2019

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

Tomorrow is of course the last day of trading for the year. We will also get the last dividends of the year including from Melcor and Boston Pizza among others.

The report on Restaurant Brands (Tim Hortons, Burger King & Popeyes) is updated and rated (lower) Buy at Canadian $83.56. The report is in U.S. dollars and the U.S. price is $63.89.

At the last update last Summer, I thought the stock was quite expensive. Since then it is down about 17% despite reporting higher earnings in Q3. It did report a decline in same store sales at Tim Hortons in the latest quarter. But it had really strong gains at Burger King and Popeyes. The stock is not cheap but has become more attractive. I added today to my small position.

Royal Bank of Canada is updated and rated Buy at $103.47. Its valuation ratios are quite attractive such that it could be rated in the Strong Buy range. But it is facing lower growth and it is possible that loan losses could cause problems in 2020. I have only a small position. I am inclined to maybe add to that but I may wait and see how loan losses develop in its next quarterly report.

This bank has enjoyed suburb profitability on its personal and commercial banking activities. In part, this is due to very high leverage. But also due to the ability to attract deposits at a very low rate of interest.

There are just two trading days left in the year. 

On Friday, the S&P 500 was up another 0.1% and I believe likely set yet another all time closing high. Toronto was down 0.1%

CRH Medical (see update just below) was down 3.3% in Toronto.

AutoCanada slipped 3.3% in what could be tax loss selling. It has been declining for about 5 years and remains far below its historic prices despite a significant rally in November that has since faded somewhat. The newer management has made significant progress on its turn around strategy and I like the chances for the stock to do well in 2020. But it is in an industry that is facing lower sales and is unpopular. Therefore management really has to do a great job and significantly outperform the industry in order to generate investor interest.

The great majority of market analysts seem to believe that the current stock market momentum will continue. It does feel that way. But let’s remember that at Christmas a year ago the markets had been pounding down and it felt like there was no limit to the downdraft. And then suddenly the updraft started and has continued almost without pause for a full year. Markets usually hold surprises.

CRH Medical is updated and rated Speculative (higher) Buy. This is a small company with a market cap of U.S. $250 million. It is very much in a niche industry as it mainly provides anesthesia services for colonoscopies. Demographics are certainly favorable to it. It is a growth by acquisition company. It funds that growth through debt and cashflows and has not issued shares since 2014 when it first entered the anesthesia business through a large acquisition. In addition to a steady pace of small acquisitions it has been buying back shares for the past two years which is an indication of its strong cash flows. A possible major risk is that new technology could emerge that would make colonoscopies largely obsolete. To date the company does seem to fear that will happen. Absent a major change in technology, I expect this company to continue to grow by acquisition. It appears to be trading at a low price to its cash flows or adjusted earnings. Since it is a smaller company, interested investors should probably not make it more than a small part of their portfolio. I added to my holding in this company today.

Our report on Starbucks is updated and rated (lower) Buy. This is an extremely high quality company. But it’s not cheap and therefore is rated only (lower) Buy. Since the last update in August its price fell about 5% while the market in general rose. A reasonable strategy might be to take a modest position now and to add to that if it happens to decline. I bought a small amount on Tuesday. U.S. markets will be open so you can buy on Boxing Day if you wish. Unlikely to be any Boxing Day discount though. Toronto will not trade on Boxing Day.

Owning Starbucks is likely to be profitable over time. In addition, I like the “psychic income” that comes from knowing that I am an owner whenever I see a starbucks, which you will see not only in your home town but just about everywhere you travel in the populated parts of the world.

Our report on Canadian Tire is updated and rated (higher) Buy at $142. This company has been the subject of a short-seller report. They forecast lower earnings growth ahead. They also believe that Canadian Tore could get a credit rating downgrade. The company disagrees. The stock appears to be good value but the short sellers concerns should not be totally dismissed.  There are always risks and that’s why diversification is important. 

On Friday, the U.S. markets set yet another new high.

The S&P 500 was up 0.5% and Toronto was up 0.4%

It appears that markets will finish 2019 at around record highs and with stellar gains in 2019.

On Friday, lululemon was up 2.75%. 

Canadian Western Bank was up 1.8%.

Toll Brothers was up 2.5%.

Constellation Software was up 3.25%.

CRH Medical was down 2.5% giving back some if its very recent gains.

Regarding Boston Pizza Royalties. They rely on the franchise operator Boston Pizza International as well as the franchisees to do things to stimulate sales. I would think that BPI should be making every effort to boost sales and avoid a cut to the royalty distribution. BPI needs to keep its franchisees happy and wants to sell more franchises. A cut to the royalty distribution would surely put a chill on the market for opening new Boston Pizza locations. Hopefully, the incentive that BPI has to spur sales will lead to them doing what it takes to boost sales. 

I know they are advertising on NHL hockey. But in general I see very few of their ads. On their “app” they have been running the same specials for months. Pasta Tuesday (from $8.99 dine-in or take away/delivery) and half price on the second pizza, take-out / delivery only. It’s disappointing not to see more action on the app to promote sales.

I was tempted to add to my BP Royalties position today. But I am biding my time. I want to hold onto some cash in case better bargains appear.

This CWB rate reset preferred share is updated and rated (higher) Buy at $17.75. It yields 6.06% and will not reset until April 30, 2014. This is not an exciting investment. But for those seeking yield and particularly yield eligible for the dividend tax credit it is worth considering.  As I have said many times, rate reset shares have burned investors repeatedly for years. But if interest rate remain stable or rise then this will be a good investment.  If the price dips then it becomes an even better investment. 

Canadian Western Bank is updated and rated (higher) Buy at $31.89.

Wednesday was another interesting day in the markets. The S&P 500 was little changed while Toronto was down 0.25%.

SNC Lavalin (not on our list but one I have mentioned) was up 19% after avoiding a trial by pleading guilty to one charge of defrauding the Libyan government and agreeing to a fine of $280 million. They were facing the risk of being barred from Federal projects for a period of years. That is probably not going to happen. The stock may get another boost if the federal government announces that SNC will not be barred. Or perhaps that is already priced into the stock.

FedEx fell 10% on its weak earnings report and outlook.

Aecon was up 3.0% after announcing some significant new contract wins.

After the close, Boston Pizza Royalties announced that the distribution to be paid on January 31 will remain at the 11.5 cents level. They had announced nine days ago ago that the December 31 distribution would remain at 11.5 cents. At this point they should be reasonably aware of how the Q4 same-store sales are looking. This presumably means that they are at least not too ugly. If they intended to cut based on the Q4 results, now would have been a good time to do so. The unit price is already down in expectation of a cut. With this news, a cut announcement in February while still quite possible seems a little less likely.

CRH Medical was up 6.8%. I don’t see any news to explain that. Possibly an analyst upgrade.

On Tuesday, markets overall were little changed. The S&P 500 was approximately unchanged and Toronto as up 0.1%.

The Canadian Western Bank Series 5 rate reset preferred share CWB.PR.B was up 1.5% to $17.66. It yields 6.1%. Rate reset preferred shares of course have a volatile and mostly disappointing history. This one had plunged to under $16 in late August which was a particularly good buying opportunity.

I will update Canadian Western Bank and these preferred shares tomorrow. 

AutoCanada was down 4.3% top $12.90. It’s not a stock for the faint of heart but management was making very good progress on turning it around as of the Q3 report.

FedEx released a disappointing earnings report after the close.

Monday was a strong day in the markets.

The S&P 500 was up 0.7% to yet another new high and Toronto was up 0.3%.

Accordingly, most of the stocks on our list were up.

Toll Brothers was down 0.6% despite a report that the home builders sentiment index was up sharply and was at the highest level in 20 years. “Builder confidence in the newly built, single-family home market jumped 5 points in December to 76, the highest reading since June 1999.”  It seems that the market is just not overly interested in home builders at this time. 

Linamar is updated and now rated only Speculative (lower) Buy. Perhaps that is too low a rating given a trailing P/E that is highly attractive at 6.2 and given that as of the Q3 conference call, the company was predicting operating earnings growth in 2020 despite softer markets.

But I worry that Q4 will be quite weak. There was the 20 day GM strike as well as continued impacts of trade wars and weaker auto production in Asia.  The stock has recovered a lot to about $48 from lows around $35. I’m concerned about a pull back before or at the time of Q4.

I basically am over-exposed to Linamar and so I reduced my holdings by 23% today. I hate to sell any portion of a stock with a P/E of 6.2 but it seemed prudent.

On Friday, the S&P 500 was about unchanged. The Phase I China / USA trade agreement had already been reflected in the market by the close on Thursday and so there was no further impact on Friday. In fact, the way positive for markets goes is usually that the initial reaction is overdone. As the news settles in  some pullback from the initial reaction seems more common than further gains.

Toronto was up 0.3%.

Shopify was up 3.8%. 

WSP Global was up 1.2% to another record high. This management seems to continue to excel at the acquisition game (on a global scale) and has not reported any big operational stumbles. 

Costco was down 1.8%. It reported a strong quarter that was simply not quite as stellar as the market hoped. It’s expensive but tends to stay expensive (in relation to earnings).

American Express was up 1.7%. It continues to be a fantastic business along with Visa and MasterCard.

The next update will be for Linamar. It’s recovered a lot from its lows. It continues to look cheap based on analyst earnings forecasts. But I do worry that it has already telegraphed that Q4 will be weak. With lower sales to agricultural (due in large part to trade wars), I worry they may have to take a write-off on some of the goodwill they bought when they purchased MacDon. I’ll look at that further as I update it.

Thursday was a strong day in the U.S. markets as Trump signed some kind of Phase I trade deal with China.

The S&P 500 was up 0.9% while Toronto was about unchanged.

Linamar benefited from the news on the trade file adn was up 4.8% to $48.24. That’s a big bounce back from lows of under $37 in early October. The stock remains far below its highs of 2014 and 2017. Yahoo Finance shows it is trading at only 6.7 times estimated forward earnings which is cheap. On the other hand I believe it will report quite weak numbers in Q4 due to a weaker auto parts industry and due to weak sales to agricultural customers. So, while it looks cheap we could be in for more whip-sawing of the price. Trump’s deal should improve the agricultural market and so perhaps a strong outlook will offset a weak Q4. FedEx was up 3.65% on the trade news. It reports earnings on Tuesday next week.

Canadian Western Bank was down 1.9%.

There was news today about a company that owns 58 buildings in Calgary (mostly office and some retail) seeking creditor protection. Buildings being sold in bankruptcy sales will no-doubt be a drag on commercial real estate values in Calgary. 

Toll Brothers was down 2.1%.

lululemon was down 3.7% despite posting strong earnings. It’s doing very well but the stock is very expensive in relation to earnings.

Wednesday saw the S&P 500 rise 0.3% while Toronto as down 0.1%.

Melcor was up 2.8% adding to recent gains. But it tends to be volatile due to its thin trading volume.

Toll Brothers was up 1.7% recovering a portion of yesterday’s decline.

After the close, lululemon reported another strong quarter of growth. But apparently its outlook, although strong,  was somewhat less than the analysts were hoping for.

FedEx is set to report earnings. Its package volume growth (or lack thereof) is seen as something of a bellwether indicator of economic growth.

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

Despite apparently beating market expectations for earnings and revenue, Toll Brothers was down 4.9%. 

Restaurant Brands was up 1.8%.

Linamar was up 1.1% which was likely due to the apparent imminent passage of a revised “new NAFTA” agreement.

Markets were down somewhat on Monday. The S&P 500 and Toronto were each down 0.3%.

Stantec was up 1.8%. 

Linamar was up 1.0% which is not bad on a day the market was down.

Constellation Software was down 3.5%. Any pull back in that stock has historically been a buying opportunity.

Boston Pizza Royalties announced (after the close of trading) their next distribution which is unchanged. No reduction to the distribution. This could possibly mean that the Q4 same-store sales are not looking too bad. Or, it could just mean that a reduction has simply been delayed. They will not want to make a reduction. But with a 104% trailing year payout, they have to be able to achieve or at least forecast an increase in same store sales to avoid a cut. They have some cash on hand that could allow them to delay a cut until Q4 2020 if same store sales stay flat. Any sustained increase in same-store sales will likely mean no distribution reduction. Any material further reduction in same store sales (even 2% or 1% sustained over a few quarters) would likely force a cut. Meanwhile, it would appear that a cut is already priced into the unit price.

Toll Brothers was up 1.3% today. It then reported, after the close, its Q4 earnings which although definitely lower than last year’s Q4 did beat analyst expectations. On a negative note, their profit margins on sales were lower and the analysts tend to view that as quite negative. On the positive side their signed contracts for new homes were up 12% in dollars and 18% in number of units (they are selling more lower priced homes). I am not sure what the expectations were but that gain seems like good news. They also indicate that they will increase the number of selling communities by 10% during fiscal 2020 – that is good growth. They forecast that the next quarterly report will have a year-over-year  increase in homes sold of between 8 and 21 percent. It would likely be a smaller increase in dollars but nevertheless that outlook seems reasonably positive. They also indicated a $10 million unusual expense for next quarter. Overall, this seems like a positive earnings report but sometimes the market decides to focus on the negative aspects and so we shall see how the price reacts. They have a conference call tomorrow morning that could also influence the market reaction.

CMHC released November housing start data. Multi-family starts are always volatile month to month and I am more interested in single family starts, especially in Alberta. Single family starts were down 8% nationally and 10% in Ontario. But they were up 12% in Alberta. Edmonton was up 4% and Calgary was up 26%. The Alberta gains are in comparison to quite weak numbers form last year but the gain is welcome news.

However, meanwhile the Alberta Economic Development department released its latest updated figures. They had updates for nine of 33 indicators that they track. All nine were down year over year. Active drilling rigs were down 28%! Even air passenger traffic was down. But that included Edmonton shown 26% which I find implausible (possibly a data error). In any case seeing all nine updated indicators in the red was an ugly picture. Looking at the 33 indicators over the past five years, they have gone from largely green (positive) around 2014 to mostly red (negative) by 2016 to majority positive by about the start of 2018 to now mostly negative. It could be that Alberta is seeing a double dip recession . It had GDP growth in 2018. Growth then turned lower. 

On Friday markets were strong. The S&P 500 was up 0.9% and Toronto was up 0.8%.

Oil and gas stocks were mostly up. XEG, the big Canadian oil and gas ETF was up 4.5%.

Trade related stocks mostly rose. CN Rail was up 2.1%. FedEx was up 2.2%, Linamar was up 2.25%.

Couche-Tard was up 2.05%.

On Friday, Statistics Canada released a very disappointing jobs survey. They estimate that 71,000 jobs were lost in November on a seasonally adjusted basis. The losses occurred in Quebec, Alberta and B.C. while the other provinces were little changed.

I have consistently said that we should not read too much into any one month’s labour force survey. The survey has basically exhibited what can fairly be described as frequent wild swings. It is a statistical survey and is subject to significant statistical error as well as to the process of seasonal adjustment that can never be perfect.

Nevertheless, this survey is a negative indicator for Quebec, Alberta and B.C. I was disappointed to see the negative news for Alberta at a time when the oil egress situation is improving. The Alberta government has already “released” some workers who were not in “permanent” positions and more job reductions are rumored. Hopefully, other aspects of the economy are improving so that the unemployment rate in Alberta does not rise. 

This week, the U.S. market will likely continue to react to positive or negative developments on the trade files. 

I am looking forward to the report from Toll Brothers and hoping that they can beat analyst expectations although it is expected that their earnings per share will be lower than 2018’s Q4. What may be more important is their outlook. Also their contracted home sales numbers are highly important. Those numbers do not affect earnings until the houses are built and delivered but they affect the stock price immediately.

Boston Pizza Royalties will likely announce its next distribution. Hopefully unchanged but potentially a cut. 

Canadian National Railway Company is updated and rated Buy at Canadian $119.00 or U.S. $89.70. This has been a stellar investment for many years.  While it does not look cheap at about 19 times earnings, it is fairly priced. It will almost certainly continue to do well over the years. In the near term it is facing a weak Q4 due to the recent strike and a slowing economy. In fact, it appears that the company is forecasting a decline in earnings of roughly 15% in Q4 versus 2018. But growth in earnings will likely resume in Q1 driven in part by higher oil shipments. I believe they will announce another annual dividend increase near the end of January.

If the prices does decline due to the weak Q4, that would likely be an even better buying opportunity. 

Thursday was not a good day for our stock picks.

The S&P 500 was up 0.15% while Toronto was down 0.25%.

Canadian Western Bank was down 6.9% after posting disappointing results for Q4. It has not increased its loan loss provisions. As long as it does not experience unusually high loan losses it will continue to grow earnings going forward.

Canadian Tire was down 2.8% after the release of a short-seller report. Canadian Tire responded this evening saying “The report contains numerous inaccuracies, which we believe are solely intended to benefit its author. It would be extremely unfortunate if investors took action based on the report.”

Boston Pizza was down a further 2.1% to $13.24. The yield is just over 10%. The market certainly seems to be anticipating a reduction in the distribution. I believe they are set to make their monthly distribution announcement next week. I suspect that they will not cut this month but they might cut in January or February if the Q4 same-store sales are down.

The U.S. market continues to largely ignore the impeachment progress and is more concerned about the prospects for a trade deal with China.

I think CN Rail is a reasonable buy with its recent decline. Q4 will be weak due to the strike but CN will likely continue to do well over time.

Canadian Western Bank is down 7.3% as Q4 earnings declined 5%. (Correction, the decline mentioned here was versus Q3, earnings were up 5% versus Q4 of the prior year). Net interest margin was down slightly and expenses are up. Management indicates that expenses are up mostly in anticipation of growth and due to work on new initiatives. There were some positive aspects to the report including the fact that the provision for credit losses was unchanged at 19 basis points. Loans and deposits to continue to grow. Management indicates that earnings are set to be boosted next year when it expects to be allowed to increase its leverage by moving to the advanced method of calculating risk-adjusted assets. However, the market is focused on the weaker results in Q4 (versus Q3 and versus expectations).

Canadian Tire was down 3.7% after a report by Spruce Point Capital Management suggested that the stock is over valued. The report indicates that Canadian Tire is more vulnerable to Amazon than the market realizes and that its costs are too high and that it is over leveraged and exposed to increasing credit card risks and that its accounting is aggressive. Time will tell whether they are right. So far, Canadian Tire has overcome many rounds of criticism.

On Wednesday, markets rebounded somewhat with the S&P 500 up 0.6% although Toronto was about unchanged.

Shopify surged 5.2% to almost $491. That’s on top of a big gain yesterday. 5.2% is a LOT of money when you consider that Shopify has a market value of $57 billion dollars. 

TFI International rebounded 2.7%.

Dollarama was down 8.9% apparently because it failed to beat expectations. 

Royal Bank was down 2.1%. This was apparently due to reporting an increase in provisions for bad loans.

In general, the bank reports have been viewed as weak. However National Bank was strong.

Canadian Western Bank will report before the open on Thursday morning. It will probably need to beat expectations, otherwise its share price might drop along with most of the other banks. Canadian Western Bank has basically no “capital markets” division and has no international operations. Therefore it is not very similar to the large Canadian banks. Also, it caters mostly to commercial borrowers which again makes it different than the big banks which have a lot of personal loans. As one example, it has no credit card loans receivable. 

After the close, Costco reported yet another good quarter. I am not sure though if it was quite as good as the market expected.

Tuesday was another negative day in the markets due to deteriorating hopes for a near-term “Phase I” trade deal between China and the U.S.

The S&P 500 was down 0.7% and Toronto was down 0.5%.

FedEx, which certainly relies on increased trade for growth was down 4.4%. Trucking company TFI International was down 3.5%. And Linamar was down 1.3%.

Shopify was notable in the opposite direction rising 5.95%. 

November auto (light vehicle) sales for Canada were reported today. They were almost exactly unchanged overall versus last year. But last November was a weak month. It appears that auto sales have stabilized after a long string of decreases. Light trucks (which includes SUVs) continue to dominate as sedan sales continue to decline. Fiat Chrysler sales were up almost 11% and that is good news in regards to AutoCanada as Fiat Chrysler is their biggest brand.

There has been good news for Alberta as work has started in earnest on the installation of the TransMountain pipeline. This is good news for jobs and helps the economy n Alberta.

And the Canadian portion of Enbridge’s line 3 has come into operation this week. I have not seen any news on whether the oil is moving under the rail contracts that the NDP government committed to (shipments were supposed to start as early as July). The new government has been trying to sell those contracts at loss but meanwhile I have not seen any news on whether oil is moving on those contracts. But overall, there is more oil moving given line 3 and other developments.  

Aecon is updated and rated (lower) Buy at $17.92.

Aecon Group Inc. is an interesting Canadian company that constructs vital infrastructure including light rail transit, bridges, pipelines, electricity transmission and distribution lines, chemical plants and more. On that basis, the company deserves to be admired and Canadians are benefited by its existence.

However, it generally has to compete for work by bidding on fixed price contracts. Historically, its margins and profits have been fairly thin. In the most recent 12 months, it profits on sales were just 2.3%. And it works very hard and takes large risks to earn that. Due to leverage its trailing year ROE is not terrible at 9.8% but is certain;y not great.

On a positive note, earnings have been increasing and SNC Lavalin has excited the fixed price market. Overall, this is not a great looking investment. Nevertheless I have grabbed a few shares today for diversification and because it may do well in 2020 with somewhat higher earnings. And it will likely increase its dividend.

December has started off with a negative day on the markets as the S&P 500 was down 0.9% and Toronto was down 0.3%. Apparently the reson was increased trade tensions.

WSP Global bucked the trend and was up 1.5%. And Linamar was up 0.6% which seems surprising on a day when trade tensions escalated.

Checking my account, I see that I picked up a few more Boston Pizza Royalty units from an order I had in at $13.75. The yield on these units is now 10.0%. It seems to me that the market is anticipating a reduction in the distribution. And it may be that the Trustees will take that expectation as sort of “leave” to make a cut. They announce the distribution monthly and it is possible that they could announce a cut very shortly. Unless they have data showing that same-store sales have increased in October and November it is hard to argue against a modest distribution cut given the approximate 104% payout ratio. To the extent that the market is already anticipating this cut, it is possible that the units would not decline further on a modest cut or would drop and then rebound. 

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

This week the Canadian market will be interested in the reports from the banks. Royal Bank reports on Wednesday. The level of actual bad debts and any changes to the level of provisions for future bad debt will be particularly scrutinized.

Canadian Western Bank reports on Thursday. It should have another quarter of growth unless it has experienced unexpected bad debts. From past experience it seems that it sometimes has loan loss volatility related to just one or a few larger commercial loans. Therefore, its loan losses can be a bit volatile. At last report they were not expecting any material increase in bad loans. They are implementing a new risk management system that will allow them to increase their leverage (it lowers their required equity ratio on a risk-adjusted basis). This should lead to additional profit in 2020. I am hoping that they can report that implemetation is imminent as it was delayed somewhat in 2019.

Toll Brothers reports on Wednesday. The market already expects earnings quite a bit lower than last year. I think most of their geographies and operations should be doing fairly well. But I am not sure about California with all the fires – and California was already weak.

Our report on Andrew Peller (which is in the wine business) is updated and rated (lower) Buy. This is a tough business that faces stiff competition. The update may be more of interest to those who already own shares or who have a particular interest in the wine business. The company appears to be forecasting increased earnings and so the share price could rise somewhat. But this is ultimately a slow growth business. I bought a few more shares on Friday but will keep this one to a small portion of my portfolio.

