2019

The report for Toll Brothers is updated and rated Buy at u>s. $35.66. The previous update had noted that while profits were up, contracts to build new homes (which become revenues and profits some 9 to 12 months later when the home is built and delivered were down. This trend continued in the latest two quarters but in a hopeful sign, contracted home sales were up in April. The stock looks under-valued but is facing several quarters of earnings decline before probably resuming growth. Therefore the stock may continue to languish under valued for the rest of 2019. Or, if home building picks up then the stock could react to that in spite of reporting lower earnings later this year.

On Wednesday, the S&P 500 was down 0.3% and Toronto was down 0.6%.

Stocks that rose included Shopify – up 2.1%, Constellation Software – up 2.3%.

Couche-Tard was up 1.5% and continues to set new highs.

Toll Brothers was down 4.6% despite beating earnings expectations. It is a cyclic company and contracts for new homes are down somewhat. Those contracts turn into revenue only when the house is built and turned over to the owner which usually takes about nine months. That was expected to be the case but California is weaker than expected. I will update the report for Toll Brothers tomorrow. It continues to look under-valued. But with earnings expected to fall for the next few quarters it may remain under-valued.

CIBC’s earnings came in weak due to weaker results in its core Canadian banking. If the other banks come in weak, that will likely “hold back” the price of Canadian Western Bank even though its mix of business is quite different than the big 5’s Canadian banking.

On Tuesday, the S&P 500 was up 0.85% and Toronto was up 0.15%.

Dollarama was up 3.5%.

Toll Brothers was up 2.2% ahead of its earnings release. It released ts Q2 earnings after the close and the headlines indicate it exceeded analyst expectations for earnings and revenues. However its backlog and new homes contracted for were down – which was expected. The company expressed optimism regarding new home contracts having picked up as April progressed. The company looks cheap but could remain so since it is expected that earnings will decline at least modestly in 2019 versus 2018. We shall see tomorrow how the markets react to the earnings news.

Our report for Constellation Software is updated and rated Weak Buy / Hold at Canadian $1182. This is a hugely successful company. However it always seems quite expensive. It might be once again worth paying up due to its track record but on the numbers it does look expensive.

On Monday, the Toronto stock exchange was closed. The S&P 500 was down 0.7%.

Apple was down 3.1%. Toll Brothers was down 2.4%. Starbucks was down 2.9%.

Over the weekend, Trump ended Steel and Aluminum tariffs he imposed on Canada last year. This is thought to pave the way for the approval of the new trade agreement and in general should be a positive for Canadian stocks this week.

Ford is cutting out 7000 white collar jobs or 10% of its world-wide white collar work force. Auto companies are usually though of as big blue collar employers. But apparently Ford has some 70,000 white collar workers. And apparently they just woke up and discovered that 10% of these were redundant. In total as of April, Ford has 196,000 employees globally.

Regarding SNC Lavalin: If the Canada Pension Plan and/or Cintra who each own over 40% of highway 407 decide to exercise their rights of first refusal and buy the 10% of the 407 that SNC has agreed to sell to the OMERS pension plan for $ billion then OMERS will receive an $81 million dollar break-fee. That is somewhat mind-blowing. Can you imagine collecting $81 million dollars in this way? Unfortunately for SNC share holders, it seems that SNC has said that there is no possibility of a bidding war. It sounds like SNC would just sell to the others at the same price and SNC would have to pay the break fee. If so, this sounds like SNC made a bad (incompetent?) deal with OMERS. I had bought a small position in SNC on Friday but that may not have been a wise move. When a company sells an asset primarily to pay down debt rather than because they got a good price, that is a red flag.

On Friday, the S&P 500 was down 0.6% but Toronto was up an impressive 1.6%.

Toronto will not trade on Monday due to the Holiday but the U.S. markets are open.

The Canadian banks begin reporting earnings later this week.

Toll Brothers will report on Tuesday. Apparently analysts expect a modest increase. But even if it is a modest decrease the company will continue to look cheap on a trailing earnings basis. The market will likely pay more attention to the outlook. I saw a report last week that U.S. home building is starting to pick up again.

SNC Lavelin announced a delay in selling part of its stake in highway 407. The reason is that the other owners of the 407 want to exercise their right of first refusal. That supports the valuation of the highway. Analysts have said that SNC’s share price is about equal to or slightly below the value of its 407 stake with essentially no value for the engineering business. SNC faces years of troubles and litigation and so perhaps that low value is quite appropriate. Nevertheless, as a definitely speculative move I bought a modest amount of SNC this morning.

Meanwhile Statistics Canada released the March figures for large retailers. In this release they did not give any text to explain whether the results were up or down. And the main table show just five months and does not indicate if the figures are seasonally adjusted or not. That could certainly lead to misinterpretations of the data especially when looking at February versus March. Expanding the table to show March of 2018, I see that the overall sales were up just 0.7% which is weak.

A show on Business News Network this morning was mentioning that Ontario is having a late Spring. That would be somewhat negative for Canadian Tire but I don’t think unfavorable weather is a good reason to buy or not buy Canadian Tire. Weather impacts on their sales tends to even out over time.

On Thursday, the S&P 500 was up 0.9% and Toronto was up 0.8%.

Shopify surged another 5.5%.

CN Rail was up 2.2%. In the latest week reported, Canadian rail car loads were equal to the 2018 figure. Forest products, grain and chemicals were lower. The past six weeks had seen increases versus 2018. Interestingly, in the U.S. rail car loads have been running consistently below the 2018 levels since the end of January – this despite the strong U.S. economy.

Canadian Western Bank was down 1.5% to $29.18. I expect it to report another quarter of earnings growth when it reports on May 29. There are never any guarantees but this stock seems cheap relative to its earnings. The stock price no doubt suffers from negative sentiment regarding Alberta. This could start to change with the new Alberta government including the promised corporate tax reductions.

Wednesday was a positive day in the markets as the S&P 500 rose 0.6% and Toronto was up 0.2%.

Shopify continues to have tremendous investor support with a 4.1% gain today.

Other gainers included: WSP Global – up 2.2%, Stantec – up 2.2%, and Couche-Tard up 2.2% to an all-time high.

Canadian Tire however was down 2.3%. It appears that the analysts were not happy with its Q1 results despite its excellent same-store sales growth.

Statistics Canada released inflation figures for April. Overall, inflation was up 2.0% from April 2018 which is at the mid point of the Bank of Canada 1 to 3% target for inflation.

Markets had a partial rebound on Tuesday with the S&P 500 up 0.8% and Toronto up 0.6%.

WSP Global was up 2.3% after reporting a 27% gain in earnings.

Shaw Communications is selling off its remaining shares in Corus entertainment by way of a secondary issue. Neither company is on our list but the sale illustrates a few things. The sales is being priced at a discount of about 16% to the current share price and on top of that Shaw will pay probably another several percent to the brokers who will sell these shares. Current Corus shareholders will no doubt be dismayed by this sale that pushes down the market value of Corus shares. And Shaw shareholders may also be dismayed at the large discount.

When it comes to the cost to sell shares retail investors actually face far lower costs than do large institutional share owners. Retail investors can usually sell tens of thousands of dollars worth of shares at the market price or at most a few pennies below. That is the case for liquidly traded shares. A Commission of $10 or less may be the only cost. That is truly a bargain. Meanwhile Shaw is facing costs in the order of 18% to quickly unload this huge position. And I recall that last year Metro faced a large discount when it sold a large block of Couche-Tard shares. Trading fees are a rare case where the little guy actually wins.

Canadian Tire is updated and rated (higher) Buy at $142.30.

Its Q1 report contained both positive s and negatives. Its same-store sales growth was stellar with 6.1% overall growth and that was on top of the 5.1% growth that occurred in Q1 2018.

But, adjusted profits per share were down 18% by our calculation. This was due in part to timing differences including a negative true-up of a margin sharing arrangement with its dealers. Shipments to stores did not grow as fast as same-store sales and that simply a timing issue. In addition, profit margins were down modestly and price competition is intense. Overall, based on the higher sales and based on management’s confidence, it does appear that Canadian Tire’s positive trend has changed despite the lower profit in Q1. There are always risks but Canadian tire appears to be an attractive investment.

Stocks were down on Monday as Trump’s trade war with China escalates. The S&P 500 slumped 2.4%. Toronto did better with a decline of 0.6%.

Among the bigger declines was Apple, down 5.8% because its iPhones are mostly made in China and will be hit with Trump’s 25% tariff.

REITs and utilities did better today, for example Fortis was up 0.6% to $50.12.

The ONEX purchase of West jet at a big premium illustrates the fact that companies can often be worth more on the private market than on the publicly traded market. It’s also interesting that West Jet even with the premium was sold for $5 billion. Meanwhile I understand that many of the not-yet-profitable Cannabis companies are trading at valuations far higher than that.

On Friday, the S&P 500 and Toronto were each up 0.4% (but futures suggest markets could open lower by close to 1% on Monday morning).

Canadian Tire was down 2.6% as analysts digested its Q1 results which featured very good same-store sales growth but with earnings that did not meet expectations. Having looked at the earning report it looks to me like management remains very confident in how things are progressing.

AutoCanada was up 4.5%.

Stantec was up 2.0% after releasing Q1 earnings. I attended Stantec’s so-called annual general shareholder meeting on Friday morning. Well, it turned out that this was a meeting in form only and not in substance. I learned that for the last five years or so they stopped bothering to have any kind of management presentation at the annual meeting. They simply go through the process of officially recognizing the votes for directors and a few other standard items, all of which are pre-ordained as essentially all the votes have come in in advance of the meeting. It was disappointing that they appeared to have basically no desire to attract any retail share owners to their meeting. (And extremely few showed up.) This is probably the future for most companies. No financial journalists showed up – possibly because there no longer are any in Edmonton? At least I got a look at their new building the tallest in Edmonton by far – They don’t own the building but are the main office tenant and have their name on the building.

On Friday, Statistics Canada released the latest labour force survey and the results were eye popping!

“Employment rose by 107,000 in April, with notable gains in part-time work for youth. The unemployment rate declined by 0.1 percentage points to 5.7% as more people participated in the labour market.

On a year-over-year basis, employment grew by 426,000 (+2.3%), with gains in both full-time (+248,000) and part-time (+179,000) work. Over the same period, total hours worked were up 1.3%.”

Even considering that this is a survey rather than a count and that it incorporates seasonal adjustments and is generally subject to some level of error and uncertainty – this was undeniably a very strong report. It bodes well for Canada’s economy and corporate profits.

The report for Melcor Developments is updated for Q1 results and rated Buy at $13.40. Single family home building in Alberta has declined significantly and therefore Melcor sold 46% fewer building lots in Q1 compared to Q1 of the prior year.

In addition, no lots were sold in the U.S. as those sales tend to be done in larger blocks and do not occur every quarter. They are actively developing lots in the U.S. for sale later this year.

Melcor reported a significant decline in earnings in Q1 and that seems likely to be the case for the full year 2019. Lot sales in Canada will almost certainly decline. Offsetting this, they are developing more property in Alberta this year which has been a reliable source of profits. And U.S. lot sales could be higher. The market value of their investment rental buildings has recently been holding up well but there could be some declines due to moderately higher vacancies rates.

So, the near-term earnings outlook is certainly negative.

But meanwhile the shares trade at just 42% of book value and the book value consists of raw land, developed land, finished building lots and income (rental) properties that appear to be worth at least their stated book value. That would appear to provide a strong margin of safety.

Unfortunately, it appears that even more patience will be required for those holding this investment.

Ultimately, Melcor’s share price over the next few years will depend on whether the province can continue to grow leading to a rebound in single family home construction and increased demand for its office and retail rental space. There has been over-building in the office segment which will hold down lease rates and occupancy levels for some years. Despite a lot of gloom in Alberta, its real GDP grew 2.4% in 2018 and the population grew 1.7%. The unemployment rate has declined from a high of 9.1% in 2016 to 6.7% as of the April report. And the price of Western Canadian Select has improved sharply in the past six months to about the $50 level. Hopefully there will be progress on the pipelines including an expected federal cabinet approval of the TransMountain pipeline in June. That and the more business-friendly polocies of the new conservative government could certainly increase the optimism levels.

Overall, Melcor looks attractive based on its large discount to book value, but the stock is not without risk of languishing or declining.

The report for the Melcor REIT is also updated for Q1.

The report for Boston Pizza Royalties Income Trust is updated and rated Buy at $17.52.

The 7.9% cash yield is quite attractive.

If the 11.5 cents per share (unit) per month distribution will be maintained for a long time then this is a good investment. If the distribution will gradually increase at even 1 or 2% annually then this will be quite a good investment.

It all hinges on whether or not BP can maintain or grow its same store food sales. Liquor sales have no impact, each restaurant pays a royalty on food sales only – this does include takeout. Adding new restaurants has almost no impact since new units are issued to BP International for each new restaurant. New restaurants are supposed to be accretive although to only a very small degree – a 10% increase in the number restaurants is supposed to add 0.75% to distributable cash per unit but that may be more than offset by cannabalization of existing locations in many cases.

BP has historically increased its same store food sales – perhaps mostly simply due to menu price increases over the years. But in recent years same store food sales are down slightly due to several factors including the recession in Alberta, a new sales tax in Saskatchewan and higher minimum wages in Ontario and Alberta that led to additional menu price increases which in turn led to some customers staying away. Another factor could be that the Boston Pizza brand is getting a bit dated in the market. Certainly in Alberta newer chains including Brown’s Social House and The Canadian Brewhouse have taken market share.

Meanwhile BP was able to attract franchisees to build 10 new locations across Canada in 2018 – which shows confidence. And BP continues to try to attract business through advertising and menu updates.

Whether or not BP will be able to maintain or grow its same store food sales is not easy to predict. Take-out orders including Skip the dishes is adding to sales but in-restaurant sales have declined somewhat.

Adding to the risk is the current 103.4% payout ratio. They need to once again achieve same-store food sales growth soon in order to push this ratio back down to 100%.

The bottom line is an attractive cash distribution that could increase over the years, but which could also decline – although probably only slowly – but any decline in the distribution would likely see a significant drop in the unit price.

Thursday’s action saw the S&P 500 down 0.3% and Toronto down 0.5%.

Alimentation Couche-Tard was up 1.7%.

Canadian Tire was down 1.7% after releasing Q1 earnings that featured lower profits but very strong same-store sales growth. I added to my position on the dip this morning.

Canadian Western Bank was down 2.25%.

Boston Pizza was down just 0.4% which was not much reaction to its earnings report. It appears that analysts expect it to maintain the distribution.

Stantec reported earnings after the close with a modest 5% growth in adjusted earnings per share. But revenue growth was strong at 12.7%.

The BP Royalties Income Fund released Q1 results before the open. The results were better than I feared they might be but not as good as I hoped. Distributable cash per unit was down 0.7%. The trailing payout ratio was about stable at 103.4%. Same-store sales were down 1.3%. They were unchanged at 0.0% on the more important franchise-sales basis (which drives the franchise fee collected by the fund).

BP needs to begin to generate increases in same-store sales driving increases to distributable cash per unit. Otherwise it is going to have to cut its distribution. It would likely be a small cut and the cash distribution would remain attractive. However, the market would likely react quite negatively. They have indicated they have new menu items and promotions to drive sales but so far the results are not apparent. The next two quarters will need to show progress.

Despite the very attractive 7.8% cash yield, I am losing my enthusiasm for this name. It appears to be losing market share to newer entrants. Historically, they have been able to slowly increase the distribution even if just due to menu price inflation. Recently there has been some headwinds.

It may be prudent to trim this position.

On Wednesday, the S&P 500 was down 0.2% while Toronto rose 0.2%

There was not much movement of note in the prices of the stocks on our list but AutoCanada rose 2.9%.

A headline today was that housing starts in April jumped 23% to an annualized 235,000 housing units. And even single family starts were up 6%. Well that sounded good. But really it was too good to be true. These gains were versus March and volatility makes such a month over month comparison rather unreliable. CMHC gave top billing to saying that the trend line was up just 2% to 206,000 units. That’s a far cry from a 23% increase.

On a year-to-date basis housing starts are down 8% and single detached are down 29%!

In Alberta housing starts are down 15% year to date and single detached starts are down 29% (and were down 25% versus April 2018). The weak numbers for Alberta are not a surprise.

Melcor Developments reported Q1 results after the close. As expected, it was a weak quarter. Its results are inherently lumpy due to sales of commercial land in Canada (mostly Alberta) and of residential lots in the U.S. which can be high in one quarter and then at or near zero in another quarter. Residential building lots in the U.S. tend to be sold in larger quantities to fewer builders versus Canada so that some quarters will have no sales (like this one) and other quarters have substantial sales. Since a weak quarter was expected, the stock may not react much. It’s property development division continues to be strong. Despite the slow economy in Alberta a fair amount of development continues. Melcor develops property only after getting sufficient leases in place ahead of construction.

On Tuesday, markets declined in further reaction to Trump’s trade tariff threats against China.

The S&P 500 was down 1.65% while Toronto was down 0.8%.

The larger decliners included : Linamar, down 2.9%; WSP Global, down 3.5%; Constellation Software down 3.5%

Regarding Linamar, I read the conference call transcript today and got a better sense of their outlook. Management is projecting a mid-single digit rise in normalized operating earnings – despite weakness in a number of its markets. It was not clear, but this probably means that actual adjusted net earnings per share will be flat to down slightly since interest costs and depreciation will be higher. It appears that Q2 will show an earnings decline and the company expects results to start to improve in the last half of the year. So the company does face some headwinds. But the stock price seems to more than reflect that and appears very cheap. I added somewhat to my position. Despite the low valuation the stock could certainly struggle given negative market sentiment towards this industry and given some decline in earnings from the excellent levels of 2018. This is another stock that will require considerable patience.

TD Direct has a new issue from Capital Power of a 5.75% rate reset share that has a minimum reset of 5.75%. This is worth considering especially for those looking to generate cash yield from a portfolio and especially in a taxable account where the dividend tax credit applies. The other discount brokers presumably have this offer as well. It will likely sell out fairly quickly this morning. But it was still available about 90 minutes after TD sent is alert. If you are interested in new issues like this sign up for new issue alerts from your broker.

On Monday. markets were initially down about 2% as Trump escalated trade tensions with China, but by the end of the day the decline was modest.

The S&P 500 was down 0.45% and Toronto closed virtually unchanged.

Earnings reports this week include Stantec, Canadian Tire and Melcor Developments.

With the sale of its problematic construction services division, Stantec can hopefully report a good earnings increase from continuing operations. It should be benefiting from the strong U.S. economy.

Canadian Tire has been growing earnings but could face headwinds from weather and a lower Canadian dollar.

Melcor will likely report continued progress in its commercial building development activity, as well as its U.S. operations. Its rental properties will likely be down moderately. Residential home building lot sales will likely be quite weak.

Linamar is updated and rated Strong Buy at $48.10. With earnings in the past 12 months of $8.82 and trading at just 82% of book value despite a trailing ROE of 16%, it certainly looks cheap. But the auto industry has declined somewhat especially in Europe and Asia. Linamar was previously projecting an earnings gain in mid single digits percentage for 2019 but with a decline in Q1 it may struggle just to match the 2018 figure. Over time it will likely continue to grow and if so, its current price is a good buying opportunity.

Futures indicate the market could open down about 2% as Trump has escalated the trade war with China imposing higher tariffs, apparently hoping to jolt China into fast agreement on a trade deal.

On Friday, the S&P 500 was up a hefty 1.0% and Toronto was up 0.5%.

Shopify was up 3.3%, Amazon was up 3.2%.

Canadian Western Bank was up 1.5%, Canadian Tire was up 1.6%, Toll Brothers was up 1.6%, American Express was up 1.8% and Andrew Peller was up 1.9%

Linamar was down 3.6% after reporting a decline in Q1 earnings. This stock certainly looks cheap. But 2019 is expected to be a weak year in which it will struggle to achieve any earnings growth. Therefore it may well remain cheap for some time.

AutoCanada was down 7.8% after reporting a loss in Q1 and after withdrawing its guidance regarding its expected 2019 EBITDA from Canadian operations. The withdrawal of guidance is something that tends to upset analysts. Management is still expressing a lot of confidence that things are getting better.

Warren Buffett and Charlie Munger once again answered questions for about five hours (with a break for lunch) at Berkshire’s annual meeting. Yahoo Finance livestreamed it:
https://finance.yahoo.com/brklivestream (The questions start about an hour into the recording).

In responding to one question about how to invest successfully, Charlie Munger said “Figure out what works, and then do it.” That strikes me as useful advice for any aspect of life.

The report for CRH Medical is updated for its Q1 report. The company replaced the CEO on April 9th. Q1 had a 22% increase in revenues per share. Adjusted earnings per share were about unchanged. My expectations is that revenues and adjusted earnings per share will increase materially (for example perhaps 20%) in 2019.

On Thursday, the S&P 500 fell 0.2% and Toronto was down 0.6%.

Shopify was up another 3.9%.

Aecon fell 3.1%.

Canadian Tire was up 1.8%.

The Melcor REIT released earnings which were lower but which was not unexpected.

Linimar also released lower earnings but which also included market share gains in a tough market.

AutoCananda released Q1 earnings. The company reported a loss but also made progress in their plans and so the market may react favorably to the earnings report. The U.S. division continued to be be a big drag on the business.

