Canadian Value Investing

BAC was a huge percentage gainer last year but don’t let that fool you. As I described in the post on comparing Canadian & US banks, BAC offers for 1/3 of the comparable Canadian bank or investment company with an apples to apples basis. A few of that valuation distance has narrowed, but don’t child yourself there continues to be big money up for grabs. 13.48/shr at the last end of Q3 2012. The business still sells for below that level even though the bank is soundly capitalized.

At the finish of the Q3 2012 the administrative centre level was 8.97% on a Basel 3 basis. The lender only requires 8.5% so it is now over capitalized and Q4 should add further to this capital buffer. 10 billion over another 5 quarter. The company has a huge low cost deposit bottom and the huge cash flow power of this bank can look once the LAS expenses come down and interest rates normalize. The economy is improving and the improvement in the housing market shall be a huge tailwind for BAC. Recent update: The recent legal settlements, with Fannie Mae particularly, settle a huge part of the legacy issues related to Countrywide.

45 billion dollars worth of issues over the past 2 years. 99 billion below publication value. You can argue they are under reserved but seriously now, that is valuation difference is ridiculous. Investing only requires grade 5 math and rational thinking. The problem is the rational thinking. This is perhaps the easiest investment decision a rational person with reasonable expectations can make.

Warren Buffett, the CEO, has managed to get clear the stock was undervalued when he first bought back stocks at 110% of reserve value (BV). He has always treated his shareholders as partners so he doesn’t buy back stocks without first permitting them to know that he seems it’s a cheap price. Since then Buffett, combined with the blessing of the panel of directors, has bought 1 back.2 billion in stock. He also elevated the price he is prepared to pay to 120% of BV. Buffett believe the stocks are cheap and symbolize great value at 120% of BV. The stocks have a type of “floor” underneath them at that level.

That doesn’t indicate the stock can’t go lower but it can mean you will see a big buyer below 120% of BV. 40 Billion in cash and is looking for someplace to get it. Buying today at historic low valuation will ensure you benefit from both the growth in earnings and the valuation adjustment as the stock moves higher.

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An buyer really only has two levers that to make comes back. The foremost is growth in earnings and the second is a rise in valuations. Some individuals include dividends but I don’t since dividends are merely a percentage of earnings. So with Berkshire you will reap the benefits of increasing profits power and perhaps a higher valuation. Over the past decade the valuation has hovered around 170% of BV. Lastly Berkshire will also greatly benefit from the improvement throughout the market, particularly in housing. Berkshire also will not pay a dividend so all of its earnings are plowed back into the company. They also own lots of outstanding companies that can create high profits on capital.

If you put all of your money in one stock, Berkshire would provide adequate diversification in one security while generating acceptable returns. The reason most people won’t buy BRK is basically because they “think” they can create a higher come back than what Berkshire can generate. Sony can be an interesting company I initially looked at last summer months but I was too stupid to connect the dots at that time.

I know, I know sometimes I am a little slow. Examining the 2011 annual report for another time I noticed a couple of things? 10 billion in cash. 2 billion for most of Sony is absurd quite. Just what exactly do I like. Then upon investigation, I discovered Sony Pictures Entertainment owns Columbia Metro-Goldwyn and Tristar Mayer.

On top of this, Sony Music is the second largest music recording company in the world and is the owner of full rights to Michael Jackson & The Beatles, among others. It should be clear that Sony possesses some very valuable and unique possessions. I would wager with some American style management Sony could be worth 5x of the current quote. Wellpoint is an organization I have been watching for some time and finally got around to reading the annual report.

For my Canadian visitors, Wellpoint is one of the biggest US healthcare organizations with 33.5 million people at the last end of Q3. They are an unbiased licensee of Blue Cross and Blue Shield in a number of US states. Let’s start by looking at the positives and the negatives. WLP is an extremely interesting investment candidate because they aren’t the most effective operator in the sector. They seem to constantly have among the higher medical loss ratios compared to competitors. The medical loss ratio, or known as the power expense ratio sometimes, is the huge benefits expense as a percentage of revenue.