holding company

This will be our last Inner Circle Q&A for 2015. Our next issue will go out on Tuesday, January 5, 2016.

Now is a good time for me to say “Thanks!” to all our Inner Circle members. It’s a pleasure to read and answer your questions. I take great pleasure and pride from the many compliments and expressions of gratitude you send every week.

That’s especially true when I hear from a member who I recognize from decades ago—from the early days after the 1994 launch of The Successful Investor, or from the two prior decades that I spent at The Investment Reporter and MPL Communications.

It’s also great to see that our Successful Investor philosophy and practice have begun attracting more and more younger investors.

I wish you all a great year-end holiday and a healthy, happy and prosperous New Year!

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NEWELL RUBBERMAID INC., $45.28, New York symbol NWL, is reportedly negotiating a merger with Jarden Corp. (New York symbol JAH). Jarden makes consumer products, including Sunbeam kitchen appliances, Mr. Coffee coffee makers, Ball jars, Crock-Pot cookers and Rawlings baseball mitts. It would cost around $11.8 billion to buy Jarden, which is almost equal to Newell’s $12.7-billion market cap (the value of all outstanding shares). The combined firm would have $14 billion of annual sales....

Invest like fabled investor Warren Buffett by looking for long-term fundamental value.

Clarke Inc., $10.62, symbol CKI on Toronto (Shares outstanding: 15.6 million; Market cap: $164.1 million; www.clarkeinc.com), is a holding company with interests in products and services in the transportation, industrial, energy and consumer areas. It also invests in securities. Clarke continues to evolve from a trucking firm into an investment holding company. However, its strategy mainly involves investing in and turning around small, distressed firms, which adds risk. From time to time, it also buys hard assets: in February 2015 it sold its container vessel, the MV Shamrock for $4.6 million U.S. It made a small profit, but the purchase of the ship at a tax-lien auction in 2004 never paid off as expected....

POWER CORP. $31.00 (Toronto symbol POW; Shares outstanding: 414.0 million; Market cap: $14.4 billion; TSINetwork Rating: Above Average; Dividend yield: 4.0%; www.powercorporation.com) is a diversified holding company. It holds its financial assets through 65.7%-owned Power Financial.

These financial assets include 69.5% of Great-West Lifeco, one of Canada’s largest life insurers, and 58.7% of IGM Financial, a leading Canadian mutual fund provider.

As well, Power Financial owns 50% of holding company Parjointco, which holds a 55.5% stake in Switzerland-listed Pargesa Holdings SA. Pargesa has 95% of its assets in five large European firms. Power Corp. also has interests in Asia.

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POWER CORP. $31.00 (Toronto symbol POW; Shares outstanding: 414.0 million; Market cap: $14.4 billion; TSINetwork Rating: Above Average; Dividend yield: 4.0%; www.powercorporation.com) is a diversified holding company. It holds its financial assets through 65.7%-owned Power Financial. These financial assets include 69.5% of Great-West Lifeco, one of Canada’s largest life insurers, and 58.7% of IGM Financial, a leading Canadian mutual fund provider. As well, Power Financial owns 50% of holding company Parjointco, which holds a 55.5% stake in Switzerland-listed Pargesa Holdings SA. Pargesa has 95% of its assets in five large European firms. Power Corp. also has interests in Asia....

INTEL CORP., $31.84, Nasdaq symbol INTC, has agreed to acquire Altera Corp. (Nasdaq symbol ALTR). Altera specializes in chips called field programmable gate arrays (FPGAs) that users can program to perform specific tasks. This helps make server computers faster. The company focuses on chip design; it outsources manufacturing to other firms, including Intel....

ATCO LTD. (Toronto symbols ACO.X [class I non-voting] $44 and ACO.Y [class II voting] $44; Income Portfolio, Utilities sector; Shares outstanding: 115.1 million; Market cap: $5.1 billion; Price-to-sales ratio: 1.1; Dividend yield: 2.3%; TSINetwork Rating: Above Average; www.atco.com) holds 53.2% of Canadian Utilities (see page 53). The company also owns 75.5% of ATCO Structures & Logistics, which makes temporary buildings for construction, mining and energy exploration firms; Canadian Utilities owns the other 24.5%. In the three months ended March 31, 2015, the company earned $94 million, or $0.82 a share. That’s down 26.0% from $127 million, or $1.10. Revenue declined by 12.6%, to $1.1 billion from $1.2 billion.

Lower earnings at Canadian Utilities hurt ATCO’s profits. As well, the structures business completed two big contracts in late 2014. As a result, this division’s earnings fell by $11 million in the latest quarter.

However, ATCO recently started working on a $125-million contract to build worker shelters at the Wheatstone liquefied natural gas project in Western Australia. It expects to finish these buildings by the end of the year.

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In addition to TransCanada (see page 51), we like these three pipeline operators’ prospects. All of them are investing in projects that will spur their cash flows—and dividends—for years to come. ENBRIDGE INC. $61 (Toronto symbol ENB; Conservative Growth and Income Portfolios, Utilities sector; Shares outstanding: 855.0 million; Market cap: $52.2 billion; Price-to-sales ratio: 1.5; Dividend yield: 3.0%; TSINetwork Rating: Above Average; www.enbridge.com) gets 90% of its revenue from pipelines that pump oil and natural gas from Western Canada to Eastern Canada and the U.S. The remaining 10% mainly comes from distributing gas to 2.1 million consumers in Ontario, Quebec, New Brunswick and New York State. The company plans to spend $44 billion on new pipelines and expansions between 2014 and 2018. It completed $9.8 billion worth of that total in 2014 and expects to finish another $8.7 billion worth this year. Enbridge has already secured shipping contracts for $34 billion worth of these projects, which cuts its risk....

A holding company is a company that owns all or a substantial part of a variety of different businesses. These businesses may be private companies, or publically traded. Holding companies may own all, or a majority or a minority, of companies in which they invest. The one thing most holding companies have in common is that they trade for less than the combined value of their holdings. This “holding company discount” is a well-known phenomenon in finance. It represents a special kind of hidden asset and potential profit for investors in holding companies. When holding companies sell assets or break themselves up into their constituent parts, much if not all of the discount may disappear. In other words, holding companies can usually sell their assets for fair market value, rather than at a discount. In addition, fair market value may turn out to be be more than analysts figured they were worth. Even without a break-up, buying a holding company at a discount to its asset value puts more assets to work for you for each dollar you invest....