2017

December 31, 2017: TFI International is updated and rated (lower) Buy at $32.86. I am comfortable holding this company at this price and will be inclined to add to the position on dips. It’s a very well managed growth-by-acquisition company. It is facing tough competition in its U.S. truck load operations at this time and therefore the company is only cautiously optimistic about short term growth. Like most good companies this has been a good company to buy on dips. It started 2017 at $34.89 rated Weak Buy / Hold. But it dipped as low as $26.44 during the year and we rated it (higher) Buy at $27.50 on May 21.

The report on the Canadian Western Bank rate reset preferred shares Series 5 is updated with a rating of (lower) Buy at $24.17.

These may be of interest for those looking for relatively safe yield and who would be prepared to continue to hold for the yield in the event the share price declines.

These shares certainly have a volatile history for something that would have been considered safe and considered by many to be “fixed income”. In reality preferred shares are not fixed income in the sense that they are not guaranteed to mature at any given price. Those who are truly interested in fixed income and not bothered by market value losses may consider them to be fixed income.

These were issued at $25 in February 2014 yielding 4.4%. This was the going rate for rate reset preferred shares at that time and in fact I believe some large bank rate reset shares were issued under 4.0%. They were supposed to protect against the expected rise in interest rates. But interest rates unexpectedly fell and rate reset shares plummeted. These particular shares bottomed out under $15 in early 2016. A review of our comments in 2016 will confirm we had positive comments on these shares throughout 2016 (and 2017 as well). Our highest rating was (higher) Buy at $16.61 posted about March 11, 2016 (the post is undated). These shares were rated Buy at $19.05 at the start of 2017. The capital gain of 27% in 2017 was certainly more than expected.

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

RioCan was down 2.8% to $24.69 and is an investment that I would consider for income particularly in non-taxable accounts since REITs are not eligible for the dividend tax credit.

Fortis Inc. is updated and rated (higher) Buy at $46.18. This arrears to be a low-risk investment that is trading at a reasonably attractive price. I intend to buy some Fortis Inc. shares.

Cannabis Stocks: I will have to admit to missing out on this investment in 2017. These stocks are mostly not yet at the stage where they have positive earnings or even much in the way of revenues. Their valuations are based on expected future earnings and sales. These types of companies are simply not a good fit for my analysis methods. It remains to be seen if future sales and earnings can justify their current share prices. If I held a large gain on these stocks in terms of percentage and especially if the gain was large in terms of dollars I would certainly sell at least some of the position. These stocks are heavily traded and so most (but not all) investors probably have harvested gains along the way.

On Wednesday, the S&P 500 rose 0.1% and Toronto rose 0.2%.

Canadian Western Bank was up 1.4% to $38.97

RioCan was up 1.7% to $25.41. Despite fears about the retail sector, this REIT seems likely to continue to pay its distributions and generally be an acceptable but unspectacular investment over the years.

I bought some shares in the Melcor REIT today. It has a cash yield of almost 8% and it trades with a price to book ratio of about 0.75. While it could decline if the Alberta economy declines, the opposite seems to be happening. I expect this REIT to continue to pay its distribution and there is a reasonably good chance of a modest capital gain as well. Checking insider trading, I note that one insider bought 3000 units at $8.50 in the very recent subscription receipt offering. I believe that offering sold out quickly and currently the shares trade at about $8.50 meaning we can buy in at the same price as the recent offering.

The Canadian dollar is at about 79.13 U.S. cents having risen somewhat in the past week or so. It seems to me that most analysts were predicting a decline. The exchange rate is always hard to predict especially in the short term. As I am holding a fair amount of U.S. cash I was hoping for a decline to transfer some cash back to the Canadian side.

A lower Canadian dollar also boosts the value of U.S. investments as calculated in Canadian dollars. But an argument can be made that perhaps we should simply calculate the U.S. investments in U.S. dollars since most investors will ultimately spend some of their investments in the U.S.

U.S. markets were open and the S&P 500 was up 0.1%.

Oil (west Texas Intermediate) is at $59.80. With oil at or near this level, I suspect the  Alberta economy will continue to improve. This should bode well for Melcor Developmensts and the Melcor REIT and AutoCanada and any other share prices that seem to be held back by fears that the Alberta economy will weaken or fail to recover.

On Friday, the S&P 500 was about unchanged (down 0.05%) and Toronto was down 0.1%.

CRH Medical was down 5.1%.

AutoCanada was down 2.2%

TFI International was up 1.6%.

It appears that we are set to close out 2017 with the S&P 500 up about 20%, the DOW up about 25% and Toronto up about 6%. Barring major bad news next week (which can happen anytime) 2017 will go down as an exceptional year for U.S. stocks. And, most are predicting continued good times in 2018.

Certainly the corporate tax cuts are a big positive for 2018. But there are other factors that could easily cause a sharp pullback. Those include higher interest rates, possible terrorist attacks and developments in the investigation of Trump and those close to him. Trump’s anti free trade policies could also harm many U.S. companies as well.

Statistics Canada reported that GDP was about unchanged in October. I believe there is some amount of estimation and statistical uncertainty in these numbers and so I would not be concerned about one month with no growth unless that was confirmed over several months.

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

CRH Medical was up 7.1% to $3.33 in Toronto.

Wells Fargo was up 2.4% to $61.61. This bank bottomed out at under $10 in early March 2009. There was a massive spike in volume as some investors rushed to sell as low prices as they feared even lower prices and other investors , enticed by the low prices, bought. The end result was a massive transfer of wealth from fearful to braver investors.

Statistics Canada released October figures for Food Service and Drinking Places which were up for the country as a whole. This report reinforces my expectation that Boston Pizza should continue to show modest growth. However, they do face competition. A newer chain, “The Canadian Brewhouse” was started in Edmonton in 2002 and now has 18 locations in Alberta and a total of 28 locations as it has expanded to the other three western provinces. Its locations are larger than Boston Pizzas. They do target a different market. I was at their newest location in St. Albert, Alberta on Wednesday evening and it was packed at 5:30 pm. The service and quality were excellent. If this business is any indication, then reports of the recession in Alberta seem to be somewhat exaggerated. (But yes, certainly some people have been very hard hit by the recession.)

Statistics Canada also released inflation figures for November showing a 2.1% annual inflation rate. If you click the link here and go into the CANSIM tables and use “add remove data” it is possible to explore the individual inflation rates for dozens of categories.

Costco is updated and rated (lower) Sell at $187.51. (corrected from the original posting that said (lower) Buy

I hesitate to rate this exceptionally excellent company in the Sell range. But it does look somewhat over-valued at this time. I probably could have just as easily rated it Weak Sell / Hold. Its last three quarters have been exceptionally strong. And the current quarter may also show strong growth given that the prior year comparable quarter saw a decline in earnings per share of 5%. After that it will face tougher comparable quarters. It is quite possible that the income tax reduction will provide a boost in earnings to justify the price.

Overall, for all the reasons indicated in the report I settled on a rating of (lower) Sell and I sold my few remaining shares today. (I was selling in an RRSP account where triggering a taxable gain was not an issue)

It will be interesting to see if Costco will have a philosophy of using the lower income taxes to boost profits or will they be inclined to use some of it to reduce prices? After all, if they were satisfied with their 23% ROE this year, they might decide to target a similar ROE and drop prices. This will also depend on competitor strategies. Costco has never had a strategy of maximizing profits, so it is not a foregone conclusion that they would choose to have the income tax reduction drop to the bottom line. And, in any case, competition could force them to drop prices.

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

The U.S. income tax reduction bill has been passed.

While the market seems to expect all of the income tax savings to fall to the bottom line, that will not necessarily be the case. Wells Fargo announced today an increase in its minimum hourly rate to $15 from $13.50 In highly competitive businesses, we should expect some of the income tax savings to show up in lower prices to consumers.

Canadian Western Bank was up 1.9%. FedEx was up 3.5% after reporting earnings. This reflects a U.S. economy that is literally on the move.

It was disappointing today to see that Loblaws and its parent Weston have been involved in collusion and price-fixing for some 15 years. This is a failure of management and controls at those companies and also I think a failure of the Competition Bureau to be effective. This will probably end up being a much bigger deal than it initially looks like.

I notice that the Globe and Mail is no longer allowing comments on its Web site. The web site states: As of December 20, 2017, we have temporarily removed commenting from our articles. We hope to have this resolved by the end of January 2018. Thank you for your patience. If you are looking to give feedback on our new site, please send it along to feedback@theglobeandmail.com. It’s because their partner “Civil commenting” is shutting down.  I sent an email to the feedback address and it bounced back! It’s been my experience that the Globe and Mail and its Civil Commenting partner was a terrible system for posting comments. It used to be far better. It always seems like companies that are on their game in one way are on their game in all ways. And companies that struggle in one way seem to struggle with everything. The Newspaper business is tough. But I don’t think that is an excuse to have a poor online system.

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

The republican’s income tax reduction bill is expected to be signed by the President tomorrow.

Costco was down 2.1%. I will be updating my report on Costco very soon.

CRH Medical was up 4.0% in Toronto. Checking insider trading, the company did buy back some shares in November. I think that is a sign of confidence. They bought back about $1.4 million worth of stock.

Linamar was up another 2.0%.

Statistics Canada reported investments in new home construction in October. In Alberta, investment in new single family homes was up 30% versus October 2016 but was still 25% below the 2014 level. The big increase versus 2016 would seem to bode well for Melcor Developments although I don’t know how the timing of Melcor’s lot sales relates to the timing of new home investments.

Money for Nothing? 

The S&P 500 is now up 20% in 2017.  The market cap of the S&P 500 is $24 trillion. At the start of 2017 it was about $20 trillion. That’s a gain of $4 trillion dollars. It’s interesting to think about just where this added $4 trillion dollars came from.

Only a little of the gain would have come from new money raised from investors by S&P 500 companies selling shares to investors including through the exercise of stock options. Especially considering that stock buy-backs would have offset some or possibly more than all of that.

Some of the gain would relate to retained earnings. If the P/E was around 20 then earnings would explain 1/20 times $20 = $1 trillion earned times about 50% retained or $0.5 trillion.

About $3.5 trillion dollars came from the fact that investors bid up the prices of shares as one investor sold to another. Not a penny in new money enters the market in that process as the money put in by the buyer goes to the seller. In effect this $3.5 trillion came out of thin air.

What a wonderful thing! The owners of the S&P 500 as a total population gained $3.5 trillion and it really did not cost any other group of the population anything!

And I am not suggesting that there was anything at all wrong with this. But I will say that it is a process that can’t go on indefinitely. When it goes the other way, money, or at least wealth disappears into thin air.

Perhaps some readers would like to comment on this.

Today, one week before Christmas, the S&P 500 was up 0.5% and Toronto was up 0.6%

The U.S. markets rose yet again on optimism that the income tax reduction Bill will be passed.

The top gainer on our list was Linamar, up 2.6%.

It should continue to be an interesting week in the markets. The Senate could pass the income tax bill tomorrow in a close vote (possibly requiring the Vice President to cast a favorable tie-breaking vote). Trump’s lawyers meet with the Special Prosecutor on Wednesday and Trump is apparently now confident of exoneration.

Regarding Melcor Developments: I happen to live very close to one of their largest Subdivisions, Jensen Lakes in St. Albert. This is a 50% joint venture with another property developer. There is certainly a lot of activity. It appears that many home lots have been sold. This large community will be under development for years to come. It includes an adjacent commercial development where building is well underway and a new theater complex will open in the Spring. It appears that two schools are under construction. Overall, while I don’t know the number of lots being sold this quarter or next year, the whole development certainly appears to be thriving.

With Melcor trading at half of book value I wondered if at some point we will be able to look back and see that as a very clear buying opportunity indeed.

Royal Bank is updated and rated (higher) Buy at $101.92

Note that, as an experiment, I have opened this post to comments. Click to comment. I am thinking that once in a while it might be useful to allow comments on a post.

Large banks tend to very profitable. Royal achieved a 17.0% return on owner’s equity in 2017.  And, in its personal and commercial banking division it has been running at about a stunning 28% after-tax return on owners equity for at least the last three years.

In some ways the high returns on equity are surprising. Economic theory would suggest that competitors would come into the space and profits would be pushed down. And despite claims that Canadian Banking is an oligopoly, there are actually plenty of choices. In Canadian Airlines, three or even just two competitors have usually resulted in a low-profit industry. So why is Canadian banking so profitable with five large banks and numerous smaller banks and credit unions to choose from?

In my view, the biggest reason is that customers really don’t shop around that much. Once a customer has their main chequing account with a given bank, they tend to stay for many years. With pre-authorized debits it is quite inconvenient to switch to a different bank or even to switch to a different credit card. Banks take advantage of that inertia by charging lucrative fees.

Part of the reason, too is that smaller competitors tend to have higher costs due to their smaller scale.

As banking and money itself has become increasingly digital and self-serve, the operating costs for banks has fallen as a percentage of revenue. But so far, competition has not resulted in much in the way of fee reductions.

A possible reason for the high ROEs of banks is that it is a risky business. Banks operate with shockingly low levels of common equity. Royal Bank has a common equity ratio of just 10.9% of risk-weighted assets. (But this is considered high by banking standards.) On a non-risk-weighted basis, its common equity is only 5.71% (that’s leverage of 17.5 times!). After deducting goodwill, Royal Bank reports that its leverage ratio is 4.4%. That’s leverage of 23 times! On its face, that level of leverage looks risky. But Royal Bank has a very sophisticated and massive risk-management program that is designed to result in low risks. This includes limiting loans to risky businesses and having a material portion of loans in government insured residential mortgages. Credit rating agencies agree that the risks are low and have assigned Royal Bank a credit rating of AA minus despite the low equity / high leverage.

With an ROE of 17% and a price to book ratio of 2.2, and a P/E ratio of 13.8, Royal Bank appears to be an attractive investment.

But despite the risk management system, that high leverage could be a problem in certain scenarios. Royal Bank has estimated what its loan losses would be in the event of a sharp recession including a drop in house prices. But those numbers can only ever be estimated. Also, it is possible that new technologies will increase competition in banking and force a decline in fees and profitability.

Overall, an investment in Royal Bank and probably the other big Canadian banks looks attractive. It would not be prudent however to go “all in” on the banks even though such a strategy would have worked out well in the past. I can’t say what a reasonable exposure would be since it would vary widely due to individual circumstances.

On Friday, the S&P 500 was up 0.9% and Toronto was up 0.2%,

Linamar rose 11.5% to $72.50 with the news of its acquisition (see yesterday’s comment.

Costco was up 3.3% after releasing earnings. I will update the report very soon. I suspect it will be rated no higher than Weak Buy / Hold.

On Thursday, the S&P 500 was down 0.4% and Toronto was down 0.7%.

Linamar was down 2.7% and then, after the close, revealed that it will acquire an Agricultural equipment maker for $1.2 Billion. It is acquiring privately held MacDon of Winnipeg in a deal that it says will be immediately accretive to earnings per share. To put the size of this deal in context, Linamar has an equity market cap of $4.5 billion and assets of $5.9 billion. The $1.2 billion dollar purchase will be financed with debt. (Previously Linamar had a relatively low debt ratio) This is a large acquisition but not overwhelmingly large. Linamar already had what I believe was a relatively small agricultural equipment division in Hungary.

I don’t know how the market will react to this but to me it looks like Linamar taking another step on a growth path that has been very successful in the past. I’m happy to hang onto their coattails as they walk that growth path.

AutoCanada was down 2.6%. Statistics Canada released new vehicle sales figures for October which were lower than September, but that appears to be a seasonal pattern, and year-over-year for Canada sales were up 13% in dollars and 7% in units and for Alberta were up 25% in dollars and 17% in units – all of which seems rather positive for AutoCanada.

Alberta’s economy has been improving. However there were some “layoffs” announced today in the oil patch as some temporary pipeline issues have made the lack of export capacity even worse.

CRH Medical posted some insider trade information today. Two insiders were awarded 30,000 rights each and a third exercised options to buy 25,000 shares at 27.5 cents. So far, no sign of any share buy backs. If no shares were in fact repurchased in November then it would seem to be a mark against the credibility of management.

I was pondering my own portfolio today. I’d like to raise some cash for possible bargains and also possibly to diversify including possibly having some allocation outside of North America likely through ETFs. So, I sold the remainder of American Express shares which were just over 1% of my portfolio and which I had last rated only a (lower) Buy. I had a gain on it and it was in a non-taxable account.

I have what is probably a ridiculously high allocation to Melcor. But it would be difficult for me to trim that given that I am rating it Strong Buy. In fact, stubbornly, I have an order in to grab a little more if it slips to $14.50. It seems to offer an excellent margin of safety from a book value perspective. But it’s not clear when there will be a catalyst to push the price higher. Hopefully they will end up reporting a strong Q4. If that happens AND if the market for new home building lots and land prices in Alberta remains reasonably firm in 2018 despite the new mortgage stress test or other factors then perhaps there will be a share price improvement by the Spring. I did come across some information that home sales are still strong in one of their big subdivisions near Edmonton at this time.

On Wednesday, the S&P 500 was about flat while the DOW was up 0.3% and Toronto was up 0.1%.

With the Democrats grabbing the Senate seat last night, I had expected U.S. markets would likely fall today due to a somewhat lower probability of the Income Tax bill getting passed. However, I now understand that the new Senator may not take office for several weeks so perhaps that’s why the market remains highly confident of the passage of the Bill as well as the fact that either way the Republicans have a slight majority in the Senate.

The FED raised interest rates 0.25% today to 1.5%. With that, I thought that the Canadian dollar might slip somewhat even though the rate rise was very much expected. It started to dip very briefly on the announcement but then rose. This goes to show how difficult it is to predict exchange rates.

These rate hikes are starting to add up to something significant. The FED’s benchmark rate is now 1.25% higher than it was in 2009 to 2015. Warren Buffett (Berkshire Hathaway) has $108 billion in cash. An extra 1% on that amount is 1.08 billion per year (pre-tax). The big U.S. banks keep billions on deposit at the FED. The higher FED rate adds to bank earnings.

On Tuesday, markets were once again setting record highs. In round numbers, the Dow is now 25,000.  The S&P 500 was up 0.15% and Toronto was up 0.1%.

CRH Medical bounced down 4% in Toronto. I had understood from this company that they were going to buy back shares starting either November 9 (for ad-hoc purchases) or 20th (for purchases under an automated portion of the buy-back plan) and that the buy-back purchases had to be reported on SEDI by 10 days after the end of the month. So far? crickets. This certainly does not add to my confidence. The unfortunate reality is that when a company disappoints in one way they tend to disappoint in other ways as well. I thought this company had a good business model. Then they got bad news in terms of government regulated pricing for their services. But that bad news seems to have been made worse by their poor ability to communicate (or perhaps anticipate) the exact nature of and impact of the price changes. They also surprised the market in the spring with their treatment and disclosure of changes in their estimates of accounts receivable. I am still hopeful for a decent recovery in this stock. P.S. After I wrote this I got a response from the company indicating “We are having a setup issue with sedi that we hope to resolve tomorrow”.

On Wednesday, the FED is expected to increase interest rates. And even though it is already expected, I think it might push the Canadian dollar down if and when it gets announced.

On Monday, the S&P 500 was up 0.3% and Toronto was up less than 0.1%.

Canadian Western Bank was up 1.1% to $38.35. That puts it 51% higher than when it was rated a Strong Buy back on June 3. Not only was that a good return but it seemed like quite a safe bet back then.

Melcor was down 2.9% and trades at half of book value. Given the solid assets, that should make for a very safe investment with good upside. But so far, fear of a decline in land and building values in Alberta and/or a complete lack of interest has kept the price down. Perhaps we can hope for a decent increase to the dividend in 2018, but that announcement is usually not made until mid March.

How to profit from (correctly) predicting a lower Canadian dollar

The Canadian dollar closed on Friday at 77.88 U.S. cents.

Exchange rates are notoriously hard to predict. But, let’s say you are relatively confident, for whatever reason, that the Canadian dollar is headed lower. And, let’s say you are willing to make a financial bet in that direction.

One way to do that is through futures trading where you can use margin and leverage. If that is what you want to do, I can’t help you. I consider that to be dangerous and extremely speculative and I also don’t know how to do it.

But if you just want to do this with your own money and with no leverage, here are three ideas (I recommend the third):

1. Transfer some Canadian dollars from a Canadian investment or bank account into a U.S. dollar investment account or bank account. If it turns out you were correct and the Canadian dollar falls then transfer the U.S. dollars back to the Canadian dollar account for a gain. A big problem here is that as I documented in yesterday’s post you would typically lose about 2.9% on the round trip with $10,000 transferred and even if you had $50,000 to do this with you would typically lose about 1.6% on the round trip. Therefore, you would have to have been correct on quite a large decrease in the Canadian dollar to make any money with this strategy. Furthermore if done in a taxable account you are required to track and report any gain.
2. Same as 1. above but use the Norbert Gambit and DLR / DLR.u as I described in yesterday’s post to lower the round trip cost. This is better but still involves a round trip cost of around 0.6% on $10,000 or 0.4% on 50,000 and it still involves tracking the gain if done in a taxable account.
3. In a Canadian dollar investment account buy DLR (Not DLR.u) which is an ETF holding U.S. dollars but trading in Canadian dollars. After the Canadian dollar (hopefully) drops, sell the DLR for a gain. The exchange cost will consist of the two trading fees say $20, plus the bid/ask spread on DLR, which is typically one cent on units trading around $12.80, so 0.08%. The total cost on a round trip, counting the two trade fees is about 0.28% on $10,000 and 0.18% on $50,000. The cost would rise slightly if the DLR.u is held for a longer time because of its management fee of 0.45% annually or about 0.04% per month which however does not show up smoothly but rather causes an occasional slippage of 1 cent on DLR.u or about 0.08% every two months on average. Just due to bid / ask price behavior there is probably a chance that the expected round trip cost can change up or down by an extra 0.08% at any time. An advantage of this DLR.u approach in a taxable account is that the gain (unlike the case for the two options above) will show up on your trading summary for easy tracking and reporting for income tax purposes.

Due to the lower cost, and the easier tax reporting, I like the third option here for cases where someone wants to make a short term bet that the Canadian dollar will fall. On the other hand it might be far wiser to simply not make speculative bets like this.

Note: I am now sending out the occasional tweet under @InvestorsFriend, and those who use twitter can follow me there.

On Friday, the S&P 500 and Toronto were each up about 0.5%.

Canadian Western Bank was up 2.2% as the market further digested its earnings report released Thursday morning.

Constellation Software was up another 2.3%. This has been a fantastic investment over the years.

The (high) Cost of Currency Conversion

I grabbed some figures on Friday to look at the cost of converting currency.

I looked at the cost to move money from a Canadian dollar investment account to a U.S. dollar investment account (or the opoosite direction) at my discount broker, TD Direct.

Option 1: Use the self-serve currency exchange feature in “EasyWeb”

The wholesale rate at the time was U.S. $0.77713 per Canadian dollar or Canadian $1.2868 to buy one U.S. dollar.

To move $10,000 Canadian to the U.S. account the rate quoted was $1.3066. That was 1.54% higher than the wholesale rate. For moving money from a U.S. account to a Canadian account the rate quoted was $1.2683. That was 1.44% less than the wholesale rate. On a round trip for $10,000 Canadian I would receive U.S. $7653. And if I then turned around and transferred it back to Canadian, I would receive $9707. So that’s a loss of $293 or 2.93% on a round trip

For a $50,000 transfer the exchange fee is lower and works out to 1.58% or $790 on a round trip or about 0.80% each direction.

I have said before that I consider this to be an outrageous fee on an all-electronic self-serve money transfer. I am basically certain that the bank can offset these trades electronically in the wholesale market at very little cost or risk.

This particular fee is simply something that banks don’t have to compete aggressively on at all. Not all bank fees are high. For example, I consider trading fees of under $10.00 to trade what seems to be any amount of shares to be very reasonable indeed. And Banks do compete aggressively on certain interest rates such as mortgage rates and GIC rates. But this exchange rate fee is something that they simply don’t have to compete on since it applies mostly to people who are sort of captive customers.

Option 2: Use the Norbert Gambit (works for investment accounts but not bank accounts)

This method uses an ETF which holds nothing but U.S. dollars and with units that trade in Toronto in both U.S. and Canadian currency. It seems to trade in sufficient volume (in my experience) to insure that the prices are very close to the wholesale exchange rate and there is only a small and stable bid/ask spread.

In this option, I would effectively buy U.S. dollars in my Canadian investment account by buying DLR.u which was trading at $12.80 ask. To complete the transfer I would need to call TD Direct and have them journal the DLR over to the U.S. side of the account where I could sell at the $9.94 bid. There would be a fee of $43 for allowing me to move the DLR before the three day settlement date.

I could buy 781 DLR.U at a cost of Canadian $9996.80. Then once the 781 units were moved the U.S. side of my account, I could sell it for the $9.94 bid netting U.S. $7,763.14. The exchange rate would be $12.80/9.94 = 1.2877 or just 9 basis points over the wholesale rate or just 0.07% or $7.00 on $10,000. However the total fees for the transactions would be $53, for a total cost of $60 or 0.60% which compares to the 1.54% indicated in Option 1 above.

If I turned around and used the Norbert Gambit to return the $7763.14 U.S. dollars to the Canadian dollar account, I would buy 780 units of DLR.u at the $9.95 ask (I would have to leave $2.14 U.S. not transferred back since I could not buy a fractional unit.)  I would then have the 780 units of DLR immediately “journaled” to the Canadian side (For a fee of Canadian $43) and sell at the $12.79 bid netting $9,976. My net cost including fees for the round trip would be the currency loss of $21 (or 0.21%) plus total transaction fees of $106 less the value of $2.14 left on the U.S. side for a total cost of $125 or 1.25% for the round trip which compares to the 2.93% round trip cost noted above if I simply used TD’s self-serve currency transfer system. That’s a saving of $168 on a round trip with $10,000.

For a round trip with $50,000 the exchange rate loss would remain 0.21% (assuming that this volume would not affect the bid/ask on DLR and DLR.u) so $105. The transaction fees would remain at $106 for a total cost of $211 or 0.42% which compares to the 1.58% or $790 using TD Direct’s self-serve currency transfer feature.

Conclusion:

There are a lot of numbers above, but the point is that by using the Norbert Gambit via DLR and DLR.u I could save about $168 in transferring $10,000 into the U.S. and then back again which provides the cost of a round trip assuming no change in the exchange rate. And, I could save $579 on a round trip with $50,000. Since in reality, I would not do a round trip on the same day, think of it as about $84 saved in each direction on $10,000 and about $290 saved in each direction when transferring $50,000.

So:

1. Consider learning and using this Norbert Gambitt for transferring between Canadian and U.S. dollar investment accounts. (This does not work with simple cash bank accounts since you can’t buy and sell DLR in bank accounts. Also it would not be cost effective for less than about $3500 due to the transaction fees). And be cautious because it is easy to get mixed up with the multiple steps of this trade.
2. It seems to me that the fact that we can save substantial amounts through this somewhat awkward Norbert Gambit process and despite the transaction fees, is strong evidence that the discount brokers could do this at a far lower charge and that they are making huge profits on currency transfers simply because the customers are essentially captive and most are not going to go to the effort of using the Norbert Gambit. In theory you could do the transfer outside of your broker through a currency broker if it involves a margin account but that would be inconvient. And, you have no ability to go to a currency broker if the money is locked inside an RRSP or other registered account. The fact that the banks are making very high profits on some of their fees provides an opening for the newer online competitors. Eventually, competition should drive some of the higher fees down.

On Thursday, the S&P 500 was up 0.3% and Toronto was up 0.7%.

Canadian Western Bank was up 3.3% to $37.12 after releasing a strong earnings report. This stock is now up 22% in 2017. It’s also up just over 50% since hitting lows under $25 in May. There were two full weeks where it could have been bought under $26. But it also remains a bit below its highs of around $42 from July 2014. Its earnings per share are similar to 2014 and book value is higher but its price as a multiple of those fundamentals (and particularly the price to book multiple) is lower than in 2014. CWB shows the book value at $24.82. This puts the price to book value ratio at 1.50. The ROE was 11% in fiscal 2017 and 12% in the last quarter. Paying 1.50 times book value to access a 12% ROE will work out well if that ROE can be maintained or increased. But I would not consider it to be a particularly compelling Buy. It seems unlikely that investors will push the price to book value ratio back up to the 2.0 range anytime soon. But the price to book ratio may increase somewhat and the book value seems reasonably sure to increase over time.

Dollarama was up 5.3% as it partially recovered from a recent little dip.

CRH Medical was up 8.6% in Toronto as it continues a recent modest recovery.

AutoCanada was up 1.9%. Then, after the close it announced some chances affecting nine dealerships that it has had a majority ownership in but where the AutoCanda founder was a part owner and the registered earlier of record. The founder is basically no longer associated with the company. (I am not sure about his ownership of shares as he has ceased to be an insider and but should probably assume that he may have sold). AutoCanada will now control five of the dealerships and the AutoCanada employee who is general manager of each dealership will be required to own a minority interest in the dealership. The percentage size of such ownership was not disclosed and will likely involve AutoCanada loaning these general managers money to make the purchase. The founder of AutoCanada will own four of these dealers through his private company CanadaOne Auto Group. AutoCanda is receiving $23 million as part of this deal.

I don’t know if this new arrangement is positive or negative but I suspect it will be viewed as somewhat positive because it cleans up the way these GM dealerships were held.

I do however view the exit of the founder last May as a negative. It seemed rather odd. The founder had ownership of car dealers both within AutoCanada and outside of it. That was somewhat messy and it may e for that reason that he excited.

BitCoin comment

This mania around BitCoin seems rather crazy. One of the big attractions of BitCoin was the idea that it is decentralized with sort of no one in charge and at least government not in charge. That idea is attractive to at least a fringe group of society. It seems a bit scary to think that view might be mainstream. Most people in the Western world have actually done pretty despite government control over currency and a lot more.

BitCoin and crypto currency is not simple to understand. I suspect that most buyers do not have a good understanding. I’ve spent years trying to understand regular dollar money and its creation and it susceptibility to value loss through inflation. I have gained some knowledge about dollar money but I would not claim to have a full understanding. Most experts and certainly many non-experts were certain that that the FED’s money printing via quantitative easing and the debt of the U.S. treasury was sure to lead to rampant inflation. That did not happen. At least not yet.  Certainly some people think it did already happen in terms of asset price inflation and that the government is hiding the true inflation. But I think the evidence is that inflation measured by the price of a representative basket of goods and services has in fact stayed low. If so many people failed to predict that inflation in dollar terms would remain low, I wonder how they think they can predict the value of a crypto currency.

I understand that Bitcoin’s reported price is determined by the average price across, I believe, five exchanges. There are some 16.5 million coins in existence and each coin or tiny fraction of a coin is owned by someone or other at all times. Lately, the total trading volume has been about 200,000 coins per day across at least 10 exchanges. That is a a dollar volume at $16,000 per coin of $3.2 billion. This means (as I understand it) that on recent days about $3.2 billion worth of bitcoin was purchased through the exchanges and this required $3.2 billion to be sold.

Given its spectacular rise, a lot of people are interested in buying BitCoin. And equally given it’s spectacular rise those who hold BitCoin are somewhat reluctant to sell. Buyers have had to bid the price up in order to pry some loose from those already holding.

Whether or not BitCoin continues to have value and ultimately becomes accepted as a currency remains to seen. For now, it has value because a lot of people want in on the action.

Those suggesting that people stay away from BitCoin have so far looked to be wrong. But truly it is an extremely speculative thing.

There is nothing wrong with risking a few dollars on BitCoin. But I don’t think it should be anymore than a tiny percentage of a portfolio nor anymore than a very modest quantum of dollars.

Personally, I am perfectly happy to sit this one out. In investing there will always be many winning investments that we “miss out” on. Even Warren Buffett, who has taken Berkshire’s per share book value from $19.46 in 1965 to $187,442 and still growing, is said to have “missed out” on a great many obvious investments for Berkshire. And, he admits it is true. But such “missing out” did not prevent his turning each $1,000 of book value into $9.6 million. (And in market value the gain has turned each $1000 of market value into about $20 million). I don’t buy lottery tickets and I won’t be buying BitCoin.

By the way, any claims that the value of a BitCoin should be something like all the wealth in the world divided by 21 million are utter nonsense. That equation also does not apply to dollars.

Laurentian Bank comment
I have never looked closely at Laurentian Bank. But my sense is that the recent dip caused by its disclosure of some falsifications by mortgage borrowers is probably over-done. I suspect every bank would have some mortgages where the borrower has inflated their income or not been truthful about the source of the down payment. It seems a bit much for anyone to be overly surprised about that. I’d be inclined to be a buyer of Laurentian more so than a seller. But I will refrain from buying given I have not done any analysis of the bank.

On Wednesday, the S&P 500 ended the day about unchanged while Toronto was down 0.1%.

