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December 30, 2012

MicroSoft is updated and rated Buy at $26.55. It has a few weak quarters but the next couple of quarters could be quite strong with the upgrade cycle of Windows * and other product upgrades. I own some and may add to my position.

December 28, 2012

RioCan preferred shares are updated and rated Weak Sell / Hold. The company has the right to redeem these at $25 in March 2016 and for that reason we don’t think this is a good investment.

RioCan Real Estate Investment Trust is updated and rated (lower) Buy at $27.52. The biggest risk here is probably a rise in interest rates. The real estate is marked to market value. That creates huge volatility in the GAAP earnings. The units could fall in price if retail real estate prices fall. The price to boo ratio of 1.31 seems high given that the real estate is marked to market. However the company has been successful at growing over the years.  I have no plans to buy but it may be a reasonable investment for the yield.

December 27, 2012

U.S. markets were down over 1% at times today but ultimately closed down only slightly.

The outcome of this fiscal cliff episode remains quite uncertain. I perhaps should have sold some stocks today to reduce my risk. But I decided to just let things ride. If stocks decline I will be looking to buy.

Alimentation Couche-Tard is updated and rated Buy at $48.19. This Canadian headquartered company operates mostly gas stations with convenience stores. Major banners include Couche-Tard, Macs and Circle-k and the recently purchased Sat Oil operations in Europe. It’s a surprisingly large and profitable operation. It is extremely well managed. The stock is up 52% in 2012. We had rated it (lower) Strong Buy at the start of 2012.

December 26, 2012

U.S. markets were open today. The Dow fell 0.2%. So far the market is basically brushing off fears of the possible tax increases and spending comes due to come into effect on January 1 unelss lawmakers make a last minute deal to avert that.

Bank of America was up 2.6%.

I sold my small position in Research in Motion today. It was up 11.4% in U.S. trading.

I considered selling other stocks just to lower my risk and to take profits in the face of this fiscal cliff issue. But I could not seem to identify anything I wanted to sell (even partially) other than RIM.

Canadian National Railway Company is updated and rated (lower) Buy at $90.48. I like CN as a company and I think it will continue to grow. I would not mind owning some. But it does not seem to be a bargain. Also I have concerns about its pension expenses.

December 24, 2012

Canadian Western Bank Preferred shares are updated and rated Sell at $26.87. This preferred share is included because 1. When it was first added to this Site, near the market lows in 2009, it traded at $21.80 and was a good investment. 2. Looking at how the probable redemption of these shares at $25 in April 2014 affects the investment is instructive and may be considered as a reminder that a nominal yield that looks good does not always tell the full story.

Canadian Western Bank is updated and rated Buy at $28.80.

December 23, 2012

Melcor Developments is updated and rated (lower) Strong Buy at $15.60. It’s my third largest holding.

FirstSerivce preferred is updated and rated Weak Buy at U.S. $25.41 to yield 6.9%. I could rate this higher based on the yield. But the company has the right to buy these back at $25 and so i see really no room for price appreciation. But the 6.9% yield seems attractive. On a GAAP basis the company does not appear to be all that strong financially, but that be more to do with conservative accounting rules than anything. I would be comfortable owning these.

FirstService Inc. is updated and rated Weak Buy at U.S. $28.20 or Canadian $28.10. It’s value ratios do not look very strong. But it is very well managed and appears to be well positioned for continued growth. Despite the low rating on this stock I may buy shares in this. I have owned it in the past but not very recently.

December 22, 2012

Berkshire Hathaway is updated and rated Buy at $89.83. It does not look like a real bargain based on earnings. But the fact that Buffett is buying shares for Berkshire up to 120% of book value (it’s currently at 121%) gives a lot of confidence. The 120% of book value is likely to become a floor price. I suspect it will report strong earnings in Q4 although the impact of Super Storm Sandy is unknown. I may add to my position in this company.

Dollarama is updated and rated (lower) Buy at $58. Dollarama is a testament to the impact of good management. Competitors could have done what Dollarama did but simply did not. With a P/E ratio of 21 it is no obvious bargain. But if it can continue to grow at the rates at all similar to those it has been posting then may be a reasonable investment. I would be inclined to nibble at it rather than buy it aggressively.

December 21, 2012

Today was a negative day on the markets and for our stock picks. In particular RIM was down 22%. Bank of America was down 2.0%, Wells Fargo was down 1.7%, Toll Brothers down 2.0%. Stantec was down 2.9% erasing most of its rather strange 4.1% increase from the prior day. The falling Canadian dollar cushioned the blow in my own portfolio somewhat but I was still down 0.7% overall. It was still quite a strong week.

Research in Motion is updated and rated highly speculative Weak Sell at $10.91.

It was interesting that the stock at first rose in after hours trading when it released earnings after the close on Thursday. But then fell hard as it was realized that it would begin discounting its monthly subscription fees to some customers and that these would not even apply to some customers on the Blackberry 10. That seemed to catch the market off guard. But as I did this update I noticed that our report from last June had stated at the end of our Outlook cell that “The Q1 report indicated there is pressure to reduce the subscription charges. That is ominous in itself.” So perhaps this should not have been such a big surprise.

This company and stock has of course been very volatile. After plummeting for about two years it did manage to rise over 100% from its lows of $6.22 reached in September.

I considered removing this stock from the list. The reason for that is that it is highly unpredictable. My methods are simply not suited to extremely speculative companies that have negative earnings.

I decided to keep the stock on the list as a highly speculative weak sell. That way it won’t affect my performance statistics since I measure performance based on the Buys and Sells and not the neutral ratings of weak sell and weak buy.

Warren Buffett has always said that he looks at hundreds of stocks and then ignores almost all of them except for a few that jump out at him as obvious bargains. He has been extraordinarily disciplined in simply ignoring companies that he finds too difficult to predict. That has famously included most technology companies. When RIM had positive trailing earnings it looked like a bargain based on its earnings. But of course it has been well known for some time that its future earnings and sales were very uncertain. Perhaps I should never have included it in the list here. I did rate it highly speculative.

When I originally started this web site in 1999, I was willing to put a rating on any company. However I learned fairly quickly that my methods and knowledge were simply not suited to a number of industries that were highly unpredictable and often featured negative earnings. Those included most of the entire resource space (mining, oil and gas, forestry, agricultural commodities). It also included all early stage research companies. And most penny stocks. I have largely excluded all those from this site over the years.

My goal is to make money and to identify winners to help you make money (but with no guarantees and at your own risk). If I can do that with the sub-set of companies for which my methods have a better chance of working, then that is fine. The experience with RIM is another reminder for me to stick with more predictable companies. No company is completely predictable. But some are simply unpredictable, at least for me.

December 20, 2012

It was a good day for our stocks picks. In particular Bank of America was up 2.9% to $11.52. And Stantec was up 4.1%.

Tomorrow may be a down day as hopes for solving the fiscal cliff apparently took a turn for the worse after the close today. It seems to me that Obama is in a strong position having just been re-elected and having been very “presidential” in the school shooting incident. The Republicans have already compromised on their no tax increase stance and I am hopeful that they will compromise a bit more and accept the next position that Obama offers on this deal.

Stock futures as of just after 11pm eastern are suggesting the Dow will drop some 200 points.

December 19, 2012

After two very strong days our stock picks slipped a little today. The Dow was down 0.7% as hopes for an agreement on tax and spending changes (to avoid the so-called fiscal cliff) start to fade. Toronto was up 0.6%.

Markets may slip further unless a deal if reached this week which seems unlikely. More likely is some kind of deal on or about December 31. So, it could be another “interesting” week or so yet in the markets.

GM’s decision to move some production out of Canada should be considered sobering in terms of the competitiveness of Ontario as a manufacturing center. Trying to subsidize companies to stay in Canada is no solution. Better news was GM’s decision to buy back a huge amount of shares from the government. Apparently GM believes its share price is attractive.

I was at a large shopping center tonight. The discounting seemed vicious and absurd. What should customers think when prices are discounted by 40%, 50% and 60%? To my mind it completely erodes trust and cheapens the products. Why should anyone pay full price at any time at these stores?

Clothing retail in particular seems to be a vicious business. I don’t predict a strong future for Sears Canada or the Bay. Thinking of Canadian Tire, I don’t think they are as subject to that kind of discounting on most of their products. I worry somewhat about their Mark’s chain. What was the wisdom of getting into such an ultra-competitive line of business. Their sporting goods stores are probably less prone to discounting. I know I have never seen too many real bargains when it comes to hockey equipment for my son.

To my mind the better areas in clothing retail are the higher priced brands which tend not to have to discount heavily. Also things like the more expensive skates and bikes. They don’t have to discount as much. Dollarama does well with its strategy (not that I like the stock). Costco and Walmart will also do okay as low-cost and therefore low-price leaders. It’s the vast middle area that is very tough. Trying to compete to sell non-luxury brand items when you don’t have a cost advantage as a retailer is tough.

December 18, 2012

It was another very strong day for many of our stock picks. Bank of America up 3.3%, Wells Fargo up 1.7%. Stantec up 2.4%, Canadian Western Bank up 2.0% Looking at the overall markets the Dow Jones was up 0.9% and Toronto was up 0.4%.

I thought about trimming some positions today but did not.

Markets were up largely on hopes for a solution to the so-called fiscal cliff in the U.S.. With time running out before the Christmas break, it is certainly possible that hopes for a compromise on that will fade and if so the market could easily retrace its recent up-steps and more. Such is life is life in the markets.

December 17,2012

Well, I was pleasantly surprised at some of the gains today. Wells Fargo up 3.7%. Bank of America up 4.0% and Toll Brothers up 4.4%. I understand that this was mostly due to hopes for a deal on the fiscal cliff. Therefore the gains could evaporate if the deal collapses. And most of the upside of a deal may be priced in now. Word tonight is that Obama will move off his position to increase taxes on incomes over $250,000 and instead go to $400,000. The republicans have said it ought to be a million. Perhaps we will see a deal somewhere around $500,000.

If markets are up again tomorrow, then perhaps i will look to trim a few of my positions. Not that I think they are getting too high but it just might be prudent to build up a bit of cash.

Buffett always says that if we are still in the accumulation phase of investing (as opposed to retired and drawing down the portfolio), then we should rejoice at market declines rather than increases. I can see his logic and certainly agree with it for younger investors. (Most investors under 40 would certainly benefit from lower stock prices today since that leaves more room for gains in future and gives them a chance to buy at lower prices). If Buffett owns 10% of Coke he focuses on the fact that he owns 10% of Coke rather than focusing on the value of the shares. He has his own idea of the value of Coke and does not rely on the stock market to tell him. If Coke goes much lower than intrinsic value he would tend to buy more. If it went much higher than his idea of its true value he would tend to think about selling. (Although in his case there are special barriers to selling, if word got out that he was selling Coke its shares would plummet, so he is not as free to sell as are you and I).

I have not reached Buffett’s level of zen about such matters and so I still like to see the stocks I own rise. Also of course, higher stock prices help my performance stats. The ideal scenario for me is to see my stocks and stock picks rise while the overall market is down or flat. That may sound selfish but the goal of a stock picker is to out-distance the index. I am confident that the index itself will do well over time, but declines in the index provide opportunities.

Canadian Western bank was down 2.2%. I took advantage of that and bought additional shares in it.

I was at “The Bay” tonight. Foolishly it had largely dropped the use of its iconic and historic “Hudson’s Bay” name years ago. More recently and more so in future it is going back to that venerable brand name. Walking through the Bay I was attracted by advertisements of 40% off several brands of watches for today only. In fact the store was replete with 40% and 50% off signs. This makes little sense to me. The message it sends to me is, never pay the regular retail price at the Bay since they will soon have a sale. Also the message it sends to me is that the regular markups must be in the order of 100% if they can afford to go 40 and 50% off. And that is not to clear surplus merchandise. The is to sell their mainline products. I presume they are still making a profit at 40% and 50% off.

Much of the Canadian retail scene is addicted to sales. And they work. But we have long since reached the point I think when all these sales are counter productive. I would rather shop at Costco where I know the mark up is only about 15% maximum and I know that if I buy today, I don’t have to worry that the item will be 40% off tomorrow.

I think The Bay and Sears (in Canada) should be very worried about Target.

December 15, 2012

Constellation Software is updated and rated Buy. This company has done very well. This past Spring it completed a process that was designed to boost its share price by putting the company up for sale (that was later canceled but it succeeded in pushing up the share price). It is an excellent company that should continue to do well.

December 13, 2012

The market was generally down somewhat today. This is not surprising and probably represents a sort of exhalation after the build up to the FED move yesterday. I should have  few more updates for our stocks in the table above by Sunday.

December 12, 2012

Notable stock price movements today included, Berkshire up 2.3% (about which, more below). Research in Motion up 5.8%. Toll Brothers up 3.9%. This made for a good day for our stock picks even with Wal-Mart down 2.8%.

The reason Berkshire Hathaway rose is that it announced it would raise the price at which it would buy back shares to a maximum of 120% of book value. That puts the buyback ceiling, for now at $89.37 for the B shares and $134,062 for the A shares (using the $111,718 book value reported by CNBC). Basically the price rose to about that buy-back ceiling level today. I believe that places a floor under the actual stock price at about that level since as soon as it falls below that Berkshire is likely to be buying.

All indications are that Buffett believes Berkshire is worth something more than this 120% of book value.

As far as whether we should buy Berkshire, the fact that Buffett is buying it back for Berkshire ought to be sufficient evidence that it will likely be a good investment.

Apparently what triggered today’s announcement was that an estate of a long-time Berkshire investor had 9,200 A shares for sale (which Berkshire bought for some $1.205 billion). I would suspect that these share belonged to perhaps even one of the original partners from back in late 50’s or 60’s who would have received Berkshire shares on the windup of the partnership in 1969. Or it was someone who obviously bought at around that time. I suspect we will hear about it in the annual letter at the end of February or he may talk about it sooner than that.

And I suspect that this estate had the paper share certificates. Buffett loves his history, especially his own history and Berkshire’s history and I think would have been attracted to the idea of buying back these old paper share certificates. Most shares these days exist only electronically and there is little romance in that. Buffett’s own Berkshire A share certificates sit in a safe deposit box in Omaha. Which, by the way maybe he should not have revealed since that would probably make it by far the most valuable safe deposit box in the world. (Although I suspect a thief would not have much luck cashing those in and maybe it would require Buffett’s signature, I don’t know how that works).

Many investors and analysts pretty much ignore book value. And truly in many cases it is a useless indicator of value. And in virtually no case can book value be counted on alone to indicate the value of shares. But if the assets of a company are conservatively stated on the balance sheet and if the assets are being used productively in and producing a reasonable return on equity and if there are no serious risks in play (and a risk could include excessive leverage) then in those cases book value can be a useful indicator of value.

Recently I have been talking about Canadian Tire trading at 1.15 to 1.20 times book value. Given that its assets are indeed conservatively stated (in particular real estate is at historic cost, not market value) and it is reasonably profitable and despite the threat of Target its not exactly clear that its profits are about to be decimated, then it just seems under-valued at that small premium to book value.

In other news we had the FED as expected announcing it will be printing money to continue buy bonds and mortgage backed securities. I think this is supposed to stimulate the economy by pushing down or at least holding down interest rates. (Which does seem odd given that they are already at record lows). The market reacted by dropping a bit because this move was already totally expected and apparently because of some comments about the fiscal cliff. I mention this because it was in the news but I don’t let FED moves decide my investments. I try to follow Buffett’s advice of buying well managed good companies at good prices.

December 11, 2012

Canadian Tire had a good day and rose 3.3% to $69.70. This puts it 6.8% above its closing price from December 3. Not spectacular ,but not bad. While there was always the risk that it could go lower, this stock certainly looked attractive at $66 and $67 etc. Most people I talk to are  certainly not excited by this stock or this company. It’s no Apple. But what it is is a nicely profitable company that trades at an attractive looking price.

Apparently Wednesday’s market mover may be an announcement form the Federal Reserve Bank that i9t will buy more bonds. I will admit to the doomers that this sounds a bit scary. They are literally creating money out of thin air to buy these. They keep interest rates down artificially by buying up huge amounts of bonds. What I don’t get is why others buyers like pension funds and banks and insurance companies and investment funds don’t go on strike and stop buying or holding long term bonds. But they find it hard to stop. They have continuously made capital gains on bonds for years. So they buy more even though they should know the capital gains will ultimately reverse even if interest rates stay low since the bonds will mature at par. Many insurance companies and banks are somewhat forced to hold bonds by archaic regulations that consider government bonds to be risk free (apparently ignoring the certain capital losses on any government bond that trades above par.).

It seems crazy but more Fed bond buying is likely to be treated as good news by the stock market.

December 10, 2012

Nothing too exciting happened with our stock picks today.

Toll Brothers was down 1.4% and Canadian Tire was up 1.4%.

December 9, 2012

Bank of America is updated and rated Speculative (higher) Buy at $10.64. This stock is up 32% since we officially added it to this site last March 11 rated Speculative Strong Buy at $8.05. It is also up 48% since we updated it (and noted that I had added to my position in it) at the same rating at a price of $7.17 on July 27. I had first mentioned in the daily notes back in July 26 and August 2, 2011 that I was buying Bank of America. That was at about $9.50. As I have said before, I bought too much on that first buy. That prevented me from taking full advantage of the big price drop through to the end of 2011. Still this investment is now “in the black” and I ultimately did almost double my position in it with both buys below that initial $9.50. This investment is now well “in the black” and hopefully with more up-side to come. Recently I was inclined to trim my position in this stock. But right now, after this update, I am more inclined to add modestly to it. However, I am already heavily exposed to U.S. bank shares and I should perhaps avoid getting too greedy.

Many of you will have read the words of various doomers over the past couple of years that claimed “all the big U.S. banks are actually bankrupt on a mark to market basis” and “the U.S. is bankrupt as well”. And paper currency is doomed. And the “U.S. house prices have not bottomed yet” (beware the shadow inventory of foreclosed houses etc). Most of the doomer comments were from people who had no understanding of these matters but yes there are some highly educated people who agree with the doomers. Maybe the doomers will ultimately be proven correct. But I doubt it. And maybe the world will end this month as the Myan Calendar runs out. Whatever, the end of days has been continuously predicted since the beginning of days. It’s not very logical to invest based on doomsday scenarios.

Banks will likely continue to be volatile investments. Those who can’t handle investing in shares that might well drop significantly in price should stay clear of stocks or educate themselves on the risk and reward tradeoffs involved. Personally, I have accepted and lived with significant volatility over the years and it has been financially rewarding. In fact price drops have often been to my advantage as I added to my positions at lower prices. Of course, that only works out if the prices eventually recover and grow, which, more often than not, but not always, they have done.

December 8, 2012

Toll Brothers is updated and rated Speculative Buy at $30.77.  It is speculative because its earnings need to grow a lot to justify its share price. I have about 4.5% of my portfolio invested in Toll Brothers. I am not that keen to buy more but I would consider doing so if it dips to about $28. This stock is up 51% in 2012. We had rated it Speculative Buy at $20.42 at the start of 2012.

Liquor Stores N.A. is updated and rated (lower) Buy at $18.40. This company yields 5.9%. It has done well , rising 8% since we added to this site last April 10 rated Buy at $17.01. And this is in addition to the dividend. It seems like an okay investment at this time. But it is not one that I particularly plan to buy.

Here are some additional thoughts on Canadian Tire.

Consider how it has done since way back in February 2000 when I first added it to this Site.

The following Table provides a comparison:

	February 4, 2000	Now	Gain	Gain per year
Stock Price	$         22.90	$         66.59	191%	8.7%
Yield	1.7%	2.1%
10-year Government Bond Yield	6.19%	1.49%
Adjusted P/E	10.3	10.5
Adjusted ROE	13.6%	11.6%
Number of Shares	77.2	81.8	6.0%	0.5%
Price to Book	1.40	1.17
Assets	$3.17 billion	$12.7 billion	302%	11.4%
Book Value per Share	$         16.34	$         56.76	247%	10.2%
Rating	Strong Buy	(lower) Strong Buy

Back in February 2000, we rated this stock a Strong Buy. Since then the stock has almost tripled, rising 191%. That’s a gain of 8.7% per year for a total return of around 10.5% per year counting the dividend. (So much for the tired and tiring mantra that “no one has made any money in stocks since the year 2000”).

Today, our rating is (lower) Strong Buy at $69.81. Considering the price is now lower at $66.59, that is pretty close to the same Strong Buy rating we had in February 2000.

The reason the rating is the same is that many of the ratios are about the same. The adjusted ROE is not quite as high at 11.6%, the P/E is very similar. The price to book is more attractive today. The yield available on a 10-year bond is dramatically lower today.

Canadian Tire has done a very good job of growing its business over the past 13 years.

These figures add to my confidence that Canadian Tire is a good investment.

The market however appears to see danger ahead for Canadian Tire. The market is worried about the impact of Target moving into Canada. There are simply never any guarantees. But Canadian Tire simply looks like it is priced below its intrinsic value.

December 6, 2012

Perhaps the biggest news in the Canadian markets today was Loblaws Companies plan to spin off its real estate into a separate Real Estate Investment Trust. Loblaw’s shares closed almost 14% higher on the news. Canadian Tire rose 2.3% today, probably because it is also in a position to sell off real estate in some manner.

Costco fell $7.48 today but that was simply because yesterday was the last day to buy and be a shareholder of record by Monday December 10. Those who buy today will not get the special $7.00 dividend.

December 5, 2012

Markets were modestly higher today.

The strongest performers included Bank of America up 5.7%, Walgreen up 3.8% and Stantec up 1.8%. On the other hand Toll Brothers was down 3.9%.

I noticed that Canadian Pacific did not release any estimate of its “charge” for all the layoffs. It will be a big number but perhaps the market has already anticipated that.

I added 25% to my Canadian Western Bank position today.

December 4, 2012

Canadian Western Bank fell 3.5% to $28.00 today after announcing good but not-quite-as-good-as-expected earnings. I will consider adding to my position at this price.

Toll Brothers was out with good earnings but the stock price fell 1.8%. Keep in mind it has a very high P/E and its earnings need to rise a lot to justify the price. (In other words the stock has for a long time already been pricing in a lot more earnings).

There was another report from the U.S. showing that existing house prices have risen since last year. House prices are too low in the U.S. and in my opinion there are few safer bets than that house prices in the U.S. will continue to rise over the next several years, recession or no.

The news that CP rail intends to chop almost a quarter of its workforce is shocking and interesting. It goes to show that when management really wants to, big changes can be made. I think we can certainly conclude that Hunter Harrison and company are VERY serious about raising profits here. I don’t think I would want to be a long-time employee there because evidently the culture change there is radical. I don’t know anything about the valuation of the stock but I certainly would not bet against the stock.

December 3, 2012

Canadian Tire continued to sink today. Down 1% to $65.25. This is (at least temporarily) unfortunate for those of us that own it but may prove to be an opportunity for buyers.

In my experience it is unusual for a large cap company to trade down near book value (1.15 times in this case) at a time when it is making good earnings (over 11% in this case). Apparently “the market” expects its earnings to drop quite a bit when Target comes into the market.

In order to beat the market one has to sometimes go against the market. I believe that Canadian Tire which has been thriving for 90 years now is likely to continue to increase its earnings over time and that it is therefore a good investment at 1.15 times book value and currently earning about 11% on book.

If the price stays this low then I believe that it could be become a target for a take-over offer, despite its multiple voting shares. I am starting to wish that Martha Billes would see if Warren Buffett might be interested. How about it Warren? come in and offer $85 or $90 per share and I will sell to you. Problem is it is not clear that Canadian Tire has the top notch management in place that Buffett would insist on.

Toll Brothers was up 1.8%. Markets overall fell about 0.5%

Greece is buying back some bonds at some 30 cents on the dollar. This is exactly what it should do. Whenever any company or country can buy backs its debt at way less than par value, that seems like a good idea. Another good idea for Greece would be to rally its citizens and expatriate citizens to buy the bonds as a matter of national pride. If foreigners are the enemy for charging high interest rates then Greece should fire up its citizens and expatriate citizens to buy the bonds from these bad foreigners. But Greece itself should buy all it can. Who would not want to extinguish debt at 30 cents or 40 cents on the dollar?

In other news Spain was requesting a bail out. I recommend the same strategy for them. Buy back their own bonds at a discount. And encourage their richer citizens to do the same (though the latter does not extinguish the debt but it might push interest rates down).

Anyhow, I don’t pretend to understand much about the European debt crisis. But I doubt it will all much impact on the long term value of Canadian Tire or most other Canadian companies.

December 1, 2012

I mentioned just below the Costco special dividend. It turns out this will be funded by debt. So taht means it won’t impede the growth plans of the Company. I had mentioned in the notes on January 15, 2012 (and possibly on other dates as well) that “Costco could probably increase its profits at will by raising prices (since its markups are so low) or by using more debt financing”. Well, this increased debt financing is exactly what they are doing. Apparently taking the debt to equity ratio from 11% to a still relatively low 40%. However, I still think that the fact that the company is paying a special dividend rather than buying back shares may indicate that they do not view the shares as undervalued. Or possibly they just view this special dividend as the fairest thing to do.

There are theories that suggest that a company cannot ever increase its value simply by adding debt, much less by simply paying OUT cash to shareholders (paying out cash lowers book value per share). The theory suggests that risks rise with debt to offset the higher earnings per share. In this case the market is suggesting the theory is wrong.

Boston Pizza Royalties Income Trust is updated and rate (lower) Buy at $19.05. I own some. I think Q4 could be weak given the “tough comparable” from Q4 last year. Also the lack of NHL hockey could harm sales.  I may possible see some or even possibly all of my shares at $19 or higher and then hope to buy back at a lower price if the Q4 report sends the share price down in February. Or I may just hang onto what I have. I am not looking to add to my position unless it falls perhaps two dollars or so.

November 28, 2012. 

The Dow ended the day up 107 points or 0.8% but had been down about 100 points earlier in the day. Toronto ended the day up 0.2%.

Costco announced a special $7 dividend and rose 6% today. It is truly a great company. But it never seems to look cheap. Investors should perhaps consider why Costco is paying out the cash this way instead of buying back more of its own shares. And the reason could well be that the company considers the shares to be over-priced. With Charlie Munger on its Board I would think it would have bought more of the stock back if it thought it was any kind of bargain. So investors may be taking the the wrong message here. Another consideration for investors to ponder ist ath special dividend to reduce cash might indicate that growth will be slower. Then again the press release states that the share buy backs are ongoing… but this special dividend appears to be 10 times higher than the annual share buy backs.

Visa Inc. is updated and rated Buy at $147.29. This stock is up 45% this year. It was not on our list at the start of the year. The latest update in 2011 had been on May 6, 2011 (lower) Strong Buy at $79.41. It got added back to our list on March 28, 2012 at $119.35 and rated Buy at that time. It is up 23% since then.

With all these increases I was rather expecting that our analysis at this time would show it to be no better than a Hold. But as its earnings have risen we can justify a higher price. The trailing P./E is high at 24.  But the P/E based on the next fiscal year earnings is more reasonable at 20. As we have perhaps seen in its earnings performance a company like this that has almost monopoly characteristics has what Buffett calls “wonderful economics”. Therefore it cab justify higher P/E than companies that face much stronger competition.

So it looks like this can be justified as a Buy. At the same time I would not load up on it. It may be a good stock to pick up on dips. The fact is that I sold this stock too early at much lower prices. Because of that I face certain emotional barriers to buying it at this higher price and so I have no plans to buy but i would reconsider on a significant dip. A reasonable strategy might be to take a small position and to hope for a dip to add to that.

Many times over the past couple of years I have remarked about the monopoly-like characteristics of this company joking when it rose that it’s hard to keep a good (largely unregulated as to price) monopoly down. It could face further price regulation in future which is another reason I would not go over board on it at this price.

November 28, 2012 (10:30am eastern)

With the Dow down about 100 points at this moment, I would be inclined to consider buying as opposed to feeling at all panicky. Sure, the market may continue to fall and for that reason I am not in any great rush to grab bargains, but overall buying on dips makes more sense to me than the opposite.

U.S. housing prices continue to recover which is a definite positive for the markets.

Canadian Tire in particular continues to look attractive to me with a P/E ratio around 11 and especially the price to book ratio around 1.2. There are ways that Canadian Tire could “release” value if it wanted to by selling off its land and buildings to REITs and leasing them back or by selling its huge credit card operations. Its own shares would be a good investment for the company and it could do a major share buy back. On the other hand it may do none of that and maybe it is is going to suffer from added competition. I happen to think there is value there, but certainly no guarantees.

This morning I see they have announced they are buying Pro-hockey life for $85 million for 23 stores.

I’m a bit concerned that they don’t do some share buy backs instead of just acquisitions, but overall this is small acquisition and is probably a good move.

I’ll show my confidence by grabbing a few more shares today.

November 26, 2012

And so begins another week in the market as the year rushes to a close now…

Dow down 0.3%, Toronto down 0.2%

Our stocks picks appear to be down a bit more than that, notably Stantec down 2.1% and Shaw down 1.8% and it seems almost everything on our list was down.

But tomorrow will be a new day and perhaps a better day. Apparently Greece has some kind of new debt deal (yawn).

Warren Buffett had an op-editorial piece in the New York times today. This was about asking he Us government to cut spending and to raise some taxes, especially on the rich and to enact the higher taxes on the rich, right now. It’s wonderfully written. Withering logic really. Many of the other members of the Fortune 400 are going to hate this.

See the editorial here:

http://www.nytimes.com/2012/11/26/opinion/buffett-a-minimum -tax-for-the-wealthy.html?smid=pl-share&_r=0http://www.nytimes.com

/2012/11/26/opinion/buffett-a-minimum-tax-for-the-wealthy.html?smid=pl-share&_r=0

Reading the comments below the editorial is a bit scary. Most of those speaking against Buffett appear to have mis-read the editorial. A few others fall to the old advise for Buffett to just send in extra taxes if he wants to. Or complaints that Berkshire sometimes (horrors) tries to minimize its own taxes. Of course it does and has a fiduciary duty to shareholders to take reasonable and always lawful actions to minimise its income taxes. No one ever mentions though that almost all insurance companies have re-insurance subsidiaries in tax havens where they transfer most of their profits to. Berkshire does not do that and in fact its overall tax rate is pretty hefty.

Buffett is trying to solve an important problem here. Dopey suggestions for billionaires to just mail in some extra money don’t cut it.

Quite honestly whenever I frequent areas where people post comments on line it is very frightening. Either most people are bitter anti-free market types or those people are simply over-represented in the community of people who post comments on line. I suspect it is the later. On-line posting is a wonderful invention for the lunatic fringe of society. And if you notice about 99% of people who post online tend to use screen names. (I suppose they would say they would be crazy not to, but some are definitely crazy either way).

And in case the Buffett editorial is not excitement enough, we got news of Mark Carney moving to become governor of the Bank of England and Toronto’s mayor kicked out of office. Never a dull moment it seems.

November 25, 2012

I have updated my personal portfolio composition. I find that tracking my portfolio composition and including the value ratios is quite useful for me. And unlike most stock pickers I am willing to share that information. You know not only what I say, but what I do.

It’s always hard to say what the markets will do in the short term. I would be quite satisfied to end the year as things stand right now since I am up 22% for the year and since our Buys and Strong Buys are well ahead of the TSX market index.

November 22, 2012

Today’s star performer was, once again, Research in Motion. Up 17% to an even $12.00. It started this year at $14.50, so it is still down 17% on the year. But it is up 97% from its low of $6.10. Clearly there was money to made and money to be lost by buying and selling at the right time. I don’t advocate a trying to trade rapidly in and out of stocks. But even a strategy of having bought at the start of the year or at any price over the past 18 months or so and then adding on the major dips and perhaps trimming on major rallies would have worked out reasonably okay. The thing is the stock was less risky at $7 than it was at $14. As I have explained previously, this company had no debt and has a huge installed base of subscribers. It is not was not and will not “go to zero” in the foreseeable future because there is too much real value there.

I’ll mention a word on Stop Losses, which I don’t use and have only ever used on extremely rare occasion in my 24 years of investing. Last week a company called Poseidon Concepts Corp. (which I knew nothing about) was in the news because it opened on Thursday morning at $5.79 after closing on Wednesday at $13.22. Anyone with a stop loss below $13.22 and above $5.79 was automatically sold at the open at $5.79. So, if an investor had a stop loess at $13 they got sold at $5.79, which did not stop much of the loss. (it did stop some since the stock is now at $5.26 and had a low of $4.76).

And the way the Stop Loss worked was perfectly as designed and was perfectly fair. The bad news came after the markets closed on the Wednesday. No one got to trade at a high price before the stock plunged. The bad news was “priced into” the stock right at the open.

Now admittedly the stock had come down in the previous weeks from highs of near $17. So some people may have been nicely protected by stop losses that had triggered on the Wednesday or earlier. But that is tough to do. A tight stop loss can be executed just due to sort of normal volatility and sell you out needlessly. A wider stop loss may turn out not to work if there is major bad news and the stock “blows through” the stop loss price and well below before it can be sold.

The bottom line for me is I don’t use stop losses. That’s because I don’t buy or sell based on what the market thinks a stock is worth. Using Stop Losses smacks of “Sell Low”, which is the opposite of what I am trying to do.

Stop losses are for traders who trade stocks. I analyze companies not squiggles on the screen. Some people may be very successful simply looking at price charts (squiggles). That simply is not my approach. I talk about earnings, traders talk about momentum and support levels and 52 week moving averages. I basically don’t even speak that language and have no interest in learning it.

Stop Losses are also more appropriate for more risky stocks where it seems conceivable that a loss of 50% or whatever could happen at any time. For many larger and more stable companies it may simply be very unlikely that the stock would plunge by a huge amount. Therefore there is less need to protect against the risk.

For those who use and swear by Stop Losses, that is great, to each his own. I simply point out that I have little or no use for them. I am more likely to be buying on dips than selling.

November 21, 2012

Research in Motion was up another 5.5% today to $10.23. It is only a week ago that I had bought 700 shares at $8.48. And I probably should buy some more but I always find it hard to buy higher. And of course it is a speculative pick.

There are many who have predicted RIM is toast. And possibly they will be proven correct. But it is a dangerous business to predict the direction of markets.

You may notice I never mention target prices. I simply try to buy what seems like good value. I try to buy good companies at good prices. I have some hope of doing well over the long term. I certainly make no claim that I will do well every week, every month or even every year. Many people seem to think markets and stocks are predictable in the short term. Maybe they are at times. But mostly not.

I took a quick look at the Board members of HP. It appears to be top heavy with private capital type people. Also perhaps top heavy with prima donna former CEO types. There appeared to be little representation from the brainy PhD’s who ought to be the heart of HP’s soul. There were only two members who have been on the Board since prior to 2009, one was 2009, one from 2010 and the other six only since 2011. For whatever reason this Board has not been able to rectify the same horrible mistakes HP has been making for years.

Of course the proxy statement has all the usual useless garbage about corporate governance and director independence. Just a load of useless drivel.

I find it telling that the proxy does not list the academic credentials of the Board members. That is an insult to all the highly educated people who really built HP. The founding Hewlett and Packard families must shudder to look at what these clowns have done.

Incredibly enough, this company now has a tangible net worth on the balance sheet of far less than zero. The net value of the company is in goodwill, which they have busily writing off. Their long term debt is about equal to their equity. With that amount of debt it is not inconceivable that they could go broke. Or at least that the debt investors could end up owning the company. Monstrous incompetence! They are however still generating significant cash flows and so perhaps are not in any dire straights.

This Board ought to be tossed holus bolus. Maybe let the CEO stay and get a new Board consisting in good measure of long-time employees and some representation from the founding families. Some representation from LONG term shareholders as well. They need to look up the criteria that Warren Buffett has described for selecting directors.

I am glad I don’t own any shares.

November 20, 2012

I mentioned a couple of times that the Hudson’s Bay IPO looked to be proceeding quite slowly. It has finally closed. They sold I understand $365 million of shares rather than the hoped for $400 million. And the price at I believe $17.50 is lower than hoped. (hyped?)

Most larger share issues in Canada are “bought deals” whereby the investment banks basically gurantee that they will sell all the shares. Whatever they don’t see they buy. Many of these sell out in minutes due to marketing and/or investor interest. Hudson’s Bay was a “marketed deal” whereby the investments banks just sell what they can. It seems to me that Hudson’s Bay was open for close to two weeks. It appears that they had to flog this hard to get it sold. Much of apparently going to American buyers. Canadians, probably unimpressed with the stores were not much interested. Especially with Target coming in.

I only mention Hudson’s Bay as a sort of curiosity. I have not analysed it at all. I just have no interest in it. The company was very clever in selling off its Zellers leases for $1.8 billion to Target. It’s a bit strange that so soon after that they want to raise money. They had years without much competition to make money and mostly did not make that much. Now with Target coming in they ask you and I to buy it. No thanks.

I noticed the big ($8.8 billion!!!) write-down at Hewlett Packard. To put that in context the company has a total equity market value of $23 billion. So this is a HUGE writedown. Again, this is just a curiosity, I have no knowledge of HP’s value as an investment. But I will say it seems to take CEO’s with huge inflated salaries to screw up like this. Apparently they just completely stupidly over paid for a huge acquisition even after rumors of accounting problems had already surfaced. Absolutely stunning incompetence. Years ago the paid big dollars to acquire Compague Computers (or however you spell that). Another complete disaster, as I recall. A while ago they apparently had a good CEO but then fired him because he had affair with a secretary (I forget why that was such a big deal). I remember Kevin O’leary saying the Board should all be fired and I think he was right. Apparently there was another even huger write-down in August related to the acquisition of Electronic Data Systems. Unbelievable that CEOs get paid millions for losing billions and then we have to hear crap about having to pay big dollars for talented CEOs. The latest occupant of the CEO chair is Meg Whitman. I believe she largely built up eBay so definitely has some credentials. But it is sad that HP could not find talent in their own ranks.

This HP writedown is so big it will likely even make a noticeable little dent in the S&P 500 earnings figure.

 

November 19, 2012

Okay, so the Dow was up 1.6% today and Toronto was up 1.4%. This gain today is not something I expected or could have predicted. Nor is it much a surprise. Stock markets rise and stock markets fall. Luckily, they mostly rise over time. An investor with a bias to being in the market (at least partially) at all times is always there to benefit from the rises. And yes, is there to be hurt by the declines too. But there are more rises than declines. That’s a fact.

With the market up a lot at the opening, I did not expect to be able to grab any Walmart at around the $68 price. But when I looked a little bit after the open, Walmart was only up a couple of pennies. So I bought 400 shares, paying $68.09. Looking good so far as it closed at $69.02.

Just about everything on our table above was up today. Particularly notable were RIM up 3.9% and Bank of America up 4.1%.

November 17, 2012

Walmart is updated and rated (higher) Buy at $68.03. If it stays at this price on Monday I plan to buy back some of the shares I sold a couple months ago at higher prices.

Markets were reasonable strong on Friday.

Notable winners among our stocks included Toll Brothers up 4.2% and RIM up 4.9%.

November 15, 2012

I took a quick read of the Walmart Q3 report that caused its share price to drop 3.6%. I could not see the bad news. It all looked good to me. Continued modest growth is what I saw. I would be inclined to buy Walmart on this pull-back.

It was a weak day in the markets with Toronto down 1.0% and the U.S. markets down slightly.

Toll Brothers closed down just 0.1% at $29.73. However the Buy order that I placed yesterday got filled at $29. So with one day down and the rest of eternity to go, that looks like a good buy so far.

Boston Pizza closed down 2.9% to $17.99. This may be due to fears that the Hockey strike will affect, which is probably true although that will be temporary. I’d consider nibbling at this price.

Walmart was down 3.6% to $68.72. I had sold my Walmart On October 3 to raise cash. It was sold at $73.63. I will consider buying back at this price.

Bombardier is down to $2.99 after getting a credit downgrade to BB (which indicates high risk) and canceling a debt issue. It might be a good investment but is speculative. I don’t know enough about it to really understand the risks. I own a small amount.

November 14, 2012

Another down day on the markets. Dow down 1.5%, Toronto down 1.7%.

Well, the fact is that all the days of our investing lives cannot be happy days (nor all the weeks, all the weeks, all the months or all the years).

Notable losers included Bank of America down 3.6%, Toll Brothers down 3.5%, Fedex down 3.3%.

And Canadian Tire was down another 0.8%.

I don’t think it is possible to predict what the market will do next. The whole fiscal cliff issue may certainly be a negative factor until it gets resolved around the end of the year. And beyond that the feared recession in 2013 is certainly a possibility. Things should be relatively quiet on the earnings front until late January. Various positive or negative news can come in at any time from economic reports (jobs, housing consumer sentiment, retails sales, producer price index and other).

What has worked for me over the years has been 1. A bias to remaining mostly invested in equities. 2. Investing in the higher rated stocks from our analysis here, and 3. leaning a bit against the market, taking a bit of money out of the market as it rises and buying gradually as it falls.  That has worked over time but admittedly is scary during the dips.

I bought a modest amount of RIM today.

I am inclined to buy more shares in most of what I own.

To that end I have placed some bids modestly below today’s closing price for Berkshire Hathaway, Toll Brothers, Wells Fargo and Canadian Tire.

The majority of my cash has been in U.S. dollars, simply because it was mostly U.S. stocks that I sold this Fall. I moved a bit of that back to Canadian just now to provide funds to buy Canadian stocks. Also with the Canadian dollar below the U.S. the exchange rate is better than it has been. If the Cnadian dollar goes several cents lower I move a bit more cash out of the U.S. dollars.

I notice on the TD Waterhouse new issues page, Hudson’s Bay is still open for buying. I believe this means that the banks are having a hard time flogging this. If it was a bought deal then the banks are stuck with it. If it was not a bought deal then the offer could even be pulled. I suspect it won’t be pulled at this point.

I notice too, three mortgage investment corporation offerings are still open. I believe those are all relatively small. And apparently not meeting with much appetite from investors.

A Tale of Two Lenders…

There is a very interesting contrast between a mortgage investment corporation and a mortgage bank. The mortgage investment corporation takes in equity and lends it out with little or no leverage at 8% or more. The investors may treat their investment as more of a fixed income investment since it funds loans and pays a high yield. The mortgage investment corporation is largely lending out its own money (the equity it raises). It does not have access to deposits from customers that it can lend out. In order to make 10% return on equity the mortgage investment corporation would have to lend at an interest rate probably above 10% since it typically has modest or no leverage. It therefore is going to be targeting commercial borrowers who are will pay that kind of interest rate. The loans may be far riskier than the residential type mortgages targeted by a mortgage bank but then the Mortgage Investment Corporation does not face much risk from its own leverage (its own debt).

The mortgage bank is typically HIGHLY leveraged. It may have 90 cents of customer deposits and other liabilities for each 10 cents of equity. It is largely or almost completely loaning out other people’s money. It can turn take in deposits at 1%, lend at 3%, for a spread of 2% and use 1% of that spread to cover costs and be left with a 1% net profit on the loan and still make 10% on equity due to the leverage. It’s really a totally different operation than the Mortgage Investment Corporation.  The Mortgage bank has to target very safe loans like government insured residential mortgages. With it’s high leverage it has to take on low-risk loans.

It’s a Tale of two lenders and they really are quite different. Both can be good or bad investments.

 

November 14, 2012 (7:10 am mountain 9:10 am eastern)

Tuesday was another negative day in the markets. Canadian Tire was down a bit more. I can not give any assurance that markets will not continue to all. I do know that Canadian Tire at $67.40 is a better investment than it was at recent prices in the low 70’s. At times like this my thoughts turn more to buying than to selling.

I am thinking of buying  a modest amount of Research in Motion in the hopes that it will turn higher on the Blackberry 10 news. I do consider RIM to be speculative since its fortunes are ties to hard to predict battles in winning the hearts of fashion and technology conscious consumers.

November 12, 2012 -3:00 eastern

I had said I would buy back some of the Toll brothers that I had sold if the price got down to about $31. The price today was $31.30 and so I decided to buy 300 shares.

November 12, 2012 – 1:30 eastern time

Today is a holiday for some, but the markets are open.

The big news among the stocks on our list was a friendly take-over offer for the Brick Ltd. at $5.40 per share. The stock is up 52% form it’s close on Friday. And it is up 126% from the $2.35 at which we added it to this site and rated it a Speculative Buy on October 11, just over one year ago.

Admittedly we only saw it as sort of luke-warm and it was not one we kept on top of.

It does illustrate that sometimes good things can happen when you buy something out of favor as long as the company is capable of surviving to see better days.

It also illustrates that sometimes companies are worth a lot more than the market would indicate.

Canadian Tire fell another 2% today. On that news I bought 200 more shares at just under $68.50. Possibly that is just an act of stubbornness on my part. My modus-operandi has always been to buy what looks cheap to me.

November 11, 2012

Stantec is updated and rated (higher) Buy at $37.14. It is up 35% this year. And is up 1386% since we first looked at it way back at the inception of this site in 1999. While it is not as attractive today as it was then or on the several occasions when it got back down to around the 10 times earnings that it traded at in 1999 it still looks like a good investment today. It’s growth by acquisition model is still in place and still working. (It also grows to some degree organically).

November 9, 2012

Canadian Tire is updated and (still) rated (lower) Strong Buy at $69.81. The market appears to be discounting the value here due to fears of the impact of Target coming to Canada.

November 8, 2012

Toronto was down 0.3% and the Dow was down 0.9%.

Among our Stock Picks, Canadian Tire got pushed down 3.3% despite releasing what seemed to be a reasonably good earnings report and despite increasing its dividend. I took the opportunity to buy 200 shares and now hold 2,236 shares. I continue to see this as a good investment. One does not beat the market by always agreeing with the market’s view of a company.

November 7, 2012

The excitement of the lead up the U.S. election has quickly dissipated in the realization that the election has not changed the government.

The Dow was down 2.4% and Toronto was down 1.1%

Bank of America was particularly hard hit down 7.1% I would view that as a buying opportunity. RIM was down 8.2% and that stock looks attractive but is quite speculative (risky).

In positive news, Constellation Software was up another 2.5%.

I am considering placing some buy orders, perhaps a little below current prices on a number of the stocks I own. Or, I may just sit the cash I have and see what develops.

November 6, 2012

In what seemed to be a surprise, U.S.  markets were quite strong this U.S. election day. The Dow was up 1.0%.

The attention now will turn to what is next including the “fiscal cliff” of potential tax hikes and spending cuts at the end of December. Futures as of about 1 am eastern time show the markets down moderately. So perhaps out little election rally will be short lived indeed.

Melcor came out with earnings after the close today. The earnings were strong, particularly on a GAAP basis.

November 5, 2012

This week starts out with Toronto down very slightly and The Dow up slightly. Toll Brothers was up 3.7% today to $33.39. I had said I would consider buying back some of what I sold a while back at higher prices if it gets down to $31. Obviously, I may not get that chance.

Perhaps the big excitement for the market this week will come on Wednesday after we see the election results.

Canadian Tire will release earnings on Thursday and I am eager to see that. I don’t see why they would not have had a good quarter, but one never knows.

Melcor is scheduled to release earnings tomorrow, Tuesday. My guess is that they will have had a good quarter. But apparently new home permits were down in September and so perhaps they will be a bit cautious in their outlook.

November 2, 2012

At the bottom of the stock list above, I have listed, courtesy of a Globe and Mail article, the fund trading symbols for several bank deposit accounts that pay 1.25%. Over the years I have generally kept my investment account cash in literally cash. This allowed me to have that money instantly available for trading. I tend not to have a high allocation to cash and with money market funds paying very little it just did not seem worth the bother. I have however used a U.S. money market fund because TD Waterhouse allows me to move money between that and U.S. stocks in an RRSP account without paying any currency conversion fee.

Today’s Globe and Mail article indicated that bank account rates of 1.25% can be accessed directly from our brokerage accounts. (A couple years ago it was 0.75% so this increase must be due to competition). At 1.25% and given taht I am currently sitting on more cash than normal at about 18%, I decided to move some money into one of these bank accounts. These actually are insured bank accounts, insured up $100,000. The banks have set these up with mutual fund trading symbols so that we can invest from our brokerage accounts. The interest rate that TD Waterhouse was paying me was precisely nothing and so 1.25% may not be much but it beats nothing. I chose the TD Bank fund TDB8150. I also put some excess U.S. dollars into TDB8152. However, I did leave about half my “cash” in cash or in the U.S. money market account since both are available instantly for buying stocks and I don’t ever want to have to wait even a day to buy a stock.

I notice that the Hudson’s Bay IP is still marked “open” on TD Waterhouse. Normally a successful IPO is sold out and marked closed within a few hours of opening. I believe this indicated the brokers are having a hard time selling the Huidson’s Bay IPO. And no wonder, I remarked on October 18 that I was inclined to avoid this and gave some reaons why.

Also on the IPO list at TD Waterhouse are two Mortgage Investment Corporations. The one I looked at briefly was only trying to raise $50 million. It had a ten year history. It would lend the money at 8 to 10% and hope to earn something close to that for investors. They pay out close to 100% of earnings and are effectively like Income Trusts, they pay no income tax as long as they pay out all the earnings.  It’s interesting to note that while banks are leveraged at least 10 times and lend out depositor money, these Mortgage Investment Corporations do not take in deposits, may use little or no debt. They lend out their own equity rather than depositor money. They might not be a bad investment. But I would be cautious with these. I would worry about mortgage defaults if the economy cools off or if certain real estate projects like residential condos run into problems. They out you somewhat into the position of lending out your money on mortgages. But unlike a private mortgage lender you don’t have to find or screen the borrowers and you diversification. But the company obviously has expenses that must be paid before you. The good news is that as long as they avoid debt they seem unlikely to get into financial difficulty. (Banks, in contrast,  can get into difficulty easily due to the massive leverage). There are three mortgage investment corporations looking to raise money on TD right now. This certainly indicates a hunger for money on their part.

Markets were down on Friday with Toronto and the DOW both down about 1.0%. Our stock picks seemed to fare a bit better than that assisted by Bank of America up 1.1%, RIM up 0.5%

My own account is at its high for the year (save Thursday when it was higher still) and is up 24.2%. I wondered on Friday if I should not sell something but could not seem to bring myself to do so. I do have orders in to trim Bank of America, Melcor and Wells Fargo if moderately higher prices are reached as I mentioned a week or so ago.

Berkshire Hathaway was out with earnings yesterday. As I expected, it was a good quarter, at least GAAP wise. However operating earnings adjusted for gains were down somewhat. I was surprised that the famed equity index put option position had not gained in value (it would have gained on the higher stock market values, but lower interest rates pushed up the mark to market liability under the arcane formulas that are used.). I could find no mention of any early estimate of the loss from hurricane Sandy. I will probably update our report shortly. Buffett bought a “little” Omaha-based internet mail-order company on Friday. At $500 million it’s a not enough to move the needle at Berkshire but instead I expect was a chance for Buffett to work with people he knows, likes and respects and was in a simple business that struck his fancy. And you can be assured that he thinks he can make a decent return with it. This company might be a sort of shiny new toy for Buffett, but he always makes sure his train sets, newspapers, candy shops, jewelry stores and all the other toys make money. (At least they are intended to make good returns when he buys them, but occasionally the economics turn against him).

November 1, 2012

Stantec was a big gainer today, up 8.4% to $37.29 after it released Q3 earnings.  Our last update had rated it (lower) Strong Buy at $31.25 on May 27. See the detailed comments under May 27.  It was rated Strong Buy at the start of this year at $27.57 and has risen 35% since then. I plan to update the report within a few days. I have not looked at the earnings report as yet.

Other notable gainers for us were Bank of America up 4.5%, MicroSoft up 3.4%. Visa up 3.7% and Research in Motion up 10.1% (rumors of its impending death having been greatly exaggerated, apparently).

Markets in general did very well due to reports of a rise in Consumer Confidence and two favorable jobs reports out this morning. Another jobs report come out Friday morning and will likely set the tone for the market on Friday.

October 31, 2012

Markets did not move much today. RIM was up 3.7%, but that is just “noise” for this company. Bank of America was up 2.2%.  Toll Brothers was down 2.2% to $33.01. This despite the fact that house prices are rising.  I has some some earlier at higher prices. I might be tempted to buy back if it happens to go down to about $31.

October 30, 2012

With the U.S. markets closed there was not too much excitement on the markets. But Toronto was up 0.5%.

The latest Case Shiller Home Price index is out and showed a 0.9% increase. The fifth monthly increase in a row.

I was wondering if Berkshire Hathaway would take any losses due to this storm. I would think the answer is definitely yes. Berkshire will probably let us know with their earnings release expected out around the end of this week or next week. Buffett does not enjoy paying out big claims. He is however very proud of the fact that Berkshire is ALWAYS in a position to pay its claims and to do so without ever putting much a dent in balance sheet of Berkshire Hathaway.

October 29, 2012

With the U.S. markets closed for a “storm day” today (and tomorrow, Tuesday) not too much seemed to happen in the Canadian markets.

I saw some discussion that Canadian Tire needs to reduce costs. I am not sure how true that is. I do worry tht is’s dealer-owned stores while benefiting from entrepreneurialism at the store level, also leads to a sharing of profits. I did observe  that Canadian Tire has higher gross margins (sounds good but means higher costs since profits are not that high). But it’s not clear that Canadain Tire should ever have the lower gross margins of a Walmart or Costco since those sell groceries, a notoriously lower gross margin business. Overall Canadian Tire looks cheap and I will take my chances on what Target does to it. Also it appears to me that Target is setting up in quite expensive digs having paid top dollar to take over the Zellers locations, that to my (limited) experience were a bit old and tired mostly and now paying to renovate (re-build) those tired old locations.

October 28, 2012

Shaw Communications is updated and rated Buy at CAN $21.06. It’s also a high yield stock at 4.6%. Shaw is up 4% this year to date, which combined with the dividend of 4.6% has been a good investment. It trades at 13 times earnings which is ostensibly reasonably attractive. However some accounting issues lead to an earnings figure that is not that reliable. Our overall rating is Buy. Subscribers should look at the full report to understand the basis for the rating.

I have added a new row to the report. This is a row to comment on “Long Term Predictability”. This new row is just under Outlook near the bottom of the report.

Ten years ago I wrote an article for this site that indicated that what we were really after was not just Growth-at-a-reasonable-price, but Predictable-growth-at-reasonable-price. Recently someone reminded me about that article. Also I recall how many times Warren Buffett has said he is looking for companies that he is reasonably certain will have materially higher earnings in 10 or 20 years. I have always shown the graph of past earnings growth and commented on outlook. But this new row in the analysis will make sure that I always turn my thoughts to the predictability of the company. It’s one thing to say that a company should continue to grow. It’s another thing to consider whether it is a company that might face major obsolescence, regulatory  or fashion issues that make its growth inherently uncertain.

A major strength of the report format that I use is that it is consistent. The same list of numeric and non-numeric items always gets addressed in each report. Perhaps that takes away from the ability of the report to be customized for a particular industry or company, but I think the requirement for each report to always address a standard list of ratios and non-numeric topics has been a good approach.

By the way I use the term numeric and non-numeric here. In college I was taught to use quantitative (being numeric) and qualitative (a measure of quality and also usually being non-numeric). I think the terms numeric and non-numeric are far more reader-friendly.

The Canadian dollar had declined about two percentage points recently. This increases the value of U.S. stocks when measured in Canadian dollars. And it decreases the value of Canadian stocks when measured in U.S. dollars.)

By the way, stock investments in American companies (like investments in U.S. houses) are NOT investments that are “in” U.S. dollars. Instead they are in investments that are “measured” in U.S. dollars. There is a difference. An investment in a U.S. bond, is truly an investment “in” U.S. dollars.

When it comes to U.S. funds versus Canadian, I generally try to think of my U.S. investments as being permanently left in U.S. dollars. When i sell a U.S. stock, I keep the funds in U.S. dollars. That avoids a currency convserions fee which I would incur if I transferred that back to Canadian dollars.

However, today I am thinking of entering an order to convert some of my American cash back to Canadian. The reason is that most of my cash is in U.S. dollars and it might make sense to balance that out. And with the Cnadian dollar down, (or the U.S. dollar up) it seems like it might be a opportune time to transfer the cash. (I would not have been inclinded to do it when the Canadian dollar had recently risen rather than fallen).

October 25, 2012

Toronto was up 0.9% while the Dow was up 0.2%. Constellation Software was up another 1.8% to $116.20. We had last rated it (lower) Strong Buy on April 1 at $89.35. They will release earnings after the close on Wednesday next week and I plan to update the report with a few days after that.

Shaw Communications was up 1.8% after releasing earnings this morning that were about equal to the prior year on an adjusted basis. Apparently, this was better than expected. I plan to update that analysis before Monday.

Yesterday I provided a link to a lengthy transcript of an interview of Warren Buffett. It is astounding how good his memory is for figures. When the host made a disparaging remark about Dairy Queen, (Berkshire Hathaway owns 100% of International Dairy Queen), Buffett bragged that its same store sales were up 5.8% in September. Berkshire owns about 79 businesses and yet Buffett happens to know this figure from memory. He also is able to condense various economic events into a few crisp sentences that explain a lot and to do that on the fly/ It’s truly remarkable. I have already said I expect Berkshire to report good earnings for Q3. I suspect it will report a week from tomorrow.

I was just noticing one thing, Berkshire owns virtually no rental type real estate, no REITs, no office towers, no shopping malls, no commercial space, no farm lands and no forest lands. Even its own operations including head office are often in rented space. I don’t think he would view real estate as a bad investment. But he has found better investments and apparently does not choose to tie up Berkshire’s capital in real estate.

It is often claimed that “most of the great fortunes of the world were made in real estate”.  Andrew Carnegie   said: “Ninety percent of all millionaires became so through real estate.” I don’t know if that was a true fact when the quote was stated. I do know that this quote is around 100 years old or more! (Carnegie died in 1919) Every real estate promoter since has quoted it. It’s categorically false today. The great fortunes of the world are made in many ways. Most billionaires today certainly did not make their fortune in real estate. By the way it may be debatable whether 50 is the new 40, but there is no doubt that billionaire is the new millionaire, given inflation since Andrew Carnegies’ time.

Buffett does however think that individuals in the U.S. who have stable jobs and who do not own a house would be making a terrible mistake not to buy one now, at today’s low prices, and lock in a 30 year mortgage.

October 24, 2012

Markets were down just slightly today.  As for our stock picks, we had Toll Brothers up 2.0%. We have already had big gains on this one this year, and it does look expensive at this time. But it certainly may continue to rise if the U.S. housing recovery continues.

I am looking forward to seeing the Q3 earnings. Canadian Tire will not be out until November 8th. Melcor and Berkshire will also be most interesting to see. And Shaw Communications should be out with their Q4 report before too long.

Warren Buffett was on CNBC for some two hours today. I have not seen it or read it (yet) but here is the transcript. I am sure it is worthwhile reading.

http://www.cnbc.com/id/49537172?__source=RSS*blog*&par=RSS

 

October 23, 2012

As most you will have noticed, the DOW was down 1.8% today, Toronto was down 1.4% and the S&P 500 was down 1.4%.

These kind of days are not unusual and simply reflect the realities of stock investing. And I am afraid I can offer no comfort that the market will not continue on down. But I am not suggesting I particularly think it will go down.  I have never claimed to be able predict the market especially in the short term.

I don’t believe that the stocks I own are over valued and I believe that our stock picks will continue to be good investments over time. As for the stock picks in the table, the ratings are as of the date and price indicated and as it states above subscribers would have to make a judgment call as to whether the rating might still apply given how old it is and how much the price has moved (or not) and what other events have taken place. I simply can’t sort of reaffirm each rating without doing the updated analysis.

There will updates coming before too long and there will be definitely a flurry in December as I always try to get everything as up to data as possible for the start of the new year. There is nothing special about a new year but I do measure performance from each January 1 and it is best to measure the performance of a Buy or Sell rating from a fresh update.

Canadian Tire was down a little today to $70.08. Yahoo indicates that is a P/E of 11.3. My analysis agrees with that. I can’t make any guarantees but I note that Walmart was trading around $50 to $55 for much of 2010 and 2011 and I believe the P/E was around 11 at times. It took a while but now Walmart is at $75, not because its earnings soared but because the P/E rose to 15.8. Buying good companies at 11 times earnings (an earnings ratio of almost 9%) will likely work out well over time in a world where the 10-year bond yield is under 2%. I considered adding to my already hefty Canadian Tire position today but I probably have enough already.

October 22, 2012

The Canadian Q3 earnings season has begun with Canadian National Railway reporting slightly better than expected earnings. We had last rated it as a Buy on July 27 at $88.40. While we have not updated it for this latest earnings release I see no reason why the rating would change given the price is now $87.07. As a very long term investment, I like CNR. Its tracks and right of ways are irreplaceable assets. People talk about Gold or land as a real asset and seem to think stocks are “paper” assets. A railway seems pretty real to me.

October 20, 2012

The Dow was down 1.5% on Friday and Toronto was down 0.4%. But our stock picks held up quite well. We did have Microsoft down 2.9%, but we also had Toll Brothers up 1.1% and Canadian Tire and Melcor unchanged. And given the big drop in the Canadian dollar on Friday and also Thursday, I think it turned out to be a very good week for our stock picks as measured in Canadian dollars. (But not when measured in U.S. dollars). Next week we should begin to get the Canadian companies reporting Q3 results. CN is usually among the first Canadian companies to report.

I notice the outrage of the Bell Canada CEO, George Cope over the disallowance of the Astral media take-over. He said Bell could not have done anything differently. Really? In fact it appears they bungled their application to the regulator and it appears they suffered from kind of group think. Now they are appealing to the federal cabinet. Good luck with that. I am no fan of the CRTC but I don’t exactly feel outraged by this decision.

October 18, 2012

While the markets were down very slightly today, our stock picks did reasonably well.

Hudson’s Bay Company is going to go public again. It was founded through the issue of a charter by King Charles II on May 2, 1670 as the Governor and Company of Adventures of England Trading into Hudson’s Bay and continued as a Canadian Corporation around 1970. I do like the history. I don’t like that it called itself the Bay for years and that it sold off its fur operations some 25 years ago (by my recollection). That was under old management but it seemed to be forgetting its proud heritage rather than celebrating it. Very dumb.

My inclination would be to avoid the shares. The Bay has had years to renovate its stores if it wanted to. Now it apparently wants to spend money on renovations just when Target is coming. I think it was very smart indeed to have sold off the Zellers leases at the huge price of $1.8 billion. But that is done and I believe some of all of that gain has already been pulled out of the company. As a shopper at the Bay over the years I have certainly been under whelmed.

To try to analyze this by reading the prospectus would be a daunting task. (I took a quick look at its statement of equity and see that it had a reduction of stated capital in 2010 — I don’t know what that means, it has had returns of capital to the owner rather than dividends in some years — which sounds like the owner extracting money such as leveraging the business up. In short there are many complexities.

And it would seem to me to be in direct competition with Target.

So, while it might turn out to be a good investment, my inclination is very much to stay away from it.

October 17, 2012

With another strong day in the markets we should keep in mind that there will be down days as well. Overall invesing in stocks tends to be rewarding but it can and will have its downs as well as ups.

The TSX was up 0.4% while the Dow was up very slightly. The S&P 500 was up 0.4%. As far as our stock picks go, Constellation Software was up another 2.0%. It has been rising nicely. I don’t know the reason but a quick look shows that they continue to grow and make acquisitions and they have announced winning some new customers. They will release earnings after the close on October 31.

Toll Brothers was up 1.8% on news that U.S. housing starts were up 15% to an annual rate of 872,000. That is still low compared to Canada which is I believe around 185,000 units and the U.S. is often regarded as roughly 10 times larger.

Wells Fargo was up 2.2%.

I neglected to mention that on Monday I did buy back the Wells Fargo shares that I said in the October 13 post that  I was tempted to buy back. They were down on Monday and I bought.

October 16, 2012

Another good day in the markets… It was good in particular to see Canadian Tire up 1.8%.

The Q3 earnings season is just in full swing in the U.S. and about to get started in Canada. So between that and the usual economic news there is lots to push the markets to and fro which will keep investors guessing as always.

October 15, 2012

It seems there are few dull days in the market. Today we had the Dow up 95 points or 0.7%. But Toronto was only up 0.2%. The larger gains among our stock picks were Bank of America, up 3.5%, Toll Brothers up 3.4%, Stantec up 2.4%, Constellation Software up 2.8%.

Also Wal-Mart up 1.8% to $77.15. I suppose it was a mistake for me to have sold recently but I was looking for something to sell to raise cash… Wal-Mart is now up 29% this year. Over the past few years (before this big gain) I explained how Wal-Mart the company had strongly outperformed Wal-Mart the stock. You may recall many analysts harping that the stock was still (then) down from its historic high of around $69 back around year 2000. Many analysts said it had been “dead money”. Yes it had, but that fact was not relevant to what the stock was worth in 2010 or 2011 or 2012. I would not likely be a buyer of Wal-Mart right now since it has gained 18% since we rated it a Buy back in May. (but I might change my mind on the next update, depending how the analysis looks then). I notice when I read the analysis that we knocked it down a bit due to the scandal in Mexico at that time. That seems to have gone away at least for now and so while I am not going to buy, I don’t think the stock is a bad one to hold onto.

No doubt the market will continue to thrash to and fro based on the latest economic news and earnings news. The low points always test our resolve and courage while also often providing opportunities. That is the nature of the markets.

October 14, 2012

FedEx is updated and rated (lower) Buy at $90.40. While the near-term outlook does not appear to be strong, this is a company that I think we can be reasonably sure will grow its earnings per share over the long term. The stock rose about 5.5% late last week on a cost-cutting announcement. However that particular bounce could prove to be short lived as the cost cutting will not be fully phased before about 24 months.

October 13, 2012

Wells Fargo is updated and rated (lower) Strong Buy at $34.25. This appears to be a good investment. I recently sold some shares at $36.46 and $34.90. I did that to raise cash. Still, I am very tempted to buy those back at this slightly lower price. But I still have about 12.8% of my portfolio (and 15.5% of my equity investments) in this company and so perhaps I should not be too greedy about buying more of this one. Most people would think I am already taking a lot of risk having $147,000 in this one company. But then look at how many people with a net worth of under $200,000 have $400,000 of mostly borrowed money invested in a house. Who is really the risk taker?

Friday’s markets were about flat overall but my own stocks took a minor hit as Bank of America and Wells Fargo declined.

October 12, 2012 11:30 am eastern time

Wells Fargo released earnings before the open this morning. It opened down roughly 3.5% and remains down roughly 3.5% at this time. (This illustrates why earnings should never be released during trading hours, by releasing before the open, no one got to trade a single share (unfairly) before the earnings news was reflected in the market price).

The earnings and operations were actually very good, record earnings. The problem was that expectations were even higher for certain aspects of the operation.

With the stock at about $34, I am tempted to add to my position. However, it is not down that much from its recent high of $36.60. I will likely hang onto my cash and see if better opportunities emerge in the weeks ahead for Wells Fargo or other stocks.

October 10, 2012

The Dow was down 1.0% today and Toronto was down 0.5%

Many or most of our stocks picks were down

Fedex was up 5.1% after announcing some cost cutting moves. Coincidently I intend to update the report on Fedex within the next few days.

Alimentation Couche-Tard rose 6.2% late on Friday as I mention below, Tuesday when the market opened again after holiday Monday it was down a bit but today was up 3.0%. Basically it appears something positive was said at their annual meeting on Friday or some analysts have upgraded the stock. I find it odd and have emailed the company asking for some explanation. I don’t expect them to give me one however. It’s an excellent company a real Canadian success story. But it looks about fully valued to me.

With the markets having been down for several days in a row now, and with talk of lower world growth and a poor Q3 earnings season it is natural to be worried about where the markets are headed.

I have always explained that I cannot predict market direction. I doubt anyone can. What I have had some success at is trying to recognize when the market and especially individual stocks appear to be good value. Also I have had success in keeping calm during market dips and trying to buy on dips rather than sell.

At the same time I try to be positioned with some cash on hand to take advantage of dips.

It’s interesting that the U.S. markets in particular have done very well in 2012 and that is despite all the things there are to worry about. At the start of September many were predicting a down month. Yet is was a very strong up month.

At this point, yes, of course, markets may fall. That is always the case. If you are overly nervous and not prepared to hold on come what may then consider reducing your equity exposure. Personally I have already reduced but I still have a high equity exposure. I also find it hard to reduce further at this point because it is I suppose an admission that I should have reduced more in the last several weeks. So I may or may not reduce anything at this point. But if markets were to fall more significantly (and no one can predict that accurately) I will be holding come what may and buying on dips as I have done for the past 13 years or more since starting this web site and even prior to that.

Well perhaps the next few days will bring glad tidings of earnings and the outlook will brighten. As always time will tell. I look forward in particular to Wells Fargo’s earnings report on Friday. They are expected to be about 20% higher than last year. If more than 20% or so the stock may rise. If less, well, you know.

October 9, 2012

Markets were weak on Tuesday with the TSX down 1.2% and the DOW down 0.8%. Most of our stock picks were down. RIM was a particularly notable loser, down 5.5%.

After the close earnings season has kicked off in the United States with Alcoa moderately beating expectations and Yum Brands as well.

Market will likely focus on whether Q3 earnings are better or worse than expected. Expectations are generally low. Other events that will push to market up or down are developments in the U.S. election and well as in the European situation and world economic growth. In other words, markets will continue to be uncertain. But the fact is that markets are never certain. Uncertainty is simply a fact of like in stock investing.

I think there is reason to be hopeful of good earnings reports from Wells Fargo, Bank of America, Canadian Tire and Melcor.

October 5, 2012

Markets on Friday were mixed with Toronto down 0.2% and the Dow up 0.3%. However many or most of our stock picks were down. One interesting gainer was Alimentation Couche-Tard up 6.2% in the final hour of trading. The company held its annual meeting going on on Friday afternoon hosted by the company. At first glance here it appears there was some kind of selective disclosure going on (with news leaked to to this group but not generally disseminated) . The meting seems to have conveyed some kind of good news even though there had been no press release. If so, this action is reprehensible.

October 4, 2012

It was another strong day for our stock picks. The Dow was up 0.6%, and Toronto was up 0.7%. We had Bank of America up 3.3%, Wells Fargo up 1.5% .. almost everything seemed to be up today.

I should probably be looking to trim a bit more to raise my cash and be a bit more defensive. But it is hard to think about selling when things are rising. What I may do right now is stick in a few “stink offers”, that is offers to sell but only if the the stock rises another 5% or whatever. We certainly can’t be sure that stocks will continue to rise or even that we won’t get a “correction”. I have some hope of analyzing which stocks appear to be good value. But I have never claimed to be able to predict short-term market direction. As far as I am concerned the overall market is fairly random  in the short term. I don’t follow any seasonal indicators, presidential cycle indicators, or anything of the kind. I am always at least partly invested in equities. I doubt I have ever been less than 50 or 60% invested and even that low was only briefly. I am often closer to 95% invested in equities. I try to pick stocks that look like good value. When markets fall I try to find some cash to buy at the lower prices. So far it has worked out okay, but certainly with some major bumps along the way.

I have just placed some orders to trim Wells Fargo (at $37.95), Melcor (at $16.95 – correction that should have read, $16.75) and Bank of America (at $10.95). These are a good bit higher than the current market and there is a good chance none of these will sell. But at least if the market happens to sort of rocket higher I will automatically trim a little here. And if markets go the other way, I have some cash ready to Buy.

 

October 3, 2012

Our stock picks did well today even though the Dow was only up 0.1% and the TSX was down 0.3%.

We had Toll brothers up 3.7% (although that is not one our top picks now), Bank of America up 2.0% and Wells Fargo up 1.8%. Berkshire Hathaway up 0.7% and there were other gainers as well. Of course there were some picks that were down as well such as Wallgreen down 1.5% and RIM down 2.2%. But overall our stock picks did well today.

I’ve just been listening to the U.S. presidential debate. In my opinion, Romney is the hands down winner tonight. He seemed to have Obama back on his heels. Obama seemed to have a look of guilt on his face as Romney went over his record. Romney seemed to have more facts at his fingertips to use. Before tonight it was said that that Obama was the clear front-runner, but if the debate has any impact then Romney will have closed the gap tonight.

Canadian Tire continues to lag and I am almost tempted to buy back some shares in it that I sold very recently (as explained below).

One interesting thing I took note of today was that Hewlett Packard fell 13%. It fell hard starting at noon and this was due to comments its president, Meg Whitman made at its annual securities analyst meeting. This was HIGHLY unfair to retail investors who are not in a position to trade on this breaking news. There is a reason that earnings are almost always released after the markets close. The reason is that it puts on all traders on a level playing floor. When news is released after hours the share price adjusts in one step change fashion and zero shares trade at intermediate prices. In contrast today millions of shares traded at intermediate prices as the news slowly wafted (like a great stink bomb) into the market. I don’t know if companies that release news like this at analyst meetings are unaware of the unfairness, or do they just not care? They could have done the analyst day but should have pre-released the bad news after the close yesterday. This is highly shameful. Similar things have happened in Canada and I have made official complaints on occasion. In fact my complaints have directly helped lead to a situation where in Canada we seldom see earnings released during the trading day now, whereas a few years ago that was common.

Update to this comment:

It’s not that obvious, so let me explain the mechanics of why releasing news during the trading day, without a halt hurts the retail invest. HP opened today at $17.23. It’s price over the past week was consistently over $17, although with a few little dips to right around $17 or a tad under. Now imagine that you, a retail investor wanted to buy some but you decided to place an order to buy at $16.95, hoping to shave off a few cents on the buy. Well at noon today, bang your order would have been filled and you would have bought at $16.95 as these analysts heard the bad news and sold to your order that was sitting there while you went about your life. By the end of the day the stock was at $14.91 due to the bad news released and you were already down 12%.

In sharp contrast, if that news had been released after the close yesterday, here is what would have happened. The stock price would have opened well under $17, perhaps as low as about $15 because the active traders would adjust their bids and asks to reflect the news. Remember stocks don’t open at the same price they closed at the previous day. If the stock had opened at $15, then zero trades would have taken place at intermediate prices between $17 and $15. As a retail investor had you noticed the bad news overnight you could have pulled your offer to buy. But far more importantly, even if you were totally unaware of the bad news, your offer to buy at $16.95 would have executed at the opening price of $15 and you would be about even, instead of down 12%. Kapiche?

This is detailed on my Investor Advocacy page.

October 2, 2012

Most stocks were down somewhat today as markets focus on various risks including lower earnings and the Europe situation and excess government debts…

One stock on the rise was Research in Motion (RIM), up 6.0% to $8.15.

Regarding Corporate earnings, the trailing earnings on the S&P 500 as of Q2 reports was $87.92. At the end of Q4 2011, that figure was $86.95. So that is only an annualized gain of 2.2%, which is pretty weak. On an operating earnings basis the annualized gain in the first six months of 2012 was 4.6%. Projections are that Q3 earnings will be up only 2.9% versus 2011 and on an operating basis will be down 1% from the prior year. All else equal this could put negative pressure on stock prices especially as the Q3 earnings get reported. In theory these projections are already baked in tot he current market index level and so what really matters is whether the earnings come in lower than or better than expected. However, all else is never equal and often reported earnings are not the biggest drivers of stock prices in a particular quarter of the year.

Keep in mind that some companies will continue to report strong earnings. I expect (but certainly can’t guarantee) that the higher rated companies on our list above and certainly those which I own most heavily will tend to report higher earnings growth that the S&P 500 index average.

October 1, 2012

Stocks had a surprisingly good day after a report showed stronger U.S. factory activity and also apparently becasue Spain signaled it might ask for a bail-out (which, for whatever reason is apparently a positive thing).

Stantec was particularly strong up 3.9% to $34.82. It’s a long-term winner.

Bank of America was up 1.5% despite announcing on Friday (after the close, I believe) that it would pay $2.4 billion to settle a class action lawsuit regarding its Merrill Lynch Division. The fact is that $2.4 billion (pre-tax) is simply not that huge for Bank of America which has a book value of $235 billion.  The market has reacted positively because the settlement reduces uncertainty about this liability.

And this brings me to address the topic of Bankruptcy and how the “death” of Bank of America and all the big U.S. banks has been greatly exaggerated.

For the past few years, even after they were bailed out I have read countless claims that all the big American banks were broke and worthless and insolvent if they were honest and marked their assets and liabilities to market. The implication being that a bankruptcy announcement is forthcoming and that one should certainly not buy their shares.

I won’t dispute that some of the banks might have had a negative net worth on market to market basis. But that did not mean they were necessarily worthless or that they were about to go bankrupt.

Banks are generally profit generating machines. Even is they have a negative net worth due to some unusual crisis, they will generally recover if left alone. Basically you just let them sit there and keep the machinery turning and they will crank out profits to rebuild equity. This is in fact what has happened.

In general corporations do not necessarily get forced into bankruptcy just because their net worth falls below zero. They may get forced into bankruptcy but this negative net worth alone is not sufficient to cause it.

In general all three of the following conditions must be met before a corporation would be forced into bankruptcy.

1. It is making losses and as a result runs out of cash to pay its bills
2. It does not have assets that it can sell off to raise cash to pay the bills
3. Its lenders refuse to lend more money or they call in the existing loans.

As long as lenders keep lending money a corporation can go on for a very long time with a negative net worth on the balance sheet and with annual losses. If lenders believe it its future and continue to lend the company money to pay iots bills then it has no reason to go bankrupt.

September 30, 2012

P.S. (update to comment) I had forgotten to mention in this post that on Friday I sold my Walmart shares. I had indicated in Thursday’s remarks that I might sell my Walmart shares.

Friday marked the end of the third quarter of the year.

While, you might not know it with all the talk of the difficult stock markets, 2012 to date has provided good stock market returns, particularly in the United States, with Toronto up 3.0%, the Dow up 10.0% and the S&P 500 up 14.5%. Our Stock picks returned an average of 11.1%. By some combination of concentrating on our highest-rated stocks (to some degree), and having invested only a tiny amount in what has been our worse pick (Research in Motion) and by trading in and out of certain positions, my own return has been 21.5%, year to date.

This past Summer provided quite good stock returns with Toronto up 7.9%, the Dow up 4.3% and the S&P 500 up 5.8%.

Berkshire Hathaway’s earnings each quarter are affected by mark to market changes in its index options “bet” that markets will rise by around the year 2020. I suspect that the strong summer markets will add perhaps a billion to Berkshire’s earnings this quarter. That is significant because Berkshire’s total quarterly earnings tend to be in the 3 billion range. Also it will likely have done reasonably well in its insurance businesses since I don’t think that there any particularly huge storms or other catastrophes in the quarter, although certainly there were some karge ones. On a book value basis it’s investments will also have done well which should generate a strong increase in Berkshire’s book value. Much of this good news about Berkshire (to the extent it is confirmed in earnings) may already be reflected in Berkshire’s stock price. It’s not as much of a bargain as it was this past Spring but it is still probably a decent long-term pick.

Research in Motion only managed an 8% gain on Friday which is a lot lower than the almost 20% gain it was showing in after-hours trading on Friday just after releasing earnings. Despite a lot of gloom and pessimism around this company, it still has 80 million subscribers and it has no debt. The market is valuing it at about $49 per subscriber. I certainly offer no guarantees. But I believe it is hard to go bust without first getting into debt. I think this is a rational speculative pick. It would rise in price if it starts to appear that Blackberry 10 will do well or if it gets a buy-out deal or can license its messaging service to others. Alternatively it could continue to bleed.

Canadian Western Bank was one of few stocks that rose on Friday (up 2.0%). I continue to like this as an investment.

Canadian Tire is up 7% this year. With a P/E ratio of about 11.1, it seems to me that this stock has room to rise on that basis. I don’t see any reason to think it will not have had a good Q3.  It continues to be held back by fears of what Target will do to its business. On the other hand many Canadian retailers should be getting a large boost in Q3 and Q4 since many or most Zellers locations have been closed for conversion to Target. Target is certainly spending a huge amount of money on its move into Canada. First, it paid an amazing $1.8 billion just to take over leases from Zellers. And now it is completely gutting and even expanding at least some of the old Zellers stores. I am curious whether Target’s landlords including RioCan face any expenses with these extensive renovations. Presumably the expansions are paid for by the landlord in return for additional lease payments. I have no idea if the landlord has to pay for any of the massive renovations within the existing store footprints. It would seem odd that Target would take over an existing store and pay Zellers huge dollars for that (due to an attractive locked in lease rate) and then turn around and gut the place and re-do everything but the frame and concrete floor of the building (that is what I witness at a local Zellers) at its own expense. And if RioCan pays for it does it get to increase the lease rate?

I have updated the composition of my own portfolio to reflect recent trades.

September 27, 2012

It was a decent day in the markets with Toronto up 0.9% and the Dow up 0.5%.

I had heard this morning that some of the economic reports out today related to housing and GDP were weak but tht the market was up on rumors that China would stimulate its economy. A source I see tonight says markets were up because of an austerity plan in Spain. These reasons for the market going up do not fill me with confidence. I’d rather see it rise on earnings gains.

So it seems my thoughts are turning more so to selling than buying at the moment.

I reduced my Toll Brothers position again today, this time by 25%. My thinking on that is that it is at $34 having fallen from a recent high of $37. But it was only a month a go that I rated it Speculative (lower) Buy at $32.28. So it was not really a favorite of mine at $34 and so it becomes a candidate for reduction given I am in a selling mood. I am in a selling mood in order to reduce risk, lock in gains and raise cash for possible opportunities ahead.

It was a bit hard for me to sell today given that I could have sold more on Monday when I sold only about 12% at $35.75. So it feels a bit dumb to now sell at about $34. But I also considered that I am still up about 42% on the stock in the account it was sold in. That’s not really a rational reason to sell but it helps emotionally. Rationally stocks should be sold due to risk or valuation or to move to something else. The price paid for a stock is rationally irrelevant to the sell decision. But emotionally, the price paid always comes into play.

This evening I am looking at the fact that I last rated Walmart a Buy at $65.31. Now it is 13% higher at $73.98, down just a little from its high of $75.24. So I think that qualifies as a candidate for sale as well given it is not looking like a bargain. Emotional factors that make it easy to sell include that I have a profit of about 30% on it. Also I have not owned it all that long and I not emotionally attached to it. For some stocks I have to admit that after owning for a long time, perhaps buying on dips, and perhaps after having analyzed a company many times over a period of years I do get emotionally attached to the stock. I combat emotional attachment by trying to be unbiased when I update the analysis. Sometimes my heart says keep or Buy and the analysis says sell or don’t buy and I try to go with the analysis in those cases.

Research in Motion reported earnings after the close. It did lose money, but apparently less than feared. The subscriber count was up to 80 million as its CEO reported a couple days ago. Its cash on hand increased when it was feared to decrease. The stock rose 20% in after-hours trading in the U.S. and so would be expected to pop up about 20% in Toronto tomorrow morning. Sadly I did not buy any today. The reason it is sad is not just that it was a missed opportunity but that in retrospect, at least, it seems like it was a pretty good bet that that the earnings were going to be okay. The CEO would never have mentioned that the subscription count was looking good if he knew that the earnings coming today would be bad news.

September 26, 2012

Markets were a bit weak again today. Toll Brothers was down 3.8% to $34.16 and its recent high was just over $37. New house prices continue to rise in the U.S. but the number of new home sales in August failed to rise as expected from the July number. Overall the housing market in the U.S. continues to recover. But as indicated in our updated report of late August I thought that Toll Brothers was starting to look expensive since it is already pricing in a lot of growth. So I have trimmed my position in Toll Brothers as noted in several posts in recent weeks.

Research in motion was up 5.8% today but has been very volatile. I continue to think it might be a good speculative pick but I have not so far added to my very small position in this company. It releases earnings after the close tomorrow, Thursday.

New figures are out for Canadian credit card delinquencies and the figures continue to show improvement. Which indicates that either 1. More people havve the earnings to pay their credit cards on time or 2. More people can borrow from other sources to pay their credit cards on time (or some combination of the two). Anyhow, it is a small positive indicator.

http://www.cba.ca/contents/files/statistics/stat_creditcarddelinquency_en.pdf

Also just released today are the latest Canadian mortgage delinquency statistics. One again the 90-day delinquency figures seem unbelievably low at just 0.33% or just 1 in 300 mortgages. The fact that the number is low and getting better is a positive sign. But I frankly don’t believe this number is really accurate. I suspect what happens is the banks don’t like to report a 90 day delinquency. So by day 60 they make some deal with the homeowner to let a couple missed payments get added to the mortgage principal if he makes one payment and this probably starts the 90 day clock over. Or Canadians simply have great access to lines of credit and the unemployed make the mortgage that way. I just don’t believe that delinquencies can be this low. I understood they were at least 10 times higher than that in the U.S.

One reason delinquencies are low however is that house prices kept rising. In a rising market a homeowner that gets in trouble with job loss can just sell the house. I wonder what will happen in a flat to declining house price market? I just don’t see delinquencies staying quite this low. At the same time there is certainly no sign of any real trouble for the banks and after all these mortgages are insured (mostly) by CMHC, so the banks will tend to get paid come what may.

September 25, 2012

Markets were down somewhat today. I was thinking about the fact that I really should reduce my high equity exposure. So I sold a small amount of my two largest positions, Wells Fargo and Canadian Tire. I also sold some Toll Brothers. This just seemed to be a prudent actions just in case markets head down

September 24, 2012

In today’s action, Melcor was up 4.3% to $15.90. But this is very thinly traded stock that tends to jump around like that, so this is fairly meaningless.

I bought a small amount of Bombardier today. I have mixed feelings about it. It’s balance sheet is very weak and so I suppose it could run into trouble if the recession deepens. On the other hand it is a huge industrial company employing thousands in a relatively high-tech environment and so it would likely get support from government even if it did run into trouble. It looks like a decent speculative pick to me but I am not planning to bet too heavily on it. I was tempted to sell some shares to lock in some of the recent gains but could not decide what to sell. (I like what I hold).

September 23, 2012

Bombardier Inc. returns to the list above rated Speculative Buy at $3.71. I wanted to look at it again because the price is well down from its early 2011 level when it reached $7.00. Sometimes a significantly lower price can be a good place to look for a bargain. Upon reading its reports, I was almost ready to forget about it due to its low profit margins. It had an earnings-before-interest-and income-tax “profit” margin of 5.9% in 2011 and 5.1% in the first half of 2012. This seems frightfully low for a manufacturing operation. Although I don’t know the margins of other manufacturers, I would have thought they would be higher than for retailers and some retailers certainly have better margins than this. Even the 8% EBIT margin that Bombardier aspires to seem low to me. However I saw that its P/E ratio was attractive despite the low EBIT margins. It definitely seems like a Speculative Pick but there is certainly some possibility of a good return if the outlook brightens.

I note that Warren Buffett’s NetJets placed a very large order for business jets earlier this year. Although Buffett does not personally manage NetJets, he does approve large capital spending and would have nbeen involved in this decision.

Years ago I though Bombardier might fit the bill for a Buffett buy-out but I am not sure it has either the profit history nor the management team that he would need. I think he would most definitely be attracted to the products it makes. I think it is an interesting company to follow.

I am planning to grab a small position in this company and then see what happens.

Sept. 20, 2012

A mixed day on the markets, Canada down a bit, the Dow up a bit. Canadian Tire did well up 1.4%. I don’t see any reason that Canadian Tire will not report a decent quarter for Q3. But it seems the stock is probably not going to do all that much until it becomes more clear if Target is going to hurt its business starting next year. Meanwhile it appears to offers good value, but there are never any guarantees.

Melcor was up 2.4% to $15.72. But that was on a very small volume. Just a few days ago some shares traded at $15.00 This is is a company where being patient and putting in an order below the current market can work out at times. (If it is at the higher end of of where it has traded over the past month then you can try an order say 50 cents or 75 cents lower and see what happens). Lately it has been in the $15.20 to $16.00 range mostly and so unless one is very hot to buy, I don’t see much reason not to try to get it under $15.40 or so. right now it is showing $15.15 bid and $15.80 asked. That brings up the point that some investors want to know the full depth of the market meaning, how many shares are bid at $15.15 and then how many at the next lower price and so on and how many shares offered at $15.80 and how many at say $15.90 etc. Some people also want to see real time prices. These people are traders and not long-term investors. They buy “stocks” (squiggles on a screen) as opposed to shares of companies. Both traders and investors buy the same thing but it’s just a completely different mentality. Investors tend to add to positions on dips. Traders consider that to be madness and use stop losses to sell on dips. Depth of the market and real time prices would just be distractions to me. I especially don’t care to see real time prices. (Actually I do see it if I place an order and that is fine but I would consider it madness to sit and watch real time prices). And while depth of the market might be interesting especially on a thin trading stock, it’s not something I particularly want to see.

September 19, 2012

Toll Brothers was up another 3.5% to $36.41. It’s now up 177% from its low of $13.16 that occurred just about 12 months ago. But it’s “only” up 78% from the $20.42 at which it was originally put on this site. This just goes to show that the gain is a LOT more when you buy the stock at a somewhat lower price. But it is not realistic to think that we can buy at the absolute bottom .

Our latest update for this stock, just three weeks ago, rated it only a Speculative (lower) Buy at $32.28. I am not a buyer at this price but may hang onto my position or may trim to take profits.

Our history with this stock is it was added to the Site as a Speculative Buy  at $21.03 on June 5, 2011. The idea was that it would rise in price when the U.S. house prices started to recover. I had no cash to Buy at that time but bought on August 3, 2011 at about $19. (This turned out to be just before the debt ceiling crisis of August 2011 and so not great timing).

Subsequently it did fall as low as $13.16.

I updated the analysis to Speculative Buy at $20.42 on December 22 and I bought some more on December 23 , 2011 at about $20. Apparently I did not take advantage of the lower price in September. I bought some more on March 6, 2012 at about $22. And more on April 9, 2012 at about $23. (There may have been another buy as well at a higher price, I am just going from searching the daily comments). TD shows my average price was $19.50 in one account and $23.77 in another and $22.60 in a third account (possibly that includes impacts of currency changes, I am not sure how TD Waterhouse reports average prices for U.S. stocks held in a Canadian dollar RRSP or RESP account)

I sold 20% of the position on June 29 at about $30. Sold another 20% on August 28 at $32.39. Perhaps by selling I have turned what could have been a VERY good gain into just a quite good gain. But I thought it prudent to trim as the price rose especially in this case where the P/E ratio is very high because the earnings still have a long way to go to recover.

I don’t think my buying and selling pattern in Toll Brothers was all that clever. But what did work out is that I identified it as a probable bargain. I bought  and then bought more when it continued to look like a good bet. Sadly, i failed to buy near its low, perhaps due to lack of funds or just out of fear.  Then I trimmed slowly as the price rose. I don’t always trim at higher prices and I have no “typical” buying / selling pattern. All of my trading tends to be ad-hoc. But it also tends to be driven by the ratings above.

September 18, 2012

The market seems fairly quiet as it settles back after the FED’s latest action waits for the next bit of news.

Fedex announced lower expectations. That truly is disappointing because delivery of packages would tend to go up if the economy is improving as hoped.

Microsoft just increased its dividend by 15%. It recently had a 2.6% yield So now it looks like about 3.0% if the share price does not react. The stock was unchanged after hours and so maybe the market is unimpressed.

I notice in the news last week about some GIANT hog farm going bankrupt near Winnipeg. Apparently the second time bankrupt. They blame it on high feed prices.

This hog farming issue was in the news a few years ago in 2007 and part of what I learned was that a huge portion (two thirds at that time!!) of Canada’s hog production gets exported to the U.S. That made no sense to me then or now since I doubt we can produce cheaper than Americans, not with a dollar at parity.

In 2007 some hog industry person wrote to the newspaper asking for support for government loans for hog farmers. I wrote them to say I was sorry but I voted no on the loan. I said that I very much sympathized but that:

I am sorry to say it sounds very clearly like your industry in Canada needs to shrink dramatically. Individual producers will likely want to sell the land or convert to grain production immediately.

Some things in economics are predictable and the continued hardship of hog farming in Canada was predictable due in good measure to the high(er) dollar. (Whether our dollar is high or not is debatable, but it is certainly higher than it was for some decades prior to about 2007.) Loans to hog farmers can’t change the poor economics of their business.

I am basically against all subsidies at all times.

September 17, 2012

Markets fell moderately today as the excitement of last week’s FED stimulus action wears off. Melcor was down to $14.90 but is thinly traded. I am tempted to add to my position.

Our reference article on Canadian Exchange Traded Funds is updated. This gives you ETF symbols and valuation information for about 48 ETFs. It can be a good way to pick up sectors that we don’t have on the list like energy stocks and oils sands stocks. Also it can be a good way to move quickly into and out of the market. The list includes a number of higher yield ETFs. This also includes ETFs for buying Gold, Silver, Oil and natural Gas for those so inclined. There are also Bond ETFs on the list. These ETF can also be used to bet against certain market segments or commodities, for those so inclined.

September 16, 2012

I am just reading the annual report for Boston Pizza Royalties Income Fund.

This company (actually entity) is an example of how a share price can increase for reasons not much related to the performance of the company itself. These units have risen 34% this year. We had rated them (higher) Buy at $14.19 for the start of this year and now they are at $19.08.

So why the big rise?

The distributions have risen from $1.104 annually to $1.176 annually. So that’s a 6.5% increase and that does not go very far to explaining a 34% rise in the price.

The mechanics of this fund are such that for the most part new restaurants do not add to the distributions per unit. The owners of the franchise company receive units of this fund when they increase the restaurant count in a year. Roughly speaking the franchise company (which is not the fund) gets 92.5% of the benefit of the increased restaurant count and existing fund unit holders get 7.5% of the benefit. A doubling in the restaurant count, all else equal would only increase the distributions per unit by about 7.5%. So prospects for new restaurants cannot possibly  explain much of the 34% increase in price.

A possible risk the fund faces is if the number of restaurants declines. The franchise company only gets new units for net new store openings. Fund unit holders are basically unaffected by closures, EXCEPT if the number closed exceeds the number opened. Fund distributions per unit would decline (all else equal) if the number of operating restaurants ever declines. This has never happened, but in 2010 there were 6 closures and six openings and so it almost happened. But in 2011 there were seven openings and four closures and this risk does not seem to be a serious risk, but it could be at some point.

The distributions will increase roughly in line with same store sales growth over the years. A very good year in same store sales growth is on the order of 6%. In the first half of 2012 same store franchise sales are up 4.9%. And that presumably was the basis for the distribution increase of 6.5%.

And I don’t think the outlook for future all-important same store sales growth has really changed much since January 1, 2012.

So, again we can explain about 6.5% of the increase in price of 34% and some 27.5% remains to be explained.

Part of the increase is possibly related to the fund’s unit buy-back operation. About 5% of this year’s increase came after they announced in late August that they would buy back some units. The fund can borrow money at quite low rates and then use the money to buy back units which saves it the 6.2% yield on those units. This operation can increase the distributions per unit over time. Buy backs are not magic and are not always beneficial. But in this case it does seem like a beneficial operation. It is particularly wise to do this when the units are under-priced, which was probably the case early this year and may arguably still be the case. While the fund wisely bought back units in 2008, 2009 and 2010 at an average price of $10.10. It apparently did not buy any back in the last 18 months or so until it announced a buyback on August 22. It’s not clear why buying back at $18 or $19 is considered wise when apparently they were not willing or able to buy back at much lower prices in 2011. Reports so far do not show any actual buy-backs under the this new program that commenced on September 4. (They may simply have not reported it yet, or maybe they were hoping to buy at the $18 price

Here is the rest of the explanation.

At the start of this year the units had a yield of 7.78%. Today the yield is 6.16%. The yield percent had dropped by 21% even though the distribution went up by 6.5%.

What has happened is that the while the fund distribution has grown about as expected and its outlook for growth has not changed much, the market has “decided” to place a higher value on the units. Previously the market wanted 7.78%, which was a pretty fine yield considering it could be expected to grow at perhaps 2 to 4% per year based on same store sales growth. But there was some risk that same store sales could fall in a recession or even worse that there would be a net reduction in the number of restaurants if closures exceeded openings.

Now the market has determined that even at 6.2% yield this is a reasonable investment given that the yield might be expected to rise at say 2 to 4% per year. And if it did rise at 6.2% and if the yield and P/E ratios remain the same then this would provide a 10.2% return so that does seem attractive.

Part of the reason the price increased was probably related to the general decline in interest rates. At a 7.78% yield and where the distribution could be expected to grow these fund units were increasingly attractive as interest rates fell and so the price was pushed up. Perhaps the market also became more confident that the unit distributions would in fact grow. In particular the risk of the restaurant count declining may be viewed as being lower now.

The thing to remember at this point is that the price of these units would likely fall if there was a major increase in interest rates. And this would happen even if the restaurant same store sales continued to increase.

At a 6.2% yield (and with probably but not guaranteed growth and with some risk of distribution decline, however unlikely) these units still seem attractive. They may well continue to increase in price even faster than the  2 to 4% per year underlying expected increase in distributions. But at some point if interest rates rise they could fall in price for that reason.

I own some and though I trimmed my position recently to take some profits, I have no particular plan to sell any. And I am wondering now why I did back up the truck at much lower prices when they were available.

September 15, 2012

I am certainly feeling “pumped” about my investment returns and the performance of the stock picks on this site this year. My own portfolio is up 22.6%. Almost all of the stock picks have done well. A notable exception is Research in Motion. But we did include the word speculative in that rating and subscribers who follow this site were aware that I personally invested only a small amount in that one and that it was discussed as a speculative stock. Also it is far from a dead company yet. Our best gainer this year is Toll Brothers the U.S. land developer / home builder up 78%. 

On Friday the market managed to continue going up due to the FED’s action. But the highs in the market occurred Friday morning and there was a moderate give-back by the end of the day. I felt it was prudent for me to take a little money off the table and so I trimmed back my Wells Fargo and Bank of America positions by a modest amount. With these two companies my history has been to buy on dips (although not every dip) and trim modestly when they rise. This has worked out well.

For example my first Bank of America buy was at $9.50 on August 2, 2011. That was very poor timing as the stock immediately fell a lot ultimately getting as low as$4.92. Also I compounded my timing error by, in a spasm of over-confidence, buying way too much all at once in that first buy. Having bought so much it was very hard for me to buy more at lower prices, but I did so, although slowly. The buys at lower prices have resulted in the fact that I now have a decent profit position in this stock despite the fact that the price today is almost exactly the same as it was on my first buy. With Wells Fargo I certainly did not trade it perfectly but I made no major mistakes and I quite stubbornly bought it on dips over the past couple of years (at one point it was over 20% of my portfolio) and I (reluctantly) trimmed some on gains and that has all worked out well.

One reason for trimming positions is I want to have some cash on hand just in case there is a general stock market decline or in case I find a company that I don’t already own (or own much of) and that looks very promising. The other reason is just risk management. I don’t expect a large decline in these stocks to happen but anything is possible in the markets.

I have updated my personal portfolio composition.

September 13, 2012

As you likely noticed, today was a blow-out day in the markets. The Dow was up 1.5% and Toronto was up 1%.

This, of course , was due to the FED’s announcement of additional stimulus consisting of printing money to try to lower interest rates (even though they are already insanely low…)

Notable winners from our stock picks included

Bank of America up 4.8%, Wells Fargo up 3.5% and Berkshire Hathaway up 2.1%.

Will this last? I don’t know… It certainly is no guarantee that it will last.

I considered taking some profits today, probably should have. It would be prudent for me since I am almost 100% invested in equities. But most or all of the stocks I own still seem reasonably priced and so I hesitate to sell. Perhasp just greed wanting more… It’s easy to feel fat and happy after all the recent gains.

Yesterday I was not able to post any comment because my ancient FrontPage software refused to open the site. I got it open today by creating a new copy of the site. I hope to move the site to a more modern software before too long. FrontPage has been out of production for years. But it still met my needs. I have no interest in loading this site up with very fancy components which tend to be slow to load. I keep the site plain and readable. Still it looks like FrontPage has to be replaced.

I believe a highlight of yesterday was Toll Brothers was up again.

So the FED is going to try to lower mortgage interest rates again. I think the safest bet around is that the price of U.S. houses is going to rise. If you know a way to invest in that through the market, let me know. (Toll Brothers might be okay, but I would prefer to find a company that is buying up a load of U.S. houses to rent and later sell and which is doing so with a strong balance sheet.). If you are in a position to buy a house in the U.S. (say you are retired and want to use the house four months of the year or more, then I don’t think you can go far wrong buying now). For most of us Canadians who are still working the idea of buying a house in the U.S. to try to rent out is not particularly feasible. It would probably work out but requires a lot of accounting and you would need to put it with a property management company and you would need to buy for cash if you are a Canadian.

Americans in a position to get into rental houses should probably jump at the chance. It looks like a generational opportunity in many cities.

September 11, 2012

It was a decent day on the markets with the Dow up a half percent although Toronto was flat.

The most notable winner among our stocks was Bank of America up 5.2%. This seemed to on talk that it would start to grow its loan base now that it had jettisoned some other assets and gotten its capital ratios to an acceptable level.

Pension Math:

Yesterday I discussed the case where an investor was going to earn a zero real return on investments (and this is about what is available in real return bonds (0.5% before investment costs) and in probably in 30-year government bonds that pay 2.4% or so before inflation). In this case if the investor wanted to fund a $40,000 per year retirement for 30 years in real after inflation dollars then he or she was going to have to save $40,000 per year (and adjusted up for inflation each year) and do this for 30 years in order to fund that retirement.

This is actually what an investor who goes 100% government bonds appears to be facing today if interest rates and especially real return rates remain as is. My conclusion is that young people looking at that would say “forget it”. It shows that a retirement period as long as the savings period is just not feasible, and far from it if real returns will be 0% (which they are for bonds and which some suspect they will be for stocks). And let’s face it starting the savings much before age 30 is not a feasible answer either in most cases. The only solution here would be to plan to work basically forever. Or to find a way to make more than that 0% real return.

I have done the calculations and as I suspected it takes a real return of about 4% to fund a 30-year retirement in 30 years of saving.

It turns out if you save $12,400 per year for 30 years (say 12.4% of a $100k salary) and you make a 4% real return then you can fund a $40,000 per year retirement for 30 years. That’s a stiff savings rate but at least within the realm of the possible.

If you can get 5% real returns then $9400 per year will do, or 9.4% of a $100k salary.

(If the salary is $50k per year then you can reach 40% of that or a $20k per year pension with that same 9.4% savings rate assuming the 5% real return.)

So basically, the math shows you need at least 4% real returns to fund a retirement of at least 40% of your salary assuming 30 years to save and 30 years retired.

This 4% real return used to be accepted as a reasonable (even minimum) real return to expect. In fact you could have locked in over 4% on long-term real return bonds back in the 90’s.

While many doubt it, I believe that the real return from stocks is likely to average at least 4% per year over a period of many years. That would make funding a retirement with stock investments feasible by saving 10 to 12% of wages. And many government and corporate pension plans are closer to contributions of 15% with say 7.5% each from employer and employee).

Current bond yields are simply too low to fund a retirement at any kind of reasonable savings rate.

I believe current long-term bond rates represent some kind of break-down in the financial markets. It simply does not makes sense that the cost of borrowing (and therefore the return available on savings) is at historic lows at a time when debts are so high. Between governments trying to push rates down and institutional bond investors being so stupid as to invest a dime at these low rates, interest rates are unsustainably low. It will not last. I would avoid long term bonds and wait for the inevitable increase in interest rates. Basically I am advocating that in our capacity as lenders we go on strike and we refuse to lend for long terms at rates that are totally inadequate.

I would (and do) invest in some combination of equities and cash and would (and do) avoid long-term bonds.

For more detailed reason why long term bonds should be avoided see our newer article on that topic (with some edits over the past few days adding in words from Buffett about how attractive bonds are (not) at very low interest rates)

September 10, 2011

Not surprisingly, markets today gave back some of the big gains from last week.

Apparently the big item this week is an expectation that the FED will announce more “easing” on Thursday. If the FED does not come through then I suppose markets would drop somewhat on Thursday and maybe rise somewhat if it is announced. But all of that is just short-term noise in any event. What really counts is longer term earnings and growth and dividends.

I am thinking about doing some analysis about the viability (or possible lack thereof) of retirement savings these days.

The historic assumption was that one could invest say 10% of earnings over the working years and it would grow after inflation at at least 5% per year. The result was that it was possible to amass enough wealth to retire on by age 65 or even as young as 55 and the investment would provide a comfortable living on top of things like the old age pension (or Social Security for Americans).

Today the real return yield on government bonds is a meager 0.5%.

Imagine if today’s fears come true and people basically make nothing on their investments after inflation and after money management costs. (And if you want to guarantee this is the case, and you are ready for retirement just take all your money and buy real return bonds at 0.5% and pay a fund manager 0.5% to do it for you.)

If zero real return is expected (or locked in) and you wanted to retire at age 60 and let’s say draw out $40,000 per year and adjusted up for inflation each year (assume you have no company pension and so $40,000 may be needed on top of the government plan just to enjoy a good retirement with some travel). And imagine you plan to have enough money to reach age 90, so 30 years retired.

In the case of making no money on investment other than inflation you are going to need a starting pot of 30 years times $40,000 or $1.2 million.

And let’s say you are age 30 today and you are going to save that $1.2 million (in today’s money) over the next 30 years. And let’s say that again you are not going to make any return on your money except enough to keep up with inflation and to cover investment costs. Well laugh (or cry) out loud you would have to start saving $40,000 per year (and adjust that up for inflation each year). And that is completely and totally out of reach for probably well over 99% of people.

The conclusion from all this is that if it were the case that people can’t make any positive real return on their investments then the whole notion of saving for a long retirement completely falls apart.

I will do some calculations but I am sure that it will show that a reasonable scenario of saving for retirement requires investment to earn at least 4% or more in real after inflation returns. And it all works out better and better as the real return goes up.

Today’s real return on government bonds of 0.5% simply makes no sense. At that rate people will basically stop saving and have to plan to work (much) longer and have (much) shorter retirements.

My belief is that the real returns we can expect are in fact a lot higher than recent low levels. Just because markets have returned little in the past dozen years does not mean the same will be true of the next 10 or 30 or 60 years. Just as the high returns of the 80’s and 90’s were an aberration so too are the low returns of the 2000’s to date.

September 9, 2012

What to do now?

I must plead guilty to very (very!) much enjoying the fact that I am up 20.8% this year to date. After quite few years investing my investments have grown to the point where a 21% gain is a very good chunk of money (just under 200k). (In an email to subscribers yesterday I said it was almost 22%, actually it was almost 21%)

Some of my accounts a reasonable amount of cash in them (the RRSP and RESP) Offsetting that I have a margin account that is using margin and some of the capital in the margin account is from a small line of credit.

All told, the net cash in the investment accounts is about 6%.

Based on my results it is tempting to put even more money and get my net cash to maybe minus 6% (invest everything plus use margin).

On the other hand maybe I should be thinking of taking some profits.

If I take some profits I do so for risk management reasons, not because I think my stocks will go down. But of course they could go down.

So maybe I will force myself to sell down some of what I have and raise some more cash.

I have not decided what to do yet.

As of Sunday evening, markets are expected to open down about 25 points on the Dow. Not surprising given the gains last week. But probably nothing to worry about either.September 8, 2012

Our popular article that analyses whether or not the S&P 500 index is fairly valued at this point in time is updated.

Alimentation Couche-Tard is updated and rated Weak Buy / Hold at $49.95. This was a great stock pick for us this year since it is up 58% since the start of 2012. It has had its share of volatility over the years but is up 187% from the $17.40 at which we rated it a (lower) Strong Buy in March 2005.

Management has been very impressive and the earnings should continue to grow over the years. At this time it looks expensive although it is possible if business remains very good in north America then the added earnings from the recent big Scandinavian acquisition could justify this share price. Personally, I will not be  a buyer a this price.

Friday was another good day in the markets for our stock picks. Bank of America did well, up 5.4%, Canadian Western Bank was up 2.2%.

In 2012 to date our Stock Picks have done well. For ease of calculation we have always measured the gains from the start of each year. Our 23 Buy and higher rated stocks from January 1 are up an average of 12.6% each. That compares very well to the TSX index which is up 2.6%. In the U.S. the Dow is up 8.9% and the S&P is up 14.3%.

My own portfolio with a heavy weighting to a few of our higher-rated stocks is up 20.8% in 2012 to date.

Subscribers who have invested based on our stock ratings (at their own risk) have also presumably done well. I’d be interested in hearing about that at shawn@investorsfriend.com (If so, let me know if I can use your results as a testimonial, I publish those with just initials, not names of subscribers).

September 6, 2012

It was a very strong day on the markets. Apparently this was mostly due to the announcement that the European Central Bank would support European countries and keep their borrowing costs low by purchasing unlimited amounts of their debt in the market (printing money to do so). Other reasons for the rise included a better-than-expected labor market survey report. These kind of gains can be quite temporary unless followed up by more good news.

Stocks that were particularly strong included Bank of America up 5.0%, eBay up 3.7% Stantec up 3.3%, Wells Fargo up 3.2% and Canadian Tire up 3.1%.

September 5, 2012

Alimentation Couche-Tard released earnings today. Reading through  the report the earnings look very good. However the share price has risen a lot since our last update and I will have to crunch some numbers before I arrive at an updated opinion on this stock.  I expect to update this report by Sunday. As I have mentioned before, I got a bit trigger happy on this one and sold all my shares too early when they “popped” on announcing the big Statoil acquisition some months ago. It would have been more logical to sell only half my shares at that time. (In retrospect I should have kept all, but regardless of where the price went, it was not that logical for me to have sold ALL my shares on the announcement).

New numbers for loan delinquencies and credit losses were released today for Q2. The numbers indicate that delinquencies and bad debts while still high in the United States are improving slowly but steadily. This is positive news in regards U.S. lenders including Wells Fargo and Bank of America.

These delinquency and  charge-off figures are available at the following link.

http://www.federalreserve.gov/releases/chargeoff/

September 4, 2012

One of relatively few stocks that were up today was Wal-Mart, up 1.25% to $73.51. It’s up 12.5% since we rated it a Buy at $$65.31 on May 28. Considering these facts, and the fact that I have only a small cash position, I decided to sell half my holdings in Walmart today. I also note that Walmart is up 23% this year to date. It may still be a good investment but it’s not as good an investment as it was in may and I just decided to take some profits on this one.

Canadian Tire fell 2.7% to $69.32.

September 3, 2012

RioCan Real Estate Investment Trust is updated and rated Weak Buy / Hold at $27.62. It has been a good investment in 2012 since it rose 4.5% and also yields 5%. However, I am not convinced that a 5% yield is attractive going forward given that distributions per share are likely to grow only slowly at best and given that there are risks that the units would fall in value if interest rates rise. Perhaps not a bad investment but I don’t find it attractive.

The series A preferred shares of RioCan Real Estate Investment Trust are also updated and rated Weak / Buy / Hold at $26.00. These yield 5.0% per year. However it appears that in 3.6 years from now they will be redeemed at $25. So the effective yield is closer to 4% which does not seem very attractive.

Bombardier series four preferred shares BBD.PR.C are updated and rated Buy at $24.73. They are higher risk than some preferred shares. The 6.3% yield seems attractive. These shares will not likely trade above their redemption price of $25 and can move lower. Therefore it may not be a good place to park money that you may need on short notice or on a certain date.

September 2, 2012

Canadian Western Bank is updated and rated (higher) Buy at $28.13. This has been a steady performer over the years. It is up 9.0% this year and that is in addition to a modest dividend yield of 2.3%. Since we first looked at it 13 years ago (and rated it a Strong Buy at that time) it has risen a total of 470%. I don’t expect that kind of performance over the next decade, but I would be surprised if it failed to at least double in price over the next decade. But it will have its downs as well as ups over that period as well. Before to read the full report.

Canadian Western Bank also has a preferred share. This is updated and rated Sell at $26.92. The yield appears quite attractive at about 6.7%. However it seems almost certain the bank will redeem these shares at $25 on April 30, 2014. Some investors may not be aware of the redemption and so the share price may remain somewhat elevated. In 2012 it had declined 1.6%, but still have a decent annualized return of about 5%. The current price appears to reflect an expected yield of about 2.4% and we don’t consider that to be an attractive yield for a bank preferred share. Possibly those who have a need for the cash around May of 2014 would consider it a reasonable investment.

September 1, 2012

I have updated the composition of my own portfolio.

August 30, 2012 

North American markets were down about 1% today…

I did not have a very large position in Canadian Western Bank and I doubled my position in that company today.

August 29, 2012

Stocks overall did not do much today as the North American stock indexes were approximately unchanged on the day. Canadian Tire however was up 2.5% and Constellation Software was up another 2.1%

Canadian Western Bank released earnings after the close today that were quite strong. Our report was last updated in December and I plan to update within the next week. I have mentioned it quite a few times this year as a stock that I bought this year and that I would consider buying more of. (I should have been buying more rather than just considering).

I notice that Canadian Western Bank released its earnings this week at the same time the big banks are releasing (we had big banks yesterday and will have four tomorrow). This may start to get Canadian Western Bank more noticed. It is indeed still tiny compared to the big five or six banks in Canada but it is growing.

August 28, 2012

I sold about 20% of my Toll Brothers position today based on the updated rating which indicates it is not longer the bargain that it was. The latest Case Shiller home price index came out and showed gained but Toll Brothers stock did not react much. I reinvested the money into additional Melcor shares.

August 27, 2012

Toll Brothers is updated and rated Speculative (lower) Buy at $32.28. I had hoped it would look better than that. Even assuming house prices and new home sales continue to recover the stock looks expensive. It may continue to rise as the housing market recovers. However I think it is prudent to take a smaller weighting in this than my current 6.6% weighting. I will consider selling half of what I hold and leaving the rest to speculate on higher prices.

August 26, 2012

Back from my travels… I am looking tonight at the Toll Brothers report and will update that company in the next day or so.

Our performance figures year-to-date as of today are very good. The way I measure performance is explained under the individual years in the performance links. I have always measured performance on a calendar year basis.

Our average stock in the Buy or Strong Buy ranges from January 1, 2012 is now up 11.2%. That compares very well to the TSX which is up 1.1% and the Dow which is up 7.7% and is similar to the S&P 500 which is up 12.2%.

My own portfolio which was heavily weighted to a few stocks from the list (as fully documented all year on this page) is up 18.8%.

August 24, 2012

So stocks were up nicely today, after being down yesterday.

Many people complain that “these days” stocks are unpredictable. They seem to think stocks used to be predictable. That is utter nonsense. Volatility in stock prices is normal and in fact provides opportunities for those who invest based on the value of stocks rather than on trying to simply guess or predicts short term stock price directions.

We are in Seattle today back to Edmonton tomorrow.

Visited Berkshire Hathaway’s See’s Candies again and bought some product. Excellent customer service. It’s educational to see how these tiny stores make out-sized profits in tiny retail spaces.

Next over to another Buffett company, Ben Bridge Jewelers. Walked in and they soon charmed us into making a small purchase, though they suggested that a $3k watch would look great on me. We did not go there but they were happy to sell us something very small while treating us as if we were buying the bigger item. We would be happy to shop there on a future trip.

Shopped in Walgreen’s as well (a company that is on our list above). I find their stores pretty densely packed and sort of down-market (no fancy floors or displays in those I have seen). That keeps costs down. Prices don’t strike me as being at bargain levels, yet they are busy. So looks like (and is) a money-making operation.

Lots of other nice retail operations; Stormteck in Victoria (a private company) and Patagonia in Seattle).

Loads of tourists around. It seems clear that many people do have discretionary cash to spend.

I wonder what will happen to the sports business given recent developments.

Lance Armstrong apparently stripped of titles earned years ago. College football cancels league titles for crimes taht while heinous, were totally unrelated to the game on the field. Why should anyone pay to watch a sporting event if the winner can be declared the loser years later? Not a business that I have any much interest in. I think sporting bodies are completely out of control at least as far as football and anti-doping go. I don’t know the solution but it just removes from me any interest in most sports.

August 23, 2012

Still cruising towards Victoria for a 6 pm docking.

Stocks were down today and our stock picks were almost all down. A notable exception, Constellation Software up 1.8% to $99.90, it has risen up a fair amount in the past month or so.

Stocks fell because of less hope for a FED interference (I mean intervention). Whatever, I think the FED has done enough damage since it began its ultra low interest rate policy a decade or more ago.

If stocks fall due to lack of FED interference, I consider that a buying opportunity on selected stocks.

August 22, 2012

On board the Celebrity Infinity cruising to Victoria from Skagway today. Stocks were down a bit but our picks did okay with Toll Brothers up 3.8% and Boston Pizza up about 2%. I have nothing to complain about regarding the markets this year. I have not been trading much but then again what I hold has been working out well.

August 21, 2012

I am just leaving Skagway, Alaska tonight. Will arrive Victoria, Thursday at 6 pm. While the Dow was down modestly today, Toronto was up and our Stock picks did okay. Walmart had been down a bit which is probably a buying opportunity and certainly is not something that worries me.

August 20, 2012

Greetings now from Juneau, Alaska. Shaw and Bank of America were both up about 2% today

August 19, 2012

Greetings from Cape Fox Lodge in Ketchekan Alaska. Internet on the cruise ship is not only expensive but I could not get it to work. I may not be anle to post this week, but probably will find some hotspots in Juneau or Skagway. Stocks did well on Friday. Stocks that I would buy now if I did not already own include Melcor, Canadian Western Bank, Stantec. Those are the three that come first to mind. Canadian Western Bank I feel is a conservative choice in particular. (No guarantees ever, but CWB seems lower risk). Refer to the table above for other ideas but keep in mind the stock ratings are always as of the date written. You would have to judge for yourself whether the rating still applies (which it likely would if price not much changed) or wait for an update.

Aug 16, 2012

Stocks had a strong day. Toll brothers was up 5.8%. Microsoft was up 1.9%, Canadian Western Bank up 2%.

So far I am hanging on not taking profits or adding to positions.

Walmart however was down 3% after reporting earnings that were good but not quite as good as hoped for by the market.

I am in Seattle today, Alaska cruise starting tomorrow.

Checked out some of the Berkshire Hathaway companies today, See’s Candies and Ben Bridge jewelers. Saw a Burlington Northern train and bridge that both looked rusty.

Saw also a new Target store downtown. When Target comes to Canada it could put some pricing pressure on some Canadian retailers including drug stores and general merchandise.

August 15, 2012

Our stocks did well today. Notably Canadian Tire up 1.1% and therefore hanging onto the strong gains it made after reporting earnings last week. Couche-Tard up 1.9%. Melcor was up 1.9% but can be somewhat volatile due to thin trading volume. Walmart was up another 0.6%. Fedex was up 2.2.

August 14, 2012

Wal-Mart was up 0.8% today to $74.01. That puts this company up 23.8% this year to date. For a number of years I Have been explaining that the fact that Wal-Mart was trading under it previous high of about $70 from 1999 was not any fault of Wal-Mart’s. Wal-Mart did its job and increased earnings year after year. Stupid investors had bid the stock to ridiculous levels in 1999.

Wal-Mart is up 58% since I first added it to this site as a Buy in 2006. It’s also up close to 50% from recent lows just under $50 in August a year ago and under $50 in July 2010 and in much of 2009. The point is sometimes significant gains can come from the most boring companies.

August 13, 2012

Our stocks hung in okay today with the markets down a little.

I notice that the TMX Group was down 5.5% today.

This is not at all the same TMX Group as it was. Firstly it is in fact a different company. The Maple Group Acquisition Corporation bought the former TMX Group along with some other things (Alpha Trading Systems Inc. and the Canadian Depositary for Securities Ltd. Then they changed the name of Maple to TMX Group. But it’s actually a different corporation with different Board members.

Not only is this new TMX Group a different corporation (albeit the old TMX Group is its biggest asset and operation be far) but he new company is different in that it has been leveraged up with a lot of debt used to buy out 80% of the old shares for $50 each.

So, the point is that once this offer to buy 80% of the old TMX shares for $50 cash each was done there was no strong reason for the new company to continue to trade at $50. Perhaps management estimated the new company to be worth $50 so yeah somewhere close to $50 might be right.

From a share valuation perspective we have little to go on now as to what these new shares are worth. The history of the earnings per share under the old TMX will not be of much help. Earnings could be higher as there are new operations involved. But there is also debt now. I am not sure what is happening to the share count. It will take a year or so with the new structure to establish a new earnings level. (Though I suppose the buy-out offer gave some estimates).

Even the old TMX Group value of around $50 was not reflective of earnings it was simply reflective of the buy-out offer for 80% at $50.

To the extent the new TMX is free to set its own prices it is a monopoly an could be quite valuable indeed. But from murky details I read, the Ontario Securities Commission will have a hand in regulating the prices it charges. In that case the value of the new entity depends a lot on how it will be regulated.

My point is that just because the same trading symbol applies here, it is not really the same company. Technical analysts will be completely lost because (as in one article I saw today) they may assume it is the same company.

At this point I simply have no idea what the new TMX Group is worth. If I add it back to the list that will probably not happen until 2013 after the next annual report so that I would have something to go on.

I have been dismayed by what I perceived to be the poor and even misleading disclosure of TMX Group and Maple throughout this process. Given their position as regulators it is disturbing.

August 11, 2012

Canadian Tire is updated and rated (lower) Strong Buy at $69.57. The Q2 earnings report was very strong.

August 10, 2012

We closed out the week with a relatively flat day for our stock picks on average.

The year to date however has been a lot better than flat.

As of January 1 we had 23 companies rated in the Buy or Strong Buy categories.  Notice we use the word companies which conveys ownership in a business rather than the word stocks which conveys investing in something abstract. We also like to say share owner or just owner which conveys more permanence and reminds that we are owners rather than share holder which conveys something temporary and perhaps external to the company.

Anyhow of those 23 companies, 19 are up in price and just four are down. The average gain for the 23 (including he four that are down) is 10.7% and that excludes returns from dividends. The only loser of note was Research in Motion which we had labeled as speculative.

The list included a lot of retail stocks. These tend to be unexciting most times. I don’t know how many dozens of times in the past year that I read that “the consumer was dead, tapped out”. So how could retail do well in 2012? Well the fact is that most of these retailers looked under-valued to us. And here are the results, year to date:

Costco up 14%  ( but we had rated that a Weak Sell)

Walmart up 23%

Walgreens up 9%

Couche-Tard up 58%

(The) Brick Inc. up 29%

Canadian Tire up 6%

After the start of the year we added two more:

Dollarama up 45% (but we thought it was too high already so missed this one)

Liquor Stores NA up 16%

So that is a very lovely performance from a boring group of retail companies. Sometimes great returns lie in the most unglamorous and boring places.

Another area we talk a lot about is Banks.

Wells Fargo, it’s up 23%

Bank of America up 39% (I owned it and it was talked about but was not officially on the list)

Not that many people were excited about investing in U.S. Banks. How many times have I read in the past year that they are technically bankrupt? That is not true but was and is often stated.

We also had Canadian Western Bank which is up 3% this year to date.

Related to both retail and banks we had Visa, it’s up 27%

So much for the death of consumer spending…

But we did not select these stocks because of a bet on retailing or banking, they were rated individually as companies. They happened to look like good value (except Dollarama and Costco which looked too expensive for our taste)

August 9, 2012

Canadian Tire came through with good earnings and the stock was up 4.8% today. The actual Canadian Tire stores had about flat sales versus last year but the former Forzani Group stores did well, Marks also did well and financial services did very well. The market is probably going to continue to be somewhat cautious due to worries about Target coming in and Lowe’s. Certainly the company looks like quite good value. I do worry somewhat though that it appears to have a somewhat higher cost structure than some competitors. Possibly its convenient locations offset that sufficiently. I will delve into the earnings to study the details over the next few days.

August 9, 2012 (before the open)

Canadian Tire earnings came out before the open and appear to be quite strong.

August 8, 2012

The Canadian stock market was down 0.7% today but the U.S. markets were about flat. Toll Brothers was up another 1.9% as a report showed that U.S. house prices are now slowly rising. It reports earnings on August 22.

It is interesting to watch RONA claim that it is adopting a new strategy of smaller stores and therefore Lowe’s should go away and not buy it up. The thing is though RONA had only small stores some years ago and then made the bone-headed decision to try to compete head-on with Home Depot. It seems to me the solution is for Lowe’s to buy up all the RONA box store locations and leave RONA have the small stores.

RONA also claims it buys most of its products in Canada. Well that is laudable, but if they can’t make a good return, it is simply not sustainable.

Canadian Tire will report earnings tomorrow (Thursday). The conference call is at 4:30 pm eastern but it is not clear what time the earnings will come out. Hopefully it will be before the open. I am hopeful but also apprehensive about the results. They already said they will take a “charge” to close some of the Forzani sports stores that they bought. That news should be baked in. Other than that they will have to show good results or else the market price will be under pressure due to fears of competition from Target and Lowe’s.

Canadian Tire has a P/E of only about 11.3 and a Price to book ratio of 1.3. It seems to have been well managed. And I think its Board is strong.

I think it could improve its earnings if it wanted by doing a sale and lease back of its stores to a REIT. Canadian Tire is trying make an ROE of I believe 12% or so and REITs seem satisfied with much less than that so it might make a lot of sense to sell the stores and sign 20 year leases to rent them back. Their would be a large profit on the transaction and the cash could be used to buy back shares and raise the dividend.

Unfortunately Canadian’s Tire dual class shares may allow it to refuse to take this step. It may be immune from any kind of take-over attempt.

August 7, 2012

Today was a strong day for the Toronto Stock exchange which was up 1.7%. The Dow was up 0.4%.

Lots of modest gains today… among the larger gainers,  Stantec up another 2.1%.   Toll Brothers was up 2.1% as the market continues to see that the U.S. house market appears to be past its bottom and on the mend. I own both of these as indicated in my portfolio composition at the link above.

August 6, 2012

Canadian markets were closed on Monday. U.S. markets were up modestly.

Bank of America was up 2.8% to $7.64. While it is speculative and is also very complex it does appear to offer good value. Housing markets in the U.S. appear to edging up and this will bode well for banks. On the other hand recor-low interest rates do make it harder for banks to make money. I am comfortable holding this stock but I am prepared to accept the risk as well as the potential reward.

August 4, 2012

Markets were up strongly on Friday mostly due to a better-than-expected jobs creation number and I think partly due to comments that Germany would not stand in the way of the European Central bank’s meddling in the markets.

Whatever the reason it was a nice way to end the week.

Stantec came out with earnings after the close on Thursday. In response to the good earnings the stock was up 9.9% on Friday to $31.22.

We had last rated it a (lower) Strong Buy at $31.25 on May 27. On May 29 I noted I had bought some more as the price dipped somewhat. Subsequently it fell to as low as $26.50 on July 24. On July 27 I mentioned that I would definitely consider buying it and that it was at $27.85. I own 1500 shares and I wish I had bought more after talking about it on July 27. It’s still a good buy for the long term.

Warren Buffett’s Berkshire Hathaway announced earnings after the close on Friday. The earnings were good with operating earnings before gains and losses on investments up 38%. Along with realized gains on sales of investments of just $81 million there was unrealized market gains of about $6.1 billion. (This is not recognized as earnings.)  This is shown in the increase in other comprehensive earnings. This tends not to get noticed much in the financial press.

What will get noticed by the financial press is that Berkshire lost $693 million on mark to market value of derivatives.  Those who like to try to knock Buffett down a notch always have a field day with this one. In reality it certainly has no more meaning than the $6.1 billion in other comprehensive gains that go unnoticed. Buffett will almost certainly ultimately make money on these derivatives.

Berkshire’s book value per share has gained 7.5% in 2012 and stands at $107,377 per class A share. (Incredibly enough, these are the same shares that had a book value of $19 when Buffett assumed control of the company in 1965.) The B shares have a book value of $71.58. Berkshire is authorized to buy back shares if the price goes lower than 110% of book value, so $78.74 per share. Berkshire closed on Friday at $85.58. Although our report is not updated I would continue to consider it a (higher) Buy at that price.

 

August 2, 2012

Today the market was down because the European Central Bank did not promise to meddle in the markets immediately. It  did however warn (err promise) that it would get ready to meddle before too long.

I view dips caused by this sort of thing as more of an opportunity than anything.

Melcor released earnings yesterday and the report was quite good. This is an under-valued stock that flies under that radar screen. The trading volume is too little to attract much attention. This is a boring company that has been listed on the stock exchange since 1968 and which traces its roots to 1923. It’s still controlled by the founding Melton family. It’s trading at 0.8 times book value and 10 times adjusted earnings. It’s a well managed company. It will have its ups and downs but I would be very surprised if it did not turn out to be a good long term investment (and perhaps good in the short term too). I had an order in to sell some of shares if it hit $15.90. It almost got there yesterday but not quite. I have now canceled my order to Sell. I was only selling to raise cash and maybe play the volatility a bit. Actually, I more inclined to buy more at this price rather than sell.

Facebook (or faceplant) hit $20 today. Linked in reported better-than-expected numbers after the close. I would think facebook should be close to a bottom here. But one never knows…

Yesterday there was a sort of mini flash crash as Knight Capital Group a U.S. market maker had a computer program go wild. It looked to me though that the real error was in their panic selling of some stocks they had bought by accident. Perhaps they could have sold more slowly.

Some investors feel that these events make stock markets more dangerous. I would argue it was nothing but an opportunity. I never use stop loss orders because I don’t believe in the “sell low” strategy. Value investors don’t use stop loss orders, those are for traders. Value investors would be more likely to have “stink bids” in. For example some lucky buyers picked up Berkshire yesterday at as low as $82.12. Not  a huge discount but it was over a $2.00 instant drop that quickly recovered. If you have confidence in the value of the companies you own then the fact that the stock falls even further below a reasonable value is merely an opportunity to buy more. Admittedly it is a worry when it happens but in the long run it is often advantageous.

August 1, 2012

The market was disappointed that the Fed did not come through with some economic stimulation today. Whatever, the FED has done quite enough meddling. I think it is tomorrow that the hope turns to the European Central Bank to do some meddling.

Overall the market did not react much to the disappointment.

We’ll see what tomorrow brings…

I am eagerly awaiting a number of earnings reports due out around the end of next week. Canadian Tire in particular. They already pre-announced they would take a hit on closing some of the Forzani stores they bought. But other than that I am hoping they have done well. If not then I hope someone lights a fire under then with a takeover offer, that would be nice but I guess is not in the cards.

I don’t know why Rona ever opened big box stores. Did they really think they could compete with Home Depot? I think Lowe’s should just buy their big box locations, after all they were closing about 8 of those so might as well sell. I don’t see why Lowe’s would want their many smaller stores. (Although sometimes those small stores are the only game in a small town and can be lucrative).

Speaking of Retail, when I looked at RioCan the figures show that they have some leases with Target (former Zeller locations). And sure enough those leases have a good number of years left and are below market. That is why Target paid $1.8 billion for those leases. But I still think that was a Huge amount of money. And how incompetent was Zellers that they could not make decent money even with the low cost leases?  Far as I am concerned Zellers were junk stores and should have turned themselves into giant dollar stores. Oh well, too late now.

July 31, 2012

The Case-Shiller report today showed that U.S. house prices rose in May.

We are past the bottom of house prices in the U.S. House prices are higher than the bottom on all 20 Cities in the survey / index. The increases range from 1.7% in New York and 2.5% in Detroit to 11.7% in Phoenix, 11.8% in Washington and 14.9% in San Francisco. The average for the 20 Cities is an increase of 3.6% above the lows. I use the raw non-seasonally adjusted figures because I believe that seasonal fluctuations are tiny compared to the trend in increases.

Facebook was down to $21.71. That is just 57% of the $38 Initial Public Offer (IPO) price. So a 43% decline.

It’s interesting to take a look at the share price and valuation of Facebook since just prior to the IPO until today.

As of December 31, 2011 Facebook had paid in equity of $2.684 billion. There was also retained earnings of $1.606 billion for a total common share equity of $4.29 billion. The founders and very earliest investors had paid essentially nothing for their shares and later private investors had paid in substantial amounts. It was not clear what the company was worth.

After the IPO The paid in capital rose to $11.684 billion. So $ 9 billion was raised by the company. The total IPO amount was $16 billion and so it appears the company got $9 billion and early investors sold $7 billion and walked off with that cash. After the IPO there were some 1880 million shares.

At the IPO price of $38, the company was valued at $71.4 billion.

But now at $21.71 the company is worth $40.8 billion. The book value per share is $7.08 consisting mostly of cash.

That is a loss of $30.6 billion in a few weeks.

It’s interesting to think about where the money went. In fact the $30.6 billion of wealth of the owners of facebook simply evaporated. That’s bad. On the other hand most of the original $71.4 billion of wealth was conjured from thin air. After all as June 30, 2012, facebook had raised a total of $11.684 billion from investors, it had earned another $1.654 billion. So that is a total $13.3 billion. (There was also another $7 billion raised at the IPO that went to former shareholders but that was just a trade some investors sold to new investors. Of the $71.4 billion total value, $58.1 billion was the estimated value of future profits on top of the $13.3 billion book value. That $58.1 billion in wealth essentially came from thin air.

What has happened since the IPO is that the estimated value of future profits has fallen to $27.5 billion from $58.1 billion. The difference $30.6 billion has simply disappeared into thin air from whence it came in the first place.

But all of that is just a matter of interest.

The real question is, should we buy facebook?

I don’t know. But I think it might be worth nibbling at. It is speculative and it could certainly fall further. I would not place a big bet on it. But a small position in it would be okay. According to analysts it is trading at 34 times estimated 2013 earnings. Not cheap certainly. But perhaps not totally outrageous. On the other hand the 2013 earnings are only a guess.

The big story on Wednesday will be whether of not the Fed stimulates the economy. If they don’t the market will fall, I suppose. I’m at the point where I really don’t care what the Fed does. The value of stocks will ultimately not be determined by the Fed. They can influence the short term but not so much the longer term. If the market falls substantially, I will be adding to positions.

 

July 30, 2012

Markets were somewhat weak today. There is some anticipation that the Fed further “stimulate” the economy at a meeting this week.

To my mind it is idiotic for the Fed to continue to try to drive down interest rates. They are already about the lowest in recorded history.

And low interest rates, while they help borrowers and stock prices and house prices inflict enormous pain on those trying to live on the interest from money in the bank. Low interest rates have succeeded in killing off many defined benefit pension plans and severely wounding most of the rest. (At least if the ultra-conservative methods of calculating the pension liability are relied on). Similarly low interest rates are almost death for life insurance companies and make it harder for banks to earn profits.

A far more logical form of stimulus, if that is what is wanted would be federal spending on public works such as roads. Unfortunately the federal government is already over-spending and in many cases not getting much for its dollar (wars in foreign places, rescuing large corporations…)

I suspect the Fed has caused quite enough damage already and not continue the madness of buying up U.S. government bonds and should think about unwinding some of what it has already done.

It’s also very hard to fathom why the Fed should care about the stock market. It is no part of the Fed’s job to stimulate the stock market.

And mature investors know that stock markets fall as well as rise even if over long periods of time they do rise. Trying to stop natural dips in the market is idiotic. If the Fed is trying to do that, its leaders should be fired.

It is ironic that in a so-called free market, the price of money itself is being manipulated down.

July 28, 2012

Some of you may want to consider our longer term and/ or lifetime subscription offers. We now have over 12 years of history of beating the market quite consistently. We can’t guarantee to keep beating the market, but we will be using the same methods that have worked well so far.

July 27, 2012

I am just taking a look at RioCan‘s annual report. I am looking at this company with some suspicion. It seems to me it is to some extent a work of financial engineering. It has a high yield. But the dividend appears to be higher than its earnings (setting aside market gains on the buildings). Some 22% of the distributions flow right back to the company under the dividend reinvestment plan. On top of that the company tends to issue a significant amount of new units each year. So how real and sustainable are the distributions when in the net the company is not really sending out much money?

But the company is growing its assets as well, so that is good.

I am not saying that the new units sold are used to pay distributions, in fact most of the new money is certainly used for new buildings. But does some of the new money go to pay distributions? I don’t know.

Companies that grow by issuing new shares are harder to analyze. The Book value per unit grows not only because of retained earnings but because of issuing new units at higher prices than book value. And RioCan is allowed to mark its building up for gains in market value, so that is vastly different than traditional accounting where buildings were kept on the books at cost.

RioCan tends to rely on the idea that its buildings only increase in value. But at some point don’t buildings basically wear out?

It may be easy to send out distributions as long as money is flowing back in from sales of new units/shares. But what would things look like if they stood still and did not sell new units and did not add new buildings for a while. Would the existing properties be able to support the distributions (after paying building capital maintenance costs)? That is part of what I struggle to understand.

Maybe RioCan is just fine, but I do look at it with some suspicion.

They report Q2 earnings on August 10 and I hope to update the report shortly after that.

Friday was a strong day in the markets. Stantec was one of the bigger gainers up 4.6% at $27.85. This is a stock that I would definitely consider buying. In fact I am wondering why I did not add to my position at recent prices. In recent weeks I was more in the mode of selling stocks to raise some cash…

Canadian National Railway is updated and rated Buy at $88.40 on Toronto or U.S. 87.98 in New York. It is a very strong company with an excellent history. It does not look that cheap but it will likely continue to be a good investment over time.

July 27, 2012 (3 pm eastern time)

Bank of America is updated and rated Speculative Strong Buy at $7.17. ( As I post this it is up to $7.31 today) As mentioned in the report, this is a very large and complex company and our analysis is relatively superficial. I don’t claim any special ability to forecast bank earnings or analyst there many risks. However, on the face of it, this company is recovering and appears to offer compelling value. It has been volatile and will likely continue to be volatile. There are no guarantees but this is a company that could double in price within a year if things go well. On the other hand financial troubles in Europe could certainly send this and other bank stocks down at least temporarily. As disclosed below I added to my own holdings in this company earlier this week.

July 27, 2012 (11 am eastern time)

Stocks had a good day on Thursday and as of Friday morning are having another strong day.

Daybook however is down 14% to $23. I have said it does not have the advertising power of Google. But it certainly does have a tremendous amount of web traffic. I have not analysed it all all. Yahoo is showing it at 35 times 2013 earnings, which is still expensive. (And of course the 2013 earnings are no more than a wild a$$ed guess). It is certain that it is a better investment at $23 than at $38. It is a purely speculative stock at this point. Anyone wanting the excitement of “playing” it should probably stick to putting only some “play” money into it.

As always the market will continue to react to the latest earnings and the latest musings from Europe.

July 25, 2012

There was not too much excitement happening with our stock picks today.

Not surprisingly we continue to get mixed signals. Bad news from Spain. But Caterpillar earnings way up.

A lot is riding on the slow recovery in the U.S. housing market.   With higher house starts comes lower unemployment. And higher house prices help the banks as well.  Rumors of the-end-of-the-financial-world-as-we-know-it continue to be greatly exaggerated.

10 year bond yields in the U.S. are at 1.41%, so let’s see that’s a 70 year payback at that rate. Count me out. Anyone who can’t find a better expected return than that is not trying very hard.

A comment on Pensions…

These low bond yields could be the final nail in the coffins of many defined benefit pension plans. Hopefully this is the darkest hour before the dawn of higher rates. Even government plans are going to have think about closing the plans to new employees. And giving people the right to walk away with commuted values based on these low rates is becoming just too generous.

The Alberta government employee pension plan has seen its contribution rates more than double since 2001. In 2001 it was 4.675% of wages up to the Canada pension maximum (then $39,100 per year ) and 6.55% above that. It has risen sharply since then and in 2013 is set to go to 11.7% up to the Canada pension maximum (now $50,100 per year) and 16.72% above that. So quite a bit more than doubled.

The Alberta government matches these “employee” contributions. (And really the government pays both sides since it pays the employee’s wages). These are staggeringly large pension contributions. It’s driven by an assumption interest rates will stay low.  The Alberta government plan uses a discount rate of 6.35% which was as of December 31, 2011. If they did it today the rate would be a good bit lower and increase the pension deficit even further. The current deficit is estimated at 23% on a going concern basis. A large chunk of the current contributions are to make up for a belated realization that past contributions were too low.

Non-government pension plans have to use discount rates that are even lower, they must use government bonds wile government plans are allowed to use corporate bond yields. Canadian National Railways for example used a discount rate of 4.84%.

If pension plans were allowed to discount the liability at the expected return on assets rate their “deficits” in many cases would turn into surplus. This would not be as conservative, but to my mind would be more accurate. Why should C.N. calculate it’s pension deficit on the basis that it would invest ALL the funds in bonds at 4.84% when in fact it expects to make 7.5% on assets? Now you can argue that 7.5% is too optimistic but to me the deficit should be calculated on some best estimate of the expected return on assets not some nonsense about investing ALL the money in bonds.

If rates are as low or lower at the end of 2012 as they are now, then pension deficits calculated on bond yields are going to be even more eye-popping. And contribution rates will have to rise once again.

This hit to government finances never seems to make the news. At some point it will. And while Alberta can handle this, what about Ontario, other provinces and the Federal government? It’s truly becoming unsustainable.

The whole notion of pensions starts to break down if have a model of working 35 years and being retired for 30 years. If pension returns are so low that one-third of wages needs to be set aside (Alberta is close to that) then something has to give. Either pension returns have to be higher or the retirement age has to increase a lot. Freedom 75 anyone?

Those in retirement now or close to it should be thankful that they can get their pensions before the retirement age rises.

And it may not be implausible that the government could simply make an arbitrary change to some of its pension plans. If features like unreduced pensions at age 55 were taken away, or phased out, the public would support that. Government workers would howl.

July 24, 2012

A weak day in the markets…

Lots of earnings reports coming in to push individual stocks in one direction or the other… Also of course news from Europe. It never ends.

I have tracked my portfolio on Yahoo Finance for something like 15 years now. I way soon try something else. Amazingly enough it does not work nearly as well today as it did 15 years ago. The Yahoo finance page is slow to load and often comes in with errors. At times I can’t even get it to show my portfolio. The news feature used to be great since it showed all the news for every stock in a portfolio on one screen with no need to click each stock. But these days there is so much news on just onebig  name like Walmart that it tends to fill up the page with news on the big stocks and so I can miss news on the smaller companies.

Yahoo truly seems to be circling the drain. It’s quite sad when an internet company can’t even manage to have its pages load quickly. And I never did understand the idea of portal pages that years ago were supposed to be big money makers. (most of the old portal pages like America online and Yahoo have faded away. One of the few real money maker I am aware of as a web site is google because it gives you ads for topics you are actually searching on. Facebook, I don’t think holds  a candle to the powerful idea of serving up ads on items you are actually searching for at that moment. PayPal is also a great money maker because it takes a cut on transactions and has a leading market share. eBay also is a great model because once nearly all the buyers and sellers got to eBay years ago  it was almost impossible to entice them to go elsewhere. Buyers want to be where the sellers are and vice versa.

High traffic is neither a necessary nor a sufficient condition to make money on the web.

July 23, 2012

As a long-term investor I really should not be concerned with daily market fluctuations. Yet it seems impossible to keep our eyes off the market. I obviously prefer my stocks to go up. I don’t mind if the general market or any stock I don’t own or have not rated as a Buy goes down. And I don’t get too upset even if the stocks I own do go down. That can be an opportunity. As long as the earnings power of the companies we own goes up, the market will eventually recognize that. Meanwhile we should use the volatility of the market to our advantage, selling high and buying low. (Most investors seem inclined to do the opposite)

As for today stocks had a down day. I added to my Bank of America position. It is a speculative stock. The price to book value ratio looks very attractive. But the ROE is still too low. If the U.S. economy continues to improve even slowly then Bank of America will do okay. But it may be a bumpy ride.

Yesterday I tried to explain the sheer lunacy of a 30-year bond rate at 2.25%.

Let me put it in perspective a different way. I explained that with a 30-year bond at 2.25%, you get your money back on average in 24 years.

This is equivalent to investing 59 cents today to receive a dollar in 24 years. Does that make any sense? This would be a return of 71% in 24 years. But that is before inflation. You would have to hope that inflation was lower than 2.25%. If inflation was 2.25% you would have traded 59 cents today for the equivalent of 59 cents after waiting 24 years. And except in certain tax free accounts you would have to pay tax on your princely gain of 2.25% per year.

And what about buying a 10-year bond that pays 1.5% like the U.S. treasury bond. That is equivalent to paying 86 cents today for a dollar to be received in 10 years (and taking the inflation risk on that).  What investor would admit to taking such a deal? And yet these bonds are being traded by the hundreds of millions daily. It’s simply not rational.

I read this morning where a 2% return might not be so bad because we might get 2% deflation, for a total real return of 4%. But investing in long term bonds will be a terrible investment if it turns out inflation is positive. And you can get the benefit of deflation by simply holding cash.

If it is truly capital preservation, without risk that you seek then consider the following:

1. For periods of more than about a year there simply IS no investment that can guarantee capital preservation in real terms. Even real return bonds can’t guarantee capital preservation because the real rate of interest can rise. There is no asset, be it paper, real or hard etc. that can be guaranteed to hold its purchasing power over a period of years. Not gold, not silver, not diamonds, nor houses, nor stocks. Some of these may be more likely than not to maintain or grow purchasing power and thus preserve capital in real terms. But none are guaranteed.
2. For shorter periods such as less than a year where (let’s say) inflation is of no concern (because you are confident inflation will be tiny) cash will preserve your capital. For safety’s sake cash is normally kept in a bank account or (for large amounts) in short-term paper such as a treasury bond.
3. Over longer periods of time cash will decline in value by the amount of inflation (offset by any short-term interest you can get) or will increase in value if there is deflation. With cash you don’t have to worry about market interest rates changing. Cash does not change in value based on supply and demand. Rather its purchasing power changes only with inflation.

If it is truly capital preservation that you crave then recognize that for very short periods only cash can achieve that. ANd for longer periods recognize that guaranteed capital preservation without risk is simply not possible.

It’s hard to see a role for long-term government bonds at today’s rates of 2.25%. Why would you lock into such a paltry return which will only protect your capital if inflation is less than 2.25% per year and which will subject your asset to possible large market value drops even if it will eventually give you a set amount of nominal dollars in the end?

Stocks on average are trading at P/E’s around 14. So that is an earnings return on market value of 1/14 or 7.1%. AND the earnings are likely to grow. What is the probability that over the next 10 years a portfolio of stocks that starts out earning 7.1% (and which can reasonably be expected to grow) will fail to out-earn a bond earning a fixed 2.25%. And what is the probability of the bond outperforming over 30 years?

Yes, 30-year bonds bought back around 1980 did about equal the performance of stocks. But stocks at around 1980 had a P/E of about 10 or an earnings yield of 10%. Long term bonds (20 years) had a yield of about 12%. So yes indeed bonds did beat stocks but they started with a head start. Today stock earnings yields are about three times the bond returns. Now stock earnings are typically only partially received in cash. But the retained portion is usually invested at an average of at least 7%, and often higher. Even the cash dividends on stocks is higher than the bond yields and the dividend is expected to grow. With such a massive head start it is hard to fathom that stocks will not easily out perform bonds in the next 10, 20 and 30 years.

But, none of this implies that stocks can’t crash very hard at any time. That is always the case. With stocks, you pays your money and you takes your chances. Or go ahead and sit in cash and give up on the idea of good investment returns. Depending on your risk tolerance (both emotionally and financially) sitting in cash may be the best option for some people.

My efforts are dedicated to the more enterprising investor who is willing to make an informed (but never guaranteed) risk / reward trade-off.

July 22, 2012

Friday was a weak day on the markets. Bright spots included Toll Brothers, up 4.4% and Walmart up 1.0%.

Also Liquor stores N.A. up 2.4% and now up 17% since it was added to this Site as a Buy on April 10. eBay was another winner on Friday up 2.0% and up a stunning 48% this year (However we had only rated it a Weak Buy / Hold). Although I have not updated the report I am very doubtful that we would rate it a Buy at this point.

I am currently looking at Bank of America and hope to update shortly. While it has risks it appears to offer compelling value. I may add to my position in it.

I looked closely at Canadian National Railway’s annual report and Q1 report. I like what I see. They will report Q2 very shortly and it should be a good report. This is a good long-term bet.

Interest rates continue to plummet to extraordinarily low levels.

When it comes to long term government bonds, I would not consider owning them. Yes, everyone who invested in these bonds in the past 30 years has made out well and generally saw capital gains. Bonds rise in value as interest rates fall.

I went into this in detail in one of my articles.

Mathematically a perpetual risk free bond can continue to precisely double in value each and  everytime interest rates fall in half. The theoretical maximum value approaches infinity as interest rates (on perpetuals) approach zero. But for 30-year government bonds there is an upper limit to the capital gains.

Consider a 30-year government of Canada bond issues at $1000 at today’s 30-year yield of 2.25%. The total cash flows from this bond over $30 years will be ( a whopping) $22.50 per year in interest for 30 years totaling $675. Plus the original $1000 for a grand total of $1675. But this money will received on average some 24 years from now. (^75 in interest payments received on average in 15 years and $1000 received in 30 years).

If 30-year interest rates somehow fall all the way to zero, then yes there remains a big capital gain on this bond, theoretically as high as 67.5% if that interest rate plunge happened tomorrow. More realistically if the interest rate falls immediately to 2.0% the capital gain would be only 5.6%.

It’s hard to imagine that anyone would buy a 30-year bond today for the sake of getting back their $1000 in 30 years and collecting a measly $22.50 per year in interest. First it would take only a little bit of inflation to make this into an investment that destroys purchasing power. Second, it is hard to imagine that there are not better investm,ents available.

Holding long-term government bonds on the speculation that interest rates will continue to fall could work out. But it comes at the cost of holding an investment that could plunge in value if interest rates rise.

If the 2.25% rate goes swiftly back to 4.0%, this bond would suffer a 30% drop in value.

10-year government of Canada bonds currently yield 1.62%. Even if rates plunged now to 1.0% this bond would only gain 5.9%. Whereas if rates returned to a more normal 4.0% then the bond would suffer a 20% loss in capital value.

It boggles the mind to think that certain investors are voluntarily accepting these flea-sized yields. Pension funds and insurance companies may be virtually forced to invest in these. Banks might also do it. There becomes a certain institutional habit where all these big players continue to invest in an irrational fashion and justify it on the basis of habit and the fact that all the others are doing it. Retail investors are free to think more independently and should think long and hard before investing at these low yields.

I would sooner short these bonds than hold them. However shorting can be emotionally challenging and it is not something that most retail investors should even consider.

I don’t pretend to understand why interest rates are so incredibly low. One possible explanation is actually that there is a huge surplus of money available to be loaned and few borrowers. That does not exactly seem to be the case however. Another possibility is that governments have somehow been able to force the rate low by having their central banks, federal agencies and possibly convincing banks and pension funds to buy these despite the tiny yields. If that is the case I don’t know that it can last indefinitely. At some point lenders are likely to demand higher interest rates.

July 20, 2012 (7:20 am mountain time)

Stocks did well on Thursday but our picks suffered with declines from Walmart and Bank of America.

Walgreen, rated (higher) Buy at the start of this year at $33.06 and had languished this year. But yesterday it announced some good news involving a contract with a large benefits plan that it had lost and now has regained. The stock jumped about 10% yesterday to $34.62.

 

July 18, 2012

Today was a strong day for U.S. markets with the DOW up 0.8%. This was driven by some good earnings reports and by comments from Ben Bernanke that the U.S. is not likely going into another recession. And, notably due to stronger housing stats in the U.S.

On this occasion our Stock picks failed to get the good news memo. I personally got somewhat clobbered by Bank of America being down almost 5%. But certainly I know that is a volatile and more speculative holding holding. (But that does not mean it may not be a great investment, time will tell)

Somewhat surprisingly Toll Brothers fell today despite the higher housing starts.

Earnings season is now in full swing in the U.S. and will get going next week in Canada. Hopefully some good news here can carry the market along although there is always the specter of bad news that can come from Europe at any moment. (including the LIBOR mess)

July 17, 2012

Markets rose today based on a positive interpretation of Ben Bernanki’s comments. Also positive earnings reports from Goldman Sach’s and Coke.

Based on an order I placed last month and then more recently renewed, I sold some of my Boston Pizza today at $18.10. This selling is just to be prudent and raise some cash as and if markets rise.

If I decide to buy anything it will probably be Canadian Western Bank. It’s always possible it could suffer loan losses due to a recession or from natural gas drillers, but overall it seems like a very safe bet for the longer term.

July 16, 2012

The Dow was down 0.4% today (Monday) while Toronto was very slightly up.

A small portion of my Wells Fargo shares sold today based on an order I had placed about a month ago to sell a few shares at $34.00.

Alimentation Couche-Tard released earnings last week. At a quick look the stock seems expensive now. If I still held I would sell. I would worry how the stock price will react after the next earnings release when, for the first time, it will be showing all the debt it has taken on to acquire Stat Oil retail stores. Long-term it should continue to do very well as a company, but the share price seems too rich at this time. Or at least the evidence is not clearly there yet to support this stock price.

July 15, 2012

Costco is updated and rated Weak Sell at $94.81. It also looked expensive at the start of this year but has risen 14%. It’s an extremely good company. But it simply looks expensive. Possibly there is an argument to pay up for quality but there is also a risk that the P/E ratio could decline despite the stores doing very well. I am not a buyer at this price. I might sell or hold if I already held it. I certainly would not “short” the stock.

Wells Fargo is updated and rated (lower) strong Buy at $33.91. While there are always risks, especially in the short term. this bank has competitive advantages and is likely to continue to do well.

This company has been my top holding for some time and represents about 18% of my portfolio. I am wondering if it should be more than that. I did have an order in the trim my holdings by a small amount at $34. That almost got hit on Friday but not quite. I am tempted to pull that sell order but may just leave it in as a matter of prudence.

Friday was a strong day in the markets. China apparently reported lower growth and paradoxically the market took this as a positive signal since the Chinese might then stimulate their economy. At least that is what analysts said happened… The market also reacted positively to J.P. Morgan’s earnings results. Overall, the DOW and S&P 500 were up 1.6% and Toronto was up 0.8%.

On Friday, Wells Fargo reported earnings and rose 3.2%. Bank of America which has been very volatile was up 4.6%

I heard an Analyst on Friday state that the U.S. airlines business was weak due to slow economic growth. That is completely laughable. The airline industry is weak because it is inherently a commodity product with no customer loyalty, and brutal competition. In such an industry it takes cost advantages to make even reasonable profits.

Interest rates are at historic lows and stock markets seem at least reasonably valued. It is dangerous to borrow to invest. Nevertheless, today may represent a generational opportunity to do so.

I have been disappointed with the performance of Canadian Tire. This quarter I understand they will have some unusual losses due to closing some of the sport stores they acquired from Forzani’s. If they do not do quite well other than that, then I may have to re-evaluate my faith. I am starting to wonder if they are competitive enough on their costs. (Some preliminary calculations indicate that their retail mark-ups are far higher than the likes of Walmart. I do think they have the opportunity to realize value by selling and leasing back stores. But there is no indication that they will do so.

July 12, 2012

The Dow was down 0.25% today and the S&P 500 was down 0.50% and Toronto was down 1.0%

I probably don’t need to say this, but as a reminder I have never said that I could predict the direction of the market. What I can do is analyses whether the market as a whole seems to be reasonably valued. You can check that valuation analysis and the assumptions used and see the results based on other assumptions in my articles about market value for the S&P, the Dow and Toronto 

What I also do is analyze whether the stocks in the table above seemed to be good value as at the dates indicated in the table and analysis.

I view market declines as being simply the nature of investing. I think investing over the years will be rewarding. But yes, we will certainly have our share declines in individual stocks and in the overall markets. Anyone who can’t deal with that should not be investing in stocks, or should limit their exposure to stocks.

The fact is that over 99% (maybe even 100%) of the subscribers to this page seem to be very mature and don’t expect to escape declines from time to time. Nevertheless I think it is good to remind people once in a while that as investors we do risk at least temporary declines.

Very few of our stock picks were up today. Toll Brothers however rose 2.7%

Warren Buffet was on CNBC for a long interview this morning. I saw some reports indicating he was pessimistic. I certainty did not detect any pessimism when I watched the interview. He said most of his companies were growing but at a very slow rate, a little slower than recent growth. His housing related businesses were starting to show noticeable growth but from a low base. His sources indicated that Europe which had still been growing was now really slowing down. He was very optimistic about the future of America.

He also said that the U.S. debt problems are very large but that the solution is very clear (raise taxes and cut spending) but congress has failed to act.

As of just after midnight the futures are up because apparently Chinese GDP numbers were good.

Friday morning Wells Fargo will report earnings before the open. Also J.P. Morgan.

It should be yet another interesting day to close out the week.

July 11, 2012

In today’s “action” the Dow was down 0.4%, the S&P 500 was flat and Toronto was up 0.3%

Our stock picks did okay… Notably Berkshire was up 1.25% to $84.09. The order I mentioned two days ago to sell 100 of my 1300 Berkshire shares at $100 went through.  Bank of America continues to be volatile and was up 2.0% today.

Alimentation Couche-Tard announced earnings today and jumped 4.8% to $48.10. Our last update on the stock was December 11 rated (lower) Strong Buy at $29.29. So, it is up 64% since then. Sadly I had sold my shares at around $38 when it initially jumped several months ago.  I hope to update this one within a week. It’s a great company and I respect management a lot. But I suspect it is going to look rather expensive at this price. Couche-Tard is a huge convenience store owner operating under the banners Winks, Macs and Couche-Tard in Canada and mostly under the Circle-K brand in the U.S.. Most of its locations are in the U.S. The recent pending (and large) acquisition that ignited the share price is in Norway. This is a case that proves that sometimes the most mundane of businesses can make big money for investors. (And RIM meanwhile has proven that the most exciting technology companies can sometimes lose big money for investors).

There is no great correlation between excitement and return in the stock market.

There will be some interesting earnings releases on Friday. I am looking forward to Wells Fargo’s earnings on Friday. The market in general seems keen to see what kind of trading loss J.P. Morgan will post on Friday.

July 10, 2012

Walmart went over $72 today and so my order to sell 300 shares went through at $72. It got as high as $72.58 but closed at $72.11.

Most of our stocks picks were down along with the market but Boston Pizza was up 1.4%. The Canadian dollar was down a third of a cent which amounts to a gain on Canadian’s U.S. investments.

My order to trim 1000 of my 8200 Melcor shares at $15.90 almost got hit today, but not quite. That order as well as a further order to trim an additional 1000 at $16.90 expires today but I will likely renew those orders. The other order I have in (besides the Berkshire mentioned yesterday) is an order to sell some of my Boston Pizza at $18.10.

Today there was news of a small futures broker having scammed some $200 million from customers.

A few thoughts on this.

Firstly there is no reason for a rational INVESTOR to be involved with speculating on futures. First, it’s a pure zero sume game. You can only win what another trader loses. (In stocks all owners can win from profits serving customers of the companies owned). Second, probably 95% of the population would not be able to do the math to think about how to speculate on futures. Thirdly, of the few people who could do the math almost none of them would have any rational reason to think that they are able to predict the direction of futures. Currency futures in particular seem like a total speculation. It MIGHT be possible to predict that corn prices will go up due to a draught. But currencies fluctuate for many reasons and I just don’t think anyone can consistently predict those (and certainly not over periods of less than about a year). To my mind, one does not invest in futures markets. One hedges or one speculates. But investing is not involved.

Also I don’t understand why any investor would want to place their funds with some small brokerage. It seems far preferable to stick with the biggest names in the business. Canadian might not like their big banks. But they do trust big banks not to literally steal their money. The big Canadian banks can easily handle almost any size investment portfolio. I just see no reason at all to start writing cheques to small companies. It’s a risk that is easily avoided.

 

July 9, 2012

Markets were down modestly today, but our stocks picks held in quite well. Walmart, Wells Fargo and Berkshire  all edged up a little.

I had an order in to trim my Berkshire position by 200 shares (from 1400) if it should hit $84. With Berkshire at about $83.60 today I decided to sell 100 at the market. The other 100 is waiting for $84.

I also have an order in to trim my Walmart position by 300 shares (from 1100) if it hits $72. It was not far from that that today and I considered selling those 300 shares at the market but then decided to just wait and see if it gets to $74.

I probably should be more aggressive about trimming positions just to raise some cash and hedge my bets at least a little.

Alco came out with Q2 earnings that were quite weak but which beat expectations marginally.

There continues to be news about acquisitions taking place at good premiums. Thomson Reuters is buying FXAll at a 40% premium to the recent traded price. This suggests that acquiring companies are perceiving some bargains in stock prices.

July 7, 2012

Our reference article on Global Exchange Traded Funds is updated. Many argue that the best investments are to be found in emerging markets. However most emerging market ETFs do not appear to be obvious bargains, although they may be when the growth is considered. For this update the China ETF appeared to be quite attractive. And a number of other countries are attractive as well. Personally I have restricted my investments to Canada and the U.S. in the vast majority of cases although I currently own a very small amount of the Japan ETF and have in the past briefly owned small positions in the UK and, I believe, the Europe ETF.

Markets fell on Friday due to weak job growth.

Walmart was one of the few gainers, up 0.4%.

Research in motion was also a gainer, up 5.2%

On Friday I read an interesting story about a company that offers satellite internet service in rural areas. With their newest satellite just launched they are able to offer high-speed internet at prices comparable to those paid in the City (although there are limits on the amount of usage).

See www.xplornet.com

I really don’t know anything about cell and internet technology but it seems to me that cheap satellite service could one day give cell phone and cable companies a run for their money. Could be a game changer.

But perhaps I don’t need to worry about Shaw Communications too much, I see that they are offering services in partnership with xplornet.

xplornet is a private company out of New Brunswick. It sounds like a nice success story.

Saturday’s Edmonton Journal indicates that home building is still growing in Alberta. I do have orders in to reduce my Melcor holdings at $15.90 and $16.90 but I really not sure I should be selling any.

July 5, 2012

Even with some news of stimulus and rate cuts from Europe and China, markets were down somewhat today. Well, that was to be expected after the recent strong gains.

Toll Brothers managed a gain of 2.3% today to $30.25. This stock got as low as $24 only three weeks ago (and I added to my position at that time). It’s been a nice run. It does look expensive but I think the U.S. housing market is in slow recovery mode. I consider it speculative because the earnings still have to increase a lot to justify the share price.

Tomorrow’s market will apparently hinge on the jobs repot to be released tomorrow morning. And then next week we will be starting to get into the Q2 earnings season.

 

July 4, 2012

U.S. markets were closed today. The TSX gained another 0.5%

Well before the market opened this morning, the TMX group and Maple group announced positive news about the deal being approved but indicated the Competition Bureau approval, although looking positive, was still needed. TMX Group rose a little on the news.

A few hours into the trading day the Competition Bureau issued a press release that it was not going to oppose the deal. The price then shot up some more. The total gain today was 3.3% with about 2% coming on the Competition Bureau press release.

It’s hard to understand how a regulatory body like the Competition Bureau could be so irresponsible as to release this news during the trading day. This kind of thing caused harm to those few trades that go through just after the news comes out with the buyer aware of the news and the seller unaware. It’s not fair. However, it was just a few shares traded before the price adjusted to the news so not that big a deal. Still it is shameful conduct, in my opinion.

The other concern about this deal is how a near-monopoly like TMX can be allowed to join with its largest competitor. If this is how things are done, then, in my opinion, the Competition Bureau should certainly be shut down as an apparently  worthless government agency. If you consider whether any large company in Canada has any real alternative to listing on the TMX, I think the answer you will arrive at is “no”. No choice would imply a monopoly on the listing business. It’s interesting that the head of the Competition Bureau announced her resignation a week or so ago. I wonder if she was pressured to approve this deal?

Turning to Research in Motion, RIM, I read the editorial by its CEO in today’s Globe and Mail. While every CEO can be counted on the say everything is fine even as the ship sinks, this CEO did strike me as knowledgeable and sincere. I am tempted buy some RIM shares but have no immediate plans to do so. It’s going to be about 8 months (or more)  before we see the launch of Blackberry 10. On the other hand a takeover deal could come at any time. Even if Blackberry 10 is as valuable as the CEO seems to think, I suspect the apparently unknowledgeable Board at RIM would jump at any takeover offer. Other than the CEO I don’t think any of them have an technical knowledge or even any consumer goods experience.

July 3, 2012

Okay, so the Dow was up another 0.6% today. Toronto was up 2.2%. Oil was up… The Canadian dollar was up.

Walmart powered ahead by another 2.0% today to $70.75. No one seems to have noticed that it has passed its lifetime high from way back in 1999. That is really of no relevance but I find it interesting. Canadian Tire was up 1.7%. Shaw Communications (which has been weak) was up 2.4%

Here are my thoughts on some of this…

Personally I am up close to 17% this year to date. That kind of gain is not sustainable. Basically my stocks are doing better than the underlying companies. That is mathematically something that can’t continue for too long.

I have a very heavy exposure to equities somewhere around 95%.

But the stocks I own don’t seem over-valued. I am loathe to sell.

But from a portfolio management perspective (as opposed to from the perspective of individual stocks) it would seem prudent pare back my equity exposure. After all we all know that markets can go down quickly at any time.

I had entered some orders to reduce a few positions a few weeks ago and those never got hit. (Walmart, Melcor, Wells Fargo, Boston Pizza and Berkshire Hathaway. Those orders are still in place. But as reported below I did go in and trim some Walmart and Canadian Tire and Wells Fargo and Toll Brothers.

Even if I sell down a bit I am still going to have a very heavy exposure to equities. I almost always do. I accept the risk of it. It has worked out well over the years. But not without some heart-stopping declines from time to time.

July 4th, Wednesday should be quite given the U.S. holiday, but then again one never knows what news will arise out of Europe.

 

July 2, 2012

The U.S. markets were open today and closed about unchanged. I would have expected at lest some decline after the big gains late last week.

I have added a new edition of the free newsletter. However, I was unable to email it out due to a system problem.

This newsletter includes a link to my new article about how Warren Buffett motivates his managers.

June 30, 2012

My personal portfolio composition is updated

After Thursday’s market surge, my own portfolio is up a surprising and rather satisfying 16.4% in 2012.

Here is a summary of how all our stock picks have done since the start of 2012.

InvestorsFriend Inc.’s performance – Year 2012
As of June 30, 2012, the TSX is down 3.0%, the Dow is up 5.4% and the S&P 500 is up 8.3%. Our average Buy or higher rated stock is up 7.3%. A notable loser is Research in motion down 49%. It was the only Strong Buy that we called Speculative. The speculative part was accurate.
Group		Rating to start 2012		Price Increase	Our Performance
Average of 6 strong buys		Strong Buy		6.3%	good
Average of 17 buys		Buy		7.6%	good
Average for all 23 buys and strong buys				7.3%
Average of 2 weak buys		Weak Buy		21.7%	very good
Average of 1 weak sells		Weak Sell		14.0%	bad
Average for all 8 Neutral ratings (weak buy or weak sell)				19.1%
Average of 1 Sells		Sell		-2.2%
Rated As – Strong Buy at January 1, 2012
Name	Beginning 2012 Price	Starting Rating	Current Price	Price Increase	Our Performance
Microsoft (MSFT, NASDAQ)	25.96	Strong Buy	30.59	18%	good
Wells Fargo (WFC, United States)	27.56	Strong Buy	33.44	21%	very good
Stantec Inc. (STN, Toronto)	27.57	Strong Buy	29.00	5%	good
Research in Motion Limited (RIMM, U.S., RIM. Toronto)	14.50	Speculative Strong Buy	7.39	-49%	very poor
Canadian Western Bank (CWB, Toronto)	25.80	(lower) Strong Buy	26.42	2%	good
Alimentation Couche-Tard Inc., ATD.B	31.70	(lower) Strong Buy	44.46	40%	very good
Average Strong buy		Strong buy		6.3%	good
6
Rated As – Buy
Name	Beginning 2012 Price	Rating to start 2012	Current Price	Price Increase	Our Performance
Wal-Mart (WMT, New York)	59.76	(Higher) Buy	69.72	17%	good
Canadian Tire (CTC.a, TO)	65.90	(higher) Buy	68.88	5%	good
Boston Pizza Royalties Income Fund (BPF.un, Toronto)	14.19	(higher) Buy	17.34	22%	very good
MELCOR DEVELOPMENTS LTD. (MRD, Toronto)	13.17	(higher) Buy	15.50	18%	good
Shaw Communications Inc. (SJR.b, Toronto         SJR, New York)	20.25	(higher) Buy	19.24	-5%	bad
Walgreen (WAG, New York)	33.06	(higher) Buy	29.58	-11%	bad
FirstService Preferred (FSV.PR.U, Toronto)	24.76	Buy	25.00	1%	good
FedEx (FDX,NY)	83.51	Buy	91.61	10%	good
Canadian National Railway Company (CNR, Toronto CNI, New York)	80.15	Buy	86.10	7%	good
Canadian Oil Sands Limited (COS, T)	23.25	Buy	19.72	-15%	bad
Berkshire Hathaway Inc. (BRKB, New York)	76.30	Buy	83.33	9%	good
Bombardier Series 4 Preferred Shares (BBD.PR.C, Toronto)	23.00	Buy	23.92	4%	good
Preferred Shares of RioCan Real Estate Investment Trust (REI.PR.A, Toronto)	25.81	Buy	25.60	-1%	bad
Toll Brothers Inc. (TOL, New York)	20.42	Speculative Buy	29.73	46%	very good
The Brick Inc. (BRK, Toronto)	3.08	Speculative Buy	4.11	33%	very good
Omni-Lite Industries Canada Inc. (OML, Toronto Venture Exchange)	1.39	Speculative Buy	1.17	-16%	bad
FIRSTSERVICE CORPORATION (FSV, Toronto) (FSRV, NASDAQ)	26.49	Speculative (lower) Buy	27.97	6%	good
Average Buy		Buy		7.6%	good
17
Rated As Weak Buy
Name	Beginning 2012 Price	Rating to start 2012	Current Price	Price Increase	Our Performance
eBay (eBay, NASDAQ)	30.33	Weak Buy	42.01	39%	very good
RioCan Real Estate Investment Trust (REI.UN, Toronto)	26.43	Weak Buy	27.70	5%	good
Average Weak Buy		Weak Buy		21.7%	very good
2
Rated As – Weak Sell
Name	Beginning 2012 Price	Rating to start 2012	Current Price	Price Increase	Our Performance
Costco (COST, N)	83.32	Weak Sell	95.00	14%	bad
Average Weak Sell		Weak Sell		14.0%	bad
1
Rated As         – Sell
Name	Beginning 2012 Price	Rating to start 2012	Current Price	Price Increase	Our Performance
Canadian Western Bank Preferred Shares (CWB.PR.A, Toronto)	27.35	Sell	26.75	-2%	good
Average Sell		Sell		-2%

 

Research in Motion is updated and rated Highly Speculative Strong Buy at U.S. $7.39 (Canadian $7.54). This company is obviously now very unstable and difficult to predict. It really is not the type of company that is at all well suited to our analysis techniques. (Due to earnings which appear to be turning negative).

