Greece – What Cheque?

Greece cheque

Greece default funny 2

Preview on Valener

Excerpt from my Valener update to be released soon:

How can a society that exists on instant mashed potatoes, packaged cake mixes, frozen dinners, and instant cameras teach patience to its young? ~Paul Sweeney

People and investors are not patient and they are less and less as time goes by. We are in a society that seeks immediate gratification. We want it done now. We want action and we want our investments to make Jim Cramer scream buy buy buy. Investors want to hear companies say they will deliver the moon. It doesn’t matter if sexy company X doesn’t deliver on those sky-high promises because investors already moved on to the next saveur du jour.

Valener is a different kind of company. Valener is a company that’s very patient and that doesn’t fit in today society. VNR is a company that you buy and forget for many years. Meanwhile you get four cheques a year that increase annually. Valener is a turtle, a company that develops slowly but well over time, either organically or through acquisitions. Valener is a company that gets better with time.

Valener and Jim Cramer are not a good fit:

IPOs are not a good deal

This cartoon pretty much explains my attitude towards IPOs. IPOs are almost always bad investments. You are often sold a distant dream at an expensive price. A lot of things has to go right for a new company to succeed. They usually need the money to grow and to take risks and they might need more money down the road. It sounds like with all the new red hot IPOs bursting out of the gate that it’s so easy to get rich. But instead the reality is that most IPOs makes investors poorer. Some IPOs are very interesting companies (e.g. Shake Shack, Fitbit, David’s Tea) and could reward investors in the future but you are paying a lot of money for that risk. Finding the gem is not easy and even if you find it can you get a fair price? IPOs are a good deal for the founders and the insiders who are looking for an exit.

Warren Buffett has a great quote on IPOs:
“It’s almost a mathematical impossibility to imagine that, out of the thousands of things for sale on a given day, the most attractively priced is the one being sold by a knowledgeable seller (company insiders) to a less knowledgeable buyer (investors).”

IPOs are not cheap

Tough Retail Life in Canada

Lately it’s been a rough ride for retailers in Canada. Just by listening to the media it feels like there is a new chain of store closing every day. The names Future Shop (rebranded Best Buy), Target Canada, Bikini Village, Parasuco, Areopostale, Jacob, Smart Set, Mexx, Zellers have disappeared, are disappearing or restructuring with the hope to have a 2nd life (or 3rd or 4th depending on the retailer). I would even add Sears Canada to the list since it’s just a zombie store (I think somebody forgot to turn off the lights). Some of the names above will be gone of the scenery for good and others will be a thing of the past. Regarding Sears, I have a great shopping tip during the holiday season; park your car at Sears, it’s the only parking lot with space available and use their store entrance to get in the mall. That strategy has worked for me for at least ten years and counting. There’s seems to be an endless list of reasons to lay the blame on. A weak dollar, high rent, the economy, the minimum wage on the rise, intense competition, lack of parking etc…without a doubt it’s an extremely difficult to be in retail. But one reason not cited is that nobody seems to blame the failure at them. Of course the reasons cited above are huge issues to overcome and I’m not trying to minimize their effect. However successful businesses know how to navigate a tough environment. There are other retailers facing the same problems and they are doing just fine. Stores like H&M, Zara, Forever 21, American Eagle, Mango, the Apple Store comes to mind. Do you think Target Canada failed because of the minimum wage or the lack of parking. No it failed because it was a terribly run business. Jacob failed because they didn’t adapt to change in customer’s taste. If you don’t provide what the customers want you will be in trouble. These stores are responsible for their own failure.The economy is not shrinking either. In 2014, according to Stat Canada and le Conseil Québécois du Commerce de Détail, sales excluding car, gas, and food are up 3.8% in Quebec and 4.6% in Canada. Consumer spending seems to exceed GDP growth. The number suggests that Canadians are spending and consuming more. They are simply not spending their money at the stores mentioned in the first paragraph. A guy I know opened a restaurant in downtown Montreal. I went once to check it out and it was mediocre. The place was huge and empty, it felt cold instead of cozy and comfortable, the lighting wasn’t good, service was ok, and the food was average (they actually burned my wife’s pizza but made a new one). I had the feeling that he won’t be in business very long. My wife wasn’t impressed. I couldn’t recommended it to anyone. Indeed, the restaurant survived six months with a couple months behind on rent. He told me that it was the city’s fault for his failure. He said “The city doesn’t do enough to bring people downtown and parking is expensive.” Of course I agree with these reasons but the number one reason for the restaurant failure was his own. The street he was on is packed with restaurants, some with lines outside. If you depend on the city for your success, you’re in for a long ride. The bottom line is he didn’t do enough to bring people in his restaurant. But again instead of taking responsibility and learn from his errors, it’s easier to lay the blame on other things.

