Food Stocks Sector Analysis And Investment Strategy

Do food stocks offer a margin of safety?

Before discussing food stocks as investing opportunities, let me just tell you why I am researching the sector at the moment (March 2019).

I like to invest in sectors that offer businesses with a margin of safety. This means that:

  • there is a tailwind because of what is going on in the world (more people);
  • businesses are already profitable and established (dividends and positive earnings);
  • what will happen is relatively predictable (you are going to eat tomorrow);
  • there are moats with high barriers to entry (logistics, scale, legacy etc.).

On the other hand, you have also very interesting sectors like Software as a service that are bound to grow, but I have no idea which provider will be a winner and whether it has a moat strong enough to insure long term profitability. If we look at the price to sales ratios of such tech stocks, we can see that there is a long way to go before those become profitable.

1 software as a service

Source: Justin Swierczek

The main difference between the two investing approaches is the approach to risk. With a margin of safety, you try to limit your downside but you also limit your upside on a specific stock. However, you are not necessarily limiting your total portfolio return. Buying stocks with price to sales above 10, implies a big potential for a total loss while buying food stocks limits the downside in many cases. Therefore, I am researching the food sector with the hope that I find something interesting to follow and maybe buy.

Food stocks – sector overview

I always like to go through long lists when researching a sector. Looking at each individual company gives me a good comprehension of what is going on in the sector.

2 list

Just from a quick look at some food stocks traded on the NYSE shown in the above list, I have concluded the following:

  • There is a lot consolidation where 6 out of 30 businesses in the above list have been taken over in the last few years. Consolidation means two things, a young market or an aging market. In this case, it is the latter where companies like Campbell Soup, Kraft Heinz, Tootsie Roll are finding it difficult grow. This forces them into expensive acquisitions that are usually a poor allocation of capital.
  • The second thing I found is that brand strength is declining and people look for new, different things. This leads to declining sales and many value traps. One example that I discussed before the actual stock decline, is Kraft Heinz.
  • It is not easy to find a business that is really getting traction within the new trends, as those change quickly.

Investing in the food sector

So, what are the tailwinds in the food sector?

  • The decreasing availability of land;
  • An anticipated increase in commodity prices over the long term due to finite resources and a growing, increasingly wealthy, global population;
  • The shift towards meat based diets, increasing the need for grain based feeds;
  • The creation of markets in farm-related carbon credits and water rights;
  • The increasing levels of investment by land-poor and food-deficient countries, attempting to protect food supplies;
  • The increasing value of farmland.

I don’t know why, but I am not fully convinced about the above tailwinds. I look at food prices, and see them mostly go down.

3 food prices

Source: FAO

The keys here are technology and investments. Each country subsidizes food production, which leads to heavy investments and overproduction. Further, improvements in technology, GMO etc. leads to more production that leads to lower prices, especially if there is nice global weather as we have had the last few years.

So, again value investing comes in handy here. You have to look for an investment where, you win big if food prices increase, but you still win if food prices stay low for the next 10 years.

Also, something tricky when it comes to food prices is ethanol and biodiesel. Politicians can simply say we will have to use other forms of energy, or oil prices can stay low, and a big part of demand for food would vanish.

On the other hand, there are many different trends in the food industry that we cannot put them all under one hat and call them food. There are organics, ingredients, flavours, spices, processed foods, private labels etc.

Bunge Stock Analysis

BG is a food trader and processor, grains, soy, corn with some other adjacent businesses.

Many are waiting for a stock market crash to buy things on the cheap. Well, you have one here.

4 bg stockprice

Source: BG Stock Price 5-year chart

The business is 200 years old and has been constantly rewarding investors. Over the last 10 years, 50% of the current market capitalization has been returned to investors.

4 bg

Source: Bunge IR

They business model is focused on increased volumes in food trade and processing.

5 global trade

Source: Bunge IR

We have seen volatile food prices  in the past, consequently BG’s cash flows have also been volatile.

6 bunge dividend

Source: BG’s cash flow statement – Morningstar

On top of everything, there have been rumors that Glencore or Archer Daniels will acquire BG. As these things take time, perhaps it will push the stock price up in the short term but I still have to research it in depth and compare to other opportunities like the already mentioned ADM, Wilmar and some others food businesses traded around the world.

Conclusion

To conclude on investing is food, it all boils down, like in most cases, to the specific business, the quality of the management, the moat, the cash flows, the growth, risk and of course, the price you pay. So, there is no point in discussing what will happen, will we eat more of this or that, the focus has to be on the businesses and I am going to analyse a few businesses for you, to give you an indication of what can be found and what are the dangers.

BG is a completely different investment now at $50, then it was at $90. So, let’s continue looking at businesses and focus less on things we cannot know and forecast.

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Zinc Stocks List and Sector Analysis

Summary

Zinc and copper are in a similar situation, low commodity prices over the last few years have put off investments, limiting future supply growth, while demand kept slowly growing. Consequently, a big supply gap is expected to open sometime over the next decade. However, a likely recession or global economic slowdown, as we are in the late part of the short term cycle, would severely hit commodity markets and zinc miners.

The best investment approach one can take in such a situation is to go through each potential investment, make earnings models, estimate the miner’s strength and survival potential in a bad environment and find good management.

Introduction

One of the sectors I understand pretty well is the zinc sector. Some of you may remember how I was pretty bullish on Nevsun Resources (NSUin the past, which is a zinc related investment.

I’ve been very bullish on zinc when the price was lowerm two to three years ago. It has all the same characteristics as other base metals; cyclic supply and demand that is relatively easy to forecast with huge and fast market sentiment changes due to the short term investors’ orientation.

If there is no immediate boom potential in a mining sector, it usually gets shunned, the first sales create a self-reinforcing cycle that negatively reflects on all related equities. However, that can only go up to a point. Having first a helicopter view on the sector and consequently a bottom up view on the investment opportunities helps in finding value at the bottom, if there will be any, and taking advantage of the next positive sentiment boom, which always comes. In this article, I’ll share my zinc knowledge, systematize it, hopefully find some stocks to follow and take advantage of the low prices when the right time comes. A big warning before we start: you have to expect huge volatility with zinc miners and therefore possible trading with a margin of safety.

Zinc as a metal

The major application for zinc is corrosion-resistant zinc plating of iron (hot-dip galvanizing). Other applications are in electrical batteries, small non-structural castings, and alloys such as brass.

