April 18, 2018

On Wednesday, the S&P 500 rose 0.1% while Toronto climbed 1.1%.

West Texas oil is at U.S. $68.75 which is a three year high.

The Bank of Canada left interest rates unchanged today.

BHP Billiton was up 3.5% to $43.00 for the BBL shares in New York.

AutoCanada was down 2.05% perhaps related to the weak auto industry sales for February that I mentioned yesterday.

TFI Industries as up another 1.9%.

The main threat to markets seems to be the same thing that caused U.S. markets to rise so much in the past 18 months – Donald Trump.

April 18, 2018 4:40 am eastern time (9:40 am in Ireland)

On Tuesday, markets managed to rise for two days in a row which seems rare lately.

The S&P 500 was up 1.1% and Toronto was up 0.35%.

Seemingly unstoppable Amazon was up 4.3%.

Boston Pizza Royalties was up 2.9%.

Alimentation Couche-Tard continued to be weak and was down 0.6%.

Couche-Tard has hundreds of locations in Ireland under the Topaz brand. I visited one in Waterford yesterday. It was a bit of a dreary place. The store was clean but was just not one of the freshest and newest looking examples at all. It did not seem well stocked at all either especially for the hot food offering. I stopped at a gas station of a competitor near Cork and it was also not up to the standards we usually see in Canada. I understand that Couche-Tard will rebrand all its stores outside of Quebect as Circle-K and I suspect they will be sprucing up these Ireland locations. I also also suspect that some of their locations in Ireland are already larger and brighter and newer than the one I visited. I passed by several locations on a road trip from Cork to Waterford but the Topax locations did not seem to be the dominant brand. Rather there seemed to be several competing brands.

April 16, 2018

On Monday, the S&P 500 shrugged off the firing of missiles into Syria that occurred Friday evening and rose 0.8% while Toronto was up 0.1%.

Costco rose another 3.0% to $194.58. It had dipped to as low as $179 earlier this year and still looked expensive at that price. However, that may have been a good buying opportunity.

Bank of America’s earnings rose either 30% or 51%, depending on which headline I look at but the stock rose only 0.5% on that news.

Constellation Software was up 2.4%.

Melcor Developments as well as the Melcor REIT will hold their annual meetings on May 10 at the Weston Hotel downtown Edmonton. The REIT at 10:00 am and Melcor Developments at 11:00 am. I will be attending and will have questions. I have not previously attended. Last year I listened to the recorded meeting afterwards and there were no questions. So, he said he assumed everyone was happy or had no concerns  something like that. Perhaps a few subscribers can join me at the meeting and we can meet for lunch after the meetings.

Statistics Canada reported new vehicle sales for February. The figures show a big drop of about 8% for Alberta. This comes after January rose almost 8%. It’s possible that this is just a random fluctuation after quite a few months of increases but it is nevertheless a concern. AutoCanada was down 0.8% today and this report may be the reason.

President Trump tweeted that it was not acceptable for the U.S. to keep raising interest rates while Russia and China were “playing the currency devaluation game”. This could certainly lower expectations for the pace of U.S. interest rate increases and all else equal could mean that the Canadian dollar will not fall as many expect.

April 14, 2018

Friday was a less volatile day in the markets as the S&P 500 fell 0.5% and Toronto was about unchanged.

Most stocks were relatively stable.

WSP Global was up another 2.2%.

Some smaller companies were more volatile including CRH Medical up 3.7%. And penny stock Ceapro bounced up 6%. A tiny company like Ceapro on the Venture exchange is allowed 120 days or around the end of April to file year-end financials. Last year Ceapro filed on April 15 so I expect they will file soon. I don’t really expect any great news. This is a research company and positive results tend to come slowly (if at all).

Wells Fargo and several other large banks released Q1 earnings on Friday. Earnings growth was strong but Wells Fargo fell 3.4%. This apparently was because core banking growth was very weak even though profit were up due to lower taxes and investment banking.

If core banking growth is weak then we may see more competition among American banks for business which should lead to some of the income tax savings being passed onto customers. Many aspects of banking are not the subject of much competition. But things like mortgage lending rates are usually subject to still competition, I believe.

I doubt that the market will fall much if at all in reaction to the Syrian air strikes. In the end it is always difficult to predict market reactions but it is possible to react to whatever the market does.

90-day mortgage default figures for Canada were released on April 10. These figures are released on a delayed basis and we got December and January figure. The official 90-day defaults remain very low especially in Ontario at 0.10% or just one mortgage in one thousand being 90 days late. But this is up slightly from the probably all-time low of 0.09% in November. These figures tend to be apparently very much a lagging indicator rather than leading. At present most people can still borrow new money to help make payments on older debt. This may continue to be the case unless something happens to throw fear into the lenders. And they have to be careful. Slowing down the flow of new lending could reveal more people dependent on new debt to make old payments and could easily spiral into a sharp credit contraction. So far there is absolutely no sign of that.

Comment on Bus Safety April 12, 2018

The horrible tragedy in Humboldt Saskatchewan took the lives of at least two kids from St. Albert, a suburb of Edmonton that has been my home for 23 years and where my kids were raised. I don’t know the families but I suspect they were not too many degrees of separation from my family. The loss here is unimaginable.

I saw an article today where the Canadian Safety Council is calling for seatbelts on all coach-style buses. They were not yet aware of whether this bus had seatbelts.

We can never eliminate all risks but I think bus safety should be reviewed as a result of this tragedy.

I have the following thoughts/suggestions and I have sent these thoughts along to the Canada Safety Council.

All buses should have seat belts. Maybe school buses don’t really need them due to their high and close-packed seats and usual slower speedsbut what would it cost to just install lap belts like on airplanes? What kind of message is it to kids when there are no seat belts on school buses?

All coach buses should have seat belts.

Obviously, when there are seat belts they should be used. About seven years ago, I was on a bus with a team of around 15 year old hockey players and we encountered very severe winds going from Lethbridge toward Calgary. We passed an overturned transport truck at one point. I had my belt on and it was at my suggestion that the coaches got everyone to buckle up. As coaches and parents and bus drivers, we adults should have required that in the first place. How many people, when they get in a taxi for some reason don’t buckle up? Seat belts are there to be used.

Coach buses may need better structural integrity and strength. The sides seem to be almost all windows. Is that part of the problem? It appears the whole top of this bus sheared off.

What about the roads? Surely rural intersections should have rumble strips. And should speed limits be reduced in both directions when approaching intersections?

And what about truck diver regulations? In this case it looks like an inexperienced new driver was driving a tandem style truck (towing two trailers). There is probably room for better regulation there.

I am not suggesting seat belt or bus structural integrity were the cause here. But it makes sense to review bus safety at this time. We can’t change the past. But we most certainly can change the future.







April 12, 2018

In what seems to be a bit of an alternating daily pattern, markets were up on Thursday as Trump clarified that when he told Russian to get ready for missiles “because they will be coming” he did not say when.

The S&P 500 was up 0.8% on Thursday and Toronto was up 0.1%.

WSP Global was up 3.5%

Costco was up 2.3% after reporting another month of very strong same-store sales. Adjusted for foreign exchange and volatile gasoline prices, same store sales in March were up 5.8% year over year and 6.5% in the first 31 weeks of this fiscal year. That is excellent growth.

It’s not clear how much of that is higher store traffic and how much is higher prices. While Costco boosted membership fees last June, I don’t think same-store sales includes membership fees. I had thought that with lower income taxes there might be competitive pressures to lower prices but there is apparently no sign of that so far.

Costco is a fantastic business that always looks expensive in relation to earnings. But if this level of growth keeps up then perhaps the shares are worth the price.

Taking Advantage of Volatility

Over the past few months I added to a number of stocks that I like when the price fell.

Logically, I could sell those latest buys even on a 10% or so rise. That would give me cash in case more and bigger dips occur.

However, when it comes to the stocks I have rated Buy and certainly (higher) Buy or int eh Strong Buy range, I find it difficult to sell any. The reason to sell in this case would have little to do with valuation but would be more for portfolio management. Still, I feel like a traitor or something to sell any of those higher-rated stocks. However, today I entered a few orders to sell just some shares that I bought on dips should their prices rise about 10% from where I recently bought. These orders were for Linamar, Toll Brothers and AutoCanada and I had an existing order in for TFI Industries. Again, this is just to sell some shares recently bought on dips while retaining mot of the position. This seems to me to be a logical approach to take advantage of volatility.

April 11, 2018

Sometimes it feels like the U.S. market is taking turns, one day up and one day down. Yesterday was up, today was down somewhat.

On Wednesday, the S&P 500 was down 0.55% while Toronto was about unchanged.

There were no particularly notable moves in the stocks on our list.

Oil (West Texas) is up to $66.75 on concerns about Middle East instability. This may be temporary but still is a positive for the western Canadian economy.

It is remarkable that the market reacted quite calmly to President’s Trump’s promise to fire missiles at Syria in defiance of Russian warnings about that. The market generally seems to hope that some of Trump’s scariest pronouncements are more bluster than substance.

As disclosed, I have added to a number of positions as prices fell in the past few months. Today I entered a few orders to pare back some U.S. stocks if their prices rise about 5 to 10%. This for Toll Brothers, Visa and Bank of America.


April 11, 2018 6:10 am eastern

On Tuesday, the volatility continues with the S&P 500 up 1.7% and Toronto up 0.2%.

Oil (West Texas Intermediate) is at U.S. $65.68.

Most stocks on our list were up. BHP Billiton was particularly strong rising 4.85% for BBL American Depository Receipt on New York.

Alimentation Couche-Tard was down 2.1%. Someone asked me about that and I decided to add a little to my position. I think it is a high quality company for the long term. Some might argue that its big growth days are over. But so far, I have seen no indication that its growth ambitions have abated.

Regarding the Trans Mountain Pipeline:

The following is a link to a site dedicated to showing support for the project. There is a link at the top right that sends a message to politicians. Sometimes (almost always?) petitions are over the top but the message they are sending here looks reasonable to me – that is, please enforce the law and allow this already-approved pipeline to proceed.


Statistics Canada has released building permit data for February.


Single family permits fell 7% versus January (presumably, that is seasonally adjusted).

Alberta had a 47% surge in multi-family permits. That tends to be a volatile number. Still…

“Alberta reported an increase in every building component in February except for commercial and industrial structures. The residential sector rose by 20.5% to $838.9 million in February, primarily a result of higher construction intentions for multi-family dwellings.”

Amazingly, we will start to get Q1 reports in the next few days. The big U.S. banks seem to get their earnings reports out rapidly. That always impresses me because there has to be a massive amount of work to get the numbers together and the written materials and to check all those words and tables for mistakes. There are also loan loss estimates that must be very carefully considered.

I saw a bit of Mark Zuckerberg’s testimony yesterday. I thought he did well. In the few questions I heard he was usually interrupted in his response though as the Senators really want to make a speech as opposed to ask a question.



April 9, 2018

On Monday, markets continued to be volatile. The DOW closed up 46 points but had been up over 400 points at the high point today. The S&P 500 ended the day up 0.3% while Toronto was up 0.1%.

Most stocks were up modestly on the day.

Kinder Morgan Canada, the builder of the Trans Mountain pipeline, is not on our list but I have mentioned it a few times and I own a small position in it. It was down 12.6% today as it announced that it will not move forward unless the opposition to the line by the B.C. government is resolved and its gets assurance that it will be allowed to build this approved pipeline.

The approval for this line may be a big disappointment to those opposed. But the fact is that it has been approved by the Federal government. It now behooves governments and law abiding citizens to cease any illegal attempts to block this line.

It is sad to see Albertans pitted against residents of B.C. People by nature like to form into “us” versus “them” or even versus “the enemy” groups. If Alberta does take strong (and probably illegal) actions against B.C. such as cutting off oil flows, this will get a LOT of support in Alberta.

Trump has demonstrated that it is easy to cater to people’s meaner instincts and get people riled up against enemies, perceived or real.

As far as Kinder Morgan Canada goes, I am not particularly tempted to add to my position. It remains possible that the Trans Mountain pipeline will indeed not get built.

I sold my Heineken shares today as planned…


Heineken N.V. updated April 8, 2018

Heineken is updated and rated (lower) Sell at 90.20 euros on the Amsterdam stock exchange or $55.20 on New York for the American Depository Receipt HEINY which equates to one half of a Heineken share.

Heineken is best known for its namesake beer brand and is a huge global brewer with many brand names.

Heineken was first added to the site on July 28, 2016 with a lukewarm rating of (lower) Buy. Since then it is up 7% in Amsterdam but 19% for the ADR on New York which shows the benefits of currency diversification at times. Not long after it was added to the site the price had declined almost 20% and I reported taking a small position on October 8, 2016 and January 3, 2017 at prices near the lows. Buying on the dip has resulted in a gain of 41%. Given the updated rating I will likely sell these shares. It’s a strong company and I would consider buying back in on a substantial dip.

(I had removed Heineken from the list for the start of 2018 since the report was well out of date.)


April 8, 2018

Today, I am posting from the Atlantic Ocean aboard the Brilliance of the Seas on the fourth day of a cruise from Tampa. The first stop is in the Azores. Then three stops in Ireland (Cork, Waterford and Dublin).

We finish in Amsterdam where I will tour the world’s oldest stock exchange. The Dutch East Indian Company better known back then as the VOS which is  short for its name in dutch (the Vereenigde Oosst-Indische Compagnie) is generally considered to be the first joint stock company in the world. The VOS had its Initial (and I believe only) Public Offering (IPO) in 1602. Initially, the shares traded infrequently. But over the years trading became more frequent and many investors used extreme leverage to attempt to get rich quickly. It was not long before there were complaints of stock price manipulation and before problems with naked short selling arose. When it comes to speculation and gambling, people have apparently not changed much in the last 416 years.

The internet connection on this ship is very good and so far I have  not had any problems.

On Friday, the market was once again concerned about the implications of Trump’s threats regarding trade. The S&P 500 was down 2.2% and Toronto was down 1.0%. AutoCanada was down 5.0% and Toll Brothers was down 3.2%. TFI International managed a 1.4% gain. Declines certainly should never be considered to be unexpected when holding stocks. Companies that rose more on expectations and speculation tend to fall the hardest. Solid profitable companies tend not to fall as much and can usually be expected to recover. Market dips always loom large when they occur but usually tend to look relatively minor in hind sight after a few years. And, lower prices offer opportunities to invest.



April 5, 2018

On Thursday, the S&P 500 was up 0.7% and Toronto was up 1.3%.

CRH Medical was up 9.5% in a partial recovery of recent losses.

AutoCanada was up 4.9%.

Toll Brothers was up 1.8% to $44.62. A few days ago it had been down very close to $41.

Couche-Tard was down 1.3% to $56.16. Earlier in the day it was as low as $55.06 which was surprising for this strong company on a day when most stocks were rising. I took the opportunity to add to my position, Quite possibly, I should go a little slower in buying on dips but I think Couche-Tard will continue to have a bright future.

Meanwhile, as of this evening futures markets suggest the DOW may open 400 points lower on Friday morning. This is a result of Trump calling for even more duties against China.

April 5, 2018

Markets on Wednesday recovered from initial big losses related to trade worries and the S&P 500 ended the day up 1.2% while Toronto was down 0.1%.

Toll Brothers had a strong day rising 4.1%.

CRH Medical continues to slip back and was down 4.3% in Toronto.

Boston Pizza was down 0.6% to $19.61 and pays monthly distributions that total $1.38 per year. I am hopeful that it will report same-stores sales growth for Q1 based on menu price increases. In any case the yield is attractive for those not too concerned about the price as opposed to the distributions. I bought units today in an account that is not mine but that I control.

April 4, 2018 10:20 am eastern

The S&P 500 and Toronto are each down about 1% as the market continues to be concerned about escalating trade tensions and actions.

Obviously, with the U.S. market still trading at a high P/E markets could certainly continue to go down. I have never been able to predict such things. Instead, my strategy has been to react to lower prices by adding to positions. At the same time, I try not to be in a hurry in doing that.

Soon, U.S. companies will begin reporting Q1 results. Expectations are that earnings will be up considerably versus last year in many cases due to the lower income taxes. This should already largely be reflected in stock prices. But the actual results if they are very positive could give a boost to markets.

April 4, 2018 8:30 am eastern time

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

TFI International (formerly TransForce) was up 1.3% after announcing an acquisition of a Quebec trucking company with 300 tractors and 1000 trailers. This would seem to be a relatively modest acquisition for TFI and continues its long-time growth-by-acquisition strategy which has been a successful strategy over the years.

Linamar was up 1.5%.

Penny stock Ceapro was up 7% and will release Q4 earnings very soon I believe.

Boston Pizza was down 1.3% to $19.73 which results in an attractive yield.