This company may represent an opportunity but it is certainly not for the faint of heart.

On the conference call the management seemed optimistic for how Blackberry 10 will do once it is launched in about 8 months. But also they seemed a bit robotic (not showing a lot of emotion) and not that forthcoming on some questions.

June 29, 2012

Well it was certainly a banner day on the markets today to end the second quarter.

The DOW was up 2.2%, Toronto was up 1.5%. Oil was up 9% (although one figure showed a staggering 18% late Friday).

The Canadian dollar was up a remarkable 1.6%.

Walmart was up 2.2% to a new closing record of $69.72. I have not seen this mentioned yet in the financials web sites that I view (mostly Yahoo)/ The last record close was in 1999! Not Walmart’s fault it took so long. Idiot investors has WAY over-priced Walmart back then.

Among our stock picks the biggest gainers were Bank of America up 5.7%, Stantec up 4.8%, Toll brothers up 4.7%, FirstService up 4.6%. Research in Motion was down 20%.

Shaw Communications is updated and rated Speculative (higher) Buy at $19.24. It reported a 3% decline in earnings and revenues in its latest quarter. It continues to lose basic cable customer at a rate of about 1% per quarter. Meanwhile telephone customer growth has slowed to the point where it only about offsets the loss of cable customers in termns of numbers. Internet growth is about zero. The television business also declined about 3%. This is of concern. I believe the television shows are strong but it may indicate advertisers switching away from television as people increasingly have the ability to speed past commercials as they watch. However Shaw blamed it on the weak economy. Shaw has the ability to increase earnings by lowering their advertising dollars and are doing this but this could worsen the sales outlook. Overall however Shaw appears to be offer good value. We call it speculative due to technology risks.

June 29 , 2012 10:55 eastern

Update 11:30 am eastern. I decided to also sell 20% of my Toll Brothers. Toll should do well certainly as a company, but I worry about its high P/E ratio and I have had a nice gain already. I always find that once I get in selling mode it’s a bit hard to stop.

The market rally is surprisingly strong this morning on positive news out of the summit of Europena leaders. Hopefully it continues, but often these relief rallies have been very short lived.

I decided to modestly reduce my holding in Wal-Mart and Wells Fargo this morning. I very much like both companies. But it is prudent that I raise a bit of cash in case of a market down-turn and also because there are always better opportunities to be found. And if I find some I will need cash to invest.

I’ll probably leave the proceeds in U.S. dollars, though it will be tempting to transfer some money to Canadian dollars especially if the Canadian dollar falls more (today it is up strongly).

June 28, 2012

Our stock picks managed to do okay today. U.S. investments were helped in terms of their Canadian dollar value by the drop in The Canadian dollar today. Toll Brothers and Canadian Tire did well today.

Shaw Communications came out with an earnings report that after adjusting for unusual items was a bit weak. Research in Motion came out with terrible results after the close. I plan to update both of these by Sunday.

As of 11:30 pm Thursday evening it appears that the Dow futures are up about 100 points probably on some hopeful news out of the European meetings. Recently the positive reacting to such news has melted away pretty quickly.

The take-over of Provident Energy at some 77% premium to the last stock price is another indication that buyers of entire companies are finding the stock market to be cheap. As Buffett has preached, when you can buy small pieces of companies at prices well below the price s that would be paid for the entire business, you are likely to do well.

On the other hand there is certainly no shortage of negative news around and it is going to take mental toughness to stay in the markets to (most likely) reap long term gains.

June 27, 2012

Pleasantly enough (and a bit surprisingly) the market has given back the losses of Monday over the past two days. Well at least that is the case for my own account, and the American market DOW has recovered quite a bit, although not completely. But Toronto has still not recovered much from Monday.

Today Toll Brothers was once again a notable winner, up 3.9% as more data suggests the U.S. home market is improving.

Hopefully, we can get through the next week or two without losing ground. (But one never ever knows). By the second week of July we will start to get the Q2 earnings reports and they should be mostly good and will probably provide support for the market.

 

June 26, 2012

Note that I plan to update many of the reports during July and early August. And some new companies will be added.

Today the market gave back some of yesterday’s losses. A notable winner was Toll Brothers up 5.3%. The latest Case Shiller report shows that U.S. home prices rose 1.3% in April. Also yesterday there was a report that new home sales were up.

June 25, 2012

As most will have noticed, Monday was a down day on the markets.

Walmart was up 1.3% and was one of very few winners today.

While stocks are generally falling in price, one positive indicator is seen in corporate transactions. Microsoft is buying a web business called Yammer for $1.2 billion, Dell computer has outbid another buyer for Quest software for $2.3 billion. I believe that the indications from corporate transactions is that corporations see many stocks as being bargains.

June 24, 2012

Dollarama is updated and rated Sell at $61.81

I highly respect this as a business but simply find the share price to be too high for all the reasons indicated in the report. As a business it is an amazing success story. And it may continue to do well as a stock. But I have to go with what the numbers tell and that is that it is too rich, a Sell.

On Friday markets recovered somewhat from the gloom of Thursday. Our stock picks did well.

Most notably, Visa was up 4.6% to $125. As I have often said in regard to this stock and a few others. it’s hard to keep a good unregulated-as-to-price monopoly down. And I have explained in the report why I consider Visa to have monopolistic features. And most of its prices are largely unregulated.

June 21, 2012

The Dow ended the day down 250 points or 2.0%. Toronto was down 351 points or 3.0%.

The market had reacted positively this week to news of the Greek election outcome and to the Fed’s operation twist. But the positive reaction has been short-lived. Today the market focused on the weak economy.

I am neither surprised nor particularly worried by today’s market decline. No doubt markets will continue to be volatile. But markets seem attractively priced. I am comfortable holding. However I would like to have some cash ready for bargains.

Canadian Tire was one of the few stocks that was up today. I sold a small portion of my holding in Canadian Tire today just to raise some cash.

Moodys down-graded some 15 large international banks today. They had telegraphed some time ago that they would do so. It seems like a non-event. Credit rating agencies have little credibility these days.

 

June 20, 2012

I was just reading the Canadian Business magazine article about SNC Lavelin and it’s Libyan scandal. I know very little to nothing about this company. But based on the magazine article its international operations are complex. It seems clear that some of its top employees in were involved in bribes in Libya and there were connections to Ghadaffi. While the company has terminated a few employees and distanced itself from (itself?) this story is not over. Personally I would stay away from this stock. I would say also that over the past few years watching the SNC chairman Gwyn Morgan on BNN and Lang and O’Leary he impresses me not at all. He seems too smooth, even too well groomed for my taste, (looks like an actor or something to me, that’s just my impression) and is perhaps infatuated with himself. I don’t know his history at EnCana and its predecessor which I think (from memory) was Alberta Energy ltd. EnCana came from a merger of Alberta Energy and Pan Canadian Energy and I think Gwyn came from the Alberta Energy side.  Maybe he is highly competent. I don’t know.

Markets held up well today after the Fed extended its “Operation Twist” whereby it would sell short term bonds and buy longer term bonds which would push long term interest rates down even further (or hold them down).

Tonight there are indications that the market will decline tomorrow. (Futures are down slightly)

June 19, 2012

Market were surprising strong today (Tuesday) with the Dow up 0.75% and Toronto up 1.6%.

Almost all of our stock picks rose. Notably Bank of America up 4.5%.

This market rise was partly on expectations that the Fed will “ease” monetary conditions on Wednesday. That being the case if it does not happen we certainly give back the gains on Wednesday.

I mentioned a few days ago that I had some orders in to trim some positions. I was hoping some would sell today but perhaps my prices were a little high. I may regret not selling a little bit on today’s rally, we shall see.

Walgreens however was down 5.9% on news that it was making a big acquisition in the U.K. BUT also on news that its earnings in the latest quarter were down 11%. I have not looked at any of this information yet.

I was in Costco on Sunday and again today. I seldom shop there (I am not the shopper in the family) but always marvel at the place when I do. As a stock it seems expensive. As a business it is exceptional.

It is by far the most efficient retail operation in getting goods to consumers at the lowest cost. It has a limited selection of goods but it has low costs and low prices.

I had heard someplace that Costco marks up everything a maximum of 15 to 18%. In fact on Sunday a clerk told me it 14%. I was not sure I believed that, but maybe. I had calculated its markup to be 17%. By comparison I calculate that Walmart marks up an average of 33%. And small stores like Reitman’s mark up by an average of some 200%!!

The notion of a competitor that can make a decent profit despite marking up by only about 17% (or 15%) must strike a deathly fear in the heart of other retailers.

In the retail business it would be strange to mark all items up by the same amount. Imagine Jewelry. I would guess that most jewelry stores mark up by an average of perhaps 100% or more. How can they compete with 17% (or 15%) (The difference is that I count the membership fees as revenue so it is perhaps 15% actual markup and they get another 2% from membership fees).

I believe Costco has pricing power on may items and could mark up by a higher amount but they choose not to.

The bottom line as an investor the stock looks too expensive but I certainly would not bet against it.

As a customer I trust Costco. In most cases you will get at least a fair price at Costco and I think very often you will get the best price around. Occasionally others may beat it with a special sale but overall Costco simply has a low markup and low costs and the consumer wins with that.

June 18, 2012

The tiny blip of excitement over the Greek election that drove the DOW futures up 66 points on Sunday fizzled out by morning. We ended up down 25 on the Dow but up 76 on Toronto.

The best performer was Stantec up 4.2%.

June 17, 2012

Stock markets were up of Friday despite fears over the outcome of the Greek election.

It appears the outcome of the election is favorable. The Dow futures were up 66 points as of mid-night Sunday night / Monday morning. Not huge but at least it is positive.

Markets may bounce around this week depending whether the proposed coalition government in Greece appears to be coming together or falling apart at any point in time. And depending on news of what policies the new Greek government will follow.

June 14, 2012

Stocks ended up doing well today on rumors / news that certain central banks would take some kind of coordinated efforts to deal with matters in Europe. For our stocks the best performer was Toll Brothers up 3.3%. Friday should be yet another interesting day as the market digests the rumors or news about central bank action and as the market focuses on the Greek Election this weekend.

June 13, 2012

A glance at the graph of today’s trading shows the Dow started out down but was modestly in positive territory much of the day before falling to a 0.6% loss at the close. The TSX started out in negative territory and then traded higher much of the day and finally closed unchanged from yesterday.

Canadian Tire was down 2.3% for no apparent reason.

Dollarama was out with very good earnings and rose 6.6% to $60.36. I will update the report on this company shortly. I thought it was over valued in January at $43.49. So I suspect my analysis will continue to suggest it is too pricey. I do however have a great deal of respect for it as a company and for its management. They are clearly doing very well indeed.

Dollarama now has an equity market value of $4.6 billion while Canadian Tire is at $5.5 billion. While Dollarama is very profitable and has established a lot of brand recognition and drawing power it’s really hard for me to believe it should be worth anything close to what Canadian Tire is. I will looking further into this comparison very shortly.

June 12, 2012

As expected my order to sell 20% of my Walmart shares went through this morning. I had placed a limit order to sell at no lower than $67. The stock opened at $67.68 according to Yahoo finance. My shares sold at $67.70 (I am not sure why it would not have been the $67.68). My shares sold at 9:30 exactly when the market opened.

None of my slightly optimistic orders to sell (a portion of my holdings) at prices a few dollars higher than Monday’s closing price got filled.

The Dow was up 163 points gaining back the near 150 point loss from Monday.

Canadian Western Bank was down 3.3% (to $26.25) for no apparent reason (other than perhaps making up for the fact that it rose yesterday when almost everything else fell). While no stock is free of risk, this one looks like a very good bet to me. Unless the western economy and house prices take quite a beating this stock seems unlikely to decline much. I would suspect that over the next seven to ten years this stock should double but will do so in an irregular fashion. (I may just talk myself into quickly reinvesting my Walmart proceeds into this, except I sold the Walmart to build some cash).

June 11, 2012

Update: earlier tonight I posted some thoughts about selling some shares to raise cash. I have now entered an order to sell about 20% of my Wal-Mart shares at a minimum price of $67. And another 20% if we happen to get to $72. I also entered orders to sell some Canadian Tire if we get to $71 and some Boston Pizza if we get to $18.20. And some of my Berkshire at $83. Also some Wells Fargo and some Melcor. With the exception of the first 300 Wal-Mart shares the rest of these are rather optimistic asking prices. It’s entirely possible perhaps very likely that these will not be triggered in the next 30 days (the orders will expire after 30 days unless renewed). But if these stocks do happen to get a material little bump then I will have taken some money off the table automatically. I usually find that on days the markets is up my brain fills with some sort of endorphins that make me feel very good about stocks and my thoughts don’t much turn to selling on those days. By placing these orders, I take any further thinking and emotions off the table. (well unless I later change my mind and cancel the sell orders).

I don’t know if this strategy makes sense. If I was really serious about raising cash I should simply sell at the market price to make sure I get some cash. But anyhow, this seems to be a way to convince myself to take at least some money off the table though that will only happen if the market rises (except the first 20% of my Walmart will sell if the price is remains above $67 anytime tomorrow.

*****************

Well the positive reaction to Spain’s bank bailout did not last long. Futures were up close to 150 points on the Dow yesterday but in the end the Dow was down close to 150 points today.

Canadian Tire and Canadian Western Bank  both managed to rise today. The rest of our stock picks were down or about flat.

Yesterday i mentioned I might sell some Walmart to raise cash. I possibly would have sold some Walmart if had been online Monday morning near the open. What I should have done was entered a sell order last night at say $68 or $67. That way my shares would have sold a the opening price today of $68.39 (this assumes that my oder would have not have affected the opening price, which in the case of huge heavily traded company like Walmart, it would not have). And the lowest I could have been sold at was my price of $68 or $67. Had the stock opened at $66 and went lower for example I would not have been sold.

The type of buy or sell order that I am talking about here (Place a sell order below the last traded price or a Buy order above the last traded price and do this off hours) can work well but ONLY with heavily traded stocks. If the stock opens higher than your limit sell price you will get that price and you cannot get less than your sell price. If the stock opens lower than your limit Buy order you get to buy at the lower open price. This makes sense when you consider that these orders are called limit orders. When I place an order to Sell Wal-Mart at $67 it means I will sell at no less than than $67. I think this sort of strategy can make sense especially for investors who are not online to place trades during the trading day.

This strategy of pricing a bit “off the market” would not make sense during the trading day. If I am willing to sell as low as $67 but the current price offered to buy is $68 then it usually makes no sense to do anything other than place a market order or a limit order very close to the $68. If however the stocks is both very liquid and the price is moving rapidly you can do an order to buy a material bit below the offer price and it has been my experience that you will still be filled at the offer price or something very close to it.

One danger with this type ofs strategy. If you really want to buy or sell then any kind of limit order could mean =you don’t get a fill if the price moves too fast. On the other hand market orders can be dangerous especially with anything other than highly liquid stocks. With a market order it is always possible you will be filled at a price much different than you hoped, that is if the market moves rapidly.

Perhaps I will enter a sell order on some of my Walmart shares tonight. But, I don’t know, I may decide to hang in there.

 

June 10, 2012

With my very heavy exposure to equities (104% since I am using a bit of margin) it may be wise for me to think about raising some cash by taking some profits. Therefore I will consider selling some Walmart, of my five largest positions, four are rated (higher) Buy or in the Strong Buy range while Walmart is rated “only” Buy and is also now moderately above the price where it was rate Buy. I probably should reduce some other positions to get the cash up to around 20% in order to be well positioned just in case the market declines and also to have funds available for any other stocks that I may want to buy. But I find it difficult to sell stocks that seem to be somewhat under-priced.

As of late Sunday evening, the futures are suggesting a positive reaction to news out of Europe on the weekend. Dow futures are up 129 points but earlier had been up somewhat more.

June 9, 2012

Our average stock in the Buy and Strong Buy range is up 5.9% in 2012 which is better than the TSX which is down 3.9% and it is similar to the S&P 500 which is up 5.4%. My own portfolio is currently  69% concentrated in just five stocks and has managed a 13.0% gain this year to date. However, my approach is relatively risky.

FirstService Inc. is updated but is rated Weak Sell at U.S. $26.30 or $ CAN $26.95. While I like the company and its history, it is complicated and its earnings were negative in Q1. At this time I prefer to avoid it and stay with what appear to be more obvious winners. It is not a company that I would bet against however. And by-the-way, selling a stock and certainly choosing not to hold a stock is a very far cry from shorting a stock. “Sell” does not mean “short” for this company or any other company that we rate.

Walmart was our big winner on Friday up 3.7% to $68.22. I don’t think such a big one-day jump was particularly justified but it was nice to see. It represents about 10% of my portfolio. If it gains a bit more it will surpass its all-time closing high of $69.44 set way back in 1999. Investors were basically idiots to have bid it up so high back in 1999 when it earned just under $1.00 per share. Now it is earning $4.63 per share and so this time its price is quite rational.

Our recent rating was Buy at $65.31.  Because I have 10% of my money in it and because the rating is not one of the higher rated stocks on the list I should probably reduce my position at this point. It will probably be a good but not great investment if held over the next 10 years.

June 7,2012

The big market gains on Wednesday were apparently due to rumors of further “easing” by the Fed and  perhaps some bank rescues in Europe. Today (Thursday) the Fed chairman more or less poured cold water on the idea of immediate Fed easing. But China did some easing. All in all the market held up not badly on the disappointment from the Fed. The Dow was up 46 points but the S&P 500 was down slightly and Toronto was down 41 points.

Canadian Tire was up 1.5%.

Thursday afternoon there was news that a Montreal-based company called Genivar Inc. was issuing shares and was buying a British company WSP Group PLC for $442 million. This was a whopping 67% premium to the share price. Yet with WSP having 9000 employees, the price does not seem all that huge.

I know nothing about Genivar and had never heard of it and I would have no reason to have ever heard of WSP Group. What I find encouraging is that companies are being taken over at HUGE premiums like this. Basically on standard present value analysis a lot of companies look very cheap and that is why we see takeovers at premiums.

June 6, 2012

Well, who’d a thunk the DOW would rise 287 points today, 2.4%? or the TSX 126 points or 1.1%

Apparently the market rose on hopes of government intervention (interference?) into the economy including bank bailouts in Spain and additional monetary easing in the U.S.

When we get gains based on rumors of government actions, those gains can certainly reverse in a hurry. In the long term what matters is holding good companies at reasonable prices.

I am currently reviewing FirstService. It had a good 2011 but its Q1 was weaker. I expect to update the report within a few days.

Canadian dollar rose almost 1 cent today to 97.35 cents after getting down close top 96 cents lately. If the dollar rises that hurts the U.S. investments of Canadian Investors. But long term I don’ think the level of the dollar is that big a deal as far as investments. If a stock doubles in ten years and the dollar moves 15 cents that is not a huge big deal.

I figure the Canadian dollar has an equal chance of rising or falling from here. If it fell to low 90’s I’d be tempted to sell some American stocks but then again my plan was just to keep those funds in U.S. dollars so why should I speculate on the currency? It is easier to find stocks that will be good investments (there are lots of them) than to try to predict currency movements. so why noit play the easier game. In stocks the average investor can win (average investor collects profits from customers of the business) and get a positive return. In currency trading there is a loser for every winner and it is a zero-sum game, negative after costs. Currency trading is more like Vegas, stock investing is more like being a business owner.

June 5, 2012

Markets were a bit more cooperative today with most of our stocks rising. This despite continued negative news out of Europe.

June 4, 2012

With Toll Brothers down another 5% today I added to my holdings. Over the years I have found that by trying to select good companies and generally holding though the down times and buying at lower prices I have been able to beat the market averages. But it has been stressful at times.

June 3, 2012

As of 9 pm eastern on Sunday evening, the Dow futures were down 100 points… I imagine markets will continue to lurch around and that sometimes they will lurch upwards and sometimes downward.

Yesterday I mentioned Toll Brothers which got fairly clobbered the past few days. I was looking today at its annual report. It strikes me as a very well managed company. The type of company Warren Buffett would be interested in if it ever came up for sale. However as a public company with no controlling shareholder it is unlikely it would ever be offered for sale to Berkshire (he avoids bidding wars). I would consider adding to my position in this company. But right now I a, already fully invested.

June 2, 2012

Friday’s market was certainly a reminder that the road to stock market wealth does not proceed in a smooth fashion.

The Dow was down 2.2% and is now down 0.8% in 2012 or about even after considering dividends. The S&P 500 index was down 2.5% on Friday but is still up 1.6% or 2012 of about 2.5% with dividends included. The Toronto market was down 1.3% on Friday and is down 5.0% in 2012.

Our stock picks seemed to enthusiastically join in the misery on Friday with, notably, Toll Brothers down 7.5% and Wells Fargo down 5.9% and Stantec down 5.0%.  (I did mention under May 2 that Toll was looking expensive and note that it was marked Speculative Buy and the word Speculative was obviously there for a reason)

Rare bright spots were Canadian Tire up 0.9% and Liquor Stores N.A. up 1.2%

The value of a Canadian dollar in terms of U.S. currency plunged about 4% in May and this cushioned the decline in U.S. stock values for Canadian investors.

Our Buys / Strong Buys are up an average of 4.0% in 2012 (without considering currency impacts or dividends) and that handily beats the markets. My own portfolio, which is heavily concentrated in relatively few stocks is still up a very satisfying 10.5% in 2012 as of today.

It is of course hard not to be worried about the world economy at this point. I certainly don’t offer any guarantees or even predictions regarding where stock prices will head. I simply try to identify companies that appear to be good investments and which logic suggests will be good investments over the longer term. Buffett has always said that he can’t predict the short term direction of stocks nor does he think anyone else can. But he has had a certain modicum of success by buying good companies at reasonably (or better yet unreasonably) low prices.

May 31, 2012

Our stocks picks did fairly well today. Walmart at $65.82 could soon reach a new all-time high surpassing its old record close which was just under $70. If so it has been a long time coming since its record high was in late 1999. But as I have often said that is not Walmart’s fault. Walmart’s earnings per share are up a staggering 370% since 1999. In 1999 the earnings were 99 cents per share. It was sheer investor stupidity that drove its share to almost $70 and more than 70 times earnings in late 1999.

It is not always the case that a company should be blamed for a share price that under-performs. Investors in late 1999 simply drove the share price far too high. Walmart did its job of growing earnings. Companies cannot be responsible for investor stupidity.

Markets continue to be very skittish and unpredictable (in hind sight markets seem like they were more predictable in the past but looking forward they are actually ALWAYS unpredictable). Tomorrow, Friday, the market may focus on the jobs report. As investors we are probably well served to keep our eyes on corporate profitability. We can’t control the markets but we can choose to be invested in stocks that appear to offer good value.

You know, it is fair to say that the 2008 financial crisis was largely precipitated by faulty notions of risk measurement. This continues today as sovereign debt is counted as zero risk for banks. It’s ludicrous. Pension funds and banks rush to put money into long-term government bonds that are guaranteed to be, at best, very mediocre investments. Regulations and faulty notions of risk prevent the banks and pension companies and insurance companies from investing in equity shares which are virtually certain to provide better returns than long-term government bonds in the next two decades or so.

May 30, 2012

On Tuesday the market gaveth and on Wednesday it tooketh that away and more. Such is the nature of markets.

Canadian Tire announced it will close a almost 100 of its  sports stores (former Forzani Group Ltd. stores). This is 20% of the FGL stores. But it will replace those with new and expanded Sport Chek locations. This seems like a logical move, they had too many different store names. As much as anything it seems to be indicative of Canadian Tire aggressively managing this business. There will however be a $26 million pret-tax unusual expense for this matter booked in Q2. This move could result in Canadian Tire shares continuing to languish unless the rest of its business reports strong growth in Q2 (which is quite possible).

Canadian Western Bank will release earnings very shortly. I suspect they will report good numbers.

Shaw Communications looks quite attractive on a P/E basis and for its dividend. And the Shaw family is buying more shares. However, the market is worried about the “game-changing” impacts of the availability of television through internet streaming and also the issue of competition with Telus TV. If my own cable bill is any indication, Shaw will continue to do well. But I don’t claim to be able to predict the impact of technology longer term. I am comfortable holding some Shaw shares. It would be nice if they would sell off their wireless phone spectrum for a profit…  Canadian Western Bank is probably the safer bet it has up-side and probably not a lot of downside in the longer term.

May 29, 2012

I have updated the composition of my own portfolio.

Perhaps surprisingly, amid  the gloom, stocks did well today.

With Stantec down somewhat yesterday, Monday, I added to my position in that stock.

Walmart is updated and rated Buy at $65.31. While Walmart’s stock is “knocked” for still being below its 1999 peak of about $70, the company itself has performed very well. Earnings per share have increased relentlessly at about 12% per year on average in the past decade. The stock unfortunately had gotten way over valued by 1999 as investors were projecting growth closer to 20%. I feel comfortable owning it. We could have rated it (higher) Buy, but there is a scandal hanging over it in regard to paying bribes to acquire licenses to build stores in Mexico.

May 27, 2012

Stantec Inc. is updated and rated (lower) Strong Buy at CAN $31.25 or U.S. $30.15

Stantec has been growing its earnings per share relatively steadily for many many years and appears set to continue to do so, although probably at a somewhat lower rate than in the past. It seems like a good bet to forecast that the share price will be double in ten years.

Stantec’s history can be used to dispel several stock market myths.

Note that Stantec’s stock price has risen 1,150% from $2.50 to $31.25 over the 13 years since it was first added to this web-site in September of 1999 (This web-site was started in June of 1999). At that time, Stantec’s earnings per share were about 25 cents per share (split adjusted) and now are $2.46 per share (on an adjusted basis where a recent goodwill impairment is added back and a small amount of amortization of customer lists and purchased backlog is also added back).

Myth one: It is popular among relatively uninformed investors to proclaim that only dividends matter. This is patently false. It is true that a strategy of investing only in dividend stocks can be a very good strategy. But it is completely wrong to suggest that there can be no return without a dividend. In fact a dividend is neither a necessary nor a sufficient condition to insure a good return. Stantec rose 1150% in 13 years before only recently implementing a small dividend. Any suggest that the returns from the capital gain are some how “paper” or not real until an investor sells is completely bonkers and shows a lack of knowledge. Even more dramatically Warren Buffett has taken Berkshire shares from $15 in 1965 to $120,000 today and no dividend has been paid (actually there was a single dividend of 10 cents in 1967 when Buffett controlled the company but was not acting as CEO). To suggest that Buffett and the other Berkshire shareholders have only made “paper” gains is sheer madness.  On the other side of the ledger, the fact that Yellow (pages) media was paying a hefty dividend not so long ago did not stop that entity from being an abysmal investment.

Myth two: In order to really prosper a company has to have some competitive advantage. Stantec does not appear to have enjoyed any particular inherent competitive advantage over the years. It was basically management skill that led to its success.

Myth three: Organic growth is what really counts, growth by acquisition is not as valuable. Well it is certainly true that often growth by acquisition does not work out well. (See Nortel). It is easy to destroy value by over-paying in acquisitions. But Stantec has grown largely by acquisition and has achieved exceptional success. Not only has it grown net income hugely, but much more importantly it has gown net income per share hugely.

I suspect that this is a company that Warren Buffett would look upon with favor.

May 24, 2012

Our stock picks made modest progress today.

The lower Canadian dollar has helped out for Canadians holding U.S. stocks. At 97.3 cents I don’t have any particular idea of where the Canadian dollar will head. I did conclude that buying U.S. stocks when the Canadian dollar was over $1.00 would probably work out okay. Over a long period of time the fluctuation in the Canadian dollar is probably not going to be a big factor in our returns. It’s much more important to be in good stocks then it is to worry about the U.S. dollar versus the Canadian.

May 23, 2012

Toll brothers reported earnings early this morning. The earnings and sales figures were good. However, Toll Brothers is already pricing in a lot of good news and will need to continue to improve to justify its current stock price of $27.75. I bought it almost a year ago at around $21 and added later mostly at lower prices for an average cost of about  $20. I bought it a way to “play” a U.S. housing recovery and it has worked out so far. The results from Toll brothers do show an improved U.S. housing market. This bodes well for Wells Fargo and Bank of America (and indirectly for most U.S. companies).

May 22, 2012

Melcor (real estate) Developments is updated and rated (higher) Buy at $15.55. If you wish to own a real estate investment, Melcor seems like a good choice. It does not have a high dividend but instead invests most of the earnings for growth (and has not issued any new shares in at least a decade). I would far rather own this at 82% of book than RioCan at about 150% of book. Both companies mark their rental buildings to market value. But Melcor’s largest asset is a land inventory that is not marked to market and is likely worth more than its book value. Both companies would post losses on market value if interest rates rise significantly. Melcor however could suffer a larger decline in adjusted earnings because its earnings depend largely of sales of building lots rather than collecting rent. If one is confident that the Alberta economy will remain strong then Melcor looks quite attractive. Note that the Melcor shares are thinly traded. with patience you may be able to buy at a better price. Click the price in the table above and study the trading prices in the past few days or weeks before attempting to buy.

It would seem that markets are vulnerable to the continued madness in Europe. However that has continuously been the case for many months. It may be wise to position with some cash in case a market “correction”. However, I am not prepared to put my investing on hold due to such fears. The time to buy shares is when the money available and they seem well priced. The only time to reduce equity positions substantially is probably during stock market bubbles. Stocks are certainly not in bubble territory. Yes, they could decline regarding the Europe situation but other than perhaps some trimming to have cash available I am not going attempt to guess the impact of the situation in Europe.

Between yesterday (with U.S. markets open) and today, our stocks picks did quite well.

As of 12:30 am eastern time markets are set to open about 50 points down on the DOW (never a dull moment, it seems).

May 20, 2012

Canadian Tire is updated and rates (lower) Strong Buy at $65.82. The valuation here looks excellent with the shares trading at only 1.2 times book value despite the 11% ROE. And the company owns substantial amounts of real estate that is carried at lower historic values.

May 17, 2012

Today’s winner was Walmart, up 4.2% after reporting strong earnings. Honorable mention to RIM, up 4.0%. And consolation prize to Liquor Stores N.A. up 1.9% perhaps on the theory that recent market declines will drive us to drink. Just about all the rest of our stock picks were down.

 

May 16, 2012

Among the very few bright spots for our Stock Picks in today’s trading was Constellation Software which was up 3.1% to $90.74. Canadian Tire was down another 0.9%. Showing the courage of my convictions I bought another 200 shares.

While in an ideal world, all our stock picks would rise steadily, that is not realistic. I certainly don’t believe that the market always gets it right when it comes to stock prices. If I did, I would have to stick to buying a broad stock market index fund.

The stock market gives us opportunities by often under-pricing or over-pricing stocks. While it is not easy to do, that feature of the market can be taken advantage of by buying what is under-priced and then selling if it happens to become clearly over-priced or relatively over-priced compared to other opportunities. Given that our stock picking service would have no reason to exist if not for mis-pricing in the market, I can hardly get upset by Canadian Tire’s little swoon here.

Of course it may be the case that Canadian Tire is not under-priced at all. My analysis suggests it is. Others disagree. The consensus of the market opinion is of course that its current price is fair. I have found and documented over the past 12 years that buying stocks that appear under-priced has worked out well for me. But even if my batting average is pretty good, it is certainly not 100%. I happen to think (based on the analysis) that Canadian Tire will be a good investment. But the validity of that belief will only be known over the future months and years (perhaps many months). Meanwhile the market will, if nothing else, provide excitement along the way.

In other news it was reported today that U.S. house starts are running at an annual 715,000, well above the 578,000 of a year ago although down from the 749,000 annualized figure from last month. Home builder sentiment also rose to the highest level in five years. This bodes well for Toll Brothers and also for the U.S. economy in general.

Lower oil prices are hurting the Canadian stock market but will help the North American economy.

My TSX valuation article suggests that the TSX index as a whole is under-valued. That article suggested that a fair value was 13,216 which is some 17% above the current level. That certainly does not meant that the TSX can be expected to rise soon. What it does suggest (but not guarantee) is that buying the TSX index at this level is a rational move supported by analysis and should turn out to be a good investment.

I also added 1000 more shares of Bank of America to my position today at about $7.11.

As I write this around mid-night eastern time the Dow futures are up 49 points, suggesting Thursday will be a better day in the markets.

May 15, 2012

It was another weak day in the markets.  A few of our stock picks did manage gains. Toll Brothers the U.S. house builder was up 1.8% and is up a total of 33% this year to date. It does look quite expensive because earnings have certainly not recovered. So far it has been a good way to bet on the U.S. housing recovery. It would be a more speculative pick at this point.

Boston Pizza was up 1.6% and has recovered from its unjustified swoon of last week.

Canadian Tire was down another 1.1%. It’s trading at 1.24 times book value and its assets include some land and buildings that are surely worth far more than book. It is trading at 11.5 times earnings and has been exhibiting reasonable growth. I believe it is a buying opportunity with a good risk / reward profile.

A couple of our stock picks that have declined somewhat and that I think are attractive include Visa and Canadian Western Bank. 

May 14, 2012

As you will no-doubt be aware, Monday was a poor day in the markets. And our stock picks certainly got hit. Most notably Canadian Tire was down 3.1%. I don’t see the justification for that. I have read their Q1 report from last week and they appear be firing on all cylinders. It seems the threat of Target coming into Canada is holding back the stock price. Also I did see that certain expenses were up in Q1 more than perhaps they should have been. Some of these may have been temporary. But there was also some indication of facing higher rents at the former Forzani Group locations as leases expire. But overall the Q1 report seemed very positive.  With this company trading at 12.5 times earnings and still growing, I am tempted to add to my position. If I did not own own it I would definitely consider buying.

Much is being made of the trading loss at J.P. Morgan. I have no real basis to have an opinion on that stock but I know Buffett owns it personally and I suspect this swoon is a buying opportunity. It seems like a far-fetched exaggeration to suggest that this loss to this giant company is really indicative of risks to taxpayers.

I would also consider Bank of America now at $7.35

May 13, 2012

Boston Pizza Royalties Income Fund is updated and rated Buy at $17.87. Basically it pays a cash distribution of 6.6% and the distribution should grow with inflation but not much beyond inflation.  We were pleasantly surprised to see the units rise 26% this year to date. Investors should not expect too much in the way of gains. This investment is attractive for its yield.

Last week there was a strange development in these units . On Wednesday morning it announced a loss on A GAAP basis but indicated that the cash distributions were unaffected by this “loss”. Upon investigation, we agree, this particular “loss” is a strange accounting artifact and is not a true loss at all. The stock opened almost 10% lower at $16.00. By t  the time I attempted to place a trade it was back up slightly to $16.35. I placed an order for 500 at $16.50. A few minutes later it was back to $16.15 so I placed an order to buy at that price. Strangely enough my $16.50 order actually got filled at $16.21 and I got 400 at $16.15 as well. This worked out well as the units recovered to $17.35 by the end of Wednesday and $17.87 by Friday.

In fact the Q1 earnings were quite strong and the little swoon in the price was unjustified but just reflected the fact that some people (quite understandably) got spooked by the loss on a GAAP basis. It would be complicated to explain it but the loss resulted from a liability being marked to market higher due to the higher prices of the units. But in substance this particular liability is not a liability at all and represents effectively ownership by Boston Pizza International and is just an accounting artifact. (I realize that is about as clear as mud, but it’s the best I can do without getting into a long story). I don’t ignore GAAP accounting lightly, but in this case it did a poor job of reflecting economic reality.

 

May 10, 2012

Canadian Tire reported strong results this morning and was up 4.2% to $70.23. This is my second largest holding. It has done reasonably well. I feel very comfortable that the earnings and particularly the assets support the share price with a reasonable margin of safety. “The market” appears to fear it will get clobbered by Target. We shall see, Target for one thing has bought into high-cost leases but may still price aggressively. I am not sure there is all that much overlap with Cnadian Tire but clearly Target will pick up business from many retailers and does increase the competitive landscape somewhat. Still, I think Canadian Tire remains a a good investment. If you do a search for Canadian Tire on this page you can see I have been quite bullish on it. Especially last August when it was briefly under $53 (remember the debt ceiling fisaco that sank stocks in August?)

Melcor reported after the close today and had good although not spectacular earnings. But Melcor trades just under book values and appears to be a good investment. With the continued strong economy in Alberta it should do well. In the ling run it will be cyclic however and profits can be hit hard in recessions. Also its rental building values will drop if interest rates rise and this will flow to earnings as a loss. But I would certainly rather hold Melcor trading at just under book value than RioCan trading at 1.5 times book value (Both have their rental buildings fully marked to market, and RioCan profits (but not cash flows) would be hit hard if interest rates rose). I have been consistently positive on Melcor for some time.

I plan to updates the reports for Canadian Tire and Melcor within a few days. Also likely Walmart.

After the close today it was announced that JP Morgan had experienced some kind of unexpected trading loss of $2 billion. To me it’s another example of why I have never believed much in the whole concept of risk management. Many risk management procedures may in fact add to risk because they make people think they can measure the unknowable. They make people too reliant on black box systems and formulas.

All big American banks may get hit on this news on Friday. But Wells Fargo does not engage in much if any of the proprietary trading activities and hedging that led to this loss. It could be an opportunity to add to Bank of America.

May 9, 2012 (10:15 am eastern time)

I added to my Boston Pizza units this morning. The company has reported earnings. It lost money under GAAP rules. However distributable cash flow was okay and same store sales were up 7.5%. I have not analyzed it in detail but it appears the loss is due to a revaluation on the liability to issue certain shares. The liability is higher due to the higher unit price that has occurred since December 31. There are indeed some strange accounting features on this entity. The main driver of the share price is interest rates and same store sales increases. Same store sales are up and interest rates remain low. Therefore I don’t think the little swoon in share price today was necessarily justified and I bought more shares. It is thinly traded so place fixed price orders rather than market price orders.

May 8, 2012

The market down-draft that was supposed to happen Monday came a day late.

In Canada we had news that housing starts are running at 245,000 per year. Meanwhile the U.S. is running at about 680,000. If you consider the usual rule of thumb that the U.S. economy and population is about 10 times that of Canada you see that Canada is enormously stronger than the U.S. Most observers feel that Canada’s housing starts are running too high while America’s are probably half where they should be. The U.S. is forming new households about twice as fast as it builds new houses and this is slowly bringing down the excess supply of houses in the U.S.

In Canada the strong housing starts bodes well for Melcor. It should report Q1 earnings before long and I expect a good report and probably a good outlook.

I was tempted to add to my Canadian Tire position today with the stock down 2.3%. It reports earnings on Friday, so I will most likely wait to see the earnings.

May 7, 2012

As of Sunday and even as of Monday morning it looked like markets would be down noticeable on Monday. Instead they ended up fairly flat on the day.

Banks including Wells Fargo and Bank America were up (1.4% and 2.8%, respectively). Berkshire Hathaway was up 1.9%.

Yellow Media reported today and wrote off all of its goodwill. What a sad story this is. I have not looked at it too closely but basically it appears it way over-paid for various business and blew its brains out (assuming it had any) with debt. As of the end of 2009 it reported equity of $5.2 billion but assets included $6.3 billion and another 2.0 billion in intangibles. So it had no tangible equity. Sometimes, that is okay, goodwill can sometimes be worth what was paid for it and more. But not in this case. Today it reports negative equity, in other words it reports its net worth to be significantly less than zero. Disgusting. But I suspect Mark Tellier and his top managers will still have done okay over the years. Must not be a proud moment for his dad, Paul Tellier (former highly competent CN President, among many other accomplishments)

There are probably a lot of lessons in there for investors.

And Yellow Pages was to some degree a product of the financial engineering and tax evasion scheme called Income Trusts. Many of those defined gravity by paying out more in distributions than they made in earnings. Well, for a while they did. When something can’t go on forever, it doesn’t.

May 6, 2012

Election outcomes in France and Greece this weekend are considered negative for markets. Dow futures were down 131 points as of 11 pm eastern time. Perhaps Buffett will get his chance to buy back some Berkshire shares tomorrow. This is going to create some bargains but will feel painful.

May 4, 2012

Berkshire Hathaway is updated and rated (higher) Buy at $80.94. The Q1 earnings just come out today and were quite good. In particular, the book value per share soared about 6.5% in the quarter due to gains on various investments. Berkshire will buy back shares if the price falls below $78.17 which is 110% of book value. If the economy keeps improving, even slowly, Berkshire should continue to have a strong year in 2012 and since the shares are only at 114% of book value, the shares would likely rise as earnings rise.

It was a weak day in the markets. Markets however are volatile by nature. It’s not something that should particularly concern long-term investors.

May 3, 2012

The TSX was down another 1.8% today. The Dow was down 0.5% and the S&P 500 was down 0.8%.

Constellation Software was down 6.9% today, presumable because its earnings while pretty good were not high enough for the lofty expectations of this stock. We have seen volatility in this stock before and that will no doubt continue.

RIM has continued on down. It looks very cheap but of course the fear is that its sales are going to plummet. It’s not clear if they can turn it around or do some kind of sale of the company or major partnership.

Tomorrow’s (Friday) market will depend a lot on how the jobs report comes out… expectations are weak at this point. Hopefully the report can beat the now lowered expectations.

Tomorrow or Saturday morning Berkshire Hathaway will report earnings.

It’s looking like the TMX deal will go ahead although there are certainly still some hurdles.

The troubles at SNC Lavalin seem to be growing. Veritas Investment research has suggested that the earnings may even have been manipulated for some years. I have never looked at the company but this looks ugly. It is surprising to see this sort of thing at a large Canadian engineering company. One thing that always comes out of these events is some kind of shareholder lawsuits. That would be okay if it meant that any guilty managers or their insurance company would pay. But more often we get the perverse situation of the company (its continuing long term shareholders) paying out a smaller group of transient share holders. And usually the lawyers take much of the money. For example some shareholders got money out of Nortel while long-term shareholders in effect paid for that. Totally perverse.

May 2, 2012

The Canadian market was down 0.8% today at 12,230. This market has not done well at all after reaching levels over 14,000 in early 2011. The trailing TSX P/E ratio is 15.7 which suggests that the index is perhaps fairly valued at this time.

The U.S. market was down much of today but ended up down only modestly.

Constellation Software reported Q1 earnings after the close that seems reasonably good but probably no better than expected.

Visa reported earnings growth after the close of 30%causing me to ask myself why I don’t own this company which I have often said is basically an unregulated monopoly (from the point of view of merchants). I had sold my shares sometime last year just to raise some cash at a time when markets seemed especially vulnerable (remember the debt ceiling crisis last August?) Well I probably put that cash mostly to good use in the interim but nevertheless wish I had ben able to hold the Visa.

In general we continue to see good earnings reports but the market also worries about the economy and Europe and so the direction of the market is uncertain (but then again, when was it ever certain except in rose-colored memory?)

Given the uncertainty I am somewhat torn between trimming some positions, especially if they rise further and just staying put or even throwing into equities what little remaining cash is in my accounts.

Toll brothers was up 1.6% today and at one point was up over 3%. It has done very well and may continue to do well as new house building recovers in the U.S. However it does look expensive at this point.

May 1, 2012

It was a strong day in the markets. Looking at our stock picks we had Bank of America up 2.5%, Toll brothers up 2.1%, Wells Fargo up 2.0%.

I am taking a look at Genworth Financial which is a private mortgage insurer and a competitor to CMHC.

On the surface it looks like a good investment. But it is risky. It does have very good disclosure of the mortgage insurance business. From what I recall CMHC’s annual report does a terrible job of explaining the business.

As I read Genworth’s material, the problem I am reflecting on is that it has no way of knowing the true probability of a house price decline combined with a recession and what that could do to its claims experience. In an extreme scenario it could be wiped out. Now the same is sort of true for Canadian Banks except that the banks actually benefit from insurance on the vast majority of their residential mortgage loans. And banks have pretty good experience with how commercial loan losses behave in a deep recession.

Canada actually does not appear to be under any material threat of a deep recession,. But it most definitely faces the threat of a relatively significant decline in house prices especially if interest rates rise back to normal or even rational levels. And basically no one knows how home owners would react to that. Yes, we have had significant house price declines in the past. But I think we are something of a new paradigm now with house prices that are far larger multiples of income than ever before. And with household debt at huge levels due to both high mortgages and due to the availability of lines of credit. Homeowners in the early 80’s recession and the early 90’s recession, with few exceptions, buckled down and managed to pay their mortgages even when house prices declined. But how relevant is that experience this time when the mortgages are so much larger compared to income and other debts so much higher as well? A lot more people may declare bankruptcy if we get a big house price reduction.

My point is not that I am worried about a house price crash. My point is that under that scenario the rosy financial picture at Genworth could deteriorate rapidly (to the point of being wiped out) and I am not sure that the probability involved is even something anyone could reasonably estimate.

So, despite Genworth looking cheap, I just don’t know that I would want to invest in it. I am attracted to companies that make strong profits. But really, Genworth has only a vague idea of what its real profits are. Its future claims are estimates by nature.

 

April 30, 2012

The TMX Group appears to be moving closer to an acquisition by the Maple Acquisition Group.

They had a press release on Friday afternoon at 1:43 pm which although a bit cryptic seemed to indicate takeover was progressing and that the Competition bureau concerns might be overcome. The stock shot up about 5.5% on that news. (This was material news released by a company and in my opinion there should have been a trading halt. I have filed a complaint with the regulator about this). Today Monday, after the close, the TMX and Maple released further information which again seems to indicate the acquisition may proceed (although hurdles remain).

Monday’s press release indicated that Maple would acquire 70 to 80% of the TMX shares at $50. The market has at least until not not been totally convinced that the sale would happen. The shares had been $42.75 on Friday before the afternoon press release an closed today at $45.10. As I said below on February 26, it may have been a reasonable speculative pick at around $42 (and that is possibly true  even at the $45, but I will not be buying any). It will likely rise tomorrow so I suppose the time to buy may have passed. If it is bought for $50, I believe one option will be to take the maximum possible shares int eh new entity rather than cash. And the new TMX / Alpha should continue to be a big money-maker.

I have been skeptical that the Competition Bureau would allow this transaction. To my mind the TMX itself is pretty close to a monopoly and I am don’t think it ever should have been allowed to operate as an unregulated-as-to-price monopoly. And it beggars belief to think that the competition Bureau can now allow it to combine under common ownership with its main competitor which is an alternative exchange called Alpha. (What are they going to do? make a rule that the two exchanges will still compete despite common ownership?) But the parties to this take-over seem to think it will go ahead although they also seem to indicate that they may not know before the end of July. So no one should hold their breath expecting a rapid payout of any $50 amount per share from Maple.

In the next couple of weeks we should get earnings releases from some of our higher rated companies. I am eager in particular to see the results for Melcor (should be strong but I am not sure about the outlook), Canadian Tire and Walmart.

April 26, 2012

A nice day on the markets… Toll Brothers was a notable winner up 3.9%, also a partial recovery on Walmart.

Natural Gas

Natural gas prices have fallen to a ten year low. (And now recovered a little bit) Now I don’t know anything at all about the economics of producing natural gas either conventionally or from shale. But it seems to me that buying this commodity at a ten year low would not be a bad idea.

Ideally the investment might be a company that has a strong balance sheet and has vast stores of low-cost natural gas (shale) in the ground. Unfortunately I don’t know of any such company.

What I would consider doing as a bet on natural gas would be to look at one of the natural gas ETFs on my list of exchange traded funds

http://www.investorsfriend.com/Canadian%20Exchange%20Traded%20Funds%20Canadian%20ETF.htm

There is the Alberta natural Gas ETF from Claymore under symbol GAS

There is also January NYMEX contract under HUN and the symbols on my list include a natural gas double bull ETF for braver souls.

Both of these have of course fallen drastically in the past year. Perhaps it is a pure speculation to try these and I don’t know if I will bother at all. But if one has a strong itch to bet on a gas price recovery this is one way to do it.

I would also mention that if natural gas prices stay very low then I would think that at some point it would start to hurt the Alberta economy. I have not heard anything but at some point I would think a lot of gas is going to get shut in and a lot of gas drilling rigs are going top go idle if they have not already.

And by the way Buffett / Berkshire Hathaway made a bad bet buying the bonds of a Texas utility whose prospects depended heavily on natural gas. He wrote off $1.4 billion of that in 2010 and 2011 but has another $0.9 billion left that he said could be wiped out if natural gas stayed low. So we may see some write off of that in Q1. Still, I think Berkshire Hathaway will most likely report a decent Q1. Bufffett made a bet linked to natural gas that has turned out bad, but that bet was made at substanitally higher gas prices than today.

April 25, 2012

We continue to see mixed signals in the markets. North America and earnings doing well, some of Europe seemingly circling the drain…

Couche-Tard has continued to do well now at $41.50. It may well have been a mistake for me to have sold at around $40. I did well on the company. But I have quite a high opinion of its and I may have snatched only a small victory here when a larger victory was possible. I did place an order to buy half back at $37.60 and it subsequently did get as low as $38.60 a couple of days ago but it does not appear to be headed back to $37.60 anytime soon, if ever. I sold partly just because I have a very high exposure to equities. At first I sold only half the day it “popped” but then it initially started to slip and then recovered and I sold the other half (oops). Anyhow, there probably are better investments… the problem is though to find them. Buffett often suggests when you find a well managed company that seems to have a competitive advantage, just stick with it and don’t be too eager to sell.

April 24, 2012

Walmart dropped a further 3.0% today to $57.77.

Walmart, today, during trading hours, released a statement on this matter. To me the statement is very weak in that it was not delivered by the CEO or Chairman. It points to the excuse that these matters were from six years ago and basically says the audit committee  is looking into this.

The stock may start to recover if and when more concrete action is seen from the Board. The main executive involved is scheduled to retire in July. At the least he should be sent packing right now. Also I don’t know why any company would keep a former CEO on the Board (because they will often tend to try to still act like a CEO). Former CEO Lee Scott who is on the board should be sent packing as well because he was CEO at the time of the allegations and apparently swept them under the rug at that time. Current CEO Duke also probably has to go because he was involved in the sweeping up as well.

I added a little to my position in Walmart today because I don’t think this matter has long term impacts on Walmart’s profitability or growth. They can deal with it and move on.

In other news, corporate earnings are continuing to come in higher than expected. In particular Apple reported very stron results after the close and this should push markets higher tomorrow (all else equal).

April 23, 2012

I sent out a newsletter yesterday with a link to a new article on how much money has to be saved and for how long, to amass one million dollars in stocks.

It feels a bit elitist to talk about getting one million in stocks. But then again we live in a world where 20-somethings are buying their first homes at a half million dollars and more in many parts of the country. That being the case any middle class person without a good pension plan who plans to stay middle class probably needs a million dollar portfolio by the time they retire. (With a good pension plan, nothing else is truly needed, but is certainly nice to have).

Walmart dropped 4.7% today to $59.54 on news that it had not only bribed officials in Mexico several years ago but (more seriously) that top management swept the matter under the rug when they learned of it.

The trading action here offers a lesson or two. 1. Once this news hit on the weekend there was no escaping it, the stock opened down about 4.8% this morning. By the time the stock opened for trading, this news was well known no one was able to sell their shares before the news spread. that’s fair. (I assume the same occurred in the oxymoronic pre-market trading (the market before the market?) but I am not sure about that.

2. This is described as investors sold off Walmart. Well sort of… except that for every share sold there was a buyer. So really investors pushed the price down. Some investors sold at around $59.50 and some bought. In the net no money was “pulled out” of Wal-Mart. Wal-Mart is worth 4.7% less than it was on Friday but the money was not “pulled out”. Rather that money (or more properly, that wealth) simply evaporated into thin air).
3. This illustrates that unexpected crap can happen at any time to any stock.

In the long run it’s unlikely this will have much impact on the value of Walmart but it could stunt it for a while.

Hopefully the Board of Directors will step up and “whack” some people. It may very well be that the CEO has to go.

In other news it was a generally down day in the markets due to concerns about Europe and world growth.

As much as doom sayers wail about the U.S. government debt and money printing, the yield on U’S. bonds was actually down today as people clamored to buy 10 year bonds at a yield of 1.96% which is below expected inflation. It makes no sense really, it just “is”. I certainly don’t think the U.S. government debt is a good thing at all, but that does not mean that the collapse of its currency is in the cards.

I added to my Bank of America position today, taking advantage of the lower price.

April 21, 2012

Comment on Bank of America.

Bank of America released earnings last week. This is a complex company. After reading its earnings press release and looking at the financials in the supplemental release and looking at its Q1 presentation, I conclude the company is really too complex for the type of analysis that I do. It’s earnings have not yet recovered from the credit crisis and are subject a number of large unusual gains and losses.

I own it and I am interested in it because the shares are selling well below book value. If, as expected, it continues to recover then the share price should rise substantially. I normally don’t look at analyst forecast earnings as they tend to be optimistic. In this case the actual recent earnings are not reflective of what it will likely be earning in the next year or two. It trades at 8 times projected 2013 earnings which is an attractive price if those 2013 earnings do in fact materialize. It trades at 42% of book value and 65% of tangible book value (which deducts goodwill).

It definitely has risks including the outcome of litigation related to mortgage activities. If the U.S. housing market and economy continues to slowly improve this stock should do well although it is also subject to company-specific risks that could cause it to lag even if the economy and other banks do well.

I consider it to be definitely speculative I also consider it to have a good probability of being a very good investment over the next year or two.

I am considering adding to my holdings even though it already accounts for 5.1% of my portfolio (I have a very concentrated portfolio).

If things go well and this stock recover significantly then my longer term plan would be to sell and to not keep this company on our list in the long term.

April 19, 2012

It was a moderately negative day int eh markets. Couche-Tard went down a bit to $38.75. I threw in an order to buy back half of what I sold at $37.60 if it happens to dip down. (I sold all my shares on the big jump yesterday).

I notice eBay took a big jump today. I had only rated eBay a weak Buy /hold at the start of this year. But I did certainly have some good things to say about it in the report as well.

There was a large take-over offer in the biotech filed today with Glaxo SmithKline bidding a big premium for Human Genone Sciences (I believe it was around a 70% premium to the stock price or more). What I take from this ist aht we are seeing take over bids well above share prices. Buffett has often said over the decades that when shares are trading in the market at big discounts to what buyers will pay in acquisitions that is usually a good investment. Buffett’s ultimate calculation of value involves the outlook for free cashflow growth, how much cash a company will spit out from now to eternity. But he has suggested that the price paid by in acquisitions is a measure he has looked at as well, at least in his earlier days.

I have basically never looked at any of the big pharma stocks although it seems like a growth sector for sure. The difficulty might be to find a pharma stock that is predictable and not overly dependent on finding the cure for cancer sort of thing. It may not be an area where financial statement analysis works well.

April 18, 2012

The big news today was that Alimentation Couche-Tard was making a huge acquisition of Statoil Fuel and Retail fuel / convenience stores in Scandanavia / Eastern Europe. Couche-Tard closed up $15.4% on this news. And this was on top of being up several percent in the past few days before this announcement.

It is more usual for the price of an acquiring company to decline rather than increase. In this case “the market” is pleased with the acquisition.

Our last update on Couche-Tard was December 11 and we rated it (lower) Strong Buy at $29.95. It closed today at $39.60. I have a high opinion of management.

I was not sure if I should sell my shares at this point or continue to ride along with the good track record here. I decided to sell. So I am not holding any now but made a very nice gain today. And I was up very close to 100% on these shares since I bought in July 2010.

Logically and mathematically, the price I paid for the share should not enter into my decision to sell. But like most investors I can’t help being influenced by the fact that I had a large gain. It made it easier to decide to sell.

I may well regret selling since Couche-Tard could very well continue to grow at a good rate for amny years. Buffett’s approach would likely be to hold.

I don’t have an updated rating on the company.

I am not completely impressed by the fact that the company focuses on the price as a multiple of EBITDAR, rather than price to earnings. However, they certainly have a very strong track record and so one has to give them some benefit of the doubt.

It’s rather astounding to think that yesterday we could have bought shares in this company for Norwegian 35 and yet today we are all excited because a company will buy it at 53. So excited that we drive the price of the buyer up 15%. If in fact Statoil Fuel and Retail is any kind of bargain at 53 then it must have been a screaming bargain yesterday at 35, but apparently few noticed. These kind of acquisitions suggest that many stocks are indeed quite cheap.

Meanwhile stocks were mostly down a bit today… Well., tomorrow is a new day and we shall see what excitement that brings, if any.

April 17, 2012

Our stock picks did well today, notably Walmart up 2.0%, Toll Brothers up 2.0%,  Walgreen up 5.3%, Fedex up 2.6%.

After the close of regular trading (but during the period of that oxymoronic activity “after hours” trading) Warren Buffett announced that he has stage 1 prostrate cancer. Apparently not a very big deal at his age. Still, it may be an indicator that he won’t still be running Berkshire into his nineties. All good things come to an end eventually. But Berkshire will go on and continue to grow after Buffett is gone. And Buffett will stay as long as he is able which could be another decade for all we know.

Berkshire is unlikely to be down much tomorrow but if it should fall more than 3% on this news, I will probably grab a bit.

Cheap articles are written that accuse Buffett of not having a successor in the wings. That is simply false. He has said for many years that the Berkshire Board regularly has an heir in mind but it is never announced because it changes over time. The opposite approach is the clever one where Conan O’Brian was announced as Jay Leno’s successor about five years in advance. Remember how that worked out?

 

April 16, 2012 (7:30 am Mountain time, 9:30 eastern)

Markets are set to open higher this morning on good earnings and other economic data. We are in the middle of Q2 earnings season now and markets are reacting to the daily reports.

April 15, 2012

Markets were down noticeably on Friday. My level of concern about this is approximately zero. Yes, markets could fall further, that is always the case. But at the end of the day it is a distraction to the larger picture which is that I am confident of growing my wealth through investing over the years.

Wells Fargo is updated and rated (higher) Buy at $32.84. This is my largest holding and I am quite comfortable holding it. I expect but certainly can’t guarantee good returns from this company.

Wells Fargo is up 27% since we rated it a Strong Buy at $25.86 on October 18. Of course you might also point out that it declined 11% in 2011 and we had rated it Speculative (higher) Buy that year.

Shaw Communications earnings were somewhat disappointing and the stock fell. I have not updated the rating. It’s alue hinges on how competitive the future is going to be.

April 12, 2012

Most everything was up today, the Dow was up 1.4%, Toronto up 1.6%.

Canadian Tire was up 1.6% and sits at a 52 week high. Earnings season continues tomorrow with J P Morgan and Wells Fargo which I suspect will report good numbers. More important will be what they say about the outlook. Most everything that was down a few percent a few days ago has recovered it seems. Never a dull moment it seems.

Cogeco cable in Ontario reported lower profits due to faster write-offs (depreciation) on set top boxes. Possibly the same thing will be true for Shaw Communications. In any event we will know tomorrow (Friday) morning.

April 11, 2012

North American markets were up about 0.7% today after ALco reported better-than-expected earnings.

Of note, Canadian Tire was up 3.0%, Toll Brothers 4.0% and Bank of America 3.7%. Melcor was down 2.7% to $14.37 which I think is a buying opportunity.

Dollarama was up 6.9% to $51.70. It released very strong earnings and raised its dividend 22%. It same store sales were up a very impressive 7.9% and it has increased the store count by (coincidently) also 7.9%, which suggest sales growth of about 16% as a run rate at the moment.

Perhaps I was too conservative thinking it was already fully valued at $43.49 in January. I am definitely impressed with it as a business. It appears to nbe extremely well managed. I just thought it looked too expensive. It is now valued at very close to $6 million per store. Clearly that value is not just for the existing stores but also reflects the ability to continue to open new stores. Dollarama has established itself as a brand in Canada. I must confess I completely missed it and I wish I had looked at it much earlier..

Despite all this performance (actually despite the growth performance but BECAUSE of the stock price performance) I cannot see it as a Buy.

In theory we would expect competition to erode their high margins. But to my knowledge other dollar stores have not posed a big challenge (they lack the scale and the management skill it seems). And the likes of Wal-Mart has not responded. And Zellers has decided to sell off its leases to a better operator (Target). So perhaps the best I can do is to copy those academics who refuse to admit that some people (like Buffett)  CAN beat the market and I am left to sniff that that “What Dollarama is doing might work in practice, but it will never work in theory!”

I am not going to worry much about missing out on Dollarama, it simply did not pass my screens. There will always be lots of stocks going up that I don’t hold. What is important is that the stocks I do hold and rate as Buys do well. And they have been.

I look forward to seeing the earnings from Shaw Communications on Friday. I also understand that Wells Fargo will report on Friday.

Speaking of Wells Fargo which is going to benefit from any housing recovery in the States, I notice Warren Buffett’s Home America company has been in the news buying up three fair sized real estate agencies in the past few months. Buffett has said he is absolutely confident houses will recover somewhat (new households are forming as teenagers come of age and this is happenings quite  a bit faster than houses are being built and so Buffett argues that house construction has to pick up at some point and prices too). Buffett also argues that when house construction recovers the impact on thee unemployment rate is going to be noticeable.

April 10, 2012

Liquor Stores N.A. Ltd (formerly Liquor Stores Income Fund) is added to the list above as a Buy at $17.01. Perhaps this can help quench the thirst for dividends with its 6.3% yield. I would not necessarily count on much growth here although we could get some.

Something to think about with EVERY investment is that even though it may be a Buy that does not necessarily means we should buy it. Ideally we place our money in the best investment we can find while maintaining some level of diversification. I am not sure if I will buy this one or not.

A couple of interesting things I learned. It’s bottom line profit as percent of sales is 3.8%, perhaps about what one might expect. But its gross margin is 25% implying a mark-up on the product that averages 33% and which is higher than I would have expected. For some reason I had the impression liquor had small mark ups at the retail level. But this makes sense. The fact is they need the 33% mark-up in order to arrive at a about 4% on the bottom line.

My pre-existing order to buy some Constellation software got filled today as the market dipped. I also picked up some Toll Brothers given the lower price. This rather rapidly uses up much of the cash I have in my accounts and perhaps I should have retained more cash in case we are unfortunate enough to get some real bargains. If that happens, which is always a possibility, I will scramble to find money to buy on dips as I am wont to do and have pretty much always done.

It will not likely be news to anyone that the U.S. markets were down about 1.7% today and Toronto was down 0.7%. Retail stocks did okay today with Canadian Tire and Couche-Tard up with Wal-Mart down only slightly. Also Canadian investors are helped on our U.S. investments by the decline in the Canadian dollar over the past few days. Unfortunately, the opposite is true for Americans who hold Canadian stocks (and that is the case even if the Cnadian stocks trade in New York). When it comes to currency impacts what matters (setting aside hedging) is the currency sales and costs are in. The reporting currency or the currency it trades in are not important with regard to currency movements.

April 9, 2012

Markets were down 1% on the Dow Jones and 0.7% Toronto.

I see where BMO Capital Markets is expected a flat quarter from Shaw Communications. We will see on Friday morning… I was hoping for better than that.

April 8, 2012

Markets as of Sunday night are predicted to open on Monday morning about 125 points down on the Dow. Personally, I don’t see that as cause for alarm at all. Of course markets could take a big drop, that is always the case. But over time as the economy grows so will stock prices.

Soon we will into the Q1 earnings season. It is earnings and interest rates and not emotions that ultimately drive stock prices in the longer term (but emotions rule the short-term).

April 7, 2012

Two important analysis articles are updated for 2011 year-end data.

The first shows what happened to portfolios  for all the possible 30-year savings periods from 1926 to 1955 all the way to 1982 through 2011 invested in either 1. 100% U.S. stocks (S&P 500 index fund in non-taxable account) or 2. Invested 60% in stocks, 35% in corporate bonds and 5% in cash.

The second shows what happened to one million dollar portfolios for all the possible 30-year retirement periods from 1926 to 1955 all the way to 1982 through 2011 invested in either 1. 100% U.S. stocks (S&P 500 index fund in non-taxable account) or 2. Invested 60% in stocks, 35% in corporate bonds and 5% in cash.

Barry Critchley at Financial Post has written an article about how the Ontario Municipal Employees Retirement System sold shares in Constellation Software and yet for some reason Constellation agreed to pay some of the costs. I had mentioned the situation to Barry Critchley. It’s not a big deal at all but it seems like a big shareholder took advantage of the little guys here.

April 6, 2012

The latest edition of our free newsletter was sent out today.

Stocks were down on Thursday. And today, Friday the jobs report in the U.S. was disappointing and could send stocks down on Monday.  Nevertheless, I feel good about holding stocks at this time.

The Financial Post’s Barry Critchley indicated to me that he is going to do a story on the share sale by Constellation Software that I have been mentioning. My only concern and it is not a huge concern given the size of the company is why the company should pay any of the costs involved for OMERs to sell shares. While it is small dollars, Constellation strikes my as an exceptionally shareholder friendly and rational company (no or few stock options issued for example). So it was disappointing to see Constellation paying any of the costs which does not seem like a shareholder friendly thing to do. I am looking forward to the story.

April 4, 2012

Markets were down again today… Everyday the market turns its attention to something new. Tomorrow, I believe tit will be the latest jobs reports. Next week of the week after the focus will be on Q1 earnings. It seems to me that the economy is still slowly improving… In fact the market was apparently down in part because the economy has improved enough that the FED will not likely need  another round of buying in bonds (quantitative easing).

April 3, 2012

The Dow was down 0.5% today and the Toronto index was down 1.5%. Our stocks picks were mostly down as well.

I have mentioned the secondary share offering of Constellation Software. This was a sale of shares by a major shareholder (OMERs private equity). Although it was offered under a prospectus filed by Constellation Software, the company received none of the money. No new shares were created. All that happened was that a large insider (OMERs) sold shares to the public.

That got me thinking; what was Constellation’s role in this? Why did Constellation have to file a prospectus and did the company incur any fees and was it reimbursed for its costs? So I emailed the company to ask and the CFO replied that the information I sought was in the prospectus. Sure enough, on page one it indicates that Constellation had fees of about $575,000 of which OMERs would reimburse $300,000. And I suspect that this does not include a lot of internal costs in terms of staff and executive time spent on this.

So, it’s interesting. A large inside holder wants to sell  a large block of stock and Constellation (meaning its other owners) gets to pay  much of the cost. And this is on top of the fact that last year OMERs effectively (as I understand it) forced the company to put itself up for sale. No doubt a lot of costs were incurred for that. AND, on top of that the sale by OMERs caused the share price to sink about 10% as they sold over 10% below the market price that prevailed just prior to their sale announcement. As someone who did not own shares, and who is interested in buying, I am okay with the price drop. As a continuing shareholder I would not be happy. And anyone who sold shares in the past couple of weeks, or probably the next period of time until the share price recovers, should not be too happy about this 10% price drop.

But I suspect this is all perfectly normal business. If I were more energetic about I might complain to “the authorities”. But I suspect I would be met by blank looks and arcane (at best) explanations. It’s probably not worth worrying about.

April 2, 2012

It was another good day in the markets. One of our favorites,  Canadian Tire was up 2.3%. Melcor has slipped a bit lately and is definitely worth considering at around $15.

Constellation Software’s secondary offering of shares (it was OMERs private equity and not the company itself that was selling shares) closed today. I understand the shares were sold at $87.50 as planned with net $84 to OMERs.  TD Securities was listed as one of the selling brokers but this offer did not show up on TD (at least not yet).

I know the brokers have bought the shares at $84 and I believe that the shares were quickly sold to investors at %$87.50. As a result of that Constellation did get as low as $87.75 today. It closed at $88.61. When I placed my order it was already a bit above $87.75, which I was prepared to pay. I then decided to get cute and place my order at $87.60 and as a result I did not buy any shares. And barring general market weakness there may be no reason for me to expect to get any at that price, but I will likely leave my order open for a while and see.

I thought better of buying more Shaw Communications since I have a good amount already.

April 1, 2012

In about two weeks Shaw Communications will release its Q2 earnings. No doubt they will report some loss of basic cable customers to Telus. On the other hand they will likely gain customers in total when phone and internet is considered. I would be surprised if they don’t report decent earnings growth. I suspect more people will have rented movies online from Shaw. Many movie rental stores have closed recently. Maybe the tech-savvy are downloading movies for free or at minimal cost but I suspect a lot of people will be renting movies from Shaw. And that has to be a high-margin business. I may add to my position in Shaw in anticipation of the earnings release.

Constellation Software returns to the list above rated (lower) Strong Buy at $89.35. I will likely buy some shares tomorrow. As noted below it may be possible to buy at $87.50.

Here is a bit of history on regarding our analysis of Constellation. This company was first introduced to our list on February 4, 2011 rated (lower) Strong Buy at $51.40. It’s price then rose unexpectedly rapidly to about $70 gaining 35% in just a few months. Then, in April 2011 it was announced that the company was looking to be bought out. This complicated matters as far as analysing the stock was concerned as its price then might be be “event driven” – more related to the buyout than the earnings.  Due to the pending buyout I did not further analyse it in 2011. At the end of 2011 (se January 2, 2012) I removed it (and several other companies) from the list due to the analysis being out of date. I stated then that ” I don’t think I would consider any of these (removed companies) to be Sells. If I held them I would be in no big hurry to sell. Then again, I have not looked at them recently.”  In March 2012, the company announced that it was not longer looking to sell itself. At this time the stock is up 74% since February 4, 2011.

The company had stellar earnings in 2011 and now appears to be worth considerably more than it looked to be worth a year ago. Company management appears to have identified a consistently profitable way to grow by acquisition. Their approach appears to be highly rational and credible. The only nagging concern would be the question of why OMERs private equity was eager to reduce its position selling shares to the public at $87.50 and receiving only $84 after fees payable. Another large institutional holder also reduced its position recently at $84. The share price recently dropped $10 on the news that OMERs would offer shares to the public at $87.50.

Overall I like the company and will likely buy some shares tomorrow. However, since the closing of the secondary offering at $87.50 was to be tomorrow Monday April 2, there may be an opportunity to buy these at no more that $87.50.

March 30, 2012

Sino-Forest filed for bankruptcy protection today. I suspect shareholders will never see a dime out of this. They say they will sue Muddy Waters for defamatory statements that they were a fraud. Well, if they were a legitimate busienss why can’t they just keep operating and eventually return to trading.

Investorsfriend.com has been around since mid 1999 (at first we were called investment-picks.com) and Sino Forest was one of the first companies looked at here. By late 2005 I had lost not only patience but trust with this company. Subscribers to this web site were effectively warned about Sino-Forest at that time. I document the very early warning here.

March 30, 2012 noon eastern time

Today is the last trading day of Q1. It has been a very good quarter for out stock picks. U.S. markets are up 8% in the quarter. The Toronto market is up 3.6% but has been volatile.

With our stocks performing sell there is perhaps a danger of feeling complacent and a bit smug. Yesterday almost of all of our stocks were down and that was a reminder that stocks ALWAYS give us bad days as well as good days. And a reminder not to get too complacent, which I will try to heed.

While there are always dangers, it does seem that the U.S. economy continues to improve. Overall, I see some reason for optimism for the outlook for stocks.

 

March 28, 2012

Visa Inc. is added back to the list rated Buy at $119.35. I had removed it from the list in late December because the rating had gotten well out of date.

A search of the comments below will confirm that over the last couple of years I referred to VISA several times as being “monopolishious”.  With the recent share price rise it is no longer the bargain it was. But it is certainly a high quality company and worth considering for the long term. (What’s in YOUR wallet?, well probably a Visa card in most cases).

The Canadian market was down 0.8% today, apparently mostly due to weakness in “materials” stocks. The DOW was down 0.5%. So given that kind of day, it was pleasant to see Toll Brothers up 2.7% and Wells Fargo and Bank of America both up as well.

On Thursday Research in Motion will report earnings. This may draw more interest than the Federal Budget…

Speaking of budgets, the Ontario budget put certain corporate tax rate cuts on hold. I think that was completely appropriate. Corporate tax rates in Canada are significantly lower than they are in the U.S. and there is no reason to lower them. In fact, I think a large number of corporate tax breaks should first be taken away, and then perhaps the overall corporate tax rate can be lowered.

March 28, 2012 (11 a.m. eastern time)

Toll Brothers is up 3% this morning and was up a similar amount yesterday. This is the highest the stock has been since the financial crisis. It’s interesting to see the stock rise these two days as the news out of the U.S. housing market this week seemed to be moderately negative.

Canadian Tire is down 2.3% this morning after having done well in recent days. I don’t know anything to attribute this to other than basic market volatility. I continue to have confidence that this is a good investment.

March 26, 2012

It was a strong day in the markets and for our Stock Picks.

Possibly I should be reducing risk by harvesting some gains. But overall I feel good about the markets and am content to let my investments ride (accepting that there is always a risk that prices will fall).

I expect to have updates reports for a couple of companies posted here over the next week.

Barring other surprise developments, the market will now turn its attention to the outlook for earnings reports for the first quarter.

March 24, 2012

I ran some numbers on Amazon today. I have been wanting to add some more well known companies like this to the list above. In part this is because I would enjoy learning more about the business fundamentals of additional companies. Also I could hopefully identify some additional good investments.

In the case of Amazon it’s clear that it is far from being any kind of value stock. It has a price earnings ratio of 142. It trades at 12 times book value. It is profitable but the ROE is only about 9%.  It’s sales have been increasing rapidly, with sales per share growth averaging 31% per year in the past four years. Earnings per share however have only grown at an average of 5% annually in the past four years. Even if analyst earnings growth projections for 2012 and 2013 are accurate, it trades at some 72 times 2013 earnings.

Basically the current share price is already pricing in quite a few years of very strong growth. If growth were to falter from the current lofty expectations then the share price could drop rapidly.

The stock compensation seems too high.

Possibly the earnings should be adjusted upwards to remove some amortization of intangible assets. But I could not see any obvious disclosure of this in the annual report on Form 10-K.

If I were to complete the analysis it would be rated Sell. I do not particularly see much value in adding this company to the list as I suspect very few subscribers would own it. Given its sales growth it is certainly possible that the share price will not drop and may even continue to rise. But I don’t see the support for that in its numbers.

Generally I like to find bargains “hiding in plain view”. If Amazon is a bargain, it is a well hidden bargain.

I have updated my article that examines whether stocks are really riskier than bonds. This article updates a graphical analysis that I first did back in 2001 when I first obtained the necessary data. At that time, based on holding investments for 30-years stocks were always the clear winner at the end of a 30-year holding period. However we have now had a decade where stocks have performed relatively badly and long-term bonds have had strong returns due to declining interest rates.

In fact an investment strategy of holding only 20-year U.S. government bonds started in 1982 and pursued for the 30 years ended 2011 has provided a return of 7.83% compounded annually and has beaten out stocks at 7.78%.

As a result, based purely on historical data it is no longer as clear that we should expect stocks to beat bonds. And certainly a partly balanced portfolio of say 70% stocks and 30% bonds has been a very good choice in recent decades.

Nevertheless when we consider that the reason that long-term bonds did so well was due to the dramatic drop in long-term interest rates, and that long-term interest rates are at historic lows and have little room to fall, then we can logically conclude that a portfolio of stocks can be expected with a high degree of certainty to outperform long-term bonds over the next 30 years.

However, for shorter investment horizons (such as 10 to 15 years) some allocation to bonds is likely appropriate. For very short time horizons such as within one year a high allocation to cash would be appropriate. (Don’t invest money that you really need for next month’s groceries money in stocks)

March 23, 2012

Our stock picks were mostly up of Friday. Notable winners were Bank of America up 2.6% Canadian Tire up 1.8% and Shaw Communications up 1.0%.

March 22, 2012

Stocks were mostly down today. But I don’t think there is any reason to get too worried about where stocks are headed.

March 21, 2012

I have just now updated my reference article on the (inflation adjusted) performance of Stocks, versus Bonds, Versus Gold and Treasury Bills. I consider this article which I first produced in 2001 to be very informative. It seemed particularly important to update this article to reflect the amazing 28% gain in value in 20-year U.S. government bonds in 2011. I will also soon be updating several other articles for 2011 data. I also added a new graph to the article to show how Gold has done much better than stocks since the year 2000. No, I have turned into a Gold bug, but I thought it was fair to the gold bugs to show the data that way. I tire of hearing that “no one has made money in stocks since the year 2000”. Firstly that would only apply if you put all your money in stocks at the peak in 2000 and failed to buy any stocks at lower prices since then. Secondly, we should not focus so much on the year 2000. It was no more important than any other year.

As for today’s markets… Most stocks were down. But we had a 2.1% gain in Shaw Communications. This stock has been a disappointment. It’s share price has not risen these past few years despite much higher earnings. The market fears competition will lower its earnings. Also it started out with  hefty P/E ratio a few years ago. I had thought that the accounting earnings were under-stating its true cash earnings and so I had thought the high P/E ratio was justified. So far, that has not proven to be the case. But I think it is doing well with its Global television stations that it bought from the bankrupt CanWest. Also it has some wireless spectrum that it can hopefully sell for a profit. And hopefully profits on its cable business can continue to grow despite the loss os some customers to Telus. It will release earnings next on about April 13 and I am hopeful to see some positive movement in the stock.

Boston Pizza and Couche-Tard were also up about 2% each today.

March 20, 2012

Most stocks were down today. Bank of America and to a lesser extent Wells Fargo were up however.

The take over of Viterra at a large premium supports the notion that stocks in general are not over-valued. I continue to expect that 2012 will be a good year in the markets.

March 19, 2012

Bank of America fell 2.8% today after initially being up about 2.5%. Apparently the fall was due to rumors it would issue more shares. However, the company has denied this. It’s fully diluted share count will however rise in its Q1 report as Buffett’s options to buy about 6% of the company have come into the money.

I added to my Berkshire Hathaway position today.

March 18, 2012

The latest edition of the free newsletter has been emailed out. You should have received it.

I am thinking of adding to my position in Berkshire Hathaway on the basis that it is likely having a good quarter. It’s book value should gain nicely on its 700 million options to Buy Bank of America shares and on its equity index derivatives (which tend to gain in value when the indexes rise, although there is also the impact of volatility and currency impacts. I expect that Berkshire’s various operating businesses are doing well as the economy recovers. It’s insurance operations however are not something I can predict at all.

March 17, 2012

Our article that calculates the fair value of the Tornoto Stock exchange index has been updated. It suggests taht the index is about 6% under-valued as a point estimate.

March 15, 2012

It was yet another good day in the markets. Bank of America was up another 4.5%. Melcor was thinly traded and was up 6.8%. It’s still quite good value at $15.50.

It would be nice to finish out the week without giving any back, but we shall see…

I really should be thinking of trimming some positions but so far I more inclined to let things ride. None of the stocks I hold seems to be over-valued. (That does not mean they can’t fall but it does suggest I should not do too badly by holding.)

March 14, 2012

Our Stock Picks have been firing on all cylinders.

While Toronto was down 1.3% today our stocks did okay. Most notably, Bank of America was up 4.1%, adding to yesterday’s gains and Wells Fargo managed to hang onto yesterday’s big gains.

After the close Melcor released earnings. This stock closed today at $14.50. It’s earnings per share for 2011 were $2.70. On a GAAP basis that would be a P/E of just 5.4. However, much of the earnings were likely from gains in values on its rental buildings. And even its regular earnings from selling building lots tend to be highly lumpy. Nevertheless the earnings are good news. The book value of the company is now about $18.50 per share.

The full earnings have been released on SEDAR but I don’t think the public gets access until tomorrow. The full earnings are supposed to be on their web site but I don’t see them there.

The bottom line is that this appears to be quite good value at $14.50. It is thinly traded so be careful that way.

Tomorrow the stock may not open higher (it should) instead we may get a delayed reaction, or possibly no reaction at all. Melcor is my third largest position. I am not eager to sell any at this time. I would be tempted to buy more shares especially if it stays under $15 tomorrow.

In choosing between REITs like RIOCAN trading at about 150% of book value and Melcor trading at some 78% of book value, for me it is no contest. (Yes, there are other considerations involved than book value, but the bottom line is I would favor Melcor)

Beware of anyone bearing long term bonds

For literally years I have though long-term bond yields were too low and would not invest in them. And interest rates kept going lower and so bond investors did well. At some point that has to come to an end.

Possibly we are at that point. The yield on 10-year U.S. bonds has gone from 2.0% to 2.3% in the past ten days. That creates a capital loss of 2.7% on that bond. The yield on the 30-year has gone from 3.1% to 3.4% causing a quick capital loss of 5.6%.

People who invest in long bonds at these low rates usually intend to sell if rates rise. If so, I hope they sold.

Most commentary blames the U.S. FED for forcing long-term interest rates down to record lows. I have never been convinced it is only the FED since lots of other parties are investing in those bonds and buying them at low yields as well. I did recently find some data however that shows that the FED owns frightenly large proportions of most of the longer term bond issues. (like 20, 40 and even 60% of the total outstanding in some cases). That gives credence to the notion that the FED has indeed been the main buyer of long-term U.S. bonds. Can they continue to hold these rates down? No one knows, but the rates were certainly on the rise this week.

March 13, 2012

It was a VERY big day in the markets. The Dow was up 1.7%, the S&P 500 was up 1.8% and Toronto was up 0.9%.

For once, the market behaved just as I had talked about in terms of the stress tests on banks. The banks passed the tests and announced dividend increases and their prices rose. (See my comments about the stress test under march 10, March 5, and February 7).

It all happened a bit sloppily today, it was not supposed to be announced until Thursday but J.P. Morgan spilled the beans and then the FED released its report. (It’s unfair to release this kind of news during the trading day, but not unusual.)

Anyhow we enjoyed Wells Fargo up 5.8% and Bank of America of 6.6%. Just about everything was up today but it was the U.S. bank stocks that were the big winners (except poor Citi Group and a couple of smaller banks failed their tests).

This will confuse the heck out of all those doomers who read somewhere that “all the U.S. big banks are insolvent” and other nonsense. As they say a little knowledge is a dangerous thing and people need to watch whose opinions they believe.

And that is not to say that the doomers don’t have some legitimate concerns. Many countries are of course in too much debt. Unfunded liabilities are a problem. But when the doomers tip into the realm of thinking the U.S. (fiat) dollar is about to become worthless and when they start ranting that banks create money from thin air  (and that this is a bad thing) and that the FED is a private company and on and on then it is time to stop listening to those doomers because they are alarmists. I mean to each his own, let those people crawl into a bunker with water, tinned food guns and ammo and some Gold, just don’t follow them there. Hopefully they sold their stocks to us near the bottom in 2008 or early 2009.

Perhaps I am being over confident but I continue to feel good about the prospects for stocks.

Still, with my own very heavy exposure to equities I may look to take some profits and move some money into cash.

March 12, 2012

The Dow was up 0.3% while Toronto was down 0.6%.

It could be a big week for the U.S. bank stocks. The Fed will release results of stress tests on Thursday after the close. If the results are good then we could see Wells Fargo raise its dividend as early as Friday. On the other hand the results could disappoint. But I think the signs are pointing towards the banks coming through these stress tests pretty well.

Basically, the outlook for stocks seems good although bad news can always be lurking.

March 11, 2012

Bank of America is added to our list above as a Speculative Strong Buy at $8.05. For a variety of reasons (including that it is tough to value a company with approximately no earnings) this first report is a very preliminary and superficial analysis. As disclosed on this Site I have owned the stock since last spring and I bought it on speculation and was attracted by the very low price to book value ratio. I expect but there are of course no guarantees that the earnings will recover sharply in 2012 and the stock price should rise towards book value. I may add to my position here. (This price of this stock was as low as $4.92 this past Fall and so it has already staged a pretty good recovery, but there should be much more recovery to come).

March 10, 2012

Friday was a good day in the markets and our stock picks are pretty close to their high for the year. I believe my own portfolio is at its high for the year to date. I think there is a good chance that 2012 will be quite a good year in the markets.

So Greece finalised its managed or orderly default on its debt. As I said back on February 14 and other dates the idea that this was going to happen without triggering the credit default swaps was ridiculous. There was no way they were ever going to get 100% of the bond holders to agree to the swap and they did not. So they are forcing the hold-outs to accept and this is indeed a default. A welched debt by other name smells just as rotten. Anyhow it is not that big of a deal. Companies and individuals have been defaulting on debts for time immemorial and so in fact have countries.

Certain system problems that have plagued this site in the past month are mostly fixed.

March 8, 2012

Boston Pizza Royalty Income Trust raised its distribution by 6.5%. The units are now at $16.50 to yield 7.1%. Growth is driven largely by increases in same store sales and so we should not expect growth to be more than 2 or 3% longer term. But even at zero percent growth, the 7.1% yield seems attractive. I had not expected the distribution to rise this fast so soon.

Most stocks were up today, partly due to optimism that the Greek bond swap would go well.

As of right now it appears the swap went very well. There will be a few hold outs however. It now remains to se beseen whether Greece will force them to take the swap. If forced that would be a default and the credit default swaps would pay off. And interestingly enough they would pay off for all holders even those who took the swap. The credit default insurance is not “attached” to the bonds, one can own the default insurance without owning a bond. However according to recent reports there is only a small amount of these credit default swaps out there. Like $3 billion out of a bond total of $120 billion or so. The other choice Greece has is to just continue to pay the interest and eventually the principal to the hold outs. That might annoy those who swapped but so be it, a few clever hold outs would get paid in full.

Stocks of interest that rose today included Wells Fargo up 3.3%, Toll Brothers up 3%. Also Canadian Western Bank was up 2.8% after reporting earnings yesterday and no doubt assisted by the strong markets.

Futures as of about 10:45 eastern time are down 5 points for the Dow, so effectively they are flat.

I had thought Melcor was scheduled to release earnings today, but apparently that will happen next week. The earnings should be good. I’m not as sure if the outlook will be good, but it should not be too bad given the strong western economy.

March 7, 2012

A partial recovery today of yesterday’s losses…

After the close Canadian Western Bank came out with earnings. The report looked pretty good to me. Underlying growth was quite good. The actual adjusted earnings per share were only up 4% however and so that is not too hot. But I think the under lying growth in loans and deposits should still be looked at favorably. If it happens to fall on Thursday (especially if the market is not falling overall then I would judge that to be a buying opportunity.

I am also expecting earnings from Melcor tomorrow, Thursday and expect a good report.

Meanwhile there will be news as to whether Greece got enough big investors to accept its big haircut deal. If not judged to be enough then markets would likely fall. If enough then markets should do well.

March 6, 2012

Well, as you will have noticed markets were down today (DOW down 1.6%, Toronto down 1.8%). It’s been a number of months since we had those kind of days. Remember last August and September? These kind of days are pretty normal really and I don’t see anything to get too worried about.

With the lower prices I decided to do a little buying and added to my Toll Brothers position.

In part markets are now worried about how this Greek “voluntary” debt swap will work out. There seem to be at least three possibilities.

1. Over 90% of the bonds will be voluntarily swapped and Greece may decide not to force the others. In which case no official default has occurred and the Credit Default Swaps (insurance against default) would then perhaps not pay off. (This scenario seems very unlikely). The clever holders who do not swap may in that scenario collect fully on their bonds.
2. Between 75 and 90% of the bonds will be swapped and Greece will force the remainder to swap in which case the Credit Default Swaps will pay off (as they certainly should)
3. Less than 75% of the bonds will be swapped voluntarily and Greece will throw a fit and decide to simply and completely default on these bonds. The Credit Default Swaps will pay off. Various officials will moan and wail and we will probably get some kind of mini panic in the market. Bizarrely this will include another flight to the “quality” of U.S. bonds.

President Obama has announced another program for Americas to refinance to even lower interest rates at almost no cost or fee.  Americans can borrow at a rate that their bank must honor for 30 years but which the homeowner can pay off with virtually no penalty at any time. The main stream financial press in Canada will again fail to notice or question why in Canada we can only lock in for 5 to 10 years and we can face HUGE penalties to get out. Refinancing for lower rates is basically impossible once you are locked in. But, don’t worry. Ottawa is “on” this. Just this week they announced that banks in Canada will have to better disclose the that these huge penalties exist.  The main stream press will not bother to ask why the Americans get such a better deal. As polite Canadians we must be content with better disclosure. (And I am not suggesting that the banks “eat” the penalty, in the U.S. it is basically investors in mortgage backed securities that allow the easy pre-payment terms.)

Well, I expect more volatility in the markets before this week is over…

March 5, 2012

U.S. markets were down modestly today but Toronto fell almost 1%.

I hold out high hopes for Wells Fargo. The FED is going to release results of a stress test analysis sometime this month. I suppose that will show that Wells would be hit hard in another major recession situation. That might temporarily push it and other bank stocks down. But overall I think the test will confirm that Wells has a lot of strength and it may be given permission to raise its dividend.

Ultimately banks will do well if mortgage delinquencies and bad loans improve. And they are improving.

The latest figures from the source I use (the FED) were just published for Q4, they show loan write-offs improving quite noticeably. Loan delinquencies are improving only slowly but at least are improving.

See http://www.federalreserve.gov/releases/chargeoff/

March 4, 2012

Strange Real Estate Developments

On Friday we had the news that Sears Canada has agreed to vacate the premises of three of its large stores and return them to the landlord in return for $170 million.

This immediately strikes me as odd. Normally a tenant is making rent payments to a landlord. Here, we have a landlord paying the tenant $57 million per store to vacate.

I understand that Sears may have had a below-market lease and I assume it must have had many years to run. But that is a staggering amount of money.

In a somewhat similar situation we had the story earlier this year that Zellers was going to collect $1,825 million in return for giving up its leases on up to 220 locations. That’s is $8.3 million per location. Given that Zellers appeared to be a struggling department store and that (from my observation) many of those locations were not that large and not that prime, that seemed like a lot of money.

I am a bit too stubborn to accept at face value that these transactions make sense for the payers of this money.

I am not smart enough or knowledgeable enough about lease rates involved to understand immediately how these transactions make sense.

I’d like to do some analysis and thinking about this and the implications for both the retail stores that have long-term leases and the owners of the properties. I understand that as interest rates have declined the value of retail properties rises since a given flow of rent will support payments on a larger mortgage.  I also understand that if lease rates have increased then the value of property rises. But it seems there is a sharing of these benefits depending on the lease.

If a retailer has a 50-year fixed price lease then I suppose that essentially all of the increase in value really “belongs” to the retailer, even though another company owns the property. Conversely if a store only has a one-year lease then the owner captures the full increase in value. Perhaps most situations are somewhere in between.

Given this information, perhaps we have to be cautious when a REIT states that its buildings have gone up in value. It may be that the tenant and not the REIT will capture that increase in value.

It’s interesting to consider that with Target paying Zellers so much money just to acquire leases, it may not exactly have cost advantages when it comes into Canada.

With these huge dollars at play, it may be necessary to understand the leasing arrangements for retailers. I know Dollarama leases all of its locations. I have not looked in detail to see if it has advantageous long-term leases.

Consider Canadian Tire. It owns 70% of the Canadian Tire store buildings (not sure about the land). From a balance sheet perspective there is certainly hidden value there. Canadian Tire does not mark its buildings to market whereas a REIT does. Canadian Tire may have vast opportunities to sell its properties to REITs. It could get a huge one-time gain. But then it would face high rent costs that would lower future profits. Selling and leasing back its stores might make sense if interest rates subsequently rise which would lower the value of the buildings and leases.

Financial statements may not clearly disclose the details of leases. If the information is there it may be relatively hidden.

March 3, 2012

My article on the valuation of the Dow Jones Industrial Average is updated and suggests that the DOW is probably about 15% under-valued as a best estimate. Of course, that does not mean it is going to jump up 15% any time soon.

Microsoft is updated and rated (higher) Buy at $32.08. This is a “downgrade” from its former Strong Buy rating at $25.06 from September and note that we confirmed the Strong Buy rating still applied at $25.96 to start 2012. In the past two months this stock has surprised many by rising 24%. We also liked it in 2011 and 2010 but it fell modestly in those years.

March 1, 2012

I noticed today that TD Waterhouse has an issue of Firm Capital for sale.

What caught my interest is that this is a Mortgage Investment Corporation. That means it has some characteristics similar to income trusts. It does not pay income tax if it distributes its earnings. This feature means it may be a good investment for an RRSP or Tax Free Savings Account.

The company trades at FC on Toronto, last at $13.65 and the offer is at $13.45 and a 52 week range of $12.00to (ever so briefly, $13.99. The yield appears to be about 6.9%.

This is not an Initial Public Offering it is a new issue from treasury.

Some things to think about:

Lending money is always a risky business.

This lender is into somewhat higher risk lending than banks typically do.

I don’t know who it is lending to but I would imagine there are some Toronto condos involved. And it is always possible that the Toronto values are about to take a dive.

Lenders are typically highly leveraged. This lender is not nearly as leveraged as a typical bank. Its equity appears to be 52%.

The fact that the shares are being issued at only a very small discount to the recent trading price seems positive. And it is a bought deal, TD must be confident that they can sell this at $13.65.

The company has not yet released its December 31, 2011 earnings. I find it odd that they can go to the market without releasing those.

Overall, while the 6.9% yield is tempting, I feel that it is too small and there are too many risks for my taste.

Money is the ultimate commodity, there is no reason to think this company has any competitive advantages (except for the non-payment of income taxes, but some others have that too). It would have a big disadvantage in that it does not have access to low-cost deposits like banks do. It generally has to pay interest on money it borrows and lends out. Also much of its lending is from its equity. It does not have the advantage (but nor the risk) of the very high leverage that banks “enjoy”. (well they usually enjoy their leverage until any bad times arrive in which case high leverage CAN be fatal)

I wanted to mention that I have looked at it but I am not very tempted.

Also, there seems to be no reason to rush to buy from TD Waterhouse. The stock trades and so if I did want to buy it I would prefer to wait for the 2011 earnings and generally wait until I read more of its financial reports to get at least some clue as to who it is lending to. All in all, I would sooner stock with Canadian Western Bank. The yield is much lower but the return ultimately may be higher and the risk may be lower.

In other developments…

Stocks edged up some more today. In particular Canadian Tire was up 2.4% (but this just makes up for some of the recent slippage there) and Canadian Western Bank was up 4.2%.

Overall I feel good about being heavily invested in stocks and particularly the ones I own. As always the market sentiment and can turn sour at any time. But overall I am comforted by the fact that P/E ratios are still reasonable and that Warren Buffett is telling people that stocks are the place to be for the long run. (He always says he has no opinion about where things will head in the short run, he sees the economy improving in the short run but does not predict the market).

February 29, 2012

Markets were a bit weak today with the Dow down 0.4% and the TSX down 0.8%. Nevertheless we had some winners today notably Toll Brothers up 4.6%, Couche-Tard up 2.0%.

February 29, 2012 (just prior to the open)

We are into bank reporting season in Canada. It was interesting to read in today’s paper that analysts were having a very tough time interpreting Bank of Montreal’s earnings due to some unusual profit items. The report was described in the Financial Post as lengthy and complex and one analyst said the earnings were un-interpretable.

Those are the very reasons why I stopped looking at any of the large Canadian Banks years ago. I found their reports too lengthy and complex. I have never agreed with the idea that more disclosure is always a good thing. It’s not if it buries the reader in details especially if the overall picture is not well summarized.

I have always favored looking at a bank like Canadian Western Bank because it was not into more complex (and very cyclical) activities of helping large corporations sell bonds and stock.

The news about SNC Lavelin is interesting. It may or may not represent a buying opportunity. Since I am not familiar with the company it is best I just stay away from it.

 

February 27, 2012

In accordance with my note yesterday, I did buy some Canadian Western bank today and added to my Shaw Communications.

Some of our stocks did well today, notably Wells Fargo up 2.8%. Meanwhile Canadian Tire was down 1% to $63.27.

I sent an email to Couche-Tard today asking for a copy of their annual report. I own shares but apparently they did not send out the annual report you send in the card to Computershare, the stock transfer agent and ask for one.

Couche-Tard told me to download it from the web and thanked me for my interest in Couche-Tard. I find that annoying, I had told them I was an owner. But it is typical investor relations people treat share holders as just that, temporary fleeting holders and not really owners.  I try to gently and sometimes not so gently remind these IR types that I am an owner and not some mere total outsider. But maybe I should cut Couche-Tard some slack, after all I am up 50% on this holding (over about 19 months holding period).

A lot of companies no longer send out annual reports and some don’t even produce a bound version. It’s fine to say it is all on the internet but sometimes the documents on the net are not very printer friendly and they are certainly not bound. In the end it helps me, the fewer people that read annual reports the more likely that stock prices deviate from reasonable levels allowing more opportunities to pick up bargains.

February 26, 2012

Regarding Melcor. I mentioned under January 31 that I had entered an order to sell what amounted to 18% of my shares if it went to $14.25. By last week I had pretty much forgot taht order was sitting there. Checking my account I notice that sale went through.

One of my RRSP accounts now has around 35% in cash. I am thinking of deploying some of that tomorrow. I am thinking of buying Shaw Communication and Canadian Western Bank. I do want to keep some cash for bigger bargains.

The TMX Group (trading at $42.60) takeover by the Maple Group which is apparently worth about $50. I don’t have a current rating on the TMX but it might not be a bad speculation. It will rise if the Maple takeover goes through and fall somewhat if it does not. But long term TMX is probably a good investment without the takeover in any case.

We should be getting more Canadian company earnings reports in the next two weeks or so (including Melcor). About 95% of the S&P 500 had already reported Q4 earnings by the middle of last week, so their the earnings season is about over.

February 25, 2012

My popular article on the valuation of the S&P 500 index has been updated. With the surge in stock prices in the past few month that market now looks about fairly valued and no longer looks under-valued.

Today’s Financial Post reveals the sad story of First Leaside Group of Companies which with $370 million invested by some 1200 investors has gone into receivership. This is an investment company with very prominent Board members that has been around since the 1980’s.

I note that investors were apparently targeted by cold calls and repeated sales pressure.

There are many thousands of small investment outfits raising money in Canada. Often in real estate and oil and gas. Having listened to their advertisements for many years and having been solicited a few times, I have never invested a cent. (Well, except for about $1500 I put into the Canadian Property Investors Trust back in the early 1980’s which went insolvent shortly after).

One I started investing through TD Waterhouse I have stuck to that 100%. I would not be very comfortable writing a cheque to some investment outfit. I prefer to buy only what trades online. Many small investment outfits are perfectly legitimate. But it would take a lot of effort to get comfortable with any of these. A good general rule of thumb in life is  that the harder (and more desperately) someone is trying to sell you something, the more cautious you should be. The best products, be they cars or investments do not need high pressure sales.

Warren Buffett’s annual letter to shareholders was released this morning. This wisdom-filled letter is in effect a gift to investors and is released in such a way that hundreds of thousands can download it all at the same time. Basically everyone on earth gets this gift at the same time (Who says there is no Santa Claus?).

http://www.berkshirehathaway.com/letters/2011ltr.pdf

Buffett has always said his job is to increase the ture or intrinsic value per share of Berkshire at a rate higher than the total return on the S&P 500 index. He uses accounting book value as an under-stated measure of progress. If he can do this the stock price will follow. In 2011 book value increase4.6% which beat the total return on the S&P 500 which was 2.1%.

Since Buffett took over Berkshire in 1965 its book value per share has increased at a compounded rate of 19.8% annually, which just over twice the compounded return on the S&P 500 (including dividends) which was 9.2%. By beating the S&P 500 by 10.6% per year Buffett has grown the book value per share of Berkshire by a staggering 513,055%. The S&P 500 total return over that period was 6,397%. A dollar of book value in Berkshire has grown to $5130 while a dollar in the S&P 500 has grown to $64.

However Buffett is quick to point out that we should account for inflation. The purchasing power of a dollar has decreased such that it takes over $7 (on average) to buy what $1 bought in 1965. Let’s assume it is exactly $7 for the sake of round numbers. Dividing by 7, the real return in purchasing power of the book value a Berkshire share has gown by 513,055% / 7 = 73,294%.

And the share price market value  has grown somewhat faster than its book value per share.

Remarkably, Berkshire shares that were about $15 in 1965 today sell for $120,000 each. A gain of an even 800,000%. It takes 1500 B shares to make an A share. Accordingly the B shares trade at $120,000 / 1500 or $80 per share. (I don’t have the exact price of Berkshire in 1965 and it would have fluctuated through the year, Buffett’s average cost to acquire control of Berkshire was under $15 but some of those purchases were prior to 1965).

Remarkably enough, the equivalent of a B share in 1965 would have cost about $15/1500 or 1 cent. So, each penny invested in Berkshire in shares in 1965 is now worth $80. Even after inflation that means each penny’s worth of real purchasing power has been transformed into $11.43 today. A gain of 114,300%.

I’d be surprised if any public company has EVER provided a return of over 100,000% in real after-inflation purchasing power since 1965. Perhaps Apple has, and if so, that would be over a shorter time.

And I am highly confident that we will see Berkshire’s shares continue to grow in terms of both booth value and market value over the next few years in particular.

February 23, 2012

Markers were moderately positive today. Very soon, I will be updating the report on the valuation of the S&P 500. I expect it will show that the market index still appears to be cheap.

Yesterday I mentioned AIMIA inc. (the former Group Aeroplan, and before that Aeroplan) which released earnings last night. I was bothered by the earnings release that seemed to be trying paint a very positive picture despite reporting a large loss. Perhaps the market was a bit confused by the release. The shares having closed yesterday at $13.08 before this news opened down only very slightly at $13.00. But they trended down all morning before stabilizing at around noon. They ended up down 7.5% at $12.10. Normally on bad news a stock would open down sharply at the open. The trading patter here suggests a delayed reaction to the press release.   It is neither here nor there if you don’t own these shares. But I don’t like to see this kind of confused presentation of results. It’s unfortunate for those who bought this morning before the market was able to digest the news properly.

February 22, 2012

The Canadian market was up 0.6% today but the U.S. markets were down modestly. Some of our key stock picks here and three that I own were whacked down today. Walmart fell for the second day after disappointing earnings. Toll Brothers was down 5%, Canadian Tire was down 2.2%. I am tempted to add to my position in these but instead am trying to have the discipline to hold onto my cash in case further bargains emerge. (One of my RRSP accounts is one third in cash, but the other RRSP account has only little cash and my non-registered account is leveraged (negative cash) so overall I have little net cash). Markets have been up a LOT in the past few months and it’s no surprise to see a pull-back. There are always things to worry about but on the other hand there are certainly positive signs in the U.S. economy as well.  And U.S. election promises may also have some positive effects.

Buffett’s annual letter will be out on Saturday morning. We already know, from the Fortune magazine article that I mentioned last week,  that in the letter he will suggest that Stocks are a better investment in the long run than is gold or bonds. This has prompted may to argue that he is wrong that Gold is a poor investment (which he did not even say!). He will be on CNBC on Monday morning. I would like to hear his views on the Greek debt swap charade.

A company that I used to have on this site has reported earnings tonight. This is Aimia which was formerly called Groupe Aeroplan and before that just Aeroplan. (I wonder why the name change?) They lost money in Q4 and in 2011 but they spin a story that they were profitable without goodwill impairments and breakage adjustments. Their accounting has always been complex by nature and subject to estimates. For a variety of reasons I have lost all trust in this company. I sold my shares some years ago. I would steer clear. They may in fact be a good investment and they may be entirely ethical. But the way they report things and the way they expire Aeroplan points after 7 years (and worse after one year of inactivity) all combined to give me a bad feeling. A few years ago I saw but excused somewhat similar red flags regarding Kingsway Financial and lost money as a result (and worse, we gave a rating here that proved far too optimistic that some subscribers followed, albeit at their own risk and albeit I did reveal the flags I saw). Once bitten, twice shy. (I will assume the rat I think I smell at Aimia is real, even if it might not be a real rat).

Searching back, I see that my last comment on Aeroplan was December 30,2010 when I mentioned the complex accounting, rated it Speculative Weak Buy at $13.75 and said I would not buy it. Today it closed at $10.97. (Update to comment, actually that was the price under the old stock ticker AER from October 6, the new ticker is AIM and it closed yesterday at $13.08).

February 21, 2012

U.S. markets finished only moderately higher but the Canadian market did very well today. It’s enough to make a person dizzy. But the point is to just buy individual stocks of good companies at good prices and not sweat the volatility too much. It’s a bit like a roller-coaster ride. Very scary but if you just hang in there it all works out in the end.

In an interesting development, after the close of trading, Telus announced that it will hold a vote to convert its non-voting shares to voting. I had thought that this might happen but did not know when.

The non-voting shares have traditionally traded at a lower price and in the case of Telus I have said we should favor the cheaper non-voting shares.

I don’t have Telus on the list above at this time. But the last update (Buy rated at $50.70 on May 22, 2011 for the non-voting shares) the last sentence in the summary cell was: “We prefer the non-voting shares since the voting shares are costlier and in this particular case we do not place any value on the vote.”.

I searched back in the old comments since I was sure I said something about the non-voting shares eventually becoming voting. Back on June 27, 2007 the comment included: “In the very long run the non-voting are worth the same as the voting and someday the two classes will likely become one.”

And our article on Dual class shares (of February 6, 2006) states:

“Class merger may be another reason to purchase one class over the other. For example, if there is the possibility of the merger of the classes you may want to purchase the non-voting share because the premium on the voting class may evaporate.”

So, the point is that this Telus development was not unexpected, but it was certainly a long time coming.

Canadian Tire has a very wide gap between its very thinly traded voting shares ($73.50) and the much more numerous non-voting shares ($65.14). I would be very leery to buy the voting shares. I have said previously that I can’t see any justification for that gap. (I can speculate that maybe some party values that vote, but fundamentally I can’t see its value). My understanding is that in the event of any kind of change in control of Canadian Tire (say the founding Billes family sells out) then the non-voting shares become voting. With this development at Telus we may see the voting shares at Canadian Tire drop in price.  (In the case of Telus the non-voting should rise to close the gap tomorrow).

Walmart dropped about 4% today on the revelation that its low price strategy of late caused a drop in profit. My recollection is that back in the Fall analysts were loudly applauding lower prices as it would lead to higher sales and same-store sales. But for some reason they now seem surprised this hurt profits. At the end of the day Walmart still looks like good value. I was tempted to add to my position today but did not.

My understanding of the Greek debt swap deal is that it is still subject to each individual bond holder voluntarily turning in their binds for new long-term bonds at some 47 cents on the dollar. This will happen March 8 through 10th. I read today that they expect a 95% take-up rate. I suppose I am only guessing but I doubt that they will get to 95%. I would think that is a few bond holders refuse to go along with the voluntary swap then those bond holders might get their 100 cents on the dollar. Otherwise this swap that is not “officially” a default would have to be an official default. Also many of the bond holders apparently hold insurance against default. If so, I really can’t see how those parties can volunteer to take a loss and give up on their insurance. (Their stakeholders would sue). Meanwhile this deal may also require agreement of each and every member of the European Union. That is no small hurdle.

 

February 20, 2012

A Greek debt debt deal was worked of late Monday (early Tuesday in Europe). The next major step is to see if parties actually do show up on March 8 to trade in their former Greek bonds for some 47 cents on the dollar in longer dated Greek bonds. The whole thing looks like a giant charade. A ridiculous attempt to paint a default as being something other than that.

It’s really not impressive to see world leaders involved in this ridiculous matter. Greece was obviously loaned too much money.

Well we will stand by for the next act in this comedic/tragic play.

Meanwhile for the moment the U.S. stock futures suggest the Dow will open roughly 50 points higher on Tuesday morning. But really that is of little consequence as wherever it opens it will move off to some other level up, or dow..

In other matters I was reading Toll brothers annual report on Friday. Everything I read looks good. This company really seems to have been vary well managed through the real estate crash. It saw its sales fall by something like 70% but managed to raise its cash substantially by selling assets and not buying new land during most of the crisis and then finally starting to buy only more recently as the bottom started to near. There are obviously no guarantees but I feel quite good holding this company. I may even consider buying additional shares.

Well, it promises to be another exciting week in the markets…

February 18, 2012

The week ended nicely for stocks.

I have posted a new version of the free newsletter. However, due to system problems I am unable to email it out. The system problems that have occurred in the past two weeks have been partially but not completely fixed.

Here is the link to the latest free newsletter, some interesting topics…

February 16, 2012

The Dow and the TSX were both up 123 points today, or 1.0% each. Bank of America was up 4.0%, Microsoft was up 4.1% and Boston Pizza was up another 1.7%. Stantec was up 5.0% today after instituting a dividend for the first time. And FirstService was up 5.3%.

As I have said in the past, to the brave go the spoils. Over the past few years a large percentage of people shunned the market due to their fears. But, as of now at least, it looks like it was yet another example that it was wise to follow Buffett’s advice and “be greedy when others are fearful” (and vice versa). Those who do nothing but moan about the markets and complain about it being manipulated and on and on tend to stay out of stocks and to not do nearly as well in the long term.

Basically I feel good about the markets right now, although of course it only takes a few days of losses of to add a tinge of nervousness to the equation. Markets are rewarding, but they are not for the faint of heart or those who can’t stomach losses, even temporarily.

February 15, 2012

Today’s markets ended to the down-side mostly. No one can say if this is the start of bigger decline. My strategy will be to hold through any decline and probably add to positions. Stocks still look cheap. I may enter some orders to trim positions a little if they rise and buy a little if they fall. But for the most part I will be standing pat.

Warren Buffett has a new article in Fortune Magazine, looking at cash, stocks and gold as investments:

http://www.cnbc.com/id/46328808?__source=RSS*blog*&par=RSS

This is REQUIRED reading. (Drop what you are doing and read it right now, if at all possible) The writing is so plain, the logic so clear. He says stocks are safer than cash, bonds or Gold in the long run. Nothing in the article surprises me because I have studied what Buffett has written and there is nothing fundamentally new here, although it is packaged up nicely. And it is nice to get the confirmation that nothing has changed that he sees stocks as better than bonds today (Gee, who’d a thunk it with stocks having dividend yields over 2% on average, (and constantly growing) and earnings yields of around 8% with growth potential and with even long term government bonds returning under 3% with zero growth and cash and short term bonds returning nothing. On top of that stock returns are taxed less heavily!)

One place where gold bugs go wrong is they view an investment in stocks as an investment in a paper fiat currency. Not true, stocks are measured in money but they represent investments in corporations that produce something of value. That value is largely independent of the currency it is measured in, especially in the long term. Gold bugs also fail to notice that Gold is also measured in dollars and not the other way around.

My own analysis has shown the same thing as Buffett notes — that stocks wallop gold and cash and bonds in the long term. It’s why I have “foolishly” been close to 100% allocated to stocks since I started invested. (It’s not for everyone, but it’s done well for me).

For example: http://www.investorsfriend.com/asset_performance.htm

and http://www.investorsfriend.com/Asset%20Allocation%20Real%20Growth%20Scenarios.htm

February 14, 2012

GREECE DEFAULT

The financial world is holding its breath waiting for some kind of Greek bond swap deal. The negotiations seem to go on forever.

And what is the point anyhow? It seems like we are trying to avoid an actual default which is considered “messy” by having a sort of soft-landing “orderly” default where investors “voluntarily” swap their bonds for new longer term bonds at some 50 cents on the dollar. It sure looks, walks and quakes like a default but they would try to dress it up as a voluntary thing. Apparently the idea is to avoid the triggering of credit default swaps (insurance against deault) since triggering those would have nasty ripple affects.

This seems to be madness for a number of reasons. 1. Greece is going to have some trouble borrowing in future either way. 2. If Greece obtains this voluntary 50% reduction in its debt it then gets bail out money that it presumably has to repay. 3. The European Union is requiring austerity measures that will shrivel Greek’s economy 4. The Greek people are mad as hell and not willing to take this. 5. It’s exceedingly unlikely that the actual owners of these bonds will voluntarily take the 50 cents at the end of the day. The bond holders are apparently represented by a finance industry group which I strongly suspect has no power to bind the actual bond holders. 6. The actual bond holders are corporate entities and pension funds that probably face fiduciary barriers from negotiating a voluntary hit like this outside of an actual bankruptcy process. 7. Hilariously enough event eh European Central Bank which has bought up a huge amount of the debt is not willing to take this voluntary reduction.

So, what should Greece do?

Here is my (possibly mis-informed) prescription:

Greece should immediately default on all bonds except those held by its own citizens and corporations. (If not an immediate default then consider something like a forced swap for perpetual bonds (at perhaps dollar for dollar or 50 cents on the dollar or whatever) and paying say 3% and redeemable by Greece at any time).

Basically Greece simply can’t afford to pay these bonds when due and so they gotta do something. Just like a peron sometimes has no choice but to go bankrupt.    These (like I guess all or nearly all sovereign bonds) were non-recourse bonds anyhow, too bad people did not read the fine print.   Then simply borrow new money by offering bonds backed by assets and future taxes. Investors world wide will lend to them when backed by assets and enforceable by some kind of world court or United Nations or something.   Sell bonds to its own citizens also backed by assets.   Paint the rest of the world as the villains and encourage Greeks to invest in Greek bonds.   Greece default is thought to harm Euro banks. So what?, the EU can bail those out. Some Greek bond holders will like this plan as credit default swaps will pay off. Too bad for the banks that issued that insurance. Anyhow EU can bail out the banks.

Take some austerity measures like pay cuts to government workers and later retirement ages but try to avoid killing the economy. Sell off assets as needed.

Do this very soon and stop all this nonsense about a voluntary default that is not called a default.

Other News:

It ended up being a “mixed” day in the markets.

I would not mind trimming some of my positions, but for the most part I feel like I would want to hold out for higher prices. And if we instead get a meaningful decline in any of the stocks I own (say 10% or more) I may just add to positions instead. (You know, buy low, sell high).

I almost wish Boston Pizza ($15.64 had not risen so soon after I bought it which was on December 28 at $14.00. I like to think I would have bought more in January had it stayed at $14. I bought it for the dividend. It may still be a good pick but I always have a hard time buying more shares at a higher price since that seems like an admission that I should have bought more. This is basically an illogical thought pattern, but it is an emotional pattern that is a reality I have to deal with. I’ll try to update the report on this one shortly because after I update a report, that seems to act as a re-set switch in my brain and then I am often more prepared to pay the higher price if a fresh analysis indicates it is still a good buy.

Another point to consider is that just because a stock is expected to by a good buy does not automatically mean you should buy it. Perhaps you are already over-exposed to that stock. More importantly it almost certain that out there somewhere is a BETTER buy, so it can make sense to sit on cash and wait for a better opportunity. (Just as girl does not have to grab the first acceptable guy that comes along, she may want to wait and look for a better choice, and waiting is especially wise when applied to life-mates since it tends to be a one-time decision – If you think the cost to trade stocks is at all high — especially including capital gains tax, try trading in your spouse – not something I ever want to experience nor would I recommend you try it.)

February 14, 2012 (7:41 am mountain time)

I mentioned several times recently my doubt that the Greek bond holders could possibly agree to a voluntary reduction in the value of their bonds. I feel there is no way they would ever get the 100% agreement that one would think would be necessary to avoid a default on the bonds. Well laugh out loud I read this morning that the European Central Bank holds 55 billion face value of the bonds and it expects to hold to majority and get paid in full rather agree to the reduction. This is ludicrous. Why would any other bond holder agree to the reduction? In fact many other investors hold a type of insurance on these bonds that pays off in the event of default. The theory is that they will agree to a voluntary reduction so that the insurance (credit default swaps) will not pay off. This is preposterous. It is like asking you and I to have some one drive a large truck into our car causing damage equal to half the value of the car and then agreeing not to calim the insurance we paid for. Get real. How could any pension fund for example agree to this? It would be against their  duty to pensioners. Even for the good of the world economy, they cannot and I suspect will not ultimate do this.

P.S. With the market up today, it might be wise to shave a few positions. The difficulty though is always what to sell… (update, sorry when I wrote this this morning I thought the market was up, I must have been looking at the gain from yesterday)

 

February 13, 2012

Okay, I am back from my short vacation to Phoenix… Looks like the market took care of itself quite nicely while I was off line.

In particular Canadian Tire came out with good earnings on Thursday and was up quite nicely. I suspect (but certainly cannot guarantee) it will continue to do well in 2012, better than the market as a whole. Wells Fargo and Toll brothers should continue to do well as long as even a slow recovery continues.

There continue to be some technical problems with the log in system for this site. I had hoped it would be fixed by now and I will be attempting to get his resolved ASAP.

February 7, 2012

Note that the log in system has been by passed due to a server problem. This should be fixed in a few days. Meanwhile you can log in without a password.

I am off to Phoenix until Sunday and so will resume the comments here late on Sunday.

For the most part, the economic news continues to be positive. For example strong building permit growth in Canda in December and most company earnings reports have been positive.

Canadian Tire reports earnings tomorrow, Thursday and I am hopeful of a good report. The U.S. banks will get some kind of stress test reports next month and I am hopeful that Wells Fargo will increase its dividend by around the end of March. Bank of America may also resume some level of dividend.

February 6, 2012

Not too much happened in the markets today as we await some kind of a deal from Greece. As the week progresses we will get earnings reports to focus on.

February 5, 2012

Stocks are off to a roaring start in in 2012. The Dow is up 5.3%, the Toronto Stock index is up a similar 5.2% and the S&P 500 is up 6.9%. Our six Strong Buys are up an average of 7.4%. My own portfolio is up 4.7%. ( I have been taking some profits off the table and have some cash, but I am certainly not unhappy with a 4.7% return in five weeks.

Talks to voluntarily restructure Greece’s debt continue. I fully expect these talks to fail or at least to eventually lead to an official default by Greece. This will likely cause a temporary hit to North American markets. (Or it could cause a small rise if it is successful or even appears to be successful this week). I imagine that somewhere a hedge fund is accumulating Greek debt on the cheap and will refuse to accept the 50 cent offer and this will force Greece to officially default. I don’t see much up-side for any investment fund to voluntarily accept 50 cents. And also some of these investors have credit default options which will protect them from losses on the Greek bonds. But they apparently give up that protection if they agree to accept 50 cents. That seems like a ludicrous scenario.

February 2, 2012

U.S. markets were down modestly today while Canada was up modestly.

RIM was up 2.9% today to $17.17. This is nice gain from its recent low of $12.80 in December. We rated it Strong Buy at $13.44. But I did not expect it to rise so fast in the absence of a take-over. It does look like good value but could certainly be quite volatile.

On the European front it seems the Institute of International Finance is still trying to negotiate some “voluntary” Greek debt restructuring. I don’t see how it can happen since there is no possible way anything close to 100% of the bond holders will agree to this and unlike in a real default / bankruptcy there is nothing to compel anyone to accept the deal even if one is reached. I mentioned this also on October 30. I don’t see what would stop a hedge fund or strategic investor from buying bonds in the market now at 40 or 50 cents or less and then refusing to participate in any voluntary exchange. They would ultimately collect 100 cents unless Greece actually does officially default.

 

February 1, 2012

A strong day in the markets… notable winners were Wells Fargo up 2.8% and Toll Brothers up 3.0%.

Tomorrow is Ground Hog day. It’s interesting how the human mind gravitates towards patterns and sees patterns where none exist and no plausible relationship even exists. Like the length of winter based on a ground hog’s shadow, or such nonsense of January indicators, Superbowl indicator and so many more.

January 31, 2012 (1:15 pm eastern)

Okay, I’m back from my cruise. Excellent weather sunny and just over 80 degrees Fahrenheit most of the time (day and night). Lots of air conditioning to keep cool when that is wanted. It’s a good way to travel. Others to ALL the work. It’s affordable. We were on Royal Caribbean. At least on our late January cruise this is definitely an older crowd. Very few families with kids. Almost no college aged people. Just us wretched boomers spending our money. I am have absolutely no complaints about the trip and the service whatsoever.

I notice Royal Caribbean shares RCL on New York have a trailing P/E of 9.35 according to Yahoo. I may take a look at their annual report when it releases in a month or so. Many businesses could learn a lot about customer service from this company. I also found the four islands we visited work hard to keep tourists happy (and spending). Well trained and knowledgeable taxi drivers and tour guides for example.

The markets seemed to do okay during my trip. However Friday was down modestly  Monday was down modestly most of the day before a late recovery and today Tuesday the markets are again down a little. As always, there is certainly a chance that markets will decline at any moment due to world events. But meanwhile I am mostly holding. Noticing Melcor was up today I placed an order to sell what amounts to 18% of my Melcor shares at $14.25. As I have explained a number of times (and As indicated in my personal portfolio breakdown)  I have a large exposure to a few companies including Melcor. Also I bought additional Melcor and others on weakness this past Fall and it makes sense now to trim on strength.

I observe that the trimming I have done in the past couple of months on strength has cost me money as stocks kept rising. Still, it was definitely a good decision to trim. There is a difference between a good decision and a good outcome. Good decisions are bases on analysis, good outcomes — especially in the short term — are partly due to good analysis but with a huge measure of good luck thrown in.

We are about to enter the year-end earnings reporting  season in Canada. There will be lots of earnings reports in the next six to eight weeks. I am not sure if any Canadian companies have already report December 31 earnings.

January 19, 2012

There will not be any daily posts or updates here for the next ten days or so. I am off on vacation on a Royal Caribbean cruise ship that goes South from San Juan Puerto Rico. We will be stopping at St. Thomas, St. Kitts, Aruba and Curacao on this seven day cruise. Comments and updates will resume on January 30 or 31.

Markets were up a little today. These first three weeks of January have seen excellent market gains. Our average Strong Buy is up 6.2% and our average Buy rated stock is up 3.1%. It happens that our one Sell rated stock is down 2.5%, so that is a good start indeed.  (This excludes Dollarama which was added after the start of the year)

January 18, 2012

I sold the 300 shares of RIM from my wife’s RRSP today at $17.42. I had bought these on December 22 at $13.79, so there was a profit of $1089 less $20 in Commissions. I have always ran that account on a somewhat lower risk basis and I figured why not grab the quick profit. I also sold the options that I had on RIM for a profit. I kept the 300 RIM shares that I have in my own RRSP account. I did mention on December 17 that RIM might be a “real opportunity”. so maybe I should have really loaded up and then hung on. But I figured I would hedge my bets here, keep the 300 shares in my own account and sell the rest. It’s definitely a volatile stock, it will move up and down on rumor until we get some real news.

Today was a good day for our stock picks. Toll Brothers was up 4.8%. Bank of America which I don’t rate but which I have talked about a fair amount was up 4.9%. FirstService was up 4.4%.

January 17, 2012

Wells Fargo came out with earnings before the open today. I think the earnings were quite good and the company is growing. Still the stock did not rise much. I sold 300 shares at $30.40 based on an order I had placed a week or so ago. But I still hold over 6000 shares and it is my largest holding, so I am not exactly bailing out here. I am hopeful the market will take better notice of the good results over the next few days. Also it may increase its dividend before long. I may place another order to sell a few more shares if the price goes up to say $32.

I’ve revised the rating on Dollarama to Weak Sell instead of Weak Buy. The numbers would really say don’t buy. But it is a very strong company and I was somewhat reluctant to rate it as any kind of Sell. But really the numbers indicate it is very richly valued. While it could continue to rise, I think it would be wise to take profits if you own this or to stand aside if you don’t own it.

Canadian Tire share price has slid a bit to $63.07. If I did already own a lot of it I would be buying. On a value basis there is no comparison between Dollarama and Canadian Tire, Canadian Tire is the better value by miles. Dollarama share are pricing in very strong growth. Canadian Tire share are pricing in very little growth. I suspect Canadian Tire could “release value” at will by such moves as selling store real estate and leasing it back or perhaps selling its credit card division. But Canadian Tire chooses not to do that. Dollarama meanwhile has apparently fine tuned the ability to generate profits from its stores. But it does not own its real estate and so any sign of decline or slower growth in its profit could torpedo the share price. In other words Dollarama is priced for near perfection. Maybe it will continue to operate to near perfection. But there is a danger it will not.

January 16, 2012

I just made a few minor edits to the Dollarama report as I noticed a couple of cells were left incomplete. It’s numbers are rather interesting. It’s net profit margins are 9.8% which is I think the highest I have seen in a retail operation. More typical would be under 5%. The market capitalization is $3.3 billion which compares to Canadian Tire at $5.2 billion. Something is more than a little odd about that.

January 15, 2012

Dollarama is added to the list above as a Weak Buy at $43.49. This is a very nice business. It has surprisingly strong margins and excellent growth. However, the share price since its IPO in late 2009 at $17.50 has probably surpassed all expectations. It does not look like a buy to me. It could however continue to do well. If I owned it I would consider lightening my position.

Speaking of retail operations, I was in a Home Depot yesterday. The place was relatively empty and when I got to the register no one was in front of me. I am not familiar with the profitability of Home Depot. But I think it is clear to say that it is not as strong a business as Costco. When you are in a Costco the place is crowded, especially on a weekend. And Costco sells its inventory before it even has to pay the suppliers. The inventory in a Home Depot would likely move through MUCH slower. However Home Depot would have higher mark ups. We rated Costco a Weak Sell above which may have been too low a rating. It always looks expensive but Costco could probably increase its profits at will by raising prices (since its markups are so low) or by using more debt financing. I may need to take that into more consideration at the next update of Costco. The company has a new CEO now and just maybe it will focus a bit more on higher profits.

As of later on Sunday evening, markets are projected to open down slightly.

This coming week we should see some of our companies report Q4 earnings, I am looking forward to seeing the earnings at Wells Fargo.

January 14, 2012

Shaw Communications is updated and rated (higher) Buy at $19.83. Note the 4.9% yield. I will consider buying more Shaw by selling some of my larger positions but I will not likely do that until after my larger holding report their Q1 results.

January 13, 2012

Markets were a bit weak today, but the week overall was good. The year has started off well for our stock picks. The six stocks that are rated in the Strong Buy category are up an average of 3.4%, led by RIM at 12%. The 17 stocks in the Buy category are up an average of 1.3%. My own portfolio which is quite concentrated in a few stocks is up 3.1%.

January 12, 2012

Shaw Communications reported earnings before the open today. The market was not excited by the earnings and the shares were down 1.4%. To me, the earnings looked pretty good. There was a loss of 23,000 basic cable customers or 1.0%. But I figure that is not that bad considering the competition from Telus T.V. And Shaw gained another 23,000 digital phone customers and 11,000 internet customers, so still some growth. And lots of cable customers are upgrading to digital and I suspect more channels.

Dividend was raised by 5% and yield is 4.8%.

But there are some signs of weakness in that the media division revenue was down 3% (on a comparable basis — last year they did not own Shaw Media for the whole three months of the comparable quarter). Cable revenue also was only up 4% and that counts digital phone as well. Also it looks like competition with Telus is getting more intense – never a good thing for profits.

I plan to update the report soon. Our rating on the stock is currently (higher) Buy and so I suspect it will continue to be rated somewhere in the Buy range.

Research in motion was up 5.5% to $16.80, which is a nice recovery from its very recent low of $12.80 in mid December. On December 17 (below) I commented that this stock might represent a “real opportunity” and I bought some options in December being the first time I have bought options on anything in about four years or so. Still, with all the negative publicity I was not prepared to make a really large bet on it. And we don’t know yet where this company is headed. It’s always possible the price will plunge again with the Q4 results. But it sure looks cheap on a trailing earnings basis.

January 11, 2012

Markets overall were down a little today. However, our stock picks did well.

In particular Toll Brothers was up 2%. My Bank of America (talked about in these daily comments previously, but not rated) was up 3.6%. and Couche-Tard was up 2%. I did not do any transactions today or enter any orders.

January 10, 2012

I may trim a few positions…

It was a good day in the markets, Toll brothers was up 4.4%. Bank of America which I hold and have discussed but which is not in the list above was up 5.7%. Here in Canada, Boston Pizza which I bought for yield and not gains was up 1.7%. And Walgreen was up 2.7%.

My Portfolio…

The composition of my own portfolio was very recently updated. It shows that I am over 97% invested in equities and less than 3% in cash. And actually a little bit of money if borrowed outside of my investment accounts and so my net equity position is actually a bit over 100%.

By most any standards my portfolio is very aggressive. On top of the high equity exposure, I am concentrated in not very many stocks. So in that regard I am living dangerously.

So… from an asset allocation or risk management perspective it makes sense for me to trim my equity exposure and trim my exposure to certain companies.

But… I have trouble doing that because all my larger positions are stocks that I rate highly. So I am conflicted about selling a highly rated company.

However, I know that logically asset allocation and risk management should come first and logically i should trim some positions.

And recall that I added to Melcor and other positions as their prices dropped and so it makes perfect sense to reverse that as the price rises.

So… I did sell what amounted to 16% of my Melcor shares today (at $13.65).

I also have a previously disclosed order in to sell a bit more Wells Fargo at $30.40. This will sell only about 4% of my Wells Fargo.

My thinking is to enter a few more Sell order and trim some positions. Ideally I would trim while prices rise in the next few weeks, but certainly that may not be the case.

I really should trim fairly aggressively right now but I am inclined to go more slowly and see where we stand after the Q4 results come in. For example I am hopeful for good results from Canadian Tire in particular. And probably Wells Fargo, although for Wells Fargo the real catalyst I hope for is a dividend increase.

This risk if I don’t trim positions we get a leg down in the markets due to Europe or Iran and I won’t have money to take advantage of lower prices.

Adding to my risk is the fact that my portfolio has grown quite nicely and I have been investing for some 23 years now and I am at the point where new contributions from savings will not save the day if the market falls. Younger investors are in a better position to ride out don-turns since their new contributions from savings are material realtive to their portfolios (no longer necessarily the case for me).

Hopefully that is not too confusing. If it is, well, it is also honest and when we are being honest every investor must admit they have conflicting thoughts about the market. We all struggle with the extent to which greed or fear is going to guide our investment decisions at any point in time. My asset allocation and portfolio composition indicates I have been rather brave — but that does not mean I don’t have my moments of fear or at least moments of thinking I should lower my risks.

Having said all this, I do feel good about the markets right now. And, having said that, anything can happen at anytime. It’s the nature of the beast.

 

January 9, 2012

It was not a bad day in the markets as U.S. bank stocks rose. We are now into earnings season. Alcoa reported after the close and its results were apparently better than expected.

January 8. 2012

I am taking a look at Dollarama right now. Perhaps I am two years too late, I should have looked at it earlier. As always it is going to take a lot of analysis and work before I add it to the site here. If nothing else it will help me in my understanding of retail operations.

As of late Sunday evening, futures suggest the Dow will open down about 35 points. However there was some indication that certain bank liquidity rules are not going to be enforced as rigorously as earlier thought and this may be good for banking shares on Monday.

January 7, 2012

Our comprehensive reference article on Canadian Exchange Traded Funds is updated. This article contains current P/E ratios and dividends yields for a broad selection of ETFs. It also includes Gold, Silver, Oil and Natural Gas ETFs. Most of you may prefer individual stocks rather than ETFs. still, ETFs can be a good way to rapidly enter and exit the market it you wish to do that. They can also help you fill in any missing sectors. Some of the higher yield ETFs may be of particular interest.

January 5, 2012

Markets did not do much today. But some of our stock picks did quite well.

Wells Fargo was up 1.6% and Toll Brothers was up 2.1%. A stock that I hold but don’t have a rating on, Bank of America was up a hefty 8.6%. My investment in bank of America was detailed in the comments below (see July 26 and August 2 in particular). I ended up buying it at around $9.50. In retrospect I was at least too early. And I was too greedy as I grabbed quite a bit. Perhaps though time will rescue what seemed like a bad investment as 2011 closed.

So far 2012 has started off quite well for our stock picks and my own portfolio. It would be nice to finish off the week this way. However, as of tonight the futures suggest a down day in the market tomorrow. The fun never ends in this game.

January 4, 2012

Of interest today, Toll Brothers up 2.9%. So hopefully that bodes well for the U.S. home building industry.

January 3, 2012

Markets got off to a very strong start for 2012.

Most everything was up.

I sold what amounted to 9% of my Wells Fargo. I had continued to add to Wells Fargo at lower prices this past Fall. So I sold some today at $28.40. I also placed an order to sell a bit more at $30.40. In some ways I don’t want to sell any. But it is my largest holding and perhaps it makes sense to play the volatility a bit. Also I want to raise cash for other investments now or later.

markets seem confident at the moment. Of course things can always change quickly.

January 2, 2012

The composition of my own portfolio has been updated. It includes mainly Strong Buys and (higher) Buys from the list above but also one two that are Buy rated. My portfolio is by almost any standard over concentrated in a few stocks and I may work to reduce the concentration.

Trading for 2012 starts tomorrow. A few companies in the list above were well out of date. I have now removed these form the list. Some of these might return especially if I think that they would be good buys. I don’t think I would consider any of these to be Sells. If I held them I would be in no big hurry to sell. Then again, I have not looked at them recently. The removed companies are:

Staples, Telus Tim Hortons, Visa, Aeroplan, Bombardier, Constellation Software, Reitmans, and TMX Group.

So, we start the year with:

9 U.S. companies

5 Canadian companies that are also listed in the U.S. for a total of 14 U.S. listed

6 Canadian companies

7 higher yield Canadian entities

27 investment choices in total.

7 entities are rated in the Strong Buy category (but please consider the full report and the reasons why we think it is a Strong Buy and all the comments in the report)

5 are rated (higher) Buy and 10 are rated Buy.

I hope to add a few new companies before too long and some of those deleted from the list may return.

Generally speaking stocks appear attractive as we enter 2012. There are, as always, risks. World events could push the entire market lower at any time. And individual companies are always subject to negative developments. Stock investors tend to do well over time but it is not without periods of losses.

January 1, 2012

Walgreen Company inc., the largest U.S. drugstore chain is updated and rated (higher) Buy at $33.06. It’s price has dropped to quite an attractive level due to the loss of about 5% of its customers who are covered bor drugs through a drug plan management company called Express Scripts. Walgreen refused to lower its prices sufficiently for express scripts but feels this was best for Walgreen and it believes it can win back many of the customers. It may be an opportunity to buy a great company at a time when it has been somewhat wounded. I may buy some shares.

eBay is updated and rated Weak Buy / Hold at $30.33. This company is a sort of toll booth collecting fees on everything sold on eBay as well as fees for payments with PayPal. Both auction sites and payment systems benefit from “first-mover” advantages whereby an incumbent has competitive advantages and it is difficult to compete against an incumbent. Given these characteristics eBay could be considered as an investment. Personally I am bothered by its attitude toward stock options and would not buy unless the price were more compelling.

Happy New Year. Our Performance for 2011 has been updated. It was not a great year in the markets but we did easily beat the the market for the 10th year out of 12.

I feel good about the selection of Buys and Strong Buys (in the table above) as we enter 2012. World financial conditions could certainly throw a wrench into he works. But that is always the case. Stocks tend to be unpredictable in the short term but tend to do well over the long term. And if one can manage to hold better than average stocks then, all the better.

Our latest free newsletter was issued a few days ago and you should have received it if you are on the list for the free newsletter (If, not, add your email address to the list, you can also delete old email addresses at that link.)

 

December 31, 2014

Element Financial is updated and rated Highly Speculative Weak Buy at $14.14. This company may do very well. Management is expanding it very aggressively. I spent a full say looking at its reports. I just could not get comfortable with what I feel is its aggressive view of how to calculate adjusted earnings and with its high executive compensation. It compensates executives very highly, mostly with stock options but also with millions in cash incentive pay. It then proceeds to add back the stock-related compensation as if it were not a real expense. I totally disagree with that view. In a recent acquisition it paid out $24 million in contingent compensation ($14 million in cash) and then added all that back because it was not an ongoing expense. I have some sympathy for that view but then again if they do repeated acquisitions this expense will occur again. With their method this expense is totally ignored forever. They even add back all income taxes on the basis that they will not pay cash taxes for the next 20 years. That does not give me comfort that the earnings are “real” and basically is simply distasteful to us. Finally, the provision for bad debt looked low to me. I could have rated this a By, albeit a highly speculative one, but overall I am more comfortable calling it a highly speculative weak Buy. Perhaps I am just jealous of the high salaries of management but I just don’t feel comfortable with this investment. (I edited this paragraph on Jan 1 with very minor edits, I generally never change any posts after they are written except I occasionally fix obvious typos, if changes are at all substantive I will make a note of that or add it as a P.S. to identify it was written after the original post)

December 30, 2014

On Tuesday the S&P 500 was down 0.5% and Toronto was down 0.2%.

I will have a few more updates before the start of trading for the new year.

Bombardier Inc. is updated and rated Speculative Buy at CAN $4.11. It reports in U.S. dollars and does most of its business in U.S. dollars. Our report is therefore in U.S. dollars. The emphasis here is on the word “speculative”. The company has a LOT of negative aspects. But it is likely moving into a period of improved profitability. It is a low margin business but the upside of that is that a given increase in revenues can lead to a large increase in profits. For investors willing to take a risk this could be a good speculative choice. I will consider increasing my position.

The Bombardier perpetual preferred shares report is updated and rated Speculative Buy. at $21.84 These yield 7.2% because Bombardier is a weak company. There is some risk here. And the possible upside is certainly not as good as on the common shares. I hold shares. I am attracted to the 7.2% yield despite the risk. We first added to this site on June 17, 2010  at $21.75. So, overall it has delivered the 7.2% yield since then but has had no capital gain. In the that period of time the shares were mostly above $22 and got as high as $25 but were recently as low as $21 and so there can be volatility.

December 29, 2014

On Monday, the S&P 500 was up 0.1% and Toronto was up 0.4% despite another decline in the price of oil.

Most of the stocks on my list were up. Liquors Stores N.A. was up 3.3% to $15.46. Maybe some of their stores are doing well. But in my area they have too many stores and the industry has FAR too many stores. One of their small competitors, Solo Liquor is trouncing them in my area. Then there is Super Store Liquor Stores and Costco to compete against. As far as I can see the earnings don’t justify the price. They recently issued stock. I suppose that keeps the dividend safe for a while. But unless earnings increase I don’t see how the dividend can be maintained longer term. And perhaps the earnings will increase but I am just not seeing any sign of it.

Melcor was down 1.9% to $19.51. This is a thinly traded stock which has very little analyst coverage. The market has pushed it down due to lower oil prices. It could certainly fall further and its earnings could certainly be hit hard by low oil prices. But it seem to me that there is a margin of safety here in its assets. Very few profitable companies trade at less than book value. But Melcor’s stock trades at 75% of book value. And that book value consists mostly of raw land, developed land and commercial rental buildings. Those seem like solid assets. Of course land values could plummet if there is a very deep recession in Alberta. And the value of commercial rental buildings would also decline. But it seems to me that it would take a deep and relatively permanent recession in Alberta to justify Melcor trading at 75% of book value. I feel good about holding Melcor but only time will tell how the economy in Alberta unfolds.

December 28, 2014

Alimentation Couche-Tard is updated and rated Sell at $47.50. I feel I am going out on a limb by rating this great company “Sell” but it just seems too expensive at this time. We had rated it only a (lower) Buy at the start of this year and it is now up 78%. We first added it to this site on March 31, 2005 rated (lower) Strong Buy at a split-adjusted $5.80. Since then it is up 719%. Over the years we mostly had it rated in the Buy range and sometimes the Strong Buy range and never in the Sell range. I did (sadly) sell my own shares in April 2012 when it “popped” on the announcement it would acquire Statoil Retail. I have always been impressed with management and the growth. Those who own it could consider selling or reducing their position.

December 27, 2014

FirstService is updated and rated Weak Buy / Hold at $US. 49.95 or CAN $58.49. Due to both its cyclical nature and to a number of accounting complexities it has a been a difficult company to value or predict. I have always thought that it was well managed. It may be worth investing in based on its management. It will also benefit if the U.S. economy continues to improve.  It’s unfortunate that I cannot be more definitive in rating this and other companies as either a buy or a sell. But in theory the stock market is supposed to do a good job in valuing companies and when it does most companies should be rated Hold. It is only a minority of companies that tend to look like clear Buys or clear sells at any given time. Canadian investors face currency risk in investing in FirstService. This is the case even when it is bought on Toronto. Currency risk is linked to where the earnings come from, not from where a stock trades. For this company, the price on Toronto will fall if the Canadian dollar rises, all else equal.

December 26, 2014

Fedex is updated and rated Weak Buy / Hold. This company has been difficult to rate over the years due to its profits being quite volatile with the state of the economy in recent years.

eBay is updated and rated Weak Buy / Hold at $57.01. This is a difficult company to rate for several reasons. First, it is to be broken up into two companies in 2015. More importantly it is subject to the risk that larger financial players like VISA or the banks will eventually dominate the online payments business or at least push the margins in that business down. Its marketplaces (eBay and classified ads) may be subject to less competition than the PayPal business.  Given its current market position I would consider buying it as a speculative pick except for the fact that I just don’t trust and respect its management due to their insistence on adding back stock options as if they were not a real expense and also due to the very large compensation and due to a recent flip-flop on the issue of breaking up the company.

December 25, 2014

On the short trading day of Wednesday the 24th the Canadian and U.S. markets were about flat overall.

Melcor was up 4.0% but as always it can jump around more than other stocks due to its thin trading.

The thinly traded Canadian Tire voting shares (CTC) lurched up 10% to a new high of $260. This makes no sense to me and I don’t see the basis for it. The non-voting shares (CTC.a) are at $122.

Yesterday I sold about 25% of my Wells Fargo shares at about $55.60. After the sale it will still represent close to 15% of my equity investments. I had basically been letting this ride despite having a very large position in it. I also added to the position at lower prices in October. Considering that I also have a large position in Bank of America and a very large exposure to Toll Brothers, I have overall a very large exposure to the U.S. economy and the rebound in its housing market.  That is probably a good bet but it certainly seems prudent, given my exposure, to trim this somewhat at this time.

I don’t believe that Toronto is open for trading on the 26th but I believe the U.S. markets will be open.

December 23, 2014

On Tuesday the S&P 500 and The DOW again hit record highs.

The S&P 500 was up 0.2% and Toronto was up 1.1%

Most of the stocks I monitor were up. Canadian Western Bank was up 3.3%. Melcor was down 2.2% which I would attribute more to randomness and the thin trading than anything.

I am pondering if I should trim my Wells Fargo position tomorrow. It makes up a rotund 19% of my equities. I have not taken profits in Wells Fargo in quite some time. Selling it would be an opportunity have at least a modest cash position. The news from the American economy has been quite strong and so maybe I should hang on. But prudence would suggest that I trim the position. I am leaning towards trimming.

December 22, 2014

On Monday, the Dow and the S&P 500 hit record highs….

The S&P 500 was up 0.4% while Toronto was down 0.3%.

Melcor was up 3.2% at $19.56…

I note the very (very) thinly traded Canadian Tire voting shares have dropped from recent highs of $257 to $202,. The non-voting shares are at $123. (The voting shares should probably be about the same.) I said the voting shares were an accident waiting to happen. Maybe they will go back up but I see no reason for it. It seems to me  highly unlikely that 1) Canadian Tire voting shares are about to be sold by the founding Billes family and that 2) in any case the voting shares even then would be worth more than the non-voting shares even if that unlikely scenario came to pass. The voting shares seem to have defied gravity for several years now. I doubt that that can continue indefinitely.

December 21, 2014

Costco is updated and rated Weak Buy / Hold at $141.77. Based on the P/E at 29.5 we could have rated it a Weak Sell. But one has to respect the fact that it is the one of the very lowest cost and most efficient retailers in the world. It will continue to grow. And it could increase profits at will by raising prices or using more debt. But it is very unlikely to raise its markups and there is no sign that it will leverage up or do things like sell off its real estate. We first added it to this site in 2008 rated (lower) Buy at $72.55. Most of the time since then we have had it rated Weak Buy or even Weak Sell. The earnings and the share price multiple have both done better than we would have expected.

The weaker Canadian dollar will hurt it somewhat next quarter. But the price might not fall because it will likely still do very well in the U.S. In the perhaps unlikely event that it fell to $125 or especially $115 I would then consider buying it. It’s a powerful company due to its low costs and so even though the P/E is high, the P/E could stay that way. I certainly would not expect the P/E to rise.

December 20, 2014

On Friday, the S&P 500 was up 0.5% and Toronto was up 0.8%. The oil sands ETF, CLO was a notable gainer, up 5.0%.

American Express is updated and rated Buy at $92.90. We first added American Express to the site last February 8 rated Buy at $87. We also indicated that a reasonable strategy might be to take a quarter or half position and look to add on dips. That is what I ended up doing. Since February the price has varies from about $84 to $96, with a recent dip to about $80 with the stock market weakness that bottomed in mid October. Overall there has not been that much of an opportunity to buy on dips. I would continue to want to hold a modest position and look to buy more on any sharp dips. Canadian investors have benefited from the slide int eh Canadian dollar. But I don’t attribute that to American Express. That gain is associated with the decision to be invested in U.S. stocks in general and is not associated with the particular stock chosen.

December 19, 2014

On Thursday, the S&P 500 was up 2.4% and Toronto was up 0.9%.

Almost all the stocks on our list were up.

As always I don’t spend much time trying to predict where the market is headed. Basically no one can because it is subject to many random events. Instead I focus on trying to react to existing stock prices by trying to find and buy some companies that appear to be under-valued and to sell out of (or reduce) positions that I hold that become apparently over-valued. This is an exercise that at least has a chance of success. Trying to predict random events does not seem worthwhile. Some people may have success predicting how long certain trends will last once set in motion. I don’t think very many have success at that. trends may also end for random unpredictable reasons.

Investors should decide if they think of stocks as ownership of small pieces of real businesses or as mere squiggles on a  screen. Most apparently are in the second camp.

December 18, 2014 12:45 pm  eastern, 9:45 am mountain time.

Wednesday was a strong day in the markets and today, Thursday is strong as well.

Canadian Western Bank and Melcor have risen somewhat.

Couche-Tard (note, our analysis is out of date due to the large price increase) is up 7.6% after announcing a large acquisition. There has just been no stopping this company. I have long said it is one of the best managed companies in Canada. In July I thought it was a reasonable but not a screaming buy at $29.26. Now it is $45.78. I sold my shares a few years ago after gaining a bout 100% and thereby missed out on much larger gains. The value was helped by the lower Canadian dollar as most of its revenues comes from outside of Canada.

When it comes to world markets I wondering what the fallout will be from the Russian situation. Also, I wonder who has lost money on oil futures. When there are massive changes in currency values and commodities there are huge traders and possibly investment banks somewhere that are on the wrong end of those bets. And their losses can cause ripple effects on financial institutions. So far I have no seen any news or concern about this.

December 16, 2014

On Tuesday the price of oil did not drop – which was news. The S&P 500 fell 0.9% while Toronto rose 1.1%.

The oils sands ETF, trading under the symbol CLO rose 4.5%. A number of stocks on our list rose but none by exciting amounts especially given the recent declines. Although CN rail was up 2.7%.

Oil was trading again this evening and appeared to be giving back Tuesday’s increase.

December 15, 2014

On Monday the S&P 500 fell 0.6% and Toronto fell 0.2%

Melcor was down another 2.2% to $17.80, Canadian Western Bank was down 1.8% to $29.41.

A few stocks on our list rose – Couche-Tard up 4.1%, and Element Financial up 2.7%.

My long-time and large investment in Melcor certainly has taken a pounding down recently.  And I bought more as it fell. Canadian Western Bank also went down a lot and I bought too early on the way down. I also bought a small amount of Stantec after it fell — and then it fell some more.

These three Edmonton-headquartered companies have fallen due to the lower oil prices. I did not anticipate that oil would fall like that. I have never attempted to predict oil prices and have generally not invested in energy stocks over the years. I did have some exposure to CLO the oils sands ETF for the last two years or so – and managed to add to that position on the way down.

Even with oil down I have been surprised at how far Melcor and Canadian Western Bank have fallen in response. It’s my assessment that Melcor is trading well below its intrinsic value and the same is true to a lesser extent of Canadian Western Bank and Stantec. It is true that if oil prices stay very low then a reasonable assessment of the intrinsic value of these companies will fall. But at this time I would judge these stocks to be under-valued.

If the Alberta economy is larger in several years then it is now then it seems highly likely that these stocks will be significantly higher in several years.

In regards to the reasons for the low price of oil I can’t pretend to have any special knowledge. But here are my thoughts.

I would say that the notion that the Saudi’s are letting oil drop simply to protect market share seems a bit absurd. To use some made up but illustrative numbers: Can it really be true that they would rather have say 30% of a $50 billion market ($15 billion for them) than say 28% of a $100 billion market ($28 billion for them)? These are made-up numbers but that would seem to be the illustrative result if they push oil prices down by 50%. It seems to me that having a market share for a finite resource like oil is a bit different than having and maintaining a market share for something like Coke. It would seem logical that a country would want to maximize its short- and long-term benefit from a finite resource. Driving the price lower would be a strange way to do that. Decreasing production at times of low oil prices would seem more logical.

One explanation for low oil prices that I have heard centers around the Saudi’s desire to economically hurt some of their enemies. That makes more sense to me.

Another explanation is that they are trying to drive shale oil out of the market. That seems unlikely to me since even if current shale producers are bankrupted the resource would still be in the ground and would be bought up on the cheap out of bankruptcy auctions and so would likely then be able to produce at lower oil prices due to the low cost of acquiring the resource.

We are also told that demand for oil is dropping. Yet the graphs I see show it increasing. Perhaps they mean increasing at a a slower rate.

We also hear that oil supply outstrips demand. What does that mean? Do they mean potential supply? I thought Economics 101 teaches that supply must equal demand and that the price adjusts to make that happen. I believe I was taught that every barrel of oil (or anything else) that is supplied (sold) must also be demanded (bought). Perhaps they mean some oil is bought for storage, but that is still demand. Or perhaps we are into some new math of economics?

Or perhaps 90% of what we hear on business television is again the need for talking heads to fill air time whether they know what they are talking about or not.

But I am not suggesting that I know where oil prices are headed. In the short term that would seem to be anyone’s guess. In the longer term I would guess higher but it’s an uneducated guess on my part since I don’t pretend to know the economics of the business. My uneducated guess would be that oil demand will keep growing to some extent with the world economy. And I would be surprised if that demand can be met at lower prices but again I have never followed the economics of the business.

It will be interesting to see if Warren Buffett comes in with an oil investment sometime during the period of low oil prices. I certainly would not be surprised by that. However, upon checking a site called www.warrenbuffett.com I see that Buffett is busy attending football games at the moment. The man gets around. I marvel at how he manages his time so well. It helps to have private jets at his disposal. Still…

December 14, 2014

Toll Brothers is updated and rated Buy at $31.56. This stock was added to the site in mid 2011, rated Speculative Buy at $21.03 at a time when it was suffering heavy losses. I added it to the site as a way to benefit from the expected recovery in U.S. home building and home prices. After that the stock briefly got as low as about $14 and has been as high as $39 and has spent the past two and a half years mostly in the $30 to $37 range. It’s earnings recovered steadily from negative levels and were recently at an “acceptable” level with a P/E of about 17 depending on how one adjusts for unusual items. This company is unusual in that it operates with a predictable lag of perhaps 15 months from signing a sale to delivering the house and booking the revenue and profit. While earnings continues to increase rapidly in 2014 its contracted sales in terms of number of units were flat with 2013 although up 7% in dollars. however signed contracts were up 10% in units and 16% in dollars in its latest quarter. It now seems likely that its earnings growth will be quite modest in 2015. But if signed contracts exhibit strong growth then the share price could increase on that basis. Now that its earnings have returned to a reasonable level and given the price to book value ratio does not seem excessive at 1.52, this company now seems like an attractive investment. It has potential for significant growth if U.S. new home construction levels return to historic levels and if the economy there continues to recover. Canadian investors face the risk that the Canadian dollar could rise against the U.S. currency.

On Friday, the S&P 500 fell 1.6% and Toronto fell 1.3%. Almost all of the stocks on our list were down as well.

December 11, 2014

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

Most of the stocks on my list were up somewhat.

A notable decliner was Melcor, down 7.0% to $18.35. This is a thinly traded stock and can be volatile partly for that reason. But apparently the market is afraid that oil prices are going to stay low and that Melcor’s sales of new home building lots are going to decline substantially and/ or that the prices it obtains for lots is going to decline materially. I notice the Melcor REIT units have not declined much in price and were up slightly today. This would seem to suggest that the market has not (at least not yet) pushed down the value of commercial investment properties. 45% of Melcor’s assets are investment properties of which its ownership in its REIT is part. If the investment properties have not declined much in value with the oil price decline then it would appear that the market believes that Melcor’s land inventory has declined in value quite significantly. And perhaps it has or will if indeed oil prices remain low and if that in turn causes a serious decline in housing starts and lot prices.

I continue to view Melcor as a good investment especially for the long term. I am already heavily exposed to it but may add to my position.

A director at Melcor bought 1000 shares a few days ago at just under $20.

Similarly an executive at Canadian Western Bank bought 2000 shares in the past few days at about $31.50.

Perhaps we will see more insider buying which would be a positive signal.

December 10, 2014

On Wednesday, the S&P 500 fell 1.6% and Toronto fell 2.4%.

Almost all of the stocks on my list were down.

The biggest decline was for Toll Brothers, down 7.9%.

Toll Brothers released earnings this morning. Earnings were up 25% compared to the same quarter last year. The company’s earnings and sales have risen rapidly since the low point in 2011. It appears that 2015 will see modest growth but the company was quite optimistic about 2016 and beyond.

This recent market decline marks the third time this year that markets have pulled back noticeably. On the past two occasions our stocks picks recovered on average. Markets are always unpredictable in the short term. In the long term they do continue to rise. The average large corporation is not going to stop making money or to stop growing its earnings.

December 9, 2014

On Tuesday, the S&P 500 ended the day about flat while Toronto gained 0.4%.

Canadian Western Bank fell another 1.5% and I added to my position in it. Most of the stocks I track were up somewhat today.

As I drove to work this morning I heard on the business news that “oil is plunging”. That sounded depressing. But, actually, they meant it plunged the day before. It was actually up for the day at the very time they were spreading that false news. In my mind it is almost never correct to say a stock or commodity IS rising or IS falling. That would appear to suggest that someone knows the direction something will head next, rather than the reality that they simply know the direction something headed in the past. And if they really do know where things are headed they ought perhaps to be buying or selling based on their apparent knowledge of the future. I mean every “trend” turns around at some point. How do people who say something IS rising or IS falling know that it did not turn around just as they made their claim? Are these the same sort of people who say things like “my gut tells me XXX will go down another YY%”? Or I “see” it headed down another ZZ%. Do people really listen to the advise of people’s guts or what they “see” (apparently in the stars). Oh well, there are 24 hours times multiple business news T.V. channels and other business news media outlets and they have to fill all that air time with something. And people do listen to this stuff, they will even constantly ask where do you “see” ZZZ heading? I say good luck with that approach to investing. And luck will be needed, I suspect.

December 8, 2014

On Monday, the S&P 500 fell 0.7% and Toronto was down 2.3%.

Once again lower oil prices were causing investors to bid down the price of many stocks.

Many reports will say that investors “pulled money out of stocks”. It’s true that some investors did so, but they could only do so by having other investors buy their shares. As a population, investors are powerless to pull money out of the market. The overall TSX market had a lower value today than it did on Friday. The difference in wealth was not “pulled out”. Instead, it evaporated into thin air. That’s how markets work.

The value of the overall stock market index should, in theory, reflect the present value of the future cash flows from the market index from now to eternity discounted at an appropriate interest rate. As forecasts of the growth of earnings and of interest rates change then the valuation of the market changes. These changes tend to be fairly radical at times in both directions. On some days the average investor makes money, on other days the average investor loses money. Those gains and losses basically come from thin air (or at least not from other investors) reflecting future expectations. In this aspect of the market winning days outnumber losing days because over time the present value of the future earnings from the overall stock market index (of corporate Canada or of corporate America as Buffett likes to say)  is constantly (but irregularly) growing as the economy expands over the years. This is a positive sum game, the average investor wins over the years. Layered on top of that, everyday some individual investors profit at the expense of other individual investors as they trade stocks with each other. That part of the market is a zero sum game.

Notable decliners today among the stocks I follow included: Canadian Western Bank down 2.8%, Stantec down 3.0%, Couche-Tard down 3.1% and Constellation Software down 3.9%.

Under the category of “Life is Just Not Fair”, we can perhaps file the fact that Berkshire Hathaway was up 0.8% today and has been setting new all-time highs quite regularly including today. And I read today that the recent huge gains in Berkshire has pushed Warren Buffett past Carlos Slim Helu into second place on the list of the world’s richest people. Number one on the list is Buffett’s very close friend, Bill Gates.

Perhaps we can take some comfort at this time from the fact that Buffett never let oil prices or macro economics interfere with his investment decisions. He simply bought the best companies he could find that were likely to earn the highest profits per dollar that he invested. He then benefited as those companies grew through investment of retained earnings. Or, if they paid a high dividend he took that money and repeated the process. He selected only companies that he felt were simple to understand — those where he could predict with confidence that earnings would grow relatively rapidly. And he focused on their earnings, not their share prices. The ideal scenario would be a share price drop even as earnings grew so that he buy more shares (of a fundamentally more valuable company) at a lower price. He never relied on the ability to sell the shares at a profit. He bought companies that he expected would ultimately be good investments if held forever and never sold. But he also did occasionally sell shares when the price seemed over-valued or he had better used for the the money.  When he bought outright control of an entire company for Berkshire, it was always “for keeps”, never to be sold. As he would say, the returns made in this fashion  have been “satisfactory”.

Shares of most profitable companies, and most certainly the broad market indexes, tend to move upwards over time. But not in straight lines. A volatile market presents opportunities for those still in the investment phase of their lives to buy more shares at opportune prices. Unfortunately, once one is in the phase of life where savings are being drawn down it is difficult to see an upside to market declines. Only if dividends are larger than the annual withdrawals or if there was a substantial allocation to cash or to assets that have not fallen in price is there much opportunity to take advantage of lower prices.

It is interesting that it is always AFTER the market falls 10% or whatever that everyone seems to get fearful. It might have been more logical to have been more fearful when the Canadian market was higher. Similarly with oil. At $64 people seem fearful of further drops but at prices over $100 they were not so fearful of a decline. I certainly can’t predict short-term oil price movements. It’s probably safe to say that oil will be over $100 again. Whether that will be in one year or five years or more I don’t know. Does anyone?

December 7, 2014

Canadian Western Bank is updated and now rated (lower) Strong Buy. Its share price has recently fallen from the $40 to $42 range of this past Summer. Nothing it its achieved earnings explains the decline. Rather, the decline is based on fears of a slow down in Western Canada (and possibly a spike in loan losses) due to lower oil prices. The company itself is projecting somewhat lower earnings growth of 5 to 8% in 2015. Obviously a slow down could a occur. Nevertheless on the numbers and on its past record of growth this stock looks relatively compelling at this price. But those who buy should, as always, be prepared to withstand a decline if that should occur.

Stantec is updated and rated Buy at $31.15 (It had a recent two for one stock split). At the start of this year we had rated it Weak Buy at $32.93 (split-adjusted). Since then its trailing earnings have increased 7.1% or 9.5% annualized and its book value per share has increased 12.1% or 16.1% annualized. On the basis of trailing earnings Stantec is a better value now than it was at the start of 2014. There are fears that its outlook for growth is lower no due to lower oil prices. However this may be offset by growth in the U.S. and by the lower Canadian dollar. About 40% of its revenues are from the U.S. I had sold my the last of my shares in Stantec in late 2013 at about $34.50 (split-adjusted) after making a very strong gain. Now I have started to buy back in. I don’t consider it be a strong Buy (which would be a more compelling Buy) but I do consider it to be a Buy and expect that it will be a good long-term investment. The short-term is always unpredictable.

December 6, 2014

I have updated the composition of my own portfolio. For this update I included an explanation of why I like to track the P/E ratio and earnings of my overall portfolio. I had started doing that years ago based on some advice I read from Warren Buffett. Later I could not find where he had said that. Recently I was re-reading his old annual letters and came across the advice in his 1991 letter.

My own portfolio gain for 2014 is still good at 10.2% despite the recent declines in Melcor which is my largest position.

On Friday the S&P 500 gained 0.2% and Toronto was about flat.

Most of our stocks rose but Canadian Western Bank fell another 2.2%. I think that is a buying opportunity. However, I have always said that banks can be risky. They operate with extreme financial leverage. At the same time a well managed bank is an earnings generating machine most of the time. In the past when Canadian Western was hammered down to low prices on fears of loan losses, those losses did not appear and the stock recovered. At this time the fears may involve both lower growth (which is certainly quite possible, even probable) and higher loan losses (which is possible but perhaps not probable to any great degree). Time will tell.

December 4, 2014

Thursday was a nasty day in the Canadian markets with Toronto down 1.9% while the S&P 500 was down 0.1%

Our Alberta stock picks were hard hit with Melcor down 6.2%, Stantec down 2.1% and Canadian Western bank down 4.6%.

I was surprised to see Canadian Western Bank down 4.6% to $33.15 after announcing record earnings of 72 cents per share and a 5% increase to the dividend after having already increased the dividend about 6% since this time last year. If it were to make 72 cents per share for four quarters that would be $2.88 per share or a P/E of 11.5.  It’s actual trailing earnings are $2.70 or $2.76 adjusted for a few items and so the actual trailing P/E ratio is about 12.1. That’s an earnings yield of over 8%. That seems attractive with interest rates at record lows.

Obviously there is a lot of fear in the markets and people are bidding down the price of stocks linked to the Alberta economy due to low oil prices. Will the the down draft continue? I can’t predict that. What I can do is observe that these three stocks alls seem to be trading at attractive prices. Alberta may well have a slow down. But I don’t think it will be permanent. It simply seems to me that on the face of it these three should all be good long term investments.

I added to my Canadian Western Bank position today. It’s always been my strategy to add to positions at lower prices unless something has happened to change the long-term positive outlook for the companies.

I may have to suffer more short term pain before seeing the long-term gains. Time will tell.

Melcor is trading at 76% of book value. And the assets that you can buy for 76 cents of the equity value on the balance sheet consist almost entirely of land, investment properties and accounts receivable. If a huge company came into Alberta and wanted to replicate these assets it seems certain that they would have to pay more than book value for the land while the investment properties and the accounts receivable should be obtainable at book value. Then there would be administrative costs to set up the business. So, it seems attractive to me to be able to buy the equity ownership in these assets for 76 cents on that dollar. In my experience it is rare for profitable companies to trade down near, let alone under, book value. The market however appears to fear that the profits are about to plunge with lower oil prices. That is always possible. It’s my belief that equity investing involves accepting a certain amount of risk and volatility.

December 3, 2014

Wednesday was a better day for the Canadian stock market with Toronto up 0.9%. Meanwhile, the S&P 500 was up 0.4%.

Canadian winners today included Canadian Western Bank up 2.0%, Stantec up 1.9%, and FirstService up 3.6%.

After the close of trading Canadian Western Bank released its Q4 earnings and reported another record quarter. Here are some value ratios calculated based on its trailing earnings as at Q3 (When I enter the Q4 numbers the value ratios will improve slightly). It’s trading at 1.85 times book value. It’s ROE is 14.2%. It retains 68% of its earnings and pays out 32% as a dividend. The dividends  yield is modest at 2.3%. But if you have an earnings engine that that is making 14% on equity it’s questionable if it should pay out any dividend at all. If you had a bank account paying double digit returns would you withdraw any money?

One can always come with scenarios of doom. What if the Alberta economy tanks due to low oil prices? What if the bank suffers huge loan losses. Well anything is possible but the question is, is this company more likely to suffer that problem or more likely to keep growing its earnings? I have been tracking it for just over 15 years. During that time its stock price is up 604% or a compounded average of 13.6% per year. It’s had its downs as well as its ups in those 15 years. I certainly like its chances for being a good investment over the next ten years. As far as the next 10 days or ten months that is harder to predict. But I am happy to climb aboard and see what happens.

December 2, 2014

Tuesday was yet another interesting day in the markets.

The S&P 500 was up 0.6% whole Toronto was about flat.

Most of the stocks on our list were up. But three Edmonton-headquartered companies that I like were down. Melcor was down another 2.8% to $20.77, Stantec was down 3.0% to $31.11 ($62.22 adjusting for its recent split) and Canadian Western Bank was down 1.8% to $34.08. I have been following two these for over 15 years and the third for 12 years. All three have seen big price drops on more than one occasion over that period. And all three have done very well over that period. I consider all three to be very well managed companies. I suspect all three will be excellent long-term investments. In the short term they could certainly continue to go down, as can any stock.

Today I bought back into Stantec which I had sold last year at about $69 (about $35 adjusting for the split). I also added to my Canadian Western Bank position. It’s entirely possible that my buying on this dip has been too aggressive and too early. Only time will tell.

Berkshire Hathaway’s A shares closed today at an even $225,000. It is almost beyond comprehension that these are the same shares that were trading at about the $14 to $18 range when Buffett took control of the company in 1965. In late February Buffett’s annual letter will tally up the results of his first 50 years of running Berkshire. Other stocks have rocketed thousands of percent in a short time. But I am not sure if any others can claim a gain of over one million percent in the last 50 years or less. If there was another, it was likely a penny stock. A one cent stock going to $100 (adjusting for splits) would be a one million percent increase, so maybe it has happened.

December 1, 2014

Monday was another ugly day for the Canadian stock market. Toronto was down 0.8% and the S&P 500 was down 0.7%.

The last I had looked the Canadian dollar was up about three quarters of a cent which reduces the value of American stocks when measured in Canadian dollars.

Notable losers included CN rail down 5.1% (apparently on fears there will be less crude oil being transported). Stantec was down 3.4%. Both of these stocks trade actively in the U.S. as well as Canada. My unscientific observation is that U.S. markets are often a lot faster to push a stock down on bad news. It may be that a higher percentage of market participants in the U.S. are trading on pure momentum and when they see a dip they push prices down fast as many people head for the exits and the only way to find buyers is at lower prices. The fact that these two trade in the U.S. may be part of the reason for such a rapid drop.

I considered buying some Stantec today but I don’t have much cash left in my accounts. Stantec’s earnings come from all over Canada and the U.S. and I don’t think are all that tightly linked to the Canadian energy “patch” or to energy in general.

I may sell more of my rate reset preferred shares to raise some cash. But I hate to sell unless I can get somewhat more than I paid.

Meanwhile seeing a new offering for a 4.5% five year rate reset preferred share from Husky (I got the notice from TD Direct) I put in for 500 shares of that. That was before I noticed Stantec was down.

Another decliner was Canadian Western Bank down 3.9%. I added to my position today. I believe it is due to report earnings in the next week or two.

Liquor Stores N.A. has announced that it is selling 3.4 million shares at a gross price of $14.65. (and presumably somewhat less than that net of fees_. The process will be used “initially top repay outstanding indebtedness under its credit facility, thereby freeing up borrowing capacity that may be redrawn and applied, as required, to fund, among other things, working capital, acquisitions, construction and/or renovations of new or existing stores and information system upgrades.”

The current share count is 23 million, so this is a hefty 15% increase in the share count.

This is a high dividend entity. It is constantly paying out cash and now it is selling shares to raise cash. I struggle with how that makes sense mathematically.

I realize that REITs do this and I hope to do some analysis to understand why it makes sense for REITs.

If a REIT or a Liquor Store chain is paying a dividend from the profit or at least cash flows on existing buildings and stores and then uses newly raised cash to build new buildings or new stores, maybe that makes sense (Although I am not really convinced of that).

But in the case of Liquor Stores N.A. it has been paying our more than it earns lately.  As a consequence , its debt has increased. On the face of it, it appears to have been borrowing to maintain the dividend. It has done some investing in stores, but lately not more than its depreciation expense.

I do think it is a good thing for the company to sell shares. The sale will strengthen the balance sheet and I think they are getting a good price for the shares. If the company is getting a good deal selling the shares at $14.65 (less costs) are the share buyers getting a good deal?

Maybe this will all work out and Liquor Stores N.A. will resume its former growth. But I am just not convinced.

November 30, 2014

Canadian National Railway Company (CNR or CN or CNI) is updated and rated Weak Buy / Hold at CAN $81.23 and U.S. $71.05. I have now been “tracking” CN for 15 years. Its share price is up a staggering 905% in that time or 17% per year on average. I have not tracked its ROE all the way back but in the last five years the ROE has been above 20%.  That explains much of the earnings and share price growth. I have long described CN as having to some extent monopolistic characteristics. The stock is up 34% this year to date . That’s a HUGE gain for such a large company. Part of the recent gain is explained by the lower Canadian dollar because its U.S. earnings are worth more as the Canadian dollar sinks. It has also see huge growth in hauling crude oil in the past few years and it had a bumper crop of grain to haul in 2014. I like it very much as a company. But as a stock it seems somewhat expensive and I am not a buyer at this price.

Regarding Liquor Stores N.A.  I lost money on that company and, more importantly, some others no doubt invested based on our analysis (albeit at their own risk) and lost money. We have it rated as a Sell at $13.31 and it is currently at $14.85. So, I may be somewhat biased against it. (We all have our biases whether we admit it or not). In any case I was in one of their stores yesterday. (I have to admit they have convenient locations, which is the reason I was there for a small purchase). In other news I spoke to someone recently who had worked at one of their large new Wine and Beyond stores. This person told me that sales were slow in November and that some staff shifts had been cut back. I imagine all liquor stores will do pretty well in December. But the problem in Alberta is there seems to FAR to many stores.

