Margin Balances

As markets get more richly valued, it is bound to make a value investor nervous. One of the methods that I like to gauge the richness and euphoria in the market is to look at the use of margin debt to buy equity.

Based on this chart, even though the general market looks richly valued (based on PE ratio), it doesn't look like the euphoria has taken hold

Data Source: http://www.nyxdata.com/

Buffett writes a letter to Uncle Sam

Warren Buffett wrote an entertaining letter to Uncle Sam for pulling through in the time of need and panic. In Buffett's usual manner, the prose is funny, folksy and down-to-earth. Here is an excerpt from his letter.

[When things are falling apart] Only one counterforce was available, and that was you, Uncle Sam. Yes, you are often clumsy, even inept. But when businesses and people worldwide race to get liquid, you are the only party with the resources to take the other side of the transaction. And when our citizens are losing trust by the hour in institutions they once revered, only you can restore calm.

I am glad that Buffett is congratulating the government officials for their actions, even though they created a whole lot of other mess (eg: moral hazards, etc.). But I am not sure if anyone else would have done any better. You just have to look at the current debt squabble in the EU to see just how slow bureaucracies can be, even when they are trying to be fast.

Full letter appeared in the op-ed area in the New York Times.

Investment Idea: Canam Group

I have been following Canam group (CAM) listed on the Toronto Stock Exchange for some period of time. It is an organization with a strong balance sheet and very able management. They seem down to earth and are happily taking advantage of the depressed asset values on there to buy businesses to further expand Canam's capability. In other words, they are taking advantage of their strong balance sheet to buy cheap assets. That is a very value oriented move that invariably will lead to great gains in the future.

I have performed back of the envelope intrinsic value calculations that I am presenting below. I used modest growth prospects (5% per annum over 10 years) and 5 yr average free cash flow and earnings. EDIT: I should clarify that the following NPV calculations assume no growth in cash flow.

Book Value: 391.9M or 8.63/shr
Graham Number: 560M or 12.34/shr
NPV (6%): 358.8M or 7.9/shr
NPV (15%): 265.5M or 5.8/shr

As of this writing, this fine business is selling for 7.5/shr, which gives a decent margin of safety to the valuations.

In addition to selling below book value, Canam offers a decent dividend yield of 2.13%.

Disclosure: I own this business at the time of this writing.