Toronto was on ts own on Thursday and gained 0.1% as U.S. markets were closed. 

Canadian Tire was up 0.8% to just under $156. I think Canadian Tire will continue to do well. They are doing lots of promotions with their Triangle reward card to pull customers in. Mark’s probably has too many sales. But I notice their prices are relatively high. I think Mark’s is increasingly a destination for higher quality brands that come with higher prices. It is not a discount store. But it is busy.

My next update will be for wine maker, Andrew Peller. I am still working on it but I expect it to be rated somewhere in the Buy range. It has posted somewhat lower earnings recently. But there were some one-time items and it looks like they are set to improve earnings in the coming quarters. I’ll post more details tomorrow. 

Wednesday was yet another positive day for stocks. The S&P 500 and Toronto were each up 0.4%. Both set record highs.

lululemon was up another 2.7% to almost $229. It has risen very steadily for the past year. It looks very expensive on a P/E ratio basis. It is a high quality business and is able to charge premium prices for its products. 

Shopify was up 2.2%.

Linamar was up 1.6%. But I note that Deere and company reported weak sales. Linamar has exposure to the agricultural sector which has been negatively affected by the trade wars. 

Couche-Tard was up 2.4% after releasing a strong Q2 earnings report and after the announcement that it is working on a large potential acquisition in Australia. 

Given the strike at CN Rail I was interested to see last week’s rail car loading reports which were released today.

Firstly in the U.S, rail car loadings had a strong uptick.

In Canada, the strike affected 5 days of the week ended Saturday November 23, which is the latest reporting period. I saw basically no reports about what level of traffic kept moving despite the strike.

In fact, contrary to the impression left by news reports, it appears that most of the traffic kept moving. Overall, looking at the graph, the decline was roughly 15%. But some sectors had significant declines while others had very modest declines. Intermodal (mostly consumer goods) was about unchanged from the previous week. (Intermodal may be less reliant on the particular workers that were on strike or is easier for management staff to take over.)Petroleum was down by roughly 15%. Chemicals were down by about 20%. Coal was down by over 25%. Forest products were down about 25%. Grain shipments were actually up noticeably versus the prior week. These percentages are quite rough because the graphs are hard to read because they don’t start the scale at zero and there are no grid lines on the chart

On Tuesday, the S&P 500 was up 0.2% and Toronto as about unchanged.

Shopify was up 5.1%

Toll Brothers was up 1.1%. A report today indicated that new home sales in the U.S. just reported their strongest two month figures in 12 years. But the report was somewhat mixed with a decline in single family new home sales in October. But overall new home sales were very strong with a 31% year-over-year increase. Overall, this would seem to be a good news report for those holding Toll Brothers shares.

After the close, Couche-Tard reported very strong profit growth for its Q2. Yesterday they had reported that they are working on what would be their largest acquisition to date. This potential acquisition is in Australia. This company has tended to just keep on performing for its owners.

I picked up a few more Ceapro shares today based on an order I had placed a few weeks ago. I placed my order at 32 cents which was slightly below the market price. My patience in waiting until my price was hit was rewarded.

The report for Boston Pizza Royalties Income Fund Units has been updated and is rated (higher ) Buy at $14.05.

The report goes onto various details. But whether this is a good investment comes down to some questions which are not easy to predict:

With a Payout ratio of 104%, can the $1.38 annual distribution (11.5 cents monthly) be maintained? And that depends whether same-store sales (excluding alcohol) can be expected to stop the recent decline and begin to grow again.

And if the Trustees decide that it is prudent to reduce the distribution to get the payout ratio below 100%, do the units still represent good value with a reduced distribution? Since the yield would still be over 8% if the distribution were cut by 15% (taking the payout ratio well below 100%). The answer would seem to be yes. But that would could change to a no if it were thought that same-store sales are going to continue to decline for years to come.

And even if the units are quite good value, will they nevertheless continue to slide in price? That is always possible especially given tax-loss selling and a certain amount of investors basically giving up on these units.

Overall, while there are no guarantees, I suspect the units will be a good investment at this price.

On Monday, the S&P 500 was up 0.75% and Toronto was up 0.5%.

Couche-Tard was up 3.5%. They are set to release earnings tomorrow. This has been fantastic comp[any and investment for many years.

Their exposure to selling vaping products is a potential worry. It might be wise for them to cease selling at least the flavored kind. 

Toll Brothers was up 2.2%. They will report earnings in early December. I do wonder what affect the wild fires have had on their sales in California which has been a weaker market for them in recent quarters.

Statistics Canada reported that wholesale sales rose in September but that was after several weak months. 

The big utility, Fortis Inc., is out with a share issue. I considered grabbing some but then I saw that the price was $52.15 which is not much of a discount to the closing price of $52.69 and so I decided not to buy any. As of 10 pm eastern time, TD Direct is showing the issue is still open. This may indicate that the price is a bit too high to attract buyers. Given the share issue, I expected to see that Fortis was making an acquisition. Instead they say the funds are for their capital investments but not acquisitions. That seems a bit odd to me. I believe Fortis has normally been able to fund its capital additions from its operating cash flows. But they seem to be indicating that capital spending will be unusually high in the near term. Fortis has been somewhat highly leveraged with debt at the holding company level. If they reduce debt leverage that could reduce their ROE.

The Boston Pizza units are down 3.0% to $14.02 this morning. Volume is heavier than normal. This on a morning when markets are higher.

It’s hard to say if this is a good buying opportunity or not. Could it be that someone has information that a distribution reduction is imminent? But since they did not cut with the Q3 results, I had thought they would not consider a cut until the Q4 sales are known. Or could it simply be someone selling a larger position?

Having bought some on Friday, I won’t add at this price. My thinking in general is that it should be a good investment at this lower price but it would likely still go lower if they do have to reduce the distribution but then would likely recover over time. If I did not own any, I would be willing to buy some at this price but would not get too aggressive in buying too much.

These shares, like most rate reset shares also offered the option to convert to a floating rate preferred share. The time to make that option has passed as the deadline was November 18th. But those holding ENB.PF.A could still sell those and buy the floating rate shares if desired.

What was unusual about the floating rate option was that it will initially pay (for the first three months) a quarterly dividend of 26.9 cents which is slightly higher than the 25.6 cents that the ENB.PF.A shares will pay each quarter locked in for the next five years.

The floating rate would normally be expected to be lower but offer almost immediate protection against rising rates. In this unusual case the three month Canada Treasury bond interest yield was higher than the five year Canada bond interest yield on November 1 when the reset interest rates were set under the terms of the ENB.PF.A prospectus. That is, the normally upward sloping interest yield curve was “inverted” as the longer term rate was lower than the shorter term rate.

Looking at the choice between the 25.6 cent quarterly payment fixed for five years and the 26.9 cents quarterly dividend that will float with the three month treasury bill rate, one had to think about the probable direction of the three month interest rate.

Most analysts tend to think interest rates will ultimately rise. On the other hand there were predictions of cuts in the near term. And consensus predictions of higher rates have been proven wrong time and again (with rare exceptions) going back probably 20 years.

The inverted yield curve itself is a predictor of lower interest rates.

Since November 1, the Canada three month treasury bill interest yield has in fact remained at about 1.66%.

The converted-to-floating rate shares have not yet begun trading. When they do it will be interesting to see if they trade higher than the price of ENB.PF.A. The relative attractiveness between the two will likely hinge on movements in the three month rate and expectations for future moves. Movement in the five year Canada bond interest rate may also be a factor but perhaps not as much of a factor in the first couple of years as the reset is not until December 1, 2024. 

Those wishing to lock in a flow of dividends might be best served to stick with ENB.PF.A which at $15.60 yields almost 6.6%. 

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

FedEx was up 2.9%. 

TFI International was up 2.45%. I don’t know if it will benefit from the CN Rail  strike. On the one hand shippers may look to switch to trucks. On the other hand any existing trucking to and from rail may be disrupted.

Linamar was down 2.0%.

I bought back some Boston Pizza units at $14.35. This represents a relatively small portion of what I had recently sold at prices above $17. The yield at $14.35 is 9.6%. Even if BP were to cut the distribution by 15% the yield would still be 8.2%. And they may yet skate through without a cut. Or any cut could be as low as about 5%.  If they do cut I would expect the units to drop in price at least temporarily and it would likely be a good buying opportunity.

Our report on the Enbridge rate reset preferred share ENB.PF.A is updated and rated (higher) Buy at $15.60.

These shares will reset on December 1 which locks in the distribution for five years. They new dividend has already been set. The yield at $15.60 seems quite attractive at 6.565%.

These shares had briefly declined below $14 in late Summer as interest rates declined at that time. The fear was that interest rates would be very low on November 1 which would have driven the reset dividend lower. But the 5 year Canada bond yield recovered somewhat as of November 1.  I had reiterated my (higher) Buy rating at that time.

Investors have been repeatedly burned by rate reset preferred shares. But given that these shares will not reset for another five years and given that market spread over the five year bond is high at 5.06%, (and perhaps has more chance of declining than increasing) it seems less likely that these shares will decline. Nevertheless, they could decline.

Markets were not much changed on Thursday.

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

I have a few orders in to add to some positions. 

I picked up some Melcor REIT at $7.95 today. 

If Boston Pizza dips to $14.30, I have an order in the buy back a small amount of what I recently sold at prices over $17.

On Wednesday, markets were mostly a bit lower.

The S&P 500 was down 0.4% while the Toronto index was about unchanged.

CN Rail was down 1.8% due to a strike there. 

Linamar was down 4.4% due to concerns about progress on the China  / U.S. trade war. FedEx was down 2.1%, probably for the same reason.

Statistics Canada reported the latest inflation numbers. This was 1.9% year over year overall but of course many components had quite different percentages, some positive and some negative.

The closure of a number of Rona and Lowe’s stores I believe reflects on that company as a weaker competitor. I don’t think it says anything much about Canada’s economy. I don’t think it is bad news for Canadian Tire and in fact may in part reflect the success of Canadian Tire to extent it is a competitor.

This morning Stats Canada reports that restaurant sales are still rising in 2019 versus 2018. Given new restaurants opening up, and changing tastes some restaurants are certainly facing lower sales but the industry overall is doing okay.

Sales of the food services and drinking places subsector increase in the third quarter

The figures in this section are based on unadjusted (that is, not seasonally adjusted) estimates.

Unadjusted sales in the food services and drinking places subsector were up 2.5% in the third quarter of 2019 compared with the same quarter of 2018. Sales increased at full-service restaurants (+2.9%), limited service restaurants (+2.4%) and special food services (+2.8%); sales at drinking places fell by 2.6%. Sales increased in nine provinces, with the largest gains in dollar terms being in Ontario (+2.6%), Quebec (+2.8%), British Columbia (+1.9%) and Alberta (+2.4%). Sales declined slightly in Saskatchewan (-0.2%).

Prices for food purchased from restaurants were up 2.7% in the third quarter of 2019 compared with the third quarter of 2018 and prices for alcoholic beverages served in licensed establishments were up 1.3% in the same period. Similarly, prices for food purchased from restaurants were up 2.7% in September 2019 compared with September 2018, whereas prices for alcoholic beverages served in licensed establishments were up 1.0%.”

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

Statistics Canada also reports weaker manufacturing sales:

“Manufacturing sales declined 1.3% to $172.0 billion in the third quarter. In volume terms, manufacturing sales fell 1.0% in the third quarter, mostly due to lower volumes sold in the petroleum and coal product (-2.4%), food (-1.5%) and chemical (-1.9%) industries.”

*********

Markets are little changed this morning.

CRH Medical has announced it exercised its option to acquire 51% of a practice it has helped develop. This is another in a string of small acquisitions and suggests that CRH’s growth strategy remains on track. 

P.S. Shortly after posting this I added a little to my CRH position.

On Monday, markets were about flat.

The S&P 500 was up just 0.05%. The TSX was about unchanged.

CRH Medical was down 1.7%.

Couche-Tard was up 1.2%.

TFI International was up 1.3%

Constellation Software is updated and rated Weak Buy / Hold at $1342. It reports in U.S. dollars and so our report is in U.S. dollars. It has been and is a fantastic company. Most of the time it looks expensive but it has been a mistake to sell this one. I’d like to see a pull-back which would likely be a better buying opportunity. 

The CEO Mark Leonard is (by far) the closest I have ever seen to a sort of “next Buffett” (Prem Watsa who is often mentioned in that regard is not even remotely close). It might be worth paying up to ride Mark’s coat tails. But the stock does seem expensive… so don’t back up the truck.

On Friday markets set new record highs.

The S&P 500 was up 0.8% and Toronto was up 0.3%.

AutoCanada was up another 7.4% to $12.73. It’s low was $7.33. Things had been looking scary until the latest earnings finally showed decent signs of a turn around. I would not get too excited to buy after this recovery. It still needs to show improved performance in the next few quarters. Sometimes the best buying opportunities  are when things look the scariest and that may have been the case here.

Boston Pizza recovered 1.8% to $14.66. Perhaps it has bounced off the bottom and may not go lower unless they actually do end up cutting the distribution.

CRH Medical was down 3.1%.

There is news that CN Rail may layoff 1600 people in Canada and the U.S. This relates to the slower traffic I have been mentioning. And they have a history of reducing costs to keep profits growing. 

Melcor Developments is updated and rated (higher) Buy at $12.04 (Wednesday’s closing price). This has been a frustrating stock that has seemed significantly under-valued for some time. But it just seems to get cheaper. It suffered from a total lack of interest by analysts which results in extremely little trading volume. It basically never issues more shares and seldom issues any convertible debt or other securities that investment banks can profit from. That is part of the reason for the lack of interest.

Other reasons are its inherently cyclical nature. Investors are used to stocks that are valued for predictable earnings not for their assets. 

I expect at least one more quarter of reduced earnings. 2020 may be flat or somewhat higher than the weak numbers of 2019. It continues to be cashflow positive even in the face of weak building lot sales. It’s investment properties provide stable cash flows. It’s U.S. building lot sales are also a plus and are ramping up.

Unless Alberta is going to go into a permanent decline or stagnation, this company should ultimately return to higher profit. 

The stock is far under-valued based on assets. But it does seem that it is in a relatively low ROE business and that is a negative.

There is nothing on the immediate horizon to boost the share price and so continued patience will be required. 

It does pay a 4% cash dividend yield.

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

AutoCanada was up another 9.8% today. As I mentioned, it seems the analysts have let it out of the penalty box after its decent Q3 report. 

There were no other moves of particular note for the stocks on our list.

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

Apparently hopes for progress in the trade war with China are fading. FeddEx, probably as a result, was down 3.1%. 

CRH Medical was down 4.5% despite no news from the company.

Stantec was down 2.85% giving back a bit of the recent gains. 

Home Capital surged 14% to $33.15 after reporting a strong quarter and a plan to buy back shares. This one is not on our list but I mentioned it quite a bit back in 2017 when it had a near-death experience before being rescued by Warren Buffett. 

Rail car loading reports continue the recent trend. Weak for Canada and really quite weak for the U.S.A.

https://www.aar.org/data-center/rail-traffic-data/

On Tuesday, the S&P 500 and Toronto were each up 0.2%

Stantec was up another 2.3%. Recall it was let out of the dog house after reporting good Q3 numbers. 

Toll Brothers slipped 1.6% adn Limamar was down 1.8%.

Boston Pizza down to $14.40 I might buy back some of what I sold recently at over $17.

A bit of a slow news day overall. 

On Monday, the S&P 500 was down 0.2% and Toronto was about unchanged.

AutoCanada was up another 4.2% and was about the only noticeable move in the stocks on our list.

I’m somewhat tempted to buy back some Boston Pizza at $14.62. If it turns out that they never have to cut the distribution (same store sales would have to grow) then it should be quite a good investment at this price. But if they do cut, then the stock will move lower at least temporarily. I don’t seem much reason for it to move higher before it reports again in February and then at that time will only go higher if the news is good. 

Markets in both Canada and the U.S. are open despite the holiday. Markets are down a little right now but nothing unusual to report.

Friday was another mostly positive day for our stocks. That was despite Trump throwing some cold water on the China trade deal hopes. AutoCanada had a good increase. It’s up a little more now. I think the Q3 results were a sort of all-clear signal and I am tempted to buy back some of what I sold some months ago. The new management is far better than who they replaced. But this is still a speculative stock. Update: I did add somewhat  to my position. 

Canada jobs data came out and was considered weak with a loss of 1800 jobs. A few news sources correctly pointed out that the survey is just an estimate and subject to quite a lot of error. You can’t go by any one month’s results. Still, there are other signs that the economy is slowing somewhat (rail car loadings for example).

CMHC reported weak housing starts for October. But actually, in the details, single family starts were up 3% year over year nationally. Weak in Ontario, Quebec and B.C. But Alberta was up 11% year over year. Alberta is up compared to weak numbers in 2018 but this is still progress. Edmonton was up 24% while Calgary was up only 3%. This is consistent with Melcor’s Q3 results where the vast majority of lots they sold in Canada were in the Edmonton region. The October figures are positive for Melcor but they will still be selling fewer lots for some time due to lower demand and they are developing fewer lots given the weak demand.

Thursday was a big day for earnings reports and a strong day in the markets.

The S&P 500 was up 0.3% and Toronto was up 0.4%.

Stantec was up almost 16% after reporting Q3. It my well rise more as it has likely earned its way out of the penalty box. With “weak comparables” it should be able to report good gains for the next several quarters. Hopefully it is back mostly on to track of the kind of performance it used to post prior to its problems with the now divested construction services business it had purchased (as part of a larger transaction) a few years ago.

Canadian Tire was up 4.5% after posting a good earnings report and raising its dividend.

Linamar was up 5.2% to $45.83 in reaction to its earnings report. This stock has been highly volatile with the trade wars. I suppose it could slump back towards $35 again if the trade deals sour but overall it still looks cheap. I am planning to hold onto my position and not trim at this point.

Energy stocks were mostly up.

Boston Pizza Royalty units were down 10.7% to $14.83 after reporting that same-store franchise-eligible sales were down 4% in Q3 and that the trailing year payout ratio is 104%. Given the comments from the owner of Jack Astor a couple weeks ago, this decline was not a big surprise at all. But they have not yet cut the distribution which is $1.38 per year for a yield now of 9.3%. I was able to find out that the Trustees knew the results of this quarter sufficiently in advance that they could have cut the distribution today if they wanted to. It appears that they are willing to hang on in the hopes that same-store-sales will rise. Remember that the Royalty entity itself is a non-operating entity that basically just collects the franchise fee and pays out interest and a very few minor expenses (it has no staff) and pays out the distribution.  Management at the operating company (BP International) it seems is telling the Royalty Trustees that things can improve going forward. Time will tell. Unless things improve within at most about six months then I would expect a distribution cut of perhaps 10 to 15% (about 5% would be the minimum cut). That could happen any time although it appears they would now not review again until February when they have Q4 results. At around $15 BP is probably a good investment even if they do eventually do a cut. But the price would drop on the announcement of any cut.

All in all, it was quite a good day for our stock picks with the exception of BP, and I had warned on that one.

And, after the close CRH MEdical reported what appeared to be at least okay results.

AutoCanada reported with big improvements in sales and with profit on the Canadian operations but still a loss overall due to the U.S. operations.  But also positive cash flows. I think these results should be viewed quite positively and I would think the stock will be up on Friday. New management is still dealing with the incredibly stupid U.S. purchase made by the former CEO, Steven Landry. I want to remember his name in case he ever shows up in charge of another company. In which case, run!

Our report for Amazon is updated and rated Speculative (lower) Buy at $1800. Historically, Amazon traded at extremely high multiples of earnings. In the past two years or so the P/E has come down but is still very high. It’s quite possible that GAAP earnings understate its “true” economic earnings but, if so, I can’t say by how much. I added Amazon to the site a few years ago because I wanted to try to understand its valuation. It’s always had huge sales growth and is a juggernaut in the economy. Despite the high P/E it seems reasonable to have at least a small exposure to it. And note that there were opportunities to buy after big dips in the past year. Perhaps there will be future dips as well. 

BP Royalties units earnings are out. The results are poor with a decrease in same-store franchise-fee-eligible sales of 3.6%. It could be worse but this is quite weak. No cut to the distribution but the payout ratio on a trailing year basis now at 104%. Trustees may not yet have had time to consider a cut. Could come next month.

P.S. BP down almost 10% to $14.99 as at 11:00 am eastern. Conference call is upcoming. Could go lower and likely will if/when distribution is reduced somewhat (possible in coming months). But not sure I would sell at this point. As indicated in recent weeks I sold most of my BP. It will still have a high yield even after a cut. If I had to bet though, I would say we will see lower before we would ever see much higher. 

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

lululemon rebounded 3.3% recovering a recent decline.

WSP Global was up 1.5%. Earlier in the day it had been down in reaction to its earnings release but presumably the conference call resulted in the mood turning positive.

Canadian Western bank was up 3.3% to $34.74. It was around $29 in August.

Couche-Tard was up 2.9%.

Linamar was down 2.35%. But it then released earnings after the close which I believe beat expectations modestly. As expected, earnings were down versus last year. It’s Transportation (auto parts) segment was actually had 15% higher operating earnings and slightly higher revenues. Its Industrial segment was quite weak. I don’t know how the market will react. That may depend largely on what the company says about the outlook. Linamar continues to be heavily affected by the trade wars.

Stantec reported after the close and beat expectations somewhat. This stock has been “in the penalty box” for quite some time due to past mistakes. This latest report may be taken as evidence that it is finally back on the right road. I would think that the stock should react positively to this report.

Melcor Developments reported after the close. Their adjusted measure is funds flow from operations which were down 17% to 32 cents per share. But that still well exceeds the 12 cent dividend. Residential lot sales were low as expected at 115 lots in Alberta versus 335 last year.  94 out of the 115 lots were sold in the Edmonton region and just 6 in Calgary. Lot prices were higher on average than in the prior year. Melcor also sold 24 lots in the U.S. at an average price of  $121,000 Canadian.  Melcor bought additional raw land in Q3 which is a sign of confidence in the future. Book value per share increased slightly to $32.20. Meanwhile the stock closed today at $12.06.  It seems likely that Q4 will be quite a bit weaker than Q4 last year. But Melcor appears to be confident inits future. The balance sheet remains strong.

It’s Wednesday, which means that the latest rail car loading reports are out. The latest week was another weak one in the U.S. with car loadings below that of the previous three years for the same week. In Canada it was also a weak week with loadings below 2018 and 2017 but remaining nicely above 2016. The last three weeks have been the weakest all year in the U.S. relative to prior years. That cannot bode well for GDP growth in Q4 for the U.S. Car loads are running about 10% below 2018. That’s not at all catastrophic but is surely a sign of weakness. But coal was the weakest area and that may simply refect a switch from coal to natural gas and wind/solar in electric generation. Intermodal which is consumer goods are running well below 2018.

Markets were “mixed” on Tuesday with the S&P 500 down 0.1% and Toronto up 0.1%

Constellation Software was down 3.3%. This has been a fantastic company in the long term. I will update the report soon.

WSP Global reported after the close. The results are a bit confusing due to accounting changes. But Revenue was up 15%. It appears that adjusted net earnings were about flat using the same accounting for both periods. One headline says the company missed expectations. We shall see how the market reacts. 

The five year Canada bond yield has recovered from a very recent dip down to 1.25% and now sits at 1.60%. That is providing some support for rate reset preferred shares. 