Trump 2016 – He’s finally doing it!

He’s running. Trump 2016. This will definitely add color to an already over crowded race. Watch for the verbal bombs. This will not be a boring race.

Trump Presidential

Trump Financial Statement

Trump White House

Charlie Rose interviews Seth Klarman

Seth Klarman and Charlie Rose doesn’t need an introduction. Seth Klarman is one of the world’s top value investor and has a must read book on the topic; Margin of Safety: Risk-Averse Value Investing Strategies for the Thoughtful Investor .“Margin of Safety” is the investing term coined by Benjamin Graham, considered by many to be the father of financial analysis. (Mr. Graham’s disciples also include Warren Buffett). The book is now out-of-print and sells for $1,500. If that’s outside your book budget, a simple google search will get you plenty of ebook/pdf copies.

Charlie Rose is probably the best interviewer out there at the moment. He has master the craft of asking questions. Below is a 45 minute interview/discussion. I could write down a cliff note version but that would be a disservice since the video offers so much more. Enjoy!

Brookfield Renewable Energy Partners L.P. – A Great Mix Of Growth And Dividends

 

Red Rock Falls Generating Station (41 MW) - Algoma: Mississagi River Source: Flickr

Red Rock Falls Generating Station (41 MW) – Algoma: Mississagi River
Source: Flickr

Below is part of my latest investment research. I usually put my thoughts on paper and sometimes I make an article out of it. My latest piece is on Brookfield Renewable Energy Partners L.P. (BEP, BEP.UN), a much under-followed security that deserves more attention. As the name state, BEP is in the renewable energy industry. They are probably one of the the largest, if not the largest, pure play renewable energy investment in the world. BEP owns and manages 250 power facilities, mostly hydro plants, some wind farms and biomass. BEP’s portfolio is composed of high-quality long life assets generates very reliable growing cash flows for many years since the majority of the cash flow is contracted through PPAs with a lifetime of over 20 years in some cases. BEP’s strategy for growth is through disciplined M&A and organic projects. They currently manage 7,300 MW in North America, Brazil, and Europe. If you are looking for reliable growing income and an element of growth, BEP should be on your candidate list.

Enjoy,

Brian

This is just a sample of the article. I can’t publish the whole article because the rights are owned by Seeking Alpha. Some articles are free and some are not, depending on what signed up for. Feel free to check out the whole article and others on their website

Reposted from Seeking Alpha
By Brian Langis

Summary

  • BEP focuses primarily on long-life renewable power assets that provide stable, long-term cash flows, and which are well positioned to appreciate in value over time.
  • The company seeks a distribution growth target of 5-9% per year and a payout ratio of ~65% of funds from operations.
  • BEP invests and owns real assets of high quality and with strong growth prospects. The objective is to deliver long-term gross returns of 12-15% on a portfolio basis.
  • The recent dip in the stock provides a nice entry point.
  • The Brookfield family of products has a great history of value creation.

If you are looking for a very long-term safe investment that provides reliable growing dividends and reasonable growth prospects, Brookfield Renewable Energy Partners L.P. (BEP, TMX: BEP.UN) should be on your candidate list. BEP focuses primarily on long-life renewable power assets that provide stable, long-term cash flows, and which are well positioned to appreciate in value over time.