On Wednesday, the S&P 500 was down 0.75% and Toronto was down 0.5%.

Apple was up 4.9%.

Constellation Software was up 2.1%. After the close it announced Q1 earnings with a revenue increase but a decrease of 11% in adjusted earnings per share. It also announced after the close a reduction in its hurdle rate regarding large acquisitions. This means it will pay more for a large acquisition. The company said this will make it more price competitive in securing these acquisitions. Constellation is extremely well managed and I would trust that it is doing the right thing here.

FedEx was down 2.0%. Linamar was also down 2.0%.

CRH Medical reported Q1 earnings after the close. Its accounting is complex and requires adjustments to the GAAP figures to arrive at a figure that better represents its true economic earnings. I thought the results were reasonably good and showed progress. But it is always hard to know how analysts will view the results.

Statistics Canada released 2018 real GDP growth figures by Province. With all the gloom in Alberta it is surprising to see they report a 2.8% growth for Alberta.
“Among the provinces, the strongest growth occurred in Prince Edward Island (+2.6%), followed by Quebec (+2.5%), British Columbia (+2.4%), Alberta (+2.3%) and Ontario (+2.2%). Growth was below the national average in Saskatchewan (+1.6%), Manitoba (+1.3%) and Nova Scotia (+1.2%). New Brunswick real GDP edged up 0.1%.”

April light vehicle sales figures were released and it was yet another weak month with unit sales down 3.5%. Fiat Chrysler was again very weak with a decline of 9.8%. I had occasion to be in some dealers over the past few weeks and things appeared to fairly busy. I just noticed today the local Chrysler dealer in my area is relocating to a new (and presumably larger and costly) location. Car dealers are still generally a profitable business as long as they are not saddled with too much debt.

A newer Canadian Western Bank preferred share CWB.PR.D that I have mentioned in the past closed today at $25.65. It pays 6.0% on $25 and so yields 5.8% and will not reset for almost five years. I had bought some when it was issued but was allocated less than I asked for. I bought more today at $25.76. This was in an RRPS where I want to generate a cash yield. 5.8% is not an exciting return but it can merit a place in a portfolio.

On Tuesday, the S&P 500 was up 0.1% while Toronto was down 0.1%.

Shopify was up 7.5% to U.S. $243.53 ($325.75 in Toronto) after reporting a 50% increase in Q1 revenue to $321. million. The market cap is U.S. $27 billion or about 21 times run-rate revenue. The company lost money on a GAAP basis but made U.S. 9 cents per share on adjusted basis. It is a massive growth story. It would seem to be very difficult to value the stock given the lack of earnings but offset by massive growth and huge expected future earnings.

Aecon was up 1.7%.

Toll Brothers was up 1.4%. FedEx was up 1.5%.

CN Rail was down 1.4%. Dollarama was down 1.8%.

I attended the annual meetings of the Melcor REIT as well as Melcor Developments today. I got clarification on the REIT’s right of first offer on buying buildings that Melcor develops. Once Melcor Developments has developed a building and has it leased it to at least 90% occupancy it is obligated to offer the property to the REIT at appraised value. I asked what the advantage was to Melcor Developments. Because Melcor Developments owns 53% of the REIT they don’t have to pay capital gains tax on the sale and yet they have effectively sold 47% of the building to the public share owners of the REIT. They also avoid real estate selling fees of about 2%. Based on these advantages, the REIT is usually able to negotiate a discount of 2 to 4%. So, it seems that the right of first offer is advantageous to both the REIT and Melcor Developments. Unfortunately, the REIT usually has to issue new units to pay for the building (along with debt). That works a lot better when the REIT units are at 100% or more of book value and does not work so well when they trade at 70% of appraised asset value as they now do. 

Overall, the message from these meetings was that Melcor Developments and the REIT expect relatively stable results in 2019. There continue to be some headwinds. The shares of both Melcor and the REIT may continue to languish unless there is some catalyst such as higher oil prices or a pipeline announcement. Melcor Developments is subject to significant earnings volatility while the REIT tends to be quite stable in terms of cashflow. But the REIT is paying out around 100% of adjusted funds from operations. I believe the indication was that this may move above 100% but that they would use available cash and credit to most likely maintain the distribution.

Statistics Canada reported that February’s GDP was down 0.1% versus January, . (Does anyone seriously think that the country’s GDP can be measured so accurately that it is known to a 0.1% accuracy? – but certainly a slow month…). contributing to the decline were lower Potash sales to the U.S. as well as lower coal exports. And rail transportation was down 11% versus January. Construction was up.  “Leading the growth was a 1.2% expansion in residential construction due to gains in single, semi-detached, row and apartment type-dwellings.” That seems surprising given weakness in the real estate market. 

I tend to pay more attention to the year-over-year change as a more reliable figure and which largely eliminates the estimation involved in seasonal adjustment. Year over year GDP was up 1.1%. Not great but at least positive. And, as always, these are real dollars and meant to estimate the volume change as opposed to price movements. (Nominal GDP growth therefore tends to be higher counting inflation). Year over year construction was down 4.5% which is consistent with other weak reports regarding real estate.

Today , Trump and the Democrats tentatively agreed to initiate a 2 trillion dollar infrastructure spending program. That is huge and has to be good for the U.S. economy. Some Canadian companies would benefit too such as Stantec and probably WSP Global as well as SNC Lavelin. 

Speaking of SNC… Stephen Jarislowsky (a famed investor who I respect) is calling for a vote on SNC Lavelin’s sale of its 16.5% share of Toll Road Highway 407. Jarislowsky said the portion of the 407 represents 80% of SNC’s value and said that after the sale SNC would be left with a “near worthless” asset (its engineering business). Back in a June 20, 2012 post I said that I thought the top executives knew about the bribes. In general I think SNC’s bribe problems were self-inflicted and they they have always tried to distance themselves from the problem rather than admitting to management’s role at that time. But those problems were a long time ago now. It’s scary to think how a company can ruin its reputation this way. Stantec and WSP Global are both valued for their revenues and earnings and not for their assets. These types of companies must be vigilant in protecting their reputations.

Even with SNC’s troubles I find it hard to believe that its engineering business is “near worthless”. I would think it would eventually recover. On the other hand it is always possible that some or all of it will be sold off to the likes of Stantec and WSP.

After the close, Apple announced Q2 earnings which beat expectations. It also announced it will increase its stock buyback by $75 billion dollars. I don’t think there is any other company in the world that could announce a $75 billion share buy back let alone “an additional” $75 billion. That is truly a staggering amount of money.

Berkshire Hathaway has a deal to help Occidental Petroleum buy Anadarko Petroleum. Berkshire would put in $10 billion and get paid 8% as preferred shares (ranking ahead of other debt it would seem) plus get warrants to buy Occidental shares. This is a sweet deal for Berkshire. Some people complain that Buffett gets these special deals. But he put Berkshire in a position years ago to get these deals. He holds massively more equity and cash than he could do. This is a drag on earnings and return on equity most of the time but then allows these sweet deals. Buffett is also in a position to agree to these sorts of deals on the spot whereas any other source of $10 billion would have to go through some layers of approval and take time. Speed of execution has long been a big competitive advantage for Berkshire.

Occidental Petroleum, by the way, was ran by a fascinating man named Armand Hammer from 1957 until his death in 1990 at the age of 92. I read his autobiography years ago which told fascinating stories about how he made money during prohibition by cornering the market and importing “tincture of ginger” (which apparently contains alcohol)  from India through his father’s drugstore and therefore had about the only legal source of alcohol in New York during prohibition. He had many other profitable adventures including meetings and dealings with Lenin in Moscow both before and after Russia became communist, as I recall. Buffett loves this sort of history, although I am not sure that Buffett would approve of some of the things Armand Hammer got involved in.

On Monday, the S&P 500 was up 0.1% while Toronto was down 0.1%.

AutoCanada was up 2.5% and Linamar was up 1.8%.

I added a small amount to my Canadian Tire position today. In general, I think the company continues to do well. But headwinds in Q1 (not yet reported) may include poor weather and the lower Canadian dollar.

After the close CN Rail reported earnings which were up 6% but somewhat below expectations. This has been a winning investment for a very long time.

On Friday, markets were down earlier in the day but recovered for a 0.5% gain in the S&P 500 and 0.2% for Toronto.

Aecon (see update just below) gained 7.1% after releasing Q1 earnings which featured an 18% gain in revenues per share and a smaller loss than the prior year.

CRH Medical was up 4.6% in Toronto.

Amazon was up another 2.5%.

American Express was up 1.5%.

Regarding AutoCanada, I had emailed some questions to the company and had not received any response despite follow up emails and phone calls. But when I emailed today, the Chairman (and effectively CEO), PauL Antony called me back. He had come onto the Board the very day the disastrous U.S. Grossenger acquisition was announced. He basically said that was one of the dumbest purchases he had ever seen. The due diligence was completely lacking. For example, AutoCanada was not aware that the leases on the purchased dealerships were being subsidized by the car manufactures and even (bizzarely) by the City of Chicago and that those subsidies would end upon the purchase. I believe he was saying that some of the leases have now been negotiated lower but I did not get much detail on that. The bottom line is that Paul Antony certainly appears to believe that AutoCanada can improve from here. But it is going take a lot of work and certainly some time and meanwhile the industry faces headwinds of lower sales. It has become ever more apparent that the past management did a poor job. I believe Paul Antony is far more able and motivated than the past management. But he is saddled with the past mistakes including the money-losing U.S. dealerships.

Our Stock picks are up an average of 14.7% this year. In fact fully 27 of the 28 stocks rated in the Buy or Strong ranges at January 1 are up in price. And the one that is down is down is down by only a penny. Normally that would be great. But it trails the market as the TSX is up 16.0% and also it comes after a poor 2018.

Aecon is updated for its Q1 results and rated Speculative (lower) Buy at $18.76

Aecon was just added to the list a few days ago. It’s Q1 numbers came out and I have done an update for that.

Based on Q1 its numbers are improved. 2019 is expected to show a big increase in revenue and a meaningful increase in profits. This was the case in Q1 although profits merely became less negative. The stock could certainly rise from here. But I have hard time “getting past” its record of low ROEs and its low gross profit levels. It takes on large, complex and important construction projects and yet does not seem to make a very good return most years. Q1 is seasonally a tougher quarter but I have a hard time understanding why it did not make at least some bottom line profit in Q1. There were no unusual problems noted in Q1 and yet the lack of profits. The bottom line is that it could be bought for the potential earnings growth this year but it does not seem like a reliably good investment for the long term. But perhaps a different picture will emerge by the end of this year.

On Thursday, the S&P 500 was about unchanged while Toronto was down 0.1%

American Express was up 1.6%.

FedEx was down 4.5%.

Toll Brothers was down 2.1%. It had been doing quite well despite mostly weaker results on U.S. home building so the drop today seems like a sort of delayed reaction. And the latest new home sales report was unexpectedly strong. As always, stocks can sometimes move in the opposite direction that might be expected based on news.

The Melcor REIT announced that it has purchased a $12.45 million retail / warehouse building in Calgary that is leased to a national tenant for 15 years with scheduled rent increases. To put this in context, the REIT has total assets of $684 million so this is a modest addition of less than 2% to its properties. The purchase was funded with debt (a credit line). The purchase is accretive to Adjusted Funds From Operations per unit. The use of debt for this purchase means that no new shares (units) have to be issued and that is good. Issuing new units (which is effectively selling off a small portion of all the existing buildings to new owners) at a 30% discount to book value (which is based on the market value of the buildings) in order to buy property that is presumably at 100% of market value would not make sense to me.

Despite already having too much exposure to Melcor Developments I added to my position in the Melcor REIT today. In theory, I am buying a tiny share of their buildings at a discount to the price that buildings trade for in the market.

On Wednesday the S&P 500 was down 0.2% while Toronto was down 0.5%.

TFI International was up 5.0% due to its strong earnings report.

The Bank of Canada indicates that it no longer has a bias toward higher interest rates. The five year Canada bond yield is at 1.5%. It is amazing how many times an upward movement in interest rates has fizzled out over the years. Looking at the 5 year government bond yield, going back to 1999, every upward trend has ended and then headed even lower. With the exception that we are still above the lows of 2016. Interest rates are notoriously hard to predict. My bet at this time would be that rates stay about where they are.

Given the above confirmation from the Bank of Canada, the Canadian dollar fell to 74.1 U.S. cents. Not good for Canadians traveling abroad, not good for importers or the prices of imported items but good for exporters – including oil and gas exporters.

Taking a look at rail car loading reports for Canada they are currently running noticeably higher than 2018. They did dip in the last two weeks but there was similar dip in the same weeks last year. The latest data was reported today. Intermodal (consumer goods) was up 10% in the latest week versus last year. Petroleum car loads are up quite noticeably versus 2018. But overall total car load traffic year to date is up only 2.3%.

Stock markets were strong on Tuesday with both the S&P 500 (up 0.9%) and Toronto (up 0.6%) closing at new highs.

Gainers included Dollarama up 4.1%, Amazon up 1.9%, Constellation Software up 1.6%.

Linamar was down 2.1%.

A report today indicated that U.S. new home sales rose to a 16 month high in March, topping estimates. That would seem to contradict reports of weaker housing starts. The explanation may be that these were sales of completed homes, both “spec” homes and homes contracted to be built about one year ago. Credit was given to the very recent drop in mortgage rates but it was just not clear to me how many of these were March purchases of spec homes versus homes contracted for some time ago. In any case it is at least somewhat positive news for Toll Brothers.

After the close, TFI Industries was out with a strong Q1 report that appeared to be even better than analyst expectations.

The large construction company, Aecon is added to our list but only rated Speculative (lower) Buy at $16.86. (It closed today at $17.00) I was asked by an associate of mine to add this to the list and also I thought it would be interesting to learn about this company and to add diversification to the list.

Unfortunately, Aeco has a fairly poor and volatile profit history over the past ten years. But it is expected to grow strongly in 2019 and it has been increasing its dividend which now provides a 3.4% yield. So, it is worth considering given the stronger near-term outlook. But at the same time it has a poor history in terms of profit and it may be wiser to invest in more stable companies. It will report earnings on Thursday which are expected to show a big increase versus a weak Q1 in 2018.

I think Aecon contributes very positively to the Canadian economy through the work that it does. But it has not proven to be a good investment most of the time.

On Monday, markets mostly took a break from the recent upward trend. The S&P 500 did manage to gain 0.1%. The DOW was down 0.2% and Toronto was also down 0.2%.

Toll Brothers was down 2.6% after a weak report regarding U.S. single family housing starts in March. Despite lower mortgage rates home building has not picked up. Toll Brothers has done well to have risen in 19% 2019 (before today’s drop) despite continued weakness in U.S. housing starts and permits. Some of the reasons cited for the industry weakness include a lack of available building lots and labour shortages. Normally, I would expect market forces to take care of the labour shortage but it may be that tougher immigration policies are having an impact. Anecdotally, I have heard that Mexican workers were extensively used in home building. If the issue is a building lot shortage this should be a strength for Toll Brothers. They have a big inventory of lots available.

Toll Brothers also announced today that it is now the 14th largest developer of multi-family houses in the U.S. and the fastest growing. It broke ground on 2,800 apartment homes in 2018. It intends to rent out most or all of these. In total it owns or controls land for a potential 18,000 apartment units. Since this ties up capital and since this REIT type income might not be fully valued inside of a home builder / land developer, I would not be surprised to see Toll Brothers sell some of these apartments to joint venture partners or even spin off a partially owned REIT at some point.

Overall though it is not clear how well Toll Brothers stock will do this year in the face of industry headwinds. The stock could remain cheap and of course can always get cheaper, at lest temporarily. But last year they made an ROE of 16% and if they can stay close to that the stock will eventually respond.

Shopify traded over $300 today. It seems that nothing has been able to stop the momentum – not short sellers, not high multiples to sales. Not so far at least.

Tomorrow I will add the construction company Aecon Group Inc. to the list. It is in a tough business. I find it hard to fathom that it only made a net profit of 1.8% of revenue last year. And that was despite a sharp increase in profits versus 2017. It’s ROE has historically been sub-par at least over the past ten years. It does however have a 3.4% dividend yield and has increased the dividend steadily. I think it does great work and benefits the country and its government and private sector customers though its work. It was interesting to learn some of the projects it is involved in. But I find the profit level to be disappointing especially given the risks it takes on. It is set to probably sharply increase profits again this year (forecast around 25%). For that reason, it might be worth a look as a speculative pick but overall it does not seem like a high quality company to own for the long term in terms of profits. It will release Q1 earnings later this week and so buying in the next day or so would be more speculative s opposed to waiting for the earnings report.

Our Melcor Developments report is updated and rated (higher) Buy at $13.70

This has been a frustrating investment. It is extremely thinly traded and has basically no analyst coverage. Partly due to a lack of analyst coverage, it trades at a huge discount to book value (currently a 57% discount). It has a history of usually trading somewhat below book value and has traded substantially below book value for the last five years.

I have given some thought as to why a company would trade below book value.

Valid reasons for a company trading below book value would include that the assets are over-valued on the book, that the company is making too low a return on equity and/or that its outlook is for a poor return on equity.

In Melcor’s case about half of its assets are its income-producing (rental) properties that are marked to market and 38% of its assets are land (19% raw land, 7% land under development, 12% land inventory). Overall, there has been no indication that the book value of its assets exceeds fair market value. Values can decline, but currently the land is likely worth somewhat more than book value.

But Melcor’s return on equity on a GAAP basis has been unacceptably low for the past four years. And on an adjusted basis I calculate the ROE at only 5 to 6% for the past four years. But that is under stated because excludes the regular market value gains it has been making by developing buildings.

One way to measure its return on equity would be to look at its average gain in book value per share over a period of years. Since 2009 its book value is based on IFRS accounting which marks its investment rental buildings to market. This caused a sharp increase in book value per share in 2009. Since then, book value per share has grown at a compounded average of 7.9% per year. That growth includes market value gains on buildings driven by development work on new buildings. And I would add about 2% for average dividends as a percent of book value to that for a total 9.9% ROE – which is arguably an acceptable although not a great return on equity. But that also included some benefit from declining “capitalization rates” used in valuing its rental buildings (from 7.28% average in 2010 to 6.47% in 2018) and cannot be expected to apply in future and could reverse with higher interest rates.

Melcor uses FFO as its preferred measure of income. On an FFO basis, Melcor’s ROE in 2018 was only 5 to 6% for the past two years and that is unacceptably low (unless it is expected to rise). But FFO would give no credit for market value gains even on new building developments and so that would seem to understate the “true” ROE.

Overall, it does appear that Melcor’s ROE may be somewhat too low even over longer periods. That would justify the shares trading somewhat below book value. But other reasons such as the lack of trading liquidity and the inherent volatility of earnings may be responsible for most of the discount.

While Melcor is under-valued on an asset basis, it seems it will continue to require patience. It probably should only be bought by investors who are prepared to hold for the longer term such as five years or more.

The Toronto Stock Exchange Index closed at a new record high on Thursday, up 0.4% on the day. Meanwhile, the S&P 500 was up 0.2%.

Most of the stocks on our list were up modestly. Dollarama had a strong day, rising 3.3%.

Statistics Canada released figures for Food Services and Drinking places as of February. I focus on year-over year changes. Alberta was up 1.6%. Ontario was up 5.4% and BC was up 5.0%. Even with its concentration in Alberta and considering that these figures likely reflect more restaurants in 2019 versus 2018, this should bode well for Boston Pizza to achieve some same-store sales growth for February (and Q1) – unless they are losing market share. The report also shows that February saw little growth (0.6%) versus January for Canada and was down 1.6% in Alberta. So that is a weak trend to start the year.

Retail sales were also re[ported and there was not much growth year over year but February was stronger than January on a seasonally adjusted basis.

I mentioned I put in an order to participate in the offering of 6.75% convertible debentures from Surge Energy. I see I was allocated only 25% of what I offered to purchase. So, apparently investors found this to be attractive. I would not be surprised if this trades right around par so I can buy more if I want to when it starts trading.

On Wednesday, the S&P 500 was down 0.2% but Toronto was up 0.25%.

Apple was up 1.95%. Constellation Software was up 1.8%.

TFI International was up 1.6%. It announced a small acquisition after the close. It will pay only US $7.2 million plus it will take on an undisclosed amount of accounts payables. The transactions adds U.S. $100 million in revenue. Most of the added business will be served out of terminals already owned by TFI. They will acquire only 7 of 69 terminals or locations used by the sellers. It sounds like the business may have been unprofitable for the sellers but could be quite profitable for TFI because of synergies whereby they can serve the customers from their existing TFI locations..

TD Direct was out with an offering of 6.75% convertible debentures from Surge Energy. I don’t know anything about Surge Energy but decided to take a chance and buy some of these for the yield. The deal did not seem to sell out quickly but is now shown as closed.

Statistics Canada was out with the latest inflation figures which were 1.9% year over year. It is remarkable how steady reported inflation has been.

On Tuesday, markets were little changed as the S&P 500 was up fractionally and Toronto was down 0.1%.

Toll Brothers was up 1.9%. Constellation Software was down 2.3%.

Canadian Western Bank announced that its rate reset preferred share which reset this month will remain a fixed reset shares. Holders had the option to convert to a floating rate option but only if a minimum of 500,000 shares wanted to convert. That did not happen. Its hard to say if that was due to apathy or a real preference to stick with the fixed rate.

