value and opportunity

The future of Utilities is very uncertain says a CEO of an US utility company

Great stock analysis about Melco, a HK listed company from Sahara blog

Expecting value looks at Albermarle

Indonesia is struggling too…

Must read: The traditional free summer issue of Grant’s oberver

Punchcard looks at Weight Watchers

I bet that many people could not point out on a map where Slovenia actually is located. Many people also don’t really know the difference to Slovakia.

So lets look at Wikipedia:

Slovenia is a small part of Ex-Yugoslavia. It has a population of around 2 mn and covers 20 thsd square kilometer. The history can be read extensively via Wikipedia. Most importantly, Slovenia was the first part of Yugoslavia which became independent. The next few years, Slovenia was seen as one of the big success stories in Europe, which resulted in Slovenia joining the EU and adopting the Euro already in 2007.

Last year however, Slovenia joined the European countries hit hard by the recession. The prior EUR fueled construction boom resulted in shaky loans, declining GDP, Rating agency downgrades, increase in interest rates etc. Starting last year, there was big fear that Slovenia was headed towards a “Greek style” restructuring.

Lately however, things look better. SLovenia has presented a restructuring plan which among others, includes the sale of a couple of state-owned companies. One should also note, that debt to GDP looks rather manageable:

On top of that, Slovenia’s economy is good at exports, but still, they are struggling in 2013. Nevertheless, Slovenia got 2 years “probation” in order to fix their problems, which they hopefully use.

The latest export vs. import data looks OK, nevertheless, 2013 will show a deficit of around -8% for the Government including bail out costs.

Slovenian stock market

From Bloomberg, one gets ~45 stocks from Slovenia with a market cap larger than 1 mn EUR, and 24 with a market cap bigger than 10 mn EUR. The major Slovenian stock market index only consist out of 7 stocks which are the following:

Ticker	Name	% Index Weight	EV/EBITDA T12M	P/B	P/E
SBITOP Index
KRKG SV Equity	Krka dd Novo mesto	29.7	6.311327	1.32	10.39
PETG SV Equity	Petrol DD Ljubljana	21.4	8.988676	0.98	8.35
TLSG SV Equity	Telekom Slovenije DD	19.7	4.734508	0.89	16.89
MELR SV Equity	Mercator Poslovni Sistem	13.5	N.A.	0.60	N.A.
ZVTG SV Equity	Zavarovalnica Triglav DD	11.8	N.A.	0.76	5.96
GRVG SV Equity	Gorenje dd	2.9	5.500231	0.18	15.94
KBMR SV Equity	Nova Kreditna Banka Maribor dd	0.9	N.A.	0.08	N.A.

Quick check of the companies:

Krka

I have written about Krka already, a generic drug company similar to EGIS. I think this is a very interesting company,. Minimal home country exposure, consistently profitable. Not “extremely cheap” but good value for money. I would buy this company directly (if I could).

Petrol Ljublijana

This is the national refinery plus gas stations owner. Also active in Croatia and Bosnia. High “mean reversion” potential in my model.

Telekom Slovenije

Local telephone company. P/E 15 looks expensive, but company pays 15% dividend and has a 20% FCF yield. Significant debt reduction

Mercator

Supermarkets, Shopping centers. High debt load, large loss in 2012. However major shareholders sold out to Croatian company Agrokor in June.

Zavarovalnica Triglav

Major Slovenian insurance company, interesting, as valuation is really low for an insurer. 10.5% dividend yield. I would buy this stock if I could.

Gorenje

Household appliances. Has made losses but very cheap (P/B 0.2).

Nova Kreditna

One of the 3 problem banks, the only listed one. Most likely insolvent without Government support

The problem:

There is almost no way to directly buy Slovenian stocks. Only Krka and Nova Kreditna have secondary listings in Poland, but even there it is difficult to trade them. I asked several retail brokers in Germany and only SBroker (where I don’t have an account) told me I could trade the 2 stocks in Poland.

