Investing in Banks?

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Check out Oddball Stocks for details of a book about investing in banks in the works that Nate Tobik is co-authoring. A sample chapter (about whether bank stocks are risky) is available there for download. I enjoyed it and highlighted the following, which supports a couple of key points the authors make in the chapter about investment opportunities with banks:

In 2012, a rogue trader (nicknamed by the media as the “London Whale”) at JP Morgan caused a loss of $6.2b. JP Morgan was able to absorb this loss and move forward without an impact to their business. Consider that of the 6,279 banks in existence in the US at the end of Q3 2015 only 177 had more than $6b in total assets. The London Whale made three bad trades that in the aggregate lost more money than 97% of the banks in the US hold in assets on their balance sheets.

Separately, the Heard of the Street section of the WSJ is often a good source of interesting statistics and commentary. For example, in the Thursday 3/10 edition, Aaron Back describes how banks have been preparing for higher rates by classifying more and more (debt) securities to “held to maturity” instead of “available for sale.” The so-called big four U.S. banks’ held-to-maturity holdings have increased from under 5% in 2011 to approaching 20% by year end 2015. Interest rates, however, at least presently, have not reciprocated. It sounds like a little FIFO, LIFO shifting. Very interesting to think about the various implications and juxtapositions of capital cushions / distressed debt levels / whether oil and gas companies will further tap credit lines / potential broader slowdown in CRE / health of auto loan and lease payments / student loan repayments and loan securitization/syndication and etc.

There is excess capacity in too many areas (and not just commodities). Reinsurance, for example. Retail real estate spinoff dreams, for another (the Sears and Macy’s locations I’ve seen are fairly typical in their feeling quite dated and needing serious renovations while leaving me scratching my head about who would actually want to lease or own stores other than Amazon). Not to mention consumer electronics, which is one area where it’s easy to understand how Japan (a longtime investment focus of mine) has struggled to remain relevant on a global scale: far too much domestic capacity where intense competition and me-tooism hurts profit margins, not to mention the overall glut when including global capacity from companies in China, South Korea and Taiwan, making meaningful differentiation near impossible and commodifying nearly everything. Perhaps almost the same can be said about investing in Banks in Japan. And even the global investment banks leading up to 2008 and for many the ongoing struggles today.

There’s a sort of natural Batesian mimicry in business and investing with one too many geniuses (and unfocused/undisciplined companies) masquerading as value-creators while in fact serving as a drag, ultimately, on pricing power and profit margins for the industry (and securities markets) at large. In some ways, consumers may benefit (and especially some patient and disciplined value investors) as prices come down, although there is often plenty of collateral damage or negative externalities by association.

Let me end by saying I like Nate’s approach with the smaller banks and oddball companies among which we are more likely to find simplicity (e.g. balance sheets), focus (one core or a limited number of profit drivers) and less competition (e.g. more attractive market valuation at time of purchase or accumulation). I haven’t commented about my newsletter in awhile — suffice it to say the rather obscure Japanese smaller caps are necessitating the aforementioned patience and discipline, which I believe is now essentially a matter of arbitraging time to realize value. I hasten to add however, as a I said recently to a friend, that opportunity cost may prove to be a bitch in some cases!

What to like about investing in Japan

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In a recent article by IBD about the attractiveness of foreign stocks, Dennis Stattman (a manager of the $60 billion BlackRock Global Allocation — ticker: MDLOX), commented that there is a lot to like in Japan. Dennis cited upward earnings revisions; corporate managers starting shareholder-friendly policies; and attractive valuations. He believes Japan is in the very early stages of a multi-year bull market. Continue reading

