December 31, 2018: On Monday, markets closed out the year with gains. The S&P 500 was up 0.85% and Toronto was up 0.7%.

It was not a good year in the markets. Fear and predictions of lower earnings ahead came into the market and pushed “multiples” down. In most (but not all) cases earnings were up in 2018. But P/E multiples and price to book ratios came down significantly.

The report for RioCan is updated and rated Buy at $23.80 to yield 6.0%. This is fundamentally a lower return business but it provides reliable cash distributions. It is very well managed.

The report for Fortis Inc. is updated and rated Buy at $45.07. Fortis projects raising its dividend by an average of 6% per year for the next five years with the earnings increase coming from its various capital investments. In Q4 Fortis will definitely benefit from the sharply lower Canadian dollar. And this seems likely to continue to be a benefit for the next few quarters.

On Friday, the S&P 500 was down 0.3% while Toronto was up 0.4%

The great majority of stocks on our list were up.

Rate reset preferred shares were up with the Enbridge series A share up 5.1%. The Canadian Western Bank rate reset preferred share on our list was up 2.4%. A Husky Energy rate reset preferred share that I follow and that I once owned  was up 11.1%. It has fallen precipitously a week or two ago on some bad news. Overall, these rate reset shares had fallen to what appeared to be obvious bargain levels and made a bit of a comeback today.

Somewhat similarly, the Boston Pizza Royalties Income Fund units were up 3.2%. These units are yielding over 9%. Given that the five year government of Canada bond pays 1.9% (indicating little fear of inflation), the 9% yield on BP would seem to be pricing in fear of a distribution cut. And that could happen given that the trailing year payout ratio is about 104%. But I see no reason to fear more than a very small distribution cut, if any. Possibly, the market fears that BP is going into a tailspin where same-store sales will fall year after year. That is a possible scenario but it does not seem likely. If the chain continues to be well managed, its same-store sales should continue to increase even just due to menu price inflation over the years. There are always possible negative scenarios such as a deep recession driving down same-store sales precipitously and causing many locations to close. But is that a reasonable expectation?

AutoCanada was up 3.8%.

Five and Ten year interest rates have declined in the past few weeks in both Canada and the U.S.. Possibly a modest decline in mortgage rates can keep the home building industry going for the sake of Melcor and Toll Brothers.

On Thursday, the U.S. markets appeared set to take back most of Wednesday’s big gain. But the market rallied into the close with the S&P 500 up 0.9%. With the markets swinging up and down for no particular reason, the next move(s) are not something I can guess. The turmoil in Washington certainly looks set to continue.

Toronto was up 2.8%.

The Canadian dollar is down to 73.4 U.S. cents. That is good news for Canadian exporters including notably energy producers. It is not good news for importers and should show up as inflation in imported groceries and consumer goods of all sorts.

Costco is updated and rated Weak Buy / Hold at $198.63.  It is a pleasure to read the annual report of this company . It is a simple company that has a very powerful business model. My ONLY hesitation on this stock is that it trades at a high price to earnings multiple. I would like to own some and may enter an order a bit below the market. Even at a high P/E buying this stock has usually worked out well.

Wednesday brought some welcome relief for the U.S. markets. The Toronto exchange was closed but should catch up tomorrow unless the U.S. market turns sharply negative again.

The S&P 500 was up a huge 5.0%. The increase was a partial bounce back from the recent declines. At one point this morning, stocks were down. It seems likely that investors could still push the market down again in reaction to bad news regarding Trade or Trump.

West Texas oil was up 9.6%.

Amazon was up 9.45%, Visa 7.0%, Toll Brothers 5.2%.

Given recent market actions it was no surprise that markets were down once again on this Christmas Eve Monday.

The S&P 500 was down 2.7% and Toronto was down 1.1%.

Most stocks were down. But Canadian Western Bank, Melcor and Toll Brothers managed small gains.

Most equity investors are probably feeling rather shell-shocked at this point. Until there is some good news for markets to focus on, the bidding down of stock prices seems likely to continue.

It is hard to keep the faith at this point. But I believe that Warren Buffett would suggest that investors focus on the actual companies and other investments that they own. He is always confident that corporate earnings will continue to rise in the long term despite occasional declines. And so far, the S&P 500 corporate earnings have very much continued to rise. Based on the results of the first nine months and estimates of the final quarter, the S&P 500 earnings are expected to rise by a very hefty 28% boosted by the Trump tax cuts from $109.88 for 2017 to $140.17 in 2018. That’s $140.17 in earnings for each “index value” investment in the S&P 500 which currently costs $2,351.

So, the S&P 500 is currently trading at 16.8 times trailing GAAP earnings (assuming the final 2018 earnings come in at about that $140.17 figure). The S&P 500 started out the year trading at 24.3 times trailing earnings.  That high multiple reflected the big earnings growth that was expected. In 2018 earnings did their job and grew as expected. But the P/E multiple has come down which more than offset the earnings growth. The current P/E of 16.8 is basically at its long-term average of about 17 (since 1949) but is lower (cheaper) than the average of 22 from the last 30 years. Analysts are projecting earnings growth of another 12% in 2019. The market P/E of 16.8 and falling stock prices would seem to be forecasting that the market (as opposed to analysts) is projecting weaker earnings growth in 2019 and beyond and/or higher interest rates (higher interest rates drive up required returns and drive down P/E ratios).

In the case of the S&P 500, I would say that it is now about fairly valued using conservative growth assumptions. My views on the individual stocks on our list are as reflected int he reports for each stock.

Getting back to Buffett, he has suggested that investors let market prices be their servant and not their master. He suggests buying when stocks appear to be cheap in relation to their true values. While, it is certainly fair to value portfolios at current market prices, investors are under no obligation to actually sell at discounted prices. Waiting is allowed and is something Buffett practices and would encourage when it comes to good quality companies and for the S&P 500 index. While riding out a sharp reduction in the market value of investments is stressful, history suggests that prices do recover and rise to new highs over time. Certainly, that is not true for every individual stock, but it is absolutely true on average and for broad market indexes.

The recent stock market declines have been hard to stomach.

The economy so far has remained strong with corporate earnings in general at record levels. But the potential that the long economic expansion is about to turn down into a recession and a whole host of risks mostly related to President Trump could mean that stocks keep going down even if they look cheap and are likely to be good long-term investments.

Quality companies with good earnings and strong balance sheets will mostly weather any storm and ultimately recover in price and remain good investments over the long term. When the market price of shares is down it is a good time to look deeper at the quality of and strength of companies.

As of early Sunday evening stock market futures predict a modest decline tomorrow. The market has been volatile in response to various risks and at the moment it is hard to see stock buyers becoming enthusiastic enough to push the markets up until and unless there is good news on various risk fronts including trade and even the stability of the White House. Analysts continue to predict robust earnings growth for the S&P 500 and so perhaps when the Q4 numbers begin to come in in late January that could fuel some optimism.

Royal Bank of Canada is updated and rated (lower) Strong Buy at $90.95.

With the market declines a lot of stocks look very attractive on valuation and that is the basis if the rating. Meanwhile the potential that the long economic expansion is about to turn down into a recession and a whole host of risks mostly related to President Trump could mean that stocks keep going down even if they look cheap and are likely to be good long-term investments.

Royal Bank is a large and somewhat complicated company. Its valuation including a 4.3% cash yield, a trailing P/E of 10.9, and a return on equity of 17% looks quite compelling. But there are always risks, not only to the share price but to earnings. RBC, like all banks, achieves its high ROE through fairly massive leverage. It manages that leverage with a complex and finely tuned risk management process that has kept it out of any real trouble for decades. But there is always the possibility that in a deep recession loan losses could wipe out earnings temporarily or cause the need to issue shares at a low price which would be detrimental. Also very high bank profits could attract disruption at some point. (Imagine Amazon Bank).

Overall Royal Bank looks like quite an attractive investment but there are always risks to both earnings and share prices.

Friday was another weak day as the S&P 500 closed down 2.1% and Toronto was down 1.5%.

The situation with Trump is certainly not helping matters. He is now apparently mulling firing the Fed chair. With all of the investigations and with the Democrats taking over the House in January, the chaos at the White House seems set to get worse. At the moment it does not look like Trump can get a deal with any funding for his Wall and so the partial government shutdown remains in place.

Most stocks on our list were down including most notably Amazon down 5.6% to $1377, American Express down 4.6%, Visa down 3.5% and Constellation Software down 3.6%.

AutoCanada was up 6.4% after it announced that it was awarded the right to open a new GMC dealership in Maple Ridge, British Columbia which is part of Greater Vancouver. They also announced a sale-and-leaseback transaction with Capital Automotive Real Estate Services Inc.  for four dealerships including this new one and where Capital Automotive will fund land and construction for the new dealership and for reconstruction at the other three. I have mixed feelings about moving to a model with less ownership of facilities and more leasing. It provides cash up front but the lease payments then have to be made. If the dealerships are profitable on an operating basis after lease payments then it can lead to a higher return on equity due to substantially less equity invested. The cash from this transaction is being used to pay down debt and so it may be that they are not doing it not so much by choice but to reduce debt and improve credit metrics.   But it is another sign that this management is very active and engaged in returning AutoCanada to improved profitability.

On Friday I bought some Boston Pizza shares and some of the Enbridge rate reset preferred shares.

The bright side of the market decline is that for those with cash, the market is offering up the opportunity to lock in quite attractive cash yields on many investments.

Thursday was another nasty down day in the markets.

The S&P 500 was down 1.6% and Toronto was down 0.9%.

And tomorrow is not shaping up to be any better… (more below)

Most stocks were down, some of the bigger declines were Starbucks down 3.0%, CRH Medical down 4.4%, American Express down 3.0%, Constellation Software down 3.6%, and Walmart down 3.6%.

Linamar managed a 0.5% gain, Toll Brothers was up 1.4% and AutoCanada was up 1.6%.

Tomorrow is the shortest and therefore darkest day of the year and it is looking to be another dark day in the markets.

Part of the reason for the decline today was a threatened U.S. government “shutdown” unless Trump gets $5 billion for his wall. If that impasse were to end then that would be positive for stocks. But Trump has signaled he is not going to back down.

The U.S. defense secretary has just now resigned due to Trump pulling out of Syria.

I’m afraid that Trump is starting to act like a wounded and cornered animal. With all the investigations and the firings and resignations the Trump presidency certainly seems to be in turmoil.

Progress on the trade friction with China would be positive for markets. But Trump seems more likely to do things that impede trade since that plays well with his base.

The share prices of good companies will ultimately recover. But meanwhile there could certainly be a lot more selling pressure before things settle out.

FedEx is updated and rated (higher ) Buy at $163. It reported adjusted earnings per share in Q2 up 27%, so that was not the problem. But it indicated that “Global trade has slowed in recent month” and this along with customers choosing to pay less in return for slower shipping was lowering earnings for Federal Express (its air plane division). Reading the conference call transcript they said it was growth in global trade that has slowed as opposed to an actual reduction in trade. In any case FedEx is now expecting quite modest growth in fiscal 2019, which, given the increase is in the first two quarters this seems to suggest a material decrease in earnings in the remaining two quarters of 2019.  And this is even after adjusting for the cost of voluntary buyouts it has just announced. Overall, it is not clear to me what they are saying will cause the earnings drop in the next two quarters. The stock certainly looks cheap compared to trailing earnings and to expected 2019 earnings. And it appears they still expect earnings growth in 2020 and beyond.

Reading the earnings transcript, I did not get the sense that the company is in any kind of panic at all. The founder is still CEO and took most of the questions on the conference call. This seems like the kind of situation where Warren Buffett might take an interest but then again he may see many other even better opportunities.

On Wednesday, markets were initially up. They then initially rose even more when the Fed increased rates as expected but then fell when the Fed indicated it still planned probably two rate increases in 2019 (down from three but not down to one or none as hoped).

At the end of the day, the S&P 500 was down 1.5% and Toronto was down 1.1%.

It seems that investors are in a nervous mood, scared of further losses and so almost all news is interpreted more negatively than normal which pushes stock prices down.

I am seeing P/E ratios on stocks that I have followed for years that before this I only saw during the depths of the 2008/2009 financial crisis.

FedEx was down 12.2% after it released its fiscal 2019 Q2 earnings and sharply reduced its earnings forecast for fiscal 2019.

Amazon was down 3.6%, TFI International was down 3.2%. The Boston Pizza untis were down 2.9%.

Melcor Developments bounced up 4.4% but that just offset a decline yesterday…

Linamar was up 2.1%.

Regarding insider trading, Tim Melton bought 3,285 shares of Melcr Developments through his Cavell holdings at $12.45 on Thursday last week and this was reported yesterday. This brought Cavell’s share total up to 1,867,994 shares. That is a tiny addition especially considering he is also one of the largest owners of the family holding company that owns 15.7 million shares. But this purchase is at least a small show of confidence and is probably designed to show confidence.

At Boston Pizza Royalties a director (trustee) bought 1250 shares in his spousal RRSP today at $14.89. I believe he is a newer trustee and may have been required to buy shares over time. But I believe this purchase in a spousal RRSP would indicate a belief that the units are a good investment.

In my own trading I reluctantly sold some of my Couche-Tard shares today. I wanted to have some cash in case even better bargains continue to emerge.

Markets closed relatively flat on Tuesday with the S&P 500 about unchanged and Toronto up 0.4%.

Stantec was up 2.3% after announcing a $35 million contract win for planning and design work at a shipyard in Maine.

Melcor Developments was down 3.8% to $12.26. (In part, this was a reversal of a little gain yesterday.)

Boston Pizza recovered 3.2%. A possible headwind for BP is the new tougher federal impaired driving laws that came into force today. The BP franchise fees that the BP Royalty Income Trust collects are on food only and exclude alcohol. But tougher impairment laws will surely keep at least some people from visiting BP and other drinking establishments. I can’t even guess if that would be a something like a 1% impact or something larger.

TFI International was down 2.4%, This could be due to fears that trade will decrease in North America. Looking at rail car loading reports, there is no sign of a slowdown in the latest report. (But the latest week will be reported tomorrow, Wednesday.)

Linamar was up 0.8%. The CEO at Linamar bought 50,000 shares on Monday at $45.36 which is a total cost of $2.268 million dollars. I believe the CEO is signaling her very strong faith and confidence that the shares are under-valued. Seven other insiders also bought shares in the past few days with most of them buying 431 shares. Given eight executives buying at basically the same time and given that several bought the same odd number of shares I strongly suspect that this was actually using bonus compensation to buy shares. It is reported as a “acquisition in the open market” but I view it more as compensation taken in the form of shares. Quite likely they had the option to take the cash so this buying is a positive signal but not as positive as if they were using their own existing cash savings to buy shares.

Two more insider buys were today reported by Canadian Western Bank, one insider bought 1000 shares on Monday and another bought 220 shares today, Tuesday.

After the close, FedEx reported its Q2 earnings and reduced its guidance for this fiscal year and said that its projected synergies from its large acquisition of TNT a couple years ago will not be realized in 2020 as previously forecast but would still be realized some time after that. They also said: “Global trade has slowed in recent months and leading indicators point to ongoing deceleration in global trade near-term,”   This pushed FedEx’s shares down 6.1% after hours while it had been up 1.5% in regular trading. Some analysts had correctly forecast much of what was announced today and the stock had already fallen. FedEx also noted that it was having a record Christmas season, so not all the news was bad. In my experience the after-hours trading seems to be sort of “hot money” that trades with hare triggers based on news and sometimes the stock direction changes when regular trading resumes the next day after analysts take some time to digest the news. So, we shall see. Based on its projection Fedex is trading at a P/E of 14 times GAAP earnings and 12 times adjusted earnings. But it appears that this 2019 earnings projection implies quite a small growth in 2019. (low to mid single digits)

FedEx’s comments about slowing global trade could affect the market more broadly as well.

Wednesday, the market will be reacting to the FED’s interest rate announcement and probably more importantly any Fed comments on its outlook for interest rate increases in 2019.

And meanwhile, the walls appear to continue to close in on Trump with his Charity shut down in some disgrace. Legal and investigation troubles for the President would seem likely to cause further (ultimately temporary) market declines.

Monday’s markets were ugly especially considering that the declines come on top of all the other recent declines.

The S&P 500 was down 2.1% and Toronto was down 1.6%. And it is certainly very possible that the declines will continue. The best near-term hope for a reprieve is if the FED would signal on Wednesday a slower pace of interest rate hikes. Any reduction in trade tensions would also help. As much as I am no fan of Trump, the increased pressures of the various investigations he is facing are creating uncertainty and weighing on markets.

This is a time that tests the nerve and resolve of equity investors. We should perhaps remember that the “deal” was that equity investors can expect (but are not guaranteed) a higher long-term return versus say GIC investors but face higher volatility and risk. It would be unrealistic to expect that the risks would never periodically materialise in even hopefully temporary losses. Investors are “supposed” to consider their risk appetites and financial ability to absorb risk before deciding on what proportion of their investments to put into equities. But naturally we may regret our level of equity exposure when stock markets decline.

Markets will recover to new highs again but no one can say for sure how low they go or how long they take to recover.

Meanwhile, wise old Warren Buffet who was patiently sitting on over $100 billion in cash at Berkshire Hathaway is almost certainly smiling and slowly buying into bargains as his legendary patience pays off once again. Berkshire will be losing market value on its huge stock portfolio but Buffett will still view the market decline as positive since Berkshire is a net buyer of stocks for the indefinite future. He will also be buying back Berkshire shares, I am sure.

Given the declines in the markets today, most of the stocks on our list were down.

The December U.S. home builder sentiment came out and was the lowest in over three years. But at 56 it also remained positive (50 is considered neutral). Toll Brothers was down 0.6% today which was lower than the overall market declines although that is not much to brag about.

The Boston Pizza Royalty Units are down to $14.45 yielding 9.5%. The units pay $1.38 annually. I have said that with the payout ratio at around 104% there is a risk of a distribution cut. But I can’t see any mathematical reason for the cut to take the payout much below about $ 1.32 which would restore the payout to 100% where they are comfortable. Or maybe they would take it down to $1.26 to provide some cushion. But I also think they will try to simply maintain the distribution. So I have trouble imagining a scenario where buying these units at the recent price is not a good investment. But anything is possible and if BP were to start shrinking the number of restaurants then the distribution would trend down.  I added somewhat to my position today.

Also, BP was buying back a few shares at 8100 per day. They only bought 1100 on Friday and reported that today. But in less than 3 weeks they are already 85% completed buying the small amount of shares that they announced they would buy. I think the signal is clear that they saw the shares as under-valued but they only had a small amount of “room” left on the line of credit that they have in place for share repurchases. There had been no recent insider buyer but the CEO grabbed 400 shares on Friday to hold 5050 which was reported today. He likely holds options as well.

And also regarding BP, Statistics Canada reported October sales at Food Service and Drinking places. On the one hand it looked negative with a 0.8% decline nationally, seasonally adjusted, for full service restaurants versus September. But it’s year over year changes that are more relevant and these were up 3.0% nationally for full service. Ontario was 3.6% and Alberta 1.4% and B.C. 6.0% and these are the biggest locations for BP. But these provincial figures were for all establishments not just full service which are likely lower. In any case not a bad year over year result. BP may lag these industry figures however due to locations in the energy path and also because what matters is same-store sales and same-store will be lower than overall given the number of restaurants in Canada is likely a bit higher year over year.

P.S after posting this I see BP has announced the next distribution will be 11.5 cents which is unchanged. part of the press release reads: “The distribution will be paid on January 31, 2019 to unitholders of record at the close of business on December 31, 2018.  The Fund periodically reviews distribution levels based on its policy of stable and sustainable distribution flow to unitholders.” They could be planning a small distribution cut in 2019. But certainly nothing in the press release here hints at that.

Checking some other insider trading:

A CWB insider who had bought 1000 shares on Tuesday added another 500 on Thursday at $26.30 (just reported today). It’s small but a positive indicator.

In other developments Couche-Tard reported a relatively small asset swap today with CrossAmerica. This is actually a related party and overall the transaction does not appear to be a significant thing. It must be slightly positive however or else they would not have done it.

The report for Canadian Western Bank is updated and rated (lower) Strong Buy at $26.10. CWB earned an ROE of 11.8% in its just completed fiscal 2018. It has not reported a loss in any quarter in over 28 years. And yet, due to fears and due to general market declines it is now trading at book value and 8.7 times trailing earnings.

Early this year the stock was as high as $40.83. At that time it was trading at 1.65 times book value and 15.8 times trailing earnings per share. The stock hit an all-time high of about $42 back in 2014 and traded at about 2.25 times book value and about 15.8 times trailing earnings.

The stock has plummeted, presumably due to perceived risks of loan losses, and/or recession and presumably due to higher interest rates and the cheaper prices of so many other available investments. Earnings and book value have continued to rise and the Bank itself remains optimistic about growth and continued low loan losses.

Over several decades now earnings and book value have risen. Sometimes faster and sometimes slower but basically fairly steadily. But the multiple in relation to book value has ranged from below 1.0 (I believe the low was 0.70) and above 2.0 several times as well as, of course, all points in between.

I did not expect this stock to return to trading at 1.0 times book value. Upon now reviewing the history I see it very briefly traded down as low as 0.7 times book value at the bottom of the Financial crisis in March 2009. But today’s situation in no way approaches the wide-spread gloom and dangers of that time. And it got down to about 0.9 times book value in February 2016 at a time when North American markets took a steep dive and Alberta was in recession due to lower oil prices and I believe CWB had reported some loan losses related to loans to oil and gas production companies due to lower oil prices . It was also at about book value in  the spring of 2017 when Home Capital was imploding due to high risk mortgages and CWB was thought to be affected due to its non-conventional mortgage business at its Optimum division. These excursions down to book value or below are scary as they happen (for those holding the shares) but tend to prove to be short-lived.

Until just a few months ago (when West Texas oil fell, and the price for Alberta oil plunged), Alberta appeared to be still growing out of the recession and the S&P 500 was still nicely positive for the year.

A buy and hold investor who has held CWB for many years has experienced very substantial volatility in both directions related to the valuation multiples. But ultimately the stock delivers a return based on its actual earnings growth plus dividend over the longer term. Those who buy at lower than the long-term average multiple will earn a somewhat higher return and the opposite is true as well. And it seems likely that the earnings and dividend will continue to grow over the years. The Bank notes that it has increased the dividend each and every year for the past 26 years.

At this time, the 1.0 price to book value, especially when combined with the 8.7 P/E ratio, looks like a strong buying opportunity. But that is never guaranteed since earnings could decline (despite management projecting growth) and since any further slide in the S&P 500 and Toronto index can tend to pull any stock down.

Dollarama is updated and rated (lower) Buy at $31.99. After being targeted by a short seller and after reporting unusually low earnings growth, the shares have come down to a more reasonable level.

With so many stocks trading at what appears to be bargain prices I am keeping a closer eye on insider trading.

Melcor CEO Darrin Rayburn bought 1800 shares at $12.55 on Wednesday to hold 43,643. This was reported on Friday. A few days ago I mentioned that Andrew Melton had bought some shares as well.  I am concerned that Melcor may report a weak Q4 in comparison to last year when they sold a surprisingly high number of home building lots in Q4. Possibly, this insider buying although it is not a very large number of shares and only two insiders buying indicates some confidence on the part of management that Q4 results will not be too bad. And of course the share price at some 42% of book value would seem to be pricing in quite a bit of gloom.

I mentioned that a couple of insiders had bought this week at Canadian Western Bank. Another insider bout 400 shares on Thursday at $25.76. He also bought 12 shares in his wife’s TFSA. That is of course a very tiny amount. But it may indicate that he wanted to scrape up even loose change to grab shares at this price.

There had not been any really recent insider buying at Linamar but on Thursday one insider bought 431 shares at $45 and another insider bought 862 at $45. Given the odd number of shares and given that one bought exactly twice the quantity that the other did I would suspect that these were buys using some kind of compensation or bonus from the company rather than independent buys with their own money.

Friday was another negative day in the markets. The other side of that coin however, is that those with cash to invest can do so at lower stock prices.

The S&P 500 was down 1.9% and Toronto was down 1.05%.

The decline in the S&P 500 was blamed on worried about weaker GDP growth in China. I never claim to be able to predict short term market moves, but it seems to me that hat the U.S. market has been in a mood to look for reasons to go down. There are times when almost all news is interpreted as good news. As in “Consumer spending is down? Great ,the FED will not raise rates so stocks are a buy”. At other times almost all news is interpreted negatively. And there are reasons to for the market to worry about where U.S. stocks are headed.

The S&P 500 P/E is not particularly high, but it’s not that low either at 20 and is still pricing in earnings growth in excess of nominal GDP growth. Analysts expect earnings to grow another 12% in the next year. That’s ambitious on top of the 27% earnings growth that occurred in the year ended September 30 which was greatly boosted by the Trump tax cuts. So, there is absolutely room for the S&P 500 to decline just based on earnings growth returning to more normal levels. On top of that thee “yield curve” is suggesting a recession may be coming for the U.S. Then there are the trade tensions. And then there is the President’s huge issues with the Mueller inquiry which could certainly add to market fears.

The valuation of the Toronto Stock market is lower but certainly Canada could also face recession and has its own trade issues.

It is obviously disappointing to see a stock portfolio declining and especially when the declines get into the double digits. But these kind of declines are not unusual. Some stocks have declined because their earnings are down. But in most cases earnings have risen and it is the valuation multiples that have gone down partly due to higher interest rates but mostly due to fears of earnings decline due to recession or trade wars. If companies can continue to grow their earnings per share over time then the stock prices will recover.

Getting back to Friday’s markets:

Costco was down 8.6%. This was despite posting good earnings in its latest quarter. Costco is a very powerful and impressive company. But it trades at a very high P/E ratio and was vulnerable to decline for that reason.

Constellation Software was down 3.6% but remains up about 9% in 2018.

Amazon was down 4.0%

TFI International was down 3.4%. I have not seen any particular reason for the recent decline.

There are not very may stocks on our list that are close to their 52 week highs. Fortis is very close to its 52 week high (it had reached a similar high 13 months ago but then declined somewhat) and Starbucks is not far below its 52 week (and all-time) high.

Toll Brothers is updated and rates Strong Buy at $32.88.

In it recently released Q4, earnings per share were up 79%. But those earnings were driven by home sales that they contracted for nine to twelve months earlier. The market is focused on slowing home building in the U.S. and higher interest rates. Toll Brothers had reported modest growth in contracts for new homes in Q2 and Q3 (while earnings were surging) and then reported a decline in new home contracts of 13% in Q4. As a result, the market has driven the stock price all the way down to just 4% above book value and with a trailing P/E of 6.9. Based on this valuation and despite the fact that earnings growth may stall or decline somewhat, I rate the stock a Strong Buy. The company made a 16% return on equity in 2018 and we can buy at very close to book value. If the ROE were to decline to say 12% it would still be quite a good investment.

The FED’s interest rate decision and outlook next week could have a positive or negative impact on this stock.

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

CRH Medical was up 3.2%. Dollarama recovered 3.4%.

TFI International was down 6.1%. I did not see any news to explain the decline. It’s been an exceptionally well run company and I would be a buyer at the current price.

The rate reset preferred shares that I tracjk were higher today. These have not done well in recent weeks.

A guest on BNN yesterday had an interesting theory about why the rate reset preferred shares had declined. He attributed it to investors selling shares in preferred share ETFs. His view was that many of the ETF investors did not understand much about what an ETF like CPD holds but were selling simply because the price of CPD was dropping. Due to the nature of ETFs this then caused the ETF itself to sell the underlying rate reset preferred shares. If so, this is a case of the ETF “tail” wagging the underlying shares “dog”/. That is an ETF is supposed to track what the shares in its index are doing but in this case the ETF may have been causing the shares to drop. This was happening because the underlying shares had poor trading liquidity, he said. It’s an interesting and plausible theory. The bottom line was that rate reset preferred shares were getting pushed down in price and were now attractive investments in his view.

I notice that Alcanna Inc. has just terminated its quarterly dividend. Alcanna is the newish name for the former Liquor Stores N.A. At one time I though Liquor Stores N.A. would be a good investment due to its dominant position in retail liquor stores in Alberta . But it became apparent that they had too many stores and faced lower cost competition and were poorly managed by (for quite a while) an absentee American CEO.

Now, the company is terminating its dividend to free up funds for what it says are ambitious growth plans in both liquor and Cannabis retail. Maybe the shares will rise on the news but I rather doubt it.

Well, Alcanna is hardly the only Alberta-based company that has struggled. But rightly or wrongly, I soured on this one.

My last comment on Alcanna was May 9 this year when I said “Liquor Stores N.A. is changing its name to Alcanna Inc. Valeant is changing its name to Bausch Health Companies Inc. I consider such corporate name changes to be cowardly and a bad sign. In both cases they are probably changing more to distance themselves from their own past records than anything.”

On February 5, 2018 I said “Liquor Stores N.A. is no longer on our list but was up 2.1% after raising over $100 million by issuing an additional 25% of its shares to make Aurora Cannabis its 20% owner and with plans to open some pot stores. I must admit to being consistently wrong on this company. It has been losing money and paying a dividend quite a bit bigger than earnings and I figured it had no money to get into the pot store business. (And its abilities also did not seem impressive) Most of the gain in this stock already came in the past several months as news had leaked out about this deal. If not for visions of pot profits this stock should have been lower.”

Stocks rose on Wednesday with the S&P 500 up 0.5% and Toronto up 0.8%.

Constellation Software was up 3.3%. Toll Brothers was up 3.2%. AutoCanada was up 2.4%.

Teranet reported that its index of the price of existing houses edged down slightly in most Cities in Canada in November.

On Tuesday, the S&P 500 was about unchanged while Toronto was down 0.4%.

Alimentation Couche-Tard rose 2.7%. This company continues to be very well managed and has plans for continued growth. The stock has risen since the end of October despite stock indexes declining since then.

Canadian Western Bank recovered 2.5%. An insider purchased 1000 shares today at about $26.00 to hold 1000 shares. He also holds 45,000 options (Many of which may be out of the money) and about 16,000 rights to restricted or performance share units.

I mentioned that Andrew Melton has bought 670 shares of Melcor Developments last week. Today he grabbed another 950 shares at $12.65. I think it is clear that that he and Melcor management view the stock as being significantly under-valued.

FedEx was down another 1.7%. It is trading down around 10 times earnings which certainly looks attractive.

A new issue out today was a Northwest Healthcare Properties REIT 5.5% five year convertible debenture. Convertible debentures trade like stocks and can provide a capital gain if the stock rises above the conversion price. They are issued with a conversion price above the current stock price so the conversion privilege is “out of the money” initially. But it is worth something. Absent the company going broke the worse case here is the debentures pay 5.5% annually for five years and then mature at the same price they were issued at. As long as the company does not basically go broke, it would seem that this will be at least a decent investment. Of course, convertible debentures can trade below issue price prior to maturity. But no one is forced to sell at a capital loss or forced to incur a capital loss then or at maturity, again absent bankruptcy or the close equivalent. As of this evening this issue was still listed as “Open” on TD Direct.