April 2, 2018

On Monday, the S&P 500 was down 2.2% while Toronto was down 1.0%.

Most stocks were down including:

WSP Global down 2.9%, Canadian Western Bank down 2.6%. Walmart down 3.8%, Costco down 3.0%, and Toll Brothers down 3.0%.

U.S. government treasury bond yields were down. The 10 year is at 2.73%. Earlier this year it appeared set to exceed 3.0%.

Canadian government bond yields also declined with the 5 year bond yield now trading under 2.0% versus highs of 2.14% earlier this year.

Dividend stocks fared better today, for example Fortis up 0.3%, RioCan up 0.5%.

If interest rates don’t rise much, which seems possible with the weaker growth in the Canadian economy then the yield stocks may turn out to be good investments.

April 2, 2018 noon eastern time

The second quarter of 2018 has started off on a negative tone with the DOW currently down 492 points or 2.0%.

This appears to be due (at least partly) to escalating trade tensions between the U.S. and China.

Toll Brothers is down 4.7% at the moment to $41.22 which is significantly more than the market and may be due to an analyst downgrade and/or concerns about higher interest rates and the impact on the housing market. Given my recent rating of (higher) Buy at $43.91 I decided to add what amounted to 5% to my already heavy allocation to this company. I have had good success over the years on buying stocks on dips including Toll Brothers. It has solid assets and a record of growth over the long term. The company itself also has a recent history of buying back shares quite aggressively on dips.

This morning I also sold the portion of my Constellation Software shares that were in an RRSP (therefore no income tax implications) and I placed an order to sell a portion of the shares I hold in a taxable account if the price happened to rise to $925.

April 1, 2018

On Thursday, the S&P 500 was up 1.4% and Toronto was up 1.3%.

WSP Global; was up 2.8%and BHP Billiton was up 2.2%.

Linamar was up 3.5%.

Thursday marked the end of the first quarter. The S&P 500 was down 1.2% in the quarter while Toronto was down 5.2%.

The index of the largest 60 stocks in Toronto now appears to be attractively priced with, I believe, a lower P/E than we have seen in some years.

The ishares ETF  XIC  shows the trailing P/E at 14.6 and the price to book ratio at 1.8 and the yield at 2.8%. This all seems quite attractive. If I had a large cash position or was looking for added exposure to Canadian stocks I would likely buy this ETF at this time. This index is heavily weighted to the large Canadian banks and also with a large weighting in energy.

Our Canadian ETF article lists a good selection of sector ETFs as well. Click the links there to get an updated P/E ratio.


Constellation Software Report updated March 31, 2018

Constellation Software is updated and rated (lower) Sell at Canadian $874. (The report has the price in U.S. dollars because it reports in U.S. dollars). Constellation is a great company and exceptionally well managed. Historically, selling this company has been a mistake. Perhaps it would be a mistake to sell now. But it is trading very high on a P/E basis using adjusted earnings. And growth appears to have slowed somewhat although it is still strong. I’m becoming a bit concerned that they seem to be somewhat aggressive in some of their adjustments to earnings. They have been adjusting the same way for many years and it has not been a problem. Still, any hint at being aggressive in that way always bothers me. I have about 2% of my portfolio in this stock. I intend to sell the portion that is in an RRSP. I am not sure if I will sell the portion that is in a corporate taxable account.

March 28, 2018

On Wednesday, the S&P 500 and Toronto were each down 0.30%.

But many stocks were up. Boston Pizza recovered some ground rising 3.3%. Couche-Tard was up 2.9% and Stantec was up 1.4%. Despite a poor start to 2018 I think these investments will do well over time.




March 27, 2018

On Tuesday, the S&P 500 was down 1.7% giving back a good portion of Monday’s gain of 2.8%. Toronto was down 0.5%.

Most of the U.S. stocks on our list that rose yesterday gave back a good portion of those gains today.

Boston Pizza Royalty Income Fund units slipped under $20 and are yielding 7.0%. I grabbed 300 additional units today.

My expectation is that distributable cash per unit will have risen when Q1 is released in about six weeks. This will be driven in part by menu price increases in Ontario in response to the minimum wage increases. In January, sales at food services and drinking places in Ontario were up 5.3%.

If BP can maintain and slowly increase its distribution then I believe these units should rise in price unless interest rates increase quite markedly.


March 26, 2018

On Monday, the S&P soared 2.8% as fears of a Trump trade war with China were reduced. Toronto was up 0.5%.

U.S. stocks that surged with the rally included FedEx up 4.5%, Berkshire up 3.6%, Costco up 3.5% and Amazon up 4.0%.

The Canadian stocks on our list mostly did not do nearly so well although Constellation Software was up 3.8%.

Stantec was down 1.3% and Alimentation Couche-Tard was down 1.2%. I believe both of these should see strong earnings growth in 2016 due to their recent large acquisitions. I added to my Stantec position today.

I also added to my very modest Home Capital position (not on our list). I am buying Home Capital due to Warren Buffett’s investment. Following Warren can occasionally turn out badly – but not usually.

S&P 500 Valuation article updated March 25

My article on the valuation of the S&P 500 is updated. Based on actual trailing GAAP earnings the index looks over valued with a P/E of 23.6. But projections are that earnings will surge in 2018 due to the Trump income tax cuts. The article shows in the first table the GAAP and operating earnings projections for 2018. If the projections prove correct then perhaps the S&P 500 is not over-valued. I would not count on those ambitious 2018 earnings projections being achieved.

March 25, 2018

On Friday, the S&P 500 was down a hefty 2.1% and Toronto was down 1.1%.

Most stocks were down…

Canadian Western Bank was down 2.8% to $33.22. I grabbed a few more shares on Friday.

Couche-Tard was down another 1.7% and I added modestly to my position in this company.

Stantec was down 2.3% to $31.72

AutoCanada however was up 4.0% as the market digested news of the acquisition of eight dealers around Chicago which it announced on Thursday morning.

Futures markets on Sunday evening are suggesting stocks will open modestly higher on Monday morning.

Statistics Canada reported on Friday that the consumer price index in February was 2.2% above that of February 2017. This apparently increases the betting that the Bank of Canada will raise interest rates at its next meeting in may. The lower Canadian dollar should contribute something to inflation in Canada.

In the U.S. I wonder if the lower corporate taxes will lead to price decreases in some highly competitive sectors such as groceries.

March 22, 2018

On Thursday, the S&P 500 fell a hefty 2.5% while Toronto was down 1.8%.

The spark was Trump’s moves to impose new tariffs on Chinese imports. I don’t think investors can claim to be shocked by this. Certainly Trump’s anti-trade views have been a risk to the market. And the fact that the U.S. market has risen so much since Trump’s election meant that it certainly had room to fall.

Some of the bigger decliners were companies heavily involved in trade. This included Fed Ex – down 5.1%. BHP Billiton down 4.0% and Linamar down 4.4%.  I’ve been trying to hold onto some cash in order to take advantage of lower prices if and when they occur. Today, I added modestly to my Linamar position. My approach in deploying available cash would be to go slow.

AutoCanada was up modestly for most of the day on news of a major acquisition. But it ultimately was swept into  the downdraft and closed down 0.7%.

AutoCanada is buying a group of eight dealers in a d around Chicago. This transaction is another indication that AutoCanada intends to continue with its growth by acquisition plans. At some point this could lead to more interest in the stock but given a current lack of enthusiasm for the auto industry, I don’t think we will see AutoCanda’s really stock take off. I had last rated the company a Buy in January. Since then it came in with strong Q4 earnings and now this announcement. I continue to hold AutoCanada and may add to my position.


March 21, 2018

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

Linamar was up 2.5% to $73.52 after some positive news on the NAFTA front that the U.S.A was dropping its proposal that all cars coming into the USA under free trade arrangement would need 50% American content to qualify for free trade status.

BHP Billiton was up 3.6% (the BBL version) and 2.6% (the BHP version).

Couche-Tard slipped another 2.1%

Toll Brothers was up 2.1%.

West Texas Oil futures are trading at just over $65. That is positive for Alberta… if it lasts.

The U.S. FED raised overnight lending rates by 0.25% to a target range of 1.5 to 1.75%. Many (uninformed) people had said that the FED could not raise rates due to the damage it would cost – especially to U.S. government interest charges. Yet rates have gone up six times since late 2015 when the target range was 0 to 0.25%. The markets were apparently a bit relieved that the FED signaled it will raise only twice more this year. But they apparently signaled another three hikes in 2019 and some in 2020 as well.

The Canadian dollar was up approximate a full U.S. cent today or 1.3%. This was apparently related to positive news on the NAFTA front. This goes to show how very difficult it is to predict the exchange rate. I recently converted some U.S. dollars to Canadian at rates better than had existed in some months. I had been patiently waiting and the patience paid off in that case. But I also sat on some more waiting to see if the Canadian dollar would drop even more. That was perhaps a mistake. If you have currency you want and especially if you NEED to convert, it is probably best to just to just do it rather than get cute hoping the rate will improve. Unlike the case for most stocks there is no particular valid expectation that currency will move in a given direction over time. (Non-valid expectations are another matter.)

March 20, 2018

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

Couche-Tard was down 6.5% (see the post just below this one for details).

AutoCanada was down 2.0%.

Oil (at least the West Texas variety) was up 2.2% to U.S. $63.42. That’s about $83 Canadian dollars which is not a low price. Of course the price for Canadian heavy oil is far lower due to lack of pipelines, transport costs and also the heavier nature of the oil.

In any case, today’s oil prices have not been enough to ignite much enthusiasm for stocks associated with Alberta. Canadian Western Bank had been doing well but is down about 13% from its recent highs. Melcor remains moribund despite a strong Q4. Ditto for AutoCanada. Stantec is headquartered in Edmonton and still gets an important chunk of revenue from Alberta but it’s far less dependent on Alberta or even Canada than it used to be. Yet it also seems to be affected by this pox on Alberta stocks. In addition there is a certain amount of gloom over most Canadian stocks due to concerns about NAFTA. Some of these stocks certainly seem under-valued and some may achieve very strong earnings growth in 2018. I think patience will be rewarded in such cases.

Alimentation Couche-Tard updated March 20, 2018

Alimentation Couche-Tard is updated and rated Buy at $59.60.

The stock dropped 6.5% today after it released earnings that “missed analyst expectations”. I would say it is more accurate to say that its earnings came in lower than analysts incorrect forecast. Lower gasoline margins (they tend to be volatile) and some higher expenses associated with acquisitions led to the lower adjusted earnings. I don’t think anything in its growth story has changed. Adjusted earnings per share were up only 1% this quarter but had risen 38% in the prior quarter.

Due to acquisitions, revenues are through the roof. I believe that on a run-rate basis this is now easily the largest company by revenue in Canada. That won’t show up in the rankings this Spring which will use Couche-Tard’s figures from its fiscal year ended April 2017 (old news). But revenue is way up since then.

The stock is reasonably priced but is not a screaming buy. I would add to positions on dips and I did so today. Earnings per share could rise substantially in the next year as it digests its latest acquisitions.


March 19, 2018 and a comment on Melcor

Markets were down on Monday with the S&P 500 falling 1.4% and Toronto down 0.8%.

BHP Billiton was down 2.6% in New York. This and the recent declines partly due to currency fluctuations as the stock has not fallen much in Australia. But it is fair to measure it in U.S. dollars which is what it mostly operates in and reports in. For Canadians the declining Canadian dollar offsets some of the decline in the stock.

CRH Medical continues to slide back from the gains it had recently made. It was down 5.6% today in New York.

AutoCanada bucked the trend and was up 4.6% which was well deserved given its earnings release last week.

I continue to think about the reasons why Melcor Developments is trading at less than half of book value despite the “hard” nature of its assets. Part of the reason is probably that it mixes a REIT in with a property developer. For whatever reasons, investors seem to have very little interest in developers of raw land. There may be other publicly traded companies in Canada that are primarily in the business of developing raw land into residential building lots and serviced commercial land – but I don’t know of any.

Property development is a business that can, by nature, produce VERY “lumpy” results. Imagine if you bought one parcel of land on the edge of a City and sold it 15 years later for a huge gain. You might have 14 years of losses due to interest payments (even if the market value of the land was soaring) and no revenue and then one year of huge profits. In this scenario the annual accounting earnings would bear no relation to the actual annual changes in the value of the land. In Melcor’s case it has a big portfolio of land and it develops the land and so there is certainly some profit from its development operations virtually every year. Nevertheless, its accounting earnings may often bear little resemblance to the true change in its intrinsic value per share each year.

I have been following Melcor closely since the end of 2002. At the  end of 2002 the stock was trading at 96% of book value. At the end of 2000 it had traded at only 62% of book value. In the years since 2002 it briefly traded at over 300% of book value in 2007 when oil prices and optimism were high. As oil prices fell in 2008, the stock fell under 100% of book value. IFRS accounting starting in 2010 inflated book value (which soared 63% that year mostly due to the accounting change). by marking up its rental buildings to market value and the price to book fell (partly for that reason) to an average of 67% in 2012. It briefly recovered past 100% in 2014 but averaged 88% that year. With lower oil prices Melcor’s average price to book ratio fell to 47% in 2016 and averaged relatively similar in 2017. Today the price remains mired at about 47% of book value despite quite a substantial recovery in oil and in the Alberta economy. There was also a noticeable recovery in Melcor’s profits in 2017.

Melcor’s land (other than under its rental buildings) is not marked to market. I would like to think that some of its land is worth more than book value. But some may be worth less than book value if the land was purchased in the more buoyant economy around 2014. Overall, there is no reason to think that Melcor’s assets are worth less than book value.

I think Melcor’s share price will increase in 2018 if its earnings rise substantially or at least noticeably. Melcor has indicated that 2018 is starting off strongly with lot sales having returned to normalized levels. There are still risks given that lot sales could certainly slow and that rental property values would have to be written down if interest rates rise pushing down the market value of commercial rental property.

Overall with a share price of 47% of book value, I think Melcor is at the low end of that range. A rise in profit would push up the book value as well as the trading multiple to book value. Given the higher book value due to IFRS accounting we will almost certainly never see the stock price at anything close to 300% of book again. But something a bit over 100% is certainly not too much to ask for. Melcor’s book value per share has increased almost every year. There can be no guarantee, but I expect that trend to continue.


Linamar updated March 19, 2018

Linamar is updated and rated Strong Buy at $71.73.

There are always risks and Linamar’s price reflects a certain amount of NAFTA fear and reflects the fact that auto production in North America slowed in the last half of 2018.

But looking at the valuation and at the track record of this family-founded and ran company, I am optimistic. I think hitching a little wagon load of my money to what seems to be the Linamar locomotive will work out well over the years.

March 18, 2018

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

Toll Brothers was up 2.1%.

The Canadian dollar was down and is currently at 76.3 cents. I had been wanting to move some U.S. dollars back into Canadian dollars and have used this latest drop to move some dollars. I can’t predict the direction of the dollar. Instead, I am reacting to the lower dollar. I am getting a better price (in Canadian dollars ) for my U.S. dollars than I would have last week or last month. In order to convert the currency I bought DLR.u (this is in U.S. dollars) on Toronto on the U.S. side of my account and had that “journaled” to the Canadian side of the account and sold it as DLR in Canadian dollars. For more information enter DLR in the search box on this page.

Futures markets are down very slightly as of Sunday evening. A headline indicates that the market does not care about Trump’s twitter meltdown. Trump’s policies may or may not be good for the U.S. but it is hard to imagine how his attacks on various institutions of government is anything good. At some point the market may decide to be scared of what is going on at the Whitehouse.

March 15, 2018

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

TFI International (TransForce) was down 2.9%. Our last rating was only (lower) Buy.

After the close, AutoCanada released Q4 results that were very strong. I don’t know what the expectations were but I would expect the stock to rise on this news. I was recently in the market for a new vehicle and was in a half dozen dealerships around Edmonton in the last five months. In my experience most of the dealerships were quite busy. I expect AutoCanada to continue to do well.





March 14, 2018

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

Toll Brothers was down 1.6% and is worth considering as a U.S. investment.

See the post just below this for an update and comments on Melcor.

I no longer have Liquor Stores N.A. on the list but I am keeping an eye on it to a certain extent. They just released Q4 earnings which included quite a large loss (73 cents per share). But you would have to look VERY hard to find mention of the loss in the press release. It took me a while to find it in the MD&A. They focus on adjusted results and on the future where they claim they will be strong in both liquor and Cannabis. Maybe so… They are under new management. Previous management that had taken over from the founders was terrible. Perhaps the latest new management will do much better.

Melcor Developments updated March 14, 2018

Melcor Developments is updated and remains rated Strong Buy, now at $14.00.