November 29, 2014

Friday was an ugly day in the market for those with exposure to oil and gas stocks or anything related to it.

The S&P 500 was down 0.5% and Toronto was down 1.2%.

Lower oil prices hit the Toronto market hard. I have always been clear that I have no ability to predict oil prices. It seems there are some people who, also having no such ability, nevertheless thought and claimed that they had that ability. Jeff Rubin threw away a very lucrative career as chief economist at CIBC World Markets in order to be free to go forth and warn the world that oils was going to get WAY more expensive. On a quick Google search I find the following: “In April 2008, Jeff Rubin, chief economist at CIBC World Markets, predicted a barrel of oil would cost $225 by 2012. With oil at $118, it was a controversial call.” In 2009 he quit his big job in order to publish his book predicting “peak oil”.

Well at least Jeff had the courage of his predictions. He was wrong but honorable. With the current lower oil prices I am sure we will hear from many who will claim to have predicted it. Many will also jump on the band wagon and predict prices to go lower.

Again, I can’t predict oil prices. I have often mentioned in the posts below that lower oil prices were a risk to the Alberta economy. I did not predict it but I noted the risk.

My approach to investment over the years has not been to avoid risk. It has been more an approach of accepting risk. In particular I accept short term risk when I think the long term outlook for a company is solid.

While my own account saw losses in the last two days, I am still ahead by 11.9% this year which is not a bad result.

Back to Friday’s stock movements…

Melcor was down 6.5% to $21.51. With the lower price I (perhaps in an act of stubbornness) added modestly to my position at $22.10. And I placed an order to buy a bit more at $21.10. Our latest update on the stock indicated that it looked very good based on its numbers but specifically mentioned the risks associated with oil prices and the Alberta economy. I am comfortable holding it, but it is not without risk. Other notable declines, in stocks on our list, were CN rail down 4.4% and Stantec down 1.8%.

U.S. stocks fared better. Walmart was up 3.0% to $87.54

Costco continued its winning ways, up 1.7% to $142.12.

The drop in the Canadian dollar on Friday also pushed up the value of American stocks when measured in Canadian dollars.

November 27, 2014

On Thursday, the American  stocks exchanges were closed. But Toronto was open and fell 0.8%.

I got clobbered on my oils sands ETF CLO which was down 8.7% to $10.59. This ETF reached a high of $16.00 in late Spring / early summer this year. That’s a decline of  34%. With this decline I added a little to my position at $10.73.

Obviously the decline in oil prices is a worry for the Alberta economy.

Canadian Western Bank fell 4.1% to $35.95. I had an order in to add to my position in this bank if it fell to $35.75. As a few days ago that looked unlikely. But it did touch $35.75 today. My order was for 500 shares and I got 100. Canadian Western Bank has a very strong history and I like it at this price. It’s share price could certainly drop if oil stays low and its earnings could too. But longer term on  the balance of probabilities this will turn out to be a good investment.

Canadian Tire had a strong day, rising 1.8% despite the weak market.

My guess is that tomorrow will see some bounce back in oil prices.

The Canadian dollar fell today which does push up the Canadian dollar value of any U.S. stocks that we own.

Given this display in Canada, it will be nice to see the U.S. markets open tomorrow even if for just a half day.

November 26, 2014

On Wednesday, the S&P 500 was up 0.3% and Toronto was down 0.2%.

Liquor Stores N.A. was up 1.6% to $14.91. Looking at the earnings and looking at the low level of business at their stores in my area and looking at the extreme level of competition in Alberta I would use the price rise to sell this. I sold at lower prices…

I notice Agrium was down 1.8% to $109.20. I sold last week at $116.69, so with one week down and infinity to go, my sell looks like a good move so far.

Today, Manulife was out with an IPO of 5 year rate reset preferred shares. With a yield of 3.8% I did not buy any. Some of the rate reset shares that I bought earlier this year had yields as high as 4.5% and seemed like safe companies. My threshold is 4%. At 4% or more I don’t mind grabbing some of these as an alternative to cash. But given some risk that they could trade under the issue price I am not going to bother buying any under 4.0%.

The one investment that has been a noticeable negative for my portfolio in the last several months is my investment in the oil sands ETF, that trades under the symbol CLO. This ETF is not on my list above but has long been on my list of Canadian Exchange Traded Funds.

In 25 years of investing I have rarely owned any energy or mining stocks or any other commodity stocks. And that was working well. I bought this one for perhaps a silly reason, to get “exposure” to this sector. This spring I was sitting on about a 30% gain and considered selling but I kept it. Now I am sitting on a 5% loss. I certainly had no ability to predict short-term oil prices. At this point there seems to be a lot of pessimism around oil prices. At this point I will likely keep this and will even add to it if it goes down much more. At some point oil prices will likely rise again but I have no idea when. Also perhaps this one will rise if Keystone pipeline is approved in January. I am not in a big hurry to buy more commodity companies.

November 25, 2014

Canadian Tire is updated and rated (lower) Buy at $125.50. The stock is up 26% this year to date. We had rated Buy at $99.49. Normally it might be expected to rate a weak buy / hold after a 26% gain in 11 months. But the earnings per share have risen about 14% since the Q3 2013 numbers that we used to arrive at the Buy rating for the start of this year. Based on earnings it is roughly 10% more expensive per dollar of earnings than it was year ago.

A bit if history…

I have mixed feelings about Canadian Tire’s performance. I still own 700 shares and so I benefit from the rise. But in the late Summer of 2011 I owned 3736 shares and the price was $57 (and my price paid was likely below that). It was my largest position. Back then the stock was selling down close to book value and seemed like an obvious bargain. We had it rated Strong Buy at $52.40 in an update of August 27, 2011. I mentioned it to a number of people back then even outside of this web site and the general reaction was quite skeptical.

Somewhat regrettably I started selling too soon as the stock rose in price. It had been over 20% of my portfolio which by conventional wisdom was WAY too high. Perhaps I should have ignored such conventional wisdom and let it run up to 30% of my portfolio. In any case I made good money on this investment despite taking some potential gains off the table too early. Also, I did buy some back on dips after selling and then sold those again later but that helped my return versus simply selling.

At its current price it could keep rising. But it could also easily slip back 10% or more on an earnings stumble. Such a slip would likely be a buying opportunity.

I notice the Canadian Tire voting shares CTC are now trading at $255 over 100% higher than the non-voting shares CTC.a The voting shares are extremely thinly trades (635 shares today). I have been skeptical about the huge premium on the voting shares for a long time. And so far I have been wrong. But I firmly believe that these voting shares are an accident waiting to happen. Over 90% of the voting shares are held by the founding Billes family (Matha Billes 41%, her son 20%), the dealers association and the employees profit sharing plan.  In this situation the ability to cast a vote seems pointless as the controlling owners can always win every vote. Possibly someone is trying to get a hold of several percent to try and get a Board seat. Back in the 80’s there was a big take-over battle for Canadian Tire and someone tried to buy control by offering a high price for only the voting shares. The courts ruled against it and there is now a stipulation that if someone buys a majority of the voting shares then all shares become voting. It does not look like anyone could gain control without all shares becoming voting. In theory one might gain effective control by buying only Martha Billes 41% but it is highly likely that such a move would face challenges. And, if someone wanted to Buy Martha’s shares, why would they fool around buying a few percentage on the market at a huge premium?

I conclude that the $255 voting shares are an accident waiting to happen. Someday, someway they will end up worth no more than the non-voting shares. That is my long-term prediction.

On Tuesday the S&P 500 was down 0.1% and Toronto was up 0.4%.

Couche-Tard was up 4.0% on another good earnings release.

November 24, 2014

On Monday the S&P 500 was up 0.3% while Toronto was down 0.6%.

Toll Brothers was up 0.8% which put it just above $35. In October it had gotten down under $30 and I reported adding to my position under $30. Stantec was down 2.1% at $34.00 (it recently split 2 for 1). I am tempted to buy back into this company at this price.

November 23, 2014

As another year draws to a close our performance figures for 2014 look good. Our two Strong Buys from the start of the year are up 19% (Wells Fargo) and 18% (Melcor). The average for all the 15 stocks rated in the Buy or Strong Buy ranges is a gain of 10.9% which matches the rise in the TSX. My own total portfolio is up 14.1% despite having a healthy allocation to cash most of the year. Regarding my two RRSP accounts the gain there was 13.4%. If I calculate this year’s RRSP gain as a percentage of the total money that ever went into these two RRSPs the gain on that basis is 107%.

Friday was a strong day in the markets with the S&P 500 up 0.5% and Toronto up 0.2%

I mentioned that I had placed an order to sell any of my pref. shares if they happen to rise to about $26.00. They only pay 4 to 4.5% per year and $26 is 4% higher than the $25 I paid for these and I figured I might as well grab the 4% if they go to $26. Also it was a way to “play” market volatility.

For  Brookfield Asset Management series F preferred share I set the sell price at $26.10 and it sold on Friday. I had bought these at the IPO at $25.00 as noted under May 27 below. I have received one dividend on September 11 of 36.06 cents per share. (I believe the first dividend was for a bit more than three months). So in total I had a return of $1.4606 per share or 5.84% in about six months. So, that is a good return. Some would calculate this as 11.68% annualized but I don’t really think that is a useful way to look at it. In the other half of the year that money might be in cash earning nothing or in stocks earning or losing who knows what. So I just look at it as a 5.84% return. But yes it is nice to do that in six months on a low risk investment. Maybe I would have been better off to hold the shares but that depends what I do with the funds received.

I posted a new article with some very basic math on how to value cash flows from things like safe bonds and safe preferred shares where the cash flows to be received are known with close to 100% certainty.

I plan to write another article extending this valuation to stocks where the cash flows are always uncertain (but sometimes can be conservatively estimated).

November 20, 2014

On Thursday, the S&P 500 rose 0.2% and Toronto rose 0.6%

Couche-Tard was down 3.8%. I did not see any news top explain why.

November 19, 2014

On Wednesday the S&P 500 was down 0.2% and Toronto was about flat.

Bombardier was up 2.0%. The company always seems to have its struggles. I’d certainly like to see it it do well. It seems to have great products but is in a very competitive industry.

Walmart was up 1.4% to an all time high. It’s still a powerful competitor in the market place. A lot of people sort of wrote it off as an investment in the last decade but it has quietly increased it earnings and gone about its business.

I see a report today that grocer Metro has seen sales benefit due to a rise in meat prices. Actually I don’t think a business benefits when its sales rise simply because of inflation. Same store volume sold matters more than same store sales dollars. If , for example, prices fell 5% and a grocer’s sales fell only 3% I would call that a great quarter because volume had increased 2%. Analyst focus too much on same store dollar growth. If they had the figures they would likely focus on same-store volume growth. But such figures are typically not available. In a world of 3% inflation a grocer needs 3% same store dollar sales growth just to stand still. If inflation were 0% and same-store dollar volume great 2% that would be a strong result, and far superior to 3% growth in a 3% inflation world.

November 18, 2014

On Tuesday the S&P 500 closed up 0.5% for yet another record high. Toronto was up 0.6%.

The biggest gainer for the stocks on my list as Agrium which closed up 2.6% at $115.60. This morning it was as high as $117.56 or up 4.3%. At my recent update of this stock I was relatively luke warm on it. So, this morning seeing a 4% jump and not immediately seeing the reason for it I decided to just sell my relatively modest position. I sold at $116.69. It seems that the reason for the gain today was that another company had had to shut down a potash mine and this would push up the price of potash.  I had bought the shares at the end of June for just under $100. So, I was up about 17% and just decided to take my gain and move this money into cash. Perhaps I should have held to see what happens with the activist investor. I considered selling just half but it was a relatively small position so I just cleared it out.

My thinking is also that I don’t mind having some cash in the account just in case we get a pull back related to the economy or “geo-politics’ / world terrorism.

November 17, 2014

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

Canadian Tire was up 1.7% to $127.137and set another high. It’s up 28% this year. And that’s on top of a 43% gain in 2012. It started 2013 at $69.38. I have not yet updated for its excellent Q3 results. Given the strong Q3 the stock is probably still not very expensive. Still, I took most of my money off the table on this one. I still hold some in a taxable account. In tax free accounts where there is more freedom to trade without capital gains taxes I would be inclined to reduce my position at this price (But keep in mind I have not updated my analysis for the Q3 earnings – nevertheless, that is how I feel at the moment).

Liquor Stores N.A. was up 2.9% today. Having lost faith in management of that company, if I had not already sold I would be using this current increase as an opportunity to reduce or eliminate this position.

I mentioned activist investors yesterday. Sometimes they certainly push share prices up. But when I look at the most successful and fastest growing (in terms of share price) companies that I have followed for may years none of them benefited from an activist shareholder. They all have had the same CEO for many years or else promoted CEOs from within. This includes Stantec, Canadian Tire, Melcor, Canadian Western Bank and Alimentation Couche-Tard. I believe that would also include all the big Canadian banks and Wells Fargo and. of course, Berkshire Hathaway.   It seems to me that activist shareholders are a big benefit only where current management is relatively incompetent.

What about some companies that took in CEOs from outside? Nortel was one, Blackberry is another. Air Canada under Robert Milton was one. I always take it as a bad sign when a company feels that it must go outside for a CEO.

November 16, 2014

As you may have seen in my email of yesterday if you are on the list for my free newsletter, I am currently working on a series of articles that shows with actual data that people who invested annually in U.S. stocks (the S&P 500 index) over a 30 year period have ALWAYS ended up at least preserving their spending power after inflation and, on average, have more than tripled their spending power, after inflation. And keep in mind that when money is saved regularly for 30 years, the average length of investment is only 15 years. The results from investing in the S&P 500 index only get better when longer time periods are examined. These results are not restricted to the S&P 500 index, but that is the index for which I have all required the data.

Here is a link to the first article in this new series.

http://www.investorsfriend.com/Saving%20versus%20Investing.htm

On Friday the S&P 500 was flat while Toronto was up 0.4%.

Alimentation Couche-Tard was up another 1.6% and is up a stunning 52% this year. Subject to further updates we would judge it too expensive at this point. (I personally sold this one WAY too early). This company flies somewhat under the radar but is truly an amazing Canadian success story. Element Financial was up 3.1%. It has been relatively volatile. Liquor Stores N.A. managed a 2.9% gain on Friday after releasing earnings that did not look impressive to me.

Agrium is updated a rated Speculative Buy at $113.19 or U.S. $100.28. It’s a strong company with excellent past growth. It is also cyclical. At this time earnings have been declining and I do not find its valuation to be compelling. It might be worth holding as a speculative pick. The recent share price increase due to an activist investor getting involved is s=not something that enters my analysis. Maybe that investor will encourage actions that “release” value. But to me, activist investors are only a benefit where a company was poorly managed and where a change of management can be brought about which appears to have been the case at, for example, CP Rail. I did not own CP rail and I can not think of a single case where one of my investments benefited from an activist investor in all the years I have been investing.

Agrium is a complex company. It’s relatively new to our list and I can’t say that I have really internalized a lot about its operations to the point where I have much of an understanding of its economics and outlook. In addition its product prices are very cyclic and so are some its major input costs including natural gas.  I cannot claim any particular insight into its future earnings. I do think it is an interesting company and one that I will enjoy learning more about. Looking simply at the numbers right now it is neither very expensive nor very cheap. Given the recent share price rise which was simply associated with activist interest I personally am perhaps more inclined to reduce my position and take my modest profit than I am to add to my position. The path of least resistance for me is to just continue hold my modest position.

My plan for the rest of this year (six weeks) is to try to get all the stocks updated for Q3 earnings releases or any other earnings releases out by year end. Every year I try to start to the new year off with everything updated relatively close to to the end of the year. At that time I also tend to delete any companies that are both well out of date and which I don’t update due to lack of time or interest in them. This year there may not be any deletions or at most about two. After that early in the new year I would hope to find time to add a few new and perhaps interesting stocks to the list.

November 14, 2014

On Thursday, the S&P 500 was about unchanged while Toronto fell 0.5% on lower oil prices.

After the close Melcor announced that it would sell $138 million worth of its rental buildings to its 47% owned REIT. It appears that $45 million will be paid through issuance of REIT units to Melcor which will increase its ownership of the REIT to 56%. Fundamentally not a whole lot is happening here since property already carried at market value is being sold to an entity which Melcor owns about half of for market value. If the market views this as favorable to the REIT and its growth then the REIT units might rise which would in turn pull the Melcor shares up. If nothing else this news may bring Melcor to the attention of investors which should be positive for its price.

Berkshire Hathaway announced this morning a small to medium acquisition. It will buy the Duracell battery brand from Proctor and Gamble for $3 billion. It’s an odd deal in that Berkshire will pay for it by trading essentially all of the shares it owns in Proctor and Gamble. To make things even out Proctor and Gamble has to throw in $1.7 billion in cash. This is really not a large acquisition for Berkshire which has $517 billion in assets.

Buffett / Berkshire has held P&G shares for many years. The shares were acquired when P&G bought Gillette which Berkshire had previously owned for quite a few years. In recent times P&G had come in for some criticism and as I recall Buffett had been mildly critical.  Buffett was sitting on HUGE capital gains on these P&G shares and would have faced hundreds of millions in income tax if he simply sold the shares. So this acquisition allows him to trade the P&G shares for Duracell and likely will not generate any capital gains taxes.

I had been surprised over the years to hear that Duracell was a money loser or at least not a big profit maker. When you look at the price of batteries and consider manufacturing efficiencies, I would have though they would be a high profit item. Also Duracell is a strong brand name. To me, this looks like a good fit. Buffett gets yet another brand name business. And he will set it up so that he president of it or top manager will have big incentives to minimize the capital invested and maximize profits. Berkshire will make sure that Duracell has all the money it needs to invest appropriately and to advertise. Any excess cash flow will go straight to Buffett to invest elsewhere. Duracell will be relieved of certain head-office related costs and will likely have a reduced burden of reporting. Buffett will want all the details on weekly sales but they won’t likely have to spend time preparing budgets and strategic plans or Board presentations for Buffett since he is not a big believer in such things.

For Proctor and Gamble this is basically a massive stock buyback funded partly with cash and partly with its Duracell unit.

Berkshire (B) shares are up 23% this year to $146. Buffett has crushed the likes of Doug Kass who was stupid enough to short Berkshire shares in the Spring of 2013 at prices from about $90 to $110 who and even got invited to speak his silly views at the 2013 annual meeting. It would be one thing to simply choose not to own Berkshire. That is perfectly valid. But to short the company was just stupid.

Liquor Stores N.A. released earnings after the close. While the same store sales growth was good at 3%, profits are down somewhat compared to last year. As noted previously, I basically gave up on this company. I used to think it could be a good growth and industry consolidation story with scale advantages but I basically lost faith in management.

November 12, 2014

Wednesday was a case of another day and another few dollars made. The S&P 500 was down 0.1% but Toronto was up 0.6%

Gainers included Canadian Tire up 1.7% to $126.00. Agrium. up 2.3%.

I noticed an offering today of Melcor REIT convertible debentures at 5.5%. I got an alert email from TD Waterhouse. It looked somewhat tempting. One of the problems with new issues is there is usually zero time for analysis by the time the alert comes out. There may have been a preliminary prospectus filed earlier but few investors would be aware of it. If I am not mistaken, the institutional investors do get time for analysis. This takes place in a “road show” process that follows strange archaic rules. I believe it is an instutionalized form of legal selective disclosure. Whatever, there are alwys parts of the market that are unfair to retail investors. On the other hand there are PLENTY of opportunities for retail investors. Institutional investors are usually somewhat forced to go along with the crowd where as retail investors are free to be contrarian whenever they wish. Ultimately, one does not beat the market (the crowd) by following the crowd.

This particular convertible debenture sold out quickly. All else equal a convertible option on a REIT may not be as attractive as a convertible option on a more normal corporation. REITs dividends all their earnings and so can have a hard time growing the unit price. Perhaps Melcor will grow but it does not have the advantage of retained earnings to add to the growth in price per unit.

With the lack of time for any analysis and with the fact that I am already hugely exposed to Melcor I decided not to grab any of this convertible debt.

November 11, 2014

While many of us had today off the American and the Canadian stock markets were both open.

As happens every day “the market” or at least the consensus opinion of the marginal sellers and the marginal buyers of each stock changed the view of the value of most every stock. Some up, some down, a few basically unchanged. This happens everyday and, except for as few as four times a year, usually has nothing to do with any real specific news about the companies involved. Sometimes it has to do with general changes in the economy such as interest rates or jobs reports. Most of the time (probably at least 90% of the time) these day to day price changes are basically meaningless noise. When the moves are larger or accumulate up to larger moves over a period of time we can perhaps use the price change to advantage in buying and selling — assuming we have some idea if the stock is now over-priced or under-priced.

Despite the fact that the movements are usually noise, we do tend to pay attention.

In the longer run there is a method to this noisy madness and stocks tend to rise or fall  for important fundamental reasons over the long term.

And sometimes what looks like daily noise can in fact be linked to important fundamental reasons. Sometimes the reasons are fairly widely known (but I may not be aware of them) other times the reasons could be relatively unknown such as leaked information.

In today’s noise:

The S&P 500 rose 0.1% and Toronto rose 0.3%

Toll Brothers was up 2.3% (In fairness there is some signal on this one as this movement is still related to its improved sales figures released Monday morning).

Melcor fell 1.8%. I certainly consider that to be noise because the stock is thinly traded and therefore subject to downside volatility simply because an extra trader or two decides to sell on a given day. Similarly its price can rise a few percentage points just because a few extra people decide they want to buy on a given day.

I notice the debentures of Liquor Stores N.A. were up 1.4% to $104.98. These pay 5.85% on a $100 and mature in about three and a half years. So roughly this looks like about a yield to maturity of about 4.15% considering that the current yield is 5.57% and from that I would deduct about 1.42% per year to reflect it maturing at $100. (The math is not exact here but should be close). The debentures also are convertible into common shares at $24.90. At the moment the common shares trade at $13.70 and the company has been struggling. So I can’t see much if any value on that conversion option.

For a yield of around 4% and reasonable stability of price or expected redemption I would look to some of the rate reset pref shares I have mentioned.

Overall I would ascribe the little rise in this debenture to its low trading liquidity and what I might call “silly buyer syndrome”. Note that I did rate these a (lower) Buy in August 2013 at $104. But at that time the common was at $15.90 and seemed more likely the conversion option could pay off. The trade up to to $104.98 today looks like noise to me.

November 10, 2014

On Monday the S&P 500 rose 0.3% and Toronto rose 0.1%

The Canadian dollar fell which raises your wealth if you own U.S. assets and measure your wealth in Canadian dollars. But it lowers your wealth if you have Canadian assets and measure in U.S. dollars. If you are Canadian and own Canadian assets that are unaffected by currency (houses would be one) then the currency change really has no impact. Most people would measure their wealth in the currency in which they live. If you think you might spend 25% of your wealth in the U.S. then a logical approach might be to have 25% of your investments in the U.S. and then ignore currency movements. That is measure two pots of wealth, a Canadian pot and a U.S. pot and ignore currency changes.

However, some Canadian companies are affected by changes in the dollar. In general those that have costs in Canadian dollars and sales in U.S. dollars (exporters) benefit from a lower Canadian dollar. Those who face costs in U.S. dollars and sell in Canadian dollars (many retailers) are hurt by a lower Canadian dollar. Hedging can offset this for a while but it can only be a temporary solution. (Virtually no company does or even can hedge out more than a couple years.)

Toll Brothers was up 2.3% today after an early release of its latest quarterly sales figures.

As of today, 2014 has been a bumpy but rewarding year.

November 9, 2014

Melcor is updated and rated (lower) Strong Buy at $23.89. Its just released Q3 earnings report was very strong. There was however a modest market value decline on some of its rental buildings and this could be a sign of more to come. Based on achieved earnings and the fact that it is selling at about 92% of book value per share this is clearly a Strong Buy on that basis. However it is a cyclical company and so that certainly adds risk in the shorter to mid term. If Alberta’s economy declines materially such as due to lower oil prices then the share price would likely decline. A sharp rise in interest rates would likely have the same effect. Longer term It is very likely to be a good investment barring any large and permanent decline in the Alberta economy. Overall based o the achieved earnings and the price in relation to earnings and book value, I feel quite comfortable owning this stock. But like most stocks it is not without risk.

November 8, 2014

Berkshire Hathaway is updated and rated (lower) Buy at $143.61. Berkshire has always been difficult to analyze because its results are a bit volatile by nature due to the impact of catastrophes on insurance results. Also its earnings have been under-stated because when it owns say 9% of Wells Fargo it only gets to report the dividends as earnings and not its full 9% share of earnings. These missing earnings turn up in gains on the Wells Fargo shares but those do not flow into earnings. For this update I have introduced a new view of adjusted earnings for Berkshire based on the assumption that its adjusted earnings are 10% of book value per share since it has increased its book value per share by a (lumpy) average of 10.7% per year in the last ten years (and the last five years was over 14%). On this basis its intrinsic value appears to be in the range of $129 to $169.

On Friday the S&P 500 was about flat, while Toronto rose 0.9%.

November 6, 2014

In Thursdays market the S&P 500 rose 0.4% and Toronto rose 0.1%.

Melcor rose 3.0% to $23.90. Volume at 21,500 shares was a little higher than normal. It’s a somewhat thinly traded stock. The value traded today was about $514,000. And lots of days it might trade only $100,000 worth.  By way of comparison, Royal Bank traded about $144 million worth today and Stantec traded about $9 million worth. Melcor is thinly traded but it’s not incredibly thin. It has enough trading volume to suit the needs of most retail investors. One simply has to be a bit more cautious in buying and selling to not simply put in a market order as the price can move even on a few hundred shares bought or sold. It’s best to put in an order at a specific price (a limit order).

About the only time I worry about really thinly traded stocks is that I would not put an extremely thinly traded stock on my list because in that case a few buys from my subscribers could push the price up. I never ever engage in trying to push stock prices up. I try to predict which stocks will rise (on the basis of fundamentals). I would never engage in promoting a stock in the hopes of causing it to rise. I consider that to be unethical even if the stock truly should rise. It’s definitely unethical if a stock is not worth much and someone tries to push the price up just so that they can sell at a profit. Always be cautious is someone is promoting a very tiny company or a very thinly traded stock. Those are prime candidates for “pump and dump” schemes.

I was a bit surprised when Royal Bank rated Melcor a Buy this Spring. With their many thousands of brokerage customers I would have thought Melcor would be too thinly traded for them to rate it.

November 5, 2014

On Wednesday stocks rose. In part, this was due to the republican gains in the U.S. elections.

The S&P 500 was up 0.6% and Toronto was up 1.1%.

Some notable gainers included:

VISA Inc. up 2.7% at $250. This is a company that touched under $200 less than three weeks ago on October 15.  A 12.5% gain in three weeks would not be out of the ordinary for a small company. But this is a HUGE company.  The market cap is $157 billion. On October 15 the market cap was about $126 billion, or $31 billion less than today. It’s interesting to ask where did this extra $31 billion which we might say is “invested in Visa” and “invested in the market” come from? The answer is from thin air. The extra $31 billion is a result of investors simply deciding to bid up the price of the shares. In theory this is because investors have decided that the risk-adjusted or present value of all the probable future earnings of VISA is now about $157 billion, $31 billion more than the perception of the of the value as of October 15. It’s not likely that both of these perceived valued were “correct”.

The financial press likes to describe a price rise as money flowing into a stock. As popular as that description is, it is in fact totally wrong. It is certainly not the case that anything close to $31 billion “flowed into” VISA stock in these three weeks. In fact basically not a cent flowed into or out of VISA. It did not pay a dividend though it may have gone ex-dividend which should have decreased its price by 40 cents, which is immaterial. And a small amount of options may have been exercised but that would be immaterial and also would have added to the share count and should have decreased the share price if anything. And there may have been some share buy backs which would be money flowing OUT of VISA as opposed to in. What happened was investors traded shares of VISA among themselves and bid up the price by $50 and so bid up the market cap by $31 billion but those trades were between investors and did not involve any cash flowing to or from VISA. I am not sure of the total dollar volume traded but it basically has no relation to the $31 billion in any case. (VISA can trade $500 million a day and the stock can go up or down, there is no relation here).

I had rated VISA as only a (lower) Buy on October 12 at $212. It certainly looks expensive now. I had the trailing P/E at 25 at $212, so now it would seem to be about 29, which is high. But the recent share price illustrates that it is hard to keep a good (largely unregulated and near) monopoly down. It seems I recently sold too early at $241 and so I may be a bit biased for that reasons, but I would not buy it now and since I sold at $141 it can assumed that I would certainly be a seller at $250. I would not however short the stock which is a FAR different game. Also the I note that the P/E based on analyst projected 2016 earnings is 20 which is high but not outrageously high. On that basis holding could still be a reasonable strategy. If I held it I would want to be in a position to add to the position if it fell back to $220 or $210 or so.

Okay, other gainers:

Canadian Western Bank up 2.4%, Canadian Tire up 2.2%, The oil sands ETF CLO on Toronto up 3.1% (This one appears on our list of Canadian Exchange traded Funds and is in my own portfolio though not on the list above.)

As far as decliners, Constellation Software was down 3.5% but this is after recent sharp rises.

Melcor was out with strong earnings after the close. This stock looks like excellent value, But there is the risk of a decline in the Alberta economy with lower oil prices. The company has not seen any slowdown and continues to say it is cautiously optimistic. This is my biggest holding which is a risk, but overall I feel very good about owning it. I await to see if there is any price reaction tomorrow.

November 4, 2014

I remember times when the markets seemed boring for weeks and months at a time. But it seems like its been years since that was the case.

Today the S&P 500 fell 0.3% and Toronto fell 1.0% as oil fell about 3% to just over U.S. $77.

I got fairly clobbered with Melcor down 4.7% to $23.15. A 4.7% decline hurts when its your largest position. On the other hand today’s loss comes at a time when my portfolio had in recent days regained and surpassed its previous high for the year. So, perhaps it just my turn. Since I have a highly concentrated portfolio and one with significant exposure to Alberta and oil, a certain amount of volatility is not surprising.

Canadian Western Bank was down 3.8% today to $36.24 and I grabbed some more of that. Also grabbed some more of the oil sand ETF CLO on Toronto which was down 4.3%. That may seem a strange and dangerous strategy given I already had heavy exposure to oil. But it fits in with my usual modus operandi of buying low or at least lower.

I am confident (but can’t guarantee) that Canadian Western Bank will be going higher in the long term.

As for oil, I really have no ability to forecast that but am just buying the oil sands ETF at this lower price.

As always. some stocks rose today. Costco was up 1.7% to another record high.

Sometimes buying on dips can turn into short term pain for (hopefully) eventual long term gain. That is a risk I am taking.

Couche-Tard was up 1.7%, possibly helped by the small cuts to merchant fees that were announced by Visa and MasterCard. Regarding those fee cuts I have not seen any information on how the cost is shared between VISA Inc. and MasterCard versus the banks.

Agrium rose 1.2% on earnings that were lower but that beat expectations. I will plan to update Agrium within a few days.

I mentioned the other day that tend to sell those rate reset preferred shares that I bought on IPOs this year when they hit $26. I had thought one of them was over $26 but I had the wrong symbol. I have now placed orders to sell any of these that hit $26. This is in RRSP and RESP accounts where I don’t have to worry about tax consequences.

November 3, 2014

On Monday the S&P 500 was about unchanged while Toronto fell 0.5%.

Oil fell 2 or 3% to close under U.S. $80. This pushed the Canadian dollar down so that it worth only 88.1 U.S. cents.

I should probably start to get a bit concerned about the price of oil because I am indirectly but perhaps heavily exposed to oil through Melcor and Canadian Western Bank. (P.S. forgot to mention my oil sands ETF symbol CLO on Toronto) However, I am not inclined to reduce that exposure.

With the Canadian dollar at about 88 U.S. cents I have placed an order to move some cash from A U.S. money market account to a Canadian money market account. In part this is due to the favorable exchange rate but its also because in that account I had a fair amount of U.S. cash and little Canadian cash so this will balance that out.

 

November 2, 2014

Dolllarama is updated and rated (lower) Buy at $99.02. As I mentioned back on September 27, 2013, this is one of the best managed companies that I know of. They are shockingly profitable. Unfortunately the shares have always traded at a high multiple so it it never looks like a bargain. Certainly, I would like it better at say $85. If I were to buy this, I would buy what amounts to a quarter to half position and hope that the price fell to allow me to buy more at a lower price. Alternatively, rather than buy at $99, I could place an order at say $90 and see if it dips. But its not that likely to dip unless the whole market dips.

In the last 18 months or so Dollarama has been buying back shares quite aggressively. Some people consider that to boost earnings per share by mere financial engineering. In this case while it adds to earnings per share growth the underlying growth was already very strong. This is a growing company but it still has excess profits that it can use to buy back shares. Also it increased its use of debt. But I see nothing wrong with that as long as the debt level is still relatively modest which I consider it to be.

On Friday, the S&P 500 was up 1.2% and Toronto was up 1.1%.

That was driven by renewed quantitative easing in Japan. I can’t pretend to very much understand quantitative easing and the ultra low interest rates that result. Low interest rates make the returns on stocks look attractive in comparison to bonds.

This rapid recovery from the recent market decline has been a pleasant surprise. The U.S. market has fully recovered. My own portfolio has fully recovered and is back to a 14% return for the year. I certainly can’t pretend to accurately predict where the market will head next. On the last dip I reacted by buying. At this time I will look to see what I might sell.

I notice at least one of my rate reset pref shares went above $26 on Friday. The Brookfield A pref. My habit with these rate rest prefs has been to sell when they hit $26 so I will look to do so tomorrow. My reason to sell at $26 is that it is 4% higher than $25 and these things only pay about 4% per year and I expect they will eventually go back to $25.

Constellation Software rose 4.8% on its earnings release. Melcor was up 3.2% but I consider that to be basically “noise” as it is so thinly traded. Agrium was up another 2.0%.

Visa was up another 2.0% or $4.78 to $241.73. It had only been about three weeks since I bought it on October 9 and I was up about 15%. So I decided to sell it Friday at about $241. I had last rated it (lower) Buy at $212 on October 4 and so it seemed to make sense to sell at $241. Selling may well have been a mistake given the monopolistic characteristics. I’ll consider buying it back on a dip to say $220 or lower.

October 30, 2014

Well, I had to laugh when I checked the markets today and saw Visa up about 10%. Not sure I would want to buy at the new price but its certainly a nice jump in the last couple of weeks. I had noted that I bought some Visa on October 9. As a company it is “monopolicious”, though not at any price and again it does face technology and regulation risks.

This sharp rise in Visa contributed to the S&P 500 rising 0.6%. Toronto fell 0.5%.

lat week I circulated the latest edition of our free newsletter in which I mentioned that it was not surprising that Visa had done well (I did not predict this latest “pop”). Most of you likely received a link to that free newsletter in an email last Thursday evening. If you are not on the list for the free newsletter you can join the list by clicking the link here and entering your email address.

http://subscribers.investorsfriend.ca/index.php?page=signup

If you are already on the list the system will indicate that.

Most of our Stock picks were up today.

Constellation Software announced earnings that were 44% higher in Q3. I had rated it only a (lower) Buy because I would be reluctant to assume and pay in advance for growth anything close to this 44% level. So I assume a more normal level of growth in my analysis. Possibly I should be upping my earnings growth assumptions for really strong companies like this. There is a tendency to assume a regression to the mean which can tend to under value the best companies. Ideally I would find companies that would be good value even at modest growth rates and then if they happen to grow extremely fast that just becomes a thick layer of icing on the cake.

I notice Barrick Gold was in the news today regarding another 20-year low in their share price. I have mentioned the company before. In my opinion (and I admit I don’t know the full story) and on the face of things it has been an abysmal destroyer of shareholder money. I am not talking about a decline in market price. I am talking about a decline in book value where a dollar is raised from shareholders by selling shares and ultimately turned into less than a dollar over a long period of year. Peter Munk is often lauded as a business leader and yet I understand he has been losing money for shareholders for about 50 years. See Clairtone, Nova Scotia which went broke in 1967. Apparently though destroying other peoples wealth has paid handsomely.

Not only has money been lost in Barrick but it apparently (and again I don’t have al the facts) on the face of it, the company has more or less poured equipment and manpower and all manner of valuable and useful materials down a hole much of it apparently never to emerge. The Gold extracted quite simply has been worth less than what was poured down the hole.

Economies (and people) benefit when manpower and materials and knowledge are combined in such a way that the output is more valuable than the inputs.

Barrick’s apparent destruction of real and tangible goods and labour is reflected in its loss of money. I have not done a thorough analysis but I believe the figures indicate that the sum total of its reported earnings since its inception are a negative number.

October 29, 2014

On Wednesday the FED, as expected, confirmed it would end its bond buying program. There was no indication of imminent interest rate increases.

The market fell only modestly. The S&P 500 was down 0.1% but Toronto was down 0.7%.

Visa was down 1.0% but then announced earnings after the close and was up 4.2% in after hours trading. As I have said before its got monopoly characteristics. Despite the risk of regulations of its fees it is never much of a surprise when it earns more money.

October 28, 2014

Tuesday was a strong day in the markets, with the S&P 500 up 1.2% and Toronto up 1.1%

Almost all of the stocks on our list were up. FirstService however was a notable decliner, down 6.9% after releasing earnings before the start of today’s trading. It’s still up 25% in 2014.

Melcor was down 2.7% to $23.70. I would chalk that up to the volatility of a thinly traded stock. Perhaps it is a delayed reaction to the dimmer outlook for oil prices released by A Goldman Sacks analyst yesterday.

Tomorrow, Wednesday should prove to be an interesting day in the market as the FED will apparently have some statement about the outlook for interest rates and is expected to wrap up its QE3 bond buying program.

October 27, 2014

On Monday the S&P 500 fell 0.23% and Toronto fell 0.5%.

Constellation Software rose 1.9% to close just over $300. Agrium rose an additional 2.1% for the same reason noted on Friday. While energy stocks were down, most of the stocks on our list were up modestly on Monday. Many Canadian companies will report Q2 earnings in the next two weeks.

October 25, 2014

Bank of America is updated and rated Speculative (higher) Buy at $16.72. This bank is difficult to analyze because it earnings have been affected by numerous litigation settlements related to the financial crisis and other unusual items. It’s balance sheet is strong enough that even if the economy int he U.S. continues to languish this bank will almost certainly survive. It’s very likely to be a good investment in the long term. It is expected to report good earnings going forward. The analyst earnings projection combined with the P/E increasing to 14 would push its price up by 25% by the end of 2015.  I consider Wells Fargo to be a significantly better bank but Bank of America probably has the higher short-term potential to rise.

October 24, 2014

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

Agrium was up 7.5% on news that an activist investor now owned a stake around 6%. I am not sure that this is a good reason for the stock to go up. But the market seems to believe that the activist will generate some change that will drive the earnings up or otherwise add value to the shares.

FirstService was up 4.4% although it will not release earnings until next week.

Anatomy of a Winning Stock

Canadian Tire reached a new high today and closed over $125.

Three years ago in the Fall of 2011 Canadian Tire was trading around $56 to $65. It was under $60 from mid-July through tot the end of October 2011. So the stock is up over 100% from the prevailing price three years ago.

So what explains that?

We can divide the gain into two components:

1. Gains in its earnings per share and resulting gains in its book value per share.
2. Gains in its multiple as in the P/E ratio and Price to book ratio which in turn reflect many things including the outlook for earnings.

Canadian Tire’s earnings per share since the Fall of 2011 are up 42%. And the book value per share is up 28%. So, 42% of the rise in the stock can be accounted for by the rise in achieved earnings.

If we are conservative and use $62.50 for the share price in the Fall of then the P/E ratio was an attractive 12.4 times earnings (and at $56 it was only 11.1). Today the P/E ratio is 17.4 times.

So the P/E ratio is up by 40% or more (depending on which price we use from 2011)

If we compound a 42% increase in earnings and a 40% increase in the P/E ratio we get an increase of 1.42 times 1.40 = 1.99 or not coincidently an increase of about 100%.

So… Canadian Tire has risen 100% from about $62.50 in the fall of 2011 to $125 today. This is explained about equally by the increase in its achieved trailing earnings and an increase in the P/E ratio.

In the Fall of 2011 Canadian Tire looked like an obvious bargain and we said so at the time and I made it over 20% of my own portfolio. The stock was basically pricing in a lot fear including what Target would do to it and pessimism about the economy and markets in general.

Today, Canadian Tire is not a screaming bargain but at 17.4 times earnings and just under 2 times book value it is also not all that expensive. We last rated it only a (lower) Buy at $115.51. Possibly I have been too conservative with this company as it has continued to do very well. But at some point P/E ratios can also come down.

A small drop in earnings  combined with a small drop in the P/E ratio can pull any stock down say 20% quite quickly. I have tried to be conservative and assumed that the P/E ratio for Canadian Tire will be in the range of 14 after my assumed five year holding period. Perhaps I should assume more like 16. I also assumed a conservative earnings growth rate of no more than 7.5% per year. By using higher growth rates and a higher P/E ratio it is possible to push the apparent value of a stock to just about any number desired within reason. I try to be conservative without being too conservative (in which case everything looks too expensive).

The ideal scenario is when we find stocks of high quality companies that appear to be obvious bargains even assuming quite low earnings growth and assuming a conservatively low P/E ratio. In 2009 and in 2011 we had a number of stocks like that. Today we don’t have anything quite that attractive on the list.

Melcor is perhaps our best obvious bargain though it can be quite cyclical. Basically to the extent some of our picks look like bargains (our banking picks come to mind) they also come with risk. Then again the market and even Canadian Tire was perceived as quite risky in 2011 which was why the bargains existed.

October 23, 2014

On Thursday, the S&P 500 was up 1.2% and Toronto was also up 1.2%

The strength of the recovery, particularly in U.S. stocks, seems surprising. It illustrates how hard it is to guess the direction of the market in the short term. I basically avoid trying to do so.

Like almost everyone, I can’t help but pay attention to short term gains and losses but it is the long term that really matters. The short term is best used to react by taking advantage of (hopefully temporary) lower prices of quality companies when the occur rather than trying to predict them.

Notable gainers today included Melcor up 2.9% to $24.10, Couche-Tard up 2.4% to $36.70.

I did add to my position in CLO the oil sands ETF at the opening price of $12.10 this morning. I had entered my order the night before with a price just above the close yesterday knowing I would pay $12.10 or less but that I would not get any if it opened above $12.10 and stayed there. It closed up  2.7% at $12.29.

Canadian Tire was up 1.0% to $124.15. It’s a strong company but I would likely take some profit if I still held it. In fact I already sold all I had in tax deferred or tax free accounts (sold too early it seems) but have held onto the shares I hold in a corporate taxable account as I prefer not to pay the capital gains tax and also not to create a transaction that I have to report for taxes.

Wells Fargo and Bank of America may be benefiting from a jump in mortgage refinancing in response to lower rates. Strangely in the U.S. most mortgages can be refinanced if rates drop and it does not hurt the banks. I believe the interest rate hit to the bank may be paid by Fannie / Freddie or they have sold the mortgages so that the hit is taken by investors in mortgage backed securities. In any case the banks do earn a fee for the refinancing and benefit that way. However, in the long run lower interest do hurt bank earnings. But then again the p?E ratios rise with lower rates. The end result is that I am comfortable buying or holding these banks.

October 22, 2014

Terrible news from Ottawa today. It was impressive the way the Seargeant at arms apparently shot and killed the terrorist. No surprise really that these ISIS-linked attacked have reached Canada. But Canada will not be cowed by this. Security will be tightened but business will continue. It’s basically our responsibility not to let these events stand in the way of normal day to day life in Canada.

Today the S&P 500 was down 0.7% and Toronto was down 1.6%.

Canadian Tire had a strong day even in the face of this day rising 1.8% to almost $123.

CLO the oils sands ETF was down 3.67% today. I can’t even pretend to know where oil prices are headed. But I do know oil is down noticable from recent levels. I will add to my CLO position tomorrow if it stays around $12.

This ETF is on our list of Canadian ETFs

October 21, 2014

Wells Fargo is updated and rated Buy at $50.45. Possibly it should be rated higher than that but I will be a bit conservative due to its leveraged nature as a Bank and due to the still slow U.S. economic recovery.

Tuesday was a strong day in the markets with the S&P 500 up 2.0% and Toronto up 1.5%.

For the S&P 500, the recent market “correction” has been recovered back to a good degree.

Notable gainers included Constellation Software up 4.6%. Couche-Tard up 3.8%. Visa and Wells Fargo and Fedex all up 2.6%.

Canadian National Railway was out with earnings up 21%  and with revenues up 16% and car loads up 11%. This is another sign that the economy in North America is growing.

October 20, 2014

On Monday the S&P was up 0.9%  and Toronto was up 0.8%. The S&P rose despite IBM reporting a big loss.

I read the Wells Fargo Q3 report (from last week) and this bank is still growing strongly in almost all of its business lines. Its net interest margin however is continuing to decline as older higher interest rate loans roll over to new lower interest rates loan. Overall it looks like a good long term investment.

Toll Brothers was up 1.3% today to $31.64. It appears that its recent trip down to under $30 was a good buying opportunity. I think it is a good investment that has the potential to be be over $40 or higher in the next year. That is not to say it can’t decline. It would if the U.S. housing recovery stalls.

Melcor was about flat today. I continue to think it will be a good investment. It’s trading around book value. There is lots of upside potential and it I think would take quite a sharp decline in the Alberta economy to cause this to be a poor investment for a holding period of at least several years. In other words it seems to me that there is some margin of safety here on a balance sheet basis.

Costco was up 3.0%. I have been waiting for a bigger dip before I would buy but the experience seems to be that this stock has not offered big dips. It’s a case where it might be worth paying a high multiple on earnings due to the high quality of the company.

October 19, 2014

On Friday the S&P 500 was up 1.3% and Toronto was up 1.2%.

As of Sunday night the Dow futures were up 84 points. It’s anyone’s guess whether the market remains volatile. But in the end owning high quality companies tends to work out unless one really over-pays for them.

October 16, 2014

On Thursday, the markets again had people guessing where they will head next. Markets opened down quite noticeably but in the end the S&P 500 was about unchanged and Toronto was up 1.3%.

Some of the earnings reports coming out were strong and that helped markets.

I had thought about entering bids on several stocks that I like say 5% below current prices. That might be a good way to buy on the steep dips that have been occurring. For those committed to buying on dips a strategy like that can make sense. But it’s not a strategy that everyone would like because it can you man you buy at 5% down on a day when the stock ends down 10% or more.

October 15, 2014

It probably did not escape anyone’s notice that markets got hammered down on Wednesday. Even after a partial recovery from steeper declines, the S&P 500 was down 0.8% and Toronto was down 1.2%

Bank of America reported approximate break-even results after another huge settlement charge related to the financial crisis. Other than that charge the results looked pretty good. This bank is trading at about 80% of book value and 120% of tangible book value. A more normal price to tangible book might be towards 200%.

I grabbed a few more share of this as Well as Wells Fargo today.

Canadian Western Bank fell 3.5% to $36.46. No doubt there are concerns that the lower oil price could cause bad debt. But overall this price may represent a good opportunity to initiate a position in this banks with its long history of growth.

Boston Pizza  at $19.71 yields 6.2% which seems attractive even though I would expect very modest growth if any due to the nature of this entity.

My strategy be to continue to buy selected stocks on dips.

It remains to be seen whether markets continue to decline or of instead earnings reports or other economic news causes the market to rise.

October 14, 2014

On Tuesday the S&P 500 was up 0.2%, while Toronto, playing catch-up (or catch-down) for yesterday’s holiday was down 1.3%.

Wells Fargo ended the day down 2.7% at $48.83. I was surprised they got their earnings out so fast. Seems to be a competition among big companies to see how fast they can report. I find it impressive that a detailed quarterly report can be put together and approved for issuance that fast. I am pretty sure that a lot of people worked late and weekends to get that done. Wells Fargo is now trading at a P/E of 13.0. Now one might argue that the profit has been boosted by low loan losses but even so I don’t think the P/E would be above 14 even adjusting for that although I am not sure. And one could argue that earnings will decline for various reasons. that is always a risk. But this bank has been growing for years and even if earnings do decline (which I have no reason to suspect they will) it would likely recover. The price to book ratio is 1.6 which does not seem excessive. The price to tangible book (after deducting goodwill ) is 1.92 which is not particularly attractive but is also not that high for a best in class bank and one which is earning an ROE of about 13% in a world where 10-years government bonds earn 2.2%. The dividend yield is 2.9%. All in all, Wells Fargo certainly looks attractive to me although there is certainly no guarantee that the price won’t continue to fall.

Toll Brothers rose 2.8% after yesterdays fall of 4.1%.

Stantec was down 1.4% to $67.12 and is worth considering. It’s been a tremendous growth company over the years.

As my own portfolio breakdown indicates, I have a position in the Claymore Oils sands ETF, CLO. I had just let that ride for a long time. Back in June when I updated the list of Canadian ETFs I called that one unattractive and yet I held on to it. The thought of selling it had crossed my mind but I just let it ride. At this point I’d be more interested in buying than selling.

If oil stays down in the low eighties or lower then presumably it will affect the Alberta economy at some point. On the other hand it would likely be good for the much of the North American economy.

I don’t have any particular insight into this market correction. Attempting to guess the market direction has never been part of my strategy at all. I react to where the market is and where stock prices are and try to buy low and then hold or sell high.

Corrections always loom large when we are experiencing them but most turn out to minor in hindsight. But obviously some do extend quite deeply.

I’ve generally ridden through corrections. I try to keep some cash on hand to take advantage of bargains and that has worked for me.

October 14, 2015 10:20 a.m. eastern time

Wells Fargo is out with Q3 earnings this morning. Earnings per share growth was only 3% but overall the report seemed strong. Deposit growth was very strong and loan growth was good. The shares were down 1.5% adding to recent declines. I grabbed a few more shares this morning.

October 13, 2014

On Monday the S&P 500 fell 1.7%. Toronto was closed.

It seems that the declines will test the resolve of those of us who invest based on fundamental analysis. Stocks can always get cheaper and for that reason it is probably best to nibble at positions rather than buying too aggressively.

Our Toll Brothers was pounded down 4.1% to $29.18. I added a bit more to my position. American express was down 2.6% to $82.78.

Constellation Software is updated and rate (lower) Buy at $280.50. It’s been a fantastic growth story and will likely continue to grow rapidly. It’s management appears to be excellent and are extremity candid. The difficulty is that the stock is already pricing in a lot of growth. I would consider taking a small position or hope for a pull-back to perhaps $250 before starting to nibble. Those holding it probably should continue to do so.

It recently had a rights offering whereby shareholders received rights to buy a long-term but floating rate bond that initially pays 7.4% and then resets to 6.5% plus or minus inflation. It takes just over 21 rights to purchase just $100 in bond face value and shareholders only received 1 right per share. The rights trade at trade around 54 cents per share and have to be exercised by November  Next March bond holders will have the option of giving the company five years notice that they want to redeem or turn in their bonds for face value. This five year notice seems a bit bizarre. I understand the bonds will trade on the TSX – which is surprising for bonds. I wonder what happens if you give notice in March to redeem in five years but meanwhile you forget about that and sell them. For those holding a few hundred rights I don’t see the point of exercising them it is probably just as well to sell them. The company also has the right to provide notice that it will redeem the bonds at face value but only upon five years notice! The whole matter of this bond and the associated rights seems very complicated and I really am not sure what to make of it. Very strange.

October 12, 2014

On Friday, Stocks also got cheaper. The S&P 500 was down 1.2% and Toronto was down 1.6%.

For the year to date Toronto remains up 4.4% and the S&P remains up 3.1% while the DOW is down 0.2%.

Our two Strong Buys from January 1, 2014 remain up 12% (wells Fargo) and 13% (Melcor). Our 15 stocks that were rated Buy or higher are up an average of 5.0% each. My own portfolio with a heavy weighting in Melcor, Wells Fargo and a few others remains up 7.3%.

Markets and the gains on this site are down from what they were earlier this year. But it is never realistic to expect to invest in stocks without periodic declines. The recent declines are relatively modest. I don’t think it is possible to predict the direction of markets in the short term. Owning shares in profitable and growing companies has always worked out well in the longer term. Shorter term volatility is basically the price we pay to enjoy the longer term gains.

An order I had in to add modestly to my large Melcor position if it hit $23.10 was filled as Melcor closed at $22.71. Melcor is now trading at 95% of its book value. It’s assets are strong. 47% of its assets are investment buildings that are rented out. These are marked to market which means they are fully valued in the book value. 39% of its assets consist of its land inventory. This is reflected at cost (including costs to develop the land and capitalized interest) and is almost certainly worth more than book value. The remaining assets are mostly receivables and cash and would be worth book value.  Melcor is also trading at 10.5 times trailing earnings (with the earnings adjusted down to remove gains related to marking buildings to market). But its earnings are cyclic.

In this case the chance to buy assets and this business below book value seems quite attractive. If you were to start your own such business today, you would have to pay market value for the assets which would be somewhat more than Melcor’s book value. And it seems unlikely that you could be as profitable as Melcor given their years of experience and their scale.

The main risk with Melcor is that due to lower oil prices or for other reasons sales of new building lots in Alberta could slow substantially and/or the prices could drop. I don’t have access to market data but I am not aware of any such slowdown. The company will no-doubt provide an update int his regard when it releases its Q3 earnings in about one month from now. Melcor has weathered such slowdowns int eh past but they do tend to send the share price down when they occur.

There are always risks, but I view the chance to buy this business at slightly below book value to be quite attractive.

The stock is thinly traded which makes it more volatile and which also can allow the share price to deviate further from its intrinsic value than is the case for most companies.

On Friday I also bought a small amount more of Canadian Western Bank and Toll Brothers to take advantage of the lower prices.

By my calculations, Toll Brothers trailing adjusted P/E ratio is 20.3. Still  not cheap but much lower than it has been in some years. I expect it to report increased earnings int he next two quarters based on houses it has already sold and is int eh process of building. Warren Buffett said last week that the housing market recovery has not been as fast as he expected. He expected to to continue to recover. He stated that that with Americans able to lock in 30 year mortgages at very low rates (and to refinance if rates get lower) it was a no brainer for people to buy houses. (I believe he is taking into account that houses in the U.S. are reasonably priced and he referred to new families starting out). His comments add to my comfort in holding and buying Toll Brothers.

Canadian Western Bank is not cheap but tends to grow earnings fairly steadily over the years and the recent price drop provides an opportunity to accumulate some shares for those interested.

For fixed income, I like Boston Pizza. It would decline if long-term interest rates rise substantially but at the moment that does not appear to be imminent.

October 9, 2014

On Thursday … stocks got cheaper.

The S&P 500 was down 2.1% and Toronto was down 1.4%.

One of the few gainers was Canadian Tire up an impressive 3.1% as its new or incoming CEO predicted profit growth an at investor day conference. Those holding a a large position in it may wish to reduce their holdings or even sell entirely.

This stock is up over 100% in three years since the Summer and Fall of 2011. Back then it got ridiculously cheap on worries that Target coming to Canada would give it a pounding. Turned out, not so much.

With stocks down today I figured I should do a little buying. I added to my small position in Canadian Western Bank and opened a new position in Visa.

I can’t predict where the markets will head in the short-term. I do know that most (but not all) of the time it turns out to be a mistake to sell heavily into a decline because it is the rare investor who ever managed to get back in before the market has already recovered most or all of the lost ground.

We are just entering into the third quarter earnings season. Those reports could determine where the market heads next.

October 8, 2014

On Wednesday the markets were down for a time but then ended very strong to the upside as the FED signaled that an interest rate hike was not likely imminent.

The S&P 500 was up 1.7% and Toronto was up 0.6%.

Fedex was up 2.7%. Costco reported strong earnings and was up 2.8%.

Liquor Stores N.A. managed to be down 2.4%. I wonder if someone could buy it out and take it private? Perhaps the money going to dividends now could go to paying debt in a leveraged buyout. But the problem is it has not been earning its dividend and needs some kind of major surgery to get back to profitability. I have lost faith in current management. Maybe they will prove me wrong.

Perhaps yesterday and this morning I should have been nibbling on some stocks but I have wanted to be cautious about spending my “dry powder”.

October 7, 2014

On Tuesday, the S&P 500 fell 1.5% and Toronto was down 1.1%.

Most of the stocks I monitor were down. A notable gainer was Canadian Tire up 1.0% to a hew high of $117.37. That is impressive on a down day. I did not see any special reason for that. They were doing some marketing but I am not sure why the stock went up. Actually almost all daily moves in stock prices are pretty much random. Companies only tend to release real news about four to 10 times in a year and yet stock prices gyrate daily. Usually there is really no particular reason.

I have never claimed any ability to predict where markets are headed especially in the short term. I did observe a few weeks ago that the S&P 500 looked some 16% over valued. But that was not a prediction it would fall in the short term and in fact it had looked somewhat over-valued on that analysis since February of 2013. I did not get out of the market in early 2013 and that was a good thing because the markets are up a LOT since then.

In any case I do not find myself disturbed by this decline. It’s always nice when the market is up but declines offer opportunities as well. I will be looking to add to some positions but I don’t want to get into a rush.

This morning, before the open I got an alert from TD about a Brookfield Office Properties rate reset preferred at 4.75%.  and I grabbed some basically sight unseen because with these offering I have no time for analysis. I have never analyzed any Brookfield company but I do recognize them as smart successful companies over the years.

Coincidently Brookfield properties fund bought a casino today for some 5% of what it cost to build it two years ago. Without any analysis that sounds like a sweet deal. I have not analyzed it but am tempted to just buy some Brookfield Properties partnership. But I will likely try to analyze it first.

Another comment on Share Buy Backs

It is often said that companies are inflating their share prices with share buybacks. There is some truth to it. But buying back shares does not automatically raise the share price. If a company is profitable and is sitting on cash earning nothing then yes a share buy back will increase earnings per share. But it also means the company has less cash, and that means it may be less able to fund growth. Its book value per share almost always declines (since the shares usually trade above book value). Sure the buying in itself may support the share price momentarily in the market but that effect evaporates quickly and the shares will stay high based on earnings and growth prospects (or may fall). The shares could fall in price if the market realizes that growth will be slower with less cash to fund it.

It seems true that the market often pushes share prices up on news of buy backs. Sometimes that is quite irrational but it can work for a while. Longer term the share price is determined by earnings and growth prospects not by expectations of buy backs.

Buying back shares makes perfect sense when the shares are trading below a fair value and when the company has no better use for its cash. A one time buyback could lead to a misleading earnings per share growth that can not be counted on in future. But if a company buys back 2% of its shares every year and that adds say 2% to earnings per share in the process and it can keep doing that, funding the buybacks from earnings then to my mind that 2% earnings growth is perfectly good growth and can be projected into the future.

Companies are free to buy back their shares and recent commentary about it is mostly just noise. Non share owners who want to tell companies what they should do with their cash. The noise makers should worry about their own cash.

If a company really wants to increase its share price over the years it should retain all earnings (pay no dividends and do no buybacks) then it can invest all the earnings for growth and if it has good growth opportunities including acquisitions, then its share price will rise. Stantec was an example until it more recently brought in a small dividend. Berkshire is a classic example. In both of these cases the growth was highly logical and not done to pump up the share price per se, though it did do that.

October 6, 2014

Walmart is updated and rated (lower) Buy at $77.32 (That was Friday’s close it closed today at about the same price $77.35). It’s not an exciting investment and it is not very likely to deliver double digit returns over the next five to ten years. But it is likely relatively safe. A reasonable strategy might be to buy on dips.

We first added it to this site on April 20, 2006 rated Buy at $46.70. Since then it is up 65% (excluding dividends) which is a decent but not spectacular return.

It is currently in a period of flat earnings due to currency impacts and weak to moderately declining same store sales. If it can resume growth the share price would likely rise somewhat. If the share price were to decline to about $70 I might buy.

Even if we conclude Walmart is likely to be a decent investment I might still not Buy. There may simply be better opportunities.

On Monday the S&P 500 fell 0.2% and Toronto fell 0.3%

This evening the Canadian dollar is at 89.44 U.S. cents. A lower Canadian dollar means U.S. stocks gain when valued in Canadian dollars. However American investors holding Canadian stocks see a decline. Whether a stock is “Canadian” or America in this context is NOT determined by the exchange it trades on. It is determined by where it earns most of its money. A lower Canadian dollar is generally considered good for the Canadian economy. It will harm retailers such as Canadian Tire as their costs s of good sold will rise.

Recently I have judged the America market to be somewhat over valued. That is definitely NOT the same as predicting it will decline. I will follow Buffett’s view on that and admit that I cannot predict the direction of markets especially in the short term. Nevertheless I can react to the a higher market by being cautious in buying and by perhaps cutting back some positions.

However, another consideration is that an expensive market does not means that every stock in the market is expensive. If I like what I hold I can potentially even add to those particular positions even while suspecting that the overall market is somewhat high.

The Canadian “market” is harder to judge in part because it is too concentrated in a few sectors. And also because I have had difficulty getting reliable earnings figures for the Toronto index.

October 5, 2014

On Friday the S&P 500 gained 1.2% while Toronto was up 0.2%. Almost all of the stocks on my list were up.

Wal-Mart will be updated shortly and most likely rated (lower) Buy. Not an exciting investment but probably a fairly safe one.

Walmart has bought back 25% of its shares over the past years and at relatively attractive prices. We like that.

Walmart has continued to grow despite share buy backs and dividends paid and without taking on excessive debt. It can do this because it has been a highly profitable and cash generating entity.

Speaking of share buy-backs…

One of the strange but well accepted fictions is that share buybacks return money to share holders just like dividends do. It may well be the same thing from the companies perspective but it is definitely not the same from the perspective of share owners.

Share buy backs return money only to departing share owners. If the share price was where it should be the continuing owners own a larger share of a company with a bit less money than it had before the buy back. It’s a wash from the perspective of continuing shareholders unless the shares were bought back at a good price. Often that is the case. Sometimes it is not.

To illustrate:

Imagine if 5 people owned 20% each of a local Boston Pizza Restaurant owned through a corporation. One wants to sell out and the ownership corporation has the money to buy back the shares of the departing owner. It’s clear to see that the remaining four now own 25% each of a  restaurant that no longer has the money that was just paid to the departing owner. Money has been returned to the departing owner and not to the four continuing owners. In contrast a dividend returns money to all owners. If the restaurant continues to do well the four remaining owners may well benefit by their increased ownership. But that is not a given. And the restaurant may need to borrow money now that its cash has been depleted by the buy-back. It is not necessarily the case that the earnings per share of the four remaining owners will increase. However that is likely the case if the cash used to buy back the shares of the departee had been sitting earning little return. But the point is that a corporation buying back shares certainly does not return money to the non-selling share holders by buying back shares. For whatever reason the fiction that this is the case seems widespread.

Theorists may point out that the share buy back is exactly like a dividend if all owners sell back the exact same proportion of shares. But no one would suggest that this ever happens in reality. Also the tax consequences would differ.

October 4, 2014

Visa Inc. is updated and rated (lower) Buy at $212. It was last updated on December 29, 2013 and rated Weak Buy / Hold at $220. It traded above $220 for the first tree months of 2014 and then dipped very briefly under $200 in April and has since been around the $215 level plus or minus about $5. It looks moderately more attractive today than at the start of the year because the price is down slightly and the earnings have increased.

We first added it to this site on April 15, 2009 (just after the bottom of the market at a time when fear still reigned supreme), we rated it Buy at $58 at that time. We rated it a Strong Buy in May 2011 at $79 and it is up 167% since then. It dropped off at our list at the end of 2012 but we added it bank to the list March 28 2012 rated Buy at $119 in November 2012 we updated and rated it Buy at $147 on August 4, 2014 we rated it Weak Buy at $184.

Visa is a great company with some monopoly characteristics. It does have risks due to regulation and future competition and it is not a cheap stock. Therefore I am not in a big hurry to invest but would consider a small position with a hope to buy on dips.

October 2, 2014

On Thursday markets were at one point down more noticeably but ended the day with the S&P 500 unchanged and Toronto down 0.3%.

Agrium was down 2.5% on a warning of lower profits. That does not seem too surprising given that profits had declined in earlier quarters. What is more important is the outlook for the next few years and beyond. I did not see any comments about that. I would want to see the Q3 results and more detail on the outlook before buying or selling.

I expect to update a couple of the reports within the next few days.

October 1, 2014

On Wednesday the S&P 500 was down 1.3% and Toronto was down 1.0%. But the S&P is still up 7.3% year to date and Toronto is up 10.3% year to date, so really there is not much to complain about.

Melcor managed a 1.2% gain today although on very little volume. Constellation Software was up  1.1%. My strategy when the market is falling has always been to sort of nibble and add to positions but to do so patiently and slowly. I believe the only order I have in is to buy a bit more Melcor at $23.10. It touched that price a few days ago but my order was not filled as there must have been orders ahead of me at the same price.

I noticed TD Waterhouse has had a couple of new issues of 5 year rate reset shares 3.9% National Bank and 4.5% Brookfield Asset Management. The market apparently has a big appetite for these. If you are interested in getting these when issued you have to register for new issue alerts with your broker and then pounce on them. I bought some earlier this year figuring they were relatively low risk and at least beat holding cash.

Warren Buffett traces his starting point with Berkshire Hathaway back to 50 years ago today. He took over control of the company 50 years ago next May 10. But he counts the year ended September 30, 1966 as his first year for his performance history in running the company. Possibly he was already having an influence on the company somewhat before the May 10, 1965 coup d’etat when he ousted the long-time CEO. At the end of February Buffett will release his annual letter and will review the results of his first 50 years on the job. He has asked his partner Charlie Munger to write about why did their methods work and will Berkshire continue to work in the future. That letter will be absolute must reading.

September 30, 2014

On Tuesday the S&P 500 was down 0.3% and Toronto was down 0.1%.

The Canadian dollar is worth 89.15 U.S. cents in the U.S. It remains, as always, worth precisely $1.00 in Canada. A lower dollar benefits Canadian exporters and makes imported things more expensive. It makes travel to the U.S. more expensive.  It also hurts the Canadian NHL hockey teams who generally pay salaries in U.S. dollars but collect most of their revenue in Canadian dollars. (So sad for them) For investors if you have U.S. investments that you will eventually spend in the U.S. the exchange rate change is of no real meaning. But it does increase the value of those investments as measured in Canadian dollars.

eBay rose 7.5% today after announcing they will split off PayPal into a separate company. They were under pressure to do so but had resisted the idea. There were some good synergies between the two and it probably is a dumb idea to break it up but activist investors are only interested in short-term gains.

Today marks the end of Q3 and within a week or or so the Q3 earnings reports will start to come in although most will arrive in three to five weeks.

Melcor declined 2.6%. As a thinly traded stock it can be volatile. There may be some fear that the Alberta economy will soften. But overall Melcor appears to offer good value. Melcor will likely report good Q3 numbers. Toll Brothers declined 1.5% and I took the opportunity to add to my position.

September 29, 2014

On Monday the S&P 500 ended the day down 0.25% and Toronto was down 0.3%.

I added a new short article about Buffett just to document the total return achieved since he took over Berkshire in 1965.

September 28, 2014

Most subscribers will be aware that this web site is something I work at on a part-time or side-business basis. Starting around next May I expect to devote closer to full time hours to this site and to my investment work in general.

Stantec is updated and rated (lower) Buy at $72.20. It is clearly a great company. But it is not an obvious bargain. Still it will likely turn out to be a good long term investment. I would consider it particularly on pull-backs.

September 26, 2014

My personal portfolio composition is updated. My own portfolio is highly concentrated and not diversified. Somewhat offsetting this is the fact that I have a 23% allocation to cash.

Our Buys and Strong Buys have averaged a gain of 5.9% this year to date. The two stocks that were in the Strong Buy range at the start of the year have averaged a gain of 16.8% each. My own portfolio has a return of up 9.6% (including dividends)

On Friday markets partially recovered from Thursday’s decline with the S&P 500 and Toronto each up 0.9%

September 25, 2014

A down day on Thursday as the S&P 500 fell 1.6% and Toronto fell 1.5%.

It’s anyone’s guess where the market will head next. My tactic has always been to react to overall market moves rather than predict them. I have an order in to get a bit more Melcor if it hits $23.10. Also I may add to my small Canadian Western Bank position.

If you find a pull-back of the size we have had recently to be particularly disturbing then perhaps you should not be invested in stocks at all. I believe Buffett used to say that if you would be very troubled by a 40% decline, perhaps you should not be in stocks. That seems a bit extreme. I think almost all of us would be VERY troubled by a 40% decline. I guess what really matters is what your reaction would be. If you would sell your stocks if they took a sudden 40% swoon and would not be prepared to wait it out then likely you should not be in stocks. If you would be disturbed but would nevertheless hang in there and also not be afraid to put in new money then you are probably okay to be in stocks. If you have a large amount invested and truly would not be upset at a 40% loss then I am not sure I believe you. Anyhow the 40% was just something Buffett used to say probably to scare weak knee’d (is that a word?) investors away from investing with him. I am certainly not predicting a 40% decline.

September 24, 2014

Wednesday was a good day for U.S. stocks with the S&P up 0.8%. But Toronto was basically flat.

Toll Brothers did not participate in the rise and instead fell 0.4% even as a report came out that new home sales (deliveries)  in August were well above forecast. The problem is that orders for new homes have been weaker. Also KB homes reported what was apparently poor earnings today.  We will see in the next few months how the orders for new homes go. In any case I expect Toll Brothers to have another two or three quarters of earnings growth due to orders already in the pipeline. I would think that would push the P/E down to attractive levels but I can’t be sure. Also a lower P/E will still not be considered attractive if the outlook turns to earnings declines.

Costco was up 1.7% today. And Walmart rose 2.0%. Possibly this was due to an announcement that it was getting deeper into banking by offering chequing accounts. Stantec was up 5.0% on news of a fair-sized acquisition in Quebec.

Melcor drifted a bit lower today.

September 23, 2014

Tuesday saw the S&P 500 down 0.6% while Toronto was flat.

Most stocks fell today. Among the rare winners were Couche-Tard, up 3.3%  and Agrium up 2.7% on news that some other fertilizer company was being taken over.

Canadian Western Bank is down to $39.55 and is worth considering.

September 22, 2014

On Monday, the S&P 500 fell 0.8% and Toronto was down 0.9%.

Stocks on our list that declined included Stantec and Canadian Tire each down 1.9%. Toll Brothers down 3.1% and Liquor Stores N.A. down 3.4%. Toll Brothers shorter term stock price will depend on the U.S. housing market. Given the decline I added a small amount to my Toll Brothers position today.

Stocks on our list that rose today included Couche-Tard up 3.0% and Melcor up 1.8%.

September 21, 2014

I have updated my article on the valuation of the S&P 500. The index does appear to be over-valued using conservative (but not pessimistic) assumptions. That is not a prediction of an imminent decline but it does offer reason to be cautious.

September 20,2014

On Friday, the S&P 500 was flat but at one point during the day set another record high at 2019. Toronto fell 1.3%.

Wells Fargo hit a new high of $53.80 and closed at $53.36. My figures show that the P/E is 14.2, the price to book value is 1.8, the dividend yield is 2.6% and the ROE is 12.9%. While there are always risks in investing, the overall picture here is “what’s not to like?”.

Canadian Tire has been hitting new highs, I calculate its stats as  P/E 16.3, price to book value 1.8, yield 1.7% and ROE 11.4%. Those stats are not as good looking as Wells Fargo but a P/E of 16.3 is still below that of the average stock.

Melcors earnings are volatile due to both its cyclic nature and accounting rules that mark it portfolio of rental properties to market as if they were investments in stocks. In that case I focus on the attractive price to book value of 1.0. I also consider that while Melcor’s reported earnings are volatile they have never been negative on an annual basis in the past ten years.

Overall, I am feeling quite good about how the markets and the economy has been doing. Things can change but at the moment I like how things have unfolded this year.

September 18, 2014

Thursday was a strong day in the U.S. markets with the S&P 500 up 0.5%. Toronto however was up less than 0.1%.

Gainers of particular interest included Bank of America up 1.6% and Berkshire Hathaway up 1.2% and Wells Fargo up 1.4%.

Liquor Stores N.A. was up 6.4% to $14. There has been no news from the company that would explain the recent strong recovery in this stock. Possible some analyst are recommending it. It’s also possible that some good news is pending such as maybe selling some of its British Columbia licenses to large grocery stores. Or maybe it will announce an acquisition (But where would it get the money?). Or maybe a buyout is in the wind? Without confirmation (or even any indication) of positive news I am skeptical that the rise will last. As reported previously I have rather soured on the company and no longer own it. It has lately been earning far less than it pays out as a dividend and seems to indicate that earnings will remain low until 2016. In my area it has way too many stores and they are not busy at all and strong competitors are taking market share. Maybe they are doing well in other areas and especially with their newer big box stores. I was recently in Vancouver and happened to walk past its Kitsilano wine store which was very nice and was busy. Overall, if I owned it I would likely reduce my position given the recent price rise.

I had entered an order a couple of weeks ago to sell my Berkshire shares if they got as high as $141. Partly just to grab profits and partly because there could be a perception of a conflict of interest for me due an acquisition that is pending by one of its subsidiaries that affects a company that I am involved in another aspect of my life. Every time I have ever sold some Berkshire shares it has later felt like a mistake (partly because one never quite remembers or tracks where the money from the sale gets reinvested). Anyhow at this time I don’t own any Berkshire shares.

Berkshire Hathaway closed at a record high of $141.28 for the B shares and a staggering $212,075 for the A shares. Earlier this year there was much ado when Buffett noted that in the six years ended December 31, 2013 Berkshire’s book value had not kept pace with the S&P 500. Buffett measures progress by book value not share price. A number of analysts jumped on this and talked about Berkshire under-performing. A look at the chart will dispel that nonsense.

https://ca.finance.yahoo.com/echarts?s=BRK-A#symbol=BRK-A;range=5y

An analyst named Doug Bass was famously short Berkshire and was silly enough to go to Berkshire’s annual meeting in Spring 2013 and debate the matter with Buffett. If Bass is still short the stock he has gotten absolutely clobbered.

September 17, 2014

On Wednesday the S&P 500 rose 0.1% and Toronto fell 0.3%. U.S. markets were slightly buoyed be the FED statement which was basically a stay-the-course statement.

Housing stocks were buoyed by news that homebuilder sentiment was up and by a strong earnings report from one of the builders. Toll Brothers gained 1.9%. Fedex was up 3.3% on a strong earnings report. It is often thought of as some kind of indicator of business growth in the economy so this is a positive sign for markets.

Canadian Tire hit a  new high today.

An interesting news item indicates that Costco will no longer take America Express in Canada. I don’t know if this is particularly bad news for AMEX since Costco had probably negotiated quite a skinny fee. It may indicate retailers starting to push back against the credit card companies. Also of interest Costco has an outsized presence in Canada with 88 stores versus 468 in the U.S. Based on 10% of the population you would expect Canada to have more like 47 stores in Canada. Costco likes Canada perhaps due to our demographics and income distribution and also perhaps because there are few close competitors to Cost in Canada.

September 16, 2014

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

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

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

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

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

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

September 15, 2014

Monday was not a particularly exciting day in the market, at least not for the stocks I follow.

The S&P 500 was down 0.1% and Toronto was down 0.3%.

September 14, 2014

On Friday the S&P 500 was down 0.6% while Toronto was about unchanged.

Toll Brothers was down 1.8% to $33.07. Melcor was down 1.1% to $23.74. That drops the price to book value to 1.0. It is a cyclic company that would suffer if there happens to be a slowdown in housing construction in Alberta and the western provinces. And the book value has been pushed up somewhat by its rental buildings that are marked to market under IFRS accounting. Nevertheless, I find the chance to buy this company with a long history of growth at book value to be attractive.

As of Sunday evening, markets were set to open lower on Monday. While rising markets are always more enjoyable, declining markets offer opportunities as well.

September 13, 2014

Canadian Tire is updated and rated (lower) Buy at $115.51. We rated this company a Buy at the start of this year at $99.49 and it is up 16% this year. At the start of 2013 we had rated it (lower) strong Buy at $69.38 and it rose 43%.  At the start of 2012 we had it rated (higher) Buy at $65.90 and it rose 5%. Back on August 11, 2011 we updated it as a Strong Buy at $52.40 with a price to book value of 1.04 and a P/E of 10.5. Soon after that it became my largest position. Since then it has more than doubled. In April 2013 it represented 22% of my equities. I sold gradually on the way up but it was still recently 6.4% of my portfolio and 8.0% of my equities.

But that is history. At this time it is still a great company but it appears to be about fully valued. On Friday I noticed it hitting $116 and I sold 30% of my position. These were shares that I had bought at $101.50 in late June after I had earlier sold most of my shares at around $110.

I may be tempted to buy back these recently sold shares if it happens to fall back to even $112. In any case it now represents about 6% of my equities and that is held in a taxable account and I will likely hang onto to that for the long term.

I don’t see any reason that Canadian Tire will not continue to do well in terms of earnings. It is also selling off 20% of its credit card operation to Scotia Bank and that could also provide another boost to the share price although that is, in theory, already priced in.

Obviously, the shares could also decline with the general market if the economy softens. Overall it remains a reasonable investment but is certainly not at the bargain basement price it was in August of 2011.

September 11, 2014

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

Bank of America rose again today, up 1.3% to $16.57.

The Canadian dollar was down close to a cent and that pushes up the value of American stocks when valued in Canadian dollars. For the most part, it’s probably not worth worrying about what the dollar does. It’s very hard to predict.  A while back I toyed with hedging against a rise in the Canadian dollar which would reverse my gains from holding U.S. stocks. I bought an ETF called FXC to do that. As mentioned previously I have sold out of that. Since I will someday need U.S. dolalrs in retirement. I rally don’t need to hedge the currency risk anyhow. It’s only because my portfolio is reported in Candain dolalrs taht there is an apparent risk there. The reality is that my future need to spend U.S. dollars provides a natural hedge agaisnt the currency change.

Speaking of currency, I am not at all in favor of currency trading which is a zero sum leveraged game. Many times I have been approached to place links on this site to forex trading sites. I would never do that. The whole notion of forex trading is at odds with the mind set that as investors we should seek to make money by owning profitable companies. Many people think that stock market investing is all about making money from other investors. They think that stock investing is a zero sum game. They are wrong. In stock investing we should think mostly about making money from the customers of the businesses we own (as the company provides valuable goods and services) and not so much about making money from other investors (though we are OK we doing some of that as well).

An old article of mine explains this in more detail.

September 10, 2014

On Wednesday, the S&P 500 rose 0.4% and Toronto fell 0.4%.

As long-time subscribers know, my approach when the prices of stocks that I own and like fall is usually to add to positions.

Most investors would not do that. And a major reason for that is that most investors find themselves judging a company by its stock price. Consider that almost all investors look at price charts but are not able to look at charts of earnings per share. Even more shocking is the fact that investment television shows tens to show you a chart of what the price did today. They often don’t even look at the say the last year. They are focused on today. The reality is that the price movements in a given day are almost always effectively random noise as opposed to any kind of signal.

If you own a stock but are not very familiar with how the company makes money, with its long term outlook and with its competitive advantages, then when the price falls your natural reaction is to be very concerned. In this situation most investors figure that “the market” knows that bad news is coming and so they are inclined to sell.

I find that by developing a strong (but certainly never perfect) knowledge of a select group of companies I can be in a position to be much more sanguine about price declines. If it still looks to me like the outlook is good then I would tend to buy on dips. Sometimes that can turn out wrong but most of the time it has worked out well.

September 9, 2014

On Tuesday, the S&P 500 fell 0.7% while Toronto rose 0.2%.

I picked up some more Melcor shares based on an order I had placed at $24.10. There was a report today that the pace of Canadian home building was down slightly but that the pace in Alberta was higher. Barring a slow-down in Alberta, Melcor is likely to continue report good results.

September 8, 2014

Stocks fell on Monday with the S&P 500 down 0.3% and Toronto down 0.4%.

Bank of America was up 2.1%. It should rise in price as it finally puts the the problems of the financial crisis and the resulting litigation behind it (or at least mostly behind it).

I added a modest position in Canadian Western Bank today.

Melcor continues to slip and was down 1.4% today to $24.20.

September 7, 2014

Canadian Western Bank is updated and rated Buy at $40.54. This has been a very well managed bank and been an excellent investment over the years. I made the mistake of selling my shares last August (as detailed at that time) due to concerns about their losses caused by the floods in Alberta last year (They have a property insurance division). It turned out the losses were minimal. I compounded that mistake by not buying the shares back at a slightly higher price after it became apparent the losses were minimal. The shares rose a lot in the last part of 2013 which made it even harder to consider buying back into it. Psychologically, it is always hard to buy back into a stock at a higher price. However, I am now ready to do so and I plan to buy some shares.

On Friday the S&P 500 rose 0.5% to another record closing high while Toronto was essentially flat.

Canadian Tire rose 1.0% to $113.95 which is at or close to a record high at it has risen 14.5% this year.

Costco was up 1.5% to a record $127.01 and is up 6.7% this year.

Melcor was down 1.1% to $24.55. It’s still up 22.4% this year but after reaching highs over $27 after RBC has put a target of $35 on it, it now seems to suffer from some lack of interest. Ultimately the share price will be be determined by its earnings performance.

September 5, 2014

Toll Brothers is updated and is rated Buy at $33.78. It’s P/E is still high at about 23 and the ROE is too low at 7.9%. But it is set to continue to increase earnings strongly in the next six to nine months. However with new contracts to sell houses having declined slightly, its earnings may flatten after that. The company believes that the housing recovery continues although it is bumpy. Toll Brothers is a luxury home builder with an average selling price just over $700,000. More recently it has gotten into building expensive condos in New York and other cities. A joint venture in New York is selling condos that in recent quarters averaged $3 to $5 million per unit.

September 4, 2014

On Thursday stocks were mostly down slightly with the S&P 500 down 0.15% and Toronto down 0.5%.

Costco was up 3.1%to $125 on a strong earnings report (and very strong same-store sales in August). It’s another example of a strong and very well managed company that always seems to look expensive but manages to maintain its high P/E ratio. Couche-Tard was up another 3.5%.

Toll Brothers was down 0.7%. I have ran some numbers and I calculate its P/E at 22.5 times adjusted earnings and 20.4 times GAAP earnings. That does not seem excessive given that its adjusted earnings growth has been over 100% in each of the last four quarters. Clearly its earnings growth will slow or flatten now. And the next quarter it faces a high comparable in the prior year. Analysts are worried about a slow-down in signed contracts in the latest quarter months versus the prior year. Sales and earnings lag signed contracts and so this is a worry. Definitely there are some signs weakness in some of its geographic areas. But it has also expanded its geography in the west. Management points to the fact that its business tends to be lumpy and argues that the slow recovery in housing continues. I would continue to judge this to be a good long-term investment.

September 3, 2014

On Wednesday the S&P 500 was down less than 0.1% and Toronto was up 0.25%

Toll Brothers was down 4.7% to $33.95 after it reported earnings this morning. This was a case where a year over year earnings increase of 110% and revenue increase of 53% was just not enough. The concern is that the sales were a little weaker than its pervious quarter although much better than the year ago quarter. Management appears to believe that the housing recover continues but is “bumpy”. They believe that the pace of new building should be 50% higher to reflect population growth.

Basically this is a bet that the housing recovery will continue in the U.S. In the past the stock has been pricing in a continued rapid increase in earnings. In the past year the stock price has bounced around but is relatively unchanged from October 2013. Meanwhile the earnings are up strongly and so the P/E ratio has started to look more reasonable although it is still somewhere around 24.

I continue to think it will be a good long-term investment and added to my position today at $34.10.

Liquor Stores N.A. was up another 4.4% today.

Couche-Tard was up 6.7% after reporting another strong quarter. It’s a case of a very strong and superbly managed company that has usually looked expensive but that has continued to out perform.

September 2, 2014

On Tuesday, the S&P 500 and Toronto both ended the day down very slightly less than 0.1%.

FirstService was up 3.8% to $62.00. I had apparently under-rated it at my last look at it in May. I have long said that I really like the management. It has been a tough company to analyze due to being cyclical and basically my analysis does not seem to work well for this company.

An order I had placed previously to add modestly to my Melcor position was filled today at $25.10. Perhaps I am being reckless adding to my large position but I think the company offers good value. I then placed another order to add a bit more at $24.10 if it goes that low. As a thinly traded stock it can be volatile for that reason alone.

Toll Brothers will report earnings tomorrow Wednesday before the market opens. The expectations are high and the stock will react to the actual results versus the expectations as well as to the outlook.

August 29, 2014

Liquor Stores N.A.  is updated and rated Sell at $13.37. I mentioned in recent posts that I had pretty much given up on this entity and had sold my shares. With a strong gain in the price in the past two weeks (which gains did not seem based on any news from the company as the shares did not gain in the first day after the earnings release) it seems opportune to sell these shares. It seems to me that the company is weak and it is going to take some kind of restructuring for earnings to recover to acceptable levels. The company seems to indicate that the dividend will not be cut but the financials would seem to suggest it should be.

With Warren Buffett’s $3 billion preferred share investment in the Tim Hortons deal in the news, it is interesting to look at his similar $8 billion investment in 9% preferred shares of Heinz with the same partner called 3G.

Berkshire’s Q2 report indicated that it made the expected $360 million in the first half of 2014 on these shares. But that it lost $20 million on its half of the common shares of Heinz. In other words 3G (which only owns common shares) made a loss of $20 billion on Heinz in the first half of 2014 while Berkshire made $340 million even after deducting its share of the losses.  This seems a bit hilarious and is par for the course for Buffett who certainly knows how to make a profitable deal.

In the case of Tim Hortons, Berkshire is not involved in the common shares and is very much a passive investor simply collecting the 9% on  $3 billion. Berkshire has approximately $55 billion in cash (out of total assets of $504 billion) and this$3 billion at 9% is a nice alternative to cash that earns next to nothing. This investment is really not much of an endorsement of Tim Hortons or Burger King since Berkshire is not investing in the common shares. It simply gets its 9% on $3 billion.

August 28, 2014

On Thursday the S&P 500 was down 0.2% and Toronto was down 0.3%.

Melcor was down 3.4% to $25.11. But most of the decline was based on one small trade at the end of the day.

August 28, 2014 (before the market opening)

On Wednesday the S&P 500 was flat and and Toronto was down 0.1%.

Stantec was up  1.4%. Melcor was down 1.25% to $25.98 as the interest that had been generated this Summer by the RBC analysis that it was really worth more like $35 has waned. I will buy a little more if it dips to $25.10 as I havce an order in at that level.

Also on the theme of real estate I am looking forward to see Toll Brothers results on September 3. I expect them to be good but really an expectation for continued earnings growth is already reflected in the stock price. So they might need to be better than just good to move the stock price. What they have to say about the outlook may be more important than the quarterly earnings.

August 26, 2014

On Tuesday the S&P 500 rose 0.1% to finish at an even 2000. Toronto also rose 0.1%.

Liquor Stores N.A. rose 5.9%. I did not see any news to justify the recent gain. Presumably some investors have taken a sudden interest.

Tim Hortons rose 8.1% after it was announced that the Burger King deal would be mostly hash and was worth about $84 per share with $65 of that in cash and the rest in shares of the new combined company. Burger King fell 4.3%. Whiel the rise in Tim Hortons is understandable, the big gain in Burger King (yesterday) is more of a puzzle. Burger King is apparently paying 30 times earnings for Tim Hortons. That would certainly not appear to be a bargain.

They are going to have to leverage the heck out of it and also squeeze costs out like crazy.

Buffett is apparently just collecting 9% on his $3 billion investment. Good for him.

I did sell 150 B shares of Berkshire that I bought about 3 weeks ago. I got a very quick 9% gain. I still own 400 shares in another account. I may sell those because a tiny conflict of interest may arise due to one of Berkshire’s pending acquisitions.

August 26, 2014 (before market opening)

There is in fact mostly cash involved with the Tim Hortons deal, so it appears selling yesterday would have been pre mature. Still there is a long ways to go before this deal closes. As I speculated in my first post yesterday, Buffett is involved. This deal was apparently leaked badly. That is both unfair and illegal. Anyhow good times for Tim Hortons shareholders. I owned it and rated it a Buy here a few years back but got out too soon. I would sell today.

August 25, 2014

Monday provided an interesting start to the week. The proposed Burger King / Tim Hortons merger is big news taht send both companies stocks up about 20%.

In other trading, the S&P 500 rose 0.5% to 1998. It also briefly rose above 2000 which excited some people since it such a nice big fat round number being reached for the first time. Toronto rose 0.4%. Liquor Stores N.A. was up 3.6%. Good for the stock, but as I mentioned recently I have pretty much given up on this company. Melcor was down 0.6% on low volume and seems not to be generating much interest at least at recent prices.

Getting back to the Tim Hortons story, I am not a fan of this. Why should Tim Hortons share owners collectively want to trade say 55% of Tim Hortons for 45% of Burger King? We are told that the Burger King share holders will have majority control so Tim’s is getting less than 50%, perhaps closer to 40%. The deal was announced because news of the merger discussions had leaked (which speaks to poor management of the process). There may never be even a proposed deal here and after that actual approval would be a long ways off.  Most likely the Tim Hortons CEO has been all over this deal. It’s possible the Tim Hortons Board of directors did not even know about it. This might be a case where the Board should vote against it. It’s one thing to allow a CEO to run the company. It’s another thing to allow the CEO to effectively sell more than half of the power house that is Tim Hortons in return for part ownership of the large but third place burger operation.

And if I was a Tim Hortons corporate employee or a franchise owner I would certain not be excited by this. 3G, the controlling owner and manager of Burger King, has a reputation for ruthless cost cutting.

I see no reason for both (or either) company’s shares to rise about 20% given a complete lack of detail and even a lack of a signed deal. If I owned Tim Hortons shares I would sell at least half and perhaps all. And particularly if I owned them in a non-taxable account.

August 25, 2014 7:10 a.m. Mountain time (9:10 a.m. eastern)

There was interesting news yesterday about a proposed Tim Hortons / Burger King merger.

This is far from done and may never happen. It may not be a good deal for Tim Hortons shareholders who will apparently trade a majority stake in Tim Hortons (a wonderful business that has long been number one in its market by a mile) for a minority stake in a rather tired third place burger chain. For Burger King it is apparently driven by Canada’s lower corporate income tax rate (about 25% versus 35% in the U.S.). There was no indication that Tim Hortons share holders would receive cash. If cash were involved then I would wonder if 3G’s friend Mr. Buffett would get involved. Burger King is controlled by 3G, Buffett’s partner in the Heinze deal.

August 22, 2014

FedEx is updated and rated Weak Buy at $149.47. It is an interesting company. It’s profit margin is surprisingly low but may mean there is an opportunity for improvement. It could be more aggressive in the use of debt to boost profits. It is projecting a 30% profit increase in the next year but that appears to be already reflected in the share price.

Markets were relatively flat on Friday.

August 22, 2014 (12:45 eastern)

On Thursday, Bank of America was up 4.1% as it reached a huge settlement of fines and penalties associated with mortgages from the financial crisis era. I had noted previously that it appears that Bank of America is about finished with these past troubles. I expect it to be a good investment.

August has been strong for most of our stock picks and the market. The market “correction” of July seems to have been short lived for the major indexes. My own portfolio has recovered losses from July and moved on to new highs.

Having made a 9% gain on some Berkshire shares that I purchased three weeks ago today, I am tempted to sell for the short-term gain. In the past every time I have sold Berkshire it seems to look like a mistake a year later.

Overall I don’t plan a lot of buying or selling. Continuing to ride along with the stocks I own has worked out quite well.

I own some FXC on New York that is a hedge against a rising Canadian dollar. I find it more of a distraction than anything and may sell that.

August 20, 2014

Markets were positive in Wednesday as the S&P 500 rose 0.2% and Toronto rose 0.5%. CN Rail was up 1.6%. Liquor Stores N.A. rose 2.2%

Melcor was down slightly but still remains close to its recent highs and is up about 30% this year.

August 19, 2014

Tuesday was another good day for our stock picks. The S&P 500 was up 0.5% and Toronto was up 0.9%.

We had Toll Brothers up 2.2% on news of higher housing starts in the U.S. Liquor Stores N.A. was up 2.2% though that is one I gave up on. FirstService was up 3.2%. Canadian Tire hit a new high today.

August 18, 2014

On Monday, the markets got off to a strong start for the week. The S&P 500 was up 0.8% and Toronto was up 0.2%. Toll Brothers was up 1.7%, Visa was up 2.0%. All in all it was a good day for our stock picks.

August 17, 2014

On Friday, the S&P 500 was about unchanged and Toronto was up 0.1%

I am working now on an update for Fedex. It’s a great company but is probably not much of a bargain. But I have not crunched the numbers yet.

Owning equities is always risky or at least exposes us to volatility. But the only way to benefit from the good days (and years) is to be in the market. That comes at the cost of losses on the bad days. But over time the good days (and years) have historically more than made up for the bad days (and years).

It’s up to each of us to determine how much volatility we can accept emotionally and can afford financially. It’s never a good idea to invest the money you really need for groceries or the rent. Most of us can afford financially to take some risks. And most of us can either emotionally handle losing days (and years) or we can learn to handle it emotionally through experience and and education. Then there is the old saying; If you can’t handle the heat, stay out of the kitchen.

August 16, 2014

eBay is updated and rated Weak Buy / Hold at $52.64. It’s a powerful and relatively fast growing and profitable company. The share price is not cheap at about 22 times earnings. Still, it may be a good investment. I am tempted to buy just a modest amount.

August 14, 2014

On Thursday, the S&P 500 rose 0.4% and Toronto rosé 0.2%.

Notable gainers included Berkshire up 1.7% and Toll Brothers up 2.1%.

Melcor was up 1.3% on decent volume.

Element Financial was up 4.2% and that was on top of a good gain yesterday as it released a good earnings report.

A number of news stores noted that Berkshire had reached $200,000 per share today. Only the American Press service noted that these were the same shares that Buffett began buying at $7.50 and that were at about $15 to $18 as he took over the company 49 years ago. Basically, I think the gain (over one million percent) is just incomprehensible to most people. It seems well beyond the realm of the possible even in 49 years.

Liquor Stores N.A. has released earnings this evening. Better than Q1 but nothing great. Earnings per share are at 14 cents and the dividend is 27 cents. They are expecting improvements in 2016. This company has been a disappointment. As noted earlier, I have sold most of my shares.

August 14, 2014 9:30 am eastern

On Wednesday the markets were relatively flat.

The next update will be for eBay, it continues to show strong growth.

Much has been made of Stats Canada’s error in the July job numbers. I have never believed that things like jobs added or certainly the unemployment rate could be measured very accurately in the first place. Analysts may have been wrong to assume such numbers were ultra accurate and not susceptible to errors. As far as the numbers having an impact on the stock market, I don’t think that is Stats Canada’s worry. They produce the numbers. They have no responsibility for how how others use the numbers. Of course they have to be as accurate as they can. But to assume there would never be errors was unrealistic.

The very thinly traded Canadian Tire voting shares have jumped to $194 versus about $110 for the non-voting shares. I have mentioned before that I see no rationale for the big premium on the voting shares. No one can take over the company by buying those shares as there is a provision that in a change of control all shares become voting. I think those buying the voting shares at such a big premium are at risk for a vary large decline. So far though the voting shares continue to rise and I have been wrong. However over an investment lifetime, acting rationally will tend to win in the end. I just don’t see a rationale to buying the voting shares. If there is effectively one buyer attempting to accumulate the A shares then perhaps they can keep rising. I just checked and the major holding of the A shares have not been buying with the exception that the Dealers association bought a small amount of shares (less than 4000 in small lots)  in the last nine months with the last buy at the end of June at $146.

August 12, 2014

On Tuesday the S&P 500 fell 0.2% and Toronto rose 0.1%

Melcor fell 1.5% to $25.61 after being up slightly for much of the day. I am comfortable holding Melcor and I think it will be a good long term investment and that it will be worthwhile buying, particularly on dips.

I usually do not read any analyst reports on companies. But it is encouraging the RBC has reiterated its $35 target on Melcor. That report was updated yesterday and could cause some short-term interest in the stock. Until very recently no big bank was “covering” Melcor to my knowledge. The recent IPO of the Melcor REIT has no-doubt generated interest in Melcor from the banks. Perhaps they are hoping Melcor will issue common shares at some point. That could even take the form of the Melton family selling off some of its huge stake in the company although I am not aware of any plans for that. And the Melton family is already now collecting very substantial dividends and may have little reason to sell. The company itself has certainly not been a frequent issuer of shares by any means.

Berkshire Hathaway’s A shares almost touched $200,000 each today. Buffett’s birthday is August 30 and perhaps a birthday present will be a stock price hitting $200,000. Imagine, five A shares is a million dollars. Same five shares were worth about $75 dollars ($15 each) when Buffett took control 49 years ago. The B shares are about $133 each. Each A share can be converted to 1500 B shares.

August 11, 2014

On Monday the S&P 500 rose 0.3% and Toronto rose 0.4%.

Almost all of our stock picks were up.

I sold most of the rest of my Liquor Stores N.A. shares. I retail a small amount in a tax free savings account. It has been a disappointment. They will release earnings within a week. I am not at all confident that they will have a good report. Maybe they will. I went to pick up beer and wine of Friday and headed for Superstore. I could not get myself to shop much at Liquor Stores N.A. (Liquor Depot and Liquor Barn) and that was not a good sign.

They need to cut the dividend and the refusal to do so seems irrational. There are far too many stores in Alberta and at some point they may announce some closures.

August 10, 2014

Melcor is updated and rated Buy at $25.88.

On Friday, the S&P 500 rose 1.1% and Toronto rose 0.5%.

Toll Brothers was a notable gainer, up 2.7%.

August 8, 2014 (9:30am eastern time)

On Thursday, Canadian Tire was up 2.6% as it released strong earnings. Melcor released earnings after the close that were relatively good. Melcor was set to open up slightly this morning. If RBC updates its report on Melcor that could generate some excitement. Otherwise it is a good company to continue to hang onto and to look to buy on dips.

August 6, 2014

On Wednesday. the S&P 500 and Toronto both closed at approximately the same level as the day before.

Bank of America received permission and raised its dividend from one cent per share to five cents. That is still almost nothing but it is a sign that the Bank’s health is much improved. The market reaction was quite muted because this was widely expected to happen. Meanwhile they are still dealing with payments and settlements related to the credit crisis. many of these payments are starting to look like corrupt shake-downs by the U.S. government and its agencies. It has already set aside or recognized liabilities for these settlements for the most part and so it may be that it is largely past the financial impact of settlements. I suspect it is a good investment but it is not without risk.

Agrium reported earnings. In a pattern that is not unusual the earnings were down versus last year but were still good news because they were higher than expected.

August 5, 2014

On Tuesday the S&P 500 fell 1.0% and Toronto fell 0.2%

Agrium was up 2.0% which was the highest of the stocks on our list.

This week I am looking forward to Melcor’s earnings release on Thursday (probably after the close)

August 3, 2014

On Monday, the Canadian markets were closed. New York was open and the S&P 500 rose 0.7%.

Berkshire Hathaway rose 3.1% due to its earnings release. It hit a new all-time high. The A shares traded as high as $195,000. 50 years of compounding growth within Berkshire under Buffett’s control and with all earnings reinvested (no dividend paid – save literally a single dime per A share paid in 1967) certainly adds up.

August 2, 2014

On Friday, the S&P 500 fell 0.3% and Toronto fell 0.8%. Constellation software was up 7.3%.

Berkshire Hathaway is updated and rated Buy at $125.83. On Friday I increased my position in Berkshire because the shares were down a bit and I figured the earnings release after the close on Friday would be good and it was.

July 31, 2014

On Thursday the S&P 500 was down 2.0% and Toronto was down 1.3%.

For those with an allocation in cash it now may be time to consider if one should begin buying on this dip. And if so how aggressively. Or should one wait for a larger dip. Logically, dips in the area of 2% to 5% are not much reason for buying. It might make sense to wait and see if more like a 10% dip or larger occurs at least in certain stocks. In my own case I often find myself nibbling on dips. Often I may do that too early when waiting for a bigger dip might have been better. But as long as I reserve some funds in case larger dips appear and/or I have new funds coming in, my strategy tends to do okay.

I noticed today that dividends were paid on Boston Pizza, and my Bombardier pref shares. Dividends can be used to buy shares at lower prices when markets decline.

July 30, 2014

On Wednesday, the S&P 500 was flat today while Toronto gained 0.5% and rose to a new all-time record.

Canadian Tire was up 1.5%, Canadian Western Bank was up 1.8%, FirstService was up 2.3%. Bank of America was up 1.6%.

I added to my Toll Brothers position today as it fell 1.1%. I entered an order to add to my Melcor position if it should fall as low as $24.15 in the next month.

Lots more earnings reports are coming… including Berkshire Hathaway on Friday – always ian interesting read.

July 29, 2014

The S&P 500 fell 0.5% apparently due to global tensions (particularly sanctions against Russia) while Toronto was about flat.

American Express reported (after regular hours) a 13% increase in earnings per share and rose slightly in after-hours ttrading.

FirstService Corporation reported earnings before the opening of trade and rose 5.2%.

I sold what amounted to 43% of my Liquor Stores N.A. shares today. Perhaps I should have sold it all.

July 28, 2014

On Monday, the S&P 500 and Toronto were relatively unchanged.

Liquor Stores N.A. was up 1.8% to $11.42. I probably should use the recent gains to reduce my position in this stock. I consider it speculative and my opinion of the company has deteriorated since I first looked at it. I don’t see a lot of reason to expect the Q2 report to be very good. And that could certainly push the stock price down. But perhaps they will make soothing comments about the future and the dividend that will help the stock price.

I have considered this to be a weak business but which did seem cheap. Perhaps I should have stuck with higher quality businesses.

July 27, 2014

On Friday, the S&P 500 fell 0.5% while Toronto rose 0.4%.

Melcor declined 1.9% to $25.14. It will report earnings on August 7. With this company I am certainly more inclined to buy on dips than to sell.

Canadian National Railway is updated and rated Weak Buy / Hold at $74.02. This company is exceptionally well managed. The stock is up over 800% since I first looked at it 1999. It has generally done better than expected over the years. Often I had rated it a Buy it did better than expected. The history here illustrates the fact that investors can do very well in buying and holding profitable companies. It is certainly a surprise that CN has gone up 800% in 15 years. But no one in 1999 would have doubted that it would continue to grow and be profitable.

At this time, CN looks expensive. It’s P/E is 22. It appears to be “pricing in” a continuation of very strong earnings per share growth. It would be tempting to justify paying this price. But it would not be prudent to forecast that the P/E will remain this high over the next five or ten years. Also it seems unlikely that it can grow profits are rates over 10% for the next decade.

It seems dangerous to bet against this company and I certainly would not short the stock. If I had a large position in it I would reduce that position (especially in non-taxable accounts). If I had a small position, I would probably just hold onto that.

I have not owned it for quite some years (unfortunately) and have no plans to buy.

July 24, 2014

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

However Toll Brothers fell 4.1% as some other home builder companies reported heavy use of incentives to sell more houses. Also recent reports indicated some slowing in new home sales in the U.S. Toll Brothers will not report again for about a month. My inclination is to buy this on dips. It’s P/E is high which means it does need to continue to grow profits to justify its price. Based on analyst forecasts of earnings in 2015 it trades at 15 times those projected earnings.

Melcor fell 2.3% to $25.62. Again my inclination would be to buy  on dips. The stock is up a lot lately and so it is going to need a good Q2 report (on August 7) to maintain and grow the price. If the earnings and outlook are strong then Royal Bank will likly update its recent Buy recommendation which could generate renewed interest. Aside from that short-term possibility it is a very well managed company which should be a good long term investment. It does however tend to be cyclic and would drop in price if new home building in Alberta slows significantly.

July 23, 2014

On Wednesday, the S&P 500 crawled a little closer to 2000, up 0.2% at 1987. That right around 200% higher than its March 6, 2009 low of 667.

Toronto was up 0.5% to a new record high.

Toll Brothers was up 1.4% today.

Bombardier announced layoffs and a reorganization.

July 22, 2014

On Tuesday, the S&P 500 rose 0.5% and set a within the trading day record. It’s very close to 2000. In theory there is absolutely nothing special about 2000. In practice a bunch of traders will take that as either a buy or a sell signal and generally get all excited about it.

Toronto rose 0.4%.

Winners today included Canadian National Railway, up 2.0%, and Element Financial up 3.3%.

Activist investor Bill Ackman pretty much appeared to lose his marbles today with a tearful three hour presentation suggesting that Herbalife was a pyramid scheme. Well apparently it is a pyramid selling scheme. But there is nothing necessarily wrong with that.

I am not sure what to think about short sellers who loudly spread the word that a stock is over-valued. In some way this is no different than owning a stock and then telling everyone what a bargain it is. No one seems to have a problem with that. Probably both should be okay as  long as the view being spread is a legitimately held view. It is wrong and should be illegal to try to push a stock up or down based on no valid reason and done just for the purpose of manipulating a stock.

In my own case I have always wanted to predict which stocks will rise or fall through analysis. I never wanted to cause a stock to rise or fall by pushing the price around such as by convincing others to buy or sell. Even if doing so was based on reasons I thought were correct, the whole idea of doing that does not seem entirely ethical to me. It just smacks of pump and dump.

Anyhow Ackman apparently has a great track record with CP Rail and other investments. But he is looking like a crackpot over Herbalife. I know he is involved with Valient / Allergan and to me, that is a negative as far as Valient goes.

Ackman may be perfectly correct that  Herbalife products are basically snake oil with no redeeming features. But the same may be true of half the crap we buy. I am not sure that should be the concern of a stock analyst. Ackman contends that Herbal life basically sells an awful lot of its product to its own recruits rather than to external customers. If so, that can’t go on for ever. To a greater or lesser degree the same probably applies to Amway and Mary Kay and Avon. If so, so what? Most recruits will never  make much money in these type of multi-level (pyramid if you will) marketing “schemes”. But I know a couple people who have done very well at it. Most kids will never make money at hockey either. But that does not mean we crush the dream of every eight year old hockey player and his parents. 100% of the people who never try will never succeed. A 0.001% or whatever chance is still a lot bigger than a zero % chance.

I have no idea if Herbalife is a good investment. But I am not sure anyone should take Ackman’s biased word on the amtter.

July 21, 2014

On Monday, the S&P 500 was down 0.2% and Toronto was down 0.1%. So far, it seems that the market is only moderately concerned about recent world events.

I added modestly to my Bank of America position today. If the U.S. economy continues its slow improvement then Bank of America is likely to be a good investment at its present level.

There will be lots of Q2 earnings reports out in the next couple of weeks.

July 20, 2014

Bombardier perpetual preferred shares are updated and rated Buy for fixed income at $22.05. The dividend at just over 7% is attractive. But there are risks. The company is relatively weak financially. Perpetual shares will fall precipitously if long term interest rates rise a lot. The company has certain conversion options that are negative to investors. Still for those looking for income a modest position in these shares is worth considering. The next quarterly dividend is payable July 31 but I was unable to find the record date so I don’t know if anyone buying these early this week would get the next dividend or not. In any case, in theory the share price will drop after the ex-dividend date if it has not already passed.

July 19, 2014

Bank of America is updated and rated Speculative (higher) Buy at $15.49. I believe now may be a good time to buy these shares. Its reported earnings are predicted to rise sharply as it puts the settlements related to the mortgage issues of the financial crisis behind it. I will likely add to my position. Bank of America shares will likely do better than the average U.S. stock over the next year.

U.S. stocks are well suited to RRSP accounts because the normal 15% withholding taxes on dividends does not apply to RRSP accounts. Also, most retirees will spend some money in the U.S. and so having U.S. investments makes sense. Regarding taxable accounts, the 15% dividend withholding tax is not something that should stop investors from buying U.S. shares and especially shares of a low dividend company like this one. (For taxable high-dividend shares it does make sense to favor Canadian companies.)

Canadian Western Bank rate reset preferred shares are added to the list and rated buy for fixed income. The 4.3% yield is not exciting. But is seems a reasonable alternative to cash. I first mentioned these shares back on January 31 when I bought at the IPO at $25.00 (with no time for analysis). I mentioned on May 6 that I had sold these at $26.00. The next dividend record date is next week, Thursday July 24. If you buy on Monday (and possibly Tuesday) you will get a dividend on July 31. But, in theory, the price will then drop by the amount of the dividend.

July 18, 2014

On Friday, the S&P 500 rose 1.0% and Toronto rose 0.4%.

Most of our stock picks rose as well.

Alimentation Couche-Tard is updated and rated (lower) Buy at $29.29. It’s a fantastic company. One of the very best managed large companies in Canada. Also one of Canada’s largest companies by revenue. But at 20 times trailing earnings, it is not cheap. I don’t own it, I sadly sold it a few years ago at only a 100% or so gain and let a potential 300% slip from my grasp. It could rise if it makes another very large acquisition at a good price.

July 18, 2014 (1:30 pm eastern time)

I (very) rarely ever call and speak to company executives. I prefer the results to speak for themselves I prefer not to become friendly with management as that can make me less objective. Also executives will almost invariably paint a rosy picture.

Today, I did speak to the Liquor Stores N.A. CFO today by phone. I was concerned that emails to the company had not been answered. In fact, that was my mistake I had the wrong email address. (But I should have gotten bounce backs but did not) The CFO was quite upbeat about the future but did say it is going to take a while for recent and planned investments to show up in profits. He was also forthcoming about the challenges being faced from competitors. This company believes its expansion opportunity is in the U.S. I confirmed that the CEO does live in the U.S. which I find not at at all ideal. It may make sense longer term when they expand in the U.S.

I am not sure if their future is bright or not. I will likely hang onto my shares but am not planning to buy any more despite the lower price.

July 17, 2014

On Thursday the S&P 500 was down 1.2% and Toronto was down 0.1%. This was apparently driven by the downed air plane.

Most of our stocks were down…

My strategy is to ignore events like this.

I am tempted to buy some more Bank of America shares.

July 16, 2014

On Wednesday, the S&P 500 rose 0.4% and Toronto was up 1.0%.

Toll Brothers was up 2.3% as new home builder sentiment improved.

Bank of America fell 2.0% as it released earnings that wer a mixture of good and bad items. Overall it appears that Bank of America continues to improve.

Melcor was down 1.1% to $26.68. However, the trading volume was good. This stock is up a lot and so set backs are to be expected. There is always the risk of a decline, but overall I expect this stock to continue to be a good investment. If I was not already so heavily invested in it I would throw in a stink bid at say $25 as one never knows…

July 15, 2014

On Tuesday, the S&P 500 fell 0.2% and Toronto fell 0.6%

In part, the Toronto market has fallen with lower oil prices as oil was down under $100. Thought it is just above $100 at the moment.

Liquor Stores N.A. fell a bit more. It announced after th clo se that it had (as usual) declared its next monthly dividend of 9 cents per share. Unfortunately, the payment of a dividend is no proof that the company is actually earning the dividend. It may or may not be sustainable.

July 14, 2014

On Monday, the S&P 500 rose 0.5% and Toronto rose 0.3%.

Liquor Stores N.A. was down 1.8%. Of my own investments this is the one I worry about. Historically they had done well. I had thought their size gave them advantages over smaller players. But they seem to be struggling. In my area a somewhat newer competitor “Solo liquor stores” is more popular and more aggressive on pricing. Plus Superstore and Walmart have opened more liquor stores. On top of that when I emailed the Liquor Stores CEO and CFO I was ignored, despite several follow ups. (As an update, I have now learned the emails were not received, I did not get a bounce back so assumed I had the correct email address but I did not, that was my mistake) It will be interesting to see how their Q2 report comes in but I am not overly confident.

This week there will be many more large U.S. companies reporting earnings and that may drive the market in one direction or the other depending if expectations are exceeded or not.

July 13, 2014 

My personal portfolio composition is updated. With the rise in Melcor, I am certainly dangerously concentrated in that stock. I have an order in to begin trimming that if it hits $27.95. I expect it to release a good earnings report for Q2 and I suspect its outlook will continue to be good but one never knows for sure.

We certainly owe much of the strength in Melcor and in the market in general to low interest rates.

I no longer have any stocks rated in the Strong Buy category. That mostly reflects the fact that obvious bargains are simply less common at this time.

July 12, 2014

On Friday, the S&P 500 and Toronto were little changed, each up about 0.1%.

Wells Fargo is updated and rated Buy at $51.40. Due partly to its price rise (up 13% this year to date), I am no longer rating this a Strong Buy. It’s still considered a Buy and a good long-term investment.

I have followed this bank on the site since February of 2009 when it was very low due to the financial crisis. At that time it was looking cheap on a book value basis but also speculative given the financial crisis. It is up 372% since being added to this site as a highly speculative Buy at $10.91 on February 22, 2009. It then rose rapidly as the stock market recovered sharply in 2009. It is up 92% since being rated a Strong Buy on February 15, 2010 at $26.88. During 2010 and 2011 it was volatile, climbing to close to $35 each of those years before going back under $25. Since late 2011 it has doubled in a fairly steady climb although with some modest pull-backs along the way. Basically it has rewarded patience and fundamental investors. Its volatility has probably left those using stop loss orders wishing they had not.

At this time those who have big gains on it and especially where it may be too large a portion of an equity portfolio (which may mean over 5% or over 10% depending on risk tolerance) may wish to reduce their position. And particularly in non-taxable accounts where one does not have to worry about triggering a capital gain.

Wells Fargo represents about 13% of my portfolio and about 16% of my equities. (I have a high risk tolerance, risk capacity). Given that it is now rated Buy rather than Strong Buy it is probably prudent for me to reduce my position.

July 10, 2014

On Thursday, the S&P 500 was down 0.4% and Toronto was down 0.7%.

Melcor had a good day and was up 1.6% to a new multi-year high at $27.40. Back in 2007, this stock briefly was around $30.  But back then it did not deserve to be that high. Today it probably does.

This morning the market had opened down due to (of all things) concern about the finances of a large Portuguese bank. Really. Now Buffett might ask, if you owned the finest and busiest large restaurant in your City, would you sell it on that news? And if not, is it rational to think about selling stocks on that news? I don’t think so. Thought I do like to keep an allocation to cash in case others sell for silly reasons and drive prices down.

July 9, 2014

On Wednesday, the S&P 500 and Toronto each rose 0.5%

Most of our stocks were up. The biggest gainer was Element Financial, up 3.5%.

I plan to dedicate time for updates the full week starting July 19. Until then I won’t likely have any updates (possibly something this weekend) but definitely a number of updates in the week starting July 19.

July 8, 2014

On Tuesday, the S&P 500 fell 0.7% and Toronto was down 0.2%.

Almost all of our stock picks were down.

However, Costco was up 1.0% and Walmart rose 0.8%. Costco always seems expensive but is a great company and I would like to buy it at some point.

July 7,2014

On Monday the S&P 500 was down 0.4% and Toronto was down 0.3%.

Most of our stock picks were down. After so  many positive days this tiny decline does not seem like anything to complain about.

The market’s direction this week will likely depend on the first few Q2 earnings releases coming in from the S&P 500 companies.

In the next day or so, Warren Buffett / Berkshire Hathaway will announce that Warren has made his annual charity donation. This is the ninth donation since his big charity plan was announced in 2006. The amount will be about $3 billion. Meanwhile his friend Carol Loomis has announced that she will retire as a regular columnist at Fortune magazine – this at age 85 and after 60 years on the job at Fortune. She is rich from her Berkshire stock and probably other investments. She clearly loved her work to have delayed retirement so long. And, in fact she will still do the odd article for Fortune, edit Buffett’s annual letter for free (as she has done for about 40 years) and sit on the Board of one of a Buffett family foundation. If everyone enjoyed working as much as Buffett and Carol Loomis do, more people would be happy.

July 6, 2014

On Friday, the U.S. markets were closed. Toronto rose 0.05%.

This week, the S&P 500 companies will start to report Q3 earnings, although most will report closer to the end of July. Canadian results will not start for about two weeks.

Hopefully, the results will allow markets to remain strong. However, there is always the chance that world events and interest rate increases or just the age of this bull market could spook markets.

July 3, 2014

On Thursday the S&P 500 as well as the DOW set new records before closing early for tomorrow’s holiday. Toronto was about flat.

The Canadian dollar has risen to about 94 cents U.S. from lows of 89 and 90 cents earlier this year. And back in January as it went under 90 cents most analyst seemed to be suggesting it would go quite  a bit lower. They were wrong.

My strategy has been to try to buy more American dollars when the Cnadian dollar is higher and convert some U.S. back to Canadian as the Canadian goes lower. But is never easy to know when to do this. It probably does not make sense to be buying and selling on a 1% move in the dollar, maybe on 3% to 5% in either direction makes more sense.

Back in January as the Canadian dollars went lower and as that increased the value (in Canadian dollars) of my American investments I hedged some of the currency buy using U.S. dollars to buy a Canadian dollar fund FXC on New York. I started hedging a bit too early. Most of this year that hedge was in a loss position as the Canadian dollar was lower than where is was when I purchased my FXC (average purchase price). Right now I am thinking of selling some FXC as it has risen. But I am tempted to wait and see if the Canadian dollar goes a bit higher before I do that.

Overall, most Canadian investors probably don’t need to bother with hedging U.S. dollars. Over a long period of years hedging might not make much difference. Also most Canadians will ultimately need U.S. dollars to spend so in that sense leaving U.S. dollars un-hedged is a natural hedge against your future shopping/ vacation/ retirement spending in the U.S.

July 2, 2014

Wednesday was a positive day on the markets as the S&P 500 was up 0.1% and Toronto was up 0.4%.

Melcor was unchanged at $26.50 but had 124,000 shares traded. This included a 100,000 share traded that was likely a “block trade” between two institutional investors. In the long run, what is important is how much Melcor earns and what its true value is (hopefully higher than $26.50). But in the short term increased buying interest can push the price up. So far, it seems that the buying interest is supporting the recently higher share price. Right now it seems that those who hold the stock want to keep it and can only be convinced to sell with this recently higher price.

July 1, 2014

On Monday, the TSX was up 0.3%. The S&P 500 was flat.

On Tuesday, the Toronto market was closed and the S& P gained 0.7% and made a new record closing high.

Melcor was up 0.6% to $26.50 on Monday. It had just over 30,000 shares traded which is high for this company. Apparently there is more interest in this company than usual.

Constellation Software rose 5.6% on Monday.

The first half of the year is over and its been a good first half for investors.

June 28, 2014

On Friday the S&P 500 rose 0.2%and Toronto rose 0.4%. Most stocks on our list were up including Constellation Software, up 3.2%.

Agrium is added to the list above as a new stock pick rated Speculative Buy at CAN $98.05 and U.S. $91.89. I call it speculative because its earnings are cyclical as it products and major inputs are commodities and the earnings were recently declining. But it will likely continue to be a good investment in the long run. I find it interesting learn about the agricultural economy by studying this company. I plan to buy shares. I will not make a large investment because I want to see how its earnings progress in the next few quarters. It is expected that its earnings will decline in Q2 compared to last year and that could possibly lead to a share price decline when it reports those earnings although in theory that is already factored into the price.

June 26, 2014

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

Melcor was down 2.6% to $26.22 on good volume (by the standards of this thinly traded stock).

I finally entered an order tonight to sell about 10% of my Melcor shares if they should hit $27.95. This is my biggest position by far and so I think it makes sense to start to trim at some point.

News of Sobeys closing some stores is not much of a surprise given amount of new grocery stores that have been built in Canada in the past decade or so. Where I live in St. Albert, Alberta, I believe the were three or four grocery stores 20 years ago. Now the population is up by a third or maybe 50% but the number of grocery stores has about tripled. Possibly this is a negative sign for certain REITs but it may be more of an isolated incident. Certainly things do not appear to have slowed down in Alberta.

June 25, 2014

On Wednesday, the S&P 500 was up 0.5% and Toronto was up 0.1%.

It was a strong day for Melcor, which rose 2.0% to $26.93 on higher-than-normal volume. Melcor announced today that it would redeem some convertible bonds that it has outstanding which are now well into the money. The bonds convert at $18.51. I am not sure if this had anything to do with the price rise today. In fact I would have though it might have a small negative effect.

It’s interesting that the bond holders have until August 7 to convert at $18.51. IF they fail to instruct their broker to take the conversion at $18.51, then the bonds automatically covert on August 8th at 95% of the average trading price in the previous 20 trading days. Based on today’s price the forced conversion might be at about $25.60. In that case investors would be FAR better off to take the conversion at $18.51. I find it disappointing that Melcor has issued a press release that technically gives the facts but omits the simple observation that if the 20 day average price is higher than $19.48 (which seems all but certain) then the convertible bond holders are better off converting at $18.51 rather than taking he default conversion. Every company seems to do this sort of thing. That is, they issue a press release that meets the legal requirements but omit plain language and common sense advice. And they probably could make the default option the $18.51 but they do not appear to be doing that.

Basically the result is that if you get a “corporate action” notice about things like this you as an investor have to take the time to understand the best option.

In the case of Melcor however, the convertible bonds do not appear to trade and were issued on a private placement basis. So, perhaps everyone that owns them would be sophisticated and would know they should convert at $18.51. Perhaps the press release was not directed at the bond holders but was more so to let the public shareholders know about this. If that is the case and the private holders of the convertible bond were notified to convert then perhaps my concern about the press release wording is misplaced.

June 24, 2014

On Tuesday, the S&P 500 was down 0.6% and Toronto was down 1.0%.

However, some of our stocks did well, Canadian Western bank up 1.5%, Toll Brothers up 1.2%.

I neglected to mention that on Friday my order to buy back some of the Canadian Tire shares that I had sold at close to $110 was filled at $101.50.

June 23, 2014

On Monday, the S&P 500 and Toronto were both about flat.

There was nothing too exciting happening with our Stock Picks today.

Currently I am reading a book that traces the history of commerce back about 5000 years. According to this book trading and commerce is basically the fountain of wealth. Many or most rich people throughout history were merchants and traders. I think this is in agreement with Adam Smith in the Wealth of Nations. It is the the related combination of the division of labor and trading along with the necessary banking and enforcement of debts and contracts that is the source of wealth.

We sometimes think of retailers as mere middle men. Yet some of the richest people in the world built their fortunes in retail. The Walton family is FAR richer than Bill Gates or Carlos Slim or Warren Buffett if you combine the family. And all their wealth came form the often maligned Walmart stores.

Most of us will never start our own businesses to get rich that way. But the next best thing may be to buy shares and ride the coat tails of successful businesses. Most investors seem to focus on trying to guess which stock is going to rise or fall. But in the long run it may be best to try to figure which businesses will thrive in the long run and buy their shares (if the price if not outrageous). If the company grows its earnings per share at a high rate the stock price will tend to follow along eventually.

June 22, 2014

On Friday, the S&P 500 rose 0.2% and Toronto was about flat.

Wells Fargo rose 1.7%. Wells Fargo has been a great investment. It was first added to this site very near the bottom of the stock market in February 2009. It was rated highly speculative Buy at $10.91. Since then it is up 385%. It was first rated a Strong Buy on this site on February 15, 2010 at $26.88. Since then it is up 97%. It has also been relatively volatile and offered plenty of opportunities to buy in the 20’s in 2010 and through to the end of 2011. It is by some measures the largest bank in the U.S. Sometimes even very large companies can provide excellent returns.

I am working on the analysis of Agrium but did not finish it yet. It is currently in a period of lower earnings due to lower prices for its commodity products. It has an excellent history of profitability. I believe my analysis may settle on a (lower) Buy rating. I like the company and may buy a modest position and then see what happens after it reports Q2 results. Q2 is by far its most important quarter. It is expecting profits per share to be about 15 to 20% lower than last year. Therefore it seems unlikely that the price would rise much in the near term. It’s financial disclosure is extremely detailed and it appears to have a strong focus on return on equity which I really like. It is however subject to wide swings in the prices of its products and some of its raw materials. Therefore it will never be an easy company to predict.

June 19, 2014

On Thursday the S&P 500 rose 0.1% and Toronto was about unchanged.

Constellation Software was up 2.5% and Element Financial was up 3.4%

Melcor was down 0.9% and its volume was closer to its old normal. Almost everyone owning this has made exvellent gains recently and many may be predisposed to sell especially if they see the price rise seems to be over or headed the other way. But fundamentally it is likely still good value and so could easily go higher (perhaps after a bit of a breather now) as lomg as the Alberta economy stays strong.

I plan to add Agrium to the site by Sunday.

June 18, 2014

On Wednesday the S&P 500 was up 0.8% and Toronto was up 0.3%. Both gains wee after statements from the FED about interest rates rising relatively modestly were taken as positive.

Melcor edged up another 1.4%. Obviously it can’t rise everyday and at some point the impact of the recent RBC report is fully reflected in the price. I am thinking of trimming my large position modestly, perhaps at just under $28 if it should get that high. Obviously the stock could fall based on world, Canada, oil-patch or company-specific news. I think it remains good value but certainly recognize that stocks don’t go up in straight lines and sometimes bad things happen to good stocks.

Fedex rose 6.2% after posting strong earnings and an upbeat outlook. As of my last look at it, I thought it was too expensive. But sometimes it’s hard to keep a good company down.

June 17, 2014

On Tuesday, the S&P 500 was up 0.2% and Toronto was up 0.1%

Those who don’t own it may tire of hearing about Melcor but it managed another 1.2 % today. Volume was 25,000 shares. At that level it would trade 6.25 million shares a year.  It has 33 million shares. But over half are with the founding family and lots more are probably held by those who will never trade. So 25,000 shares per day may be at the high end of the trading we will ever expect to see here. (So, again it’s surprising that RBC would mention it to their vast client base.) In theory trading adds nothing to the true value of a company, especially one that is not looking to sell additional shares. In practice it often adds to the share price. A decent volume of trading can facilitate making a quick capital gain and then selling. And it facilitates selling out at any time. Most retail investors do not need to see a lot of volume since we tend to have 1000 shares or (much) less very often. But for those who get into owning say $50 or $100k or more in any one company a lack of trading liquidity can be a concern.

With a company like this, a good strategy might be to have a core or minimum holding intended to hold indefinitely. On top of that when it is cheap one could own another layer with the intention to sell if it no longer looks cheap. Or a layer of stock that is used to buy low and sell high and perhaps repeat that if the stock is volatile. I have tried to do that with stocks like Wells Fargo, Toll Brothers, Canadian Tire and some other over the years. Sometimes it has worked out. I have not however had firm rules so it has been ad-hoc.

Wells Fargo also did well today, up 1.2%. Bank of America was up 2.0%. I read mixed mixed messages about the U.S. economy and about home building. In general, I believe a slow recovery continues and that the big banks and Toll Brothers will do okay.

June 16, 2014

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

Melcor rose 4.0% on the continued effect (or affect?) of the RBC report on Friday. But really the volume, although a good bit higher than normal, is still quite low and for that reason the stock price could be volatile. But overall, I agree with RBC that the company is worth more than it is trading at and I am inclined to enjoy the gains and not sell any at this time. Perhaps I am being  rather greedy in doing that (since I have such a high exposure to it) but that is my thinking at this time.

June 15, 2014

On Friday, the S&P 500 rose 0.3% and Toronto rose 0.6%.

Similarly, most of our stock picks were up.

There was an interesting development for Melcor on Friday. RBC Capital markets has initiated overage with a rating of outperform and a $35.00 price target.

I am surprised they would “cover” it given the very low trading volume. Their report alone could certainly push the price up.

I have occasionally been concerned that even my own recommendations could push up a stock price. If a stock were under-valued and any analyst said so and the stock rose as a result, there is technically nothing wrong with that. It’s fair game if the stock was truly under-valued. But the worry would be that if an analyst pushes a stock price up, then who would be there to buy when that analyst and his “followers” wanted to sell? Out of caution I never want to push a stock price up. I want to identify under-valued stocks and then ride them up. The seedy side of pushing up stock prices would be “pump and dump” where an analyst purposely pushes a stock price up and then sells ahead of his followers. That of course is highly unethical. About 10 years ago I briefly removed Melcor from this site when its price kept rising and I was afraid I was causing that. (It turned out it was a Calgary brokerage company that had recommended the stock).

So I am surprised that RBC is covering this thinly traded stock. I suspect it will push the price up. I am perfectly happy with that.

The stock initially rose about a $1.00 on Friday but closed up 44 cents. Volume was several times higher than normal but still quite low. Near the end of the day the graph shows a lot of very small trades. I am not sure what to make of that.

Part of the reason for RBC covering the stock may be that Melcor now has someone dedicated to investor relations. Also the company has grown and it makes sense that eventually the bigger brokers would take notice.

In looking into this I also found the following comment about the RBC report:

“A number of other analysts have also recently weighed in on MRD. Analysts at Laurentian raised their price target on shares of Melcor Developments from C$28.00 to C$29.50 in a research note on Monday, March 17th. They now have a “buy” rating on the stock. Analysts at LB Securities raised their price target on shares of Melcor Developments from C$28.00 to C$29.50 in a research note on Monday, March 17th.” (I think that would be just one analyst but the quote implies more than one)

This probably explains much of the recent surge in Melcor’s price. The Laurentian coverage does not seem to have had any great impact on volume however. A worry with Melcor is that if someone were to rush to sell 10,000 shares or more they could push the price down.

I would buy Melcor at this price if I did not already have such a large position in it. My thought has been to not even trim this position unless it gets closer to $30, although prudence would suggest I should be thinking about trimming now.

I will be interested to see how the price reacts this week to the RBC report.

Overall I am happy with my large investment (as a percentage of my portfolio) in Melcor and look forward to  (probable) gains ahead. If it happened to fall back to the $21 range I suspect I would buy more despite already owning what most would advise is too high a position in one company.

Today I am reading the annual report for Agrium. I really like what I see. It’s also trading at a reasonable P/E. I plan to add it to the list above when my analysis is complete and I suspect it will be rated Buy or higher.

P.S.

On Friday there was news about a very large acquisition by a Canadian gaming company.

“Amaya Gaming Group (TSX:AYA.TO – News) announced a jackpot of a deal Friday as the Montreal-based company said it will pay US$4.9 billion in cash to buy the world’s largest online poker company, operator of popular brands PokerStars and Full Tilt Poker.”

.. So a $4.9 billion acquisition. Looking up Amaya Gaming I see that it last reported assets of $519 million and equity of $238 million. I saw some information about how this would be financed including issuing shares through a subscription receipts method at a price of $20, some 42% above the previous days closing price. Most of the purchase price would be raised by issuing $2.9 billion in debt and $1.0 billion in convertible preferred shares at $24 per share in a private placement.

It all seems very strange indeed to me. It appears that the the new pref share holders will eventually own about 30% of the company if the conversion is exercised. (It would make more sense to me if they ended up with over 50% in which case this would be a sort of reverse takeover deal.)

It simply baffles me how the market could so quickly decide that this is a good deal and that Amaya’s shares are now worth some 42% more than they were the previous day. Usually acquisitions are viewed with skepticism.

The reason that the stock price ahs risen close to $20 appears to be that:

Amaya has entered into an agreement with a syndicate of underwriters led by Canaccord Genuity Corp. (“Canaccord Genuity”), Cormark Securities Inc. (“Cormark”) and Desjardins Capital Markets (“Desjardins”) (collectively, the “Lead Underwriters”), and Clarus Securities pursuant to which the Lead Underwriters and Clarus Securities have agreed to purchase from treasury, on a bought-deal private placement basis, 25 million subscription receipts of the Corporation (the “Subscription Receipts”) at a price of C$20 per Subscription Receipt (the “Subscription Price”), for aggregate gross proceeds to Amaya of C$500 million.

I remain quite baffled and skeptical of this deal.

June 12, 2014

On Thursday, the S&P 500 fell 0.7% and Toronto rose 0.1%.

Fedex fell 2.5%, possibly because oil prices rose.

I am pretty much holding tight, not buying and not selling though I do have an order in for some Canadian Tire at $101.50 and it got down to $101.84 today.

June 11, 2014

On Wednesday the S&P 500 was down 0.4% and Toronto was down 0.1%.

Alimentation Couche-Tard was up 2.8%. Canadian Tire was down 1.6% to $103.55. I still own some in a taxable account but had sold most of what I owned (all in registered accounts) at close to $110 (before that I sold most on the way up over the past couple of years). I have an order in to buy some back if it hits $101.50 which it could well do.

Berkshire Hathaway is now number 4 on the Fortune 500 which is ranked by revenue. It’s number 2 in terms of book value of equity. It’s number 5 in terms of market value. It has 302,000 employees in total but only 25 at head office. What Buffett has accomplished starting with a $20 million dollar textile company in 1965 is truly staggering.

June 10, 2014

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

There were no particularly notable moves in our stock picks.

I am cognizant that there have been few updates lately or new companies added to the list. I plan to work to change that.

June 9, 2014

Monday was a positive day in the markets as the S&P 500 rose 0.1% and Toronto rose 0.2%

My own portfolio took a hit due to Melcor being down 2.3%. But that is not something that bothers me given the recent gains in that company. I suspect it will be higher before long and and am highly confident that it will be higher in the long run.

June 8, 2014

On Friday the S&P 500 rose 0.5% and Toronto rose 0.3%

Canadian Western Bank was up 3.1% and American Express was up 2.3%

Last week I purchased data from the TMX group (data that used to be free) so that I could check the P//E ratios and yields of the Toronto Stock index and its various segments. The TMX data provides a P/E ratio based on the published earnings numbers without adjustment. In general the P/E ratios were unattractively high. Using this data I updated two reference articles:

1. The valuation of the TSX

and

2. A list of Canadian Exchange Traded Funds with the  P/E ratio, yield and price to book ratio.

In addition to the TMX “raw” P/E ratios I also show the P/E as seen by ishares which are adjusted P/E ratios but which may be more relevant.

Due to the introduction of IFRS accounting in Canada, the reported earnings are often relatively meaningless. That’s mostly because IFRS apparently makes no distinction between a one-time gain or loss and earnings from operations.

These articles were included in the latest edition of the free newsletter which has been emailed out today.

June 5, 2014

On Thursday, the S&P 500 rose 0.6% and Toronto was about unchanged.

I did not note any dramatic moves in our stock picks.

The European central bank will charge banks 0.1% to keep money on deposit at the central back. I don’t pretend to have a great understanding of this but the idea is that the banks should lend out the money instead of keeping it at the central bank. But banks would rather pay the 0.1% than lend to bad credits. Also Amanda Lang pointed out today that most of the countries in Europe can now borrow at better rates than the U.S. That seems strange. It could be because the banks in Europe are buying up the government bonds of all the European countries rather than keeping money at the central bank or lending it out. This pushes down interest rates. Bank regulators always seem to encourage banks to hold government debt as they consider it risk free. The central bank in Europe is also buying up government bonds (and this “support” is why they are considered relatively risk free). Hopefully all of this will lead to a continued and further recovery of the economy in Europe. Stronger companies in Europe are certainly benefiting as they can borrow at ultra low rates.

Possibly, it would be a good idea to invest in some European ETFs. Some are listed in our Global ETF article. The ETF that trades as IEV on New York offers broad exposure to Europe. I don’t have a buy /s sell recommendation. I don’t think it would be a bad idea to purchase some for diversification. I don’t own any.

June 4, 2014

On Wednesday, the S&P 500 was up 0/2% and Toronto was up 0.4%.

I added to my Toll Brothers position today based on the update posted earlier today.

The reference article on the valuation of the Toronto stock index is updated. I had to purchase the P/E data from the Toronto Stock Exchange (it used to be posted free). On A GAAP basis the P/E of the Toronto index is apparently 38. However iShares puts the figure at 17.6. Reality may be somewhere in between. I am worried that iShares is too aggressive in assuming that all negative earnings can be set to zero. Nevertheless I used the iShares figure.

I will also shortly update my list of Canadian exchange traded funds and their P/E ratios.

June 4, 2014 11:45 am Mountain time

Toll Brothers is updated and rated Buy at $36.01. As the report indicates its earnings are still too low but they are recovering very rapidly. This still seems to be a reasonable play on the long-term recovery of the U.S. housing market. I first added Toll Brothers to this site on June 5, 2011 as Speculative Buy at $21.03. It subsequently soon went under $15 but then rose rapidly to the $35 range where it has been with some fluctuations for the past two years rising as high as $40. It’s been a good investment and has been a good one to play the game of selling on rallies and buying dips. I plan to add to my position.

June 3, 2014

On Tuesday, the S&P 500 was about unchanged and Toronto was up 0.4%

There as a new issue of “split shares” stocks and debt today form a company called. NewGrowth Corp. That’s interesting, a company with a name that contains absolutely no clue about what line of business it is in. From the name all we know is that it is new and intends to grow. While overall the market may not be over-valued, the existence of this company seems a little scary. I realize that one could read its prospectus to find out what it does or in tends to do. The reality is that few investors read the prospectus and in many cases there is literally no time to to do so as the issues often fill and close out very quickly. In this case, and I think it is not surprising, the issue ahs not yet sold out.

Apparently this entity already trades and appears to be a closed end ETF. It was apparently created by Scotia Bank to invest in banks and utility companies. It splits out the income from dividends versus capital gains.

I have never bothered to look into the mechanics of any of these “split” corporations. To me, they just add in a lot of complexity and some fees. If I want dividend shares I will buy dividends shares. If I want capital gains I can buy directly shares in companies that I expect to grow. Bank shares typically offer both and I don’t see any value in separating them.  Most advisors suggest having some of each in any portfolio so why separate them? I doubt that these split entities add any value to the market. And I doubt that very many investors would understand much about how these entities work.

I suppose I might consider it if the closed end fund were trading at a large discount to the underlying shares.

There might be the odd situation where someone with no other income wants a portfolio with 100% dividend income because there is very little tax in that situation. But that is a rather rare situation, I suspect. It could perhaps be arranged for a non-working spouse but seems to be an aggressive form of tax planning and revenue Canada might want a very clean paper trail on where the funds came from that are generation say $60k in dividends, in a taxable account, for someone who is not working or drawing a pension. While such cases might exist, it does not apply to me and I have no interest in this at this time. Even if I was especially hungry for dividend income I don’t think I would look to the complexity of split shares. They are derivatives. Nothing inherently wrong with that but it definitely adds complexity.

Overall I just don’t see it as useful to spend any time looking at this or any other “split share” entity.

And it is just very hard to take seriously an entity called NewGrowth Corp.

June 2, 2014

On Monday , the S&P 500 was up 0.2% and Toronto was up 0.1%

FirstService was up 3.1% on news of an acquisition it is making.

Element Financial was down 2.6% on news it is making a large acquisition. It also has a new issue out for subscription receipts at $12.75 (existing shareholders can buy more shares at $12.75). A convertible debenture at 5.125% and a five year rate reset preferred share at 6.4%. As this company makes acquisitions and issues shares and debt its balance sheet changes rapidly. I think it has to be considered speculative. I am not particularly inclined to invest in it at this time.

Melcor was up 1.6% to $25.40. I think we should not get too excited about the recent increase in Melcor. It’s been on low volumes and it would only take a few sellers of 20,000 shares or whatever to push the price down. So I am enjoying the ride and have not sold any but would certainly not be surprised if it fell back.

June 1, 2014

On Friday, the S&P 500 rose 0.2% and Toronto rose 0.1%

Melcor closed up 0.6% at $25.00 and is up 25% this year.

The next update will be for Toll Bothers. My preliminary analysis indicates it will be rated Buy at its recent price of $36.22. As its earnings grow it is looking less speculative. I am considering adding to my position.

May 29, 2014

On Thursday the S&P 500 was up 0.5% and Toronto was down 0.2%.

None of our stocks moved much. Today may have been my chance to buy back some Canadian Tire as it hit a low of $102.26 before ending the day up 0.7% at $103.97. I have now placed an order to buy some at $101.50 it it happens to fall that low in the next month.

Also I placed an order by some more Boston Pizza at $20.18

TD sent me notice of about four more stock offering today.

The five year rate reset pref shares that I mentioned yesterday fell a bit more today. Yesterday they fell despite the fact that the five -year government bond yield fell. I think they may be falling due to so many new issues coming out. But given that so many investors look for dividends these are probably good value at this time. Having sold some near $26 I am inclined to buy back in if they go back to $25 or so.

May 28, 2014

On Wednesday the S&P 500 was down 0.1% and Toronto was down 0.3%.

Toll Brothers rose 2.1% after releasing strong second quarter earnings.

Onex (which we had rated only a Speculative Weak Buy at $62.00 rose 4.3% to $67.70 after releasing earnings.

It will likely take a another day or so for the market to digest the earnings reports of both of these companies. I will plan to update these reports soon.

Canadian Tire was down 1.8% at $103.23. I plan to enter an order to buy back some of the shares I sold.

In terms of preferred shares the three five year rate reset preferred shares that I had bought earlier this year (and then sold out of two of them) all fell in price today. These were Canadian Western Bank CWB.PR.B, National Bank NA.PR.S 4.1% series 30 and Enbridge ENB.PF.A 4.4% series 9. (I also have the very similar ENB.PF.C series 11)

The Enbridge Pref. ENB.PR.A fell to $24.97. I already own this one having paid $25.00 for it. So this seems attractive given that interest rates are now lower than when it sold at $25.00.  4.4% is not a great yield but may be a reasonable substitute if one is holding excess cash. In buying these I would not do it unless prepare to hold for five years if necessary. (I don’t want to buy and then sell at a loss, so if they fell I would likely then want to hold until maturity and hope to get $25 when the rate resets.

TD Waterhouse continues to fairly bombard me with emails about various new issues. The pace of new issues seems to be some multiples of what it was for most of the past year or two. Investors should be a bit cautious to be buying shares at a time when so many companies seem eager to sell shares. Most of these new issues I ignore but these rate reset preferred shares seemed relatively safe. The yields are not great at all but I consider them to be relatively safe.

May 28, 2014 7:10 am Mountain Time

This morning it is Bank of Montreal out with an offering of five year rate reset non-cumulative preferred shares at 3.9%. It is probably a decent alternative to cash but you have to be willing to hold for five years. You could sell any time but it would drop somewhat below $25 if interest rates rise but likely (no guarantee) return close to $25 in any case when the rate resets in five years. I have never analyzed Bank of Montreal but perceive it to be a strong bank. I am not recommending or rating these shares as I have not analyzed them but they are probably a reasonable investment as part of a portfolio. For myself I had bought a few issued previously from other banks and companies at over 4% or so I decided not to buy any that are under 4% so I will not buy this one. It will likley sell out in a few hours or less. I have to wonder at what point the market gets saturated with these.

May 27, 2014

On Tuesday the S&P 500 rose 0.6% to a new closing record high. Toronto fell 0.4%.

American Express rose 2.9% to $91.39. Constellation Software rose 3.1%. and Bank of America rose 3.4%.

Wells Fargo continues to rise and was up 0.8% to $50.55.

This morning I got an alert from TD Direct (my discount Broker) that Brookfield Asset Management was issuing five year rate reset cumulative preferred shares at 4.5%. This compares to a non-cumulative issue a few days ago from Royal bank at 3.9%. I have done well with the 5 year rate rest preferred shares that I bought earlier this year, most of which I later sold for small but quick gains. So it was an easy decision to grab some of this issue. It’s more or less a substitute for holding a higher than normal cash position although I have to be prepared to hold it for up to five years.

These shares are not without risk as they could certainly trade under $25 if interest rates rise. But as long as Brookfield Asset Management remains financially strong I suspect they would ultimately return back close to $25 in five years even if they did fall in price. This is because if rates are higher in five years the yield will reset to reflect that. In the meantime I may well get a chance to sell them off at something like $26 if they prove popular in the market and if interest rates stay low

May 26, 2014

On Monday the U.S. markets were closed for the Memorial Day holiday. Toronto rose marginally (0.05%).

May 25, 2014

FirstService is updated but remains rated Weak Sell / Hold at U.S. $48.77 or Canadian $52.91.

In many ways I like the company and its management. But it has a number of accounting complexities. Also even on an adjusted earnings basis the trailing P/E of 25 is not attractive. It could be bought as a speculative pick due to its long-term growth history.

On Friday the S&P 500 rose 0.4% to close above 1900 for the first time. Toronto was about flat.

Toll Brothers was up 1.6% to $35.50 and will release earnings this week.

Canadian tire was down 2.0% to $103.44. This decline was likely in reaction to other retailers reporting difficulties. I had sold most of my shares (all in registered accounts and kept those that were in a taxable account). I may start to buy back a few shares if especially in the price keeps dropping.

Melcor closed at $24.25 but as usual the volume is thin. At some point I will likely begin to reduce my large position in this stock especially if the price keeps rising.

May 22, 2014

On Thursday the S&P 500 rose 0.2% and Toronto rose 0.4%.

Toll Brothers rose 2.0%. It will release its Q2 earnings next week.

I am considering adding to my Wells Fargo position and Boston Pizza. But I may wait and see what else turns up.

May 21, 2014

On Wednesday the S&P 500 rose 0.8% and Toronto rose 0.9%.

Element Financial rose 5.3% on some news it would make an acquisition.

Crombie REIT was raising money today by selling additional shares. It’s rather baffling to me why the market rewards the charade action of paying a large dividend only to take that money back in through share sales. Ultimately long-term gains come from earnings and cash flows, not this sort of financial engineering. It is true that the dividends are paid to existing share owners and the money is raised back from new owners but still I think owners would ultimately be better off if some earnings were simply retained for growth. Consider if if a huge investor initially owned 10% of a REIT after some years his ownership falls due to the share issuances. Or if he wants to stay at 10% he has to buy more shares (in effect give back the dividend), so what good did the dividends do in that case? In fact the dividends would trigger taxes in a taxable account whereas retaining the earnings should lead to an unrealized taxable gain and no tax. I believe REITS have benefited greatly from ever declining interest rates. At some point that will end and REITs will not look so good.

May 20, 2014

On Tuesday, the S&P 500 fell 0.7% and Toronto fell 0.8%

Most of our stock picks were down although none were down sharply other than Element Financial which was down 2.8%. Liquor Stores N. A. was up 4.8%. It seems someone must think the decline was over-done. I was just checking if perhaps insiders had bought any shares on this recent decline. Nothing has occurred or at least nothing has been reported yet.

TD Direct (Waterhouse) sent me notice of three more stock offerings today. A possible interpretation is that companies are scrambling to raise money while stock prices remain high.

It was interesting to hear today that the Target Canada CEO has been fired and replaced by a Target corporation marketing veteran.  It is clear that Target made mistakes. It is not as clear who made the mistakes. I feel some sympathy for the fired CEO (though I imagine if I saw his severance package I might not shed any tears for him.). He had a very tough job. For whatever reason Target gutted many or most of the old Zellers locations and even expanded some. So this guy has basically been managing a HUGE construction project, or really close to a 100 construction projects. He had to continue doing that even as stores opened. He no-doubt has a construction executive but still it would not have been easy to manage the merchandising and store openings at the same time as maybe 50 construction projects were going on. Overall I believe Target paid way too much to Zellers and cam at Canada too big t and too fast. Now, we will see if the U.S. marketing executive will be able to straighten things out in Canada.

May 19, 2014

On Monday, the Canadian stock market was closed but U.S. markets were trading. The S&P 500 rose 0.4%. Our U.S. stocks picks were mostly up slightly.

AT&T is buying Direct TV for $48.5 billion. I have no idea if that is a good idea for AT&T or not but it goes to show that buying and selling companies remains popular.

May 18, 2014

The composition of my own portfolio has been updated. I am running an extremely concentrated portfolio. Not everyone has the risk capacity or the risk tolerance to do that.

Melcor is updated and rated (higher) Buy at $23.52. I decided to update this again because it was one of two Strong Buys on the site and because the price had risen. It’s up 17% in 2014. I was also interested to update it because it is my largest holding. It’s thinly traded and therefore we should be cautious in placing buy orders (enter an order to buy or sell at a fixed price, not at the market price) and we should be cautious in interpreting its daily price movements. It still looks like a good investment. However, it is cyclical and certainly not without risk especially in the short term.

Liquor Stores N.A. is updated and rated Speculative (lower) Buy at $10.21. This company has been a disappointment. It was first added to this site two years ago on April 10, 2012 at $17.01.It subsequently went over $20. But then it started reporting various bits of bad news and has fairly plummeted in the last year.  (There is some offset in that it has paid out about $2.16 in dividends since April of 2012)  It seems I took too much faith in its prior success. I thought it had advantages as the largest liquor store owner in Alberta. It’s sales per share have not been the problem. But earnings have evaporated for various reasons. And lately the sales per store have declined modestly. I am reluctant to give up on it at this point. But Q2 is not likely to be a strong quarter given the weather and given increases to their cost structure, although they did mention on the conference call that the trends in Q2 were good. Management seems optimistic of improvements starting later this year but does not appear to forecast a return to the former profit levels until 2016. The dividend is too high and it seems likely it will be cut. I am holding onto my shares but I will not likely add to my position despite the lower price. I calculate that in buying these shares we are paying about $1.6 million per store fully stocked (inventory is $0.4 million per store net of accounts payable) and that is considering that we notionally paid off the debt. The stores are in rented premises.

On Friday the S&P 500 was up 0.4% and Toronto was down 0.5%. There were no particularly noteworthy moves in the prices of our stock picks.

May 15, 2014

On Thursday, the S&P 500 was down 0.9% and Toronto was down 0.6%.

Most of our stock picks were down. Walmart was down 2.4%. Bombardier was down 7.4% after Air Canada announced it would not be replacing certain jets which “the market” was thinking it would replace with Bombardier’s new C-Series jet.

Most painfully for me, Liquor Stores N.A. was down 7.4% as the market continues to react to its Q1 earnings. If this does not turn around and continues to be a loser it will be something of an unforced error on my part. I had expressed concerns about management and noted the declining earnings but I still added to my position after concluding that the stock was cheap. Buffett has always said to restrict investments to the best companies and I failed to follow that advice in this case. I plan to update the analysis within a few days. I suspect the weather is not doing the company any favors in Q2 either. We are halfway through Q2 and today felt like Fall in Edmonton.

TD Waterhouse seems to be almost bombarding me with stock issues lately. A couple more today. In contrast, early this year it seems there were more like a couple per month. Smart companies issue shares when the share prices are over-valued and certainly not when the shares are under-valued (unless they HAVE to). So, this is a red flag of caution for me.

The TD site shows two REITs offering shares this week. Now I would ask what should we call an entity that pays out a high dividend but then turns around and sells shares to bring in new money? It seems the market values a company higher if it pays out a dollar and then brings that dollar back through share sales than it does a company that merely keeps the dollar in the first place. Both would look the same in substance and so my fear is that some of these REITs are practicing financial engineering designed to raise the share price. Now that may be fine in the short term. But in the long term value is created by earnings not from paying a dividend and then grabbing the money back.

On the Enbridge preferred shares that I attempted to buy at the IPO on Monday morning I got allocated only half of what I put in for. This could be because my order was delayed when their system was not working when I first tried to buy. (I placed my order an hour later by phone).

All of this share offering actively also seems to indicate that investors are eager to buy now that markets have risen so much. This is typical, investors sense less risk when share prices are higher and they perceive great risk when share prices have fallen a lot. Just the opposite of reality.

May 14, 2014

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

Liquor Stores N.A. was down 2.7% to $11.16, Toll Brothers was down 1.5% to $34.35, Canadian Tire was down 1.3% to $107.94. Meanwhile Element Financial  was up 5.2% to $14.00.

Boston Pizza Royalties Income Fund released earnings this morning and same restaurant sales were down slightly. That can probably be fairly attributed to weather. And I suspect Q2 is also affected by the late Spring. I have not updated the analysis but I still look favorably on this company. I may add to my position, especially on a dip.

May 13, 2014

On Tuesday the S&P 500 was about unchanged and Toronto was up 0.2%.

The S&P 500 briefly went above 1900 for the first time.

The only particularly noticeable move for our stock picks was Liquor Stores N.A. which was down 3.5% to $11.47. This company released “earnings” actually a loss in Q1. Perhaps I never should have looked at this company. It retails the same products that its hundreds of competitors do. I had thought there was value in its scale and ability to buy up smaller competitors. But right now it’s not clear that this is the case. And it increasingly appears that management is not strong.

I would not be at all surprised if they cut the dividend which is too high. On a positive note they were able to increase their borrowing limit this quarter. I don’t particularly want to see more debt but it is encouraging that the lenders allowed it.

TD Waterhouse seems to be coming put with a lot of IPOs and secondary stock options. It may be that companies are eager to issue shares at the higher prices. This could be a signal that we should be more cautious.

Element Financial came out after the close today with what appear to be good earnings and strong growth.

As expected, the Enbridge pref shares did fall today as they went ex-dividend. They closed at $25.10 versus $25.35 yesterday. However it would have been easy to miss the decline. Yahoo shoes the shares down only 1 cent because they adjusted yesterday’s close for the dividend of 24 cents.  It seems one has to be careful in looking at past prices because sometimes they are adjusted.

May 12, 2014

On Monday, the S&P 500 rose 1.0% and Toronto rose 0.8%.

Notable gainers included Toll Brothers up 2.0%, Bank of America up 2.2%.

The Enbridge preferred shares that I hold were down 1.2% to $25.35. This would appear to be because Enbridge issued new shares that seem to be about identical priced at $25.00. The existing shares, I believe, pay a dividend to owners of record as of this Thursday, May 15. I believe that means that they trade ex-dividend tomorrow so we may see them pretty close to $25.00 The existing pref never got all that high, it peaked at $25.74 which would have included perhaps 18 cents for the pending dividend. Perhaps the new issue of Enbridge pref which opened (and then closed) today was no great bargain at $25.00. But it was somewhat better than the existing at a recent $25.6 or so (notwithstanding that the $25.60 included a pending first partial period dividend of around 18 cents. I don’t pretend to know the precise relative risks of these shares versus the Canadian Western Bank that paid a similar amount and that I just sold at $26. But I consider the risks to be roughly quite similar and quite low and am happy to buy these Enbridge at $25 with proceeds of selling the Canadian Western Pref at $26.

I did end up buying some of these new Enbridge shares today at $25.00 via the IPO.

Canadian Tire bounced around a bit today from $108.14 to $111.34. I decided to sell what I had inside of tax free accounts and got about $110.00. The Canadian Tire that I hold in a taxable account I have not and may not sell. In the taxable account, which is a corporate account I am up 67% on the Canadian Tire shares. I am not sure what tax rate applies, probably at least 15% and so it may not be wise to sell those unless I thought the price was going to drop at least 10%. That is certainly very possible. But I am not predicting that and I still rate these shares a (lower) Buy and so overall it likely makes no sense to sell these in my taxable account. I am really not sure it made sense to sell int eh non-taxable account either. Every time I have sold Canadian Tire in the past 18 months or more the stock has ended up going higher. In some cases the decision to Sell something will seem clear cut. In this case it was not a clear cut decision.

May 12, 2014 (7:10 am Mountain)

Enbridge just announced (I saw it on TD Direct Investing) a new issue of 4.4% five year rate reset preferred shares. I tried to grab some as they may be more attractive than the preferred I sold last week. The TD site was broken and I was unable to buy.

May 11, 2014

Melcor Developments released earnings after the close on Friday. Earnings were down but that does not mean much because Melcor’s earnings tend to be relatively lumpy. They did increase the dividend. It’s my biggest position and I am relatively  confident that it offers good value for the long term. I wills see if the market reacts to the news and will plan to update this company within the next week.

May 10, 2014

Canadian Tire is updated and rated (lower) Buy at $111.29. Our last rating before this was Buy at $99.85, and before that it was (higher) Buy at $83.78 and it was (lower) Strong Buy at $68.65 back on February 24, 2013. On August 11, 2011 we had called it a Strong Buy at $52.11.

A year ago and certainly three years ago we would not have guessed it could go this high. In some measure the strong price rise is due to strong earnings – especially at its Sports Stores. Certainly in 2011 it was artificially low due to unfounded fears about the impact of Target. It was trading right down around its book value and at under 11 times earnings although it was well known that it had real estate that was worth far more than book value. The fizzling of the Target threat is part of the reason for the strong gains.

A good portion of the gains comes from financial engineering designed to make visible the value of the real estate and the credit card portfolio. By forming a REIT but retaining 83% of the REIT people can see the market value of that real estate. Similarly we found out on Friday that the finance division was worth about $2.5 billion as Scotia Bank is buying 20% for $$500 million.

Many analysts will do a sum-of-the-parts analysis and may conclude it is still under-valued. I focus on earnings. I don’t do any sum-of-the-parts-analysis at all. It only really applies to entities which have subsidiaries that also trade (like Canadian Tire) but is fairly rare and I simply don’t do that analysis.

At a current 16 times earnings its not expensive but it is certainly not the bargain it once was. Anyone with big gains on this would likely be prudent to reduce the holding. Say you put 5% of your portfolio into this in 2011 and it is now 8% of the portfolio. Prudence might suggest bring it back to 5%.

It’s still a great company and make do well but I don’t think we can possibly expect the leaps in price we have seen in the past 18 months or so. And it could always stumble from here. If I had a small position I would hold and look to add on dips.

One ironic thing is that surfacing the value in the REIT came at he cost of some earnings now flowing to the minority owners of the REIT who now own 17%. Canadian Tire got cash for that 17% but may not be earnings much on that cash. Similarly Scotia will now get 20% of the earnings on Finance and Canadian Tire may earn little on the $500 million received for that. For these reasons earnings growth may be hard to come by in 2014 and for example earnings per share were down slightly in Q1 2014.

I still have a fairly large position and may sell the part that is in non-taxable accounts.

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

Canadian Tire was up 3.3% as the analysts apparently liked the news better after having more time to analyze it.

On Friday my National Bank 4.1% preferred shares that I purchased at the IPO in early February for $25.00 were sold at $25.95. I will also receive a dividend of 27.24 cents per share which will be paid on Monday. So my return was $1.22 or 4.9% in just over three months. The yield on these is now down slightly to 3.95% which is perhaps not bad and beats cash. But as with the Canadian Western preferred shares that I mentioned a few days ago, I am happy to grab the 4.9% in such a short period of time and move on. If I saw these shares retreat to $25 I would quite possibly buy them again.

To the extent I decide I want more exposure to preferred shares perhaps I should buy instead more of the Bombardier preferred shares which yield about 7.0% — although those are perpetual shares and therefore come with a great deal of risk if interest rates were to rise significantly. Or for yield, I might look to buying more of the Boston Pizza. It’s basically a perpetual as well but its distributions should rise slowly over time offsetting some of the risk there. There is always Liquor Stores N.A. but I feel I have enough exposure to that and it is far different than any of the preferred shares.

May 8, 2014

On Thursday the S&P 500 was down 0.1% and Toronto was down 0.8%.

Nothing on our list was down more than about 1%. However the oils sands ETF that I have in my own portfolio and which is on our list of Canadian ETFs was down 3.5%. That ETF has been up nicely this year but took a bit of a dive today. I have not looked into the reason. I suppose it may have been the sad news of a worker being killed by a bear at Suncor. But then Suncor was only down 2.2% so that does not really explain it.

Meanwhile Costco was up 2.5% and was the only notable gainer on our list.

Canadian Tire ended the day down 0.2%. Basically it seems that while the Scotia Bank deal is positive it was already anticipated and “priced-in”. I plan to update the Canadian Tire report in the next few days. I suspect that that the big move up in this stock is likely about done with. It should continue to do well long-term but it has about finished with the financial engineering moves that have boosted its price about 100% in under three years. Presumably the analysts will have further digested the news after close today and we could see some additional price reaction to this news before it settles out.

May 8 (7 am Mountain, 9 am eastern)

There is relatively big news at Canadian Tire this morning about partnering with Scotia Bank and a higher dividend and share buy backs. Offsetting this is a lower earnings per share. As of now shares are set to open at $109.50. I would not tend to buy or sell at that price but rather wait and see how the price settles out today and probably tomorrow as the news is digested.

May 7, 2014

Stocks were up on Wednesday as the S&P 500 rose 0.6% and Toronto rose 0.3%.

The biggest gainers on our list were Fedex and Berkshire each up 2.2% and American Express up 2.1%.

Melcor should be out with earnings in the next few days.

May 6, 2014

On Tuesday, the S&P 500 was down 0.9% and Toronto was down 0.6%. That hardly seems noteworthy given all the recent gains.

Constellation Software was down 3.8%. Toll Brothers was down 2.6%.

Recently I mentioned that I had placed orders to sell some preferred shares at about $26. These were shares I recently bought at their IPOs at $25.

My Canadian Western Bank pref. shares sold today at $26.00. They were not in the list above but I had mentioned them when I bought them and several times since. I only held these for 3 months (plus 1 week). I just collected a 1.0% dividend on April 30 and now I have sold at a 4% gain. So that’s 5% in 3 months. I could think of that as 20% annualized although I am not sure that is really a useful way to think of it because it’s not something I can repeat again in the next three months. They were to pay 4.4% annually, so I am happy to grab 5% in 3 months and move on. They still actually yield 4.2% which is not bad and so maybe I should have held. Time will tell if selling was a good move.

Most things in the market are hard to predict. So it’s fun when a prediction comes true. I said from the outset that the amount that Target was paying to come into Canada seemed very high. I said it would be a high cost operation. $1.8 billion to merely take over the leases on the Zellers stores! (which in my experience were in many cases located in tired old malls). I checked at the time with at least one real estate expert and they had no concerns about it. More like no clue. The smart play was selling off leases like Hudsons Bay / Zellers did and like Sears did. And it was smart to sell off real estate into REITs as Melcor and Canadian Tire (although only about 10%) and others did.

Now there is chatter that Target should pull out of Canada. I very much doubt that would happen, they have already spent the money now. The one-time charge to close up now would be several billion, I suspect. At this point I am fairly sure they will stick things out.

May 5, 2014

On Monday the S&P 500 was up 0.2% and Toronto was down 0.5%

Melcor was up 3.4% to $24.05. But we REALLY need to remember that this is VERY thinly traded. Just a few people keen to buy or sell can really push the price around. I believe they will issue earnings shortly, possibly at the end of this week. And they will likely announce the dividend as well. Last year there was a special dividend but that is less likely this year.

Melcor is my largest position and for that reason I could start to trim my position anytime. But if don’t particularly want to do that and may just let things ride and see what happens with the Q1 report.

May 4, 2014

The latest version of our free newsletter was sent out yesterday. You should have received it but note that it is a separate email mailing list.

On Friday the S&P 500 fell 0.1% while Toronto rose 0.7%.

Notable gainers included Constellation Software up 3.6%, Element Financial up 4.3% and Toll Brothers up 2.0%

After the close on Thursday it was announced that a unit of Berkshire Hathaway was buying AltaLink and electricity transmission company in Alberta from SNC Lavalin. SNC’s stock jumped 5.1% on the news.

It now appears that SNC was a buying opportunity at prices in the $35 to $40 range back in 2012 when major problems with bribery were identified at the company. Back on June 20, 2012 I commented on SNC and said that I would stay away from it. It seemed to me that the corruption was probably well entrenched in the company. Subsequent to that I was not very impressed how it was handling the issue. It seemed to blame it on a few bad apples as opposed to doing a major house cleaning. But perhaps in fact the problem has been well taken care of. Buying a wounded company after its price falls can be a good strategy. The difficulty is to determine how the serious the wounds are. In the case of SNC it was well known that it had two valuable assets in AltaLink and in its 407 Toll road that it could sell. I have not looked at SNC and so I really have no idea if it is still a good investment at this point.

May 1, 2014

Thursday was another decent day for our Stocks. The S&P 500 was flat and Toronto was up 0.1%.

Melcor was up 1.5% to $23.25 (on thin volume). Canadian Tire was up 1.3% to a new high at $109.02.

Constellation software was up 4.6% after posting another strong quarter of earnings.

April 30, 2014

Wednesday was another positive day in the markets with the S&P 500 up 0.3% and Toronto up 0.5% and with the DOW closing at a new record high.

Bombardier was up 5.5% to $4.41. Stantec was up 2.5%, Couche-Tard was up 2.3%. eBay was down 5.5%.

Melcor was up 0.5% on (as usual) very thin volume and at $22.90 is at a 52 week high.

The Wells Fargo Preferred shares rose 1% to $22.63 and I have now sold out of that position.

These perpetual shares pay $1.28125 per year to yield 5.66%. That is perhaps not a bad yield at all but I had bought these shares at $19.90 just a few months ago and so I am basically taking my quick profit and moving along.

The price movements in these preferred shares can be divided into two causes. 1. They tend to move up and down as the yield on long term government bonds move. Most of the reason that they got down under $20 was because the long-term U.S. bond yield had risen. 2. Additional price moves occur (or cause depending how you look at it) when the spread or the yield difference between these shares and the long term treasury yield changes. The other part of the reason for the sub-$20 price was a wider spread at that time. Just in the last two weeks these shares were as low at $21.70 (yielding 5.90%). The rise to $22.63 came despite the long-term treasury bond yield being essentially unchanged at about 3.50%. Therefore this recent price rise occurred as the spread over the Treasury bond declined from about 2.40% to about 2.16%. Wells Fargo has been a strong company all along and so it’s not clear why the spread should change that much. (There is also some impact as it gets closer to and then farther from its dividend date each quarter.)

The bottom line on these shares is that they rose a bit over 4% lately for no reason that I know of and I had a profit in them already and I don’t much like perpetual preferred shares in any case (due tot he interest rate risk) and so based on some orders that I had placed I have sold out of these shares.  With the spread now at 2.16%, it (the spread) may not get much lower and any further price increase here would likely come from long term interest rates falling, and most forecasts suggest the opposite is more likely.

April 29, 2014

Tuesday was a strong day in the markets with the S&P 500 up 0.5% and Toronto up 0.4%.

Looking at my favorite stocks, returns seemed to be bustin’ out all over.

Melcor was up 1.2%. (It’s thinly traded and so it’s gains must be taken with a grain of salt but at least the still tiny volume was a bit more than it is most days). Wells Fargo was up 1.1%. The oil sands ETF, CLO which we don’t have a rating on but which has been in my own portfolio for about a year (as disclosed on this site) was up 1.9%. FirstService was up 2.8%.

Bank of America, as I had expected, recovered some ground today and was up 1.9%.

My Wells Fargo preferred share was up 0.9% today to $22.40 and also rose yesterday and as a result my order to reduce that position at $22.25 was filled. I believe this is the first time in a while that it has been this high (The less than fabulous Yahoo Finance only shows me five days on the stock for some reason). I have entered an order to trim some more at $22.50. The yield on these is perhaps still quite good at 5.7% and maybe I should keep them but I don’t really like perpetual shares in an environment where interest rates could rise.

Yesterday the Canadian government apparently sold $1.5 billion of 50 years bonds at just a hair under 3.0%. I fail to see the logic in that for pension plans, life insurance or anyone else. Years ago Buffett wrote about people buying non-taxable bonds int eh 1940’s at around 1% which he said was clearly an abominable return. I think 3% is quite abominable too especially where the investor is taxable. It’s a P/E ratio of 33 if you want to look at it that way. And while the E, the earnings will be paid in cash (unlike the case for most of the earnings of stocks), it will also (unlike the earnings of most stocks) not grow at all over the 50 years. Well, to each his own.

April 28, 2014

On Monday, the S&P 500 bounced around considerably but when the bell rang it was up 0.3% and Toronto finished about unchanged.

Bank of America was down 6.3% to $14.95 after it had to admit to an embarrassing calculation error involving submissions it made to the FED when it applied to raise its dividend and buy back shares. Now those two things are on hold. There is speculation that the dividends hike will go ahead but perhaps not the stock buy-back.

I suppose this illustrates what I have said (see April 18 for example) that this Bank is not as well managed as Wells Fargo and is not as much on top of its game. But in its defense this was an arcane calculation that involved reversing some strange mark to market rules that apply for GAAP purposes to debt it owes but do not apply for FED purposes. The fact that the calculation lowered its ratio of investor capital by 20 basis points also points out the fact that those calculations are NEVER all that certain. Equity capital is Assets minus liabilities . And when you start marking some assets to market and some not (as banks must) and marking to market some liabilities and some not (as banks must) and when you start risk adjusting the assets (as banks must do for some purposes), it is an awful lot of arcane calculations and assumptions in the end and yet it gets presented as a calculation to two decimal places. In substance it’s not really a figure that is known to such accuracy in the first place.

In any case although highly embarrassing, this does not appear to change the Bank’s earnings power at all. And as far as being disappointed by the lack of share buy backs, I don’t really share that disappointment. The market is not disappointed because the buy backs are necessarily a good investment in substance. The market only cares that the buy backs would drive the share price up at least in the short term. If people really think the shares are such a bargain that the bank should buy them back then certainly they can buy themselves at 6.3% less than yesterday.

I added to my position in this stock today though I was a bit hasty and only got a 4% discount to yesterday’s price.

I suspect, but certainly can’t guarantee that cooler heads will prevail tomorrow and Bank of America will likely start to recover  form this little dip quite quickly. I can’t predict which way it will head but to me it looked like good value at this price although I do continue to regard it as somewhat speculative.

I mentioned on April 21 that I would sell some pref shares that I had bought this year at $25 if the price should hit $26. I mentioned Canadian Western Bank and National Bank rate reset shares. There was also Enbridge 5 year pref. shares.

I am not sure why I did not choose $25.95 instead because sometimes I figure that is a way to sort of be ahead of all the orders at the even price. National Bank got to $25.95 today which I am not sure is justified. I entered an order to sell eh Enbridge as well at $25.95. The thing is I never expected these to trade more than a few cents above $25 and if I can grab $26 or so I am happy to do so and will have made a good annualized return and can look for somewhere else for a safe alternative to cash as I felt these shares were. If these were in a taxable account I would not do this since selling for a 4% capital gain would not be worth the bother and the tax.

