Friday, December 31, 2010

Last buys before the New Year

Bought more Vodafone (NYSE: VOD) stock.

Added Global X Lithium ETF (NYSE: LIT) to portfolio. The Fund seeks investment results that correspond to the price and yield performance of the Solactive Global Lithium Index. The index in turn consists of equities related to Lithium mining, battery production and such. I was looking at the individual companies in the index and decided to buy the index itself to hedge bets. Some of the companies look very expensive, but on the other hand Lithium is one of the key resources in the Green Race (electric cards, smart grids..).
10 largest holdings of the fund:
Symbol: Equity name: Percentage of fund: Currency

6674 GS YUASA CORP 4,48% JPY

Thursday, December 30, 2010

Beating the market - or not

Who believes in Efficient Market Hypothesis?

I don’t believe that efficient market hypothesis (EMH) completely captures what is going on in the markets. In other words, I believe that some investors can beat the market in long term and it is not just pure luck. According to EMH super investors like Warren Buffett and Charlie Munger of Berkshire Hathaway (BRK.A) are just incredible lucky. I don’t think so. Markets failed miserably in IT bubble, US housing bubble and recent EU debt crisis. The information about the risks was out there long before the crash, but market in general ignored the realities. Mr. Market failed to price assets “correctly” according to publicly available information.

Riding the bubbles with Mr. Market

Tree caricature from South Sea Bubble cards. Copyright expired. Source: "Extraordinary Popular Delusions and the Madness of Crowds" by Charles Mackay / Wikipedia.

The IT bubble was obvious case of pure mania, but even if I knew that I was riding a bubble I could not help to stay out (like Buffett did). On average, I got out pretty clean with a healthy net gain despite of some big losses in the aftermath of the bubble as I came back in too early. All in all, I probably was lucky that I did have only relatively small amount of money to invest back then. I was foolish enough to allocate all my money to single sector (technology/IT).

There are no mistakes or failures, only lessons. - Denis Waitley

I did not have any clue on US housing bubble, but I did start to sell off family stock positions in 2006 because I knew we needed the money for a house within 2 years and wanted to reduce risk by moving all money into short duration time deposits. Thus I completely avoided the crash, but I also lost some profits by hopping out of a very strong bull market that continued until around mid 2007.

Eruption at Eyjafjallajökull April 17, 2010. Source: Árni Friðriksson / Wikipedia. Some rights reserved. Distributed under the terms of the GNU Free Documentation License.

While I was unaware of what was happening in the US, I and plenty of others in Scandinavia suspected that there was something terribly wrong in the banking system of Iceland. Many prominent people in Finnish banking sector warned about Iceland banks that were luring people in with one year time deposit offers yielding whopping 5% or even more. Some people wrote these warnings off as jealousy, but I did not touch any of those offers. It was widely known that the Iceland banking miracle was built with good old leverage using cheap credit in the aftermath of IT bubble and low interest rates. Therefore, it was really a time bomb set to go off if interest rates raise and stock market plunges. When the perfect storm came into Europe from USA Iceland banks started to fall like dominos.

Does it make sense to try to time the market?

I came back into markets late 2008 as I simply could not believe how cheap some companies were selling. For the first time and probably last, I used borrowed money in investing as all of our savings were already spent on a house (our housing market has not crashed – at least not yet). It took a while to convince my wife to agree to this, but eventually she agreed that I can spend less than 5% of the value of the house back then. So off I went. I think I saw what every other value intestor saw back then: low valuations with healthy margin of safety.

Now, given all this bragging you might think that I believe I can time the market. No, I don’t believe I can – I don’t believe anyone can get it all right. However, I believe that a person with better than average knowledge about stock markets can spot the extremes: the lowest of lows and the highest of highs. Most of the time, timing the market is just pure waste of time. For the past two years I have tried to do that and in the process I have lost to the index due to my cash and gold positions. Also, I have deliberately built a defensive portfolio that does not behave well in bull market, but does not have a lot of downside risk either. Still, it is extremely interesting and useful to understand how ones portfolio compares to a suitable index.

How to benchmark your portfolio

First you have to select an index. I would recommend a broad index like “S&P 500” for USA, “MSCI World” for developed markets, “MSCI All Country World index” or “FTSE All World index” for developed markets combined with emerging markets. I have chosen the MSCI All Country World index for me because I am investing also outside the developed countries. It is important to study the index closely as the name does not always tell what it actually tracks (i.e. “MSCI World” really does not represent the world and “MSCI All country world index” does not actually do that to the fullest extent possible either).

After selecting the index, I recommend to find an ETF that tracks the index and reinvests the dividends. Then all you have to do is to compare performance of your portfolio to that of a single ETF. I wasn’t able to find one for my purposes, so then I looked for an ETF that distributes dividends and tracks index similar to “MSCI All Country World”. I found three candidates: “iShares MSCI ACWI Index ETF” (ACWI) tracking “MSCI All Country World Index”, “Vanguard Total World Stock Idx Fd ETF” (VT) tracking “FTSE All World index” and “WisdomTree Global Equity Income Fund” (DEW). However, I find it a bit hard to convert back and forth from USD to EUR and then also to track the dividends. Therefore, I chose to track the index itself and compile own benchmark index “fund”.

How to construct own benchmark index “fund”

It is actually not at all hard. First you need to find the index data. You can download MSCI index data from their web site in Excel format. Before doing so, make sure that you have selected the right index, currency and index level. I used the “Net” as in “With Net Dividends” that takes into account taxes that you would have to pay before you can reinvest back into the fund. “Gross” option reinvests dividends wholly.

Then you should get data from your brokers about your investments, cash position etc. The additions in cash to the brokerage accounts are a bit problematic. I chose track these as if I had purchased my imaginary benchmark index fund on the very same date. By dividing the money with the index, you get “shares in index”. Be sure to take into account the usual expenses in purchasing and owning an ETF. I decided to use 0.5% for yearly expenses and 0.5% for purchase cost and spread. The rest is then just a matter of “small” Excel exercise.

In nutshell: you are comparing your actual investment performance to passive index investing. You don’t have to track the individual trades, dividends or such. You only have to look at cash and stock balances at year end and take into account any additions or removals to/from brokerage accounts. This may sound easy, but actually is not. It may take a while to get hang of it. But believe me, it will be worth the time and next year you have got a template ready!

Sunday, December 19, 2010

BYD: Build Your Dreams

“The companies that succeed are often the ones who just improve better and faster than the competition and just keep doing that. And that is the essence of BYD.” This how Berkshire Hathaway Vice Chairman Charlie Munger described BYD in an interview with Fox Business back in May 2010. Berkshire Hathaway (BRK.A, BRK.B) owns 9.9 percent of BYD (BYDDF.PK, BYDDY.PK) through its MidAmerican Energy Holdings subsidiary. Charlie Munger introduced Buffett to the company that he had discovered via Li Lu, a hedge fund manager that also happens to have a large stake in BYD.

“Build Your Dreams” or “BYD” is in the business of making cars: conventional, hybrids and electric ones. It is also a major battery and electronics manufacturer that supplies components to major cell phone manufacturers. Despite that the fact that the car division of BYD didn’t even exist until 2003 it is now brining in the most revenues. In 2009, over half of the revenues came from auto division while handset components and assembly services contributed 37% and battery division 10%. So far, the growth has been mostly due to home market as over 80% of revenues come from China. Therefore, the potential of this company is huge if it succeeds also in other markets.

