by professional analysts. (Follow link contained here and here to see possible reasons why).

Makes one wonder why they'd have any money in almost any conventional mutual fund, (with a few notable exceptions [Bill Miller, Marty Whitman, etc.])? Next time your broker trots out the "strong buy" recommendation, it's OK to leave the room screaming,

No, you'll never take me alive ... or my money ...


The Confused Capitalist

Tuesday, August 15, 2006

Blogger needs to wake the engineer up from his nap

Is anyone else having the same problem with Blogger that I am? Everytime I use the spell checker for the past week or so, a dialogue box informs me that "Blogger is experiencing a problem. An engineer has been notified" ...

and no spell-checking occurs. Which is a tragedy for a weak speller like me ...

please, Blogger, please, awaken the engineer!

Thank you!


The Confused Capitalist

Monday, August 14, 2006

Value matters: Low PE stock returns pummel market averages!

If you needed more evidence or confirmation that stock value matters, i.e. not paying too high a PE ratio for stocks, some late-breaking research confirms, once again, that "value" stocks beat up on expensive "growth" stocks.

A report recently released by RBC Dominion Securities confirmed that a portfolio of the cheapest 20% of the equity universe has, since 1980, far outpaced the rest of the market. This performance contrasts even more markedly with the most expensive 20% of the market.

Total returns for those one-fifth of companies with the lowest price-earnings ratios in the S&P500 beat the index by 3.5% annually, and trampled the 20% most expensive part of that same market by 6% annually.

In Canada, the example was even more extreme, with the S&P/TSX composite index used as the equity universe. There, the cheapest one-fifth of companies soared past the index by 5% per annum, and trashed the most expensive quintile of companies, by 15% annually.

Furthermore, this performance is remarkably consistent over time: every five year period over that time frame saw the cheaper stocks outperform, except for a single five year period (the bubble years of 1995-1999 and only within the S&P500), and even then, this was only minor and only against the most expensive quintile of stocks.

Perhaps this can form the basis for a new "enhanced ETF" product.


The Confused Capitalist

Sunday, August 13, 2006

Agitation over enhanced ETFs

There's an unruly crowd hanging out on the 'net right now, at the corner of Financial Street and New Products Way.

Seems that this crowd is getting upset, persnickity even, over whether enhanced ETFs, are going to fare better in the long haul than conventional ETFs. That is, ETFs that track the standard market indices.

Of course, many in the crowd are muttering that no one can be absolutely sure they'll outperform, and therefore, *stay away*.

"These is dangerous times, friends, they say, and dangerous products. Beware."

But not to worry, friends, the sheriff has just pulled alongside, and told them agitators to cool down. The sheriff points out to them that most of these product concepts have been backtested and, anyway, many of the enhancements are simply based on writing rules for, and then computerizing, superior investment behaviour.

That is, he tells them ...
Exploiting market inefficiences, and doing things well-known to enhance returns, like buying stocks that have cheap valuation metrics. And this type of 'nvestment behaviour is likely to be rewarded long into the future. So calm down folks, calm down.

Remember, even the now lowly index funds were once considered newfangled and there were many who doubted their ability to outperform 'ventional mutual funds, despite extensive
the sheriff slows his speech to a crawl and gesticulates quotation marks for those slow in the crowd
"back-tested" research that showed that 80% of mutual funds didn't beat the index after just a five year period.

Investing in back-tested enhanced ETFs is jest smart 'nvesting. Jest smart 'nvesting. And there's nutin' wrong with that, is there folks?
The crowd disperses. Most walk away, figgering the party's over. A few walk away, muttering 'bout the good old days. A few go looking for the brains behind these new products ...

... and think they see him ...

But the wisest quietly head to the nearest internet cafe, for a quick round of research, and portfolio re-balancing with these new enhancements.

And thus things are as they always were ... angst over something newer AND better ... and the sheriff walks away ... peace restored once again.

Enhanced ETF - US example, Canadian example.


The Confused Capitalist

Thursday, August 10, 2006

Dividends: Swinging the Odds in my Favor!

In my own investing, I pay attention to signs that the business managers and corporate directors have a "shareholder orientation". One place this is clearly visible relates to dividends; paying and increasing them. The reason I pay attention is because the propensity of dividend-paying stocks to outperform is well-known. As reported over here, dividends have a fabulous track record for indicating outperformance with the underlying stock.

Some have speculated that this is due to the managers having to keep their "eye on the ball", i.e. what produces cash-flow and earnings, and to look to keep developing aspects of the business able to do that. I believe that's true over the longer-term.

Over the shorter-term, I also believe that instituting or increasing dividends has a good record of predicting upturns in that particular business. Basically, when either of those things happens, a group of individuals very knowledgeable about the business (i.e. the company's directors) are telling you that things look pretty good from their perch.

