New Investment: Ternium S.A.

In my last post I mentioned that I  intend to recommend stocks in one industry as it is cheap. I'd like to retract that. I was talking about the oil industry but I have found a few other stocks I think are interesting to look into. So I will  give an oil stock or two in the coming days, but for now let us go into one of my favourite industries, actually my favourite, Steel & Iron.

I always loved mining, a simple business that anybody could understand. Just find a mine with some precious metals in it, acquire it which is the majority of the cost and then you pay people to excavate which is a lot cheaper than you think (relative to revenues). But this industry does not lend itself easily to financial statement analysis. Typically every few years they have a bad year, and with no explanation. Free cash flow is always very low and still means nothing. Though I have never been able to verify it, my theory has been that they spend a lot of capital expenditures on acquiring more mines or doing research on them. Either way, I have found over time these businesses are worth       8-10x earnings.

The stock I am recommending is Terniu SA (TX). When we look at the balance sheet, we don't exactly see a fortress balance sheet, but a solid one nonetheless. Current assets are only slightly below twice the current liabilities and total assets is only slightly below total liabilities. So highly unlikely to go bankrupt anytime soon.

Next comes the income statement. Margins in TX was about 6%-7% in 2013 and 2011. Bad years happen and in 2012 it was only 2%. Cost of Goods Sold was a bit higher that year relative to price. From what I've seen, even good companies in this industry periodically have a bad year, but we shouldn't let it affect us. After all the balance sheet has remained solid through this. So income statement seems solid.

Now the cash flow statement. As you may notice capital expenditures are very close to operating cash flow giving it a free cash flow of approximately 0. I have never fully understood why but for mining capital expenditures tend to equal operating cash flow quite often and it has never been a worrisome figure. If it was deep in the red I would be worried about if there is any real money in this business but as this business has paid dividends for years and remained so well capitalized I tend not to worry too much.

As the business is right now at 5x earnings and the analysts expect it to continue for the next year or so I recommend this stock as a buy with a selling price of approximately $30.

You may also be wondering why I like this industry so much when so little can be evaluated. I find that it is easier and faster because cash flow statement just needs to be glanced over to make sure free cash flow is not too far negative, balance sheet was always an easy calculation and the income statement shows your profits. Doesn't mean I can't be wrong, just that it is simpler to put the odds in your favour in this industry.

Updates and Companies to Consider Selling

Let us open with some bad news. I said I would not buy Microsoft because it is too confusing what will happen. In the ended they almost doubled in price in 2 years. Again, I do not have a crystal ball to see the future with. When it's too cloudy I go to a different opportunity. So for not recommending I do apologize but only someone who understands technology really well would have been able to see this coming. I'm not that good at it.

I also recommended to sell Blackberry because their phones were not that great, and I couldn't see the value in the business. I still don't and in the last year and a half the stock has gone nowhere. The new phones some people like but I am not that impressed. Sales are low, and quite frankly their specs still have not caught up to the other large companies. So no I do not have faith in BBRY at this time and thank god I was justified last month as well.

My first two posts shows that I gave advice that made no money. Idiotic, isn't it? So I would say bad things about myself except that I did give some advice that made money. So let's look into that.

Tim Hortons was a stock I recommended about 2 years ago. It was bought out for approximately 50% more than when I recommended it in cash and stock. Considering you had held it for approximately 2 years you got a rate of return of approximately 20% compounded. I was hoping to get that for the next 10 years, but Burger King saw the value and scooped it up at a price I believe will be considered a bargain in the next decade. So good for them. I recommend selling the stock in the new company as it seems a bit overpriced and there are bargains now.

Now we come to Hewlett Packard. This is the company you made the majority of your money in if you only followed my advice. This stock is up a whopping 150% in the last 2 years. Unbelievable right? I recommend a sale only because I think there are better stocks to buy now. Nothing against the company, If you want to hold on to the stock, hold on to the stock, but I am going in a different direction and would recommend a sale.

For those of you who want to know my track record. I only made 3 recommendations in the last 2 years. One of them was an error that I recommended a sale at a 10% loss. The second stock gained 50% and the third one gained 150%. I rounded down the returns because I don't know what price would have been reasonable for people to get into the stock. If that is the case then on average each stock returned 63%. So your average return if you put equal amounts in those 3 stocks on an annual basis is 27%. You can call me lucky if you want, but I was hoping for better returns actually.

The problem you have now if you follow my advice is that all your money is in cash, so what do I invest in? Interestingly enough, if you pay attention to everyday things there is an entire industry that looks to be cheap and I am considering diversifying into that industry. You can call it risky, I do not agree because this industry cannot easily be replaced. See you all soon.