Certainly, Melcor’s stock price has been disappointing since 2014. Some of the decline was warranted due to the lower oil prices and the weak Alberta economy. But when oil prices recovered somewhat and the Alberta economy recovered and despite Melcor’s earnings rising, the stock price remains similar to levels it traded at in 2015. I have looked closely at the numbers and other factors and I believe the stock is substantially under-valued.

It’s trading at only 47% of book value. And while some of its assets have been “written up” to market value (and are at risk of a write-down as interest rates rise) indications are that the true value of its assets is equal to or greater than book value. For example in 2017 it sold a parking lot and an industrial building for proceeds that exceeded the book value of those assets even those both of those were already carried at estimated market value.

On an earnings basis it trades at 9.0 times my calculation of adjusted  earnings. For adjusted earnings I eliminate any gains or losses on fair market value of properties and I eliminate gains or losses caused by changes in the trading value of the Melcor REIT units which due to accounting rules are a liability on Melcor Development’s balance sheet. Overall I believe my view of adjusted earnings is somewhat conservative at this time because it gives no credit for the gains in property values that come from the development process.

So why does the market value these shares at only 47% of book value?

Part of the reason is that it has such low trading liquidity that many market analysts may be reluctant to mention it. For whatever reason it basically gets zero press and attention in the financial news.

Part of the reason may also be the complexity of its accounting. It owns 53% of the Melcor REIT and consolidates 100% of the REITs results and then shows a liability for the 43% minority interest. This creates complexity.

As a property developer, Melcor’s financial statements and results call for a a different interpretation than most companies. All of its undeveloped and partially developed land is better thought of as “inventory” rather than as fixed assets. For most businesses, fixed assets are used to produce products or services. In Melcor’s case these fixed assets get modified and improved and become the product. So we can think of Melcor as having a huge amount of inventory. And that inventory must be carried for quite a few years and its resale value is subject to decline at times (and increases at other times).

Part of the reason for Melcor’s low share price may be fear that its “inventory” will end up being sold at prices that fail to generate reasonable profits. To date, profits on lot sales have fallen somewhat but remain, I believe, reasonably attractive.

What has to happen for Melcor’s share price to rise appreciably?

A higher share price is probably going to require some higher level of investor interest. Possibly a sharp rise in earnings over the next few quarters could be a catalyst. That could happen since the first three quarters of 2017 were relatively low in profit.

Share buy backs are a possible driver of higher share prices but to date the company has been unwilling to buy back shares.

It’s possible that the company will increase the dividend if they continue to feel confident about the outlook for 2018 and beyond.

What could go wrong?

Melcor’s earnings could decline if home building declines substantially in Alberta. There is also the risk of vacancies and of mark-to-market losses on its investment properties due to vacancies and/or higher interest rates.

In the Meantime?

I am going to continue to hold Melcor on the basis that the shares are under-valued and that they are likely to rise over time due to growth and due to investors eventually recognizing the growth. Meanwhile there is also a 3.7% cash dividend yield. I am not holding this for the yield but the yield is helpful. Melcor has very solid assets and it simply seems likely that buying or owning these at 47% of book value of equity is going to work out well eventually.




March 13, 2018

On Tuesday, the S&P 500 was down 0.6% while Toronto was up 0.3%.

Alimentation Couche-Tard was down 2.8%. I would be tempted to add to this stock on dips.

CRH Medical continued to slip back from its recent gains and was down 4.9%.

Linamar was down 2.0% probably due to continued trade war rumors.

U.S. inflation came in about as expected at 1.9%.

I am currently working on an update for Melcor Developments. It really finished the year strong and yet the stock price is stuck remains down near the 52 week low.

March 12, 2018

On Monday, the S&P 500 was down 0.1% whole Toronto was up 0.2%.

Melcor Developments was up 3.6% but that is not very meaningful on this thinly traded stock.

Note the previous post to this which updates the Melcor REIT.

Many Alberta-based stocks are still suffering from investor pessimism. But take a look at the Alberta Economic Dashboard and it indicates the economy in Alberta has been recovering quite strongly (which is not to say that it is back to where it was, it’s not).




Melcor REIT updated March 12, 2018

The Melcor REIT is updated and rated Buy at $8.07 to yield 8.4%.

This REIT is trading at a 30% discount to the book value of the equity or a 14% discount to the total value of debt plus equity. Presumably there is investor fear about vacancies and rental rates in Alberta. And those fears may be valid. But I like the discounted price which provides some margin of safety.

Some of the REIT’s properties are relatively new buildings that have long-term attractive tenants such as Shoppers Drug Mart, various bank branches, Tim Hortons, Star Bucks and other name-brand retail tenants. About half of the income comes from office properties and some or most of those buildings are older.

Since these units are not eligible for the dividend tax credit they are perhaps best suited for registered accounts.

March 11, 2018

Friday was a strong day for the U.S. markets with the S&P 500 up a hefty 1.7%.

Toronto was up 0.25%

Gainers included Visa up 1.9%, American Express up 2.6%, Berkshire up 3.7%, and FedEx up 3.0%.

CRH Medical retreated 4.7%.

My next update will be for the Melcor REIT.

An interesting thing about REITs that lease space to business tenants is that almost all the expenses tend to flow through to the tenants albeit some over a period of years. Most of us might be more familiar with residential rent leases where the landlord is responsible for property taxes and maintenance. With the long-term nature of business/ commercial leases and the flow through nature of almost all of the costs (not financing costs), the risk for commercial landlords including REITs is much reduced. They still do have risks in terms of vacancies and the market rent levels when leases expire but the risks would seem to be FAR lower than in the case of short-term residential leases where costs do not automatically flow through. There is also the risk of changes in interest rates and changes in market value of properties which affect commercial landlords and also residential landlords.

March 8, 2018

On Thursday, the S&P 500 and Toronto were each up 0.4%.

Linamar was up 8.4% to $73.75 after releasing a strong Q4 report.

Melcor Developments failed to react to its strong Q4 / 2017 earnings report and closed up 0.5% at $13.97. This for a company that has a book value per share of $30.21 per share and where the assets are solid consisting mostly of land and buildings. Granted, the book value has been boosted by IFRS accounting which marks its rental building up to market value. This is also a company that earned $1.15 per share in 2017 and $1.05 in 2016 (with Alberta in or recovering from a recession).

There is a great deal of commercial building going on near Edmonton. Despite oil prices being lower than 2014 these developers apparently still think that land and buildings in Alberta are a good investment. Those investors are effectively paying 100 cents on the dollar to construct new buildings. Meanwhile the equity of Melcor trades at less than 50 cents on the dollar. It seems to me that buying Melcor at around half of book value is ultimately going to offer a better return than would investing directly in similar land and buildings at market value. But it appears that continued patience will be required. Meanwhile the 3.7% dividend yield is not too bad.

CMHC reported that Canadian housing starts were running at an annual rate of of 230,000 as of February. This is at or about a record pace. Canada has been running at 200,000 or more for years while the U.S. has ten times the population is still building houses are far lower than record levels and is around 1.3 million houses per year. Certainly the pace of new home construction in Canada could slow with higher interest rates and a cooling home resale market. But so far there has been no decline.

Canadian Western Bank was down 0.2% despite posting better-than-expected results this morning. The bank also raised its dividend 4% which is a total increase of 9% in the past year. A CIBC analyst apparently “downgraded” the stock on concerns about the future growth rate albeit with a price target of $40. At one point today the shares were down to about $35 and I added modestly to my fairly large position in this stock, buying at $35.21. I had last rated it Buy at $40.55 and I do like to demonstrate the courage of my convictions.

CRH Medical updated March 8, 2018

CRH Medical is updated and rated Speculative Weak Buy / Hold at U.S. $3.15 or Canadian $4.07. Basically I would not buy at this price. This has been a disappointing investment over the past 17 months since it was first added to the site. After an initial sharp increase in price it plummeted over a period of months due to changes in the amounts it could bill for its services. It became a good buying opportunity this past Fall and we rated it Speculative (lower) Strong Buy at U.S. $1.85 or CAN $2.37. It certainly looked cheap then but it took a certain amount of bravery to buy it after its big decline in price. I had bought additional shares at low prices but the fact that I already had a lot of shares at higher prices meant that I was not prepared to add too many more dollars. I have now sold what amounted to 44% of my shares and I think that was prudent. Those with larger positions might want to lighten up. It may still have  a good future but its profitability in 2018 remains to be seen.

March 7, 2018

On Wednesday, the S&P 500 was close to unchanged (down 0.05%) while Toronto was down 0.5%.

CRH Medical was down 4.3%.

BHP (BBL on New York) was down 1.9% an the company has spoken out against Tump’s tariff plans for steel and aluminum. BHP’s main product is iron ore sold mostly in China and other Nisan locations and the tariff is likely somewhat harmful to BHP.

Costco was down 2.1% but then released results after the close that apparently beat expectations.

Linamar was down 0.6% but then released a strong earnings report after the close.

Canadian Western Bank was down 1.5% but will release earnings before the opening.

Melcor was down 0.9% and then released earnings after the close. It appears to me that the fourth quarter was fairly strong. Lot sales were strong but it was most mostly lower priced lots that they sold. They had been offering incentives to help sales throughout 2017 but they indicate that this is no longer the case as sales have returned to normal levels (which I would take to be higher than 2016 but lower than the peak years) in 2018. All in all, I see no reason for this stock to be trading at slightly under half of book value. Hopefully this report will push the price up somewhat. However, real estate is an unpopular sector at this time and so those holding this stock are likely to continue to have to be patient.

March 6, 2018

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

CRH Medical was up 12.8% in Toronto and a similar amount in New York. Apparently the market and or analysts were pleased with its Q4 report and the analyst conference call this morning. I may have been hasty in selling 44% of my shares today but we shall see. On an adjusted basis the profit level definitely supports the current share price. But I am not clear what the profit is going to be in 2018 with the government-mandated lower prices for its services. I will update the report for CRH in the next few days.

Meanwhile… stock futures are down about 1% on news that White House Economic adviser Gary Cohn has resigned. Trump’s views that all trade deficits are bad is certainly popular. I don’t think it is correct and it probably represents a very uneducated view. But voters are not typically educated in economics and so it plays well. Trump continues to claim that the U.S. runs a trade deficit with Canada when in fact it is a surplus once services are included as well as goods. Increasingly these days people seem shameless about using “alternative facts”. We shall see how things unfold.

Melcor Developments reports after the close tomorrow and Canadian Western Bank before the open on Thursday. Hopefully these stocks will respond positively on Thursday.

March 6, 2018 1:10 pm eastern

With CRH up a little this morning, I took the opportunity to reduce my position by what amounted to 44%. I had added to my position at prices as low as U.S. $1.75 and some at about U.S. $2.35. So these shares were sold at a profit (based on a last in, first out accounting). My position in CRH was larger than I was comfortable with and this was an opportunity to reduce that as well as raise cash. These were sold in RRSP accounts where triggering a gain was not an issue. I will update the report on CRH before long. We won’t likely know its profitability under the new pricing rules until it releases Q1 results. Generally, the business model still looks good to me but I am bothered by the financial press release not even mentioning net earnings to shareholders.

With Melcor dipping down to $13.95 today I could not resist grabbing a few more shares.


March 5, 2018

Monday’s markets improved through the day and the S&P 500 closed up 1.1% and Toronto rose 1.0%.

CRH Medical released Q4 results after the close. The revenue gains seemed quite positive and the outlook for revenue for 2018 seemed somewhat optimistic despite the government-mandated price reductions that they face in 2018. The entire focus of the press release was on EBITDA which I find disturbing. Possible, the reason for this is the analysts who follow the company are most interested in EBITDA. We will see how the market reacts. Any material increase in the stock price might be limited because a lot of people have been burned by this stock and might be eager to sell.

The CEO at CN Rail has been ousted in what was clearly an unfriendly parting. It is impressive to see a Board act so independently and decisively. But I think it was quite unnecessary (and a low class move) to basically insult the outgoing CEO by stating ““The Board believes the company needs a leader who will energize the team, realize CN’s corporate vision and take the company forward with the speed and determination CN is known for,” said Board Chairman Robert Pace.”  Warren Buffett has said that the main job of a Board of directors by far is to select the proper CEO. In this case the Board, in 2016, selected their relatively long-serving CFO (who had no operating experience) for the CEO role. Naturally, the press release did not allude to the Board having made a mistake in that selection. I would not be a buyer of CN Rail stock on this news.

Bombardier is issuing $500 million U.S. in shares. I applaud the move. Their balance sheet is extraordinarily weak and it behooves them to raise equity. This should be good for the bond credit rating and the preferred shares although the credit rating would remain very weak.

Stantec updated March 5, 2018

Stantec is updated and rated Buy at CAN $32.22 or U.S. $25.05 (It was analysed at the previous closing price, it closed today at $32.42 and U.S. $25.05). Stantec has been a prodigious creator of wealth over the years but the stock has been relatively flat in recent years. It made a very large acquisition in 2016 that turned it into a global company. That large acquisition has not yet led to the expected increase in earnings per share. In Q4 in particular there were cost overruns on some projects in the acquired business. If, as expected, Stantec has now overcome these issues in 2018 then the earnings and share price could rise noticeably. I continue to have faith that the stock will resume its historic upward trend. However any unexpected continuation of material project difficulties into 2018 would likely send the stock lower.

March 4, 2018

On Friday, the S&P 500 was up 0.5% (although the DOW was down 0.3%) and Toronto as down 0.1%.

AutoCanada was down 2.0%. They will not release Q4 results until March 15. I am expecting improved results in Q4 and and an improved outlook for 2018.

Canadian Tire was down 1.8%.

The Melcor REIT rose 2.1% after releasing earnings. They noted continued pressure to lower rents upon renewal of office leases in Edmonton. And there is some risk of increased vacancies. Overall they saw signs of improvement in the market but their cash flows from operations per unit do not seem likely to grow in 2018 even with the addition of new properties acquired from Melcor in January. Still, with a cash yield of 8.3%  these units seem attractive. They booked a modest fair value gain of $3.8 million on investment properties in the fourth quarter versus losses of $16.6 million in the first nine months of 2017. Fair value losses are to be expected as interest rates rise.

When Melcor Developments reports on Wednesday, I expect their lot sale numbers to be good. However lot sales from their busy new Jensen Lakes subdivision could be at lower gross profits since that land may have been purchased at time of peak land values. Melcor will presumably not report any fair value losses on properties in Q4 but rather would report gains due to progress in developing new buildings. I am under the impression that Melcor may book a small loss on properties transferred to the REIT in January 2018. The reason for that would be that such properties were earlier marked up to market value and the transfer may have been at a price slightly lower than the Q3 estimate of market value. Melcor Development shares are trading at half of book value. That would seem to provide a substantial margin of safety. It’s hard to imagine that there shares are not under-valued.

I am currently working on an update for Stantec Inc. Stantec stumbled somewhat in Q4 with some cost-overruns and there were also some unusual income tax expenses. I remain positive on Stantec. I notice that the company resumed buying back shares on February 27 and 28 as the price declined with the earnings release. Stantec also happened to mention its work on housing developments in southern Alberta had increased in Q4.


Toll Brothers updated March 2, 2018

Toll Brothers is updated and rated (higher) Buy at $43.91. The last update was on October 9, 2017 at $42.81. After that it went as high as about $52 before sliding back after the middle of January. I had reported trimming my position somewhat but I still thought it represented reasonable value at $52.

The earnings on this company have marched rather steadily higher since 2011. But the stock price has been somewhat volatile. The dips can be hard to take but they do provide buying opportunities. I would describe the Q1 earnings report released February 27th as very strong indeed. Yet the market found reasons to push the stock down. This should be a good investment at the current price.

March 1, 2018

Markets fell on Thursday and Trump indicated he will impose tariffs on steel and aluminum imports to the U.S. I am not very familiar with the rules but for things subject to NAFTA the partners are allowed to impose anti-dumping or countervailing tariffs in situations where goods are being sold abroad at lower prices than domestic (so-called dumping) or when goods are subsidized by government (countervailing tariff allowed). I would think that if the new tariffs apply to Canada then there will an opportunity to challenge it under NAFTA and the associated dispute rules.

The U.S. markets fell on this news because it is more evidence that Trump is anti trade in general. For at least several hundred years most of the world has generally been increasingly pro-trade. The U.S. is less dependent on trade than most nations (and far less than Canada) and is in a position to try a more protectionist approach if it wishes.

The S&P 500 was down 1.3%, the DOW was down 1.7% and Toronto was down 0.3%.

It’s interesting that U.S. markets fell so much on this news about tariffs. Tariffs that Trump believes will be good for the U.S. or at least good for some of his voters.

Linamar was down 2.75%.

Canadian Western Bank fell 3.0%. I thought that they were reporting earnings today but in fact they report a week from today.

Toll Brothers will be my next update. I added a small amount to my Toll Brothers position today.