Monday was another positive day in the markets due to optimism that the U.S. and China will sign some sort of partial trade deal.

The S&P 500 was up 0.4% and Toronto was up 0.5%.

FedEx was up 5.3%.

TFI International was up 2.4%.

Linamar was up 2.3% to $44.63 which is a good recovery from a low of under $37 about one month ago. The company has already signaled that Q3 will show a decline in earnings and the market could send the stock lower when Q3 earnings are released. Their comments on the outlook will be important as will continued progress on trade talks / agreements.

Toll Brothers was down 2.2%.

Markets were up sharply on Friday as the U.S. jobs report came in  strong. The S&P 500 was up 1.0% and Toronto was up 0.7%.

Notable gains included FedEx and Toll Brothers each up 2.5%.

Apple was up 2.8%.

SNC Lavalin (not on our list but one I follow) was up another 4.6%. Its future depends to a good extent on how aggressively it is going to be chased through the courts by the Canadian government and also by sort of ambulance-chasing lawyers who will sue on behalf of shareholders who lost money on the stock . That’s a despicable process because it ultimately results in long-time shareholders (who also suffered the declines) suffering as the company is forced top pay money to a smaller group of usually transient shareholders and to the ambulance-chasing lawyers. Companies do not truly commit crimes, people do. I would rather see any guilty executives and board members chased through the courts instead.

Aecon Group was up 4%.

Stantec will report earnings Wednesday afternoon. I am hoping for significantly better results there. They divested their problematic construction services division late last year. The market was quite disappointed last quarter that Stantec was unable reduce certain costs and post better profits. Stantec has been quite deservedly “in the penalty box”. Management needs to prove they are capable of showing much better results.

Melcor Developments will report earnings on Wednesday afternoon as well. Given the good results from the Melcor REIT, (see post below) I am more confident that Melcor will report positive earnings. But it will almost certainly be a decrease in earnings and funds from operation given that Q3 2018 was a relatively strong quarter. Book value per share which is over $31 will likely be little changed and remains far higher than the market price. Based on the REIT report I am not expecting any material declines in market value on its investment rental buildings. It is always possible that they will need to write-down the value of some land holdings but there has been no indication of that  happening. What may be most important is their outlook for future lot sales in Alberta as well as in the U.S. They curtailed their Alberta land development activities this year and so that likely guarantees lower lot sales in Alberta even if the demand were present ( and demand was likely weak). The stock looks attractive on a book value basis but it appears that it is in a low return business. 

Our report on the Melcor REIT is updated and rated (higher) Buy at $7.99. The REIT just released Q3 earnings which had a number of positives. After about six quarters of declining adjusted earnings per share, they reported an 8% increase in Q3. This was partly due to timing issues but was also due to ongoing factors. They reported “new stability and positive momentum with leasing activity”. They have made some acquisitions and another one is pending. In my last update I was worried they might have to cut the distribution. That is always possible but now does not look likely. I have an exposure to this REIT. I am definitely thinking of adding to that. My only hesitation is that I already have such a very large exposure to Melcor Developments and also to real estate in general (Including Toll Brothers). Also, I have built up some cash now and would like to maintain a reasonable level of cash to take advantage of any bigger bargains that come along.

Stocks were mostly down on Thursday as the S&P 500 fell 0.3% and Toronto was down 0.1%.

But SNC Lavalin was up 20% after announcing Q3 results that included the big gain on the sale of most of its stake in highway 407 and that included positive progress in other areas of its business.

Apple Inc. was up 2/3%

After the close the Melcor REIT reported Q3 results which were quite good. This included an 8% gain in adjusted funds from operations per unit (although flat year to date). They also indicated they are seeing “new stability and positive momentum with leasing activity”. I have been worried about the impact of their loss of RBC as a tenant in the Royal Bank Building in Edmonton. This loss was effective with the start of Q4. They clarified that this loss was 1.6% of their total leaseable area. So it is a big loss but not over whelming. And I suspect the percentage would be closer to 1% in terms of revenue. There was no indication that they are taking a mark-to-market loss on the building due to the high vacancy. Possibly that projected vacancy was already reflected in their balance sheet value for that building – or perhaps a loss will show up in Q4.

Overall, this was definitely a positive report from the REIT. This would also mean that the parent company,  Melcor Developments itself will not be reporting any material mark-to-market loss on the Royal Bank building in its Q3 report next week. Melcor will however likely show lower profit year over year due to slow residential lot sales. What may be more important is what they say about the outlook.

Constellation Software reported Q3 results which were once again quite strong.

Toll Brothers announced it has secured increased borrowing capacity. Toll Brothers’ outlook should be benefiting from lower interest  / lower mortgage rates. On the other hand the fires in California could be significantly slowing their sales in that State.

Today marks the end of fiscal 2019 for Canada’s banks as well as for Toll Brothers. 

Warning – do not open any attachment in an email that you receive from me. I never send attachments to my investorsfriend lists. I use links.

On Tuesday, my email system was attacked when I opened a so-called secure PDF file that appeared to be from someone I knew and trusted. The hacker then sent similar attachments to an unknown number of my email contacts. If you received it, do not open.

On Wednesday, the Bank of Canada held firm on interest rates at 1.75%  while the FED lowered by 0.25% to 1.50%. But the Canada statement was interpreted as signalling a possible cut ahead and the FED statement was interpreted as signalling this may be it for rate cuts.

The Canadian dollar fell on the news. Apparently yesterday was the day to buy U.S. dollars, or at least ws better than today. I was wanting to transfer some Canadian dollars to U.S. but will wait ans see if our dollar rebounds from today’s little decline. 

The S&P 500 ended the day up 0.3% and Toronto was up 0.5%.

Constellation Software was up 2.1%. 

After the close, Starbucks reported a strong quarter with U.S. same-store sales up 6%. This is a stock worth considering.

Apple Inc. also reported after the close and while the revenue growth was modest, the results were apparently better than expected as the stock is up modestly in after hours trading.

The latest rail car loading reports are out. In the U.S. they remain weak, running below the levels of 2018, 2017 and 2016 but there was an improvement versus last week. In Canada there was a sharper improvement and rail car loadings were equal to the 2017 level and well above 2016 but below last year’s level. 

The yield on the 5 year Canada bond fell sharply down 16 basis points today. But, strangely, the rate reset preferred shares mostly did not decline on that news and instead some were up.

Our report on Heineken is updated and rated Weak Buy / Hold at 90.90 euros. Or you can buy in the U.S. as HEINY for U.S.$ 50.55 (these were yesterday’s closing prices). Two HEINY are equivalent to one common share. The stock is not cheap. It may be of interest for diversification. I had added it to the site back in 2016 after touring “The Heineken Experience” in Amsterdam. It should continue to do well long term but does look somewhat expensive at this time.   

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

Apple was down 2.3%. Shopify was down 3.2% after reporting a loss but sharply higher revenue. 

Tomorrow, the FED is expected to cut interest rates by 0.25 while the Bank of Canada is expected to hold interest rates steady.

If so, that supports strength in the Canadian dollar. I am thinking of buying some DLR (effectively buying U.S. dollars) on Toronto to transfer that to the U.S. dollar side of my account and to then make some purchases of U.S. equities. 

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

Restaurant Brands was down 3.7% after “meeting earnings expectations” in Q3 but reporting a reduction in same-store sales at Tim Hortons. 

Toll Brothers was down 2.6%

Rate reset preferred shares rose as the 5 year Canada bond yield is back up to 1.65% which is a good recovery from lows around 1.15% at the start of September.

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

Linamar was up 1.6%. Fed Ex was up 2.6%.

It will be interesting to see if the market reacts positively to the death of the ISIS leader. Definitely a big win for Trump. He’s had a nice weekend.

The market is expecting another FED rate cut this week. 

Numerous earnings reports will be rolling in. 

Our report for BHP Group (formerly BHP Billiton) is updated and rated Speculative Buy for the BBL ADR (American Depository Receipt) that trades in New York at $42.49. It also trades as the BHP ADR at $49.22. The two types of shares are said to be economically equivalent and yet a big discount has applied to BBL for some years. We would favor the BBL. Adding to the confusion these ADRs each represent two actual shares.

BHP is a massive mining company headquartered in Australia but with operations around the world. Its main product is iron ore but it also has large operations mining copper and coal ans also has off-shore petroleum wells. In Canada it is is developing the Jansen Lake Potash mine which is not yet operational. 

Its earnings are inherently volatile and hard to predict. But it does have a strong balance sheet. It also pays a high dividend currently with a trailing yield of 6.3% on the BBL shares. But they vary the dividend up and down somewhat with earnings. For that reason and because it is not eligible for the Canadian dividend tax credit, it should not be bought primarily for the dividend. The stock price is almost exactly unchanged since our update one year ago but it did pay regular dividends amounting to 6.3% of the BBL price and a further 4.8% as a special dividend. As reported in comments earlier this year, I sold out my position in this company at a gain earlier this year.

This stock is probably best suited to those who particularly seek an exposure to a large mining company.  For further comments see our comment of October 16 last year. The stock is reasonably priced at this time but it appears to be facing lower earnings this fiscal year which could certainly send the price lower.

In Thursday’s action, the S&P 500 and Toronto were each up 0.2%.

Shopify was up 8.8% continuing its recent gyrations. 

Visa was up 2.8% and then released yet another strong earnings report after the close.

Linamar was down 2.5%.

After the close, TFI International released earnings that on an adjusted per share basis were unchanged versus last year at $1.04. Apparently analysts expected $1.05. If this stock drops on the news I may look to add modestly to my position. It’s a good long term performer. However, the lack of growth this quarter is another indicator that the economy is softening somewhat.

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

Linamar was up 1.5% and has had a good bounce back from recent lows. 

CRH Medical announced that it has arranged with its lenders to increase its credit lines to $200 million from $100million in a new three year arrangement. They will also reduce their borrowing costs by up 10 1.0% and will borrow at LIBOR (the London Inter Bank Offered Rate) plus 1.25 % to 1.75%. That appears to be a relatively low cost. This would appear to indicate that the lenders have confidence in CRH and that the company is generating good cashflows. They have been buying back shares regularly which suggests confidence on the part of management. On this news, I was tempted to increase my position but upon review my position is already large for such a small cap company. And I do worry that this company could be vulnerable to technological changes that could decrease the demand for colonoscopies. (Their business is almost entirely in providing anesthesia services for colonoscopy procedures). On the balance though, I think the company should continue to do well. 

Statistics Canada reported that wholesale sales fell in August after rising in July.

I have been watching rail car loading reports more frequently. The latest weekly report was out today.

U.S. rail car loadings have continued to weaken. In the latest week they were noticeably below the levels for the same week in any of the past three years. Relatively to prior years this latest week is the weakest all year and the second weakest was the prior week. To see what I mean look at the graph. If you click through to the graph, notice the “radio” buttons to the right that allow you to choose Canada, the U.S. or Mexico and to look at individual freight categories. Canadian car loads were also weak. This latest week was the worst performance relative to the previous years on the graph. But the Canadian car loads do remain above the 2016 levels whereas in the U.,S. they are now below the 2016 level. At least visually, the Canadian situation does not look as bad as the U.S. But then again the percentage drop in the two countries is not clear from the graphs. In any case the lower volumes are indicative of a weakening economy in both countries.

Well, Albertans stayed up late only to find that the election did no go their way.

But the stock market opened as usual and life goes on. The S&P 500 finished the day down 0.4% and Toronto was down 0.2%.

Shopify was down 6.2%. It will take a very good Q3 growth report if this stock is to regain its high this year.

SNC Lavalin got a boost from the election and rose 14%.

Visa Inc. was down 3.2%.

Toll Brothers was up 2.1%.

CN Rail reported earnings after the close. Revenues were up only 4% but adjusted earnings were share were up 11% which is good. However, they reduced guidance for Q4 and were down slightly in U.S. after-hours trading.

Statistics Canada reported sales at food services and drinking places for August. The gains versus August of 2018 were good at 2.8% for Canada and 3.2% for Ontario. For many months now these reports have looked favorable for the likes of Boston Pizza and yet BP and some other restaurant chains have struggled to maintain let alone increase same-store sales. So, I am not sure that this will translate into an actual gain for BP in same store sales for Q3 but this is a positive report. There was no evidence in this report of the slump reported by the owner of Jack Astor’s last week. Perhaps the evidence will show up in the September report. My best guess is that BP will be able to maintain its distribution. But the possibility of a cut certainly remains.

I drove through Melcor’s Jensen Lake subdivision and shopping area today. This is an attractive new community which already has schools open. Melcor has scaled back its land development this year in response to slower sales but this subdivision is still being developed which is positive. The shopping area is developed by Melcor and then the buildings are transferred to the Melcor REIT after being leased out. There was one new tenant open for business and a gas station is under construction. Basically it looks like this shopping area is prospering. I don’t expect any great news from Melcor or the Melcor REIT with their Q3 results. The REIT faces added vacancy of a large office where the Royal Bank has vacated several floors of its former Edmonton regional office. But the REIT should report fairly stable results and Melcor Developments overall will still be cash flow positive.

On Monday, the S&P 500 was up 0.7% and is once again over 3000. Toronto was up 0.25%.

American Express was up 2.0%. I added to my modest position today.

Andrew Peller was up 3.3%.

Statistics Canada reported that investment in building construction was up moderately in August. Even in Edmonton, with the lower oil prices, the commercial building never seems to stop. 

Polls are just about to close here in Alberta as I type this. Should be an interesting evening watching the results. 

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

Shopify was down 5.4%. lulu lemon was up 1.0% to $207.

Over the weekend a new BREXIT deal failed to get passed. Boris Johnson was forced to write a letter to the EU to ask for a n extension beyond October 31. He did not actually want to send the letter and so he followed it up by another letter suggesting they deny his request. Strange days indeed.

There will lots for the market to pay attention to this week including lots of earnings reports. Also BREXIT progress as well as impeachment progress. Never a dull moment. If the saying that truth is strange than fiction did not already exist, it would surely be coined now.

Our report on American Express is updated and rated Buy at $116.74. It has done well since we rated it (higher) Buy on January 19th. The stock price is up 16% since then and this is justified by its earnings and revenue gains. It’s not quite as attractive as it was in January but still looks like a good investment. I have only a small position and I want to add to that. 

VISA is a stronger brand but is not priced as attractively.

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

The market has not pushed Boston Pizza any lower as a result of the distribution cut by the smaller restaurant royalty entity SIR (main brand Jack Astor’s) which announced a distribution cut this weak. I have not seen any analyst comments about it.

Statistics Canada reported a gain in manufacturing sales for August.

I am selling the rest of the BP units in an RRSP account today. I have kept the units I hold in a taxable account. I see a downside risk if they have to cut the distribution. And I don’t hold out much hope of any near-term big upside surprise such as much improved same store sales or a much improved outlook from the company. If there is no distribution cut then the units will likely remain trading about where they are. To date they have used some cash on hand to maintain the distribution despite the payout being a little over 100%. Ultimately, they need to achieve some same store sales growth. And perhaps they will given that the Ontario economy is strong and Alberta is slowly improving. However the remarks from the owner of Jack Astor’s that were in the news yesterday are not encouraging.

In other news there is a tentative BREXIT deal but the U.S. market has not risen on that news.

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

Stantec was up 2.2%. Toll Brothers was up 2.9%.

Linamar was up 2.4%. This was likely related to General Motors reaching a tentative union deal. That’s good. On the other hand Trump said today that there was no problem starting a trade tariff war with Europe since the U.S. can’t lose such a trade war because the U.S imports more from Europe than it exports. That kind of talk is not good for a company like Linamar. Trump has also talked about the chinese agreeing to buy more U.S. agricultural products. If so, that should be a positive for Linamar’s agricultural division. But I suspect it is far too early for farmers to be ordering new equipment.

The Boston Pizza units did not show much reaction to the news today that a smaller restaurant royalty entity (SIR Royalties – whose main brand is Jack Astors) is cutting its distribution by 16.7% after same store sales fell 5.9% in the latest quarter. They complained of a change in customer behavior in the full service restaurant business including more skip the dishes type orders which do not generate much in the way of beverage sales. This seems to have come up rather suddenly. They note that just last year they increased the distribution twice. 

It may be that “the market” does not view the situation at SIR Royalty Income Fund to have much relevance to Boston pizza Royalties Income Fund. I don’t know anything about SIR but I understand from BP that the full royalty is collected on skip the dishes type orders. Also BP Royalties excludes alcohol sales and so any decline there does not directly affect the distributable cash. BP has very little analyst coverage and we may see a delayed reaction tomorrow. As noted below I sold some BP units today to lower my risk. In one RRSP account that had a heavy allocation to BP I sold half the units. I have some also in a taxable account and did not sell in that account.

The latest rail car loading reports were out today. In the U.S. railcar loadings have been weak all year. Early this year they were running below the 2018 levels but above 2017. In the Spring they fell back to about the 2017 level. More recently they fell back to the 2016 level. In this latest week they are noticeably below the 2016 level. Not a good trend!

In Canada, the data had been much stronger with record car loads most of the year but more recently falling back to the 2017 level but still well above 2016 and with this week stronger than last week. 

I am selling as much as half of my BP units today. A smaller restaurant royalty entity that owns Jack Astors has cut their distribution and cited lower sale. I have been worrying about BP needing to cut their distribution due to their payout ratio being around 103%. This latest news increases my fear. 

Markets moved higher on Tuesday. This was likely due to continued optimism about progress on China / USA trade tensions. The outlook for a trade deal is likely to continue to cause volatility in the markets.

The S&P 500 was up 1.0% but Toronto was about unchanged.

Linamar was up 2.8% and FedEx was up 2.2%. Optimism over trade was likely the reason. 

Shopify was up a hefty 5.0% in Toronto catching up to its move in New York from yesterday.

Our report on Dollarama is updated with a rating of (lower) Buy at $47.28. This has long been an extremely well-managed and successful retailer. Usually its shares have looked too expensive. It is probably about fairly priced at this time. It has had a history of outperforming expectations. 

On Monday, the Toronto stock exchange was closed for the holiday while the S&P 500 was down 0.1%.

In U.S. trading, Shopify was up a hefty 4.6%.

In Edmonton, it was announced that Toyota will move its west-end Mayfield dealership into West Edmonton Mall. This will be a very large investment by Toyota and West Edmonton Mall. Toyota certainly continues to have faith that auto dealerships are attractive and profitable businesses. Toyota seems to have big bright relatively new dealerships everyplace I go in Canada. These dealerships are owned by private dealers, not by Toyota. So this  shows strong faith in the business and hopefully that can bode well for AutoCanada’s dealerships as well. Looking up some history, the current owners of Mayfield Toyota bought it when it was failing in 1998 and completely turned it around. Hopefully we can see a big turn around at AutoCanada. New management is trying hard to correct the mistakes of the prior management.

Three large banks report Q3 earnings tomorrow (Tuesday) and that will be a big focus for the markets.

Markets rose of Friday as Trump hinted that some kind of at least partial trade deal with China was pending. Later on Friday he confirmed it was a partial deal and markets retreated somewhat from the highs of the day. 

U.S. markets are open on Monday while Toronto will be closed. As of late Sunday evening futures trades are suggesting a mildly higher opening tomorrow.

On Friday, the S&P 500 was up 1.1% while Toronto was about unchanged.

Stocks gaining included: Apple – up 2.7%, FedEx – up 3.0% and Linamar  – up 3.2% All of these would benefit from a trade deal.

Couche-Tard was down 1.9%. 

On Friday, Statistics Canada was out with a very strong jobs report. I always point out that the jobs numbers are only a statistical estimate based on  sample and therefore inherently subject to an error term. In addition they are seasonally adjusted so that the gain or loss in any month is over and above any change we would expect just based on things like students returning to school and the Christmas rush. While we should take any one month’s numbers withe “a grain of salt”, the strong September number comes on top of strong August numbers and there si really no denying that Canada has created a lot of jobs over the past year. My memory gores back to a time when the unemployment rate was well over 10% in the early 1980’s and you literally never saw a “help wanted” sign anywhere for years at a time at least in my small town in Nova Scotia. So, I marvel at just how good today’s 5.5% unemployment rate is. Yes, there are many who say it does not count people who would like a job but can’t be bothered to actually look for one. I can tell you from personal knowledge that unemployment was truly a LOT higher in the early ’80’s than it is today. Statistics Canada certainly says so. But there will always be those who choose not to believe the government figures. 

Further to the Melcor REIT acquisition. Like all REITs, their build assets are marked each quarter to their best estimate of market value. The REIT is buying a $55 million retail power center. They of course are paying market value by definition. Meanwhile according to their figures the REIT is trading at an “enterprise” (this means counting both debt and equity of about 86 cents on the dollar of market value. If the figures are to be believes, we retail investors can buying into these assets at 86 cents on the dollar versus what institutional buyers like the REIT itself are willing to pay. Normally, I would expect REITs to trade at some small premium to institutional market value.  Overall, a 14% discount to market value is not huge but gives some comfort that the REIT is undervalued. Looking at only the equity value of the REIT units the discount to book value is about 30%. Now it could be that the REIT is over-stating the value of its assets and they really are worth less than book value. But they are supposed to report those figures to the best of their ability. There are never any guarantees but these REIT units seem attractive for a portion of a portfolio. They are not likely about to soar but they should continue to spit off a yield that seems attractive. (Recently 8.75%).

Markets were higher Thursday on (faint) hopes of progress in the China / USA trade talks.

The S&P 500 was up 0.6% and Toronto was up 0.3%.

TFI International was up 3.6%. 

Couche-Tard was down 1.9%. It may be under pressure due to its exposure to selling vaping products.

lulu lemon was up 3.1%.

Given the slow down in global growth and apparently a decline in global trade and given the potential impeachment of Trump, I think the stock market is certainly vulnerable to declines. It always is really, but it seems more so at this time. 

Linamar’s price is already  down a lot and while it looks very cheap it could be vulnerable. They have already telegraphed to some extent that their Q3 report will be weak and their outlook will also be deteriorating. They remain optimistic about the future but the stock market may focus on near-term issues. Progress on trade talks and on the GM strike would be helpful.

I remain optimistic about Toll Brothers as lower interest rates are a positive. 

See also the update on Melcor just below this post.

The Melcor REIT and Melcor Developments have announced that the REIT is acquiring, for $55 million, a retail shopping “power centre” in Grande Prairie which will increase the REIT’s square footage by 9.7%. As part of the deal, Melcor Developments will purchase between $10 and $15 million of units from the REIT (Likely closer to $10 million as it depends on the proceeds from the REITs convertible debenture issue which has apparently already sold out today.)

Overall, I think this is a good development and indicates that Melcor still has faith in the Alberta economy. But there are aspects of the deal that I don’t like. I don’t like to see the REIT issuing units at the current 30% discount to book value. This is partly alleviated by financing the purchase largely with debt. And from the perspective of Melcor Development share owners there is really no issuance of net equity. However the new $40 million (probably will be $46 million with the over-allotment) is convertible at $8.90 which is a 20% discount to the REIT’s book value per share. That likely means a future issuance of REIT units at a minimum of a 20% discount to book value. 

REITs work best when they can acquire new assets by issuing equity at or above book value. In those cases the issuance is accretive to cash flow per unit AND to book value per unit. In Melcor’s case the issuance is accretive to cash flow but dilutive to book value per REIT unit (and more so if the debenture ends up converting at some point).

