Wednesday, February 11, 2009

Time for Commodities?

Commodities have been in a secular downturn for almost a year. It is a distant memory when oil touched 145$ and how people were predicting 200 and 250$ oil. Now oil is barely able to crack 50$. The same can be said for various other commodities. Copper has fallen from 4$ to 1.5$. Aluminium has fallen from 1.4$ to .65$. Zinc has fallen from 1.25$ to .5$. Suffice it is to say that Commodities have seen a massive correction - in many cases upwards of 60%. This has impacted commodities stock and many have fallen by similar if not larger amount.

I recently came across a stock which has some very interesting characteristics:
  • It has profitable operations and have been able to make money in Q4 and throughout this downturn.
  • Sum of parts along with cash is worth more than the market value of the company.
  • Sum of parts is quoted in the market so that an easy hedging strategy can be followed.
The name of the company is Sterlite Industries (SLT). This is part of the Vedanta group of companies which is based in London. So what ails the stock? Some of the issues I see are:
  • Lack of clarity around what is around the corner with Arasco transaction. In 2008 company agreed to pay more than 2.5Bn $ for the entity. Current negotiations are ongoing and that is making investors nervous.
  • Management interest may not be fully alligned with shareholders because one entity own the majority of the shares and the majority owner have similar interests through other entities.
Overall, I do believe it is a good time to look at the stock. If you have patience and are willing to hold out for a 3 year period this could be a multi bagger. The key is patience.


Saturday, February 7, 2009

Getting started - ACT(S)

You know how people say "Well begun is half done". I hope so. I have been thinking of starting a blog for a while now. Finally, today as I was about to go to sleep I decided "its now or never". So here I am blogging away....

I hope to achieve the following with this blog:
  • Pass across some of the interesting things I have come across.
  • Suggest interesting ideas that I am looking at.
  • Keep myself honest by having these in public and having others to comment.
  • Build overtime a group of like minded investors that can help each other out and critique.
Onto investing...

The recent market dislocation provide a lot of interesting opportunities. As always it is pretty easy to be torn both ways investing / fleeing depending on what view you take. However, if there are companies where the net working capital is more than the market value then it should go only one way - UP! With that in mind I have been looking at a company ACTS (Action Semiconductor) which is currently trading at less than 50% of the cash it has on its books. It is lik getting a dollar bill for 50 cents.

As Graham mentions, every investment needs to satisfy 2 criteria:
  • Degree of safety of principal
  • Satisfactory rate of return
Let us look at the above in some more detail:
  • Degree of safety of principal - Since the company is trading at only half the cash, I think this is well covered for now. It may go down another few percentage points but as people realize the bargain that is available, it has only one way to go - UP!
  • Satisfactory rate of return - This will depend on how the operating performance of the company is over the next few quarters/years. Company has been consistenly profitable (including Q4 2008) because of tight cost control and adapting to changing market conditions. Going into 2009, the projections for revenues are very weak. However, company is taking additional measures to reduce operating expenses to bring it in line with the future performance. Besides, there are some interesting new areas that company is entering into. Those areas have huge market opportunities. Even if a few of those materialize, the revenue streams from those could be enormous. This coupled with company products targetting lower expense segment means that as the world economy comes out of the funk that it is in demand for some of these products can shoot up quickly.
Thus on both counts I feel comfortable. There is no such thing as a sure thing but this is as good as it gets.

Let me know your comment.