The release on bail of the CFO of Huawei is a positive for markets. In my mind it was also a foregone conclusion since the argument to not release her on bail seemed to center of on her wealth and sophistication. To me, even suggesting that extremely wealthy people should be basically barred from getting bail was simply ridiculous. And all the more so, given that she is not accused of a violent crime. And I am certainly not convinced that Canada should turn her over to the American authorities.

Monday was a volatile day in the markets. But at the end of the day, the S&P 500 was up 0.2% while Toronto was down 0.45%.

Most of the stocks on our list were down. Constellation Software was among the few gainers and was up 1.1%.

Checking insider trading, I notice that a Canadian Western Bank insider (Margaret Mulligan, a director since 2017) bought 3600 shares today at $26.54 (That’s $96k worth, presumably with her own money, not shares received as compensation – although that is possible). She now holds 6400 shares. However, the signal may not be reliable because as a director she is required to own shares. But it looks like she may have seen this as an opportune time to buy as she was not obligated to have her quota of shares completed until March 2020.

Linamar was down 4.6% to $44.19.  That puts it at 82% of book value for a stock which earned 18% on book value in the trailing year and which according to Yahoo Finance is trading at 4.5 times expected 2019 earnings per share. Looking back I see that Linamar traded at book value at the end of 2011. Most of the time it trades above book value. During the financial crisis it briefly traded below 30% of book value which gores to show that stocks can sometimes trade at extremely low multiples. Unlike today, Linamar lost money in 2009 on a GAAP basis and barely broke even on an adjusted earnings basis. In the case of the financial crisis, the low stock price turned out to be a wonderful buying opportunity as the stock later rose 20 fold and despite the recent decline remains over 10 times higher than its price at the end of 2008. The latest decline could be related to possible tensions with China especially given that four of its sixty manufacturing plants are located in China.

AutoCanada was down 5.2%. FedEx was down 4.2%. Basically investors are more fearful and are bidding down the price of most stocks.

Prices for Alberta oil have improved dramatically with lower spreads versus world oil prices since Premier Notley announced mandated production cuts effective January 1. Possibly there are other reasons such as refineries coming back online. So far, the improvement has not led to any bounce in the Alberta stocks on our list.

Rail car loadings are often seen as a good indicator of the state of the economy. In the U.S.,  rail car loadings in 2018 continue to run above the 2017 levels. In Canada this is even more so. Petroleum related car loads in particular are up quite darmatically and are trending higher almost every week.

Statistics Canada reported building permits for October which were down 0.2% versus September. Single family residential permits were up 4.2% versus September. But it is beyond me why the news release would focus on the comparison to September rather than compare to the 2017 figures. But they did include a handy table that showed that comparison. Overall residential and non-residential permits were down 4.0% versus the prior year and single family permits were down 10.5%. Those declines are probably much more indicative of the trend than the comparison to just one month earlier.

I always look at Alberta because of Melcor Developments. In good news the seasonally adjusted single family permits for October were up 5.9% versus September. However, that was down 22% versus October 2017. September had been down 31% and August 42%. Clearly single family home construction is down considerably in Alberta at this time. In 2017, Melcor sold a surprisingly high number of single family building lots. Melcor’s Q4 will likely show quite a sharp drop in single family lot sales. With the shares trading at 42% of book value, that outlook should already be more than reflected in the share price. Melcor’s share price in 2019 seems likely to be driven by whether or not progress and optimism on the pipeline front increases.

Meanwhile CMHC reported housing starts for November. They report the trend was 210,000 in November up from 206,000 in October. That is a healthy number and Canada continues to have housing starts that seem proportionally high versus the United states. However, single family starts were down 15% in November versus the prior year. Alberta was down 18%. Calgary was down 23% and Edmonton was down only 6%. Melcor is substantially more active in the Edmonton region at this time which is a good thing.

With the Canadian dollar now below 75 U.S. cents it may be opportune to those with U.S. cash to favor moving some of that back into Canadian dollars. I am in the process of moving a small amount of U.S. dollars using the procedure of buying DLR.u in the U.S. dollar side of my accounts and then having that journaled over to the Canadian dollar side where I will sell it as DLR receiving Canadian dollars. For more information do a search in the comments are for DLR as I have explained the steps in detail in the past including December 9 and December 10, 2017.

Melcor continues to buy back its small allowed quota of 1262 shares per day. It began the buybacks on October 9. This came after several years where Meclor had obtained permiossion from regulators to buy back shares but then did not do so. They buy back shares most days although they have skipped a few days. It’s a small amount but is welcome given the low price of the shares.

Andrew Melton bought 670 shares at $12.75 on Thursday. This is a very modest addition to his large holdings but is a welcome sign.

After recently announcing that it would buy back some units, the Boston Pizza Royalties Income Fund has bought back its allowed quota of 8100 units each week day since November 28.  The BP Fund unlike a corporation does not retain any earnings and so it uses borrowed money to buy back units. It can borrow money at a substantially lower interest rate than the current 8.7% yield on the units. So, the buy backs are accretive to distributable cash per unit. However the fund had already nearly exhausted its credit line  that is available for this purpose. Therefore the current buy back program is small and is authorized to buy back only 0.5% of the units. But it is accretive and a positive sign. It will be interesting to see if any insiders now buy units.

Canadian Western Bank has a buy back authorization in place but has not yet announced buybacks. This was discussed in the conference call last week. THE CEO was clear that he definitely thinks the shares were under-valued. And that the balance sheet is strong enough to permit some buybacks. But he showed a clear preference to use funds for growth rather than buy backs. So I am not clear if they will do any buybacks. I doubt if they could make an acquisition as cheap as their own shares. So I would like tos ee some buybacks. CWB did have a bit of insider buying in October. They would have been in “blackout” (insiders not allowed to buy) From end of Q4 (October 31) until last week’s release of earnings and so we may see some insider buying very shortly.

Friday’s action saw the S&P 500 down 2.3% and Toronto down 0.95%.

Costco was down 3.6%.

AutoCanada was down 4.4% to $11.09.

Statistics Canada reported large job gains for November. And this is NOT explained by Christmas hiring since these figures are always seasonally adjusted. I mentioned a few times in the last few years that the monthly lob creation numbers are just a statistical estimate. Their recent volatility suggests that the sample is no longer representative or reliable. And what seldom gets mentioned is that even if the sample were highly representative the small sample size still leads to a large statistical uncertainty in the order of plus or minus 30,000 jobs nationally.

Speaking of jobs: A call center just closed in Sydney Nova Scotia. About 650 jobs gone which is a vicious blow to that  small City of some 32,000 people. There are only about 100,000 in the whole Cape Breton metro area. And probably no more than half are in the work force (after deducting children, students, the retired and those medically unable to work or otherwise not wanting to be in the workforce – like stay-at-home parents. So this is probably an increase to the unemployment rate of over 1.0% just from this one event. This was a contract call center. I don’t know if there was mismanagement but I can easily imagine that it is a brutally competitive industry where the customers shop around for the lowest bid. In this case the customers were GM OnStar, Sirius XM satellite radio, AT&T and Allstate Insurance. Was the Call Center competing against  India? I don’t know. I don’t know if this Call Center was enticed to Sydney with subsidies (I suspect so). If so, it would seem to go to prove a region cannot “purchase” jobs.

It was another bad day for Trump in terms of the mounting evidence that his campaign had much contacts with Russians.  And the news on that front and the uncertainty it causes could certainly get a lot worse.

Rate reset preferred shares were mostly down today and have declined significantly lately. This leads to some fairly high yields. (Considering that the highest quality rate reset preferred shares got issued at yields under 4.0% when these were popular.)

ENB.PF.A issued March 13, 2014 yielding 4.4%. Now, due to the price drop to $16.95 it yields 6.5%. It is due to reset a year from now on December 1 and at the current Bank of Canada rate would reset to a slightly higher dividend to yield 6.9%. If someone today were putting together a portfolio to spit off dividends, these shares (and many other rate reset preferred shares) would be worth considering.

On Thursday, the S&P 500 ended the day down 0.15% while Toronto was down 1.6%

Earlier on Thursday, the S&P 500 had been down as much as 2.9%.

Investors are nervous about trade tensions with China and in general are fearful of declines. Therefore many stocks are being driven down in price as many investors wish to sell. And buyers are only coming in if the price is reduced. It appears that many stocks are being pushed down well below fair value. Eventually that will correct but in the meantime stocks can always decline more. That is always the case.

Canadian Western’s earnings were fairly strong although with only a 5% gain in adjusted earnings per share in Q4. And they appear to predict continued growth for 2019 and have not yet experienced any untick at all in credit losses associated with the energy patch recession or spinoffs thereof. CWB shares were down 1.15% to $26.68 but traded as low as $25.31 earlier in the day. While there are never any guarantees, I believe these shares are definitely undervalued at this price. I added somewhat to my position.

Costco was up 3.0% after reporting yet another month of very strong same-store sales growth.

Dollarama was down 11.8% after reporting earnings. Comparable store sales have slowed but are still positive. Traffic in their stores declined 0.9%. I plan to update the report for Dollarama in the next week or so. The P/E ratio on this stock has come down to 21 so it is no longer pricing in huge growth.

On Wednesday, the U.S. markets were closed to respect the late President George H. W. Bush.

Toronto rose 0.8%

The Bank of Canada held interest rates constant but apparently sees risk in the economy and therefore it is now thought that interest rates may not rise as much as previously thought.

CN Rail was up 2.3%. It has announced it will, with an unnamed partner, make a bid for the Halterm container pier in Halifax. Recently it had also acquired a trucking company. Apparently, CN plans to expand in transportation outside of the rail business. CN has been very well managed dating all the way back to its IPO in 1995. I suspect it will continue to do well.

CRH Medical was up 8.3%. On Monday it announced it had made an acquisition in Tennessee. This was its fifth acquisition of 2018 and so it’s growth by acquisition streategy continues.

Linamar was down 1.6%.

Canadian Western Bank was down 1.35% and had been down 4% at one point during the day. This may have been partly in response to the Bank of Canada’s comments or may have been due to Laurentian Bank posting weaker-than-expected earnings. CWB will report its Q4 earnings tomorrow morning. My expectation is for a strong Q4 and a record year. The market will be looking (fearfully) for any indication of higher loan losses in Q4 or expected in 2019. The market will also likely focus on the bank’s outlook for 2019.

Trump has described himself as a Tariff Man. He is crafty and knows that “his base” are not big stock investors and tend to view tariffs as a good thing.

Rate reset preferred shares continue to fall. They are definitely worth considering at these prices especially for those who want to lock in a a given amount of cash yield from their portfolio. For example to fund withdrawals in a retirement account. In particular, I refer to the rate reset preferred shares of high quality companies.

The Canadian dollar is down to 74.71 U.S. cents or $1.34 to buy one U.S. dollar. Meanwhile I received a report on Monday that indicates that most of the big Canadian banks expect the Canadian dollar to strengthen to about $1.27 (79 cents). CIBC however expects $1.31 in Q2 or 76 cents. Obviously, currency rates are hard to predict.

On Tuesday, the S&P 500 was down a hefty 3.2% while Toronto was down 1.4%.

Most stocks were down.

FedEx took an extra hit (and ended up down 6.3%) because a Morgan Stanley analyst said that Amazon has some planes of its own and will take away 10% of FedEx’s business by 2025. That could be. But I would consider the fact that FedEx appears to be a very cost-efficient operation. I marvel that they can ship an overnight envelope within the United States for an average charge of $13.09. And an overnight box for an average charge of $23.57. I don’t know that Amazon could do it any cheaper.

AutoCanada was down 5.7% probably largely due to the weak Novmber auto sales report which came out yesterday.

Amazon was down 5.9%.

Dollarama was one of the few stocks on the rise and it was up 4.1%.

Toll Brothers earnings came out and were very strong as expected but also as expected contracts to sell homes (which won’t be booked into revenue until the houses are completed were down. They were down 15%. The stock declined at the open and was down 10% to $30.17. But, perhaps in response to to the conference call, the stock rallied back and closed down 1.6%. Investing is a tough game when a stock can fall 10% upon reporting earnings per share up 78% in the quarter which was the case here. The trailing P/E ratio is 6.8 and earnings are expected to rise moderately in 2019 (but perhaps fall in 2010, it contracts for new homes continue to decline). The stock trades at only about 4% above book value and the company earned 16.5% return on opening equity in its fiscal 2018.

The decline in the S&P 500 today was blamed in part on indications that Trump has made less progress on trade talks with China than was thought. Also the U.S. yield curve had partly inverted with 5 year bonds yielding 2.79% which is very slightly less than 2 year bonds at 2.80%. And the ten year at 2.91% is not much higher than the 2 year. An inverted yield curve is believed to be a reliable indicator of an impending recession. I believe the “official” inversion required the 10 year to fall below the 2 year.

It would not be surprising to see continued turmoil in the U.S. markets given trade uncertainties and more damage to Trump from the Mueller investigation.

In my own trading I sold in a registered account the few shares of Home Capital that I owned on which I had a 30% gain and half of my small position in Fortis. This was just to raise a modest amount of cash.

On Monday, the S&P 500 ws up 1.1% which was likely due to reduced trade tensions between China and the U.S. after Trump met with the Chinese leader on Saturday.

Toronto was up 0.5%

West Texas Oil is up to $53.55 after Russian and Saudi Arabia apparently agreed to continue an arrangement to curtail production.

Alberta Western Canadian Select heavy oil surged in price after the Alberta government announced mandated production cuts that take effect on January 1. It seems very unfortunate to have this interference in the market. But it was a wise move politically. And it will provide a much-needed boost to the mood in Alberta.

Meanwhile…

BHP was up 5.0% in New York probably due to higher oil prices.

Amazon was up 4.9% to $1772. About two weeks ago, its decline bottomed out at about $1500.

Constellation Software was up 2.5%

Visa was up 2.3%

Toll Brothers was up 1.7%. On Wednesday, it will report its earnings for Q$ 2018 ended October 30. The Q4 and 2018 earnings should be quite good. But it seems likely that they will report a decline, or at best little growth, in new contracts in Q4. Contracts to build houses only get booked as revenues when the house is completed. The focus will likely be on their outlook. It will also be interesting to see how aggressively it has been in terms of buying back shares. For the past few years it has been an aggressive buyer on dips. It will also be interesting to see if there was any uptick in cancellation rates. The stock price seems to be anticipating a much slower pace of signed contracts for new homes in its fiscal 2019. The expected pace of higher interest rates in the U.S. seems to be slowing and this is a positive for Toll Brothers. The recent fires in California as well as hurricanes in the east during Q4 will likely have slowed new contracted sales in recent months.

AutoCanada was down 2.7% to $12.43. After the close a report on Canadian auto sales for November came out. Frankly, it was ugly. November auto sales for Canada were reported down 9.4%. Fiat Chrysler sales were down 35%. AutoCanada has a heavy exposure to the Fiat Chrysler brands. Meanwhile Fiat Chrysler reported that its sales in the U.S. were up 15% in November while Ford reported being down 7%. I don’t know why there would be such a dramatic difference between the two countries. Possibly there is a shortage of the most popular models and Fiat Chrysler is favoring the U.S. dealers with supply?

Auto sales year to date in Canada are only down 2.3% and while 2018 will show a decline over 2018, it wills till be higher than 2016 and will be, I believe, the second highest year on record. So the situation is not dire (although the November figures are certainly not encouraging).

After the close the Melcor REIT reported it purchased a building in Lethbridge for $6.25 million. This is a modest acquisition but is accretive as it will be paid for in cash. As at Q3, the REIT indicated that it basically had some excess cash that it wanted to deploy. With the REIT units trading at about 67% of book value, I don’t think it would make any sense for the REIT to purchase anything if it had to issue units to pay for it. Overall, this is a small but positive step for the Melcor REIT.

On Friday, the S&P 500 was up 0.8% while Toronto was about unchanged.

AutoCanada was up 10.7%. This may have been due to an analyst recommendation given that the company did not release any news.

Boston Pizza Royalties was up 3.3%. After the close it announced that the CFO of Boston Pizza International was leaving to pursue other opportunities. This appears to be a completely friendly parting.

Constellation Software was down 2.9%.

Melcor Developments was down another 2.3% to $12.50. The company continues to buy back 1262 shares each day. It’s a tiny amount but that is all it is allowed due to the thin trading liquidity. It is also allowed to make one block trade per week over and above that but so far that has not happened. I don’t particularly to expect to see any such block trades.

Canadian Tire and Dollarama were each down 2.0%.

On Saturday, President Trump will meet with the Chinese leader regarding trade tariffs and barriers and the results or lack of results from that meeting are likely to affect markets on Monday.

Next week, Toll Brothers will release Q4 earnings on Wednesday and Canadian Western Bank will release Q4 earnings on Thursday morning.

On Thursday, the S&P 500 was down 0.2% while Toronto was up 0.15.

Linamar recovered 3.3%.

AutoCananda was up 4.1%. Earlier this week, AutoCanada announced a new partnership with Kijiji as its preferred online partner. It’s hard to say what the benefits will be. But I think it is another example of how the new AutoCanada management is moving forward on various initiatives.

WSP Global was down 2.8%.

It is a bit scary to think about what will come out of the Mueller report. There can be no doubt that it will anger Trump. It could very well include grounds for impeachment or charges against Trump. Trump will then lash out from his powerful position. And his “base” will defend him. Presumably the markets will see that as a risky time.

The report for Melcor Developments is updated and rated (higher) Strong Buy at $12.75 based on the fact that it trades at 42% of book value per share and based on the “hard” nature of its assets. This has obviously been a very frustrating stock to own since oil prices declined in 2014. Subsequently Alberta has been recovering from recession for several years. But the very recent oil price declines and in particular the discounts on Alberta oil have very much darkened the mood in Alberta. Experience teaches that cheap stocks can also get cheaper and that there are never any guarantees. But based on the numbers and assuming Alberta is not in a permanent decline, my methods rate this stock highly. But continued patience is likely to be required. I expect that they will sell fewer lots in Q4 versus last year, perhaps far fewer.

On Wednesday, the S&P 500 surged 2.3% and Toronto was up 1.3%. This came after remarks by the FED Chair that were interpreted to mean that interest rates may not rise as high as had been expected in 2019. However, this was only an interpretation and that interpretation could change at any time.

Couche-Tard rose 4.8% to a new record high based on its earnings report and assisted by the overall general rise in the markets today.

Dollarama was up 4.1%.

Amazon was up 6.1%.

Most stocks were up.

Toll Brothers probably did well to rise 1.5% given that October new home sales in the US. came in at the lowest since March 2016.

But Linamar fell 4.2% probably in further reaction to the GM plant closings as well as talk of U.S. import tariffs.

Melcor Developments was down to $12.75 or 42% of its book value. This seems ridiculously cheap. I will update the report for Melcor tomorrow.

Royal bank’s Q4 earnings topped expectations and they are optimistic about growth in 2019.

There are lots of things to mention tonight.

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

CRH Medical was up 6.9%. The company did not release any news and there was no new insider buying. Therefore, the reason could be an analyst comemnt or upgrade.

Linamar got smacked down 5.2%. Probably a delayed reaction to the GM news. I don’t know if GM’s news has any material impact on Linamar… but I guess it is safe to say it is not good news and that I suppose was reason to push Linamar down even further.

Bank of Nova Scotia (not on our list) kicked off the 2018 fiscal year end and Q4 earnings season for Canadian banks. Apparently its earnings were about as expected as the stock ended the day virtually unchanged. Bank of Nova Scotia is selling operations some in none “non-core” Caribbean countries while retaining core business in that part of the world. I have always been a bit suspicious of why the Canadian banks have so many branches in the Caribbean. To the extent they simply provide banking there, that’s fine. But I tend to think that a certain amount of it relates to Canadian individuals and corporations hiding money. If so, that is something that they should all probably divest. I believe Royal Bank has also divested some in that area as well.

The Canadian Western Bank rate reset preferred share on our list, which pays $1.10 annually, 1.26 for a yield of was down 2.8% to $21.91 to yield 5.0%. But if the five year Canada bond remains at its current level of 2.29% then it would reset, five months from now on April 30, to pay $1.26 5.04% of $25 for a yield of 5.75% at $21.91. In a recent update I rated it (lower) Sell at $24.57 because Bank of Montreal which would be deemed safer has issued one in September at 4.85%. (Why own CWB at the then 5.05% when you could get the larger BMO issue at not much of a lower yield? Strangely though the CWB rate rest share then rose briefly over $25 before falling back. Basically it would appear that at lest for CWB, the market is pricing in more risk. Simply demanding a higher yield. Not because of interest rate increases (which this share will float up with in four months) but because of simply market participants bidding the price down and effectively demanding a higher return a higher spread over the government rate to hold this share. The same higher risk premium may be affecting the rate reset pref shares of the larger banks, but not to the same extent as CWB and probably most issuers other than the big banks. Risk on, as BNN is fond of saying.

After the close, Alimentation Couche-Tard reported its Q2 results. BNN headlines suggest they exceeded expectations. 84 cents adjusted versus 82 cents expected. Adjusted earnings per share were up only 5%. But because they enjoyed very high gasoline margins last year in Q2, there would have been an expectation for lower gasoline margins this quarter. They did come in lower, but still pretty high. Meanwhile the all important merchandise same-store sales probably very much exceeded expectations at 4.4% growth in the U.S., 4.6% in Europe and 5.1% in Canada. Overall, given the negative mood of markets lately, I don’t know if this will be enough to move the stock higher. Hopefully it can at least hold its own in a period where stock prices are mostly on the decline.

For those interested in Global ETFs, I have updated the P/E ratios and other data on a list of Global ETFs. South Korea looks particularly attractive. In general, most of the P/E ratios are lower and looking more attractive.

I have also updated the article on the valuation of the S&P 500. It looks a bit expensive on conservative assumptions.

Our report on the Melcor REIT is updated. Based on its 9.0% yield and the fact that it is trading at 67% of book value, and supported by recent insider buying, it is rated Buy. But at the same time its distributable cash per unit has declined in 2018 due to a combination of moderately higher vacancies, lower rents on renewal and new leases and higher tenant incentives – all due to the recession conditions and office space excess in Alberta. About half its cash flow comes from mostly newer retail properties and those have fared much better. It is another investment that looks cheap but where there are no guarantees it won’t get cheaper.

On Monday, the S&P 500 was up 1.5% while Toronto was about unchanged.

Boston Pizza Royalties recovered 4.6% after it announced it will initiate unit buy-backs. I was a bit surprised by that because it has already taken on a material amount of debt over the years to buy back units. The economics of the buy backs work well as it can borrow money at a substantially lower rate than the distribution yield that it saves after the buy backs. And, its credit line for the purpose of buybacks had already been just about maxed out. Perhaps for thiose reasons, it only asked for and obtained permission to buy back 0.5% of its units or 115,000 units. This is a very tiny amount considering that the daily average volume is 33,00 units. They can purchase a maximum of 8,164 units per day. At that rate they could complete the buyback plan in 14 trading days. This action seems directionally good, but is so small that it seems more symbolic than substantive.

Given the low price I added to my position today.

Amazon was up 5.3%

AutoCanada was down 3.6%.

Couche-Tard will report its Q2 tomorrow, after the close. I would expect its U.S. same-store merchandise sales to be good given the economy there. U.S. gasoline margins tend to be volatile. Fuel margins were unusually high in Q2 last year so that is going to be a headwind. Currency is also a headwind as it reports in U.S. dollars. Another headwind would be damage and business interruption from recent hurricanes. The tailwind will be its growth and synergies. Overall, I am not that confident that the results will be viewed positively especially given that the stock has done well lately compared to the market. The market is apparently expecting a strong quarter.

On Friday, the S&P 500 was down 0.7% and Toronto was down 0.5%.

BHP Billiton was down 4.0% which may have been linked to lower oil prices.

Canadian Western Bank got pushed down 5.8% to $27.89. This was no-doubt due to the current gloom in the west about oil prices. CWB is expected to report good results for its Q4 that ended October 30. But the focus will be on its outlook for growth and for credit losses. It is now trading only 8% above its last reported book value per share ($25.77). It would seem logical for the Bank to begin buying back some shares at this level. It has a plan in place that allows it to buy back shares. But it has a history of seldom or never actually using the approved plan to buy back any shares.

Boston Pizza Royalty Income Fund declined 2.6%. See update below.

Linamar was up 3.4%

Alimentation Couche-Tard earnings preview:

This company will report its Q2 earnings after the close on Tuesday. Generally its earnings rise most quarters due to recent acquisitions and synergies. However volatile and unpredictable gasoline margins can cause earnings to rise even further or to decline in any given quarter. In addition the stock price tends to react positively or negatively to increases/ decreases in same-store merchandise sales. Therefore even when earnings rise, as expected, the stock can fall. With the market declines of late it would certainly not be a surprise if Couche-Tard falls after reporting earnings unless its report is very strong. Couche-Tard has risen during November, which means that analysts are expecting a strong report.

Our report for Boston Pizza Royalties Income Fund is updated and rated (higher) Buy at $15.53 (It closed today at $15.13 to yield 9.1%).

These units have been falling in price. Presumably, the market is now expecting a distribution cut. I believe a distribution cut of 5 to 10% is a possibility although BP will likely try to avoid that and will try to maintain its distribution.  Same-store sales have declined modestly over the past four quarters (about 0.4% on average). In addition higher income taxes, higher interest rates and other factors have caused distributable cash flow per unit to decline about 4% per quarter over the past four quarters. The fund targets a payout ratio of about 100% but it is now paying out 103.4% of trailing distributable cash per unit. BP needs to resume growth in distributable cash per unit which would be driven by a return to growth in same-store sales. If BP forecasts that this is unlikely to occur relatively soon then it will likely have to cut the distribution. But a cut of just 5% to 10% would bring the payout ratio below 100%. And the units would still have a very attractive yield.

Unless the BP restaurants are going to go into a major slide with noticeably slumping sales per store and with closures exceeding new openings, these units at this price are likely to be a very good investment over time.

BP began 2018 with 391 locations. It expects to open 9 to 11 new locations in 2018 and to close 5.

I added to my position in these units today.

On Thursday, the U.S. stock markets were closed while Toronto was about unchanged.

There were no particularly note worthy moves in the Canadian stocks on our list.

Boston Pizza is down to $15.53 yielding 8.9%. Rising interest rates would not seem to explain very much of the decline. After all, the rate on a 10 year Canadian government bond is still only 2.35%. Presumably, the market fears a distribution cut here due to recent declines in same store sales.

Today, Statistics Canada released data on sales at Food Services and drinking places for September. For the full service restaurant category the gain in Canada for September versus the prior year was 5.4%. Ontario was 6.1% and Alberta was 2.1%.

Boston Pizza had reported same-store sales down 0.2% for Q3 and down 0.4% year to date. It certainly appears that they are under performing the market somewhat. In order to maintain and not cut the distribution they don’t need much same-store growth. But they need some. The trailing year payout ratio is 103.4%. They need some growth (or a distribution cut) to get that down to or under 100.0%. They have a modest amount of cash that allows them to run at over 100% temporarily. But unless they see (or forecast) same store growth resuming then they eventually have to cut. The latest added gloom in Alberta will not help matters. I can’t say how likely a cut is. Any cut should be quite modest. And I think they will try hard to avoid a cut.

I will soon update BP for its Q3 results and will include taking a look at its debt and whether rising interest rates might contribute to the risk of a distribution cut. Its interest rate is locked in for 2019 but after that will presumably rise. In the past the fund has borrowed money to repurchase shares. The economics are good on that at the current unit price but it might be considered too risky.

The numbers of people collecting Employment Insurance benefits declined in September across the Country. In part due to an improved economy. But especially in Alberta it was partly due to expiry of special extended benefits.

The low oil prices are of course the big topic of conversation in Alberta. But rail is ramping up rapidly. There are several proposals to ship bitumen in solid form which could use coal cars. The solid bitumen could then be shipped to Asia in container ships or bulk carriers. The huge price spreads create a huge arbitrage opportunity and there are people looking to take advantage. Justin Trudeau bravely came to Calgary to speak but basically had absolutely nothing new to say about how to get oil moving.

Wednesday was another interesting day in the market.

The S&P 500 was about unchanged. But Toronto was up 1.5% and almost all the stocks on our list were higher.

CN Rail was up 3.0%.

Constellation Software was up 3.1%.

TFI International was up 2.5%.

Royal Bank was up 2.4%.

Toll Brothers was up 2.8% as U.S. existing home sales rose in October (versus September, and presumably seasonally adjusted) after six months of declines. It seems that U.S. home sale figures are actually quite healthy but the home builder stocks have gone down considerably because the housing market is less healthy than it was six months ago and there are fears about the impact of higher interest rates.

U.S. markets will be closed on Thursday for Thanksgiving and I believe open only a half day on Friday.

The report for WSP Global is updated and rated Buy at $64.18. It’s not cheap but if it keeps growing like it has been it will do well.

WSP Global is fairly similar to Stantec in that both are consulting engineering companies that have grown by acquisition.

WSP’s track record is remarkable in that its management decided to grow extremely aggressively. In 2016, when it was called Genivar and had 5000 employee it decided to acquire U.K. based WSP with 9000 employees. To some degree this may have been a sort of arbitrage. I believe European stocks were still cheap in 2012 while North American stocks had made a good recovery from the financial crisis. Furthermore I believe Genivar (as it then was) was probably trading at a relatively high multiple to earnings supported in good part by its very high dividend payout ratio (fairly high dividend yield). Genivar issued shares in Canada probably at a relatively high multiple and used the cash to buy WSP presumably trading at a lower multiple. Genivar actually paid a premium of 67% of the trading price of WSP and yet it was still not paying too high a multiple for WSP.

Stantec has also been a highly successful growth by acquisition company. But they went at it in a somewhat less aggressive or less audacious fashion. Stantec, until recently, stuck to North American acquisitions. When it acquired MWH in 2016 it became global but MWH was a U.S. company. I believe it was also a private company that did not trade on a stock exchange. Stantec ran into trouble because MWH was not a pure-play consulting company but instead had a riskier construction services division which became a big drag on earnings in 2017 and 2018 – but which Stantec has now divested.

I always said that Stantec’s management deserved great credit for their growth-by-acquisition strategy. Any number of other engineering companies could have gone public and done this but very few even tried.

But it appears that Genivar (now WSP) did it as well and with their aggressive approach they are now bigger than Stantec (and far more global). And so far they do not seem to have run into much trouble by growing so fast and so far afield. I truly believe that their management deserves great credit for their ambitions and their skills in doing this.

Stantec’s history as a public company goes back to 1994. Genivar (now WSP) went public in 2006. Since 2006, Genivar / WSP has been the better investment.

At this time I would still be partial to Stantec given its lower multiple and that it has now (almost completely) put its recent construction services woes behind it. It might be wise to own some of each.

Tuesday was a non-bring day in the markets.

The S&P 500 was down 1.8% and Toronto was down 1.3%.

Almost all the stocks on our list were down. But the three exceptions were stocks I mention a lot.

Toll Brothers was up 2.0%.

Linamar was up 0.8%

And AutoCanada managed a 0.5% gain.

Some of the notable decliners included:

CN rail down 4.1%.

