Cuba – Is the Country Frozen in Time Finally Thawing?

Cayo Santa Maria
Cayo Santa Maria

Me and my fiancé recently got back from our first all-inclusive vacation in Cuba. This was a change from my usual style of traveling since I always avoided popular tourist destinations but circumstance led me to experience what I would label as “light” travelling. It turned out to be a great time and it was certainly different from my past travelling experiences. The Cubans are great hardworking people. With Cuba fresh in my mind, I wanted to share my thoughts on the region with you.

“In Cuba we got everything we need, but nothing we want.” – Cuban worker

Now that toppling governments is the viral thing to do, one has to wonder how come Cuba hasn’t taken the street for Revolution 2.0. Most revolutions are usually sparked by a highly young demographic that is not content with the current state of affairs, a department that Cuba doesn’t lack in. The young Cubans probably find it hard to believe that a pair of crusty 80 year old brothers is the solution to a better future. It seems that it would be a matter of time before the Cubans join the trend and chase the Castro brothers off of the island. But it won’t happen anytime soon for reasons I will explain below. Or Castro simply removed any “Square” required to start a revolution. Ukraine has the Maidan Nezalezhnosti Square, Libya has the Green Square, Egypt has the Tahir Square, Tunisia has the November 7 Square, and Turkey has the Taksim Square. Maybe Cuba doesn’t have a “Square”.

The Revolution
At the heart of the Cuban revolution were poverty, corruption and social injustice (and Batista was a terrible leader). However, more than fifty years after the revolution, the results of the socialist experiment are in plain sight. Cuba is an impoverish nation with a highly educated workforce. I believe Fidel had the best interest of his people in mind but his ideology and economic reforms were a setback for the island. Cuba is a victim of terrible capital allocation, the same problem the Soviet-Union was suffering from. The old Soviet-Union was producing a lot of genius people, but because of terrible capital allocation skills those geniuses never lived up to their potential and ended up being a waste of talent. Cuba is in the same boat. The island is full of highly educated doctors and chemical engineers. Unfortunately these smart individuals have no incentive, or simply can’t, apply their talent to the greater good.

At the resort where I was vacationing at, those same chemical engineers and doctors were mixing drinks for me. Why? Because they are rewarded for their hard work in tips and therefore could provide for their family. The sad reality is that a bartender at a resort can earn more in one day of work than in a whole month as a doctor.

Cuban Apartment
Cuban Apartment

Revolution 2.0 Will Wait
There are two main reasons for the delay.

First Cuba hasn’t reached their “rock bottom” of pain. The ordinary Cuban might not be comfortable, but he’s also not suffering. They are in a state of “rut”, the state where you are not suffering enough to make it a catalyst for change. The Cuban citizen has his basic “needs” covered. Food, housing/shelter, electricity, water, free education, and free healthcare are provided. If the Cubans decide to overthrow Castro, there will be suffering and danger, at least in the short-term. It’s a gamble. Fear, uncertainty, and the risk of losing their basic “needs” privilege are part of the cost-benefits analysis. There’s also a possibility that it does not materialize into a better world.

An analogy is the 9-5 worker stuck in his miserable job. He’s not particularly happy with his job but it pays the bills and feeds his family. He knows with some effort and courage he can find something better, but changing career brings short-term suffering and uncertainty. After all, why jeopardize the next mortgage payment, it’s not guaranteed he will be happier and have more money. So in the end the 9-5 worker stays in the same position because it’s sort of comfortable. That’s the state the Cubans are in. After your health, education, hunger, electricity and shelter is looked after, it’s hard to pull the trigger.

The other reason the Cubans are not over throwing the government is the lack of communication. The ordinary Cuban doesn’t have access to the Internet (although available on the black market and it can be expensive). In most revolutions you can fill up a “Square” with thousands of people in minutes with just a Tweet. In comparison, it took Castro 6 years to topple the Batista government with his guerrilla warfare tactics. So if a Cuban starts a fire, there’s good chance it would be extinguish before it gets a chance of spreading. Without modern communication, it will take a long time to get the message across.

