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Peter Mantas
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Peter Mantas, CIO of Logos LP. Experienced investor seeking value in the global capital markets. I aim to identify quality global businesses trading at a discount. Twitter: https://twitter.com/Logos_LP
My company:
Logos LP
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Logos LP Blog
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  • Emerging Markets Represent An Opportunity For The Value Investor

    Over the past 12 months, the US stock market - as measured by the MSCI US Equity Index - has risen about 16% and is dancing around all-time highs. Overseas the picture is a bit less clear cut. Europe overall has moved up about 16%, Japan 0.13%, China about 1.3% and Emerging markets roughly 2%.

    Based on data supplied by FactSet, a financial analytics firm, the US equity market is now among the most expensive in the world when you compare stock prices to company fundamentals such as per-share earnings, dividends and net assets.

    Furthermore, emerging economies are expected to grow two to three times faster than developed nations like the US, according to International Monetary Fund estimates.

    Is it time to jump into emerging markets? Or is America a safe house against world uncertainty thus wholly deserving of the lofty valuations commanded by its companies?

    Well, according to JP Morgan Asset Management now is one of the best times in history for investors to buy into less mature economies. The bank has gone so far as to predict that emerging markets will rise by 10% or more in the coming 12 months. This pop would reverse recent losses and offer a solid gain.

    Although we don't feel comfortable making such predictions we do share the Bank's optimism as emerging market shares are very cheap against book value. For example, the MSCI Emerging markets index which is made up of shares of the biggest companies in these regions is currently trading at a price to book ratio of below 1.5 which is the lowest it has been since 2007.

    Interestingly, research by JP Morgan has found that since 1995 each time this valuation has dipped below 1.5 the stock market in the next 12 months has tended to deliver returns above 10%.

    This occurred in both July 1996 and November 2002, when emerging markets suffered an ugly setback. Shares rose by 27% and 30% respectively in the following 12 months.

    In fact these low valuations are totally out of step with fundamentals. In a recent article in Fortune Shawn Tully points out that:

    "These countries have younger populations and a greater abundance of natural resources than the developed countries of Europe and North America. The BRICs -- Brazil, Russia, India, and China -- generate 22% of the world's GDP, and owe only 5% of the sovereign debt.

    By contrast, the developed countries control 62% of global output, and pay interest on 90% of the government bonds. With fast-growing workforces and ample supplies of crops and minerals, the developing countries are in a stronger position to cover their future interest burdens, and hence channel more of their future growth into private investment, than many western nations are. Few developing nations shoulder total debt exceeding 50% of GDP. For the emerging economies, Brazil is a huge borrower with debt to GDP of around 68%. By contrast, most of the big western economies -- including France, Italy, the U.K., and Germany -- carry burdens of between 80% and well over 100%. Japan's ratio, for that matter, tops 200%."

    What about the risks of exposure to emerging markets?

    At present there is certainly a fear that emerging markets are not the answer. Aside from the normal risks such as political instability, market volatility, liquidity concerns, poor corporate governance and foreign exchange rates, investors of late have been concerned about China's slowdown and surging inflation in India, Argentina and Turkey. Nevertheless, the main popular concern are the potential effects of the US Federal Reserve's "tapering". Investors fear that "tapering" and rising US interest rates will cause capital to flow out of emerging economies as cheap yield hungry capital will be on the decline.

    If money rushes out of emerging economies the value of their currencies could be depressed which can cause damage. Nevertheless, there may be a silver lining as the value of currencies would be determined by market forces which could in turn help export competitiveness.