Berkshire Hathaway down 3.3%

Costco down 4.1%.

For those with cash and looking for yield, I believe there are many opportunities.

The Enbridge rate reset pref share on our list is down to $17.91 to yield 6.1% and it will reset a year from now and at its current price would yield 6.8% if the Government of Canada five year bond remains at its present 2.28%. I don’t think there is much danger that Enbridge will ever stop paying the dividend here.

Boston Pizza Royalties has slipped to $15.67 to yield 8.8%. Certainly, the oil price situation in Alberta and other factors could mean that its same-store sales drop or certainly do not rise. In that case at some point it would have to cut the distribution. But unless there is a drastic decline in same store sales that should be a small cut to the distribution. And BP will likely try hard to avoid any cut.

Also on Tuesday, the Canadian dollar fell about 0.75 U.S. cents so The wholesale rate to buy a U.S. dollar is now about $1.33 Canadian. So expect to pay about 1.35 at the bank to pick up some U.S. cash. And expect to pay maybe as much as $1.37 if you make a U.S. purchase on most Canadian dollar credit cards.

And the price of West Texas Intermediate oil fell 7%.

Monday’s action saw the S&P 500 down 1.7% and Toronto down 0.6%.

Canadian Western Bank had a notable decline of 2.7% to $29.91. Book value per share is $25.77 (end of Q3 and will almost certainly be higher when it reports Q4 in early December). Return on book value has been running at about 12% It has not had a loss in even a single quarter in over 25 years. But the market is probably worried about bad debt given the low oil prices. Canadian Western Bank has basically no direct exposure to oil and gas producers but it certainly has exposure to companies that depend on the energy patch for their revenue. CWB has had a great history of avoiding much in the way of bad loans. It will probably continue that way but of course there is always a risk.

Toll Brothers was up 2.2%.

• “Sentiment among home builders dropped 8 points in November to 60 in the National Association of Home Builders/Wells Fargo Housing Market Index.
• The reading was the lowest reading since August of 2016, but anything above 50 is still considered positive.”

Amazon was down 5.1% to $1512.

CRH Medical was down 3.8%.

Visa Inc. was down 3.9%.

Melcor was down 3.9% giving back Friday’s gain.

AutoCanada was up 5.0%.

After the close, Canadian Tire announced a share offering for the Canadian Tire REIT whereby Canadian Tire Corporation will sell $200 million in shares and reduce its ownership of the CT REIT to 76.3% a reduction of 7.4 percentage points and the REIT will sell an additional $65 million. As I write this the offer is shown as still being open on TD Direct. This may mean it is not selling out very fast. I put in an order for a few shares.

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

Melcor Developments was up 4.0%. The company continues to buy back each day the small amount of shares that it is allowed to which is just 1262 shares per day. They are also allowed to add to that with certain block trades but that has not yet occurred.

Dollarama was up 2.2%.

AutoCanada was up 2.2% and I notice there has been a bit of insider buying since it released Q3 numbers. The new CFO who was appointed in late August bought 20,950 shares (about $241k worth) last week at prices from $11.05 to $12.30. He had not previously bought any shares.

The new President (he is not CEO) whose appointment was also announced on August 22  added 8,363 shares at $12.35. He now has a total of 39,097 shares worth about $435k. Some of these are in the name of his family members presumably his wife (4885 shares)  and son (773 shares),

These latest purchases are consistent with my theory that the new management is confident that they can make a material amount of money through share price increases as they turn the company around. They were awarded stock options. But in addition executives and some directors have purchased material amounts of shares with own money. They appear to have substantial incentive to turn things around.

See post below for an update on Stantec. The next update will likely be WSP Global which is in the same line of business as Stantec.

Stantec is updated and rated (lower) Buy at $31.01.

I was tempted to rate it higher due to a potential turn-around in 20019 but the numbers don’t support that just yet.

The story of Stantec is that it has been a successful growth-by-acquisition company for many years. As is often the case, the stock price did not always track the earnings per share progress.

The stock price had reached a then high in 2007. The stock then fell with the financial crisis and then bumped along and did not surpass the 2007 high until 2012. The price then rose rapidly until 2014. The price then fell with the energy recession conditions in Alberta. Since 2016 earnings and the stock price have been hampered by problems in its Construction Services division which it acquired in mid-2016 and which was known to be a riskier operation. Stantec also has reported increased price competition in its core consulting business as well as project execution difficulties.

Now, Stantec has sold the problematic Construction services division (at a loss) in early Q4. This should lead to strong earnings growth in 2019, certainly on a GAAP basis and probably also on an adjusted earnings basis.

I had expected a material increase in earnings per share due to the acquisition of MWH in 2016 which was a very large acquisition. Clearly the Construction Services division is a large part of the reason that the expected earnings growth did not happen. It may be too, that the remainder of the MWH acquisition has been difficult to integrate or not as profitable. Or it may be that the profits from MWH will begin to show up more strongly in 2019.

Meanwhile Stantec is in a cyclic business and the recent lower oil prices, especially in Alberta, are a headwind.

There has been some insider buying as recently as this past week which is a positive indicator.

Overall, there are always uncertainties. Stantec may be about to achieve strong earnings per share growth after four years of difficulties. Certainly if it can achieve the 15% annual revenue growth that ti targets the stock price should do well.

Its financial picture may look brighter when it reports its Q4 numbers early next year because the losses in Consulting Services will then be classified as discontinued operations and the achieved 2018 profit of its ongoing businesses will be more visible.

On Thursday, the S&P 500 was up 1.1% while Toronto was up 0.1%.

Stocks on the rise included: Visa, up 1.9%, American Express up 1.7%, Linamar up 1.7%.

Stocks on the decline included: CRH Medical down 4.2%, AutoCanada down 1.9%, Dollarama down 2.7%, Walmart down 2.0%, Couche-Tard down 1.9%.

And Toll Brothers was down 5.9% after aother home builder, KB Homes reduced its forecasts.

Toll Brothers has a large operation in California. I don’t know if builds in areas that could be threatened by fires. But in any case, it seems likely that the current fires would be slowing sales at this point. U.S. housing starts have slowed in recent months. There is some debate as to whether there is an over- or under-supply of new homes in the U.S. Higher mortgage rates are slowing the market. Toll Brothers will report its October 30 fiscal year end results on December 5. At that time we will know more about how mortgage rates and the softer market is affecting Toll Brothers specifically. They already have contracts in place which locks in their revenue for most of the next year.

Checking the Case Shiller index of existing home prices had flattened out as August after years of steady gains.

There is a softening in the market and mortgage applications are down. But Toll Brothers share price as well as those of other home builders seem to have declined very much disproportionately to the softening.

Canadian Tire is updated and rated (higher) Buy at $152.70. The stock has fallen in the past week even thought the company reported strong earnings growth in in Q3.

On Wednesday, the S&P 500 was down 0.8% while Toronto was about flat.

AutoCanada fell 12.3% to $11.09 giving back a good portion of its recent gains. Unfortunately, there may be nothing to support the share price unless and until it able to post improved earnings which is expected to do by Q1 2019. New management owns substantial shares and is in it to win and has a lot at stake so they will certainly be trying hard.

TFI International was down 2.9%. It’s latest numbers were great but it’s hard for any company to fight the tide of a weak stock market.

CRH Medical was up 3.6%.

Meanwhile, Warren Buffett has been putting money to work taking advantage of lower share prices.

The drop in the price of West Texas Oil along with continued wide discounts on Alberta oil do not bode well for the Alberta economy unless something changes.

In downtown Edmonton there is nevertheless a LOT of building going on. Near the new downtown arena that opened in 2016 Edmonton’s two tallest buildings (office and condos) are nearing completion. One will be the headquarters for Stantec. Very nearby a condo development appears to be going ahead though they are still working at ground level at this point. Not far away a mid-rise condo building is taking shape. Lots of other buildings have been added in downtown Edmonton in recent years. Most of these likely committed to before the oil price decline of 2014.

But there is also a lot of new but vacant retail space downtown very close to these new buildings. Some space has been available for lease for several years. Downtown Edmonton has improved a lot in recent years but there remains a few derelict buildings in the very heart of downtown on Jasper Avenue. This is very close to where Canadian Western Bank and Melcor Developments are headquartered.

The Alberta economic dashboard is showing mostly improved numbers. But some of the formerly improved numbers have turned negative.

On Tuesday, the S&P 500 was down 0.15% and Toronto was down 0.2%.

AutoCanada rose 11.4% to $12.65. But it is likely to continue to be quite volatile until and unless it can book some solid improvements in 2019. See update below.

TFI International was up 4.2%. Dollarama was down 2.5%. CRH Medical was down 3.9%.

West Texas crude has plunged to U.S. $55.50 and the Alberta heavy oil “Canadian Select” is under $18 U.S. At least one large oil sands producer (Cenovus) is actually calling on the government to impose production cuts on the industry. Wow, this in an industry that prides itself on being free market. First, Cenovus publicly begged its competitors to cut production. Now it wants “Mom” (the government) to mandate it. Sad. 

The latest pipeline delays and oil price drop are rather ugly indeed for Alberta. Unless this latest oil price drop proves to be temporary, the industry will start to contract and lay off workers. 

The report for AutoCanada is updated and rated Speculative Buy at $12.45. The future of this investment is heavily dependent on the abilities of the new management team that took over in July. They have made a number of changes and they seem to have credible plans for big improvements starting by January 1. 

The stock has had welcome bounce since reporting (terrible) Q3 results last week. Unfortunately, the stock could easily sink back down since it is going to take four to six months before it can possibly report a recovery in profits.

The Q3 report and conference call revealed their plans for improving things. It also revealed even more evidence that their acquisition (by the former management) of dealers in the Chicago area was a horrible mistake. It was apparently totally botched as they paid too much and these dealerships apparently are not even breaking even on an operating income basis. Half of their directors left soon after that acquisition. It’s not clear if they left in protest of a dumb acquisition or were they forced out because they agreed with it?

Monday was a government holiday, but the markets were open. The S&P 500 was down a hefty 2.0% and Toronto was down 0.8%.

Amazon was down 4.4%. Visa was down 2.9%. Stantec was down 3.4%. Canadian Tie was down 2.85%.

AutoCanada managed a gain of 2.1%. 

2018 has been a tough year in the Canadian stock market. The saving grace is that lower stock prices do provide buying opportunities for those putting in new money or who can at least invest dividends and other income that flows into their portfolio.

The next update will be for AutoCanada and then likely Stantec.

On Friday, the S&P 500 was down 0.9% and Toronto was down 0.5%.

Stantec was down 6.5% in what seems to be a delayed negative reaction to its earnings release of Thursday morning.

Linamar was down 3.2% in further negative reaction to its earnings release. See update below.

Canadian Western Bank was down 4.0%. Possibly, this was in reaction to news that TransCanada’s Keystone XL pipeline construction has been blocked in the U.S. This is negative news for Alberta and perhaps the market is concerned about the potential impact on CWB’s growth and loan losses. The Canadian Banks will be reporting their 2018 fiscal numbers in a few weeks. I expect those numbers to be strong but the market will focus on the outlook.

TFI International rose 2.5%, bucking the downward trend in most stocks.

AutoCanada rose 13.2% to $11.13 despite posting a loss in Q3. The stock had opened down 10% to $9.00 but recovered sharply later in the day, perhaps in response to the conference call. On the call management expressed strong confidence in their various plans to improve profits by Q1 2019.

Linamar is updated and rated (higher) Strong Buy at $48.21. This is primarily based on its low price to earnings ratio of 5.4 times and low price to book value combines with management’s optimism that earnings will continue to grow. There are never any guarantees but this looks to me like a very attractive investment at this price.

On Thursday, the S&P 500 was down 0.25%, giving back a bit of yesterday’s gains. Toronto was down 0.1%.

Melcor was down 4.3% to $13.40. That puts it at 44% of book value. Unfortunately, the wait for a recovery here continues. CMHC reported today that single family housing starts were down 30% in Alberta this October versus October of 2017. So that does not bode well for Q4 although, I don’t know the timing between lot sales to home builders and actual housing starts. Q4 is normally Melcor’s biggest quarter for lot sales. Q4 2017 was a strong quarter and so it seems likely that earnings will be lower in Q4 ’18. But they will almost certainly still be positive. Melcor bought additional land in Q3 which is an indication of their confidence. Melcor is a conservative company with a strong balance sheet. Melcor also bought 2 office buildings in Glendale Arizona as they continue to diversify. 

Toll Brothers was down 3.15%. In general, the markets have bid down the price of home building related stocks.

TFI International was down 3.7% to $43.69 but remains up 32% this year to date.

Linamar got crushed down 7.3% today to $49.79 after reporting a modest rise in profits in Q3. The stock trades at 5.5 times trailing earnings which would suggest an expectation that profits will decline. Yet the CEO is quite optimistic that earnings will once again improve in 2019. It occurs to me that because Linamar has not issued any shares in at least ten years and because it mostly borrows from banks rather than issuing bonds, the analyst community (who mostly work for the investment banks that earn fees when companies issue shares and bonds) owes it (and does it) no favors. 

Meanwhile, Canadian Tire was up 10.8% after reporting earnings and raising its dividend.

After the close, AutoCanada reported earnings. Its sales figures showed a small improvement but it posted a loss due to increased expenses. The company updated its turn around plans and is optimistic about improvements in 2019 despite expectations of a weak auto market.

Wednesday, in response to the results of the mid-term elections, the S&P 500 was up 2.2% while Toronto rose 0.5%.

Among the many gainers were:
CRH Medical up 8.4% 
Amazon, up 6.9%
Starbucks up another 3.3%
Visa, up 2.8%

And Canadian Western Bank was up 3.2% despite West Texas oil being down to $61.60. This may have been in response to an announcement by Imperial Oil that it will do yet another Bitumen extraction project. The $2.6 billion project would begin production in 2022. Presumably, Imperial Oil believes pipeline expansions will be in place by then. 

Linamar was one of the few stocks declining ans was down 2.0%. After hours it released Q3 results which included sales up 18.6% and earnings per share up 5.6%. The stock certainly seems under-valued. We shall see how the analyst community digests the latest results.

Also after the close, Costco released strong same-store sales growth figures.

On Tuesday, the S&P 500 was up 0.7% as U.S. markets await the election results. Toronto was up 0.5%.

TFI International was up 3.6%. Starbucks was up another 2.4% 

Melcor Developments released earnings after the close that were very similar to year ago levels although slightly lower. It did sell 335 lots in the quarter compared to 320 last year but more of the lots this were joint venture and the average price per lot was down 2.2% which may have been due to a different mix of lots or may have been due to some weakness in the market. Lot sales were down in Edmonton and Calgary but there was a very large increase in lots sold in Red Deer. The surge in Red Deer sales was likely due to having more lots available for sale there as opposed to any surge in demand. Overall, the earnings report was good and should provide support for he stock price which is at less than half of book value. But it is Q4 that is the biggest seasonal quarter and the market (such as there is one in this very thinly traded stock) may be fearful of a slower Q4. With the Alberta economic recovery having faltered somewhat lately and with the new home market softening  it will be difficult (perhaps very difficult) for Melcor to match last years’s Q4. But the (low) stock price may already be fully reflecting that expectation. 

Statistics Canad reported building permits for September which were up 0.4% versus August.  But digging into the details I calculate that September was down 7% year over year. And when it comes to single family home permits the report indicated:  “The value of building permits for single-family dwellings was down 1.2% to $2.2 billion in September, the fourth consecutive monthly decrease. Four provinces reported declines, most notably Ontario and Alberta.” For Alberta the non-seasonally adjusted single family number was down 20% in September versus August but the number for September 2017 was not provided.

On Monday, the S&P 500 and Toronto were each up about 0.6%.

Berkshire Hathaway surged 4.7%, Toll Brothers was up 2.4%, TFI International was up 2.1%, Costco was up 1.9% and Canadian Western Bank was up 1.8%. Most stocks were up but Linamar was down 1.8%.

The Governor of the Bank of Canada has made it even more clear that he intends to move interest rates higher. The Bank’s overnight policy rate which he has already increased from lows of 0.50% to a present 1.75% is expected to move to a neutral (non-stimulative) level of between 2.5% to 3.5%. Higher interest rates act as a gravitational force on stock prices. Actual and/or expected earnings growth is a buoyancy force but will be hard-pressed to overcome this gravitational force in many cases.

Lowe’s is closing 31 of its 630 Canadian stores. These are mostly or perhaps all small stores under the Rona and other brand names that they purchased in 2016. I did not see any indication that any of the newer large stores under the Lowe’s brand name would close. This looks more like a continuation of past trends of small stores losing out to much larger stores than any failing of the Canadian economy.

The news that a large Potash mine in New Brunswick that was more or less mothballed in 2016 is to be permanently shutdown is unfortunate. I mentioned this back on January 21, 2016 as a failure of both competition regulation and of the executives involved. The mine is owned by Nutrien which was formed after Agrium merged with Potash Corporation of Saskatchewan I said then:

“The news of the Potash mine closure in New Brunswick is troubling for several reasons. One, is that Potash [Corporation of Saskatchewan] appears to have significant market power and even belongs to a price-fixing cartel called CANPOTEX. Potash may be favoring its Saskatchewan operations and I wonder why one company was allowed to have so much market power. Second, this New Brunswick mine is very new and Potash invested $2.2 billion in it and who knows what government assistance was provided. Meanwhile, executives were no doubt paid millions to make the decision to invest in that mine. Presumably they were caught off guard by the commodity price decline. No one can be expected to accurately predict the future. Nevertheless, it appears a huge mistake was made here. New Brunswick and the employees will suffer greatly. Shareholder money has been wasted. But what price will the executives pay?” 

Subsequent to that, the two and only large Potash producers in Canada were inexplicably allowed to merge by what is supposed to be the Canadian competition watchdog. I mentioned my skepticism that the deal would be approved back on August 30 and September 12 2016. But the deal, which clearly decreased competition in the Potash market was nevertheless approved. Well, at least the two major producers would no longer need fear being accused of collusion on prices after the merger since there would be basically no one left to collude with in Canada.

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

Starbucks was up 9.7% to $64.32 after releasing Q3 earnings and sales figures. This high-quality company was added to our list on August 25 rated Buy at $52.75. 
Linamar was up 3.4%.
Couche-Tard was up 2.0%.

But CRH Medical was down 4.3%, TFI International was down 2.4% and AutoCanada was down 3.0% and Toll Brothers was down 2.3%.

On Friday Statistics Canada released the October labor force survey. Overall, employment was little changed. But the unemployment rate was up from 7.0 to 7.3% in Alberta and this unemployment rate in Alberta has been increasing since May driven by more men looking for work.

(This post was made on November 1, but inadvertently, was not uploaded until November 3) On Thursday, the S&P 500 was up 1.1% and Toronto was up 0.8%.

BHP Billiton was up 5.0% after it released details on a special dividend and a stock buy-back plan. The exact amount of the dividend per share will be released later but it will distribute $5.2 billion dollars which I calculate will amount to an extra one-time cash yield of 4.0%. The $5.2 billion stock buy back will buy back shares “off-market” at a discount of 10 to 14%. BHP explained that under Australian income tax rules, certain Australian share owners with capital gains on the shares will net more after tax dollars by selling at this discount than they would by selling at the market price.

In any case, it has never been my view that share buys backs are automatically a good thing. After all, while it reduces the share count it also reduces cash and the book value of the company. BHP is a speculative investment because its results are always dependent on commodity prices.

Dollarama was up 4.1%, largely shaking off the Short Seller report of yesterday.

Amazon was up 4.2%.

AutoCanada was up 5.1%. AutoCanada will release earnings one week from today, after the close. 

The Melcor REIT was down 1.5% in response to its earnings report. 

CRH Medical was up 7.6% as its earnings report was well received.

Our report for FedEx is updated and rated Buy at $222. The stock is down 11% this year to date. That’s in spite of sharply higher earnings per share. Growth in volume of packages moves has been strong and it has also increased prices charged. The lower price provides a buying opportunity. This is a company that seems sure to be around and to be larger 10 and 20 years from now. So, it is a good candidate for a long-term buy and hold.

CRH Medical posted Q3 results after the close. In general the results looked positive with higher adjusted EBITDA attributable to owners ( a good portion is attributable to minority interests) but lower net income attributable to owners. Given the complexities in the financials of this company it’s hard to say how the market will react but I would guess moderately positively. But it does look the actual earnings per share at 0.4 cents per share were lower than the analyst-expected 2 cents. The market reaction will depend on how the results compared overall to expectations (revenue, EBITDA and other line items) and what is said about outlook.

The Melcor REIT released earnings after the close. The bad news is that adjusted Funds From Operations per unit were down 13% in Q3 and 8% year to date. Furthermore, the payout ratio as percent of this AFFO has risen to 105% in Q3 and 99% year to date. 

Now at least some of the Q3 decline would have been fully expected, and in part was due to the sale of two buildings where the funds have not yet been redeployed, but also partly due to 7% lower same-property net operating income. The decline in AFFO is arguably already “priced-in” with the units trading at 72% of book value and yielding 8.35%.

The occupancy rate is 90.3% and the company indicted good progress is leasing space.

As interest rates rise, all REITs are at risk for mark-to-market non-cash (but nevertheless real) losses in asset values. The REIT reported mark-to-market losses of $1.8 million. That seems quite minor in relation to assets of $721 million.

Based on this I would expect the parent Melcor Development Inc. to post only minor mark-to-market asset fair value losses in Q3 which in fact should be partly or even fully offset by sort of “sweat-equity” market value gains on two new restaurant buildings that were occupied in Q3 (unless the gains on these buildings have already been booked).

The Melcor REIT will host a conference call on Thursday morning at 11 am eastern.

So, Halloween was anything but scary in the markets.

On Wednesday, the S&P 500 rose (or recovered) 1.1% while Toronto was up 0.9%.

Notable winners included:
Amazon, up 4.4%
Visa, up 3.8%
TFI International, up 2.3%
CRH Medical, up 4.1%

Dollarama was a notable decliner, down 5.3% after a strong sell recommendation by what is probably a short-seller. I have no issue with short-sellers as long as they are giving their honest opinion. To me, it’s just the opposite side of bullish reports so often issued by various parties that have a vested interest in a stock going up. No one is required to sell when a stock declines due to a short-seller report and if they are wrong, the stock will recover.

The Short sellers made several points about Dollarama and I will address the main ones below:

Dollarama has abandoned its roots as a true dollar store: That’s true but Dollarama has been introducing higher points for years. Possibly they have gone too far with the $4.00 price point but prices higher than a dollar have been in place since I believe before the IPO. But maybe it is starting to annoy customers.

Costs are rising and there is going to be more competition and lower profit margins: Well time will tell. Dollarama has had incredibly juicy profit margins for years, at least ten years. In theory others should have moved in on the action. I often wondered why Walmart could not have been a formidable competitor by having dollar sections in their stores. Or why Zellers did not become giant dollar stores. So far, Dollarama has remained extremely profitable and appears to be the best-managed Dollar store chain in Canada and quite possibly has been better managed than the U.S. chains.

Accounting issues: The short-seller mentions profits on foreign exchange hedging. That certainly sounds like it would have been a temporary thing. They also rented some space from the founding family and then I believe recently bought some property from the founding family. Well, so far  investors have done extremely well by this family. I too had noted the odd situation in which Dollarama has paid out more than all of its retained earnings and invested capital mostly in share buy backs. I have wondered for years if they were paying too high a price in share buy-backs. Well, until recently the share price just kept rising -driven by profit growth.

Their growth outlook is unrealistic: The short sellers don’t think the store count can grow as fast as Dollarama says. Well, yes it HAS to slow down at some point. Time will tell how much the store count will continue to grow.

Overall: There is no doubt that Dollarama’s earnings growth was going to slow down.  That is mentioned in our Dollarama report. I would not count this stock down for the count. Our last update called it only Weak Buy but now the price is lower and it seems worth considering edging into this position. It’s still not cheap.

Tuesday was a positive day in the markets as the S&P 500 rose 1.6% and Toronto was up 1.2%.

Our big gainer was Toll Brothers which rose 8.75%. Tomorrow will be the last day of its fiscal 2018 and it will report earnings in December. It’s earnings should be good, but the market will concentrate on its outlook.

Couche-Tard was up 2.9%. 

CN Railroad  was up 3.7% after announcing that it will acquire Winnpeg-based trucking company TransX which is currently Canada’s largest privately held transportation company with 3,000 employees, 1500 trucks, 4000 containers and 1000 intermodal containers. 

I believe CN has “always” ran a number of trucks as part of intermodal operations. But my understanding is that this has been a relatively small part of its operations and the resulted were lumped in with rail shipments of intermodal containers. Now, CN appears to be entering the trucking business in a much more series way.

Terms of the deal were not released but I would bet that the deal required a premium price. Presumably TFI International would have been an interested buyer as well but they are disciplined in what they will pay. Also, there may have been more synergies for CN.

On Monday, stocks were initially higher but closed the day with the S&P 500 down 0.7% and Toronto down 1.1%.

Amazon was down 6.3%. (see update below)

Toll Brothers was down 2.5% as was Visa Inc.

CRH Medical was down 3.3% in Toronto and will report earnings after the close on Wednesday. They are facing the lower billing codes imposed at the start of this year but this will be partly offset with growth due to acquisitions made since last year.

Linamar was down 2.7% and will report  earnings a week from Wednesday. Earnings for Q3 may suffer from tariff related costs but I expect their outlook to be good. As of Q2 Linamar management was expressing great optimism. This company has been growing for years and so I don’t see why a small drop in auto sales should prevent them from expecting growth.

Costco managed a gain of 1.9%.

It seems that markets are nervously awaiting the outcome of the mid-term elections.

I do worry that the divisions in the U.S. will lead to further violence. Trump today called much of the media “The Real Enemy of the People”. It is scary to think how his supporters will react and who they will blame if the Republicans do poorly on election day. Much less how they would ever react if Trump is ever charged or impeached. It seems to me that any prominent American speaking out publicly against Trump would have to fear for their own safety. I don’t know if there has ever been a time before this when freedom of speech in America carried such risks. Trump is doing great things for the economy and jobs, but it seems to be coming at a high cost.

Our report for Amazon is updated for Q3 earnings. With the recent slide in its stock price and its recently higher earnings the price / earnings ratio of this stock has come down a lot but is still very high at 86. The company is forecasting slower 10 to 20% year-over-year revenue growth in Q4 and no growth in operating earnings – which is a large part of th e reason for the price decline. While the stock is still expensive this could be an opportunity to edge into this name for those of use who missed the big run-up. In the past the P/E always looked WAY too rich for my taste. But its revenue and earnings growth later justified a high price.

Warren Buffett has praised Jeff Bezoes greatly on many occasions going back many years but never bought the stock. I would not be shocked if he did so now but on the other hand it may still be too rich a price for his tastes.

There is news this evening that IBM is making a big acquisition.

What shocks me about it is the price paid in relation to not only profits but even revenues. Based on this I dearly wish that some of the companies I own and that are on our list would be acquired. Big premiums are not usual in acquisitions.

• IBM announced plans to acquire Red Hat in a deal valued at about $34 billion.
• Prior to the acquisition, Red Hat’s market capitalization stood at approximately $20.5 billion.
• The acquisition is by far IBM’s largest deal ever, and the third-biggest in the history of U.S. tech.

“IBM will pay cash to buy all shares in Red Hat at $190 each. Shares in Red Hat closed at $116.68 on Friday before the deal was announced.”

“The acquisition is by far IBM’s largest deal ever, and the third-biggest in the history of U.S. tech. Excluding the AOL-Time Warner merger, the only larger deals were the $67 billion merger between Dell and EMC in 2016 and JDS Uniphase’s $41 billion acquisition of optical-component supplier SDL in 2000, just as the dot-com bubble was bursting.”

NOTE that Time’s purchase of AOl was a complete disaster so was the JDS Uniphase deal mentioned. I don’t know about the Dell deal.

“The company, which went public at the peak of the dot-com boom in 1999, earned $259 million on revenue of $2.92 billion in its last fiscal year, which ended Feb. 28. Its revenue grew 21% between the 2017 and 2018 fiscal years.”

So, let’s see, IBM is paying 131 times earnings and 11.6 times revenue!!!

This can probably be explained by what Warren Buffett calls excessive Animal Spirits. IBM must have gotten absolutely rabid in its hot pursuit. And I suspect Buffett is glad that he no longer owns much if any IBM shares when they are making this kind of deal!

For most of the companies on our list, I suspect that a large premium would be needed to make an acquisition happen. And if some buyer wanted these companies they probably would be willing to pay the premium needed. Unfortunately there is no sign that any acquisition offers will be made.

But it is comforting to to realise that even as stock prices have gone down, there could be acquirers out there willing to pay big premiums. Hurray for Animal Spirits!

Our report for Constellation Software is updated and rated (lower) Buy at Canadian $871. The price has declined from a high of $1,134 and meanwhile earnings have continued to grow briskly. While the stock is not cheap, this may be an opportunity to start a small position in this excellent company perhaps with a view to adding if it happens to dip further.

On Friday, the S&P 500 was down 1.7% while Toronto declined 0.2%.

Amazon was down 7.8% to $1643. In early September it had briefly reached $2050.

Costco was down 3.6%

On a day when most stocks were down, Toll Brothers gained 3.1% and TFI International gained 2.8%.

Our report for Visa Inc. is updated and rated (lower) Buy at $137.74. Shares in this powerful money maker have looked expensive on a P/E ratio basis for quite a few years. But the subsequent growth has justified the premium valuation. Now, the valuation is still high but has come down a little. A reasonable strategy might be to open a small position with a few to adding to that if the P/E multiple further declines.

Thursday saw a partial rebound from Wednesday’s market declines.

The S&P 500 was up 1.9% but Toronto was up only 0.1%.

Amazon surged 7.1% but then was down 5.3% to $1687 in after-hours trading after it released Q3 earnings. If I had some U.S. cash I would be tempted to grab just a small amount of Amazon at prices under $1700.

Toll Brothers recovered 5.0% to $30.38.

Linamar recovered 5.15% to $54.50.

Visa was up 4.7% after its profit surged (again).

I notice that a CWB insider bought 475 shares yesterday. This makes three insiders that have purchased in October. Normally insiders of CWB are rarely purchasing, so I think they view the stock as under-valued.

After the close, Constellation Software released Q3 earnings showing a another quarter of strong growth – but that was likely as expected.

Royal Bank was out with a new rate reset preferred share paying 4.8% and resetting to the Bank of Canada plus 2.38% in five years. However, back on September 6, Bank of Montreal had done an issue at 4.85%, a spread of 2.69% over the government of Canada five year bond. Here the Royal Bank spread is lower at about 2.40. So, the Royal Bank issue looks less attractive to me especially given yesterday’s increase in the Bank of Canada interest rate. But nevertheless it sold out fairly quickly even as Royal bank increased its size from $300 million to $350 million.

Some, but not all, outstanding rate reset preferred shares will reset above 5.0% if the government of Canada five year bond stays at 2.40% or goes higher. Some rate reset preferred were issued at spreads of closer to only 2% above the Canada five year. Many investors may welcome the opportunity to get close to 5% or even higher on a preferred share that has a very high credit rating.

