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Last week’s removals readily played into a ‘return of the bear market’ scenario: we believe that as an income investment HE, which has banking interests, was not as attractive as GXP, and Caldwell could be negatively impacted by a slowdown in Canadian labor market activity. As for the four remaining Wish List companies, while a deep bear market or economic recession would not necessarily be a positive, it is not a glaring negative either:
- Economic slowdown in Canada could also bring with it a weakening loonie – something High Liner could immediately benefit from. We are confident that demand for frozen fish will continue to increase. Our worst case scenario is that High Liner continues to struggle with raw material costs and shares fall another 10-15%, although with the company acquiring share in Canada longer-term returns should be more attractive.
- Great Plains Energy needs positive developments on rate cases and solid performance on the merchant side of the business. Baring a dramatic spike in US interest rates we do not believe that a bear market will play a key role in deciding the company’s fate.
- American Shares Hospital Services is a speculative long-term investment that could prosper from its recent investment in Still River as the adoption of proton radiation therapy technologies comes online in 2008/09. Since the company is dependent on financing arrangements, interest rates are a concern, although the broader tenure of the equities markets is not. While illiquidity of the stock is annoying, we really do not mind if AMS shares do not trade at all over the next 3-5 years.
- Hancock could be negatively and severely impacted by a bear market and/or economic slowdown in America. We do believe, however, that the release of its financial statements is likely to decide which direction the company’s share price heads over the near term. Hancock could be removed from the Wish List in the near term, regardless of the fact that shares are down significantly from when we selected the company.
In 2003 we began to remove companies because their stock prices rose above our over/undervaluation tolerance levels. These tolerance levels were partly influenced by our conclusion that the bear market would soon return after a relief rally. We were wrong in our timing and, to borrow a Buffett analogy, we could have achieved greater returns simply by watching movies during the day rather than interrogating our holdings for cases of overvaluation.
By explicitly acquiring a larger cash position today and preparing for better opportunities in equities tomorrow are we again acting too early? Do the equity markets have more room to run once the Fed stops raising interest rates and orchestrates the magical ‘soft landing’?
We don’t think so. Rather, valuations are high by historical standards, the US economy is slowing down - which suggests that earnings growth is about to slow down - and commodity prices remain stubbornly high. If stocks can rally strongly in this environment we do not mind missing out.
None of our existing holdings are screaming bear market buys. More importantly, however, the remaining four Wish List companies are not screaming sells either. With the exception of the Hancock situation, the Wish List is ready for the bear. In the words of Mr. Bush George Bush, ‘Bring it on’…
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