Dollarama was down 2.1%, apparently due to lower-than-expected same-store sales figures and in spite of another large increase in earnings. Results compared to expectations often matter more than results compared to the prior year.

AutoCanada was down 2.5%.

TFI Industries was down 2.2%

CRH Medical was up 8.2% in Toronto. I have been watching for it to report any share buy backs under its Normal Course Issuer Bid announced on November 7th and which appeared to be allowed to commence on November 9 for certain purchases and November 20 for purchases under an automatic Plan portion of this issuer bid. I emailed the company to clarify whether the purchases had started November 9 and when they would be reported. They mentioned the November 20 data and indicated that part had to be reported ten days after the end of the month. So it seems we should know by Monday if they bought back any shares in November.

Canadian Western Bank will report earnings before the opening of trade tomorrow, Thursday. I expect a good report including probably some recovery on oil and gas loans previously written off. Their comments on outlook could be at least as important as the actual results as the market is always looking ahead. (Not so much, “What have you done for me lately”, as “What will you do for me tomorrow?”)

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

Toll Brothers was down 7.4% to $46.93 after releasing Q4 earnings and 2018 outlook that “missed analyst expectations”. At a quick look the Q4 results look pretty strong to me and I think it is the analysts and not the company who have some explaining to do. This stock has been volatile and could certainly go in either direction. But I think it still offers good value. The U.S. housing recovery appears to be still in progress.

Constellation Software was up 2.5%.

The Melcor REIT was down 3.1% to $8.55 after it issued units yesterday at $8.50. This one is certainly worth considering given its yield of 7.9%. The unit price is below book value due to concerns about the Alberta economy including the potential for vacancies in its rental spaces and possible loss of market value on its buildings. A 7.9% cash yield never comes without some level of risk, but this seems likely to work out well over time.

To the extent that “the market” even noticed Melcor Developments today it was unenthused by the sale of the 5 buildings to the REIT.  It is unclear to me if the buildings were sold below book carrying value or not. It appears they may have been transferred at $1.5 million below or around 2% below book, given that was the discount to appraised value as at September 30 and they may have been carried at that value. Furthermore, since the REIT is about 53% owned by Melcor Developments and is consolidated into Melcor Developments balance sheet, it might be the case that no loss or gain would be booked. But I suspect there would be as the buildings would now likely be carried at the purchase price rather than appraised value.

Bank Profits

I am currently taking a very close read of Royal Bank’s Q4 and fiscal 2017 results.

Even after many years of looking at bank balance sheets, I remain shocked by the level of leverage employed. And I am stunned by the level of profitability that Royal Bank has in personal and commercial banking which represents 50% of its total earnings.

Royal reports a return on equity on personal and commercial banking of 28.5%. And that is not due to anything unusual this year. The prior three years averaged a bit higher than that.

Part of the reason is extreme leverage. In this business segment, Royal has assets that are 21 times higher than the common equity that it attributes to this business. That means its equity ratio is just under 5% of assets. Now, on a risk-adjusted basis they would be leveraged “only” a bit under 10 times and have common equity somewhat over 10% of risk-adjusted assets. But 10% is still low for any industry except banking.

I just find it ironic indeed that banks and the whole financial and credit rating system would insist that most companies need common equity of more like 50% and so may leverage more like only two times, but banks can apparently safely leverage with risk-adjusted assets at 10 times common equity and actual assets at 20 times common equity.

Also a 28% ROE seems very attractive indeed. It raises the question of whether banking is susceptible to disruption and new entrants who would be satisfied with lower profits in relation to equity.

And the high leverage raises the question of whether this is really safe. Is a bank leveraged like this as safe as it thinks? Maybe so, given federal mortgage insurance. But the safety of Canadian banks would remain to be seen in the event of a truly deep recession or in the event that housing prices were to go into free-fall. (What has rocketed up, may not be expected to come down, but the possibility may be there). The ability of Canadians to pay their loans is one thing in an environment where new loans to make payments on old loans are very easily available. If the lending taps were to be turned off, that ability would be somewhat different. I am not predicting anything here, but this sort of scenario is perhaps not impossible.

On Monday, U.S. markets opened sharply higher reflecting the Senate approval of the income tax reduction plan over the weekend. The excitement died down by the end of the day and the S&P 500 was down 0.1% while Toronto was down 0.4%.

I reviewed my own cash position on the weekend and found I was at 23% cash. I’d like that to be a bit higher but it is always hard to decide what to sell. This morning Berkshire was up sharply and so I decided to sell half of my remaining small position. And Canadian Western Bank was up and I have heavy allocation to it and decided to sell a small portion of that. Most or all of my selling in the past few months was likely a case of selling too early as stocks have mostly continued to move higher. Nevertheless, I think the trimming was prudent. I am often adding to positions when stocks fall and it makes sense to do the opposite as those same stocks rise.

In today’s trading: FedEx was up 3.6%. Costco was up 2.4%, Bank of America was up 3.4%.

Visa was down 3.3%.

Berkshire’s A shares got as high as $299,000 per share today. These are the self-same shares that were trading under $20 as Warren Buffett took control of the company in 1965. His average cost was $14.86 per share. The earliest price shown on Yahoo Finance for these shares is $380 in March 1980.

The U.S. markets seem to be pricing in a lot of optimism. Stocks can likely stay high and go higher as long as basically all the big news breaks to the positive. That is the income tax reduction gets passed into law, the spending bill gets passed to prevent the government shutdown, Trump does not get charged or impeached anytime soon and there is no other major bad news.

Melcor Developments has announced it is selling 5 commercial rental properties to the Melcor REIT for $80.9 million. The properties are fully leased and are mostly retail but one of the properties is Industrial.

There was no disclosure by Melcor Developments of whether there was any gain or loss on the transfer. Since these properties were already marked to market, I would normally expect there was little or no gain or loss except possibly a small loss due to the transaction costs. But I see that the Melcor REIT disclosed it is buying the properties at a $1.5 million discount to appraised value. This would seem to imply a loss for Melcor Developments unless the properties were on the books for less than book value.

Melcor management indicated that the proceeds could be invested in new projects or raw land.

There was no mention of any of the money going to dividends or share buy backs.

The REIT will issue shares (units) and debt to pay for these assets and the share unit issue will reduce Melcor’s ownership from 56.7% to 53.6%.

For Melcor Developments $80.9 million represents 21% of the investment properties that Melcor owns that were not already part of the REIT.

Overall, there may be little reason for the moribund share price to react to this news.

Melcor REIT

The REIT is issuing $15 million in new units at $8.50 (approximately a 6.7% increase to the unit count) and $20 million in convertible debt paying 5.25%.

These new issues seem attractive as investments and the new issues both sold out quickly.

$2.5 million off the purchase price is paid by issuing a form of REIT units to Melcor. So it seems Melcor is not getting $80.9 million in cash. The external cash coming into Melcor appears to be $35 million.

There is also some debt on the properties which the REIT is taking over.

This transaction is probably moderately positive for the REIT’s unit price since it constitutes growth for the REIT.

Overall

The transaction and its impact is certainly not entirely clear to me. It’s all a bit confusing when a building is sold to an entity 53% owned by the seller. This transaction is in keeping with why the Melcor REIT was established.

What, me worry? (said the market)

On Friday, the S&P 500 ended the day down 0.2%. But at one point in the day it was very briefly down 1.5% probably due to Flynn’s guilty plea. Toronto also ended the day down 0.2%.

Linamar was down 3.0% and Dollarama was down 2.2%. Stantec was down 1.6%, Visa was down 1.7%, Toll Brothers was down 1.3%.

The Canadian dollar surged 1.8% after Statistics Canada reported (actually estimated) that the Canadian economy added (a statistically estimated) 80,000 jobs in November and that the national unemployment rate fell sharply to 5.9% from 6.3%. (Take that, doomers!)

The U.S. stock markets largely shrugged off Michael Flynn’s guilty plea and the implications thereof and continued to focus on the Senate passing the income tax reduction bill. That bill looked set to pass the Senate Friday evening but there would be a next step where the House and Senate bills have to be reconciled and (I believe) the reconciled version passed by both the House and Senate.

Perhaps by Monday the market will be focusing on the implications of Flynn’s plea and who he has now (quite rightly) tattled on. I tend to think this is truly the beginning of the end for Trump. At very least there would seem to be justification for charges of obstruction of justice in regards to Trump’s efforts to halt the investigation of Flynn. And despite the gravity of the situation, I think the Special Prosecutor would proceed because: 1. It is his job and 2. He would likely (wrongly or rightly) view it as doing a huge favor to America and the world. Any charging, impeachment or resignation of Trump is going to be a scary time. I would expect his supporters to riot in the streets – and for him to encourage that.

I did go ahead and sell half of my relatively small American Express and Costco positions this morning. I also then sold what amounted to just over half of my relatively small remaining position in Bank of America. All of these sales were in registered accounts where I don’t have to worry about paying tax or even reporting the transaction.

As November came to a close, the good times continued in the markets.

The S&P 500 was up 0.8% and the DOW surged 1.4% and Toronto was up 0.6%.

This came as it appears more certain that the Senate will pass the corporate income tax reduction bill in the U.S.

CN Rail was up 2.6%

Canadian Western Bank was up 2.3%.

Even Melcor came to life and rose 3.4%.

FedEx was up 2.4%.

Costco rose a hefty 3.9% after reporting blow-out same-store sales growth for November.

AutoCanada was up 4.0%.

Dollarama was down 2.1%.

Perhaps I am being too cautious, but for my own situation I am inclined to continue to think about trimming some positions. I’m up 20% on a small Costco position as well as 20% on a small American Express position both in a registered account. I may sell half of each.

There are some things to like about Bombardier as a company. It makes great and exciting products. (Top of the line business jets, great commercial jets including the new C Series, fast trains and subway cars). The company employs many thousands of people and contributes greatly to the economy of Canada and some other countries and helps meet the transportation needs of the world.

I’d love to be able to say the stock is a good investment. Unfortunately, I can’t say that. It actually has a book value of NEGATIVE $2.71 per share. Now, that is a red flag but not necessarily a deal breaker at all. For example, Dollarama is so profitable that it is now financed entirely with debt and has a negative book value per share. But Bombardier is barely bringing in enough EBITDA to just pay its interest costs. Adjusted EBITDA of $689 million through Q3 2017 and finance (interest) expenses of $507 million. The company shows an adjusted  EBIT coverage ratio of 1.1. Normally anything under about 2.0 is considered unhealthy, I believe.

With these weak numbers it seems to me that a debt restructuring could occur. That would involve wiping out the common and preferred shares. Maybe the government would never let that happen and maybe pending improvements in profits and cash flows mean it will never happen. But maybe it could happen. I think governments would be want to protect jobs. But why should they want to protect equity investors?

The company has at times talked about wanting to achieve an EBIT margin of around 8.0%. From rough calculations it appears to me that close to half of that would go to interest costs leaving pre-tax earnings at 4% of revenue (and this is just an aspiration, what they HOPE to do). It just looks inadequate to me.

Based on its numbers I would have to continue to rate the shares as a Sell. And even the preferred shares I am now thinking should be rated a Sell given the weak balance sheet. But I am not very much inclined to update the reports and update the rating on these shares. Instead, I am inclinded to remove these investments from our list. The common shares (A and B) trade at low prices and any improvement in outlook could send the shares higher. This makes it very hard to predict which direction the shares will move in the next year. Maybe I am giving up on Bombardier just when things are looking better. But there is just nothing in the numbers that would give me much faith.

I have also long been bothered by what looks to me like poor disclosure. Over the years their reports hardly mention government assistance. How can that be? When they announce a new plane order it is always at “list price”. It turns out list prices seem to be grossly exaggerated compared to the actual prices. How is that honest reporting? Then they seem to deny that the C Series plane order from Delta Airlines was “dumping”. But they booked an “Onerous Contract” charge on that sale. (I had never before heard of a company making a sale and then immediately booking a huge loss on the sale). In my view, the company has not been honest with even itself for years.

Consider Bombardier’s Debt:

They just successfully raised one billion dollars of seven year debt at 7.5%. That is actually impressive, I suppose. But I find it strange that $600 million of this will be used to pay off lower interest 4.75% debt due 2019. Why pay off 4.75% debt with 7.5% borrowing? I think they have done this before and it may be they don’t want the risk of being UNABLE to raise debt in 2019.

What of these 7.5% bonds though? Are they worth the risk? Bombardier has a a credit rating of B minus from Standard and Poors which means “faces major uncertainties” but it is above the CCC rating which means “currently vulnerable”.

I don’t think I would risk buying these bonds. 7.5% is a very good return if it comes to pass and the bonds mature as scheduled in seven years. But I think it comes with a non-zero risk that this company could be forced to restructure at some point. (In which case  these bonds would likely take a permanent loss.) I think I would prefer a more certain 4 or 5% to this potentially risky 7.5%.

Here is something interesting from Bombardier’s latest report:

In Q3 they delivered 16 commercial planes (7 Q400, 4CRJ regional jets and 5 of the new CS300, the 150 seaters). Revenue was $525 million so $33 million per plane (and that assumes none of the revenue came from spares or anything other than plane deliverys). And they delivered 31 business jets (4 Learjets, 18 Challenger jets, and 9 Global jets). Revenue for business jets was $1095 million. So this appears to be $35 million per plane. I am shocked to see that business jets sell for more than commercial jets even with 5 150 seaters in the commercial figure. Commercial jets are being sold at a loss. Hopefully, Air Canada and Delta and Swiss Air and the others will send nice thank you cards to Bombardier for selling them planes below cost.

Never a dull moment… Wednesday was another interesting day in the markets. The S&P 500 was about unchanged and Toronto was down 0.4%. But there were certainly some stocks with bigger moves.

FedEx was up 3.4%. Costco was up 2.2%. Wells Fargo and Bank of America were each up over 2%.

Visa was down 3.1% and Constellation Software was down 3.1% and Amazon was down 2.7%.

Toll Brothers was up 1.2% and has finally gotten back over the $50 level for the first time since it briefly got that high in a needle peak back in 2005. With new home construction in the U.S. at the highest level since the financial crisis and with home prices rising, and given general optimism, Toll Brothers could certainly continue to rise. Still, with over 10% of my portfolio in this company, I decided to trim my position modestly today.

*********************************************************************

ATTENTION budding stock analysts:

If there is anyone living close to St. Albert who is interested in learning more about value investing analysis and perhaps even doing some analysis for InvestorsFriend, I would be interested in hearing from you at shawn@investorsfriend.com. You would need to have relevant financial / accounting education and ideally already have some knowledge of investment analysis. Unfortunately, I need to restrict this to someone living nearby.

****************************************

On November 26 I emailed an article about the valuation of the S&P 500 to those on the list for my free newsletter. Today, I sent my thoughts about Bitcoin. If you did not receive those click the “Free Newsletter” menu item at the top of this page and enter your email address on the list. The system will indicate if your email is already on the list.

*******************************************************

I was checking fees to transfer money from Canadian dollars to U.S. dollars today. I have no plans to transfer money but was just interested in the fees. Here is what I found:

TD Direct would charge me 1.54% to transfer $10,000 Canadian. So about $154.

Alternatively, I could use the Norbert Gambit buying 782 DLR.u at the $12.78 ask price for Canadian $9,994 and then having that journaled to the U.S. side of my account and selling at the $9.94 bid. This would yield U.S. $7,773. That would actually be (strangely enough) only $2 less than the wholesale exchange rate that Yahoo was showing at that time. There would be a $10 fee to buy the DLR.u and a $43 fee for selling the DLR early before the settlement date. And the $43 might be in U.S. dollars. So, it would appear that the cost here would be just under $70 or 70 basis points and considerably cheaper than just doing the regular transfer described above,

Another option (not applicable to registered accounts) would be to go through a currency exchange firm. I used Knightsbridge foreign exchange inc. recently to make a payment in Australian dollars.  For $10,000 Canadian going to U.S. dollars, Knightsbridge quoted me a rate that worked out to a fee of $47 U.S. or about Canadian $61 so 61 basis points. I would have to wire the money to Knightsbridge which would cost me $30 and a trip to the bank branch. So this would be cheaper than straight TD online transfer but is a lot more inconvenient.

It appears to me that the Norbert Gambit with DLR.u and DLR is very cost effective. The precise cost could vary depending on the bid/ask spread on these units but in general this looks like a good approach. Due to trade fees this probably only makes sense for transfers of more than about $5000.

The Knightsbridge approach might be best when transferring money that is not in an investment account and so where DLR can not be used. Also I will use Knightsbridge again when making any large payments in Australian dollars.

Well then, Party On!

On Tuesday, the S&P 500 was up 1.0% and the Down Jones Industrial Average was up an attention-grabbing 255 points or 1.1%. The jump was fueled by optimism that the corporate income tax reduction bill is closer to getting passed. A version of the bill passed a Committee vote and will be debated I believe tomorrow by the full Senate.

I wonder though how many times the market can rise on the same news?

As an investor I suppose I should cheer for a corporate income tax cut. But I look at the fact that the after-tax earnings on the S&P 500 are up 20% in the last year on a GAAP basis and 17% on an operating basis – to, by far, new record highs. And I look at investors happily paying 24 times trailing GAAP after-tax earnings for the S&P 500 and I wonder how that indicates that American businesses are suffering under the current 35% income tax.

Sorry, but I have never been in the “any-tax-cut-is-a-good-tax-cut” camp.

If the tax cuts do come they will also benefit those many Canadian companies that earn a lot of their revenues in the U.S. These include Couche-Tard, Stantec, CN Rail, Fortis Inc., Royal Bank, CRH Medical, and Constellation Software as well as many companies not our list. CN rail in particular would likely get a large one-time gain due to a lower liability for its deferred income taxes.

Meanwhile as markets cheered the progress on the tax cut legislation, the North Korean Intercontinental Ballistic Missile test was ignored as was a looming possibility of a U.S. government “shut-down” that could apparently happen on December 8th if certain spending bills are not agreed to by then.

So, it is party on as investors keep dancing as the music keeps playing or something like that. The CEO of Citigroup in August 2007 prior to the financial crisis, in the midst of warnings about loose lending, famously said that one had to keep dancing as long as the music played even as he admitted that the then party would end at some point. It soon did.

Now, 2017 is not 2007 and there is nothing equivalent to the sub-prime lending crisis threatening the U.S. markets at this time. But there is the prospect of higher interest rates which will be a negative at some point. There is the potential for increased tensions with North Korea. There is the fact that U.S. protectionist policies could harm the U.S. economy at some point. Still, U.S. markets could certainly keep going up. And as Buffett would say, the S&P 500 is almost certain to be higher a couple of decades from now and probably substantially higher. But even so, there will be a decline in the market at some point. When that happens investors with some cash on hand may find some bargains.

In today’s market most of the U.S. stocks on our list were up.

Toronto missed the party and was down 0.1%. Stantec was down 2.1%.

Meanwhile, the Alberta government upgraded its economic outlook and estimates that Alberta’s GDP will have grown 4.0% in 2017 when the final numbers have been tallied.

Amazon.com (Is it the only company left that actually has dot com in its official name? There used a bunch of them.) is updated and rated Sell at $1,196.

I can’t deny that my rating performance on this stock has been very poor. I first added it to the site on July 4, 2015 rated Sell at $438. Prior to today, my last update was Sell at $1004 on June 24 this year. In fairness, the reports I post consist of a lot more than the final rating and in that June 24 report there was certainly a lot of information and the concluding sentence in the rating cell was “Nevertheless, the shares could certainly continue to rise and some may wish to hold it but should be aware that its earnings need to grow massively to justify the stock price.”

I continue to look at Amazon to try to understand what I am missing. The stock is currently trading at 305 times trailing year GAAP earnings. That presents something of a mystery.

Several possibilities come to mind as follows:

1. The stock is way over-valued, or
2. GAAP earnings are going to increase at huge rates like 50 or 100% for quite a few years, or
3. GAAP earnings vastly understate the “true” economic earnings of the company at this time, or
4. Some combination of the above.

Looking at its income statement, I think a good case can be made that GAAP earnings are way understating the “true” earnings due to excessively conservative accounting (which most likely is required by accounting regulations). There is a large expense for “Technology and content”. The company explains that “Technology costs consist principally of research and development activities…”  Research and development will probably benefit many future years and is therefore in substance creating an asset. To the extent that some of this large technology and content expense is actually going to benefit future years, current earnings are under-stated. Similarly Amazon spends a lot of money on Marketing and some of that will surely benefit future years. The difficulty is that I have no way to guess how much of this expense should perhaps be added back to calculate an adjusted earnings.

Amazon itself likes to focus on various measures of free cash flow. Amazon is unusual in that it collects payment from customers before it has to pay its supplies. It also collects PRIME and Amazon Web Services revenue upfront. Most companies must invest in working capital as sales grow. Amazon instead finds that its cash balances grow with increasing sales even if the sales are done at break even. This creates a sort of “float” similar in some ways to Berkshire Hathaway’s float and to deferred income taxes. It’s a liability but it keeps growing over time. The question arises as to whether at least some of this component of operating cash flow is akin to earnings and should be added back in calculating an adjusted earnings.

In any case Amazon is trading at 73 times free cash flow so even if that were considered earnings the stock would be expensive.

One of the mysteries of Amazon is how does it finance its huge balance sheet growth?

Assets have grown by $51 billion from $64 billion at thne end of 2015 to $115 billion at Q3 2017. That required $51 billion of additional liabilities or equity. Only $4.2 billion came from added retained earnings. $6.8 billion came from issuing shares in “the issuance of employee benefit plan stock” (Which was not for cash but which allows for an expense to be paid without cash) and through the exercise of stock options and to a small extent by paying for some acquisitions with shares. I don’t think there has been any public offering of the shares in at least ten years. So, Amazon has not been issuing shares to the public but stock issued to the employee benefit plan exercises and or acquisitions paid in shares did finance a material portion of the growth. Debt is up by $16 billion and all of that increase came in 2017 with the Whole Foods acquisition. So, with the exception of the whole foods acquisition Amazon has not recently been financing growth by issuing debt. Accounts Payables are up by $5.7 billion and that financed most but not all of the growth in receivables and inventory. Accrued expenses are up by $5.5 billion. Unearned revenue is up by 2.0 billion (PRIME and Amazon Web Services upfront payments from customers). Other long-term liabilities, which consist mostly of lease obligations are up $9.6 billion.  I am not sure if I have solved the mystery here but Amazon is growing its sales faster than its assets and, despite relatively low GAAP profits, it has been able to finance the asset growth through operating liabilities and by issuing shares for a material component of compensation and without adding to debt (until the acquisition of Whole Foods).

The bottom line is that Amazon does look over-valued in relation to earnings and I don’t think any view of adjusted earnings that I could come up with would change that.

However a strategy of refusing to buy the shares on that basis has resulted in a missed opportunity here. A simply strategy of buying Amazon based on sales growth and share price momentum has done very well. The fact is that a value-oriented investing strategy will always tend to “miss” many stocks. But a value-oriented strategy may still still be superior in the long term. At some point, fear will return to the markets and a stock like Amazon could be vulnerable. Time will tell.

On Friday, the S&P 500 and the Toronto stock index were each up 0.2%.

The Boston Pizza Royalties Income Fund units were up 1.6% to $22.48. These units should be a good investment for the 6.5% yield. The price does fluctuate and the units have been a very good investment when bought on larger dips. There is some danger that the price could fall as interest rates rise. But growth in distributions per unit will likely cause the units to maintain or increase in value over the years. But that does not mean the price can’t fall temporarily.

Constellation Software was up 1.9%.

The Competitive landscape for Liquor Stores versus Dollar Stores:

Liquor Stores N.A. which is no longer on our list but which I continue to follow to some extent was up 1.1% to $10.06. I lost faith in this company some time ago and the fact that it is under new management does not change my view. I think they simply face a very tough competitive landscape.

Consider the competitive landscape that this liquor store chain faces. It’s the largest chain in Alberta but still only owns about 13% of the total stores (at my last check). Imagine if you wanted to get into business and compete against them. As a small one-location store you would have no trouble getting wholesale supply at exactly the same prices as this big chain. And it is no secret where to find that wholesale supply. I believe every liquor store in Alberta buys essentially everything (there may a few exceptions for certain specialty wine stores) from the provincial liquor wholesaler and I don’t believe there are any volume discounts at all. If you opened a store in a good location there would be no real issue with trying to establish a brand name or following. It would be obvious what you were selling and a convenient location would attract a certain amount of local traffic. You would be at a disadvantage in terms of scale for advertising. But you might choose not to advertise. Despite its larger scale, Liquor Stores N.A. has not been able to build up any big reputation for low prices – probably because they don’t have costs that are much lower than even a one-location store. The point is that you would not be at any insurmountable disadvantage. This is is proven by the fact that there are many one-location liquor stores operating in Alberta. Given competition, it may not be a very lucrative business, but the mom-and-pop stores do seem to survive.

Contrast that with what would happen if you thought about opening a one-location dollar store in competition with Dollarama. I don’t know where you would go to purchase your goods at wholesale. But I guarantee that you would not have access to the same low prices and the same store-brand proprietary merchandise that Dollarama sources (which is mostly in China). Even if you had a great location, it would not be obvious to customers exactly what you might be stocking. I suspect you would have  a hard time drawing in customers. Even the smaller dollar store chains, which include the Great Canadian Dollar store and Buck or Two Plus!, I suspect cannot access the same low-cost products as Dollarama. Certainly, unlike in the case of liquor, there is no requirement for Dollarama’s suppliers to sell to other dollar stores. The names of Dollarama’s specific Chinese suppliers are basically valuable trade secrets. Dollarama has built up a huge amount of brand awareness which is very difficult to compete against. The point is that Dollarama has established itself in a manner that is extremely difficult to compete against. I don’t think a one-location dollar store could easily survive. Only large chains would have much chance of competing successfully against Dollarama. Dollarama gets a huge advantage from being by far the largest of the dollar store chains and from the proprietary sourcing knowledge and relations that it has built up. In the liquor store business the fact that everyone must purchase from the same provincial wholesaler at the same price eliminates much of the advantage of scale.

Dollarama is updated and rated (lower) Sell at $162.03. For a number of years I have described Dollarama as a great company and one of the best managed companies in Canada. But it has always seemed expensive and I believe the highest I have rated it is (lower) Buy. In 2017 it is up another 65%. Despite all its great characteristics the current P/E of 39 seems very high and may be pricing in too much future growth.

It will report its Q3 earnings on December 6th. That may be another strong quarter possibly boosted by the fact that it began accepting credit cards in all stores as of May 1.  Starting in January, it will face a significant boost in wages due to higher minimum wages in Ontario. That could slow growth. And overall, it could struggle to continue to show same store sales growth in the range of 6% quarter after quarter.

If I had a large position in this stock, I would at least trim the position. I do not own any shares.

On Thursday, U.S. markets were closed for Thanksgiving while Toronto was unchanged for the day.

There was no movement of note in any of the stocks on our list.

Oil rose a bit more and is at $58.37. That’s good except that part of the reason for the increase is the fact that the part of the Keystone pipeline that is operational is shut down due to a leak which lowered oil supply in the U.S. and caused the price to increase somewhat. So, that could be quite temporary.

On Wednesday, the S&P 500 was down 0.1% while Toronto was about unchanged.

Canadian Western Bank was up 1.7% to $36.73. This bank is benefiting from the strong recovery in Alberta. The recession in Alberta bottomed out around November of 2016. While the economy has not fully recovered, there has been a substantial recovery.

Oil jumped 2.2% today to $58.06. The Conference Board of Canada in a new report estimates that Alberta’s GDP growth for 2017 will come in at 6.7%! The Alberta Treasury Branch economists put the estimate lower but still strong at 4%.  Statistics Canada recently reported that the investment in single family housing in Alberta in September had risen 35% year over year although it was still down 23% from the September 2014 level.

With the continued recovery in Alberta and particularly with the market and pricing for new single family houses apparently doing well, I would expect Melcor’s share price to eventually react positively. AutoCanada has also been benefiting from the recovery.

The Alberta government has an “economic dashboard” web site. Clicking there you can see that most of the indicators that they are tracking are green which indicates improvement. I have also noticed that the government employee(s) responsible for this site seem to update it immediately when new data becomes available. Government workers are often maligned but I think they deserve credit in this case.

Markets were up “bigly” on Tuesday with the S&P 500 up 0.65% and Toronto up 0.45%.

There appears to be a lot of optimism in U.S. markets based on recent earnings growth and projections for continued robust earnings growth. GAAP earnings on the S&P 500 are up 20% in past 12 months and are projected to rise another 20% in the next 12 months. Analysts tend to focus on operating earnings which eliminate certain unusual items and those are up 17% in the past 12 months and are projected to rise another 18% in the next 12 months. That is a lot of optimism given that earnings a year ago were not in any kind of trough. If the projected earnings increase in the next year occurs it would put the S&P 500 earnings well above the trend line of growth. That could occur but I would not count on it. This kind of earnings growth would put the lie to the notion that large companies face stiff competition.

Toll Brothers was up 2.0% to $47.95. This is a record high other than the needle peak of just over $50 reached in 2005. After 2005, Toll Brothers plunged with the financial crisis and bottomed out under $15 in September 2011.

For Toll Brothers to be at a record high is not necessarily anything to brag about or to worry about. This is a company that until recently retained all of its earnings for growth and as of now pays out a dividend that only amounts to 11% of earnings. Any profitable company that retains a large portion of its earnings should naturally be expected to have a rising share price over the years just as a bank account will grow if interest remains in the account to compound.

Dollarama was up another 3.3%. It’s a great company but is too expensive for my tastes.

Linamar was up 2.6%. I added 30% to my position in this stock today.

The report for Linamar is updated and rated Strong Buy at $68.50. The price has declined from about the $80 range after the release of Q3 earnings. Earnings per share were down 12% in Q3 whiles revenues per share were up 6%. The company indicated that earnings per share were actually up 9% on an adjusted basis but was not able to fully explain the source of the adjustments because part of it came from a boost to the prior year earnings related to a confidential payment from a customer to be released from a contract. Some of the adjustment related to variations in foreign exchange.

Overall the company appears cheap at 8.5 times earnings and they project double digit growth for 2018. However the market may perceive bigger risks from a NAFTA termination and in general is unwilling to pay a higher multiple for a company viewed as cyclic and with auto sales possibly at a cyclic high.

While, there are always risks, the company appears to merit a Strong Buy rating based on its numbers. As always there are many details in the report and subscribers are encouraged to consider the full report and not just the rating. I plan to add somewhat to my position today.

On Monday, the S&P 500 was up 0.1% while Toronto was about unchanged.

Home Capital was up another 7.0%.

Melcor was down 1.6% to $14.70. It is possible that there is some tax loss selling involved. With the shares trading right around half of book value it can be argued that the market feels that this company is worth significantly more dead (liquidated) than alive. It is disappointing that management does not see fit to buy back even a token number of shares. They recently added to land holdings so that would suggest that they could have spared some cash for buy backs. This stock has required a lot of patience. If the Alberta economy and oil prices continue to improve then that should pull the share price up. We won’t get another earnings / sales report until March. Meanwhile the dividend yield is good at 3.5%.

Shortly I will post an update for Linamar which appears to be undervalued after its recent decline.

On Friday, the S&P 500 was down 0.3% while Toronto was up 0.4% Oil prices rose and West Texas Intermediate is at $56.68.

TFI Industries was up 1.4%.

Home Capital was up 3.8% to $15.67. It’s not on our list but I bought a small amount as mentioned on August 24 and I commented on the company on September 3 and September 11. Some analysts and observers thought that Buffett was crazy to invest in Home Capital. He paid $9.55 per share striking a deal when the shares were lower than that and the company was in extremely serious trouble. Buffett’s shares were purchased directly from the company and not other investors and so shored up Home Capital’s balance sheet and his seal of approval restored confidence in Home Capital. Confidence is something that deposit taking institutions absolutely must have. I have a theory that Buffett did this deal, very small by his standards, just to show people that he still has the skills and energy to do things like this.

Walmart was down 2.2%. Its 11% surge on Thursday may not have been justified. On an adjusted basis its earnings per share in the quarter were up only 2%. Its projected earnings per share for the full year that will end in January appear to be just 2% higher than the prior year. It is trading at about 22 times those adjusted earnings. Walmart is a great company but it has been growing earnings only very slowly in recent years. The main cause of the share price increase is likely the 50% rise in online sales that it reported. That is very impressive but online sales remains a very small proportion of total revenues. Also it was not clear how much of the 50% was due to the acquisition of Jet.com that Walmart made last September. If a good part of it was due to that acquisition then it would seem that we could not expect a 50% gain next quarter since the prior year comparable quarter would then already include Jet.com

A comment on Fixed Income

I was thinking this morning about whether there might be opportunities in corporate bonds. I would only be interested in relatively short term bonds such as up to about 5 years since I would not want to take the interest rate risk that is inherent in longer bonds. I thought maybe a company like Enbridge might offer an attractive yield because it has been viewed as having some weakness.