Value investing in Sanrio vs the Hello Kitty premium

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Sanrio (TYO: 8136) (OTC: SNROF) shares have taken a beating the past several months and really got hammered last week — “blame” Goldman Sachs for the latter, as it appears that its post-earnings report casting undue pessimism and uncertainty on Sanrio’s business model fueled the selloff and compelled Morgan Stanley-MUFG Securities to publish a copycat note. (Sanrio’s statement emphasizing profit-focus and no plans to abandon lucrative licensing business.) Attracted to Sanrio’s high ROE, a weakening yen, and “Cool Japan” marketing in overseas markets that only solidifies the popularity and brand recognition of flagship character, Hello Kitty, I had the fortunate timing of building a position in Sanrio’s ordinary shares in Q4’12 ahead of a sizable run up in 2013. Following are some lessons learned from that profitable investment and the intraday 23% drop Sanrio’s shares suffered last Thursday.

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Japan: one-trick ponies, exporters, yen, QE, EWJ, real estate, domestic demand; some sound conclusions

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Value investors will still find excellent valuations in Japan despite the market’s gains over the past several weeks. As I say again, in my latest exclusive at Seeking Alpha, “Investing in Japan Beyond the Platitudes,” the most interesting opportunities are in domestic-demand small/mid-cap companies. I’ve received a number of messages asking about WisdomTree’s hedged Japan Equity fund (DXJ). Yes, DXJ has done well, much better than iShares Japan (EWJ), in this rally. However, I’m not a big fan of DXJ for some of the same reasons I don’t like EWJ. Over 270 portfolio holdings for DXJ and 300 for EWJ mean outside of  the top-few positions no one stock is really going to move the needle; the top holdings are not dissimilar from the benchmark indexes nor the one-trick pony mutual fund managers. Exporters are already cyclical and the demand/supply (selling) of their shares only makes them more cyclical — this is even more a concern should positions get closed en masse in DXJ given its smaller asset base that has surged only recently.

Finally, I don’t see the yen “blowing up” — it’s not as simple as some may wish or have been led to believe to see a currency like the yen or a country like Japan “blow up” in a straight line. Beware macro pontification coattailing. The great 2005 Nikkei rally saw a roughly 10% weakening of the yen. Overnight, Economy Minister Akira Amari warned excessive yen appreciation may benefit exporters but would hurt people’s livelihoods. The business press is concluding Minister Amari as having suggested the yen has weakened enough. In fact, too weak of a yen begins to hurt exporters if materials costs don’t start to decrease. In this sense, the input environment is quite different than ’05; ditto the strength of the global economy now vs. then.

One too many raw deals for shareowners

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I recently wrote an article published exclusively on Seeking Alpha, entitled, “Why GE’s Buyback is a Raw Deal for Shareholders.” Share repurchase programs are trumpeted out and rarely questioned.  I believe that many, but not enough, investors understand that buybacks can be largely self-serving and hardly in shareowners’ best interests. I encourage you to read the above linked story (link visible in full article view) on GE and note the fact that the impact of share buybacks when looking at shares outstanding is very dismal; stock price performance is equally unimpressive. Continue reading

Barron’s on the Nikkei’s 2012 reversal

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Barron’s Kopin Tan writes about the Nikkei’s reversal this year in the International Trader – Asia section (first half discusses Prada’s valuation) of this week’s edition. After being the best-performing market in Q1, the Nikkei has slid 16% since its peak in late March. The vicissitudes of the market should not weigh on value investors. In a phone conversation I told Tan that the rallying and retreating is a recurring theme for Japan.  I am thankful for the cheaper stocks and see excellent opportunity in domestic demand stocks, yes, the debt-ridden, deflation defatigued, and demographically doomed domestic economy. I’m being facetious of course. But as I watched fiscal year-end March earnings and the next fiscal year forecasts come in, there were more and more companies reporting and/or forecasting record earnings. The persistently strong yen is far from ideal, but take a moment and think about the fact that the majority of Japanese companies have remained profitable despite the horrible aftermath of 3/11, the severe flooding in Thailand only a few months later (manufacturing facilities impacted), and of course the ongoing uncertainty in the EU and elsewhere.