Investing in zinc – supply, demand and price

Zinc has a strong correlation with the global economy, especially economic development in China. More growth equals to more building, more requirement for steel and consequently for zinc. Further, if there will be increased demand for zinc batteries, demand for zinc might pent up even more. At the end, for investing purposes, it all boils down to:

  • Mining costs
  • Reserve size
  • Demand and supply
  • Other risks (jurisdiction)
  • Financing and debt
  • Sentiment
  • Management integrity and quality
  • Margin of safety and value

One can find irrationality in the above, so let’s see whether there is irrationality in the zinc sector.

1 zinc price

Source: Infomine

Zinc prices tripled over the last two decades due to increased demand from China, like it has been the case for most commodities. Also, a high degree of volatility is common. Zinc reached a high of $1.6 last year while it reached a low of $0.61 a few years ago.2 zinc price

Source: Infomine

Past prices don’t mean that much, we have to see what are the minimum prices related to production costs, supply and demand. Current prices are still high, and relatively stable. However, prices of zinc mining stocks have plummeted.

3 zinc related miners

Source: Bloomberg

The bad performance is because markets always project what is ahead. Both Dalio and Klarman have been warning us about a slowdown in 2019/2020. A global economic slowdown will inevitably hit zinc prices and consequently stock prices. However, investing in zinc is about seeing what is beyond 2020 and then correctly timing it. A margin of safety in the form of long term value is something that always helps.

Let’s first see about the short- and long-term outlook.

Short term outlook for zinc

A good way to check the fundamentals of a base metal is to look at the inventories with the London Metal Exchange. There is more zinc around the world within the so called ‘hidden inventories’, but the LME gives a good indication of the general trend and situation. Hidden inventories usually move in sync with LME warehouse levels.

4 lme levels

Source: LME

It is very interesting how the cycle works; at the end of the previous cycle in 2007, inventories were very low, as those were in 2000. Low inventories, high prices, lead to heavy investments, that in combination with declining demand due to recessions, creates high levels of inventories that take a while to be consumed.

The above chart shows how we are again at the end of the zinc cycle.

The International Lead and Zinc Study Group (ILZSG) forecasts that zinc supply will grow 6.4% in 2019 while demand is expected to grow only 1%, but they still expect a deficit of 74,000 tons which is much less than the deficit of 322,000 tons in 2018. Mines ramping up in 2019 are Vedanta’s (VEDL) Gamsberg operation in South Africa, MMG’s Dugald River mine, New Century Resource’s Hellyer tailings project, with output to in rise in Cuba, Kazakhstan, Peru, South Africa, Turkey, and the United States.

ILZSG’s report tells me that if there is any kind of slowdown, supply might quickly exceed demand. This would lead to rising inventories and lower zinc prices.

1 zinc price

As it was the case from 1999 to 2003 and 2008 to 2015. This means miners might be looking at a few bad years, if not more, depending on global economic growth. The key is to buy value at the point of maximum pessimism.

In general, I would say there is a big investing opportunity once every decade; 2016, 2007, 1994, and there are a few small opportunities two times a decade, 2014, 2011, 2009, 1997, 1991. Such volatility, long periods of low prices and oversupply, high correlation to the economy and all that goes along with a risky sector like mining is, puts off many investors. A contrarian attitude is key and the easiest way to have such a behavior is to have a margin of safety, preferably in the form of cash and cash flows.

The long term outlook

The long-term outlook is not a linear one, but definitely a growth one. The zinc market will grow alongside economic growth and might have a boost thanks to batteries and increased galvanization, that usually increases as economies develop.

5 ,etal usage

Source: ILSZG

Also, things might be different for zinc when the next recession comes. Due to low prices, that put off investments, there might be a structural deficit ahead. This means that even with a recession, demand might outstrip supply because there simply aren’t enough projects out there. Same story as with copper, where a structural deficit is expected to emerge in the next decade.

6 zinc gap

Source: Teck

It also depends on what kind of a recession will we see next, one with India and China still growing or one with big issues there? For investing purposes, it is really important to time this well. For us investors, whether the supply gap open in 2020 or in 2023 makes a big difference.

Time to look at the details.

Cost curve, prices, expectations

When it comes to costs and prices, the marginal producer is usually the one that sets the price. As the price depends on the marginal producer, it results in high volatility if there is oversupply or high demand. However, 97% of miners are cash flow neutral or positive with zinc at $1 per pound. In 2016, with oversupply, prices quickly went to $0.6 where only 75% of producers have positive cash flows.

7 zinc curve

Source: TECK

When you add the sustaining costs, still 85% of the population is profitable at zinc $1, that again means many can sustain production at lower prices. So, if we hit a downturn, one can really expect zinc prices to go below $0.8, but not much lower as I don’t believe such an equilibrium could last for longer.

Therefore, my calculation for a margin of safety zinc price is $0.8 per pound. The key is to find stocks that offer value even with such a low price. If you find something like that, whatever happens with the market, you will be fine. Also, one should always keep the debt in mind, something usually not included in the reported mining costs.

Another thing to keep in mind is that there aren’t many pure zinc miners, so there is another possibility to take advantage of irrationality, but you have to also analyze all the other operations a miner has, which is a lot of work. For example, Teck’s investor presentation deck has 178 slides.

8 zinc miners

Source: TECK

Zinc miners list – which one is a buy?

Altius Minerals Corp [TSX:CN] (ATUSF),

AngloAmerican [LN: AAL], (AAUKF),

Arizona Mining [TSX:AZ] (WLDVF),

Canadian Zinc Metals [TSXV: CZX] (CZXMF),

Darnley Bay [TSXV: DBL],

Glencore [LN: GLEN] (GLNCY),

Heron Resources [TSX: HER] (HRLDF),

Ironbark Zinc [ASX: IBG] (IRBGY),

Independence Group [ASX: IGO],

Lundin Mining [TSX: LUN] (LUNMF),

Metalicity (ASX: MCT),

MMG limited (HK:1208),

Nevsun Resources [TSX: NSU] (NSU),

New Century Resources (ASX: NCZ),

OZ Minerals (ASX: OZL),

Solitario Exploration & Royalty Corp [TSX: SLR) (XPL),

South32 [ASX: S32] [LN: S32],

Trevali Mining (TSE: TV) (TREVF),

Tinka Resources (TKRFF),

Vedanta (VDNRF),

Zinc One (ZZZOF).

Which one is a buy? Well, give me some time to go through the complete list, make earnings models, estimate intrinsic values through cycles, look at all other potential risks and see about the investing risk and reward. Then, we will see what stocks to cover and possibly invest when there is an opportunity to invest with a margin of safety. I am willing to even wait 10 years to do that but you never know given the market’s volatility.