Keeping its population in isolation and semi brainwashed seems to be contributing to its stability. North Korea is the master of that art, by keeping the Koreans off the grid, the state managed to convince a starving population that it’s on the top of the world. Because I was vacationing, I didn’t get the chance to have in-depth conversations with the population, I did manage to have a few exchanges. In overall they seem to believe that only Cuba has the unique benefits of universal healthcare, free education and pensions. Now I understand why the government is restricting Internet access.

While on the topic of communication, USAID recently made headlines with their fake Cuban Twitter program aimed at creating an Arab Spring in Cuba. USAID decided they wanted to overthrow Castro through a Caribbean Spring via text messages but they blew their budget. Click here to read the NYT coverage. Obama now officially joins the list of Presidents that failed to take Castro out.

ZunZuneo, The Cuban Twitter
ZunZuneo, The Cuban Twitter

For change to happen you need a strong emotional response. You will get an emotional response the day Cuba can’t get the money to support their generous social programs. If that happens, Cubans could be on the street. To put that in perspective, imagine the reaction in the U.S. if the social security check came in late, madness would hit the street.

An example of a country failing to cover the basic needs of its citizens is Venezuela. Venezuela, under Chavez and now Maduro, had their own socialist experiment and now some Venezuelans are falling through the cracks. The reforms are hurting the population it’s trying to help. Now the population is in the street protesting for change, and that’s a hard genie to put back in a bottle.

Cold Hard Cash
Aside from remittances, estimated at $2.6 billion in 2012, which is one of Cuba’s biggest revenue sources, tourists are a huge source of hard cash, exactly what Cuba needs to survive. Tourists, mostly Canadians, Europeans and some Argentinians, love the warm Cuban weather, clear blue skies and beautiful perfect beaches. These vacationing resorts are mushrooming everywhere competing for tourist’s money. As I mentioned above, a lot of highly educated Cubans want that dream job of working on a resort to get some of that tourist money. The average Cuban monthly salary ranges between $15-$25 depending on the trade. Of course they love when they receive tips, but money is not everything.

There’s a chronic shortage of goods in Cuba. Bringing basic goods into the country sometimes triumphs giving money because it’s impossible to shop until you drop in Cuba (A box of 25 Cohibas is pretty light). The stores are government owned, so the supply of goods is very limited. On the other hand, I notice that there never seems to be a shortage of cigars. I found out that the cigar markers have a production quota and if they surpass it they get a bonus. I also recommend you get the handmade cigars and not the machine made one, there’s a huge difference in quality and price.

Cuba’s biggest exports are not cigars but doctors. Because of its great educational system, Cuba mass produces doctors and uses it as a currency. Cuba recently sent 30,000 doctors to Venezuela in exchange for 3,000,000 barrel of oils. Using that metric, one doctor is equivalent to 100 barrel of oil. At $100 a barrel, one doctor is worth $10,000.

I remember when I was attending high school in the U.S. Fidel Castro was portrayed as the devil, right up there with Saddam Hussein. We were constantly told that Fidel was a bad bad man. When I came back to Canada the attitude towards Fidel was quite different. In Canada Fidel isn’t depicted as an “evil” person, but just another dreamer with failed economic policies. I subscribe to that school of thought. (But then again, if I had nuclear weapons pointed at me I’d probably feel differently.)

Cuba is also strong at playing the anti-U.S.A. propaganda game. While visiting gift shops there’s plenty of books portraying the U.S. as the great Satan. I don’t even want to know what they say in schools. Since the Cubans are not exposed to any other views because of the restriction of information flow, that’s the only view they know. Psychology 101, if you repeat the same thing over and over you will end up believing it.

