Thursday, November 28, 2013

Look For A Scalable Niche

When looking for small growth companies it’s often advised to find companies that occupy a niche in the marketplace. After all if a company doesn’t have a presence in a niche, they are probably not even a profitable business. Even a behemoth like Wal-Mart can be thought of as a niche – big box stores with a large variety of merchandise at everyday low prices. In some ways every business is a niche. Even if the product or service is the same, all businesses are looking to differentiate themselves from the competition and have a niche appeal.

In stocks, especially small caps, what matters most is occupying a scalable niche. A company that has a niche but cannot continue to grow and scale is a dead in the water stock. I write about this because I am debating with myself about a stock I own; my concern is about the scalability of their niche.

The stock is International Barrier Technology (IBH.v). They specialize in fire proof building products and coatings. Almost all their sales are into the US residential and commercial market. Positives first – Revenues are trending up nicely. They were profitable last 3 quarters. New license agreement with Russia/Euro client. All time high square footage sales. Margins improving. No analyst coverage/ unknown by institutions. Negatives – They have only 3 big customers who are distributers of their product. Any loss of these customers would affect the stock greatly. They have never proven to be consistently profitable. Though the company is profitable, the market cap is only $8 million so be warned, this is an extremely speculative stock.

My main concern is, can they scale the niche in this up cycle and consistently grow the bottom line? Is the technology offered by IBH capable of driving profitability over the next 3-5 years? Or is it too small of a niche to be a growth stock? The appeal here is if revenues and earnings continue to trend how they are, the opportunity is there. I am leaning towards the ‘too small of a niche’ and am thinking hard about selling my position for something better. The market for IBH’s products may just be too small to earn 2-3 cents a share over the next 4 quarters, which is what I think they need to do to propel the stock higher.

Tell me what you think in the comments below.

Monday, November 25, 2013

A Must Watch Warren Buffett Video

Speaking to UGA students in 2001, Warren Buffett shares some great insights for all investors. There is not much new here for investors familiar with Buffett, but the way he articulates his ideas in this video is very entertaining and informative for all skill levels. If you are a beginner looking to invest, there is a plethora of investing wisdom to be absorbed here. In my opinion it’s one of the best Buffett lectures I have watched. 

Usually I don't do short video posts but I find myself listening to the lecture a few times a month just to keep my temperament in check and stay sharp, so I thought it was worth a post. It’s a good tool to help stay in the right mindset for investing, plus he is pretty funny at a few parts especially the marital advice. The investing stuff starts at about 12:50.

Saturday, November 2, 2013

Why I Do Not Dabble In Commodity Stocks

Last year I made a conscious decision to eliminate my mining and energy exposure in the portfolio. Nothing against mining and oil and gas investors because some are very good at what they do, but I never could find an advantage in this field.

My guess is because I have no formal training in engineering, geology and have shown limited personal interest to learn how to value these companies. Speaking on valuation, it’s hard to get your head around some of the resource estimates. Each company seems to use a different method of measurement and different geological firms to come up with estimates. Since most of the smaller companies do not make money at all, it becomes very difficult to learn how to value these companies. Even if you put the work in, it’s hard to trust the consistency of the resource estimates from all these various firms. This may be truer for the mining sector and less in oil and gas. I posted an article on StockTwits about Pretium Resources that illustrates some of the questions raised about resource estimates and the standardization of these geological firms. Here’s the link:

One of my main concerns about mining and energy producers, especially the small ones, is it attracts the fast money crowd. These investors are looking to make a quick buck over hours, days or weeks. Generally this type of investor knows very little about the company, its growth prospects or its valuation compared to peers of similar growth – all things I follow closely. They attract investors who heard about it from their neighbour or saw it recommended on TV and didn't do any due diligence. Bottom line, I want to own stocks where the holders value what I value when looking at a stock and will not panic sell on routine corrections. I recognize the long term benefits of finding the right company and holding it for a very long period, and I want to be involved in stocks with similar investors.