About the author: Sven Carlin is a full time investor and researcher at Sven Carlin Stock Market Research Platform.

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Altria Stock Analysis + BTI and PMI + Tobacco Industry

Contents

Altria stock analysis and fundamentals.

Reason for stock price decline.

Tobacco business overview

Discounted cash flows for MO

BTI stock – British American Tobacco

Philip Morris International

Are tobacco stocks a bargain?

Among the top 10 requested stocks to analyse over the last year were definitely Altria (NYSE: MO) and British American Tobacco (BTI). The reason is simple, we have declining stock prices and strong looking fundamentals. This article will explain what is going on and why is the market pricing these companies in a certain way by looking at MO, BTI and Phillip Morris International (PM).

altria stock analysis

Source: CNN Money – Altria Stock Price

2 bti stock price

Source: CNN Money – BTI Stock Price

Stock prices had done extremely well over the past decade, up till 2018.

Altria stock analysis and fundamentals

Let’s first discuss the fundamentals, which have been improving at first sight.

Altria’s fundamentals look excellent. Revenues are up over the last decade, albeit stable for the last 7 years (line 1), net income had been stable but exploded in the last 3 years (line 2), operating cash flows have been constantly positive and significantly increased in the last 12 months (line 3) while capex spending is minimal (line 4) which leaves plenty of room for high free cash flows (line 5).

3 mo fundamentals

Source: Morningstar MO Key Ratios

The just mentioned positive fundamentals translate into high shareholder rewards in the form of higher earnings, higher dividends and higher buybacks.

4 summary fundamentals

Source: Altria

However, we have to understand that the recent years earnings have been skewed by special items. Altria’s EPS in 2017 was $3.39 when adjusted for special items. The reported earnings per share were higher in 2017 due to tax items that increased earnings by $1.91 while earnings in 2016 were higher due to the gain on the AB InBev/SABMiller business combination.

5 earnings

Source: Altria

The actual earnings for the company have been $3.03 in 2016, $3.39 in 2017 and are expected to be between $3.95 and $4.03 in 2018. This means that the adjusted average PE ratio (using 3 years average earnings of $3.47) on the current stock price of $50 is around 14. The price to book value is 6, so one has to focus on the cash flows and book value is not really significant.

Reason for stock price decline

A company in a declining or stable sector is usually called a cash cow and cash cows are often looked at as you look at bonds, or even worse, annuities. If we look at MO’s revenue and dividends, it will give a better picture over what has been going on. Revenues haven’t been growing lately but dividends did grow over the past 10 years.

6 dividend

Source: Morningstar MO Key Ratios

The dividend is $2.86. On the price of $50 it gives a yield of 5.7%, a very good yield. The forward yield is at 6.5% as the dividend is expected to increase further. So, what investors expect from MO, is a stable dividend for as long as it lasts as smoking is slowly getting out of fashion.

Tobacco business overview

We cannot say the sector is in a positive trend, actually it is an industry that kills its customers.

7 smoking

Source: WHO

The trend is actually pretty clear when it comes to cigarettes consumption. Other threats are the FDA regulating nicotine in cigarettes, taxation, litigation, goodwill impairment, tobacco prices and who knows what ghosts can come out of the closet. I always urge investors in any company, to read its Risk section in the annual report. A quote from Altria’s 2017 annual report:

“Legal proceedings covering a wide range of matters are pending or threatened in various United States and foreign jurisdictions against Altria Group, Inc. and its subsidiaries, including PM USA and UST and its subsidiaries, as well as their respective indemnitees”

8 the trend

Source: World in data

What makes this comparable, but different than a bond is the value at maturity. You expect to get your principal in full from a bond, with MO, you don’t know whether you will get a principal or how big it will be. Therefore, it is all about the cash flows. The value of an asset is the discounted sum of its future cash flows.

Discounted dividends for MO

Let’s assume that dividends grow by 9% over the next 6 years, are flat for the following 4 years and then start declining by 10% per year. This are the cash flows an investor could expect over the next 20 years.

9 dividends

Source: Author’s estimation

The 2037 dividend will be $1.79 in the above case to which I can attach an expected yield of 10%, as the dividends are declining, that would give me a 2037 stock price of $17.9. What we have to do now is to discount the future cash flows to the present value and sum up those values. When we compare it to the stock price, we get the net present value.

At a 5% discount rate, which is extremely low for stocks, the present value of the stock is $50. At an 8% discount rate we are at $39 while at a 10% discount rate we are at $33. To invest in Altria and other tobacco stocks, you need only two things, estimate their future cash flows, discount them to a present value by using your required rate of return and then compare to them to the price. That is what you can do, but what the market does is usually a bit different.

The key when discounting future cash flows is what discount rate to use. The usually used rate is one that puts a premium on the risk-free rate, which is usually US Government Treasury rate. If I take the yield on the 10-year Treasury note over the last 5 years, it had been declining up to mid-2016 and since then it has been going up mostly.

10 10 year treasury

Source: FRED

If I put a 300-basis points premium on a required dividend yield from a company, the required dividend yield in 2016 would be 4.8%, while in 2019 it would be 6%. Usually, when yields are low, even the spreads between the yields are low. So, I could add 200 basis points on the 2016 yield and 300 on the 2019 yield. We have then an expected yield of 3.8% in 2016 and then, due to the increase in the risk-free rate, it suddenly jumps to 6%. This is extremely important to understand when looking at cash cow companies like Altria. It firstly impacts the present value of the future expected cash flows and secondly, it changes the expected dividend yield.

If I keep a constant dividend of $3 for MO, when the market expects a 3.8% dividend yield, the price of the stock will be $78.94. If the markets require a 6% dividend, the price of the stock will be $50. Such things are never linear, but MO’s stock declined from $70 in 2016, went even above $75 in 2017, to the current $50. In line with the higher expected market returns due to higher interest rates.

11 3 year chart

Source: CNN Money – Altria Stock Price

This is what explains the pressure on the stock over the last 3 years on top of all the other issues.

The business

Then, apart from milking the cow, sometimes the management decides to do something exciting, something they maybe had to do earlier. They buy a competitor, or just part of it. MO announced paying $12.8 billion for a 35% stake in JUUL, the U.S. leader in e-vapor. The problem is that the deal is at 33 times sales, financed by a loan and focused on growth.

12 strategy

Source: Altria’s JUUL rationale

Investing in a growth business, increases the uncertainty for future revenue or profits, but increases the certainty on the $14.6 billion of debt.