Looking on TD Direct at bonds up to five years duration, nothing seems attractive to me. There are very few that yield as much as 2.0%. One of the highest is a FairFax bond that has a yield to maturity of 2.62% and matures in June 2020 (so 31 months). The return is perhaps acceptable but is not overly compelling. If you had to sell the bond early it appears that you would lose 1.1% on the bid/ask spread in selling it back to the bank.

TD Direct also lists some high-yield bonds. Some of these are from riskier companies including Bombardier and Sherritt International. One that looked interesting to me was a Parkland Fuel Corp bond due just short of 7 years that yields 5.2%, or if called early in 5 years yields 5.0%.

In general most investors looking for fixed income might be better off to look at ETFs which offer diversification and probably lower bid/ask spreads. Our ETF list includes some fixed income ETFS, but admittedly there is not much yield to be had in the shorter term ETFs. The ishares 1- 5 years laddered corporate bond index ETF, symbol CBO is yielding about 2.3% (to maturity of the bonds held) and has a management expense ratio of just 0.11% for a net return of about 2.2%.

With these low yields, I don’t hold any fixed income as such and instead am content to hold some cash on which I can earn 0.95% in the “high yield” bank deposit offering of my brokerage account. I like having these funds instantly available for other investments. If I wanted to hold a higher level of cash/fixed income such as 40%, I might consider putting some of it into fixed income rather than cash.

Guaranteed investment Certificates could be considered rather than short-term bonds. TD Direct offers 1.8% on a TD 5 year GIC. But they also currently offer, for example, 2.71% on a Canadian Western Bank 5 year GIC or 2.70% from Laurentian Bank. Not only are these almost certainly safe issuers, these investments are covered by government deposit guarantees up to $100,000 per investment account. No doubt there are higher yielding GICs in the market but you will not typically find those available from a bank discount broker such as TD Direct. Keep in mind that these GICs would not be cashable before maturity.

It’s tempting to consider preferred shares or other higher dividend investments as a substitute for low-yielding bonds or GICs. If doing so be aware that those have no maturity date on which they would return the principal. The market price of these investments can decline below what you pay for them and stay down. The same criticism has been levied against fixed income ETFs. However, the fixed income ETFs are considered fixed income since they hold investments that do mature. Arguably this is not much different than an investor holding a portfolio of individual fixed income investments that mature, but not on the same date.

Fixed income distributions are taxed at the full marginal rate and therefore it is best to hold these in non-taxable accounts.

On Thursday, the S&P 500 rose 0.8% as the House of representatives passed a proposed income tax reduction bill. The Senate republicans hope to pass their different version of the bill in the next couple of weeks. If that occurs the two bills would need to be reconciled into one final version and passed by both the Senate and the House, as I understand it. It’s not a done deal yet.

Meanwhile, Toronto was up 0.4%.

Walmart was a huge winner up 10.9% to $99.62 after releasing Q3 earnings. The improved earnings and outlook has surprised the market. The Walton family still owns about half of the shares and they saw a gain in their wealth of around $16 billion today. 10.9% produces a really big gain when it is applied to something in the order of $155 billion. The Walton’s collectively are easily America’s richest family. The big excitement today was driven by online sales being up about 50%, store traffic being up 1.5% and same-store sales up 2.7%. It remains to be seen if this big share price jump will sustained.

CRH Medical finished the say up 11.2%. The company indicated to me that it has not yet bought back any shares. Ceapro finished the day up 5.4%.

TFI Industries (formerly TransForce) was up 2.8%. Dollarama was up another 2.5%.

Overall, it was a very strong day for the markets.

Visa Inc. is updated and rated Weak Buy / Hold at $111.25. The previous rating was Buy at $78.02 on January 1 of this year. It’s up about 43% since then. The gains were very steady all year. It remains a power house of course. But at 32 times trailing earnings it is expensive.

I have only a small position in it. I considered trimming my position today but decided that given the small size of the investment I would let it ride for now.

I notice that Ceapro released Q3 earnings yesterday morning before the open, The report has positives and negatives. Moderately higher sales but significantly lower profit. But keep in mind that when profits are low, the percentage swings can easily be large. The company reports some progress on its research efforts but there are no real break throughs. Recently it seemed to me that the company was focusing more on its research efforts and vieed its actual sales in the cosmetics business to be the source of funds for research and not the real driver of profit. Now it seems to be focusing more attention on the cosmetics business. It recently announced an acquisition. I view Ceapro’s research efforts as a sort of lottery ticket. It could pay off nicely but it might just turn out to be a waste of money. But meanwhile the base cosmetics business may be enough to justify the current share price. Ceapro is a penny stock and a speculative pick. Not a stock that I would put serious money into but one where I am content to have a small exposure.

CRH Medical is up 10% this morning. Hopefully we have seen the bottom for this one. It’s going to be well into 2018 before we can see its profit levels under the new lower fee structure.

P.S. 11:30 eastern

There is a vote on the income tax changes in the U.S. Senate today which may be why the market is up. Much of the upside for the hoped for corporate tax reductions must already be “priced in” – if so, we could see market declines if the tax bill does not get passed. And it is going to be tough to get it passed.

On Wednesday, the S&P 500 was down 0.6% and Toronto was down 0.2%.

Recent experience notwithstanding, the S&P 500 index does decline sometimes. Warren Buffett suggests that most Americans simply invest in the S&P 500 index and they will do well. But he means will do well over a lifetime of investing. He has said many times that markets can fall in the short term and that he has no ability to predict when or by how much and he very much doubts anyone else has that ability either.

CRH Medical bounced up about 12% today. The company has not yet reported any recent buybacks or insider buying despite the lower share price. It’s possible that insiders are precluded from buying due to their knowledge on non-public information – for example if an acquisition is in the works. Or maybe they simply lack the courage to act on their apparent view that the stock is under valued.

Canadian Western Bank was up 2.2% today.

FedEx was down 2.5% today.

I did end up trimming my Toll Brothers position somewhat today. It remains one of my larger positions. I sold in an RESP account where I had gains of over 80% some of which likely came from the currency change.

AutoCanda was down 2.3%. Statistics Canada reported new vehicle sales for September. sales had risen in the country overall as well as in Alberta. AutoCanada has already reported Q3 which included September so perhaps this report reveals little. But it still shows positive momentum going into October.

I listened to Donald Trump’s speech today about convincing all countries to put pressure (through trade sanctions) on North Korea and about doing Fair trade deals as opposed to just free trade deals. This was a good speech that will definitely play well with his supporters. And even those against Trump will have a hard time arguing against what he said today.

Trump’s views implicitly assume that Americans (or the citizens and businesses of any nation) are basically part of a giant “team”, where America wins or loses as a Nation. That’s an attractive notion but it may not be very true. In reality the people and businesses of a nation compete a lot with each other and do not win or lose as a collective team. Imports from China certainly hurt some businesses and cost some jobs. But those cheap goods also benefit millions of Americans. Economic theory suggests that free trade tends to have more benefits than costs. And there is absolutely no requirement to have balanced trade with each and every nation. Certainly, the overall trade deficit of the U.S. is a problem, but it probably makes no sense to think that there should be a balance with each country – even if that sounds logical.

As for Canada, I think Trump’s stance against NAFTA is a problem and is a risk for Canadian exporters and their employees. It depends how negotiations eventually play out.

Tuesday’s markets saw the S&P 500 down 0.2% and Toronto down 0.7% (as commodity prices fell).

Toll Brothers was up 2.2% to $47.05. It’s now up 52% this year to date. Our last rating was (higher) Buy at $42.81 on October 9th. The 10% price increase since then would likely be enough to reduce the rating to Buy or (lower) Buy if the report were to be updated.

Whether someone already holding this stock should add, hold or trim depends on more than just the rating. Such a decision would be influenced by the size of the position. I have a large position and would not consider adding more at this time. I trimmed this position to raise cash on October 17 at $43.10 which it seems fair to say was a prudent move but could now be viewed as a mistake. With a large position I think it is prudent for me to trim it somewhat and I may do so tomorrow. I hold some in RRSP and RESP accounts where triggering a capital gain is not a factor.

TFI International was down 3.1% to $30.76. Our last update rated it (higher) Buy at $27.50 back on May 21. This is a very well managed company and should continue to do well in the long term.

CRH Medical was down another 7.7%. Hopefully the stock is just being dumped by people who look only at price trends and not fundamentals. The company certainly claims that it still has a profitable operation and in fact that they are still growing by acquisition.  There is certainly a lot of uncertainty over how profitable it will be in 2018 under the new lower fee structure but I did not see any indication at all that it would not continue to be profitable and grow.

Boston Pizza released earning this morning that were neither particularly good nor bad. Same-store sales which is the absolute key driver of valuation were up only about 0.4%. Still, it is an increase and this entity that pays out about 100% of its distributable cash does not need much if any growth to justify the unit price.  Distributable cash per unit was up 3.5% but that appeared to be due to certain smaller items that are somewhat volatile. I would continue to consider these units to be worthy of a Buy rating and possibly it should be more like (higher) Buy.

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

AutoCanada was up 2.8% adding to Friday’s 9.2% gain which was in response to its Q3 earnings release.

Constellation Software was up 1.4%.

FedEx was up 1.5%.

CRH Medical was down 1.0%. It seems likely that tax loss selling is contributing to the recent declines. Last week, the company announced it had approval to buy back shares. No such repurchases have yet been reported which could be due to a lag between purchasing and reporting or it could be that no shares have been repurchased.

My next update will be for VISA Inc. It’s up 43% this year. I have long said that VISA functions as an oligopoly or duopoly when it comes to consumers choosing between it and MasterCard (and sometimes American Express or other cards). And I have said it is more of a monopoly from the point of view of merchants who in most cases have no real choice but to accept it. Its stock price reflects its remarkable market power and so it will not likely look like a bargain but I have not ran the numbers yet.

I just now came across this link which allows users to rate investment “newsletter” services.

The rating part of this site might be new since not many of the 697 newsletter listed have any rankings yet.

I don’t know anything about this ranking site but it looks okay. It appears to allow you to rank InvestorsFriend.com anonymously.

On Friday, the S&P 500 was down 0.1% and Toronto was down 0.3%.

A big winner was AutoCanada up 9.2% after releasing earnings. Some observers predict hard times for auto dealers as the industry moves to more reliable electric cars and ride-sharing and as driverless cars potentially become so popular that fewer people feel the need to own a car. I don’t know if such predictions will come true. I do know that predicting the future is always tough. Meanwhile the auto sales industry is enjoying record sales in Canada and the West is once again outpacing the rest of the country. “Sales for the Company were up 9.4% in the third quarter, out-performing the national sales increase of 6.8%.” On a trailing year basis, the P/E ratio based on adjusted earnings per share seems reasonably attractive at 16 given that earnings could continue to increase on a year over year basis. According to Yahoo Finance, the stock is trading at 12.5 times the expected level of 2018 earnings per share. I have a relatively large exposure to this company and I am not thinking of reducing my position.

Stantec was up 2.0%.

Regarding Melcor Developments, I came across the following analysis of its value in an RBC update of a few days ago:

Our (RBC’s) $16.00 price target is derived through a sum-of-the-parts valuation, which includes: 1) a $9.25 value for Melcor’s Community Development division, derived though a ~0.50x price-to-book ratio, a discount to peers which trade at 1.5x, reflecting negative
investor sentiment due to the company’s exposure to the oil patch; and 2) a $6.75 value for the company’s Commercial Properties portfolio, derived though a ~0.55x multiple to our NAV per share estimate, which reflects a holding company discount and compares to the current P/NAV of Melcor REIT at 0.84x. Overall, our target price implies a ~0.56x multiple to our adjusted book value of $28.49. Based on relative risk-adjusted return expectations, we rate MRD shares Sector Perform, supported by our price
target.

So RBC believes that due to its exposure to the oil patch Melcor’s lands should sell at just half of what those lands cost Melcor (including the costs of development and capitalized interest on the land). With this logic, when Melcor buys new lands or invests in developing raw land into lots, they are effectively as Buffett would say “turning dollar bills into 50 cents pieces”. Meanwhile “peers” (not exposed to the oil patch) sell at 1.5 times cost. And meanwhile oil prices have risen in recent months and activity in the oil patch is increasing. To me, RBC’s analysis looks like nothing more than using whatever multiple happens to basically explain the current share price. If one is to believe that the current share price of stocks is generally correct then why bother with analysis? If the market is always correct and there is no ability to identify under-valued stocks then it would be logical to simply invest in the index. In my view the $28.49 book value is likely a more reasonable estimate of the true value of Melcor. Even though the share price might not reflect that true value anytime soon, I like to think that buying Melcor around $15 is basically what Buffett would describe as “buying dollar bills for 50 cents” or something close to that. Well, only time will tell which view is more correct.

The Melcor REIT report is updated and remains rated Buy at $8.73 yielding 7.7%.

This REIT was added to the site on September 25, 2016 rated Buy at $8.63.

Since then, the units have done their job paying an annual yield of 7.8% of the $8.63 and with the unit price remaining quite stable.

The Melcor REIT is arguably an investment that could pay out a dividend yield of 7.7% for a great many years with probably some modest increase to the dividend over the longer term. Even if so, that is not really that exciting. If you put $10k into this and it pays $770 per year or $64 per month, and if the unit price remains stable, that is not much to get excited about. And there is the chance the unit price will decline.

But what if you have a larger portfolio and are looking for income and willing to hold for years? If someone puts $50k into this and collects $3850 per year or $321 per month, that might be reasonably exciting. For taxable accounts the dividend tax credit does NOT apply. (This is a correction written November 13 at 10:15 am eastern) I originally wrote that the dividend tax credit does apply. It does not apply to REITs which are therefore probably best suited to RRSP and TFSA accounts. For some REITs the distribution may be return of capital but that varies year by year.

Some investors would be attracted to the idea of owning hard assets, which in this case is a portfolio of buildings with about 50% of its rents from office buildings (mostly in Edmonton) and 43% from mostly newer retail buildings (this includes bank branches) the great majority of which are in Alberta. Owning and collecting rents from buildings has been a strategy of wealthy people since time immemorial. The term Rentier is sometimes applied to such wealthy people. Rentier is often seen as a negative term – mostly, not coincidently, by people not in a position to collect such rents.

Certainly the unit price is not immune from declining. This could occur due to higher interest rates and/or due to a developing surplus of office rental space in Edmonton among other reasons.  But keep in mind that the traditional wealthy rentier family kept their lands and buildings for decades and even generations. They were not looking to make a quick capital gain and sell. So, perhaps investors in this REIT could take the same long-term view. The distribution is unlikely to be cut but that is always a possibility.

Overall, the 7.7% yield is quite attractive and many investors might conclude that there is a place for this REIT in their portfolio. To date, I have not bought it partly because I am already so heavily exposed to Melcor Developments. But I am quite tempted to buy at this time.

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

Canadian Western Bank was down 1.9% to $34.37. With oil having recently risen to the $57 level I suspect that they will report good results for their Q4 which ended October 31.

Canadian Tire was up 3.1% to $162.42 after posting another strong quarter.

After the close, AutoCanada reported strong results for Q3. The stock price reaction tomorrow will depend on whether the result was better than anticipated or not. I would think the price would rise on the news.

Also after the close, Liquor Stores N.A. reported results. This company is no longer on our list having last been rated as Sell on November 14, 2015 at $8.55. Once again this quarter, the company reported a loss.

The company has been reducing inventory. They hope to win back market share. I don’t think they can compete at a sufficient profit level. They face low-cost high-volume competitors in Costco and SuperStore. In addition there are a couple of small chains that have been very nimble and also pursue high volume lower price strategies. Liquor Stores N.A. has long appeared to have far too many stores in Alberta. In my area they have several small stores that appear to be very quiet in terms of sales traffic. Despite the possibility of a recovery here, if I owned this, I would Sell and move on.  They have a tentative deal to sell their Kentucky U.S.A. stores. That will provide cash but I have not seen any indication if they will book a profit on the sale.

On Wednesday, the S&P 500 was up 0.1% while Toronto was down 0.2%.

Stocks that rose today included Stantec, up 1.0%, Couche-Tard up 1.7%, Costco, up 1.7%, and Toll Brothers up 1.5%.

Spoiling the day, was Linamar down almost 14%. The company claimed that earnings were up 9.4% on an adjusted basis but it seems the market decided to focus on the drop in the actual GAAP earnings. Our graph for Linamar shows that it seldom claims much of an adjustment for earnings and on that basis perhaps its claim this time should be given the benefit of the doubt. But they got the 9.4% in part by now claiming that the year ago quarter should be adjusted down, something they did not reveal at that time. Analysts don’t take kindly to retroactive adjustments like that.

The decline in the price here would seem to be a buying opportunity but as noted in our last update, there are risks regarding NAFTA. The stock looks cheap on a P./E basis but this is an industry that is known to be cyclical.

Berkshire Hathaway is updated and rated (lower) Buy at $186.21 which was the closing price yesterday. At the moment the price has dropped slightly to $185.04.

With earnings down somewhat in the past year and with the price up about 30% in the last 12 months the stock is not cheap. But it may get a large benefit from the proposed corporate income tax reductions.

I have sold half of my position on which I had a 39% gain and which was in an RRSP account so that no capital gains taxes are triggered by the sale. I wanted to raise cash and also sort of hedge my bet on this stock.

Berkshire continues to have a HUGE cash position at $109 billion. Even as a percent of assets, to put the figure in context, the cash position is quite high at 16% of assets. I suspect that if Buffett / Berkshire does not find acquisition to reduce the cash down under about $60 billion it may well finally introduce a dividend, either a regular dividend or a one-time payout.

Warren Buffett is 87 years old and shows no sign of slowing down. But of course health issues could arise and force him to step down at any time. It’s always possible that he will curtail his role at any time but so far he has given no indication that he will do that. The Board knows who would replace Buffett he were gone at any time.

Berkshire’s book value per share is up 963,100% since Buffett took over the company. I have information that Buffett has his eye on seeing that figure rise to one million percent (another 3.83% from here would do it). It’s always possible that Buffett would see attaining one million percent growth in book value as a convenient time to retire. But again he may just continue to march on. The share price gain is already up around two million percent, but Buffet has always used book value per share as his yardstick to measure progress.

On Tuesday, the S&P 500 was about unchanged while Toronto was up 0.25%.

Wells Fargo and Bank of America were each down 2.0%.

RioCan was up 1.7% to $25.35. It had released earnings late last week.

Linamar was down 1.9% and then released earnings after the close. On an adjusted basis the earnings were up 9.4% but were down on a GAAP basis.

On Wednesday I will post an update for Berkshire. The stock is up 14% this year to date (and up 30% since it was rated (lower) strong Buy one year ago) while operating earnings are down. It’s tough to get a handle on what its normalized level of earnings is. With a price to book value ratio of 1.49, the stock is not cheap. But it may get a big benefit from proposed corporate income tax rate reductions due to its huge deferred tax “liability”. So i would rate it probably (lower) Buy.  I hold it and I am inclined now to hedge my bet by reducing my position somewhat which will help me in my goal of raising my cash percentage. The Senate will reveal its income tax proposal on Friday which could affect the optimism for the tax cut and therefore the share price of Berkshire. Every time I have sold Berkshire in the past it later seemed like a mistake to have sold though that’s hard to say as it would depend where I invested the cash after selling.

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

Toronto was up 0.45% as oil (West Texas Intermediate) rose to $57.24, up 2.9%.

Toll Brothers was up 2.1%.

Stantec was down 1.8%. It reports earnings on Thursday.

CRH Medical fell another 7.6% in Toronto. Perhaps I am being reckless, but I added to my position today. This remains a profitable company and I will stick to my usual practice of buying companies that appear to be under-valued. Over time this has worked out well for me although not with every stock and there are never any guarantees.

Melcor is updated and rated Strong Buy at $15.05. In today’s trading the market was unimpressed with the earning and the stock traded as low as $15.00 and closed at $15.15. This is a company that has never failed to report a profit in the 15 years that I have been following it. Its assets consist mostly of real estate and there is no indication that these assets are worth less than book value and yet the equity trades at 51% of book value. I expect book value to rise over the years (though not every year) and I expect the price to trade up closer to book value at some point. This company looks good from a traditional “margin of safety” perspective. The market can ignore the value for a time but ultimately if the company continues to make profits and to slowly raise its dividend over time (currently the yield is 3.5%) then the market will reflect something closer to full value at some point. When the market ignores the value of a stock there is always the option of basically buying and being prepared to hold for the very long term. I would expect the dividend to be raised modestly in early 2018.

Melcor’s Q3 results were strong (in my opinion) with a year-over-year increase in funds from operations of 25%. The number of single family lot sales was up by 58% and the average price was relatively stable but it appears that somewhat more of the lots involved a joint venture partner. The gross profit on lot sales is lower than in peak years but is still reasonably good at 35%.

These shares are selling at just 51% of book value and about 11 times trailing adjusted earnings (which is similar to funds from operations in this case.)

I already have a huge exposure to this company but I would be tempted to add to that on this report if the share price does not increase on the news.

It’s always possible that market for new building lots in Alberta is about to collapse and/or that the market value of its rental buildings will collapse but based on the results reported here these shares appear to remain significantly undervalued. There are many indications that the economy in Alberta continues to recover from the 2014 decline in oil prices.

The report also indicates that while Melcor is owed $6.2 million by the recently bankrupt Reid Built Homes, it retains title to those lots and has concluded that this receivable is not impaired.

Unfortunately it may remain the case that great patience will be needed as the share price may take a long time to move back closer to book value (currently $29.30). Meanwhile I expect book value to increase most quarters though it would decrease if the market value of its properties declines such as due to vacancies or lower market comparable transactions.

I have updated the composition of my personal total portfolio. I wanted to see in particular what my cash position was. It’s 19% and I would not mind seeing it go somewhat higher. I have no fixed income. With no fixed income, a reasonable allocation to cash provides some stability to my portfolio and allows for buying on dips in individual stocks or the overall markets.

On Friday, the S&P 500 was up 0.3% while Toronto was about unchanged.

Bombardier was up 6.1%. Fortis was up 1.4%. CRH Medical was down 15% on Toronto as previously noted.

Melcor released Q3 earnings on Friday and I will be taking a close look at that report today. At a first look, the results look good and the company appears to be optimistic.

CRH Medical is updated and rated Speculative (lower) Strong Buy at U.S. $1.85 or Canadian $2.37. This one has been a huge disappointment as it is down 57%  since it was added to the site on October 9, 2016 rated Speculative Buy at U.S $4.32. And it is down about 80% since the high of about U.S. $9.00 that it reached in early April (and when I still thought it looked like good value due to the growth).

Its latest drop was about 16% today after government-mandated reductions (effective January 1) to the prices it charges for its services were finalised this morning and which included not only the expected reductions that had largely been responsible for the sharp share price decline but an additional important fee reduction. On the conference call yesterday it appears that the company was quite certain that only the expected reduction would occur.

In addition to the fee reductions in 2018 there has been a reduction in revenues per patient this year due to a change in payer mix (more government, less commercial insurance) that the company appeared to be very slow to realize was even happening.

So, clearly some reduction in the share price from the April highs was absolutely warranted. But it appears to have been over done. The company remains profitable and is generating good cash flows and its growth-by-acquisition strategy remains fully in place. Granted, it is not clear what the profit level will be after the fee reductions are in place in January but indications are that he company will still be profitable and generating good cash flows.

Overall, the valuation appears to be quite attractive. With good cash flows, the company is not in danger financially and in fact plans to continue to make acquisitions at the same pace as the past two years.

But this remains a speculative pick and the original indication from October 9, 2016 to consider making only a relatively smaller purchase is perhaps still wise.

It will be interesting to see if insiders step up and buy shares at this latest low price.

One analyst pointed out that there may be tax-loss selling which could keep the price depressed through year end. On the other hand the company mentioned yesterday that it hopes to take some action to boost the share price.

I added to my own position in this stock on several occasions as the price declined since April. At the current price it represents about 1.4% of my portfolio. I may add somewhat at this price although my enthusiasm to do so is certainly tempered by the experience so far.

In general, the analysts that recommended this stock at far higher prices have been embarrassed by the result and may be unlikely to recommend it again anytime soon. That could mean the stock will be a long time recovering. But ultimately earnings over the next several years will determine the stock price.

CRH medical is down a further 12 % in Toronto trading this morning. And down 17% in U.S. trading.

This is due to finalization of government-mandated fee reductions for 2018 which included an additional reduction, not previously anticipated.

The company indicates that adjusted EBITDA previously expected to decrease 13.5% will now decrease 20%. But they also say that adjusted EBITDA margins will remain healthy at 43% and that they look forward to growing the business with more certainty.

It is not clear how much the adjusted net earnings per share will decrease but it would be higher than 20% perhaps far higher.

Unfortunately the margins have already decreased in 2017 for other reasons including the mix of customers. Clearly, I was overly optimistic about this company earlier this year.

I am working on an update but the difficulty is that we won’t know the new level of earnings per share until we see several quarters of results under the new fee structure.

On Thursday, the S&P 500 was about unchanged (though the DOW was up 0.35%) and Toronto was down 0.1%.

Alimentation Couche-Tard jumped 3.1%. There was no news so this may have been due to an analyst recommendation.

Toll Brothers fell 6.1% to $43.79 after the House republicans proposed income tax changes that included limiting mortgage interest rate deductibility to a maximum of a $500,000 loan down for the current one million. The decline is probably an over reaction since the package of tax changes is far from finalized let alone approved. And it may not have a huge impact in any case. In any case the decline only gives back about 3 weeks of gains.  This decline is a useful reminder that stocks don’t only go up and ANY stock could be hit with news causing a similar or larger drop at any time. That’s why at least some diversification is always called for. In my own case perhaps I should have trimmed a bit more Toll Brothers as it kept rising in recent days. Sometimes we all fail to do what is prudent out of concern that we might miss out on more gains.

CRH Medical was down 7.3% to $2.79 in Toronto after releasing earnings yesterday afternoon. I get the sense the analysts that cover it are a bit bitter about the company surprising them with certain bad news earlier this year.  If so, the company is going to have to fight its way back with earnings. (That is, it won’t get help from optimistic analyst projections.) The company did generate cash in Q3 and posted bottom line GAAP earnings of 3 cents per share (down from 4 cents the prior year). Or maybe the analysts are simply projecting lower profits in 2018 when certain government-mandated fee cuts kick in. Meanwhile it has strong balance sheet and has been continuing to make small acquisitions. I will be working on an update for this company tomorrow.

Bombardier posted Q3 earnings (well, losses, really). The stock rose 6.1% on the news that it had a letter of intent for some 61 C Series jets. I was curious to see if they would write-down any of the C Series development costs having recently agreed to sell half of same for zero dollars. There was no write down and I could not see any discussion of that. I listened to the analyst question part of today’s conference call and no analyst asked about the potential for a write-down on C Series investment. I would think that will have to be addressed in the audited statements at the end of the year. Well maybe it does not matter much, the book value per share is already negative and so maybe further negative is not a concern to analysts.

Perhaps I am giving up completely on the company too early but the company has had to sell off chunks of itself in desperation and is faced with selling the C Series at cash losses. I remain confident that the company will continue to exist. But it may end up at some point being owned by the debt investors.

Costco was up 1.4% to $164.95 after reporting same-store sales growth of 5.9% (adjusted for gasoline price changes). That is impressive growth. Costco always seems expensive in relation to earnings but it is a power house. Accumulating on dips has been a good strategy. The strong same-store sales also perhaps suggests strength in the U.S. economy.

Wednesday saw the S&P 500 rise 0.2% while Toronto was about unchanged.

Canadian Western Bank retreated 1.9% which was not surprising after its 4.8% gain of Tuesday which did seem a bit overdone.

Linamar was up 1.7%.

Toll Brothers was up 1.3%.

I mentioned this morning that I thought that the Competition Bureau looking into price-fixing was a good thing. Back in April I addressed in a newsletter article the lack of intense competition that many businesses face. (Good for investors, bad for consumers.)

CRH Medical reported Q3 results after the close. They did make a profit but not as high as the prior year. Overall, given how much the stock declined from its peak I think the report could support an increase for the stock. I will update the report in the next few days.

On a personal note, back in June I mentioned that I have a son who had just graduated in Geology / Earth Sciences from St. FX University in Nova Scotia. He has a strong resume, well rounded in academics, sports and life skills. A couple of subscribers have been very helpful pointing out possible leads on geology jobs. But, with the summer job over, he is still looking…  if anyone is looking to hire a Geology / earth sciences graduate or knows of someone looking or just wants to offer advice, email me at shawn@investorsfriend.com and I will pass on the information. Plan B, given the RESP account can handle it, is to go back for a masters, possibly in Australia or the U.S.A. No sense limiting things to Canada.

On Tuesday, the S&P 500 and Toronto were each up 0.1%.

Our big mover was Canadian Western Bank up 4.8% to $36.34 after it announced the acquisition of a $900 million dollar portfolio of equipment loans and leases. This will add 10 cents per share in the fiscal year which starts today and another 10 cents the year after that. There could be continued gains after that to the extent that the customers stay with CWB after two years which they have no obligation to do.

On that basis, the approximate $1.70 rise in the share price was not really justified by this news alone. But it does signal management optimism about the future and that combined with higher oil prices could justify the stock price. I still expect CWB to continue to rise. But with this gain on top of all the other gains in CWB since it bottomed around $23 briefly in May amid the Home Capital scare I decided to sell what amounted about 12% of my CWB yesterday. It remains a very large position for me. Having added a lot to my position in the 20’s it seems prudent to trim somewhat now. This is particularly the case given that I have wanted to have a higher allocation to cash.

CWB is down 2.4% this morning.

This morning the Competition Bureau has raided grocery stores over possible price fixing. This is welcome and surprising news for the country. In my opinion, based on many years of observation, the Competition Bureau has done almost nothing to foster competition in Canada. In many products and services there seems to be only a small handful of competitors. Yet mergers and acquisitions are constantly allowed to happen. Recently the merger of the two giant potash producers was allowed despite the fact that the combined entity will totally dominate the market. I mean no one seems to notice that the potash producers are opening part of a price-fixing cartel operating outside of North America (CANPOTEX)! I believe the cartel would be illegal in Canada and the U.S. which is probably why it does not operate here.  Years ago I believe the two and only large propane distributors were allowed to merge.

I am an investor but I am also a citizen and there is a place for limits on market power and limits on price collusion. Ethical behavior needs to trump profits and that can include making unethical anti-competitive behavior illegal.

On Monday, the S&P 500 was down 0.3% while Toronto was up 0.3%.

TFI Industries was down 3.2% and I think it represents good value.

After the close, Canadian Western Bank announced an acquisition that they say will add ten cents per share to earnings in each of the next two years. That is positive. However, they also clarified to me that they have no intention of buying back shares at this time unless their share price drops. I was misled by a press release of a few weeks ago into thinking they would be buying back shares. It’s annoying to be misled by a press release that is legally accurate in form but misleading in substance (in my view).

I was just reading some blog comments about RRSPs. Lots of people are adamant that RRSPs are a bad way to invest. There was a complaint that the tax rate on death of the last surviving spouse was 50%. Truly that is a a heavy tax rate. But the complainer probably fails to understand the math whereby something close to 40% of the RRSP was contributed by the government in the first place via the refund (and growth on the refund). We should always be aware that the taxman effectively owns about 40% of our RRSP. But our own 60% share gros tax free and there is a huge benefit in that over time.

I won’t go through all the math but RRSP investing can be shown to be precisely equal to TFSA investing on your share (net of the refund) of the RRSP if the marginal tax rate is unchanged. (Say 40% at time of contribution/ refund and 40% at withdrawal). That being the case and the TFSA being tax free, the RRSP was also tax free growth on your net contribution.

My main observation is that once people get a certain idea about something like RRSPs then they tend to stick doggedly to that view. No amount of math or logic will change there minds. People tend to listen to views that agree with their current view. This is called confirmation bias and we all do it. In part we do it because we truly don’t have time to waste looking again and again at the same things. But we should all be aware we are have a confirmation bias and once in a while be willing to reconsider.

It is true that for some people, especially lower income people, RRSP investing is not the best idea. But any notion that it is a bad idea for middle and high income earners is simply false when the math is looked ito. But people tend to believe what they want to believe. If they have no RRSP savings, and probably little or no other savings than the idea that RRSPs are a tax bomb or a bad idea becomes quite convenient.

Visiting Tampa (and nearby areas including Sarasota) Florida this week I have a few observations about business and the economy:

Overall, this area of Florida has a mix of affluent, middle, and more than a few low income people judging by the housing stock. But overall mostly prosperous looking. Shopping and restaurants not overly busy this time of year but not exactly dead either.

I went to a PopEyes which is a growing popular chain recently purchased by Restaurant Brands International (owner of Tim Hortons and Burger King). Pretty quiet at 1:30 pm and overall with a very limited menu (think KFC). I was not impressed. I don’t think it has anything close to the sales power of a Tim Hortons location or even a Burger King.