Warren Buffett did it without commodity exposure. The greatest investor of all generally made his billions with insurance, financials, media and consumer product stocks. Sure he has owned a few integrated oils and maybe I’m missing some other holdings but commodities were never a big part of his circle of competence.

This isn’t to say that you cannot make money in the commodity space. Maybe if I had over a million dollars I would own a couple energy yield plays for income. Personally, I find it easier to value a company based on earnings growth, something most small resource and oil and gas stocks do not have. There are plenty of growth opportunities in consumer discretionary, financial, industrial, healthcare and technology. The need to venture outside of these easier to understand sectors is not worth it to me. I like easy to understand businesses that are small and underfollowed by big money. I like companies that have an idea and products. I like businesses that are growing every year and are reasonably valued. To me this is a much more transparent and sensible way to invest.

Thursday, October 31, 2013

How Not To Be A Pig

The familiar adage, ‘Bulls make money. Bears make money. Pigs get slaughtered’ is well known in the investment world. It got me thinking about what it means to be a pig, because nobody wants to get slaughtered. The more I thought about what the conventional thinking was on being a pig, the more I am convinced that conventional thinking in itself is the most piggish of all.

My understanding of prudent conventional investing wisdom is that you must take a profit after a run up in a stock. A common practice to hear is selling half of your position and ‘letting the rest run’. I’ve heard this countless times from professional managers on TV or in print. When you think about it, doesn’t that seem like the most piggish of all things to do? If you’re a bull you continue to hold and do nothing. If you’re a bear you sell the stock for something else. If you’re a pig, you sell some and hold the rest with less conviction.

Here’s what can happen when you do the piggish thing. You feel good that you took profits after a 20% run up. You take the cash raised from the sale and buy another stock on a pullback. Two weeks later the original stock you ‘took profits’ on is up another 10% and a few analysts just picked up coverage with a positive recommendation. Over the next year the stock goes up 200%. The other stock you purchased with the raised cash was a more conservative stock because you wanted to ‘lock in’ profits. That stock basically goes sideways for the year, but you did get a nice 3% yield. After seeing your original stock skyrocket, you end up buying it back at much higher prices on an emotional whim.

This is just one example, obviously anything can happen. More often than not the original stock you purchased is just as good or better than the stock you would buy with the cash you took profits with. If you were so compelled to buy another stock, the best thing would be to sell your entire least favorite holding and replace it with the new compelling holding, not sell some of your winners to buy it.

Somehow selling your winners has become prudent investing, when in reality it’s the most piggish move of all.

The Teenage Nightclub Monopoly of Canada

Recent performance in Cineplex (CGX-T) has in my opinion solidified its blue chip status on the Toronto Stock Exchange. But aside from the numbers (they just reported all-time record revenues in Q2 2013) Cineplex has a few simple fundamental reason behind its success.

Cineplex dominates the large screen movie viewing market in Canada. Their recent acquisition of Empire Theatres is sort of the icing on the cake of the monopoly. They now have presence in Atlantic Canada which will add another piece of the framework for growth. I still believe there is plenty of room for steady expansion either by new concepts in Canada or a big international acquisition sometime down the road. Like any monopoly, they can steadily raise prices over time almost guaranteeing steady growing revenues and cash flow in the long term. How many companies can you say have 80% of the market, steady growing revenues with low barriers of entry?

Cineplex has an attractive demographic customer base for advertisers. Children and young people are the majority of their audience and big corporations are willing to pay up to have their eyes and ears for a minute. Their media advertising sales grew 44% in Q2.

I did some Peter Lynch inspired recognisance work one Friday night when I went to the movies. What I saw was a lot of teenagers spending their parents’ money. I remembered back to my teenage years and I spent a lot of time at Cineplex on the weekends too. Clearly this has continued for an extended period of time. These theaters are ingrained into Canadian teenage lives. I am now convinced that Cineplex is the Teenage Nightclub Monopoly of Canada, minus the liquor.

