December 30, 2015

On Wednesday, the S&P 500 fell 0.7% and Toronto fell o.8%.

Preferred shares mostly rose, for example the Canadian Western Bank preferred share was up 3.8%.

Oil prices fell as oil inventories rose. Apparently, the North American oil producers are mostly maintaining or increasing production while hoping that the OPEC countries reduce consumption. Meanwhile OPEC may be hoping that some North America oil producers will be driven out of business and that they will stay out of business even if oil prices rise because they and their lenders will live in fear of low oil prices. No longer will oil companies be able to borrow money on the basis of projections of oil prices at $100 or anything close to it. If OPEC (or maybe just Saudi Arabia) stands its ground then we are going to need to see significant oil production in North America come out of production before oil prices will rise. Alberta laments that future oil sands projects will no longer happen. The reality may be that even some current oil sands production or some projects that are well underway will need to be canceled.

Updates for RioCan

The report for ReoCan REIT is updated and rated Buy at $24.24.

When I first added RioCan to the site on July 9, 2011 rated Weak Buy (essentially a Hold) it was trading at 1.53 times book value. Now it is trading at a much more attractive 0.98 times book value. The unit price may be volatile in the next six months as the market digests the impact of its sale of its U.S. properties. For those looking for yield this seems like a reasonable bet.

The report for the RioCan preferred share is also updated and rated (lower) Buy at $18.59. These were shares were added to the site on July 9, 2011 also rated Weak Buy at $25.70. The appeal of rate reset shares at that time was that they would not fall in value if interest rates rose (as expected) due to the reset. Instead, interest rates unexpectedly fell a lot. Time has basically run out for these shares as the reset date is now only three months away. They may be of interest for those who seek yield and who expect rates to rise. In that case the buyer would choose the option of converting this to a floating rate on March 31, 2016 yielding a projected 4.2% and hope for rates to rise.

December 29, 2015

On Tuesday, the S&P 500 rose 2.3% while Toronto fell 0.5%.

Toronto’s decline was caused in part by Valeant’s decline of 11.1% which was due to news that its CEO is in hospital with pneumonia. Valeant is down 60% in U.S. dollars (which it reports in) since I added to the list rated Sell in late July. At this point I don’t have any strong opinion on Valeant. It has made changes to its business model and it will take time to see how that will affect its profits. I am not going to attempt to update the rating on Valeant and will remove it from the list. According to Yahoo finance the forward P/E is 10.3. But I suspect that is an adjusted earnings figure and that the P/E based on GAAP earnings will be far higher than that. I would consider it to still be a speculative stock.

Almost all the stocks on our list were higher on Tuesday.

I will have a few more updates to the stock ratings before the start of trading for 2016.

December , 2015

On Monday, the S&P 500 fell 0.2% while Toronto was closed in lieu of Boxing Day.

Our next update will likely be for RioCan Reit as well as the RioCan preferred share series A. The preferred shares are set to reset to a materially lower dividend on the reset date which is now only three months away. There is also an option to convert to a floating rate preferred share on the reset date. That option may be viewed as preferable to locking in for five years at the fixed rate.


Updated Onex Corporation Report

Onex Corporation is updated and rated Speculative (lower) Buy at $85.68. This entity is not a normal operating corporation but is a combination of a conglomerate holding company that invests mostly in private companies (the value of which is difficult to estimate but which ONEX reports) and a hedge fund management company that invests money for others in return for a management fee plus performance fees.

ONEX has gained 27% on Toronto this year. However, that was largely due to the decline in the Canadian dollar. ONEX reports in U.S. dollars and has most of its investments in U.S. companies and therefore should be judged on its gain in U.S. dollars, which is about 7% this year. I am not trying to diminish the gain in Canadian dollars but the fact is that this should not really be considered a Canadian dollar investment. In this respect it is a bit like an investment in an S&P 500 fund in Canadian dollars on Toronto. Such an investment if unhedged has risen far more than the S&P 500 in 2015 simply due to the currency movement.

ONEX is a strong company. It will likely continue to do well long term. Canadian investors face currency risk if the Canadian dollar rises. It may face some weakness in Q4 due to its investments in higher yield debt. It is likely a good long term investment but it does not seem compelling at this time.

December 26, 2015

On Christmas Eve, the S&P 500 fell 0.2% while Toronto rose 0.2%.

Boston Pizza Royalties was up 2.4% to $17.70. Last week, co-founder Jim Treliving bought 5000 units at $16.97. Combined with other recent insider buying, it seems clear that management views these units as under-valued. The entity itself will likely resume buying back shares as soon as this week.


Updated Wells Fargo Report

Wells Fargo is updated and rated (higher) Buy at $54.82. Despite being the world’s most valuable bank Wells Fargo’s operations are mostly concerned with the traditional lending out of depositor money. It does not engage in the large-scale investment banking or creation of structured products that the Wall Street banks engage in. It has relatively little pretense outside of the United States. These features lower its risks.

We first added it to this site at the very height of the financial crisis (just prior to the bottom in stock prices) and rated it a highly Speculative Buy at that time. It is up 402% since then. It’s price was fairly volatile for several years after the bottom but has risen steadily since the summer of 2011 although with some volatility in 2015. We had rated it a Speculative (lower) Strong Buy in February 2010 and it is up 104% since then.

Wells Fargo is an excellent company with excellent management. It appears set to continued to grow and provide good returns to its owners over the years. For Canadian investors there is currency risk. Currency risk is something that should be considered in an asset allocation context and is not part of the individual securities selection process. That is, our rating here (and for all U.S. companies on our list) does not consider currency risk but is based on investing U.S. dollars with the return to be accounted for in U.S. dollars. I recently reduced my own position in this company in order to free up U.S. dollars to convert to Canadian dollars. I retain a large position in Wells Fargo.

December 23, 2015

Wednesday was a positive day in the markets with the S&P 500 up 1.2% and Toronto was up 1.5%.

Oil (West Texas) was up 4.8% to $37.89. This was apparently due to a surprise decease in oil inventories.

AutoCanada was up 4.7% although it had not released any news.

Retail sales were reported for October and were about flat. They were up 0.1% in dollars but down 0.3% in volume. The impact of the lower Canadian dollar is starting to be seen and is causing some inflation. There will surely be more to come. The figures above would appear to suggest inflation of 0.4% in the month – that’s equivalent to 4.8% annualised.

Restaurant sales were reported for October and were up 0.3% in Canada although down 1.7% in Alberta. This is slightly negative for Boston Pizza but does not suggest any material decline in sales.

Boston Pizza is in the process of renewing its unit buy-back program. I don’t expect a lot of buybacks but any support for the unit price is welcome given that the units appear to be under-valued in the market.

I transferred some funds from U.S. dollars to Canadian dollars in my RRSP. In this transaction, I was completely captive to my broker TD Direct and the exchange rate was about 0.93 cents under the wholesale rate, or about 0.66% below. I only got that good of a rate by transferring what amounted to more than $30,000 Canadian. Apparently even at $25,000 Canadian the rate would have been closer to a charge of 1.5%.

In a non-registered account it might be possible to set up an electronic transfer of U.S. dollars to an external currency broker, make the exchange at a much lower fee and then transfer the Canadian dollars back to a Canadian dollar brokerage account.

Canadian Forex offers something like this and I am investigating exactly how it works. The banks are smart though, they know that I might rather just pay the 0.66% rather than risk sending say $25,000 off to Canadian Forex and trusting to get it back in U.S. funds or the opposite. It’s not clear to me why Canadian Forex would not transfer the money instantly rather than taking four days as their site indicates they do.

December 22, 2015

The S&P 500 was up 0.9% on Tuesday and Toronto was up 0.4%.

The five-year government of Canada bond yield was down to 0.72% on Monday and edged up to 0.75% on Tuesday. This very low yield continues to keep rate reset preferred shares trading at low prices since the dividend will reset at the reset date based on the five year Canada bond plus a contractual spread. For rate reset prefs that are trading at low prices I would favor those that have a longer time before the reset date. Those could provide a capital gain in two possible ways: 1. If the five-year Canada yield rises in the intervening months and years then the reset dividend could be more attractive. 2. If the five-year Canada bond yield remains low in another two or three years then perhaps the market yield on preferred shares will return to close to the 4% level reflecting what might then be an expectation of relatively permanently low rates. I am hoping for scenario number 1. On the other hand capital losses are always possible if the credit condition of the issuing company deteriorates.

Q4 is coming to a close. Many companies are going to report large currency gains and losses. U.S. multi nationals like Costco, Walmart, Fedex, Berkshire and Visa will see negative currency impacts.

Canadian companies that sell into the U.S. or that own subsidiaries in the U.S. will benefit from the lower Canadian dollar. This includes Stantec, Onex, Element Financial, and TransForce.

Bombardier and Couche-Tard are interesting in that they are Canadian companies that report in U.S. dollars because they do the majority of their business in U.S. dollars but also do substantial business. The lower Canadian dollar will have a negative effect on their reported earnings but when translated back to Canadian dollars the impact would be poitive. This should be beneficial to the Canadian dollar share price.

Canadian Tire which sells in Canadian dollars exclusively but which faces buying about half or more of  its products in U.S. dollars should be negatively impacted by the lower Canadian dollar. This is particularly true because Canadian Tire has not raised its prices (at least it had not as of Q3). So far, it has managed to overcome the dollar impact by working on its purchasing strategies and also by cost cutting. It also had a certain amount of hedges. I strongly suspect that the sharply lower Chadian dollar will finally start to hurt Canadian Tire by Q4 unless they can raise prices to compensate. Some of the same comments apply to Dollarama but I understand it has already raised some prices and with its strong growth and given its products may be in a better position to raise prices without scaring away customers.

All of the companies mentioned may have some hedging in place. But as Canadian Tire stated a year ago. Hedging only provides a “glide path”. Hedging is generally not done for more than a year in the future and so it only delays currency impacts. It simply can’t permanently eliminate the impact. Hedging is expensive and ties up balance sheet assets or borrowing capacity and so it is rare to go much beyond one year or certainly beyond two years. Hedging can also leave a company at a disadvantage if the currency moves in the other direction. Competitors could have a beneficial currency move that the hedged company has hedged away.

Some companies do have a certain amount of natural permanent hedge where revenues and expenses are both in a foreign currency. In that case it is the profit that will not be permanently hedged.


December 21, 2015

On Monday, the S&P 500 was up 0.8% and Toronto was up 0.1%.

Canadian Western Bank was up 1.6% after announcing an acquisition of an commercial and equipment finance company that it believes will be quite accretive although not for several years. The initial payment is $30 million in shares and $19.5 million of cash. In addition another $70.5 million will be paid in future over the next three years contingent on performance of the business.

The great majority of the target company’s existing loans are off-balance sheet as they have been securitised and are not being acquired. It appears that what CWB is purchasing in the management team and its ongoing ability to generate new loans and also the renewals of existing loans which CWB will now fund. It appears that the majority of the purchase price is for goodwill although that is not entirely clear yet. If so, this is in contrast to CWB  which is trading not much over book value.

Up to 50% of the total contingent consideration may be settled with CWB shares, provided the share price at the time of issuance exceeds $30, with the remainder to be paid in cash.

I view this transaction as a positive event and something that suggests that CWB is confident about its finances and continues not to expect to run into a problematic level of loan losses.

The initial addition to CWB’s share count will be about 1.6%.

The market continues to value Canadian Western Bank’s rate reset preferred shares at what appears to be a low price and also to value Boston Pizza Royalties Income fund at a low price. I added to both these positions today.

The fear appears to be that Boston Pizza Royalties franchise revenue per share could decline. In its history since inception in 2002 this fund has only cut its distribution once and that was when Income Trusts lost their income-tax free status in 2011 at which time it also became eligible for the dividend tax credit. History suggests that the current distribution which generates a yield of over 7.6% will increase slowly over the years. However, it is true that a severe recession leading to sustained lower same-store sales could cause a decrease in the distribution. And if the recession led to restaurant closures exceeding restaurant openings then a distribution cut would be likely. The fund is currently not at risk for store closures as long as openings exceed closing since BP International receives new units for new restaurants net of closed restaurants. Anything is possible but I continue to think that this 7.6% yield is attractive.

December 20, 2015

On Friday, the S&P 500 fell 1.8% while Toronto was up 0.1%.

Bombardier was up 16% after announcing that it received the expected certification for the smaller version of its new C-Series plane and also announcing a significant rail car contract. I expect Bombardier to announce some additional sales for the plane before too long but unfortunately the buyers will likely get significantly discounted polices as Bombardier is desperate for sales. I would think also that Bombardier should be benefiting from the sharply lower Canadian dollar.

I reduced my Wells Fargo position in order to free up some cash to transfer back to Canadian dollars to lock in the exchange rate gain on a portion of my portfolio.

Updated FedEx report

FedEx is updated and rated Buy at $147.15. It’s an excellent company the stock price has declined about 15% in 2015 despite higher earnings.

December 17, 2015 (with a correction Dec 18)

On Thursday, the S&P 500 was down 1.5% and Toronto was down 1.2%.

The Canadian dollar is down under 72 U.S. cents. This seems bizarrely low. It certainly seems to be driven by low oil prices. I don’t know why low oil prices have quite so much impact on the value of the dollar.

This Canadian dollar spent most of 2011 and 2012 around par and sometimes above. It has now been declining for three years. The decline in terms of the U.S. dollar has been about 28%. And it now cost 40% more to buy an American dollar with Canadian money. One place the value  of the Canadians dollar has not fallen much is in Canada. There has not been much inflation overall. For example automobile prices are not anything remotely close to 28% (correction, 40%) higher.

If there were no frictions between Canada and the U.S. we might have expected that inflation would have been 28% (correction 40%) higher in Canada versus the U.S. You will notice that if a stock trades in both Canada and the U.S. then the Canadian price immediately reflects the currency difference. For every dual listed stock, the U.S. stock price is now about 28% lower than the Canadian price (and the Canadian price is about 40% higher than the America price). That’s because there is little friction and arbitrage requires the prices to react that way. Can you imagine the impact if all prices in Canada had risen by an extra 40% just due to the currency impact?

There will be pressure for Canadian consumer goods prices to rise. (A lot!) Otherwise people could buy goods in Canada and bring them into the U.S. at a profit. Despite some frictions that is happening with automobiles.

Canadians should and will reduce their travel to the U.S. and Americans will and should increase their travel to Canada.

Overall I think that the Canadian dollar is well below purchasing power parity and I don’t expect it to keep declining. (Then again I never would have dreamt it would get this low).

I am really starting to think I should sell some U.S. stocks and move some funds back to Canada. But I really HATE to give TD Waterhouse about 1.4% for simply changing the money (a far charge when it involves a thousand in cash, where I can shop around, but usurious when it involves an automated electronic transfer of $50,000 or whatever trapped in a RRSP account where I am a completely captive customer.)

Melcor was up 12.2% today but  I won’t chalk that up to anything other than volatility on this thinly traded stock. The company has finally started buying back some shares but they are limited to a paltry 3057 shares per day because of the thin trading.

The Canadian Western Bank rate reset preferred share was down 5.0% to $16.59. At that price it yields 6.6%. If the Bank of Canada 5 year rate remains at about 0.8% at the reset date in about 39 months then the yield at this price would reduce to 5.4%. It seems to me that if the five year Canada rate is still so low in three years then 5.4% is going to be an attractive rate.

It might be argued that the Royal Bank rate reset pref just issued at 5.5% is the better investment. It might be if one considers that Canadian Western Bank is likely to face financial difficulties. (I don’t, but it could) But assuming that neither bank is headed for financial difficulty I like the Canadian Western pref. The Royal bank pref issued at $25 is not going to be worth much more than $25 upon its reset in five years because the bank will have the right to repurchase it and that will limit any upside. In contrast the CWB pref could rise in value towards $25 if market yields on this product decline.

Kevin O’Leary said today that these rate reset preferred shares are “toxic”. But the only reason he gave was that the existing crop had fallen from about $25 to $17. But that happened mostly because the five year Canada yield fell. Kevin did not say if he expects the five year Canada rate to fall again despite the FED having now raised rates.

Bombardier has a press conference Friday morning. Presumably they got the certification on The C-Series.

December 16, 2016

The Federal Reserve Bank in the U.S. finally raised its overnight inter-bank target rate by 25 basis points.

The S&P 500 rose 1.4% and Toronto rose 1.9% despite about a 4% drop in the oil price.

The Canadian dollar fell but only moderately.

Canadian rate reset preferred shares were mostly up 4% or more as they partially removed from what were likely irrationally low levels.

Almost every stock on our list was up today.

I was impressed hat Wells Fargo announced within 12 minutes of the FED release that it was raising its prime rate by 25 biases points to 3.50%. They obviously had that announcement ready to go but I still think it is impressive when a huge company (or any company) can move that last. It also seems obvious that someone had the authority to announce the rate increase without any meetings or the like.

Wells Fargo, I suspect, wanted to let the other big banks know what it was doing and at least two others followed suit with a couple of hours.


Update to Constellation Software Report

Constellation Software is updated and rated Speculative (lower) Buy at CAN $581 and U.S. $423 (this was based on yesterday’s closing price and it is at CAN $585.43 as I post this as stocks rose on the FED news).

Constellation is one of Canada’s very best managed public companies. The ONLY concern I have had with constellation is that it generally trades at a very high P/E ratio. That leaves it vulnerable to a price decline if the growth falters. At the moment the P/E ratio at 26 based on adjusted earnings is lower than it was at my last update.

My analysis is in U.S. dollars because the company reports in U.S. dollars. Strangely enough a rise in the U.S. dollar tends to lower its earnings in U.S. dollars but increase those earnings if measured in Canadian dollars.

I don’t happen to own any shares as I sold too early on the way up. If I had the cash I would be interested in taking a small position now and then hoping to add to that on a pullback. (Or if it kept rising that would be okay too, although I would then regret that the position was small)




December 16, 2015

On Tuesday, the S&P 500 was up 1.1% and Toronto was up 1.7%.

Preferred shares were particularly strong.

Melcor bucked the trend and was down 4.8% to $12.36. And the trading volume was a bit higher today at 31,329 shares. It is now at just 44% of book value. So 56% below book value, which seems remarkable. If the financial statements are to be believed then those selling are “selling dollar bills for 44 cents”. And they may be doing this out of fear that soon the going market price for these particular “dollar bills” will be 40 cents or whatever. To my mind, if Melcor is going to run into such serious trouble that half of its book equity is going to be wiped out then Alberta would have to be in extremely dire shape for that to happen. At present the unemployment rate in Alberta is 7%. That is not a dire unemployment rate, nor even close to dire.

Melcor usually reports strong lots sales and profits in Q4 and quite possibly that will not be the case this year as builders will surely be more cautious and lot price s will be down somewhat. But a cyclic earnings decline hardly seems to justify such a fire sale share price.

Regarding Boston Pizza Royalties, I notice that founder George Melville grabbed 10,000 shares yesterday at $17 and just under. As a major owner in Boston Pizza International he receives free Boston Pizza Royalty Trust units for every new restaurant that opens and often sells part of the shares received. I take it as a good sign that he is buying Royalty Trust units in the market.

Regarding the Alberta economy, I have for many years been watching  the 90-day mortgage delinquency rates published by the Chadian Bankers Association. Annoyingly, they publish at least three months behind and the latest we have is the August numbers. Even as of August we were about 12 months into lower oil prices. And these delinquency figures for Canada and for Alberta have not budged at all. In fact, for both Canada as a whole and for Alberta, these 90-day montage delinquency rates are down very slightly in the last year. Really, these numbers look too good to be true (roughly, only one in 400 mortgages is at least 90 days late, these numbers were closer to one in 100 in early 2011 and even that did not create any big problems for the banks) I have long wondered if the banks are somehow hiding the delinquencies by allowing customers to skip payments or something. I certainly expect these figures for Alberta to go up somewhat as the layoffs mount and as severance packages run out. But there is no indication whatsoever that these delinquencies will reach problematic levels. I will continue to watch…

Wednesday afternoon should be interesting after the FED decision comes out.

December 14, 2015

Monday was another non-boring day in the markets.

The S&P 500 was up 0.5% while Toronto was down 0.78%

Oil is at $36.26. The Canadian dollar is worth just under 73 U.S. cents.

Natural Gas is at a low last seen in 2002 at U.S. $1.89 in New York

Notable decliners today included:

Melcor, down 3.7% to close at $12.98. As usual, this was on a small volume, just shares.

AutoCanada was down 5.7% to $20.66. A Statistics Canada report released today shows that new motor vehicle sales across Canada increased by 4.6% from the prior year in October. But they declined 15.7% in Alberta where AutoCanda has about 43% of its dealerships. Perhaps November and December will be far worse these sales figures would not seem to justify the huge slide in the share price here.

The preferred shares on our list were mostly down including the RioCan rate reset preferred share down 5.7% to $17.31. This particular share will reset in less than four months on March 31, 2016. It the Bank of Canada five-year rate stays around 0.75% then this share will rest to pay (0.75 plus 2.62 or 3.37% on a $25 face value yield about 4.9% at its current price.

Normally, in a world of 0.7% five-year bond rates a 4.9% rate reset yield might seem attractive. But last week Royal Bank sold a rate reset pref yielding 5.5% and which will reset at the five year plus 453 basis points. That would seem superior to the RioCan share although the bank preferred share I believe is subject to being converted into common shares of the bank in certain dire circumstances.

For whatever reasons it appears that buyers of rate reset preferred shares have gone from accepting yields around 4% and less on new issues about a year ago to now requiring 5.5% even from a very strong issuer. In part this is due to a fear that the Bank of Canada five-year yield will remain low and that the reset yields will be low even five years from now.

I added to my positions in Melcor, the Canadian Western Bank preferred share and Boston Pizza today. It’s always been my practice to try to add to positions of companies that I consider to be under-valued as they become cheaper. At the moment there seems to be more opportunity to do that than I would like. Time will tell if buying at these prices will turn out to have been wise.

Perhaps a FED move on Wednesday will put a different sentiment into the markets.



December 13, 2015

On Friday, the S&P 500 declined a hefty 1.9% and Toronto was down 1.7%.

Overall, 2015 has not been a good year for stock investors, especially for investors in Canadian stocks. The Toronto index is down 12.6%. The average Buy (or higher) rated stock on this site was down 12.3%. Most years, we have done materially better than the Toronto market but that has not been the case this year.

Due mostly to a generous exposure to U.S. stocks my own portfolio is down “only” about 5%.

For 2016, I will be continuing with the same analysis approach but plan to add more companies to the list.

Experienced stock investors know that it is unrealistic to expect every year to result in gains. But they also know that it is realistic to expect to make gains and build wealth at a reasonable rate over the years. Lower stock prices today may very well set us up for superior returns in the future. As long as corporations keep earning strong profits, investors are going to benefit from that over the years.

The moods of investors very much affect stock prices in the short term. But in the long-term it is companies and their customers that affect profits and ultimately stock prices.

I have updated my detailed analysis of the valuation and attractiveness of the Dow Jones Industrial Average. The results indicate that it is likely about fairly valued at this time. But that depends, among other factors, on the forecast for earnings growth that is assumed.

These last few weeks of the year could prove interesting as the market reacts to the FEDs move (or, less likely, lack of movement) next week.

There has seldom been a dull week in the markets in the last several years and that seems set to continue.


December 10, 2015

On Thursday the S&P 500 was up 0.2% and Toronto was up 0.6%

Dollarama was down 5.3% to $77.37. That is down from a high of almost $94. I read that latest quarterly press release and the company continues to grow very strongly. But it was a very expensive stock and so it was vulnerable to a decline for that reason. It is still expensive at this price and is pricing in a lot of growth.

Rate reset preferred shares have been getting hammered again as the five year bank of Canada yield has been declining. Also Royal Bank and Bank of Nova Scotia issued new five year rate rest shares at 5.5% and these will reset in five years at the five year plus about 4.7%. That is far richer than many existing rate reset shares. Correspondingly the existing rate reset shares had to go down in price so that their yields could compete.

The CWB five year rate reset is at $17.10 yielding 6.4%. It resets in a bit less than 41 months from now at the five year rate plus 276 basis points. We would need the five year Bank of Canada rate to go back to about 1.50% or higher before this would ever get back to the $25 level. At the moment there seems to be no increase in sight and instead there is talk of further Bank of Canada rate decreases. Perhaps the picture will change if the FED finally raises rates next week. Things can change rapidly in the markets and are seldom predictable.

It is amazing that the same market place that attracts some entities to buy a five year Canada bond at 0.8% refuses to buy a five-year Royal bank rate reset preferred share unless the yield is 5.5%. It seems like there is not one pool of investors who choose between these two. Given a choice it would seem clear the 5.5% preferred share is highly likely to be the better investment. But there seems to be a pool of captive investors or a pool of money that will ONLY invest in government bonds and so will accept the ultra low rate of 0.8%. At the end of the day there is some small chance that the Royal Bank could run into huge financial difficulties. It is probably exceedingly unlikely but there are some pools of money that are mandated not to take ANY chances. Even at that it is surprising that there is not enough other investors who are willing to take some risks and who would have been willing to take the Royal Bank pref shares at some level well below 5.5%. Consider that a five-year bond issued by banks yield only about 2.1 to 2.3%. The pref share would seem to be only slightly riskier and yields a lot more at 5.5%.

In the absence of financial troubled at RBC it is hard to conceive of how there would be a risk of that pref share trading under $25 when it resets at the five-year plus 4.7%. Say the five-year bank of Canada rate falls to zero, then would our RBC pref share not be attractive at reset at 4.7%? Or do people think the five-year Bank of Canada yield will be minus 2% in five years or something like that?

As noted yesterday, markets do not always seem to be rational.

December 9, 2015

Wednesday’s action had the S&P 500 down 0.8% while Toronto was up 0.1%.

Dollarama fell 7.3%. I will update that report soon and definitely before the end of this year.

Costco was down 5.4%. I would want a bigger retreat than that before I would be a buyer.

Canadian Western Bank fell another 2.0% and is almost down to its book value.

AutoCanada fell another 3.3% to $22.24. Presumably this is on continued fears of a soft vehicle market in Alberta where 43% of its dealerships are located. This stock had topped out briefly at $90 in June of 2014. It’s quite a drop for a company that has not reported any losses. (profits were down 35% in the latest quarter). Perhaps the market’s view is that Alberta is never going to recover.

Toll Brothers was down 3.0%.

When stock prices decline I remind myself that I own shares in actual companies and not mere squiggles on a screen. Lower stock prices provide buying opportunities. And if stock prices were not at times irrationally high and at other times irrationally low, then there would be no point trying to select individual stocks. Irrational prices are very much the friend of the rational investor.

I have been checking for insider trading on certain companies.

At Boston Pizza, Jordan Melville, presumably related to founder George Melville purchased 2000 shares (units) at $17.99 on December 8th (Monday) to hold 7100 units.

