We reviewed a few stocks this year. So far, our take has been mostly right. Our current scorecard is provided at the top
of each section.
YPF
(+33%) and Telecom Argentina (+16%)
Last April we noted that the nationalization of YPF
and the expropriation of its then controlling shareholder, the Spanish
multinational Repsol, was part of a long standing pattern of misbehaving by the
Kirchner governments.
Last month, with surprise developments affecting its
unrestructured sovereign debt (impounding of the frigate Libertad in Ghana, adverse New York court judgment), with massive
street demonstrations against the Kirchner government and the evident
difficulties that YPF had in closing joint-venture deals with the likes of
Chevron and others, we surmised that change may soon become inevitable and we started
to invest in Argentina, just a little.
We thought that YPF would be a good start, with Telecom Argentina as a
less speculative second choice. At the
time, their ADR prices were $10.46 and $9.82 respectively.
Today, they are $13.90 and $11.41. While Repsol’s legal pressure is continuing,
the Spanish government has made it known that it was in regular contact with
its Argentine homologue and that a resolution of the dispute was likely. After initial difficulties, YPF was able to
raise substantial sums by issuing bonds on the local market; ironically, the repressive
financial controls made YPF bonds the best deal in town. It also helped that the government could
force its Social Security system to buy half of the company’s debt offerings.
Negotiations seem to be continuing with Chevron and
now Bridas, and they are very difficult: how could it be otherwise given the Repsol
expropriation precedent and the unrealistic energy pricing system? In the end, I think that Argentina has no
choice but to pay Repsol for its stake in YPF and to adopt economically
sensible oil and gas prices. After all,
its shale deposits are among the richest in the world, it will control and
benefit their exploitation and it doesn’t want to be too dependent on Bolivia
and Brazil for its energy needs.
Even though it gears to become the energy national
champion (by taking control of Metrogas and with its expected bid for Petrobras
Argentina),YPF continues to be priced for disaster (see peer comparisons in our
September post). I do believe that the current strategy consisting in copying
the Brazilian energy model is wrong and terribly costly; but even then, if the
Repsol dispute is settled, as I expect it will, the YPF stock should rise very
appreciably.
Telecom Argentina is well managed, profitable and
carries a large net cash position. Price
controls and high inflation have squeezed its profit margin, but it too is
priced for disaster. Its stock may not
pop up as much as YPF’s, but it is offers lower risks.
The other big risk factor for US investors is the
continued listing of these companies’ ADRs in New York, as this provides
liquidity and attractive economics given the overvaluation of the Argentine
peso. One would think that, unable to
tap international bond markets, Argentina would be anxious to maintain access
to international equity markets.
JP
Morgan Chase (+19%)
In May, I commented on the London Whale travails of
JP Morgan which had pushed its stock price down to $36.96 on the day of my
post. I advised prudence, cautioned that
the loss on its derivatives could well exceed the initial estimate of $2
billion (it did) but took the view that buying below $36 would result in a
profitable trade. The stock price spent
two months below that level, bottoming at $30.70. Today it is $42.81.
The bank management was extensively reshuffled. Yet markets have responded without
enthusiasm. Although the stock price should
appreciate further next year, my view of the company has evolved. I have come to the conclusion, partly through
personal experience and partly through industry review, that the bank has grown
too big and diversified to provide superior customer products and services and
to be effectively controlled.
Warren Buffett once said that he wanted to invest in
businesses that even fools couldn’t sink, because sooner or later fools would
be in charge. JP Morgan’s top management
is very smart, even if it may suffer from some hubris; but I wouldn’t want to
own the stock if fools were at the helm.
Admittedly, this is a remote possibility in the case of JPM.
Standard
Chartered plc (-6%)
Last August, I wrote about Standard Chartered
plc. I expressed disbelief with their
decision to continue doing business with Iran through their US facilities
despite clear prohibition imposed by their host country. I questioned the bank’s decision-making and
the oversight exercised by its Board of Directors. I also felt that its market value failed to
reflect the inherent risks of its business model. I elected to pass and wait for another day to
invest. The stock price then was
1,418.5p; today it is 1,497p.
Since then, little has changed. Of its twenty-one Directors,
only two new have joined the Board following disclosure of the Iran saga. No top or senior manager has paid the price
for this fiasco. The bank settled the
outstanding charges with the US federal authorities for $327 million. However, its latest quarterly results were
satisfactory and, had I bought the stock back then, I would have made a 6% gain
to-date. I remain a skeptic but I admit
that I may have been wrong.
Apple
(+26%) and Research in Motion (+87%)
Last September, I argued that Apple was not a cheap
stock despite its modest p/e multiple, the reason being that such multiple
resulted from a very high gross margin. I
noted that reverting to 2006 gross margin levels would push the p/e above 23,
even after deducting Apple’s large cash balances from its market value. I also expressed some doubt that Apple could
maintain its growth rate and gross margins by targeting emerging markets
such as China. Interestingly, Apple’s
latest quarterly results showed a small drop in margins which the company put
on the concurrent launches of new products.
The stock price, which was $691 on the day of our initial writing, has
now fallen to $510.
Irrespective of its fundamentals, Apple, once buoyed
by client adoration and investor exuberance, seems to have lost some of its
magic: Steve Jobs passed away; it
stumbled with its handling of Google Maps and Youtube; it continues to rankle
with its refusal to support Adobe Flash; Apple TV remains an undefined
possibility. That said, relative to its
peers, it remains a unique company; it is just very difficult to keep beating
extraordinary expectations and to have to add $50 to $70 billion a year to
justify current market valuation.
On September 28th, I argued that Research
in Motion, the maker of the Blackberry, was a buy as it was priced for
extinction, which didn’t seem likely. Today, a consensus has emerged that its
new Blackberry 10 will come to market early next year. Carriers and large corporate clients are
testing it. Besides its reported merits,
the BB10I is benefitting from telephone carriers wanting to break the
Apple/Android duopoly. On the other
hand, RIMM is faced with patent litigation from Nokia and has a very steep hill
to climb in Europe and North America to regain market share.
How will RIMM look like in two years, will it have
succeeded in regaining critical mass, I don’t know. But it has a sporting chance thanks to a
meaningful client base (80 million), strong technology and good finances. Back on 9/28/12 the stock price was
$7.50. Today, even at $14.05, its stock price
continues to discount a somber future.
We should remind ourselves that extrapolating in a
straight line is always dangerous; that was true when I wrote about these stocks
back then and that is true now. Market
valuations are right most of the time, but when consensus reaches 90% or more,
it is usually worth our while to investigate.
