There are still three weeks to go before Christmas and already many stores are offering 30 to 50 per cent off their entire inventory. On the face of it, this should mean that there are bargains galore in the store. But, experience has taught us that often the original price is grossly extravagant, so the discount simply lowers the price to a more realistic level. What we would really like to find is Holt Renfrew quality and style at a Winners price point.
So it is in the stock market. Just because the S&P/TSX Venture Exchange index is off 32 per cent year to date doesn’t mean that these stocks are cheap. Especially when 65 per cent of the listings are resource and energy stocks where the primary asset is undeveloped acreage. What we would really like to find is a Venture Exchange price decline coupled with main board S&P/TSX quality and disclosure.
Aberdeen International is a recent addition to my portfolio and may fit the bill. The stock traded at $1.02 during the first quarter and was down to 62 cents by the end of November, so it certainly qualifies under the price decline criterion. It is listed on the S&P/TSX main board, has a credible website and investor relations program, and even provides a modest dividend yield of 3.2 per cent.
Aberdeen International is a global resource investment company with a focus on private and micro-capitalization companies. Management takes an active role in these companies and hopes to unlock value over a two- to five-year time frame. At present, the top five holdings make up about one-third of the portfolio, so it is reasonably diversified, plus there are another 20 investments in agriculture, oil and gas, and mining. As of early October, about two-thirds of the investments are publicly traded and half of them are exposed to gold and precious metals.
What makes the stock of particular interest to a value investor is the fact that management reports the value of the investment portfolio every quarter and, as of Oct. 31, the investments and cash were valued at $1.15 a share. So, you are effectively buying an actively managed resource portfolio at 50 cents on the dollar.
With only 87 million shares outstanding at 62 cents, the market cap of $54-million is not going to attract many institutional investors, but liquidity could improve significantly if the 37.5 million warrants are exercised before their expiry date of June 6, 2012. With a strike price of $1, they would be slightly dilutive at the current asset value of $1.15, but the enhanced liquidity is a worthwhile tradeoff. Management and the directors own 17 per cent of the shares outstanding, so they are no doubt highly motivated to see the stock move above the warrant strike price.
To be fair, many closed-end investment companies trade at a discount to the asset value of the underlying portfolio, so the real issue is whether or not a 50 per cent discount represents a real bargain or just a pre-Christmas promotion. The Aberdeen International website offers Sprott Resource Corp. and Pinetree Capital Ltd. as somewhat comparable business models. The first trades at a significant premium to net asset value while the second trades at a 45 per cent discount, which is not particularly helpful in addressing the issue.
My observation is that if you passed a store where the goods had been marked down 40 per cent year to date and were then priced at a further 50 per cent discount to the suggested retail price, you would probably make a quick circuit of the sales floor. Sure, the discount could widen over the next few months, but the margin of safety seems to be adequate.
As a recent shareholder, I hope that Aberdeen International works out, but honesty requires me to admit that this line of thinking and analysis explains how I and a number of other reputable value investors ended up as major shareholders in the ill-fated Liquidation World. It too traded at a discount to net asset value and its inventory was liquidation priced. Be sure to diversify!
Robert Tattersall, CFA, is co-founder of the Saxon family of mutual funds and the retired chief investment officer of MacKenzie Investments.