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I read in a newsweek artical that farmers would be doing very well during this recession. Jim Rogers said that something to the effect that farmers would be driving lamborghinis and stock brokers would be working for them. So, is now the time to get into companies like Deere and POT? what are your thoughts?

Then I would invest in lamborghinis. But most of them drive Cadilacs and Lincolns and Chevy Pickups.

Would now be a good time to get into commodities/farm stocks?

Contributed by: Arjun Rudra (http://www.investingthesis.com) –

There exist a number of ways investors can screen for stocks. one of these ways involves screening for companies that exhibit high returns on equity (ROE). ROE is a very good yardstick by which to measure how well the management of a company creates value for its shareholders. However, as with everything the ROE statistics has it foibles and can be artificially inflated. To dig a bit deeper into what ROE is and how it translates into investment performance, we are super excited today to present to you an interview with a portfolio manager that relies heavily on the use of return on equity as a screening tool. His name is Jason Donville of Donville Kent Asset Management and he manages 2 funds on behalf of individual investors as well as select institutions, namely the Capital Ideas Fund, which was voted the Best New Fund in Canada for 2009 at the Canadian Hedge Fund Awards and the Financial Services Fund. take a second to sign up to our RSS feed or to subscribe to our updates via email for a follow-up to this interview with Jason’s top stock picks in a few weeks time.

Biography: Jason has had an illustrious career as an award-winning analyst in both Asia and Canada. Prior to founding DKAM, Mr. Donville was consistently ranked as one of the top financial services analysts in the country. in 2004 and 2005, Mr. Donville was ranked in all three financial services research categories (banks, insurance and diversified financial services) in the annual Brendan Woods surveys. Mr. Donville was also recognized as the top Stock Picker in Diversified Financial Services in the 2004 and 2005 National Post/Starmine surveys, and ranked number 3 for forecast accuracy in 2004 in the same survey.

Q: Warren Buffett has often pointed out that the return that a company gets on its equity is one of the most important factors in making successful stock investments. Mr. Donville, why don’t you start off by telling us why you consider the Return on Equity metric so important as opposed to Return on Assets or Price to Cash Flow?

A: We consider Return on Equity (ROE) to be the key starting point for any company we look at because we believe the key value driver of any company is its ability to earn a return on equity that is substantially higher than its cost of equity. However, we don’t simply stop at ROE. A company can achieve a high ROE in many ways and we use DuPont analysis to drill down into the ways in which a company earns a high ROE. Typically a high ROE (greater than 15%) can be achieved in one of three ways. these are 1) leverage 2) margins or 3) asset turnover. We generally avoid highly levered companies. about 95% of the companies we own have high profit margins and about 5% have high asset turnover ratios. Typically, companies with high ROE’s also have high ROA’s but we start with ROE first because it requires less adjustments when screening large numbers of companies. We consider Price to Cash Flow to be a valuation metric and valuation is the second but separate stage of our investment process.

Q: There area number of ways to calculate ROE from the most simple being Net Profit ÷ Average Shareholder Equity to the more complex DuPont Model, which is Profit Margin (Profit/Sales) * Total Asset Turnover (Sales/Assets) * Equity Multiplier (Assets/Equity). Mr. Donville, which of these formulas do you utilize in your calculations of ROE or is it a variant/combination of these?

A: We use both. in our main database we use net profit/average common shareholders equity to screen large populations of stocks. But once we see something we like we use DuPont analysis to drill down and understand where a companies ROE is coming from. We consider DuPont analysis to be one of the most valuable tools in the entire investment world.

Q: in addition to a high ROE, what other valuation/operating metrics do you pay close attention to, Mr. Donville? Additionally, when assessing a company’s viability as an investment, do you find discounted cash flow analysis (DCF) helpful or do you rely primarily on values that are readily ascertainable on a company’s balance sheet?

A: We look at working capital management because we find that there are times when it is difficult to be objective about a company’s management. Working capital management (inventory days, accounts receivable management, etc) is like a form of DNA for a company – its their signature of how good they are as managers that they cant hide. We also think quality of management is important but you need to have repeated exposure to management to get a really good read as to which managers know their stuff and which don’t. when we are just starting out with a new company, working capital management is a good proxy because good managers typically run tight ships and this is reflected in working capital management.

From a DCF perspective, we have a calculator that we use that is based on EVA (Economic Value-Added) analysis and it is very good at showing us how valuable a high ROE company is. that said, when we find a company with an ROE of say 20% and its trading on a PE ratio of less than 10 and has a low dividend payout ratio, we know before we even look at our DCF/EVA model that its extremely undervalued.

Q: How do you generate your investment ideas?