The 3 month T-Bill is currently very similar to the 5 year Canada bond yield. That would mean that the floating rate shares would have started out paying just around precisely the same rate as the five year fixed reset. In this circumstance the floating rate option might have been the better option. Certainly it was if you expect rates to rise over the next five years. But for whatever reasons few people chose the floating option – possibly simply because the default option was to stay fixed for another five years.

These shares will now pay 4.301% of $25 annually. The yield at their current price of $19.21 is 5.6%. When these shares were issued in 2014 the market deemed them to be worth $25 despite paying only 4.4%. This was with the five year Canada bond yielding 1.58% which is basically the same as today. But today the market demands a significantly higher yield of 5.6%. In part that may be due to the fact that very short term accounts now yield closer to 2% whereas they were closer to 0% in 2014. Or it may be due to the poor experience with rate reset shares that has investors demanding a bigger risk premium. In 2014, some investors thought of rate resets as a sort of substitute for cash but with better interest. But resets fell in price and investors found out that they were not a substitute for cash. Also in 2014 investors probably thought there was virtually no chance that the five year Canada government bond rate would fall as it was already so low at 1.58%. But it did fall to near a shockingly low 0.5% at one point. And so today investors know there is a chance rates could fall even if they are expected to rise.

Our report on the Melcor REIT is updated and rated Buy at $7.64

The yield at 8.8% is quite attractive. But note it does not qualify for the dividend tax credit and so is best suited for non-taxable accounts. While the yield is attractive there may be little growth in the unit price even in the long term. At some point the units should move back up towards book value which gives some potential for gain. But that may not happen, if at all, for another year or two given the recession in Alberta and pressures to lower rents upon renewal. But he REIT is well managed and has good properties with only about 10% of the space up for renewal in each of the next four years.

The units trade at about 70% of book value and book value is based on the market value of the buildings. That discount as well as the yield support a rating of Buy.

On Monday, the S&P 500 was down 0.1% while Toronto was up 0.2%.

Costco was up 1.8% and trades at a trailing P/E of 32 and a forward P/E of 29. That is expensive but it is also about typical for Costco.

Shopify was up another 1.8% to $292 in Toronto. I had ran the numbers on it early this year but was not prepared to put a rating on it, other than to say it was speculative. It has surged almost 50% since then. I don’t know the basis for its current price. Do people buy, because it has gone higher? Will its Q1 growth be enough to satisfy expectations? For those with big gains, I would think it would be prudent to at least trim this position.

On Friday, markets were strong with the S&P 500 up 0.7%, Toronto up 0.5% and the DOW up a full percentage point.

Correspondingly, most of the stocks on our list were up on the day. FedEx was up 2.6%, Canadian Western Bank was up 1.8%. Berkshire Hathaway was up 1.9%.

Statistics Canad released a report showing that the prices for newly built homes have remained quite stable. In the face of softer housing markets, builders have not done much discounting (though they may be doing some through incentives other than price). Most new single family homes are pre-sold before they are built. It is builders who have “spec” homes that are more likely to be forced to discount – possibly heavily.

Ceapro is updated. This basically something of a lottery ticket stock. It’s a difficult one to put a rating on but I settled on Highly Speculative Buy / Hold.

Actually, Ceapro does not really even belong on this site because it is such an early-stage company. When I first added it to the site just over two years ago, it was making decent earnings on a line of existing products as well as undertaking research into new products. So, at that time it looked like it might be a reasonable investment just based on its existing products and growth in those and that the research efforts might provide a bonus. Also it had recently raised substantial cash and so had a strong balance sheet.

Subsequently the company disappointed me in several ways. Its sales of existing products fell even as it was spending substantial money to relocate and build expanded production facilities for those products. And over quite a number of quarters it provided almost zero information on the reason for the sales decline. Then the new production facility basically sat unused for about two years as commissioning the facility and obtaining permission from its customers to produce at the new location took a very long time – with not much explanation along the way. Meanwhile they continued to capitalize costs to the new facility and not amortize it which in my view seemed to distort profits upwards. Then they ran into a lawsuit and had to pay out substantial funds.

The company decided to focus more heavily of research for future products. With added expenses and with lower sales of the existing products the profits evaporated.

So now, the reason to buy the stock or continue to own it would be to benefit from the potential of its research efforts. I really have no ability to judge the potential of those efforts. They have a clinical trial just getting underway to use one of their products as a cholesterol-reducing agent. That certainly sounds intriguing and could be worth a lot if it works. But realistically, the odds of a break-through product may be quite slim. They do have a number of other products in development and apparently some of their processing and manufacturing patents may be valuable and could possibly be licensed out.

So, overall, this is definitely a high risk investment. If I did not already have a small investment in it, I would not likely make one now. But given I have some familiarity with it and given its possible future products I have added somewhat to my investment. I would not recommend more than a small investment here. They will need to raise money and might do so at a low share price and there is certainly no guarantee that its research efforts will pay off.

On Thursday, the S&P 500 and Toronto were each essentially unchanged.

Shopify was up 2.5% to a another record high.

Penny stock Ceapro was up 10% most of the day and ended the day up 7.5%. It reported a big gain in sales in Q4 and a small profit in Q4. But it remains essentially a lottery ticket on the outcome of its research efforts. I will likely add a little to my small position. This is a highly speculative investment.

Andrew Peller announced that it will undertake a big advertising campaign. I have it rated only (lower) Buy. The advertising should certainly boost sales.

On Wednesday, the S&P 500 and Toronto each rose about 0.35%.

Linamar was up 1.7%. Dollarama was up 2.0%. CRH Medical was up 3.0%.

AutoCanada rebounded 4.1%. An interesting report today revealed that sales at Canadian new car dealers actually rose slightly to a new record in 2018. New vehicle sales were down but used vehicle sales were up and the service centers also had gains. Possibly due to its concentration in Alberta and its particular mix of brands, AutoCanada suffered a 3% same-store sales decline. But its more serious problems relate to its newly acquired U.S. operations. Checking insider trading, the only recent trade is that the departing CFO (who is leaving on very good terms and who was part of the new management team) sold all of his 30,000 shares on March 20 at $11.45. Not exactly a vote of confidence on his part.

After the close, Canadian Western Bank announced that they have obtained permission to buy back 2% of their shares. Canadian Western Bank had never bought back any shares until it bought back 2% in December and January in response to its low share price. At their annual meeting last week, I asked if they might back more shares. I did not get a clear answer then, but now I have one. In some cases companies announce buy backs but never follow through. In this case I think we can expect to see them buy up the 2% quite quickly. I view this as a sign of confidence on the part of management.

Also after the close, Costco announced yet another month of strong same-store sales growth.

Tuesday’s action saw the S&P 500 fall 0.6% and Toronto down 0.4%.

Shopify rose 2.0%.

Boston Pizza royalties Income Fund rose 1.1% to $17.31. At this price the yield is 8.0%. That suggests that the market may fear a distribution cut and certainly no growth. However, the recent modest gain in BP may indicate that the fear is subsiding. And if BP can begin to show some same-store sales growth that would further quell the fear. Looking at insider trading, there have been no insider trades so far in 2019. Two insiders did grab a few shares late last year at under $15 when markets had slumped.

Checking research, I see that TD does not cover it nor does RBC and apparently only two analysts do. So why might that be? Well, BP only rarely has issued new units to the public. Each year they issue new units to BP International based on the number of net new restaurants opened (which drives additional royalty revenue for the Fund). But that does not produce any Commissions for the brokers. And so the lack of potential commissions would seem to explain the lack of analyst coverage.

The discount on Canadian oil is way down, probably mostly due to the government mandated production cuts. And the price of West Texas oil has increased. Therefore it seems likely that the Canadian oil producers will report better profits in Q1. According to BNN the price of the Energy sector is up 18% this year. Based on the potential for further upside and for diversification, I bought some of the energy ETF, XEG today. Partly to pay for that I sold my modest investment in the Australian ETF, EWA. I will shift the U.S. cash that results from that sale back to Canadian dollars using DLR.u and the Norbert Gambit which I have explained int he past.

The Alberta election is only one week away. If, as expected, the United Conservative party wins, that could possibly generate some optimism for the Alberta economy. And there is an expectation of (another) final? federal government approval, by the end of May, of the Trans Mountain pipeline expansion.

After starting the day in negative territory, market ended slightly positive with the S&P 500 and Toronto each up 0.1%.

Apple Inc. was up 1.6% to $200.10. Canadian Tire was up 1.5%.

Statistics Canada reported the value of building permits for February. For Canada there was a decline of 5.7% versus January due to a decline in construction intentions for multi-family residential. These figures can be volatile month to month but there is no doubt construction has slowed down.

Bank of Montreal is out this morning with a 5.1% rate reset preferred share. This is down a little from a recent CIBC issue at 5.2% but still indicates lower investor appetite for these shares which means the banks need to offer higher yields to sell them. This Bank of Montreal issue has a reset spread of 3.5% (over the 5 year Canada bond yield) which is on the higher end of what the spreads have been over the years. (For TD the spreads since 20134 have been mostly under 3.0% but the highest was 4.66%.)

At 5.1% these shares could be a good choice for those looking for yield and planning to hold for the long term. still, they could decline in value if the banks actually do run into higher loan losses as some expect.

P.S. earlier this issue was still open but as of 11:00 am eastern it is closed at T.D. Direct meaning they sold out.

On Friday, the S&P 500 and Toronto were each up 0.5%.

Notable gainers included: WSP Global, up 2.3%; TFI International, up 2.1% and Linamar, up 1.7%.

Statistics Canada released another of its volatile jobs reports, this time indicating little change in March. Headlines spoke of 7,000 jobs lost in March but that is basically unchanged when you consider the statistical error level and the fact that the number of people employed is 18.9 million, A difference of 7000 in a population of 18.9 million is basically below the accuracy of the measuring device. It’s the equivalent of a 175 pound person losing one ounce of weight. The results are probably more reliable over longer periods and they indicate strong gains in the first three months of 2019 as well as over the past 12 months. The unemployment rate remains very low (by historical standards) at 5.8% for Canada. Alberta was measured at 6.9% unemployment (of the population that is either working or actively looking for work – which is defined as the labour force) which is high by historical standards for Alberta.

The latest rail-car loading report (from Wednesday) shows Canadian rail car loadings running very strong. The latest week was particularly strong. In contrast, rail car traffic in the U.S. has been running noticeably under the 2018 levels. Most likely, CN and CP will report good results for Q1.

Stantec is updated and rated Buy at $32.64. Historically, Stantec has been a strong growth-by-acquisition company. However, the stock has been relatively flat for the past four years. Initially, this was due to the impact of lower oil prices which slowed its business. Then, in 2016 it made a very large acquisition which came with a “Construction Services” division that proved to be very problematic. Stantec divested this at a loss in late 2018. Now it is once again a pure-play fee-for-service company. It appears to have good sales and earnings momentum entering 2019.

On Thursday, the S&P 500 and Toronto were each up 0.2%.

Toll Brothers rose 1.9%.

Shopify was down 4.9% after a short seller report came out. That’s really not much of a drop considering how fast this stock has risen and considering its high multiples to sales.

Apparently there was some progress on a U.S. / China trade deal after the China’s number 2 man met with Trump. That could boost markets tomorrow – or maybe not since it was already expected – futures markets are little changed this evening.

Regarding interest rates: Fortis Inc. just announced it will buy back up to U.S. $400 million of its 3.055% notes due in 2026. In part this is because it just sold and asset and so perhaps has spare cash. Fortis is a growth company and so it is a bit remarkable that it feels that it it would rather not have the use of $400 million for the next seven years at a rate of 3.055%. In fact they are paying a premium of $30 per $1000 to avoid having continue to borrow this $400 million at 3.055%. This suggests that Fortis has a very low cost of borrowing and they probably don’t see the cost of borrowing rising much anytime soon.

I attended the annual meeting of Canadian Western bank today. These annual meetings are largely perfunctory and scripted. With rare exception the annual meetings of large companies are almost a charade. I am not “picking on” CWB, this is just the way things are done. 12 nominees were running for 12 available spots on the Board. So, they all got in! The Chairman followed the script by asking if there were any other nominees from the room. Of course none were expected and none were nominated. I believe that almost all of the votes would have been cast in advance of the meeting. (Mine was) Most retail investors are not “registered” owners and I believe must vote by proxy which is typically done in advance of the meeting. Registered shareholders could vote at the meeting and it looked to me like at least three did so at the appointed time during the meeting. There were likely more registered owners who voted just before the meeting started.

The CFO and The CEO both gave good presentations highlighting the strong record of CWB. This Bank has a very strong track record. It’s ROE in 2018 was 11.9% and they target 12 to 15%. They have not lost money in any quarter in over 25 years. Despite that, the shares are trading at only just over book value. As Buffett would say, if you wanted to start a new bank and fight for market share it would cost you book value (plus more in startup expenses). Here you can simply buy an already established bank for very little over book value. I would certainly expect this to be a good investment at that price over the medium to longer term. The very near term is harder to say. If I did not already have a large exposure to CWB I would want to buy more at this price.

After the management presentations there was a chance to ask questions. Only four were asked. It seems people must attend these meeting more to socialise than to learn anything.

CRH Medical is updated and rates Speculative Buy at U.S. $2.71 or CAN $3.59.

This Canadian company started with a patented hemorrhoid banding product (of all things) that it was successfully selling to many of the Gastrointestinal physicians (GIs) in the U.S. It then decided to get into the business of providing anesthetic services to these Gastrointesinal physicians. It got into that business by selling shares and making a large transformational acquisition in 2014. Its strategy then became to be a growth-by-acquisition company by acquiring existing anesthetic service businesses from physicians. Often, it acquires 51% of the practice so that the physicians can both receive cash and retain substantial ownership. The growth strategy has worked well except that as announced in 2017 and implemented on January 1, 2018 there was a government-mandated reduction to the fees it can charge. This resulted in significant headwinds and uncertainty in 2018. But revenue per share and adjusted earnings per share continued to increase despite the headwind in 2018. And the impact of the lower prices has now been “lapped” which should pave the way for noticeable growth in 2019. The company indicates that it currently has no competitors in this business of aggregating the anesthetic practices of GI clinics. It is a high margin business and CRH benefits from its scale.

The share price has been volatile and, in retrospect, it overshot the mark in 2016 and then basically crashed in 2017 due to having been probably over-valued and due to the announced fee reductions. Despite having been quite successful in dealing with the 2018 headwinds, the stock price is currently at about the same level as it was in early 2018 and is down substantially from the 52 week high reached last September. This is a small company and should be considered somewhat speculative and is not suitable to be large percentage of a portfolio. But given its growth plans and current price is may have good upside.

I increased my position in this company by one third today but it remains only 1.3% of my portfolio.

On Wednesday, the S&P 500 was up 0.2% and Toronto as up 0.1%.

Toll Brothers was up 1.4%. TFI International was up 1.7%.

CRH Medical was down 1.9%. Our report for CRH will be updated tomorrow and rated probably Speculative Buy. I will likely add to my position tomorrow.

Melcor Developments was down 1.9% but that was on very low volume (even by its standards). Checking insider trading I note that Melcor has continued to buy back shares at its small allowed rate of 1262 shares per day. I also see that a long-time director reduced his position by about one third in late March after earnings came out. That is disappointing to see. It could be a negative signal. Melcor is very cheap in relation to asset value but 2019 could certainly be very weak in terms of sales of residential building lots in Alberta. Still, the population of Alberta was up 1.6% in 2018 which provides some support for home building.

Alberta’s economic dashboard is showing a lot of red figures and Alberta may currently have slipped back into recession. Hopefully the election, recently higher oil prices, and hopefully some progress on pipelines will get the economy growing again soon.

Although the DOW was down 79 points, Tuesday ended relatively flat with the S&P 500 virtually unchanged and Toronto up 0.2%.

Constellation Software was up 2.7% while Shopify was down 2.0%.

Figures for March auto sales were released and there was an overall decline of 2,5% in light vehicle sales versus March of 2018. This is the 13th consecutive month of lower year-over-year sales. Still, March of 2019 was the third best March on record beaten only by 2017 and 2018. Fiat Chrysler had another bad month with sales down 11.5%. GM was even worse with sales down 18.4%. Ford was up 7.2%. Honda was up 12.0% and Hyundai was up 8.8%. April will be an easier comparable and so perhaps the

Once again, “light trucks” (which actually include even small SUVs) gained share and now represent 74% of sales volume.

Monday was as strong day for the markets with the S&P 500 index up 1.2% and Toronto up 0.8%.

Among the gainers were:

BHP Billiton – up 3.0% for the BBL shares on New York
Canadian Western Bank, up 2.6%.
FedEx, up 2.8%.
Dollarama, up 6.1%
American Express, up 2.2%
AutoCanada, up 2.9%
TFI International, up 2.6% and has announced another modest acquisition
CRH Medical, up 3.4% in Toronto
Linamar, up 2.2%

For those interested in rate rest preferred shares: Canadian Western Bank today announced the new reset distributions on CWB.PR.B Series 5. The timing of the reset is fortuitous for CWB in that it comes after the Bank of Canada five year bond yield has fallen from a recent high of almost 2.5% of last October to a level of 1.54% at noon today. The reset distribution on these pref shares will be $1.07525 per year or 4.301% of $25. Since these shares closed today at $19.10 this is a yield of 5.63% of that price. Alternatively, those holding these shares can (up until April 15th) elect to convert to a floating rate option that will pay $0.27525 in the initial quarter or an annualized yield of 4.404% on $25 or 5.764% of the current $19.10 price. But this second option will float with three month T-bill rates.

It is unusual that the floating yield option here, at least initially, is higher than the new five year fixed rate. That is because the three month treasury bill yield is currently slightly higher than the 5 year bond yield (Inverted yield curve). Either option might be considered reasonably attractive. Choosing the floating option might make sense if you expect the 3 month treasury yield to rise and not fall over the next five years.

It will be interesting to see what percentage of the holders of these shares choose the fixed and floating options. In either case, CWB is not going to redeem them and they will continue to trade in the market. (Although if too few chose the floating option or too few choose the fixed option then only the more popular option will continue.) I think staying with the fixed five year distribution might make the most sense.

Thursday was a mostly positive day in the markets with the S&P 500 up 0.4% and Toronto up 0.1%.

Gainers included CN Rail up 1.6%, Constellation Software up 1.7%, Starbucks up 1.7% and Alimentation Couche-Tard up 1.3% to a new all-time high.

Stocks going the other way included Toll Brothers down 2.0% and AutoCanada down 2.75%.

When it comes to the Consumer Price Index, many people are skeptical of the often low number reported by Statistics Canada. They use a “basket” of goods, which, since it is an average tends not to match the actual basket and therefore the actual inflation experiences by any particular person. Also, I think people tend to notice price increases a lot more than they notice price declines.

Statistics Canada has a new CPI Data Visualization Tool. This is a very neat and slick tool. On the left it show you graphically, the weight of all the items in the basket (and by hovering you can see the weight numerically). On the right it shows the percentage CPI in total and for each item in the basket as you hover over it. It also gives this by province. Another part of the tool allows you to see the inflation rate going back as far as 1914 for each item in the basket. This tool is well worth checking out. It’s very informative!

Wednesday was generally negative in the markets but some of our top picks did well.

The S&P 500 was down 0.5% and Toronto was down 0.1%.

But Couche-Tard was up 3.0%; Toll Brothers was up 2.0%, Melcor Developments was up 3.5%.

Also, Andrew Peller was up 3.7%.

I sold out of my position in BHP Billiton. As a resource stock it was not the type of stock I normally follow. It was introduced on January 27, 2018 at $50 for the BHP ADR in New York and $44.80 for the BBL ADR shares in New York which are supposed to be economically equivalent but for some reason trade at a lower price. It closed today at $47.57 for the BBL shares. It also paid total dividends of $5.50 which included a special dividend of $2.04. The total return was about 18% in the 14 months. It tends to be volatile.

Tuesday was a positive day in the markets with the S&P 500 up 0.7% and Toronto up 0.6%.

Most of the stocks on our list were higher. Notably, Constellation Software was up 2.6% and FedEx was up 1.8%.

Toll Brothers was about unchanged as there was mixed news on the U.S. housing front. Housing staters fell 8.6% in February and single family starts were down a hefty 17%. But sales of existing homes rose 11.8% and mortgage rates are at their lowest level in a year. Housing starts are often volatile and these later two factors may suggest that the the drop in single family home starts in February will prove temporary. Home builder Lennar reports earnings tomorrow, Wednesday and its results will likely impact Toll’s price.

After the close, AutoCanada announced it had arranged the sale and lease back of two additional dealerships. This generated $24 million of cash but comes with the obligation to lease the sites back for the next 19 years. In theory this does not really add any value since the price received presumably simply reflects the value of the lease obligation. In practice there may be some benefit if the REIT that purchased the dealership has access to low-cost capital due to its stability. These transactions also provide a way to leverage AutoCanada’s business as they become an asset-lighter company. This can work out very well if they become more profitable. Or it could become dangerous if revenues fall and they then have lease obligations as opposed to owned assets. I am not sure what to think of this but I hope that the new management knows what they are doing. It is another sign that this new management is very active in making changes.

