From time to time, we intend to make postings to our Straight Talk Blog when we have something important to say. All three partners will be contributing authors. We'll alert you by e-mail when we make a new posting.
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Sep 15, 2014 4:28 PM Heathbridge Capital Management
For the second time this month, one of your portfolio investments has been the target of a take-over bid. Read on…
The new bid is for Nobel Biocare, a manufacturer of dental implants that we bought on the Zurich exchange for about 9 Swiss Francs less than two years ago. We were the 11th largest shareholder and the takeover offer has resulted in gains for our clients of approximately $15 million.
Today it was announced that a US dental supply company will pay 17.10 Swiss francs for Nobel, about a double from our cost in Canadian dollar terms. As we often do, we have sold 1/3 of our holdings while we assess the probability of a higher price emerging. Most likely, we will sell the remainder in the next few days. As with Tim Horton’s, we believe the share price would have been higher in the long term, but since the management of the company supports the bid, it is clear that the long term is no longer an option.
There seems to be a point in a fairly long cycle where take-overs become a feature in the investment universe of value investors. This happens at a point in an economic recovery when companies start to regain confidence, have cash to deploy, and are able to find acquisition targets that still represent rewarding valuations. The good news is that we are still likely in the mid-point of the economic and stock market recovery. At least, this was the case when this phenomenon happened in the past.
This means that we will have some cash to deploy. As it happens, we have been looking at a number of candidates. We will take our time in making our decision.
Sep 10, 2014 4:18 PM Heathbridge Capital Management
The more we looked at “King Horton”, the more we felt that it no longer met our criteria. Therefore, we sold the remainder of your Tim Hortons shares on Tuesday for a little more than $88 ½. The stock was good to us, but, if we’d had our druthers, we would have preferred to have owned it on the old basis, at a lower price now but at potentially a much higher price in two or three years.
If you have any questions on this, please don’t hesitate to call.
Sep 2, 2014 12:51 PM Heathbridge Capital Management
The proposed takeover of Tim Hortons by Burger King has created more excitement than any other single portfolio development that we can recall. We apologize for not blogging about this earlier but we are still actively assessing our next course of action.
We were Tim Hortons 37th largest shareholder. The Burger King proposal unlocked significant value for Tim Hortons shareholders, resulting in over $10 million of gains since June 30th for Heathbridge managed accounts. Those clients who were with us when we established our initial position at $30 per share enjoyed a triple after the announcement, not including returns from a generous dividend. All in all, close to a “double double”.
We felt it prudent to sell a third of our holdings into the strength of the market at $89.22 after terms were announced. This means our initial shareholders now carry their Tim Hortons “for free”.
Tim Hortons, with its powerful brand and renewed discipline, would likely have surpassed that share price in a few years’ time without the deal and we are sorry to be losing exposure to this icon with a great business model and prospects. However, the announcement accelerated the share price movement and put us into this fork in the road.
We have yet to determine whether the strength of the new merged company will be sufficient for us to own. Our options are: to replace Tim Hortons shares with shares of the new Canadian-headquartered company (King Hortons one wag named it), to take the cash component of the offer, to trim further or to sell completely. The transaction will require the approval of Tim Hortons shareholders and the federal government so we have some time to ponder our options. We are meeting today with the top-ranked analyst in the sector.
Apr 11, 2014 11:25 AM Heathbridge Capital Management
In response to recent media coverage concerning the possible internet vulnerability caused by the Heartbleed bug, our technology experts have advised us that Heathbridge Capital Management’s systems are not impacted.
The custodians of your account(s) have also advised us that their systems have not been affected.
TD and National Bank say they have multi-layered authentication safeguards in place to protect customers so customers can conduct their banking securely and without their data being at risk. Although they do not recommend any specific actions to be taken as a result of this new bug, they recommend that anyone accessing their systems change their passwords regularly.
RBC Investor & Treasury Services Information Technology Teams reviewed their systems security protocols and have advised us that RBC I&TS systems are not vulnerable.
We continue to monitor the situation.
If you have any questions or concerns, please contact us at 1-800-446-3819 or 416-360-3900.
Apr 11, 2014 11:20 AM Heathbridge Capital Management
From the song “Spinning Wheel” by 70s band Blood, Sweat and Tears.
For some time, we have been combing through candidates in the natural gas industry, looking for a supplement to the oil exposure which we have established in Suncor. We reached the conclusion that the Montney play in British Columbia offers a truly differentiated resource distinguished by its huge potential to grow over a very long period of time.