BYD e6 shown at 2009 North American Auto Show, Detroit, Michigan, US. Source: Wikipedia.

Wang Chuan-Fu founded BYD back in 1995 in Shenzhen, China. By 2000, BYD had become one of the world's largest manufacturers of cellphone batteries. Both Buffett and Munger sing high praises for the CEO of BYD. "This guy," Munger told Fortune in April 2009, "is a combination of Thomas Edison and Jack Welch - something like Edison in solving technical problems, and something like Welch in getting done what he needs to do. I have never seen anything like it." Buffett actually wanted to buy 25% of BYD, but Wang Chuan-Fu only wanted to let go of 10%, which Buffett took as a good sign.

Looking at the owners of the company, one can immediately see that majority of the stock is controlled by insiders and a few investment companies.

*) owned 89.5% by Mr. Lu Xiang-yang
**) via MidAmerican Energy Holdings Company

***) controlled by Mr. Li Lu

The market capitalization of BYD is about USD 13 billion when valuing the company using all outstanding shares and the price of H shares listed in Hong Kong and available for foreigners to buy. P/E 2009 is roughly 21 and P/E for 2010 can be estimated to be in the same ball park given that the profitability that fell drastically in Q3 will pick up. Otherwise the P/E 2010 might be closer to 30. Therefore, by no means the company can be considered cheap.

The revenue growth has been very good and gross margin has stayed in range of 19-22 for more than five years. The problem with BYD seems to be that the net profit swings quite wildly. Apparently in Q3 2010 BYD was barely making profit while first half of 2010 seemed to go better than ever. Despite of this, earnings per share has gone up consistently over long run and is likely to do so also in future if gross profit margin stays in the same ballpark as now.

Using current price for H share ($5.42 for BYDDF.PK) the P/B of the company is 4.5. Therefore, it can hardly be referenced as a value investment. It is clearly a growth play. So far the growth has been phenomenal and more importantly – profitable! It is quite intriguing to find Buffett and Munger still so committed to BYD at these valuation levels. They have stated that BYD might become one of the biggest auto manufacturers in the world. Bold statement, but not at all hard to believe given what they have managed to achieve so far.

I recently bought BYD via Frankfurt Xetra (BY6).

Friday, December 10, 2010

Is Western Digital a bargain?

The company

Western Digital (WDC) is one of the world’s largest makers of data storage products. Specifically, it is a global leader in the development and manufacture of hard drives and solid state drives for internal, external, portable and shared storage applications. The products Western Digital offers are used in computers of all kinds ranging from a notebook to high end servers. They are also used in other applications such as mobile devices and home entertainment equipment.

Picture. Inner view of a Seagate 3.5 inches hard disk drive Medalist ST33232A model manufactured in Malaysia in 1998. Copyright: Eric Gaba (Wikimedia Commons user: Sting).

Hard Disk Markets
The data storage industry is expected to ship some 660 million hard drives this year. Western Digital and Seagate (STX) compete neck to neck for the number one position in this market. Western Digital is number one in terms of shipped units, but Seagate gets more revenue as it serves the high-end enterprise sector. Western Digital employs a low-cost business model and gets lower average selling price. Combined they ship over 60% of all hard drives. Hitachi (HIT) has third largest market share (18%). The other significant players are Toshiba and Samsung.

The market is still growing. Industry observers foresee a compound annual unit growth rate of 5.6 percent for the years through 2013. The driver of this growth is simply the amount of data that needs to be stored and backed up in the world.

Threats to hard disk sales: Solid-state disks and Tablets

Picture. Mtron solid state drive. Source: Wikipedia user 76coolio.

Solid-state disks do not have moving parts like hard disks do. Therefore, they are faster in seeking data, immune to vibration and shock and also more reliable. Solid-state disks are superior to hard disks in many respects except what comes to storage capacity and price. Therefore, it will take years for solid-state disks to have significant share of the overall storage market in terms of terabits sold.
Tablets that use solid-state disks are feared to cannibalize PC and notebook sales. While this might be true to some extent, the tablets are also complementary to PCs and notebooks so the overall storage market grows leaving plenty of room for hard disks still far into the future.

Increased capital spending

According to iSuppli the hard disk companies will spend considerable amount of money in the near future on their manufacturing plants. Western Digital will spend $1.2 billion during the next five years on its plants in Malaysia. Likewise, increased capital expenditures have been announced by the likes of Toshiba, Samsung and Hitachi.

Western Digital vs. Seagate

Data source:

Seagate has higher long term debt / equity – ratio and price per book than Western Digital, but on the other hand it has higher margins and lower P/E and P/S valuations. Looking at these values, both companies look like good picks. However, I started leaning towards Western Digital as I followed the buyout talks regarding Seagate in which Western Digital seemed to have an upper hand. Also, Western Digital products populate five positions in Top 10 list of most sold hard drives in my favourite local computer dealer whereas Seagate has only two (WDC #2,3,6,7,8: STX #4,9). This fact and the fact that Western Digital is volume & cost efficiency champ, I place my bets on it at this point of time.

A closer look at Western Digital

Western Digital has very strong balance sheet. There is only tiny amount of long term debt compared to cash and cash equivalents. Subtracting long term debt from cash leaves net cash position of $2596 million or $11.30 per share.

The valuations of the company also look very attractive if the net cash is taken into account. Also, the growth rate has been phenomenal so far. Even if it reduces to 10% p.a. the company looks cheap. estimates price per free cash flow at 7.09. My own back-of-the-envelope questimate is that FCF for ongoing fiscal year will be at least $800 million (or $3.48 a share). Taking into account net cash position, I arrive to conclusion that the price of the business divided by free cash flow is 6.8. Not awfully cheap, but given the growth prospects, I think it’s a buy.

Tuesday, December 7, 2010

Inflation tax

Mr. Taxman collects payments in many forms ranging from income tax to sales tax. The most unjust form of taxation in my opinion is capital gains tax that does not take into account inflation. Atleast in my country capital gains are taxed in nominal terms, not in real terms. Only certain holdings like your own house where you live are exempt.

Let's assume that Mr. X won in lottery and bought a property worth of 1.000.000 FIM back in 1980 for investment (not for living primarily). This translates to 168.188 euros and change in nominal terms.
Fast forward to 2009 when the property is now valued at three times the original purchase price: 504.564 euros. He decides to sell. Does he make a profit in real terms? No.
Picture. A tax collector at work – from an illustration by Henry Holiday in Lewis Carroll's „The Hunting of the Snark“ (1876). Copyright expired. Source: Wikipedia.

See that lizard in the picture? Look left. Lower ... There it is reaching for the pocket of the man sitting (and presumably working despite of all the strange creatures wondering around). At any rate, that's Mr. Taxman collecting money from Mr.X.

Mr.X actually makes a loss of 36.721 euros in real terms. This is because Mr. Lizard (alias the tax man) collects 28% tax from nominal gain - not from real gain.

The nominal gain in this example is 336.376 euros. Therefore, Mr. taxman collects 94.185 euros from Mr. X. That leaves 410.379 euros for Mr.X to reinvest.

In real terms, one million finnish marks in 1980 translates to 447.100 euros in 2009. The real profit Mr.X made is 57.464 euros. However, because he is taxed on the nominal gain, he loses money in real terms. This is what I would call "inflation tax" or "stealth tax". Bummer!!

