September 7, 2009

Changes to portfolio

Reducing EEM stake by more than half. I have been holder of Emerging Market index for a while in an effort to diversify internationally. The call was to hold the index for the long term but as my style of investing changes, more focus on event driven investing, I find my emotions rule how I view this position. I get swayed by economic analysis from various sources. I do not have any insight or edge.

Also, I have bought in the EEM when all were selling in Sep of last year. Valuation then made sense. Now emerging market funds are loaded with capital as money flow into them like crazy. Valuation has increased from 10 x earning to 20 time earnings now. People have high expectation of emerging market due to growth potential. I think it is a likely scenario that economic dominance will shift to some emerging economies like China and India but the odds that the market gives me for returns are not favorable. So I am taking my profits here and I will set tight.

I am also selling out of FirstService(FSV). I am existing this position with a small loss of 7%. I have made this call based on valuation alone. the value of the sum of the parts were higher than the market cap of the company. However as I started to look at the business details, a step I should have done before buying, I started to change my mind and cheap valuation does not cut it alone. I sold because:
  • high compensation to CEO and management compared to peers and level of earnings growth.
  • rollup strategy that is empirically destroys value
  • ROIC is on par with the cost of capital
  • bulk of the growth is attributed to acquisitions. what will happen if they can't acquire anymore?

Another sell decision TSX index: too much concentration in Natural resources and financials. Actually between the two sectors it makes up to 75% of the index. And those two areas where I do not have a lot of insight. Another small loss of 4%.


Anonymous said...

I agree. I am actually building cash position for my portfolio. Got out of GOLD miners stocks last week. Sep/Oct tend to be cruel months. What are you staying long on? Any new purchases? I sold my Bank loan after I read and agreed with your assessment last month.


Sami said...

currently I am happy to have cash. everything has gone up so quickly that makes me uncomfortable. So I will sit tight. one thing that i am researching is commercial real estate as it is been beating down a lot. but I am not in a hurry.

I believe in reverting to mean so over the long run I think US equities provide good value. over the last decade they performed badly against bonds, gold and almost everything else. So it will only be natural for them to perform well in the future

Anonymous said...

Agreed. I started reseraching some REITs a few weeks ago. But, like you keeping my powder dry and ready. Already have a decent position in BAM. Are you looking at REITs or individual stocks or a mutual fund for your commercial real estate?

Sami said...

I am looking for reits and real estate operators companies rather than funds.

I like BAM and its management but it such a complex entity with all of its subsidiaries and off shoots. I have a good position in their preferreds that will convert to common some time in 2011.

Anonymous said...

Hi Sami,

What REITs and real estate operators companies are you looking at?

Sami said...

I still like Brookfield properties.Good management and good assets. with the recent financing and BAM backstopping them I think any liquidity issues with the name is very limited. Moreover they are working their leases and know how to manage their properties.