Stock Picking Trick: Delopping its own set of Personal Economic Indicator: How’s the business these days?

One of the trick I retained from the famed investor Peter Lynch, is to question whenever you can people around you about their jobs and how the business goes.  The amount of information you can get this way might sometimes provide insight you would never suspect.

I did this quite often with my mother (now deceased), who was salesman for a high end shoe seller store. The change of buying patterns in the customers were more accurate than most economic predictions.

Recently,  I bought a piece of furniture at Leon’s. The salesman who concluded the deal was just the kind of candidate for such an interview: White hair, lot’s of experience and has obviously lived thru high and lows of economic cycles. My wife knew what was coming… and started rollling her eyes… But since I manage her investment portfolio too, with an average result better than her previous mutual funds… She kept silent. So, while he was completing the papers, I asked my usual question “How’s the business these days?”: “The location is ok here, but we’ve seen better. People are delaying furniture buying because they bought houses a couple of notches above what they can really afford”.  Now, the salesman point of view is one thing. That being said, when you add up this with other facts… his interpretation might not be too far off the chart. 

In North America, the car pent up demand is still above 10 years; people still kept their car as long they could; same for furnitures, at least in Canada. House markets are still radioactive hots;  average debt per canadian is increasing every year. 

Now, when people decide to delay furniture acquisition, even with 5 years no interest plans, you can bet that the furniture market is not going to recover soon. Companies like Breault& Martineault (TSE:GBT.a) are still in for a couple more difficult quarters. Their last quarter was in the red, with the same pattern: a bit worse than its competitors (Leon’s and the Brick).

The salesman point of view also confirms my own opinion on the canadian housing market, and my decision to move housing related stocks like Home Capital Group  (TSE:HCG) on the watch list.

Surprising what insights we can get from unusual sources… Try this trick whenever you can.

Playing The Mythbuster With Four Leaf Clover and Multi-Bagger stock

Did you ever try finding out four leaf clovers? I personally did and still does, with some success. I even found five and six leaf clovers. According to botanists, four leaf clovers are rare (less than one per 10,000 clovers). Stats are even worse for five and six leaf clovers. So finding them shall be extremely hard, lengthy and lucky right? Wrong. Usually, with the proper approach, it takes me less 30 to 60 minutes to find at least one. With some training, you can spot them just by glancing quickly over a patch.

Part of the approach is explained here: http://www.wikihow.com/Find-a-Four-Leaf-Clover. This link also mentions that once you have found a patch, it is very likely that other clovers in the same patch may have the same gene. The same patch will eventually produce other clover leafs with the same mutation.

Same applies for multi-bagger stocks. Granted, they are rare, often short lived. Few companies can grow that much, and the bigger it becomes, the harder it is to grow. Lots of investor contest the mere existence of such stocks, or consider it is too difficult finding them. Here is my little challenge to you fellow investors: just by glancing over canadian stocks, how many ten baggers can you find? Here are the ones I found by looking at newspapers and my own personal list of stocks.

I precise some more rules: 

1-must have reached to ten bagger threshold over a maximum of ten year period

2-can look in the past up to 1990 until today

3-threshold must have been reached and maintained for a significant time (i.e.: startups and mini small caps do not count. Otherwise, this would have been too easy…).

4-dividends can be counted in the calculation

5-Finally, must still be in business today.

Here is my list:

Home Capital Group (HCG): from the 2$ range in 2000 up to the 30$ range in 2006 +dividends

Calian Technology (CTY): from the 2$ range in the 2000 up to the 20$ range today + dividends

Breault&Martineault (GBT.A) from the 1$ range in the 2000 up to the 22$ range in 2010 + dividends

Sxc Health (SXC): from the 6$ range in 2006 up to 80$ today (no dividends)

Research in Motion (RIM): from the 10$ range early 2003 up to the 100$ range in early 2008 (no dividends)

Alimentation Couche Tard (ATD.B): from the 2$ range in 2000 up to the 25$ range in 2006 + small dividends

SNC Lavallin (SNC): from 4$ in 1999 up to 40 in 2008 (with dividends)

Stella Jones (SJ):  from the 3$ range in 2003 up to 40$ today (+ dividends)

Computer Modelling Group (CMG): from the 1$ range in 2005 up to 15$ today (+ dividends)

And I could go on for quite a bit more.

Now that my point is demonstrated, what is the pertinence of this demonstration? Simply this: by studying these ones above, it may help finding future multi baggers. By understanding why some falters after some time, you might learn when it is time to get out of a stock. By looking at how their balance sheets look like you learn how they generate their cash flow and what generates the funds. You might get insight  on what their competitive advantages were, what was their growth strategy, how this was funded, etc.