Still, this is probably a modestly good development for both the REIT and for Melcor Developments. It also indicates that management is active in attempting to grow the business.

Another point: Checking insider Trading a younger Melton family member who runs their U.S. operations sold a modest number of Melcor Development shares on October 1. He has done this a few times before. Disappointing, but maybe he simply needs the cash. Melcor itself has been buying back its meager allowed 1000 shares most days, so that is positive.

FedEx is updated and now rated only Speculative (lower) Buy at $138.39 (Its moved slightly higher at $140.49 as I post this). FedEx has been hurt early and hurt hard by the global slowdown in the manufacturing and industrial sector and the associated trade. They have slashed their adjusted earnings outlook to a drop of 16 to 29% for the current fiscal year ending May 31 2020. And that could worsen if trade tensions further escalate. But they are cutting costs and investing for growth in ecommerce and expect profits to resume growth in the next fiscal year. They also face another possible hit to their pension valuation as interest rates have declined once again. The company looks relatively cheap based on past earnings and is not expensive based on the projected lower earnings. It is possible that the share price is already reflecting the poor near term outlook. But overall given the weak outlook it is probably best to wait for a lower price and/or some sign of improvement including major progress on a China USA trade deal. I hold a very few shares and will continue to hold those and have placed an order to add to that if it happens top drop to $124.

On Wednesday, markets were positive due to some optmisim about the China / USA trade talks.

The S&P 500 was up 0.9% and Toronto was up 0.5%.

Costco was up 1.7%. Then, after the close it reported September same-store sales up a strong 5.6%. That is strong growth. They do not disclose how much of that is due to price inflation as opposed to volume. 

Couche-Tard was up 2.1%. Dollarama was up 2.5%. Linamar was up 2.1%. WSP was up 2.0%.

Boston Pizza Royalties announced its latest distribution – unchanged at 11.5 cents per unit per month. I worry that they may need to cut that to 11 cents or 10.5 if they can’t show some increase in same-store sales. I’d like to see more advertisements from them. The parent company collects advertising fees from the restaurants and does spend it. But wherever they spend it, I don’t see the ads.  I worry that they don’t have any compelling message to bring people in. Searching for news, I see that they have a new partnership with Hockey Night in Canada as way to bring people in to watch the games. 

The latest railcar loading reports were out today. The weak trend in the U.S. continues with carloads below 2018 and 2017 and about equal to the same week in 2016. Canadian car had weakened somewhat in the few weeks and were noticeably weak in the latest week. Petroleum car loads show a sharp decline versus recent weeks. All in all, the carload report is more evidence of a softening economy and especially softer trade volumes.

On Tuesday, the S&P 500 was down 1.6% and Toronto was down 0.6%.

Correspondingly, most of the stocks on our list were down. 

TFI International was down 3.0% to $37.76. The company has been buying back shares aggressively and the shares do appear to represent good value.

CMHC released housing start data for September. Single family starts in Alberta were up 8% although to only 952. The Calgary area was up 37% although only to 383. These figures may suggest that the Alberta market is at least no longer declining which is a positive for Melcor Developments. Year to date,  Alberta single family starts were down 19%.

Statistics Canada released building permit data for August. For Alberta residential permits in August (includes multi-family) were up 1.5% year over year. This indicates stability although at much lower levels compared to peak levels.

On Monday, the S&P 500 was down 0.45% and Toronto was down 0.2%.

Dollarama was down 2.65%. 

Apparently, Alberta is about to announce that it has sold some of its crude-by-rial contract commitments to the private sector. I would have thought the government would have to pay the private sector to take those contracts. Why? Because to the private sector they are only profitable if there is a wide spread between the Alberta price and the American price. But, the more crude by rail that ships, the narrower the discount! Only the provincial government would have been in a position to do large crude by rail shipments at a narrow and unprofitable discount. The overall benefits to the economy would out weigh the losses on the shipments. 

Now the province is cleverly offering to relax its mandated production cuts if the extra production goes out by rail. Possibly this could mean the government will sell some of the contracts without a loss. But I am skeptical, I think if honestly accounted for the contracts will be sold at a loss becasue they are so much more risky in the hands of individual private companies than they were in the hands of the government. Again. this is because the government did not need to make a profit on crude by rail as the added volume and lower differential would have brought in huge revenues in taxes and royalties out weighing the loss in shipping. On top of that the general economic benefits that would be spread across the economy. A government can afford to spend money to support the wider economy. A private company can only afford to spend money to support its own profits. I explained my thinking on this more fully back in March

On Friday, the S&P 500 was up 1.4% and Toronto was up 0.4%.

Linamar rebounded somewhat, up 4.4%. Most stocks were up.

The U.S. added fewer jobs than expected. But the unemployment rate is a record low 3.5%. Virtually, it seems there is almost no one left to hire. The jobs report was taken as a sign of economic weakness and so expectations for further interest rate cuts went up which is generally positive for stocks.

As one comedian put it, the Democrats continue to make inquires to try and prove that Trump did those things that he openly admits to doing.

In can anyone missed it, last weekend I sent a link to our free newsletter.

https://www.investorsfriend.com/newsletter-september-28-2019/

On Thursday, markets started out negative but finished positive with the S&P 500 up 0.8% and Toronto up 0.4%.

Linamar got hammered down 10.3% after indicating that sales were slowing in all three of its categories (auto parts, access – i.e. scissor lifts etc., and agricultural equipment. On top of that, the GM strike is costing it additional sales and profit loses. Linamar may not say anything further until its Q3 results are released. They will likely still be projecting good (although lower) profits in 2020. They may also be facing goodwill write-offs particularly on the big agricultural acquisition made in early 2018. While the company will likely resume earnings growth after a pause, investors heading for the exists could continue to push the price lower. Near-term catalysts for a an increase would be an end to the GM strike and/or significant progress on trade tensions.

Canadian Tire was down 2.7%, Couche-Tard was up 2.0%.

On Wednesday, the S&P 500 was down 1.8% and Toronto was down 0.8%.

Accordingly, most of the stocks on our list were down. The bigger decliners were Apple down 2.5%, BHP Billiton – down 2.9%, Visa – down 2.6%, American Express -down 3.3%, and AutoCanada down 2.9%.

September auto sales for Canada were reported today. August results ahd been up slightly and had been the first increased month in about a year or more. But September was another decline, down 3.7%. Overall, I would not expect a great Q3 report from AutoCananda even though they were growing better than the industry average as as of Q2.

After the close Linamar released some industry sales conditions figures and it seems very clear that they will report a decline, perhaps a large decline, in profits in Q3. It’s hard to say to what extent that is already priced into the stock but certainly the stock seems likely to decline on this news. They are being hit by a softer economy and the trade wars in all aspects of their business. But they did say they are picking up business as some competitors go out of business.

In terms of bargain hunting, I intend to deploy cash only quite slowly. I added a little to my TFO International position today.

The latest rail car loading reports were out today. The smae trend is continuing. That is, the U.S. is recently running lower than any of the past three years. Canada is running below 2018 and close to the 2017 levels but well above the 2016 levels.

Tuesday was a down day in the markets as the S&P 500 fell 1.2% and Toronto was down 1.3%.

With the economy softening, I would be inclined to hold more cash. But I always find it difficult to part with most of the stocks I own and so I have very little that I am willing to sell. Therefore I will likely keep holding and will look to deploy my small cash position slowly if and as bargains arise.

Linamar was down 4.0%. This company faces slower auto sales and also trade issues on auto parts. In addition its agricultural division is suffering as farmers delay spending due to tariff issues. Despite being very cheap in relation to earnings it seems that this stock could certainly go lower before ultimately recovering. Yahoo Finance shows it as trading at 5.26 times trailing earnings and basically the same at 5.25 times forward earnings. That implies that analysts expect earnings to be unchanged in the next year or so. But if that were true, which should it trade at such a low multiple? Perhaps more likely, earnings will decline in the next year. But the company seems confident that it will ultimately continue to grow.

Today marks the end of the third quarter. Soon, the next round of earnings report will start to flow in.

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

Toll Brothers was up 2.4%

TFI International was up 2.7% after announcing that it has authority to buy back up to 7 million shares. This represents a hefty 9.0% of outstanding shares. Many companies get authority to buy back shares buit then buy back very few. TFI has a history of buying back aggressively when they think their price is too low and when they also have the funds to do so. In the past year,  TFI bought back 7.0 million (as of September 18) out of an authorized 8.3 million by September 30. And the 8.3 million had been bumped up just at the end of August from an earlier authorization of 7.0 million shares. The average price TFI paid in the past year was $39.59 and they continued to buy up until September 18, at about that same price. It appears that they have not yet disclosed whether they purchased any shares after Setpember 18.

In last evening’s press release, TFI seems very clear that they view their shares as under-valued. TFI’s management has proven themselves to be very smart. I would take their views on the share price and their buying back activity to be a very positive signal. Our rating on this stock is (higher) Buy at about its current price. I am happy to hitch my wagon to this company and its management for a portion of my portfolio.

I have updated two articles that go into detail on specific ETFs to consider investing in.

The first article covers the relatively new balanced fund ETFs from Vanguard and iShares. These could be especially useful for newer investors and for anyone who wants a more passive, perhaps less stressful, approach. If someone wants to know how to start an investment portfolio, they could do a lot worst than just put a lump sum into VBAL or XBAL or one of the variations around this that are available. 

That article also provides a list of ETF symbols that could easily used to put together a customized balanced ETF. For example some investors might want to customize the fixed income component in regards to the amount of long- versus short-term bonds or perhaps including REITs and preferred shares and GICs rather than strictly bonds. And some investors would want a different allocation of equities between Canada, the U.S. and the rest of the world. 

And for those looking for a much more customized or a-la-carte approach, I have updated my detailed ETF article that provides a wide range of Canadian ETFs that also includes P/E ratios and yields and, in many cases, my thoughts on whether each ETF is attractive at this time. There are tons of links in this article. Financial and High Dividend ETFs were among the ETFs that looked most attractive.

On Friday, the S&P 500 was down 0.5% and Toronto was down 0.6%.

One of the old favorites on this site but no longer on the list, Wells Fargo, was up 3.8% after announcing its new CEO. Apparently he will work out of New York and not have to bother moving to actual headquarters in San Francisco. Which probably effectively means that head office will in substance move to New York. I’m not sure that Elizabeth Warren is done pounding on Wells Fargo yet. 

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

So far, it appears that the market is ignoring Trump’s problems regarding favors from Ukraine. But it does look like those problems are real.

The most notable move in the stocks on our list was TFI International, up 1.9%.

After the close Canadian Western Bank announced that it has approval to buy back up to 2% of tis shares starting October 1. However, I don’t expect them to actually buy back any shares unless the price goes back to about $28. They had authority to buy back shares in recent months. They bought back a few shares in May and June but ceased buying when the price went over about $28.20. They prefer to hang onto their cash and equity capital (two different things, by the way) for potential use in some kind of business expansion.

Checking some other companies: Melcor has bought back their tiny allowed maximum of 1000 shares on many but definitely not all days since they resumed buying on August 9th. They had not previously bought any since the end of March. CRH Medical continues to buy steadily but they only report it monthly so the last month reported was August. TFI International was buying steadily until September 3 but thereafter has stopped buying (except for a very tiny amount on a few days). This may be due in part to the price going over $40 but it may also be that they think the share could get cheaper as the economy softens and/or trade tensions continue. Stantec resumed buying back shares in August after having stopped buying at the end of March. They paid about $28. They have not yet reported September.

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

Shopify recovered some of its recent losses, gaining a hefty 6.9%.

Toll Brothers was up 1.7%. But that was a modest gain considering that the report on new home sales was very strong: “Reports last week showed housing starts and building permits jumped to a more than 12-year high in August, and home resales rose to the highest level in 17 months.” It might be considered that Toll won’t benefit as much because its homes are at higher price ranges. But they also now have lower priced homes as well. And, if the value of smaller or older homes increases then some of those owners find it easier to move up into more expensive homes.

Regarding Couche-Tard. I would not be surprised if its stock comes down somewhat due to all the concern about vaping products. But I am not going to sell on that theory. Instead, I will plan to buy more if it comes down enough.

Markets were mostly negative on Tuesday with the S&P 500 down 0.8% and Toronto down 0.4%. This was blamed on trade tensions. Also, the Democrats moved to explore impeaching Trump – but in this strange world that was not really big news.

TFI International was down 2.8%. I would like to add to my position in this.

AutoCanada was down 2.0%. I bought back a small portion of what I had sold earlier at higher prices (but at a significant loss). This is a risky investment but I did like the progress shown in their Q2 report.

Toll Brothers managed a gain of 1.2%. There will be a report out tomorrow (Wednesday) on the latest U.S. new home sales numbers. It is expected to show an increase.

Statistics Canada reported the July numbers for “food services and drinking places”. Year over year sales were up 2.5% entirely due to inflation. Given there were likely more restaurants than last year, this would mean that same-store sales were likely weak as in maybe 1%. I am following this because Boston Pizza needs to achieve a bit of same-store sales growth in order to maintain its distribution. In that regard, the July figures don’t suggest that BP will have gained much if anything in same-store sales since I believe it has been lagging the market in that regard. So far they keep maintaining the same distribution despite paying out 103% of distributable cash on a trailing year basis. They have some cash reserves that allows this but they need to show some growth in distributable cash per unit in order to get the payout ratio back to 100% or a bit below. My hope has been that they achieve that even if just based on inflation in food prices – also also helped by Skip the dishes sales. And if not, I suspect any distribution cut would be modest. But the unit price would likely react quite negatively to any cut. One thing I don’t expect is any increase to that distribution in the foreseeable future (like the next year or probably two). But meanwhile the yield is 8% which is nice.

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

lululemon was up 3.1%

FedEx was down 2.2%.

Statistics Canada reported that Wholesale sales rose in July and that “the personal and household goods subsector and the motor vehicle and motor vehicle parts and accessories subsector contributed the most”.

Checking the Alberta economic dashboard I see that Alberta’s population rose 1.7% (year over year) in the second quarter of this year. Net migration (from all places outside of Alberta) versus Q1 2018 improved by 40% in Q1 2019 to 10,474. But the vast majority of the increase in population which was about 75,000 new residents was due to births outnumbering deaths.

On Friday, the S&P 500 was down 0.5%. But Toronto was up 0.25% and sits at a record closing high.

Canadian Tire was up 3.35% to $148.82. This is a good recovery from the $133.43 level of our update of last month. The recovery is likely due to analyst reports indicating that the stock was under-valued.

lululemon was down 2.2%. FedEx was down 2.4%. CN Rail was down 1.9%. It seems that the market is worried that the world economy is slowing.

Statistics Canada reported that retail trade was up in July for the first time in three months. But the increase was less than analysts had predicted.

On Thursday, the S&P 500 ended the day unchanged while Toronto was up 0.35%.

Couche-Tard was up 2.4% and has recovered a good portion of its recent decline from its high.

Toll Brothers was little changed despite a report this morning indicating that “U.S. home sales unexpectedly rose [1.4%] to a 17-month high in August for a second straight month of gains, the latest sign that lower mortgage rates are encouraging buyers off the sidelines.”

The Organization for Economic Cooperation and Development (OECD) lowered its outlook for growth of the world and of Canada’s economy for 2010.

On Wednesday, the S&P 500 ended the day about unchanged and Toronto was down 0.2%

The Federal Reserve lowered interest rates by 0.25% in light of potential risks to the economy posed by trade tensions.

FedEx fell 13% due to its poor quarterly earnings report and lower outlook. The disappointing earnings and lower outlook was also blamed, in part, on trade tensions.

Toll Brothers was down 3.7%. That was in spite of a new report that ” U.S. home construction surged in August to the fastest pace since mid-2007 on more apartment projects and single-family houses, a welcome sign for the housing sector that has struggled to gain momentum.” And, “Permits, a proxy for future construction, also increased to a 12-year high. ”

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

Restaurant Brands was up 3.4%. Dollarama was up 2.4%.

Shopify was down 2.6% to $435.67. or U.S. $328.82. That’s actually pretty strong considering the company sold shares today at U.S. $317.50.

After the close, FedEx announced quite weak earnings and a weaker outlook and the stock fell close to 10% in after-hours trading.

On Monday, the S&P 500 was down 0.3% in a mild reaction to the partial destruction of Saudi Arabia’s oil refining infrastructure. Toronto was up 0.4% as oil rose about 10% in reaction to the reduced capacity of Saudi Arabia.

The large cap energy ETF XEG was up 9%.

Toll Brothers was up 5.2%. This was likely in reaction to an influential analyst “upgrading” the stock.

Couche-Tard was down 3.9%. I don’t know if that might be related to the potential that its sales of vaping products might be restricted due to new health concerns. In any case I am not too concerned and would consider adding to my position in this company if the price declines another few dollars.

Shopify announced it will sell 1.9 million class A subordinate voting shares. I did not see a price mentioned. The press release seems to imply that this is a new class of shares (since it said the issue was conditional on the shares being listed on the exchanges, but I don’t think that is actually the case. This move will likely cause a drop in Shopify’s price.

The big news for markets over the weekend was the major attack on the Saudi oil refining. This morning the S&P 500 is down 0.3% which is not a big reaction. Toronto is up 0.4% because oil prices are up a hefty 10%.

The large cap energy ETF, XEG is up 6.8%.

Perhaps unrelated, Linamar is up 2.4%.

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

Toronto hit a new within-trading-day high.

The European Central Bank announced anew round of bond-buying which will keep interest rates lower-than-low in Europe.

Shopify was up for the second day and was up 2.8%.

Visa was up 1.7%. Restaurant Brands was up 1.6%.

Couche-Tard was down 2.0%. The recent health problems linked to vaping and calls to ban flavored vaping and possibly restrict all vaping could be a drag on this company.

Markets were strong on Wednesday with the S&P 500 up 0.7% and Toronto up 0.45%

Canadian Tire was up 1.9%.

Toll Brothers was up 3.2% and then after the close announced a relatively small acquisition of a builder of mostly more moderately priced homes. This was in South Carolina.

SNC Lavelin (mentioned several times but not on our list) was up 4.5%. CIBC has reestablished coverage and Jarislowsky Fraser has announced it has increased its position. It’s definitely a speculative pick.

Costco was down 2.2%.

CN Rail indicates that traffic in Q2 is about flat with last year. This is somewhat confirmed in the latest rail car loading reports. Canada in the latest week was equal to 2018 in volume. But for the U.S. volumes continue to be back to 2016 or 2017 levels in recent weeks. For CN, we might see a somewhat lower stock price ahead. I would welcome the opportunity to buy if it happens to pull back towards $100 certainly. But that may not happen as CN has also increased its freight rates which could offset the flattish volume in Q3. CN will likely tend to continue to do well over time.

Although overall markets did not move much today there was a lot of movement in various stocks. The S&P 500 was almost unchanged and Toronto as up 0.3%.

Restaurant Brands was down 4.2%. Possibly, this was related to Wendy’s announcing it would roll out a breakfast offering and that its profits would decline as a result of start-up costs. Starbucks was down 4.0%.

SNC Lavalin (not on our list but which I have mentioned) bounced up 12.3%. I did not see what news drove this.

Shopify was down 6.2% despite announcing a the acquisition of a fulfillment company. I don’t trade or ever analyse stocks based on momentum but those who do may be asking if the uptrend has been broken.

FedEx was up 2.9%. Toll Brothers was up 2.25%.

Visa Inc. was down 2.9%.

TFI International; was up 2.45% and Linamar was up 2.0%.

All in all, a good day for our stock picks.

Statistics Canada released building permit date for July. Non-residential building permits were up a hefty 21% year-over-year in Ontario. Alberta had a 22% drop in non-residential. There has been a LOT of commercial and multi-family building activity happening in and around Edmonton for years even despite the lower oil prices. But activity is slowing down.

Costco is updated and rated (lower) Sell at $296.05. Basically, if I owned it I would sell at least half of the position at this price or avoid having a very large position. On the other hand it is a great company and although the valuation would suggest sell, another option would be to hold and buy more on a substantial dip.

Everything about the company is great except that it trades at a hefty 38 times trailing earnings. That’s about double the stock market average. Even based on forecast earnings it has a P/E of about 35. Costco will almost certainly grow its earnings per share faster than the market average. So it does deserve a premium P/E multiple. But the issue is whether 37 is just too high. Costco could also once again issue debt to increase its leverage and ROE. And it could declare another special dividend. These things would help support the stock price.

Historically it has been a mistake to sell Costco just because it got expensive. So I am cautious about rating it even a (lower) Sell. But I just could not justify such a high P/E ratio. I’d love to have a chance to buy it a much lower multiple say down towards 26 times earnings – which would still be a premium multiple.

“Couche-Tard“, as the company is often referred to, has been a very long term winner. And, after several years where the share price did not do much, the stock is up about 60% versus a low point in May of 2018.

For quite a few years I thought that declining cigarette sales would eventually be a drag on earnings. Instead tobacco and related products have continued to grow due to sales of vaping products. That’s good for the company although not so good for health. It’s astounding that the western world after years of work to reduce tobacco sales allowed vaping products to become mainstream apparently even among teens. That is not good, but it does benefit Couche-Tard.

In their recent conference call, management discussed many initiatives to increase earnings. In particular they are adopting many ideas and practices from the “Holiday” chain of stores that they acquired not so long ago. I see it as a sign of excellent management that Couche-Tard actively adopts best practices from the many chains that it has acquired. This shows that arrogance has not set in.

Couche-Tard has a goal of once again doubling its financial size in a five year plan that started about 18 months ago. I like their chances of doing so. After its recent rise, the stock is not as attractive as it looked in 2018. We recently rated the stock (lower) Buy at $84.57. It will likely continue to do well over time.

Markets were relatively flat on Monday with the S&P 500 unchanged and Toronto down 0.2%.

Stocks on our list that moved up included FedEx – up 3.4%, TFI International – up 1.7%, and Linamar – up 1.7%.

lulu lemon was down 4.3%, giving back some of its recent strong gains.

Shopify was down 5.9%. That stock is certainly pricing in tremendous growth and future profitability. After the close it announced the acquisition of a fulfillment company. On that news it rose slightly in after-hours trading.

American bank stocks rose sharply today. American consumers increased their credit card spending at a fast rate in July. This is generally seen as a sign of confidence.

Our report on Visa Inc. is updated and rated Weak Buy / Hold at $181.55.

Visa certainly has wonderful economics and is extremely profitable and is growing earnings rapidly. But with a price/earnings ratio of 35, the stock is arguably fully valued. A P/E of 35 seems expensive for a large mature company. At some point it can’t keep growing earnings at numbers like 15%. On the other hand it may continue to do so for a number of years yet as the world continues to move to digital payments. It may be the case that it is better to pay 35 times earnings for an extremely wonderful profit machine than to pay say 10 times earnings for a mediocre company subject to intense competition. This company has been a great investment over the years even when it was trading at a P/E of over 30. Still, I would prefer to wait for a lower P/E before buying or at least before buying any material amount.

Markets were strong on Thursday as the S&P 500 rose 1.3% and Toronto was up 0.8%.

lululemon was up 4.3% and that was before it released a strong earnings report with revenues up 22% and beating expectations on earnings as well and it rose a further 5.0% in after-hours trading.

FedEx was up 3.3%.

Linamar was up 3.7%

Markets were higher on optimism about trade talks with China. The markets are also expected to open higher this morning.