Monday was a relatively quit day in the markets with the S&P 500 down 0.1% and Toronto down 0.15%. You would never know that any big news (the Mueller Report) came out over the weekend.

Couche-Tard was up 3.3% and Toll Brothers was up 2.8%.

I was interested today to see that Emera (parent company of Nova Scotia Power) is selling a $1.3 billion Maine utility to ENMAX which is the power utility owned by and serving the City of Calgary. Canadian utilities have had a lot of success in buying U.S. utilities. Most notably Fortis Inc. has a great track record and Emera has also done well. I worked for many years in a career involving utility regulation. I never quite understood how the Canadian utilities could apparently out-bid U.S. utilities for regulated U.S. utilities. It might have something to do with Canadian utilities trading at high P/E multiples due to their high dividends and due to the Canadian dividend tax credit and also due to a regulatory system in Canada that was probably less risky for the utilities. In addition, in regulatory hearings we learned that Canadian utilities buying U.S. utilities could apparently deduct the same interest on both sides of the border! In regulated utilities, the customers directly cover the deemed income tax expense. Part of the “game” is typically to collect revenue for that income tax “expense” but then not really have to pay it all due to tax deductions at the parent level and other tax-saving initiatives.

There was no indication of what gain, Emera would book on this sale but I suspect it will be a substantial gain. ENMAX is financing the purchase entirely with debt. Meanwhile they will likely argue in front of regulators that a utility needs to paid as if it has financed about 40 to 50% of the cost with equity. Essentially ENMAX will want to be paid about a 10% return on equity on about half of the book value rate base acquired while financing it with debt closer to 3%. The fact that ENMAX is owned by the City of Calgary may allow it to borrow very cheaply.

Emera would have been getting paid a regulated return on the book value of the utility (less any goodwill that Emera paid when it acquired the Maine utility). But it will no-doubt have sold the utility at an amount substantially above the regulated book rate base value. So, ENMAX will likely be paying substantial goodwill on which it will earn nothing. But the regulated return on the rate base may be sufficient to make the overall purchase price paid worthwhile.

I suspect Emera has got a good deal with this sale but it might work out well for ENMAX too with its approach of financing with cheap debt.

As of tomorrow Monday, the focus will be on how the market reacts to the Mueller report. Trump was not really fully exonerated – though he claims he was – but there was no proof of collusion and insufficient proof of obstruction of Justice. The market may take this as a very positive sign even though the Democrats are not about to drop their various inquires. As of early Sunday evening, pre-markets are up modestly.

As of Thursday, the market was focused on the benefits of lower-for-longer interest rates and not on the various signals that a recession might be coming soon to America.

However, on Friday as the yield curve inverted (The ten year yield ended the day slightly lower than even a one month treasury bill!) the market apparently began to fear recession and the S&P 500 was down 1.9% and Toronto was down 1.0%.

Some of the notable losses included FedEx down 2.8%, Amazon down 3.0%, and CRH Medical down 4.9%.

Among the few stocks with gains were: Couche Tard, up 1.5%, Riocan up 1.3% and Fortis, up 0.8%.

With the yield on Canadian government debt being roughly 1.6% to 1.7% for everything from 3 month treasury bills all the way to ten year bonds (and 30 year bonds around 2.0%) dividend stocks paying 4% and higher should be increasingly attractive – except if their prices are expected to fall due to recession or other reasons. Retail investors can also invest in GICs paying about 2.0% to 2.5% (For example, available at TD Direct) and somewhat higher at some smaller financial institutions not available through the bank discount brokers.

As an example of attractive dividends, the Boston Pizza units are now yielding 8.4% as they fell 2.4% to $16.41. There are certainly no guarantees but those units are likely to continue to pay the current $1.38 per year distribution. However, there is some risk of a modest cut of 5% or so in the distribution because the trailing payout ratio is 104%. But management appears to believe that they can maintain the ratio above 100% using cash on hand and that same-store-sales will slowly rise to bring the ratio back down to a sustainable 100% or less. There is always some risk that BP will lose market share and suffer same-store sales declines necessitating a distribution cut or that recession would cause that to happen at least temporarily. But overall, it seems likely that this 8.4% yield investment will do far better than guaranteed fixed income investments paying mostly 2% or less. Investors have had quite a bad experience with these units over the past 18 months as the price declined from highs over $23. It may be that this bad experience is scaring investors off from what appears to be a very attractive yield.

Somewhat similar comments apply to rate reset preferred shares. If interest rates in general are to remain lower-for-longer then the yields on rate resets should be looking more attractive even if they will reset at, for example, 5.6% of the current price for the Canadian Western Bank rate reset on our list. Investors have been repeatedly “burned” on rate reset shares as their prices fell due partly due to lower interest rates at times but mostly due to the market “demanding” higher spreads over the 5 year government bond. It may be that this bad experience has pushed the rate resets down to attractive prices. They are probably still best suited to those committed to holding for the long term for the yield and especially as a component of a taxable account.

I had a chance to talk to a local Edmonton BP owner on Friday. He does not expect boom times to return to his Edmonton restaurant but instead seems to expect stable results. It appears that he makes quite a good living from this one location. He is facing a mandated renovation that will cost towards $500,000 and he was not complaining about that.

On Thursday, the S&P 500 was up 1.1% as the market apparently decided (for the moment at leeast) that the benefits of lower-for-longer interest rates out weighted the risk that this was signalling a recession ahead. Toronto was up 0.5%.

Apple Inc. was up a hefty 3.7% to take the number one spot as the most valuable American company.

Toll Brothers was up 2.5%.

Shopify was up 2.4%. FedEx recovered 2.2%. TFI International recovered 2.3%.

Statistics Canada reported construction investment in January. The numbers can be hard to interpret since the main table was not seasonally adjusted. Overall, the results showed surprising growth.

Wednesday’s session saw the S&P 500 down 0.3% and Toronto down 0.1%.

FedEx was down 3.5% after reporting earnings.

Amazon was up another 2.0% which is certainly impressive for such a large company.

As foreshadowed yesterday, I did add to my Couche-Tard position. This is a great company and I would not mind it being a larger percentage of my portfolio.

TFI International was down 3.6% and seeing the decline I added to my position in this well-run company.

I don’t see any need to hurry to deploy cash but decided to add to these two at this time.

The Fed signaled that it will not likely raise interest rates this year. This is positive for stocks except to the extent that it is seen as a being due to weakness in the economy.

Tuesday was an eventful day for market news. North American stock market were positive earlier in the day but ended weak. The S&P 500 was about unchanged while Toronto was down 0.4%.

AutoCanada was up 3.6%. It has, around 10 analysts covering it and based on the stock price it appears they generally remain supportive. I looked for updated reports at RBC Direct and TD Direct which are the two that I have access to and neither of these two appear to be covering the company.

CN Rail was down 2.0%. Toll Brothers was down 1.9%. CRH Medical was down 3.4%.

Couche-Tard was down 2.5%. Then, after the close it released what appears to be blow-out earnings . Adjusted earnings per share almost doubled. But apparently they were expected to slightly more than double. They raised their small dividend by 25%. This is a great company and I am inclined to add to my position especially on any decline.

FedEx released what was apparently disappointing earnings and a disappointing outlook. FedEx mentioned
“weaker global trade growth” but headlines seem to interpret this as weaker and slower global trade – which is not quite what is says – but is more newsworthy.

Statistics Canada reported sales at food services and drinking places in January. The release was confusing with mixed messages. first, it said that on a seasonally adjusted basis, January was down 1.0% with full service restaurants down 2.1%. But then they went on with a headline saying it was a strong start to the year. In fact, that include a handy table showing the year over year January change and it was UP 5.5% with full service restaurants up 5.7% and drinking places up a huge 8.3%! They call these numbers seasonally adjusted but there really should be no seasonal adjustment to compare a January to a January but I guess they are comparing last year’s adjusted number to this year’s adjusted number and so that could introduce an error. Digging into the NOT seasonally adjusted number, I was only able to find it for the Canadian total and not for full-service and drinking places. The total increase was 5.2% which is not far different from their seasonally adjusted 5.5%.

Overall, I would be suspect of the claimed decline from December to January due to the difficulty of seasonal adjustment. In terms of consumer behavior, December is vastly different than January and so I imagine a big (and error prone) seasonal adjustment is needed. What is important is that there was a big year-over-year increase in January. In part that will be due to a larger number of restaurants. But an average restaurant must have seen increased sales and that bodes well for Boston Pizza as long as they are keeping up with industry averages. 3.5% of the 5.5% year-over-year increase was simply due to price increases. But for the Boston Pizza Royalty Income Fund, that still leads to increased franchise revenue collected as long as higher prices do not lead to to fewer customers. For the industry as whole sales were up 5.5% while prices were up 3.5% suggesting that customer volumes increase (albeit counting new restaurants).

The federal budget included measures to assist first time homebuyers and gave more assistance if it is a new home. This could spur an increase in housing starts or at least stem the decline in housing starts.

On Monday, the S&P 500 was up 0.4% and Toronto was up 0.7%.

FedEx was up 2.5%.

Now that almost all (97.5%) companies have reported their 2018 earnings, the final GAAP earnings for the S&P 500 index came in at $132.08. That is 20% higher than the 2017 earnings with the Trump tax cuts responsible for most of the gain. Last year the projection were for about a 27% increase which I thought was very optimistic. As recently as about six weeks ago the projection was that the 2018 growth would be 27%. The fact that the final number is coming in closer to 20% has not been much remarked upon in the news to my knowledge. Operating earnings were up 22%. For 2019 the current projection is that GAAP earnings will rise another 17% while operating earnings are projected to rise 9%. These projections tend to be optimistic. In addition to the forecast of higher earnings the market is being pushed up by projections that interest rates will continue to stay lower-for-longer. Ultra low interest rates definitely support P/E levels that are higher than the historical averages.

Statistics Canada released the monthly report of large retailer sales for January. For whatever reason on this report they do not provide any written comments on the results nor do they provide a table showing the month over month change (which would have to be seasonally adjusted) or the year over year figure. So, this one requires some work to make any sense of it. I looked at the change form January 18 to January 19 and saw that every category was up except fuel sales were down noticeably which would be due to a price drop. Excluding fuel, average sales were up a robust 2.9%. Other than fuel, all of the other 13 categories had increased sales. That’s impressive even though some of that would be simply due to inflation.

On Friday, the S&P 500 was up 0.5% and Toronto was up 0.3%.

There were no particularly large moves in the stocks on our list but Amazon was up 1.5% and CRH Medical was down 2.3%.

In economic news, Canada’s manufacturing sales rose more than expected in January which came after three months of declines.

AutoCanada is updated and rated Sell. In the previous update I had noted that the value ratios would suggest a sell unless earnings were expected to increase. And I did expect an increase in 2019 (and possibly in Q4 2018) due to the efforts of the new management and with recent write-offs and restructuring charges hopefully behind them. However, with the Q4 report it has become more clear that the U.S. dealerships are a huge millstone since the best that they are hoping for is to bring these UP to about an operating break-even point by the end of 2019. They have now written off $61 million of the $132 million paid for the U.S. dealerships just last Spring. All of the U.S. locations are leased. Not only that but the company has recorded $32.5 million as a liability due the the U.S. leases being unfavorable. And with those dealerships operating at a loss there is the potential for more write-offs as well as the ongoing losses. If it were not for the U.S. operations, AutoCanada would probably be under-valued. But in the face of the U.S. losses and despite probable improvements on the Canadian side, the stock no longer looks like a reasonable investment. Note that the CEO who made that acquisition was (thankfully) ousted shortly afterwards.

I am holding onto abut half of the shares that I owned in AutoCanada at the start of this year. That may not be very wise given the state of affairs. But I was not prepared to give up entirely just yet.

AutoCanada turned out to be a very poor investment. Initially this was due to slower auto sales in Canada. That could quite possibly have been over-come. But the U.S. acquisition for $132 million turned out be an absolutely disastrous purchase. They have already written off $61 million on the purchase. While a note to the financial statements appears to suggest that these dealerships still have a total value over $100 million, the fact that they are making an operating loss might suggest a true value much closer to zero.

In terms of what happened here, I believe I under estimated the significance of certain events over the years such as the departure of the founder, other management departures and Board member departures as well as the depth of the downturn in sales in Alberta as well as the sharp deterioration in Chrysler’s sales that began near the start of 2018. But I would never have guessed however that the $132 million U.S. purchase was such a disaster. When it comes to acquisitions, I generally assume management knows what they are doing unless they have a poor history in that regard. Also, in acquisitions there is usually no information available to second guess management on the value being paid.

I sold what amounted to 43% of my AutoCanada position today.

As mentioned in my previous post, the Q4 earnings were quite awful. I am surprised that the stock is only down 5.5% at the moment. Earlier today it was briefly down as much as 18%.

I had accumulated far too large a position in this company and it has become increasingly speculative. I was quite reluctant to sell at a loss and hoped the new management could turn things around. The problems in their U.S. operations (purchased less a year ago) continue to be revealed to even worse. They indicate that traction in their Canadian turn-around strategy will not be very much apparent until Q2 is reported. This is not an investment that should be allowed to be a material percentage of a portfolio. If I did not own any, I would not see any reason to be a buyer at this time. I will likely hang onto a good portion of what I have left but that may be out of stubbornness more than anything.

On Thursday, the S&P 500 was down 0.1% while Toronto was down 0.4%.

The market took little notice of Melcor’s earnings as Melcor rose 0.5%.

CRH Medical, which also released earnings yesterday was down 3.2%.

AutoCanada released its Q4 results after the close (sometime after 7 pm mountain time, which was annoyingly late). The results were quite awful. The U.S. dealerships in particular are money losers. There were also two resignations mentioned, including their new chief financial officer. Management expressed optimism for “very material improvements” in 2019 but also noted several headwinds. They still talk about making acquisitions but the reality appears to be that they are in survival mode at this point. Unfortunately, it seems likely that the stock could suffer another significant decline on this news.

WSP Global reported very strong earnings growth for Q4 earnings and plans to continue its strong growth.

Wednesday was another strong day for the U.S. stock market with the S&P 500 up 0.7%. Toronto was up just 0.1%.

Nothing on my list was up as much as 2.0% but a number were up over 1%.

Dollarama was down 2.75%.

There have been a lot of large corporate acquisitions in the news this week including, most notably, Brookfield Asset Management’s $4.8 billion acquisition of 62% of Oaktree Capital. There were other acquisition announcements this week of over $500 million in several sectors including mining. To me, this suggests that corporations are willing to pay high prices for assets and suggests that what Warren Buffett calls “animal spirits” are running high. This is positive for stock prices.

Melcor Development released 2018 results after thee close today. As expected Q4 lot sales in Canada were down versus last year and were down 24% overall for the year. But they sold a good number of lots in the U.S. including some that they developed and some that they had bought as finished lots. Overall the Q4 results were similar to last year which was a lot better than I thought it might be. They do expect weak lot sales in Canada in 2019. But they are very well positioned to weather a downturn. The book value per share is now $32.01 which is 147% higher than the stock price of $12.93. Roughly half of the assets are income producing. The land assets are certainly illiquid but they are also of a very “hard” nature. Based on past experience, I don’t particularly expect the market to take much notice of the earnings or outlook.

CRH Medical also reported Q4 and 2018 earnings. These earnings looked good to me but I saw a headline that suggests they were about equal to expectations.

On Tuesday, the S&P 500 was up 0.3% and Toronto was up 0.2%

CRH Medical was up 6.5%. It will report earnings tomorrow, after the close.

Fortis Inc., was up 1.5%. Costco was up 1.4%.

Linamar was down 4.4% after reporting earnings and lower “guidance” for 2019. Linamar expects earnings to grow in the single digits in 2019. It is trading at under six times earnings and is trading at a modest (about 8%) discount to book value while earning an ROE of about 18%. The stock appears to be trading as if earnings will decrease (and stay down) rather than merely slow.

Melcor Developments will report tomorrow, after close. Lot sales this quarter were likely lower unless they sold a significant amount of lots in Arizona. The outlook for lot sales in 2019 is likely to be quite weak. Their REIT business. And their building development activities have also been fairly steady. The stock price reflects a lot of pessimism plus a lack of interest from investors.

Linamar is down 4.5% to $48.52 after releasing Q4 earnings that were good but which included lowering their revenue growth outlook for 2019 to mid single digits while they expect earnings to grow high signal digits. It appeared to me that the stock was already pricing in basically no growth over perhaps the next five years. In reality, while earnings can go down in any one year, it seems very likely to continue to grow earnings over medium and longer periods of time. The stock looks cheap but it may stay that way until better growth resumes. It is also possible that stock buy backs will be undertaken which would assist in growing earnings per share.

The situation with the Boeing 737 max is potentially disruptive to air travel. Air Canada and West Jet fly these planes. There is a software change in the works that will decrease the need to pilots to remember detailed procedures in certain circumstances. I am not at all tempted to buy Boeing on this dip.

When it comes to the public finding out what kind of plane they are booked on, I have long wondered why we don’t see that when we are choosing a flight online. I have always felt that I would pay a premium to avoid flying on either a very old or perhaps also a very new aircraft or, as in this case, an air plane that may have some issues at the moment.

Markets were higher on Monday with the S&P 500 up a hefty 1.5% and Toronto up 0.7%

Among the gainers were: Apple, up 3.5%; Canadian Western Bank, up 2.0%, FedEx, up 2.7%; Toll Brothers up 2.2%, Visa up 2.2%; and Amazon, up 3.1%.

Linamar reported Q4 and 2018 earnings after the close. Apparently, slightly higher than expected although a little lower than last year’s Q4 on a normalized basis. Analysts will likely be more concerned about Linamar’s outlook. The stock appears to be very cheap but investors worry about slowing auto sales and about trade disputes.

Shopify rose another 5.5% to $U.S. 200.30. (I will use the U.S. price since it reports in U.S. dollars.) This was because it was announced it will become part of the TSX 60 index. That means many ETFs will be obligated to buy Shopify and many other mutual funds and investors who seek to mimic the TSX 60 will do so as well. There can be no doubt that more buyers, and especially buyers who must buy, pushes up the price of a stock. But fundamentally, that seems like a poor reason for a price increase. I mentioned before that by far the bulk of Shopify’s assets are actually held in cash and marketable securities. The cash and marketable securities amount to U.S. $18.29 per share. So, we might say that the remaining $182 per share represents the value of Shopify’s business. The book value equity in that business minus the $18.29 per share value of the cash adn securities (and I will add in their accumulated losses on the basis that the losses were mostly meant to be investments in the future) is just $2.98 per share. It may well be that Shopify’s future earnings will more than justify its current share price. But it is extremely richly valued in relation to book value and richly valued in realtion to revenues (run rate of revenues $12.77 per share but rising rapidly). The stock has been on a sharp uptrend. But it will likely have its downturns as well. I had added Shopify to the list and analysed it for information but was not prepared to put a rating on it other than “Speculative”.

Some of the rate reset preferred shares were down. The Enbridge shares on our list ENB.PF.A are down to $16.65 (asking price). At that price the yield is 6.6% ($1.10 per year). They will reset on December 1. If the five year Canada bond stays at its current yield of 1.64% the reset will be 1.64% plus the reset spread of 2.66 %to total 4.3% of $25 or $1.075 to yield about 6.5% at the current price. Even though rates are still low, the “going” or market rate on rate reset preferred is now about 5.2% for the big banks and probably around 6.5% for the likes of Enbridge.

If an investor is looking for cash yield, especially in a taxable account, these shares are worth considering. It is possible that they could rise in price if the market becomes more convinced that rates will stay lower for longer. For example GIC rates could slip back which could cause the market yield on rate resets to fall (and their prices to rise). Of course, investors in the past bought these things for yield back when the market yield on bank rate resets was around 4%. Despite buying for yield and even if committed to holding for the long term, it was very disappointing to see the capital losses that have occurred.

Meanwhile Canadian Western Bank announced that it will not be redeeming its CWB.PR.B shares when the five-year anniversary date arrives on April 30. I did not expect them to renew these. Why would they redeem shares that are set to reset at (2.76 +1.64) 4.4%. when they just had to pay 6.0% on a recent issue of rate reset shares? The $19.25 price of these shares suggests a yield after the reset of 5.7%. The discounted price of these shares reflects the fact that the pending reset dividend at 4.4% of $25 is below market. If the market yield for CWB rate resets is 6.0%, then these shares should perhaps be a little cheaper yet. CWB reminded people today that they have the option to convert these to floating rate shares. The floating rate will be the three month Canada T-Bill rate plus 2.76% and would float quarterly. The 3 month T-Bill is currently very similar to the 5 year Canada bond yield. That would mean that the floating rate shares would start out paying just around precisely the same rate as the five year fixed reset. In this circumstance the floating rate option might be the better option. Certainly it is is you expect rates to rise over the next five years. That might explain why these shares are trading to yield “only” 5.7% upon reset. That is, the price might be a little lower than $19.25 if not for the option to convert to quarterly floating at the end of April.

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

Costco was up 5.1% after reporting earnings.

AutoCanada was up 2.3%. It’s scheduled to release earnings on Thursday, after the close. Given its troubles in 2018 and given it is trying to right the ship, it seems like anybody’s guess as to whether its earnings release will give much comfort to the market or will instead contain more unexpected bad news. The troubles in 2018 were partly related to weaker Canadian auto sales generally and the disappointing news regarding Alberta’s economy. But it also suffered a huge self-inflicted wound with its strange botched purchase of U.S. dealerships that led to a big write-off within mere weeks of the purchase. That debacle is why the company is under new management.