Melcor Developments finally bought back a few shares 300 on December 8th at $13.28 and 2000 today December 9th at $13.50. They had announced a buy back program last Spring when the stock was considerably higher but only now finally bought some shares. An insider at Melcor exercised 3333 options at $12.76 and sold the shares at $14.77 which is a bit of  a negative sign.

A Bombardier insider sold all his 47,000 shares at $1.23 in November. Not exactly a display of confidence.

Update of Toll Brothers Report

Toll Brothers is updated and rated (higher) Buy at $33.84. Sales for a homebuilder are hard to predict. However, in this case the revenue is relatively predictable because it is driven by signed home sale contracts about one year earlier. Based on that I had expected Q4 which it just reported to be a bit stronger but possibly the deliveries will show up next quarter. For the next year it should be reporting revenues in the order of 25% higher based on signed contracts in the four quarters of 2015 and based on a backlog interring the year that is up 29% in dollars. If its margins are relatively constant then earnings should also grow by about 25% in 2016. The company continues to believe that the home building industry in the U.S remains in recovery mode as housing starts are still well below historical averages. With a P/E of 16.6 and with a potential 25% increase in profits in the next year the stock seems attractive. In addition, the company has bought back shares fairly aggressively when the price dips under about $35 as it now has.

Comment About Oil Production and Oil Prices

Here is the latest on Canadian Crude Oil production from Stats Canada figures released this Wednesday morning, December 9th.

Canada produced 17.2 million cubic metres of crude oil and equivalent products in September, down 3.5% compared with the same month in 2014. (So a decline in September)

Total exports of crude oil and equivalent for September were up 12.0% from the same month a year earlier to 15.3 million cubic metres. At the same time, imports of crude oil and equivalent were relatively flat, edging down 0.4% to 2.5 million cubic metres. (So Canada has added to the world supply glut)

For the quarter ending September 30, production of crude oil and equivalent products increased 4.8% from the same quarter a year earlier to 57.1 million cubic metres. At the same time, exports of crude oil and equivalent products increased 7.9% to 45.4 million cubic metres, while imports were up 4.2% to 8.4 million cubic metres. (So, on the quarter Canada has increased production and net exports).

This increased Canadian production while bemoaning a supply glut brings to mind the old saying from Pogo “We have met the enemy and he is us”. This is classic behavior for commodity producers during a supply glut. Each one wishes the others would curtail but each one tends to produce like mad even at the lower prices in an attempt to grab cash flow.

What I find strange about the current situation is that the Saudies (alone or with OPEC) are thought to have had the ability to single-handedly maintain the high price but they chose to let it crash. Possibly they had in fact lost the ability to control the price but they may think they can regain control after they show OPEC and others the pain that comes from a free market price in this commodity.

Sadly, if Canada can’t compete on a free market basis then there is not much to be done. Should we really be hoping for a restoration of the OPEC price-fixing cartel? In the absence of either shortages or cartels, commodities are a game where low cost producers win, not high-cost producers. For Canadian oil producers cutting costs may be the only option available.


December 8, 2015

Tuesday was another down day for the markets. The S&P 500 fell 0.7% and Toronto fell 0.9%.

Among the more notable decliners were certainly some that I have rated as Strong Buys or Buys and which I have a heavy allocation to in my own portfolio.

Melcor was down 6.0% to $13.30. That was on small volume but clearly some investors are throwing in the towel. That will almost certainly prove to be a mistake with this company trading at under 50% of book value per share. I added a small amount to my position today.

Canadians Western Bank was down 1.2% to $23.28 and now trades at just a 5% premium to book value. Banks are highly leveraged and can be risky for that reason. But this Bank has not reported a single quarter of losses in about 27 years. And it does not expect to do so in 2016 either.

Boston Pizza Royalties fell 0.6% to $17.40 and now yields almost 7.5%. This entity simply collects and passes along (with almost no operating expenses) a share of the franchise fees. I don’t think there is much risk of a dividend cut here in the near-term. In fact I am expecting a small increase before too long. Even in the event of moderately slower same-store sales we would likely see the distribution maintained. If the downturn was longer-lived a modest cut would likely be made. In the event of a really large decline in same-store sales and/or a net reduction in the store count then a larger cut in the distribution would be needed. I don’t think that is likely at all. It’s hard to imagine a scenario where more than a 10% cut to the distribution would be needed, though anything is possible. Investors can bid the unit price down or up, but the distributions are affected by customers not investors.

Toll Brothers was down a hefty 7.0% as it released Q4 earnings that were somewhat below expectations. However, based on signed contracts for houses sold in 2015 which will be recognised in earnings upon delivery in 2016 we know that its revenues will be up by about 25% in 2016. Barring major cost increases it appears to have as much as a 25% increase in earnings per share basically baked into the numbers in 2016. I will update the report for this company tomorrow and it looks like it will be rated (higher) Buy.

Wells Fargo was down 1.8% to $54.40.

These five stocks are my largest holdings and all five were down today. Such is life in the markets. At least the lower Canadian dollar partially offset the losses on the U.S. stocks.

I notice that TransAlta was down 7.5% to $4.35. I don’t have that stock on our list. Despite its poor management and its coal plants, I suspect that at $4.35 it would be a good speculative pick. At this price it seems quite possible that it would be acquired at a decent premium. Berkshire Hathaway Energy surprised me greatly by having some joint ventures with this poorly-managed company dating back a few years. So Berkshire is a possible purchaser although they may decide they just don’t want the coal plants at any price. Capital Power would be a logical purchaser except that the government would not like the market concentration that would result. AltaGas is smart and might be a buyer. Surely there is some company that could pick this up on the cheap. It’s amazing how toxic the very notion of coal fired power plants has become. Contributing to the company’s woes is the fact that the wholesale power price in Alberta is currently incredibly low. But that will change.

Among the few winning stocks. Costco was up another 1.75% to $168.87 in advance of releasing earnings which it did after the close. Costco was briefly under $120 on that market dip of August 24. It had been above $140 just prior to that day. This goes to show that having some stink bids in can be a good strategy. Costco is a fantastic company but it won’t go up in straight lines. Pull-backs of 10 to 20% tend to occur and have been buying opportunities. The stock is too expensive for my tastes at this time.

Returning to the topic of oil. Energy analysts moan that Saudi Arabia has lowered the price by increasing supply. They decry this as politics. But that is what normally happens with commodities. The keeping of prices high via a cartel was the anomoly. As Kevin O’Leary has said may times, commodity prices rise quickly on shortages and then when there is a surplus, prices fall “without touching the sides”. Based on the last figures I saw, Canadian oil producers have not decreased production but have increased it. They seem to expect Saudi Arabia to eventually cut production. The price of oil is what it is and remains unpredictable. Wise oil companies would not have taken on much debt. The unwise did and must pay the price which for some means insolvency. Given that the oil is still flowing there is still a LOT of work and spending and jobs in the oil patch. Some bank or other today was projecting that the Alberta GDP will still grow 0.8% in 2016. That’s not great but it may mean that the collateral damage to companies like Canadians Western Bank and Melcor and even Boston Pizza is being over estimated. If Alberta starts shutting in a major amount of oil rather than merely canceling planned projects then the collateral damage would be greater.






December 7, 2015

On Monday, the S&P 500 was down 0.7% and Toronto was down 2.4%.

A decline in the price of oil in the oder of 6% to $37.65 was the main driver for the decline.

OPEC met on Friday. My understanding is that most OPEC members wanted Saudi Arabia to curtail production but that most of them were not willing to also do so. I refuse to believe that the Saudis have driven down the price of oil simply to “maintain market share”. Why would they do that at the cost of halving their oil revenues? Instead, I believe that they are doing it to hurt others. It could be to hurt all other OPEC members and to teach them that life is painful when they don’t abide by the production quotas of the OPEC cartel (which they generally did not over the years). After a period of sufficient pain the Saudis may convince its all OPEC members to adhere to production quotas and the cartel can be effective again. Or perhaps the Saudis want to punish and weaken certain oil-producing enemies. One popular theory is that the Saudis want to drive North American shale producers out of business. That may be, but it seems to have inflicted a huge toll on the Saudi revenue and in any case the shale oil will still be there. Another possibility is that the Cartel is simply broken. With increased North American oil production, it may be that OPEC simply cannot control the price of oil even if it wanted to. The Cartel may lack the cohesion needed to be a Cartel. It’s my sense tht OPEC decided nothing on Friday, rather OPEC failed to be cohesive enough to act together to restore their cartel.

Alberta laments the loss of revenue. However, if oil can be imported at $38, it simply does not make any sense to spend money on projects that require $60 oil. Lower oil prices are good for most of the world’s population. If supply and demand rather than cartels are driving the price of oil then that seems to be a good thing for the world at large. If it was the OPEC cartel that lifted oil to artificially high prices over the 15 years from 1999 to 2014 then Alberta owes an unacknowledged and huge debt of gratitude to OPEC for those boom years.

Most of the stocks on our list were down today. For example TransForce down 2.4%, CN rail down 2.4%, Canadian Western Bank down 3.8%, Melcor down 5.7%, Liquor Stores N.A. down 5.3% and AutoCanada down 3.0%.

Among the few gainers was Walmart which was up 1.4%.

Days like this test the resolve of investors. However, what is ultimately important is not the price at which stocks trade at on a given day but rather what they should logically trade at. That’s because actual trading prices are more volatile than true value and because stocks ultimately will trend towards their true value which is the price that they should logically be trading at.

Canadian Western Bank update

Canadian Western Bank is updated and rated Strong Buy at $23.66. This bank’s earnings remain strong despite lower oil prices. Q4 profit did decline about 8% versus the previous year. But the bank is not expecting any unmanageable level of loan losses. The share price is down about 45% from the highs reached in August 2014. Experience suggests that buying a well-run bank at 1.07 times book value tends to be a good investment. However, patience is required.

December 6, 2015

On Friday, the S&P 500 was up a hefty 2.0% and Toronto was up 0.3%.

Notable gainers included Berkshire Hathaway, up 2.9%; Bank of America up 2.9%; Visa, up 2.7%; Toll Brothers up 2.3% and Valeant up 2.3%. Also, the Canadian Western Bank rate reset pref shares were up 3.7% but that is on a tiny volume and it has fallen a lot earlier in the week.

A number of Canadian stocks were down on the day, perhaps in part due to the weak jobs report.

Liquor Stores N.A, down 2.9%; AutoCanada down 2.5%; TransForce, down 1.7%. Also Canadians Western Bank was down 0.9% and Boston Pizza was down 1.1%.

For those of us who try to invest in under-valued stocks it is certainly frustrating to see such stocks slip even further even while other stocks rise.

My own return this year is about negative 3%. While I’d like to have made a better return I take comfort from the fact that the valuation aspect of my portfolio has seldom or never been better. The average price to book value of the stocks I hold is 1.3 and the average P/E is 12.3. My average dividend yield is 3.3%. The silver lining in lower stock prices has been the ability to invest at lower prices.

I have updated the break down of my personal portfolio.


December 3, 2015

Thursday was another negative day in the markets with the S&P 500 down 1.4% and Toronto down 1.0%.

The biggest loser on our list was the Bombardier preferred shares down 5.5%.

Among the rare gainers on our list were three retail stocks, Canadian Tire up 1.1%, Walmart up 1.2%, and Costco up 1.6% on its strong same-store sales results.

Canadian Western Bank reported decent earnings (earnings per share were down 6% in Q4 versus the prior year but that was largely due to lower gains on securities, a slightly higher credit provision versus the abnormally low level in Q4 2014 and a lower “other income” result). A 6% decline, especially in the midst of the Alberta recession is not a bad result. The bank also increased its dividend by 4.5%. Despite what appears to be decent earnings and a decent outlook whereby the bank is not projecting any problematic spike in credit losses, the stock was down 1.4% on the day.

This stock trades at 1.12 times book value and management is expecting an ROE of 12 to 15% over the next three to five years. If that happens and the P/B remains constant at 1.12 then investors would earn about 11 to 13% per year. And any rise in the price to book value would create an additional return. However the projected ROE could certainly fail to materialise and the P/B ratio could fall. But banks traditionally trade at higher P/B ratios than 1.12. Overall, I think the math suggests that investing in these shares is likely to provide a good or very good return over the next few years unless loan losses become a LOT larger than management is expecting.



Visa Report Updated

Visa Inc. is updated and rated Weak Buy at $79.04 (it closed today at $78.29 but my analysis was done earlier at $79.04). Visa is clearly an excellent company and is exceptionally profitable. And it sits at the center of the conversion of monetary transactions to electronic forms. Nevertheless at 31 times earnings it does not seem like good value. And its VISA Europe transaction is going to cause it to report lower growth in the next two years before that transaction becomes accretive. I would prefer to wait and hope for a pull-back in this stock rather than buy now.

December 2, 2015

Wednesday was a down day for the markets with the S&P 500 down 1.1% and Toronto down 1.3%.

Almost all the stocks on our list were down.

Meanwhile Royal Bank became the first Canadian company to report an annual profit over $10 billion. I think it was only about six  months ago that Valeant had ever so briefly displaced Royal Bank as the most valuable company on the Toronto Exchange. I guess that never made a lot of sense.

Costco just reported same-store sales for November. They had 3% in the U.S. and 0% overall. But excluding currency and fuel prices they were up 6% which is stellar growth. The same-store growth in Canada in Canadian dollars and excluding fuel price changes was 8%. Apparently, Canadians are still spending apace, at least at Costco.

Canadian Western Bank reports earnings tomorrow morning. I expect the earnings will be reasonably good. But given fears about the Alberta economy, I suppose it is unlikely that the stock will rise even if the earnings are strong.


December 1, 2015

On Tuesday, the S&P 500 rose 1.1% and Toronto rose 1.2%.

Notable gainers included Valeant Pharmaceuticals up 9.6%; Stantec, up 2.0%; Couche-Tard up 2.7%, Toll Brothers up 2.4%; Bank of America  up 2.2%,  Constellation Software up 2.2%; Liquor Stores N.A. up 3.5%. and Amazon up 2.2%.

Decliners included TransForce, down 2.2%, Melcor down 3.1%, and Bombardier, down 3.8%.

I added to my margined Boston Pizza position today. Boston Pizza Royalties units were down 0.9% today to $18.54. Since I only expect the yield spread to be something less than 4% per year, it’s clear that I could lose more than that in a few days. But I have confidence in this investment and am prepared to stay in for several years. I might reduce the position if the units rise back to about the $22 range. It’s one thing to talk about potential returns and losses ahead of time, but I always find that making an actual investment focuses the mind. I already had substantial Boston Pizza shares. But now it will be on my mind that I borrowed money for these shares. I made sure the amount borrowed was not large in relation to my portfolio.


Amazon Report Updated

The report on Amazon.com Inc. is updated and rated Sell at $680. I had added this company to the site only five months ago and rated it a Sell. It’s up an amazing 55% since then. I added it to the site because I was curious how its financials looked. It has a reputation of huge growth but essentially no profit. Using fundamental analysis there was no way that I could rate it a Buy. Perhaps it will keep rising. But there is always some danger that it will instead prove to have been over-valued. It’s difficult to gauge what the value should be when a company has virtually no earnings per share but holds the promise of substantial future earnings.


November 30, 2015

On Monday, the S&P 500 fell 0.5% while Toronto rose 0.8%.

Agrium was up 2.8% and Melcor was up 4.7%.

FedEx was down 3.4% but that comes after two months in which it gained about 14%.

Walmart was down 1.8%

The Canadian Western Bank rate reset preferred share was down 3.9% to $17.86. These share’s trade very thinly. At $17.86 the yield is 6.16%. To me, that seems attractive and I expect these shares to trade higher in the coming months. But there is always the risk that they will trade even lower if Canadian Western Bank reports credit losses or their is fear that they will. This bank announced last month that it was going to redeem $300 million of debentures on November 30 (today).  It looks like they may have had the cash to do this but they may also decide to issue new preferred shares at a higher yield and with perhaps a guaranteed minimum reset level and if they did, that could also cause these existing shares to fall. Or the Bank of Canada could reduce interest rates. There are ALWAYS scenarios under which any investment can fall in price. Which is why many people never invest in stocks at all.

The Canadian Banks report earnings this week. CWB is scheduled to report by Thursday morning. I don’t think they will report much of an increase in actual credit losses. But they might report an increase in reserves for such losses.

I did purchase some Boston Pizza shares on margin today, having indicated yesterday that I planned to do so. I did not get as many shares as I wanted as I did not want to chase the price higher so I will likely add to this in the next few days.

I added an article about this strategy as well as a new article on management capital allocation skills. You likely received my newsletter email about these two articles.

The Alberta Securities Commission extended Canadian Oil Sands bid review period from 60 days to 90 days. Suncor had wanted it to stay at 60 days while COS wanted it extended to 120 days. It’s typical of regulators to seek a middle ground. They will have stated many reasons why 90 days is correct. But at the end of the day the human tendency to compromise is likely what drove them to the 90 days. It will be interesting to see Suncor’s next move. I’d like to see them refuse to extend their bid beyond Friday as planned. That would likely cause the COS shares to fall and would be entertaining if nothing else. Those who are convinced COS is worth more than the Suncor bid could then show the courage of their convictions by buying more.

Bank of America Report updated

Bank of America is updated and rated (higher) Buy at $17.48. This bank has finally put (hopefully) virtually all of the large financial crisis related litigation settlements behind it. If earnings in these next two quarters can match the performance of the previous two then the trailing P/E ratio is going to decline to about 11 (at the current stock price), which is attractive.  The bank is selling at 84% of book value and 119% of tangible book value which is attractive.

I added to my position today. I used funds in the U.S. dollar part of my account. Canadian investors should use funds that they have more or less permanently allocated to U.S. dollars or, if not, they should consider the currency risk.

November 29, 2015

On Friday, the S&P 500 rose 0.1% while Toronto fell 0.4%.

I am now planning to make use of my margin account to buy some additional Boston Pizza shares. The distributions will easily pay the monthly interest on the margin borrowing leaving about a 4% profit before tax. There is always a risk that these units will decline in price. However, I feel there is a higher probability of the units rising in price. I have not used margin or borrowed to buy stocks for a few years. This margin amount will not be large compared to my portfolio and the amount will not represent a large risk.

Bank of America will be the next report updated and it will likely be rated Speculative Buy. I will likely add to my Bank of America position tomorrow (Monday).

Agrium report updated

Agrium Inc. is updated and rated Speculative Buy at U.S. $97 or Canadian $128.

This stock is up 2.5% this year in New York, but 16.6% in Toronto.

Although headquartered in Calgary, I consider this to be more of a U.S. dollar investment than a Canadian dollar investment. (And that is unaffected by whether it is purchased in Canada or the U.S.). Most of its revenues and earnings and earnings are in U.S. dollars and for that reason it reports in U.S. dollars. The stronger stock performance in Toronto was due to the drop in the value of the Canadian dollar.

Agrium is an inherently volatile and cyclical company. Demand for its products varies from year to year with weather and farm income levels. In addition , revenues and earnings can vary greatly with its product prices that change rapidly based on the market price for its products which are mostly commodities. On top of that its costs vary greatly with the price of natural gas  which is a major input into some of its products.

It has a strong long-term profits history and appears to be reasonably priced at this time.


November 26 , 2015

On Thursday, the S&P 500 was closed and Toronto rose 0.2%.

One thing that investors can give thanks for is that while stock prices can rise or fall on any given day the majority of companies on the stock exchange make an additional profit each and every business day of the year.

After updating Element Financial earlier today, I bought some shares in that company.


Element Financial Report updated

Element Financial is updated and rated Speculative Buy at $17.50. This company has grown by acquisition at a huge pace. Barring higher loan losses or other problems it should report significantly higher earnings in the next year based on its current book of business. I am bothered that he company seems too aggressive in adding back items (stock options and compensation related to acquisitions) to arrive at its view of adjusted earnings. But overall I consider it to be a Speculative Buy. I would take a huge position but I would be comfortable with making a modest investment.

November 25, 2015

The S&P 500 and Toronto were both essentially unchanged on Wednesday.

U.S. markets are closed on Thursday.

Bombardier had a 12% rebound. The Bombardier pref share that we follow rose 3%. I suspect these shares will rise somewhat as it becomes apparent that Bombardier is not going to actually go broke.

AutoCanada fell 6.8% to $25.54 as the company announced a share sale at $25.50. At $75 million ($86.25 million with over-allotment option) this is a fairly large share sale in relation to the existing $626 million market cap. The number of shares will increase by about 14%.

It was only a week ago that AutoCanada negotiated an increase to its credit line for $200 million to $250 million. As of September 30, it had $133 million drawn on the then $200 million credit line. It subsequently purchased or announced the purchase of about four dealerships.

Overall, it appears that the equity issue is not any sign of financial duress but rather is to provide continued funds to make acquisitions. RBC was involved in the increase to the credit line and it will benefit from the fees to raise this equity.

At this point considering this equity raise and considering that Q4 is likely to be a poor quarter, it does not seem likely that there would be much reason for these shares to rise until and unless the company can resume earnings per share growth perhaps in Q2 of 2016.

I think this company should do well longer term based on its acquisition strategy but the near-term does not look encouraging.

November 24, 2015

On Tuesday, the S&P 500 was up 0.1% and Toronto was up 0.2%.

Oil bounced back to $42.85.

Bombardier wasted some money to host an investor day in New York City (the stock does not even trade in New York) and their attempts to reassure investors were enough to cause the stock to fall another 4.8%. The company said that 2016 revenues would fall and that the company was working on a five year turnaround plan.

Alimentation Couche-Tard released another good earnings report and the stock rose marginally.

My next update will be for Element Financial. The growth in its balance sheet has certainly been enormous. The company asks investors to focus on its view of adjusted earnings rather than GAAP earnings. That can be appropriate but I don’t agree with all their add backs. They seem proud to forecast that they won’t pay cash taxes for about the next 12 years.

AutoCanada closed at $27.40 but after the close announced a share sale at $25.50. This is annoying. However, if the money needed to be raised for acquisitions it is perhaps at least forgivable. This company pays a dividend and fundamentally that does not make a lot of sense. Why pay out money only to raise it back in while paying heavy fees to underwriters?


November 24, 2015

On Monday, the S&P 500 was down 0.1% and Toronto was down 0.4%.

As expected TransAlta got a bounce due to the Alberta climate change report and rose 9.4%. I don’t have TransAlta on the list but have mentioned it a few times lately.

I also mentioned Capital Power yesterday. It fell 10.3%. Capital Power issued a statement that seemed to indicate that it agreed with the Alberta Climate change approach.

I am not sure why this would be bad for Capital Power but good for TransAlta.

Perhaps TransLAta’s boost was more related to a leak of some news that it released very hnear the close of trading, after which the stock was halted for the day. TransAlta will get an investment from its partly owned subsidiary, TransAlta Renewables and from the Alberta Pension Management company.



Alberta Climate Change Report

Alberta has released a climate change report. It includes higher carbon taxes and a phase out of coal fired generation by 2030. And there will be a cap on oil sands emissions.

Clearly, we have arrived at the point where there will be financial incentives to reduce CO2 emissions and to reduce consumption of fossil fuels.

There was an indication that coal generation companies will be at least partially compensated with a promise not to “unnecessarily strand capital”. That seems like a promise to compensate although the word unnecessarily weakens the assurance.

Perhaps TransAlta will bounce on this news. That depends how much of its low price was simply due to its horrible track record and how much was due to fears of a phase out of coal without adequate compensation. At best TransAlta is a cigar-butt type stock, it looks cheap in some respects. But it remains a poorly managed company.

Capital Power could also get a boost on the news. It has had a relatively poor track record also but not nearly as bad as TransAlta.

There are also other companies that own coal generation in Alberta.

If there is any bounce on this news it may not be much of a bounce became the details and the level of compensation for early retirements of coal-fired electricity plants are far from clear at this point.



November 22, 2015

Friday’s markets saw the S&P 500 rise 0.4% while Toronto fell 0.3%.

West Texas Intermediate oil is down to $39.39 which is negative for the Toronto stock index.

Liquor Stores N.A. rose 3.4% which probably indicates that some analyst or other was impressed with their announced small expansion into New England.

Valeant recovered another 8.3%.

The Bombardier series C preferred shares rose 8.5% to $10.58. This is logical given that having arranged for two large cash investments, it seems unlikely that the company will fail to pay the distributions on these shares at least for the next several years.

The Bombardier common equity B shares failed to rise upon the announcement of the $1.5 billion investment by the Caisse. At this time the equity market value of Bombardier is $2.8 billion. On that basis, the Caisse paying $1.5 billion for 30% of the Transportation segment would suggest that the whole company is worth considerably more than $2.8 billion. I understand that some analysts are disappointed that the Caisse investment has onerous terms for Bombardier and dilutes the eventual upside for common share owners. But onerous terms were to be expected. Bombardier remains highly leveraged and produces products upon which it struggles to make any profit. I had expected the common shares to rise somewhat as this latest investment lessens any risk of bankruptcy at least for the next several years.

Melcor fell 4.5% to $14.90. There can be no doubt that Alberta is in recession. These shares offer the opportunity to buy into assets at a bargain price. But owning these shares will likely require patience.

Walmart update

Walmart is updated and rated (lower) Buy at $60.07. Walmart is currently experiencing declining earnings per share due to the high U.S. dollar and particularly due to the substantial wage increases that it announced early in 2015. The company projects that earnings per share will decline 6 to 12% in fiscal year 2017 that begins on February 1, 2016. They project earnings will grow 5 to 10% in fiscal year 2019. The stock price and P/E ratio already seems to reflect this news. It still makes a very attractive ROE and will be buying back shares ar a strong pace and is in a position to increase the dividend. Therefore, the share price could still rise in 2016. But certainly it is not going to soar. I have 100 shares that I bought recently at $60.27 and may add another 100.

I was curious about the prices I had bought and sold Walmart at so I looked that up. More detail than anyone needs to see but anyhow it illustrates a bit of buying lower, selling higher.

I note from the daily comment records that I had sold Walmart at $75.13 back on April 6, 2013 (and also April 3 that year at a similar price)  to raise cash for something else and so that worked out well. My comment from November 19, 2012 indicates I bought those shares at $68.09. Previous to that the comment from November 15, 2012 indicates I had sold my Walmart shares at $73.63. I also sold some on July 12, 2012 at $72. And some sold on June 12, 2012 at $67.70. I had bought some Walmart on April 24, 2012 at around $58. Around this time I had a large position in Walmart and some of that I bought on April 1, 2010 when the price was about $55. and some December 17, 2009 when the price was about $53. And bought some on September 16, 2009 at around $50. Bought on April 27 2009 when the price was around $48. And April 13, 2009 at around $51.

November 19, 2015

On Thursday, the S&P 500 was down 0.1% and Toronto was up 0.5%.

The Canadian Western Bank preferred share bounced up 3.2% on a small trading volume. Melcor was up 2.2% but that was also on light volume.  Boston Pizza Royalties was up 1.5%.

Valeant had a strong bounce, up 15%.