I checked out a couple of Circle K locations (owned by the Canadian giant, Alimentation Couche-Tard). They are reasonably busy. Smaller and not as fancy as most Canadian locations but with beer sales they probably do well. Also, very friendly service. Behind on technology, since when your prepay gas inside the store you have to know the amount you want to pay whereas in Canada it just charges you for whatever you take.

We ate at Panara Bread which is now owned by a German company. Service seemed slow by nature of the way things are ordered. They had run out of the type of bread one of us wanted and the coffee was cold. So, unimpressive overall.

I went to a Walmart Neighborhood market store to see what those were like. This is basically just a big grocery store. It was all fine except the checkouts were all self serve and seemed prone to people needing help so it ended up slow to check out. Meanwhile the Walmart annual report said they were focusing on speed and convenience! (If so, they have work to do). My Canadian debit card would not work at Walmart. What year is this again? This is in Florida which has hordes of Canadians visiting every year.

Went into a Dollar Tree store to see how that compared with Dollarama. Nothing costs more than a dollar and it is truly impressive what they can offer for a dollar. But this store was a bit grimy perhaps mostly because it was old. Nothing like the cleanliness of a Dollarama – which in fairness are mostly all quite new.

A restaurant I would recommend (too bad it is not a publicly traded chain) is a small little chain called Boca ktchen bar market. I had “SMOKED CACHACA CHICKEN Tecumseh Farms chicken, Brussels hash, crushed chimichurri” Not cheap but healthy and exceptionally tasty.

Statistics Canada recently reported sales for food service and drinking places for August. The numbers look strong which bodes well for Boston Pizza’s Q3 report. Unless BP has lost market share it should show an increase in same store sales which is what drives the distributable cash.

Meanwhile as of Saturday afternoon, West Texas oil is just over $54 which is a strong increase and bodes well to all things Alberta.

On Friday, the S&P 500 rose another 0.8% and Toronto was up 0.4% finally reaching a new record high close.

In the U.S. in particular it starts to seem like stocks only ever go up. Obviously, this is wrong but with gains almost every day for the last year investors are mostly feeling good and most may be complacent about risks.

Amazon was up 13.2% to $1100 dollars after it handily beat earnings estimates by posting earnings of 52 cents per share. The math indicates that the stock is trading at 280 times trailing earnings and 144 times forecast earnings (the trailing earnings may not yet reflect the latest quarter but that won’t make much difference and no doubt analysts will boost forecast earnings).

I spend little or no time being concerned about stocks that I missed out on. In the case of Amazon I have looked at the numbers closely several times starting in July 2015 and it was far too richly valued for my blood. I have no regret about not owning it since it simply does not fit my value investing approach.

Another stock that is up hugely is Apple. I have some regret about that because I really should have looked at it a few years ago when it was trading at an attractive P/E level. But overall, I have done well in the markets and there is no sense lamenting what I did not buy.

Back to other stocks today:

Constellation Software was down 2.3% after posting earnings that were, it seems, a bit disappointing. I would not particularly mind a bigger pullback in order to buy. I own a few shares and will not be selling.

TFI Industries was down 1.5% after being down 6% earlier in the day. It is a well managed company and one I intend to keep for a long time.

TFI International, TransForce is down about 6% on its earnings release. Adjusted earnings down a little. But overall the report shows growth in revenue and a gain on an asset sale. I am adding to my position this morning at just over $30.

Amazon is up 10%. It has a P/E of around 250 and so my methods see it as way over valued. I respect it but won’t buy it. I am not clear if Amazon can somehow shift into a higher profit mode or when that would ever happen.

P.S. Amazon earnings per share were 52 cents and the stock price is $1187. Presumably the market expects earnings per share to rise many fold (say 20 fold) at some point.

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

Stantec was up 2.2%, FedEx was up 1.6%, American Express was up 2.3%.

Ceapro, which is a risky penny stock was up 11.9% which only takes it back to 66 cents. This was after it announced a small acquisition. This would seem to be a sign of confidence by management. But it also drains cash which makes the company somewhat more susceptible to financial difficulties. I am interested to see if it report a profit in Q3 or at least positive cash generation.

CRH Medical was down 3.1% on Toronto. It announces earnings next Wednesday.

Melcor was down 2.2%. The continued weakness in this stock is annoying since it is trading so far under book value. Hopefully the Q# report will bring good news. The Alberta economy continues to improve but it is certainly possible that it will have non-cash mark to market losses on its rental building fleet. There was also the bankruptcy of Reid Built homes which likely owes at least some money to Melcor. But overall, I would think that the stock still has a good margin of safety due its assets.

I mentioned yesterday that I transferred U.S. dollars back to Canadian using the Norbert gambit, buying DLR.u on Toronto and then selling DLR. My overall exchange rate was 78.29 cents (Canadian $1.2773 per U.S. dollar) which was excellent considering the official exchange rate for yesterday was 78.06 cents (I believe that was the noon rate, and when I was doing the transaction the exchange rate was somewhere just over 78 cents). To Calculate the exchange rate using DLR I would take the offer price on DLR.u divided by the bid price on DLR. This seems to work out to a good rate compared to the official rate when going from U.S. to Canada.

As it turns out I would have got a better rate today as the exchange rate on the Canadian dollar went down.

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

Linamar was up 0.8% despite the down day in the markets and seems attractive although its not clear to me how it might be affected by any failure of NAFTA.

The Canadian dollar was down to about 78 U.S. cents today as the Bank of Canada held interest rates steady. I used the Norbert Gambit today to move some U.S cash back to Canadian. This was in an account that had a lot of U.S. cash and very little Canadian after I had sold out of Wells Fargo in late 2016 due to its troubles. (In retrospect I should have moved some of that cash much sooner, but today’s 78 cents is a better exchange than has prevailed in some months.) I left some cash on the U.S. side and may move that if the Canadian dollar sinks further.

For more information on Norbert search Norbert and DLR in these comments the past couple of years. TD Direct charged me $43 and it appeared to me I paid and additional $20 in bid/ask spread costs both in buying DLR.u and then Selling DLR. So total cost $83 (well a bit higher as one of those $20 was U.S. dollars). $83 was 0.35% on the Canadian amount I moved which is a good bit cheaper than the standard charge from TD. It might have been possible with a bit of patience to avoid the bid /ask spread but then the exchange rate could move while a person tries to get cute like that.

The report for American Express is updated and rated (lower) Buy at $93.86.

American Express lost the Costco branded cards in 2016 because they were not willing to cut the merchant fee down as low as Costco wanted. That caused a drop in earnings but earnings are now increasing.

American Express was first added to this site on February 8, 2014 rated Buy at $87. It’s only up 8% since then. But there was an opportunity to buy it in early 2016 at under $60 and even briefly at under $55. It’s always hard to buy when things are are looking dark but those are the best opportunities. When companies that are unlikely to stay down are on sale that is the time to buy.

At this point American Express looks like a reasonable buy and may do well but does not seem compelling.

On Tuesday, the S&P 500 was up 0.2% and Toronto was up 0.3%. And the DOW was up 0.7% after strong earnings reports from Caterpillar and 3M.

CN Rail was up 1.9% but may decline tomorrow as its earnings report after the close was disappointing due to higher costs. But its carloads were up 11% illustrating general strength in the economy.

Stantec was up 2.2% to $36.46.

Bank of America was up 1.9%.

It’s been a great time to be an owner of stocks. My approach is generally to react to market moves as opposed to predict them. I like to move a little towards cash as stocks rise and use that to buy when stocks fall. Most (by far) of my investing however is stock by stock as opposed to looking at the overall index.

The next update will be for American Express which is likely to be rated (lower) Buy at around $94. I already have a modest position in American Express which I will likely just hold.

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

Boston Pizza was down 2.3% to $21.63. It will be interesting to see their Q3 report to see if same store sales were up or down.

Melcor was up 3.5% but given its thin trading volume I would not read anything into this.

On Friday, the S&P 500 was up another 0.5% to yet another record high. Toronto was up 0.2%.

The S&P 500 is now up 15.0% this year to date. That is impressive especially considering it entered 2017 already at a record high and trading at 23.7 times trailing actual GAAP earnings and 21.0 times trailing operating earnings.

During 2017 S&P earnings have increased sharply which does provide support to higher stock prices. Despite being 15% higher this year, the S&P 500 right now is trading at 22.4 times estimated 2017 GAAP earnings and 20.4 times estimated 2017 operating earnings.

So, the good news is that the S&P 500 is slightly cheaper in relation to earnings than it was at the start of 2017. But the S&P 500 is nonetheless expensive.

There is a risk that the S&P 500 could fall if investors decide that a reasonable multiple is say 18 times trailing GAAP earnings. And GAAP or operating earnings could fall.

Back on March 9, 2009 the S&P 500 bottomed out at 666 as earnings were quite low due to the financial crisis. The P/E at the bottom was 11 times trailing GAAP earnings to March 31, 2009 and 10 times operating earnings. Pessimism abounded. THAT was a fantastic time to buy. The S&P 500 is up a staggering 287% from the absolute low. If I use the 798  level of March 31, 2009 (rather than picking the absolute low of 666) the S&P 500 was trading at about 13 times trailing GAAP earnings and the S&P 500 index is up 223% since then. Of course, the real doomers back in early 2009 were waiting for the S&P 500 to fall even further to eight times earnings or whatever. They are still waiting.

So, markets remain optimistic at this time and are relatively richly valued. But the P/E ratio is not at record highs. It is certainly possible that U.S. stocks can keep rising.

But surely, some caution is warranted. I have said often that it is ALWAYS the case that markets can move lower at any time. A 20% decline almost anytime should not even be considered much of a shocking event. But I also think it is impossible to accurately guess when that could happen.

Everyone’s risk tolerance and (more importantly) financial risk capacity is different. One approach is to never allow the equity allocation to get too high. Those with a balanced portfolio may be well advised to simply carry on. That tends to work well over time.

In my own situation, with a very heavy exposure to equities, I am inclined to try to build up more cash. That is always difficult to do in portfolio of individual stocks since it can mean selling some shares that I would rather not be selling. I think it would be easier to sell down an ETF than a particular stock since there tends to far less emotional attachment to ETFs. As previously indicated, I did sell some shares last week. I may do more of that this week.

Meanwhile as to how individual stocks on our list fared on Friday:

Canadian Western Bank was up 1.4%, Costco was up 1.5% and the U.S. banks did well.

The Canadian dollar was down almost a full U.S. cent.

I note that Concordia International, a Canadian pharmaceutical company is entering a process to restructure some debt. The company states that this is not a bankruptcy or insolvency. Perhaps not, but it surely represents an attempt to renege on some debt (albeit in a negotiated fashion). I am really not familiar with the company at all. Concordia’s shares fell 39% on Friday to 72 cents. But more importantly the shares are down from about $3.00 earlier this year and from all-times highs of over $100 in 2015. This is basically a total wipe out, an approximate 100% loss for those who bought near the high in 2015.

I try to avoid buying shares with any obvious risk of going to zero. That’s the main reason I always look at the balance sheet. A company with large debts compared to equity is a potential candidate for bankruptcy. If it has strong profits and cash flows it may still be safe. But a highly leveraged balance sheet is a red flag. I saw such a red flag at Valeant at its peak and steered clear. Last week I sold my Bombardier preferred shares. That company may limp along for a long time yet and may even always be rescued by government. And maybe it will even become profitable and restore its equity to a positive level someday. But I am happy to get clear of such an over-leveraged and generally unprofitable company. Someone else now owns my shares and has both the risks and rewards of that.

In contrast, a company with zero or very low debt can survive a period of losses. It is very difficult to go broke if you don’t have any debt.

Warren Buffett’s rule number one is “Don’t lose money.” That does not mean don’t invest in shares that might go down. Instead, he means don’t invest in shares with much of a chance of going down and permanently staying down. He also advises to be ready with ample cash for times when shares get very cheap.

Walmart is updated and rated (lower) Sell at $86.22. (Yesterday’s closing price, today it closed at $86.40) As always, the report gives the rationale for the rating. Under the rating system that I have always used a (lower) Sell is between a Sell rating and a Weak Sell/ Hold rating. To be clear, if I owned it, I would sell.

Walmart has risen 25% this year. I thought it looked overvalued at the start of the year. (I was not alone in that view;Warren Buffett sold almost all of Berkshire’s Walmart stock in early 2017 or late 2016.) Walmart’s revenues are up about 5% per share in the past year but earnings per share are down. To some extent, the stock has risen to share buybacks. I am a fan of share buybacks  if done at a reasonable share price but in this case it has not so far been enough to push earnings per share up and the share price may be too high now for buy backs to make sense. It looks like the share price is already pricing in a good improvement in 2018. Yet management is only projecting an earnings per share gain of 5% in the fiscal year that starts on February 1, 2018.

Management indicates that they want to lower costs and get back some of Walmart’s traditional reputation as the low-cost leader. But they seem to be having trouble getting that done. My impression is that management is not hungry enough to push this huge company to grow earnings at a faster rate. The founding and still controlling Walton family is rich beyond comprehension (easily the richest family in the U.S.A, collectively far richer than Buffett and Gates) and is unlikely to push management hard. And then there is the matter of competing against Amazon which may or may not have lower costs but which is definitely content to make far lower gross profits on sales.

On Thursday, the S&P 500 was about unchanged while Toronto was up 0.2%.

CN Rail was up 1.6% to $102.64. It’s interesting how some blue chip type companies like this seem to go on rising year after year. In an article I wrote in 2003 called Do As The Rich Do I noted that rich people invest in blue chip stocks and I mentioned CN and Manulife. Adjusted for splits, CN Rail was trading at $11.16 on the date of that old article.

Toll Brothers was up 2.0% after a report that home builder company confidence levels had risen.

AutoCanada was down 1.8%.

This morning I have sold the rest of Bombardier preferred shares Series 4. I have wanted to raise cash to provide stability to my portfolio and for possible other opportunities. Bombardier’s latest move has given away half of the C Series project for a bit less than zero dollars (AirBus got handed 100 million warrants representing about 5% of Bombardier’s shares at $2.29 so that is worth something).

I was holding these preferred shares on the basis that they yield about 9% and it seems likely that the dividend will continue to be paid and that governments would not likely allow Bombardier to go out of business. There was certainly some risk but the dividend was attractive. And I was hopeful that the C Series would eventually generate cash and even profits and improve Bombardier’s balance sheet.

But the punitive tariffs imposed by the USA has apparently caused Bombardier and Airbus to value the C Series project at something close to zero. Any improvement in Bombardier’s balance sheet will likely take a few years – and is far from certain to ever occur .

And while governments will always want to protect jobs they will not necessarily protect the equity of preferred share investors or debt investors. It is always possible that Bombardier will enter creditor protection at least temporarily in order to “restructure” i.e. “partially default upon in an orderly way” some of its debts. In such a scenario, common and preferred equity could be wiped out. I am not predicting that but it is always a risk with such a weak balance sheet. The controlling family is likely very reluctant to ever renege upon the debt in this fashion since they would also presumably be wiped out of their equity and it would be a huge embarrassment. I don’t know what the risk of such a scenario is but it would not be zero.

I first added these preferred shares to the site in June 2010 at $21.75. The price today is $17.44 or $4.31 lower. But they have paid dividends of $1.5625 annually or a total of about $11.33 in the approximate 7.4 years since they were first added to this site. Whether an investor has lost or gained on these shares depends on the purchase date since the price has been quite volatile over the years.

In any case, what really matters is the future risk/reward on these shares, not the past, and I have decided to move on and have sold these in my own accounts.

Wednesday was another strong day for U.S. markets with the S&P 500 up 0.1%. The DOW surged 0.7% because IBM was up 9% after reporting better than expected earnings. Toronto was down 0.2%.

It’s worth thinking about which companies on our list would be harmed if NAFTA is canceled and tariffs between the two countries rise. This would hurt exporters and importers.

Many Canadian retailers that import U.S. products including Canadian Tire would be somewhat hurt but given that all competitors would face the same tariffs, Canadian consumers would take most of the harm and the stores would be hurt only to the extent demand fell due to higher prices.

Canadian exporters who face domestic America competition would be badly hurt depending on the tariff levels. Obviously Bombardier comes to mind. And Linamar would likely face some harm on a portion of its business.

Regarding Bombardier, I have not seen anyone ask whether the “sale” of half the C Series project for zero dollars means that Bombardier will have to write down the value of its share of the project to about zero as well. Bombardier has an extremely weak balance sheet. I am starting to think its preferred shares might be too risky. I may sell the remainder of the preferred shares that I have to get this weak company out of my portfolio.

After the close on Wednesday, American Express released a strong earnings report and announced the retirement of their CEO. This certainly seems to be a very smooth and planned transfer of the CEO role to an internal candidate. Meanwhile VISA is increasing its dividend by 18%. The credit card business continues to be a very lucrative business.

On Tuesday, the S&P 500 and Toronto were each up 0.1%. The Dow Jones Industrial Average crested the 23,000 level for the first time ever and closed just under that round number.

Bombardier had a good day up 15.7% and its preferred shares that are on our list were up 7.2%.  CRH Medical was down 3.5% on Toronto.

AutoCanada was down 2.6%. This came on a day when Statistics Canada released August new vehicle sales numbers that looked strong to me.

The Office of the Superintendent of Financial Institutions announced certain tighter mortgage rules today. When asked “what if this causes significant house price declines”? The head of OSFI basically replied “Not My Problem” (not in so many words of course, but that was the gist of his response). And I agree it is not OSFI’s job to support house prices. OSFI’s key role I believe is to insure banks don’t lend on such stupid terms as to endanger the safety of the bank deposits of Canadians. But OSFI would not likely want to cause a house price decline leading to mortgage defaults which would weaken bank balance sheets.

A lot of things have been tried to attempt to cool Canada’s hot housing market. Maybe this one will work. And once it starts to work it may be no soft landing. We shall see.

I am in a mood to trim a few positions today because my cash position is low and it is always good to have some cash for opportunities or withdrawals and because U.S. stocks have been going up quite steadily for almost a full year now and are up 22%. In Canada the index gains have been smaller and more volatile but it is still up 9% from the lows of about a year ago.

There are stocks that I have bought somewhat aggressively on the way down. So, given that and given a desire to raise cash, it seems reasonable to trim some positions which are up significantly from their lows. I am trimming just a little of my Canadian Western Bank, Toll Bothers, Boston Pizza and TFI (Transforce) and also sold about half of my Bombardier preferred share position.

So, Bombardier is selling half of its C Series jet project to Airbus for umm zero dollars.

What an indictment, what a testament to a colossal failure of management. Bombardier spent , as I indicated in 2016, at least $5.4 billion on the program before selling half of it to the Quebec government for $1 billion. And arguably that was really a sale for just a half billion since Quebec would own half of the billion dollars it put into the C Series partnership. Now they have given away half of the C Series for no cash whatsoever. Bombardier will apparently own 31% and Quebec 19%. Apparently Quebec’s share had slipped from 50% to 38% even before this deal presumably because Bombardier was continuing to put cash into the C Series partnership and the Quebec government was not.

The whole think looks like good news for the Canadian economy and jobs. As for Bombardier it looks like more evidence that the company is probably totally worthless just as its balance sheet says it is. Bombardier’s shares trade at a positive value due to some hope of a resurrection or whatever.

I have trouble seeing how Bombardier’s shares will rise on this news but who knows.

I don’t know what it means for Bombardier’s preferred shares. I would think they are riskier than ever on this news.

But maybe it is good news, it will be better to make some future profits or at least positive cash flows from 30% of a more viable C Series as opposed to owning all of a program that was facing years of losses. If the preferred shares happen to bounce on the news it might be wise to trim or eliminate positions.

Little attention has been paid to how much shareholder money has been destroyed by Bombardier’s management. Shareholders have actually lost more money than all the government subsidies combined.

Monday’s markets saw the S&P 500 up 0.2% and while Toronto was about unchanged.

Ceapro was down 4 cents or 6.3%. I have been very disappointed with what I view as poor disclosure at this company. It was always a speculative pick. When first added to this site last February 12, based on its results through Q3 2016 it was profitable. So it looked like the existing line of products alone, with growth, could justify the share price and if their research panned out that would add to the value. But in the three quarters reported since then sales on the existing products have fallen (with little to no explanation from management) and adjusted profits fell close to zero. The company has enough cash to carry on for some time but we now seem to be much more reliant on their research efforts leading to new products. It’s always possible that they will come out with exciting news about their efforts to develop new products but that could drag on for a long time. I am becoming less optimistic on this one. We shall see if there any good news in the Q3 results next month.

Couche-Tard was down 0.9% to $59.85. The recent share sale by Metro at $57.17 was apparently about 5 times over-subscribed. I had placed an order for 200 shares through RBC and was allocated none. It seems to me that initial public offerings and this secondary offering often seem to get the market excited with a scarcity premium.

Dollarama was up 2.5%.

Liquor Stores N.A. (no longer on our list) was up 2.3% to $10.00 as they have announced they are working on a possible deal to sell their Kentucky Stores. A couple of years ago I had thought they should maybe sell those stores to their America CEO (and turf him). It would have been more timely with the lower Canadian dollar at that time. I have not been following the company closely but I believe the profits are quite a bit lower than the dividend. I have thought for a long time that they need to close some stores as Alberta has too many and they face competitors with lower costs. Anything is possible, and they do have new management  which is good, but I would not bet on this company doing well.

Constellation software was up 2.2%.

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

AutoCanada was up 4.0% with no news during the trading day. But after the close, the company announced it was acquiring a large established Mazda dealership near Montreal. The family that built up and currently owns the dealership will retain a 10% ownership and will continue to be involved in running the dealership. It sounds like news leaked out on Friday during the trading day. Be assured that the Ontario Securities Commission takes that seriously and will be looking for unusual purchases that could be linked to insider trading. In this case adding one dealership is no guarantee that the stock price would rise. But anyone who knew about this deal and who bought it the past few days would be taking a risk doing that.

This is another indication that AutoCanada continues with its long-standing plan of growth by acquisition.

TFI Inc (formerly TransForce) was up 4.4% and had not released any news. This increase could be due to a positive recommendation by some influential analyst or other.

Linamar was up 2.1%.

BNN television hosts were giving thought to which companies might be harmed if NAFTA is scrapped. They listed Couche-Tard, Stantec, Shopify, CP Rail and one other (that I can’t recall) as having the highest portions of their revenue from the U.S. But they are very wrong to conclude that revenue from the U.S. indicates any dependence on NAFTA or even trade at all. Couche-Tard and Stantec earn most of their revenue in the U.S. but they don’t do it by exporting anything much. Stantec’s U.S. revenues would relate to staff employed in the U.S. And Couche-Tard’s U.S. revenues come from its U.S. stores, not exports. I am a bit surprised to see CP rail on the list. I don’t recall if they have much track in the U.S. CN rail has substantial track in the U.S. but again those revenues do not come from any exports by CN rail. Shopify might be at risk if there is a tariff introduced on their services sold into the U.S.

The Globe and Mail pointed out that the tariffs if NAFTA did not exist might not be very large in any case. (Then again, they might be…)

On Thursday, the S&P 500 was down 0.2% and Toronto was down 0.4%.

AutoCanada rose 3.8%.

Alimentation Couche-Tard was up 3.9% to $61.24. That surprised me given the announcement on Wednesday that Metro was selling 11 million shares in a public offering at $57.17. Anyone who grabbed shares from that sale would seem to have got a good deal.

Part of the reason for the increase was likely a story that Kroger might be selling its chain of 784 convenience stores and that Couche-Tard might be a buyer. Another possibility is that after the share sale at $57.17 sold out almost immediately there was something of a scarcity premium added to the shares?

This sudden increase in the face of the sale at $57.17 is an illustration of how unpredictable markets can be.

I am a bit skeptical that this higher price will last unless there is positive news from the company to support it. I mean I think the shares will do well over time, but I just wonder what would justify this increase. Couche-Tard will next report earnings in early December.

Melcor was down 1.6% to $15.39. This may have been related to the fact that ReidBuilt Homes has run into financial difficulty ReidBuilt is a customer of Melcor in at least some of its subdivisions (I have no idea what percentage of Melcor’s revenues they represent.) ReidBuilt likely owes money to Melcor since home builders typically do not pay for lots until after they build and sell a home on the lot. I don’t know if Melcor has any kind of lien on the land, I would think they would. This sort of thing is the reason why Melcor is a conservative company and maintains a strong balance sheet. This development could possibly cause a big hit to earnings in Q3 or Q4 but I don’t think it will be a very serious blow to Melcor.

Meanwhile, Statistics Canada reported new home price data for August and their data indicates that new home prices have remained extremely stable in Alberta with almost no change going back to the start of 2014. You would think if home builders were in trouble there would be price declines. And perhaps there have been incentives which don’t show up as discounts.

On May 29 I had noted a land Developer called Walton had gone into receivership.

In conclusion, this news about ReidBuilt is not good but I don’t think changes the fact that Melcor’s shares remain very much under-valued.

On Wednesday, the S&P 500 was up yet another 0.2% and Toronto was also up 0.2%.

Bombardier was up 4.4% to $2.35 after Delta Airlines said it would not be paying a 300% duty. Why is this news? Of course no one is ever going to buy a plane that comes with a 300% duty. Delta hopes the duty will never be imposed. And of course Delta hopes to take delivery of those jets at the agreed upon price. After all Bombardier sold those planes at a huge discount WAY below cost. The point is Delta is an AMerican company and will fight against the duties and so that is positive.

Also today  “A Russian employee (of Bombardier) in the Swedish branch of Canadian plane and train maker Bombardier was acquitted Wednesday of aggravated bribery in one of Sweden’s biggest corruption cases to date.”

One thing I am wondering: Porter Airlines has a contract to buy C Series planes but has been barred from using them as planed at the Toronto Island Airport. If the market price of Bombardier’s planes improves could Porter sell those delivery slots at a a big gain? I understand the C Series to be a great plane. But any airline that wants to order one today is looking at least three years out for delivery…and presumably less of a discount unless they went and bought the delivery slots from Porter (assuming that is allowed).

There was some interesting news about Alimentation Couche-Tard after  the close of trading. The stock had closed today at $58.94.

Due to Metro selling its Couche-Tard shares to buy Jean Coutu, the following is occuring:

Alimentation will buy back 4.37 shares from Metro at $57.17 per Class A share which represents a discount of 3% for subordinate shares on the Toronto Stock Exchange (“TSX”). In addition, Metro will pay a 1% commission fee. This represents a reduction in the share count of about 0.8%.

In a separate transaction, 11,369,599 Class A shares held by Metro will be acquired by Caisse de dépôt et placement du Québec.

Finally, 11,369,599 Class A shares held by Metro will also be converted to subordinate shares and sold through a syndicate of brokers. The price has been set at $57.17. The shares are available through TD Direct and presumably other discount and full service brokers as well.

So the bad news (for those who own it) is I would expect Couche-Tard to fall down close to $57.17 tomorrow since no one should pay more than that when they can buy in this offering at $57.17.

The share repurchase should be positive for earnings per share but only by a very small amount. The repurchase is also a strong indication that Couche-Tard believes its shares are under valued. Well, the management at most companies constantly think that but the Couche-Tard management is a lot smarter than most.

Overall, I see the share sales to the Caisse and to the public as just a switch of owners that will have probably no lasting impact on the share price after a few weeks. It certainly has zero impact on the true value of these shares. Some might even argue that this takes away an “over hang” since it has been known that Metro would sell and once it is done then there is no major owning looking to sell. Personally, I pay no attention to “over hangs” and instead simply try to understand if shares are under valued.

I had last rated Couche-Tard a Buy at $60.25 just last month. I will likely put in an order for a small amount of these shares to add to my position.

P.S. Whoops too late, the offering has already closed. In that case perhaps the price will not fall as low as $57.17. Apparently, I should have been buying instead of typing. As always with new offerings, one has to act quickly. I did not think 11 million shares would sell out so fast.

P.P.S Checking RBC Direct, (at 8:15 pm eastern) the issue was still open and I was able to place an order there for a family member. Interesting.

On Tuesday, the S&P 500 was up 0.2% and Toronto was up 0.3%.

Walmart was up 4.5% to $84.13 after announcing that it will buy back $20 billion in shares. That would represent about 8% of its shares which is quite substantial. It also announced that it expects earnings per share to rise 5% in its next fiscal year. It would seem to be the buyback that has ignited the share price. In general, I would not consider a buyback to be a very good reason to get excited about a stock unless the stock was under-valued and the buyback was a catalyst for the stock to move up to a fair value.

In Canada, the news is that Sears Canada will be closing all its stores after no buyer could be found. This is sad. It has been a long time coming.

I have not mentioned Sears too many times on this site over the years. Looking back I see that on December 19, 2012 I said: “Clothing retail in particular seems to be a vicious business. I don’t predict a strong future for Sears Canada or the Bay.” On March 4, 2012 I marveled at the “the news that Sears Canada has agreed to vacate the premises of three of its large stores and return them to the landlord in return for $170 million.” and I questioned the wisdom of whoever was paying that money.

On October 30, 2013 I noted: “Sears is selling the rights to five big store leases for $400 million. Good for them. This seems a smart move. If they can’t make much money at stores like Eaton Center in Toronto, why not grab that kind of cash?”

On January 31, 2013 I said: “I don’t have any good opinion of Sears Canada. At West Edmonton mall a week after Christmas, I walked through one of their stores at 3 p.m on A Saturday and the floors were full of mud that appeared to be left there from previous days. If they can’t even bother to clean the floors they are toast.”

Sears was no doubt in a tough business. But it also seems clear that it has been very poorly managed for years. It’s disgusting to see that current management have been paid large retention bonuses to stick around after they first filed for creditor protection a few months ago. It’s beyond me how any judge could approve that.

On Monday the S&P 500 was down 0.2% while Toronto was closed.

Costco was down 1.6%. It’s not cheap but may be worth nibbling at due to its recent decline.

Stock futures are up this evening.

Big insurance company AIG (American International Group) is reporting $3 billion in losses from the recent hurricanes. I have not seen much indication that Berkshire Hathaway had major losses (other than at its GEICO division). Presumably it had some losses but likely not enough to create a quarterly loss overall for Berkshire. I believe Berkshire had cut way back on catastrophe insurance as it viewed the going rates as inadequate. If rates have now risen substantially due to the recent hurricanes then Berkshire is probably back in the market. Berkshire did suffer significant losses in its GEICO division related to the hurricanes but again probably not enough to cause a quarterly loss overall for Berkshire.

Toll Brothers is updated and rated (higher) Buy at $42.81.

This stock is up 38% in 2017 and is up 55% since it was rated (lower) Strong Buy on February 27, 2016. It was rated Strong Buy 13 months ago on September 11, 2016 and is up 46% since then. It was first added to this site back on June 5, 2011 rated Speculative Buy at $21.03 as a way to benefit from the expected recovery in U.S. house prices. It proved to be volatile in price and certainly has not always moved in the expected direction. The price volatility has provided opportunities to add to positions at attractive prices. Despite the recent price increase it is still rated (higher) Buy based on our expectation for an earnings per share rise of perhaps 25% in the next year. Given its history, the share price could suffer a pullback in the meantime. And certainly if the overall market pulls back, this one is not immune. But overall, it appears to remain a good investment at this price.

On Friday, the S&P 500 was down 0.1% and Toronto was down 0.3%.

Stock markets, especially in the U.S. have been very strong indeed this year. But I would say that Donald Trump could do something at any time that would drive markets down. It’s not a bad idea to maintain balance in portfolios and to maintain some cash to take advantage of lower prices should they occur. At the same time, getting out of the market in anticipation of declines does not seem to be viable since there are always many many more scares than actual big declines.

Costco was down 6.0% to $157.09 despite posting a strong earnings report. This stock is never cheap but it is a power house. I added modestly to my position on this dip even though my last rating was only Weak Buy at $157.  I would add more on a bigger dip such as below $150.

Penny stock Ceapro managed to hang onto its gain of Thursday and added another 2 cents or 2.9%.

Statistics Canada reported employment figures for September. I don’t pay much attention to the monthly job gains and losses since they seem to be volatile and after all are subject to statistical error including seasonal smoothing calculations. The unemployment percentage rate however is fairly stable. It would surprise a lot of people to know that at 6.2%, the unemployment rate in Canada is almost at record lows in data going back to 1976. It did get to 5.9% and around 6% for much of 2006 through 2008. But other than that it is has usually been quite a bit higher than 6.2% and was over 10% all through 1982 to 1985 inclusive, peaking at 13.1% in January 1983. (This is when the youngest boomers were entering the labour force and supposedly had it so easy!).

Alberta’s unemployment rate is 7.9% which appears to be close to the historical average. It’s far higher than the lows of under 4% that happen in boom years but also far better than the 11 and 12% rates of 1983 and 1984.

The unemployment rate in the U.S. is 4.2% which is at the very low end of rates going back to the 1970’s. These low rates confound the many people who are certain that we live in terrible times and that the America economy is broken. Many of them will simply choose not to believe the official figures.

Linamar is updated and rated (higher) Buy at $77.93.

