Comparing Canadian Equities to US Equities

The last several years have seen a strong separation between Canadian equity returns and US equity returns, made even stronger by the Canadian dollar's outperformance as well.  EWC is an iShares ETF that measures Canadian equities (in US dollars), and SPY is a good ETF to reflect US equities.  The graph below shows the ratio between these two ETFs, highlighting the strong out-performance Canada has had for almost 13 years now.

The interesting question is, can a difference like this continue for long?  The ratio has clearly had trouble going over 0.25 since mid-2008, and from the craze for commodities that has been behind this trend, I would be very worried about investing in Canada assuming this ratio can continue.

It's too bad this data isn't available for the seventies (the last big commodity surge).  I suspect it would show a similar run-up followed by a drop to the 0.1 level that you see in the 90s.  What and when will make it fall is impossible to predict, but some things that come to mind are a hiccup in China's debt-fueled growth, increasing interest rates causing construction slowdowns around the world, etc.

Why Best Buy Is a Better Purchase Than Amazon

An interesting contrarian analysis... I definitely think differently about ordering electronics online than I do about books... It's harder to return and shipping costs become much more relevant...

Why Best Buy Is a Better Purchase Than Amazon

http://www.gurufocus.com/news/146276/why-best-buy-is-a-better-purchase-than-amazon

Berkshire Hathaway Authorizes Repurchase Program

More evidence of cheap stocks available out there... Warren Buffett rarely buys back stock and only if he believes it is significantly under-valued...

Berkshire Hathaway Authorizes Repurchase Program

http://feedproxy.google.com/~r/ValueInvestingWorld/~3/pm9cllM-w1s/berkshire-hathaway-authorizes.html

Recent interview with Bruce Berkowitz of Fairholm Fund

He describes why he is so bullish on financials, and says Bank of America (BAC) is the one stock he would recommend based on normalized earning power of $4 a share (vs. recent prices of $7)!

http://www.wealthtrack.com/transcript_09-16-2011.php

Some analysis of CSC (Computer Sciences Corp)

An interesting stock...

http://www.gurufocus.com/news/146242/the-most-overlooked-technology-bargain-computer-sciences-csc

Which half of the S&P500 is best?

People have done studies in the past of selecting stocks based on fundamental metrics like PE, price-to-sales, etc.  From what I've read, those studies show that buying the cheaper stocks is a winning strategy over the long run.  If you divide up the S&P500 into two halves by various metrics, you can aggregate the companies' sales, earnings, etc to get a view into what a holding company that held each of these companies would look like.  Below are a selection of details on these virtual companies, made up by taking the bottom or top 250 companies by various metrics.

Some results are obvious (ie. taking the lowest price-to-sales gives you a lower price-to-sales).  You may also wonder "what about growth?" - it is true that growth is not reflected in these numbers (the expectations for it are reflected through higher prices of course).  At the level of 250 companies in the S&P500, however, it seems unwise to expect a lot of value-creating growth, but I accept this nonetheless as an important caveat to the numbers below.

Here are some observations I found interesting:

• The dividend yield is fairly similar unless you select for yield, in which case the high dividend half has a lower PE, but significantly higher ROE.  This highlights that maintaining a high ROE in companies that re-invest all their money back into the business is often difficult.
• You can buy 65% of the earnings of the S&P500 for only 52% of the market cap (first two columns) - I was surprised to see this half has the same margins, and even slightly higher ROE.  The main downside seems to be a noticeably higher liability-to-assets ratio.

Update on Sector SPDR Weightings

In my last post on the relative values of the 9 sector SPDR ETFs, I showed a graph of the values across time (link).

Since then, the market has fallen a 17% or so from the monthly peak, so I thought I'd look at some peaks and troughs over the past 10 years from this point of view.  The table below shows the relative weightings for today, followed by the recent peak in May, the terrible low of March 2009, the peak before the credit crisis in October 2007, and the bottom after the dot-com bust in September 2002.  The colors show how that weighting compares to the previous one.

A few observations:

• XLE and XLB (energy and basic materials respectively) are falling for the first time in a long while - could this mean the end of the resource/commodity boom that we have been in for the past ~10 years?
• XLY and XLK (consumer discretionary and technology respectively) have been doing quite well, including in the recent pullback - there are lots of cheap stocks in those sectors, so this makes sense to me.  If we're headed into recession, shouldn't consumer stocks be falling by more?
• XLF (financials) is as low as it was in March 2009... it doesn't seem like the same kind of environment from a risk of financial collapse perspective, so does that mean there are bargains in the financial sector?

Date	SPY	SPY Change	XLB	XLE	XLF	XLI	XLK	XLP	XLU	XLV	XLY
22-Sep-11	112.86	-17.3%	10.7%	21.0%	4.1%	10.2%	8.4%	10.4%	11.7%	11.1%	12.4%
1-May-11	136.43	84.5%	11.9%	23.4%	4.8%	11.3%	7.8%	9.2%	9.6%	10.3%	11.8%
1-Mar-09	73.93	-51.7%	10.4%	22.2%	4.1%	9.2%	7.6%	11.0%	13.7%	12.4%	9.4%
1-Oct-07	153.08	105.5%	11.9%	21.0%	9.1%	11.1%	7.8%	7.7%	11.5%	9.8%	10.0%
3-Sep-02	74.49		9.8%	12.1%	11.3%	11.1%	6.9%	11.0%	9.7%	14.6%	13.4%

Chinese Real Estate Bubble, and US Bottom?

