From the Desk Of Irwin Michael – April 15, 2016 The New Value “Every time we’ve moved ahead in IBM it was because someone was willing to take a chance, put his head on the block and try something new.” – Thomas J. Watson Over the past decade there have been many changes with respect to traditional value investing. For instance, over the years we were able to purchase deeply undervalued stocks trading at half of book value, net asset value and/or at several times cash flow multiples. Successful purchase examples during that time included Com Dev International, Flint Energy Services, High Liner Foods and Vector Aerospace. However, the likely occurrence of similar investment opportunities, today, has fallen off significantly due to increased investor competition, aggressive corporate takeovers of deeply undervalued securities and fewer initial public offerings. Looking back many changes occurred with regard to the securities markets and it is our view that the stock market has become increasingly efficient. This result is largely due to expanding media attention and the remarkable growth in the transfer of financial information, greater investor education and a declining appetite for investment risk. Consequently these factors are making it extremely difficult to uncover overlooked, deeply undervalued equities. The point is not to imply that an investor won’t be able to pick off an attractive deep value stock from time to time. It is our opinion, however, that generally the purchase quantities will likely be insufficient for most institutional investors, the stock might be an illiquid value trap and/or the stock may lie in the precarious resource sector vulnerable to volatile commodity prices. This situation is the reality of today’s value marketplace. The fact is that pickings are very slim and value investors such as ourselves have had to face a more complicated world of “new value” whereby past parameters of low price/earnings multiples, discount to book value, replacement cost and/or out-of-favour contrarian investments are no longer enough to achieve investment success. In approaching the new value stock selection process and factoring in the current fickle investment environment we find that many investors are shifting away from the traditional “buy and hold” investing. We are encountering more of a traders’ market mentality with common share liquidity becoming increasingly important. While we are not forsaking our old value investing principles we do expect that liquid large capitalization common stocks will lead the market recovery over the next 12 months and that a liquidity-driven environment will likely continue to the end of 2016. In fact, our new value selections emphasize not only liquidity, free cash flow and excessively strong balance sheets but also corporate globalization, e-commerce, cloud computing, high technology, mobility, healthcare, fintech and strong product branding. These themes are most prominent in our security selection process today. Interestingly, many of our new selections have been in very large capitalization American equities which offer the numerous new value elements we are seeking. A few examples of these new value ABC Funds’ holdings include Apple Inc., Boston Scientific Corporation, Microsoft, Johnson & Johnson, Visa, Amgen Inc., Kraft Heinz Co. and PepsiCo Inc. We believe that these common stocks offer not only good long term value and liquidity but also investment stability, dividends and growth in an extremely volatile financial environment. Summing up, we have moved ahead to expand our common stock value selection universe given that many market changes have taken place. Going forward we intend to constantly review our value principles and will opportunistically make modifications wherever necessary. Irwin A. Michael, President I.A. Michael Investment Counsel Ltd.
