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In the pursuit of alpha I look for value. Value investing has been shown to work time and time again. I'm a CFA level 3 candidate. I work in the banking field but I'm looking to move more towards a analysis role....
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  • Why Diageo PLC Has Preformed So Well And Why It Will Continue To Do So

    Diageo DEO ,one of the world's largest alcoholic drink manufacturers, has preformed well and will continue to do so because of its geographical diversification, product diversification, relative valuation and the industry it's in. We will also take some time to look at the market forces that are exerted onto the industry to get a better understanding why this industry has preformed so well for so long.

    "Diageo plc engages in producing, distilling, brewing, bottling, packaging, and distributing spirits, beer, wine, and ready to drink beverages in North America, Europe, Africa, Latin America, and the Asia Pacific"Yahoo. Among some of their most popular brands include Smirnoff vodka, Johnnie Walker whisky, Baileys Original Irish Cream, Captain Morgan rum, J&B scotch whisky and Guinness stout. Diageo also produces other spirits brands, including Crown Royal Canadian whisky, and Seagram's whisky. Diageo also produces many popular wine brands and beer brands.

    The stock performance of Diageo since 2000 has done quite well. It has Grown 11% YOY since early 2000 as can be witnessed below. This growth in stock price is on top of the 1.8% dividend yield the company provides.

    (click to enlarge)

    When we take a closer look at how Diageo has done compared to its peers and the market in general its even more impressive. The Google graph below indicates that it has more then doubled both the S&P and Dow Jones Indexes while easily beating out its competitors in the same industry since April 2003.

    (click to enlarge)

    With its geographical reach, Diageo PLC will be able to withstand changing tastes from one continent to another. The tastes may change from place to place, but overall demand I don't feel will decline. I don't think its going to decline because people have been preaching healthy lifestyles for so long ,and yet many have not heeded the call. We are all affected by the stress of our daily lives and we are all going to look for ways to relieve that stress. One way many people cope with daily life is to have a few drinks either with the co-workers after work or with people on the weekend. The general population has been over worked, over stressed for sometime; this trend has been happening for decades and does not look like its going to subside any time soon. A positive sentiment for the industry over the next year is shared from the analyst of S&P in their latest research report on Diageo published April 6th.

    "Our fundamental outlook for the distillers and vintners sub-industry for the next 12 months is positive, reflecting our view of favourable demographics and strong consumption trends as drinkers favor wine and spirits over beer. We look for consumers to continue to trade up to luxury items over the long term."

    Relatively speaking, Diageo PLC is undervalued. The average systematic measure of market risk, or beta, for the companies is 1.05, while the individual beta for DEO is 0.79. Furthermore, the P/E ratio on average is higher for the other companies then Diageo. Basically Diageo is cheaper and safer then the average competition, while getting the best ROE and the second best profit margin.

    (click to enlarge)

    Source data

    While we have taken a direct look at Diageo, let's take a moment to look at the underpinnings of the malt beverage industry. The look may help us explain why the industry has preformed so well and why it's going to keep producing above average returns.

    (click to enlarge)


    Some industries on the figure have preformed well year-over-year, while other industries are right at the bottom like air lines. There are certain forces that effect profitability year over year for each industry, now we are going to look at those elements with the help of Professor Porter's 5-forces framework.

    (click to enlarge)

    Threat of Entry: Low-Medium

    • Brand power is quite strong with all the advertising money sent.
    • If someone wanted to compete with large established companies, they would come up against the Net Work effect. Basically people want to drink what is popular and what everyone else is consuming.
    • Advertising budgets in the industry will make any potential entrant think twice, in 2012 Diageo spent 1.69 Billion British pounds on advertising.

    Power of Supplier: Low

    • Suppliers have almost no power. The basic inputs to alcoholic beverages are farm outputs, and there are many farms competing to sell their grains.

    Power of Buyers: High

    • There is no cost to switch from one product to another. If someone wants to try something else, that simple idea is all that it takes for Diageo to lose the sale.

    Threat of Substitutes: Medium

    • If someone wants to try something else, there is no way for any industry participant to stop them. But with so many different products offered, that substitute drink, which the customer picks up might just be owned by Diageo.

    The fifth force with be quantified with the Herfindahl-Hirschman Index - HHI' "A commonly accepted measure of market concentration. It is calculated by squaring the market share of each firm competing in a market, and then summing the resulting numbers. The HHI number can range from close to zero to 10,000. The HHI is expressed as:

    HHI = s1^2 + s2^2 + s3^2 + ... + sn^2 (where sn is the market share of the ith firm).

