November 10, 2015

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

Canadian Tire was down another 2.1% to $108.93. It’s probably a Buy at that price but it would probably be best to wait for it to report earnings on Thursday morning. The earnings may be good but the concern is the impact of the sharply lower dollar. Are they starting to have to pay a lot more for their stock now? And what would happen to sales if they had to increase prices to compensate? Earlier they had apparently found ways to offset the currency but I can’t believe it is possible to compensate for such a large change in the currency.

Liquor Stores N.A. fell another 6.2% to $9.05. I plan to update the report on this company soon to see if it is starting to look more reasonable. The dividend certainly seems unsustainable. I did not see any indication that they plan to cut costs, which may be what is needed.

Melcor fell 2.5% to $14.61 and then reported earnings after the close. The earnings and lot sales appeared to be quite strong given the slow-down in Alberta. They report the book value per share as $28.47. And that is for solid assets with no purchased goodwill on the books. Yes, the land and building asset values could fall. But for now, $28.47 should be a moderately conservative calculation of the book value and we are able to buy shares at pretty much half that, or a 49% discount to book value. And the company has relatively moderate debt leverage such that it is very unlikely to run into financial danger. This is the sort of scenario that can often be confirmed later to be a golden opportunity. There are never any guarantees but this looks like a bargain to me.

Boston Pizza Royalties Income Trust rose a modest 1.0% to $18.50 after reporting better-than-expected same store franchise (royalty eligible) sales growth of 2.6%. This was strong growth in spite of the slow-down in Alberta where it apparently gets one third of its revenue. The simple math here is you get a 7.0% cash yield where the cash yield seems not only safe but very likely to grow slowly over the years. I added to my position today.

The Bombardier pref shares fell 4.4% to $10.00. With a yield of 15% (It was 6.25% when these were issued at $25) these are clearly quite speculative and the market views them as highly risky. The common shares are at $1.45. Bombardier has the right to convert these to 12.5 common shares per pref. That would be okay at the moment as it would mean we would be paying in effect $10/12.5 = 80 cents per common share. But if they did that and then the common plummeted we could still lose badly. And maybe they should do that. Since they issued the pref at $25.00 the conversion would seem to be equivalent of issuing common shares at $2.00 from the point of view of Bombardier. It is possible that Bombardier could simply eliminate the dividend on these shares. But the dividend is cumulative and so cutting it would likely be done only in the case of an even more desperate situation. It would certainly not do much for confidence in the company and I believe the company needs to project confidence to its (potential) customers. If one were to bet that the worse is over for Bombardier then perhaps these shares are a reasonable speculation. It would not seem wise however to take a very large position in these. And perhaps any position at all is unwise.