Currency Risk

This is a factor that many investors fail to account for but that has a huge impact of their investing results. Most people may not be aware of it, and thankfully, I fully grasped the depth of those implications the easy way.

Back in September, as I was adding companies to my portfolio, the Canadian dollar was at par with the US dollar. Which made buying American companies at the then current prices a bargain, and I have luckily been proved to be right! From September 17th, when I made my first trades acquisitions of American stocks, to now, the US dollar went from 1.07 Canadian dollars to 1.29 Canadian dollars. That is a 20% jump, and it was mostly due to the financial meltdown in the last quarter of 2008.

Being an investor living in Canada, and that applies to any investor; it is in my advantage to invest mostly in companies that trade in the local currency because I would be in a very uncomfortable position if currency rates had moved the other way. Since currency exchange rates are influenced by macroeconomic factors, I think it is a thing that value investors tend to minimize by not investing much in foreign countries.

That is in fact the main reason I do want to avoid those particular types of fluctuations. I am aware of my limitations in reading macroeconomic trends, so for someone like me, trading with currencies is a double edged blade. That is a factor that can work for me or against me. As a value investor I guess it is probably better for me to stick with local currencies.

Money to Be Made In Alcoholic Beverages

When attending social events, it came to my attention the amount of alcohol that is often consumed when people gather. So I started doing a bit of investigating and noticed that among the biggest companies that produce spirits tend to have very healthy profit margins and incredibly reasonable returns on equity.

While studying the financial statements of Pernod Ricard, I was wondering if that company had a subsidiary in Canada that was majority owned but had enough shares outstanding to still be publically listed and I hit the jackpot.

The company in question is called Corby Distilleries Limited (TSE: CDL.A, TSE: CDL.B). The company has been around for a while in Canada, since 1859 to be precise. It is a leading Canadian manufacturer and marketer of spirits and imported wines. Corby’s portfolio of owned-brands includes some of the most renowned brands in Canada, including Wiser’s Canadian whiskies, Lamb’s rum, Polar Ice vodka and Seagram Coolers. Through its affiliation with Pernod Ricard S.A., Corby also represents leading international brands such as Chivas Regal, TheGlenlivet and Ballantine’s scotchwhiskies, Jameson Irish whiskey, Beefeater gin, Malibu rum, Kahlúa liqueur, Mumm champagne, and Jacob’s Creek and Wyndham Estate wines. Corby has about a 24 percent share of spirit sales in Canada,representing more than 4,000,000 cases of spirits sold annually. Corby owns or represents 8 of the 25 top-selling spirit brands in Canada, and 16 of the top 50, as measured by case volumes. Additionally, with volume of approximately 900,000 cases, Corby is also a leading importer of wines in the country, and that impresses me since it is not a much known company.

It wasn’t a subsidiary of the French parent company at first, because the company already has it’s own brands of spirits. Where things get interesting is the alliance with Pernod Ricard. The company currently has a net income of about 100 million dollars a year without the use of leverage, awarding the company with a net profit margin of about 40%! So it makes total sense for the company to be profitable even during the current economic conditions.

That partnership also awards the company with an expanded portfolio of product so sell. Recent numbers have shown that the Canadian market for alcoholic beverages has been surging through the first quarter of 2009. That is a reason I like this company a lot, mostly since they are the only authorised distributor of Pernod Ricard products in Canada.

Full disclosure: the author has no position in CDL.A or CDL.B

The Northern Track to Profits

When you look at the news that is being circulated buy the many investment pundits, it is very clear that value companies are rarely what generate the buzz in the financial community. The best example I have in mind is the Canadian National Railway Company.

Canadian National Railway Company (TSE: CNR, NYSE: CNI), incorporated in 1922, is engaged in the rail and related transportation business. CN’s network of approximately 21,000 route miles of track spans Canada and mid-America, connecting three coasts: the Atlantic, the Pacific and the Gulf of Mexico. CN’s freight revenues are derived from the movement of a diversified portfolio of goods, including petroleum and chemicals, grain and fertilizers, coal, metals and minerals, forest products, intermodal, and automotive. They are so diversified that every company in North America large enough to need their services has very probably heard of them!

They also have a long history of profitability and their financial statements for the year 2008 show that there is no end to the earning power of the CN. With 8 billion dollars of revenues and 2 billion dollars of profits for the year, the resulting 22% net profit margin is very attractive since very few companies get to reach such a level.

The most amazing those is the impressive 18% return on equity generated by the firm. Even if it has declined throughout the year 2008, that number is almost twice that of the average company. Keeping such a fast pace for almost a ninety years is a very rare feat considering that the great majority of companies fail in their first years without even showing signs of profit to their owners.

I guess I am not the only investor noticing those attributes since the common stock of the company, dually traded on the New York Stock Exchange and the Toronto Stock Exchange has been recovering a lot faster that the overall economy year to date and is moving closer to the intrinsic value per share of the company. It is a sure sign that bargains never last and that investors have to act fast to avoid the mistakes of omission that are caused by what Warren Buffett calls “Thumb sucking”.

Full disclosure: the author has no position in CN