So my warning over past couple of weeks of a meltdown in resources has come to pass (well, begun anyway). I can promise you NOBODY will sign in to acknowledge it. Why? If you’re also a maverick investor/advisor – you’ll be used to this. People in general despise people that manage to be correct on occasion. So if your mission is to be loved, and have lots of company, then investing successfully is probably not the best hobby to adopt.
The best advice anyone with lots of experience (especially your financial advisor, whom you probably listen to less frequently than you should) can provide, is warnings like I’ve been doing for past couple of weeks. The key is what NOT to do that saves your bacon but it’s only fair I share with you (in a simple terms as possible) what I would look for in a stock – this isn’t a recommendation or advice, just an example.
First, I want stocks that fit a forward looking theme. I’ve mentioned in prior postings that despite what you read about (Portugal, Spain financial woes, lack of substantial job growth especially in the US) interest rates will rise eventually – sooner than anyone expects. This will create pricing flexibility for financial firms. A small mortgage company in a tough industry just reported a tiny profit. Why has it been so tough? In their words:
“The results also reflect the level of competition in the Canadian residential mortgage business. As we noted in announcing our fiscal 2010 year-end results, the spreads on insured mortgages tightened in the latter part of fiscal 2010 and rather than do business under those conditions, we chose to reduce our underwriting volume.”
When an uptick in overall rates occurs, my experience tells me the banks and other firms in the mortgaging/lending business will increase their rates to consumers by more. They are businesses after all. They’ve used the low rate environment to build their book of business (volumes of loans of mortgages on their books) – the bigger firms can afford to do this. But as the spread between what a homeowner pays (rate of interest) on his mortgage, and the amount a bank pays for funds (interest on deposits, bond portfolios etc.) widens in general, even the little guys make more money.
Here is a price chart for Xceed Mortgage (symbol is XMC on Toronto Stock Exchange):
I like the fact it’s been out of favour while virtually every other stock (even Bell Canada) has a stock chart that’s been rocketing skyward. When a company is struggling (see my post about short sellers being the muggers of the financial industry) it’s likely much of the pressure on the price has been exagerated by short sellers. The below chart shows they did have quite a party at the expense of the company and innocent stockholders, but that interest has sinced waned substantially.
The bottom line is that in my opinion (opinions are like bum holes; everyone has one) the downside in this sort of situation is limited, but if interest spreads do widen much of the cost cutting this company had to suffer through will bear fruit in terms of improving profits quickly – but the key is “unexpectedly.” Only unexpected (by the herd) changes in financial markets create opportunities (and catastophe). Getting accustomed to thinking like a ‘maverick’ takes practice, but it’s worth it. When you stumble across it in a bookstore over the next few months, pick up my new book “A Mavrick Investor’s Guidebook.”