Within this differentiated play, there are companies that themselves are truly differentiated. One of these is Nuvista, a company that not only produces gas close to transportation hubs but that also has a high proportion of its production in condensates that are necessary to transport oil from the oil sands. The company has the potential to increase its reserves and production many fold over the next decade. As it learns about its resource, it is making its production more and more efficient and profitable.
Because natural gas plays are volatile, we bought less than half a position for all accounts, being prepared to buy more if the share price declines or if the company issues equity to develop its resource faster than its current cash flow allows.
For our “4” risk-ranked accounts, we also bought Painted Pony, a company in the North-East of BC whose production is more focused on natural gas. Its production is close to pipelines that take its molecules down into the western United States and to the Vancouver area. If LNG plants were constructed on BC’s west coast, its production would become extremely valuable to this industry. Its reserves have the potential to increase exponentially for the next 20 years. Because its gas is sold primarily in the spot market, its share price would decline (for a while) if natural gas prices collapsed, and so we bought a very small position, being very prepared to buy more. Many believe that the share price would look through any short term move in spot prices to the long term returns that can be generated by its prolific, long-lived properties. While it is slightly riskier than Nuvista, in our opinion, it is not nearly the gamble implied by the rock band Blood, Sweat and Tears.
Jan 21, 2014 11:11 AM Heathbridge Capital Management
Market and economic forecasts have a dismal record of success. At the beginning of 2013, economists worried about debt ceiling brinksmanship, a lacklustre US economic recovery, stubbornly high unemployment and recession in Europe, amongst other concerns. How did it all actually turn out? The best one-year market growth in the US since 1997 and the best in Japan since 1972! And, take heart. The year-end quiz provided in our Market Commentary outlines why strong performance in 2013 does not imply weak performance in 2014.
Results for the year for Heathbridge equity clients turned out to be the best since 1999. Our returns were generally in the first quartile compared to our peers but for the 5-year period we were in the top 5th percentile.
Apr 15, 2013 7:57 PM Heathbridge Capital Management
The price of Gold is falling. Copper is falling. Oil is falling. The sky is falling! What’s going on?
Commodities may be selling off because of weak economic news. Gold may be selling off because the Cyprus Central Bank will have to sell some of its gold reserves to meet its EU bank bailout commitments. On the other hand, they all may be selling off just because the commodity boom is over for this cycle.
So why didn’t we see this coming? The answer is we partially did. It has certainly been one of the likely probabilities after so long and strong a rally. On the other hand, with the Central Banks printing so much money, monetary debasement is also a high possibility and some gold in the portfolio seems prudent. Our gold strategy is deployed through Goldcorp, a company with one of the strongest financial positions and the best growth profile in the industry. Recognizing the risks, though, we hold just a small position.
Suncor has excellent cash flow and dividend growth prospects, even with a lower price of oil, and so we continue to hold a full position even though lower prices for the commodity and for the stock seem likely for the moment.
Hudbay Minerals is our third resource play. It has the best growth profile in the mining industry, which could hurt it if metals prices continue to collapse. Fortunately, we trimmed a small amount in February, and so it represents less than a full position now.
In total, our commitment to resources is only about ten percent compared with forty percent for the S&P/TSX Index. Better relative performance is small comfort, but in truth, our exposure isn’t huge. We continue to monitor the situation closely.
Mar 26, 2013 8:57 AM Heathbridge Capital Management
The returns from the Heathbridge Checkmark Equity Pooled Fund have been strong and its assets have hit the $50 million mark. Our fixed costs have proportionally diminished as a result. We are happy to share the benefits of scale with our clients and will reduce our management fee from 1.65% to 1.55% effective April 1st. This follows a similar reduction of 0.10% we made in January 2011.
For our clients who have sub accounts greater than $300,000, the fee remains low at 1.25% as it is for their larger segregated portfolios.
We have also reduced the fee in the Heathbridge Foreign Equity Pooled Fund (formerly the Heathbridge US Pooled Fund) by 0.10% from 0.50% to 0.40%, effective February 1st when the fund grew through $12 million. This fund is designed specifically for clients managing US estate tax exposure. The fee is designed to be inexpensive protection in this regard and we have been managing this account on a breakeven basis as a service to such clients.
Jan 26, 2012 3:41 PM Heathbridge Capital Management
This week marked the beginning of the Year of the Dragon in the Chinese calendar, the most auspicious and powerful of their twelve signs, one associated with high energy, respect and prosperity. So far in 2012, these attributes also apply to your portfolio.