    The bottom line:

    With such attractive valuations, it should not come as a surprise that in 2014 the best performing markets are as follows:

    Best Performing Markets of 2014 Ticker YTD

    Market Vectors Egypt ETF EGPT 26%

    iShares MSCI Indonesia ETF IDO 23%

    iShares MSCI Philippines ETF EPHE 15%

    iShares MSCI Thailand Capped ETF THD 11%

    iShares MSCI Turkey ETF TUR 10%

    iShares MSCI India Index ETF INP 8%

    iShares MSCI Brazil ETF EWZ 6%

    *Data as of May 27th

    Although, based on the risk factors outlined above, these markets should be considered risky and some would go so far as to say that such picks represent contrarian plays, we contend that the risks are over exaggerated. It should be remembered that one of the reasons why US companies have done so well in the last 12 months is due to the growth in non-US markets and thus if one can stomach some volatility, emerging markets should make up at least a small proportion of any value investor 's portfolio as low valuations today can lead to higher investment returns over time.

    -Matthew Castel, Head of Strategy and Investor Relations

    Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Jun 15 9:07 PM | Link | Comment!
  • Logos LP And Where The Market Is Going In 2014 And Beyond

    Logos LP is grounded by a balanced philosophy: 'Innovation' and 'Discipline'. The 'Innovation' side of this philosophy suggests considering investments from a perspective which diverges from the norm. For us, this principle consists of viewing potential investments from a unifying and interdisciplinary perspective. As for 'Discipline', we pride ourselves upon a rigorous commitment to our investment strategy. This guiding philosophy or 'vision' allows us to navigate the uncertainty of the financial markets and establish a set of standards or objectives around which to measure performance.

    Over the next 6 weeks, my partner and I will explore our vision through a 6 part series covering some of our investment ideas for 2014 on.

    Let's get started:

    1. Stay long stocks.

    Allow me to provide a simple disclaimer: Despite the epic rise in equity premiums over the last year and a half, I think it's very important to point out that value investing is timeless. Regardless of expansionary or recessionary times (even better in recessionary times), finding value (or even wonderful companies at fair prices) allows for amazing cash generation over the long term.

    However, investors need to also keep in mind that we are in a bull market and will probably be in one over the next little while. I say this because despite some managers calling out for 'bubbles' or massive collapses on the S&P or MSCI Global Index, people forget how bad the Great Recession really was only a few years back. This is not to say there may not be 'bubble-like' qualities in certain sectors like 'new-media' or biotech (FB, TWTR, LNKD, NFLX, IBB etc.) but the increase in fund inflows, M&A activity, and IPOs should not be a cause of concern for the overall market. Fundamentally, the US, and global economy for that matter, is nowhere near where it should be in terms of growth, innovation, employment and overall government and capital investment.

    Let's look at some historical data:

    The world's largest economy shrank 4.1% from the fourth quarter of 2007 to the second quarter of 2009. Household spending fell 1.2% in 2009, twice as much as previously projected and the biggest decline since 1942. The data better explains why the jobless rate doubled, reaching a 26-year high of 10.1 percent in October of 2010, and has been slow to subside.

    The rebound from the recession was more subdued in the last six months of 2009, as the economy grew at an average 3.3% annual pace from July 2009 through December. By comparison, growth averaged 7.2% in the two quarters following the 1981-82 recession, during which the economy contracted just 2.9%.

    Moreover, over the last 5 years, poverty has soared with the number of Americans in poverty increasing to the highest level in more than 50 years that the Census Bureau has been tracking poverty. Over the last 5 years, the number in poverty has increased by nearly 31%, to 49.7 million, with the poverty rate climbing by over 30% to 16.1%. The number of people on food stamps has reached an all-time record high of 47.7 million, up 80% over the past 5 years. From 2008-2013, the economy has grown at an average annual rate of 0.6%, less than one fifth the long term average American growth rate.

    While equity premiums have soared, I don't believe we are in a bubble. There is still too much growth on the table, barely any inflation, very high unemployment and trillions of dollars in corporate cash on the sidelines. The recession in 2009 was too deep and is still fresh for millions and millions of people, as we lived through one of the hardest periods since the Great Depression. Thus, I think Yellen will keep her foot on the pedal and although the ride may be a little bit bumpy, markets will continue to rise.