Linamar was added to the site on November 27 last year rated Strong Buy at $51.09. At that time it looked very cheap. It’s up about 53% since then. But it still looks quite cheap with a P/E of 9.4. It could be rated (lower) Strong Buy based on its numbers. However  earnings growth has slowed somewhat in 2017. Also the recently higher Canadian dollar will likely be a headwind in the near term. And there are risks regarding NAFTA and protectionism in the U.S. In my own trading, I may add modestly to my position and will be prepared to buy more if the stock dips into the $60’s. It is a very well managed company and should do well over the long term but its price can be volatile when investors turn pessimistic about the outlook for auto parts companies.

On Thursday the S&P 500 was up yet another 0.5%. Toronto was up 0.3%.

Ceapro was up 12 cents or 21%. I don’t see any news to explain that. And it was only on a relatively few trades later in the day. I would not read anything into that. This is a penny stock and they move around a lot in percentage terms.

Big news today was TransCanada’s official cancellation of the Energy East Pipeline. It’s not entirely clear if this was strictly due to regulatory barriers. One analyst on BNN claimed there won’t be enough oil to fill all the pipelines that were potentially in the works.

Certainly the regulatory climate is extremely difficult. I spent 13 years working for the utility regulator in Alberta. My view is that their process was becoming increasingly complex and suffocating over the years. The National Energy Board (NEB) I think suffered from the same massive information overload whereby it becomes almost impossible for any one human mind to read, much less comprehend and assimilate the massive amount of submissions. The scope of the proceedings has vastly mushroomed over the years. On top of this the NEB was more recently required to consider environmental impacts both of the project and then more recently of the end users of the oil. I think trying to determine if a pipeline is in the National Interest in that environment is almost impossible. A pipeline will always be very beneficial to a relatively small portion of the population. It might somewhat benefit a very large portion of the population. And there are some people who bitterly oppose pipelines. Whether it would contribute to pollution that harms the environment is perhaps impossible to know. It depends whether the oil in the pipe spurs new consumption or simply displaces oil produced elsewhere. And how exactly can one balance the harm and costs of pollution or possible spills against economic benefits? That’s an argument that could go on forever. There can never be a consensus on such matters. At some point, a regulator or government has to simply make a call on those matters. But governments seem less willing than ever to make calls which will be bitterly opposed by some.

The loss of this potential pipeline is certainly negative for Alberta.

Perhaps it is a positive for CN rail.

Statistics Canada reported that Canadian exports fell in August. Volumes decreased 1.9% in August, while prices were up 1.0%. This may be partly or largely due to the higher Canadian dollar. Products priced in Canadian dollars became less competitive. Perhaps we should wait to see if the volume decline is confirmed in the next month or two before reading too much into it. The price increase seems surprising but could be related to higher oil prices. It is volume rather than price which has the most impact on the economy and jobs.

Wednesday’s markets saw the S&P 500 up another 0.1% while Toronto was about unchanged.

Canadian Western bank was down 2.0%. Linamar was down 2.6%.

RioCan was up 1.7%.

The Globe and Mail reports that auto deliveries (I believe this is to dealers as opposed to sales to customers) were strong in September and will almost certainly be over 2 million vehicles delivered in Canada in 2017 which is a record high. This should be good news for AutoCanada. However, deliveries of Fiat Chrysler products (which is their main brand) were down 6% in September. Still, AutoCanada should report a strong Q3 compared to 2016.

Alberta has announced preliminary plans for marijuana sales. It looks like existing private hemp stores should be well positioned to get licensed. There will be no sales through Liquor Stores. I remain perplexed as to why Liquor Stores N.A. (no longer on our list) is trading at around $9.99. They have been paying out a dividend while losing money at least on a GAAP basis. The market is showing faith in the new management. I do not have that faith, but then again I am no longer following the company very closely at all.

FedEx is updated and is rated (lower) Buy at $223 (yesterday’s closing price).

FedEx has achieved strong earnings per share growth in the past few years. I focus on earnings adjusted for certain one-time or acquisition-related costs. The shares are worth considering but are not any huge bargain. For new positions, I would take a half or quarter position now and would be prepared to add to that on a dip.

FedEx is up about 16% since our last update of last December when it was also rated (lower) Buy. Looking back, our track record on this stock has been poor. On at least two occasions in the past we rated it Sell after some poor results and it went on to do quite well. In other cases it looked like a Buy based on results and then did not do well. Buying and holding (or better, adding on dips) would have worked out okay. The company has done well long term but has had volatility that has been difficult to predict.

Tuesday was another positive day in the markets with the S&P 500 up 0.2% and Toronto up 0.1%.

Linamar was up another 1.5%.

The Canadian Western Bank series 5 preferred share was up 2.0% to $23.77.These shares were issued at $25 in 2014 yielding 4.4%. They traded above $25 for most of 2014 but declined through 2015 and reached a bottom of just under $16 in early 2016. The recovery since then has been relatively steady.

I mentioned these share favorably at $18.85 on December 23, 2016 and at $19 as well as at $18.25 on September 4 and in an update on March 13 at $16.61 and on February 23. It was disappointing to see these shares decline the way they did (along with almost all rate reset preferred shares). But those the declines also provided opportunities for bargains.

At this point there is not much upside left in these shares. But if interest rates continue to rise they could get back to $25.

Warren Buffett / Berkshire Hathaway today announced it will acquire 39% of the company that owns the Flying J truck stops. Berkshire’s ownership is set to rise to 80% in 2023 with the controlling family continuing to be involved and owning 20% at that time. This is a typical Buffett acquisition, a very large successful and simple family owned business. It seems to me that the business has some similarities to Alimentation Couche-Tard. On highway trips most people like to stop at the biggest and brightest and cleanest service stations.

The news today was that Jean Coutu will be sold to Metro and the family will receive some $2.5 billion dollars. The family deserves great praise for the business it has built up. But one thing that never seems to be mentioned in situations like this is the income tax the founding family will pay. Possibly it’s not mentioned because they have managed to shelter most or all of that gain from taxes. Whenever the founder of a huge family-owned company dies you might think there would be a huge income tax bill. But maybe estate taxes are only for the little people? I really don’t know. (P.S. to clarify, I used the term “estate taxes” quite loosely here, I refer to the deemed disposition on death and resulting capital gains on cottages and investment rental properties and financial investments and small business value gains above the $830,000 exemption and the full taxation of the RRSP /RIF of a the last surviving spouse.)

RioCan announced on Monday that it will sell properties in smaller places to concentrate on the six largest cities in Canada. This will take place over a couple of years. They intend to buy back some units and will suspend their dividend reinvestment plan. I would definitely consider buying these units if I had much cash in my accounts. This REIT seems to be very well managed. I would not be surprised if they increased the distribution before too long. The unit price is up less than 2% on the news. Apparently analysts and the market are not overly excited by the news.

On Monday, the S&P 500 rose 0.4% and Toronto was also up 0.4%.

The U.S. markets were apparently unaffected by the mass shooting in Las Vegas. Sadly, the general public is mostly no longer all that shocked by such an event.

Canadian Western Bank was up 1.1%. It announced this morning that it has been approved for a “normal course issuer bid” under which it could buy back up to 2% of its shares.

Some companies announce such bids but then end up buying back few or no shares. My information is that CWB has NEVER bought back any shares and I am not sure it has ever had a normal course issuer bid for common shares. So, there is every reason to believe CWB is serious and will buy back shares. The share price is probably up somewhat since the CWB Board approved this and applied to the stock exchange for approval. Still, I am pretty sure they will be buying. It is unfortunate that CWB had to issue shares in 2016 at $24.50 only to buy some of those back now at much higher prices. But circumstances have changed. In 2016 there was apparently a need to shore up capital. Now the bank believes it has “excess” capital and can afford to buy back some shares. And it apparently believes the shares remain under valued.

Often companies are very poor judges of the true value of their own shares and are sometimes prone to paying too much in buy backs. But given that CWB has no past history of buying back shares, I think they do have a rational basis for doing so at this time.

In summary, this buy back would seem to be good news and should provide an added buoyancy force on the share price.

Couche-Tard was up 1.6%.

Linamar was up 2.8% to $78.28. I know it is a great company but I don’t know if it remains good value at this price.

The next update will be for FedEx. I will plan to update Linamar soon.

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

TFI International was up 2.2%.

CRH Medical bounced up 12.5% on Toronto and 10.6% in U.S. trading.

Alimentation Couche-Tard was down 1.2% to $56.90. I would be inclined to use this dip to add modestly to positions.

The terrorism attack in Edmonton last night hits somewhat close to home for all Canadians and quite close to home for those of us living in or near Edmonton and anyone who is familiar with the two locations of the attack. These types of attacks are unfortunately a part of life. I think the proper response includes a lack of panic and continuing to go about life as usual.

Canadian Western Bank is updated and rated Buy at $33.71. This stock is up 11% this year. It’s also up 42% from the low it reached in May when it was dragged down by concerns about sub-prime residential real estate lending when Home Capital suffered a run on the bank. It’s up 33% since we rated it Strong Buy at $25.37 on June 3. On more than one occasion over the years, this bank has sold at very attractive prices when investors were basically in something of a panic mode. The stock remains well below its all-time highs of over $40 that it traded at in July 2014. I thought it was good value in the mid- to low thirties in the last half of 2014 but it has taken a long time to get back to that level.

At this time the bank is reporting progress on many fronts. I considered rating it (higher) Buy but I went one notch lower to pay respect to the fact that banks are highly leveraged and that additional bad news in terms of loan loses is possible. Subscribers should also review our report to get a better sense of why the stock is rated Buy.

It is my second largest position. Having added significantly to my position at various prices on the way down including around $28 and $26 (as I recall) it may be prudent for me to begin to trim the position at some point simply to raise cash and for diversification. For the moment, I am inclined to maintain my full position.

Last Saturday, I sent out  an edition of the free newsletter and I followed up yesterday with a link to a new article on exactly how Canadians can put together a low-cost diversified portfolio using Exchange-Traded-Funds. This may be useful for less experienced investors in particular. Even those of us that prefer to pick individual stocks may wish to consider ETFs for fixed income and for international diversification. The management expense ratios for some bond ETFs have declined recently to very low levels.

If you did not receive those emails you can see the newsletter in our list of newsletters here. And you can add your email to the free newsletter list here.

On Thursday, the S&P 500 rose 0.1% to yet another record high and Toronto was also up 0.1%

The Bombardier pref shares recovered 6.2%.

Toll Brothers was up 1.8%, FedEx was up 1.9%, Canadian Tire was up 1.4%, Andrew Peller was up 2.2%.

Canadian Western Bank was up another 0.9% on top of yesterday’s 4.9% rise.

CRH Medical has announced another small acquisition. This would seem to be a positive development as the company continues to pursue its growth strategy just as it said it would.

I notice that Liquor Stores N.A. (no longer on our list) was up 2.1%. I saw someplace that there is speculation that it could be allowed to sell marijuana. There is some rationale to that given that Ontario is going to sell marijuana through the same body that runs government owned liquor stores. But those will be separate stores. I certainly would not count on Liquor Stores N.A. being allowed into the marijuana business. Meanwhile, its debts have risen and I don’t know that it would have the capacity to invest much into a new business. It if did get into the business, it would likely have to issue shares.

U.S. markets have been positive in the past couple of days partly due to Trump’s plans to lower corporate income tax. This positive reaction is in spite of the fact that he has trouble getting much of anything passed through the House and Senate. In addition, no one seems to remember that there is a thing called competition which in theory would flow much of the income tax savings through to customers.

Boston Pizza announced that Boston Pizza International has sold $33 million worth of fund units to founder George Melville for $20.64 per unit as part of a reorganizations that it announced on September 19th. The Boston Pizza Royalties Income Fund has always been a financially engineered entity with a complex structure. It is not entirely clear to me if this reorganization has much impact on the value of the units at all. It looks to me like it will lower distributable cash flow a little as a 7.25% loan to that the fund had made to a related entity is being paid off. But the fund will presumably receive cash and could use that to buy back units which is accretive to cash flows per units.

I am also a bit concerned to see how much of the BP Fund, Jim Treliving will end up owning. He will now fully control Boston Pizza International (BPI) and I would want him to continue to have ownership in the BP Fund to give BPI more incentive to treat the fund well. When you have complex structures and related entities there is potential for one entity to be treated more favorably than another. To date, it has always appeared to me that the founders of BP who controlled BPI have always treated the BP Fund very well, for example not burdening the fund with much in the way of administrative costs. And it looks like Jim Treliving / BPI will still have an incentive to treat the fund well as BPI has the option to acquire 10.2% of the units (but I am not at all clear on what if any price they would pay to exercise that option). The other founder, George Melville is basically getting out of BPI and will be the largest owner of the BP fund. So, presumably, he is confident that the reorganization will not be bad for the fund.

So far the market has not reacted in either direction to news of the reorganization. Perhaps the market is a bit unclear as to the impact of the reorganization.

On Wednesday, the S&P 500 was up 0.4% while Toronto was up a hefty 0.9%.

Canadian Western Bank was up 4.9% to $33.56. Just four months ago it had briefly dipped to just under $24 at the time that Home Capital looked to be circling the drain. It’s always scary to buy on dips but it can certainly pay off at times. I did not see any news to explain today’s 4.9% increase. Possibly some analyst has made a bullish call on the stock and that could be linked to the higher oil prices and recovering Alberta economy.

Speaking of dips:

The Bombardier preferred shares on our list were down 4.5% to $16.24. They now yield 9.6%. That’s tempting but Bombardier is a truly weak company. It is probably only by the grace of government subsidies and support that it has not long since declared bankruptcy. But it appears that government will continue to support it and so it will likely continue to pay the dividend on these shares. Still, there as no guarantees. I have about 2.6% of my portfolio in these shares and so I am not very tempted to add to that.

Couche-Tard was down 1.9% to $57.97. I believe that may have to due with Metro’s possible purchase of Jean Coutu since Metro might sell its substantial investment in Couche-Tard shares to pay for that. Such a sale would have absolutely no impact on the true value of Couche-Tard but could push the price down temporarily. I am somewhat inclined to buy on this dip but then again, I already have about 2.9% of my portfolio in Couche-Tard. I would be more likely to buy on a bigger dip. Couche-Tard has nothing close to the risk that Bombardier has. As Couche-Tard founder Alan Bouchard has said, Couche-Tard may not make planes, but it does make money.

Meanwhile, CN Rail was up 2.2% and Canadian Tire .and Boston Pizza were each up 1.7%.

On Tuesday, the S&P 500 was about unchanged while Toronto was down 0.3%

Bombardier ended the day up 6.1% but that was before a very negative (albeit preliminary) ruling came out in which the C Series jets could face a 220% duty in the U.S.

The Bombardier preferred shares on our list were down 4.4%, and again that was before the negative trade ruling.

It’s hard to keep up with the absurdities at Bombardier. The company must be one of the very worst managed large companies in the world. When it contracted to sell C Series planes to Delta and to Air Canada in 2016, the price was so low that it actually took a “onerous contract” loss in booking the sale. (So Boeing’s charges about dumping are not exactly without merit) Now we have the absurdity of a 220% duty. Will the USA protect Boeing from competing with this Canadian company that apparently is willing to sell jets far below cost? That protects Boeing, but what about the harm to U.S. airlines and their passengers?

CRH Medical was down another 5.3% on Toronto.

I have updated the article that lists some global ETFs and includes P/E ratios and dividend yields as well as the management expense ratios.

It would be nice if there were some regions of the world that looked like clear bargains. But I did not find that to be very much the case although China looks attractive.

My next article is going to look at the Canadian and Global asset classes and ETFs and build a table that could be used to put together an ETF portfolio which includes the major asset classes as well as some amount of global diversification. This may be useful particularly to newer investors who want to get started investing with ETFs rather than individual stocks. And it may also help those of us with a portfolio of individual stocks to think about possibly adding some level of global diversification.

Financial theory is clear that diversification is generally a good thing. In the absence of an ability to pick stocks (and at InvestorFriend our history suggests some ability there) or an ability to pick winning regions of the world (with the most attractive stock prices given growth) one would diversify perhaps as widely as possible. However, it is not as clear to me how much global diversification is called for when currency risk is considered. A widely diversified U.S. investor could concentrate fully half of their equities in the U.S. just based on market representation. And that takes care of a lot of currency risk. But I have never been a believer that Canadian investors should take their Canadian equity exposure way down to anything remotely close to the 3% or whatever that Canada represents of world equity markets.

I am not going to suggest what precise exposure Canadians should take to U.S. and world markets but I will include in my article some thinking that may help. In my portfolio, I have had extremely little to almost no exposure to companies outside of Canada and the U.S. and I have not regretted that lack of exposure. But, I do think there is room for some such exposure. In particular, index investors (as opposed to stock pickers) should probably have that exposure. In the case of picking individual stocks it is more difficult to become familiar with foreign companies and so more home-bias seems natural.

On Monday, the S&P 500 was down 0.2% while Toronto was up 0.4%.

CRH Medical had another weak day, down 7.1% on Toronto and 9.4% in U.S. trading. This was after announced several things in a press release on Friday.

The press release updated expected revenue and adjusted EBITDA attributable to shareholders (i.e. after deducting the share going to the minority owners of each Anesthesia provider which CRH does not own 100% of)  for Q3. Annoyingly, they did not say how the updated numbers compared to Q3 2016. When I looked it up, they are projecting a 20% reduction. They blame this on a reduction in commercial patients versus expectations and canceled procedures related to the Florida hurricane. And this in spite of the positive impact of recent acquisitions. The hurricane impact is truly outside of their control but the market will not like the fact that the number of commercial patients was over-forecast.

In positive news, they announced the acquisition of 51% of an anesthesia practice. This is the fifth acquisition in 2017 and suggests that their growth-by-acquisition plan remains intact.

Overall, it still appears to me that the underlying business is viable and that this should be a good investment over time going forward. However, it appears as if any material improvement to earnings could be at least a year away. The reductions in their pricing which drove down the share price do not come into effect until 2018.

I was somewhat tempted to continue to increase my position due to this price drop and given this latest acquisition. But I have enough exposure already and I was not impressed that I had to calculate what kind of reduction they were communicating for Q3. I would have thought the press release should have made that clear.

Bombardier was down 4.0% to $2.14 after news that Siemens will in some way combine its rail operations with Alstom rather than Bombardier. Certainly, Bombardier has been a terrible investment and I last rated it Sell at $2.05 in August of last year.

I retained some faith in their preferred shares which yielded 9.1% at my last update also in August of 2016. Since then there has been some good news in terms of deliveries and performance of the C Series plane. But Bombardier has also been in the news regarding corruption allegations in some of its marketing in areas of the world that do tend to be corrupt. And we have the spat with Boeing. Overall, the company and its preferred shares seem to be even more speculative. At the same time the Canadian government has its back and so I have not sold my preferred shares.

In other news, Statistics Canada released July figures for food services and drinking places. There was an increase in sales. This should be positive for Boston Pizza unless they have lost market share.

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

Canadian Western Bank was up 1.2%.

Linamar was up 1.5%.

Stock futures are slightly positive on Sunday evening perhaps relieved by Chancellor Merkel’s win in Germany.

The markets continue to shrug off the bombastic comments of President Trump.

Statistics Canada reported retail sales figure for July which were down slightly in volume terms but up slightly in dollar terms.

Statistics Canada also reported the August inflation figures. 

On Thursday, the S&P 500 was down 0.3% while Toronto was up 0.5%.

Canadian Tire was up 2.2%.

AutoCanada was up 2.2%.

Statistics Canada reported on investment in new home construction in July which as up 6.4% nationally from the prior year. I pay particular attention to investment in single family homes in Alberta. This was up 34% versus July 2016. That’s impressive but it would have been boosted by replacing homes destroyed in the Fort McMurray fire. And the amount remains 6% below the July 2015 level and 24% below the level of 2014 (which was likely a peak). Overall, the pace of single family housing investment in Alberta shows a good recovery from the depths of the energy recession and bodes well for Melcor Inc.

Statistics Canada also reported positive results for wholesale trade in July, with particularly strong growth in Alberta.

On Tuesday, the S&P 500 was up 0.1% and Toronto was up 0.6%

AutoCanada was up 3.4% to $23.96. Apparently some investors like the company at about $24. I wonder what they were thinking in late Spring, early Summer when it was available for $18?

FedEx was up 2.2%. What I found interesting about that was that yesterday when FedEx released earnings after the close, the headlines indicated FedEx missed earnings expectations and the stock fell in “after-hours” trading. It’s supposed to be the smart money that pounces and trades after hours on news. But the reality is that it usually takes a few hours to digest earnings news. In this case the smart money was not so smart.

After the close yesterday, the Boston Pizza Income Royalties Trust announced some changes involving its relationship to the operating company Boston Pizza International. There may be little impact on the royalty units but the changes are somewhat complex. It does appear that the fund will no longer collect the 7.5% interest on a $24 million loan to BPI as the loan will be “eliminated”. I have long listed this as a risk since why has BPI continued to pay this high interest instead of paying off the loan? But overall the press release seems to indicate the changes are positive for the fund. The royalty units rose 1.% today so perhaps the market judges the changes to be positive. But I would question the ability to understand the changes. I like the fund and it has been a good investment. But it has always been a financially engineered entity and has always been complex.

Warren Buffett said today (or it may have been yesterday) that the DOW will be over one million in a hundred years. What is astonishing about that is that it will only take a compounded gain of 3.87% per year for the DOW to rise from Tuesday’s close of 22,371 to 1,000,000 in 100 years. Buffett also noted that since Forbes started the list of the 400 richest Americas in 1982, some 1500 different people have appeared on the list. Buffet is always coming up with unique figures like that. I never heard of anyone else looking into how many different names were on the list. But Buffett’s point was that NONE of them were short sellers. Buffett has always felt that America will do well over the years and that while stocks can fall over shorter periods of time they will always rise over the decades.

Some years ago I came up with my Rule Number 1: “Always assume that Buffett is correct”, Rule Number 2 of course is “Don’t forget rule number one”.

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

Toys R Us declared bankruptcy. This has been expected. This will not be much of a concern to RioCan since Toys R Us was not listed in its top 30 tenants and therefore likely represents quite a bit less than 1% of RioCan’s revenues.

Statistics Canada reported weak manufacturing sales. But there was some indication that this was caused by by normal fluctuations in sales including shutdowns at auto factories. It remains to be seen if this data indicates a true slow down as opposed to statistical noise. But certainly the recently sharply higher Canadian dollar is a negative for manufacturing.

Wells Fargo was up 1.2% to $53.36. Its problems with sales practices and resulting regulatory sanctions are not over yet and so I would be reluctant to invest in this bank at this time.

Toll Brothers was up 0.6% to $40.20. There is nothing special about the $40 mark but I like to think it deserves to be over $40.

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

Canadian Western Bank was up 1.9% to $31.80. That is an increase of 25% since I rated it a Strong Buy on June 3. On the other hand it remains below the prices of around $40 and in the mid to high $30’s where I thought it was a good investment in the fall of 2014. It did not turn out to be a good investment at all that fall. But I mitigated the damage by buying on dips since that time.

AutoCanada was up 5.3% today to $23.08. This is another company that turned out not to be a good investment at the $40.36 price when it was added to the site on July 14, 2015. But it is now up from its lows and I believe that it will ultimately turn out to be a good investment especially for purchases near the lows and probably at the current price as well.

CRH Medical was down 8.6% on Toronto. That is disappointing but may ultimately turn out to extend the opportunity to buy near the lows. It appears to remain a good company that should be a good investment at these prices.

RioCan is updated and rated Buy at $23.84. The company provides a huge amount of detail on its various properties and growth initiatives. The bottom line however is a 5.9% distribution that seems very unlikely to be curtailed and which will likely increase slowly over the years. In addition the units are available at just a hair under book value. And book value is based on the RioCan’s income properties (shopping centers of various types) marked to the value that they trade at among big institutional buyers. That means we can apparently effectively buy into retail shopping infrastructure on the same terms that pension funds and other institutional buyers would pay. All of this is positive. On the other hand these income properties appear to be relatively low return assets reflecting their low risk. And, book value seems likely to decline (unless offset by growth projects) due to higher interest rates. And, there are worries about the future of bricks and mortar retail. Overall though at the current price RioCan looks to be a reasonable investment for those seeking cash yield in their portfolios. In taxable accounts investors should review the taxation of these units which is relatively complex and changes year to year. I would prefer to hold this investment in a non taxable account.

When I first added RioCan to the site on July 9, 2011 I rated it only a Weak Buy / Hold. In part I was concerned by the price to book ratio which at the time was around 1.5 despite the properties being marked to market. I feel more comfortable buying with the price to book at basically 1.0.

I have no immediate plans to buy most because I don’t  have much cash and since I have never had a preference for cash yield versus capital gains. I have generally always strived to maximise return and been agnostic as to dividends versus capital gains. In large measure this may be due to the fact that most (but not all) of my investments have been in non taxable accounts. In taxable accounts since I have not been withdrawing cash I prefer to buy and hold for capital gains (non-taxable until sold) rather than receive taxable distributions. On the other hand I do like the idea of a relatively reliable 5.9% return (assuming no capital loss) just to add stability to a portfolio.

On Friday, the S&P 500 was up 0.2%, closing at 2,500. Toronto was about unchanged.

The next update will be for RioCan. The rating will somewhere in the Buy range. It pays a 5.9% distribution and that distribution seems likely to rise over time. The units trade at about book value meaning you can buy in at a price that currently is about equal to the latest estimate of the market value of the buildings (net of debt). Their properties are marked to market value quarterly. You effectively pay no extra premium for the ability of management to grow the book value per unit over time. In part this is due to current fears that market values of the existing properties will decline with higher interest rates (which is true) and fears that retail shopping malls will see increased vacancies and lower rents over time due to online shopping – which RioCan managements seems to dispute. Overall, I think RioCan offers good value at the current price. I would not expect big capital gains but the distribution is attractive and the unit price seems likely to hold up or increase moderately over time. Due to the way the distributions are taxed (which changes from year to year), this investment is probably better suited to non-taxable accounts.

It was not obvious to me before, but I now understand that RioCan (and perhaps most REITs) probably contracts out much of the real operations of properties. They indicate in the Annual Information Form that they do the maintenance work with internal staff. But with 300 properties and only 669 employees, I suspect much of the maintenance is contracted out. They pay brokers when leasing out space. Apparently, companies are not required to discuss the work they contract out.

On Thursday, the S&P 500 was down 0.1% while Toronto was up 0.3%.

CRH Medical was up 11.6% to $3.47 in Toronto. It appears that some of the recent plunge in this stock was overdone.

Today I am looking at the reports from RioCan in preparation for an overdue update. Essentially this retail property REIT is down because of fears of the death of bricks and mortar retail, The CEO of RioCan believes such death rumors and fears are greatly exaggerated. I have not done the analysis yet but  I think he is probably right and that RioCan is attractive. RioCan has a yield of 5.8% and while the distribution has not increased since 2012, there likely will be increases at some point. On that basis the investment looks attractive. I have no real ability to predict the future of bricks and mortar retail. But I do think the RioCan CEO is both knowledgeable and sincere in downplaying that fear.

Yesterday, I was mentioning Stantec. In my files I have an old summary page from its 1998 annual report that shows that its gross revenue in 1994 was $89 million and net income was $3.9 million. 22 years later, in 2016, the gross revenue was $4,300 million and net income was $130 million or $181 million adjusted for certain amortization and acquisition costs. By any standard, this is HUGE growth. The share count however was up by about 155%. The shares that existed in 1994 represent about 39% of today’s shares. The adjusted earnings per share have grown from $09.25 to $1.69. Again that is a huge increase even over 22 years. Perhaps surprisingly that is 14.1% per year which may not sound all that high.

The fact is that compounding earnings per share at double digit figures for two decades produces remarkable gains. And every extra 1% in the compound return adds tremendously to the tally over two decades.

Anytime we can find a company that seems likely to continue to compound earnings per share at double digits for a decade or more it will turn out to be a great investment unless the shares are trading at a very high P/E ratio.

Stantec, at the end of 1994 was trading at $0.9375 (spit-adjusted) or 10.1 times trailing earnings. In retrospect, we now know that would have been a fantastic buy-and-hold stock. The stock has compounded up at an average 17.8% per year (faster than earnings per share growth due to an increase in the P/E ratio) . But even if it had been trading at 25 times earnings, it still would still have been a very good investment with a compounded annual growth rate of 13.0%.

For long term holdings that will really build wealth it is very important to select companies that can grow earnings per share at high rates. It is less important that they be purchased at bargain prices (though at some point a too high price ruins the investment).

Stantec is still growing in the same way that it has for decades. There are no guarantees, but it seems reasonable to assume that it could continue to grow earnings per share at 10% or more per year. Its P/E ratio at 19 is not the bargain it was in 1994 or 1999 but is also not unreasonably high.

If Stantec is purchased today, the wisdom of that should not be judged on the share price in six months or a year but rather based on the share price a decade from now.

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

Costco rose 1.8% which is relatively large increase for such a large company.

I no longer have Liquor Stores N.A. on the list but I keep an eye on its price. It was up 2.5% today. I took a quick look at its recent conference call transcript and did not see anything good. The company admits that certain family-owned discounts mini chains in Alberta have lower costs. It has tried putting prices up but has had to lower prices due to competition. New management is going to try to reduce costs. I suspect they will close some stores. If I still owned these shares I would Sell. Liquor is always going to sell but the problem is that the various competitors sell basically the same products. Customers can easily go to the cheapest location. The lucrative part of the liquor industry would be the producers of popular branded premium products. Having to compete mostly on price, as retail liquor stores do is not a road to great profits. And having to do that while not having the lowest costs is a very rough road to follow. Some years ago I thought Liquor Stores N.A. had cost advantages due to scale. But the monopoly provincial liquor wholesaler does not give volume discounts and it seems that a number of chains have lower costs than Liquor Stores N.A. Simply, Liquor Stores N.A. financial results for the last few years appear to refute my original idea that they had important scale advantages such as in advertising.

Note the update for Stantec in the post below.

Stantec is updated rated Buy at CAN $34.25. This has been an exceptionally well managed growth-by-acquisition company for many years. Its share price is up 2,642% since I first added it to this site way back in September 1999. Its growth strategies and overall approach remain consistent but it has expanded greatly geographically. The share price has been relatively stagnant for the past four years. Recently its revenues per share have surged due to a very major acquisition in mid 2016 along with other acquisitions and organic growth. Earnings per share were sharply higher in its latest quarter, up 37%.  It seems likely that strong growth will continue in the last half of 2017 although the recent sharp rise in the Canadian dollar will be a substantial drag on growth. I am very comfortable holding this stock and will consider adding to my position.

Stantec could pick up increased work related to repairing the recent hurricane damage.

Costco is up another 1.9% this morning to $163.10. This great company always seems expensive but it did dip to the $151 level a couple of times this Summer, including July 10 when I noted I bought some. It’s a company I would be interested in adding to on dips.

CRH Medical continues to recover modestly. I think it will be a good investment at current levels.

The Enbridge rate reset preferred share on our list is updated and rated Buy at $21.16.

These shares are similar to the Canadian Western Bank preferred shares updated yesterday. The Enbridge shares fell sharply in 2015 as interest rates declined and the projected reset yield therefore declines. In addition, I believe that Enbridge restructured in a way that weakened the balance sheet somewhat which further pushed these shares down and I believe this is why they trade somewhat cheaper than the CWB shares. With the recent rise in interest rates these Enbridge preferred shares have gained 13% in 2017.

These shares were briefly under $16 and even under $15 in early 2016.

At this time these Enbridge preferred shares at $21.16 seem more attractive than the similar CWB shares now at $22.73 although that may reflect higher risk. They could be purchased for the 5.2% yield. The possibility of a gain towards $25 would be a bonus and if the shares happen to fall they could continue to be held for the dividend.

The report for the Canadian Western Bank rate reset preferred shares Series 5 is updated and rated Buy at $22.50 yielding 4.9%.

Given the the two recent Bank of Canada rate increases the projected dividend at the reset date of April 30, 2019 has increased and the projected yield (at the current price) is 5.0%. Accordingly, the share price has increased. Given expectations of further rate increases these shares could increase towards $25. But I would not expect the price to go past $25 since the bank can redeem them at $25 on April 30, 2019. If the yield at that time was above the yield the bank could issue new prefs at then they would likely be redeemed.

Like many rate reset pref shares issued around 2014 and prior, these fell from their initial price of $25 as interest rates unexpectedly fell which lowered the projected reset dividend. Over the past few years there have been occasions when these shares become quite attractive. Our highest rating was (higher) Buy at $16.61 on March 13, 2016. These shares were rated Buy at the start of 2017 at $19.05. They would not have been a good investment at our initial rating of Buy at $25.64 in July 2014. However, there were good opportunities to invest at good prices in the later months of 2015 and in all of 2016 and the start of 2017 as indicated from time to time in the daily comments and occasional updates of the report.