On Wednesday the S&P bounced up 1.1% and Toronto was up 0.3%.

FedEx was up 2.4% and Dollarama was also up 2.4%.

TFI International was up only 0.1%. With the company recently increasing its already very large share buy back program because they think the stock is under-valued, I think this stock will do well. They tend to keep on delivering higher profits and the stock price should follow.

Alimentation Couche-Tard released another strong earnings report and will split its shares two for one. I have been a fan of this company for a long time. It probably can’t grow as fast as did historically but it will grow and it looks like good value at this time. Like TFI they keep on delivering better results almost every quarter. Apparently the good earnings were as expected so the stock may not react much today but it will almost certainly rise over time.

The Bank of Canada left interest rates unchanged yesterday and apparently does not like the idea of cutting so that may change the expectations.

P.S. 8:45 eastern: August auto sales have been reported and were up a very small 0.3% year over year. I believe this marks the first month without a decline in something like a year or more. Fiat Chrysler which is the most important brand for AutoCanada was up 27% although this was an estimated figure. Fiat Chryler sales had declined more than the industry for the last year or more and so this appears to be a good turn around for that brand. AutoCanada has said it likes its Chryler stores. They also said they are not looking to sell anymore dealerships in Canada. But they do have I believe four of the poorly performing U.S. dealerships for sale. They may continue to do more sale and lease-backs in Canada.

Markets were weak on Tuesday with the S&P down 0.7% and Toronto down 0.3%. This was due in part to a decline in U.S. manufacturing activity likely related to the trade war.

Most stocks were down. CRH Medical was down 4.6% despite announcing it was acquiring the 49% minority interest in one of its subsidiaries. CRH has a nice business but as indicated in our report I would think there is some risk of colonoscopies (they do the anesthesia) becoming a lot less needed due to new technologies including swallowed cameras.

I am usually tempted to add to positions on dips but I will likely not do so and instead will maintain my small cash position in case much better bargains emerge.

It looks like Britain is about call an election. The reduced chances of a hard exit from the European Union that was potentially to happen on October 31 is probably good for markets although futures markets for tomorrow are down marginally at the moment.

Autocanada is updated and now rated Speculative (lower) Buy at $8.45.

In their Q2 report recently released there is a lot of improvement. Higher sales and gross profits. It appears that they have turned the corner on losses and should be profitable going forward at least excluding any unusual items and writeoffs. Based on analyst forecast earnings the forward P/E is shown as 6.3 which is attractive if it can be believed. And the price to book value ratio is attractive at 0.62. But on a trailing year basis they were still losing money. The 2018 U.S. acquisition continues to lose money. The new (as of mid 2018) management seems very optimistic. It is even possible that they could get a take-over offer since a group of auto dealers is probably an attractive business for private equity and certain pension funds.

They still face the headwinds of a slower auto market in Canada (but they managed growth in Q2 despite that) and the losses in the U.S. division but the Canadian dealers are profitable and improving.

Given the poor performance of this company (partly due to lower industry sales but mostly due to the former management’s disastrous and inexplicable U.S. acquisition where they paid $132 million for a bunch of money-losing leased dealerships) and given some possibility that their debt and lease obligations will cause problems, I am reluctant to add much to my position (I had sold I believe about half of my position back in March when I rated it Sell at $11.83 which was disappointing having previously thought it was a buy at much higher prices). Still, I may be tempted at this price given the numerous improvements seen in the latest quarter.

On Friday, the S&P 500 was up 0.1% and Toronto was up 0.35%.

Most stocks on our list were up.

I read the conference call Transcript for Canadian Western Bank today. While there are always risks related to the economy, the tone of that conference call certainly seemed very positive to me. CWB is very likely to continue to do well in terms of earnings. And the stock price will follow at some point.

TFI International announced an increase to their already large stock buy back program. TFI management certainly sees the stock as under-valued.

Statistics Canada reported good growth in GDP for June and for Q2.

Markets were strong on Thursday with the S&P 500 up 1.3% and Toronto up 0.7%.

Linamar was up 2.35%. And FedEx was up 2.7%. Presumably both related to more optimism or less pessimism about trade wars.

Canadian Western Bank reported Q3 earnings which really could not have been expected to be much better. Growth around 10%. Credit losses down marginally. The only negative was a slightly lower net interest margin due to lower rates. Also admin costs were up but that was expected. The stock rose only 0.35% despite the markets having a strong day. Basically, it seems that investors are cautious on bank stocks and so CWB remains cheap and I believe attractive.

The bank did say that 2019 earnings growth is expected to be slightly below their medium term target. That could be mostly due to Q2 which had low growth. Overall the tone from management remains optimistic.

Also, they increased the dividend by 4% and that is the second increase this year.

On Wednesday, the S&P 500 was up 0.65% and Toronto was up 0.5%.

Most stocks were up while most of the rate reset preferred shares were down a little.

National Bank reported good results. Hopefully, Canadian Western Bank will as well.

Checking the latest rail car loading reports out today (a good indicator of economic activity) the pattern continues of the U.S. being weaker than last year. Canada has been running at or above last year most weeks (so a record high level) but this week was slightly below the same week last year. Not enough below to indicate any concern.

On Tuesday, the S&P 500 fell 0.3% – probably because the market’s faith that a China trade deal is closer started to wane. Toronto was up 0.5% as oil prices were higher.

Couche-Tard was up 2.1%. This has been a winning company for many years. And they have a five year goal and plan to double their financial results in the five fiscal years ending April 2023. They are now in the second year of that plan. I would like to increase my position in this company over time.

Costco was up a hefty 5.0%. They just opened their first store in China and apparently the crowds were so heavy that they had to close early for safety reasons.

AutoCanada was down 5.7% to just $8.33. There was no news from the company today. I suspect some analysts have basically thrown in the towel on this company. On Friday it had announced that it had done sale and lease back deals on two more of its dealerships and I believe in the Q2 report they indicated that will be the last of those deals. Those deals provide cash but come at the cost of the long-term lease liability. The company had reported a lot of progress in Q2 but still reported a loss due to their U.S. operations. The new management under Paul Antony has taken a lot of actions to correct the past mistakes.

Director, Dennis DesRosiers purchased 10,000 shares on August 13 at $9.72. Dennis has spent decades reporting on Canadian auto industry sales and so I view this buy as a definite positive signal. The only other insider trade this year was that the departing CFO sold all of his 30,000 shares at $11.45 back in March. That was a negative indicator but he was exiting the company.

Also, a report tonight indicates that Mawer New Canada Fund has purchased AutoCanada shares this year as one of only five new investments. Mawer has a very good reputation and so this is a positive development.

Melcor Developments was down 2.2% to $11.65. That puts it at about 37% of book value which seems ridiculously low considering the nature of its assets. The company does have debt but the debt is largely on its investment rental properties which are profitable after covering the interest charges. Melcor’s stock is extremely thinly traded. Its price appears to reflect an extremely gloomy outlook. They will almost certainly sell fewer residential building lots in Canada this Q3 compared to last year. They also sold 140 lots in the U.S. in Q3 last year and due to the lumpy nature of U.S. sales they may or may not sell any in Q3 this year. Profits are likely to be low but positive until home building in Alberta returns to a faster pace. However, they are well positioned to simply hold onto their valuable land holdings. They have significantly slowed their land development activity which reduces capital spending. They continue to profitably develop commercial buildings. This is a conservative company that can withstand the current softer market conditions.

Melcor has resumed buying back shares but is restricted to a tiny 1000 shares per day on the market. But they are also able to do larger block trades and I understand there is one such purchase expected to be finalized shortly.

The outlook for residential home building and Melcor depends to some extent on progress with pipelines and there has been some progress recently.

On Monday, the S&P 500 was up 1.1% and Toronto was up 0.4%. This came after President Trump said that China was ready to negotiate a trade deal. There is probably little reason to believe it but the market of course wants to believe it, so they do, at least to some extent.

Canadian Western Bank was up 2.3% to $30.94. It looks cheap on the basis of price to book value and the P/E ratio. They report Q3 earnings on Thursday. Earnings should be solid unless they have experienced unexpected loan losses. Net Interest Margin may have declined somewhat due to lower mortgage rates (and possibly lower rates on other loans) and the market will be trying to forecast if that margin will fall further in Q4 due to lower loan interest rates combined with deposit rates that have not yet been adjusted down for the possible Bank of Canada rate cut. Analysts will also be looking carefully at any increase in impaired loans or loan loss provisions. So far, CWB management has expressed confidence that they do not expect to see materially higher actual loan losses even if impaired loans rise (they tend to get good recoveries as their loans are mostly secured). Steve Eisman has pointed out that Alberta Treasury Branches has experienced higher loan losses and provisions and he thinks some of the same will apply to other banks. Overall, with low natural gas prices and slower economy in western Canada and with the potential for lower interest rates and higher loan losses, we should probably not expect CWB’s Q3 report to be good enough to push CWB’s price up much (and it could fall) despite its attractive valuation. I would like to see CWB give an update on its move to the more favorable method of calculating its risk-weighted assets. That move in 2020 is expected to boost profits, although they have not yet said by how much.

Ultimately CWB will almost certainly continue to grow over the years and the stock price will follow although not in a smooth fashion.

On Friday, the S&P 500 was down 2.6% after Trump escalated the trade war with China. And Toronto got pulled down 1.3%.

Almost all of the stocks on our list were down. Among the hardest hit were Apple – down 4.6%, and FedEx – down 3.9%, and TFI International – down 3.2%.

Linamar was down 3.7%. It has experienced slower sales in its agricultural division due to the trade wars and this could certainly get worse before it gets better.

It seems to me that Donald Trump wants a trade war. It may be that his strategy is to paint China and many other countries as basically enemies and himself as the right leader to fight these enemies.

The U.S. economy and the stock market has done very well under Trump so far. But there is certainly a risk that the economy is now softening and an even bigger risk (for investors) that “the market” will now decline in the face of the risks of the escalating trade war. So far, the market has bounced back with the next kernel of positive trade news. But that may not last. Over the weekend there was apparently some progress on a trade deal with Japan. I am skeptical that this will be enough to reverse Friday’s negative tone.

The report on Toll Brothers is updated and rated Buy at $35.97. It looks like a Buy based on its numbers. I completed this report this morning before Trump’s tweets sent the price for most stocks lower.

In Thursday’s markets the S&P 500 was about unchanged and Toronto was down 0.3%

Toll Brothers was up 2.0% presumably because the analyst comments were somewhat positive today after they digested the Q3 earnings report and conference call.

With RBC and CIBC having now reported Q3 earnings, I understand both did well on their core Canadian personal and commercial banking. But Steve Eisman (of The Big Short) expects Canadian banks to have to increase their loan loss provisions soon. Given his track record, his comemnts carry weight.

He also mentioned today that he is short Canadian Tire. He thinks Canadian Tire will face bigger losses on its credit card operations. He also thinks that Amazon is hurting and will hurt their business. Again, given his track record and stature his views count and he may be right. On the other hand, Canadian Tire has been very well managed for many years and continues to post good results and to express optimism.

Statistics Canada reported June wholesale trade figures which were better than expected, with a rebound versus a weak May. This chips away at expectations of a Bank of Canada interest rate cut and probably contributed to the government of Canada five year bond yield rising to 1.33% today. That’s a far cry below the nearly 2.50% that it briefly reached last Fall but a nice rebound from 1.20% a few days ago. The table shows that wholesale trade is up 2.3% versus June of 2018.

Markets were up on Wednesday with the S&P 500 up 0.8% and Toronto up 0.6%.

Shopify was up another 4.0%.

Lululemon was up 2.0%,

Toll Brothers fell 4.5% despite reporting Q3 earnings that beat expectations. They also increased their full year guidance modestly and indicated they have increased their home prices in about half of their communities. Q3 earnings and sales were down versus last year but that was expected. Listening to the conference call and looking at the numbers my sense was that the decline of recent quarters is now leveling off. The stock apparently declined due to some concern about lower sales in California. Possibly, the stock will recover a bit when the analysts have updated their reports based on today’s conference call. Or not.

In Alberta, the news is that the Trans Mountain pipeline construction will resume in about 30 days. Hopefully this will provide some boost in employment and confidence for Alberta.

Rate reset preferred shares fell again today despite a large increase in the five year Canada bond yield (which was due to the 2.0% inflation which lowered expectations for Bank of Canada interest rate cuts). Perhaps rate reset preferred share owners are reaching capitulation. Selling even when rate rose as they have been so badly burned over and over. Possibly selling at the bottom? Showing the courage of my convictions I added a bit to my ENB.PF.A position today.

Tuesday was a moderately negative day in the markets.

The S&P 500 was down 0.6% and Toronto was down 0.5%.

Shopify was up 3.6% to $499 and traded above $500 today.

Toll Brothers was up 1.4% to $36.91. It then reported Q3 earnings after the close of $1.00 per share, beating expectations of 83 cents. As expected earnings and sales are running below the level of last year. The company indicated that they are off to a good start in Q4. It’s not clear how the market will react. I would suspect not a whole lot of reaction. The comp[any believes its shares are under-valued and bought back almost 4 million shares during the latest quarter at an average of $35.74. That’s a reduction of 2.7% in the share count.

The Enbridge rate reset preferred share ENB.PF.A is down to $13.86. I thought it was attractive in my last update at the end of June at $15.81. But since then, the FED has lowered interest rates and in general interest rates around the world are lower and talk of negative yields is pervasive. The 5 year Canada bond yield at my last update was 1.38%. Today it is down to 1.20% and it seems it is expected to go lower. At 1.20% the ENB.PF.A would reset on December 1 to (1.20 + 2.66) 3.86% of $25 paying 96.7 cents per year. That would be a yield of 6.96% of the current price of $13.86. I would view that as quite attractive in a world that pays 1.20% on a five year government bond and where the yields on high interest savings accounts and GICs are expected to head lower. And if the Canada Bond yield is way down at 0.50% on December 1, then ENB.PF.A will reset to pay 79 cents or 5.7% on the current price. Assuming there is not much chance that Enbridge will ever fail to pay the dividend it appears that the market is either pricing in an even lower reset yield or “feels” that 5.7% to 6.96% is insufficient. Investors have been continuously and repeatedly “burned” by these rate reset shares. At some point (now?) investors will have driven them down in price to the point where they offer very good value.

Monday was yet another non-boring day in the markets as the S&P 500 was up 1.2% and Toronto was up 1.0%.

Canadian Western Bank was up 5.0% although there was no news from the company. Linamar was up 2.5%, and Toll Brothers was up 3.5%.

The banks will begin reporting their Q3 earnings this week. There may not be much chance that the this push their prices up. Even if the report no material increase in bad loans and if they report good profits,, the markets will likely focus on fears that net interest margins will predecease and that bad loans will increase. And if either of those two has already happened in Q3 then the bank shares would decline.

I suspect Canadian Western Bank continues to do well. But if any of the big banks stumble then that could pull CWB down as well. The point being that even though CWB seems cheap, there may be too much fear in the market (regarding lower interest rates and high bad loans) for the share price to rise much even if its Q3 report is strong. A possible catalyst for CWB would be if they report good progress in their project to move to the more favorable advanced system for measuring their risk-weighted assets and if they start to indicate what the profit benefit of that will be.

Checking insider trading, I notice that Melcor has resumed buying back its little quota of 1000 shares per day. Also their CFO added 400 shares at $12.06 on Friday to hold 2000 shares in her RRSP account. These are both small buys but still nice to see.

After reporting Q2 results, Linamar is once again buying back shares. The CEO also bought shares for her children last week and one other executive added a few shares.

Toll Brothers will report earnings this week. Expectations seem rather low at 83 cents versus $1.26 last year. Hopefully they can beat this muted expectation.

Friday’s action saw the S&P 500 up 1.4% and Toronto up 0.9%. Markets are gyrating up and down mostly based on the latest word on the trade wars.

Notable gainers included CN Rail -up 1.9%, Apple – up 2.4%, FedEx – up 2.1%, TFI International – up 2.3%. Rate reset preferred shares were down once again.

Canadian Tire is updated and rated (lower) Strong Buy at $133.43. The recent slide in the share price seems unwarranted and results in Canadian Tire trading at an attractive price.

On Thursday, the S&P 500 was up 0.25% while Toronto was down 0.2%.

Canadian Tire was down 2.4% to $131.47. I plan to update the report shortly. My initial impression was that its Q2 earnings report was good, but the market obviously found something not to like.

Walmart is not currently on our list. It jumped an impressive 6.1% today after posting strong earnings.

Toll Brothers will report earnings on August 20. Expectations are for 83 cents per share down from $1.26 last year. I’d like to think it will be above 83 cents. For one thing the share count is down by 3% which should help. The U.S. new home builder market has been weak but Toll Brothers is in a strong position with an excellent land position.

Also, later this month the banks including CWB will report. They should do well but if they report that net interest margins are about to be squeezed down again by low interest rates then that would be a negative for them. Higher loan losses are also a possibility. So far, those predicting higher loan losses have mostly been wrong.

WSP Global is updated and rated Buy at $69.82. It has a great history of growth and trades at a reasonable although not particularly compelling valuation.

Compared to Stantec, WSP trades at a higher multiple to trailing earnings and book value. But it has been growing faster. And whereas Stantec is trying to emerge from several years of problems (notably cost overruns on its now disposed of construction services division that it had acquired in an acquisition), WSP has not reported any stumbles despite its tremendous growth by acquisition. Stantec also disappointed analysts in the latest quarter by reporting that it had been slower than planned in reducing admin costs and in admitting that it had not been closely managing such costs for some years.

Stantec, perhaps offers some added upside if it has now put its recent problems behind it and can return to the good graces of analysts.

For historic reasons, (i.e. I have been following Stantec for 20 years) I own Stantec but not WSP. If I were investing today, I would buy some of each rather than only Stantec.

On Wednesday, the S&P 500 was down 2.9% and Toronto was down 1.9%.

Market sentiment seems to be on a hair trigger with stocks rising or falling materially each day depending if news developments are considered bad or good.

The fact is that being invested in equities is never for the faint of heart.

Some of the more notable decliners include: FedEx – down 3.4%, Wells Fargo (no longer on our list) – down 4.3%, Bank of America (also no longer on our list) – down 4.7%, Amazon -down 3.4%, Visa and Amex both down 2.9%, Costco -down 2.9%

When markets decline it is never clear if it is a buying opportunity or if it is just the beginning of a larger drop. If I were “sitting on” a lot of cash I would be tempted to add to positions. But I would also try to remember that there should be no hurry to deploy cash.

Rate reset preferred shares were pounded down again. I look at the Enbridge ENB.PF.A. It’s down to $14.37. It will reset on December 1 and at the current 5 year Canada bond rate of 1.19%, the dividend would drop from $1.10 to 96 cents. That’s a yield of 6.7% at the current price. Assuming the Canada bond yield remains 1.19% on December 1, 2019 then over the next 5 years the Canada bond would pay out $11.90 per year per $1000 invested or a total of $59.50 over five years. But then it would mature at the $1000 face value. ENB.PF.A barring insolvency of Enbridge would pay out $67 per year per $1000 invested at $14.37 for a total of $335 over the five years. But what would ENB.PF.A be trading at in five years? It seems to me that if the Canada bond yield were still very low then ENB.PF.A should be trading higher since its dividend of say 96 cents per year would be attractive. And if rates rise then the reset yield on ENB.PF.A would rise. And ENB.PF.A would have to fall by about 27% at the end of five years before it would under perform a 1.19% Canada bond.

The market repeatedly teaches that there are no guarantees on the value of rate reset shares. But If I had cash and was looking for yield I would consider a including a number of rate reset shares.

CWB.PR.D trading at $25.40 has four and a half years to go paying $1.50 per year or 5.9% and then will reset at a hefty 4.04% above the five year Canada bond or it may be called in at $25 at that time. Either way, that seems attractive. Buying ENB.PF.A today involves the risk of where the Canada bond yield will be on December 1. And with negative rates in the news it certainly could be lower than the current 1.19%.

Overall, a small group of rate reset preferred shares could be selected that would yield over 6% and with the reset dates somewhat spread out over time. In our world of extremely low interest rates, 6% is becoming very attractive.

With prices down today, I bought a very small amount of lululemon. I don’t rate it a buy and will wait for a lower price before adding to this small position. I bought it partly because my family shops there.

The latest rail car loading reports out today, are similar to last week. Canada still running slightly above 2018 levels. The U.S. running above 2016 levels but noticeably below 2018 and even below 2017.

The CEO of Melcor Developments, Darin Rayburn bought 1000 shares today at $12.31. It’s a small purchase but it is with his own money and I would consider it to be a small positive signal. Note too, that lower interest rates tend to push up the market value of commercial rental buildings. The impact on the value of Melcor’s lands should also be positive with lower interest rates but those values are affected by many other factors including the state of the economy and the growth of the communities where it owns land.

Markets rebounded on Tuesday after it was announced that the new 10% September 1 U.S. tariff on $300 billion of Chinese imports would be delayed until December for most consumer goods.

The S&P 500 was up 1.5% and Toronto was up 0.7%.

Linamar recovered 4.4%. Apple was up 4.2%.

Most rate reset preferred shares were up somewhat as the 5 year Canada bond yield rose from 1.20% to 1.25%.

Monday was a negative day in the markets with the S&P 500 down 1.2% and Toronto down 0.6%.

Rate reset preferred shares were mostly particularly hard hit. This was due to the plunge in the five year government of Canada bond yield to 1.20%. It had started this year around 2.0% and had been as high as 2.5% in the Fall of 2018.

For example ENB.PF.A fell to $14.73. It will reset on December 1 at the Canada five year yield plus 266 basis points. If the Canada bond yield is 1.20% that would mean a reset yield of just 3.86%. But that would be 3.86% of $25 or 96.5 cents. That would make for a yield of 6.55% on the $14.73 price which is actually a very good yield in a world of 1.2% five year bonds. If the five year bond falls all the way to 0.50% on December 1 then this pref would reset to pay just 79 cents per year or 5.36% on the current price. That’s also not a bad yield.

ENB.PF.A has been a terrible investment over its life based on its market price decline. Investors, many times bitten, are now many times shy.

Various rate reset preferred shares have to be looked at on their own merits. Some have far higher reset spreads than this Enbridge pref. Newer issues and those that have recently reset have close to five years before they will reset again.

At the moment there are short term high interest accounts that pay 1.6% to 3.0% or more. These have no risk of a market decline and may be more attractive than some of the rate reset shares. But given the lower bond yields, I would expect the rates paid on such “high interest” accounts to head lower, perhaps much lower, very shortly.

Very low and even sometimes negative yields on government bonds are indicative of serious problems in the global financial system.

On another topic, CanFor is being taken private at a premium of about 70% to the recent stock price. This illustrates that stocks can trade quite a bit lower than the fair value that would be paid to acquire the entire company.

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

Linamar was hammered down 8.1% (see update). I will be interested to see if the analysts lower their forward earnings estimates. According to Yahoo Finance, the forward P/E is just 4.4.

AutoCanada recovered 11.0% as it reported improved sales and EBITDA. The results are still far from good, but it is an improvement.

Linamar is updated and remains rated Strong Buy, now at $37.92. It is in a period of declining earnings. But its valuation seems extremely low in relation to earnings and book value. The near-term stock price is dependent on how trade tensions evolve.

