Tuesday, June 26, 2007

gasoline prices are great...aren't they?

Listening to people complain about gasoline prices can get a little irritating. Especially since many people who complain about this are the same people who drive SUVs and pick up trucks, and do not have the necessity to do so. I can see if you own a business where you require one, but if you are getting yourself to work and back each day in a V8 4 wheel drive GMC Sierra you may as well have your pay cheque transferred directly to Petro Canada. Maybe try living in Europe, we have had it good for a long while.


I partially know this from experience as I used to drive a 97 Ford Ranger, which is a smaller truck, and would often walk away from the pumps frustrated after having paid $70 or $80 to fill it up. Recently I found out that this was nothing when I rented a full size pick up truck for the day to transport my demolished deck. I filled the rental back up at the end of an exhausting day; I had only used slightly more than 1/4 tank, and I rung up the pump to $54. This truck would have cost about $150 to fill up at that day's price, which was about one month ago today. Compare that to my 2006 Toyota Matrix which runs me about $40 for a full tank.

Wow.......that would not go over well with me, but I may be a little frugal, but I would not enjoy paying over $8,000 / annually on gasoline just for the pleasure of driving one of these things around with nothing in the box.


Personally higher gas prices don't really bother me. We drive 2 Toyotas that get 32 mpg (avg.) and 36 mpg (avg.), and our monthly gas bill is about $220. Also, we are both well compensated for our out of town kilometers for work. Gas mileage was one of the reasons we got rid of our older vehicles, as well as one of the reasons we selected the Matrix and Yaris.


I also own shares of Petro Canada (PCA), so I am slightly hedged against rising gas prices. I feel a lot better paying my gas bill to Petro Canada when I know that they are growing the value of my investment over time, as the rest of the world scorns them as thieves and villains.

Monday, June 25, 2007

added more Inter Pipeline

I bolstered my Inter Pipeline Fund position today by doubling my stake, and thus lowering my adjusted cost base. See my previous post regarding Inter for my reasoning here.

Since my last purchase of IPL.UN, they announced the closing of the acquisition of the Corridor Pipeline System for approximately C$760 million (includes debt associated with Corridor's existing assets). Additionally, Inter Pipeline Fund will assume all of the debt associated with the expansion currently taking place on Corridor. The pipeline transports diluted bitumen from the Athabasca Oil Sands Project (AOSP) near Fort McMurray, Alberta, to the Scotford Upgrader near Fort Saskatchewan, Alberta.

This acquisition makes IPL.UN the largest pipeline carrier of Alberta oil sands product (~50% carried by Inter).

IPL.UN is currently yielding 8.9% as of writing this.

Tuesday, June 19, 2007

General Electric day



I'm officially declaring today General Electric (GE) Day. I guess when your market cap is over $400 Billion and your the 2nd largest publicly traded company in the world, a lot can happen in one day. GE's stock shot up today by 3.2%, the largest one day gain in more than 3 years (3 year chart pictured). Trading volume on the day was much more than double the normal volume, making the rise more meaningful. So much could be read into what occurred to GE today, and why it occurred, but I'll limit my thoughts to this short post.

The What and Why?

  • Investors speculated that profit growth could shine because of several new jet orders announced at the Paris Air Show (GE manufactures jet engines, among other things).
  • The yield on a 10 year note slipped 6 basis points (easing concern about borrowing costs)
  • GE bought a stake in a natural gas play (Regency Energy (RGNC))

Possible interpretations from the day:

The global economy is strong, and will remain strong in the near future. Those in charge of decisions regarding new jets, probably need to be fairly confident in this.

Natural gas plays may be a good value right now. Going forward they may excel. GE does not just take large stakes in businesses indiscriminately.

No big deal, stocks rise and fall every day.

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All and all a pretty eventful day for the company that owns MSNBC....gives them something to report I guess....

Friday, June 15, 2007

my stock selection process

The process used when selecting a stock to consider buying is probably different for everyone. As I've mentioned before, I maintain a watchlist that I have compiled over some time. Every stock must qualify for the list. In order to qualify for the watchlist every stock had to go through my process, which I consider to be fairly stringent. I try to look at most angles, analyzing the stock both quantitatively and qualitatively. Any single factor that fails to meet my criteria will disqualify a stock. I'd like to run through a simplified example of the system that I use to select a stock that might someday be worthy of my investment dollars. My example company here is Walgreen (WAG), which is probably one of most fundamentally sound companies I've ever analyzed, a bit of a no brainer...

