Todays article is an update on my active-portfolio investments.

Musing

Much like October of 2018, the month of October this year has been anything but calm, consistent with historical data on high-October volatility.

In a perverse way, I am glad to see that at least some trends seem to hold true to their historical precedence for these are strange times for world economy at large.

The historical savings glut, in part, fueled by the retiring baby-boomer generation, and in other parts, fueled by the massive growth of non-capital intensive industries has led to the unthinkable scenario of negative interest rate, more than $15trn world over, meaning lenders have to pay money to lend.  The US unemployment rate fell to 3.5 %, the lowest since 1969 and yet we see no trace of inflation. Rather, this unprecedented growth in jobs has accompanied with wage stagnation and an ever widening gap between the top 1 % and the bottom 50 %.

In the near term, trade-war uncertainty looms; the September repo crisis was a warning shot to the financial system, with Feds injecting over $50 B to prop up the repo markets for a first fiscal intervention in the past 10 years. The ensuing uncertainty has led Feds to again reduce its target for federal funds rate by quarter of a percentage, to a range between 1.75 % and 2.00 %. To top it all, yield curve inversion has now persisted for more than a quarter, stoking fears of an impending recession.

Investment Activity

Market sell-off creates opportunities for long-term contrarian investors such as myself and I got to work. I purchased shares of GrafTech International Ltd. ticker, EAF and Invesco, ticker IVZ.

GrafTech International Ltd. makes graphite electrode products that are essential to the production of electric arc furnace steel and other ferrous and non-ferrous metals. The company has a global customer base of steel producers and other metal producers. The company was founded in 1886 and is headquartered in Independence OH.

EAF came on my radar when it was reported that Mohnish Pabrai, the famed value investor, has taken a big stake in EAF. I was intrigued. I began digging into EAF and soon found that the majority stake holder of EAF is Brookfield Asset Management, (ticker BAM).  Around the same time, quite coincidentally, BAM was forced on my radar for completely unrelated reasons. BAM recently acquired a majority stake in Oaktree Capital Management (ticker OAK, now defunct), creating the worlds largest alternative money manager. I had stocks in OAK and after the transaction on OAK closed, I ended up inheriting some stocks of BAM.

As of this writing the following are the financial metrics on EAF that are of interest to me:

• Enterprise Value (EV) to Earnings before Interest and Taxes (EBIT) ratio: 4.82
• Return on Invested Capital (ROIC): 90 %
• Share-holder’s yield: Dividend Yield + Yield from share re-purchase: 12.9 %
• Piotroski-score: 8
• EBIT growth: 25.4 %
• Return on Equity:  N/A
• Total Debt: $2.04B
• Total Cash: 205.26 M
• Levered free Cash flow: 495.98 M

The debt load on EAF is a drag on the equity price and probably the main reason for the stock to be trading at relatively cheap multiples. I am however pleased with the healthy free cash flow numbers produced by the firm, giving me conviction that the debt load is manageable and that there does not seem to be a near term threat of dividend cuts. A high Piotroski score seems to confirm my view of financial strength of the firm.

The fair value range for EAF, using EBITDA multiples method stands between $9.41 and $12.90; whereas using the PE multiples method, the fair value stands between $12.46 and $19.79. With a significantly higher upside, and relatively low downside, I was willing to put my money and collect healthy dividends, while waiting for markets to work its magic on the stock price.

The second purchase I made in the last month was Invesco, ticker IVZ.  Invesco is one of the world’s largest independent asset management groups with over 750 investment professionals worldwide. I have been a consumer of IVZ product for quite some time now with investments in the following Invesco ETFs: PCY, DBC and the BulletShare bond ETFs.

IVZ is yet another dividend aristocrat with yield of about 8 % as of this writing and is currently trading close to its 52- week lows at $15.84.  The financial metrics on IVZ that are of interest to me are:

• Enterprise Value (EV) to Earnings before Interest and Taxes (EBIT) ratio: 18.61
• Return on Invested Capital (ROIC): 5.89 %
• Share-holder’s yield: Dividend Yield + Yield from share re-purchase: 8.08 %
• Piotroski-score: 4
• EBIT growth: -74.75 %
• Return on Equity:  1.42
• Total Debt: $2.5B
• Total Cash: $1.23 B
• Levered free Cash flow: $2.4 B

The financial metrics look no good. With high debt, low growth and low return on equity, the stock should not have been a purchase for me.

What moved the needle for me was the fact that Invesco has robust free cash flow to sustain a healthy dividend yield of > 8 % at the current share price numbers and the fact that the stock is trading below the low end of fair value estimates based on the following: the EBITA multiples method puts the stock price in the range $16.24-$22.44, whereas the PE multiples method puts the stock price in the range, $18.41-$23.48.

I have therefore initiated a small position in IVZ and will add to my stocks should the stock price fall further.

Below is the synopsis of my active-investment portfolio

Video/Book/Article/Audio for the Week

I have several suggestions from the week past:

• Steve Dubners interview with ex-British Prime Minister, David Cameron, worth a hear from the ex-leader who initiated the Brexit referendum, campaigned against it and then lost.
• Tobias Carlisle’s interview with Michael J. Mauboussin;  I have been aware of Michael Mauboussin through his wonderful book titled, More than you know. Fascinating to hear them discuss the concept of mean reversion through the real-world example of companies that land on Business Magazine cover.
• Planet Money Questions Podcast, especially relevant to get a laymen-handle on the world of repo finance.
• Global Macro Monitor article on, How Rich Get Richer and Poor Get Poorer. One statistics, net-worth of top 1 % increased 165.6 % vs. a decline of 8.6 % for the bottom 50 % household, is particularly noteworthy.