    The closer a market is to being a monopoly, the higher the market's concentration (and the lower its competition)" Investopedia

    Any score below 1,000 indicates a competitive market place, 1,000 to 1,800 is moderately concentrated and anything above 1,800 is highly concentrated-uncompetitive.

    he HHI of 2800 speaks for its self; even thou there are hundreds of different brands to chose from at your local liquor store, there is only a highly concentrated hand-full of companies that compete. This lack of competition in conjunction with the other 4 forces, has contributed to elevated returns in the past, and should keep those returns elevated into the future.

    Apr 16 3:24 PM | Link | Comment!
  • Suntech: Another Green Energy Casualty. Where Do We Go From Here?

    Suntech Power STP, one of the world's biggest solar panel manufacturers, was forced into bankruptcy court Wednesday, becoming yet another renewable power company to suffer that fate.

    Suntech missed a $541 million bond payment last week.

    Over the last year, solar power manufacturers have suffered large losses from rapidly growing over-capacity that has put pressure on prices. Another solar heavyweight, Germany's Q-Cells, filed for bankruptcy last April, as did America's Beacon power at the end of 2011. Recently German's Siemens pulled out of the Solar panel business because of losses.

    The sharp rise in production capacity can be attributed in large part to the Chinese government's efforts to encourage the industry. Hundreds of small Chinese solar cell manufacturers sprang up after the government offered tax breaks and subsidies. The leaders of China see green energy as a way to develop higher quality jobs and reduce the demand for foreign energy.

    "Prices of polysilicon wafers used to make solar cells plunged by 73 percent from 2010 to last year. The price of cells fell by 68 percent and that of modules by 57 percent." Source

    News of Suntech reminds me of many green energy companies that have gone out of business or left the business while they still had the chance. As an investor, I'm mindful of the many investors that took a chance on these ventures and lost.

    A great way to see how Renewable energy companies have performed over the years is the Renewable Energy Industrial Index (RENIXX). The index is market capitalization weighted, and tracks companies that make at least 50% of their sales from wind power, solar power, fuel cells, geothermal or hydropower.

    (click to enlarge)

    As we can see, the index has not done well.

    "The index closed recently at 159.36 points. Compare that to its all-time high of 1918.71 in December of 2007." Rob Wile, Business Insider Source

    That's down almost 92% from its peak.

    With feel-good green companies performing so poorly, how is the other class of altruistic investing-SRIs (socially responsible investments) doing? To find out how SRIs are doing, we'll use iShares MSCI Socially responsible ETF (DSI) which has been designed to "measure the equity performance of U.S. companies that have positive Environmental, Social and Governance ("ESG") characteristics" Source

    As we see from the graph below, its performed in-line with the S&P 500 over the last few years.

    (click to enlarge)

    When we look closer to the YTD performance the SRIs have out preformed the S&P by 2.5%.

    (click to enlarge)


    So if your looking for Investments that better more then just your brokerage account, stay away from renewable energy and instead look at socially responsible investments.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

    Mar 24 2:40 AM | Link | Comment!
  • Fishing For Value On The TSX

    We all want to own companies that have great returns, but we also want to get the best deal.

    With the Canadian economy being the strongest during the last recession and poised to stay strong with their energy exports, I've decided to screen Stocks on the Toronto Stock Exchange. I'm looking for stocks that have a history of good and improving returns, and are cheap compared to their current P/E ratios.

    The Criteria:

    1 year ROC greater than 20%

    1 year ROE greater than 20%

    5 year average ROC greater than 15%

    5 year average ROE greater than 15%

    P/E smaller then 12



    1 Yr ROC

    1 Yr ROE

    5 Yr ROC

    5 Yr ROE

    Latest P/E









    Cathedral Energy Services







    CML HealthCare







    Canadian Oil Sands







    First Quantum Minerals







    Global DIGIT II







    Indigo Books & Music







    Imperial Oil







    Mackenzie Master Ltd. Partner.







    National Bank of Canada






    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Additional disclosure: All stocks were taken from the Toronto Stock Exchange, their Canadian ticker symbols are listed. Data was pulled from GlobeInvestor.

    Mar 20 1:34 PM | Link | Comment!
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