Given the lower price , I would expect management to probably increase the volume of share buy backs. They have been buying back a modest amount of shares in recent months. The dividend is very small. The company is well positioned to increase the dividend if it wanted to but there has been no indication that they plan to. They have a relatively modest debt level and are paying that down. This leaves them well positioned to easily survive the industry slow-down and to make whatever investments they deem appropriate.

Stantec is updated and rated Buy at Canadian $28.50 and U.S. $21.56.

The market was disappointed with its Q2 earnings report that featured good revenue growth but also a decline in adjusted earnings of 9.5%. The company blamed this on a delay in implementing its planned cuts to admin costs. Overall, their explanation was confusing and not well received. It appears that the company is admitting poor management of its admin costs going back some years. But they indicate that more decisive action has been taken as of Q3. Overall, it appears that Stantec has resumed growing earnings after several years of dealing with problems in its now divested construction services division. Unless there is a material slow down in the world economy, Stantec should report higher earnings over the next year .

Never a dull day in the markets it seems…

S&P 500 was up 1.9% and Toronto was up 0.9%.

Shopify was up 4.3%.

Boston Pizza Royalties Income Fund reported earnings before the open. Same-store sales subject to the franchise fee (excludes alcohol) were basically flat (down 0.3%). Distributable cash per unit was basically flat (up 0.1% helped out by some unit buy backs in December). Trailing 12 month payout ratio remains of concern at 103.3%. So, basically they are treading water. They indicate optimism that same-store sales can grow with advertising and menu price increases. I worry that they may have to cut the distribution a little. The yield at almost 8% remains attractive especially as interest rates are falling once again.

Stantec was down 4.7% for the reasons I mentioned yesterday.

Canadian Tire reported earnings before the open with normalized earnings per share up 13.7% and same-store sales growth of a respectable 2.2%. … and the stock fell 4.8%. The reason for the decline was likely their announcement that they will acquire the 65 store chain Party City for $174 million. I don’t know why the market would react so negatively to this. Canadian Tire now has a very good history of acquiring other chains successfully (Primarily Mark’s and the former Forzani sports stores). If I had sufficient cash, I would have bought more Canadian Tire shares today. I did in fact buy a few in an account I manage for a relative.

AutoCanada reported earnings after the close. They tout a lot of improvements but there was still a net loss and so we shall see how the analysts and the market react tomorrow.

Also, after the close, Linamar reported earnings. They tout good cash flow and improved market share but earnings (not unexpectedly) are down versus last year but still nicely positive. Again, we shall see how the market reacts.

Restaurant Brands announced that a major share holder, (presumably its controlling owner) will sell 20 million shares in a public offering. i suspect that this means the share price will decline on Friday.

I plan to go through the various earnings reports and update several of the reports in the next week or so.

On Wednesday, the S&P 500 was down most of the day but ended the day up 0.1%. Toronto was up 0.7%.

Restaurant Brands was strong with a 3.6% gain in Toronto and 3.4% in New York.

Rate reset shares were lower due to the declining 5 year Canada bond yield rate.

CRH Medical was up 3.8%.

After the close, Stantec reported earnings that were lower than expected. They blamed it on higher than anticipated admin costs saying that planned staff reductions in that area were delayed. But it was not clear to me why that made the admin costs (as a percentage of sales) higher than last year as opposed to simply higher than budgeted. Analysts may be upset that the company did not achieve its planned cost reductions. While their adjusted earnings per share at 50 cents would still amount to $2.00 for a P/E of 15, which is not bad, and while revenues were up, the market will likely “punish” the stock tomorrow for the disappointment.

Also after the close, Costco reported yet another good month of comparable same-store sales – up 5.1% in July. Slightly lower than recent results but still very good.

I believe Boston Pizza Royalties Income Fund reports tomorrow. I have said a number of times that I am worried that they might have to cut the distribution unless same-store sales grow.

On Tuesday, the S&P 500 had a partial recovery from yesterday’s losses and was up 1.3%. Toronto, playing catch-up, was down 0.75%.

Some stock movements of note included: Canadian Tire- down 2.1%, TFI International – down 2.6% (I was happy to grab a few more shares of this excellent company with the decline), Linamar -down 3.2% (which seems awfully cheap but it gets hit with trade war fears as well as concerns about slower auto sales), Melcor down 3.2%.

It seems that the market has a hard time dealing with cyclic stocks like Melcor and Linamar. The fact that Melcor’s book value is some 150% higher than the stock price and that those assets are solid seems to count for nothing at this time.

On Monday, Canadian markets were closed while the S&P 500 declined 3.0% due to Trump’s escalating trade war with China. A 3% decline in the U.S. markets is not a huge deal considering all the recent gains. Obviously, the declines could continue. The Canada market will almost certainly play catch-up to the downside tomorrow. Market declines always have a silver lining in terms of improved buying opportunities.

Some of the decliners today included: Apple -down 5.2%. FedEx down 4.0%. Toll Brothers – down 2.7%, and Amazon – down 3.2%.

TFI International is updated and rated (higher) Buy at $39.69. Based on valuation I would have rated the company a Strong Buy. But the company does see some softness in the outlook. I believe a rating of (higher) Buy is conservative. I just listened to the conference call and was once again extremely impressed with the CEO and his constant focus on profitability and cost control. I plan to add to my position on Tuesday (and the price will likely be down given the U.S. market decline today). I would add even more if I had the cash available.

Markets fell on Friday probably due to Trump’s escalating trade war with China and disappointment that the FED did not promise more interest rate cuts.

The S&P 500 was down 0.7% and Toronto was down 0.6%.

Restaurant Brands was one of the few gainers. It was up 6.1% after releasing Q2 earnings that were better than expected. See our update on that company.

Melcor was down 4.2% to $12.65 after releasing (as expected) weak Q2 earnings but after also (unexpectedly) cutting the dividend from 13 cents to 12 cents. The number of shares traded was low as usual at less than 9,000 shares. The daily average is 3,500 shares which would represent an annual turnover of 2% which is incredibly low. Book value per share is $31.76. Despite a very soft market for home building lots (which is expected to continue) they did manage to sell 106 lots in Alberta Q2. This was down from 144 in Q2 last year. Their investment properties remains stable and brings in reliable income and development of new investment property buildings is continuing at a good pace. These two divisions allow the company to remain profitable and cash-flow positive despite the much softer housing market. There were no lot sales in the U.S. where lot sales tend to be done in large infrequent batches. There will likely be some U.S. lot sales in either Q3 or Q4.

Melcor is a discounted “asset play” in that its shares trade at 40% of book value and the assets are solid consisting largely of land (which unfortunately generates no income until sold) and the income investment properties. It seems that the controlling family ownership prevents other companies from taking over Melcor in order to basically buy these hard assets at a huge discount. The shares may continue to languish well below book value until and unless earnings improve sharply. Given this discount, I could not resist adding a few more shares to my position although I already have really too much exposure to this company. We cannot count on Melcor’s management to do anything to to boost the share price such as by doing a substantial share buy back. They are very conservative and will likely hang onto cash and wait for earnings to improve. Perhaps progress on the pipeline front will result in a resumption of stronger housing demand. Despite the softer economy, Alberta’s population increased by 1.7% or about 75,000 people in Q2 mostly due to births far exceeding deaths. In Q1 the net immigration was 10,000 people.

The next update will be for TFI International. Its stock price has fallen despite strong earnings growth. Trading at a P/E of 10 and it has been growing strongly. I will be adding to my position.

Having recently looked in detail at Starbucks and at Restaurant Brands, I wanted to look at some of the big similarities and differences between the two businesses.

Both are in the quick-service food and beverage industry with tens of thousands of locations world wide. There are almost 31,000 Starbucks while Restaurant Brands has over 26,000 locations of which 69% are Burger Kings, 19% Tim Hortons and 12% Popeyes. Starbucks of course is mainly selling coffee as sales of a typical store are 74% beverage and just 20% food and 6% other.

Starbucks concentrates almost exclusively on its one brand (its other brands include Teavana and Seattle’s Best Coffee). Restaurant Brands has its three current brands and could acquire other restaurant brands over time. Therefore Restaurant Brands may grow somewhat by acquisition while Starbucks will grow almost exclusively organically. The Starbucks brand is known and recognized globally. Burger King is well known but is not close to the global leading brand that Starbucks is. Tim Hortons is not well known outside of Canada and some parts of the U.S. Popeyes is not well known outside of the U.S.

Both companies plan to continue to expand internationally by seeking partners or master franchise arrangements that involve hundreds or even a thousand or more locations.

Their franchise models differ greatly. Restaurant Brands has almost no company-operated locations whereas half of the Starbucks are company owned (and the vast majority in Canada are company-owned). For Restaurant Brands many or most locations in North America are owned by people who own just one or a few locations. Some Burger Kings are owned in very large groups but most are not. Outside of North America, Restaurant Brands partners with with companies that own many locations perhaps even all the locations in a given country. Starbucks has very few one-off type owners in North America. It is not a traditional franchise model. Instead they partner with companies that own many locations. And outside of North America that is even more the case.

Starbucks leases virtually all of its store locations and does not own them. In contrast, many Burger King and most Tim Hortons locations are owned by the company and the franchisees pay lease rents to the company.

Restaurant Brands in the case of Tim Hortons (but not Burger King or Popeyes) acts as wholesaler in selling coffee and many supplies and even equipment to franchisees. This does not appear to be the case for Starbucks.

Geographically, Restaurant Brands gets a high 56% of its revenue from Canada. This is due to collecting rent and providing wholesale supplies to Tim Hortons which results in far more revenue per location for the company as compared to Burger King and and Popeyes locations. 33% of its revenue is from the U.S.A. and the remaining 11% is spread across about 100 countries. In contrast, Canada would represent probably less than 10% of revenue for Starbucks and the total for the U.S.A alone is 70% with the other 30% coming from all other countries combines.

The balance sheet and debt leverage of the two companies is quite different. Starbucks has grown organically and most of what acquisitions it has made involved buying back non-company-operated stores. As a result purchased goodwill and similar intangibles represents “only” 25% of its assets. Restaurant Brands purchased its three brands with the result that purchased goodwill and similar intangibles represents 75% of its assets. Both companies are worth far more than the book value of assets. Debt finances 57% of the assets of Restaurant Brands while Starbucks appears similar at 52%. And Starbucks now has negative book equity due to share buy backs. But when it is considered that Restaurant Brands has vastly more goodwill and intangibles then Starbucks is far less leveraged in terms of debt versus market value. Restaurant Brands’ debt is 25% of the value of its enterprise value (book debt plus market value of equity). Starbucks’ debt is only 9% of its enterprise value (book value of debt plus equity). In terms of interest coverage ratios, Starbucks is far stronger.

Starbucks has been buying back vast amounts of its shares – partly because it came into a wind-fall of $7 billion by selling distribution rights for grocery stores product sales to Nestle but also by recently using large amounts of debt to fund buybacks. Restaurant Brands bought back only relatively few shares in recent quarters.

The above information may or may not be useful in evaluating whether the shares of the two companies are attractively priced but it does provide a description and comparison of the two.

Restaurant Brands is updated and remains rated Weak Buy / Hold now at U.S. 77.22 or Canadian $101.02.

This was only added to our list in late July but is now updated for its just released Q2 earnings report. Q2 has strong same-store sales of 3.6% at Burger King and 3.0% at the far smaller Popeyes chain. But Tim Hortons was almost flat at 0.5%. Due mostly to added Burger King locations, revenues per share were up 5.4% and earnings per share were up 6.9%. These are god numbers but not that great given the trailing P/E ratio of 32. The stock could continue to do well driven by international expansion. But it is expensive and so I would prefer to wait and see if there is a pull-back before adding to my small position in this stock.

Markets fell on Thursday after Trump escalated his trade war with China announcing new 10% tariffs on most remaining Chinese goods starting September 1. This will be for most of the goods that he has not already imposed tariffs on.

Stocks that fell on this news included: FedEx – down 4.2%, Linamar – down 4.25%, and Apple – down 2.2%.

Canadian Western Bank was down 3.6%. This may have been related to lower oil prices. Banking has remained very profitable but the market apparently fears loan losses.

TFI International was down 3.3%.

In better news, CRH Medical was up 12% in Toronto, although only 5% in the U.S.

After the close, Melcor released Q2 earnings. As expected, revenues and earnings were weak. But they did manage to report a profit and funds from operations per share were higher than last year although down versus 2017. Annoyingly, they cut the dividend by 1 cent to 12 cents per quarter. They have had a history of adjusting the dividend down in lean years. Melcor noted that its investment properties business continues to grow as does its property development division. They expressed confidence that they can deal with the weaker lot sales but they also indicated that residential building lot sales in Canada will remain weak until higher job growth returns to Alberta. It seems to me that the stock price has already more than reflected this scenario.

Desrosiers automotive reported vehicle sales for July. They were down 1.0% which is actually not bad considering that Q1 was down 4.1% and Q2 was down 6.4%. Fiat Chrysler was up 19% which is the first increase after at least a year of significant declines for that brand. This report is good news for AutoCanada given its heavy concentration of Fiat Chrysler dealers. Perhaps it will be able to report that Q3 is starting off well. But I expect its Q2 report to contain more bad news.

Our report on Starbucks is updated and rated Weak Buy / Hold at $95.38. Normally, I would not rate a mature company like this as high as even hold give the P/E ratio of 35. But low and going lower interest rates do support high P/E ratios. And Starbucks is one of the best-known brands in the world. The company can license the brand in new countries with its partner making the investment and Starbucks simply collecting a licence fee. Also, it should report earnings growth of perhaps 15% in its next quarter due in part to a large reduction in the share count. And it may continue to buy back shares aggressively.

This stock is up a surprising 81% since it was added to this site rated Buy on August 24, 2018. Earnings growth supported some of that increase but much of it came from a large increase in the P/E multiple that the market was willing to pay. It is definitely not the “Buy” that it was last August.

On Wednesday, the S&P 500 fell 1.1% after the FED gave the markets a 25 basis point interet rate cut but apparently did no promise firmly enough to do more of the same in future. Toronto was down 0.4%.

Canadian Western bank was up 3.9% after lenders Equitable Bank and Home Capital reported strong earnings in Q2. CWB has an alternative mortgage division which is presumably also doing well. CWB and the large banks reached the end of their Q3s today and will report probably toward the end of August.

AutoCanada rebounded 4.1%.

Penny stock Ceapro was up 8.5% to 44.5 cents.

After the close, CRH Medical reported Q2 earnings. The report looked good with higher revenues and profits. However the EBITDA margin was down somewhat so the market may focus on that rather than the good aspects of the report.

Tuesday was a moderately negative day with the S&P 500 down 0.3% and Toronto down 0.2%.

Most stocks that I follow were down a little.

Toll Brothers however was up 2.1%. I don’t follow lumber prices but I saw where they are down. That should be good for Toll brother’s profit margin. Their next earnings report will be late August. While many stocks are “priced for perfection”, Toll Brothers appears to be priced for something closer to a disaster. It is trading at 8.6 times forward estimated earnings and at 1.07 times book value.

The Melcor REIT released earnings after the close. It was about as expected with revenues stable but adjusted funds from operations down 4% year over year but up 3% versus Q1. The occupancy rate is 89%.

Tomorrow, the market will focus on the expected FED interest rate cut.

On Monday, the S&P 500 and Toronto were each down 0.2%.

TFI International was up 4.1% probably because analysts further digested its Q2 results from last week and liked what they saw.

AutoCanada was down another 3.1% to $8.82. With the recent weakness it almost seems as if some bad news about the upcoming Q2 release has leaked out. Then, after the close AutoCanda announced that its creditors have agreed that its lenders have agreed that its maximum permitted funded debt to EBITDA ratio can stay at the temporarily higher limit of 4.5 for another nine months after which the maximum gors back down to 4.0 times. It’s hard to interpret the significance of this. To the extent that AutoCanada has not already maxed out its credit lines then this means it has a bit more borrowing room. Does it imply a sort of show of faith by creditors? I don’t know that it does since they may not have had a lot of choice. It could be seen as bad nes in the sense that it means that AutoCanada’s EBITDA is not going to increase fast enough to bring the ratio of Debt to EBITDA down to 4.0 very soon. Overall, given the recent problems at AutoCanada it would probably be safer to assume that this is not good news. At best it can probably be considered neutral news.

Meanwhile, I am working on the update for Starbucks. It is interesting to see the different model versus Restaurant Brands which I will elaborate on. Starbucks looks quite expensive. It had a burst of increased traffic per store (strangely in all three of Americas, Europe and China / Pacific) in its latest quarter after a number of quarters of little traffic growth (but some ticket size growth -possibly related to inflation). I am not sure if the market expects this traffic growth per store to continue. Or the optimism may be based on accelerated international growth.

Markets were higher on Friday as the S&P 500 rose 0.7% and Toronto rose 0.3%.

Aecon jumped 9.8% after reporting earnings. This company takes on risky fixed price construction contracts but has done well. That’s in sharp contrast to SNC Lavalin’s recent experience and Stantec also struggled when it got into that business through a large acquisition a few years ago and ended up divesting that business.

Starbucks surged 8.9% to $99.11 after releasing its latest earnings. This will be our next update. This stock is up a remarkable 88% since it was added to this site last August rated Buy at $52.75. I certainly never expected such a large established company to jump 88% in a year. The forward P/E ratio is 32 and the trailing year P/E is 35. Those levels have normally been considered unsustainable for the long term. But with interest rates on U.S. 10 year government bonds at about 2% and potentially set to fall and/or not rise for the foreseeable future, there is an argument that a stable earning company with some growth is not that expensive at a P/E around 30. And Costco as an example has maintained a P/E around 30 and higher for quite some time. Still, I think it is risky to assume that the P/E ratio will stay so high. I will be updating the report shortly and look forward to reading Starbucks’ financial reports to try to understand what could justify this stock having doubled in price since one year ago today.

TFI International was up 3.5% after releasing earnings. In a most unusual move for Canadian companies, they have not yet posted their full earnings release with management discussion and financials. I plan to update our report soon when that information is released.

AutoCanada was down 3.2% to $9.10. Hopefully this is not due to some people being aware of what their Q2 report might contain. I have discussed the many problems that this disappointing company is dealing with. My hope is the the new CEO, Paul Antony, who took over last Summer will be able to show that better times are ahead. I do not expect that Q2 will have returned to acceptable profitability and it could very well be a loss and more write-offs.

The market this week is eagerly expecting a rate cut from the FED and (the market hopes) promises of more cuts to come. In addition there will be earnings reports and Trumps latest tweets for the market to react to.

Restaurant Brands which owns Tim Hortons and Burger King and Popeyes and trades in Canada and the U.S. under symbol QSR is added to our list. This company definitely has reliable cash flows and will likely continue to grow. But it is also quite expensive with a P/E ratio of about 31. And it is highly debt leveraged. On a valuation basis (in isolation) it should be rated Sell. But given its growth plans it may continue to do well. I may be stretching things a bit to rate it as high as Weak Buy / Hold but that is the initial rating. I am buying a very small initial position. This company along with many others trading at high P/Es will be vulnerable in a stock market correction.

Owning at least a few shares of Restaurant Brands may be of particular interest to those who are frequent customers of one or more of their brands.

The report contains a lot of detail about the company. 

I am buying in the U.S. portion of an RRSP account partly because the dividend is paid in U.S. dollars.

If buying in a taxable account note that although it is registered as a Canadian company it is more of a U.S. company in substance and most of its growth is outside of Canada. As far as currency exposure, that does not really change at all whether you buy in Canadian dollars or in U.S. dollars (other than you can avoid the fees to translate the dividend into Canadian dollars each quarter). The company appears to indicate that Canadians are not subject to a withholding tax on the dividend even if they buy the shares on the New York Stock Exchange in a U.S. account.

The dividend is an eligible dividend for Canadian tax purposes (qualifies for the dividend tax credit).

Markets took a little rest from their gains on Thursday as the S&P 500 declined 0.5% and Toronto was down 0.7%.

AutoCanada was down the most as far as the stocks on my list – down 3.3%. Nothing else declined by a notable amount.

After the close, TFI International reported Q2 earnings. Revenues were up only 2% but adjusted net income was up 19%. And they announced authorization to slightly expand their large share repurchase program from 6 million shares to 7 million. They are serious about this and have already repurchased 5.6 million shares in the past 9 months at an average cost of $39. I would expect TFI to be higher on Friday based on this earnings report.

Aecon also reported Q2 results showing strong growth.

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

CN Rail was up 3.3% after releasing a strong earnings report.

lululemon was up 1.7%

Aecon was up 1.5% possibly benefiting from SNC getting out of the fixed price business which Aecon seems to do well on.

Canadian Western Bank was up 1.7%.

Couche-Tard was up 1.0% after announcing it will acquire 10% of a cannabis retailer for a $26 million investment. The transaction is relatively small for Couche-Tard and is somewhat complicated. It is reminiscent of some of Buffett’s acquisitions in that it is in the form of convertible debentures and options such that Couche-Tard will initially earn 8% on its investment and Couche-Tard could end up owning 50.1% of the company if all options are ultimately exercised. We may see more reaction in the stock tomorrow as analysts digest the move.

Constellation Software was up 2.8%.

Going the other way, BHP was down 4.1%

I will be adding Restaurant Brands to our list very soon. However, I am not sure it merits a buy rating. It trades at a high price earnings multiple and is highly debt leveraged. On the other hand it has stable income streams and is growing. Since so may Canadians are Tim Hortons customers and since it is so obviously busy, its owner, Restaurant Brands, seems like a reasonable company to take a look at it. Actually I first had Tim Hortons on this site back in 2004 and into 2006 by having Wendy’s which then owned it and it was a good stock to own. After that we had Tim Hortons on the site when it traded stand alone. Tim Hortons was ultimately up over the period it was on this site but it was volatile.

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

Linamar rebounded 3.6% probably due to potential progress on trade talks between China and the U.S.

FedEx was up 2.5%.

SNC Lavalin got hammered down another 9.6% as investors bail. Presumably suitors will be lining up now to see what businesses SNC is willing to sell at fire sale prices. I believe they are scheduled to close the sale of a portion of their highway 407 Toll road. That might provide some support to the share price. In any case the stock remains highly speculative. So far, the woes at SNC have not dragged down the price of Stantec or WSP.

CRH Medical was down 2.6% to $3.46 in Toronto. On Monday it had announced its latest small acquisition which to my mind is more evidence that their growth-by-acquisition strategy remains intact. The company continues to be active buying back shares. Purchases in June were at prices from about $3.60 to $3.93. This suggests confidence on the part of management that the shares are under-valued. It also suggests that the company has sufficient cash adn cash flows to make these purchases.

CN reported record profits for Q2. CN has been a consistent winner for many years. They keep moving more freight without having to add to their route miles. They have been efficient at trimming costs. Other than sometimes looking expensive I don’t think I have had a bad thing to say about this company in quite some years or almost ever.

Statistics Canada reported sales at food service and drinking places for May. They were strong, rising 4.7% year over year. Prices were up 2.5% suggesting that volume was up about 2.2%. Average same-store sales growth would be somewhat lower as the number of restaurants in Canada presumably increased in the past year. I worry that Boston Pizza has lagged the full service restaurant industry for (from memory) about the last year. I understand that Pizza chains have lagged but Boston Pizza is a lot more than Pizza. BP needs to report increased same-store sales soon or they are going to have to make a small cut to the distribution as they are paying out around 103% of distributable cash per unit. As of Q1 they said growth in Ontario was strong but Alberta was lagging. Alberta probably continued to lag in Q2. For one thing Alberta (at least around Edmonton) had way more rainy days in June than is typical and that will not be good for the patio business. (July has been just as bad but that is Q3). Hopefully the Raptors run gave a boost in May and early June. It’s never easy to predict what will happen. As mentioned, I reduced my position recently. You may have seen they have been doing some T.V. advertising. They always advertise but lately it was in places other than television. At this point I would be satisfied if same-store sales were at least not negative and if they leave the distribution unchanged.