Regarding National bank at $25.95, that seems a bit high. The initial yield was 4.1% at $25, so now the yield would be 3.95% and I believe I would still collect a small dividend since the ex-dividend date was April 9. The yield on 5-year government bonds is not down  and appears to be up about 10 basis points since these were issued and so the decline in yield here is just due to market popularity it would seem. I would have liked to have soldl at $25.95 today because it may not get to the $26.00 sell price that I has entered.

April 27, 2014

Onex Corporation (a private equity investment fund corporation) is added to the list but is rated only Speculative Weak Buy. It’s a complex entity and I may be able to come to a more definitive buy or sell rating over time. (I have emailed the company asking for some additional information) Also there has been and there will be times when ONEX will be at a bargain price. It seems worth keeping an eye on but is not a stock I will buy at this time. I must admit that over a period of many years reports of the CEO’s very large compensation has bothered me. In addition to being worth keeping an eye on as a possible investment, it is also perhaps worth keeping an eye on it for what can be learned about its approach to investing.

April 26, 2014

Friday was a weak day on the U.S. markets as the S&P 500 fell 0.8%. Meanwhile, Toronto fell 0.1%

Most of our stocks fell including Melcor down 1.8%, Canadian Tire down 1.9%, Stantec down 2.1%, Toll Brothers down 1.5% and Bank of America down 2.4%. And Visa was down 5.0%.

I don’ think this is an unusual level of volatility in the markets.

I am working now to add Onex Corporation, a private equity investment company, to the list. Unfortunately, while I can provide substantial information about the company I don’t know if I will come up with any particular rating. It’s a complex entity and may simply be too hard to analyze, at least for me. It’s one of those well-known Canadian companies that I always wanted to know a bit more about. Lately it was in the news when its CEO Gerald Schwartz was reported to have collected biggest compensation package in Canadian corporate history. Taking a quick look I discovered that the company had actually LOST money on a GAAP basis in each of the last two years. Furthermore, it did not have a lot of retained earnings on the balance sheet.

So… I resolved to take a close look at it. I have read its annual report and am in the process of crunching numbers and filling out my standard report format. But my sense is that it may be too complicated to rate. It definitely looks way over-priced on some metrics. But much of the value is not reflected on the balance sheet, and does not seem to be reflected in recent earnings either.

Even if I can’t come up with a definitive rating, I will learn a lot about the company and its approach to investing and will document that.

April 24, 2014

On Thursday the S&P 500 was up 0.2% and Toronto was up 0.1%.

Some of my favorite stocks did well. Toll Brothers was up 3.3%, Melcor was up 1.9% (but it’s so thinly traded that it’s movements are sometimes just “noise”, nevertheless it feels good), Canadian Tire was up 1.5%.

The Wells Fargo preferred shares rose enough to hit my sell order at $21.95 and so that sold 40% of my shares in that. I have now entered an order to sell another 20%(of the original amount) if it hits $22.25 in the next month.

I should keep in mind that part of the reason that preferred shares rise in price is at times just due to value of an upcoming dividend. I now realize that for these preferred shares I should be keeping an eye on the dividend date. For example, I was pleased that the Canadian Western and National bank and Enbridge preferred shares had all moved a bit over the issue price of $25. But since these pay 25 to 27.5 cents per quarter, part of the reason for the increase is just that the next dividend record date draws closer each day. I would expect these shares to decline a full 25 cents or so every three months when they go ex-dividend and then to recover that 25 cents over the next three months. In addition to that they move around a little as interest rates move and possibly as the health of the companies change. This is all well known but really was not top of my mind because I have rarely owned preferred shares in the past.

The same applies for any stock with a material dividend – they will tend to fall in price by the value of the dividend when they go ex-dividend and then (all else equal, which it never is) they recover that ground over the next three months a the next dividend record date approaches. However most common stocks have small dividends and the price movements in the stock that are related to earnings outlook tend to far outweigh the movements associated with the approach of a dividends payment and it is really something that I have rarely considered when looking at a stock. That is, I would rarely if ever delay buying or selling a share based on an impending dividend nor would I factor in the impact of a pending dividend on whether the stock price was attractive. (I am talking about an impending single dividend) I do take the dividend yield into account and consider whether is attractive WHEN COMBINED WITH the expected growth rate.

I had an email today that asked if I put any faith in “rules”‘ like Sell in May or other seasonal patterns in stocks. The answer is, no I don’t put any faith in such rules. I basically studiously ignore all forms of “technical trading” rules. For example, I don’t use stop loss orders. I pay no attention whatsoever to “support” or “resistance” levels. Those things might work for some people but they are just not my approach to investing. All of those rules really treat investments as “squiggles” on a screen as opposed to treating them as ownership in real companies.

I do sometimes trim positions on gains and buy on dips. That is basically the opposite of what momentum and technical traders would do.

April 23, 2014

The S&P 500 was and Toronto were both down 0.2% on Wednesday.

Alimentation Couche-Tard has split its stock 3 for 1 and was up 3.6% today. I had called it only a (lower) Buy in December and it up quite a bit since then. I have to admit to being a bit choked that I sold it way (way) too early. I have long said that it one of the best managed companies in Canada. It goes to show that sometimes sticking with a great company even when it seems quite expensive (at times) can be a good strategy. Dollarama would be another example. Also Stantec and Canadian Western Bank and Constellation Software.

Toll Brothers was down 1.8%. It’s a stock that I am comfortable holding although I long said it was a more speculative pick.

I was reading yesterday that Warren Buffett’s first purchases of Berkshire Hathaway consisted of a measly 200 shares at $7.50 in 1962. ($7.60 counting a 10 cent commission paid). Buffett took control of the company in 1965 with the shares trading around $15. His average cost was $14.86. These are the exact same shares that today trade for $190,800. $200,000 would seem to be within sight before too awfully long.

As much as Buffett’s genius is recognized, I am not sure that the stunning magnitude of this accomplished is widely appreciated. The share price is up 12,720 fold since the $15 of 1965. That’s 1.22 million percent. What is perhaps equally stunning is that this is “only” a compounded annual return of 21.3% per year for 49 years. There are venture capitalists who will tell you that they expect to make 20% per year. Really?, if they can keep that up they can be the next Buffett.

Berkshire Hathaway is perhaps the greatest real life example of the power of compounded returns. I don’t believe Berkshire ever had a year when it soared 200% much less 500%. It never discovered a cure for cancer or anything of the like. I’ve never heard Buffett mention it having any patents. It had some highly profitable business but perhaps nothing in the league of Microsoft or Google or Apple. Returns on equity most years were excellent but only once exceeded 50%. A steady compounding at high but not outlandishly high levels over a period of 49 years has compounded up to a truly outlandish result.

Value investors sometimes talk of finding businesses that are “compounding machines”. If we could find one that would return something in the order of 20% for a very long time, the results would be truly spectacular. Anything that would compound in the double digits would be more than enough to get quite rich over a period of decades assuming reasonable annual investments. of new money.

It’s interesting to note that any early Berkshire shareholder following conventional diversification advice would have had to keep selling down their position to “prevent” it from becoming too large a part of their portfolio. Also Berkshire’s stock price has fallen at least 50% from peak to trough on four occasions sconce 1965. Anyone using stop losses would been sold out and it doubtful that they would ever have gotten back in. And there would have been countless declines of 10% to shake loose anyone trading on any sort of a technical basis.

It’s also interesting to contemplate what a horrible disservice to its long-term investors it would have been if Berkshire had started paying a dividend years ago. Consider, if you had a bank account compounding at 20%, the last thing you would want to do would be to pull money out of such an account. Berkshire has in effect been a somewhat lumpy version of such an account.

April 22, 2014

Tuesday, the S&P 500 and Toronto each gained 0.4%

Yesterday’s chart showed that over 30-year periods the S&P 500 total return (including reinvested dividends) had never failed to compound wealth at at least 4% on a real basis, 4% after deducting inflation. And it was only under 5% in those 30 year periods that included substantial inflation.

Unfortunately the same cannot be said for shorter time periods like tens years. The following graph shows the real return from the S&P 500 over rolling ten year periods.

The graph above shows that there have been occasions where holding stocks for ten years resulted in a negative real return. Most of these periods covered the worst of the high inflation years. The other time it happens was in the ten years ended at the end of 2008 and 2009 which was caused by investing at the top of a market bubble and then experiencing two market crashes.

The point is though, when it comes to holding stocks and especially if one holds the majority of their wealth in stocks, one should have a time frame in mind of something more than ten years.

Despite their supposed safety, the real returns from long-term bonds were negative over ten year holding periods FAR more often than was the case with stocks.

April 21, 2014

On Monday, the S&P 500 was up 0.4% while Toronto fell 0.1%

Lately, I was thinking about the fact that even if markets were to provide only say a 7% nominal return over the say the next 30 years, that might still work out to a fairly good real return if inflation is very low. So I decided to graph nominal and real returns from stocks over rolling 30 year periods. The following is the result.

It turns out that for 30-year rolling periods starting with 1926 through 1955 all the way to 1984 -2013, the nominal total returns (includes dividends) from the S&P 500 have been surprisingly stable and usually in the 10 to 12% range. After deducting inflation the real returns were more volatile. It appears that in high inflation periods, nominal returns did not rise to “hedge” away the inflation. Instead the nominal returns remained fairly steady and it was the real returns that suffered with high inflation.

Warren Buffett had observed this in 1977 and wrote an article about it in Fortune magazine.

Since inflation is quite low today, this data would suggest that real returns from stocks should be higher than average if such low inflation continues for many many years.

In terms of trading, I have made some gains on the preferred shares that I bought in the last several months. I have now entered some orders to sell some of that if the prices rise to a certain point. I will sell the Canadian Western Bank and National bank five year rate reset pref. shares which I bought at $25, if they should happen to hit $26 (which may be quite optimistic indeed). Also I will sell some of my Wells Fargo perpetual pref. shares that I bought around $19.80 if it should hit $21.95, which it is pretty close to. I am just not entirely comfortable holding perpetual preferred shares. And I may sell the rest if it gets a bit past $22.

April 20, 2014

Constellation Software is updated and rated (lower) Buy at $265. This has been a wonderful investment. It is up some 369% since we first rated it (lower) Strong Buy in February 2011. (Admittedly our analysis and following my own actions would have not have led to holding that whole time.) The price history on Yahoo finance goes back to late 2007 and shows a price just under $25. Viewed on the longer term, there were very few material price drops over the years. It’s been a relatively steady gainer. If there is such a thing in Canada as a “Buffett of the North”, it is Mark Leonard the CEO of Constellation.

Unfortunately the shares are not cheap. It could continue to be a strong investment if its abnormally high growth continues. When a more prudent level of forecast growth is applied it looks expensive. But at least anyone holding it has hitched their fate to exceptionally good management.

Regrettably, I have sold all my shares in this company, most of them far too early.

April 19, 2014

American Express is updated and rated Buy at $86.22. It seems like a decent investment. Not one that I am really excited about, but decent. I did add to my position in it very recently.

April 18, 2014

On Friday the S&P 500 was up 0.1% and Toronto was up 0.4%.

Most of our stocks were up but Toll Brothers was down 1.4%  to $34.16. It remains a speculative choice. I have added to my position recently at about this price.

Bank of America is updated and rated Speculative (higher) Buy at $16.15. It reported a loss in Q1 due to settlements related to mortgage issues from the credit crisis. These settlements will likely soon be behind it and don’t change the outlook for the bank, which is positive. This bank trades at a low valuation and will likely increase. But it’s not nearly as strong or as well run as Wells Fargo and so I look at it as a more temporary investment.

April 16, 2014

On Wednesday the S&P 500 and Toronto were both up 1.0%

Most stocks were up. Bank of America was down 1.6% on disappointing earnings. Earlier int he day it was down at least 2.5%.  I plan to update the report on Bank of America in a few days and I expect it will continue to be rated speculative (higher) buy. At some point its litigation expenses dating back to the financial crisis will be behind it and should move forward as an earnings engine much like other banks except it will be cheaper in relation to book value.

Liquor Stores N.A. announced it will spit another of its regular 9 cent monthly dividends payable in May to shareholders of record on April 30. This is as expected, they have expressed that they wish to maintain the dividend but we should realize a cut is always possible. The March dividend of 9 cents came into my account today as scheduled.

Melcor is selling two building to Melcor REIT. Melcor REIT is issuing new shares (units, that is) to pay for the buildings (will also use some debt). Melcor is allowing its ownership of the REIT to drop to about 48%. The buildings are already marked to market and therefore there is likely no material gain on the sale. But it frees up Melcor’s cash for other purposes. I suspect this is positive for both the REIT and for Melcor. It was always the plan for Meloor REIT to buy additional buildings from Melcor.

American Express posted a 12% earnings gain after the close. Perhaps about as expected, shared down slightly in the oxymoronically-named “after-hours” trading session.

April 15, 2014

On Tuesday, the S&P 500 rose 0.7% and Toronto rose 0.1%

Bank of America was up 2.4%. Toll Brothers fell 1.1%. Earlier in the day it got as low as $34 and I grabed a few more shares at $34.17.

Element Financial fell 3.7% to $13.77. Possibly the pull-back is a buying opportunity. The recent announcements I have seen (I have not read them closely) have indicated that it is still growing albeit by acquisition of loan portfolios. About a month ago I saw a couple of IPOs for new lending companies in Canada so it seems like a lot of companies are keen to lend. Who knows how that will turn out. Lending is a business which required particularly good management. It is easy to self-destruct in the lending business. The hope is that Element has good management. I have not bought any but I might. But I won’t buy a large position in it as I do consider it speculative.

 

April 14, 2014

On Monday, stocks rebounded based on stronger retail sales figures in the U.S.. The S&P 500 was up 0.8% and Toronto was up 0.2%

Visa was up 2.2% and American Express was up 1.1%.

If one has a decent selection of investments in good companies, then my approach to the stock market much of the time reflects a saying a long ago Toronto Mayor, who was fond of saying – Don’t just do something!, Stand there! Time is the friend of an investment is a good business.

April 13, 2014

I have added a Wells Fargo preferred share to the list above. These are the shares that have been in my personal portfolio since December.

I noted on December 19, 2013 (see below) that I had bought these shares at $19.81 to yield 6.5% and I described them in pretty good detail, and my reasons for buying, but noted that I had not done any real analysis.

They rose fairly quickly and have traded mostly fro $21.50 to $22.00.

These perpetual shares move (inversely) with the 30-year U.S. treasury yield, but also move for other reasons.

When the price changes for other reasons such as the outlook for Wells Fargo or the supply and demand for these shares then the “spread” of the yield minus the 30-year treasury changes. When issued the spread was 2.0%. When I purchased these shares they were at a spread of 2.6% (over the treasury then at 3.9%) indicating a possible bargain.

Most of the price gain on these shares since I purchased them has been due to the U.S. 30-year treasury yield falling from 3.9% to 3.5%, Also the shares rose as the spread reduced from 2.6% to 2.4% at this time.

In looking at the attractiveness of these perpetual preferred shares yielding 5.9% several thoughts come to mind.

Long-term interest rates are likely to rise. I have explained why that makes long-term treasury bonds unattractive. If long-term interest rates rise materially then these perpetual shares will definitely sink in value. And there is really no floor to that if interest rates were to rise to very high levels. On that basis perhaps these perpetual shares are a bad idea.

On the other hand, conventional portfolio management practice would suggest that we always hold some assets in many asset classes. And both long-term bonds and perpetual shares are conventional asset classes. If we wish to hold a conventionally balanced portfolio then we should probably hold some perpetual preferred shares and the Wells Fargo shares are a reasonable choice for U.S. investors and for Canadian RRSPs / RIF – and to a lesser extent RESP and TFSA accounts – where a 15% withholding tax on the dividend will apply. (Canadians should choose Canadian companies for preferred shares in taxable accounts).

There could be some up-side on the shares if the spread returns back to the 2.0% above the 30-year treasury that applied when they were issued.

Even if interest rates rise, and the shares fall in price, the 5.9% yield is not likely to be such a bad yield, on the current value, over the longer term given current tame inflation outlooks. But in that event it would be hard not to be distressed by the share price decline.

For myself, I have made a decent gain on these shares and can sell without worrying about a capital gains tax as they are in an RRSP account. I am tempted to sell these and put the funds perhaps partly into additional Wells Fargo Common shares. Basically I have thought of selling these shares ever since they rose to $22 but took no action. I had some thought that they might eventually return to $25, but after further though and analysis, that is unlikely unless long-term interest rates move back to about 3.0% on the 30-year treasury, and the spread on these would also have to narrow.

Rate re-set preferred shares.

Over the past few months I also indicated had bought some rate-reset preferred shares (Canadian Western Bank, National Bank and Enbridge). (CWB.PR.B, NA.PR.S, and ENB.PF.A) These all had to be bought on a moment’s notice, with no time for analysis, as they were bought at the IPOs. These are now trading at $25.50, 25.45 and $25.40 respectively. They were bought as $25.00 yielding 4.4%, 4.1% and 4.4% as an alternative to holding cash. The 5-year government bond rate is a bit higher since these were issued which should have pushed the price of these down. Apparently the spreads on these have narrowed. I believe that these shares, if they should drop in price, will return to about $25 on their rate reset date in five years. And given the probable return to $25 in five years I don’t think they would ever plunge much below $25 unless interest rates really go high or the companies run into financial trouble. (I consider these to be vastly different than perpetual preferred shares). I think they are a good alternative to holding cash or near-cash for several years. I also never expected them to trade much above $25 and if they get much higher and certainly at $26 I might sell.

April 12, 2014

On Friday, the S&P 500 was down 1.0% and Toronto was down 0.4%

Some weaker stocks of note included:

Visa, down 2.4% to $197. We had last rated this a Buy back in 2012 at $147 and thereafter called it a Weak Buy, most recently at $220. It might be worth nibbling on at this point.

Toll Brothers down 2.4% at $34.73. I may add to my position especially if it goes to $34 or less.

Bank of America was down 2.2% to $15.77. It is speculative but I would buy at this price.

With American Express down a little more on Friday I added to my position in that stock.

Wells Fargo is updated and rated Strong Buy at $48.08. Perhaps I am getting too exuberant, but when you look at this bank and how it is earning an ROE of 14% and trades at a price to book of 1.62 and a P/E of 12 and is growing strongly, it cerainly looks like an excellent investment. There are no guarantees but it seems reasonable to forecast that this will be a good investment if held for the longer term.

April 10, 2014

The Good Times Stop Rolling (at least for a day)

On Thursday, the S&P 500 fell 2.1% and Toronto fell 0.9%.

Most of  the stocks I watch were down. Notably Visa down 2.9% to $201.55. Possibly it’s  chance to buy but I am not keen on it. American Express was down 3.8% to $85.36. I hold a small position and am tempted to add to it t this price. Bank of America was down 3.0% to $16.12 which is attractive based on our last update. Bank of America just had another “settlement” where it had to pay out close to a billion dollars. certainly these payouts are annoying but presumably all that nonsense will soon be behind them. It will report earnings on Wednesday next week.

Wells Fargo will report earnings tomorrow.

April 9, 2014

The Good Times Roll On…

On Wednesday the S&P 500 rose 1.1% after apparently the FED minutes proved palatable to the market. Toronto rose 0.4%

Canadian Tire rose another 2.4% to $108.23. This has been a huge winner for us. Personally I sold too quickly on the way up but it’s still some 8% of my overall portfolio. At this point I think my thoughts should again turn to trimming it even though that has not been so wise to date.

Just about everything was up today…

Liquor Stores N.A. today announced that its CFO is gone for personal reasons and was replaced from within. I had sent an email to the CFO about six weeks ago and then a follow up and he never responded. I worried that meant that he was not on top of his game. Perhaps he did have personal issues to deal with and if so I wish him well. Meanwhile as far as the company is concerned a new CFO is probably a positive thing. I guess though they could use it as an excuse to re-evaluate and cut the dividend. Ultimately I think the dividend is too high and a cut might be the proper move. But the stock would go down on the news most likely. In the last report the company said it was committed to maintaining the dividend. That may be true. But it’s not a guarantee. One interpretation of recent moves is that the Board is on top of things making changes. The bottom line is the stock looks cheap but I consider it speculative.

 

April 8, 2014

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

The first quarter earnings season has kicked off with Alco reporting a loss but overall the results were better than expected as was their outlook.

April 7, 2014

On Monday, the S&P 500 was down 1.1%and Toronto was down 0.9%

Not surprisingly, most of our stock picks were down as well. In particular American Express was down 2.9%. I don’t know any particular reason for this stock going down 2.9% while the market was only down 1.1%. The reality is that many times there is basically no real reason as to why stocks wiggle around in price on a particular day. Some price movements are essentially random.

Liquor Stores N.A. managed a small gain today. On the weekend there were more news stories about liquor sales in grocery stores coming to Ontario (which has a particularly backward liquor distributions system in my experience). Also we know it is coming in B.C. and there was speculation about Alberta. I rather doubt much will change in Alberta. We have about 1200 private stores and I can’t see the government cutting all these stores out of their livelihood when the licenses were purchased from the Alberta Government. Also we already have liquor stores located next to grocery stores in terms of Superstore (separate buildings) Sobeys (separate buildings and not very many locations) and Costco (same building, separate entrance. I continue to view Liquor Stores N.A. as a more speculative stock and I not sure how well managed it is. I hope that its founder, who is still on the Board will take action if needed. As the report indicates, I do not consider this to be a great company, I am attracted by the seemingly low price of the shares in relation to earnings and in relation to the dividend (though I am not convinced that the dividend can be sustained). For more thoughts see the report.

This weekend I sent out the latest edition of the free newsletter. You likely received it but note that the list for the free newsletter is separate from the list of paid customers. If you did not receive an email with the free newsletter, you can add your name to that list.

The theme of my newsletter was about the need for people to invest money and grow capital over the decades. Coincidently there as a bit of a book review in the Globe and Mail this morning regarding a brand new book that suggests that those who invest will be the rich and that the gap between rich and poor will increase in a slow growth world. In effect 7 or 8% from the market today, with low inflation, may be a far superior return to say 12% in the early 80’s accompanied by high inflation.

http://www.theglobeandmail.com/report-on-business/searching-for-heroes-in-a-world-of-economic-villains/article 17849036/#dashboard/follows/http://www.theglobeandmail.com/report-on-business/searching-for-heroes-in-a-world -of-economic-villains/article17849036/#dashboard/follows/

The author of the book thinks its a problem that owners of capital will get richer. Perhaps it is a problem. It’s also an opportunity.

April 4, 2014

Today, Friday, started out well but ended negative.

The S&P 500 was down 1.3% but Toronto was down only 0.1%

As for our stock picks, most were down.

Bank of America was down 2.5% to $16.72. While its a more speculative stock, it likely offers good value.

April 4, 2014 10:45 am eastern time

This morning markets are higher as both the Canadian and U.S. jobs reports were considered positive news.

Toll Brothers is up 1.9% and Wells Fargo has pushed above $50.

April 2, 2014

Today, the S&P 500 rose 0.3% and Toronto rose 0.5%.

Canadian Tire rose 1.1% to $106.29. Back in the middle of 2011 this stock had been hammered down by fears of what Target would do to it. I updated it on August 28, 2011 at $52.40 rated Strong Buy. It was trading at just 4% over book value and at a P/E of 10.5 based on trailing earnings. It seemed an obvious bargain. But it had also recently fallen back from prices around $63 and there was never any guarantee that it would be a great investment. I made it my largest holding. Now it has more than doubled. In an effort to be prudent I sold on the way up and reduced my position ultimately to 35%, by share count, of what it once had been. I believe I did buy some shares back on a dip but then later sold those.

Now, Melcor is my largest position. And when I think of buying stocks, buying more Melcor is near the top of my list. By my figures it trades just under book value and at a P/E of 10. But Melcor is more cyclic than Canadian Tire and its assets are mostly marked to market so it is probably not quite the bargain that Canadian Tire was in late August 2011. But it does appear to be a bargain certainly. I heard the head of Edmonton real estate on the radio today opining that house building in Alberta was continuing at a brisk pace. If so Melcor should certainly continue to do well.

I suppose my thoughts should be turning to trimming some positions given recent gains. But I don’t find myself in much of a selling mood.

Very soon we will be into Q1 earnings reports. That always has the potential of moving markets. On Friday we get jobs numbers. The bigger picture seems to be slowly improving economies and interest rates that so far have not risen. That bodes well for markets. Then again there is always the risk of world events such as the situation in the Ukraine or who knows what unexpected event.

Many such event scan have a quick impact on the price of stocks, though they rarely affect the true value of the stocks. The main risk factor that could drive stock values lower is probably a rise in interest rates.

Much investment advice focuses on managing risk. That might be wise. In the long run however it seems that learning to live with risk and volatility is the path to greater ultimate investment wealth.

April 1, 2014

On Tuesday the S&P 500 rose 0.7% to close at a new record high. Toronto rose 0.3%. Toronto remains below the peak it reached around June 2008.

Notable gainers today included Bombardier up 3.4%, Dollarama up 2.7%, and Toll Brothers up 2.2%

I thought Boston Pizza might rise on news of its automated stock buy back program but it fell marginally. I added a few more shares and it is now my fifth largest position.

March 31, 2014

On Monday, the S&P 500 rose 0.8% and Toronto rose 0.5%.

Almost all of the stocks on our list were up today.

It’s been a good start to the year and those of us who have been brave enough to be owners of corporations via the stock market have been rewarded. Those who totally shun stock markets avoid volatility but forego much in terms of long term wealth creation.

I notice Boston Pizza was one of very few (on our list) to decline today, down 1% to $19.53. We recently rated it (higher) Buy at $19.55. Boston Pizza also thinks the price is attractive and after the close today signaled that it will be buying shares on an automatic basis. I believe this will start immediately. They apparently had not bought back any shares for at least six months.

March 30, 2014

Costco is updated and rated Weak Buy / Hold at $112. It always seems expensive. But it is almost certain grow its earnings over the years. Every time it opens a store it seems to create a traffic jamb, at least in Alberta.

On Friday the S&P 500 was up 0.5% and Toronto was up 0.6%.

This year to date the S&P 500 is up 0.5% while Toronto is up 4.7%.

Our two Strong Buys from January 1 (Wells Fargo and Melcor) are up 9% and 7% while our 13 stocks rated in the buy range are up an average of 0.6% since January 1. The fall in the Canadian dollar has added to the returns for Canadians holding U.S. stocks while harming Americans holding Canadian stocks.

Berkshire Hathaway is updated and is rated Buy at $124. For this analysis I have placed more emphasis on the fact that the stock trades at a premium of only 37% over book value and on Buffett’s view that intrinsic value far exceeds book value and that the gap is widening. To me this looks like Buffett is basically telling us the shares are under valued in his opinion. And keep in mind he has always been very careful not to “tout” the stock and in the late 90’s went so far as to state that the stock was (at that time) not undervalued and was at a price where he would not buy it. In addition I have emphasized the fact that the view of adjusted earnings that Buffett provides annually is understated because it excludes all investment gains and losses, includes only the dividends and not the full earnings from the huge investments in companies like Coke, and deducts income tax at about 31% when in fact cash taxes are running closer to 20%.

I would not expect this stock to soar but it does appear to be a good solid investment.

Earlier this year I was wanting to add to my position in Berkshire but was cheaping out trying to buy at $109.10 (see comment of Feb 3) when it was trading at $112 or so. It did dip to that price and I doubled my position so that it now represents 3.2% of my portfolio. But as noted under March 13 I made the mistake of not grabbing more Berkshire at $112 when it reported excellent Q4 earnings and yet the share price did not initially move. Having done that, I find it difficult to now buy any at $124 but I may do so based on my latest analysis.

By most standards, having 3.2% in a single stock is already a full weighting. But I tend to run a much more concentrated portfolio and believe in Buffett’s philosophy of buying a meaning amount of stocks that I particularly like rather than spreading the investments more thinly, which is definitely conventional wisdom. It takes more confidence to concentrate holdings.

Those who concentrate their portfolio should be aware that most experts argue that it is impossible to consistently pick winners in the stock market and that an index fund is best. Even Buffett recommends index funds for MOST people. My understanding is that he believes that those who can picks stocks successfully (or believe they have a reliable source of such stock picks) can go ahead and concentrate on the best picks. He would also probably warn that most sources who purport to be able to pick winning stocks are not actually able to do so successfully in the long run. But he has always argued that some people can pick stocks successfully by following good logic and focusing on business fundamentals.

March 27, 2014

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

After the news yesterday about most U.S. banks passing stress tests by the FED, Wells Fargo was up 1.2% to $49.10. This stock is up 83% since it was first rated a Strong buy on this site four years ago (February 10, 2010 at $26.88. More impressively it is up 350% since it was first added to this site on February 22, 2009 rated highly speculative Buy at $10.91. It has been somewhat volatile at times. I recall I sold out of it way to early but then got back in heavily and held something of a core position plus added on dips and sold on rallies and have done well that way., though most of my gains came just from the holding, not the trading. Wells has moved up in price since we last rated it (Strong Buy at $46.39). I would guess it would rate perhaps (lower) Strong Buy or at least (higher) Buy it it were to be updated at today’s price.

Bank of America did not do as well in the stress tests. It passed but apparently got its planned dividend hike shaved back a bit. It will raise it dividend from one cent to five cents per share. This is still almost a zero dividend but can be considered a positive step. Bank of America fell 1% today to $17.01. It’s up 112% since we first added it to this site rated Speculative Strong Buy at $8.05 on March 11, 2012. I believe I reported buying it myself at around $9.50 in the spring of 2011 and it subsequently fell under $6. I had bought too much at $10 and was not prepared to load up at the $6 price which was unfortunate. At this time we rate it Speculative (higher) Buy at $17.01 and I do think it is well worth considering. Not as safe as Wells Fargo but quite possibly has more potential to rise in the short term.

I expect to have some updated reports by Sunday.

March 26, 2014

On Wednesday the S&P 500 was down 0.7% and Toronto was down 0.8%.

Canadian Tire was up 2.9%. This may have been based on a presentation that Canadian Tire made this morning at a CIBC retail analyst conference.

There was news about most of the American banks passing further stress tests and getting approvals for their dividends and buy-back plans today. Bank of America also had news about big settlement payments. It’s hard to interpret but my suspicion is that U.S. bank shares will take this as positive news. Certainly I have no particular concerns about my investment in Wells Fargo or Bank of America. I am hopeful of a dividend increase at Bank of America. (Their existing dividend is extremely tiny)

I received a question from a U.S. based subscriber as follows:

I wonder if you might have any general comments for US subscribers to your service about the impact of the fall in the Canadian Dollar from it’s most recent high to it’s current level under 90 cents as it relates to US subscribers purchasing Canadian stocks.  Boston Pizza, for example, has seen it’s share price (in US dollars) fall from $22.18 (US) to the current $17.55 (US) a drop of over 20% which dwarfs the dividend yield over the same period.

My thoughts are as follows:

As the questioner went on to say in his email, there is nothing we can do about what has already happened. We can deal with where the exchange rate is today but we can’t change what has already happened.

Canadians who held U.S. stocks in 2013 benefited from a 6.6% decline in the Canadian dollar (which was unexpected by most). There has been a further 5.0% decline n 2014.

During this time American Investors in Canadian stocks were harmed by this decline.

In the five years from the start of 2008 to the end of 2012, the Canadian dollar bobbed up and down but started and ended that period at about $1.00 U.S.

In the six years from the end of 2001 to the start of 2008, the Cnadian dollar rose an unbelievable 59% from its low of 63 cents all the way to U.S. $1.00. During that time Canadians who held U.S. stocks (as they were constantly told to do for diversification) got absolutely clobbered by the exchange rate change. On the other side of that, American investors in Canadian stocks enjoyed windfall gains.

Back when the Canadian dollar was 63 cents, many observers seemed to think it was destined to stay low or go even lower.

Similarly, when it hit $1.10 briefly an awful lot of people seemed to think it was headed to $1.20.

My view is that I can’t predict where the Canadian dollar exchange rate will head. But as it rose into 90’s and especially as it got over $1.00. I commented that it seemed to me that the best way to bet was that it would fall rather than rise. I moved money into American stocks when the Canadian dollar was over $1.00 U.S. That has worked out nicely. But as it headed below 95 cents and more so as it got towards 90 cents I moved some U.S. cash back to Canadian funds to hedge my bets a little.

I believe that in the long run the fluctuation of the currency is not that important. Over the last 100 years the Canadian dollar has usually been pretty close to a U.S. dollar but it did spend a couple decades languishing well below 80 cents and had a  brief dip to 62 cents. Those were BIG moves that had a HUGE impact on the returns in certain years. But over the long term such as 50 years stocks have returned at least 10 fold (1000%) even after inflation. In that context the exchange rate movement has not been that huge.

Investing in other countries is part of a diversification strategy.

Most Canadians will want to invest in U.S. stocks for general diversification and because Canada simply lacks enough companies in certain sectors like internet based stocks and, consumer brand name companies and bio-technology. Also most Canadians who invest will eventually want to spend some of their retirement money in the U.S.

American investors may look to Canada to obtain exposure to certain resource sector stocks. However Americans rarely intend to spend much retirement money in Canada so they do not ultimately need Canadian currency in the way that Canadians need American currency. Americas probably have less need to diversify to other countries (given their own huge economy) and other than for resource stocks may not have a lot of reason to choose Canadian investments.

For Americans who bought U.S. Canadian shares for diversification, the recent decline in the Canadian dollar is unfortunate. But it could have gone the other way. Over an investment lifetime some diversification is usually a very good thing. But over any short period of time one might wish they had piled everything into the one stock or the one currency that did the best. You can’t judge whether diversification was wise by looking at just a one or two year period.

Right now with the Canadian dollar at 90 cents it really seems to have returned to a more middle of the road position. I have also often heard that on a purchasing power parity basis it should have been closer to 90 cents than $1.00. So in general I certainly don’t have much reason to expect it to move down or up. I do expect it will move. I just don’t know which direction.

My strategy is to react to Canadian dollar currency movements rather than try to anticipate. So if the Canadian dollar falls I would look to try to repatriate some U.S. dollars back to Canadian. If the Canadian dollar were to rise back towards a U.S. dollar I would be inclined to look to shift cash from Canadian to American at that point.

I would also say that most all investors should steer far clear of foreign exchange or FX trading. It’s one thing for Canadians to buy some American stocks. It’s quite another thing to make a leveraged bet on currency. I see FX trading as a great way to give yourself ulcers and to lose a lot of money.

March 25, 2014

On Tuesday the S&P 500 rose 0.4% and Toronto 0.1%.

Liquor Stores N.A. was down about 30 cents most of the day both yesterday and today before closing about unchanged. As my report indicates, this stock should be considered somewhat speculative. Of the stocks I own, this is the one I worry somewhat about. I emailed the CFO twice in the last week or so and got no response. That is not a great sign. I don’t email executives very often but when I do I usually find they respond. A CFO that does not respond to a question (I asked if they could borrow money to buy back shares) is a bit of a worry. Next time I will email the CEO. They are still generating a lot of cash compared to the share price so I am not prepared to sell my shares but I just wanted to share the fact that this is one I worry about.

March 24, 2014

On Monday the S&P 500 was down 0.5% and Toronto was down 0.4%.

Before the market opened today I entered orders to Buy additional Melcor at $21.60 and Boston Pizza at 19.60 and both were filled at the open. Later I noticed Toll Brothers was down under $35 and decided to add to that position as well at $34.81. It closed at $35.48.

March 22, 2014

Boston Pizza Royalties Income Fund is updated and rated (higher) Buy at $19.55. This entity is an ownership in the the 4% franchise fees on the food (not alcohol) sales of Boston pizza restaurants. The cash distributions essentially are almost unchanged when new restaurants open as new units are then issued to founders of Boston Pizza. The distribution rises with increased food sales on a per restaurant basis. The units have recently declined due to a 3.6% decline in distributable cash per unit in Q4 which was blamed on poor weather. On that basis Q1 could also see a decline. Another possible reason for the decline was that the founders sold units in a secondary offering at $21.10 in march. The 6.3% yield is attractive. I believe the recent price decline presents a buying opportunity. Note however, that Q1 2014 should also be expected to be a relatively weak quarter due to poor winter weather across Canada this year. I will likely increase my position.

It’s interesting to note that the units were first issued in 2002 at $10.00. The units climbed briefly over $20 in 2006 but were hammered down under $8 with the financial crisis. Those who bought at the IPO in 2002 at $10.00, and have held since,  have since collected $14 in distributions in addition to a capital gain of close to 100%. This is a nice illustration of the rewards of investing. At the start of 2009 we rated them a Strong Buy at $7.51. It is stunning to look back now and see how cheap stocks were at the start of 2009 and to remember how scared investors were.

Melcor is updated and rated Strong Buy at $21.50. It’s Q4 earnings were very strong. The stock is thinly traded and so it should be bought with an order to buy at a certain price rather than a market order. I will likely add to my position even though it is already my largest holding.

On Friday, the S&P 500 was down 0.3% and Toronto was down 0.2%. Liquor Stores N.A. was up 2.6%.

March 20, 2014

North American markets were positive today with the S&P 500 up 0.6% and Toronto up 0.2%.

U.S. bank stocks did well in anticipation of stress tests results. Which all the large banks passed. (All except for one whichh I had never heard of). I am not sure if the stress test results came out after the close or before.

We had Wells Fargo up 2.5% and Bank of America up 2.7%.

Liquor Stores N.A. was up 2.9%. Apparently this was on news that it hired four new vice presidents. I don’t really know if that that was such a wise move. Possibly it signals their confidence in growth ahead. But meanwhile it probably adds about a million dollars per year to their costs at a time when they could do with some cost cutting. Also, in general, I’d rather see a company promote from within. What does it say to current staff when people are parachuted in above them?

Once again it starts to feel like the gains have been too easy to come by. We should always be prepared for markets to go the other way. I am not suggesting that we can predict that markets will fall, or certainly when that could happen. We just should always be aware that markets and particularly individual stocks often go down as well. The trick is to react rationally when that happens. I remain in favor of a bias to trimming on rallies and buying on dips. Especially for those with larger portfolios. For those closer to the start of their investing career a strategy of buying regularly works well. When just starting out, a market “correction” is a great blessing (the bigger the better) even though it feels awful. At the other end of the time scale, for those retired people who need to spend their dividends and who have no extra money to invest, broad market corrections have no redeeming features except possibly if some rebalancing can be done such as from cash or fixed income to stocks. We all have different financial capacities for risks and different emotional tolerances for risk and need to make our investment decisions in accordance with that.

I expect to update some of the reports in the next few days. I want to take a look at Boston Pizza and also will likely update Melcor.

March 19, 2014

Wednesday was a weaker day in the markets with the S&P 500 down 0.6% and Toronto down 0.2%.

But the Canadian dollar fell 9 tenths of one percent which adds to the value of U.S. stocks in Canadian dollar terms.

Couche-Tard was up 5.4%. Melcor was up 2.3%, Bank of America was up 1.4%. Almost everything else on our list was down. Overall, with the sharply lower Canadian dollar, we had a good day.

With a concentration in some of the better performing stock picks, my portfolio is up 5.2% this year.

March 18, 2014

Tuesday was a strong day in the markets with the S&P 500 up 0.7% and Toronto up 1.0%. Also the Canadian dollar fell 6 tenths of one percent which adds to the value of U.S. stocks in Canadian dollar terms.

In terms of our stock picks, gains almost all were up and there were no significant losers.

March 17, 2014

On Monday, the market decided that so far at least it was okay with the situation in Ukraine and focused on stronger manufacturing data. The S&P 500 was up 1.0%. Toronto was flat as gold miner shares declined.

Among our stock picks notable gainers included Bombardier up 4.8%, Liquor Stores N.A. up 2.3%, and Constellation Software up 2.1%. Melcor was down 2.8% on usually high volume. This decline comes after the strong gains it made in the past few days after releasing earnings and is no cause for concern.

On average the P/E ratios of the stocks in my portfolio, particularly the larger holdings do not seem too high. A notable exception is Toll Brothers where the P/E ratio is definitely high but where the earnings were still recovering from the housing crisis, and still apparently growing rapidly.

March 16, 2014

I have updated the composition of my personal portfolio.

Indications on Sunday evening are that the market is not bothered by the situation in Russia. If the resounding support for Crimea joining Russian is viewed as accurate then it may be difficult for anyone to oppose it too strongly. The United States should probably but out. A closer vote would have been more problematic. But anyhow I have no special insight into these matters.

On Friday the S&P 500 was down 0.3% and Toronto was down 0.1%.

Liquor Stores N.A. is updated and rated Speculative Buy at $11.48. This high dividend stock is down 33% since we first added it to this site just about three years ago rating it Buy at $17.01. Even after collecting over $3.00 in dividends it is still down. We certainly did not rate it a Buy just because or even mostly because of the dividend, though that was a factor in its favor. But this decline goes to show that the presence of a good dividend is no guarantee of a good return.

At this time the stock appears to offer good value. I like the dividend. On the other hand I would not be distressed if they cut the dividend since fundamentally it appears unsustainably high. But maybe they will manage to maintain the dividend as they plan to do.

March 13, 2014

On Thursday, the S&P 500 was down 1.2% and Toronto was down 0.5%.

Most of the stocks that I keep an eye on were.

Obviously, the troubles in Ukraine could cause further market declines but I generally never sell on such fears because for one thing there is hardly a month that goes by without some such “threat” to the markets. If we sold on every such fear we would seldom own any stocks.

A notable decliner was Toll Brothers down 2.7% to $36.77.

Melcor was up 3.4% on its good earnings to $21.70. That was a good gain given the market decline. For whatever reasons Melcor remains quite thinly traded which makes it a bit more volatile. I added about 12% to my holdings at $21.50 though it was already my largest holding. I could have had it closer to $20 over the past month but such is life in the markets.

It’s always clear in hind-sight that we could have traded more astutely. For example, I was pretty sure that Berkshire would rise after its earnings release almost two weeks ago. Yet on the Monday after it did not rise and that was due to Ukraine situation. I could have added to Berkshire around $112 but I failed to do so.

I was reading more of the Liquor Store N.A. report today. They certainly seem confident that they can maintain the dividend. If so, this will be a good investment.

March 12, 2014

On Wednesday, the S&P 500 was flat while Toronto was up 0.4%.

Liquor Stores N.A. was up 4.9%

After the close Melcor reported strong earnings and a positive outlook. I may add to my position.

I would continue to rate it in the Strong Buy range.

March 11, 2014 (from the Mayan Palace, near Cancun Mexico)

On Tuesday, the S&P 500 was down 0.5% and Toronto was down 0.2%.

I grabbed a bit more Liquor Stores N.A as it fell 3.4%

I believe Melcor will release earnings tomorrow Wednesday after the close  and I believe it will likely be a strong earnings report.

Apparently, New Jersey is the third state to ban direct auto sales that don’t use a dealer. So much for that “land of the free” myth. Tesla shares fell on the news.

March 10, 2014 (from the Mayan Palace, near Cancun Mexico)

On Monday the S&P 500 and Toronto were both about flat while the Dow was down 0.2%.

I sold off my Constellation Software. Possibly a bad decision because it is really great company. But it is expensive.

Toll Brothers was down 2.5% to $38.26. It is up a lot since our last update and the market is uncertain about where house prices are headed do it does tend to be volatile.

Canadian Tire voting shares are trying to prove me wrong as they jumped another 12% to $164. This was on 2,266 shares traded. With that kind of low volume it does not take much to push the price up if there is a few irrational buyers. Possibly someone is trying to accumulate voting shares, but I fail to see why. Only 9% of the voting shares trade and the rest are closely held by the dealers association, the profit sharing plan and a branch of the founding Billes family. So with 9% could one even demand a Board seat? And its not clear that anyone has accumulated even 1% let alone anything close to 9%.

Liquor Stores N.A. was down about 6% to $11.65. I will likely add a bit to my position especially if it dips a bit more.

March 9, 2014 

On Friday the S&P 500 was flat, remaining at a record high while Toronto was up 0.2%

Constellation software released earnings and was up 12% to $265. It’s a great company and has exceptionally good management. Still, the stock is expensive. I may sell my shares with a hope to buy back later or just take the profit.

The Canadian Tire voting shares rose another 5% to $147, on a very tiny volume of 555 shares. While I can’t guarantee what will happen, I would definitely sell if I owned Canadian Tire voting shares.

Wells Fargo was up on Friday and I reduced my position a little at $39.20. (Update, I believe this should have read $49.20)

With the turmoil in The Ukraine, it would not be a surprise if markets pulled back, but I have no ability to predict that. If that happens I will look to buy on pull-backs which has always been my strategy.

This week I am at the Grand Mayan resort near Cancun Mexico.

March 6, 2014

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

Our stocks picks has a reasonable good day. American Express was up 1.5% to $93.52.

The Canadian Tire voting shares, inexplicably, were up another 3.3% to $140.00. Meanwhile the non-voting shares were down 0.3% to $99.20. Only 656 voting shares traded versus 164,423 non-voting shares. With only 656 shares traded this latest rise in the voting shares cannot be taken too seriously.

Costco declined 2.8% after posting disappointing revenues and profits that “missed expectations” (which probably means the expectations were wrong). I’d love to see Costco fall further since I would like to buy but it seems too expensive. It is a powerful company (due its low cost operation) and will do well long term.

Liquor Stores N.A. released earnings after the close. The Q4 report had some bad news in terms of a write-off of intangibles or goodwill in British Columbia due to the fact that grocery stores are going to be allowed to open liquor store sections in their stores. Also sales growth was weak. They also indicated that profits will not rise until 2016 and that until then operating margins will be reduced as they implement certain plans. But overall the market was probably already expecting this and so it’s not clear to me that the stock will decline tomorrow. The company indicates it is committed to maintaining the dividend which is close to a 9% yield. If that is believed then the price could rise. The best scenario here would be if the company could borrow money at a low interest rate and buy back shares that yield 9% and thus increase EPS that way. This may not be possible. The worse case would be a share issue. I would have thought that a dividend cut would be preferable to a share issuance.

Brave investors could also borrow money and invest in the shares yielding near 9%. But that could certainly be risky.

British Columbia released news on its liquor-in-the grocery store plan just today. It’s my understanding that  grocery store may need to purchase a license from an existing store and so this could be an opportunity for salvation or partnership for Liquor Stores N.A.

Overall these shares remain speculative due to all of these matters.

The Conference call is tomorrow, Friday at noon Mountain time, 2 pm eastern and perhaps the share price will be quite volatile tomorrow morning and then may or may not be volatile during and after the conference call.

Canadian Western Bank released another excellent quarterly earnings report.

Berkshire was up 1.9% to $121.20.

The bottom of the market in the great recession occurred on March 9, 2009, five years ago. Those who either rode out the bad times or kept up their regular investing all this time have done very well.

March 5, 2014

On Wednesday, the S&P 500 was flat while Toronto was up 0.1%.

Element Financial was up 5.5%. Bank of America was up 3.2%.

Melcor will release its earnings next week, Wednesday March 12, probably after the close of trading.

I notice that Canadian Tire’s voting shares CTC rose 3.2% today to $135.50. This is a 36% premium to the non-voting shares CTC.A on Toronto. As far as I can see there is no justification for the premium. The voting shares are very thinly traded. My understanding is that for decades now there has been a provision whereby if someone were to take control of Canadian Tire by buying up the voting shares (which would have to be bought from the Billes family to get control) then the non-voting shares would become voting shares.

At last check the ownership of the voting shares was as follows: Martha Billes and her son Owen have 61.5% of the voting shares. The Dealers association owns 20.5% and the the profit sharing plan owns 12.2% of the voting shares. This left about 6% for the trading public.

There was no insider trading in these voting shares since at least 2008. Strangely the Dealers association has bought 1700 of these shares in late February. That’s a tiny amount considering that they own 702,000 such shares.

I don’t think the Dealer’s Association purchase explains the large premium which I believe has persisted for some years.

While it’s always possible that the scarcity of these voting shares will continue to cause a price premium, I would not hold the voting shares. I would be quite surprised if the premium persists in the long term. It may persist for years or it may collapse or be reduced at any time. Both the voting and the non-voting shares pay the same dividend, except it is one cent per year higher on the non-voting shares and the common share dividend is non-cumulative (it would not be made up later if it were ever skipped), while the non-voting dividend is cumulative.

The same situation existed, although to a much smaller extent, with Telus for years. It had a non-voting share that traded at a small discount. I had said buy the cheaper share the non-voting. Ultimately those were converted to voting and so buying the cheaper shares in the case of Telus was the right move. In addition to the cheaper price the trading liquidly was much better.

In Canada we have quite a few cases where both voting and non-voting shares trade. Generally the voting shares have low trading volumes and trade at only a very small premium. Each case may be company-specific. It surprises me that Canadian Tire has this large premium since its non-voting shares become voting on a take-over and since both types of shares are equal if the company is ever wound up (per note 28 of the 2013 financial statements). But, for whatever reason the difference has in fact persisted for quite some years.

“Scarcity” of the voting shares in my opinion provides absolutely no rational support for the premium. But I suspect scarcity has something to do with what appears to be an irrational premium.

March 4, 2014

I think most of us were surprised to see such a strong market on Tuesday with the S&P 500 up 1.5% to 1874 and another new record close. Toronto was up 0.5%.

Most of our Buy rated stocks were up including American express up 2.9%, Element Financial up 3.0%, Bank of America up 2.6%.

I saw a notice today from TD bank for another five year rate reset preferred share. This one at 4.4% from Enbridge. I grabbed some of that for the kids RESP account as I figure it is an alternative to holding cash.

I am basically holding tight with my positions at this time though with an order in to buy some Melcor a little under $20 and a rather unrealistic order to buy Toll Brothers if it falls to $34. I wondered today if I should trim some more Toll Brothers. Many of my moves to trim positions in the last year have not worked out that well as the prices continues to rise. Although I believe some have where there was more volatility and where I bought back later at lower prices. A strategy of trimming gains can work better when the market is  a bit more choppy, which it inevitably will be at some point. Also in some cases while I trimmed and did not buy back I may have made good investments with the funds received. I don’t track all that detail (and it might not even be possible to do so) but I do know that my account is up quite nicely (at 3.7%) in the first two months of this year and so certainly I can’t complain.

March 3, 2014

On Monday the S&P 500 was down 0.7% while Toronto was flat.

I would not have minded seeing a bigger decline today since it might have given me a chance to pick up some Berkshire at a better price.

Buffett was on CNBC’s Squawk Box for 3 hours this morning (as he always is the Monday after the annual letter comes out). He reiterated his views that we should buy companies for the long term and that we should not be bothered by stock price declines, especially when they are caused by macro economic events. He was accompanied by the two portfolio managers that he hired in the past couple of years as his eventual investment successors at Berkshire. One of these noted that Buffett had once answered that his investment “secret” was that he reads 500 pages per week. (To that I would add his ability to do math in his head and his possibly photographic memory and the fact that he been reading those 500 pages per week for about 70 years now.) People who think his special connections are his secret are wrong and fail to explain what his secret was 60 years ago when he was virtually unknown and his annual returns were higher than today. Yes, he does indeed benefit from special connections but that advantage is outweighed by his disadvantage in having to now manage about $200 billion of assets. I think he could earn far higher annual percentage returns if he was working with just $100 million and relied on no special connections. That was the situation about 55 years ago and he was stomping all over the S&P 500 returns in those days. Anyhow, any special connections he has grew out his own hard work over the years.

It seems to me that an awful lot can be learned from Buffett about how to grow the smaller amounts of investments that each of us possess.

March 2, 2014

Canadian Tire is updated and rated Buy at $99.85.

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

Warren Buffett came out with his annual letter yesterday. As always it is full of excellent investment advice.

http://www.berkshirehathaway.com/letters/2013ltr.pdf

I had expected Berkshire to post good earnings and the earnings were very good in Q4. I expect Berkshire’s B shares to push up to the $120 range on the news.

February 27, 2014

On Thursday the S&P 500 rose to a new closing high and finished up 0.5% at 1854. Toronto was up 0.2%. Most of the stocks we follow were up including Stantec up 2.9% and Element Financial up 2.1%.

February 26, 2014

Markets were about flat today. But Toll Brothers was up 1.7% to $38.90. I had sold about 15% of my Toll shares last week at $38.00. I still have a lot of shares and given normal volatility, I may get a chance to buy these back at $34. If it continues up, fine. If it declines I can buy back, so fine as well.

Element Financial issued five year reset preferred shares today at 6.5%. This compares to 4.4% for Canadian Western Bank, reflecting higher risk. I would have bought some but the issue closed by the time I saw it. Element common shares rose 4.3% to $13.99 on the news. I think it would still rate Speculative Buy at this price.

Target announced, among other things, that it has lost almost one billion dollars in Canada since it arrived. I take some satisfaction in this since I said from the start that they appeared to over-pay for the Zellers leases and that they would not be a low cost operation. (Search my 2012 comments if interested). Some things are more predictable than others.

February 25, 2014

On Tuesday the S&P 500 was down 0.1% and Toronto was down 0.3%.

I was not able to enter an order to buy Melcor due to system problems at TD Bank. I may enter the order tomorrow.

Reaction to Toll Brothers report was mixed (glass half full, half empty) it looked positive to me.

February 25, 2014 10:25 am eastern

Toll Brothers is out with relatively strong earnings this morning. The stock has a high P/E as it is still ramping up earnings from the lows of the housing crisis. I consider it more speculative due to that but it is worth considering.

Also, I am will put in an order for some Melcor today.

February 24, 2014

Monday was a strong day in the markets with the S&P 500 up 0.6% (and hitting a new high before dropping back a little. Toronto was up 0.1%.

Almost all of the stocks on our list were up today.

Our Stock Picks have done well and I believe my own account has reached a new high, the first new high since the market pull-back earlier in February.

Warren Buffett will publish his latest annual letter on Saturday. An excerpt on value investing has been published by Fortune Magazine.

http://finance.fortune.cnn.com/2014/02/24/warren-buffett-berkshire-letter/

February 23, 2014

On Friday, some of my Toll Brothers shares got sold at $38 based on an order I had in place. I then sold a little more at $38.

I am visiting just south of Tampa this week. Went to Branden Mall at noon today, Sunday. On one side of the Mall there was no parking left, people parked on the grass. It seems to indicate that the Florida economy is much improved and recovered.

February 20, 2014

On Thursday the S&P 500 was up 0.6% and Toronto was also up 0.6%.

Toronto is at a three year high. And its quite close to its all time high. The S&P 500 is just a little below its all time high reached in late December. This all seems pretty good considering the market and economic news has been fairly mixed.

Alimentation Couche-Tard jumped another 3.6% today. While it seems expensive I have been saying for a number of years that it is one of the very best managed companies in Canada. Around 2007 I was in Florida and spent some type checking out one of their run of the mill Circle-K stores in Tampa. That may seem silly but I like the idea of owning companies that I shop at and where I can check out their operations that way. This company was a real market darling in the early 2000’s. Then it suffered an earnings drop around 2007 and then of course got clobbered in 2008. Most of the analysts seemed to abandon it and missed out on an absolutely stunning performance since the lows of the 2008 debacle. Buffett is always saying if you invest in a really good company you probably stick with it instead of trying to get cute and sell when it starts to look like less of a bargain. This would be a case in point. (Nevertheless, I am not buying back in at this price).

February 19, 2014

On Wednesday the S&P 500 was down 0.7% and Toronto was up 0.3%.

Most of the stocks we follow here were down although none precipitously. Some stocks that gained included Canadian Tire, up 1.1% and FirstService up 2.2%

The Bombardier pref share was up 1.3% and has basically done surprisingly well considering the decline in the common shares.

The Canadian dollar dropped over a full cent due to weak wholesale sales data.

For the Canadian market there are still lots of Q4 earnings reports to come in which could move stocks in one direction or the other. I am looking forward to an expected good result from Melcor. Also looking forward to a the report from Liquor Stores N.A.

As investors, most of use spend far too much time looking at fluctuations in share prices. I read an article recently that said that some people and families buy Gold with no intention to sell it ever. It was said that these long-term investors don’t care so much about the price of Gold but merely want to accumulate more and more ounces of it. The same thinking certainly applies to some people who accumulate house or apartments as long term investments. They may tend to measure their progress by the quantity of real estate that they accumulate over time or its earnings power and not by its resale value. This is the way Warren Buffett looks at accumulating companies and stocks. I think he would advise us to track the number of shares in good companies we own and to accumulate more and more with possibly no intention to sell. Or to track the total earnings of the shares we own and pay less attention to the price fluctuations. For Buffett stock price fluctuations are important only to the extent they give us the opportunity to accumulate shares cheaply or to occasionally sell if the price is beyond a sensible estimate of intrinsic value.

February 18, 2014

On Tuesday the S&P 500 was up 0.1% and Toronto was up 0.1%.

I’m not sure it was a wise move but I did buy some Bombardier as a speculative pick at $3.60 today (before it fell another 2.2%). I don’t expect any quick turn around here since the next earnings will not come out for about three months. I suppose there could be good news in terms of plane orders or cost cutting, but things could also get worse before they get better. I had understood that Warren Buffett’s Net Jets had placed a very large order in the past year but this did not seem to be mentioned in the annual report. It may be a bit awkward for Bombardier to talk about that since it owned a competitor operation to Net Jets called Flexjet which it just sold and the buyer has placed a very large order and so Bombardier has to be careful not to offend either of these two.  I have said before that Buffett would like the products that Bombardier makes but I doubt he would invest in the company given its low profit margins. To the extent that Bombardier is dependent on the kindness of governments I don’t think Buffett would like that at all. And I don’t really think it has the management quality that Buffett would demand.

February 16, 2014

Bombardier is updated and rated Speculative (lower) Buy at $3.60. This stock is down 25% this year and in general the stock has done poorly for many years. The most recent decline was due to delays and higher costs on its new C-Series airplane. The question now is whether the low stock price provides a speculative opportunity for a good gain in the next couple of years. The company has already issued its 178 page annual report for 2013. I spent quite a few hours going through that but really I am unable to get a clear sense of future profits. Since the company is highly leveraged, there is certainly some risk of major share price declines if the C-Series has further problems and if they run into cash issues and have to issue shares at a low price. On the other hand it’s hard to imagine that the government would “allow” the company to go broke in any scenario. And it’s possible that a couple of years down the road there could be large profits on the C-series. Listening to the conference call the analysts seem rather frustrated with management. The analysts share my concern that the margins on planes seem very low.

I am planning to buy some shares as a more speculative position.

On Friday the S&P 500 was up 0.5% and Toronto was up 0.4%.

Most of our Stock Picks were up on Friday, Toll Brothers was up 2.2%

I made a modest purchase of American Express shares on Friday.

February 14, 2014

It was a strong day in the markets on Thursday with the S&P 500 up 0.6% and Toronto up 0.7%.

Canadian Tire was up  3.1% to $97.39 on its strong earnings. I’d still rate it a Buy (or higher). Constellation Software was up another 3.8% to $249.49. It seems too expensive but has continued to power ahead.

Our only big decliner was Bombardier which was down 9% to $3.68 on poor earnings and outlook and higher costs for its C-series plane. I don’t see a balance sheet in the press release, which is annoying. I am curious to see if the balance sheet looks better after the recent sale of its fractional jet business which I would assume had significant assets and significant debts.

Unless it is going greatly improve its profits down the road, this seems like poor business with weak profit margins. This is particularly bad considering the company is highly leveraged with debt.

It really seems like time for new management here. I am not sure why a public company thinks it is acceptable to keep the founding family member on as CEO in the face of poor performance. The Board of directors needs to be turfed here.

I plan to update this report shortly to see if it might now qualify as a speculative pick.

I don’t really follow it but I notice that Barrick Gold has lost another bundle. What a pathetic sad story of destroying invested capital this has been. Yet there are those who would laud the achievements of Peter Munk in building such a large company here. In corporate performance size should be considered to be a very distant second priority to the goal of making positive returns on capital.

February 14, 2014 8:45 am eastern (6:45 Mountain time)

Canadian Tire released excellent earnings this morning (I might even say blow-out earnings given decent growth when others are struggling). Should be a good day for the stock.

February 12, 2014

On Wednesday, markets ere basically flat with the S&P 500 down less than 0.1% and Toronto up 0.1%.

FirstService jumped 4.4% to $47.25 after releasing a good earnings report. I have consistently admired the management of this company. However it has been quite lumpy in its earnings over the years and I have not had much success in predicting when to buy or sell this one. For example our last rating was Weak Sell / Hold at $45.52. At the start of each of 2011 and 2012 it was rated Buy and it went nowhere. At the start of 2013 we had it rated it weak Buy and it soared 52%. It is well managed but its earnings have been quite volatile. Perhaps I have been too conservative in outlook when its earnings have been in a trough.

I did pick up a bit more Liquor Stores N.A. today at $12.17 and so await with great interest its Q4 earnings report around March 5 or any earlier information from the company.

February 11, 2014

It was only eight days ago that markets were (as we now know) reaching a low point markets fell most days in January and entered February with a down day. Suddenly everyone seemed to accept that we in the middle of a market correction and that it probably had a ways to go down yet. Bu then suddenly the market has risen just about every day since February 4th. It just goes to show that markets are always unpredictable, especially in the short-term.

On Tuesday we had the S&P 500 up 1.1% and Toronto up 0.6%.

Most of our stock picks were up. Liquor Stores N.A. however fell 1.8% $12.19. I attempted to grab some near the close at $12.17 but did not get a fill. Again, I do consider this speculative and it’s entirely possible that they will cut the dividend. On the other hand it certainly looks better to me at $12.20 than at recent prices of $14.00 to $14.50. It will likely announce its next monthly dividend on Friday or Monday. I suspect the dividend will be unchanged and that there will be no substantive news until they release earnings around March 5. But certainly, one never knows.

February 10, 2014

On Monday the S&P 500 rose 0.2% and Toronto rose 0.1%

Liquor Stores N.A. fell 3.8% to $12.41. There was further news on the company to my knowledge. I am mildly tempted to add to my position at this or lower prices but will likely just stick with what I have.

There should be lots more Q4 earnings reports coming in shortly and that can always move individual stocks one way or the other.

February 8, 2014

American Express is added to the list above rated Buy at $87.

February 7, 2014

On Friday, the markets ended the week strongly with the S&P 500 up 1.3% and Toronto up 0.5%.

Most of our stock picks were up. Liquor Stores N.A. recovered another 4.5% to $12.90.

February 6, 2014

On Thursday the S&P 500 was up 1.2% and Toronto was up 1.1%.

Almost all of our stock picks were up.

A notable gainer was Liquor Stores N.A., up 4.6% $12.34. I was looking into the report that recommended liquor sales be allowed by grocery stores. One thing I learned is there are over 600 private liquor stores in B.C. and they are about half the market. As I read the report it recommends that grocery stores would have to have separate areas for selling liquor and they would likely have to purchase an existing license. No new licenses were recommended. Overall the decline in the stock price at Liquor Stores N.A. seems over done. That is not to say that Liquor Stores is without risk.

On Friday morning the big news should be the jobs reports.

February 6, 2014 (11:10 am  eastern time)

The last few weeks have been a reminder that markets can certainly fall. Anyone holding stocks has to be prepared for periodic declines. With the market up today, perhaps it is appropriate to think about your risk tolerance and consider reducing your equity exposure if market declines would cause you great distress.

In theory the decision as to the percentage asset allocation in stocks is a separate matter from which stocks to own. In practice it is hard to reduce equity exposure overall if it involves selling some stocks that you like. The theoretical answer would be to reduce all positions fairly evenly if you are inclined to reduce exposure to equity.

I suspect the jobs reports tomorrow could push the market in one direction or the other.

For myself, I will likely hang on to my stocks for the most part with no material reduction to the equity exposure.

February 5, 2014

On Wednesday, the S&P 500 fell 0.2% and Toronto rose 0.4%. Most of our stock picks were up.

Liquor Stores N.A. fell another 3.8% to $11.80. I added modestly to my position in that stock today. I consider that to be a speculative purchase to some degree. I checked the insider trading on this company and there was no insider trading reported since December 31. That was as expected. Most companies prohibit their insiders from trading after the end of quarter until earnings are released. This is to prevent accusations of trading on material non-public information, which is not allowed. Several insiders were buying in December at around $14. So that is a positive sign.

I have updated the composition of my portfolio.

I am currently working on adding American Express to the list of stocks.

February 4, 2014

On Tuesday the S&P 500 rose 0.8 % and Toronto rose 0.1%.

Most of our stock picks were up. Liquor Stores was down another 4.6%. I resisted the urge to buy any more of that.

Canadian Tire was down 1.2% to $93.71. I don’t think we can know much more about either of these retailers until they release their 2013 earnings reports. Canadian Tire has been doing things to “release” value in the past year such as creating a RIET (albeit retaining over 80% of it) and buying back shares. They are also looking for a financial partner on the credit card aspect of their business. Maybe there will be positive developments there. And we don’t know how their Q4 sales went and how the weather impacted things for good or bad. There is also the impact of the lower Canadian dollar going forward. Lot’s of moving parts and I await the next earnings report, which will be a a week from Thursday.

February 3, 2014

As most of you are no doubt aware, on Monday markets were down fairly sharply. The S&P 500 was down 2.3% and Toronto was down 1.5%.

The only stocks on our list that escaped the damage were some preferred shares. Bonds had a comparatively good day as interest rates declined moderately.

One of our stocks, Liquor Stores N.A. fell 10.4% to $12.85 .This was on news that British Columbia, where about 15% of its stores are located has tabled a report recommending that grocery stores be allowed to sell liquor. Quite possibly the stock reaction is overdone, as this change could still be a ways off and it seems possible that the (I believe) relatively few private stores in B.C. would be compensated. On the other hand our report on the company was not exactly concern-free. There is some chance that buying this is chasing a faltering a business. And certainly there must a reasonable risk that the dividend will be cut. The company has saddled itself with paying out all of its earnings (and a bit more). This policy dates back to its income trust days. Still, the company does appear to be profitable and over the long haul has shown good growth.

In reaction to today’s decline I did what I always tend to do. I remained calm. Market declines are a fact of life in the markets.

I had a standing order to add to my Liquors Store N.A. position if the price dropped to $13.67. The bad news was press released only an hour before the opening of trade (It was based on a report issued by the government on Friday or Saturday). The stock opened down only 5 cents but then fell steadily. This trading pattern illustrates a poor dissipation of news. If the stock had been halted for several hours to let the news spread (which takes extra time on a thinly traded stock) it would likely have opened down more substantially which would have been more fair. In any case my order to add 25% to my relatively small position was filled at $13.67 and then I decided to buy another similar amount at $13.00.

I also had an order in to buy back some Berkshire at $109.10 (I had sold almost all of my position months ago as the price rose.) It’s not really relevant what the price was when I sold but the comments below indicate I sold most of it on July 23 so that would have been a little over $118. I would say Berkshire is known to be worth more today than it was six months ago due to its strong investment gains since then and also due to its own retained earnings.  As our report indicated, Buffett has indicated that Berkshire will buy back stock at prices up to 120% of book value, that limit was $101 as of Q3 but will likely rise several dollars after the Q4 numbers are released. So, we are not quite down to the level where Berkshire will buy back its own stock, but we are not far off.

If stock prices continue to decline there are some other stocks that I would want to buy. However I would like to take that slow. For one thing I want to wait until recent trades, including my purchase the National bank and Canadian Western Bank preferred shares settle in my account so I can better evaluate my cash position.

February 2, 2014

On Friday the S&P 500 was down 0.7% and Toronto was down 0.3%. Toll Brothers was up 1.7% to $36.75. My order to trim Toll Brothers at $37.50 was filled as Toll reached a high of $37.58 on Friday. This trimming was a minor one indeed as I only sold what amounted to 7% of my Toll Brothers shares. I have another order in to trim a bit more at $38. I have also now entered orders to trim Well Fargo at $47.90 and more at $49.90. (A typo was corrected here as I originally wrote $37.90 and $39.90)

This level of “trimming” is really not much more than tinkering and a small attempt to take advantage of price fluctuations. It does not really constitute taking much money out of equities (especially given that these orders to sell are above the market and may never get filled).

If anyone is serious about reducing their equity position (as opposed to just a bit of profit taking) they should sell at the market – ideally that would be done during the trading day so you can see the price you are getting.

January 31, 2014 11:45 am eastern

This morning the Dow had been down 225 points but then recovered and is currently down 117 points or 0.7%.

With the market gyrations this weak and with some reports of lower earnings, difficulties in retail and given that market P/E ratios are somewhat above historic averages, it is wise to be aware that markets can go down as well as up.

It’s difficult to know if one should sell down their equity position. Over the past five years there have been many market scares where it would have turned out be a mistake to sell. No one can say for sure if the market will now decline or instead will go on to new highs.

I would say that anyone in the market has to prepared for the possibility of losses. The price investors pay for getting 30% on the S&P 500 last year is that in other years it will surely decline.

My strategy this past year has to been to have some cash on hand and to be prepared to buy on dips. And if there was a major correction I would ultimately end up with an equity exposure of close to 100%. I might even use margin if stocks got cheap enough. Over time this sort of strategy has worked very well for me. But it’s not for everyone.

Certainly I have considered this week whether I should trim even stocks that I like such as Wells Fargo and Toll Brothers and Bank of America. So far I have not done so. I reserve the right to decide to do so at any time. Right now I do have an order to trim Toll Brothers by a small amount at $37.50. I have not considered trimming Canadian Tire or Melcor despite my large positions there.

Canadian Western Bank was briefly out with one of these five year rate reset preferred shares that are non-cumulative and that may be converted to common shares (by the Bank) under certain adverse conditions. These pay 4.4%. I have placed an expression of interest with TD Waterhouse for some shares for an RRSP account. (I am a bit worried I am using up my cash surplus here but I suspect I could sell these to raise cash later and am not likely to suffer much loss to do so). Very soon after I placed my order the offering closed. Some subscribers may wonder why I don’t send an email about something like this. However, that has never been my practice and also I don’t really like the idea of getting in a big hurry in the markets.  In fact my buying even preferred share IPOs seems a bit dangerous, it involves making snap decisions which has never been my approach to the markets. Also, in terms of sending an email, it turns out that the offering was about to close by the time I say it. To access these offers you have to sign up for IPO alerts with your broker.

January 30, 2014

On Thursday we had the S&P 500 up 1.1% and Toronto up 0.7%.

In something of a mirror image of yesterday, almost everything on our list was up.

Regarding the Royal Bank preferred shares that I mentioned yesterday, they started trading today. Symbol RY.PZ They traded at about $24.95. That’s interesting because at the IPO last week they were oversubscribed and the size of the issue was increased from $200 million to $500 million. Perhaps there was a perception of scarcity. They pay 4.0% and reset in five years which likely means that they can be counted on to trade around Par in five years. They are riskier than some preferred because they are non-cumulative and in certain conditions could be converted by the bank into common shares. For those happy to collect 4% yield they may be a decent choice. With interest rates having declined a little in the last week I had expected these Royal Bank preferred shares to trade a little above $25. That may yet occur. If interest rates rise they will decline in value. But I don’t think there is much risk a very significant decline due to the rest in five years.

Yesterday I had purchased similar National Bank at their IPO and purchased them in a corporate account. However I had second thoughts about that due to income tax implications. I called TD and they allowed me to shift the purchase to an RESP account. For the RESP which has just entered the spending phase these shares seem a reasonable alternative to cash. Most of my RESP will remain in common shares because I can afford the risk.

January 29. 2014

On Wednesday the S&P 500 was down 1.0% and Toronto was down 0.3%. The futures had been positive Tuesday night but turned negative by the opening on Wednesday. In part, this seems to be due to the FED continuing to taper its bond buying, though that was expected. Mostly it may be linked to weakness in emerging markets.

Almost all of our stock picks were down as well. Toll Brothers managed to close unchanged.

At some point it will be time to take advantage of lower prices. I have an order in for some Berkshire at $109.10. I should probably place an order for Canadian Tire as well. Since I already have a large position in it I don’t need to be aggressive and might set a price for a 100 shares several dollars below the current price. I’d like to have some Costco as well but since it still seems expensive I would start with about 100 shares which would not be a big position for me. Again, I want to move quite slowly in putting cash into the market just in case there is a larger “correction”.

A few months ago I signed up with my discount broker (TD) to receive notice of all IPOs. One problem with buying IPOS is that many of them tend to get sold out very quickly. There is almost no time for analysis.

Recently there was an IPO for some Royal Bank 5 year rate reset preferred shares at 4.0%. I noticed that one, thought it sounded decent. It sold out very quickly. It turned out that this one had a feature whereby it concerts into common shares if the bank runs into certain big trouble. Therefore it is riskier and pays a higher dividend. It may have been non-cumulative as well in terms of the dividend. Those risks seem remote to me.

Today there was a relatively similar offer for National Bank five year rate rest preferred shares at 4.1%. Now, 4.1% does not excite me much at all. But I figured it might be an alternative to holding cash. And I figure it won’t likely trade much below $25 due to the rate reset feature. I ended up buying some in a non-registered corporate account. I have a vague understanding that a corporation that earns dividend income pays little or no tax on it. In any case it was a chance to see how TD’s on-line IPO system works. I found that I had bought these shares with about two clicks of the mouse. I did not even have to enter a trading password which did surprise me. I was not sure that I would get the full amount I “expressed interest” in buying. Technically my purchase was called “an expression of interest”. However, for all practical purposes it was my firm offer to buy so many shares at the offered price. TD now shows that I was allocated the full amount of shares that i “expressed interest in”. The issue will close on February 7 and at that time TD will take the cash from my account and the shares will appear in my account and begin accruing the dividend and soon after they will begin to trade on the exchange.

The Royal Bank issue starts trading tomorrow and I expect it might well trade a little above $25 giving a quick capital gain for those who bought at the IPO.

January 28, 2014

On Tuesday the S&P 500 rose 0.6% and Toronto rose 0.8%

Toll Brothers was up 4.1%, Bank of America was up 2.6% and Couche-Tard was up 3.5%.

I don’t put much faith in anyone’s ability to predict the short-term direction of markets but perhaps today’s result indicates that there remains a lot of optimism among investors. For a larger decline to take hold probably requires investor fear. I suppose fear can arise quite quickly but right now it does not seem widespread.

January 28, 2014 (7:30 am mountain time, 9:30 eastern)

Markets were down somewhat on Monday with Toronto down 1.0% and the S&P 500 down a small amount. Markets were set to open higher on Tuesday.

With emerging markets down, perhaps one should consider some of the emerging market ETFs. These are speculative and I woiuld consider only a small investment.

http://www.investorsfriend.com/Global%20ETFs.htm

There was news yesterday about Hudson’s Bay selling a large Toronto store and an adjacent office tower for $650 million. They would lease back the retail space. I don’t now the lease obligations that Hudson’s Bay will have but this seems like a very good deal for them. I am not sure it was a good deal for the buyer. It does show the value of real estate and perhaps add to confidence in the Value of Canadian Tire which despite spinning off a REIT still owns over 80% of that REIT as well as substantial additional real estate. Melcor also still owns substantial rental real estate including over 50% of its REIT.

January 26, 2014

Element Financial is added to the list of stocks and rated Speculative Buy at $12.98. It’s an interesting company whereby an aggressive management has undertaken a a very aggressive growth strategy and turned a small financial company into a much larger one. It is in a somewhat higher risk niche of the lending market. Profits are not (yet?) at an acceptable level. The main concern here would be that it is easier to lend money than it is to =lend money wisely. There is an opportunity to ride along and grow with an aggressive management but also a risk that they have lent and grown too aggressively. It’s worth considering but only for a smaller and more speculative position. We will revaluate after the 2013 annual report is issued.

On Friday the S&P 500 was down 2.1% and Toronto was down 1.5%.

Most of our stocks picks were down including Toll Brothers down 3.4%.

I don’t know if this will be the start of a deeper “correction”. We do know that the the US. market in particular had risen a LOT and that the P/E ratio was getting high (see our DOW and S&P 500 valuation articles). This, in part, explains why we started this year with just two stocks in the Strong Buy range and in general our ratings are lower than at the start of last year. Still, we did see good value in stocks like Wells Fargo, Melcor, and to a lesser extent Canadian Tire, Bank of America and Walmart. Toll Brothers we saw as good value but Speculative. We also had some Buys in the higher yield area.

My strategy will not likely include selling any of these companies (even though I have high exposures to the stocks mentioned, other than Walmart. I mentioned last week that on Thursday I had considered selling some Toll Brothers and of course it now seems clear that would have been a good idea.

In any case, it seems to me that the market is as likely to bounce up on the next bit of good news as it is to bounce down on bad news or negative sentiment. But I accept the risk that stocks can go down as well as up.

I am looking forward to more Q4 earnings reports coming out in the weeks ahead.

My strategy will be to watch for the opportunity to pick up better priced shares. I will not get in a hurry to do so. I believe patience is more a virtue in the markets than is a tendency to act swiftly.

January 23, 2014

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

The Canadian dollar had fallen another half cent on Thursday but in the end closed about unchanged.

Most of our stock picks were down with the market. A few managed gains today including Toll Brothers up 0.1% and Canadian tire up 0.6%. I was tempted to sell some Toll Brothers today but instead just restored my expired order to trim a bit at $37.50 and a put a new order to trim a bit more still at $38.50. I was also thinking about buying back some of the Berkshire that I sold earlier this year but decided not to though I think it is reasonably attractive.

In the next few weeks the market will be reacting to many earnings reports as well as the usual economic reports.

There was interesting news today about Air Canada’s large pension deficit melting away in 2013. I knew pension plans would be much improved in 2013 (and wrote about it here http://www.investorsfriend.com/pension_debacle%20too.htm ). But the improvement at Air Canada is even more than I would have expected. (Sounded a bit too good to be true, actually)

January 22, 2014

On Wednesday the S&P 500 was up 0.1% and Toronto was up 0.3%

The Canadian dollar declined approximately one cent which benefits Canadian investors how have U.S. investments (at least as measured in Canadian dollars, that is. It’s not of much consequence for Canadian that consider their U.S investments to be permanently in U.S. funds to be ultimately spent in the U.S.) Americans who own Canadian investments are hurt by the decline and must wonder why they invested in Canada or why they did not sell a while ago.

I bought a bit more of the Canadian dollar ETF under symbol FXC on New York. This basically locks in some of my gain on U.S. cash and investments. My strategy is to buy a bit more FXC with every cent the Canadian dollar drops. So far this hedge has cost me money as the Canadian dollar keeps dropping.

Lately it seems like everyone is predicting the Canadian dollar to keep going down. I find that interesting that people are so smart not to have guessed at 92 cents it would keep going down. Where were these same people when our dollar was closer to par? If they are such great forecasters they could have made a fortune on currency bets. I doubt that people can really forecast the movement of currencies. I just react to the movement, buy more Canadian dollars with my U.S. funds as they get cheaper and with the idea to buy back into U.S. funds if our dollar climbs. And I am only nibbling at it, not making any big bets.

Turning to our Stock Picks, Toll Brothers had a strong day rising 2.1% on news that it was making an acquisition of a large and attractive parcel of land in Houston. Overall it was a positive day for most Canadian investors mostly due to the lower dollar.

My order to buy some Bombardier preferred shares (mentioned yesterday) did go through today at $21.80. It’s interesting that the order sat there for a month and it just happened that the price finally fell that low on the day that order was going to expire. Sometimes (but not always) it pays to be patient or to cheap out a bit when placing orders. Of the course the shares could fall even further given Bombardiers woes or if interest rates rise. But it’s still better to have bought at $21.80 than to have paid the higher prices that prevailed all January until now.

January 21, 2014

On Tuesday the S&P 500 was up 0.3% and Toronto was down 0.3% and the Canadian dollar slipped a bit lower.

Bombardier fell 3.9% after announcing layoffs. I think this company needs new management. But it is also an inherently tough industry. Of more interest, the Bombardier perpetual pref. shares that we have on our list fell 1.8% to $21.95. I had placed a hopeful order at $21.80 almost a month ago. It got very close to that today. My order expires tomorrow, so I can only hope that a few more owners of these shares are spooked by the news at Bombardier. These shares do come with interest rate risk (all perpetual pref shares will get hammered if interest rates rise a lot. They also come with company-specific risk. But I don’t think Bombardier is at much risk of insolvency, though that cannot be completely ruled out given its weak balance sheet and tough industry. You might think that the government would never allow Bombardier to go bust. The same could be said of General Motors Corporation. But the governments did in fact allow GM to go broke and its shareholders were wiped out and a new company bought GM’s assets and changed its name to the very similar sounding General Motors Company and pretended that it “emerged” from bankruptcy. (Not that I think Bombardier is at risk of that, I just say you cannot rule it out). On the balance of probabilities I expect the pref shares are a reasonable investment.

January 20, 2014

On Monday the U.S. markets were closed for Martin Luther King day. Toronto was up 0.7%.

I notice Boston Pizza was down 2.0% to $21.00. It’s worth considering for those wanting yield (and it should grow its distribution slowly over the years).

I plan to add Element Financial to the site before too long. This is a case where new management came in and took over a small company and have been growing it aggressively. So far that has paid off quite well. But the thing is that they may be competing mostly on price. And they do not have cost advantages. (certainly not over the big banks). They do however go after a higher interest segment of the lending business. So I don’t know yet if it a good investment at all. One thing I am eager to look at is executive compensation. Also I will be interested to see what the insider trading looks like. In any case studying this company is helping me learn more about the lending business.

January 18, 2014

Bank of America is updated and rated Speculative (higher) Buy at $17.01. It’s not as well run as Wells Fargo but it should do well in 2014 as it continued to recover from the financial crisis.

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

A notable gainer was Visa Inc., up 4.7%. We had recently rated it as only a Weak Buy / Hold. It is a fantastic company with quasi monopoly characteristics. Still, it sometimes faces price regulation and it has become quite expensive trading at about 31 times earnings.

The Canadian dollar is down to a value of 91.2 US. cents.

Most of our stocks picks are down slightly in the first couple of weeks of 2014. However, Our higher rated U.S. stocks are mostly up (Wells Fargo up 2.2%, Bank of America up 9.2% and Toll Brothers down 2.8%). Combined with the sharp fall in the Canadian dollar (from 94.2 cents on December 31) Canadian investors have done well in these U.S. stocks. Overall our Stock Picks are up modestly this new year when priced in Canadian dollars.

Wells Fargo is updated and rated Strong Buy at $46.39. It’s been an exceptionally well run bank. Basically a wealth compounding machine (though it does have its risks in times of recession and credit crisis). I dug a little further into its economics on this update (search the report for the word economics to see that). Banks will do better if interest rise. The reason for that is that banks obtain a lot of deposit money at zero interest rates (most chequing accounts). As interest rates fell the profit spread on lending out that portion of their deposits got squeezed down. This bank was first added to this Web Site on February 22, 2009 at $10.91 and rated Highly Speculative Buy. This was at the height of the financial crisis just weeks before the market finally bottomed out on March 9, 2009. That would have been an ideal time to buy it and hold but did require courage. We first rated it in the Strong Buy range on February 15, 2010 at $26.88. The importance of buying at distressed prices when possible is illustrated by the fact that Wells Fargo is up 325% (up $35.48) since our initial rating but only 73% (up $19.51) since it was rated in the Strong Buy range in calmer times in 2010. The “penalty” for waiting to buy in calmer times does not look so dramatic in dollar per share terms but is dramatic in percentage terms.

I had been considering entering an order to trim my position in Wells Fargo especially if it rose a bit more. However , based on this update I will not do that. I’d be more inclined to add to the position given it remains one of the two highest rated stock Picks on this site. But I also have to consider that I want to keep a substantial allocation to cash in case better opportunities come along (other stocks, or lower prices in general)

January 16, 2014

Today the S&P 500 fell 0.1% while Toronto rose 0.4%

Bombardier common shares fell 7.7% to $4.17. I fist rated Bombardier on this site as a Buy at $12.80 back on November 10, 1999. It subsequently went over $25 in the year 2000 but then soon collapsed and has since struggled to remain over $5.00. It’s sad because it was such a great Canadian success story. It has a wonderful history and makes exciting products. What it struggles most to make is money. It certainly has to be considered a speculative pick if it can be considered a pick at all.

The Bombardier preferred share that I have on this site fell 1.5% to $22.35. This seems like a reasonable investment. I have had an order in for some to buy at $21.80, but that may have been an unrealistically low bid. I may up my bid to about this $22.35 price.

January 15, 2014

On Wednesday the S&P 500 was up 0.5% and was at a record high today of 1851 before closing at 1848. Toronto was up 0.6%.

Bank of America released higher-than-expected Q4 earnings this morning and rose 2.3% to $17.15. This stock is up 10% since January 1. Wells Fargo also rose today to $46.40. While I continue to like both and hold both I may enter orders just to trim a bit if they keep rising.

Another notable gainer today was CN, up 2.5%.

It was in the news today and yesterday that General Motors is reinstating its dividend for the first time in some years. This is sort of true but not really. The predecessor company General Motors Corporation went bankrupt and changed its name to liquidation Motors Inc. and has really nothing to do with the new company, General Motors Company. The new company General Motors Company, bought much of the assets from the the bankrupt General Motors Corporation but it is a new and separate company. I think this is an important distinction. GM’s web site under “company” states: “Our story starts on November 18, 2010, when we completed the world’s largest initial public offering…”  The financial press may be willing to pretend that the old GM emerged from bankruptcy and still exists, but that is not technically true. And the bankruptcy should not be forgotten.

The business news these days is mixed. Some companies are unfortunately “laying off” aka terminating employees. Other companies like Desjardins and Gold Corp are making big acquisitions. As is almost always the case, those who fear the markets will find reasons for fear and those who are optimistic will find reasons for optimism.

January 14, 2014

On Tuesday the S&P 500 was up 1.1% and Toronto was up 0.1%.

The Canadian dollar slipped about a half scent and is now at 91.1 cents. This is quite grand for Canadians holding U.S. investments and terrible for Americans owning Canadian investments. My trade that hedged some of my U.S. dollars against a rise in the Canadian dollar (see FXC mentioned under January 8) has so far cost me money. But nevertheless I have made quite a bit of gain as the Canadian dollar fell and so it seemed reasonable to hedge a part of that gain given that movements in exchange rates are not something I can predict.

Wells Fargo has released earnings for Q4. Profits per share were up but revenues were down due to a decline in mortgage refinancing (U.S. homeowners can refinance when mortgage rates fall, but in the last six months they have risen). Wells fargo’s earnings were boosted by another “release” of provisions for bad debt.. That is not sustainable but it does indicate continued improvements in the U.S. economy as delinquencies decline.

January 13, 2014

On Monday the S&P 500 was down 1.3% and Toronto was down 0.5%.

Most of our stock picks were down. The Canadian dollar however rose a third of a cent.

It’s certainly not surprising or alarming to get a down a day like this. As for the next move, I don’t think such things are predictable. We are not getting into the Q4 earnings reports and those may drive the sentiment somewhat. Or numerous other bits of news could drive markets. It’s really quite normal for markets to gyrate.

Rather than try to predict markets it may be best to simply be positioned to react to changes. I like to keep an allocation to cash in case of bargains. And with the big market returns of the last two years (excluding commodity stocks) it seems prudent to have a higher allocation to cash than normal – though each person’s normal may differ. On the other hand if stocks go higher I would like to trim positions a bit in that case.

January 12, 2014

On Friday the S&P 500 rose 0.2% while Toronto climbed 0.9%. The Canadian dollar fell another half cent and can now be purchased for 91.8 U.S. cents.

Stantec was up 3.4%, Liquor Stores N.A. was up 1.5% and Toll Brothers was up 2.0% to $36.73 (I have an order in to trim my Toll Brothers position slightly at $37.50).

I added to my Melcor position on Friday. I had entered an order on Thursday evening to buy at $20.00, it opened at $19.88 so that was the price I paid on that order.

Also on Friday an order I had entered to buy some Canadian dollars with U.S. cash was triggered and I bought some Canadian dollars in exchange-traded fund FXC on New York. This basically hedges some of my U.S. exposure. FXC will rise in price if the Canadian dollar rises.

There are also two ETFs on Toronto DLR is U.S. dollars priced in Canadian dollars, DLR.U is U.S. dollars that trades in U.S dollars on Toronto. Apparently it is possible to buy one and then have the broker “journal” it to the other to sell in the other currency. It seems that if you wanted to bet the Canadian dollar will keep falling you could buy DLR.U the U.S. dollars on Toronto. You would pay an exchange fee. Later the investment can apparently be journaled (transferred) to DLR where you could sell in Canadian dollars with no further exchange fee. This is probably not worth doing unless you have a keen desire to bet that the Canadian dollar will continue to fall.

I am currently taking a look at Element Financial an equipment finance company that has been growing rapidly. I plan to complete an analysis and add it to the site. So far my impression is that it looks expensive. If it is bought it would be a speculative situation. While its share price has risen rapidly it is not (yet?) earning a reasonable return according to its financial statements. (There can be a vast difference between shareholder returns and accounting returns).

January 9, 2014

On Thursday the S&P 500 was flat while Toronto was up 0.1%. The Canadian dollar slipped about another quarter of a cent and is at 92.19 cents U.S. per Canadian dollar.

Bank of America was up another 1.5%. Costco which always seems to look too expensive but which is a fantastic company jumped 3.9% on good sales figures in December.

Melcor is my largest position but I plan to add to my position and have entered an order to do so. There are no guarantees but as long as the Alberta economy is strong it seems like homebuilding is strong in Alberta and they should do well. And even if Melcor has some bad quarters it seems like an excellent company for the long term.

January 8, 2014

On Wednesday the S&P 500 was flat (although the DOW was down 0.4%) and Toronto was up 0.1%

The Canadian dollar was down about a half cent.

I have U.S. stocks and U.S. cash. To hedge a bit of the U.S. cash (against a rise in the Canadian dollar) I bought some FXC on Toronto (update this should read New York) which is a fund of Canadian dollars that trades in U.S. currency. This was in an RRSP account. On TD Waterhouse, I get an automated wash trade which means I am buying this in U.S. dollars (with my U.S. cash that was in a U.S. money market account TDB 166). This means I am not paying any exchange fee to get back to Canadian currency. My plan would be to sell this if the Canadian dollar rises and I would have more U.S. dollars than I started with. This sort of thing may not be worth bothering with, but anyhow I am doing this on a small scale.

As the Canadian dollar falls this helps exporters and hurts retailers who sell imported products. I considered if I should trim my Canadian Tire position. But most of that is in a taxable account and I don’t think it is wise to trigger a capital gain.

It certainly has been a good time to own (most) stocks these past few years, especially U.S. stocks. Basically most large companies make strong profits and owning these companies tend to to work out well for investors, although with lots of ups and downs.

January 7, 2014

On Tuesday the S&P 500 was up 0.6% and Toronto was up 0.7%.

Couche-Tard and First Service were each up 3.7% today, which is impressive.

The Canadian dollar was down about one cent and is now at 92.7 cents and this pushes up the value of U.S. dollar investments. At this level I might be inclined to convert some U.S. funds to Canadian.   I don’t know which way the dollar will head, but I do like to sell on rallies, buy on dips, be it stocks or the dollar.

January 6, 2014

On Monday the S&P 500 was down 0.3% and Toronto was down 0.4%

Some of stocks did okay, Liquor Stores N.A was up 1.9%. Bank of America was up another 1.5%.

Fedex is going to borrow $2 billion to buy back shares. Strange that they would do this just after the stock has jumped in price. It does not appear that they bought back many shares in the past few years when they had the chance at lower prices. Share count count has increased. This does not look intelligent at all.

One prediction I will make is that Berkshire Hathaway will report a strong Q4.

January 4. 2014

I have updated the reference article on Global Exchange Traded ETFs. These can give exposure to different regions and countries around the world. Unfortunately there were no real bargains in evidence. Possibly Russia and China could be considered as speculative picks. And others could be selected for diversification.

January 3, 2014

On Friday the S&P 500 was about flat and Toronto fell 0.3%. Bank of America was up another 1.9%

January 2, 2014

On this first trading day of 2014 the S&P 500 fell 0.9% and Toronto fell 0.2%

Bank of America however was up 3.4%

January 1, 2014

I have updated the composition of my own portfolio. It’s not the intention that anyone copy it but it is provided for the sake of transparency and disclosure.

For purposes of performance tracking for 2014, the above ratings will be used as the start of 2014 rating. In all cases the closing 2013 price will be used as the starting 2014 price.

On the last trading day of 2013 the S&P 500 rose another 0.4% closing at 1848 for a stellar rise of 29.6% in 2013. The Toronto market rose 0.3% to 13,622 posting a gain of 9.6% for 2013. In 2013 Stocks and particularly American stocks provided returns that were a lot higher than the earnings of the underlying companies. That partly reflects the fact atht there were previous years when the opposite occurred. Over long periods of time investors cannot expect to make returns that are larger than the underlying earnings.

In terms of an outlook for 2014, my guess is that the earnings on the S&P 500 will advance perhaps 5 to 10%. However the (trailing earnings) P/E ratio which is at about 19 will be hard pressed to maintain that level. It is unlikely to rise. Therefore my guess in that the return from the S&P 500 index in 2014 will not exceed 10% and is more likely to be closer to 0% or less. That does not means that certain U.S. stocks will not rise. Of course, many will. I expect the U.S. economy to continue to improve and house prices there to continue to rise.

For Canada it is much harder to guess the direction of the overall stock market due to its heavy representation from commodities and resource stocks. I won’t hazard a guess. Certainly there will be many Canadian stocks that will do well.

Our performance figures for 2013 have been updated. It was an exceptionally good year, one of our best ever. Interestingly the three stocks that were in the Buy range that declined were all high yield stocks.

In preparation for the new year I am removing a few stock picks that are older and that I am not updating. These are MicroSoft, Blackberry (Research in Motion) and Shaw Communications. I plan to make some new additions to the list before too long.

RioCan Real Estate Investment Trust is updated and rated Buy at $24.77. This is not the type of investment that is going help anyone earn something exciting like 15%. But it should be a relatively safe investment. The units would fall in price if long-term interest rates increase. However it also has modest growth potential and may have a place in the mix of many portfolios.

RioCan Preferred Shares are updated and rated lower Buy at $24.90. The yield at 5.3% is perhaps attractive. But they have little or no upside potential (due to the fact that the company can redeem at $25 in 2016). If long-term interest rates were to fall these units would fall in price and could remain permanently lower unless interest rates declined again. They may be a reasonable investment for the yield but I would choose the Trust units rather than these to get the growth potential. In a taxable account these might be the better choice due to the dividend tax credit. Unless I was dependent on spending the cash flow from a taxable account I would not want to hold these in a taxable account unless I was in a position where the tax was close to zero.

December 31 2:45 pm eastern

On Monday I bought some Boston Pizza Royalties Income Fund units based on my update of Friday. I also decided to sell the small holding I had in the Gold ETF, GLD. Gold does not fit into my investment style. Today I placed an order for Bombardier preferred shares at $20.20. The price was up a little from yesterday and I decided to price a bit below the market. On the Bombardier report I just added one sentence under Recent events about them selling the fractional jet division, I had forgotten to mention that. It may possible change the look of the balance sheet by getting rid of both the associated assets and debt.

December 30, 2013

On Monday, markets were relatively flat. Constellation Software rose 4.4%.

The Canadian dollar rose about a half. This reversed a similar decline on Friday.

Bombardier preferred shares are updated and rated Buy at $22.17.

Bombardier inc. is updated and rated Speculative Weak Buy at Canadian $4.64. Basically it appears to be in a low margin business. Due to extreme financial leverage the P/E is reasonably attractive but extreme financial leverage adds to risks. It may be well as its recent new aircraft production models become mature in several years. Overall it seems like a speculative stock.

December 29,2013

Visa Inc. is updated and rated Weak Buy / Hold at $219.67. Visa is a very unusual company. It is basically trying to insert itself as a substitute for money and to collect a toll on every transaction. And it has had great success in doing so. With its powerful “moat” (competitive advantages), it could continue to do very well as a stock. But it is quite expensive with a P/E ratio of 29 and there are risks that regulation or possibly competition will tame its monopolistic pricing habits.

December 27, 2013

On Friday the S&P 500 was basically unchanged while the Toronto Stock index gained 0.5%. I believe the Canadian dollar fell about a half cent which benefits Canadians that hold U.S. stocks and who track their portfolio in Cnadian dollars. It hurts Americans who hold Canadian stocks.

Boston Pizza Royalties Income Fund is updated and rated (higher) Buy at $20.86

This is actually a rather odd entity. A heavily financially engineered entity that collects a 4% royalty from food sales at Boston Pizza restaurants (excludes alcohol). The units unfortunately do not benefit in any meaningful way from new store openings. That is because new units are issued to basically the founders of BP in exchange for the right to the 4% from these new stores. The unit distribution will rise over time only if same store food sales rise. These units have bond-like characteristics but also offer some possible growth (and risk of shrinkage – and shrinkage is seldom or never a good thing!). Overall the 5.9% yield (and the yield should grow over time) seems attractive given today’s low interest rates. If the yield were to grow at 3% per year (as same-store restaurant sales rise) the total return would be about 8.9% per year, assuming no change in the P/E ratio and that would be quite attractive. The units would however fall in price if interest rates rise.

This entity is not the best fit for my standard template for evaluating stocks. For this update I assumed that the P/E ratio in the long term will range from 14 to 17. (Previously i assumed a more conservative terminal P/E ratio). An entity that distributed all of its earnings and which is apparently lower risk can support a higher P/E ratio at a given growth rate.

Certainly there are no guarantees but this looks like an attractive investment to put into the mix in a portfolio. I had sold my units early in 2013 but I now plan to buy back into this entity.

December 26, 2013

On Boxing day the U.S. markets were open (’cause Boxing Day does not exist in the U.S.). The S&P 500 was up another 0.5% to a record at 1842. I’d like to see 2013 slip quietly in the record books before we get any kind of correction. But chances are that some down days will arrive before long and as early as Friday. We shall see.

The latest edition of our fee newsletter has been posted and includes a new article. I have liked something called the Dupont Formula ever since I studied it about 20 years ago. And I have included the formula in my spreadsheet for many years but I don’t highlight it or mention it in the stock research reports. I plan to start doing so because it is an interesting and insightful analysis. This may be the first time I have written about it.

December 24, 2013

On Christmas Eve we had the S&P 500 up another 0.3% and Toronto up 0.5%. It would be great if the market could just coast through to the end of the year. I believe New York will be open on Thursday while Toronto will open again on Friday.

Wal-Mart is updated and rated Buy at $78.01. Growth has slowed somewhat. Not an exciting investment but I would expect it will do okay over a longer term holding period.

December 23, 2013

Bank of America is updated and rated Speculative (higher) Buy at $15.69. It looks attractive on a price to book value basis. The P/E ratio does not look attractive but that may be mostly because of various unusual losses that it is still subject to as it comes out of the crisis period. Many of its business segments are recovering rapidly.

On Monday the S&P 500 was up 0.5% to (what else is new?) another record high. Toronto was up 0.4%.

Toll Brothers was up 4.7% today.

Regarding Dollarama, which I updated yesterday I added sentence to the report today under outlook that the lower Canadian Dollar could hurt its earnings. They do hedge currency but typically hedges only go out a year or so, if that. So maybe the lower dollar won’t hurt just yet. And maybe they can pass along all the extra cost. I just point out that all else equal, a lower Canadian dollar is bad for importers like Dollarama.

December 23, 2013 (1:10 am eastern)

Having only trimmed 6% of my Toll Brothers this morning at $35.50, I entered an order to trim another similar amount at $36.50. That has now been hit and I have now entered an order to sell the same amount again at $37.50. I still like Toll Brothers. But all year I have played the volatility on this stock trimming on rallies and buying back on dips and it has worked out pretty well. Toll Brothers was at $32.70 10 days ago and there has not been any company specific news on this rally just optimism on the housing front and optimism that interest rates will stay low.

December 23, 2013 (10:10 am eastern)

Checking the markets this morning, I see the DOW is up 63 points. The thought occurs to me, has this market (or at least investors) been drinking? It just seems like a lot of gains in recent days… I certainly welcome the gains but I also know that markets don’t go up in straight lines, at least not for long.

I have had an order in for quite a while to trim Toll Brothers if it hit $35.50. That got hit this morning so I was trimmed there, but only by 6% of what I owned.

I am somewhat inclined to trim other positions except that my holdings are concentrated in stocks that I like…

December 22, 2013

Dollarama is updated and rated Weak Buy / Hold at $87.78. It’s a great company. They have built a fantastic business. But the stock price is high now and does not seem attractive to me.

On Friday the S&P 500 was up 0.5% and Toronto was up 0.1%. Most of our stock picks were up. Toll Brothers was up 2.7%.

FirstService is updated and rated Weak Sell / Hold at U.S. $42.79 or CAN $45.52. I have long admired the company. But is has been a very difficult one to value. It has risen a lot since our last update when it was also rated Weak Sell / hold. In part the Canadian dollar price has been pushed up by the lower Canadian dollar. This could be considered for a speculative pick but the achieved earnings at this time do not support a Buy rating.

December 19, 2013

On Thursday the markets basically held on to the big gains from Wednesday. The S&P 500 was down just 0.1%. Toonto was up 0.4%.

Today I bought some Wells Fargo Preferred Shares. I have not analysed these, but I do know Wells Fargo quite well.

These shares trade as WFC.PRO on New York. In Yahoo Finance the symbol is WFC-PO. Use caution as it may be hard to find the right trading symbol in your particular discount broker software. For TD Direct (Waterhouse) the symbol is WFC.PR.O. They are a perpetual share that pays U.S. $1.2812 per year on a $25 par value. They now trade at about $19.81 to yield almost 6.5%.

There shares are non-cumulative which means that if they miss a dividend it will not be made up later. That may be a large part of the reason for the discount.

Another reason for the discount is simply that long-term interest rates have risen since these shares were issued at $25.

As perpetual shares these would get absolutely hammered if long term interest rise a lot. So that may be a reason to avoid them.

But I figured the yield at close to 6.5% was attractive and I would take my chances. It seems to me that the entire decline from $25 to $19.80 is not justified by how far interest rates have gone up. If there are other temporary factors pushing the price down, then I would hope that will be in fact temporary.

I bought these in an RRSP account to avoid the 15% U.S. withholding tax that applies if Canadians buy these in most other types of accounts.

I don’t know if I will add these shares to the list above because I may not have enough information for an adequate analysis.

December 18, 2013

A P.S. to the post below, I was reading that US. mortgage applications are WAY down. I understand that is mostly due to a lack of refinancings as interest rates are no longer falling. Wells Fargo was making a lot of money on refinancings. All else equal this could be a reason to trim a position in Wells Fargo to some extent. Still, like I said it has a low P/E ratio and I know it has lots of growth areas so I don’t know if I will trim.

December 18, 2013

The outcome of the FED meeting was surprisingly positive. The FED announced hat it would moderately taper its bond buying reducing it from $85 billion per month to $75 billion. However the FED also indicated that it would be keeping interest rates low for some time to come. The market initially fell on the news but then almost immediately began to rise sharply and rose fairly steadily through to the close.

The S&P 500 was up 1.7% and Toronto was up 1.2%.

It seems that there must be a strong segment of the market that continues to buy the more it goes up.

I would be a bit surprised if this full gain holds tomorrow (Thursday) but one never knows.

Most of our stocks picks were up. Notably Toll Brothers was up 3.6%, Wells Fargo was up 3.1%. I thought about trimming some positions but did not. Lower interest rates are not good for banks but on the other hand Wells Fargo has a relatively low P/E and so I am reluctant to trim that.

Stantec, Couche-Tard and Constellation software were among the minority of stocks that were down (albeit modestly) on the day.

The Canadian dollar fell about 0.8% (down over three quarters of a cent). This is beneficial to Canadian investors with U.S. investments. (Beneficial when calculated in Canadian dollars, but of no consequence if one intends to ultimately spend their U.S. dollar investments int eh U.S.)

December 17, 2013

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

Constellation Software was up another 5.2% to $217.73. on the same news that I mentioned yesterday.

I first added Constellation Software to this site back on February 4, 2011 rating it (lower) strong Buy at $51.40. It quickly went up to about $67 but then a strategic review was announced. For a long time it became very hard to value as it was trading based on being sold. I believe I sold at something like 50% gain. The Ontario Municipal Employees Pension Pension Plan was a major owner with Board representation and they wanted to cash out. They finally did so around April 2012 at something close to $90. Now these were insiders and you would think they would have a clue. Constellation was superbly run and making big profits. Yet these experts sold. I bought back in around that time as the company was one again trading on fundamentals rather than on a sale speculation. I paid more to buy back in than I had sold at. That was tough to do but turned out well.

Somewhere along the line I sold half of what I had to take profits. In recent updates it has looked expensive.

But it is a great company and sometimes it seems these great companies just keep steamrolling along. I sold half my position today at $118.50. I now hold 75 shares on which my gain is 148%. In addition there was more gain from the first time I owned it.

The total gain since it was first added to this site is 324%. Apparently someone forgot to tell it that “buy and hold is dead” (which of course, it is not.)

I mentioned that the experts at Ontario Municipal Pension plan sold way too early. Another example of experts being wrong was when Bain Capital got completely out of Dollarama at prices in the 20’s and 30’s. Now it’s in the 80’s. I guess it goes to show that investing is not so easy.

Visa had another good day up 2.6% to $213.25. It’s a powerhouse that in recent updates has looked expensive. But being a largely unregulated (as to price) monopoly has its privileges. (Sorry to say so American Express), I call it a monopoly because almost every business has no choice but to accept its cards. I made modest gains on this company but let far larger gains slip from my grasp. Still, I can’t complain.

Canadian Tire also did well today. One negative though on Canadian Tire, at some point the lower Canadian dollar could hurt earnings. Maybe not a huge factor but it is a negative for Canadian Tire (which imports most of its products).

Stantec was down 2.6% today despite announcing a modest acquisition. It’s another great company that just seemed to get too expensive.

On Wednesday afternoon I believe the FED will speak about quantitative easing and the timing of when it will be scaled back. The market seems to expect soothing words like it will be later and it will be gentle. We shall see.

December 16, 2013

It seems like 2013 has been one of the most interesting years in the market in a while (well, then again 2008 was pretty interesting). 2013 seemed to offer excitement in the market almost every week, sometimes every day.

On Monday the S&P captured some attention by rising 0.6% and Toronto was up 0.4%.

Constellation software soared 5.2% on news it was making a sizable acquisition. eBay rose 3.0%. I own some constellation but no ebay. I don’t worry much about what I don’t own. I look at what I do own. I have four large holdings and three of the four were up at least 1% today. Canadian Tire, Toll Brothers and Wells Fargo.

The next update will likely be for FirstService Inc.

December 14, 2013

Costco is updated and rated Weak Sell / Hold at $117.91. As a customer I really like Costco. And as an analyst I am a huge fan of its business model. It is a low cost leader that must strike fear into the heart of competitors. As a stock, however, it does not excite me. It traded at 25 times earnings. That is high in the absence of even higher growth. At $118, investors are basically assuming that growth in the 10% per share range will continue and that the P/E will not decline much. It is a high quality company and maybe it will turn out to be a reasonable investment. But it seems to lack much up-side at this point (absent a take-over or something radical like that) and the price could drop if it falters for a quarter or more or in a general stock market decline.

December 13, 2013

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

Toll Brothers is updated and rates Speculative Buy at $32.70. It’s speculative because it’s P/E is still very high at 34. But earnings are set to increase very significantly in the next year due to contracts already signed. This will lower the P/E. Home prices will be higher in 2014 on new sales but new sales (which will hit revenue in 2015) have started off slowly in fiscal 2014 which started on November 1. On this stock my strategy will be to trim my position on gains and buy on dips. If I did not already own this my strategy would be to initiate a modest position.

December 13, 2013 (12:30 pm mountain, 2:30 eastern)

Canadian Western Bank is updated and rated (lower) Buy at $37.77. This is probably still a good long-term investment. But I am not excited by it at the moment as it is not longer clear that it is bargain priced. For more information, as always, refer to the full report.

I have removed  the Cnadian Western Bank preferred shares from the list above. They trade at $25.60 and are likely to be redeemed in April at $25. That is exactly why I have rated those pref. shares a “sell” over he past several years. They are down almost 5% this year, largely offsetting the dividend. The net return was still positive, so they were not a horrible investment, just not a good investment in the past couple of years.

December 12, 2013

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

I will definitely have some updates to the reports in the next few days.

December 11, 2013

On Wednesday the S&P 500 was down 1.1% and Toronto was down 1.4%.

Apparently this was due to some disappointing earnings releases as well as fears that the fed would taper its bond buying.

Almost all of our stock picks were down. A notable exception was Visa, up 3.1% and Couche-Tard up 1.9%.

When stocks decline my thoughts turn to buying. But I am not in a hurry to do so.

December 11, 2013 6:50 am mountain time (8:50 eastern)

On Tuesday the S&P 500 was down 0.3% and Toronto was up 0.1%

Toll brothers initially rose on its earnings and then fell 0.7% by the end of the day. The earnings were strong but that was already expected.  Canadian Tire fell 2.1%.

Markets are set to open moderately to the up-side today.

I will have some updates by Sunday (Canadian Western Bank and Toll Brothers…)

The news of job losses at Kellogg in Ontario gets a lot of press but I would not put too much weight on a few events like that. The success of the overall economy is always hard to judge and and the impact on different stocks is often very difficult to judge. I tend to stick with analyzing individual stocks.  The idea is to hopefully find / hold a few things that are obvious bargains or good investments (long term). Buffett calls this stepping over 1 foot hurdles rather than trying to jump over 6 foot ones (he does not try to predict the market in the short term).

December 9, 2013

On Monday the S&P 500 was up 0.3% to a new high closing price of 1808. Toronto was up 0.2%

Toll Brothers was up 2.1% to $33.58. I understand that they will release Q4 earnings tomorrow morning. We might not get much news since they had already partially released the Q4 numbers a few weeks ago as they announced a big acquisition. There will likely be some news on their outlook and so hopefully their will be some good news.

December 7, 2013

On Friday the S&P 500 was up 1.1% and Toronto was up 0.6%.

Most of our stock picks were up and Canadian Western Bank was up another 3.2%.

Alimentation Couche-Tard is updated and rated (lower) Buy at $77.50. This has been an incredible and somewhat under the radar success story. The CEO and main founder opened his first convenience store in 1980. He joined with three others who became the long-term management and effectively his partners around 1984. In 1986 a predecessor company went public on the Montreal Stock exchange with 34 stores. Growth through acquisition has been relentless. The company now has 6,215 company-operated stores and an additional 2200 stores which are franchised and/or to which it provides fuel. The founder is a billionaire and the equity market value of the company is almost $15 billion. In 2012 it acquired a chain of stores in Europe paying a 52% premium to the stock price at that time. Despite the premium the price paid was apparently attractive and the acquisition has worked out brilliantly. The balance sheet indicates that the company has taken in a total of $696 million in shareholder capital (via share issues and acquisitions paid in shares over the years). By comparison it has earned more than that amount in the past year alone and the retained earnings are $2,786 million. The company had no usual advantages and I therefore attribute its great success to the drive and skills of management. Today, the share price does not look like a bargain. If I owned it (sadly I sold on the way up) I would probably trim the position. Having sold at much lower prices I personally am not inclined to buy back in. However setting emotions aside a reasonable strategy might be to take a small position and then hope for a price drop to add to the position.

Buying a small amount and hoping for a price drop may seem strange but it hedges the bet. If it rises, fine. If it falls we may regret the initial purchase but the chance to buy more shares of a great company at a better price would be ours.

December 5, 2013

On Thursday the S&P 500 fell 0.4% and Toronto was down 0.8%.

Most of our stock picks were down today. A notable exception was Canadian Western Bank, up 5.6% on strong earnings. I have had lots of good things to say about this bank over the years. I had sold my own shares this past summer when I worried that it would report losses from the Alberta floods (it has a property insurance division). It seems my fear there was unfounded. And I compounded my error when I failed to buy it back when the bank releases its earnings three months ago indicating no such losses (not material at least).  Canadian Western Bank has grown a lot over the years. Despite some major downs as well as the ups, it has been a fantastic buy and hold company over the long term.

Early this morning there was news that the U.S. GDP growth for Q3 had been revised up to a robust 3.6% per year. That is 3.6% real and would be closer to 5% when you add in the official inflation rate. There was also some good news regarding unemployment benefit claims. So, I thought, the market should rise. But it was down instead. The explanations was that the good news is taken as bad news because the FED might taper it’s bond buying. And it is true that higher interest rates could certainly cause stocks to fall despite a strong economy.

Recently I clicked the box to receive all the “new offerings” from TD Securities. I saw an interesting one today, a five year bond paying 4.14% per year from Morguard Corporation. I am not familiar with the company but have heard of it. I clicked on Yahoo and saw it pays a dividend and its share price is up a LOT lately. That gave me some comfort that the bond was safe. The thing with these type of bond issues is that they sell out quickly. There is really no time to do research. It requires a snap decision to buy or not. That’s not my style. I don’t like snap decisions. Anyhow, while 4.1% is unexciting I thought I’d go ahead and buy some as I have some idle cash. I knew that this issue might sell out quickly so there is a certain excitement in the buying process. It would be easy to spend a lot of money fast in a situation like this. In any case when I called in the issue was sold out. I had not seen the email alert until an hour after it came out and the issue sold out in 50 minutes.

If you are interested in bonds for fixed income, I think new issues can be a good idea because you don’t pay any fees to buy and the interest rates may be better than you can find elsewhere on similar risk investments. There are thousands of small bond issues like this and they don’t trade like stocks. Most may rarely trade. If you are a discount broker client (like me) you will likely find that the selection of bonds that you can buy is very limited. These new issues may be the only chance to buy. Having said that, you had better be prepared to hold until maturity because your discount broker may not be willing to buy it from you later and if they do they will charge a fat hidden fee by offering you a low price on it.

As I think about this poor liquidity it is perhaps for the best that I was not able to buy any of this bond today.

December 4, 2013

On Wednesday the S&P 500 was down 0.1% as was Toronto.

For Canadian investors who own U.S. shares the modest market losses this week have been offset to a certain degree by the lower Canadian dollar.

This morning there was news that would normally send the Canadian dollar higher. First Canada today reported a small trade surplus for the latest month, the first surplus in 22 months. Second, oil prices have climbed this week. The Canadian dollar, however continued to fall due to some indications that the Bank of Canada would not only not raise interest rates but could possibly cut interest rates.

With these few negative days, my thoughts naturally turn to potentially trimming some positions to raise my cash level and lower risks. The thought occurs to me that I could sell some Wells Fargo and although it is down a bit from its highs that is probably offset by the lower Canadian dollar and I would effectively be selling at about the recent highs in terms of Canadian dollars. Again, I don’t really want to to trim Wells Fargo since I rate in the strong Buy range but if the mood strikes me to raise my cash position I may trim that a bit, possibly Toll Brothers as well.

Canadian Western Bank came out with earnings this evening that look quite good.

December 3, 2013

On Tuesday the S&P 500 was down 0.3% and Toronto was down 0.7%. I never know where markets are headed int eh short term but after weeks of gains it is not surprising to have at least a few weak days.

Most of our stock picks were down but nothing dramatic.

I am still working on the Couche-Tard update. I want to take extra time to understand its success as best I can. I consider it to be one of the most admirable companies in Canada. For one thing, it’s a rare exception to the usual rule that Canadian companies expanding into the U.S. do poorly. It purchased the U.S. circle-K chain some years ago in huge acquisition and this has worked out extremely well. I am pondering its ROE which it says is over 20%. Warren Buffett grew Berkshire into one of the larger companies int he world and himself into one of the riches people in the world by compounding (and retaining) earnings at right around 20% average for the 48 years from 1965 to today. Now, getting 20% for decades is the holy grail of investing, but it makes sense that if you ever want to compound money at 20% a possible strategy would be to climb aboard a company that is making 20% (and expected to continue to do so) and hand on for the ride. The way most people try it is through aggressive trading and leverage and risk (options and such). I actually have never hard of a documented case where that worked out. (George Soros may be one case though I have not seen exactly how he grew all his wealth, it is known that some came from aggressive trading).

Any suggestion that 20% or even 15% is remotely possible is unconventional advice. Conventional and safer (so the conventionals tell us) is to invest in a balanced portfolio widely diversified. Conventional advisors don’t earn that much more if you earn 15% and you might leave them or try to sue if you have a bad year and so conventional financial advisers cannot and will not suggest unconventional strategies even if they happen to think they have merit and are safe in the long run.

I am not 100% sure that we can continue to beat the averages, much less continue to spank the market or to approach 15 or 20% but so far our track record is very good. Follow the advice on this web site at your own risk, however. It is for adults only. It’s for people who are ultimately willing to take responsibility for their own trade decisions. It’s been maybe a couple weeks since I mentioned… InvestorsFriend Inc. (much less myself) offer absolutely no guarantees of investment results. If that is not acceptable, then by all means cancel your subscription. (Note that refunds are not possible after 6 weeks from the date of a payment). Very few people ever ask for refunds.

I did really mean to get into that whole topic, I just write what comes to mind and sometimes the process takes off in unexpected directions. One cannot really talk about 15 and 20% returns without mentioning that such things are by no means guaranteed, nor is any return level guaranteed, but I repeat myself now.

December 2, 2013

On Monday the S&P 500 fell 0.3% while Toronto was up 0.2%.

Some of the bigger moves included CN rail up 2.9% as the stock split. Stantec up 2.8%. Constellation software was up 5.8% and I have no idea why it has been so very volatile of late. It’s still a bit below its highs reached earlier this month. Dollarrama was up 2.4%.

My own account was down slightly as Toll Brothers fell 1.7%.

I am working on the update for Couche-Tard. That company has had astounding success and growth. But I suspect the numbers will not suggest that it is a bargain at this time.

December 1, 2013

One more month to go in 2013. I would certainly be happy if we could hold onto the excellent gains achieved so far in 2013.

This month the big market driver may be whether the FED gives any hint of tapering its bond purchases or not.

On Friday the S&P 500 was down 0.1% and Toronto was up 0.2%.

FedEx is updated and rated Sell at $138.70. It’s up 51% this year. At this point it appears to be pricing in too much growth. Perhaps it will deliver the growth. It’s a strong company. But it appears too pricey at this time. As much as I like the idea the the founder Frederick Smith is in charge, he is 69 years old and maybe it is time for new management given a less than stellar track record lately. The air express business seems to offer a fantastic service at a low price but the profits seem too modest in that part of the business in particular. FedEx will report another quarter of earnings in mid-December and perhaps things will look better then.

November 29 (11:40 am eastern)

Stocks are up again this Friday morning.

Canada’s GDP grew at 2.7% annualized in the third quarter. GDP numbers are always presented in real dollars so in dollar terms it would have been a little higher than that after adding in the official rate of inflation.

In terms of the stocks I hold I am inclined to trim positions given that I have had such strong gains. But it’s hard to know what to trim. To me, Melcor and Wells Fargo still look quite attractive, so I will not trim those. With Canadian Tire I had quite a large position a year ago and it seems I trimmed a little too fast on the way up. So I am not inclined to trim more.  With Toll brothers having risen lately I may trim that. I have just now entered an order to trim that a little if it hits $35.50.

I am certainly surprised just how well the markets and our stock picks have done this year. Basically I am going to continue to “dance with the ones what brung me”. My cash position is about 34% and if the markets or any of my stocks were to suffer a large decline I am prepared to buy low.

Everyone’s risk tolerances and risk capacities differ based on many factors. These is never a one-size-fits-all answer when it comes to being in the market at all or to buying or selling any particular stock. Markets are unpredictable. But they tend to be rewarding in the long run. By attempting to buy stocks that appear to offer good value based on fundamentals and trimming or selling when they appear expensive relative to fundamentals it seems that one can do quite well over the years.

November 27, 2013

On Wednesday the S&P 500 was up 0.25% and Toronto was up 0.1%.

Most of our stocks picks were up and there were no particularly large moves in either direction.

This morning I received an email with a press release indicating that Tim Hortons was selling $450 million of ten year bonds yielding 4.52%.

I’ve generally not been interested in long term bonds. On the other hand 10 years is perhaps not so very long and the yield looked attractive compared to the ten year government bond yield which is at 2.62%. A spread of almost 2% looked tempting.

I figured maybe I could put some of my idle cash into this. The idea would be to most likely hold until maturity. Or in the spread (the premium over the government bond yield) decreased I could possibly get a capital gain on the bond.

If interest rates rise, the market value of the bond would fall but the risk of a big increase in interest rates seems to be becoming more remote and in any case I would not have to sell at the loss as I could hold until maturity.

TD Securities was listed as being involved in selling these.

But when I called TD Direct Investing, they said they had no bonds to sell to me. Now, it was a private placement so that might explain it. TD Direct Investing suggested that TD Bank was buying the bonds for its own account or for institutional investors.

I emailed Tim Hortons and they said that accredited investors were eligible to buy. But the issue was already over-subscribed (sold out) in any case.

I suspect full service brokerage clients of TD Securities may have been able to get some of these bonds but not the discount broker clients.

It was interesting to learn a little about this because at some point I will likely want to buy some bonds.

The fact that I could not buy any seems to make the bonds all the more attractive of course.

I may try to get registered as an accredited investor with TD although it may be that as a discount broker client I move not be able to access accredited-investor-only products in any case.

In other news, I note that the Canadian dollar has been falling. This increases the Canadian dollar value of our U.S. investments which is nice added boost. I have no idea how low the Canadian dollar will go but at some point (maybe 93 cents) I would move some U.S. cash back to Canadian dollars and then hope to reverse that if the Canadian dollar rose. In the longer term movements in the Canadian dollar against the American have not been that important. (Consider that a 10 cents move after ten years would only amount to 1% per year, so not that big a deal for investors.

 

 

 

November 26, 2013

On Tuesday the S&P 500 was flat while Toronto was down 0.9%.

On the other hand Alimentation Couche-Tard surged 3.0% to $76.17. It’s now up 56% this year having started the year at $48.19 and rated Buy. And, it’s up 338% since it was first added to this site almost nine years ago on March 31, 2005 rated (lower) Strong Buy at $17.40. That works out to an average yearly compounded gain of 18% per year for anyone who bought and held that whole time. Apparently, in the case of this company, rumors that buy-and-hold-is-dead are greatly exaggerated. I plan to update the report for this company by Sunday.

Toll Brothers was up 3.5% as the latest Case-Shiller home price index saw additional price gains for U.S. houses in September.

November 25, 2013

On Monday, the S&P 500 and Toronto both ended the day down very marginally – basically flat.

Constellation Software fell 3.6% to $186.55. Earlier in the day it got as low at $178.50. This caused me to ponder why I had not sold my shares last week (at about $200) when I said I was thinking about it. There was no immediately apparent reason for the drop, as far as I know. Possibly this stock illustrates the perils of stop loss selling. What if someone has a stop loss in at $180 and it sold there just before bouncing back to $186.55? That would not be fun. I virtually never use stop losses. I sell based on valuation, not when the crowd is selling.

November 24, 2013

On Friday the S&P 500 closed up 0.5% (and closing above 1800 for the first time ever) and the Toronto was flat. There were no particularly note-worthy moves in any of our stock picks.

eBay Inc. is updated and rated Weak Buy / Hold at $50.33. The company has strong earnings characteristics but with a P/E of 22 it is pricing in a lot of growth. It may be worth considering as a more speculative pick, but overall seems a bit expensive. I had added it back to this site on March 24, 2013 rated Weak Sell at $53.27. Given that the S&P is up over 26% this year and given that eBay’s earnings have continued to rise it’s somewhat surprising that the stock is down a bit this year. Perhaps investors fear that competitors will steal its market, particularly in regards to PayPal. There are always risks.

November 21, 2013

Well, Thursday was yet another very strong day in the markets. The S&P 500 was up 0.8%, The Dow was up 0.7% and closed above 16,000 for the first time ever. Toronto was up 0.3%.

As for our stock picks we had Bank of America up 3.0% and Toll Brothers up 2.0%.

Obviously stocks cannot and do not and will not keep going up indefinitely. They can go sideways or down at any time. If we hold some cash and we hold good companies, declines need not be that huge a concern as we can use declines to add to positions. Still, we all hate to lose ground.

When I look at what stocks I own and might trim myself it’s a bit tough. I have Wells Fargo and Melcor rated in the strong buy range and so it’s not that easy to sell any of those two. Regarding Canadian Tire I already trimmed it by about 50% from what I held about a year ago. Regarding Toll Brothers I believe I have trimmed that as well from my peak levels. I already sold all my Stantec. When I look at what I hold there are few I would want to trim. I mentioned earlier the possibility of trimming or selling Constellation Software, so that is one. There is my oil sands ETF which I don’t have a rating on but which also has not risen much. These is Liquor Stores which I rate low but which I am nevertheless not that keen to trim.

Possibly I should enter some hopeful orders to trim most positions if they rise much further…

My cash is sitting at about 37% which has been a drag on my returns but which seems prudent for risk management given I hold no fixed income.

I could decide to raise the cash to 40% or even 50% and just trim all stocks in proportion to achieve that. That might be logical. My cash level should really be set at some target rather than just be set sort of accidentally as I sell stocks and buy.

As of the moment I am not much inclined to take action on trimming but just wanted to share my thoughts on it.

November 20, 2013

On Wednesday the S&P 500 was down 0.4% and Toronto was down 0.1%. Markets were initialy positive on positive economic news regarding consumer spending but turned negative when minutes of the FED meeting disclosed discussions that tapering of the bond buying could begin soon. Among the stocks I keep an eye ion I notice Couche-Tard was up another 2.0% to $73.50. It appears that I sold that one far too early. Then again, it’s hard to say what I put the money into and given my gains these past two years I have no complaints about having sold a lot of stocks at well below today’s prices.

It seems to me that gains on higher price stocks are sort of smaller than they appear to be. A stock rising from $80 to $90 seems great and is great. But at 12.5% it is nowhere near as good as the 50% gain when a stock rises from $10 to $15, though at first glance it may look like a larger gain. We may sometimes feel regret about selling a stock at $80 that soon went to $90, when the fact is we may have put the money received on the sale into a $20 stock that rose to $22.50 or more and therefore it was not a bad thing that we sold but it may feel like it. We tend to “compartmentalize” our investments into individual stocks whereby we can regret the gain we missed out on while forgetting the gain we obtained by reinvesting the proceeds. I know that happens to me, where a sale of a stock feels regrettable but really was not regrettable.. And of course sometimes it truly was regrettable that I sold.

November 19, 2013

On Tuesday the S&P 500 was down 0.2% and Toronto was down 0.1%.

Among our stock picks there was not much excitement although Bank of America was up 1.8%.

I sold the remainder of my Stantec shares today. I was hesitant to do so because it was in a taxable account. And I am not sure I should have sold. I’d like to buy back in in future if the P/E ratio were quite a bit lower.

In 2007 and the first half of 2008 I watched P/E ratios rise higher and higher. To some extent I responded by using higher assumed P/E ratios in my valuation formula. Essentially what that did was more or less justify the higher stock prices that we saw in 2007 and the first half of 2008. As I have mentioned before , it is always possible to torture the numbers until they confess that any particular stock price is a bargain. I did not get as carried away with that as many others but to some extent I engaged in pushing up my assumption of a fair P/E ratio. I will try to avoid that this time. If markets continue to go higher it should lead me to selling out of or trimming some positions as their P/Es (and price in relation to value in general)  seem too high (like Stantec).

I am not suggesting that I am rushing for the exits. In fact some stocks still have low P/E ratios (and also that is not the only thing to consider) so I would not be reducing all positions. In general I am seeing fewer bargains now and that is to be expected as markets have risen.

November 18, 2013

On Monday, the DOW pushed over 16,000 for the first time and the S&P 500 pushed over 1800 for the first time. Bu then both fell back and we ended the day with the S&P 500 down 0.4% and Toronto was down 0.2%.

Stantec is a great company. But its price now seems to be rising on a momentum basis. It’s up 74% this year. I had earlier sold the shares that I held in non-taxable accounts. I have some shares left in a taxable account and I will likely sell those tomorrow. The P/E ratio is 21 and that’s certainly not extreme for a growth company. But it does seem a little too rich for me. On the other hand Stantec is almost certain to have a higher stock price than this in 10 years. I certainly would not short the stock but I am inclined to sell.

November 17, 2013

On Friday the S&P 500 rose 0.2% to another record high. Toronto was up 0.3%. The next update here will likely be for eBay.

November 14, 2013

On Thursday the S&P 500 index rose 0.5% to yet another record high close of 1791. Toronto rose 0.4% to 13,431 which is roughly 6% below its all-time high from 2011.

Most of our stock picks were up today. Notably Toll Brothers rose 2.6% to $33.51.

I have just updated my analysis of the valuation of the S&P 500 index. The trailing P/E on the index is 18.8. That alone suggests it is not attractively priced unless the P/E was based on a depressed earnings level. But the earnings level is not depressed. Unless we expect interest rates to remain low indefinitely (say for  decade) and therefore P/E ratios to remain elevated indefinitely the S&P 500 index seems somewhat over-valued. As a point estimate it looks perhaps 18% over-valued. That does not mean it will fall anytime soon. But it does suggest we should be cautious about committing too much of our funds to the U.S. stock index.

In the coming weeks I will update a similar analysis for the DOW (which normally looks like better value than the S&P 500) and for Toronto (which is a more volatile index due to the heavy resource sector representation).

November 13, 2013

Today the S&P 500 was up 0.8% and Toronto was up 0.3%

Canadian Tire poked its head just above $100 but closed at $99.74.

Liquor Stores N.A. fell 3.2% to $14.07. I was tempted to buy a bit more.  I have thrown in a bid at $13.51. I also threw in bids for Melcor at $18.75, Toll Brothers at $30.10. Quite possibly none of these will get filled. I used these below market bids because I already hold substantial positions in these three companies.

November 12, 2013

On Tuesday the S&P 500 and Toronto were each down 0.2%

I don’t believe markets are predictable in the short term. The strategy is to react to the market. And it is to try to calculate a reasonable value for a selected group of companies that are suitable for such a valuation process (most aren’t as they are too unpredictable) and then buy these quality companies when they are good values and trim or sell if they become over-valued. As Buffet says, simple but not easy. So I am not fixated on what the market will do, no one can predict that accurately. But if one makes rational moves in response to markets then things tend to work out.

In the next few days I may enter some orders to trim on rallies or sell on dips, whichever happens.

November 11, 2013

Stock markets were open on Monday despite Remembrance day. S&P 500 was up fractionally, up 0.1% and Toronto was down fractionally, down 0.15%.

Canadian Tire was up 2.1% to $99.22. It just about cracked over $100 and if it does (which seems likely) that may generate a bit of news, although in substance $100 is not more important than $99 was.

Constellation Software is updated and rated Weak buy / Hold at $201. It’s a great company. But it does seem rather expensive. It is pricing in a lot of continued growth. Given that other investments seem more attractive I am tempted to sell my shares. I had sold half earlier and may sell the remaining shares. Even if I sell i will keep an eye on this company. It seems to approach the growth-by-acquisition strategy from the most rational approach I have ever seen outside of Berkshire Hathaway.

November 10, 2013

Canadian National Railway Company is updated and rated Weak Buy / Hold at $116.90. This is a great company that has been growing for years and will continue to do so. Right now it just does not look like a bargain.

Here is some history. The stock up 29% this year. We had rated it a (lower) Buy at the start of 2013. In 2012 it was up 13% and we had rated it Buy at the start of that year. In 2011 it was up 21% and we had rated it Buy at the start of 2011. In 2010 it was up 16% and we had rated it Weak Buy, in 2009 it was up 28% and we had rated it (higher) Buy, in 2008 it was down 4% and we had rated it (lower) Buy. In 2007 it was down 7% and we had rated it (higher) Buy.

November 9, 2013

Melcor is updated and rated (lower) Strong Buy at $19.71. Basically it looks like a bargain but there is risk because profits would decline a lot if house building activity in Alberta was to take a sudden plunge. It’s also thinly traded, therefore be cautious in placing orders. I would place an order to buy at a certain price rather than to buy at the market price since the market price can be volatile due to the thin trading. This is my largest holding and I am thinking of adding to my position.

Liquor Stores N.A. is updated and rated Speculative (lower) Buy at $15.06. This was a disappointing stock pick for 2013. It is down 19% this year. It started the year at $18.56 and had a dividend yield of 5.8%.

Many investors seem to think that a dividend is a very important consideration in choosing stocks to invest in. I have never considered a dividend to be the main factor in investing. A dividend is usually a plus, but it is neither necessary nor a sufficient condition for a stock to be a good investment.

By some measures Liquor Stores N.A. is attractive at its current price. The dividend is attractive but may not hold, it could be cut. The opportunity to buy at 110% of book value is attractive. Book value consists mostly of purchased goodwill. Still, we are able to effectively purchase liquor stores here for only 10% more than the company has invested in those stores and that does seem attractive. But recent results are weak and it is going to take a bit of turn-around in order for the stock price to rise.

At this time, due to lower earnings and a negative trend in earnings I consider the stock to be somewhat more speculative.

November 8, 2013

Friday was another strong day on the markets with the S&P 500 up 1.3% and Toronto up 0.6%.

Toll Brothers fell 2.3%. This company’s earnings have risen sharply this year but because it started out the year with a very high P/E ratio its share price has been left out of the party this year.

The news of its strong Q4 (which was partially released on Wednesday night) would likely have caused the stock to climb but that was somewhat cut off at the knees by news that they would make a big acquisition and issue shares. The share price was revealed on Thursday night and the price is $32.00. In this case it is not surprising that the TOLL shares traded at about $32 today.

It’s seems unfortunate that the company would issue shares at $32. Luckily it appears this is not that huge an issue. It’s about $225 million while TOLL has a market cap of about $5,700 million. The acquisition is $1,600 million so it will be mostly paid by cash and debt. Hopefully a case of short-term pain for long term gain.

Canadian Tire is updated and rated Buy at $97.15. Its Q3 earnings were excellent. The impact of the REIT transaction is not in the financials statements yet as it occurred after then end of Q3. In any case it really does very little in substance since Canadian Tire still owns 83% of the REIT and since the REIT will be consolidated into the balance sheet at historical cost and not at market value. Canadian Tire seems to have suffered basically no impact from Target and that includes it Mark’s stores. The outlook appears good. I had trimmed my position approximately in half as the price rose 40% this year. However at this time I am more inclined to buy than to trim further.

November 7, 2013

This morning the good news was that U.S. GDP was strong. But the market decided that was maybe bad news since it might point to an earlier end to quantitative easing. S&P 500 was down 1.3% and Toronto was down 0.6%.

Toll Brothers managed only a 0.5% increase on its strong earnings. Canadian Tire came out with strong earnings and a dividend increase but the stock did nothing. (Maybe not so bad on a negative day, and basically a lot of good news was already baked into the price of Canadian Tire.)  Melcor fell 2.3% on its earnings, but that is on thin trading so may not mean much. Liquor Stores N.A. was also out with earnings which were I guess a bit on the weak side, although not terrible. It’s shares fell 2.7%.

I hope to update the reports for two or three of these by Sunday. Toll Brothers has not yet released it full financial results but I may be able to at least update the P/E ratio.

U.S. jobs report will come out tomorrow (Friday) morning. Perhaps it will be bad given teh government shutdown that happened in October. Never a dull moment it seems.

November 7, 2013 (6:55 Mountain time, 8:55 eastern)

There was additional news on Toll Brothers later last night and this morning. They are making a large acquisition of a luxury home builder in California. They pre-announced Q4 earnings and revenues which were stellar. Unfortunately they also announced they will sell additional shares (I could not see a price mentioned). The share counted rises by only about 4%, so not too serious. Assets are rising by approximately 15% after deducting cash they will pay. I was hoping for a big price increase here on the news but given the share sale I now don’t expect too much to happen. I might trim my position it it jumps to say $38 which is perhaps not realistic.

November 6, 2013

On Wednesday the S&P 500 was up 0.4% and Toronto was up 0.1% The Dow Jones Industrial Average was up 0.8% to another all-time record high.

Costco was up 3.3% to $124. I have said before it always looks expensive. But what a fantastic operation it is. It appears we should have grabbed some at $112 or whatever even though that did look expensive. It’s one to keep an eye on if it ever falls due to some temporary issue or a general market decline.

Melcor was down 3.1% today. But it’s really thinly traded and it had risen about the same amount in the past couple of days so I consider this to be just “noise”. Melcor released earnings after the close today Wednesday. The headline numbers show a decrease but on an adjusted basis the company indicates a small increase in earnings. The results at Melcor are lumpy by nature and so it should not be expected to smoothly increase earnings every quarter. The company indicates that the outlook remains positive. I will definitely consider buying on Thursday if the price declines but not if it rises. It’s already my largest position and so perhaps I should not be buying. I may also consider trimming if the price rises.

Toll Brothers canceled a planned appearance at an investment conference today. (They canceled today or possibly yesterday and they were to appear today.) Not sure what to make of that. Possibly it canceled pending some news. It just completed its Q4 on October 31 and most companies go into a silence mode between year-end and the release of earnings and so I don’t know why they would be at an investment conference in the first place in early November. I see now after-hours news that they are rumored to be bidding on another company. Sometimes news like that pushes a stock up, more often the buyer’s stock goes down on the news. We shall probably know on Thursday morning. Bidding on another company suggests there are other bidders, so that might suggest they won’t get any real bargain.

November 5, 2013

Markets started out quite negative on Tuesday but in the end the S&P 500 was down only 0.3% and Toronto was flat.

I neglected to mention yesterday that it was nice to see Melcor back over $20. It was up another 2.5% today to $20.70.

Melcor will report earnings this week and I expect good results. As for the outlook, things still seem to be fairly hot in Alberta as far as home building to my knowledge.

But the news that EnCana is dumping 20% of its staff is sobering. natural Gas prices are very low and while i am not tapped into what is happening “in the field” I understand it is very slow. At some point this could affect the broader economy and house prices in Alberta but so far that is not much sign of it to my knowledge. In any case Melcor looks like a good investment and if were to get hit by a weaker home building market that would most likely be temporary. There are always things to worry about but overall I like holding a good chunk of Melcor shares.

November 4, 2013

Stocks were up a bit more today… S&P 500 up 0.4% and Toronto up 0.2%.

Blackberry / Research in motion caused some entertainment and grief in the markets today with a 16% fall. I have no idea what it is worth or what its future holds. Might be worth throwing a (very) small amount on it just for the entertainment value. Presumably Prem Watsa and Fairfax financial have some clue that it is worth more than the current price. It’s probably best to focus on more predictable companies. It seems rather disgusting that this CEO Thurston Heins gets a reported $20 million exit fee. All in all he got  a nice pay cheque in return for doing apparently nothing much good and perhaps a lot of bad.

If you read the press release from the company including the title, it seems pretty apparent that the company is completely delusional. The financial press took this as “Fairfax buy-out is off” whereas the press release is titled Blackberry receives investment of a billion… Just read the press release and you can see how delusional the company is. Amazing.

http://press.blackberry.com/financial/2013/blackberry-receives-investment-of-u-s—1-billion–from-fairfax-.html

On third thought. I don’t think I would touch this thing even for the entertainment value. Sure it may bounce up, but I don’t want to get involved with this kind of management.

Constellation Software was out with excellent earnings today after close. I will look to update this report soon.

November 3, 2013

Stantec is updated rated Weak Buy at CAN $65.69 and U.S. $62.81.

Stantec’s share price has risen a remarkable 65% in 2013. In part this is due to achieved earnings growth in 2013. But in part it is due to investors being willing to pay a higher multiple for its earnings. The P/E ratio started out 2013 at 14.7 and is now at 20.2.

Stantec is a great company and has a great future and will likely continue to grow earnings at a strong rate in the long term. However, it is now “pricing in” quite a bit of growth. It is not the bargain that it was before this big price increase.

It does not appear to be the best choice for an investment at the moment though it will likely due okay in the long term. I had recently sold all of the shares that I held in non-taxable accounts. I still hold some shares in a taxable account and am undecided whether to sell those. The stock is not rated Sell, but I could still decide to sell these shares to hold cash or invest in something more compelling.

While the Q3 earnings reported on Thursday morning were very strong, it is not entirely clear why the price jumped quite so much on Thursday and Friday. I did a search for analyst reports and did not see anything that seemed to explain the sharp rise.

November 2, 2013

On Friday the S&P 500 was up 0.3% and Toronto was down 0.2%.

Stantec was up another 5.7% and is now up a total of 65% this year making it the best performing stock on our list this year.

Berkshire Hathaway is updated and rated (lower) Buy at $115.27.

Berkshire is so huge that it is unlikely to provide an outstanding return. It should do okay and occasionally when it becomes more under-valued it can be a great investment. And right now it is probably a reasonable investment.

I follow Berkshire for what it (i.e. Warren Buffett) can teach me about investing in general.

An interesting point is that of Berkshire’s $458 billion in assets, and despite the fact that Berkshire is known for its huge investment portfolio, almost none is invested in U.S. Treasury BONDS. It has a large investment in U.S. Treasury bills which is where it keeps most of its cash and cash equivalents. But there is  a grand total of just $2.5 billion (0.5% of the assets) invested in U.S. Treasury bonds. This is an especially low figure when you consider that most U.S. insurance companies keep a large portion of their assets in U.S. government bonds. Berkshire has only 6% of its assets in fixed income of any kind. This compares to 23% of assets in equity securities. Most of Berkshire’s assets are invested in wholly owned businesses. Of this 6% invested in fixed maturity investments, most has a term of five years or less and very little has a term of over ten years. Buffett has said that long term bonds are a terrible investment at this time. He practices what he preaches (and also preaches what he practices).

Conventional advice is to always have a significant exposure to fixed income. However, keep in mind that not all fixed income is created equal. Most fixed income investments such as medium and especially long term bonds may be fixed income but they are not, by any means, fixed in market value. To the extent that preferred shares are considered fixed income, they often behave very much like long-term bonds, they are in no way fixed in market value. (Shorter term preferred shares with much lower yields may be relatively fixed in value).

Also keep in mind that the three main asset classes are, cash, fixed income and equities. Dividend paying stocks should be considered to be in the equity category even though they pay an income. Preferred shares are something of a hybrid but should probably be considered to be fixed income. Preffered shares are unlike bonds in that they may never mature and that makes them far different than bonds.

If Buffett is right (and it’s ALWAYS wise to assume that he is) then it would be wise to keep fixed income investments to the shorter maturity and to favor preffered shares over bonds. Personally I have been content to hold more cash than usual and in some ways that is in lieu of fixed income. Cash in my investment accounts pays up to 1.25% in accounts like TDB8150 (see list above), although most of my cash pays me nothing at all. Cash (the portion that pays nothing) gives me instant availability in case I wish to purchase stocks. Cash and deposit accounts provide complete stability since they do not decline in value if interest rates rise.  To my mind those advantages outweigh the tiny extra return I could get by holding fixed maturity investments in the two to five year range. Many preferred shares pay substantially higher interest rates but those that do (perpetual preferred shares) would fall in value if interest rates rise. I consider preferred  shares to be an alternative to equity investments and not an alternative to fixed maturity / cash investments.

At this time (of record low yields) I would avoid bonds and avoid perpetual preferred shares. For income I would favor higher dividend paying equities or simply selling down equities as cash is needed. For the portfolio stability features that bonds are often meant to provide I would prefer cash and deposit accounts. Regarding preferred shares an exception might be if the tax advantages were important, for example where they are held in a taxable account and especially if a lack of other income can result in substantial preferred share income at a low tax rate. I simply see no place at all for long-term bonds at this time.

October 31, 2013

Thursday saw the S&P 500 down 0.4% and Toronto down 0.7%.

Not a scary day for our stock picks though, not with Stantec up 6.5% to $61.96 on a good earnings release. We rated it Buy in August at $50.46. I’d be more inclined to sell or trim at this price and in fact I did trim my position as noted in the daily comments. I still have some in a taxable account where I have been following a rule of buy and hold because I don’t wish to trigger capital gains to be paid or even the work of reporting the gain on my tax return. But maybe I will decide to sell that… I will update the report before long.

Canadian Tire ended the day down very slightly. But this morning it was up a little and I decided then to trim a little of my position. The more stocks I trim the more I have to think where can I invest the money. (Given I already have big exposures to my favorite few stocks).  But it does seem prudent to trim on big gains. I’m content to sit on some cash for a while.

Stantec has been a real winner for a long term buy and hold investor. I first added to this (then brand new) web site in August of 1999 rating it Strong Buy at (split-adjusted) $2.50. And the thing is it was actually a pretty obvious bargain, then selling for 10 times earnings and 1.22 times book value. In those days everyone wanted Nortel and Cisco and their ilk and boring companies like Stantec were unloved. Also Stantec was quite small at that time and therefore was under the radar. Having been originally rated a Strong Buy at $2.50 in 1999, Stantec rose $3.81 today. TODAY!. That is the power of a strong ROE and compounding at work. Note that Stantec was volatile over the years. It was not always easy to sleep for those holding a big position in Stantec. Those who bought on major dips and sold on big rallies would have been well rewarded. But I suspect none in reality would have done as well as someone who simply bought and held. See graph.

It’s been a remarkable year for our stock picks so far. Right now it seems reasonable to be looking to trim positions with big gains and try to catch our breath and see what stocks still seem to offer good value.

Not all the stocks on the lost above have very recent report dates. But the two strong Buys do. I continue to like Wells Fargo and Melcor as the two best picks right now. Note that Melcor is thinly traded meaning you can’t really trust a price change of say 2 or 3%, that can just be noise. You can easily over-pay by at least 2 or 3% if you are careless placing an order for a thinly traded stock like Melcor. Don’t use a buy at market order or sell at market. Enter a reasonable price in an order and try to be patient. Of course there are no guarantees and if the whole market should turn down then these two stocks would be pulled down as well. And of course every company can report bad news at any time. Those are risks we must accept if we are to invest in individual stocks and especially if we run concentrated portfolios.

In investing, it’s probably fair to say that good returns usually require us to take risks. And risk means it might not be a good return, it could be a poor return. And contrary to what some say, it does not work the other way. Taking risks in no way shape or form guarantees a high return. If it did it would not be risk. And also many risks are just stupid risks and are not associated with high returns. Only the right types of risk are (usually) rewarded.

For more information on risk, see my articles on that subject.

http://www.investorsfriend.com/portfolio_theory.htm

and

http://www.investorsfriend.com/risk_and_reward.htm

 

October 30, 2013

On Wednesday the S&P 500 was down 0.5% and Toronto was up 0.1%. Apparently the FED is less optimistic about U.S. growth. I did not note anything too exciting in the news regarding the stock picks listed on this site. Visa was reported to ahve suffered an earnings decline of 28% but that was not really true in substance because it was due to last years quarter having a special gain on income taxes and this year having a normal level of income tax.

It seems likely that there will some negative economic reports in the next month due to the slow-down caused by the U.S. government “shut-down” and borrowing limit debacle.

Target is reporting slow sales in Canada. I have said before that their purchase of the Zellers leases for $1.8 billion seemed to set them up as high-cost operators.

Sears is selling the rights to five big store leases for $400 million. Good for them. This seems a smart move. If they can’t make much money at stores like Eaton Center in Toronto, why not grab that kind of cash?

October 29, 2013

Another good day for the markets on Tuesday with the S&P up 0.6% and Toronto up 0.5%.

It seems that there are times when the market goes down much further than most anyone expects (early 2000’s and 2008 into early 2009. Then there are other times like maybe now (thinking here of the U.S. markets) and like late 2002 to mid 2008 and most of the 80’s and 90’s where the market continues to rise more than most anyone expects.

Many people look for cycles or market indicators and try to guess the direction of the market in the very short term, the medium term and the long term. For short term they often speak of over-bought or over-sold, or resistance levels, for medium term they may talk of cyclic trends and cyclic bulls and bears and for longer terms it is secular bull and bear. Laughably they call a bear market AFTER the market is down 20% and a bull AFTER it is already up 20%.

I basically studiously ignore all of that. I cannot predict where the market is headed. But I can react to it. I can try to judge if the market is over-valued or under-valued. If we can buy stocks when the market is under-valued then we may lose in the short term but over the years we will tend to win.

We can also pretty much ignore the overall market and simply buy good companies at good prices. That tends to be a winning strategy over time.

In the next month or so I plan to look again at the valuation of the markets. The biggest driver may be interest rates. When the main choices are i)  long bonds at 3% o 4% (and no growth), ii) short bonds at squat but hoped for reinvestment at higher rates later or iii) a market with a P/E  of as high as 20 (5% earnings yield with growth) the market may be the best of a somewhat unexciting lot.

October 28, 2013

On Monday I did not note much of interest in the market.

S&P 500 up 0.1%, Toronto down 0.2%.

Stantec was up 2.5%.

Canadian Tire finished flat at $97.90. At one point it touched $99.51 today. There is absolutely nothing special about $100, at least in theory. Still, in practice I think a close over $100 would generate some excitement. Maybe that way all the people who ignored Canadian Tire a year ago at price under $70 can start to pile in. However unless there is news on further “release of value” initiatives such as a partial sale or partnership of the finance operation, I don’t see why we should expect much more here in the near term. The earnings release will hopefully show good same store sales. But will also show the one-time costs of the REIT transaction. And possibly there will be some hit from Target. Obviously, Canadian Tire was a better investment last year at around $70 than it is now at close to $100.

There will be some updates to the reports coming soon.

October 27, 2013

On Friday I sold what amounted to 6% of my Toll Brothers shares at $33.56. These particular shares had been purchased two weeks ago at $30.43. This is a strategy I have been using with Toll Brothers, buying on dips and selling on rallies. I do not have any strict rules about this but in this case the swing was about 10%.

Yesterday the latest edition of the free newsletter was sent out. If you did not receive that by email then you could try adding your email to the free list. The system should let you know if your email is already on the list. There is also a “validation” process for the free list. That is not critical because I send out to both validated and unvalidated emails on the list (always with a link to get removed from the list)

My own portfolio breakdown is updated. I continue to run an extremely concentrated portfolio. More concentrated than I have been historically. I have over 48% of my portfolio in just four stocks and that is 74% of the equity portion of my portfolio. That kind of concentration should generally be considered to be HIGHLY risky. I have never recommended that anyone copy my portfolio and have always indicated that it was based on MY risk tolerance and MY capacity to take risks. I happen to have a lot of faith in each of my four largest positions (Melcor, Wells Fargo, Toll Brothers and Canadian Tire). But I have said that Toll Brothers is speculative due to the high P/E ratio. And banks are highly leveraged by nature and therefore can be risky for that reason alone and property development is a cyclical industry. And I have, over time as it rose, sold about half of the Canadian Tire shares that I held around this time last year when the stock was particularly cheap looking. These four stocks could certainly cause me grief at any time. That is a risk I have been taking. I reveal my own portfolio because some people expressed an interest in it years ago and in the interest of transparency. But such a portfolio may not be suitable for others and it is up to individuals to decide that.

A certain amount of concentration should be expected in the portfolio of a stock picker such as myself. As a fellow stock picker recently said, if you can’t pick stocks you should be highly diversified (invest in index ETFs). But if you are convinced that you have a good ability to pock stocks then it makes sense to concentrate in your best ideas.

Subscribers may want to limit the allocation to an individual stock to some lower limit like 10%. Even that is considered quite high by most experts. The limit is up to you, I don’t offer advise on asset allocation or the limit in any one stock since that is highly specific to each individual.

The reality is that it is impossible for the average investor to beat the index. (Just as the average person can not be taller than average). By following a stock picking strategy subscribers to this site are implicitly or explicitly trying to do better than average. Therefore you have opted for a less diversified strategy. But the extent to which you concentrate your holdings is up to you and I wanted to remind you that my own level of concentration is very high and could be highly risky.

Running a concentrated portfolio is part of the reason I have done so well the past two years. That knife could cut the other way at some point. Hopefully these four stocks are not going to decline a lot more than the market at some point while I still own them. But it could happen. This is part of the reason that I am running with a higher-than-usual cash position. If one or more of these four take a big hit due to a company-specific reason but it is a one-time problem, then I would likely be buying on that dip.

I don’t mean to alarm subscribers. I just mean to let people know that blindly following my own portfolio could be very risky. I prefer that my subscribers take more of an a-la-carte approach and pick and choose from the stocks that are rated after reading the reports. Many and perhaps most subscribers will also hold investments not listed above.

The bottom line is that we all invest at our own risk and we should all understand that stocks do go down at times. And some of them stay down.

October 24, 2013

Another day and the markets were up again. This all seems a bit too easy… I am thinking about what positions I might trim…

S&P 500 up 0.3%, Toronto up 0.6%.

As for our Stock Picks, Toll Brothers up 2.3%, Canadian Tire up another 1.0%, Visa up 2.0% to $203.

Less than 24 months ago Visa was under $100. In early 2011 it was under $70 having fallen on some negative news and developments. Ever since I added it to this site in April 2009 at just over $58 and rated Buy I have consistently described it as virtually an unregulated monopoly and when it rose after falling I said it was “hard to keep a good monopoly down”. In May 2011 I rated it a Strong Buy at $79.41. Sadly, I sold my own shares too early. The point is there are times and there are companies where the value seems pretty darn obvious. Visa at times fit that mold. I don’t like it at $203 but it is even clearer now that it was a wonderful bargain in early 2011.

October 23, 2013

On Wednesday the S&P 500 was down 0.5% and Toronto was about unchanged.

There were a couple of big gainers today, CN up 4.4% and FirstService up 4.9% as both released strong earnings.

I’ve long considered both to be excellent companies though both (and especially FirstService) had seemed too expensive at last check.

The Canadian Tire REIT CT Real Estate Investment Trust started trading today. It rose marginally above the $10.00 IPO price. I understand that for the first few weeks the investment bankers will “support” the stock price, or attempt to, by buying shares if needed.. That sounds like some kind of “legalized” stock price manipulation and I believe that is just what it is and it done for every IPO. It’s yielding 6.5% as I understand. I don’t have an opinion on its value but I assume it will most likely stay above he $10 level (barring any increase in interest rates which is starting to look less likely)

Canadian Tire Corporation still owns about 83% of  CT REIT. The whole purpose of this exercise was to “reveal” the value of Canadian Tire’s real estate and drive up the share price. That is a form of financial engineering and it has worked. I suppose that is okay if the stock price was under-valued previously and I definitely think that was the case. I would have preferred to see at least 50% and as much of 100% of the Real Estate sold since investors are willing to pay so much for REITs.

We can now attempt some interesting math for Canadian Tire Corporation.

The REIT has a market value of $1.76 billion. (I had earlier seen reports of $3.5 billion but I calculate $1.76 billion). Canadian Tire itself has a market cap of $7.7 billion. So the rest of Canadian Tire Corporation minus the entire REIT is valued at about $6.0 billion. This may seem low when we consider that Dollarama is valued at $6.3 billion and Canadian Tire has far more locations (including its Marks and FGL sports locations) and vastly more retail space. Canadian Tire’s financial Services division is worth a great deal. (It accounts for about 41% of profits and is presumably worth at least $2 billion) Canadian Tire also still owns significant real estate outside of the REIT. This appears to leave the retail division not valued that highly.  Financial statements for Q3 and certainly by Q4 may reveal that the Canadian Tire stores (The 490 actual Canadian Tire branded stores) are not that profitable after they pay rent to the REIT. The fact that Canadian Tire owned its own real estate may have been masking relatively low profits on the store. But then again Canadian Tire “retail” is really mostly a wholesale operation since its dealers own the actual retail businesses at each Canadian Tire store.

I suspect Canadian Tire is not over-valued at $96 and may remain somewhat under valued. This is going to become more clear as it begins reporting under the new arrangement. Canadian Tire’s next step may be to sell off a portion of its finance operations in order to reveal the value of that component of the operation.

Canadian Tire’s next earnings release, which should occur with a few weeks id going to be interesting and could cause the stock price to move. I’ve taken some profits along the way but I also feel comfortable hanging on to a relatively lasrge position here.

October 22, 2013

Markets were up nicely today.

S&P 500 up 0.6%, Toronto up 0.5%.

The reason the markets were up was because the employment numbers in September int he U.S. were bad enough that the fear of FED tapering is eased. That is not exactly a sustainable reason for the market to rise.

Markets have risen a lot in the past two yeas. That cannot continue indefinitely of course. It’s anybody’s guess when markets could go the other way for a time. I am thinking of building up more cash and reducing my equity exposure. But it’s hard, after all I like the stocks I hold.

As far as our Stock picks today we had Canadian Tire up 1.7% to $96.30 and Toll Brothers up 2.5% to $32.65.

Given the rise in Canadian Tire I ended up selling what amounted to 19% of my position. As is almost always the case with me this was in a non-taxable account so I don’t have to worry about triggering a capital gains tax. I may regret this if Canadian keep rising. But considering I have made a very good return with Canadian Tire it seemed reasonable to take some profits.

October 21, 2013

The week has started out not too badly on the markets. The S&P was flat awhile Toronto was up 0.4%.

On the weekend there was a report in the Edmonton Journal about a company that owns a facility that loads oil onto trains just outside of Edmonton. Currently the oil is trucked in but soon they will be loading from a pipeline. 100,000 barrels per day capacity. (Which is a lot). It seems like that could be a good business.

The company is Canexus Corporation. They are mostly a company that manufactures Sodium Chlorate and it looks like they got into the oil loading business simply because they already had a train loading facility.  I took a quick look but there were some things I really don’t like. Recently they swung  from profits to losses on their core operations the Chlorate operations. The loss is definitely a negative but there was something else that bothered me a lot more.  The company talks about something called “Cash Operating Profit”. In Q2,  this cash operating profit was $23.0 million despite an actual profit of negative $14.8 million. It turns out that “Cash operating profit” is really EBITDA plus non-cash compensation expense. In my opinion it is outrageous and mis-leading to refer to this as a “profit”. And especially when they focus on this number as the headline number. It is not unusual to refer to EBIT as operating income, but to call EBIT, much less EBITDA profit is just not right in my opinion. I can’t trust a company that does this. I was intrigued by this oil to rail loading facility. It is a large facility and I suspect it could be quite profitable. But it comes along with a commodity chlorate business that is losing money at this time. Possibly I could take another look after the Q3 earnings, but it may just be wise to keep away from a company that takes this much liberty with the definition of the word profit. Also the sight of burning train cars just West of Edmonton this weekend is a worry for all the plans regarding shipping oil by rail. (In this case it was not oil that burned, but still the images are damaging). In addition to all that, the company appears to be trading at close to four times book value.

 

October 20, 2013

The U.S. markets finished the week at all time highs. Nothing surprising there, stock markets don’t reach new all time highs every week or every year, but over time all previous highs do tend to eventually get eclipsed. The major reason for taht is taht companies on the stock market are generally profitable and they generally retain a portion of earnings to fund growth each year. Economies and stock markets do tend to grow in the long term. But do remember that stock markets don’t move higher every year.

On Friday our biggest gainer was Liquor Stores N.A. up 3.2%.

This week will bring more earnings reports and who knows what other news. Seldom a dull moment.

The Canadian Tire REIT may also start trading this week. I believe the IPO closes on Wednesday. (Meaning, the money changes hands that day). If the REIT trades up then the Canadian Tire Shares may go up a little as well. I don’t really expect much further impact from the REIT on the Canadian Tire shares at this point. The Q3 earnings report will be important. Also any indications of further financial engineering such as a partial sale of the financial services operation (which has been alluded to) could be positive.

October 17, 2013

Onwards and upwards (at least for today)

The S&P 500 gained 0.7% on Thursday and Toronto was up 0.6%.

Most of our stock picks were up. The biggest gainer was Toll Brothers up 4.4%.

Canadian Tire was briefly above $95 today but closed at $94.40 up 0.5%. I had mentioned I had an order in to trim at $95 but that order apparently expired before today. I thought about trimming today but did not. (Sometimes it’s hard to pull the trigger and sell when the stock is rising and that’s why automated orders to sell at a given price can work well.).

The Canadian Tire REIT should start trading within about a week and that could possible give us another few cents on Canadian Tire depending how the REIT trades. The next big news for Canadian Tire should be the Q3 earnings which not come out for a few weeks yet. I expect they had a good Q3 except that they will have unusual expenses for the REIT launch so the headline earnings number could look negative. Also Cnadian Tire (like most stocks) will always tend to move somewhat with the overall markets and with economic news. Overall, I am not in any rush to sell but still, it may be wise to trim a little given the gains.

October 16, 2013

Well it appears that the gong show in the U.S. senate and house is about to be resolved positively.

On this news the S&P 500 rose 1.4% on Wednesday and Toronto rose 0.2%.

It’s still possible that the deal could hit a snag yet, but it appears matters are resolved for now. However I understand this thing will resurface by January. Perhaps the market will ignore it even more so the next time. The politicians can only cry Wolf effectively so many times. ‘course we might remember in the Fable the wolf eventually does come around and eat the boy up as his cries are ignored. (But in this case I don’t think the government will ever allow the U.S. to default).

So, if this deal does get done then it will appear that we have done the right thing by staying the course and by picking up some stocks on dips. Volatility is the friend of anyone who invests on fundamentals.

Seeing Liquor Stores N.A. down a bit more today I added to my position at $14.90. I checked my report to refresh my memory and while it was rated (lower) Buy at $15.98, the report also said the Value ratios indicated a Buy. So anyhow these things are never guaranteed at all but I decided to Buy some. The recent price decline could indicate bad news is coming and has leaked out. Or it could be just a fairly random drop. It’s interesting to note that Liquor Stores had about the highest dividend yield on our list. A high dividend is certainly no guarantee in and of itself of a good investment. I am familiar with their stores in Edmonton. If anyone is making money with liquor stores these guys should be able to given their scale. So my suspicion is that they will do okay. Only time will tell.

October 15, 2013

On Tuesday the S&P 500 was down 0.7% but Toronto gained 0.3%.

The big question is what will happen the rest of this week as the U.S. attempts to get past the thatrics of its debt ceiling and budget issues. Futures as of about 10 pm eastern showed the Dow up 70 points, but that could go the other way quickly if it looks like a deal will not get done.

I mentioned Gold recently. (October 1). Today I bought a bit of Gold. I figured it might be a reasonable speculation given it is under $1300. I only put 1.7% of my portfolio into Gold. I bought the ETF that trades as GLD on New York. I am prepared to double my position if Gold drops to somewhere in the 1100’s. And I would add even more if it went lower still.

Also today I added to my Toll Brothers position.

 October 14, 2013

On Monday the U.S. markets were open while the TSX was closed.

The U.S. market opened in negative territory but in the end the S&P 500 closed up 0.4%.

Until the budget and debt ceiling issue is resolved int eh U.S. we can probably expect markets to be quite volatile.

I added to my position in Wells Fargo today.

October 12, 2013

Wells Fargo is updated and rated Strong Buy. It just reported another excellent quarter of earnings. Revenues did decline in the quarter due to lower mortgage refinancings which generate fees. But overall, the business appears to be still growing. It is one of my larger holdings. And I plan to add to my position, perhaps substantially. It is not without risks and certainly if there is a general market decline it will fall in price. But overall it seems likely to be a very good investment.

On Friday the S&P rose 0.6% while Toronto was flat.

On Friday I was tempted to add to my Liquor Store N.A. position as the price fell. But given the rating was only (lower) Buy and the price is only down 4% since that rating it may be wiser to wait until the next earnings release comes out. Or I may enter some stink bid and see what happens.

October 10, 2013

In a remarkably strong day on the markets, on Thursday the S&P 500 rose 2.2% and Toronto rose 1.3%. Apparently this was due to meetings that were expected to take place after the close on Thursday. The rumor was that the Republicans would allow a six week extension to the debt ceiling. It seems remarkable that just a (lousy) six week extension could make the market so happy. Clearly the market is not very fearful of the shutdown and the debt ceiling.

Almost all of our stock picks were up, with many rising over 2%.

Early in the trading day there was news that Canadian Tire’s REIT was all set to go and they would be selling 15% of the REIT and keeping 85%. Around noon, the rumor was confirmed.

So with Canadian Tire now at $93.88, it may be a case of “what you see, is what you get”. That is , the REIT may now be fully priced into the stock. The next driver for the share price (aside from movements in the overall market) might be the Q3 earnings release. I expect that it had a strong Q3 but it likely incurred costs related to the REIT and it is not clear whether the market will essentially look through those earnings and focus on adjusted earnings.

Again, I have not looked at the REIT and am not really interested in it.

October 9, 2013

Stocks rose slightly on Wednesday with the S&P 500 up 0.1% and Toronto up 0.3%. Our stock picks seemed to do a little better than that on average. Notably, Stantec was up 3.0%. Very few of our stocks were down today.

My order to add a little to my Wells Fargo position at $40.10 got filled today as the stock dropped to $40.07. It closed at $40.36.

My buying on this dip caused by the political theatrics in the U.S. has been pretty cautious. Perhaps I should have grabbed CN, Stantec, Costco, Berkshires and others on their dips but I felt it was prudent to be more cautious. No one knows how ugly this little situation could get. I am hoping not too ugly at all and I am not expecting it to be too bad. But it’s nice to retain some cash just in case.

October 8, 2013

Another down day as the S&P 500 fell 1.2% and Toronto was down 0.8%.

Wells Fargo got down close to buy order of $40.10 but did not quite get there.

Alcoa was out with good earnings to kick off the earnings season today. But it’s probably going to take an end to the political nonsense to turn the market around at this time. Strong Q3 earnings will not likely over come the impacts of the political impasse. But that too shall pass.

October 7, 2013

The S&P 500 fell 0.9% on Monday but Toronto was up 0.2%/.

Wells Fargo closed down 1.7% to $40.62. I have an order in to add to my position in this company at $40.10. I have a few such “stink bids” in but this is the only one that is remotely close to being “hit”.

October 6, 2013

This week we should expect more nervousness due to the U.S. government shutdown and the pending debt ceiling limit. As of Sunday night the DOW was projected to open down 74 points.

We should soon hear news about the final prospectus for the Canadian Tire REIT. Presumably things are moving ahead with that. If so we might see Canadian Tire’s shares rise a little on the news. On the other hand it is always possible that Canadian Tire is finding little institutional support for the REIT in which case Canadian Tire’s shares would take a hit. But I suspect the REIT process is going reasonably well. The REIT offering closes the week of October 21, and I am not sure if we hear much news before then. Possibly the final prospectus would come out some time before that.

Also this week we should start to see the first of U.S. companies report their Q3 results.

October 4, 2013

The market and our Stock Picks have weather the first four days of the government shutdown quite well.

On Friday the S&P 500 was up 0.7% and Toronto was up 0.2%

Most of our Stock Picks were up on Friday.

Toll Brothers however was down 3.2% to $31.06 on concerns that the shutdown would slow or prevent closings on new home sales since they require government mortgage insurance (which is apparently shutdown). Also title insurance may not be possible with the government shut down. This allowed my order at $31.01 to be filled as the stock dropped slightly below $31 at one point. It was a just two weeks ago that I had sold some Toll Brothers on a pop up top $35.01. I am happy to have bought back at $31.01 half of the shares I so recently sold at $34.01. My purchase price is 11.4% lower than the recent sale price.

October 3, 2013

And so the market was sweating a bit more today…

S&P 500 down 0.9%, Toronto down 0.8%

Most of our stocks were down a bit. I have some orders in to buy on dips but none of my prices were hit yet. I don’t want to get in a big hurry and buy heavily on say a 3% dip instead it’s more like start to nibble on say 5% dips (although I don’t use any strict rules, so my bids were not precisely 5% under recent prices). I would nibble slowly if the market keeps going down since I would not want to spend all the cash too early. And I am not saying the market will go down. I treat everyday in the markets as a surprise. Anyone who thinks markets are predictable in the short term should prove it by using options and leverage to get rich fast. I don’t know of anyone who has done that.

Next week we will start to get a few Q3 earnings reports. Possibly that will take some attention of the government issues.

October 2, 2013

It seems the market started to sweat a bit today about the shutdown and the pending debt ceiling issue.

The Dow was down 0.4% although the S&P 500 and Toronto were down only very marginally. Actually a good number of out r stock picks were up today. Melcor was down to $19.06 and I believe it is quite attractive at that price.

Futures tonight are suggesting the Dow will open down 32 points. This afternoon Obama said that Wall Street should be worried. So far it is not much worried.

It is certainly possible that we will see some ugly down days ahead. Some people will have sold out of fear. If we did that every time there was something big to worry about we would never own stocks. So, while it could be a rough ride I have always found that basically riding out the storms has worked well. If stocks happen to decline materially I have cash and will be buying. I really can’t predict where the market is headed in the short term and that has never been my strategy. I react to what the market does and I try to buy bargains and do some selling high and buying low. Selling low has never been part of the strategy for me.

October 1, 2013

Well, it was another interesting day on the markets. How much more interesting does it get than a U.S. government shutdown? But actually the market just yawned and went up. I suspect the market will gyrate around now, this shutdown may be amusing and easy to ignore for a day or so but after a bit the market certainly might get nervous.

Today the S&P 500 rose 0.8% and Toronto rose 0.5%. Most of our Stock Picks were up.

It was interesting too, that the price of Gold fell. I have absolutely no ability predict the price of Gold but clearly today is a better time to buy than when it was at $1800 or whatever. I don’t have any plans to buy Gold but you never know perhaps the mood wills strike me at some point. If I were to buy I would go with one of the Gold ETFs that hold physical Gold. These are listed on my ETF article. But maybe the fact that Gold fell today is telling in that even the doomers are giving up on it.

September 30, 2013

So far the budget show-down and government shutdown theatrics have been something of a non-event for North American stock markets. The S&P 500 fell 0.6% today, so that was not much of a reaction. Toronto fell 0.4%.

Perhaps there will be more reaction on Tuesday if and when the shut-down actually begins. But it looks like there may not be any big reaction. Futures as of almost 10 pm eastern time point to the Dow opening 50 points higher however much can change by morning.