After the close, the Melcor REIT reported Q4 and 2017 results. For the year, the results were about flat. In Q4, Adjusted Funds from Operations were down 3% but in general results were fairly stable and occupancy remained at about 92%. While there was some loss in fair value of the buildings during the year there was actually a small increase in Q4. I don’t see why the markets would react negatively to the report but we shall see. The REIT hosts a conference call tomorrow morning.


February 28, 2018

On Wednesday, the S&P 500 was down 1.1% and Toronto was down 1.5%. I don’t know if there was any special reason. U.S. markets remain relatively close to record highs and seem somewhat jittery regarding higher interest rates. Lately a 1.1% move in the S&P 500 is simply nothing unusual.

Melcor closed down 4.7% at $14.90. The volume was 24,000 shares which for most companies is tiny but Melcor is very thinly traded and the average volume in the last three months is apparently only 5,000 shares per day. Today, most of the trading was near the end of the day and the price drop may reflect what happens when someone tries to sell 20,000 shares in a market that averages 5,000 shares. Had I noticed it going under $14 I likely would have picked up a few more shares. Melcor reports Q4 earnings on March 7

Meanwhile the Melcor REIT closed down 2.5% at $7.88 and my order for 1000 shares at $8.00 got filled. It will report earnings tomorrow, probably after the close.

Toll Brothers was down another 2.8% at $43.83.

Canadian Western Bank was down 2.0% to $37.93 and will report earnings tomorrow. I believe that will be before the open. I expect continued good results.

BHP Billiton plc (The American Depository Receipt BBL)  was down 3.6% to $40.82. The supposedly economically equivalent American Depository Receipt for BHP Billiton Limited trading as BHP in New York was down 2.7% to $46.50. The discount for BBL versus BHP is 12.2%. The reasons for the discount are not clear. I hold the discounted BBL shares. This is a more speculative investment since it is so dependent on commodity prices.

It’s always more enjoyable to see the prices of stocks that we own rise rather than fall. But these dips can provide buying opportunities.

Today I sold 300 shares of TFI International at $33.01. I had bought these 300 shares at $29.12 on a very recent dip and only bought because of the dip. Therefore I decided to sell given the shares had rebounded. I only have TFI rated (lower) Buy at $32.86.  Given that I am looking to raise some cash I placed an order to sell more shares if it hits $34.50.

The Canadian dollar has been dropping and is at 77.8 U.S. cents. I have been waiting for a drop to about this range or a bit below in order to transfer some U.S. cash to Canadian dollars using DLR and the Norbert Gambit which I described in detail on December 9th and 10th. Around December 10 the dollar was also at 77.8 cents and there seemed to be a lot of predictions it would decline. Instead, it promptly rose.

Transferring Funds to Australia

Speaking of transferring currency. This week, I was dealing with the issue of how a Canadian student living in Australia can transfer money from a Canadian bank account to a local Australian bank account.

Consideration was given to using HSBC which has branches both in Canada and in Australia. It was found that the HSBC in Australia was apparently not interested in students and in any case the Canadian HSBC is quite separate from the Australian operation. HSBC advertises itself as an international bank. I am not convinced.

Apparently, writing a cheque on a Canadian account and depositing into an Australian account could take weeks or a month to clear. We will test that.

A wire transfer did not seem feasible since a student in Australia can’t go into a the branch in Canada to sign for such a thing as required.

TD offers a service called Visa Direct. The Australian account came with a debit card that had the VISA symbol on it. Using that Australia Visa number it was possible to transfer money from a Canadian TD account directly to an Australian account. This turned out to be very easy to do online. TD charges a fee of $12.95 to transfer up to $2500 and then scoops an additional 2.5% or so exchange fee (over and above the wholesale rate) which presumably gets shared between TD and VISA and perhaps the receiving bank. It’s annoying to be charged 2.5% over and above the wholesale exchange rate but this was the most convenient method. I have, in the past, used the wire transfer and gone through a Foreign Exchange firm to get a better rate for larger amounts.

It seems to me that a number of banking procedures are relics of the past including wire transfers that require a branch visit. Hopefully some of the FinTech products will disrupt some of this including the fees.





February 27, 2018

On Tuesday, the S&P 500 was down 1.3% and Toronto was down 0.3%.

Toll Brothers was down 5.1% to $45.10 even though it reported strong Q1 fiscal 2018 earnings. Apparently the market was disappointed with the full year outlook. I believe it is a good investment at this price.

The Federal budget came out today. I don’t think there was anything in it that would affect stock market returns.

In my own trading, I am somewhat inclined to do some selling to raise cash. However, none of my bigger holdings look over-priced to me and so it is difficult to pull the trigger on any sales. Meanwhile, with the Melcor REIT trading as lkow as $8.00 today I decided to place an order for a small amount. The order did not get filled.

On the one hand I like the idea of owning a part of the various buildings that the REIT owns. On the other hand the units could decline with vacancies and higher interest rates. But I think the risk I am taking, with a small position in the Melcor REIT, is TINY compared to all those younger people who buy houses at today’s prices using 90% (or more) borrowed money and where the value of the house is multiples of their net worth. Stocks are generally perceived as risky and leveraged investments in houses as safe. Reality and perception are not necessarily aligned in this case.

February 26, 2018

Monday was another strong day in the markets with the S&P 500 up 1.2% and Toronto up 0.5%.

Canadian Western Bank was up 2.5%.

CN rail was up 2.2%.

Berkshire Hathaway was up 3.9% after releasing Q4 earnings and the annual letter and after Buffett appeared for three hours on CNBC’s Squak Box. He has made that very early morning appearance every year for about nine years on the Monday after the letter comes comes out. It is impressive that he has the energy to do that at 87. As always his memory was incredibly sharp and his knowledge encyclopedic.

The government of Alberta has announced that it will invest $1 billion in loans and grants to encourage the construction of bitumen upgrading refineries. It’s a bit ironic that it is an NDP government that is helping out private businesses this way. It is not quite as impressive as it first sounds since the money will be deployed over some eight years and won’t start for another year or so. Still, it should be positive for Alberta’s economy.

I am in the process of updating the breakdown of my personal portfolio. My cash position is down to 14%. As markets are rising I am tempted to see what positions I might want to trim to raise a bit more cash.

February 25, 2018

Friday was another strong day in the markets. The S&P 500 was up a hefty 1.6% and Toronto was up 0.8%.

Stantec was down 1.8% and I added modestly to my position in that company.

Warren Buffett’s annual letter came out on Saturday. I will comment further regarding the letter in the next few days.

On Friday, Statistics Canada released inflation figures for January.

One item of note is that Restaurant prices were up 3.9% year over year for Canada and 4.9% in Ontario. This could be linked to the higher minimum wages. All else equal, this should lead to higher revenues for the Boston Pizza Royalties Income Fund. Even if traffic goes down a bit I would think that revenues would be higher. That was not yet evident as of Q4 however and so we won’t know until Q1 is reported whether or not the higher prices are benefiting Boston Pizza. It could be a situation where the franchisees are somewhat harmed by the higher wages (given that prices may not rise enough to fully offset the higher wages especially net of any decline in customer traffic) while owners of the Royalty income Fund units benefit. Or, maybe the Fund unit holders will be harmed as well if customers respond negatively to higher prices.

When it comes to same-store-sales increases (for any “retail” business), an increase due to volume and traffic is preferred. But an increase due to higher prices is also usually beneficial.

The “Russian etc.” probes are catching fish very close to Trump. So far, the stock market totally shrugs that off. Maybe now that the Trump tax cuss are in place the market does not care if he gets charged at some point.



Canadian Tire Updated February 25, 2018

Canadian Tire is updated and rated Buy at $176.15.

This company has been extremely well managed and has set ambitious goals to keep improving and growing and has met those goals.

In the very long term it has created billion in value for shareholders.  $619 million of invested equity has a book value of $4750 million through the retention of earnings and this is net of substantial dividends paid out. The market values the equity at $11,835 million. The ROE at 11 to 13% in recent years and 15% in 2017 drove the value creation from a book value perspective and also drives the substantial market premium to book value.

The stock has risen very substantially in recent years due to earnings growth. It is rated Buy at this time and perhaps could still even be considered a (higher) Buy. I sold my own shares too early on the way up. I am interested in buying back in but will wait and see if there is a better opportunity.

February 22, 2018

Thursday’s markets were surprisingly strong or at least the DOW was, especially earlier in the day. The S&P 500 ended higher by just 0.1% and Toronto was down 0.1%.

It was disappointing to see Stantec down 11.0% after it released earnings.  GAAP earnings per share were down by about 60% but that was mostly due to unusual one-time income taxes related to the tax changes in the U.S. Earnings were down in Q4 but this was mostly due to (hopefully) one-time cost over-runs. Adjusted earnings per share were down by 9% but this was mostly due to (hopefully) one-time cost over-runs. But I notice in the presentation the company shows normalized earnings per share (after adding back the project over runs) were UP 49%. Clearly the market was not buying that normalized story.

I believe Stantec will continue to do well over the years and that this dip is likely a buying opportunity. However, I would be cautious and not rush in. I may add modestly to my position tomorrow.

In better news, CRH Medical was up about 11%.

February 21, 2018

On Wednesday, the S&P 500 was down 0.55% as FED meeting minutes apparently caused the market to be more concerned about rising interest rates. Toronto was up 0.55%.

TFI International was up 10.5% after releasing Q4 earnings.

CN rail was up 2.8%.

Royal bank was up 2.0%.

February 20, 2018

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

Most of the names on our list were down.

Walmart was down 10.2% to $94.11 after reporting earnings. Our last rating was (lower) Sell in October at $86.22. It had then promptly soared reaching $110 at the end of January.

BHP Billiton fell 4.4% in New York (and 5.2% on the BBL shares) and fell 4.5% in Australia. This was after announcing first half of fiscal 2018 earnings that were improved on an underlying adjusted basis but apparently lower than expected. I added to my small position. I consider this to be a speculative investment by nature and I hold it for a bit of diversification and for a bit of a change of pace from my usual diet.

RioCan was down 1.8% to $23.84. It could certainly continue to fall as interest rates rise and the market value of its properties comes under pressure for that reason. On top of that, vacancies are always a possibility. Nevertheless it is very well run and I am comfortable holding some of these units and will consider buying more on dips but I perhaps have had my fill for now.

Canadian Tire was up 2.0%.

After the close, TFI International reported revenues up 2% and adjusted earnings per share  up 8%. It’s hard to say how the market will react. There are probably positive as well as negative aspects of the report and it depends what the market “decides” to focus on.




February 20, 2018 11:20 am eastern

BHP Billinton came out with earnings which were strong but were lower than analysts expected. It also raised the dividend but my understanding is that they essentially have a policy of having a dividend that floats up as well as down with adjusted earnings and so the dividend increase may not be very relevant. My report notes the strange share structure whereby it has two classes of shares which are apparently economically equivalent but where one class trades at a discount. An activist investor is pressing for action to unify the two classes but the company has no plans to do so. Still, I would buy the lower-priced class and hope for unification at some point. With the shares down 3.9% in New York I plan to add a modest amount to my position.

My next update will be for Canadian Tire. I have ran the numbers on the latest results and the stock appears to continue to be a Buy at around $175. This company has really been firing on all cylinders at least since the financial crisis ended and has somehow escaped the damage that Amazon has inflicted on so many retailers.

In the U.S., I think there is a risk that the markets will start to get concerned at how close the legal probes are getting to the President.

February 18, 2018

Friday’s markets saw the S&P 500 about unchanged and Toronto up 0.3%.

Fortis Inc. jumped 3.75% to $42.08 as the market perhaps decided that its recent slide was over done.

Kinder Morgan Canada Ltd was up 4.45% to $19.97 after it got some positive news about the ability to start a small part of its Trans Mountain pipeline construction efforts. This one is not on our list but I mentioned last May 28 and 24 that I grabbed some shares at the IPO. It has also been included in my own portfolio which I update occasionally. I am a bit surprised to see that I am now up 17% on Kinder Morgan plus a bit more for the two little dividends received. It is not a stock that lends itself to value analysis since so much depends on political approvals. I am not sure if I will continue to hold or maybe take my gain and possibly buy back on dips. I think the pipeline has to go through but certainly much opposition remains which will likely cause the stock to be volatile.

Yesterday, I sent out the latest edition of our free newsletter. The email list for that is separate. If you did not receive the email you can add your email to that list at the following link. The newsletter featured a description of the new Vanguard Canadian ETFs that allow a balanced globally diversified portfolio to be bought with just one security. It’s similar to certain diversified balanced mutual funds except with far lower fees. It may not be of as much interest to our paid subscribers who are presumably comfortable picking individual stocks and ETFs. This newsletter also discussed my view that businesses and investors do get some very good tax breaks. That view may not be popular with very many business owners or investors but its a timely topic. In any case, while some people may view tax breaks as loopholes to be closed others may be more interested in how to take advantage of such legally available tax breaks.

I mentioned perhaps a couple of months ago that I wanted to get some international exposure and would probably buy some international ETFs. On Friday I looked at buying the rest of developed world ETF under symbol VIU on Toronto. This one is included in my recent article about setting up a global ETF portfolio. But since I wanted to reduce my U.S. cash rather than Canadian, I instead decided to buy the country-specific ETF for Austrailia that trades as EWA in New York and which is included in my Global ETF list and which happens to have a reasonable P/E ratio as well as a high yield. The distribution is paid only twice yearly and was high in 2017 but I don’t know if it will remain that high. The distributions on ETFs can be somewhat erratic. Also I am not sure if this distribution will be subject to the 15% U.S. withholding tax even when held in an RRSP. I was looking for some international exposure and whether or not there is a withholding tax on the distribution was not something that would effect my decision on this one. For reasons that I will not get into at this time, I have a particular interest in Australia at this time.

February 15, 2018

Stocks were mostly higher on Thursday as the S&P 500 rose 1.2% and Toronto was up 0.5%.

Canadian Tire surged 6.5% after reporting Q4 earnings. Costco was up 2.5%.

Constellation Software was up 3.1% after reporting Q4 earnings.

Dollarama was up 2.3%.

I added modestly to my positions in Fortis (which was up 2.2%) and TFI International (which was up 0.5%).


February 14, 2018

On Wednesday, the S&P 500 was up 1.3% and Toronto was up 0.7%.

Notable gainers included BHP Billinton, up 3.2% in New York. Costco up 1.7% and Visa up 2.0%. Amazon up 2.6% (And they said trees don’t grow to the sky).

Fortis was down 1.7% to $39.69. The recent decline in this stock is likely due to dividend stocks becoming less popular in the face of recent and anticipated interest rate increases. Given that I recently thought it looked good at $46 I will likely add to my position in this stock.

February 13, 2018

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

TFI International was down 3.1% to $29.75. This company has a strong history of growth by acquisition and is very well managed. But it is in a tough industry. The price decline may be related to news that Amazon will apparently enter the package delivery business. I am tempted to add somewhat to my position on this dip. TFI will report Q4 earnings next Tuesday, after the close of trading.

A comment on a share repurchase announcement:

Phillips 66 (PSX) announces it has agreed to repurchase 35 million shares of Phillips 66 common stock from a wholly-owned subsidiary of Berkshire Hathaway Inc. (NYSE: BRK.A; BRK.B) for $93.725 per share. This $3.3 billion repurchase is expected to close on Feb. 14, 2018.

“We are excited to have this opportunity to return capital to our shareholders in such a meaningful way,”

I probably get hung up on wording at times. Here we have a company buying back shares from exactly one share holder and yet making the technically false statement that this is a return of capital to shareholders (plural). Buffett himself has written about repurchases and points out that the money goes to departing share owners not continuing owners. In this case Berkshire is the only departing share owner but is also a very large continuing share owner.

Berkshire is selling these shares only because they own over 10% of the company and pushing ownership back below 10% lowers certain regulatory burdens.

I am quite willing to accept that this purchase is good for both parties. I just choke on the implication that this is somehow a return of capital to shareholders in general.

To the extent that this is an “opportunity” for Phillips 66, it should be because it is an opportunity to buy back shares at less than their estimated intrinsic value. It is nonsense to imply that returning capital to (departing) share owners is always a good thing for the remaining continuing owners.

What Will Buffett Say at Month End? February 13, 2018

Sometime around the end of this month, Warren Buffett will release his annual letter.

It’s hard to predict what Buffett will write about, but here are my guesses in that regard.

The letter always starts by noting the percentage change in Berkshire’s book value per share as well as the compounded rate of growth since Buffett took control of the company in 1965. Berkshire is likely to post an unusually large percentage increase in book value per share due to the reduction in income taxes which will lower the liability for deferred income taxes by roughly $35 billion. Buffett will be clear that the bigger gain in book value is an abnormal result. He will also likely note that it has NOT added anything close to $35 billion to intrinsic value since these defferred income taxes in effect were never really going to be paid since each dollar paid was usually offset by more than a dollar of new deferrals. However, intrinsic value will have increased to the extent that future profits will be increased by the lower tax rate.