To learn all about investing in Japan (comprehensive A-Z overview of the nuts and bolts of the market and its players, as well as key idiosyncrasies and enigmas explained) including why the debt, deflation, and demographic fears are overblown, see my book, Investing in Japan. If you are currently investing in Japan by way of the iShares Japan ETF (EWJ) or another Japan-focused ETF or a mutual fund, you’ll definitely want to see how your money is actually being managed. Japan’s broadly undervalued market (0.9-times reported book value among large caps and significantly cheaper for smaller caps) and abundance of deeply undervalued  (net-nets) and very attractively valued (“GARP”) stocks  means there are multiple viable investment approaches. Don’t be misled by tunnel-visioned macro opinion jockeying at one extreme and pedantic fault-finding on the other. Shares of Unicharm (Tokyo: 8113), a leading Japanese diaper and hygiene product maker, rose four-fold last decade.

Is GE’s dividend really a top priority?

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Please see Seeking Alpha (“GE Dividend Still Taking Back Seat to Buybacks“) for my latest installment in the saga of General Electric’s (GE) reluctance to share the wealth with its shareholders. *Click “Read Full Story” below for hyperlink to Seeking Alpha.*

General Electric shareholders’ latent power

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The raison d’etre of stock market players are various, but for anyone who has been holding stock, or intending to hold, for the longer-term (for simplicity let’s say in excess of one year), corporate governance has direct, profound implications on corporate value.  Stock traders may be disregarding wholesale anything other than up/down ticks in price and margin requirements, but in fact, these so-called “providers of liquidity” — and societal stakeholders at large — are impacted by corporate governance. In the case of General Electric (GE), one of the most widely held and actively traded stocks, all stakeholders should be aware of the abuses of a select few that impact many. With external recourse nearly nonexistent, it is up to shareowners to realize the latent power of their proxy votes, vote accordingly, and effect change. Time is of the essence as GE’s annual meeting is rapidly approaching. Non-GE shareowners are encouraged to read and apply standards to their companies’ proxies. The corporate wrongs detailed below are widespread — it is proxy season so don’t delay. Continue reading

Corporate Valuation for Portfolio Investment

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Corporate Valuation for Portfolio Investment: Analyzing Assets, Earnings, Cash Flow, Stock Price, Governance, and Special Situations (2010, Bloomberg Press), is an ambitious effort by coauthors Robert A.G. Monks, a renowned shareholder rights activist, and Alexandra Reed Lajoux, an M&A expert. They cover a lot of ground in around 540 pages, and state at the end of Chapter 1 that the book is intended primarily for institutional investors, adding that they would be honored if professors recommend their book along side other classics such as Security Analysis (review).

The book favors breadth over depth in many instances, but is rich in footnotes for further research. Students of finance and practitioners will find Corporate Valuation for Portfolio Investment a great book to read reference, while individual investors with no formal background in finance will in fact have much to gain from the chapters on financial statements, valuation methods, and the coauthors’ “philosophical framework” for valuation. Continue reading

Dusting off a classic: book review of Security Analysis

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Inscription in beginning of book: “Many shall be restored that now are fallen and many
Shall fall that now are in honor.” — HORACE. Ars Poetica.

In the fourth edition of their investing classic, Security Analysis: Principles and Technique (pub. 1962; prev. ‘34, ‘40, ‘51), Graham & Dodd (and newly joined co-auther, Sidney Cottle) faced an environment in which their conservative approaches to common stock investment left them with increasingly fewer opportunities due to the 1950s bull market. They acknowledged their dilemma, which is one value investors will face time and again: stick to your bread-and-butter, “old and highly conservative standards” and risk both the charge of “old-fogyism,” and the possibility of missing important changes to the underlying structure of common stock values; or embrace the general optimism and the long-term expectations of growth, which are used to justify market levels, and risk repeating the practices, and probably the errors, of bull markets past. Continue reading