BEP is one of the largest publicly traded pure-play renewable power platforms in the world. As of March 31, 2015, the company owns and manages 208 hydroelectric generating stations, 37 wind farms, 2 natural gas power plants, and 3 biomass plants, for a total of 250 power-generating facilities. Overall, the assets that it managed or manages have 7,265 MW of generating capacity and annual generation of 25,562 GWh, based on long-term averages. This is a global portfolio with assets across 14 power markets in North America, Latin America and Europe. BEP generates enough electricity from renewable resources to power 4 million homes each year. The structure is a limited partnership established in Bermuda since 2011. Brookfield Asset Management (NYSE:BAM) owns, directly and indirectly, 63% of BEP. Below is a summary table of the partnership:

Thesis

Here are some of the mains reasons why I like BEP as a very long-term investment:

  • The company invests and owns real assets of high quality and with strong growth prospects. The objective is to deliver long-term gross returns of 12-15% on a portfolio basis.
  • A solid, experienced management team with a “boots on the ground” approach. Has a history of making disciplined conservative acquisitions.
  • BEP benefits from its strategic partnership with BAM.
  • It has a highly stable cash flow profile sourced from predominantly long-life hydroelectric assets, the vast majority of which sell electricity under long-term power purchase agreements (PPAs). BEP generates significant free cash flow. A portion of this is re-invested, and the other is returned to unitholders.
  • Provides inflation protection (contractual clause for rising prices).
  • A great investment for income seekers. BEP has a history of increasing distribution to unitholders. The company seeks a distribution growth target of 5-9% per year and a payout ratio of ~65% of the funds from operations (FFO).
  • Invest in the renewable power sector (reducing contribution to global climate change). Also, coal is retiring, making room for more expensive generation.
  • BEP has large moat. There are a lot of obstacles in the way if you plan to open a hydro plant tomorrow.
  • Investment-grade balance sheet (BBB credit rating). Maintains a ~40% debt-to-total capital ratio.

I like that the cash flow is attached to real long-life assets, instead of, let’s say, to a brand name. I know, to a certain degree of certainty, that the hydro plant and its contract will be providing cash for the next five to ten years. I can’t make that same prediction regarding my favorite brand or store at the mall. Sure, BEP is not a sexy investment, and it’s actually one of the most boring investments one could make. It has all the characteristics of a boring investment: cash-rich, high cash margins, conservative management, real long-life assets etc… It’s hard to have a decent BBQ conversation when you have invested in a bunch of hydro-generating stations and wind farms (Nobody is going to ask you about the hydro inflow rate last quarter or how the wind is blowing in Ireland). But keep in mind, this is an investment for long-term income and growth. As long as the rivers are flowing and there’s wind in Ireland, you can sleep at night.

Source: BEP Investor Profile May 2015 – Slide 6

The performance returns table above demonstrates the superior historical performance of BEP as of December 31, 2014. Of course, that wonderful 15-year historical performance is no guide to the future. However, because of the company’s solid business model and high-quality assets, above-average returns wouldn’t surprise me over the long run.

The stock price has been weak of late, likely a function of the rise in bond yields, which has pressured interest rate higher and poor hydrology. Investors, particularly those with a longer-term view who appreciate BEP’s strong dividend growth outlook, should take the opportunity created by the recent pullback to take a position.

While the overall business may be fairly valued on the surface at about 13x trailing adjusted EBITDA, the normalization of hydrology, organic growth and accretive acquisitions suggests that BEP could appreciate by 13.7% in 2015. The details of my valuation are below.

The Brookfield Asset Management Family

To better understand BEP, it’s important to understand the parent company, Brookfield Asset Management. You can’t talk about BEP without talking about BAM, since they are in the same family. BAM is a global manager of real assets with $207 billion AUM ranging from property, renewable energy, infrastructure, private equity and others. Sorting out the Brookfield family can be a challenge. Brookfield Asset Management is the parent company at the top. It has ownership stakes in the three Brookfield public companies and private listings, as demonstrated in the chart below:

Source: BAM Corporate Profile Slide 6 – Q1-2015

I like the whole Brookfield family. There’s something for everyone. BAM is more for the growth-oriented investor, and the listed partnerships (BPY, BEP, BIP) are interesting for their dividends. A significant portion of BAM’s earnings are from the dividends its listed partnership distributes. The main reason why they don’t roll up the whole structure to BAM is because the market will apply a conglomerate discount (BAM is a former conglomerate with a colorful history). A conglomerate is more complicated to value and more confusing. In its current form, you attract more pure-play investors, since real estate investors can invest in BPY and energy investors can invest in BEP.

This is just a sample of the article. I can’t publish the whole article because the rights are owned by Seeking Alpha. Some articles are free and some are not, depending on what signed up for. Feel free to check out the whole article and others on their website