Nelson Smith

Nelson Smith
Contributor since: 2012
This is massively good. Well done.
How's your Home Capital position doing, Krug?
A few months ago I crunched the numbers, and I think Pepsi should split up the company. I think that apart, Pepsi and Frito-Lay are worth about $122 per share.
I wrote a bunch of words about it here.
http://bit.ly/1AUDY4r
David -- Because on my side of the border, there are quality names that yield 5-6%. Considering how retail REITs are yield plays, I'd recommend investors maximize yield day 1, assuming it's sustainable.
Nice piece. Nothing wrong with RioCan, but I prefer Calloway because I'm nervous about the Canadian consumer. I figure if things get tight more people will end up going to Walmart, which anchors every Calloway development. I also think that the foot traffic Walmart attracts is a big plus when it comes to getting other retailers in a development.
But I do agree with Frank's point above. RioCan is doing some interesting things development wise. It's just not enough for me to like it over Calloway.
Nigel, what do you think about Home Capital Group? Focused on the GTA, actively moving away from insured loans, and lending to folks regular banks won't touch. I think it's toxic with a capital T.
I disagree with the recourse thing.
U.S. foreclosures after the crisis were highest in Florida and Nevada. Which are both recourse states. That didn't stop folks from those states from mailing back the keys.
I just googled, and it turns out more than half of U.S. states are recourse states. Sorry user, you've got this one wrong.
I don't follow U.S. REITs much, so I just typed out a comment about how there are a couple hundred REITs out there and chances are you could find one with a yield of 6-8%. And then I looked. They are few and far between, huh?
Y'all are nuts for taking under 5% for a retail REIT. I would never do it.
Here's what I don't understand about the "Coke can always just use its system to grow other brands" thing.
When it comes to water, Coke has a much smaller moat than it does with soda. Water is water. The Dasani brand is known to consumers, but it's not nearly as well known as Coke.
I worked at a grocery store from 2001-06. I did a lot of the ordering. When it came to ordering water, price was most important. You had to stock Coke or else people would revolt. Nobody cares enough about Dasani to revolt. We'd sell Dasani, but wouldn't push it unless the Coke rep gave us a good deal on the 24 packs. I can't imagine it changing since I left the industry.
There's value in Coke's distribution system. But as brands get further and further away from the Coca-Cola brand, they're worth less. Dasani, Vitamin Water, Minute Maid, etc. all have value, but they pale in comparison to the Coca-Cola brand. And yet, investors value the whole thing as though every brand conveys that same emotional response to customers.
I'd consider paying 23x earnings for a company that just sold Coca-Cola. But 23x earnings for a company that sells other beverages that are only marginally as strong? Nah. And yet *those* are the beverages that are supposed to take Coke into the next promised land?
That's okay. There's something like 8,000 publicly traded stocks in North America. I'm sure I can find enough to fill a portfolio without KO.
I think Tom brings up a lot of valid points with Coke. The fact is growth has slowed to practically nothing, management is paying themselves *really* well, and the stock is bid up thanks to retail investors' delusion that the next 50 years will somehow be as profitable as the last 50.
Like I've said before, $KO would have to fall 50% before I'd look at it. There's just too many headwinds to pay 23x earnings for it.
There's a whole lot wrong here, but others have already beaten me to it. Watsa has been much better than the market for too long for me to doubt him over a couple of years of underperformance (which is easily explained by reading his Chairman's letter). Josh, might I suggest cutting down your volume? 8 articles in 2 days isn't doing you or your readers any favors if you misunderstand companies as wildly as you do Fairfax.
I agree with Fordman here that Ford Credit certainly plays a big role in the debt calculations. I believe GM is suffering from the same sort of deal.
But what's the solution to that? Will either company ever spin out the credit divisions? If not, you run the risk of investors everywhere liking the car company but not liking all the debt on the balance sheet from the finance arms.
Nice article.
I'd be happy to own Coca-Cola at 12x earnings. I can't get excited about it at almost double that, even if Uncle Warren is happy to hold at these levels.
As for everyone criticizing the author about questioning Buffett, take a look at the Oracle's record over the years. He's gotten plenty of stuff wrong.
(Clicks "track new comments" button)
(Waits for the usual suspects to show up and tell you how wrong you are)
(Rubs hands in glee)
I wish I was as sure of anything as much as the author is sure of Petroamerica.
Nice article Bram.
I've looked closely at Urbana a couple times in the past, and I just can't figure out what the catalyst will be to move it closer to NAV. I look at the privately traded assets, and see just a few that are interesting -- the exposure to Bombay (obviously), and then the small investments the firm has in the Hungarian stock exchange and the investment in the new Canadian Securities Exchange. I just don't know if they will be enough to get it back into a situation where investors are willing to pay a premium for the assets.
Saying that, I'll probably end up buying some. It's not very often $1 comes along for $0.60. I just won't feel good about it.
I read about that plant in Saskatchewan. The problem with it is it cost $1.3 billion, while a similar coal plant without the carbon capture technology would cost $350-$400 million. The price of carbon capture has to come down a long way before it's viable for anybody except government.
No, you don't understand the business.
There's basically zero synergies that can be captured by having it all under one roof. They're ran as separate businesses. This isn't hard to understand. Frito Lay has its own warehouses, it's own account reps for big customers, and its own sales force. Pepsi has all its own warehouse space, sales reps, and account reps. And Quaker/Tropicana/Gatorade is essentially another company still, with its own army of sales reps. It would be impossible to change this.
A grocery customer can't even order Gatorade from their Pepsi sales rep. Each week a store gets several chip deliveries and several soda deliveries. On separate trucks. There are no benefits and no economies of scale.