Steps

1. The Idea
There needs to be an initial idea to spark my interest. Due to the demographic environment in North America, if I could buy any type of retail or staple stock, I want it to cater toward the baby boomer section of the population. Reason being, that the groundwork for growth should already be laid by increasing demand over time. Shoppers Drug Mart is the premier drug store chain in Canada and was added to my watchlist long ago. I needed another choice in the sector as SC seemed to never trade near my 'buy' price, and might not for years to come. I looked south of the border where I discovered Walgreen Company (WAG) and CVS which are by far the two dominant chains. For several of the reasons below, WAG won out.

2. Earnings Growth
The first thing I always do is look at earnings growth. This can be a dis qualifier right away. Two examples of companies which I have disqualified due to their sporadic earnings growth patterns are Disney (DIS) and Caterpillar (CAT). Earnings growth does not necessarily need to be high, it just needs to be steady, smooth, and consistent, this keeps things simple, conservative, and reliable. In the case of WAG, my eyes almost popped out of my head when I looked at their 10 year EPS history, absolutely phenomenal! For the last 10 years they've grown EPS every year by roughly 15 - 20%, without exception.

3. Debt
The lower the debt/equity ratio the better, some exceptions, but low makes me feel good.
In WAG's case it is 0.00 (makes me feel warm and fuzzy :)).

4. Return on Equity
The higher the better, is the long term trend up or down? This is a good factor when comparing companies across an industry. In WAG's case the current ROE is 18.4%, and has generally been on the rise since 2002. When compared to SC (16.5%) and CVS (15.2%), it stands up well.

5. Industry Specific Factors
In retail, net margins and same store sales growth are very important. I liked what I saw here.

6. Dividends
Do they pay a healthy one? Are they growing them regularly? What's the payout ratio, is it healthy, is it increasing? Any major blips in the pattern, why?
In the case of WAG, it's certainly not my usual dividend stock, but it is important to know that they've raised their small dividend every year since 1987. The raise has averaged about about 20% in recent years. This is more of a growth stock for my portfolio. They build stores with their free cash flow, instead of paying dividends.

7. Other miscellaneous factors
Including P/B, P/S, ROA, sales growth, read company website, read annual report, others opinions of management, past Market Call guest opinions, Jim Cramer's opinion (in this case best of breed), retail investor's opinions, my interaction with company, future of industry, risks to industry, risks to company, etc. Not limited to these, and these are all taken as less important than the 6 above.

DECISION = YES - (ADDED TO WATCHLIST)

8. Valuation
I'll explain how I determine my 'buy' price in a later post, as some readers have asked this question.

Wednesday, June 13, 2007

late stage capitalism

The official Wikipedia definition of 'Late Stage Capitalism' states that it is a general term that refers to capitalism in the late 20th century, generally with the implication that capitalism is historically limited, and that it will eventually end. While I'm not sure about this, I have my own 'consumer products and behaviour' version of what I feel might be thought of as the symptoms of late stage capitalism. I'll organize these in various categories. I believe that some of these items have just been introduced to the Canadian market lately, which was the straw that broke the camel's back. I need to vent......

Mini-Size Chocolate Bars
What is the deal here.? Have you seen these things at convenience stores lately? Why would I want to pay the equivalent price for half the product? So basically I'm going to pay you a premium to help me eat less of your product; reason being, it's not that good for me?

Bottled Water
I believe this market segment is saving Coke and Pepsi. Well it better be Raspberry Flavoured Dasani....or else. Ever walk down your street the night before garbage day, the blue boxes are overflowing with those little plastic bottles. We're guilty, as we buy bottled water, mainly because it helps us drink more water and is convenient. Last time I checked though it still came out of the tap; and I'm guessing filtration technology, municipal treatment standards, and distribution and harnessing technology are improving every year...

Mini Size Pop
Aren't they cute? See Mini-Size Chocolate Bars.

Diet Books
Dr. Phil is the smartest man alive. Check the best seller list. One of these diet methods must work, I just need to keep reading books until I find one that's right for me. Wait a minute carbs are bad, no fat is bad, no eat what you want.....

Paint Choices
Was that Peanut Brittle in the Satin or Desert Camel in the Semi Gloss with a tinted primer? Wow, I hope those little sample cards are recyclable.

Febreeze Noticeables™
Way to go Procter & Gamble, build an entire market segment around having an artificial scent in my house so strong that I can notice it for a long time. I'm glad there is 8 choices of scent because I need 'Clothesline Breeze™ & Meadow Songs™' to disguise the fact that my Labrador just got back from a good swim.

