Monday, March 31, 2008

Yellow Pages - YLO.UN

When I invest in companies I invest for the long haul. Ideally, I would like to hold a company indefinitely so one of the first criteria I look at before adding something to my portfolio is the sustainability of the business model, and I just don’t see YLO.UN existing long term using their current model. That being said, I certainly don’t consider them a dead company and they are making steps in the right direction by transitioning online. However, unless they can completely transform themselves into a dominant online advertiser it’s my opinion that they will not exist at some point in the future.

I do like and use some of their online services such as canada411 and autotrader and I am positive on their recent agreement with Google to become the first Canadian based reseller of Google AdWords adverts. However, the bulk of their revenue still comes from print and I don’t think print will be around longer term.

Personally, I’m skeptical that even if they did transform themselves into a completely online company that they’d be able to compete longer term in the online world. To date I haven’t seen any competitors that rival the online services that YLO.UN provides but in my opinion any one of the major internet players could be getting ready to launch Yellow Pages death swoop. All it would take is Google adding a phone book and local category search to their main page, or to Google Earth for that matter. Mapquest is already halfway there as they have a category search that in addition to providing the contact information generates a map and direction to get there from your house. I used it instead of canada411 last week to search for directions to all of the Thai restaurants in my part of town.

So although I don’t think that YLO.UN is on deaths door I just can’t see any reason to buy them based on my long term investing style and their current business model. For a short to medium term hold YLO.UN should keep spitting out cash. If they successfully transform themselves into a dominant online advertiser and secure some kind of competitive advantage than I’d certainly be willing to give them another look.

Just to give you the other side of the coin Fellow Blogger the MoneyGardner is a holder of YLO.UN and will be writing up a post on the buy case later this week.

Friday, March 28, 2008

Canadian Tire Scraps its Print Catalog – A Foreshadowing of Yellow Pages Fate?

Canadian Tire announced yesterday that they will be phasing out the print edition of their catalogue and replacing it with an online edition.

“all of our research was indicating that readership levels were decreasing and more and more people are on line,” Canadian Tire spokeswoman Lisa Gibson said in a telephone interview Thursday. “So that's why we decided to let people know on line and not make a big production.”
-Quoted from an article by John Partridge of the Globe and Mail

In my mind the above quote could easily apply to the print edition of Yellow Pages. Shares of YLO.UN have slid 30% over the last 3 months and as the yield creeps higher I’m increasingly being asked if I think now is a good time to buy YLO.UN. My short answer is that if you’re a long term investor I don’t think there is a good time to buy. In my next post I’ll explain my rational behind my don’t buy recommendation.

Thursday, March 27, 2008

Some Recent Dividend Increases

With all the negative press over the last month I thought it might be a little refreshing to hear a little good news. So here’s a little summary of some of the recent Canadian dividend increases over the last month.

-T.D. Bank (TD) Annual div increased 3.5% to $2.36
-TECSYS Inc (TCS) Declared first dividend of $0.02
-Canadian Tire (CTC.A) Annual dividend increased by 13.5% to $0.84
-Constellation Software (CSU) Annual dividend increased by 20% to $0.18
-Stella-Jones Inc (SJ) Annual dividend increased by 14.3% to $0.32
-Transcontinental (TCL.A) Annual dividend increased by 14% to $0.32
-Aecon Group Inc (ARE) Annual dividend increased by 42.9% to $0.20
-Bonterra Energy Income Fnd (BNE.UN) Annual distribution increased by 4.5% to $2.76
-CCL Industries Inc (CCL.B) Annual dividend increased by 16.7% to $0.56
-Guardian Capital Group (GCG.A) Annual dividend increased by 11.1% to $0.15
-SNC-Lavalin Group (SNC) Annual dividend increased by 33.3% to $0.48
-Superior Plus Income Fund (SPF.UN) Annual distribution increased by 3.8% to $1.62
-AGF Management (AGF.B) Annual dividend increased by 25% to $1.00
-North West Company Fund (NWF.UN) Annual distribution increased by 18.5% to $1.28

If I’ve left any out that should be mentioned just leave them in the comments section.

Tuesday, March 25, 2008

Facebook Worth 15 Billion?

For those of you who haven’t heard of Facebook here is an extract from the “about” section of Facebooks website.