13 financing

Source: Altria’s JUUL rationale

Apart from purchasing a stake, a stake, not the whole companies, MO also bought a 45% stake in Cronos, a cannabis company for $1.8 billion.

Suddenly, on top of the yield contraction, the company is turning into growth in a desperate move to counter the negative trend in its sector.

BTI stock – British American Tobacco

Similarly to MO, BTI declined too over the last 3 years.

14 BTI

Source: CNN Money – BTI Stock Price

However, the decline is much bigger due to the risk of a menthol ban in the US that gives 25% of profits to BTI.

On top of that, BTI, has a big debt issue as it quadrupled its debt in the last 10 years.

16 BAT balance sheet

Source: Morningstar

The debt is why BTI stock declined more that MO. Debt is a certainty, and when you acquire other companies by using debt, you are always buying at a premium in an uncertain world. And such an acquisition is the perfect example of what I’ve been discussing. They bought Reynolds at peak tobacco where the debt will remain at peak and interest rates have been going up while industry headwinds are getting stronger. This is a perfect example of short-term management thinking taking into account current interest rates, current premiums and current earnings not caring that those all change. Usually debt costs go up and earnings go down.

However, this is also in line with the prevailing strategy for tobacco companies over the past decades that focused on acquiring other smaller players. Such a pyramid strategy works well until it doesn’t.

1 comparison

Source: Bloomberg

Actually, over the past 5 years, BTI has been the worst performer.

Philip Morris International

PM stock is also under pressure and close to 7 year low.

The fundamentals look good and the dividend is also high.

17 pmi

Source: Morningstar PM stock

The interesting thing here is that cigarette volume sales are actually declining between 1 and 2% per year. The question is, like with the other stocks, what will happen which leads us to the investment strategy and whether tobacco stocks are a bargain?

Are tobacco stocks a bargain?

Well, that depends on you, what return do you want and who are you competing against?

When analysts are positive, pension funds check their target, they have to be invested and diversified and they buy as they have the money and must buy things. Further, it also depends on interest rates. When those are low, tobacco stocks look very attractive as any kind of yield is amazing. When yields are higher, then a declining industry is not so attractive and be careful not to jump into the growth trap.

If you are invested or interested in investing, you have to approach this from a scenario perspective. Nobody knows how will the environment look like in 10 years, if earnings are above expectations, interest rates etc, stocks will do good, if earnings go below expectations, dividends are cut, stocks will suffer. And here is the problem, you cannot know what will be the tax rate in 2024, you cannot know whether there will be a menthol ban or not, you cannot know what will other countries do and you cannot know what will the cannabis or vapor industry look like in 10 years.

So, now that I have welcomed you to the world of investing, one has to look at all these “cannot knows” and see about an investing strategy. My key message is to look at the future and then invest, I know the dividend is attractive, but think what happens and how you would feel if the dividend goes from 6% to 8%, then to 10% and consequently to 12% due to the stock price declining? What would you do and how would you feel? Let’s compare this in an example.

18 comparative table

Source: Author

If I sum up the present values of a stock with a $3 dividend, like the one we used with MO at a 10% discount rate and a PE ratio of 10 after 20 years to a stock that pays only $1 in dividends now, but growths that dividend at 10% over the next 20 years, the present value is similar.

So, the question is what you want and whether you can predict dividends in the future? Try to do such comparisons for as many stocks as you can, compare tobacco stocks to others, and if tobacco stocks come out on top of the hundreds you compared in a good, bad and neutral scenario, then you invest.

On a price of $50 – a dividend of $1 is 2%, a dividend of $3 is 6%. But the present values aren’t much different if one is my MO case and the other growth its dividend by 10% over the next 20 years.

My opinion

Now, if I take risk, in this case in the form of FDA, regulation, negative trend, interest rates etc. I want to be paid for it. That’s it. I personally think that across the globe, you can get equal of higher yields in growing industries, with much less regulatory risk and much less pressure and much less baggage.

For full disclosure, I did invest in tobacco when I was a kid, I think 2009 and 2005 or something like that. But, I was just buying a 3.5% yield, no debt and net cash. I would buy 20% under cash per share and sell 20% above cash per share. The company was Tobacco Industry Rovinj from Croatia. I called that compensation for passive smoking as a kid. Later the company got acquired by BTI.

So, my personal message is to simply compare what are the risks you are taking in comparison to the dividends you are getting. For example, a completely different story, but perhaps a bit more positive trend over the next decades can be found with Daimler.

19 interest rates daimler

Source: Morningstar – Daimler

The dividend yield is even higher, and in 20 years people are more likely to drive cars than smoke. So, it is as always, up to you to see how what fits your portfolio. What will happen to the stocks mentioned short term? Let’s leave that to speculators and media, we focus on investing here.

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Micron stock analysis

  • To invest in Micron, one has to understand the industry’s cycle.
  • A PE ratio of 2.5, doesn’t mean much as it shows the past, not the future.
  • It is better to look at book value, the actual value of the owned PP&E, ROIC, industry cycles, Micron’s moat and the competition.

The fact that Micron Technology (MU) is one of the most followed and owned stocks is intriguing by itself. To invest in MU one should understand the semiconductor industry properly to take advantage of its inherent cycles. A look at MU’s stock chart shows how investors clearly don’t understand the memory industry cycle as periods of market exuberance are quickly replaced by sheer depression.

micron stock priceSource: SeekingAlpha MU

I sit down with an industry insider, Yaokai Yiang and discuss his investment thesis, investment activity and general view on MU. Enjoy the video.

Video content:

0:00 Micron stock analysis introduction

2:06 Micron short thesis

4:20 Memory industry overview

5:00 Earnings prediction for MU

6:24 Short thesis

7:15 Book value and business value

8:00 Micron stock and its fair value

9:00 Competition and moat for Micron

9:50 Can Micron go bust?

11:00 Next memory industry cycle

13:30 Dividends

14:00 The only moat in the industry is time

15:15 Investment strategy & risk and reward

20:18 Recession risk and impact on MU

22:15 Conclusion

Investing In Uranium – Bullish And Bearish Thesis On 5 Uranium Stocks

  • The bullish thesis for uranium is strong; growing demand coming from Japanese restarts and developing Asia, alongside production cuts.
  • However, uranium prices are low, so there must be a bearish thesis out there too.
  • I put Cameco, Kazatomprom, Uranium Participation Corp, Azarga and NexGen Energy into a risk and reward investing perspective.