Cineplex has its doubters. The main bear argument I hear is they have saturated the market so growth will be limited. Even if they have saturated the market (which I believe they are 10-20 years away from approaching saturation) they can still raise prices overtime. Another bear point is its expensive, trading at about 18 times forward earnings. However, for a reasonable valuation, you get a monopoly with pricing power and high barriers of entry. Also pays out a growing dividend. It is definitely worth having in any Canadian dividend stock portfolio.

Don’t expect any crazy returns from Cineplex as an investment. After all it’s only a boring movie theater operator, not a glamorous high growth company. In my opinion, Cineplex does well as a core conservative holding that you can hold through any environment but still has some decent upside potential in an improving economy. I believe it will continue to outperform the broader TSX index over time.

Disclosure: I do not have a position.

Wednesday, October 30, 2013

Invest Like A Rebel

If you want to build wealth by investing in stocks it pays to know something that others do not know. Accomplishing this is deeply related to investing in an unconventional way, or investing like a rebel.

First there is the basic principal. The majority of people are not interested in stocks yet most of those people would agree that they could use a few extra bucks. The basic principal of knowing what others do not relates to your interest in stocks and the recognition that investing in them can be financially beneficial. That realization is important because a lot of people don’t make that connection and will never buy a stock. Simply knowing this and acting on it puts you ahead of the wealth building curve and solidifies your unconventional nature.

The basic principal of knowing what others do not refers to an advantage in knowledge versus the general populous. However, to be a successful investor you must evolve to know something that most other investors do not know. This proves to be more difficult. In my experience, you can gain a considerable investing advantage when you get to know something that most other investors do not know. To me, if you can’t find an advantage in stocks it’s best to just buy an index fund.

Gaining an edge in stocks is deeply rooted in being unconventional and investing like a rebel – and most investors do not know this. Generally, investors are comfortable staying with large well known blue chip stocks, and sticking to conventional wisdoms like ‘you must diversify’ and ‘no more than 5% of the portfolio in one holding’. It makes sense that if you invest like everyone else, you’ll probably end up underperforming the index, just like most professional mutual fund managers. So the goal is to avoid the common methods of the masses of underperforming mutual funds. As a do it yourself investor you can enjoy freedoms that fund managers do not have. There is no need to worry about a director or manager criticising your every move. It’s easier to invest outside the box and adopt a rebel mentality.

In my opinion, rebel investing means exclusively sticking to small and medium sized stocks as opposed to the big dinosaurs the funds own. It means not diversifying in sectors you don’t understand – personally I avoid mining and oil and gas stocks all together. It means not benchmarking or following any allocation rules – feel free to have 25% or more of your portfolio in one stock. It means sticking to underfollowed, simple, easy, growing businesses at a fair price and avoiding the widely known stocks that are constantly covered in the media. It means having the temperament and conviction to let your winners run.

Whatever rebel investing means to you, it always helps to have a solid foundation. Learning from the past great investors is the best way to develop the basics. I recommend Peter Lynch, Warren Buffet, Ben Graham and Ken Fisher. Also a must read is Reminiscences of a Stock Operator. In my experience, a basic investment foundation paired with an unconventional investment method is a framework for outperforming in stocks.

Friday, September 27, 2013

How Patience Can Negatively Affect Investor Returns

If you have been interested in investing for some time, you may have heard that a common trait among great investors of our past is patience. Unless you plan on trading and taking little profits/ losses here and there, patience is a very important attribute to possess as a long term stock market investor. Here’s how patience can work in your favour as an investor.

Having patience allows you to ignore the ups and downs of daily volatility and focus on the fundamentals. Putting too much emphasis on daily gyrations in price is a sure way to panic selling one of your best stocks just as a breakout is beginning. Breakouts usually happen this way; after a long time basing, the stock takes one last dip testing the patience of even the stoutest long term investor. At this point sellers are exhausted and what’s left are the most content owners and new buyers on the pullback.