Saturday, December 4, 2010

What drives gold upwards?

While I typically ignore all predictions on the price of gold at certain time (because of very high volatility of gold prices), I highly recommend this excellent article on gold:
Four Reasons Why Gold Will Hit $1,900 in 2011

In his arcticle Peter Krauth summarizes his bullish case for gold:
  • Ongoing global stimulus initiatives figure to ignite inflation, which is highly bullish for gold.
  • The so-called concept of "peak gold" is real, and that even in the face of record gold prices, miners can't seem to crank out enough of the "yellow metal."
  • Global demand is burgeoning as wages rise in such newly emergent markets as China and India - a trend that's not going to quit.
  • Global investors remain dramatically under-invested in gold.
I could not agree more!

Here is a couple of recent articles from Seeking Alpha regarding exploding Chinese demand:

I am a gold bull

Having gold in portfolio seems crazy to many. However, to me it has been increasingly easy to add to my gold and gold stock positions even though the price of gold has skyrocketed. I am no gold bug. I don't believe that we should return to gold standard (i.e. that paper money in circulation should be convertible to gold at a fixed exchange rate). Instead, I am a gold bull. I not only believe that it's good to own gold as portfolio diversifier, but I believe that it is quite possible that it will be the best performing part of my portfolio. So far, it hasn't been. I have paid a price from my gold bullishness and also from my overally defensive stock portfolio. I probably have lost to most indexes. So far.

It is sobering to read economics 101 books. Equally so, it is sobering to study how central banks and fiat money work. Ever wonder why we have inflation? ....It's not some "law" as in gravity or second law of thermodynamics. It's created by the central bank in control of the fiat money in question. They add money to the system via banks as long as they get the inflation rate they are targeting. Why it's important to have inflation?  ... So that you spend your money and don't sit on it like Uncle Scrooge. Because sitting on money (i.e. saving) causes deflation (i.e. negative growth - job losses etc.) if everybody does it. And that's not good. Therefore, we have to have some of it. Not too much, not too little. Just "right" amount.

The fact that central banks cause deliberately inflation leads to the fact that economies have to grow atleast at the inflation rate. Otherwise, economy will be actually declining in real terms. And that's why we just gotta have always growth. Not necessarily real at all. But people are lot happier that way. They get salary increases and they think that they are getting more wealthier. It is just the perfect scheme.

You really can fool most of the people ALL THE TIME. But you can't fool all of the people all of the time. I was long fooled, but I am no more. For me gold is money. When I don't keep all of my savings in stocks and property, I invest some of it to gold. I also have to keep paper money: dollars, euros, swedish krona and so on for practical reasons and to hedge my cash positions. The reason I hold gold and cash should be obvious to anyone following the financial news. The situation does not need much more sparks to get the fire really going. I really hope it does not happen, but who knows. Anything might happen. You got basically a currency war brewing: the mighty race to bottom. When US devalues, other have to follow. Not just because they want to keep their currency "cheap", but because that's the ultimate way to get the debt load reduced.  And it might work, if just most of the people have faith.

It's all about faith. What we really have is a faith-based monetary system. And right now, the gold charts tell me that more and more people understand where we are headed ultimately and try to protect atleast part of their wealth from the doom day scenario. I really hope we don't eventually get hyperinflation, but inflation we will have. Because the central banks make everything to get the inflation started. The big risk here is that they really don't understand how global economy works. Nobody does. So they might overdo it. Then it's the 70s all over again.

Wednesday, November 24, 2010

An Indepth Look on Sanofi-Aventis

I hold pharmaceutical companies because they are good defensive plays, offer decent dividend income and are currently fairly valued. Also, I believe that in the long run, aging baby boomers in the western world and people rising to middle class in the east will drive up the revenues big time. While food, water and shelter are high on everybody’s priority list, prevention and treatment of illness is not far behind. The modern medicine can do wonders and the ever increasing number of pharmaceutical products helps people to increase quality of life and even life expectancy.

VEGF Trap (aflibercept) molecule. Copyright: Dominique Sarraute. For press use only.

Introduction to Sanofi-Aventis

Sanofi-Aventis (SNY) caught my eye when browsing the portfolio of Berkshire Hathaway (BRK.A/BRK.B). At year end 2009 it was the 9th largest common stock investment of Warren Buffett valued at approximately $2 billion. Looking at information available via also two other famous value investors have Sanofi-Aventis in their portfolio. This is not much compared to U.S. based companies Pfizer (PFE) and Johnson & Johnson (JNJ) that are much more widely owned among the tracked investors. Makes me wonder if there is a U.S bias among the tracked investors or whether there is something wrong with the stock compared to the others in the same sector.

French Sanofi-Aventis is one of the biggest drug manufacturers in the world. It has roughly $85 billion market capitalization and annual sales of $40 billion (2009). The product portfolio of Sanofi-Aventis includes vaccines, prescription medicines, generics, consumer health care and animal health. It has worldwide presence and 100,000 employees in over 100 countries.
Sanofi-aventis generates a substantial share of its revenues from the sale of certain key products. Ten best selling products of Sanofi-Aventis:

Out of all sales 87% come from prescription medicines and the 10 best selling products deliver almost 50% of top line.

Patent protection and regulatory exclusivity of existing products

Without patent protection and regulatory exclusivity products can be manufactured and sold by anybody. When so called generic products enter the market, sales of the original branded product will fall dramatically as generics are typically sold at significantly lower price. Therefore, the future profits of current products of any pharmaceutical company depend heavily on both patent protection and regulatory exclusivity.
Sanofi-Aventis own a broad portfolio of patents, patent applications and patent licenses worldwide. These patents relate to active ingredients, pharmaceutical formulations, product manufacturing processes, intermediate chemical compounds, therapeutic indications/methods of use, delivery systems and enabling technologies. Regulatory protection including obtained pediatric extensions of currently 10 best selling products is summarized in the following table:

Table is based on data from 2009 annual report.


*) In most of EU
**) Later filed improvement patents. Patent protection of Taxotere beyond Nov 2010 was invalidated recently by Delaware court.
***) Sales figure for Stilnox includes also some related products with different trade name: Myslee, Ambien and Ambien CR.

Looking at the above table, one can see that the 10 best selling drugs have no regulatory exclusivity left after this month in EU and US and also the patent protection is getting quite thin in the next two years. In five years, the protection will be almost non-existent. Most of the “big pharmas” face the same problem, so this is an industry-wide problem. Therefore, it is no wonder Sanofi-Aventis has been busy in acquisition front.


