September 30, 2012 Comments

P.S. (update to comment) I had forgotten to mention in this post that on Friday I sold my Walmart shares. I had indicated in Thursday’s remarks that I might sell my Walmart shares.

Friday marked the end of the third quarter of the year.

While, you might not know it with all the talk of the difficult stock markets, 2012 to date has provided good stock market returns, particularly in the United States, with Toronto up 3.0%, the Dow up 10.0% and the S&P 500 up 14.5%. Our Stock picks returned an average of 11.1%. By some combination of concentrating on our highest-rated stocks (to some degree), and having invested only a tiny amount in what has been our worse pick (Research in Motion) and by trading in and out of certain positions, my own return has been 21.5%, year to date.

This past Summer provided quite good stock returns with Toronto up 7.9%, the Dow up 4.3% and the S&P 500 up 5.8%.

Berkshire Hathaway’s earnings each quarter are affected by mark to market changes in its index options “bet” that markets will rise by around the year 2020. I suspect that the strong summer markets will add perhaps a billion to Berkshire’s earnings this quarter. That is significant because Berkshire’s total quarterly earnings tend to be in the 3 billion range. Also it will likely have done reasonably well in its insurance businesses since I don’t think that there any particularly huge storms or other catastrophes in the quarter, although certainly there were some karge ones. On a book value basis it’s investments will also have done well which should generate a strong increase in Berkshire’s book value. Much of this good news about Berkshire (to the extent it is confirmed in earnings) may already be reflected in Berkshire’s stock price. It’s not as much of a bargain as it was this past Spring but it is still probably a decent long-term pick.

Research in Motion only managed an 8% gain on Friday which is a lot lower than the almost 20% gain it was showing in after-hours trading on Friday just after releasing earnings. Despite a lot of gloom and pessimism around this company, it still has 80 million subscribers and it has no debt. The market is valuing it at about $49 per subscriber. I certainly offer no guarantees. But I believe it is hard to go bust without first getting into debt. I think this is a rational speculative pick. It would rise in price if it starts to appear that Blackberry 10 will do well or if it gets a buy-out deal or can license its messaging service to others. Alternatively it could continue to bleed.

Canadian Western Bank was one of few stocks that rose on Friday (up 2.0%). I continue to like this as an investment.

Canadian Tire is up 7% this year. With a P/E ratio of about 11.1, it seems to me that this stock has room to rise on that basis. I don’t see any reason to think it will not have had a good Q3. It continues to be held back by fears of what Target will do to its business. On the other hand many Canadian retailers should be getting a large boost in Q3 and Q4 since many or most Zellers locations have been closed for conversion to Target. Target is certainly spending a huge amount of money on its move into Canada. First, it paid an amazing $1.8 billion just to take over leases from Zellers. And now it is completely gutting and even expanding at least some of the old Zellers stores. I am curious whether Target’s landlords including RioCan face any expenses with these extensive renovations. Presumably the expansions are paid for by the landlord in return for additional lease payments. I have no idea if the landlord has to pay for any of the massive renovations within the existing store footprints. It would seem odd that Target would take over an existing store and pay Zellers huge dollars for that (due to an attractive locked in lease rate) and then turn around and gut the place and re-do everything but the frame and concrete floor of the building (that is what I witness at a local Zellers) at its own expense. And if RioCan pays for it does it get to increase the lease rate?

I have updated the composition of my own portfolio to reflect recent trades.