As of Sunday evening, markets appear set to open moderately lower.

Statistics Canada reports (I probably should say claims) that Canada added 56,000 jobs in February driven by full-time job gains and that this came on top of strong gains in January.

Once again I would take this with a huge grain of salt. Firstly, Statistics Canada certainly reveals, but does not really high light that the statistical standard error is 29,000. Secondly, the 29,000 assumes that their survey represents a random sample. In an age where many people don’t have home phones (land lines) and vast numbers of people have unlisted or non-public numbers, it is presumably vastly more difficult to get a random sample than was the case decades ago. Thirdly, the numbers are seasonally adjusted and that is always subject to error and weather. Perhaps February historically sees an an average seasonal gain of say 20,000 jobs. But were the seasonal factors and weather average this year? Fourthly, it seems to me that the jobs report has simply been producing almost wild month-to-month swings for about two years now.

So far on BNN, I see them accepting the figure without stopping to ask how accurate it is. They take it as gospel that 56,000 jobs were added, as if it were a count based on some kind of records as opposed to what it is – a survey of only a sample of households. I believe it is a telephone survey and that once a household is in the survey they stay in for about six month, but I was unable to find a description of the survey this morning. Sample data is certainly fine. But anyone extrapolating the results of a sample tot he popualtion should make it clear that the result is not a hard number but rather an estimate with an error range around it.

Thursday was a weaker day in the markets with the S&P 500 down 0.8% while Toronto was down only 0.2%.

On the positive side, Toll Brothers was up 2.0%. And CN Rail was up 0.8% and has has been trending up steadily since the December 24 low.

FedEx was down 3.0%.

Canadian Western Bank was down 2.4% to $29.33 despite its good earnings report and dividend increase. CWB has a book value as of today of $27.30. So it is trading at a premium of only about 7% over book value. And on its book value it has recently been earning an ROE of about 12%. That’s good, although not great and it is lower than it was a few years ago. And CWB has not lost money in any quarter going back close to 30 years. The company is no longer touting that steak perhaps because such a streak is likely to end at some point especially as accounting rules have generally resulted in more volatile earnings and more often the requirement for various write-offs from time to time. And certainly CWB could suffer higher loan losses and even more so could face a period of lower growth. But if it is assumed that it can continue to earn something close to 12% on its book equity on average and if you can buy in at what is quite close to book value, then that is going to work out well over time. The dividend yield is 3.7% which is certainly not the highest dividend around. But it does beat the yield on a GIC and that dividend is extremely likely to keep rising over the years.

Now, admittedly CWB share holders have not seen a great return at all since the stock was close to $42 almost five years ago (just before oil prices went down from the high levels of early to mid 2014) . The thing is back then the book value was only about $19. The lesson here is that it is now apparent that buying CWB at twice book value or more was not such a great move. And I will admit that at the time I thought it was reasonable to pay twice book value given the ROE at the time. Going forward I will be more hesitant to pay, for example, twice book value for a bank. But having had a bad experience in paying twice book value then does not seem like a good reason to refuse to buy CWB today at 1.07 times book value, much less to sell at that price.

Rate reset preferred shares have once again been declining as the 5 year bank of Canada bond yield falls. The market is continuing to demand what could be called quite a large yield premium over the five year rate. That higher required “spread” and the lower 5 year bond have both been responsible for pushing down the price of rate reset preferred shares. As someone who tends to look to “buy low”, I would be tempted to perhaps buy some of the discounted rate reset shares despite the unhappy track record. They could have a place particularly in a portfolio that is designed to generate dividend yield in a taxable account.

(I was unable to make my usual post last evening due to a very rare server problem on the telus system where this website is hosted.)

Canadian Western bank was out with a good earnings report this morning and increased the dividend by 4% which was in addition to an earlier 4% for a total increase of 8% over last year. Loan loss provisions were up by a very small amount. The stock is down 1.0% despite the overall positive news. This could be explained by the general negative tone in today’s markets or just the fears of a slowing Canadian economy. The market does what it does with stock prices. If CWB can continue to deliver earnings increases and growth over time then the stock price must eventually follow.

With the lower Canadian dollar yesterday, I thought of moving some U.S. cash back to the Canadian side. I had some U.S. cash in my corporate investment account and I have started the process of moving that over using the Norbert Gambit which I mentioned many times. The first step was to use the cash to buy DLR.u which is a fund of U.S. cash that trades on Toronto. The same fund of U.S. dollars trades in Toronto in both U.S. dollars (DLR.u) and Canadian dollars (DLR). Now that I have bought DLR.u in the U.S side of my corporate account I will wait a couple days until it “settles” and then ask TD Direct to journal it over to the Canadian side (I will check because I may be able to do that online now rather than calling) where I can sell the U.S. dollars in Canadian dollars as DLR. If I was eager to lock in the exchange rate, TD can journal it over without waiting the few days but there is a charge of around $45 U.S.. So, I just decided to wait until it settles and take my chances on the exchange rate.

Another reason I wanted to move this corporate cash was to stay under $100,000 Canadian worth of U.S. assets in my corporate account. Going over $100k Canadian worth of U.S. assets triggers reporting requirements with Canada Revenue. I have found that Turbo Tax corporate did a poor job of helping meet that reporting requirement in the past and there are penalties if it is not reported properly. Unless I wanted to have well over $100k in U.S. assets it does seem worth the bother and I am going to stay under $100k for now at least. There is a similar reporting requirement for individual investment accounts but not for the RRSP accounts. Therefore, if we have over $100k in U.S. investments it is far simpler to keep that in the RRSP account. In addition to the having to report being over the $100k, the tax reporting requirements just to deal with exchange rate fluctuations in any taxable U.S. account that Canadians hold are tedious especially if you do any amount of trading. On, that basis it may be best to try to keep all your U.S. investment cash and securities in the RRSP if you are in a position of having an RRSP that represents half or more of your total investments.

I will also mention an interesting aspect of my trade to buy DLR.u. Yesterday I placed the trade to buy an amount of DLR that was not in even hundreds. I was buying XX70 shares. I decided to get a bit cute and not pay the offer which was $10.08 per DLR. Instead I made a limit order at $10.07. These units are extremely stable so the price does not fluctuate more than about a penny over short periods of time. Anyhow the trade for even lots went through so I got XX00 shares at $10.07. But the trade for the left over 70 shares did not go through. I canceled that today to avoid paying a $10 fee on $749 worth of DLR. Not a big deal if I had paid the $10 but it was interesting to see that the odd lot did not go through. In my experience most of the time odd lots are traded easily. Certainly if I had bid the offer at $10.08 it would have gone through.

On Tuesday, the S&P 500 was down 0.1% while Toronto was up 0.3%.

There was not much movement in most of the stocks on our list.

But AutoCanada slipped 2.7% and Toll Brothers was down 2.3%. Dollarama was up 2.4%.

Regarding interest rates. It appears that this latest round of interest rates hikes has once again fizzled out without rates getting back to any definition of “normal. The 5 year Canada bond yield is at 1.75%. That’s nicely above the lows of a few years ago but also sharply lower than the near 2.5% of last Fall. The 10 year Canada bond yield is at 1.86%. Meanwhile if a stock has a P/E of 20 (which historically would be considered high and expensive) that is an earnings yield of 5%. It’s not a dividend yield but if it is a good company and it is earning 5% on the price you pay and will retain some or all of the earnings for growth, it should do well. And very often the ROE on the retained earnings is over 10%. Buffett would say that on average a stock with a P/E of 20 is very likely to be a better investment than a bond at 1.9%. In fact vast numbers of stocks have a cash dividend yield well higher than the 1.86% of the ten year bond and that dividend is extremely likely to grow. But of course the bond has the advantage of certainty. If the expectation for higher interest rates has diminished then that supports higher P/E ratios for stocks.

I look at things like preferred shares paying 5% or more and Boston Pizza paying around 8% and it seems likely they will certainly do better than bonds. But as always there are risks and we have to put up with market value fluctuations even if the dividends are steady.

And also on interest rates, I saw today that HSBC is out with a 5 year mortgage rate at 2.99%. TD Bank is still paying 1.6% on TDB 8150 which is a sort of “high” interest account that I have access to in TD Direct. It seems quite likely that could decline.

Checking some insider trading (specifically buy-backs) for selected companies, I see that Melcor is continuing buying its little maximum of 1262 shares per day. Canadian Western bank only reports the buy backs monthly. They were buying back about 60,000 shares per day in December and up until January 22. I am fairly certain that the only reason they stopped is that they had completed the full amount of their announced buyback. They paid up to about $29.60 per share as the price rose in January. I will also mention that several CWB insiders grabbed some of the 6.0% rate reset preferred shares that CWB issued on January 29 and which I mentioned at that time.

I had mentioned previously that CRH Medical began a buyback program on October 19. They report it only monthly. I see they have continued to buy back shares steadily in January and February. The amounts per day vary. Recently the maximum is about 9,000 per day. Unfortunately, I also see some insider selling in December. In two cases they exercised 30,000 options and sold only 15,000 so that is not as bad as selling all 30,000. It may be nothing to be concerned about and fairly normal for executives to sell since they often get compensated with options as opposed to cash. But it is a case of buying shares with the company’s money, while selling some of your own…hmmm.

On Monday, the markets started out higher but ended lower with the S&P 500 down 0.4% and Toronto down 0.2%.

Dollarama was up 3.0%. Amazon was up 1.5%. Toll Brothers was up 1.2%.

I have to say Amazon is truly amazing. Last night at about 11:30 my son ordered a piece of equipment from Amazon. It arrived about 16 hours later (today at 3:30 pm) on our step. Due to Prime membership, there was no shipping charge. It must be largely due to technology that they can deliver that fast. As soon as you place an order automated systems kick in and the product is moving towards you virtually instantly.

Shopify was down 2.6% but remains very near its record high at $248 in Toronto and U.S. $186 in New York. I had added Shopify to the list on January 16 and provided my analysis but I had not put a rating on it. Shopify has tremendous growth but is not yet profitable on a GAAP basis. Let’s take a look at some numbers from its balance sheet which is in U.S. dollars. All figures below are in U.S. dollars.

Assets are $2.25 billion. Book equity is $2.09 billion. The market value is $20.63 billion. On that basis investors are paying $9.86 for every dollar of book value. That could certainly be considered expensive but probably not outrageously so for a tech company. But note that it has $1.97 million in cash and marketable securities. That part of the assets can’t be worth more than about that same $1.97 billion. So let’s subtract that $1.97 from the market value and the book equity. Now we have a book equity of $0.12 billion (equity in assets other than cash and marketable securities) and that is valued at $18.66 billion after we deduct the value of the cash and marketable securities. To be fair, I will also add back the $0.20 billion in accumulated losses since those losses were meant to be an investment. On that basis we have a total book equity value in asses other than the cash and securities (with the losses added back) of $0.32 billion which the market values at $18.66 billion. So, the market is valuing every dollar of equity invested in other than cash and marketable securities at $58 dollars. In effect, Shopify has turned every $1.00 invested in assets other than cash and marketable securities into $58 dollars. That is impressive. In the old days alchemists dreamed of turning lead into gold. This looks like today’s equivalent. The alchemy of successful tech investments. It ‘s one thing to turn a few dollars each into $58. It is quite another thing to turn each of $0.32 billion ($320 million dollars into $58 each!.

My point being, that while Shopify is very impressive it also looks extremely expensive on this basis.

Looked at another way, Shopify had revenues of $344 million in Q4. Annualized that would be $1.38 billion per year. Again, it is valued at $20.63 billion. That’s almost 15 times revenue. But of course revenues are growing rapidly. Still, it would seem to be a rich valuation.

I am not prepared to put a rating on Shopify but I will say it is speculative. It is “pricing in” a huge amount of future growth and profitability. And maybe it will achieve that.

I would be cautious investing too much in it. For one thing all it may take is a short-seller to come along and claim it is vastly over-valued and the price could easily fall.

But then again it has momentum and the support of investors.

This is the type of stock that Warren Buffett might put into the “too hard” basket. It is just very difficult to come up with a fair value for a company like this.

Bad news on the pipeline front as Enbridge announced a delay in its Line 3 pipeline. Now expected to be operational sometime in the last half of next year rather than late this year. This was due to a new schedule for when U.S. State and federal permits are likely to be received. There was however some indication that at least the process for permitting has become more definite.

With this development, it is interesting to think about the economics of oil by rail.

When there is a temporary large discount on Canadian oil, independent shippers and the rail lines can arbitrage that by buying cheap in Alberta and selling high in the U.S.

Unlike the producers and the province in general, an independent shipper (and the rail roads) taking advantage of the arbitrage would want the differential to stay wide.

But if all the oil producers got together to ship by rail they would not mind if their action caused the differential to evaporate. But the oil industry is not allowed to get together as that would be collusion. And when just a few producers ship by rail it could end up narrowing the differential and all the oil producers that did not bother to invest in or risk shipping by rail get a windfall. In this circumstance it is difficult for producers acting independently to invest much in shipping oil by rail. What if they lock in two years of oil by rail shipments based on a wide discount in Alberta and then because of all the oil by rail shipping, the differential disappears? The producers that contracted for shipping by rail could lose money on the shipments while ALL producers gain from the lower differential.

In this circumstance the province doing the oil by rail makes sense. The provincial government can “win by losing”. That is if the province ships a large amount of oil by rail and the differential narrows they could lose money on the shipping. But they would likely more than make that up through higher income taxes, higher oil royalties and the general improvement in the economy.

This sets up as a rare case where it appears that government intervention may have been a good thing. But it is not without victims. The independent shipper who was arbitraging the price differential could be hurt drastically. Any producer that had locked in oil by rail may find that the shipping is no longer economic with the reduced differential caused by the provincial government doing a large amount of oil by rail shipments.

Canadian auto sales in February were 3.7% lower than the prior year. The lower sales number is clearly not good news for the economy or for AutoCanada. But it should be noted that February 2018 was “a tough comparable” month. February 2018 had been 2.0% higher than February 2017 and was a record high for February. Despite a weak finish, 2018 was still a strong year for auto sales in Canada. 2016 and 2017 had both been banner years with big increases compared to 2012 through 2015 which was a period when auto sales did not grow much at all. February 2019, despite the 3.7% drop was the third highest February ever. Therefore, there are still a lot of auto sales happening in Canada. If auto dealerships have historically been good profitable businesses most of the time (and they certainly appear to be) then well-managed auto dealerships should continue to be profitable in 2019. And, starting in March the comparable year sales are a little less tough as 2018 sales were about flat compared to 2017 in March and then started to run increasingly below.

One piece of good news for AutoCanada was that Chrysler sales with a 2.0% decrease in February were down less than the industry average. This comes after a long string of big monthly declines for Chrysler. Chrysler (including Fiat) is actually the top selling brand in Canada. AutoCanada has a heavy exposure to Chrysler dealerships.

It’s interesting to see that “light trucks” which include SUVs absolutely dominate the market with a 75% market share in the first two months of 2019 up from 72% in 2018. This might suggest that people are still not choosing the cheapest economy vehicles.

Friday was a strong day in the markets and for our stock picks. The S&P 500 was up 0.7% and Toronto was up 0.4%.

Linamar was up 3.0% as after Martinrea (also an auto parts company) reported strong results. Linamar will report on March 11. According to Yahoo Finance, Linamar is trading at just 5.6 times expected earnings. Basically, it seems that investors are not willing to pay a high multiple for the stock due to fears of earnings decline. The fears relate to trade wars, stagnant or falling world auto sales and the impacts of electrification of vehicles. Linimar does have a history of being a very cyclic stock. But it has also grown through the years and appears to be very well managed.

Couche-Tard was up 2.8%.

TFI International was up 2.2% and Canadian Tire was up 1.8%.

Stantec was down 1.0% in further reaction to its earnings release. Stantec has definitely had some operational stumbles the past few years. It has plans in place for strong earnings growth in 2019. But investors may wait to see actual progress before they are willing to bid the price up. According to Yahoo Finance the stock is trading at (a relatively attractive) 13.6 times expected earnings.

On Thursday, the S&P 500 was down 0.3% and Toronto was down 0.5%.

BHP Billiton was down 3.0% in New York. It’s a volatile stock that moves with commodity prices including iron ore. It also of course moves with company-specific developments.

Toll Brothers fell 2.0% in further reaction to its earnings. U.S GDP came in higher-than-expected at 2.6%. Note that GDP growth is always expressed in real terms. The growth is higher when inflation is included. The U.S economy has been strong. In my recent trip to Tampa Florida I was told that there is still a lot of new homes being built. Prices have not been that strong due to the ample supply. In the suburb of Tampa that I visit (Riverview), the roads basically can’t handle the traffic despite the fact that more lanes have been added. But U.S home building numbers overall have remained well below the levels seen before the financial crisis. Buffett said he was surprised by this and pointed out that the percentage of people owning homes is down something like 5% and the number in rental accommodation is up by some 5%. If the U.S economy remains strong and mortgage rates remain low then we could see a recovery in home building. But at the moment the trend is apparently not in that direction. December housing starts were particularly weak with single-family starts down 6.7%.

Stantec closed unchanged in reaction to its earnings release which I mentioned this morning. After the close they announced an increase to their share buy-back program. They have been buying back shares and os management does appear to sincerely believe the shares are under valued.

TFI International fell 1.0% despite what looked like a very good earnings report. I reduced my Stantec position and increased my TFI position.

Canadian Western Bank will report earnings on Thursday next week. They have their own mix of business that is different from the big banks (no capital markets business) and I believe different from National Bank and Laurentian (CWB is focused on commercial lending). So, it seems likely that they will show some increase. I am not at all sure how their mortgage business will fare. It would be safer to assume that they too have been hurt by the stress test and the slow-down in housing sales. Unless they ran into more bad loans on the commercial side, I would expect to see at least modest profit growth. It would be wishful thinking, but I wonder if they could make an offer to buy Laurentian Bank given that CWB wants to expand nationally and that Laurentian seems like it could use better management.

Stantec’s earnings came in apparently somewhat above expectations. But not great. There is a 5.5% dividend increase. Our latest rating was (lower) Buy and from a quick look at the earnings report I don’t think the rating will increase. I plan to trim my position today to have cash and/or move into higher rated stocks and also increase diversification. Stantec currently represents about 4% of my portfolio.

Wednesday’s session saw the S&P 500 and Toronto each about unchanged.

Toll Brothers ended the day down 2.5%. It’s interesting that after its earnings release yesterday, the stock rose in after-hours trading and the one headline I saw said that the earnings beat expectations. Today, the headline I saw said orders came in low. After hours trading, when a company issues news, seems to be “hot money” that has to make a decision without a chance to digest the news. The direction is often different after some overnight reflection. Also, most earnings reports have both positive and negative aspects. It can seemingly depend on the mood of the market as to which it focuses on. Toll Brothers is selling at not much over book value. But its orders for new homes are running lower than last year. It’s a profitable company and will likely trend hither over the years. But right now, there may be little reason to expect it to move quickly in either direction.

After the close today, TFI International released earnings. Basically, they appear to be blow-out results with Q4 adjusted earnings per share up 63%. Some of that increase was expected but not all of it. Presumably, the stock will trade higher tomorrow. TFI is exceptionally well managed and they seem to be able to continually wring higher profits out of their operations. I regret that I don’t own more shares. For whatever, reason there is a trading halt on TFI. That seems quite unnecessary given that the news came out after the close of markets. The trading halt will likely be lifted before the open tomorrow. Possibly someone at TFI requested the halt out an abundance of caution or a misunderstanding of the rules. To my knowledge, Canada has no “after-hours” trading system. Nor should it.

Statistics Canada reported the January Consumer Price Index today. Overall, prices are up 1.4% versus one year ago. But excluding a drop in energy prices the increase was 2.1%. Food prices were up 2.8% and shelter costs up 2.4% and those are two areas where people always notice increases.

On Tuesday, the S&P 500 was down 0.1% while Toronto was up 0.1%.

Couche-Tard was up another 2.7%.

Stantec was up 1.9%. It will report Q4 earnings on Thursday. The hope is that with the sale of it construction Services division it can get back to reporting growth it its core business.

Toll Brothers reported Q1 fiscal 2019 earnings after the close. There were positive and negative aspects to the report. Pre-tax earnings were up 15% but that is based on homes delivered that were contracted for about a year ago. New contracts this quarter were down 31% in dollars and 24% in number of units. But the company indicated that contract sales started to turnaround somewhat in February. The shares were up 3% after hours. So far, it appears that the earnings report was better than expected. But tomorrow will see a more complete reaction to the results.

On Monday, the S&P 500 was up 0.1% and Toronto was up 0.3%.

AutoCanada was up 4.4% to $13.46. This stock has been increasing despite a lack of positive news regarding Canadian auto sales. January sales were weak. While I hope that the new management can turn things around, I don’t have much faith that the Q4 report will contain good news. Auto sales weakened in 2018 and especially for Chrysler which AutoCanada has a heavy exposure to.

Shopify was up another 2.6%.

Constellation Software was down 3.0% giving back a portion of recent gains.

After the close, TFI International announced an acquisition. This appears to be a modest sized acquisition.

