vendredi 7 décembre 2018

A little value investing with Banque Laurentienne (LB.TO)

Value investing doesn't appeal to me. I despise most value investors because almost all of them have done pretty bad over the last years. Many of them invested in Sears Holdings, which was one of the worst moves one could do 5 years ago (and almost everybody knew it back then, but they invested in SHLD anyway). However, sometimes, a particular situation appears, and, with a value perspective, it looks interesting.

Banque Laurentienne is an interesting case to me.

It's another of these Quebec's stocks. However, this time, it's not one of the best canadian stocks. It's not one of the worst either, but it's probably a so-so stock. The stock is selling at 75% of Book Value, which is something we usually see only for stocks that go through a crisis that will probably lead them to bankrupcy. That was the case with AIG and Bank of America a few years ago, for instance. Both survived because they were "too big to fail" but the road since then has been hard and still is for AIG. I don't think that LB.TO is similar to these two. LB.TO faces some challenges, doesn't grow that much and has a lower ROE than most banks, but the situation looks better than many other stocks. 

So, for LB.TO, if you pay about 40$ for a share, you'll get a 6% dividend (the payout ratio is lower than 50% so the dividend appears to be safe), a share that should be at least 25% more expensive if it just respected it's book value and a sector that isn't at risk of a change of habits or a technological clash. I'm not sure that it's a good investment, because I respect what the market thinks about most stocks. In other words, the market is usually right for fixing prices. However, it's tempting to gamble a bit on that stock.

I don't do it, but I think it would be a good idea for most investors to gamble about 5% of their portfolios on stocks that don't follow your usual rules of investment but that appear interesting in a way or another (very expensive, unconventional, under book value…). 

It's all a question of balance. You don't have the same opinion of a portfolio with 5% on Weed Stocks than a portfolio with 25% on weed stocks.

3 commentaires:

  1. Well, as a value guy I guess I should respond…

    Over the long-term Value has historically outperformed Growth (and even more so in the small-cap arena), however Growth investing has had it’s periods of outperformance. The mid to late sixties (the nifty fifty) and the mid to late nineties (the tech bubble) were two such periods although they both ended badly. Currently since 2008-2009 (financial crisis) liquidity has flooded the equity markets and has found a home in growth orientated names. This has been compounded by the disruptive nature of the tech boom making Growth names all the more popular. But when too much money chases after the same asset class, things can get sloppy.

    One problem involving growth investing is the emphasis on ‘adjusted earnings’ where a lot of intangibles are written off thus inflating the reported numbers. ‘Earnings’ are basically an accounting concept filled with estimates and assumptions and often times outright manipulation. I don’t pay much attention to earnings preferring to focus on operational cash flow, especially free cash flow.

    On top of all of this I’m getting a suspicion that the market may be currently rotating away from Growth and back to Value where there is more emphasis on risk control and less on growth of equity.

    As a value guy I like growth as well but not run away growth where your car is liable to spin off the road the first time you don’t hit your quarterly numbers. Value investing is more than buying dead assets. At Brookfield Asset Management they practice a particular type of Value investing which entails gaining control of a company and reworking their asset base and selling down the road for a good profit. They are very good at doing this without incurring a lot of risk along the way.

    Okay I guess I’ve said my piece…bring on the rebuttals…

  2. Value investing does outperform growth investing over the long run. Of course, it's not returns that should matter. It should be RISK ADJUSTED returns that matter. That only makes the case for value investing more compelling. Once a growth stock stops growing...look out below. Investors start asking: why we are still paying 100x earnings for something that has stopped growing? The volatility can get intense, and even if the growth stock rebounds, you have probably been shaken out as it corrected 50 to 80%.
    The last five years or so have been very good for growth investors. Things ARE changing. Analysts have already started revising earnings estimates downwards. It will prove hard for most companies to match the 10% growth in revenue and about 30% growth in earnings of the S&P 500 stocks in the last year (huge corporate tax cuts that fatten the bottom line are not an annual thing). As earnings are revised downwards, the best hope may be deep value stocks that can enjoy p/e multiple expansion because they go for less than 10x next year earnings.
    There's a lot of wisdom in the comments above. I especially like the focus and emphasis on cash flow.
    I hate to be overly agreeable. So, in closing, I will leave you guys with the names of five growth stocks that are insanely overpriced by any metric. Jot down the names of these five stocks. Next, create your own list of ten value stocks (or deep value stocks). Let's see if the FIVE BEST names on your list of ten value stocks can top these five names in the year(s) ahead. I totally agree that we're heading into a value investor's market. The five names that I provide are not coming from me. Here they are (and keep in mind that they are insanely overpriced):


    *A far smarter and more successful investor than myself thinks these five stocks are changing our world and should enjoy insanely high growth in the next five years. Most of the names listed went public just in the last couple of years and are disrupting hugely profitable niches or establishing themselves as market leaders in new areas. They are Software and cloud type stocks. They do not make widgets and won't be affected much by trade wars or tariffs. These companies are looking to get rich in the way they handle information. Business analytics. Data bases. Programmatic advertising, etc.

  3. I think it's a little soon to tell that the market is shifting from growth to value. I don't think we can see that coming clearly after just a few tough months. I'd wait at least one year to affirm that.