September 30, 2013 7:10 am Mountain time 9:10 eastern)

Given the antics and theatrics to the budget legislation and “government shutdown” in the U.S. the DOW was set to open 142 points down. While anything is possible this is likely to be a temporary situation. It could last most of October giving he pending debt ceiling theatrics that are pending. My strategy would be to buy on dips but slowly, and certainly keeping some funds in cash.

U.S. markets are up a lot this year and so at least a minor decline does not seem like such a big deal to me.

September 27, 2013

On Friday the S&P 500 fell 0.4% and Toronto was about unchanged. U.S. markets have fallen moderately due to concerns that the Congress will fail to pass a budget bill by Monday which would force a shutdown of many government departments. There is a also a looming debt ceiling that needs to be lifted. This all appears to be politics and theatrics and is likely to get resolved. Those positioned with some cash to spend on dips may find some bargains.

Dollarama is updated but rated only Weak Buy at $84.30. This is a great company. One of the best managed companies that I know of. But is simply seems to be too expensive. Admittedly I though the same when I added to this site in early 2012 at $43.49. So, I guess I missed this one. But the reality is that I have a system that seems to work well for me. My system is more likely to identify more obvious bargains than Dollarama. My system tends to assume that a company growing at 30% will not keep doing that. When a company does keep growing earnings per share at 30% it may well be that I will not have bought that company or rated it a Buy. (Though I did rate Dollarama a (lower) Buy in December 2012 at $58). I don’t worry much about the stocks I miss out on. There are always hundreds of stocks rising in price. We can’t own them all or hope to identify them all or anything close to that. My goal is that the stocks I do own or do rate as Buys rise acceptably in value. If that happens on average, we will do okay.

In any case I like keeping an eye on Dollarama since it helps me understand what kinds of things can lead to excellent profitability in a retail operation.

September 27, 2013 at 11:30 am eastern

The Dow is down about 100 points or 0.6% this Friday morning. Apparently this is due to concerns about the debt ceiling in the U.S. that needs to be raised. It’s basically impossible to know how much the market will decline as this situation unfolds. I have mixed feelings about it. On the one hand I never like to see my portfolio value decline. On the other hand the dip is likely (but not guaranteed) to be temporary which creates buying opportunities.

September 25, 2013

On Wednesday the S&P 500 was down 0.3% and Toronto was down 0.1%.

Most of our stock picks were down.

Canadian Tire was down 1.5% to $92.39. But earlier in the day it reached a new high of $94.93. As mentioned under September  16, I had placed an order to trim my position at $94 and a bit more at $95. So about 10% of my Canadian Tire shares were automatically sold as the price hit $94. My offer at $95 is for about 5% of my shares.

Back on September 5 I had placed an order add a little to my Melcor position at $19.17. Until today the price refused to drop that low and instead seemed to hover around $19.30. But today it dipped below $19.17 and my buy order was filled.

While I can never be sure of where prices will head, Melcor seems like a better bargain than Canadian Tire right now and so I am happy with the above trades.

It seems the market dropped in part due to fears that the U.S. government would have difficulty passing legislation to raise the debt limit and would therefore run out of cash. But I don’t think the market will react all that much this time around. After all we went through this nonsense in August 2011 and it got resolved so the market will likely assume it will get resolved. Still it could be a catalyst for a “correction” (also often know as a buying opportunity but occasionally is the start of something worse).

Apparently there was also a rumor that Wal-Mart had curtailed orders to lack of sales but Wal-Mart denied this.

September 24, 2013

Tuesday was another decent day for our stock picks.

The S&P 500 was down 0.3% and Toronto was up 0.3%

We had Toll Brothers up 2.2% after reports that house prices continue to rise in the U.S. and after a home builder reported good earnings. Canadian Tire was up another 0.5%. Stantec was up another 1.9%. I sold half of my fairly small Stantec position today. Sadly I had sold a third of my then Stantec position back on January 3 at prices quite a bit lower than today. The Stantec shares that I have left are in a corporate margin account and I don’t plan to sell that since I don’t like to needlessly trigger either income tax or even the burden of calculating the income tax. I make well end up regretting today’s sale of Stantec since it is such a great company. But as we should all be aware markets, and especially individual stocks can surprise us with losses at any time and so building cash and trimming some positions as they rise does seem prudent.

September 23, 2013

Monday was another interesting day in the markets. It seems like it’s been a few years since we have had even a week where markets were totally boring.

The S&P 500 was down 0.5%. Toronto was basically flat.

Blackberry / Research in Motion has a tentative agreement to be bought out for $9 a share. It’s apparently subject to 6 week due diligence period. Blackberry is free to accept a higher bid if one should materialize before the proposed deal closes or becomes more firm. The current bidders would receive a $150 million termination fee in that event.

The bidding group is led by Prem Watsa at Fairfax Financial. He has been called the Canadian Warren Buffett. Of course, he is nothing of the sort. Buffett generally only invests in companies where it seems reasonably certain that the company will be around and be much larger in 10 years. That hardly describes Blackberry. Also Buffett would require good management in place. That also hardly describes Blackberry. Buffett also says that turn arounds seldom do turn. Good luck Prem Watsa.

Canadian Tire was up 1.7% to $93.25 today. Not a huge jump but certainly interesting on a day taht the markets were generally weak. Canadian Tire jumped around 1% quite suddenly at noon. It’s possible that its planned REIT IPO has moved closer to reality. Or perhaps some analyst up-graded Canadian Tire today. Recent declines in interest rates (a modest decline which occurred with the Fed’s failure to taper) should help bring a higher price for the REIT. For the most part I am holding my current Canadian Tire position but I do have order in to trim slightly at $94 and $95.

Stantec was up 2.3% to $54.42. That is a gain of 37% this year on top of a 44% gain last year. While it does not look overly expensive I am nevertheless tempted to sell or trim my position. This has been a truly wonderful investment over the years. It can be volatile at times but over the years it has grown hugely.

September 21, 2013

My personal portfolio composition is updated. My four largest positions, Wells Fargo, Canadian Tire, Melcor and Toll Brothers make up a hefty 58% of my equities and 46% of my portfolio. There is no doubt that that is risky. If one or more of these take a significant drop ( a drop unrelated to the overall market) then I may come to ask myself how I let the portfolio become so concentrated. On the other hand I have followed these stocks for years and I am comfortable with them.

If I was not prepared to live with some (perhaps substantial) down-side risk I simply would not be able to hold this portfolio.

Contrary to what I said in my note of September 19, I did in fact sell 12% of my Toll Brothers shares on Thursday morning at $35. These shares closed Thursday at $33.84 and I had not realized that just after the opening on Thursday they had gone up to $35.01. I had mentioned I had put in orders (above market) to trim this position. In this case the order seems to have worked very well. I mentioned earlier that I had added to Toll Brothers as it fell. The 600 shares I sold at $35 were purchased around $31 within the last month. I don’t think this sort of thing would be worth bothering with if I held only say 300 shares in total. When I started this web site in 1999 it was normal for me to own 100 or 200 shares of something like Toll Brothers. As my portfolio has grown I can play the volatility up and down like this. (Though there is no certainty that will work out better than just selecting a good investment and then holding it until the price seems clearly too high.)

My cash position is now 37%. The rest is equities. I hold no bonds or preferred shares at this time.  While building cash has lowered my return this year (but I am still up a very satisfying 24% or so), I don’t regret the higher cash position and may try to move it even higher. Perhaps a high cash position makes good sense considering my concentrated portfolio. This way I have the cash to grab bargains if we do see a general decline in the markets or if one of my larger holdings tanks. There are no easy answers to the asset allocation question and certainly the right amount of cash and bonds versus equities varies widely according to individual circumstances.

On Friday the S&P 500 was down 0.7% and Toronto was down 0.9%. Most of our stock picks were down. Visa was up another 2.2% to almost $199. We had thought it was already too expensive. But as I have said many times before in relation to Visa, “it’s hard to keep a good monopoly down”. (See the report for our comments on the extent to which it has some monopolistic characteristics). It’s has not gone straight up by any means, but VISA is up 241% since we added it to this site in April 2009, just after the bottom of the big stock crash, at $58.24 rated Buy. And it is up 150% since we rated it in the Strong Buy category at $79.41 on May 6, 2011. But again at this price of $199 we are not fans.

September 19, 2013

Not to say that markets are predictable at all, but the fact that the market today gave back some of the previous day’s gains is certainly not surprising.

The S&P 500 was down 0.2% and but Toronto was basically unchanged.

A notable decliner was Toll Brothers, down 2.2%. I did not trim my position in that as I mentioned I might. I have an order in to trim at $35.

Boston Pizza was down 2.5% $22.25. I would have thought it should be rising like most of the other higher yield investments. However our last update was (lower) Buy at just under $20, so I am not a buyer at this point.

I am somewhat inclined to build my cash position a little higher. (I plan to update the page showing composition of my portfolio within a few days). I do have some orders in to trim Canadian Tire and Toll Brothers and it would nice if the prices would rise up and trigger those sells. But it is anyone’s guess if that will happen. We have had a lot of gains this year and certainly further gains are NEVER guaranteed (especially in the short term).

I notice that Buffett remarked today that stock prices were such that finding stocks to buy was not easy. On the other hand I am pretty certain he is not about to start selling Wells Fargo or Bank of America or Walmart. Buffett said that stocks were more or less fairly priced.

September 18, 2013

Well THAT was unexpected. Fed says slowdown in its bond buying just yet and so the markets rose. DOW and S&P 500 at record levels. Toronto apparently at a two year high.

S&P 500 up 1.2% today, Toronto up 0.8%.

It’s another example of how unpredictable markets are in the short term. That is not necessarily a bad thing at all, it just a characteristic of the markets and one that can be used to advantage as well. I had thought I had an order in to trim some more Toll Bothers at $34 but my order was at $35. I may trim that a bit tomorrow if it remains above $34.

September 17, 2013

On Tuesday the S&P 500 was up 0.4% and Toronto was up 0.1%.

Markets don’t move up in straight lines and it certainly would not surprise me to see the market turn down. But, basically the short term moves in the market are unpredictable…

I did sell half of my Constellation software today. It’s a great company but I decided to hedge my bet and take half of it off the table.

September 16, 2013

Monday was a strong day for the markets with the S&P 500 up 0.6% and Toronto up 0.7%.

Most of our stocks picks were up. Most notably Constellation software was up 4.2% to $181.63. I last rated the stock Weak Buy at $142 on May 18. At that time I indicated I might sell half or might not. I did not. Since then it has released an excellent  earnings report and I believe other good news. Still, with this rise in price I am tempted again to sell half of my position. Since it is not a huge part of my portfolio perhaps I will just let it ride. Sorry to be non-committal.

Wells Fargo was up 1.7%.

Canadian Tire was up 1.3% to $93.24. I am tempted reduce my position slightly. I had already reduced a fair amount at around $83 but still hold a large position. If I really wanted to reduce I would use a market order. But since I am not that eager to reduce I will instead place an an order to sell some at $94 and $95. If I only owned a small position in it I would not bother with this sort of thing. Since I have quite a few shares it easier for me to trim a little if and as the price rises.

September 15, 2013

As of Sunday night, markets futures were up on news that Larry Summers is out of the running for the Fed chair job. Also perhaps on confirmation that Syria will not be bombed.

The Summers news seems to illustrate that in the markets news often comes out of the blue. Most investors are better off keeping a relatively fixed percentage of their money in stocks at all times. Market timing does not seem to be a lucrative approach since predicting the future is always difficult.

It’s basically a sure bet that stock markets rise in the long term. So why bet against that?

With roughly two thirds of my funds in stocks and the rest in cash I figure I can do okay no matter what happens. If markets happen to crash I will be buying and eventually it will likely be proven that the decline was a buying opportunity. But meantime I would have to be willing to live with a decline in my investments.

September 14, 2013

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

Walmart is updated and rated Buy at $74.36. This is certainly not a stock that is going to double anytime soon. But it’s a relatively simple (despite being huge) company that seems relatively sure to continue to grow over the years and which is trading at a decent price. I don’t own it at this time but would not be adverse to buying and would definitely look to buy if it happens to go back to the $68 range which it could do if its next quarterly report is a little weak or if the markets in general decline for any reason.

September 12, 2013

On Thursday the S&P 500 was down 0.3%. Toronto was down (again) this time down 1.0%.

Almost all of our stock picks were down but Liquor Stores N.A. was up 2.0%.

Toll Brothers was down slightly to $32.47 But earlier in the day it was as high as $33.52. This caused my order to sell a little at $33 to be filled. As noted yesterday i will sell a bit more at $34, $35 and $36. No plans to buy any but I suspect I will buy a little if it heads below $30 though with the amount I have I should probably not buy any more unless it heads to more like $28.

Yesterday I mentioned that entering orders above or below the market can take emotion out of the decision. More importantly it can make sure the sell or buy trigger is actually pulled. It’s one thing to make a mental plan to sell at $X or buy at $Y. It’s quite another thing indeed to actually do it. I mean it is not hard to buy or sell (although it can be tough to pull the trigger in real time) but I think we all make a lot more plans to buy or sell than what we actually carry out.

As of yesterday my own account is up 24% for this year, which is rather surreal (particularly on top of the 28% form last year). That kind of return is not sustainable but it does feel nice.

Yesterday, Kevin O’Leary commented on the Canadian Tire REIT and said he would not touch it because it was all one tenant and not diversified. I believe Amanda Lang even mentioned that it was possible that this REIT IPO will be a failure to launch.

I have not been much interested in REITs. I can never get very comfortable with entities that routinely distribute more than 100% of earnings (they distribute the non-cash depreciation expense). I have not given any thought to whether the Canadian Tire REIT will be a good investment. I am not interested in it.

As a Canadian Tire share owner I am interested in selling real estate to the REIT. I’d prefer if Canadian Tire would sell at least 49% of the REIT to the public, not the mere 10 to 20% that they plan.

But in order to sell any the REIT has to be attractive to REIT buyers.

In general there is no shortage of REIT investors.

But Kevin raises a valid concern about the attractiveness of this REIT. If I were into buying REITs, the single tenant would not bother me much, not when that tenant is very stable and profitable and well financed, as is the case here. What would concern me is the fact that Canadian Tire will own 80% or more of the REIT and manage it in addition to being the only tenant. In this scenario the REIT management may be always in a conflict of interest. But Canadian Tire is setting it up with long-term fixed leases so that eliminates much of the concern. (They can’t lese property to the stores at bargain rates). And I suspect the REIT management will be strongly incented to work for the REIT’s benefit, not for the the parent company’s benefit.

But the bottom line is that is some danger that this new REIT will not be well received. That would mean it fails to launch or it gets the properties at a bargain price (a high yield is required).

If the REIT failed to launch then Canadian Tire shares would fall in price. But that would be a buying opportunity.  If the REIT is is initially priced too low (yield is too high) then that is not such a big deal since only 10 to 20% of the REIT is actually being sold to new owners. In that case the Canadian Tire shares would fall a little but probably not too much.

The bottom line for me is I am pretty satisfied to have sold some of ]my Canadian Tire shares on the way up but to still be holding a very large position. The stock price may rise or fall and I can react accordingly. (Sell on rallies, buy on dips). There is never certainty, but I am comfortable with this investment.

September 11, 2013

On Wednesday the S&P 500 was up 0.3% and is just a shade under its record high of early August. Toronto was unchanged. The Toronto stock index remains noticeably below its highs of early 2011. It’s all time high was back in 2008 before the credit crisis. At last check Toronto seemed reasonable valued at this time. I would not chase the higher performance of the U.S. market at this time. I would tend to have investments in both countries. I have nothing against investment sin Europe and many other parts of the world but have simply not looked at individual stocks in those places and have not looked too closely at global ETFs, though what looking I did did not seem to turn up compelling values although some of the countries were deemed attractive.

Most of our stock picks were up today. But as far as my own portfolio goes, the most notable gainer was Toll Brothers up 2.6%.

Recently I had added to my own already large position in Toll Brothers as its price fell. I bought shares at $32.08 (July 24),   $31.21 (August 14) $30.53 (August 28)  and $30.15 (Sept 5). Roughly, this took my allocation to Toll Brothers roughly from about 9% to about 12% of my portfolio which could certainly be considered risky. (Perhaps over indulging my appetite for this stock as it fell).

Toll Brothers closed today at $32.50.

So I now ask myself if I should start to trim? I think I should and so have now placed orders to sell just these recent buys at $33, $34, $35 and $36. That is, if it happens to hit those prices in the next month. I don’t know if this sort of add on dips and trim on rallies will work out well or not. I often do  this to some degree on an ad-hoc basis, but pre-entering the orders will take any further emotion out of the picture and also allows me to sell even if the stock blips above my sell price only briefly. In any case I will still have quite a large exposure to Toll Brothers even if these sells are all hit.

Recent buy orders that I placed to buy Canadian Tire, Costco, CN, Berkshire and Canadian Western Bank below the recent market price (of a week or so ago) now seem rather unlikely to be filled. But one never knows in the markets. Movements can be sharp and unexpected. The notion that markets are ever or were ever predictable is simply a rose colored view of history.

September 10, 2013

And Tuesday was another good day for the U.S. market with the S&P 500 up 0.7%. Toronto managed to be down 0.2%. The Canadian market has seriously under-performed the U.S. market this year.

Canadian Tire released its preliminary REIT prospectus today. There was no reaction in the Canadian Tire share price. Perhaps there will be a bit more reaction tomorrow after analysts get a bit more time to digest the numbers. I thought perhaps it was showing the real estate was worth slightly more than previous estimates. In any case the REIT transaction is pretty well priced into the stock at this point and so probably we can’t expect much more from the Canadian Tire stock price when the REIT hits the market which could occur with a month I suspect. Canadian Tire is planning to sell only 10 to 20% of the REIT and retain the rest. I’d prefer to see them sell more and cash in while the REIT market is still paying a lot for real estate due to low interest rates. Selling 10% of the REIT does (and has) surfaced value but it is really just financial engineering. Selling half or more of the REIT would be more of a true substantive transaction. Canadian Tire was also looking for some kind of bank partner for its huge credit card operation and that could give us another boost to the share price.

Today I saw that Liquor Stores N.A. was down under $15.50 so I added to my position in that company. I bought at $15.35. I only had a small position so decided to add to it. It is not one of my higher rated stocks but then again it is the highest yielding selection on my list and it gives me some diversification.

September 9, 2013

Monday was a good day in the markets with the S&P 500 up 1% and Toronto up 0.3%. Most of our stock picks were up.

Toll Brothers was up a hefty 4.7% to $31.87. Therefore my recent buys of that stock may have been good timing. It certainly has its risks. Wells Fargo and Bank of America have both indicated that mortgage business will be down noticeably in Q3. Yet both rose today.

Most of the stocks I own (or at least the industries they are in) would seem to be economically sensitive. That is they do better as the economy improves. (I suppose most stocks do netter with the economy but certainly commodity stocks and many individual companies can be disconnected from the economy). One could argue that much of our success in the last 20 months in particular has been based on a certain amount of faith or a bet that the economy was doing better. But I also look at the the valuation of each company and try to avoid being in stocks that are too rich in terms of the P/E ratio (Toll brothers being an exception as it is much more cyclical and still working its way out of a huge profit slump).

The next update will be for Wal-Mart. I try to think of these as companies not just stocks and not just as ratios from financial results.

I find it interesting to try to get a grasp of the size and nacre of the business.

I have read Wal-Mart’s January 2013 annual report and based on that my summary description of Wal-Mart is as follows:

Wal-Mart operates retail stores in various formats around the world based primarily on being a low cost provider of general merchandise and groceries in (mostly) large format stores. It is the largest retailer in the world and groceries account for more than half of its sales. It is the largest grocer in the United States. The company had revenues of $469 billion in fiscal 2013. Total assets were $203 billion and total invested equity was $76 billion.

Wal-Mart’s U.S. stores accounted for 37% of the store count, 60% of the square footage, 59% of sales, 71% of operating income and 49% of assets. International revenue accounted for approximately 57% of the store count, 32% of the square footage, 29% of net sales and 22% operating income and 44% of assets. Sams warehouse clubs accounted for 6% of the store count, 12% of sales, 8% of the square footage, 7% of operating income and 7% of assets.

Operating in 27 countries including the United States with 10,700 stores, 1072 million square feet and 2.2 million employees. Outside of North America it uses about 66 different local banner names. Major Countries outside of the Unites States are (in declining order of store count) Mexico, Central America (Guatemala, Costa Rica, El Salvador, Nicaragua and Honduras) United Kingdom, Brazil, Japan, China, Canada, Africa (largely South Africa), Chile, Argentina and India. No stores in Europe (except the UK) and just twenty in India. It appears from the balance sheet that it owns the great majority of its land and buildings, although it certainly rents a significant number as well.

Wal-Mart may be a boring business and it took over a decade to get back to (and then surpass) its share price high that it set in 1999. In 1999 stupid investors drove the share price far too high. No fault of Walmart’s. I added it to this site in April of 2006 rated Buy at $46.79. It’s up 55% since then. Not spectacular in seven years but certainly not bad at all. Given the recent price increases it may not be much of a Buy at this time. I will evaluate that after I crunch the numbers in the next few days. But I think we can be pretty certain that it will continue to grow over the years. It still has a lot of the world left to conquer.

It was interesting to read today that the Canada Pension Investment plan is a major partner in buying Neiman Marcus for $6 billion. This is a luxury department store chain of some 42 large stores an outlet chain called Last Call. It’s not obvious to me that a luxury department store is a great business. I believe it would sell mostly luxury brands but those same brands would be available in other stores as well like Saks. Perhaps the luxury bands themselves are able to impose rules against discounting and therefore keep the prices up. To my mind it is the various luxury brands that are the better business and not the luxury department stores that sell the brands. I believe people have  a lot of brand loyalty but I doubt there is a lot of loyalty to a particular store. But perhaps Neiman Marcus has a lot of in-house brands as well. When it comes to retail it seems like the Dollaramas, the Costcos and the Walmarts that offer the best value to consumers may be the better businesses by far.

September 8, 2013

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

I entered some orders today to move some cash in my TD Waterhouse investment accounts into TDB 8150. I understand this account pays 1.25% per year as noted int he bottom row of the table of stocks picks above. Rooting around the TD site and also on sedar.com I was not able to find the current interest rate but I believe it is still 1.25% per year. Mostly I just leave my cash in the investment account cash category so that it is instantly available for investment. However, at this time I have relatively large cash balances and so I figured I may as well collect some interest.

In my RESP account I only had three stocks (Canadian Tire, Melcor, and Toll Brothers) and a lot of cash (having recently sold some shares in that account) and so I just placed an order to buy some Wells Fargo for that account. In this account I also have orders in to add to the Canadian Tire and to buy Canadian Western Bank – but those orders are below the market and may not be filled.

September 5, 2013

On Thursday the S&P 500 was up 0.1% while Toronto was up 0.7%

Our stock picks have done well the past few days.

Canadian Tire is at $91.65. That is a gain of 32% this year. Whenever I mentioned Canadian Tire as a good investment over the past few years I was usually met with a look of deep skepticism and confusion. When this stock was trading around 115% of book value last Fall it was pretty clear it was under-valued (see my comments of last December 8 and December 3). Good investments do not have to glamorous. Now at about $92, it’s not the bargain it was. But management is still working to “release value” with its pending listing of its real estate in a REIT. Canadian Tire is up an even 300% since it was added to this Site in February 2000. It happened under the noses of investors and shoppers but few suspected it was one of the better investments to choose in 2000 or in late 2012 and at various (but not all) times in between.

With Toll brothers touching $30 and a bit below I added a few more shares today. Also I placed an order to add to my Melcor position at $19.17.

North American auto sales are back to record levels. There is much skepticism about the U.S. economy but it seems to chugging along pretty nicely.

September 3, 2013

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

Canadian Tire was up 2.2% and Stantec jumped 4.7%.

Shaw Communications fell 5.8% probably because its wireless spectrum that it plans to sell has declined in value now that Verizon will not enter Canada.

Many investors constantly try to predict where the market is headed. Last week many were convinced stocks would fall due to Syria. Over the weekend that got at least delayed and so stocks rose on Tuesday.

I find it better to acknowledge that in the short term the markets and certainly individual stocks can move unexpectedly. I don’t don’t think I can predict short term movements. But I can take advantage of them when they occur. I can trim stocks that rise unexpectedly and buy stocks that fall. Sometimes that won’t work out but on average it seems a reasonable strategy. Another strategy I use is try to be invested in good quality companies. With good companies that seem well priced I am comfortable buying on dips. If I had no idea at all what a stock “should” be worth then I would be like most people and not comfortable buying on dips. The more familiar I am with a company and the more confident I am about its value then of course the more confident I can be in buying on dips. Market volatility can be very much the friend of the informed investor.

September 2, 2013

Melcor is updated and rated (lower) Strong Buy at $19.36.

Toll Brothers is updated and rated Speculative Buy at $30.61. It’s a good company but the share price is already pricing in a very large earnings recovery. Given the need for earnings to rise rapidly to justify the share price, it is a speculative pick. I originally added it to the site in June 2011 at $21.03 as a way to participate in the U.S. housing recovery. I have quite a large exposure to this stock, it is my third largest position. I have continued to buy as the price fell recently. Possibly I am getting too emotionally attached to this stock.

Recently longer-term interest rates have risen while short term interest rates have remained near zero. In isolation, this bodes well for banks since get higher interest rates on loans and bond investments while continuing to pay very little on deposits. Perhaps higher interest rates will slow mortgage sales. But overall the outlook for U.S. banks seems strong. Our picks there are Wells Fargo and Bank of America. I have not looked at any other U.S. banks and therefore have no opinion on any others.

August 29, 2013

Canadian Western Bank was up 4.7% as fears of insurance losses due to Alberta floods were mostly unfounded. I hope to buy back the shares I sold on that fear but it’s hard to buy back at a higher price. I entered an order to buy a bit over $28.

Markets rose today despite Syria. I don’t think it’s worth bothering to try to predict short term movements, instead I focus on trying to take advantage of random movements in individual stocks. Trim a little on gains, buy on dips, or just hold good stocks and forget about it.

August 29, 2013

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

A notable gainer was Constellation software up 2.8% to another record high. It’s a great company by seems expensive at this point. I will think about reducing my position.

After the close, Canadian Western Bank came out with earnings. Given the storm damages in Alberta (where they insure some cars and homes), the earnings seemed surprisingly good to me. I would like to buy back the shares that I sold several weeks ago.

August 28, 2013 10:40 am eastern time

With the markets down yesterday, I decided today to enter of a few trades. I bought some Toll Brothers. I also entered hopeful bids on some stocks. Canadian Tire at $83.10, Costco at $105.10, CN at $95.50 Berkshire at 105.10. I just add the 10 cents in case there are a lot of bids at even dollars in which case I will be a bit ahead of those bids.

August 27, 2013

On Tuesday the S&P 500 fell 1.6% and Toronto fell 1.3%. This was apparently due to fears of U.S. involvement in the troubles in Syria.

Such world events have never factored much if at all into my investing. I have never, to my recollection,  sold due to fears of such events. Instead I try to trim positions that seem fully or over-valued and I buy what seems to be good value. I try to keep some cash around to take advantage of lower prices when from time to time. In keeping with that I added a bit to my Wells Fargo position today. My inclination will be to slowly add to positions if markets decline further.

August 27, 2013 7:15 am

I have read the Q2 report for Melcor. It continues to do well. I am confident it will continue to be a good investment long term. Shorter term it would drop if house prices drop and especially if new house construction in Alberta slows. There is always that risk. But overall I am comfortable holding it and I am thinking of adding to my position if I can get it around $19 or a bit over.

On Monday

August 24, 2013

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

Toll Brothers fell 3.9% as a report showed that new home sales fell in July. Mortgage rates are still low but have increased quite a lot in recent months. Still Toll Brothers management was quite upbeat in its earnings release last week.

With the Canadian dollar down near 95 cents I transferred some U.S. dollars to Canadian. Generally I view my U.S. investments to be permanently in U.S. dollars but I ended up with more cash in U.S. dollars than Canadian and it seemed opportune to transfer some to roughly equalise the cash in each currency. I don’t really want to transfer any more but I would be tempted to do so if the Canadian dollar fell to 93 cents or especially to 90 cents.

August 23, 2013, 9:15 am eastern

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

This week Target’s earnings report indicated that its new Canadian stores “contributed” a loss of 21 cents per share. There were also indications that sales were slow and customers were disappointed that prices were higher than in the U.S.

From the start I noted that Target in Canada would not have great prices because for one thing it paid so much for its leases, $1.8 billion paid to take over the Zellers leases, then $10 or $15 million to expand or completely renovate each store. After all of that there was still rent to pay. Target now reportedly expects it may not start making money in Canada until 2015. Some things in business are hard to predict but this seemed reasonably predictable. Though I don’t recall any mention, in Canada’s business news, of the high occupancy costs that Target was facing in Canada.

August 22, 2013, 7:30 am eastern time

On Wednesday the S&P 500 was down 0.6% and Toronto was down 0.8%

Market declines are not all bad news since they provide a chance to buy good companies at more reasonable prices. CN and Costco come to mind.

Toll Brothers released good earnings on Wednesday morning but the stock was about unchanged on the day. With its high P/E this stock was already pricing in good earnings growth. The company has been able raise house prices substantially this year and expresses confidence that sales growth will continue for perhaps several years.

August 20, 2013

On Tuesday, the S&P 500 rose 0.4% and Toronto rose 0.6%. Canadian Tire rose 2.6%, more than recovering yesterday’s decline.

Toll Brothers rose 3.1% ahead of its earnings release scheduled for tomorrow morning. Stantec was up 2.1%.

Seeing these fluctuations it often looks like one could make money by constantly placing sell orders for a portion of holdings 2% or so above market and buy orders 2% below. I imagine the academics have tested this and it is unlikely to be that easy… also it takes nerves of steel. And the selling on small rises might wipe out the chance to ever make much bigger gains.

I bought a small amount of shares of Liquor Stores N.A. today at $15.80.

August 20, 2013 (10:15 am eastern)

Liquor Stores N.A. Subordinated debentures are added to the list above rated (lower) Buy at $104. Yielding 4.6% to maturity in April 2018, and fully taxable these are not too exciting but may be a reasonable choice for fixed income. I note that, for example, Bombardier pref shares have a higher yield, but they also have a higher interest rate risk as they are perpetual. I am not sure I will buy any of these, if I did I might enter an order at $100 and see if I get any. I may buy the common shares instead.

August 19, 2013

Liquor Stores N.A. Ltd. is updated and rated (lower) Buy at $15.98. While the yield is quite attractive, keep in mind that a good yield is nether a sufficient nor a necessary feature of a good investment. I’d be willing to take a relatively small position in this.

I will provide some analysis of its convertible debentures tomorrow. They trade at 104% of par but I would consider placing an order at par and see what happens.

On Monday the S&P 500 was down 0.6% and Toronto was down 1.2%

Toll Brothers was down 3.4% as apparently all the home builders fell on fears that higher interest rates will slow the housing recovery. Canadian Tire was down 1.5%.

Interest rates have risen again this past week. I have no idea whether this is the start of a trend up or just another bump that may soon be retraced. I do think that ultimately interest rates will rise but I can’t guess when.

Preferred shares and all high yield investments tend to decline in price automatically with higher interest rates. Especially longer term and perpetual high yield investments.

August 18, 2013 

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

Our stock picks were mostly up.

I have read the reports for Liquor Stores N.A. and crunched the numbers and will plan to post the report on Monday. As of right now I would rate it (lower) Buy at $15.98. I may buy some. The convertible debentures pay 5.85% and trade at about 103 (103% of par). The conversion price is $24.90 and maturity is April 30, 2018.  These are worth considering as fixed income. I might enter a buy at 100 and see if I can get any.

August 15,2013

On Thursday the S&P 500 was down 1.4% while Toronto was up 0.5%.

Several companies including Walmart reported weak results which has the market worried about growth.

Most of our stock picks were down. A notable exception was Toll Brothers, up 3.4%.

If stocks go down I will be looking to add to positions. But I don’t want to rush to buy anything.

August 14, 2013

The S&P 500 fell 0.5% on Wednesday and Toronto was about unchanged.

Couche-Tard was down 2.9% to $58.48 and is worth considering.

I expect to have an update for Liquor Stores N.A. and Melcor by about Sunday.

I am off for a family trip early tomorrow to Moncton where I have been many times to visit relatives and then later on to my homeland in the Sydney area of Cape Breton where my family has operated a successful and well maintained Motel business for almost 50 years now. These days I don’t think anyone would be wise to open a single location independent Motel or Hotel but my family’s property has managed to fend off the challenge of the bigger chains for decades now. If you are thinking you would like to own your own small business, you might like my article that compares owning a business to owning shares through the stock market. Both are investing but there are a lot of differences too. (A publicly-traded company you own shares in won’t give you a job just because you own shares, but neither will it call you about a plugged toilet).

August 14, 2013 11:15 am eastern

Melcor released earnings this morning. At a quick look I think the earnings are good and the outlook positive. The headline numbers show a drop in earnings due to the costs of setting up the REIT. However I agree with the company that the adjusted earnings that show an increase in earnings per share are more relevant.

I added modestly to my Melcor position this morning.

With Toll Brothers down the last few days I also decided to pull the trigger and add modestly to my Toll Brothers position this morning.

A few subscribers have asked about Liquor Stores N.A. where the share price has declined noticeably after an earnings release. I have taken a preliminary look at the earnings release but have not yet ran the numbers, which I plan to do. I am inclined to Buy at this price. The earnings release did show some some negative items on an adjusted basis and seemed to indicate the next year had some headwinds. But I suspect that the company will continue to do well in the long term.

Bombardier preferred shares have declined partly due to higher interest rates and partly due to operational issues at the company. These shares do face risks if interest rates rise. Also bigger risk if the company were to really falter badly. But the yield seems attractive at this time and I would be comfortable buying these.

August 12, 2013

On Monday the S&P 500 was down 0.1% while Toronto was up 0.4%. We had Toll Brothers up 1.8%. Melcor was down 2.4% but it is so thinly traded that day to day movements are not very meaningful.

Blackberry was up 10.7% on news that it wants to look at strategic options such as going private or being bought out. It’s pretty sad because this probably means that even the company itself has given up on any real future. This sort of thing is very speculative and I would not be too interested in speculating on it. But but certainly it could see a decent return if the right buyer comes along.

August 11, 2013

On Friday the S&P 500 was down 0.4% and Toronto was down 0.1%. Our stock picks on average were down a bit more than that.

I reviewed the Canadian Tire earnings release and everything seems to be in order. While the valuation is not as compelling as previously, I am still comfortable holding these shares. The last rating was (higher) Buy at about $84. Now at about $90 the rating would likely be Buy. I don’t particularly give any extra value for the idea that they will seek a financial partner for the credit card portfolio but it is probably a positive factor. Both the REIT initiative and this finance initiative will not happen for some n=month yet. And so possibly the share price could retreat a little just for that reason as the market’s enthusiasm could want due to the wait. I would likely be looking to add to my position is the share price fell to about $83. That’s not to say I think it will go to $83 or should go there. I simply own a lot of shares as it is and would not likely buy back unless there were a pull-back to the $83 level.

I have updated the composition of my own portfolio. I am now at 41% cash and 59% equities. In many ways I would rather have less cash. But as stocks rose I have taken profits and so my cash has risen. Also I sold the Canadian Western Bank shares just to wait and see what happens with any insurance losses due to the Alberta floods and other weather events.

August 8, 2013

Canadian Tire opened for trading at $86 but then quickly rose to a high of $90.49 and closed the day at $89.45, up 7.1%. The earnings were decent but an added bump came form the fact that they will seek a strategic partner for the credit card operation. In general its seems like the company is trying to do various things push the share price up, namely the REIT and this partner for financial services. I plan to update the analysis within a few days and I suspect it is still a reasonable buy at this price. I did however sell about 25% of my shares at around $89. I may regret that later but I may get a change to buy back at $83 or so if the stock drops. Usually over time stocks do pull back and don’t advance in straight lines. I had earlier sold some shares in Canadian Tire at $83 just to be prudent since I had such a large position.

The S&P 500 rose 0.4% while Toronto rose 1.3%.

Most of our stock picks were up today. The Q2 earnings have come in fairly strong for most companies both in Canada and the U.S.

August 8, 2013 (7:19 am Mountain)

Excitement about Canadian Tire abating , open now projected at $85.28. Well these things usually take a bit of time to settle out, it looks like the headline earnings growth was 16% but was 4% on an adjusted basis, so okay, but not great as far as earnings.

August 8, 2013 (6:53 an Mountain, 8:53 eastern)

Canadian Tire earnings are out and look pretty decent. Announced intention to do something strategic with the credit card operation (they are not selling the operation). I would imagine the stock would rise on this news.

Sure enough TD is showing the open could be $87 that is the bid / ask right now.

August 7, 2013

Today the S&P 500 was down 0.4% and Toronto was down 0.5%.

Almost all of our stock picks were down as well. Constellation Software was an exception and was up 4.2%. Toll Brothers was down 3.0%.

Canadian Tire is expected to release earnings before the open tomorrow. It’s my biggest holding and I am cautiously optimistic that it had a good quarter. It was a late Spring and so possibly the quarter will not be so good. We shall soon see. I expect the credit card division will have done well.

I was just taking a look to see if Canadian Western Bank’s insurance customers at Canadian Direct are mostly in Ontario rather than western Canada. I could not see a breakdown (there may be but I did not find it). I did read however that they have reinsurance and catastrophic losses. So maybe they won’t be hurt much by the Alberta floods or Ontario floods. It’s really just not obvious to me if they will hurt much or not. The fact they have not announced any losses would seem to suggest that perhaps it was not a big deal for them. (In which case I sold my shares too hastily). On the other hand perhaps they have no obligation to report any losses until they report earnings which is probably early September. If they do have a lot of customers that were flooded by they have reinsurance then the fight will be on to see if the reinsurance is going to cover them. Overland flooding could be excluded. Alberta insurance companies are being pressured to “honor” claims for sewer backup even when technically a sewer backup associated with overland flooding was excluded from the policy. Things could get interesting. There could also be a fair amount of vehicle damage due to flooding, and that typically is covered as I understand it.

August 6, 2013

The S&P 500 fell 0.6% today and Toronto fell 1.1%.

Notably we had Toll Brothers down 2.5% to $32.20. I have consistently indicated that Toll Brothers is a speculative pick because it has a very high P/E which mostly reflects that it is still climbing back from the impacts of the housing crisis. I think the stock tends to get pushed around because it’s hard to know what it is really worth and because of various speculations about where housing prices are headed. I am not much bothered by this decline and I will buy more if it continues to fall. Since I already own a lot of it I put my Buy order at $30.10 though I don’t particularly expect it to fall that far, although it certainly could.

Visa got some bad news today as a judge ruled that the maximum fee on debit transactions should be 12 cents and not 21 cents. Although apparently this make not take affect for quite some months and could be appealed. Before 21 cents was adopted as their cap, I believe Visa was charging more like 28 cents on debit purchases. Also they had some crazy system where they (strongly) encouraged the use of a signature rather than a PIN on debit transactions and then charged the retailer something closer to 100 basis points when the signature was used. I believe retailers sued VISA over that.

Meanwhile in Canada I believe debt transactions have basically always been under about 12 cents and I recently heard they were 8 cents. And that is for the purchase of any amount on a debit card. The retailer pays about 8 to 12 cents per transaction plus I understand the debit machines cost a fixed rate of about $40 per month per machine.

Visa has been trying to expand from its credit cards roots and is now heavily involved in debit cards. Basically Visa would probably like to collect a significant toll on every debit transactions.

But it’s interesting to think about this. It seems to me that the variable cost of a giant electronic network to process payments should be close to zero. And I suspect the fixed costs could be covered if they charged something like one basis point on every transaction (1 cent per hundred dollars). Basically Visa and other payment networks would like to take electronic money transfers that should cost very little and charge very fat margins on them.

Now I am all for making a profit. But I am not in favor of very large profits when the service seems to be a monopoly. And it does look like a natural monopoly situation. One central open network could allow the transfer in either direction from any bank account to any other. We should not need multiple networks. But if its one network then the profit has to be regulated.

It seems to me that until recent years paper cheques were centrally processed for a very low costs. Banks and central banks did this (and still do) in some kind of cooperative fashion. Electronic money transfers should costs a lot less to process than paper cheques and yet the likes of VISA want to charge a lot for it. And they really want to set up as near-monopolies all the while claiming to be subject to intense competition.

In Canada Interac has operated as a non-profit entity owned by the banks. Its costs and charges are very low and it was partly as a result of that that Canada has been at least 15 years ahead of the U.S. in adopting the wide-spread use of debit cards. Visa would like to change that in Canada as well.

Regardless of whether VISA is a good investment at this time (which is not entirely clear), it is not a company whose ethics I respect. The same applies to MasterCard.

Think about it. COSTCO operates on a net profit margin of just under 2%. That is the net compensation to Costco share owners for providing the stores and all that goes with it. Meanwhile VISA and MasterCard seem to think they should earn 2% from retailers for an electronic transaction. Something is wrong here. Visa and MasterCard already charge interest to those who pay late so why do they need this fat 2% from retailers? I suspect they charge it because having established dominant positions as quasi monopolies, they can. With the advent  of electronic transactions why did merchant fees not decline? Something is really quite wrong.

Maybe I am just griping because I sold my VISA too early. But really something is wrong here.

August 5, 2013

Stantec is updated and rated Buy at $50.46. The stock has risen 13% since we rated it a (higher) Buy on May 25. It is up 27% this year. Incredibly, it is up just over 1900% since we first added it to this site as one of our first ever picks and as a Strong Buy in September 1999. Since that time Stantec has pursued the same strategy of growing both organically and by acquisition. It has been extremely well managed. The stock price has certainly faltered from time to time but the business itself has not skipped too many beats. With the recent price increase the stock is not as attractive as it was earlier this year. However it still appears to offer reasonable value. My plan is to hold the shares I have and to look to add more if it should have a pull-back to perhaps the $45 level. (I don’t have any hard and fast rules on that sort of thing but that is my thinking at this time.

August 4, 2013

Visa Inc. is updated and rated Weak Buy at $184. (essentially a hold) This is a fantastic company. However its price has already risen spectacularly over the past few years and it now appears expensive and is pricing in a lot of growth. If I still owned it I would be tempted to sell half of what I owned or not to have a huge position in it. But a small position would be okay.

We first rated Visa on this site as  Buy at $58.24 on April 15, 2009. This was near the bottom of the 2008 2009 crash when everything looked cheap but felt risky. Since then I mentioned many times that it had monopolistic characteristics. Most of the time since it was added to the site it has been rated Buy, it was rated (lower) Strong Buy in May 2011 at $79.41 and at one point prior to that was rated Weak Buy. Also at one point it was temporarily removed from the list for a time as the report had gotten very far out of date. Personally I bought on several occasions but then sold too soon.

On Friday most of our stock picks were up. Most notably Toll Brothers was up 2.8%.

I am sitting with something like a third of my portfolio in cash. I have been missing out on some recent gins because of that but that is okay. I don’t need to swing for the fences. And it seems like we seldom go a whole year without something throwing stocks into a bit (or more than a bit) of a panic so most likely there will be opportunities that way at some point. Having cash at that point will be advantageous. But I don’t advocate being out of the market altogether just because it might fall. It always might fall, but over time it rises more than it falls. And if there is not some general panic at some point, there are ALWAYS individual bargains out there to re-deploy cash at some point..

August 1, 2013

The first day of August was a strong day in the markets. The S&P 500 was up 1.2% to a new closing record of 1707. Toronto was up 0.9%.

I am feeling a bit Giddy about the performance of our stock picks this year given today’s action.

Stantec was up 5.4%. That makes 26% this year (it was rated (higher) Buy at $37.14 to start this year) and a staggering 1903% since Stantec was first added to this web site as a Strong Buy at a split adjusted $2.50 in September 1999. It was one of our earliest stock picks and has been the best overall gainer. Their business model has not changed but they have gotten a LOT bigger. Sadly, it is not one of my own bigger positions but it does represent 4.8% of my equity portfolio. By the way I just don’t go in for the idea of putting something like  1% into a stock. If I can’t put at least 3% in, what is the point? unless it is just an initial buy with a hope to add more. I have not read the latest results and so I don’t know what I would rate Stantec at today. I suspect a Buy rather than (higher) Buy, but I don’t know. I don’t think I would rate it Sell.

Another big gainer was Constellation Software up 6.8%. Based on my latest update (from May) for this stock I suspect it continues to be a great company but looks quite expensive.

Our U.S. bank stock picks were up as well today. Also the Oil sands ETF, CLO up 2.4% on news of TransCanada’s planed pipeline to the east and also the general upward push in the markets on good economic news today.

With all this good news the trick now may be not to get over-confident and too exuberant.

I ended up selling the rest of Canadian Western Bank shares today just because I suspect the next earnings release in early September will be hit hard by insurance losses due to the Alberta floods. I will buy some or all of it back if the the stock does drop several dollars. On the other hand if it does not drop the worse that has happened is I have more cash and will I miss out on some gains in CWB. Well by early September we will see if I have gotten a little too cute in trying to sidestep short-term news on CWB. My usual practice would probably be to just hold on and be prepared to buy on a dip.

And then there is Barrick Gold. I mentioned this company July 1 and July 3 when they pre-announced that they would be having (another) huge write-off for Q2.

Well the numbers are in and they now have negative retained earnings to the tune of almost $5 billion. Now to be fair they have paid about $4 billion in dividends since 1998. But it looks like the grand total of earnings in its entire history is now either negative or some tiny number. This is a company with $18 billion in share capital much of which they have had for some years. They had $13 billion of share capital as far back as 2006. Again to be fair not all of that $18 billion was cash forked over by investors, some it came from issuing shares for a large acquisition (Placer Dome) a few years ago. (it’s unknown how much real investor cash had been put into Placer by actual shareholders and how much was just market gains). Still it appears that quite a few billions (maybe $10 or so, to as much as $13) in cold hard investor cash was placed in the hands of Peter Munk and company at Barrick and their job was to make a return on that money. But with accumulated earnings over all the years since their creation of about zero, they have made no return for their investors. It takes a staggering incompetence to achieve such a record. And to do it over a period where Gold was up hundreds of percent is truly a notable feat of incompetence. (well, in my opinion at least).

 

July 31, 2013

Today the S&P 500 was about unchanged while Toronto was down 0.8%.

Our Stock picks had a better day than that with Toll Brothers up 3.2% and Stantec up 2.0%. Visa was spanked down 7.5% on a court case loss involving debt card fees. I hope to update the report for Visa very soon.

I sold half of my Canadian Western Bank shares today on the theory that they will announce fairly significant insurance losses due to the Alberta floods. I hedged my bets by (so far) keeping the other half.

I neglected to mention yesterday that I had sold my small Bombardier position. They make wonderful and exciting products but they seem to struggle to make a decent profit level. I held these shares in an RESP account and and had a decent gain on them and just decided to sell.

July 30, 2013

On Tuesday the S&P 500 was about unchanged while Toronto was down 0.7%

Potash corporation fell 16% on news that a huge Russian Potash producer, the world’s largest would exit a pricing cartel. I don’t own any potash stocks (or any commodities for that matter save some oils sands ETF units). My sympathies for those that own it. But as for the company itself I am not too sympathetic at all. Potash Corporation had long belonged to a price cartel called Canpotex. I can’t have much sympathy for that kind of price fixing. Especially when Canpotex probably artificially (and significantly) raised the price of fertilizer which is a nasty thing to do in a world where millions go hungry when farmers in Africa can’t afford fertilizer.

I have no idea what Potash Corporation is worth. This development also illustrates the fact that sometimes things can come out of the blue very unexpectedly.

Other news today indicated that TD Bank announced a significant insurance loss due to flooding in Alberta and Ontario. (That should hardly have been considered a surprise however) I alluded to the same happening for Canadian Western Bank in my July 23 comment. I thought I had probably mentioned it earlier but I don’t see it.

Canadian Western Bank has a home and auto insurance business and will surely have suffered significant losses due to the Alberta floods. I don’t think that is any  concern at all in the long-term but it could certainly push the price down temporarily.

I was very tempted today to sell some of my Canadian Western Bank shares. It might even be wise to sell them all and hope to buy back at a lower price when it announces its insurance losses.

Meanwhile we had Canadian Tire up 1.6%. And FirstService was up over 6%. I have long liked FirstService but it did not look like a buy at all in the last update.

July 29, 2013

The most recent of the free newsletter was sent out…

http://www.investorsfriend.com/July%2027%202013.htm

On Monday the S&P 500 was down 0.4% and Toronto was up 0.2%. I did not note anything of much interest happening with our stock picks.

It is in the news that Hudson’s Bay Company will purchase Sak’s Inc.  for some $2.9 billion. Hudson’s Bay will pay $16 per Saks share. Saks shares appear to have topped out with a needle peak at About $36 in early 1999 and then crashed to $5 and then clawed back to $20 and bumped around only to crash to just under $2 in March 2009 (just another of the sweet sweet bargains that were around in early 2009 as the market was predicting the end of the financial world or something). Then it clawed back to the $10 range and finally then on up to $15 on rumors of a sale.

Apparently Hudson’s Bay can extract some value by selling off and leasing back the real estate. Though one wonders why Sak’s could not have done that themselves.

I visited Saks on fifth avenue, Manhattan in March. As I documented in the daily comments below, I was not overly impressed.  The place was snooty. I am not sure why store clerks have earned the right to be snooty. No price tags on the first floor or two. The difficulty is that these days it is too easy to comparison shop and it’s hard to maintain huge margins even on luxury products unless they are proprietary brands. It’s the luxury brands that have the cachet and not so much the luxury retailers.

I don’t particularly see a great future for this combination, but we shall see.

July 25, 2013

S&P 500 up 0.3%, Toronto flat on the day.

Toll Brothers was down another 1.1% to $31.95 and the low for the day was $31.00.

Visa was up 4.2% to almost $195. Our ratings on this stock for the past few years (as of the start of each year, except as noted) was: 2013: Buy at $151.58, 2012: not on list at start of year but added back on March 28, 2012 rated Buy at $119.35. 2011: Buy at $70.38, 2010: Weak Buy at $87.46, 2009: Added to the site on April 15  rated Buy at $58.24. Over these years I mentioned numerous times that Visa had characteristics of an unregulated monopoly. I sold it too early myself, then bought back and again sold too early. I intend to update the report in the next week or so. I suspect it will look rather expensive at this price.

July 24, 2013

S&P 500 down 0.4%, Toronto was down 0.6%.

We had Toll Brothers down 6.2% to $32.31. This is a more speculative stock given its high P/E ratio. The market seems undecided about this one as contradictory news comes in about the housing market. I grabbed a small addition to my position at around the $32 mark and placed an order to grab a bit more at $30.10 if it goes there. Other than Toll Brothers it seems our stock picks were mixed today, some up, some down, nothing of much interest.

I notice Empire, owner of Sobeys has announced the sale of 68 Safeway stores to Crombie REIT. I am a bit confused about when this would happen because I would not have thought that the Safeway deal had closed yet. I don’t follow Empire. But I think this is impressive that Empire / Sobeys moved this fast. In contrast it is a bit bothersome that Canadian Tire planed something like none months to get its REIT off the ground. Also i prefer the Empire approach of selling off the real estate to an unrelated party. Canadian Tire in contrast is “selling” its properties to a REIT that it will own 80% or so of. In effect Canadian Tire is in substance not doing much at all but is just doing some financial engineering to “release value”. If REITs are willing to pay silly prices for real estate why not just sell to an unrelated REIT and grab a very long term lease?

July 23, 2013

Today the S&P 500 was down 0.2% and Toronto was down 0.1%.

Toll Brothers was up 2.1%. Canadian Tire was down 0.4% despite news that Canadian Retail sales were unexpectedly strong in May. CN fell 3.1% on concern about increased regulations. It’s a great company but still seems expensive. My “stink bid” is set at $90 – probably unrealistically low but you never know what strange things can happen in the markets.

Canadian Western Bank fell 3.6% and the chart shows that almost all of the decline came at the very end of the day on high volume. Possibly some news has leaked about insurance losses in Alberta due to the floods. Or maybe some large institution just needed to sell a lot of shares. This drop does not bother me at all. Canadian Western Bank appears to be a well run and reliable operation. It will almost certainly continue to grow over the years. If, in the meantime the market would like to offer up its shares at lower prices, I am fine with that.

I sold what amounted to 60% of my Berkshire Hathaway shares today and now hold 200 shares.

I was reading in this morning’s newspaper that the price for Alberta heavy oil (from oil sands) is about $90 per barrel and that this price had been as low as $50 in January. I can’t pretend to be able to predict oil prices and have not looked at the oils sands companies. Still it seems to me that the oil sands ETF symbol CLO at just under $13 has not moved much on the recent positive news. And it is well below its historical peak and the P/E ratio at 17 is not that high assuming that profits could improve quite a lot with this $90 price. (However, I am not aware what this price was as a year ago. I recollect from news stories that it was considered quite low last Fall but I am not sure about last July). I understand that certain bottlenecks in Cushing Okalahoma had caused the price differential or spread for heavy crude to be especially large. I understand that the bottleneck situation is much improved due to the reversal of flow of an Enbridge pipeline and also due to more oil being shipped by rail. The same situation was causing West Texas crude to trade far lower than Brent crude.  If the spread is now much reduced then if Brent crude stays high (and I have no prediction on that) then the western Canada heavy crude price should stay high and I would thing the CLO units would then do well. The bottom line is that I certainly don’t have all the information or all that much to go on, but with the big recovery in that heavy oil price I feel good about owning this oil sands ETF and may add more to my position.

July 22, 2013

S&P 500 was up 0.2% to yet another record close. Toronto was up 0.6%.

I may sell some or all of the rest of my Berkshire Hathaway. I have a good gain on it and it no longer looks like the bargain that a year ago or even at the start of this year. Also it’s anyone’s guess what it’s earnings will look like in Q2. Most of its businesses are probably doing well. There should be a gain on the Equity Index puts. But the insurance business is always a question mark. Maybe a mistake to sell…

Here is a graph of how the Stock Picks from January 1 have done. (They have done very well indeed). The graph has all the Buys and Sells but omits the Weak Buys and Weak Sells as those are pretty close to a hold. I have always omitted those on the graphs going back to the year 2000. The fact is that our stock picks are doing usually well this year and are unusually consistent.

 

July 21, 2013

Bank of America is updated and remains rated Speculative (higher) Buy at $14.75. As I read the Q22 report, it is clear that many aspects of the operation are improving greatly. I started to plan to buy some more shares. But then spending some time reading the annual report I focused on how complex this bank is. It is not the ideal type of investment because it is definitely somewhat speculative. But it is crawling out a hole and likely will be a good investment at this price. It is nowhere nearly as well managed as Wells Fargo, but it may be the better investment at this price. I may or may not add to my position.

This week we will get a number of Q2 reports for Canadian companies.

July 20, 2013

Wells Fargo is updated and remains rated (lower) strong Buy now at $44.45. It seems to be a very well run company. It should continue to do well over the years. From time to time it will likely have a bad quarter or year simply due volatility in certain gains and losses. It is my fourth largest position. I lament somewhat that I did not leave it as my largest position but instead I sold a considerable amount of shares as it rose, to be prudent. In reality that was probably a very good decision (given the facts and risks) even though in hindsight it would have been better to keep all the shares.

The S&P 500 was up 0.2% of Friday (to another record closing high) and Toronto up 0.4%.

For our stock picks, overall on average there was not much change but we did have Stantec down 2.2% and  Microsoft was down 11.4%.

July 18, 2013

Another good day in the market with the S&P 500 and Toronto each up 0.5%. We had Stantec up 2.8%, Fedex up 4.2% (although we had not rated that one highly), Wells Fargo up 2.1%, Bank of America up 3.2%. Generally most stocks on our list were up.

The next update will be for Wells Fargo which probably will remain in the Strong Buy range or possibly (higher) Buy. I may also update Bank of America which is more speculative but will probably continue to be rated fairly high.

Apparently Detroit filed for bankruptcy today. This was not unexpected. Still it could put a damper on the market’s mood.

I note that yesterday’s comment failed to upload until today apologies for that.

July 17, 2013

S&P 500 was up 0.3%. Toronto up 0.4% as Fed chair Bernanke sooths the markets.

Our stocks picks had a good day with Bank of America up 2.8%, Toll Brothers up 1.8%, and Wells Fargo up 1.1%. Most of our stock picks were up.

2013 has been a great year in the markets for our stock picks so far. It starts to feel like I should have stayed more fully invested. But one should not be too greedy. (Not that greed is any way shape or form a bad thing, let us not be hypocritical about that, but being prudent is also wise.)

July 16, 2013

The S&P 500 was down 0.4% and Toronto was down 0.1%. None of our Stock Picks moved much and most were sown slightly.

Goldman Sachs and Citigroup both “beat expectations” in earnings releases. Home Builder confidence was higher in a report today which bodes well for Toll Brothers.

Wednesday’s, markets will likely be driven by the reaction to a speech by Fed chair Ben Bernanke.

July 15, 2013

The S&P 500 was about flat today but Toronto was up 0.5% as it was boosted by the Loblaws / Shoppers Drugmart deal.

Most of our stock picks were up today but Toll Brothers fell 2.2% to $33.84. They don’t report earnings until around August 22. I expect a good report at that time.

It appears that Loblaws has bid about 20 times earnings for shoppers. And the market cheered this by pushing up Loblaws stock by 5.4%. The fact that companies are willing to pay 20 times earnings provides support for stock prices. Canadian Tire is trading at only 13 times earnings.

Much was made of the fact that the transaction will be immediately accretive to earnings for Loblaws. However adding to next year’s earnings per share is neither a necessary nor a sufficient condition to make this a wise investment for Loblaws. I have no idea if it is a wise investment for Loblaws. And knowing that it is accretive earnings does not educate me on that point. Loblaws can borrow money at low rates. Borrowing money at 4% and investing in something that earns 5% is accretive, but not necessarily wise. And it can issue shares, as it is doing in this purchase at 20 times earnings. If I can issue shares at 20 times earnings then any purchase under 20 times earnings is accretive. But 20 items earnings is still only a 5% earnings initially. Whether this works out for Loblaw investors comes down to how well Loblaws can manage the operation in the years ahead.

July 14, 2013

Alimentation Couche-Tard is updated and rated (lower) Buy at $61.88. This company has rather quietly grown int a giant. It has been a fantastic investment. Thirteen years ago the shares traded under $3.00 and they are now about $62.00. It is very well managed. It has grown by acquisition. I started following it in March 2005 at a price of $17.40 and rated it (lower) strong Buy at that time. In 2008 the share price got as low as $10. Great companies are certainly not immune to large price declines but if they are great companies, then the price recovers and grows over time.

Some companies blow their brains out on acquisitions. But it can also be a very profitable strategy. Two cases that I follow where it has worked extremely well have involved simple businesses that made acquisitions in the very same line of business. These two are Couche-Tard and Stantec. Liquor Stores N.A. may be another example. RioCan may be another.

July 13, 2013

On Friday, markets were relatively flat. Among our stocks picks most of them fell somewhat on Friday.

Our two U.S. banks stocks were strong with Wells Fargo up 1.8% and Bank of America up 2.0%.

I reduced my position in Berkshire Hathaway. Basically, I am looking at the fact that I am up 21% this year to date on top of 28% last year and therefore thinking of trying to make sure I don’t end up giving back too much of that if I can help it. Looking at what I hold and thinking about what I might trim, Berkshire has one of the lower ratings and had increased further since my last rating. So, I decided to trim.

It seems I would have done even better this year had I not ran with a fair amount of cash. But I think it was prudent to run with cash. Markets or individual companies can drop at any time for many reasons and a decent allocation of cash is useful to take advantage of bargains from time to time.

I have updated the composition of my own portfolio. My portfolio is particular susceptible to a decline by virtue of the simple fact that it is concentrated in so few stocks. Luckily it seems those have been quality stocks but certainly there is a risk to being that concentrated.

July 11, 2013

Ben Bernanke the FED chair indicated that accommodative monetary policies (probably meaning low short-term interest rates) will remain in place for the foreseeable future (even if QE 3 – the bond buying that pushes down longer term interest rates is scaled back). This pushed the S&P 500 up 1.4% to a new record high. The Toronto stock exchange was up 1.5%.

The big winner for our stock picks was Toll Brothers, up 6.6%. Also, Stantec was up 2.9%.

Very soon the attention in the U.S. will turn to the Q2 earnings releases. They will need to be pretty good to sustain recent gains.

I have enjoyed the rise in stock prices and I am confident that int he long term stocks will continue to rise. But at the same time I see the wisdom of taking some money off the table to be more prepared just in case there is a pull-back or in case better bargains are identified. The percentage on a portfolio that should be in equities is a complex personal matter. Rules of thumb based on age simply don’t cut it.

Berkshire Hathaway A shares have hit $175,644. The B shares are $116.98. We last rated it at (lower) Buy at $111.82 on May 11. I am inclined to maybe trim my position there. It seems like it has up a little too much this year. But good for Warren Buffett. I am not hearing much from all those mis-guided people who for so many years moaned that the stock was not doing well – completely oblivious to the fact that Buffett’s seeks to grow the earnings and value of the company and does not try to push the share price up. He was doing his job all along and now investors have realized it and pushed the stock price up.

July 10, 2013

Markets were about flat in the U.S. and Canada today.

We had Canadian Tire up 1.2% and Stantec up 2.7%. Couche-Tard made a big recovery up 6% and being down 5% on its earnings release yesterday. What this illustrates is that earnings should be released after the close so that there is more time to digest the news.

My order to trim Canadian Tire at $83 got filled today and that sold about 16% of my shares in that company. It’s my largest holding and so I had lots of room to trim.

I’ll plan to post an update on the composition of my portfolio this weekend. I’m not sure what my percentage cash is at the moment.

July 9, 2013

In my July 6 update just below I mentioned that I was thinking of buying some of the oils sands ETF, CLO. I did buy some of that on Monday but forgot to mention that in the update of yesterday.

The S&P 500 was up 0.7%, Yahoo is still showing Friday’s price change for Toronto so as far as Yahoo knows, the rain may have washed Toronto off the map. Google Finance Canada indicates Toronto was up 0.7%.

Toll Brothers went up 6.4% on news that foreclosures in the U.S. are way down. It seems I should have bought additional Toll Brothers shares on Friday or Monday instead of merely being tempted to do so. But I already had it as around 9% of my portfolio so I did okay today.

Alimentation Couche-Tard fell 5% on its earnings release. And that was on top of a 2.3% drop on Monday when the earnings news apparently leaked out early. This is a great company and possibly the pull-back is an opportunity. I will plan to update the report within the next week or so. Meanwhile we can let the price settle out. I suspect it will still look expensive but I need to run the numbers.

Most of our stock picks rose today. Many rose about 1%.

July 8, 2013

On Monday the S&P was up 0.5%. Off hand I am not quite sure what Toronto did because Yahoo Finance seems to think it last traded on July 5. I have mentioned before that I have used Yahoo Finance for at least 15 years. But lately it slow to load sometimes only loads half the page and in general it makes me think that Yahoo is a company that is circling the drain. I really should switch to something else. It’s pathetic when one of the original internet portals cannot even serve up a web site that loads properly.

Wells Fargo was up 1.8% to a new all-time high. You may be aware that over the past few years and especially in 2008 and 2009, it was popular to suggest that the U.S. banks were technically broke. Yet Warren Buffett was telling us that Wells Fargo was a great buy. And gee, it turns out Buffett was right again and the doomers were wrong. Wells is a great company. But I did take the opportunity to trim my position today. It did not quite hit my price of $43 that  I mentioned below under July 6 but when I saw it at $42.95, I figured, close enough and changed my order to a market order and sold what amounts to 23% of what I held.

The whole train derailment tragedy did not affect CN’s price much today. It also did not affect Berkshire Hathaway. It may not be well known that one of the Berkshire businesses in the manufacture and rental of crude oil train cars. This through its Marmon subsidiary. All those cars that we see with PROCOR on the side of them belong as I understand it to Berkshire. And of course Berkshire owns Burlington Northern which carries lots of crude oil these days. And it could possibly have an exposure in insuring or reinsuring the Montreal, Maine and Atlantic railway although I have seen no suggestion of that.  In any event Berkshire is so big that even if crude shipments are curtailed because of this it should not have a very noticeable impact on Berkshire.

I would imagine that the Montreal, Maine and Atlantic will be bankrupted by this unless it has awfully good insurance. Also early indications appear to strongly suggest negligence on the part of that railway and I would also guess that its license to operate may be in jeopardy. I guess it’s natural for the rail road company to deny negligence but it seems despicable that they have pointed fingers at the fire fighters who dealt with a fire in the locomotive hours before the derailment. I am not sure the executive of the rail road would be safe on the streets of that town after saying this.

July 7, 2013

The train derailment in Quebec is obviously very tragic. It seems clear that dozens were killed. (I find it strange that there were no reports of anyone escaping burning buildings with or without injury. It appears that anyone in the burned buildings had no chance. Hopefully most of those were commercial buildings unoccupied at night but apparently there was at least one night club.)

This will be a big deal for the rail industry. I would expect new safety requirements and possibly restrictions on shipping crude oil by rail. This would seem to bolster the arguments for the proposed pipelines.

It may be crass to mention it but I imagine that rail stocks could decline at the open tomorrow morning. The train that derailed was owned by a small private company. But I imagine that there are some negative implications for all rail companies. The only one I have analyzed is CN. Certainly if it happens to fall to $90, I would be a buyer. Perhaps its more likely to decline just a few dollars in which case I would not likely be a buyer.

Costco is updated and rated Weak Buy / Hold at $112. This is a wonderful business. It’s a simple and predictable business with strong competitive advantages that is almost certain to increase its earnings per share for many years to come. I would like to report that it is a Buy but seems somewhat too expensive. A possible strategy would be to take a small position and then hope to buy additional shares at a lower price. Or just wait and see if there comes an opportunity to buy in at a lower price.

It would be tempting and not difficult to “torture” the numbers until they confessed that this is a Buy. This could be done simply by assuming that the P/E will stay at 24. In which case the shares will rise with earnings and its seems clear the earnings will rise. But assuming the P/E will stay at 24 would be aggressive. It is reasonable to pay a higher P/E ratio for a high quality and growing company like Costco. But a P/E of 24 is difficult to justify. At this price it’s unlikely to be a terrible investment if held for five years or so but also perhaps not that likely to be a great investment.

July 6, 2013

RioCan is updated and rated Buy at $25.49. It seems like a reasonable investment choice. The biggest risk factor is further increases in interest rates.

On Friday I was thinking about the rise in oil prices and noting that the Oil Sands ETF symbol CLO has not risen much. I was prepared to buy a relatively large amount of that ETF on Friday but the market was just closing and so I will likely buy some on Monday.

On Friday we had the S&P 500 up 1.0% and Toronto down 0.3%. Wells Fargo and Berkshire Hathaway were each up 2.1%. Toll Brothers was down 3.0%. I was tempted to buy some more Toll Brothers but did not pull the trigger. I may place an order to grab some if it sinks some more.

I entered hopeful offers to trim my Canadian Tire at $84 (correction this should read $83) and Wells Fargo at $43.

The lower Canadian dollar has helped out with my returns as measured in Canadian dollars. For the most part that is sort of noise as I intend to leave those funds in U.S. dollars more or less permanently. However if we got down towards 90 cents I would likely move some U.S. cash back into Canadian dollars. I am not sure that I would sell any stocks to do so. So this is noise but nevertheless has a pleasant sound. The lower Canadian dollar will also nbe good for the economy. My understanding is that fundamentally the Canadian dollar should be more like 90 cents U.S. (purchasing power parity) and actually I was quite surprised that the rapid move from 70 and 80 cents up to the $1.00 level and above a few years ago did not do more damage to Canadian industry.

July 5, 2013 (7:00 am Mountain time (9:00 eastern)

The jobs report came in at 195,000 which is better than expected. Dow futures up 166 points, interest rates up a little. There is a delicate balancing now as the market decides if the jobs report is “too good” meaning that quantitative easing will begin to be tapered off. It’s not at all clear that the market gain will last the full day but so far the reception to the news is quite positive in the stock market. Maybe a day to consider trimming some positions especially for those of us with large positions in certain stocks.

July 4, 2013

U.S markets were closed today. Toronto was up 0.2%. No large movements among our stock picks but it was nice to see Canadian Tire up 1.1%.

On Friday morning we will get the latest jobs report. The hope is that it will be lukewarm. If it is too cool then the market will worry about a lack of growth. If it is too high then the markets will worry that quantitative easing will end earlier. Or the market may focus on announcements today that England and Europe intend to keep interest rates low for some time. Or maybe the market will instead worry about Portugal’s finances or the unrest in Egypt. As of 11 pm eastern the futures suggest the DOW will open 134 points higher. But a lot can change by the time the opening bell rings.

July 3, 2013

Today the S&P 500 was up 0.1% while Toronto was down 0.3%. Canadian Tire was down 1.1% to $80.62. At one point today it was up to $82.45. Given this is my largest holding I perhaps should have had an order in to sell some at $82 or whatever just to take advantage of volatility. There did not seem to be any really notable movements in our stock picks today just the usual bobbing up of down.

I had a bit of correspondence with Barrick Gold as I could not resist pointing out to them how abysmal it was that they had achieved so little in the way of earnings over the years. If I understand and recall their telephone response correctly it was along the lines of: yeah we were really dumb in the past and blew a lot of money but now we have a new CEO and are going to do things differently. Does not exactly inspire confidence. In my opinion, they have become a national embarrassment.

July 2, 2013

This week belatedly starts off with the S&P 500 flat on the day and Toronto up 0.4%. Canadian Tire was up 3.0% apparently for no particular reason.

July 1, 2013

The next update will likely be for RioCan. If you search back in these comments I have not been a fan of RioCan for a variety of reasons. In the last month or so the unit price declined from the $29 range to the $25 range. This was due to higher interest rates.

The next shoe to drop with the Q2 report will be that they will show negative fair market value impacts which will lower GAAP earnings. This type of mark to market accounting is not something that I am a fan of. It was nice though when it was always a positive factor since it was introduced a couple of years ago. I believe it came along with IFRS accounting. The company will focus on Funds from operations which will probably show growth. And quite possible the market will ignore the fair market value losses on the buildings and may consider that this has already been fully reflected in the lower unit prices.

RioCan reports that Target is spending about $8 to $10 million per store in renovations, at Target’s expense. If baffles me how Target could come in and pay about $10 million per store to take over leases and then pay About $10 million to renovate a store and then still have to pay the rent  and still somehow make money.  And why does it make sense to spend $10 million on a leased store without locking in the lease for many additional years beyond the existing Zellers leases? (albeit the Zellers leases had I believe 10 to 15 years left in many cases). And if they can. what in the world was Zellers excuse for not making money in those locations since they did not face the $20 million in costs that Target has. Obviously Target knew all this going in, but it would certainly not surprise me if they announce some losses in Canada. Also I have said from the start that Target is unlikely to offer any big bargains to customers. It seems to me that Target Cando is a high cost operation. I am not sure what RicCan gets out of the deal. Eventually they should get a lot higher rent when the Zellers leases run out, also the presence of Target will up the rents in the rest of the shopping center.

I have been no fan of Gold companies over the years. I took a look at Barrick Gold’s balance sheet and some history there. The company does pay a dividend. But overall it looks like their performance has been quite poor. They currently have $18 billion in equity share capital and $4 billion in retained earnings. When it reports Q2 it may have zero retained earnings. Even with some large dividend payouts (that total about $3.9 billion since 1998) that looks pretty bad to me. This company has definitely been good at raising money from investors (by share issues for cash and by buying Placer Dome for shares). The record in returning money or growing book value for investors looks relatively poor to me even with the dividends. I have asked the company for some information on that. From about 2002 through 2012 they enjoyed an amazing increase in the price of Gold. And so for this company to have a poor record of profit over this period (which I believe it has) seems inexcusable.

This Barrick Gold situation is what Warren Buffett refers to when he talks about being a wise allocator of capital. Investor capital is scarce and ought to be treated with great respect and good stewardship. Buffett would not have dumped capital into a hole like Barrick has apparently done. Society benefits when investor capital is placed in the hands of skilled allocators like Warren Buffett. As Kevin O’Learly would say, some managers basically murder dollar bills and that is not good for investors or for society as a whole.

Now, none of this is to say that Barrack would be a bad investment today. I don’t know. It may not even be knowable given the uncertainty of both gold prices and exploration costs. But it seems fair to say that management has so far been relatively poor, certainly not stellar. It apparently needs to be “cut-off” from access to additional capital lest it continue to make poor use of capital.

On a share price basis the VERY early investors in Barrick have done okay. Those few who were in the company by January 1986 have seen compounded return so 12.6%. That is very good. This is based on the U.S. stock price. Canadian returns would be worse given that the Canadian dollar was far lower over most of the period.

But those that got in 20 years ago at the start of 1993 have seen compounded average returns (with dividends) of 1.44%. An investor in January 1995 has had a slightly negative return. Investors in January 2000 have seen a an average return of 0.39%.   Those invested at the start of 2003 have seen compound gains of 1.28% (lost in share price but did receive dividends). Investors in January 2005 have lost 3.42% per year.

June 29, 2013

On Friday the S&P 500 was down 0.4% while Toronto was up 1.0%.

Interesting moves included Shaw Communications up 5.4% to $25.24 on the release of a good earnings report. I have not mentioned it much lately but our last rating was Buy at $21.06 on October 28, 2012.

Then there was Blackbury (formerly Research in Motion) down 26% to $11.08 on a poor earnings report. Our last rating was Highly Speculative Weak Sell at $10.86. I mentioned in the report that the company was difficult to predict but might be considered a highly speculative. Buy for more adventurous investors.

For the First half of 2013 our Stock Picks have done very well.

The three Strong Buy are up 14% (Canadian tire), 21% (Wells Fargo) and 19% (Melcor) for an average of 18%. My own portfolio is also up 18.0%. The 19 Buys were up an average of 11.9% each. There were only three decliners and the biggest decline was 8%.

Here is how our Stock Picks look graphically as of today. (Weak Buy and Weak Sells are considered basically Holds and are not shown in the graph (we have always done it that way) because we were basically sitting on the fence with those.

June 27, 2013

S&P 500 was up 0.6% today and Toronto was up 0.4%.

Almost all of our Stock Picks were up. Notably, Wells Fargo up 1.3%, Toll Brothers up 2.6%, Canadian Tire up 1.1% and Shaw Communications up 3.7%. It’s surprising how the equity market has bounced back from the recent dip.

Fixed income has not recovered much. I think people with any length at all to their fixed income, such as five year bonds or longer (including in mutual funds and ETFs) are going to be surprised at the losses in June.

My own portfolio is, in theory, highly risky, far too concentrated and not at all balanced. In practice it has been relatively stable and I believe dropped less than the equity market (certainly less than the Toronto market) during the recent dip and it has recovered better than the market as well. But there is no doubt that my portfolio leaves me at risk if something nasty happens to one of my six largest holding.

I don’t hold any fixed income. I do hold cash. I am increasingly thinking about the fact that not all fixed income is created equal. Money market funds, very short term bonds and short GIC or even five year GICs behave pretty much like cash (except GICs are locked in). Longer term bonds are vastly different than cash and at this time expose investors to a lot of downside risk while offering scant returns. There are some equities such as dividend stocks and REITs and preferred shares that can behave somewhat like equities and somewhat like bonds. REITs have some potential to grow since they are businesses but they also behave a lot like long-term bonds and should be viewed with a great deal of caution right now. They WILL get clobbered if interest rates rise much. Perpetual preferred shares also get hurt with higher interest rates but at least the returns are usually better than bonds, so the risk reward tradeoff is better. Some preferred shares face almost certain redemption on their reset dates and if they are trading above the redemption price then a capital loss is baked in. Canadian Western Bank preferred shares are an example.

There was news today that Rona is closing stores and taking a $220 million “charge”, of which $195 million will be “non-cash” (non-cash how comforting!). I am pretty sure the sees of demise were plantedd by Rona years ago went it opened big box stores and tried to compete head to head with Home Depot .

In other news this week Hudson’s Bay is considering buying Saks. Apparently Saks is a beleaguered chain. As I mentioned under March 28, I visited Saks 5th Avenue in New York. A very snobbish place where they did not even seem to have prices indicated for anything on the first floor. Higher floors were less snobbish. The whole concept is probably obsolete. Who wants to pay high prices for snooty service? And why would Hudson’s Bay think they could run these places? I do applaud “The Bay” for abandoning that incredibly stupid name and going back to the Hudson’s Bay name. But nothing else about the place impresses me. The outgoing CEO of Hudson’s Bay has been lauded lately. For what I wonder? Has there been any profits of note?

June 26, 2013

S&P 500 was up 1.0% today and Toronto fell 0.5%.

Most of our Stock Picks were up today. That includes long-time favorite Wells Fargo up 1.8% and relatively recent speculative pick Toll Brothers up 1.9%.

With the recent partial recovery and with some recent buying on dips and with the decline in the Canadian dollar helping out, it seems my own account is down only about 1.5% form its late May peak, which puts me up about 17% this year to date which is an excellent return (particularly given how bad the Canadian market has done).

But what of Gold? I never have any opinion on where the price of Gold is headed. I have never invested in Gold or Gold companies or Gold ETFs. (Well save for one ill-fated small investment in Bema Gold back at the time when BreEx was flying high.) From that I learned how Gold companies tended to have little or no profits and were basically priced as lottery tickets and I never touched the stuff again. And I really never regretted that, since why should I abandon a system of picking stocks of profitable companies that has worked fairly reliably for me just because some people won a small lottery prize with Gold in the 2000’s.

Possibly Gold will recover, I have no idea. It is clear that it is cheaper now than it was in about three years. Technical traders who by definition love to sell low and buy high will not consider buying now. If I were interested in Gold (which I am not) I would be more inclined to buy today than at the the former high prices.

As far as Gold Miners it’s hard to get interested in that when I see that Barrick Gold has become a national embarrassment. I wonder how much money Peter Munk ever made for investors as opposed to what he made from investors? According to its Q1 balance sheet it has $19 billion of shareholder invested capital just $4 billion in accumulated retained earnings from its total history. And I seem to recall reading that it facing a big write-off so that may wipe out the retained earnings. Unless it has paid out a LOT of earnings as dividends (and it has paid at least some) this is a very pathetic record indeed. If the purpose of Barrick was to create jobs for many people and to create big salaries and esteem for its executives it has done well. If its purpose was to create returns for its share owners, it seems to have failed pretty badly. And let’s not forget we just finished ten years of strong Gold prices. The real damage in terms of wealth destruction may lie ahead.

The efficient market hypothesis suggests that none of this can be predicted from looking at balance sheets or past history or anything else and that the ability to beat the market is purely random. Well, there is SOME truth to it but it’s certainly not 100% true and I have found some value in actually looking at fundamentals and financial statements.

Well, I suppose I should not get over confident, else the investment gods will smack me down.

June 25, 2013

The S&P 500 was up 0.9% and Toronto was up 1.4%.

Among the stocks I follow there were impressive gains from Boston Pizza, up 4.1%,  RioCan up 3.7% and Bank of America up 3.0%. Almost everything was up today.

With some good economic figures from the U.S. the market turned its attention away, at least for today, from Bernanke and the  possible tapering off of quantitative easing. Soon the market will turn attention to the Q2 earnings reports.

June 24, 2013

It was a negative day on the markets with the S&P 500 down 1.2% and Toronto down 1.3%.

For whatever reason Canadian Tire managed to gain 1.2%.

Despite some recent losses, I don’t feel bad about how our Stock Picks have done.

I think it is fair to say that I have mentioned the concept of taking profits a number of times and that I have done some of that. So I sit with a good amount of cash right now for bargain hunting and I assume that many subscribers may be similarly positioned. I think it is fair to say that I warned that long-term bonds were in a a bubble and should be avoided.

High yield entities have been very popular but I have never had a big exposure to them and was not a big fan, especially lately as yields crept lower. That has worked out well.

I mentioned on Thursday that I had placed an order to buy some Canadian Western Bank if the share price hit $27.10. That order was filled near the open today.

June 23, 2013

I have updated the article on long-term historical asset class performance for the first half of 2013. Given the weak performance of bonds and especially Gold in the first half of 2013, I thought it was worthwhile to update this article.

FirstService is updated and rated Weak Buy / Hold at U.S. $29.75 or CAN $31.10. I have followed this company since 2002 and I respect the management. Around Edmonton its Colliers International signs are ubiquitous. I currently having one of its franchise companies College Pro painters do a little exterior painting for me. So I was hoping the numbers would look good. Unfortunately the profitability does not look strong and the accounting is quite complex. Things could look a lot better going forward since it has just eliminated its preferred shares which were an expensive form of financing (They paid 7% and were not tax deductible to the company, meanwhile it si able to borrow 12 year money at 4%). On the other hand they may face a goodwill write-off their operation that looks after foreclosed houses in the U.S. Overall it looks best to give this company a pass. Any buying would have to be considered quite speculative.

June 22, 2013

The composition of my own portfolio is updated.

On Friday the S&P 500 was up 0.3% and the Toronto index was up 0.2%.

Canadian Tire was down 2.4% to $77.75. Seeing this decline I bought back (at $78.12) some more of the Canadian Tire shares that I had recently sold at $86.50 and $82.23.

The market may be predicting that Canadian Tire will decide not to sell a portion of its Real Estate into a REIT after all or that the valuation will be lower given recent declines in REIT prices. Most assuredly the valuations would be lower. As far as the ability of selling a portion of the real estate into a REIT to “surface” or make apparent the value of the real estate, that is not overly important. A transaction to “surface” value does not create value. To the extent that Canadian Tire has attractive real estate the value is going to show up either more quickly in the REIT transaction, or more slowly over time in the form of a competitive advantage and higher profits over the years. The proposed REIT transaction is supposed to make more apparent the value of Canadian Tire but it is going to have minimal impact on the consolidated profit or balance sheet because they are planning to retain about 80% of the REIT and only sell 20% to outside shareholders. My thinking was that if fools were willing to pay extraordinary values for real estate, then Canadian Tire might have been wise to lock in very long term leases and sell all of it to the fools. But they wish to maintain control of the real estate. Selling 50% to 100% of the real estate at the top of the market would have locked in value rather than merely surface value.

In any event Canadian Tire looks like good value to me.

Year to date, the S&P 500 is up 11.6% and Toronto is down 3.5%. Our Three strong buys are up an average of 16.3% year to date. Our average for all 23 stocks rated (lower) Buy or higher is 9.8% year to date. My own portfolio is up 15.8% this year to date.

June 20, 2013

The S&P 500 fell 2.5% today and Toronto fell 2.4%.

I did a bit of buying in the morning, which was early because the markets fell further in the afternoon.

I bought some Toll Brothers at $31.21, it closed at $31.70

I bought some Canadian Tire at $79.57, it closed at $79.65

So my prices on those worked out okay even though markets in general were down quite a bit more in the afternoon.

I also placed an order for Melcor if it should fall to $17.90 and for Canadian Western Bank if it should fall to $27.10.

While no one can predict markets in the short term, I don’t see any reason to expect a real dive in the markets. As documented in these daily updates I had sold some shares in recent weeks in order to reduce risk and to have cash for buying. If and as stocks fall my strategy will be to look to buy.

I think it is fair to say that in these comments and in articles updated recently I have indicated that long-term bonds were likely to be a bad investment. In the last couple of weeks long-term bonds have been falling as interest rates rise.

Stocks also fall with higher interest rates, all else equal. But while 30-year bonds were yielding 3% not long ago, stocks were never priced so high as to reflect 3% interest rates. Stock P/E ratios were a bit higher than historic averages. Bond P/Es (the reciprocal of yield) were basically at all time highs. So long-term bonds have a lot more to fear from higher interest rates than do stocks.

June 19, 2012

So, apparently the FED has signaled that the “quantitative easing” consisting of the Feds buying $85 billion per month worth of bonds and mortgage securities will taper off sometime this year and end around this time next year. And all this will occur only if the economy is strong enough. Although totally expected the S&P fell 1.4% after this news and Toronto fell 0.8%.

I am not convinced that this is anything to worry about. Markets are always unpredictable. But if interest rates rise somewhat and the economy continues to recover that does not really portend disaster for stocks. If markets decline much, my thoughts will turn more to buying.

June 18, 2013

It was another strong day on the markets with the S&P 500 up 0.8% and Toronto up 0.6%. Most of our stocks picks were up.

Yesterday I listed the 10-year compound average annual earnings per share growth rates for all the companies currently on my list for which I had 11 years of adjusted earnings data in my spreadsheet. The growth rates were very strong. Now that would not be at all impressive if these were mostly new stock picks that I had recently added to the site. (Since I could have simply added stocks with strong past growth rates). Instead many of these stocks have been on the list for over ten years. Few of them are particularly recent. The one with negative earnings “growth” Toll Brothers, however has been on the list for only two years. RioCan another low earnings grower (albeit it has a large dividend) has been on the list for less than two years. The highest grower, Couche-Tard has been on the list for eight years, it was first rated as (lower) Strong Buy. Since then it is up 239%.

If a stock grows its earnings at 15% per year (three of the stocks below were higher than that) then its earnings grow by 305% in ten years. If that stock was purchased at a reasonable P/E and if the P/E has remained stable or not declined much then the investor is going to have seen returns pretty close to that 305%, plus dividends.

When you boil it down to basics the key to big returns on stocks, is big earnings per share growth (combined with buying at a reasonable price). And the key to big earnings per share growth is (believe it or not) LOW dividends and (most importantly) a high ROE.

If a company has and maintains a 15% ROE and no dividend then its earnings per share will grow at 15% per year. (If it paid a 50% dividend it would grow at 7.5% instead.)  And if it starts out with a reasonable Price to book ratio or price to earnings ratio and if that ratio is stable then the stock price must rise at 15% per year. Now, in reality the P/E ratio and P/B ratio will bump around and it will fall went the whole market’s in a slump. But as long as the P/E eventually recovers, 15% ROE and no dividend generates 15% returns per year as long as the P/E ratio eventually is as high as it was at the start.

This is the very simple math that sent Buffett looking for companies that he figured could be relied upon to deliver growth in earnings per share of 15% or more. And he found that PREDICTABLE growth was available in some (but certainly not all) boring low-tech companies and often companies with very strong consumer brand names.

Having observed as (literally) a little boy that if one could compound money at a rate like 15% one would become very rich, Buffett soon set out to gather the seed money (from massive paper routes as a teenager and some early employment and from performance fees on a hedge fund partnership). He worked like a dog and ferreted out a few companies where he could make 15% plus on his own money and for the hedge fund. Then he kept doing that for 60 years (but stopped the hedge fund partnership when he was 39). He was very wealthy by age 30. He was beyond wealthy by age 40 and on his way to becoming for a time the wealthiest person in the world. His long term average return is around 20% per year compounded in the past 50 years and somewhat higher than that in the early years.

It seems to me that Buffet’s simple formula is worth trying to copy. Find stocks that can be predicted to grow earnings per share at relatively high rates and which sell for reasonable prices. Buy, wait, reap rewards.

To a good extent I have been doing this, but Buffett’s approach would probably suggest more focus on the the company being high quality (high ROE) and not as much focus on it being a bargain. The great company will grow to offset a somewhat (but not ridiculously) higher price paid.

This formula will tend to work. But meanwhile the stocks prices may jump all over the place and predictions of gloom and hyperinflation and all manner of calamities keep most people from staying in the market through the ugly times or buying more shares at the ugly times. But a few brave people will persevere and become rich with simple thinking like this.

June 17, 2013

It was a strong start to the week with the S&P 500 and Toronto both up 0.8%. Notably, we had Canadian Tire up 2.5%, and Toll Brothers up 2.4% and Couche-Tard was up 4.25%.

It’s worthwhile to think about what kind of stock returns to expect going forward. Firtsly the short term is alwasy unpredictable so it’s anyone’s guess. But in the longer term earnings per sgarea growth pushes up stock prices. If we start at a normal P/E level llike 15 or so then if earnings grow 10% per uyear for a decade we could expect our stock price to grow at 10% per year on average. ANd the total return would be expected to be the 10% plus the dividend yield. Which sounds pretty good.

The difficulty is project earnings growth. For individual companies earnings growth is very hard to project. But what Warren Buffett teaches is to focus on a select group of stocks for which it is more predictable (ideally almost certain) that over a decade or so the earnings will grow at an acceptable rate. This is why Buffett famously loves things like Coke and America Express and Wells Fargo and his rail road, Burlington Northern. Buffett did not “miss” any tech stocks like Apple, he simply chose to invest only in companies that he felt were relatively certain to grow earnings and which were available at decent prices. Based on his own knowledge he was just not as certain about Apple, or it was not available cheap enough buy the time he saw that it was a predictable stock.

For the stock market as a whole, we can say that logically we don’t expect earnings per share to grow much differently than the growth in the economy. And the data shows this is correct over the long run.

Unfortunately at this time the economy appears set to grow at only perhaps 3% real GDP. But that may translate to 4 to 5% nominal GDP. Not great but not too bad if we add in a 2% average dividend. (And I suspect in a low growth scenario companies will be able to increase dividends as they have less need to invest in growth). When look at the valuation of the S&P 500 I use growth in the 4 to 6% range.

But when I look at individual stocks I often use growth of more like 6% to 12% for the next five years. Perhaps I am being optimistic. (But this growth is just one input into the stock rating process, it does not determine the rating it is just one factor.)

But then again what has been the past average growth of adjusted earnings per share for the companies I am looking at? In the past ten years GDP in the U.S. has risen at an average compounded nominal rate of just 4.0%. Yet during that time here is the adjusted earnings per share of the companies on our list. These are the ones I have ten years of data for.

Canadian National 12.5% per year average

Canadian Western bank 14.4%

Stantec    17.7%

Canadian Tire 10.2%

Melcor 8.0%

Alimentation Couche-Tard 29.6%

First Service 8.7%

MicroSoft 19.1%

FedEx 11.9%

Berkshire 12.0%

Costco 10.3%

Wells Fargo 7.7%

Toll Brothers minus 10.5%

RioCan 2.8%

S&P 500 7.8%

Don’t get too hung up on the individual numbers but the point is that the stable of companies that I am following appear to have grown significantly faster, on average, than the economy did in the past ten years.

Therefore I am perhaps not out of line expecting them to continue to do so. But at the same time it is impossible for a ANY company to perpetually grow faster than the economy. That is why I am also often assuming that the P/E ratio will decline in the next five years. If I start with a P/E above average, I tend to expect that to come down to about the average P/E in five years.

June 16, 2013

Markets rose substantially on Thursday but then fell and gave back about half of that on Friday. Still the S&P 500 remains up 14.1%. But Toronto is down 2.0% year to date. With our Strong buys up 17.0% and our overall buy or Strong Buy average up 11.6% we are once again well ahead of the Toronto market. As of Sunday evening the U.S. markets are set to open to the upside (based on futures markets which trade on Sunday evening).

As you may have seen, we released the latest edition of our free newsletter on Saturday.

June 12, 2013

The S&P 500 was down 0.8% today and Toronto was down 0.9%.

Almost all of our stocks picks were down today with the Market.

I am fairly certain that Melcor went ex-dividend today meaning that if you bought yesterday you would get the 75 cent dividend on June 28 and if you bought today you don’t. So in theory, all else equal,  the stock should have declined 75 cents today. It was basically unchanged despite the down market. Possibly that is due to its being so thinly traded and not enough people realize it was ex-dividend today. Ooops ignore what is in yellow, Yahoo finance mis-led me.  Correction, it did fall 79 cents today so pretty much as the theory said it would. But this may be a buying opportunity as all else equal I expect it will creep back up. The 75 cents they are paying out does reduce the book value. But it will have only a tiny impact on earnings… But maybe this dip with the dividend just shows how dumb it is for people to always think dividends are so great. It’s our OWN money they are paying out and money paid out does not compound and grow. Which is precisely why Warren Buffett never paid out a dividend at Berkshire going back to 1965. (Actually that is a lie, ironically enough he paid out exactly one thin dime per share in 1969 and never another dime)

June 11, 2013

Canadian National Railway is updated and rated (lower) Buy at CAN $100.44 or U.S.$ 98.54. It’s an excellent company with excellent economics and well managed. It could be bought for the long term but the share price does seem somewhat high at this time.

Markets were down on Tuesday, the S&P 500 fell 1.0% and Toronto fell 1.3%. At this time I am peronally neither inclined to sell nor to buy anything. (But I reserve the right to change my mind at any time.) I’ll keep you posted each evening if anything changes. And based on the ratings above there are certainly some stocks that appear to be good choices for the long term. The short term AS ALWAYS is anyone’s guess. I have generally never let short term fears keep me out of the market. That has at times made for a bumpy ride but has worked out very well overall.

I believe that Melcor will trade ex-dividend tomorrow (25 cent regular dividend plus 50 cent special dividend payable June 28 to shareholders of record on June 14) . Therefore in theory it probably should drop about 75 cents tomorrow, all else equal. Unless the market falls in general tomorrow, I am not so sure Melcor will fall much, but we shall see.

June 10, 2013

I’ve completed and update for Canadian National railway and will upload the report tomorrow evening. The rating will be (lower) Buy at $101. It’s an excellent company. Possibly worth paying up for but in general seems a little expensive.

The S&P 500 was about unchanged today and Toronto was up a tiny 0.1%. Toll Brothers slipped 3% to $32.58 and is worthy of consideration.

June 9, 2013

On Friday the S&P 500 rose 1.3% and Toronto fell 0.3%. Given the rise on Friday I considered if I should be trimming some positions. I considered that I have a large percentage of my portfolio in Wells Fargo and Canadian Tire. I then sold what amounted to 20% of my Canadian Tire shares and 15% of my Wells Fargo. I concluded it was prudent to trim these positions and also it gives me cash to look for better investments. I definitely like these stocks long term or I would have sold all. I have no idea where they will head in the short term but there is always a risk they could fall. There is also a “risk” they will rise but if so I still own a lot of them both. I have a lot of gains in the past 18 months and despite being confident that stocks will rise long-term, I would not feel good about leaving all my money in equities at this time. I want some in cash. I won’t touch long-term bonds.

My next update will be for Canadian National Railway. It looks to me like a great company but the stock may look expensive.

June 6, 2013

It was not a bad day in the markets. The S&P 500 was up 0.8% while Toronto was down 0.3%.

Toll Brothers was up 4.5% and Wells Fargo was up 2.3%.

As always the market gyrates with each piece of good or bad news.

Apparently Friday’s market tone is expected to be set by the U.S. May jobs creation report. Markets probably should not fixate on the net jobs created (or lost) in a single month when that number is probably only a rough estimate of reality, but fixate they do.

June 5, 2013

Okay, so stocks were down two days in a row.

S&P 500 down 1.4%, Toronto down 1.2%. With the U.S. markets up so much this year the notion of a decline two days in a row seems foreign. But really it is nothing more than a small dose of reality. Stocks do not go up in straight lines and sometimes they go down. Sometimes a lot.

At this point people who have no idea what their stocks are really worth and who think of stocks as nothing but squiggles on a screen start to panic. As far as they know a stock is worth what someone will pay for it in the next two minutes and it has no intrinsic value. Wiser investors however know that stocks are shares in companies. And if they have chosen their companies with care and if they are confident that those companies are likely to continue to make growing amounts of money not every quarter or year but most quarters and years then these investors are much less likely to panic.

Personally I am not only not panicked I am barely bothered at all by this level of market decline. Sure it’s always nicer to see stocks rise. But I do have cash on hand to take advantage of dips. And I do have some sense that the stocks I own have fundamental value and are likely (but not guaranteed) to rise in price in the long term. Buying shares on dips is part of the reason I have made an average of 16% per year over the past ten years. Often I have bought too early on the way down. But I have tended to keep buying as my favorite stocks declined. And this has paid off in most (but not all) cases. And I have tended to trim positions that seemed to be fully valued or over valued. And I have tried to move money into stocks that seemed the best bargain I could find while also staying mostly with large stable companies. And I have sometimes increased my cash allocation when stock markets rose. (Like I did last week).

That has been a recipe for success for me. So no, I will not be panicking even if markets continue to fall. And I am not suggesting they will continue to fall. They might or might not.

But not everyone can take the heat and volatility of being in stocks. If you can’t take the heat then by all means sell some or all of your stocks. I don’t advise on individual asset allocation levels or risk capacity or risk tolerances. Our Stocks are mostly up a lot this year and if you sell some now you still most likely have good gains on them. There is nothing wrong with moving at least some cash to the sidelines if that is what you wish to do.

June 4, 2013

Our report on global exchanged traded funds has been updated.

Most of our stocks were down today. The S&P 500 was down 0.6%, Toronto down 0.1%.

Toll Brothers was down 2% to $32.92. We last rated it Speculative Buy at $34.13. And it is speculative given the high P/E ratios but would definitely be inclined to buy if I did not already own quite a heavy position in it. There is chatter about the housing recovery being “fake” because homes are being bough by investors or because the market is propped up by the Fed. On the other hand I read that homebuilders have a hard time finding enough workers and Toll Brothers reported it was increasing the home prices. There are ALWAYS reasons for fear and there is ALWAYS The possibility of a sharp market correction / crash. But many investors have learned that over the years accepting risks and accepting that portfolios will decline from time to time is usually quite rewarding in the end. Being too fearful and too worried about capital preservation is a mindset that can forego a lot of gains. You end up sleeping better I suppose with strategy but you seldom end up ever sleeping in real luxury with a too cautious approach.

For Canadian investors, the decline in the Canadian dollar today was beneficial to U.S. holdings.

June 3, 2013

At the end of the day the S&P 500 was up 0.6% and Toronto was down 0.3%.

We had Toll Brothers down 1.7%. But most of the stocks on our list were up.

I like to think that you the customers of InvestorsFriend Inc. are smarter than the typical investor. As do your selfers (albeit with a little help from your (Investors)Friend) I think you are more savvy then average.

Here’s what average looks like:

A bank employed senior financial advisor friend of mine was explaining to me today that he puts the vast majority of clients into pretty bland portfolios with usually a heavy allocations to bonds. He thinks they would be better off with more equity exposure in most cases. But he explained that when client accounts are up 20% in a year, no one calls to thank him. When they fall 5% they all call in to gripe and some leave. So investors have trained the advisor community to act very meekly and to travel in a herd. If you bet against the herd and win your client benefits and congratulates himself on his astuteness in choosing you. If you bet against the herd and loser, the client screams, calls you idiot, tells all his friends you are an idiot and then leaves with his money. So, investors who wish to do well on management fees and who want a sane life act meekly and follow the herd. Failing with the crowd, you still get yelled at but maybe not as loudly and the client may stay put as he sees most everyone failed.

This is not that intelligent. For one thing, long term bonds may be riskier than equities. Almost all long term bonds (except very recently issued ones) are trading above par. Some trade well above par like 30% above par. They WILL mature at only par. They WILL decline in price and market value. That is a mathematical fact. They could gain in value in the next year. But any bond that currently has a market value above par WILL suffer a capital loss eventually as it matures at par. (I set aside convertible bonds, I speak of plain bonds). And long term bond funds will be affected by this as well. Now perhaps the yield on the bonds will still make them acceptable investments but I doubt it.

Now it is possible that in say the next ten years equities will decline even more than a long term bond with 10 years left on it (Say a 30 year issued in 1983 that is trading way over par today). But I highly doubt that will be the case. For my money, equities are a safer bet than long-term bonds over say the next ten years.

And maybe rebalancing and investing new money will mean that the bond portion of the portfolio will do okay. But the math suggest to me that equities held today will almost certainly (but its not guaranteed) outperform long term bonds held today if we check back in say 10 years.

But Advisors are mostly going to recommend a hefty allocation to bonds including some long term bonds. That’s because the customers trained them to do so and when the long term bonds eventually fall in value at least the Advisors will fail with the herd and not on their own.

More intelligent investors (like most of you, I think) know that occasional losses, maybe even sizable percentage losses is just a part of the winding road up the hill to wealth. And if we are going to have losses either way (I’ll bet even balanced portfolios have some substantial losses in some years over the next ten years), then why not choose the route with the higher expected returns (more equities)?

With markets at record highs (at least in the U.S.) it’s a reasonable time to ask yourself if you can stand the heat and the volatility off equities. I am not in the business of setting asset allocations (the percentage of your portfolio in bonds, cash and equities). That is a personal decision and I don’t give personal advice. Periodically, it is good to reflect on what exposure to equities you are comfortable with. I would put the non-equity portion in cash and short-term stuff and I personally would avoid long-term bonds and most perpetual preferred shares for that matter.

June 3, 2013 1:20 pm eastern

With Toll brothers down today I decided to buy back 500 shares. As mentioned under May 29, earlier this month I sold 500 at $37. Around May 29 I placed an order to buy 500 at $32.10. But just now I decided to grab them at $33.30. Toll was down as low as $32  At the same time a headline today was “Homebuilders struggle to find workers.” With my trimming of positions last week my cash position had reached 27%, the highest in quite some time. So that also made it easier for me to grab 500 shares. I now hold 3600 shares of Toll, it’s around 9% of my total portfolio. I tend to hold a much more concentrated portfolio than most people. My approach would be considered quite risky in that respect.

June 2, 2013

On Friday the TSX fell 0.8% and the S&P 500 fell 1.4%. In the U.S. the declines came in the afternoon. For the moment the trimming of positions that I did on Friday morning and in recent days seems to be good timing.

I never claim to be able to predict short -term market moves but in general I don’t see that anything has occurred that would lead me to particularly expect a market decline.

May 31, 2013 (12:10 pm eastern)

A subscriber just emailed and asked me if I would trim Berkshire. On May 11 below I mentioned I would consider that. It was last rated here as (lower) Buy at $111.82 on May 11. Now it is at $114.75.

So perhaps being in a bit of a selling mood this morning I have now sold 400 of the 1200 shares I had. In my kids RESP account I had 200 shares and was up 57% and sold 100. In another account I had 1000 shares (B shares obviously) and was up about 32%. I sold 300. Logically having a gain or a loss on a share in a non-taxable account should not enter into the thinking about selling it at all. Selling should be based on the current price of the stock versus its perceived value and prospects. But emotionally it does always seem easier to sell something with a gain on it. Obviously I may regret selling these because Berkshire is doing very well on its various businesses. Also many Johnny come lately analysts are suddenly much more fond of the stock and Buffett now that it has risen so much. But I think trimming this after recent gains is prudent. It’s up 28% this year. It was up 18% in 2012. That is a HUGE amount of gains for such a large company.

May 31, 2013 (11:50 am eastern)

A note to our American subscribers: Are you able to easily buy stocks on the Toronto stock exchange? Canadians can buy on the major American exchanges as easily as they can on Toronto and for the same low commissions. But over the years I have understood that American investors could not easily buy on the Toronto Stock exchange. It was possible but involved higher Commissions. This was due various regulatory factors that required a Canadian broker to get involved and perhaps also a lack of interest by U.S. brokers in making the Toronto stocks available to their customers. But I wonder if anything has changed? Are those treading through American discount broker systems able to easily buy on Toronto and with low commissions? Let me know your experience at shawn@investorsfriend.com.

The reason I ask is that over the years I have been hesitant to market this site to the American audience since only about half our stock picks trade in the U.S. (that includes American stocks plus a number of Canadian companies that also trade on the big American exchanges.)

May 31, 2013 (11:15 am eastern)

I sold what amounts to 54%of my Bank of America shares this morning. It probably still has strong potential for gains because its price to book value is still low. But looking at the comments in the summary of our last rating it, we were considering it speculative and we were not impressed with management. Anyhow I have had a relatively large exposure to U.S. banking and I have made strong returns and it just seemed prudent to reduce this holding. As always it is a struggle to decide these things as one weighs the possible upside against the possible downside. It is seldom easy to decide.

May 30, 2012

Markets were relatively flat today. However, several of our Stock picks did very well.

Wells Fargo was up 1.2% to $41.25. Seeing it was up I decided to sell some just to be prudent.  I was not sure I should sell, after all Buffett was still buying fairly recently (and may still be). And it was rated (lower) Strong Buy at $37.21 as of April 13 on this Site. But I own it mostly in non-taxable accounts and I have good gains on it and I was stubbornly buying in the past when it swooned. So it seemed prudent to sell some and so I sold what amounts to 20% of what I held. I got $41.50.

Bank of America was up 2.6% to $13.83. Quite possibly I should be trimming that as well.

Berkshire Hathaway was up 1.8% to $114.84. Yet another new high for that stock. The A shares closed at $172,200. As I have mentioned before, these are the very same shares that were trading in the $14 to $18 range in 1965 as Buffett was accumulating enough to take control of the company. I don’t think it has really sunk in for most people just how remarkable that is. This stock is up over 10,000 fold! That’s over one million percent since 1965!

It would be one thing if Berkshire started out in 1965 as a penny stock with few assets and then had a moonshot through some kind of invention or gold discovery or valuable patents or the invention of an immensely popular software or product(s) or the like. Instead Berkshire was already a large company in 1965. It then had an equity book value about $20 million, $19.46 per share. Not a small amount in 1965. And Berkshire has never owned anything that really rocketed up in value in a very short period of time. Berkshire is a testament to the power of compound returns. When the time involved is 48 years, it “only” takes a return of a little over 21% per year to compound up to a 10,000 fold gain, that one million percent gain. It’s not the 21% that is particularly remarkable. It’s achieving that kind of return on a compounded basis for 48 years that is remarkable. A huge part of the success came from insisting on retaining ALL the earnings over all those years. A company that pays out a dividend when it could have kept that money invested at 21% does its investors a huge disservice.

The profitability of its various ventures has generally ranged from quite good to superb. But there was nothing the likes of Facebook or Google. A major key was the avoidance of losses. Berkshire has had a decline in its book value per share on just two occasions since 1965. And those declines were due to market value declines of its stocks. I am not sure if the company has ever had negative earnings since 1965.

In many ways what Buffett has done is merely to observe that if money is compounded at a reasonable return for a long period of time it will grow dramatically.  That truth was evident and well known when it came to bonds. What Buffett did was look for equity investments that had returns higher than bonds and where in fact this result was highly certain to occur. Buffett famously avoids the technology sector and most commodity companies because the returns are not predictable enough. He has described his stock picks as being like “equity bonds”. This is the simple and extraordinarily powerful concept that we are all free to copy from Buffett. Growth at a reasonable price is NOT enough. Buffett insists on highly predictable growth at a reasonable price.

May 29, 2013

A moderately negative day on the markets with the S&P 500 down 0.7%. But Toronto was down only 0.1%.

Toll Brothers was down 5.2% to $34.47. On May 22 I had sold 500 Toll Brothers at $38.58. With the lower price today I bought back the 500 at $34.80. On May 14 I had sold 500 at $37 I have placed an order to buy those back at $32.10 should the price go that low. Also I have placed an order to buy a few more Melcor shares at $18.51 but only until June 11 because I want to buy before the ex-dividend date.

May 28, 2013

It seems crazy just how good the U.S. market and out stock picks have done this year, especially after doing so well last year. I’d appreciate it if you could spread the word to friends and family about this web site.

It was another strong day on the markets. This was due to positive economic reports. The S&P 500 was up 0.6% and Toronto was up 0.4%.

We had Microsoft up 2.2%, Berkshire up 1.3%, Wells Fargo up 0.8% and Bank of America up 0.7%.

Toll Brothers was down 1.0% despite the strong housing price report. This is most likely due tot he fact that Toll Brothers has a very high P/E and is already pricing in a huge increase in earnings.

Melcor is set to pay a dividend of 75 cents on June 28 to shareholders of record as of June 14. 25 cents is the regular twice yearly dividend and 50 cents is a special dividend.

With the shares trading at around $19 that is a dividend of 3.9% on June 28. That seems attractive on its face. But, in theory, Melcor shares should decline about 75 cents right after June 11 (or so) when it goes ex-dividend. In theory those of us who own shares should not be at all excited by the dividend since the company is in effect giving us what we already own. But practical reality may be different than theory. I am not sure Melcor will decline much due to the dividend. I believe it is easily worth the $19 with or without the extra 50 cent dividend. I own quite a few shares. When it pays the dividend that will be the largest dividend I have ever received all at once by a factor of about three. My own money or not, it will be nice to receive it into my accounts.

May 27, 2013

U.S. markets were closed today for Memorial day. Toronto rose 0.2%.

It’s interesting that Valeant Pharmaceuticals has risen so much on the announcement it will buy Bausch and Lomb for some $8.7 billion. More typically when one company acquired another the one being bought has an increase in the share price and the one doing the buying sees its shares sink somewhat.

One explanation for the rise in Valeant’s shares was that it will be immediately accretive. Well of course it will. It’s financed mostly with debt. If you can borrow at 4% then buying any company with an earnings yield of at least 4% or a P/E under 20 will be accretive. And if you can forecast huge synergies that can make most any deal accretive.

But, a transaction being accretive to earnings per share is neither a necessary nor a sufficient condition for a wise acquisition.

The following statement seems rather ambitious (but then again I know nothing about Valeant)

Valeant expects to achieve at least $800 million in annual cost savings by end of 2014. Bausch + Lomb expects to have revenues of approximately $3.3 billion and adjusted EBITDA in 2013 of approximately $720 million .  The transaction is expected to be immediately accretive to Valeant’s cash earnings per share.  Assuming the transaction occurred on January 1, 2013 and assuming the full realization of synergies, the acquisition would have been approximately 40% accretive to Valeant’s expected 2013 Cash EPS.

However growth by acquisition can indeed be an excellent way to create value for shareholders as long as it is done properly. So perhaps the market is correct here.

May 26, 2013

FirstService Preferred is removed from the list because the company has redeemed them. Investors in the preferred shares received cash and or common shares. FirstService common shares remain on the list above. The common shares are a far different investment than the preferred shares were. I very much like the management at FirstService and it may do well long term. But the valuation did not look attractive as of our last update. Things may look better going forward as they will no longer face the expense of the preferred share dividend and I believe their balance sheet has been strengthened. However they did send some cash out of the company and the common share count has increased. It will take some time for all of this to work through the value ratios. We will start to reflect it with our next update on the company.

May 25, 2013

Stantec is updated and rated (higher) Buy at $44.50. I have now been watching this company grow steadily for fourteen years. The share price is occasionally volatile but the earnings have been marching upwards at a high and relatively steady rate. In recent updates I have added a cell to look at the economics of each company. Stantec does seem to have excellent economics. I believe its client customers are “sticky”. It would be false economy for its clients to switch to a cheaper consulting firm when the clients are undertaking very expensive projects.

Perhaps I am becoming complacent but it occurs to me that it is a good thing to own a stable of companies like the ones I own which seem to have good economics which it seems reasonably certain will grow their earnings at some reasonable rate over the next decade or so and furthermore for the most part have reasonable price to earnings ratios. Sure, their share prices would drop if the economy slows but these do seem like the type of companies that can be predicted to recover and grow their share prices over time. Of course I make no guarantees of that, but that is my thinking.

May 23, 2013

Today the U.S. markets showed some resistance to negative manufacturing data from China and worries about a slowdown in the FED’s money printing initiative. The Dow was down just 0.1%. Toronto was down 0.7%.

I thought about trimming my large positions in Canadian Tire and Wells Fargo in case they drop. But I decided not to. If stocks drop I do have some cash ready to go.

Toll Brothers was up 1.4% today. The surprising news in the U.S. is that new home prices are at record highs.

Canadian Western Bank was up 1.8% today despite the fact that TD Bank reported disappointing earnings including an increase in bad debt provisions. Most of our stocks were down somewhat.

May 22, 2013

Today started out with markets up substantially as Ben Bernanke signaled he would keep on stimulating the economy. But markets cooled significantly in the afternoon after Fed meeting minutes revealed some Fed members want start to phase down the stimulous.

Toll Brothers had excellent earnings and got as high as $39.25. It closed at $37.07 up 2.9%. I took the opportunity to sell about 16% of my Toll Brothers at $38.56.

I don’t pay too much attention to the market trends (I focus on individual stocks and valuation). But it does seem like we have had a very good run here. It may not be a bad idea to trim some positions. We should always be comfortable with the fact that  markets can and do drop. The trick is to be confident in what you hold when markets decline and to be ready to take advantage of bargains even as the crowd runs scared.

May 21, 2013

Markets did well today with Toronto up 1.0% and the Dow up 0.3%

Toll Brothers will report earnings before the open tomorrow (Wednesday morning). Toll Brothers fell 1.6% today, presumably on nervousness about the earnings.

Toll Brothers is pricing in a lot of growth and so any sign that it is not growing earnings (and especially any sign that the outlook is not rosy) could send the stock down. I show the adjusted P/E as a whopping 68, which means it has to grow earnings a lot to justify its price. I do expect it to grow earnings a lot but that’s not a certainty. And note it was last rated Speculative Buy at $34.13. As I contemplate what the stock might do tomorrow and as I recall that the stock got as low as $30 in mid-April I start to wonder if I should have sold more than I did at my $37 price where I did sell some last week on May 14. But that is the nature of markets especially if we get fixated on the short term. We second guess ourselves a little (or a lot). Anyhow if it rises tomorrow I will smile and probably sell some more and if instead it happens to drop toward the low thirties I imagine I will buy some. Toll Brothers strikes me as a well managed company. I expect it to do well, but that does depend on the rebounding housing market in the U.S.

I was reading that analysts expect 7 cents per share earnings this quarter and 28 cents per share next quarter. I find the notion of analyst earnings projections to be preposterous. In my opinion there is no way for analysts to predict earnings to that kind of implied accuracy unless it is a very predictable company (which Toll Brothers is not) or unless someone inside is whispering the number to analysts. As others have pointed out it is completely backward to suggest that a company has missed or beat analyst expectations. Instead it should be said that analysts over-estimated or under-estimated what the earnings would be.

May 20, 2013

We’ve just pretty much ended the annual season for voting our shares. I used to vote my shares years ago. Then I gave up because really it is usually a waste of time since the recommended slate usually gets in with 99% of the votes or something. Also, in Canada, we only get to withhold our vote; we don’t get to vote against a director. And rarely is there ever a competing slate of directors.

But it is easy to vote online once they send you the ballot. So sometimes I would go in and withhold my votes on someone if I had a reason to. But I was never sure if anyone really saw or cared that my few votes were withheld.

But this year there seems to be a new development. All the companies now issue press releases showing the results of the vote including the number of votes withheld for each director. Well, let’s face it you or me withholding our votes is not going to change the result. But in most cases there are few votes withheld and so even a few hundred votes withheld may add noticeably to the withheld number. It might be 14,600,000 votes for and 14376 votes withheld but that means you can almost see your contribution to that 14376 or whatever. And it seems to me that it is embarrassing for a director to get too many withheld votes. And especially when it is selective. I am seeing cases where most directors had 1% or less withheld but one or more directors are singled out and have 5% or more withheld. Everyone sees that. It sends a message.

So the bottom line is that withholding your votes (especially selectively on a few directors you don’t want) is now a bit of an interesting spectator sport. So, hopefully more people will get involved with voting.

The Canadian markets were closed today. New York was open. Wells Fargo climbed a little and is now over $40. But generally it was a quiet day in the U.S. markets.

Yahoo is paying  one billion for Tumblr which is apparently exceedingly popular but apparently has little revenue let alone profits. Well, a quick glance at the balance sheet of Yahoo suggests they can afford to throw away a billion if they wish. They have a couple billion cash and essentially no debt. But meanwhile I have used Yahoo Finance for over 15 years and these days I often have to hit refresh multiple times just to get the web page with my portfolio to load. Years ago their web pages used to load at least. I am certainly not impressed. But it seems they are profitable so perhaps they do know what they are doing.

May 19, 2013

Canadian Western Bank preferred shares are updated and rated Sell at $26.38. I believe the bank will redeem these next April 30 for $25, therefore I don’t think they are a good investment.

Bombardier Preferred shares are updated and rated Buy at $24.75. At 6.3% these seem worth considering. They could fall in price if Bombardier faces problems but I suspect the dividend would continue to be paid. I would not put a large percentage of my portfolio into these. But certainly I would consider putting in 5% or so. I don’t think Bombardier would be interested in redeeming these at $25 even if they begin to trade somewhat above $25. The reason is that Bombardier has a realtively weak balance sheet.

There are updated stock market valuation “Special Reports” articles in item 2 in the list of Links just above.

My personal portfolio breakdown is updated.

Constellation Software Inc. is updated and rated Weak Buy at $142.48. This is a great company. It is very well managed. It has great economics and it will grow. For that reason it should be a good long term investment. But the recent share price increase makes the stock somewhat expensive. This company makes up about 3% of my portfolio. I am not going to add to my position at this price but would consider adding at a lower price. I may sell half of my position or I may just hold on.

May 18, 2013

My analysis of the valuation of the Dow Jones Industial Average is updated. It suggests that the DOW is about fairly valued  (3% over-valued as a point estimate). For whatever reason the DOW valuation has generally looked more attractive than the S&P 500 for some year s now. The S&P 500 valuation paints a less benign picture.

My analysis of the S&P 500 valuation has been updated. It’s a bit scary since it suggests that the S&P 500 index may be 18% over-valued. The trailing P/E on the index is a hefty 19.0. That is troubling. However, not all U.S. stocks have such high P/E ratios. I invest in individual stocks and not in the S&P 500 index.

Friday was another strong day for the markets and our stock picks. We had Toll Brothers up 2.2%, Wells Fargo up 1.6%, Berkshire up 1.3%, The Dow and the S&P 500 are at record highs (as they probably should be – given record low interest rates, an economy that is growing, albeit slowly, and the passage of time and the retention of earnings since prior market peaks). But the Toronto index is well below record highs and lags due to its heavy weighting in the energy and commodity sectors.

May 16, 2013

Melcor is updated and rated (higher) Buy at $18.62. I may add to my position in this company.

Constellation Software rose 4.5% today. I don’t know the reasons that it is has been rising. I will plan to update the report on this company in the next few days.

I have mixed feeling about the markets. My analysis of the S&P 500 dated March 24 suggested that the S&P 500 looked about 12% over-valued at 1557. Sine then it has risen 6% to 1650. It’s trailing earnings are just a little higher than they were in March. This analysis is meant to be a long-term indicator but it does suggest that the S&P 500 is somewhat over-valued.

Meanwhile I like the U.S. stocks I hold, Wells Fargo, Bank of America and Toll Brothers. I like Berkshire as a company but its shares no longer look particularly attractive. And I like the Canadian Stocks that I own including Canadian Tire and Melcor. Also Canadian Western Bank and probably Stantec (this one not updated recently). I am not sure about Constellation until I update it. These are all the stocks I own in any meaningful amounts.

So, it’s hard to know if I should add to the stocks I like or instead take some profits since the overall S&P 500 seems somewhat overvalued. There is also the option of sitting tight and re-evaluating as time goes on.

May 15, 2013

It was yet another day where the American markets did much better than Toronto. The Dow was up 0.4%, the S&P 500 was up 0.5% but Toronto was down 0.8%.

Canadian Tire slipped 1.2%. However Wells Fargo was up 1.4% to a new high.

Our next update will likely be for Melcor. I have read its Q1 report and its very positive. I definitely like this company and will consider adding to my position. The report did not mention the outlook and that is always uncertain but over the long term this company just keeps adding to its book value per share. Earnings and the share price can be cyclical but the underlying growth trend seems strong. The new Melcor REIT seems to be trading well and will be a positive factor in keeping the Melcor share price up.

I notice a lot of positive articles about Berkshire. This seems to be a case of Johnny-come-lately. Most analysts were a lot less excited by Berkshire when it was at much lower prices.

May 14, 2013

Today was surprisingly strong on the markets. The Dow was up 0.8%, the S&P 500 was up 1.0% and Toronto was up 0.4%

Many of our favorite stocks did well, Bank of America up 2.8%, Toll Brothers up 1.7%, Wells Fargo up 1.5%, Canadian Tire up another 0.5%. Stantec up 3.0%, Melcor up 1.4% (but Melcor has tiny volumes and so tends to move somewhat randomly).

20% of my Toll Brothers shares made a quiet exit from my account today. Automatically sold at $37 based on an order I had placed about two weeks ago to trim that position if the shares hit $37. I have mixed feelings on that but it did seem the prudent thing to so.

Greece had a debt upgrade today. Fitch raised it from CCC to B-. The rating is still very much in the high risk junk category. Nevertheless if is a welcome  change in direction. Estimates of the U.S. deficit for this year fell sharply to $642 billion. That’s down from 1100 billion last year and down from a peak of 1400 billion. Slowly but surely the financial world is recovering and all those doomsday predictions are proving to be wrong. But worry the prophets of doom will continue to predict the end is nigh.

May 13, 2013

The S&P 500 ended the day about unchanged while the Dow was down 0.2% and Toronto was down 0.5%

Canadian Tire did okay, up another 0.6%.

May 12, 2013

Canadian Tire is updated and rated (higher) Buy at $83.78. It is obviously not the buy it was at my last update on February 24 at $68.65. But it is still not an expensive stock and I am not in a hurry to sell any more at this point. The sale of real estate to the REIT is maybe six months off and so meanwhile the stock may fluctuate with the market, with its earnings and with fears of competition.

May 11, 2013

Friday was another good day on the markets with Canadian Tire up another 1.7% and Melcor up 1.9% and Bombardier was up 5.4%.

Berkshire Hathaway is updated and rated (lower) Buy at $111.82. With the recent strong gains in this stock (it is up 25% this year) I am tempted to sell some of my holding. It is not going to rocket ahead and could suffer a decline. But generally anytime I have sold this stock it has been a mistake.

The story of Berkshire is well beyond remarkable. Buffett took control of the company in 1965 and he measures its growth based on the growth in its book value per share from September 1964 which was the last annual report before he took control. The share price was driven up over $19 as he took control but was apparently in the $14 range earlier that year. The same shares now trade at $167,780. The increase in the share price since 1965 is just under or somewhat over one million percent (10,000 times increase) depending what price you take as the starting point.

I have not seen this one million percent ,milestone mentioned in the financial press. It seems like the press are not quite able to comprehend this figure. Buffett very quietly mentioned in a CNBC interview that the stock was up 10,000 fold but the journalists failed to pick up on this.

Buffett has ALWAYS judged the growth of Berkshire by the increase in Book Value per share. This has grown at about 615,000% since 1964. I have it on the very best of authority that Buffett “likes that one million percent figure”. I think he would like to see that mark reached before his time as CEO ends. That could be done at the end of 2017 if the growth averages 11% per year, which is a stretch but possible. Buffett is an EXTREMELY competitive man (though he comes across as low key).

Berkshire also reached number 5 on the Fortune 500 list this year. Although Exxon and Walmart are much bigger, you can bet he has his eye on the number 1 spot, or at least on moving up another spot or two.

At the annual meting this year Buffett noted that Berkshire had reached number 5 as well on the list of most valuable companies in the world by market capitalization. Again, he will have his eye on the spots above him.

With all of this, I think I shall ride the Buffett coattails for a while yet and hang onto my shares. If the shares should drop say 10% I would then likely add to my position.

May 9, 2013

As most will have heard, Canadian Tire came out with decent earnings today but more importantly announced plans to spin off the real estate into a REIT which they would continue to own 80 to 90% of. But the existence of the REIT would make the value of the real estate more obvious. Canadian Tire shares ended the day up 11.2% on the news at $82.36. The stock opened at $86.50. I sold what worked out to 15% of my shares at the open based on an order I placed just before the open. I only heard the news a few minutes before the open. I might have sold closer to 20% but actually did not know off hand how many shares I owned across several accounts and was in a rush.

Selling some at $86.50 looks good right now, and may look even better tomorrow if the stock slips lower. Or perhaps before long I will regret selling at that price.

The actual REIT IPO will not take place until the Fall and so there is a lot of time for the market to digest the news and to worry about other things. So I don’t necessarily think the stock will rise over the summer. But really nobody knows and it depends on many things. The best that we can hope is to understand that the stock is probably still selling below a reasonable value and for that reason (and not for short term gains) I am comfortable holding it.

I have to wonder who were the buyers today especially at the open. It actually reached a high of $87.45 just after the open. Ya gotta feel like a chump if you bought near the open today and you end up losing money on this company today when 99.99% of its owners were making money on the stock today.

I had been advocating for Canadian Tire to do something like this. Still, in many ways the whole thing is strange. They plan to retain 80 to 90% of the REIT. But the 10 to 20% that trades is expected to fix a value on the real estate that is far higher than the common shareholders of Canadian Tire were apparently fixing on it until now. But the existence of the 10 to 20% that trades will effectively cause the common shareholders to now fix a higher value on the real estate as they can see its market value transparently due to the REIT. In the limit if they retained 99% of the REIT, you have a situation where basically NOTHING has changed in substance and yet the company jumps in value. It is financial engineering. In a pure efficient market this sort of thing would not increase the share price. But markets are not 100% pure and efficient. Thank goodness since if they were 100% efficient it would not be possible to find under-valued companies except by random luck).

In other news Melcor came out with earnings after the close. The earnings were good and they announced a 50 cents special dividend. I suspect that with push Melcor up tomorrow but we shall see.

May 8, 2013

Another decent day in the markets.

Thursday should be interesting as a some of our companies will report earnings. I believe Canadian Tire and Melcor will report, although Melcor will likely be after the close.

I have not looked at Tim Hortons in quite some time. They announced today that they have a new CEO coming from outside the company. To me, that is not a great sign. Tim Hortons is a unique and highly successful Canadian company that has built itself up remarkable over almost 50 years now. There should be someone in-house capable of being the CEO. An outside CEO could be some kind of prima donna (aren’t they all?) who will look to do things differently. Also it announced earnings today and everyone is disappointed same store sales are down a bit. Same Store Sales gets a bit too much attention for restaurants and retail. Imagine you own a golden goose. Do you complain because the size of the egg does not grow each year? Or do you contrate on getting the goose to reproduce itself. Tim Hortons can still grow by opening new locations. Obviously the gallons of coffee or pounds of food that can be served at one location cannot increase forever. And if same store sales are flat due to no inflation, what is the problem with that? All that Tim Horton’s needs to do is study its own history and if it has gotten off-track of historic methods then fix that. It certainly does not need any new ides form the Nestle executive that they are bringing in. That is my opinion. I would send this new CEO guy on a road trip across Canada to visit at least a 100 Tim Hortons locations and get him to read the several books that have been written about Tim Hortons and do that before he is allowed to step foot in head office. And he should seek out the advice of Ron Joyce who is the former owner who largely built the comapny.

May 7, 2013

Okay, so I know that technically we are not supposed to get excited about day to day moves in the market. In fact for those still in the early savings phase of life, lower stock prices are what you should rationally cheer for. The ideal scenario is low stock prices as you save money followed by soaring prices in retirement.

But anyhow even if it is not rational to get too excited by short term stock price increases it nevertheless always feels good.

Today we had Canadian Tire up 3.0%. I guess the negative analyst report that pushed it down 1.8% was now yesterday’s news.

Wells Fargo up 1.3%.

A little here and a little there, and no real big losers and it’s been adding up nicely so far this year.

I am considering buying some of the Claymore Oil Sands ETF , CLO on Toronto. This is listed in our Canadian ETF reference article.  I don’t try to predict oil prices but the ETF has a reasonable trailing P/E and has declined in price significantly in the past two years. Almost down tot he 2009 lows… And also I rather like the idea of having some skin in the oils sands game.

May 6, 2013

Our stocks picks did better than the market today.

Bank of America was up 5.2% after it settled a dispute with a major credit card company.

However Canadian Tire was down 1.8%. Apparently this was due to an analyst downgrade predicting that the Q1 report will be weak. Perhaps it will be weak. We had a later Spring in most of Canada and perhaps Spring sales in march were weak. And certainly in Western Canada April was still winter and so the early sales in Q2 may have started out weak. If the recent to sell is merely due to Q1 earnings, that does not seem a great reason to sell. The stock appears cheap based on trailing earnings. Possibly its earnings are going to decline material but I’m don’t see the basis to assume that is so.

Warren Buffett was on Squawk Box this morning for three hours. This followed his huge annual meeting weekend that just took place. Some of his comments illustrate how incredibly hard he works and how passionate he is about business. He reported that sales at his Nebraska Furniture Mart will likely come in at around $40 million for the weekend up from $36 million last year. And he reported that the carpet and flooring department was up 36% and drove the sales increase. It is incredible to me that as busy as he was this weekend he took time to review and memorize these figures. He will know as well the sales that took place on the meeting convention floor and at his Borcheim’s jewelry. He reported (from memory) on the number of carloads that Burlington Northern is carting today and what it carried at the peal in 2006 and how far it dropped at the bottom in 2008. The point is he is still an incredibly hard working individual who has a photographic memory and still has incredible passion to see all of his businesses succeed. I would bet that the average small business owner hardly knows his sales from last week and somehow Warren Buffett tracks such numbers for numerous businesses.

May 5, 2013

Weather is always interesting… Here in Edmonton Spring refused to arrive in April and winter hung on strongly. We got a good bit of snow this past Monday and Tuesday and freezing temperatures. Spring then arrived on Thursday and by today we moved straight to Summer (at least temporarily). I used the opportunity to sit outside on the deck and read the Berkshire Hathaway Q1 report. What could be better? I will update the report for Berkshire before long.

A word about Bonds and Bond funds.

As I updated my ETF article I noticed that under bond ETFs the cash yields were significantly higher than the yields to maturity. This could cause investors to think they are getting say 4% when it is really more like 2%. A similar situation would occur if you bought a bond at par some years ago at higher interest rates. You now have a capital gain on that bond because interest rates have declined. It is still paying you a high interest rate but really your yield to maturity is far lower. The capital gain on that bond WILL disappear by the time it matures at par.

Also if you buy such a bond today at a premium it will still give you  a cash yield that is higher than the yield to maturity. You have to have higher cash yield now to make up for the fact that it will decline in price by maturity. If you think of that cash yield as being really a return, that is wrong since part of it is in effect a return of the premium over par that you paid.

I had a question from a subscriber and I want to share the response here. This is for those interested in bond ETFs.

Question:

In your article about Bond ETFs, you didn’t mention symbol CBO.  This is a five year laddered bond ETF.  I think it is a good place to park cash.  It pays 4.5 plus interest.  I would be interested in hearing what you think. Thank you.

Response:

I think the 4.5% yield is true but is misleading.

All bond funds today hold some bonds that they bought a little (or a lot in the case of long bond funds) earlier when yields were higher. There bonds now trade above par and that tended to push the bond ETF price up as interest rates fell.  As these particular above par bonds approach maturity they will fall to par value and be redeemed at par (barring bankruptcy). So, these ETFs will fall a little in price if interest remain stable and fall further if interest rates rise. A five year laddered  fund suffers less from this issue than a longer fund.

ishares is showing a yield to maturity of 1.76%. They do show current yield of 4.41%.

http://ca.ishares.com/product_info/fund/overview/CBO.htm

I believe the 1.76% is the best guess at what you would earn over the next few years on this fund. You should expect the trading price of CBO to fall a little, offsetting your 4.5% yield.

The price of CBO has trended very slightly down over the past five years despite declining rates.

http://finance.yahoo.com/echarts?s=CBO.TO+Interactive#symbol=cbo.to;range=5y;compare=;indicator =volume;charttype=area;crosshair=on;ohlcvalues=0;logscale=off;source=undefined;

I don’t hold any fixed income and so am not a good person to have a view on whether 4.5% with expected capital loss and 1.76% net expected return is attractive. Things will work out a little better than 1.76% over the next few years if interest rates continue to decline.

Looking at their holdings, everything is showing coupons in the 4 to 6% range.

That seems odd to me as interest rates are lower now. But they don’t show yield to maturity for each bond.

For one year bonds or two year they appear to be buying the tail end of bonds that were originally much longer. These bonds boast high interest but they pay a premium above par that quickly withers away as the bonds mature in one or two years or three etc. This is the issue I mentioned above except I did not realize they are sort of manufacturing that issue by buying the tail end of long bonds rather than new one year bonds and two year etc.

http://ca.ishares.com/product_info/fund/holdings/CBO.htm

However, they are following the DEX 1-5 year index so it seems the issue appears to be embedded in the index, it’s not ishares that creates the problem.

At the end of the day I find the 4.4% cash yield to be highly misleading.

End of response, but a few more thoughts…

It is disturbing that people may be buying this 5 year laddered ETF and think they are actually earning 4.4% yield. It’s not true, not unless you count return of your own money (represented by the falling ETF price) as your money.

Personally I see little or nothing to attract me to invest in bonds. I believe you can find Guaranteed Investment certificates from banks that pay more than this laddered 5 year appears to pay (more than the yield to maturity, that is). I had never looked into this but I looked just now and TD Waterhouse offers GICs from a number of banks. Unfortunately the rates are pretty low, but at least the product is very straightforward. You cannot cash these prior to maturity.

Or buy individual bonds. I just don’t see anything of interest (no pun intended) in bond ETFs.

May 4, 2013

Markets were strong on Friday. Our Stock picks have done well year to date, up 11.1% on average. My own account is up 10.6%. This compares to the Toronto market which is “up” 0.0%. In the U.S. the S&P 500 is up 13% and the DOW is up 14%.

I just updated my reference article that provides Canadian ETF symbols along with P/E ratios and dividend yields for a a selection of equity segments and also Dividend ETFs and Canadian Bond ETFs and also ETF for Gold, Silver, Oil and Natural Gas. For this update I added direct links to show the holdings of each ETF.

I consider this to be a very valuable reference article. I know of no other similar reference article for Canadian ETFs. Most lists of ETF symbols don’t even mention P/E ratios. http://ca.ishares.com does contain mucj of this information but my article includes additional ETFs and also is easier to use especially for non-experts. And I include some indication as to the attractiveness of may of these ETFs.  It takes me a full day just to update all the links and figures in this article.

Looking at the P/E ratio of the Toronto Stock Exchange it is about 19. Therefore the Toronto market does not appear to be attractive even though it has lagged the U.S. market. Some of the segments however appear to be attractive.

May 2, 2013

Markets recovered the ground lost yesterday. Our Stock Picks had a particularly good day with Toll Brothers up 3.1%. Almost all of the stocks on the list were up.

Canadian Western Bank is updated and rated Buy at $28.42. I am comfortable holding it. I did not own it I would be comfortable buying some at this price. Since I already hold it I would be more likely to add to it if the price falls.

After an extensive look at its annual report I can boil down the economics of how it makes money as follows:

The bank takes in depositors at a weighted average interest of 1.88% and lends out money at an average of 4.77%. The net interest spread was most recently 2.62%. This spread (unfortunately) is falling as market interest rates drop but 0% interest deposits cannot decline any further. The range of deposit interest paid is 0% to 2.53% with most of the deposits being in the 2.53% category. The 2.62% gross profit is then reduced by the banks operating costs. The net interest after operating costs and income taxes is about 1.0%. With such a thin margin it becomes very important to avoid defaulting loans and where defaults occur to have security so that at least some amount is recovered. CWB’s allowance for bad debt runs at about 20 basis points. The 1.0% net profit on loans is then leveraged up by the fact that the loan assets are financed with only about 8% common equity (they are mostly financed with deposits) This results in an ROE on the lending business of about 14%.Residential mortgage loans average 4.06% interest while the much larger category of all other loans averages 5.57%. Business is competitive but some of it tends to be sticky to a good degree.

(Some of the math above does not work out exactly but the above represents the economics as I understand it)

May 1, 2013

Markets were down today. They can’t rise everyday.

The Melcor Real Estate Investment Trust started trading today. It was issued at $10.

It traded all day around $9.96, $9.97.

It’s interesting… With an IPO like this the company and the IPO investors hope that it will trade vigorously and for a price higher than the IPO.  But really why should any of the IPO buyers be eager to sell today especially for under $10. They bought this for yield so why sell? And why should Melcor want the new IPO owners to abandon the REIT to be replaced by new owners? (especially if it is donmne below $10). The REIT price should tend not to fall much (if any) since the IPO buyers presumably are happy with it and can hold for the dividend rather than selling at a loss. Ideally new buyers who missed out on the IPO will come in and bid the price up to pry some shares loose from the hands of the IPO investors.

I would expect this REIT to gravitate to being quite thinly traded (like Melcor Corporation itself) . And if interest rates stay low and as the market gains comfort with this REIT and as it grows the price should rise. Today’s trading was probably orchestrated by the investment banks that sold these shares. They probably trade it back and forth to generate some liquidity in the units.

Melcor will release Q1 earnings on may 9. I would expect decent to possibly quite good results in their sales of building lots and a reasonable outlook for that. They may report modest gains on investment properties as interest rates continue to decline. They will likely report unusual expenses due to the issue of the REIT. For Q2 outlook (or as an event subsequent to Q! quarter end)  they will likely indicate that they made just a very small gain in selling properties to the REIT. The trading of the REIT could pull Melcor up a bit since Melcor trades below book value and this REIT should reveal that the investment properties are worth the full book value.

April 30,2013

Well, today seemed to be another case of another day, another few dollars gained.

S&P 500 at a record high. Most of our stocks were up…

Case Shiller home price index shows U.S. house prices rising.

Melcor had some strange trading today. About 200,000 shares in smaller lots traded over the noon hour (eastern time) and pushed the price over $18 to briefly $18.30. But then the stock fell to $17.70, albeit on just one trade and  it closed at $17.90. This trading is strange because Melcor often only has only a few thousand shares trading in a day. About half the time less than 10,000 shares trade. So, I figured maybe there was no news on the REIT front. But there was no news. So it may have just been that someone bought about 100,000 shares and had to bid up the price to get them and after that the price retreated again.

Melcor is so thinly traded that it’s price really can’t be trusted. It can move several percent just because someone is in a hurry to buy or sell 10,000 shares.

I already have a lot of Melcor but have toyed with the idea of buying more especially if I could get it under $17.50.

I believe the REIT should start trading as early as tomorrow (Wednesday May 1) and that should may have some impact on the Melcor shares one way or the other. (I suspect the impact would be positive).

April 29, 2013

It seems that the Market works in mysterious ways. We see lots of stories warning about slow growth and slowing earnings and too much debt. And yet the DOW rises over 100 points today. And the S&P 500 hits a new high.

Most of our stock picks were up today. With the markets have done so well in the past 18 months or more (at least if you had a good exposure to U.S. stocks and little exposure to commodities) the danger now is perhaps in becoming over confident.

Toll brothers at its high today was up over 50 cents but then closed down 50 cents at $34.19. I just entered an order to trim my position if it hits $37. At least that way if it rises that high some will be sold automatically. I find that if I see a stock I own has risen it’s not that easy to pull the trigger and trim the position. After all when seeing that a stock has just made you money it’s harder to get in the mood to sell it. So perhaps when it comes to trimming on rallies and buying on dips, an automated approach is best.

This weekend I studied the annual report of Canadian Western Bank closely. It’s a well run company and is very likely to be a good investment over any longer period of time.

A big issue facing banks at this time is compression of their net interest margins. Traditionally banks earn a “spread” by taking in deposits at say 3% and lending out at 6%. In that scenario a 1% drop in interest rates might change that to 2% and 5%, so no big deal. But many deposits have been paying about 0% for several years now. In that case when lending rates go down the spread has to go down since the deposit rate of o% cannot be lowered.

Banks today have many loans outstanding that were made when in interest rates were higher. As those loans are paid off new loans are made but at lower interest rates and lower spreads . That squeezes profits. At Cnadian Western Bank in 2012 they grw loans by a robust 14%. But adjusted earnings per share were only up by 6% due to interest margin compression. 6% earnings per share growth plus a 2.5% dividend is  not bad, but it would be better without the margin compression.

As examples of the margin compression that may occur at Canadian Western Bank, residential mortgages averaged 4.06% in 2012. But new five year mortgages are going out at closer to 3%, so I have to think this 4.06% figure is declining. However most of Canadian Western Bank’s loans are commercial loans where they face less competition and they may be able to hold their interest rates up better than is the case for residential mortgages.

It’s interesting to note that Canadian Western had invested in the preferred shares of other banks. These had attractive yields which were taxed at a lower rate. But bank regulators in their “wisdom” have passed new rules that effectively limit CWB from investing as much in those preferred shares.

Despite any struggles that CWB has in the short term, it seems reasonable to forecast that it will continue to grow and be a good investment in the long term.

April 27, 2013

Toll Brothers rose 2.4% on Friday which was nice to see after my recent comments about it and purchases of the stock. This builds on the bigger gain of Tuesday.

I have updated my article that compares the long-term performance of stocks, bonds, cash and Gold. It was back in the Summer of 2001 that I first was able to obtain the data to calculate for myself the after-inflation gains from the various asset classes over the long term. Since then I have updated the graphs each year. Little did I know that stocks were going to do quite so poorly in the years since the stock market bubble peak of 1999. Nevertheless the data gives me confidence that stocks do win out in the long run. Besides that with judicious stock selection some investors can make good returns in stocks even when the stock indexes do not do well.

April 25, 2013

Today was another decent day in the markets. There were no big gainers among our stocks but a little bit here and a little bit there and overall a good day.

In the short term our stocks rise because other investors bid up their prices. That always feels good. But much more importantly in the long run our stocks rise because the businesses in which those stocks represent tiny slivers of ownership increase their earnings and improve their future prospects.

I find myself increasingly drawn to the Warren Buffett style of restricting investments to good companies. If we can buy good companies at good prices we can win with that one decision. We can potentially just hold that stock thereafter. Or we can layer on some trading, trimming or selling positions when stocks rise and being a buyer on dips. And migrating to the best companies and values over time.

Buffett no longer plays the trading game with stocks at Berkshire. When it came to entire companies he decided about 40 years ago that it was just too unpleasant to buy a company and then sell it. He would be dealing with real people -managers and employees.  He decided he would only buy companies for keeps. Then he turned that into an advantage becoming the buyer of choice for anyone who had built up a large business and who wanted to sell it but who wanted it looked after properly in a permanent home. And even with stocks, Berkshire is so large and Buffett’s influence is so huge that he can’t very well buy a stock today and then turn around and quickly sell it. He would be accused of manipulating markets if he did that. And while Buffett has said that selecting stocks very wisely and trading infrequently is a good plan for most people, he has also said that more money could be made by an astute investor if some trading and arbitrage is layered onto that.

April 24, 2013

Toronto had a good day, up 1.5%, while the DOW was down 0.3%. It seemed a decent day for our stock picks with Bank of America up 2.0%. Toll Brothers gave a back 1.35% after its big gain yesterday. It seems I sold my Microsoft too early as it was up 3.8% to $31.86. Still I have nothing to complain about overall.

April 23, 2013

It was certainly a pleasant surprise to see Toll Brothers up over 9% today to $34.13. Yesterday morning it had been under $30 briefly. It seems for a day at least the market shared my enthusiasm for the company. Apparently this move was due to an “upgrade” from Barclay’s and perhaps others. That’s a bit scary. It prefer stocks to go up based on earnings rather than based on an upgrade.

The Dow was up just over 1% today.

Wal-Mart was up1.4% today to tie its recent highs at just over $79. For several years I had explained that while Wal-Mart’s stock had not done well since its peak of $60 back in late 1999 that was simply not Wal-Mart’s fault. The market had stupidly bid Wal-Mart way too high back then. The stock then fell to the $50 range and it has taken years of steady earnings growth that has now allowed the stock to set new highs. We rated it (higher) Buy in 2010 and (higher) Buy to start 2011 at $54. And also (higher) Buy at about $60 to start 2012. It was mentioned many times over that period as worthy of consideration. Many analysts considered Wal-Mart to be dead money. It seems they were dead wrong. I recently sold my Walmart to buy more Toll Brothers and to raise cash.

April 22, 2013

On Friday, Melcor‘s new Melcor Real Estate Investment Trust posted its final prospectus. The REIT will yield 6.75%. It appears that this  Initial Public Offer has successfully closed (has raised the money it was targeting). This created some transaction costs for Melcor and may mean that Melcor’s Q1 will not look that great. But Melcor has done this to benefit Melcor share owners and certainly if all goes according to plan, Melcor’s share price will benefit from this. I do not have any opinion on the REIT but I continue to like the Melcor shares.

Regarding Toll Brothers, I note a headline tonight that says: Home sales Begin to Slip as Buyer Demand Outpaces Supply. That does not exactly look like bad news for Toll Brothers.

Another headline tonight reports that News Corp will receive $139 million from its Directors and Officers insurance in regards to the phone hacking scandal. That is bizarre. It makes me wonder what companies are paying for directors insurance fees if these kind of payouts are possible. That’s not an expense item I have ever seen disclosed – with one exception. Berkshire Hathaway has disclosed that it pays zero for directors insurance because it does not provide any to its directors. If they mess up they are on their own. And I would bet that none of Berkshire Hathaway’s insurance companies are involved in paying out this money to News Corp. To be sure, they do offer that insurance but I suspect they know how to pick which companies to insure and were unlikely to have insured News Corp. And if they did they will have had the amount capped as they always do.

April 21,2013

Bombardier Inc. is updated and rated Speculative (lower) Buy at CAN $3.89. This is an interesting company that certainly makes fun stuff – It makes Lear jets, other business jets, smaller commercial jets, high-speed trains and subway cars. But the profits seem inadequate and highly unpredictable. Management has managed to destroy large amounts of invested capital in the past dozen years. However it does have a very good order book at this time and so the short-term outlook while speculative could be considered fairly strong. I have about 1% of my portfolio in these shares. I’m not planning to sell that. I would consider adding to that as a speculative bet but would not want to place a very large bet on this company due to its poor earnings history.

It has received a very large order from Warren Buffet’s Netjets subsidiary. I have wondered in the past if Buffett might be interested in the company. I think he would definitely like the idea of owning a producer of planes and high-speed rail cars. He would also like the long-history of the company and the fact that the founding family still runs the business. But I am not convinced that he would like the economics of the business at all or that he would be be at all impressed by management.

April 20, 2013

Our stocks had a good day on Friday. Overall our average Buy or higher rated stocks is up 7.4% this year to date. This beats the TSX by over 10% but trails the U.S. markets by a few percentage points.

Bank of America is updated and rated Speculative (higher) Buy at $11.66. For this update I read the front section of the annual report where the business segments are described and the President’s letter if given. I did not attempt to read the voluminous material on risks nor review all of the very numerous tables of figures. The analysis is necessarily at a high level. As always, I entered the key financial numbers for our analysis. Unfortunately, in this case the net income is relatively unreliable due to numerous adjustments and the lack of any reported adjusted earnings figure. What I read did not impress me. I listened to the Q1 conference call. The CFO read through a pile of material in a completely monotone and robotic fashion and using a copious amounts of acronyms. The CEO then came on with a discussion that sounded a lot less scripted. This bank is nowhere near as strong and well run as Wells Fargo. But it is trading cheaply. There is probably an opportunity for a good return on these shares as the bank continues to recover from the financial crisis.

April 18, 2013

Most of our stocks were down today but Canadian Tire was up 0.8%. The company has reached a new 10 year agreement with its dealers. The dealers operate each store as business owners in a manner that is similar to owning a franchise. I thought about trimming my Canadian Tire a bit today. I know I was adding to my position a while back on dips so it may make sense to trim. But I decided to just hang on. As I have mentioned before the market seems leery of the impact that Target will have on Canadian Tire and that is simply not going tobe known for some time. Meanwhile the stock looks like good value.

Toll Brothers however went down 4.0% today.

April 17, 2013

Today’s market decline seems more sensible than yesterday’s gain…

It is perhaps an encouraging sign that Toll Brothers managed a small gain today (0.5%) given the market was down. Canadian Tire was also up (0.6%) despite the TSX being down 1.4%.

Fed “beige” book came out at 2 pm eastern and indicated U.S. economy continues to grow but the market did not seem to react to that.

Bank of America was down 4.7% today on disappointing earnings. I will plan to update that report by Sunday as I now have the annual report and the Q1 report.

April 16, 2013

Well, I don’t think too many people were expecting this big rebound (or any rebound for that matter) today. It goes to show markets are very unpredictable, particularly in the short term.

One of the bigger gainers were Berkshire Hathaway up 2.5%. This was partly due to Coke being up 5.7% and Berkshire owns about 8% of Coke.

Toll Brothers was up 2.9% on larger-than-normal volume. Every stock on our list was up with the exception RioCan pref shares which were down 1.0%.

I plan to have more updates before long as the Q1 reports come in.

One trading idea would be to enter orders, for the stocks you own to trim positions at say 10% above the current price and orders to buy more at 10% below. (Or you might choose 5% or 15%…) You can leave orders like that in place for 30 days and see what happens. I have done a bit of that on occasion. It can be a way especially to trim positions without emotions getting in the way  since it would be on auto pilot. This obviously is more applicable to those of you that have larger positions. For example if you hold 1000 shares of something you might place an order to sell 100 to 200 on a 10% rise and buy 100 or 200 on a 10% dip. But there are absolutely no rules around this. And I can’t say if this tends to work better than buy and hold. It seems like it would be a good way to take advantage of volatility. But if the stock rises 10% and then keeps on going you may regret selling. It’s just an idea that you might sort of layer on top of whatever else you are doing just targeted to take advantage of volatility. And you could also decide to do it on just a few stocks.

April 15, 2013

It was a nasty day in the markets. The TSX was down 2.7%, the Dow was down 1.8% and the S&P 500 was down 2.3%.

In particular Toll Brothers was down 7.7%. Apparently this was mostly due to a report that home builder sentiment was down.

Higher costs for building materials and rising concerns about the supply of developed lots…

Many builders are expressing frustration over being unable to respond to the rising demand for new homes due to difficulties in obtaining construction credit, overly restrictive mortgage lending rules and construction costs that are increasing at a faster pace than appraised values,” said Rick Judson, National Association of Home Builders Chairman and a home builder from Charlotte, N.C.

However, Toll Brothers has said that it has an advantage in that it has its own large supply of developed building lots and has access to credit due to its strong balance sheet. Also its customers are higher end and have less difficulty obtaining mortgages. Toll Brothers is not a company that is “unable to respond to the rising demand for new homes”.

Overall I suspect Toll Brothers is  doing well. But perhaps the stock had gotten too high. I was aggressive in buying on the recent dips and should have bought slower or waited to see if this bigger dip would happen. Nevertheless I added again to my position in Toll today.

The other day I wanted to check the P/E ratio of the Toronto Stock Exchange Index. My ETF article has links to where the TSX shows the P/E ratios for the index and all the segments. But the links had changed and I can no longer find the P/E ratios. It would not surprise me if they simply stopped publishing it. Few investors are interested in such matters. I will look into this with the TSX. Possibly the data is still available on a paid subscription basis.

I suspect that the sharp drop in Gold was partly responsible for a nervousness in the market today that led to equities falling. And certainly the explosions at the Boston Marathon later in the trading day would have added to the fear.

This sort of thing is in the nature of markets and it’s why investors need to be able to handle risk and to take advantage of dips rather than fearing them.

April 13, 2013

Wells Fargo is updated and rated (lower) Strong Buy at $37.21. Although I have a large exposure to this, I may add to my position. There are many companies where it would be difficult to guess if they can continue to grow earnings over the years. But Wells Fargo seems to be a company where it seems quite safe to predict that it will continue to grow its earnings over the long term. And it appears to be under-valued. Still, earnings and particularly revenues and net interest margins could decline in the shorter term and there is certainly no guarantee that the share price will not fall. But in the long term it seems a good bet that the share price will rise. At last last report Warren Buffett was still buying it.

April 11, 2013

MicroSoft was down 4.4% today on news that PC sales have fallen. It has risen about that much in the past few days. I decided to sell my shares and move on. I had been wanting to raise cash anyhow. MicroSoft is a complicated company and basically I did not have that much conviction or emotional attachment around owning it and so is easier for me to sell that as opposed to something like Wells Fargo that I have rated higher and bought often. Also MicroSoft seems like a difficult company to predict given technological changes.

In general the U.S. market was positive today and Canada lost ground.

Tomorrow (Friday) morning Wells Fargo will release earnings. I suspect they will have done well. Interest rate spreads (net interest margin) will likely be a little lower however. Credit losses should be steady or improved. There will be some expenses to settle litigation and related matters around the whole mortgage fiasco situation of circa 2008 but much or all of that will have already been booked in previous quarters.

April 10, 2013

So far this year it has certainly been a good time to be in the U.S. market. Despite various worries and warnings the DOW and S&P 500 are up a lot this year and the DOW was up 0.9% today and the S&P 500 was up 1.2%.

Prudence would suggest trimming some positions for those of us with high exposures to equities. I thought of doing that today but ended up not selling anything. And with Toll Brothers down 2.3% today, I added to my position in that company.

Constellation Software was up 3.3% today.

In the next few weeks we will have earnings plus the usual economic reports and various world events all of which ,the reality is, can push the markets around unpredictably.

April 9, 2013

After scaring people last week, the markets have surprised with a strong start to this week. A new record for the DOW today.

Microsoft was up 3.6%.

I was reading Canadian Tire’s annual report which arrived in the mail a few days ago. Management does seem very energetic and confident regarding growth. While there are never any guarantees, I feel good about my investment in Canadian Tire.

Meanwhile in the U.S. J.C. Penny has fired the CEO it hired about a year ago. The guy was a Prima Donna who changed absolutely everything at Penny’s and rolled out the changes without bothering to test them. He had apparently been responsible for Apple’s retail stores. What he did not realize was that Apple stores worked because they were selling a unique and hot product. It was not the stores that sold the products. It was the products at Apple that made the stores successful. And even to the extent that the Apple stores were in fact hip and very well designed, it was a mistake to think that similar concepts would appeal to J. C. Penny customers, who apparently were mostly an older crowd, or that hip young people were going to rush to a fuddy duddy old brand like J.C. Pennys. It is one thing to sell a hot proprietary product that you make yourself and quite another thing to try to make it selling the same stuff as numerous competitors. The simple fact that Penney’s went outside for a new CEO last year tells me they had no confidence in themselves at that time.

April 8, 2013

Monday ended up being a decent day in the markets for our stock picks. Most notably Toll Brothers was up 2.9% and Bank of America was up 2.0%.

Canadian Western Bank was down slightly and closed at $27.63. I am tempted to add to my position at or below this level.

We are now into the Q1 earnings reporting season. First the U.S. companies start reporting this week and then in a couple of weeks the Canadian companies will start reporting.

April 6, 2013

FirstService is updated and rated Weak Sell at U.S. $33.50 or CAN $ 34.01. I like it as a company and would be interested to buy on a speculative basis at $30 or less. It announced this week that it would eliminate its preferred shares. This could cause some selling pressure as the preferred holders are likely to sell the common shares that they will receive in early May. Also the outlook for the first half of 2013 is weak. The company expects very good results after that.

I will remove the preferred shares from the table above fairly shortly. I did indicated in the report on the preferred shares that it was possible the preferred shares would be redeemed.

It was a bit odd that FirstService introduced preferred shares some years ago since the move almost eliminated its common equity. It will now have a stronger balance sheet.

Friday was a down day in the markets although a late day rally eased the losses. In keeping with my April 4th comment I sold the remainder of my Walmart at $75.73 and bought more Toll Brothers at $31.17. I honestly don’t know if that was wise though Toll Brothers did end up closing at $32.16. My portfolio is perhaps dangerously concentrated in a few stocks at this point.

The composition of my own portfolio has been updated.

I saw a story that indicates that Target’s prices at its new Cnadian stores are higher than Walmarts. That is not a surprise. I mentioned in previous comments that with the lease purchase from Zellers and the renovations they did to those stores it did not appear that they would be a low cost operation. Also the story talked about empty shelves at the newly opened stores. That seems surprising and would seem to indicate that they don’t have the supply chain in Canada figured out.

April 4, 2013

It was another day of the U.S. stock market doing better than the Cnadian market.

A notable winner was Wells Fargo, up 2.0%.

The stocks that I have the most interest in buying at this time are Toll Brothers, Melcor and Canadian Western Bank. If I sold anything, perhaps the first thing that comes to mind would be my remaining Walmart shares.

Part of the reason Toll Brothers has fallen this week appears to be an announcement that it will borrow $300 million. I did not see the borrowing as a negative since they are a growing company. This company hunkered down and sold assets as house prices declined with the real estate crash. Now with the recovery they are investing in growth.

I note that chairman Gwyn Morgan and three others will leave the SNC Lavalin Board. I had mentioned under February 11 below that I expected Gwyn to bail ASAP. And I really don’t blame him. He is a relative newcomer to SNC and Did not create the mess and did not sign up to fix a mess. He does not need the money from this gig and it is really not worth it. Plus he did not seem to have the stomach and/or talent to do much about really digging into the rot at SNC and getting this mess put behind it. Next we may see the company sell off its infrastructure investments. The new Board is independent and new enough to go after the rot more aggressively. And the new members come in knowing what they have signed up for. (Which is to clean house.)

April 4, 2013

Ouch, markets took a drubbing today. Dow down 0.8%, S&P 500 down 1.1% and Toronto down a painful 2.1%.

Our stocks did not escape and almost all were down. Boston Pizza was one of the rare exceptions as it rose a bit more.

My recent purchases of Toll brothers yesterday and today were a bit pre-mature as I bought above the current price of $32.48m down . But that is what happens when one buys on the way down. If it is a good company buying on the way down tends to work out in the end.

I notice SNC Lavalin will hire an outsider as CFO. It’s rather pathetic that a company does not have the faith in its own staff to hire from within. Or the sense to have groomed a successor. This could get interesting though as an outsider will have no vested interest in protecting past accounting. Maybe he will come in with the perspective of an auditor and find more transactions that reek. The old refrain is that where there is one or a few cock roaches, there are many.

I don’t know what to make of the threat from North Korea. If they actually could strike North America with nuclear weapons (which I understand they say they can’t but which experts dispute) then I suppose we would have bigger things to worry about than our portfolios.

I would like to have some cash or buying power in case markets decline for whatever reason. But I don’t think I am prepared to do much if any more selling.

April 3, 2013 (11:40 am eastern time)

As mentioned yesterday I wanted to raise some cash today. sitting at home after my trip I took the opportunity to so some selling this morning. I sold half my Walmart. I then sold my Shaw Communications which has risen about 18% since my last rating which was Buy at $21.06. It may have risen on faint hopes of a Rogers take-over. Certainly I may regret selling this, but I needed to sell something to raise some cash as it seems prudent to have some cash around in case better bargains emerge. I also sold the rest of my Boston Pizza. It will continue to do well as an entity and the cash flows I think are secure and will grow although only quite slowly. But it would fall if interest rates rise and I just was not sure it should be this high ($22.25) my last rating was (lower) Buy at $19.96. Also some of its price rise seems a bit financially engineered when they borrow money to buy back shares. We could all borrow at low rates and buy this stock and make money on the dividend but it is risky. Having the company do it is convenient as we don’t have to make the payments. Still it somehow smacks of risk and a bit of a free lunch. The strategy made a LOT of sense when the units were clearly under-valued but I am not sure it makes sense now. I then bough a bit more Toll Brothers as it was down 2.25%, perhaps I am being stubborn there as it is not clearly a bargain but I do think the U.S. housing recovery will continue.

I saw some figures yesterday that indicate that loan delinquencies in the U.S. are WAY down from what they were a couple of years ago – with one important exception. Mortgage delinquencies are still VERY high (30 day delinquent around 10%). But I wonder now it that is an artifact of the past. These loans may have been delinquent for a very long time and we are looking at the same loans. Banks are allowing the delinquencies under various government programs and also due to the very slow foreclosure process. I think the current mortgage delinquencies may far overstate the situation on a go forward basis.

April 2, 2013

I spent some of my travel time carefully re-reading a book called Buffett the Making of an American Capitalist. Buffett’s feats of wealth creation are truly extraordinary. And his methods are well chronicled and can be copied. Few bother to try.

A plan is starting to gel in my mind to somehow get together a pool of money to be invested in ways that copy Buffett. More details will follow although it could be a few years yet before I get this off the ground.

It was a strong day for our stocks. Berkshire up 1.6%. Not really any big gainers but certainly most of our  stocks were up.

I have little cash in my accounts. I will look tomorrow to see what I might trim to raise some cash, maybe Shaw and Walmart, not sure yet.

Final thoughts on Manhattan as we left this morning.

LaGuardia Airport is so close to downtown, it is great. The airport is old and crumbling. Yet it was very functional and we fairly whizzed through security. The flight left a bit early! And this was Air Canada.

As far as businesses in Manhattan and especially Times Square. Well known brand names are what people flock to. Many independents are there but the brand names are gaining ground. That applies to just about everything. Hotels, drugstores, candy stores, jewelry, restaurants, clothing. Both brand name stores (Macys, Saks, Levies..) and brands themselves do very well.

April 1, 2013

A  moderately weak day in the markets. Most of our stocks were down. Melcor, Boston Pizza and Walmart were among the winners.

Day 7 in Manhattan

Walked up to see the Touraine a luxury condo building owned by Toll Brothers (units range from $3 million to $20 million with only the $20 million penthouse as yet unsold. A nice building in a great neighborhood. Several blocks off south end of central a

I am thinking of placing an order to buy more Toll Brothers but I may try to get cute and go a bit below the market price.

Also today, shopped at Macy’s. Much of it is very price but they also some deals. With the traffic they get through the store they must be selling a lot. Then shopping on Fifth avenue including FAO Schwartz (toys) which is worth a visit, some unique and quality items there and finished with Dinner at Bubba Gump’s Shrimp Company.

March 31, 2013

Day 6 in Manhattan:

NBC studios tour, SOHO, Chinatown and a show (The Book of Mormon).

One disappointment the green hop-on-hop-off bus service had very poor service. Buy the red hop-on-hop-off by Gray Line or just take taxies and subway.

Another minor disappointment, the McDonalds next to our hotel is the slowest ever. Tonight they were horribly slow and also out of Coke and out of chicken snack wraps. It goes to show that businesses have to work to stay on their game.

But overall Manhattan is great. Well worth a visit.

In terms of Canadian businesses, TD Bank has a huge presence in Manhattan. Tim Hortons is here but nearly invesible. ALDO shoes has a good presence. Did not notice any other Canadian companies here.

In regards to Melcor, as I mentioned, market interest in the Real Estate Trust spin-off may not be that high. In any case the real estate was already marked to market (unlike their development lands) and therefore there may not be any material value gain when the REIT starts to trade. So, perhaps the January pop in Melcor’s price to $21 and higher was overdone. But anyhow I think Melcor is still good value at around $18 or $19 and will be a good long term investment. There is always the risk of a housing slow down in Alberta but in any case that would be temporary.

Day 5 in Manhattan (March 30)

Museum of Natural History, Central Park and Ground Zero. We continue to find everyone to be very friendly to and patient with tourists.

March 29, 2013

The stock markets were closed today, but Manhattan was certainly open.

Day 4 in Manhattan:

Short bus tour of downtown… water taxi tour of Statue of Liberty (view only) and several stops of interest. Excellent tour guides. Did some shopping. Grimaldi’s pizza at Brooklyn bridge Visited Wall Street (and met Grimaldi himself who actually sold the original pizza store and opened a new one next door (presumably after a non-compete ran out)). Walked the Brooklyn bridge. Visited Wall Street and the nearby famous Bull. Rode the subway for the first time. (The rest of the time we just walked since so much was so close).

P.S. Goodbye to Ralph Klein.

March 28, 2013

S&P 500 reached an all time closing high today. And will reach many more in the years to come.

Canadian Tire was up 2.0% and that is on top of recent gains. This seems to be fairly random. Why investors would ignore it for a while and now bid it up is a mystery — though not unusual. To me, it looks like good value. Canadian National Railway was also up 2%.

Melcor was down 2.9% today and had been down over 4%. Possibly the market knows that Melcor may be having trouble marketing the units in its proposed new Real Estate Investment Trust. Or it could be just normal volatility on this thinly traded company. I grabbed 600 shares at good prices on this decline.

Day 3 in Manhattan included the following:

Saks 5th Avenue – worth touring through and has great brand names. But outrageously over-priced. It’s probably coasting on its history and brand value. Rather snooty and pretentious.

Then off to the Museum of Modern Art. This place is the very definition of pretentious. Some of the art was literally garbage. But to each his own.

Went through Grand Central Station (Grand Central Terminal) which is truly grand.

Also the Waldorf Astoria on Park Avenue which was grand and would be a nice place to stay.

Finished with an off Broadway Show “Avenue Q.”

March 27, 2013

Markets were a little negative today. My American Banks and Berkshire were down. No big losses overall though.

Day Two in Manhattan… Rockefeller tour, skating rink, buildings, history and art work. Observation deck is better than Empire State but one HAS to do both. Staff were great. We had New York pass book which includes both. Lunch at a little Chinese restaurant $8.75 lunch special included soup, very generous beef and vegetables (lot’s of other choices) and rice. Excellent value. Lots of staff on hand they do a huge phone order business. Excellent service they knew how to maximize revenue over that lunch period.

New York Knicks game tonight… sold out… almost bought fake scalper tickets but were warned against it. Bought from Tickets Now affiliated with Madison Square Gardens and ticket master. Everything about Madison Square Garden was first class.

March 26, 2013 

A strong day for the markets. Right now I am just holding and enjoying gains.

As far as my trip to New York I have the following notes.

United Airlines rep in Edmonton was exceptionally good. United Airlines flights were smooth and even arrived erarly.

United Airlines terminal in Houston was a bit gross, not that clean, even the service at a Wendy’s there was strangely slow and confused.

New York LaGuardia is in a run down area. American Airlines buildings looked circa 1940. Lots of crumbling infrastructure.

Taxi was low cost and traffic was light, cheaper to get downtown NYC from LaGuardia than downtown Edmonton from the Edmonton (actually in Leduc) airport.

Empire State Building staff were very effective at ushering people in. Very friendly and good at what they do. It’s a slow process because they do such a booming business. Down town New York seems great. Holiday Inn Express has been great. Visited M&M world store (part of the Mars empire) in Times Square, friendly and busy. Tony’s Italian restaurant in Times Square was excellent.

March 25, 2013

I leave tonight for a family vacation in New York City. I hope to visit the New York stock Exchange among many other attractions. It’s my first trip to New York City unless I count visiting Coney Island and the Bronx Zoo in 1972 when I was twelve years ago.  I expect to be able to update the daily comments from New York. But if I am not able to, I am back on April 3.

It should be no surprise that markets were down on Monday. This business of depositor “haircuts” for Cyprus bank depositors may not be any big deal at all for North America but it certainly is not a positive development.

I think there will be some ripples from this. Depositors in any weak bank especially those with deposits above the insured levels should be looking to move their deposits to more solid banks.

Banks hit with large deposit withdrawals may have problems unless central banks lend them enough money to cover all withdrawals. Most banks will have their assets tied up in loans.

These weak banks facing deposit withdrawals will call call in all the loans they can. Corporations and individuals who have borrowed from weak banks may find themselves scrambling to get new loans and new lines of credit.

All of this should mean that short-term interest rates on treasury bills of the strongest countries will go down and even go negative. The bond interest rate for these countries may go down as well. Tresury bill interest rates for and bond interest for weak countries will rise.

Costs for corporations to borrow should rise as many banks will not have money to lend.

Weaker banks will face nationalization or a forced takeover or in some cases even failure. Virtually none of this will affect the big banks in Canada. Smaller banks or weaker banks in Canada could face some deposit withdrawals.

Deposit insurance and implicit government guarantees have made people largely indifferent to which bank they had deposits with. These latest developments should make people, especially very large depositors including large corporate deposits more selective in choosing a bank.  And that is a good thing. We may see the emergence of small banks with much higher equity ratios. Possibly the higher equity will be invested in equities but it would still be there to provide security to depositors while also earning decent returns for bank shareholders.

It is sad indeed that Warren and Buffett, Berkshire Hathaway is not allowed in the banking business in the U.S. Berkshire owned a small bank in the 70’s and was forced by regulators to sell it.  If it were it would be showing how banks should be run.

I considered reducing some of my positions today but in the end decided rather than do something, I would just stand there.

Meanwhile Walmart and Canadian Tire did well today.

Visa was up 2.4% today. It has looked quite expensive for a long time but as I have said before it is hard to keep a good monopoly down. It is not on our list at this time.

March 24, 2012

My article on the valuation of the S&P 500 is updated and now suggests that as a point estimate the S&P 500 is about 12% over-valued. Basically the as reported earnings on the S&P 500 have remained stable over the past six months (since the last update) while the index has risen significantly. Although the particular stocks that I hold seem to offer good value this analysis may cause me to consider taking some profits and reduce my equity exposure somewhat.

I have added eBay back to the list of stocks in the table above. It is rated Weak Sell at $53.27. The company has many strengths. It is expensive but possibly the growth will take care of that. I am troubled by its excessive executive compensation and by an irrational insistence that stock options are not real expenses.

I had last rated this only a Weak Buy/ Hold at the start of 2012 at $30.33. So it seems I missed an opportunity to invest in a winning stock in 2012. That really does not bother me at all. I made excellent returns in other stocks in 2012. And even though my return would have been better had I invested in eBay, I don’t regret it. If I have developed a method of stock investing that works well on average that is all I need. Investors who would insist on never missing out on any stock that moves up strongly are simply being unrealistic and really showing a lack of knowledge and/or an immaturity.

Some subscribers may wonder why I would return a stock to the list that is rated Weak Sell. The main reason is that I did not know what rating it would have until AFTER I completed my analysis these past two days. The alternative of only adding stocks that are Buys would cause me to bias my ratings toward Buy. Also some of you may read the report I have compiled and conclude that you would in fact like to buy based on the strong growth and notwithstanding a high valuation and the executive pay.

March 22, 2013

Friday was another strong day on the markets with the DOW up 0.6%. Most of our stock picks were up.

Overall, my own account is up 8.5% since January 1. Our average stock that was rated in the Buy or Strong Buy range (everything above Weak Buy) has risen 6.8% since January 1. The Toronto Stock Exchange index is up 2.6%. The DOW is up 10.7%.

