"Dr. Flowlove" or "How I learned to stop caring about EPS and love the cash"

Ask most journalists, and they will tell you that what they like most about their jobs is that they get paid to talk to interesting people all day long. On that front, I'm certainly no exception. I didn't get into journalism with any woolly-headed notions of being a "writer" — my dream job was basically having somebody pay me to read different newspapers all day long, and I figured working for one of them would be the closest thing to that.

Mirroring my own interests, my journalism jobs thus far have run the gamut of diversity — I've done everything from news and editorial to sports and business. It's my work in the business press, however, that makes me privy to some truly fascinating people who can not only help me professionally, but give me some insights into the world of investing also.

Case in point? Jay Taparia. I recently had the privilege to attend a CFA Institute sponsored seminar led by Mr. Taparia. The lecture's aim was to be a sort of crash course in financial accounting for journalists, walking us through some of the more common accounting malapropisms that unscrupulous companies try to put in their quarterly reports, so that we can catch them in the act and unearth the next Enron before it happens.

I'd guess that a good 80% of the general population is woefully uneducated about finance, and I'm loath to admit it, but I doubt that members of the financial press fare too much better. Crappy companies depend on the fact that most deadlined-frenzied reporters couldn't define amortization if their lives depend on it, and the herd mentality dictates that all too often we get caught up in blindly reporting whatever the company's press release deems the "most important" number to be.

It shouldn't be that way, and according to Mr. Taparia, it doesn't have to be. While his seminar is already paying off in my day-to-day work of sussing out corporate bullshit, from a personal investing standpoint Mr. Taparia proved similarly invaluable.

I won't bore you with the details, but the Taparia mantra, in a nutshell, goes as follows: Cash flow is king.

Net income is the easiest trap to fall into, Taparia says, and small investors' obsession with charting earnings-per-share is foolish, because earnings are one of the easiest numbers to manipulate. Though a lot of the specifics are rather obtuse to synthesize, Taparia's main point is that in his role as a money manager he disregards conventional matrices like revenue and net income because they are too easy to muddle.

How? You can sell merchandise on credit and book it as revenue before you see a dime. You can pay suppliers on credit to avoid having to list it as an expense. You can hide inventory (he relates the anecdote of a well-known bottling company that famously used to load up trucks with merchandise on December 31 every year in order to hide inventory and beat estimates by a penny) in any number of ways, and you can hide long-term debt levels by eschewing property mortgages in favour of much more costly, yet balance-sheet friendly, leases. And at the end of the day, you post a scintillating net income, and watch your stock tick up accordingly.

But cash flow - literally, how much cash is coming in and out of the business at any given time - paints a much clearer picture of how solid the company's financial ground is. There's obviously much more to it than that, and all investors should of course do their due diligence before even thinking of buying a stock. But from where I'm sitting, cash flow is one factor that just got bumped to the top of my list.

Oil ETF

Interesting news for all ETF investors and those who believe that oil prices still have a ways to go.

The American Stock Exchange launched the first ETF that tracks the price of U.S. oil yesterday. Under the ticker symbol USO, the fund will track the price of U.S. oil futures.

After its first day of trading, the fund closed at $68.02 — or a little more than $2 off the record high of US$70.85 that barrels of oil hit after Katrina last year.

An etf that opens at a few dollars below the all-time high of the asset it tracks? Considering these things are supposed to be long-term investments, I'm not convinced.

Car trouble

Given the chronic-temporary-employment nature of my chosen profession, I'm preparing for yet another move, as I've been offered a job in a different city from May until September. While the money is good, after bouncing around so much already in my short career, I've learned that the peripheral costs of moving to different cities can quickly add up.

My next locale is close enough that its only a few hours' drive to get back home, so I plan on doing that every other weekend. I've crunched the numbers, and have roughly calculated that it'll be cheaper for me to rent a bare-bones car than it is to go by Greyhound bus or Via rail. (A friend of mine who works at Enterprise Rent-a-Car has graciously offered to find me deals on compact cars, which I'm going to take him up on — despite his employer's legendary failures in the customer relations milieu)

As much as I'm dreading it, renting cars a dozen times over the next few months will give me the chance to test out a money-saving theory I've always had. The rare times I've rented cars in the past, I always signed up for the $25 insurance, just to be safe. But reading the fine print on my RBC Visa Platinum Avion card I'm thinking maybe I've been wasting my money:

For coverage to be in effect, You must:
1. Use Your RBC Royal Bank Visa Platinum Avion card to pay for the entire rental from a Rental Agency;
2. Decline the Rental Agency's Collision Damage Waiver option or similar coverage offered by the Rental Agency on the rental
contract. If there is no space on the vehicle rental contract for You to indicate that You have declined the
coverage, then indicate in writing on the contract “I decline CDW provided by this merchant”

The policy specifically goes on to say that panel and cube vans are not covered by the policy, nor does it include third party liability or personal injury insurance. Every time I've asked anyone at rental agencies if I'm covered by my credit card, they always told me I'm not. But it's an industry which is notorious for their high-pressure, commission-based wage structures. At the very least, it seems as though fender-benders to the car itself would be covered. But if I got into any serious accidents where the car is totaled and or people are injured, I could be up the proverbial creek without a paddle.

