Walmart, Teck Corp, And Active Investing Vs Buy And Hold

Yesterday, Michael Hainsworth (Market Call BNN TV) interviewed Ross Healy, Strategic Analysis Corporation, who was talking about Value Investing. The discussion is a good study, well worth your time.

I recommend this interview with Ross Healy, Cdn Asset manager for 43 years. He has a wealth of experience to share. For the first 10 years of his career was a bear market like we’re in. Buy and hold did not work, cycled thru stocks, often didn’t hold for long. Dividends were a big piece of the return. TCK: Don’t turn the mgmt over to a Bay St guy….he trashed the balance sheet, a departure from the careful way that Keevils ran the company for years. Think about it, Lindsay couldn’t see what was coming? What does that say about Bay St/Wall St. wisdom and foresight. What was he thinking?Posted by: westcoaster at November 17, 2008 11:20 PM

Hainsworth started the interview with the statement that since the last time Healy was on the show (Dec 20, 2007), his “Past Picks” were down -31%. Healy responded by discussing the need to understand that the Value investing paradigm had returned after a whole generation of Buy-and-Hold investing. His main point is that investors need a Sell strategy. He speaks well, and is a very credible guy.

Now, please turn to Finance Google and click on the chart for Walmart (WMT). Next, click on Max. Then, run the little dot up and down the price track and look for 1983. The prices and dates are shown.

You will see that in comparative terms the price of WMT was 50 to 70 cents in 1983, which was when I visited Ross Healy in his private office on Eglinton Ave in Toronto after he had departed Merrill Lynch Canada, where he had been head of research.

The day I sat with Ross, some time in 1983, WMT had moved up in price from about a dime in the 1981 Bear market. There was a Bull market then and Ross was still bearish.

On the walls of Ross’ tiny one-man office of Strategic Analysis Corp were plenty of charts and stuff about WMT. His discussion focused on how the incredible price run-up in WMT was unsustainable. His bearishness regarding Wal-Mart was palpable.

He backed up his detailed arguments with terrific fundamental analysis, going into matters of their purchasing system, and their payment and credit policies that he opined were abusive and would not be tolerated for much longer.

Let me say that Ross knew this company’s financial summaries inside and out. In his professorial manner, he can be convincing, and because of that, and his former high rating as a professional on Bay Street, he has always been a sought-after guest on financial TV.

But he was wrong when it came to WMT. In fact, he could not have been more wrong. Worse; he stuck with that negative opinion for maybe 15 years.

Move ahead to 1993 and you’ll see WMT had moved up to about $15, up 100-fold since the Bull market of 1980. By Dec-1999, the price of WMT had grown to $69.

My, how had 20 years flown by - ten cents to $69.

We all have our crosses to bear. (No pun intended).

My point here is not to put the knock on Ross Healy. He clearly is above all that, and I think highly of him. But, I wanted to point out that we all have our opinions, and sometimes they are found to be wrong.

There is never a time in the market when prices always go our way. The market is a dance where none of us selects the music. We must adapt.

With respect to WMT, why not review my notes in the second last Week In Review (Nov 9):

Wal-Mart might not be everybody’s favorite shopping place, but WMT makes a great dancing partner.Today, it, like most consumer stocks is not on my desirables list. The economic data tells you why. But their business model is a good one and the company continues to perform well. With a $15 billion stock buy-back in the works, WMT ought to do well over the next several years. But careful trading of options is going to be required to generate satisfactory profits in the long run.

Re Wal-Mart, do you recall my WIR#32 (August 10)?

Wal-Mart is a company many people love to hate, for some reason. For me it is a member of the Cara 100 and a portfolio core holding, although one that requires adroit buy and sell timing and use of put and call option writes to maintain a suitable Total Return.I see no reason to say much positive about the stock right now. Certainly I am not bullish in the short run.

You know when I was discussing it as a purchase candidate. You might recall that in the Aug-27-07 WIR, I recommended “parking the family jewels in a Wal-Mart parking lot”. The price closed at $43.63 that week. So why today at $57.86, where you could have sold for $61.00 two weeks ago (a +40.0% capital gain plus the nice dividend), would I be excited about the stock? I’m not.

But if you really want to get an insight into how I think about trading markets, please revert to WIR#6 Feb 10, 2007, when I reviewed WMT off the top (when the price was $47.97). You will see my reasons for why I was buying WMT below 43 much later in the year. You will also see how I opined that the banks were nuts for buying Fortress Investment Group (FIG) at $35. It went to $8 if anybody cares. But I was telling you that the bank analysts had a hate on for Wal-Mart and it was a terrific Cara 100 company.

So who called it? But you knew that already. (LOL)

I love this stuff.

By writing a 60 call you would have taken in another couple bucks in options premium and had the stock that was priced at $57.63 on the Friday close Aug-8. Then the stock worked its way down to a low of $47.40 on Oct-10. How good is that! Proof of concept.

Moreover, on the mid-October dip, you could have written the 40 and 45 puts or gone long the stock or put on any of numerous option trades and made significant profits as the stock worked itself back up to 55-56 in two or three weeks.

In the six sessions since I opined that WMT should be avoided for now, the stock has fallen -4.74% from $54.39 to $51.81. I have been nimble.

In the Buy-Sell-or-Hold part of yesterday’s Hainsworth BNN-TV interview, Ross Healy rips Don Lindsay, the former head of the CIBC World Markets investment bank and now CEO at Teck Corp (TCK). He clearly does not like Lindsay, and, as you know, I do.

Healy says, never hire a Bay Street dealmaker to run your company and that Lindsay shredded the Teck balance sheet and didn’t understand mining.

I find Healy’s comments offensive. Teck Corp was an acquisitor long before Lindsay was recruited from Bay Street. He was hired for his deal-making expertise and mandated by the Teck founders Keevil family to buy assets at affordable prices and get them properly financed. He did that. Unlike Healy, he has no cross to bear.

Teck owns many valuable resources that would be welcomed by the world’s largest mining companies. Lindsay could sell some of those assets and improve the balance sheet. He has the cash flow to issue a financially sound convertible preferred share to use the proceeds to pay down debt. When it comes to understanding balance sheets, Don Lindsay is a master.

Enough said; I like both these gentlemen… and I mean gentlemen. Both of them are fine people.

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