Tag Archives: seeking-alpha

Learning From The Past, Part 6 [Hopefully Final, But It Won’t Be…]

This is the last article in this series … for now. The advantages of the modern era… I went back through my taxes over the last eleven years through a series of PDF files and pulled out all of the remaining companies where I lost more than half of the value of what I invested, 2004-2014. Here’s the list: Avon Products (NYSE: AVP ) Avnet (NYSE: AVT ) Charlotte Russe [Formerly CHIC – Bought out by Advent International] Cimarex Energy (NYSE: XEC ) Devon Energy (NYSE: DVN ) Deerfield Triarc [formerly DFR, now merged with Commercial Industrial Finance Corp] Jones Apparel Group [formerly JNY – Bought out by Sycamore Partners] Valero Energy (NYSE: VLO ) Vishay Intertechnology (NYSE: VSH ) YRC Worldwide (NASDAQ: YRCW ) The Collapse of Leverage Take a look of the last nine of those companies. My losses all happened during the financial crisis. Here I was, writing for RealMoney.com, starting this blog, focused on risk control, and talking often about rising financial leverage and overvalued housing. Well, goes to show you that I needed to take more of my own medicine. Doctor David, heal yourself? Sigh. My portfolios typically hold 30-40 stocks. You think you’ve screened out every weak balance sheet or too much operating leverage, but a few slip through… I mean, over the last 15 years running this strategy, I’ve owned over 200 stocks. The really bad collapses happen when there is too much debt and operations fall apart – Deerfield Triarc was the worst of the bunch. Too much debt and assets with poor quality and/or repayment terms that could be adjusted in a negative way. YRC Worldwide – collapsing freight rates into a slowing economy with too much debt. (An investment is not safe if it has already fallen 80%.) Energy prices fell at the same time as the economy slowed, and as debt came under pressure – thus the problems with Cimarex, Devon, and to a lesser extent Valero. Apparel concepts are fickle for women. Charlotte Russe and Jones Apparel executed badly in a bad stock market environment. That leaves Avnet and Vishay – too much debt, and falling business prospect along with the rest of the tech sector. Double trouble. Really messed up badly on each one of them, not realizing that a weak market environment reveals weaknesses in companies that would go unnoticed in good or moderate times. As such, if you are worried about a crushing market environment in the future, you will need to stress-test to a much higher degree than looking at financial leverage only. Look for companies where the pricing of the product or service can reprice down – commodity prices, things that people really don’t need in the short run, intermediate goods where purchases can be delayed for a while, and any place where high fixed investment needs strong volumes to keep costs per unit low. One final note – Avon calling! Ding-dong. This was a 2015 issue. Really felt that management would see the writing on the wall, and change its overall strategy. What seemed to have stopped falling had only caught its breath for the next dive. Again, an investment is not safe if it has already fallen 80%. There is something to remembering rule number 1 – Don’t lose money. And rule 2 reminds us – Don’t forget rule number 1. That said, I have some things to say on the positive side of all of this. The Bright Side A) I did have a diversified portfolio – I still do, and I had companies that did not do badly as well as the minority of big losers. I also had a decent amount of cash, no debt, and other investments that were not doing so badly. B) I used the tax losses to allow a greater degree of flexibility in investing. I don’t pay too much attention to tax consequences, but all concerns over taking gains went away until 2011. C) I reinvested in better companies, and made the losses back in reasonably short order, once again getting to pay some taxes in the process by 2011. Important to note: losses did not make me give up. I came back with vigor. D) I learned valuable lessons in the process, which you now get to absorb for free. We call it market tuition, but it is a lot cheaper to learn from the mistakes of others. Thus in closing – don’t give up. There will be losses. You will make mistakes, and you might kick yourself. Kick yourself a little, but only a little – it drives the lessons home, and then get up and try again, doing better. Full disclosure: Long VLO – made those losses back and then some.