Can anyone shed light on this? Should I keep buying the rental car insurance or am I just flushing money down the drain?

Too rich for my blood

Every day, a new record high for the TSX. Revenues at oil and mining companies seem to slow a little, but soon enough, business continues to boom. Even the alleged "no-brainers" (Canadian bank stocks) have P/E ratios much higher than those in the US, Japan and Europe...

Is it me, or is the TSX looking a little overvalued right now?

What's a budding value investor to do?

A taxing endeavour

Given that its tax time, I've spent last two weeks talking taxes with anyone who'll listen. I've never really been mathematically inclined, and filing my return every year serves as an excellent reminder of that. So I generally try to pick the brains of anyone who'll listen, looking for tips for keeping more of my meagre earnings for myself.

In one of those aforementioned conversations, I heard something interesting I felt the need to pass on here. I must admit I don't fully understand it myself (see previous comments re: math skills) but a work colleague was telling me his theory of why its a bad move to keep dividend-producing stocks in your RRSP portfolio. The idea, if I recall it correctly, is that since dividend income is already one of the most tax advantageous forms of income there is, it's sort of a waste to "hide it" in an RRSP where the money will ultimately be taxed at a much higher rate when I redeem it.

The conversation came about because I was telling him I couldn't decide whether to put my return into a Berkshire Hathaway B share as I'd originally planned, or buy some bank stocks for the dividend income. He advised the Berkshire stock specifically because it doesn't pay dividends. He spends his dividend income outside of his retirement account, because it's already tax efficient. He says he only puts mutual funds and ETFs in his RRSP account for that reason, keeping his juicy large cap dividend stocks in a regular investment account. In a sense, he was advocating spending the dividend income as you get it because you've already paid the tax on it.

Has anyone else heard this theory? And if anyone with a background in accounting is reading this, is he right?

...

Postscript Aside from this dividend debate, doing my taxes this year has reminded me of the huge advantages of RRSP's in general. Any twenty-somethings out there, take note: I know they're not sexy, and it's fun to blow all your money as it comes in. But it really does make sense to start an RRSP as early as possible. It actually pays, and I'm starting to see it with my own eyes.

...

Post-Postscript I notice that FP's Jonathan Chevreau's blog entry today closely mirrors the subject of this post. I encourage you to read the article in it's entirety here, but his answer, essentially, is that RRSPs pay. So it's a no brainer for all Canadians to max out their RRSP room every year — whether in equities or elsewhere. As far as dividend are concerned, proposed changes to the way dividend income will be taxed by Ottawa may start to make a difference, and mean it could meake more sense to hold dividend stocks outside the RRSP. But until that happens, every $1 in the RRSP is a good, tax efficient $1.

I told you so...

The surest sign yet that hype over shares in Tim Hortons' has reached a fever pitch?

The birth of a blog devoted exclusively to tracking all the Tim's IPO-related news.

Thanks to Canadian Capitalist for the link.

Stellar performance

In the never-ending pursuit of above-average portfolio returns, I've heard of a lot of truly "out there" gimmicks. But the one I read about in Barron's this morning (sorry I can't find a link to it) takes the cake.

Henry Weingarten has been a mathematician and financial analyst for more than two decades. But he prefers to call himself a financial astrologer. As head of private money manager The Astrologers Fund Inc. Weingarten combines fundamental and technical analysis with astrology to predict stock performance.

I know it sounds hokey, but a perusal of his website reveals he's been dead-on in his predictions — although there's curiously no mention of his misses.

Weingarten is in the news right now because he reckons the total solar eclipse coming on March 29 does not bode well for the markets. On that same day, Pluto will be in stationary retrograde at the galactic centre of the cosmos — the same position Saturn was in before the market crashed in 1929.

It all adds up, Weingarten says, to him predicting with more than 90% certainty that the Dow Jones Industrial Average is set for a tumble, and will sit below 10,000 by June. Considering the DJIA is well above 11,000 now, that's a pretty steep drop. If Weingarten is correct and U.S. stocks are set to shed 10% of their value, you know what I think, don't you?

Sounds like a buying opportunity. :)

If only those B-class Berkshire Hathaway shares I've been lusting after could take a similar spill, I'd be one happy camper.

Party on, Garth!

Though I've never been accused of being on the right wing of the political spectrum, one blogger I always keep an eye on is Canadian MP Garth Turner. The long time columnist and broadcaster's blog is refreshing for the fact that he has thus far managed to avoid censoring himself now that he is a member of the government. (Indeed, he's already landed himself in hot water for some high profile disagreements he's had with the PMO's office.)

Politics aside, on a financial level, Turner has some interesting comments on the looming arrival of the (gasp!) 50-year mortgage to would-be Canadian homeowners like me.

You can read the entry here but the 10-cent version is this: mortgage lenders are only starting to pitch these long-term mortgages because they know that after such an increase is house prices over such a small time frame, owning a home is becomging too expensive for the "average" Canadian family. But the industry depends on a steady supply of new owners, so they pitch these monstrously long mortgages to us to make home ownership seem more feasible, conveniently neglecting to mention that you end up paying way more for the house in the long run.