The existing rate resets have generally not been rising with the recent higher interest rates. But a perpetual preferred would fall. So these resets are pretty much doing their job simply by not declining. The problem is that some of them were issued at very thin spreads over the five year Canada and those one’s may never return to $25. They could do so if the market spread over the five year declines. And perhaps the RBC issue today indicates that is starting to happen. We might see the market yield on the highest quality rate reset shares (The Banks) top out around 5% even if rates rise another 50 basis points. That would mean tighter spreads to the five year Canada and would be very good news to any older rate reset preferred shares (that are trading materially below $25) that are of high quality and have a higher spread. Older rate reset shares that are already at $25 might not benefit since the issuer can redeem them at $25 if their spreads are above market.

On Wednesday, the S&P 500 was down a very hefty 3.1% and Toronto was down 2.5%.

Given a lot of negative sentiment including concern about the outcome of the U.S. mid-term elections and many other international risks, it is certainly possible that markets will continue to decline.

The Bank of Canada, however has a positive view of the economy. It hiked its interest rate to 1.75% today and signaled it wants to get to at least 2.5 as long as the economy remains reasonable strong.

Speaking of the economy, Statistics Canada released Retail sales figures for August which show a strong 6.6% gain versus the prior year and 4.0% gain versus July (but the comparison to July may be misleading as it was not seasonally adjusted).

Most stocks were down today. TFI International fell 7.9% despite its impressive Q3 earnings results.

Toll Brothers fell back under $29 after a report that September new home sales were quite negative.

Fortis Inc. was one of the few gainers and rose 2.45%.

Melcor continues to buy back the modest approximately 1250 shares per day that it is allowed. This is likely being done under their automated program since they are currently in a blackout period awaiting Q3 earnings. It appears their broker was old to buy at prices of $14.00 and under.

Checking insider trading on Canadian Western Bank, I see that an insider bought 1000 shares on October 11 at $32.95 and a further 375 on October 22 at $32.00. Another insider had bought 600 shares at $33.98 on October 1. With the share price now down to $30.76, it might be wise for CWB to buy back some shares.  They have authority in place to do so but based on past behavior they may not do so.

CWB as well as the big banks are likely set (in December) to report another very strong quarter of earnings as their fiscal years end on October 30th. Higher interest rates are generally positive for them unless it leads to loan defaults. But the share prices could continue to be weak if they report weak loan growth in Q4 or forecast that for fiscal 2019.

Our report on CN Rail is updated and rated (lower) Buy at $107.79. It’s an excellent and strong company with a good outlook but is not cheap in relation to earnings.

On Tuesday, the S&P 500 ended the day down 0.55% but had been down over 2% earlier in the day. Toronto closed down 0.8%.

Among the few stocks on the rise were Toll Brothers, up 4.1% and Linamar, up 3.4% and Melcor, up 2.2% and TFI International, up 2.0%.

CN Rail was down 2.9% and then released another good earnings report after the close.

AutoCananda was down 3.6%.

Oil (West Texas) has fallen to about $66 on reports that Saudi Arabia and others will pump more oil to offset the reductions in Iranian oil exports that are expected with the Trump sanctions on that country that are expected to be effective soon.

The U.S. stock market may continue to be volatile at least until the Mid-term elections, now only two weeks away.

The Bank of Canada is expected to increase interest rates tomorrow.

The report for TFI International is updated with a (higher) Buy rating at $44.99.

Amid the gloom of falling stock prices in recent days, it was nice to see this company report an eye-popping 97% increase in adjusted earnings per share in Q3. Year to date adjusted earnings per share are up about 74%.

Their results reflect the strength in the U.S. and also the Canadian economy. They are busy hauling more stuff and also have been able to increase their rates. This is a very well managed company that has really performed over its history. Hitching your wagon to this management has proven to be a good strategy.

One figure in the report really caught my eye. In the less-than-truckload division they show a revenue per week per vehicle of $19,000. That amounts to just shy of one million dollars of revenue per year for each truck in that division. That’s impressive!

On Monday, the S&P 500 and Toronto were each down 0.4%.

Most stocks were down.

But Stantec rose 5.8% as the market continues to react positively to last week’s news that it has reached a deal to sell its problematic construction services division. Possibly there was also other positive news for the sector given that WSP Global rose 3.1%.

Canadian Western Bank was down 4.4% to $31.53. That puts it at 1.22 times book value and at a trailing P/E ratio of 11.4. There has been very little insider trading this year, but one insider did buy 800 shares at $33.98 on October 1. The stock is cheap. But as the market has been demonstrating later, there is no rule that a cheap stock can’t get cheaper.

Toll Brothers fell 3.2% to $29.06 putting it at just a shade under book value and 7.3 times trailing earnings and, according Yahoo Finance, 5.7 times forward earnings.

Melcor Developments was down 2.2% to $13.66. I just noticed that Melcor has finally started buying back some shares. Due to the thin trading they are only allowed to buy back small amounts. They have bought back about 1200 shares each day last week mostly at $14. It’s not much but it is a signal that management is confident in the value and in its cash position.

In news that is relevant to Melcor. Statistics Canada today reported the investment level in new houses updated for August. For Canada there was a decrease of 2.2%, the first year over year decrease since 2014. Lower investments in single family homes accounted for most of the decrease. In Alberta, the single family home invest was down 17% year over year but did rise 2.6% versus July – but that is not a seasonally adjusted number. It can be misleading to read too much into one month of data but this is a negative report.

Given a slower housing market it seems unlikely that Melcor will have a particularly positive earnings report for Q3. But that is hard to predict as there are sometimes profitable sales of commercial land. Melcor looks quite cheap in relation to its asset values. It is also cheap in relation to trailing earnings. But its earnings are lumpy and hard to predict and could certainly fall if home building activity is slower. It also has a 3.7% dividend yield.

Boston Pizza was down 1.2% to $17.01. Statistics Canada reported sales at food service and drinking places for August. Sales at full-service restaurants were about unchanged versus July for Canada. However they were up 5.9% year-over-year. For Alberta there was a decline of 0.8% for August but a 2.5% gain year over year. For Boston Pizza with its heavy concentration in Alberta and with a big exposure to the energy patch areas the numbers may suggest that Boston Pizza will once again in Q3 show no growth in same store sales and possibly a small decline. The unit price already reflects a negative outlook.

After the close TFI International reported another very strong quarter of earnings growth.

The steep decline in the price of Toll Brothers down to about book value is hard to stomach.

Investment banks including Bank of America and RBC analysts have turned negative on the home building sector. Still, the forward P/E ratio is very low at 5.9. It’s hard to believe that the same analysts who are projecting earnings that amount to 17% of the stock price are the same analysts with a negative outlook. But it may be that they expect strong earnings in 2019 followed by far lower earnings in 2020.

But meanwhile the latest survey of home builder sentiment actually edged higher in October.

Everything in its numbers for Toll Brothers looks very positive to me in terms of valuation. It is true that higher interest rates are a negative for home affordability and for the price of any stock. Overall my analysis would continue to suggest a Strong Buy rating for Toll Brothers. But certainty the market has disagreed with that recently.

Toll Brothers will report its Q4 earnings around December 7th. Those earnings are expected to show a strong increase. Based on its existing backlog, I believe an earnings increase for the first two or three quarters of its fiscal 2019 is already pretty much baked into the numbers. But the market will likely focus on how many contracts for new homes it signed in its Q4 (which will hit revenues and earnings about a year later) as well as its comments on outlook.

Our report on American Express is updated for Q3 earnings and rated (higher) Buy at $106.73

On Friday, the S&P 500 was about unchanged while Toronto was up 0.4%.

Stocks on the rise included:
CN Rail, up 1.9%.
Stantec up 3.3% on its pending divestiture of its problematic construction services division.
American Express up 3.8% on its Q3 earnings release
TFI International, up 2.4%

Stocks declining included:
Linamar down 1.5% and Toll Brothers down 4.1% to $30.02.

Toll Brothers fell along with other home builders on a report that existing home sales in the U.S. were weak in September.

“Total existing-home sales which are completed transactions that include single-family homes, townhomes, condominiums and co-ops, fell 3.4 percent from August to a seasonally adjusted rate of 5.15 million in September. Sales are now down 4.1 percent from a year ago (5.37 million in September 2017).”

There was both positive and negative news in the release:

“Total housing inventory at the end of September decreased from 1.91 million in August to 1.88 million existing homes available for sale, and is up from 1.86 million a year ago. Unsold inventory is at a 4.4-month supply at the current sales pace, up from 4.3 last month and 4.2 months a year ago.”

“The median existing-home price for all housing types in September was $258,100, up 4.2 percent from September 2017 ($247,600). September’s price increase marks the 79th straight month of year-over-year gains.”

For one of their largest federal mortgage insurance companies, Freddie Mac, “the average committed interest rate for a 30-year, conventional, fixed-rate mortgage increased to 4.63 percent in September from 4.55 percent in August. The average commitment rate for all of 2017 was 3.99 percent.”

These figures indicate some weakness in the market for existing homes but it does not appear to be major weakness. The market is forward looking and appears to be forecasting a larger decline for home builders.

Meanwhile Toll Brothers reported results have remained very strong and trailing year earnings per share are $3.91 per share with a P/E ratio of 7.5. The book value per share is $29.57 which is close to double the $15.36 level that it bottomed out at seven years ago in 2011 after several years of losses due to the financial crisis and housing price collapse in the U.S.A. Based on its backlog of existing signed contracts to build houses, earnings should climb about 20% in the next year. However, earnings growth will then slow because signed contracts in dollars the most recently reported quarter rose somewhat slower at 12%. And it’s certainly possible that the pace of signed contracts has slowed in the current quarter and could decline going forward.

Management would appear to view the shares as under-valued as it was buying back shares fairly heavily at prices that averaged $47.40 in Q1 of 2018. And Yahoo Finance is not showing any insider sales since January when the price was $52. In previous years insiders had sold fairly regularly.

The bottom line is that Toll Brothers certainly looks cheap to me. But I thought so as well at $44 back on March 2. (Since March 2, earnings are up substantially while the share price is down quite substantially) It is now selling at book value at a time when its earnings are quite high (the trailing ROE is 13.6% and the company was expecting that to hit 16% in its next report). During the financial crisis when it was reporting large losses the price bottomed out at around book value.

Canadian National Raiway Company will report Q3 earnings on Tuesday. I expect another good quarter. CN is up 2.5% this morning after Canadian Pacific reported good results in Q3.

Rail car loadings for Canada are running higher than 2017 in most weeks. Rail car loadings are substantially higher than 2016 and 2015.

Petroleum shipments are up sharply in 2018. Intermodal which represents consumner goods have been running higher than 2017 but were below 2017 in the most recent two weeks which would be the start of Q4. Motor vehicle and parts shipments have been moderately lower than 2017.

These rail car load figures illustrate that the Canadian economy has grown at least modestly in 2018.

Stantec has announced it has reached a deal to sell its problematic MWH Constructors division. This division was acquired in May 2016 as a portion of the acquiistion of MWH Global which included substantial core free-for-service business. The MWH Contructors division has represented about 22% of Stantec’s revenues but was a drag on earnings. The Constructors division took Stantec into a riskier line of business where it took much more risk in terms of cost to complete projects. And these risks have materialized as substantial loses on some projects. The sale will return Stantec to a pure-play fee-for-service business model.

Stantec has not disclosed terms of the deal. Given the division was problematic it seems reasonable to assume it was sold at a loss. That is unfortunate but the move is probably positive for Stantec. The stock has not reacted much, up only 1.8% this morning on a day when most stocks are rising.

It seems reasonable to expect that Stantec will report growth in earnings in Q3 on an adjusted basis but quite likely an earnings decline on a GAAP basis after accounting for the sale.

On Thursday, the S&P 500 was down 1.4% and Toronto was down 0.8%.

Most stocks on our list were down. Heineken was up 2.3% to $78.50.

FedEx was down 2.7% to $217. It is well below its high of $274 and looks attractive.

Canadian Western Bank was down 2.4%. BHP Billiton was down 2.9%. Amazon was down 3.3% to $1771. AutoCanada slumped another 4.0%. CRH Medical was down 6.9%.

Linamar was down another 2.1%.

It appears that the market is pushing down almost all stocks. Whether over-valued or under-valued, and whether earnings are growing or not, most stocks have declined recently.

Meanwhile Q3 earnings reports seem to be coming in strong such as America Express with earnings up 22%.

It remains to be seen on a case by case basis whether the Q3 earnings numbers will come in strong and whether the market will react positively to that.

The U.S. economy continues to be quite strong but the markets seem to be starting to price in fears of recession.

Statistics Canada reported Employment Insurance claims for August and the number of people receiving benefits was down 1.6% versus July. Ontario was about unchanged but the number in Alberta was down 3.7%. This is certainly moving in the right direction.

More impressively, the number of people receiving Employment Insurance benefits in Canada was down 11.7% versus one year ago. Versus last year, Ontario claimants were down 10% and Alberta was down 23%!

Toll Brothers announced that its executive chairman, Robert Toll, age 77 would relinquish that role and become a regular Board member while the CEO would become chair (as well as remaining CEO). I welcome this move given that the company appeared to be effectively paying two CEO-level salaries. Also, I don’t like the notion of executive chair roles since it can lead to confusion as to who is in charge.

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

Starbucks was up 2.3%.

Linamar was down 2.15%. I could not resist adding a little to my position again today.

It was disappointing to see Toll Brothers down 2.6%. This was likely due to a report indicating that U.S. housing starts fell 5.3% in September. However that was blamed on Hurricane Florence which had a temporary impact. I believe Toll Brothers has been doing better than the industry average. It has substantially higher price points than the industry average and its customers are not affected as much by the modest increase in mortgage rates. And, unlike some builders, it has access to ample building lots. Nevertheless the market has pushed its stock down along with the rest of the market. It will release its 2018 fiscal earnings in early December which could be a catalyst to push the price up. It should report strong earnings in Q4 but the market will focus on how many contracts it has signed for houses to be completed in 2019 and its outlook for 2019.

Statistics Canada reported on manufacturing for August which declined 0.4% from July but that came after three months of increases. The decline was due to a higher rate of shut-downs in automotive assembly plants.

Our one mining company, the giant BHP Billiton (market cap about $129 billion U.S.) is updated and rated Speculative Buy. This is an inherently unpredictable company since its earnings can swing massively with commodity price changes. As detailed in the report its biggest product is iron ore at 35% of revenue in its fiscal 2018. Copper was 30%, Coal 21% and petroleum 13%. And petroleum will be lower in 2019 as it is in the process of closing the sale of a significant amount of its petroleum operations.

Given the inherent unpredictability of this commodity company the reason to buy it would be for diversification or perhaps if an investor has a particular interest in the mining sector.

The company has a very strange share structure in that it trades as two legally separate entities in London (BHP Billiton plc which also trades as an American Depository Receipt BBL in New York) and Australia (BHP Billiton Ltd. which also trades as the ADR BHP in New York). The Ltd. and plc companies are managed as one entity  and the shares in the Ltd. and plc shares have equal economic and voting rights. Yet the plc shares traded at a 14% discount in New York as of October 16th. To add to the confusion the ADR represent two Ltd. or plc shares respectively. I have small position in the BBL shares.

BHP Billiton will soon drop the Billiton part of its name. BHP had merged as an equal with Billiton plc in 2001. Billiton was the name of an island in Indonesia where Tin was discovered in 1851 and Billiton plc was founded in 1860. BHP stands for the original name of BHP, the Broken Hill Proprietary Company Limited founded in 1885 and named after the hill (Broken Hill) in remote Australia where a rich deposit of lead and silver had been discovered in 1883.

Tuesday was a very positive day for North American stock markets with the S&P 500 up 2.15% and Toronto was up 1.1%.

Constellation Software was up 6.0%. Amazon was up 3.35%. Visa was up 3.3%, Toll Brothers was up 3.3%. There were quite a few stocks that were up 2% or so.

AutoCanada was down 1.8% to $11.24. 

In the U.S. the ten year Treasury bond yield is 3.16%, up 0.70 percentage points from 2.46% since the start of the year. Shorter term interest rates which are much more under the control of the FED have risen more sharply at 2.19%, up 0.90 percentage points from 1.29%. A 0.90% increase on 1.29% is obviously proportionally a much sharper increase than 0.70% on a base of 2.46%. It is the 10 year rate that has more of an impact on stock prices and mortgage rates. So far, the higher 10 year yield has not had a noticeable impact on stocks. This could be because it remains too low to be much of a  a competitor to stock investing. If the ten year yield keeps rising it will inevitably have an impact dragging stock prices downward. Interest rates are a gravitational force on stock prices. Earnings growth is a buoyancy force. The Trump tax cuts provided a strong buoyancy force this past year.

On Monday, the S&P 500 was down 0.6% while Toronto was about unchanged.

Linamar recovered 3.4%.

Canadian Western Bank recovered 2.0% to $33.72 and trades at 1.30 times book value and, according to Yahoo Finance 12.3 times trailing earnings and 10.4 times forward earnings.

One thing that has been lacking in the companies I own and/or that are on my list is that few to virtually none of them have been taken over including in past years. It would be nice to see some takeover action to pump up share prices.

I have sometimes wondered if CWB should merge with National Bank to form (say) Canadian National Bank. Looking up the numbers, CWB is tiny with a $3.0 billion market cap versus $20 billion for National Bank. Both are tiny compared to Royal Bank’s market cap of $142 billion. Royal trades at about the same trailing and forward P/E and has a price to book of 1.98.  National Bank trades at a forward P/E of 9.5 and a price to book value ratio of 1.78

Given the size of CWB versus National Bank, it looks like National Bank could fairly easily buy CWB. And I suspect they could pay up to 2.0 times book value which would be $52 per share. They could pay in shares of National Bank. I don’t see why regulators or anyone except management of CWB should object. It would certainly add to efficiency. Well, I have no reason at all to think this will ever happen, but perhaps it would be a logical move for National Bank to become more, well, National. Maybe CWB should buy back some shares and generally try to get their share price up closer to intrinsic value to prevent a take over offer. Or, maybe takeovers of banks are just too hard to do in Canada.

On Friday, markets recovered somewhat as the S&P 500 rose 1.4% and Toronto rose 0.6%

Visa was up 4.7% and Amazon was up 4.0% and so perhaps Thursday was the day to grab these. But it is never clear when these dips have hit a low. 

Linamar, however was down another 2.2% to $53.74. I was just reading their Q2 report which very much reinforced my thinking that this stock is way under valued. Well, perhaps I am getting schooled in the ways of cyclic stocks which can be dangerous to buy based on past earnings when they are about to move into a period of sharply lower earnings or losses. We shall see. But here I see a stock that earned $5.40 in the first half of 2018. If that is annualized to $10.80 then this stock is trading at just 5.0 times earnings. Yahoo finance shows the forward P/E at 5.2. Adjusted earnings per share were $8.09 in 2017 and $7.92 in 2016. But certainly the company has had periods of very lower earnings per share in the past including 2009 when it barely made a profit at all, 2 cents per share.

I also look at its book value per share of $53.71. So it is trading precisely at book value. Now, book value can be meaningless in some cases but looking at the balance sheet and the history of profitability, I believe book value here is relevant and significantly understates what the company is worth. As a thought exercise, imagine you had built up a popular retail store or restaurant with growing sales that was averaging about a 20% return on equity: Would you then allow others to buy in at anything close book value? 

Insider trading however looks a bit negative with two insiders selling in the past few weeks. And Q3 could certainly show some negative impacts from trade uncertainty. With the new NAFTA (USMCA) agreement, I though Linamar should recover but it rose only modestly on that news and has since given back that gain.

I can’t be certain, but I think Linamar is the kind of company Warren Buffett would love to buy if it were for sale. It has a long successful record under the management of the founding family. It seems somewhat similar to his Precision Castparts company. 

Overall, certainly Linamar looks like a bargain to me. I have a fairly large percentage of my portfolio in this company and therefore perhaps should not add to it. Nevertheless I did add modestly to my position with a small purchase on Thursday and again on Friday.

Turning to housing, the Teranet index of new home prices for September was flat versus August and up 2.1% from a year earlier. The Edmonton market is the most important in regards to Melcor. Edmonton was flat in September but up 3.4% in the past six months and down 0.5% from one year ago. Calgary was down 0.1 in September versus August and on a seasonally adjusted basis is down in the past three months and down 1.3% in the past year. Overall, it appears that new home prices in Alberta are relatively flat with perhaps a very modest downward bias. What is more important to Melcor is the pace of new home sales and home building permits which I also mention whenever I see statistics on that.

We have now entered the Q3 earnings reporting season. Wells Fargo (no longer on our list) has already reported and beat expectations. 

Thursday was a negative day in the markets with the S&P 500 down 2.1% and Toronto down 1.3%.

Most stocks were down including AutoCanada down 4.3%.

A few stocks on our list managed not to fall today including Melcor up 1.0% and Constellation Software up 1.0%, Toll Brothers up 0.1%., Couche-Tard up 0.7%. Hopefully, the stocks which seemed cheap on fundamentals will be less vulnerable if the market continues to decline.

On Wednesday, the S&P 500 was down a hefty 3.3% and Toronto was down 2.1%.

I don’t think investors can complain much about the S&P 500 giving back a little of the big gains it has recently made but complaints about the TSX being down 2.1% are fair enough given that it is not much above the level it was at in 2008 before the financial crisis.

Similarly, some stocks like TFI International which was down 5.6% are still up strongly in the past year. But even stocks that already seemed quite cheap like Linamar (down 3.3%) were also pushed down although in most cases not as much as the market average.

Among the rare gainers today was… actually upon checking there were none on our list that were spared today with the exception of the Enbridge rate reset preferred share on our list that managed a 0.15% gain.

Most of the time a sharp dip like this is followed by some recovery but that is certainly not always the case. The U.S. economy remains very strong but to some degree the U.S. stock market was priced for something close to perfection… so a stiff correction is certainly possible.

Higher interest rates are starting to bite.

Conveniently, Trump can blame the market decline on the FED.

On Tuesday, the S&P 500 was down 0.1% while Toronto was down 0.6%.

Ceapro was up 19% on its news but for whatever reason most of the gain and most of the trading came only in the last 90 minutes of trading. Walmart was up 2.5%. Starbucks was up 2.1%.

Linamar was down 2.0% and has given back almost all of the recovery it made when the tentative NAFTA deal was made. Fedex was down 2.3%. AutoCanada was down 7.3% but I did not see any particular news to explain the dip today. It will report Q3 earnings on November 9 which will likely not offer good news but the important thing will be the outlook at that time as new management indicates plans and progress. Toll Brothers was down 2.5% probably due to fears about what higher interest rates will do to the housing market. Based on past patterns it seems certain that the company itself will be buying back shares aggressively at this price. While the tactic of buying on dips has not been a winning strategy in 2018 I would still continue to buy if I had the U.S. cash and if my exposure to the stock was not already too high. Based on fundamentals this stock is at the cheapest I have seen it. 

Ceapro press release this morning that they have Health Canada approval to start a human trial on using one of their two main products as a cholesterol lowering agent. If this panned out it could be a very big deal. And perhaps this will give the market and Ceapro reason to push the share price up. The stock is very speculative. I own some and despite the fact that it was formerly profitable and now not, I am holding these shares. Perhaps somewhat in the same vein as no one would sell a lottery ticket after buying it… The stock right now is pricing in very little optimism about the outcome of their drug trials and research. Perhaps at least some chance of success should be priced in.

According to the press release, this is a big development for Ceapro. And at only 12 weeks for the study we won’t have to wait all that long for the results.

On Monday, the S&P 500 ended the day about unchanged. Toronto was closed.

Amazon was down 1.3% to 1864 but was as low as $1831. Those wanting to own Amazon could consider buying on this dip but probably don’t need to be in any rush.  There is not much reason to expect any real crash at all.

Costco was up 2.3% partially recovering a recent decline. This stock does not seem to give many opportunities to buy on dips. It usually soon recovers from dips.

Visa inc. was down 2.4%. It remains expensive but like Costco has a strong history of recovering from its dips and those dips are usually modest.

On Friday, the S&P 500 was down 0.6% and Toronto was down 0.4%.

Costco was down a hefty 5.6% to $219. This was after Costco announced earnings and announced that it had identified some control issues regarding the accuracy of its financial reports. This is not an issue that is easy for the market to understand. So far, it appears that certain controls are not as strong as they should be but it has not led to any actual problems in Costco’s financial reports. Costco continued to report very strong growth. However it trades at a high multiple to earnings (32 times trialing earnings) which leaves it vulnerable to a price decline if there is any reason for concern about earnings and growth. History suggests that buying Costco on dips works out well. But it is still expensive. I’d be more interested in buying gradually if it goes below $200. But even if it got down to $171 it would still be trading at 25 times earnings.

Higher interest rates are definitely pushing stock prices down. All else equal, higher interest rates pull stock and bond prices down as basically a gravitational force.

The 5 year Bank of Canada rate has recently increased rather sharply reaching 2.48% on Friday. It’s hard to imagine, but that rate got as low as about 0.6% in early 2016. Institutions were then willing to tie up money for five full years at a paltry 0.6%!

A popular opinion was that governments would not let rates rise because they and other borrowers could not afford higher rates. That was faulty logic because lenders / savers/ investors also ultimately have a say in what level of interest will entice them to lend. (Try telling your bank not to raise your interest rate on your debt because you can’t afford it!)

It may be that higher interest rates at first did not have much impact on stock prices since bond yield yields were too low to offer any kind of alternative to stocks. But gradually rates have crept up to the point where bonds, especially considering risk, can start to offer competition to stocks.

Higher interest rates can affect all stocks but usually it is higher dividend stocks that get “hit” first and hardest.

You might think that at least rate reset preferred shares, especially those at a discount like the older Enbridge issues would rise. Actually since market rates are up, they mostly do well to at least not decline (like perpetual preferred shares do) with higher rates. In addition rate resets near $25 can’t really go up much because the company can buy them back at $25 on the five year anniversaries of issue. Discounted rate reset shares are more likely to rise if the balance sheet of the issuer improves.

Canada reported strong employment growth in September. Recall that July was strong and then August was very weak and now September is strong. Again, I think this says more about the inaccuracy of the data than the true situation. However, looking at the unemployment rate at 5.9% it is clear that the Canadian economy is relatively strong. At around 6%, the unemployment rate measured in a consistent fashion is at the low end of the range over the past 50 years or so. One can argue with the accuracy of the 5.9% but the data over decades is clear that this is a relatively low unemployment rate.

In the U.S. the unemployment rate is a stunningly low 3.7%. I understand that a difference in how it is measured might mean that using the Canadian method that would be closer to 4.7%. In any case it is very low. Trump’s policies may eventually cause lots of problems but there is really no argument that under Trump the economy is doing exceptionally well.

With a strong economy, the strongest companies with attractive profitability and growth will reward investors eventually, if not necessarily in the near term.

With West Texas oil at U.S. $74 and in spite of various discounts on various grades of Canadian oil, the Canadian oil producers as a sector should be growing both activity and profits.

Thursday saw the S&P 500 down 0.8% and Toronto down 0.4%.

A drop in the S&P 500 is no surprise and not distressing after almost two years of almost uninterrupted gains since Trump’s election. But it also seems to pull down Toronto and various stocks that have not participated in the big gains of the past two years.

Linamar was down 3.4%. As is my habit in these cases I picked up a bit more today.

Dollarama was down 1.9% and I added to my small position. It had fallen on disappointing earnings growth in its Q2. It’s still not cheap so I would accumulate only slowly and not aggressively.

AutoCanada was down 3.4%. I view AutoCanada as more risky than Linamar and am not eager to add to my position in this one.

Toll Brothers was down another 1.4%. I would have grabbed a few more shares today but I don’t have the cash in the U.S. dollar “side” of my investment accounts.

Amazon was down 2.2% to $1909. If I had some U.S. cash, I would be tempted to finally put just a few dollars into this name.

My approach has always been to buy individual stocks low and sell when those stocks seem over-valued. This year continues to offer lots of opportunity to buy low, but I would certainly like to see less opportunity for that and more opportunity on the sell high side.

Tomorrow, the expectation is the U.S. jobs number will be very positive leading to more bragging by Trump. Life is just not fair at times!

Whenever I travel, I like to make note of how various retail and consumer businesses are doing or what my impressions are.

At Edmonton Airport on Tuesday night I went to the BP for a beer before our flight (strictly for research of course).

The airport BP at 10 pm on a Tuesday night was surprisingly busy. At least 20 people. The service was great. Their prices are expensive but that is always the case at an airport. I was pleased to see how busy they were. Competitors are closer to the gates but the BP location feels a lot more like a restaurant / bar whereas some of the others have no walls and are very open to the traffic in the hallway. But the others were fairly busy as well.

At Toronto at 5:30 am the Tim Hortons had a huge line up and Starbucks had just a few in line. We had a long layover and went for breakfast around 7 am. Tim Hortons did not have any tables (not that the tables were full, they have none!) so that was out. We decided on A&W as a budget choice. It was VERY busy, hard to get a table. But I was very impressed that you can order a traditional eggs and toast breakfast cooked the way you want and they get in done in about 5 minutes. They had a lot of staff and I think this outlet is very well run to serve so many customers so fast. In general I have been very impressed with A&W’s advertising for years now. They are drawing people back that have not gone there in years. Their royalty units yield only 4.7% which is not attractive. But they seem likely to grow. I have not looked at their financials but I think this should be a decent investment.

By 8:00 Starbucks was looking busy but I suspect it was partly because the line at Tim Hortons was so long. Canadians do gravitate to Tim Hortons. Today, in a village outside of Moncton (St. Antoine) I found myself heading to Tim Hortons for lunch because I knew it would be fast and clean etc. As expected, the service was indeed fast and friendly. Not too busy though.

I passed by a number of Circle-K locations (Alimentation Couche-Tard) . They have a big presence in the maritimes. Usually their stores are brighter and more inviting looking than the local competitors. Sad, for the mom and pop stores, but that is reality.

In St. Antoine though is a quirky and large store called Kent Liquidators. I was impressed at their prices. It is not easy to compete against Dollarama and the large grocery stores and pharmacies. But I found their prices to be surprisingly low on most items. For example 50 lbs of potatoes at $11.99. That is 24 cents per pound. Try finding ANYTHING in superstore or whatever for 24 cents a pound. I would not want to be the farmer though. I can’t imagine how the farmer made any money.

The Moncton area in general continues to look quite prosperous. Some how, some way, people in Moncton (and in most of Canada) find a way to live well it seems.

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

Canadian Tire was up 1.7%.

Toll Brothers was down 2.0%. Competitor Lennar reported strong earnings and sales growth this morning but its price was down 1.1%. It appears that the market is focusing on the risks to Home Builders (including higher interest rates) at this time rather than current (and expected near-term) profitability. Yahoo Finance indicates that the trailing price to earnings ratio for Toll Brothers is only 8.2 and the forward P/E is 6.4. That would seem to be a clear bargain and yet the market continues to push the price down.