Vietnam Steps Into Emerging Markets Spotlight

By Tim Maverick These days, when investors hear the words “emerging market,” they immediately run in the opposite direction. The Institute of International Finance reports that investors pulled $40 billion out of emerging markets in the third quarter alone. That’s the fastest pace since the height of the financial crisis and the largest outflow of funds since the fourth quarter of 2008. But as a contrarian investor, I’m intrigued. These outflows made me wonder if, in the panic for the exits, someone may have overlooked a gem. And sure enough, shining like a beacon in the dark, was Vietnam. According to researchers at Capital Economics, Vietnam is one of just five emerging nations, as well as the only nation in Asia, whose economy is growing above its average growth rate since 2010. Economists forecast that Vietnam’s $186-billion economy will grow at 6.1% this year and 6.2% in 2016. This follows growth of 5.2% in 2012, 5.3% in 2013, and 6% in 2014. Capital Flowing to Vietnam Vietnam has been able to attract productive capital inflows recently. In fact, it ranks seventh among all countries, including the United States and China, in foreign direct investment (FDI). Most of that money is going into manufacturing. Vietnam is highly competitive in low-tech industries like textiles and footwear. But importantly, it’s also competitive in high-tech manufacturing. Vietnam has become a major exporter of smartphones, for example, and Samsung has one of its largest global smartphone facilities there. Thanks to the Vietnamese government, the economy’s momentum should continue. The government lifted the 49% ownership cap at a number of listed companies, which will allow foreign companies to invest heavily – or even take over – some Vietnamese firms. In addition, the government has tamed inflation. In 1988, inflation was at an incredible 774%! Four years ago, it was still at 22%. Two years ago, it was down to only 6%. And today, inflation is negligible. Vietnam’s Emerging Consumer Class The growth of manufacturing jobs in Vietnam is changing the face of the country. Here are just a few examples: The country has one of Asia’s fastest urbanization rates, which is creating a consumer middle class. According to the CIA World Fact Book, about a third of the population is now urban. The annual urbanization rate from 2010-15 is just under 3%. Vietnam is now the fastest-growing auto market in Southeast Asia. Through August, year-on-year car sales were up a whopping 62%. Vietnam’s internet penetration rate is rising faster than anywhere else in the world. With more than 40 million people connected to the internet, Vietnam has more users than any other country in Southeast Asia. Not surprisingly, Vietnam has been Asia’s top performer in 2015. Its gain is only about 3.5%, but that looks fantastic compared to other stock markets: It’s still relatively cheap, too, at just 12.5 times estimated earnings. And what really caught my eye is that the market is still trading about 50% below the peak level hit in 2007. The only easy way for U.S. investors to play Vietnam is through an exchange-traded fund – the Market Vectors Vietnam Fund (NYSEARCA: VNM ). This ETF’s portfolio consists of 30 stocks, and it has about 75% of its assets invested directly into locally listed Vietnamese stocks. VNM has a very reasonable expense ratio of 0.7%. The big drawback is that VNM has underperformed Vietnam’s index, showing a year-to-date loss of about 19%. This is likely due to the fund’s over-weighting in the most liquid, financial stocks, as well as energy stocks. You can get much better performance with closed-end funds focused on Vietnam, which are traded in the over-the-counter market. The most liquid of these is the Vietnam Opportunity Fund ( OTCPK:VCVOF ). But even this one is very thinly traded. The advantage is that it’s trading 18% below its net asset value, so you’re buying assets at a discount in an already cheap market. Finally, when – not if – emerging market sentiment turns, the upside could be substantial. Original Post

The V20 Portfolio: Introduction

Summary The V20 Portfolio aims to generate annual returns of over 20% over the long term. This portfolio is highly volatile due to concentration. If you have a long-term horizon, the V20 portfolio may be for you. After multiple requests from readers and much deliberation, I’ve decided to reveal a portion of my portfolio which I’ve dubbed “V20.” A rather uncreative name, but I’ll get to that later. This sub-portfolio represents the core holdings (~70%) of my entire portfolio. If you are interested in the performance of my entire portfolio, you can view it at any time using the link beside my name. The main reason why I hesitated to disclose my holdings was because I do not want readers to blindly follow them without understanding the associated risks and goals. But with the recent market downturn, I believe that analyzing my portfolio right now could provide a lot of value. That being said, I must reiterate that you must understand the goals and risks of this portfolio and judge them yourself before taking any positions. Thus far I’ve been analyzing specific companies. With this series, I hope to shine a light on my portfolio construction strategies, as well as analyzing performance from a top-down perspective (looking at the portfolio as a whole). The weekly updates will identify whether there have been any