It's a fascinating read, and refreshing to see in print something I've suspected myself for a long time. I hadn't crunched the numbers myself but Turner argues that under current interest rates, a $300,000 mortgage ends up costing you $580,000 to pay back over the life of a 25-year loan.

I'm in my mid-20s, and I have friends buying condos at the moment. Though the thought of paying down a mortgage to earn equity (as opposed to rent) is very appealing to me, I just don't have the stomach to borrow such a staggering amount of money right now. I know there's a massive marketing machine designed to convince me why it makes sense for me to buy a home as early as possible, but I won't be signing up for one of these ludicrous no-money-down plans. My own benchmark is to try to have a 20% downpayment. Considering a starter condo in a non-hip part of town can cost you upwards of 200K in this city, that means I'm going to need $40,000 before I jump in.

All the more reason to get busy looking for undervalued companies that pay dividends until then, wouldn't you say?

Double Trouble

You could say I'm addicted to my double-double from Tim Hortons' every morning. And you'd probably be right. But despite my predilection for Tim's own brand of hot, brown, sugar-water, I'm still shaking my head at the people clamoring over themselves to get in on the action when the iconic donut chain goes public in an IPO later this month. In bullet form, let me tell you why.

It's a growth story with nowhere else to grow

Yes, yes, we've all seen those lineups outside the stores at 8:45 every morning and thought "man, that place is just a license to print money" but honestly — I have my doubts. There are currently 2,886 Tim's franchises in Canada and the United States. That's a staggering amount — more than the Golden Arches, in fact. I would argue that if they haven't hit it yet, Tim's is very close to complete saturation point in Canada. Any more, and new locations are going to start competing with each other, something sure to anger the franchisees. Furthermore, I can't shake the feeling that the Tim's love affair might be coming to an end. In every industry, people fall in love with a sexy up and comer, before it reaches hegemonic status and people start to resent it for its success. The company launches an advertising blitz with all the newfound money, but overnight, people start to view the new kid on the block as being painfully lame and stuck in the past. They move on to the next big thing, and the stock suffers. It happened to McDonalds. It happened to Wal-Mart. It can happen to Tim's, even in Canada.

If Tim's has anywhere to grow — and that's a big if, IMHO — it's going to happen in the States. Indeed, even before the IPO talk, Wendy's management was talking publicly about wanting to double the number of U.S. Tim's locations by the end of 2007. Well, forgive me for being skeptical. Let's not forget that Tim's has already been in the USA for more than 20 years and they still haven't hit anywhere close to the brand recognition, let alone loyalty, that they have in Canada. We Canucks think drinking at Tim's is an act of patriotism. But Americans aren't seeing the same love story. The US has just as many devotees of Krispy Kreme and Dunkin Donuts as Canada has Timcoholics. And for people who actually like their coffee to taste like coffee, Starbucks enjoys much more loyalty. Although I'm told actual coffee aficionadoes are more prone to find their local independent java house and never leave.

The bottom line? Wendy's is spinning off Tim's at the perfect time, because they realize the chain is at its peak in terms of growth. They're eager to get their hands on the cash, so they can use it to shore up the problmes in their core burger business. I fully expect Tim's to continue to pump out nice, stable revenues for several years to come. But the market will view Tim's as a growth stock, and I'm not so sure that the explosive growth can continue. That's a concern for me. So is this:

The smart money isn't excited

Consider this. US hedge funds like Nelson Peltz' are the ones who pushed for this IPO in the first place, so they could "unlock value" in their sagging Wendy's shares. And despite the fact that Canadian retail investors are the ones most excited about the IPO, the vast, vast majority of shares are being sold through NY-based underwriters. I don't think that was an accident. That, to me, suggests that the institutional investors who will get first crack can't wait to flip their shares to mom and pop investors caught up in the hype. As usual, the big brokerage houses throw retail investors under the bus to make a buck. "Smart money" knows things we don't. Ron Joyce certainly does. He's the man who regrets selling the chain to Wendy's in the first place in 1995 for $600 million. But even he's now come out and said he's not interested in buying a stake at the prices being mentioned. Ron Joyce is one of the richest men in Canada — who am I to disagree with his instincts?

My gut suspects that in the hours, days and weeks that follow Tim's hitting the open market, the action will be fast and furious. Share prices will almost certainly soar well past the IPO price, and I wouldn't be surprised to see capital appreciation well into the double digits.

But ultimately, as Tim's inevitably has to stop the number of new franchises they open (or even, dare I say it, close some break-even U.S. locations) the never-ending growth story Joe Q. Average investor expected will stop, and he'll be crying into his double-double about why his can't-miss investment missed.

My bold-yet-completely-untechnical prediction? A year from now, Tim's shares will be trading at less than the IPO price. And that's when I'd consider buying in.

It's carnie time

the 38th Carnival of Personal Finance is up over at Canadian Capitalist and I'm honoured to be included in it.

Check it out.