This year the overall gain in book value per share since 1964 is likely to have surpassed one million percent. That gain turns a single dollar into ten thousand dollars. That seem to me like a huge milestone and I know from a non-public source fact that Buffett has had his eye on reaching that number. But it may be a bit anticlimactic given that a few years ago he started revealing the total gain in market value per share and that gain has already been well over one million percent.

Buffett may then discuss the income tax reduction. He has said in the past that it was basically unnecessary but that it has increased the value of corporations. (I was surprised that he has apparently not stated that some of the lower taxes will be competed away in the form of lower prices or higher wages.) Buffett may also discuss the lower rate of tax applicable to repatriated cash from foreign profits. He has noted previously that this will not much affect Berkshire since Berkshire already pays income taxes on foreign profits and those already partly offset the tax due on repatriation. The real winners on repatriation are companies that earned (often with dubious artificial accounting maneuvers) big profits in foreign tax havens. And the new repatriation rules actually encourage that sad behavior. Most or many large insurance companies use “captive” reinsurance subsidiaries to artificially transfer substantial profits to foreign tax havens. I have never seen Berkshire get any credit for not doing that.

Buffett is likely to discuss Berkshire’s massive cash position and it’s even possible that he will announce the start of a regular dividend or a special dividend. He could announce a plan to buy back shares but that is more difficult since the share price might go up in response.

He will discuss that his insurance operations made an underwriting loss due to the 2017 hurricanes. This came after 14 consecutive years of profit and he will likely predict most future years will feature underwriting profits. In any case his insurance operations likely were profitable in 2017 after including investment income.

Buffett is no fan of Trump. But he he does not believe in engaging in unprovoked criticism and so I think any comments about Trump will be quite restrained or indirect. Buffett usually includes some soothing words about his optimism for the future of America and its corporations and people. He may discuss trade issues and what might be done to make trade more fair while retaining a mostly free trade regime.

He may discuss higher  interest rates and their impact on stock valuations and possibly on the U.S. debt and the value of the U.S. dollar.

He will discuss the recent appointment of two new vice-chairs and any resulting contraction of his own role. Executive compensation may now have to include these two highly paid executives. Their pay was not previously disclosed in the Berkshire reports though in at least one case it was available in separate reports issued by subsidiary companies.

Whatever Buffett decides to discuss, it will be educational and inspirational and a good read as always.



February 12, 2018

On Monday, the S&P 500 was up 1.4% and Toronto was up the same amount.

In part this was due to Trump releasing details of an infrastructure subsidy plan.

The plan seemed to get mixed reviews with some pointing out that the $200 billion is over ten years and that the spending will be funded with yet more debt. Of course EVERYTHING Trumps does or says gets mixed reviews these days in a world where the various media outlets appear to be taking sides.

In other news Trump says he will soon announce new duties on countries that he feels are not practicing fair trade. A trade war is not exactly good news for the markets.

Most of the stocks on our list were up today. Perhaps that indicates that buying near the lows last week will turn out to have been a good move for those who did so.

Looking for Yield

I notice TD Direct is out with an issue of 6.75% convertible debentures from Just Energy. I know a little bit about the company but I don’t know how safe these debentures are. The conversion price is $8.90 while the shares closed today up 8.5% at $6.15.

Investors who are more confident that the shares will rise past $8.90 would be better off to simply invest in the common shares rather than the convertible. The commons shares have a dividend yield of 9.9%.

I was about to say that the 6.75% yield seemed attractive but now that I am reminded of the high dividend on the stock I would choose the stock instead. I am not putting a rating on this but I would say that given the high yield the view of the market is that the Just Energy shares (and the convertibles to a lesser extent) are a speculative investment.

On my Links page I had a link to the Financial Post Market data which used to include a list of convertible dentures. That link no longer works.

As far as high yield debt, TD Direct has nothing that looks particularly appealing to me. They have some Sherrit International  issues yielding over 10% for maturities around 3.5 to 7 years. But Sherrit has been a very weak company for many years and I am not sure it is worth the risk. There are also a couple of energy companies yielding over 7% to maturity. There is also a Bombardier issue yielding over 7%. Given the difficulty of assessing the credit worthiness of what are by definition weak companies (hence high yield), I would look instead to a high yield ETF to gain diversity.

However, I have not found anything overly attractive in that area either. ishares offers two that invest mostly in the U.S. but are hedged to Canadian dollars. XYH has a yield of 5.6%. CHB yield 5.8%. Looking at Vanguard, they do not appear to offer a Canadian high yield ETF.

ishares also offers XHB which is Canadian bonds with somewhat lower credit but it yields only a little over 4% which does not seem attractive.

A knock against bond ETFs is that they never mature. But I believe the cash flows (after the fees) are the same as a laddered portfolio of individual bonds which in effect never really matures either. Basically I think this “never matures” criticism of bonds ETFs is not a valid criticism. It has some truth to it but does not seem to be a valid reason to avoid bond ETF. I avoid investing in bond ETFs because of the low yields not because they never mature.


February 10, 2018

On Friday, the U.S. markets once again were highly volatile and the DOW, at it low, was down 500 points before finishing the day up 330 points or 1.4%. The S&P 500 finished the day up 0.5% and Toronto finished down 0.2%.

A number of U.S. stocks rebounded somewhat including: American Express up 3.8%, Visa up 2.4%, Berkshire up 2.2%

Dollarama was down 3.2%. CRH Medical was down 4.6%.

In my own trading, I added to my AutoCanda position on Friday.

The near-term direction of the U.S. market depends on how many investors become fearful of further declines and and how many are ready and willing to buy.

There is still plenty of things that could “spook” the market including, among other things, the Russian investigation and political tensions related to Trump not releasing the Democratic version of “the memo”.

RBC Direct System Outage

RBC has indicated that they had a major problem in their discount trading platform on Thursday and trades were not going through and it was due to a problem with a fibre optic cable.

I trade through TD Direct. But I occasionally do trades in RBC Direct for a relative.

I tried to sell two stocks on Thursday and not only did the trades not go through, but it was not really clear to me if they did or not. This is a big failure. I doubt that RBC has any legal obligation to make traders whole but their still could be a class-action law suit or some kind of regulatory penalty to RBC due to this. I understand their call center has been over-whelmed also.

The January Jobs Report

Statistics Canada released a poor jobs report for January. The headline indicated 88,000 jobs lost and an unemployment rate of 5.9%.

I have noted before that the jobs / unemployment rate data is from a survey of households and is subject to significant errors. As I recall, Statistics Canada indicates someplace that the statistical error (and this assumes that they have a good random sample) is about 30,000.

I am never one to say that statistical data like the unemployment rate or inflation is manipulated. I believe Statistics Canada presents the data honestly.

However, there have been some wild swings in the data that call the accuracy into question. I think it is somewhat irresponsible to release this data and state “employment fell by 88,000 in January” without being a lot more clear that this is only an estimate and is subject to error / uncertainty.

It is frustrating to watch guests on Business News Network opine that the loss may have been due to the normal loss of Christmas seasonal workers. In fact, the data is already seasonally adjusted although again that is a process subject to uncertainty and error.

Basically, people love to see confirmation of their position in the data. Those against the minimum wage increase immediately saw evidence of that causing job losses.

I would read very little into this January report. It largely offset an usually strong report in December.

Before jumping to conclusions of doom, consider that the Statistics Canada press release also states:

“Adjusted to US concepts, the unemployment rate in Canada was 4.9% in January, compared with 4.1% in the United States. The unemployment rate for both countries trended downward in the 12 months to January.”

“The labour force participation rate in Canada (adjusted to US concepts) was 65.5% in January, compared with 62.7% in the United States. On a year-over-year basis, the participation rate declined by 0.3 percentage points in Canada, while it was down 0.2 percentage points in the United States.”



February 8, 2018

On Thursday, the DOW ended the day down 1033 points or 4.15%. The S&P 500 was down 3.75% and Toronto was down 1.7%.

The biggest decliners on our list included Toll Brothers down 5.0%, American Express down 5.6%, Visa down 4.8%, FedEx down 4.7%, and the Boston Pizza units down 4.1%.

Some of the rate reset preferred shares were among the few winners.

As of 10:15 pm eastern time, the futures market shows the DOW up 20 points.

Meanwhile another “government shutdown” looms in the U.S.

The DOW today is only down to levels of very late November. I believe I mentioned in November and December that the market seemed to keep rising over and over again on the SAME news, the news of the income tax cuts. The market rose very sharply until it peaked at the end of January. For months the market seemed oblivious to lots of risks including government shut downs, trade wars, and even potential serious problems with North Korea.

For those with equity investments, it is never fun to see the markets go down. But really, it’s hard to see the U.S. market declines in February as being much more than a dose of rational thinking. The markets had begun to price in perfection or something close to it.

It has been in the news that people betting that the volatility index called the VIX would stay low have lost money. Searching this site it appears I have never ever mentioned the VIX. And why would I? It was certainly nothing that I would ever advise investors to bet on one way or the other. I don’t even bother with options and part of the reason for that is that they tend to speculative and they are also not easy to understand. I have a lot of financial education but I know that there is a ton of math around options that I simply don’t understand. Meanwhile though it seems like a lot of people out there with probably not that much math and finance education think they understand options and the VIX and options on the VIX very well. I am happy to let these people make their bets against each other. I prefer investments where money flows mainly or at least partly from customers of businesses to owners as opposed to merely between owners/investors.

I note the news today that the National Energy Board will be replaced with something new. I mentioned on October 5 that the NEB process was becoming increasingly complex and suffocating. I worked for a utility regulator for 13 years and I believe I mentioned somewhere along the lines that I thought that the regulatory process was basically collapsing under its own weight. I’m not hopeful that the new process will be much better. Various groups say they want to heard and listened to. What they really mean is that they want the decision to go in their favor. And they are not willing to accept decisions that go against them. How does one fix that? Perhaps by enforcing the law?


February 8, 2018 1:20 eastern

The Dow was down 680 at one point and 518 as I write this.

So, it seems that the days of wild swings and possible big down moves are continuing.

I never know where the market is headed short term. I imagine another day of headlines of losses could turn sentiment more negative and cause more people to sell.

My S&P valuation article has been suggesting for a long time that the market seems over-valued. That article may be too conservative by not taking account of the sudden big rise in earnings expected for 2018 but in any case the P/E on the S&P 500 has definitely been quite a bit higher than historical averages. Still P/Es could stay high if the interest rate increases are modest.

My approach continues to be to add to my higher rates stocks on dips unless I feel already too much exposure. Accordingly I added to Toll Brothers just now at $44.58 and I grabbed a bit more Linamar at $68.50. I also reduced my Boston pizza position somewhat at $20.52. I sold what I bought a few days ago at $19.60 plus an equal amount.

My approach is not to get into a panic or hurry either buying or selling.

For trading it would probably be better if I entered some orders at attractive prices to buy or sell to put some things more on auto pilot.

February 8, 2018 10:00 am eastern

The results for Boston Pizza this morning were fairly weak. Not terrible, but weak. Distributable cash per unit declined 2.9% in Q4 and 0.6% for the year. Royalty-;igible same store sales which is the key performance number was negative 0.2% in Q4.

The units are currently down 1.3% to $20.93.

Despite a pay-out ratio of 100%, I don’t think the distribution will be cut. But it also can’t grow until and unless they get growth in royalty-eligible same store sales leading to growth in distributable cash per unit.

Given higher interest rates these units could fall in price. And of course if market sentiment is generally negative then that can lead to at least temporary declines.

The distribution remains good here and history suggests it will rise over the years.

I have quite a large exposure to this name and I may consider trimming it a little.

The previous rating was Buy at $21.12. I was thinking Q4 would show some growth given the partial economic recovery in Alberta.


February 7, 2018

On Wednesday, U.S. markets were mostly higher but ended the day down slightly.

The S&P 500 was down 0.5% while Toronto was down 0.2%.

Canadian Western Bank was up 2/0%.

Canadian Tire was up 2.6%.

Statistics Canada released data for building permits in December. I am always like to check data regarding single family home starts in Alberta given my investment in Melcor Developments. The December data shows that the number of single family dwelling permits issued was 1079 units. This is seasonally adjusted. This level has been fairly constant all year except it was higher back in April and May. I suspect the seasonal adjustment here is far from perfect. In any case these numbers confirm that the number of single family housing permits has recovered somewhat from the recession lows but is noticeably below the peak levels. In 2014 this number was about 1500 permits most months. Overall the 1079 single family home permits for December 2017 is neither a particular good number nor is it a bad number. I don’t know if Melcor would typically book a lot sale before a home permit was taken out or after. It may be right around the same time in many cases.

Boston Pizza Royalties Income Fund is scheduled to release earnings before the open tomorrow (Thursday morning, that is). I am hopeful that their same store sales will be up (and that’s really the only number that matters in this case) due to to menu price increases even if the number of customers may not have risen. I know that casual type restaurants in my area are busy but there does seem to be more competition.

February 6, 2018 RRSP Tax and Math

There is widespread confusion about how RRSPs really work and whether they are a tax-avoidance mechanism or a mere tax deferral mechanism, or worse a “tax trap”.

The following illustrates divergent views on the matter:

A tale of Two Attitudes Towards Tax on RRSP Withdrawals

Imagine Frank and Joe have identical and relatively modest RRSPs and are both 65 and about to retire and start living, in part, on their RRSP savings.

Both contributed $50,000 over a period of years starting at age 30 (So from say 1983 to 2017). Their marginal tax rates averaged 30%. Now, in 2018 the two RRSPs have grown to $200,000.

They are both told that on withdrawals they will face a 33% marginal tax rate, a bit higher than when they contributed because both have modest defined benefit pension plans or other incomes such that the marginal tax rate went up.

Frank calculates that on his original $50,000 contribution he got back a 30% refund so $15,000. And he now realizes that he will have to pay 33% tax on $200,000 for a total tax of $66,000. He will net $134,000 over a period of years as he withdraws. (We will ignore further growth in the RRSP).

Frank is wild: “This tax is outrageous! I never should have invested in an RRSP! I saved $15,000 in tax and now will have to pay back taxes of $66,000! Not only that but much of my gains were capital gains and dividends. I could have invested in a taxable account and paid WAY lower tax, like maybe 15 to 20%, not 33%! This RRSP has been nothing but a tax trap.”

Joe looks at it differently. He calculates that after the refund he only ever invested $35,000 net of his own after-tax money. He looks at “his” RRSP as being $35,000 funded by him and $15,000 funded by the tax refunds. Or 70% funded by him, 30% by the refund. He notes that the RRSP quadrupled to $200,000. He calculates that had his net $35,000 quadrupled with zero tax it would net $140,000. He notes that in the RRSP calculation he will net $134,000 after the $66,000 tax. He feels that the refund had funded 30% of the now $200,000 RRSP. Ans so he figures the first $60,000 of income tax is fully funded by the refund. He calculates that his net share of the tax will therefore be $6000. He is paying $6000 tax on his gains of $105,000 ($140,000 minus $35,000) for a tax rate of 5.7% on the net growth in his net investment in the RRSP.

Joe is very happy with the situation. “I am SO glad I struggled and put that $50,000 in the RRSP over the years he says. Not only was it savings that I otherwise would have spent, but the tax on the growth of my net $35,000 cost of those contributions was only about 6% which beats anything I could have done in a taxable account all to heck. Even though my marginal tax rate went up, I came out way ahead. And just think if I could manage to get this money out at say a 25% marginal tax rate. That would mean the refund MORE than covered the tax on withdrawals, with money left over!”

So, two identical RRSPs both with 33% taxes on withdrawals, one taxpayer is screaming and regretful, the other smiling.

Who is correct? Click here to leave a comment or see any comments.


February 6, 2018

U.S markets were once again not boring today, opening down then bouncing around considerably and then closely strongly higher.

The S&P 500 finished up 1.7%, the DOW was up 2.3% and Toronto was up 0.2%.

Boston Pizza was a notable winner today, up 5.3%.

Fortis Inc. was down 2.2% and despite the fact that high yield stocks could certainly decline with higher rates, it seems attractive for the dividend and may be worth accumulating. Simply be prepared to hold for a very long time and/or to accumulate more on further declines.

