YEAR-END, PERSPECTIVES AND IDEAS

The 2011 is ended. Finally, some might say. I don´t know about you, but 2011 was a year that has taught me a lot, I´m sad that it runs. Riding a hostile environment makes you see things differently, especially in investment ideas. Before this year, I bought shares thinking in my future profit. Today I´m focus on not lose money, or in the potential profit if I am short. "Try to kill the business", as the fallen star Berkowitz says.


In equities, things went wrong. Short funds made spectacular returns, especially in Asia. Long-only funds, as we, made a bad year, but we still think that there are great oportunities waiting for being found. I´m not saying that the stock market is cheap. I´m saying there are individual companies very cheap and their prices discount apocalyptic scenarios.

From a macro perspective, the problem has not disappeared. The investors are terrified with the leverage of the states, and this is an issue that must be resolved by politicians. As Greenspan says, "The United States can pay any debt it has because we can always print money to do that". As at the end will happen what Obama, Merkel and Hu Jintao say, and also the arguments of an 8 year boy has more sense that the arguments of the Chairman of the FED, we will not spend much time trying to guess what will happen in the short term. Bill Gross, fixed income guru, bet against the US Treasuries two times this year, and he was wrong.

If we use a bottom-up approach, we will discover little gems that can give us great joy in a few years. As I always say, focus on cash generation, low leverage, non-regulated business, high ROCE (Return On Capital Employed) and CEOs with their net worth in the company, avoid mercenaries CEOs. The best case is if the analyst are bearish or don´t follow the company.

My ideas for the Spanish stock market for this year are,

Acciona (ANA), Acerinox (ACX), ArcelorMittal (MTS), CAF (CAF), DIA (DIA), Europac (PAC), Ferrovial (FER), Inditex (ITX), Prosegur (PSG), Repsol (REP)  and Tecnicas Reunidas (TRE).

Our portfolio is down 9.42% in 2011, less than the IBEX 35 (spanish index), and more than the S&P 500. Bad result that has made us research on long-short strategies that we started to put into practice in a simulated portfolio. We don´t intend to incorporate in the short term.

We are epa3001

              
Now let´s make a review of the mistakes and successes of the year.

MISTAKES

1. Cyclical companies.We bought cyclical companies, steelmakers and automotive too early . In any case, we bought when we saw them cheap, and they have fall more and more, making them more interesting. We continued buying.

2.AIG. We bought AIG because the American Govern was the biggest shareholder and now they are selling their holding losing money. Additionally, with the 10 year US bonds at 1.8% interest rate, the investment income of the float is not going to generate impressive profits. If we think that the actual situation will pass, and the US Govern financing interest rate will go up in the long term, we will see the insurance P&Ls flight. Today, Mr. Market is selling us the insurance sector at 0.8x book value, and AIG at 0.6x with a great franchise, with SunAmerica and Chartis as core business.

3. Short Selling. That were omission mistakes. We did the research, and were pretty sure, but we lacked conviction in the trade. These shorts were planned in : Research in Motion (-75.1%), ACS (-34.7%), Metrovacesa (-81.8%) and Gamesa (-43.8%)


SUCCESSES

1. EURUSD. We were bearish against the EURO. This decision protected us from the August fall. We are still bearish against the EURO. Euroland has big problems and them must be solved by managers untrained and inexperienced in restructuring stories. In the other side is the FED, with their addiction to depreciate the USD, to increase exports and manipulate its debt. We are not in a currency trade, we bet for american companies rather than European competitors.

2. Companies with high free-cash flow generation, growth and no debt. These companies were Microsoft and Johnson&Johnson. They have fullfied our purpose and we sold our Johnson shares because there were things more exciting in the market. We maintain the Microsoft shares because the improve cash generation quarter after quarter, tons of cash on balance, amazing ROCE, interesting strategy with Nokia and Skype and Xbox division results taking off.

3. Ferrovial. The catalyst have acted and we are still bullish on them because we like the managment, focused on deleveraging the balance sheet, selling non-core assets and focusing on projects that provide a superior return without singnificant leverage increase.

4. Cash. Since early this year we have been in a cash position that began on 73% of the portfolio and has been declining as the portfolio plummeted. This has mitigated the fall of the portfolio and allowed us to be more flexible in the buy-side. Now we mantain a 28% cash position, being the first position of the portfolio and without intention of touching it.