Oh, I forgot. Sometimes they work together and build soda/chip displays in stores or split ad space between the two. Like I mentioned before, there's no reason they couldn't continue to work together as separate companies. Pepsico and Yum continue to do it.
Spend some time in emerging markets. In Asia, Frito Lay barely exists (maybe a dozen skus) and Pepsi is being dominated by Coke. They don't even manufacture any Frito Lay products, it's contracted out. Pepsi isn't doing anything special in emerging markets. The rising tide is just lifting all boats.
I've spent 10 years in the business. But hey, keep thinking you understand it better than I do.
Pepsico spun out Yum Brands (Taco Bell's owner) in 1997. The companies have retained close ties since, but the only notable business establishment the two still have is all of Yum's restaurants have a lifetime guarantee to serve Pepsi products in their restaurants. (Although that's just in North America, I've been to KFCs in South Korea that serve Coke).
Still think that Pepsi and Frito Lay can't cooperate if they're separate companies?
Mike's math is way off. I took an average of the 17 companies annual returns and got 12.9%. It's obvious just by looking. 12 outperformed 11.1%, some by a lot.
Of course, it proves nothing. So the best third of a group of stocks outperforms the index. Big deal. That's pretty much what you'd expect to happen.
If the losers would have been punted, as he suggests, does that mean companies like McDonalds would have been shown the door between 2000 and 2003 when it lost much more than the S&P 500? How about PFE over the last decade? It's flat, while the S&P is up 77% (excluding dividends for both). It's easy to say "oh, I would have sold the losers," but it's much more complicated than that in real life.
I'd like to echo what varan said about the sentimental language. An investor could have easily said the same things about J.C. Penney, Kodak, Sears, and all the other dogs. I'm younger than the author, and I can remember the days when the Kodak and Sears brands were strong. It's easy to say in hindsight "oh, Coke, P&G, JNJ, etc. have great brands and people will use these products forever" now that you've been proven right. But if you had of said "Kodak is a great brand. People will be using its film forever" in the 80s and early 90s, people would have agreed with that, too.
But hey, keep thinking articles like this are "proof" that the almighty dividend will conquer all.
"For his last 2 properties, I don't know how he managed to get 2 mortgages in 1 day, but essentially, he's renting out those properties to pay for most of the mortgages."
No, Canada doesn't have a real estate bubble at all. Why would anybody think that?
As a former front line Frito Lay employee, I completely disagree with Valuentum. Here are the facts:
1. There's no reason why a separate Frito Lay and Pepsi couldn't work together on promotions. And there's no reason why they couldn't continue to work together on other things too (although those advantages are, IMO, extremely overrated.)
2. "two separate entities would need two distribution chains and two back-office corporate overhead teams"
They already do. Chips and soda aren't delivered to the stores on the same truck, and customers didn't call into some magical Pepsico hotline when they had an issue with chips or soda. They cut one check each month to Frito Lay, and one to Pepsico. They're essentially ran as separate companies these days anyway.
3. Frito Lay would be valued higher because it actually has growth, especially in Latin America. The beverages division has pretty anemic growth, if anything. I'd never pay 18.5x earnings for the beverage business, but if KO is any indication, investors are willing to pay that for that type of business. I don't think either of Peltz's valuations are out of line.
I liked this piece Michael. Good job.
WSD:
I didn't read SA back then, but I read a lot of other DGI blogs from 2007-08. I remember Citi/BoA being almost universally owned by the DGI crowd. In 2007 both were yielding something like 5%, raising dividends, and had p/e's of around 10x. Most were pretty vocally pounding the table on them, figuring the upcoming mortgage crisis wouldn't be a big deal.
BoA didn't cut its dividend until Q4, 2008. By then the share price had fallen from a high of mid $50s to a low under $20. I mention this because the first thing this group says is "oh, I'll just sell when they cut the dividend, and keep most of my capital intact."
I agree wholeheartedly. I've got my core positions that I still think are cheap, and will hold them. I'm deploying some of my cash into debt and keeping the rest ready to start buying when the market does actually correct.
I love these types of articles.
Authors bring up good arguments about why the market is overvalued, using metrics that have traditionally told us that things are getting a little rosy (like CAPE, S&P 500 price to sales ratio, and Buffett's favorite, stock market value compared to GDP). And the comments are decidedly still bullish.
What a great contrarian indicator.
(Not so much Dale's article here, but some of the other ones. Comments here seem pretty 50/50.)
For me, that's the value in these macro articles, to see how bullish the average investor feels. And right now feels a lot like 2006 again.
AT&T did $128 billion in revenue last year and had a net profit of more than $18 billion. Getting excited about $500 million and $100 million, respectively, is like altering your financial plan based on change you found in the sofa.
Another great article Dale. I've been slowly selling my winners over the last six months and moving into bonds. I'm keeping my interest rate risk low by... get this... investing in short term bonds. I still have some high yield though, which I bought at lower levels. I'm happy to continue deploying that cash.
I also completely agree with Mr. Debunker. I'd stay very far away from DG stocks over the next cycle as all the 2008-09 converts move into the next thing. I'm also apparently the only one who remembers DG investors loading up in financials in 2006-07, since they all had a good history of dividend growth and were cheap on a P/E basis. Yep, there was a reason for that.
I've never understood why DG investors don't just buy VIG mixed with a little BRK and just go golfing instead. If there was an index that replicated my investing strategy exactly I'd go for it.
Was anyone else distracted by the fact that Tim kept calling it the Canadian Imperial Bank when the company's name is actually Canadian Imperial Bank of Commerce, or was it just me?
The average Canadian owes more than 160% of their income. The average American owes less than 130%. U.S. borrowers deleveraged after the financial crisis, where their debt to income levels peaked at around 160%. Canadians just kept on borrowing.
It's just not true that Canadians are more conservative than Americans.