Vertex Value Fund – quick ‘n dirty

The back drop for US equities is perhaps the best we’ve ever seen. The 10-year bond trades at 50 times earnings with no growth. Stocks on the other hand are trading at 14 times earnings and company earnings are growing. Stocks are poised for a major multiple-expansion, but even without that the earnings yield is 7% and increasing with the risk free rate pegged at nil. In other words, the equity risk premium is sublime. Wages are rising finally as bargaining power has shifted to employee from employer; a reflection of the unemployment rate falling to under 6% from over 10%. Oil is the largest tax on the US economy. The price of oil dropping from $110 to $80 will be a huge driver of economic expansion – bigger than QE and will allow the Fed to exit the program gracefully. Rising oil is inflationary, falling oil is deflationary and thus, interest rates are likely to stay low for a while. With rising wages, falling oil and stable interest rates, consumers will have fuller pockets to buy that new house, car, technology etc. All the while corporate margins are expanding with reduced manufacturing and transport costs.

Sounds pretty good, “eh”?

Meanwhile, the S&P 500 and TSX have underrepresented the recent carnage in the market. Mega-cap stocks (blue-chip companies) have held-steady, masking the dramatic decline of between 25 and 50 percent for most stocks. It looks almost post credit-crisis out there for many stocks and industries, despite no lingering potential for a bank failure or systemic collapse.

So, here’s what we’ve been doing . . .

Selling long-held positions in the insurance companies Partner Re, Montpelier Re, Validus, and Platinum Re. These stocks remained near 52 highs during the sell-off. They are still very inexpensive (trading under book value) but there are other insanely inexpensive stocks out there to buy:

  • We’ve increased our weight in the offshore drillers, North Atlantic Drilling and Hercules Offshore. Analysts hate the sector – stocks are off 50 to 80 percent – the perfect place to plant a new position.
  • Purchased Adept Technology (a robotics firm headquartered in California) stock which is down 70% since March. The CEO, Rob Cain took over this sleepy company that has been around since the 80s and is turning it into a powerhouse in robotics. The firm manufactures both fixed and mobile robots for the manufacturing industry. Our funds now own about 6% of the company.
  • Conifex Timber (a forestry company) is about to become a power producer which should revalue the firm upward.
  • Added to Copper Mountain and Taseko Mines at these new levels – $1.80 and $1.60 respectively.
  • Finally, we added Blackbird Energy, our first investment in the energy sector, ever. Blackbird has quietly acquired a large land package (dirt cheap) in the liquid rich Montney formation. We were the lead financier for their drilling program which will commence shortly.

The following charts illustrate plainly our “plant, grow, harvest” investment strategy of building a position following extreme devaluation and patiently waiting for its return to reasonable levels, before harvesting the profit.

Fairfax Financial (position built around $100 and sold over $400)
FFH

Bristol-Meyers Squibb (position built around $25 and sold above $45)
BMY

Hercules Offshore (currently building position)
HERO

Copper Mountain (currently building position)
CUM

Investors’ have been selling their stocks to buy fear. All we can say is – thank you!

#untilnexttime