Liquor Stores N.A> had about a 4% bounce earlier int he trading day as it announced an acquisition in New England. But it ended up about unchanged on the day, possibly because the market realised that it was only buying half of two (larger) stores and planning to build two more large stores in that area. The CEO of Liquor Stores actually lives in Massachusetts and has hired some (I believe) high-priced American executives in the past year or so. My recommendation would be that they sell the U.S. operations to this CEO and part company with him and his new American executives and get back to running the Canadian stores. Also, the dividend needs to be cut at least in half. Selling the U.S. operations might be timely, given the high U.S. dollar.

Hall of shamer, TransAlta was down 6.6%. At its current bargain basement price it might be worth considering as a highly speculative bet. I have not ran an analysis of the company.

The market was unimpressed with Bombardier’s deal regarding its rail unit. Apparently the deal is extremely difficult to understand and involved a high interest convertible bond, but where reportedly the interest will not be paid with cash but rather with additional equity in the rail unit. Perhaps the Bombardier B shares will react more favorably after analysts have some time to digest the deal. The Bombardier pref share that we have on this site rose 6.0%, which I think makes sense as this deal presumably increases the chances that Bombardier will survive long-term and continue to pay the dividend on this preferred share.


November 18, 2015

On Wednesday, the S&P 500 was up 1.6% and Toronto was up 0.9%.

Stocks that rose included CN Rail, up 2.2%; Berkshire Hathaway, up 2.3%, Bank of America, up 2.4% and Visa Inc. up 2.0%.

The Canadian Western Bank preferred share was down 3.8% to $19.17. It’s yielding 5.7% and is worth considering.

Markets are always unpredictable in the short term. My strategy is generally to say relatively fully invested except that I occasionally have a relatively high cash allocation, such as 20 to 30% at times when it appears that stocks are over-valued or when I have taken a lot of profits after a big run up in the markets. At this time I have very little cash and am relatively fully invested in equities.

November 17, 2015

North America stock markets ended Tuesday with the S&P 500 down 0.1% and Toronto down 0.3%.

Stocks that rose included Walmart, up 3.5%. Canadian Western Bank was up 1.7% and its rate reset preferred share was up 2.1%.

Valeant fell another 4.3%.

AutoCanada Update

The report for AutoCanada is updated and rated Speculative Buy at $28.64. This company was added to the site on July 14 rated Buy at $40.36. It had at that time fallen by 55% from highs around $90 in May of 2014. Since being added to the site the stock has fallen 29%. Same-store new vehicle sales declined by 13% in Alberta where 43% of its dealerships are located.  Meanwhile the company continues to make acquisitions and has announced the purchase of five additional dealerships in four transactions since July. The near-term earnings growth outlook remains weak for this company and owning it is likely to require patience. When it comes to auto sales at least, there is clearly a recession in Alberta and it appears set to get worse as layoff announcements continue.

November 16, 2015

Markets were surprisingly strong on Monday with the S&P 500 up 1.5% and Toronto up 1.8%.

Among the bigger gains were Couche-Tard, up 4.6%, Canadian Tire; up 3.8%; Toll Brothers, up 3.2%; Boston Pizza Royalty units up 2.2%; Stantec up 2.1%.

Stocks that fell included most or all of the rate reset preferred shares on our list but most notably, the Enbridge rate rest pref shares which were down 4.4%, perhaps on leak of news of their layoffs that came out after the close. Also Valeant was down another 2.7%.

AutoCanada is continuing to make dealership acquisitions. It is facing declining sales in its all-important Alberta market but it seems the company is still confident of the future. I plan to update the report on AutoCanada in the next day or two.

Berkshire Hathaway’s NetJets subsidiary is taking delivery of the first Bombardier Challenger 650 business jet as the launch customer. It is very important for Bombardier to remain on good terms with NetJets which is a major customer. Several years ago NetJets had placed a HUGE order for up to 275 Challenger aircraft. It may have cut back that order since then but certainly remains a very important customer. I suspect NetJets is not too pleased with the fact that Bombardier is on such shaky ground financially.

November 14, 2015

On Friday, the S&P 500 fell 1.1% and Toronto fell 0.4%.

Bombardier was down another 7.3% as its conditional sale of C-Series planes to Porter Airlines will not be happening since the Federal liberal Transport Minister indicated the runways there will not be extended as hoped. For the same reason, its pref shares were down 8.9%.

Canadian Tire was up another 2.2% due to its excellent earnings report.


November 14, 2015 Liquor Stores Shares and Debentures updated as Sell and Strong Sell

The report for Liquor Stores N.A. is updated and rated Sell at $8.55. The dividend appears to be running at double the earnings level which seems highly unsustainable. In addition, I have lost faith in management.

The report for their convertible denture is also updated and rated Strong Sell at $102.31. In the latest Q3 they noted in the management discussion that they have the right to pay out these debentures in common shares (as opposed to cash) anytime after April 30, 2017. Previously this right was disclosed in the annual financial statements notes but not in the management discussion. When I first added these debentures to this site I had read that note and I noted in my report their right to pay these out at par in 2017 but I had failed to notice that they could pay in shares or cash at their option. It seems to me that the option to pay in shares weakens the value of these because the very payment in shares would likely cause the share value to drop due to dilution concerns and also due to fixed income investors selling the shares. In some ways these debentures seem well protected in that company would have good cash flows if they suspended the common dividend. But overall, I would definitely hasten to sell these debentures if I owned them. I see no upside for them and plenty of possible downside and on top of that the yield is not particularly attractive.

November 12, 2015

On Thursday, the S&P 500 fell 1.4% and Toronto was down 1.6%.

Valeant was down 6.2%. Based on my view of adjusted earnings as of Q2 (which was a lower number than the company provided as I did not agree with all of their add backs) Valeant is trading at 11.6 times earnings which would seem to be attractive. However, we don’t know how much the earnings will be hit by their troubles. This company is likely to continue to be volatile. My own concerns about trusting management have certainly not gone away. Overall, this is a highly speculative company and I am not too interested in buying. If I did buy shares I would take only a small speculative position.

The Canadian Western Bank pref shares were down 4.2% to $19.80 and seem attractive.

Canadian Tire released earnings which I think it is fair to say were much better than expected – a blowout quarter. The shares rose 2.1% on a day when very few stocks were up. I continue to be surprised that they are not being hurt by the lower dollar as they indicate they have found offsetting savings in purchasing and in cost control. I still think there may be some delayed impact as merchandise being sold in Q3 may have been purchased earlier this year or the price may have been contracted for when the dollar was higher. Based on the numbers Canadian Tire would have a rating of Buy. Listening to the conference call management sounds very confident and they believe the shares are under valued.

Stantec is updated and rated Buy at Canadian $32.75 and U.S. $24.66. Stantec has seen a significant slowdown in its oil and gas related business to the point where this dropped from 25% of revenue down to 15%. But acquisitions and growth in other business areas and a huge boost from the lower dollar allowed Stantec to post an adjusted earnings per share gain of 7% in Q3. The only adjustment is that I add back amortization of client relationships and backlog because those are like goodwill and in reality are not declining in value. Stantec may struggle to show much growth in the next few quarters but its business model of (significant) growth by  acquisition along with (usually) modest organic growth remains in place and I expect this company to continue to be a good or very good investment.

It’s interesting to note that Stantec’s operations in the U.S. benefit immediately from the lower dollar in that the revenue and profit is translated back to Canadian dollars at a higher rate. In contrast Canadian manufacturers that sell into the U.S have often not seen an immediate benefit. The reason for that may be that the manufacturers are pricing in Canadian dollars. In that case it is their U.S. customers who get the immediate benefit. Over time these manufactures will likely gain market share against U.S. competitors or can raise their prices to U.S. customers.

November 11, 2015

On Wednesday, the S&P 500 was down 0.3% and Toronto was down 0.5%.

Canadian Tire was up 4.2% ahead of its earnings report tomorrow (Thursday) morning.

Melcor was up 3.3% after posting reasonably good earnings. It remains very thinly traded with less than 6000 shares traded today even with the earnings release. Basically almost no one is paying attention to this company.

Boston Pizza Royalties rose another 1.0%. It is also very thinly traded with less than 12,000 shares traded today and also attracts very little attention. On their conference call yesterday only one analyst had any questions. It has a 7% cash yield and that distribution appears to be safe and is likely to grow modestly over time.

Element Financial was up 8.8% after reporting earnings. I will update the report on this company soon. It’s new strategy of focusing on the service aspects of fleet financing sounds logical as I never did understand how it would compete in a straight lending operation as other entities have lower costs of funds.

Toll Brothers has been bouncing around but was up 2.4% today.

Melcor report updated

Melcor is updated and rated a Strong Buy at $15.25. It has a long history of earning good returns on equity and it is on sale for close to half price due to fears related to lower oil prices and the Alberta economy. In addition it is thinly traded and almost no one is paying it any attention.

November 10, 2015

On Tuesday, the S&P 500 rose 0.1% and Toronto was down 0.5%.

Canadian Tire was down another 2.1% to $108.93. It’s probably a Buy at that price but it would probably be best to wait for it to report earnings on Thursday morning. The earnings may be good but the concern is the impact of the sharply lower dollar. Are they starting to have to pay a lot more for their stock now? And what would happen to sales if they had to increase prices to compensate? Earlier they had apparently found ways to offset the currency but I can’t believe it is possible to compensate for such a large change in the currency.

Liquor Stores N.A. fell another 6.2% to $9.05. I plan to update the report on this company soon to see if it is starting to look more reasonable. The dividend certainly seems unsustainable. I did not see any indication that they plan to cut costs, which may be what is needed.

Melcor fell 2.5% to $14.61 and then reported earnings after the close. The earnings and lot sales appeared to be quite strong given the slow-down in Alberta. They report the book value per share as $28.47. And that is for solid assets with no purchased goodwill on the books. Yes, the land and building asset values could fall. But for now, $28.47 should be a moderately conservative calculation of the book value and we are able to buy shares at pretty much half that, or a 49% discount to book value. And the company has relatively moderate debt leverage such that it is very unlikely to run into financial danger. This is the sort of scenario that can often be confirmed later to be a golden opportunity. There are never any guarantees but this looks like a bargain to me.

Boston Pizza Royalties Income Trust rose a modest 1.0% to $18.50 after reporting better-than-expected same store franchise (royalty eligible) sales growth of 2.6%. This was strong growth in spite of the slow-down in Alberta where it apparently gets one third of its revenue. The simple math here is you get a 7.0% cash yield where the cash yield seems not only safe but very likely to grow slowly over the years. I added to my position today.

The Bombardier pref shares fell 4.4% to $10.00. With a yield of 15% (It was 6.25% when these were issued at $25) these are clearly quite speculative and the market views them as highly risky. The common shares are at $1.45. Bombardier has the right to convert these to 12.5 common shares per pref. That would be okay at the moment as it would mean we would be paying in effect $10/12.5 = 80 cents per common share. But if they did that and then the common plummeted we could still lose badly. And maybe they should do that. Since they issued the pref at $25.00 the conversion would seem to be equivalent of issuing common shares at $2.00 from the point of view of Bombardier. It is possible that Bombardier could simply eliminate the dividend on these shares. But the dividend is cumulative and so cutting it would likely be done only in the case of an even more desperate situation. It would certainly not do much for confidence in the company and I believe the company needs to project confidence to its (potential) customers. If one were to bet that the worse is over for Bombardier then perhaps these shares are a reasonable speculation. It would not seem wise however to take a very large position in these. And perhaps any position at all is unwise.

Boston Pizza Q3 earnings (10:10 am eastern)

The Q3 report for BP Royalties is out and same store sales were stronger than I would have expected given the thinking that Alberta would be a drag. Franchise sales upon which the royalty is collected were up 2.6% on a same store basis. Distributable cash is up strongly. The distribution was not increased but there appears to be room to increase it and that will likely occur in early 2016. Meanwhile the unit price was up only a few cents this morning. I may add to my position today.

November 9, 2015

Monday saw a negative start to the level of stock prices in north America, on average. The S&P 500 was down 1.0% and Toronto was down 0.5%.

Liquor Stores N.A. was down 11% to $9.65. We had rated this a strong Sell on March 13 at $15.26. We had lost confidence in management some time ago.

Canadian Tire was down 3.3% to $111.25. This has been a great company and appears to be very well-managed. However, our concern for a least the last year has been about the impact of the sharply lower Canadian dollar. Its REIT subsidiary of which it owns over 80% reported after the close what it claimed was a strong third quarter and increased its distribution by a modest 2.6%. Canadian tire reports earnings on Thursday morning.

Stocks that rose on Monday included AutoCanda up 3.4%.

With rate reset preferred shares having risen a lot in the past five weeks but still being mostly well below issue price the thought arises as to whether one should trim positions here. Logically it may make sense especially if there are better uses for the cash. But it’s always emotionally difficult to sell below issue price. With that in mind I have not sold any of the pref shares that I bought at $25. But I did today sell at $21.54 a third of my Canadian Western Bank preferred shares that I had bought early last month at $16.80. These rate rest shares should continue to rise if Canadian interest rates rise due to the FED possibly finally rising its rate in December.

The Melcor REIT which is about 55% owned by Melcor Developments reported what appeared to be good results this morning. The REIT rose 3.2% while Melcor ended the day down slightly. Melcor will report tomorrow, likely after the close.

November 8, 2015

On Friday, the S&P 500 and Toronto were both about unchanged at the end of the day.

Stocks that were on the rise included most rate reset pref shares, including the Canadian Western Bank rate reset pref shares up 4.5% to $21.30.

Bank of America was up 3.7%.

AutoCanada fell 5.4% to $29.34. I understand that was because it said that the outlook in Alberta was uncertain and might remain weak. (Apparently that was a surprise to some.) Earlier in the day on Friday it was down about 10% and I grabbed some additional shares at $27.83.

Liquor Stores N.A. fell about 10% after reporting earnings. They continued to add modestly to sales but same store sales were about flat and they continue to have  a dividend that is higher than earnings which is not a sustainable situation.

Last week there was big excitement about a better-than-expected U.S. jobs figure. I do think the U.S. economy is clearly doing well. It’s official unemployment rate is down to 5.0% and it topped out at 10.0% in 2009. Many people argyle the official number is way too low and reality is higher. But even if that is the case it’s hard to argue that things are not a LOT better when the official unemployment rate is half what it was in 2009.

But as far as the excitement over the October jobs creation figure of 272,000 jobs, the financial press should stop to ask about the precision of the number. It’s not as precise as they make out. Also I saw where it tends to go up in October most years. That simply means the seasonal averaging is not working as it should. These numbers are always reported after seasonal averaging. While the jobs number was good it should be taken with some caution due to its inherent lack of precision.

I have been studying the 2014 annual report of RBC. It is no more complex than might be expected for such a large bank. But that still leaves a lot of complexity. I see it as potentially risky but the risks are managed like a finely tuned instrument. As long as the risk management is as good as the bank thinks it is then RBC is probably a bargain at its current price of around 11 times earnings. But I would be cautious about getting over loaded on Canadian Banks because they really do have some risks that could materialise in certain circumstances.

The MELCOR REIT will report tomorrow. I don’t follow it but will check out its results because they will impact MECLOR Developments itself which reports after the close on Tuesday.




November 5, 2015

Thursday’s action saw the S&P 500 down 0.1% and Toronto down 0.8%.

Valeant was down about 15% after big investor Bill Ackman sent a letter expressing frustration to the company. Last week he tried to explain why the company was still solid in a 4 hour presentation – which caused the market to decline. The company may be thinking it has enough enemies without having a friend like Ackman.

I took a look at my July analysis of the company to see if the share price was now getting down close to book value. Not even close, as I have the book value at U.S. $18.69 as of Q2. So, it seems the company still looks very expensive compared to what it paid for its assets. Based on the company’s view of adjusted earnings it would look quite cheap. I would not be prepared to put any significant amount of money, if any at all, into these shares at this time.

Rate reset preferred shares have continued to recover in recent days and weeks. Most recently due to a rise in the government five year bond yield. The Canadian Western Bank preferred share is now at $20.47 up 3.9% today. I had mentioned these on September 30 and for a  couple days after that when they could have been bought for under $17.00.

Melcor fell 3.0% today. The Melcor REIT will report on Monday and it could very well report lower occupancy and possible some loss in market value of its buildings. Melcor Developments owns about 56% of the REIT which represented 13% of Melcor’s profits in 2014.

Melcor itself will report earnings after the close on Tuesday. No-doubt Melcor’s lot sales and profits will be lower than in the year ago quarter. But I suspect they are still selling lots and that the situation is far from dire. They are financially strong and are very well capable of surviving even steep declines in their sales and have done so many times over their long history.

Stantec reported decent earnings this morning Profits per share were up 4% despite the slower economy and the company continues to grow. The stock rose only 0.6% and may rise more tomorrow after analysts have had more time to digest the earnings and provide their assessments.

AutoCanada reported earnings after the close that were down as would be expected but still well into the positive territory. Apparently the earnings were a shade lower than expected.

I have removed Fortis Inc. from the list due to a possible conflict of interest as I am doing a few hours per week of contract work that involves an analysis of the earnings of one of their subsidiaries. They report earnings tomorrow and I had indicated in early October in the daily comments that I expect those earnings to be strong due to their recent U.S. acquisitions.

I will be updating a number of companies in the next couple of weeks for Q3 earnings and also I hope to add Royal Bank before too long but first I need to take a lot of time to carefully read their extensive annual report.

November 4, 2015

Wednesday’s markets closed with the S&P 500 and Toronto each down%.

And oil gave back much yesterday’s gains but remains above $46.

Couche-Tard was up another 2.7%.

Bombardier was up 6.5% after one of its C-Series customers, the Latvian flag carrier, Baltic Air, which has ordered 13 planes, got an $87 million bailout which it needed due to its negative equity of 75 million euros. It’s pretty sad when this is the sort of thing that makes Bombardier’s stock rise. Bombardier has negative equity of $4.0 billion and only got a bailout/investment of $1.0 billion. Perhaps now they should call for a level paying field with Latvia.

There has been talk that this is one of the worst earnings seasons in some years in the United States. Just how bad is it? GAAP earnings share on the S&P 500 are expected to be down 4% year-over-year and operating earnings per share are expected to be down about 7%. And, about 75% of the companies in the S&P 500 have already reported. Actually this is not a very large drop in earnings and is explained by lower oil prices. We should not expect reported earnings to rise like clockwork every quarter. And Q4 earnings are projected to show a 10% increase. So I am not exactly losing sleep over this one quarter of earnings slippage.

I have a statistics Canda report that shows the average profit and equity of the various industries in Canada. In six quarters of data through Q2 2015, the only negative profits on this report are for the oil and gas industry which on average lost money in each of the last thee quarters. All of the other industries made money. And, based on the Q4 numbers the ROEs were mostly at 9% annualized  or higher with some higher than 15%.

I take comfort in this because if companies are making good returns on book equity and I own companies (shares) and if my shares are not trading too far above book value (and they are not) then it seems logical (even inevitable, unless the corporate earnings decline or P/E ratios decline dramatically) that I will make good returns. Stock market returns will always be far more volatile than the underlying corporate earnings, but over time corporate earnings drive stock market returns.



November 3, 2015

On Tuesday, the S&P 500 rose 0.3% and Toronto was up 0.6%.

Oil (West Texas Intermediate) was up 3.7% and is just under U.S. $48.

Alimentation Couche-Tard partially recovered some recent losses and was up 3.8% today.

Visa was up 3.6% as this largely unregulated-as-to-fees giant with monopolistic characteristics continues to grow including by purchasing Visa Europe. The difficulty with this stock is that it always seems to look very expensive.

The Canadian Western Bank preferred shares fell 2.5% giving up yesterday’s gain. The Bank’s common shares were up 2.1%.

I am now taking a very close read of the annual report of Royal Bank of Canada. I have not had any of the large Canadian Banks on the list here in about ten years.  I had given up attempting to analyse them years ago due to the complexity and in favor of the far simpler Canadian Western Bank.

So far, two things strike me about the RBC annual report. First, the disclosure seems very good and very clear. Second, I am surprised at just how incredibly leveraged it is. Banks are regulated as to their leverage but are still allowed a huge amount of leverage (low equity compared to assets).

From my very first look at a bank on this site (CIBC in February 2000) I have always noted that banks have very high leverage. Still, I am surprised just how high the leverage of Royal Bank is. As long as its assets are low enough risk the high leverage works out well.

On the face of it, I suspect Royal Bank will rate as a (higher) Buy or Strong Buy based on its earnings and book value and growth but it is difficult to know what to make of the risk.

Bank debt always seems to be given the highest ratings by the debt rating agencies in spite of the leverage. Banks do enjoy a lot of government support including mortgage insurance and including deposit insurance (which vastly lowers the risks to depositors allowing them to attract deposits while these days paying little or no interest). Still, it is a bit of a mystery to me how they can be considered so very low in risk.

November 2, 2015

Monday was a strong day in the markets with the S&P 500 up 1.2% and Toronto up 0.7%.

The Canadian Western Bank preferred shares that I updated yesterday were up 2.6%. I notice the volume is very light in these shares. It was up about 2.6% early in the day on just 100 shares traded. That low volume was a bit disturbing to see. I would hate to think my Buy rating had anything to do with the increase today. It’s never ever my intention to cause stocks to rise. I wish to identify under-valued stocks and then ride them up due to their earnings growth or as their P/E multiples increase as the market perhaps begins to recognise the value.

Some advisories are in the business of actually pushing stock prices up. In the worst cases they are engaging in “pump and dump”. (Garbage will rise if you blow on it hard enough.) I would never engage in or condone pump and dump nor do I wish my advice to affect the price of any stock. What would be the point of the InvestorsFriend subscribers pushing a stock price up with our buying? To whom would we then sell? If the price rise was justified then there would be nothing wrong with pushing the price up. Still, that is not something that I am comfortable engaging in other than perhaps temporarily and inadvertently on some of the thinner trading stocks (of which we have only a few).

In the case of very thinly traded stocks it could occasionally happen that the buying of the InvestorsFriend subscribers pushes a stock price up. But that is never the intention. And for the most part we don’t cover stocks with very low trading volumes. But it could happen with Melcor and probably some of the preferred shares.

On thinly traded stocks we should all be careful not to just buy at the market but rather we should probably enter a fixed price when buying those stocks.

Certainly Canadian Western Preferred shares did not rise all that much today but still I wanted to point out that I would never intentionally push a stock’s price up.

Canadian Western Bank Preferred Shares report updated

The report for the Canadian Western Bank rate reset preferred shares is updated. These preferred shares now yield 5.7%. The reset date is not until April 2019. At that point if the five year Canada bond rate remains at about 0.86% then the distribution on these shares would drop but the yield on the current price would still be attractive (assuming the bank is still financially strong) at 4.7%. In fact, if the government bond rates remain at about today’s low levels in three years then I would think that all fixed income yields would come down and that 4.7% might be seen as very attractive.

There is no doubt that investors have been “burned” by rate reset preferred shares. They were bought because they would perform well if interest rates rose which is what was expected. Instead, rates decreased and these shares fell in price as their reset distributions would fall with lower rates. It appears that the prices were driven lower than justified as many investors “bailed out” due to the surprise losses. (“Cleverly” locking in such losses).

Rate reset shares have had some recovery in the past month. They should increase in price if the FED finally raises interest rates in December.

October 31, 2015

On Friday, the S&P 500 was down 0.5% and Toronto was down 1.9%.

Valeant’s decision to “sever ties” with Philidor (a company that it had an option to buy and which it consolidated and which therefore in a sense was part of Valeant) would seem to be basically an admission that the short seller was right. The short seller is in good measure vindicated by this action by Valeant.

Bill Ackman came out and compared the troubles at Valeant to American Express’ “Salad Oil Scandal” back in the early 1960’s which Warren Buffett made a fortune on by going in and buying after the fall in Amex’s share price.

I don’t think it is a good comparison at all. AMEX was purely a victim in the Salad Oil Scandal. Valeant is cast as villain in the present scandal.

After the Salad Oil Scandal had pounded down the price of America Express shares, Warren Buffett did research (he talked to his friend that owned a restaurant) and found that customers were still using their American Express cards as normal. He concluded that there was a strong underlying business there and that American Express would recover. He was so confident that he put about 40% of his partnerships money into the stock and made a huge return.

In the case of Valeant, customers have abandoned the part of its business that went through Philidor and it’s not yet clear whether these large institutional drug buyers might also abandon other Valeant companies. There is concern that doctors will be less likely to prescribe Valeant products. So, for many reasons Bill Ackman’s analogy is not a valid one.

I am looking forward to Q3 earnings reports from Stantec, Melcor, Boston Pizza Royalties and others in the next two weeks or so.

Stantec will benefit from the lower Canadian dollar but this will be offset by slowness related to the lower oil prices. Boston Pizza Royalties units have fallen significantly due in part to fears of lower sales in Alberta. On Friday statistics Canada reported that restaurant sales in Alberta rose about 1.5% in August after two months of decline. I view Boston Pizza units as low risk and I believe there is a good chance the price will rise in the short term. They may even report a distribution increase. Melcor has declined due to the oil price situational and will no doubt report lower lot sales. It may also report some mark to market losses on its rental buildings. It will be interesting to see how cautious they are on future sales. In any case, I believe its shares represent good value.


Bombardier Pref Share report updated

The Bombardier pref share on our list is updated and rated Highly Speculative Buy at $10.75.

This has been a terrible investment due to Bombardier’s troubles. It’s yielding 14.5% which is indicative of very high risk.

However, if you think it is unlikely that Bombardier will declare bankruptcy then this may be worth considering. The investment by Quebec would appear to signal that the company will likely not be allowed to go under. But governments are concerned about job protection and might ultimately find a way to protect the jobs while letting the pref and common shares become worth even less. If the common shares significantly lower than there is a chance that pref shareholders will be given 12.5 common shares for each pref share and that could be worth even less than the present $10.75. It may be this aspect of the pref shares that is holding the price down so low. As of today if the company exercised the option to redeem these shares in return for 12.5 common shares, the 12.5 common would be worth $17.75. But if the common shares get low enough it is possible that the 12.5 common shares could be worth far less than $10.75.

While, there are no guarantees I think the odds are reasonably good that these shares will continue to pay their dividends and will ultimately rise in price.

I must admit though that I have not bought any additional Bombardier pref shares at prices below about $16. I have a modest exposure to these shares but did not want to go over board.


Bombardier Stock Report Updated

Bombardier is updated and rated highly speculative (lower) Buy at $1.42.

Clearly, this has not been a good investment for many years.

I added it back to this site on September 23, 2012 rated Speculative Buy at $3.71. It’s down 62% since then. I had noted that it had many problems but it nevertheless looked like a reasonable speculative pick.

Prior to that it was also added back to the list on June 14, 2010 as a Speculative Buy at $4.62 and removed at the end of 2011 at $4.06

It was first featured on this site back in our earliest days in the Fall of 1999 rated Buy at $12.80 for the multiple voting A shares. It actually rose to $23.10 by December 1, 2000 and we rated it Weak Buy/ Hold at that point. By December 1, 2001 it was down to $13.95 and we rated it Speculative Weak Buy. It cratered to $5.72 by the end of 2002 and we removed it from the list. It was then absent from the list until 2010. It is down 92% since we first looked at it in 1999. Truly an abysmal record.