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

Nothing good to report on most of the stocks on our list. Rate reset shares were generally down today as the 5 year government of Canada bond yield rate has slumped down to 1.4%. At that rate most rate reset preferred shares would reset at unattractively low rates based on their par values of $25. Therefore they are mostly trading well below that. I explained some of the reasons why back in March.

Toll Brothers was down 1.8%. My understanding is that the home building industry in the U.S. is suffering from labour shortages and a shortage of building lots. In a way those seem like the problems of a robust market rather than a weak one. Toll Brothers has a plentiful supply of building lots but the share price does not seem to get any credit for that.

Apple was up 2.3%.

SNC Lavalin was in the news today and tumbled 6.7% as it announced a huge writeoff and that it will attempt to exit certain problematic lines of business. SNC has never been on our list but I did mention it a few times lately and that I had bought a small position as a speculation. Quite possibly that was a mistake. It has been said that its portion of highway 407 alone was worth approximately the share price with all the rest thrown in for nothing. That may or may not be true.

SNC is now writing off $1.9 billion in goodwill. They describe this as non-cash. true, but unfortunately it was $1.9 billion in cash (or shares) that they paid to purchase that goodwill at some point in the past. This is evidence of very poor management. They either over-paid for that business or were unable to manage it competently or some combination of the two.

SNC is going to winddown its “lump sum turnkey projects” business. Apparently it has been losing money on these and will not even attempt to sell the business. I believe Aecon is at least partly in that sort of business. I guess though that Aecon would not be willing to take on their backlog in this area unless maybe SNC paid the likes of Aecon to take it over. Sad. And sad to think that big shot executives were likely paid very well indeed to mismanage this business.

SNC is also apparently going to try to sell all or a portion its consulting engineering business in the areas of resources (oil and gas, mining and metallurgy). This could benefit the likes of Stantec and WSP who might find bargains feasting on the carcass here. On the other hand consulting engineering service businesses being sold at distress prices could put downward pressure on the value of Stantec and WSP.

Overall, I can’t say if SNC is now trading for less than the value of its 407 toll road. It may well be trading at a discount to its value but I don’t know. Others have argued that this is the case. Clearly, SNC’s stock remains highly speculative.

Also regarding rate reset preferrred shares, Royal Bank announced that it will NOT be redeeming its series BB rate reset preferred shares (which trade as RY.PR.H) when they reach their 5 year reset date next month on August 24th. This is no surprise. The shares trade at $18. RBC is paying 3.9% or $97.5 cents per year on these shares. They would have to pay probably a little over 5.0% to issue new rate reset shares today. The fact is that rate reset shares featured a bit of a heads we win, tails you lose aspect for RBC and other issuers. If the market yield on new issues were materially lower than 3.9% then RBC would redeem these and issue new shares at a lower yield. That caps the upside on these shares. Even considering issue costs and considering that in some cases the reset is up to five years away, no rate reset share is likely to ever get above about $27 and $26 is more likely. On the other hand if market yields on these shares rise well above 3.9% (which is what happened) then the market price of these shares falls and there is actually no particular bottom to how far they can fall. So the investor lost when the market yield rose and if it went the other way the upside was capped.

As explained in the link above, the “culprit” is not so much the 5 year Canada bond yield but rather the market spread demanded over and above the 5 year Canada bond. It is that spread that has sharply increased.

Having said all this, when certain rate resets like this trade at $18 to yield 5.4% and will not be reset for another five years, that seems like a pretty good yield in today’s low interest rate environment. For whatever reason, the market “demands” 5.4% on these shares while accepting a paltry 1.4% on a five year government bond. If interest rates are to stay very low for longer, it is possible that the market yield on rate reset preferreds will decline (in particular the spread over the five year Canada bond) which would lead to a capital gain on these discounted shares. Or, if the 5 year Canada bond yield rises that could also lead to a capital gain on these bonds if the spread declines.

In Friday’s session, the S&P 500 was down 0.6% while Toronto was close to unchanged although slightly down.

America Express was down 2.8% after reporting earnings. It’s earnings were strong but it forecast increasing costs for card holder rewards.

Statistics Canada reported that retail sales were down 0.1% versus May and if gasoline and auto sales were excluded then sales were down 1.0%.

While this was a negative report, I note that the year over year change for May was still positive at 1.0%. But we probably needed 2.0% to keep up with inflation. These numbers are seasonally adjusted which is an imprecise exercise. Seasonal adjustments would assume a typical seasonal difference between April and May whereas the weather this year may have been less favorable than average. I would not read anything into this report unless next month’s report confirms a negative trend.

Q2 earnings reports for Canadian companies are just starting to come in but most will arrive in the first half of August.

On Thursday, the S&P 500 was up 0.4% boosted by more indications that the FED will cut interest rates later this month.

Toronto was up 0.1%.

Most of the Canadian stocks on our list and that I otherwise monitor were down somewhat.

Couche-Tard was down 2.4% to $79.48. That is down close to the price that the company bought back stocks in early May and so perhaps they will be stepping in to buy once again. I was very tempted to add to my position at this price but I already have about 3% of my portfolio in this company. And the price could certainly go lower as there may be little reason for it to rise in the next few months unless it announces an exciting acquisition.

I notice that BNN Bloomberg was showing that Western Canadian Select fell nearly $7.00 to just under $41 today. But I don’t see any news on this. If it did fall that much today, that is another disappointment for Alberta. This price can be very volatile depending on the availability of any export capacity and on storage capacity. It is also affected by demand and it may be that U.S. Gulf refineries that receive this heavy oil were shut down due to storms.

On Wednesday, the S&P 500 was down 0.65% while Toronto was down 0.1%.

TFI International slumped 4.1%. This was likely driven by declines in other transport related stocks after U.S. railroad CSX reported lower profits and, of more concern, lower traffic in most or all all of its freight categories. It also lowered its traffic outlook for the next quarter. I suspect this was also the reason that CN Rail was down 3.0% and FedEx was down 2.8%. The latest report out today shows that U.S. rail car loads last week were lower than in 2018. This has been a clear pattern since late January. Meanwhile, Canadian rail car loads were moderately higher than 2018 which has been the pattern all year. I took advantage of the decline in TFI to add 100 shares to my position.

Toll Brothers was down 1.9%.

AutoCanada was down 2.1% to close just below $10. Apparently expectations for its Q2 results are pessimistic.

Linamar was down 2.6%

All in all, it was a not a good day for our stock picks.

On Tuesday, the S&P 500 was down 0.3% as Trump warned that he could impose further Tariffs on China and as a stronger-than-expected retail spending report cast doubt on the extent of expected FED interest rate cuts.

Toronto meanwhile was relatively unchanged with a decline of 0.05%.

Aecon was up 3.2%.

CN Rail was up 2.0% after CP Rail reported a strong Q2.

Toll Brothers was up 2.1%.

TFI International was up 2.5%

The Melcor REIT was up 2.9%.

Penny stock Ceapro was up 6.8% to 39.5 cents. It has been volatile in recent weeks.

A number of stocks on our list were down but the moves were all less than 2.0%.

The Western Canadian Select oil price has touched U.S. $50 in recent days and its recent strength is a positive indicator for Alberta.

On Monday, the S&P 500 was about unchanged and Toronto as up 0.1%

The Melcor REIT announced / confirmed that its distribution will remain unchanged for the next three months and announced that it will release Q2 earnings on July 30th.

Regarding Melcor Developments I wondered if probable weak Q2 lot sales could even lead to a loss being reported in Q2. That is possible given IFRS mark-to-market accounting for building values. On the other hand if lot sales are down then the cost of lots sold will also be down. The general and admin costs of the property development division are not much over $2 million per quarter. Overall, there is probably little reason to think that Melcor will not once again post positive earnings in Q2 (particularly after adjusting for certain non-cash valuation items including building market value changes and changes related tot he market value of the minority interest in the REIT). They are a very conservative company and when earnings are down they have at times lowered the dividend. But my understanding is that they are more committed to a stable and sustainable dividend at this point. Cash flows should continue to be relatively strong as they collect for lot sales made previously (their home builders typically pay for lots when they sell and deliver a home) and as they curtail spending on new developments.

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

lululemon jumped 3.5% to $189.52. I had added it to our list less than two weeks ago at $180.86. I had been predisposed to rate it at least a Weak Buy but it seemed to rich. It’s a fantastic company but I will wait to see if there is a pull-back.

FedEx was up 3.0%.

U.S. companies will begin reporting Q2 earnings this week .

I sold a bit more of my Boston Pizza position on Friday. I had added to my position at good prices when it dipped at the end of last year and I felt it was reasonable to sell those shares to hedge my bet on this entity somewhat. This was in an RRSP account where taxes were not a concern.

I was tempted to add to my position in TFI International as it has dipped. But I will hang onto the cash for now.

Couche-Tard is updated and rated (lower) Buy at $84.57 (yesterday’s closing price).

What a wonderful success story this has been for Canadian investors. Remarkably, it is now the largest Canadian-based company by revenue!

Since I added it to this site in March 2005, the stock is up 1,358% or over 20% per year compounded. It is up 24% in 2019 to date. It won’t necessarily gain much in the next year and it could retreat. But over time it should continue to do well.

Thursday saw a new record close for the S&P 500 up 0.2% to 2999.9 (so rounded = 3000) and the Dow Jones closed above 27,000 for the first time. Toronto was down 0.2%.

AutoCananda was down 3.2%.

Costco was up 1.9% after reporting strong same-store sales for June.

The next update will be for Couche-Tard. It’s been a fantastic investment. But it’s expensive at this time. Selling it has generally been a mistake but it is not a compelling buy at this time.

This morning I sold what amounted to 8.5% of my Boston Pizza Royalties shares. These were in an RESP account and (although this is not supposed to matter) I had a capital gain on those shares over and above the distributions received. I also may reduce my position in another account. The near 8% yield is quite attractive. But I worry that if same-store sales have not improved that a small distribution cut could be needed. That would likely push the price down several dollars as the market would likely over react. BP just announced the next distribution with no reduction. But I worry that they may be losing market share. Also the poor June (and now July) weather in Alberta will not have helped. And I understand that the weather in Ontario was not great either. Perhaps they will show a same-store sales growth in Q2 and even if not they may be able to maintain the distribution until same store sales do grow again. But I do worry about this investment. At the same time, if there was a modest cut and the market over-reacted I would want to add to my position.

U.S. markets were higher on Wednesday on indications that the FED may lower interest rates.

The S&P 500 index was up 0.45% to 2994. It poked its head above 3000 for the first time during the day.

Toronto was up 0.1%. West Texas oil is back above U.S. $60 and Western Canadian Select is at about U.S. $48. That is good news for Alberta if it lasts.

Looking at Canadian Western Bank it can be seen that the problem for long-term holders is that the price to book ratio has had some history of dropping from highs well over 2.0 down to about 1.0 and even briefly below during times when bad loans and/or lower profits are feared. That has been the case periodically since early 2016 and was also the case during the financial crisis. Meanwhile book value per diluted share has risen from $22.16 at October 31, 2015 to $28.07 now. I believe that buying CWB today at 1.06 times book value is far less risky than buying it at the 2.17 times book value that it traded at at the end of 2013. Yet the stock would have been considered much safer back then. It was trading at 2.17 times book value because investors perceived little risk of bad loans at that time and they expected strong growth in earnings to continue. P.S (added July 11) At the end of 2013 our rating was (lower) Buy. We now know it would have been a good time to sell ahead of the oil price collapse in 2014 but at the end of 2013 a sort of luke-warm rating was appropriate.

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

Amazon was up 1.8% to $1988.

AutoCanada lost more ground ans it was down 2.7% to $10.81.

Toll Brothers was down 2.2% to $36.25 and continues to lanquish despite the strong U.S. economy and its still-strong earnings. According to Yahoo Finance its forward P/E ratio is 8.6. That would imply an earnings per share decrease of 18% but would also make it still cheap. The price to book ratio is 1.07 and the assets would appear to be quite solid.

CRH Medical was down 3.7%.

Couche-Tard reported earnings after the close which were apparently disappointing. Preliminary indications are that this was mostly related to volatile fuel margins. Same-store merchandise sales growth was very strong in each of its three main geographies.

Housing starts in Canada were up strongly in June versus May. I pay most attention to single family starts and particularly in Alberta. Also, I focus on year over year changes rather than comparing to last month. Alberta single family starts were down 8%. But that is a good improvement from recent months that were down by a third. And Edmonton starts were down only 2% year over year. That is a positive since Melcor Developments is more concentrated in and near Edmonton rather than Calgary (which was down 14%). Overall the figures are encouraging but nothing to get too excited about. Multi-family starts in Alberta were up 48% year over year in June but that tends to be a volatile figure.

Yesterday, I mentioned the updates for Canadian Western Bank and for two of its rate reset preferred shares. Investors have been badly burned by rate reset shares. But some rate reset shares were issued at spreads of just 2.3% over the five year Canada bond. The two CWB shares are trading at spreads of about 4.2% higher than the 5 year Canada bond. The risk of price declines still exists but is far less than it would be at the old tighter spreads. Also these two have close to 5 years to go before they will reset and so a 5.8% yield can be locked in for a long time. The point is that rate reset preferred shares are worth considering despite the poor historical experience. I believe CWB is cheap and also worth considering.

Monday was a moderately negative day in the markets with the S&P 500 and Toronto each down 0.5%.

Shopify was up 2.65% after a positive analyst comment.

Lululemon climbed another 2.0%.

See the list of stocks on the subscriber home page for updates to Canadian Western Bank and two of its preferred shares issues.

On Friday the markets took a breather from recent gains and the S&P 500 was down 0.2% and Toronto was down 0.3%.

BHP was down 4.5% possibly linked to calls for a probe into a recent spike in iron ore prices.

Melcor Developments was down 2.4%.

Rate reset preferred shares were mostly up somewhat as strong economic data in the U.S. cast doubt on the idea that interest rates will decline.

The next update will be for Canadian Western Bank. It continues to grow its loans and deposits. There is always some risk of bad loans but overall this bank looks quite cheap.

On Thursday, while U.S. markets were closed, Toronto was up 0.1%.

AutoCanada was down 1.9%. After the close it announced it has hired a new CFO who will start on August 12. The person hired has significant experience as CFO of a number of public companies. This is good news for the company. But meanwhile Canadian June auto sales were announced and it was another bad month with a year-over-year decline of 7.2%.

The Financial Post today ran a story about Natural Gas producers facing bankruptcy as a glut of Natural gas in Alberta has prices under $1.00 and back at around 1990 levels. Apparently the (supposedly) free market government in Alberta wants to prevent the bankruptcies. The whole thing is a bit scary for the Alberta economy. The story indicated that the government hopes to see LNG plants and pipelines. But there was zero mention of how the industry managed to apparently over invest creating the glut of gas over and above the available demand. Perhaps in part it was just due to lower cost fracking operations. If so, then the higher cost producers need to be allowed to go bankrupt. That’s how (even relatively) free markets work. And there was no mention of how the Alberta and Federal government have probably failed in the area of pipeline tolls and pipeline approvals. Success, they say, has a thousand parents. Failure is an orphan.

It seems that natural gas production is a low profit industry. That’s not surprising. Most commodity businesses are low profit. Only the low-cost producers tend to make good profits. For some reason though the industry still attracts investment.

Perhaps Alberta should start touting the low cost gas to attract industry and residents. We heat our homes here very very cheaply.

Wednesday was a strong day in the markets with the S&P 500 rising 0.8% to close at a new record high and just a hair below 3000. Toronto was up 0.6%.

Among the gainers were: Couche Tard up 2.9%, Dollarama up 2.4%, Starbucks up 2.7%.

The great majority of stocks were yup today but some went the other way. CRH Medical was down 5.3%. And Linamar was down 3.3% presumably due to fears about trade tensions.

But amid trade tension fears came word today from Statistics Canada that Canadian exports were up sharply in May versus April as well as versus the year ago figures. From their Table 2 it can be seen that total exports were up an impressive 8.6% year over year. Energy exports were up 14.2% year over year and motor vehicle and parts exports were up 14.0%. Any way you look at it these numbers are impressive.

The price for Western Canadian Select was down 7% today and the discount versus WTI has widened. A wider discount provides more incentive to ship crude by rail. But with such a volatile spread and with the Alberta government recently interfering in the market by contracting for crude by rail, private shippers would find it to be a risky business. I am skeptical that the Alberta government will find anyone to take their crude by rail contracts off their hands – unless they are paid a lot to do so. Why should some companies ship a huge amount of crude by rail which would narrow the discount and benefit all producers and not just the ones that ship more oil by rail?

Tuesday was a positive day in the markets as the S&P 500 rose 0.3% and Toronto as up 0.5% despite a drop in oil prices as it played catch up due to the holiday on Monday.

Home Capital, which is not on our list but which has been mentioned from time to time, was up 4.3%. Once again it appears that predictions of gloom for Canadian lenders has proven false.

Shopify was up 4.0% as it continued to attract investor support despite nosebleed multiples.

Dollarama was up 3.7% after agreeing to buy the majority of a Latin American Dollar store chain that it has been working with for some years. This was not a surprise as Dollarama had an option to make that acquisition.

TFI International was up 2.3%.

FedEx was down 2.0%.

I have added lululemon to our list of rated stocks. It is a high margin retailer. Unfortunately, this stock is very richly priced at this time and so it is rated Weak Sell/ Hold at this time at U.S. $180.86. I would be interested in acquiring at least a few shares on any material pull back. It is a powerful brand and I continue to monitor it in the hopes that perhaps a better buying opportunity will emerge. This stock has generally looked expensive and I must admit that way back at its IPO I wrote that it was way over-valued. I was wrong on that.

We are now into the third quarter of the year and very soon the Q2 reports will start to come in. The U.S. banks will start to report by mid month while most Canadian companies will not report until some time in August.

On Monday, the S&P 500 was up 0.8% to a new record closing high of 2964. Toronto was closed and had risen 0.5% on Friday.

Notable gains included: CN rail up 2.2% on Monday in U.S. trading, CRH Medical up 2.9% on Friday and Linamar, up 1.7% on Friday.

Lower income taxes on earnings taxed in Alberta kicked in today with the Alberta corporate tax rate declining from 12% to 11%. That is not huge but for a company with all of it earnings subject to Alberta taxes that would add slightly more than 1% to net earnings starting today. There will be a further 1% cut on January 1, 2020 and then 1% January 1 2021 and 1% January 22 when the rate will be down to 8%. This will definitely benefit Melcor Developments. CWB will also benefit but only to a small extent since much of its earnings come from outside Alberta.

Our report on an Enbridge rate reset preferred share is updated and rated (higher) Buy at $15.81 for those seeking tax efficient yield and willing to hold for the long term. Rate resets and in particular the Enbridge rate rests have disappointed investors time and again by falling in price due to falling interest rates combined (paradoxically) with higher market rates on newer rate reset shares being issued. Meanwhile these shares have paid their dividend exactly as required. This particular share will reset in December. Interest rates are hard to predict but if the 5 year Canada bond were to stay where it is then the yield at the current price would be 6.4%. If the 5 year Canada bond yield falls then the reset yield will be somewhat lower- but still attractive in such a low interest rate world.

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

Toll Brothers rose 2.1% and Dollarama was up 2.2%. FedEx was up 2.1%.

Shopify rebounded 4.0% which indicates a lot of resiliency and faith in that company.

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

Melcor Developments was one of the larger decliners on our list – down 2.7% to $12.55. That means the shares are trading at about 40% of book value. And the book value consists of real estate assets with no goodwill on the books. The stock is thinly traded and has little or no analyst coverage. It seems quite likely it will report a weak Q2. The company had bought back shares from October through March. They were only allowed to buy back a tiny amount each day, but they did so regularly for about six months. After the end of March they stopped buying. Possibly they want to conserve every last dollar at this time when their sales are lower? Or possibly they decided that the small amount was just not worth the bother. Insiders were also not buying except that one director bought just a few shares.

Due to the low share price, Melcor’s dividend yield is now attractive at 3.9%. The company has indicated that it would like to maintain a reliable dividend but that cannot be guaranteed if earnings decline too much.

Stantec was down 2.2%.

FedEx was up 2.5% despite its weak earnings report and weak outlook.

Trade uncertainties are weighing some stocks down. Checking the latest rail car loading reports published today:

U.S. rail car traffic is noticeably down compared to the two prior years. Categories that are down include intermodal (which is consumer goods), food and farm products (excluding grain), metallic ores and minerals. On the other hand, petroeum product car loads are up substantially.

Canadian rail car loadings in contrast are running slightly higher than 2018 and substantially higher than 2016 and 2017. Most categories are up but coal is down noticeably and farm products are down slightly. Petroleum car loadings are up substantially.

Oil prices including for Western Canadian Select have rebounded somewhat in recent days as has the Canadian dollar.

On Tuesday, the S&P 500 was down 1.0% and Toronto was down 0.9%.

Accordingly, the great majority of the stocks on our list were down.

FedEx was down 3.1% and then released earnings after the close. While the earnings beat estimates on an adjusted basis there was a lot of bad in those earnings and FedEx is projecting a drop in adjusted earnings in the next year. My faith in this company is diminishing. The stock is not expensive in relation to earnings but tht assumes it can back to growing earnings per share.

Shopify was down 9.0% in Toronto.

Bombardier announced the sale of its commercial regional jet business for some $550 million. That seems to me like a pathetically low figure. Thought it does beat out the sale of half the C Series to AirBus last year for approximately zero. This latest sale could require a another write-off it it was sold below book value but I did not see any mention of that. Bombardier has been extraordinarily poorly managed for the past couple of decades at least. The newish CEO might be a step in the right direction but the second and (especially) third generation family members that drove Bombardier to the brink of bankruptcy retain control and significant management authority.

Statistics Canada reported that wholesale trade rose in April.

Markets were relatively quiet on Monday as the S&P 500 was down 0.2% and Toronto was about unchanged.

Shopify was down 4.8% giving back a little of its recent massive gains as some analysts think it has ran up too far.

FedEx was down 2.7%.

The Canadian dollar has shown strength this month as it is now near 76 cents whereas it was slightly under 74 cents U.S. at the start of this month.

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

Couche-Tard was down 3.1% as it retreats from recent record highs. Experience suggests that this is a stock to hold for the long term perhaps adding on dips. Selling when it seemed too expensive or somewhat over-priced has been a mistake.

Toll Brothers was down 2.6%. The market for new homes in the U.S. has never fully recovered from the scars of the financial crisis. Homes are very affordable in the U.S. the scars of the financial crisis still weigh on the market.

AutoCananda was down 4.6% giving back some its recent gains. It remains a speculative and unpredictable stock mostly due to its disastrous U.S. dealership purchase of just over one year ago. Absent the U.S. division, the stock would be higher.

Trump (and the U.S. administration) has thrown more uncertainty into the market with his various pronouncements of a possible Chinese trade deal and his upcoming meeting with the Chinese leader. The passage of the USMCA deal is also uncertain given Democratic Party opposition and the difficulty of amending the agreed to deal. There is also the escalating tensions with Iran. Of course the reality is that markets are ALWAYS uncertain even when all appears calm.