A great example of this is the AutoCanada Inc. (ACQ-T) chart. During the summer of 2010 to the winter of 2011, AutoCanada’s stock basically did nothing bouncing between $4-5, yet the fundamentals were compelling. If you held through that period, you saw the stock breakout around $5 to now trading at about $36 a year and a half later. Despite what the technicals, momentum indicators and volume were doing during that basing period, you would have made a bunch of money if you showed patience, ignored the technicals and held the stock simply because the company was doing great. (upon further look, during the basing period the trendline did breakdown from the previous up trend, so most technicians would have sold and it's debatable/unlikely they would have bought it back)

Another positive of having patience is that it gives you the temperament to hold on to your winners when most traders advise to sell the stock because it “had a good run” or some technical indicator broke down. To me this is the most important benefit of patience. If you own a great stock in a great company, having patience can be life changing (see AutoCanada since the 2009 lows). That alone is reason enough to have patience with your best holdings and look for other stocks that match the criteria of your best holdings. 30 year charts of Nike, Colgate Palmolive and Phillip Morris illustrate this life changing potential.

The negative side of patience is harder to define but I’ll give it a try. As a retail/ DIY investor, you have limited funds to deal with. With limited funds, it’s almost impossible to build a meaningful position in every company that you like. This means that when you find a compelling company you have to sell something to buy something else. This is where patience can get you in trouble.

To avoid missing opportunities, investors must be willing to sell a good company to add a tremendous company. In practice this can be very difficult. It is even harder when the ‘good company’ has been a long term holding of yours and you have been lucky enough to get above average returns out of it.

It makes sense when you think about how every successful investor is constantly learning. When you are learning more every day, the stocks you pick now will probably be a lot different from ones you picked 2, 3 years ago. If you are successfully learning, your new stock picks should also be better than most of your old picks. This is where patience rears its ugly head. I can’t count how many times I have stumbled on a compelling stock that I didn’t know about till then, yet could not buy it because I was fully invested and did not want to part ways with my old, reliable holdings. In hindsight, this was my mistake – I should have sold something that was good to buy something tremendous.

As a successful long term investor you must have patience, but don’t let that stop you from using new knowledge and ceasing new compelling opportunities. 

Monday, January 28, 2013

4 'Special Situation' Canadian Stock Picks

Disclosure: I own MRD and CMG

WestJet Airlines (WJA-T)- WestJet is the best-in-class airline in Canada. Their balance sheet is exceptional for any company, much less an airline. They have a long term debt to equity of .42 and 1.45 billion in cash. That's almost half the market cap in cash. The nature of the airline industry is very cyclical so I would be cautious at these levels, but we can learn a lot from WestJet about how a best-in-class company almost always outperforms. Their main competition, Air Canada, is bogged down in legacy and pension costs, hampering their ability to effectively compete. WestJet continues to execute on their strategy of being an efficient and well-run company. Airlines are generally shunned by investors, but the numbers don’t lie with WestJet. Personally, I wouldn't think twice to buy on any type of pull back even at these extended levels, but you’ll want to keep a close eye on earnings calls for any cyclical slowdowns.

Cineplex (CGX-T)- Cineplex has a dominate position in movie theaters  essentially a monopoly. Their only competition is from Empire Company who also operates a small chain of movie theatres. Movies are ingrained in our society, and I still believe Cineplex will thrive even with the internet and downloading movies becoming more prominent. Cineplex makes most of their money on high markup confectionery items, which hints at a pricing advantage. With the lack of significant competition and a proven management team, I expect Cineplex to continue to outperform the broader index over time.