Looking at various acquisitions done in 2009 and 2010, Sanofi-Aventis is expanding business to generics and consumer health products as well as strengthening its R&D pipeline and product lines. The 2009 acquisitions include:
• Zentiva N.V. - a branded generics group with products tailored to the Eastern and Central European markets
• Laboratorios Kendrick - one of Mexico’s leading generics manufacturers
• Medley - a leading generics company in Brazil.
• BiPar Sciences, Inc. - an American biopharmaceutical company
• Fovea Pharmaceuticals SA - a French biopharmaceutical R&D company
• Laboratoire Oenobiol - one of France’s leading players in health and beauty dietary supplements
• Chattem, Inc. - one of the leading manufacturers and distributors of branded consumer health products, toiletries and dietary supplements in the United States.
• Shantha Biotechnics - an Indian biotechnology company that develops, produces and markets vaccines to international standards
• Remaining 50% of Merial - a world-leading animal health company

The acquisitions and tender offer in 2010 are summarized in the following table:

The takeover offer for Genzyme (GENZ) is by far the largest undertaking and the tender offer has been covered widely in Seeking Alpha already so no need to dig deeper into that one:

Sanofi Takeover Offer for Genzyme: The Pressure Is On (October 5, 2010)
Sanofi-Aventis Makes Hostile Bid to Acquire Genzyme: Are They Overpaying? (October 5, 2010)
Sanofi / Genzyme Battle Likely to End Somewhere in the Middle (October 11, 2010)

R&D pipeline

The research and development pipeline of Sanofi-Aventis is full of products in different development phases and it’s quite frankly quite hard to assess the commercial potential of these drugs and whether some of the drugs in the early phases ever get even approved. Majority of late phase products are vaccines or related to either thrombosis or cancer treatment. Almost the same therapeutic areas describe the early phases of the pipeline except that there is nothing related to thrombosis and lots of drugs related to central nervous system.

Strasbourg Research Center: Protein dispensing in a eppendorf tube. Copyright : Antonin Borgeaud / Interlinks Image. For press use only.

Somewhere in this pipeline there ought to be the next billion-dollar-a-year selling drugs. Without many of those, the annual sales and profits will decline. This in turn, starts the vicious cycle of cost cutting and then the 4-5 billion euro per year R&D budget gets cut down making the chances of hitting home runs even more remote. The R&D process typically takes 10 to 15 years from discovery to commercial product launch, so anything started this year won’t help the problem at hand in five years from now.

In addition to its own R&D, Sanofi-Aventis pursues a strategy of acquisitions, in-licensing and partnerships in order to develop new growth opportunities. Also, it is outsourcing R&D as explained in article “Sanofi Continues to Look Beyond Its Own Walls to Fill the Void From Drugs Going Off-Patent” published October 3rd in Seeking Alpha. It seems that outsourcing R&D is the trend among big pharmas.


Sanofi-Aventis is currently trading at same level than it was back in 2005. With P/E ratio of 10 it looks cheap, but you have to keep in mind all the drugs going off patent. I have look at all the big pharmas selling around or below 10 and they all have the same problem. In short: the are not really cheap. Nor they are awfully expensive either. I won’t second guess Mr. Market what comes to companies as closely followed as these. Looking at P/B of 1.2, Sanofi-Aventis is by far the cheapest of all major drug manufacturers. It also pays nice dividend (4.5% yield). [Data source:]

I calculated from information available in Berkshire Hathaway 2009 annual report that Buffett had paid on average a bit over $80 for each share of Sanofi-Aventis. Given that two ADRs represent one actual common share, then you need to divide that average price by two to get ADR average pricing which becomes then $40.37. Sanofi-Aventis ADR was trading at $32.67 at the time of writing this article. This means 19% discount compared to the average purchase price of Mr. Buffett. Not bad.

A look at the latest quarterly report

Net sales and EPS were up 4.8% and 8.7% on reported basis for the first nine months compared to last year. Quarterly figures were less impressing. With constant exchange rates, both Net sales and EPS were actually declining when compared to figures year ago. The net sales of Pharmaceuticals, the largest segment by far, declined 3.5% mainly due to generics competition on Q3. All other segments were growing. Consumer health care and generics segments were demonstrating especially strong growth and so did emerging markets sales. Basically sales outside US and Western Europe were growing while sales inside these regions were declining.

Sanofi-Aventis has plans to cut down US sales force significantly and redeploy resources towards strategic priorities in 2011. The R&D to sales ratio is also trending down. In Q3 it was 13.9%. Net debt level was reduced in the first nine months of 2010 thanks to strong free cash flow. Profit margins stayed on very healthy levels.


Sanofi-Aventis was not my first choice in pharmaceutical/healthcare sector mainly due to very high amount of sales coming from products that face increasing generics competition in the next years. Also, pharmaceutical segment is quite dominating in the group unlike in Johnson & Johnson that have more balanced portfolio to stabilize the up and downs of pharmaceutical segment. However, there seems to be sufficient margin of safety in the current pricing. Also, the dividend yield is attractive. I am bullish for the healthcare and pharmaceutical segments in the long run due to aging population in the western world and rising standards of living in the east. Therefore, I find Sanofi-Aventis quite suitable to my defensive portfolio mostly made out of dividend and asset plays.

I bought Sanofi-Aventis today (NYSE: SNY, Paris: SAN).

Monday, November 15, 2010

Portfolio status

I have been steadily decreasing my cash reserves. Now I have approximately 20% of portfolio as cash and I intend to decrease cash position to zero within 6 months. By cash position, I mean cash that I have allocated to investment use by moving that to brokerage account.

Rest of the money is pretty evenly allocated between the following:
- Gold
- Mining companies
- Utilities
- Oil and gas
- Healthcare/Pharma
- Telecom

.. and then I have the category "Other" in which there is only Intel at the moment.

Geographical distribution of stocks looks like this:
- Europe 51.4%
- North America 39.2%
- BRIC 9.3%

I know.. the share of BRIC should be bigger. If we fast forward 20 years further, I belive my alloction is more like Europe 25%, NA 25%, BRIC 30%, Other developing nations 20%. And Gold: 0%. Once the bubble really gets going I'm gonna sell the barbaric relic and turn that to shares in wonderful companies!

Man.... I just hope that I could someday do this (investing) for living..

Sunset in Silicon Valley

Sunday, October 24, 2010

The End Of The Golden Age

King Oil

One can argue that the world would be very different from what it is today if we hadn’t found crude oil and invented how to leverage this very convenient and relatively cheap energy source. The energy density of oil derivatives such as gasoline is superior to any other substance in liquid or gas form. That’s why majority of cars are propelled either by gasoline or diesel and airplanes use kerosene. Also, approximately 15% of oil is used to make asphalt, plastics and wide variety of critical chemical products. Therefore, crude oil plays a key role in the modern globalized world economy. It has truly enabled a golden age for those that can afford to leverage it.

Oil derrick in Okemah, Oklahoma, 1922 (Source: Wikipedia)

Peak Oil

Unfortunately, oil is a finite resource and some day we will run out of it if we continue consuming it like we do. Long before this happens we will have serious problems - as soon as demand exceeds the supply. This is the essence of “peak oil” concept. International Energy Agency (IEA) estimated in their 2008 World Energy Outlook that oil production should not peak before 2030 if 64 million barrels per day (mb/d) of additional capacity is taken into use between 2007 and 2030. In theory, this is possible, but in practise there is a very real risk of under-investment since the required new capacity is equivalent to six times the current production of Saudi Arabia. Therefore, the report concludes that an oil-supply crunch can happen as early as 2015.

It is immensely hard to estimate the maximum rate at which the oil can be extracted from all different sources, both conventional and unconventional. Therefore, it is also hard to estimate when oil production will peak. What seems fairly certain is that it will do so within the next 30 years and I am personally tilted towards it happening within the next 10 years. US production has already peaked long time ago (early 1970s) as predicted by Hubbert back in 1956 using knowledge of past oil discoveries to predict the future production. Hubbert’s ideas are taken increasingly seriously by main stream analysts. Guardian published a very interesting article back in 2005 in which Chris Skrebowski, editor of Petroleum Review, predicted that the peak would be 2008. Remember those oil prices back in 2007? The financial crisis might have actually masked the problem – for now.