On Thursday, the S&P 500 was up 0.9% and Toronto was up 0.4%.

Couche-Tard was down 2.7% but that was likely just due to some analysts deciding that it has run too far too fast.

Penny Stock Ceapro was down 8.3% to 33 cents. That was on significantly higher volume than normal and may have simply been caused by someone wanting to sell a lot of shares. It is a very speculative company but does have some good prospects. I added a little to my position but it remains a small position.

Statistics Canada reported that full-service restaurant sales in April were up 6.5% year over year. That should bode well for Boston Pizza. But it seems that have been lagging the industry. Still, with a 6.5% gain they should have achieved some same-store gains in April. It is same-store sales gains that are drive distributable cash per unit. Even 1 or 2% same-store sales gain would be quite acceptable.

On Wednesday, the S&P 500 was up 0.3% as the FED held interest rates unchanged but signaled it might now be more open to a cut but that depends on future data. Toronto was roughly unchanged.

Canadian energy stocks did not react much to the Trans Mountain approval – it was fully expected. And of course many hurdles remain and much time will pass before any oil will flow – if ever. My bet would be that the line will get built but it’s too early to count on it.

Shopify surged another 6.8% after announcing new features. It’s Chielf Operating Officer stated that Merchant Services will see one very dominant player (like Google in search, Facebook in social media -a winner take (nearly) all situation). And that Shopify is well positioned to be that dominant winner. If true perhaps Shopify’s stock price is justified. But given a huge multiple to sales it is going to have to continue to grow very rapidly indeed.

At the far end of the spectrum from Shopify, Boston Pizza Royalties (which is profitable and paying out about 102% of earnings but struggling to grow) was up 1.9% to $18.17. This is the first time above $18 since last August. This entity yields 7.6% but it is going to have to resume same-store sales growth soon if it is going to maintain let alone grow its distribution. Hopefully, it is having a good Q2 perhaps boosted by the Raptors success.

Mexico’s Senate has voted 114-4 to approve the new USMCA trade deal. I believe Canada is set to approve it as well. But meanwhile The U.S. is talking about proposing changes. I don’t know how that would work. Passage of the USMCA by all three countries would be positive for stocks. But I don’t know how Mexico and Canada would react to any proposed changes to the agreement that was already negotiated.

A correction – I had mentioned that the interest rate on what is basically a “high” interest account for TD Direct investors (TDB8150) was down to 1.6% for 1.75%. I was mistaken. The rate is unchanged at 1.6%. With longer term interest rates declining I am expecting this rate to go down. It will certainly go down if the Bank of Canada lowers interest rates later this year as some expect it will.

Tuesday was a strong day in the markets as President Trump announced that he would meet with the Chinese leader. This was taken as good news for trade and the economy.

The S&P 500 was up 1.0% and Toronto was up 0.9%

SNC Lavalin was up 5.5% as it announced it had named an executive to lead a cost cutting effort.

Apple was up 2.3%.

The federal cabinet approved the Trans Mountain pipeline. But it’s not clear how soon construction will start and it is clear that opponents will continue to challenge the project in court through on the ground protests and attempted blockades. Markets should react positively but perhaps in a muted fashion given past false starts for this pipeline.

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

CRH Medical was up 3.1%. Couche-Tard was up 1.9% as it has continued to make new highs this year.

There are more signs of lower interest rates. RBC lowered its posted rate for a 5 year fixed rate mortgage. Checking with TD Bank, their posted five year mortgage rate is 5.34% but their actual rate offered is far lower at 2.86%. I had been expecting TD to lower the rate on their investment savings account that can can be used within a self-directed account (TDB 8150). I notice today the rate is 1.6% whereas it had been 1.75% for for quite a few months. The rate on the five year government of Canada bond is down to 1.34% which is considerably lower than the 2.4% level of last Summer. Various rate reset preferred shares have declined in price to yield in the 6% range. I would think that at some point the market might decide that 5 and 6% is quite attractive if rates are once again headed down.

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

AutoCanada gave back 2.5%.

On a year to date basis the markets and most of the stocks on our list have done well. But that came after a sharp decline at the end of 2018.

The overall markets as well individual stocks are always reacting to the latest news. And reacting to predictions of what news will be.

On Tuesday, the Trudeau government is expected announce the approval of the Trans Mountain pipeline. Although approval is expected, the actual approval would likely be positive for companies hat are directly or indirectly exposed to energy and the Alberta economy. But the approval may also come with various conditions that will be viewed as positive or negative. And of course the opponents of the line will likely vow to keep blocking construction in any way they can including more court challenges. But construction should get underway almost immediately.

If the Trudeau government instead announces that the line is not approved or that it faces another delay it would be quite negative for the energy sector and Alberta. I would expect a very angry reaction in Alberta if that happens.

CMHC reported that housing starts were lower in May but still running at over 200,000 starts annually. Multi-family housing starts are volatile. On a smoothed seasonally adjusted trend basis, CMHC reports that that starts were down 1.8% versus April. Given my investment in Melcor Developments and its positive rating on our list, I am always interested in the single family home starts in Alberta. These were down 28% in May and 29% year to date. Clearly, Melcor will have a very weak Q2 for Canadian lot sales. But they do have other revenue sources including U.S. lot sales, building development in Alberta and income from rental buildings.

In more positive news, Alberta’s population rose 1.7% year over year in Q1 versus 2018. The Alberta’s economy is weak but with a growing population there will still be some demand for new houses. Melcor will slow its development of new lots. So far, I am not aware of any material decline in lot or land values.

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

Dollarama soared 11.3% after reporting better than expected results and an improved outlook.

AutoCanada was up 4.3% after announcing the sale and lease-back of three more of its dealerships. These transactions have pluses and minuses. They generate cash but commit AutoCananda to lease payments. To the extent they are done on a strategic basis, that is perhaps a good thing. To the extent they are done more of a last resort they are not a good thing. Hopefully they are another sign of new management being active to turn things around at AutoCanada. In related news, reports indicate that revenues at new car dealers are up despite lower new car sales. This is due to stronger used car sales at those dealers. Also average prices are up driven by increases in truck prices.

I plan to add Lulu Lemon to the site in the next few days or so. It has very strong brand power and earns high margins.

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

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

Today, I attended Stantec’s “Investor Day”. In reality this is a day for analysts and institutional investors. They had a good turn out with 22 representatives from institutional investors and 11 “sell-side” analysts representing mostly the capital markets divisions of the various banks.

I have always thought that Stantec was well manged and that impression was reinforced today. The top executives seemed very competent and knowledgeable. And they all seemed to have credible plans for growth. Stantec has been targeting revenue growth of 15% annually. However there was some indication at the meeting that 15% might be a stretch and that they might lower the goal (I suspect that would be to lower double digits). After several tough years it appears that Stantec is set to resume growing earnings per share.

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

SNC Lavalin was up 7.0% after a surprise announcement that its CEO will retire and that an existing executive was named interim CEO and has been asked to perform an expedited strategic review of the company.

Canadian Western Bank was up 2.1%. AutoCananda was up 2.3%.

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

Trump who, love him or hate him, it seems clear longs to be a dictator called into CNBC this morning to complain about the FED acting independently. Trump has been good for the markets – but at what price?

CRH Medical was up 3.6% but has been weak lately. FedEx was p 2.4% presumably due to easing trade tensions with Mexico. Linamar was up 2.3%. Aecon was up 2.8%

Visiting Kelowna, it is my impression that business is slow. BP West Kelowna Monday at lunch was not very busy 12:30 pm and was looking really quiet shortly after 1 pm. A higher end golf course (Tower Ranch) was quite quiet on Sunday despite that being the best weather in a few days. It could be that Alberta residents are staying away over the pipeline issues and higher property taxes on out-of-province Canadians (domestic foreigners?) who own vacation properties in the bigger centers in B.C. including Kelowna.

Linamar is up 2.1% likely due to Trump’s agreement with Mexico to not impose the new (illegal-under-NAFTA) 5% and rising tariffs on everything that he had threatened. The reaction would likely be more positive if the market was more certain that the new north american trade agreement will be passed soon and that Trump can reach an agreement with China.

Regarding Canadian Western Bank. I had expected that they would be buying back shares in May under their new (modest) buy back program. But they bought none until May 29 and May 31 when they bought a few shares mostly at $28. It is disappointing to see that they did not buy more. On the other hand they are shrewd and bided their time to get a good price. They would prefer to keep their equity capital for expanding their business. But they have some equity they can spare and will likely buy more shares in June if the price remains low enough.

With the big Canadian banks in the news regarding the potential for bigger loan losses and regarding short sellers, Canadian Western Bank will likely be held back as well. Unless there are going to be unprecedented loan losses at CWB it should turn out to be a good investment since it is trading at only about book value. Over time it should benefit from a rising book value as well as an increased trading multiple to book value.

Posting from Kelowna this Sunday evening.

The big news on Friday was Trump’s new agreement with Mexico. This should be quite positive for markets on Monday. Linamar should benefit from this news.

Thursday’s markets saw the S&P 500 rise 0.6% as there was some optimism that Trump would delay the new 5% tariff on Mexico. Toronto was up 0.1%.

The biggest gainer on our list was Starbucks – up 1.8%.

After the close, Canadian Western Bank announced it will issue a 10 year debenture that pays 3.668% for five years and then a floating rate of 1.99% plus the 90 day bankers acceptance rate after that. These bondds have “bail-in” provisions – they are non-viability contingent capital. Therefore, in theory, these bonds could be automatically converted into common shares if CWB ran into big financial trouble. The market likley perceives little chance of that happening. Still, the market perceives some risk in these bonds given that a government of Canada ten year bond now pays closser to 1.70%.

CWB is raising $250 million with these bonds “for general banking purposes, including future refinancing requirements.” I note that CWB currently has $250 million in subordinated debentures outstanding. CWB is eligible to redeem those existing debentures as of December 17, 2019. It appears that the existing debentures pay somewhat lower interest than the new bonds to be issued. However it may be that they are not as attractive to CWB as capital because they may not have the same and latest “bail-in” provisions preferred by the banking regulator. Therefore my guess is that CWB will use the $250 million to repurchase the existing $250 million of bonds in December. That will likely improve certain of their capital ratios, such as Teir 1, although total capital would be unchanged. In any case, the new offering is nothing to be concerned about.

Wednesday was a mostly positive day in the markets with the S&P 500 up 0.8% and Toronto up 0.3%.

Shopify surged 6.6%.

RioCan was up 2.2%.

Linamar was down 2.3% and is very close to its 52 week low. Fears of continued trade wars and slower auto sales weigh this stock down. It’s hard to believe that its trailing P/E is 5.0. Even harder to believe is its forward P/E which according to Yahoo Finance is 4.7. The forward earnings estimate could very well be too high (i.e. forward P/E could be unrealistically low) as earnings could certainly decline. But in any case it appears to be very cheap. But it seems that cheap stocks can always get cheaper with bad news. Even when the bad news is seemingly already more than “fully priced in” stocks can fall when bad news arrives or is predicted to worse.

I notice that about 25% of the votes were “withheld” from each of Linamar’s six directors. (The range was 23% to 30%). That is big withhold rate. I am not familiar with the reasons. Linamar has a very small Board and with two members of the founding and controlling family on the Board and one executive on the Board this Board would lack the independence that is valued by corporate governance experts. I am not aware of any criticism of how the company is being run so I am surprised at the large number of votes withheld. It’s a slap in the face. But a google search reveals that Linamar has had a long history of poor voting results. At times more than half the votes were withheld. Overall, the voting result then is nothing new and I don’t think it is cause for concern.

Linamar had bought back a small amount of shares in March. There were no buy backs in April. But in May, Linamar bought back about $5 million worth of shares at prices from $47 to $43. It appears that the company does believe its share are under valued.

Costco reported May sales after the close. Same store sales were up 4.3%. That’s a respectable gain but less than the stellar numbers it has been achieving for most of the last two years or so.

Today, I attended the annual meeting of Ceapro which is the one penny stock on our list. It was a worthwhile meeting. There was a good turn out. There was a lengthy presentation by management and questions were encouraged and detailed answers were given. This company has a number of initiatives that could transform the company’s fortunes. I don’t know enough at all about the science to judge how likely they are to succeed. But management certainly seems sincerely optimistic. I consider this stock to be very speculative. But I added to my small position today.

Stock markets were up sharply on Friday as the FED chair indicated that the FED would consider lowering interest rates if economic data indicate that this is an appropriate response.

The S&P 500 was up a hefty 2.1% while Toronto was up 0.9%.

Among the top gainers were: Apple – up 3.7%. Shopify – up 3.4%, FedEx – up 4.8%, Starbucks – up 3.0% and Linamar – up 2.7%.

There is a debate at the moment about whether the Canadian Banks are soon to face higher loan losses leading to lower profits and lower stock prices. It is very difficult to know the risk that this will happen. Some have been predicting this for at least several years and have either been wrong or early. Banks estimate their future loan losses using various models and assumptions. Actual losses will be determined in the future. But provisions for losses must be estimated now. These provisions are inherently subject to error. Also, the level of loan loss provisions has changed with new accounting rules effective this year.

I have always said that banks are highly leveraged and are potentially risky. But meanwhile they also tend to make very attractive profits and have been great investments as the risk of significant loan losses has not materialized.

The appropriate and prudent response is probably to have and hold some allocation to the banks but not to get over exposed to this one sector.

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

Shopify was down 4.3%. Amazon was down 4.6%.

Toll Brothers was up 2.4%.

May auto sales were down 5.9% versus 2018 but it was still the third best May on record. Fiat Chrysler sales were once again abysmal as they were down 25%. AutoCanada unfortunately has a heavy concentration of Fiat Chrysler stores although they have many other brands as well.

There was more bad news for Alberta as an Appeals court has reversed the approval of Enbridge’s “Line 3” pending more study of the risks of an oil spill into the Lake Superior watershed. Perhaps it is a very good thing indeed that the fomer NDP government in Alberta had contracted for a large amount of oil by rail. That was supposed to get started slowly starting as soon as July.

Friday was a down day in the markets due to Trump announcing escalating tariffs on all Mexican imports starting June 10. This despite the existence of NAFTA which is still in place and the USMCA which (was?) soon to be ratified.

The S&P 500 was down 1.#% and Toronto was down 0.3%.

Linamar was down 3.4%,.

Statistics Canada reported GDP growth of 0.1% (0.4% annualized in Q1). Ther e are a lot of details int he report but clearly growth was weak in Q1. This report looks at how GDP is “spent”.

Separately, Statistics Canada also reported GDP growth by industry for March. This report looks at how GDP is created. It was more positive showing a 0.7% gain for March versus February.

The overall conclusion appears to be that the economy emerged from Q1 on a strengthening note.

I don’t think Statistics Canada does a great job of explaining the differences in the two types of GDP reports.

I have updated the composition of my own portfolio for information. I have never suggested that anyone follow my portfolio but was asked years ago to provide it.

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

Canadian Tire was down 2.0%. The recent decline would appear to provide a buying opportunity. The stock has often had periods of declines but has certainly trended up in the long term.

I had occasion to drop off a car for service at a Hyundai dealer in Edmonton today. This dealership certainly seems busy. There were plenty of staff and there seemed to be plenty of customers. That was 9:00 am and no doubt that is a busy hour. But returning at 1:30 pm the place was still rather busy. Hopefully, AutoCanada’s dealerships are also busy. Looks can be deceiving but that Hyundai dealership certainly looked like a profitable operation.

I was also at West Edmonton Mall for a few hours and it was also reasonably busy for a Thursday morning. I checked to see if the Boston Pizza was busy at noon. They were far from full but were as busy or busier than several nearby competing restaurants.

Wednesday was a negative day in the markets as the S&P 500 was down 0.7% and Toronto down a full 1.0%.

The Canadian dollar slipped under 74 U.S. cents as the Bank of Canada left interest rates unchanged.

Among the bigger declines were: Shopify – down 3.6%, Couche-Tard down 3.0%, and TFI International down 3.9% (I added to my position today based on the lower price).

Canadian Western Bank released Q2 earnings. Loans were up 10% and Deposits up 8% year over year which is solid growth. Adjusted earnings per share were up only 1% as non-interest expenses were higher. The Provision for credit losses remained quite low at 23 basis points, up for 20 in the prior yer but down slight from 24 in Q1. Impaired loans rose to 0.62% versus 0.49% last year and 0.51% last quarter and with the increase due to one general commercial loan in Saskatchewan.

Overall the result was not great but not bad. The market initially pushed the stock price down about 3% and I added a little to my position. But the price recovered during and after the conference call and was up 1.7% at the close. That was a nicely positive reaction considering the negative day in the markets.

It seems likely that CWB will continue to increase earnings over the long term although it could certainly have some decreases if recession conditions develop. It has not reported a loss in any quarter in over 25 years but that could happen if loan losses become significantly higher. If CWB does continue to grow earnings over the years it will also very likely enjoy periods where the price to book ratio rises considerable above the current 1.0.

Tuesday’s market saw the S&P 500 close down 0.8% and Toronto down 0.3%.

Canadian Western Bank was down 1.7%, probably dragged down by Bank of Nova Scotia reporting higher loan losses even though that was largely in their international business. With some large banks increasing loan loss provisions, CWB might have more reason to do so under the cover of “everyone else is doing it”. But hopefully they have no reason to do so. They report tomorrow, Wednesday, before the open.

The Case Shiller index of U.S. existing resale home prices came out. The headline is that the pace of increases has continued to decelerate. But it is also the case that home prices were still increasing at least modestly in all 20 cities in the index. As usual, the market can choose to focus on the fact that the increase is lower or on the fact that it is still an increase.

It seems that fears hold back the price of many stocks. I read today that Fiat Chrysler and Renault bot trade at forward P/Es of 4. That would seem to indicate a lot of fear that earnings are about to collapse. Meanwhile it seems that no fear at all is shown regarding for example Shopify, up another 1.4% today and trading at a high multiple of sales (as opposed to earnings). Time will tell if either the pessimism or the optimism is justified for various companies.

The report for CN Rail is updated and rated (lower) Buy at $124.50. I have consistently said that CN is a great company given its duopoly position with CP Rail and the rails’ cost advantage over trucking and CN’s excellent history. But it usually tends to trade at a high P/E that makes it expensive. Such is the case now. I’d rather buy it on a dip than at this price. But selling it even when it looks expensive has consistently turned out to be a bad idea (well, depending where the proceeds were reinvested). Buying it, even when it seemed expensive has worked out well over time. I hold a small position.

CN rail is up 1,440% since I first added it to this web site back on August 27, 199 rated only “Speculative Weak Buy” at that time. It is also up 370% since I rated it in the Strong Buy category on January 25, 2007 when it exhibited one of its rare periods of actually looking cheap in comparison to earnings.

Back in the late 1990’s I had a friend who was quite senior at CN and he had many stock options and had made large gains. But he was eyeing maybe selling some of the shares since “it can’t go up forever”. Actually, CN shares might beg to differ given that they have in fact risen fairly steadily in the 23 years since the Initial Public Offering in late 1996. And the shares will almost surely be higher still in another 10 and 20 years. Sure, the shares have had their set backs especially when the whole market was down. And those declines would have been painful at the time. But looking back the declines were always temporary and relatively short-lived. Of course living through a year waiting for a recovery feels like an eternity at the time. But looking back it seems a mere flash of time.

U.S. markets were closed on Monday while Toronto was up 0.7%.

Boston Pizza International announced that it has a new CFO effective immediately. That sounded a bit scary depending on why the incumbent was gone. But it turns out that the incumbent was only doing the job on an acting and interim basis until a permanent CFO was found. So, it appears that the announcement of a new CFO is no cause for concern.

A company that I used to have on our list was in the news today. Alcanna, formerly Liquor Stores N.A. (owner of Liquor Depot and Liquor barn with a large number of liquor stores in Alberta) is buying 28 Solo Liquor stores. That surprised me because I am very (perhaps all too) familiar with Solo Liquor stores and I had thought that they were doing well and they were certainly busier than most Liquor Depot stores in my experience. It turns out Solo had 90 stores (far more than I would have guessed) and that they are in receivership. This goes to show what I had already concluded: Liquor retailing in Alberta is a very tough business. There are far too many stores and competition is mostly on price. There are limited scale economies becasue the provincial wholesaler sells to everyone at the same price – no volume discounts. It is very difficult to compete with the likes of Superstore and Costco liquor stores. This move will likely be good for Alcanna especially if many of the remaining Solo stores not purchased are to be closed (which was not clear). Alcanna also operates six cannabis stores. I have not been a fan of Alcanna due to a string of losses the last time I looked and its previously (and since ousted) poor management. But I have not looked at it lately.

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

Gaining stocks included BHP Billiton – up 2.6%, toll Brothers – up 1.8% and Linamar – up 2.0%.

Aecon Group was down 2.6%.

Canadian Western Bank is set to report earnings on Wednesday. In general, I expect continued growth. There is always a risk that they will report higher loan losses as some of the larger banks have done this month. CWB has a reputation of prudent lending. It also has a different loan customer mix compared to the larger Canadian banks. I am not expecting any big changes to loan losses. CWB’s stock is cheap in relation to its earnings and book value. It’s been weighed down by negative sentiment towards Alberta even though the percentage of its business in Alberta has been declining. CWB is also working on getting regulatory approval to move to a more sophisticated way of calculating its risk-weighted assets. This will allow it to add leverage to certain of its loan categories similar to the big banks. This should allow it to increase its ROE. However it’s a long process. After a number of years of preparation and testing of software, they plan to apply by October to be allowed to use the advanced calculation method. I don’t think they have ever said how long the approval process would take. Perhaps they will update the status in this Q2 report. When the implementation of the new method starts to come into sight (for example used in analyst forecast earnings models) then perhaps the stock will get a boost from that. I believe CWB has also been buying back shares in May. They may report on that on May 29 or they may wait until early June and report that separately.

Go Raptors! Hopefully the Raptors’ success has brought in more customers to Boston Pizza’s sports bars. More importantly, their success is a nice boost for Toronto and Canada.

CIBC is out with a 5.15% rate reset preferred share. This is not an exciting investment but for those looking for yield in a portfolio and especially for tax efficient yield in a taxable portfolio it is worth considering. As of about an hour after TD sent an alert about this, the issue is still open. This is only very slightly lower than the 5.2% they issued at in April. It represents a spread of of about 3.63% over the five year Canada bond. Despite lower interest rates the market is still demanding a relatively high spread over the five year Canada bond. Unless that market spread goes down we will not likely see much recovery in the various rate rest preferred shares. I had explained some of the reasons why rate rest preferred shares have struggled in a newsletter in March.

Checking Western Canadian Select oil price, it was down to U.S. $40.41 yesterday, down 8%. It got as high as $55 in April so going back to about $40 is certainly disappointing for Alberta.

Checking the latest rail car loading reports the latest week for Canada shows a very small increase versus 2018. Car ladings had been noticeably higher than 2018 from late March to early May but are relatively similar to 2018 for the past two weeks reported. In this latest week Petroleum products are up significantly versus last year and coal and chemicals are up as well. Grain is about unchanged. Everything else (Intermodal, Forest, Farm excluding grain, minerals and motor vehicles are down. This could indicate some softening of the the economy in the past couple of weeks. If looking at the data you need to select Canada as it defaults to the U.S.