Bombardier remains an extremely poorly managed company. One that is anything but on its game. One that now focuses on mere survival.

It should only be considered for those looking for a highly speculative stock. Now that it has dumped out a tremendous amount of bad news, it may actually have some positive news to report in the next nine months or so. Customers may now be more willing to place an order for a plane since it seems more clear now that the Quebec government is not going to let the company fold up operations or anything of that sort. (It’s not certain however that the government would not be willing to let the shares go to zero. It’s employees that the government cares about, not share owners.)



October 29, 2015

The S&P 500 was about even and Toronto was down 0.5%.

Constellation Software was up 4.8% after releasing a strong earnings report. Like I mentioned yesterday, some companies just seem to always be on their game.

Bombardier made the news with a U.S. $4.9 billion dollar loss. To put that in context a report yesterday indicated that the entire Canadian oil sector would lose Canadian $2.1 billion in 2015. In fairness that $2.1 billion must exclude write-offs but still Bombardier has posted a truly mammoth loss. (It’s world-scale really.) Most of it is in the form of write-offs of money previously spent on the C-Series plane and, while they were at it, $1.2 billion for new line of Learjets that they have now scraped.

In rough numbers, Quebec will own half of the C-Series program. Quebec is paying $1 billion for its half. Bombardier will have paid at least $4.2 billion for its half and it may be more like $6 billion. Some people say governments are bad investors. Clearly they are not as bad as Bombardier.

This does not look like much of a gift from Quebec. Rather it looks more like it could be an astute investment. But that remains to be seen.

This investment by Quebec leaves Bombardier to live on, and at least be able to pay its bills as they come due. The company brags of its $2.3 billion cash. I find that to be less than comforting when I see that their cash plus accounts receivable is somewhat lower than their accounts payable. This $2.3 billion does not exactly look like surplus cash to me.

They also go to brag or at least attempt to reassure investors by pointing out that they have $1.3 billion in available credit facility. To me this looks similar to someone with no cash pointing out that they still have “room” left on their credit card.

In any case they are able to move forward and hope for better times ahead.

One thing that this massive write-off will do is make their profits look a lot better when they ultimately do start delivering planes. Previously they would have been expensing say $6 billion in program costs and spreading that cost across the future plane sales. Now that should be more like $3 billion spread across future plane sales. I am not sure what kind of percentage reduction in costs per plane that leads to but it will surely be a material amount. This is sort of accounting trickery as they have just booked $3.2 billion in development costs  today which reduces the amount to be booked in future and makes the reported profit per plane higher in future. (Or turns what would have been losses into profits) Trickery or not, it is legal, even required accounting and if they can start reporting profits on these planes the market will lap that up.  Bombardier will surely have a better year in 2016.

I am not clear if they revealed whether or not the early plane sales will now be reported as profitable given this write-off. Without the write-offs I understood the planes were going to result in accounting losses in the first few years of sales. (Which is normal in this tough industry) Either way the delivered planes will surely result in cash flow gains on sales before deducting amortization of development costs.

Clearly Bombardier remains a highly speculative investment. Hopefully the bad news is out of the way for now and the next news such as some new sales contracts and then the certification and then the delivery of planes in 2016 will cause at least some recovery in the share price. There is also the planned sale of part of the Transportation division. Hopefully not at a fire-sale price.


October 28, 2015

Wednesday was a strong day in the markets with the S&P 500 and Toronto each up 1.2%.

The FED once again did not raise rates but appeared to hint that it probably would in December. Maybe. The market ultimately decided that this was good news and pushed stock prices up.

Bank of America was up 5.4% and Wells Fargo was up 2.5%.

In Canada the market was boosted by a close to 7% rise in the oil price fueled by a lower-than-expected oil inventory increase.

CN Railway was up 2.9% on its earnings and on the general market rise.

Canadian Western Bank was up 2.5% perhaps due to the Alberta budget and the oil price rise. Stantec was up 2.8%, probably for the same reasons.

Bombardier was up 11.0% on reports that the Quebec government would announce financial assistance of some kind tomorrow. After the close came a story that they would abandon their Learjet 85 program – which would mean more job loses and write-offs. (This company cannot seem to keep anything secret – recall its talks with Airbus were recently leaked). The pref. shares rose 15.9%. Also, after the close, came a decision by Toronto Transit to sue them for late deliveries of subway cars. I have often found that some companies are constantly “on their game” and others constantly stumble.

Bombardier will release earnings and be much in the news tomorrow, Thursday.


American Express update

I have updated the American Express report for Q3 earnings. It’s rated (lower) Buy at $75.25. It’s had some “headwinds” lately due to loss of the Costco affiliated card in Canada and the pending less of same in The U.S. in march and also due to the higher U.S. dollar and due to ramped up marketing spending to attempt to replace the lost Costco business. It is not expensive on a P/E basis, which supports the lower Buy rating, but is facing at least a year of lower growth. Overall it is not compelling at this point. It has lost 14% since it was added to this site almost two years ago. It is a strong brand and may recover but not likely very soon. Longer term investors could consider a small position in this stock.

October 27, 2015

On Tuesday, the S&P 500 was down 0.3% and Toronto was down 0.7%.

TransForce was down 7.0% for probably no good reason. I initiated a small position in this stock today (I bought when it was down more like 4%) and have an order in that will fill if the stock drops just a bit further.

Many other of our stocks declined today including AutoCanada down 4.2%, Element Financial down 5.2%, and the Bombardier pref share down 5.9%. Such is life in the stock market.

CN Rail was down 3.8% and then after the close posted a better-than-expected 18% increase in earnings per share. Look at the earnings per share graph for CN rail, it is a thing of beauty. Earnings were boosted by currency which we had expected. I first added CN to this site in the earliest days of this web site in 1999. It’s up 10 fold since then. CN provides a vital transportation service and is well managed and does not really face intense competition. It seems fair to predict that it will continue to grow its earnings over the years though it may face occasional earnings declines. As to the stock price, that will be left to the sometimes madness of the market. Stock prices can certainly be far more volatile than earnings. But looking back, CN’s stock price has been relatively well behaved.

The Alberta budget released today, with its stimulous spending could be a positive catalyst for some Alberta stocks on Wednesday. I am thinking of Stantec and maybe also Melcor and Canadian Western Bank. It certainly should not be a negative factor.

The U.S. market may breath a sigh of upward relief if the FED keeps interest rates unchanged tomorrow (Wednesday) and especially if it signals that “lift off” may be delayed into 2016.


October 26, 2015

Monday saw the S&P 500 down 0.2% while Toronto was down 1.2%.

AutoCanda was down 4.9% and Melcor was down 3.7%.

TransForce was up 3.8%.

Valeant was down 4.8% as it failed to convince investors that all is well. With its debt and all its troubles, this is a stock I am steering clear of.

Bombardier issued  a “media advisory” indicating that it will host a conference calls for investors and analyst ONLY on Thursday, morning and that they will no longer be taking questions from the media at the end of their calls.

Hmm, seems like they don’t like taking questions. Maybe they should go a few steps further and not take any questions from anyone. The earnings release should speak for itself. They could consider getting rid of their investor relations people to save money. Some companies don’t conduct conference calls or bother having an investors relations group.

Markets this week are expecting the FED to announce on Wednesday  that it will, once again, not raise interest rates. Markets are perhaps a bit jittery waiting for that confirmation.

In terms of the economy, rail car loading figures are often considered to be a good gauge.

In the U.S. rail car loading are down somewhat versus last year but ahead of 2013 and 2012. In part this is due to low natural gas prices which has led to less coal being shipped to power plants as they switch to natural gas.

In Canada rail car loadings are down noticeably from last year. And also down versus 2013.

The link here has options to show which types of carloads are up or down. (grain, coal, crude, automobile’s,…) It seems that metallic ores and minerals have really plummeted…

Rail Traffic Data

CN Rail will report earnings after the close on Tuesday.

October 23, 2015

Friday was another positive day in the markets. The S&P 500 was up 1.1% and has clawed its way back to a small positive gain for the year to date. Toronto was up 0.5% but remains down 4.6% year to date.

Melcor was up a hefty 9.0% but we should not read much into that because the volume, although somewhat larger than a typical day, was still very thin. Still, it’s nice to see.

Amazon released earnings and rose 6.2% to $599. The GAAP earnings were 17 cents per share and year to date were 24 cents. Apparently there are big market value gains to be had while selling massive quantities of goods at basically a break-even level. Apparently its okay for Amazon to basically keep on promising profit tomorrow while offering basically no profit today. This for a company that is about 20 years old now.  It reminds me of the White Queen who offered Alice jam yesterday and jam tomorrow but said there would never be jam today. Except with Amazon there was also very little jam yesterday as well as approximately none today. Perhaps special rules apply to such a game-changing company as Amazon. The likes of Walmart and Best Buy must feel like they are the victim of a competitor who is completely mad. Or perhaps the jam will indeed flow with great abundance tomorrow.

American Express was up 2.9%.

And Valeant rose 6.0%. I don’t know if there is anything to the accusations of accounting irregularities. I think, probably not. But I still had my own concerns about the company in regards to how it calculates cash earnings, how it avoids income tax and how it pays obese executive compensation. And I think the investigations into price gouging are very serious matters. Also there is the very high debt level. We may see a nice bounce when they explain things on Monday but I am not touching this one myself.

TransForce Inc. is added to our list, rated (lower) Strong Buy

TransForce is the largest trucking company in Canada and gets about one third of its revenues from the U.S. It has a very successful track record of both growth by acquisition and of generating strong earnings and cashflow from its operations. It appears to be forecasting flat to slightly negative earnings growth in Q4. And it may be less acquisitive in the next year or two as it digests recent acquisitions and pays down debt. But overall it appears to offer quite good value and it seems reasonable to forecast that it will continue to grow relatively rapidly in the longer term and to achieve high returns on equity.

This is the first time I have had a trucking company on the site in a long time. Way back in late 2001 and early 2002 when Contrans was on our list. We got a big gain on that as it rose 140% in 15 months. It became an Income Trust at that time which pushed up the price. We added it back to the list in early 2004 rated Sell. We did not follow it for long after that as it looked too expensive at that time. Coincidently it was recently purchased by TransForce.

There was no real reason that we went so many years without a trucking company on the Site. I had thought of adding TransForce but until now did not find the time or have enough inclination to do so.

On my recent road trip across Canada I noticed how many trucks were on the road. It seemed like a surprisingly large percentage of the vehicles on the highways are trucks. I can’t guess what percentage other than to say a lot. Most of my driving for many years has been City driving with occasional trips to Calgary from Edmonton and also some driving in the Maritimes on vacations (I flew there but did some highway driving). For whatever reason I just never really thought before that with all those trucks someone was probably making good money in the business. I have also heard that trucking is a huge employer, truck driver is one of the most common occupations. For whatever reason I also always had the impression that trucking was very competitive and not a lucrative business (my Contrans experience notwithstanding). I may have picked up that attitude some decades ago perhaps during a recession or otherwise at a time when some trucking company or other was in the news complaining of poor profits.

In fact, it seems like almost every company will claim that it is in a highly competitive business. Yet it seems like very few companies are losing money (some certainly manage to) and extremely few companies trade at less than book value which one might expect them to do if profits were hard to come by. In fact the ROEs of companies are surprisingly high as I documented a while back.

In addition to TransForce I also hope to add the parent company of Peterbilt. I also noticed on my cross country trip that many communities along the way had a prosperous looking Peterbilt outlook. I started thinking, who services all these trucks? Maybe Perterbilt? I have also long noticed that here in Edmonton there seems to be a lot of very prosperous looking truck dealerships. The parent of Peterbilt is called PACCAR and they build and service trucks under several brand names. It looks to be an interesting company and might be another good addition to our list.




October 22, 2015

On Thursday, the S&P 500 rose 1.7% and Toronto was up 1.3%. These are hefty gains.

Individual winning stocks today included CN Rail up 2.5%, Canadian Western Bank up 2.0%, Berkshire Hathaway up 3.1%, Constellation Software up 3.4%, and AutoCanada was up 7.6% to $36.01 AutoCanada’s stock traded under $26 on several days in the last few months and as recently as October 1. Some “clever” person managed to catch the very bottom and sell a few shares at $22.10 within the last few months.

Declining stocks today included Valeant Pharmaceuticals, down 6.6%. And American Express which was down 5.2% after releasing earnings yesterday. Buffett still sings its praises and Berkshire holds a huge amount. But Berkshire established its position in 1994 and 1995 with a small additional purchase in 1998 and not a single share bought or sold since then. Berkshire’s ownership has nevertheless increased as the company bought back shares and stands at about 14% of the company. I believe Berkshire is precluded from buying any additional shares as normally no one company or person is allowed to own more than 10% of a bank. And I believe American Express is registered as a bank holding company.

In my own investing I had an order in to sell the 100 Costco shares that I scooped on August 24 at $125 if the price hit $154.90. It did so yesterday and so my shares were sold for a quick profit. I may regret selling shares in such a wonderful company (which closes at $158.15 today. When the trade settles I am going to consider moving those U.S. dollars back to the Canadian side of my accounts. I hate to pay the high currency trading fee which cannot be avoided as this is RRSP money and so is totally captive to my broker. Well, I could try buying a Canadian stock that trades in New York and then having the stock “journaled” to the Canadian side of my RRSP and then selling that in Canada. But meanwhile it takes three days to settle and the price can move and the whole thing is generally a big Hassel and not worth it.



American Express comment

America Express was down about 6% to about $72 after posting Q3 earnings that were down 11% per share. Analysts had apparently expected a smaller decline.

I am not exactly shocked by the 11% decline given that one third of its revenues come from outside the U.S. and given the sharply higher U.S. dollar. Also we know it lost the Costco card in Canada.

The company had said earnings would be flat to down in 2015. Given that earnings were up  in the first half of the year this was an indication they would be down in the last half of the year. The company also indicated it was ramping up certain marketing expenses. In my own report I should have focused on that.

I did say:

“The short term outlook is negative as the company grapples with the loss of its large Costco co-brand business in early 2016 and ramps up marketing expenses in 2015 to attempt to replace that business and also due to the negative impact of the higher U.S. dollar.”

I had noted in my October 13 post that I have an order in to add to my position if it falls to $70.10.

Overall I don’t think it was the company that “missed expectations” in Q3, rather it was the analysts who “missed” the guidance that Amex had provided. Analyst predict earnings but no company is obliged to target to meet those external expectations. To say that a company missed analyst expectations is like saying the Weather missed the forecast rather than the other way around.

American Express, perhaps like the weather, is becoming somewhat harder to predict.

October 21, 2015

On Wednesday, the S&P 500 was down 0.6% and Toronto was down a full percentage point.

Valeant Pharmaceuticals, which was added to this site rated Sell on July 30 at $331 is down to $154.  I had concerns about both the valuation and the trustworthiness of management, so I am not interested in buying even at this much lower price.

Many of the preferred shares on our list have risen noticeably of late after having fallen to levels that certainly seemed too low. The Canadian Western Bank Preferred Share rose 8.4% today to $19.52. It was about two weeks ago that I reported buying some of these at $16.80.  The Enbridge Preferred share that is on our list was up 5.2%.

The Five Year Canadian government bond yield was 0.88% as of yesterday. Ponder that. At that rate you could double your money (before taxes and inflation) in 114 years with simple interest. But to be fair, counting compound interest it would only take 79 years. Why would anyone lock up their money for five years to earn 0.88% per year? Perhaps banks and life insurance companies required to do so by regulators? Or pension funds that blindly must allocate a certain percentage of their money to five year government bonds no matter what the yield? Or someone that just has such huge piles of money that they don’t need for at least five years and are unwilling to take any risk whatsoever.

I continue to be somewhat flabbergasted to see Melcor continue to decline. It was around $14.15 this morning and I entered an order to buy yet a few more shares at  $14.10 and I got a partial fill on that order. Under accounting rules, Melcor marks to market the value of its revenue properties each quarter. We could certainly see a loss in that area this quarter and probably a higher vacancy rate as well. But I don’t expect anything too negative. It seems to me that if Melcor is really only worth half of its book value then surely a lot of developers of the new condos and office towers and industrial and retail buildings around Edmonton will be in bad shape. And yet the new building continues apace. Despite lower oil prices and a certainly a slower economy I am not seeing the evidence that would come close to justify Melcor being so low. New home building has certainly slowed, but it has not disappeared. But we shall see, in investing there are no guarantees. It will be another three weeks or so before Melcor reports earnings.

After becoming interested in the trucking business I have decided to add TransForce to our list and my analysis is in progress. So far I quite like the story and the valuation. It will almost certainly be rated Buy or (higher) Buy. It will report Q3 earnings tomorrow after the close. I don’t have any insight into the earnings for this quarter but I suspect they will be reasonably good. If I had cash I would be tempted to buy some tomorrow. However, it might be safer to wait for the earnings report.


October 20, 2015

The S&P 500 was down 0.1% and Toronto was up 0.6%.

Stantec was up 2.8%. AutoCanada was up 4.6% after announcing it will acquire two Nissan dealerships in Ontario.

Melcor fell 3.4% to $14.34. I had placed an order a couple of weeks ago to add a few shares to my position if it fell to $14.51. So that order got filled today.

Subscribers may tire of me noting that this stock is under-valued. The book value was $27.58 per share at the end of June. So basically, you can buy this at about half of book value. Most companies trade at something in excess of book value. It is always possible that some of its land assets are worth less than book value (price it paid plus investments in developing the land plus capitalised interest). On the other hand, I have not heard of any big decline in land values in Alberta. And it may not be able to continue to its practice of creating value by developing new rental buildings (retail and office) at least not for a while. While Melcor does own land and buildings it is something of an asset light operation when it comes to actually developing land and buildings. It contracts that work out. That may make it easier for it to scale back costs if that business is to be much slower. There is no doubt that this is a cyclic company. However, I fail to see any evidence to suggest that it is only worth half of its book value per share.

October 19, 2015 – Election Day

A big win for Justin Trudeau. The fact that it is a majority government should be a positive for markets.

Who would have thought Margaret Trudeau could get another PM in her family?

Businesses are not about to stop making money, that’s for sure.

October 18, 2015

On Friday, the S&P 500 was up 0.5% and Toronto was up 0.1%.

The Canadian market will have the results of tomorrow’s election to ponder and should react somewhat to that on Tuesday.

The U.S. Q3 earnings reports will be pouring in these next two or three weeks and the Canadian Q3 reports will start to come in this week but most will be late October to early November.

I sent out to the free newsletter list an update of my Exchange Traded Funds list. (It’s a separate list but most paid subscribers are on that list as well. You can add an email to the free list or remove an old email address at this link)

I knew that the P/E ratios would be looking better than at my last update but I was surprised at just how many segments of the market look attractive. Even the global gold shares ETF reports a low P/E ratio and low P/B ratio and that is the first time I ever recall that. As I recall, Gold companies looked expensive even when Gold was near its peak.


October 14, 2015

On Wednesday, the S&P 500 fell 0.5% while Toronto rose 0.2%

Walmart announced that its earnings per share would fall 6 to 12% in the fiscal year that begins in February due to previously announced wage increases. On that news the stock fell 10%.

The Walmart earnings news release was poorly handled by the company and I have the following concerns:

  1.  The press release title was “Walmart strategy drives growth and sustainable returns…” The part about the earnings decline was buried in the middle of the release. I consider that to border on misleading and to just generally be a poor way of communicating.

2. The news was released during an institutional investment conference in the middle of the trading day. The trading in the minutes after the release clearly shows that some people were lucky enough to sell early before the news was fully reflected in the stock price. That is unfair since it easily have been avoided by releasing the news before the market opened.

However, overall the market may be over reacting here. I bought 100 Walmart shares after the decline.

Other stocks on the move today included Valiant up 5.6% and Toll Brothers down 2.3%.

Wells Fargo released Q3 earnings with earnings per share up 3% which is not bad considering that lower interest rates have been a drag on earnings.

This evening, Valiant released a press release titled “update regarding government inquiries”. It stated that valiant had responded to a letter from a Senator and also revealed that Valiant had been subpoenaed for documents from the attorneys general of New York and Massachusetts. The response to the Senator also appears to indicate that some of the recent drug price increases would be refunded to certain hospitals. (They said they were “beginning outreach to hospitals where the impact of a price change was significantly greater than the average.” — I guess they have not heard of plain language. ) I would take all this as not surprising but mildly negative news.

October 14, 2015 – Walmart 2:30 pm eastern

Walmart is down almost 10% after forecasting an earnings decline for its fiscal year that begins in February. The company indicates that sales would continue to increase and that earnings per share would grow 5 to 10% in fiscal 2019 which ends in February 2018. Its profit this year has been hit by the higher U.S. dollar. I decided to buy a 100 shares on the decline. However, these shares could certainly go lower or lanquish for some time before any recovery.

October 13, 2015

The S&P 500 was down 0.7% and Toronto was down by 0.9%.

Canadian Western Bank was down 4.9%, CN rail was down 3.0%, AutoCanada was down 4.5% and Melcor was down 2.9%.

The Q3 earnings season is underway and Wells Fargo will report tomorrow.

Raymond Pare, the CFO at Alimentation Couche-Tard has resigned. He was a key executive and had been with the company for 13 years as an executive. He was CFO for the last eight years and a VP finance prior to that. He owns at least 45,000 shares or some $2.7 million worth and it may be at least twice that. The insider holding report is difficult to interpret. He may have felt somewhat hard done by as the four founders of Couche-Tard hold vastly more shares and have reaped truly staggering wealth from Couche-Tard.

My assumption is that Pare had a conflict with the new CEO who took over after the main founder Alain Bouchard stepped back from the CEO role. The new CEO also holds many more shares than Pare and so Pare may have felt he was not being treated fairly.

Couche-Tard’s success is mostly due to its operations and not to any magic in financing and so I don’t think this will be a major problem for the company.

October 13, 2015 American Express Update

American Express is updated and rated (lower) Buy at $76.78. It is facing a loss of its Costco card business in the United States in 2016 and has already lost the Canadian Costco card. Also the higher U.S. dollar is a negative. Nevertheless it has the ability to control marketing and promotional expenses and managed to increase earnings per share on an adjusted basis in Q2. It’s valuation seems relatively attractive. It will likely be a good long-term investment. It will report Q3 earnings in a week or so. I hold some and have entered an order to add modestly to my position at $70.10 if the price happens to fall to that level.

October 13, 2015 – Hydro One IPO

This Initial Public Offering of shares in the Ontario electricity transmission and distribution is open as I post this. I have not done any analysis but regulated utilities tend to provide  returns over the years that are at least acceptable. I put in for a small amount of shares. If it is over-subscribed I may get less than the amount I put in for.

October 12, 2015

The S&P 500 rose 0.1% and Toronto was closed for the holiday.

Oil was down 4.4% to $47.44.

The Baker Hughes report of active drilling rigs shows that the number of active drilling rigs in North America is down 59% compared to the year ago figures. That is a remarkable decline by any standard. I am not familiar with the supply and demand data for oil but this report would certainly seem encouraging for those that expect the lower oil price to curtail supply and to eventually result in an increase in price.

October 12, 2015 Cost update

The report for Costco is updated. This is a wonderful business but the price (currently $154) usually seems to high. I was able to grab some at $125 on August 24 when the market had a very bad day. I may sell that and take my quick gain and then hope to buy in again at a lower price.

October 11, 2015

On Friday, the S&P 500 rose 0.1% and Toronto fell 0.1%.

Costco added to the gains of the previous day and rose 1.5% to $153.97.

There were a few things in the news that struck me as surprising:

  1. Alberta added 12,000 jobs in September according to Statistics Canada. The net addition was in part-time jobs. This seems very surprising given the lower oil prices. I am not convinced that this was a real gain. It might have more to do with the lack of precision in the stats Canada estimates and the process of seasonal averaging. Still, Alberta’s economy has not yet taken a really huge hit so far and those who think Alberta is sort of down for the count are likely quite wrong.

2. Another somewhat related piece of news was that the Edmonton Catholic school Board is looking to hire 200 teachers and will recruit in Ontario as there are not enough suitable candidates locally. School enrollment at the Board is at a record high. Again, rather surprising amid talk of an Alberta recession.

3. It was reported in the Globe and Mail that Bombardier’s loss in 2014 was its first in a decade. I found that surprising but upon checking my own report and graph on Bombardier shows it to be true. It is then a bit of a puzzle as to how the company ended up with negative common equity at the end of 2014 after just one year of losses. Looking into this I found that Bombardier has had a fairly weak balance sheet with inadequate common equity and too much debt for at least a decade. Even when its share price was briefly at the $30 level back in 1999 its common equity level was moderately thin. When equity is thin it can be wiped out fast as happened to Bombardier in 2014. They restored equity to a positive level in 2015 mostly by issuing shares. It is sad that they did not issue shares in 1999 and 2000 when their share price was at a peak. Instead, amazingly enough, they bought back significant amounts of shares in the year 2000 at prices near the top of the historical range.


October 8, 2015

The S&P 500 was up 0.9% and Toronto was up 0.8%.

Stantec was up 3.8%, Costco was up 2.5%, Canadian Western Bank was up 2.3% to $26.50 and CN Rail was up 2.1%.

Melcor fell 4.5% to $15.42.

Oil is trading at $49.54.

Costco released same-store sales figures for September. The raw numbers did not look that great because they were hurt by currency impacts and lower gasoline prices. Adjusted for those factors the September figures were stellar with U.S. same-store sales up 8% and Canadian adjusted same-store sales up 11%.

Some of the Canadian increase might be due to higher prices as I believe they are saying the increase was 11% in Canadian dollars after adjusting for lower gasoline prices. If the volume increase was anything close to 11%, that is absolutely stunning. Clearly many Canadians love shopping at Costco. Some refuse on principle due to the fact that an annual membership must be purchased. In general, I don’t like to pay a membership to shop at a store. But Costco’s prices make the membership fee well worth the price.

Costco’s shares almost always seem expensive. It would be one to buy if its price pulled back significantly due to a something like a bad day in the markets as it did on August 24 when it briefly plunged as low as $117 from the $146 range at which it had been trading a few days previous. I grabbed some that day at $125. I had thrown in what seemed to be a low-ball bid before the market opened that day and it got filled.  It’s now at just under $152.

October 8, 2015 – Fortis Inc. is added to our list

Fortis Inc. has been added to our list of stocks and is rated Buy at $39.14. This is “pure play” regulated utility which results in earnings that are relatively low risk. It should report strong earnings growth in the next few quarters due to increased assets in service and due to the positive impact of the lower Canadian dollar on its U.S. earnings.

October 7, 2015

S&P 500 up 0.8% and Toronto up 1.6%.

Stocks of note: Melcor up 6.2% (but on thin volume as usual), AutoCanada up 2.8%, Toll Brothers up 2.8%, Boston Pizza up 2.6%, Canadian National Railway up 2.5%. Bombardier down 13%.

