"Anyone who is not investing now is missing a tremendous opportunity."
"The time of maximum pessimism is the best time to buy and the time of maximum optimism is the best time to sell."
The stock that we write about today is AFL (AFLAC Inc). This company, which luckily found a duck as a logo, is the largest supplier of supplementary health insurrance in the US and Japan. They for instance claim to insure 25% of household in Japan. AFLAC operates in a business with a very stable inelastic demand: we all get sick every now and then and people, especially in developped economies, tend to avoid saving on health care even in terms of crisis.
The company is huge but it did not try to actively expand outside of its own markets and stayed stable in its profitable niche. Basically all of AFLAC's growth strategy is based on organic growth by opening new retail branches in newer locations. AFLAC did not expand greatly but at the same time they took little to no risk in times very uncertain otherwise for financial firms, and they have done a great job at keeping their margins high.
If you look at the broader picture and check how this company has been doing over the past decade, the picture tells another story, actually they did much better than the indices, with +108% share price increase since 2000
The stock has been performing rather poorly lately, basically because people find them a fairly dull company with too much exposure to Japan. So Year-To-Date, AFLAC was down nearly 8% and as therefore has been greatly underperforming the US indices:
At the same time we feel that this recent dip is greatly underserved as AFLAC grows its revenue between staying flat and +5% depending on its business lines while it currently increases its operating earnings. Profit margins are expected to raise from roughly 4% last year to 7% in 2013.
Therefore we feel that the recent dip creates and opportunity to invest in this stable company that ovtherwise remains a great dividend sock. AFL (AFLAC Inc) now yields 2.8% in annual dividends, that is much more than saving accounts generate these days.
The AAPL stock (Apple Inc) went down 5.5% during trading yesterday. You probably missed this as all the media attention is now on some dreadful event which occured in Boston, Iran or North Korea, but this is really a HUGE drop. Apple is now 40% off from its levels of last fall (that was the time when all the famous tech analysts from the Wall Street firms were telling us to buy AAPL). Now the stock now reaching extremely low levels: we are now trading at $400 a share down from $700 only 5 months ago.
According to public finance sites such as Yahoo Finance, the stock now trades at about 8 times its forward Earnings. I know that P/E is not an indicator that you should blindly trust, but at least it is telling you that people expect this company to underperform greatly its peers in the coming years.
But is it so? The iPhone and the iPad are still accounting from about 80% of all profits of the company. Such a product concentration is obviously dangerous but at the same time they are now only starting to penetrate the biggest growth smartphone / tablets markets in the world: namely China and India. Appple products are making a killing there so the sales in these markets is extremely promising. Apple will get growth from India and China. Moreover the existing customer base is very loyal to Apple products, partly because it is such a mess to switch from Apple to Android as you lose all your Apps, your contacts, your email settings.... Basically customers are locked with Apple, they are glad about it and they will keep on buying Apple. The price of the stock is now being beaten by people who anticipate a catastrophic quaterly report next monday. Is it going to be so? Maybe, but this is highly unlikely.
We feel rather that if last fall's levels were obviously too high, the current levels are creating an opportunity to buy into this great company.
For people living in Europe, or Japan or the US the past few years have been associated with serious bank crises. Think of the Lehman Brothers, Bank of Cyprus or the Kaupthing bank of Iceland ban... But actually there is a country very close to us which has managed to navigate brilliantly through all this turmoil: Canada. 4 of the 5 major Canadian banks reported a profit for 2008, and all of them reported a profit in 2009, needless to say that none of them asked the Canadian government for an emergency loan which was the rule in the US and Europe at the time. Actually it is not the first thing that the Canadian bank system outperformed the others. During the Great Depression of 1930s, 9000 banks went bankrupt in the US but not a single one made default Canada.
It is a fact that the Canadian banking system is extremely stable, which is due to the way lending is done in Canade. First, the Canadian banks have a strong track record of being careful lenders: they only do lend to people who can demonstrate a capacity to repay their loans and especially with regards to mortgages. Canadian banks require that the borrower makes a down payment of typically 20% during a house purchase, and they will be very strict with amortization periods. Second the mortgages are government-backed, meaning that if borrowers cannot repay their loans, the government will step in to make the payments which makes a huge difference for the banks in terms of credit risk. Last but not least Canadian banks are authorized by the government to take big margins on all the products and services to their customers. Similar fee practices would be criticized by most governments but they are encouraged by the both Canadian government and finance regulatory body. And you bet that the Canadian banks use this opportunity to increase their revenues in terms of crisis and build up their treasury. All this regulated by the Canadian Bank Act which is a very good regulation: both strict and pragmatic for the business.
