September 16, 2014 Comments

Markets rose on Tuesday after reports indicated that the U.S. inflation rate remains subdued which was interpreted as meaning that the FED will not be in a hurry to raise interest rates.

The S&P 500 rose 0.75% and Toronto rose 0.2%.

Canadian Tire had a strong day rising 1.5% to almost $116.

Melcor fell 1.9% to $23.19. This thinly traded stock has been relatively volatile since May. It first rose above $23 around May 1 and then rose to a peak of $27.60 but has now fallen back to the $23 level. Apparently part of the reason it was rising this Spring and earlier Summer was a strong recommendation by RBC capital. That at least temporarily boosted demand for the stock. While probably 99% of investors worry about market demand for a stock. That is not my concern or certainly not my main concern. As long as the company continues to do well the stock price will eventually follow suit. I have always said that every stock and every company has its risks. This is particularly true if you define risk as the chance of a stock price decline even if temporary. I would be more concerned about the risk to Melcor’s earnings. And its earnings would decline if the Alberta economy and the demand for new homes in Alberta slows down. Even in that case the earnings would, if history is any guide, eventually recover. And at this time I am not aware of any slow-down in the Alberta new house market. The bottom line is that Melcor appears to offer good to excellent value. I have an order in to add still a bit more to my position if it drops to $23.10.

Melcor’s stock price has about doubled from the $11 range at the start of 2010. Therefore you might think the stock is not the bargain now that it was then. But the book value has more than doubled from about $10 at the start of 2010 to over $23 at this time. Some of the increased book value is due to new mark to market valuation accounting for its rental buildings. But most of the increase is simply due to retained earnings. The stock may actually be more of a bargain at this time compared to early 2010 based on trailing valuations. But of course we now know its earnings grew a LOT since the start of 2010 and we don’t know for sure what the earnings will do in the next five years. I strongly suspect the earnings will rise although they will have their ups and downs as well.

I was just noticing that Canadian National Railways is up 10 fold since I first started following it 15 years. Over the years it often looked expensive but I consistently recognized it as an excellent company and noted that it appears to have certain monopoly characteristics. In my January 2003 article called “Do as the Rich Do” I mentioned that rich people were buying the likes of CN while most investors were chasing various penny stocks. It’s almost painful to mention that Bill Gates became its largest shareholder I believer over 15 years ago and has therefore made at least 10 times his money on the millions he invested back then. And I believe he has added tot he position over the years.

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