Deep value picks from Francis Chou

Chou posts double digit gains but still has a lot sitting in cash

  0 Premium content image

by

Online only.

  0 Premium content image
(Creative Commons/401(K) 2012)

(Creative Commons/401(K) 2012)

Long-time money manager and deep value investor Francis Chou recently released two letters to investors. The first was addressed to clients in the U.S. and the second was geared to Canadians. But they both cover similar ground and I’m going to focus on the Canadian offering today.

Chou is an interesting value investor for several reasons, but most people are attracted to his long-term track record. Chou Associates, his flagship fund, largely invests in U.S. stocks and has gained 10.2% annually over the last 15 calendar years. By comparison, the S&P 500 climbed 2.7% per year over the same period. (Both figures are in Canadian dollar terms.)

His Canadian-focused Chou RRSP fund climbed 10.0% annually over the last 15 years. It also handily beat the market because the S&P/TSX Total Return index advanced only 6.2% annually over the same period.

The gains include fund fees (MERs), which currently stand at 1.8% annually for both funds. But it is important to point out that Chou has provided fee rebates in the past when he thought his performance wasn’t up scratch, which is really quite extraordinary.

The big gains were achieved despite Chou’s propensity to keep a large part of his funds’ assets in cash. As of March 16, the Associates fund had 26% in cash and the RRSP fund had 22% in cash.

To some degree that reflects his stance on the markets, which is quite cautious these days. He says, in part, “In 1981, I felt the economic conditions were such that you were set up for a huge success. You just needed the courage to load up the truck and buy everything in sight. By contrast current conditions make me feel that investors are being set up for a heartbreaking disappointment, especially for the unwary.”

He also comments on the bond market and says, “In other words, noteholders or bondholders are willing to pay the government the privilege of holding its notes. And this is not an aberration. Countries like Germany, France, Sweden, Netherland, Belgium and Austria have seen their two-year sovereign debt trading at negative yields. Not to be outdone, a corporate bond of Nestle 3/4% maturing in October of 2016 is also trading at a negative yield. So, you have come to this ridiculous situation where you can borrow money for free.”

He might not be bullish on the markets overall, but that didn’t stop him from snapping up a few bargains in 2014.

In his Associates fund, he added Chicago Bridge & Iron (NYSE:CBI) at an average price of $44.00 per share. (It now trades at about $50 per share.) He also picked up General Motors class-B warrants at $16.21 a piece. (They now go for about $20 each.)

In his RRSP fund he added Dundee Corp (TSX:DC.A) at an average price of $11.79 per share. He also increased his position in Reitmans (TSX:RET.A), which now has an average cost of $5.80 per share. (You can get them at similar prices today.)

Be sure to read Chou’s letters before you head to the market.

Safer Canadian Dogs

Investors following the Dogs of the Dow strategy want to buy the 10 highest yielding stocks in the Dow Jones Industrial Average (DJIA), hold them for a year, and then move into the new list of top yielders.

The Dogs of the TSX works the same way but swaps the DJIA for the S&P/TSX 60, which contains 60 of the largest stocks in Canada.

My safer variant of the Dogs of the TSX tracks the 10 stocks in the index with the highest dividend yields provided they also pass a series of safety tests, such as having positive earnings. The idea is to weed out companies that might cut their dividends in the near term. Just be warned, it’s a task that’s easier said than done.

Here’s the updated Safer Dogs of the TSX, representing the top yielders as of March 30. The list is a good starting point for those who want to put some money to work this week.  Just keep in mind, the idea is to hold the stocks for at least a year after purchase–barring some calamity.


Name Price P/B P/E Earnings Yield Dividend Yield
BCE (BCE) $54.01 4.15 18.12 5.52% 4.81%
Potash Corp (POT) $41.13 3.34 20.34 4.92% 4.71%
CIBC (CM) $91.01 1.98 12.54 7.98% 4.66%
Rogers (RCI.B) $43.19 4.06 16.55 6.04% 4.45%
National Bank (NA) $45.88 1.74 10.5 9.52% 4.36%
Bank of Nova Scotia (BNS) $62.78 1.62 10.98 9.11% 4.33%
Bank of Montreal (BMO) $75.05 1.42 11.86 8.43% 4.26%
Shaw (SJR.B) $28.61 2.9 15.98 6.26% 4.14%
Royal Bank (RY) $75.19 2.11 11.95 8.37% 4.10%
TD Bank (TD) $53.43 1.69 12.78 7.82% 3.82%

Notes

Source: Bloomberg, March 30, 2015

Price: Closing price per share

P/B: Price to Book Value Ratio

P/E: Price to Earnings Ratio

Earnings Yield: Earnings divided by Price, expressed as a percentage

Dividend Yield: Expected-Annual-Dividend divided by Price, expressed as a percentage

As always, do your due diligence before buying any stock, including those featured here. Make sure its situation hasn’t changed in some important way, read the latest press releases and regulatory filings and take special care with stocks that trade infrequently.  Remember, stocks can be risky.  So, be careful out there. (Norm may own shares of some, or all, of the stocks mentioned here.)

New & Noteworthy

Mohnish Pabrai and Guy Spier in conversation

Money managers Mohnish Pabrai and Guy Spier talk about their books, value investing, and more.

Just For Fun

Talking Funny

A discussion of comedy and what goes into it by Jerry Seinfeld, Chris Rock, Ricky Gervais, and Louis CK.

Leave a comment

Your email address will not be published. Required fields are marked *