I sold 900 of my 1900 Boston Pizza Royalties Income Fund units. I am not sure it was wise to sell. But is was only last month that I rated these units a (lower) Buy at just under $20 and they went up another 7.5% since then. I believe they raised the distribution 4% since then and also resumed borrowing money to buy back shares. There is probably no reason to think the units will not continue to do well. But they were starting to look expensive and so I pulled the trigger and sold half. I am up 45% on these units (which I believe I have held for several years). That is in addition to the distributions received. These units briefly went under $8.00 in the despair of December 2008. We rated it Strong Buy at that time.

With Walmart now above $74, it is probably still a good investment. Still, it is one that I may consider trimming to raise cash.

For the most part I am inclined to remain near fully invested. But I do recognize that markets can always decline at any time. I focus on owning businesses. I like owning shares in profitable companies that I frequent like Canadian Tire, Walmart, Boston Pizza and Shaw Communications. I also enjoy owning shares in well known companies like Berkshire, Wells Fargo, Bank of America, Stantec, Melcor, Canadian Western Bank and Toll Brothers. Even if the market declines I will still own the same number of shares in these great companies. And I will have the opportunity to buy additional shares at lower prices. I’m confident that these will be good investments over the long term.

March 21, 2013

Melcor Developments reported today that it has filed a preliminary prospectus for the proposed partial spin-off of its rental properties into a REIT. This will not likely lead to an accounting gain for Melcor since the real estate is already marked to market. But if the REIT trades above book value then that could push the Melcor stock up. When I saw the press release today it looked like good news to me and I was able to buy more Melcor before its price rose much today. Melcor was up 4.0% on the news today. Possibly it will rise further as this news gets reflected in the stock price. It’s thinly traded and so does not instantly reflect news.

Boston Pizza was up 2.4% to $21.40. I find it expensive at this price. It recently announced it will borrow money to buy back shares. That is accretive to the yield. But it feels a bit forced. Also since our recent update they raised the distribution by 4%. It has done very well indeed but it does seem expensive at this point. I am more inclined to sell some as opposed to buy more at this point.

Canadian National Railway was down 2.5% today. It does not look cheap but possibly the decline is a buying opportunity. CN should do well long term.

March 20, 2013

Toll Brothers was up an impressive 5.8% today. I added a bit to my Melcor position today based on an order that I had placed a week or so ago.

March 19, 2013

Our stock picks did okay today. Canadian Tire was up 1.1%. I did not sell any of my Shaw at least not yet and it rose 1.3%.

The whole business with Cyprus is not something that would cause me to sell any stocks but it was a very stupid situation.

Cyprus, for whatever reasons, had a huge banking industry with substantial foreign deposits. Those banks lost a lot of money when Greece defaulted. Banking regulators in their “wisdom” encourage banks to hold government bonds and usually consider them to be risk free. Left on their own these banks even if they were short capital would almost certainly have recovered. Now the IMF and European Union or whomever have basically waved a huge red flag that tells everyone to pull their money out of the Cyprus banks. If the banks and Cyprus got into trouble die to the banks losing money on Greek bonds then destroying the reputation and business of these banks is hardly going to help matters. What must be done in the event of weak banks is for government officials to to either nationalize the banks or profess great confidence and financial support for the banks. What was done here (or attempted to be done) just seems idiotic.

March 18, 2013

As expected, markets were weak today due to the Cyprus bail-out situation. But overall the reaction was modest and not as bad as many feared. I have not seen any good analysis of exactly what was being proposed there or why the banks were involved. What was the financial health of the banks? How did the banks relate to the government which was being bailed out? I understand that the terms of the deal may change… The idea of “taxing” bank deposits does seem like a singularly stupid idea. Just how broke was Cyprus what were the consequences if it defaulted on its debt? Surely some $12 billion is not really that much money, surely the government had some kind of assets it could sell instead? Why not issue a series of Cyprus patriot bonds to be sold to Cypriots at home and abroad who would buy the bonds as a show of patriotism?

I’m tempted to take some profits on Shaw Communications which has done very well as far as the stock price in past six months. Profits and free cash were strong in Q1 (our last update was Q4). It appears that the company was not predicting much growth in 2013 overall and so subsequent quarters may not look as strong as Q1.

March 17, 2013

As of late Sunday, it appears that the markets will open down 1% or so due to events in Cyprus whereby depositors in apparently insolvent banks will have to give up about 7 to 10% of their savings deposits in exchange for shares in the banks. (Which shares might or might not be worth anything.). Shock and anger is apparently the reaction from financial commentators. But really, banks have historically been known to be risky ventures. It’s precisely because of that high risk that they generally have some amount of deposit insurance. Bank depositors, especially those in Canada and to a lesser degree the U.S. have forgotten that banks are highly leveraged and therefore risky. There is a ton of misconceptions about events like this. It seems likely that Cypress simply did not have the money to make good on the guarantees (They use the euro and therefore can not simply print money). Presumably the banks were very weak and this was about the best that could be made of a bad situation. Also, apparently much of the money was deposits from outside the country. Do we really need to have all that much sympathy for people who put their money into foreign banks on tiny island countries to earn the extra return or to avoid taxation or whatever?

This could indeed have unintended consequences as bank depositors in other countries may rush to remove cash.

I think this is only a big deal if the financial commentators and traders make it out to be such.

I certainly would not be selling my stocks on this news. Others likely will which could push markets down further.

I will mention though that I had occasion in late November to need about $7000 in cash to make a large purchase (of a shiny object) from Costco. Costco, being the crafty devils they are, would not take a cheque that large. And debit cards only go to $1000 it seems. And I don’t carry American Express. And Costco does not take Visa. I went to TD and tried to withdraw $7000 from my account. They said sure, it will be ready first thing in the morning and the maximum allowed today was $3500. But interestingly I could get $3500 from each of two branches on the dame day, which I did and I made the purchase. It was an interesting learning though. We do trust our money to the banking system and it may not be as accessible as we think. (The fine print states they can require notice to withdraw cash from most accounts).

And early this year I was moving a large amount of money around and I found that about $25,000 was the limit for an electronic transaction. If you had the idea you could instantly scoot a few hundred grand to the Caribbean or someplace on a whim you might find it is not that easy.

I don’t think any of that really needs to be something to worry about. But it was an eye-opener.

March 16, 13

Toll Brothers is updated and is rated Speculative Buy at $34.13. As the report indicates, this luxury home builder is not an obvious bargain. But as it roars back (in terms of sales) from the depths of the U.S. housing crisis it appears set to show much larger earnings over the next couple of years. The issue becomes whether or not the growth is already priced in. Personally I plan to add to my position but not go overboard. I will be prepared to add to my position if the share price should happen to decline by say 10%.

On Friday our stocks had a particularly good day. Bank of America was up 3.8% and Wells Fargo was up 3.3%. The banks were up after having passed the Fed’s Stress Tests and having announced stock buy backs. Canadian Tire was up 2.2%. While some of the stocks were down, it was a strong day overall.

March 14, 2015

Today, Thursday saw another good day in the markets.

Most of our stock picks were up nicely although nothing spectacular. Boston Pizza certainly had a good gain up 1.9%to  $20.99.

It is amusing watching the stock market television channels attempt to analyst the market. Is there a stock market bubble they ask? Really? since when does an S&P 500 trailing P/E ratio of 16.2 constitute a bubble? And especially when interest rates are at record lows. Yes, the stock market can always fall hard on bad news but it’s clearly not in a bubble. And the notion that the market should fall because it has reached a new high would defy a couple hundred years of history whereby the market always eventually surpasses its old highs and moves on. Though sometimes that takes a long time. And sometimes there are gut wrenching declines. But by what logic would we expect the market to necessarily fail to move past its 2000 and 2008 highs at this point? Maybe the market will fall but it won’t be because of a triple top or any such nonsense.

It seems like for years we listened to many commentators on television tell us we were in a long-term bear market. Now that the market has already risen and left these geniuses behind, now many of them are suggesting we are in a bull market. I have no use for such concepts. In fact bear market and bull market theories are just another form of sell low and buy high which does not make a lot of sense to me.

I am pretty sure that there is a strong negative correlation to watching stock market television channels and investment performance. They are just far too fixated on short-term matters.

I am often asked if one needs to watch their stocks very closely after buying. My reply is not at all. Firstly watching will not usually provide any clear signal. Secondly the effort should be on buying carefully in the first place.

I seldom ever watch BNN, although I am sure they have some good segments. Same for Bloomberg and CNBC.

I do record and watch Lang and O’leary almost every day. They have a good variety, great guests and are not fixated on micro movements in the stock market. And I always find Kevin O’Leary to be entertaining. I certainly don’t agree with everything he says but I do agree with a lot it. And I marvel at his quick wit. He is very sharp.

March 13, 2013

The Dow and the S&P 500 were both about unchanged today but the Toronto Stock Exchange Index was down 134 points or 1.0%. For many years I have found that my stock picks tend to move more with the broad U.S. market indexes and not Toronto. I pay little to no attention to the Toronto index. Except I do use it as a benchmarked to compare my performance each year. I have not paid a lot of attention to the components of the Toronto Index. My understanding is that it is heavily weighted to resources (oil & gas, minerals, forests…) also a heavy weighting to financials. Many other sectors are not well represented in that index.

It was a mixed to slightly down day for our stock picks.

If anyone knows of any seminars on stock picking and investing using fundaments I would be interested in knowing. I’d like to find one where I could participate as a presenter. The type of seminar or course I am thinking of is probably two full days or more and charges a fee to participants. (Free courses would likely be trying to see something rather than provide education). Obviously, I am totally not interested at all in anything to do with technical analysis, charting, or foreign exchange trading. Also I am not interested in options or derivatives (not as a presenter anyhow). My interest is to participate in a seminar that focuses on fundamental analysis and also asset allocation. If you know of anything, let me know at Shawn@investorsfriend.com

March 12, 2013

Our banks stocks lost some ground today as did Toll Brothers and Canadian Tire. The noise to signal ratio from this as far as I am cornered is a great deal of noise and no signal. I take signal from earnings reports not stock price blips.

As far as Canadian Tire goes, I like it because (among all the other reasons mentioned in the report) it appears to have decent earnings with a P/E of just under 11. And it trades at just 1.2 times book value. And I suspect some of the assets are quite a bit under-valued. Overall it looks like good value to me with some safety margin that should mean it is quite unlikely (but always possible)  I would take a loss if I held it several years. However there may not be any catalyst to push the price up any time soon. It could take a year or more before the impact from Target is known. On the other hand it has said it will be buying back shares. (none yet reported since the Q1 report came out). There are also possible catalysts in terms of acquisitions and divestitures. Overall I think it has good value and I plan to ride along with it. Around 2002 my feat was that Walmart was then moving out of the Woolco stores into much larger stores. Canadian Tire did not seem to miss a beat on that. Canadian Tire has its large auto service operation. Target is not competing there. (I keep waiting for Canadian Tire to start selling a line if Indian or Chinese cars, low priced ones. They are ideally positioned to do it.)

Speaking of the auto service, I took our 2005 Volvo cross country wagon there last Thursday night because my wife had complained it was making unhealthy noises after starting. They diagnosed the problem in about 30 minutes and explained it was the starter failing to fully retract but did advise replacing the (volvo= expensive) starter yet as the situation was harmless. In fact we then realized it mostly happened when we used the auto starter and we are soon out of that season. My point is, I got excellent very speedy service and no up selling. And I like shopping where I own shares. They charged me the agreed upon diagnosis fee, and I was perfectly happy with that. (Car problem diagnosed = happy wife = happy Shawn)

Retailing can be a tough business. So it’s interesting to observe that the single greatest family fortune in existence is that of the Walton heirs. On billionaire lists they rank as high as number 11 as individuals. Christy Walton $28 billion, Jim Walton $27 billion, Alice Walton $26 billion, Robson Walton $26 billion. All told for the Walton family that is $107 billion and WAY ahead of the ostensible number one, Carlos Slim Helu who scrapes by with $73 billion. Naysayers will complain that the Waltons were retailers who did not add value to the products and who destroyed the Mom and Pop shops. The other side of that argument is that they brought huge economies of scale to retail and have improved the lives of millions upon millions by lowering the cost of everyday goods. I certainly make no apologies for owning some Walmart shares and I hope the Walton’s don’t either. Anyhow, it’s not like that family is ever going claim the $107 billion dollars of goods and services that they could buy and go waste that money. Most of it will go to benefit society one way or the other. Anyhow my intertest in Walmart and its history is to study how retail makes money and how I can apply that in buying shares of other retailers.

 

March 11, 2013

Of note today was Wells Fargo up 1.7%. I like the prospects for this bank and also for Bank of America.

I added a small amount to my Canadian Western Bank position today after it fell 1.4%.

March 10, 2013

Melcor Developments is updated and rated (higher) Buy at $18.61. This is a very well-managed Edmonton-based company that has traded on the stock exchange since 1968 and which traces its roots back 89 years under the ownership of the same founding family. Earnings are cyclical and the stock price can be highly volatile. I first added it to this site in late 2002 rated Strong Buy at $3.60 (Actually at $36.00 but it later split its stock 10 for one). Since 2002 the assets on the balance sheet have increased from $209 million to $1447 million (boosted somewhat by mark-to-market valuations on rental properties). This company illustrates how owning shares in companies can work. The company does pay a dividend. But it retains most of its earnings to grow the business. And those retained earnings have greatly benefited share owners. Anyone who argues that companies should always dividend out as much of their earnings as possible (or even pay any dividend) is dead wrong in the case of companies like Melcor.

By simply hitching a ride at a time when the share price is reasonable investors who bought and hold did very well indeed.

However, Melcor’s shares did soar to the unreasonably high price of just over $30 in the Spring of 2007. The shares rose about 500% in just over two years. The shares were over-valued at that point.  In late 2008 through early 2009, Melcor shares traded as low as under $4.00. This was during the financial crisis (which turns out to have been the financial opportunity of a lifetime). At $4.00 Melcor shares were extremely cheap and far cheaper in relation to book value than at any time since I began following the company in late 2002. This illustrates the fact that both the quality of a company and its price are very important factors.

With a company like a Melcor a reasonable strategy is to have a default position of buying and holding. But also be prepared to buy on dips and be prepared to sell if the market exhibits irrational exuberance about the stock.

I am comfortable holding this stock although I realize it can fall significantly in times of recession in the home building industry in Alberta.

March 7, 2013

Two of our Stock Picks were down noticeably today. Canadian Western Bank was down 4.8% and Constellation Software was down 4.4%. On the other hand, Bank of America was up 2.8%.

Canadian Western Bank released earnings this morning and the stock fell 4.8%. At a quick look, the earnings were not bad. Adjusted earnings per share were up 2%. Not great but not awful. The market does not like that the net interest margin is lower. But the lower margin should not be a surprise with interest rates so low. I believe that the shares offer reasonable value at this price and that a Buy rating remains applicable. I don’t think a person would go too far wrong in buying and holding these shares.

Constellation Software released earnings this morning and the stock fell 4.4%. At a quick look, the earnings were quite good. I am comfortable holding this stock.

U.S. banks stocks may do well in the wake of the Fed’s stress tests taht were released today. Apparently further results are due next week and by the end of next week there may be indications of increased dividends at some U.S. banks.

Melcor showed little reaction to its earnings report. It is thinly traded and not followed by many analysts and so that may explain the lack of reaction.

March 6, 2013

Well, it was yet another strong day for our stock picks. But we should not get over confident. There will be down days as well and down months and even down years. But right now, all the painful down days (like 2008) seem like a distant memory.

Bank of America was up 3.2%. Toll Brothers was up 1.8 %, Canadian Tire, which is my largest holding was up 0.8%.

The down-side is that many of our stocks have risen substantially since the last updates, and so the bargains are less obvious now, and so I am eager to get more updates done. But it’s a nice problem to have.

Melcor Developments came out with earnings after the close today. The earnings and the report looked quite strong to me. At this point I would wait and see how the market reacts. (Although I will probably trim my position if it rises). I will update that report by Sunday after first seeing where the price settles on the earnings news. However it does trade quite thinly and so the price may take some time to react to the earnings news. They also have a new CEO promoted from within but that does not appear to be a disruptive event at all. (The best run companies usually do promote from within. If a company’s  board of directors can’t find a new CEO from within it means they don’t respect their employees and they don’t think the company has much proprietary knowledge or culture to build on.)

March 5, 2013

So the Dow Jones Industrial Average reached a new all-time high today. Not a big deal, but it does seem an encouraging sign.

I have a very heavy weighting in equities (around 90%). For that reasons I may look to see what positions I should trim a little as prices rise. But for the most part I am content to let things ride.

Warren Buffett was on CNBC’s Squawk Box for three hours on Monday before the market opened. He said that equities remain good investments compared to other assets. He never makes predictions about the stock market except that he thinks it will rise in the long term. He said a long-term government bond was the dumbest investment around. He encourages Americans who need a house to buy ad to take a 30-year locked in mortgage rate. He does think that at some point the FED will begin to reverse its easy money policy. When that happens he believes most institutional stock investors w will be looking to sell some stocks. (Basically he is saying stock prices will fall then, perhaps a lot). Berkshire will not be looking to sell stocks at that point.

I notice that lower mortgage rates in Canada are in the news. In some ways it is surprising that banks have not always been more competitive. People say the industry is an oligopoly with only five major competitors. Actually five is plenty to promote competition. Consider, three airlines in a market will usually beat each other to death. Banking should be very competitive in that their products are the ultimate commodity. And with the internet the old convenience of the local branch is not much of a factor. But there remains an inconvenience and a high a=switching cost (in time and effort) to se=witch banks. Big banks are very silly to offer mortgages through brokers. That is a low profit business. Smart banks will try to capture you as a customer and have you using five or more of their products. When they do that they don’t have to be as aggressive on prices.

Speaking of airlines/ I saw an ad today where Air Canada will match prices and give you an extra $50 off if you find a cheaper flight within 24 hours of booking. This is a really stupid strategy for Air Canada. It’s seldom a good idea to compete on price. And I don’ think it is ever a good idea to price match since that means you are agreeing to match whatever stupid price your competitor offers. And it’s really dumb to compete on price when you are not the low cost operator. Air Canada should try to compete some other way like convenience, comfort, safety service and on-time travel. On top of an already stupid idea, this will create  a customer service nightmare when people start trying to phone in and prove they saw a cheaper flight. As Buffett also said yesterday, Airlines have all the characteristics of a really bad industry. Encouraging customers to shop even harder for the lowest price every time is not going be a money making strategy.

March 4, 2013

It was a decent day at least in the American markets with the DOW up 0.3%.

Walmart was up 2.2%.

Some people figure that stocks are expensive simply because the DOW is near its record high. But that is totally normal. The last high was five years ago. S&P 500 as well as DOW earnings are somewhat higher than they were five years ago. The U.S. GDP is higher than it was five years ago. Interest rates are lower. So we should fully expect the markets to surpass their old highs. That’s what markets do.

On the other had growth expectations are low and that does act as a gravitational force on the markets. And if interest rise that is also a gravitational force. Investors may be wise to keep some cash ready to buy bargains should they appear. Or be ready to use new savings to do so.

Overall the fact that markets are at record highs is far from any clear danger signal. Markets are unpredictable. In the short term, they will rise and they will fall unpredictably. Over long periods of time they will rise due to profitable businesses retaining earnings and growing.

..

March 3, 2013

Berkshire Hathaway is updated and rated (lower) Buy at $102.05. For the reasons given in the report this rating may be conservative. By my reading, Buffett has hinted (but not stated) that the intrinsic value is closer to the $130 range.

Buffett’s much anticipated annual letter came out after the close on Friday. As always it was chock full of investment wisdom.

Berkshire had an excellent year although Buffett, in typical fashion called it a sub-par year because it slightly trailed the S&P 500 this year in terms of the increase in book value per share.

The entire annual report runs to 109 pages (not excessively large by the standards of large companies and considering it includes the 24 page letter form Buffett). I read the entire thing. Years ago I had assumed that Buffett himself was not much involved in the writing the official parts of the annual report. I was wrong. Buffett’s fingerprints are all over the report including even the notes to the financial statements. He has a particular succinct style of presenting information. No words are wasted. No doubt, his CFO and controller write much of it, but they follow the Buffett format and it seems clear that he edits it.

Over the years I have read a huge amount of negative comments about Buffett. The indisputable fact is however that he is one of the greatest investors and CEOs in history. People would be wise to spend their time learning from him and not bashing him.

A subscriber asked about whether U.S. stocks should be purchased in a U.S. dollar investment account. The answer is yes. Unregistered accounts (taxable accounts) usually offer the ability to set up a U.S. dollar account. The strategy then would be to move some money to that account and then buy the U.S. shares. You will incure a currency conversion fee. But thereafter the money can be left in that U.S. dollar account even if you later sell the stock or dividends are received. This avoids further currency conversion costs. In registered accounts, TD Waterhouse offers the ability to automatically do “wash trades” whereby U.S. stocks are funded from a U.S. dollar money market account and no further currency conversion costs apply. If the U.S. stock is sold the money goes automatically back to teh U.S. money market account. Other discount brokers may require you to call in each time to request the wash trade (as TD used to require) or may not offer this.

February 28, 2013

Strong gainers today included Canadian National Railway up 3.0%, Couche-Tard up 2.7% and Melcor up 2.4% (but it is thinly traded and tends to jump around a bit). Also RioCan up 2.8% although that is similar to its price at our last update.

Canadian Western Bank was down 2.1%. It will likely release earnings soon. I certainly like it longer term.

Warren Buffett will release his annual letter tomorrow at about 4 pm eastern time. Also the Berkshire Hathaway annual results will be released. Berkshire will have had a good year.

February 27, 2013

Markets were very strong on Wednesday with the DOW up 1.25% and Toronto up 0.6%.

Berkshire Hathaway was up 2.5%. Toll Brothers was up 2.0%.

At lunch time on Monday I bought additional Berkshire Hathaway shares paying $99.54. It ended Monday at $98.58. On Tuesday it opened at $99.05, got as low as $98.25 and closed at $98.72. Today, Wednesday it opened at $98.58, but closed at $101.21. So I did not get the best price this week and certainly I should have been buying quite some weeks ago. But nevertheless I am happy I bought some on Monday.

Target indicates it will spend $1.5 billion in capital in Canada in 2013. (possibly that was meant to include the 2012 spending). That would be on top of the $1.8 million they paid to acquire the leases (though some was recouped selling some leases to Walmart. They presumably also spent a lot in 2012. They say the stores they acquired “were in very poor physical condition”. I know the Zellers near me was stripped to the bare steel and concrete. Even the exterior walls were torn out for an expansion. They will open 124 stores. It sounds like they will have spent at least $3.3 billion on the 124 stores. That’s a remarkable $27 million per store — and they will still be paying rent. That strikes me as expensive. I don’t know how that fits in with expectations that Target will offer low prices. Consumers should not expect anything close to the U.S. prices. For may reasons they will face higher costs in Canada.

Perhaps it is a great deal for the landlords like RioCan. Target apparently pays for all these capital costs. It will be quite some years before the leases come up, but at that time the landlord would have the benefit of the renovations and be able to charge a high rent to Target.

February 26, 2013

Markets were generally strong today.

Toll Brothers was up 3.3% on strong reports regarding U.S. housing prices and new home sales. It should really be no surprise that U.S. house prices are rebounding given record low interest rates and given that houses were often selling below replacement cost less an allowance for depreciation and obsolescence. Stories of shadow inventories had many convinced that U.S. house prices would not rebound. But last Spring, Warren Buffett was saying that houses were among the best investments possible for U.S. citizens due to their low prices. When Warren speaks, smart investors listen. Uniformed people disparage him despite his 60 year record of exceptionally astute investment moves.

Melcor has fallen to $18.25, down 2.7% today and down from recent highs of over $20 on news it will spin off some investment properties into a REIT. I suspect there are fears that the Alberta market is cooling. And fears that the REIT plans could fall through. I am holding this stock with excellent gains on it and will re-evaluate after it releases earnings around March 7.

I have been thinking of adding Proctor and Gamble to the site. I like their brands and I don’t think the stock will look overly expensive. But a fortune magazine article has painted a disturbing picture of the CEO. Apparently several years ago he was involved with some 18 outside organizations and commitments including sitting on various boards. Now he has culled that back to about six. I guess I would have thought that being CEO of a huge company would be a full time job. It would seem to take a special kind of idiocy to be involved in 18 outside organizations. I would seriously question his judgment on that. I would think that about 2 outside commitments would be enough.

There was an interesting story today about the Ontario Teachers Pension Plan. Indexing of the pension for inflation, for service earned after 2013,  will only occur if the plan is fully funded. Past service will apparently remain fully indexed. Even though it is being made on a go-forward basis this change apparently entirely eliminates the pension’s deficit calculation as at January 1, 2012. The plan had a relatively modest deficit of 8.2%.

I believe this is a wise and fair move. It’s not that pensioners do not “deserve” inflation protection. They do. But from now on it will be paid only if investment returns are such that there is no pension deficit. Currently all the pension investment performance risk has been with the still-employed teachers and the employer. There has been zero risk for the retired teachers. This change puts some of the risks on the retired teachers but only on a go-forward basis. In fact it appears to have no impact on current retirees and will only affect those that retire after 2013. For retires in the next five years or so the impact should be very minimal. But those retiring in (say) 20 years will only receive inflation indexing if the fund is fully funded. In hind-sight the plan has been too rich and the contributions were too low. Contributions have already been increased about as much as feasible and there was really no choice but to deal with the benefits. This change appears to be a good one although it might be described as the lesser of the possible evils.

February 25, 2013

A graph of today’s markets shows that they started out strong, but reversed to losses by mid-day and then fell heavily at the end of the day.

Apparently part of the reason was election results in Italy.

As an investor I pay little attention to things like elections in Italy. I figure if I own stocks at reasonable prices I will do okay long term. The shore-term is anyone’s guess.

With the market down today, I decided to add to my position in Berkshire Hathaway. I should have been buying it before Christmas…

I’m tempted to add to my positions in Wells Fargo and Bank of America but I may not given I already have a relatively large allocation to each of these.

February 24, 2013

Canadian Tire is updated and rated (lower) Strong Buy at $68.65. There are risks with any investment and I would urge subscribers to read the report. Subscribers may wish to place more emphasis on the risk posed by Target and a more competitive retail market. For a wide variety of reasons I conclude that it is likely, but certainly not guaranteed, to be a good investment.

My personal portfolio is updated. My cash component is lower than the last update due to some buying and due to withdrawing some cash from my non-registered account.

Markets were up strongly on Friday.

It’s been interesting to see the Canadian dollar fall to 98 cents. Ever since the Canadian dollar soared some years ago I have felt that the risk had been more to the downside than the up side. At this point I have no strong feeling at all as to whether it will rise or fall. There is actually no reason why our currency should trade at par with the American dollar although it does make it easier to compare prices across the border. My approach has been to move a certain amount of money into U.S. dollars and leave it there.

February 21, 2013

I plan to update a couple of the reports this weekend based on earnings reports. I also plan to update the composition of my own portfolio. It has not changed a lot since the last update and I don’t recall any new stocks being added, just additions to existing positions. I see little need to hunger for new picks if the existing ones seem good. Some subscribers have asked for more guidance on what to buy. At the end of the day I provide information and opinion here. Each company has a report. My opinion of the company is not totally captured in just the rating. Subscribers should, ideally, read the report on any stock they are interested in. There are never any guarantees in the investing world. Many investors become comfortable with volatility. If you own shares in good companies they usual recover but once in a while a company can really collapse. And occasionally the overall stock market takes a dive. I don’t pretend to be able to predict those things. I simply try to buy some good stocks at good prices. I then sell some if I need to raise cash for better opportunities or if the overall market is seems too high in relation to earnings and interest rates.

After posting the note on Canadian Tire this morning I went into TD Webroker and the stock was set to open down modestly somewhere under $68. So I placed an order for a small additional amount at $68 which meant I would get the opening price to a maximum of $68. (If it opened and stayed above $68 my order would not be filled). It ended up opening at $67.30. It closed at $68.91 so, with one day down and forever to go, it looks like a good buy so far. I am happy to hold this stock but as mentioned just below I don’t expect any sudden surge in the price. Maybe a little positive move due to the share buy back and that assumes all else is equal like the overall market remains pretty stable.

Bank of America was down 3.2% to $11.42. I still think of this stock as being a good investment but somewhat speculative.

Walmart was up 1.5% to $70.26 after it reported earnings. I mentioned under February 16 that I added to my position on a price dip that day at $69.29. I am comfortable buying or owning this stock at this price.

February 21, 2013 (approx. 8:45 am eastern, 6:45 Mountain time)

Canadian Tire earnings came out prior to the opening of trade. The fourth quarter was okay, at best, not terrible, certainly not great. The full year was pretty good. They are doing a modest stock buy back and emphasized that. If the share price drops on this news I would be a buyer.

February 20, 2013

Markets fell today on fears that the FED would stop buying back bonds and interest rates would rise.

Well, maybe that is a legitimate reason for the market to fall but I am not so sure. Interest rates are at record lows and I don’t think the P/E ratio on the market indexes is too high for thee low rates or even somewhat higher rates. The end of FED bond buying would also signal some return to a more normal state of affairs. Personally, I just can’t see panicking and selling overtime the market might fall. It always might. But long term good companies rise in price.

Toll Brothers fell 9.1% after lower-than-expected earnings and lower-than-expected home deliveries. Both were above last year but lower than expected. I have been saying that Toll Brothers looked expensive though I did hang onto my shares. I expect to update the report by Sunday.

Constellation Software is down to $115. It has fallen in recent days and weeks from the $124 level. When I look at is recent press releases I don’t see any bad news. It will releaase earnings March 7. It is always possible that the market has detected a negative report coming. But I do not see cause for alarm. I don’t particularly plan to buy at this point but I would be more inclined to buy than sell.

I expect Canadian Tire to release earnings before the open tomorrow (or at least by end of trading tomorrow). This my largest holding. I own it because it looked like it was bargain priced to me. But earnings reports are always unpredictable. I certainly have no idea of what might be in the works. Generally I expect that they had a decent Q4. The credit card portfolio should have done well. The stores, I can’t predict but see no big reason to be worried. The wild card might be if they announce some cost-cutting efforts (unfortunately these are usually associated with costs for severance) and how the market might react to that. By the time most of you read this, we will likely know how things turned out. The conference call is scheduled for 4:30 pm so that may mean the release is after hours instead of pre-opening. I find it rather bizarre that they would issue a press release about the conference call and not indicate the time of the earnings release. This seems to be standard but dumb practice.

If the stock happened to drop several dollars or more on bad news I would be inclined to buy but I would also want to first be aware of the news.

On the positive side if they happen to announce any strategic moves like selling real estate or the credit card operation or a heavy share buy back then it could rise in price.

If there are no surprises in the earnings news then I expect the stock might rise a bit but not much as the market is going to be waiting to see the impact from Target though that won’t really be apparent for up to a year.

February 19, 2013 (these comments did not upload until the 20th)

Well, a pleasant start to the markets this week. ‘course we’re supposed to be thinking longer term but still a gain always feels good. Stantec up 3.3%, Shaw Communications up 2.5%, almost everything was up, but Constellation software was down 3.1%.

And a good day for Buffett, Berkshire A shares were up 1.6% to $152,498, a new record high. The B shares were up 1.25% to $101.02. These are basically the same shares except one A share is convertible into 1500 B shares (but not vice versa).

I have not seen much mention of the fact that Berkshire closed at a new record today, nor that it is up over one million percent since Buffett took over the company. His average cost of acquisition was $14.86. His first buys were at $7.60 per share in 1962. These are the same shares that are now worth $152,498. I don’t know what the shares traded at on May 10, 1965 when Buffett took control, perhaps it was a bit over $15. But most assuredly the shares were under $15 in early 1965. Buffett tracks his performance back to the start of fiscal 1965 which was October 1, 1964. I believe he was already influencing, if not controlling the company by then.

It seems to me that this kind of gain (one million percent or more) is worthy of a bit of recognition.

February 17, 2013

As many of you saw, I sent out an email today intended only for former (not current) customers. The email went to everyone on the free and paid lists by mistake. There was a link there to subscribe at a special price. If anyone who was not a current customer used the link that is completely fine.

It does create a bit of an issue where any existing paid customers used the link as they may end up with two subscriptions in PayPal. That can cause login problems as well as double billing. If you did that it’s fine except please understand we may have some issues to get through in regards to any billing or login problems.

If anyone has a big issue with some other people getting a special price, email and tell me what you would like done. I think the service is great value at the regular price and so I am hoping not too many people will be upset that someone else got a discount. But if you are just tell me what remedy you would like to see.

My apologies for the confusion created by the mis-directed email.

As you will see just below, one company on the list has been updated. And accordingly it is highlighted in yellow on the list. It will remain in yellow for about one month.

There had been a total lack of new updated reports in 2013 to date and that was related to the fact that basically everything had been freshly updated near the end of 2012. There have of course been comments about five days per week.

There has been a flurry of new subscribers due to some newspaper media coverage of my self and this site in Edmonton.

New subscribers should read the short article (the link to this article is also near the top of this page and many of you will have already reviewed it) with some information about using research page.

Occasionally people email to ask if I can review their portfolios. No, that is not a service we offer. InvestorsFriend Inc. and myself as its editor owner cannot give any personal advice. All of the advice here is generic. It’s not tied to anyone’s particular circumstances. Also, I also cannot comment on any stock or company not on the list here. My approach has always been that analysis must precede opinion. Unless I have analyzed a company in at least some detail I try to refrain from forming much less sharing an opinion. Analysis, of the sort that I undertake, cannot always prevent mistakes but it certainly helps.

Updates to the stocks on the list will come. I believe that over the course of several months or a year there will always be sufficient updates. Occasionally a new company will be added.

Boston Pizza Royalties Income Trust is updated and rated (lower) Buy at $19.96. In this case notice that it is not a corporation. This is actually a rather odd entity. A heavily financially engineered entity that collects a 4% royalty from food sales at Boston Pizza restaurants (excluded alcohol). The units unfortunately do not benefit in any meaningful way from new store openings. That is because new units are issued to basically the founders of BP in exchange for the right to the 4% from these new stores. The unit distribution will rise over time only if same store food sales rise. These units have bond-like characteristics but also offer some possible growth (and risk of shrinkage – and shrinkage is seldom or never a good thing!). Overall the 5.9% yield seems attractive given today’s low interest rates.

I own units and sometimes toy with the idea of selling as the price has risen. I have excellent gains on these units and so I worry about losing that gain. But overall it seems a good investment. If the unit price should fall due to perhaps a weak quarter or just lack of buying interest then I might buy more. If an investor is truly looking for yield and truly would not be bothered by a unit price decline as long as the cash distribution was unaffected then this might be good choice. But it is very hard to not be bothered by price declines. Those are always a risk.

Subscribers tell me they value me giving my though process. I probably should have bought more Boston Pizza even as the price rose. I believe I probably got (back) into this stock in the $11 something range. When I buy at $11 it simply becomes hard to buy later at say $13 or $15, much less $18 or $20. This is especially the case given that the share price did not rise because of any great earnings or dividend surge at all. To acknowledge that these units are still a (lower) Buy today  at $20 is to admit that they were probably a steal at under $12 in 2010 rather than the Speculative Buy we rated it at. Even there we had to contend with our own history that called it a Strong Buy on December 13, 2008 at just $7.15. That was after it fell hard in the financial crisis, like everything. It would have been hard to keep calling it a Strong Buy after a swift rise the the $12 range. (I do try to make the ratings independent of past history but one can’t simply erase their memory of prior prices).

Although these units seem to be a reasonable investment, if one needs cash for other investments or purposes I certainly don’t see an issue with selling this one.

Our ratings history is:

Today (lower) Buy at $19.96

December 12, 2012 (lower) Buy at $19.05

May 13, 2012 Buy at $17.87

December 24, 2011 (higher) Buy at $14.18

November 28, 2010 Speculative (lower) Buy at $13.78.

May 16, 2010 Speculative Buy at $11.45

The difficulty in 2010 was that we knew the distribution would be sharply cut when it became taxable at the start of 2011. We also knew that the lower dividend would then be eligible for the dividend tax credit. But it certainly seemed a more risky situation given the then pending distribution cut.

November 28, 2009, Buy at (about) $11.40

August 15, 2009 (higher) Buy at $10.20

February 9, 2009 (higher) Buy at $8.65

December 13, 2008 Strong Buy at $7.15 (financial crisis, err… financial opportunity days)

Our initial rating was (lower) Buy at $14.47 on January 9, 2005.

We dropped it from the list in 2006 after our report got outdated and the price rose very steeply and I sold my units at a gain. It briefly soared to $20 in 2006 but we were not rating it  at that time.

All this detail I got just from looking back at the links to my old comments. Anyone industrious can check it out if they wish. Just do searches for comments on Boston Pizza. For past years scroll to the bottom of this page for a link to past years’ comments. Of course there is always the risk that I backdated the old comments and ratings. Anyone who has the slightest suspicion of that should shop elsewhere for advice.

February 16, 2013

Berkshire Hathaway A shares closed Friday at a record closing price of $150,141.

This exceeds the previous high close of $149,200 on December 10, 2010. It did however reach $151,650 on December 11, 2007.

Regaining a high from five years ago is nothing to brag about. But still Berkshire has certainly done well of late. There will likely be some news about it reaching the all time high.

What I find fascinating it consider that these shares were in the $15 range as Buffett took over the company in 1965. He paid an average $14.86 for his controlling stake. The shares have since risen  a staggering 10,104 fold. That is just over one million percent. And yes, the math is correct. What is equally remarkable is that it “only” took a compounded gain of 21.2% per year to achieve that. This illustrates that absolutely stunning results can occur if you compound money at 21% for say 50 years. (Even at 10% your gain is 117 fold in 50 years. Each extra tiny bit of return after 10% adds a staggering amount over 50 years. A 1000 fold gain in 50 years (100,000% gain) requires 14.8% per year compounded. It also suggests that getting much over 10% for 50 years is no easy feat. Only a few people can possibly accumulate huge wealth otherwise there would be nothing left for others. But don’t begrudge Buffett. His fortune represents “claim checks” on the goods and services produced by society (including produced by Berkshire) But he is never going to cash these claim checks he is giving it ALL away. He lives on the modest half billion or so that he has accumulated outside of Berkshire, and he will apparently give much of that away as well.

Walmart fell 2.2% to $69.30 on Friday on news about an internal email describing February month to date sales as a total disaster. And the executive wrote “The worst start to a month I have seen in my ~7 years with the company”.

When I saw the price down My reaction was to think about buying and certainly not selling. This was an internal email and no doubt was at least a bit exaggerated. Anyhow, I don’t think one should change their outlook on Walmart based on an email about sales over a two week period.

I don’t know if I honestly say I would have preferred a 5% or larger decline (I own some Walmart) but given the decline had already happened I figured the thing to do was to consider buying. I looked at my last rating which was (higher) Buy at $68.03. I had also been wanting to perhaps deploy more cash into the market. So I ended up adding 50% to my Wal-Mart position. Wal-Mart at 2.9% of my portfolio (prior to the add) was only my 12th biggest holding and so I also considered that. It had been a much larger share of my portfolio but I had sold some at about $72 and so this was also just in some way restoring the position. There are always lots of complex reasons to buy or not and in the end one just pulls the trigger or not. But those were some of my thoughts as I bought on Friday. I bought on my lunch time at $69.29. It had gotten as low as $68.13 earlier.

I have looked it up in the comments below and I note I had sold all my Walmart on October 3 at $73.63. (And I would have had good gains on that). I had previously some some on July 10 at $72 based on an order placed some days earlier to sell at that price. Also I sold some on June 12 at $67.70. The notes below indicate I bought some Walmart on April 12 at around $58. At that time it was one of my five largest holdings. I don’t know what my average price on Walmart was. TD Waterhouse shows my my average price paid for stocks I hold but it does not show me a history for a stock like Walmart that I owned and then did not own and then own again.

I also bought some Walmart back on November 19 at $68.09.

One way to pick up possible bargains without having to monitor the market at all is to enter “stink bids” below the current price. The discount that you apply in the stink bid strategy would depend on many factors. It might be just 2% low in one case and 20% in another case. Anyone who had a buy order in on Walmart at say $68.50 or $69 (which can be left as an open order for a maximum of 30 days) would have been filled at that price while being blissfully unaware of any news or price decline. That works well if the decline is temporary and rather sucks if the decline is larger and the stock falls well below your buy price. If the bad news happens when the market is closed and it opens at a price lower than your buy order you will get that lower price.

In general stink bids can be a decent way to buy and to take advantage of volatility. I have done this on occasion. If you really want to buy a stock then you probably should just buy. If you kind of want to buy but are a bit ambivalent this can be a good strategy.

 

February 14, 2013

In today’s news, Warren Buffett’s Berkshire Hathaway is partnering with another outfit to buy Heinz. This is not a huge surprise considering it fits much of the profile Buffett likes. It’s sells branded consumable products that are not likely to change much in the next two decades or longer. It’s simple, stable and predictable. It has a very long history. Buffett likes his history. It was a family company though I am not sure there is any family involvement left. I have no idea about the valuation. I do know that the fact that he is paying some 20% more than the market place is no indication that he is paying too much. He has always held that he can calculate the value of a company like this better than the market can.

I usually don’t have any short term predictions about share prices. But I did mention in my January 20 note below that I expected Berkshire to hit a record price this quarter. It’s just about there. It’s up 4.2% since then. Not huge put the thing is the upside seemed predictable and there did not seem to be a lot of downside risk over a reasonable holding period. I own Berkshire but I should have bought more. I was cheaping out hoping it might fall a bit.

February 13, 2013

Today we had a number of stocks falling in price. But that is nothing unusual.

Boston Pizza was up 2.5% to $20.40. It just released earnings last week which at a quick glance were pretty good. I’ve toyed with the idea of selling some of what I have (It’s in RRSP so no capital gains tax to worry about). But then again I see no reason for it not to hold up pretty decently and so I just hold it. (Of course it always COULD fall).  When it was at $14 about 16 months ago I never expected it to jump so fast or to anything close to this $20. From here I really see also no reason for it to increase much if at all. The yield already seems a bit low for an entity that will not grow dividends per unit fast at all (for the reasons indicated in the report). Longer term if interest ever finally rise its yield will rise meaning the price would drop.

With Canadian Tire down, I bought a bit more. This may in fact be sheer stubbornness on my part. The stock just looks cheap to me. If in fact earnings do stumble than I am hoping for some kind of action like a change of management to release value. I think the value is there (in the credit card portfolio, and the real estate in addition to the actual retail business)  so that provides some downside protection. But hopefully earnings do not in fact stumble. In December the company started buying back its own shares for the first time in a while (outside of smaller buys to offset stock option grants). They did not buy any since year-end but often companies are not allowed to buy shares between the end of a quarter and when they release earnings. The share buy back gave me some hope that management as of December saw the stock as cheap and therefore were not likely expecting to report bad news. We shall see around February 21 when they report earnings. But even if earnings are good, the market may not push the stock up until and unless the company proves it can maintain earnings after Target gets in operation.

Mortgage rates:

About 14 months ago I did a lot of digging into why Americans can lock in mortgages for 30 years (30 years!) at really low rates while in Canada the normal maximum lock-in was five years, although seven and ten years were available at rather exorbitant interest rate premiums. A 25 year lock in was available at a huge premium. I never did get any satisfactory answer to the mystery.

The interest rates I saw at that time were:

5-year fixed 5.29% but 4.09% special deal (so similar to U.S. 30-year fixed rate)

10-year fixed 6.75% but 5.45% special deal (39% higher than U.S. 30-year fixed)

25-year fixed 8.75% (call for special deal) I called and the mortgage specialist was not aware what the special deal might be and had never heard of anyone locking in for 30 years. The posted rate is more than double the U.S. 30-year fixed rate.

Well some things have changed.

Today a number of banks are offering very competitive 10 year locked in mortgage rates:

Scotia Bank has the lowest at 3.69% locked in for 10 years.

For the Canadian market, that is phenomenally low. Many people with large mortgages who cannot afford it if rates rise should consider locking in. The lowest posted rates are around 2.4% locked in for one year. So it is tempting to take that lower rate.

Maybe you can get even lower than 2.4% through a mortgage broker. But there are certainly people who might want to consider that 10-year lock-in.

Interest rates have gone lower than almost anyone thought they could and they have stayed low. But things can happen fast in the finance markets. Rates can rise. Rate are at record lows and they will rise at some point.

At 3.69% I almost tempted to take a few hundred thousand out as a mortgage and invest that. I would be very surprised if I could not make more than that 3.69% on average over the the next ten years by investing. But in the end, I don’t need the stress. Markets can fall and one way to add a lot of stress to your life is to be in the markets with borrowed money during a major market decline.

I suspect banks are able to do this because they have in turn found investors willing to lend money to the bank for ten years at something like 2.5%. If they can securitize these mortgages and fund them from investors locked in at say 2.5% then that is okay for the banks. (A 1.19% spread for the banks is not great but not horrible). 10-year Canada bonds pay investors 2.0% so I can’t see any sane investor offering ten year money to the banks at less than about 2.5%.)  If on  the other hand the banks are funding these mortgages with non-locked in deposits (on which they pay approximately nothing) then the banks are playing a very dangerous game. Higher spreads now but massive risk if deposit rates rise in the market.

Then there are the American banks who manage to offer 30-years locked in at 3.5%. The 30-year treasury in the U.S. pays 3.23%. So we have homeowners somehow borrowing at nearly the same low rate as the U,S, government. This is only possible due to a phenomena that I would call “stupid investor tricks”. In order for a bank to lend at 3.5% for 30 years it needs someone (investors) willing to lend it money at less than that. (And, no, despite what you heard about fractional reserve banking, they don’t get to print up the money in the basement of the bank)

Part of the game here is that mortgage investors expect a lot of the mortgages to be paid out early and so they don’t expect their money to really be tied up for the full 30 years. These investors will be sorry if rates rise, as their money will be locked up for a long time at low rates.

Warren Buffett has advised that it is wise idea for American’s to buy houses and to lock in at these ultra low 30-year rates. What is smart for the borrower will not ultimately be smart for the investor who funds that mortgage . (The banks tend to be in the middle hopefully collecting a spread and fees and not taking the risk).

February 12, 2013

Markets were higher today… In particular we had Toll Brothers up 4.4%. It looks expensive at this point but I continue to hold it. Also we had Bank of America up 3.2%.

February 11, 2013

Stocks were generally down a bit today. The Q4 earnings for many Canadian companies should be rolling in shortly.

I note today that the former CEO of SNC-Lavalin has been charged.

http://ca.finance.yahoo.com/news/former-snc-head-pierre-duhaime-formally-charged-fraud-152714437.html

Wow, that is certainly a fall from grace. From rich and powerful CEO to looking at possible jail time and certain large legal bills, stress and embarrassment.

I don’t know much about SNC. But my understanding is that huge bribes were paid in Libya  (and possibly elsewhere including even possibly Canada). And it seems that the top people knew about this. In the case Libya it may have been sort of excused as a cost of doing business, a case of “when in Rome”. They may have felt they were doing this for the good of shareholders. But it is illegal under Canadian law for Canadian companies or Canadians to offer bribes anyplace in the world.

While not knowing anything except the few news stories I have read, I think SNC faces a lot more trouble over this yet. I think they had some connection to that Canadian woman who is in a Mexican Jail accused of helping to try to smuggle out Saadi Gadhafi. From all appearances the company (or at least some former executives) were involved but now they have abandoned her. Nice. With several men now charged someone will sing in turn for a lower sentence and perhaps many more will be implicated. Possibly the company could be given a large fine. That would punish innocent shareholders but still it could happen I suppose. There is even the ridiculous possibility that some shareholders who bought more recently will win a class action suit and the company (i.e. indirectly other quite innocent long-term shareholders) would have to pay that.

I am not impressed with chairman Gywn Morgan’s handling of the whole affair and I expect him to try to jump ship as soon as he can. He is newer at the company and he never signed on for this crap. He seems to be too optimistic that the rot has now been removed. I would doubt that. To me, it seems more likely that rot had invaded quite deeply. We shall see.

I don’t know if SNC is a reasonable investment or not. I understand it has good assets and a good break-up value. But I tend to think its future is very unpredictable. I would not be comfortable investing in it. (Though it turns out that one would have been wise to got in at the lows a few months ago and yet I felt the same way then, too uncertain.)

February 10, 2013

Greetings and welcome to a new group of subscribers who joined this weekend after seeing an article in the Edmonton Journal.

For the benefit of the new subscribers I will mention that I usually post some comments here five times per week. Usually it is Monday through Thursday evenings and then sometime on the weekend, often Sunday evening. Sometimes I don’t have much to say, other times I will comment on one or more of the stock picks or comment on something that has been in the business news or something related to investments. I rarely have anything to say about where I expect the markets to head in the short term since I don’t believe I have any ability to predict that. Markets tend to rise in the long term and be unpredictable in the short term. It’s better to focus on trying to identify and buy some companies that are likely to do well in the future (in terms of earnings), that are well managed and that are available at good prices. With this type of company purchased at a reasonable price the future stock price may vary but will ultimately tend to reflect the growth in earnings.

Dividends are nice but are neither a necessary nor a sufficient condition. Berkshire Hathaway has made a return of literally one million percent for its investors since 1965 and without any dividend (well ironically enough it did pay a single dime out in 1967 but nothing since then). Of course many investments do pay excellent dividends. And there are examples of companies that were paying good dividends until suddenly suspending the dividends and then plunging in value. Sustainable earnings drive returns for investors over the long run. If the earnings are not growing then the only way the return is going to be acceptable is with a good dividend yield.

Subscribers often ask which stocks to purchase from the list above. I can’t make that decision for investors. I hope that subscribers will pick and choose from the list  based not only on the rating (and noting if the current stock price has changed since it was rated) but also based on reading and contemplating the reports on each company.

Of the companies on the list I tend to like all of those in my own investment portfolio but certainly can’t make any guarantees. In particular I like the prospects for Wells Fargo, Bank of America and Canadian Tire. Canadian Tire is facing increased competition and so maybe it will suffer. But my expectation is that it will report reasonable good earnings for Q4. It reports on February 21, I believe. It basically seems to be priced as if the outlook is somewhat pessimistic.

Almost all of the stocks in the list were updated near the end of 2012. The ratings were our opinion as of the date and price indicated. Some of them have subsequently risen quite nicely in price which makes it more likely that if we were to update today, then the rating might be a bit lower. In particular, Melcor is up significantly and while we still hold it we would not likely consider it to be a Strong Buy at the current price. Similarly Toll Brothers is up significantly compared to the price at which it was rated in early December. Some others have had fairly strong increases and in some cases the increase has been quite modest (making it more likely that the rating would still apply).

There will be some updated ratings over the coming weeks and months. In some cases I will update for the Q4 earnings reports. I tend to focus first on the higher rated companies in terms of doing updates. I will also keep you informed of any trades in my own account.

Patience is a virtue in investing. New subscribers should not necessarily be in any powerful hurry to make trades based on the information on this site. It makes sense to get familiar and comfortable with our approach.

February 7, 2013

I’m featured in the business section of the Edmonton Journal tomorrow.

http://www.edmontonjournal.com/business/Lamphier+sides+coin+this+stock+picker/7940653/story.html

Our stock picks have ended out the week in decent shape.

As always the signals from the economy are mixed. The U.S. economy continues to recover.

Canadian multi-family housing starts dropped a lot in December. Single family housing starts were also a bit lower I understand. In general house prices in Canada appear to be slipping a bit.

In Alberta things seem strong. But we do have the issue of a low oil and gas prices and eventually that couold cool the economy in Alberta. So Melcor faces that risk. On the other hand I expect Melcor to release good Q4 earnings (around March 6) although it may report a weaker outlook. Melcor had of course risen about 20% last month when it announced it would spin off its office and retail rental properties into a REIT (which is would continue to own a majority of that REIT). If that plan were to fall through then presumably Melcor would decline. And if the plan goes ahead perhaps it would rise a a bit more on that news. It is tempting to sell or lighten up on Melcor. On the other hand it’s probably going to be a good long-term hold. My strategy at the moment is to hold and I would probably buy if there was a significant pullback.

February 6, 2013

A notable winner among our Stock Picks today was Alimentation Couche-Tard, up 4.7% to $52.60.  I did not see the news that prompted this. This company is an incredible (and under-reported) Canadian success story. I am not eager to buy at this price but it has been a good stock pick for us over the years. It has certainly not gone up in a straight line. But is has done very well indeed over the years. It was under $20 at the start of 2010.

February 5, 2013

Most of the stocks that declined yesterday recovered today. There does not seem to be much sign of fear in the markets.

For the moment my strategy might be described as “Don’t just do something, stand there!”

February 4, 2013

Markets were negative today. It’s certainly not something that worries me. I think any pull-backs right now might prove to be more of a buying opportunity than anything.

February 1, 2013

So, we got a surprise 150 point, 1.2% jump in the DOW today. Which goes to show that in investing half the battle (actually 100% on average) is just showing up. The market tends to rise over the years. A buy and hold index investor can get the average return just by showing up and staying put. These are the passive investors. All other investors try to beat the index by stock selection and various forms of timing strategies. The passive investor grabs every 150 point day just by showing up, but also gets the down days but does make the average return over time, which works out okay. The markets timers try to side-step the down days but more often than not also miss too many of the big up days.

This web site is dedicated to beating the market by superior stock selection. In order for some people to do that others must trail the market. (That is harsh but it is the math of the matter.) Luckily there is a large pool of people who can be expected to trail the market because they follow non-sensical methods and jump in and out of the market at the worse times.

When you think about it, value based investors ended up experiencing more of a “financial opportunity” than a financial crisis. It felt ugly a the time but the financial crisis allowed the smart money to scoop up stocks at very attractive prices from the panicked dumb money. (Again, harsh but true). Or perhaps more kindly it allowed those willing and able to take risks at the bottom of the market to scoop up bargain stocks from those who would not or could not bear the risk.

Most of our stock picks gained today. About the only notable loser was Toll Brothers down 3.1%. I have said that Toll Brothers does not look like any real bargain to me. Still, in it could do okay with the recovery in house prices. And I do hold some Toll Brothers.

January 31, 2013

Markets were generally down on Thursday. This hardly seems surprising after all the recent gains.

There was unfortunate news for employees at Best Buy / Future Shop and Sears Canada with layoffs announced.

Sears Canada was smart in 2012 to have sold off some leases for huge gains. If they have any long-term leases at good rates on large stores they would likely be best to try to sell the lease holds if they can.

I don’t have any good opinion of Sears Canada. At West Edmonton mall a week after Christmas, I walked through one of their stores at 3 p.m on A Saturday and the floors were full of mud that appeared to be left there from previous days. If they can’t even bother to clean the floors they are toast. Simons of Quebec has opened in West Edmonton Mall. I had seen their store on St. Catherine’s Street in Montreal several years ago and liked the prices and merchandise (like Canada Goose jackets). The new Simons in Edmonton is carved up into boutique areas within the store and in general seems to be a good shopping experience. In retail I think you either have to be a low cost operation (Costco) or go for higher end brands and service. Trying to compete on price while not having low costs is a losing strategy.

I suspect Best  Buy / Future Shop can survive but Sears is probably circling the drain.

January 30, 2013

Markets were moderately down today. Notably (especially to me, since it is my largest position) Canadian Tire was down 1.8%. But I consider that to be basically just normal volatility on a negative day.

U.S. GDP was down 0.1%. I don’t know how that is measured. But I feel safe in saying that the accuracy of measuring the output of the entire U.S. economy is not likely more accurate than a half percent or so. So I don’t put a lot of faith in numbers showing quarterly growth to the nearest tenth a percentage point. In addition there were apparently temporary factors including Super Storm sandy at work. I understand military spending was down quite a bit. That may have been more a case of deferring expenses rather than real cutbacks. But, who knows? it is certainly possible that the U.s. will cut back quite substantially on military spending. But overall I think the slow but steady growth pattern in the U.S. is well established.

We continue to be in the middle of the Q4 earnings release season with many reports yet to come in, especially for Canadian companies.

January 29, 2013

Today was another decent day in the markets with modest gains in most of our stock picks.

Dow up a half percent. Doomers are still waiting for end of financial world and have missed relatively massive gains since the bottom in March of 2009. I think you subscribers are on average much more intelligent than the average investor. Sure we all have our moments of fear when listening to doomers and talk of currency collapse but for the most part I suspect few or none of you are certified doomers who want to sit close to 100% in Gold and want to avoid all “paper” assets. (Actually I would argue that many “paper” assets are in fact quite real and that some so called real assets are just as much paper as are stocks that represent ownership of real companies with real asset and real earnings power. Ownership of my house is indicated by papers. Gold coins in my safe would admittedly be quite real if I had any. Gold kept by a custodian may be evidenced by paper.

On January 27 I mentioned the topic of unconventional wisdom.

Warren Buffett has pointed out that it is very dangerous to fail with an unconventional strategy. You can be fired or sued often. Filing conventionally or with the crowd is not as dangerous. Because of this not many people will succeed unconventionally because they don’t like the risk of unconventional failure. This is true in all aspects of life.

Buffett said in his 1984 letter:

(Failing conventionally is the route to go; as a group, lemmings may have a rotten image, but no individual lemming has ever received bad press.)

Buffett went on to say that he was willing to risk unconventional failure.

The risk of failing unconventionally is why advisors seldom or never encourage a client to go in too heavily on any given stock or to go all equities. I also try to avoid giving any personal advice to do that. I reveal that I am not running a diversified portfolio but I will not accept the risk of advising any individual to do what I do. My advice is generic. I rate stocks. I show evidence of what running 100% equities has resulted in the past (basically higher returns over the long run but gut-wrenching losses from time to time). You subscribers decide your own asset allocation and exposure to each stock and indeed whether to buy any particular stock. I do not know your particular individual circumstances nor would I want to be responsible for your decisions.

And I should hasten to add that you subscribers as a group have been very mature over the years and with extremely rare exception (like about three people in thirteen years) have never even hinted at blaming InvestorsFriend for any bad outcomes in the market. (There were some additional subscribers who expressed concern about the results from time to time but without hinting that they considered InvestorsFriend or myself in any way responsible for their trade outcomes, much less financially responsible). You subscribers (with the three or so exceptions in thirteen years) have been grown ups and have accepted the risk of your own trades. The requirement to do that is posted on this Site in several places (including the login screen) and you have agreed to that and I am grateful for it. I (technically InvestorsFriend Inc.) could not provide this analysis on any other basis. Our disclaimer of course disclaims any financial responsibility for trades made on the basis of the information provided). There is no possible way that advice purchased for $15 per month or less could come with guarantees even in the event of errors or omission. If anyone happens to disagree with that, please unsubscribe.

I did not intend to get into all of that, it just sort of popped out of my brain as I wrote tonight, but perhaps it is good to point this out from time to time.

For any comments about this, email me at shawn@investorsfriend.com

January 28, 2013

Our stock picks lost a modest amount of ground on Monday. Following up on yesterday’s comment I added somewhat to my Wells Fargo holdings today.

Moody’s debt rating service downgraded six Canadian banks today. I doubt that this is anything to worry about at all. These banks are still very highly rated.

As I troll around several financial sites on the internet it is scary to see the number of comments posted online from people who mis-guidedly believe that “the end is nigh”. That gold is only real money. That paper currency will be worthless. That fractional reserve banking is evil. That central banks will print their way to hyperinflation. These people often gravitate to hard assets especially gold. They usually seem to forget that owning shares in, for example, Canadian national is also a fairly hard asset in itself.

In my 52 years of life the Canadian dollar has lost somewhere close to 90% of its value. That would be a big problem for me and my parents if we had kept our money under our mattresses. We did not. Myself and my parents before me invested in businesses both as direct owners and through the stock market. Our wages, dividends and retirement cheques, as the case may be, have on average far more than kept up with inflation.

We were seldom much bothered by the fact that the dollars in which we were paid did not have a fixed value in relation to gold, or to gasoline, or anything else. Sure, we wished we our wage increases were not partly offset by inflation but as long as we were running ahead of inflation we were okay with it.

I can’t guarantee it but I suspect that inflation is not going to be any great concern in the next several decades. I figure if I focus on accumulating higher amounts of wealth as measured in dollars, I will do okay.

There is, by the way, a vast difference between financial wealth and money. Financial Wealth consists of real goods and services and the ability to buy same. Financial Wealth is measured in money, but is in basically independent of money. Money may be slowly declining in value in terms of the wealth each dollar will buy. But wealth can nevertheless grow, in real terms, as long as wealth grows faster than inflation when measured in dollars. If a new currency were adopted tomorrow, the wealth of our nation would not necessarily change much less evaporate even if all the old currency was burned. Some financial wealth is held as money or the equivalent (cash, term deposits, bonds), but much financial wealth is not invested in money as such but is merely measured in money (houses, clothing, stored food, vehicles, shares of companies, and even gold are examples).

January 27, 2013

Friday was another decent day in the markets. Toll Brothers was up 2.4% to $37.98. That’s a 23% increase since we rated it a Speculative Buy on December 8 at $30.77. With a 23% increase our report has effectively become out of date. I have a position in it and would be more inclined to trim that position than to buy at this price.

Based on the ratings above, and current prices, I think the best buy would be Wells Fargo and Canadian Tire. Also to a lesser degree Bank of America. Both banks reported Q4 results and our analysis is not updated for that but I don’t think the ratings would have changed. I don’t offer any advice on what any investors exposure should be to the banking, retail, or any other sector since that is very much dependent on a host of personal factors.

Conventional wisdom might suggest never getting too high of an exposure to any one sector and certainly to any one stock. On the other hand I can point to some individuals, including myself, who have long ignored conventional investment wisdom and things have worked out nicely. Perhaps there is something to be said for unconventional wisdom. Often being unconventional may be very unwise. But there are times when one can be both unconventional and very wise.

January 24, 2013

Not surprisingly, Constellation Software recovered from the little dip it took yesterday, rising 3.7%. Canadian Tire did well, up 2.1%. The lower Canadian dollar has also helped out the value of American stocks when measured in Canadian dollars.

January 23, 2013

Constellation Software was down 3.3% today. This occurred in the last hour of trading and was on relatively small volume. It could well be that someone was just a bit impatient in selling and wanted to sell today and that could have pushed the price down. I don’t see this as reason for concern. Those with a trader mentality however, might.

Couche-Tard was down a modest 1.1% after Metro Inc decided to sell half of its very large stake in Couche-Tard and did so by way of a secondary offering of the shares tot he public. This naturally tends to push the price down at least temporarily. This also does not appear to be any cause for concern.

Toll Brothers was up 2.1% on continued strength in the U.S. housing market. There were many doomers who were calling, over the past six months to a year or more  for U.S. house prices to keep falling (oh the debt, oh the unemployment, oh the shadow inventory). Meanwhile Warren Buffett was calling houses the best bet around (household formations were much higher than home construction and the excess inventory was being whittled away, he said, and oh he mentioned too that people could and should borrow at the dirt cheap rates for 30 years locked in). That was about nine months ago, I believe. One bets against Mr. Buffett at one’s peril.

Overall it was not a very eventful day for our Stock Picks.

January 22, 2013

Today we had Bank of America up 1.9%, Melcor up 1.6% to $19.75.

CN fell about 1% despite a dividend increase and good earnings released today. I am tempted to buy some CN. It does not look particularly cheap but I am attracted to the quality of its business.

Wells Fargo announced, after the close, that it was increasing its dividend by 14%. And apparently is is hoping to increase the dividend again in 2013 pending permission of the Fed. This bodes well for Wells Fargo and for other banks as well.

January 21, 2013

U.S. markets were closed today for the Martin Luther King holiday. The Toronto stock exchange index rose 0.5%.

With Canadian Tire down 1.3% I added a small amount to my position.

Research in Motion was up another 11% to $17.41. Regrettably I had sold my shares on December 26. (It looks like I “cleverly” sold in the U.S. market since Toronto would have been closed that day). In any case, I cant worry about what I don’t own. There will always be many rising stocks that we miss out on. As long as we can make a good return overall, that is what counts.

Canadian National Railway is scheduled to release earnings at 9:00 am tomorrow (Tuesday). I don’t know why it would release only 30 minutes ahead of the opening of trading. That does not give sufficient time for the market to digest the news before the start of trading. It could indicate that there will be no big surprises in the numbers. I think it should have a good report. One area of possible concern would be its increased pension liability, but that will not likely flow into earnings. (I believe it will be reported in comprehensive earnings). The pension expense in 2013 will also likely rise. Overall CN will probably continue to do well.

January 20, 2013

On Friday we had an okay day in the markets with the Dow and Toronto each up about 50 points. Research in Motion continues as a surprise winner this new year, up another 7% on Friday.

I’ve been reading a few annual reports and hope to have a new company to add to the list before too long.

Warren Buffett in an interview on Sunday morning once again expressed his optimism for the the U.S. and its prosperity over the long run. Those who have dismissed Buffett and his optimism over the past few years (or over the past 60 years for that matter) have generally lived to regret it.

Berkshire Hathaway has had a good year in 2012. I expect it will have had a strong Q4 although Super Storm Sandy may have put some dent in the results. I expect Berkshire shares to hit an all time high this quarter. But that is nothing to brag about. The best companies reach all time highs on a relatively frequent basis. They retain a portion (or even all of ) of their earnings and grow their book values per share and earnings per share and so it is logical that the share price should march higher.

January 17, 2013

Toll Brothers was up 3.6% to $36.16.

Bank of America was down 4.3% after a disappointing earnings report. Given the price drop I decided to by back (in a registered account) the 1500 shares I had sold at a slightly higher price when I cleared out my margin account a couple of weeks ago. Bank of America is a huge and complex business and I consider it to be more speculative than most of the stocks I own. However, I am hopeful that it will increase its dividend sometime in the Spring and that it will continue to slowly recover from its various wounds (from the financial crisis).

January 16, 2013

Although the Dow was down we had Bank of America up 2.0%.

We are now entering a period where many U.S. companies are releasing their December 31, 2012 results. Obviously the market will react to those depending if they are better than expected or lower than expected. The other thing driving the markets will be the usual political madness in the U.S. and whatever unpredictable random events happen around the world. As always, seldom a dull moment.

January 15, 2013

Today ended up being another good day for our stock picks. Notably, Toll Brothers up 3.8%, Canadian Tire up 1.6%.

I’ve been thinking about adding to some positions. But overall I am already heavily invested in equities and I am just going along for the ride with the companies I own for now.

January 14, 2013

Shaw Communications announced after the close that it had sold its Mountain Cable franchise in Hamilton to Rogers for $400 million. Also Rogers bought for $50 million an option to buy Shaw’s wireless spectrum. Shaw bought the one third of TVtropolis from Rogers for $59 million (possibly Shaw already owned the rest of it?). The total deal was indicated to be $700 million after deducting the $59, so that seems to leave $300 million unexplained by the press release.

There was no indication if there was a loss or gain on the transaction. In any event whether it is a gain or loss, positive or negative, the share price should adjust for this at the open tomorow and there will likely be no opportunity to trade based on this information even if we knew if this was positive or negative. I would guess that it is at least slightly positive.

Shaw also announced the results of its election of directors. The main trading shares of Shaw are non-voting. I would have liked to vote and I would not have voted for Sheila Weatherill as a director. She is the former CEO of of the capital region health authority in Alberta who got a rather obscene severance package severalk years ago and then soon got a job on the Board of directors of Alberta Health.  And under her CEO watch (and signature) it was recently revealed that totally obscene expense claims were routinely approved and she was recently forced (that is my interpretation of her “resignation”) to resign from the Alberta Health Board. And oh yes she has just finished testifying before an inquiry that as health CEO she routinely informed hospital staff when VIPs were in their care but insisted unconvincingly that this was not preferential care. So she seems a rather tainted board candidate for Shaw Communications. And all this was in the news just in the past few weeks. So how did the vote turn out? Well, 12 of the board members received 100% approval with zero votes withheld. Four others including the (in my opinion) rather tainted Ms. Weatherill received over 99.99% approval with just 785 of 20,888,380 votes withheld. That kind of support sounds like something out of the Russian elections of the 1970’s. False democracies everywhere would be proud of such a farcical result. Some of the voting shares do trade and so it is incredible that only 785 shares were withheld from such a relatively notorious candidate. With online voting it is getting easier to vote our shares (when they carry a vote) and I have recently been voting my shares and typically withholding my vote from some candidates. Realistically it’s a total waste of time but maybe it will send a message in a few cases.

January 12, 2013

My popular article on the valuation of the Dow Jones Industrial Average is updated. I see the Dow as about fairly valued.

On Friday we had Constellation Software up 3.7%.

I no longer have Research in Motion on the list, but it was up 13%, again indicating that rumors of its death may have been premature.

Wells Fargo came out with excellent earnings although just a hair above expectations) and dropped 0.9%. Apparently bank analysts were disappointed that its net interest margin fell to 3.56% from 3.66% last quarter. So let’s examine that. The average 30-year mortgage rate in the U.S. is 3.4%.

Now, if Wells pays nothing on deposits it still can’t make 3.56% on a mortgage sold at 3.4%. Wells Fargo has about the highest net interest margin in the business. Part of the reason its margin fell is that it took in a lot of new deposits on which it is paying nothing or next to nothing (that’s the good news for the bank) but it has parked those deposits at the Fed earning 0.25% because it can’t find suitable people and businesses to lend all that money to (that’s the bad news, but keeping cash on hand is better than lending it to those who can’t pay it back).

And remember Wells is not making this 3.56% on its own equity. It is making a gross margin of 3.56% on lending out depositors money. It’s own ROE is MUCH higher due to leverage.

I am no expert on bank finances, but I do know a little bit. And I think these analysts get too focused on particular ratios. In this case it is net interest margin. In other cases it is same store sales for retailers. I may be naive but when I see a 25% increase in profits like Wells has posted here, I tend to think that is pretty good. I am a happy Wells Fargo owner.

January 10, 2013

It was another strong day for stocks…

Melcor continues to bounce around.

Yesterday I mentioned that having seen Tuesday’s closing price of over $20 most of us would be reluctant now to sell much below that. Of course another option is just to keep the shares indefinitely. After all at $20 the shares would certainly not seem over valued. The company is well managed and even by the is REIT action demonstrates an interest in making sure the share price does not languish below a reasonable value if they can help it. Sure, there is always a risk that Melcor shares will dip with a slow-down in housing construction in Alberta if that occurs  and may dip if the REIT plans fall through. But long-term there is no reason at all to think that this will not continue to be a good buy and hold company.

Speaking of buy and hold, in a 2009 newsletter I explained why any suggestion that “buy and hold is dead” is a mathematically challenged view. i.e it’s demonstrably and mathematically wrong.

I read today that Warren Buffett had explained how U.S. banks wee now in better shape financially than they had been in years. That is in contrast to thousands upon thousands of articles and comments on the internet about how the banks are technically insolvent. So who are you going to believe? Those comments usually based on old articles from 2009 and parroted by financially illiterate doomers or will you believe Warren Buffett?

Of course the doomers and doubters then say that Warren is talking up his own book since he owns banks shares, oh and he is also a tax evader, they gripe. It it all so tiring to read such drivel. Any fair minded person who has actually studied what Buffett has said and done over his 60 year investing career has to conclude he is a man of the highest intelligence and integrity. But you know each to his own. Frankly if it were not for mis-informed people using poor strategies to invest and using twisted thinking there might be no one for us to “beat” in the stock market. Those who still believe that most U.S. banks are near insolvency are easy prey for more intelligent or more informed investors.

I understand that Wells Fargo will report earnings on Friday morning.

Canadian Tire confirmed to me today that they are buying some shares based on the price. They did so in December. I don’t see any buys yet in December (correction, January) however which is disappointing.

January 9, 2013

Melcor gave back 8.2% today closing at $18.70 But it is still up about 19% this brand new year. As I mentioned yesterday the trading is thin and it was not cleat that yesterday’s close of $20.37 was where the stock really ought to settle out after the news about the REIT plans. Today only 36,000 shares traded so again it may continue to be volatile. Today at least will have benefited from at least some time for those few analysts that watch this stock to have done some calculations. They will probably try to estimate what the REIT will trade at and what Melcor will trade at after the planned spin-off. (That is not an approach that I use).

Perhaps the best move was those who sold yesterday. Time will tell.

It’s interesting that having seen the $20.37 price yesterday that tends to put price in our minds and we may tend to be reluctant to sell much below that. It’s mostly an irrational feeling. After all the $20.37 price (and the high yesterday of $21.25) were reached in a moment of excitement on thin trading and with a lack of much information or time for analysis. And maybe it is wise to hang on for that $20+ price/ Melcor would not likely have looked into doing this REIT business if they thought that the price was not going to go up significantly. And I am not sure that a 20% rise really would have been enough for them to do this. So certainly it is very possible indeed that before long we could see that $20+ price again.

But keep in mind there are other factors that can drive the stock higher or lower including interest rates, the outlook for home building in Alberta and its Q4 earnings report and outlook for 2013.

Overall, I inclined to hold on at this point though I also see nothing wrong with selling a portion to grab some gains.

In other developments… Bank of America was down 4.6% apparently after being “downgraded” by Credit Suisse analysts. Perhaps it is ironic but I tend to pay zero attention to what other analysts think about any stock. It may be a sign of over confidence but I very rarely even read much less pay attention to any stock research reports other than my own (I make an exception for anything Warren Buffett says). If I do happen to pick up a hint from some analyst that I respect, I first run the numbers myself before deciding if a stock is a buy.

It’s somewhat bizarre that yesterday there was MAJOR news about the big banks in terms of settlements of litigation and a favorable change in the amount of cash or “liquidity” that banks have to keep on hand and yet bank shares barely budged. I would have thought that all that news would be either positive or negative overall but not neutral. And then today the stock sinks simply based on the opinion of some analyst.

Bank of America had risen quite a bit lately. It is a volatile stock and in this context I don’t think a 4.6% price drop is any particular big deal.

Shaw Communications came out with earnings that were apparently a bit better than expected. Also I believe there was a dividend increase. I have not looked at that report yet. I tend to have a slower approach to analysis and trading. It’s just not in my temperament to make a snap decision by glancing at earnings news. There are many people who would argue that success in trading comes only from keeping an eagle eye out and fingers on the trading keys. It’s been my experience that old fashioned buying good stocks (that is, companies) at what appears, after thoughtful analysis, to be good prices and then simply going along for the ride as earnings (hopefully) rise or (hopefully) the P/E multiple rises, can be a good way to invest.

January 9, 2013

Today would have been a mildly negative day for our stock picks except for one stock.

Several alert subscri9bers emailed me this afternoon to report that Melcor shares were up sharply (almost 20%) this afternoon (closed at $20.37) after announcing that it would look into the idea of spinning off its commercial rental income properties into a Real Estate Investment Trust that it would retain significant ownership of. This sounds similar to a plan that Loblaw recently announced.

There are several points to consider here:

1. This is not a done deal. Then again there is little reason to think it can’t or won’t be done.
2. These properties represent about 43% of Melcor’s assets, the raw land and developed land is not included here.
3. We can’t be too sure where the share price ought to settle out on this news. Melcor is a quite thinly traded, most days less than 10,00 shares trade, some days there are no trades. Only 93,000 sga=hares traded today. Many Melcor investors were likely unaware of this news. The share price could easily slip back as people take profits in the coming days. Or maybe it will rise.
4. I certainly have no idea where the price should be in terms of fundamentals. The REIT structure saves income taxes and that alone does add some real value (even considering REIT distributions will be not qualify for the dividend tax credit).
5. Fundamentally the value of Melcor should in theory not be changed by this excect for the income tax savings. But practically speaking it’s value is increased in the market.
6. Melcor was under valued before this announcement.
7. Having bought Melcor at an attractive price it is not surprising that an event has happened to release value. In some ways the REIT does not so much create value as release value that was already there.
8. I had not thought of Melcor doing this, but now that it is announced it seems almost obvious that this is something that they might have looked at.
9. I don’t think there is much reason to think that this in isolation would increase Melcor’s dividend much. The partially spun off REIT will trade independently and will have a high yield. But Melcor itself will not see its cashflow per share rise much from this. Melcor would get a cash infusion from the partial spin-off but may use that for new investment or debt repayment rather than dividend increases.
10. It’s really anyone’s guess whether an investor should take profit at this time either fully or partially. I am inclined to sell half or so especially if the price stays over $20. I doubt that we have to worry about it falling back to say $17 anytime soon.
11. I am not sure why they don’t consider selling off the entirety of this into a REIT and not retaining any. After all if the market offers really high (stupid high?) prices for real estate why not sell? And it if makes sense to sell some, why not all? Perhaps the market would not take up all the shares if all were offered. If they sold all they could do a special dividend. But companies are usually reluctant to do things that materially reduce their asset base since that diminishes the domain of mangement.

By the way ,I emailed Canadian Tire several times over the past months suggesting they do something like this. I wonder though if the moment has passed for Canadian Tire given it seems so many others are doing this. Loblaw and I believe the Bay might be doing this as well. I can’t recall them all but I believe there has been a relative flurry of this type of announcement just in the past month or so.

January 7, 2012

Markets gave back a little today after the recent gains. However Melcor was up about 2% on decent volume and Toll Brothers was up 2%. Based on the rating above I would not be an enthusiastic  buyer of Toll at today’s $34.35 given it was rated only Speculative Buy at $30.77 on December 8, though it is certainly possible that our rating was too conservative. Certainly it’s a bit more speculative at $34.35.

As I have tried to make clear many times the ratings above apply at the date and price indicated (and certainly there are no guarantees). Whether the rating still applies some days, weeks or months later as the price changes and as earnings and other events unfold at the company is unavoidably a matter for your judgment since I don’t/can’t update the ratings any more frequently than I do.

Also, as you can appreciate, each report provides numerous facts, figures, and observations that are ultimately distilled into a rating. What is provided is both the rating AND the report with all the reasons for the rating. Some of you may read the report and conclude that a different rating should apply. Or you may just see some factor in the report (or from your other sources of information and general knowledge) that causes you to avoid a certain stock for whatever reason.

At the end of the day if the stock ratings here have helped you pick winners it was in large measure because you ultimately agreed with or trusted the rating and pulled the trigger on certain trades, knowing that it was at your own risk. Congratulations to all those subscribers who have done well with these stock picks.

The big U.S. banks made some settlements regarding foreclosure and mortgage issues stemming from the financial crisis of several years ago. Their stocks did not seem to react much indicating that the news was about as expected. But in general it should (all else being equal) pave the way for continued gains in Wells Fargo and Bank of America. There was also a  favorable development that delayed a planed increase in the amount of cash they have to keep on reserve. Such cash tends to earn very little or no interest for the banks and so they like to hold minimal reserved of cash on hand. In this case cash does include deposits at the Federal reserve bank (hence the name I guess) which these days does pay 0.25% – I believe it historically may have paid nothing.

The earnings season will kick off this week with Alcoa which somehow manages to get its December 31 year-end numbers out extremely quickly after year-end. In Canada Shaw Communications reports its Q1 results on Wednesday.

January 6, 2013

I have updated the table showing the percentage of my portfolio that is is invested in each stock I own and in cash.

January 5, 2012 (from Lloydminster)

Friday was another positive day in the markets.

I finished selling out everything in my margin account. 200 shares of Canadian Tire were sold but were replaced with an equal buy in an RRSP account. 3000 shares of Melcor were sold. 500  shares of Shaw Communication were sold. Again, this selling was to clear out the margin account. I would have preferred to keep these stocks.

I mentioned I had a problem accessing TD Waterhouse when I updated to Windows 8. That was resolved by added TD to a short list of sites that are to be opened in compatibility mode. This is available under tools on internet explorer.

At the moment I am down to about 75% equity (and 25% cash).

My next step is to withdraw some of that cash in the margin account and to use it also for contributions to RRSP and TSFA. Also will move some more business cash into the business investment account. I plan to update my portfolio break down (percent I have invested in each stock) in the next day or so. I will be looking to buy a few of the higher rated stocks that I don’t already own and perhaps replace some of what was sold from the margin account.

It would not upset me to see a pull-back in the market to facilitate some buying. On the other hand if stocks continue to rise in value I can certainly live with that.

January 3, 2013

The TSX finished down 0.6% today. The Dow had been up but finished down 0.2% after the market began near the the end of the day to fear that the FED was going to stop buying bonds. (FED minutes revealed a worry about all this bond buying).

The markets never seem to focus on any one thing for long. So the euphoria over the fiscal cliff deal was unlikely to last too long and now we are moving on to the next worry or opportunity. None of this is predictable. Markets tend to move higher in the long term and are unpredictable in the short term.

Canadian Tire was down about 1.4% today. It’s always possible that my assessment of the value of Canadian Tire is too optimistic. Time will tell. But the fact that the share price declines is in no way convincing evidence that it is not a good investment. Some of the best opportunities in the markets (and perhaps some of the worse) will always be found among unloved stocks.

Dollarama was down 2.1% to $57.65. Possibly that had to do with poor results at a U.S. Dollar Store. It may be an opportunity to nibble at Dollarama.

My thoughts today again turned to selling. In particular I want to get rid of the margin I have been using in my margin account and may also end up withdrawing some money from the margin account for other purposes and so I may end up selling most or all of the stocks in my margin account. This will reduce my equity exposure and give me cash to be ready in case the market does dip. However, since I like the stocks I hold I will try to replace some of what I sell in the margin account by buying the same in the RRSP accounts.

I sold some Berkshire in the margin account today. Also I sold 500 shares of Stantec in the margin account. I still hold 1000 shares in other accounts. My gain on those 500 shares was 107% and so that made it easier to pull the trigger and also it has jumped quite a bit in the past six weeks.

I would like to update my personal portfolio breakdown but am having a technical problem even seeing my portfolio details in TD Waterhouse. I updated to Windows 8 because Microsoft had a special $40 deal on the Windows 8 update (for Windows 7 customers) until January 31 and now it seems some sites I visit are not yet compatible with Windows 8.

It may not have been wise to update to Windows 8 so soon. There was a promise that my machine would be faster. Yeah, not so much. Also my machine was trying to to add some newer Windows 8 updates tonight and then reported that it failed and was reverting and then it almost looked like it was not going to boot up at all and so overall I would caution people not to update to Windows 8 just yet. Possibly you could buy the update for the $40 but not install it yet.

January 2, 2013

I don’t think too many people expected today’s big market rally. After all we already got a big rally on Monday when it looked like this fiscal deal would go through.

Today we had the DOW up 2.3%, Toronto up 0.9%. We had Berkshire up 3.9%, Toll Brothers up 3.6%, Melcor up 3.7%, Stantec up a scorching 4.9% and loads of other nice gains. Canadian Tire was among the few that managed to go down a bit today.

Our Stock Picks have done very well lately. But it’s starting to feel a bit like manna from heaven. And it seems wise to remember that stocks don’t go up in straight lines. We will have our down periods as well. And it would be nice to have some spare buying capacity when that happens.

So on that note I forced my mind to think about trimming some positions today. I have a margin account where I have been making some modest use of margin and had some Wells Fargo and Bank of America sitting there and it was bought with margin (borrowed money). I was waiting until this new tax year and with the arrival of a new tax year and with all the pleasant gains of late I decided to get rid of those stocks in the margin account (I have plenty left in the RRSP accounts and in a cash account). While I was in a selling mood I decided to reduce my Toll Brothers position as well. It’s about the highest P/E ratio stock I own and also one of the lower rated ones. But I still have some. I sold 700 and have 1050 shares left.

None of this means I have turned negative on these stocks. I added heavily to Wells Fargo and Bank of America when they fell and so I became rather over-weighted in them and it just seems prudent to trim as they rise. And more importantly it seemed prudent to find something to trim given the recent market gains. I chose Wells Fargo and Bank of America mostly because they were in that margin account and I really don’t need to be using any borrowed money.

(Before anyone emails me about this “revelation” that I had a bit of margin, it has been disclosed before and only very briefly did it ever get the the point where I was more than 100% in equities. I think I got to 102% or something very briefly. Almost always my net cash has still been positive (I was using margin in the margin account but there was more than offsetting cash in the RRSP accounts).

January 1, 2013

Well, the 2012 year is now over. Our Stock Picks this year had an excellent performance. Click to see the detailed performance by company for 2012. The six Strong Buys were up an average of 19.6% each. The 17 Buys were up an average of 14% each. Only 3 of the 23 Stocks rated in the Buy or Strong Buy range at the start of the year fell in price. Meanwhile, the the TSX was up only 4.0%. The Dow was up 7.3% and the S&P 500 was up 13.4.

My own portfolio benefited from being concentrated in some of the better performing stocks and from buying on dips and a certain amount of selling on rallies and in general a certain amount of trading during the year. I managed a 27.6% gain (subject to the final numbers on my December statements which tend to differ very slightly from the online figures).

All the Performance figures are updated for 2012.

There is really no such thing as a typical gain in the stock markets. Some years will assuredly be negative. But overall stocks do tend to rise in the long term. Add overall our approach has beaten the market. But we make no guarantees or promises about the future.

Every year at this time I make a special effort to update as many of the reports as possible. This has now been completed.

It is also appropriate at this time to remove a few companies. The Brick is deleted from the list because it was taken over by Leons.

I am removing E-Bay because it is out of date. It rose a surprising 68% in 2012. I do not have an interest in updating it at this time.

I am removing Walgreen because it is out of date. I may update it and add it back at a later time.

Omni-light industries is removed because it is out of date. This was our only micro cap company last year. It did not work out well. It may be a good company but I am not too interested in updating it.

Costco is updated and rated Weak Buy at $98.73. It always seems expensive as a stock. As a company it is a fantastic business. It has co0st advantages over stores like Walmart, Target and all specialty retailers. It has the ability to open new stores that will instantly draw traffic and be profitable.

It has recently paid a special dividend and also has been buying back shares. It is not the case that buying back shares or even paying dividends is automatically a good thing. It may be that Costco has excess cash and/or has made too little use of debt. It borrowed the money to pay the special dividend. Cost co shares trade at 3.4 times book value. If it came down to a choice between building a new store at 1.0 times book value or buying back shares at 3.4 times book value, then shareholders would clearly be better off with the new store. If it is the case that Costco can build all the new stores that it can comfortably manage in a year and still buy back shares and pay special dividends then it does make sense to do so.

As a customer I am increasingly a fan of Costco. I know they mark up products by  maximum of 15% over their cost for the goods. Therefore I am confident that I am getting a good price on anything I buy there.

December 31, 2007

 

As indicated yesterday, I did buy some some IGM shares today.

 

The Kingsway CFO and a couple of other insiders have bought shares around Dec
20 at about $12. Kingsway is hosting a conference call on Wednesday after the
markets close.  expect the purpose of this is to try to sooth the analysts
about recent increases in their estimated liability for insurance claims
(reserve increases at Lincoln General). Despite its problems, the stock does
look cheap and given the insider buying, I bought additional shares today.
Clearly this is risky given I already have a high exposure to this troubled
company.

 

Stantec was last rated Weak Buy at $32. Now it
has risen to $38.89. It is a great company but seems expensive. We would not be
buyers at this price.

 

Home Capital was last rated
Speculative (lower) Buy at $40. The same rating would apply at today’s close of
$41.90. However, we do think it is speculative because it could suffer a large
increase in bad debt expense in any recession. Also it has relied on
securitization for some of its profits and we are not entirely clear if it can
continue to securitize mortgages given the difficulties in the asset backed
commercial paper markets. Due to risks, it might be better to wait for its year
end report before investing in this one.

 

Canadian Western Bank
is
updated and rated Buy at $31.45. This has been a great stock year after year. It
is up 535% since we first added it to this Site as a Strong Buy back in 1999 at
$4.94 (adjusted for stock splits). In recent years it has not been cheap and
therefore was not rated Strong Buy but has managed to perform beyond
expectations. It is not cheap but has been a proven winner and will likely
continue to be a good investment for the long term. It is occasionally volatile
in price.

 

December 30, 2007

 

IGM Financial is updated and rated
Strong Buy at $49.82. This company has had a history of growing its earnings
relentlessly over the years, getting larger like a snowball rolling down hill.
It may have trouble growing earnings in 2008 if markets decline. But over the
long term it seems highly likely that it can continue to grow. And it is
available at what seems to be an attractive price. It also pays a reasonable
dividend at 3.7%. While no stock is without risk, I suspect it could add some
stability to a portfolio in the next 24 month period. I intend to buy shares
tomorrow.

 

December 29, 2007

 

FedEx is updated and rated Weak Buy / Hold at
$94.91(this was our analysis price from Dec 21, but it closed Friday at $90.62).
This is a great company but the current outlook appears to be weak.

 

Canadian Tire is updated and rated Buy at
$71.62 (This was our analysis price, but it jumped to $73.53) as of Friday’s
close.

 

Melcor Developments
is rated Speculative
(lower) Buy at $18.77 and is returned to the list above. I had removed it a few
years ago due to low trading liquidity. It now has better trading liquidity.
This stock is a way to participate in land values in Alberta and Western Canada.
It is also a way to participate in owning a land developer that in the long run
can make money even when land prices are stable.  The stock price has
retreated significantly from its $30.47 high. But I consider it to be
unpredictable at this time since lot sale volumes could decline significantly in
2008. The best approach may be to buy a small amount and then monitor through
2008. In the long run it will likely continue to do well, but the short-term
seems particularly uncertain.

 

I had an order in to sell a small portion of my Western Financial if the
price reached $5.49. That trade went through on Friday. I like WES long term.
It’s model of acquiring privately held insurance brokers and folding them into
WES is a winning strategy. But I worry about its banking operation. That can be
a risky area. At this time I decided to reduce my exposure to the company.

 

December 27, 2007

 

I took advantage of a dip in the price of
Shaw communications today to add
to my position. As of their August year-end they were still growing. With some
slowing in western Canada they will not likely add the same number of new cable
subscribers in the current fiscal year. But they may be able to grow profits
through switching more customers to digital television. And their digital phone
business is still growing rapidly. The stock is not cheap but given the past
growth and the monopoly aspects of their cable service, I believe it will
continue to do well. They will likely release Q1 earnings in the second week of
January.

 

I had placed an order to add a small amount to my Tim Hortons if the price
fell. It did fall today and I picked up 100 shares. The stock is not cheap and
so that causes some risk that it could fall to a more sustainable P/E ratio.
Still, given the quality of the company and the continued obvious success I am
happy to add to my position if or as the stock drops. In terms of same-store
revenue growth, it does face a tough comparable in Q4 but overall I see no
reason that Q4 will not be a good quarter. The U.S. operations are a possible
are of concern but I believe that ultimately with time and advertising they
should do well in the U.S.

 

I took a look at Melcor Developments today. This is a land developer and real
estate company that operates mostly in Alberta. This was a stock that we first
introduced on this Site as a Strong Buy at $3.60 exactly five years ago. It
subsequently got as high as $30.47 but has dropped back and closed today at
$18.20. We no longer have this company rated on the Site. Nevertheless, I can
make a few comments about it.

 

Melcor is a very well-managed company. If history is any guide it will
continue to grow earnings in the long term. But in the short term earnings will
likely fall. In the past few years its profits soared as land and house building
lot prices soared. Now lot prices are flat or falling. And lot sales are
expected to slow significantly because of an existing supply of new homes on the
market.

 

On a P/E basis Melcor looks very attractive with a trailing P/E of 8.1. But
that P/E reflects high earnings not likely to be repeated in 2008. The price to
book ratio is 2.2. This may be moderately high given the outlook. The next
earnings report will likely be strong based on a gain on an asset sale, but lot
sales could be quite weak.

 

Overall, this is a very difficult company to predict at the moment. I hold a
few shares and will likely keep those. However I am not confident that right now
is a good time to buy this.

 

December 26, 2007

 

Berkshire Hathaway rated (lower) Buy at
$4570 is added to the Site. Berkshire of course is Warren Buffett’s investment
holding company. He took control of the company as a textile operation in 1965
and turned into an investment holding company. The share price since then has
risen from under $20 to a present level of $138,500. (But you can buy a B share
which is 1/30th of an A share for a recent price of $4570). Amazingly, over 42
years it “only” takes a return of 23.4% compounded annually to turn $20 into
$138,500.

 

As a huge conglomerate, Berkshire is not really the type of company that is
best suited to the analysis template used on this Site. But I have added it to
the Site because it is a stock that is of interest to many and I do hold a few
of the B shares.

 

Regarding Kingsway, it is possible that the next piece of bad news will be
that some investors will sue them for late/improper disclosure of their earnings
troubles at Lincoln General. Much of that risk may already be “priced in”.
Still, on such news the stock would likely drop. Certainly based on its own
accounting, Kingsway is now a bargain. However, any recovery is probably going
to be many months and will require patience and a tolerance for volatility.

 

Note that we will have more updates prior to the start of trading for 2008.

 

December 23, 2007

 

The Thomson Corporation is removed from our list above for two main reasons.
Firstly, it is basically just too complex. It is a huge company that operates in
a number of different business segments. This has resulted in it being very
complex, partly due to the way the accounting for its numerous acquisitions and
divestitures must be done. Currently it is in the midst of attempting to acquire
Reuters and this would increase its size by about 50%. A full valuation of
Thomson should therefore include a valuation of Reuters. Secondly, when I look
at its valuation based on managements view of the past 12 months adjusted
earnings from continuing operations (and I add back 70% of the amortization of
intangibles on the basis that intangibles are like goodwill and should not be
amortized) it has a P/E of around 21 and so does not appear to be a bargain. (A
third reason to remove this is to free up time to look at other stocks)

 

We originally added Thomson to this Site because we really like its business
model of selling information electronically. It seems to have the potential for
high returns and growing profit margins. But to date it appears that this is not
showing up in the reported earnings to the extent we had hoped. I suspect there
is hidden value here and that it would be a reasonable long-term investment. But
the complexity is too great to have confidence in that.

 

I consider Thomson to be more of a U.S. company than a Canadian one because
most of the revenues and operations are in the U.S. But for some reason it
trades mostly in Toronto. Perhaps due to its history with Canadian investors.

 

One ‘knock” against Thomson is that for Canadian investors the shares have
really not gone anywhere for years. But that’s not really the company’s fault/
Investors bid these shares up to unrealistic levels with a P/E well into the
30’s around the year 2000. As the P/E has now regressed back to more reasonable
(but still high) levels the stock price was unable to grow despite higher
earnings. Also given that most of the earnings are in the U.S., it really should
be judged based on its New York stock price growth. It amazes me when Canadian
stock analysts comment on the stock price in Toronto without mentioning the
obvious boat-anchor-like affect of the huge climb in the Canadian dollar since
2002 and in 2007 in particular. The stock price has risen somewhat since 2002 in
New York, although again the stock price was hurt by the fact that the P/E had
simply been pushed too high around that time. In my view the company has done
quite well since 2000 (adjusted earnings per share up about 90% in 2006 versus
2000).

 

I have a modest position in Thomson. I am inclined to hold onto it except I
may sell simply to raise cash.

 

December 22, 2007

 

Property insurance companies have certainly proven to be an unpredictable
bunch. By their nature, their reported earnings really cannot be trusted. They
really don’t know their own profitability for a given year until several years
later when all the claims for that year have been settled. One thing I have
observed is that a low price to value ratio is probably the most reliable
indicator of value.  If that is the case then Kingsway Financial probably
will turn out to be a good investment after its recent plunge. It is now at a
price to book value of under 70%. Despite recent problems it has reported
profits every year since ’96 (or earlier) and it will likely still have at a
positive profit (although small) in 2007. Over the longer term it has produced a
reasonable return on book value. Therefore the opportunity to buy at 70% of book
value may prove to be a good opportunity. However, I do acknowledge that its
management appears to be far less than competent and so it does remain risky.
The bizarre and embarrassing way that the founder has now retired from the CEO
chair just after mis-speaking about their claims reserves on a recent conference
call and coincident with a large surprise increase to reserves could possibly be
cause for law suits. It is a good thing that the CEO or CFO have not been active
sellers of the stock prior to the recent plunges in price.

 

E-L Financial
is updated and rated
(lower) Buy at $565. This will likely be the last update for this company and
then it will be removed from the Site. It was originally added to this Site
because it owns Dominion General Insurance company and a few years ago it seemed
apparent that Canadian auto insurance companies were set to make a lot of money.
The stock is up 64% since it was added to this Site in March of ’04. But lately
its earnings and its share price have been falling. 

 

The company trades at only 90% of book value and for that reason it may turn
out to be a good investment. But other than that I am not very interested in
this company. It is rather strange company that is majority owned by the Jackman
family. They really don’t seem all that serious about being a public company.
(It is thinly traded, they do not hold analyst calls, it appears they do not
even have an a web page for investor relations, the stock price is too high to
be of interest to most investors). They describe it as an investment holding
company. In general I prefer to focus on single-line-of-business type of
companies rather than holding companies. I do hold some shares in this but
intend to sell those shares particularly if the stock price goes back to about
the $620 range or above.

 

Performance figures for 2007 as well as the
model tracking portfolio and my own
portfolio composition are all updated. This
past week was not kind at all… particularly the plunge in Kingsway.

 

I few stocks that we are no longer following are removed from the list above.
These are Cognos (it was bought out). Burlington Northern Santa Fe (We added
that because Buffett was buying it., we may add it back at some point…)
Canada Bread (it seems expensive at this time and we are not following it).
There may be a a couple more removed by year end. It makes sense to remove some
stocks to concentrate on the higher rated stocks and to make room for new picks.

 

December 21, 2007

 

FirstService is updated and rated Buy
at U.S. $30.11 or CAN $29.90. This is a Toronto headquartered company, but
should really be considered to be a U.S. investment given that most of the
operations are in the U.S. The stock has tended to be volatile but the company
itself has been consistently growing on a per share basis. We could have rated
it (higher) Buy but we are somewhat concerned about any slow-down related to the
slowness in the U.S. property markets. Currently I don’t own it but I plan to
buy some probably on Monday and I would look to add to the position on weakness.
This really seems to be the type of simple company with strong management that
Warren Buffett suggests we invest in.

 

Regarding Kingsway Financial, I note that while TD Securities has cut its
target price to $12, Scotia has a target of $17, BMO $15 and Desjardins $19 (all
of these issued after the recent bad news from the company). So… there is
certainly a variety of opinion. Fundamentally this is simply a difficult company
to predict.

 

Alimentation Couche-Tard is updated and
rated (lower) Strong Buy at $17.25. The price has dropped lately. Partly this
was due to the higher Canadian dollar, given that 80% of sales are in the U.S.
Also earnings per share were down but the company claims that if gasoline
margins were the same the earnings would have risen. The longer term trend to
growth appears to be intact. This may be an opportunity to buy a good quality
company at a reasonable price. There is always risk in the shorter term given
the recession risk in the U.S. I am attracted to owning this simple type of
business that caters to consumers and where an investor has the opportunity to
see the stores personally. I am adding to my position in this company.

 

December 20, 2007

 

An insider (Board member James Reeve) at Kingsway bought 20,000 shares today
at $11.39 to hold 40,000 shares. At $228,000 dollars this is a very nice vote of
confidence. Hopefully Kingsway itself is also buying. I am also pleased that
they reported this the same day to the SEDI system. It is definitely scary to
buy Kingsway at this time. But with the stock trading around 70% of book value
it seems like a bargain. But there are certainly no guarantees with this one.

 

There continues to be bad news in the financial sector… I took the
opportunity to add to my Tim Hortons position today. Also I had placed an order
to buy additional Western Financial Group
if it fell and that order got filled today. Although I have done some buying
lately, I am still quite cautious on the markets and I would like to make sure I
have a reasonable cash position in case certain stocks fall. Western Financial
Group may have fallen due to a slowing in Alberta. Also there was their recent
convertible debt issue. I like the company but the stock price has not been
cheap. I like their insurance brokerage operation. But their banking operation
could be risky.

 

Watts Water Technologies
is added as a
new company rated (lower) Buy at U.S. $30. (It closed today at $28.68). This
company is a market leader in selling water-related hardware to plumbers and
contractors. Note that the share price has been trending down, presumably due
tot he construction slow-down in the U.S. We selected this company after
screening for lower P/E type stocks. It looks like a good long-term bet. But we
do worry it could suffer further from the construction slow-down. It may be best
to wait for its earnings trend to turn back upward. Or take a small position now
with a view to adding to it at lower prices.

 

December 19, 2007

 

Kingsway fell about 22% today and that is on top of already huge declines
this year. I always said it was an unpredictable company. But I thought the book
value, (still around $16.50, even after the announced large increase in
estimated claims liabilities) would provide support for the stock price. I added
to my position at this lower price today. This stock could fall further and in
the best scenario is going to take quite a while to recover. It will only rise
much if it can announce good earnings results each quarter in 2008. At the
moment management has basically lost all credibility and investors wonder what
the next bit of bad news will be. Although, Possibly we will get some bounce
back from today’s lows…

 

With this happening and with the overall outlook for stocks being rather
gloomy, I am definitely inclined to look for positions to sell and raise my cash
position. (I sold a small portion of my ING Canada today). But I did buy some
Tim Hortons on weakness today. I really would like to see Tim Hortons drop
another dollar at least and then I would buy more. It’s a company that seems
relatively predictable and is highly profitable and so any further decline in
its price to my mind are buying opportunities. (Though in this market I would
average in because if the overall market drops it tends to pull everything down
and so it is wise not to buy too aggressively at this time).

 

December 18, 2007

 

Kingsway Financial is out with bad news
and is likely to fall sharply tomorrow. Yesterday they announced that their
founder/CEO/chairman, would retire as CEO but stay on as chairman. Today they
announced that once again they have to sharply increase their estimate of claims
liabilities at their biggest subsidiary. Given a history of this sort of thing,
this is very annoying. It was only 5 weeks ago that they came out with earnings
and basically gave assurances that the claims liabilities were sufficient. In
the Nov. 11 update I suggested that this might be a case of a mediocre company.
It was apparently attractively priced, but perhaps this is a lesson that
mediocre companies should be avoided, even at bargain prices. Personally I have
been analyzing the company for a long time and perhaps I have become more
attached to it than I should have.

 

It is possible that it will recover because it does make good returns on its
investments. I don’t particularly think that it makes much sense to sell at this
point. Unfortunately, it remains a risky and unpredictable company.

 

I ended up adding slightly to my position in Kingsway today because I had an
oder in below the market price and it dipped down at the end of the day.

 

On a brighter note, Berkshire Hathaway also dipped down today and I bought
back some shares I had sold a couple weeks ago. The buy price was 10% below the
recent sale price.

 

I also placed order to buy Tim Hortons and Western Financial Group at lower
prices.

 

Given this latest hit to Kingsway, I will be in a defensive move and may look
to reduce some poistions.

 

December 17, 2007

 

A bad day in the markets. But certainly not any big surprise. I sold my
Canadian Western Bank shares to take the profit there. I reviewed my own
holdings again with a view to wanting to sell because I remain quite cautious in
my outlook (i.e. I am scared that stocks could fall – that is not such a bad
thing as long as one then has cash to buy). I have a large exposure to Tim
Hortons but had already trimmed there and also I am very confident that it will
be a good investment long term and so I was not inclined to sell more of it.
Much of the rest of what I hold seems to be reasonably valued and/or I just like
the outlook for the stock and therefore am not inclined to sell. I believe I am
now around 40% in cash.  EL-Financial fell about 9% today, but it tends to
be quite volatile and so I am not sure that the price on a given day is all that
meaningful there. FirstService fell quite noticeably today and I am not aware
why. It does have exposure to apartment management and that may be a slowing
industry. I plan to update the analysis of FirstService soon.

 

December 16, 2007

 

Manulife Financial
 is updated and rated
Speculative Buy at $41.01. Based on its earnings, this stock could be rated
higher. But this this a hugely complex company. I may delete it from this Site
because it is simply too complex. It has a history of steady earnings growth. In
some of its product lines it has displayed amazing growth. But I see it as risky
due to the complexity. It may not be immune to some of the write-offs that we
have recently seen from big financial companies. I would be prepared to hold a
reasonable amount of it, but I would not want to get over-exposed to it.

 

In terms of the general markets, my outlook remains cautious. I am thinking
of taking at least profit in Canadian Western Bank since it is at a high, at a
time when many large bank stocks are at risk of falling due to sub-prime related
write-offs.

 

The weird effort to interfere in the market for Asset Backed Commercial Paper
in Canada has failed to be resolved and the artificial freeze on the market is
extended to the end of January. This could lead to some investors finally
selling out of this paper at fire-sale prices. The law-suits will soon begin.
Expect to see more write-offs and lots of law suits. This could push the
Canadian market down tomorrow Monday.

 

December 12, 2007

 

The markets at first rose today on news of an agreement for central banks to
help banks (oh joy more interference in the markets). But the gains were later
retraced and I think this shows justifiable nervousness of investors.

 

I am tempted to add to my position in Kingsway. Perhaps this is a case of
clinging to a stock that has not done what I had expected. It looks bargain
priced. On the other hand since I think that market could easily fall, I am more
inclined to sit on my cash.

 

December 11, 2007

 

Reitman’s (a Canadian women’s clothing
chain) is updated and rated Buy at $19.19 (it closed today at $19.36). Based on
its achieved numbers it should be rated higher than Buy. But it did have an
earnings drop in each of Q1 and Q2 before recovering strongly in Q3. Therefore
we are a bit cautious on the outlook. It is not entirely clear how the Canadian
dollar is affecting it. The higher dollar lowers its costs of goods, which could
lead to higher profits (unless it was forced to lower prices to compete with
other retailers and cross-border shopping). It is is up nicely since my note of
December 4.

 

The Fed lowered interest rates today and yet stocks fell. The reason is that
the the 25 basis point cut was already fully “priced in” to the market. It
appears that a hope of a 50 basis point cut was also partially priced in. When
the cut was only 25 basis points then stocks fell as the extra hoped for rate
cut did not materialize. In addition I understand that the press release
accompany the interest cut was not as suggestive of further rate cuts as had
been hoped for.

 

In addition now that the rate cut has been made there is little reason now to
expect stocks to rise in the very short term. Investors may have also concluded
that tax-loss selling would be a negative in the nest two weeks. And then there
is our old friend the sub-prime crisis.

 

The American bail out plan for certain sub-prime borrowers is a colossal
mistake. One of the absolute key requirements for a functioning free market is
the “rule of law”. Here the U.S. government has decided to help out
irresponsible borrowers by allowing them to change the terms of their mortgages
at the expense of the banks and investors who are owed the money. If the banks
wanted to give a break, to avoid the cost of foreclosure, fine, that is their
right. But the government should not have the right to break those contracts. It
is a slippery slope. Where will it lead? I suppose the U.S. government’s word is
still usually pretty good but ultimately how can they be trusted to pay their
own debts if they are willing to break contracts like this? Directionally the
financial trustworthiness of the United States has taken a turn for the worse.
The government should have paid for the bail out from tax dollars not from the
pockets of banks and mortgage investors. It is a black moment for capitalism. If
the stock market figures this out (as the corporate bond market, and certainly
the debt derivatives market already has) then the market could take a sharp dip.
For these and other reasons I remain with a bias to increasing cash.

 

For that reason I sold some Tim Horton shares this morning to take some
profits off the table. It remains my largest position. I love the company but
that does not mean I can’t take some money off the table.

 

December 10, 2007

 

Canadian National Railway is updated and rated
(lower) Buy at $51.49. This has been an excellent company and continues to have
a strong long-term outlook. However, the earnings trend has now flattened and
this seems likely to continue inQ4 and well into 2008.

 

tomorrow the Fed is expected to lower interest rates. Stocks may rise on that
news. However, I believe the markets are vulnerable now to to the next wave of
worry over sub-primes issues and possible recession.

 

Tim Hortons has done very well lately.
It is an exceptional company and one which I am very comfortable holding. But I
may trim position since I have a large exposure to it. (Like almost all
investors I reserve the right to worry about my money and therefore to sometimes
trim positions. This is especially the case right now because I still have a
bias to increasing my cash position to hedge against the risk of a general
market decline).

 

December 9, 2007

 

Wal-Mart
is updated and rated (higher) Buy
at $48.24 (it closed Friday at $49.02. The stock price has done well lately but
has been volatile this year due to recession worries. The investment thesis here
is the opportunity to buy an exceptional world-class company that appears to be
still growing earnings at low double digit rates at a P/E multiple that is below
the market average. While the stock price has been disappointing for some years,
the earnings per share have pushed steadily higher. There is some risk of slower
or lower earnings in the short-term but based on the achievements to date this
looks like a good investment for the long term.

 

December 8, 2007

 

Performance figures for 2007 are updated.
Also my own portfolio and the
model tracking portfolio are updated.

 

Yesterday I noticed Berkshire Hathaway had leapt to $150,000 per share. The B
shares were at $4991. That’s up about 36% from the $110,000 / $3,666 range at
the start of the year. This is not a stock that we rate on the site for a
variety of reasons that have been mentioned before. I had mentioned under
January 2 below that Berkshire was probably a good bet at $3666 and I indicated
I had bought some on January 3 and added more on August 28 (at about $4,000).
I had fully intended to hold that “forever”. But on Friday as I looked at the
price and with my cautious outlook for the markets I sold half my small
Berkshire position. I can only hope and pray that it will fall back
substantially so that I can buy more.

 

December 6, 2007

 

The market was up due to the rate freeze for some sub-prime borrowers. I
don’t really “get” this plan. Apparently no Federal money goes in. If Banks are
better off doing this (as claimed) then they could do it themselves. Sounds to
me like some borrowers will get a free ride and some of these would have paid
the high rate. It sounds like it totally tramples on the rights of banks and
investors who bough the mortgages to foreclose if they want. That is the
definition of a mortgage. You pay it or the bank gets to sell your home. If the
Feds wanted to interfere they should at least pay for it (although that would be
with taxpayer money). The market needs to take it course here.

 

The market may continue up due to interest rate cuts. But overall there seems
to be a ton of “rot” in the financial system. Also, home prices are still
falling. The recession in the U.S. has probably already started. Markets look
reasonably priced on a P/E basis but given that earnings are headed down
(possibly a lot) it is hard to imagine that stocks can stay level much less rise
in the next year. But there will always be individual stocks that will do well.

 

December 5, 2007

 

A strong day in the markets as we continue to see rather wild fluctuations.
Berkshire Hathaway was up 1.7% today and so Mr. Buffett was up just over $1
billion to $64 billion. Life just is not fair. But rather than pout about that,
my strategy is to try to learn from him. I will be updating some articles about
his methods soon.

 

The Americans apparently will freeze certain sub-prime mortgage payments for
five years. Apparently this will only be for those who were making current
payments at somewhat lower rates. This will not protect those who defaulted even
on the initial rates on their mortgage (and there are plenty of those).
Conspicuous by its absence was any hint in the story I saw of who would pay for
this. I don’t know if the federal government will pay or they expect banks to
pay or will the amounts be simply tacked onto the mortgages for later. Overall I
am skeptical that this will prevent house prices from falling. There are still
going to be probaly literally millions of foreclosures in the U.S.

 

Kingsway was down noticeably again today. Still no reports posted of any
share buy backs which they promised to do. Reitman’s has shown us that sometimes
the market is wrong it sends stocks down too much and they become bargains.
Kingsway continues to look like a bargain but is a very unpredictable company.
I’m certainly not a seller at this price. But I have a large exposure to it and
so I am not too inclined to buy more, particularly until I see that the company
is at least buying back shares. If management believes its own story, they
should be backing up the truck to buy. We shall see.

 

December 4, 2007

 

The Bank of Canada did lower its interest rate by 0.25% today. This led the
Canadian dollar a little lower. Stocks did not react. It seem that there is a
good chance that more rate reductions are on the way in both Canada and the U.S.
All else equal this is good for stocks. Problem is, all else is not equal. The
rates are being lowered due to the housing price “correction” and probable
recession, these things are decidedly bad for stocks. I remain quite cautious on
markets overall. I expect continued relatively wild swings in the market.

 

Reitman’s released earnings during the middle of trading day today. Many
(maybe most) companies do that, releasing earnings during to day. I consider it
to be unfair to small investors but there is not much you can do about it.
Warren Buffett’s Berkshire Hathaway as usual is the model in this regard. He
likes to release earnings on Saturday mornings if possible to give the most
amount of people the most amount of time to digest the news. By the way
Berkshire has galloped higher this year and Buffett may have surpassed Bill
Gates as the richest American. Berkshire is up over 50% in the last 18 months. I
have not analysed Berkshire.

 

Reitman’s had a pretty reasonable quarter and I suspect exceeded
expectations. Same store sales were down about 3%. Retail analysts seem to focus
huge attention on same store sales. But if the decline was driven mostly by
deflation associated with cheaper cost of goods (due to the higher Canadian
dollar) then that is not a problem. Earnings per share on a comparable basis
were apparently up about 18%, which sounds very good. They also increased the
dividend. Same store sales were up about 1% in November and that may be pretty
good performance in the face of a surge in cross-border shopping and a probable
deflation in prices in the month. We have not yet analyzed the results but on
the face of it, they look good. Reitmans was up on the news today and I suspect
it could go higher tomorrow. I will place an order to buy some.

 

Back to Warren Buffett. I am wondering if Buffett will one of these days buy
a big retailer. If he could find a retailer that had a huge amount of sales of
gift cards, he might like that. Gift cards (like insurance companies) give him
interest free money. And he absolutely loves interest free money, because he can
invest it. Making 15% on his own money is nice. But making 15% on someone else’s
money (which they have voluntarily loaned to him at 0%) and pocketing it is his
idea of heaven.

 

December 3, 2007

 

There is a possibility that the Bank of Canada will lower interest rates
tomorrow, Tuesday, if so that could send stocks up and the dollar down. If it
does not happen we may see stocks down and the Canadian dollar might go up
(though with the lower oil price, I am not sure the Canadian dollar can rise
much).

 

Telus has certainly been disappointing
lately. The market seems to be expecting that its earnings growth will be much
weaker than in the recent past. Also Telus announced last week that it acquiring
Emergis for $763 million for the equity share .

 

“Emergis (TSX: EME –
News) develops and manages
solutions that automate transactions and the secure exchange of information to
increase the process efficiency and quality of service of its customers. Emergis
generated $170 million in revenues in 2006 and currently employs approximately
1,100 people in offices across Canada including: the Longueuil, Québec
headquarters and offices in Mont-Saint-Hilaire, Ottawa, Toronto, and Calgary.
Emergis has expertise in electronic health-related claims processing, health
records systems, pharmacy management solutions, cash management and loan
document processing and registration. In Canada, Emergis delivers solutions to
major insurance companies, top financial institutions, government agencies,
hospitals, large corporations, real estate lawyers and notaries, and 3,100
pharmacies. Emergis’ shares are included in the S&P/TSX Composite Index.”

 

I have never understood why Telus would be involved in software for
healthcare. This initiative does not really seem to fit with the mandate of a
telco. The market seems disappointed with it. I don’t really like it but at $763
million for the equity it is not a huge acquisition for Telus.

 

Some investors might wonder if it would have been smarter to sell Telus when
the share priced turned down. In hindsight (which as they say is always 20/20,
that is true). On this Site we are fundamental analysts, we take our cue from
the earnings and the fundamentals, not from what other investors are doing.
Sometimes we will be wrong. But on average we have a good track record using a
fundamental approach.

 

December 2, 2007

 

Recent market events once again illustrate how very unpredictable the market
is in the short term. At the start of last week it was looking like a number of
huge U.S. banks were facing severe problems related to sub-prime loans. And it
looked like this would take a natural course that would get worse. House prices
would fall causing more and more people to default on loans. It was also not
clear that the Fed could lower rates given the low U.S. dollar. But later in the
week there was a firm expectation that the U.S. government will have some kind
of bail-out for mortgage borrowers facing sharp increases in interest rates
(their initial rates were below-market teaser rates). Apparently the Fed is also
prepared to lower rates.

 

This has helped and may continue to help markets. But it all seems very
dangerous. The U.S. government seems to be supporting a system where a housing
price bubble is allowed to form, but they try to prevent the bursting. It is
unrealistic to think that house prices and stock prices must only be allowed to
ratchet upward and never down. Attempts to delay natural corrections will likely
end badly. It may be okay to ride stocks higher for a while but most investors
may want to consider having cash available to take advantage of an eventual
deeper correction in stocks (probably linked to a fall in U.S. house prices /
recession).

 

December 1, 2007

 

Walgreens is updated and rated Buy at $38.74.
Based on its achieved earnings and growth and valuation, it looks like a
definite Buy. This company is well respected as a long-term strong performer.
However, it has announced that earnings growth is expected to slow somewhat.
Consequently the share price did drop significantly. It appears to be a good
investment but patience could be required as the share price has been trending
down. We analyzed it at $38.4 but it dropped to $36.59 as of Friday.

 

November 28, 2007

 

Don’t Just Do Something! Stand There! 

 

This usual strategy would have worked out well as a way to react to Monday’s
sell off. Those who did nothing saw Monday’s losses reversed and then some. It
seems the rebound is mostly based on the expectation of lower U.S. interest
rates. This continued wild action illustrates the fact hat no one ever knows
where markets are headed in the short term. But I remain cautious on markets
given the huge write-offs related to sub-prime loans and given U.S. housing
prices that continue to fall. As always as strategy of “just standing there”
will likely work out well in the long run, but at the expense of significant
declines from time to time. With a weaker economy my belief is that there is
significant risk of market declines in the next six months or so.

 

Telus may fall tomorrow on the news that some spectrum will be auctioned to
new players. But overall this is still an industry largely protected from
competition (U.S. telcos, banned from Canada). It’s not clear that any new
competitor would have much impact. Perhaps of more risk to Telus is its ability
sustain its historic growth. Telus will likely forecast its outlook in December
and that may be the next possible catalyst for the stock to rise, if that
forecast is strong.

 

Nov. 27, 2007

 

It has been some time since we updated TSX Group. We lat rated it a
wspeculative Buy at $43.74. We mentioned under Aug. 14 that it is facing more
competition. Recently a small competitor called Pure Trading has gotten up an
running. TSX Group closed at $49.10 today. I hold some and I am planning to sell
it tomorrow. It has continued to report strong profits and volume as competition
so far has been minimal. For the purposes of the Model Portfolio Iwill
notionally sell half the TSX at the opening price tomorrow..

 

It was yet another “interesting” day in the markets. My sense is that markets
are more likely headed down than up, givemn more bad news from the banking
sector.

 

It seems this may be the time when we all realize that the phrase “off
balance sheet liability” should have been an obvious red flag. By definition,
liabilities belong ON balance sheets.

 

The one pattern that seem s to keep repeating this year whether for huge
banks or for the companies on this Site is that almost every small sign of lower
profits, lower sales or other bad news somehow seems to get worse rather than
better.

 

Regarding Kingsway, they had promised on
the conference call that they would be buying back stock in the period before
year end (i.e. now) having been blacked out of that previously due to pending
earnings release or due to other inside information. But checking today I see
one insider sold about 15,000 shares in the last week at about $16 to hold about
7,000 (and he may not be done selling yet).  Another insider bought 260
also at about $16 to hold 5,660. There was no report of any share buy-backs,
although I believe that their habit in the past was to report those only
monthly. The insider sale here is a worry. The shares do look cheap and are
under book value so it is distressing that an insider would sell.  But then
again it is only one insider selling so it may just be that the person needed
money. Still it is a negative factor to consider.

 

A lot of stocks tend to look like bargains now. However, given he overall
trend of market to the downside, I would be inclined to hold on to any cash for
now and wait for possible better bargains ahead.

 

I f I did buy stocks now I would want to average in buying some now and then
waiting perhaps a month or two to consider buying more.

 

The problem is that some of the events in the credit markets are quite scary.
Credit truly has been the grease of the economy for decades and without that
grease it could slow considerably.

 

In a slowdown it might be the discretionary purchases that get hit first and
hardest. A person can put off buying a car, house furniture and new cloths. Also
restaurant meals are discretionary. But insurance bills, cable and telco bills
tend to get paid without cutting back unless things get really bad. If in fact
the general markets slide back noticeably however, it will tend to pull just
about everything down somewhat.

 

The one possible salvation is more interest rate cuts, that could help at
least temporarily. I tend to expect interest rate cuts in both the U.S. and
Canada by year end.

 

November 26, 2007

 

Stock markets continue to be highly volatile. It looks as if the sub-prime
problems could continue to get worse. And related to this, lower house prices in
the U.S. could lead to a recession there. Investors should always remember that
stock markets (i.e TSX index, DOW index) can at times decline in the range of
30% and very occasionally more than that. Most individual stocks can drop by
huge amounts on unexpected bad news. Investors accept this risk in return for
returns that are expected to be attractive in the long term. These situations
create stress but also create bargains. Investors who cannot accept the
volatility of stocks should reduce their exposure to stocks.

 

Stantec is updated and we rate it weak Buy at
$32.00 (We analysed it at $32 but it closed at 34.09 today). It has definitely
been  a great company.  If you believe in betting on a winner, it may
be a reasonable bet. However, at this time it appears that its growth could be
slower which would hurt the stock price.

 

November 24, 2007

 

Quebec has announced aid for manufacturers due to the high dollar. That
should help Bombardier (which we do not have on this Site) it may also help
Dalsa and Clemex (a company we used to have on this Site). If you hold these,
this might be a reason to continue holding. But with no figures announced for
any given company, this is not a reason to buy.

 

Reitmans (now $16.95) has not performed as
we expected since we rated it a Buy September 9 at $20.18. We did highlight in
our last update the unexplained 6% drop in August same store sales. Since then
we have had a massive increase in the value of the Canadian dollar. As mentioned
under September 20, we had thought that might help them as they would save on
inventory purchases given much of their product comes from the U.S. On the other
hand when prices in Canada started to come down they may have suffered due to
older high-cost inventory. Also the dramatic rise in the loonie above $1.00 U.S.
caused a wave of cross-border shopping that may have hurt Reitmans. In addition
we understand that the weather was unseasonably warm this Fall and that could
have hurt sales. On the other hand Stats Canada reported inflation in women’s
cloths in September and we though that might indicate that they were doing well.

 

Looking at insider trading, 3 insiders did exercise options and sell shares
in September and a fourth also sold shares. One insider bought shares in early
October at $19.15. This would not seem to particularly set off any alarm bells.
The company itself was buying back shares in September. For whatever reason, the
company did not buy back any shares in October. The recent stock price drop took
place in November and insiders would likely have been prevented from buying
then, because the end of the quarter had been reached, but the earnings not
released.

 

The company will release earnings soon and we will know then how the weather
and the dollar has impacted it.

 

EGI Financial (property insurance) is
updated and rated Weak Sell at $14.00. Based on its reported earnings it looks
cheap. But a large portion of its earnings in the past two years came from
retroactive recognition of profiuts from prior years (reserve releases) and that
is not sustainable. For this year without the retroactive gains it is still
reasonably attractive. However, earnings in the property insurance segment have
been trending down. Overall we are inclined to sell this at this time. This
stock was rated Speculative (lower) Strong Buy at $9.90 the start of this year
and is up 41%. It is up 81% since being added to this Site as a Speculative
(higher) Buy in September 2006 at $7.75. So, the stock has done better than we
expected but it is probably time to move on.

 

For purposes of the Model Portfolio we had sold half the EGI on Aug 21 at
$11.75. And I sold muy own position September 7 at $12.49 as mentioned on those
dates. At this time we will notionally sell the rest of the EGI from the Model
Portfolio at he opening price on Monday. Note that these shares are thinly
traded. Therefore I would not use a market order. One possibility is to place an
order now to sell at say $13.75 and you would then get the higher of $13.75 or
the opening price on Monday. But if the opening price is lower than $13.75 your
shares would not sell, so you could consider placing the order somewhat lower
than $13.75. If placing an order during the trading day you probably would want
to take the offered price rather than trying to get cute and trying to get say
the last price traded at.

 

November 23, 2007

 

Our Performance for 2007 is updated. In 2007
it looks like our performance may, for the first time, trail the market.

 

In my own portfolio I have a large exposure to Tim Hortons. I sold some of
that today and hope to buy back in if it drops to about $36.

 

Loblaw Companies Limited is updated and rated
Weak Sell at $33.30. Our last update called it Weak Sell/ hold at $45.15 so we
were on the right track but not pessimistic enough. We wanted to keep an eye on
this because it could show a big rebound in share price if it can get back on
track. It’s really quite shocking what has happened to Loblaw. For over 20 years
prior to 2005, this company reported amazing and steady earnings growth. It had
a premium P/E multiple. The ROE was high. It was considered to be perhaps the
best managed grocer in North America. At that time it was thriving despite the
competition from Costco, Sobeys and others.

 

But since 2005 it has had special charge after special charge. A major
project to consolidate distribution centers was totally botched and left the
shelves short of stock! (for a couple of years it seems!). The 30-something son
of the controlling owner was installed as president. What was left of the
talented senior management group that had done so well historically, decamped.
Junior has decided on a low price strategy and seems bent on forcing costs down
accordingly one thousand people are being let go in head office (which seems a
strange step in a company that is apparently flailing operationally). In the
last 12 months its profits have been about 1% of sales. To me it would seem
logical to simply raise prices by a measly 2 or 3% which would at least double
the profit, even after tax. I would have thought a focus on quality and perhaps
offering Aeroplan points to gain loyalty would be in order. To me low prices
gain no loyalty since you only get customers only at the expense of too-low
profits. Also if not already in place they need to insure an entrepreneurial
structure where store managers share in profits.

 

Maybe they are simply the victims of too much competition, but then again
their competitors I believe are still doing very well.

 

At this point the share price will likely languish unless junior is ousted,
the real estate is sold and leased back, or the whole company is sold. We will
continue to keep an eye on it for signs of life.

 

Western Financial Group is updated
and rated Speculative Buy at $5.54. It appears that this company will continue
to grow solidly over the years. However, there is certainly a risk of a
pull-back in the share price due to loan losses, a slow down in the economy or
even just because financials in general are viewed as more risky at this time.

 

I have done some edits on our
Special Report on Asset
Allocation in Retirement  (This report is listed in the links for
members above).  After listening for many years to claims that a balanced
asset allocation was best (which was hard to believe given that over the long
run stocks tend to way outperform bonds and cash) I obtained actual past data
and did graphs to show the result of different exposures to stocks versus bonds
and cash. I believe that these are very important articles. They do show that
going 100% in stocks exposes one to occasion huge losses of capital but that it
tends to be worth it in the end. I find that looking at this article and the
graphs therein can cause me to be more comfortable with taking the risk of
losses. It adds to my confidence that equity markets do tend to come back and
outperform in the end.

 

November 22, 2006

 

When markets decline it is easy to doubt the wisdom of being in stocks. If an
investor cannot handle significant losses on the equity portion of their
portfolio then that investor should not be in equities. Past data suggest that
the investor who learns to tolerate the occasional large losses that are on
average associated with equities will be rewarded in the long run. Our
Special Report on
Asset Allocation During the Savings Phase may help to calm some nerves. This
article is in the list above.

 

November 21, 2007

 

Obviously stocks are not doing well lately. It is always very difficult to
guess where markets will go in the short term. At the moment the trend appears
to be to continue down and this is driven largely by the increasing concern over
sub-prime mortgages and related banking issues, by concerns over lower house
prices and concerns about a U.S. recession. It’s always difficult to say to what
extent this is already “priced in” to the market. At any time there could be
good news such as particularly an interest rate cut that could drive markets.

 

This has been a tough year with an awful lot happening in the markets. A
subscriber emailed me indicated some frustration in being able to follow this
Site.

 

This is a good time to remind all subscribers to review the short
article on how to use this Site.
There is also a link to that article at the top of this page.

 

Subscriber feedback is welcome at
shawn@investorsfriend.com

 

For most of this year I have indicated that I am defensive and cautious on
the overall markets markets. Several times this year the market seemed to defy
gravity by coming back to about its previous high and at that point it looked
like being cautious was not the right strategy. But after each rally, we have
again see a market dip. Therefore as of right now, the cautious strategy seems
to be vindicated.

 

The level of cautiousness is another word for how much risk to take. This is
a very individual decision because it varies greatly by age and a host of other
factors as discussed in the articles section of this Site.

 

Clearly stocks are better bargains now than they were a few weeks ago. It may
be time to do some bargain hunting. An investor with cash could go into the
market gradually, perhaps planning to invest an equal amount over each of the
next six months.

 

A number of stocks on this Site have declined and may be attractive. I prefer
to buy those that have been updated more recently including Kingsway, Telus, and
ING Canada. Although not updated very recently I believe that Canadian Western
Bank  Canadian Tire, Shaw and Western Financial Group are attractive.
However, with stocks generally trending down, and with financial stocks coming
under particular pressure, there certainly are no guarantees.

 

I am tempted to do some bargain shopping but I will be hanging on to most of
my cash in order to have cash avaialble if the markets decline further.

 

A subscriber asked me to comment on the
Model Portfolio and I have made an updated comment there.

 

November 20, 2007

 

Alimentation Couche-Tard came out with earnings today around noon. Earnings
were down from last year but they indicated that this was because gasoline
margins were abnormally high last year and they claim that on an adjusted basis
earnings were actually up. Certainly the higher Canadian dollar hurts the value
of the earnings once translated back to Canadian dollars. We intend to have this
report updated by Sunday.

 

News about sub-prime loans continues to be a threat to markets especially
since it tends to feed into predictions of a recession in the U.S. This
continues to be a reason to be cautious in the markets at this time. The percent
of a portfolio allocated to stocks is a very personal decision depending on
numerous factors. Personally I am 35% in cash, 65% in stocks whereas
historically I have been close to 100% in stocks.

 

Shaw communications looks more attractive now after declining back under $24.
The P/E on it does not look cheap but its earnings have grown steadily as its
revenues grow and its costs do not grow as fast as the revenue. If this can keep
up as more people switch to digital cable then Shaw should do well. In this
market environment it seems best to average in, buying stocks gradually rather
than all at once if possible.

 

November 19. 2007

 

A bad day on the markets. But on the bright side for those with cash stocks
are cheaper now. Markets could certainly go lower, no one really knows. If we
can own good profitable companies at reasonable price/earnings or price/book
ratios we will do well in the end.

 

I added to my Kingsway and my Western Financial positions today.

 

As the Canadian dollar backs off, my strategy that I followed of buying
gradually on the way up is looking good. As it hit $1.10 it felt like I should
have waited and not bought at 95 cents and 98 and $1.02 and $1.05 etc. But now
that strategy looks okay. I probably should have bought more U.S. dollars as the
Canadian dollar fell back to $1.08 then $1.06. But it is just hard to do that.
Logically I see nothing wrong (and a lot right) with buying U.S. dollars at
$1.01 or 99 cents etc, since barring the last couple of weeks that is still a
30-year bargain. Emotionally though I guess I now prefer to wait and see if we
get back to $1.05 or higher. In any event I also have already converted a
reasonable amount of cash to U.S. dollars.

 

November 18, 2007

 

I have entered the data for the Western Financial Group Q3 report but not yet
completed the report. It had a good quarter with good internal growth.  And
it continues to have a good strategy of growth by acquisition. It’s not clearly
bargain priced, but with all the trends moving favorably, it will likely be a
good investment over the medium to longer term. I may add modestly to my
position in this. I do worry that eventually it could face some credit losses in
its banking operation but there appears to be no sign of that yet. One
interesting fact is that it reports EPS unchanged year over year at 4 cents
diluted and 5 cents basic. But is proper significant digits are used the growth
was 19% in diluted EPS and 15% in basic EPS and that is a lot better than the
zero that they show. ROE has also increased and is now 10.6%, not high but the
trend is very good. If it were not for share issues the growth in earnings per
share would be a LOT more. If it ever gets to the point where it does not need
to keep issuing shares, we may see accelerated growth. In some ways it is
following a similar path as Canadian Western Bank which started out with low ROE
and it eventually grew quite nicely and also CWB at one time was increasing its
share count very quickly but that has stopped increasing so fast and I am hoping
WES is on the same path.

 

I took a quick look at Loblaw Q3 report. At this lower price of around $35
it might be worth sticking a speculative toe into it but overall it looks like
the any turn-around in profits is not imminent.

 

Home Capital
is updated and rated
Speculative (lower) Buy at $40. We last rated this Speculative (lower) Strong
Buy on August 28 at $34.30 and it has risen nicely since then. We had first
introduced this stock to the site as a Buy on April 26, 2002 at $7.43. Right now
it is a tough one to call. The value ratios would indicate a Strong Buy. But we
are worried about a possible recession in Ontario with the high dollar and we
worry that the sub-prime mortgage issues could have some impact on the company.
Although we are cautious with our rating at this time, it could certainly be
bought as a speculative pick.

 

November 17, 2007

 

Performance figures for 2007 are updated.
The model portfolio’s performance is
also updated. My own portfolio is updated. It
can be seen that I am personally way over-weight in “dollars and donuts”. (cash,
financials and Tim Hortons)

 

I added to my Kingsway position on
Friday. It has been quite disappointing. However, it is now trading at just 88%
of book value. Book value is determined by the estimated actuarial value of the
claims liabilities. In theory book value is under-stated somewhat (making it
even more attractive) because management chooses not to discount the liability
for the time value of money. Lately it has had a history of having to restate
upwards its liabilities for past periods related to its largest U.S. subsidiary,
and that is bad. But it had a similar problem in Canada a few years ago and that
was eventually solved. It’s earnings in any one quarter or year are highly
unpredictable and almost meaningless by nature. What matters is the earnings
over long periods of time. It has a reasonable record in that regard. For
property insurance stocks the most reliable indicator may be price to book value
(Fairfax financial turned out to be a great investment when it was looking ugly
and traded under book value, ING Canada turned out to be a bad investment when
it was reporting exceptionally strong ROEs over 25% and was trading at about
250% of book value). Kingsway at the moment has not proven itself to be a great
company at all and in fact appears mediocre.  Also the company basically
promised on the conference call that it was going to start to buy back
meaningful amounts of its shares before year-end. Overall it it does look like a
good bargain here but is not for the faint of heart or the risk averse
investor..

 

November 15, 2007

 

Markets were down today, but our Picks are holding up better than average.
Tim Hortons has been particularly kind to me as my largest holding. For those
not holding it, I think it is still okay to average in at this price. Sure, it
could dip, but it’s a keeper for the long run.

 

Loblaws reported and it was ugly. The stock got hammered today. It’s stunning
how this star has fallen from grace. It traditionally did sport a very high P/E
and so there was room to stumble, but they seem to be falling down drunk! Can we
bring back Richard Currie?

 

I still think at some point this will be a bargain and that time may be now.
(I will take a look at the financials in the next few days). . At some point the
buy-out funds will pressure them because this could be bought and then the real
estate sold and leased back. The Weston family may not want to sell, especially
at this price, but a take-over offer, might at least spark some action. I guess
jr. Weston was not kidding when he said the turn-around would take a couple
years.

 

November 14, 2007

 

If you looking at a rating in the table above please remember that the
ratings are as at the particular point in time as stated above the table. Prices
change fast in the market and so if the price has moved much you should consider
whether the rating still applies. It’s not possible for us to keep updating the
rating for each price movement or new information.  It’s hard to give
guidance here, but for most stocks if the price has moved 10% then that could
easily affect the rating if we were to update. Also occasionally things in the
market change. Recently the sharp jump in the Canadian dollar has had impacts on
various stocks and I have posted comments below.

 

 I think the best way to use this Site would be to consider making use
of our ratings soon after our report date. Unlike many people I don’t
particularly believe in rushing when it comes to stocks. There is always another
buying opportunity to come. If you want to follow our Buys and Strong Buys
(always at your own risk, and after reading and agreeing with the detailed
report,  and always with you considering your own risk tolerance) it
probably makes sense to do so close to the time of new ratings or when we make
an updated comment in the daily comments or we indicate we have traded the
stock.

 

You can search the daily comments using the search capabilities of your
internet browser (control-F for most computers). It may make sense to search
back for comments made after the date of each rating above.

 

A subscriber questioned whether the Couche-Tard rating of (lower) Strong Buy
at $21.70 as of September 3 is still valid, given that I personally just reduced
my position and the stock is around $19. It’s a fair question. I have been
mentioning below that this company will be hurt by our higher Canadian dollar as
most of the operations are in the U.S. The dollar is up a lot since September 3
(95 cents at that time). Then again the stock price is down a similar amount.
The two may offset and maybe the rating would still apply today, but I think I
would quite possibly rate it a little lower due to the currency.

 

I was thinking that the when earnings come out, they may look good in U.S.
currency but then when translated back into Canadian dollars it might look bad.
I just decided to sell some but not all. Another reason I sold is my general
bias right now to raise cash. I had bought several stocks on Monday as reported
below and was looking to raise a bit of cash.

 

It’s unavoidable that in my own trading , emotion and fear tends to come into
the picture, whereas in a  stock rating I can be more logical and
unemotional. A stock may be rated Strong Buy, but every stock has a certain
amount of risk and at times I may sell a Buy rated stock to reduce risk.

 

Today’s rise in ING Canada may be
indicative that it was at bargain levels which our rating suggests.
Kingsway is supposed to be starting a
buy-back program and this could lift the stock, though in the past they have
said they would buy and then ended up not but they say that was because they
were in a black out period such as when they are looking at an acquisition. I am
tempted to add to my Shaw
Communications position given its price drop.

 

The Canadian dollar is sinking now. It now starts to seem like it would have
been a good bet to load up on U.S. dollars when the Canadian dollar was up above
$1.08. I wonder how many people caught the very top? I am comfortable with my
own strategy which was to buy gradually as the dollar rose. I switched some
money to U.S. funds and I  consider that money to be permanently in U.S.
dollars. There are a lot of investments and other things to buy with U.S.
dollars. I probably should have switched even more, but I am comfortable to go
slow. We may see another chance to get  above $1.05 and perhaps even above
$1.10 but I don’t think we can count on that.

 

November 13, 2007

 

There is never a dull day in the markets lately. On some glimmers of good
news today the market fairly soared in the U.S.

 

Regarding the insurance stocks that I follow, I guess I have good news and
bad news (depending how you look at it) which is that they are cheaper yet again
today. With these stocks if you are buying, it seems best to average in.

 

I did trim my Couche-Tard position today. That may not have been a wise move
since we had rated in very highly on September 3, and the stock is down since
then. (So normally I would look to add rather than trim) But most of its
earnings are from the U.S. and the price drop since early September does not
match the dramatic increase in the Canadian dollar since that time. When it
reports earnings next week it may look good since it reports in U.S. dollars,
but the translation back to Canadian dollars will look disappointing I think. So
I just thought I would sell some and hope to buy back in after the earnings
release and as the market digests the harm that the high Canadian dollar has
caused. Normally I would not be jumping in and out but I find these $10 dollar
trades make it so easy to jump in and out particularly in an RRSP account.

 

Nov 12 2007 (the following was sent to subscribers via email)

 

You may have heard that the Canadian dollar fell back to $1.03 today. It goes
to show just when everyone is convinced a market can only move in one direction,
it turns around and surprises most people. Most investors I think should be
taking the opportunity to move some Canadian funds into U.S. dollars. No ones if
we now slip back under $1.00 or instead it goes back to $1.10

 

Cognos, which we last called a Speculative Buy at CAN $42.48 is being taken
over at U.S. $58. Over the years this stock has often looked expensive, though
we have long stated that its accounting may be conservative and that there might
be hidden value in all that R&D expensed over the years.

 

Cognos was one of the first stocks ever rated on this Site when we called it
a Strong Speculative Buy at $15.83 in June 1999.

 

Nov 12, 2007

 

Based on the recent updated ratings, I added modestly to my positions in
Telus, Kingsway, ING Canada and Northbridge. I still have a bias to keeping cash
for possible bargains ahead but still wanted to nibble at what looked like good
prices.

 

I am tempted to trim my positions in Western Financial Group on fears of a
slow-down in Western Canada and in Couche-Tard on fears of how hard the high
Canadian dollar will hurt it as it translates back earnings from the U.S. But so
far I have not taken any action on these. I have basically no exposures above
about 4.5% of my portfolio (most are blow 4%). Therefore I am less nervous about
dips in any individual name. I do have 14% of my portfolio in Tim Hortons.
Certainly I am vulnerable to volatility there, but I am comfortable to accept
the volatility because I am confident it will do well in the long run. (In fact
I had been hoping for a dip to below $35 to add to my position, but it does not
look like that is going to happen).

 

November 11, 2007

 

Note that in many of the recent updates the cell that is supposed to give the
summary of the rating and a summary of the reasons for the rating was missing.
This has been corrected.

 

Kingsway Financial (trucking and
high-risk driver insurance) is updated and rated Speculative (lower) Strong Buy
at $16.69. This stock has not been a happy story for us. It has now fallen back
precisely to the price it was at on June 17, 2003 when we first added it to this
Site as a Speculative (lower) Strong Buy. Subsequently the price has ranged all
the way from about $11 to as high as about $26. The recent fall is caused by
three main reasons. 1. After several years of very high insurance industry
profits. the industry in general is now displaying lower profits. 2. About 70%
of the business in in the U.S. (although it is head-quartered in Canada) and the
high Canadian dollar hurts the Canadian share price. and 3. It has a nasty habit
of reporting retroactive losses from other years. Even though reported profits
have still been good despite the retroactive losses, the market HATES this and
figures more bad news could be coming. 

 

So, it’s hard to now get excited about investing in Kingsway. But the fact is
that the stock looks very cheap right now. It is rare to see profitable
companies trade below book value. However, this may be a case of buying a
mediocre company at an attractive price (maybe even very attractive price). But
Warren Buffett has said he prefers a great company at a fair price, rather than
a mediocre one at a great price. Overall based on the valuation, I will likely
add to my position in this stock.

 

ING Canada (Home, auto and commercial
insurance) is updated and rated (higher) Buy at $38.60. Over the past few years
when we analysed ING Canada it has always been extremely profitable on reported
earnings. Although we rated it in the Buy range we had expected earnings to
decline from recent extraordinary levels. And we had noted that the high price
to book value was a risk. Now the earnings have come down and the market seems
to be “spooked” by this which is surprising given that the company predicted
profits would come down. At recent prices ING looks like a good long term
investment. The short-term as always is much more difficult to judge. I am
inclined to add to my position in this company.

 

GAAP earnings for insurance companies are best looked at over the long term.
Quarter by quarter and year by year the earnings by nature tend to be extremely
lumpy and therefore difficult to interpret.

 

A point of interest in the Q3 report for ING Canada is that they wrote off
$40 million of a $70 million exposure to Asset Backed Commercial Paper. That is
a much higher percentage write-off than others have taken. The difference here
is that they did not invest in Asset Backed Commercial Paper. Instead they
actually invested in (I believe the subordinated debt of) two of the “conduits”
that sell the commercial paper. Those conduits are clearly at risk of being
worthless. The conduits will have to make good on any losses in ABCP suffered by
the note buyers. That could use up all the equity in the conduit and next the
subordinated debt is at risk of being used up (made worthless) and then the
senior dent of the conduit. After that the conduit would be worthless and the
ABCP note holders will suffer the loss. I will go on record here as predicting
that the remaining $30 million of their investment could be written off. Overall
though this is not a big deal for ING Canada which has over $7 billion in
investments and $3.2 billion in shareholder equity.

 

The Asset Backed Commercial Paper situation in Canada is really quite
remarkable. Many conduits are in default on repaying 90-day term investments.
They normally repay these by issuing new 90 day notes. (The equivalent of paying
off a floating interest mortgage every 90 days by taking out a brand new
floating rate mortgage). Recently the conduits found no one wanted to buy their
90 day notes and they are in default. In normal circumstances they should be
forced into liquidation. Bizarrely some big institutional investors have agreed
to hold off on forcing the conduits into liquidation and instead may accept
longer term notes. (If you loan someone money for 90 days and they can’t pay,
why should you then agree that they don’t have to pay for say two years?). It
seems possible that small investors could also force the conduits into
liquidation. Perhaps the current approach is best because in liquidation, the
conduits will have to sell off assets perhaps a fire sale prices and ABCP
investors may lose money. This is a strange situation and not how markets should
work.

 

If you hold any Asset Backed Commercial Paper investments that are stuck in
this mess then you probably had help and advise from a broker or financial
advisor. You may want to suggest to your broker or Advisor  that you want
your money NOW. I predict advisors are going to have make clients whole in some
cases. That may then lead to liability insurance claims by the brokers. It may
or may not be fair for brokers and advisors to face any liability. Investors are
supposed to know all investments are risky. It seems the entire market mis-judged
the risks on these ABCP notes.

 

If you bought ABCP (the kind that is now frozen) completely on your own in a
discount account then you may ultimately face a loss. And I can’t think of much
you can do about that. You may want to harass the entity that issued the notes
and try to be first in line for  any redemptions. A discount broker almost
certainly has no liability to you in this case.

 

Another category would be mutual funds that invested in these notes. In this
case the mutual fund company may pay money in to offset investor losses. But
that would only work where the losses were small compared to the value of the
mutual fund company. If a mutual fund has a lot of these notes then the
investors in the mutual fund could face losses.

 

November 10, 2007

 

Telus is updated and remains rated
(lower) Strong Buy at Canadian $50.98, for the non-voting shares. The price has
fallen lately while earnings remain strong. The market seems concerned about
higher competition and lower growth. Based on the achieved numbers Telus looks
like a good investment. I am not sure if I will add to my own position because
overall I am inclined to hold onto cash in casee the overall market declines
further.

 

Markets took a hit this week. No one should claim to be surprised by that.
The bigger surprise all year was the strength in markets in spite of the risks
from sub-prime loans, falling American home prices, potential U.S. recession,
the sheer five year length of the current bull market, and the inescapable fact
that markets have always been known to be volatile. They seldom go up in
straight lines.

 

Most of this year it was tempting to be bearish or at least defensive.
However, that seemed a losing strategy most of the year as the markets regained
ground time and again after each decline.

 

My own strategy (as chronicled on this Site was to move towards cash on
several occasions this year. Most recently I have been at about 37% cash for a
number of weeks. I also indicated I was still in more of a selling mood than a
buying mood. But I tended to ‘like” the individual stocks I was holding and so I
stopped selling. At the moment it feels like I should have gone to a higher cash
position. But sentiment can turn quickly. Over the long run it pays to have
exposure to stocks. I am not too fussed about declines in stocks that I think
are good bets to be higher in the medium to long term.

 

In the short term the declines of this week could certainly continue. I don’t
see much reason for a rally. As I mentioned previously earnings on the S&P 500
declined on a year-over-year basis in Q3 and this is the first such decline in
several years.

 

In fact on a GAAP basis the S&P 500 earnings declined a frightful 27% in Q3
year-over-year (Thanks to GM’s huge write-off and the huge write-offs at big
U.S. financial institutions). Even on an “operating earnings” basis which
excludes some one-time items these earnings dropped 5%.  In general, it is
expectations of profit growth that drives stocks higher. If the market starts to
sense that earnings will decline in 2008, then certainly the U.S. market will
decline.

 

The Canadian market is always much harder to predict due to its high
weighting in commodity stocks.

 

So, certainly investors should be cautious at this time. In any market
bargains will appear and I will be watching to find some of those.

 

In my recent new article on the Canadian
Economy I expressed surprise at finding that the energy industry accounted
for only 4.7% of Canada’s GDP in 2006 despite accounting for 36% of the TSX
market value. I came across an article by CIBC’s Jeffery Rubin that confirms
this. He said oil and gas is ten times more important to the TSX than it is to
the GDP figure.

 

The reason for this is that almost all of the oil and gas industry is listed
on the TSX. Even where U.S. and world companies own oil and as operations in
Canada they have tended to so so through Canadian subsidiaries that do trade on
the TSX. Meanwhile, huge swaths of the Canadian economy such as government and
all private businesses do not trade on the TSX. Canada’s auto industry is mostly
ran by foreign companies that do not trade on the TSX.

 

Manufacturing is a big part of GDP, and a huge component of exports,
but a tiny component of the TSX. This may be one reason why manufacturing
company woes (due to the high dollar) are not getting that much attention. When
the oil and gas industry was hurt by the Income Trust taxation decision the
wailing that was heard was not that of the employees in these companies but was
that of investors. Manufacturing has few investors to wail for it, therefore the
sector may be half dead from the high dollar before it gets any attention.
(Long-time readers know I am generally in favor of free markets, let the chips
fall where they may. But I just want to point out that a Canadian dollar above
the U.S. dollar will almost surely decimate the manufacturing industry in this
Country and therefore I think government is likely to take action to reduce the
dollar’s level at some point).

 

In my article and recent newsletter I also indicated Canadian exports would
drop and imports rise. Figures just out for September confirm this. Perhaps
within a couple of months Canada will be into a trade deficit after years and
years of surplus.

 

November 8, 2007

 

A couple of days ago, I mentioned you are now able to subscribe for three
years, five years or even a lifetime. The lifetime option is rather unusual,
although some other newsletters do offer it. So far there has not been much
interest and I may remove the lifetime option very shortly. I’m certainly more
than happy to have you as a monthly or annual subscriber, but I wanted to offer
these other options to anyone interested.

 

New Longer term subscription Offer. Some subscribers have asked me
about longer term subscriptions. The following link will allow you to subscribe
for three years, five years or even a lifetime. If you take any of these options
I will refund the unexpired part of your current subscription.

 

Click to see how these longer term
subscription options work.

 

The market ended okay today after being down a noticeable amount earlier in
the day. There is some fear around and it seems sure that more bad news is
coming in regard to sub-prime loans and related matters.

 

Banks with their thin equity ratios are finely tuned instruments. When they
do occasionally lose money it can get ugly because of the leverage. Overall I am
not inclined to go bargain hunting just yet.

 

In the midst of all this market uncertainty, the incomparable Warren Buffett
is having a magnificent year. His Berkshire stock is up a tidy 22.3% this year
to date. Now Buffett still held about $50 billion in shares at the start of this
year after having given away about $2 billion in 2006, the first year of his
20-year mega-donation to charity plan. So clever, Warren often described as
yesterday’s man is up 22% on about $50 billion, which is over a $10 billion
gain, which is beyond eye-popping. After giving away about $4 billion to charity
in the past two years, his wealth in Berkshire shares has gone from about $44
billion to now $59 billion, and he may possibly have passed Bill Gates as the
richest American. (Berkshire share are up an incredible 46% since he announced
his donation in June 2006).

 

I plan to soon update and edit some of the articles on this Site regarding
how Buffett does things.

 

November 7, 2007

 

I can’t say I was surprised at the tumble in the markets today. I have been
defensive to somewhat bearish most of this year which was why I took my cash
position from near-zero to 37%. I am not ready to start buying yet and will wait
to see if further bargains emerge.

 

ING Canada took a big hit today. I think this is over-done .The company is
still very profitable. Given the current market I am not ready to buy yet, but
if I was starting fresh with a portfolio to invest then this is one I would
likely buy.

 

The Canadian dollar finally took a breather today. A report by the conference
Board indicates the auto parts industry profits will be hurt by the high dollar.
I suppose they know a lot more about the industry than I do, but margins on
parts sent to the U.S. would presumably have been crushed by the rise from 85
cents to $1.08, not to mention the earlier rise from the 70 cent level. Margins
on parts sold in Canada would be largely unaffected, unless there are competing
parts available from the U.S. and unless the car plants shut down. I don’t claim
to know much about the auto industry but if a Canadian plant was not obscenely
profitable at an 80 cents dollar, it’s hard to imagine it is making any money at
a $1.07 dollar. Basically the more Canadian labor and material content in a car
the less competitive that car is right now compared to where it was at a lower
dollar.

 

I suspect the cross border traffic this coming Holiday weekend will be a
sight
to behold.

 

I am all in favor of free markets, and cross border shopping, but I do see
this as very devastating for the Canadian economy. Canada gets certain benefits
out of having a currency that floats against the U.S. But it certainly gets
certain ill effects as well. Europe adopted a single currency and Canada really
needs to think about first pegging the Canadian dollar to the U.S. and then
probably eventually adopting the U.S. dollar. Apologies to anyone who thinks
that is unpatriotic, but I think this would be best for the Country. Many will
say, why chain ourselves to a sinking stone like the U.S. dollar? I just think
we are already chained to the U.S. and may as well admit it. I don’t think this
country can afford a currency that rises 50% plus compared to the U.S. given we
trade so massively with the U.S.

 

And, how much has a lower dollar hurt the average U.S. resident? Somewhat
less than the impact the average Canadian felt when the Canadian dollar dropped
to 62 cents, which is to say not much at all. A change in currency value matters
little to an American. The biggest impact is higher gasoline prices.

 

November 6, 2007

 

The Canadian dollar continued to “gap” upwards today at unprecedented rates.
The Bank of Canada apparently is not ready yet to step in to halt the rise. I
really don’t think the Canadian economy can sustain this sharp rise without
literally hundreds of thousands of job losses.

 

Last night CBC National news showed that there was gridlock at the Peace
Bridge crossing back into Canada on Sunday as hordes of Canadian cross-border
shoppers tried to return home. They mentioned 65 tour busses full of shoppers.
An awful lot of Canadians live within driving distance of the U.S. and I suspect
a lot will do their Christmas shopping across the border. I welcome your
thoughts and observations on this at
shawn@investorsfriend.com

 

To date, I think Canadian retailers or wholesalers have been scooping higher
profits on imported products. Now they may be forced to sell at U.S. prices due
to so many shoppers going to the U.S.

 

I have continued to move some funds slowly into U.S. dollars. So far it has
been a losing strategy. But at some point when the Canadian dollar starts to
slide back, I will have U.S. dollars. If I tried to wait for the peak, I might
miss it.

 

The low U.S. dollar is not hurting the average resident of the U.S. because
the U.S. mostly trades within its own borders. It does hurt a bit in terms of
oil and gasoline prices, but overall the impact is small. Inflation remains low
in the U.S. There is no sign that the U.S. will move to halt the slide in its
dollar.

 

Manulife came out with earnings today. I have only glanced at the report but
I did see that their sales increases were eye-popping. The high Canadian dollar
continues not to hurt them very much (which surprises me). I plan to update the
Manulife report by Sunday.

 

New Longer term subscription Offer. Some subscribers have asked me
about longer term subscriptions. The following link will allow you to subscribe
for three years, five years or even a lifetime. If you take this option and
I will refund the unexpired part of your current subscription. If you
take one of the longer term options I will also cancel your existing
subscription in PayPal where applicable.

 

Click to see how these longer term
subscription options work. I plan to offer this longer term option for only
a limited time depending on response.

 

November 5, 2007

 

Today’s news regarding CitiGroup reinforces my perception that it continues
to be a time for caution.

 

If anyone has basically first-hand knowledge of Canadian companies that are
being hurt by the high dollar I am interested in hearing about it at
shawn@investorsfriend.com

 

November 4, 2007

 

Northbridge Financial (commercial
property and casualty insurer) is updated and rate Buy at $36.52. It released
what appeared to be very strong earnings for Q3. However insurance company
earnings are typically affected by unusual gains (so frequently that unusual
items are in fact usual). It seems well managed and with a Price to Book ratio
of 1.38 combined with a longer term ROE historically above 15% it is probably a
good long term buy.

 

The share price can be moderately volatile. The shares are up nicely since we
rated it a (higher) Buy August 4 at $33.52. And it is up 82% since we introduced
it to this Site almost four years ago on December 5, 2003 rated (higher) Strong
Buy at $20.10.

 

November 3, 2007

 

I have really been surprised to see the Canadian dollar jump so high. as of
Friday it was gapping higher at an extreme rate. Some observers claim that
Canada’s economy can handle this, that manufacturing is no longer that
important.

 

I looked up figures at Statistics Canada and it sure looks to me like
manufacturing is still very important. See our new article summarizing the
Canadian economy.

 

Based on how important manufacturing is, I believe a dollar above par
constitutes an economic emergency. You should have received our
emergency newsletter on this topic.

 

On the plus side, we are all a LOT richer in terms of what we can buy in the
United States. On the negative side “would the last one out of the Canadian
factory, please turn off the lights”. Lord knows they probably can’t afford the
power bill to keep any extra lights on!

 

November 2, 2007

 

MicroSoft is updated for its latest
earnings release and rated Buy at $37.16. It has jumped 25% since we last
updated it only 3 weeks ago when we rated it Buy at $29.77. It is a complex
company.  Given recent earnings performance  it is still rated Buy.

 

FedEx is updated and rated Weak Buy / Hold at
$102.43. The company has had some weaker earnings and has not been a good
investment over the past couple of years. It is down 9% since we added it this
Site about 1 year ago rated Buy.

 

Historically it has provided excellent returns over the longer term. Warren
Buffett suggests we invest in relatively simple companies with good or great
long term prospects, with competent trustworthy management and when available at
reasonable prices. FedEx may fit the bill in the long term going forward. But it
is forecasting little to no earnings growth this fiscal year (on an adjusted
basis). I am not going to buy a this time. If I held it I might sell to move
into something higher rated.

 

On a positive note they have said they expect this current quarter to be a
record in terms of volume moved and they have raised priced.

 

November 1, 2007

 

Today’s market dip reinforces my thought that it is a time to be cautious.

 

Northbridge Financial released earnings after the close today. At first
glance the earnings look very good. I do note that some of the earnings were
related to one-time events and no-doubt analysts will find a cloud around this
apparent silver lining.

 

I continued to move some cash into U.S. dollars.

 

Yesterday it was reported that there is so much on-line shopping going on
that Canada Post is falling behind in processing the parcels coming in from the
U.S. Chrysler has announced price cuts on its cars to compete with U.S. prices.
Wal-Mart is selling books and magazines at U.S. prices, as are some private book
stores and Chapter/Indigo I understand has cut prices a minimum 10%.  So,
some of the higher dollar benefits are flowing to consumers. Retailers who are
bringing in new inventory from the States and who are not sitting on old
high-cost inventory should do well. Retailers with older high-cost inventory may
have to sell at cost. Bombardier Recreational Products has been in the news
because it is becoming well know that “quads” and probably “sleds” are thousands
cheaper in the U.S. Also most of us have noticed that Canadian Tire was selling
a medium size “quad” for $4500 last summer and in fact had it on sale in June
for $3500. Good luck competing with that. (And next year the price will likely
be lower still). Bombardier Recreational Products is probably going to have to
help their dealers out by giving rebates on their inventory to get it sold.

 

At a 95 cent Canadian dollar I wondered how an auto plant in Canada made any
sense given that the car companies were not exactly reporting big profits even
when the dollar was 80 cents. At $1.05 it’s getting really hard to imagine how
it makes sense to make cars or parts in Ontario. Sorry, but I think the math is
clear there. (And the corporate income tax cuts will not help that situation
because they will no doubt be losing money and so income tax is not a problem).

 

October 31, 2007

 

A big day on the markets with the TSX up 313 points and the Dow up 138
points.

 

The market is always hungry for good news. In Canada the market has now been
fed by announces tax reductions, higher oil prices and probably some spill over
from the U.S. interest rate cut. All this good news allows the market to forget
for the moment about lower earnings for some companies and the risks posed by
the high dollar and a possible U.S. recession/sub-prime/housing slump.

 

In the U.S. the market has been fed by lower interest rates and this allowed
it to forget about lower earnings for some companies and the risks posed by the
high dollar and a possible recession/sub-prime/housing slump.

 

So it’s nice to have all these gains but I have to think caution is still
warranted. I have to wonder what the markets can feed on next. Taking some
profits and positioning for any market correction is probably a good idea,
especially for those with very high equity exposures. Admittedly a 100% equity
strategy will do well in the long term, but except for younger investors just
starting out, that just does not feel like the right strategy right now.

 

Possibly in Canada the next feeding will consist of an interest rate cut to
stem the rise in the Canadian dollar. With that in mind I will likely move a
little more of my cash to U.S. dollars tomorrow. So far, hindsite says I
transferred money too early. But at some point if the dollar falls I will
already have some funds in the U.S. Those who wait for the very top could miss
it.

 

I’m going to think again about the stocks I hold and that I have identifies
(below) as being hurt by a higher Canadian dollar. I may trim a bit more there.
For example with Kingsway I have liked the company but I was not factoring in a
25% increase in the Canadian dollar this year. (Kingsway reports in U.S. dollars
so on a reported earnings basis a higher Canadian dollar actually helps it. But
when converted back to a Canadian stock price. a higher Canadian dollar is
definitely negative for Kingsway. As I have said before, currency exposure
depends on where a company has its revenues and expenses. It does not depend on
where the stock is listed.

 

Ya can’t keep a good monopoly down?

 

The TSX Group which still has basically a monopoly on the Canadian stock
exchange business had yet another big earnings increase released today. The
stock had fallen on threats of a competitor to come in 2008. But now the market
has forgotten that threat for the moment and is focused on the good earnings
news. It’s really hard to say if there is any serious threat of competition
there.

 

Heard about any hurricanes this year? I have not. This could be why Berkshire
Hathaway is doing so well.

 

October 30, 2007

 

Today’s tax reduction announcement should be good for stocks due to lower
corporate taxes (though in a competitive market the tax savings may get based on
the customers eventually) and due to higher consumer spending.

 

The big news tomorrow should be regarding the expected FED interest rate cut
of 25 basis points.

 

That and the tax cuts could drive the Canadian dollar still higher. I
transferred a little more cash to U.S. today and intend to transfer a little
more this week, no matter if the dollar is up or down.

 

The Case-Shiller index of home prices in the U.S. released today shows U.S.
house prices fell about 1% in August. More importantly U.S. consumer confidence
slipped about 4% in the latest survey.

 

An article in the current issue of Fortune magazine tells the story of how
bad some of the sub-prime mortgages are. Someone is going to lose a lot of money
on those mortgages and I suspect most of those losses have yet to be announced.

 

October 29, 2007

 

U.S. markets are maintaining a bullish trend driven mostly by the expectation
of an interest rate cut at the FED meeting on Wednesday. If interest rates are
not cut then I expect stocks would fall.

 

According to figures on the Standards and Poors Web Site at

http://www2.standardandpoors.com/spf/xls/index/SP500EPSEST.XLS the S&P 500
earnings in Q3 are down slightly from Q2 and down compare to Q3 last year, but
so far this slightly negative earnings growth has not bothered the market.

 

I notice that Canadian Pacific took about a 15% write-down on some Asset
Backed Commercial Paper investments. Those investments are in default but the
big investors have agreed not to push the entities that issues these into
insolvency. This is a very strange situation. In some cases the under-lying
long-term assets are good, in others they are not good. I suspect that if this
is not resolved by year-end then the write-downs will have to be bigger.

 

My own results have been hurt by my somewhat cautious stance this year. But
with an equity exposure of just over 60% I have not been overly cautious and I
think it was a good decision to be somewhat cautious. We have seen a lot of
turmoil this year and may see more yet. It is now five full years since the
Canadian stock index bottomed out and markets simply do not tend to go up every
single year.

 

October 28, 2007

 

eBay is updated and rated Speculative Buy at
$36.72. This company is very complex, generally we prefer more simple
businesses.

 

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professionals and anyone running a similar professional office that provides
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My personal portfolio composition is
updated as well as the performance
figures for
2007.

 

This coming week on Tuesday October 30, the FED is expected to lower interest
rates yet again. To a large extent this may already be factored into stock
prices. But it could drive stocks up a little further. It could also drive the
Canadian dollar higher. But if that happens I would think that Canada might
decide to lower the dollar by cutting interest rates (which is good for stocks).
Meanwhile, I fear that certain Canadian companies (see comments below,
particularly September 20) will report lower earnings due to the high dollar, if
not in Q3 then in Q4 (where the dollar at and above par may apply for the full
quarter). I also fear that at any time further bad news will result from loan
losses in the U.S. and from lower house prices in the U.S.

 

Shaw Communications is updated
and rated Speculative Buy at $26.03. This company has been increasing its
revenues at strong rate. Earnings have been increasing at a very rapid rate but
from low levels. The company has some accounting complexities that may it
difficult to evaluate. On a P/E basis it looks expensive. But with earnings
recently rising very sharply and with a very strong insider buying signal, I
feel good about holding this stock. I intend to place an order to add to my
position if the price should fall to the $24.50 range. The reason I hesitate to
add at the current price is that I still wish to maintain a high cash balance in
case the stock market in general drops.

 

We also rated this stock Speculative Buy as at the start of 2007 and it is up
41% since then.

 

October 26, 2007

 

Tim Hortons
is updated and rated Buy at
CAN $36.05 or U.S. $37.35. This is clearly a great company. But it certainly is
not particularly cheap. To buy this is a case of paying up for quality. It may
be best to average in. It is possible that earnings will show strong growth in
the next 12 months as earnings growth has lagged revenue growth. After that I
believe it has a strong probability of growing at about 10% to 12% over the
years as it grows into the United States. It is also possible that it could move
into other countries. In Canada it is the largest “fast food” chain and has
easily competed with all the American chains. I see no reason that it cannot
compete successfully in the U.S. and even other countries. But I do think it
will take some years to establish itself in new markets.

 

If Tim Hortons happens to fall in price, that will not bother me much and I
would use the opportunity to add to my position.

 

In 1995, Wendy’s had bought the then-private Tim Hortons for about $600
million. Wendy’s wisely left Tim Hortons to grow and left the Tim’s management
in place. Today Tim Hortons has an equity value of $7.0 billion U.S. while
Wendy’s is only at $3.0 billion.  Ironically, Tim Hortons could now
probably buy Wendy’s if it wanted to.

 

October 25, 2007

 

Tim Hortons
will release earnings tomorrow
morning. (That’s unfair because the retail investor has no time to react, they
should release earnings after the Friday close – like Warren Buffett does –
which gives everyone a fair shot at reacting to the numbers. At least they don’t
commit the ultimate sin of releasing earnings during the trading day – as many
companies do – which surely should be illegal).

 

I expect the headline Tim Hortons earnings to be an increase because Q3 last
year was weak. But the important thing may be how it compares to expectations
which I understand are around 35 cents per share. I do expect some bad news from
the American operations since the high Canadian dollar will hurt that investment
– possibly even some write-down of the U.S. investment. But operationally in the
U.S. as far as sales I expect it to be okay and to improve slowly.

 

Alberta came out with the Royalty increase today. It seems the consensus is
that oil stocks, especially oil sands and especially those linked to Suncor and
Snycrude will decline tomorrow morning. My sense is that royalties did need to
increase for oil sands. I don’t know about the other sectors (conventional oil
and gas). The biggest concern is that the Premier seemed to be threatening to
take action unless they “agree” to “renegotiate” the favorable contracts that
run to 2016. That seems extremely bad and sends the message that the Alberta
government’s signature on a contract cannot be trusted. Sure, taxes and
royalties can increaser that is always a risk, but here they seem to be in
effect ripping up a contract. Some of the Premier’s answers displayed either a
deep mis-understanding of economics or that he is not being truthful.

 

It seems some of these stocks already went down (although Suncor was “only”
down 6%)  in after-hours trading. By the way what is this after hours crap?
If you and I can’t trade after hours why should others be allowed? This sounds
like legalized insider trading on a grand scale.

 

There may be some bargain opportunities in Canada tomorrow but I am not sure
that I will want to wade in until things settle down a bit.

 

In the U.S. markets we have the continuing worry about sub-prime related woes
that are pulling down on markets, while expectations of Fed rate cuts push it
up. This week the upward pressure seems to be at least equal to the down-ward
pull even in the face of some big financial write-downs. Lower interest rates
certainly are good for stocks (all else being equal). But if the financial loan
defaults get big enough then no amount of rate cutting can fix that. Possibly
wild actions such as the giovernement stepping in to guarantee loans would help.
But overall I remain cautious. The U.S. markets are probaly due for a pull-back
related to the financial issues and home prices.

 

In Canada CMHC (a government creature that surely should not exist in a free
market) has – with amazingly bad timing – now stepped in and said investors can
buy investment properties with nothing down and the banks will be protected by
adding the 7.5% fee to the mortgage. At least the banks are protected but in
that scenario maybe the banks are then incented to give out risky loans. If the
buyer defaults then the CMHC will pay the bank. Who would pay a 7.5% insurance
fee except those who cannot otherwise afford the property – and therefore are
bad credit risks. Even with a 7.5% fee CMHC could lose on this deal. CMHC now
has a number of viable private sector competitors. It should be getting out of
the mortgage insurance business and sticking to setting housing policies and
regulations for mortgage insurance and such. It should not be competing with the
private sector.

 

October 24, 2007

 

I had the following question today:

 

Have
you ever looked at Norbord (NBD on TSX)?

Would it be a good investment at today’s depressed price?

 

The answer is no I had not looked. I did have Ainsworth lumber on the site
for a while and I think it did okay. But I really shook my head when Ainsworth
loaded up on debt a few years. I even emailed them about it thinking it was
risky in a down-turn. They did do very well for a while. Now that debt chicken
is home to roost.

 

As for Norbord. I have not looked closely enough to have a strong opinion at
all. It has a number of really great years but right now it is losing money. And
it has some debt. I would worry about the debt with the panel board prices being
low and with the American housing recession. We would need to understand if it
is cash flow positive even though earnings are negative. If cashflow is negative
then that is ugly…   In fact the balance sheet on their site does
show negative cash from operations this quarter and year to date. Debt has gone
up a lot in the last year, I am not familiar with why, other than if it was
borrowing to cover negative cash flow and dividend and some cap ex. Certainly
the Norbord dividend is a positive but it was cut once and could be again. Sorry
I can’t be more definitive. The high dollar is hurting it as most sales are into
the U.S. and if it hurt in Q3 watch out for Q4 with the dollar over par. This is
just my quick look. To really form an opinion would take me at least 4 to 6
hours effort and even then how can I predict panel board prices. Overall I am
not too excited to look at it.

 

This is why I prefer the more predictable companies. A company like Norbord
faces very volatile product prices. In contrast look at Tim Hortons, they
control their prices, that is easier to deal with.

 

Another interesting day, as the DOW was down 200 points at one point today (a
noticeable dip but really not a huge dip). It was down due the Merrill Lynch
announcement of a bigger write-off on sub-prime. But by end of trading the Dow
recovered and was almost unchanged on the day. The recovery was linked to the
thought the FED will cut interest rates. As I said in a recent newsletter, it
feels like you can’t beat this market down with a stick. I remain cautious,
although i suppose a “pop” is possible on an interest rate cut.