Linamar was down 3.25% and trading at a price that seems to reflect a lot of fear. Yahoo shows its forward P/E ratio at an almost preposterous 5.9. Does the market think its earnings will be strong for the next year and then fall off a cliff? This company has decades of growth and success behind it and buying it when it is out of favour is likely to work out well over the years.

In general, it seems 2018 has been a tough year for value stocks. Some are down because their earnings are down but quite a few seem to be down based on fears that may not be at all warranted. Time will tell.

On Tuesday, the S&P 500 was about unchanged while Toronto (apparently unexcited by the big LNG announcement) was down 0.5%.

CRH Medical bounced up 7.1% on Toronto to $4.99. It’s been quite volatile lately but has mostly trended down after reaching $5.88 in early September.

Canadian Western Bank was down 1.7% to $33.29.

AutoCanada was down 1.85% to $13.24 with the stock not getting any boost from the trade agreement or the LNG announcement. Chrysler apparently did much better than the other domestic brands in U.S. sales in September, with a 15% gain. This could bode well fro AutoCanada with its heavy concentration of Chrysler dealers. Perhaps Chrysler has some better models on offer at this time compared to the past year when they have lagged. But I just checked Canadian figures and Fiat Chrysler was down 4%, not as bad as Ford down 14% or GM down 6%. It seems September was a poor month for Auto sales in Canada. If new management can turn things around at AutoCanada it is unlikely that will show up in profits before some time next year.

Our report on the Enbridge Rate reset preferred share, the Series 9 trading as ENB.PF.A is updated and rated Buy at $20.47.

The shares happen to be very similar to the Canadian Western Bank rate reset preferred share that is on our list which is rated (lower) Sell at $24.57 and which closed today at $24.90. Both shares have a dividend of $1.10. The CWB share will reset in April 2019 at the Canada bond 5 year yield plus 276 basis points while the Enbridge shares will reset December 1, 2019 at the 5 year plus 266 basis points. The CWB shares have the small added risk of being non-cumulative and that they would be converted to CWB common shares in the unlikely event CWB gets into certain triggering financial difficulties.

The shares started out in early 2014 with the same distribution amount of $1.10 and the same price at $25 and almost the same reset yield spread. After both were issued, interest rates unexpectedly continued to decline and the price of both shares fell as they were no longer competitive with the newer rate reset preferred shares being issued (some with guaranteed minimum reset yields). As interest rates rose, the CWB shares have recovered to almost $25. But I recall that the Enbridge share suffered a separate blow when Enbridge took certain actions that weakened its balance sheet and credit rating not long after the issue date. Therefore, the Enbridge shares may not recover towards $25 until and unless Enbridge’s credit rating improves, which it may do. But they may recover somewhat in any case as the reset date approaches.

The CWB and the Enbridge shares are both now rated Pfd-3. In fact the Enbridge shares seem to be rated slightly higher at PFd-3 (high). But at $20.47 and with the same distribution now and with a distribution that will be just 0.1% lower after the reset, it appears that the Enbridge shares are trading as if they are quite a bit more risky.  Perhaps that provides an opportunity to buy the Enbridge shares at a discounted price.

It is possible that the CWB shares are trading at $24.90 in anticipation that CWB will redeem them at $25. I don’t know why they would, given CWB probably cannot issue new rate reset shares at much if any lower than a spread of 276 basis points. But it is possible that the bank analysts are expecting these shares to be redeemed.

These shares could be purchased for yield by those willing to hold for the current yield and the expected yield in the next five year reset period. Or, they could be purchased on a more speculative basis for both the yield and the hope that the price will move at lest somewhat towards $25 perhaps by the time of the reset in 14 months.

One reason that all rate reset preferred shares are not rising with the higher Canada 5 year yield is that the market yield on competing new rate reset preferred shares has risen. Bank of Nova Scotia had an issue today (it sold out rapidly) at a yield of 4.85%. The credit rating was higher than the two noted above at PFd-2. For comparison, that was about 246 basis points above the Canada bond and it will reset at 243 basis points above the Canada in five years.

Shell and partners have announced a go-ahead decision on this project. They say it is $25 to $30 billion capital investment. That would be U.S. dollars which may explain why we are seeing a $40 billion figure in the Canadian news. It appears that a $6.2 billion pipeline to be build by TransCanada will be in addition to the $40 billion (but I am not 100% clear on that). There was no indication that this includes spending on the gas exploration and extraction (much of the gas may come from existing production).

This is a HUGE project. I understand it will be the largest capital project, in dollars, ever to be built in Canada and by quite a large margin. I understand there will up to 10,000 workers during construction including one large work camp to accommodate 7500 workers in single rooms.

This project is definitely positive for the economy of B.C. and I suspect there would be significant benefits to Alberta as well. And there will likely be components sourced all over Canada. I understand though that the steel will come for over-seas and perhaps much of the components will as well. But in any case this project is absolutely huge. Benefits will flow to many parts of the economy.

I was disappointed to hear people on Edmonton talk radio this morning complaining that B.C. was hypocritical in supporting this while opposing the TransMountain pipeline. That is probably true. Nevertheless, those who support resource development should be glad that B.C. is open for business at least for this project.

I must admit when I first heard about various $35 billion LNG projects for B.C. I said the amount was far too high and I thought it would never happen. And certainly I thought multiple such mega projects would never happen (I still doubt we will see a second $40 billion project). I am happy to be proven wrong here and I welcome this investment.

On Monday, with a NAFTA (Sorry Trump, I mean USMCA) deal in hand, the S&P 500 was up 0.4% and Toronto was up only 0.2% on this news.

Linamar was up 6.3%. It will probably rise more as the good news is digested.

In unrelated news, Alimentation Couche-Tard was down 1.6%, probably for no particular reason. It won’t report earnings again until December and so barring acquisition news, it may not have any catalyst for an increase before then.

CRH Medical was down 9.3% to $4.66 in Toronto. Possibly some analysts believe that its gains this year had been over done. It will report Q3 results in November. It may also announce another small acquisition at any time (or not).

West Texas Oil was up today and is now over $75. However, I believe BNN was showing Western Canadian Select (heavy) oil as down today. Big discounts on Canadian oil provide a bigger motivation and profit in shipping by rail.

I spoke to the Boston Pizza CFO today. He acknowledged that Boston Pizza has basically lagged the overall full service restaurant industry partly due to a heavy concentration of locations in areas impacted by the energy patch slow down. Based on that conversation I am quite a bit less fearful of any distribution cut. But I also don’t think the Q3 report will offer much if any good news. I expect BP to maintain its distribution. They need to resume same-store sales growth before they can even think about a distribution increase. We also face the headwinds of higher interest rates. But at $17.16 the yield is 8.0% which is attractive and which is perhaps pricing in some chance of a distribution cut (which, again, is unlikely although possible).

Melcor issued a low-key press release today to celebrate their 50 years as a public company. These guys are certainly not into hype and probably could have tooted their own horn somewhat.

Here in St. Albert, which borders Edmonton, Melcor has a very large and successful sub-division under continuing development at Jensen lakes. This also features a Retail shopping area with buildings developed by Melcor and then sold to the Melcor REIT as buildings are completed and leased out. This includes a new Landmark Cinema building. Also in the past month a Great Canadian Brewhouse as well as a Brown’s Socialhouse has opened. Bother were packed on Saturday evening. I think this says something about the prosperity of St. Albert. Alberta is not booming but it is certainly still doing well. To get an understanding of the properties owned by the Melcor REIT see the following links. These links do show some vacancies, but they also show that most of the retail properties are quite new. (The office properties are much older on average but are well-located.) And it seems to me that there were noticeably more vacancies early this year than now, that is my impression. Northern Alberta space for lease .    Southern Alberta space for else.

When it comes to selling home building lots, it is hard to guess if this Q3 was better than last year. In Q3 2017, Melcor sold 320 building lots. I understand that sales in St. Albert’s Jensen lakes community are quite strong. But the 320 from last year is probably a tough comparable. On the other hand, last year they sold very little commercial land and so if they sold more commercial land this year, then that could bode well for the Q3 report. They will likely also book a value gain on the new Canadian Brewhouse and Browns Socialhouse buildings completed in Q3. But they may have mark to market losses on other buildings due to higher interest rates. Melcor’s earnings are “lumpy” by nature.

Late Sunday night, CBC indicates that sources tell it that a tentative NAFTA deal has been reached,his should be very positive for Linamar and probably also CN and AutoCanada perhaps most Canadian stocks.

As for Friday, the S&P 500 was unchanged while Toronto was down 0.8%. Friday was the last trading day of Q3, a quarter in which U.S. stocks rose sharply.

Canadian Tire had a weak day and was down 2.6%. Subject to cash availability, I would like to add to my small position in this company at this price.

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

Toll Brothers was down 2.4% to $33.55. That makes the price to book value 1.13. The trailing price to earnings ratio is 8.4 and the stock is trading at just 6.5 times the earnings that analysts expect it to achieve next year. There are certainly times when book value is meaningless. But here the book value is invested in land and buildings and there is no purchased goodwill on the balance sheet. Overall the stock simply looks stupidly cheap to me. That does not mean it can’t get cheaper. But ultimately the stock price will reflect the earnings performance. Market sentiment can push stocks down or up temporarily. And temporary can certainly feel like a long time. But at some point shares will reflect fundamentals and earnings.

Constellation software was up 3.0%.

AutoCanada was up 4.4% and this evening announced that its lenders had relaxed one of its debt covenants to allow its funded debt (which apparently means long-term debt and probably excludes its short term inventory financing debt) to temporarily rise as high as 4.5 times EBITDA rather than the current 4.0 times limit. The company indicates that it does not actually expect to exceed the 4.0 limit but the allowance to go to 4.5 gives it more flexibility and demonstrates that its lenders have confidence in the company. Overall, this announcement does seem to be moderately good news.

On Wednesday, the S&P 500 was down 0.3% while Toronto rose 0.1%.

The FED increased interest rates as expected and apparently signaled more increases to come.

AutoCanada was up 3.8% on news of the sale and lease-back transaction that I mentioned yesterday. Earlier today it was briefly up as much as 8% on the news. I think the company continues to face headwinds in terms of a softer market for new vehicles and uncertainty about trade tariffs. But I also think it is probably now under far better management.

CN rail rose 2.2%.

TFI International was up 2.1%.

Linamar was up 2.2% which was surprising given state of the NAFTA talks.

Toll Brothers was down 2.5% to $34.36. Meanwhile, a story today noted that the Home Builder stocks are trading at very cheap multiples AND projecting strong earnings growth in the next two years. These stocks are definitely out of favor. In part this is due to fears about sales slowing with higher interest rates. And also due to higher lumber costs. The story also noted that there are shortages of new homes and difficulty getting enough labour. With Toll Brothers now trading at under 1.2 times book value and with a single digit P/E, I think it offers very good value.

When a company is out of favor the stock price may only rise when the company continues to report higher earnings. The company basically has to pull itself up. I think Toll Brothers has a good chance of doing this. I am confident that the company itself is buying back shares  at this time as they have been doing so regularly for several years. I added modestly to my position today.

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

Linamar was down 2.2% and will probably continue to be weak until and unless there is some progress on NAFTA.

After the close, AutoCanada announced it did a deal to sell and leaseback two dealerships raising $55 million. In a way this should be a neutral because it will be paying rent to reflect the sale price. But these deals tend to be viewed as positive. And I think it is another reflection of the fact that the new boss Paul Antony is taking speedy and decisive action to improve profitability at AutoCanada.

In other news, Statistics Canada reported July sales at food services and drinking places. They give both the change since June and the change since July of the prior year. I focus on the change since the prior year. They note that the comparison to last July is “unadjusted, (that is not seasonally adjusted)”. I understand the concept of seasonally adjusting July versus June or July versus December. But I don’t know what they would mean when they say July 2018 is not seasonally adjusted versus July 2017. It’s obviously the same season. Possibly it could mean not adjusted for the number of weekdays and weekend days? In any case the numbers are adjusted and they report:

In July, unadjusted sales in the food services and drinking places subsector were up 4.9% year over year. Sales in each of the following industry groups increased: full-service restaurants (+5.6%), limited-service restaurants (+5.2%), special food services (+1.2%) and drinking places (+1.4%). Sales increased in every province, with Ontario (+5.0%), Quebec (+5.9%) and British Columbia (+5.8%) recording the largest gains in dollar terms.

Prices for food purchased from restaurants were up 4.4% in July compared with July 2017

This increase driven mostly by higher prices is exactly what I had expected in 2018 as prices were raised due to the higher minimum wages. This should bode well for Boston Pizza. But this increase has been happening most months since at least January and yet Boston Pizza did not report higher same store sales in Q1 or Q2. The concern therefore is that Boston Pizza is losing market share. I have asked BP about this but they have not responded. In their reports they mostly blame lower sales in the energy patch areas. With 28% of their restaurants in Alberta, it is possible that they have a dis-proportionally high exposure to the energy patch. But I still think they have probably lost some market share.

On Monday, the S&P 500 was down 0.35% which was blamed on the escalating China / U.S.A. trade war.

Toronto was down 0.1%

West Texas Oil rose 2.1% to $72.25 as OPEC indicated it would not increase supply as requested by Donald Trump.

Most of the stocks on our list were down.

Dollarama was down 3.2% to $41.82. I bought a few shares today amounting to about 0.5% of my portfolio. I want to cautious and do not plan to buy this aggressively at all, not at this price at least.

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

Amazon was down 1.5% to $1915.

BHP Billiton was up 2.0%. Due to commodity price volatility this is an inherently volatile stock. It can be held for diversification although in general commodity stocks are not great performers over the longer term.

There did not seem to be much if any positive news on the NAFTA file last week. If there is no movement next week then that will probably weigh on the Canadian market including Linamar and AutoCanada.

On Friday, Statistics Canada released inflation figures (estimates really) for August with an overall inflation rate of 2.8% year over year. A lot of people seem to believe that Statistics Canada or the government deliberately under estimates/reports inflation. They also often claim that volatile items like food an energy are ignored. Those people might want to actually read the report and to dig into the numbers. They might be shocked to see that the report indicates:

“Gasoline prices rose 19.9% in the 12 months to August, following a 25.4% year-over-year increase in July.”

So, energy prices are certainly not ignored. Statistics Canada does however provide some alternative measures of inflation that exclude more volatile items but reporting numbers with and without volatile items is hardly ignoring or hiding the volatile items.

Our report for Dollarama is updated and rated Weak Buy at $43.21

After a decade of growing its earnings per share at a compound annual average rate of about 31%, Dollarama grew earnings per share by “only” 12% year-over-year in the latest two quarters. And same-store sales growth dropped to 2.6% from the historical level around 6%.

As a result, the share price is down 24% from its peak level which it reached in January.

With a trailing P/E of 27 the stock is still not cheap but it is cheaper (at our last update in late 2017 the stock had a P/E of 39).

The lower price arguably provides a buying opportunity. But since the stock is still expensive and since it could suffer from negative sentiment and since the days of 30% growth are probably gone for good, we would not rush to buy the stock.

I will likely buy just a few shares and then reevaluate as the stock price moves and when the next earnings report comes out late this year.

I have long said that this is one of Canada’s best managed companies. But over the years I have generally seen the stock as expensive. Generally it was rated Weak Buy and the highest we rated it was (lower) Buy on a couple of occasions. In retrospect it would have been a great investment at any time from its IPO in 2009 until about mid 2017. The rating previous to this one was (lower) Sell at $54.01 (adjusted for the recent stock split) which now looks like a good rating at that time.

P.S. After posting this, I had also saw a transcript for last week’s earnings conference call. Based on reading that I expect to see Dollarama very active in buying back stock based on the lower price as they indicated they planned to do so and that was before the price decline. I would also say that Dollarama is very much on its game. Its CFO and CEO both seemed to be able to easily address questions. They have a clear strategy and they very much know what they are doing.

On Thursday, the S&P 500 closed at a new record high, surging 0.8% to 2931. The 3000 level is not far away. The U.S. economy is undeniably strong. And the great bulk of the income tax reductions appear to have fallen to the bottom line. If the 500 companies in the S&P 500 actually faced a lot competition then much of the tax cuts would have been competed away. Instead, it may be that the S&P 500 is dominated by companies that do not have to compete aggressively on price. They may mostly have powerful positions in the market based on brand and scale and lack of competition. Or maybe they quietly agree not to compete on price. It’s hard to know. But in a truly competitive market much of those income tax savings would have been competed away with price reductions.

Toronto was up 0.4%.

CN Rail reversed course versus yesterday and was up 2.1%.

Linamar was up 3.1% to $62.07.

Marijuana Stocks

I have not analysed these. But I think it is clear that their market values are reflecting an expectation of many years of very large profits ahead. The price paid for these stocks today is assuming those profits will occur. Early investors have made a lot of money. These stocks have created vast wealth out of thin air. All will be well if the profits materialize. But my suspicion is that in many cases profits sufficient to justify the prices of these stocks today will not materialize in many or most cases. But we shall see.

I would ask, were there massively profitable marijuana stocks in the U.S. as a number of states legalized there? What about in the Netherlands and other areas where it is legal?

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

West Texas Oil is at $71.48. Unfortunately as BNN Bloomberg reported today, basically ALL the different grades of Canadian crude are selling at big discounts to the West Texas Price. They indicate that big discounts have opened up and widened substantially in recent weeks. Some of this could be temporary. More crude-by-rail is needed.

CN Rail was down 1.9% today. CN is expensive but will benefit from shipping crude.

Canadian Western Bank was up 1.45% possibly linked to the higher oil price.

TFI International was down 2.9%.

CRH Medical was down 5.8%. It remains up about 50% this year but is down about 13% from its recent 52 week high. It could certainly continue to be volatile.

U.S. housing starts were higher than expected in August at an annualized rate of 1.28 million versus an expected 1.24 million. That is positive for Home Builder stocks. Unfortunately home building permits fell to an annualized rate of 1.23 million units.

U.S. housing starts were running at over 2 million before the financial crisis which was apparently above the number of household formations. U.S. housing starts averaged roughly 1.5 million per year in data going back over 50 years. My understanding is that at about 1.3 million units, housing starts are below the level of new household formations. Therefore there is room for U.S. housing starts to increase to at least the 1.5 million level. Consider too that in Canada we have had housing starts running at over 200,000 for most of the years since about 2002. Considering the U.S. has ten times the population we might expect U.S. housing starts to be closer to 2 million especially considering their strong economy. The bottom line is that I feel good about the prospects for Toll Brothers.

Alimentation Couche-Tard has its annual meeting tomorrow, Thursday. I expect that they will try to get some (well-deserved) press around the fact that they are now Canada’s largest company by revenue.

On Tuesday, the S&P 500 was up 0.5% as investors basically ignored any negative risks from Trump’s trade war with China. Toronto was up 0.7%.

West Texas oil is just a hair under $70.

TFI International was up 3.3% to $48.70.

FedEx was down 5.5%.

Canada’s (perhaps surprisingly) strong manufacturing sales strength.

Statistics Canada reported on Canada’s manufacturing sales for July. The report is quite positive.

“Manufacturing sales increased for the third consecutive month in July, rising 0.9% to $58.6 billion. Higher sales in the transportation equipment and chemical industries drove the increase.”

On Monday, the S&P 500 was down 0.6% which was at least partly due to concerns about Trump’s escalating trade war with China. An announcement by Trump about new Tariffs is apparently pending as of early Monday evening. Update, Trump has now announced 10% tariffs on $200 billion of Chinese imports effective September 24, rising to 25% on January 1 and threatened tariffs on $267 billion more imports if China retaliates. It will be interesting to see if the market reacts negatively to this, which I expect it will.

Meanwhile, Toronto was up 0.4%.

Amazon was down 3.2%.

Statistics Canada reported new vehicle sales for July. The results were not good with a 2.8% decline for Canada versus July 2017 and a steep 10.1% decline in Alberta. In both cases the numbers were however, higher than July 2016.

Derosiers Automotive consultants have reported August numbers showing a 1.6% decline for Canada. They also show that Fiat Chrysler which has been particularly weak was down 9.6%.

None of these figures are good news regarding AutoCanada. AutoCanada has a heavy exposure to Fiat Chrysler (37% of revenue) as well as to Alberta. (28% of revenue) Absolutely terrible weather in Alberta for the middle part of September will not help matters either. I am quite hopeful that AutoCanada is now under better management. But results from Q3 will not likely be good.

FedEx reported earnings after the close. Although earnings increased, they apparently did not increase as much as expected and the stock fell 3.6% after hours. However, after hours trading on news can sometimes be misleading. Tomorrow’s trading will be a better indication of how the market perceive the FEDEX results after having a bit of time to digest the news.

I spoke to a Boston Pizza Franchisee today. He reports a lower bottom line but said his top line (which is what the Royalty Income Fund units depend on) was about the same as last year. He reports that Ontario Boston Pizza franchisees are having a hard time with the minimum wage increase and suggested some restaurants will close there as well as one in Edmonton. Overall, my discussion with the BP franchisee painted a negative picture. The top line determines the franchise fee and distributable cash and should hold up reasonably well. But if profits for the franchisees are falling that increases the risk of closures. This investment has become more speculative than it seemed to be in the past.

On Friday, the S&P 500 was about unchanged and Toronto edged up 0.1%.

Costco was down 2.4% as an analyst report pointed out the high P/E ratio.

Penny stock Ceapro was down 5%.

Our best hope this week would be for good news on the NAFTA file.

A few of our companies will have had some damage from Hurricane Florence. Alimentation Couche-Tard has at least some stores in the area (I saw a picture of one Circle-K half under water). Berkshire Hathaway will have losses in GEICO and likely in catastrophic insurance as well as probably damage in several other subsidiaries. Toll Brothers likely has some operations in the area. But it won’t likely amount to much of a hit for any company on our list. Even if it did, that is obviously a tiny problem compared to what the residents there are going through. And of course there are people in The Philippines and area that are facing a far greater storm that for a number of reasons (poor housing stock in many areas and probably lesser ability deal with the disaster) is going to impose far far greater misery.

Our report on Amazon is updated and rated Speculative Weak Buy / Hold at $1970.

I was very tempted to not put a rating on it because it is “too hard”. Buffett has said that many investments should be put in the “too hard” basket and that he would just focus on companies where it is more apparent that the stock is under valued and where he feels he can predict future earnings.

I have not had any luck so far in rating Amazon. I first added it to the site on July 3, 2015 rating it a Sell at $438. Subsequent updates were also rated Sell including the most recent update rated Sell at $1196 on November 27, 2017.

Despite a poor record in rating this stock I wanted to read its reports and try to better understand the company and its valuation.

I track my performance in rating stocks is based strictly on the rating and the subsequent price increase or decrease. But it is also fair to say that each report contains a lot more than the rating. The reports look at  many factors. Hopefully most subscribers read the reports to get an understanding of why a given stock has a given rating.

In the case of Amazon, the last rating was Sell. But The last few sentences in the summary part of the report said:

“The stock may well continue to rise with sales and sharply increasing profits but we simply can’t justify the valuation with the available accounting numbers. Overall we would rate this as a Sell. It should be considered a speculative stock. Those with large gains should consider cashing out at least some of the gain (just as Jeff Bezos has consistently done). Nevertheless, the shares could certainly continue to rise and some may wish to hold it but should be aware that its reported earnings do not appear to justify the stock price.”

And the report noted that the GAAP earnings might be substantially under-stating the true economic earnings.

It remains very difficult to know how to rate Amazon. The trailing P/E is 156 which means the stock is “pricing in” substantial earnings gains (such as 40% per year for five years). But perhaps it will achieve that.

I have no plans to buy and if I did it would be a small amount with a view to perhaps adding if there were a substantial pull-back.

For years it was said that Amazon had very little earnings per share. Recently earnings per share have risen very rapidly. But the company’s focus remains on growth and so it’s not clear that earnings per share can be counted on to rise in the short term.

Again, perhaps I should just put this one into the “too hard” category.

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

Linamar was up another 4.5% top $61.06. I suspect it was upgraded by some analyst(s) since there does not seem to be any NAFTA news to explain it.

Toll Brothers was down 1.6% to $36.35. Based on its P/E ratio and price to book, this stock looks more attractive than it has at any time since I first looked at it in 2011. But Home builders are an unpopular sector at this time probably mostly due to fears about higher interest rates.

Dollarama was down 17% after posting results and an outlook that fell short of expectations. I intend to update the report on this company soon.

Statistics Canada reported the change in the new home price index for July. There was very little change in any Canadian City from June to July. Year-over-year, the  top gainers were Ottawa region (Ontario side only) at 4.8%  and London at 4.4%. Top decliners were Toronto down 1.2% and Regina also down 1.2%. Given my position and rating on Melcor Developments, Alberta is always of great interest and year over year Edmonton was unchanged and Calgary was down 0.3%. Based on this data, new home prices from builders have been resilient with little change in response to new mortgage rules and higher interest rates. This index covers single family dwellings including row-houses but not condos.

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

West Texas Oil was back over $70 U.S. dollars.

Linamar was up 5.8% and AutoCanada was up 4.5%. I did not see any news to explain this. When (if?) a NAFTA deal is announced these two stocks should benefit, especially Linamar.

CRH Medical was down 8.3% in Toronto and 5.6% in U.S. trading. It has been a volatile stock.

CN Rail indicated at a conference that it is moving 50% more crude by rail in Q3 to date than last year’s Q3. With Tran Mountain delayed, CN and others will be more willing to invest in tanker cars to expand this business. CN is another stock that will benefit when (if?) a NAFTA deal is reached.

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

Yesterday, after the close, Boston Pizza Royalties had announced that its latest distribution would remain at 11.5 cents. I had been wondering if the market had been expecting or fearing a small cut. Apparently not since the units fell a further 0.5% today. If the recent price decline was due to fears the distribution would be cut this month then presumably the units would have risen when the distribution was maintained at 11.5 cents. Or, perhaps the market would expect any cut to come with the Q3 earnings report. Or perhaps the market does not fear a cut but instead simply sees no sign of growth.

Canada Mortgage and Housing Corp. says the pace of housing construction starts slowed in August compared with July. The agency says the seasonally adjusted annual rate of housing starts was 200,986 units in August, down from 205,751 units in July. This is still a fairly strong level of building activity. Canada’s rate of new home construction has been running higher and mostly far higher than the proportional rate in the U.S. for over ten years.

Single detached housing starts in August were down 18% nationally and also down 18% in Alberta and down 27% in Edmonton but up 4% in Calgary. Monthly figures are probably volatile. Year to date, single family starts were down 13% nationally and 9% in Alberta but up 2% in Edmonton and down 4% in Calgary.

Alimentation Couche-Tard is updated and rated (higher) Buy at $65.99 which was the closing price yesterday. Its recent Q1 fiscal 2019 earnings report featured stellar gains. The next two quarters should also show some growth based on acquisitions. However, earnings can be be volatile based on gasoline margins. For many years, this has been one of Canada’s best managed companies and I have long described it that way. Now, it has (remarkably) become Canada’s largest company by revenue – though only 13% of that revenue is earned in its home country. I added modestly to my position today.

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

Canadian Western Bank was down 1.7% to $35.16.

CRH Medical which is a higher risk pick, was up 2.3% to U.S. $4.35 or Canadian $5.72. I reduced my position by 20% today. I had added to my position at lower prices last Fall and the position had grown fairly large.

I am considering adding to my position in Alimentation Couche-Tard. It will hold its annual meeting on Thursday of next week. Possibly, it will get some press regarding the fact that it is Canada’s largest company by revenue. So far, little notice seems to have been taken of that remarkable achievement. In its just released Q1 earnings report (for the period ended July 22)  the company noted that its same-store merchandise sales in Canada were up 6.6%. Some of that must be inflation. But in any case it would seem to be an indication that consumers in Canada continue to spend fairly freely.

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

Costco was up 2.0% to $241.46 after releasing very strong same-store sales figures for August. I listened to a recorded call regarding the results and it was not clear to me how much of the increase was due to price and how much due to increased traffic through the stores. In any case, the results were very strong and also indicate strength in the U.S. economy (were most of the stores are located). Costco continues to trade at a high P/E multiple based on expectations of continued strong growth.

On Friday, Statistics Canada released the latest jobs report which saw a notable decrease of 52,000 jobs in Canada “after two months of increases”. To my mind, it is almost irresponsible for the financial press (who should know better) to report these results without (seemingly ever) highlighting the inherent statistical and other potential sources of error in the numbers. For political polls we usually hear something like the results are considered accurate by plus or minus 3% 19 times out of 20. And that would only be the statistical sampling error, biases in political survey questions could introduce far larger errors.

For the jobs data, Statistics Canada does not highlight the error level (it probably should) but does provide a link that indicates that the statistical error alone is plus or minus about 58,000 19 times out of 20. AND, it acknowledges that there are many other sources of errors.

To my mind, it is misleading to speak of 52,000 jobs lost in August as fact given the size of the statistical errors and the other errors.

At best, the jobs survey should be interpreted as indicating a trend based on some months of data. A single month’s results like August are simply too volatile to rely on. And in this case the poor August results look more like a correction to big job gains reported in July than any true loss in August.

And note too, that the figures are seasonally adjusted. The apparent job losses cannot be explained by normal seasonal patterns of students returning to school and such, as that is already accounted for (in an estimated manner).

So, how many jobs did the Canadian economy actually create or lose in August (on a seasonally adjusted basis)? The answer is no one knows, we only have statistical estimates. Yes the point estimate was a loss of 52,000 jobs from July to August. Not good. But the error level in the numbers for both July and August is too high to be very sure that there was ANY loss in August. Trends in job gains or losses need at least several months to be confirmed.

Our report and rating on the Canadian Western Bank rate reset preferred share Series 5 CWB.PR.B is updated and now rated (lower) Sell at $24.57.

These shares will reset in less than seven months on April 30, 2019. The yield will reset to the yield on the Canadian government 5 year bond plus  2.76%.    If the five-year Canada bond remains at its recent yield of 2.22%, then these shares would reset to 4.98% of $25.00 , paying $1.245 per year. That would be a yield of 5.07% on the current price.

5.07% strikes me as an acceptable return. And, it will be higher if increases in the Bank of Canada interest rate and/or market forces push the yield on the 5 year Canada bond higher than 2.22% as of April 30, 2019. Or it could be lower.

Based, on that I see nothing wrong with holding these shares until April 30 and seeing what the reset brings.

However, I notice that the Bank of Montreal last week issued a new five year rate reset preferred share at a spread of 2.69% over the 5 year Canada. While the CWB preferred share here is set to reset at a slightly higher spread of 2.76%, I am not sure that the market will judge that to be a sufficient premium to invest in Canadian Western Bank which is far smaller. CWB’s web site indicates that these shares are rated Pfd-3 while Bank of Montreal’s web site indicates that apparently similar preferred shares are rated higher at pfd-2.

Overall, it appears to me that the market spread for CWB to issue a new rate reset preferred share is probably higher than the 2.76% that these shares will reset to. Therefore, I doubt that CWB will redeem these shares at $25 on April 30 and I suspect that after the reset they may well trade somewhat below $25. Therefore, it seems reasonable to sell these now.