Once you are trained in finding multi-bagger, the next challenge is to keep them long enough to profit, which is in my own opinion, way more difficult than finding them.

Tecsys: review of a sleeper stock that might surprise

Look at Google finance, and draw the 10 year chart on that stock: a 50$ peak in the 2000′s then, a drop in the 2 dollar zone for the next… 10 years. Phew! Nothing to get excited about at first view.

Then why investing 10% of my portfolio in this sleeper? Because the story has evolved a bit since 2008. First, they instated a dividend policy in 2008, then increased it twice since then. Second, since 2003, they bought back approx. 4 millions out of their 15 millions shares and they continue to do so each year. They have a good balance sheet too.

As for the busines story: it’s a small Canadian software company, who carved itself over the years a niche market in supply chain management domain. There are multiple competitors in the software industry, but the bareers of entry are significants. First, you must develop a competitive product and continuously improve it. Second, once a customer has bought your software, the cost for them to switch to another product is so high, it takes major reasons to justify this.  Once the software is sold, the software company gets service revenues from customers when they need customization and licenses revenues in order to secure support and regular improvements (usually 15 to 20% of acquisition cost).

Two key things to watch in small software companies: the number of employees and the recurring revenues. You want a stable or growing number of employees; otherwise: bad call. For recurring revenues, the ideal mix you want if 60% of total revenues; lower than that suggest either difficulty to retain customers or to license it at a profitable price. Higher than 60%, suggest they have difficulty, or stopped getting new customers. Tecsys has a stable number of employees, and its recurring revenue is slowing growing every year, to reach today 40%. An increasing recurring revenue ratio usually also means an increase in cash flow. Customer support is usually less effort/cash intensive than finding new customers.

The only minus so far in this story? : lack of growth.

In clear: I like the business story (their product is well quoted by IT experts), the risk reward profile is attractive and  they do reward shareholders. If nothing happens, you get more than a term deposit, with regular increase of the dividend when they can (plus share buy back). If something happens, such as being acquired (M&A) or growth accelerates… you get a potential multi bagger not yet on the pro’s radar. This kind of stock is usually less stressful and volatile than high profile fast growers such as… Apple or Dollarama….

Tecsys is VERY thinly traded. Be careful if you take a position, and as usual, make your homework.

How the Internet has changed Investing: The Good, The Bad and the Ugly

I found this very interesting article on : http://www.investopedia.com/financial-edge/0212/How-The-Internet-Has-Changed-Investing.aspx?partner=globeandmail#ixzz1p7HoQXP2

I also added investopedia on my link sites. They have a bunch of very interesting information.

I concur on many things about what they say, since I started investing in the eighties.

Before the internet, you had to talk to a broker over the phone and the minimal discount commissions were about 50$, instead of 10$ today. The information was difficult and tedious to find. You wanted to know about insider trading? Good luck. It was either paying absurd fees to an intermediate or going directly at the stockmarket documentation room and and asking for the info. You had to get a ticket, and wait. Today, you can get it on the web… just right here: http://www.lautorite.qc.ca/fr/bulletin-fr-corpo.html (sorry it’s in french, but I’m sure there is the equivalent in english somewhere else. anyway, it’s just to make my point).

As for the financial info? Ha!  What a fun it was. You had to phone directly to the company to get them. If you were lucky, you could get a RECENT copy. There was also a special service from the Globe and Mail, you could subscribe for free (I think it still exist), and choosing to receive the annual reports of your choice. I recalled receiving a whole box of them, and my wife wondering about my weird investing hobby of mine … The sad thing is that the companies you could get this way were  not always those you wanted tough. Of course, all of this took WEEKS.

Now, almost any discount trader provides wealth of them on a click. Google finance provides you in a couple of clicks nice and quite accurate stock charts. You also have annual and quarterly reports on Edgar and Sedar for the past 10 years.

Finally, the fun part: when there was a big move on a stock, you, the small investor had to wonder why for a couple of hours if not days… First to Know there was a move (usually in the newspaper the next day); second to find out why, requiring you to scan a couple of financial newspaper. Today: you could get immediate alerts on your smartphone.

Compared to this, today sounds like investor paradise, Hey? However… this instantaneity has brought its own set of challenges:

1-We are now drowned in an ocean of both objective and subjective information. What information can be trusted, where? What information among this is relevant or isn’t? Today’s challenge is to sift through this until you find your golden nuggets. Moreover, if, by lack of experience,  you misled your nugget with  fool’s gold… You might be trapped in a scam. Just look at all the ads promising you a mountain of money in a couple of days.