As of yesterday, our average 3-ranked equity accounts (regular equity accounts) were up 6% since the beginning of the year and our 4-ranked equity accounts (our “businessman’s risk" accounts) were up 10%. This compares with around 5% for both the Canadian market (S&P/TSX) and the US market (S&P 500 in C$). We know it is early days and storm clouds remain in Europe but our companies continue to march ahead.
The strong start to the year has been fueled by the laggards of 2011 that we highlighted in our year end quiz, including Magna and Life Technologies, both up over 25%. The dramatic outperformance of the 4-ranked accounts was largely due to the 130% increase in the share price of Gennum after a takeover announcement Monday evening (January 23). Gennum was also a name in the Heathbridge Checkmark Equity Pooled Fund. We sold the shares to lock in the gain and eliminate any deal risk.
Perhaps the greatest service that an investment manager can offer to its clients is to persuade them to stay the course. Our last blogs were sent in August and September, urging calm and recommending that investment positions be held. Since those times, equity account values have increased by 10 to 15 percent.
It can never be said for certainty that the worst is over and we will undoubtedly have further ebbs and flows in the pricing environment for stocks. However, we like the investments you own and are confident that these securities will eventually provide you with good returns.
Feel free to call with any questions you may have.
Oct 5, 2011 11:31 AM Heathbridge Capital Management
Tumbling markets continue to create anxiety for our clients. However, there is much underlying strength and good news that the markets are not pricing in. For this reason, buying is the better course of action than selling. Indeed, the prospective benefits of selling have rarely been lower. We believe that there are good reasons for investors to discipline their emotions and stay the course.
After a week of good economic indicators in North America, the percentage chances of a recession/depression are actually diminishing. Yet markets continue to tumble, pricing in recession as if it were a certainty. The downward course in the market has been caused as much by buyer timidity as by rapacious selling. Momentum speculators take advantage of this trend and exacerbate it.
Your September statements will arrive shortly and their equity components will show a 3 to 5 percent decline for the month. The major indices, in comparison, have declined 8 to 9 percent. Many of the companies in your portfolio have reported favourable business trends and are in exemplary financial condition. They have the strength to weather the current storms and to increase their dividends.
It is important to bear in mind that it is impossible to predict when the markets will turn upwards again. Reversals can happen suddenly and missing them is costly. The most dangerous position right now, as we see it, is to be out of the market.
Sep 16, 2011 4:55 PM Heathbridge Capital Management
The month of August saw extraordinary trading activity in our accounts. Some eyebrows have been raised and we thought it would be worthwhile to review this activity in a blog even though it will be covered in our October quarterly report.
We find we are most active at extreme points of the market. Sudden price movements tend to vary in their strengths security by security and present opportunities for rebalancing. The August markets proved to be no exception.
The rebalancing incurred higher than normal settlement costs for the period. It is worthwhile to point out that we do not receive any benefit from trade commissions and it is in our best interests as well as yours to minimize the all-in cost of each transaction. Overall, the activity had no material impact on the value of your portfolio.
Our trades focused on trimming securities whose price more closely approximated what we determined to be their intrinsic value in order to add to securities where significant price-to-value gaps had emerged. Often we had to trim 2 or more securities to add to one.
We also replaced Kraft Foods with Comcast. Kraft Foods has proposed a split of its businesses that does not make compelling sense but which activist investor Carl Icahn feels will “unlock value”. We don’t like financial engineering to manipulate a stock price and took advantage of Kraft’s initial price rise to dispose of our position. We owned Comcast before and bought it again to replace Kraft in our US portfolio. Kraft was up and Comcast was down, so this was a good exchange.
In September, taxable accounts will see another double trade. We realized a tax loss in Encana. Not wanting to be out of the natural gas market at a very low point in the cycle, we bought Talisman to replace it for the period that Encana must remain out of the portfolio. When sufficient time has passed we will likely reverse the trade.
These matters will be examined in greater detail in our quarterly letter but we wanted to discuss them now while the topic is fresh in your mind.
As always we welcome your questions about your accounts.
Sep 12, 2011 9:40 AM Heathbridge Capital Management
At the risk of over-communicating, we are blogging again on the topic of the investment environment. We appreciate the concerns that market downdrafts and headline news are creating for you and want to err on the side of staying well in touch.
Your statement for the end of August will show a decline in value that was greater than that of the markets. This is unusual for us. For the most part, good companies that went up a lot for us in the past quickly gave up gains as sentiment reversed. Many names in your portfolio have actually gone up in the past three weeks – Viterra, Cogeco and Goldcorp, for examples – which is evidence that good diversification is one tool for managing volatility. In most instances (but not in this most recent instance), the gains in such securities will offset the declines in other securities.
