October 12, 2017

On Thursday, the S&P 500 was down 0.2% and Toronto was down 0.4%.

AutoCanada rose 3.8%.

Alimentation Couche-Tard was up 3.9% to $61.24. That surprised me given the announcement on Wednesday that Metro was selling 11 million shares in a public offering at $57.17. Anyone who grabbed shares from that sale would seem to have got a good deal.

Part of the reason for the increase was likely a story that Kroger might be selling its chain of 784 convenience stores and that Couche-Tard might be a buyer. Another possibility is that after the share sale at $57.17 sold out almost immediately there was something of a scarcity premium added to the shares?

This sudden increase in the face of the sale at $57.17 is an illustration of how unpredictable markets can be.

I am a bit skeptical that this higher price will last unless there is positive news from the company to support it. I mean I think the shares will do well over time, but I just wonder what would justify this increase. Couche-Tard will next report earnings in early December.

Melcor was down 1.6% to $15.39. This may have been related to the fact that ReidBuilt Homes has run into financial difficulty ReidBuilt is a customer of Melcor in at least some of its subdivisions (I have no idea what percentage of Melcor’s revenues they represent.) ReidBuilt likely owes money to Melcor since home builders typically do not pay for lots until after they build and sell a home on the lot. I don’t know if Melcor has any kind of lien on the land, I would think they would. This sort of thing is the reason why Melcor is a conservative company and maintains a strong balance sheet. This development could possibly cause a big hit to earnings in Q3 or Q4 but I don’t think it will be a very serious blow to Melcor.

Meanwhile, Statistics Canada reported new home price data for August and their data indicates that new home prices have remained extremely stable in Alberta with almost no change going back to the start of 2014. You would think if home builders were in trouble there would be price declines. And perhaps there have been incentives which don’t show up as discounts.

On May 29 I had noted a land Developer called Walton had gone into receivership.

In conclusion, this news about ReidBuilt is not good but I don’t think changes the fact that Melcor’s shares remain very much under-valued.