Urbana Corp: Some discounts are just unwarranted

Over the last year, much has been written on the value blog circuit on Urbana Corporation (TSE:URB and TSE:URB.A). Instead of repeating what these dedicated value investors and bloggers have written, I will try to stand on their shoulders.

It is very obvious that Urbana sells at a discount to net asset value (NAV), which the company diligently publishes every single week-- extra points to Urbana for transparency. Using that data, I have charted the Price to NAV ratio over last two years.

Over this two year period, the median discount has been 68.3%.

As of this posting, the discount is hovering close to 50%. The reasons for this may be two-fold. (1) Financials are being sold off on the wide market. Since Urbana book is mostly financials, there is a mark-to-market pressure and then the additional pressure of this organization being a financial itself. This sounds absurd, but Mr Market is known for that. In a round about way, this can be justified by the Mr Market; "If the big US banks are selling at 50% to 70% discount to tangible book, what is the point of giving any premium to this tiny Canadian financial firm called Urbana." Furthermore, (2) According to 2010 annual report, some big institutional holder had to sell off to meet redemption requirements. This forced selling has kick started a vicious circle. It is clearly visible in the growing spread, while the NAV has been fairly flat over the same period.

The upside in Urbana at current prices is significant, but it is important to look at the downside before an intelligent investor is infatuated by the upside. After researching Urbana's history and regulatory filings, I have the following risks outlined.

• Urbana paid or pays too much for a security because their universe is limited to financials, especially in the emerging world and exchanges.
• There is disincentive to hold cash for long periods of time because of the management fee structure.
• Management is not fully aligned to the shareholders (they make more income, the bigger the portfolio)-- see blog article by Saj Karsan.
• Management doesn't prove to be an effective capital allocator in the long run.

In spite of these risks, the discount to book is unwarranted. It is especially unjustified because the management has a 10% share buyback in effect. This is a good capital allocation move and will make up for a portion of the risks outlined above.

Disclosure: no position, yet

EACOM Timber Corporation: First Look

Here are my notes from a cursory analysis I did of this business. It is traded on the Canadian venture exchange under the symbol ETR. All numbers below are in Canadian dollars.

• Current price .075/shr -- i.e. 7.5 cents
• NCAV: 0.111/shr
• Book: 0.31/shr
• Current discount to NCAV: 67%
• Had a fire at a plant, lost everything there, but insurance covered it, minus a deductible. Will see that impact in Q4 numbers
• Receivables cover 40% of current assets-- very high!
• Inventories cover 46% of current assets-- very high!
• Not much cash on hand for a rainy day
• Management has been relying on equity raising and credit facility
• Cash flow positive because of equity raising done in April, 2011
• 19% shareholder dilution was done
• I don't like the over reliance on sizzling overpriced Canadian housing manufacturing sector

This one truly is a cigar butt style investment. It is selling close to Graham's famous 66.6% of NCAV. But there may be hidden value here in terms land and timber ownership-- I need to investigate that some more.


Frankly, I am not impressed with the balance sheet and cash flow statements. But, if I can find hidden value on the balance sheet, the stated book value would be a gross understatement of the actual book value.


Does this look like an interesting opportunity to the readers of this blog?


Full Disclosure: None

Opportunities exist when perception overpowers fundamentals

The following is a perfect example from Buttonwood, where sophisticated investors (such as pension funds) make irrational decisions. This particular one relates to their fear of bad optics, i.e. how they will be perceived by stakeholders if they had to report losses due to well known, long running problem.

A hedge fund manager told me at lunch today that meetings with clients often started with the question "What's your fund's exposure to peripheral European sovereign debt?"  The right answer to that question is, apparently, zero. If this attitude is common, hedge fund managers will avoid the asset class as an easy way of keeping their clients sweet. Nor do the clients want the managers to short the asset class, lest the Europeans come up with a deal at the last minute.

These clients are not sinister, top-hatted capitalists but ordinary pension funds afraid of some embarrassing loss in their portfolio. Their fear imposes a constraint on the people who look after their money. A similar process has happened at money market funds. Which fund manager wants to risk telling the clients they have lost money because of an exposure to Greek or Italian debt, stories that are all over the headlines?

Fear is often more powerful than greed.

 As a long term investor, you can take advantage of this fear, and carefully select businesses to add to your portfolio. These days, plenty of opportunities exist in European equities, Japanese equities and American financials and housing sectors.

Disclosure: None

Canam Group: Significantly inconsistent market pricing

What's wrong with this picture?

When a company is selling at low price-to-earnings ratio, it is usually safe to assume that the market has sufficiently discounted the future. Specifically, the market likely foresees significant decline in the earnings and earnings power.

If the same company is also selling for half the book value, then it can be assumed that market foresees future events to harm the balance sheet, either through major losses and/or significant negative cash flow.

If the market is right about the valuing the company at low price-to-book ratio, then the debt holders of the organization can also be expected to suffer a loss. Consequently, the debt holders should be expected to demand a higher premium from the company, in the event of a default.

However, that is not entirely the case in Canam Group's (TSE:CAM) situation-- the first two arguments are true, but not the third.

Canam is currently selling for under 5 times average earnings. This business is also available in the market at more than 50% discount to book value. However, the debentures (traded on the Toronto Exchange under the symbol CAM.DB) are hardly below par, while the stock has dropped significantly during the same time.

This can only mean that Mr. Market is overreacting to the recent bad news (i.e. dividend suspension) on the equities front, but is relatively calm on the fixed income front. The debt holders must not be actually worried about the balance sheet, otherwise they would have sold off the debentures to discount the expected future. Hence, the low price-to-book valuation on the common stock is likely due to short term irrationality rather than anything else.

As a value investor with a longer term horizon than the market, this sort of inconsistency can be an opportunity for significant gains in the near future.

Disclosure: I am an owner of Canam Group at the time of this writing.

Tweedy Browne Interview on Morningstar

Morningstar interview with Will Browne and Tom Shrager, from Tweedy Browne.

Topics covered:

• Where they see value today
• What is their criteria for a good business
• Tweedy portfolio overview

http://www.tweedy.com/video/ (requires Quicktime)
NB: this video is from May 2011, but only got posted today

Full Disclosure: CSCO (which is also a major holding of Tweedy Browne)

Euro Debt Crisis: From denial to acceptance

I must admit that since my last post on this topic, the sentiment in Europe has rapidly changed from denial of the problem, to not just accepting it, but working towards a good solution.  The market seems to expect that.

I expect that the market is at least, half right.

I believe that the European leaders finally accept the situation for what it is, but I am not convinced that they will have a perfect solution that the market is already pricing in. Besides, if the bond market truly believed that the forthcoming euro solution would be worthwhile the Greek CDS rate would have moved down in anticipation. It certainly has not done so.

Greek CDS Rate (As of Oct 23, 2011)

This may represent short term trading opportunities, but that isn't for me.

If the market drops more from here, I intend to buy some more undervalued securities. If not, I certainly wouldn't mind seeing my portfolio rise.


Full Disclosure: None