Car Prices and currency:

About two weeks ago a car dealer was telling my that a lot of cars were being bought and shipped tot eh U.S. because they are now significantly cheaper in Canada because prices did not rise as our dollar fall. Today, this story was confirmed as Nissan warned its dealers not to sell cars to people planning to ship them to the U.S.

In some ways car prices in Canada should be adjusted promptly when the currency changes. But the industry apparently follows an archaic practice of setting most of the prices in January and then  sticking with that. They also seem to try to smooth out currency variations. Imports did not get remarkably cheaper when the Canadian dollar soared from 70 cents up past a (U.S.) dollar nor have they gotten expensive on the way down.

The only way the industry can maintain vastly different prices on the two sides of the border is if there are restrictions and costs on customers moving cars across the border. Clearly there are some costa and then the car companies try to erect additional barriers such as banning cross border sales.

It will be interesting to see what happens to Canadian car prices when prices are adjusted again which I understand will happen in January. We could see quite a jump in prices. This would be a negative for AutoCanada.

October 6, 2015

S&P 500 down 0.4%, Toronto up 0.7%

Oil rose several percentage points and is trading at $49.07.

Among the gainers: Canadian Western Bank up 3.0%, and AutoCanada up 2.8%.

Bombardier surged very near the end of the trading day to close up 14.9% on rumors it would sell a stake in its C-series plane program to Airbus. This surge then prompted both companies to announce that they HAD been in talks but the talks were over and there was no such sale pending. So, it appears the talks were leaked. Another example of Bombardier’s inability to do things properly? There should not have been a leak and when there was the stock should have been halted.

Regarding Canadian Oil Sands Ltd. There are reports that the price that Suncor is proposing to pay (albeit in Suncor shares) is well below replacement cost of the assets. Checking the Canadian Oil Sands balanced sheet the offer is in fact at about book value. That could be below depreciated replacement cost given older assets on the books at lower historic costs and given accelerated depreciation. Seymour Schulick who owns 5% of the company is apparently most unhappy with the offer (which is valued at just under $9 per share) and figures the shares are really worth more like $20. Really Seymour?  Is the market rally quite THAT dumb? Seymour Schulick made his fortune in mining ventures and is a smart investor, so maybe he is right, maybe the market really is THAT dumb. If so, it means there are opportunities to buy shares at far less than their true value at least from time to time.


October 5, 2015

On Monday, the S&P 500 was up 1.8% and Toronto was up 1.6%.

Notable gainers included TransAlta up 5.7%, Canadian Western Bank up 6.2%, America Express up 3.9% and AutoCanada up 6.2%.

Valeant pharmaceutical was down 11.1%. Valeant is being accused of price gouging. Even in competitive non-regulated markets there are legal restriction’s on price gouging. These restrictions in law date back several hundred years in the English common law. I am not a fan of this company as I noted on July 30.

The Suncor deal is being described as Suncor buying Canadian Oil Sands Trust for about $4.3 billion for the equity and $6.6 billion including the assumption of debt.

But this is an all-share deal. Suncor would issue shares to pay for this rather than paying cash such as by borrowing the money.

Using the method that Warren Buffett has used to describe such deals it would be described as follows: The current Suncor share owners would collectively give up 7.7% off the current Suncor (share count to be increased by 8.4%, in order to gain 92.3% of Canadian Oil Sands Trust. The current owners of Canadian Oil Sands Trust will own 7.7% of the combined entity and are thus giving up 92.3% of what they already own in order to gain 7.7% of the current much larger) Suncor operation. If there are synergies  and cost savings then perhaps the deal will work out well for both groups. Or perhaps the deal is more favorable to the buyers.

Canadian Oil Sands is trading somewhat above the value of the one quarter of a Suncor share to be received for each COS share and were up 55% today.

It is perhaps remarkable that in a so-called efficient market, Canadian Oil Sands shares were apparently under-valued by at least half (correction, should read by at least one third as in 0.55/1.55=0.355).

Some of us indirectly owned Canadian Oil Sands shares when we owned the Oil Sands ETF that traded as CLO. Sadly, that ETF was wound down last month by BlackRock and we received cash for our CLO shares. Presumably, BlackRock wound it down because there was too little buying interest. That is typical, the investing public no longer wanted CLO or Canadian Oil Sands Trust when the price of oil fell. Even though these were very long term assets they were priced in the market as if oil was going to stay down.

Perhaps what we can take form this episode is that the market trading price certainly does not ALWAYS represent a reasonable price for a company. Sometimes it is way high and sometimes way low. Most of the time it is probably reasonable and one has to be cautious when they are betting that they know better than the market. But sometimes it is a good bet.

October 4, 2015

I am currently working to add Fortis Inc. to our list. It’s a “pure-play” regulated electric and gas utility which owns a number of utilities in Canada and the U.S. (and a small amount further south). It looks like the rating will end up being Buy of (higher) Buy. It appears set for excellent earnings growth in the next few quarters.

Fortis is getting an extra boost from the lower Canadian dollar as it translated back U.S. dollar earnings. It made significant acquisitions of U.S. utilizes in the relatively recent past but at a time when the Canadian dollar was higher. The lower dollar will be a benefit to reported earnings and even more so to the reported book value per share.

Another company that will benefit from the lower dollar when it reports Q3 earnings is Stantec. Also CN rail, Valeant and Agrium. There are many other factors at play, but the currency impact will be favorable for these companies.

Another beneficiary will be Alimentation Couche-Tard, However it is an odd one in that it reports in U.S. dollars. The lower Canadian dollar will hurt its U.S. dollar reported earnings but if the earnings are translated back to Canadian dollars the currency impact will be favorable. Overall it will be unfavorable in form but favorable in substance. Substance is what matters though the market can sometimes fail to see substance in the short-term. Bombardier also reports in U.S. dollars and the same comments apply.

There is speculation that the Caiise Depot which is owned by the government of Quebec will possibly buy some equity shares in Bombardier such as in a private offering. The share price reaction, if that happens may depend on the price per share paid and also whether it is accompanies by the Bombardier family reducing the multiple of votes that the A shares have as compared with the B shares. The reaction of Bombardier’s debt and pref shares should be to increase if this equity injection occurs.

U.S. market commentators seem worried that the Q3 earnings reports will be weak due to currency impacts. This should not be a surprise but also it tends to create just a blip in earnings growth. In most cases where the currency has impacted the translation of profits from foreign operations (as opposed to profits from exports), it does not signal a downward trend in earnings since the impact on growth in EPS from foreign operations would be gone once the U.S. dollar stops rising. It does sort of move the long-term earning graph down but the upward slope or growth rate should resume once the currency stops moving. Of course growth could also be decreased by many other factors.


October 2, 2015

On each daily post I mention the percentage gain or loss in the S&P 500 and the Toronto stock index for the day. Everyone tends to focus on the closing numbers. But sometimes the closing number has little to do with how the markets traded for most of the day. For example today, the market was down noticeably before finishing the day with a gain. So, really the closing numbers are just where the market was at 4:00 eastern time and may not be all that much more relevant than where they were at, for example, 11:45 am. If the S&P 500 closes at say 1951 it is sometimes said that the market will start the next trading day at that level. That is completely false. The market opening each day is based on bid and ask prices just before the market opens and can and often does diverge greatly from the previous day’s close.

Having said that, for what it is worth, on Friday, as at the close, the S&P 500 was up 1.4% and Toronto was up 0.7%.

Earlier in the day the market had been down due to the weak September jobs report in the U.S. And it did look weak at 142,000 versus an expectation of a bit over 200,000 and especially as it came with a downward revision to the numbers for July and August as well. But it’s probably too early to tell if this is the start of a slowdown in the U.S. versus a one-time blip in the modest upward trend they have been on.

One thing that never ever seems to be mentioned is the precision of the numbers.

A quick check a the source of these numbers shows that they are sample-based and seasonally adjusted.  http://www.bls.gov/news.release/empsit.nr0.htm

The source data indicates “An over-the-month employment change of about 100,000 is statistically significant…”. So one might question how the financial press can get so very excited about the number coming in 60,000 too low when it takes 100,000 to be statistically significant.

Then there is the seasonal adjustment. Without that we might see a big increase in September as the season changes. Certainly in November and December the raw numbers would see big job increases due to the Christmas season and all that leads up to that. So, the numbers do indeed need to be seasonally adjusted. But that must be an imprecise process. It cannot be known with precision how many jobs were affected simply by the seasonality impact.

Overall, while I would not want dismiss the notion that the jobs growth in the U.S. is slowing, I would caution against getting too excited about one month’s reading and about ascribing unrealistic levels of precision to a seasonally adjusted sample-based number.

Turning to individual stocks, most of the stocks on our list closed higher today. In particular I notice that the Canadian Western Bank preferred shares that I bought yesterday for $16.80 closed at $17.73, up 2.8% versus yesterday’s close.

I won’t get too excited by my little gain on these preferred shares given that overall our stock picks this year are somewhat trailing the TSX index. Hopefully our picks can play catch-up in this fourth quarter. In any case, an evaluation of whether we doing better than the TSX requires more than nine months or a year and we remain significantly ahead of the TSX index in the longer term.

October 1, 2015

Today, the S&P 500 rose 0.2% (although it was down for most of the day) and Toronto fell 0.5%.

TransAlta managed to gain 2.6% after agreeing to pay a penalty to one of its regulators. I have not added TransAlta to the list but I have mentioned that it might be getting down to good value though I also think it has been one of the worse managed companies in Canada in the past 20 years (Other contenders for that title would include Barrick Gold and Bombardier.). TransAlta also announced it will shed about 250 jobs mostly in head office. It seems clear it will report a huge loss for Q3 due to this penalty and the employee severance costs.

Today I bought the Canadian Western Bank rate reset preferred shares that I mentioned yesterday. I paid $16.80.

Boston Pizza Royalties was down 2.7% to $16.75. Investors may be concerned about its sales in Alberta. I would not be surprised if they report a small decline in same-store sales overall for the chain in Q3 (nor would I be very surprised if it is instead a small gain). But I would be very surprised indeed if that led to a cut in is distribution. Boston Pizza Royalties is probably a safer bet than the Canadian Western Bank rate reset preferred shares and it yields a bit more.


September 30, 2015

S&P 500 up 1.9% and Toronto up 2.1%…

Notable gainers included Valiant up 12.3% (in a partial rebound from recent large losses). Dollarama, up 2.3%, Liquor Stores N.A. up 3.6%. Couche-Tard up 2.2%, AutoCanada up 4.0%.

I had noticed today that Canadians Western Bank’s rate reset preferred share was down as low as $16.45. At that price it would yield almost 6.7%. And it can’t reset to a new and possibly lower distribution until April 2019. I put in an order at $16.60 but did not get a fill. About six months ago it was trading at near $25 and yielding 4.4%. At that time the government of Canada 5 year yield was 0.86%.

Today that government of Canada 5 year yield is 25 basis points lower at 0.51%. But that does little to explain the 230 basis point increase in the market yield. (Correction, today’s yield is only about 5 basis points lower so the increase in the yield on CWB pref shares is not explained by any material change in what it might reset to)

The higher yield would appear to be based on a general distain for rate reset shares and an increased fear that the 5 year Canada yield could stay low for a very long time and this the reset distribution on these shares could be lower than the current distribution. It is also likely based on fears that Canadian Western Bank could run into financial difficulty due to loan losses linked to the low oil prices. However, I note that according to the CWB web site the credit rating on these preferred shares is the same as I saw in March when the yield was so much lower.

Every so often the market offers what later can be recognised were clearly bargain prices. For example in early March of 2009 at the bottom of the financial crisis and around August 2011 in the debt ceiling “crisis”. It remains to be seen if the rate reset preferred share prices of September 2015 will later be recognized as being clear bargains. I suspect they will…time will tell.


September 29, 2015

S&P 500 up 0.1% and Toronto up 0.2%.

Bombardier was up 7.0% on comments from the Quebec government that Bombardier’s contribution to the economy is highly valued by the government and the company would be supported (though there were no specifics). That is of course positive. But one should remember that the company and its jobs could possibly be supported in ways that fail to protect equity share owners.

Valiant was down another 4.4%. As I hear stories about price gouging I think back to my reading of its reports. I don’t remember the company indicating that its strategy was to raise prices on drugs. I thought it high-lighted “synergies”. In any case this latest news is another reason for me not to trust this company. It seems bizarre that the United States would not have any regulation at all on drug prices. That would seem to be an invitation to gouge in certain cases. Traditional economic logic is that monopolies need to be regulated as to price. And Valiant has a monopoly for certain drugs. The whole notion that Valiant was suddenly worth more than the Royal Bank seemed a little strange to me.

My previous order to add to my Boston Pizza position which I had placed last Wednesday at $17.26 was filled today. I continue to marvel at the ability to buy this with a 7.5% yield. Recall this is a top-line entity which simply collects a portion of the franchise fee and distributes it to owners of Boston pizza Royalty. It’s basically a toll booth on all food orders at Boston Pizza. A long as people keep eating at Boston Pizza the toll will be paid. And if the volume of people or the menu prices rise over time then the “toll” (the franchise fee) rises. (The opposite is true as well of course.) I am not seeing much chance of down-side for those buying at this price and holding, though there are never any guarantees.

I have mentioned insider buying at this entity. About ten insiders bought in August at prices from about $16.50 to $18.00. Two of them added a bit more in September at about $17. The entity itself has been buying back shares since August 21 (after it took a long break from doing so) and has paid about $16.80 to $17.50. The entity is buying relatively small quantities but this still seems like a positive indicator.

One thing that the plunge in this entity and in particular the plunge in rate reset shares has demonstrated is that there is no substitute for cash. If you absolutely need the money back for spending in a short period of time (like a year or two or less) or if you are absolutely unwilling to chance any loss in market value then you must restrict investments of that money to cash and cash equivalents including savings accounts GICs and government guaranteed investments of the required term. But for those willing and able to stomach some risks then the various rate reset preferred shares that have declined in value and entities like Boston Pizza Royalties that have declined in price would seem like good choices. With rate reset preferred shares though, one has to be aware of the reset date and the yield that would result if the five year bank of Canada bond yields stays around its current level of about 0.8%.

Consider the Enbridge pref share that we last rated as (higher) Buy at $19.27. These have now declined to $16.85 paying $1.10 and yielding 6.5%. The negative part is that the reset dividend could be in the order of 84 cents at about the current 5 year Canada rate. But that would still be a 5.0% yield at the current price. And the reset does not happen until December 2019 or about four years. So, one scenario is that you pay $16.85 today. You collect about $4.40 in dividends over the next four years and then the yield falls to about 5% on your original $16.85 if interest rates remain at todays low levels. And if rates are still near-zero in 2019 then I expect the market yield on pref shares will be less than 5% and so the price on these shares could rise.

But almost everyone is expecting interest rates to rise in which case the reset dividends could be closer to today’s $1.10 in which case I would expect the value of these shares to rise. So, I am just not seeing much chance of down-side here if held for the four years.

Then again, I did not in any way expect the fall to $16.85 either.  And perhaps these share prices could drop even further as people sort of capitulate or do some tax-loss selling. But to me the price already looks irrationally low.

And one more thing to add to this lengthy post: Costco came out with earnings after the close that looked very strong. Same store sales figures were hurt by lower gasoline prices (which should not affect the profit) and due to currency impacts on Canadian and other international locations. Adjusting for those two items the same-store growth was stellar at 6%. I notice already some stories that suggest Costco “missed revenue estimates”. Well, one can spin this negatively if they want but at a quick look I think the report was strong. I think it is appropriate to adjust for currency and gasoline prices in looking at same-store growth trends. I would not however adjust the earnings for that (because the lower gasoline prices and the exchange rates might stay where they are) but in any case the raw earnings per share were up a healthy 9%.

By the way, one segment that will be hurt by the lower gasoline prices is credit card companies (Visa, mastercard and Amex) . Their take at the pump is generally some fixed percentage of the price of gasoline and so their revenue from gasoline retailers declines at lower gas prices. I am not sure if that is all material to them overall but it is a negative.


September 28, 2015

Stock market indexes declined on Monday. The S&P 500 was down 2.6% and Toronto was down 2.8%.

This year to date, the S&P 500 index is down 8.6% and Toronto is down 11.1%. That is certainly a poor year, but really, it’s not disastrous. If all the annual returns on the market were lined up this one would be in the lower half of the group to be sure, but I am pretty sure it would not be in the bottom 10% of years.

Somewhere along the line Warren Buffett noted that corporate profits do not necessarily grow each time the earth circles the sun. And certainly stock market indexes do not grow each and every time the earth circles the sun. They do most years but they don’t increase anything close to every year. So, there is nothing unusual about the stock index performance in 2015 to date.

The most notable declining stock in Canada today was Valeant Pharmaceuticals, down 16.5% to Canadian $221.81 and U.S. $166.50. I take a certain amount of satisfaction in that given that I added to this site rated Sell at U.S $253.91 and Canadian $331 on July 30 this year. I did notice today that our report incorrectly states the currency used was Canadian but given the price in the report it was U.S. dollars which the company reports in, which it does because it is in reality an American firm in substance. See our comment that day as it was added. For those with patience and the ability to stomach “volatility” (which, let’s face it, really means “losses”) there are certainly bargains to be had. And anyone who can’t stomach losses, even those which are likely to be temporary, should not be invested in individual stocks or perhaps really in anything but cash and cash equivalents.

Costco will report earnings on Tuesday. I expect all to be fine with Costco except for two things. Revenues will be hurt by lower gasoline prices. But not profits so that is unimportant. Revenues and profits will suffer a bit due to Canadian store results being translated back at a the current weak currency level and the same applies to most other international operations though I believe Canada is biggest one that has had a large and unfavorable currency move. This is basically a one-time blip in the earnings growth rate since currencies do not keep trending down (really, they don’t.)

I am currently reading the financial materials for Fortis Inc. and will add that company to this site within the next week.


September 27, 2015

Friday saw the S&P 500 about flat while Toronto was up 0.3%.

Individual stock movements which seem worthy of note include Canadian Western Bank up 3.4% and Bank of America up 2.2%.

I noticed that Melco issued a press release about a change to its stock transfer agent. This is of no real significance to investors. The reason it happened is that its form stock transfer agent Valiant Trust formerly owned by Canadian Western Bank was sold to a larger Torrent stock transfer company called Computershare Canada. The assumption in such sales is that the customers will stick with the business after it is sold. In this case Melcor apparently decided to instead switch to a different small Calgary based stock transfer agent company called CST Trust company. I don’t know the reasons for the switch but it could involve someone at Melcor management knowing someone at CST Trust or maybe a desire to deal with an Alberta provider if possible. To me it points out the potential falisy of the notion that customers of a company like Valiant Trust can effectively be sold to a different company and expected to be docile and stay on as customers with the new owners. As consumers we experience this as well when companies of which we are customers get bought. I applaud Melcor for not being docile in this case.

Tomorrow we will start another day and another week of investors frantically selling shares back and forth to each other. More importantly, on Thursday the third quarter will end and soon thereafter we will start to see the Q3 earnings reports roll in which will give some insight into how the various companies are doing in terms of profit growth or decline. The days ahead will also yield the usual economic reports. There is always future news to look forward to in the markets. And there is always past news to attempt to digest.



September 24, 2015

S&P 500 down 0.3% and Toronto down 0.3% (after bigger losses earlier in the day)

Bombardier was down again, this time down 8.2%.

I grabbed a bit of Toll Brothers shares at something under $36. This buys back some Toll that I had sold a couple of months ago at $41.

September 23, 2015

The S&P 500 was down 0.2% and Toronto down 0.8%.

And oil fell about 3.8% to $44.61.

Canadian Western Bank was down 3.0% presumably due to fears related to oil prices.

Bombardier was down 8.6% possibly because it is so hard to know what the future holds for this debt-ridden and exceedingly poorly managed company that on the other had tends to have the support of government and which does have good products to sell.

All in all it was just another day in the markets with stocks moving somewhat unpredictably which is really what they are supposed to do – it’s called the random walk theory.

P.S. I entered two orders to add to my Boston Pizza position. One order just a little below the market and another order a little further below the market.


Dollarama update September 23, 2015

Dollarama is updated and remains rated Weak Buy.

I have said repeatedly that Dollarama is one of Canada’s very best managed companies.

It’s profitability is so high that any economist would tell you the profits should not be sustainable. Somehow it sells everyday products that it buys from others and charges less than other retailers but makes significantly more money doing it. It was recently making 13.5% bottom line after income tax  profits on sales. This is unheard of for a retailer selling non-proprietary products. It puts in stores at a cost of about $700,000 (fully stocked) and the company trades on the market with a value of $12 million per store. The stores have a payback period of about two years. Its ROE is running at 47%. Its profit in the latest quarter grew by 43%, up from the “mere” 28% of the past three quarters.

In theory, its competitors should learn from it and replicate its model and drive down profits. Why would WalMart not have a large dollar store section and why couldn’t it source products as cheap as Dollarama?

So we are left with Dollarama trading at 34 times earnings. That seems very expensive. It also seemed expensive over the years (I was never able to rate it higher than a (lower) Buy) and yet its growth has justified buying at expensive prices in the past. And not only is it 34 times earnings but it is 34 times an earnings level that really should be competed lower – but that has not happened.

In the end the company has my greatest respect. But I cannot bring myself to invest at this price. Neither would I dare short it though. If it continues along its past path and if smarter competitors don’t emerge then its earnings should continue to rise. And it may even have the ability to replicate its success in other countries over time. I would not be comfortable holding a large position in it. But those who did so have done exceptionally well. The reality is that if I held I would have sold it a long time ago and if I held it today I suspect I would sell it all.

I am sorry that I cannot have a more definitive Buy / Sell position on this company but I have provided my analysis and my thinking.




September 22, 2015

Stock prices mostly traded lower today. The S&P 500 was down 1.2% and Toronto was down 2.1%.

Valiant Pharmaceuticals (which I last rated Sell at $331) was down 5.4% to $287 in Toronto.

Stocks that rose included Stantec up 1.7%, and Boston Pizza up 1.7%.

I may add to my Boston pizza position tomorrow.

I had an order in to grab 200 more shares of Melcor if it fell to $15.76. It fell 1.8% and my order was filled as the last trade of the day. It trades very thinly and only 971 shares traded hands today. According to Yahoo Finance, the forward P/E for 2016 earnings is 10.4 and the price to book value is 58%. I figure that if I can buy on that basis a conservative company that has been on the stock market since 1968, things are likely to work out well.

I notice that the Bank of America CEO won a vote to allow him to remain chairman. I am fine with that. I own some shares and they had the computer share stock transfer company call me several times looking for my vote. This has happened before with Bank of America. I don’t recall if any other company has ever called me soliciting my vote. This is rare. But it shows that they know how to get the vote out when they need it. I don’t have a problem with them calling me either. As a result of their call I went online and voted in favor of the CEO remaining chairman. Buffett was in favor of it too. Best governance practice might call for separate rolls but I would also say that good governance is not strictly a matter of following trends like that. At the end of the day the most important role that a Board chair has is to work to replace the CEO when needed and that is not even in discussion here. The CEO is running Bank of America. Period. I don’t have a problem with that. Bank of America is on the mend. Why mess with that?


September 21, 2015

S&P 500 up 0.5% and Toronto up 1.0%.

Gainers included CNR up 2.7%, Canadian Western Bank up 1.5%, Canadian Tire up 1.8% and Element Financial up 2.9%.

Boston Pizza Royalties was down slightly and I believe it represents excellent value at its price of not much over $17. It yields 7.5% and the cash distribution is likely to rise slowly over time. At its current price I believe it represents a good yield investment and should also provide a capital gain. Certainly I did not expect it to fall in price to this level but the only sensible reaction to that as far as I am concerned is to take advantage of the lower price if possible.



September 20, 2015

In Friday’s episode of follow the bouncing market the S&P 500 was down 1.6% and Toronto was down 1.0%. And most of our stock picks were down as well.

As this week gets ready to start, the futures are calling for a negative start to trading on Monday morning.

I sent out the latest edition of the free newsletter on Saturday and you should have received it by email. If not, you can add your email to the list here.

September 17, 2015

On Thursday, the big news (or at least confirmation of what was expected by most) was that the FED did not raise interest rates as it continues to await and expect further improvement in the U.S. economy and as it awaits and expects inflation to move up towards its 2% target. The reaction of the market to the news was volatile, as the market first fell, then rose and then ultimately fell modestly on the news.

The S&P 500 ended the day down 0.3% while Toronto was up 0.2%.

Stocks closing higher included Boston pizza Royalties up 3.3% and Canadian Western Bank up 1.6%.

Stantec was down 3.6%.

The FED non-move was seen as negative for Banks as Bank of America was down 2.9% and Wells Fargo was down 2.8%.

Oil basically stood it ground and is at about $47.

There was a modest increase in the Canadian dollar which is now at 75.9 cents.

Liquor Stores NA update September 17, 2015

Liquor Stores NA is updated and remains rated Strong Sell, now at $11.25. It appears to have a highly attractive dividend yield at 9.6%. However this dividend appears to exceed its earnings by close to double. It would appear to be at a high risk for a cut to the dividend unless it can sell off some assets such as some of its licenses at a good price. Its cost structure appears to be too high. It appears to have bulked up its management team in anticipation of a major growth initiative but it is not at all clear that it could finance such growth.

September 16, 2015

On Wednesday, the S&P 500 was up 0.9% and Toronto was up 2.2%.

Oil was up about 5% and is at U.S. $47.27 which is really not such a low price.

Most of our stock picks were up: Stantec up 4.3%, Canadian Western Bank up 2.5%.

TransAlta is a troubled company with apparently very poor management. But it was up 5.6% to $6.05. It might be what Buffett refers to as a cigar butt type company. Fundamentally a poor company but selling at such a low price that it might just provide a decent return at this point.

Thursday’s excitement will be about whether the FED raises rates or not. It would be nice if they would get on with it and raise interest rates by a small amount.

September 15, 2015

On Tuesday, the S&P 500 rose 1.3% and Toronto was up 0.8%.

Oil is at $45.08 U.S. which is about $60.00 Canadian. At that level it may be that the western Canadian economy will remain stronger than the market expects. Calgary home prices rose modestly in August.


CNR Update September 15, 2015

The report on Canadian National Railway Company is updated and remains rated Buy now at CAN $74.43 or U.S. $ 56.18. The lower Canadian dollar will continue to benefit its results in Q3 and Q4 due to its U.S. operations and will offset what will likely be modestly lower car loadings. In July and August Bill gates substantially increased his already massive investment in this company.

CN is down 7% this year but is up 181% since we rated it a Strong Buy in early 2007 and is up 821% since it was first added to this site 16 years ago though we rated it only a weak buy initially. Its earnings per share have powered higher over the years like a train climbing a mountain. There can be the occasional switchback but overtime it just keeps on rising.

September 14, 2015

On Monday, the S&P 500 was down 0.4% and Toronto was down 0.8%.