significant events that could have impacted the portfolio and whether our original thesis remains intact. New or closed positions (if any) will also be announced. What Is The V20 Portfolio? The V20 Portfolio consists of stocks that I believe to have asymmetrical returns. In aggregate, the goal of the portfolio is to generate 20%+ return per year over the long term. The V stands for value, the style of investing that I abide by personally. What’s so special about the V20 portfolio? How does it differentiate itself from many other funds/portfolios that you see out there? I would say that one of the major differences is the return expectation. I am not aware of any mutual fund that aims for a return of 20% per year. These type of returns are typically only expected of alternative investment vehicles such as hedge funds and private equity funds. However, I believe that this performance goal is very achievable as a retail investor, if you can stomach the following risks. Risks First there is the volatility. To maximize expected returns of the portfolio, the holdings are not diversified (in the traditional sense anyways). There are typically 5 to 15 stocks at any given time, with skewed weights. Stocks with the largest upside will typically get the biggest share of the portfolio. Because of this set-up, volatility (defined as standard deviation of returns) will likely be much higher than an index such as the S&P 500 over any period of time. You must also accept price risk in the short and medium term. Price risk is the risk that holdings may be undervalued for an extended period of time even though there is still substantial upside. Because the portfolio holds many stocks that are out of favor, you must be willing to grit your teeth while the stock awaits a recovery. Risk In Action (click to enlarge) Here we have a graph illustrating the performance of the S&P 500 and the V20 Portfolio. As you can see, the portfolio has significantly outperformed the index this year. However, it wasn’t rosy all the time. At the beginning of the year, you can see that the portfolio drastically underperformed the index, almost losing 20% in a matter of weeks. To tie this back to the aforementioned risks, had you sold the portfolio then, you would’ve missed out on all of the subsequent gains. This is why I cannot stress enough that you must hold a long-term view if you want to invest in this portfolio. Who Is This Portfolio Suitable For? That answer to that question is ultimately for you to decide, but I do have a few suggestions. There are two general categories: investors who are building towards retirement and retirees who wish to pass on assets to family members. They may look different to you, but they are united by a common factor: a long-term investment horizon. In my mind, this is the critical success factor. By holding a long-term view, the aforementioned risks become irrelevant. To be invested in this portfolio, you must have no plans to withdraw the funds over the next five years at a minimum. This means that if you want to turn $40,000 into $50,000 by next year for a down payment on a house, this portfolio is not for you. If your child is going to college next year and needs tuition, then this portfolio is not for you. On the other hand, if you have excess income every month that you stow away at the bank earning 1% a year, then this portfolio may be suitable for you to create wealth over the long term. Portfolio Overview (click to enlarge) ACCO Brands (NYSE: ACCO ) You can read my previous analysis here . This company makes office supplies. Although there has been a shift away from paper-based products due to technological advancement and green initiatives, the company has delivered good results over the past couple of quarters. I admit that society is becoming increasingly reliant on electronics, however, I believe that things like binders (one of the products that the company makes) will remain prevalent in school and offices. To protect myself from a potential secular decline, I’ve allocated only a modest portion of the total portfolio to this stock. magicJack (NASDAQ: CALL ) As you can see, magicJack constitutes a significant portion of the current portfolio. You can read my analysis on the company here . Since I wrote the article in April, the stock has appreciated by around 25%. I think most people would be happy with a 25% return in less than six months, and may even sell the stock after a nice run. However, I believe that there remains substantial upside to this company, so I will keep the current allocation until fair value is reached or close to being reached. Due to the large amount of cash on the company’s balance sheet (which cushions its downside), I believe that the stock is relatively safe; hence, I’ve allocated a significant portion of assets to this stock. Conn’s (NASDAQ: CONN ) You can read my latest analysis here . Conn’s is one of my high conviction ideas. The company is a consumer retail company with a spin. Its primary customers are credit constrained (i.e. low credit) consumers. I think after the last financial crisis, investors have become automatically fearful when credit-related companies report increasing delinquencies. What they miss is that this is something that the management can easily control. Over the past couple of quarters, the management has significantly tightened credit policy in an attempt to decrease bad debt expense, all the while