A nice article from GMO about real estate bubbles, and how many indicators are implying possible trouble in China (India and to a lesser extent Canada also seem to be showing this in my view).  The USA, on the other hand, seems to be close to bottoming out according to their analysis, which would line up with things that Warren Buffett has said in the past few months.  The link below is to a summary, and the original article is linked there for people who are registered with GMO.

http://www.gurufocus.com/news/145558/gmo--observations-on-the-real-estate-cycle-in-china-and-the-united-states-fxi

Large Caps on Sale - any way you look at it

I was thinking about my last post on large caps, broken out by quintiles.  It was market-cap weighted since I summed all the companies together and I was wondering whether some of the largest ones like Apple etc were dominating the numbers.  To look at it another way, I tried doing it with each company equally weighted and got similar results shown below for those interested... I did this by assuming the same amount invested into each company.

The results are not very different - the largest cap companies continue to be cheapest and have the best margins and ROE.  The Market Cap column in this table represents the sum of $100 million invested in each of the 100 companies.

Large Caps on Sale? S&P500 By Market Cap Quintiles

Another interesting application of aggregating on the S&P500.  I broke the S&P500 into quintiles (5 groups of 100), sorted by Market Cap.  Quintile 1 was the biggest 100 companies by market cap, then the next 100, etc.  The table below shows how they look.  The interesting trend is that the bigger you get, there's a clear upward trend to higher margins and ROE (TTM), and yet also to a lower P/E ratio.  Some of this can be explained of course by the higher expected growth of the smaller companies, although the low margins and ROE make me wonder whether that growth adds to value or not.  Or perhaps this is another piece of evidence that large U.S. blue-chips are on sale?

Buffett's Berkshire Stock Holdings as an Independent Business

Benjamin Graham wrote a long time ago about the importance of seeing stocks as a share of a business, not as pieces of paper that are traded between investors.  Since Warren Buffett is one of Graham's most famous disciples, I thought it would be interesting to apply Portfolio Aggregation to the stocks that Buffett's company Berkshire Hathaway is invested in.

An easy way to get a list of stocks that Berkshire holds is from Buffett's annual shareholder letter.  I took this list, excluding a couple that I couldn't get information for (Munich Re & BYD), and added up Buffett's share of sales, earnings, etc into a separate holding company.  Here's what the holding company looks like with some comparisons to the S&P 500.  Some interesting things that jump out about Berkshire's holdings:

• They are cheaper - 11 P/E ratio vs 14 for the S&P 500 (TTM).
• They are more efficient with capital (no surprise there) - ROE is 4% higher.
• Most of the efficiency seems to come from leverage, since the ROA (backing out interest) looks similar.
• This may be because 34% of these holdings are in banks (WFC and USB) vs 16% for the S&P.
• They have very little capex (2% vs 6% of TTM sales).  This may have been somewhat different if the BNSF railway hadn't been bought out and moved into Berkshire as opposed to in these holdings.
• Their return on retained earnings is far higher (+13% vs -18% for the S&P).  This may be because the S&P earnings are so affected by bad banks & their associated write-offs, but is interesting nonetheless.

Dell Could Repurchase 25% Of Its Shares In The Next 12 Months And Barely Dent Its Cash Hoard

An interesting analysis on how cheap Dell is and how they are spending capital on share repurchases (as opposed to acquisitions that other companies in the space seem to be doing).  The exact math is debatable since if Dell buys back 25% of their shares, it is unlikely they'll be able to do all of that at today's prices.  But with Mr. Market in a pessimistic mood these days, who knows?

http://seekingalpha.com/article/293627-dell-could-repurchase-25-of-its-shares-in-the-next-12-months-and-barely-dent-its-cash-hoard

Defense stocks are at historic lows: analyst

Some good names to investigate if you believe like I do that the USA will continue needing higher military spending to keep it secure...

Defense stocks are at historic lows: analyst

http://us.rd.yahoo.com/finance/external/cbsm/rss/SIG=11kitjnkn/*http%3A//www.marketwatch.com/News/Story/Story.aspx?guid=F53B185E-6864-44DD-9FE7-A255D9AFBD93&siteid=yhoof2

Sent from Read It Later.

China's Biggest Bubble Warning Ever

I continue to believe there's a problem in China that isn't getting enough attention in the media...the specific pharma plant mentioned in this article is eerie if it's true...

China's Biggest Bubble Warning Ever

http://www.gurufocus.com/news/145419/chinas-biggest-bubble-warning-ever

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Prof Richard Sylla returns prediction

Richard Sylla is a professor at NYU.  He apparently predicted poor returns for the past decade and his current forecast shows good returns for the next decade (his approach seems basically like a "mean-reversion & overshooting" type argument).

Read more here, and the key picture is pasted below...