Canadian Tire was down 2.6% to $118.10. Possibly the decline has something to do with the impact that it will face from the lower Canadian dollar, which is a concern that I have been noting for about nine months.

Melcor was down 2.0% to $15.62. However this was based on a tiny share volume of 1320 shares traded (Melcor is a notoriously thinly traded stock). The market cap is about $520 million having been reduced today by some $10,000,000 based on trades of 1320 times $15.62 or about $21,000. This math illustrates how just a few shares trading hands can push the market cap around by a large amount. When the trading is thin the market price is simply less reliable. This is a stock that can easily move 2% simply by one trader buying or selling say 1000 shares. Those who hold Melcor should be prepared to hold for a longer period because the lack of trading means that an attempt to sell your shares could push the price down.

Toll Brothers Update September 14, 2015

Toll Brothers is updated and remains rated Buy now at $37.23. Its latest quarter reported revenues and earnings were weak with a small decline. However that was related to a decrease in its signed home sales contracts from one year prior. This company has a somewhat unique one year average lag between making a sale (contracting to deliver a house) and ultimately completing and delivering the completed house and booking the sale. It’s signed contracts in the past were up an average of over 20% in the four previous quarters. This means that a 20% increase in earnings or more in the next year would appear to be basically baked in.

Alimentation Couche-Tard Update September 13, 2015

The report for Alimentation Couche-Tard is updated and rated Weak Buy / Hold at $60.12.

As mentioned previously, this is one of Canada’s very best managed companies. Since it was added to our list on March 31, 2005 rated (lower) Strong Buy at a split-adjusted $5.80 it has risen 937% or a compounded average of 25% per year. It went public as a very small company in 1986 at a split-adjusted price of 9.375 cents per share and the stock price has increased by a compounded average of 24% annually for 30 years  for a total gain of 640 times or 64,000%!

It now appears to be about fully valued although it would continue to be a strong investment if it can continue to grow rapidly. The stock price certainly did not increase in a straight line over the years and it is possible that there will be opportunities to purchase it at a better value in future.

September 13, 2015

On Friday, the S&P 500 was up 0.4%, while Toronto was down 0.8%.

This week the market will be focused on the FED’s interest rate announcement on Thursday.

September 10, 2015

Thursday saw the S&P 500 up 0.5% and Toronto up 0.3%.

Bombardier was up 29% as it showed off its new plane in Toronto. This stock is on something of a knife edge. It’s been like a plane in  nosedive. It could crash or it could truly pull out of the dive perhaps with government help. I would not read too much into this stock move.

Dollarama rose 6.7% after another stellar earnings report. The stock always looks expensive. I have mentioned before that it is one of Canada’s best-managed companies. I plan to update the report for this stock soon.

September 9, 2015

On Wednesday, the S&P 500 finished the day down 1.4% and Toronto was down 0.7%.

Bombardier was a notable gainer, up 23% on rumors that there was some offer for its rail transportation business which offer was rebuffed but might indicate they can get a decent price when they spin off part of that unit later this year. In some ways I would hate to see part of the company sold at a fire sale price but on the other hand anything that gets assets out of the hands of current management is a good thing especially for the employees and pensioners.

My next update will likely be for Alimentation Couche-Tard.

September 8, 2015

Canadian Western Bank is updated and rated Strong Buy at $22.78. I have studied the latest earnings report and read the earnings call transcript. Given the low oil prices I could not have hoped for a better report or outlook. The market however remains quite fearful of this stock. In my opinion, this is the stuff of which excellent investment opportunities are made.

September 6, 2015

The software that controls the logins and passwords has been mostly restored and the need to login with a password should be restored very soon. I apologise for the confusion that this has created. For now, you are able to access the material here without logging in.

Friday’s markets had the S&P 500 down 1.5% and Toronto down 0.5%.

I will update the Canadian Western Bank report in the next few days. It is exasperating to see people part with their shares for prices around $22. Investors who merely follow stock prices and not earnings may tend to sell as prices decline. That is certainly not my game and never will be. If a stock looks like good or excellent value I will be tending to buy and not sell. While anything is possible in the economy, I see no reason to lose faith in Canadian Western Bank.

September 3, 2015 (8:00 am eastern time)

Canadian Western Bank’s earnings are out. Very positive in my opinion. Stock set to open about $1.00 higher or say 4% (and this 4% will change by the time the market actually opens in about 90 minutes) and remains a clear bargain in my opinion. But yes, if Alberta really sinks into a bad recession then the company could see much bigger loan losses. So there are always risks. But after almost a year of much lower oil prices this bank is doing very well. They expect to continue to be profitable.

September 3, 2015

On Thursday, the S&P 500 was up 0.1% and Toronto was up 0.4%.

Oil is at $46.55.

Melcor was up 4.6%.

Canadian Western Bank fell 2.5% despite reporting earnings that were about as good as could be hoped for given the low oil price. As of the close someone had sold at $23.28 but someone else had bought at that price. History will show, I strongly suspect, that the buyer got the better deal. Book value is about $22 and the company expects to continue to be profitable. The fact is that the market periodically prices stocks too high and at other times too low. Buffett teaches that we should use the market to our advantage. If you conclude that a stock is undervalued and you own it, rather than fret about that consider buying more at that price if you can. I added a little to my Canadian Western Bank position today. I suspect that stock will do better than the market tomorrow as analysts get a better chance to digest its earnings release.

September 2, 2015 (8:40 eastern time)

On Tuesday, the S&P 500 fell 3.0% and Toronto fell 2.7%.

I’d rather see rising markets but declines are undeniably a fact of life for investors. As I have said many times, I don’t particularly try to predict declines or step aside. I try to build cash as markets rise and spend it as markets fall. Over time that has worked. Also over the years I have learned not to get too bothered by market declines. I don’t lose sleep over it.

I added yesterday to my small position in CN rail.

Yesterday after the close the futures on the DOW were down another 400 points or so but last evening were up 150 points or so. As of now they are up 120 points.

Perhaps the watchword is “Get in, sit down, shut up and hang on tight”. But others are free to follow a different approach.

P.S. Big kudos to Penn West for cutting director pay by 40% and chairman Rick George’s pay by 50% as part of yesterday’s cuts. It won’t hurt those rich directors much but it is a welcome move and shows a better attitude. I don’t recall any other company doing this although I am sure there has been a few over the years.

September 2, 2015

On Wednesday, the S&P 500 was up 1.8% and Toronto was up 0.5%.

Canadian Western Bank will report earnings either tonight or tomorrow morning. I expect certainly some increase in the allowance for bad debt and in delinquent loans. And I expect them to express some concern about future bad loans. But I also expect them to reassure that they don’t expect bad debt to get out of hand at all. Well, we shall see what they see.

Lately it seems like the market reacts strongly to negative news and not so much to good news so perhaps I should not expect any big increase in the stock no matter what the news but again, we shall see.

August 31, 2015

On Monday, the S&P 500 fell 0.8% and Toronto was about flat.

Oil surged 8% to over $48 but now sits at $47.60.

AutoCanada was up 4.3%.

Toll Brothers is at $36.97 which is down from recent highs of $42.19 due to both the overall market decline and a somewhat weak earnings report last week.

BUT the weak earnings in this latest quarter were related to house contracts signed about a year ago. Meanwhile house sales contracts were up 12% in numbers and 30% in dollars. This basically bakes in earnings growth next year as revenue is booked only when a house is completed and delivered. I was surprised that earnings were down this quarter and I have not completed my analysis of why but my initial assessment is that the upward profit march for Toll Bothers remains in place. I would still consider the company to be a Buy. Last years Q3 had a large surge in earnings (like a double) and so the decline this year compared to that may be partly a result of volatility or lumpiness. There was a lot of good news in the report such as a record high in the price of house sale contracts signed. That profit will show up when the houses are built.

August 30, 2015

Happy birthday to Warren Buffett who turns 85 today and who remains extraordinarily sharp. In fact part of his success that is seldom recognised is that he has a sort of photographic memory for figures and all things business. And he combines that with an ability to do math in his head. Figures just mean so much more to him at a glance because of these abilities. It allows him to make decisions on his own at tremendous speed.

On Friday, the S&P was about flat and Toronto was up 0.7%. Lots of individual stocks jumping around though. Some preferred shares such as Canadian Western Bank and Enbridge up 3 and 4% in partial recoveries. AutoCanada up over 9% on the day, again as only a partial recovery from the depths of earlier in the week.

Oil is at $45.26. I have never (ever) claimed any ability to predict commodity prices especially in the short term. I don’t really think others can either. Most forecasters just seem to go with the recent past trend which they will predict will continue. Depending how far back they look (days, weeks, months) they will see the trend as up or down. I guess most would see it as down.

August 27, 2015

Well it certainly has not been a dull week in the markets. On Thursday the S&P 500 rose 2.4% and Toronto rose 2.9%.

Just about everything on our list was up. So, as of now at least, it looks like a policy of hanging tight on this market correction has worked out not so bad. Combine that with some buying on dips and the market correction may have been a bit like a plunge on a roller coaster – scary but harmless.

August 26, 2015

Wednesday’s action saw the S&P 500 end the day up 3.9% in partial a rebound from recent losses. Toronto was up 1.7%.

Almost everything was up. Apparently some very nice bargains were picked up in the past few days.

Meanwhile my road trip continues as I was in Peterborough yesterday with a stop-over with relatives (where my computer refused to connect to the internet. Quebec City tonight.

As I traveled the highways I see that both Canada and the U.S are sparsely populated in many stretches and I also seemed to see a lot of prosperity. Most of the businesses certainly seem to be in newer buildings. The housing stock is mostly newer and there are very few junky looking cars on the highways.

I don’t understand all the reasons why but it is apparent that the Cities are more prosperous than the rural areas. Certainly there are some poor areas but really the two countries look in good shape to me as far as the installed bases on commercial buildings, houses and highways.

I don’t expect the increase in average living standards to end any time soon nor do I expect the markets to stop trending up over the longer term.

August 24, 2015

On Monday, the S&P 500 was down another 3.9% and Toronto was down 3.1%.

Every stock on the list I monitor was down.

I entered orders before the open to pick up a few shares of Costco at $125 and Berkshire at $128. Both were filled. Apparently there were some really big drops at or near the open such as Costco down to $117.

Futures are now indicating that markets will open significantly higher tomorrow.

Meanwhile… my road trip continues. North Dakota and Minnesota featured light traffic but that is likely normal as the population is spare. Chicago appears to be booming with quite a bit of building construction and heavy road construction. Tourists appeared to be in abundance. No mark downs evident on “the magnificent mile” where mid to high-end retailers abound.

Toll Brothers reports tomorrow (Tuesday).

August 22, 2015

So the S&P 500 ended the day on Friday down 3.2% and Toronto was down 1.9%.

Every stock on our list was down with the strand exception of Bombardier where the pref shares were up 17% and the common up 1.6%.

I have not changed my opinion on the higher rated stocks and will continue to add to positions as funds allow.

I started a road trip today. In Regina tonight. Ramada Hotel in Emerald Park is full. Nearby Boston Pizza was busy and the service very fast and everything about it was excellent. As an owner of the Royalty Trust units and as a customer I was well pleased. 7.5% yield on this? certainly looks like an excellent investment to me. Overall not seeing much sign of slowdown though I would say the highway was not crowded.

August 21, 2015

My IT provider indicates the login server will be fixed soon meanwhile I have opened all the reports for your access without logging in, just click the links.

August 21, 2015 (12:40 pm eastern time)

Market declines continuing. I have added to Boston Pizza and Melcor today. Market declines are a fact of life. I have always followed a policy of buying on dips and not trying to jump in and out of the market. That has worked for me. Market declines always feel awful at the time but looking back they usually are not such a big deal unless one sells after declines and locks in losses. Other people have different approaches but this is my approach.

My web site developed a new problem today and the usual three recent daily comments went away which is why I have pasted them back in here. My IT providers are working on all the issues.

August 20, 2015

On Thursday, the price of owning a share of Corporate America or of Corporate Canada fell 2.1%.

It will be said that investors pulled money out of stocks. Not really. For every share sold there was a buyer. Investors as a population trade shares with each other and no net money flows in or out in the trading process. Money does flow into companies when they issue shares through IPOs, secondary offerings and DRIPs. And money flows out of company’s through dividends, share buy-backs and the occasional dissolution and liquidation of a company.

So, what happened today was that investors bid the prices of stocks down by an average of 2.1%. It is rational for investors to do this in the event of lower growth expectations or when interest rates are expected to rise. Whatever growth expectation that investors had (on average) as of yesterday it appears that they have a lower one today.

Investors may or may not be correct. At any given time the “true” value of corporate America and corporate Canada or any individual company is likely to be above or blow the trading price.

It is always up to individual investors to decide if the market or any given individual stock is attractive at any given price.

Stock market declines are nothing new. Many of us have lived through several cycles. Some people claim to know which way stock prices are headed on average. I have never claimed to know that. I merely try to find some individual stocks that seem cheap or reasonable compared to an estimate of their true value. Over time buying such stocks has worked out well. In the shorter term it has sometimes certainly produced temporary losses on the portfolio and sometimes permanent losses in certain stocks.

Almost all of the stocks on our list were down today. Bombardier was a rare exception with a little bounce up on news that 80% of the test flight hours on the C-100 are complete.

AutoCanada also managed to be up a small amount today.

P.S. Just checked and three of the Boston Pizza insiders that had bought in the past few days added more shares today. They appear to think BP Royalties Income Fund is a fine value here and increasingly so as it slipped below $18, closing at $17.47 today to yield 7.4%. And what is the worst case in terms of the dividend here? I expect the distribution to rise. But say restaurant sales fell off by 10% which is a LOT then the distribution might have to be cut to $1.17 per year from $1.30 and would still yield 6.7%. I mean maybe there is a remote case of something worse but the risk reward looks very good to me. Of course the share price can fall further because if people sell in fear then the price has to keep dropping to attract new buyers. If you owned a Boston Pizza restaurant and were paying that 7% or so royalty fee every month (BP Royalty gets 5.5% and BP International gets the rest) as a top line skim off the top would you feel like the guys receiving that were at much risk? If your sales fall 10% your profits could fall much more (you could even move into a loss given many of your costs are fixed)  but your royalty bill is only falling that 10%. And I am not expecting BP sales to fall anything like 10% except maybe in a few locations.

August 19, 2015

My server problem continues but should be resolved soon. I use a local small business to host the login page. Over the years the up-time has been very good and I am confident that they can correct this soon. The main site is hosted by Telus and very seldom ever goes down.

On Wednesday, the S&P 500 was down 0.8% and Toronto was down 1.1%.

Most of the stocks on our list were down.

This can certainly get depressing. Particularly things like Melcor down 5.3% to $15.30. And Canadian Western Bank down 2.4% to $23.45. And AutoCanada down 6.8% to $26.09. In all three of these cases it is due to fears about what will happen to the Western economy and their earnings given the low oil prices. Meanwhile they are all still reporting profits in their latest quarters. These are not like some of the oil companies that are reporting losses. These are strong companies. I certainly expect these to recover but that does not mean they can’t go lower before that happens. Back in 2009 Melcor and Canadian Western Bank certainly went down more than I expected. I tended to buy on the way down and certainly bought some too early as it turned out. I am doing the same thing this time. I have been around the block a few times seeing strong companies have their share prices pushed down. If one can stomach the volatility it tends to work out quite well over time.

I suspect that many investors are not really that familiar with these companies and they just sell as the price goes down. Long term success in investing tends to require keeping a cool head when the mob panics.




August 19, 2015 – Canadian Tire updated

Canadian Tire is updated and rated (lower) Buy at $127. This is a very well-managed company. For the reasons indicated in the report it will likely struggle to show profit growth in the next couple of quarters and could certainly report lower profits. But in the medium and longer term it should continue to grow. I hold some shares in a taxable account and will not sell. I would welcome the chance to buy at a lower price if that were to occur. But I would not be inclined to Buy at this time. (lower) Buy is a sort of luke warm buy rating. As always there is a lot of information in the report and a simple two word rating does not do justice to all the information. Subscribers should read the report to understand the reasons for the rating. With this update I added a description of how the assets on the balance sheet break out. It’s always nice to have an understanding of what assets you are buying into.

August 19 (7:20 am)

On Tuesday, the S&P 500 was down 0.3% and Toronto down 0.4%.

Individual stocks of note from our list included Walmart down 3.4% and Bombardier continuing its nose dive. However, AutoCanada managed a 2.1% gain and Toll Brothers rose another 2.8%. I sold about one sixth of my Toll Brothers just to trim that large position. I may move some of the funds received back to Canadian dollars.


August 17, 2015

On Monday, the S&P 500 was up 0.5% while Toronto was down 0.2%.

Boston Pizza fell 2,4% to $17.96. I added modestly to my position at $18.03. In the past two trading days six insiders have bought shares mostly at about $18.50. They would have been “blacked out” from buying from July 1 until approximately these last two trading days as generally insiders cannot buy between the end of a quarter and the time the earnings are released (and perhaps a day or two after).

AutoCanada fell 3.3% to $27.41. I would be comfortable adding to my position and may do so in the next few days.

Toll Brothers was up 2.3% to $40.75 and made another 52 week high. This was on news that the Home Builder confidence index was at a ten year high. Toll Brothers reports earnings on September 25. (correction a week today, August 25)  Four years ago this company had dipped under $15 during one of those U.S. government debt ceiling crisis times. As I reported back then, I was buying around that time even though (or because) it has fallen from my June 2011 Speculative Buy rating at $21.03. In that case the sharp dip turned out to be a buying opportunity as the stock recovered above $21 in early January 2012 and never looked back. Once it got above $30 it fluctuated between about $30 and $40. Some people call that sort of thing a “trading range” but I consider that term and concept to be less than useless. I am not trying to figure out where stocks will trade but rather what they are worth which can be two different things.

August 16, 2015

My login server is still down and so I have opened access to the subscriber page without logging in. I had thought that this was also giving you access to all the reports but that was not the case. I have now opened up access to the recent updates such as Boston Pizza. I will press my vendor harder to get this server fixed ASAP.

On Friday, the S&P 500 was up 0.4% and Toronto was up 0.3%.

AutoCanada was down 5.2%. to $28.33 I bought this stock too early it seems but nevertheless I think my investment will work out and certainly it makes increasing sense at these lower prices. Management here has owned car dealerships going back as far as 1994 (when they bought Crosstown Chrysler one of the very largest dealers in Edmonton). They lived through the scary days of circa 2008 when Chrysler and GM went broke and were closing dealers. Even with a concentration in Alberta, I don’t think the conditions today in any way approach the scary days of 2008. AutoCanada was still nicely profitable in Q2 despite the slow-down in Alberta and so I suspect this company will continue to be profitable and to grow over the years. They may not be profitable every quarter but over time they are likely to do well. I observe that in every community car dealers always appear to be prosperous businesses over time. They are not exactly located in run-down buildings. I like the opportunity to own a piece of these prosperous businesses.

Bombardier and especially its preferred shares continued its face plant. It certainly seems like the family management here has been a disaster this past 15 years or more. They basically blew their brains out with debt. Hopefully they can come up with some drastic action like a government debt guarantee and or a sale of part or all of the company. At this point I would not be surprised if they layed off thousands of people. They need to restore some level of confidence that they are not headed for bankruptcy.

Liquor Stores N.A. reports on Monday and we will see if they were somehow able to improve profits despite the ultra competitive market they are in.

Boston Pizza Royalties Updated Report

Boston Pizza Royalties Income Fund is updated and rated Strong Buy at $18.40 to yield 7.1%.

This entity has declined about 20% since it was around $23 in March of this year and also it was $23 in the Spring of 2013.

Several months ago it announced an usual transaction whereby it was increasing the royalty it receives from Boston pizza food sales to 5.5%. This was a substantial increase from the 4.0% that had applied since inception of the Trust in 2002. This was to be paid for mostly by issuing new units to the founders of Boston Pizza but was to be about 9% accretive to distributable cash per unit. That was a substantial rise considering that normally the distributions per unit might be expected to rise at more like just 2% per year due to food inflation.  After the transaction the company did increase its cash distribution by 6.2%. All else equal, this might have been expected to increase the unit price by about 6.2% for a price of about $24.50. For that reason, I was a buyer when they issued new shares at $22.10.

The reasons for the decline in price may include the following:

The share or unit count increased by about 30%. Therefore there are many new owners who were not previously owners. When the share price did not immediately go higher than the $22.10 price they paid many of these new owners may have been inclined to sell, pushing the price down

The economic outlook for Canada has weakened somewhat and perhaps there is a fear that the distributable cash flow could decline with lower restaurant sales.

The market spreads or required return on commercial debt has increased and this could mean that the market simply is requiring a higher yield on an entity like Boston pizza.

My thinking is that Boston Pizza yielding 7.1% and where the distribution has a history of rising slowly over the years is too high a yield. I expect the market to push that yield down by pushing the unit price up. This will be assisted when Boston Pizza (likely) continues to report strong increases in distributable cash per unit for the next three quarters due to the recent accretive transaction. Given the yield was bumped up only 6.2% on a transaction that was about 9% accretive I expect that the distribution could also be increased another couple of percent in the next nine months.

In summary, not in spite of, but because of the price drop here I continue to find the Boston Pizza Royalty units to be attractive.





August 13, 2015

A server problem is preventing access to the login page so I have temporarily redirected that link to this page.

On Thursday, the S&P 500 ended the day down 0.1% while Toronto was down 0.7%.

West Texas Intermediate oil is now at U.S. $42.95.

AutoCanada was down 4.0% to $29.87. I am a buyer at this price.

Canadian Tire released earnings and fell 3.2%. The company indicated that adjusted profits were down 4.9%. In part this was due to the partial sale of the finance business to Scotia Bank which is something I had mentioned was a negative, al else equal. They also face higher lease costs due to the REIT. Most of the higher market lease costs are eliminated away on consolidation but the 20% or so share owned by the public is not consolidated away. In addition their admin costs were up. The report briefly mentioned the impact of the lower Canadian dollar but the impact appears to still be somewhat hedged. I expect larger impacts from the low dollar as time goes on and hedges mature and as new imported product is ordered at presumably much higher prices (higher in Canadian dollars). Although I last rated Canadian Tire a Buy I did note some concerns and my concern about the Canadian dollar impact is much greater now tha the dollar has fallen substantially since my last update.

Melcor was down 1.6% to $16.11. It takes patience and confidence to hold and continue to buy this stock but I believe such confidence will be rewarded. However my report does note some risks.

The Bombardier preferred share melted down a further 6.9%. Clearly the market perceives significant risk of bankruptcy for this company. I am hoping that the company can come up with something drastic to restore confidence. They now may need something like a government debt guarantee. They are talking about selling off a portion of the train / subway car division late in the Fall or early next year. Perhaps they need to think more in terms of selling that whole division as soon as possible. It’s truly a sad state of affairs and a testament to terrible management.

Boston Pizza Royalties Income Fund was down 1.6% to $18.80. The yield is now 6.9%. This entity has a consistent history of slowly raising the distribution over time (the exception was when Trusts became taxable in 2010). The yield could be cut if same-store sales fall more than a little or if the chain experiences net closures of restaurants. I am not expecting the distribution to be cut. Management has been able to boost the distribution through share buy-backs and more recently when the Fund acquired a larger interest in the Franchise Royalty and did so at an accretive price. While there are risks, this entity seems relatively predictable. Barring a significant increase in interest rates or an (unexpected) cut to the distribution I suspect the units will eventually trade back above $22. That, combined with the yield would be a good return. I added to my position in this entity today.

In more positive news, Toll Brothers rose 2.0% and hit a new 52-week high. The thesis that home prices continue to rise in the United States and that Toll Brothers continue to benefit from this remains intact.

August 12, 2015

Melcor is updated and continues to be rated Strong Buy now at $16.37. And the report continues to indicate that the stock is not without risk. This company is trading at 59% of book value and I believe that buyers will be rewarded as the company has a history of profitability even in most recession conditions.

On Wednesday, the S&P 500 was up 0.1% while Toronto was down 0.5%.

AutoCanada was up 3.7%.

Boston Pizza Royalties Income Fund was down 2.0% despite the fact it reported a decent Q2. Same-store sales were up only modestly but that is not too bad considering the fact that Canada appears to be in a mild recession. I continue to like this for the yield which is now about 6.8% and I expect the distributions to continue rise slowly over the years.

Bombardier has reportedly received another credit down grade. It was already well into junk territory and I have mentioned that this could be a big problem for it. Who wants to order a plane or a train from a company with such a poor credit rating much less give a deposit to such a company?

August 11, 2015

A server problem is preventing access to the login page so I have temporarily redirected that link to this page.

Monday’s stock market rally was short-lived and on Tuesday the S&P 500 was down 1.0% and Toronto was down 0.4%.

AutoCanada was down 2.5%. Toll Brothers was up 0.9% despite the negative day on the markets. Toll Brothers reports earnings on August 25 and I expect they willreport further progress in revenues and profits as the housing recovery continues in the U.S.

Melcor came out with earnings that were markedly lower than Q2 last year. But they still made a profit. There are lots of moving parts and so the earnings are somewhat hard to interpret. This company does not do conference calls and generally does not say much at all about the outlook. I will update the rport after I see where the stock price heads on this news.

Melcor’s results included:

Revenues down 30% – They indicated this was partly due to timing of getting subdivisions registered to sell lots but also due to softer markets in land sales. (There was no break-out tot he two factors.

There was strong growth of 22% in revenues from income-producing properties.

They sold 202 single family lots to house builders. This was down 17% from the prior year. That does not seem like such a big decline given the oil price in Alberta. But the average price was also down 16% and there was little discussion of whether this was due to a different mix. They did say that gross margin (for the entire company) declined from 49% to 46% due to mix of lot sales and also due to targeted “programs” (read price reductions) to increase sales in select communities.

There were apparently no market value declines in its portfolio of income properties.

Overall the report indicated that the company is being cautious and reducing its risks and is well prepared to get through a period of lower economic activity in Alberta.

The company reports its book value per share as $27.67. This reflects income property marked to market and reflects the book value of the investment in land held for future development and for sale as lots (This includes the cost of developing the land).

With the units trading at a recent $16.57, they are trading at 60% of book value.  In my experience, it is rare for profitable and strong companies to trade below book value. However, Melcor has a history of usually trading somewhat below book value although usually not to this extent.


August 10, 2015

On Monday, the S&P 500 rose 1.3% and Toronto rose 1.1%.

Toll Brothers was up 2.3%. Agrium was up 2.2%. Liquor Stores N.A. was up 2.9% (it reports earnings next Monday)

AutoCanada was one of the few decliners on out list and was down 2.6%.

Sunday’s leak about Buffett being “in talks” to buy Precision Castparts was true but the deal was already done by the time it leaked. What likely happened is that as the deal was about to be announced the circle of people who knew about it started to widen beyond the trusted few and so a leak happened. But in any case the leak occurred when markets were closed and the deal was going to be announced before the open in any case. So not a major leak as probably no one had the opportunity to trade on the news. Still Buffett will not like that the news was leaked.