The Ever Increasing Demand For Black Gold

China, India and other fast growing economies are currently far behind in per capita consumption of oil compared to EU or U.S. Consider this: If you sort all of the countries by per capita daily oil consumption and start from the lowest consuming countries, you need to sum up the consumption of nearly 100 counties to match the daily oil consumption in US. Among these countries are China and India. Altogether the citizens of U.S. consume the same amount of oil than 4,8 billion people elsewhere.

Crude Oil Consumption Profile Of The World [Data Source: CIA World Factbook].

In the above graph, the country with the highest per capita oil consumption (Virgin Islands) is the leftmost dot while the country with the lowest consumption (Chad) is the rightmost dot. Between those two are plotted all the countries for which I found statistics for both population and oil consumption. The two parameters are summed cumulatively for each country starting from the country with highest per capita oil consumption.

As you can see, the most oil consuming 1 billion people spend more oil than all the rest 5,7 billion or so. Most of the so called developing nations with huge GDP growth rates happen to be in the group “rest”. I think it’s fairly safe to assume that they will increase the per capita oil spending from the current level in the future.

The Ever Tightening Supply

According to the CIA World Factbook there is about 1382 billion barrels of oil in the proven reserves. In addition, there are unconventional resources such as Athabasca oil sands region in Canada and heavy oil in Venezuela. The problem with unconventional resources seem to be that only a fraction of them is determined to be recoverable:

Source of estimates: Oxford Energy, CIA World Factbook and the Government of Alberta

Even though unconventional resources seem to be vast, they are estimated to add only approximately 10 million barrels per day to the supply side in the best case when taking into account all unconventional sources such as biofuels and oil from coal. For example, The National Energy Board of Canada estimated back in 2006 that the best case for oil sands production in 2015 would be 4.4 million barrels a day while the base case was 3.2 mb/d and the low case only 1.9 mb/d.

The current production rate of oil is about 84 million barrels a day so the unconventional resources will not have major effect in the long run given depleting conventional sources. Also, a major problem with all sources is decreasing EROEI ratio (energy return on energy invested). For oil it used to be 100 a long time ago and now it is somewhere below 20. EROEI for biodiesel is roughly 3 and for ethanol it is not much more than 1. Depending who to believe, EROEI for oil sands is between 2 and 4. Basically anything above 1 makes sense, but because we are used to high ratio (= cheap energy) we may have serious problem when the average EROEI of all supplies of oil goes below 5.

World oil reserves (source: Wikipedia)

The Last Hurrah Of Offshore Oil Production

After pumping oil from land deposits, the industry went offshore. First submerged oil wells were drilled already in late 1890s. Oil & gas production in Gulf of Mexico in 1990 was almost exclusively done in shallow waters (less than 1000 feet). By 2005, majority of production was in deep water (1000-5000 feet) and ultra deep (more than 5000 feet). Before the accident in Gulf of Mexico, it was estimated that by 2020 majority of production would have come from ultra deep water wells. However, there is one problem with all this in addition to the work being increasingly costly, energy consuming, difficult and dangerous: Yearly production decline in deep water wells is reported to be much higher than in shallow water wells. This makes it increasingly hard to sustain the already achieved production rate in offshore wells as production declines in older wells.

Platform P-51 off the Brazilian coast (Wikipedia/Agência Brasil)

Who Will Profit From The Raising Demand For Petroleum
The entities owning the oil and gas reserves are certainly going to profit from the peak oil as it will drive the value of their reserves and yearly production up while their costs are not likely to increase at the same rate. The big problem with the reserves is that the entity owning them right now, might not be the one owning them in the long run. If oil, gas and other critical finite natural resources are not at the heart of national interests yet in some countries, they will certainly be so in the long run. High oil prices are likely to cause unrest and discontent among citizens and politicians will respond with the usual remedies: socializing either the profits via higher taxation or taking ownership of the resources. While many of the oil majors and super majors seem to be reasonably valued and well positioned right now, one has to consider the possible outcomes of the next energy crisis. Government ownership might be actually a plus.

The companies to consider include Exxon Mobile (XOM), Chevron (CVX), ConocoPhillips (COP), BP (BP), Shell (RDS.A) and Total (TOT) all of which were featured in an excellent SA article. In addition, companies such as CNOOC (CEO), Statoil (STO), PetroChina (PTR) and Petroleo Brasileiro (PBR) are worth considering. Many of these are heavily involving also into natural gas, which is becoming increasingly important source of energy and is likely to last much longer than oil. The companies having significant investments on the unconventional side include Suncor (SU), Canadian Natural Resources (CNQ), Imperial Oil (IMO) and Nexen Inc. (NXY).

The Case For Offshore Oil & Gas Drillers

The offshore drillers pop up in my stock screens often since they got the right stuff: growing revenues, relatively low debt burden, excellent margins, low valuations in terms of P/E, P/B and price per cash flow. In exchange of all this, you have the risks which are all too familiar to everybody by now. However, these companies are less likely to experience socializing as they do not own the reserves, but only the rigs used in drilling the offshore wells. So far, it has seemed to be excellent business and I am betting my money that it will continue to be excellent business in the long run (5-20 years) as long as there is something worth drilling on the bottom of the ocean.

Different types of production platforms (Wikipedia, NOAA)

Drillers that have equipment used in deep and ultra deep production are the most appealing as that is the segment which is growing. This means that they have floating rigs, drill ships and such equipment either in use or under construction. The more they have these as percentage of their entire fleet the better. Also, I prefer ones with geologically diversified portfolio and big oil companies as customers (lower counterparty risk). The companies worth studying for these traits include (in the order of market cap): Transocean (RIG), Diamond Offshore Drilling (DO), Noble Corporation (NE) and Atwood Oceanics (ATW). Brief financial and valuation summary of these corporations:

Data source:

Related long positions: Chevron and Noble Corporation.
Full disclosure of positions:

Monday, October 18, 2010

New position: Intel

Today I opened two new long positions: Intel and Noble Corporation which I will discuss later.

Intel is probably the next best thing besides owning a monopoly. However, the chip-making giant is now so big that it's hard to grow much bigger. Therefore, in no way it can be thought as a growth play. To me it's both a defensive value play as well as a dividend play.
Picture: Intel i5 processor (source Wikipedia / Qurren).

It has some 20.3 billion in cash and cash equivalents ($3.65 a share) and operational cash flow in range of 11 billion a year. Management is authorized to spend 5.7 billion on buying back own shares. Currently Intel pays out quarterly dividend of 15.75c which is roughly 3.3% yield at $19.2 a share. Intel has very low debt to equity ratio so it is really a cash cow. In addition, it has amazing pricing power and huge technological edge to all competitors.

There are not many companies left that can build manufacturing lines by themselves for the nanometer scale structures needed in the state of the art processors. These factories require huge amounts of knowhow, skill and money to build and operate successfully. Simply put: Intel has moat (competitive advantage) like no other technology company in my opinion.

At P/E 10.3 and P/CF 7.75* I think Intel is a pretty good catch. If it still grows, it will be only a bonus.