Uranium prices have been subdued for more than a decade now. However, there are many uranium bulls calling for the perfect storm in the sector due to production cuts and expected demand growth.

I did a bit of preliminary research into the sector to see what is really going on and found lots of contradictory info. This led me to make 3 videos on uranium. The first describing the uranium bullish thesis. The second countering the bullish thesis with a bearish thesis and consequently, in the third video, analyzing 5 stocks from the sector to get a perspective what is the actual risk and reward when it comes to investing in Uranium.

Investing usually boils down to buying investments with positive asymmetric risk and reward. So, it is important to pair the potential risks and rewards to an actual stock price.

The bullish thesis video content:

0:47 Uranium price

2:18 Production cuts and demand growth

3:18 US procurement quota of 25%

3:35 Uranium growth story

The bearish thesis video content:

0:30 Conservative energy growth estimates

1:44 Ageing reactors

3:39 NexGen’s project and production cuts

5:26 At the mercy of the Kazakhstani Government

5:47 Cost curve

Discussing 5 uranium stocks:

0:50 Cameco (CCJ)

3:15 Kazatomprom

4:51 NexGen Energy (NXE)

6:46 Azarga (AZZUF)

8:00 Uranium Participation Corp (URPTF)

9:08 Investment thesis

Stock Market News – The FED, Interest Rates and How to Invest

Good day fellow investors,

The news this week was all about the FED as the FED’s chairman made a speech and their meeting minutes came out on Wednesday. The market reacted extremely positively to the news and new rhetoric.

1 s&P 500

Up 1.55% on Monday, 2.3% on Wednesday.

Something very important it that we have to always do is to differentiate between the FED’s rhetoric and what they will actually do. As we have seen this week, what the FED says has a big impact on markets and changes the economic environment.

So, the FED must be very careful about what and when it says something. Let’s give a quick overview of what has been said and what has been done and then discuss and explain the implications of it.

The topics:

  • Powell’s dovish speech
  • FED’s meeting minutes
  • Economic data
  • Investment risk reward outlook

On October 3 2018, Powell said the following:

we’re a long way from neutral at this point, probably.

This week he said this:

interest rates are “just below” a range of estimates of the so-called neutral level

And this is very important for asset values and the economy! Let me explain:

Everything starts in the economy based on where interest rates are.

2 20 years interest rates

Source: FRED

Why is this so important for the economy and asset prices? Well, first about the economy. People have unfortunately already a lot of debt, be it student debt, mortgages, car loans or credit card loans. Now, if interest rates go up, debt becomes more expensive and consequently interest payments rise and there is less money available for spending.

For example, I have plotted the 30-year mortgage interest rate against the FED’s funds rate.

3 mortgage rate

Source: FRED

You can see how if follows the FED’s rate but what is important is that since the FED started increasing rates, the 30-years mortgage rate went from 3.5% to the current 5%. This means that the cost of a mortgage increased 42% which is huge.

The following chart shows how closely correlated those things are.

4 mortgage rate

Source: FRED

Now, why are Powell’s words so important. Because he now said the neutral rate will be closer to the current level of 2% than what was previously expected, closer to 4%. That 2% difference in the normal rate, makes the difference between a 5% mortgage and a 7% mortgage which is an enormous deal as people have more money to spend elsewhere and the economy doesn’t suffer.

Why did Powell change his rhetoric? Economic data

A look at the FED’s minutes show how they are watching what is going on and allowing for flexibility.

Concern on debt, leveraged loans.

11 debt

The last economic date has been showing weakness signals and therefore the FED changed their rhetoric not to lead the economy into a recession immediately as they usually did in the past. To say it again, when the FED increased rates, usually a recession followed.

The economic data came from various sources.

Home prices have slowed down in growth.

6 home growth

Source: WSJ

Why is this so important, because the economy is based on debt and asset prices going up, a decline in home prices would quickly lead to a 2009 situation.

But, perhaps the most significant information related to the economy is the following.

GM is cutting jobs in order to prepare for a slowdown in the cycle. You can do whatever you want but you can’t fight market cycles.

closing

Even the extremely bullish IMF downgraded its global outlook.

7 global downgrade

Source: Bloomberg

Also, something that summarizes an economy, are business equipment orders, not growing despite the tax cuts and stimulus.

8 equipment orders

Source: Bloomberg

How to invest in this environment?

Now, with everybody yelling that the FED will start the next recession, the FED is changing its policy to not be the one starting a new recession, what happen in the past will not be the next trigger, it is always something new.

Nevertheless, by lowering the normal rate, the FED is going along with the populist policies across the globe as you cannot be the only idiot tightening. So, things will be going along as they are going until they stop going and currencies go to hell. Be careful when owning bonds and business that cannot transfer price increases to customers and business that are alive just because of low interest rates.

For example, car manufacturers in Europe that can borrow at 0%:-)

I am investing in commodities, good businesses that will survive cycles and inflation.

On the economy

It is clear that it is so dependent on stimulus, both fiscal and monetary and that is how it is. One day, the FED and politicians will lose control because they are not allowing for a natural cyclical economy A recession is good as it eradicates the bad. However, bankruptcies are at historical lows.

9 us bankruptcies

Source: Trading Economics

Lower interest rates will make it easier to pay off debt, but we are just postponing the inevitable and making it harder down the road. One day, inflation will knock on our doors, be ready, be hedged and have a long-term mortgage again if the opportunity knocks with a 3.5% 30 year mortgage.

Keep reading, we will simply continue with what we do on this blog, looking for great businesses that are going to do well no matter what happens in the economy and we are going to look for value across the globe and buy when we find it but we will always keep in mind the risks out there.

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McKesson Stock (MCK) – A Value Investing Perspective

  • MCK has caught the eye of many value investors, even Seth Klarman.
  • I explain where it is that they see value and what is the margin of safety.
  • Investors could reach a 15% long term return from investing in MCK at current levels.

Introduction

McKesson (MCK) came out as a buy within a few value investing funds that I follow, with the largest being Seth Klarman’s Baupost Group. In this report I’ll summarize the risk and reward in an investment thesis and show the value investing perspective on this. Value investing focuses on the value of the underlying business and when the stock trades with a margin of safety to that, it is a buy. So, let’s see what has Seth Klarman been buying.

MCK overview

MCK is a company that distributes drugs, can there be a better business, especially if it is legal? It had $208 billion in revenues in 2018 and operating cash flows of $3.8 billion. It delivers 1/3 of all prescription medicine in North America.