Generally, they're going to have far more knowledge and insight about their business than I do, and when you add that to the obvious shareholder orientation of returning excess capital, this provides me with three positive signs unavailable in many businesses. Just to recap, those signs are:

1. Ability of management to keep their eye on the ball - i.e. business activities that generate cash;
2. A "report" of sorts from the directors, that things are looking pretty good as far as they can see, and;
3. A "shareholder brain", a positive decision to return excess cash to shareholders, rather than spend it foolishly.

I once used a list published in a national newspaper that showed companies that had increased their dividends in the past one, three, and five years (i.e. three sets of companies) by the highest amount over that time frame. I think each list had about 50 companies on it, with some overlap (i.e. a company might have appeared on two or even three of the lists). Many were obviously larger companies with established track records and with very solid, if unspectacular, share price growth too.

However, I used the list in a different way. I speculated that companies appearing only on the one year list (highest dividend raises in the past year) and nowhere else, were signalling a significant upturn in their business fortunes.

I tracked those companies, let's call them Dividend Dynamos, over the course of a year, and compared it to the most appropriate benchmark, the TSX/S&P60.

Even after eliminating those in the oil business (whose fortunes were in a major upswing) from the Dynamos, but not the benchmark, after one year, the 10 remaining Dynamos were up by an average of 39%, compared to just 18% for the benchmark. Also, not a single one of the Dynamos was up by any less than 20%!

Further, a quick and dirty assessment on the benchmark told me that about half of the benchmark rise was due to oil companies. So the true comparison was even starker: about a 4:1 advantage for the Dynamos.

Dividends: a good thing. Look for them.

NB Ammended at 10:04AM to include missing link to prior dividend discussion. Also here.


The Confused Capitalist

Wednesday, August 09, 2006

Chasing Growth at any Price - uh, like NOT!

I couldn't make up my mind about the title: I thought that "Recipe for Diaster: Growth at any Price" was too melodramatic. Nevertheless, it's a trap that many investors fall into.

I was reminded of this when I read this morning's paper and the Whole Foods (WFMI) decline was discussed in some detail. The three analysts in the paper (not the three stooges, no), suggested that Whole Foods was going to be able to grow its net income at about 15% p.a. over the next three years. That's pretty good growth, and it can make a fine stock pick IF (if) you don't pay too much for it.

The three stooges (sorry, analysts) then proceed to put a PE ratio on the projected earnings of between 35 to 39 and, voila, the target price of $60 to $70 is achieved.

PE of 35 to 39? Are we still on planet NASDAQ, circa 1999-2000? As I understand it, earnings growth for the S&P 500 is projected at around 11%, and has an aggregate PE of about 17. Whatever would make you double your projected PE (and then some) for growth only slightly higher than the average? And they can recommend this to clients?

Buying growth is fabulous! Paying too much: NOT! A recipe for mediocre returns, at best. Smart investors always watch for value.

The Confused Capitalist

Removing variation improves investing results

Do you ever wonder why Toyota, Honda, Subaru, etc. vehicles have both remarkable reliability, AND so very few recalls?

Well, one reason is that that the Japanese-based manufacturers strive to reduce variation in their product build-outs. That means that, for instance, Toyota workers world-wide, are taught - for instance - to tighten a certain bolt with their left hand. The ordinary assembly worker is given months of training to ensure exactly that happens. Therefore, when a problem arises, it is much easier to find the source: variation has been driven out of the system.

This was something that was stressed by Dr. W. Edwards Deming(, the so-called "American who taught the Japanese about quality."

This is also something that can be done to improve investing results as well. To get better at investing, we have to take the time to create (or borrow) some systems, some analysis, before we buy a security. This may start out as simply as writing down a very few basics on a piece of ordinary fullscap about the investment.

This would include some valuation metrics (PE and growth ratios, for instance), some of the underlying business metrics (e.g. balance sheet info, etc.), and also what your expectations are regarding the potential of the stock, both on the upside and downside. Don't forget to list the what you see as the positives, and also the negatives. This allows you to consider things that could derail your rosy forecasts, and hopefully get a better picture of reality.

In my small and microcap blog, I do this in a narrative fashion, that works well for me. But I have also tried to institute these things as a system, by using a standard template for each stock I analyze. This, hopefully, allows me to drive some variation out of my investing system.

Of course, the final step is to review actual results against both a reasonable benchmark (an appropriate market index), and also against your initial projections. This should also help to develop "profound knowledge", something Dr. Deming promoted strongly.


The Confused Capitalist

Tuesday, August 01, 2006

Building a Net 2.0 Company - Some Tips

Came across a recent posting at Dead 2.0 on how to build your internet-based business for the future.

Hint: don't rely completely on an exit strategy that rhymes with "Get bought by Poogle". Among the other tips:

Find some friends who don’t drink the kool-aid and get their honest feedback.

Good stuff.


The Confused Capitalist