Tag Archives: Quality Companies

Buy Quality; Capitulation in the Gold Stocks; Shorting Socialism

Cliff

Borrowers want capital, but they get money–newly created credit money. More credit money has been issued by the banking system than savers have deposited (“fiduciary media”). Those participants in the economy who suffer losses due to price changes were not parties to the original credit transactions. They are participants in the economy who receive the new money late in the process, after prices have been bid up by the credit money.  –Mises (so much for the harmless actions of the Fed)

 

What Happens When You Buy Quality: October_Quest_2013

CAPITULATION IN THE MINERS

When I use the word capitulation it implies an ending to the bear market in precious metal equities, however NOTHING is certain in markets.   I know not all public gold stocks will go to zero. Eventually, the laws of supply and demand assert themselves and you can only buy assets super cheap if sentiment is SUPER bearish. I think in late June when gold hit $1,180, gold stocks made a FEAR bottom while today they are going through despair/throw in the towel selling.

GDX gld Oct 14

People see no hope so why own. Volume is relatively low and the selling persistent–day after day.

lundeen101313-10

The above chart shows the sell-off from new highs over the past 90 years in the BGMI, the Barron’s Gold Mining Index). Currently, 2013 shows about a 63% loss or in the range of the past 10 bear markets.

Read more: http://www.gold-eagle.com/article/dow-jones-and-barron%E2%80%99s-gold-mining-index-1885-2013

BPGDM

The low relative volume, the historical depth of the sell-off and the demarcation of price movement between high quality (RGLD, FNV, SLW) and low quality gold stocks (NEM, GLDX) as the chart above shows, leads me to believe that we are closer to the end  of the decline.

From: http://www.acting-man.com/?p=26553

We continue to get one ‘do or die’ moment after another in the charts of gold and gold-related instruments. So far, the outcomes have obviously been bearish every time since the 2011 peak, but at some point that is bound to change, as the fundamental backdrop continues to be gold-friendly (note that not every aspect of the fundamental backdrop is – for instance, the declining federal deficit is probably viewed as a negative by market participants). Often it is precisely at those times when nothing seems capable of turning a market around that surprise changes in trend can and do occur.

Note that gold sentiment remains absolutely dismal. Recently Mark Hulbert’s HGNSI (gold newsletter writer sentiment index) stood at minus 20 (meaning gold timers recommended a 20% net short position on average), while the daily sentiment index among gold futures traders (DSI) stood at 9 (all time low: 5).  Bearish sentiment in the sector rarely becomes as extreme as it is at the moment. Of course it has been quite negative for some time now, but the current readings are rather extreme even so.

A major reason why we continue to maintain that the fundamental backdrop remains gold-friendly even though the price action suggests a bear market is still in progress, is that we believe that mainstream analysts are quite mistaken when they assert that it is back to ‘business as usual’ in the economy. It clearly isn’t.

HUI-gold-ratio2

History is being made today!

Of course, if you believe QE will lead to sustainable growth without monetary mayhem then stay away from anything to do with gold.

SHORTING SOCIALISM

The company exists as a social transfer mechanism between Western investors and   Brazilian government officials and Petrobras workers.  No hope.

Shorting socialsim

 

Affirming the Case for Quality (GMO White Paper); Share Repurchases

Quality Companies are often under appreciated by investors

I hope my wretched scribbling will help your investing journey. We want to learn from the lessons all around us. Study failure so as not to pay a high tuition for knowledge and study success so as to develop your own investment method.  Yes, it is fun to point out the disasters like Sunpeak Ventures (SNPK)—nothing but a “pump and dump”—yet focusing on great companies is more valuable, yet less popular than you might think. Your time is best spent understanding and investing in great companies—either hidden champions that are emerging or dominate hidden niches or great franchises with dominant moats.  This is why I try to write often about competitive advantage, franchises, and quality businesses.

Here is a GMO White Paper (June 2012) that affirms the case for quality. Companies with high and stable profits (KO, PEP, EXPD, M, and GOOG) tend to have lower bankruptcy risk, lower leverage and generally higher returns compared to risk of loss. Please read carefully: GMO_WP_-_2012_06_-_Profits_for_the_Long_Run_-_Affirming_Quality

Ben Graham argued that real risk was “the danger of a loss of quality and earning power through economic changes or deterioration in management.”

The returns earned by stock investors are entirely a function of the underlying corporate profits of the stocks held in a portfolio.  Note the focus that Buffett has placed on knowing where a business will be in five to ten years—a chewing gum company versus a high tech start-up). As he says, “We favor businesses and industries unlikely to experience major change…operations that….are virtually certain to possess enormous competitive strength ten or twenty years from now. A fast changing industry environment may offer the chance for huge wins, but it precludes the certainty we seek.”

Oligopolies tend not to revert—note the persistence of corporate profitability of companies that operate within corporate barriers.

Look at the stability of companies like Tootsie Roll and WD-40. Tootsie Roll (Tootsie Roll_VL) has slowly declining returns on capital but it is shrinking its capital structure. Note the low price variability. Everyone knows about WD-40 (WDFC) (lubricant oil) and Tootsie Roll (candy)—the products will not disappear in the customers’ minds nor become obsolete.

Note on page 4 of the GMO White Paper: While it has become conventional wisdom that the market misprices price-based risk factors like low beta outperforms high beta, we find that it also misprices fundamental risk. . Companies that report negative net income underperform the market by a whopping 8% per annum. The market overpays for risk at the corporate level in much the same way that it overvalues the risk of high beta stocks. Conversely investors had historically underpaid for the low risk attributes of high quality companies.  To us (GMO), investing in Quality companies simply exploits the long-term opportunity offered by the predictability of profits in conjunction with the market’s lack of interest in the anomaly. Their predictability higher profits are not quite high enough to command the attention of a market in thrall to the possibility of the next big jackpot. 

Lesson: focus on quality companies to find better returns for lower risk.

Radio Show on Quality Stocks

For beginners and (those who are willing to sit through or skip the commercials), there are discussions about high clean-surplus ROE companies here: http://www.buffettandbeyond.com/radio.html

More on corporate buybacks

Assessing Buybacks from all Angles_Mauboussin

Prize

Tomorow I will post the prize to all those who lent their wisdom to: http://wp.me/p1PgpH-Qw