August 8, 2015 2 Comments
We have been watching the markets and trends and there are some stocks that we will cull prior to the next round of investing.
Coca-Cola Femsa (KOF) – this is basically the Mexican and Latin American Coca-Cola distributor. Per their last earnings release:
“As beverage transactions continued to outpace volumes across our operations- reinforcing our daily consumer engagement – we are encouraged by our operators’ positive performance in the midst of a challenging environment, marked by weak consumer trends in Brazil, a slowly recovering consumer landscape in Mexico, and currency volatility across our markets. On a comparable basis, we delivered high single-digit consolidated revenue growth and double-digit operating income growth during the quarter.”
What they mean by “comparable basis” is that the currencies of Mexico, Brazil and other countries such as Argentina have collapsed and they are still making a lot of sales but the sales are worth less when they are converted into the US dollar or some other index as they were in prior periods.
So what do we do? Do we hold on and wait for the dollar to fall and / or their currencies to rise? The company seems well run (they have growing transactions) and Coca-Cola is never going away, and these countries have a rising middle class and growing populations (unlike most of the world) to consume more goods in the future.
Royal Dutch Shell (RDS.B) – Shell has been pummeled by the commodity price slump. They are also based in the UK / Europe so they face an additional currency overhang when translated into US dollars. They also were “acquirers” of a natural gas company in the midst of these events which means they paid a premium price in a time of decline. The most worrisome element, however, is that they continue their high risk plan of drilling for ice in the volatile and difficult arctic, at a time of reduced oil prices (which makes high cost investments like deep water drilling even riskier). They also have a relatively higher chance of environmental catastrophe which will be very difficult to clean up given the paucity of local resources and the ferocious environment in the far north. They are a sell. If we want to “buy low” in the oil or natural gas business there are better candidates.
Trans Alta (TAC) – Trans Alta is a Canadian power generator. They have strong exposure to coal and also the Canadian commodity boom / bust which consumes much of their electricity. They pay a strong dividend (for now) but it has been reduced as the company struggles. Future dividend cuts would impact the company even further. Given the combination of the poorer Canadian economy and currency, the dire forecast for coal, and the commodity bust, this is a sell.
Wynn (WYNN) – Wynn is a gaming operator with operations in Macau, the only area of China where their gambling-mad citizens are allowed to play. There are also many other more subtle elements to this infatuation with gambling including an ability to move currency out of the country, which is otherwise difficult to do. Recently the new Chinese premier (dictator?) has cracked down on certain types of ostentatious corruption (generally among those who are not politically allied with him, since “corruption” is embedded into all aspects of their command economy) which has hurt gambling. But Wynn is a shrewd operator and he is expanding capacity and likely this too, shall pass. It is hard to sit while revenues and profits decline, however.
Exxon (XOM), Statoil (STO), and Devon (DVN) – these energy giants (Exxon is the biggest, but Statoil is unique since it is from Norway, and Devon is smaller but well run) have all been hurt badly by the reduction in oil and natural gas prices. For now, unlike Shell above, I think it makes sense to stick with them.
Seaspan (SSW) – Seaspan owns container ships that travel between China and overseas destinations and has been investing in a new, fuel efficient fleet. Seaspan has a very high dividend (8%) which they have been able to sustain so far. On the one hand they seem to be a good operator but overall Chinese exports are faltering and if there is a general fall in the market they likely will still be able to rent out their newer, fuel efficient craft but the rate that they would receive would be correspondingly lower. This one is on the edge.
Westpac Banking (WBK), Canadian Imperial Bank (CIB), Toronto-Dominion Bank (TD) – the first bank is Australian and the latter two are Canadian. These banks are generally well run but all have been hit by the depreciation of their currencies vs. the US dollar, and the fact that they are exposed to real-estate “bubbles” in the Australian and Canadian markets. As the commodity markets fall, the entire country can be hit with reduced services, demand and an overall high level of debt. These are on watch.