ZED - Sold & Lesson Learned

I recently sold my position in ZED for about a 30% loss. If you’ve been following this blog for any length of time you’ll know that ZED accounts for only 0.4% of my portfolio so selling at a 30% loss will certainly not affect my portfolio in any meaningful way. However, my brief foray into speculative, cyclical, micro-caps has taught me a couple valuable lessons.

1.I should stick to large companies that I’m able to properly analyze. Before buying ZED I used the same techniques that I use for large caps. However, with small caps the earnings are often much more volatile and the accuracy of earning estimates is often low as there are usually very few analysts following each name.

2.I have been developing and using a value oriented dividend growth based investment strategy for the past 8 years that has been working successfully for me. I should stick with what I know and continue to invest in what I’m comfortable and successful at.

Retirement Nest Egg at the Close of Oct 31, 2007

-down 1% from last month
-up 7.6% in 2007
-CDN 69%
-U.S. 27%
-International 4%

TRP - 4.52%
CSH.UN - 5.08%
GWO - 5.23%
PFE - 3.49%
POW - 4.55%
BA.UN - 0.41%
WAG - 3.52%
L - 3.69%
UNS - 2.88%
GZ - 2.41%
TD - 13.9%
EIT.UN - 2.75%
JNJ - 5.49%
MMM - 3.68%
ATD.B - 3.83%
O'Shaughnessy’s Global - 3.97%
American Growth Fund - 0.96%
CDN Value Fund - 3.74%
Small Cap Growth Fund - 4.4%
Chou Associates Fund - 10.15%
Money Market Fund - 11.37%

No huge changes from last month. I initiated a position in WAG and unloaded ZED for a loss which I’ll talk about more on Monday. The decrease in my portfolio is largely due to the weakness of the US dollar. I’ll also start including the amount of Canadian, American and International exposure that I have for each network update. I’m currently sitting with about 11% of my portfolio in cash and am watching quite a few stocks but am closely watching C,BAC, TOC, IIC, BMO, WMT as well as opportunities to add to my existing positions on weakness.

Government Sued Over Income Trusts

I came across an article by John Partridge while doing my daily read on Globe Investor and thought that it was worth sharing.

SYNOPSIS:
A U.S. couple is currently in the process of suing the Canadian government claiming that the 2006 unexpected changes to the income trust tax laws are in breach of the NAFTA agreement.

To read the entire article please follow this link.

U.S Housing

Ok so Buffet and many other deep value investors are starting to re-enter the housing market and some of you want to go against the herd and follow Buffets lead (and why wouldn’t you Buffet is the most successful investor of all time)...but which housing companies are going to survive? Which are going to fail? Which are going to thrive? There are some great companies out there that are certainly going to survive ie- HOME DEPOT, LOWES etc…However, are those companies going to thrive? What about builders? Which ones are going to continue to thrive? If you’re like everyone else out there you don’t know the answer to those questions (and neither do I). However, if you’re confident in the sector but not necessarily in the individual names of the sector you might want to check out the SPDR Homebuilders ETF.

“The SPDR Homebuilders ETF seeks to replicate as closely as possible, before expenses, the performance of an index derived from the homebuilding segment of a U.S. total market composite index. The Fund uses a passive management strategy designed to track the total return performance of the S&P Homebuilders Select Industry Index (the "Homebuilders Index" or the "Index"). The Homebuilders Index represents the homebuilding sub-industry portion of the S&P TMI. The S&P TMI tracks all the U.S. common stocks regularly traded on the NYSE, American Stock Exchange, NASDAQ National Market and NASDAQ Small Cap exchanges (except Berkshire Hathaway). The Homebuilders Index is an equal weighted market cap index.”

The above description was taken from the American Stock Exchange

Year to date XHB is has already fallen 42.56%. Here are the top 10 holdings.

Home Depot - 4.44%
Lowes - 4.33%
Sherwin Williams - 4.75%
Mohawk Inds Inc - 4.99%
D R Horton Inc - 4.45%
Pulte Homes Inc - 4.62%
Toll Brothers Inc - 5.38%
Leggett & Platt Inc - 4.73%
Lennar Corp - 4.68%

It’s currently trading at almost exactly it’s net asset value.