The country is filled with Che Guevara pictures and paintings, portraying him as a hero. Here’s a little known fact: The rights to the famous iconic image of Che that you see on every hipster’s T-shirt and posters, is owned by an Atlanta based firm. Is Che rolling over in his grave knowing that an American company is raking millions by filling the malls with his image…?

Now a capitalist property money making machine.
Now a capitalist property money making machine.

The solution to Cuba’s misery might be in the new plan Raul brought forward. In 2011 Cuba’s communist government has enacted a 300-point economic plan that will overhaul its domestic economy to encourage more private enterprise. I understand Cuba’s desire to take it slowly, probably based on a blueprint that Vietnam and China used to liberate their economy. After all, instant liberation would bring a lot of instability. Cuba’s neighbors, the Caribbean and LATAM region, are not exactly a success story.

Part of the plan is attracting foreign investments. Cuba has a new foreign investment law in place that provides incentives for companies to invest in Cuba, such as an 8 year tax exempt, investment security to foreigners and expropriation ban. The plan will also guarantee transfer of profits or dividends outside Cuba. The plan also extended the term for leases of land to foreign firms to 99 years from 50. Major foreign companies doing business in Cuba include Canada’s publicly traded Sherritt International and Spain’s Melia Hotels International. The State also plans to shift a large portion of the workforce from the public sector to the private sector. There’s also housing reforms where Cubans could finally own private property.

Cuba’s biggest assets are its people. Cuba, to a much lesser extent, could pull a South-Korea or Japan, where natural resources are scarce but is human capital rich. With more economic reforms and liberation, Cuba should use its human capital to get itself out of poverty and raise the standard of living. Cuba can achieve that by letting the Cuban people free to pursue their own destiny and improvement, and not take everything the labor has earned.

The Cuban government is starving for capital to support its generous social programs, which is also the government’s lifeline. The current regime knows that it can’t support across-the-board subsidies. With the 300-point plan in place it’s steering the island away from a command economy to a mixed economy with market mechanism. It’s certainly a step in the right direction. While I’m cautiously optimistic, attracting foreign investors will certainly shape up the island. Opportunities exist for the foreign investor, but the risk is extremely high. If successful, it will reap rewards.

Raul Castro’s son is being groomed to take over the “throne” once Raul steps down in 2018. But the younger Castro is not the solution. If Cuba wants a better future, it will need to come from its citizens but as long their basic needs are covered, Cubans are not going go for a regime change. Cuba is human capital rich with its prized doctors and professionals. Cuba needs to liberalize its economy, politics and free its people to prosper and pursue their destiny. In the end everyone will benefit.


Tronox – Time To Focus On The Future

Reposted from Seeking Alpha
By Brian Langis

I have been a shareholder of Tronox for about a year. Every year I review my positions and verify that the reasons why I invested are still valid. I originally invested in Tronox because I believed it was undervalued. Now that I am reviewing this investment, I can’t help noticing that the case only got stronger. Despite the headwinds in the industry, the stock did well during the last year, especially with its hefty dividend. I decided to share with you my investment thesis.

Tronox (TROX) mines and processes titanium ore, zircon and other minerals, and manufactures titanium dioxide (TiO2) pigments that add brightness and durability to paints, plastics, paper, cosmetics, toothpaste and other everyday products. Tronox is a vertically integrated company since it has acquired Exxaro’s Mineral Sands Operations in 2012. That means it’s a fully integrated producer of titanium ore and TiO2. Titanium ore is the feedstock required to produce Ti02. By controlling both the ore and the facilities necessary to produce TiO2 will make Tronox one of the lowest-cost providers in the business, providing the company with a major competitive advantage.

Tronox’s past problems are well known. The bankruptcy in 2011 and the dispute with Anadarko seem to have overshadowed the merits of Tronox. The lengthy trial was finally settled. Even though the value of the settlement is much lower than was expected, the settlement can only mean good for the company.

The table below provides a bird’s eye view of Tronox.