Buffett acknowledged that the deal was not cheap from a valuation perspective and indicated that the current CEO of Precision was a key reason to do the deal. That is always the case with Buffett. He only buys companies where he judges that exceptionally good management is in place and will stay on.

I’d like to see Buffett take an interest in Bombardier but its poor management history probably totally precludes that. And possibly owning Precision Castparts which sells to all the big plane makers would also preclude owning a plane manufacturer.

Melcor reports tomorrow, after the close. Due to the cyclical nature of the company and due to the impact of market value gains and losses on its properties it may not be immediately apparent if the earnings are good or not. I am optimistic that they will have had a pretty good Q2, but the more important thing may be their views on the quarters ahead. In any case, they have the ability to withstand recession conditions and I am confident that the shares will offer a good return over time.

August 9, 2015

On Friday, the S&P 500 was down 0.3% and Toronto was down 0.7%.

Most stocks were down but there were some gainers:

American Express was up 6.3% on reports that an activist investor company had taken a large position. I’d prefer it to be up on earnings. I am not sure that AmEx has anything wrong with it that could benefit from an activist. I considered reducing my position after the gain on this news but decided to hang tight.

Stantec was up 4.1% bouncing back from the 11% decline the previous day.

Berkshire Hathaway released earnings after the close on Friday. Earnings declined mostly due to volatile gains as there was a large gain last year in Q2. The auto insurance profits were down somewhat. Most of Berkshire’s businesses showed gains and to me the earnings report looked reasonably good. Shares were down in “after-hours” trading on Friday but that would be trades done ahead of any detailed look at the results.

There are reports that Berkshire is in talks to buy a company called Precision Castparts in a $30 billion deal, it’s largest ever (Though Burlington Northern was nearly that large).

It’s unusual for Buffett’s deals to be leaked. He positively HATES leaks. There may not actually be a deal. Anyone close enough to the deal to really know would be an absolute fool to incur Buffett’s wrath by leaking it.


August 6, 2015

Thursday was a down day for markets as the S&P 500 fell 0.8% and Toronto fell 0.7%.

Most of the stocks on our list declined. Notable decliners included Valeant Pharmaceuticals down 6.0% and Stantec down 11.0% on its earnings report (see my previous post)

Melcor was down 3.3% to $16.71.

AutoCanada was up 2.3%. It released earnings after the close that showed a modest decline in earnings per share versus the prior year. It was clear that the recession conditions in Alberta had a negative impact. However, overall, the company still made 56 cents per only modestly below last year’s 61 cents. Generally, to me this report looks like a good improvement over how things were looking in Q1. We shall see how the market reacts to this news.

August 6, 2015 – Comment on Stantec’s Earnings

Stantec reported earnings before the open and the stock is down about 10.5%.

I just added to my position. I would consider it to be A strong Buy but I continue to consider a good Buy for the long term.

I read most of the earnings report and the earnings per share were down 2.1%. This was due to a combination of some lowering of gross margin. Also due to a bit less professional time charged to projects and a bit more charged to admin and general. The resource sector suffered a decline. None of this should have been any surprise. Perhaps the decline is based on a recognition that there will be no speedy recovery.

Stantec remains a very strong and diversified company and I am confident it will continue its pattern of growth over the years. But it does have its cyclic components and so a decrease in earnings at times should not be a shock.





August 5, 2015

In Wednesday’s markets the S&P 500 was up 0.3% anf Toronto was up 0.1%.

Walmart was up 2.4%. RioCan REIT was down 3.7% even as it announced authorization for some share buy-backs (though that does not necessarily mean it will buy any, at least anytime soon).

Bombardier was down another 3.6%.

TransAlta was down another 4.7% to $7.51. It seems quite possible that some company will come along and make an offer or that activist investors will move in. It has no controlling owner. However some companies may be precluded from buying it because the Alberta government and the electricity regulator would not wasn’t to see more concentration of ownership of power plants in Alberta.

AutoCanada was down 3.1% to $31.34. It reports earnings after the close tomorrow (Thursday). A report out today indicated that auto sales in Canada reached a new monthly record in July. On that basis it may be that sales in Alberta have not slowed that much in Q2. I await the earnings the report to find out.

August 4, 2015

On Tuesday, the S&P 500 fell 0.2% while Toronto rose 0.15%

TransAlta (which I have mentioned before but do not have on the list) was spanked down another 5% to $7.88. Even though it seems to have suffered from exceedingly poor management these last 20 years or so, this stock is likely cheap at this point.

Boston Pizza Royalties was down 2.4% to $19.90. This continues to look like a good investment to me.

The RioCan rate reset preferred share that is on our list was down 4.7% to $18.35. That’s a yield of 7.15% but only for the next eight months or so. After that the distribution is set to be reduced sharply from the current $1.3125 to about 84 cents if the 5 year Canada bond remains at about 0.76%. But that would still be a yield of about 4.6% on the $18.35 price. Perhaps investors have been at least “twice bitten” by these rate resets and therefore are “three times shy” and so there are few investors that want to hold them. I would think that the $18.35 the price is attractive. But then again I thought the price was reasonable in February at $20.70. At some point if the five year Canada Bond is going to stay under 1% then it may make sense new or reset five year pref shares will be bid up in price to bring their yields down well under 4%. For now, it seems investors are not willing to bid prices up to that extent.

Dollarama was up 3.3% today, apparently on no news, at least no official news.

August 4, 2015, RioCan updated and rated Buy

RioCan Real Estate Investment Trust is updated and rated Buy at $26.79.

The report here contains a great deal of information about the company and the factors that went into the rating of Buy. But the main factors are a yield of 5.3%, a price to book ratio of 1.07 and the fact that strong management with a strong track record is in place. Risks include recession, higher interest rates and possibly at some point loss of the income tax exemption for REITs although that does not appear to be on the table at this point.

I first added RioCan to this site on July 11, 2011 rated Weak Buy (essentially a hold) at $26.00. At that time I did not like the pice to book ratio of 1.53. That rating seems appropriate in hindsight as the unit price has basically not risen and also there were much better buys to be had in July 2011.

At the end of 2012 I updated it and rated it (lower) Buy at $27.52 with a price to book ratio of 1.31 and indicated I was not buying but that it might be a reasonable investment for yield.

At the end of 2013, start of 2014 it was rated Buy at $24.77 and the price to book was down to 1.11.

At this time (August 2015) I may be a buyer as I think it is attractive, especially for yield. However, the unit price is certainly not immune from declining if the Canadian recession deepens to interest rates rise much.

August 3, 2015

On Monday, the S&P 500 fell 0.3% while Toronto was closed.

Oil is trading at $45.81 and the Canadian dollar is at 76.02 U.S. cents.

With Berkshire Hathaway down a bit today I doubled the small position that I had in that company.

I am working on the update to RioCan REIT and it looks like I will rate it a Buy. When I first looked at it in 2011 it was expensive at 1.53 times book value (see comments of July 7, 2011). Now it is trading at 1.07 times book value. So we can basically buy into it at a small premium over its estimate of the value of its rental properties. All else equal, some premium to reflect managements ability to add value o the properties is probably reasonable. Book value could decline (if interest rates rise or the economy is softer) but at least by paying just 1.07 times book value we don’t start out over-paying.

August 2, 2015

On Friday, the S&P 500 fell 0.2% while Toronto rose 0.6%

The Canadian Western Bank preferred shares fell 3.4% to $20.76. At that price I would definitely be a buyer. These shares were close to $25 as recently as early May and have fallen with interest rates and oil prices. I don’t think the decline is justified.

Bombardier fell another 7.4% as the market was apparently not reassured by its earnings report and conference call on Thursday.

Canadian markets are closed on Monday.


July 30, 2015

On Thursday, the S&P 500 was about unchanged and Toronto was up 0.6%.

AutoCanada was up 4.3%.

Bombardier fell 9.7% after reporting a fairly weak quarter. While earnings were weak they were at least positive. But their orders for new planes were extremely weak in the quarter. I mentioned earlier that it may be at the point where no one wants to place an order, much less put down a deposit at such a weak company.

In the earnings release there was really almost no information on what the company intends to do to make things better. They did confirm plans to sell off a portion of the Transportation business before year-end and to do some cost-cutting and also they are delaying the in service date for the next generation of their large business jet. They did mention that they still have some room left on the company credit line. There was not much indication of any big initiatives from the new CEO although he has replaced some of the executives.

For whatever reason the preferred shares were at first up on the day and finished the day unchanged.

I have not seen or heard the conference call. Perhaps a few more details came out in that.

Another weak and exceedingly poorly managed company is TransAlta. It’s been beaten up mercilessly of late including most recently being found guilty by the Alberta regulator of manipulating the Alberta power market on a few occasions back in 2010 and 2011.

I am loath to invest in another possible turn-around situation, especially under present management. But this company is now trading just under book value and at a $2.4 billion equity value could potentially become an easy take-over target. For unfathomable reasons Berkshire Hathaway Energy is already in partnership with them on some proposed new plants. So possibly Berkshire could make an offer. Any buyer of the whole company would likely have to have little or no existing generation in Alberta since the regulator would not want to see any added concentration of generation ownership in Alberta. Existing management and the Board is likely tired of all the bad press and would likely be willing to sell if a decent offer came in and if they themselves would get a nice severance. There is no controlling shareholder and so really management would not have much say in the matter anyhow.


July 30, 2015 Valeant added to our list

Valeant Pharmaceuticals International, Inc. is added to our list but is rated Sell at U.S. $253.91 or Canadian $331.

I spent considerable time to attempt to understand this company. My description cell near the top of the report may be of interest as hopefully a concise description of this company.

One thing I learned it that this is really not a Canadian company at all except in legal form. In substance it is a U.S. company. I have analyzed it in U.S. dollars because it reports in U.S. dollars and incurs the vast majority of its revenues and expenses in U.S. dollars. The Canadian stock price has gotten an extra boost due to our lower dollar.

I rate this a Sell based on valuation and also the fact that I have trouble trusting management due to their aggressive approach to calculating adjusted earnings or “cash EPS” and also their aggressive approach to avoiding income tax. I may be wrong but I figure that a management that is very  aggressive about avoiding paying income taxes today might also put its own interests ahead of shareholders at some point. Their management compensation is also very high. I am not sure that their stated goal of increasing the stock price (albeit over a three period) is the best goal as that could lead to pushing the stock price up past a reasonable level which likely be temporary. I am also concerned about the high debt level and the below investment grade credit rating. Also they self-insure their product liability risks which is not only risky but could be over-stating earnings if they are not expensing a reserve for liabilities each year.

In rating this a Sell I am going against market sentiment and momentum but those are factors which simply do not enter into my fundamentals-based approach.

Certainly, the stock price could continue rising. But those who own it and have accrued a large gain should likely consider at least trimming their position.

July 29, 2015

On Wednesday, the S&P 500 gained 0.7% and Toronto gained 1.6%.

Canadian Western bank was up 5.3%. Constellation Software was up 3.1% to $598 dollars. Constellation released a good earnings report after the close although the revenue growth may have been lower than expected.

Bombardier will release earnings and have a conference call before the market opens tomorrow morning. Hopefully the company can offer some reasons for optimism.

Yesterday I mentioned Home Capital. Its earnings were down but only 2% so I am not sure that will satisfy the short-sellers although certainly the stock had recently been pricing in continued growth. The stock was halted after the close and if there is any sanity (and there may not be) it will remain halted until after the earnings conference call tomorrow morning. The stock may gyrate but I am not sure that it should sink too much, but we shall see.

I am near completion of my analysis of Valeant. I am leaning towards a rating of Sell. The stock just looks too high to me and I have concerns about management’s view of “cash EPS”. Investors are effectively paying up front for an expectation of pretty strong growth. Also this is a highly leveraged company with a debt rating of BB minus. I am not sure that investors are taking into account the risk here.

But then again management has certainly grown the company at a tremendous rate.

I have trouble with the concept that the company buys out  another company at a premium to the recent share price and a big premium to book value of that acquired company and then investors pay a multiple of quite a few times the book value that Valeant has paid. It’s premiums on top of premiums. Clearly book value may not be relevant to a drug company (The value of the proverbial “cure for cancer” would have NOTHING to do with the book value of that cure.) But how do we explain Valeant paying $x dollars for the equity in a company and then that turns into shareholders shortly paying some large multiple of “X” like 10 times! No one has suggested that Valeant has in the meantime found anything like the cure for cancer and so it all seems just too good to be true to me. I mean it would take a LOT of synergies to explain how Valeant has added so much value by means of the acquisition.

July 28, 2015

Tuesday’s markets provided a modest reversal of recent losses. The S&P 500 was up 1.2% and Toronto was up 0.5%.

Most of the stocks on our list were up but there were no dramatic increases.

I continue to work on adding Valeant Pharmaceuticals to the list. If nothing else it will be a good illustration of how an adjusted earnings figure can deviate very far from a GAAP earnings figure and do so consistently for several years.

Home Capital (which was on our list many years ago) will report earnings tomorrow, probably after the close. For what it is worth, I will go on record as predicting that the short sellers will be disappointed. It may very well predict slower growth but I doubt that it will be reporting losses or any major earnings decline. I have not looked at all closely a the company and I base my prediction on my understanding that home prices continue to hold up well and that Canadian mortgage delinquency and default rates remain low.

July 27, 2015

Monday was another day that was good for picking up stocks at lower prices but not so good for those already fully invested. The S&P 500 was down 0.6% and Toronto was down 1.3%.

Showing the courage of my convictions I added to my Canadian Western Bank, AutoCanada and Boston Pizza Royalties positions today.

July 25, 2015

On Friday, the S&P 500 was down 1.1% and Toronto was down 0.6%.

Declinming stocks included AutoCanada, down 3.6%; Canadian Western Bank down 3.0%.

Stocks that rose included Amazon, up 9.8% to $529 dollars on news that it made 18 cents per share in Q2. The stock trades at 284 times trailing earnings according to Yahoo.

Visa was up 4.2% after reporting strong earnings in Q2.

I am continuing to analyse Valeant Pharmaceuticals. It did not yet release a Q2 balance sheet. Based on its own view of cash EPS is it trading at about 23 times 2015 earnings which is perhaps not so high given its growth. However what they call cash EPS is really an adjusted view of cash flow and appears to over-state a more reasonable view of adjusted earnings.

With oil at $48 there is probably no catalyst for Alberta-linked stocks to rise, at least not until they report earnings. Auto Canada does not report until August 7, Melcor is August 11.

Canadian ire will report in the next week or two and I am interested to see if there is any sign of damage due to the lower Canadian dollar. I believe the lower Canadian dollar has to hurt them at some point as their costs of goods sold should rise and they may not be able to pass along all of the cost increase. They contract to buy merchandise at least six months ahead and that along with some hedging may explain why their has been no noticeable impact as yet.

Any American company with substantial profits earned outside the U.S. should be reporting a negative impact due to the higher U.S. dollar on their international business although in some cases such as Walmart the cost of goods sold for their American sales should be noticeably lower due to lower import costs. The U.S. should also be seeing low goods inflation due to lower import costs.

July 23, 2015

On Thursday, the S&P 500 fell 0.6% and Toronto fell 0.3%.

Markets appear to be testing the patience of value investors.

Amazon came out with a surprise profit of 19 cents per share and the stock price soared 18% in “after hours” trading to $482 dollars. Certainly the 20% jump in revenues is very impressive. But it’s hard to imagine why a profit that basically rounds off to zero in term of the share price has generated so much excitement. Clearly Amazon is a market darling at least for now.

In Canada, Valeant Pharmaceuticals is another market darling. It came out with a GAAP loss of 15 cents per share. But the company added back a number of items and calculated a “cash earnings per share” of $2.56 and the stock gained 9.2% to $341 and the company is now worth more than Royal Bank. I have been reading the annual report and the quarterly press releases and to me the add backs to “cash earnings” look aggressive. At very least I would say that I don’t yet understand a number of the adjustments and so I can’t have confidence in them. I believe the company may also be aggressively avoiding income taxes through inter-company debt to European subsidiares. Overall this is one market darling that I would not be comfortable holding despite its apparent massive success.

Meanwhile American Express came out with earnings that looked pretty good. The earnings were about equal to last year but that was in spite of the expected hit from the higher U.S. dollar and because they divested their travel services business. The company showed decent growth absent those two items but the stock declined 2.5%.

AutoCanada fell another 6.7%. This stocks seems to be down quite a bit in a week despite not issuing any news. Presumably this is linked to lower oil prices and fears about the Alberta economy. Or perhaps there is non-public news regarding how its dealerships are doing. Statistics Canada announced today that new auto sales in May were up 2.0% across the country but there was no separate figure for Alberta. Canadian Western Bank was down another 1.25%. I added once again to my positions in these two stocks.

The Bombardier preferred shares fell another 6.2%. I decided I had enough exposure to that one and refrained from any buying today. This company really needs drastic help such as government guarantees on its debt or on its customer progress deposits at this point. They are scheduled to release earnings (more likely GAAP losses) on July 30.



July 22, 2015

On Wednesday, the S&P 500 fell 0.2% and Toronto fell 0.5%.

Several of our U.S. stock picks continue to rise. Toll Brothers was up 2.5%, Wells Fargo was up 1.0% and Bank of America was up 2.0%.

Meanwhile Boston pizza was down 3.0% to $19.90 and AutoCanada was down 4.3%. (I added to my positions in both of these today.). Stantec was down 2.3%.

A definite wave of fear has swept over Bombardier. Its B shares were down 5.6% and its preferred shares were down 10.1%. Apparently the latest decline happened when Bombarier held a conference call with CiteGroup bond analysts (which sounds like selective disclosure but that is another issue) and reassured the analysts that Bombardier had at least three years worth of liquidity (which is I believe basically cash plus room on the credit card I mean credit line). Bombardier was unable to answer any questions about the C-Series plane and most other matter because they must wait until July 30 when they release earnings and inform all investors at once. This conference call seems ill-advised. Possibly the fear here is over-blown but is is clear that Bombardier has been a terrible investment. It appears to be in a tough industry and to have horrible management. I contacted them today to let the company know what I think of them. The difficulty now is that this whiff of real fear could be self-fulfilling. If there is now a real fear that the company will go under then why would any airline place an order? (much less put down the deposits and progress payments that Bombardier relies on) payments Why would any supplier give them credit? At last report, Bombardier did have substantial cash. But that cash was largely offset by payables.

In other news, Canadian Pacific Rail reported that car loadings were down in every category except forest products. I have not analyzed CP as a stock and have no opinion on that but the lower car loadings are another sign of a softer economy. Whereas CN had reported an increate in automotive car loads, CP reported an 18% decline and also a 6% decline in Canadian intermodal car loadings. I believe that CP is more exposed to the Western Canadian economy than CN is.




July 21, 2015

Tuesday was another negative day for Canadian markets. The S&P 500 was down 0.4% and Toronto was down 0.3%

Bombardier was down another 4.8% to just $1.79.

This company has been a disaster for both investors and for the extended Bombardier family for the last 15  years.

At $1.79, its common equity market value is $2,404 million. It’s assets are $29,085 million. On its books, the value of its common equity is shown at a palty $200 million (this is after deducting preferred shares of $347 million)

It has debt of $9,046 million.

Its corporate governance is abysmal. Its Board of directors is stacked with five family members, three of who have been on the Board since 1975 (and probably prior to that at predecessor companies). Some other Board members I would describe as political hacks or celebrity appointees (former Premier Daniel Johnson, Jean Monty of Nortel infamy, Vikram Pandit of CEO of CitiGroup at the time of the financial crisis, and the CFO of Google). Some years ago it appointed a then relatively young family member as CEO. But investors are not blameless, they continue to elect this Board with only a small percentage of votes withheld. I would imagine that the large extended family is not too happy with this Board as they see their family fortune melting away.

I don’t know what is going to happen with this company. If it were to become insolvent it is likely that the Quebec government would work to save the jobs. But that does not mean that shareholders would be rescued.

Canada’s low dollar should be a major positive for this company but it may be that the company was “clever” enough to have hedged away the gains.

I still cling to some hope that the company can pull out of this dive and begin to report significant earnings. However earnings on the C-Series appear to remain at least a year away and meantime there are reports that it may take yet another restructuring charge in Q2 in relation to its plans for the next generation of its largest global business jets. The new CEO has been in place for only a few months and it is possible that he will be able to give some confidence to the market when it reports its Q2 results. This would include plans to sell off a portion the rail car business.


July 20, 2015

On Monday, the S&P 500 rose 0.1% but Toronto fell 1.5%.

Canadian Western Bank fell 4.2% to $24.41. In part, this was likely due to a decline in oil prices which briefly dipped below U.S. $50. Also it may have been due to the overall decline in the Toronto market. It may be that “the market” suspects that Canadian Western Bank will face large loan losses. At last report, the Bank was not expecting that to happen. Canadian Western Bank actually has a very long history of earning money literally every day.  Each day they accuse more interest income than they do interest expense. I will be holding firm to my usual practice of buying on dips. (I added to my position today) Unless the Alberta economy is in for a major economic down-turn, Canadian Western Bank will be a more valuable company in the years ahead. I note that house prices have not budged much to the downside in Alberta.

AutoCanada fell 4.8% today. This again could be due to a general fear of all things Alberta.

Canadian National Railway reported higher-than-expected earnings growth today. However that was largely due to the benefit of the lower dollar as U.S. earnings are translated back to Canadian dollars.

The two consumer-driven load categories auto and intermodal both had increased car loadings.

All five commodity load categories had lower car loadings (grain, coal, petroleum, metals and forest products)

While the commodity sector is weak, the consumer sector has not gotten the memo.

The question remains, will consumer consumption decline or at least fail to grow in the next six months?

I have been taking a look at Valeant Pharmaceuticals. It may be sour grapes on my part for not owning it, but I don’t like some of what I see. They seem to be very aggressive in adding back items to arrive at what they call cash earnings per share. They have a stated goal of getting the stock price higher. That might seem good but might not be so good it if the stock price is pushed up higher than is justified. Overall the stock is too rich for me. Not because it over $300 which matters not at all, but because I am not sure the earnings justify the stock price. However, I have more reading and analysis to do and so I have no actual rating on the stock at this time.

July 19, 2015

On Friday, the S&P 500 rose 0.1% and Toronto fell 0.6%.

Stocks on the rise included the Canadian Western Bank rate reset preferred share up 4.8% to $23.36. Similarly, the RioCan rate rest preferred share on our list was up 4.9%. Both of these had fallen to what were likely unjustifiably low prices.

Q2 earnings reports from U.S. companies continue to come in and the Canadian reports are starting to come in as well. Canadian National Railway reports on Monday, after the close.

On Friday I added a small amount to my AutoCanada position. And I bought a small additional amount of the Bombardier pref. shares. These pref shares are highly speculative. Bombardier has so much debt that if it were to go broke the pref. shares could quite possibly be worthless. My hope is that the company can limp along until it sells off a portion of its rail unit which it hopes to do later this year and until orders for its C-series airplane ramp up and it starts making delivery of that plane in 2016. Possibly I am just being stubborn in adding to my position here.


July 18, 2015 Enbridge Rate Reset Preferred Shares (see correction)

An Enbridge Inc. rate reset preferred share has been added to our list rated (higher) Buy at $19.27. At that price it yields 5.7% but only until December 1, 2019. At that point the dividend will be reset to yield 266 basis points plus the 5 year government of Canada bond yield. If the government yield were to remain at today’s 1.15% (correction, should read, 0.69%) then these shares would reset to yield 3.81% (correction, should read 3.35%)on $25.00 or 4.9% (correction, should read 4.3%) on today’s price of $19.27.

Rate Reset preferred shares have recently suffered losses. The idea of these shares was that investors would be protected from sharp declines if interest rates rose materially because the rate would reset after five years. However, what happened was that interest rates continued to fall. But the market yield on new and existing rate reset preferred shares did not fall as much. The spreads over the five year bond increased. The result is that rate reset preferred shares that have reset recently have done so at dividends that are less than the market yield on new $25.00 rate reset preferred shares and therefore are worth materially less than $25.

The fear now, is that even those rate reset preferred shares that have three or more years to go before they reset will suffer the same fate. This could happen if interest rates on the 5 year Canada bond continue to fall or refuse to increase and if in particular, the market spread on these rate reset preferred shares is less than the spread at which they will reset.

I believe those rate reset preferred shares like the Enbridge one that we have added that have three or more years before the reset date have likely already priced in the scenario of a reset below the market yield at that time and that therefore their is now a reasonable chance that these shares can offer a capital gain if turns out that the reset yield is closer to a market yield than is currently expected.

Note that the RioCan rate reset preferred on our list now has less than 9 months before its reset date and so it is now running out of time for interest rates to increase or the market spread to decrease. This means there is less chance for it recover towards $25.00.




July 16, 2015

On Thursday, the S&P 500 0.8% to 2124. This puts it back very near its high of 2134. Toronto was up 0.5%.

Gainers today included Amazon up 3.1%, Liquor Stores N.A. up 3.4% and Constellation Software up 2.1%.

AutoCanada declined 2.3%.

It seems that the nonsense about Greece is over with for now and the market is turning its attention the Q2 earnings reports.

Canadian Exports Have not benefited from the lower dollar 

The lower Canadian dollar should be helping exports. If the exported good is left at the same price in Canadian dollars then it becomes far cheaper for American to buy it in terms of U.S. dollars and sales should rise. If the exported good is priced in U.S. dollars then the volume should be unaffected but the profit for the Canadian firm improves.

Statistics Canada reported that for May 2015: Export volumes decreased 2.5% and prices increased 1.9% (as compared to April 2015). The traded deficit widened.

On the face of it this means the lower Canadian dollar is not helping.

Possible explanations include:

For many exports the volume and Canadian dollar price may have been contractually set (or hedged) many months ago when the Canadian dollar was higher.

Canadian exporters may not have raised their prices to reflect their improved competitive position versus America competitors.

In addition, the trade deficit is affected by many other factors including most notably lower U.S. dollar prices for oil and other commodities. The value of the Canadian dollar versus the U.S. is only one of many factors.

With the continued drop in the Canadian dollar, I suspect we will see the benefit show up in higher export dollars and volumes in the coming months.



July 15, 2015

On Wednesday the S&P 500 0.1% while Toronto rose 0.4% The Canadian dollar fell to a value of U.S. 77.3 cents after the Bank of Canada cut its benchmark overnight interest rate by 25 basis points to 0.50 in order to attempt to stimulate the Canadian economy which is thought to have edged into recession territory. Stocks on our list that rose today included CN rail up 2.6%, Couche-Tard up 4.4%, and Bank of America up 3.2%. Stocks that fell today included Canadian Western Bank down 3.3% to $25.51, and Bombardier down another 4.0% to $1.90.

I added to my CWB position today. It’s book value per share is $20.18 or $21.56 counting a special gain for that it has already announced for its next quarter. It has a long history of increasing its book value each quarter. The stock appears to be pricing in a high probability of significant loan loses.