increasing sales. After the recent decline, I believe that there is once again significant upside for this stock, which is why I’ve put a large chunk of the portfolio in Conn’s. Dex Media (NASDAQ: DXM ) This is one of my more interesting holdings. There is a big chance that the company may go bankrupt. So why am I holding this you ask? Despite a declining business, the company is still generating a significant amount of cash ($136 million of cash form operation in H1). Given the low capex requirement ($4 million in H1), it is literally a cash cow. The only problem is that the company is saddled with debt, which stood at $2.2 billion at the end of the second quarter. Almost all of it will be due by the end of next year. There is absolutely no way that the company can afford to pay all of it out of pocket, so its future depends on whether the lenders will refinance. At the current price, the market is essentially betting that the equity holders will be completely wiped out. I, on the other hand, remain hopeful that the restructuring process will extend the bond maturities. Of course, this is a highly risky investment, as I could lose everything. For that reason, I’ve allocated only an extremely small portion of my portfolio to this stock. Intelsat (NYSE: I ) This is a satellite company. Similar to Dex Media, the company has a significant amount of debt. The difference is that the company remains profitable. There are significant barriers to entry, so I believe that the company can maintain its profitability. The problem is that it is fairly sensitive to rate increases. If the Fed raises interest rates, then it would cost more for the company to roll over its bonds. As it stands, however, I see substantial upside for this stock given the current financial profile. Nevertheless, the debt is a concern, so I’ve allocated only a modest portion of the portfolio to the stock. Perion Network (NASDAQ: PERI ) Perion Network is a technology company. Through its products, the company provides ways for software publishers to earn revenue by linking search results from major search providers such as Google and Microsoft. The products themselves are a bit dubious, with some critics calling them adwares. While the company is profitable, the stock was hit hard when Google decided to upgrade Chrome to enhance security, which prevented many of Perion’s products from being installed. However, I believe that the company’s products will continue to provide its partners (e.g. Microsoft) with search volume and are still a unique way for software publishers to monetize their content. Similar to magicJack, the company also has a large cash balance, which will protect losses in the short term. For the above reasons, I’ve decided to make it my third largest holding. How The Holdings Fit Together There is always systematic risk. This is the type of risk that I have no control over (e.g. a sector decline). However, I’ve tried to minimize this risk by diversifying my holdings into uncorrelated sectors. I believe that none of my holdings are tied to a single common factor that could influence their values. ACCO Brands manufactures office supplies, magicJack is a niche communication company, Conn’s is a sub-prime retailer, Dex Media is an advertising company, Intelsat is a satellite company, and Perion Network is a niche technology company. As you can see, none of the holdings have a clear overlap. However, I must admit that every stock will be influenced by an economic downturn. This goes back to the idea of systematic risk. Unfortunately, pretty much everything is tied to the economy, so I’ve decided to accept this risk for now. The second risk I want to talk about is a bit more elusive. I’m talking about the idea of permanent capital loss. Buffett supposedly said the following words: Over the years, a number of very smart people have learned the hard way that a long stream of impressive numbers multiplied by a single zero always equals zero. How do I apply this to my portfolio? Well, I believe that there are stocks whose potential upside is exceeding large; however, they are highly risky in the sense that it would be possible to lose everything. One such example in my portfolio is Dex Media. As mentioned earlier, there is no doubt in my mind that the company may go bankrupt over the next couple of years, which is why the company is trading at a depressed valuation in the first place. Nevertheless, I believe that the upside is extremely attractive should restructuring yield favorable results. There are a variety of factors in play here, but I will save those for another time. The bottom line is that I may lose the entire invested amount in Dex Media. Going back to Buffett’s quote, an easy way to get “impressive numbers” would be to invest your entire portfolio, so that should events transpire in your favor, you could achieve returns that would be out of this world. However, by doing so, you would be setting yourself up for the possibility of permanent capital loss if things don’t turn out the way you expect them to, and this is what I strive to eliminate from my portfolio. In the V20 Portfolio, you can see that DXM only constitutes a very minute (1.1%) portion. This means that I’ve limited my upside, but the portfolio will still enjoy a nice boost should the stock appreciate significantly, and I can sleep soundly even if the company goes bust. Editor’s Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.