(Disclaimer: As always please do your own research before making any purchases.)

Time to Get Back Into Housing? Buffet Thinks So

The U.S. housing sector is a mess, everyone’s waiting for the next shoe to drop in the whole sub prime fiasco and all the analysts are advising clients to avoid the sector. You’d have to be crazy to invest in the U.S housing sector right now… right? Well maybe not, last month Warren Buffet raised $750 million through a debt offering for Clayton Homes, which “builds, sells, finances, leases, and insures manufactured and modular homes as well as re-locatable commercial and educational buildings.”

Other successful investors initiating positions in the housing market include:
Robert Robotti
Robert Rodriguez

Natural Gas – II

Here’s a little more detail on the factors that effect natural gas prices.

Weather
The demand for natural gas usually peaks sometime between November and March. This of course depends on how cold the temperature gets as natural gas is the main input for heating North American homes. Likewise, the demand for natural gas increases in the summer when everyone starts turning on their air conditioners. The price of natural gas is also influenced by catastrophic weather events ie- hurricanes. If you’ve ever watched your local weather forecast you know that the weather can’t be accurately predicted (especially the long term forecast) so although we know that weather affects the price of natural gas we can’t predict when. However, it is safe to assume that at some point there will be either a vicious hot/cold snap or major hurricane and gas prices will spike (which is when they should be dumped)

Demographics
Well this one is obvious...the more people that need to heat/cool their house the greater the demand for natural gas.

Economic Growth
Industrial and commercial enterprises use a huge amount of electricity (which is largely generated with natural gas). When the economy is flourishing the demand for goods increases and therefore the manufacturing of goods increases which increases the amount of electricity used. The opposite occurs during a recession. As an example during the small recession in 2001 the industrial demand for natural gas fell by 6%.

Fuel Competition
This basically refers to the ability of large industrial users of natural gas to change fuels if the price of natural gas gets too high. For example, some power plants can change from gas to coal and vise versa if the price of either commodity gets too high. This will decrease demand of the commodity and therefore reduce the price of that commodity.

Storage
The amount of gas in storage obviously affects the price…the more gas in storage the lower the price, the less gas in storage the higher the price. This is a simple principle of supply and demand, if there is lots of gas in storage there is a limited threat of a supply crunch.

Exports/Imports
If natural gas is cooled to -260F at normal pressures it become a liquid know as LNG and takes up 1 six-hundredth of the volume that it does in it’s gaseous state. LNG is really the only economically viable way to ship natural gas internationally and currently only accounts for about 1% of the natural gas used in the United States. However, as technology advances this number is certain to climb which will cause natural gas to be priced based on global demand (as most commodities are) instead of continental demand.

Chartwell Seniors Housing - CSH.UN

I’ll continue on the natural gas theme next week…in the meantime. I increased my position in Chartwells Senior Housing yesterday bringing CSH.UN up to just over 5% of my portfolio.

“Chartwell is a growth-oriented investment trust owning and managing a complete spectrum of seniors housing communities. It is the largest participant in the Canadian seniors housing business and the third largest in North America. Chartwell will capitalize on the strong demographic trends present in its markets to grow internally and through accretive acquisitions. Chartwell also has an exclusive option to purchase stabilized communities from Spectrum, Canada's largest and fastest growing seniors housing development company.”

-The company is well positioned to capitalize on the aging North American demographic
-They have a significant presence in the higher margin category of retirement homes (ie-retired wealthy people)
-I’ve recently talked to a few people who have just placed their parents in a Chartwells nursing home and they were blown away at the quality of the accommodations and services provided in the home.

Dividend Yield: 8.9%
Current P/E– 0
Projected 2007 P/E – 16.5X
Projected 2008 P/E – 12.3
Price/Sales – 1.9
Price/Book – 1.3

-Were recently for sale but did not receive any offers that management thought were acceptable.
-Have primarily been a growth by acquisition story but are now concentrating on bringing in all operations.
-BMO rates them as “outperform”
-National Bank has a $15 price target
-Canaccord has a $12.5 price target
-First Call consensus is a hold

For more information on CHS.UN please visit their website at:
www.chartwellreit.ca