November 21, 2016

Returns are bustin’ out all over… The U.S. stock market indexes are at record highs.

The S&P 500 was up 0.7% (to a new high) and Toronto was up 1.2%.

Most of the stocks on our list were up today.

I added once again to my Melcor Development position today.

Consider Melcor’s share price versus its past earnings. Melcor closed today at $12.62. In the five years ended 2015 its GAAP earnings per share totaled $14.05. And its adjusted earnings per share totalled $9.51. So the stock is trading at 6.6 times its average adjusted earnings in the past five calendar years. On its face that is very attractive. But Melcor’s adjusted earnings in the latest four quarters are only $1.07 and quite possibly will be lower still for calendar 2016. And certainly calendar 2017 could see lower earnings. So, Melcor seems very cheap in relation to past earnings but we don’t know if or when it might once again start earning like it did in recent years. But my thinking is that these past earnings combined with its low price to book value ratio and reasonably strong balance sheet point towards a potential for a strong recovery in the share price (eventually, that is).

I also added to my Toll Brothers position today since it seems quite attractive.

It was announced today that Canada would attempt to phase out coal-fired power plants buy 2030, with certain exceptions. Alberta had already committed to that. One of the companies affected by this is TransAlta. The company indicates that 80% of its plants in Alberta are old and were due to retire before 2030 in any case. But it does have some plants that are affected by the rule. I don’t know if there will be any government compensation. If there is this could work out well for TransAlta investors since from what I understand the share price is already putting little or no value on those plants and instead TransAlta is valued for its part ownership of a related but separate company, TransAlta Renewables. Also TransAlta indicates it will be allowed to convert some of the retired coal plants to natural gas and do so on a cost effective basis. So, the bottom line is that TransAlta might be reasonable speculative pick even though I consider it to be one of Canada’s most profoundly poorly managed large companies.