There is no question that the markets are more volatile now than before. The cause of this is not so much that times are unusual as that huge volumes of money printed by central banks are being used both to buy the market and to short it, causing extreme up-and-down price movements.
What is the best way to manage volatility? The first is not to take it as a signal that you are going to lose money. Volatility makes investors nervous but it does not make them lose money if the stocks held are not sold at their weak points. Good companies are the safest bet in most times of tribulation, even if, as “equities”, they carry a connotation of risk. Volatile downsides are very often followed by volatile upsides.
It is important to remember that volatility causes the most dangerous of future outcomes to loom larger than they merit. The large, well funded companies we follow are doing well. Those that are reporting some softness are those that have corporate customers which are holding back on purchases in fear that policies of over-active governments will hurt their businesses. They are not seeing a collapse in end markets. While 9.7 percent of US workers are unemployed, 90 percent are still working. We think that there is a good chance of a strong market recovery in 2012 in a period of just moderate economic activity. We side with those economists who feel that the chances of a depression are small.
At some point the “bear” will simply get tired. The timing of this turn is hard to predict. History suggests that the safest course now is just to hold on.
Please call to clarify any part of this discussion or if you are just worried and would like to chat.
Sep 7, 2011 8:37 AM Heathbridge Capital Management
The stock market turmoil this quarter has created a great deal of anxiety. The
headline news has been far worse than the positive trends being experienced by
many companies. There has not been a better time to invest new money since
March 2009. If you have been thinking about adding funds to your account, this is
a great time to do so.
As we grow, we will be careful not to dilute our high standard of service for
our existing clients. To this end, we will raise our minimum account size for new
relationships to $750,000 starting in January 2012. We want to give you notice in case you had friends or relatives that you were thinking of introducing to our style of management.
We would welcome the opportunity to discuss the market, your account and the
implications of the new minimum at any time. Please don’t hesitate to call.
Aug 19, 2011 12:23 PM Heathbridge Capital Management
The markets continue to deliver surprises. Most surprising are the number of foolish, panic- inducing statements that world leaders are making, which are serving to exacerbate the situation.
Account values at this point are 10 to 15 percent lower than at last quarter end. While it is possible that the market could continue to drop further, we think the better course of action right now is to buy rather than sell.
Gold has gone “parabolic”, as have bond prices. The final point in a parabolic up-movement is hard to predict, but at this stage the end is often not far away.
The best of the banks are in a very different position than they were in 2008: now they are well positioned to weather a liquidity crunch. In addition, the economic and corporate data are simply not bad enough to warrant the current level of concern.
As the world, particularly Europe, gets back to business after the summer holidays, we expect to see substantial reversals of the equity mix in portfolios, moving from the current T-bills and gold towards stocks.
We know this situation is unnerving, but we believe the best thing to do right now is to wait it out.
Aug 4, 2011 7:00 PM Heathbridge Capital Management
The world is revelling in a full-fledged market panic. Ironically, the topic of greatest concern one week ago was the possibility of a US default. Our blog of last Friday argued that it would be wrong to sell on that account. But within days, that commentary became irrelevant as the world skipped right over that issue to dwell on a double-dip recession on account of European defaults.
Economists’ views of the likelihood of a double dip recession seem to rest on whether or not they believe that government spending is a source of economic activity or not. Equivalently, views that we will have a second recession depend on the notion that European economies will slow down as government expenditures are cut back to accommodate tight finances. Most corporations are seeing little derivative effect from cut backs in government expenditure, although certain sectors which are very dependent on subsidies, like renewable energy, are suffering drastically. In fact, the interest rates on corporate debt are falling precipitously as investors shun government debt to invest in the (supposedly) safer corporate sector.
This premium on corporate debt is at odds with the sell-off in corporate equities. The huge flow of funds created by monetary stimulus is a double-edged sword. The funds can be used to short as well as to invest. At the moment, shorting the panic is the easiest route.
It was our belief that economic activity was bound to slow as corporations trod carefully, given the news that was dominating the headlines. Slowdown in China also seems likely, but this would not in itself be a killer for the US economy. The caution taken by corporations has, in many instances, created great balance sheets. We believe that the economy will resume recovery as corporations start to invest in capital goods and inventory once again.
When things are going well, people will use any reason to buy. We are experiencing the opposite right now, with people anxious to sell. Volumes in the summer tend to be light and it doesn't take much selling to cause the market to drop.
Over the medium term, the pressures for governments to get themselves into balance is a positive influence just as the financial system was forced to get into balance after the 2008-2009 crisis.
We believe that this spasm is creating wonderful opportunities and continue to believe that selling now would be ill-advised.