If not, it should move right to the top of your summer reading list. It is the accumulated reflections of Peter Cundill. A Canadian value investor, Cundill used the Graham Deep Value Approach to return a little more than 15 percent, on average annually, to investors for almost 30 years.
Cundill once described his approach as looking to buy dollars for $0.40, and he focused almost entirely on the balance sheet. He once commented that he did liquidation analysis and liquidation analysis only. He wanted to buy stocks in companies that traded below where he estimated they could be profitably liquidated.
1. Things To Do
Cundill looked all over the world for ideas, and felt that most of the time he could find enough bargain issues to get his funds invested in such bargain issues and provide above average returns. However, he was not afraid to hoard cash when he could not find enough true bargains to get fully invested.
Related: Hetty Green: The Grandmother Of Value Investing
Value investors today, however, find themselves facing a situation where it is very difficult to get fully invested, because of a lack of opportunities in the aftermath of a five-year rally in global equities. There are a few things to do, however, even in an overheated market.
The most obvious opportunity for those who favor a deep-value approach is the U.S. community banks. Many of these smaller banks face challenges that will push them toward the inevitable conclusion: they need to sell to a larger institution rather than go it alone. The avalanche of regulations is pressuring the bottom line as compliance costs spiral out of control and make it difficult to earn sufficient profits to justify independence.
2. A 'Perfect Storm' For Regional Banks
At the same time, the slow economy and fierce competition in the banking sector makes it hard for the regional banks to find sources of organic growth. They will have to look to mergers and acquisitions to provide earnings and asset growth. This combination of banks that need to sell and banks that need to buy appears to be creating a long-lasting "perfect storm" in the smaller regional and community banks.
3. Oil And Gas
The other obvious opportunity in the United States comes from the oil and gas sector. The debate about oil and gas, versus the new green technologies, will rage on for years. The simple truth is we need cheap sources of fossil fuel to run our economy and will for decades to come.
Natural gas from the unconventional oil and gas fields is going to be the key to the search for energy independence as well. As T. Boone Pickens pointed out in an interview with The Wall Street Journal, “You could knock OPEC out, 75 percent of it, with heavy-duty truck running on natural gas instead of diesel. You have so much leverage by having our own fuel in the U.S., it's incredible.”
Fracking and natural gas are here to stay, and right now many companies in the industry are selling way below book value despite owning valuable assets in the U.S. and Canada.
4. International Opportunities
Looking globally. there are some bargains in the European banking sector. The recent difficulties at Banco Espirito Santo and the upcoming European stress tests has many investors spooked and some of the banks in the region trading at large discounts to book value.
Greek banks in particular look appealing, as some of the smartest investors in the world including Wilbur Ross (Trades, Portfolio), Prem Watsa (Trades, Portfolio), John Paulson (Trades, Portfolio), Seth Klarman (Trades, Portfolio) and David Einhorn (Trades, Portfolio) have invested in recapitalizing these banks. Large banks in Germany, France and the United Kingdom also appear to be priced near the point of maximum pessimism as well.
5. Metals And Mining
If your company makes its money digging stuff out of the ground, chances are your stock is very cheap right now.
A slow, grinding global recovery has not allowed enough economic activity to work off excess supplies of materials like iron ore and coal, while silver and gold have fallen out of favor with many investors in 2014. From a deep-value perspective, it looks like even with soft business conditions and weak pricing many of these companies could be liquidated at satisfactory profits right now. When the economy does finally get out of low gear, many of them could skyrocket in value.
There is not a lot to do right now for asset-based value investors, but there a few opportunities to get money to work in safe and cheap bargain issues. Once you have established positions in those few situations that do exist, go back and read this article.
Once you've done that, it is time to sit back and wait for the markets to create new inventory -- and allow us to get more money to work in safe and cheap stocks.
The industry continues to present opportunities for value-investors who can weed through the daily noise of the market. Learn about Banking’s Top “Insider Secret”, known as the Great Bank Reduction.
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