Melcor Developments (MRD-T)- There have been several negative headlines the last 6 months regarding the housing industry in Canada. As a result, the valuation of Melcor Developments has been depressed, still trading at 5.5 times earnings and .92 book value. Considering the recent company performance, which has been great, there is a clear disconnect between the valuation and the performance of the business. I think Melcor will be a great pick for 2013 because it should appreciate by a combination of multiple expansion and earnings performance. They recently announced plans to unlock value by spinning off some assets into a REIT – the result is a more focused community developer with more capital. I’m willing to bet housing is in a correction, not a free fall, and Melcor is the cheapest way to play with still some room for serious growth long term.

Computer Modelling Group (CMG-T)- CMG occupies a terrific niche in oil services technology; they make reservoir simulation software for the oil and gas industry. They have a tremendous record of un-interrupted double digit earnings growth over the last 10 years, usually growing over 20% a year. Over the long term, they have rewarded their shareholders handsomely with a combination of dividend growth, special dividends and capital appreciation. They have a world class balance sheet with no long term debt and lots of cash. A decent argument can be made that CMG is expensive, trading at 28 times forward earnings, but I believe it’s worth the premium. There is almost no other company that has consistently performed better over the long term than CMG, yet it still remains under followed and underappreciated.

Thursday, January 24, 2013

No More Using Margin, Raised Cash, Transitioning

I haven’t been updating my progress lately because I have not been able to save any money. I ended up quitting my new job realizing it was not for me pretty quickly. Currently, I’m on the lookout for better employment, something new and enjoyable. In the mean time I have started an eBay Store and remain very optimistic on my portfolio and progress. Here’s the link to my store: 

Portfolio wise, I did raise some cash to start the eBay store by selling some of my more conservative large cap holdings. The eBay store cost about $4000 to buy inventory and start up. I basically downsized the portfolio, sold some relative losers, kept my winners and focused more on my core strategy which is under appreciated small /mid caps. I also closed out my margin debt balance; now the dividends are coming in as cash, and I’m completely debt free, which feels good.

The positions I parted ways with were Saputo, Tim Hortons and my only materials stock Imperial Metals, taking a small loss on THI and nice profits on SAP, III. I now have no commodity miners or oil and gas producers in my portfolio. I also sold my position In Prism Medical down about 12% -$250 loss (first significant loss in recent memory), and sold SIR Corp for a nice $400 profit.

The performance of the portfolio has been surprisingly awesome, especially lately. Several positions are near all time, or 52 week highs. I have no losers in the portfolio. Most positions are comfortably in the green. My portfolio has untaken profits of about $13 200. Luckily several stocks have been exceeding my expectations including MTY, AD, MRD, KBL, CMG, AP.UN, SNC and WTE. My largest holding, Asian Television Network, has benefitted lately from clarity on growth objectives and some new launches, specifically 25 channels with Cogeco Cable. I’m very confident in the future prospects of these companies and continue to hold all of them.

What I am left with now is a focused small/mid cap, special situations portfolio that I believe is positioned well for long term growth. I will continue to focus on being extremely passive and letting my positions run. I just had a job interview, so hopefully that works out and I’m looking forward to new goals and challenges in 2013.

Thank you to everyone who visits this site and all your emails. I hope we can keep learning together. Please email me at for market chat or just to bounce an idea off me. Good luck to all in 2013.

Margin Account
Company Name # of Shares Market Value
Westshore Terminals  135 $3,773.25
Asian Television Network 2750 $9,130.00
Allied Properties REIT 94 $3,215.74
Black Diamond Group 260 $5,712.20
K-Bro Linen 123 $3,688.77
Computer Modelling Group 196 $4,321.80
SNC Lavalin  53 $2,391.89
Bird Construction 204 $3,047.76
New Look Eyeware  100 $939.00
MTY Food Group 125 $3,012.50
Melcor Developments 150 $2,934.00
Total $42,166.91
TFSA Account
Company Name # of Shares Market Value
New Look Eye Ware 190 $1,784.10
Alaris Royalty 122 $3,128.08
Asian Television Network 469 $1,557.08
MTY Food Group 136 $3,277.60
Total $9,746.86
Cash Total $375.00
Margin Account Total $42,166.91
TFSA Account Total $9,746.86
RRSP Mutual Fund (approx) Total $800.00
Total Assets $53,088.77