It’s certainly not the most exiting chart to display. As the chart demonstrates, TROX has clearly underperformed on the market but has bounced back from its lows. Tronox had a lot of ups and downs and reflects the problems in the TiO2 industry. The problems are starting to clear up and the stock should improve over time.

Investment Thesis

Why do I think Tronox is a good investment?

Tronox is sitting on $1.47 billion in cash and has about ~$10 billion in tax shield. The pigment industry is stabilizing, its bankruptcy and legal problems are behind, free cash flow is generated and parts of it are returned to shareholders via dividend or share buybacks. Tronox could also benefit from the industry consolidation. Tronox has the means to be a buyer and could also be a target.

I believe that Tronox is undervalued and there’s potential for 30% to 53% upside from the current ~$26 market price. There’s more detail on my valuation below.

Weak demand for titanium dioxide and low prices has weighed on the results of Tronox. Last year, Tronox swung from a $1.1 billion profit in 2012 to a $90 million loss (non-adjusted). The industry is in part responsible for the mess by over producing during good times. In the last couple quarters excess inventories have dwindled down and the playground for better times is being prepared. You can position yourself for better times ahead and take advantage of the upswing.

What’s makes Tronox an interesting company is that it’s involved in all the facets of the TiO2 cycle, from the mining to the production of TiO2. This provides TROX with a competitive advantage on the cost side since it has greater control over the supply chain.

For the full article Click Here.

MTY Q1 Update

MTY had a good Q1 results. Revenue is up, EBITDA is up, margins are slightly up, but net income is down (large amortization charge). Their cash flow from operation doubled to $8,7m from $4m, fueled by recent acquisitions. The free cash flow is also increasing. That to me is one of the most important metric. That means more cash for acquisitions and the shareholders. Stanley Ma is doing a great job compounding that growth. MTY used part of their cash, $12 million, to pay down a line of credit and some debt. Also I didn’t know if you knew but they augmented their dividend last quarter The only downside was the net gain of one store (40-39). That’s terrible organic growth. Following the trend of most restaurants and retail store right now, their Same-Store-Sales growth -1.7%, blase largely on the weather. They get a pass this quarter because of the terrible weather, but they eventually need to stop the negative trend. Hopefully a strong beautiful summer will get people in stores. I’m also noticing more and more of their products on the shelves of grocery stores. I still haven’t tried them but they do look good (but not healthy). Other than that everything is on par. Patience is the key here.

Here is an interview with the CFO in the WSJ last month (paywall)

Here are both documents from the SEDAR filing:
MTY – Financials Q1 2014

MTY – MD&A Q1 2014

Original investment research: MTY Food Group Inc. – A Restaurant Stock For The Wallet

Highlights of the first quarter of 2014:

  • EBITDA grows by 8% to reach $9.5 million fueled by the results of the newly acquired concepts, of which the positive impact was partially offset by non-recurring master franchise fees earned in 2013 as well as by higher charges related to store closures incurred in the first quarter of 2014
  • Cash flows from operations more than double as a result of lower income tax burden
  • Revenues increase 13%, with most of the growth coming from recurring revenue streams
  • Operating expenses grow 17%, as the company adjusts its structure for future growth and suffers from higher charges related to store closures
  • Same store sales growth declines by 1.7% during the first quarter, impacted by adverse weather in some regions of Canada, sluggish economies mainly in Quebec and Ontario and intense competitive pressures
  • System sales increase by 24% to reach $200.6 million during the quarter
  • The number of units at quarter end sits at 2,591, a net gain of 1 unit generated by 40 new store openings and 39 store closings

This Investor Seeks To Buy A Dollar For Fifty Cents

Reposted from The Globe and Mail
By Larry Macdonald

Brian Langis, 29


Investment manager and consultant

The portfolio

Positions in American International Group Inc., Bank of America Corp., Citigroup Inc., SNC-Lavalin Group Inc. and other companies.

The investor

Brian Langis manages a private investment company and serves as a consultant for a frontier (or “pre-emerging”) market fund. He is a candidate for the Chartered Business Valuators membership exam in 2014.