I did add to my Canadian Tire position today.

Berkshire Hathaway is updated and rated Buy at $203.71.

The headline news from Berkshire’s Q4 report is hat Berkshire / Buffett lost $25 billion in the quarter and that this included a write-down and other problems as Kraft Heinz. The loss was caused mostly by the stock market plunge in Q4 and a new rules that requires unrealized gains and losses on investments to be reflected in net earnings. Previously they were reflected in “comprehensive earnings” which allowd thge loss to be reflected in book value but not in earnings.

But Q4 actually included a 71% increase in operating earnings (GAAP earnings excluding the market value losses). Operating earnings for 2018 were also up 71%. A large part of the increase came from lower income tax rates. But pre-tax operating earnings were also up substantially.

Based on the higher operating earnings Berkshire’s shares are rated a Buy. I am tempted to add to my modest position.

On Friday, the S&P 500 was up 0.6% and Toronto was up 0.1%.

Shopify was up another 2.25% in Toronto.

Andrew Peller was up 4.5%.

The S&P 500 and Toronto are each up over 11% in 2019 gaining back much of the ground lost in late 2018.

If Berkshire Hathaway happens to get hammered down to say $190 or below tomorrow (Monday) due to its earnings report, I will consider buying some. Buffett will appear on Squawk Box on Monday morning.

Stock futures were up on Sunday evening as Trump has extended a deadline that would have increased tariffs on Chinese goods starting March 1.

Canadian Tire is updated and rated (lower) Strong Buy at $145.42. This has been a strong company for decades. It will likely continue to do well with steady but relatively modest growth. Its price to earnings ratio is seldom as low as it is right now at 12.4 times trailing adjusted earnings per shares. It has sometimes been quite a bit cheaper than its current 2.1 times book value, but that measure is not as relevant as the earnings multiple. Also the price to book value has been pushed down by share repurchases.

One of the adjustments to earnings is to add back a $50 million dollar “expense” related to an obligation to repurchase Scotia Bank’s 20% share of its credit card operation if Scotia Bank wants it to. The reason that obligation has grown is because the credit card operation has grown and become more profitable. It takes an accounting regulator to count the fact that its finance operation is more valuable as an expense. Sure it would cost Canadian Tire more to buy back that 20% share in the unlikely event that Scotia Bank wanted it to. But that ‘s because it is simply a more valuable asset. The other big items we added back (which management also did) were costs related to the Helly Hansen acquisition that had to be expenses and costs associated with the rollout of their new triangle rewards program. Those are expenses that are not only one-time in nature but which are arguably more in the nature of capital investments versus expenses.

I plan to take the opportunity of this lower price (and lower P/E ratio) to build a larger position in Canadian Tire. I’d certainly be comfortable with this as 5% of my portfolio.

On Thursday, the S&P 500 was down 0.35% and Toronto was down 0.2%.

TFI International was up 2.1% to $40.45. This is a very well-managed company.

Toll Brothers was up 1.5% to $37.30.

AutoCanada was up 1.4% to $12.54. I reduced my position in this stock by about 20% today. This was to reduce my risk.

Most stocks were down modestly on the day.

Kraft Heinz (not on our list) released poor results, cut its dividend, revealed an investigation into their accounting, took a large write-off and said that the packaged food industry has become tougher. This is a 3G company, the same people that control Restaurant Brands. They are notorious for ruthless cost cutting. There will not be a lot of sympathy for their troubles. Buffett (Berkshire has been a major investor / partner with 3G for years) defended 3G’s approach last year while noting that Berkshire itself does not take such a ruthless approach. It will be interesting to see if his reaction changes especially if accounting irregularities are found.

On Wednesday, the S&P 500 was up 0.2% and Toronto was up 0.6%.

AutoCanada was up 2.8%. It has recovered a bit of ground lately although it has not released any further news.

Constellation Software was up 2.3%.

Canadian Tire was up 1.9%. I will update the report on Canadian Tire in the next few days based on its Q4 earnings released.

BHP Billiton is up about 17% since January 23. And that was on top of a special dividend of about 5% received on January 30. It released a good earnings report on Monday. I sold half of my small position in BHP today.

On Monday markets were closed for President’s day and Family Day holidays.

Over the weekend Trump tweeted (among other things):

“The Mueller investigation is totally conflicted, illegal and rigged! Should never have been allowed to begin, except for the Collusion and many crimes committed by the Democrats. Witch Hunt! “

That would seem to be yet another indication that Trump thinks that the Mueller report will be very damaging to him. His approach is to discredit the report.

The reaction from his supporters could certainly be violent. So this is a risk for investors.

In my experience the legal system does not take at all kindly to be being disrespected like this. For example convicted criminals who fail to admit guilt have an extremely hard time being granted parole. How will even Trump’s appointees to the Supreme court react to such utter contempt for the rule of law?

On Friday, the S&P 500 was up 1.1% and Toronto was up 0.9%.

Linamar was up 3.9% to $50.28. AutoCanada bounced up 3.6%.

Constellation Software was down 3.3% giving back part of Thursday’s big increase.

As of Sunday evening futures were suggesting U.S. stocks would be little changed on Monday morning. But Asian stocks were up on trade optimism. (Probably already reflected Friday in the U.S.)

This recovery in the markets offers a chance to rebalance for those that found themselves in December too heavily invested for comfort in too few stocks or in stocks versus fixed income. There is nothing like a sharp market decline to cause some rethinking on risk tolerance and / or risk capacity.

On Thursday the S&P 500 was down 0.3% while Toronto was up 0.4%.

Canadian Tire was down 4.75% after releasing earnings. The only headline on Yahoo Finance last night said that they beat earnings expectations. If that is the case then it was likely something about the outlook that spooked investors. I intend to update the report in the next week. Investors have worried about Amazon’s impact for years but Canadain Tire has continued to do very well despite Amazon. They also managed to overcome a big headwind from the lower Canadian dollar.

Constellation Software which has a stellar record jumped 14% after releasing earnings.

Visiting Cozumel, Mexico yesterday it was more prosperous than probably much of Mexico ansd including Costa Maya which we saw on Monday. This port gets apparently six to eight cruise ships a day in high season. While there is a protected cruise ship tourist area on shore, the locals also benefit greatly because most of the shopping is done downtown and outside of the protected cruise-ship areas (where the locals don’t benefit as much). Circle K has a presence in Mexico (I believe through a partnership). I looked for Circle-K as we had a tax tour of part of the city but did not see any. Mexico should be developing and growing faster than Canada and the U.S. and therefore should offer investment opportunities. The easiest way to get involved with that would be through an ETF. The ishares one is EWW. But despite the fact that Mexico should be developing, this ETF has not done well at all. There may be too much corruption or a lack of good incentives for the private sector. Looking at this I am not very tempted to invest in Mexico at this time.

It was interesting that we never had to show passports when going ashore in Mexico, Belize or Honduras. The cruise line has passenger passport information and the immigration authorities apparently use that to clear all passengers to come ashore. I recall that even entering a U.S. Caribbean island from a ship some years ago we had to show passports. Understandably, Mexico, Belize and Honduras are less worried about people sneaking in their country than is the U.S. I don’t recall if Canada requires cruise ship passengers to go through some kind of customs process. When passengers do not have to show passports to go ashore, it makes it a lot easier to spend money ashore to the benefit of the local economy.

Boston Pizza Royalties Q4 earnings were not great but definitely better than I expected / feared. The key points are:

• Same store sales growth of negative 0.2% for the Period and positive 0.1% for the Year.
• 
  On a Franchise Sales basis, SSSG was positive 0.1% for the Period and negative 0.3% for the Year compared with negative 0.2% and negative 0.4%, respectively, for the same periods in 2017.
• Distributable Cash³ per Unit increased 0.3% for the Period and decreased 3.1% for the Year.
• Payout Ratio⁴ of 103.8% for the Period and 103.3% for the Year. Cash balance at the end of the Year was $2.7 million.
• The following are my words, I could not get rid of the bullet point s here for some reason
• The number one key figure is franchise sales growth per store (sales excluding liquor on which no franchise fee is collected). This was up 0.1% in Q4. Not great but a return to growth following a period of modest declines. Not bad considering the funk in Alberta in Q4. I expected distributable cash per unit to be down due to higher income tax but it was positive probably due to some items that fluctuate quarter to quarter.

Although the payout ratio is above 100%, there was absolutely no indication of a distrubution cut. Instead it sounds like management expects sales per unit to slowly rise and bring tht ratio down

We shall see how the market responds today.

Reporting today from off Roatan, an island that is part of Honduras. Spent the day there. The local population is mostly of Spanish heritage but many or most speak English. The local income levels are mostly quite low. But they are an entrepreneurial people. Many try to make a living from cruise ship and fly-in tourists. Taxi drivers and souvenir sellers abound. An influx of vacation property owners has driven up property prices. Roatan is known for its diving opportunities as its coral reefs are close to shore.

Markets were with the S&P 500 up 0.3% and Toronto down 0.1%.

AutoCanada was up 3.4%

I believe Boston Pizza Royalties Income fund reports tomorrow. I am expecting same store sales to be about flat or down a little. Any gain would be quite positive. Distributable cash per unit will likely be down due to a higher income tax rate in British Columbia. They will “lap” that impact as of Q1 which will be good. They need to show an increase in distributable cash per unit very soon otherwise I would expect a possible small cut to the distribution. They have close to 30% of their locations in Alberta and that is not helping matters. I understand Ontario has been quite strong for them.

Teranet released the January home price index. They note some declines. But to my mind the declines have been quite modest so far. After seven months of decline Calgary is down only 2.4%. Granted home prices in Calgary have not moved much in ten years (after soaring for 10). But why should the value of an existing home that just gets older every year increase?

Belize City

Markets were positive on Tuesday with the S&P 500 up a hefty 1.3% and Toronto up 0.5%.

A report today indicated that American’s confidence in their financial future is the highest in 16 years.

That sounds positive for Toll Brothers which was up 4.2% today.

Canadian Western Bank was up 3.3%. FedEx gained another 2.4% gaining back some of the loss from recent months.

AutoCanada was up 3.8% to $11.40. Of the companies I own, this one worries me because of its own past mistakes and the industry headwinds. It is going to take strong efforts by the new management to turn things around.

In Belize today we had a short tour of the City. It’s certainly not prosperous but people are trying. The cruise ship industry helps a lot. But the ships don’t encourage people to walk about past the secure tourist shops on the pier area. That seems unfair since the locals were friendly. We ventured forth and found the local nearby vendors to be aggressive is selling their souvenirs, beer and food and such. But they are only trying to make a living and so we supported the locals and did not bother with the sanitized approved tourist shops on the pier. In a local grocery store I found the prices expensive, higher than Canada. The local currency is worth 50 cents on the U.S. dollar so you take the posted price and divide by two and that is the price in U.S. dollars. From what I saw the locals must face high prices for groceries. And that’s despite the depressed economic conditions. Hopefully tourism will continue to help them improve the economy. Belize is a former British colony and so the official language in English. Most of the residents are descendants of African slaves. They are trying to overcome their oppressed past and hopefully will continue to succeed at it slowly but surely.

Scotia Bank has a presence in Belize. Fortis Inc. owns some electric generation assets in Belize.

In my own trading I bought a small amount of Andrew Peller and Canadian Tire today. This increases my diversification. (Also provides and excuse to buy more wine.)

Posting today from Rhapsody of the Seas just out of Costa Maya entoute to Belize. I expect to be able to post each day but a weak internet would be the problem if I go AWOL.

On Monday, The S&P 500 was up 0.1% and Toronto was down 0.4%.

Canadian Tire was down 3.2%. I did not see any news from Canadian Tire. I’d be tempted to buy on this or larger dips.

Andrew Peller was down 3.6% to $13.49. I am thinking of buying some.

FedEx was up 2.2%.

On Friday the S&P 500 ended the day up 0.1% but Toronto was down 0.45%.

FedEx was down 2.3%, and Linimar got pushed down 7.6%. These both may have been related to some negative news or views on trade talks, especially China / U.S. There was no news from Linamar to particularly explain a drop.

Statistics Canada reported on jobs and unemployment for January. They reported 67,000 jobs gained with Ontario gaining 41,000 and most provinces gaining but Alberta losing 16,000. The unemployment rate rose 0.2% to 5.8% nationally as more people looked for work. As always, I take the monthly numbers with a grain or two os salt because statistically the error level is about plus or minus 30,000 and that is if it is a perfect random sample. Year over year is probably more reliable and on that basis there were 327,000 jobs created. Even with population growth that is good growth for the year.

Posting from Tampa Florida today…

On Thursday markets were down moderately with the S&P 500 down 0.9% and Toronto down 0.1%.

CRH Medical was up 4.9% in Toronto.

Costco was down 0.9% despite reporting yet another very strong month of same-store sales growth in January. Growth was particularly strong in the U.S. at 7.3% and 4.3% in Canada. These are the numbers adjusted for foreign exchange and gasoline sales. Growth before adjustments were lower but it is the adjusted numbers that are usually focused on. Still, some reports called the growth disappointment.

Wednesday was a relatively quiet day overall in the markets with the S&P 500 down 0.2% and Toronto up 0.1%.

Not much of particular note, but Linamar was up 1.8% and has now recovered to $52.16. The stock is cheap but faces a lot of negative sentiment (and realities) about auto sales as well as trade tensions. It is a very well managed company and should continue to do well long term.

Toll Brothers dipped down 2.65%.

AutoCananda announced sometime during the trading day that they will sue their own founder and long-time CEO, Patrick Preistner, who is no longer associated with the company. He now owns car dealerships privately through his company Canada One Auto Group.

I was not at all happy to hear this news. It strikes me as a strange move, perhaps even a desperate move. When Preistner left AutoCanada I said at time that that was a strange move. I don’t think I knew then that he owned dealerships privately. I don’t think the extent of that was clearly revealed in AutoCanada’s reports. Perhaps Priestner did favor his own private investments over those of AutoCanada. But I am skeptical that much good can come of spending money on legal fees and spending management time on this. AutoCanada’s biggest mistake was the disastrous purchase of the eight Chicago area dealerships in the Spring of 2018 when Priestner was long gone. They almost immediately wrote off an even one third of the purchase price. And three directors very soon left. I don’t know if they left because they did not support the acquisition or were forced out due to their part in it. Of course the official version is they left for basically personal reasons.

I was surprised the stock did not sink today on this strange news, instead it was about unchanged on the day. But analysts have not yet had time to give their reactions.

I have been thinking that the new chairman (and effectively CEO) Paul Antony (who only joined the Board last Spring) is a real kick-a$$ guy who has already made a lot of changes. Most notably ousting the CEO who bought those Chicago dealerships. He also changed out most or all of the other top managers. Despite the lower stock price I now consider AutoCanada to be quite speculative. It faces industry headwinds as well as dealing with its own past mistakes. So far they do seem to continue to be somewhat in an expansion mode which is a hopeful sign. They always planned a lot of capital spending. I don’t know if they can now delay some of the dealership renovations to conserve cash or not. Sadly, things may get worse at AutoCanada before they hopefully start to get better. The upcoming Q4 report could certainly contain more negative news.

Tuesday was another positive day in the markets with the S&P 500 up 0.5% and Toronto up 0.6%.

WSP Global was up 2.2%. Stantec was up 2.4%. Starbucks as up 2.6%. Couch-Tard was up another 2.0% to an all-time high.

Tomorrow there may be some reaction to the State of the Union Speech.

I notice CN rail is out with a debt offering 3.0% for ten years and 3.6% for 20 years. It certainly seems like a small return. But at least it is guaranteed to mature at par (barring financial disaster at CN which is extremely unlikely). I don’t think many retail investors bother much with individual bonds like this. If a retail investor does want bonds, new offerings like this would be the way to go as there is no trading commission. (CN is effectively paying the commission). Normally when you buy bonds there is a large commission that is hidden from view. I notice TD Direct does not seem to be involved in selling this bond to retail investors (maybe it will show up tomorrow morning). I do see though that TD has quite a long list of corporate bonds at this time. If you look at the bid yield versus the offer yield you can get a sense of the large hidden commission. Be cautious with that. If you are buying a corporate bond, ask how much less you would get if you turned around and sold it immediately. My recollection is that in the past TD had only a small selection of bonds. (I could be wrong on that though…) None of the yields look very high. TD mostly sticks with safer bonds but does have a few riskier high-yield bonds as well. A few of those look interesting but would be risky.

Checking some insider trading I notice that Canadian Western Bank reported today on their January share buy backs. Recall that they has bought back some shares in December (I believe this was their first time ever doing that ). In December they paid around $25 to $26. In January the price was higher and they paid up to $29.61, although mostly a bit lower than that. The last buy was January 22 and I believe that completed their allowed and planned budget for this which was not a huge buyback. But I do think it was a very positive indicator that they truly believed their shares were quite under-valued.

Melcor Developments continues to buy back 1262 shares per day. It’s tiny but is all they are allowed due to the thin trading liquidity.

Markets were positive on Monday as the S&P 500 gained 0.7% and Toronto was up 0.6%.

CRH Medical was up 4.0% and Ceapro bounced up 6%.

AutoCanada slipped 2.8% which was not surprising given the January auto sales report that I mentioned in my last comment.

We will soon be into the main part of the 2018 Q4 earnings reporting season for Canadian companies.

It was tragic to hear about the CP rail derailment that has killed three . It’s a reminder that most companies on the stock exchange are out there doing real and valuable and and sometimes dangerous work. The economy relies on these companies and many of them like CP and CN are very efficient at what they do. While this accident is tragic, it is worth pondering the fact that it is newsworthy because it is so rare. We live in an age where industrial accidents are so rare that they are big news. That’s a very good thing. We know it was not always that way.

On Friday, the S&P 500 was about unchanged and Toronto was down 0.3%.

Most rate reset preferred shares were up modestly as the government of Canada five year bond yield rose 7.5% to 1.862%.

Visa was up 3.6%.

Amazon was down 5.3%, giving back just some of its recent gains.

Desrosiers Automotive was out today with their free monthly sales report on Canadian auto sales. It is amazing that they get the data so fast that they can report January sales on February 1. Basically, it was another ugly month for passenger car (down 14%) and light truck (down 5%) sales. Last January was the highest January ever and so this January overall was still about equal to January 2016 and 2% below January 2017. It’s not good news in regards to AutoCanada. Their biggest brand at 37% of revenue is Chrysler which was down 20%. In terms of year over year declines, Chrysler has been one of the worst selling brands in Canada for about the past nine months. GMC representing 10% of their revenues was down 10%. Hyundai representing 11% of AutoCanada’s revenues did have solid gains of 22%. Unless AutoCanada was able to increase revenues in service and cut costs it is going to be very tough for them to report good news for Q4 or apparently Q1. The stock is already pricing in a lot of bad news. They have already written off considerably goodwill and they write off more with the Q4 report. The company made its latest dealership acquisition in December and they still seem confident that they have the finances to continue to expand.

Rail car loading levels (a good indicator of economic activity) had been showing strong gains in Januaruy but in the latest week fell back to about the 2018 level in both Canada and the U.S.. In Canada autos and parts were noticeably below the 2018 level. Petroleum had another week of very strong year-over-year gains.

On Thursday, the S&P 500 was up 0.9% and Toronto was up 0.4%.

AutoCanada bounced up 5.7%. I stopped in at their Volkswagon dealership in an Edmonton suburb today. This dealership is only about two or three years old and is still ramping up towards profitability. The manager there expressed optimism about AutoCanada under its new management.

Toll Brothers was up 3.6% to $36.94. While, I think the stock deserves to be higher it is doing well lately given that the U.S. housing market is softening. I was somewhat tempted to trim my large position in this stock today but did not do so. Toll Brothers has been ramping up the development of rental apartment buildings which it does with joint venture partners. They announced financing of a a project in Atlanta yesterday. The stock was beaten down a lot in 2018 and has only partly recovered. But the company itself remains focused on long-term growth.

Shopify, which I have not put a rating on other than to say it is speculative (due to its high valuation ) was up another 3.5%.

Amazon was up 2.9% but then fell 4.9% in after hours trading after it reported earnings which were good but which apparently included lower than hoped for “guidance” for Q1.

Boston Pizza was down 3.6% to $16.77. Trading volume was over twice the daily average and so perhaps some large holder sold a lot of shares. Hopefully, it will report positive same-store sales growth in Q4. For each of the last four quarters same-store sales were down modestly (average about 0.4%). But distributable cash per unit was down several percentage points with the difference mostly due to a higher income tax rate in B.C. It still faces that issue in Q4 but then “laps” that impact. Distributable cash flow per unit needs to start increasing again or they will have to cut the distribution somewhat. If that happens it would likely only be a 5% or so cut but the market would likely react quite negatively. I had lunch at a BP today in Sherwood park Alberta. They had a decent crowd for lunch but not exactly packed.

Statistics Canada reported GDP for November which was apparently weak with just a 0.1% increase versus October. However GDP growth is usually looked at on a year over year basis and on that basis it was actually up 1.7%. To my mind it is inexcusable for Statistics Canada to put out a press release where it is not even immediately clear if they are talking versus the previous month or versus the same month in the prior year. It is very easy for the press to get this mixed up when statistics Canada writes in an ambiguous manner. Also, 0.1% growth in a month would be 1.2% annualized (although a month is too short a period to annualize). Reports like this can usually be interpreted positively or negatively depending on the bias of the interpreter. And keep in mind that GDP growth is basically always reported on a real basis. That is, the actual growth was higher but they deduct inflation.