These shares are worth considering for the reasonably good yield of 4.9% combined with a potential for as much as an 11% capital gain over the next 20 months. There is also always the potential for a capital loss if interest rates fall (seems unlikely) or CWB runs into financial difficulties (unlikely but always possible).

Monday was a strong day in the markets with the S&P 500 up 1.1% and Toronto up 0.4%.

CRH Medical was up 10.1% in Toronto after announcing another acquisition. My view was (and is)  that despite the recent government-mandated reduction in the revenues that it receives for each anesthetic procedure, it was still reasonably profitable and its growth strategy was intact. I continue to have confidence in this company. The higher Canadian dollar is something of a headwind but should be a relatively minor factor in the big picture as the company grows.

Home Capital (which I have mentioned, but which is not on our list) was up 3.4%. There is a vote tomorrow regarding whether Warren Buffett / Berkshire Hathaway can buy a second approximate 20% chunk of the company at the discounted price of $10.30. Home Capital has just announced that its Oaken Financial subsidiary has cut the rates on its GICs. This was completely expected since after the rescue by Warren Buffett the company does not need to offer abnormally high rates to attract GIC deposits. If the shares happen to fall after this vote, (no matter which way it goes) that would be a buying opportunity, I believe.

AutoCanada was up 2.3%.

CMHC released housing starts data for August. The annual run rate trend is very strong at 219,000 housing units per year. Given my large Melcor position, I am always most interested in the single family starts in Alberta. Those were up a hefty 45% from the prior year for the month of August. I believe that would still be well below the level of 2014 but is nonetheless quite positive.

Couche-Tard is updated and remains rated Buy, now at $60.25

I have been following this company since it was added to this site rated (lower) Strong Buy at $5.80 (split adjusted) on March 31, 2005. The gain has been 939%. It would have made a great buy and hold forever stock. At times it has looked too expensive but in fact its subsequent growth has always justified the price. The achievements of this once tiny Canadian company are truly staggering. Just in the years I have been watching, it has gone from (I believe) roughly 5,000 stores to roughly 13,000. And they still have the acquisition pedal to the floor!

The stock price has been relatively stagnant in the past two years. Now, based on recent large acquisitions that have taken its assets to $20.1 billion in Q1 from $14.2 billion in Q4 and $12.3 billion just 15 months ago, it appears poised for another very significant jump in revenues and earnings per share. In 2012 through 2014 it got a major boost from a very large European acquisition (the boost in revenues was immediate upon closing the deal but some of the boost in earnings was achieved only after cost-cutting moves). These recent large acquisitions may not be as lucrative as the European acquisitions but will almost certainly deliver significant earnings gains over the next couple of years.

Offsetting this somewhat is the higher Canadian dollar that reduces earnings when translated to Canadian dollars though it (paradoxically) increases reported earnings in U.S. dollars. There is also a near-term headwind in terms of damage to stores from the two recent hurricanes.

I am confident in buying or holding this company but I would also be prepared to buy more on a possible dip related to the above factors. Its margins on fuel sales can also be volatile which can lead to better buying opportunities sometimes.

On my just completed road trip from Cape Breton Nova Scotia to Edmonton I certainly found myself attracted to stop at the largest and brightest and cleanest of “gas stations”. The stations that have a large convenience store as well as a Subway or Tim Hortons are highly convenient. Couche-Tard runs many stations like that. And there is certainly room to add more or convert existing gas stations to this larger format.

It may be very simplistic and boring to look to this simple retail business as an investment. But I believe it will continue to do well. And this is a business that all investors can understand. An added benefit of buying these shares is a certain satisfaction that will come from shopping their stores as an owner.

And note that this is now a HUGE company. Its revenues are now running at $48 billion annually and poised to increase. Report on Business Magazine ranks it ninth largest company by revenue in Canada. But due to its April 30 year end that was based on revenues nearly a year old. Manulife had the highest revenue at $53.5 billion. It looks to me like Couche-Tard could possibly  make a run to the top spot in the next few years. In terms of net profit, Couche-Tard ranked 19th highest in Canada. It had only 15% of the profits of number one, Royal Bank. But still being the 19th most profitable company in Canada might shock a lot of people.

On Friday, the S&P 500 was down 0.2% and Toronto was down 0.3%.

Dollarama was up another 3.6% to $139.50. Usually I have said this is a fantastic company but looks too expensive. On November 2, 2014 I had it as (lower) Buy at $49.51 (adjusted for a subsequent stock split) That may have been the highest I ever rated it. It kept on growing faster than I would have been willing to assume. Sometimes it pays off to pay up for high quality. And despite its products, this was always a high quality company.

Alimentation Couche-Tard is another extremely high quality company. I am going to post another update for that company likely tomorrow since I think it is well worth considering at this time and given that it just released earnings last week. It is currently facing some store damage due to the Texas and now the Florida Hurricane. If it dips on that news, I think that would be a buying opportunity.

Statistics Canada reported unemployment and job figures on Friday. Some interesting facts. I never like to read too much into the one month changes since there is by nature a certain level of statistical uncertainty in the results since they come from a survey of a sample of households as opposed to say counting everyone paying into CPP in a month or something like that. I note that despite recent improvements in Alberta, the unemployment rate remains somewhat high at 8.1%. For Canada as a whole the unemployment rate is 6.2%. That is definitely lower than the average over the past 40 years.

It is often claimed that “the boomers” never had a problem getting a job. In part this is survivor bias. People look at those boomers that did get good jobs and have pension plans etc. They may be overlooking the many many boomers who were only sporadically employed or made little more than minimum wage. They do exist. Jobs have ebbed and flowed over the decades. The past often looks certain and rosy looking back. But in actuality people living in particular years in the past only seldom perceived the economy to be all that great. Today’s young people do face a tough job market. And some years in the past had far better job prospects than today. But over the past 40 years I can attest there were recessions and years with quite poor job prospects and high unemployment.

On Thursday, the S&P 500 was about unchanged while Toronto was down 0.2%.

Ceapro was down 4 cents or 6%. This is going to remain volatile and its ultimate future depends on its research panning out. Their CEO invited me to meet with them after I complained about poor disclosure. Due to travels I have not met him yet. It may end up being a phone call.

CRH Medical was down 3.9% on Toronto. In part this is due to the higher Canadian dollar. I remain quite confident that CRH has a good business model and is low risk at this point (though I never pretend that I can guarantee anything).

Dollarama was up an impressive 10.6% after posting earnings. I have for years said this is one of Canada’s very best managed companies. But it always seems expensive.

There are theories that higher risk companies make the highest returns. In practice some of the safest businesses in simple consumer businesses seem to make higher returns than most risky companies. There never was a theory that said ALL risky companies would make high returns (if so there would be no risk). But often it seems FEW risky companies make much money.

My road trip now has me in Kenora Ontario. Back home on Saturday.

On Wednesday, the S&P 500 was up 0.3% while Toronto was down 0.2%.

Couche-Tard rose 2.6% after releasing its fiscal Q1 earnings. AutoCanada rose 2.9%.

CRH Medical slipped 3.1%.

My road trip across most of Canada continued today from Ottawa to Wawa. A scenic route but not built for speed. The lack of a true highway (meaning limited access at a minimum and ideally at least two lanes each way) across this country can’t be good for trucking or businesses dependent on trucking. If infrastructure spending is contemplated, then a true TransCanada highway is an obvious candidate.

Tim Hortons and McDonalds with there multiple new and clean locations seem to be the obvious stopping points on the trip and are invariably busy. Subway and a few other chains also proliferate. The biggest service stations including those ran by Couche-Tard and Canadian Tire also are attractive stopping places and are busy. The “chainification” of all such consumer services has been ongoing for decades and will continue.

On Tuesday, the S&P 500 was down 0.8% and Toronto was down 0.7%.

Melcor is showing a bit of life, up 3.3% to $15.70

Wells Fargo down 1.7% and Bank of AMerica down 3.2%

AutoCanada was down 3.0%.

My road trip continues, Ottawa last night, stopped in Petawawa at the moment.

As always, auto dealers seem to be one of the most prosperous looking businesses that we pass. We passed no less than four large new looking Toyota dealers just in Nova Scotia and New Brunswick. It seems to me that owning AutoCanada with its 57 dealers is going to work out well especially as the recovery in Alberta continues.

Possible bank of Canada rate change today…

Oil hanging in not bad at $49.17 but Toronto is down for some reason this morning.

I may or may not have internet to post anything tonight/tomorrow morning.

On Friday, the S&P 500 was up 0.2% while Toronto was down 0.1%

Canadian Western Bank was up 3.4% to $29.99 in further reaction to its strong earnings report. It appears to me that this bank will continue to recover and remains good value at this price. It’s my second largest position representing a heft 13.5% of my portfolio as of August 28. I have no plans to trim it although having added a lot of shares when it swooned to the $26 and $25 level last Spring, it might be prudent to trim it somewhat. I own it partly in RRSP accounts where I don’t have to worry about triggering taxable capital gains.

Home Capital was up 3.2% to $13.97. I mentioned I grabbed a few shares about a week or so ago. The vote to approve Buffett/Berkshires added investment at $10.30 takes place September 12. Some investors oppose the discounted price. I think it deserves to go ahead since it will totally shore up the balance sheet. But some investors believe Buffett’s original investment has already done that sufficiently. Buffett will retain his original 20% stake no matter what. But I suspect he will feel insulted if the vote is negative. How smart is it for Home Capital owners to insult Buffett? Not very, I would say, but as a huge Buffetf fan I am biased.

Statistics Canada reports that

“Capital expenditures for the oil and gas extraction industries rose 14.9% from the second quarter of 2016 to $9.8 billion in the second quarter. This increase followed a 2.2% year-over-year gain in the first quarter of 2017.”

This is more proof of the partial recovery that has occurred in that industry.

I am on a road trip this week heading west from Cape Breton. Edmonston, New Brunswick on Monday night. Ottawa on Tuesday night. Next stop to be determined. Sault St. Marie or probably somewhat past that.

Thursday was a positive day in the markets with the S&P 500 up 0.6% and Toronto up 0.5%.

Canadian Western Bank was up 1.1% to $29.00 on its strong earnings release and remains a good investment that is likely to continue to recover towards past highs.

Stantec was up 1.6% to $34.70 and is also a company that will almost certainly continue to do well.

Toll Brothers was up 1.9% and is another one that appears set to continue to do well.

Couche-Tard slipped down 0.7% which seems surprising given it is expected to report strong earnings on September 6. Earnings are rising as it integrates recent very large acquisitions.

Markets are expected to do well today as a U.S jobs report came in strong.

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

Canadian Western Bank was up 2.1% to $28.69. This morning it has reported a very strong Q3 with adjusted earnings per share up 15%. The only negative I saw was gross impaired loans had increased but they indicated that his was as expected and previously forecast. The provision for bad loans was down which is positive. I would expect this stock to continue to do well. Earnings are up and in addition it is trending back to trading at a higher multiple of book value. CWB also raised its dividend by 4%.

TFI International was up 1.6% and continues to be a long term winning company.

Penny stock Ceapro was up another 6 cents or 10%. Presumably, some investors feel that its recent plunge was over done. But I expect this one to continue to be volatile and it is a speculative stock.

I had said that Couche-Tard was reporting on Tuesday. Actually, I now see that it will report on September 6.

Tuesday saw the S&P 500 up 0.1% and Toronto up 0.2%. So the markets have shrugged off the North Korean missile shot.

Penny stock Ceapro bounced up 6 cents or 11%. But I would not read much into that as there was no news. The company does have cash and is in no danger financially and so the decline probably was over done. A substantial recovery in this stock is likely a long ways off and depends on the success of their research and development.

Alimentation Couche-Tard is expected to post strong Q1 earnings today, probably after the close.

On Monday, the S&P 500 and Toronto were each about unchanged.

Markets are forecast to be down on Tuesday due to a missile launched by North Korea that flew over a part of Japan. It’s anyone’s guess how markets will react and how far Korea will go with its provocative actions. If markets do fall, it would nice to be in a position to have cash to invest at the appropriate time.

I updated the breakdown of my own portfolio.

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

Toll Brothers was up 2.1%

As of Sunday night, oil prices have not reacted much to the Texas hurricane and shutdown of some offshore oil production in the Gulf of Mexico.

Canadian Western Bank will release earnings on Thursday. I expect it to be another good report.

On Thursday, the S&P 500 was down 0.2% while Toronto was up 0.1%.

Costco was down 5.0% on news that Amazon will close its acquisition of Whole Foods on Monday and intends to lower prices. For the same reason, Walmart was down 2.0%.

Costco has always been quite safe from competition because it had the lowest costs. It charges lower prices and still make a good profit. I don’t think Whole Foods under Amazon can achieve costs as low as Costco. But then again, Amazon has shown a strong tendency to seek sales even at low or zero profits. It is a scary thing to have a competitor like that. Traditional style grocery stores including Walmart probably have a lot more to worry about than Costco with its low-cost warehouse style approach. Costco has long been an expensive stock. Possibly its P/E will come down to account for the risk of Amazon. My strategy would be to nibble slowly at Costco if and as its price comes down. I hold a small position in Costco and am certainly not considering selling.

I happened to be looking at Alimentation Couche-Tard today and decided to add to my position. It reports earnings next Tuesday which are expected to be very strong.

I also on Wednesday made a small purchase of Home Capital shares just on the strength of the Warren Buffett investment. I do consider this to be somewhat speculative as the company has warned it could be hurt by new mortgage rules and also it could be hurt of home prices decline in Ontario which appears to be the case in Toronto. So, I will keep my investment small and revisit later.

On Wednesday, the S&P 500 was down 0.4% while Toronto was up 0.5%.

Constellation Software was up 2.0%.

Royal Bank rose 1.1% after releasing a good earnings report and raising its dividend. I am optimistic that Canadian Western Bank will also have done well in its Q3. I don’t expect them to increase the dividend as they usually do that (if at all) in December and also as a conservative bank they may wish to hang onto their capital.

Statistics Canada reported on food services and drinking places for June. Compared to June of 2016, sales were up 5.0% for Canada as a whole and 2.5% for Alberta but down 1.3% for Saskatchewan. I was surprised when Boston Pizza indicated continued weakness in Alberta and Saskatchewan in Q2, compared to Q2 2016. This data arguably supports that to some extent. To some extent rising food prices have been offset by lower customer counts. Over time I expect Boston Pizza Royalties Income revenues to rise moderately with higher food costs leading to higher menu prices.

On Tuesday, the S&P 500 was up 1.0% while Toronto was up 0.2%.

Toll Brothers was down 2.6% to $37.27 after reporting earnings. In may ways the earnings were strong, but the market found some aspects disappointing. I continue to view Toll Brothers as a good investment. The company itself bought back substantial shares at an average of $39.02 in the quarter. In the past I have found the company to be astute in buying back shares at good prices and so I think the fact that they are buying at $39 is a positive indicator. The company has recently been growing its revenues in the range of 20 to 25%.

Ceapro declined another 10%. This is a penny stock and it could certainly continue to decline. If its research and development of new products pans out then it could do well. But that is likely to take at least one or two years. I plan to hold onto my small position in this company. I don’t think I will add even at lower prices until I see some improvement or at least an end to the recent declines in revenue.

Statistics Canada reported that investments in new home construction increased in every province except Newfoundland in June. In that regard, the Canadian economy continues to do well. In Alberta the investment in new single family homes was about 23% below the June 2014 level but was above the June 2011 level. New housing construction in Alberta has recovered somewhat from the recession lows. But I would not expect it to return to the 2014 peak level anytime soon.

On Monday, the S&P 500 was up 0.1% while Toronto was unchanged.

CRH Medical was down 4.3%. There were no other particularly noteworthjy moves in the stocks on our list.

News reports today indicate that Warren Buffett / Berkshire “lost out” in its bid to acquire a large utility out of bankruptcy of the parent for some $9 billion. I am not sure Buffett would consider it a loss. He does not engage in bidding wars. Berkshire likely spent very little money or even time preparing their bid because the value that they would pay is very obvious to them from the financial statements. They never spend much if anything on consultants when they make a purchase offer. Buffett has cemented his reputation here for not upping his original offer. Companies learn that if you get an offer from Berkshire it is a take-or-leave it deal. He does not negotiate up. Usually it is the company that wishes to sell to Berkshire that must name a price and Buffett usually takes it or leaves it. Buffett is perfectly happy to pass on deals that are too expensive. He does not wish to suffer from “winners curse”.

And, oh yes, it seems Berkshire will get a $270 million breakup fee from the utility. For the financial press to view this as a loss to Berkshire merely illustrates how much smarter Buffett is than the financial press.

On Friday, the S&P 500 was down 0.2% and Toronto was down 0.5%.

Ceapro, a tiny Edmonton biotechnology company was down 12.7% to 69 cents after releasing Q2 earnings. An d this decline is in addition to a steady slide in the share price. I had mentioned on June 20 and June 7 that it could continue to decline. The report and comments here have indicated that I had some concern about disclosures.

A quick look at the Q2 report leads me to even more concern about disclosure. They say:  “The 35% difference in product sales volume relates primarily to lower sales of beta glucan.” And I think that is all the disclosure they give. No discussion of what customers have slowed their buying or why. I would have to look it up to see what product the beta glucan was going into.

At the moment I am not inclined to add to my position in this company.  It was always going to be a risky company. But increasingly I fear it is not being candid with investors.

Regarding Melcor, I have had some email discussion with management. I put it to them that with the stock trading at 50% of book value there are two possibilities. 1. The stock price is irrationally low and the problem lies with investors not valuing the stock properly. I hope this is the case and that management can work harder to communicate the value of the company including by buying back some shares or raising the dividend (rather than buying more land for $1.00 that the stock market then seems to value at 50 cents); or 2. The stock price is reasonably correct and Melcor has effectively turned each $1.00 of share owner equity (mostly retained earnings) into about 50 cents. If so, that is certainly a failure on the part of management. I hope by putting this to management (and I used extensive quotes from Warren Buffett where he indicated that it would be a fail if his stock sold much below book value especially for an extended period of time) that I can get management to realize that having a stock that trades at half of book value is not acceptable in the longer run. I don’t think they should not be patting themselves on the back and awarding bonuses while the stock is so far below book value. Either the stock is irrationally low, or the assets need to be written down in value. I think it is the former.

Canadian Tire is updated and rated (higher) Buy at $151.46.

I had last updated Canadian Tire on April 1, based on its December 2016 annual results and rated it Weak Buy /Hold at $157.98. Since then it has released Q1 and more recently Q2 earnings which were very strong. On July 5, I mentioned it was worth nibbling on at $144. Given the strong earnings of the first half of 2017 it now appears to be worthy of a (higher) Buy rating (or at least Buy). I may not buy back into this name given that my cash position is relatively modest at this time.

Canadian Tire credit card customers pay a lot of interest

One of the interesting things I saw in the Q2 report is the following:

In the Finance segment, which is largely a credit card operation, the annual revenue as a percentage of the average accounts receivable was 22%. This suggests that the majority of these credit card customers are not paying off their balances each month. Rather, the Canadian Tire MasterCard customers mostly tend to run a balance. The average balance is $2761. This makes sense. The type of consumer who pays off their credit card monthly likely has a credit card from a big bank, often a gold card. The typical Canadian Tire credit card user is apparently not in a position to pay off the card monthly. These would be somewhat higher risk customers. In fact Canadian Tire writes off 5.6% of its credit card receivables yearly to bad debt.

The most lucrative credit card customer is the one who runs a balance and pays the 26% annual interest rate but who pays at least the minimum monthly and never defaults. These people are the bread and butter of the credit card industry. They don’t cost the card company in bad debt. They often don’t cause collection costs because they do pay the monthly minimum. Arguably it is unsavory to be charging these people 26% annual interest. But they incur these debts willingly and other credit card companies charge similar rates. I would advise these people to try to pay off these cards or to shop for a lower interest rate. But meanwhile Canadian Tire alone has 1.9 million such customers.

Customers who pay off their credit cards monthly are also profitable. The profits there come from the fees charged to merchants. But these customers are no where close to as profitable as those that run balances but pay monthly and never default.

Some customers do run up balances and eventually default. Credit card companies clearly lose money on these customers. It takes perhaps 5 to 10 good customers running balances and paying 26% interest to make up for every (average) customer that defaults. While Canadian Tire reveals that it writes off 5.6% of credit card receivables in a year it does not appear to reveal what percentage of the customer base that is. It is likely that some customers pay interest faithfully for years but then later default due to changed circumstances. The worst customer would be the new customer that runs up a balance and then defaults.

On Thursday, the S&P 500 was down 1.5% and Toronto was down 0.3%.

While 1.5% is  a sizeable one day drop I don’t really consider it to be that significant in light of how much the U.S market is up since November. When these dips happen, I never know if it is the start of something larger or not. And I don’t think anyone else knows either.

Regarding CRH Medical: I had a lengthy conversation with their CFO today. I had sent in a list of questions mostly to clarify my understanding of the business. I was satisfied with the responses which did clarify and increase my understanding of the company. I think the company will continue to grow. The reductions in the amounts it can collect from insurance companies for its services are a set back but I think the company remains quite viable. The stock price may recover somewhat as they make acquisitions in the next six months. But a bigger recovery will likely take a year or more as the company demonstrates where its earnings stand under the new billing regime. I also noticed that a Board member has bought about $100,000 in additional shares last week.

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

Boston Pizza Royalties was up 2.7%.

Costco was up 2.1% even after being ordered to pay $20 million to Tiffany’s for selling (very real) diamonds but using the Tiffany name which they were not entitled to do. Although I own Costco shares, it looks very clear to me that Costco is in the wrong and Tiffanys deserved to win this case.

A comment (okay rant) about Aeroplan/Aimia. Aeroplan was a good program when it was part of Air Canada. It was sold off years ago when Air Canada was desperate for cash. Later Aeroplan expanded and bought other loyalty programs in Europe. I have been collecting Aeroplan points for close to 30 years. I used to own shares in it. Over the years it became harder to redeem for flights and it seems to me that on their classic rewards there was a lot of extra taxes and fees that had to be paid in cash. Some years ago, Aeroplan announced a policy of expiring (in my view confiscating / legally stealing) points if there was no activity in a year. At that time I was in contact with the company top management and told them that I thought that was deeply unethical and unfair. Some people collected points mainly from flying and that is not always an every year thing. I simply consider their policy to be a form of “legalized theft.” I signed up to the program before the terms and conditions were changed to allow expiry of points on lack of activity for a year. I sold my shares years ago feeling that if they mistreated the points collectors, they might also mistreat investors.

More recently Air Canada announced it will no longer be a partner with Aeroplan in a few years when its contract runs out.

I had a CIBC Aerogold credit card for collecting points. CIBC sold my account to TD a few years ago. I kept the card out of inertia.

Today I finally switched my TD Aeroplan infinite card to a TD cash rewards infinite card. It was extremely easy since my credit card number will not change. I am tired of points cards. I would rather just have the cash back card.

The danger I now face is that my Aeroplan points will be expired (stolen from me) if I have a year of inactivity with Aeroplan. I will be trying to use up my points.

It’s my view that people should consider using up their Aeroplan points. I see little reason to stay with an Aeroplan credit card other than to generate the activity to insure your points are not expired for lack of a transaction in a year.

On top of being what I consider to be an unethical company, Aimia has a weak balance sheet. They owe $3,276 million in reward points (after deducting points they unethically expired). You might think that the money they collected for such points would be in cash and investments. No, they only have $790 million in cash and investments. Much of the money collected in selling points was invested in buying other loyalty programs. Aimia shows a net equity on its balance sheet of just $27 million. Assets (which are mainly goodwill and similar intangibles) are $4,295 million. I would have thought this should have been a strong cash generating business. I don’t know why they have a paltry book equity of $27 million. It is true that the actual debt is relatively modest at $449 million. But at a glance I would say the balance sheet is very weak. The share price recently plunged from the $9.00 range and is now at $2.14. The book value per share is just 18 cents per share. Possibly the cash flows justify the $2.14 and more, but I would not count on that.

I don’t know if the shares of Aimia will recover. When the shares plunged a few moths ago, I took a quick look and saw the weak balance sheet and tiny book value per share and decided I was not interested in owning shares.

In my view this is a morally and financially weak company.

It was supposed to generate loyalty to Air Canada. I believe it did the opposite.

This rant is an addition to my “Thoughts on Aimia / Aeroplan of June 14 this year”

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

It certainly seems possible that the market could react negatively to the fiasco that is the Trump presidency. The chances of Trump getting much legislation passed seems slim.

Melcor managed a 4% gain but as always, that is on thin volume. AutoCanada was up 2.1%, adding to recent gains.

AutoCanada is updated and rated Buy at $21.96. Many aspects of its Q2 report were positive and it now appears set to resume earnings growth.

On Monday, the S&P 500 was up 1.0% and Toronto was up 0.6%.

AutoCanada was up 5.8% as the market continues to react positively to its Q2 results.

TFI International was up 2.6%.

On Friday, the S&P 500 was up 0.1% (despite Trump / North Korea) while Toronto was down 0.3%.

AutoCanada had a strong day, up 10.4% after releasing earnings. This will be my next update. Reading through the report there were a lot of positives. Management continues to pursue acquisitions. It appears to me to be set to report good earnings gains in the next year. It will be lapping weak quarters which will make it easier to achieve growth.

Our report on Boston Pizza Royalty units is updated and rated Buy at $21.12.

There has been modest weakness in same-store sales, which is by far the main driver of distributable cash per unit, in the past year due to weakness in Alberta and Saskatchewan. I would expect some modest growth going forward as they lap the poor quarters of the past year. Higher interest costs will be a small drag on distributable cash as they have some modest debt. The main impact of higher interest rates, should that occur, would be a decrease in the P/E ratio for a given level of distributions. In other words higher interest rates could push the price of the units down even if the distributions rise somewhat. But I view a 6.5% cash distribution that could rise (it could fall but that seems unlikely) as attractive even in the face of interest rates that will likely rise moderately. For those seeking dividends, especially in taxable accounts, I believe these units have a place in a portfolio.

Melcor Developments is updated and rated (lower) Strong Buy at $14.50. Those of us who have put a material amount of our portfolios into this stock are no doubt frustrated by this stock. Despite posting what would appear to be good results in Q1 and now Q2 of 2017 and despite recent improvements in the Alberta economy the stock is unchanged year to date. And it is down significantly from its 2014 highs.

I rate it a (lower) Strong Buy for all the reasons indicated in the report including the 3.6% dividend yield and the fact that it is trading at just 49% of book value (and where the assets are primarily investment properties and land). The Alberta economy appears to be recovering. I am willing to hold this stock and collect the dividend. I expect the price to move closer to book value at some point. Of course there are no guarantees. It is always possible that home building will plummet, that lot and land prices will plummet and/or that the rents and vacancies on its retail and office rental buildings will cause a loss of value. But the company has a very long history of profitability and growth in book value over time. It seems to me that the opportunity to buy in at half of book value is a good opportunity. Due to the low trading volume and due to the history of the stock often trading under book value, investors who buy should be prepared to hold for some years.

Thursday was a negative day in the markets with the S&P 500 down 1.5% and Toronto down 0.9%.

Canadian Tire was a notable bright spot, up 5.4% after releasing a good earnings report.

CRH Medical also managed a gain, up 2.3%.

Boston Pizza Royalties units fell 7.3% to $20.60 after releasing earnings that showed a decline in same-store franchise sales of 1.6% leading to a decline in distributable cash flow per unit of 0.9%. I expect the long term trend to continue to be a slow increase in distributable cash per unit. The fund is distributing almost exactly 100% of distributable cash and plans to continue to do so. The current distribution is $1.38 per year (paid monthly) for a yield of 6.7%. Even given the fact that interest rates are going up somewhat, a 6.7% cash yield that will likely increase slowly over the years seems attractive. It is possible that the distribution would have to be cut if distributable cash per unit continues to decline. But I don’t expect that to happen given that the economy in Canada has been improving. If the distribution were cut, it would likely be a small cut. That would however, spook the market. I would consider adding to positions in Boston Pizza especially if the price stays under about $21.

There was essentially no market reaction to Melcor’s Q2 earnings report. The shares were down 1.1% to $14.20 There were only 700 shares traded. And 300 of those were me buying a bit more. It would appear that there is simply very little interest in this company. And there is likely still considerable fear about the future prospects for home building in Alberta. So, the stock languishes trading at just 49% of book value. And, that book value consists of solid hard assets.

Interestingly, the company indicated that its administrative expenses were up 27% based on discretionary bonuses given the strong results in the quarter. The company continues to add to its land positions and appears to be confident about the future.

On Wednesday, the S&P 500 was about unchanged while Toronto was down 0.3%.

I consider Trump’s tweets (taunts) regarding North Korea to be dangerous and this could turn into a catalyst for a market decline. But there is always the risk of a market decline. I try to be in a position to buy if the market declines. If you sold every time there seemed to be a risk of a market decline you would usually find that the dip never occurred and then as the market rose you would likely not buy back in. Or if the dip occurs what is the chance you would buy back at something close to the right time?

There was better news for our stock picks today. Stantec was up 9.4% to $34.40 after releasing better-than-expected earnings.

CRH Medical was up 2.7% on Toronto. Perhaps the bottom is finally in for this stock.

Melcor reported what appears to me to be strong results after the close.

This company is trading at just 49% of book value. Management is showing confidence in the future as they purchased additional raw land in Edmonton, Kelowna and near Phoenix. They also purchased an 80% interest in 294 lots in Phoenix. The price paid was apparently $16,200 per lot. Compare that to the average lot price they sold in Alberta in the quarter which was $174,000. Management presumably thinks that when they put equity into a land purchase they are not turning dollar bills into 49 cents.

I don’t know why they would not be buying back shares. (In effect buying a dollar of book value for continuing owners by paying just 49 cents to the exiting/selling owners.) It might be because the trading volume is so thin they would not get enough shares to make the purchase worthwhile. In fact they are only allowed a maximum of 2,158 shares per day which would amount to about $620,000 per month and so it would take quite a while to deploy much money that way. Or perhaps they fear that buying shares would push the share price up in an artificial manner only to see the price drop when they would stop buying.

I think Melcor’s share price suffers from some complexities in its accounting. Bizarrely, when the the unit price of the Melcor REIT rises, Melcor must report a loss since it consolidates the REIT and shows a liability for the non-controlling interest which is the publicly traded portion of the REIT. Ponder an investment that you have to show a loss in when its price rises! There are mark to market adjustments in the value of its investment properties which flow to income and then are adjusted back out in looking at funds from operations(FFO). It also creates value in its commercial property development division but this does not flow to the income statement until the property becomes a finished investment property. And at that time it gets lumped in with changes in market value on investment properties and tends to get ignored. Management suggests FFO is a good measure of performance. I think FFO understates performance since it does not include any profit from the commercial development activities.

Melcor is an inherently cyclical company and it seems that the market has a hard time getting the price to reflect the value and//or the market simply dislikes cyclical companies.

AutoCanada was down 3.3% and Linamar gave back 2.1% which was about the same amount it rose on Tuesday.

On Tuesday, the S&P 500 was down 0.2% while Toronto was flat

Linamar was up 2% after another auto parts maker reported strong results.

CRH Medical was down another 7% in Toronto and 10% in U.S.A. trading. At this point it is likely going down simply because it has gone down. Some owners simply capitulate. I could be wrong, but as a company with substantial positive cash flow and that was recently able to substantially increase its credit line at the low rate of 3.25%, I do not see this as a company that is in danger of running into any financial difficulty. I fully expect some recovery here. But it may take quite a while as investors have been badly burned. Analysts too, feel burned. Insiders have stock options some of which will not pay off unless there is a very substantial recovery. The next announcement of an acquisition could push the stock higher. I have sent a lengthy list of questions to the company and they will get back to me this week. In what may be an act of stubbornness, I added to my position once again.

In better news, Canadian Western Bank was up 1.3% to $29.38. It had bottomed out at $23.68 just a couple months ago during the Home Capital panic. It’s all-time high is a bit over $40 and its history suggests it will surpass that level again. CWB has not reported a loss in any quarter in over 25 years. Banks however are highly leveraged and so they are certainly not without risk.

Melcor is scheduled to release earnings after the close today.

Stantec has reported relatively strong earnings this morning.

CRH Medical is updated and rated Speculative (lower) Strong Buy at U.S. $2.70 or CAN $3.42. $2.70 was the price earlier today in U.S. trading but it closed at $2.60, up 5.1%.

This stock has certainly been very disappointing recently. Therefore it seems fair that I review my history with this stock.

It was added to the site on October 9, 2016 rated Speculative Buy at U.S. $4.32. For the start of 2017 it was rated Speculative Buy at U.S. $5.25

On April 7, 2017 it was updated and rated Speculative Buy at U.S. $8.55.

Subsequently its Q1 earnings report in late April revealed a decrease in revenue per case at its largest subsidiary due to a “change in payer mix” (which really probably would have been more properly described as the loss of a major insurance payer customer). On April 30, 2017 I commented on the company and the price decline and indicated I might buy more.

The price continued to decline in June and I remained positive on the company in my comments.