The conclusion we draw from this is very clear: Canadian banks, are low-risk money machines with good returns to investors. They are exactly what bank should be.
How to buy shares from Canadian banks? First, the stocks of the five major Canadian banks are traded in the New-York Stock Exchange:
Or if you have a limited capital to invest we recommend that you subscribe to the Exchange Traded Fund from Blackrock: iShares S&P/TSX Capped Financial Index Fund traded on the Toronto Stock Exchange (ticker TSX:XFN):
To find a broker to invest in Canada follow the link HERE.
To learn more about exchange-traded-funds follow the link HERE.
The food and beverages industry is a very interesting one from an investor point of view. Obviously the general outlook is that there is a very stable growth with sustained price inelastic demand. Everybody must eat and the population is growing in most parts of the world. Moreover most of the developing countries are consuming more per capita as they get richer. Also food prices are bound to go up as you do not need to be an Einstein to understand that food prices should go up when farmers all over the globe start to produce corn or sugar cane for biofuels instead of growing foods. Another frequently cited factor, the developed economies of the US, UK, the Eurozone and Japan tend to print money faster than ever, which should also have the effect of devaluating their currency and pushing the commodities prices up. And, oh yes, I nearly forgot: the world is heating up. It is actually quite real and creates pressure on arable land, illustrated by the fact that the US is suffering since 2012 from a very severe drought (see wikipedia article HERE).
But these are general long-trends that people guess will impact the food industry. What are the facts? Do we actually see a real price increase in food that could potentially lead to profit for certain companies in the food value chain? Well actually yes. Facts do concur with the "wisdom of the crowd". Food prices tend to go up pretty steeply right now, which can be illustrated by the following two recent studies:
- in the US, the United States Department of Agriculture recently published a study where it forecasts a 3% to 4% price increase for food prices during 2013. (see HERE). This is in the range of double of the US inflation forecast for 2013, as published by PwC (see HERE).
- in the UK a recent study published today showed that the cost of going up increases, here again, at twice the price of the official inflation rate (article can be read
Prices growing faster in this industry than in the rest of the economy while demand remains price-ineslatic. This is a great recipe for growing margins for the major players in this industry. Which is another point why we think that companies like Treasury Wine Estates (see article HERE), Mac Donald's (see article HERE) and Nestlé (see article HERE) are companies with very interesting prospects for the years to come.
"In the business world, the rearview mirror is always clearer than the windshield."
If you studied economics, you probably remember your first course about "efficient markets". And then other courses where your teachers tell you that markets are pretty efficient and that so many investors are out there so that the price in the market is always the correct price based all informations available. Well this is wrong. Actually it is not only wrong, it is a BIG LIE. Many of the most profitable fund investors are actually living purely on exploiting market anomalies. Today we will talk about one specific corporate action and what the consequences of this event are for share prices: Share Repurchase.
When a company decides to distribute money to its investors it usually pays out dividends, but not always. An alternative to paying out a dividend is to actually repurchase some shares that are in the market. With a share repurchase the investors are turning in those shares for money distributed by the company. The effect of share repurchases is that the number of shares in circulation diminishes, so it can be interesting to do when the management wants to reshuffle the control structure in a company especially when they think that their company is undervalued by the market. Shareholders that do not sell their shares hold after the repurchase a larger percentage of the shares in the company, so the shareholders who keep their shares get a bigger decision power in a company which they think is undervalued.
What is interesting for us with shares repurchases is that the company does make a public offering about the tender price at which it will buy the shares. So you do know beforehand the price at which the shares can be sold on a future date. But it is funny enough that not all shares will be repurchased. In short the market overreacts to the repurchase offer and they always go too high in value just a few days before the repurchase. The shares then stay overpriced for a few days, leaving you the opportunity to sell them and earn a nice little gain. This pattern occurs every time when a share repurchase occur so you can exploit this mispricing and trade with nearly 100% guarantee that your deal will be in the money ! This is called an arbitrage opportunity.
Two finance professors from INSEAD have actually defined a trading rule around this, and one of them, Theo Vermaelen, has been fairly successful as an investor using this strategy to trade in the market.
Without going too much into details the trading rule that involves you buying shares six days prior to the expiration of the repurchase offer if the stock price is at least 3% below the tender price. Then you should tender those share (and then make 3% profit) or sell the shares than cannot be tendered on the market after the expiration of the tender offer, and then you also make a profit !
You can see more details about this trading strategy in the research article from Theo Vermaelen and Urs Peyer following the link here.