August 9, 2017

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

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

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

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

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

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

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

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

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

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