1 mck overview

Source: MCK

We all know the population is aging and there is nothing that can be done in relation to that. Perhaps an interesting trend to invest in and MCK certainly gives us exposure to that. We have to see how big of a moat their business has and whether, and how much, it will be affected by the various Amazons etc. entering the field.

2 distributionSource: MCK

It is important that they can invest in growth but also reward shareholders, we will see later about the return on capital.

9 MCK dividend

Source: MCK

But before, let me compare the bull and bear thesis.

McKesson – Bull and bear thesis

Let’s start with the value investing bull thesis as a few value investing funds have opened a position in MCK.

The main investing thesis is that the stock has declined from a high of $240 to the current lows while the business fundamentals haven’t changed.

4 mck stock price

Source: CNN Money MCK

On the fundamental side, revenues have been growing steadily and doubled over the past 10 years (line 1). Gross margins and operating income have been relatively stable while the dividend has tripled (line 2). Alongside dividends, the company had extra cash to do buybacks as it lowered the number of outstanding shares by 27% over the last 10 years (line 3) but at the same time it doubled its book value (line 4). Operating cash flows have been increasing (line 5) while the business doesn’t really need much capital to grow as the capital spending is just 15% of the operating cash flow or less (line 6). All the above brings to lots of free cash flow that can be used to reward shareholders (line 7). From this point of view, MCK has all the characteristics of a great business.

5 mck fundamentals

Source: MCK Morningstar

When such a great business can be bought at a fair price, value investors jump in. The current market cap is $24.5 billion while the free cash flow over the last 12 months has been $2.7 billion for a price to free cash flow ratio of 9. Also, if I sum up MCK’s free cash flow over the last 9 years, it equals its current market capitalization.

4 mck free cash flow

Source: MCK

This means that if we assume MCK to have the same business results over the next 9 years as it has had over the past 9 years, investors would get their money back in 9 years and still, after 9 years, own the business.

I’ll use Netflix (NFLX) as an example of a company that has negative free cash flows and that is not able to reward shareholders. It is definitely an exciting stock, offering huge growth, but the business model is not amazing and it is not a cash producing business yet. Value investors prefer boring, cash printing businesses, and avoid exciting growth stocks.

6 nflx

Source: NFLX Morningstar

Another positive for MCK is its scale, owning 1/3 of the medicine prescription market in North America is a big deal. It has contracts with CVS Health mail order, Walmart, Albertsons etc. Further, 3 companies control 90% of the pharma distribution market. MCK, AmerisourceBergen (ABC) and Cardinal Health (CAH). It would be extremely costly for new entrants to build what these 3 companies have built, their distribution networks, warehouse efficiency etc.

MCK – Return on invested capital

When it comes to great businesses, return on invested capital is key. MCK has had a ROIC of around 12% over the past 10 years. If the company continues to do that, you can expect its value to compound at that rate. The funny thing is that by investing at the current FCF valuation, you are close to paying a fair price for this.

9 MCK dividend

Source: MCK

Total shareholder returns in 2018 have been $1.9 billion. On the current market cap, that is a yield of 7.7%. This is what you can expect in the future if the valuation remains where it is. But if the ROIC continues to be at 12% and the growth continues, that can only grow.

MCK stock – Fundamentals

MCK’s long term debt is just $8 billion on which is ok on $3 billion of operating cash flows per year.

7 mck long term debt

Source: MCK Morningstar

Despite the buybacks and dividends, the book value has doubled over the past ten years and is currently at $47.73. With $13.16 of free cash flow per share, the return on book value is a staggering 27%. Compound that over time and we can only imagine where will MCK lead shareholders if things continue as those are now. However, there must be something wrong with the company too, if not the stock price would be at $240 as it was a few years ago.

MCK – Bearish thesis

There have been some headwinds lately that have put pressure on the business and consequently on the stock. As Walgreens acquired half of Rite-Aid’s stores, MCK lost part of its revenue and there have been major pricing pressures in the industry that have affected MCK’s profit growth.

Amazon’s threat

Further, the complete drug industry is shifting and there is more pricing pressure from payers. It is inevitable that MCK will feel the pain of this industry trend but, as with any other business, there are always risks, if MCK manages to mitigate those risks by increasing efficiency and cost savings, it will continue to do well for shareholders.

Two other concerns are Amazon (AMZN) and the opioid epidemic issue. We know what has Amazon been doing to retailers over the past decade and when a player like that acquires a company like PillPack, it is a good time to be concerned.

8 amazon

Source: CNBC

The market significantly reacted to the above, but we have to keep in mind that PillPack had revenues of $100 million in 2017, which is not much compared to the $208 billion for MCK.

Now, let us assume the worst-case scenario, that AMZN becomes a big player in the industry. How long is it going to take it to become a significant player there? We have seen it acquire Whole Foods but did it immediately impact other grocery stores and their business results? Of course not.

Further, the population is aging, both in the US and in Europe where MCK acquired German drug wholesaler Celesio in 2013. So, let’s say AMZN takes 3% of the market year by year over the next 10 years. In will end up owning 30% of the market, however, we can expect the market to unfortunately grow at 5% per year.

7 mck growth

Source: MCK

So, MCK could end up growing at 2% per year even if AMZN becomes the dominant player in the industry. However, the market’s growth is an issue that is also putting pressure on MCK due to the opioid epidemic. Before discussing that, let’s say that MCK doesn’t grow at all over the next 10 years. This would mean that its free cash flows would be around $25 billion, what is the current market capitalization. Whatever value is left after 10 years, it would be a bonus to those who invest in MCK today. And that is why value investors have been buying MCK, the cash flows are the value while the future potential is the margin of safety. In case of further stock price declines, someone would probably snap it and bring it private.

The opioid epidemic

If you are an opioid distributor, your goal is to sell as much as you can. This can create a distorted picture of what is actually good for the patient or not. The Daily doses of opioids in the 20 most populous countries shows a staggering statistic. If the US or Germany would fall to the Japanese average, revenues for MCK would decline significantly.

9 opioids

Source: QZ

Just as a note:

  • Opioid pain relief in different countries
  • US gets 30 times more opioid pain relief medication than it needs
  • Mexico gets only 36% of what it needs
  • China gets about 16% of what it needs
  • India gets 4% of what it needs
  • Nigeria gets just 0.2% of what it needs

Source: The Lancet Commission on Global Access to Palliative Care and Pain Relief

I am personally fortunate that since my wife has taken care of my nutrition over the past 7 years I have not taken any kind of pill. So, if my wife gets famous, that is another risk for MCK.