Saturday, December 29, 2012

4 Practical Tips for Passive Investors

1. Avoid opening your broker account daily/regularly – Unless you’re doing research, there’s no reason to open your broker account and look at your positions constantly. As a beginner, this was something I did frequently and it mostly lead to unprofitable, emotionally driven portfolio moves. 

Personally, I found that I would talk myself out of a perfectly fine company, or ‘take profits’/ sell one of my winners, when the best thing to do was nothing. I was more susceptible to market fluctuations. As a passive investor, most of the time the companies you originally selected should still be compelling for the same reasons you chose them in the first place. It’s easy to forget the original reason why you bought a stock when you’re constantly looking at your positions and the profit/ loss column. Always remember the reason that first compelled you to buy a stock; if it has not changed, hold, if it has changed or maybe you were wrong in the first place, then you may think about selling and replacing with a better company. You cannot gain this insight from constantly checking your positions. 

You should always question your positions and continually look for better companies, but having your online broker always open can lead to too many emotional trades. I like to briefly look at a watch list once or twice a day to keep an eye on my positions. Speaking from a passive, long term investor perspective, in my experience, there is no value in watching your positions constantly throughout the trading day.

2. Do way less, but not nothing – As a passive investor, it’s very important to not make too many portfolio moves, but you still have to sometimes. This is a problem that I’m learning the hard way. This year I have essentially made almost no portfolio moves, except buying stocks with new money saved. In hindsight, because of my extreme passive nature, I have missed out on good opportunities. Ideally, as a passive investor, the goal should be to make as little trades as possible without missing out on an opportunity to add a better company to your portfolio. The upside of extreme passivity is low trading fees, but that shouldn't discourage you from selling a less attractive stock for a more attractive stock. So do way less, but not nothing. (I realize ‘not nothing’ is terrible grammar but it seems to uniquely fit my thinking on this subject)

3. Make your own index fund and let it run – I find it helpful to think of investing in this way. If you buy an index fund, basically you are buying every stock on the S&P500 or TSX and holding it for an indefinite period. I like to think of my portfolio in that way. Essentially my portfolio is my own personal index fund of my favorite companies, and for the most part, I plan to hold all the companies for an indefinite period. 

If you buy individual stocks like me, you have the flexibility to switch a company out and add a more attractive one. Most people would think of that portfolio flexibility as a positive, but one just needs to observe how almost all mutual fund managers under perform an index fund over the long term. Hence, that flexibility could be negative. This is why I always recommend a passive, long term approach. For the most part, if you make your own index fund of 10-20 stocks and let it run passively for the long term I’m willing to bet your long term returns would be better than if you were constantly tinkering with your portfolio daily (which seems to be common practice of most investors).

4. Think only very long term (5yrs-forever) – So your favorite company just had a less than great quarter and the stock is beaten down accordingly - don’t worry. As long as you bought the stock for the right reasons in the first place, time will heal your worries and the stock price. 

Time is the friend of a wonderful business. A good illustration of this is Saputo; after a rough quarter earlier this year the stock sold off to below $39. Despite the reason for the weak quarter, you could still have concluded with a good degree of certainty that Saputo still had a leadership position in Canadian dairy and specialty cheese markets (which it did and still does), they still had growth opportunities in international markets and by acquisition (still does). Despite the bad quarter, the original reasons why you would have bought the stock were still intact. That’s why it is so important to think very long term. Since then the stock has advanced to over $50. Short term thinking could have had you sell this stock at fire sale prices, only to see it shrug off temporary shortfalls and continue to rally. Remember, this only applies to phenomenal businesses.