On July 10 I noted that it was the subject of short selling and some analyst criticism.

In mid July the stock fell precipitously on the announcement that insurance companies would reduce the fees they pay per case by some 18%. I commented on July 16 and July 17. indicating I was adding to my position.

Around August 3 the company released Q2 earnings which were judged to be disappointing and the stock was pummeled down by about an additional 30%. See my comments of August 3 just below.

It’s fair to ask what went wrong here.

The risk that insurance companies could reduce the fees paid was noted in my report from the start. Risks don’t always materialize, in this case it did. As the bad news unfolded since late April, I did not anticipate that the stock price would continue to react so negatively.

When the company was added back last October 9, the comment included “Those buying should perhaps make only a relatively smaller purchase. Be prepared for volatility.” It’s fair to say that I basically ignored that advice in my own trading and made it a larger position than perhaps such a small company should be.

In the update of April 7 I had noted that it was pricing in considerable growth in the range of perhaps 20% per year. I had not anticipated that earnings growth was about to be at least temporarily halted or probably reversed by the fee reductions.

It now seems apparent that the company has had some issues in its disclosures and could do a better job and be more candid.

At this point it still appears to be a profitable company with a good plan for growth. But given the fee reductions coming in 2018 it may take quite a long time to recover much of the recent decline. And it is certainly not without risk. It may be too dependent on the actions of the insurance companies and the gastrointestinal clinics where it provides service. When I ran the numbers for today’s update the analysis indicated that the company is now substantially under valued. As always there can be no guarantee of that.

It’s interesting that despite the fee reductions it found that upon review it did not have to write-down the value of its purchased intangibles. The company does not appear to think that even in retrospect of the fee reductions that it paid too much for the acquisitions.

On Monday, the S&P 500 rose 0.2% while Toronto was closed for the civic holiday.

The report for Constellation Software is updated and rated (lower) Buy at Canadian $704. That was the price I used in the analysis but it closed today at $698. The company reports in U.S. dollars. Therefore I do the analysis in U.S. dollars and converted the share price to U.S. dollars for purposes of analysis. This stock is not cheap. But it is has been one of the best managed companies I know of. It’s CEO is extraordinarily candid and focused on creating returns for shareholders. He has a great track record and those who have ridden his coat tails by buying and holding these shares have done very well. There may be dips in the share price but the overall direction will likely continue to be up.

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

CRH Medical got pummeled down by 29% after releasing Q2 results. I have read the release and listened to the conference call. To me the stock reaction continues to look over-blown. (But I thought that even before this latest plunge).

Changes in the revenue per patient that they receive from insurance companies will certainly reduce their earnings growth in 2018 or perhaps cause a decline in 2018. This is not good considering the stock was pricing in considerable growth earlier this year. But their acquisition and growth model remains intact and so growth in earnings should resume.

Management seems to be confident of the future. The analysts on the call seemed mostly polite but one or two had some challenging questions. It is quite possible that analysts feel somewhat betrayed after recommending the company and then being surprised by the reduction in revenues per case.

I found that management handled the questions well and seemed on top of their numbers.

There was certainly a concern about a significant one-time increase in revenue due to a change in accounts receivable estimates that had benefited Q1 but was not disclosed in Q1. The company explained the reason for that but the reason was weak. I believe it should have been disclosed in Q1.

I do think the company could improve its disclosure. It focuses too much on EBITDA with little mention of bottom line earnings. There did not seem to be any real discussion of the reasons for certain operating expenses increasing quite a bit faster than revenues.

A positive disclosure in the report was that despite the lower revenues per case that will apply in 2018 there has been no impairment in the value of its acquired companies.

Overall, this still looks like a good business to me. But 2018 will be a year of little earnings growth or perhaps a decline. 2017 earnings have also been impacted by certain changes in its payer mix. Recent acquisitions will offset some but perhaps not all of that decline. Earnings should grow substantially in 2019 due to acquisitions.

I will run the numbers to determine what the P/E now appears to be based on adjusted earnings.

I would expect that certain analysts reports will impact the stock price on Friday.

CRH Medical down 23% in early trading. Apparently the market focused on the negative aspects of the earnings release. The conference call has starts at 11 am eastern and may change the tone. I am not sure if the RBC or Scotia analyts have commented yet. Certainly it is possible that I have completely mis judged the value of this company. Perhaps stubbornly, I bought more at this new lower price.

Meanwhile TD Direct is out with a 5.25% rate reset preferred share from Kinder Morgan Canada. That seems attractive but note that Kinder Morgan is likely considered somewhat higher risk.

On Wednesday the S&P 500 was up close to unchanged while Toronto was up 0.4%.

The Dow Jones Industrial Average breached the 22,000 point mark.

CRH Medical was up about 11% after announcing an acquisition and forecasting more acquisitions. It then releases earnings after the close. The earnings release seemed to be generally positive  Revenues was up strongly. Adjusted EBITDA attributable to share owners was up 4%. But actual bottom line earnings per share were slightly below zero. That may have been due to an unusual expense to pay off early some high cost debt. This is not great results but considering the huge drop in the share price the results seem positive and may suggest that the price drop was overdone. The company will justifiably face some criticism of its disclosure. It focuses too much on EBITDA and seems to ignore bottom line earnings. I believe the net earnings would be positive after making legitimate adjustments for amortization of purchased customer relationships (which is not likely a wasting asset) and for the unusual interest penalty paid. The company will host a conference call Thursday morning. It remains to seen whether the market will focus on the negative aspects of the report or the positive aspects. In part, this depends on how key analysts view the results. At this time I continue to believe that the shares represent good value but I also view the shares as somewhat speculative.

Constellation Software was up 3.6%. I am in the process of updating my analysis and I expect to rate the shares probably (lower) Buy. This likely remains a good long term investment but I am not much inclined to add to my position at this price.

On Tuesday the S&P 500 was up 0.2% while Toronto was up 0.4%.

Toll Brothers was up 2.2%.

AutoCanada was down 3.6%. That was in spite of some news that July auto sales were very strong in Canada but weak in the U.S. However Chrysler sales were down and AutoCanada has more Chrysler dealers than any other brand. It does have GM dealers which did well. AutoCanada dealers should be doing well in comparison to 2016. We will find out with the Q2 earnings release next Thursday August 10, after the close.

CRH Medical will announce earnings after the close today, I understand. They just announced another acquisition this time of 55% of a anesthesia practice in Florida. And, they said the pace of acquisitions will accelerate. The stock price did not react to the news. It seems to me the market is pricing the company as if it is in trouble or badly wounded and yet the company appears to be forging ahead (albeit there will be a hit to profits in 2018 due to recent fee reimbursement reductions by medical insurance companies). I added to my position yesterday. I am not sure how prudent that was given the uncertainty of the Q2 report. But investing in stocks has never been a matter of certainties, more a matter of probabilities. Especially in the case of smaller companies.

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

Costco was up a hefty 3.7% gaining back some recent losses. Looking on Yahoo Finance (which has become increasingly useless) I don’t see any news to explain this. Not that the market ever owes anyone an explanation for price changes.

CRH Medical was down 2.6%. I  am quite eager to see its results on Wednesday. Most of the share drop related to decreases in what it will be reimbursed for its services by insurance companies starting in 2018. So, possibly even a good Q2 will not be rewarded. What may be more important is the companies outlook discussion. It is possible too that they will write-off some of their purchased goodwill. Despite uncertainties I am hopeful that the Q2 result will lead to an increase in the share price.

I am currently working on an update for Constellation Software. It’s clearly a great company. The question is whether all of its greatness is already fully reflected in the share price. It’s disclosure is interesting. The chairman’s letter is unbelievably candid and useful. The annual report MD&A however I found not to be very useful at all. I am going to look at the Annual Information Form which appears to have more useful information. In many years of investing I have never quite figured out why companies need an Annual Information Filing in addition to the annual report. If the information in the AIF is useful why not just include it in the annual report? Sometimes the AIF provides nothing much in the way of additional useful information. Other times the best information is in the AIF. At least that has been my experience. But I don’t always look at the AIF if the annual report seems comprehensive.

Canadian National Railway Company is updated and rate Weak Buy / Hold. It’s a great company and should be a good long-term investment. It had a blow-out quarter in Q2 with traffic and earnings up strongly. However they are projecting only very modest gains the rest of this year. My experience has been that they tend to exceed guidance.

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

Couche-Tard was down 2.0% and Wells Fargo was down 2.6%.

This week and next will feature a number of Q2 earnings reports.

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

Fedex was down 2.9%.

Constellation Software was down 3.5% after releasing Q2 earnings.

CN Rail really had a huge Q2. Carloadings were up as follows: Metals and minerals 32%! Grain and fertilizers 16%, Intermodal (which is generally consumer goods) 16%, Automotive 9%, Petroleum and chemicals 6%, Forest products down 2%, Coal was down 3% (but for whatever reason way up in revenue). CN however warned that the next two quarters will face tougher comparable and that currency will be a headwind. I would think that these huge increases in car loads suggest that the Canadian economy is truly on the move and growing.

Perhaps TFI International (TransForce) will also report a strong quarter given the increase in goods on the move. TransForce will also face a currency headwind in the back half of the year however as will Stantec. Couche-Tard is interesting in that a higher Canadian dollar increases its earnings which are reported in U.S. dollars but it is really a negative when translated back to Canadian dollars.

On Wednesday, the S&P 500 was about unchanged (even though the Dow Jones was up 0.45%) and Toronto was down 0.2%.

Ceapro was down 4.8% to 78 cents. This is a very speculative stock. I expect a poor earnings report in Q2. Unless they can announce big progress on their research efforts the share price may have no reason to recover. But the balance sheet is reasonably strong and so the company will be able to get through a year or so of low earnings or losses if that occurs. I own some but am not particularly inclined to add to my position. We will know more after the next earnings release.

CRH Medical was down 6.0% giving back most of the recent minor bounce.

CN Rail was down 2.4% to $99 after releasing Q2 earnings and its outlook. For some time it has looked expensive. But it remains a high quality investment for the long term. I will update the report for tis Q2 results within a few days.

AutoCanada was up 3.2%. I expect that its sales were reasonably good in Q2 especially the later part of Q2 as auto sales in general have been strong. It reports on August 11.

The cancellation of a $36 billion proposed LNG project  was much in the news yesterday. While the owner, Petronas explained that it was due to changes in world natural gas prices, many people were quick to blame regulations and a poor investment climate in Canada. I have been highly skeptical of the two largest LNG projects since the first one $40 billion in Kitimat, was announced. The idea of a $40 billion dollar project immediately struck me as WAY to large to make sense. I never thought these projects would proceed at $36 or $40 billion. However there has been confusion because the LNG terminal itself was apparently $11 billion which at least seemed (maybe) within the realm of possibility. I mentioned it here on September 28, 2016.   In any case world natural gas prices have declined and THAT primarily is the reason for the cancellation. We can’t expect projects to go ahead if they are uneconomic. If there is a way to build a smaller LNG terminal and one that does not require a massive new pipeline, then maybe that can go ahead.

Tuesday was a strong day in the markets with the S&P 500 up 0.3% and Toronto up 0.5%.

There will be a lot of earnings reports in the next few weeks to give direction to the market.

The yield on the 5 year Canada bond continues to rise and is now at 1.64%. That’s still low but is the highest since early 2014. It had bottomed out down near 0.5% which was insanely low.

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

CRH Medical had a modest bounce, up 10.6% in Toronto. They will report earnings a week from this Wednesday (i.e. August 2).

Constellation Software was up 2.8% after announcing another pending acquisition. It will report Q2 results on Thursday morning.

The yield on the government of Canda five year bond continues to rise. This is very positive for all those old rate reset preferred shares that have been trading under $25 due to the fact that it looked like they would reset at low interest rates. The higher the 5 year bond goes the gigher the reset goes. This is explained in our report on Canadian Western Bank Preferred shares.  

Also see the report on the Enbridge rate reset preferred share. In the case of the Enbridge shares I think they fell not only because of the lower 5 year bond yield but also because they were issued at a time when the market yield on rate reset preferred was particularly low (They were issued at the low yield of 4.4%). And Enbridge then restructured in a way that lowered the credit strength backing these shares as I recall.

Statistics Canada reported on Food Service and Drinking places for May. There were declines in sales in most provinces. The declines were in comparison to April and not to the same month in the prior year. I find it strange (an annoying) that Statistics Canad does not always make it abundantly clear if they are talking about a comparison to the month before or the same month a year ago. Their convention seems to be that the comparison is to the immediately prior period unless they say otherwise. They also by convention show seasonally adjusted numbers which is the best way to judge the change.  Investors are often more interested in the comparison to the prior year since that is how we usually look at corporate earnings growth. Looking at the same month a year ago sales for all of Canada were up 4.5% which is impressive and bodes well fro Boston Pizza. For Alberta sales in May were up 0.1% versus April and down 0.1% from May of 2016.

Statistics Canada also reported that wholesale trade had strong gains in May (versus April and seasonally adjusted)

On Friday, the S&P 500 was about unchanged while Toronto was down 0.5%.

Melcor was down 3.5% to $14.00. I am cautiously optimistic that they will report a decent Q2. Their views on the outlook may be more important than the Q2 numbers. It is always possible that they will have some non-cash mark to market losses on investment properties.

RBC upgraded CRH Medical to outperform at $4.07 with target $6.00 compared with previous sector perform with target $8.50 at $4.74. That report appeared to give CRH a little boost on Friday morning but it closed the day unchanged.

Statistics Canada reported investment in New Home Construction that was higher in May versus the year earlier period.

Statistics Canada also reported inflation numbers for June. They measured inflation at 1.0% since June of last year but 1.4% excluding food and energy. Contrary to popular opinion they don’t ignore food and energy they just give the numbers both ways. Also contrary to popular opinion the report here indicates that the cost of houses does factor into their inflation numbers. Providing an inflation number is a thankless task since everyone seems to expect the number should match what is happening in their own personal “basket” of goods and services rather than some average basket. In addition it seems like people see and remember price increases a lot more clearly than price decreases. I certainly see no reason to think that the numbers are manipulated for political purposes which is what a lot of people seem to think.

Retail Sales in May were also reported and were up . Motor vehicle sales were strong and Alberta was strong.

Thursday’s action saw the S&P 500 about unchanged and Toronto up 0.1%.

Limamar was up 4.4% to $71.56.

CRH Medical was down another 2.6% to $4.06 on Toronto. Scotia Bank precipitated the big plunge of last Friday when it warned about government-mandated reductions to the fees CRH receives for its services. It had closed last Thursday at $6.62. After the stock closed on Friday at $4.74, Scotia indicated its target was now $8.00 and rated the company a “Sector Perform” with a 69% upside to the target. It must be in one heck of a strong sector if a 69% upside is “sector perform”.

RBC meanwhile issued a report before the open on Monday lowering its price target from $10 to $8.50 on the news and also rating it “Sector Perform”. RBC however had a down side scenario of $3.75 and an upside of $10.

Some other analysts have spoken against the company including one at the Motley Fool.

It’s interesting that the stock has fallen so much with these $8.00 and $8.50 price targets. The company itself has now confirmed that revenue under the new billing codes on existing business would be down some 7.5% and EBITDA down 13.5%. The company expects the new lower billing codes to be in place on January 1, 2018. However, this would still appear to leave room for some of that to be offset by acquisitions and it appears to me also organic growth.

Certainly the lower billing codes are a negative for the company. And certainly some analysts are skeptical about its acquisition strategy. But it appears to me that the price reaction has been very much over done. But only time will tell if that is the case. Based on the timing of the Q1 report, I expect the Q2 earnings to be released around the middle to end of next week.

In terms of the Canadian economy I notice CP rail released earnings today that included some big increases in rail car traffic. I have a link to a site (toggle the radio buttons at this site to choose Canada, the U.S. or Mexico) that shows total rail car traffic in Canada and it is WAY up over 2016 levels and is back to similar levels as 2014. Any notion that the Canadian economy is stagnant is just not true.

On Wednesday, the S&P 500 was up another 0.5% and Toronto was up 0.6%.

TFI Internaltional (TransForce) was up 2.9%.

After the close, American Express reported earnings that were apparently higher than expected.

Statistics Canada reported that manufacturing was up strongly in May. Some industries had very strong gains. There are always lots of people ready to focus an the negative and tell you that the economy is bad. But the actual figures seem to tell a different story.

Tuesday saw the S&P 500 up 0.1% and Toronto down 0.1%.

CRH Medical was down another 10.5% on Toronto. It’s doing a good job of making my opinion on that company look very wrong. Well, time will tell if this was just some big dip from which it will recover or instead the company is simply worth a lot less than I had thought. We will know more when the Q2 earnings report is released.

In better news, Linamar was up 2.0%.

I notice Home Capital is reporting higher liquidity. That comes from higher GIC balances and from some big loans paid back by its borrowers. For whatever reason its high interest savings account balance has not gone up much at all. I think Home Capital is providing very attractive GIC rates (2.5% for on year) but at 1.5% its high interest savings account is not all that attractive. Presumably they prefer GIC deposits which are locked in rather than (so called) high interest savings account where the deposits can leave in a flash as they recently found out.

On Monday, the S&P 500 was about unchanged while Toronto edged down 0.1%.

There were not any particularly noteworthy movements in the stocks on our list.

CRH Medical issued a press release explaining that it will face lower revenues in 2018 due to lower reimbursement rates for its services which are mostly billed to various government and commercial health plans. The company estimates that the changes will reduce 2018 revenue by 8.5% and EBITDA by 13.5%. Net earnings would presumably decline more than that. But the company also stated that it would continue to have an EBITDA margin of about 47% and that it was continuing to focus on acquisitions and organic growth. Overall, I suspect this will turn out to be quite a good investment at today’s price but of course there are never any guarantees. I have perhaps already sunk somewhat more than a prudent amount into this name. Nevertheless I added to that today and bought some in the account of a relative for which I have trading authority.

Statistics Canada reported on non-residential building construction investment in Q2. For the country there was small gain but several provinces had declines. The comment on Alberta was interesting:

“The largest decline occurred in Alberta, followed by Saskatchewan. In Alberta, the decrease was mainly the result of lower spending on both institutional and commercial building construction. Despite the decrease in spending, Alberta had the second-highest total spending on non-residential building construction ($2.5 billion), accounting for 20% of total spending for the country.”

So Alberta still accounted for 20% of the nation’s non-residential building construction. That may or may not be sustainable. But for the moment, any notion that Alberta’s economy has ground to a halt is greatly exaggerated. There may not be much growth in the Alberta economy. But there is also not much if any decline overall. Yes, the unemployment rate is up but the rate has also started to improve. GDP declined in 2016 but will likely grow in 2017.

http://economicdashboard.alberta.ca/

I just noticed that Statistics Canada had reported new vehicle sales on Friday for the month of May. There was an absolute surge in Alberta sales (up 17%). This should mean that AutoCanada will have done well in Q2.

On Friday, the S&P 500 was up 0.5% to another record high. Toronto was up 0.3%.

CRH Medical was down a withering 28% on Toronto and 27% in U.S. trading. I understand this was precipitated by a negative report from Bank of Nova Scotia analysts. I understand there is a concern about decreases in the fees it is allowed to charge certain large public health plans. The company discussed a decrease in revenue per case in Q1 due to a change in the payer mix but it did not seem to be a big concern. The analyst concerns may or may not be over-blown. I may add a modest amount to my position at this lower price but I don’t want to bet too much on it at least until after the Q2 results come out. I had taken some comfort from the fact that it was recently able to increase its credit line by $100 million. I viewed that as a show of faith by lenders. There may be other concerns that the analysts have identified. I do not have access to the negative analyst reports. The company has not commented on the price decline.

The report for Alimentation Couche-Tard is updated with a rating of Buy. This is a great company and I believe it is poised to report increased revenues and earnings per share due to recent acquisitions.

On Thursday, the S&P 500 rose 0.2% while Toronto was down 0.1%.

Linamar was up another 1.8%.

AutoCanada was up 2.8%.

I drove through a large Melcor development in St.Albert, Alberta today. This is Jensen Lakes which they own half of in a joint venture. There is a lot of building going on there. Mostly duplexes and some multi-family. Some single family too. In addition a lot of commercial development and Melcor is the developer for some but perhaps not most of that. All of which is to say that development in Alberta has certainly not ground to a halt. Melcor had sold a very surprisingly large number of building lots in Q1. I am cautiously optimistic that the same was true in Q2.

I mentioned CRH Medical a few times lately. I have added to my position in it.

I am now reading through the Couche-Tard annual report that came out yesterday. This company still has the pedal to the metal in terms of acquisitions.

On June 28th Berkshire announced:

On June 28, 2017, Bank of America Corporation announced that it plans to
increase its quarterly dividend to $0.12 per common share. When this occurs, Berkshire will exercise its warrants to acquire 700,000,000 shares of Bank of America Common Stock at the exercise price of $7.142857 per common share. Pursuant to the terms of the warrants, Berkshire expects to use its $5 billion of Bank of America Corporation 6% Preferred Stock that it currently owns as the consideration to acquire the common shares.

Bank of America closed today at $24.35. Therefore Berkshire / Buffett is looking at a pre-tax gain of about $17.21 per share or a staggering $12 billion dollars. This will NOT change Berkshire’s book value per share since that already reflects the market value of the these stock options. I am fairly certain however that it WILL lead to a reported pre-tax gain of an “extra” $12 billion pretax and perhaps $8 billion after tax in Q3. I don”t think it will hit the upcoming Q2 report.

This gargantuan gain came as a sort of “kicker” over and above the 6% return that Berkshire earned by investing $5 billion in preferred shares of Bank of America. This deal was done in 2011 when Bank of America was still very much struggling with the impacts of the financial crisis.

Many will “sniff” that only Buffett could get such a deal. But the fact is that the Bank of America shares were trading right around $7.00 as Buffett made that deal. And they closed 2011 at $5.56 even after Buffett had thrown his support behind the company. (At year end his options were under water). But it is true that Berkshire / Buffett were among the very few entities that could have given Bank of America that fast $5 billion equity. Still, any of us could have gained by following Buffett and buying BAnk of America at under $8 and even unde $6. In fact I made a large investment that year which for some time after that (and especially at the end of 2011) looked like a mistake but which turned out very nicely. Looking back I bought not long before the Buffett announcement and indicated I did so without fully analysing the company. (August 2, and July 26 comments). Bank of America was later added to the site as a Speculative Strong Buy on March 11, 2012 at $8.05. By the start of 2017 it was rated (lower) Buy at $22.10.

With this settlement of the options Berkshire will no longer own the 6% preferred. I suspect they would have liked to keep those but if he paid cash for the options Bank of America would likely have used the money to redeem the preferred shares in any case which I believe they have the right to do.

This whole episode is just one more in a huge series of brilliant moves that Buffett has made over the years. I truly believe that he has one of the most brilliant financial minds in history and that he is fact overall a remarkable genius. At the time of the financial crisis and for several years after there were many investors and analysts who screamed that the big U.S. banks were technically broke. They were wrong.

Notice the weird $7.152857 exercise price on this options. Buffett did that so that his investment $5 billion and particularly the resulting number of shares 700 million would come out to such nice round numbers. He memorizes an enormous amount of data and does most of the math in his head. Having a round 700 million shares makes the math and the memory easier. Buffett did something similar in his recent Home capital deal buying enough shares to own a round 20% of Home Capital after accounting for the new shares to be issued. At 86, the man still has it, believe me.

On Wednesday, the S&P 500 was up 0.7% while Toronto was about flat.

Alimentation Couche-Tard was up 3.7% to $62.40 after releasing earnings prior to the open.

As expected, the Bank of Canada increased its key interest rate by 0.25 percentage points.

“The bank’s target for the overnight rate — at which major financial institutions make one-day loans to each other — moved up by one-quarter of a percentage point from 0.50 per cent.” (to 0.75%)

It interesting that a central bank can set a rate at which banks lend to each other. I am not familiar with all the levers they have to encourage banks to lend to each other at their target rate but they do in fact have the tools to get the big banks to cooperate.

Rate reset preferred shares (especially those trading under their $25 issue price) edged up as the higher Bank of Canada rate (and more specifically a higher yield on the government of Canada five year bond) leads to a higher coupon at the next reset date for these shares.

Perpetual preferred shares should act like very long term bonds and decline with higher interest rates.

Boston Pizza Royalties is an unusual security that in some ways is similar to a perpetual preferred share. BUT, unlike perpetual preferred shares, its distributions tend to increase over time.  It would decline in value if long-term rates were expected to soar. But as long as rates are expected to rise only modestly it could certainly continue to hold its value and perhaps even rise. I hold it for yield not for gains at this time. It would also decline if same store sales decline such as in a recession. It’s distributions of about 6.0% may be relatively succulent but they do not represent a (risk) free lunch.

The Canadian dollar rose about three quarters of a U.S. cent in currency trading. My approach to the exchange rate has not been to try to predict movements. Instead I have basically committed a certain amount of my portfolio to the U.S. dollar side of my accounts and I (very occasionally) tweak that by moving some money back to the Canadian side when the Canadian dollar sinks  and do the opposite as it increases. At the moment I feel no great urge to start moving Canadian dollars to the U.S side. It there is such a thing as predictable momentum in the exchange rate (which is doubtful) then my approach may lead to short term regret as it will seem I should have waited longer to make each move but likely works out well longer term. This is similar to how buying good companies on dips can lead to short term regret as the dip deepens but usually works out well with an eventual rebound.

Tuesday’s action had the S&P 500 down a scant 0.1% and Toronto up 0.3%.

Linamar was up another 2.1%

Couche-Tard was up 1.2% after announcing another acquisition deal. They post earnings tomorrow, Wednesday.

The big news tomorrow is expected to be an interest rate hike form the Bank of Canada.

A stock I used to have on the list Liquor Stores N.A. was up 5.5% after announcing it will turf its CEO and has named a new one with excellent credentials. This was no surprise after the Board was ousted in a proxy Battle. I was not a fan of the departing CEO Stephen Bebis. It was my impression that Bebis poo pooed the approach of the two men who built the Liquor Store Chain and had grand ideas. I understood he ws going to try to avoid competing so much on price but it looks like the company abandoned that plan some months ago and are now advertising low prices. It was also my understanding that Bebis actually lived in the U.S. and not near the Edmonton headquarters. The former chair of this company was Jim Dinning who I used to think was a great manager and leader. But he was unable to do much with Liquor Stores and also did nothing with Western Financial Group except sell it at what seemed too low a price. My perception is that Liquor Stores N.A. suffers from too many stores and too much lower cost competition. We can probably expect them to sell off the U.S. stores. (May as well take advantage of the low Canadian dollar and bring in U.S. dollars at a gain)  I don’t really see a solution to the too many stores in Alberta problem. It’s not nice trying to compete with Costco and SuperStore and some other discount stores.

CMHC released figures on new home starts for June. For single family homes, Calgary was up 31% versus June of last year and Edmonton was up 70%. I would not read too much into this since monthly numbers can be volatile and last year was a low point. Still, this looks like good news for Melcor Developments.

Ever since the financial crisis Canada has continued to build way more houses in proportion to its size than the U.S.

On Monday, the S&P 500 rose 0.1% while Toronto was up 0.5%.

Linamar was up 2.2%. to $65.53 (Our report is out of date on that one as the stock is up 28% since we added it to the site in November.)

Toll Brothers was up 1.3% to $40.95. That’s its highest price since it crashed back in 2005 in the lead up to the financial crisis and housing slump in the U.S. I added it to this site in June 2011 at $21.03. It has been quite volatile but that has provided opportunities to buy a great prices. It was first rated in the Strong Buy category on February 27, 2016 at $27.57. I sold some of my holdings back on March 3 just to raise cash. I have no plans to sell any at this time.

Costco was down 2.0% to $151 and Walmart was down 2.8 to $73.23. I had bought a small amount of Costco on Friday and added half as much again today and also put in an order for more if it hits $146 (which it may or may not do) . Costco is a great company, not yet cheap but I am willing to buy a small amount on this pull-back.

CRH Medical was down 4.6% in the U.S. (and I analyse this one in U.S. dollars) and 3.7% on Toronto. As noted earlier, it was the subject of some short selling and criticism lately. I still think it is a well run company with a viable growth strategy. As a small company it is a more speculative pick for that reason alone. It would be safer to wait until its Q2 report comes out but I like it as a speculative pick now. I would not invest too large a portion of a portfolio (or an uncomfortable number of dollars) in it however. At last check I had it as less than 1% of my portfolio. But the exposure to any stock should be considered not only in percentage terms but also in dollar terms.

On Friday, the S&P 500 was up 0.6% while Toronto was down 0.3%.

I mentioned in the last post here that I liked Alimentation Couche-Tard under $60 and I added to my position in that on Friday. It’s no screaming bargain but I like the management and suspect it will continue to do well. It reports earnings this week.

Costco was down 1.9% to $154.11. I started a new and small position in Costco. Again, this company never appears to be cheap but it is an excellent business and so I bought a small amount on this pull-back.

Statistics Canada released the June labour force survey results and it was considered to be a strong report and is expected to be the final straw that will insure the Bank of Canada raises interest rates on Wednesday.

On Thursday, the S&P 500 fell 0.9% and Toronto was down 0.5%.

Melcor was down 5.9% to $14.40. The Melcor REIT was down 3.2%. I did not see any specific reason for this. It could be related to fears about commercial rental property values in Alberta. However, in other news today, Statistics Canada reported building permits for May. The number of permits for single family homes in Alberta was up a healthy 43% versus 2016. This put the figure back to 17% higher than 2015 but still 16% below the 2014 number. There were similar strong increases in March and April. Some of this increase would be related to rebuilding in Sort McMurray where Melcor does not operate and where the houses are built on existing lots to replace the burned houses. But it still appears that home building in Alberta is fairly strong and this could mean that Melcor had a fairly strong Q2 in terms of building lot sales.

Alimentation Couche-Tard was down 3.6% to $59.43. I believe there is some speculation that its gas station business will ultimately be hurt by electric vehicles. Perhaps that is true but that is some years away. But still it could lower the P/E multiple on the stock. But overall I am inclined to buy at this price and may add to my position.

AutoCanada was down 3.8% perhaps also on fears that electric vehicles will harm the auto service business.

TFI Industries (formerly named TransForce) was down 2.7% to $27.54 and appears to offer good value at this price.

On Wednesday, the S&P 500 and Toronto were each up about 0.1%.

Canadian Tire was down 3.0% to $144, possibly due to a negative opinion from some major analyst. I rated it a Weak Buy / Hold in April at $158. With this decline it might be worth nibbling on. It has been a very well managed company.

On Tuesday, American markets were closed for their holiday while Toronto was down 0.3%.

Canadian Western Bank was up 1.7%.

Constellation Software was down 2.3%.

Interest rates are on the rise. The yield on the government of Canada five year bond is up to 1.44% which is a nice jump from the 0.93% level of a month ago. This rate was last this high in early 2015 and on sustained basis it was last higher than this in 2011. Rate reset preferred shares should continue to rise as this rate moves higher and I believe tend to lag the government rate sometimes having a delayed reaction.

RioCan REIT provided an interesting update today:

On June 29, 2017, RioCan completed the sale of its Cambie Street property in Vancouver, B.C. for a sale price of $94.2 million, which equates to a capitalization rate of 3.29%. RioCan has also entered into a firm agreement to sell a portfolio of six chartered bank branches located in B.C. at a sale price of $30.3 million, which equates to a capitalization rate of 3.72%. The sale is expected to close in the third quarter of 2017.

Capitalization rate in real estate means net operating income divided by the sale price. And net operating income means income before interest, depreciation and income tax.

LOOK at these cap rates! RioCan is selling property at 30 times EBITDA and 27 times EBITDA.

Assume for the moment that depreciation is zero since it is often offset or more than offset by property appreciation. We still need to pay something for interest and income tax. These buildings would appear to be trading at something like 50 times the net income they bring in!

Possible explanations:

Stupid buyers who say well all the other buyers are paying stupid amounts so we shall too?

Redevelopment opportunities, to increase rent value?

Future rent increases?

I just can’t imagine paying such high amounts to access a stream of rents. I think RioCan is wise to sell. RioCan is a very well run company. They may suffer some from the Sears bankruptcy and and other retail problems. But I suspect they will continue to do well over the years.

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

U.S bank stocks rose.

Statistics Canada reported April GDP growth on Friday. It should always be remembered that this is an estimate of GDP growth and is subject to statistical error. Growth was pegged at 0.2% for April. This is not annualized but rather the estimated growth in April alone.

14 of 20 sectors were found to have grown in April versus March. This is also always seasonally adjusted so that, for example, they don’t report an increase every November just due to Christmas. This seasonal adjustment is also an estimate of necessity. I am pretty sure it would not attempt to adjust for any unusual weather in this particular April but rather adjusts for the fact that April in general tends to be a more active month than March in a typical year.

Overall, this GDP report along with recent reports indicates that Canada’s economy continues to grow at a modest rate.