About Facebook
Facebook is a social utility that connects people with friends and others who work, study and live around them. People use Facebook to keep up with friends, upload an unlimited number of photos, share links and videos, and learn more about the people they meet.

Anyone can join Facebook
All that's needed to join Facebook is a valid email address. To connect with coworkers or classmates, use your school or work email address to register. Once you register, join a regional network to connect with the people in your area.

Discover the people around you
Facebook is made up of many networks, each based around a company, region, or school. Join the networks that reflect your real-life communities to learn more about the people who work, live, or study around you.”

Microsoft recently invested $240 million for a 1.6% stake in facebook while Hong Kong billionaire Li Ka-shing invested $60 million for a 0.4% stake. Using those figures, would value the company at a whopping $15 billion. I have little doubt that the 4 year old company and its 23 year old founder are brilliant but are they worth $15 billion? Just to put this into perspective here are the market capitalizations of some popular Canadian large caps.

Telus – $7.7 billion
Shoppers Drug Mart – $11 billion
Tim Hortons – $7.4 billion
Loblaws – $7.9 billion
Bombardier – $10 billion

Although there is no denying the popularity or marketing potential of Facebook I would have reservations about investing in an online “social utility” that is valued the same as Tim Hortons and Telus combined. The valuation may be appropriate if its current growth were to continue indefinitely however, personally I think there is a chance that Facebook has the potential to become a “flavour of the month”. Anyone remember geocities? Of course there is a chance that it may stick around however, if I had $15 billion to invest I think I would rather take my chances and buy both Telus and Tim Horton than gamble on Facebook. Which would you rather own?

Wednesday, March 19, 2008

Core Portfolio Holdings

You often hear analysts talk about “core holdings” but what exactly is a core holding? Well according to

“A core holding is bought with the express purpose of being held for a very long time, and is often a high-quality security with a history of fairly steady performance.”

I thought that in this time of market turbulence it would be refreshing to go over a model portfolio of companies that I would consider core holdings.

TRP, ENB (pick 1)
RY, TD, CM (pick 1)
GWO, SLF, MFC (pick 1)
POW, PWF (pick 1)
BCE, T, RCI.B (pick 1)
REI.UN, XRE (pick 1)
CNR, CP (pick 1)
FTS, EMA, EP.UN (pick 1)
TLM, PCA, ECA, CNQ (pick 1)
COS.UN, SU (pick 1)
L, WN, EMP.A (pick 1)

C, BAC, JPM (pick 1)
GE, UTX (pick 1)
PG, CL (pick 1)
FDX, UPS (pick 1)
Large International Drug Company (PFE, TEVA etc…)

What do you consider your core holdings?

Monday, March 17, 2008

How Much Does It Cost To Beat the Market?

I was recently reading the New York Times and came across a very interesting article by Mark Hulbert. In his article he outlines the results of a recent study that attempted to quantity the collective cost of Americans trying to beat the market. The study entitled “The Cost of Active Investing” found that collectively it is costing Americans roughly $100 billion annually to try and beat the market. The study “took into account the fees and expenses of domestic equity mutual funds (both open- and closed-end, including exchange-traded funds), the investment management costs paid by institutions (both public and private), the fees paid to hedge funds, and the transactions costs paid by all traders (including commissions and bid-asked spreads). If a fund or institution was only partly allocated to the domestic equity market, he counted only that portion in computing its investment costs.

Professor French then deducted what domestic equity investors collectively would have paid if they instead had simply bought and held an index fund benchmarked to the overall stock market, like the Vanguard Total Stock Market Index fund, whose retail version currently has an annual expense ratio of 0.19 percent. The difference between those amounts, Professor French says, is what investors as a group pay to try to beat the market.”

The results of this study imply that there are really only 2 strategies that investors should stick with:

1. Buy and hold a diversified portfolio.
2. Play the market through low cost ETFs.

To view the entire article please follow this link.

Thursday, March 13, 2008

Global Credit Crunch

The credit crunch caused by the mortgage fiasco in the United States is now truly a global phenomenon. The Bank of Canada announced yesterday that they will be injecting $4 billion in an attempt to ease some of the liquidity issues caused by the mess south of the border. During the same period a credit infusion will also be offered by the Federal Reserve, the Bank of England, the European Central Bank and the Swiss National Bank. It may be too little too late however at this stage in the game what other reasonable options are there? The bottom line is more liquidity is required to allow financial institutions to continue doing business. At this point the only other alternative would be to force the financial sector to liquidate its rotten assets and wipe out the leverage which would cause many of them to go bankrupt. That would be a lose-lose for everyone.