*) P = quote minus cash & equiv. per share

Saturday, October 9, 2010

The Myth Of Moore's Law

One very good example of a reverse-engineered law (i.e. no law at all, but a presentation of what has happened) is the one called Moore's Law. From the evolution of this law, one can see how this type of laws are created: they are basically continuously modified to fit what has happened in the past. So they have actually very little predictive power in the long run. I believe many laws in economics are just like this one, but let me concentrate on this, because this is way closer to my circle of competence and work.

I absolutely admire what Gordon Moore and Intel has done so this article is in no way meant as attack against them. I don't know who have modified the law and when, but that does not matter in the end because the "law" now in circulation has very little to do with the original one.

The original prediction (later titled Moore's law) was presented by Gordon E. Moore in "Electronics" Volume 38, Number 8, April 19, 1965 and this is the direct quote from that paper:

"The complexity for minimum component costs has increased at a rate of roughly a factor of two per year (see graph on next page). Certainly over the short term this rate can be expected to continue, if not to increase. Over the longer term, the rate of increase is a bit more uncertain, although there is no reason to believe it will not remain nearly constant for at least 10 years. That means by 1975, the number of components per integrated circuit for minimum cost will be 65,000."

So the original law calls for doubling every year counting from 1959 (1 transistor). As a reference, the Intel 8080 introduced in 1974 had only 4500 transistors and not 32768 as had been predicted by Moore. Intel managed to surpass 65000 transistors only in 1982 with Intel 286 that had 134000 transistors. Moore's law predicted 8,4 million so by now it was very clear that the original prediction was way off.

In fact, the law was fairly accurate only between 1959 and 1965. I.e. up to the point when the article was written. So it did not actually manage to predict anything right. Sure, the increase of transistor count has been incredible, but not as incredible as predicted by Mr. Moore back in 1965.

Because the original law predicted way too high growth rate, the "law" has been adjusted as follows:

"The number of transistors that can be placed inexpensively on an integrated circuit has doubled approximately every two years." [source: Wikipedia]

You can see for yourself how accurate that law is. It basically grossly understates the development. According to this Law #2 there should have been only 32768 transistors back in 1989, but Intel managed to put 1,2 million transistors into Intel 486. So c'mon this law does not work either if it starts in 1959.
Because even this adjusted law (#2) is not accurate, a third modification has been made to reset the law basically early 1970 to first Intel chip (Intel 4004 introduced 1971). Now this law #3, is somewhat accurate description of what has happened, but it has absolutely nothing to do with the original prediction.

And like law #2 it too falls short. It predicts 1,7 billion transistors whereas Intel 8-core Xeon Nehalem EX has 2,3 billion and NVIDIA GF100 has 3 billion transistors. But hey, let's call that a rounding error in the law. It's really amazingly accurate if you use logarithmic scale that hide the "small" differences of, say, 1,3 billion transistors that is roughly the same as the high end chips had in total ín 2008 (NVIDIA GT200).

Note: logarithmic scale!

The increases in clock speeds and transistor counts have been truly amazing. My first computer was Commodore 64 back in 1984 and in my wildest dreams I could not have imagined the awsome power that I can harness today from my PC and the amount of data I can store. However, there have not been nor will be any hard laws of progress behind this and nor there will be. I laugh every time I see Moore's Law and it's awsome predictive powers referenced. At that is often.

Note: logarithmic scale!

Friday, October 8, 2010

Investment checkerboard

I sorted my investments by using a 6 by 6 checkerboard where the vertical axis is used to measure growth and horizontal axis has six categories to place a particular company into. The checkerboard was inspired by Peter Lynch's book "One up on Wall Street" where he introduces his method of mapping a company into one of six categories. Three of the categories are essentially growth categories and three others are: cyclicals, asset plays and turnarounds.

I wanted to give each company two dimensions: growth category and then a second property which essentially gives away the primary reason why I invested into the company.

Here we go:
The growth is measured as yearly average growth from last 3-5 years (depending on what was easily available). Dividend rate is either from Google Finance or then from a local Arvopaperi stock magazine.

At any rate, I don't have cyclicals or turnarounds as I have constructed my portfolio as defensive one. All commodity plays (oil, gold etc.) are asset plays in my opinion. I believe both oil and gold to rally long term and that will unlock the hidden value in the companies (basically the huge leverage they have on these commodities). Then rest of my stocks are pretty straightforward dividend plays. Note that some of the dividend plays also buy back shares and that is not taken into account in the grouping.

This was quite a useful excercise as I now recognise that I should look for some growth plays also. And it would not hurt to find companies that give decent dividend AND grow minimum of 10% p.a.

Saturday, October 2, 2010

On economics and physics

What's next: Deflation, double dip, inflation...?

Quite frankly, I do not think even the best economists know the answer for sure. I am no economist and after reading Economics book about half way through I don't know what to think about the dismal science. Mathematically, micro/macro economics 101 is easy to follow. The only question is: does it really work that way? Is there laws?

Atleast to the latter I can say that there seem to be very few hard laws in economics. And I am talking about the kind of laws which you can use to predict what will happen given a set of starting parameters. In physics you can make accurate predictions based on work released in 1687 (Newton: Philosophiæ Naturalis Principia Mathematica). Still works today like clockwork if given certain limitations (that were pointed out later by Einstein in theory of relativity), no need to discuss about it.

Take economics: There seems to disagreements over the very key concepts.
  • What causes inflation? Some say money printing and some say something else.
  • How about what to do if an entity (like city or country) is loaded on debt and near bankrupt due to rising cost of funding their debt load and especially due to deficit spending. How about a little bit more debt? Or should they just admit that maybe you have overextended themselves and need to cut back?
Would it be a good idea to cure hangover with some more alcohol? Maybe once, but not every day.. 

What is clear to me is that many western economies are now in the corner. Anything bad happens and shit will hit the fan. The only way out seems to be ... yes! ...more money out of thin aír!

Thursday, September 30, 2010

Penultimate Preparedness

I continue quoting Peter Lynch's "One Up On Wall Street":

"No matter how we arrive at the latest financial conclusion, we always seem to be preparing ourselves for the last thing that's happened as opposed to what's going to happen next. This 'penultimate preparedness' is our way of making up for the fact that we didn't see the last thing coming along in the first place."

Greed on the way up, fear on the way down. Both are contageous. That is why we always miss the turn of the tide.

"The day after the market crashed on October 19, people begin to worry that the market was going to crash." [he refers to 1987 Black Monday]

"Those who got out of the market to ensure that they wouldn't be fooled next time as they had been the last time were fooled again as the market went up."

His point eventually is in the book... you should not try to time the market because you can't. No one can. I know I have tried. Sometimes almost correct, many times not at all. It's like tossing coin. You may get enough success to think you can do it and then you get really wiped out. And I totally agree on the penultimate preparedness. That leads to excellent buying opportunities as was the case in early 2009. Both crashes and bull markets will always be overdone. Always have been and always will be.

Wednesday, September 29, 2010

Passing The Mirror Test

I just finished "One Up On Wall Street" by Peter Lynch, the legendary fund manager of Fidelity Magellan. The chapter 4 in the book is called "Passing The Mirror Test". In short, you should answer:

1) Do I Own A House? (A: Yes)
2) Do I Need The Money? (A: No)
3) Do I Have The Personal Qualities It Takes To Succeed? (A: Yes)

For questions 1 and 2 the answer is easy as they are objective. The third one is tricky as probably anyone investing already will say yes :-)

The qualities related to success as an investor according to Lynch:
  • patience
  • self-reliance
  • common sense
  • a tolerance for pain
  • open-mindedness
  • detachment
  • persistence
  • humility
  • flexibility
  • willingness to do independent research
  • willingness to admit mistakes
  • ability to ignore general panic
And on top: "In terms of IQ, probably the best investors fall somewhere above bottom 10%, but also below top 3%".