I bought back, at $46.08, some of the Toll Brothers shares that I had sold in the past few months at $50 and $51.50. It closed at $46.75 so that trade looks okay so far. But I should have employed a strategy I talked about before. Toll Closed on Monday at $44.82. It opened this morning at $43.70. But I was not watching the market at the open. If I had placed an order last evening at any price higher than $43.70 (say I placed it at $45) I would have got it at the opening price of $43.70. I have used the strategy before of a limit order placed after the close. If you place a limit order just under the market during the trading day you are not going to get a fill much if any below your order price. But a limit order placed before the opening could be filled far lower if the market happens to open low. Now, you do take the risk that while you buy somewhat low, the market then heads even lower. Overall the strategy of entering an order around or not much lower than close in highly volatile times could result in a low fill at the opening. Of course you could also simply place an order during the trading day well below the market. The method I describe is applicable to be used when a stock has already closed at what you consider an attractive price so you place your order there but all the better if it opens lower.

It’s sad to see the escalating trade war between Alberta and B.C. I have always thought that the B.C. government has no jurisdiction over the federally-approved TransMountain pipeline. The B.C. government gave its input in the federal proceedings but then the federal government made its decision. I would like to see Trudeau swiftly assert federal powers and do so just as forcefully as necessary. (How far should he go? Well hopefully, just watch him!) I am a long-time resident of Alberta and was born and raised in Nova Scotia. But I have never considered myself a citizen of anything other than Canada. Inter-provincial trade barriers are an outrage.


February 5, 2018 Easy Come, Easy Go

So, after falling 666 points on Friday, the DOW fell another 1175 today.

The S&P 500 was down 4.1%, the DOW was down 4.6% and Toronto was down 1.7%.

Many commentators are aghast. But they should really get a grip. The U.S. markets were roaring higher for months. Markets had risen almost uninterrupted for 15 months with a particular surge in the last couple of months. This only wipes out a about 5 weeks of gains.

It was interesting to see that Boston Pizza managed a gain of 1.3% today although it is still down about 10% from recent highs. TFI International, up 0.2% and CRH Medical, up 0.3% were the only other two stocks on our list that managed a gain.

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.

Most of the Canadian stocks were down more modestly compared to U.S. stocks.

Tomorrow I will consider doing some bargain shopping. Possibly Toll Brothers and the Melcor REIT. But I see no need to rush.

February 5, 2018 WSP Global Inc. is added to our list

WSP Global is added to the list rated Buy at $58.75. Many Canadians may not be familiar with this company. I hope the “Description” cell of the report does a reasonable job of giving an overview of the company.

It’s a growth-by-acquisition company. I have always been agnostic between earnings per share growth from acquisitions versus organic growth. As long as a company is growing earnings per share its intrinsic value should rise. Cash flow or earnings formulas do not ask the source of the earnings, although analysts seem most interested. I am interested in the source to the extent it provides clues as to whether the same pattern can continue in the future. Most of the strongest growing companies that I have analysed over the years have been growth-by-acquisition companies. These include notably Constellation Software, Stantec and Alimentation Couche-Tard.

Of course growing by acquisition is neither a necessary nor a sufficient strategy to insure success.

February 4, 2018

As of about 6:45 eastern the futures markets have the DOW down about 200 points. This often changes vastly over night so we will see where it opens.

In the last half of 2017 I had increased my cash position. As the U.S. market continued to soar that cost me money. But I think it was absolutely prudent given my own stage of life – which might be called semi-retired. If markets now happen to decline in a material way, I will be in a position to buy. Or if I identify other companies that I consider to merit a Strong Buy rating or at least a fairly high rating, I will be in a position to buy a meaningful amount.

My own strategy has never been predict the market direction based on market sentiment. Rather it has been to try to buy stocks of quality companies at attractive prices and to generally trim or sell positions that appeared to be over-valued. I try to react to stock prices versus my estimate of value as opposed to predict prices. I do try to predict earnings growth to some degree.

I am currently working on WSP Global and will add it to the site in the next day or so. I suspect the rating will be Buy. It’s got a great track record in its strategy of growth-by-acquisition. It is similar to Stantec in many ways. However, it has been far more aggressive in making acquisitions, especially global acquisitions in the past ten years compared to Stantec. It’s now larger than Stantec. WSP has however funded its growth by issuing shares at a very high rate. Management has been extraordinary ambitious regarding growth and so far they have managed to fulfill those ambitions.


February 2, 2018

There was nothing boring about Friday’s markets.

The S&P 500 tumbled 2.1% and Toronto was down 1.6%.

Despite the scary headlines of the DOW being down 666 points or 2.5%, this drop is not large in the context of the way the U.S. market roared ahead in recent weeks.

Almost all the stocks on our list were down. Some of the more notable declines included:

Canadian Western Bank, down 3.0%

Boston Pizza Royalties Income Fund, down 4.0%.

AutoCanada down 5.0%.

Experiencing declines is inevitable when invested in equities. I did not find today’s declines to be bothersome. Rather, they could represent buying opportunities. But I would not be in a rush to redeploy cash. My strategy has been to lean against the market on the way up by building cash and then slowly redeploying cash if and when the market or particular stocks that I like decline.

Meanwhile the seemingly unstoppable Amazon rose 2.9% after reporting strong gains in Q4. Amazon always looks way over-valued to me but then continues to rise. I will puzzle over its numbers again soon. It does not bother me that I “missed out” on Amazon since it simply does not pass the criteria that I use and which has been quite successful for me. I am more regretful about Apple because it would have passed my criterion if I had gone through its numbers but I never did so. Partly (or largely) that was likely because of an unconscious mental block against it since looking at the numbers might have reinforced regret at not buying it many years ago. I have never claimed to be immune to such illogical biases. Actually running the numbers tends to overcome the bias in a lot of cases.

Wells Fargo got slapped hard after the close by the FED and was down 6.2% in after-hours trading. I sold it too early back in late 2016 because of uncertainty over regulatory penalties and no longer follow it closely. The FED has ordered four people off the Board and indicating it will not allow Wells Fargo to increase its assets. The bank could reduce its assets by not issuing new loans as fast.

I rather suspect Warren Buffett might have liked to sell some Wells Fargo. The problem is when you are Berkshire and you own 10% of something, any indication you would sell would tank the price.

I certainly would not be surprised to see Wells Fargo tumble quite a bit more on this news.



February 2, 2018 (Groundhog Day) noon eastern

At minus 20 or so here in the Edmonton area any talk of an early end to winter is certainly premature.

Stocks are down today. In the case of U.S. markets that seems like a bit of overdue sanity.

Boston Pizza Royalty is down 4.7% to $19.55. That may be due to predictions that they had a poor Q4 and are facing more competition. Or it may be due to higher interest rates. I grabbed some at $19.60 this morning. I figure a 7.0% yield where I believe the distribution will rise (albeit very slowly) over time and where I believe it would at worst decline slightly is going to be a pretty good yield in any likely future interest rate environment. Of course, if rates really soar, these units will fall. And they may fall due to deteriorating business at BP if that occurs. Or they can fall simply due to fears and unpopularity of yield investments. Those are always risks. In any case I was attracted to the lower price today and added to my position. BP reports earnings, I believe next Thursday.

Declining markets always have their silver lining. It’s clearly better to buy at a  lower price today than applied yesterday. As for whether tomorrow will be lower yet, time will tell.

Getting back to the minus 20 degree temperature in Edmonton: Luckily the cost of home heating in Alberta is almost minor compared to some areas of the county. Natural gas is particularly cheap at the moment $2.13 per Gj on my latest bill. And I used all of 19 GJ despite cold weather and running a furnace and running a fireplace in a Sunroom. Natural Gas is so cheap that the delivery charges are quite a bit more than the gas commodity charges. All told for the gas plus delivery plus administrative charges and even the carbon tax and GST my heating bill for a month in the coldest part of winter was $166.11

I am pretty sure the heating costs in Ontario are quite a bit higher. And I KNOW that the costs in the Atlantic provinces where fuel oil or electricity is widely used for heat are FAR higher. I don’t think $500 to heat for a month would be particularly unusual in the coldest months.


February 1, 2018

On Thursday, the S&P 500 was down 0.1%. The Dow was up 0.1% but had been down earlier in the  day. U.S. markets have been gyrating a little. Tomorrow we will see how the market has reacted to several big earnings reports after the close today.

Toronto was down 0.6%.

Melcor was down 3.6% to $14.75. This is a very thinly traded stock and so it is susceptible to big drops if someone needs to sell more than a few thousand shares in a hurry. I had an order in and so I picked up some additional shares at $14.80. As a company in a boring industry in a province that is still recovering from recession, it is unlikely that there will be any sort of spontaneous enthusiasm for this stock. Rather, it is going to have to show good earnings numbers before it comes back to life. I am hopeful that it had a good Q4 and that management is feeling more confident about 2018 but that remains to be seen.

AutoCanada was up 2.8%.

Boston Pizza was down 2.0% to $20.52.

Higher yield investments are under pressure as interest rates rise.

The five year Government of Canada bond yield rose to 2.14% today. That is the highest in over seven years. This rate had bottomed out at about 0.60% two years ago.


January 31, 2018

On Wednesday, the U.S. markets initially rebounded from Tuesday’s losses but were volatile. The indexes were negative in the afternoon before closing at a modest gain with the S&P 500 up 0.05%. Toronto was about unchanged.

CN rail was up 1.2%. Boston Pizza Royalties rebounded 2.0%. TFI Industries was up 1.4%. Fortis Inc. was up 1.8%. Linamar was up 2.5%.

Our penny stock, Ceapro, was up 6.6%.

Toll Brothers was down 0.9% to $46.58. This is now down from its recent high of $52.73. I had trimmed my large position selling some at around $45 in November and then more at $49.94 in December and $51.47 in January. With this decline, I am somewhat tempted to buy back some of what I sold.

Statistics Canada released data on Gross Domestic Product by industry for November and almost all sectors were showing good growth.

The Canadian Bankers Association today posted figures for 90 day delinquencies updated through November. Their figures are basically fore the larges six banks in Canada plus a couple of smaller banks (CWB, Laurentian Bank and Manulife Bank) . They do not include second tier lenders like Home Capital nor the credit unions. I find the delinquency figures, especially for Ontario to be literally unbelievably good. In Ontario the 90 day delinquency rate on mortgages is 0.09%. That is  a record low in figures going back to 1990 (although 1990 also started out at just 0.11% in January of that year before rising rapidly to 0.70% by early 1992). A 0.09% delinquency rate means less than one in one thousand mortgages are more than 90 days past due. For a long time, I have been suspicious that banks legally “hide” delinquencies by making various arrangements to officially allow customers to change the terms of their mortgage. That might be quite appropriate but it could distort the delinquency figure. I also suspect that many home owners that would otherwise be delinquent simply borrow additional money from various sources to keep their mortgage current. If we get either a recession or a noticeable decline in home prices then I suspect these delinquency figures will rise. However, there is no indication that Canada will see anything close to the massive delinquencies that occurred in the U.S. around 2007.


January 30, 2018

On Tuesday, the S&P 500 fell 1.1%. Despite the headlines, this is minor decline in the context of recent gains.

Toronto was down 0.9%.

Canadian Western Bank was down 2.7%.

Stantec was up 1.3% which was a nice gain on this negative day.

Boston Pizza Royalties Income Fund was down 2.0% to $21.52 and seems tempting for its 6.4% yield.

Linamar was down 2.7% to $70.84. It appears to offer good value but could certainly fall on concerns about NAFTA.

Shaw Communications is offering buyouts to some 6500 employees and apparently expects some 650 to accept the offer. This is bad news for the company and for the economy. I understand the severance offered is 6 months plus one month per year employed to a maximum of 30 months severance. It would be unfortunate to be offered say 18 months pay to leave and not be in a position to take the offer for fear of not getting another job or not being in a position to retire early.

It appears that British Columbia is refusing to accept the jurisdiction of the federal government when it comes to oil pipelines and oil exports. In my view, the Federal government should exert its authority forcefully.

Meanwhile, the oils sands industry in Alberta appears to have recklessly over-invested in advance of securing pipeline capacity and the result is the low Canadian heavy oil price resulting in low profits and therefore low income taxes and and also resulting in low royalties collected.

January 29, 2018

Well, the U.S. market decided not to rise on Monday. Well, markets don’t rise everyday. (And normally they don’t rise 9 out of 10 days either, but that seems to be about the recent situation).

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

Toll Brothers was down 3.7% to $47.49. I last rated it (higher) Buy at $42.81. I don’t think the recent drop is necessarily anything other than normal fluctuations. It has tended to be a somewhat volatile stock. The market may fear some slow-down in U.S. home building with higher interest rates. Home building in the U.S. remains proportionately far lower than in Canada and I believe remains far lower than its historic pace.

CRH Medical was down 5.9%.

I note Fortis was down 1.4% to $42.97. With higher interest rates, utilities lose favor. Fortis has done well over the years and is probably worth accumulating for those seeking dividends. Just be prepared to add if it keeps falling.

I am working on WSP Global now to add to the site. It’s fairly similar to Stantec. It seems to fly under the radar somewhat or at least I have managed to ignore it for years. I am surprised to see how large it is. Ultimately I will do some comparisons to Stantec. So far I have only read the Q3 report and was struck by how straight forward that was. Most quarterly reports seem to have more “boiler plate” than useful facts. WSP seemed to focus on the numbers and to present the numbers in a concise manner. It would have some similarities to SNC Lavelin as well. But SNC got into other businesses as well as ethical trouble and I don’t think I will be looking at that one.




January 29, 2018 10:30 am eastern time

Ceapro which is the only true penny stock on our list and which we have considered speculative for that and many other reasons announced this morning that it has lost a court judgement which appears to total $724,000 plus interest. (There a was another $1.215 million against a Ceapro subsidiary but the press release appears to indicate that is not a concern presumably because the subsidiary has no assets and Ceapro will not have to pay.)

Ceapro at Q3 had cash of $7.4 million and book equity of $24 million and trades with a market value of $48 million. I believe they spent some of the cash in an acquisition in Q4. A judgment that will result in payment of under $1 million is perhaps not that serious.

Still, it is a black mark against the company. I found the timing of the press release to be poor (could have released on the weekend for more time to digest the news before trading started). And I found the wording of the press release to be poor with few details and no discussion of financial impact.

I am surprised to see the stock down only 3% to 5% at the moment.

I have hung onto my losing position in this stock. But it is a speculative company and I have had a number of concerns about poor disclosure.

It might be wise to Sell and move on. I am not changing the rating (Speculative Weak Buy/ Hold at 64 cents) but I definitely think of this as a very speculative company. I have not decided to sell any shares at the moment.



January 26, 2018


On Friday, the S&P 500 surged another 1.2% while Toronto was up 0.2%.

Most stocks rose including Walmart, up 1.6%, Berkshire up 1.0%, Dollarama up 2.0%, Amazon up 1.75%.

Bombardier (no longer on our list)  had a great day, up 15.3% after a U.S. agency unexpectedly reversed course and ruled that countervailing or anti-dumping duties of close to 300% would not be applied after all. I wonder now though if Bombardier will regret having given away half of the C-Series program to AirBus for nothing. If it does regret that move, perhaps it can get out of the deal. One approach might be for Bombardier to issue a large amount of shares to try and get its book value UP closer to zero or maybe even above. If it could raise enough money, maybe it could afford to pay some kind of break-fee to AirBus and cancel that deal.

In my own trading, I bought some BHP Billiton today and added significantly also to my Stantec position. I bought Stantec in New York to use up some U.S. cash as I felt my U.S. cash position was too high and I missed my chance to transfer it to the Canadian side at 78 or 79 cents and now refuse to do so.

S&P 500 level and earnings:

The S&P 500 is now up 7.4% in this new year to date. That would be a decent gain for a year.

While the latest surge in the S&P 500 was happening, there were some changes in earnings estimates on the S&P 500.

The forecast for 2017 GAAP earnings on the S&P 500 fell from $114 about ten days ago to $108.47 as of today. 32% of the S&P 500 companies have now reported earnings. The estimate for the final Q4 earnings number came down as some companies reported (or are expected to report) unusual losses related to the income tax reduction because they had loss carry-forwards which are not as valuable in a lower tax environment. Some companies also reported extra taxes on repatriating foreign cash. This would be offset somewhat by some companies like Berkshire Hathaway and most industrial style companies that will report large unusual gains in relation to deferred tax liabilities. In any case, if the $108.47 2017 GAAP earnings estimate is correct then the S&P 500 is trading at a hefty 26.5 times trailing GAAP earnings. That P/E is higher than historical but it might be reasonable or even low if long-term interest rates are going to stay extremely low or even go lower as some people still think could happen. And the forecast for 2017 operating earnings is $124.22 for a P/E of 23.1 on that basis.

But stocks tend to trade more on forward earnings. The estimate for 2018 GAAP earnings is $141.35. On that basis the S&P 500 is trading at a far more reasonable 20.3 times 2018 estimated GAAP earnings. And the estimate for 2018 operating earnings is $152.11. On that basis the S&P 500 is trading at 18.9 times 2018 estimated operating earnings.