Anyone who bought these preferred shares shares at their issue price of $25 back on February 3, 2014 and who sells now at $24.57 will have gotten extremely close to the yield of 4.4% that the shares paid. (The actual return would be about 4.36% per year). But those investors had to endure these shares trading below the $25 issue price after the first year which included briefly plunging below $16 in early 2016. But that presented a great opportunity to buy at that time and reap an excellent return. We rated these shares (higher) Buy at $16.61 on March 13, 2016.

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

WSP Global was up 7.3%. It did not release any news and so perhaps the price rise was due to an analyst upgrade in outlook.

Alimentation Couche-Tard was up 4.5% due to its strong earnings release. At a quick loo, its earnings release was very strong. I believe this will continue to be a good investment.

CRH Medical was up 4.2% on Toronto. This company will likely continue to do very well. But as our report states there are risks including :  “Technology may also be a risk as it is possible that scanning or swallowed camera technologies could displace the need for colonoscopies.” Given the risk and the small size of the company and the past stock volatility it may be appropriate to trim this position. I have almost 2% of my portfolio in this name (having added to the position several times as it fell in 2017) which may be excessive for me both in terms of the percent and the dollars involved. So, I may trim my position somewhat. I am holding it in an RRSP where triggering capital gains taxes is not a concern.

AutoCanada was down 2.8%. I visited their KIA dealership in Edmonton today. I am optimistic that this company is in a turn-around situation but positive earnings results from the efforts of the new management may not even start to materialize until Q4 is reported in early 2019. The market price may or may not react prior to that. Given the recent history of this stock, the market may very well not react until an earnings or sales /margin improvement is demonstrated and reported.

Boston Pizza Royalty Units have now slipped to just below $17. This is disturbing to the extent that it may signify that the market expects even a small cut in the distribution. It may be that Boston pizza will fail to achieve the same-store sales growth that it needs in order to maintain and grow its distribution. In the latest report in August the company certainly seemed optimistic. But they also don’t reveal traffic levels. They disclose same-store sales which declined slightly despite price increases which suggests lower traffic. They will likely announce the next distribution early next week. There has never been a cut to the distribution except when the Fund became taxable effective 2011 as announced in 2006. But they review the distribution level monthly and if the payout ratio is too high and if they don’t see current or near-term improvements in same-store sales then presumably a small cut would be appropriate.

I notice that Bank of Montreal issued a five year rate reset preferred share at 4.85% today. According to TD Direct the issue has already sold out.

4.85% may be an attractive yield for many people. This is a spread of 269 basis points over the five year government of Canada bond. By comparison the Canadian Western Bank pref share on our list is set to reset at a spread of very little higher at 276 basis points. On that basis, I suspect the Bank of Montreal shares would trade higher than the CWB given the size of the two banks. Therefore, with the CWB shares trading at $24.59 and with a reset date coming up on April 30, 2019 it might be wise to sell the CWB preferred shares. Possibly with interest rate increases both the CWB shares and the new Bank of Montreal shares will rise. But just on a comparison basis the Bank of Montreal share price of $25 might suggest that the CWB shares which yield 4.47% until April 30 and which could yield moderately more than the Bank of Montreal shares after April 30 may be less attractive than the Bank of Montreal shares (and so their price may drop). That is, while the yield on the CWB shares may be reasonably attractive now and after April 30 (at the current price), the price could go lower if the Bank of Montreal yield is considered MORE attractive given the larger size of that bank.

On Wednesday, the S&P 500 was down 0.3% and Toronto was down 0.15%.

Toll Brothers was up 2.1%. AutoCanada was up 2.5%, possibly on optimism that the new management will turn things around.

Visa was down 3.5%. Its had strong increases in the past six months and so this is just giving back a little of those gains.

Kinder Morgan Canada was down 2.0% to $16.79 after announcing it will issue a very large special dividend ($11.40) to send to investors the money it got from selling Trans Mountain. This is roughly what was expected. Kinder Morgan Canada is not on our list but I mentioned a few times that I owned some shares. I had actually coincidentally sold my shares on Tuesday before the announcement. I sold after reviewing and updating my portfolio. I figures with the pipeline sold, my reason to hold the stock was gone. With the announcement of the dividend on Tuesday after the close, I feared my timing had been very bad. But so far it looks like selling on Tuesday was a good move. Kinder Morgan Canada will I believe continue as a much smaller company. It’s not one I know anything about. I had bought Kinder Morgan Canada with the idea that the pipeline would go though and the stock would rise. That of course did not happen. In the end I made a few dollars because I had bought it cheap.

Speaking of Trans Mountain, it certainly appears that Justin Trudeau is not going to do anything to get the construction started. It looks like everything is on hold for maybe a year as they go through the motions (charade?) of consultations and reviews while at the same time assuring that the line will go through. If that’s the case why not at least continue to build the non-controversial parts of the line? If the line is going to go through then why not have a hearing on how to mitigate tanker traffic impact as opposed to any charade hearing on whether tankers will be allowed? I must admit, I don’t know the concerns of the indigenous people. Route? Compensation?, economic benefits for them? Unless the indigenous people want the route changed then why is construction halted?Could construction not continue while they debate / consult on other concerns? In any case this delay is certainly bad news for Alberta.

After the close, Alimentation Couche-Tard released a strong earnings report. Apparently it somewhat exceeded expectations. But the analysts can always find something negative to focus on if they are minded to. So we shall see where the stock opens on Thursday morning.

Meanwhile Trump appears to be under heavy attack by his own staff in the Whitehouse. But so far, the markets have certainly not seen his Presidency as negative for stocks. It does seem his policies have been good for the economy. I wonder what price America is willing to pay for that and just how much they will put up with.

On Friday, the S&P 500 was about unchanged while Toronto was down 0.7%.

The cancellation of approval and therefore work permits for the Trans Mountain pipeline was an ugly blow for Alberta on Friday. That could continue to affect stocks this week. I have not seen any sign that Trudeau is going to take any drastic action (such as legislation that would reverse the court’s decision) to insure that at least some work on the line can continue / commence next Spring as planned.  On a positive note this should be good news for CN Rail and any company involved in transporting oil out by rail.

The market will be hopeful of major progress on the NAFTA negotiations this week. Failing that, there will likely be downward pressure on Canadian stocks.

I look forward to Q1 earnings from Alimentation Couche-Tard on Wednesday. Hopefully another positive quarter and outlook.

Our one penny stock, Ceapro Inc., is updated and rated Sell at $0.45. When first added to this site, Ceapro was a profitable operating company that was also engaged in research that might payoff. But over almost the past two years sales declined and profits started to evaporate such that now it is much more of just a lottery ticket type stock. The research could pay off. But its operating profits no longer support even its now lower stock price on their own. I have only a small investment in it and I plan to keep my shares despite a number of concerns with this company as detailed in the report.

Canadian Western Bank is updated and rated (higher) Buy at $35.50.

It was surprising and disappointing to see CWB drop $2.00 after releasing a strong earnings report on Thursday morning. The earnings growth of about 9% apparently fell short of analyst expectations of about 12%.

The additional drop of 61 cents on Friday was more understandable, and could have been larger, given the bad news about the TransMountain pipeline and given that the NAFTA talks did not appear to be going well.

Certainly CWB could decline if a NAFTA deal is not soon reached or oil prices decline or it reports unexpected loan losses. But overall, it appears set to continue to grow earnings. And, its valuation in terms of the P/E ratio and price to book ratio is lower than its historic average. Its price to book ratio is 1.38. A more normal level is closer to 1.75 to 2.0. But it has gone done down to around 1.0 or slightly below at times.

One could ponder what is a fair multiple of book to pay for a company that is earning around 12% on book equity in a world where the ten year Canadian government bond yield is 2.3%? At its current price, CWB pays a cash yield of 2.9%. Based on historic results, CWB’s book value per share could easily double in ten years. There will certainly be investments that do better than CWB in the next ten years. One of those will almost certainly not be a ten year government bond purchased today at a yield of 2.3%.

Canadian Western Bank now does about one third of its lending in Alberta, one third in B.C. and one third in the rest of Canada (largely Ontario). The Ontario lending is not done through bank branches.

Happy Birthday to Warren Buffett who turned 88 today. He spent the day in Manhattan at a lengthy lunch for eight that he auctions off annually. This year the lunch auction had raised over $3 million for a charity. He was interviewed on CNBC today. I read the transcript of the interview. I always find his words to be both very impressive and comforting. I think anyone who has listened to Warren Buffett on at least a few occasions and who is not extremely impressed must be an incurable cynic or just refuses to believe what is in front of their eyes. (How could a Billionaire be a truly self-made and decent person? some people just can’t fathom that.)

The transcript is well worth reading.

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

It was very disappointing to see the federal court overturn the TransMountain pipeline approval today. I worked for a utility regulator for over 12 years and it has long been my opinion that these regulatory proceedings have basically collapsed under their own weight. The level of interventions and consultations have absolutely ballooned. The scope of the hearings have expanded exponentially. But the court said it was not expansive enough. I certainly don’t think it is reasonable that a pipeline company should have to answer for all the environmental aspects of exploring for oil and for transporting it on ships  and for the carbon released on burning the oil. The scope of the hearing should be restricted to the pipeline itself and the lands it crosses. I know from direct experience that the amount of material filed and placed before regulators in these cases is well beyond the number of pages that any human could ever hope to even read, let alone truly comprehend in anything like a year. And increasingly, parties that are consulted will never be satisfied with merely being heard. They all now seem to insist that the hearing was flawed if the decision goes against them.

As far as oil tankers, there was a time when the people living in any port City realized that more ships meant more prosperity. Oil tankers are certainly already subject to license and safety regulations. Why in the world should those aspects be looked at in a pipeline hearing? And how could the NEB really weigh the risks versus reward? In a world of zero tolerance for risk it is an impossible job. These decisions are best made by government. In fact, the decision was already made by government so can we please move on?

This immense difficulty in getting a pipeline built that mostly just twins an existing line is a huge black mark against Canada.

It is past time for Trudeau to declare the project in the national interest and to get the line built.

Canadian Western Bank declined 5.25% today after releasing record earnings and raising its dividend. The bank now trades at about 1.4 times book value. The Canadian banks including CWB have all been great investments over the long term. But that is not because they traded up to high multiples of book value or high multiples of earnings. Indeed, they usually trade at relatively low multiples, perhaps reflecting risk. Their stock prices have moved higher over the years as they basically pull themselves up by their own boot straps. That is, they tend to keep on increasing earnings and book value and even at low multiples the stock price gets pulled up. I would have liked to see CWB rise $2 today and I thought it would after reading the report this morning (before the opening of trading). Instead it fell $2.00 It will likely continue to be a good investment over the years as its earnings increase over the years.

Tomorrow, Friday, offers the possibility of good progress on NAFTA (or not). Never a dull moment it seems.

Canadian Western Bank reported earning this morning. Earnings per share up 9%, the dividend raised by 4% and giving a positive outlook. And the stock promptly declined 5%.

Headlines indicate analysts expected 12% earnings growth. And perhaps the 4% dividend increase is seen as disappointing.

I was surprised to see the stock drop on what looked like quite a good earnings report. I have added to my already large position this morning. It may not be wise for me to get over-exposed to one company like this but that was my reaction this morning.

I will learn more about analyst concerns later today from the conference call.

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

AutoCanada was up 5.1%.

On Thursday morning, Canadian Western Bank will report. With its commercial lending  focus, its results do not necessarily track that of the large Canadian Banks. I believe it should report growth and an outlook that continues to improve.

Boston Pizza Royalties Income Fund is updated and rated Speculative Buy at $18.09.

The thesis for investing in the BP Royalty units was that you get a good yield and the yield should rise perhaps 1 to 3% annually on average. If that can be expected to happen or even if the distribution stays as is, then BP should be a good investment given the cash yield. This should be true even with moderately higher interest rates.

BP has a strong history of growing its cash distribution per unit.

However for about the past two years, distributable cash per unit has declined somewhat. And this occurred despite menu price increases particularly in Ontario (in response to higher minimum wages) that should have increased the franchise fees that the BP Royalty entity collects and pays out.

BP same-store sales growth has been weak to slightly negative. Meanwhile Statistics Canada reports that restaurant sales in Canada grew an average of 6.4% year over year in the past nine months. Alberta, where BP has 28% of its restaurants was weaker at 2.6%. If BP maintained market share its same-store growth would still lag these figures since some of the growth reflects new restaurants. But overall it looks like BP has lost some market share.

Unless BP starts to grow its same-store sales in this Q3 it is possible that a small cut to the distribution could be made. I believe BP will attempt to avoid that but that now seems like a possibility.

Any distribution cut would likely be small such as from 11.5 cents per month down to 11 cents. But the market would likely react quite negatively if that did occur. BP is attempting to achieve growth with renewed marketing efforts and added take-out sales.

Given the 7.6% yield the rating is still in the Buy range. But given at least some possibility or even just the fear of a modest distribution cut it is now rated Speculative Buy.

On Tuesday, the S&P 500 was about unchanged while Toronto was down 0.5%.

Linamar was up 3.3%.

Our one penny stock, Ceapro was down 10% after releasing its latest results.

The next update will be for Boston Pizza Royalty Units. On a yield basis it looks attractive but there is at least some possibility it could cut the distribution by a small amount unless its distributable cash per unit begins to grow again in the next quarter or two. It targets a payout ratio of around 100%. Its trailing year payout ratio is 101.6%. In 2013 the payout ratio for the year was 100.7% and the distribution was maintained. If there is a cut to the distribution, it might be only in the range of say 4% (From 11.5 cents monthly to 11 cents.) But the market could react quite negatively to that. On the other hand perhaps Q3 will see growth in distributable cash per unit and/or perhaps they will simply allow the payout ratio to stay above 100% for several more quarters. Sales have continued to be somewhat soft in Alberta. I had thought that menu price increases especially in Ontario would lead to an increase in distributable cash per unit but as of Q2 that has not been the case. Additional annual menu price increases were implemented in June and should benefit the upcoming quarters – unless the higher prices lead to lower customer traffic.

On Monday, the S&P 500 was up another 0.8% and Toronto was up 0.5%.

Linamar rose 6.5% on news of progress on NAFTA. I suspect that if Canada gets a NAFTA deal done then Linamar could easily rise another 20% or more. Meanwhile it could be volatile if the the NAFTA news does not continue to look positive. And, it is possible that the market will not be too enthusiastic on Linamar even with NAFTA due to slowing auto sales in the U.S. which are believed to be declining from recent peak levels. AutoCanada was up 2.8% and should also benefit from further positive progress on NAFTA.

The report for Toll Brothers is updated and rated Strong Buy at $37.52. Toll Brother’s earnings have been very good but the market fears that home prices will soften with higher interest rates.

I bought some Starbucks shares today.

On Friday, the S&P 500 was up  0.6% to a new all-time closing high.

Toronto was up 0.2%.

Constellation Software was up 2.2%.

This week the Canadian market will get earnings reports from the remaining big banks. We will also get earnings for Canadian Western Bank on Thursday morning. I suspect it will be another quarter of growth.

Starbucks is added to the list rated Buy at $52.75.

Starbucks is not a screaming Buy but it is a solid blue-chip type company that is very likely to be a decent invest over the long term. If you are  customer then why now own at least some shares? And even as a non-customer there is a satisfaction that comes with owning a piece of an obviously prosperous business that most of us see so often both near where most of us live and work as well as where most people travel. Recent weakness in the stock price combined with earnings that have been rising provide, I believe, a buying opportunity.

Starbucks’ stock price has mostly trended down since it reached its high of about $63 almost three years ago around October 1, 2015. It did briefly rise and surpass that high at around $64 on May 1, 2017. But it’s now down about 17% from those highs. Prior to its 2015 peak, Starbucks had absolutely soared from lows briefly under $5 in 2009. That low had come in the financial crisis after Starbucks had reached highs of around $19 in 2006.

By the way, when looking at a stock chart that covers decades be aware that normal arithmetic scales really distort the history of the price gain. A log chart is really the ONLY way to properly look at the long term trend in any stock price that has changes substantially over 20 years or especially 30 or more years. The higher the percentage average gain in the stock price the more an arithmetic chart distorts the trend. Note that on the Yahoo charts the default scale is arithmetic. But you can click the interactive chart option then choose maximum time period and then under settings change to the log scale. The picture changes drastically between arithmetic and log. Only the log chart is useful if trying to see if the price trend is similar in recent years to distant past years.

Most stocks rise in the long term for the simple reason that they make money most years and they seldom distribute all of the earnings as dividends. Stock prices can certainly go down over any given period of time. But over long periods of time if a company is making money most years and is retaining a large part of the earnings to grow the business, then the stock price almost has to rise (unless it started out at some ridiculously inflated level).

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

AutoCanada was down 5.1%. If new management are successful in their plans to substantially increase earnings, those earnings are not likely to start to materialize until Q4. Q3 could show a lot of progress but will also likely have costs associated with the management change including the compensation cost of rights (options) granted to the new management. When the stock price would start to anticipate gains is difficult to predict.

Toll Brothers declined 2.8% giving back more of its recent gain. Home Building stocks seem to be unpopular at this time and so Toll is trading at a low multiple to earnings and relatively low premium to book value. Meanwhile Toll is predicting double digit earnings per share gains for its fiscal 2019. It is currently in Q4 of fiscal 2018.

On Wednesday, the market basically ignored Trump’s latest troubles as the S&P 500 was about unchanged.

Meanwhile, Toronto was up 0.3%.

Canadian Western Bank was up 2.4% to $38.68. This was likely in reaction to good results from Royal Bank and also perhaps a reaction to higher oil prices. This stock had reached a high of $40.83 back in January. And in July 2014 it had reached its all time high of about $42. As its earnings and book value continue to increase it certainly could surpass those highs if the recovery in Alberta continues.

Toll Brothers declined 2.9% giving back some of yesterday’s large gain.

AutoCanada recovered 6.4% to $12.94. Today, the company announced the hiring of a new CFO as well as a V.P. who will also be CFO of the U.S. region. This continues the recent pattern of rapid action by the new executive chair Paul Antony.

My expectation is that the new management team will be granted options and other incentive compensation arrangements. If AutoCanada is truly undervalued at this point and can be “repaired” then this management team could expect to make at least a few million dollars each. Recently the market cap of the stock was $320 million. If new management can double that in say 24 months then things will work out very well for share holders buying near the lows. It appears as if a high quality management team has been assembled. And no-doubt they have been enticed with options and the possibility a big payoff for them.

Filings made this week indicate that the executive chair has been granted one million options at a price of $10.05. In addition he purchased 277,200 shares at at average price of $11.27 each. That is a purchase of $3.125 million apparently with his own money through his investment corporation. A director since 2014, Barry James purchased 10,000 shares at $10.25 on August 14. MaryAnn Keller, a director since 2015 who is now the lead independent director purchased a total of 8000 shares on August 14 and August 20 paying U.S $8.09 to $8.71. She was also granted 2948 rights (options). The other incumbent directrs were granted just 830 rights. Two new directors were granted 1487 rights.

Michael Rawluk, the new President (but not CEO) and chief operating officer was granted 430,000 rights (options) at $10.05.

I suspect that the new executives will also have bonus arrangements that will pay off substantially if they can substantially increase profits of the company.

Statistics Canada reported sales in food services and drinking place for June. Of note, Ontario was up 2.1% and Alberta was up 1.5%. But that was May to June of this year as seasonally adjusted. More impressively, Ontario was up 7.6% year over year which would have been mostly due to price increases associated with higher minimum wages. Alberta was up only 1.5% year over year. The Alberta result is sort of lukewarm at best in regards to Boston Pizza which has a heavy concentration of restaurants in Alberta and which I believe faces but the Ontario figure is a positive for Boston Pizza.

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

Toll Brothers earnings were better than expected in all regards and the stock was up 13.8% and I think remains cheap.

Canadian Western Bank was up 1.8%.

AutoCanada managed a 5.8% recovery.

I trimmed my CRH Medical position by 25% today given recent gains. This keeps my investment to a more reasonable level in this company.

With two of Trump’s close campaign associates being officially felons as of today, it might make sense for the markets to be a bit more worried. But this evening the pre-market on the DOW was down a mere 45 points. The Trump tax cuts and business friendly policies have been a big boost for markets. At some point, I would think that the market would start to worry that Trump will eventually be pulled down. It is a strange world. It seems to me that Trump was formerly calling the Mueller probe a witch hunt. But more recently he calls it a rigged witch hunt. Clever. That way if it finds him guilty of something, well it was rigged in the first place.

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

CRH Medical was up 6.0% in Toronto. With the strong recent gains, I am considering trimming my position in this company.

Toll Brothers is scheduled to report earnings before the open tomorrow. I believe the market is expecting a strong increase in earnings but is also anticipating some softening in the market regarding current sales. The stock is down about 27% this year to date in response to fears about a softer market including higher lumber prices. In terms of its price to book value and price to earnings ratio, I believe the stock is cheaper than it has been in years.

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

CRH Medical was up 4.5% to $5.14 in Toronto.

The big Canadian Banks will begin reporting their Q3 earnings this week. They will likely report continued growth in profitability on their lucrative Canadian personal and commercial banking. Profits on core banking areas outside of Canada should also be higher. Investment Banking and Trading operations are much harder to predict.

Canadian Western Bank will report on August 30th and it seems likely they will have had another good quarter.

Stock market reaction usually comes down to how good the earnings are in relation to expectations as opposed to in relation to the comparable quarter last year. The stocks also react to changes in outlook.

Constellation Software is updated and rated Weak Buy / Hold at Canadian  $949. Note, though that it is analysed in U.S. dollars because it reports in U.S. dollars.

Constellation Software has been a fantastic investment over the years. I have generally rated in in (lower) Buy because it always seems expensive and is pricing in a lot of growth. But it has continued to achieve high growth and more than justify its price over the years.

With the previous update on March 31 I was concerned about what seems to be their somewhat aggressive view of adjusted earnings. But the fact is that whether looked at by revenue per share growth or cash flow or adjusted earnings or book value per share, the growth has been exceptionally good. I had lowered the rating to (lower) Sell on March 31 but I am raising it to Weak Buy / Hold at this time. I hold a what is unfortunately only a very small amount and would be interested in adding if the price happens to dip.

The founder and CEO writes an exceptionally candid and useful shareholder letter which is very much worth reading.

Markets were very strong on Thursday with the S&P 500 up 0.8%, the DOW surging 1.6% and Toronto up 0.5%.

Walmart surged 9.3% after a strong earnings report which including a big gain in on-line sales.

CRH Medical was up 6.3% in the U.S. and 4.9% in Toronto to $4.92 – which is a good recovery from its lows last Fall of $1.86. But it is also still down over half from the high briefly reached in early 2017.

Toll Brothers will report earnings on Tuesday. Thee stock is down 29% this year after having risen 55% in 2017. Yet the earnings outlooks seems to remain strong.  The analyst forward P/E is 6.9 and the trailing P/E is 9.5 which suggests that analysts expect strong earnings growth of 37% in the short term. But the current price would seem to suggest that the market either does not believe that or believes that earnings will fall after that. My report indicates that earnings could rise 27% in the next year simply based on the increase in contracts to build that have already been signed. Possibly higher lumber prices will trim the earnings increase. Reports are that the home builders face labour shortages. Being so busy that there are labour shortages does not sound to me like such a bad scenario. The Home Builder sentiment index has declined slightly to 67 but this is still a positive sentiment level. So, Toll Brothers certainly looks cheap in terms of valuation but the home building industry which has been quite robust is softening. In part, this is due to higher interest costs. It seems that home builder stocks have fallen out of favor at this time despite strong earnings.

The next update will be for Constellation Software.

Wednesday was a down day in the markets apparently due to worries about the situation in Turkey and contagion from that.

The S&P 500 was down 0.8%. Toronto was down 1.2% as the price of West Texas oil fell to about U.S. $65.

Most stocks were down…

BHP Billiton was down 5.3% in New York as the price of various commodities including copper fell.

AutoCanada managed a 16.0% bounce. At the current price it is possible that there could be a take-over offer given the valuation and given that there is no controlling share holder that might block such a bid.

Tuesday’s markets were strong with the S&P 500 up 0.6% and Toronto up 0.5%.

Dollarama was up 4.0% although it did not issue any news. Many stocks were up in the range of 1% to 1.5% today. Linamar was up 2.0%.

Stantec was down 0.4%. But after the close it revealed that it will acquire a British engineering consulting firm with 700 employees. This is a fairly large but not huge acquisition for Stantec which currently has 22,000 employees including 2400 in the U.K. But it does illustrate that Stantec continues its long-standing practice of growth by acquisition. I suspect the market will view this as a positive development.

The report for Costco is updated and rate Weak Sell / Hold at $220.31 (That was the analysis price, it’s 221.33 as I post this).

Costco is a fantastic business. It’s high P/E (34 currently) is the reason that I have typically rated the stock as Weak Sell /Hold going back quite a few years. Occasionally there have been pullbacks but it has consistently recovered to trade at a high P/E level.

Once again it looks expensive. But there may be little reason for it to pull back unless there is a general market decline. It seems set to report strong earnings growth in the next two quarters due to the lower income tax rates. But it does face somewhat tougher comparable in those quarters which saw growth in the prior year of 18% and 13%. The consensus analyst forward P/E ratio implies an earnings per share growth expectation of 17%.

For Costco, there has been no sign that if faces any competitive price pressures. I had thought that in the reputably highly competitive grocery market competition would force some of the income tax savings to be passed onto customers. For Costco so far, this has not been the case. Due to its low costs, Costco may be more protected from competition.

Overall, Costco’s share price could pullback if earnings growth is not nicely into the expected double digits.  If I held it I would likely sell at least half based on the high valuation. But a reasonable strategy might be to hold and be prepared to add to the position on a pullback. Over the long term such as five to ten years the stock will likely continue to rise even if it does pullback temporarily.

On Monday, the S&P 500 was down 0.4% and Toronto was down 0.5%.

AutoCanada fell another 6.5% to $10.05. Trump’s threats about auto tariffs are another factor pushing this stock down.

Toll Brothers was down 4.2% to $34.17. They will report earnings on August 21.

The report for AutoCanada is updated and rated Speculative Buy at $10.75.

This has been a very (very) disappointing investment since it was added to this site on July 14, 2015 rated Buy at $40.36. At that point it had already declined from a high of $90 per share very briefly reached on June 6, 2014.

This site has had great success with some growth-by-acquisition companies including Couche-Tard, Stantec, TFI International and Constellation Software. Auto dealers have always appeared to be some of the most prosperous looking businesses in any City or town. Overall, I thought AutoCanada had good potential and my rationale for rating the stock in the Buy range was provided in the report with each update.

But its concentration in Alberta proved very problematic as the oil price declined and Alberta went into recession. It also had a change of management when the founder / CEO left. Some other executives also left. More recently its heavy concentration of Chrysler dealerships proved to be a big drag as Chrysler sales have declined rather steeply even as auto sales in Canada were at a record. To top things off it now appears that its recent large U.S.A. acquisition was a huge mistake as they now realize they over-paid.

The share price has now declined to levels that I would never have guessed would occur.

So, what now?

The company is under completely new top management in the past couple of months. New management has made a large write off of goodwill (and equivalent) indicating that they vastly over paid for the U.S. acquisition and also to a far lesser extent many Canadian acquisitions. On an adjusted basis the earnings are still certainly positive resulting in an adjusted P/E of 8. And the shares are trading at only 62% of book value. The new management projects sharply improved results in the next 18 months.

Overall, at this point, the shares have hopefully finally bottomed out and there should be good upside potential over the next year if the new management is successful. So far, in just a couple of months this new management led by the Board chair (now effectively CEO) has already taken swift and decisive action. And they seem confident in their plans for material improvements.

AutoCanada released its Q2 results and they are extraordinarily poor.

They are replacing the CEO (though weirdly keeping him on as an adviser in the area of relations with the various auto makers and dealership acquisitions).

The CFO is resigning but staying on as an advisor for three months.

They have added some new executives and Board members.

They basically admitted to being incompetent (or close to) in supervising and integrating their dealerships and in over-paying for their recent large U.S. acquisition.

They provided a fairly grim outlook while at the same time suggesting that big improvements in operations and ultimately profits are coming.

Well, hopefully, they have gotten all of the bad news out of the way at once.

I imagine the stock will open sharply down tomorrow. However, they do claim that on an adjusted basis the earnings per share would be 55 cents per share which compares to 57 adjusted in Q2 last year.

This has been an unfortunate investment. I had analysed it based on the facts as I saw them and reported on but the future certainly did not pan out as I had thought it would.

P.S.

Just trying to figure out what is happening at AutoCanada. Three of the eight directors elected on March 21 had resigned, two on June 20 and the third on June 26 though one stayed on to help establish the Special Committee. Brand new director Paul Antony, age 50, was appointed chair on June 20.

I had thought that maybe some directors resigned because they did not like the big U.S. acquisition.  And that could be given it was announced March 22, and possibly some directors only learned of it that day. But perhaps more likely is that they clashed with Paul Antony.

Paul Antony is now to be executive chair. Who is now CEO was not clear to me in the press release. But I would say Paul Antony is in charge. Given the rapid changes in the Board and executives in the very few short months that Paul has been on the job, it seems clear that he is a “doer” and probably a real fire brand. Perhaps the leadership of Paul Antony is what the company needed.

All may certainly not be lost in terms of this investment. The company sill owns 54 dealerships. Even with the Q2 loss (mostly a write-off of goodwill), the shares are trading somewhat below book value. And it appears that Paul Antony is not going to fool around in probably “putting the wood” to everyone to get improved profits ASAP.

On Thursday, the S&P 500 was down 0.1% but Toronto rose 0.6%.

Boston Pizza Royalties Income Fund released Q2 earnings which I found to be somewhat disappointing. The increase in same-store franchise-fee-eligible sales that I thought would occur driven by menu price increases in Ontario, and also driven by comparison to weak results in 2017,  did not occur. Instead, these were down 0.4% which must have been caused by lower traffic. Due to lower franchise-eligible sales per unit and due to a small income tax increase the Payout ratio is running above the target 100%. I’m a bit worried that a small distribution cut could be required. However, the fund may try to avoid that and ride through a down period if it can see increased sales per unit ahead. The market reaction was a decline of only 0.7% so perhaps my fear is unfounded. I reduced my own large position by what amounted to 28% by selling some units in two non-taxable accounts where I had a small gain.

Canadian Tire fell 7.9% after announcing Q2 results. This calls even more into question why it released positive news about  its partnership yesterday with a pet supply company that pushed the share price up. Part of the reason for earnings being disappointing was some unusable costs for its new loyalty program and for the acquisition of Helly Hansen. I have not looked closely at the earnings release yet but the issue may be that analysts simply were over-estimating the earnings. The stock price may simply have risen a bit too far too fast.

Stantec was up 3.5%. See update in post just below.

Costco was down 2.8% despite reporting strong July same-store sales. It’s an exceptionally great company but the market gets worried about its valuation at times.