Still say Yes to the third one? I say "Maybe, hope so"..

Tuesday, September 28, 2010

Crappy investments: Airlines

I haven't been flying with Finnair for a while and noticed that they have reduced their service in the intra-Europe flights to the level of a low cost airline (give or take a sandwhich). However, their ticket prices still ain't in the same ballpark, which leads me to believe that they have basically given up the competition in those routes and are only flying them to feed their long distance routes to Asia. Why in the earth would anyone want to pay 30-50% premium for flying with them? Better service (definitely not this time)? Better pilots? (I do not think so)

Next time I pick a low cost airline. That will also save the money of my employer. I guess they have airmile cards too..

Airlines in general are crappy investment due to cronic overcapacity in the business. Apart from a few airlines most of them are running on losses. I don't touch them even with a very long stick. But for some reason new airlines emerge and the old ones don't seem to have trouble attracting capital. Beats me..

Talk about business that has need for high CAPEX, generates tons of CO2 and is utterly dependent on cheap oil.. They will get really screwd over long run..

Monday, September 20, 2010

Gold: pros and cons

Every time gold sets new records gold related articles fill the media. In Seeking Alpha, gold related articles appear daily and in large numbers. Here are some picks that I found interesting recently:

Pro gold articles:
Critical articles:

Despite for repeated bubble calls, I remain pro-gold. It is the ultimate hedge against irresponsible government behavior. Currently such behavior (deficit spending & money printing) is rather common throughout the western world (so called "developed" countries ;-).

Closer look to most retirement schemes reveal that they are nothing more than giant ponzi schemes with a twist. The twist being that governments never get procecuted on the fraud. They just either lend some more money or print it. Or default under the debt load.

The most powerful signal towards continuing gold rally is the unwinding of hedge books by major miners (such as AngloGold as told in the first referenced article).

No matter how convinced I am to gold as speculative investment (or wealth preserver), I will not put a significant amount of my money into it. House, piece of land and farmland are also quite good inflation hedges if you are into them for a very long run. You see, land is no longer "manufactured" ;-)

Wednesday, September 15, 2010

Gold continues bull run

Gold seems to continue bull run after seasonal (summer) weakness. New records have been set in dollar terms..

I have recently bought a bit more gold and more shares of my two favourite gold miners (NEM & ABX). Like anything in my portfolio, I will be steadily adding gold and gold miners to keep their share in my portfolio constant. Currently my target is to allocate 15% to gold and 15% to gold miners. That makes me more of a gold bull than Soros although you have to take quite many zeros off when talking absolute value in dollars ;-)

Wednesday, September 8, 2010

Eying Wintel

I have been avoiding tech stocks ever since the crash of 2000-2001. Not because I got burned badly, because I wasn't. Sure I lost almost 100% on one stock and more than 50% on a couple, but I also made some spectacular gains on the ones I was wise enough to dump between 1999 and 2000.

The reason why I don't like tech stocks in general is that the field is very competitive and requires huge R&D spending. You can loose your #1 position very fast. There are numerous examples of companies that were ones great, but now are either bankrupt or dimineshed to some niche market.

There are exceptions: the ones having moat.

An economic moat is a competitive advantage that is difficult to copy or emulate, which provides a significant barrier to competition from other firms. Buffett has often referred to an economic moat as being similar to a fortress or a medieval castle that one can not penetrate.

Two companies come instantly to my mind: Intel and Microsoft often referred as "Wintel". Both companies are so strong in their fields that they are close to monopoly without being one. Currently both are trading quite low P/E ratio so many prominent hedge managers characterised as "value investors" have picked up either one or the other. I too am eying both companies.

I could buy them tomorrow, but on the other hand I want to space out my investments in order to keep the market timing minimal. Also, as everyone else, I am still cautious on the "recovery"...

Wednesday, September 1, 2010

Took a position in Chevron

I basically transferred money from CHNG to Chevron (CVX). Out of all big oil companies, I found Chevron to be most attractive based on financial comparison between the big ones.

Otherwise, a good summary of oil&gas majors can be found here:

Unfortunately the article does not include PetroChina and PetroBras, which I found interesting in addition to Chevron and maybe ExxonMobil.

Dumped CHNG

The Rosen Law Firm today announced that a class action lawsuit has been filed on behalf of purchasers of China Natural Gas, Inc. common stock during the period from March 10, 2010 through August 19, 2010. CHNG was trading over $10 a share in beginning of the period. Since then the stock has declined over 50% (or 110 MUSD in market value) so the potential damages are quite huge compared to the remaining market price and book value of the company.

Shortly after seeing this announcement I dumped all my shares in CHNG.

I happen to be one of the people that purchased the stock during that period so I need to consider whether I want to participate in the lawsuit. My largest purchase was on the 20th of August so that won't qualify. At any rate I don't want to stick around while other people loot the company via the lawsuit especially if I won't qualify for it or have other reasons not to participate.

Even though I increased position in CHNG fairly recently, I did that without fully understanding the underlying problems in CHNG and similar stocks. These problems are fairly well summarized in the following arcticle:

Here you can find the Barron's article + some commentary in the end:

I feel like a sucker. But this will teach me one more lesson. It's not the first time and won't be the last... Such is life..

Friday, August 20, 2010

Telecom picks

I added two telecom stocks to my portfolio: China Mobile (NYSE: CHL) and Vodafone (Nasdaq: VOD). In China Mobile there are three main things that make it attractive to me: 1) first it is a telecom stock (defensive), 2) it is Chinese stock, 3) by any standard ít is doing excellently.

I use Swedish TeliaSonera as benchmark for all telecom sector stocks. Not many can raise to the same level but China Mobile can in terms of ROA/ROE/ROI and margins.

Vodafone is not doing so fine, but it is low on valuation and I am betting on Verizon resuming dividend by 2012. Vodafone owns 45% stake in Verizon.

Doubled bet on CHNG

China Natural Gas (Nasdaq: CHNG) is selling below $5,40. I took a real good look at Q2 results and don't agree with the market valuation. I do not see any fundamental reason for the sell-off. So I bought more of it. If it was a good by at higher price, it is more so at the current price. At least I think so.

It is not ofter that you can get a growth stock at P/E below 7 (my estimate for 2010 EPS is $0.80).

Wednesday, August 18, 2010

Soros and Gold

I browsed through the latest SEC filing from Soros Fund Management and found out that Soros has quite big exposure to gold and gold miners: 17,5% of the whole portfolio.

The biggest position is by far the SPDR Gold Trust (638 MUSD). The rest of 890 MUSD gold related position is invested in gold miners. As the list of holdings is quite long (hundreds of entries), I may have missed something. I basically browsed through all with word "gold" or "resource" and found these:


From the gold miners. Soros has by far the largest positions in Novagold (90 MUSD) and Kinross Gold (66 MUSD).

Tuesday, August 17, 2010

The Oracle of Omaha increases JNJ position heavily

It seems that Warren Buffett increased dramatically Berkshire Hathaway's position in Johnson & Johnson during the last quarter. He also seems to think it is a good buy after drop of about 10% in May. JNJ is one of my biggest positions at the moment.