Wednesday was a positive day in the markets with the S&P 500 rising 1.55% but Toronto as up only 0.1%

The U.S. FED seemed to give something of an “all clear” signal indicating that it sees less need to continue raising interest rates.

WSP Global was up 4.8% after releasing highlights of its three year strategic plan by which is plans to become the premier professional consultancy in its industry in the next three years. As our report indicates this company has been extremely aggressive in growing through acquisitions.

BHP (the BBL ADR) was up 3.1% in New York.

Amazon.com Inc. was up a hefty 4.8% (REALLY hefty when you consider its total market value of $817 billion.)

If indeed we are at or near the end of the cycle of higher interest rates, and with the 5 year Canada bond yield at 1.82%, and the 3 month T-bill rate at 1.63% it seems to me that the market yield on various stocks and preferred shares could start to come down. That would push their prices up. Looking at TD direct they offer 1.6% on a TD deposit account and 3.0% on a 5 year GIC. In comparison to that, the ability to get say 6.0% for five years on Canadian Western Bank’s new rate reset issue CWB.PR.D might be attractive to some investors. You are not guaranteed at all that it will be worth $25 in five years but with a spread of 4.0%% over the five year bond upon reset it is basically guaranteed to be paying at least 4.05% (that’s if the 5 year Canada goes to zero) and it seems very unlikely it would reset at less than 5% and it could be a lot more. Of course we don’t know what inflation will be. But if someone wanted fixed income this might have a place in a portfolio. One thing investors have learned about rate reset preferred shares however; they are not a substitute for cash or investments that are guaranteed to mature at a certain price.

On Tuesday, the S&P 500 was down 0.15% while Toronto was up 0.55%

The Canadian Western Bank preferred share that I said (see January 21) was over-priced in relation to a new CWB issue was down 2.6% to $20.11. CWB’s new 6% issue started trading today as CWB.PR.D. It closed today at $24.83 to yield 6.04%. I thought it might trade above $25 given there was a heavy demand for these shares when they were issued last week. So far, rate reset preferreds seem to demand higher and higher yields in order to entice buyers.

Amazon was down 2.7%

Boston Pizza Royalties Income Fund is back up to $17.40 to yield 7.9%. If it is going to be able to increase same store sales then it should probably be trading higher. But given that it may report yet another quarter of same store sales declines it remains vulnerable to sliding back down again. It in effect competes with other yields in the market including rate reset shares and those yields have risen which, all else equal, pushes down the market price for competing investments including BP.

Apple Inc. released earnings after the close and rose 5.7% after hours. We shall see if it maintains or builds on that gain after analysts have a bit of time to digest the report.

CN Rail came out with (not that surprisingly) a big earnings gain Q4 of last year and raised its dividend by 18%. Still, the stock was about unchanged in U.S. after hours trading.

On Monday, the S&P 500 was down 0.8% while Toronto managed a 0.1% gain.

There seems to be a lot happening in the news. The U.S. has now charged Huawei and its CFO Meng Wanzhou, who is facing an extradition hearing in Vancouver. I don’t particularly understand much about this but it certainly is not a good development in regards to trade with China for either Canada or the U.S.

The U.S. is apparently considering sending 5000 troops to Columbia in vase they are needed in regards to Venezuela.

Reports are that the Mueller report is near completion.

So, lot’s of things for the market to worry about.

Linamar was down 2.6%. Penny stock, Ceapro was down 9% but that may just be fairly normal volatility for that stock.

The price of Stantec and WSP did not react to the problems that SNC has revealed.

Fortis Inc. announced that it has an agreement to sell its ts 51% interest in the Waneta Expansion Hydroelectric Project in British Columbia for approximately $1 billion. The market showed little or no reaction to the news. It’s beyond me why they would not have stated what gain (or less likely, loss) they expect to book on the sale. Also if it was an acquisition they would be telling us it was accretive and probably by how many cents per share. But no word here on how dilutive this is to earnings per share. They do indicate that the funds will be used in their capital investments which would indicate that the lost earnings will be restored. In any case Fortis is a very well-managed company and presumably this transaction is beneficial. Fortis prefers regulated assets or at least those with really long contracted cashflows. This transaction may directionally reduce their risk assuming that the entire output of the dam was not contracted for decades to financially strong buyers.

Vale has suffered a tragic and deadly dam failure in Brazil on Friday last week. I wondered if BHP Billiton might go down on the news given that they had a huge dam failure in Brazil in 2015 on a dam that they owned in partnership with Vale. I believe Vale was the operator. BHP has been wanting to resume operations but this latest development probably at least delays that. BHP’s stock does not seem to be affected by this latest failure so far. There has been no press release from BHP about it to address any possible impact on BHP. Mining always seems to be a tough way to make money. These dam failures have not only caused deaths but have been an environmental disaster.

I have never had SNC Lavalin on the list but its bad news this morning is possibly of relevance to Stantec and WSP. SNC will report lower 2018 earnings for a number of reasons. The stock is down 20% on the news. On a mining&metallurgy division project there are performance problems with whatever they were involved in plus cost overruns and they are unable to recognize certain costs as revenue as the client might not pay. Unrelated to that, they are facing problems in Saudi Arabia where 15% of their workforce is located and with that and slowness in oil and gas and also apparently some disputes about amounts that clients will pay (they mention revenue recognition issues) they are taking a write-down of $1.24 billion or $7.06 per share.

The thought comes to mind whether any of this has relevance to Stantec and WSP. Largely the answer is no given that one problem was specific to to one mining&metallurgy division project and the other problem relates mostly to Saudi Arabia. But it was not entirely clear that the slow down mentioned was restricted only to the oil and gas division in the middle east and to other very specific projects.

Overall, there is little indication of any relevance to Stantec and WSP. Nevertheless, it seems like a negative indicator for those two companies that have at least some business in the middle east.

In my own trading, I lightened up somewhat on Stantec this morning, selling what amounted to just over 25% of my shares. It was one of my larger positions and I wanted to reduce the risk. Also, I only have Stantec rated (lower) Buy and I can buy into something I rate higher which will also increase my diversification. I do not own any WSP shares.

Friday was a positive day in the markets with the S&P 500 up 0.85% and Toronto up 0.6%.

Our one penny stock, Ceapro was up 7.5%.

Linamar was up 4.8% to $51.17 after it announced approval for a share buy-back. They are authorized to buy back up to 10% of the public float or 4.5 million of the total 66 million shares. The company explained:

“We are initiating this NCIB in recognition of what we believe is a significant level of under valuation of Linamar stock. We do not feel that the value of our business is being adequately reflected in our current share price” said Linamar CEO Linda Hasenfratz .

I believe this is an important announcement. Linamar is a growth company and would prefer to be doing an acquisition rather than giving up cash like this. Looking at the share count it appears they last bought back shares during the financial crisis when their shares got really hammered down (like from a peak around $26 to briefly under $4!). My impression is that this is a very well-managed company. I certainly believe that management honestly believes that the shares are significantly undervalued. And while there are risks to their sales outlook and while “the market” may remain skeptical, I think they are right. This buyback should provide support for the share price and hopefully earnings reports during 2019 will further support an increased price.

BHP Billiton was up 4.3% (The BBL shares on New York)

Starbucks was up 3.6% after releasing an earnings report.

AutoCanada started the day down slightly but ended the day up 3.0% which may be a positive reaction to the CRM partnership that it announced and which I mentioned yesterday.

On Thursday, the S&P 500 finished the day up 0.1% while Toronto was up 0.5%.

Toll Brothers was up 1.7% and Linamar was up 2.8%.

Starbucks was down 2.5% but is up about 2.0% in after hours trading after it released a favorable earnings report.

AutoCanada has just announced a strategic partnership with a Customer Relationship Management company that it already does business with. It sounds like they take care of emailing customers reminding them to come in for service. Apparently a new group dedicated to AutoCanda will have 85 employees (some presumably are already employees of the CRM firm). This company is located in Saint John New Brunswick and has over 500 dealers that it markets for across North America. AutoCanada has been a very disappointing investment. But the new management under Paul Antony continues to be busy making changes that they say will improve profitability. I don’t expect those results to shown in earnings until Q1 is reported, at the earliest. Hopefully the stock price could respond earlier. This remains a speculative investment given its own past mistakes and the weaker state of the auto sales market at this time.

Statistics Canada reports that the number of recipients of Employment Insurance was down 13% in November year over year. There was a big decline in Alberta but no doubt that is partly due to benefits simply running out. Still, the report suggests an improved jobs market overall.

Apple Inc. is added to our list and rated Speculative Buy at $153.92. Apple is well known as one of the most valuable companies in the world. It also has a low P/E ratio at 12.9 – those two factors together tell you that it is highly profitable. It earned $60 billion dollars in its latest fiscal year. I am calling is Speculative at this time (which may be an exaggeration) because it has warned on its Q1 results to be released next week and it may sell fewer iPhones in 2019 due to tensions with China and perhaps longer replacement cycles as the technology has become more mature. In my own account, I have made a small share purchase and will wait for the Q1 results before possibly adding to that.

On Wednesday, the S&P 500 was up 0.2% while Toronto was down 0.2%.

About the only notable move in stocks on our list was Constellation Software, up 3.0%

Rail car loading reports are out for the third week of January. In Canada, every category except grain and non-metallic minerals is up and many categories are up substantially. This includes intermodal, which is consumer goods which is up noticeably. Even autos and auto parts are up year-over-year. These figures suggest the Canadian economy continues to grow. If you click through to the chart be sure to click the “radio” button to choose Canada and then use the buttons to see each commodity. The red line at the left is 2019 and 2018 is the green line. These figures may include CN and CP’s U.S. operations but in any case on the face of it the data looks quite positive on a year over year basis. It is more difficult on this chart to compare January to December especially given seasonality and I have not attempted to make that comparison.

Statistics Canada reported retail sales for November. Year over year they are mostly quite flat (up 0.5% for Canada as a whole, Ontario up 2.9% and Alberta up 0.5%) which would indicate a modest decline in most provinces considering inflation. Nova Scotia shows a 6.4% decline. That’s rather hard to believe. Scary, if true. These statistics are always subject to data collection errors.

On Tuesday some fear returned to the market and the S&P 500 was down 1.4% and Toronto was down 0.8%.

BHP was down 3.2% in New York (the BBL shares).

CN Rail was down 3.2%. Amazon was down 3.8%. CRH Medical was down 3.5% in Toronto.

Our one penny stock , Ceapro. was up 5.7%. It’s a highly speculative stock but could pay off as it has some products at various stages of trials or planned trials. I was under the impression that they were running a 12 week trial but upon checking I see it is an 18 to 24 month trial.

“The 18-24-month study will enroll approximately 280 subjects who cannot tolerate high doses of current treatments. Patients enrolled will be randomized to receive either placebo, low, medium or high doses of beta glucan (500 mg tablet) as add-on therapy to atorvastatin 10 mg – 20 mg or an equivalent statin for a 12-week treatment period. The primary efficacy endpoint of the study will be the change over 12 weeks in LDL-cholesterol. ”

So, perhaps there will be no major results for a long time yet.

Regarding the Canadian Western Bank 6.0% preferred share. I had placed an order (technically an “expression of interest”) for 1000 shares yesterday morning. I was allocated 400 shares. That suggests the offering was substantially over-subscribed. This would also suggest that the 6.0% return was somewhat above market. If market conditions remain unchanged I would therefore expect these shares to begin trading a little over $25.

Statistics Canada reported manufacturing sales for November. The result was a modest decline. But it appears that the decline was caused by lower petroleum refining. I believe that may have been partly due to shut downs at the customer end. Still, it was not a positive report overall.

Statistics Canad also reported sales at food service and drinking places for November. The results showed a small increase versus October and a strong 5.1% increase versus the prior year including 2.9% for Alberta. This should bode well for Boston Pizza except that BP has been showing modest declines (around 0.4%) in same store sales for the past four quarters despite the fact that the industry overall has seen relatively good gains most or all months in that time period.

Statistics Canada (they were busy today) also reported Wholesale trade figures for November. The report showed little growth year over year.

All three of the above reports included handy tables that summarized the percentage change versus October as well as month over month ans showed this by province. For some reason, there are other reports (including the residential investment report I mentioned yesterday) that don’t give those handy tables. In those cases it can be very tedious to try to extract the data and calculate the year over year change. I usually focus on year over year changes.

U.S. markets were closed for the Martin Luther King jr. holiday on Monday. Toronto rose 0.3%.

CN Rail was up 2.3% amid reports that it and CP are rationing capacity due to congestion – which is to some degree a nice problem to have for the two rail lines.

Andrew Peller was up 3.7%.

Canadian Western Bank was up 2.6%.

Constellation Software was down 2.4%. AutoCanada was down 4.2%.

Canadian Western Bank issued a new 6.0% rate reset preferred share which sold out quickly. (I placed an order for some). This issue was at spread of 4.05% over today’s five year government of Canada bond yield. That is a hefty spread when you consider that some rate reset preferred shares have been issued in the past at a total yield under 4%. This issue will reset in five years at a spread of 4.04%.

This issue follows BMO and TD which recently issued at 5.2%. CWB has to pay more as it is considered riskier. I don’t know why CWB would make this issue. As of the end of October CWB had $265 million in preferred shares outstanding which was the same as October 2017. This issue will add $125 million to the preferred share total which is substantial. CWB has common equity of $2,321 million. I understood that CWB thought its capital level was already somewhat high. CWB is currently buying back about $50 million in shares so to some extent this could represent replacing common equity with preferred equity. But the capital level is being increased by about 75 million or 2.9% which is substantial and perplexing. This could be to facilitate asset growth of some kind or it could be that they predict losses ahead and wanted to shore up the balance sheet – but I doubt that is the case. It is possible but I think unlikely that they plan to redeem the rate reset issue that is due to reset at the end of April.

Those existing rate reset preferred shares closed down 2.2% at $21.55. If the five year Canada yield remains at 1.95% these will reset at 4.71% of $25 for a yield of 5.5% at the $21.55 price. I would see the new 6.0% shares as more attractive than the existing ones likely to reset around 5.5%. The existing shares have the advantage that they could reset somewhat higher than 5.5% (or lower) and if the market spread on these shares decreases they probably offer a higher chance of a capital gain. New issues at $25 can’t really ever be expected to trade much above $25 given the right of CWB to recall them at $25 on the reset date. The existing shares also benefit from a slim possibility that CWB will in fact redeem them at $25 but that seems unlikely. Why issue new shares at 6.0% and then redeem old shares at 4.71%? The existing shares also benefit from the fact that they are still accessible around $21.55. The new, probably more attractive, issue at 6.0% is closed. It will be interesting to see if it starts trading somewhat above $25.

Statistics Canada reported investment in new construction in November.

The investment in single family homes in Alberta is a very important to Melcor. This (new construction plus renovations) was down 20% year over year which does not look too bad. But it is down an even 50% from the November 2016 figure and down 31% from the 2015. figure. Clearly this is a volatile sector and clearly home building / home renovation are down quite substantially in Alberta versus two years ago. Somewhat of a saving grace is that the land and building lots that Melcor does not sell this year it still owns and can sell in future. But it does face carrying costs to hold land for longer periods. Selling home lots is not Melcor’s only business. About half its assets are devoted to its portfolio of commercial income properties. It also develops new buildings profitably. The decline here versus 2016 is I believe larger than the decline in single family starts and may indicate that renovation spending in Alberta is down even more that new home construction.

For Canada overall, residential single family investment in November 2018 was down 7% year over year.

This is very time sensitive but CWB is out with a new rate reset preferred share issue paying 6%. I just placed an order for some. This 6% yield would suggest to me that the current pref issues of CWB should fall a bit in price today.

American Express is updated and rated (higher) Buy at $100.48.

With this update I added four new lines to the report (all reports will get these new rows as they are updated).

The new rows are just below the rating cell as follows:

Previously, in the summary cell of each report I have addressed whether it was a good business, and well managed and what the outlook for growth was and what the valuation looked like as well as other factors. And the rest of the report gave lots of further details and gave my thinking. But it is easy to get bogged down in details and also some people likely just look at the rating. But the rating cannot really stand as a summary of the entire report. These four new rows address the key questions that Buffett has said we need to ask. And they help to explain the rating. At times a stock is rated very highly due to its cheap valuation but it may not be a fundamentally great business. At other times a great business is rated fairly low due to an excessively high P/E ratio. These four new rows can help to explain the rating. Ideally subscribers would still look at the full report and try to see the full logic of the rating.

On Friday, the S&P 500 was up 1.3% and Toronto was up 0.6%.

Berkshire Hathaway was up 2.9%, TFI International, FedEx and Constellation Software were each up 2.1%

Among the relatively few stocks on our list that were down was Linamar, down 1.5%.

An insider at Canadian Western Bank bought 3,250 shares at $29 today which is another vote of confidence.

Toll Brothers announced that it will team up with J.P. Morgan Asset Management to construct a 421 unit rental building in Westchester New York’s Platinum mile. This is a $78 million investment for Toll Brother’s half of the cost. For context, Toll Brother has assets of $10,245 million. Westchester is within an easy transit commute form New York City. Toll Brothers also sells single family homes in Westchester including this town house project with prices around $1.0 to $1.2 million.

Regarding getting Alberta’s oil to market. CN and a First Nation have announced that they will invest $16.7 million each along with a yet-to-named third partner to build a plant to turn bitumen into plastic coated pucks that can be shipped (presumably to the coast) via open hopper rail cars at far less cost than shipping in tanker cars. The plant would take two years to complete. The First Nation must be confident of the technology since this is a big investment for them. The capacity would be 10,000 barrels per day which compares to existing rail shipments of 330,000 barrels per day. For CN this is not a large investment. It is interesting to consider that the mandated production cuts in Alberta which have increased the price of Alberta heavy oil and bitumen actually harms the economics of this project. The economics will depend on the “spread” between Alberta heavy oil and bitumen and world oil prices when the plant is operating. Those spreads are very hard to predict. Each project that works to get more oil out reduces the spread. For the Alberta economy overall, this is good news. It’s small and not immediate but another step in the right direction.

If rail shipments are any indication, Canada’s economy continues to grow in January. Rail car shipments are up sharply in the first two weeks of January versus the prior year. Intermodal, which is consumer goods, was up and petroleum was up sharply. Auto and auto parts were down moderately while all other categories appeared to be up or at least similar to last year. You can see the figures here. Click the “radio” button to Canada and then explore the different commodities.

Thursday’s action saw the S&P 500 rise 0.8% ans Toronto was up 0.7%

Dollarama was up 2.5%. Most stocks were up but Toll Brothers was down 1.6% and Linamar was down 1.2%.

Regarding rate reset preferred shares, Toronto Dominion was out with an issue at 5.2%. I did not notice the email from TD Direct about this new issue until about 5 hours after it came out and the issue was sold out by then. The five year Canada bond yield is at 1.93% and so this is a hefty 3.27% spread. It will reset every five years at the five year plus 3.27%. So even if the five year once again were to plunge to its record low around 0.50% (and such very low rates were the case in much of 2015 and 2016 and were the reason that rate resets plunged back then) this one would still reset at 3.77% which would be low but not horrible. And if the five year goes to say 3.0% which it is sort of “supposed to” under Bank of Canada outlook then this would reset at 6.27% which while not fantastic would certainly earn a place in a portfolio, especially a taxable account where the dividend tax credit would apply. All the comments I made on Monday regarding the very similar Bank of Montreal issue also at 5.2% apply to this TD one.

Regarding AutoCanada. I happened to be driving by one of their dealerships at 9:00 am this morning and stopped in. This is their Mercedes-Benz dealership that they acquired just this past Fall. I don’t like to waste the time of car salesmen with corporate type questions – though I will be in the market for a car soon but I figured at 9:00 am on a Thursday they should have time to chat and I told reception that I was there primarily as an investor (share owner). The Sales Manager was phoned and told I was interested in how sales were going and he said he was in a meeting and all that information was on the corporate website and also did not invite me to wait until his meeting was over or come back later. I felt rather disrespected to get that brush-off. Another salesman paid me no attention (I thought car sales guys used to be hungry!). But I asked if any salesman was available and one young but experienced guy was and he was very knowledgeable and helpful and generous with his time. I did not get any real detail about sales but it was indicated that sales were down but not terrible. And I know from the Desrosiers report that Mercedes Benz and most import brands while down a bit in 2018 have not seen the declines that Chrysler saw. Mercedes was flat in December while the industry was down 8 percent.

In any case this dealership is relatively new and it is massive and impressive. There were about four people working just at the auto service counter and two people on the reception counter. So the place looked pretty prosperous. Hopefully the prosperity will flow through to the share owners again at some point.

On Wednesday, the S&P 500 was up 0.2% as U.S. banks rose after some of them reported higher-than-expected earnings. Toronto was up 0.4%.

Shopify was up 2.1%. With a great future but no current earnings, the value of this company is somewhat “untethered” and so floats around, probably based on “technical” trading and momentum. The founders of Shopify have done extremely well and I believe they have been very astute in selling shares and raising a huge war chest of cash while still retaining control of the company.