 

In Alberta, the Premier in a speech tonight seemed to indicate pretty
strongly that the energy royalties will be increased but also said in effect
that he wanted to be fair to business. The actual royalty rate increase will be
announced tomorrow after the market closes, I believe. That could make for some
dips in the energy stocks tomorrow.

 

October 23, 2007

 

Discount Trading Fees

 

I mentioned under Nov. 17, that TD Waterhouse has reduced trading charges to
about $10 (for those with at least $100,000 in accounts which on request can
include all accounts in a household) and best of all it seems that the $10
applies to an unlimited number of shares. TD’s fee used to be $30 with a 1000
share limit. I never really minded paying $30 because I did not trade that much
and seldom traded over 1000 shares. But I was not happy when I sold 4000 shares
of a $3.00 stock and got dinged $120 for a $12,000 share sale. It did not seem
fair to me that the percentage charge should be different just because the share
count was higher. It’s all electronic and I don’t see much difference between
1000 shares at $12 and 4000 shares at $3.

 

TD started offering the $10 fee about a year ago for accounts over $500,000
(on a household consolidated basis). This new $10 fee is much better. Except I
must admit it may be leading me to trade far too frequently.

 

A subscriber emailed today that National Bank had charged him $780 to trade
26000 shares prices at about $6.00 each. (About a $156,000 trade so nice to have
that “problem” in a way!). This was in a discount trading account. This was $780
to do a completely electronic trade. On a percentage basis the $780 does not
look that bad (about 1/2 of one percent). This was a large trade. But TD is now
allowing this trade to be done at $10. And E-Trade I believe has been at $10 for
a long time. It seem to me that if you are paying $30 and especially if that
includes a limit of 1000 shares, it is time to really start complaining. It’s a
hassle to change discount brokers but there are limits to what you should put up
with.

 

If you have a full-service broker and are relying on the broker for advice,
that is a different story and you would expect to pay much higher fees.

 

Mortgage Issues in the U.S.

 

One story today was that Countrywide Financial would offer to renegotiate
mortgages and lower the payments for homeowners that are in difficulty. They
have a partner Neighborhood Assistance Corporation of America that is involved
and that may be taking some of the risk.

 

This is probably a good thing and probably what should be done. But I suspect
that bank regulators will still want these loans marked as non-performing. You
just can’t make a bad loan good, by agreeing to stretch out the payments.

 

It seems to me that banking statistics are soon going to show sky-rocketing
numbers on non-performing loans. That is, unless policy makers and government
somehow work together to throw out normal banking regulations and try to
sugarcoat what is happening.

 

I maintain a cautious stance, particularly on the lending sector in the face
of this.

 

However,  Canadian Western
Bank has dipped a bit. I would think it will not be exposed to any loan loss
issues at least not soon. So this dip may be a buying opportunity.

 

Our last update on Home Capital was
very positive but we mentioned it had some speculative aspects. Now with this
surge in the dollar I fear for the Ontario economy. I am under the impression
that Ontario has a large number of manufacturing jobs and I believe many of
those jobs are at risk due to the high dollar. In that scenario, if it comes to
pass, I would expect Ontario house prices to fall or at least stall and I would
expect Home Capital to have some loan loss issues. So far, so good, but I would
not get over-exposed to the company. On the other hand it has an exceptional
track record so there is no need to panic.

 

Nice to see Tim Hortons doing well, although
I was almost hoping for a dip to $34 and might have added to my position.
Earnings are out on Friday, I believe.

 

We should have a few companies updated by Sunday at latest as earnings
reports come in.

 

October 21, 2007

 

The latest edition of the free
newsletter was sent out today.

 

Given my cautious stance of late, I was not surprised by Friday’s
pull-back…  I have not ever had much luck forecasting short-term market
moves, but my bet is that markets move down further this week.

 

October 18, 2007

 

Google is out with amazing profit growth. This is definitely a great company.
Most of the earnings come from the ads we see when do searches. Google has a
huge market share and since we don’t pay to search, it is extremely difficult
for competitors to get us to use other search engines. I’m not sure at all that
Google is worth its price but I do know that as a company it is a great company.
It will earn very high returns on equity for the foreseeable future.

 

I have been a paying customer of Google in that I have paid them to place
advertisements to this Web Site. In my experience two years ago, the Google ads
were a great investment for me. They were able to send me lots of new visitors
every day for a modest cost. And a reasonable percentage of these  visitors
signed up for my free newsletter and eventually this paid stock service. But
lately Google sends me a lot less visitors and it costs a lot more (like four
times more!) to attract a visitor. But much worse than that a much lower
percentage of the visitors Google sends are joining my free newsletter list or
taking this paid service.

 

It even looked like Google had figured out better ways to send traffic to me
to get the fees from me but the traffic was increasingly of little or no value
to me.

 

My experience has been in the early days, Google advertisements were very
cost effective for me. However for the last 6 to nine months they seem to
have been a waste of money. I have stopped using them.

 

Possibly this is because stock markets are not as attractive at this time.
But I suspect it has more to do with email fatigue. More and more people are
reluctant to sign up for a newsletter when they get so many emails
already. If this is true then we may start to see Google’s growth slow.

 

I am now relying more on free organic traffic from Google, which I attract a
lot of based on the articles on this Site.

 

As I watch the volatility in the markets I am tempted to buy some stocks on
dips. But overall, I am still interested in maybe trimming some positions. I
have a large exposure to financials and that area is vulnerable to the sub-prime
issues and possible recession in the U.S. Also before buying I will see how the
Canadian Q3 earnings reports come in. These will start arriving next week.

 

Meanwhile, let me know your thoughts on this Web Site or on investments in
general. What can I do to make this Site more valuable for you? (I may not be
able to accommodate your requests, but if enough people ask for the same thing,
then perhaps I can). email me at
shawn@investorsfriend.com

 

October 17, 2006

 

If you are still paying $30 per trade, call your discount broker and
complain. TD Waterhouse is now charging $9.99 per trade (and I believe there is
no limit on the number of shares) for all accounts with more than $100,000
(previously it was $500,000). And they allow you to count all your household
accounts in reaching the $100,000 level. This is a remarkable cut in fees. Only
about 1 year ago I had to pay TD $120 ($30 times 4) to trade 4,000 shares of at
$4.00 so $120 on a $16,000 trade. Now it’s $9.99.

 

These lower fees prove that competition can lower prices when you are dealing
with a commodity product and when the price charges is very visible. It’s really
rather shocking because it is a hassle to move brokers and so I would have
thought that they would keep the fees higher and instead try to use incentives
to get new customers. Like cell phones, give something free but then lock the
customer into high monthly charges.

 

These lower trading costs are leading to lots more trading. I don’t do penny
stocks but I suspect the trading of those is way up. I’m not sure that the lower
fees have saved me any money though. I have been trading WAY more. I am spending
about the same amount in trading fees as ever. And I am also paying hidden costs
in the buy/sell spread (scooped by the market maker).

 

I moved some more cash into a TD U.S. money market fund today. I may try to
be patient and wait for $1.04 or $1.05 to move more, but then again I may just
decide to move it sooner. The dollar can go in either direction from here. I
feel good about getting U.S. dollars for 98 cents and I don’t want to get too
greedy waiting for 95 cents.

 

Berkshire Hathaway was up another 2% today. I wish I had done the full
analysis and recommended it on this Site. I did give it some very solid plugs
especially in the last year most notably on January 2 and I reported when I was
buying it. Unfortunately I did not buy enough. Buffett may have just overtaken
Bill Gates again as the richest American. If so, you heard it here first. (He
was up over $1 billion on his personal stake in Berkshire today alone!).

 

This credit mess in the U.S. is likely to get a lot worse.

 

How could it not when these idiots were loaning out money on “stated income”
(liar loans). And lending money on the basis of a 2% interest rate for the first
year or three which then resets to maybe 7% or more. Loan companies we must
remember operate on a sliver of equity. I have always said that all banks were
potentially quite risky. Normally they operate as finely tuned machines. But
when things go wrong they can go wrong in a big way. For example Banks usually
set aside only 1% to 2% of loans as a contingency for bad debt. Then they have
something less than 10% in owners equity. So what happens if house prices plunge
and they get into 3 or 4% loan loses? This chews into their equity in a big way.
And it only takes maybe 10% loan losses to bankrupt them typically. Of course a
bank does not lose 100% on a bad loan. But if 20% of their loans are bad and
they recover only 75% on foreclosing on the homes. That would work out to a 5%
loss of assets or maybe half their equity. However some banks may be protected
by mortgage insurance. we will probably find that many banks do okay but some
U.S. financial institutions are likely to go bankrupt.

 

House prices are falling in the U.S. not too sharply yet but falling.
Meanwhile millions of people have mortgages that they never really could afford.
They may walk away. Then the banks will need to foreclose but they will be lucky
to recover in may cases 75% of the loan after costs as they sell into a down
market.

 

One solution might be to offer lower payments to the homeowners. But under
banking regulations I believe they still have to mark that as a bad loan. You
can’t make a bad loan a good one by agreeing to make a concession on the
payments or extending the term of the loan.

 

Then there is the Asset Backed Commercial Paper situation. This “paper” is
backed up by sometimes suspect loans. Ameritrade of all companies today
apparently wrote off $200 million of what they thought was a cash equivalent.
Watch for more of this.

 

Almost any company with cash on the balance sheet could be holding some of
the Asset Backed Commercial Paper. Not a huge deal for most profitable
companies, but it would be a one-time hit.

 

If financial companies in the U.S. start to suffer it may drag down the
Canadian financials at least somewhat. I am hopeful that the property insurance
stocks that I rate will not be much affected, but that remains to be seen. There
could be a few surprises in the Q3 financials. And even more when we get to
audited year-end financials next February.

 

October 16, 2007

 

A story in today’s paper talked about how United States Bombardier
recreational products dealers are now not allowed to see snowmobiles to
Canadians coming across the border for bargains. Apparently they rationally
applied a 7.5% surcharge to cross-border shoppers. Then they raised that to a
minimum of $1250. Then they changed the policy two weeks ago and applied a $3000
surcharge. And finally now they have banned the U.S. dealers from selling to
Canadians. This is to protect the Canadian dealers.  The article did not
address the reason that a Canadian-made product is cheaper in the U.S.

 

This is just an example of the pressure that is exerted by cross-border
shopping. Bombardier will I think be forced to lower the prices dramatically in
Canada. Canadians will shop in the U.S. and if Bombardier won’t sell their
snowmobiles to Canadians then I suspect maybe Yamaha or Artic Cat will.

 

I moved $20,000 into U.S. funds today at about CAN $1.02. I probably should
have moved more, but so far I have under-estimated how high our dollar went.
Still, few people are suggesting it can go much higher. I continue to think it
is a good idea to move some funds into U.S. dollars, especially if you have any
plans to buy U.S. stocks, or to travel to the U.S. I would be comfortable moving
about half my cash into U.S. funds. The dollar has already backed off from the
recent $1.03 level. It’s anybody’s guess which direction it will go now. With
high oil prices, there is little reason for it to drop unless the Canadian
government signals that it could lower interest rates. They did not do so today,
but I believe they signaled they are no longer thinking of raising interest
rates.

 

October 15, 2007

 

I sold my BCE shares today for the reasons mentioned in yesterday’s note.
Tomorrow, the Bank of Canada is expected to leave interest rates unchanged. My
view is that they probably need to lower interest rates to push the Canadian
dollar down. What ever harm the high dollar is doing will not show up in the
statistics for some time, but I definitely think the damage is happening now.
Stephen Jarislowsky, one of this country’s most successful investors has stated
that there is no way our manufacturing and forestry industry can withstand what
amounts to a 50% increase in labour costs when measured in U.S. dollars. (and
that was before this last push up from 96 cents to $1.02). Inflation numbers
will come out later in the week. I expect the high dollar to curtail inflation
but again it may take a number of months before the price cuts show up in the
stores and a another month after that before the statistics reports show it.

 

My cash position is now at about 38%, this leaves me pretty well positioned
if stock prices fall but also leaves me with a reasonable exposure to stocks in
case they keep rising based on interest rate cuts.

 

Many investors simply take a  balanced approach to stocks, bonds and
cash and don’t attempt to ever try to time the market. Nothing wrong with that
approach. Younger investors who are still very much in savings years can afford
to go 100% equities and they will do all right because any losses in a
market correction would be more than recovered as they continue to invest at
lower prices. Retirees with substantial exposures to equities (higher than say
40 to 50% should probably be concerned since if you are living off a portfolio
and not investing new money, than a market correction is only bad news, it has
no silver lining in that scenario. But these asset allocation decisions are all
very personal and generalizations based on age often do not apply well to any
particular individual.

 

October 14, 2007

 

I have been predicting price reductions in Canada as a result of the higher
dollar. It’s worth considering, how fast should price reductions occur?
Retailers would like to wait until they sell their inventory of U.S. goods
purchased when it cost maybe CAN $1.10 or more to buy a U.S. dollar.
Retailers that I talked to said that they tend to order product up to one year
in advance and that the price drops are a long way off. But consider if one
retailer had no inventory of such goods and brings in fresh new product now when
it costs CAN $0.97 to buy a U.S. dollar, that retailer could drop prices
immediately. In competitive markets we should expect price drops to be fairly
fast. But retailers will want to drag their feet. It will be interesting to see
just how fast the prices drop. My advice to individuals is to really shop
around, to ask retailers when the price will drop, to delay major purchases and
to look at ordering in products from the U.S.

 

I believe the big retailers like Canadian Tire and certainly Wal-Mart will be
faster to drop prices. Small independent retailers are going to be hurt because
it is much harder for them to drop prices and “eat” the exchange rate change on
their inventory.

 

I have some shares in BCE (last traded at $40.66) that I am holding as
an arbitrage against the agreed purchase price of $42.75. Ontario Teachers
Pension plan is apparently firmly committed to proceeding with the deal. I do
worry though what the American partners are thinking as the Canadian dollar
soars. Possibly they have already locked in the financing and the currency. But
it cannot be denied that BCE at CAN $42.75 looks a lot more expensive now to an
American than it did at the time of the deal.  I may sell some or all of my
position to get rid of the deal risk.

 

We are hoping to add some new companies to the Site. We would like to do some
pre-screening and target the type of companies that Warren Buffett might suggest
we consider.

 

The following is the result of some preliminary screening.

 

Freight Car America (symbol RAIL, price $39.75)

 

RAIL turned up on a list of low P/E high return on capital companies. The
company manufactures repairs, sells and leases rail cars. S&P shows an ROE of
87% and a P/E and a trailing P/E of 5. On the surface that looks like a
screaming Buy. But sales in the latest quarter dropped by 47% year over year.
That is a HUGE drop in sales. Amazingly they still had a profit in Q2. In fact
if the Q2 profits were annualised the P/E would still be an attractive 11. And
maybe the sales drop was just the result of lumpy order from rail roads. But the
past few years shows no other dips. Luckily the company appears to have
substantial cash and almost no debt. This should allow it to survive even if it
loses money for a period of time.

 

Overall this is not a company I want to look further at. The recent 47% drop
in sales tells me that this is a very unpredictable company.  In order to
understand its sales outlook I would have to understand how many rail cars are
likely to be needed in North America. I suspect that rail cars are a commodity
product and that profits are low except in times when there is huge demand and a
shortage of available rail cars. I suspect its costs have increased tremendously
due to the fact that steel prices rose by (I believe) hundreds of percent in the
past few years. Warren Buffett and Charlie Munger talk about having three
baskets “in”, “out” and “too hard”. I put this company into the “too hard”
category. It may turn out to be a good investment but for me it is too hard and
too unpredictable.

 

McGraw-Hill Companies (symbol MHP, price $52.77)

 

I am interested in this company because it owns Standard and Poors (S&P).
S&P strikes me as possibly being a wonderful business because it shares a
dominant position  in credit rating reports with competitor Moody’s. I
suspect that their costs have been going down due to electronic delivery of
their products. In addition this company turned up on a list of companies with a
good combination of high returns on capital and lower P/E ratios.

 

MHP consists of S&P 44% of revenues, Education 40% and other information and
media 16%. The P/E is about 19. The ROE is reported by S&P to be only 12.8% in
2006 but in past years was usually over 20%. Another source (Argus) reports the
ROE at 55%. The share price dropped recently from about $70 and went under $50.
This was due to the criticism that S&P took over the sub-prime and Asset Backed
Commercial Paper situations. The stock has now recovered somewhat.

 

With a P/E of 19 this may not be a  screaming Buy but I believe it is a
high quality company that is likely to continue to be highly profitable and to
continue growing in the long term.  It is worthy of further analysis.

 

Moody’s Corporation (symbol MCO, price $49.40)

 

I have log been interested in looking at Moody’s because it shares something
of an oligopoly in credit ratings with S&P. Also Berkshire Hathaway owns about
17% of Moody’s. MCO has a P/E ratio of 17 and an ROE which is well over 100%.
Similar to McGraw Hill the price of Moody’s fell substantially over the Summer
due to the sub-prime and asset backed commercial paper problems. On the surface
Moody’s looks more attractive than McGraw Hill. I also like that Mooy’s is more
of a pure play. I intend to further analyze Moody’s.

 

Costco Wholesale Corp (symbol COST, price $68)

 

I chose to take a look at Costco simply because it is well known as a highly
successful big box retailer. Warren Buffett has often favored companies that
sell directly to consumers (rather than to businesses) because they tend to be
easier to understand.

 

Costco has a trailing P/E of 30 and its ROE has been around 12% for several
years. On the face of it, that looks somewhat expensive – even for a
high-quality company. Given that I am screening for bargains, I will choose not
to analyze this company further at this time.

 

Amazon.com Inc.

 

I decided to take a look at Amazon because of its dominant position as an
internet retailer. Also in the past Buffett has spoken favorably about it.
However, it has a P/E of around 82 based on 2007 projected earnings. Even though
its profits may grow very strongly, the valuation is far to rich for me. I will
not analyse it further at this time.

 

Speaking of Warren Buffett…

 

He was in Toronto on Thursday and exerts of his speech were reported. He
views the U.S. market as expensive even with a modest P/E of around 17. The
reason is that he thinks that corporate earnings may be unsustainably high. He
indicated that corporate earnings as a percent of GDP are much higher than
normal (I believe he said TWICE as high). If earnings regress back to a more
normal percentage of GDP then corporate earnings would drop markedly and
therefore today’s reasonable P/E levels could be mis-leading.

 

Buffett, by the way, has also seen his wealth absolutely leaping in the past
weeks and months. The Berkshire shares are up a LOT lately. In fact I calculate
that he held about $43 billion in Berkshire shares in June 2006 when he
announced his big charity give away. He has now given the first two
installments, some $4 billion. But instead of now holding $39 billion in
Berkshire shares, his remaining shares are now actually worth about $55 billion.
He has been written off many times as “yesterday’s man”. Once again he is
proving his critics wrong. (He may even pass Bill Gates to regain his spot as
the richest American at this rate – But presumably won’t catch Carlos Slim of
Mexico given the plummeting U.S. dollar).

 

October 13, 2007

 

My personal portfolio composition is
updated. My most recent sales are a reduction in the Thomson position and the I
sold the few shares that I had in Canadian Pacific. This was to raise the cash
position.

 

October 11, 2007

 

Yesterday, I left off saying I was feeling cautious and might raise my cash
position. This mornings paper had a story about a real slow-down in gas drilling
in Alberta. So I did go ahead and trim some positions (sold some of my Kingsway
Couche-Tard and Canadian Western Bank and TSX Group). The first two on concerns
that this rocketing Canadian dollar will be a drag on earnings (in Canadian
dollar terms). The second two just to take profit.

 

The market then rose sharply today but then fell sharply and was down at the
end of the day.

 

No one can predict the market direction in the short term. But we can make
reasonable decisions such as lightening the exposure to stocks when predictions
call for earnings to be about flat in Q3 and when we have all the worries about
housing prices, sub-prime and possible recession. History shows that in the very
long run you can always just ride these things out. But personally I just feel
better to move more into cash and then eventually re-group and I hope to buy
back into a more concentrated portfolio if markets happen to fall. The danger of
course is that if the market keeps rising then I will be sitting with cash and
missing the up-side.

 

Also even if I think the market in general will dip, I also think the Stock
Picks on this site will do better than the market.

 

In Canada we may get an interest rate drop next week to combat the dollar.
That would be good for stock prices.

 

October 10, 2007

 

Greetings to all new subscribers. Actually things have been quiet over the
Summer and into Fall, not a lot of new subscribers. I always appreciate any
referrals for new subscribers. I know many of you have referred people and I
thank you. I also know in many cases people are just not receptive to the
suggestion. You tell them you have a good source for stock investment ideas and
education but they ignore you. Such is life.

 

I read a scary little story today. Apparently the Thomson First Call earnings
estimates are suggesting that the Q3 earnings will be a little under last year’s
Q3 on average. If that happens it would be the first earnings drop since early
2002.

 

Stock markets NEED expectations of earnings growth in order to go up. The
market at any given time is usually pricing in average earnings growth of at
least 5% per year. Combined with a 2% dividend that gives 7% return. The market
in today’s low interest rate environment is probably priced to give an
expectation of 7% to (at most) 9% return or 5% to 7% growth. If earnings
start to fall it will be tough for markets to continue to expect that kind of
growth. In fact earnings growth has far outpaced nominal dollar GDP growth for
the last five years. That cannot continue. Either earnings were clawing out a of
a deep hole since about 2001 (which is partly tue) or earnings have over-shot
the sustainable mark (likely partly true). In any case the earnings cannot and
will not exceed the growth in the economy in the long-term. If earnings decline
Stock prices would drop on average. Lately it seems like low interest rate and
the hope for more rate cuts is all that holds/pushes the market up. But interest
rates can’t go down forever. And if earnings growth turns to earnings declines,
the market would definitely decline.

 

I’m not trying to scare anyone. In fact a  market drop will provide
investment opportunities. (For those with cash) But I am definitely cautious. I
have been cautious most of this year and so far it has cost me money. But when I
see a forecast for earnings to decline I have to think stocks will drop. I may
try to get my cash position up more towards 40%.

 

Here is a thought – Just because you expect a stock to go up does not mean
you have to own it. For example maybe you have a better stock to put the money
in. Or you may expect a stock to go up, but you are not sure. In that case if
you don’t like the risk regard ratio, then don’t buy the stock even though you
fully expect it to go up. I often have trouble selling a stock just because it
would then cause me pain if in fact it went up. But that’s not very rational
thinking. If I have a better use for the money (even to sit in cash) that’s
okay, it’s okay to sell even if you think (but are not sure) a stock will go up,
or you just have a better use for the money.

 

 

October 9, 2007

 

A subscriber had the following question:

 

Hello — I see
that Reitmans is still listed as a “buy” although it seems to be steadily going
down (all the more reason to buy?)  I bought some at a higher price and am
thinking of averaging down.  Do you still consider this a good buy?  I read the
article some weeks ago about their apparent miscalculation of their market but
think they might recover–what do you think?  I guess the downside is a general
recession and lack of consumer confidence.

 

Our Reitman’s report was dated September 9. Since then we
are not aware of any new info and so with the price down somewhat since then, we
still consider it a Buy. We mentioned in the report that its current quarter had
started out with an unexplained 7.2% decline in same store sales in August. We
have not seen that figure reported for September. The company seems well managed
and should do well in the future as it has in the past. The high Canadian dollar
should be good for profits given it sources much of its cloths from outside of
Canada. Possibly it could even show negative sales growth due to price cuts and
still make good profits. If clothing prices fall due to the higher Canadian
dollar, it would be possible that Reitman’s would have to write down the value
of inventory but we see no sign of such precipitous price drops, most
competitors would likely try to sell off stock before dropping price. We continue to think it is a reasonable to stock to
hold.

 

On the overall markets, Q3 earnings seasons kicked off today. We may see some
volatility the next couple week as major headline companies report either strong
or weak earnings. Many U.S. companies have substantial earnings from outside the
U.S. and the low U.S. dollar could help their earnings.

 

I plan to move some cash into a U.S. money market tomorrow. Perhaps I should
wait for an even higher Canadian dollar, but my view is that I should take
advantage of the high dollar now rather than getting too greedy (especially
given the unpredicatble nature of exchange rates).

 

An analyst on BNN yesterday made the comment that the Manulife stock price
has not risen much in the last year or so. In my view you cannot talk about a
company like Manulife without talking about the Canadian dollar. Manulife is
headquartered in Canada and is very much a Canadian managed company. But the bulk
of its its profits are earned in the U.S. and outside of Canada. It seems to me
that the performance of Manulife has to be judged in U.S. dollars. The price is
up quite steadily in U.S. dollars. Earnings could continue to rise in U.S.
dollars. But I would think it will have difficulty reporting much of an increase
in earnings in Canadian dollars. If it can grow earnings in Canadian dollars then
in U.S. dollars it will show huge growth.

 

I believe that any Canadian company that earnings most of its profits in U.S.
dollars (Kingsway, Thomson, Couche-Tard, and Cognos, should really be judged on
its U.S. stock performance rather than Canadian. (I can’t hold management
responsible for changes in currency rates). But even if it not management’s
“fault” a drop in earnings due to a currency movement still leads to a drop in
stock value.

 

October 8, 2007

 

Target is updated and rated Buy at $66.31.
This stock is up 35% since we added it to this site on June 2, 2006, rated Buy.
It’s another example of a high quality company available at a price that is
reasonable although not particularly cheap.

 

Microsoft is updated and rated Buy at
$29.77. The company is still growing is earnings and profits quite rapidly. But
the P/E ratio has come down under 20. Therefore the overall thesis here the
ability to buy a dominant company with strong growth at a reasonable price.
Canadian investors in all U.S. stocks will be hurt if the Canadian dollar
continues to rise. But they will benefit if the dollar sinks. And in the long
run movements in currency tend to be small relative to returns.

 

Cognos rose 13.6% on New York today because a competitor received a takeover
bid. Cognos is a great company but usually looks too expensive. Sadly, I have
very recently sold my Cognos shares to raise my cash position. I don’t think I
would buy on this jump given that no take-over offer is on the table.

 

The composition of my personal portfolio is
updated. I keep this updated for my own information as well as for the interest
of subscribers. It can be hard to remember to overall number of shares held,
when they are held in a few different accounts.

 

I had sold most of my Clemex shares but still have a few. I hope to sell
those tomorrow. In some ways I would like to hold some shares in case it ever
finally produces meaningful sales and profits. That is much more of an emotional
reason than a logical reason. But it is another company that will be hurt badly
by the high dollar.

 

I don’t mean to be fixated on the high dollar. Certainly the high dollar is
not the only factor in the market. But it is one factor where we can with some
reliability predict that an impact on earnings for a number of companies. Often
earnings hits are a totsl surprise, but in this case certain predictions can be
made.

 

October 7, 2007

 

I sent out the latest issue of the free
newsletter today, if you did not receive it check that you are on the list by
simply joining the list “again” and the
system will indicate if your email is already on the list.

 

October 6, 2007

 

Another very strong week in the markets. Our
2007 performance is updated.

 

October 4, 2007

 

I sold my double bear position today. I said before that I don’t really like
holding the bears. I prefer to just raise my cash position when I am cautious
about the market. But the beta pro bear ETFs are a way to quickly hedge against
a drop in the market. Tomorrow certain jobs data will be released in the U.S.
that could drive the market up or down. I just did not want to hold the bear in
case the market keeps going up due to anticipation of lower interest rates.

 

It is quite possible the market will fall, but I personally find that holding
both stocks and a bear position means that I am in effect betting on both a
market rise and a market fall, and I just don’t like taking both positions at
once. Again. I will try to raise my cash position by taking profits. Most of the
stocks I own I am confident that even if they decline in a market down-turn,
they will tend to come back before too long.

 

October 3, 2007

 

I mentioned in recent posts that I had placed some orders to sell portions of
my positions if the price happened to rise say 5 or 10%. This would hopefully
take advantage of temporary volatility. I placed such an order on
Shaw Communications. However, in retrospect it
was not the best candidate. The reason is that it is about to release earnings.
In that case any jump on an earnings release would not be volatility but would
be based on the news. However, I did have such an order in and sold 1/3rd of my
position today at $25.90. So far it looks like a good move because Shaw closed
at $25.47. (But if Shaw comes out very shortly with strong earnings, I will
likely regret having sold at $25.90). Normally I would rather just hold the
Shaw, but right now I am still feeling cautious and this is one way to increase
my cash position.

 

Overall, my account and I think our stock picks on average were up today,
despite the market being down…

 

Couche-Tard has fallen about 10% since we
rated it (lower) Strong Buy on September 2 at $21.70. Reasons for the fall
include the surge in the Canadian dollar in the past month. As a company with
substantial operations in the U.S. It actually report in U.S. dollars. So, on a
headline basis the rise in the Canadian dollar will actually help reported
earnings due to the higher value of Canadian earnings. But the shares trade in
Canadian dollars and when we translate the American dollar earnings back to
Canadian dollars to calculate a P/E ratio, the rise in the Canadian dollar does
hurt the earnings in Canadian dollars and does hurt the share price. It will not
be hurt nearly as much as a Canadian exporter but it will be hurt. We won’t know
how much it is hurt until after it reports a full quarter with the dollar at say
about the $1.00 U.S. level. I still think this is a strong company and I am
happy to hold it. But there are always risks in any stock, that is the nature of
investing.

 

October 2, 2007

 

A strong day for a number of our Stock picks today including Canadian Western
Bank, Couche-Tard and Shaw Communications…

 

A subscriber emailed me today and asked:

 

Just curious about your thoughts on US ETFs.  I read
your article on CDN ETFs, however, I’m
more interested in exploring US ETFs right now with the dollar being on par.
Any reputable companies you suggest looking at?

 

The first source that comes to mind for me is
www.ishares.com Go tot hat site and then
roll your curser over the menu items at the left and menus appear for different
ETFs. Click on thse and you can see various ETFs. If you click to the page for
each ETF you can get the trading symbol and also see fundamentals including the
P/E and Price to Book ratio. And you can closely approximate the ROE by
calculating it as ROE = Price/book divided by P/E. In fact this gives you last
12 months earnings divided by current (ending) equity (A standard ROE
calculation is earnings divided by mid-year equity).

 

Anyhow… that page and calculation gives you some idea of
the valuation of the ETF. There are now apparently thousands of ETFs most not
based on traditional indexes but rather most new ones are based on made up brand
new indexes. A Canadian investor looking for exposure to certain sectors in the
U.S. should probably stick to ETFs that are based on traditional segments and
indexes rather than some very narrow index that was cooked up last week.

 

If there is a sufficient demand for it I will do an article
that lists the ETF trading symbols for the U.S. segments from ishares and maybe
one other ETF provider and also I will comment on the P/E level. If you are
interested in such an article email
me to let me know. If you are emailing me, I would be interested to know a
little about what kind of stocks you own, what your percentage allocation to
stocks (as opposed to bonds and cash) is and how this Site has helped you or
what your other sources for stock ideas are or any other thoughts you have. (I’m
not trying to track that information by individual subscriber at all, but just
trying to gget a sense of what subscribers in general are up to).

 

Yahoo Finance has an ETF center that may be of some use.

http://finance.yahoo.com/etf

 

There is also an article on our Site regarding

global ETFs.

 

October 1, 2007

 

A very strong day on the markets. Personally I would have done better if I
had not hedged by buying some of the double bear funds as described in earlier
postings. That is the nature of the hedge there, it protects on the downside but
it cost me upside today. As I said in earlier posts, rather than the double bear
type of hedge I would be more comfortable simply being in a higher cash
position. I will continue to review my portfolio to see what I might sell or
trim. I hate to sell the two bear positions now at a loss, but it is no fun
holding them right now…

 

I entered an order to trim my Shaw at $25.90 and to trim the Couche-Tard at
$21.  Previously had orders in to sell my BCE if it reaches $41.29 and my
EL- Financial if it reaches $674. Despite it being already my largest position I
placed a low bid to buy more Tim Hortons if it falls to $33.10

 

The strength of the market continues to surprise me. Once again it goes to
show that while it is risky to be in the market, it is also risky to be out.
Markets certainly trend up in the long term and therefore anytime we are out of
the market we may miss out on gains.

 

It seems that the market is going up in anticipation of interest rate cuts.
Paradoxically, those cuts would be in response to weakness in the American
economy. So certainly this rally seems tenuous when it is based on expected
weakness.

 

It really does seem like a particularly uncertain time in the markets.
Dangerous to be fully in the market due to expected economic weakness, but
dangerous to bet against the market due to possible interest rate cuts. And in
Canada I believe that the high dollar could be a reason to cut interest rates.

 

Walgreen reported disappointing results
today and took a big fall. It made money and its earnings were just 1 cent per
share less than last year but the market was expecting a gain of 6 cents. My
sense its that this could be a buying opportunity. We’ll update our report soon.

 

EBay reported a big write-off on its Skype business. This may not be such a
big deal because Skype was not contributing to earnings anyhow (and was most
likely a big drain on earnings). eBay has two exceptional businesses, being
firstly its auction business where it enjoys close to monopoly status and
secondly the PayPal business where it also does not face that much competition.
I understand those two businesses and I have been a long-time use of PayPal.
Call me a ludite, but I never understood Skype. I personally have zero desire to
make a telephone call over the internet and anyhow there are tons of competitors
to Skype. And for the most part, I understand Skype was free. eBay may
eventually sell it off and that would be a good thing, I believe.

 

September 30, 2007

 

My personal portfolio composition is
updated. (I don’t know of any other “newsletter” editors who keep their
subscribers up to take on the editors personal portfolio holdings and
performance.) Perhaps most of those editors would not want to disclose that
information. Also I have a vague understanding that regulators, in their
“wisdom”? actually discourage such disclosure.

 

Our three Strong Buys from January 1 are now up an average of 14.4% (Manulife
4%, EGI Financial 31%, Telus 8%). The average Buy or higher rated stock is up
6.7%. The Model Portfolio is up 3.0% and my own Portfolio is up 3.1%. The TSX
market is up 9.2%, the DOW is up 11.5% and the S&P 500 is up 7.7%.

 

I have mentioned a number of times that is seems rather surprising to see the
American markets up significantly for the year and near record highs given
worries about the U.S. economy (particularly housing prices) and the subprime
mortgage situation. (The TSX is up mostly due to high oil and commodity prices
so that is not perplexing).

 

So far, my cautious stance this year (if reducing my equity position but
still remaining mostly invested in equities can exactly be called cautious) has
cost me return. Moving some funds into U.S. investments to take advantage of the
high Canadian dollar has also cost me as the Canadian dollar continues upward.
But I don’t really regret those decisions. I think my cautious stance was
prudent.

 

I tend to stick with certain investments for the long-term. At the same time
when the situation changes I need to be prepared to abandon even old favorites.
For example, Dalsa is a Canadian manufacturer that sells mostly to U.S. and
international markets and has been hurt significantly by the higher Canadian
dollar. I think the company has great technology and it has a very low price to
book value and probably has hidden assets due to “investments” in R&D that has
been expensed over the years. Still, it seems like there is a great risk that
profits will be further damaged and that losses could be reported due to the
extreme rise in the Canadian dollar. Therefore I reluctantly abandoned this
company for now.

 

 I also took a look at other stocks and considered if it was reasonably
predictable that some of these could be hurt by the higher Canadian dollar. I
sold my Cognos shares last week for that reason and notionally sold half of the
Manulife in the Model Portfolio. See recent comments for other stocks likely to
be hurt or helped by the high Canadian dollar.

 

One strategy that I may employ now is to enter some bids to sell a portion of
any stock that I own if the price should rise say 5% and to buy additional
shares on dips of 5 to 10%. This strategy of putting in optimistic offers to
sell and optimistic bids could help me benefit from simple volatility.

 

September 26, 2007

 

It seems clear that we are in a more risky stock market environment than
usual. That’s because the U.S. is fairly widely thought to be headed into a
recession brought on by lower home prices, a hang-over from excess borrowing,
and simply the end of a low economic growth cycle. So those who are unprepared
for short-term losses should be reducing their exposures to stocks (unless they
are already in a well-balanced position).

 

On the other hand young investors may be better served by staying and in
continuing to invest new savings though-out any market down-turn. And maybe a
recession will not materialize. Maybe governments will succeed in stimulating
the markets through interest rate cuts.

 

In my own case, at age 47, I can afford to take some risks but I am not so
young that I can ignore the risk of a market down-turn. At this point I am
willing to give up some potential returns by moving into a higher cash position
which will protect me if the market does correct. But I certainly want to keep a
good portion of my funds in stocks and I want those to be quality stocks.

 

So what to do in this uncertain market?

 

One idea is to move out of any stocks where the company can reliably be
predicted to have an earnings decline in the next quarter to year.

 

Consider the impact of the higher Canadian dollar. The Canadian dollar
averaged roughly 85 cents U.S. in Q1 2007, and  close to 90 cents in Q2. It
looks like it might average 95 cents in Q3 and end the quarter at $1.00. The
dollar had been over 80 cents since late 2004, and so the 85 cents in Q1 was not
too much of a shock. But 90 cents in Q2 was a shock and 95 cents in Q3 is a huge
shock. And certainly $1.00 in Q4 would be a huge jump from the 85 cent level.

 

So, this is one of those cases where we know something has happened and we
can make reasobanle predictions about which companies will be hurt and which
helped.

 

And this move in the dollar will be a huge impact for some companies.
Consider a Canadian manufacturer that sells all its product in U.S. dollars.
With a total cost of 1.00s Canadian and revenue of $1.00 U.S, that was $1.18
Canadian in revenue and a very healthy profit of 18%. Now with a U.S. dollar
worth just $1.00 Canadian, the profit margin has totally evaporated!.

 

Some of these Canadian companies may have hedged their currencies, but hedges
don’t tend to last forever. So in general it seems like a good idea to sell or
reduce positions in companies that will be materially hurt by the higher dollar.

 

There is a lag in that we will not see the damage in Q3 until it is reported
around November 1. And even the damage from Q2 could have been reduced by
hedges, but those hedges eventually run out. So, the opportunity right now is to
try to guess which companies are hurt. I have addressed the specific companies
in industries in recent posts below.

 

On that note, I decided today to sell my Dalsa shares. That is a logical step
given the weak rating we have on it. I had earlier sold over half my position in Dalsa but wanted to hang on to some since it seemed like such a smart and
company and has great technology. But I just think their earnings are continuing
to be crushed by this high dollar, so I am moving on for now at least.

 

I also sold today 40% of my Northbridge shares. Thos shares look quite cheap
and I hated to sell. But I did not want to be over-exposed given the risk that
it may be exposed to investments in Asset Backed commercial paper.

 

The other though I have is that I want to raise cash by selling anything
questionable, trying to keep my higher quality stocks. Then after moving into
more cash I may move that back into the higher quality stocks (and those will
low exposure to the high Canadian dollar). This may also be an opportunity for
me to increase my U.S. and foreign stock positions.

 

In terms of the Model Portfolio, it
is meant to be a  100% equity portfolio, but based on the above I will
notionally sell half of the Manulife. I did sell my own position in CN, over
worries about lower revenues and the higher dollar but will leave it as is in
the model portfolio for now. Also I considered selling Northbridge in the model
over worries about possible asset backed security exposure. On the other hand
Northbrige may benefit from the high dollar to the extent that some payments
from the 2005 hurricanes have not been made yet and can now be paid at a lower
Canadian dollar cost (assuming they did not hedge).

 

Also given the high dollar, I continue to think it is a very good idea to be
moving money into U.S. stocks. Sure, the dollar could go higher, but it could
also go lower. I don’t think it is a good idea to try to wait for the very
top…

 

September 25, 2007

 

Canadian Tire is updated and is
rated at (lower) Buy  at $79.50. This company has performed very well. We
would have rated it Buy except for concern that growth could slow as Canada’s
economy seems likely to slow with the higher dollar (although the high dollar
does help Canadian Tire in the short term until prices adjust down to reflect
the higher dollar).

 

I decided to sell my CN and some of the Telus today just given my defensive
outlook. Hope to buy back at a lower price later. With CN I like the long-term
but short term they are reported hurt by low forestry shipments.

 

September 24, 2007

 

My mood is defensive at this time. I expect markets to pull back temporarily.
I may raise my cash position.

 

September 23, 2007

 

Another edition of our free newsletter has
just been sent out. If you did not receive it by email, check your junk folder
and then try using the free member login menu item at the left to see if your
email is on the list for the free newsletter.

 

Topics are:

 

Did
you know that consumers pay up to about an obscene 2.5% in fees to banks just to
convert money?

 

Are
Canadians richer now that their money is worth much more in U.S. funds?

 

Does
it seem like we can’t Beat This Market Down with a Stick? (not that we want to!)

 

Speaking of being richer due the currency movement…  I recently
calculated my personal return in U.S. dollars. Since the start of 2003, my
personal compounded return is 177%, but compounding in 58% for currency gains,
my return in U.S. dollars is 280% since the start of 2003. Similarly the model
portfolio is up a compounded 178% in Canadian dollars since the start of 2003 or
281% in U.S. dollars.

 

September 21, 2007

 

Performance figures are updated for 2007.

 

September 20, 2007

 

The market direction was down today. I had been expecting that after the
market rise on the Fed cut interest rates then there would be a pull-back
because the gloom of the sub-prime, housing and recession still looms despite
the Fed rate cut. But so far only this small pull-back in the DOW today.
Canada’s markets were dropping fort he same reasons as the U.S. but also because
of the threatened increase to emery royalty rates in Alberta.

 

The big story continues to be the  Canadian dollar now basically equal
to one U.S. dollar.

 

Here are some thoughts on how the dollar affects our Stock picks.

 

First, any company that trades in the U.S.  in U.S. dollars has done a
lot better in U.S. dollars than in Canadian dollars. Canadians that invest in
any company that has either costs or revenues that are not strictly in Canadian
dollars are then exposed to currency risk.

 

The major risk of concern now is companies that are hurt when our dollar
rises against the U.S. dollar.

 

Most at risk are companies such as manufactures that face labour and
other costs in Canadian dollars but with the majority of revenue from the U.S..
This includes Dalsa, Cognos and to some extent Manulife. Each company may be
affected to different degrees and may be partially hedged but in general I
expect the higher Canadian dollar to hurt these companies, and there prices,
would fall, all else being equal (although all else never is equal). Companies
that we don’t cover but that are similarly affected would include manufactures
like Bombardier and many forestry companies. With many companies being
international the extent of the pain is very different for each company.

 

Also at risk is any company that has big U.S. operations. In this case the
hit to revenue is offset by a benefit on the expense side, but in the net they
are hurt. This includes Kingsway, Couche-Tard, and First Service and Thomson
corporation. In effect these are essentially U.S. operations that happen to be
managed from Canada. All of these report in U.S. dollars because that is where
they get most of their revenues and also face most of their expenses. Manulife
is also somewhat in this category, although it reports in Canadian dollars.
Virtually all of the U.S. headquartered companies on our list would be not very
much affected by the dollar movements but Canadian investors in these are hurt
by the rise in the Canadian dollar. (The exposure on say Thomson corporation
might be similar to that on say Fed Ex). The location of the official head
office has little impact on the currency exposure, it is the location of the
expenses and revenues that drives the currency exposure.

 

Companies that are primarily operating in Canada but with substantial
revenues and expenses in the U.S.. are also hurt by a higher Canadian dollar.
Companies in this situation from our list are are CN, Stantec and Canada Bread.

 

Some companies should be almost totally unaffected by the rise in the
Canadian dollar (unless for some reason they had borrowed in U.S. dollars). From
our list such unaffected companies include, Shaw Communications, Telus, E-L
Financial, Home Capital, IGM Financial (at lest prior to its Putnam
acquisition), ING Canada, Loblaw, Northbridge Financial (Northbridge has a small
U.S. exposure), Tim Hortons (though Tim’s has a small U.S exposure) TSX Group,
Alarmforce and EGI Financial (EGI has a small U.S. exposure and I believe Alarm
force has a very small U.S. operation).

 

Finally some companies benefit from the higher Canadian dollar. These are the
lucky companies that face import costs in U.S. dollars and collect revenues in
Canadian dollars. Thier imported goods costs should be dropping like a rock.
These include Canadian Tire ad Reitman’s both of which source most products
outside of Canada. Under perfect competition they would pass the savings onto
customers, but I suspect right now they are not passing all of that along.

 

We will be updating our Canadian Tire report very shortly and it might be a
good way to ‘play” this dollar rise.

 

As far as companies that are hurt, your investments in U.S. companies show
the hurt instantly on your Web Broker account when translated back to Canadian
dollars. But for many companies it is not clear that the hurt has yet been
reflected in the share prices. Certainly it has not all shown up in the earnings
reports yet. Again some of these Q3 reports could be ugly. And for many
companies a drop in value due to the rise in the Canadian dollar is like a
permanent one-time hit to valuation. There is generally nothing the company can
do. (It it could cut costs it presumably already would have). Companies with
expenses in Canada and revenues from the U.S. could driven from profit to loss.
These have to be looked at individually. Luckily, Cognos and Manulife have
traditionally been very profitable, but I don’t see how they can escape some
pain in this regard.

 

Companies like Couch-Tard where it is a matter of the repatriated profits
from the U.S. being lower due to the dollar are not as bad off. The growth in
profit can resume once the dollar stabilizes but basically the profit level may
have been effectively set back removing several years of growth.

 

Overall, the story is mostly one of pain here, it is another reason to be
more cautious on the market at this time.

 

Canadian that have invested in U.S. have been hurt, but there is a (very)
bright side, your wealth when measured in U.S. dollars has increased
dramatically. I’ll address that topic further in the next day or so.

 

If you are thinking about the impact of the high Canadian dollar on other
companies, here is the general rule:

 

Revenues mostly from outside of Canada with expenses mostly in Canada equals the house of
severe pain (exporters)

 

Expenses outside of Canada and revenues inside Canada equals heaven
(importers)

 

Operations out side Canada (revenues and expense) equals more moderate pain

 

Hedges can eliminate the pain or gain but it is difficult to know who is
hedged without detailed study. And generally currency hedges are only temporary.

 

 

September 19, 2007 (This comment is a day late getting uploaded, due to a
technical problem)

 

The Dow continued up a little today but I think the American market will now
likely pull back… So I bought some of the Canadian bear ETF funds (HXD and HFD) today.
However, maybe I should have waited on that because it is very possible that
Canada will now lower interest rates to put the brakes on the dollar and if so
that could move the market up.

 

September 18, 2007

 

Does our now mighty Canadian dollar deserve a new name? If so I have a
suggested name. Believe it or not there are better names for a currency than the
“loonie”. Or should we adopt the U.S. dollar?
Read the full story here.

 

An impressive rally today. But now what? We have the Dow up 10.2% this year.
That is a surprisingly high return in the face of a major credit crunch, an
ongoing decline in  U.S. housing prices and a looming U.S. recession. It
seems to me that the market has now wrung pretty much all possible optimism out
of the Fed interest rate cut and other good news on lower inflation. For the
short term it is really hard to see how the U.S. market can continue up. I am
thinking defensively, and looking to take partial profits. As usual, the
difficulty I face is that I do like the individual stocks I am holding and so it
can be hard to decide where to trim. But my outlook is definitely cautious and
defensive at this point.

 

September 17, 2007

 

Monday was a day of little movement as we wait for the Fed move today
Tuesday. If it’s not 50 basis points of lower interest than I think the market
drops. If it is 50 basis points then I suspect we get a short-lived rally. But
then again. trying to predict short term moves in the market is very difficult.

 

Wal-Mart
is updated and rated (higher)
Buy at $43.32. As an investment this company gets no respect these days. It’s
stock price has trended down for quite some years. But wait a minute because
meanwhile, its earnings per share continues to march up steadily. Right now the
market seems to be assuming that its growth will be close to 4% going forward
than it’s historic 12 or 14% level. This really seems to be a chance to buy a
great company at a bargain price. Sure, recession could hurt earnings
short-term. but recession is not a long-term concern. Buffett had bought a large
position in 2005. It would be interesting to know what he thinks of it now. I am
very tempted to buy some myself. My only hesitation is that I prefer to raise my
cash position at this time.

 

September 16, 2007

 

As we start the week, the surprising thing is that the DOW is up a rather
impressive 7.9% this year to date and the S&P 500 is up 4.7%. That is a
surprisingly good return given we have been hearing about the sub-prime /
housing / consumer recession scare since February. We have been on a roller
coaster… I suspect the move this week will be down. After all, if the Fed
announces a rate cut that is already expected and any rally on that news seems
likely to last about 5 minutes.

 

The TSX is up 7.3%, but that is not so surprising given the oil price.

 

Overall, I am inclined to be defensive this week. I would be very selective
in any buying, and would be more inclined to try to get my cash position up as
my cash position is still only around 12%.

 

As I post this the Japanese market is down…

 

I updated my personal portfolio composition.
With stocks held in four different accounts, I find it necessary to enter the
amounts into a spreadsheet to show me the overall percents otherwise it is easy
to lose track. I also have to admit that my portfolio is the result of a lot of
individual buy / sell decisions. In theory I should set target percents for all
these stocks and then move towards that. In reality a lot of emotional baggage
and past history gets in the way of establishing the correct percents in each
stock. Still. if I were particularly uncomfortable with the weights in each
stock I would move to adjust it.

 

The ratings in the table above represent my (our) best rational assessment
for each stock. Sometimes there too our past history with a stock can influence
our thinking but we lay out all of our thinking in each report… It is my own
portfolio that more emotional and historical baggage would come into play.
Therefore I suggest subscribers look first to the individual stock ratings in an
a-la-carte approach rather than mimicking my own portfolio. The model tracking
portfolio is also a possible guide though in general subscribers have stocks
outside of what we cover here and I do think the a-la-carte approach is best.

 

September 13, 2007

 

The market rose nicely today once again confounding (at least so far) those
who preach doom and gloom. The strength in the U.S. market is all the more
impressive because it came on a day when oil prices reached record highs (which
is bad for the U.S. economy). Shaw Communications
did very well today closing at $24.50 and it may go to show that it can be a
good idea to place orders to buy good stocks on dips (Shaw had dipped to $23.24
last Friday and had been dipping even as the market rose). It’s a bit surprising
to see Tim Hortons down in the past few days
even as the market was rising, and also given it announced a deal to be located
in the new Wal-Mart superstores in Canada.

 

Business ideas. I know many of you are highly successful individuals
and may have many business interests. I am opening up my Blog at

http://investorsfriend.blogspot.com/ for members to share some thoughts on
ideas about business opportunities outside of the stock market.. I had started a
discussion there last February but we did not get many posts to the blog. You
can post anonymously so, why not add your thoughts and responses to what you
read there? I only intend to keep that open for about 5 days, so lets get, your
thoughts up there. (It will be open for reading after that but I will only
encourage posts for the next few days).

 

You can also email business ideas to me at
shawn@investorsfriend.com

 

Sometimes I am asked to comment on specific stocks. I really can’t give
useful thoughts on companies that I have never looked at. So I focus on trying
to be quite knowledgeable about a selected group of stocks rather than knowing a
little about hundreds of stocks. For discussion of stocks not “covered” here,
you could try www.stockhouse.ca See the
Bulleting Boards there. For Canada enter the symbol as T.TOC for U.S stocks just
enter the symbol.  At least there is some discussion there. But often I
must admit the discussion there is based on absolutely nothing. It’s often a
case of the blind leading the blind. Still on the blue-chip type stocks there
are some useful discussions. As far as on speculative stocks, it is 99% useless
chatter and hype, but can be mildly entertaining.

 

September 12, 2007

 

The Canadian dollar is back to 96.5 U.S. cents, which about ties the 30-year
record high it briefly reached on July 24.

 

My thoughts are: buying a car? go across the border and save thousands.
Shopping? consider a trip to the U.S. or consider on-line shopping. Retailers
need to drop prices in Canada to reflect the higher dollar but will only do that
if they see that shoppers are heading across the border. Our retailers (those
that sell U.S. and other foreign made goods) have benefited greatly from this,
but at some point the pressure will be on to lower prices.

 

This high dollar will I think at some point brutally hurt the manufacturing
sector.

 

The United States remains a hugely important country for most Canadians. Most
of us should think about having U.S. investments. We could wait for our dollar
to reach parity and higher, but that has risks too. I have moved some funds into
U.S. dollars and would like to continue to do so, averaging in when our dollar
reaches new highs, like now.

 

It’s an outrage that we are now allowed to invest all of our RRSP and RESP
funds outside of Canada but the banks are prevented (by some old-fashioned law,
as I understand it) from giving us U.S. dollar accounts within our RRSPs.
That means you face currency conversion costs on every U.S. stock you trade in
your RRSP. That is a needless cost.

 

September 11

 

This morning I heard that China had passed Canada as the number one import
country of the United States. Wow, that kind of crept up on us. I think it bodes
well for the rails like CN and Burlington since a lot of imports come by rail.
Also inflation in China is rampant. I suspect taht may mean wages will rise fast
in China and pretty soon some production will move to even cheaper countries.
But China will still be growing as an import source for the U.S. (And Canada
too).

 

This morning there was news that one of the Fed Governors had hinted that a
rate cut was coming. Therefore the market opened higher. I then decided to sell
my two small position in the Horizons Beta Pro bear ETS. I believe this takes my
cash position up to about 15%. I would rather go to cash than the beta pro bear
funds because holding any bear fund while still being 85 or 90% invested just
seems too inconsistent. Still the bear funds can be a good way to hedge on short
notice.

 

I’m still feeling nervous about the U.S. housing / mortgage situation… But
right now the market seems to be holding in well on the anticipation of a FED
rate cut. But I wonder if after that happens, the overall market will basically
say, okay that’s fine, but it’s not enough and the selling sentiment might
return.

 

In the long term markets always do well, but I don’t think the U.S. can fend
off a recession forever and the negative short-term affect that has on markets.

 

September 10, 2007

 

Hopefully markets won’t do much as we wait for the Fed to confirm  a
rate cut. For the short term I remain more nervous than optimistic. For the long
term I am confident that good companies will do well. In any market there are
always some bargains to be found, although it definitely is harder to well when
the general markets seem to be declining.

 

September 9, 2007

 

Canadian Western Bank is
updated and rated Buy at $27.10. For many years it has grown steadily in
earnings. It should continue to do well unless there is a major slow-down in
Western Canada.

 

Reitman’s
(women’s clothing stores) is
updated and rated Buy at $20.18. It’s earnings have dropped somewhat in the
first half of this year. Based on the ratios it would still look like a (lower)
Strong Buy. However it reported that its next quarter has started off with a
7.2% drop in same store sales in August and therefore we are being more cautious
on the rating at this time.

 

September 8, 2007

 

I always appreciate any referrals that subscribers make. I am including here
a link that you can use to refer friends and relatives and which gives a special
price of $100 per year (regular is $120 per year).

 

I would be very grateful if you would email your endorsement and a link to
the following page to anyone you think might be interested.
Link to referral special rate.
Hopefully, it is clear that the value of the analysis here is well beyond
$120…

 

The TSX index is at 13651 and sports a P/E ratio of 17.8. This looks
expensive. See our updated analysis here of the
TSX valuation.

 

The Dow Jones Industrial Average closed on Friday at 13,113. Looking at a
long run analysis, this seems like a reasonable level. Our analysis of the
DJIA P/E ratio and valuation is updated.  (In the short-run the
direction is anyone’s guess but my sense is that markets will decline more due
to the sub-prime mess and the housing situation in the U.S.)

 

September 7, 2007

 

Another volatile week in the markets. Our Picks were generally down this
with, with the market. My own portfolio is up slightly on the week, helped by
the beta pro bear positions that I mentioned under September 5 and helped by
some of the selling I did.

 

As mentioned under September 2, I had placed an order to Buy Shaw if it
dipped to $23.25. It did dip to $23.23 today before closing at $23.54.
Therefore, so far it looks like my strategy there was a good one. Similarly I
had placed an order to sell my EGI Financial shares at $12.49 and it looks like
I got the high price of today as these sold today at $12.49 but then EGI closed
at $12.20. The idea here was to use volatility in my favor by placing some
orders to buy below the market and some orders to sell above the then market.

 

September 6, 2007

 

After the market close today Dalsa announced it would take measures to cut
costs. This included some down-sizing and lay-offs. There will be usual expenses
charged to earnings next quarter for this. There was also mention of possible
asset write-downs. It’s hard to say how the market will react tomorrow but my
guess would be that the stock will decline.

 

Today the market once again rose in spite of fears about sub-prime problems
etc. I was feeling in a defensive mood and slightly trimmed my position in Tim
Hortons today at $35.20. Also I trimmed my Telus position by half. I still like
these stocks but I want to have some cash in case better bargains appear. In
addition BCE was up nicely today and decided to sell half my position there.

 

While the market does not seem expensive, I do think U.S. housing prices are
going to fall, possibly a lot, and that is probably going to have some general
negative impact on stocks.

 

September 5, 2007

 

I mentioned yesterday that it is a time to be cautious. This morning a
headline in the National Post talked about large losses on non-bank sponsored
Asset Backed Commercial Paper. These short term investments could be on the
balance of many companies. If the 50% loss figure is correct than we will
certainly have a few companies that will be hit with surprising losses. I am not
aware if any of the stocks rated on this site are directly at risk… But it’s
easy to suspect that the U.S. economy will continue to be hit by the sub-prime
mess. Therefore, overall I would not be surprised to see markets head back down.

 

As a partial hedge I may trim some positions. Today I sold a but more of my
Western Financial Group. I also sold one third of my Canadian Western Bank
shares. I also bought a small amount of the double bear TSX Financial sector HFD
and the double bear TSX 60 ETF which trades as HXD. As I mentioned before, I
would really rather pull money out instead of buying the bear ETFs, but there
just were not any other stocks I want to sell at the moment. My biggest position
is Tim Hortons. I may even trim that back but as of today could not bring myself
to do so. Unless the market really tanks, I think Tim Hortons will be higher by
the end of this year, but it certainly could dip in the meantime. Overall I am
still reasonably close to fully invested.

 

September 4, 2007

 

Today I grabbed some Couche-Tard at the
opening price which was good since it was the low price for the day. A previous
order to sell my EGI financial was partially
filled. Also a previous order to trim my
Western Financial position back a bit was executed and some of that sold at
$5.85. I may enter an order to sell just a bit more at around $6.00. While the
market has recovered from August lows, there is still certainly the threat of an
American recession. It’s a time to be cautious and try to avoid stocks that will
sink really hard in a recession. But even more so, avoid stocks that might sink
and never recover. If it sinks but then comes back that is hard to take but in
the end does not really hurt you…

 

September 3, 2007

 

Stantec
(consulting engineering
services) is updated and still rated Weak Buy, now at CAN $34.50 or U.S. $32.57.
It’s a great company with a great ROE and a steady history of profit growth. But
the high P/E at 24  and the housing recession outlook in the U.S. are
reasons that we can’t rate it higher. Recently in the market turmoil it got
under CAN $30 and that might be a reasonable entry point, if it happens again.

 

It has been exactly eight years since we first added Stantec to this Site. It
was one of our first stocks we looked at. We called it a Strong Buy then at
$2.50 (actually $10 but adjusted for splits, it is $2.50). It has been a winner,
but the P/E was no where near 24 back in 1999.

 

Attention, any Dentists
reading this: (everyone else if you have any dentist email pals you may want to
forward this)

 

 

My latest newsletter spoke of the huge
value of information. Coincidentally a friend of mine in Calgary has an “e-book” available that will be extremely valuable to any Dentist who is
interested in learning how to make more money from his or her practice. My
friend Dr. Dave Robertson, DMD owns a $6 million per year multi-dentist practice
in Calgary. And he works only 2 days per week. Dave told me last year that he
was thinking of setting up a program to offer all his dental management tricks
and tips to other Dentists. Just today he emailed me and it is up and running.

 

You may think you have seen and heard all this before, but Dr. Dave is the
real deal, he’s the guy actually working 2 days per week and making a LOT of money. Check
out Dave’s program at
http://www.dentalmanagementsecrets.com/ There is a lot if information to
read there. After he describes it all you will likely be shocked at his low
introductory price for all these secrets in his e-book format.

 

P.S. If you make a purchase from him let me know.

 

 

Alimentation Couche-Tard (operator of
Couche-Tard, Mac’s and Circle-K brand convenience stores) is updated and
upgraded to (lower) Strong Buy at $21.70. Reading their annual report I was
impressed by the simple strategy and the success they have had. It has been a
growth company and should continue to be. In fiscal 2007 ended April 30, their
earnings were about flat due to lower gasoline margins and also less acquisition
in 2006. However earnings growth has resumed strongly in the latest quarter with
strong gasoline margins and the impact of quite a few acquisitions in the past
year. The stock price has been hurt by the pause in earnings growth and also by
the higher Canadian dollar (They report in U.S. dollars and I translate that at
the current exchange rate). Based on past trends this should be a good
investment. It is always easy to point to risks like competition and the
pressures to stop smoking but the fact is that the numbers indicate that they
continue to do very well despite those pressures. One negative is that Q2 faces
a “tough comparable” and therefore cannot be expected to show robust earnings
growth. I plan to add to my position in this company.

 

September 2, 2007

 

Loblaw is updated and rated Weak Sell /
Hold at $45.45. There have been no signs of recovery. Even though it has
potential and has valuable real estate it is perhaps just as well to Sell and
move on. It is surprising because this was formerly thought of as the best
managed grocer in North America. Now they made errors in strategy in getting
into merchandise sales in Ontario. But worse then that they seem to have
repeatedly fell down in the simple execution of being able to stock the store
shelves! Too bad the family would not decide to sell to Warren Buffett if he
would have it. But Buffett usually insists on good management being in place.
But he does like family companies. Certainly if the family ever sells out,
Buffett and Berkshire would be a buyer of choice.

 

Loblaws (adjusted) net profit margins are only 1.2%. Personally my first
thought would be they can simply raise the prices by about 5% and I suspect the
bottom line would improve a lot even after losing some customers. To my mind it
was silly to cut prices in advance of Wal-Mart coming in because in the grocery
business, a customer will not stay with you next year because you gave him a
deal this year. They probably need to raise prices, focus on execution (stock
the shelves!) and figure ways to really retain customers like locking up either
the aeroplan points or the airmiles points in as many provinces as they can if
it is not too late. They give store-brand points, but I never know what those
are worth and am not much interested in collecting points other than airmiles or
aeroplan.

 

My own portfolio composition is updated.

 

I took a look at a number of the Picks to see if any kind of unuusal insider
treading was happening. Of Note Some big Shaw insiders are buying JR Shaw bought
around 1 million shares. Ron Joyce was also buying. Also a few executives. This
is very positive signal for Shaw. Which we rate
a Speculative Buy.

 

I am surprised to see that Telus was not
buying back its own shares given the price drop. I thought possibly they are
under a black-out but then again one of their Directors was buying. It is
surprising because until about the end of June Telus was buying heavily and
steadily – possibly there is just some delay in getting going again.
Kingsway also continues not to buy its shares
even when they had dipped to the $18 range.

 

With the end of Summer and the start of a new month I decided to take a look
at my portfolio to see what adjustments I might make. I am inclined to place buy
orders on a number of stocks at 5 or10% below recent prices. But I have little
cash to do that. I also looked to see what I might sell in order to raise some
cash.

 

I have a sell order on EGI Financial at $12.49 to take profit and clean up
that small position from my portfolio. Similarly I have a sell order
EL-Financial at $679. I have a sell on all my CE if it gets to $40.95. I have a
sell on a small potion of my Western Financial at $5.85 as I am over-exposed to
it. I have a sell on a potion of my Northbridge Financial at $35.90. And I
placed an order to buy additional Shaw at $23.25 if it should dip that low. Also
a buy on some Berkshire Hathaway B shares at $3810. This is more orders than I
normally have but it might be a way to take advantage of volatility. If some of
these sell then I may place some buy orders below the market.

 

Burlington Northern Santa Fe
is
added as a new company and rated Buy at $81.15. I added this to the Site because
Warren Buffett (Berkshire Hathaway)
has been purchasing shares at about $80 and now owns 15% of the company. I
wanted to put this company through my analysis process partly in order to gain
further incite into how Buffett might be thinking. This railway bears a lot of
similarities to Canadian National. In both cases there lots of deferred income
taxes which adds to earnings quality. In both cases the ROE are very strong.
They are great companies but usually don’t tend to look cheap.

 

Buffett has said he prefers a great company at a fair price to a mediocre
company at what looks like a bargain price. I suspect Buffett is attracted by
the way rail companies can sometimes be protected from competition. Also as the
economy grows and they run more trains over the same lines they can be very
profitable. Right now there is the uncertainty about the economy and that causes
me to hesitate to assume that Burlington can continue to grow earnings very fast
. In fact for 2007 earnings are expected to grow only in the low single digits.
My strategy here would be to take an initial position and then hope to buy more
if recession drops earnings and the price temporarily by late this year or
through 2008. Buffett may see other things and he may have an ability to
influence management to cut costs or whatever. Based on my analysis I would
consider CN to be as good as or a better investment than Burlington. However,
buying what Buffett is buying seems like a very good idea to me.

 

September 1, 2007

 

Bargain opportunity on bronze statutes and decorative pieces
(off
topic, I admit)

 

A friend of mine started a company and early this year imported a stock of
bronze statutes and decorative pieces. He intended to wholesale these to
retailers. Sadly he was unable to gain traction in getting sufficient retailers
to stock his products. Now he is selling off the stock at very substantial price
reductions. Many are half price or less.

 

I was at his open house and was certainly impressed. Some of these are quite
large and could be used outdoors. Most of the pieces are, I believe, for display
on a small table or the like. Frankly, I am no connoisseur of such things but to
me the articles looked to be of high quality and some would be suitable to
decorate the finest of new homes.

 

Prices now appear to range from about $150 to $3200. The original prices were
$300 to $7500. For $229 for example you can get a fish figure that is over 2
feet long and over 24 pounds. The $3200 statute is stunning and is basically
life-sized (6 ft and 218 pounds) and would be suitable for a finer home or
business and could be used outdoors.

 

My friend is able to ship these pieces anywhere in North America. He is
located in Sherwood Park, just outside of Edmonton.

 

If you have any interest in such baubles, check out his Web Site at

http://www.animagusimports.com/retail/catalog/

 

At these prices, these articles will not last long. (In fact, I almost
hesitated to post this, because I may want first dibs myself!).

 

The latest edition of the free
newsletter has been sent. If you did not receive it by email, enter your email
address onto the free newsletter list, using the
menu item to the left.

 

I have updated the 2007 performance figures.
It’s no one of our best years, but we are doing reasonably well in a tough
market.

 

The market recovery was surprisingly strong on Friday. I had expected initial
gains on the speeches by the President and the Fed chair, but I then expected
the gains to fade on Friday afternoon, but they held strong.

 

August 30, 2007

 

President Bush is going to outline some kind of sub-prime mortgage imitative
tomorrow (Friday). This should provide at least a brief rally in markets
especially banks and builders – which will send short sellers into a tizzy. With
the continued volatility, one idea would be to place order to sell a portion of
holdings at say 5% to 10% above the current price and to buy more on a 10% dip.
This would work well in  a non-taxable account. If you are sort of luke-warm
on a stock. then this sort of “stink-bid” 10% below market could end up getting
triggered just by volatility. Or same on the up-side an overly optimistic offer
might get taken up…

 

August 29, 2007

 

The market today again showed its ability to bounce back. Convenience store
operator Alimentation Couche-Tard (Macs, Circle-K) released strong earnings
today and jumped 7% to $21.88. We last called it a Buy at around that same
price. We have not updated our report but it will still be rated Buy or higher
given the strong earnings report. Tim Hortons also did well today. At times like
now when investors are realizing the complexity of some companies (such as those
with sub-prime or asset backed commercial paper), it is comforting to own a
simple business like a convenience store chain and a coffee chain, where you can
drive in and judge for yourself the quality of the operation. Warren Buffet has
always favored simple businesses. Frankly the more I have learned about the
complexities of financial and other companies, the more I have come to
appreciate a simple retail business, or any business with clean uncomplicated
financial statements. Other reasonably simple (and profitable) businesses like
Shaw and Telus also did well today. Again these are the type of businesses that
you deal with yourself and it becomes easier to understand how they make money.

 

I removed Pet-Value from the list above, it was a new addition that turned
out to be only a weak buy and so I am removing that to focus time on more
productive areas. Similarly, Clemex has been removed since our report was out of
date and I have little interest in this stock which has been a frustrating
under-performer for many years (notwithstanding that it is up in price this
year).

 

In the past year I cleaned up my own portfolio by selling off a lot of small
positions that really had almost no chance of having a major impact on my
results and which basically were taking up valuable “mind-share”.  I still
hold over 20 positions spread across 3 portfolios. Ideally I would like to trim
that back to 15 or even 10 positions. That will involve greater volatility. But
it will also force me to be more selective and invest only in my better ideas.

 

August 28, 2007

 

It was certainly a bad start to the week. Perhaps we should all have a plan
for what to do as the market falls. Will you sell to preserve capital? or ride
it out? I have said before this decision has to be different for each individual
depending on both capacity to take risk and the willingness to take risk. I do
not believe that there is a “right answer”.  If you are intending to buy on
dips you should decide that ahead of time and take action accordingly. If you
intend to sell on dips then you should enter stop losses so that the job gets
done.

 

The markets have shown surprising resiliency as in last week when they were
strong. But when I think about the housing foreclosures in the U.S., it is easy
to conclude that a consumer recession the U.S. looms. In this situation the
earnings of many companies would fall and P/E ratio would probably drop somewhat
as well. Perhaps a good strategy would be to stick with stocks where earnings
are not likely to drop due to a U.S. consumer recession. That might include
stocks like Shaw, Telus, our property insurance picks, Canadian Western Bank and
Tim Hortons. But I certainly can’t guarantee that these stocks will not drop.
What I am quite confident of though is that the fact that if they do drop, they
are strong companies that will recover.

 

Home Capital is updated and rated
Speculative (lower) Strong Buy at $34.30 (it closed today at $33.25). Based on
past earnings it qualities as a Strong Buy. But it is speculative because of its
possible exposure to sub-prime issues and because financials in general are at
risk of falling. Also a housing recession could cut its earnings sharply.
Possibly we could rate it lower, but the fact is that on its achieved numbers
and its trend to date it looks like  Strong Buy. It looks like a reasonable
pick but I would not bet too heavily on it given the speculative aspects. I plan
to buy a few shares in Home Capital.

 

Today I bought 1 B share in Berkshire Hathaway. I would have liked to wait
for a lower price and have an order to buy another if the price drops a bit
more. I also bought some shares in Wendy’s International today on the news that
it may get a buy-out offer. This speculative. Wendy’s has a high trailing P/E at
29 but indications were that this $33 stock might get an offer around $40. But
again that is speculative.

 

I was looking again at Coventree Inc. (COF on Toronto). This was the company
that has been in default in August on some of its Asset Backed Commercial paper
as it was unable to “sell” new debt to pay-off the maturing debt. I was looking
at its book value and discovered some shocking issues. Its 2006 fiscal year
ended September 2006 and the annual report stated that its book value per share
was $4.99 per share and bragged that this was a 64% compounded annual growth
since 1998. But this was “excluding Variable Interest Entities”. In reality the
book value per share was about $1.16. That is a shocking over-statement in my
opinion. If they are going to use a non-gaap figure like that, they should
clearly state the gaap figure at the same time. Apparently there were some 110
Variable Interest Entities consolidated in for GAAP purposes but excluded for
these non-gaap figures.

 

As of its latest quarterly report the book value per share is negative.
Clearly there are some enormous complexities and issues in the accounting here.
Clearly we have to very careful in looking for issues in the financial
statements of Coventry and any other company involved in asset backed
securities.

 

Home Capital seems a lot more straight forward than Coventree, but perhaps the
issues at Coventree do illustrate that there is risk in financial companies.

 

August 27, 2007

 

With this whole credit crunch I believe it is still safe to invest in
commercial paper issued directly by a large investment grade corporation. For
example, TD Waterhouse lists some commercial paper that is issued directly by
corporations. As I understand it the entities that are most trouble are sort of
shell companies that bought the right to receive say car loan payments (average
term maybe 24 months left to go) and then they funded that by selling 90 day
commercial paper. At the end of 90 days they redeem to commercial paper by
selling new commercial paper. If they can’t sell the new stuff that is a big
oops, they can’t redeem the 90 day paper that has matured.

 

If a little Trust like that trades then its market price has probably
plummeted. Thus could be a big but risky opportunity to buy the beat up little
Trust. After all the car loan payments will likely still come in, the Trust has
value, just no liquidity. I am not going to find the time to dig into these but
it is an opportunity. If there is a brave mutual fund that is swooping in to buy
these Trusts (assuming there are some that trade) then that mutual fund would be
a good investment.

 

However, I just took a look at Coventree Inc COF on Toronto. The shares have
plummeted. But the company is showing negative book value so I would not touch
that one at all.

 

DBRS listed other Conduit companies with liquidity issues

 

http://www.dbrs.com/intnlweb/jsp/content/document.faces

 

I suspect most of these do not trade in the market. If any do trade and have
book values well above the share price, they might be good, but risky
investments. Even if they trade, it may be under a parent name and so these
would be hard to find.

 

Based on my new Global ETF article, I
bought a few shares of the United Kingdom index EWU. I bought this in a U.S.
margin account, that way I will not face currency bid/ask spreads if I trade in
and out of this (I do face though the currency movement risks). I considered
Belgium and Italy with their lower P/E ratios but looking at the constituent
companies in those indexes (see www.ishares.com)
I saw that those indexes have some huge weightings to single companies and are
not that diversified. So I chose the U.K. However, I do worry that the U.K. is
exposed to a large bubble in its property prices. Anyhow, this little purchase
gives me a toe into into international diversification. (Although some of the
Canadian companies like Manulife have big international components).

 

August 26, 2007

 

Thinkin’ Global – For a long time I have wanted to take a look at some
global Exchange Traded Funds( ETFs). Basically the idea was to see if the P/E
ratios are a lot lower in some other countries. If so, an ETF investment would
probably be a good idea. Part of the idea was to “fish where the fish are”. In
other words if the low P/E stocks are in other counties then it might make sense
to invest there rather than strictly in Canada or the U.S.  What I have
found though is that in a global world the average P/E ratio in most counties,
even in emerging markets is up around 17 or higher.

 

Still, it is useful to know the ETF symbols and the P/E ratios for some
international ETFs in order to diversify. Also I did find a couple of European
countries that had lower P/E ratios.

 

You can click here for this important new
Global
ETF article.

 

For now at least I am not making this available to the free members of this
Site, this is reserved only for you paid subsbcriber members.

 

August 25, 2007

 

Important article update – Our Special Report that analysis the valuation ratios of
Exchange Traded Funds and sectors
on the TSX is updated.  I also include there the symbols for the Exchange Traded
Funds that allow you to buy exposure to a given sector through an ETF and we include comments on the valuation of
each sector. I have added many more ETF symbols to this article. As subscriber to this Site you have access to all our special
reports. See the list above of links for members only.

 

I am hoping to develop a similar article with selected global ETFs. However,
it may not be easy to find the all-important P/E ratios for global ETFs.
(update, actually it was a lot easier than for the Canadian ETFs)

 

August 22, 2007

 

It was nice to see the recovery today. But it’s not at all clear if the
credit crunch has been fixed. I would be surprised if we don’t get some bad days
the other way, although the market direction seems to be up now for the moment.
But the real point is to keep investing in strong companies at low or at least
reasonable prices.

 

August 21, 2007

 

It was nice to see many of our Picks up today. It was not clear why the
telecos were up other than bargain hunting. But with the DOW down today the
overall market direction still seems to be down. I had hoped to buy some
Berkshire today but I cheaped out with a low bid and the price did not come down
to meet my bid.

 

With BCE up nicely today I sold part of my position there. Buying BCE was a
speculative bet that the take-over at $42.75 will happen. But there has been
some doubts that it will and so I took the opportunity to reduce my risk. At $38
BCE is hard to resist but at $39.88 it seemed opportune to sell some. In some
ways I am reluctant to sell more BCE since it seems more likely than not that
the $42.75 will eventually be paid. But then again if I sell now there may be
better gains in a stock like Telus and then I avoid the “deal risk” associated
with BCE.

 

EGI Financial
is updated and rated Weak Buy /
Hold at $11.75.  This is a stock that we rated Speculative (lower) Strong
buy at $9.90 at the start of this year. However, at this time I am focusing on
the fact that its high GAAP earnings are driven in large part by retroactive
gains related to prior years (what the industry calls “favorable reserve
development”). After adjusting for that and for realized gains on investments
the earnings look much less impressive. The fact is taht the profits of property
insurance companies are inherently volatile and we should not get too wrapped up
in the P/E ratio or ROE which can be highly volatile. Price to book is a more
reliable indicator. In this case price to book is reasonable at 1.27, but we
have some other property insurance stocks on this site with lower price to book
ratios. I am also cognizant that this company is small which adds to risk and
the trading is thin which adds to price volatility. Overall I am inclined to
reduce or eliminate my position ion this stock and take the profit. For the
model portfolio I will notionally sell half at tomorrow’s opening price and put
the proceeds half into Reitmans. and half
into Telus.

 

I also intend to no longer update the report for this stock in order to focus
more time on other stocks (I have too many property insurance stocks on the
list). EGI actually did exactly as I hoped since it was added to this Site in
that it has reported retroactive gains on auto insurance from prior years. This
drove the stock price up about 49% sincce it was added to the Site. But it is
not realistic to expect those retroactive gains to continue indefinitely.

 

August 20, 2007

 

Today’s market reaction was a pretty weak follow up to Friday’s FED interest
rate cut. Markets started out positive, then went negative and then finished
mildly positive. So that is hardly an enthusiastic reaction.

 

I decided to bargain hunt a little today and bought small amounts of Canadian
Western Bank and Kingsway.

 

I was hoping Warren Buffett’s Berkshire Hathaway would pull back a little and
I would buy. Instead it rose. Wiley old Warren Buffett is doing just fine in
this market. In fact his stock is up 29% since June 2006 when he announced he
would start giving away his money. So far he has given about $4 billion worth of
Berkshire stock to the charitable foundations he selected last year. Nevertheless
his own stake in Berkshire has increased from about $43 billion at that time to
about $52 billion now.

 

Warren Buffett has over 99% of his wealth in one stock, Berkshire Hathaway,
the giant conglomerate of which he is President and controlling owner. If you
look at the stock price history of Berkshire, it becomes apparent that some
years Warren has lost billions in net worth. Yet it does not bother him.
Occasional declines in wealth are a fact of life when one chooses stocks as the
road to riches. In times of decline we need to remember that id f we own shares
in good businesses and if we purchased those shares at reasonable prices, our
wealth is going to grow satisfactorily over the years despite some setbacks.

 

It’s up to each individual to decide if they stomach the volatility of the
market. My sense is that there may be further down-side ahead, but in the long
run, the markets will reward those who hold quality stocks.

 

August 19, 2007

 

I had mentioned in some detail under January 2 below that I thought that
Warren Buffett’s Berkshire Hathaway was a good investment at $3666 per B share
and I mentioned under January 3 that I bought a small amount. And I mentioned
under August 16 that these shares are doing well and that I think the big
company is well-positioned. Berkshire fairly leapt (up 4.1%) on Friday and now
are $3948 per share. I am thinking of buying more but would prefer if they
dropped back a little first. (Hopefully it will dip a little with the
approaching hurricane Dean)  I have long considered adding the stock to the
list above. However, it is very complex and the earnings tend to be volatile and
Buffett himself has said it would be very difficult to analyze based on the
financial statements. And there is no way that I could understand all of its
complexity. Still it trades at what seems like a modest 1.54 times book value.
Given its reputation I am willing to invest in it.

 

Transfer some money to a U.S. account? In recent editions of the free
newsletter I indicated it might be wise to transfer some funds into U.S. dollars
if possible. When I mentioned that in early July our dollar was at 94 cents and
looked to be headed to $1.00. But I thought it was prudent to transfer some
money now rather than getting greedy and waiting for parity. Unfortunately U.S.
dollar accounts are not possible inside an RRSP. I transferred a small amount
into U.S. dollars when our dollar was over 96 cents (I lost about 0.85 cents on
the exchange fee but a fee always has to be paid). I intend this money to
permanently remain in U.S. funds. That way when I buy and sell U.S stocks I will
not face an exchange fee each time. Today with our dollar above 94 cents having
recovered from about 92.5 cents, I took the opportunity to transfer a little
more into U.S. funds. Some experts are predicting our dollar will fall into the
mid to lower 80’s. On the other hand with the FED rate cut maybe our dollar will
rise. My thought is to take advantage of our high dollar and get some money into
U.S. funds. If we reach close to parity I am prepared to think about borrowing
money to put permanently into U.S. funds.

 

I am not doing this to make money on the exchange bet. Rather it is a hedge.
I know I will need U.S dollars in the future. They are cheaper now than they
have been in 30 years (except for very recent spikes above the current level).

 

In theory one could also buy options on currency and really make some money.
In reality that would not be hedging and would be pure speculation. And I
believe you need a special trading account to do that. I don’t know how to do it
and I am not particularly interested at all.

 

The market direction still appears to be down. Friday’s rally was really not
that strong given the Fed action. We have perhaps been “spoiled” by almost five
years without a 10%-plus market correction. Now, we are reminded that these
things do happen in the markets. Quality dividend paying stocks have been hurt
along with the market. But at least with those kind of stocks we can be
confident that they are good investments in the long run.

 

At some point if the market continues to drop I will be looking to bargain
hunt. However at the moment I am also thinking defensively.  I may decide
to reduce some positions, particularly on rallies.

 

With the large swings in the market, one strategy might be to place partial
sell orders 5 or 10% up on some stocks and buy order 5 or 10% down (on the same
stocks). In the past week some of these would have been triggered to advantage.

 

Our Performance figures for the year are
updated. It was quite a bad week for our stock picks.

 

Our article that looks at the
valuation of the S&P 500
index is updated. The conclusion is exactly the same as it was in our
February 10 update to that article, that the S&P 500 index is probably
moderately over-valued and caution is warranted. This is a long-term indicator
and not a predictor for the short-term. There is a link to these members-only
articles above, or click the link here.

 

August 17, 2007

 

Western Financial Group is updated
and rated (lower) Buy at $5.60. It just released a strong earnings report.
Given recent stock price volatility it may be possible to purchase this stock at
closer to $5.00 or less. It should be a good long-term investment. This stock
has done very well since we first called it a Strong Buy just over two years ago
at $1.96. It’s no longer a clear bargain like it was at that time, but it still
should do well.

 

August 16, 2007

 

The good news today was the recovery in the U.S. market. The Dow at one point
was down 2.6% but recovered to be down just 0.1%. The S&P 500 actually managed
to finish up slightly on the day. But the TSX was down 1.5%. The big declines
earlier today show that there is a lot of fear in the market. Despite the late
recovery in the U.S. market today, the trend still appears to be down.

 

When the credit markets recover we may see private equity buy-outs come back
into the market looking for bargains. But that does not seem to be immediately
on the horizon.

 

Possibly there were some good bargains to be had today (we won’t know if this
was the time to buy until we see where the market goes next. But Canadian
Western Bank was down to just over $23, Kingsway was close to $18, CNR was under
$50. But I must admit, I was not in a buying mood but was instead thinking
defensively. I sold a small portion of my Tim Horton shares. Also I bought a
small amount of the beta pro funds that is a two times negative bet on the TSX
60. It trades as HXD. This was as a hedge. Rather than hedge like that I would
prefer to simply sell something and move into cash, but I bought the HXD as a
quick way to hedge.

 

BCE has fallen to $38. This is on fears that the Teachers Pension Plan and
its partners may not be able/willing to complete the buy-out at $42.75. I don’t
enough about it to understand how likely it is that the deal could fall apart. I
hold BCE and I amof course worried about the possibility of the deal not getting
done. I saw a report today that “accuses” about 10 banks of not hooring their
promises to provide emergency funding to certain sellers of securitized debt. If
it is true that the banks are not absolutely living up to their commitments,
that is quite scary. The BCE deal also requires banks to honor their commitments
to finance much of the deal.

 

One stock that was up today was Berkshire Hathaway. I own a bit of it and I
had been thinking of buying more. I have not analysed the stock, but my sense is
that it is reasonably priced. Warren Buffett’ Berkshire Hathaway is sitting in a
great position now. They have cash and can swoop in to pick up bargains in this
market. Many private companies would probably love to be bought out by Warren
Buffett and Berkshire. They would be a buyer of choice.

 

At this point my plan is to pretty much continue to hold my stocks because I
am confident that my portfolio will recover in the long run. I also intend to
buy additional shares in our higher-rated stocks but I am not inclined to start
buying just yet.

 

August 15, 2007

 

There is not much to say about the market declines since no one knows how low
it will go. Some experts think the worse is over, others think it is yet to
come. As I post this Japan is down 2.6%, Hong Kong is down 3.3% and Australia is
down 5%, so things could be ugly tomorrow (Thursday), if this is any indication
(though North America often leads rather than follows Asia)

 

Reitman’s is updated and rated (lower)
Strong Buy at $22.07. This retailer has carved out a profitable niche in the
Canadian women’s clothing field. I plan to buy shares in this.

 

August 14, 2007

 

Another negative day in the markets and it seems likely that further declines
are coming.

 

The TSX Group announced certain fee cuts. The National Post reported that the
TSX was cutting trading fees by as much as 20%. That may over-state the cut
since listing and secondary listing fees are also big sources of revenue. But
there does seem to be a risk that the TSX Group is moving from being a virtual
monopoly (and almost obscene profit margins) to more of a competitive company. I
think it still ahs a lot of monopoly characterizes in taht most companies in
Canada are captive to having a listing on the TSX for the foreseeable future.
Still, I considered selling my TSX shares this morning but I have a relatively
small position and decided not to sell.

 

At some point stocks that have declined become bargains. The difficulty is to
know when we are at or close to the bottom.

 

I believe that Northbridge offers
excellent value at today’s close of $32.43. In fact I understood from their
conference call that they have a “out” on the S&P 500 and they will make gains
on this as the market falls and this will hedge them from about half of any
stock losses that they suffer in the market. Also
Kingsway  and ING Canada appear
to be attractively priced now. Shaw and Telus and
CN have all fallen quite a bit from their highs despite what appears to be
reasonably good outlooks. I would be inclined to buy these rather than sell. It
seems these last three had all benefited to some degree from premiums associated
with possibility of a take-over and that premium has been eliminated. At some
point stocks will certainly turn around. I believe that that there still some
very well financed private equity companies that will be looking at these lower
stock prices and thinking about acquisition targets.

 

But everyone has to consider their own risk tolerance and ability to stomach
losses since in this market everything seems at risk for further declines.

 

I did sell two thirds of my Dalsa today for
the reasons mentioned yesterday and also sold a bit more of my Clemex alluded to
yesterday.

 

August 13, 2007

 

The overall markets recovered a little ground today but then failed to hold
that ground and finished slightly negative. This is in site of whatever efforts
central banks are taking to “add liquidity” (I won’t pretend I understand how
that works). The ripples of sub-prime debt and a drying up of certain high-risk
debt markets are still spreading. As some assets go down in price then certain
investment funds start to report loses on those assets or (worse) an inability
to estimate the value of their investments in high risk debt. This tends to send
out shivers of fear and everything drops including stocks with absolutely no
exposure to any of this. Hopefully at that point the bargain hunters step in to
support prices of the better stocks. Overall it looks like the general market
trend is still somewhat downward.

 

Western Financial reported good earnings growth today and also reported low
loan losses in the banking business. Last week they had announced a small
acquisition. We’ll update our report after they release the full financials and
notes which we have not seen yet. But at today’s $5.66 and under it probably is
a Speculative Buy. But in this market expect volatility. I was able to buy a few
shares on Friday at $5.15.

 

I mentioned you might get EL-Financial under $600 and someone did grab 200
shares at $590 today, which I think was a nice price and then it finished at
$665. Partly that reflects the poor trading liquidity. This goes to show it can
pay to be patient, especially in a volatile market.

 

Our next updated report will likely be for Reitman’s. It looks good, probably
a (lower) strong Buy, though we are not quite finished the report. At tomorrow’s
opening price we will notionally sell the Dalsa in the
model portfolio and replace it with
Reitman’s.

 

I may sell some of my Dalsa tomorrow to
reduce my exposure. I have been a fan of the company. But who knows when they
will be able to convince Hollywood to start using their camera? (It should come
but when?). They were hammered by the high Canadian dollar and that problem is
not going away. In the last conference call they alluded that they may do some
restructuring to cut costs. Maybe the stock would rise on that news or maybe it
would fall since it might involve severance costs and other costs. I will not
get out entirely, but I may reduce my exposure.

 

Somewhat similarly Clemex is a stock I have grown extremely tired of waiting
to see some good news from. They were lately optimistic that sales of some of
their new products were about to take off – I have heard it before. And they
were also hurt by the high Canadian dollar. Again I will keep some but may
reduce the position. They are up about 50% since the start of the year but their
results don’t justify it.

 

August 12, 2007

 

A new edition of the free newsletter has been sent. If you did not receive it
then try adding your email address to free
newsletter list.

 

Given that there seems to be a higher than usual risk that the overall stock
markets will decline many of you may be thinking about increasing your cash
position and lowering your equity position.

 

In February this year as the market fell I went to 20% cash and later to
about 30% cash. But through the late Spring, early Summer as the market rose I
invested the cash back down and as bargains appeared more recently I have taken
the cash all the way down to 0%. During this period I also ended up clearing out
a lot of smaller positions and also clearing out some stocks that I just was not
at as “attached” to.

 

Now, I find that I might like to increase my cash position somewhat again.
The difficulty is that I am invested in stocks that I like. As a fundamental
investor I have put a lot of time and energy into understanding these companies
over the years. Therefore I have grown “attached” to many of them. Also I find
it difficult to sell even a portion of a position if we have a “Buy” rating on
it. When I look at my portfolio, there is just not much that I would consider
selling.

 

In this situation, one solution would be to “short” the overall market or
target segments of the market while keeping my portfolio as is. But this require
margin capacity or cash.

 

If the market declines further due to sub-prime worries the most vulnerable
stocks are probably U.S. sub-prime lenders, and possible some big U.S. financial
institutions that are involved in selling “securitised” mortgages to investors.
It’s difficult to say what Canadian stocks could be most affected. Possibly all
the financials could be, although in theory they have little exposure. Any big
company that has a “take-over premium” in the stock could drop further given
that private equity bids are drying up. This may explain why Telus and Shaw and
certainly BCE have dropped.  I think the entire real estate sector is quite
vulnerable.

 

In addition in a market pull-back everything tends to get hit to at least
some extent. In these situations, stocks that trade at lower P/E ratios and that
are cash-flow positive should do better than average. Industrial companies that
have a high ratio of debt maybe affected because the borrowing costs for riskier
companies has risen.

 

Shorting the market or segments of the market can be done in margin accounts
by selling short ETFs. For the overall TSX market, sell short the XIU exchanged
traded fund (60 largest stocks on the TSX index). For the TSX Financials you can
sell short the symbol XFN, for the TSX real estate, you can sell short XRE. For
the S&P 500, sell short the symbol SPY exchanged traded fund.

 

Short selling is not allowed in RRSP accounts nor I believe RESP accounts.
For these, one can consider the new Horizon beta pro plus funds that allow you
to buy a position that is effectively in reality a two times short position. For
the TSX 60 two times short bet the symbol is HXD. For the TSX Financials two
times short bet, the symbol is HFD. These are useful symbols to keep handy if
you wish to bet that the market will go down.

 

Shorting the market might be a good idea at certain times. But keep in mind
that if you do this you will likely want to watch the position carefully. It
becomes almost an obsession. Taking a bet against the market takes up a lot more
“mind space” than does riding along with the market.

 

Shorting the market can be considered a hedge against your portfolio. The
idea might be that you are synthetically taking yourself out of the market. In
reality you will tend to watch thee individual positions rather than just
looking at the total hedged portfolio. If you really want out of the market, or
partially out, it is probably better to sell than to attempt to hedge.

 

I will give some consideration to selling a few small positions that I can
part with. I will also think about hedging. But for the most part I am probably
going to ride along with the portfolio I have.

 

August 11, 2007

 

YAHOO came out with a new feature to add stock quotes to a web site. I added
this above so that you can check the current price of any stock you are
interested. 

 

BCE may represent a good opportunity. It closed Friday at $38.85 and was
available under $38 earlier ion Friday. Meanwhile the Ontario Teachers Pension
plan and its partners are to buy the company at $42.75. That transaction will
not close until perhaps March 2008. There appears to be a nervousness that the
deal will not go through. But the Teachers plan late in the trading day on
Friday reaffirmed their commitment to buy. It seems quite likely that if the
market starts to be more assured that the deal will happen then the price could
jump quickly back to the $41 range. So the opportunity here would be to buy now
in the hope of a small gain. The risk is that if the deal is somehow canceled
then the BCE price could tumble back to the $30 range.

 

In some ways BCE looks like a good bet for the small gain but then again
these are complex matters. I had bought some BCE on speculation on August 8
(unfortunately paying $39.60). I bought some more on Friday at $38.49.

 

A few weeks ago I had placed a bid for some additional Western Financial
Group at $5.15, well below the market price. Yesterday as the market tanked,
that order was filled.

 

EL Financial
is updated and rated (higher)
Buy at $660 per share. This is mostly a property and liability insurance company
but also has a large life insurance arm and a general investments arm. Like the
other property insurance companies, the earnings are cyclic and inherently
“lumpy”. Perhaps the most reliable measure of value here is the book value. This
stock trades at only 1.06 times book value. The stock price can be volatile and
you may be able to buy much lower (under 600) simply due to volatility and
especially if the markets are dropping in general. It has a strong profit
history and the chance to buy around book value is attractive. But this is a
long-term investment. Be prepared though for the price volatility.

 

August 10, 2007

 

Our performance figures for 2007 are
updated. Despite the last few days, we still have a reasonable return year to
date.

 

ING Canada is updated and rated Buy
at $45.56. This appears to be Canada’s best property an casualty company. It is
the largest in Canada and has no exposure to the U.S. and no exposure to
high-risk drivers and little exposure to commercial insurance. It appears to be
highly profitable. However, I am increasingly of the view that the reported
profit of property insurance companies is too lumpy and cyclic to put much faith
in the numbers from any quarter. But ING has proven to be highly profitable when
looked at over a period of years. Its price to book value ratio is somewhat high
but may be a case of paying up for quality. I think it will be a good long-term
investment.

 

(11:30 Eastern time) Today’s continued decline is not what we like to see.
And it could get worse. But so far I am not all that distressed. After all what
we have so far amounts (for investors who have been in the market a long time)
to giving back several months gains from a bull market that is almost five years
old. Even if we get to the point that the market backs up a year or two,
(hopefully very unlikely) most investors are certainly well ahead over the past
five years.  In the long run markets go up. We are not at bubble valuations
and therefore I think a very serious decline is not that likely. Hopefully the
bargain hunters will be stepping in. So it could get worse before it gets better
but in the long term investors will always do better than non-investors.

 

For those with large holdings in cash, there will be buying opportunities…

 

 

August 9, 2007

 

Today’s stock market decline cannot really be described as a surprise. And it
is very possible that the market decline will continue.

 

In the face of this it was nice to see Tim Hortons rising. It has been
disappointing to see the declines in Telus and Shaw (although it creates
opportunities for new investments in these). These would generally be considered
relatively safer stocks and so I am hopeful that they will start to stand up
better.

 

I sold more of my Clemex today and may sell more tomorrow. (See yesterday’s
comment on Clemex).

 

August 8, 2007

 

Another strong day in the markets. Surprisingly market sentiment seems to
have turned bullish again. But with the sub-prime issue still menacing and the
decline in the U.S. housing market things can turn bearish very fast.

 

Tim Hortons continued to climb. In the past six months or more it has been
volatile and those who waited for dips were rewarded. Given the generally
volatile markets, I suspect dips will occur. But if I owned none, I would start
to average in now, since we can’t be assured it will dip and I think it is a
long-term winner.

 

Telus and Shaw Communications have both declined probably because there is
now little or no speculation that they might be taken over. I hold more Telus
than I do Shaw but I would like to even that up by buying more Shaw.

 

I bought some BCE today. I paid about $39.70, maybe I should have been more
patient for a lower price. But with the take-over offer at $42.75 I think the
BCE price should move up.

 

I sold a small amount of Clemex
today. This a tiny Canadian manufacturer of computerized microscope image
systems. Recently it released poor results for its fiscal 2007 ended April 30.
It has been one of those companies that always has big promises about the future
and seldom delivers much.  Last year it looked like it was on the road to
good profitability but now it has stumbled yet again. I have kept a base
position for quite a few years in it in the hopes of being around if it finally
ever gets going but it hardly seems worth the aggravation. I’ll plan to update
this report soon but on the face of it, it looks like a Sell.

 

Manulife
came out with a strong earnings
report today. The stock moved up 2.5% but could move higher again tomorrow as
the market digests the news. Manulife is a very complex company. I don’t
understand why it has not been hit hard by the higher Canadian dollar. After all
most of its revenues are from outside Canada with about 50% from the U.S. The
standard answer might be that it is hedged. There are certain natural hedges
given that its liabilities are also mostly from outside of Canada. But the
profits are not naturally hedged and it is not reasonable to think that it could
have hedged against the Canadian dollar’s huge rise these past few years. It
boggles the mind to think how well it might have done if our dollar had not
increased. Certainly the old John Hancock shareholders (who received Manulife
shares on a takeover deal several years ago) have done extremely well, as the
price of Manulife has soared in U.S. dollars. I plan for our report on Manulife
to be updated by Sunday.

 

I opined in the last free newsletter that
lululemon was over-valued at about $30. Now it has soared to almost $40. Clearly
it is a great company. But the market is effectively valuing it at $45 million
per store. Now these stores do roughly an average of $4 million per year in
sales (per the prospectus). At a 10% profit margin that would work out to about
113 times earnings. In Q1 the profit margin was in fact 8%, but it does seem
possible it could grow that margin (But 15% is probably at the high end of an
optimistic forecast) . Of course the market is valuing the future stores, not
just the existing stores. But any sensible math here shows the market is
requiring shareholders to pay up in advance for years and years of
phenomenal growth – which may not occur. Apparently the stock is going up
because among other things Jim Cramer recommended it. Jim is a smart guy but I’m
not sure he has done the math on this one.   I can’t see any analyst
recommendations for it except RBC said it was worth about $23 and an independent
firm in Canada said it was worth $16. I’m glad I did not short it. But I have to
think that shareholders now are unwittingly playing a dangerous game of “musical
shares”. I probably should just ignore this stock but it is a good illustration
of how the market can temporarily depart greatly from reason.

 

 

August 7, 2007

 

Tim Hortons
is updated and rated Buy at CAD
$33.95 and U.S. $33.20. The Q2 report was consistent with my expectations noted
under July 30. Profits up in Canada except down marginally after the much higher
income tax rate versus last year. U.S. division struggled somewhat. Overall the
stock does not look cheap but I have a strong suspicion it will do well. Q3
earnings last year were not very good and so in Q3 this year it should be able
to report a double digit earnings per share growth.

 

Tim Hortons was up nicely today. It is my largest position and I have felt
comfortable owning it because I think it would do better than the market if the
market “corrects”.

 

I’m not sure why Tim Hortons was up so much today. I expect it to bounce
around a bit before hopefully going higher after the Q3 earnings. Of course it
will also be affected by how the general market does. I may add more to my
holdings particularly if it happens to dip back to the $32 level.

 

Telus dropped further today. I noticed that TD Waterhouse is still bullish
with a target price around $70. It seems the market in general sees risk in
Telus. If I did not own any, I would definitely want to start a position at this
price.

 

BCE has slipped to $39.05 despite that fact that the Ontario Teachers Pension
Plan has agreed to buy it out at $42.75. Investors who buy now will not receive
the $42.75 until perhaps March 2008. There may be some risk that the deal will
fall through but my understanding is that the risk is low. I believe that BCE
would be a good bet at this price. One ha s to be a bit cautious though. If BCE
is a smart investment at say anything under $41, then it seems strange that
various financial players have not bid it up to that level. So I think it is a
good bet, but would not “bet the farm” on it.

 

August 6, 2007

 

Fed Ex is updated and rated (higher) Buy at
$109.04 (the price today closed at $110.83). With a P/E of about 16.8 this
appears to be an opportunity to acquire a high-quality company that is the
leader in its field at a reasonable price. I have not personally bought this but
would consider doing so. Canadian investing in this face down-side currency risk
if the Canadian dollar goes up but benefit from the currency move if the
Canadian dollar goes down. I believe it is prudent for many Canadians (those
with little or modest U.S. investment exposure) to move more investments to U.S.
stocks given that the Canadian dollar is recently near 30-year highs.

 

Markets were open in the U.S. but closed in Canada today. The DOW was up
2.2%. The only thing that seems clear is that the direction of the market is
very uncertain at this time. There appears to be bargain hunters pushing prices
back up when they fall, but at the same time there is a lot of fear that markets
will fall.

 

Early today Telus was down over $1.00 on New York. Seeing this I decided to
add to my position in Telus.

 

August 5, 2007

 

Telus is updated and rated (lower) Strong Buy
at CAN $55.99 or U.S. $53.00. It had an earnings report on Friday morning that
was bad on the surface although it appears that after adjusting for one-time
items, earnings were up. It seems the market is worried about the rest of the
year and does not believe Telus when Telus says it will still meet its target
earnings per share for the year. Maybe that is true, but on the numbers the
stock looks good at this price. I think it will do better than “the market” in
the short-term. (But if the general market drops further it may get pulled
down).

 

August 4, 2007

 

Kingsway Financial is updated to
Speculative Buy at CAN $20 or U.S.18.95. Kingsway is a property and liability
insurance company that insures mostly vehicles  and operates 69% in the
U.S. and insures mostly high-risk autos and also trucking.

 

I am considering adding to my position in Kingsway.

 

I added a small amount to my Northbridge holdings on Friday.

 

Northbridge Financial
(a property and
liability insurance company with business that is 90% commercial and about 87%
Canadian, 13% U.S.) is updated and rated (higher) Buy at $33.55. At the present
time it is highly profitable and would be rated a strong buy except for the fact
that profits are expected to decline in the near term due to both increased
competition (lower prices) in its market and also recent profits were boosted by
unusual capital gains.

 

The market in general views property/liability insurance companies as very
risky and unpredictable. The market always seems to focus on any aspect of the
earnings which are negative. Northbridge trades at a relatively low (1.26)
multiple to book value. It seems likely that if book value can be increased in
future then the stock price will rise. While earnings are unpredictable
Northbridge has been able to increase book value per share rapidly in recent
years. In the near-term I expect lower but still positive earnings which should
push up the book value (even after the dividend is paid) and this in turn should
push up the stock price. I view Northridge as a good long term investment.

 

August 3, 2007

 

Our Performance figures are updated.

 

August 2, 2007

 

Today was a good day for markets and our Picks in particular. Telus,
Kingwsway. Tim Hortons, CN , Cognos were among the stocks that rose noticeably.
Again it is encouraging that the market seems to keep showing signs of optimism.
But at the same time the credit problems remain.

 

I saw a report today that close to 1% (1 in 120) of all house in the U.S.
were in foreclosure proceedings. I’m not sure i believe it can be that high.
That sounds like a huge rate… It is hard to imagine how the U.S. will escape a
recession if this is true and that would definitely drag markets down.

 

So despite a good day today, I definitely remain cautious.

 

Northbridge Financial reported
excellent earnings today after the close. I have read the report but not
completed an analysis yet. On the surface earnings were phenomenal, $2.29 in Q2
and this is a $34 stock! It has earned $3.17 year to date. But there were some
one-time gains. Still the operating profitability is quite strong. Book value is
$26.70 per share and so the premium to book is only about 27%. In the short term
though the revenue is shrinking and profits are expected to decline somewhat.
Overall, I think the stock should rise tomorrow but the market always seems to
value property insurance stocks lower than most sectors in terms of multiples of
earnings and multiples to book value. I would definitely consider buying
tomorrow, especially if it has not risen at the open. We will update our report
probably by Sunday and based on where the price goes tomorrow. On a quick check
on insider trading, there was a little bit of selling and less buying. Not
enough selling to be a concern. The company itself has not bought back shares
this year even though at times the price seemed quite low.

 

Kingsway Financial also reported earnings
today. I have read the report but not in detail and have not done any analysis
yet. Kingsway had a good quarter with an ROE of 17%. (And this is all the better
given that the high Canadian dollar hurts them). But the market may focus on
the bad news that had more retroactive losses (reserve developments) in its
Lincoln General division. Also they predict lower profits and sales ahead due to
competition. But this stock trades only about 7% over book value and has an
attractive ROE. In addition the company states that it had retroactive gains
(positive reserve developments) in Canada, but chose not to “release” these
earnings. Overall I am not as confident that this will rise tomorrow, but I will
consider adding to my position if it does not. We will update our report
probably by Sunday and based on where the price goes tomorrow. Taking a quick
look at insider trading there appeared to be a number of buyers including the
CFO and fewer sellers. This is positive. The company itself did not buy back any
shares in the quarter which is quite disappointing given what they would
presumable view as a low price.

 

Kingsway provided a link to a conference call but it was a dud link tonight.
Also they said the conference call link was on their Web Site, but I don’t see
it there. Their Site does not seem to be up to date. It seems like they are a
bit sloppy with their Site and I think that reflects a company that overall I am
sorry to say seems always a bit sloppy around the edges. (For example poor
supervision of subsidiaries and the credit analysts at S&P complain that their
risk management is not up to par. So overall not a bad company and the price is
cheap but they simply do not seem to be on their game.

 

Tim Hortons will report tomorrow morning and I am hoping for good things
except from the U.S. division they may report more problems.

 

August 1, 2007

 

Another volatile day in the markets. The Canadian market was poor, it was
down 330 points but closed down “only” 214 points or 1.5%. But the U.S. DOW and
S&P market was only down very modestly most of the days and then surged in the
final hour to be up 0.7% for the S&P 500 and 1.1% for the DOW. I always consider
the U.S. DOW and S&P 500 to be a better indicator of broader market sentiment
than the TSX composite index. The Canadian TSX index is more volatile due to its
concentration in energy, financials and resources.   So overall while
the dip in Canada is a bit scary, the strength int he U.S. is encouraging.

 

Nevertheless I think the fear meter has been turned up for all of us. I am
certainly optimistic about markets in the longer term. But in the shorter term I
am worried the market could fall further due to problems in the lending markets
and a possible slow-down in the economy.

 

On the Canadian market there are certainly good dividend-paying companies
that are down in price. If the markets goes back up we may kick ourselves for
not buying this dip. But then again the dip may deepen. markets are always
unpredictable in the short term. While stocks like CN, Shaw, Tim Hortons and
Telus may go down further I am quite comfortable holding them as I think the
longer term direction is up.

 

Stantec is down noticeably. I would wait until after the quarterly earnings
are released (tomorrow, I believe) before possibly buying. I suspect they will
have been hit by the Canadian dollar and so it will be interesting to see if
they can post a good number despite the dollar.

 

I am about 90% invested in equities and 10% in cash, therefore I am not in a
big hurry to bargain hunt.

 

The fact is that markets normally do go down as well as up, although the
long-term trend is up. I am prepared to hold good stocks through a period of
decline. The decision as to whether to try to move some money to cash is alwys a
very personal one, depending on each investors situation.

 

lululemon (lll, Toronto, lulu, NASDAQ)

 

Wow, this stock has done well, despite a small drop today. If you want to you
can let me know if you own it or are thinking of buying. It is a great company
with exceptional marketing. But he stock price seems grossly high to me. I was
in the Edmonton store at lunch today at Kingsway Garden Mall. I saw that the
merchandise did seem to be high quality and probably unique products possibly
not easy to find elsewhere (although I suspect some sport stores have some
similar products). The products are high-priced but not outrageously so. I saw
nothing over $99 (pants for personal trainers to wear). Shorts and “tops” tended
to be in the $50 range. That does not strike me as obscenely profitable unless a
high volume is sold. I was in the store about 15 minutes. There were other
customers and browsers but it was not crowded. The cash was not lined up but
they did make some sales during my time in the store (not from me, although I
would consider buying if I had been there to shop).

 

 The store is pretty small, I would guess maybe 1000 square feet. In
Sunday’s newsletter, I had estimated that
based on 2006 sales of $149 million and probably the equivalent of 40 stores
open all year that was roughly $3.7 million per store or $10,000 per day. I
don’t have a good feel for estimating retail sales but I suspect $10,000 would
be considered a really good day in most small stores in a shopping mall. In the
store I was in, I doubt that there was enough merchandise for sales to be much
higher that roughly $10,000 in a day. (And I would not be surprised if Summer
sales are more like $5000 per day at that store). Although I guess in retail the
reality is it might be $5000 or less many days and then would ramp way up close
to Christmas. But the point is the stock market is valuing lululemon at over $36
million per store (based on 59 stores $33 dollars and about 65 million shares).
Obviously most of the value being paid is not for the existing stores, but it is
for the growth. But the problem is that investors are paying up in advance for
years of growth that has not yet happened. I maintain my prediction that this
stock has to drop in price.

 

Consider too, there are almost no analysts putting out valuations so far. I
believe RBC Capital put a target of about $23 on it. (As I recall based on
earnings tripling by 2009 and then a P/E of some 36 applied). The investment
bankers that sold the shares for lululemon and its insiders received an option
on over  I believe 2 million shares. Those investment banks have an
incentive to make sure the price stays high so they can sell those additional
shares. I do not believe in conspiracies, but I think this stock is selling on
pure hype. In the coming couple of weeks I would suspect that retail analysts
will come out with price targets well below $30, but we shall see.

 

I mentioned I was thinking of shorting and that I think shorting is very
risky. Clearly had I shorted on Friday I would be deep in the loss territory
now. TD Waterhouse does not have this available for shorting. Is that because it
is too new? I don’t know.

 

If anyone has facts on lululemon that counter my analysis, please let me
know.

 

 

July 31, 2007

 

On the one hand it was nice to see a positive sentiment in the market this
morning. But the sharp dip in the DOW near the end of the day indicates a mood
of fear still exists..

 

Canadian National Railroad is updated and
rated (higher) Buy at CAN $55.30 or U.S. $52.20. It has proven itself to be very
well managed. In the near term earnings are projected to grow only 5% in 2007,
much lower than its recent growth. But it will likely resume higher growth and
meanwhile is available at a reasonable price. It has been a bit volatile lately.
I hold a position and I would consider adding if it dipped to the $52 range. For
new positions a good strategy might be to buy some now and then look to buy
again on a dip.

 

July 30, 2007

 

Tim Hortons will release earnings Friday morning. Here are some thoughts on
that.

 

I am hopeful of strong sales increases for Canada. I note that their recent
Camp Day raised 15% more than the prior year. So that is a positive indicator.
At all their better locations I see big line ups… With over 3000 locations,
the few I see may not be indicative but still…  Profits in Canada should
be up but that depends on any unusual charges… last year they had a low tax
rate in Q2 due to a one-time tax refund…   I expect the U.S.
operation will still be having some trouble, it is going to take I think a few
years to gain traction in the U.S. and at any time they could have a
restructuring charge to close a few stores in the U.S. Recall they had bought a
small chain in Southern New England a few years ago an converted the stores to
Tim Hortons. Those I think are the ones that have not worked out, probably
better that they build their own locations, not buy and convert. The high
Canadian dollar will hurt the results from the U.S. also. But going forward it
gets easier to invest in new locations in the U.S. with our now-mighty Canadian
dollar.

 

Regarding Manulife financial which should also report shortly, for some time
I have expected them to be clobbered by the high Canadian dollar and it never
happened. I don’t know why, given most of their earnings are in U.S. dollars. It
seems to be a great although very complex company. It would not surprise me
though if the dollar finally catches up to it.

 

Basically any company that has a lot of revenue outside of Canada could be
hit hard by our dollar in Q2 and harder still in Q3. The worst hit are those
with most costs in Canada and most revenues from outside. Meanwhile a retailer
like Canadian Tire enjoys bring in cheap imports with our high dollar…

 

Obviously it was  good to see the market recover a bit today…
But with all the credit worries in the market, it seems like the overall
sentiment in the market is quite nervous and dips to the downside seem more
likely than does a full recovery of the recent dip.

 

lululemon went up again today. I did have a thought to short it, but on the
other hand it would be dangerous to short it when it seems to be still rising.
Shorting is always very risky. I have had very little experience with shorting.
It can sound easy in theory.

 

I spoke to TD Waterhouse about shorting it early today and they indicated
they had not available. Possibly that is because it is so new, that it has not
landed in the customer’s accounts yet. I know when I have bought a stock on an
IPO with TD it has not landed in my account right away. I wonder if some people
who bought on the IPO are still waiting for it  to appear in their
accounts? lululemon traded 2.8 million shares on NASDAQ today and only 423,000
shares in Canada. So it may be that most of the share are in U.S. hands.

 

July 29, 2007

 

The latest edition of our free newsletter has just been sent. We keep totally
separate email lists for the free newsletter versus the list of paid
subscribers. But most of you are no-doubt on the free list and have recently
clicked to verify your membership in the free list. To access this latest
newsletter click the menu item  for the login for subscribers to the free
newsletter at the left.

 

In this free newsletter I discuss the lululemon IPO that was much in the news
on Friday. I believe that this IPO was grossly over priced. And that is the case
despite the fact that it then popped upward in the market. This seems almost
sure to sink and I’ll bet the investment banks that touted it will have some
explaining to do.

 

I am thinking of shorting lululemon, if it is possible to do so. But I view
short-selling as extremely risky and complex. In short-selling you can lose an
unlimited amount.

 

July 28, 2007

 

Alarmforce is updated but still rated
Weak Sell / Hold at $5.61. For this update we added back an expense for
amortization of an intangible asset since that was a non-cash items and since
unlike depreciation, it does not represent the wearing out of any asset that
will have to replaced in future.  Despite this the adjusted P/E still seems
very high and we can’t justify buying this stock. However, we continue to think
that the earnings are conservatively stated and that at some point as it gains
scale it may start to look attractive. 

 

The performance figures for all of the stocks in the
model portfolio have been updated.
However we have not done and any trades there. Performance figures for all the
stocks picked at the start of 2007 are updated. While we rate stocks all through
the year, we track performance on an annual basis based on the picks at January 1
each year. Full details of all the ratings throughout the year are also
maintained and are provided in the daily comments below. That way subscribers
can track our performance on ratings made at any time through the year.

 

e-Bay is updated and the rating is raised to
Speculative Buy at U.S. $33.53 (the price last closed at U.S. $32.57). For this
update we have added back amortization of purchased intangibles. This expense is
very similar to goodwill which is no longer expensed and we simply do not
consider that to be a real expense. The result is that our rating increased. We
call this a Speculative stock because it is a large international company that
operates in several lines of business and thereof we consider it a hard company
to understand. It is not cheap but if the growth trend continues then it should
be a good investment.

 

Shaw communications has run up steeply on take-over rumors. But the whole
environment for takeovers has cooled. Shaw could easily slide back a few dollars
at this point.

 

Dalsa is updated and our rating is cut to
Speculative Weak Buy at $10.19. Dalsa has clearly been a disappointment for us.
With most of its costs in Canada and the great majority of its revenues in U.S.
dollars, it has been “hammered” by our higher dollar. And that is in spite of
some hedging which it has in place. I had hoped it would be able to adjust
prices upward, but it seems that has not been the case. The company is going to
have to reduce costs significantly in order to regain profit in its core
business. They do seem optimistic that they can do this starting in 2008. The
company indicates that some cost-cutting initiatives could be announced within
weeks. That could lead to restructuring charges before it leads to actual
savings. The company has a new digital major motion picture camera which it is
trying to convince Hollywood to use. If they can convince a director to use
their camera in a major motion picture, then this could send the stock price up.
In the near term it is certainly possible that this stock will continue to
disappoint. I am reluctant to reduce my position but I do view it as
increasingly risky. On a positive note the company has little debt and has great
technology and it should eventually recover.

 

July 26, 2007

 

It was a nasty day in the markets. It is always frustrating to see investment
values drop.

 

But no one should claim to be particularly surprised. The market has had two
earlier “corrections” this year and the surprise has been that it came back and
resumed new highs.

 

This time there are indications that higher interest rates are putting a real
damper on future private equity take-overs. That becomes a double whammy. All
else being equal markets do fall with higher interest rates. But private-equity
deals were pushing the market higher. Without the support of private equity
deals the market could easily fall a good deal more.

 

I don’t think we are in for any kind of disastrous decline but a pullback that
totals say 15% down from the high would not be a shock. But I don’t think anyone
can predict what the market will do in the short term. Perhaps tomorrow the
bargain hunters will be out. Personally, I am comfortable holding the stocks I
own because most of them are solid, dividend paying and profitable companies
that are likely to move higher in the next few years, no matter what happens in
the next few days and weeks.

 

Dalsa reported weak earnings after the close
today. It has been hurt by the high Canadian dollar. It is also hurt by losses
in its digital cinema division (which is attempting to get Hollywood to switch
to digital). I view those losses as more of an investment than as “real” losses
but that is only the case if they will eventually gain success in this business.
Dalsa trades at only about 1.2 times book value and book value will increase
next quarter when they close a land sale at a material profit. Given the high
Canadian dollar I think the stock is going to continue to languish or decline
somewhat until they are able to announce significant progress in digital cinema.
Our report on this stock will be updated in a few days after we see how the
stock price reacts to the earnings.

 

July 25, 2007

 

Of note today, Shaw was up to $53 which has been a sudden strong run for this
stock. I suppose one could trim positions but often when you trim a position on
a good stock, you may never end up buying it back on the dip, so maybe it is
best to just hang in there and see where it goes. Meanwhile Telus is down so I
would consider adding to positions there.

 

Tim Hortons was among the stocks that slipped lately and I would consider
adding to positions there.

 

Canadian Tire should be benefiting from our high dollar and personally I am
thinking of buying. It always looks somewhat expensive but has been an
out-performer.

 

The TSX continues to earn outstanding profits (released earnings after the
close today) The problem there is that its long standing (virtual) unregulated
monopoly position is coming under fire from new competitors and it is very hard
to know if the TSX will be harmed by the competition. I am therefore cautious on
that stock at the moment. I have effectively a “half” position in it (2% of my
portfolio rather than my more typical position of closer to 4% in a number of
stocks)

 

We are in the middle of earnings season for stocks that had a quarter end of
June 30. Therefore we will have a number of updated reports over the next few
weeks.

 

July 24, 2007

 

This was a negative day as the Toronto stock index fell 2.8%. Of more
concern, even the less volatile DOW fell by 1.6%. It will take a few more days
to see if this turns into a larger drop or instead proves (once again)  to
be short-lived.

 

As our dollar moves ever higher, it is certainly a good opportunity buy some
U.S. stocks or even to simply convert some Canadian cash into U.S. dollars.
Sure, our dollar could continue to rise. But like the stock market, that can
also turn around fast. Right now we have the best opportunity since 1977 to buy
U.S. dollars on the cheap. If you have a need for U.S. dollars for a trip or
just for diversifying your investments, I think it is a good decision to buy now
and not be too greedy in waiting for parity.

 

Having said that it does look like there is reasonable chance that we could
get to parity with the U.S. dollar. But as I have said before, this high dollar
is really going to hurt Canadian manufacturers and our tourism industry. At some
point the Bank of Canada may have to try to reverse this.

 

Meanwhile, many of you will no doubt be planning shopping trips to the U.S.

 

July 23, 2007

 

Market Outlook

 

Markets have done very well lately, apparently shrugging off worries about
inflation, sub-prime loans, housing price declines and a potential U.S.
recession. It would therefore be easy to become complacent and assume that the
good times are set to roll on.

 

But keep in mind that a rising market give no guarantee that it will
continue. After all, logic would suggest that all major market declines begin at
a high point and I suspect most major market declines begin directly after
strong up trends in the market. (1929, 1987 and 2001 being the most notorious
examples). So… while I am enjoying the ride I am also keeping a cautious eye
on things. Markets can change direction very rapidly indeed. I am hopeful that
most of our higher-rated stocks here, would do relatively well even in a market
decline. A falling tide does pull down all boats but at least companies like Tim
Hortons, Telus and Shaw would tend to be somewhat recession proof (though they
would certainly be hurt by higher interest rates).

 

There were a number of interesting developments today.

 

Shaw Communications jumped over 3% to CAN
$51.68 this is up almost 7% since we updated it last week. I like the company
and would consider averaging in at this price for new positions. Personally, I
already hold it and was hoping it would dip so I could buy more.

 

Canadian National Railway reported
earnings after the close. Net income was down but on an adjusted basis it was up
6% which is not too bad given they had some weather and line closure problems.
They lowered the earnings outlook for the year partly due to the higher Canadian
dollar. This is not a surprise given that they have significant operations in
the U.S. An earnings slowdown due to a higher Canadian dollar should be viewed
as a one-time impact. It does mean that the profits are at a lower level going
forward but if the dollar is expected to stabilize then it has no further impact
on the rate of growth. We will update our analysis after we see how the stock
price reacts tomorrow to the earnings results.

 

FirstService
dropped in price today
but that was due to a special dividend whereby it is handing out about $5 U.S.
in preferred shares for each existing share. This seems a bit strange. However
it is probably a positive indicator overall. It is somewhat equivalent to
roughly a 13% stock buy-back (which is huge) financed by a preferred share
issue. I am not at all clear as to why they chose this rather unusual route.
When looking at the stock price in future it would seem fair to add back the $5
U.S. in preferred stock that will be received.

 

Dalsa jumped a surprising 8.6% today ahead of
its earnings to be released on Thursday. The stock had suffered lately partly
due to our higher dollar. Perhaps its recent dips under $12 were good buying
opportunities. While we had last rated it (higher) Buy I was not sure it would
recover meaningfully until it is able to announce much better revenue results
for its digital major motion picture camera product. Hopefully today’s gain is a
a signal that the earnings will be good or at least reasonable.

 

July 22, 2007

 

The composition of my own portfolio has been updated. (See the last item on
the list of links for Members only above – below the table of stocks.)

 

Alimentation Couche-Tard
(the big
convenience store operator with main brand names Couche-Tard, Mac’s and
Circle-K) is updated for its fiscal 2007 results and rated Buy at $21.26. The
stock price has been hurt in recent months by the sharp rise in the Canadian
dollar (80% of its operations are in the U.S.). The company had a relatively
flat earnings year in fiscal 2007. However indications are that earnings may
grow in the range of 20% in fiscal 2008. I am comfortable holding shares in this
company.

 

July 19, 2007

 

Another good day in the markets, with the DOW up 82 points to 14,000. My
strategy is for the most part to hang on for the ride while selectively buying
on dips. A focus on cash generating stocks will continue to to rewarded as long
as private equity buyers remain active. Things to watch for are higher interest
rates or recession which are likely to eventually bring the party to an end.

 

CP and CN stayed pretty high despite the fact that CP indicates it is not in
active talks to be acquired.

 

July 18, 2007

 

Today’s big news was the news that Brookfield Asset Management might bid for
CP Rail. This sent CP up 15.5% and CN up almost 6%.

 

This adds support to other potential targets that are profitable and generate
cash such as Shaw Communications and Telus.

 

If this bid materializes, CP may rise more and also CN could rise further.

 

Today I bought shares in
Cognos.

 

July 17, 2007

 

Where’s the Bear?

 

Once again reports earlier this year of the death of the now 4.5 year old bull
market have tuned out to be greatly exaggerated. Markets have continued to do
very well. A key driver seems to be high bids to take companies private. It’s a
bit odd since in most cases companies always traditionally were worth more in
the public market.

 

With a possible U.S. recession looming and also higher interest rates it’s is
a bit hard to believe that markets can continue to rise. It’s not time to panic
in any way given that valuations still seem not excessive in most cases. But in
my view we should be cautious because a market decline is overdue and seems sure
to arrive at some point. Nevertheless in the long term markets will continue to
do well.

 

July 16, 2007

 

As the Canadian dollar seems to keep going up, it may seem est to wait before
investing in the U.S. But keep in mind the dollar could fall. And it is at a 30
year high. So I believe now is a good time to invest in U.S. stocks and take
advantage of the high Canadian dollar.

 

Shaw Communications is updated and rated
Speculative Buy at CAN $48.35 or U.S. $46.38. It just released an excellent
quarter and also increased the dividend by 18%. On value ratios it still looks
expensive but I think this may be a good investment due to the growth. I am
looking to add to my position in this.

 

July 12, 2007

 

WOW! a 2% rise in the DOW today. Again it goes to show that the risk of being
out of the market is often greater than the risk of being in the market.
(Although to an academic there is no risk in a sure return of 0%, while even a
return that may vary between 10% and 20% would be considered risky, because it
is uncertain. No wonder most academics are not rich!). As noted a number of
times I have been a bit cautious on the markets. But at the moment sentiment
driver by merger mania is certainly high. It’s okay to ride with the merger
mania as long as we don’t get to a point where the market is clearly
over-valued. We don’t seem to be there yet. The market is not cheap but its not
stupidly expensive either.

 

July 11, 2007

 

With the modest weakness in Western Financial Group I placed an order to
re-purchase some of what I sold at $5.55 and some more at $5.25. Seems a
reasonable chance it will dip at least to $5.50 area…

 

I bought some Telus today on its recent
weakness. I did not see any reason for the weakness although it could be due to
fear that they will mount a bid for BCE. I now hold a large position in Telus
than I do in Shaw. I would prefer to have more
Shaw and will buy it on
weakness. Shaw will release earning on Friday morning and I suspect they will be
good.

 

July 10, 2007

 

A negative day for the markets due to some earnings disappointments and
worries about sub-prime loans (which is also related to U.S. housing price
declines and a U.S. house construction decline which could lead to a general
slow-down in the U.S. economy). If earnings reports in the next couple of weeks
are positive then the market will continue upward. There are always individual
bargain stocks to be found. But it is certainly possible that we are in for a
market decline in the overall market averages. If that happens I suspect that
the type of stocks featured as Buys on this Site will perform better than the
market average.

 

On July 5 I mentioned Wi-Lan shares and indicated I might buy some. I have
now bought some Wi-Lan shares. I bought these on speculation, it is not a
company that can be analyzed based on past profits since it is really just
getting started in the process of beginning to collect royalties on its patents.
It’s not clear how successful they will be in convincing the alleged patent
infringers to pay up.

 

July 9, 2007

 

Walgreen the large U.S. drug store chain
is updated and rated Buy at $43.88 (it closed today at $44.69). It looks well
priced given its growth. I am considering buying. Canadian investors face
currency risk if our dollar continues to rise.

 

I sold my BCE shares for a small profit today. They have been a little
volatile and I am just not that hopeful that Telus will try to make a bid given
the Competition Board issues. Although the fact that the BCE Chairman Richard
Currie has now called them amateurs might provoke them. Ironically, in the same
interview Currie called attacks on the BCE bid process “graceless”. Not a lot of
grace shown by anyone here…

 

July 8, 2007

 

Pet Valu
a pet store retailer is added as a
new company but is rated only Speculative Weak Buy at $12.81. I screened for
some new companies to add and this one looked good with a P/E around 11 and a
very high ROE. And a pet food retailer seemed like a potentially high profit
business given the tendency for ever higher spending on pampered pets. But on
detailed analysis it is not clear that this is a bargain. The P/E turned out to
be about 13 on a diluted earnings per share basis. Earnings have been growing
sharply but that was partly due to the higher Canadian dollar. The store count
is flat and therefore we cannot expect the strong earnings growth to continue
for too long.

 

But it could be bought on speculation that the recent sharp rise in the
Canadian dollar will result in strong earnings growth in 2007.

 

Some subscribers may wonder why I would post a new company that is only a
Speculative Weak Buy. Our policy is that we cannot know the rating until the
analysis work is done. Having done the work here, the rating turned out to be
lower than hoped. But having done the work it is still worth posting as some of
you may hold the stock or be familiar with the stores.

 

I do think the Pet supply retail “space” is worth watching.

 

We hope to be in a position to post a few more new companies in the coming
weeks.

 

July 6, 2007

 

Performance figures are updated. Our three
Strong Buys from January 1 are now up an average of 20.0% each since then.

 

July 5, 2007

 

I am considering buying some Wi-Lan shares. They are now a patent royalty
company hoping to earn revenue by colleting license fees from a large number of
companies that are allegedly using its patents. It’s definitely quite
speculative and is a story stock. It is not proven yet that these companies will
pay the royalties and they could be battling in the courts for years. Nokia has
signed on to pay for use of the patent and I understand another unnamed company
has signed on. Companies have until the end of July to sign on at a reduced rate
or face law suits and a higher rate.

 

BCE moved up 26 cents today mostly near the close. There has been further
speculation about a Telus bid. That still seems unlikely unless Telus could get
an advance ruling that the competition board would okay the merger. But its hard
to see how the competition bureau could possibly give any kind of advance
ruling…

 

July 5, 2007 (before market open…)

 

My buy of BCE at about $41.30 may not do well unless Telus decides to bid
again for BCE (which I doubt). The deal will not close until first quarter 2008.
So I have a long time to wait to collect $42.75 – but I will get dividends along
the way and so the downside seems limited (Teachers unlikely   to back
away form the deal, BCE shareholders likely to approve. The other possibility was
that Teachers would go into the market now and buy up shares.

 

Meanwhile the market overall has done well this week and my purchase of Telus
and Tim Hortons this week looks good so far. (I am supposed to think long term,
but it’s always nice to see things go in the right direction…)

 

July 3, 2007

 

Today I added a small amount to my Tim Hortons shares. I think the recent
price drop provides a buying opportunity.

 

I was thinking about Bell and Telus. BCE is to be purchased at $42.75, the
stock was trading today at $41.30. It probably makes sense that there be  a
discount since the deal is not expected to close for some six months. But there
is still the possibility of a Telus bid (although I think that is a slim chance
and is problematic given the competition Board review). Still I decided to buy
some BCE hoping it will trade up closer to $42.75 and I can make a tiny but
hopefully fast profit. Possibly Teachers Pension Plan will go into the market
and be a buyer. If they can buy now at say $42 that might be better than buying
later at $42.75.

 

I also thought maybe Telus will rise if those who have BCE sell now and then
look to replace it with Telus. Also the BCE bid validates a high value for Telus
and it is possible some of the failed BCE bidders would look to buy Telus. …
So I bought a few Telus shares on that basis.

 

All of this goes against my wish to keep holding cash but I thought these
might be good opportunities…  I would hope to close out the BCE purchase
for a small gain and get that part back into cash.

 

July 2, 2007

 

Home Capital is updated and
rated Speculative (lower) Buy at $36.90. Given its growth we could rate this
higher. But it’s hard to understand how it can sustain this kind of growth in
the supposedly competitive mortgage market. And in a housing recession it could
even face losses if loan losses grew large. But based on the numbers it does
look like it would be a good investment. It has done very well in the past and
the price is almost 5 times higher than when we first looked at it, calling it a
Buy in April 2002.

 

Note, our new business opportunity described above.

 

The latest issue of our free investment newsletter was sent today. You should
have received it. In addition you
can access it here.

 

June 30, 2007

 

Our year-to-date performance figures have
been updated. With the year half over our Picks are ahead of the market.

 

Cognos is updated and rated Speculative Buy
at U.S. 39.70 or CAN $42.48. The company does not appear to be cheap but the
accounting seems conservative in that a tremendous amount of R&D is expensed
under accounting rules  even though one would suspect that some of that
spending represents an investment rather than a current expense. I am tempted to
buy some Cognos. I may enter an order below the market and see if it dips a
little. I am a little hesitant to buy because of my inclination at this time to
raise or at least maintain my cash position in case the overall markets decline.

 

Note that while Cognos trades on the TSX and is a Canadian company, investors
should judge its performance and price trend in U.S. dollars, not Canadian. This
is because it earns most of its money in U.S. dollars. Accordingly it reports in
U.S. dollars and our analysis is in U.S. dollars.

 

Since we first rated the company calling it a Speculative Strong Buy in June
1999, it has risen 269% in U.S. dollars. The rise was 168% in Canadian dollars.
Canadian investors were hurt by the rise in our dollar and this happened even
though the stock traded in Canadian dollars on the TSX.

 

June 28, 2007

 

I sold 25% of my Canadian Western Bank position today. This was not due to
any dis-like of CWB but rather was a desire to raise cash. I considered adding
to my large position in Tim Hortons but did not do so. I may start to add to
this position since I am confident of the quality of Tim Hortons in the long
term.

 

I am current working on an update for Cognos, which will be posted in the
next day or so. Based on the accounting results it looks fully valued. But I
believe the accounting may be conservative due to expensing of R&D. Earnings
were up sharply in the latest quarter and yet the price has declined. I expect
to rate this Speculative Buy. I may buy some.

 

June 27, 2007

 

Another interesting day in the markets. The Dow at one point was down 77
points but then rallied to close up 90 points.

 

Western Financial Group announced today that its convertible preferred shares
would have a dividend of 6.75% and be convertible at a  price of $7.25. On
reflection, maybe this is a good thing. It’s a lot better than issuing shares
now at some price below the market price, as they have done in the past. If the
stock price continues to go up over the years then in effect they will have sold
shares at $7.25. WES closed at $6.18 today.  I hold shares and will
continue to hold and would be interested in adding to my position if the stock
fell back to say $5.50 or lower. The preferred shares might be a good investment
since they mostly insulate an investor from the volatility of the shares and
still leave upside if the shares eventually go above $7.25, which does seem
likely in the longer term.

 

June 26, 2007

 

It was a big surprise this morning to find that Telus had pulled out of the
bidding for BCE. This sent BCE shares down 3% while Telus was initially up as
much as over $2.29 but ended up 19 cents. Yesterday the Telus CEO was asking
that a competition review be done immediately in order that Telus not be
disadvantaged in the bidding. Wow, what gall. Telus should have expected to be
disadvantaged in that they proposed to merge with one of only two other National
competitors in the cell phone industry. We happen to have a legal requirement
for a competition review. (And on the face of it if this deal was allowed the
what point is there to ever  review any deal for competition? This was
clearly going to reduce competition.) This brash CEO thought he could whine and
get his way? I recall that did not work in October when he thought the
government should allow Telus to turn into an income trust. Sure we have too
much government in this country. But  given the laws the government and the
competition bureau has to be shown respect.

 

I said when Telus announced the bid, I did not think the merger would be
allowed. It’s probably for the best that they withdrew the bid. If the BCE was
faced with the highest bid from Telus then it would have had to decide if it
would accept a bid subject to a competition review or go with a clean bid from
the other bidders. My guess is that the Telus Board which apparently met last
night to consider the bid price decided it was not likely the bid would fly. I
think the Telus CEO was prepared to go ahead but was likely over-ruled. If so,
we have a rare case of a Board of Directors actually doing its job and not just
rubber stamping whatever the CEO wants to do.

 

At this point I suppose BCE has some up side. Then again any accepted bid
could take months to close… I am not too keen on the BCE shares right now,
although if they fell to $38 during the bid review that would likly be a good
bet. And also buying at $40 or so might work out well, especially if they
announce an attractive bid in the next few days. There was talk of the
successful bid being revealed by Friday. A bid of $43 might see the stock run up
close to that but then would likley fade a bit as the reality of a long wait for
the cash sets sets in.

 

I would consider buying Telus (the voting shares see below) here as they are
down from recent highs and we had last rated the company (lower) Strong Buy at
$56 so I think $62 is not unreasonable…

 

I notice the Telus voting shares closed at only 42 cents higher than the
non-voting. Often the voting shares trade at $1.50 or even $2.00 more than the
voting (I have not tracked the exact spread so going by memory here). At he time
of the Trust conversion, the spread got tight like this but then went back to a
much wider spread. In the very long run the non-voting are worth the same as the
voting and someday the two classes will likely be come one. But meanwhile there
is a lot of risk the spread will widen. So if I owned the non-voting I would
probably sell now and buy the voting while the spread is tight.

 

Market sentiment continues to look negative. The DOW was up as much as about
70 points today but then closed down 14 points. It seems there are bargain
hunters out there but fear seems to be winning out most days. Toronto has had
some bad days but I always expect volatility based on oil prices and that is
very hard to predict. I mentioned that my own bias is to raise more cash, but I
keep having trouble deciding what to sell.

 

I was tempted to buy more Tim Hortons today but first I may force myself to
sell something as I do want to keep my cash position at its present level of
about 23% or higher.  So far my stocks and our picks in general have held
up very well in this market correction and this has left me less anxious to sell
any of what I hold.

 

June 25, 2007

 

Again today the broader U.S. market showed signs of both fear and bravery
with no clear direction established.

 

Canadian Western Bank
is
updated and rated Buy at $28.26. In recent years it has not seemed cheap but it
seems to keep on doing an imitation of a slower but steadily rolling snowball by
growing ever larger and more profitable. It has jumped in price recently. It
might be wise to take a half position and then hope for a pull-back.

 

June 25, 2007 (pre-market opening)

 

The drop i the DOW on Friday reinforced my defensive outlook on the market.
So far the markets seem to keep bouncing back but with higher interest rates
broader declines seem more likely than gains in the short term. In such an
environemnt it seems wise to trim more speculative positions and concentrate on
more solid companies that have lower P/E ratios. Divend stocks do get hit when
rates rise but at least most of those are solid and tend not to fall
precipitously.

 

My bias at the moment is to increase my cash position but to still be on the
lookout for bargain priced stocks. We will have a couple of updated reports
within the next few days (Canadian Western Bank and Cognos) 

 

June 21, 2007

 

A big story today was that Telus would like to buy BCE. On this news BCE was
up 4% and Telus down 3%. I can’t see this deal being allowed to happen. For
better (or more likely) worse we do have a competition board in Canada. It’s
hard to imagine the competition Board letting this through. Also why would the
BCE Board accept a bid from Telus if there was a big risk it would not go
through? Better to take a lower but more certain bid. On this news I would be
inclined to sell BCE if I owned it and consider buying Telus since it has moved
down.

 

June 20, 2007

 

Today’s 1% fell in the Dow reminds me of the fact that I have a generally
defensive view of the market right now. Markets were still heading down at the
Close today and this could indicate the down-trend will continue tomorrow. This
fall was apparently caused by higher interest rates in the bond markets.

 

Unrelated to this I reviewed some data today that showed that in the past few
years lenders have experienced very low default rates even on junk debt. This
cycle will likely turn at some point. At that point (after it settles out) there
could be better bargains in the debt markets as interest rates jump especially
for junk and other risky debt.

 

I do think stocks are destined to continue to do well in the long run. Still,
I am inclined to want to increase my cash position to build cash for future
investments and to limit my risk at this time. I have not made any decision yet
on what I might sell.

 

 

June 19, 2008

 

Today, Western Financial Group indicated it will issue $15 to $25 million in
referred shares. The market showed little reaction but did push the share price
down a few cents. When I read the press release it is difficult to understand.
They indicated the share will be convertible at a price not yet determined. In
general I view this as negative for the share price at least in the short term.
At this time I might be more interested t buy the convertible preferred shares
than the common shares. I like WES, but the use of dilutive securities like
this makes the stock more difficult to analyse. What tends to happen, as the
earnings improve these things come into the money and suddenly the diluted share
count shoots up. It’s harder to grow earnings per share when the share count
goes up.

 

On the other hand the fact that they are raising money is perhaps indicative
of more acquisitions ahead and those have been good in the long run.

 

By-the-way, I am downtown Toronto this week. They have a very nice waterfront
area here. I was pleasantly surprised when I visited this area this evening.

 

June 18, 2007

 

Another interesting day in the markets.

 

A couple of financial stocks really jumped.
Western Financial Group jumped to
$6.48 although there were probably extremely few share traded at that price. It
ended the day up 3% at $6.05. Partly this may have been a delayed reaction to
the confirmation last week that (as previously announced) it will start to pay a
small dividend. An interesting trading strategy with a small stock like this is
to put in a sell order say 10% above the usual price and just maybe you will get
a sale at a high price. I did not consider selling today because I have already
sold probably too much of this Stock on the way up. Possibly now though the
trading is getting a bit silly. There is a lot of excitement about the dividend,
but the reality is the the dividend at 4 cents per year is less than a 1% yield.
At this point some people are buying WES simply because it has momentum. But
momentum can evaporate quickly…

 

Similarly Canadian Western Bank
was as high as $29.40 before closing up 2% to $28.55 and this was on top of a
big jump of around 6% on Friday. But the higher price did not last long. I was
about to sell some at $29 but the price had slipped to $28.55. Again an interest
strategy would have been to have been sitting there with an offer some 10% above
the recent price. This could give a sell at a good price but also can mean you
sell too early if the stock for example jumps 15% and stays there. I have placed
an order to take partial profits here by selling at $29.50 if it should hit that
price. (I am not sure that that is a good move because this stiock may go higher
than that before too long, but as always nothing is certain in the markets, and
at $29.50 I will have made a very quick 20% as I only recently bought this
stock. And I will only sell 40% of my position)

 

June 17, 2007

 

I rarely do this, but I wanted to let you know about a business operated
by a friend of mine who is also a member of this Site. He is importing unique
products to decorate finer homes and offices. If you are looking for something
special to decorate your home or office check out

http://www.animagusimports.com/retail/catalog/

 

This company is bringing in unique products and can ship to you anywhere
in North America. I have seen the products in person and I thought that they
were very reasonably priced given the size and quality. 

 

Canadian Tire is updated and rated
(lower) Buy at $82.10. This company has often appeared to be fully valued and
not a bargain but then it has managed to out-perform by growing earnings faster
than expected. Our last update in February we called it (lower) Buy at $73.20
and it has done well since then. It has more than tripled since it first was
added to this Site as a Strong Buy at $22.90 on February 4, 2000. Admittedly and
regrettably subsequently under-rated it, even calling a Weak Sell at some times
as the Wal-Mart threat loomed. I personally held it years ago and sold too
early. We had removed it from the Site and then brought it back as a (lower) Buy
at $39.45 for the start of 2004 and it has doubled since then.

 

Investors are often eager to know when to Sell. But as this company
illustrates, it may be that a good time to sell is never reached if the company
keeps growing earnings. When I look at some of the big-ticket items like “Quads”
that they are selling at very attractive prices, I suspect this stock may
continue to surprise to the up-side. The stock has been moderately volatile and
so it might pay to be a bit patient in buying it.

 

Hub international is removed from the Site since it was taken private. Bank
of Nova Scotia is also removed. The report was out of date. We prefer to focus
on smaller banks like Canadian Western Bank.

 

Canada Bread
is updated but rated only Weak
Buy/Hold at $58. The stock has been volatile but with no clear trend since we
added to this site in 2005. While sales have started to grow, earnings even
after adding back restructuring costs have been flat. It is possible that there
is up-side if its parent Maple Leaf decided to take it private, but based on the
numbers this stock is fully priced. If I held it personally, I would likely sell
and move into something higher rated.

 

Target
is updated and rated Buy at $63.79.
This company was added to this Site one year ago (May 29) and was rated Buy at
$48.82. It has done well and is up 31% in that time in U.S. dollars. Most of the
increase in the stock price is due to the earnings increase and the P/E also
rose somewhat. This continues to look like a good investment.

 

June 16, 2007

 

FirstService is updated and rated
(lower) Buy at U.S. $ 36.59 or CAN $38.79. This stock has done exceptionally
well since we rated it (lower) Strong Buy on February 6 this year at U.S. $25.16
or CAN $29.68. This was an example of the benefits of buying a high quality
company. It is a great company. However, give the big stock price increase it is
no longer clear that it is a bargain. At this point it would be prudent to
average ina nd perhaps hope to buy on a dip. If its past growth rate continues,
it will continue to be a good long term investment. It has had a history of
significant stock price volatility which can be frustrating but which has
created buying opportunities in the past. Looking at the long-term, the stock
has almost tripled in U.S. dollars since we first added it to this Site in 2002
at a split-adjusted $12.28. Although headquartered in Canada this should be
considered to be effectively a U.S. stock since the majority of its operations
are in the U.S.

 

June 15, 2007

 

Performance figures for the year to date
have been updated.

 

There was a very strong gain for Canadian Western Bank up 6%  to $28
today. This stock was mentioned as a buy on dip at May 15 and at $24 of April 24
(see below). Given no news today, I am not at all sure that this jump in price
is sustainable in the short-term. But long-term the stock should continue to do
well.

 

June 14, 2007

 

Another surprisingly strong day in the market. In particular Couche-Tard did
well today which comes after a long slide in this stocks – partly the slide was
caused by the higher Canadian dollar. Western Financial had a strong day.

 

Tomorrow, the direction that market will likely be determined by a U.S.
consumer price index report that I understand comes out tomorrow.

 

With the market up, I thought about what I might sell. My second largest
position is Northbridge and so I decided to reduce my position in that stock by
one third. We recently rated the Stock (higher) Buy but I just wanted to reduce
my exposure. We have had some minor storm damage in the West lately. It should
be no big deal at all, but in the past I have seen insurance stocks get hurt
over payouts on relatively small storms, so that was another reason to reduce my
exposure to the property insurance segment. My cash position is now about 23%.

 

June 13, 2007

 

Today’s market rise was a welcome surprise. It illustrates that, as always,
markets are very unpredictable in the short term.

 

June 12, 2007

 

Wal-Mart is updated and rated (higher)
Buy at $50.08. That was the price yesterday. Today it closed at $48.91. It
appears to us that the stock represents good value at this price. We had last
rated this (higher) Buy Nov 29, 2006 at $47.39, and it has risen somewhat
since then.

 

A negative day on the markets. With market interest rates increasing on
government bonds, the negative trend seems set to continue. A couple of bright
spots were Western Financial Group and Canadian Western Bank as well as
Northbridge Financial. Western Financial tends to be volatile and it could
certainly move lower if the negative trend continues.

 

In order to build cash I decided to sell some shares today. Instead of
following my idea of cutting my larger holding proportionately, I decided to
first sell some other positions. I sold my New York Stock Exchange Group shares
because I don’t follow the company and therefore do not have a strong basis to
hold it. Also I sold half my TSX Group position because of concerns about
competition there. I sold my IGM position simply because it was a small position
and I have decided to hold a more concentrated portfolio. I sold my small
position in XEG the oil and gas exchange traded fund because it is not a “stock”
that is rated on this Site. In general these sales are not a comment on the
value of these stocks but rather reflects my desire to hold more cash. My cash
position is now 22% with the remainder being all equities.

 

My portfolio is almost entirely in non-taxable accounts, this allows me to
trade in and out without worrying about triggering taxes. Ina taxable account I
would be more reluctant to take gains.

 

In terms of the Model portfolio, as mentioned on the
model portfolio page, the percentage
of cash to hold is a personal decision and so the model is meant to be a 100%
equity portfolio except when small amounts of cash are parked as a result of a
stock sale.

 

I find myself certainly in a defensive frame of mind, but certainly not in
any panic. The market really has not fallen all that much. If it continues to
drop my inclination is to sell more shares in order to raise cash just in case
the correction does deepen as in that case there will eventually be bargains to
be had.

 

June 11, 2007

 

Our Stock Picks did well today as did the Canadian market. However, the DOW
was flat.  I remain concerned that the recent minor market down-turn is not
over yet. Still, market timing is always difficult and for the most part I will
remain in the market. I am prepared to suffer the risk of short-term declines in
return for long-term gains. As alluded to earlier, I may engage in limited
market timing by raising my cash position from 14% to perhaps 20 or 25%. We also
intend to look for additional bargain priced stocks, as investing in bargain
stocks is a good way to insure against major losses in a market down-turn.

 

June 10, 2007

 

Friday’s partial recovery is encouraging. But it is fair to say that the
market may be “due” for a more significant down-turn than we have so far seen.
Market P/E ratios are perhaps moderately high but not excessive. But given
inflation and interest rate increases and slowing economies and given the fact
that markets have risen for some 4 and one half years, a down-turn of 10% or
more would certainly not be much of a shock. As always I would hope that the
Buy-rated stocks on this Site would do better than the market. Nevertheless a
significant market down-turn would tend to pull almost all stocks down to some
degree. that is simply the reality of the stock market.

 

As I post this late Sunday evening, the Japanese and Chinese markets are up
in Monday trading and so perhaps this will meant hat the North American markets
will not be down tomorrow.

 

The percentage holdings in my personal
portfolio is updated. My largest holding by far is Tim Hortons. Given that
it was not one of the highest rated stocks on this Site (great company but
expensive) and given the recent price decline it now seems apparent that based
on my enthusiasm for this company (despite the expensive stock price) I may have
let myself become over-exposed to this company.

 

Last week I found myself wanting to increase my cash position. But given that
I like the companies I hold, I found it hard to pull the trigger and sell. In
particular I do find it hard to sell shares of companies that we are rating here
as Buys.

 

To combat this I believe I should set a cash percentage target and then sell
proportionally from all or most of my significant holdings. In this manner the
sales I would make would not be an indication that I no longer like any
particular company. Rather it would be based on an indication that I want to
raise cash in case the market does correct further. With commissions of only
about $10 per trade it is feasible for me to proportionately trim back positions
in say 10 stocks and it only would cost me $100 in commissions.

 

My current cash position is 14.3% which is up from about 0% in April.
Depending on the market’s direction this week, I may raise this cash position by
selling proportionately from five to ten of my larger positions.

 

June 8, 2007

 

I sold half my Shaw shares today. This was one of my largest holdings and yet
was rated only Speculative Buy. I think the company will do well. The stock
however had a high P/E and so I was worried about a decline and wanted to move
some funds to cash.

 

June 7, 2007

 

We have had a modest “correction” in the markets and it could certainly get
worse.

 

I believe it is very much an individual decision as to whether one should now
attempt to time the market by selling some stocks in the hopes of buying back at
a lower price, or stay the course. In depends on time horizon and individual
tolerance for loss.

 

So far this week, I have not sold stocks because I do like the companies I
hold and I can’t be certain that the market will continue to fall.

 

If an investor is inclined to sell when the market appears to be going into a
correction, then it is probably not too late. The market is really only down
enough to suggest that a deeper correction may be underway. It is hard to say if
the correction will now end or will deepen. It is certainly possible that a
correction in excess of 10% could develop here. But I see little danger of a
really deep correction because stocks still have reasonable P/E ratios on
average given today’s low interest rates.

 

June 6, 2007

 

A bit of a nasty day with the Down down 130 points. Toronto was down 200 but
I look at the Dow as a broader indicator – Toronto moves with commodities. We
could very well be in for further declines. It’s never easy to decide if one
should stay in the market or instead reduce positions at a time like this and
hope to buy at lower prices. My inclination is to stay mostly in the market
given that I believe I am holding high quality companies that will do well in
the longer term. At the same time it would be nice to have an allocation to cash
in order to buy if the market does drop a material amount. I see little
advantage in holding longer term bonds because higher inflation and higher
interest rates – which seems to be the expectation a this time  – drive
longer term bond prices down even faster than they drive stock prices down.

 

Tim Hortons
has dipped lately. While it
could dip further I view declines in a strong company like that as a possible
buying opportunity. A good strategy might be to average in buying as it
declines. Similarly ING Canada is at low
not seen in over 1 year and this could be an opportunity.

 

Couche-Tard has not done well.
Apparently two senior managers recently left. However I understand that its four
most senior officers remain in place. Part of the frustration for the next level
of management is that the old-guard who own significant shares are in no hurry
to leave. Part of the reason for the decline in Couche-Tard is certainly the
fact that most of its revenue and profits come from the U.S. and the higher
Canadian dollar hurts this company. On this one I would wait for the next
earnings report to see how the valuation looks at that time.

 

June 5, 2007

 

The following was sent by email to all paid members late on June 5:

 

 

The stock markets in general have done very well this year to date.

 

Our main focus is always on individual stocks. In terms of the general
markets I think they may be somewhat over-valued but not in a bubble state by
any means. The long-term outlook remains good for stock markets. In the short
term I note a rather sharp rise in Canadian interest rates (10 -year goverment
yield at 4.5%). Most of the past few years that has been closer to 4.0% and
even lower. Last May it also went up to around 4.6% very breifly and we had a
noticeable decline in the markets at that time. Also there is talk of Bank of
Canada interest rate hikes and inflation worries are surfacing.

 

The factors above are negative for stocks. On the other hand corporate
buy-outs have continued to support stock prices.

 

If your equity exposure is very high, it may be prudent to move some funds
to cash. The decision to attempt to time markets is always very dependent on
individual circumstances and preferences. There is a risk of being in the
market and there is also a risk of being out of the market.

 

 

 

 

Walgreen Company
is updated and rated Buy
at $45.14. This stock seems to be reasonably priced,. If it can keep up its
historic growth levels then this will be quite a good investment. Even if growth
falls somewhat to the 11% range (from 15%)  it will be a reasonable
investment. I do not own this stock but I am very tempted to buy some. Canadian
investors do face the risk that the Canadian dollar will continue to rise.

 

June 4, 2007

 

Loblaw
is updated and rated Speculative
(lower) Buy at $50. The stock is well down from its historic highs. Even when we
add back restructuring, goodwill impairment and related charges identified by
management, our resulting adjusted earnings figure is low and results in a P/E
of 35. It’s unclear what the “normal” level of earnings would be in the absence
of current problems but in the presence of the recent more intense price
competition. We continue to hope that they can resolve their problems and
increase the earnings but it is not clear if this will happen. The price to book
is 2.5 but we suspect that the building assets would be worth far more than book
value…  In the end it is not clear when the problems with this company
will be resolved and therefore caution is certainly warranted.

 

Most of the subscribers to this Site are Canadians. Lately Canadians who
invest in U.S. stocks have been hurt by our higher dollar. The consensus seems
to be that our dollar will continue to rise. From that point of view Canadians
might not want to buy more U.S. stocks.  But then again, with our high
dollar U.S. stocks look cheaper… If there is a very attractive U.S. stock
which Canadians would like to own, it probably makes sense to buy and not worry
too much about the currency. Most Canadians will eventually spend some money in
the U.S. and that offsets some of the risk of a higher dollar. Despite all the
predictions of a higher Canadian dollar, there is always a chance that out
dollar will decline. If a person were certain that our dollar would rise then it
might make sense to buy the appropriate currency futures to capitalize on that.
I view currency futures as a specialized and risky area…

 

American investors who own Canadian shares (those that earn their revenues in
Canada – as opposed to Canadian based companies that earn most revenue in U.S.
dollars) have benefited from the higher Canadian dollar. 

 

FedEx is updated and rated (higher) Buy at
$111.18. This appears to be a relatively simple business. It has brand value and
continues to grow with global trade. This appears to be an opportunity to
purchase a great company at an ordinary (although not particularly low) P/E.

 

Microsoft
is updated and rated Buy at
$30.48. This is a huge and complex company. The investment thesis here is taht
while the share price has bumped along the share price is not much different
than it was five years ago. And it is well down from the breif euphoric peak of
around $60 of 1999. Yet the revenues per share have grown steadily over the
years and the earnings per share have grown. The P/E of 21.5 is higher than the
market average but is not grossly high and would normally be considered low for
a company with an ROE of 40%. Canadian investors face currency risk if our
dollar continues to rise.

 

June 3, 2007

 

Stantec is updated and rated Weak Buy at
$34.20. This has been an amazing stock – rising some 1268% from the $2.50 that
we rated it a Strong Buy at when we first looked at this stock in September
1999.  This growth was supported by earnings to a degree with earnings per
share rising some 400% over those years. The P/E ratio has also risen
substantially from 10 to a present 24, which actually accounts for most of the
stock price increase.

 

Over the years we initially called it a Strong Buy and then Buy or Weak Buy
and it was (lower) Buy at $25.25 for the start of 2007. It seems we have been
conservative by not rating it high enough most of the time…

 

This is clearly a Great Company. It would be easy to change our growth and
P/E assumptions enough to keep on rating it a Buy. But from a conservative value
analysis perspective it is hard to rate this a Buy at this time. Yes, the stock
price may keep rising if it keeps on growing at past rates. But I have to think
the P/E can’t get much higher.

 

I have very much liked its growth strategy of buying private companies at
lower P/E multiples and folding them into Stantec which trades at a higher P/E.
But now there is a danger they could over-pay. The reason is that with a P/E of
24, any purchase at a P/E lower than 24 is accretive to earnings per share. But
if they start paying high P/Es for acquisitions (and I don’t know if they are)
the danger is they would be over-paying. Just because Stantec trades at some
high P/E does not really mean that they get a good return by paying high P/Es in
acquisitions. They continue to buy back shares despite the high price. This may
indicate a lack of discretion in this area.

 

I am just wondering if the stock is now pricing in a rosy future of continued
very strong growth. In such a case we then leave little room for up-side and
lots of room for downside.

 

Also their U.S. based earnings are hurt by our higher dollar.

 

Overall, give the high ROE and the great history we can’t call it a Sell and
we rate it Weak Buy.

 

Regrettably, I sold my Stantec too early some years ago. I do have some in an
account I manage for a relative. Although we rate it Weak Buy, I may sell that
and transfer the money to something we rate higher. (This is a non-taxable
account and has a 75% gain on Stantec achieved in a relatively short period…In
a taxable account I would be less inclined to sell)

 

 

Our performance figures including the graph for 2007
are updated.

 

June 1, 2007

 

A strong end to the week with renewed interest in the bids for BCE driving up
the telco / cable sector.

 

I am in Fort McMurray right now, my first trip here ever. I have a little oil
sands tour tomorrow. It is amazingly warm here, over 30 Celsius, and probably
the same tomorrow. If you are ever here in Summer I highly recommend the jet
boat tour of the river. A one hour tour that includes some of the history of the
City and the role of the river. Incredibly we saw a couple of groups of young
people swimming in the river. (Don’t tell Al Gore, or David Susuki, they will
blame global warming…).

 

I noticed two Tim Hortons here both lined up out the parking lots, despite
the hot day… While the stock has slid down and certainly could slide back
further I do think it is a reasonable investment at this price. Likely to do
well in the long run…

 

We will have several updated reports within the next few days.

 

May 30, 2007

 

The S&P 500 finally closed at a new record high after 7 years. In some ways
that could be interpreted to mean no money was made in stocks in the last seven
years. The reality is that anyone who kept investing every year in the S&P 500
has made money. Those who started investing around 2002 or were making larger
investments in recent years have done well.

 

I’m not sure that this record S&P 500 close will generate much excitement…

 

I sold a bit more of my Western Financial today. I then entered an order to
buy around $5.10 and would not mind seeing it take a  dip to $5 or below.
But it certainly has momentum lately and maybe will not take such a dip.

 

As the Canadian dollar continues to soar any Canadian who invested in U.S.
stocks feels some pain. The natural reaction is to now favor Canadian stocks. In
reality we clearly have a good opportunity here to use our high dollar to
diversify into the U.S. and other countries. Sure maybe the dollar will keep
rising, but at some point if you don’t put some dollars outside the country then
you could miss the boat and see our dollar slide back. I am of the view that
over the longer term the movement of our dollar against the U.S. will not be
that large. For example if our dollar rises to say $1.14 in say 10 years , that
would only be 2% per year and if one could make 2% higher in some U.S. stocks
then that would be a wash. And I feel I have no ability to predict where our
dollar will go. I do have trouble believing our economy can withstand it getting
much higher. And it could certainly go lower.

 

Of course those Americans who bought Canadian stocks are smiling all the way
to the bank. This should create more interest for Americans to buy Canadian
stocks, which is a good thing.

 

May 29, 2007

 

Western Financial was up again today. I did have some correspondence with the
CEO today and he explained that the reason that he sold shares recently was
because an interest-free loan from the company that he had used to buy the
shares some years ago, had to be repaid. So that takes away what I thought was
quite a negativee factor. I have revised the report a bit for that. Perhaps I am
being too conservative but I an leaving the rating at Weak Buy / Hold at $5.42.
I may sell a few shares and try to buy back at a lower price. But I will
definitely continue to hold some shares.

 

My Tim Hortons Pick has not done so well
lately. There is probably no reason to expect it to recover until and unless Q2
comes out and is positive in late July. But long-term I definitely like this
stock. Today in the Financial Post there was a story they may have to close a
few stores in Southern New England. I was already aware that they have a few
poorly performing stores in Southern New England and this was mentioned in my
note under May 6 below. I believe those are stores from a chain that they took
over and re-branded so this situation may not have happened had they built their
own stores and chose the locations. In any event it does not seem like such a
big deal to me but does indicate expansion in the U.S. will take time. My view
is that this could be an opportunity to average in as the price declines.

 

May 28, 2007

 

Western Financial Group is
updated but rated only Speculative Weak Buy / Hold at $5.42. This stock is up
99% since we first added it to the Site as a Speculative Buy at $2.73  in
September 2004. Subsequently it fell to $1.96 where we rated it Speculative
Strong Buy at $1.96 and it is up 177% since then. It has grown a lot over those
few years, but the share count also went up a lot. In the past 3 months it has
jumped from $4.25 to $5.42 on the strength of a very good Q1 and strong
prospects. It would be easy to get over-excited and keep buying. But the stock
has tended to be volatile. On a number of occasions they have issued equity
below the market price. They just announced a pending acquisition and my fear
would be that they would issue shares to pay for it and might have to issue at
$5 or so (that is pure speculation on my part). On the one-hand it is a growing
company and will likely be a good investment if held for the next five years. On
the other hand I am nervous about this higher price and believe it could easily
come back under $5.00 I trimmed my position at $5.38 and do not regret that. I
may possibly trim more but will definitely hold some. I like the company a lot,
but the share price seems somewhat high.

 

May 27, 2007

 

An edition of the free newsletter was sent late Saturday night. If you did
not receive the email, here is a copy of what was sent access it here

 

 

Fellow investors, please click the link below to access the latest edition
of our investment newsletter.

 

http://www.investorsfriend.com/May%2027%202007.htm

 

This issue I take a look at the mathematics of how to eventually grow a
portfolio into the $3 million range or even the $10 million range.

 

I review why Warren Buffett, by age 20,  did not merely THINK or HOPE he
would become rich, he KNEW he would. – Because he had a PLAN and so can you.

 

I discuss the pontential for a Registered Retirement Savings Plan to grow
to $100,000 and a bold idea to find another way to pay for college allowing
the RESP to become the seed money for an investment fortune for your child. 

 

I also discuss some of the expected winners and losers that will emerge due
to the recent surge in the Canadian dollar.

 

 

EBay is updated but remains only a
Speculative Weak Buy / Hold at $33.01. Given its stature it is worth monitoring.

 

May 24, 2007

 

With Western Financial up 10 cents this morning I decided to take some
profits and sold 3000 shares at $5.38 to hold 6500. Also I decided to take some
other profits as well. BCE was back above $39 and I sold my BCE shares which I
had bout very recently at $36.03.  I also decided to sell my Telus shares
since they were at about a record high. If the BCE bidding cools a bit both of
these would fall and I may get a chance to buy back in. 

 

Longer term interest rates in the U.S. rose today on the news that the prices
on new houses fell 11%. My sense is that we are quite likely to see some sort of
decline in markets.

 

May 23, 2007

 

The S&P 500 failed to close at a new high despite flirting with this for the
third straight day. This was blamed on Alan Greenspan’s comments about China’s
stock market being over-priced and ready to burst down. I read something about
stocks in the same company that trade higher in China than they do in Hong Kong.
If true, that is scary. I’m beginning to feel that the market is due for some
kind of correction. Long-term interest rates are creeping up and yet the market
has not reacted. Still, I am reluctant to sell much right now given the recent
upward trend and the buy-outs. Strong cash flow companies will likely fare well
in any correction.

 

With Canada’s higher dollar, any company that has a majority of earnings
outside of Canada could be hit with lower earnings and a lower stock price in
terms of our dollar. It would not change the true trend of earnings growth for
such companies but would lower their earnings. An example is Manulife. I have
been amazed that Manu life managed to grow earning very strongly these past few
years as our dollar soared. Partly it may be offsetting liabilities in the
foreign currencies, but I think the dollar will hurt Manulife. Canadian
Manufacturer’s would also be hard hit. A company like Dalsa would be hit
somewhat. Others that are affected include Kingsway, Cognos, Thomson and FirstService. These company’s should be judged by their performance and share price
in U.S. dolalr terms but even if they stand still in the U.S. they decline in
Canadian dollars.

 

But I don’t regret having some exposure to U.S. equities or Canadian
companies that have exposure to the U.S. dollar. Our may very well trend higher,
but I would not try to get too cute and for example get out of U.S. stocks on
the hope of buying in later with a stronger Canadian dollar.

 

A good day for Western Financial Group on the news mentioned in yesterday’s
posting here. It opened at $4.95 (only up about 2 cents) but got as high as
$5.48 and closed at $5.28 on over double the normal volume. This was a rare case
where the market was slow to react to the news in the morning. I grabbed 1500 at
$4.96 (Almost bought more but chickened out). This is a great growth story.
However as I look at the value ratios it is hard to justify this price. I have
some concerns about the way the share count has grown due to dilutive
securities. More shares appear in the diluted share count as convertible debt
came into the money. Also there were preferred shares issued last year and
apparently these are convertible into a lot of shares. I like the story here,
but not so much the price. I may reduce my position particularly if it goes
higher tomorrow. I will update the report on this company within a few days.

 

May 22, 2007

 

The S&P 500 failed to close at a new high after flirting with it two days
this week. Hopefully it makes the push across that line tomorrow (Wednesday) or
else the technical guys will probably conclude the old record is a resistance
level and failure to cross it would be negative from that perspective.

 

I added to my positions in both Northbridge and ING Financial today.

 

My next update will likely be
Western Financial Group and then WalGreen. I was reading the Western annual
report tonight and was impressed with the Growth and the optimism. I have said
before that CEO Scott Tannis is building a growing business there and it might
be a good idea to tag along. Coincidently, they just announced they bough a
small Bank to merge with their Bank. I don’t think they released the price paid.
The Bank acquisition is $125 million in loan assets, which is very tiny by Bank
standards but big enough for Western and it gives their little Bank needed
scale. Hopefully they can finance without issuing more shares. It may not be
more than a $25 million or so acquisition, we shall see.

 

Maybe it’s a good think their Chairman, Jim Dinning did not win the
conservative leadership and become Premier. I have a lot of respect for Dinning
and if he can focus more attention on Western Financial that is great. If
Western does not jump tomorrow it might be worth picking up some shares. But I
would not buy too much at once, their shares tend to be volatile and so their
may be better opportunities to Buy later on, so on this Stock I would average
in…

 

May 21, 2007

 

Northbridge Financial
is updated and
rated (higher) Buy at $34.07. This is a property and liability insurance company
operating 90% in the commercial (non-residential) market and about 87% in Canada
with the remainder in the U.S. The stock is up 12% since we called it a
Speculative (higher) Buy on February 24 at $30.49. Longer term it is up 70%
since we rated it a (higher) Strong Buy in February 2003 at $20.20. However, in
the last 20 months it is has been frustrating as it reached $35 several times
only to fall back to the $30 range. The set-backs were mostly related to
hurricane losses that happened in 2005 but for which the loss estimate was
increased several times. They have since exited that volatile business. Still,
unpleasant surprises are to be expected with insurance stocks. Overall this is
not a growth story but is a value story. It appears to be a company that making
attractive profits over the long term and which is available at about 1.26 times
book value. With some exceptions, buying insurance companies at this lowish
multiple to book value usually turns out to be a good investment.

 

At the last update we called Northbridge Speculative – that is because it is
unpredictable. But as a solid usually profitable company it is not particularly
speculative and so we have dropped the Speculative word from the rating this
time. Recently the price jumped a couple dollars to $35 and then fell back to
$34.07. These are reasonable entry prices, but possibly it will fall back to the
$33 level…  The Q2 earnings will likely boosted by a large gain of about
$1.75 per share on the sale of its shares in HUB International.  while that
is a one-time event and is already known, it may still provide the support to
push Northbridge up somewhat. There is also a possibility that its controlling
parent Fairfax could either sell it or take it back private.

 

Northbridge appears to offer better value than ING Canada at this time.
However, with insurance stocks it seems preferable to spread an investment over
several rather than making too large a bet on any one company. I may increase my
position in this stock.

 

May 20, 2007

 

If the U.S. market rises this week, that should push the S&P 500 index to a
new record, finally regaining its high close from March 2000. Making a new high
after 7 years is nothing to write home about, but still it could generate some
excitement in the markets.

 

May 19, 2007

 

ING Canada is updated and rated Buy at
$48.11. It recently released earnings. Although earnings were down from the very
high level of Q1 last year, they were still very good. Most of the value ratios
look very good, but the Price to Book value at 1.9 may be somewhat high for a
financial company. Earnings will continue to be volatile and unpredictable which
is the nature of property insurance companies. Earnings may continue to trend
down from recent very high levels. But this is a very well run company and it is
lower risk than the other property insurance stocks that we feature because it
focuses on lower risk mostly residential business. I intend to add to my
position in this company.

 

May 18, 2007

 

Our Performance figures for this year have
now been updated.

 

If you need to change credit cards in PayPal see the link near the very top
of this page to a short article
that covers some tips on how to do that. If the credit card is changed
PayPal requires you to go in and find the subscription to investorsfriend and
then update the funding source for this subscription. Otherwise when the old
credit card is expired or is deleted from payPal they automatically cancel the
subscription to investorsfriend.

 

May 17, 2007

 

The market continues to show good strength. It was good to see the Telecom
and cable stocks rise today on news of renewed interest in BCE. Hopefully that
continues.

 

Currency Moves

 

The Canadian dollar has risen back past the highs of last May and so is at a
high not see in I believe 20 years. As it continues higher this hurts our
investments in U.S. dollars. And it could very well go higher given the trend
and given that the consensus is that Canada is more likely to raise interest
rates then is the U.S. and given that higher oil and commodity prices tend to
push our dollar higher.