Monday, August 2, 2010

Becton, Dickinson & Co.

I took a new position in Becton, Dickinson & Co. (NYSE: BDX), a global medical technology company. I added this company to my fairly long list of companies to study when I noticed that Warren Buffett (Berkshire Hathaway) has been steadily increasing Berkshire's position in this company and the company happens to operate in a sector that interests me. It was added to Berkshire's holdings in Q2/2009 and subsequently the position was increased in both Q4/2009 and Q1/2010.

What really got me interested in this company was in-depth presentation on Becton Dickinson by East Coast Asset Management published in Seeking Alpha by Market Folly. They basically argue that the company is worth $90-$95 a share. This range comes from several valuation methods, which I won't dive into here. It is worth to mention that valuation using 8% discount rate and assumption of no growth in free cash flow gives valuation of $65.

At first look BDX does not appear to be very cheap (P/E 13,6 and P/B 3,1). However, I tend to keep in mind a quote from Buffett: "It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price". I think this actually comes from Charlie Munger, who introduced this thinking to Buffett at some stage. At any rate, after reading the East Coast paper and looking into the company, I can understand why Berkshire has a position in this company.

In short:
  • steady increase in demand is there making it hard to believe that company can not increase free cash flow
  • company has multiple competitive advantages
  • margins are excellent and have been improving last 5 years
  • ROE average over last 5 years is 22.2%
  • 37 consecutive years of dividend increases
  • the company has been purchasing it's shares back using more money per year than for dividends. Therefore, the current not-so-high dividend yield has great potential to rise also in the future (in 2009 the company used 550 MUSD for share repurchase and 317 MUSD for dividends). The company could easily pay dividend which would give over 5% yield at $70 share price.

Tuesday, July 20, 2010

Fred Olsen Energy

The tragic accident in Deepwater Horizon oil drilling rig and the resulting oil spill as well as all previous major oil spills are horrible reminders of just how dangerous oil drilling and transportation are to the environment. In addition, the use of oil in transportation and electric generation is also pollutive and adds ever increasing CO2-level in atmosphere. Therefore, nature would be much better of without us using it.

Deepsea Delta semi-submersible drilling rig in North Sea (source: Wikipedia)

Unfortunately, oil is very much needed by the global economy now and far into the future. Therefore, oil drilling and transportation will have to continue. All the easy oil deposits have been probably already found in the land and under the sea. The demand for deepwater drilling rigs have been growing and the demand for shallow water rigs have been declining or staying flat for years (reference: see page 14).

I have been looking more companies in the oil and gas sector to my portfolio and Fred Olsen Energy (Oslo OSE: FOE) looks attractive. Fred Olsen Energy provides exploration and production services to the offshore oil and gas industry. It has 7 drill rigs, 1 accomodation platform and 1 drill ship which it rents for oil and gas companies. Currently it has no exposure to Gulf of Mexico. Most of the rigs are in the North Sea currently.

Compared to many of its competitors Fred Olsen Energy is small. However, the offshore drilling segment of the company is very profitable. Engineering and fabrication segment is loosing money, but the amounts are not significant compared to the main segment. The balance sheet reveals that the company has quite high debt load. However, it looks to be manageable especially in the current abnormally low interest rate environment.

The first half of 2010 has been weak in terms of revenue, but still the company has respectable cash flow from operations. The contract status of the fleet seems to be also in order. Five out of Nine rigs/ships have contracts in place until 2013-2015. The rest are shorter term. There seems to be a slight oversupply still in the floater market. I am sure that that and the contract status are reflected by the valuation of the company already.

What caught my eye in the first place was the forecast figures I saw in recent Arvopaperi magazine for this company (source: Facset):

P/E 2010: 4,9
yield: 8,19 %

The forecasts are even better for 2011. Looking at the Q2 raport from the company, I am not sure if these are conservative enough given that both revenue and profits are way down from 2009. At any rate, these valuations are so low that I think there is sufficient margin of safety for me. The latest dividend was NOK 10. The shares of the company are trading right now at 178 NOK.

Wednesday, July 14, 2010

Nautilus Minerals

Exploration stage mining companies are sort of lottery tickets. You can loose pretty much all your money in investing in them or then you can make spectacular gains. It all depends on what the company finds and if the mineral deposits are feasible to mine.

Last week, I took a small position in an exploration stage company called "Nautilus Minerals" (TSX/AIM: NUS). I am typically not interested in exploration stage companies, but this particular company does something that at first sounds like sci-fi: Their first mine will be located 1600 meters below the surface of Pacific Ocean near Papua New Guinea. In fact, long ago it was sci-fi. Jules Verne envisioned underwater mine in his book "Twenty Thousand Leagues under the Seas" back in 1870. I haven't read it, but I sure am familiar with Captain Nemo and Nautilus (the submarine) that were introduced by this book. It seems that Nautilus Minerals have taken their name from Nautilus the marine creature (not the sub) based on their logo.

The Nautilus, as pictured in "The Mysterious Island". Source: Wikipedia.

Oil and gas industry went offshore in the 1940s and now it might be the time for mining companies to do the same.  Nautilus Mining will use existing offshore oil technologies to cut ore from the seafloor and pump it to the surface as seawater slurry. Once the ore is dewatered, it will be shipped to shore for processing.

Recently published independent engineering study titled "offshore production system definition and cost study" related to the first ever underwater mine "Solwara 1" reveals some very interesting things. Indicated and inferred resources combined and valued at market prices for metals put the mineral deposit somewhere around 1,6 billion USD (at the time of writing). Most of this is copper (about 1 billion USD) and gold (about half a billion). Extraction requires 383 million USD capital expenses and approximately 150 million operating expenses (estimated based on $70 USD per tonne OPEX). The difference of resource value minus direct CAPEX and OPEX is over 1 billion USD. Naturally not all of this can be clarified as profit as there are other expenses involved in the process (such as smelting and refining).

Nautilus Minerals has about 169 million shares outstanding (diluted) and 196 million USD in cash (additional 40,7 million USD if all options etc. are excercised). The required CAPEX needs to come from somewhere. Either they have to issue more shares or then they need to sell some of the future revenue for cash today. So let's assume they sell more shares. Let's further assume that they can cover this by issuing 131 million shares putting total shares outstanding to 300 million.

Now, to justify the current share price of 2.11 CAD (about 2.05 USD) they would need to be able to make profits in the range of 600 million (net present value of future profits). If successful and completed within the CAPEX and OPEX estimates, the Solwara 1 alone should give this kind of profit with a healthy margin for error.

Yes, there are some very big IFs since this is a pioneering project. There are also big risks that the whole concept of underwater mining comes under attack for environmental or other reasons although the company claims that the environmental and social impacts are smaller than those associated with conventional land based mines. Also, between now and the completion of the mine, the company will have negative cash flow (Q1 2010: -13,3 million USD) due to exploration and other operating costs that are not related to mineral extraction from Solwara 1.

Solwara 1 was granted environmental permit in December 2009 and the company is expecting to have the mining lease in place during 2010. The company has over 450.000 square kilometers of tenements in five jurisdictions. There are many other high grade mineral deposits already found besides the Solwara 1.

Recently the stock has gained a lot and has been trading with wild daily swings up and down.