Conclusion – what to expect from investing in MCK?

I really don’t like the big pharma and the way they go about promoting what they make. If the same amount of money would be spent to promoting eating broccoli, people would live much longer. However, I also have a responsibility to show the best risk reward investments out there to my investment community and consequently also invest in the best businesses out there.

When it comes to what to expect from investing in MCK, the first thing we have to keep in mind is the 7.7% investors yield in the form of buybacks and dividends. Further, the capital that gets reinvested will probably yield 12% and the market will grow probably at 3 to 5%. This means that MCK’s revenues will probably double in the next 10 years and profits too. This would bring the stock to double over the next 10 years in addition to giving you a yield of 7.7%. The return from the stock doubling would be 7% that in addition to the 7.7% shareholder yield gives you a return of 15% per year if it remains business as usual for MCK.

If the market calms down, the current concerns become mere overreactions, and the price to cash flow goes to 15, the market cap could quickly jump to $45 billion which implies an upside of 87%.

On the downside, there will probably be some fines, more negative sentiment etc. That might put significant pressure on the stock but not on the long-term business, something to keep in mind.

Am I going to invest?

I am going to look at it a bit deeper, listen to the conference calls, see about my negative feeling for the pharma sector in general and then also compare it to other potential investments.

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Investing in Sugar – Südzucker AG Stock Analysis

Investing in commodities is tricky and many call me crazy for doing that. However, I don’t invest by buying an ETF, I invest by carefully analyzing long term trends and take advantage of short term irrationalities. By short term I mean up to 3 years, by long term I mean a decade.

This article will explain:

  • How to approach investing in commodities by using sugar as an example (Sugar cycle analysis)
  • How to take advantage of cyclicality and what the market doesn’t yet see (will you still eat sugar tomorrow? I hope not, but you probably will)
  • Analyze a commodity stock Südzucker AG (SZU) (OTCKP: SUEZF) from a long term perspective

Contents

Investing in Sugar – Südzucker AG Stock Analysis  

Commodity investing strategy – take advantage of long term cycles           

Sugar price cycle        

Sugar production costs          

Sugar price forecasts  

Sugar investing strategy        

Südzucker AG (SZU) (OTCKP: SUEZF) Stock Analysis    

Investment thesis

Commodity investing strategy – take advantage of long term cycles

Let me show you first the core of this investing strategy. The below figure plots SZU’s stock price and the price of sugar over the past 20 years.

1 sugar price

Source: Macrotrends and author’s adjustments

The correlation is not perfect but if you would ask a 7-year-old kid, he would say it is. And such a long-term investing perspective is the starting point when investing in commodities. The key is than to look at all the possible margins of safety, who will go bankrupt in the sector, who is the lowest cost producer, and all the other cyclical factors affecting the sector. It is also important to have a clear strategy because nobody knows where the bottom is. On top of it all, some stocks might be considered sugar stocks, move in correlation to sugar prices, but have the minority of their revenue derived from sugar.

The point is that the market is cyclical and will always be cyclical. Those are natural forces that affect commodity markets and if you take a decade long approach to investing in commodities, you will achieve great returns by taking advantage of those long term market forces that eventually prevail. However, it is crucial that you do nothing for most of the time, something impossible to do for most investors. Let’s see what is going on with sugar.

Sugar price cycle

When production is higher than consumption with any commodity, things are not good for the respective commodity’s price.

2 sugar suficit

Source: Sudzucker

Sugar is in oversupply and will remain so for at least a year or maybe two. This leads to low sugar prices as farmers dump what they have and there is no way around it. However, low prices, perhaps some bad weather might lower future production and then we will probably see higher prices again, like it was the case in 2015/16.

3 sugar price 5 years

Source: Macrotrends

In the last 5 years, sugar prices have been extremely volatile. We are now at 50% of what the price was in 2016. This is explained by demand and supply. However, from a risk reward perspective you approximately know what is going to happen next. Low prices, lead farmers to plant something else and you get high prices next. Like it was the case in 2016.

A production decrease is expected but not enough to offset rising inventories.

4 production decrease

Source: Sudzucker

Of course, the above are just expectations where a drought might mix things up. However, the company SZU expects to see negative income from sugar operations next year.

5 outlook

Source: Sudzucker

As a long term investor, I price in the above and then already think beyond 2018/2019. What will be the case then? At some point in time, sugar producers will have to produce less to stay alive. SZU expects at least two difficult transition years so that is something to take into consideration because financial markets have a hard time thinking long term.

The easiest way to explain a cycle is to look at the cost. In the long term, the price of a commodity will fluctuate around the average cost that satisfies the demand. So, what are the average cost prices for sugar production around the world and is the long-term supply demand trend stable?

Demand for sugar is expected to grow steadily over the next decades, unfortunately for human health, but that is another topic.

6 sugar production

Source: Sudzucker

Sugar production costs

According to Nordzucker: “At the current price level, there is hardly a sugar company in Europe which can still produce at a break-even,” Which means European production costs are above $12 cents per pound for the most efficient producers. The beet union is going nuts and warns how all producers are selling below cost. They require protection from cheaper production in Mercosur (another thing my taxes will pay but that is another story).

The EU levied production quotas in order to become an exporter of sugar which increased production and now you have overproduction.

Brazilian costs are around 10 to 14 cents per pound depending on the producer and Thailand is also there.

Sugar price forecasts

JSG Commodities forecasts prices to hit a low of 8 cents per pound. The European Association of Sugar manufacturers is also not positive and demands government action.

Other sugar producers foresee sugar prices continuing to be under pressure in the short term, still reflecting strong production from other countries, such as India and Thailand, resulting in an expected overall crop surplus. The magnitude of this surplus will depend on the size and the mix of the huge crop, which should have more ethanol production and significant impact on productivity due to the drier weather.

Sugar production is volatile and that is something to keep in mind.

7 sugar production india

Source: Bloomberg

Another good monsoon and there will be more pain for sugar. Drought and you will see prices spike.

Costs in India vary around Rs. 36.50 per kilo of sugar that is 16.59 per pound or 23 cents per pound. Given the bumper crops the costs must be lower but without the subsidies, hardly competing with Brazil.

All indicates that we are below balance prices. I don’t think people will suddenly stop to eat sugar so demand will remain stable at least. This leads to the next step which is to look at whether there are investing opportunities and the development of a strategy.

Sugar investing strategy

So, we know that sugar is in a downturn which is not sustainable over the long term. However, we also know that the negative earnings are only about to hit companies as most expect two years for the skies to clear.