Analysts tend to focus on operating earnings not only for individual companies but for the index as well. I agree with excluding unusual gains and losses for individual companies to arrive at sort of normalized earnings. For indexes I have thought that practice wrong, since on an index of 500 companies there is nothing unusual about some amount of unusual losses each year. There are gains too, but it ALWAYS nets to unusual losses to be added back. There are 20 years of quarterly data for operating and GAAP earnings on the S&P 500 database that I am looking at. There is not a single quarter where the unusual gains and losses netted to even a tiny gain. It’s ALWAYS a loss to be added back. How then are such losses on the index unusual?

The S&P 500 may very well continue to surge. But I will put on the record right now that I believe the estimates for both the S&P 500 GAAP and operating earnings for 2018 are absurdly high. Despite a strong economy and the tax cuts I am extremely doubtful that the final 2018 numbers will come in that high. The forecast calls for a 22% increase in operating earnings. And, it calls for a 30% increase in the GAAP earnings.

Well, it will be interesting first of all to see if those 2017 estimates continue to get trimmed as the remaining 68% of the S&P 500 Q4 earnings roll in. If the operating forecast of $124.22 gets trimmed that could possibly finally take the wind out of the sails of this big S&P 500 surge.




January 26, 2018 12:50 pm eastern

I am going to add BHP Billiton to the site probably rated Speculative Buy with an emphasis on Speculative. I usually don’t look at commodity stocks but I am making an exception here. This is a huge and complex company and its value depends very heavily on commodity prices and it is inherently unpredictable. Nevertheless, I am going to take a modest position at not much over 1% of my portfolio. It trades as both BHP and BBL in New York. The company claims the two shares are economically equivalent and yet BBL trades at a discount to BHP. I am going to buy the cheaper BBL shares.

January 25, 2018

On Thursday, the DOW surged ahead another 0.5% but the S&P 500 was only up 0.1%. Toronto was down 0.5%.

Canadian Tire was up 1.5%. Costco was up 1.9%. Dollarama was up 1.6%. Amazon was up 1.5%.

Toll Brothers was down 3.3%. It’s always been somewhat volatile and I see no reason for concern.

The gains in the U.S. market have certainly been stunning over the past 15 months. The S&P 500 has not had a noticeable pull-back since very early 2016.

Toronto has a much larger decline that bottomed in early 2016 and has not had much of a pull-back since then. It’s easy to forget it now, but Toronto did out-perform the U.S. market in 2016.



January 24, 2018

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

CN rail was down 2.1%. Stantec was down 1.5%, Toll Brothers was down 1.5%.

CRH Medical has continued to recover and was up 3.0%.

U.S. stocks have kept going up despite P/E ratios that are quite a bit higher than historical averages. But of course low interest rates support high P/E ratios.

Consider that “the competition” is a 10 year Treasury that currently yields 2.65%. A 2.65% yield is a P/E of 37.7 AND the E or distribution is never going to rise over the ten year holding period. From that point of view it could be argued that the S&P 500 at some 24 times trailing GAAP earnings is still by far the better bet especially considering that the E on stocks does tend to grow. Treasuries are considered risk free and WILL mature at par value.

Interest rates are rising. But it’s very hard to say how high they will go.

I’ve generally been unwilling to assume that stock P/Es will stay above 20 or even 18 in the long run but it is always possible that they could. In order to push P/Es below 20 it may take ten year yields rising closer to 5% or some big global shock. The other threat to stocks would be a lower E due to recession. In the U.S., there appears to be no sign of recession.




January 23, 2018

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

AutoCanada was up 3.0% and Amazon was up another 2.6%.

Boston Pizza Royalties was down 1.5% to $21.18 and yields 6.5%. Despite somewhat higher interest rates this is an attractive yield if the distribution can be expected to grow even slowly over the years. I am somewhat tempted to add to my position. But I will likely wait and see the Q4 results. It may be facing more competition in some markets.

In a related matter, it was interesting to see today that the KEG franchise company will be sold to CARA for $200 million. The franchise company is the operating company that selects franchisees and owns the concept and sets all the rules and does the advertising.

The Keg Royalties Income Fund is a non-operating entity that (I understand) collects and distributes a 4% top-line royalty or franchise fee. It is interesting to note that the Keg Income Fund has a market cap of $216 million dollars and is therefore worth more than the actual operating company.

It’s also perhaps interesting to think about the fact while the Keg Income Fund collects 4% off the top, Servers probably average at least 16% or four times that. Collectively, then Servers are collecting four times what the Fund gets and that is in addition to their wages. The amounts the servers will collectively get in tips over the future years would also appear to worth more than four times what the operating company is worth. That may or may not be “fair” but I find it interesting.

The keg Royalties Income Fund was down 3.8% to $19.00 to yield 6.0%. Just looking at the yield and considering that the units may have declined today based on uncertainty, I would suggest that the Keg Royalty Units are worth considering.

CN Rail reported earnings after the close that were apparently a bit disappointing to the market. Actually the earnings were not that bad with a decline of 2% year over year. It’s unrealistic to think that earnings can rise every quarter. CN also raised its dividend by 10%. It also forecast 2018 earnings per share growth of around 7%. In my experience CN tends to forecast low and usually beats its forecast. In any case, CN has looked expensive to me and I will not be looking to buy unless it falls at least 10 or 15%. CN is considered to be somewhat vulnerable if NAFTA were to be scrapped. Despite having considerable operatins int eh U.S., C.N.’s press release did not make any mention of the impact of the lower income taxes in the U.S. But it’s presentation did indicate there was a gain due to a lower value of U.S. deferred income taxes. The full Management Discussion and Analysis as well as the financial statements will be released on January 31. (I believe this little delay is unusual, in Canada the practice is to not release any results until the full results are available.)


January 22, 2018

On Monday, as the partial government shut-down looked to be a short-lived situation the S&P 500 rose 0.8%while Toronto was about unchanged.

Berkshire was up 1.3%, Costco up 1.1%, Toll Brothers 1.3%, Visa 1.3%, Amazon 2.5%… The good times roll on it seems.

TFI International was down 3.2%. CN rail was down 1.6%.

Statistics Canada reported on the investment in new home construction in November and indicated:

“Alberta stood out with a $77.0 million increase in single-family house construction, accounting for nearly three-quarters (73.1%) of the total increase in spending on new house construction in the province. Spending on new housing construction in Alberta increased year over year for all components for the first time since April 2015.”

This supports my view that the Alberta economy continues to recover and that 2018 may be a good year for Alberta-based companies.

However, Statistics Canada also reported that sales at food service and drinking places were down 1.3% in Alberta in November.

The highly respected Billionaire Octogenarian investment manager Stephen Jarislowsky was on BNN today. Among other things he mentioned that with the lower income taxes, U.S. companies would be more competitive versus Canadian companies trying to sell into the U.S. No doubt he is right. But it seems to me that the way that would happen is that the U.S. companies would be able to lower their prices to compete more aggressively against Canadian imports while still making higher profits than before due to the lower income taxes. If so, that supports my point that some of those income tax reductions are going to flow to customers in the form of lower prices and not all of it to higher profits. After all if the U.S. companies maintained prices  in spite of lower income taxes that, in isolation, would leave them unchanged in regard to competitiveness with Canadian imports.

Of course there are other changes planned and maybe the U.S. companies will not have to worry about Canadian imports as Trump will impose higher import duties.

Jarislowsky also indicated that the Canadian dollar might rise making Canadian exporters less competitive.


January 21, 2018 9:40 pm eastern

The U.S. Senate has adjourned until tomorrow and so the U.S. government partial shutdown will last at least part of Monday. But it did appear that a vote on Monday morning might resolve matters for a few weeks.

Futures markets had been down only marginally and with the latest hopes for a resolution, markets may not suffer on Monday.

January 21, 2018

Canadian Western Bank is updated and rated Buy at $40.55. It has already made a strong recovery from the lows it experienced in 2016 due to (apparently unfounded) fears that it might experience problems with sub-prime mortgages similar to the Home Capital situation. It has also made a strong recovery from the lows of 2015 and 2016 that were related to fears about loan losses due to the low oil prices and recession in Alberta. I believe that CWB’s results in 2018 are likely to support further gains in the price.

AutoCanada is updated and rated (higher) Buy at $22.86. It exhibited a strong recovery in earnings and sales in Q3 but the stock price has not made much of a recovery. I expect earnings to grow strongly in the next three quarters as it faces weak comparable quarters in the prior year and as the Alberta economy has improved.

I am also expecting Melcor to do quite well in 2018 although that could be derailed if the new mortgage stress tests have a big impact on new home construction. Also Melcor’s rental buildings which are marked to estimated market value quarterly could see some reduction in value due to higher interest rates and possibly due to vacancies. However, I believe the fact the shares trade at only about 53% of book value provides a large cushion or margin of safety.


January 20, 2018

On Friday, the U.S. markets were unfazed by the impending (partial) U.S. government shutdown.

The S&P 500 was up 0.4%. Toronto was also up 0.4%.

CRH Medical was a notable gainer, up 6.7% in Toronto to $3.85. It’s still down 32% from the price at which it was introduced on this site and is down some 69% from its subsequent highs. Still, it has doubled since hitting a low of $1.86 in Toronto a few months ago.

I would expect the U.S. market on Monday to react at least somewhat negatively to the reality of the U.S. government partial shutdown.


January 18, 2018

On Thursday, the markets had what seems to be a rare down day.

The S&P 500 index was down 0.2% and Toronto was down 0.3%.

Our biggest gainer was Constellation Software, up another 1.6%.

A number of large U.S. financial companies have reported big write-offs due to Trump’s income tax reductions. That’s rather counter intuitive but it happens for two reasons:

  1. When a corporation has past losses, that have not yet ever been claimed on its tax returns and that it expects to carry forward to reduce future cash income taxes, it must book this as a deferred tax asset. When income tax rates drop, the value ability to carry forward past losses declines. In this case each $1.00 of unclaimed past losses could formerly be used to reduce future taxes by 35 cents at some point. But now, it will be just 21 cents.
  2. Some corporations have earned money in other countries at low tax rates. The former rules were that if the cash was repatriated to the U.S. income tax was payable representing the difference between the foreign tax rate and 35%. Trump’s changes included capping the repatriation tax rate at 15.5%. to the extent that this encourages companies to repatriate cash that they formerly had no intention of repatriating, this causes a one-time income tax hit. In many cases large corporations were using accounting maneuvers to basically legally pretend that profits were earned largely in tax havens. If the foreign tax was zero then upon repatriation they will now pay 15.5% whereas previously they were refusing to repatriate the cash due to a 35% tax. Paradoxically, the new rules could encourage corporations to book even more of their profits in offshore tax havens and then repatriate it. Why pay 21% in the U.S. when you can transfer the profit to a tax haven through “transfer charges” and then bring the money back at a 15.5% tax rate?

January 17, 2018

U.S. markets continue to be on fire. At the moment, this is a market that knows no fear.

The S&P 500 was up 0.9% on Wednesday and the DOW was up a scorching 1.25%. Meanwhile, Toronto was up 0.2%.

CRH Medical was up 6.5% to $3.44. The company continued to buy back shares at a good pace through to the end of December. (Apparently these trades are only reported on a monthly basis). On a negative note, a director sold 16,000 shares in December at U.S. 2.50.

I added to my position in AutoCanada.

The Bank of Canada increased interest rates by 0.25% today. The 5 year Government of Canada bond yield rose to 2.015% which is the highest since 2011. This bodes well for rate reset preferred shares, particularly those that will reset relatively soon. Keep in mind however that rate reset shares should not be expected to go much above $25 because typically the issuer can redeem them for $25 on the reset date.

West Texas Oil remains relatively strong at $64.22.

The Canadian dollar is at 80.3 cents and seems to have defied a lot of predictions that it would fall.

I have been saying that I expect at least some of the income tax cuts in the U.S. to be competed away in price declines. I finally saw one analyst on BNN today who mentioned that should happen in more competitive sectors.



January 16, 2018

I didn’t intend to take yesterday off from posting (It was Martin Luther King Day and U.S. markets were closed) but due to some other distractions that is how it turned out.

On Tuesday, U.S. markets first posted new within-day highs as the DOW burst through the 26,000 level. But U.S. markets then reversed with the S&P 500 down 0.35% at the close. Toronto was down 0.45%.

Most stocks were down but Canadian Western Bank, Stantec and Couche-Tard were each up 1.0%.

Constellation Software was up an impressive 6.9% to $787.87 after it announced its latest acquisition.  I have sung the praises of the management of this company ever since it was added to this site on February 5, 2011 rated (lower) Strong Buy at $40.87. Subsequently, the stock has often looked expensive and on two occasions I sold my own shares to raise cash. I did buy back in but sadly, only a small amount. I don’t think I ever rated it a Sell. Warren Buffett has always advised against selling the strongest companies even when their shares look somewhat over-valued. When we find a company that not only has great economics but has great management we should probably grab onto the coattails of such management and simply hang on for the ride.

I am currently working on updates for three Alberta-based companies: Canadian Western Bank, Melcor and AutoCanada. The Alberta economy has made a significant but not a full recovery from its recession that bottomed around October of 2016. CWB’s share price has responded and rebounded significantly from its lows. But AutoCanada and Melcor remain low for various reasons. As long as Alberta continues to recover, which I expect it will, I think these last two could and should rebound nicely in 2018.


January 12, 2018

U.S. markets soared again on Friday.

The S&P 500 rose 0.7% and the DOW was up 0.9% to 25,803. Toronto was up just 0.1%.

There appears to be a great deal of optimism that the Trump corporate income tax reductions will fall straight to the bottom line. In reality not all of it will. We have already seen several announcements about some of the money going to higher wages at some large companies. And I finally saw today a discussion that in some cases companies are going to use the lower tax cost to lower prices in an attempt to gain market share. (Oh, so there is still a thing called competition out there, at least in some industries? I was beginning to wonder)

In any event:

Berkshire Hathaway was up 1.7%, Costco was up 1.3%, and Amazon 2.2%.

For the Canadian stocks on our list there were no particularly noteworthy moves.

The U,S, markets could continue to go higher given higher earnings and the income tax cuts and given the strong economy. But these stocks have also likely been going higher because investor sentiment is strong due to the strong gains in the past 15 months and really in the past nine years.

U.S. markets have been rising steadily all the way since the bottom way back in March of 2009. There were modest pullbacks along the way which were quite scary at the time. But looking back now, those pullbacks look very minor. Investing is perhaps the one one area where people tend to get excited about buying at higher prices.

At some point something will happen to put some fear back into the sentiment of U.S. investors.

A reasonable strategy at this time, for those Canadians with high allocations to the U.S. markets, would be to reduce some of their U.S. positions and rebalance some of that back to the Canadian side.

It’s hard to say where the Canadian dollar will go. My own approach has been to reduce my U.S. equities but I mostly held the proceeds in U.S. dollars as I thought that the Canadian dollar might fall giving me a better opportunity to transfer dollars back to the Canadian side at a better exchange rate.


January 10, 2018

Wednesday was a rare negative day in the markets.

The S&P 500 was down 0.1% and Toronto was down 0.4%.

Canadian stocks were likely negatively affected by the announcement that the U.S. is imposing countervailing duties on newsprint imports from Canada. This and other reports has heightened the concern that Trump will attempt to scrap NAFTA.

As far as the countervailing duties go, if Canadians looking at this are being honest, I think they have to admit that this and other Canadian industries have in fact been subsidized. And the fact that the U.S. also subsidizes some industries is really not much of a defense. A useful argument can be made that the duty will harm U.S. customers. But I doubt that a useful argument can be made that the subsidies do not in fact exist.

Probably related to NAFTA fears, CN rail was down 2.7%, TFI International was down 1.3% and Linamar was down 1.9% and the Canadian dollar was down as well. These and other stocks that would be hurt by a loss of NAFTA may very well continue to slide if and as it becomes apparent that Trump will attempt to scrap NAFTA.

Meanwhile Toll Brothers was down 2.9%.

Berkshire was up 1.3% after Buffett announced that two key executives would join the Board of directors as vice Chairs. Edmonton native Greg Abel is vice-chair non-insurance operations and Ajit Jain is vice-chair insurance operations. These two have long been the main heir-apparents for the CEO role. It was not entirely clear but it appears that these two will effectively be in charge of their two areas such that Buffett’s direct reports will presumably decline from over 60 to probably just these two plus a few head-office staff including the CFO. Buffett retains primary responsibility for investing although he has two proteges in the wings in that role who have been for about five years independently investing a large but still modest portion of the investment funds. Although Buffett is definitely not retiring, this does seem to be a partial step back which I did not predict but guessed just might happen in my January 1, 2018 comment.