A: We try to read a lot of research and troll through a lot of databases looking for high ROE companies. once we find them we try to meet with management as quickly as possible and we try to ascertain how sustainable the high ROE is. once we are convinced that we have found such a company we start buying the stock.

Q: We try to read a lot of research and troll through a lot of databases looking for high ROE companies. once we find them we try to meet with management as quickly as possible and we try to ascertain how sustainable the high ROE is. once we are convinced that we have found such a company we start buying the stock.

A: Alpha can come from many sources and we view our core competency as being stock pickers. We generally don’t use much leverage but we use a lot of concentration. Our top 5 positions typically account for 50% of the entire portfolio and our top 10 names would account for 75% of the portfolio. We have shorts on from time to time but we see ourselves as primarily a long fund.

Q: Before we head to your views on the equity markets, Mr. Donville, I wanted to ask you a question on position sizing. outside of using options and derivates, I think the sizing of positions in one’s portfolios is integral to controlling risk. What are your thoughts on this subject, Mr. Donville and what criteria do you use to decide the size of stakes you acquire in companies?

A: We tend to hold highly concentrated positions but we also tend to buy stocks on the way up. We rarely if ever average down and we never buy a large position all at once. We want to see the upward movement in the stock validate that we are correct in assuming that the said company is undervalued.

Q: in your July 2010 newsletter (the ROE Reporter), Mr. Donville, you opine that the pessimism we have been hearing about is overdone and that you think the Canadian and US markets are heading higher. While there appears to be a tug of war between the bulls and bears with regards to inflation/deflation and the state of economy, there appears to be clear evidence from multinationals that emerging markets is where the growth is at. my question for you Sir is how much exposure do you have to the emerging markets in your portfolio and to what particular sectors?

A: Neither of my funds has an emerging market mandate.

Q: Finally, what books have you read in recent years that have stood out as valuable additions to your investment library?

A: I have a voracious appetite for investment books and if you come to my office you will see that my book shelves are stuffed with investment books. Two books I have read recently that I would highly recommend are as follows. The first is The Great Reflation: How Investors Can Profit From the New World of Money by Tony Boeckh who has been the brains behind the Bank Credit Analyst for more than 30 years. this book provides a very thorough overview of the macroeconomic factors that have gotten us to where we are today and Boeckh’s writing style is very engaging. The second book that I have read is The big Short by Michael Lewis which is ostensibly about the subprime meltdown in the US. However, like so many other books by Lewis such as Liar’s Poker, The New New Thing, Moneyball and The Blind Side, half the value of this book is in its story telling style. I think Lewis is as gifted a writer as Malcolm Gladwell and Lewis is arguably stronger when it comes to telling long intricate stories that require the reader to stay engaged for 300 pages or more. I also would recommend anything written by Michael Mauboussin , Aswath Damodaran, and Ron Chernow, all three of whom I rate extremely highly.

Thank You, Mr. Donville!

Do you pay attention to the ROE when researching an equity? let us know what you thought of this interview or anything else about the site in the comments.

Related posts:

1. Interview with Martin Braun of Adaly Investment Management Corp.
2. Musings on Crude Oil, Natural Gas and the Outlook on Energy with John Stephenson of first Asset Funds
3. 5 Canadian Portfolio Managers You Should Follow

An Interview With Portfolio Manager Jason Donville of Donville Kent Asset Management

 Look at the 6 month chart below of the PowerShares DB Commodity Index Tracking (DBC). it looks like a roller-coaster at six Flags and shows lots of volatility with some pronounced pull-backs. I've included the 100-day moving average

On commodities generally, there was a good interview with Jim Rogers in a July edition of The Globe and Mail  in Canada.Rogers called the great commodity bull market and he is himself a rich man thanks to his investing prowess.As a result, people seek out his opinion on commodities. even though commodities of all kinds have taken a hit in this crisis, the longer-term dynamics still look strong. As Rogers put it: “Did the stock market bull market in end in 1987, when stocks fell around the world fell 40-80%?” No, it didn’t.  The point Rogers makes is that even in the course of longer-term bull markets, there can be stiff corrections. even now, though, the fundamentals for owning commodities — and the stocks that benefit from rising commodity prices — are still intact. As a result, they look very appealing in this uncertain market.  As Rogers says: “I’d rather own commodities than just about anything I can think of… Commodities have a long way to go; the fundamentals have only gotten better in the last year. The best place to have your money is in commodities… most of them are going to make new all-time highs.” I tend to agree. We’re in good position to benefit from the unfolding commodity bull market. Precious metals and energy will lead the way in the next couple of years as well as some of the base metals and perhaps uranium. Jim Rogers, who lives most of the time in Singapore, really knows how to "think outside the box" when it comes to investing. Describing his favorite type of investment,Rogers is renowned for saying in the traders' bible, Market Wizards… "I just wait until there is money lying in the corner, and all I have to do is go over there and pick it up."  his point was clear… if you wait for a low-risk,over-looked lucrative trading opportunity you're more likely to make an exceptional profit and reduce your risk.   "The government is printing lots of money and borrowing even more; that's not the basis for a sound currency," he told Bloomberg in a telephone interview this summer. "The idea that anybody would lend money to the U.S. government for 30 years at three or four or five or six percent interest is mind-boggling to me."Rogers said he's unloading dollars, and he plans to "short U.S. government bonds someday."And it wouldn't surprise me if he starts shorting the U.S. stock market indices when they really get bloated (perhaps after another 10 to 20% rise from here). 