This means that only the fittest will survive, there will be losses next year which will make things look ugly from an investing perspective where few like to invest in companies with negative earnings. But we have to find those companies that will have high positive earnings over the next decade which could lead to high dividends and higher stock prices when sugar prices turn up in the next cycle. Let’s see if SZU has what it takes.

Südzucker AG (SZU) (OTCKP: SUEZF) Stock Analysis

SZU is a holding company with diversified production.

8 szu group

Source: Sudzucker

Sugar revenues are expected to decline more than 10% and the operating result turn from positive to negative. Special products and fruit will grow by more than 10% but it will not be enough to compensate for the decline in sugar revenues.

9 finances

Source: Morningstar

A two year slump and lower operating results by 75% will affect earnings and most importantly cash flows. If cash flows drop to 2015 levels, the dividend might still be sustained for one year as a EUR 0.5 dividend requires only 102 million in cash.

My concern is that in case of higher sugar prices, SZU’s net income doesn’t change much and will probably come to 500 million in operating income and 250 million in cash available for dividends which would be around 1.2 EUR per share. That would however be a 10% dividend yield that would propel the price to a yield of at least 5% in Europe. Think of a stock price above EUR 20 in such a case.

10 szu

This means that the stock will probably go to 20 and above in the next few years as the cycle turns. It was trading above EUR 25 just a year ago and above EUR 30 in 2013.

The company has a stable balance sheet where only 43% of the assets are financed by debt.

11 balance sheet

Source: Sudzucker

Debt issues shouldn’t really be a concern given the long-term maturity.

12 debt repayment

Source: Sudzucker

The market cap is much higher when the dividend is growing or higher which shows how short term oriented the market is.

12 long term group

The investments next year will be high which will probably increase debt. However, the investments are mostly into starch.

12 starch

They also have a pizza business with EUR 1 billion in revenue.

13 pizza

Could it be that the only reason this stock is this low is because it might go lower and the dividend might be cut?

Investment thesis

I know SZU is going to be at EUR 20 somewhere in the next 5 years, for sure in a decade. I need a 15% return which means the purchase price comes at EUR 10.98! Still one EUR to go down. However, it might go even lower which means you buy more at 9 and then at 7. Sell at 11 and sell the first position at 20 and collect dividend in the meantime. That would be a relative investment strategy but I am an absolute investor looking for business earnings, not just market returns. Never depend on markets for your returns, it doesn’t work well in the long term even if it did miracles in the last 35 years.

A look at earnings shows that the average earnings over the past decade were EUR 1.2 giving a current CAPE (cyclically adjusted price earnings ratio of 10). This implies a 10% long term return which is nice. Given that my required return is 15% per year, my entry point would be EUR 8. Given that few like European stocks at the moment, if sugar prices stay down for another year and we see pain and negative earnings in the sector with some dividend cuts, it is possible to see this at 8. Then it would be a great margin of safety investment no matter what happens. If DB goes bust and we see turmoil in Italy it might really happen.

14 long term

When and if it gets closer to 8, I’ll take another look, dig deeper into the European beet industry and look at SZU’s subsidiaries. Given the German ownership I don’t think private equity funds will want to mess with this one and split it in pieces.

To conclude, this is a really good company at currently a relatively low price. I am waiting for an absolutely low price with a margin of safety. As I look at hundreds of companies per year, I am happy with finding a few that trade at such absolute low prices with large margins of safety. Given the amount of research I do, I find a few of them per year which are my buys. Check my research platform for more information about what and how I do.

SZU goes on my watch list and I’ll wait for an opportunity that might come in the next decade, as I cover the company I’ll understand it better and take advantage of possible opportunities.

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CHILE ETF AND STOCK ADR LIST ANALYZED

Chile stock market overview

Chile is the most developed country in Latin America and the GDP growth has been nice and stable.

chile GDP

Source: Trading Economics

The debt to GDP is at extremely low levels.

chile debt to gdp

Source: Trading Economics

The population is expected to grow slowly but surely over the next 30 years. The currency has been extremely stable towards the dollar and traded in line with the dollar’s own strength.

usd clp currency

Source: FRED

MSCI Chile ETF

The ETF for Chile is not cheap at all given also the good economics.

chile etf ECH

Source: iShares Chile ETF

All of this makes me look at Chilean stocks from time to time. Chilean stocks that are traded on the NYSE. Here is the list:

Chilean stocks traded on the NYSE – Chile ADRs

Banco de Chile                                            BCH   NYSE Banks

Banco Santander Chile                              BSAC NYSE Banks

Compania Cervecerias Unidas                 CCU   NYSE Beverages

Embotelladora Andina – A Shares AKO    NYSE Beverages

Embotelladora Andina – B Shares AKO    NYSE Beverages

Endesa-Empresa Nacional de Electricidad         EOCC NYSE Electricity

Enersis                                                          ENIA   NYSE Electricity

Enersis Chile                                    ENIC  NYSE Electricity

Itau CorpBanca                                            ITCB   NYSE Banks

Latam Airlines Group                                  LFL     NYSE Travel & Leisure

Soc. Quimica y Minera de Chile – B Shares        SQM   NYSE Chemicals

Vina Concha y Toro                                     VCO   NYSE Beverages

Source: Top Foreign Stocks

I believe VCO, which is a nice company was recently delisted which shows another risk of investing in such stocks but if you invest in the business that is not such a worry, you get the value of the stock at the average 3 months price before the delisting announcement.

So, this is just an overview that I do on many markets, it has been compiled by David Mostl, my intern, and some things have been added by me.

Something very important to note is the tax on Chilean dividend distributions that varies on a personal level but can go up to 35% which is something to keep in mind.  Here is the video overview:

A detailed analysis of EOCC:

Conclusion

  • Banking sector: difficult to see through/understanding the companies. Dependent on an economy growth to see an increase in loans.
  • Beverage sector: solid business, relative stable, but do we get value for the price?
  • Utilities: interesting valuation, new projects are where new value can come from, potential as more electricity will be consumed
  • GPRK: interesting company, to get exposure to the oil price; strong cashflow
  • LTM: many risks, cyclical, dependent on a low oil price
  • SQM: lithium gets/is very important for todays life, also fertilizers. Enough value for the price?

I have also looked at some stock traded in Chile but high on the ETF ownership list. Unfortunately, all have a high PE ratio and not what you’d expect form an emerging market.

list chile stocks

Chile is interesting but we can find better opportunities, better risk reward opportunities around the world. Chile is stable and good, that comes always with a price.

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