How he invests

Mr. Langis uses his business valuation skills to estimate how much a company is worth. If the amount is greater than the company’s stock-market capitalization, Mr. Langis may be interested in buying its shares (after factoring in a margin of safety).

“The one particular metric I really put emphasis on is free cash-flow generation,” he adds. “With excess cash, they can pay me a dividend, reinvest in the company, pay some debt, or acquire a company. In general, if a company can increase their excess cash capabilities, that can translate into higher stock prices.”

At the moment, his portfolio is mostly concentrated in U.S. financial stocks – one of the “few sectors that remains undervalued.” As for SNC-Lavalin, the “ethics scandal is keeping the company down, but underneath there’s a going-concern company with great assets.”

“As you can see, I have a penchant for companies that make it on the most-hated list,” sums up Mr. Langis. “To find value, you sometimes have to look where others are not, and usually you end up in undesired places.”

Best move

Mr. Langis recently “hit a home-run” with World Wrestling Entertainment Inc., registering a 100-per-cent return over a seven-month holding period. He had read the company’s filings and “knew that if somebody wanted to buy the company” they would have to pay a lot more than the market capitalization. Also, there was no debt, and a stable 5-per-cent dividend yield.

Worst move

“With the bull market over the last couple years… [it was] not pulling the trigger at certain opportunities that I found undervalued.”


“Focus on the value of a company and its relation to share price.”

CFL Expansion

I asked Mark Cohon, the Commissioner of the CFL, for an expansion team for Eastern Canada. Atlantic Canada, with the right infrastructure, can support the 10th team. The CFL is a great league and it needs more teams. A new CFL team is a value added to the league and to the existing franchises. Let’s have a real Pan-Canadian League.

Well he didn’t say no. With Ottawa Redblacks settled, it’s time to look out East for the future of the league.

CFL Response

60 Minutes – “The Market is Rigged”

A great piece by 60 Minutes. I heard about it in the news but watching this 15 minutes clips really, really clarify things. Good work by all the guys involved, especially Canadian fella Brad Katsuyama.

Starts at 30 seconds.

TARP Warrants

The Trouble Asset Relief Program (TARP) bank warrants is an interesting way to play some of the US banks and financials. Although more complicated and sophisticated than owning a common share, you have to approach them like a really long-term call option. Basically, you have the option to purchase one share at the strike price for each warrant held. Warrants are risky investments because if the share price doesn’t climb above the strike price before the expiration date, the warrant expires worthless. A simple Google search will lead you to a lot of really smart people that have broken down the math and the different probabilities. I highly suggest you really do your research because there are a lot of variables and inputs that influence the movement of these warrants.

The warrants that I am following at the moment are Bank of America Warrant Class A, Class B and AIG. BAC Class A is more conservative and less risky with a strike price of $13.30 and an expiration date of January 16th 2019. If you are extremely bullish on BAC, the Class B is certainly more risky with a strike price of $30.79 and expires on October 28th 2018. What’s also very interesting, that you don’t find in other warrants, is that the strike price is adjusted downward when dividends are raised after a certain threshold. That’s pretty sweet considering the banks are starting to raise their dividends.

If you really want to get legal, I will refer you to the pleasure reading section:

BAC Class A Warrant Prospectus
BAC Class B Warrant Prospectus

The banks issued warrants to the U.S. Treasury in exchange for bailout money. Then the Treasury sold the warrants to the public in an auction process.

Depending on the website, I always have trouble with the symbol. The sticker varies from site to site.
Yahoo: BAC-WTA
Bloomberg: BAC/WS/A:US

Below is a table summarizing the warrants.


Ukraine: Mapping the Conflict

The Wall-Street Journal had a section mapping the conflict from different angles. Very interesting. In a previous post I had a map of the gas supplies to Europe via Ukraine.

I’m more of a visual learner, so I think it was worth sharing.

Source: WSJ