2-Volatility has increased, for a number of factors (day traders, short sellers, speed of financial readjustments based on news). Consequently, your decision taking process has to go in overdrive too. You can now miss opportunities by waiting too much. You also need a strong resistance to stress for the big, often senseless market moves. When (not IF) you make a bad decision, you better be quick on the grief process before divesting. Indecision or denial  are not an option, it’s an handicap. For the kind of people who sometimes sense the rats of their self confidence, leaving the sinking ship of their courage… Becoming a seasoned investor on those conditions is maybe more challenging today.

3-Having an edge is more difficult, since most information is available to all who are seeking it. Here is an example: In the early nineties, I took a position in a turnaround furniture maker company called Shermag. They published in a local newspaper, that they were hiring hundreds of worker for a new night shift. I immediately understood the impact this would have on the stock, who went from 2.50$ to 14$ three years later. The market waited for the financial results to adjust progressively. Today, I am almost certain that with our friend Google, the pricing adjustment would be way more quicker.

I don’t regret the past, mind you. But one has to admit that like most improvement, no matter how beneficial it is, more often than not, it also brings its own curse disguised as a blessing.

Glentel and The Eternal Investor Dilemma: What to do when a growth stock slows down?

Note: all the info below was extracted for Glentel M&A, available on their website. The extracts below are focussed on specific elements. Pls refer to the original M&A for more information.

Last week, Glentel announced relatively good numbers for 2011. Sales for the year ended December 31, 2011, increased 42% to $583.7 million compared to $412.3 million in 2010. Consolidated net income and basic earnings per share for the year ended December 31, 2011 were $28.7 million, $1.29 per share, compared to $23.4 million, $1.06 per share, for the previous year. A 22% increase.

However, there was some other informations that were less rosy: In the 4th quarter of 2011, sales of retail mobile phone products, tablets and services in the Retail Canada Division increased 4% to $113.1 million in 2011 compared to $108.6 million in 2010. For the year ended December 31, 2011, sales of retail mobile phone products, tablets and services in the Retail Canada Division increased 15% to $380.7 million in 2011, compared to $330.2 million in 2010. The number of stores added in Canada during the year was 9%.

Sales increased throughout the year; however, the Retail Canada Division saw flat (2010 – 23%) same-store activation growth for the 4th quarter and a 4% (2010 – 15%) growth for the year, for stores that were open for both 2011 and 2010.

WIRELESSWAVE and Tbooth wireless delivered strong results in this quarter, whereas WIRELESS etc. (Coscto Wholesale stores) was impacted by the absence of a top-selling smartphone for 2011 in its product lineup. The next generation of the smartphone was introduced to the market in the 4th quarter of 2011 compared to extraordinary sales performance of its predecessor model sold by WIRELESS etc. in the same quarter of 2010. The Company has realigned the product lineup and promotions to leverage our position in WIRELESS etc.

Hum… What interpretation can we do of this? Is this a small hiccup in the company growth? Or something more serious? Hard to discern a significant trend with only one quarter. The smartphone crave is still raging tough, so that is not a fundamental shift on the smartphone market. Another key piece of information is Glentel’s admission of the impact of a key top selling smartphone on their performance. Are their growth so dependant on ONE product? But then, how can this explain the flat same store activation growth for the whole canadian retail sector? In a quarter that is usually one of the year’s strongest? Will Glentel succeed in resuming its growth through US expansion and a product lineup realignment?

This is where the investor dilemma takes all its meaning. I can stay in, thus getting in for a negative return (at least short term… IF things improve). OR, I can get out and wait to see how things unfold in the next few quarters (and missing an eventual rebound). Hum… Remember what I mentioned in previous posts on ignorance? Right now, I feel ignorant (that is why Glentel was a small position in my portfolio), and it is hard taking sound decisions with few facts. I can’t connect all the dots with the info I got so far.  In fact, I feel just ignorant enough to put Glentel back on my watch list and divest from the stock until I know more.

I like growth stocks, but when you invest in these, you have to deal on a regular basis with situations such as this one, and it is never easy.