Regarding Saudi Arabia: Their decision to cut off trade (at least imports) and to take other actions will certainly negatively impact those few companies that sell to them. This apparently includes SNC Lavalin. But I have seen concern on BNN that the Saudi sovereign wealth fund selling shares in various Canadian companies is also a concern since it would push share prices down. To me that is no concern at all. Those share prices would likely bounce back and the only party harmed would be the Saudi Wealth fund. The other actions they are taking would appear to harm Saudi students in Canada a lot more than it harms any Canadian university or hospital. Apparently they also stated that they will continue to sell oil to “Canada” (meaning I believe Irving Oil). Irving Oil may want to consider other sources for ethical reasons. In any case, overall, this action by Saudi Arabia is not any kind of factor whatsoever in my investment decisions.

Stantec is updated and rated (lower) Buy at Canadian $34.14 or U.S. $26.20 after releasing Q2 earnings.

Q2 results were hampered by continued losses related to a few projects that Stantec inherited in its 2016 purchase of MWH Global. These were Construction Services projects in which the company takes significantly more cost risks than it does in its main business of hourly consulting. It is somewhat disturbing that these costs showed up again after the company had indicated in its Q4 press release that it did not expect such issues to arise again (as they had in Q4). Perhaps the company should not have shared that expectation.

Even when I partially adjust for these unusual costs, Stantec’s earnings growth is tepid at this time. But I still expect it will put these issues behind it and could show a large earnings gain in the next few quarters. On the other hand the Construction Services division is now under Strategic Review and it’s hard to guess the outcome of that – although Stantec did review the division for a goodwill impairment for this earnings release and found no impairment – which is a positive sign.

Overall, Stantec certainly has the potential to rise significantly if it can put the the losses on the problematic Construction Services projects behind it. But the company seems more risky at this time.

Boston Pizza Royaties Q2 results are out this morning. The results are at least moderately disappointing with same-store-franchise-eligible sales down 0.4% and this is despite some menu price increases and increased take-out orders. Traffic volume in the restaurants is not revealed but must be down. This is blamed primarily on the continued lower activity in Alberta and other energy-patch areas.

The distribution remains attractive at over 7%. However, the payout ratio in Q2 was 103% in Q2 which is a quarter that is normally expected to be under 100%. The release may be hinting at a possible modest distribution cut to keep the payout ratio at the target 100% level.

The bottom line is that without the hoped for increase in same-store franchise-eligible sales and with higher interest rates and despite the attractive yield, the unit price could certainly decline until and unless same-store franchise sales begin to grow again.

I have a fairly large position and I may reduce it somewhat.

I do note however that the Q2 report continues to suggest that the outlook is positive with plans for more advertising and other actions. My fear of a small distribution cut may be unfounded. A lot will depend on the Q3 results. As is usually the case, investing is a waiting game.

On Wednesday, the S&P 500 was about unchanged while Toronto was up 0.2% despite a decline in oil prices.

Canadian Tire surged 3.2% after announcing it would partner with Petco to bring bring Petco’s prducts into its stores and online. It was not clear in the press release how big a deal this was but it seemed to have sparked a strangely large jump in the stock. It also seems odd that this news was not saved for their earnings release tomorrow. In any case Canadian Tire has been a stellar investment for about the last decade.

Stantec declined 1.9% after reporting Q2 earnings. It continues to have problems with its Construction Services division that it acquired in a large acquisition about two years ago. Its main business of consulting services is doing well. It will likely put the Construction Services problems behind it. At this time the stock certainly has potential but is more risky due to this lingering problem.

Linamar was down 6.3% despite reporting stellar earnings growth in Q2. The stock looks very cheap on a trailing earnings bases and on the basis of analyst earnings projections for the next year. But trade war fears have battered the price down. It takes bravery to keep adding to positions but this could be a great opportunity.

Costco has reported another month of excellent same-store sales growth in July. Up 6.4% excluding changes in gasoline prices and the impacts of currency changes.

On Tuesday, the S&P 500 was up 0.3% while Toronto was down 0.8%.

Based on my Melcor update I added a little to my position in that stock.

I also added a little to AutoCanada which will report on Thursday. It’s certainly possible that AutoCanada’s Q2 earnings will be disappointing. But there would seem to be a lot of good deal of potential disappointment already priced-in to the stock.

I am now reading through Starbucks results. I plan to add Starbucks to the list.

On Monday, the S&P 500 was up another 0.35% while Toronto was closed.

Berkshire Hathaway was up 2.9% on its good earnings results. I had mentioned that Berkshire had not yet bought back any shares under its new plan and I thought that might be a negative. But I now see where Berkshire had pledged not to buy any until the Q2 results were out. This is in fairness to those who might have sold to Berkshire, who knew the results would be good. But from here forward it is fair game, investors who would consider selling have been warned that Buffett could be buying. (So, they might want to re-examine the logic of their decision to sell).

CRH Medical was up 4.35% in U.S. trading.

Melcor Developments is updated and once again is rated Strong Buy at $14.52.

It is frustrating to see this stock languish at just under half of book value. Not only does the equity per share have a value that is likely around twice the share price but the shares are also trading at only about 8.4 times trailing adjusted earnings by my calculation.

The question arises as to whether the assets are actually worth at least book value if the company were to sell off its assets. Well, around half of the assets are investment properties. The valuation of those tends to be pretty clear based on the rental revenues generated. Yes, those values have declined somewhat with higher vacancy rates and lower rents in the office buildings in Alberta. But that is already reflected in the book value. And yes, the values could decline further with higher interest rates or a return to a deeper recession in Alberta. But for the moment those buildings are on the books at approximately their market value. About 37% of the assets are development lands. Some is raw land and some is developed and this includes capitalized interest. Some of this land is surely worth more than book value (perhaps far more). But some may be worth less than book if the land was purchased at times when the Alberta economy was stronger and oil prices higher. But overall, there is no indication that this land is not worth at least close to book value or more on average. So why are we able to purchase these shares at half of book value? Is it not likely that the demand for residential building lots in Alberta will stay fairly strong as pipelines eventually get built? Or as natural gas goes up in value if and when a large LNG plant is finally announced for B.C.? It’s always possible that land and building values will plummet either due to recession or far higher interest rates. But I just don’t see the justification for a 50% discount here.

It seems the share languish partly because they trade so thinly that analysts don’t recommend them despite the value. And without recommendations they continue to trade thinly due to a lack of buying interest. It will likely take some kind of catalyst to ignite the shares such as sharply higher oil prices and/or predictions of increased home building . Or maybe just a couple of strong quarters of earnings if that occurs. So there is certainly potential upside but it may not be imminent. Meanwhile I believe the 52% discount to book value should mean that the shares should not fall much in price. The 3.6% yield is also attractive.

On Friday, markets were strong with the S&P 500 up 0.5% although Toronto was up only 0.1%.

Berkshire Hathaway released its Q2 numbers on Saturday morning. They were strong. Of interest they reported no share buybacks have taken place. In isolation that could push the share price down but perhaps the strong earnings will prevent that. Buffett is extremely patient. He may wait and see if there is a better opportunity to buy back Berkshire shares. Although he has also said that if Berkshire’s shares were ever plunging he would let the plunge happen and not try to reverse it with buy backs.

I mentioned that Melcor Developments sold 147 single family building lots at an average $163k in Q2 versus 104 at $174k in 2017. In both cases some of these lots were part of a 50% joint venture so the net lot sales for Melcor’s owners was lower. Historically, I believe there were very few joint venture lots but now a substantial number of lots (I don’t know how substantial) are joint venture. In any case the sales in Q2 2018 look fairly good. Other more volatile aspects of Melcor’s business come into play, but these single family lot sales are an important indicator. Here are the historic number of lots and prices for Q2:

2018 147 @ $163k average

2017 104 at $174

2016 92 @ $179

2015 201 @$153

2014 244 @$182

2013 197 @153

2012 149 @ $142

2011 80@ $143

What really matters is the how many they will sell in future and at what price and especially in Q4 which is seasonally the biggest quarter.

I mentioned my regret at substantially reducing my position in TFI International. Some I sold at about $32.50 (oops) But most I sold at $41.50. In both cases I had fairly large gains (very roughly about 50 and 100%). And these were sold in non-taxable accounts. So, in may ways I have little to complain about. But with the price now at $45.78 and the company optimistic it would be better if I had not sold. I think my regret comes partly because it was my own decision to sell. So a committed error. Meanwhile, I have little regret about not selling Melcor at higher prices since I still think it should recover given it is trading at half of book value and where book value represents very real assets with presumably very real market values that are at or above book value.

The report for CRH Medical is updated and rated Speculative Buy at U.S. $3.45 or Canadian $4.49. While nominally a Canadian company it is in fact a 100% U.S. company in substance and my report is in U.S. dollars.

This company was added to the site rated Buy on October 9, 2016 at $4.32 as a growth-by-acquisition company that appeared to offer reasonable value. The stock then approximately doubled. But then very bad news came as it was announced that the company would have to reduce its government-controlled prices for its services. In the confusion about its future profitability that followed, the stock briefly fell under $2 in the late Fall of 2017 before beginning a good recovery. We rated it (lower) Strong Buy on November 3, 2017 at U.S. $1.85. It now appears that, as we suspected, the company is still nicely profitable in 2018 even with the reductions in its fees. The growth model remains intact. It’s still a small company and its accounting is complex. It appears to offer reasonable value.

Thursday saw the S&P 500 rise 0.5% and Toronto rise by 0.2%.

CRH Medical was up 3.5% after reporting earnings. The market apparently agreed with my assessment (on a quick look at the earnings) that the earnings report was good but not great.

The report for TFI International is updated and rated Buy at $45.49. Given its sharp price rise I wanted to see if the earnings justified the price gain. And I think they do. This is a very well managed company. In 2017 it had some weakness. But the market for its services has improved. And it has been very good at cutting costs. I regret having substantially reduced my position in this stock after it had recovered nicely from a dip to about $27.50 in the Spring of 2017. The earnings gain in the first half of 2018 has been very substantial and powered the share price up. The founder / CEO handles the earnings call himself and he seems very optimistic about further earnings increases.

Melcor Developments released earnings after the close. About half of its business is the development of raw land into single family home building lots and some commercial lots. That business tends to be cyclic.  The other half of its business is the development, ownership, and leasing out of commercial (office, retail and some light industrial) space which is generally a steady cashflow business – although that business has recently seen some decline in cash flows due to lower market rents on renewing leases. Overall its operating cashflows remain cyclic especially given the recession in Alberta. Cashflows are also affected by occasional sales of rental buildings or lumpy sales of commercial developed land. On top of that, various accounting rules cause the GAAP earnings to be volatile even when the cashflows are steady. The result is that the earnings report can be difficult to interpret.

The Q2 report looks weak from a GAAP basis and somewhat weak from a cash flow perspective. However it did sell 147 building lots at an average price of $163,000 in Q2 this year compared to 104 lots at an average price of $174,000 in Q2 last year. Both figures however include a substantial number of lots that are part of a joint venture and so not all of the revenue is Melcor’s. Average lot prices vary with the size and location of lots and a lower price may or may not  indicate weaker market conditions. Lot prices do not appear to have declined all that much due to the (now waning) recession.

Melcor continues to trade at about half of book value. This could remain the case unless the company can buy back shares (which it does not seem to want to do and which is difficult due to the low trading liquidity) or some major investor takes an interest or the Alberta economy recovers more strongly. Under accounting rules, Melcor would have to write down its book value if it did not believe that its assets minus liabilities were worth book value (which again is double the share price!).

Given the complexity of the earnings and the low trading liquidity and lack of interest from analysts there may not be much market reaction to the earnings.

On Wednesday, the S&P 500 was down 0.1% and Toronto was down 0.35%.

TFI International was up 5.2%. This has been a very well run company. Reducing my position in this name earlier this year has not turned out so well. Sometimes it seems that the best time to sell a good company is never. Still, this stock is not cheap and it might be prudent to trim positions somewhat.

CRH Medical released earnings after the close. At a quick look, the earnings report looks reasonably good but not great. Earnings are improved versus 2017 but do remain relatively low.

The report on the Melcor REIT has been updated and rated (lower) Buy at $8.17.

On the one hand the 8.2% yield is highly attractive. And the units are trading at 73% of book value. And the REIT is doing a good job of signing on new tenants and keeping the occupancy up. On the other hand lease renewals, particularly on the Edmonton office space, are being done at rates lower than the expiring leases. And building market values have been declining somewhat. It seems likely that adjusted earnings per unit which declined, about 14% in the first half of 2018 could continue to decline somewhat in the rest of 2018. A small cut in the distribution is  a possibility if the payout ratio goes above 100% of adjusted earnings. And, interest rates are rising somewhat. Overall, the units seem attractive for the yield (even considering some possibility of a modest cut) and could be rated Buy. But given the potential for a further earnings per unit decline in the last half of 2018 and even the possibility of a modest cut to the distribution, I would hesitate to rate the units too highly. I have a position in these and would be a buyer (cash permitting) of additional units under $8.00.

On Tuesday the S&P 500 and Toronto were both up 0.5%.

TFI International was down 2.2% giving up part of recent gains. In contrast Constellation Software was up 2.5% recovering part of a recent decline.

FedEx was up 2.2% and has been volatile of late.

WSP Global was up 2.5% after announcing yet another acquisition.

On Tuesday morning, Statistics Canada released May GDP figures showing a 0.5% gain in May versus April with an almost unprecedented 19 out of 20 sectors growing but in part this was explained by weakness in April linked to weather.

I notice the Brookfield companies recently making acquisitions of publicly traded and paying fairly large premiums to the stock prices. This illustrates stocks can be under-valued (or over-). Brookfield are smart operators and the prices they paid probably indicates that investors were under-valuing those companies. Unfortunately though some companies (Melcor is probably an example) can remain under-valued because a controlling owner will never sell. But ultimately, value tends to surface.

On Monday, the S&P 500 was down 0.6% and Toronto was down 0.3%.

Heineken fell 5.3% after releasing first half earnings.

Constellation Software slipped another 4.2%.

The Canadian dollar is at 76.7 U.S. cents which is a six week high.

West Texas oil is just over $70.

This week will feature additional Q2 earnings reports.

I ate at the large BP at Niagara Falls, BP calls this a flagship location. On a Saturaday afternoon it was certainly very busy although not full. Almost any food and drink business in Niagara Falls seems to be quite busy due to the crowds.

Sunday morning early things were quit but a large Tim Hortons had a big line up.

Monday morning early a Starbucks was busy but nothing like the Tim Hortons had been been. Also the starbucks was out of regular tea. That’s poor performance not acceptable from a chain like that.

I think at Niagara Falls the free view of the Falls draws the crowds and then most people end up spending lots of money.

Constellation Software was down 9% on Friday after releasing Q2 earnings. It is a fantastic company but had looked over-valued. It will likely continue to do well long term. Personally, I am not a buyer at the current price.

Trump has said the U.S. would agree to a zero tariffs with the European Union if all non-tariff barriers were also eliminated. I have to agree with that approach. If countries want free trade let it be truly free. Canada should jump at any similar offer. Sorry dairy, poultry, and egg farmers but we need free trade.

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

TFI International (formerly TransForce) was up 10.0% after releasing Q2 earnings. It’s now up 32% year to date and 67% since being added to this site rated (lower) Strong Buy on October 23, 2015. At this time (although I have not read the earnings report) I’d be tempted to trim the position. However I did that earlier this year as it rose which cost me gains. Sometimes the answer to when should I sell is “never”. I attribute the success of this company largely to excellent management. It’s probably not the easiest industry to make money in and so management has made the difference. It’s been a successful growth-by-acquisition company for many years.

Linamar recovered another 2.2%.

WSP Global was up 3.2% despite no news.

The main recent problem processing PayPal payments including new subscriptions have been (it appears) solved. Nevertheless, I am working on having a second payment processor to provide more choice in payments. For now, I am leaving the subscriber page open so you don’t need to login. That will give time to deal with some subscriptions that got canceled by PayPal.

On Thursday, the S&P 500 was down 0.3%. That was a small decline considering that FaceBook plunged 19% and has a big weight in the S&P 500. Toronto was up 0.2%.

Linamar recovered 6.1% presumably on lower fears about auto tariffs. AutoCanada recovered 4.4% presumably for the same reasons.

Toll Brothers recovered 2.0%.

U.S. GDP figures are out this morning showing 4.1% annualized growth in Q2. That is (as always the case with percentage GDP growth figures) in real dollars before inflation. So this is extremely strong growth. The lower income tax and some lower regulations are driving growth in the U.S. economy. It remains to be seen if U.S. deficits and debt due to lower taxes will eventually harm the economy. But at this time Trump can certainly claim a lot of credit. He will no-doubt be emboldened. Today’s GDP figure should support continued strength in the U.S. stock market.

On Wednesday, the S&P 500 was up 0.9% adn Toronto was up 0.2%.

CN Rail was up 4.7% after reporting Q2 earnings. This has been a stellar long term investment. It usually looks expensive but seems to end up justifying the price paid. Probably wise to continue to hold especially in taxable accounts (rather than trigger a gain).

Boston Pizza bounced up 3.6%.

Stantec was up 2.2%.

AutoCanada continues to slide, down 3.8% today. I am not aware of any new news and the continued slump could be due to fears or could be due to someone having information that Q2 will be a weak report on August 9.

Toll Brothers was down 3.5%. It may be that this sector is just unpopular with investors. There are always fears such as higher interest rates. But so far, to my knowledge U.S. home prices continue to rise and homes there remain affordable.

The issue with PayPal was caused by InvestorsFriend being categorized as a type of financial institution of some sort. After many years of accepting payments PayPal and or the credit card companies decided we were in a risky category. I have changed the category and will see shortly if the problem is resolved.

When traveling, I like to check out and document anything I see related to companies on our list or just observations on the economy.

At the Edmonton airport on July 19 at just before noon I saw that the big Couche-Tard store in the arrivals area was looking quite prosperous. There were several employees stocking shelves in addition to the cash register staff.

The Boston Pizza that is on the security side had some customers but was not overly busy as lunch hour approached. A bit later I saw that competitor “Chilis” was quite busy. The Chilis is right out by some of the gates. The BP is tucked away from the gates and I think people would prefer to be closer to the gates in many cases. This is just one BP and a non-standard one but I don’t think it is really a roaring success…I could be wrong. More interested in tea and speed than beer and sitting down, I went to Tim Hortons for a quick lunch. Not too busy and they were a bit slow. Later, in Toronto I went to a little Tim Hortons near the West Jet gates. With only two employees and a long line up, it was one of the slowest Tim Hortons I have ever experienced. (Not, that anyone in an airport might be in a hurry!). We don’t have Tim Hortons (Restaurant Brands) on the list (we did make money on Tim Hortons years ago when it traded separately). Restaurant Brands and Tim Hortons may do great in China etc. but they seem to be going downhill slowly in Canada and their U.S. presence including huge fights with franchisees.

Visiting family, who are in the Hotel (Motel) / Restaurant business in North Sydney, Cape Breton I am told that tourist visits are way down this July. The locals however were packing the restaurant as they have been doing for a great many years now.

On Tuesday, the S&P 500 was up 0.5% while Toronto fell 0.2%.

BHP Billiton jumped 5.1% (The BBL American Depository receipts in New York). I don’t see any news or earnings release to explain that. It might have been an increase in the price of iron ore or copper. I don’t follow (much less try to predict) the prices of those commodities so I don’t know. There was some news about BHP fighting a lawsuit and perhaps the estimated pay-out has gone down.

Linamar bounced up 2.05%.

TFI International which has been strong this year gave back 4.4%. Possible due to trade war fears or maybe it was just considered to have risen too quickly.

AutoCanada continues to slump, down 2.7%.

Toll Brothers was down 1.8%.

The Boston pizza units slipped another 1.1%. Further to my comments this morning the issue may be that 28% of the restaurants are located in Alberta and Statistics Canada reported Monday morning that restaurant sales were up about 6% in Canada overall but virtually 0% in Alberta year over year in May. And, the weather in Alberta in May was good to very good as I recall after a poor weather month in April. It also may be that competition is stronger in Alberta. I know that a chain called Brown’s Social House has been expanding as has the The Canadian Brewhouse. These are somewhat more “drinks” oriented (especially obviously the Brewhouse) so I don’t know how directly those two compete with BP. Well, we will see how same-store sales do in Q2 when they report in early August. If they have not increased I would have to conclude it is more a BP-specific problem since the industry overall is showing increased sales. I believe that the distributions here are “safe” with the exception that if same stores sales do decline it is possible that a very small cut to the distribution would be made – but I believe BP will strenuously try to avoid that.

I have enough of these units but I did grab some for a relative’s account that I look after.

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

Boston Pizza units were down 2.6% to $18.33

No doubt, we are all getting tired of too many stocks giving opportunities to buy rather than just giving gains.

In this case the yield on the BP units is now 7.5%. Even with some modest interest rate increases that is an attractive yield. The five year Canada bond yield is only 2.1%.

It is possible that the Boston Pizza restaurants are struggling more with competition and that therefore same store sales may be declining. I was hoping they would be increasing even if only due to higher menu prices in response to higher minimum wages. BP will report Q2 figures in early August. News about that whether positive or negative should not have leaked out but that is always possible.

Possibly the price decline is just due to some larger owner needing to sell.

BP will likely try to maintain the $1.38 (11.5 cents monthly) annual distribution even if sales were a bit weaker. As a “top line” fund the distrubutable cash flow tends to be very stable and usually grows slowly over time.

P.S. (9:30 am eastern) I notice yesterday, Statistics Canada reported sales at food services and drinking places that were positive:

“Following a decrease in April, sales in the food services and drinking places subsector were up 1.9% to $5.9 billion in May. Higher sales at limited-service restaurants (+2.4%) and full-service restaurants (+1.8%) accounted for all of the increase. Slight decreases were reported in the special food services industry group (-0.1%) and drinking places (-0.2%).

Following decreases in the previous month, sales bounced back in most of the provinces, with the largest increases being in Ontario (+2.0%), Quebec (+2.4%) and British Columbia (+2.4%). The only decreases were in Nova Scotia (-1.4%) and Prince Edward Island (-0.6%).”

The above were increases versus April. The year over year increases were very strong as follows:

“Unadjusted year-over-year sales were up in the food services and drinking places subsector, increasing 5.7% in May compared with May 2017. Sales in each of the following industry groups increased: full-service restaurants (+6.5%), limited service restaurants (+5.8%), drinking places (+5.2%) and special food services (+1.1%). Sales increased in nine provinces, with the largest gains in dollar terms being in Ontario (+7.2%), Quebec (+6.0%) and British Columbia (+7.3%).

Prices for food purchased from restaurants were up 4.5% in May compared with May 2017 and prices for alcoholic beverages served in licensed establishments were up 2.5% in the same period.”

This looks like positive news regarding BP particularly the increase in sales in Ontario likely driven by menu price increases due to higher minimum wages. So, it is not apparent to me why BP fell yesterday on this news. The growth year over year was really strong EXCEPT notably Alberta growth was only 0.1% so basically unchanged. BP has a high number of locations in Alberta and there seems to be more competitors. So this Alberta number might be what caused the drop. But overall the numbers were very strong at 5.9% growth in Canada as whole for full service restaurants.

On Friday, the S&P 500 was down 0.1% while Toronto was down 0.65%.

Linamar was down 4.8% due to tariff war fears. The U.S. Commerce department was conducting hearings late last weak regarding the (preposterous) issue of whether auto and auto parts imports into the U.S. represent a national security risk. Reports are that that the U.S. auto industry is virtually unanimous in its opposition to tariffs on autos and parts. The industry does not want to be protected from imports. So, it’s hard to imagine there is any real chance the Commerce department will recommend tariffs. I don’t know when any decision will be reached but in general I believe these hearings move quickly. There may be a relief rally in Linamar if the tariff idea is rejected. It’s hard not to be very cautious about Linamar at this time but I did add a small amount to my position on Friday.

Statistics Canad released June inflation figures indicating inflation has been 2.5% overall in the past year. Higher gasoline prices contributed to the inflation figure.

Retail sales figures were released for May and were up 2%. There was a 3.7% increase in auto and auto parts dealers but this came after a similar decline in April that was attributed to poor weather. This is positive news regarding AutoCanada which did recover 2.0% on Friday.

Overall, the inflation and retail sales figures provide support for the Bank of Canada to continue to increase interest rates (at least modestly).

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

CRH Medical was up 3.5% to $4.18. It has settled back from the $.50 to $4.60 range it reached in early May. The market is still dealing with the uncertainty of how profitable it will be under the new lower regulated prices it started receiving on January 1. I was tempted to add to my position around $4.00 earlier this month. But I probably already have enough exposure and will wait and see the Q2 numbers and the market reaction.

CN rail was up 1.5% to a new high of $114.23. This has been a wonderful investment over the years and it may continue to do well. But it is not bargain priced at this time.

Linamar was down 2.35%. The U.S. Commerce department is currently looking at whether auto imports are a national secuity risk. That is a joke and it seems certain they will find that is not the case. But perhaps the tactic is to make other tariffs more palatable by threatening this one and then not doing it. Trump is the absolute master at distracting attention from one thing by drawing attention to something else. When auto tariffs do not emerge perhaps there will be a relief rally for Linamar and possibly AutoCanada.

Statistics Canada reported investment in new housing construction in May. It was up a strong 6.3% year over year but that was entirely driven by multiple family units as investment in new single family houses was down. However single family investment in Alberta was about unchanged from the prior year. In Alberta, overall investment in new houses of all types was up 3%.

Statistics Canada also reported non-residential building investment for the second quarter which was up 1.4% versus Q1. But Alberta and particularly Edmonton was down. There has been a LOT of commercial building going on in Edmonton and it seems this may be slowing down. But these non-residential construction figures tend to be volatile especially when looked at for a small area.

Firstly, as you likely noticed, I have a new contributor, Zack Trease, to InvestorsFriend who has written some posts that you see below. We actually intended his posts to show up on a separate page. They showed up here on the daily posts page before I made a proper introduction of our new contributor, which I will do shortly. My apologies for not introducing Zack before his posts started showing up.

Meanwhile, on Wednesday, the S&P 500 was up 0.2% and Toronto was down 0.25%.

BHP Billiton bounced up 2.7% after it announced its iron ore and copper production had increased. This was always going to be a volatile and unpredictable stock since it is so dependent on commodity prices.

Canadian Western Bank was up 1.4%. The bank has a subsidiary that specializes in franchise financing for hotels and restaurants. That division had a press release today noting it was financing “Ricky’s Group” to acquire the Famoso pizza chain in western Canada and on July 12 had issued a press release about providing a line of credit to expand a small Toronto restaurant chain. In most cases the Bank does not press release loans like this but the franchise division has press released three financings in 2018. Overall, it seems clear that Canadian Western bank continues to grow. As long as it continues to have a low incidence of bad loans, the stock should continue to rise (albeit irregularly) over the years. These recent press releases are likely a form of “advertising” to other potential borrowers rather than an attempt to reach the investor audience.

Berkshire Hathaway was up 5.3% on the announcement of new flexibility in repurchasing shares. (Buffett will be hoping for a stable or lower price so he can repurchase shares at the best price.)

AutoCanada declined 3.7% and was down over 5% at one point today. When I saw it down about 5% I added a bit to my position. Time will tell if that was a wise move. I don’t expect any real news out of the company until it releases earnings on August 9.

Tuesday saw the S&P 500 rise 0.4% and Toronto 0.15%.

Linamar was up 3.0% to $59.38 modestly rewarding those who were brave enough to buy near its recent low of under $55.

Toll Brothers was up 2.8%. My betting is that this stock will rise as the U.S. economy continues to be strong.

AutoCanada recovered 1.85% but will likely continue to be volatile.

Berkshire Hathaway announced that it has authorized Buffett and Munger to buy back shares if they BOTH think the shares are trading below a conservative calculation of intrinsic value. Previously they were  allowed to buy back only up to a maximum of 120% of book value – and it almost never trades that low. Berkshire has piles of cash. Also book value is not as useful a gunge of its intrinsic value as it once was when marketable securities formed a larger percentage of its assets. If they do buy back any stock we won’t likely know about it until a large amount has been purchased. Buffett can certainly keep a secret. And you don’t get to be a broker for Buffett unless you can keep a secret. They can probably buy a substantial amount over a period of at least weeks before they will be required to disclose the purchases.

Anyone holding Berkshire shares and thinking of selling has now “been warned” that Berkshire might be the buyer – which should give pause to anyone thinking about the wisdom of selling.

But knowing Buffett, this is no guarantee of immediate action. He could very well be waiting for a lower price. But my suspicion is they will do some buying very soon.

Statistics Canada reported on manufacturing activity for May which did show reasonably strong growth versus April.

The survey of large retailers for May was also released. Sales appear to be up quite strongly from the prior year. But Statistics Canada did not include a discussion of the results and it’s a bit clunky on their system to get into the tables. Usually this sort of data is seasonally adjusted but this did not seem to be which means you have to compare it the same month last year as opposed to April this year.

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

Linamar recovered 2.75%. There was not much movement of particular note in most of the stocks on our list.

A headline this morning on BNN television said that U.S. consumer spending increased 6% in June. That is a huge increase. However with inflation running around 3% it is more like 3% in volume terms plus 3% for price increases. I was skeptical that it could really have grown that fast.

Looking into the details I found that U.S. retail trade increased by 0.5% in June versus May. So, then I thought maybe the 6% came from annualizing the one month’s gain, which would be basically bogus. But the details claim that year on year the increase was 6.6% in June. And May growth was  5.9% year on year. Unless that is some sort of statistical anomaly, it is truly an impressive rate of growth.

Statistics Canada reported new motor vehicle sales numbers for May. For each od Canada, Ontario and Alberta, the number of new vehicles sold in May 2018 was relatively similar to 2017 (Ontario was down about 1% and Alberta up about 1%). This was not at all a bad result given that 2017 had been significantly stronger than 2016 (11% Canada , 11% Ontario and 17% Alberta). So May 2018 faced a “tough comparable” versus 2017.

On Friday, the S&P 500 was up 0.1% while Toronto was about flat (it was down marginally).

AutoCanada was down another 0.1% to $15.32. Earlier in the day it was as low as $14.74.

Reviewing its press releases I took notice that in addition to Arlene Dickenson’s resignation, which I had mentioned, it had also announced two other director resignations on June 20. Overall, combined with the replacement of a key operating executive that it announced on July 3, it certainly appears that there had been considerable dissension at the Board and perhaps management level. My suspicion is that those directors who may not have fully supported the current strategy are gone and that the CEO likely has the full support of the remaining Board. However, I could be wrong given that they went ahead with the Special Committee to look at strategic alternatives. The CEO has only been with the company for two years. It is possible that he would not be against selling the company if a buyer could be found at a reasonable price that gives the CEO an ample payout. But that is all speculation.

One of their largest and longest held dealers is in Edmonton – Crosstown Motors is a huge Chrysler, Dodge, Jeep dealer which also sells Fiats as well. I went to visit the dealership on Friday. Everything seemed good and prosperous looking there. They admitted that they are not as busy as they were a few years ago. But they seemed relatively busy and the staff I talked to certainly seemed upbeat.

They will report Q2 earnings on August 9. My suspicion is that the numbers won’t be great. But the market will also focus on their future outlook. With the new executive in charge of operations and with the Board member resignations plus the Special Committee it would certainly seem that management will be very focused at this time in improving profitability. Q2 will also include the new Chicago dealerships for most of the quarter. Hopefully there will not have been any unforeseen additional expenses in regards to that acquisition.