There were no other particularly noteworthy moves in the stocks on our list. Bank of America which is o longer on our list was up 7.2%. I have a few shares bought some years ago and sold today about half of those for more than twice what I paid for them.

Having found myself with far too little cash to take much advantage of the low stock prices in December, I now plan to try to raise my cash position. To that end I sold at a gain some of the bargain shares I did pick up in December. This made for a small reduction in my position in Boston Pizza. Earlier I had slightly reduced my position in Linamar. I also put in an order to slightly reduce my large position in Canadian Western Bank.

One stock that could very well decline before it ever (hopefully) turns around is AutoCanada. As mentioned in an earlier post, December auto sales in Canada were rather ugly. And yesterday I saw a comment by an apparent industry insider that said the first half of January is down again. It’s entirely possible that AutoCanada will do further write-offs of goodwill. But I think they will remain cash flow positive. Most of their debt is “floorplan” debt to finance their inventory. Other than that their debt is not tiny but seems reasonable. I was originally attracted to AutoCanada as a growth-by-acquisition company which can be a very good strategy (successful examples include TFI International, Stantec, Alimentation Couche-Tard, WSP Global, Constellation Software, Fortis Inc, and Berkshire Hathaway) Unfortunately it turns out AutoCanada was over-paying for acquisitions. Then they had a period with poor management (Steven Landry, who was brought in from outside AutoCanada) which led to an apparently extraordinarily dumb purchase of Chicago area dealerships leading to an almost immediate large write off and a change of directors and CEO. I think the new Chair (and defacto CEO) is very competent but he is trying to deal with a mess and running into a slowing auto sales market.

On Tuesday, the S&P 500 was up 1.1% and Toronto was up 0.5%.

Shopify was up 3.55%. Amazon was also up 3.55%

Most stocks have risen considerably off their December lows. This includes Toll Brothers up 1.1% today to $36.11, Canadian Western Bank up 1.2% to $29.32, Linamar up 1.2% to $49.06. But these remain well below their highs. Alimentation Couche-Tard is basically at its all-time high at $71.79.

AutoCanada was down 2.6% and Melcor was down 2.1%.

In the United Kingdom of Great Britain and Northern Ireland, Theresa May’s Brexit deal was very soundly defeated. And it looks like her government could be defeated tomorrow. Markets apparently welcome the news since it will lead to some next steps in towards leaving or possibly staying in the European Union.

There have been a number of take-over / merger announcements lately which indicate that “animal spirits” remain strong as corporate managers are still willing to pay up for acquisitions.

Regarding Gold companies I have written extremely critically of Barrick Gold in the past. I have not looked at it again but I will go on the record to say that I think that its recent takeover by the management of Randgold is a very positive thing for Barrick shareholders. The new CEO sounds far more competent to me.

On Monday, the S&P 500 was down 0.5% which was blamed on news a decline in China’s imports and exports in December. The market did not seem to pay much attention to the latest news about Trump. (Allegedly took steps to keep secret his discussions with Putin and continued coverage of the news that the FBI had opened an investigation on Trump as soon as he fired the FBI director – and openly said that he did it because of the Russian investigation).

Toronto was up 0.2%.

CN Rail was a notable gainer, up 2.2% as its traffic was up 9% year-over-year in the first week of 2019. This is also potentially a positive indicator of economic activity. However, in this case the increase appears to be almost entirely related to increased oil by rail.

Regarding rate reset preferred shares, there was an interesting development today. CIBC came out with an issue yielding 5.2% which is 3.3% higher than the 5 year Canada bond yield. When you consider that in retirement, 4% is often considered the maximum safe withdrawal rate, this 5.2% cash yield could certainly be attractive to those looking to generate cash yield for withdrawals. By the time I saw it, it had already sold out and it was likely available for only an hour or two.

This issue has implications for existing rate reset shares. These CIBC shares will reset in five years at the 5 year Canada bond yield plus 3.31%. This 3.31% “spread” is far larger than most or all of the existing bank rate reset preferred shares and is larger than the spread on many of the non-bank issuers as well, such as utilities. The implication is that if these new 5.2% CIBC 3.31% spread rate reset shares are worth about their issue price of $25 today, then all those issues with lower spreads are definitely worth somewhat less (at least today) and perhaps considerably less than $25. For example the Canadian Western Bank issue on out list that will reset at a spread of 2.76% on April 30 would yield only 4.66% at $25. As a smaller bank those probably need to yield at least 5.4% to compete with the likes of this CIBC issue and that suggests a price of $21.57. And those shares closed today at $22.64 which suggests an April 30 yield of 5.15%. That suggests to me that the CWB shares may be a little over-priced but the explanation could be that the CIBC shares were scarce and snapped up quickly and the Canada bond could move higher by April 30, and if so, the CWB shares will yield more than 5.15% at their current price.

The fact that the market “spread” on bank rate reset preferred shares has risen to 3.31% explains why most rate reset shares are trading well under $25. They could come back to $25 if the market spread declines significantly enough. That spread tends to decline as the Canada bond yield increases.

On another note, some may wonder how a bank makes money lending mortgages at rates as low as 3% or whatever while paying a much higher rate on its own preferred shares. The answer is “leverage”. Preferred shares, along with common shares, and bonds issued by banks are part of a bank’s owner’s capital. And they are allowed to leverage that capital considerably. Basically when they lend mortgage money at 3.0% that is funded largely by deposits on which they are paying less than 3.0% and in some cases 0%. This was explained in our article on how banks make money.

I have added Shopify to the list of stocks but only on a preliminary basis and have not yet assigned it a Buy / Sell rating other than to say that it is Speculative. Shopify appears to have a wonderful business model and a great future. But it it is not yet profitable on a GAAP basis which makes it very difficult to value. Despite not being rated, the report provides a description of Shopify and provides information and y thoughts on the company. I will likely assign a buy / sell rating in a subsequent update. A possible added value for Shopify is that it might be an attractive take over target for the likes of Amazon or IBM.

Much of Shopify’s potential future value may already be reflected in the share p[rice. Clearly the really big money has already been made by the insiders that started the company. And those that bought soon after the IPO in 2015 have also done very well. With a U.S. $16 billion market cap it could still have upside but probably not massive upside at all.

The analysis is in U.S. dollars because the company reports in U.S. dollars and gets most of its revenue from the U.S.

Friday was a relatively quiet day for the markets with the S&P 500 unchanged and Toronto up 0.2%.

And there were no noteworthy movements in any of the stocks on our list.

A possible headwind for the markets is the political situation. Friday there was a new revelation that the FBI had opened an investigation in 2017 into whether Trump’s actions were a benefit to Russia. Apparently this investigation was later folded into the Mueller inquiry and the outcome is unknown. Trump’s former long-time lawyer is going to testifying publicly in front of Congress. And at some point the Mueller report will be released. All of this will lead to more turmoil for the President and could certainly send the markets lower.

Then there is the partial government shutdown. That is creating turmoil. So far it has had zero impact on the reports for initial claims of jobless benefits or the unemployment rate. But could it directly and indirectly lead to a surge in jobless claims and the unemployment rate? I would think so. And the partial government shutdown will likely lead to various delays that could lower corporate revenues and earnings. I saw a report where sales of existing homes were delayed because federal flood insurance could not be accessed. I don’t know if this will affect Toll Brothers’ ability to close and deliver homes. Any number of companies could be affected in unexpected ways. On top of that there is the potential for more turmoil if Trump declares a national emergency to get his Wall funding.

It would seem wise for investors to have some cash available in the event that the market offers up bargains due to the turmoil.

Markets were up moderately on Thursday with the S&P 500 up 0.45% and Toronto up 0.7%

TFI International continued to recover and was up 2.2%.

Linamar was up 1.7% and that was despite news that Ford and Landrover Jaguar would be laying off thousands in Europe. I don’t know what impact this would have on Linamar but certainly it is not good news. But Linamar’s stock is cheap and perhaps the market decided it was already more than pricing in the weaker auto market in Europe.

We are now in a period where most companies (those with December 31 year ends) are in “quiet periods” where they won’t likely release any news until their Q4 results come out. Still, there have been a few merger type announcements even in this period. The market at the moment has been watching the FED closely for signs of how fast it raise interest rates. Also, as always news from the White House can push markets in either direction at any time.

Statistics Canada released building permit data for November. As expected, permits were down in Alberta compared to the prior year. Residential permits were down 17% and non-residential down 18%. Alberta construction and particularly around Edmonton had been holding up quite well over the past few years despite the lower oil prices. A number of large office and residential towers had likely been committed to before oil prices fall. And single family starts held up well also. But now, activity is clearly slower.

Statistics Canada also released the index of new home prices for November. This data shows new home prices have remained fairly stable with declines in Alberta at roughly 1%., versus the previous November. So far, it does not appear that home builders are offering big discounts on new homes. Correspondingly, I have not seen any indication that Melcor has reduced its lot prices – although it has focused on selling smaller less expensive lots in the past year or more.

Today, the S&P 500 rose 0.4% and Toronto rose 1.4%

West Texas Oil is at $52.16 and I believe I saw Western Canadian Select at over $43 on BNN today. The Canadian dollar is back up to 75.7 cents from lows of 73.3 U.S. cents just one week ago.

Two weeks ago, all was gloom and now a lot of things have rebounded sharply. Whether this lasts is anyone’s guess. Trump is getting nowhere with his Wall money demands and may declare a national emergency. Never a dull moment. And, clearly any given stock and the market overall can turn down quickly if any bad news appears.

Stocks on the rise today included:
Linamar, up 5.1% probably due to possible progress in China / U.S. trade talks.

Toll Brothers, up 3.65% to $36.31. A good recovery from $31 on Christmas Eve. While it is still cheap, I was tempted to trim a bit more today but did not. U.S. home building numbers have been low. On the other hand 30 year mortgages rates in the U.S. have retreated somewhat from the highs seen in October. And the pace of U.S. home building remains well below historic averages.

Boston Pizza, up 2.5% to $16.66. It got as low as just under $14 on Christmas Eve as I suppose some people must have been selling in a panic thinking there was no bottom to it.

Almost all the stocks on our list were up today and there were no declines of any real note.

Costco has reported same-store sales for December. The numbers to look at are the ones adjusted for gasoline prices and currency. Adjusted for lower gasoline prices, U.S. same store sales were up 7.1%. And in Canada, adjusted for gasoline and for currency (as their unadjusted number is in U.S. dollars) same-store sales were up 8.1%. It seems many people are still spending apace. These gains come on top of or in comparison to similar big gains in the prior December. Costco’s same store sales accelerated well over a year ago and just keep charging ahead. I suspect some of this must be inflation increases but in any case the results are very impressive. Unfortunately, the stock always seems quite expensive and it will likely be up tomorrow. Perhaps the next time the market gets a fright will be the time to at least nibble on this.

On Tuesday, the S&P 500 was up 1.0% and Toronto was up 0.7%.

Notable gainers included:
TFI International, up 4.4%
Dollarama, up 5.1%
WSP Global, up 3.0%
Andrew Peller, up 2.9%

Canadian Western Select oil continued to climb and was over $40 U.S. This is a spot price and most production is probably sold at contracted prices. But this is certainly a welcome development for Alberta.

President Trump is speaking to the nation tonight about border security. That may affect markets in one direction or the other tomorrow. Meanwhile, there is apparently proof that his campaign chair met with a Russian operative during the campaign. Markets seemed to ignore that news today.

Melcor, in insider trading data posted today, reports that a few insiders had purchased a very modest amount of shares on December 31 “under a plan’. Checking back the plan was in place for several years and so I would not consider these buys to offer much in the way of a positive signal. They simply take some compensation money at year end and buy some shares.

Canadian Western Bank in insider trading information posted today reports that an insider had bought 500 shares December 24 and 500 shares at $25.00 December 27 at $25.09. This is another positive indication that management views their shares as under-valued.

Markets rose on Monday with the S&P 500 up 0.7% and Toronto up 0.5%.

Rate reset preferred shares rose with the Canadian Western Bank pref share on our list up 4.2% and the Enbridge one up 3.7%.

Couche-Tard was up 2.5% and sits basically at an all-time high.

Constellation Software was up 4.5%.

AutoCanada however was down 4.6%.

West Texas Oil has risen to $48.73. More importantly for Alberta, Western Canadian Select was at $39 today. Presumably the mandated productions cuts are having an impact. This is much-needed good news for Alberta.

Wine maker Andrew Peller Limited is added back to the list rated (lower) Buy at $13.87. It’s not particular cheap but it has been well managed and may be of interest especially to those who enjoy its products.

The next update will be to add wine maker Andrew Peller back to the list. Its price is down to about $14 from highs of $19. With the recent market declines it was briefly under $12 in December. At $14 it is probably reasonably priced but not cheap and may end with a rating of (lower) Buy. Still, it might be nice to buy some especially for those that enjoy its products.

Looking ahead to the Q4, Canadian companies that earn much of their earnings outside of Canada will benefit from the lower Canadian dollar. This includes Stantec, WSP Global, TFI International, Fortis, Royal Bank, Linamar and to a lesser extent CN Rail.

Couche-Tard will not see a benefit in its reported earnings since it reports in U.S. dollars, but the value of those U.S. dollars is higher in Canada dollars. The same applies to CRH Medical.

Companies that import into Canada will be hurt by the lower Canadian dollar and that includes Canadian Tire and Dollarama.

Markets  were higher on Friday due to a strong U.S. jobs report combined with soothing comments from the Fed Chair.

The S&P 500 was up a huge 3.4% and Toronto was up 1.5%

Some of the larger gainers were:
Amazon, up 5.0%
American Express up 4.5%
Visa, up 4.3%
BHP Billiton, up 6.3%
Canadian Western Bank, up 3.7%
FedEx, up 4.6%
Toll Brothers up 5.1%

I sold what amounted to 8% of my Toll Brothers shares. I hate to sell any but with all the volatility and with many predictions of a housing slump in the U.S. it seemed prudent to sell a little into this rally.

The Canadian jobs report for December was relatively weak especially for Alberta. And the numbers may well be correct. December was certainly a gloomy month in Alberta. But I can’t believe how the jobs report keeps getting reported with zero mention of the (large) statistical error level. This report became even more volatile a couple of years ago and so I don’t think much can be made of any one month’s report.

Checking insider trading reports for today, I see that Melcor continues to buy back some 1162 shares per day. It’s tiny but it is all they are allowed due to the thin trading volume.

But I also see that Canadian Western Bank reported today on its December share buybacks. They started on December 6, the same day they released their Q4 numbers and have been buying back 60,111 shares per day. That’s about $1.5 million dollars worth per day. To put that in context, CWB has a market cap of about $2,325 million. If CWB keeps going at this rate they will finish buying the authorized 2% of shares or 1,767,000 shares before the end of January. If the price averages $26, they will have spent $46 million which is almost exactly half of what they currently “spend” on dividends in a year. It certainly looks like they definitely view the shares as undervalued and wanted to grab as many shares as they could at the recent lower prices. This also indicates that are confident that earnings will continue to be quite good. They would not blithely give up 2% of their equity capital if they thought there was much trouble on the horizon.

This buyback will be modestly accretive to earnings per share. Banks are always highly leveraged and need to be to make a good return on equity. CWB has had a higher equity ratio than regulators require and somewhat higher than what management felt was needed. This buyback will increase the bank’s leverage slightly. Since the shares are trading right around book value, the buy backs will essentially not be dilutive to book value per share, which would normally be the case.

I watched President Trump speak and take questions today for over an hour. Again he looked very relaxed and confident. He seemed to take questions in stride without getting angry. Sure, he was his usual boastful self and stretched the facts at times. And attacked the judiciary!  But he also gave convincing reasons for building his Wall / Fence and was very clear that he is not backing down.  The Democrats and CNN can say what they want but he campaigned and won the Presidency on a promise to built the wall. Sure he said Mexico would pay and now he says well they will pay through the better trade agreements. The Democrats will likely have to scramble now to get him the money without looking like they are backing down.

On Thursday, the S&P 500 fell 2.5% while Toronto fell 0.9%. Apple reported lower sales in China and there was also other weak economic news from China including lower automobiles sales.

Berkshire Hathaway which has a large investment in Apple shares fell 5.5%. FedEx was down 3.7%, Visa was down 3.6%. Starbucks was down 4.3%. TFI International was down 4.1% to $33.80 – seeing that, I bought some TFI today.

Melcor Developments was up 4.5%. But that could amount to “noise” for this thinly traded and beaten down stock. Checking insider trading, Melcor has not reported any buy-backs this week. Hopefully, the program has no ended.

Desrosiers Automotive consultants released a report of auto sales for December. The numbers look rather ugly with sales down 8% year-over-year. And sales for 2018 were down 2.6%. However this was in comparison to 2017 which was the strongest year on record. Desrosiers points out that 2018 still comes in as the second highest year ever and said that December’s figures were still a solid total. (They may just look bad compared to the very strong December 2017). But in any case this is not positive news regarding AutoCanada. If there is any good news from AutoCanada regarding Q4 it will likely have to come from better management and cost cutting.

I received from Knightsbridge Foreign Exchange a summary of where the big banks expect the Canadian dollar to go in Q1. RBC projects no change from the current 74 cent level and a rise to about 75 cents in Q2. BMO and TD both project a rise to about 79 cents for both Q1 and Q2. The other banks are somewhere in the middle. Possibly now is the time repatriate some U.S. dollars back to Canadian.

Statistics Canada has created a new dashboard of new housing market conditions. There is a “radio button” to switch from comparing to the previous month and comparing to the same month the prior year. Year over year things (prices, October permits) are mostly up slightly except that housing starts were down 12% in November. Housing starts include multi-family which can cause substantial volatility.

Meanwhile, the consumer economy seems to continuing to hum. I was at Costco today, Thursday at 1 pm – it was basically packed. This was in St. Albert a suburb of Edmonton. Minor point but Tim Hortons was also quite busy. So far, I see no slow down in the propensity of people where I live to partake of fast food and restaurants and shopping.

January 2, 2019 P.S.: I have updated an article that describes how to set up a diversified portfolio using ETFs, or even just using one single ETF.  I also updated the reference article that provides a list of selected Canadian ETFs covering equities, higher dividend equities , fixed income and commodities.

January 2, 2019: After starting out the day in the red, by the end of the day, markets started out 2019 on a positive note. The S&P 500 index was up 0.1% and Toronto was up 0.2%.

Boston Pizza was up 5.8% after announcing that 10 new restaurants opened in 2018 will join the royalty pool. The net new addition is only 5 restaurants because 5 closed. And it seems likely that the 10 new ones will have a higher average revenue than the five that closed so perhaps the net addition is higher than 5. In any case new restaurants may not be accretive in any way to cashflow per unit. They are designed to add just 0.085% to franchise revenue for each 1.0% that new restaurants add to the royalty pool. After accounting for any cannabilization, new restaurants may not be accretive. But the addition of new restaurants does indicate that they are still attractive to franchisees (despite higher minimum wages and some decline in guest traffic). And the BP Royalties need profitable franchisees for the system to be sustainable. More restaurants improves the economy of scale for advertising. The BP press releases are very confusing and they could do a better job there. They should be much more clear about the impact on cashflows per unit, which is what really matters.

Canadian Western Bank was up 2.0%.

CRH Medical was up 3.6% after it announced this morning that it had made another small acquisition. It’s growth by acquisition strategy remains in place.

Linamar was down 3.4% as investors seem to continue to be fearful of its prospects.

I saw much of Trump’s television appearance today. While not a fan I have to admit he looked very relaxed and confident. And his comments on his Middle East strategy sounded sensible to me. He took credit for having the Saudies turn on the pumps and bring oil prices down. There was a time in Canada (1970’s) when Saudi Arabia / OPEC was considered a very bad actor for restricting supply and pushing oil prices up. It is never admitted, but the oil industry in Alberta (and therefore the province) has benefited greatly by OPEC’s actions over the past 40 years or more. That’s fine, but it’s not so honest when the Alberta government and the industry pretend they were operating in a free oil market all these years. When they count their blessings, they ought to count OPEC twice. Even today, I am sure that absent OPEC, supply would be higher and oil prices lower.

January 1, 2019:

The Enbridge rate reset preferred share on our list is updated and rated (higher) Buy at $17.00 At this price it is yielding 6.5% and is projected to reset on December 1 this year to yield 6.7% on a $17.00 price. These rate reset shares have been disappointing with their declines in value. But their cash distributions have been safe (although variable at the reset dates). It’s hard to imagine a realistic scenario where receiving 6.5% or so for a long time (on what would be just a portion of a portfolio) would be a terrible return. But investors have learned with these shares that the market values are anything but fixed. And they will not necessarily ever return to their original $25 price. At $17.00 the risk / return equation seems favorable.

Canadian Western Bank Preferred Share report is updated January 1, 2019. As the report indicates, this rate reset preferred share currently yields 5.0% and is set to rest on April 30 which would be to 5.3% if the five year government of Canada bond yield stays at its current level of 1.9%. 5.3% is not a bad yield but it may not be competitive given that market yields have recently risen. These rate reset shares have turned out to be far more volatile than expected. These particular shares had traded well under $25 since mid 2015. At times such as under $20 they were attractive for potential capital gains. These CWB shares finally got back to and above $25 in October before slumping along with basically all rate reset shares. We had rated them (lower) Sell on September 8. If I held these I would wait and see what happens at the reset date on April 30.