Portfolio assessment, first quarter 2012, part 3

First Service Canyon:  First service offers pumping services. In clear: they are the ones providing the fracking hardware and expertise to oil and gas companies. They published excellent results, and raised their dividends by 150%. it now stands at 4.5%. Balance sheet is excellent, payout ratio is reasonable (should be below 20% for this year). They still plan to increase a bit their pumping fleet this year, and they can do so with their cash flow. They evolve in a cyclical industry (oil service) that a pro recently commented as moving back and forth from “feast to famine”.  My personal “amateur ” evaluation of this is that yes, they evolve in a cyclical industry with wild high and lows. However, the pumping domain is still a growth story, and is fueled by three factors:

1-a fast and quick adoption of this revolutionary (albeit controversial) technology: that part is now completed. More than 90% of new wells are using fracking (darn thing i did not see it sooner…)

2-using this technology with gas, rich liquid gas (butane, propane, etc), light oil and eventually shale oil. Now that gas price is depleted because of the abundance of demand, there is a huge switch for using fracking with these resources. The trend is strong as rich liquid and light oil prices are excellent. Regarding oil: the long term trend has not changed. It will remain the major source of energy for at least one more century, and will fetch good prices.

3-to keep producing at profitability level, fracking have to be used repetitively, more and more frequently , with higher pressure. Hum… some similarities here with heroin addiction…  This trend is still increasing, and IF First Service information stands true, they have the newest and most powerful pumping fleet. Sounds to me like a competitive advantage.

In clear: two of these growth factors out of three are still active, with a company offering a 4.5% dividend, a rock solid balance sheet, good cash flow, and a young fleet with lots of pumping power.  To me, it’s a hold, with potential buy on dip below 10$ (if the dips are caused by greek scare like events). Needless to say: this stock is volatile. A drop in oil and gas prices has more impact on oil services companies than on oil and gas companies. Dividend will somewhat help alleviate this.

Gasfrac: already commented in previous post. Nothing new. It’s a special situation, quite speculative. My position is very small.

Portfolio assessment, first quarter 2012, part 2

Now, let’s talk about where we stand so far. The portfolio performance so far in 2012 is around 10%.

My biggest position is still Imperial Oil (IME), and since I have published a couple of post on this, plus that there is not that much new things to say, I will not elaborate more on this stock and its market. I suggest you consult the following posts: 1, 2. I would buy more of Imperial on any dip below 40. I still believe that Imperial has what it takes to be of 3 or 4 bagger within the next 10 years. Imperial is subject to some serious volatility during downturns, but one look at the balance sheet is enough to understand why it is not deserved.

Regarding Apple (AAPL), now my second position (thanks to a growth in value of more than 50% since I bought it) not that much to say. I refer you to this posts: 3. I do not intend to increase my position in that stock. Apple was a 100 bagger in the past 10 years, and has now the biggest cap in the world. I doubt it could repeat this in the next 10. But still, with a good 2012 year, the possibility of instauring a dividend policy, things are looking good for a couple more quarters with this stock. This one is a hold. Apple is quite volatile but this might change a bit if a dividend policy is implemented.

Dollarama also grew by 50% since I bought it. Their growth plan is unfolding as expected, they should be debt free by 2013, the dividend should grow, the payout ratio allowing some room for dividend increase and their cash flow is so impressive. A hold at current price level. However, I would not be surprised to see this stock above 50 by the end of the year. The stock is popular and mutual funds are fawned by its performance. A simple growth story to keep as long as possible. Dollarama was quite resilient during markets downturns.

Glentel had a nice run when Apple published its most recent quarter numbers, bagging a 30% gain so far in 2012 (pls refer to this post: 5). If 2012 unfolds as expected, if Glentel continue rewarding investors with dividend increase and if competition if not too aggressive against them (few bareers of entry for selling cells, tablets and smarphones…), should be a good year too. A hold for 2012. I initially bought Glentel to hedge my bet with Apple: Apple is selling one product while Glentel sells all of them… So far, both bets are winners. Glentel was a seven bagger in the past 5 years and is surfing on growth by acquisition and the smartphone craze. How long will this last?

Calian Technology: Calian is a kind of hybrid: a consulting firm providing skilled resources to the Canadian government plus an engineering firm supporting government based communication infrastructure. More than 60% of their business is government related. They were quite successful in it so far, since Calian is a 10 bagger for the last 10 years. They did a lot of share repurchase and raise their dividend sixfold in the past 10 years. Will they repeat their feat? Hum, revenues are stalling, margins are eroding, dividend payout ratio is maxed out, share repurchases are decreasing (2011: less than 1%). I have a small position with Calian. Believe me, it is not because i got a  7% annual return (dividend + repurchase). This is not the kind of return I am looking for. I want to see what move they will do to resume growing. They recently acquired a chain of medical clinics… Interesting move. In Ontario and Alberta, automobile related injuries are paid by insurers, and insurers are interested in doing business with clinics with national coverage… I kind of suspect, that they might be targeting this market for recurring revenues. I was wondering if I should keep Calian, now it is definitively a hold. Calian is very stable in volatile markets, and quite illiquid. Might acquire more if they follow up with other health care related acquisitions.