I also bought some AutoCanada today based on my analysis of yesterday.


July 14, 2015

On Tuesday, the S&P 500 rose 0.4% and Toronto was up 0.5%

Oil was up modestly to $53.25 as I write this. Oil rose despite fears that Iran will soon have the green light to pump more oil now that U.S. sanctions are to be lifted.

Tomorrow’s big excitement is whether or not the Canadian central Bank will cut interest rates. It seems most people hope not but think it will do so.

July 14, 2015 – AutoCanada added to our list

AutoCanada Inc. (which owns 48 auto dealerships) is added to the list and rated Buy at $40.36.

I will likely buy some tomorrow.

I found it interesting to see that the gross margin on new cars sold to retail customers averages 10.2%. However the margin on fleet sales is only about 0.9%. Apparently the dealers are ager to get the fleet business in order to get their numbers up and therefore sell them at next to no profit.

I was surprised to see that the margin on used cars sold to retail customers was lower than the new car figure at about 7.7%. This may partly reflect the fact that the a dealer may in a sense over-pay a customer for a trade-in in order to sell the new car.

Not surprisingly the gross profit is much higher an parts /service and especially on finance/insurance products.

It’s a popular notion that a car dealer might give you a better price if you pay “cash”. In reality you generally already are getting a better price since you won’t be paying interest. Also the dealer may strongly prefer that you finance through the dealer since the dealer then makes a commission on the financing but still gets paid cash immediately by the lender. Even when there is a zero interest offer you won’t likely get a deal by paying cash. The reason for that is that the zero interest would be a marketing promotion from the manufacturer and if you choose not to avail of it that probably does not affect he price the dealer paid for the vehicle.

Another interesting fact about the car business is that apparently the manufacturers set the prices in the first quarter of the year and do not therefore usually adjust them even when the Canadian dollar is changing substantially in value.

I like the idea of owning some shares in dealerships. When I look around any municipality some of the most prosperous looking businesses are car dealerships. Warren Buffett recently bought an auto dealer business and that is another point in favor.

AutoCanada has been beaten way down in price due to a weak Q1 and due to worries about the Alberta economy. At this this point the valuation looks reasonable.



July 14, 2015 9:20 am eastern

Markets rose on Monday after a conditional debt deal was worked out for Greece apparently in the middle of the night. The S&P 500 rose 1.1% an Toronto was up 0.8%.

On Tuesday the market was set to open down about 0.2% on the S&P 500.

I am currently working to add AutoCanada to the list. It is down over 50% from its peak.

Wells Fargo is out with Q2 earnings which the market is viewing as mildly disappointing at the moment (the stock was down about 1% pre-market trading)

July 12, 2015

On Friday, the S&P 500 rose 1.2% and Toronto rose 0.9%. This was due to optimism over a Greek debt deal. Almost all the stocks on our list rose. The Bombardier preferred shares were down 4.6% to $15.10. This would seem to suggest that “the market” views Bombardier as being in quite dire shape.

As of Sunday afternoon there is no Greek debt deal but it sounds like there may have been some progress except that the lenders are demanding that Greece actually pass the pension cuts and tax increases in their legislature before any money flows and even before the terms of the deal are finalized. I was under the impression that Greece had made some major concessions here and at this point a failure of the creditors to agree could basically cause riots in Greece. I have seen lots of material about Greece asking for $60 billion or so. What I have not seen is how much of that would be non-repayable. I understood Greece was going to ask for a certain amount of debt forgiveness. In any case all of this creates “volatility” in North America. My approach is to use the volatility as a time to add to positions as prices fall and not a time to sell in a panic.

Apparently most of Canada’s big bank economists are predicting and or calling for the Bank of Canada to lower interest rates on Wednesday. I find that ironic given that they were all so angry when the Bank made a surprise cut earlier this year. Why was the earlier surprise cut so bad but yet they want another cut now? I think these bank economists are most interested in simply being seen to have made accurate predictions. I hope The Central Bank does not cut interest rates and I don’t think it will do so this week.


July 10, 2015 comment on Bombardier

Bombardier shares have fallen under $2.00. This is appears to be a terribly managed company although possibly the new CEO will ultimately be an improvement. Our report for this company has almost nothing good to say but I did conclude it might be a okay as a highly speculative bet.

With the shares under $2.00, the company now has the right to convert the pref shares to class B subordinate voting common shares. At the moment that would not be such a bad thing for pref holders as they would get closer to $25 worth of common shares (assuming he price stays close to $2.00) for each pref share which are trading at $15.25.

Bombardier has been a horrible investment for many years. If it pulls through it could offer a good return. But it has to be considered high speculative. I did add to my class B share position today. I am not at all sure that was a wise move.




July 10, 2015 10:40 eastern time

Yesterday I added to my Boston Pizza Royalties Income Fund taking advantage of the lower price.

Markets are up today, presumably on progress on a Greek debt settlement.

Bombardier has been declining. It’s obviously a highly speculative stock. It might be worth taking a bet on given that it could rise if it is able to partly spin off its rail transportation unit as planned for late this year. I certainly would not bet the farm. While the Quebec government will work to protect the jobs there is no guarantee of any protection for share owners. Possibly I will add a small amount to my position.

July 8, 2015

On Wednesday, the S&P 500 was down 1.7% and Toronto was down 1.5%.

Just about everything on my stock list was down.

I grabbed a few more Canadian Western Bank shares.

I also trimmed my large Toll Brothers position by about 20% and will likely transfer those U.S funds back to Canadian dollars.

If stocks are down tomorrow, I will do a bit more buying.

It is certainly possible that in the next few days there will optimism about the next Greek debt proposal and markets could rebound.

Today’s closure of the New York Stock Exchange for about three hours was nowhere near as bad as it sounds. These days there are competing exchanges and all those stocks kept right on trading elsewhere. The S&P 500 continued to be updated and calculated for example. So, this closure sounded really bad and was bad for the NYSE but it really did not affect trading all that much other than it likely scared some people.

As of about 11 pm eastern time the futures markets are suggesting that stocks will rise 0.5%.



July 7, 2015

Stocks were volatile on Tuesday as the indexes had been down mid day but finished the day with the S&P 500 up 0.6% and Toronto up 0.2%

Costco surged 3.4% to $140.50 on a favorable analyst report. This stock always seems expensive but the company has powerful economics and perhaps it would have been worth grabbing some on the recent dip to about $135.

Canadian Western Bank was down 1.6% to $27.31. I placed an order to buy some today when it was at 26.82. But my order was “declined” because a cheque from another financial institution had not yet cleared. Apparently it takes 7 business days for a cheque to clear. I deposited that cheque on June 25th. But with the holiday it will not clear until July 8th. I was not used to this because on day to day banking I believe my deposits are set to be available immediately or I have overdraft protection so this has not come up before. It really shows how cheques have become archaic. soon all money transfers will be electronic. For that matter so will all money be electronic, but that is another story.

With oil having taken a sudden drop to about $52, it is understandable that the Western Canada based companies are being bid down in price. But certainly Melcor and Canadian Western Bank look like good value to me. They are only indirectly affected by oil prices and the questions include, where will oil go and what impact will it have. Obviously no one really knows.

Toll Brothers was up 1.9% to $39.07. It’s up 14% this year to date in U.S. dollars and a lot more than that if measured in Canadian dollars. It’s my largest position and I may start to trim it back for that reason and also partly just to raise some U.S. cash some of which I might then transfer back to the Canadian side of my portfolio. I do think it remains a good way to participate in the recovery of U.S. house prices but it has also been quite volatile and not everyone would agree that the U.S. house price recovery will continue.

Canada’s trade deficit was in the news today. I would think that our lower dollar would certainly increase our imports substantially as most of what we import is priced in U.S. dollars and certainly not Canadian dollars. Meanwhile the dollar value of some but not all of our exports also rises with a lower dollar. To the extent that we sell products where the price is effectively set in U.S. dollars then our exports rise in Canadian dollar terms as our dollar sinks. But some exports are likely priced in Canadian dollars. Overall I suspect a lower dollar tends to increase the trade deficit even as it does definitely benefit exporters.

July 6, 2015

On Monday, the S&P 500 fell a modest 0.4% despite the Greek vote to reject the creditors’ offer. Toronto was down 0.6%.

And as of this evening futures are predicting that the market will open modestly higher on Tuesday.

The bigger move was in oil which is down to about U.S. $53 partly due to a slight increase in the drilling rig count in the U.S.

Taking a look at rail car load reports, they are down somewhat from the year ago figures. This is not a positive indicator for growth.

The next company to be added to our list will likely be Auto Canada. I am curious to learn more about the margins on car sales and the economics of the dealership business.


July 5, 2015 – Greece votes no

On Friday, the S&P 500 was about unchanged and Toronto was up 0.3%.

On Sunday, Greece voted no to a debt deal that was apparently not even on the table anymore.

As of close to midnight eastern time the Dow futures are down about 200 points — which is not a particularly big deal.

This does not look like it will have any major impact on North American markets at this time.

It is quite possible that a debt deal will be worked out in the next few days.

In any case, this is not something that changes my investment approach in any way.


July 4, 2015 – Amazon.com inc. added to our list

Amazon is added to our list but is rated Sell at $437.71.

As a customer I am a big fan of Amazon. (Especially because I recently saved over 80% by buying a generic printer toner cartridge through Amazon when other sources only had the over-priced HP brand — and by over-priced I am talking about $160 to $215 depending on the source for a printer cartridge, the generic which was new and not refilled was a stunning $17.50 each plus shipping when I bought two).

Amazon is changing the retail game. It also provides web services to businesses. It is a unique and truly amazing company. However based on the numbers I could not rate it a Buy.

Due to its position in the economy and what it is doing to other businesses it is certainly worth understanding even if the stock is not a Buy at this time.

July 2, 2015

On Thursday, the S&P 500 was about unchanged while Toronto, in catch up mode for the holiday, was up 0.6%.

CN railway was up 1.9%.

Canadian Western Bank was down 2.6%.

Times like this when stocks have been flat or down in the past year are often better times to buy than times when stocks have risen. But emotionally it feels best to buy when stocks have been rising.

If I had substantial cash in my accounts, the stocks from our list that I would buy include firstly Melcor, Canadian Western Bank and Boston Pizza Royalties. After that also any of the stocks on the list that are rated Buy or higher. (i.e., this excludes the (lower) Buy rated stocks). I would include ONEX although it seems a bit more speculative. I would exclude RioCan REIT at this time since my rating is out of date.

With the Canadian dollar taking a sudden dip under 80 cents I would be inclined to move some U.S. cash back to Canadian dollars. But as I have said before the transaction fees to do it are a bit onerous and so I have no immediate plans to do so (partly because while I have substantial U.S. investments, I have little U.S. cash).

With the U.S. dollar having risen against most currencies dueing Q2 we can expect U.S. multi-nationals to report a currency hit in their Q2 reports. This would include Wal Mart, Costco and VISA.

Canadian companies with substantial U.S.  and international revenues will benefit from our lower dollar. This includes CN, Stantec, Couche-Tard and Bombardier. Couche-Tard and Bombardier are a bit complicated because they report in U.S. dollars and the currency move will lower earnings as reported in U.S. dollars but it will be an increase in Canadian dollars.


July 2, 2015 ONEX update

ONEX Inc. is updated a rated speculative Buy.

It’s an usual company in that it is mostly an investment fund but also an investment manager. For a number of reasons its GAAP earnings and balance sheet are not helpful. Our speculative Buy rating is based on management’s view that the company has about $67 per share in investments (unencumbered by debt at the parent company level) and that there is a further $18 to $20 value in its stream of investment fees that it collects.

July 1, 2015

On Canada day, the S&P 500 was up 0.7% while Toronto markets were closed.

On Tuesday the S&P 500 had been up 0.2% while Toronto had been up 0.4%.

The Canadian dollar fell on Canada day and sits at 79.45 U.S. cents per Canadian dollar, or 125.9 Canadian cents per U.S. dollar.

Oil has fallen and is at U.S. $57 per barrel for West Texas Intermediate on the August contract in New York.

The first half of the year has not been great or even good for North America stock markets. But is has not been that bad either. Experienced investors know that markets don’t rise in straight lines.

Investing is often a game of waiting. Markets now await further news out of Greece. And they await the Q2 earnings reports and also the various economic data that arrive weekly, monthly and quarterly.

Since investing is so often about waiting a good approach is to favor companies where time is on the investors side. Companies with good economics that provided needed products and services at a profit and that can be expected to grow their profits over the long term even if the next quarter is hard to predict. Costco is certainly one such company though it does seem expensive.



June 29, 2015

On Monday, North American markets fell about 2.0% on the news from Greece.

Just about every stock on my list was down.

I have learned not to get stressed out by these things. As usual, in pull-backs I am more interested in buying than in selling.

As of late Monday night, futures markets are predicting a slight bounce back on Tuesday.

My next update will likely be to add Amazon to the list. I am not sure if it will be rated a buy but it is certainly an interesting company that is worth understanding.

June 29, 2015 1:20 pm eastern)

Markets are down (1.3% U.S. and 2.0% in Canada) due to the Greece situation. If I had ample cash I would likely add to positions including Canadian Western Bank, CNR and Berkshire. But with limited cash I am trying to be patient and see how the week develops.

I am not thinking of selling anything at this time.

June 28, 2015

The reference article listing Global ETFs is updated. However, none of these appear to be compelling investments.

As of about 9 pm eastern, the DOW futures are down 247 points on the Greek situation. I am not inclined to buy stocks in the next few days unless they happen to be down at least 5%. It should prove to be an interest week ahead.

June 26, 2015

On Friday, the S&P 500 was flat while Toronto was down 0.6%.

Monday’s markets may be driven by the Greece debt situation unless markets finally decide they no longer care what Greece does.

June 26, 2015 FedEx update

The FedEx report is updated and the rating is (lower) Buy at $172.85. This is a strong company. The valuation is not compelling but it may be worth taking a small position in at this time. I marvel that the company charges an average of only $12 for an overnight express (air) envelope within the United States and $21 for an overnight express (air) parcel. (Meanwhile Canada Post charges about $18 to deliver a greeting card to the other end of Canada on an “expedited” basis which arrives after three business days!). The efficiency of FedEx and UPS is what makes online retailing feasible. FedEx also notes that as it expands into various countries such as in Europe it provides a benefit to those economies by facilitating speed in business and by offering affordable delivery service.

June 26, 3015 (9:15 am eastern)

On Thursday, the S&P 500 was about flat while Toronto was down 0.3%.

Melcor was down 2.5%. Oil was down moderately and is currently at $59.24.

The Dow is set to open slightly higher despite the Greek debt issues.


June 24, 2015

On Wednesday, the S&P 500 fell 0.7% on fears that a Greece debt deal was not so near after all. But Toronto rose 0.3%.

Melcor rose 3.6% but as usual that was on a small volume.

Canadian Tire rose 1.5% to $136.81. This company was in the low to mid $50’s in August of 2011.

Canadian Western Bank was up 1.9% and Stantec was up 1.7%.

June 23, 2015

On Tuesday, the S&P 500 rose 0.1% and Toronto rose 0.8% (as oil rose about 25).

I continue to view certain stocks that have been driven down by oil prices as buying opportunities. These include Stantec, Melcor and Canadian Western Bank and to some degree also CN rail.

A report today indicates that new home sales in the U.S. are running some 24% higher than last year in the first five months of the year. This bodes well for Toll Brothers.


June 22, 2015

On Monday, the S&P 500 rose 0.6% and Toronto was up 0.9%. This was on optimism about the Greek debt deal.

Most of the stocks on our list were up.

Melcor managed to fall 1.5% to $17.25. In my view that is “Mr. Market” offering to sell a stock cheap. Oil (West Texas) is at about $73 Canadian. Prior to 2004 oil had never been as high as $60 Canadian. This according to monthly data from http://www.indexmundi.com/commodities/?commodity=crude-oil-west-texas-intermediate&months=240¤cy=cad

Yes, we spent about seven years above $70 Canadian and sometimes above $100. But really $73 Canadian is not that low for oil, it’s just lower.

A Stats Canada report released today said that investment in residential home construction (includes multi family)  in Alberta was up 8.3% on the year. I certainly don’t expect Melcor to be selling increased numbers of building lots right now but there is no indication of a huge slow-down at this point. Also Melcor relies on subcontractors to do the actual work of developing land and their prices for the subcontractors are down. There are always scenarios to think about where the stock goes lower but I have had good success over the years buying stocks when they seem to be cheap. I grabbed another 150 shares of Melcor today.

June 21, 2015

On Friday the S&P 500 was down 0.5% and Toronto was down 0.8%.

However, Canadian Western Bank was up 1.8% and Toll Brothers was up 1.6%.

As of Sunday evening the DOW futures were up 73 points on optimism about the Greece debt talks — but that can change direction quickly.

June 19, 2015 Walmart update

Walmart is updated and rated Buy at $72.98. Its earnings per share have declined in the past two quarters due to the higher U.S. dollar (which reduces earnings from Canada and other international locations) and also due to increased wages and benefits. The decreases will cease as the company “laps” previous year quarters that also had the same impact. However in the case of the wage increases that lapping nay not occur for another nine months. In any case at a P/E of 14.7 with a dividend yield of 2.7%, Walmart is worth considering. The company has an extremely strong balance sheet and could easily undertake an international acquisition if it wished to move into additional countries. Meanwhile it is adding stores in most of the 27 countries in which it operates. Same-store sales growth has been modest but positive.

June 18, 2015

In a further reaction to the FED statements of Wednesday, the S&P 500 rose 1.0% on Thursday and Toronto was up 0.3%.

Berkshire Hathaway was one of the bigger gainers, up 1.9%.

Melcor managed to fall 1.3% to $17.50. I grabbed another 200 shares. This is company that has a book value of over $27. The book value was $9.00 per share at the end of 2008. So that is a gain of $18.00 per share in book value in six years albeit some of that was mark to market gains on rental building. Melcor earned $2.64 per share in 2014 on an adjusted  basis and about $3.00 per share on a GAAP basis in each of the last three years. It lived through 2008 without reporting a loss on an annual basis. I don’t recall it ever having an annual loss since I started watching it in December 2002 at a stock price of $3.60. The share price shot up to over $30 in 2007 (THAT was far too high) and then back down to close to $3.60 in the scary days of early 2009. THAT was a tremendous buying opportunity. It seems to me that things would have to get awfully bad in Alberta for Melcor at the $17.50 range not to work out to be a good investment. If things are as bad as those selling their Melcor shares at $17.50 seem to think then I wonder how much Alberta house prices should be down? 30% rather than just around 3%? West Texas is at U.S. $60 per barrel or $73 Canadian. I am not convinced that that qualifies as a low price in comparison to the average price of oil in the past 15 years. I don’t have the data at hand but I would be willing to bet that $73 Canadian per barrel for West Texas is higher than the average over the past 15 years. I believe Oil dipped briefly to U.S. $10 in 1998. Alberta may be headed for a recession but it’s not a depression.

June 17, 2015

On Wednesday the S&P 500 was up 0.2% while Toronto was down 0.1%

Janet Yellen, chair of the FED, said she expects the FED to start to increase interest rates before the end of  this year. Also the indication is that the rise in interest will be slow. Stocks responded positively to this.

Stocks on the rise today included RioCan REIT up 2.1% and Canadian Western Bank up 1.9%.

FedEx was down 3.0% as higher costs resulted in lower-than-expected earnings.

My next update will be for Walmart. I plan to soon update a few more companies as well and then to add some new ones to the list.

June 17, 2015 (11 am eastern time)

On Tuesday the S&P 500 was up about 0.6% and Toronto was relatively unchanged.

Dollarama which I judged on Monday as too expensive for my tastes rose another 2.9%. Today it indicates that some of its share buybacks will be by private placement with arms-length third parties. One interpretation of that is that these third-parties who own a lot of shares are selling due to the high price.

Markets are off to a positive start today but the news and comments from The FED later today will likely impact the market in one direction or the other.

June 16, 2015 (11:25 am Eastern time)

Markets this morning are mixed with New York up slightly and Toronto down slight.

It sounds like Hudson’s Bay Company made another good deal yesterday buying the a big German retailer and then doing a partial sale of the real estate by putting the real estate into a joint venture. I have unfortunately not analyzed Hudson’s Bay but I have been very impressed with them over the past few years. Selling those Zeller’s leases to Target for $1.8 billion was brilliant and there were some other real estate sales as well. They sold the flagship Hudson’s Bay store in Toronto in a sale and leaseback deal for $650 million. The Baker family of the United States bought Hudson’s Bay for less than the value of the real estate some years ago and then bough Saks 5th Avenue also apparently for less than the value of the real estate.

June 15, 2015 Dollarama update

Dollarama is updated and rated Weak Buy at $72.01. I first added Dollarama to the list in early 2012 rated Weak Buy at $21.75 (all stock prices mentioned here are split adjusted). I considered it then to be very well managed but it seemed too expensive at a P/E of 22 and the valuation of over $5 million per store seemed too rich. Also Bain Capital which had owned 80% of the company had sold all of its shares at prices from $12 to $16.25. It turns out that Bain apparently made a mistake in selling all of their shares and that I was far too conservative in projecting the growth of the company (I considered it could grow at 12% based on new stores and same-store growth plus some additional growth beyond that 12% for economies of scale).

Earnings per share growth has been closer to 30%, which is remarkable. This growth came from a combination of same-store sales growth, new stores, share buybacks, economies of scale and some additional financial debt leverage.

It seems clear that Dollarama has been one of the very best managed companies in Canada. The problem is that the market is well aware of the performance and has pushed the P/E up to 31. The value per store is now a remarkable $10 million. The total value of all the shares is $9.4 billion. To put that in some context, Canadian Tire has a value of $10.3 billion. And recall Canadian Tire includes Sports Chek and other sports stores as well as Mark’s and owns most of the real estate of the Canadian Tire brand stores and has a huge and profitable MasterCard operation.

Despite the performance of Dollarama, I am not a buyer at 31 times earnings. At the same time I won’t rate it a Sell but if I owned it I would reduce my position especially if I had a large position.

While I have never owned it, I enjoy reading its financial reports and learning how it has been so successful. Every retailer should study this company.

Some analysts have commented that Dollarama’s success is a reflection of a poor economy. That is not the case. I don’t think consumers have suddenly become more value conscious. Most people have always looked for value. What is new is the availability of the value provided. Dollarama is delivering every day products at notably lower prices than traditional retailers and, at the same time, making far higher profits. That is a combination which greatly benefits consumers. One analyst said that Dollarama is the best dollar store operator in the world. Its remarkable success is something to celebrate and to learn from.


June 14, 2015

Friday’s action saw the S&P 500 down 0.7% and Toronto down 0.6%.

Almost all the stocks on my list were down but Melcor managed a 2.2% gain albeit on practically no volume.

I notice TransAlta (which I have not had on the list in the last dozen years due to a conflict of interest with the job from which I recently took early retirement) is down under $10 per share. To put that in context, the earliest price shown on Yahoo Finance is $13.75 over 20 years ago on January 12, 1995. I have long had a very (very) low opinion of the company. Its managers and directors over the last 20 years or more would appear to belong in some kind of Business Hall of Shame. I normally try to avoid negative comments on companies not on my list but I feel compelled to make an exception here. It may in fact be good value at its current low price but it seems clear it has been very poorly managed. The dividends were reasonably good over the years but I don’t think that makes up for the share price. That this record occurred by a utility headquartered in Alberta which has boomed for much of the past 20 years is stunning. If current management should see my comment and be offended I would only invite them to demonstrate good returns over the next few years. The past record is what it is.

Investors in TransAlta (owners) are partly to blame. All the directors were recently voted in with at least 95% voting in favor and most getting 99%. Of course many owners don’t bother to vote but those who did gave a ringing endorsement.

Last month, TransAlta announced it sold $1.8 billion of assets to a related subsidiary company, TransAlta Renewables which trades separately and which has a decent track record,  and of which TransAlta now owns 76% of. I was looking to see what the gain or loss on the sale was but it’s not mentioned. Perhaps that is because in effect TranAlta sold these assets mostly to itself. Brilliant? With consolidated reporting there may not be a gain or loss reported. It may be beneficial if the subsidiary trades at a higher valuation multiple.

I am working now on an update for Dollarama whose managers would belong in a  Business Hall of Fame.

June 11, 2015

On Thursday, the S&P 500 rose 0.2% and Toronto was down 0.4%.

Canadian Western Bank at $28.02 is trading at 10.5 times trailing earnings according to Yahoo. The dividend yield is 3.1%, I calculate the P/E ratio as 10.2. The book value per share is $21.56 after adding in a special gain of $1.38 that will be booked in the current quarter. The ROE has been running at about 14%. This stock appears to be an attractive investment. There is some risk due to bad loans but based on its past history I expect this to be a good investment.

June 10, 2015

On Wednesday, the S&P 500 was up 1.2% and Toronto was up 0.5%.

Most of the stocks on our list were up. Some notable gainers were Dollarama up 2.7% after releasing an earnings report. Visa up 2.5%. Canadian Western Bank up 2.0%.

Oil was up but then slipped back in evening trading and is presently at $61.10 for the July West Texas Intermediate futures contract in New York.

As always, there is a lot of noise and volatility (in both directions) in the market. Meanwhile corporate profits tend to grow relatively steadily. For example earnings for the S&P 500 are up 75% since 2004 and 171% since 1998. With companies in the stock exchange increasing their earnings relatively steadily over the years it should not be that hard to go along for the ride and make money in stocks. Worrying excessively about the next threat to stocks and losing sight of the big picture is why so many people fail to make much money on their investments.

I look at Melcor trading at 5.6 times trailing earnings. Now that included some unusual gains to be sure. But I calculate Melcor as trading at 6.9 times adjusted trailing earnings. Also it’s trading at about 68% of book value. And yet buyers are not rushing in to bid this stock up due to fears about the Alberta house building outlook due to lower oil prices. Even Melcor itself does not want to buy its own shares. It announced a share buyback 10 weeks ago and then promptly bought exactly no shares since then. There are always risks, but this looks like excellent value to me.




June 9, 2015

On Tuesday, the S&P 500 was about unchanged while Toronto was up 0.5%.

Oil was up about 4% and is now at $60.85 for the July West Texas futures contract.

Dollarama will report earnings tomorrow. I plan to update the analysis for Dollarama in the next few days. Its margins may have suffered somewhat due to the higher Canadian dollar but overall it probably had another strong quarter. Its one of the very best-managed companies in Canada.


June 8, 2015

On Monday, the S&P 500 was down 0.7% and Toronto was down 1.4%.

Lower prices provide the opportunity to buy shares at better prices. For example, CN railway, Boston Pizza, Melcor, Canadian Western Bank  and Berkshire Hathaway.

June 4, 2015

On Thursday, the S&P 500 and Toronto were each down 0.9%.

Among the few stocks rising in price was Constellation Software up another 1.5% after announcing an acquisition on Tuesday.

The May job creation report will be out tomorrow and will no-doubt be a driver of market direction.

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