The alternative:

Although I usually do not like certificates issued by banks, in this case this would be the only alternative. I found several of them:

1. RCB7J9 / AT0000A038L9 from Raiffeisen International
2. AA0DMM / NL0000762557 from RBS
3. HV2AXY / DE000HV2AXY3 from Unicredit

The RBS paper seems to have the lowest bid/ask spread. As far as I have seen, they are all without maturity and track the SBI.

The opportunity /upside

For me the Slovenian index is quite interesting due to the following points:

+ there is almost no banking exposure left in the index. the only remaining financial is a cheap insurance company which i would buy outright
+ the Government has to sell some of their stakes, including among others the Telephone company. I am pretty sure that for the time being they will do nothing to punish the TelCo in order to get a price as high as possible
+ the largest stock in the index is Krka with ~30% which I want to buy anyway
+ once the Euro recovery story gets played more seriously (Goldman is already starting to “promote” European stocks), markets like Slovenia will follow with a certain delay.
+ Slovenia did never piss off other countries like Cyprus which supported tax dodging or Hungary which runs on a political amok course. In my opinion, they will be “well” treated by the ECB, EU and IMF.

Nevertheless for the time being I will not invest but look a little bit more into the other large index constituents, especially the TelCo and Oil company.

During a short holiday break I read that book. It is written by Charlie Gasparino, a quite famous Wall Street reporter.

The book is about the recently uncovered insider trading activity including among others, the infamous Galleon founder Raj Rajaratnam and many people connected with Steve Cohen’s SAC capital.

Those insider cases have been the biggest since Ivan Boesky in the 80ties and many people went to jail. Some trades were “simple” insider tips, others were conducted much more clever via so-called “expert networks”.

The book itself is strong on details about the lw enforcement process. It reads rather like a crime investigation story than a finance book. The author also shows a little bit the history of insider trading which was not illegal until the great depression.

The author several times calls insider trading the “victimless crime”and one does get the impression that he doesn’t consider it such a serious crime. He also stresses that the strict enforcement in these cases might have something to do with both, the financial crisis and the Bernie Madoff crime and the desire to please the public with some high-profile arrests.

Although I agree that a lot of criminal transaction before or during the financial crisis have not been really prosecuted (John Corzine, Dick Fuld etc.), I do not think that insider trading is a victimless crime. Victims are clearly many retail investors esp. mutual fund investors. Although insider trading might nt explain everything, a part of the fact that so many mutual funds underperform might lie in the lack of insider trading compared to unregulated hedge funds.

As a summary I would say the book is not bad but not half as well written as for instance a Michael Lewis book. If you are really interested in how the SEC examines insider trading, you might buy it, otherwise save the money for the next Michael Lewis book.

Red has some very good comments on Dart Group.

Must read: Michael Pettis on China

Punchcardblog is writing a fictitious letter to Jeff Bezos about the newspaper business

Expecting value looks at pawn broker H&T Group

Wilbur Ross is looking at Spanish and European banks.

Interesting table: Cable TV vs internet

Interesting study: Defined benefit pension plans (DBO) seem to perform siginficantly better than defined contribution plans

David Einhorn’s Q2 letter. Interestingly he partcipated in the recap of some Greek banks.

Good Howard Marks Interview

Michael J. Mauboussin’s updated “meassuring the moat” paper (via CSinvesting)

A kind of “small cap manifesto” from Nate at Oddball

Did value investing work during the long Japanese depression ?

Another Caterpillar short thesis

Due to the nice weather, I cannot guarantee weekly links at the moment…..

The interesting case of EBIX, a US software company with potential fraud allegations

One of the early Chinese reverse merger frauds, China Medical Express is now sued by the SEC

And an interesting case of a beef/cow Ponzi scheme in Japan

Paul Krugman gets it wrong on Apple. Noone is forced to buy Iphones at high prices.