It would be interesting to hear some other examples from readers.

Friday, June 8, 2007

Starbucks®

One of the qualities I really like in a company is a strong brand. I read a great quote recently that stuck with me - "A brand is the most valuable piece of real estate in the world, the corner of the consumer's mind."

I regard Starbucks® as a phenomenal brand. Recently when MillwardBrown ranked it's Top 100 Most Valuable Brands for 2007, Starbucks ranked # 35, and increased by the 3rd best percentage from the 2006 ranking next to Google (#1), and Apple (#16). I would argue that Starbucks should be #1.

Just one look at the logo or those crisp, bright, white paper cups made from 100% recycled fibers puts me on one of their leather chairs, sipping a latt矇, and listening to Norah Jones. Starbucks has taken coffee to the realm of social responsibility, environmental stewardship, ethical practices, affluent lounging, musical relaxation, in a cherished coffeehouse. Their annual report titled 'My Starbucks' looks more like a cross between a charity foundation brochure and a high school yearbook signed by your favourite ethnic barista. These people are the best marketers in the world, marketing the best brand in the world.....that's still coffee.

Now to the stock:

I've always found it difficult to value growth stocks. This apple falls very far from my normal dividend tree. Such high growth expectations are hard to meet, and hard to predict.

The company is trading at a P/E of 35. This may seem like a big number, however SBUX is actually over 30% off its 52 week high. The reason for this is complex and involves many variables, not the least of which the fact that recently McDonalds coffee was rated above Starbucks in a recent Consumer Report taste test, as well as the fact that the CEO Howard Schultz said "measures taken to fuel Starbucks' rapid expansion had led to a "watering down" of its iconic brand." Scary stuff, if you like the crack cocaine that is earnings growth. Here are the stats:

2004 EPS +42% ROE = 17%
2005 EPS +30% ROE = 20%
2006 EPS +20% ROE = 25%

A P/E of 35 (current trading levels) are all time lows for SBUX, which has traded at P/E ranging from 37 - 67 over the past 10 years.

Are Chinese going to eat up the whole Starbucks experience the way most North Americans have. Their international sales are growing at more than a 20% clip. Same store sales seem to be dropping the last few years, however their still above 7%, which is pretty healthy.

Is this stock a 'buy' or 'sell' right now? It must be one of these. It certainly can't be a 'hold'. The multiple contraction potential, and international culture risk surely make it a 'sell', but the fact that it's trading at an all time low P/E, the same level it traded at on October 29, 2004 (see above for progress since then), and the fact that it is Starbucks® make it a 'buy'.

Thursday, June 7, 2007

sell off stats


Markets are selling off the last three days, and they are not discriminating. (Above is the TSX/S&P in the last month for some perspective.)
Here are some percentage losses with an emphasis on some of my favourite stocks.

Time Period = Tuesday (June 5, 2007 open - Thursday June 7, 2007 close)

TSX/S&P -3.0%
DJIA -3.1%

Sun Life -2.8%
Manulife -3.2%
IGM Financial -4.4%
Shoppers Drug Mart -2.5%

Walgreen -2.7%
Scotts Miracle Gro -5.6%
General Electric -2.8%

Exceptions were few and far between:
Tim Hortons -0.7%

Will be interesting to see how far we may go. Interest rate worries are probably leading the charge downward here. Buying opportunity or the beginning of the end?


Tuesday, June 5, 2007

added more Sun Life

As promised, today when Sun Life financial dipped about 2.5% below where I started my position approximately one month ago, I doubled my position to lower my ACB. For my thoughts on Sun Life see my post in early May. I wouldn't rule out buying more if the stock keeps dropping, however I am satisfied with my current position where my cost is around $50 / share.

Monday, June 4, 2007

my greatest investing fear

I've recently been thinking about what my greatest fear is with respect to: investing, my investing strategy thus far, as well as going forward. At 28 years of age could it be a coming major market downturn, faulty stock selection, or inappropriate allocation of assets? No, none of these scare me at all.

My greatest fear is looking back and realizing I didn't take enough risk!

I really like my current strategy. I am comfortable with it, I understand it, and I believe it will allow me to prosper long term if I exhibit discipline, patience, and common sense. However, given my age, tolerance for risk, and low level of need for capital, should I be making some bets that could potentially yield higher returns. Will I regret going with a 100% boring, conservative, dividend growth, large cap, fundamentally solid, smooth earner strategy? Will I have these regrets when I look back at my investing activity, when I turn 50 years old.

This is my greatest investing fear. What's yours?