With the stock price falling, it is hard not to be worried about what is happening. But fundamentally, this should still be a profitable business and their growth by acquisition strategy does have merit. The banks have shown confidence by financing that recent large Chicago acquisition. Possibly the share price has over-reacted to the down side based on uncertainty.

On Thursday, the S&P 500 and Toronto were each up 0.9% which made for a strong day in the markets.

Constellation Software was up a hefty 4.6% and has continued to be a real winner even when it seems expensive. Similarly, Amazon was up another 2.4%.

Couche-Tard was up 3.15% as analysts further digested its earnings and apparently found them appetizing.

On the other hand, AutoCanada fell 5.1%. There was no news to account for this. Many investors including perhaps institutional holders may be throwing in the towel. In retrospect, of course it would have been wise to sell these shares at higher prices. Investing is almost always a waiting game. I am waiting now to see their Q2 results, their outlook, and any results from the Strategic review. I did pick up a very few more shares today but I don’t want to get carried away buying too many. With the recovery in the Alberta economy they should be selling more vehicles. However, some 46% of their sales in Q1 were from Chrysler dealerships and that company reported a 17% drop in sales nationally in June and 11% year to date. The reasons for the big under performance at Chrysler were not revealed. I believe AutoCanada is still generating ample cash flow and is in no danger financially.

The report for Alimentation Couche-Tard is updated and rated (higher) Buy at $62.20.

The fact that this is (inexplicably) now Canada’s largest company by revenue does not seem to have gotten much attention.

It now only derives about 13% of its revenue from Canada.

The shares only officially trade in Toronto and it is therefore probably almost entirely owned by Canadians. The great majority of its assets are outside of Canada. This company represents a large (over $1.5 billion per year now) flow of profits from outside of Canada (about two thirds of profits are from the U.S.) flowing into Canadian hands. I wonder what Trump would think of this.

On Wednesday, the S&P 500 was down 0.7% and Toronto was down 0.8%. Today, the market took notice of Trump’s trade was threats and his insults to NATO and Germany.  It’s hard to argue with his economic success so far. Time will tell if that continues. But if there was ever a man who seems drunk on power it has to be Trump.

BHP Billiton was down 5.0% in New York. The prices of the commodities it sells including iron ore and copper have fallen.

Linamar was down 2.6%, presumably on trade war concerns.

AutoCanada was down 2.0% presumably for the same reason.

The next update will be for Couche-Tard and it will likely be rated (higher) Buy at $60.30.

The Bank of Canada increased its benchmark interest rate by 0.25% to 1.5%. With the ten year government of Canada bond yield at 2.16%, higher interest rates are not yet at a level where they pose any real threat to equity valuations.

On Tuesday, the S&P 500 was up 0.35% and Toronto was up 0.6% to a record high.

The record high on Toronto is welcome, but it is not necessarily cause for any great celebration, and the achievement of a record high certainly is not a recent to conclude that the market is over-valued. The Toronto stock index is made up of a weighted average of 249 companies.  In most years the great majority of these companies make positive earnings. And they retain some (I believe roughly half on average) of those earnings rather than paying all of the earnings out as dividends. This causes the aggregate book value of the index to rise steadily. With more and more assets and equity invested in the 249 companies each year, the aggregate earnings of the index tends to grow most years. If the P/E ratio remains constant then the price of the index rises. In reality the P/E ratio is constantly changing with interest rates and investor confidence. However, over time the rising earnings does push the index to a new record high repeatedly over the years. In some cases a record high could be set daily. In other cases such as a market crash that follows a market peak it could take many years to reach a new high. But the point is there is nothing special about a record high to suggest that the market is over-valued or to necessarily get very excited about. But, yes, it is a welcome development.

Alimentation Couche-Tard was up 6.7% today to $60.80 based on its strong Q4 earnings report. I have partially completed an update for this company but still need to read the annual MD&A. At $60.80, I believe it remains an attractive investment. Its trailing adjusted P/E ratio is 17.7. It’s probably set to grow adjusted earnings per share by at least 10% in the next year and possibly more like 15 to 20%. Its current quarter (Q1 fiscal 2019) which ends at the end of July will show a sharp increase in revenue and probably earnings based on a very large acquisition it made at the end of June last year. The following two quarters after that will also benefit from smaller acquisitions that will affect those quarters but which were not yet made in Q2 and Q3 of fiscal 2018. However, offsetting that the fuel margin in Q2 2018 was unusually high and should be expected to be lower in Q2 2019. By Q4 of fiscal 2019 growth may be slower relying on same-store sales growth and continued added synergies from relatively recent acquisitions. But the company may make further acquisitions by then. Overall, I am tempted to add to my position at this price. It would have been better to have bravely added even more at the recent lower prices but now there is added confidence of earnings growth given the strong Q4 report.

Constellation Software was up 2.1%.

Housing Starts:

BNN television was reporting today that Canadian housing starts had surged to an an annualized level of 248,000. That sounded extremely high to me. Checking CMHC, they report the headline figure as 222,000 based on a six month moving average but they also indicated that the annualized June figure was indeed 248,000.  When you consider that U.S. housing starts are running at 1,350,000 (and this after years of trending up from the financial crisis lows of I believe under 500,000 around 2008) and considering that the U.S. population is roughly ten times larger, it is evident that Canada is (and has been for years) building houses at a rate that is proportionally far higher than in the U.S. Yet, I heard Phil Soper of Royal Lepage say today that there is a shortage of new housing units in Canada!.

The 222,000 and the 248,000 figure were both pushed up by unusually high multi-family starts including notably in Toronto.

These housing starts figures certainly present a mixed picture. Single family starts were actually down 16% in Canada (down 19% in Alberta and down 24% in Ontario) while multi family starts surged 35% (including up 65%! in Ontario but down 12% in Alberta). These figures are probably too volatile to conclude much from one month.

Year to date, single family starts are down 10% in Canada (down 6% in Alberta and down 16% in Ontario) Multi-family starts are up 11% for Canada (down 5% in Alberta and up 19% in Ontario).

On Monday, the S&P 500 was up 0.9% and Toronto was up 0.5%.

FedEx was up 2.9% recovering some of its recent decline.

C.N. rail was up 2.7% to a record high.

Linamar bounced up 2.7%,

Toll Brothers was up 2.2%.

Couche-Tard was up 1.75% before reporting Q4 results after the close. The earnings report was very strong on a GAAP basis and also quite strong on an adjusted basis with adjusted earnings per share up 23% when adjusted for all factors including one less week in Q4 versus the prior year. Gasoline margins were up versus Q3 and versus Q4 of 2017 but were down from the unusually high levels of Q1 and particularly Q2. Same-store merchandise sales were up modestly. The dividend was increased by 11% but it remains a a low dividend at just 10 cents per quarter. Overall, I would think that stock should respond positively to this earnings report.

Friday was a positive day in the North America stock markets as the S&P 500 rose 0.85% and Toronto rose 0.65%.

Statistics Canada reported the labour Force survey results for June. The report was positive with 32,000 jobs added. More people returned to the labour force (and not that this is ALWAYS seasonally adjusted, so it is not about students available for work in the summer) and so the unemployment rate increased to 6.0% nationally. By historical averages that is a low unemployment rate. Of course the many naysayers will always find negative things int eh jobs reports (too many part time, too many government…).

There seldom seems to be too many dull weeks in the markets. This week we expect a rate increase by the bank of Canada and we will start to get Q2 earnings reports from America companies. The U.S. companies tend to report faster but the downside is they mostly give only partial details with full details to follow a few weeks later. In Canada we get the full earnings release with press release, financial statements and management discussion and analysis all at once. I prefer the Canadian system.

On Thursday, the U.S. markets were quite strong with the S&P 500 rising 0.9%. Toronto, however was down 0.2%.

Q2 earnings reports from U.S. companies will start to be released next week.

Also Alimentation Couche-Tard will release on Monday its Q4 earnings (for the fiscal year ended back on April 30). While their earnings are occasionally hampered by lower gasoline margins, I expect that between the Q4 report and their comments on their outlook and growth plans that the news will positive.

AutoCanada

With AutoCanda currently undergoing a ‘Strategic Review”, I wanted to put down some thoughts about the company’s strategy and its competitive advantages. I will also send these to the Special Committee of the Board that is currently looking at Strategic Alternatives

Description: AutoCanada owns 54 automobile dealerships in Canada and has a total of 4,200 employees. Brands include the various Chrysler Brands (Chrysler, Dodge, Jeep, Ram), FIAT, the various General Motors brands (GMC, Chevrolet, Cadillac , Buick), Infinity, Nissan, Hyundai, Subaru, Mitsubishi, Audi, Volkswagen, KIA, BMW and MINI, Toyota and Lincoln. Revenue categories include new car sales, used car sales, finance and insurance and parts/service. Almost half of its revenues are from Fiat Chrysler (46%) 11% from Nissan/Infiniti, 10% from Volkswagen/Audi, 10% from BMW/MINI, 9% from General Motors, 7% Hyundai and 7% others. 45% of revenue is from dealerships in Alberta with a further 20% in B.C. They lease about half of their locations and own the others. These figures exclude the Q2 2018 acquisition of 8 dealerships in the Chicago metro area plus a large autoplex also in Illinois.

Growth Strategy: AutoCanada’s strategy has been growth-by-acquisition of additional dealerships.

Profitability of the Industry: Auto dealerships certainly appear to be profitable and prosperous businesses. In large cities there are always many auto dealerships and they almost always have bright updated looking buildings. In small towns, auto dealerships are often (or always) among the most prosperous looking businesses. It seems to me that if auto dealerships were not profitable businesses it would not have been possible to get the dealers to spend money on what appears to be relatively frequent and costly upgrades to their buildings and lots. However, the need to make these investments to keep the dealerships looking modern and fresh is a negative aspect of the business.

Competitive Environment: Here, there are pluses and minuses.

On the minus side, auto dealers sell identical products as other dealers selling the same brand. To a certain degree this fosters an environment of competing largely on price, and that’s not a recipe for high profits in any business. Dealers battle this tendency to some degree by making their prices somewhat opaque. The price that any individual customer pays is usually negotiated. This makes it somewhat harder to comparison shop for the lowest price.

On the plus side, auto dealers are somewhat protected from very local competition since the manufactures will not locate a competing dealer with the same brands unreasonably close to an existing dealer. Therefore some level of exclusive territory is provided although certainly the exclusive territory would not tend to be as large as an existing dealer would prefer. Most customers would prefer to purchase from a dealer located most conveniently to their home or work location.

Overall, I believe that the profitability of the auto dealer business is good and that AutoCanada’s strategy of growth by acquisition in this industry has merit provided that it does not over-pay to acquire dealerships.

Synergies:

AutoCanada’s business model depends on its ability to add profits to acquired dealers through some sort of synergies and economies of scale.

One possible economy of scale would be volume-discounts from the manufacturers. However, I understood from reading Berkshire Hathaway’s annual report that its group of auto dealerships does not enjoy such discounts. My understanding is that there are volume discounts / incentives at the individual dealership level but that these do not apply across multiple dealerships.

There would be some synergies related to financing multiple dealerships. However, this benefit is muted because the manufacturers apparently require minimum working capital levels be kept at each dealership rather than on a consolidated basis.

There would also be synergies in negotiating the highest commissions on selling financing adn warranty products.

Regarding marketing, there may be little in the way of synergies. National brand advertising is done by the manufacturing. Auto dealer advertising tends very much to be specific to individual dealerships. This advertising usually involves local newspapers and local radio stations. There may be some ability get volume discounts from national newspaper and radio chains but overall the opportunity for savings may be modest due to the local and dealer-specific nature of the advertising.

Regarding administration and management there may be some synergies involving computer systems and the sharing of best practices. On the other hand competing dealers often have an entrepreneurial owner minding the shop which can lead to a sharper focus on cost management for those competitors.

Repeat Business: All else equal, a business with frequent repeat business from the same customers tends to be more profitable. Unfortunately, while some customers may purchase or lease a new car from the same dealer every few years, that is probably much more the exception than the norm. In my own case between my wife and I, we have purchased just four new vehicles and two used vehicles going back 30 years three of which we still own. These six purchases were made at five different dealerships plus one used-car lot. Given that many people keep a new vehicle for approximately a decade, and given changes in tastes and needs, and given the tendency to relocate, and given the tendency to shop based on price, there is often little likelihood of purchasing a new car from the same dealer multiple times or even more than once.

On the plus side, once a new car is sold, there is often repoeat business in terms of servicing including warranty and recall work (both of which are paid for by the manufactures albeit at a lower than normal hourly labour rate).

Return on Equity: On an adjusted earnings basis, AutoCanada’s return on equity in the four years from 2011 through 2014 was very attractive as it averaged over 19%. And this was achieved despite the large goodwill premiums that AutoCanada had paid in acquiring dealerships. However, mainly due to the energy-related recession in western Canada the ROE was barely adequate at about 9% each year  in 2015 through 2017. And Q1 2018 saw adjusted profits per share (after deducting a gain on an asset sale) decline by 86% by my calculations. It remains to be seen if AutoCanada can return to an attractive ROE level.

Strategic Alternatives: This could involve selling the entire company. Given recent weaker results it seems unlikely that this could be done at much or any gain in the share price. Some individual dealerships could likely be sold for gains to other groups that already own multiple dealerships. These groups are privately owned as opposed to being publicly traded. But such sales would lead to revenue and profit per share declines in subsequent years.

Conclusion: Management and particularly the Board are in the best position to judge whether selling some dealerships or even the entire company would benefit share holders.

On Wednesday, U.S. markets were closed for the holiday while Toronto was up 0.3%.

Canadian Western Bank rose 1.9%.

The Enbridge rate reset preferred share that is on our list rose 0.6% to $20.60. These shares will reset to the yield on the government of Canada five year bond plus 2.66% in December of 2019. My understanding is that part of the reason that these units are trading well below $25 has to do with Enbridge’s debt levels (weaker balance sheet). Given Enbridge’s moves to reduce debt and given expectations of higher interest rates, I believe it is reasonable to expect some increase in the price of these shares prior to the reset date.

Linamar was down another 2.5% to $54.75. I expect that they will report good results for Q2 but the market is very much focused on the risks to its profitability if Trump imposes tariffs on autos and parts coming into the U.S. I bought another 100 shares…

Canadian auto sales for June were down slightly from the record level of 2017. General Motors several of the other brands that AutoCanada sells, including Nissan and Volkswagen had increased sales. But Chrysler sales were down and Chrysler is AutoCanada’s biggest brand by far and represented 46% of revenue in Q1. Chrysler was apparently down 17% year-over-year in June which is an ugly drop. Presumably their line-up of cars is not aligned with what customers are looking for. On a positive note, Alberta auto sales are likely still benefiting from its continuing recovery. Also on a positive note, U.S. sales were strong and so perhaps AutoCanada will report good results from its new Chicago area dealerships.

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

Canadian Western Bank was up 1.9%.

Couche-Tard was down 2.9%, giving back a portion of its recent partial recovery. There was news today that Irving Oil will acquire 13 and brand 23 sites currently operated as Ultramar gas stations. The news was a bit sketchy but likely involves the convenience stores remaining under the Circle K brand. In any case this is a minor transaction.

AutoCanada was down 1.7% after announcing that its V.P. of operations has “resigned” and been replaced by a new hire as “President” who was in charge of operations for a Winnipeg group of 22 dealerships. This is not good news since it likely suggests that operations in Q2 were weak in some way. Coming on the heels of a recent director resignation I think it also suggests that dissension among managers and probable finger pointing is occurring. The new President (but not CEO) will assume full responsibility over dealership operations, as well as associated functions including business intelligence, marketing and human resources. I rather wonder what the the Board and the CEO see as the role of the CEO if it is not to be personally in charge of operations and marketing.

Linamar was down 2.9% as fears of auto tariffs escalate.

On Monday, the Toronto Stock market was closed for the holiday and the S&P 500 ended the day up 0.3%.

Oil remains strong at U.S. $74.50 for West Texas Intermediate.

Trump is complaining that OPEC has manipulated oil prices higher than they should be. He is right on that. OPEC exists to collude and push oil prices higher than they would be if the OPEC countries actually competed aggressively for oil volume rather than agreeing to oil production quotas for each member countries. They do tend to cheat on the quotas but the overall impact is certainly to push oil prices higher.

Canadians, these days seem to view higher oil prices as a good thing. And higher oil prices are certainly good for oil companies and for the governments of Alberta and other oil producing provinces that collect higher royalties and at higher oil prices. But I would think higher oil prices are generally quite negative for Ontario, Quebec and the Maritime provinces. Trump knows that high oil prices benefit some Americans. But he seems to believe that, overall, higher oil prices are a negative for the U.S. He is probably right. Perhaps it is about time that the U.S. or some other international body put major pressure on OPEC to cease colluding and pushing up the price of oil. But OPEC is not the only international body that exists to collude and push up the price of some commodity or other, For Canada, CANPOTEX (for Potash) comes to mind. There are probably other examples as well.

Futures on Monday evening suggest a mildly negative opening for stock trading on Tuesday.

On Friday, the S&P 500 was up 0.2% while Toronto was up 0.6%.

Linamar recovered 3.2% to $58.91. Perhaps Thursday was the day to buy.

The first half of 2018 has not yielded much return for most investors. The Toronto stock index is up 0.5% in these  six months while the DOW was down 1.8% and the S&P 500 was up 1.8%. Dividends would have added something less than 1.5% to those figures. Our Stock picks have not beaten the market in the first half of this year and are down an average of 2.6%.

Soon we will start to get results for Q2. Earnings are generally expected to be strong. But trade wars and other risks can always send stocks lower.

On Thursday, the S&P 500 was up 0.6% while Toronto was down 0.3%.

Linamar was down 4.5%. This came after CEO and founding family member Linda Hasenfratz painted a very grim picture of what would happen to the entire North America economy if heavy tariffs were introduced on vehicles and parts to the U.S. Auto prices in the U.S. would rise sharply and auto sales would plummet and cause a deep recession she warned.

While there are risks and no guarantees, my approach is to add a bit to my position here. Given the risks I would not be brave enough to invest a large amount of new dollars at this time but I am willing to nibble at the lower price. If I did not own it already, I would then be willing to buy a reasonable amount at this lower price.

On Wednesday, the S&P 500 was down 0.9%. And Toronto was down 0.3%. Earlier in the day both markets had been up.

CRH Medical was down 3.9% and has generally given back some of its recent gains.

Toll Brothers was down 2.3%. Yet when I check for news of Toll Brothers the top headline was “New home sales still well below historic norms of demand” (despite increased sales in May)”. However there was also a story indicating that housing affordability has suffered with higher prices and higher interest rates amid tight inventory. So, there seems to be a number of positive and negative factors and at the moment the market has little enthusiasm for home builder stocks.

WSP Global gave back 3.0%. And Canadian Western Bank was down a further 1.5%.

West Texas Oil has suddenly rebounded from its recent dip that saw it down to about U.S. $64. Now it is about $73 which is the highest since late 2014.

Despite the higher oil price the Canadian dollar slipped under the 76 U.S. cent mark as the Bank of Canada Governor made a speech that was taken to hint that Canadian interest rates might not be hiked on July 11 after all.

Trump’s trade wars are clearly a threat to stock market index valuations.

I tend to think that the world will (over time) continue on a long march towards ever more global trade and global cooperation and inclusiveness. However, the U.S. at present appears set to possibly turn back the clock something like a 100 years. It’s often popular to be nostalgic for the good old days – especially among people with no memory of just what the good old days were really like.

On Tuesday, markets rebounded somewhat and the S&P 500 was up 0.2% and Toronto was up 0.6%.

West Texas oil was up about 2.5% and sits at U.S. $70.63 which is close to $94 Canadian which is actually not at all a low price for oil if you look at say the average of the past 15 years. The higher oil price is likely why BHP Billiton was up 3.2% in New York.

After the close, AutoCanada announced that Arlene Dickenson who became a director only in 29017 is resigning from their Board “to devote her time towards other significant opportunities.”

While the press release suggests a friendly departure, it’s a bit difficult to believe the reason stated. Perhaps she was not in alignment with the thinking of other Board members especially regarding the new special committee (to address strategic alternatives) and or the recent large U.S. acquisition.

In the absence of further information I would view this departure as a red flag. I don’t intend to sell any shares on this news but it strikes me as possibly a negative development.

Monday was a down day in the markets with the S&P 500 falling 1.4% and Toronto down 1.6%.

Most stocks were down on the day. This was blamed on Trump’s escalating trade wars.

Walmart was an exception and rose 1.9%. I suppose higher prices for Chinese and other imports that Walmart sells could actually raise its same-store sales. It would still be the low-cost retailer in many cases. I have never quite agreed with too much emphasis on same-store sales increases. Surely a sales increase driven by price increases is not as strong of a sign (or even a good thing) compares to a sales increase driven by volume of goods sold.

U.S. treasury bond yields are down a little from recent highs. But not that much. It’s a bit distressing to think that Trump’s trade wars will lead to lower interest rates in a flight to quality.

What Trump may find is a lot of unintended consequences. Like Harley Davidson moving production to Europe to avoid retaliatory European tariffs.

Vanguard Canada has introduced four new ultra-low fee mutual funds for Canadians. Two of these are global, one is a U.S. dividend fund. One covers growth stocks outside of Canada and the U.S.  Mutual funds have taken a lot of abuse over the years in regard to high management and high trailer fees and related issues. I have never been one to “bash” the whole category of mutual funds. They (including their trailer fees) have their place especially for investors just getting started. These new funds are nicely suited to do-it-yourself investors.

However, according to the Globe and Mail: “Currently, self-directed investors can purchase the funds on two discount brokeragers: Questrade and Qtrade Investor.” I would hope that the likes of TD Direct and RBC Direct will soon offer these. Of course, do it yourself investors already have access to numerous low-fee ETFs. These low-fee funds are not available to most mutual fund investors. That’s because they don’t pay any trailer fee and after-all the business model of most mutual fund sales offices relies totally on trailer fees.

A low fee balanced ETF or balanced mutual fund could offer a formidable competitor to fee-based advisers who tend to basically build balanced portfolios from ETFs but charge around 1% plus the underlying ETF fees to do so. (In fairness they usually provide other services and advice.) I mentioned the idea of investing in just one balanced / global low-fee ETF in a recent article. Now we have something similar in a mutual fund.

American Express was up 1.35% after the U.S. supreme court ruled in a very close 5-4 decision that AMEX could continue to impose rules that prevent merchants from suggesting that customer use a card with a lower cost to the merchant. I think American Express gets a bit of sympathy for at least offering some competition to the two giants (Visa and MasterCard). But there is always a risk that laws and regulations will change to allow merchants to steer customers to cheaper cards.

On Friday, the S&P 500 was up 0.2%.

Toronto was up 0.7% as the price of oil climbed because OPEC agreed to production increases that were smaller than expected/feared (feared by those who want higher oil prices, which is certainly not everyone).

Yahoo Finance at the moment (about 9:10 pm eastern time Sunday) is showing West Texas oil at $68.21 up 4.1%. Yahoo is hard to understand. On their graph it looks like the price increase took place on Friday not over the weekend and in fact the price is down very slightly in Sunday trading. CNBC seems to show it correctly, down 0.4% on Sunday to $68.33. In any case, oil is up several dollars in the past trading day or two.

Stocks that rose on Friday included BHP Billiton, up 2.4%.

Couche-Tard was up 1.9%. Speaking of Couche-Tard I notice that their competitor 7-11 has put in several brand new stores in Edmonton. Most of the new ones that I saw do not have gasoline sales. 7-11 had put in a store on Jasper avenue probably six or seven years ago. It surprised me to see it go in since previous to that there were just a few grubby convenience stores in that area and probably some smoke shops hidden in the office buildings. Well, that store was immediately very busy and stayed that way. The point is that these convenience stores seem to be remarkably busy in a lot of cases and that’s why Couche-Tard and 7-11 and probably others invest a lot of money in them. A bright clean 7-11 or Circle-K can draw a lot of traffic that was not about to enter a smelly grubby store with bars on the windows. A nice modern store seems like a welcome addition to various city neighborhoods.

Penny stock, Ceapro was up three cents or 5.8% but I would not read anything into that. (When three cents makes six percent, that is a far different story than when it takes six dollars to make 6%)

Statistics Canada reported retail trade figures on Friday. 

Following three consecutive monthly increases, retail sales in April declined 1.2% to $49.5 billion. The decrease was primarily due to lower sales at motor vehicle and parts dealers. Inclement weather in many parts of Canada may have contributed to the overall decline in April. Excluding sales at motor vehicle and parts dealers, retail sales were down 0.1% in April.

So, a weak report but given it came after three moths of increases it’s too early to tell if it is a trend. And I note that sales were still up year over year including 2.2% in Alberta. Usually, these reports can be interpreted as positive or negative and it often depends on the agenda of who is looking at the report as to how they want to interpret it.

Statistics Canada also reported inflation numbers.

Again there were pluses and minuses. In general the report was viewed as showing that core inflation is tame and this has somewhat reduced the betting on a Bank of Canada interest rate hike in July.

On Thursday, the S&P 500 was down 0.6% and Toronto was down 0.5%.

AutoCanada was down 3.8% losing some of the little bounce it had had on news that it will look at strategic alternatives.

Linamar was down another 2.9% on trade war worries.

I was surprised by the news today that Employment Insurance recipients have fallen to a record low based on data going back to 1997. For some people, the reason is that the benefits have run out. But overall it is because unemployment has been falling.

The economy has been doing well. In my experience, many or most people almost always view the economy as bad, the times as tough. I suppose life is never all that easy but it appears that today’s economy is actually better than the historical average in someways.

Statistics Canada also reported that “Following a strong March, sales in the food services and drinking places subsector were down 1.8% in April to $5.8 billion…Colder than normal spring temperatures and an ice storm affecting Central and Eastern Canada may have contributed to decreased sales”

This sounds bad for the likes of Boston Pizza, but note that this was a decline versus the prior month. The report goes on to note that sales were actually up fairly strongly versus April of 2017 – so that’s good news for the likes of BP for which year over year same store sales increases is very much THE key factor.

The report states:

The figures in this section are based on unadjusted (that is, not seasonally adjusted) estimates.

Unadjusted year-over-year sales in the food services and drinking places subsector rose 3.1% in April compared with April 2017. Sales were up in each of the following industry groups: full-service restaurants (+2.8%), limited-service restaurants (+2.7%), special food services (+8.1%) and drinking places (+1.1%). Sales increased in seven provinces, with Ontario (+4.9%), British Columbia (+4.2%) and Quebec (+1.9%) posting the largest gains in dollar terms. Newfoundland and Labrador (-3.2%) reported the largest decline.

Prices for food purchased from restaurants were up 4.5% in April compared with April 2017, while prices for alcoholic beverages served in licensed establishments were up 2.2%.

The increase in sales appears to be essentially due to price increases as opposed to volume.

I find it strange that they talk about the comparison to the same month the prior year not being seasonally adjusted. Since it is the same month I would think there would be no seasonal adjustment to make. Unless they were thinking of the timing of Easter or the number of Saturdays in the month.

On Wednesday, the S&P 500 was up 0.2%.

Toronto was up 0.6% and has crept up to a new record closing high. That’s a good thing but not exactly earth-shattering. Stock markets should be expected to trend up over time and therefore must at least occasionally reach new all-time highs.

FedEx was down 2.6% after releasing its latest earnings report.

Dollarama was up 3.3%.

Constellation Sofware was up 2.3%.

Toll Brothers slipped another 0.45%.

A report in the Financial Post today provided some interesting figures about the U.S. housing industry/market. New housing starts were up 5.0% in May to near an 11-year high in terms of the seasonally adjusted annualized rate of 1.35 million. Estimates are that the U.S. needs 1.5 to 1.6 million housing starts to bring supply and demand into a better balance.

The bad news is that permits for single family houses (these will turn into starts down the road) were down 2.2%. But that is apparently because builders are running out of serviced lots and also experiencing labour shortages. So, apparently builders are having trouble keeping up with demand.

I would think that a shortage of serviced building lots will benefit Toll Brothers because they own thousands of lots and may be in a better position than some or most builders.

Higher lumber prices have also been a  concern. Higher lumber prices could certainly lower Toll Brothers profits in the short term. But in a market where building lots and labour are scarce, I would suspect that Toll Brothers can raise prices to reflect the higher lumber costs.

My expectation is that Toll Brothers will probably report an earnings increase of at last 10% in the current quarter. It would be closer to 25% I believe based on an increase in signed contracts from about 9 months to a year ago. However, the higher lumber prices could push the growth down somewhat. I also expect that Toll Brothers will report that it has been buying back shares on the recent dip. They have tended to be very astute in buy-backs over the past few years.

I thought about grabbing a few more shares today but I don’t have the U.S. dollars in my accounts to do so. Plus I have enough Toll already.

On Tuesday, the S&P 500 was down 0.4% (modest compared to the decline of 1.1% in the DOW). Toronto was also down 0.4%.

BHP Billiton was down 2.9% in New York. This was due to lower commodity prices. Volatility is par for the course with commodity-linked stocks.

FedEx was down 2.0% but then after the close it reported an earnings gain and revealed a massive order for new planes.

Constellation Software gave back 2.5%.

Linamar was down 0.3% today to $62.62. Earlier in the day, I added modestly to my position at $62.10. It’s hard to say how the evolving trade situation is going to affect Linamar but the stock appears to be cheap and I am putting faith in the founding family which still runs this business to continue to succeed.

Toll Brothers was down 0.6%. And that was in spite of a report that showed that May housing starts rose 5.0% which was far higher than expectations of under 2%. And starts were up 20% from May of 2017!. Despite this growth, Toll Brothers and probably the other home builder stocks have been unpopular and investors have bid down the price they are willing to pay for the shares. Investors are presumably worried that higher lumber costs and higher interest rates will lead to a slowdown in housing starts.

The Canadian dollar is down to 75.3 U.S. cents. This has just made all Canadian imports cheaper for Americans and visiting Canada has become cheaper for Americans. Meanwhile Canadians buying goods in U,S dollars pay about $1.33 plus an exchange fee. I know if you use a TD debit card in the States, TD will tack on an unconscionable 3.5% extra for a total of close to $1.38. (I was going to say $1.365 but they tack on 3.5% not 3.5 cents)

The report for TFI International is updated and rated (lower) Buy at $41.30 (It actually closed today a bit higher than my analysis price at $41.60.)

On December 31 the stock was at $32.86 and I rated it a (lower) Buy. In February it slipped under $30. It’s Q4 report showed only a 4$ earnings per share growth. But then it reported Q1 results near the end of April and the stock has surged upwards.

The Q1 results were impressive in part because they demonstrated management’s strong abilities to cut costs in the face of revenue declines excluding recent acquisitions. The 56% surge in adjusted earnings per share in Q1 was also driven by a “weak comparable” in Q1 2017.

At its current price TFI may be fairly valued. Still, I am inclined to take some profits here and reduce my position. This will also give me cash which may be a good thing if trade wars continue to weigh on the markets.