Why Bernanke is the wizard of Oz (Damodaran)

Chinese troubles

EDIT: Don’t miss this speech of value legend Michael Price

Must read: Jim Chanos interview on fraud

The Brooklyn Investor on Loew’s corporation

A fund managament company which I discovered by chance which has an interesting “off the beaten path” portfolio: Evermore Capital

Highly recommended: “A good day to live” blog. Mainly about downshifting but with occassional great comments about investing, how to take crisis more easily etc.

Alternative Assets are overhyped says Abnormal returns. I like especially this quote which sums up alternative assets nicely:

Think of it like this, he [Bernstein] says: “The first person to the buffet table gets the lobster. The people who come a little later get the hamburger. And the ones who come at the end get whatever happens to be stuck to the tablecloth.”

The weekend is always a good time to step away from the “micro level” i.e. single stocks to more general considerations.

More recently, if find myself more and more analysing French stockss, as they seem to be technically still quite cheap. In my portfolio, the weight of my French stocks Bouygues, Tonnelerie, Installux, April, Poujoulat is around 15% and growing.

On the other hand if you read especially “Anglo Saxon” media, it seems to be clear that France is in deep trouble.

Perma Bear Mish for instance a month ago saw problems everywhere and as always a quite immediate chance of collapse.

Before that, the (UK based) Economist titled France as the “time-bomb” of Europe with a quite funny cover in on of its November issues:

Germany, in contrast, is considered to be the growth engine of Europe despite a recent slow down.

Let’t go back a couple of years:

In the year 2000, Ireland was the Celtic Tiger as reflected in this famous speech of Mary Harney and a year before that, again the Economist branded germany as the “sick man of Europe”.

The economist article greatly summarizes the overall view on the German economy of that time:

But it is now coming under pressure as never before. As economic growth stalls yet again, the country is being branded the sick man (or even the Japan) of Europe.

The reason was clear: A socialist Government and suspicious company bosses:

The red-green coalition government led by Gerhard Schröder since last October has “encouraged the suspicions of a corporate sector predisposed to fear the worst,” says Alison Cottrell, chief international economist at PaineWebber in London. The dark picture painted by Hans Eichel, Mr Lafontaine’s replacement, to justify fiscal belt-tightening has further unsettled industrial bosses. And a lack of corporate confidence has been one of the main factors that has kept unemployment so high.

The 1999 article mentions all the “standard” prerequisites for a better future like lowering corporate taxes, increasing flexibility but finishes with a quite bleak outlook:

It is, perhaps, not surprising that market-friendly politicians, including one or two in the government, now complain of Germany being a blockierte Gesellschaft (blocked society). Unblocking it will take determination. Without that, Germany is unlikely soon to shed its title as the sick man of Europe.

So what happened in between, how did the sick man of Europe become the (temporary) growth engine ?

Let’s look at Corporate taxes for instance:

It is interesting to see that the biggest drop in corporate tax rates actually happened in the 1998-2005 period where Gerhard Schroeder led a Social Democratic/Green government.

In my personal opinion, a combination of several factors has at least contributed to the change in fortune of Germany at least so far:

– lower tax rates on corporation which stimulated investment in Germany
– Hartz IV which “motivated” people to go back to work quicker when they lost a job
– increased labour flexibility (“Kurzarbeit”, etc.
– a generally cooperative climate between trade unions and employers with modest salary increases and more one time awards
– privatisation of major Government companies such as Deutsche Post, Deutsche Telekom etc.

A second set of developments which in my opinion is not so prominent but were nevertheless equally important:

The end of the “Deutschland AG” which was the description for the fact that almost all German companies were owned locally and/or by each other. Management of German companies did not have a lot of pressure because each manager sat on the board of several other companies. In the center of The Deutschland AG were the big financial institutions such as Deutsch Bank, Muenchener Rück, Commerzbank and Allianz.