    As simple as this idea sounds, I think it is an important one since it allows investors to eliminate excess noise. Furthermore, just because equities have risen does not mean there aren't any opportunities out there. Focus on US industrials that have lagged the broader market over the last few years and that are fundamentally linked to the growth in employment and incomes.

    May 10 8:10 PM | Link | Comment!
  • Total (TOT): A Value Investor's Dream?

    True value investors pick unloved dogs trading well below intrinsic value that will in time become stars and reach their full potential. We believe Total (NYSE:TOT) is a nice case study which offers a look into the mind of such investors.

    Although over the last few years TOT has underperformed most of the other majors, its high risk-high return strategy of inorganic growth projects is coming to a head with promising increases in cash flows and decreasing levels of capex on the horizon. Although surpassing its 52-week high on practically a daily basis, TOT represents an investment which will increase in value and provide an impressive dividend stream over the long term. From 2010-13, TOT's net operating cash flow averaged about $21 billion, which meant that their $7 billion dividend (EUR 2.36 per share) had to be funded from divestments ($31 billion of assets have been sold since the beginning of 2010).

    Although asset sales are not intrinsically problematic as the energy majors often reshuffle their portfolios, using divestitures to address shortfalls in cash flow are. Further, the company has seen a decrease in real earnings over the last 5 years and has seen a decline in production of 2% from 2008 to 2013. Over this period the market took a dim view of the company and with the exception of BP, Total's stock has underperformed all of the majors since 2008.

    Yet, over this period CEO Christophe de Margerie who became CEO in 2007 has lead his company to develop a strong pipeline of upstream growth projects as well as an aggressive restructuring of its downstream operations. These initiatives have been geared towards TOT's promise of cash flow growth.

    The market has been preoccupied with this promise as capex has averaged $31 billion the last four years, which is quite high for companies like TOT. These high levels of spending have been the major reason dividends are largely unchanged since 2008 (the company raised its dividend once, with a 3% increase in 2012).

    Simply put, TOT is increasing production and reducing capex which in theory is a simple formula to enhance operating margin, yet in practice is very difficult to accomplish. TOT is expected to increase production 4% year over year and as set a 3.0mboe/d production output by 2017 which is a 30% increase. Their list of new fields is also quite impressive and will definitely offset the reduced production from 2008-2013. Moreover, similar to XOM and CVX, 80% of its earnings are to come from its upstream segment, which is a much more profitable segment over the longer term.

    One of the great things about this company is its transparency with respect to its operations. TOT is the only one of the 3 companies that provides sensitivity figures for the dependence of its net income on the price of Brent. More specifically, its net income increases by about $112 M for every $1 increase in Brent.

    The price of Brent has consolidated in the range $90-$110 and is expected to continue trading around this range in the next few years. As described above, the EPS of TOT are expected to rise from 6.3 in 2013 to about 8.2 in 2017. Based on these numbers, one can calculate the EPS (in $/share) of Total in 2017 for a range of prices of Brent ($99-$119). The average price in 2013 was $109/bbl.

    Oil price = $99, $104, $109, $114, $119

    EPS = $7.9, $8.1, $8.2, $8.4, $8.6

    The results show that the EPS of TOT in 2017 will be in the range 7.9-8.6 if the company meets its production outlook and the price of Brent does not change dramatically. With a $109 level EPS of 8.2 and assuming conservatively the stock remains at a depressed valuation near 10, TOT will yield capital gains of about 30% until 2017 on top of the near 5% dividend yield it already provides.

    Again, this will all depend on management execution and margin controls, which for any business, is the source of sustainable growth going forward. Yet, if these factors hold up, TOT will represent the quintessential case study of a dog turning into a star over time. Buy and hold for dear life….

    -Peter Mantas, Chief Investment Officer

    &

    -Matthew Castel, Head of Strategy and Investor Relations

    Disclosure: I am long CVX.

    May 02 11:36 AM | Link | Comment!
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