Dorothy Kosich on Monday filed a report through Mineweb.com that reminds us of the Swiiss perspective on commodities, and that seems to be one of their strong suits. she wrote:

"In recently published research, Credit Suisse metals and mining analysts say they are "selectively bullish" on certain commodities-such as copper, zinc, carbon steel, platinum and nickel-and remain "long-term bullish" on commodity demand driven by demographics and global infrastructure spend.

"Credit Suisse's analysis suggests we are currently in a growth period for long-term commodity demand driven by the ongoing industrialization of China and emerging markets; global demographic shifts that will drive commodity-intensive demand for infrastructure; and by a wealth-transfer effect which requires infrastructure that is the "single greatest driver of long-term commodity demand."

"Research analysts Michael Sillaker, Elly Ong, Alessandro Abate, and Hannah Kirby wrote, "We believe global industrialization will continue and, as such, ongoing demand for commodities should remain strong. against this backdrop, we believe there is substantial long-term upside potential for steel, metals and mining stocks."

"In their analysis, the analysts determined China's apparent metals consumptions appears "way ahead of real demand growth rates." they believe "China is arbitraging the West on commodity prices. it is acting as an effective ‘vacuum cleaner' for commodity demand in an ex-China recession, which would not have been material ten years ago."

"China appears in effect to be frontloading its own industrial recovery and stimulus by buying commodities as a cheap asset class. This compares with the Western world, which tends to buy most when demand is at its peak and prices are high. This is a well thought-out strategy from China but we should caution that apparent demand growth rates are well above where we see real demand growth right now and, as such, demand from China is unsustainably high in our view."

"Credit Suisse's analysis suggests the country is currently consuming the amount of copper it should be consuming in 2011/2012. "there is a risk of a pull back, especially if prices start to rise, and any rapid pullback is unlikely to be matched by ex [external] China demand growth."

"Meanwhile, the analysts forecast "a substantial tightening in the ex China supply-demand balance for all commodities (although some more than others)."

"We continue to like the long-term story for metal demand," the analysts said. "Like the 1950s and ‘60s post-war restructuring phase (when metal demand grew in the 6-8% range), we are now in what we believe is a long-term industrialization phase. …Therefore, after the cyclical recovery, we forecast, metals demand should structurally remain at relatively strong trend levels in the next 10-15 years."

Credit Suisse advises the strongest commodities for its long-term view of the global metals and mining sector are:

•1)       Copper-potentially 21mt of demand by 2012 will not likely be met by new mine capacity. even under a significant long-term slowdown in China, "we would get to 25mt of copper demand by 2016-which means new mines are necessary. when new mines are necessary the pricing dynamics should move from cost plus pricing to long-term pricing that satisfies the IRR of newbuild."

•2)       Zinc-"although zinc is not favoured by many investors, we believe they often forget how late-cycle this metal is (within the 20-30-year cycle). …mine depletions from 2012E could be significant, although Chinese production capability is potentially large in our view. …We believe China's mined output is in general small scale and ‘inefficient' and hence high cost, which is unlikely to be cost effective in a demand boom. We expect a sharp price increase in zinc in 2011/12, which will be required if CEOs are to be encouraged into building new projects."

 •3)       Iron ore-"we are positive structurally on volume, as low-cost high-quality ore continues to take market share from high-cost production, notably in China and India, as the steel market continues to grow at 4-5% in the long term. nonetheless, given spare capacity (largely higher cost), new volumes from the seaborne majors will, we believe, come at the expense of price in the long term."

 •4)       Coal-thermal coal looks set for the long term. Metallurgical coal is structurally tight in supply, but geared to external Chinese demand; "so it may take time to return to 2008 levels."

 •5)       Platinum-"limited new capacity, ongoing supply problems, and increasing global care and jewellery market, with cleaner cars suggesting a long-term switch to diesel. Fuel cell demand remains a positive long-term possibility."