January 9, 2018

Another day and another set of records in the U.S. markets.

S&P 500 up 0.1% while Toronto was about unchanged.

With the recent strength in markets, especially the U.S. markets, reasonably diversified equity portfolios and balanced portfolios have been gaining ground at a rate that is more than acceptable.

Stantec was up 1.7% to $35.60. I expect this company to continue to do well given its recent acquisitions and given growth in the economy. The lower U.S. tax rates should be a benefit (assuming the lower rate is not offset by price reductions due to competition). Stantec has both deferred tax assets (any U.S. portion of which will decrease in value) and deferred tax liabilities (which liability will be reduced to the extent it represents U.S deferred taxes). The deferred tax liabilities are about twice as high as the deferred tax assets so I would expect some non-cash gain in Q4 to reflect the lower tax rate.

Boston Pizza Royalty Units were down 2.1% to $21.50. It makes sense that these units would fall in price with higher long term interest rates – all else equal. But I expect distribution increases over the years to offset that such that these units could rise in addition to paying their attractive distribution.

Liquor Stores N.A, which has not been on our list for quite some time but which I occasionally mention has defied my expectation and rose 4.6% today to $11.68. I believe there was some speculation earlier about it getting into  the retail Cannabis business. I did not think that likely since Alberta has said Cannabis will not be sold in liquor stores. And it did not seem to have the cash to get into a new business. But I suppose it could take the opportunity to sublet some of its spaces (which it leases and does not own) to Cannabis retailers as it appears to have too many stores. I have trouble seeing that as a big opportunity. But I suppose any speculation of any involvement with Cannabis is enough to push the stock up. Meanwhile I understood from their recent press release that they apparently took a loss on selling a couple of U.S. stores and, if so, that will be reported in the Q4 results.

Speaking of recreational Cannabis retailers, I wonder how profitable that will be. Private retail Cannabis stores will be allowed in, I believe, Alberta and Saskatchewan but not Ontario or Quebec or most other provinces. If it is like the Alberta liquor stores where everyone is buying at the same price from the government supplier (as will be the case in Alberta) it may be difficult to generate particularly high profits. It may be lucrative initially if there are few stores compared to demand.



January 9, 2018 9:35 am eastern

I notice Brookfield Renewable Partners L.P. has an offering this morning (still open at TD Direct as I write this) that pays a minimum 5.0% on a rate reset preferred share. This seems tempting. Even with interest rates rising, 5% does not seem like a bad return on what I certainly suspect is a safe security. And if rates do rise a lot, at least it resets in five years. And if interest rates happen to fall, the 5.0% minimum would apply at the reset date.

MedReleaf LEAF.TO is out with an offering of $100 million is shares at $26.50 and this includes a half warrant exercisable for two years at $34.50. The stock closed yesterday at $29.20 with a market cap of $2,763 million. I think it is extremely wise for the company to bring in cash while its shares are hot. It will be interesting to see if the issue at a bit of a discounted price causes the market price to cool. I note that TD Direct does not list this new issue. I don’t know if they have been involved in other share sales by the Cannabis companies.

Rob Carrick in the Globe and Mail this morning reports that Fear of Missing Out is gripping the market pushing stocks higher. That seems accurate.



January 8, 2018

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

Toll Brothers was up another 1.3%. Walmart, which we last rated (lower) Sell, was up 1.5%.

The rate reset preferred shares are generally still edging up and that’s because the five year government of Canada bond yield is now very close to 2%. Six months ago it was just under 1%. That adds 25 cents to the projected reset yield on these type of shares compared to the projection six months ago. Since most of these shares only yield roughly $1.00 to $1.25 , a 25 cent increase in the projected reset yield is significant.

After the close, Laurentian Bank announced it would issue $125 million worth of common shares at $54.80. That’s a bit disappointing to those holding the shares which closed today at $56.83. This is relatively small issuance compared to the Bank’s market cap of $2,214 billion. Laurentian Bank’s equity ratio was low at 7.9% after it recently redeemed some preferred shares. Laurentian also faces some potential costs due to some mortgages that were sold to a third party and for which the proper income verification or related checks were not properly done in all cases. This share issue has already closed out on TD Direct. I have not in any way analysed this bank. But I suspect that buying some shares during this time of what appears to be modest distress will work out well.

Cannabis stocks jumped again today. Canopy Growth (WEED) was the biggest gainer, up 17.2%. Its market cap is now $7,608 million which I notice is more than triple that of Laurentian Bank. I normally would be paying absolutely no attention to these early stage companies but it just so happens I am keeping an eye on four of these. I don’t think the market has much to go on in valuing these stocks. The market caps look very high to me and my suspicion is that these stocks will eventually decline quite a bit. But so far anyone investing int hem has done very well. The Globe and Mail suggested that these stocks could be vulnerable to a “short attack”. However anyone wanting to mount such an “attack” might have to go after the whole sector. And with so much unknown about the future of the industry it might be hard to mount such an attack. I say attack, but if the stocks truly are over-valued I see it as completely legitimate for some analyst to come out and say that even if she could profit as a result. Not much different than promoting that a stock she owns will go up. As long as it is an honest opinion, that seems like fair game to me.

The earnings and revenues of these stocks will also not be impressive when they report Q4 results. But that may not matter at all since the market is looking to sales and profits AFTER legalization.



January 5, 2018

Friday’s action had the S&P 500 up another 0.7% and the Dow up 0.9%. The gains have continued to come fast and easy on Wall Street. Toronto, however, was down 0.4%.

Toll Brothers was up another 2.2% to $51.21. This company has worked out as a decent way to benefit from the recovery in the U.S. housing market.

TFI International was down 2.2% giving back some of the recent gains.

Yesterday I mentioned my new calculation that breaks out the contributors to the total equity value of a company. Most of the companies that we have on the list here have a history of making profits. Most of them have positive retained earnings even even after paying dividends and any stock buy backs. In addition because most of them earn double digit ROEs, in a world where a 10 year government bond yields just 2.1%, the market values them at some premium to book value. Many of the companies on our list have been prodigious creators of value over the years.

As an example, the equity market cap value Linamar Inc. can be broken out as 3% (remaining after any stock buy backs) original share owner investment, 58% retained earnings and the remaining 38% of the market cap represents the premium the market has found to be appropriate over and above the book value. Linamar is therefore valued at $100 for every $3 of original owner money that it took in and most of that value was generated by making and retaining profits.

Linamar pays only a modest dividend (recently only 6% of its trailing earnings). And I suspect it has bought back few if any of its own shares. The fact that its original share owner invested money is so much smaller than retained earnings reflects many years of retained earnings and also is due to the fact that Linamar seldom or never issues shares in acquisitions. It also apparently has not issued huge amounts of stock options. Only 38% of Linamar’s value represents a premium over and above book value which is relatively modest. If the market believed that Linamar could continue to earn its five year average ROE of 20% then the premium would logically be far higher. Basically, these figures indicate that Linamar has done what we would want any company to do: It took in investor money, and made profits and reinvested and compounded those profits at a high rate of return and has earned a market value that is at a premium to the invested/retained capital. Not every company can make either of those two claims. Usually, if past profits have represented an attractive ROE the market will award a premium to book value. Exceptions could occur when the future is seen to be bleak for some reason.


January 4, 2018

Thursday was yet another wonderful day for stock investors. Especially U.S. stock investors.

The S&P 500 was up another 0.4%. The Dow was up 152 points or 0.6% as it cruised through the 25,000 point milestone without even slowing down to acknowledge that feat and closed at 25,075. Toronto was up 0.25%.

A notable gainer was TFI International up 2.4%.

Most investors in stocks have been enjoying excellent gains of late. Their only complaint might be that those with exposures to Cannabis or certain crpyto currencies have done even better.

I feel like the gains are coming rather too easily and quickly and we should not expect the party to continue without end.

The four Cannabis stocks that I am keeping an eye on were down roughly 10% on average today after the white house announced that federal agents could still prosecute cannabis users in States where it is “legal” because it remains illegal under federal law. That basically put a damper on expectations for the Canadian companies selling into U.S. markets. It seems to me too, that the TSX was recently concerned about listing any Cannabis company that was doing business in the U.S. due to legal issues. This news could heighten the concern of the TSX. Overall, the fact that these stocks fell only about 10%, which only gave back approximately the gains of the previous day, perhaps reflects the strength of the appetite for these stocks.

Costco was down 0.8% today even though it reported absolutely stellar December same-store sales growth. I have Costco rated as a (lower) Sell which seems sort of harsh for such a powerful company. But perhaps the market action today reflects that even great companies can get over-valued at times. Still, I was surprised to see a drop after those great December figures came out.

A New Corporate Performance Indicator

When I look at the book equity of a company, I always take some note of the proportion of the book value that represents original shareholder money and the proportion represented by retained earnings. If a large portion is retained earnings then that is proof of profitable operations in the past.

Usually, but not always, a negative retained earnings figure indicates a history of losses. An exception to that rule can occur when a profitable company has paid out all of its past earnings as dividends or for share buy-backs (which reduces both retained earnings and original invested shareholder money). Dollarama is such a case.

I have calculated a new performance indicator (that I have not seen elsewhere) by breaking out the equity market cap value of companies into three components:

1. Original shareholder invested money – raised by seed financing, public offerings of shares, money received on the exercise of stock options and also the value received when shares are issued in corporate takeovers. This amount has often been reduced when a portion of share buybacks (or in some cases dividends) is considered to be a return of original shareholder invested money.

2. Retained earnings including accumulated comprehensive earnings which has often been reduced by dividends and share buybacks.

3. The residual which is the amount by which the market value exceeds (or in some cases trails) book value which is the sum of components 1 and 2. The market should logically value a company at a higher level than book value when that company is expected to generate returns higher than those “required” by investors. (Just as a bond paying an above market yield will trade above par value.)

As an example, the equity market cap of TFI International can be broken out as 24% (remaining) original share owner investment, 20% retained earnings and the remaining 56% of the market cap represents the premium the market has found to be appropriate over and above the book value.

This is not a perfect indicator but it does illustrate that TFI has a history of profitability and that some of the profits have been retained. It also illustrates that the market believes that TFI can continue to achieve book value ROEs that are higher than investor required returns and that therefore a premium value over and above book value is appropriate. Basically, these figures indicate that TFI International has done what we would want any company to do: It took in investor money, and made profits that are high enough to deserve its shares to trade at a premium to the invested/retained capital. Not every company can make that claim.

I will provide more details of the results of this analysis in a forthcoming article.


January 3, 2018

Markets were up fairly strongly again today. The S&P 500 was up % and Toronto was up 0.4%.

Toll Brothers was up 4.3% to $50.42.

TFI Industries was up 3.2%.

I don’t know any specific reason for these two rising today. But I do know that, like virtually all of the companies on our list they are profitable companies that rise in value over time based on profitable sales to their customers.

Meanwhile four Cannabis stocks that I am keeping an eye on (but have absolutely no plans to invest in) were up an average of another 12.1% each today. Wonderful for those holding or who sold today.

The valuation of these four companies is as follows:

Aurora $6.5 billion

Medreleaf $2.8 billion

Aphria $3.3 billion

Canopy Growth $6.9 billion

Total $19.9 billion.

I have no idea at all what the profits and sales of these companies will be. Do the buyers of these stocks?

I do know that $6.5 billion is a LOT of money. By comparison some companies that I follow have market caps as follows:

Canadian Western Bank $3.5 billion.

Stantec $4.0 billion

Toll Brothers $8.2 billion U.S. ($10.3 Canadian)

Dollarama $18.0 billion

Linamar $4.8 billion

TFI International $3.0 billion.

To me, it seems a bit much that, for example, Canopy Growth and Aurora Cannabis are each worth far more than the likes of Stantec, TFI, Linamar and Canadian Western Bank.

Again, I have absolutely no idea of the profits that these companies stand to make. Predictions are that some of these Canadian companies will become world leaders in this new business. Maybe so, but if I held these I would be worried that the valuation is not anchored to much of anything concrete. The very lack of anchoring has allowed the valuation to sail ever higher. But on what basis?

Should those who hold these stocks consider locking in at least some of their gains? Should they ponder the old advice to be cautious when others are greedy?

Or are these shares destined to climb higher as various mutual funds may now be buying so as not to be left out of this exciting investment?

In any case it seems that markets continue to be anything but boring.

Meanwhile, oil (West Texas) is at $61.78. Perhaps Melcor and some other Alberta-based stocks will benefit from that.






January 2, 2018 and January 1, 2018

The market is off and running for 2018 with the S&P 500 rising 0.8% and Toronto rising 0.6% on this first trading day of the new year.

FedEx was up 3.2%.

CRH Medical was up 4.8% on Toronto to Canadian $3.47. This has been quite a volatile stock with a 52 week range of $1.82 to $12.35.

Penny stock Ceapro was up 10% to 55 cents and after the close announced the grant of 210,000 options (which vest over three years) at 50  cents. Also 210,000 Restricted Share Units. This quantity of options does not strike me as overly large. It gives management an incentive to do things that push the stock price up (like hopefully make money).

Cannabis / Marijuana stocks surged again today. This feels a bit like money for nothing. None of these stocks would look attractive based on earnings to date or their book value. Maybe the stock prices are justified based on earnings projections. But it appears that people keep pushing the price up based on momentum but also based on various announcements that indicate that there will indeed be sales.

It may be sour grapes on my part but I would offer the following thoughts:

A large market for any product is no guarantee of large profits for anyone let alone every company in the industry. Airlines always have many billions in revenue and yet often the industry is not very profitable and bankruptcies have been frequent in the past.

Will Cannabis be a commodity product? In that case expect only the lowest cost producers to make large profits.

Will Cannabis be a branded product where people pay more for their favorite brand? In that case, which brands will be the favorites?

What are the barriers to entry in the Cannabis business?

In the tobacco business, did the farmers make huge gains or was it companies higher up the food and brand chain that made the big money?

My guess, and it is only a guess, is that that these stocks could certainly go higher, perhaps far higher, but many of them may well finish the year lower than they are starting the year.

Aurora Cannabis has a market cap value of $5.4 billion and a price to book value ratio of 18 times. By way of comparison, Canadian Western Bank has a market cap value of $3.5 billion (which it slowly built up over about 30 years) and a price to book value ratio of 1.6. Maybe that is sensible. Maybe not.

Some of these companies have recently raised money but issuing shares. I think that is extremely wise and could guarantee the survival of the company. If any of these companies have any debt they should now issue shares to pay that off and to build a war chest while they can.

Many investors must be sitting on tens of thousands of dollars in gains on these shares. While they could go higher, it would seem to be prudent to lock in some of those gains.

Despite the large gains so far, I think it has to be admitted that investing in or holding these stocks is an exercise in gambling as opposed to investing. But again, this may all be sour grapes on my part.

January 1, 2018:

Here are a few predictions and thoughts about 2018:

It appears that barring geo-political risks, the U.S. economy will do well and Canada should do well also although NAFTA issues are a concern.

Stock markets may not do as well as the economy since a good deal of optimism about 2018 is already reflected in stock prices.

Interest rates will likely continue to increase (and all else equally, that is a negative for stocks).

Many stocks and a number of sectors or even possibly the market overall will have one or more periods where fear pushes their prices down materially. Those are the periods where having cash to invest at lower prices can be very advantageous.

Berkshire Hathaway’s book value per share growth will likely surpass the one million percent figure when the 2017 number is released (boosted by a huge gain on its deferred income tax liability). I don’t think Warren Buffett will view that incredible milestone as an appropriate time to cut back his duties or retire as CEO, but at 87 years old he just might. However, he really does not appear to have lost anything in terms of his abilities or energy and so he might be motivated to just keep on going unless a health issue emerges. If Berkshire does not announce a major acquisition of at least $25 billion, this should be the year that it finally introduces a dividend and/or buys back shares.

I have updated the composition of my own portfolio. I have a large 25% allocation to cash and a very concentrated equity portfolio. The P/E ratio of my equity portfolio is relatively low at 14.4 which, in theory, reduces my risk. I like the safety aspect of the 25% cash but at the same time this could reduce my return. I may redeploy some of my U.S. cash into global ETFs.

The performance of our stock picks in 2017 was good with the three stocks that were rated in the Strong Buy range as of the start of 2017 rising an average of 18%. The 22 stocks that were rated (lower) Buy or higher rose an average of 15.6%.

My own overall portfolio was up 15.2%.

Meanwhile, the Toronto Stock Exchange index was up just 6.0% but the S&P 500 was up 19.4% and the Dow Jones Industrial Average was up 25.1%.

Most analysts seem to be predicting another strong year for stocks in 2018. That remains to be seen. Stock indexes are unpredictable in the short-term.

For the start of the new year, I have removed several stocks where the report was well out of date.

Note see the menu to the right to click to see 2017 and earlier comments