Tuesday, March 11, 2008

Stock Selection Process

Here is the general process I use to evaluate a stock.

1. Are their products/services in a growing or stable industry?
-for me this would exclude companies such as newspapers, tobacco etc. Basically, I look for companies that I think will still be around in 50 years.

2. Do they have a competitive advantage or are there large barriers to entry?
-for example companies like TRP and CNR have huge barriers to entry. Other than the billions of dollars that would be required to build the infrastructure it would takes year and years to get the proper approvals.

3. Do they have a history of returning value to shareholders?
-for example, JNJ has raised their dividend for the last 44 years. MMM has paid a dividend since 1916. A history of share buy backs would also be a plus.

4. Are they trading at a reasonable price?
- I use my fair value calculation when appropriate.

To calculate fair value I use a modified discounted cash flow model. Basically, I calculate the present value of the future dividend income and the present value of the future estimated EPS (multiplied by the PE ratio that I think the company SHOULD be trading at) and the sum of those two numbers is the fair value

My stock selection process has evolved over the years and I find it effective to select companies for my particular investing style. However, for other strategies or investing styles my selection process would be very ineffective. I’d also just like to note that the formula I use to calculate fair market value is not valid for all types of companies. For example, it’s not effective for many REIT’s or resource companies as their share prices are generally based on NAV, FFO, or reserves which are not included in my formula.

Friday, March 7, 2008

New Billionaire on Top

There’s been a little shuffling at the top of the billionaire list this year. Warren Buffet is now officially the world’s richest man. His net worth is now an estimated $62 billion up from $52 billion last year. His 10 billion dollar ride has ended the 13 year reign of his longtime friend Bill Gates who was been bumped down two notches to the world 3rd richest man. But come on...once you hit a few hundred million does it really matter anymore? Regardless here is a list of the top 20 richest people in the world.

1. Warren Buffett
2. Carlos Slim Helu
3. William Gates III
4. Lakshmi Mittal
5. Mukesh Ambani
6. Anil Ambani
7. Ingvar Kamprad
8. KP Singh
9. Oleg Deripaska
10. Karl Albrecht
11. Li Ka-shing
12. Sheldon Adelson
13. Bernard Arnault
14. Lawrence Ellison
15. Roman Abramovich
16. Theo Albrecht
17. Liliane Bettencourt
18. Alexei Mordashov
19. Prince Alwaleed
20. Mikhail Fridman

Wednesday, March 5, 2008

U.S. Recession?

The talking head on business networks like BNN and CNBC have been debating the issue now for months, “is the U.S going into recession?”. Some economists are saying yes, while others are saying no. Well Warren Buffet has an answer for us…yes the U.S is in a recession.

Based on the technical definition of a recession (two consecutive quarters of negative GDP growth) we haven’t yet entered a recession. However, Mr.Buffet was recently quoted as saying “I would say, by any commonsense definition, we are in a recession”. That’s good enough for me. If the world most successful investor says we’re in a recession I believe him.

Monday, March 3, 2008

Portfolio Update as of Feb 28, 2008

-no change from last month
-up 0% in 2008
-CDN 66.2%
-U.S. 30.4%
-International 3.4%

TRP - 4.46%
CSH.UN - 4.19%
GWO - 4.31%
PFE - 4.72%
POW - 3.76%
WAG - 3.30%
L - 2.39%
UNS - 2.27%
GZ - 2.50%
TD - 12.74%
EIT.UN - 2.65%
JNJ - 5.31%
MMM - 3.41%
C - 3.39%
ATD.B - 3.05%
BCE - 5.31%
IIC - 2.80%
O'Shaughnessy’s Global Fund - 3.38%
American Growth Fund - 0.84%
CDN Value Fund - 2.96%
Small Cap Growth Fund - 4.02%
Chou Associates Fund - 9.48%
Money Market Fund - 8.78%

The only change in my portfolio over the last month was that I added a quarter position to my Citibank holding.