The end of the “Deutschland AG” was driven in my opinion by 3 major developments:

– the removal of taxes on investment gains for corporations in 2002
– the problems of the large German financial institutions after the 2002/2003 crash which forced them to sell their shareholdings
– finally the Euro. Before the Euro, German Insurers for instance had to invest 95% of their investments in Deutschmark. So basically if they had to invest in German shares because there was no alternative. After that, the 5% restriction changed to “non Euro”, so suddenly german insurers could diversify their portfolios into the Eurozone.

Although there will always be a special relationship between companies in one country, one can say that the old “Deutschland AG” does not exist any more. One of the big examples for instance was the take over of Hochtief, the German construction company by ACS from Spain. 15 years ago, something like this would never had happened. Deutsch Bank or someone else would have organized a defense.

In my opinion, the end of the Deutschland AG contributed a lot to the positive developement of big German companies like BASF etc. because it put a lot more pressure on management. Ironically as a result, many of the benefits of the German renaissance went to foreign shareholders.

Back to France:

From the German example we know now that a title story in the economist might not be the best indicator for the future of a country. In the cae of France is see a few similarities to Germany in the end of the 90ties:

– everyone is complaining about the socialist president
– the press is full about the “millionaire tax” and guys like Gerard Depardieu and Aranult leaving the country

Without being an expert in French politics, however from my outside view this looks like a brilliant political move from Hollande. He gives his leftwing voters something directly and spectacular to calm them down. I would assume that a guy like Bernard arnault is not paying that much taxes in France anyway, so it doesn’t really hurt seeing him leaving.

On the other hand, Hollande seems to now the German play book quite well and is on the way trying to improve labour flexibility in France. Interestingly, Sarkozy made a similar last minute attempt almost exactly a year ago.

But as history shows, at least in continental Europe, real labour reforms are mostly implemented by Socialist Governments, liberal or conservative ones. As always, the comment says that this is not enough:

Still, this is no Reagan (or even Schröder) Revolution. The unions will preserve counterproductive worker protections and welfare guarantees. The deal includes expanded privileges for union reps within companies and more reserved seats on company boards.

However, you have to start somewhere and together with his “U turn” in corporate taxation, this is a significant green shoot in my humble opinion.

Last but not least I see two other interesting factors at work which might point to a better future for France:

Demographics:

France’s demographic development is much much better than Germany’s as one can read for instance here.

From a demographic standpoint, France and Germany are thus in radically different situations. While France has maintained a satisfactory fertility rate, almost sufficient to ensure the long-term stability of the population, Germany’s low birth rate will lead to a substantial and rapid decline in the total population and to much more pronounced ageing than in France (Figures 3 and 4).

At some not so very distant point in the future, there will be more Frenchies than Germans:

So yes, France has definitely a problem with youth unemployment, but part of the problem is that they actually do have a lot of young people which Germany does not have any more.

Africa

I am not able to comment on Mali or any other political issue here. But if at some point in time Africa will catch up with the rest of the world, French companies will benefit most due to their historical relationship etc.

Summary:

It is clear that France at the moment does not look like the future growth machine of Europe but neither was germany end of the 90ties. However I see a good chance that France finally gets it act together and implements the required reforms. If that happens, France could experience a somehow similar trajectory like germany over the last 10-15 years.

From an investment point of view, this might be one of the most interesting “secular” opportunities going forward despite (or because of) the very negative headline news. From a micro level, I find a lot more well managed, unlevered companies in France than in all the PIIGS countires combined.

From a portfolio point of view, I will accept a quite significant weighting of French stocks if I find additional interesting french companies. I could imagine having up to 30-50% of french stocks in my portfolio going forward.

But make no mistake, this will be a long journey and superior investment returns on French stocks might require more then 1 or 2 years to materialise.

And finally to make this a little bit funnier, the Monty Python take on the epic battle between the English and the French: