Gotta Buy Vivendi (ADR VIVHY)

Vivendi's annual report reveals Seth Klarman's Baupost Group owns 25.5 million shares in the company.  Klarman is one of the great value investors of all time.  While his forays into media, satellite and drug companies I don't understand, his investment in Vivendi seems logical enough.  The stock is cheap on a price-earnings, price-sales and price-dividend basis.

According the the annual report, earnings per share were 2.11 euros last year; dividends for 2011 are 1 euro.  Since shares are currently 12.90 euro, that's a 6x PE and a 7.8% yield.  The bulk of its business is telecom, but Vivendi also owns Universal music and Canal Group (a French cable company).  It also owns a 60% stake in Activision Blizzard (publishers of the best-selling Call of Duty videogame franchise).

On initial glance perhaps not a glamorous growth portfolio but definitely a stable of solid cash-cows selling at a very reasonable price.  If Klarman is in, then so am I.

Premium or Discount on Close End Funds?

I recently read a write-up on Urbana (URB) on the excellent web site Value Investors Club.  Urbana is a 'closed-end' fund; basically a publicly traded corporation that owns shares of other companies. The article argued that the fact Urbana represents a value opportunity because its shares trade at a 40% discount to its net asset value (NAV).

I would argue differently.  Basic corporate finance says that a stock's value is equal to the discounted present value of its dividends.  Last year the fees and expenses of Urbana consumed all the interest and dividend income earned by its investments.  Plugging that fact into the dividend discount model (DDM), we should actually expect shares to trade at a 100% discount to NAV!  Sure, income should grow over time, but since the investment management fees are a % of the asset value, these will grow as well.

So the 40% discount might actually not be enough.  If all the fruit from the orchard or all the milk from the cow goes to the manager, how much is the orchard or cow actually worth?  In the words of John Burr Williams (who developed the DDM in the 1930s):

A cow for her milk
A hen for her eggs,
And a stock, by heck,
For her dividends.

An orchard for fruit,
Bees for their honey,
And stocks, besides,
For their dividends

I will admit that exceptional management could justify a closed-end fund's fees through selection of stocks that generate above average returns.  However I don't know that Urbana fits the bill; it basically invests in stock exchanges around the world.  If you believe these are great investments and that somehow Urbana's management will select better ones than you could (perhaps because it has access to private investments that you don't) then Urbana might represent value.

But blindly believing that because a closed-end fund trades at a discount to its NAV it represents value is a dangerous investment strategy.

Advent Wireless

Advent Wireless (AWI - Venture Exchange), a cell phone retailer with 5 stores in Vancouver and 19 in Toronto that sells Rogers/Fido wireless, internet, cable and home phone.  Last traded for $1.09, has $0.93 cents in cash and short term investments and no debt, though it does have about 12 cents in (undiscounted) lease commitments.

Trailing 12-month earnings are 14 cents per share.  Previous annual earnings:  2010 - 13 cents; 2009 - 8 cents; 2008 - 13 cents; 2007 - 13 cents; 2006 - 8 cents.

Over the past 22 quarters, AWI has earned $7.4 million while its cash/STI balance has increased $8.6 million, the only infusion of capital being $215,800 from the exercise of some options in 2008.

It's small and it's dependent on Rogers for its business, though the 2010 MDA says they secured a 5-year agreement in May 2009.  It also indicates that Rogers is consolidating its independent dealer distribution network, which presents "both risks and opportunities" for the company.

But by any measure it represents significant value.  I own shares and intend to buy more.

The Results of Graham-Inspired Investing Part 2

So those were the good ones.  The bad ones weren't all that bad:

CWH - Chartwell Technologies was bought out by Amaya Gaming in July 2011 for $ 0.875 per share plus 1/8th of share of Amaya.  Assuming the Amaya shares were kept, they last traded at $3.60, so that's another 45 cents, for a current valuation of $1.33, a 12% increase against 3% for the TSX.

AAH - Aastra Technologies took a beating in 2011, falling below $14/share, but has since recovered somewhat to $21.09.  That's an 8% decline against a 2% decline for the TSX.  If I factor in the dividends received though, the decline in Aastra shares is only 2%.  However, that's not quite a fair comparison to the index since the index does not include dividends.  Aastra's yield is higher than the index's, so the shortfall is somewhere between 0 and 6% -- probably around 4%

GDL - Goodfellow was sort of the mirror of Aastra, climbing through 2010/11 to a high of $12.50 before falling down to its current price of $8.36.  This represents a 15% decline for the stock since it was mentioned here vs. a 4% climb for the market.  Again, dividends offset this somewhat.  If those are factored in the loss is only 7%.  Still, a disappointment.

Overall, there were 4 winning stocks that beat the market, 2 by a very large margin, and 2 stocks that lagged, though not by a huge amount.  On average, each holding to today beat the market by 60% over an average period of 2.4 years.

Graham principles triumph again.

The Results of Graham-Inspired Investing

There have been 6 stocks written up on this site since it began.  Three have significantly outperformed the TSX:

DL - Danier Leather, written up in Oct 2008, the shares have climbed from 3.60 to a recent close of 11.26, a 213% increase.  During the same period, the TSX index climbed 29%.

MT - Miranda Technologies, written up in January 2010, has climbed from 5.00 to 12.99, a 160% rise.  The TSX is up 4% in the same interval

CWL - Caldwell Partners, has had its ups and downs since first mentioned here in Dec 2009 at a price of 52 cents, but last closed at 75 cents, a 44% increase during a period which saw the TSX climb only 5%

Re-invigorated

Family and professional demands have taken me away from this blog for a long time, but recently reading The Big Short by Michael Lewis has re-inspired me. In particular, the stories about Cornwall Capital and Dr. Michael Burry I found very motivational: Small-time investors who used in-depth analysis, logic, common sense and tenacity to achieve spectacular success.

Aastra Technologies

Aastra Technologies(TSX:AAH)is in the telecom equipment industry and closed today at $22.78 per share. With 14.03 million shares outstanding, the market capitalization is $320 million. Cash and short-term investments total $104 million, while debt is just $23 million. So...enterprise value is: 320 - 104 + 23 = $238 million.

Cashflow has been impressive. The past 5 years, operating cashflow has averaged $59 million, while capital expenditures have averaged only $14 million. So that's about $45 million in free cashflow annually. Not a bad return on $238 million dollar investment!

A lot of the free cash has been used to make acquisitions and revenues have grown from $500 million in 2005 to $833 million for 2009. However, management has been pretty good at returning some cash to the shareholders, buying back about 20% of the outstanding shares over the past few years and paying a dividend of 20 cents per share quarterly for a yield of 3.4%.

So cash generation and utilization have been good, especially relative to its current enterprise value.

On top of that the balance sheet looks fine. Net current assets after deducting ALL liabilities (Graham's net-net) are $9.78 per share.

This site is all about stocks that are cheap relative to cash and assets, and Aastra fits the bill.

Be sure to your own due diligence before making any investments. And of course, I own shares in Aastra.