 "if investors, like us, favour the above commodities, then Rio, Anglo or Xstrata are probably the equities to own," the analysts advised.

‘BHP possibly has the best commodity mix and the strongest growth profile of the stocks in our universe. The problem we have with the stock is that the market appears fully aware of this and the stock therefore appears to have priced this in," they said. "We do think, however, that BHP is a relatively strong defensive play in the cyclical universe for more cautious investors wanting cyclical exposure."

So whether you are an analyst at Credit Suisse or Jim Rogers, the long-term outlook for commodity prices looks very positive. Don't forget the chart above though. This sector is very volatile and investors should expect some gut-wrenching corrections along the way.

These will usually be wonderful buying opportunties and times when we can accumulate or add to our holdings. The same can be said for the precious metals reflected in such ETFs and Closed-End Funds like GLD, SLV,SIVR,IAU,CEF and ASA.

For those who want to be patient, let's remember Jim Rogers' words,"I just wait until there is money lying in the corner, and all I have to do is go over there and pick it up."

Disclosure: I do own some GLD, SLV, and CEF at the current time. On the next correction in silver prices I intend to buy some SIVR and the next meaningful dip in commodities and the metals in general I intend to buy ASA and BHP.

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it. please remember investments can fall as well as rise. And they will! – Advanced Investor Technologies LLC accepts no responsibility for any loss or damage resulting directly or indirectly from the use of this content.

checkthemarkets.com – Jim Rogers and a Swiss View on Commodities

I just register WALL STREET SURVIVOR which is (Stock Trading) for fake money and my question is what kind of stocks would you recommend that will earn me a lot of $$$?

What kind of stocks would you recommend that will earn me a lot of $$$?

May 10, 2010

Posted by Christian @ 3:00 pm

Jim Rogers, chairman of Rogers Holdings, speaks with Bloomberg about Greece, the future of the euro, and his strategy for stocks and commodities.

“In the end, I don’t think the euro will survive,” says Rogers, expecting the currency not to last more than 10-15 years. “At the moment, we’ll probably have a rally.”

Rogers expects the stock market to continue correcting itself for a while. Currently, he’s not selling any commodities nor buying anything. Rogers advises on thinking about investing in silver rather than gold right now.

Want to stay updated on the financial truth? Subscribe to free posts via RSS or email. Bull Source updates are also available on Twitter.

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Tags: China, Chinese yuan, commodities, euro, gold, Greece, Jim Rogers, precious metals, silver, stock market

Jim Rogers Forecasts End of the Euro

I mean he uses Berkshire Hathaway’s money to purchase the stocks, so who technically owns the stock, Buffett or Berkshire since a corporation is a seperate legal person?

Does Warren Buffett own all the stock of all those companies he buys?

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George Soros: Financial crisis moving into second stage

How does an average Joe find out what stocks Warren Buffett is investing in lately?

The penny stock market consists of stocks that are traded for lesser than five dollars. To pick a winner you want to find stock that is on top of one cent. if you view that there are stocks for lesser than a cent, you shouldn’t invest. In the penny stock market, any amount thing lesser than a penny isn’t worth investing. You will never gain anything from a stock under a penny. With the penny stock market, there are risks like any amount other stock market. In proof, it is only like the fixed stock market except you buy stocks for much lesser. That’s why you should treat the penny stock market like any amount other investment.

When youre planning on investing in the penny stock market you will want to understand the way to invest. first you want to open an account for your broker. Thus you will want to find a financial adviser. A financial adviser will tell you who to invest in the penny stock market and who stocks you should avoid in the penny stock market. They will budget, record, and plan each your funds. even with a financial adviser, you will want to do your own research in the penny stock market. You want to understand every thing about the company and the stock that youre purchasing. With proper investing, you should be accomplishable to benefit from quick gains from the penny stock market.

The only way to be successful with the penny stock market is to understand who companies to invest in through research. Research is key to any amount investment. The penny stock market could impart to you a good investment and some money, but you want to understand when to sale and when to buy. You want to realize when youre in a risk. This could take years. The penny stock market, like any amount stock market is incredibly tricky. It is more of trial and error than anything. That’s why you want to have trusted advisers and understand where to get the good research on your penny stock.

Like other stock markets, the penny stock market is a pit of schemes. One way to understand for sure that youre playing into a scam is when they start to push the stock too much. When they start encouraging you to buy cheap penny stock at sizeable quantities, there is anything up. They are noted for being one of the a variety of get rich quick schemes. first, there is not way to get rich quick, especially when it comes to the penny stock market. The only way that one could gain a real investment is if the stock becomes to be bigger or worth way more than you bought. Don’t get distracted by the investment or the broker.

Penny Stock Market For Dummies

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