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

No particularly big moves in our stocks. Toll Brothers was up 1.5% to $39.51. Hopefully back over $40 soon. This company had languished around $28 for much of 2016. We had it rated (higher) Buy at $31 at the start of 2017.

The yield on the five year government of Canada bond rose again today to almost 1.40%. This is still low but moving in a direction that will help the rate reset preferred shares.

We have now reached the end of Q2 and a some companies will report Q2 earnings by mid July although most Canadian companies will not report until about mid August.

As of last week our Stock picks were up an average of about 6.4% for the year (not counting dividends). This is much better than the TSX but not as good as the S&P 500.

I will have some more company updates soon.

Not sure anyone will be interested but on this 150th birthday I decided to document my memories from Expo ’67 when I was seven years old. I just wanted to document my memories and figured this web site was a good place to store them.

Thursday saw the S&P 500 and Toronto both down 0.9%.

U.S. banks went the other way with Wells Fargo up 2.7% and Bank of America up 1.7%.

Alimentation Couche-Tard was down 2.5% to $62.75. It is a stock that I would be tempted to add to at this price. It will release its Q4 fiscal 2017 results probably around July 11 judging by last year’s release. Most of the time they report earnings gains. But what is important is how the earnings compare to expectations.

Rate reset preferred shares should have been on the rise today with the higher government of Canada five year bond yield. But they were likely held back by the weak day in the markets. The five year yield is up to 1.35%. Paltry but the highest in over two years and up 0.064 percentage points today.

Home Capital got their approval for the Buffett investment today from the TSX and Berkshire now owns 20% of the company. Berkshire spent  CAN $153,225,739 to acquire 16,044,580 common shares. Those seem like odd numbers. But this is classic Buffett. He worked it out (probably personally and possibly in his head) to own an even 20.0% of the shares after his purchase. In many ways I think this whole investment was just a fun little project for Buffett. Normally, $153 million is far too small for him. But he was asked by a friend to get involved and he may have wanted to demonstrate his skills at bargain hunting. Some will complain about his discount deal at $9.55. But he made the deal when the shares were around $11. (Ad they may have been more like $7 when he was first approached)  He likely would have been prepared to close the deal or certainly announce it immediately but Home Capital took a week or more to agree to it and announce it as they had to seek a fairness opinion. Anyone complaining about Buffett buying at $9.55 was free to buy the days the shares were down under $7. The fact is that when Buffett bought for $9.55 the company got a LOT more than just $9.55. They got that cheaper line of credit and more importantly they got a TON of market confidence.

Home Capital also just announced a sale of $252 million of mortgages at 99% of face value. This company is completely out of danger now. It’s GICs are as safe as they ever were and they carry the highest rates around. Anyone wanting GICs and having convenient access to these should grab them. Anything up to the $100k CDIC limit is 100% safe. Going above that also seems quite safe though it might be wise not to put too of a portfolio with one company. I do expect however that they will report a big loss in this Q2 due all the unusual expenses, the biggest of which was a $200 million upfront payment on the $2 billion line of credit that they got from Ontario Hospital Pension plan. That line of credit has now been paid off and the Pension Plan has (I believe) pocketed $200 million. Recall many were aghast at the risk the pension plan took.

In my opinion, the whole episode was completely bungled by the former Board of directors and by the Ontario Securities Commission. The run on the bank should that was precipitated by the OSC was needless damage. They charged in to punish management for some very poor disclosure and their cure was far worse than the initial disease. There should have been a way to announce the punishment (which for the company was mild) much faster or immediately, before the run on the bank.

Meanwhile, Friday’s excitement will include a GDP report before the market opens and then an outlook update from the Bank of Canada. Analysts will be trying to predict if the Bank of Canada will raise interest rates on July 12.

On Wednesday the S&P 500 was up 0.9% and Toronto was up 0.5%.

The Canadian dollar was up strongly to 76.8 U.S. cents as currency buyers and sellers reacted to predictions that the Bank of Canada might start to raise interest rates in July. My strategy has not been to predict where the Canadian dollar is headed but rather to react to where it is. When it is higher I try to transfer some money to U.S. cash or investments and do the opposite when it is lower. It’s said what level constitutes “high” or “low”. One strategy would be to consider that when it moves 5 cents or maybe 8 or 10 cents (pick a number) from where it last peaked or bottomed then it might be time to move some cash.

Most stocks were higher today. Canadian Western Bank was up 2.7% but remains under valued.

Some former Penn West financial executives were charged by the U.S. Securities and Exchange Commission today with having with manipulating earnings. I think it is unfortunate that they also charged the company itself. I am in favor of punishing individuals who break laws as opposed to inanimate corporations owned by innocent share holders. I understand that sometimes the company will have to be fined but I would go after the actual law breakers first. A corporation has no mind of its own. The company also just changed its name to Obsidian Energy in what I view as a cowardly attempt to distance itself from, well, itself.

This company also settled an earlier share holder class action law suit. I find those to be bizarre. The company (that is indirectly new and long-time owners) pay cash to some people who bought when the share price was higher due to improper accounting. Some people who sold shares to the new owners unknowingly benefited from the situation. They get to keep that benefit. But continuing share owners of long standing got no benefit yet they have to pay the class action. I judge it to be cowardly for the Board of directors to have agreed to pay share owner money to settle that class action.

The SEC described a very basic form of manipulation. They allegedly  “capitalized” expenses that were not creating assets but were just expenses. In itself that could be just a difference in judgement. But the SEC alleges they did it with nice round figures designed to meet analyst earnings targets. That’s gross manipulation. The Alberta Securities Commission had looked into this and did not bring any charges.

I believe Home Capital is now impatiently awaiting TSX approval of Warren Buffett’s equity investment. I believe that deal is OFF if the approval does not come tomorrow. (Although I suppose Buffett might extend the deadline but he likes things done fast and might just say forget it). The Berkshire $2 billion line of credit is already in place and that will not be canceled even if the equity purcahse is not approved. Home Capital is having its delayed annual meeting tomorrow.

I mentioned a while back that Home Capital’s GICs could be purchased through TD Direct. That was wrong, I was looking at Home Equity which is a different outfit. For whatever reason TDhas not offered Home Capital GICs since 2011. You can however purchase Home Trust (part of Home Capital( GIC’s through RBC Direct and Scotia itrade. I have never been a fan of GICs but the Home Capital rates (2.5% for one year 2.8% 5 year) are higher than competitors (due to their problems) and I think are safe now with Warren Buffett’s rescue. Even if Buffett’s equity purchase is not approved that would basically be the TSX deeming the company safe enough not to need Buffett’s money. In addition if you stay under $100k there is deposit insurance in case Home Capital did go bust.

On Tuesday, the S&P 500 fell 0.8% while Toronto was down 0.2%.

Rate reset preferred shares were up as the yield on the government of Canada five year bond rose.

Couche-Tard was up 1.9% and after the close the Canadian competition regulator approved its large pending acquisition of CST brands.

Linamar was down 2.0%.

CRH Medical was down 3.4%. I notice it added $100 million to its approved credit line limit a couple of days ago. It appears that its acquisition strategy remains intact. I may add to my position.

Constellation software was down 2.3% while AutoCanada was up 2.3%.

On Monday, the S&P 500 and Toronto were each about unchanged.

Alimentation Couche-Tard was up 3.6% after the Competition regulator in the U.S. cleared it to close its latest huge acquisition. The deal will close on Wednesday.

Andrew Peller was up 1.8%.

Costco was up 1.9%. I did not end up buying any today.

The S&P 500 has not had any significant pull-back since the November election. If one should occur that might offer a better price for Costco and other good companies.

Every once in a long while I will take the liberty of posting a personal advertisement here. And today’s the day.

I have a son who just graduated in Geology from St. FX University in Nova Scotia. He was a good student and (probably more importantly) does very well in the people skills department.  In April he was awarded the Professor D.J. MacNeil Memorial Award which goes to the graduating student whose overall performance at the university indicates a promising career in the earth sciences. He has a strong resume, well rounded in academics, sports and life skills.

So, if anyone is looking to hire a Geology / earth sciences graduate email me at shawn@investorsfriend.com to obtain his resume.

He is spending the summer as a golf caddy at Cabot Links / Cabot Cliffs in Inverness Cape Breton. If any of you happen to be golfing there over the summer you now know who to ask for as a caddy. Caddies are mandatory at this course.

End of personal advertisement. Now back to regular programming.

On Friday, the S&P 500 was up 0.2% and Toronto was up 0.6%.

Stocks on the move included TFI Inc. up 2.0% and AutoCanada up 2.3%.

On Friday, Statistics Canada reported that inflation was running at only 1.3% and this cooled expectations for a Bank of Canada interest rate hike.

With Costco down to $157 from its recent peak of  $183 I thought it might be worth looking at. In addition it has reported stellar same-store sales of late. Unfortunately it still certainly does not look cheap and I am rating it a Weak Buy at $157.13. Still, I may grab 50 shares tomorrow especially if it is down again. It has fallen because Amazon will buy Whole Foods and could turn that into a bigger competitor. But I think Costco will continue to do well despite the Amazon deal.

Amazon is updated and rated Sell at $1004. Every time I look at it, it appears to be way over-valued but I have noted in the past that it can still keep going up. Which it has.  I continue to look at it and try to understand why investors are paying 189 times earnings for it. Obviously, they expect earnings to increase a lot. This company is already one of the highest valued in the world at $491 billion. Will it now double to a trillion? It’s just too expensive for my tastes.

On Thursday, the S&P 500 was about unchanged while Toronto was up 0.5%

Canadian Western Bank was up 5.9% to $27.00 as all the smaller lenders went up after it was announced that Warren Buffett / Berkshire Hathaway would invest in Home Capital. Berkshire would provide a standby line of credit of $2 billion and would invest $400 million for about 40% of the company pending approvals. The line of credit, if used, would be at 9%. But the intention is that it will not be used but instead Berkshire will collect 1.75% just for promising to have the $2 billion ready to lend (at 9%) should it be needed. It won’t likely be needed since Buffett’s investment will put a golden seal of confidence upon Home Capital and deposits should now flow in.

If I was looking to put money into a higher interest savings account or a GIC I would now have the confidence to put it with Home Capital. Looking on TD Direct I can access some Home Capital GICs but not the ones with the best rates and not the high interest savings accounts. If I wanted to put money with Home Capital in their high interest savings account or in their higher rate GICs through their Oaken Financial division, I would have to do it outside of TD Direct. I have never owned a GIC and am not interested and also I like keeping everything with TD Direct so I can see it all in one place.

Regarding Canadian Western Bank this 5.9% gain to $27.00 is nice but is not that exciting since I certainly thought it was a good investment at $32 and even higher back before oil tanked. I do see it as still under-valued. I rarely have “target prices” in mind but I fully expect Canadian Western to be over $40 within a couple years. This should occur as its book value increases with retained earnings and its trading multiple to book value rises from the current low level.

Stantec was up 1.5%

Costco was down 2.1% to $159.79. Although still not at all cheap, it might be worth nibbling on. It is a fantastic company. One idea would be to out in a limit order for $155 or $150 and see if it happens to go that low. But save some cash in case it happens to go even lower.

On Wednesday the S&P 500 was up 0.1% and Toronto was about unchanged.

There was not much movement in the stocks on our list. Bombardier was an exception, down 5.0%.

Statistics Canada reported the investment in new home construction for April. Given my interest in Melcor Developments, I am always interested in the figure for single family homes in Alberta. This was up 9% versus April 2016 but still down 28% versus 2014. The trend has been going in the right direction.

I notice that Home Capital’s deposits were about unchanged yesterday despite news of the sales of mortgages at a pretty good price. I had thought that with this bank now probably out of the woods deposits would flow back due the high yield they offer. But those with cash to deposit are apparently remaining cautious.

Stantec announces that its CEO of the last eight years will retire at the end of this year to be replaced by another long-time Stantec executive.

This looks like business as usual. Stantec has always named its new CEO’s from within. This is a sign of a company that believes in its own people. The exiting CEO will also remain on the company’s Board. That’s another Stantec tradition.

I don’t see anything negative in this development.

https://finance.yahoo.com/news/stantec-announces-appointment-president-ceo-104500601.html

On Tuesday, the S&P 500 was down 0.7% and Toronto was down 0.8%.

Ceapro, our one penny stock, was down 5.1% to 92 cents. This could easily continue to go down unless there is some positive news on the earnings or future products front. This was always a speculative pick. I am not inclined to make further investments despite the lower price.

CRH Medical was down 3.0% in Toronto and 3.5% in USA trading. I think they have a solid business model and so I would consider adding to this one on this and the recent weakness.

I notice that Home Capital had a nice inflow into its high interest savings account product on Monday. (The first notable inflow since the big outflows started.) They likely did even better on Tuesday. This lender appears to be out of the woods now operationally. It will be interesting though to see what kind of loss it will post for Q2. The share price is likely to continue to be volatile.

Statistics Canada reports that wholesale trade increased in April. Apparently, the economy continues to grow. I note the vehicle sector was down. On June 14 I noted that the retail auto sales in April were up nicely in dollars although down in units. So, conflicting signals here but it might suggest dealers were less confident and brought in fewer new cars.

Regarding TFI Inc. (TransForce) I see that the company bought back almost 900,000 shares in May at prices as high as $29.30 but mostly at closer to $28. This company has been very smart in the past about buying back shares at good prices. This buyback adds to my confidence that the shares are good value at the current 27.25.

Bank of Montreal is out with a rate reset preferred share paying 4.4%. This does NOT feature any minimum on the reset yield as some relatively recent issues did. I am not planning to buy this and I don’t think it is a great investment. What it illustrates is that the market yield on rate reset shares has drifted down. On August 31, 2016, TD had to pay 4.85% to issue similar shares and my comment of February 25, 2016 notes that Royal Bank did an issue at 5.5% at that time. As the market yield on rate reset preferred shares has drifted down (despite forecasts of Bank of Canada interest rate hikes) this has pushed up the price of the many existing rate reset shares on the market. With the market yield down and the potential reset yield rising if the 5 year Canada bond yield rises, this provides two reasons for the existing rate reset preferred shares that are trading under $25 to rise.

Home Capital has announced it will sell $1.2 billion of commercial mortgages at 99.61% of face value. But this could drop to as low as 97% if credit losses are higher than expected. Ordinarily this would not be a great price at all. In an originate-to-sell model Home Capital needs to get about 101% of face value. But this is a pretty good price in this case given all of Home Capital’s troubles. This would appear to indicate that Home Capital is worth at least something relatively close to book value which could mean the shares will continue to rise. Meanwhile, as of Friday Home was still seeing deposits declining although slowly. If this move restores confidence then perhaps the deposits will now being to increase.

This development for Home Capital is also a positive for Canadian Western Bank which shares had fallen out of fears about its alternative mortgage business. However CWB is down 1.8% this morning likely due to the lower oil price.

On Monday, the S&P 500 was up 0.8% while Toronto was up 0.5%.

Most stocks on our list were up today including TFI International (TransForce) up 3.0% and Stantec up 3.4%.

I notice Tim Hortons faces several lawsuits by franchisees. I followed Tim Hortons closely when it was a separate publicly traded company. (And even before that Wendy’s used to be on our list here back when it owned Tim Hortons.) Maybe I am just sort of jealous since I never looked into owning shares of Restaurant Brands International but these RBI people so not strike me as nice people at all. I always thought it would be great to own a Tim Hortons location but with recent developments I am not so sure. But they do seem to stay amazingly busy.

On Friday, the S&P 500 was about unchanged while Toronto was up 0.2%.

Amazon was up 2.4% on the announcement that it would acquire Whole Foods.

Whole Foods increased 29% on the news to $42.68. But it remains below its peak of about $54 reached in early 2015 and about $60 reached in late 2013.

It was interesting to hear that the purchase will be financed by debt. Amazon has not issued many shares in recent years. It’s share count is up only 12% in the last ten years and that probably is the result of executive and employee stock options being exercised. Amazon has also not issued all that much debt. Debt was not large compared to its assets or equity. It had the capacity to issue significantly more debt if it wished to.

Costco was down 7.25% on the news and at one point on Friday morning was down to $165. I was tempted to buy some Costco on the dip but decided not too since Costco is still expensive in relations to earnings. But Costco is a powerful company and it may continue to have a very high P/E ratio. I have difficulty picturing how it would be cost effective for people to have their Costco-type purchases shipped to their house. costco seems to do what they do in an extremely efficient manner.  The danger with Amazon is that it might be willing to make only a tiny profit on groceries and so could put some price pressure on all grocery sellers. Walmart was down 4.7% to $75.24 on the news and it does seem more likely to be potentially hurt if Whole Foods adopts a lower price strategy. Walmart is also very efficient but it operates at a higher mark-up than does Costco. Based on my most recent updates, I would not be a buyer of Walmart or Costco but of the two I would pick Costco.

Regarding Alberta, part of its recovery from the recent oil-related recession will depend on population growth. Recent data indicates that Alberta lost a net 2400 people to other provinces in Q1. That might sound a bit ominous. However, Alberta actually gained a net 4700 people when immigration from outside Canada is considered. That’s down from recent net migration as high as 28,500 in a single quarter and around 80,000 per year. But significant growth still comes from “organic” growth. Last year there were 55,000 babies born in Alberta. That’s a 1.3% increase in the population. This would seem to be good news for the likes of Melcor and AutoCanada since more people and especially more young families means more homes and more vehicles, all else equal. Alberta’s population growth has indeed slowed significantly in the past couple of years. But there is still significant positive growth.

Once of the realities of recessions is that they surely don’t hit people equally. A jump in the unemployment rate from say 5% to 8% is somewhere between very painful and absolutely devastating for the 3% of the labour force that is now unemployed. But some 97% of the workforce is largely unaffected. And all of the retired people are basically unaffected. I don’t mean to trivialize the recession but its impacts on the economy should also not be exaggerated.

Some businesses such as grocery stores are probably very little affected by higher unemployment since the people did not leave and still have to eat. The home building industry was hard hit due to lower in-migration and a general decline in confidence about the future.

And there are other impacts on the economy such as a sharp decline in capital spending in the oil patch.

I have said before that it is corporate profits and government revenues that were the hardest hit by the oil recession in Alberta. Eventually that could lead to significant tax increases on individuals, but that has not happened to date.

Fortis Inc. is added to our list and rated Buy at Canadian $45.56 or U.S. $34.32. Headquartered in Newfoundland, Fortis has grown by acquisition into a huge North American utility company. It sticks almost 100% to regulated assets. It has basically benefited from the fact that utility regulators have, in my opinion, been overly generous in maintaining regulated returns close to 10% in most jurisdictions for years mostly ignoring the massive decline in interest rates. (Basically, the regulators were bamboozled by the utilities arguing for high returns.) Fortis pays large premiums to acquire regulated assets because they know that the regulated returns are generous. Investors cannot immediately benefit from the high regulated returns because we too must pay big premiums to the regulated value upon which the return is paid. (See comments on book value and goodwill within the report) But over the years as the company grows investors benefit as the company invests in growth of its utilites and does so without paying a premium. Fortis is another example of a growth-by-acquisition strategy that has worked out very well.

On Thursday, the S&P 500 was down 0.2% while Toronto was down 0.1%.

TFI International (TransForce) was down 2.6% and I added to my position in this company today.

In the next day or so I will add Fortis Inc. to the list and it will likely be rated “Buy” or possibly (lower) Buy.

Home Capital (not on our list but much in the news) was up 12.7% to $13.67 after it announced a settlement with the regulator. A settlement that included relatively minor punishment for three executives and fines/payments for the company itself

An ironic thing in the Home Trust situation is that the company and the executives were not pursued by the Ontario Securities Commission because the company discovered that certain of its brokers were falsifying mortgage applications. The crime the company and the executives was charged with was failing to DISCLOSE this in a timely manner. By failing to disclose this Home’s share price was artificially higher than it should have been for a some months. When the news was disclosed Home’s shares fell about 35% shortly after the problem was disclosed. Had they disclosed it earlier the share price presumably would have declined earlier. And there seems to be no doubt that it should have been disclosed earlier and that the lack of disclosure caused some people to pay too much for the shares (while others benefited by selling at an artificially high price). Clearly the executives deserved to be sanctioned/fined for this. (I am not so sure the company itself  should be fined since that just punishes innocent shareholders).

What I find ironic is that when the regulator came after the executives and the company it caused a situation whereby investors had no idea how to value the company. Since then the shares have traded as low as $5.06 and as high as $14.47. The regulator apparently caused a run on the bank that threatened its existence. The turmoil and confusion and the extreme difficulty of figuring out a fair price for the shares caused by the regulator’s actions seems to have FAR exceeded the damage the original crime caused. Home many share owners have now been harmed by selling out in a panic at the low prices? Should the regulator’s actions also be considered a case of poor disclosure? The market was left with no idea how seriously the company would be hurt by the charges.

Perhaps if the regulator had demanded the executives be removed from the company and gone after only the executives and not the company, the run on the bank could have been avoided. The company itself bungled the situation by trying to fight the regulator instead of tossing the guilty executives overboard. (But it would be difficult for a Board of directors to toss out some of its own members) The notion that corporations are “persons” is a legal fiction. In reality a corporation is an inanimate construct that does not itself commit crimes. It is the management of corporations that commit crimes not the company (in my opinion) and surely not the external share owners. Yet the shareholders often bear the biggest costs of any crimes by far. Executives usually get away very lightly.

On Wednesday the S&P 500 closed down 0.1% while Toronto was down a hefty 1.4%.

Oil is down to $44.69 which pushed Toronto lower.

Toll Brothers was up 1.4% to $39.12.

AutoCanada was down 2.3%. Statistics Canada today reported the April new vehicle sales. For Canada as a whole the number of vehicles sold was down 1.6% versus 2016 but in dollars the sales were up 4.7%. In Alberta there was a strong recovery with unit sales up a hefty 15% and sales in dollars up 18%. This actually look like a very positive result for AutoCanada. However it is also the case that AutoCanada’s sales in Alberta have lagged the average as some of its dealers are in harder hit areas.  AutoCanada has not yet reported buying back ANY shares under its recently announced buy back approval.

TFI International (TransForce) was down 2.5% and is certainly worth considering.

CRH Medical was down 4.6% in Toronto. I would be tempted to continue to add to my position here but I probably have enough of it.

Home Capital has announced a settlement with regulators. Its former long-time CEO will pay a fine of one million dollars and be barred from being a director of a public company for four years. Two others will pay $500,00 each and be barred for two years. This is a very light penalty in comparison to the enormous grief and damage caused by the announcement of the regulator’s investigation. I believe both the regulator and Home Capital really bungled this whole matter.

In addition some $39.5 million will be paid by the company for a class action lawsuit settlement. In my view this is totally inappropriate as it amounts to today’s innocent Home Capital share owners (indirectly) paying money to a sub-group of owners or former owners. Typically most class action settlement money goes to lawyers which is ridiculous.

There is speculation that Home Capital’s share price will recover strongly on this news and rumors that it is getting a $2 billion loan at a more reasonable interest rate. Perhaps so, but then again an awful lot of damage has been done to Home Capital’s business model.

The FED did raise interest rates today. The FED rate is still only in a target range of 1.0% to 1.25%. But this is the fourth increase in 19 months and the third in 7 months. And four more increases are expected in the next 18 months. Slowly but surely it seems that we have finally entered a period of rising interest rates. Bond yields actually declined somewhat today but overall the trend may now be up.

Meanwhile we have indications that Trump is now being officially investigated by the special prosecutor for obstruction of justice. I don’t think he will end up being charged but it might be something for the market to worry about.

With the targeted attack on Republican law makers today I would think that the terrorism threat has just become a LOT more real in their minds. Possibly this could lead to increased security. That won’t be good for trade and tourism and should be something else for the market to worry about.

Trump and the Republicans have a lot of things to worry about. Providing corporate income tax rate relief may not be so high on the agenda.

With the collapse in the share price of Aimia (owner of Aeroplan) which came after Air Canada announced it will cease its partnership with Aeroplan in 2020, it is worth taking a look at the value of the shares. (Particularly since it was on our list here from 2005 to 2010 and so I have some familiarity with it.)

Aimia announced today it was suspending the dividend. The press release was titled “Aimia Provides Update on Dividends”. Update? Now I would ask what kind of self-respecting person would put that title on the press release? This kind of nonsense is common at many companies and to me indicates a lack of honesty.

The reason the dividend needed to be suspended is interesting. It’s because under the Canadian Business Corporation Act:

A corporation shall not declare or pay a dividend if there are reasonable grounds for believing that… (b) the realizable value of the corporation’s assets would thereby be less than the aggregate of its liabilities and stated capital of all classes.

Okay, so what is the stated capital per share of Aimia? As calculated below its book value is 61 cents per share. That consists of $10.93 per share in share capital and $7.58 in contributed surplus (so a total of $18.51 per share of money raised directly from shareholders, I believe that is the stated capital) plus $0.27 in other comprehensive income and (hilariously) accumulated retained LOSSES of $18.17 per share. $18.51 plus $0.27 minus $18.17 = the 61 cents of book value.

So the dividend had to be suspended if the market value of the assets less liabilities was less than about $18.51 per share. It is a wonder the dividend was not suspended a long time ago. These financial statements clearly indicate a company with a history of destroying shareholder capital.

The share price right now is $1.55 down 18% today on news it has suspended its dividend. And down from about $8.25 in April and down from highs of over $14 in 2013 and 2014.

In a case like this, it is worth looking at the balance sheet to see if it is possibly worth more than this $1.55 even on a liquidation basis.

It’s latest financial statements reveal a book value of just 61 cents per share ($92.7 million divided by 152.3 million shares). So that indicates it is NOT likely worth $1.55 in liquidation.

The balance sheet shows that a HUGE 70% of the assets consist of goodwill and intangibles. Basically this is the value that Aeroplan paid in acquisitions over and above the value of any hard assets it was acquiring. Aeroplan’s tangible book value per share is far below zero.

You might think Aeroplan would hold a pile of cash or investments from selling points to TD bank and AirCanda and all the other places that give out Aeroplan points and other points programs that they own. In fact, yes, they do have what amounts to $4.42 per share in cash and investments. But Whoops, they indicate that the liability to those holding points amounts to $21.29 per share. And then there is debt and other payables.

It is possible that Aimia’s non aeroplan business has value and that the company is in fact worth more than $1.55 per share. But this balance sheet analysis suggests that not only might the shares be worthless but those holding points would also face a large loss of value in the event of liquidation.  Just paying the debt would use up most of the cash and investments in the event of liquidation. But liquidation is not necessarily what will happen.

So, looking at the balance sheet, I see ABSOLUTELY no reason to buy these shares.

My last look at the company on December 30, 2010 stated:

Groupe Aeroplan is updated and
rated Speculative Weak Buy at $13.76. This company has achieved huge growth in
revenue on a per share basis. That alone, indicates it may have potential to
grow earnings per share at a high rate. But a right now the earnings are not
high, even on an adjusted basis. Various accounting issues make it almost
impossible to analyse. Therefore we would not buy it. Perhaps the implementation
of International Financial Accounting when it reports Q1 will clarify matters.

That report also indicated:

We don’t like management’s attitude that it’s okay expire customer’s points. We have concerns about accounting disclosure.

On February 22, 2012 I indicated that I did not trust the ethics at Aimia.

I would have thought that the Aeroplan points holders did not have much to worry about. But looking at the financial statements they do have something to worry about.

On Tuesday, the S&P 500 was up 0.4% to another record high while Toronto was about unchanged.

(Apologies as yesterday’s post here did not get uploaded.)

Toll Brothers was up 1.5% to $38.57 and is up 24% this year.

Rate reset preferred shares have done well in the past two days as the yield on the 5 year Canada bond has jumped from about 0.96% to 1.15% in just two days. That is still an incredibly low interest rate but it is a big move in two days. When it comes to the long-predicted rise in interest rates there have been many false starts. But now the FED has increased rates 3 times in 18 months and Wednesday is expected to be the fourth time.

The FED’s interest rate announcement and and any comments if makes are likely to be the big focus for markets on Wednesday.

Home Capital is not on our list but is of interest partly because troubles at Home Capital caused Canadian Western Bank’s shares to fall due to (probably over blown) fears that some of the same issues would surface in a small segment of CWB’s business.

Home Capital’s shares have been rising on rumors that it will attract a large new investor to add to equity and will get new management. Today Home Capital’s shares fell 7%. The difficulty is that Home Capital’s brand name may be virtually beyond repair. It’s quite possible that Home Capital is worth at least its share price even if it simply winds down operations, collecting the existing mortgages as they come due. But as a going concern or brand name any added value beyond the liquidation value seems questionable.

GIC investors and mortgage applicants have basically no loyalty. Tonight Home Capital provided its latest daily summary of deposits and liquidity. Total deposits were down about $42 million. Yet the company indicates that its liquidity was UP $60 million. No explanation is provided in these daily updates. Presumably the increase in liquidity (despite lower deposits) means that mortgages are getting paid off or paid down and so the company is basically in wind down mode on its mortgages. It appears that few new mortgages are being funded or at least that repayments far exceed new mortgages. If Home Capital cannot attract deposits or mortgage customers, what is the value of the brand?

Possibly an announcement of a major equity injection at Home Capital would restore trust and customers. But at what price would a large investor be willing to buy shares? That price might be below the current share price.

On Friday, the S&P 500 was down 0.1% while Toronto was up 0.3%.

U.S. financial stocks were strong while the big “tech” stocks were weak.

Bombardier was down 7.1% as Boeing’s complaint against it passed a first hurdle. A U.S. trade body ruled in favor of allowing Boeing’s complaint to proceed.

North America stock markets are up about 0.4% this morning.

The U.S. banks are particularly strong.

The latest employment figures are out from Statistics Canada this morning and are very strong.

The unemployment rate in Quebec was down 0.6% to 6.0%, the lowest since these statistics started in 1976. This is remarkable. I have been following these figures to a greater or lesser extent since about 1980. To my recollection Quebec was always a have-not province with noticeably higher unemployment than Ontario. Something different and remarkable appears to be happening in Quebec.

I was not able to open the Statistics Canada web site for more details. I also did not receive the usual daily email from them. They had major problems with their site a month or two ago. I suspect it is not fully fixed. Every large organization now faces big risks from software as we are all so dependent on computer systems.

I noticed the comments about this positive jobs report on Yahoo Finance. Most people were ranting that the gains were only temporary. They are completely oblivious to the fact that the numbers are already seasonally adjusted.

Wednesday’s action saw the S&P 500 up 0.2% but Toronto down 0.6%.

Our one penny stock, Ceapro was down 5.6%. Unless earnings turn higher in Q2 this stock could certainly go down a lot more unless earnings from existing products recover or there are positive developments from its research efforts. It’s more suitable for a bit of “mad money” than for any kind of serious investment.

CRH Medical was down 2.5%. It got some negative attention from certain analysts but I don’t think it is a particularly risky investment. I added to my position today. But I would not be prepared to make this one of my larger investments at all.

The madness that surrounds the presidency of Donald Trump continues. It’s not clear when or if the market is going to get spooked by any of it.

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

AutoCanada was up 4.2% after announcing it might buy back some shares. Buy backs are generally positive for share prices but the real driver has to be earnings. If the company has the cash available and is convinced that the stock is under valued then some buybacks will be a good thing. Be aware that companies do not always follow through on actually buying back any shares after they get permission to do so.

CRH medical was down 4.0% to $7.73 Canadian. Note that the report is in U.S dollars and it trades at $5.75 U.S.  This looks like a good speculative pick and I may add to my position in this one.

Monday was a mildly negative day with the S&P 500 down 0.1% and Toronto down 0.2%.

Toll Brothers gave back 2.0%. Ceapro which is a speculative penny stock was down 6%.

Canadian Western Bank ended about unchanged today. I see some articles talking about its risks. I don’t know if these people were arguing to sell the stock when it was $40 or $30 or did they wait until it was down to $25 on fears to suggest selling / not buying? Maybe the naysayers are right but I don’t think so.

In the update for CN Rail I give figures on the increase in carloadings versus 2016. The growth in 2017 is very strong. It bodes well for the economy. It also ties into the fact that Canada’s GDP growth in Q1 was strong.

CN Rail is updated and rated Weak Sell / Hold. It’s a great company but seems expensive at this time (as it usually does). It had some weakness in carloadings in 2016 but carloadings have rebounded very strongly in Q1 and now Q2 as well. I expect it to report a good increase in earnings in Q2 and possibly through 2017. Still, with a P/E of 22 and a dividend yield of only 1.6% it seems expensive. I am not inclined to buy at this time. I was too pessimistic on the company at the last update (see December 29, 2016) in good part because I understood from the company’s 2016 earnings forecast as of Q3 that they were expecting an 8% decline in Q4. Perhaps I misunderstood and/or the year ended off much more strongly than the company expected. It seems clear that the carloadings in Q1 and now Q2 were unexpectedly strong. Carloadings are up double digits from 2016 although not that much higher than 2015.

Rail Traffic Data

The strong carload figures at CN bodes well for the performance of the Canadian economy in general. Things are increasingly on the move, it seems.