 

But when it comes to investing in the U’S’ I am not going to be too bothered
by the risk that our dollar could move higher. There are several reasons for
this.

 

1. Like most Canadians I will likely have a need for U.S. dollars at some
point for short visits to the U.S. and in later life longer visits or even
winter residence in the U.S. Therefore having some U.S. investments is a hedge
against our dollar moving lower. If I had substantial non-registered assets I
would definitely consider having a U.S. dolalr account for U.S. invesments and I
would monitor  the value of those assets in U.S. dollars and not worry
about the value in Canadian dollars, since these would be dollars destined for
U.S. spending.

 

2. It’s always possible our dollar will fall. If it falls then it will turn
out that buying U.S. stocks now iwas a good move.

 

3. In the long term of over ten years, the currency movement will not likely
be all that large. I would hope to double or triple my money based on U.S.
returns over a ten year period. If the investment is up say 150% in ten years,
then even a 20% movent in the currency over that period is not a big deal.

 

I believe that his high dollar will be very bad for exporters and for the
tourist industry. The tourist industry will also be hit by moves to require
passports for Americans that visit Canada via air travel. Ground travelers from
the U.S . don’t need passports (yet) but may stay home thinking they do need
passports. My suspicion is that a huge percentage of Americans don’t have
passports and will not get one. Ontario could be hurt badly.

 

Inflation

 

Recent figures show that inflation in Alberta has really taken off. As a
resident of Alberta I was surprised that inflation seemed pretty tame at about
3.5% annually through most of 2006. By March 2007 the year-over-year rate was
5.5%. Recently apartment rents in Alberta have truly sky-rocketed and with that
and labor shortages, I would not be surprised if inflation in Alberta zooms to
the 10% range. That would be very significant and could lead to lots of labor
trouble. Government unions are going to want raises tied to inflation but the
government will not want to give them.

 

It’s gets interesting because Alberta almost needs the brakes to be applied
such as through higher interest rates. But the rest of Canada has inflation
close to 2% and could use lower interest rates to stem the rise in our dollar
which as noted above hurts both exporters and tourism.

 

As we update various companies we will be thinking about how our higher
dollar may be affecting them.

 

May 16, 2007

 

Target
is updated and rated Buy at $58.01.
(it’s $56.92 as I post this). It’s got attractive profitability and past growth
and should be a good long term investment. In the short-term recession could
temporarily slow it down but as a discount chain it should not suffer too badly
in a mild recession.

 

May 15, 2007

 

Buy ’em when they’re down? A reasonable strategy is to buy good
companies when they dip in price. If they truly are good companies then they
will bounce back. However, when a company slides down on bad news it is usually
difficult to have the courage to buy.

 

In the past seven months CNR got to $55 and then had dips back to around $50.
Early this year it was affected by strike action and by poor weather. Given that
the stock is now at $58.78, it looks like buying on those dips would have been a
good idea.

 

A number of our Picks have dipped from their recent highs and are worthy of
consideration for a Buy on dips strategy.

 

TSX Group – down on concern of a possible future competitor

 

Telus and Shaw are down from the recent highs that they reached in the
excitement over the BCE bid and the run-up in BCE. They could regain those highs
if related merger and acquisition activity heats p again or may do so by Fall
based on earnings results.

 

NYSE/ Euronext symbol NYX – Not a stock we have analysed but I have commented
on it before and do own it. The stock has lately been volale and is currently
down at an eight month low. The P/E is shown at about 52 by Yahoo so that seems
very expensive.  But the NYSE is still transitioning from its former
essentially non-profit days and its profit has been rising sharply. Given the
brand name I felt it likely has some competitive advantage and pricing power.
It’s hard to get a feel for such big numbers, but it’s $12 billion market cap
seems reasonable compared to the TSX at $3 billion. I consider it speculative
given that I have not analysed but simply note that this mght be a reasonable
entry point on the expectation the price will recover…

 

Couch-Tard – Down due to lower profits on gasoline sales but management
expects that to be temporary and the company continues to grow. Should be a good
long-term investment.

 

Tim Hortons – Down from recent highs, could rise in 3 months if the Q2 report
is good. I think we can have good confidence that even if volatile it will very
likly be higher in 2 years.

 

ING Canada – Down due to a more competitive environment for property
insurance. It remains the only pure exposure to strictly Canadian standard home
and auto insurance. A blue-chip type stock. A good candidate to buy now on the
assumption it can recover.

 

Canadian Western Bank – recent dip should be an opportunity to buy…

 

Kingsway – another possible candidate but I do consider it more speculative
due to recent and ongoing issues regarding its insurance profits and retroactive
changes to estimates made in prior years.

 

Tomorrow I will review my holdings and will likely add to my position on one
or more of the above.

 

May 14, 2007

 

Over the weekend I sent out the latest edition of our
free newsletter, which you should have
received.

 

late last week I sold my shares in Pason, a company we used to cover but no
longer do. I did not analyze the results so I sold without a lot of basis to do
so. I generally think very highly of Pason. They seemed to be signaling a poor
quarter or two coming up so I decided to sell and try to buy back later at a
lower price.

 

May 11, 2007

 

It seems like there is no stopping this market. The DOW roared back from its
little setback of yesterday. I am somewhat worried about the soft retail sales
figures in April. Today, the market seemed willing to shrug that off. If retail
sales are poor in May then that would likely put a damper on the market. But in
that case interest rates would stay and low and so it seems unlikely that we
would see any huge market correction. I am hoping that the S&P 500, next week,
can finally and at last pass its old record from year 2000.

 

May 10, 2007

 

Western Financial Group came out with very strong earnings today. Given the
recent increase in this stock, this kind of growth was probably largely priced
in. The stock did not move today on the news. But I think it is possible that
these earnings will push WES up somewhat in the next few days. I have not yet
updated our report. I suspect it will not look like a real bargain, but if it
can keep growing at anything close to the recent pace this will be a good
investment. If it happens to fall in price I will be looking to add to my
position.

 

May 9, 2007

 

EGI Financial
came out with quite good earnings
today but the stock did not react. It’s thinly traded and so may be slow to
react or perhaps this good news was already “priced in”. I would consider adding
to positions at this price (about $12.30)

 

Shaw has come down in price partly I think because the excitement about BCE
that had pulled it up has die down. It’s always hard to buy on dips but I would
consider adding to positions as it drops. I think it will do well, unless
competition with Telus erupts into a pricing war. It would be nice to see
Buffett buy into this as well (fit’s the bill as a family controlled
cash-positive business with to some extent monopoly like characteristics – but
as always Buffett might not like the price and never gets into bidding wars).
Foreign ownership rules would prevent Buffett taking full control but he
sometimes gets around such rules by leaving the votes with the family. Anyhow,
it’s probably not for sale. The Shaw’s are having a great time owning it and
collecting lots of dividends so why sell?

 

May 8, 2007

 

Thomson fell 3% today on the confirmation that it will bid to buy Reuters. I
am not in a position to judge if they are paying too much. The fact that they
are buying at a time when many companies are buying could suggest the price
might be high. I do like the economics of selling electronic information. As I
understand it this move would leave just two major players in the financial
information field, Thomson-Reuters and Bloomberg. Bloomberg apparently has no
history of competing on price. So it should be possible for both Thomson and
Bloomberg to make high returns in this business. The acquisition at around $17.7
billion U.S. is large for Thomson which has an equity value around around $26
billion U.S. and another $4 billion in debt. This will increase the size of
Thomson by over 50%.

 

It seems to me that Thomson made a very smart move to get out of newspapers
some years ago and focus on providing subscription based information to
businesses and to do so increasingly in electronic formats. Those smart changes
were made under the watch of current CEO Richard Harrington. (He will retire and
the Reuters CEO will take control if this friendly take-over proceeds).

 

A situation like this certainly makes the Thomson stock more risky. It will
take some years before we would know if the take-over was a wise move. Still,
with the stock down I am certainly inclined to hold my position and if did not
own any I would consider buying.

 

The Thomson stock price in Canadian dollars has also been hurt by our higher
dollar. Since it earns most of its revenue in the U.S. it is really in substance
a U.S. company and the stock performance should be judged in U.S. dollars.

 

I had pondered whether Warren Buffett might have been interested in buying
Thomson – assuming the family would sell. It might be the type of company that
he likes – though he might not like the price. Buffett often buys
family-controlled businesses, but only with the cooperation of the family and
never in an auction situation.

 

Another one I would like to see Buffett buy in whole is CN but that is
probably quite unlikely. It would be nice though if it turns out this is one of
the rail roads he has been accumulating shares in.

 

May 7, 2007

 

It is encouraging to see the DOW and S&P 500 continuing to go up. In addition
private equity deals and mergers and acquisition activity continue at a fever
pace. Therefore market sentiment seems strong.

 

May 6, 2007

 

Kingsway is updated and rated Speculative
(lower) Buy at $CAN $20.48 and U.S. $18.50. Q1 was disappointing because of yet
another retroactive reserve development related mostly to 2004 and 2005 and
related mostly to U.S. trucking insurance. This is an actuarial increase. Partly
it may reflect a more conservative estimation approach. Kingsway’s earnings are
volatile by nature. It seems clear that “the market” is not pleased with the
unpredictability. It would be easy to rate Kingsway no higher than a hold. But
it does look attractive on a price to book value basis. Sometimes good
opportunities arise by buying on bad news. The recent problems relate to
retroactive claim estimate increases for past years. The company indicates that
current profits would be quite attractive if not for the retroactive issue. If
there is no further retroactive problems then the reported profits would
increase to attractive levels.

 

Tim Hortons is updated and rated Buy at
CAN $34.99 or U.S. $31.53. It is not a cheap stock and in rating it Buy (as
opposed to Hold or (lower) Buy) we are giving weight to the quality of the
company. It probably has the highest consumer loyalty and brand value of any
large Canadian company.

 

Q1 was not as good as I had hoped but it was still a good quarter with 14%
revenue growth. The company has room to expand in Canada particularly in the
West. The U.S. expansion will likely proceed slowly and will take heavy
advertising to build awareness. In particular the company has had trouble with
about 60 locations mostly in Connecticut and Rhode Island. The Company is
running these units directly and having difficulty getting franchisees due to
lower sales.

 

Just over half of the trading takes place in New York, which may indicate
that U.S. residents still own perhaps half the she shares. U.S. residents have
enjoyed stronger returns recently due to our higher dollar. Possibly, this
explains some of the price weakness recently as U.S. residents may be taking
profit as our dollar rises.

 

I see this as a good long term bet, not a company that is likely to shoot up
in value but also one where there is little chance of losing money over a period
of years and certainly some chance for returns in the low double digits. My
strategy is to hold the stock and to add to add to my position on dips.

 

May 5, 2007

 

The TSX Group is updated and rated Speculative Buy at $43.74. This stock fell
significantly on Thursday after the big Banks announced they plan to develop a
competitive trading exchange. This is viewed very negatively, given that TSX has
enjoyed essentially an unregulated monopoly position to date. The stock is
speculative now because it is not at clear what the impact of competition will
be. The Banks may take only a niche slice or they may take a big slice. This
will not start for about 1 year. Meanwhile the TSX still is very profitable and
has a number of plans for expansion. It may be unlikely but a take-over offer is
also perhaps possible. The stock did recover somewhat on Friday.

 

TSX had a weaker Q1 for earnings, but that was mostly due to growth-oriented
spending initiatives, the revenue growth remained strong.

 

It is always hard to wade in and Buy when a stock is down like this. I feel
comfortable holding a modest (4%) exposure to it but given the uncertainty I
have no plans to add to my position.

 

On Friday, I added a small amount to my Tim Hortons position.

 

Sobeys is removed from the list above given that it is being taken private.
We had under-rated that stock based on its weak earnings. We had noted that it traded
(previously) at only about 1.3 times book value and that it was likely trading
at less than market value of the assets. This is an example of the concept that
“value will out”. When a company trades at less than market value of assets
(because earnings are low), it can often be a good opportunity because there is
safety in the market value of assets and because sooner or later that value
tends to be released.

 

I suspect Loblaw is far to large for Weston to ever take it private, but
still the valuation of Sobeys may be an indication that eventually a way will be
found to realize more value from Loblaw.

 

May 4, 2007

 

Performance figures (see links above) are updated. Our Picks took some hits
this past couple of weeks (most notably TSX Group and Kingsway Financial).
Nevertheless, our performance in the year to date is still good.

 

May 3, 2007

 

There is a LOT happening out there

 

TSX Group fell 12% to $41.77 after the big banks jointly announced some kind
of competitor system. I have said before that TSX Group was obscenely profitable
and was effectively an unregulated monopoly. Given the high profits of the TSX
it is not all that surprising that a competitor would try to come in. The TSX’s
former president Barbara Stymiest had moved to RBC last year and I suspect this
may have been her idea. Normally, it would be very difficult to mount a
competing exchange and gain traction with customers. In this case the big banks
probably represent a large percentage of the TSX customer base and therefore may
be able to mount an effective competitor. It is not clear if the new competitor
intends to go after most of the TSX’s business or just a smaller portion. It’s
very hard to say if the TSX Group’s share price will now go lower… We intend
to update our TSX Group report by Sunday.

 

Tim Horton’s reported earnings per share that were lower than last year. But
that was mostly due to a very low tax rate last year. The stock will likely fall
tomorrow. The U.S. same-store was only 4.0% which will be viewed negatively.
It’s my view that U.S. sales traction will take a few years and a lot of
advertisement investment, but they will ultimately do well in the U.S. Dunkin
Donuts outlets appear to look like poor cousins compared to Tim Hortons, and
Starbucks is a different market. Canadian same-store sales growth was 6.3%, down
from a stellar 8.7% last year. But it seems to me that 6.3% is very good, we
can’t expect these little locations that are already lined up to continually
increase volume, it looks like they are producing a maximum volume already in
many locations. The real growth in my view is from added locations and they
expanded the store count by about 6.5% in 2006. In Q1 revenues grew by almost
14% which is very strong growth. It seems clear also that the company could
raise its prices and add to profits in that way if it wanted (although the bulk
of any price increase would go to franchisees). We intend to update our THI
report by Sunday.

 

Kingsway was down 13% for the reasons mentioned in yesterdays post here. This
has been a very disappointing company. But at this point it is down around book
value and for that reason alone it should turn out to be a good investment over
the next couple of years. At this point though I am glad I had reduced my
position earlier this year. It’s not a stock I want to get over-exposed to.

 

Northbridge Financial reported after the close. While its profits were down,
I believe they were still excellent profits. They made 6.5% profit on insurance
(before investment earnings) and note that Warren Buffett considers it
acceptable to break even on the insurance and let the investment side make the
money, so making 6.5% on insurance is outstanding. This stock is not well
followed. If the stock is about flat tomorrow then I believe this would be an
opportunity to Buy.

 

Our picks have taken some hits in the last week or so. But I am encouraged by
the continued rise in U.S. markets. It is the nature of stock markets that they
go down at times. But over the years being in the markets gives you a share of
the profits of large corporations and it usually brings a very good return over
the long term.

 

May 2, 2007

 

Q1 earnings releases are now coming in.

 

Kingsway reported poor results after the close today. The market will not be
pleased that is is once again reporting retroactive losses. The company contends
that it is currently quite profitable except for large retroactive adjustments
to insurance loss estimates of prior years. The stock will likely drop quite
materially tomorrow (Thursday). If what the company says is true then
ultimately this will still prove to be a good investment. Admittedly it is
getting very hard to believe this company. They have not been on their game.

 

I added a small amount to my Western Financial yesterday at $4.71. I placed
an order to buy more Tim Hortons if it falls to $34.75 (corrected I had said
here $34.5)

 

The Dow has continued its march upwards… This bodes well blue-chip type
stocks.

 

With the Canadian dollar rising, now may be a good time to buy U.S. stocks
(on the assumption that our dollar is unlikely to rise much more and could
fall).

 

April 30, 2007

 

CN is updated and rated (higher) Buy
at Canadian $55.61 or U.S. $50.24. The stock has done well despite a Q1 that was
weak due to weather and labor problems that were likely temporary. The Canadian
price is also hurt by the higher Canadian dollar.

 

Our Picks have suffered some declines in the past few trading days. Partly
this reflects the big run-up in cable and telco stocks which has now cooled
somewhat. BCE has cooled as the market realizes the sale/auction will likely
take some six months. This has affected telcos and cable companies.

 

Tim Hortons will report earnings on Thursday. Apparently the market is
expecting 32 cents earnings per share versus 39 cents last year. This may
reflect some one-time items. I think the strength of Tim Hortons is obvious and
that earnings will almost certainly continue to increase. If Q1 shows an
earnings decline and the stock backs off below CAN $35 or U.S. $31.50, this
would be a buying opportunity. I have great confidence in this company for the
long term.

 

April 26, 2007

 

The late-in-the-day announcement that Sobey’s controlling parent would buyout
the trading shares at a 50% premium was big surprise. It reinforces the notion
that these acquisition type deals may keep pushing the market higher. It also
reinforces the value of cash flow producing companies. It may fuel speculation
that Loblaws will also have to do something to increase its share price. The
share price jumped about 51% to just a few cents below the offer price.
Therefore, I see no opportunity to get in on this at this point. If I held it I
would tend to sell at prices above $57 rather than wait for the full $58 offer
price – which could take some time.

 

ING Canada
has slipped all the way to $48.
Possibly “the market” knows that Q1 was not a good quarter. But I have no reason
to suspect that. The nature of property insurance is that earnings can swing
quite wildly due to the impact of storms and even retroactive adjustments to
prior years. Overall, I have long considered ING to be probably the highest
quality property insurance company in Canada that trades on the market but it
has been expensive. It is still not cheap, but I suspect at $48 this will turn
out to be a good investment. I may add to my position. I checked insider trading
and there was none in 2007 other than when the company bought back shares in a
dutch auction at $54. The parent company did sell some shares into that auction.

 

Dalsa reported earnings after the close.
Earnings and sales were disappointing but the backlog was up and the outlook
seemed improved. My sense is that the company is more valuable than its earnings
would suggest. I believe that soon some film makers will start using their
digital cinematography camera. They are very confident that they have the best
product and it seems a safe bet to assume that digital will eventually replace
film in motion pictures. I consider the stock somewhat speculative due to low
earnings. But it also has little debt and is cash flow positive and it trades at
only about 1.25 times book value all of which should provide some down-side
protection. If the shares fall on Friday then I believe that this will be a
buying opportunity.

 

It was mentioned in today’s Financial Post that BCE bonds have dropped as
much as 16% in price due to credit worries associated with the possible buy-out
of BCE. However bond holders are working to try to protect their interests. A
reasonable trade now would be to buy the particular long-term BCE bonds that are
yielding the most. This would be based on speculation that when the dust settles
the BCE bonds will still have a strong credit rating (that is unknown at this
point). I have little experience in buying bonds. Be careful because the trading
commission is hidden in the bid/ask spread from your broker. Ask your broker for
the bid/ask in terms of percentage and try to negotiate. Be aware that buying
long-term bonds is also effectively a bet that interest will not rise. I would
not bother with this trade unless willing to invest at least $10,000. Having
little cash right now, I will not try this trade.

 

My old “friend” Clemex inc. is
showing signs of life at last. It reached 31 cents today on volume that is much
higher than normal for Clemex but which is still just small dollars of volume.
This recent price has been as low as about 20 cents. I know of no news to
account for this. I am not inclined to Buy but hold onto my very long-standing
and money-losing position. Those interested in speculating on such penny stocks
might consider a small bet on it, but I have no great faith that anything much
will happen. It would be nice to see a buy-out but I would really only like to
see that at 50 cents or hopefully higher. They seem to have great technology but
questionable marketing over the (way too many) years that I have followed it.

 

April 25, 2007

 

It was nice to see the DOW go through 13,000 so decisively, closing at 13,090
for its first ever close above 13,000. It’s just a number but I think it does
indicate that the buying enthusiasm in the market. The S&P 500 should soon close
above 1500 for the first time since I believe 2000. It does not have too far to
go to surpass its all-time high. In many ways that is nothing to brag about, we
expect markets to go up and so it’s a about time it did pass that old high. But
the old year 2000 high was at the top of a bubble. This time around the index
deserves to be this about high and so is much more sustainable than it was in
2000.

 

Many people thought that the rally that began all the way back in late 2002
was a sucker rally and that based on chart patterns from 1929 and from Japan
they thought the DOW would fall back below it’s year 2002 lows. Many of those
bears are still waiting, having missed out on tremendous gains since late 2002.

 

I entered an order for some shares of
Western Financial at $4.71, the low today was $4.76, on relatively light
volume. I like the company and would not mind seeing it fall temporarily so I
can buy more.

 

April 24, 2007

 

In the next week or two, Q1 earnings results should be a driver for many
individual stocks…

 

As some of the excitement over BCE has warn off, Telus and Shaw have also
dropped… The Pension plans still have to bid enough to entice the BCE
shareholders to sell and that could be an amount of $40 or $42 or more. If the
bid comes in that high then Telus and Shaw should climb back up. Either way both
Telus and Shaw seem set to continue to rake in higher cash flows.

 

While some of my stocks lost ground the past few days, it was good to see
that the DOW kept rising. I consider the DOW more of an indication of the trend
given that the TSX is so volatile with energy.

 

I hold some NYSE Euronext Inc. I have not analyzed the stock  and I
believe it has a very high trailing P/E ratio. But I hold it in hopes that it
can ultimately earn high profits like the TSX has and other exchanges have. But
unlike the TSX, the NYSE faces active competition. lately it has been volatile.
Right now it has swooned down to levels where it worth considering as a
Speculative Pick.

 

Western Financial Group has also backed off. I am not that keen to add to my
position unless it backs off further. Canadian Western Bank has come back to $24
and I think that is a good entry point. I suspect it is still growing its
earnings given the hot Alberta economy.

 

April 23, 2007

 

Before the markets opened today there was an expectation that something of a
bidding war for BCE might erupt. Instead the indication was the opposite.
Several pension plans lined up to get in on the bid that involved the Canadian
Pension Plan investment Board. So rather than mounting an alternative bid these
firms just wanted in on the CPP bid. Meanwhile Ontario Teachers Pension Plan
indicate it would not over-pay for BCE. I suppose we would never expect any
bidder to suggest they would over-pay. But it seems like things are cooling down
a bit. I mentioned I had bought some BCE on April 16 (at $36.03). I sold half of
that today at $39.83. I was hoping this whole BCE situation would continue to
lift Telus and Shaw along with BCE. This will depend on how the bidding action
for BCE goes.

 

I had not analyzed BCE, I bought it purely as an opportunistic move based on
rumors of a take-over bid of around $40. Some have suggested as high as $45, but
that may be a stretch.

 

I decided to a bit clean-up on my portfolio today. I have long been carrying
about a dozen or more small to very small positions. These are mostly stocks
that I have owned for years and which I have never done an analysis or I stopped
analyzing them for some reason quite some time ago. I kept some of these just
for diversification. Also it can be painful to sell a stock that is really down
only to see it rise later. But for the most parts these tiny holdings were just
a distraction. The positions are too small to really affect my portfolio (unless
they jump 500% or something). Another reason I kept these was it would have cost
me $29 per trade to sell but for the last six months my trading costs have been
reduced to $9.99 per trade.  Anyhow I cleaned out four of these minor
positions today. It feels good to be rid of the distraction. And I would rather
redeploy the money to stocks that are on our current buy list.

 

CN reported earnings after the close. As expected they were not great. But at
a quick look, they did not seem that bad given the strike and bad weather. If CN
happens to fall on this news then I think that would be a buying opportunity.

 

ING Canada has fallen noticeably. Meanwhile
our other property insurance stocks seem to be mostly rising. Therefore it might
be opportune to buy some ING at this price.

 

Couche-Tard has fallen to about $23.
In part this may simply reflect the higher Canadian dollar. Most of their
revenue is from the U.S. so its value falls as our dollar rises. This is
unfortunate but a fall in price for that reason would not indicate anything
negative about the company itself. Possibly though the drop also reflects that
the market may be aware that fuel margins remain low (I am personally not aware
of where fuel margins are). The bottom linme for me is that I still like the
company.

 

With our dollar at a relative high point compared to where it has been, now
may be a good time to buy some U.S. stocks. I don’t claim to predict currency
moves, but I figure right now our dollar could either rise or fall, but if I
were looking to buy U.S. stocks I would not wait for our dollar to rise further.

 

April 22, 2007

 

I have not updated the Performance figures this week, but as summary, the
model portfolio is up 9.1%, the Strong Buys are up an average of 16.1% and the
24 Buys or Strong Buys are up an average of 9.9%. My own Portfolio is up 8.0%.
The TSX is up 5.9% and the DOW is up 4.0%. Heading into 2007, after four strong
years, I was not expecting the markets to do this well.

 

With markets doing this well, our brains tend to assume the trend will
continue. In fact we should be watching out for the opposite. High gains in the
last 4 and one half years could mean we have squeezed all the good out of the
markets and it will be time for a rest or a retraction. I am trying to keep that
in mind and watch out for signs of a decline.

 

But overall, my inclination is to hold my equity allocation close to 100%
given that private equity and acquisition bids seem to be pushing the market
higher. Today’s market may be somewhat overvalued on a P/E basis but it is
certainly not wildly over-valued given today’s low interest rates. But markets
could fall if interest rates rise or if earnings or expected earnings drop. I
reserve the right to change my mind and start lightening up on equities if the
market starts to drop.

 

I have updated the breakout of my own portfolio.
My cash position is about 0%. In response to the February market correction I
had taken my cash to about 30%, the highest ever for me. As I re-deployed the
cash I took the opportunity to rebalance my portfolio. For example, I took my
weighting in insurance stocks down quite a bit.

 

While you may find it of interest to know what I actually hold, I also do
this exercise for my own use. I hold my shares in two RSP accounts and one RESP
account plus a small unregistered account. I find it useful to have a
spreadsheet where I put it all together. I currently own 24 stock (plus a
another dozen or more very tiny positions – which are becoming insignificant and
which I may soon weed out entirely). Right now a lot of these 24 are at about 4%
of my portfolio. Tim Hortons is my largest position at 13.3% and I feel quite
comfortable with that. You may notice Tim Hortons is only rated (lower) Buy. It
has a high P/E and maybe I am being aggressive in holding it as my largest
position. It also has a very high ROE and basically I have decided it is worth
paying the high price for the quality.

 

April 20, 2007

 

Well this week certainly ended on a high note, with the DOW leaping 153
points or 1.2% to a new all-time high. It seems entirely possible that the S&P
500 index will soon surpass its old all-time high from way back in 2000. The
last time the S&P 500 was this high, its P/E was around 28. Now it is at a much
more sustainable 18.

 

I have just added a new Article that looks at the historic results from using
a 100% equity
strategy during a 30-year savings period, as compared to a fully Balanced
approach. For many years I have been reading advice about asset allocation.
Much of the advice never made sense to me – for example we are told that
equities are expected to have the highest return but that despite this we should
still invest some of our money in bonds. I could see the logic of this for some
retirees but was not convinced it was right for most savers or even for all
retirees.

 

In earlier articles I have plotted the results of investing a one-time lump
of money and the results strongly favored equities. However, plotting a more
realistic savings strategy with investments in each year is more complex and it
seemed possible that dollar-cost-averaging would pull the results in favor of a
balanced approach. Now for the first time I have plotted the data myself to see
the results for myself. The results are very enlightening. Take a look,
questions are welcome. I have made this report available exclusively for you
paid subscribers.

 

April 18, 2007

 

I recently posted a few new testimonials. I
really appreciate receiving those. It really makes my day to hear about
subscribers doing well.

 

BCE, Telus and Shaw all cooled somewhat today. But if the reported bidding
war erupts for BCE then we could see more up-side soon. However, given the
run-up there is certainly the risk that they come down. I am content to hold.
Meanwhile Tim Hortons, and CN were up nicely today. Even though Tim Hortons is
up a couple dollars very recently, I like its chances to go higher when it
releases Q1 earnings. It could easily soon surpass the temporary high it made
last April in its first day of trading $37.74. That was a pretty meaningless
high that was made in the excitement of the first few minutes of trading when
buyers got over-excited. But it may be news when it eventually passed that old
high.

 

All the Tim Hortons that I visit are extremely busy.

 

Has anyone visited a Tim Hortons in the U.S. in the past few months? I
suspect it will take a few years at least before it really starts to catch on
even in the Northern States. 

 

April 17, 2007

 

I had the following question from a Member of this Site:

 

 

I note that in take-over deals often the stock of the company being taken over
goes up and the stock of the company doing the taking over goes down.  Why is
that?

 

On a take-over deal the target usually goes up simply because the price being
offered is higher than the recent trading price. If the offer is a cash purchase
the stock price often rises to close to the offer price. Sometimes it can stay
below if the market thinks the deal could fall through and/or take a long time.
Sometimes the target companies trading price rises above the offer. This usually
means that the market expects a higher offer to materialize. If the offer is for
shares of the buying company then the price of the target will jump around as
the stock price of the buyer moves.

 

The stock of the buying company can go up if the market thinks the purchase
of the target is a good idea and especially where their are synergies or where
competition will be reduced. But often the buyer is paying a hefty price for the
target and may be taking on debt to pay for it. In these cases the market price
of the buyer can fall. Basically it signals that the holders of the buying
companies shares are not in favor of the deal.

 

 

Another nice day for telecommunications shares. At this point I am just
enjoying the ride. I am thinking about taking profit on Telus but so far I am
just holding.

 

April 16, 2007

 

As markets reach new highs in spite of predicted lower earnings growth and a
possible U.S. recession we should be growing cautious. But take-over offers are
driving the market higher and it is hard not to be optimistic.

 

In a fit of exuberance today, I bought some BCE given that there is much talk
of a take-over at $40. I then added to my Tim Hortons and my Dalsa position,
taking my cash position down close to zero. Tim Hortons is not a cheap stock but
rather seems to be a case where paying up for quality will likely be rewarded.
It’s a fun stock to own because every day you can see evidence of how well they
are doing.

 

I was surprised that Telus has jumped so much. Partly that is due to the BCE
increase. It looks to me like Shaw communications is taking a lot of customers
away from Telus but the market seems unconcerned. I own Telus but my larger
position is in Shaw.

 

April 15, 2007

 

Shaw Communications is
updated and upgraded to Speculative Buy at Can $43.73 or U.S. $39.90. It
released strong earnings on Friday morning, but the share price fell. I doubled
my personal position in Shaw on Friday. I did that based on the growth story.
When I now review the value ratios, my enthusiasm is somewhat tempered. The
stock appears expensive. However, that seems partly due to conservative
accounting. The sales growth storey has been very good. I like the potential for
future strong earnings growth based on digital television. Phone revenues are
also growing strongly, but that does bring up the concern that a price war with
Telus could occur. It may be unlikely that a take-over offer would occur but it
would be an attractive company for take-over if the Shaw’s wanted to sell.

 

I had unfortunately sold half the Shaw in the model portfolio earlier this
year. At this time I will notionally buy it back at tomorrow’s opening price.

 

Shaw has been a good Stock Pick and more than doubled in the past two years.

 

April 13, 2007

 

Performance figures for 2007 are updated.
Our average Strong Buy or Buy is up 7.7%. There were only three Strong Buys as
of January 1, 2007, but these are up an average of 13.4%

 

April 12, 2007

 

The TSX closed at a record high today. A number of our Stock picks did well
including CN, Shaw, Thomson and Tim Hortons. For now at least the bears and
doomsayers have been foiled by the resilient market.

 

April 11, 2007

 

My article on the valuation of the various segments of the Canadian Stock
Market is updated. You can access it
here. (See the fifth article, updated April 11). This article also gives you
the trading symbol for Exchange Traded Funds that track various segments.

 

April 10, 2007

 

I added to my Tim Hortons position today. I notice Canadian Western Bank has
been a bit weak and I think this may be an opportunity to Buy.

 

April 9, 2007

 

CN rose today on news that Warren Buffett’s
Berkshire Hathaway had invested in three rail roads and that CN might be among
these. CN might very well be included. I note that CN serves Omaha and that Bill
Gates has been a long-time major investor in CN.

 

April 6, 2007

 

In the Links for Members Only section above, the performance figures for 2007
are updated.

 

April 5, 2007

 

Markets continue to do well. The Dow is back almost to record highs. In the
short term it appears that private equity buyouts continue to provide support to
stock prices. The sentiment can turn negative at any time but so far market
sentiment seems reasonably strong. The old advice that while being out of the
market protects from risk, it also exposes one to the risk of missing market
gains has proven true since the little correction in February.

 

April 4, 2007

 

Cognos is updated and rated (lower)
Speculative Buy at Canadian $46.65.This is a good, possibly a great company. It
always appears expensive but that is perhaps due to conservative accounting
rules. For those interested, this is probably a good entry point, particularly
if one averages in with a smaller initial position.

 

April 3, 2007

 

An edition of the free newsletter was sent out
today. If you did not receive it, this may be due to your spam control system.
You can check if you email is on the list for this free newsletter by adding
your email “again” on the signup box on our home page, or the bottom of any page
on this Site. If the email is a duplicate our system will indicate it is a
duplicate.

 

Our stock picks continue to do well this week.

 

April 2, 2007

 

The model Portfolio has been
updated to show performance by individual stock. I have not made any notional
trades in this Portfolio.

 

March 31, 2007

 

2007 Performance figures are updated. With
Q1 over, we are ahead of the market.

 

March 29, 2007

 

Cognos is out with strong earnings. I like the company but when I last
analyzed it, it was too expensive. I plan to update our rating in a few days.
The stock will likely rise tomorrow as the earnings were apparently higher than
expected.

 

The rumor of a take-over bid for BCE this morning was interesting. These type
of take-overs and rumors of takeovers are definitely a factor in keeping the
stock market going up.

 

I bought some BCE this morning but then sold at a small profit given that the
rumor was denied. But it does seem quite likely that an unsolicited bid for BCE
could emerge and so I suspect it would be okay to hold BCE. But there would be a
danger of it falling back to where it was if no offer materializes.

 

It has been a good week for our Stock Picks, hopefully it finishes off that
way on Friday.

 

 

March 28, 2007

 

With the DOW down about 100 points today, I suppose my recent feelings of
caution should be reinforced. As I write this, the Japanese market is down 1%
and so tomorrow may well be another down day.

 

But meanwhile my own stocks were up quite nicely today and were up each day
this week. So I feel good about that.

 

I am interested in buying TSX Group as it has come down, and particularly if
it drops more. Also Tim Hortons comes to my mind.  The recent update of my
portfolio composition indicates I am 21% in cash. But I am somewhat inclined to
wait and see if better bargains emerge before adding to my equity allocation. If
the worse happens and we get a major correction, and I I happen not to have much
cash at that point, then my plan is to borrow money to invest at some point. I
feel that the borrowing capacity that I have allows me to be more aggressive in
my asset allocation. On the other hand I want to move slowly, if the market does
drop, it will not be easy at that point to decide to borrow for investing.

 

I have removed the link to my Blog area for now. There is into that much
activity and it is only a nuisance for you to check it only to find no updates.

 

Business Update:

 

As investors, I suspect that you would agree that this Web Site business
needs to continue to grow and that growth will enable us to expand the number of
stocks provided and to add more U.S. stocks and ultimately some international
stocks.

 

The paid subscriber count stands at about 540 having grown slowly but surely
over the last four years. I would certainly like to see that grow to 1000 this
year. We tend not to cover thinly traded stocks and so there is plenty of room
for lots more subscribers.
If you know other people who could benefit from this
Site, please consider referring them to this Site.

 

You may see some advertisements on this Site starting very soon. I am going
to use an ad agency that promises not to post ads for any dubious products.
Presumably the ads will be non-obtrusive.

 

Thanks for your continued support.

 

March 27, 2007

 

I note the Canadian dollar is up quite a bit from recent lows. In my view
this may be an opportunity if one is looking for U.S. stocks, our dollar goes a
little further now.

 

March 26, 2007

 

This week is off to a good start. I bought Couche-Tard shares today.

 

March 24, 2007

 

U.S. stock markets rose this week, largely on indications that inflation is
tame and that therefore the Fed will likely not raise interest rates and may
even lower them. On its own, that is good for stocks. However, if the the reason
that inflation is tame is that the economy is cooling and companies are less
able to raise prices, then that is bad for stocks. Overall, I remain cautious on
the direction of the markets in general. A stock market that rises due to a
cooling economy does not sound all that promising to me.

 

Higher oil prices helped the Toronto market. That was partly due to increased
middle East tensions. If such tensions ease then oil could head back down. My
understanding is that on a supply and demand basis, oil should be somewhat
lower.

 

The Thompson Corporation is updated and
rated (lower) Buy at U.S. $42.45 or CAN $ 49.23. Most of its revenues are
derived from electronic information sold on a subscription basis. I am attracted
to the economics of the business. However, Thomson does not seem to be bargain
priced. Over the six or so years that I have been looking at it, it has tended
to under-state its earnings. Possibly this family controlled company has little
incentive to try to inflate the share price. For this update, I added back 70%
of the expense related to amortization of trademarks and customer lists. These
are very similar to goodwill which is not amortized and I do not view these as
real expenses.

 

I also include earnings from divisions that are for sale, while management
excludes those earnings. This allowed me to arrive at a higher and (I think)
more realistic view of adjusted earnings. Still, the P/E based on such adjusted
earnings was above 20. Management seems optimistic about growth but they still
indicate that earnings growth will be around 9%. On that basis I cannot rate the
Stock higher than (lower) Buy.

 

Because of its activity in acquisitions and divestitures, Thompson’s
accounting has some strange complexities. I believe this is a case where some
view of adjusted earnings is needed since GAAP earnings are distorted in various
ways by acquisition and divestiture accounting rules.

 

The stock may be a bit volatile as the market attempts to figure out where
earnings will go after the Learning division is sold.

 

It would be nice to think that after the sale Thomson would issue a special
dividend, but there is no indication that this is planned. Due partly to
securities regulations, it is expensive for companies to issue shares. Therefore
when they have excess cash they tend to hang on to it, since if they dividend it
out, it is expensive to raise new equity later when needed.

 

I hold some Thomson and I like its prospects over the long-term. If the stock
falls to about U.S. $39 I would definitely consider buying more at that price.

 

I removed AeroPlan from the list above because the report was out of date.
The unit price has moved up a lot since I last looked at it. Although I really
like the business model, it looked expensive =to me even before recent
increases. Also I had concerns about the negative equity on the balance sheet.
Overall it may be okay, but I had no plans to update it and so it is best to
remove it from the table above.

 

March 23. 2007

 

In the section below the Stock table that is labeled “Links For Members
Only”, the 2007 Performance figures are
updated. It has been a volatile year, but our Stock Picks have done well. The
composition of my own portfolio has also been
updated.

 

Alimentation Couche-Tard
(which is
more commonly know as simply Couche-Tard) is updated and upgraded to Buy at
$23.71. The stock is not cheap but does represent at least reasonable value if
its past growth rate is any indication. Earnings declined in Q3 but the company
believes that is simply due to volatility on gasoline margins. The store count
continues to increase. If the controlling shareholders ever decide to sell, I
believe it would be an acquisition target. The stock is cheaper on a P/E basis
than it has been in some time but that may be due to fears that earnings growth
has faltered. If it continues to operate as it has in the past, I suspect this
will be a reasonably good investment. I am considering taking a small position
in this.

 

March 21, 2007

 

A very strong day in the markets today. Once again rumors that this bull
market is over seem to have been greatly exaggerated. I still remain cautious
however, it seems like liquidity and private equity are pushing markets up, but
I think with earnings growth now moderating quite a bit, the market will be
nervous and will tend to be volatile on any hint of bad news.

 

March 20, 2007

 

I notice Tim Hortons down a bit today. We only rate it (lower) Buy. Still it
might be worth nibbling at at this price. Even if just for the psychic pleasure
us shareholders get every time we see those big lineups, this is a stock most
Canadian investors should consider owning.

 

Canadian Western Bank is updated
and rated Buy at $25.95 (it closed today at $25.72). Our last full update on
this company was in September when we rated it Buy at $20.96 (as adjusted for
recent split). For January 1, we called it Weak Buy at $26.39. Given the strong
Q1, we are now back to Buy. This has been an exceptional investment over the
years. We first featured it on this Site way back in August 1999 at $4.94 (split
adjusted) and we rated it Strong Buy at that time. This stock has grown somewhat
like a slowly rolling snowball…

 

In recent years it has not been bargain priced (and still is not a clear
bargain) but the earnings have managed to grow to support the price. Until very
recently I was concerned that the return on equity was okay but not impressive
at under12%. Now it is up around 14%. Perhaps with scale this will keep
improving. With the strong Western Economy this stock seems likely to continue
to do well. I do not look for any huge price jumps, but rather reasonable steady
gains over a period of years (which is not to say that at times it will not fall
in price).

 

March 19, 2007

 

A nice day in the markets. I added to my Telus position today. I also placed
an order for Western Financial at $4.16. Perhaps I should have just paid the
$4.25 but since I already have a reasonable exposure, I decided to try under the
price. It’s possible the stock will jump a somewhat in one direction or the
other in response to Wednesday’s conference call. Q4 was very strong, if it is
confirmed that this in a new “run-rate” for earnings then it might rise, if on
the other hand they reveal there a one-time gain that explains the Q4 earnings
jump, then the stock could fall. Either way I like it long term.

 

An interesting story today was a pet food Income Trust called Menu Foods that
fell 25% and at one point was down about 40% on news that some of its pet food
product was causing sickness in animals and there would be a big recall. It is
not a stock that I have ever looked at.

 

There is not much that can be done to avoid getting exposed to a situation
like this. Investors who pick and choose individual stocks (on their own or with
the help of advisors and newsletters and other sources) hope to beat the market.
As a result of attempting to beat the market we will tend to have significant
positions in individual stocks. As a result we will tend to be less
diversified than the index. It then becomes a fact of life that occasionally
something bad and unexpected will happen to some of our companies. Even if you
invest in solid companies with excellent managers, things can go wrong. That is
simply a fact of life. Certainly Warren Buffett teaches us that we should take
big positions in our best stock picks. If we choose our stocks wisely then we
will beat the index but unexpected volatility is part of the price we pay top
play the game.

 

Below I answer three questions from Members of this Site.

 

QUESTION: Am I correct to recall that about 2-3 years ago, that you
were not in favor of investing in Telus? Now you are saying a strong buy. I am
wondering how the turn came about.

 

You can see most of our history on Telus by hitting Control-F and entering
Telus this will search for every mention of Telus in the dated comments below.
Then scroll to the bottom of this page and click a link that gives the dated
comments all the way back to 2002. Also if you click to our Performance figures
and then find the ratings for the start of each year, you can see where we had
Telus as of the start of each year.

 

But here is the story: Telus was rated Weak Buy at $39.50 on October 3, 1999.
Even Weak Buy turned out to be too high a rating. On November 3, 2000 it was
rated Weak Sell, also at $39.50. (I don’t have all the intermediate ratings at
hand, but they are in our records). For the start of 2002 we rated Telus
Buy at $23.56 (It sank a lot from there but is now well above that). On February
15, 2002 we updated Telus to sell at $20.30. That was the last update for a long
time (it was removed from the list at some point) By the summer of 2002, Telus
was briefly under $8 and I bought a tiny amount at that time. The market
effectively was pricing Telus as if bankruptcy were a possibility at that time.

 

As it struggled back from its lows I suspected that its earnings would rise
sharply at some point but it was difficult to analyze given that it had very low
earnings at that time.

 

Telus returned to the Site as a Speculative Buy, October 6, 2004 at $28. By
then its earnings had recovered. Subsequently it has at times been rated in the
Strong Buy range. Basically a few years ago Telus was not earning any money and
insisted on talking about EBITDA rather than earnings. Eventually the earnings
did recover and that explains our rating change. In retrospect it would have
been nice to have called it a Buy at about $14 rather than $28, but still even
since $28 in late 2004 we have done well.

 

QUESTION: When we go shopping for stocks, should we be looking for 15%
per year annual growth in individual stocks? I think that is a good target. I
was a member of the Canadian Shareowners Association for some years, about 10
years ago. That was their mantra. Steady growth and growing earnings to the tune
of about 15% combined, with the growth plus dividends.

 

I think using a potential increase of 15% is a reasonable hoped for target.
However, interest rates have come down a LOT in ten years. These days if we were
pretty confident of 8%, that would probably be high enough. Our reports indicate
that when we calculate intrinsic value we use an 8% discount rate, which means
we require a minimum expectation of 8% return (an expectation is not a
guarantee. As of recently, we  also calculate what kind of growth would be
needed to give us a 15% return per year for five years, assuming a selling P/E.
(We may start mentioning this calculation in future reports).

 

QUESTION: I’m curious why you rate WES a (speculative) buy at $4.25 and
would consider buying more, yet your high estimate of the intrinsic value is
$4.11.  Does this mean your assumptions are inherently conservative?  I have
viewed your high intrinsic value estimates compared to current prices as
indicators of expected gain. Is that a valid approach?  If you bought WES now,
what price do you think (at this point in time obviously) it should reach before
you sell some again? 

 

Intrinsic value is just one tool and factor to look at. Intrinsic value
estimates a value based on having a current earnings per share level and then
assuming some growth and assuming a P/E ratio at which it can be sold after a
holding period (we use five years). This works best for companies that already
have a string of smooth annual earnings increases and where the company is
stable and the future is somewhat predictable. In the case of WES earning per
share jumped 33% in 2006, but had fallen in 2005. Our assumption of 10 to 15%
earnings per share growth annually over the next five years might be
conservative. But it is also rather uncertain, it’s tough to predict when the
recent history is pretty volatile. For more mature companies we would place more
weight on the intrinsic calculation. However, in no case do we want to
over-emphasize the intrinsic value calculation. It’s only as good as the
assumptions that go into it. Our overall rating does not tend to focus too
heavily on the intrinsic value, again it is one of quite a few factors.

 

If I bought some WES now around $4.25 or lower I would consider selling some
if it quickly jumped to $4.75 but I would definitely keep some as well. Should
be a good stock for the long run.

 

I have cleaned up the Blog somewhat,  removing some Posts. It does not
look like the Blog is going to get a lot of traffic. Use the Blog when you want
to share ideas with other Members or seek feedback from them. For questions
emailed to me I will try to Post here. I do not plan to Post very often to the
Blog, but rather let that be for Members to share ideas.

 

The Blog is at

http://investorsfriend.blogspot.com

 

March 18, 2007

 

AlarmForce is updated and remains
rated Weal Sell/ Hold at $5.60 (It last traded at $5.55). This is a stock we
liked at considerably lower prices. With a P/E of 38, to buy this is to believe
that earnings are grossly understated (and we do think they are  at least
somewhat under-stated) or that growth will be very high. At this time it seems
priced to high.

 

Microsoft is updated and rated Buy at
U.S. $27. (It last traded at $27.33). This is a huge and complex company. I don
not currently own it. I would consider averaging into over time.

 

Sobeys
is updated and remains rated Weak
/Buy / Hold at $39.17. (Our analysis price is from Friday morning, but is
dropped to $37.75 by the close on Friday). We continue to monitor this. It has
an attractive price to book ratio. If the competitive situation improves and
earnings increase then it would do well, so there is some up-side potential
here. However, we do not think that now is the time to buy.

 

Canada Bread is updated and remains
rated Weak Buy / Hold at $55.30. (It last traded at $53.45 and our rating would
still apply at that price). This is not a stock I have much interest in but we
continue to monitor it.

 

Western Financial Group is
updated and upgraded to Speculative Buy at $4.25. The company released 2006
earnings after the close on Friday. The details were very skimpy and further
details will likely be released tomorrow and there is a conference call on
Wednesday at noon. Q4 was not reported separately but was apparently very good.
I had sold some of my holdings at around $4.20 in February but now I am strongly
considering adding to my position. It’s possible that the shares will trade a
little under $4.25 but it may be more likely that they will return to recent
highs around $4.50. Partly this will depend on the outlook that the company
presents during Wednesday’s conference call.

 

March 17, 2007

 

Telus is updated and remains rated (lower)
Strong Buy at CAN $56.06. The overall investment thesis is that it has a
reasonable P/E, and attractive price to cash flow and its earnings have been
ramping up. If it continues to execute it the same way, adjusted earnings are
expected to rise about 20% in 2007 and this will be a good investment. If
overall markets “correct” downwards, this would likely be hit but not to the
same extent as the overall markets.

 

March 14, 2007

 

North American markets were down slightly most of the day but ended positive.
It seems the battle between those who are nervous on dips (and are inclined to
sell) and the bargain hunters continues. As I post this late Wednesday night,
Asia markets are up…

 

In any event the best approach is to be invested in stocks that are
relatively under-valued, that will provide some cushion if the market falls and
ultimately such stocks tend to out-perform the market. We have several updated
reported we are working on and will have some updates by Sunday at latest.

 

March 13, 2007

 

I think today’s slide was a reflection of the nervousness in the markets.
Most investors are sitting on excellent profits from the last few years and
there may be a tendency to head for the exits on any bad news. Today the bad
news was related to sub-prime banking loans and also weaker than expected
economic news. Sub-prime problems were nothing new but the market seemed to
react sharply. As of late Tuesday, Asian markets are down and my bet would be
that North American Markets will fall on Wednesday.

 

It’s always questionable if one should attempt to time markets or just ride
through the dips. That I think depends on each persons circumstances and
attitudes. Two weeks ago I increased my cash a fair amount but then bought some
back last week. I’m inclined to just ride things out at this point. If the
market does drop, it will eventually recover.

 

March 12, 2007

 

The markets were up a tiny bit today. There was also a huge private equity
deal announced with a famous investment fund known as KKR buying Dollar General
for about $6 billion. This may be indicative of how private equity money can
support stock prices.

 

My sense is that the market will edge ahead, but I think there is a
nervousness in the market such that on my bad news the markets will fall fairly
hard (not disastrously, I suspect – but still hard). So we may do okay until and
unless some bad news event sends us down.

 

I notice Western Financial down a fair amount from its peak. It has tended to
be volatile and so a dip like that is not unexpected. I had sold some at about
$4.20 and might look to buy back if it happens to go under $4. It will likely
release earnings soon and I would think they should have done well in Q4.
Possible they are being hit with worries about bad loans given the sub-prime
situation in the U.S. But in Western Canada right now it is hard to imagined
that very many people will default on loans.

 

March 10, 2007

 

If you pay by credit card in PayPal note that updating a credit card in
PayPal involves a couple steps. The tricky part is that if the credit card is
changed, PayPal requires subscribers to go into any active subscription and
change the credit card associated with that particular subscription. If the
credit card is changed and the old credit card is removed or expired and the
subscription is not updated to the new credit card, then PayPal will
automatically cancel the subscription. Specific instruction are included in the

short article about how to use
this research page.

 

March 9, 2007

 

2007 Performance figures are updated.
Despite the market correction of last week, we are still up for the year and
ahead of the market.

 

March 8, 2007

 

I purchased Canadian Western Bank shares today when it released what appeared
to be good earnings. We will update our Canadian Western bank report shortly.

 

As of this morning the markets continued bounce back from last week’s dip has
been surprisingly strong. Most observers seem to agree that we should expect
continued volatility. I remain cautious about the short-term outlook. However, I
did purchase back the Tim Hortons shares that I sold last week.

 

On Feb. 25, we had updated Canadian Tire but had neglected to update the link
inth table above. That has now been corrected.

 

March 6, 2007

 

hmmm, well, maybe the bargains were yesterday. The reality is no one knows if
the market has now recovered from its recent correction, or if the correction
will resume.

 

Warren Buffett says Be scared when others are greedy and be greedy when
others are scared. Maybe at the end of yesterday I should have been feeling
brave and greedy. But I must admit I was being more cautious than greedy. In the end I
think my decision to move my cash position up to 33% was wise for my particular
circumstances. It allowed me to hedge my bet, in terms of the market direction.
I remain in a wait and see mode for now.

 

March 5, 2007

 

I have good news and I have bad news… and I can express both with the same
two words “Bargains Ahead”.

 

The Dow showed surprising strength and was in positive territory most of the
day when we might have expected something of a plunge based on world markets
overnight. The strength in the DOW seemed like a good sign but then it took a
hard dip at the end of the day. I’m generally not a trend investor but it does
look like we are in some kind of down-trend and it seems likely to continue.

 

Note that an edition of the free newsletter
was sent out yesterday. If you did not get it, try adding your email to our free
list with the link on the home page. If the system indicates your email was
already on the list then our newsletter must have got blocked as spam.

 

Part of the market decline is due to concerns over sub-prime mortgages in the
U.S. I mentioned this issue on Feb 9. I am not surprised that Home Capital was
hit by this today. Their loans are probably a LOT safer than many of the
American Sub-Prime loans but it is in that sub-prime market and therefore it
will likely be hit further by this issue.

 

You can share your thoughts with other paid members of this Site at our
Members-only Blog page.

http://investorsfriend.blogspot.com

 

March 2, 2007

 

The TSX was down 3.7% this week and the DOW was down 3.3%. Our Buys/Strong
Buys fell by 2.3%, The model portfolio was down by 2.5% My own portfolio fell by
2.4%. So, we got hit, but not quite as badly as the market did.

 

March 1, 2007

 

To Sell or Not to Sell?

 

With the market “correction” this week most investors are wondering if they
should reduce their equity position and perhaps at least partly step aside from
the markets for now.

 

This is an tough question and there are no universal answers.

 

Firstly, no one knows if the market correction will deepen or has already
ended.

 

 

The S&P 500 P/E ratio is 17.2 as of today. That’s above long term averages
which might suggest that markets are somewhat over-valued. But with today’s low
interest rates a P/E of 17.2 is certainly not grossly overvalued. The market is
very unlikely to crash like it did in the early 2000’s. At that time the S&P 500
P/E ratio was aroundd 30 and the market was grossly over-valued.

 

Factors which could drive markets down include. High oil prices, its moderate
overvaluation, terrorist attacks, international market events such as the drop
in China’s stock market, declining housing prices, a recession, back credit
losses brought on by lower housing prices and/or recession, lower earnings
expectations, or lower earnings reports (and this is not an exhaustive list).

 

Factors which might drive the market up are, bargain hunting, continued
excess money from inside and outside North America looking for a home, mergers
and acquisition activity by corporations, private equity and pension plans
taking over companies, continued or increased consumer confidence, lower oil
prices, a recovery in housing prices, the absence of recession (and this is not
an exhaustive list).

 

The market has now risen for four and one half years since it bottomed in
late 2002. Huge earnings growth supported this rise. But now earnings are
growing only slowly.

 

On balance we should not expect a strong year in the markets. A 10% gain is
probably the most we should hope for and a 10% drop is perhaps almost as likely.

 

 

But markets will go up in the long-run. If you pull money out of stocks you
risk missing the upside.

 

Young investors who are just starting out should simply rejoice that stocks
are cheaper. You will be be buying for may year to come and if the market
crashes that is simply an opportunity to buy stocks at a better price.

 

Wherever the market is going to be in five years or ten years, will depend
mostly on earnings at that time. If the market goes down 100 point tomorrow or
goes up 100 points, that does not change where it will be ten years from now.

 

Any investor with a fully balanced portfolio may want to simply ride out any
correction.

 

Sound advise might be “Don’t just do something, stand there!”

 

However, investors who perhaps have a very high exposure to stocks given
their age and circumstances might well want to sell some stocks now and move
some into cash. And selling at a point that is several percent below recent
highs may still look like a good idea if the market happens to correct more
sharply.

 

The bottom line is that I can not tell people whether they should sell any
stocks or just ride out the bumps. That is a very individual decision.

 

In my own case when the week started I was over 90% in equities. And at 46 I
do have some years of saving ahead of me. At the same time I have accumulated
enough investments that if I were to take a 10% decline or greater it would be
pretty painful. In my own circumstances I felt it was prudent to sell into the
correction and increase my cash position.

 

Today with the market down almost 200 points (DOW) in the early going I did
sell some shares. I sold my Shaw Communications, my FirstService, some more
Kingsway and some more Tim Hortons. I think these are all good stocks. Possibly
I over-reacted, but I simply wanted to get into a reasonable percentage of cash.
My cash position is now about 33%.

 

I think that is a reasonable level. But I reserve the right to move into even
a higher cash position if it looks like the “correction” is going to deepen.

 

I am not in any way in panic mode. I expect there could be volatility and I
am prepared to accept losses. At some point the market would bottom (if it has
not already) and with a reasonable cash position, I would then hope to Buy close
to the bottom.

 

In addition, I have mentioned before that I had become over-exposed to some
stocks like Kingsway, so this recent action of lightening my position there was
perhaps long overdue.

 

 

February 28, 2007

 

I just posted a Question on the Blog, Is critical Illness Insurance something
we need, or is it just a high-profit margin scam? What do you think?

 

 http://investorsfriend.blogspot.com

 

It was nice to see the DOW end in positive territory today. I think that
indicates that there are still lots of bargain hunters out there. I am not sure
that this correction has ended yet. I think it will take at least a few days to
settle out.

 

Early today the market opened higher but then fell back some and later was
rising… In the face of this I decided to trim partially my CN, Shaw
Communications and Tim Hortons. That brings me only to 18% in cash and I wanted
to have at least some cash to take advantage if the markets do fall. I am not
sure if I will sell anything else.

 

February 27, 2007

 

Alarmforce
is updated and rated Weak
Sell / Hold at $5.40 (It last closed today at $5.20). We have rated this stock a
Buy in 2005 at $3.33 to $4.15. Since then we called it a Weak Buy and it has
done well. But at recent prices it seems expensive.

 

The market slide today was about 3.5% in the U.S. and 2.7% in Canada. It ‘s
not really that huge of a slide but it certainly is an attention grabber. The
question now is whether investors will see this an an opportunity for bargains
tomorrow or will they start more of a stampede to get out? I don’t think anyone
knows the answer to that. If the market is still trending down tomorrow than it
might be wise to reduce some positions to get into cash.

 

I wanted to do that this morning but then again it is always hard to sell
something that is already down. I did sell my Manulife shares this morning, just
to raise cash. I’m cautiously optimistic that this slide will soon turn around.

 

February 26, 2007

 

If you have done well with our Stock Picks I would appreciate if you could
send in a few words for our testimonials page.
(Thank you to those who have already done so) email
shawn@investorsfriend.com

 

I no sooner had Hub updated than it was announced that it was taken over at a
premium today. Northbridge has an investment in Hub and will make a gain that
will add to its book value and to reported earnings this year. Stantec had a big
day, up $2.00, I am not sure why.

 

The U.S. market has been down a bit the last four days partly on concerns of
mortgage delinquencies. Sooner or later that is likely to be a very big issue
for the States but should not have much impact in Canada except that our
financial stocks may fall just because multiples in the sector fall with the U.S
troubles. With oil up over $60 the U.S. market is actually hanging in pretty
well. There was a huge take-over announced a record $32 billion leveraged
buy-out of a utility by private equity. It was also so private equity that is
buying Hub.

 

It looks like private take-overs could keep the general market rally going…
unless a recession or other event like a terrorist attack trumps that…
I’m inclined to build a higher cash position but at the same time I want to stay
mostly invested to take advantage of further price increases…

 

February 25, 2007

 

If I decide to raise my own cash position, one stock I may sell is Manulife
mostly I suppose because I do not have any emotional attachment to it.
(Logically we should all trade on cold hard logic, but realistically that is
simply not always the case). Also it is not one of our higher rated stocks.

 

Stantec is updated and rated (lower) Buy
at CAN $ 28.19. It has done very well in growing earnings. It may tend to be
volatile and there is some risk that the U.S. housing slowdown could hurt it.
But its management tends to be resilient in finding ways to grow…

 

Canadian Tire is updated and rated
(lower) Buy at $73.20 (It last closed at $72.31). It had a weak Q4 which was
blamed on weather. It has done very well in growing profits over the years.
Certainly not a company that I would bet against.

 

Home Capital
is updated and rated
Speculative (lower) Buy at $35.30. (The price closed Friday at $35.95. Given its
strong growth history and reasonable valuation is may be a good speculative
Pick. But we worry how loan losses would affect it if housing prices begin to
decline even moderately or a recession takes hold in Ontario. I would be
inclined to wait for a better entry point.

 

February 24, 2007

 

Hub International
an insurance
brokerage company is returned to the Stock list above but only as a Weak Buy /
Hold. Certain acquisition-related charges were depressing its earnings. Earnings
have now improved but the P/E is still very high at 29. It will release Q4
earnings next week and we plan to update this report soon after that and
re-evaluate at that time.

 

EGI Financial, a small high-risk auto
insurance company is updated for Q4 earnings and is rated Speculative (higher)
Buy at $11.05. This company is up 43% since we added to this Site as a
Speculative (higher) Buy in September 2006 at $7.75. The company had an
exceptionally good quarter and year. This auto insurer is doing what I had they
all would – release redundant reserves from prior years when auto insurers had
become very conservative in their claims estimates in the past few years and
then claimed had fallen sharply as drivers avoided claims and laws changed to
restrict court awards. At this point the company still looks attractive but is
hard to evaluate since earnings are likely to fall (perhaps substantially) in
2007 from the very high level achieved in 2006.

 

Northbridge Financial is updated for
its Q4 2006 earnings and rated Speculative (higher) Buy. The price to book value
of 1.33 seems attractive. Also the P/E nominally is attractive but earnings
could drop due to competition and possibly lower realized gains. I like that
this company is 90% in Canada and 38% in autos. But the approximate 60% exposure
to commercial property and liability could make it more volatile. Last year my
thesis for insurance stocks was that they would likely report reserve
redundancies (retroactive gains) particularly in the Canadian standard auto
segment. Some of the companies have now done that and for those that have not, I
am now less confident that this will happen. My thesis on Northbridge at this
time is that it looks like good value. It offers a good leverage to bonds in
that for each dollar of stock market value it has about $2.00 invested, mostly
in bonds. It should be a reasonable investment for the long-term but I don’t see
any reason for a near-term jump in price (Other than possibly if it were bought
out at a premium). While the value looks good the price could drop if earnings
drop in 2007 due to competition and/or lower realized gains on investment. Due
to uncertainty, I see it as Speculative particularly in the near term.

 

February 22, 2007

 

There have been  new posts to our new Members Blog, check it out at  http://investorsfriend.blogspot.com
Share your knowledge…

 

Two property insurance companies reported earnings today. EGI Financial
posted excellent results during the trading day but was only up 1.5% on that
news. It may move more in the next few days and looks like good value.
Northbridge posted after the close and I thought the earnings were reasonably
good, but not exceptional. At this point I will wait and see where it moves
tomorrow. We will likely have both of these stock reports updated by Sunday.
Kingsway continues to slide. Probably no reason to expect any turn-around there
until they and unless they report good earnings in Q1. I don’t think now is the
time to sell Kingsway and it it may very well turn out to be a good buying
opportunity but it will require patience.

 

February 21, 2007

 

Manulife is updated for its Q4 earnings
and rated Speculative Buy at $40.78. We had last rated this as Speculative
(lower) Strong Buy at $39.35. However, as I read the Q4 report and looked at the
50 page statistical supplement, I was reminded again of the incredible
complexity of this company and the fact that earnings are basically estimated by
actuaries. Some of its product lines continue to grow at absolutely amazing
rates but some others have slowed down. Overall I am just not as comfortable
with it as I was earlier. I don’t mind holding it but would not want a very
large position in given the difficulty of understanding its financials. It gives
Canadians international exposure but also exposed Canadians to currency risk as
most of the revenues are in U.S. dollars.

 

February 20, 2007

 

A surprisingly large jump in Western Financial today. This has been a good
run. I do expect continued volatility as the trading is still thin – although
improving. I’m not sure when the earnings are coming out. I had reduced my
position yesterday (a good decision despite a bad outcome). I will not sell any
more at this point. At this point I am waiting for the earnings report.

 

In general, markets have continued to do well. The Q4 earnings season for the
S&P 500 apparently came in at about 9.2% growth year-over-year which is quite
good although lower than the double digit growth of the past few years. The
danger is that soon the market will start anticipating lower earnings growth. I
am watching cautiously.

 

Regarding the new article on
asset allocation and
portfolio performance in retirement, I have made some relatively minor edits
in the article and I updated the date written to February 20.

 

Regarding our new Members Blog, note that you can post anonymously. For now
at least I will only advise paid members of this Site about the Members Blog.
But if too few posts are made I will make everyone on the free newsletter list
aware of the Blog as well. (A members Blog like that is of little value if no
one is posting to it.) I am convinced that the paid members of this Site form a
knowledgeable group of investors and have also generally been successful in many
ways beyond investing. Therefore this may be a great group to bounce ideas off
each other. So post away at
http://investorsfriend.blogspot.com. Already there are some posts there.

 

February 19, 2007

 

I recently created a Blog area for Paid Members of this Site to post comments
or question to other Members. See
http://investorsfriend.blogspot.com . Why not be among the first to post
something there?

 

Just below the Stock table above is a link to four items that are available
exclusively to you paid subscribers and two additional items that are also
available to those on our free newsletter list. None of these eight items are
available to casual visitors to the Site. Of particular interest are eight
articles that examine the state of the broader market’s current valuation levels
and the expected long-term return going forward. Most of these eight were very
recently updated.

 

Just added to that list today today is an
exclusive special report
that graphically delves into the question of how balanced portfolios compare to
all-equity portfolios in a retirement scenario, where money is being withdrawn
each year. This asset allocation problem is often discussed, but usually with no
real data to back up the arguments.

 

Portfolio Review

 

In reviewing my own portfolio it is apparent that I have a very high exposure
to property insurance. And in some cases my larger positions are stocks that we
only rate as (lower) Bur or even Weak Buy. Logically I should probably keep my
portfolio closer in line with the stocks we rate higher and should trim the
lower rated stocks. Also I should be careful about too high an exposure to any
one stock or sector unless I am very sure of my position. It is particularly the
case that I should rebalance given that my portfolio is about 95% in non-taxable
accounts, where tax impacts of trading are of no concern. Also I recently
qualified to trade at $9.99 per trade with TD Waterhouse. Therefore, trading
costs to rebalance are not a concern. So, logically I have little excuse not to
trim certain positions, and rebalance my portfolio. And this could include
moving to a targeted level of cash.

 

However when I sit down to do this, logic seems to meet emotion. It is
difficult to trim any position I own because “its price might rise”. Logically
this should not stop me from moving to a more balanced portfolio. But
emotionally I find it difficult.

 

Therefore I find myself unable to fully rebalance. But I did trim my
Northbridge position today. And I entered an order to trim the Western Financial
if I can get $4.20 or $4.19. I did get $4.20 on some of it but quickly ran into
the fact that this stock is not very liquid and had to drop the price a bit in
order to sell more. I may trim other positions later today. In some ways I
should trim both Tim Hortons and Shaw Communications because both are lower
rated. Their prices are high in relation to trailing earnings. But both appear
to be in a great position to increase earnings in the next 12 months and
therefore I find it difficult to trim these.

 

In a future newsletter, I will further address this emotional difficulty that
arises in trying to rebalance a portfolio.

 

I have done very well in the markets the past four years. Naturally, I don’t
want to see my portfolio decline by any material amount. If I begin to have a
greater fear of general market correction, I will be trimming positions and this
could include even higher rated stocks where I am simply over-exposed.

 

February 17, 2007

 

ING CANADA is updated and is rated Speculative
Buy at $51.50. I do not view it as highly speculative but it could be volatile.
The property and liability insurance business, by its nature, is difficult to
forecast. ING remains highly profitable but its earnings are declining from a
cyclic peak. It appears to be the highest quality Canadian stock in this sector,
but it also trades at a higher valuation. I expect it to do reasonably well in
the next several months. The company has offered to buy back $500 million of
shares in a Dutch auction and announced -after the close of trade on Friday –
that it will accept bids within a range from $51 to $59. It seems to me that
should place a floor under the share price at $51 and possibly the shares will
move up on the news that the company views the shares to be worth up to at least
$59.

 

February 15, 2007

 

ING fell on what were considered disappointing earnings today. In fact the
earnings were actually quite good and only looked bad compared to incredibly
high earnings in Q4 last year. There are many issues here. Insurance accounting
is a strange mix of inconsistencies. Realized gains come directly into earnings
(though often ignored by analysts) Unrealized gains, which are just as real are
not brought into income. Income is affected by changes in estimates from prior
years. Bottom line, ING remains highly profitable. But it commands a premium
valuation. I will update our rating in the next few days. This company does not
have the type of issues that hurt Kingsway… I don’t expect it to trend down
now as Kingsway has.

 

CN has done surprisingly well in the face of the strike… Could easily
pull-back a bit if strike is expected to cause problems. So far market seems to
assume strike not hurting CN…

 

The overall DOW continues to show momentum to the up-side…

 

February 13, 2007

 

It was nice to see the Dow up 102 points, so maybe the overall trend is still
up… (Toronto was up 131 which is great but Toronto is volatile with energy so
I don’t get excited by jumps up or down in Toronto as I have little that is
energy-related).

 

I had sold some Shaw Communications near the peak and bought some of that
back today. Also I redeployed some of the money from selling Kingsway into ING
Canada. I no longer owned any ING and I wanted to own at least some in case it
comes out with strong earnings. I like that it sells standard home and auto
insurance and strictly in Canada . I have said before it is the highest quality
Canadian property insurer. But it also sells at a premium price compared to the
others.

 

February 12, 2007

 

A negative start to the week. After a very positive start to the year,
perhaps we are in for a bit of a pull-back. I sold 40% of my Kingsway today
because my weighting in it was too high and because although it still seems
cheap, it has not done what I expected it to. The company has repeatedly said
that it was “reserving” very conservatively for claims. Therefore it should have
been releasing redundant past reserves. Instead it added to prior year reserves.
Over the years it has been a good investment but very volatile. It seems like
management is not on top of their game. I always said with these insurance
stocks it is best on spread the investment over several of them. I had too much
in Kingsway… I don’t see it plummeting or anything since it trades only about
1.25 times book value and some 9.1 times trailing earnings. But with negative
sentiment it could go somewhat lower especially if the credit rating agencies
decide to down-grade them. I have not seen anything about that however a and in
this case “no news is good news”.

 

February 11, 2007

 

Tim Hortons is updated and remains
rated (lower) Buy now at CAN $36.16 and U.S. $30.83.

 

It’s not cheap because the market is pricing in robust growth. But given the
earnings growth in 2006 it looks more attractive now at $36 than it did last
Spring at prices under $30. With a P/E of 26, this is a case of paying up for
quality. Also its U.S. expansions appear to be proceeding well, whereas these
were more doubtful last Spring. I expect its Q1 to be strong which could be the
catalyst to get it over its IPO opening high of $37.99. On the other hand there
is some risk that profit taking and a general market correction could see it
fall back to the lower 30’s. In that case I would add to my position.

 

February 9, 2007

 

Web Site Developments

 

I have moved 8 articles that
use recent data to examine whether or not markets in general are a bargain at
this time. These 8 were formerly available under the Free Reports button but
will now be available exclusively to paid subscribers and those on the free
newsletter list. I have placed a link to these articles above under the Stock
Picks table.

 

In addition, I am working on a couple of advanced articles (asset allocation
graphs of actual past results and ETFs) that will be exclusively for you paid
subscribers.

 

This move is designed to give more value to those who join the free list and
particularly to those who join the paid service.

 

Kingsway Financial is updated and rated
Speculative Buy at $23.16. The overall thesis is a good (not great ) company
available at what seems like a good price. It has been frustrating due to its
unpredictability. Some of that unpredictability is inherent in this industry. It
will likely require patience and the price will likely rise only as the company
demonstrates earnings growth. Not a company that the market is likely to get
excited about any time soon.

 

For those owning property insurance stocks I continue to think it best to
spread the investment across a number of companies. Personally I became more
exposed to Kingsway than I should have.

 

Loblaw has continues to disappoint. It is
incredible that they are letting so many experienced staff go. Just a few years
ago they were considered the best grocery operators in North America. I would
not buy at this point. Analysts have pointed out that they coould easily raise
the share price by doing a sale and lease-back on the real estate. But there is
no indication that they will consider such a move.

 

Market Comment

 

HSBC bank yesterday announced higher bad debt on sub-prime mortgage lending
inthe U.S. This could be the beginning of many announcements regarding bad debt
in the U.S. After all lending criteria have been soft (for example lending
mortgage money on stated income – ne need to prove your income). A ridiculous
practice that evolved in the U.S. was to offer mortgages with below market rates
for the first few years and then that rate would climb significantly in a few
years. This was an obvious recipe for trouble.  Marginal consumers are
likely running into trouble as interest rates have risen and as their
teaser-rate mortgages come up to market rates. Trouble with bad debt losses
could create a lot of negative sentiment in the market if it takes hold.

 

February 8, 2007

 

Kingsway Financial came out with Q4 earnings after the close of trading and
they were disappointing. The headline is Q4 earnings down by 53%. However, I
have said many times that insurance company earnings are lumpy and therefore
straight GAAP earnings year-over-year comparisons are not that meaningful. The
company did disappoint by announcing (in effect) retroactive reductions to prior
years earnings (pre-tax) of $53.6 million.

 

That’s bad but it helps that it was confined to just one of their
subsidiaries and that it related to discontinued lines of business. In any other
business, analysts would treat this as an unusual loss and add it back in for
adjusted earnings. But in the insurance industry this “unusual” loss is
considered sort of normal business and by convention it is not added back.
Also the $53.6 million hit was offset by opposite developments that totaled
about $30 million (pre-tax). Overall the quarter was disappointing but it was
still a pretty good year. And overall we still have a company that earned 14.5%
ROE and that trades at a P/E of 9.9 and a price to book of 1.35. I consider it
an “okay” to “good” company (not great given no inherent competitive advantage
or barriers to entry) and it is available at an attractive price.

 

This is a stock that is probably going to continue to require patience. I
will update our rating after we see where the price goes tomorrow. It could well
go down tomorrow. Certainly it should not go up. Some analysts may gripe about
the (in effect) retroactive change to prior years results but unrealistic to
expect insurance companies to report smooth earnings. Analysts may also focus on
the fact that revenues were down in 2006. I’m not bothered by that as I focus
more so on profitability rather than revenue growth. Management stated that they
were confident earnings would grow in 2007.

 

Kingsway shares did fall about 3% today, perhaps in anticipation of the
disappointing earnings.

 

Feb 7, 2007

 

An excellent earnings report from Tim Hortons today. But it seems the market
was expecting it and therefore the stock price basically did not move. They
increased the store count by around 7% this year. Therefore it seems to me that
they have two ways to grow. One is by adding more stores the other is by selling
more in dollars per store. We’ll update our report by Sunday.

 

Kingsway was up nicely today, hopefully this signals that its earnings will
be good.

 

February 6, 2007

 

FirstService Corporation is updated for
strong Q3 earnings and we upgrade our rating one notch to (lower) Strong Buy. I
am attracted to the management quality here. The insider buying and holding
signal is also strong. Our report is in U.S. dollars because it reports in U.S.
dollars and it trades in the U.S., but Canadian investors should buy on Toronto.

 

Tim Hortons has been creeping up towards
the high that it reached in the euphoria of its opening moments of trading when
it hit the exchange last Spring. Possibly that will generate some excitement. It
may be largely still owned by Americans who received the shares in the spin off
from Wendy’s. The Tim Horton shares have done better than the Wendy’s since the
spin-off and I see no reason for those American to rush to sell, although
certainly some will continue to take profits since the stock does seem
expensive. While it is expensive, I am satisfied to hold onto my position.

 

February 5, 2007

 

Dalsa declined today and it seems that the
market is worried about low revenues on its semi-conductor business. I believe
that this will turn out to be a good investment over a two year plus holding
period. But as a technology company, it is less predictable than many companies.

 

February 4, 2007

 

Earlier today, I sent out an edition of the free newsletter. If you did not
receive it, check your junk mail folder. You can access the
free newsletter here.

 

The TSX Group is updated. Its rating drops to
Buy from (higher) Buy because of the strong price increase since our last update
in November. We consider this company to be almost an unregulated monopoly and
this is reflected in its staggering profitability of 40% on sales and an ROE of
70%. Certainly the price could drop if market volumes or fall or the TSX index
falls. But overall, it still looks like a good investment. A case of paying-up
for quality.

 

February 3, 2007

 

Our Performance in 2007 has really leapt out of the gate. The 24 Strong Buys
/ Buys are up an average of a rather amazing 5.8% (in 1 month!). The Model
portfolio is up about 4.9%. In comparison, the TSX index is up 1.2%. Click to
see the results graphically. The graph does not
show the company names. I’ll resume more detailed reporting of performance later
in the year. 19 of the 24 Buy / Strong Buy stocks are up and 5 are down, with
the largest decline being only 3%.

 

Dalsa Corporation is updated and remains
rated (higher) Buy at $12.35. Its profits are low, but is has been cash flow
positive and has been reducing debt at a good rate. It has little debt. This
represents a chance to buy a small technology company that probably has little
down-side risk if held for several years, but which could double within a couple
years if its revenues improve and if its digital major motion picture camera
product becomes accepted in the picture industry. The shares trade near their
low points of the past four years despite profits having improved from a steep
fall in 2005. I am tempted to add to my position but will likely decide to be
content with the position I have.

 

February 1, 2007

 

Wow, another great day. Just about everything up… I notice Lakeport Brewing
Income Trust to be bought by Labatt for $28 and the stock is up about 36% to
$27.92. Good for those holding it!. I have never looked a it in detail but I
understand that they have done a great job. If I owned it, I would be very much
inclined to sell at this price and take my gain and run. Investors may be hoping
for a higher bid. On the other hand the controlling owner has tendered her
approximate 25% stake, so I highly doubt that a competitive bid will be
realized. Also there is a question of this deal being stopped by the competition
bureau. I’m no fan of government control, but if ever a deal looks like it would
reduce competition, this looks like it.

 

Lately I am focusing more on companies with strong competitive advantages (In
the best cases things that look like unregulated monopolies). Basically I am
looking for more great companies at good prices and fewer good companies at
great prices.

 

At the other end of the spectrum are companies that are in horrible
industries like (most of the time at least) Airlines. I avoid those. Some years
ago I analyzed Nova Chemicals. I really respected its management. And it seemed
to be a low-cost producer. But I eventually concluded that they were in a
horrible situation. They produce as I recall commodity products like Styrene
where they cannot command pricing power and where there often seems to be excess
capacity in the market driving down prices. Meanwhile one of their big inputs I
recall was natural gas which was shooting up in price. I gave up on them. I last
looked at it May 11, 2001 at $35.10 and called it basically a hold and then
stopped looking at it. It subsequently got briefly over $60 but today trades
again at around $35 and just announced a big loss. For me, this is a type of
stock to avoid. It’s to hard to understand, it’s too volatile and it just seems
to be in a really tough industry.

 

 

January 31, 2007

 

eBay is updated for Q4 and rated Speculative
Weak Buy/ Hold at $32.06 (it closed today at $32.39). It is a great company, but
with a P/E of 41 it is pricing in growth around 20% which means it probably has
to grow at 20% just for the price to stand still (and management is projecting
20%). It could well exceed that growth so it is a possible speculative Buy but I
am not planning to buy it. We like that it probably has barriers to entry but we
were bothered by management’s attitude toward executive compensation and an
apparent refusal to acknowledge that stock option expenses are real. Note that
others may report their P/E as 25, which is based on 2007 non-GAAP earnings. But
those Non-GAAP earnings exclude stock related expenses, which is just plain
wrong. But again, it does have strong business characteristics…

 

A good day for the markets with the DOW up 98 points. (Unfortunately the TSX
index is so heavily weighted to energy, that the DOW is a better indicator of
broad market trends).

 

We have some new earnings reports to deal with. The TSX Group had a great Q4
as expected. Dalsa’s earnings after the close looked good. I am not clear if the
TSX earnings came out before the close or not. In any event we usually wait at
least a day or so before updating our reports because if for example the
earnings after the close are higher than the market expects, then the market
price will tend to jump at the open and so if we rate it a Buy the night before,
it will usually be too late to act. So we tend, as I said, to wait until we can
give a rating based on a more stable price after the market has reacted to the
news.

 

I’m going to be doing some analysis of the risks of being in all equities
versus balanced portfolios. This will be based on actual patterns of returns
that investors (both those saving for retirement and those living off of a
portfolio) would have seen with those strategies had they followed them in
various years for 10 and 30 year periods going all the way back to 1926. The
results in some ways were surprising. Stay tuned for a new article on this
subject. (I already have some articles like that on the Site, but this will show
graphically year by year volatility and return of various strategies of balanced
versus all equities).

 

January 30, 2007

 

U.S. Fed meetings started today but I now understand their economic comment
will come out tomorrow. That and the release of earnings reports could cause
some higher volatility in the next few weeks (hopefully volatility in the upward
direction…)

 

January 29, 2007

 

I notice that 10-year interest rates are up about 1/4% since December. In the
face of that , the fact that our stocks have done well is a positive sign.
Tomorrow the U.S. Fed will release a statement on interest rates and inflation
and this could move the market.

 

Kingsway has been volatile and at $24 is
down from its highs of around $26. The company has a share buy-back program and
was active in December. They only seem to report the activity once per month and
so we don’t know if they were buying in January. Possibly the market knows that
its 2006 final earnings report is not going to be great. With property insurance
companies, we never know if they are going to report retroactive losses related
to prior years. I was hoping they would be reporting retroactive gains rather
than losses. We shall see. In any event at $24 it appears to be a solid
long-term investment, but the short -term is very difficult to predict. It’s my
largest holding.

 

January 28, 2007

 

I’m working on an article that looks at exactly how all-equity and balanced
portfolios grew or shrunk, based on actual data from 1926 to 2006 and for both
the investing phase of life and the spending-the-portfolio, phase of life.
Preliminary results are rather startling. This article, when completed will only
be available to you paid subscribers.

 

Our article Are Stocks Really Riskier
than Bonds? has just been updated for the 2006 data. I’ve also just updated an article that looks
at the returns from stocks, versus bonds and cash for different time-periods
since 1926. I consider this to be a very important article. I recently paid $135
U.S. just to get the updated data for 2006, so that also gives an indication of
the value of this information.

 

January 27, 2007

 

Microsoft, is added to the list above rated
Buy at $30.97. Microsoft has spent the last five years trading mostly between
$25 and $30 and the stock is well down from its highs of over $50 reached
briefly around year 2000. But the company has continued to grow although at a
slower pace and its P/E ratio seems reasonable (although not compelling) at 23.5
Combine that with its quasi-monopoly characteristics in some of its products and
we think the stock is worth considering.

 

January 26, 2007

 

Performance Update

 

The TSX index has jumped around a bit this month and is up 0.6% year to date.
While the Dow is up 0.2%.

 

Meanwhile our three Strong Buys from January 1 are up an average 4.0% and the
average for all the 24 stocks that started the year in the Buy and Strong Buy
categories is a gain of 4.6%. And only a few of these 24 are down, and the most
any of them are down is 3%.

 

I just added new material to the Performance
page that indicates that over the years our high returns have apparently not
come with high risks. I can’t say that the future will not be risky. I have
always said stocks involve risk, especially in the short-term. But the numbers
indicate that for calendar year holding periods our Picks have exhibited little
risk (with the exception of 2002 which does exhibit more risk).

 

January 25, 2007

 

Canadian National Railway is updated and rated
(lower) Strong Buy at Can $53.00  U.S. $44.96. This company has
exceptionally good history of growth in profits per share. They were at around
$1.00 per share in 1998 and are now at $3.40. This seems to be another huge
company that has defied the usual assumption that big companies cannot grow very
fast. The share price today is pricing in growth of around 8% assuming that the
P/E remains around 15 to 16. If it grows faster than that it will be a good
investment. As mentioned in comments on January 23, I am attracted to the idea
that this company is likely somewhat protected from competition. If you want to
move freight by rail along its networks, I suspect you would often have at most
1 other choice of rail company. Sure, you could use trucks, but it seems that
rail is more cost-effective over long-hauls. I suspect that if this stock is
held for the next five years, it is quite unlikely to be a poor investment such
as losing money over that time, but is has a reasonable chance of earning 10 to
15% annually. So, that seems like a good risk-reward tradeoff.

 

January 23, 2007

 

Loblaw
fall a bit today after announcing
800 to 1000 layoffs in head office (15 to 20% of staff). It seems the market is
having a hard time accepting this as good news. I have to wonder how cutting out
a big chunk of workers will fix the distribution and computer system problems
that they had. They will take a yet another special charge to cover the cost
$150 to $200 million.

 

I still think Loblaw will be a great bargain at some point, but it’s not clear
if that is now, or will it decline back to its recent low around $45 and below?

 

It is a bit scary to think that a 33 year-old is in charge and that he got
the job largely because of being the controlling owner’s son. Maybe it’s good
that he is taking decisive action. But the market is going to continue to punish
any perceived mistakes.

 

I don’t own it and am not thinking of buying at this time. But again, at some
unknown point, it will have hit its lows and the brave buyers at that time will
likely be rewarded. So, it’s worth watching.

 

 

A very nice day all around today. CN was up
almost 3%. And after the market closed it released a strong earnings report and
raised its dividend by 29%. I would think it will be up tomorrow as a result.

 

I was thinking about CN in terms of whether or not it would be a company that
Warren Buffett would approve of investing in. (Note his good friend Bill Gates
is a big shareholder in CN, and CN’s U.S. line runs through Omaha where Buffett
lives – coincidences?)

 

His investment criteria stated in his 1977 letter to shareholders was:

 

We want the business to be (1) one that we can understand, (2)

with favorable long-term prospects, (3) operated by honest and

competent people, and (4) available at a very attractive price.

 

In later years he said the same thing applies but he is now satisfied with an
attractive price rather than requiring the price to be very attractive.

 

He often talks about companies that make high profits because they are
protected from competition by their superior “franchise” or brand name appeal.
Therefore, I think his favorite type of company might be an unregulated
(virtual) monopoly in a simple, predictable business, ran by competent and
trustworthy management and available at a reasonable (preferably a bargain)
price.

 

Examples of unregulated monopoly companies are rare but they do exist. I
believe the TSX group is an example. In the U.S. there are only are two main
bond-rating agencies that virtually every large corporation has little choice
but to use. These are virtually unregulated monopolies. Coke used to be one. For
many decades there was no way in the world you would open a convenience or
grocery store or restaurant and not sell Coke.

 

And I wonder if maybe CN qualifies? There are only two railroads in Canada
and I suspect many CN customers may not have access to CP. It seems to me that
railroads have proven themselves to have big cost advantages over trucks at
least for long-hauls and bulk product. I suspect it would impossible for anyone
to build a third competing railroad in Canada even if they had billions to
spend. So, I think if CN is not a monopoly, it is at least a duopoly with CP. CN
is generally acknowledged to be the best run railroad in North America, so that
means management is quite competent. While management is no-doubt well rewarded
I don’t think anyone questions their integrity. But what about price? This great
company sells at about 15 times earnings. So basically, it is a well above
average company and is selling at a below average multiple of price to earnings.  We will
update the CN report soon, after seeing where the price settles out in the next
few days.

 

Yesterday I was mentioning energy trusts, I added a new paragraph to
yesterday’s post.

 

January 22, 2007

 

Today our stocks were generally up most of the day but ended down slightly.
The 88 point drop in the DOW is a bit of a worry. I don’t sense that we’re into a
general down-trend, but certainly if the earnings season is perceived as weak,
we could be in for some negative market action in general. Still, P/Es are
generally not too high and I see no reason to think we are in for a big
correction.

 

Energy and oil stocks march to their own drums. I’ve never claimed any
ability to judge where oil prices are going. But with prices now down to the
low 50’s I would think it could certainly head lower unless the weather turns
and stays cold in the Northeast U.S. If not the market will soon look to Spring
and I suspect that would be negative for oil. (Probably the same applies for
natural gas).

 

I don’t follow energy trusts but I believe I have said in the past that when
energy prices were rising that was covering some sins on the energy trust side
like high-payouts and high acquisition costs. An ever higher price for your
product can make any company that bought more oil and gas fields look like a
hero. Now the reverse is true. Lower energy prices are sure to hurt any Trust or
corporation that bought oil and gas fields based on say $70 oil prices.

 

Basically, even over-priced acquisitions of oil and gas fields would have
turned out to be accretive to earnings and cash flows per unit as energy prices
jumped upward.  But a falling energy price can make a good acquisition look
bad. As energy prices have fallen, distribution cuts were likely a given. But
certain Trusts and corporations that made high-priced acquisitions will face a
double whammy. I would predict more pain in this area, but again it is not an
area I know much about.

 

 

January 21, 2007

 

Reitmans is updated and rated Strong Buy
at $21.25 (it closed Friday at $21.45). This stock is far too boring to be of
any interest to the ninnys who spend a lot of time of stock message Boards.
(Sorry if I cause any offense with this remark, but most of the posts I have
ever seen are based on absolutely no knowledge or analysis and message boards
tends to be most active for penny stocks that have no earnings).  It’s
so boring – all it seems to do is make money. It’s also up 32% since we added to
this site on October 21, 2005, rated (higher) Buy. The basic investment premise
here is that it is a good company (23% ROE) that is trading at a relatively
cheap multiple of earnings at about 16.

 

I don’t own shares in it, but plan to buy some. Logically it should be added
to our model portfolio, and I will consider doing so soon.

 

Walgreen Company is updated and is rated
(lower) Buy at U.S. $46.16. This is definitely a great company with a excellent
history. Unfortunately with a price/earnings ratio of about 25, it seems fully
valued. It’s up 6% since added it to this site on December 11. It could be
bought on the basis that it is worth paying a premium for such a high quality
company. But I would prefer to wait and see if an opportunity to buy at closer
to $40 happens to occur.

 

January 18, 2007

 

A negative day today. But I am encouraged that the DOW lost only a small
amount. Most of our picks are unrelated to oil and energy and tend to move more
in tandem with with the DOW than the TSX.

 

With recession still being talked about for the U.S. we should keep in mind
that market sentiment could certainly turn negative.

 

Telus has been weak and it may be that the
market senses it is being hurt by competition. We will know more when it
releases Q4 earnings.

 

January 17, 2007

 

Kingsway
fell back today. It seems this
company will only rise if it reports strong earnings. The market always seems to
be pricing it pessimistically. I believe “the market” finds it frustrating that
this company like most insurance companies is so unpredictable. We never know
when they will surprise us with retroactive charges or credits as their
estimates of the profits of prior periods keeps changing as their accident
claims get filed and settled. Still, it continues to look cheap.

 

Tiny Clemex did well today rising 4
cents to 25 cents releasing some good news. This is an extremely tiny company.
It has disappointed me in the past but may be poised to move somewhat. I think
its a reasonable speculative pick, but given the volatility I would try to get
it for 22 cents or less and would not be too eager to pay the 25 cents unless it
trades at that level for at least a few days. It is definitely speculative. But
they have survived for a long time and appear to cash-flow positive, so that
should support the price in the 22 cent range at least. A buy-out is possible
but my sense it that the founder/President values his independence and has no
intentions to sell out.

 

Tim Hortons continues to creep up, now
at $37.30. It tends to look expensive but then again is a case of paying up for
quality. In the euphoria around its over-subscribed, much-hyped IPO last Spring
it apparently traded as high as $37.99 that first day but soon started falling
and bottomed out at just under $27 around August and then again around October.
It was widely expected (not by us) to “tank” somewhat when the Wendy’s
shareholders received their Tim’s shares in early November (increased the
trading float by some 5 times). Instead it has climbed steadily since then. It
may make some news if it it goes over the $38 mark, setting a new high and
generating excitement. I’m happy to hold at these prices but am not adding to my
position. If I had none, I would consider buying a small amount and then adding
to that if the priced dropped several dollars.

 

January 16, 2007

 

Nice increases from Tim Hortons and
CN today. At this point I am just enjoying the
ride… We will have a couple or more updated reports by Sunday.

 

January 15, 2007

 

A good start to the market week today. I sold what amounted to 31% of my Shaw
shares near the opening this morning. It opened at $42.50, I sold at $43. In
retrospect I could have waited because the price was over $43 most of the day
and closed at $43.61. But the reality is that when you want to sell, you pretty
well have to take the bid price or risk the price dropping. It was good to see
the price climb today after the opening drop and so maybe it will hang in there
and rise. But I just thought it prudent to take some money off the table on this
one. I still have a large position in it and may trim a bit more or may just
hold on to the rest.

 

January 14, 2007

 

Late Saturday I sent out an issue of our free
newsletter. If you did not receive it, this was either due to the email
getting blocked as spam or your email is not on our list. To test if your email
is on our list for the free newsletter just enter it again in the box on our
home page. If it is a duplicate email, the system will indicate it is a
duplicate.

 

A technical note – In some browsers you may need to do a control-refresh to
see the latest version of this web page. We typically post updates, evenings and
weekends, and very seldom during the trading day.

 

Shaw Communications is updated
and now rated Speculative Weak Buy / Hold at $43.81. The stock price has really
jumped recently. Our prior ratings in the past two years were:

 

Oct 27, ’06 Speculative Buy at $34.90

 

July 3, ’06 Buy at $31.55

 

April 14, ’06 Buy at $28.49

 

Jan 14, ’06 Speculative Buy at $25.60

 

also January 21, 2005 Buy at $21.20

 

The investment thesis over that time was that earnings seemed under-stated
and both earnings and cashflows were increasing rapidly. Now the earnings have
increased sharply as expected, but the price has also doubled and the P/E is
still over 30 so it no longer looks like a bargain.

 

It may keep going up on earnings and price momentum… On the other hand I
would think a lot of people including insiders will now look to take profits.

 

It is 10% of my portfolio. Therefore, I will likely reduce my holdings
probably by at least half. Since I am of course still greedy for up-side I may
just enter a stop-loss at say $42 for half or more of my position. I don’t have
any real reason to think it will drop, it’s more that it looks fully priced and
I don’t want to risk 10% of my portfolio on it. I also have little cash and
selling some of this allows me to raise cash.

 

I hold my stocks in RRSP and an RESP account. In a taxable account I would be
more inclined to hold.

 

For purposes of the model portfolio,
I will notionally sell half the Shaw at tomorrow’s opening price.

 

January 11, 2007

 

Wow! Shaw Communications was up $2.95 or 7.5% to $42.38. That is quite a
large jump for such a large company. This jump was in response to a good
earnings report released this morning and perhaps also sparked by what must have
been an enthusiastic mood at their annual meeting today. At this point I do
wonder if it is a bit over-done. But I’m not anxious to sell yet because it
could keep moving up based on its earnings and sales performance.

 

Kingsway also did well today. And a couple
of more volatile stocks, Western
Financial and Clemex also did
very well today. Moves in small volatile stocks are often pretty meaningless but
nevertheless the whole situation looked nice on my screen as my stocks were up
over 1.5% today.

 

E-L Financial has come down to $600
which makes it a better Buy than when we very recently rated it a Buy at $635. I
understand that in B.C. there was considerable property damage due to recent
storms and this my hurt E-L Financial somewhat, but overall should not have any
lasting impact.

 

January 10, 2007

 

Shaw Communications (last rated Speculative Buy at $34.90 was up about $1.00
this morning to $39.24. Possibly driven somewhat by anticipation of its annual
meeting tomorrow. It may also be about to release earnings for its Q1. It’s up
6% since the start of this new year. And it’s up 12% since we rated it a
Speculative Buy on October 28. Our report indicated that the value ratios did
not look strong but that the cash flows were higher than suggested by the
earnings. If I decide to raise cash in my own portfolio, I may sell some of
this. But on the other hand, it still seems to have strong price and earnings
momentum, so I will most likely hang on to this.

 

One bothersome negative aspect of Shaw is its rather obese pension and
related compensation to the Shaw’s. The company is big enough that it may not be
a big concern. But the fact that they chose such lavish pay packages is
bothersome.

 

In general, I would like to be about 20% in cash at this time to take
advantage if the market dips. But I like the outlook or the stocks I hold and
therefore I am not inclined at the moment to sell. Recent market weakness has
not affected our Stock Picks, which are up slightly in this new year.

 

January 8, 2007

 

We really should not judge stock selection performance over a period shorter
than at least six months or a year. But it’s human nature for most of us to
watch stock market performance by the day, if not by the hour. I have not yet
started to calculated returns for 2007, but I do know that the TSX is down about
3% and my own account is slightly up. So it looks like we are off to a good
start.

 

I had mentioned in notes below (see Nov 9 and Nov 28)  that at some
point Loblaws was going to be a good investment opportunity. The trick was,
when? Now it is at $51.21, up from lows around $45. So perhaps the bargain level
was $45 to $47. Perhaps it is still a bargain. Again it is interesting that most
analysts fell all over themselves recommending this at prices over $70 but then
abandoned it and were not recommending it at $45. Admittedly, we were too early
in rating it Buy on the way down.

 

The market is applauding recent continued changes in the executive ranks. I’m
not so sure all these changes are a good thing. Loblaw’s for many years had a
reputation as the best grocer in North America. They were on their game. They
seemed hungry, always finding a way for profits to go up.  They must have
had some very good operational managers all up and down the chain of command.
Given that I would have thought promotion from within would be called for. Sure
they ran into problems lately but I don’t think that is reason to start making
wholesale changes in management. When you do that the message to existing staff
is, “you are not competent, we need new people to run this place”. That does not
seem fair given the three decades of prior stellar performance. At this point, I
continue to wait-and-see. I would not be surprised to see the stock settle back
at least a few dollars before things eventually turn around. But then again if
they get their act together again, it could just continue up.

 

January 7, 2007

 

Stantec
is updated for its price increase
and remains rated (lower) Buy at $24.54

 

January 5, 2007

 

A nice bump on Tim Hortons up 5.5% today, because of a strong sales report. I
think this is an example of how investing in an obviously great company can
pay-off even when the stock is not cheap. Even when the stock looks a little
expensive, common sense as you see the line-ups says buy this stock.

 

Kingsway was down 2% today but on no news. Insurance companies are hard to
predict and at this point I am waiting for the Q4 report to see how Kingsway did
in 2006. But it looks attractive to me.

 

January 4, 2007

 

Our Picks held up well today despite the TSX being down another 1.2%. The DOW
was down at times today but in the end was up slightly, which is encouraging.
Tim Hortons did well today perhaps in anticipation that its Q4 same-store sales
to be reported tomorrow will be strong.

 

 

January 3, 2007

 

Toronto market was down 1.7% today. That was mostly related to energy and
gold stocks. I am encouraged that the DOW was up a small bit today because most
of the picks on this site are more correlated to the broader economy like the
DOW, and our picks are not so much correlated with the TSX.

 

The Home Depot President today resigned or was asked to leave and it is
reported he got a severance of $210 million. Actually the severance was $20
million and a lot of the other amounts are for stock options he already has but
which vest early and for other entitlements already earned like an obese
pension. Apparently most of the $210 million was contractually obligated under
his contract. It crazy that the Board of directors approved that contract back
in 2000. Imagine how motivated this guy must have been lately. If he did nothing
but suck his thumb all day then he gets to be fired and walk away with $210
million. So basically he had very little motivation. That sucks.

 

I added today to my position in Berkshire Hathaway, per my comment yesterday.

 

Just based on volatility it might be a good entry point for a general
exposure to energy through the XEG exchanges traded fund on Toronto. I
considered buying at $78 today but cheaped out and placed an order at $75.10. I
usually go with individual stocks but for a number of reasons (including the
difficulty of predicting energy prices) we do have any energy stock picks here –
and will not be adding any – but we have some XEG in the model portfolio.

 

January 2, 2007

 

..And we are off to the races for another year and the market is up this
first day…

 

BerkShire Hathaway and Warren Buffett

 

I have often though about adding Berkshire to my list. I own 1 B share and
attended his annual meeting in Omaha in 2003 (along with 14,000 other people
that year). But even Warren Buffett warns that Berkshire can be hard to analyse
because it is a huge conglomerate and has “lumpy” earnings. Still, this summer I
was thinking of analysing it but sadly never did. (There will always be many
missed opportunities in investing, especially in hindsight). Berkshire B shares
are up from about $3000 last summer to $3666 today. And last summer would have
been a good time to buy using our higher dollar.

 

But that’s history. I have not analysed Berkshire in any detail but took a
look today and I believe it is a good investment at U.S. $3666. Q4 will likely
show a profit drop because last year it had a special $5 billion gain in Q4.
Reading the Q3 earnings press release, my sense was that Buffett is excited
about business prospects at this time. Not a stock that is going to leap in all
probability but I think it will be a good investment over the long term.

 

TELUS

 

Telus announced that its president, Darren
Entwistle has sold 168,000 shares (wow that’s about $8.8 million worth). He
still holds about 402,000 ( $21 million). Back around September they were
bragging he was the largest individual shareholder and had never sold any shares
except to pay the taxes when he exercised options. But then on November 1, with
the Income Trust Announcement he would have lost about $6 million on his shares
and another $4 million on his approximate 400,000 options. That’s about $10. No
wonder he was real cranky about the Government’s move. 

 

..So I can’t blame him when he decides to diversify out of Telus somewhat.
And who knows, maybe he suddenly felt the need for $5 million in spending money.
But I also have to take it as a somewhat negative signal, in isolation. If he
had full and total confidence that Telus shares will rise this year, he might
not sell. We still rate Telus a (lower) Strong Buy, but this news in isolation
is cause to be a little cautious. The numbers and trends on Telus look quite
good, but maybe, just maybe, the Telus president is sensing increased
competition ahead. (Sorry to send a mixed signal on this stock, but the fact is
the signals are almost always at least a bit mixed when it comes to the
prospects for stocks).

 

Loblaw will take a $100 million write-down
to liquidate some non-food merchandise. Market reacted well to this. A bit
disappointing. As merchandisers I would have thought they could sell that stuff
on their own without resorting to selling it off to a liquidation chain. I
totally respect their past history of profit and growth. And maybe their current
actions are a sign they are going to turn things around. Here in the West their
Superstores with cheap bag-your-own groceries and with lots of general
merchandise have apparently done well over the years. With recession looming in
Onterio I would think the budget no-frills approach would be good. But then a
gain maybe demographics is against them, many of us are tire of no-frills and we
want to enter a nice bright clean full-service grocery and we are not too
interested in buying a shirt and pants with our groceries! Again, I respect
their history but they need to show some strong management action soon. The
market will punish any negative surprises. I am taking a wait-and-see on this
one.

 

January 1, 2007

 

Happy New Year and greetings in particular to new subscribers.

 

Heading into 2007, markets appear strong. Valuations generally seem good, due
to high earnings. In general corporations are likely to keep on increasing
earnings over time and shareholders will benefit from that.  However, there
can be no guarantees. A recession in the U.S. could push markets down. As could
a terrorist attack – particularly if on North America. And individual stocks are
always subject to negative surprises.

 

For purposes of Performance tracking for 2007, the above ratings will be used
as the ratings at the start of 2007. Most of the reports are fairly recent and
in most cases the price has not changed much and those ratings from various
recent dates still apply for
January 1. In a few cases above we have adjusted the rating to reflect stock
price changes or a change in view.

 

These were:

 

Canadian Western Bank now considered a Weak Buy at 52.78

 

Home Capital now considered a Weak Buy / Hold at $34.05

 

Tim Hortons now considered a (lower) Buy at $33.69

 

I am removing some companies from the table that have not been updated in
some time. These include Hub International and Forzani Group.

 

December 31, 2006

 

Happy New Year to all of our valued subscribers. I am hoping that 2007 will
be another successful year for all of us.

 

December 30, 2006

 

FedEx is updated at rated (higher) Buy at
$108.62. This looks like an opportunity to buy a “great” company at a reasonable
price. We first added this stock to the Site in October at $112.

 

Manulife Financial is updated and rated
Speculative (lower) Strong Buy at CAN $39.35 or U.S. $33.79. Manulife is one of
Canada’s very few “world class” companies. Our last update was September 9, when
we applied this same rating at $36.10. We originally added it to this Site as a
Strong Buy at $17.48 (adjusted for subsequent split) on Dec. 13, 2002.

 

The final performance figures for 2006 have been updated. It was another good
year in the markets. Although the TSX index did well, we managed to beat it for
the seventh straight year. And, I believe our Model Portfolio and also our group
of Buys and Strong Buys were a lot less volatile over the year than the TSX
index.

 

December 27, 2006

 

E-L Financial (property insurance life insurance and other investments) is
updated and rated (higher) Buy at $635. This company can tend to be volatile
given its earnings volatility and low trading liquidity. However, it appears to
be a good long-term investment. I bought shares in this today. Our previous
rating was Buy at $622 in June this year. We originally added it to this site as
a Speculative Buy in March 2004 at $345.

 

When it comes to property insurance stocks I believe in holding several of
them rather than just one or two.

 

The earnings of these companies tend to be quite unpredictable. Therefore,
the ratio of price to book value may be a better guide to value.

 

(Note a table that was here has been removed as it was causing a problem in
width of this page)

 

It’s not our particular intention to focus on the insurance sector. But it
has been a sector that appears to offer good value. Therefore we continue to
have an over-weighted focus on this area.

 

The market is worried that auto insurance rates will will due to competition
and that therefore these companies will not grow. That may be true. But,
off-setting this is high current profits and the fact that sharply higher real
estate prices could allow revenues to grow despite lower auto insurance prices.
Also, to date, it does not look like auto insurance rates have come down very
much.

 

December 26, 2006

 

Sobeys is updated but remains rated Weak
Buy/ Hold at $39.25 (Our analysis date was Dec 19, since then the price has
increased to $40.75). The company is not over-valued but basically we would like
to see evidence of more robust earnings per share growth before we would be
interested in this stock.

 

EGI Financial is updated and rated
Speculative (lower) Strong Buy at $9.60. This means that we consider it
Speculative and also consider that it fits into the Strong Buy category, but at
the lower end of that category. We could easily have rated this lower on the
basis of risk. But on the basis of the value ratios it certainly looks like a
good Buy. In essence, here we have an established  company with a good
history of profitability where the market is willing to let us buy in 1.21 times
book value, which seems reasonable. But it is in a risky and often unpredictable
industry. I may add to my position in this company.

 

I sold my Cognos shares based on our updated rating. I was a bit hesitant to
sell since, although it seems over-valued, it is a great company and it
certainly could continue to rise in price. But logically, it makes sense for me
to move my money toward my high-rated picks. For the same reason, I added to my
FirstService position (Actually, I entered an order to Buy FirstService at its
last traded price but it did not hit my price today) . (Canadian Markets are closed today, but I was able to
place
these trades on the the U.S. market.)

 

December 24, 2006

 

FirstService Corporation is updated
and rated (higher) Buy at U.S. $23.42 or CAN $27.14. This company has a strong
history of growth and appears to be available at a reasonable price.

 

Cognos is updated and rated Weak Sell at
CAN $47.55 or U.S. $40.97. This stock is up 54% since we called it a Speculative
(lower) Buy at $30.29 on July 21. At $47.55 it looks over-valued. Possibly it
will keep going up on the hopes of higher profits, a special dividend or a
take-over. But based on fundamentals it appears over-valued. I plan to sell my
shares in Cognos.

 

To our valued subscribers:

 

I hope that everyone is having a great
Christmas season.

 

It has been our pleasure to provide stock
research to you. As a group, our subscribers have always demonstrated
great maturity and intelligence when it comes to investing. You have looked
for guidance in picking stocks but at the same time you have taken ultimate
responsibility for your own investments. You have understood that that there
are rewards in the stock market but also risks.

 

If you know of others with similar
attitudes, who are looking to invest in stocks and are looking for some
guidance and high-quality stock analysis, please consider emailing a link to
our site to them with your comments. 

 

At InvestorsFriend Inc. we are just
completing our seventh full year of operation and our seventh year of beating
the market index.

 

Each year at this time we update and/or
reconfirm our stock ratings for the new year. You can login over the next week
to check for updates. I trust we will continue to earn your business
throughout 2007 and beyond.

 

Many of you are set up on monthly or
annual subscriptions that renew automatically through PayPal. If you paid by
cheque you can check the end-date of your subscription by choosing “My
Account” on our login page.

 

December 23, 2006

 

I’ve reorganized the Articles list so that you no
longer have to drill down more than 1 level to find any article. Many of these
articles are definitely worth reading again even if you have already read them
once. (My view is that in any endeavor, you can never review the basics too many
times).

 

My own portfolio break-down has been updates (see links below the stock
table) and the 2006 performance has been updated as of Dec 21 (Thursday).

 

December 21, 2006

 

Note that we will be updating a number of reports (as many as we can get to)
in time for the start of trading for 2007.

 

I just sent out an issue of the free newsletter, which you should receive.

 

I was very pleasantly surprised to see
Western Financial Group jump to
$4.20 today. This may have been the result of an institutional player trying to
accumulate shares. It announced today that its underwriters were using a
“over-allotment” from their recent share issue to buy more shares. That gives
the company cash but I don’t see why that should have driven the stock up,
unless these brokers were encouraging their clients to buy it. I like WES long
term but it does look expensive right now. I would not be surprised at all if it
fell back to say the $3.70 level. It is thinly traded and that makes it
volatile. I considered selling at $4.15 today but decided to hang in for the
long term.

 

December 19, 2006

 

Kingsway financial was down 2.7% today to $23.28 . My comments just below
under Dec 13 still apply. CN and Telus were also down which could be good buying
opportunities for both.

 

I note that the Dow Jones set a new record high today. As long as the Dow is
still going up, it seems unlikely that most “blue-chip” stocks like Telus and CN
will continue to slide.

 

December 17, 2006

 

My analysis on the valuation of the Dow Jones
Industrial Average is updated. Since the last update in September, the Dow
index is up a fair amount, but earnings also rose. Therefore the index remains
perhaps moderately overvalued. I expect the Q4 earnings reports to be good. On
that basis, the Dow could continue to rise unless fears of recession grow.

 

December 16, 2006

 

Walgreen Company is added to the list of
stocks above as a (lower) Buy at $43.56. (That was our analysis price but note
that it closed on Friday, up slightly at $44.50). It is not a screaming Buy and
in fact is pricing in continued strong growth. But this may be a case where it
is worth “paying up” for quality.

 

We have added a few companies lately. At this time i am also removing
Sleeman’s which was taken private and Brampton Brick (which we have lost
interest in).

 

December 15, 2006

 

Telus is updated and rated (lower) Strong
Buy at $53.17. I plan to increase my position in this stock.

 

December 14, 2006

 

The markets have kept powering ahead with the Dow and the Toronto composite
index at record highs. At some point we will get a down-turn. Therefore, it
seems wise to have some money in cash or short-term investments to take
advantage of any major market decline. But the market certainly may continue to
rise. P/E ratios are still reasonably low compared to where they have been over
the past ten years. Therefore I am comfortable keeping most of my investments in
stocks. I tend to take a long term view and I am willing to live with the risk
of a market pull-back.

 

Clemex, which is a very tiny higher
risk company announced earnings today. Q3 Sales were down 6% to $1.40 million
which is disappointing. Profits were down over 70% but that may not be too
meaningful as profits last year were only $147,000 and so a small decline in
revenues combined with a small increase in expenses made for a large drop in
profit. The comapny had indicated last quater that this Q2 would not be
strong… The company seems confident about the future. I tend to think it is
worth its current price, but then again this company has a bad history of
under-delivering (see my comments dated Sept 16 below). The company did not yet
release its balance sheet but I believe its debt has continued to come down
which has reduced its risk.

 

I did add to my Kingsway position today.

 

December 13, 2006

 

Kingsway Financial fell under $24 today.
It’s always hard to “step-up” and buy on dips like this. There is always the
fear that a dip means that someone knows something negative is coming. Thos who
trade on based on analysis of charts and momentum would tend to sell rather than
Buy. However, those who, like myself, trade on fundamentals are inclined to buy
on dips. In the past three years buying Kingsway on dips would have worked well.
But there were periods in earlier years where a little dip was followed by much
bigger drops. At this time I believe that the fundamental value of Kingsway is
such that a very large price drop is unlikely. Therefore I am inclined to Buy on
this dip. Many times in the past I have regretted not adding to my positions on
dips.

 

One thing that is a bit annoying is that Kingway is “supposed” to be buying
back shares but have not reported buying any shares since mid-September. They
have said that it can be hard to buy since they are only allowed to buy on a
down-tick in price and cannot buy on an up-tick in price. I would have thought
that they could have stepped in to Buy in the past few days. (Maybe they have
bought and have just not reported it yet).

 

Meanwhile a number of our other Picks were going up…
Clemex reported that it believes its
shares are under-valued and indicated that it will buy back some shares. I’m a
bit surprised that they would have the cash to do so, but anyhow this was
positive news. Tim Hortons seems to be
fighting back from a recent small decline in its price. They have not reported
their same-store sales increase for November (This use to be reported when they
were part of Wendy’s)

 

December 11, 2006

 

Western Financial Group fell to
3.61 today. Based on the financials it looks like only a hold or weak buy. Buy
as a speculative play on the Alberta economy it may not be a bad pick. In early
December it bough 15 new insurance agencies with the proceeds of its equity
issue. This brings the total number of insurance offices to about 71. It may
take at least 6 months before this shows up in earnings, so this Stock is likely
to require patience.

 

December 9, 2006

 

Performance figures are updated.

 

Target is updated and is rated Buy at
$58.09. This retail stock has done very well (up 19%) since we added to this
Site in late May at a price of $48.82.

 

December 7, 2006

 

I sent out an email to all paid subscribers tonight. It was really just a
reminder to login to this Site, but if you did not receive it, we may not have
your correct email address (You can check that under “MY Account” on our Login
Page). (If you change your email address, the email that is your user name will
not change unless you request me to change it.)

 

Dalsa reported today that its CFO was
resigning as of January 13. They did not say why but they thanked him for his
service and giving that he is staying until January 13, I suspect he simply left
for a bigger opportunity.

 

Check our recommended book section, I have started to
add a few comments under each book.

 

December 6, 2006

 

IGM Financial is updated and rate (higher) Buy
at $48.80. Since our last update in March the price has not changed but earnings
are up. In addition long-term interest rates are down and dividend stocks are
more in favor due to the announced Income Trust tax changes. IGM’s earnings
could fall if the market falls or if Banks win more of the business. But overall
if IGM keeps on doing what it has been doing and has success similar to its past
then it seems likely to provide a return in the range of 10 to 15% annually
(although with volatility) if held for five years. In the short term if markets
continue to do well, it could certainly advance to $55 or $60

 

Good gains today on Kingsway and Shaw
Communications. CNR was down but I suspect
that is just normal volatility. I did hear today that American executives were
selling shares at record or near-record rates. That ‘s not a piece of
information that I would act on but it is a reminder of the fact that with the
Dow  and TSX at record levels we have to be aware that a significant market
“correction” is always a possibility. As mentioned earlier that is offset by
very low interest rates and still-strong earnings. In the end I don’t think
anyone can accurately predict when a market correction will arrive.

 

December 5, 2006

 

A number of our Picks did well today including
Kingsway, CNR and
Western Financial Group. Based on
economic news today, there was some talk today that the U.S. economy will do a
soft-landing rather than a recession. That remains to be seen. But for the
moment the market sentiment seems good.

 

December 4, 2006

 

The market continued to show strength today. I was surprised that the
TSX Group rose 3.5% today on the same day when Instinet announced it would
start competing with the TSX in 2007. I’m not sure how big a threat Instinet
would form. Tim Hortons was at first up
today but ended up down for the day even though the overall market was strong. I
don’t think there is much reason to think Tim’s will rise much more in the short
term. Perhaps a dip is more likely but at the same time I am not going to sell
since the dip may not happen.

 

November 30, 2006

 

Wal-Mart is updated and rated (higher) Buy
at $47.39 (our analysis price was $47.39, but the stock closed at $46.10 today).
Analysts are focused on weak same store sales growth in the past two months.
However total sales increased almost 12% in the past two months year-over-year
which seems impressive. Overall the stock is out of favor and may well fall in
price, but I view it as an opportunity to buy a company that historically has
been exceptionally strong but which is available at a very ordinary multiple of
price to earnings.

 

November 28, 2006

 

It was good to see stability in the U.S. market today therefore there seems
to be no reason to think that Monday’s drop was the start of a down trend. EGI
Financial holdings appears to have dropped back to reasonably attractive levels.

 

Loblaw is updated and rated Speculative
(lower) Buy at $47.70 when evaluated (closed at $47.26 today). I continue to
watch this stock and believe that at some point it could offer good value if
there is an indication that profits will rebound. But currently it is not clear
if profits can rebound quickly to the 2004 levels. Therefore I continue to take
a wait and see approach to this one. It did drop since we gave it the same
rating in August at $49.01. It remains to be seen how effective and aggressive
will be the new CEO, Galen Weston jr.

 

November 27, 2006

 

Home Capital is updated and rated
Speculative (lower) Buy at $28.75. It closed today at $27.94. This stock has
struggled lately and we last rated it Speculative (lower) Buy at $31.80 on
August 7. The high was reached early this year at $43. We first rates this Stock
a Buy at $7.43 (adjusted for subsequent split) in April 2002. We have done well
on it but don’t currently own it.

 

It seems unlikely that Home will regain it former 30% growth rate. Recently
net interest revenue was growing at 14.5%. It faces more competition. Lately I
keep hearing advertisements from more and more new mortgage companies that I
have never heard of. At some point some of these companies are going to suffer
credit losses. But Home has a strong history and I would not bet against it.

 

I don’t own it and am content to wait and see how Q4 does, before considering
a purchase.

 

Our Stocks took some hits today mostly on names that had gone up a lot
lately. (New York Stock Exchange, Tim Hortons, Cognos). I had thought about
reducing my position in NYSE but having already reduced it once this year, I
just decided to ride it out as a speculative pick. I think this company has lots
of potential but it certainly go much lower, having risen do quickly. With Tim
Hortons, I had mentioned on Nov 9, that I would think about trimming. But again
I just decided to ride it out and bank on the long-term strengths of this
company.

 

Today I did add to my positions in TSX Group and Thomson, both as longer term
bets.

 

Nov 25, 2006

 

The Thomson Corporation is updated and
rated Buy at CAN $48.30 or U.S. $42.66. This is another stock where the GAAP
earnings appear under-stated. The value ratios would suggest hold rather than
Buy. However, it is in a good position for strong earnings growth due to the
electronic delivery of most of its products. I may add to my position in this
stock. It is essentially a U.S. company although it is based in Toronto.
Canadian investors face currency risk. It is up about 7% since we rated it lower
Buy in September. The stock price has not done that well over the past 6 years
or so, but that was partly due to currency for Canadian investors and for U.S.
investors it was mostly the fact that the stock had simply become over-valued in
the early 2000’s.

 

The TSX Group is updated and rated
(higher) Buy at $45.81. This Stock was originally added to this Site as a Buy on
October 12, 2003 at $14.43. (adjusted for a split and for a special dividend)
Clearly it has done very well since then. At various times I have considered it
to be too expensive. It is not cheap. But I believe that its special
characteristics as a near-monopoly in Canada do justify its current price. I
have a small position in it and plan to add to my position.

 

Nov 23, 2006

 

Performance figures have been updated.

 

Nov 22, 2006

 

More gains today…

 

Note that we will likely have a couple of updated reports by Sunday.

 

REGARDING PAYPAL

 

Most of you pay your subscriptions through Paypal. New subscribers to this
Site who pay through PayPal end up opening a PayPal account as you sign up with
us. We use PayPal because they are an established secure payment processor. But
admittedly they do have some confusing and or annoying practices.

 

If you just opened a PayPal account, they will email you to confirm your
email address with them (confirm your PayPal account). If you never intend to
use PayPal except for payments by credit card, I don’t believe it is necessary
to confirm the email. I don’t think there is a harm to confirming the email at
all but you don’t need to do it in my experience.

 

PayPal may also encourage you to link in your Bank Account. Personally I see
no benefit to that and would not do it. In fact if you do confirm your bank
account, they will make the bank account the default payment source for any
future PayPal transactions (existing subscriptions paid by credit card would
continue to go to the credit card). Bottom line, is unless you use PayPal for
something other than credit card payments I see no benefit to linking in your
bank account.

 

Be aware that scammers often pretend to be PayPal. Be careful of any email
from “PayPal” that asks for credit card info etc. Often they will show PayPal as
the link but if you click through you will see the URL is not really a PayPal
URL. This is not PayPal’s fault it is scammers but the point is always be very
careful. If you need to change something on PayPal log in at
www.paypal.com. Also the PayPal buttons on
this Site of course are safe and go to the real PayPal.

 

I hope the above is not confusing or alarming. In fact none of our
subscribers have ever reported being scammed by a PayPal look-alike. But I just
thought the above might help in trying to understand the various emails from
PayPal about confirming email address and confirming / adding a bank account.

 

Nov 21, 2006

 

Our model portfolio got a nice boost today from New York Stock Exchange
Group, up 9.7% today and it has been on a real tear lately. It started this year
as Archipelago rated Speculative Buy at U.S. $50. Archipelago was attractive
because the it was about to buy the New York Stock Exchange (in a reverse
takeover where the former owners of the NYSE would own most of Archipelago – and
where Archipelago would be re-named NYSE Group). For a variety of reasons the
new NYSE Group is hard to value and we did not have a rating on the combined
entity but we kept it in the Model portfolio and I own it personally.
Archipelago went up to about $85 soon after the takeover of NYSE and then fell
back briefly to the low 50’s. We sold half at $65.69 on the way down. It has now
climbed all the way to U.S. $104.50. I really don’t know what it is worth now.
But I have a feeling that the brand power of the New York Stock Exchange makes
it worth a lot. It will have to increase its profits by a huge amount to justify
its current price. But I suspect it can do that. Having already sold half, and
not having a huge position in it, I am content to just let it ride. But I do
view it as being quite Speculative at this price.

 

In terms of easier to predict stocks, Shaw Communications and Kingsway both
had nice gains today.

 

Nov 20, 2006

 

A good start to the week. Kingsway, Shaw, CN, Tim Hortons all up. Western
Financial was down a couple cents most of the day. It finished up one cent but
that was on a tiny end of day volume. I did not sell any yet. I may sell some
tomorrow.

 

Nov 18, 2006

 

Western Financial Group is
updated and rated Weak Buy / Hold at $3.64. In August we had rated this a
Speculative Buy at $3.25. At the beginning of 2006 we rated it a Speculative
(lower) Strong Buy at $2.80.

 

In Q3 the earnings growth was definitely good with a 44.8% growth and in 2006
to date earnings have grown 38%. But we focus on earnings per share and more
particularly on earnings per diluted share. The diluted share count has
increased quite materially due to conversion of debentures in January and due to
other convertible securities that are now “in-the-money” given the share price
increase. In addition the company just issued additional shares at $3.50.
Fundamentally, I have trouble paying $3.64 for shares that the company is
apparently willing to sell for $3.50 (though I realise the company may have had
little choice but to issue shares to finance growth – although I believe they
previously indicated growth was more likely to be financed by debt).  I am
still reasonably comfortable holding it and I believe it should do well
particularly given the strong Alberta economy. But I expect the share price to
be volatile. I have a large exposure to it and I may reduce my position, but I
will definitely continue to hold some.

 

For purposes of the model portfolio I will notionally sell half the position
at Monday’s opening price (but not lower than $3.45) This could be accomplished
by placing a sell order now for $3.45 since I would then get the opening price
if it was higher than $3.45 or if lower, this becomes a  limit order at
$3.45.

 

 

Nov 17, 2006

 

ING Canada is updated and rated Speculative Buy at $54.60. It is not highly
speculative but has to be considered somewhat speculative due to its high price
to book value and the volatile nature of earnings. But overall it will likely
continue to do well. Our previous rating on this stock was Buy at $52.96. It
started this year rated (higher) Buy at $51.25. It originally was added to this
site as a (higher) Strong Buy at $34.15 in June 2005.

 

The main reason I was attracted to insurance stocks in 2003 was my theory
that auto insurance rates had gone too high and with drivers avoiding claims if
at all possible, I figured auto insurance profits would go very high. This has
definitely happened with ING.

 

Nov 16, 2006

 

I never did own any oil and gas Trusts, and I don’t know much about them. But
for many the business model included buying production. There was perhaps not
much value added in those cases except maybe the tax savings were a big value
add if purchased from a taxable corporation . Though I suspect exploration
companies never paid much cash tax anyhow with their capital cost allowance
deductions or other depletion deductions.

 

One thing, for sure in a rising oil and gas market if a Trust over-paid for
assets, that sin was hidden as the market rose and took care of it. In today’s
market, oil and gas have fallen therefore we may see some cases where Trusts and
others over-paid for assets. That is just one more piece of bad news for the
sector.

 

If I wanted to play oil and gas right now I would likely buy the exchange
treaded XEG units on Toronto. I don’t disagree that it is a good idea to have
some exposure to oil and gas, though I happen to have none and I focus my
attention on companies that seem more predictable to me than oil and gas prices.

 

Loblaw was up only $1.00 earlier today but ended up $2.40. I did not buy. My
strategy there would be to establish maybe a third or a half of a target
position and then wait and see. Q4 will be ugly and the price may drop . Then
again the market already knows about the write offs coming in Q4, so maybe it
will just focus on the future. They say it will be a  long haul though so I
guess no reason this will shoot up. (unless maybe they did something big like a
sale and leaseback of the real estate – and maybe new CEO (young Galen Weston
junior) will try something like that to make his mark…) I have not analyzed
the Q3 results yet…

 

Nov 15, 2006

 

Loblaw reports earnings, tomorrow, Thursday. They announced a certain key
executive will stay (I think he had resigned but now will stay..). I’m tempted
to Buy but will likely wait for the earnings and then see where the price goes
and re-evaluate.

 

A good day in the markets. Markets can always turn down quickly, but right
now it feels like the market will keep rising. The last three calendar years
ended very strongly, I hope this will be one more. We expect to have a couple
updated reports on the Site by Sunday.

 

Nov. 14

 

Kingsway is down from its highs. Basically this stock tends to be volatile
but has trended up over. It could certainly drop somewhat more but I am
comfortable holding it. Recent lower oil prices and lower inflation in the
U.S. bode well for most of the stocks we feature here.

 

Nov. 13, 2006

 

Note some of these updates under Nov 13, will not get posted until the
14th due to a problem uploading the Site at this time.

 

Stantec is updated and rated (lower) Buy
at

CAN $22.65 or U.S.$19.99 (Subsequent to our analysis date, it closed today
at CAN $23.62 and U.S. $20.83).

 

 

Canada Bread is updated but remains
rate Weak/Buy / Hold at $53.80. Basically not a stock we are too interested in
at the moment but given past growth we feel it is worth keeping an eye on.

 

IMPORTANT ADMINISTRATIVE NOTES

 

With all the spam and spam filters these days it is easy to miss legitimate
emails. My emails may get blocked as spam because they contain links or because
they are not addressed to each recipient but rather do not show the recipients.  If you
use Outlook, take a minute to go to Tools, Options, then hit “Junk Email” (near
the top of the box under Options) then hit safe senders and add
shawn@investorsfriend.com. This
should ensure you get my emails… unless of course they are blocked by a spam
protector before they ever hit your inbox.

 

As a reminder, those that subscribe by cheque can see the end date to which
access to this site has been paid under “My Account” on our Member login page,
after you login but before you click through to this page.  Unfortunately,
our email system is not (yet) set up to issue reminders about expiry dates.
Because this is a subscription system, the expiry is indicated as “Next Payment
Due”. For PayPal subscribers this indicates when the next payment will process
(of course it will not process if the subscription has been canceled).

 

Given our rating on Dalsa I decided to add to my position in it today. I also
added it to the model portfolio. As a high-tech company it is always possible
that it will surprise us with some bad news such as a write-off of its
investment in the cinematography camera. But the stock seems cheap and I believe
the risk/reward balance is quite good at prices under $13. I’m not taking a huge
position in it, but I figured why have a tiny position that would hardly matter
to my portfolio?

 

Nov. 12, 2006

 

A edition of the free newsletter was
just sent out (1:15 pm eastern time). If you did not receive it by email, let me know, as I am
interested in knowing if it is not getting through to some of you for any
reason. (To email me click on
shawn@investorsfriend.com )

 

Nov. 11, 2006

 

Dalsa is updated and rated (higher) Buy at
$12.23.  With a P/E of 21 the stock does not look cheap. But the price to
book value ratio of 1.27 is quite attractive. It appears to me that earnings may
be considerably under-stated due to (presumably temporary) start-up-stage losses
in digital cinema and also due to amortization of intangibles and the expensing
of R&D. The stock price has not done well over the past few years. However, at
prices under $13, I believe that this stock represents strong value with
excellent potential. As always though, there are no guarantees. As I mentioned I
would under Nov 8, I have added to may position in this stock. I doubled my
position and it represents 2.3% of my portfolio and I may increase this to as
high as 5%. I would note, that listening to the conference call, the analysts
seemed to have some concerns and did not seem supportive. Therefore the Dalsa
shares will not likely rise until it actually produces higher earnings, it is
unlikely to be driven up by analysts recommending it.

 

Nov 9, 2006

 

I notice Loblaw down around $46 again. I
believe this will be a bargain at some point. For example they could announce a
sale (and lease back) of real estate to a REIT and that would lift the price. I
don’t believe they have announced Q3 earnings so I would wait for that.

 

Western Financial Group has
announced today (I believe it was after the close) that it will issue $25
million in shares. This is hefty considering it has a market cap around $120
million. I notice this press release did not get picked up in YAHOO Finance, so
not all investors know about this. I have often mentioned in my reports the
possibility of a share issue as a negative thing. It may be good long-term, but
in the short term it usually drives the stock down, and sometimes substantially.
Possibly, they can market this at around $3.80. Given their earnings growth and
the recent stock price increase it may be possible for them to sell the shares
for $3.80. But certainly $3.50 or lower is possible. Given no price is yet
announced, we may very well see noticeable drop tomorrow. Unfortunately, if that
happens it will likely happen fast and there will simply be no chance to sell at
say $3.75 or higher with the hope of buying back in as others sell. Trading was
halted as of the end of today. My bet is it will open $3.50 or lower,
unfortunately. We have had a good run with this stock and volatility is to be
expected…

 

Tim Hortons is updated but rated only
Weak Buy / Hold at $33.55. They really did not release a lot of financial data
for Q3 and also due to the share issue in June and other factors associated with
the spin-off from Wendy’s we really don’t have comparable financials for even
the last 12 months. It is going to be a least after Q1 2007 and possible later
before we really get an accurate picture of the annual profitability of Tim
Hortons as a public company -particularly given that there were some unusual
expenses associated with going public and the separation from Wendy’s. The stock
is up 18% since we rated it a (lower) Buy at $28.37 and indicated we were buying
on July 30. It has been moderately volatile.

 

After this run-up and given the quality of the company I am reasonably
comfortable with the 5% weighting in the Model Portfolio. However, my own 8.9%
weighting may be a bit high and I may trim that. If I did not own any I would
probably buy just a small position and average in that way. It’s certainly
possible that it will fall in price, although long-term the direction is up.

 

Whenever I am in their stores, or drive by, I think, “how could I not own
some of this?”. It’s a case where the numbers do not indicate a bargain, but
then again the strength of the brand is apparent to all and that should bode
well in the long-term.

 

Nov 8, 2006

 

Wow, yet another great day in the markets.
EGI Financial Holdings came out
with earnings mid-day and rose 11% to $9.41.
Western Financial came out with
strong earnings after the close. Clearly the market has been anticipating strong
earnings from WES so it remains to be seen if the stock will rise tomorrow.
Cognos also did well today.

 

Our performance is at a record high for the year, and that is a good
accomplishment considering the Income Trust situation that negatively affected
many investors.

 

On the other hand Dalsa closed at $12.01
today, although a more realistic price is about $12.50 since it traded at that
level most of today. It looks like someone traded a block of 200,000 at $12.01
late today. In the last update I said I would be interested if the price fell
below $13. I am going to add to my position in this stock. It could turn out to
be a real gem, but is likely going to require patience. It recently reported
earnings and I have not updated for that. Basically their digital movie camera
unit loses money, but this may be more of an investment than a true loss.

 

Nov 7, 2006

 

I ended up selling about 40% (had entered an order to sell 50% but then
decided to sell a bit less) of my Kingsway on the stop loss. I really don’t like
stop losses, I would have got a better price by just selling. But I was
reluctant to sell and this stop loss at $25 was a way of forcing myself to sell
but only if the price dropped. Tim Hortons had another good day today. I will
update the Tim Hortons report in the next couple of days.

 

Nov 6, 2006

 

Kingsway Financial is updated and is
lowered to a Speculative Buy at $25.60 from the former Speculative Strong Buy at
$21.97.

 

It may be useful to review how the investment thesis on property insurance
has changed over the past few years.

 

When I began looking at insurance companies in 2003, I was attracted by the
extremely high insurance rates that were in the news. I figured they might be
making a lot of money. GAAP earnings were low or negative around that time but
that was being caused by retroactive expenses (developments) related to prior
years. My theory was that insurance rates had over-shot the mark as they were
moved high enough to generate profits in spite of retroactive expenses. It
seemed likely that a profit gusher was around the corner. And this came true,
insurance profits have absolutely soared since then. (I hope I am not
over-stating the accuracy of my thinking in 2003, but that is how I recall it).

 

Over the ensuing period profits did rise and so did the share prices but in
general the property insurance companies looked very cheap.

 

At the present time, profits are still high, but rates are declining. And the
stock prices have risen noticeably. In general insurance stocks look like good
investments but are not as compelling as before. Update added Nov 17, 2006.
While rate decreases put revenues and profits under pressure, an offsetting
factor is that property values have increased dramatically and ultimately this
should increase the revenue and size of the industry.

 

In the case of Kingsway I was very hopeful that they had over-reserved and
would at some point release these reserves creating huge profits and increasing
the book value. Now I am not as sure this will happen. It sounds like they were
so burned on being under-reserved in the past that even if they think they are
over-reserved they will be very reluctant to release that as earnings.

 

So… I still think Kingsway is a good investment. It should continue to do
well. But I will definitely consider cutting my exposure to it. I may put in a stop loss at $25 on half
of my
Kingsway position. (Hopefully the
stop will not be hit…). I generally don’t use stop losses but I will make an
exception here due to my high exposure to the stock. The model portfolio has a
much lower exposure to Kingsway than I do and so I am comfortable with keeping
the Kingsway position in the model.

 

Update: for my own account I entered a stop loss order to sell half my
Kingsway if the price goes to $25 or below but not to sell below $24.

 

Nov 5, 2006

 

Northbridge is updated and continues to
be rated (higher) Buy at $30.84. Northbridge had a combined ratio of 93.6% in
Q3. This means it made 6.4% on the insurance itself before any earnings on
investments. For whatever reasons insurance company analysts have come to view
that kind of profit as normal when in contrast Warren Buffett considers it quite
acceptable to merely break even on the insurance. The industry is still quite
profitable but is viewed as very risky. Basically this company will likely
continue to drag its share price up slowly by its own bootstraps (profits add to
book value and that tends to drag the price up). Also it plans some significant
share buy-backs which should help although that will actually pull the book
value down a little.

 

Nov 5, 2006

 

ebay is updated and rated Speculative Weak
Buy/Hold at $32.67. We added it to this site back on July 17 with the same
rating  and at a price of $25.66. Maybe we were a little conservative then.
We realize it still has great potential if past very high growth continues. But
the fact is that investors buying now are paying up-front for some pretty robust
growth. If growth slows the price would drop. In addition I really don’t like
their high executive compensation and the fact that they were so slow to expense
options. It’s an okay investment as a way to benefit if it keeps growing fast,
but I definitely consider it somewhat speculative. I hope to have one more
updated report later today and some through this week as well.

 

Nov 4, 2006

 

Performance figures are updated, as well as for the Model Portfolio, and my
own portfolio. See links above (below table of stock picks).

 

Nov 3, 2006

 

I’m now in Toronto Airport. Big line up at Tim’s… Although not a cheap
stock I love the company.

 

I will update performance figures tomorrow. Also some report updates by
Sunday night. Looks like the week ended on a positive note.

 

Nov 3, 2006

 

Northbridge earnings out… it fell but does not look bad to me…

 

I’m sitting in Ft. Lauderdale airport returning to Edmonton. Check for
updates over the weekend.

 

Even with Trust and TSX situation we have not had a bad week maybe down a
little but not much.

 

Nov 1, 2006

 

A big hit for Telus today… I don’t see it going lower from here. This
income Trust tax announcement is a bit of a shock, but not really. There has
been lots of speculation that the government needed to do something and it was
only wishful thinking that people thought the government would stand idle. Our
picks lost I believe about 1% today while the market was down 2.4%.

 

As usual these things happen so fast that there was no time to react. I am
not thinking of selling anything on this news. It does take away some of the
upside for Shaw, CNR, TSX Group and Tim Hortons.

 

October 30, 2006

 

This week started off with a good day for our stock picks, although the
overall market was flat… Various stocks could be volatile in either direction
in the next few weeks as they release earnings which in a few cases may have
negative surprises and a few other cases may have positive surprises. But
overall the market tends to “know” (somehow – such as insider leaks) what the
earnings will be and therefore the stocks often don’t move much at all on an
earnings release.

 

October 28, 2006

 

The model portfolio is updated. Until Friday, I am attending a course at
Delray Beach Florida and may or may not be able to respond to emails.

 

October 27, 2006

 

Shaw Communications is updated and rated
Speculative Buy at $34.90. The current profit would not justify this price but
profits have been trending up very strongly. It seems to be in a good position
to keep growing cash flow. With the recent dividend increase to $1.00 per share
from 60 cents, we may see interest from income oriented investors. I believe it
is generally thought that if the company was for sale it would fetch over $40
per share. Also the Income Trust route is a possibility. So it may be somewhat
speculative at this price because it needs to keep growing the cash flow and
earnings to justify this price, but I like its chances.

 

October 26, 2006

 

Lots of earnings news today.

 

Shaw Communications had great earnings which must have been anticipated,
given that the stock was flat today. I plan to update our report on on this
company soon. My sense is that it will continue to well.

 

Tim Hortons reported great sales but lower net income. It showed surprising
strength on that news. I was almost tempted to take some profits but thought
better of it. It certainly could pull back, but I would not count on it.

 

I don’t follow Wendy’s any longer. But I wonder if the market is confused
about how much Wendy’s is making without Tim Hortons. Some headlines today spoke
of Wendy’s earning 61 cents per share. But that was with it owning 82% of Tim
Hortons for most of Q3. Absent Tim Hortons Wendy’s earned a paltry 16 cents per
share. That would appear to make its $35.50 share price look pretty expensive.
Meanwhile Tim Hortons earned 27 cents per share. I really wonder if the U.S.
market totally “gets it” regarding the fact that Tim Hortons was the main profit
element of Wendy’s in recent years. I like Wendy’s as a business but it looks
expensive and it will now be necessary to analyze its profits without Tim
Horton.

 

October 25, 2006

 

Yet another good day today…

 

Check out our Performance page. I have added
bar graphs to show the average return for Strong Buys and Buys etc. in each year
since our inception. Until now this data was in a table format, but as more
years were added to the table, it is probably a lot easier to see graphically.
Of course past returns are no guarantee of future results, but it seems logical
that if we have done well each year for seven years and we keep with the same
approach, we can reasonably expect good returns in future.

 

October 23, 2006

 

I added to my position in CN today… If oil prices stay low/decline, it
looks like the general market outside of energy can keep rising. Nevertheless,
it is not a bad strategy to build some cash and also to be ready to react if the
market starts to turn down

 

October 22, 2006

 

Canadian National railway is updated and
continues to be rated (higher) Buy at $52.31. It had a great earnings report. We
started the year with CN rated (higher) Buy at $53.15. When it fell to around
$46 it was tough to have the resolve to keep rating it highly. We kept it at
(higher) Buy. In retrospect maybe we should have said Strong Buy, but we bought
in to the fears of recession.  It turns out that $46 was a great
opportunity to buy CN. And at around $52, indications are that it is still a
good investment opportunity. (But there are never any guarantees).

 

October 21, 2006

 

Couche-Tard (operator of the over 5000
Mac’s and Circle K convenience stores) is updated and rated Weak Buy at $25.85.
This has definitely been a great company and it probably has substantial growth
ahead of it. But it seems too expensive at this time. If I owned it I might
continue to hold or I might look to re-deploy the money.

 

Kingsway fell noticeably this week but
this may just be normal volatility especially in light of its very strong recent
gains. Overall performance of the stocks on this site was up again this week.

 

CN certainly did well this week. I had mentioned a few times in September and
October my interest in CN as it had fallen to prices around $48 and $46. It’s
always hard to be brave and buy on those kind of dips but now we have CN
suddenly back over $52.

 

October 19, 2006

 

CN released yet another great earnings report after the close today.
Presumably it will rise tomorrow. I think it is becoming even more clear that
this was a real bargain when it fell to the $46 level recently.

 

October 17, 2006

 

FedEx Corporation is added as a new
company rated Buy at $112.68 which was our analysis price. It closed at $115.82
and in any performance figures we would start measuring from that higher price.
Our Buy rating would apply up to at about $120 at which point we would want to
re-evaluate. The investment thesis here is the chance to buy a great company at
a pretty ordinary price to earnings ratio.

 

We could easily see a few more down days in the market. My hope would be that
strong Q3 earnings would quickly reverse any negative trend. I thought Western
Financial held up surprisingly well today given a negative day in the markets
and the fact it rose so much recently.

 

October 16, 2006

 

It was interesting today that Aeroplan
announced that points will now have to be used within seven years. That is
probably reasonable but will still breed some resentment. I know a lot of people
have accumulated a ton of miles via the aerogold credit card. At this point if
they don’t have travel plans maybe they will switch to another credit card that
gives a different benefit. Aeroplan also upped its dividend which is a positive.
More importantly Aeroplan introduced a new system whereby all seats will be
available but at various levels of points that will be linked to the cash fares
of those sets. This should be a very good move and could see a lot more points
being redeemed. Bizarrely this will be bad for cashflow but good for GAAP
accounting earnings. (Although it could also possibly lead to more accumulation
of points which is good for cashflow).

 

Another good day… particularly for Western Financial Group. I would worry
that this could certainly be volatile. Most of the recent increase was on low
volumes but today the volume was good. It may start to attract more attention
just because it has done so well. At this point our rating at $3.25 is quite a
bit below today’s close of $3.88. We will update in November after they release
Q3 earnings.

 

With such strong gains lately one could fall into the trap of thinking the
market will just keep going up. But from experience we know that it can turn
around easily to the down-side. But so far so good…

 

October 15, 2006

 

In terms of stocks to Buy I am personally thinking of adding to positions in
CN, Shaw communications and maybe E-L Financial and Bank of Nova Scotia. All of
the Buys and higher above are worth considering but note that our ratings apply
as of their date and if the price has jumped a lot or too much time has passed
then our rating would likely change if we updated it. As always, subscribers
invest at their own risk. Although we have done very well, stocks are always
risky in that surprise events at a given company can take the price down in
a hurry – as we recently saw with Cryptologic. The Q3 earnings will soon be
rolling in and we will update many of the reports for that.

 

I made a note on the model portfolio
page that I will notionally buy CN, Manulife and Bank of Nova Scotia

 

Alarmforce is updated but is only
rated a Speculative Weak Buy at $4.66. We continue to monitor the company but it
is not one we have much interest in at this time.

 

Bank of Nova Scotia is updated and
rated Buy at $48.20 as of our analysis date (it closed on Friday at $47.74). The
basic investment thesis here is that buying a company with an ROE around 21% is
a good deal when the P/E is only about 14. Should continue to do well barring a
recession that causes significant loan losses.

 

Performance figures have been updated. Outside of energy stocks much of the
market has been doing unexpectedly well and seems to have momentum heading into
the Q3 earnings release season.

 

On Friday, I bought back the half of my
Kingsway shares that I recently sold. I felt that the pain of missing out on
the the potential gains there outweighed the potential pain of the loss if it
drops.

 

If anyone has emailed me and not heard back, try re-sending the email. I get
a huge volume of spam emails. Occasionally when deleting spam I may end up
deleting a valid email.

 

October 11, 2006

 

Looks like I was early in taking profits on Kingsway and in trying to play
the volatility on Western Financial. Both up today.

 

So.. BCE goes the Trust route, I first speculated on that on this site
a couple of years ago that we might see some mega-conversions. There should be
more to come why not Loblaws for example? (not that I have heard anything).
Large coprations that pay lots of cash taxes will be looking to convert. Maybe
big energy companies…

 

Some people talk of leveling the paying field with a higher dividend tax
credit. That will not work. The playing field would only be level if corporate
dividends were tax deductible (like interest payments) to the corporation and
fully taxable to the shareholder. Even then some trusts have the advantage of
being able to flow through distributions as return of capital so corporations
would need that right as well, dividends in excess of earnings would be tax-free
return of capital.

 

Overall there still seems to be some financial engineering at work which is
still providing a one-time boost to stocks.

 

October 10, 2006

 

Sobeys is updated but remains a Weak
Buy / Hold at $37.58 (We analysed the ratios based on a price of $38.16 but the
same rating applies at today’s closing price of $37.58). It’s not an investment
we are interested in at the moment but we feel it is worth monitoring and
keeping an eye on Sobeys will help us in monitoring other grocers including
Loblaws.

 

Tim Hortons was up again today. If I did not own any I would not take a large
position at this price but would definitely be interested in owning at least
some of it. It looks expensive but it may be a case where paying for quality
pays off in the longer term. I would not mind seeing it drop in price because
that would be  an opportunity to accumulate it.

 

October 8, 2006

 

I have updated the percentage holdings in my personal portfolio. (See link
just below the stock table above). My cash position at 27% is the highest it has
ever been. This was due to profit taking and a desire to build up cash in case
of a market correction. I have missed out on some return by moving into cash but
I think it was a prudent strategy. I may even give some consideration to more
permanently allocating a portion of my portfolio to safer short-term
investments.

 

An edition of the free newsletter was
emailed out late Friday night.

 

October 5, 2006

 

Earlier today, I posted the following note on the login page.

 

 

I may sell half my Kingsway today. I was wondering if I should take some
profit or maybe even buy more. Checking insider trading I see a a few sells in
September and no buys. Just to be prudent I think I will sell half… Later I
indicated that I had indeed sold half.

 

 

There is a very good chance I will regret selling half my Kingsway shares.
But at last check it was about 14% of my portfolio and I just wanted to take
some money off the table. I’m not sure that the insider sales in September were
anything to worry about at all. Insiders still have very large positions and
this was probably just the normal exercising of options and sale of shares that
happens to most companies all the time. But Kingsway tends to be volatile and I
just did not want to be holding so much of it if it fell – which I have no
reason to think it will. In the model portfolio it is around 8% and I am
comfortable at that level.

 

As always there are no truly easy answers in the market, no guarantees. Each
of us has to decide what we are comfortable with.

 

I bought back the 25% of my Tim Hortons that I had sold last week, plus a bit
more.

 

October 4, 2006

 

Today was another positive day for our Stock Picks.

 

There was no sign today of selling pressure on the Tim Horton shares despite
the float of shares having increased by over 400% on Monday. Volume continues to
be ten times normal. It occurs to me that some of that volume is probably just
due to arbitrage between the New York and the Toronto price. If it gets cheap in
New York based on the Toronto price adjusted for the $U.S. dollars then the
arbitrators sell in Toronto and buy in New York and ten minutes later may be
doing the reverse so that creates some of the volume I believe.

 

I was skeptical that all the Americans would sell, but at the same time it
seemed logical that there might be some selling, when the number of owners goes
up 400% and the pool of potential buyers is unchanged. Tim Hortons itself was
going to buy back shares and this may be helping. Also the news stories on the
share distribution may have generated some buyer interest. And there is perhaps
still the effect of it having been added to the Canadian indexes last week which
forced index funds and other mutual funds that track the index to buy it.

 

I had sold about 25% of my Tim’s just as a precaution in case it dropped. Now
I think it is time for me to buy these back in the next 1 to 5 days. We only
rate it a (lower) Buy but I like the company and it would be a shame if I fail
to buy back just because it is up 20 cents from where I sold and then the thing
keeps going up. But I will not buy too much, I want to be ready if the price
does fall back below $27 and will buy more if that happens. In the past I have
sometimes been stubborn and failed to buy a share just because it was 20 cents
or a $1.00 higher than where I thought it was going. I’m trying to become less
stubborn that way. In other words my “clever” trade of selling 25% of my Tim’s
last week has not worked out and it is best if I admit that and reverse it by
buying back in.

 

Apparently there is a new OPEC agreement to keep oil above $50 to $55 through
production cuts and Wednesday night this has driven oil up somewhat. I guess the
point here is that oil will certainly continue to unpredictable and that in turn
will push the markets around.

 

The Dow Jones has certainly shown strength after pushing through its highs. I
don’t follow technical analysis but I understand that a decisive push above an
old high is considered to be a positive indicator.

 

As planed I sold my small amount of Wendy’s today.

 

October 4, 2006 (6:45 am)

 

I did bail out of Cryptologic yesterday for the reasons mentioned previously.
I plan to remove that company from the list above as the report is no longer at
all valid given the retreat from the U.S. market and the move to Ireland and the
pending change of CEO. I am thinking of selling my Wendy’s shares today. They
are up a lot… may have more upside as they sell off the Baja Fresh division.
But on the other hand their earnings will look bad I think without Tim Hortons
and it will take a while to sort out the value of the company on a stand-alone
basis. Tim H. shares have not yet landed in my TD Waterhouse account.

 

October 3, 2006 (6:35 am Mountain time)

 

I am going to notionally sell the Cryptologic in the model portfolio at the
opening price today. Currently the opening price looks like it will $19.
Everything has changes for this company and it is likely to make months to get
back on track and a couple years to get back to where it was in profits. I may
sell what I have as well and move on. It is not worth the mental distraction at
this point.

 

October 2, 2006

 

CN will report earnings on October 19. I am
tempted to add to my position before the earnings come out.

 

I took a hit on Crypotologic based on news today that they will no longer
have revenue from the U.S. due to a change in laws. They will lose about 30% of
their revenue and probably a bigger percentage of profit. Perhaps I should have
seen it coming , in  fact I had this listed as a risk for this stock. It
was no secret that the company operated in an arguably illegal business, which I
mentioned in the report. This is (in part) why the stock was called (highly)
speculative. Again perhaps I should finally dump it but it is not a large
holding for me and so I have not decided to sell. It will be very difficult to
analyze the company at this point because one has to figure the earnings under
the new situation with the loss of the U.S. customers. The company was trying to
put a positive spin on the fact that it was well prepared for this. But still,
it is certainly a major blow to them. In retrospect I should have steered clear
of this company but as they say, you can’t win ’em all.

 

I mentioned on September 28 that I would place an order to sell about 30% of
my Western Financial at $3.35. On Friday there were some trades at $3.35 but
those people must have been ahead of me as my shares did not sell on Friday. But
they sold today. I hope to buy back at $3.15 or lower. I complained to TD about
the high trading charges for stocks like this. The charge is 3 cents per share
for amounts over 1000 shares. That is 6 cents for a round trip trade or 1.8%.
Compare that to the paying $58 for a round-trip trade of 1000 shares of a stock
that is priced at $58 where the percentage is then 0.1%. I feel that the fees on
a small dollar shares are way too high on a percentage basis. I am seriously
considering switching over to E-trade.

 

It was interesting to see that Tim Hortons was down only 23 cents today. A
lot of people expected it to plummet as the Wendy’s shareholders who received
Tim Horton shares over the weekend start to sell. Volume on Toronto was 10 times
normal so indeed there has been some selling. It may take at least another few
days to see if a down-trend develops. My “free” Tim Horton shares are not in my
account yet so some people may not have been able to sell yet. I’m hoping it
does fall at least to $27.50 so I can buy back what I recently sold at $29.13.
If it goes much lower that will be hard to take in the short term but would
actually be a good buying opportunity. I mean if a stock goes lower just because
more people own it and want to sell, that seems like a decline that should be
temporary. The stock is ultimately valued for its future earnings and cash flows
and that has not changed with the Wendy’s spin-off. Tim Hortons was going to buy
back some shares so that may have supported the price today. The bottom line for
me is I have some exposure to it, I would like to have more but I am going to
wait to see where the price goes in the next week or so.

 

Kingsway has been up very nicely lately… I am certainly hoping for more yet
from it.

 

October 1, 2006

 

It will be very interesting to see what
Tim Hortons does in the next few days. Report on Business Television were
indicating that it was expected essentially all the Americans who receive the
Tim Horton shares will immediately want to sell and Canadian shareholders will
buy. If true, it seems logical that that Tim Hortons could dive a few dollars.
But then again if the market really anticipated this then it should be already
“baked in” to the price.  Of course Tim Hortons rose on Thursday and Friday
due to a surprise announcement that the stock will be included in the TSX/S&P
index. Perhaps many funds were forced to buy for that reason and perhaps all the
more so because Friday was the end of Q3. But it would really seem strange if
the Tim’s were now to dive early this week because if that is expected I would
have thought that many of these funds could have waited for the cheaper price
this week.

 

Well, Q3 is over and there has been little or no damage from hurricanes this
season. I have to think the property and casualty insurance stocks will report
excellent Q3 results. Therefore I am hopeful of good gains in our insurance
stock picks by the end of this year. But possibly any gains will be held back by
reductions in insurance rates and general fears of risk regarding this sector.

 

September 29, 2006

 

This was an extremely good week for our Stock Picks here. See updated
performance figures at the links above.

 

September 28, 2006

 

Onward and upward so far. I have been surprised by the gains this week. As
alluded to yesterday, I did sell just over 25% of my Tim Horton shares at the
opening this morning. I intend to buy back if it drops to about $27.50 when
Wendy’s dividends out all its Tim Horton shares tomorrow. (It may take a few
days before the recipients will be able to sell any even if they want to, I know
with TD it usually takes a few days before shares like this show up in my
account.)

 

Similarly I placed an order to sell roughly 30% of my Western Financial
Shares at $3.35. I am gambling that before the stock goes to up to say $3.50 and
beyond (which it should eventually) it will first fall to say $3 and I can buy
back in. I usually don’t try to get cute like this and play the volatility but I
am giving it a try with these two stocks. If nothing else I will have raised my
cash position in case the general market falls.

 

September 27, 2006

 

Adding to the note below about Tim Hortons. Given that the rise today was
apparently simply due to the stock getting added to the TSX/S&P  composite
plus TSX/S&P 60, and given all the shares due to hit the market on I understand
this Friday, it might make sense for anyone with a lot of Tim Hortons to sell
some if the price is still near CAN $29 tomorrow and then hope to buy back in a
few days at a lower price. I may do this with a small portion of my shares. The
risk of course is that the stock will stay high and I won’t get to buy back, so
this would just be a short-term risk management type of trade.

 

Tim Hortons jumped a surprising 5% today… just when it looked to keep
dropping due to the flood of shares that will hit the market in about 7 days
when Wendy’s spins off the approximate 82% of Tim Hortons that it owns and those
shares hit investor accounts and some of them start to be traded. But I said
before that may not push Tim Hortons down much and if it does it will be
temporary.

 

The 5% rise today was because Tim Hortons will be added to the TSX
composite. Actually this is a pretty dumb reason for a price increase. It should
have been anticipated and it has nothing to do with valuation, so this
particular rise may be indeed temporary.

 

A new share called WEN-WI is trading and it is Wendy’s without the Tim
Hortons and it reached $31 yesterday. Back in the Fall of 2004 we had a Strong
Buy rating on Wendy’s at U.S. $36 and it fell as low as about U.S. $31 briefly
after that. Those who bought Wendy’s at that time still have Wendy’s worth U.S.
$31 and will receive about 1.36 shares of Tim Hortons now worth about U.S. $35.
So this was a great deal back in 2004. We saw Wendy’s as a great deal in 2004
due to the value of Tim Hortons, although we did not expect a 100% gain two
years. I did not happen to Buy Wendy’s at the low and keep it until now but have
still done well on the stock. Also in the Spring of 2006 when investors were
frothing at the mouth to buy Tim’s at the IPO (and were told they could not get
any) we were calmly indicating that you could get Tim Horton shares simply by
buying Wendy’s.

 

Tim Hortons may continue to be volatile and could certainly fall several
dollars quite easily, but long-term it still looks good. With a good company
like this, time is on your side if you hold long term.

 

September 26, 2006

 

Canadian Western Bank is updated and
remains rated Buy and was analyzed at $41.91 (closed today at $41.49). If you
are interested in this or any other stock on this page, please be sure to read
the report closely. It is always a judgment factor to come up with a rating and
subscribers should read the report to be sure they agree with the analysis.
Various facts in each report could cause you to come to a different conclusion.

 

Kingsway rose 18 cents today. However,
very briefly just after the open of trading it was down over $1.00. I have seen
this stock do that before. This suggests that one strategy would be to place a
bid about $0.75 or 1.00 below the close and just see if it dips down the next
day. One strategy might be to keep changing the offer every night to only buy if
it dips below the previous day’s close. But the danger is that if there is some
bad news that sends it down rather than just a dip, you will have bought on the
way down. Basically such a strategy would just be a trading a strategy. If you
really want a stock then often you are forced to offer the market price. Another
strategy is to place an offer more substantially below the market like 10% below
and then you only buy if it drops, and in this case you would leave the offer
and not change it every day. I paced an order today about $1.00 below the close
to add a small amount to my position if it drops.

 

As mentioned previously, the trading volume on
Western Financial is down. It did not trade yesterday at all.  While I
definitely like it long term, it could certainly dip below $3.00 quite easily on
this lack of liquidity.

 

 

September 25, 2006

 

Cryptologic took a nasty 11% hit
today on the news that it move headquarters to Ireland and that the CEO is not
able to move and will be replaced. Our report did note that this was risky,
after all it is engaged in internet gambling which is of questionable legality.
From a risk management point of view it might make sense to sell and move on. I
have a fairly small position in it and may hang on to see what happens. I would
not be surprised though it it falls further just on the uncertainty. The stock
fell steadily all day today, so that might mean it will keep falling tomorrow. In terms of
the model tracking portfolio I have not decided what to do there either. It is
2.9% of the model tracking portfolio. If it was 5% I would likely sell half just
to manage risk. Unfortunately I can’t give a clear direction here, the
fundamentals still look very strong but there is now much uncertainty as well as
significant one-time expenses for the move.

 

Sept 24, 2006

 

Click on “Our Track Record” at the top of this
page to see our new “Mountain Chart” that shows the results of investing in our
Stock Picks over the years.

 

Sept 23, 2006

 

EGI Financial Holdings is added
as a new company rated Speculative (higher) Buy at $7.75. This means it is
Speculative and that I consider it to be somewhere between a Buy and a Strong
Buy. It is quite thinly traded, perhaps almost too thin to put on this Site. It
may not be possible to Buy at $7.75 but I would consider the same rating would
apply up to about $8.75. Basically, the investment thesis here is that buying a
nicely profitable company at a price around book value should be a good
investment.

 

I first mentioned this company around November 2005 when I bought shares at
the IPO at $10.50. I did not add it to this Site at that time because I
certainly already am over-represented in property insurance companies. But as I
see the price here fall under $8.00 I think it is worth considering. Due to its
speculative nature I would not want to put too much into it however. Although I
am inclined to keep building my cash position, I may add to my position in this
stock. I will not do so before Wednesday Sept 27, because it is fair that I
trade only after giving subscribers to this Site an opportunity to buy before I
do. For most of the stocks on this site, that would be a rather pointless
restriction since most of the stocks here are very liquid and my trades would
not disadvantage anyone. However, I will make it a practice not to Buy any
company until at least 2 full trading days after it has been, for the first
time, rated a Buy or higher on this Site.

 

Speaking of property insurance companies. I continue to think Q3 should look
very good for them, given the lack of extreme weather or major fires in Canada.
I am tempted to buy back into ING Canada as it
has fallen in price in recent days.

 

Performance figures are updated. My own portfolio and the Buys had a small
gain on the week even as the TSX went a bit lower.

 

Sept 22, 2006

 

At this time the overall broad market such as the DOW index is in something
of a tug-of-war between lower oil prices and lower long-term interest rates
which should both push the broader market up and fears of recession which is
pulling the market down. This week the fear of recession was the stronger force.

 

The Thomson Corporation is updated
and rated (lower) Buy at  CAN $45.02 or U.S. $40.31. I like the business it
is in – selling information electronically. I seems to me that profits could
really grow as it continues to deliver more products electronically and less in
print. But the price is high. I prefer to wait for a pull-back before I would
buy. I have a small position in it and may even consider selling that to raise
cash or to move into a stock that I rate Buy or high. A (lower) Buy rating means
I consider it somewhere between a Weak Buy / Hold and a Buy.

 

Sept 20, 2006

 

Loblaw was down 2% today after announcing
its President is being replaced by Mark Foote an executive that had joined them
from Canadian Tire earlier this year. I was also surprised that Galen Westin
senior age 65 will hand over the executive chairman role to junior aged 33. In
some ways I saw the moves as positive. It says to me that the Weston family is
concerned about the stock price and the profit slide and they want action to fix
it. On the other hand, it could well signal that Q3 will be bad. The new CEO
could take the opportunity to make certain “charges” for the future costs in the
restructuring which would drive earnings down in Q3. After all if there is any
way to transfer expenses from Q4 when the new guy is in charge to Q3 where it
can be blamed on the old guy, it would be an easy decision for the new guy to do
it.

 

My belief is that at some point Loblaws will be a good investment but it is
not clear if it has bottomed yet. I believe there are things the company can do
to “realize value” these include turning into an income trust (why not?,
everyone else is) or selling off the real estate and leasing it back. I have not
bought any yet. If I did I would consider buying about 25% of the shares I would
ultimately like to have and then waiting to see where it goes after it post the
Q3 numbers. If the family ever wanted to sell, I wonder if Buffett would be
interested? Other Canadian companies that I have thought Buffett might like to
buy include Thomson,
Shaw Communications and any of the Power
Financial group. (Although Buffett prefers totally private companies that do not
trade on the market.)

 

Shaw was up nicely today. With oil down I would think
CN might recover. It may depend if the market is
still expecting a recession.

 

I may place an order to sell some (say 25%) of my
Western Financial if I can get
say $3.30 or more. I have a big exposure to it. I notice its trading volume is
down so not much buying interest right now. On the other hand it could announce
an acquisition which could boost the price. And Q3 should be strong unless there
are developments in the area of bad debt on loans. But with the strong Alberta
economy there is little reason for people to default on loan payments.

 

September 19, 2006

 

With oil down today and with benign inflation reports I would have thought
the DOW and non-oil stocks would go up. At some point I may become interested in
the Energy Exchange traded fund XEG if oil falls further. We have some XEG in
the model tracking portfolio but I do not own it personally.

 

September 18, 2006

 

It was not surprising to see CN go up today.
This is a strong cash generating stock and it should do well. If we had a bad
recession it would likely drop but it’s not clear that we will have a bad
recession and in the long run it will do well even if it does dip temporarily.
As a different situation I also like Shaw
Communications as a company that is increasing its cash flows. It seems it could
be running a path similar to that of Telus but maybe a year behind Telus in its
move towards better profitability. I sold some of my Pason Sytems stock today
(no longer rated on the Site). If I bought anything right now it might be to add
to my Kingsway or
Northbridge positions.

 

September 16, 2006

 

A tiny company, Clemex is updated and
rated (highly) Speculative Buy at 22 cents. This stock would not be on this Site
if it were not for the fact that I have held this stock for many years and that
it was one of our picks in our earliest days on this Site.

 

I will provide here some “true confessions” on my history with this stock:

 

I have a rather unfortunate history with the stock having first bought it at
its IPO around 60 cents, followed it down to under 30 cents and then very
briefly up over $1.00 where I sold only to buy back at around 80 cents and then
bought more as it fell to 20 cents. As I averaged down all the way to about 15
cents I became way over-exposed to it. Around then I removed it from this Site.
It ultimately fell to under 10 cents.  As it finally became profitable
again in recent years I sold some around 23 cents and 33 cents but still have it
as about 1.6% of my portfolio. As it recovered in the past few years from under
ten cents to the 40 cents level, I finally added it back to this Site at 38
cents which in retrospect was either too late or to early given the recent move
back to the 20 cent level.  This is a stock where I basically clung to my
early positive views on the stock (from year 2000) even when it began posting
losses. Hopefully that is the type of mistake that I can avoid in future.
Certainly most of my trades in recent years have worked out much better than
this one.

 

The thing is, it really does seem to have great technology and so I keep
thinking there is potential here. Right now I consider it quite speculative but
I keep it on the Site because of my own interest in it. It is not a stock that
investors should get over exposed to. Management appeared to indicate that Q2
will not be all that strong, but that Q3 and Q4 will be strong. (The year end is
April 2007). If so the stock price could recover nicely in the Spring of 2007
but may or may not do much until then.

 

September 15, 2006

 

Recently I decided to refresh my memory by re-reading a book called How to
Pick Stocks Like Warren Buffett by Timothy Vick. According to Vick, Buffett
had a rule that he would not invest in a stock unless there was a reasonable
chance of making 15% per year if held for the longer term (say ten years). We
calculate intrinsic value on the assumption that an investor would be satified
with an 8% return. However, in truth most of us are certainly hoping for more
like 15%. Therefore we have added a new calculation to to our analysis where we
will calculate what earnings growth would be required in order to provide a
return of 15% per year using a reasonable projection for the selling P/E in five
years. In some cases this may help reveal cases where there is little hope of
ever achieving a 15% return.

 

Canadian Tire is updated and
rated Weak Buy at $69.02 (it closed today at $69.85). In the past we have under
estimated the company’s ability to grow earnings and perhaps that is the case
again. But the stock price is pricing in fairly robust earnings grow at a time
when the economy in most of Canada may be slowing.

 

September 14, 2006

 

For those holding Wendy’s, do not panic if the stock appears to plummet from
its current $63.84 level to about the $29 level. It should do so on whatever
date it starts to trade without the right to receive the 1.3593 shares of Tim
Horton per Wendy’s share that it is expected to spin-out at the end of this
month. I saw an indication today that tomorrow Friday September 15th may
possibly be the last day that Wendy’s trades as a Wendy’s / Tims combo. But I am
not sure on that date. The correct date may be Oct. 2. TD indicates record date
September 15 and ex-date Oct 2, so it seems more likely that Wendy’s will drop
to a “Wendy’s only” share on October 3. It’s been a nice run for Wendy’s
considering that when I first added to this site in 2004 it was just under $38
and it fell as low as about $31 before eventually doubling to in the two years
after that.

 

Tim Hortons has fallen back a bit and while we only rate it a (lower) Buy I
do like the potential and will likely add to my position if it should happen to
drop to about the $27 level.

 

My cash position has increased to about 16%, which is still not that high
given the possibility of a pull-back in the markets. Still, I find myself itchy
to add to some of my higher rated positions.

 

September 13, 2006

 

Performance figures have been updated. Our Buys and Strong Buys have done
well in the past few weeks even as the TSX index has fallen. At the moment I am
feeling optimistic about how things will go through to the end of the year.

 

September 12, 2006

 

Quite possibly I was too hasty in selling off some of my Telus shares. For
the model portfolio purposes I will hold onto Telus for now at least and see
what happens.

 

I don’t se why a company like Loblaws or CN might not think about going the
Trust route as well, which is an added bonus in holding those stocks. (Though I
have heard absolutely no indication that they would consider it).

 

The conversion of Telus could cause the government to start looking at this
again. If they don’t do something, then at some point very few companies will be
left paying income tax. If they do announce a review of Trust taxation then it
will send the Trusts down in price.

 

Trust conversions are financial engineering – wringing more value out of the
same pre-tax cashflow. We seem to have had an awful lot of that in the past five
years or so. But at some point I would think most of the financial engineering
and mergers and divestitures will be essentially done and then we could enter
quite a dry spell where this extra boost to stock prices will no longer happen.

 

I noticed today a stock I used to cover, Sino-forest is down to $3.70 from
highs around $7. Based on earnings it would look quite cheap. Also there has
been some insider buying. So that seems tempting. But as I said earlier about
this company I was just not comfortable with it due to past changes in strategy
and seeming inconsistencies in their story. Warren Buffett teaches us to not
invest unless we are comfortable with management. For whatever reason I am just
not comfortable. Therefore I think it is best if I just stay away from this
stock. Maybe I will miss out on something here. But the fact is that there are
thousands of companies to choose from and I prefer to put money into companies
where I don’t have any nagging doubts about whether I quite trust management.
So, I think I will continue to ignore Sino-Forest.

 

September 11, 2006

 

The TSX market was down over 200 points today as the hot energy and minerals
sectors continued to cool. However my own account and our stock picks here had a
positive day.

 

The big news was Telus announcing it would become an income Trust. I did
mention that rumor under March 9 below. But we rated Telus a (higher) Buy even
without the Trust conversion possibility. So the Trust conversion is just an
added bonus. I sold just over half my position this morning. For the model
portfolio purposes I will continue to hold it.

 

Another interesting thing with Telus today. The non-voting shares which in
recent days trailed the voting by $2.00 and have generally trailed by about
$1.50 closed the day at only 40 cents lower than the voting shares. I have for
some time felt that in the case of Telus it would be best to buy the cheaper
non-voting shares because the vote was not really worth anything to a retail
investor and because the two share classes would likely eventually come
together. The non-voting shares existed so non-Canadians (mostly Americans)
could hold more Telus than would otherwise be allowed. As soon as Telus found a
way around that foreign ownership restriction it was predictable the two share
classes would converge. That’s why I switched to analyzing the non-voting shares
back on May 7, 2006. And under Feb 21, I mentioned I bought Telus non-voting for
my account.

 

For the moment I consider Telus to be a hold. It may well rise further if the
conversion goes through but that is some months off. If the conversion does not
go through it would drop. So overall I am comfortable with my decision today to
sell about half my shares and play wait and see with the other half.

 

It looks like this Fall could be a tough period for stocks. Ina falling
market it will be more difficult for the picks here to rise, still I like the
chances for these picks.

 

September 10, 2006

 

An edition of the free newsletter has just been sent out (11:35 pm Eastern
time). If you have not received this then try adding your email to our free list
on the home page. The system will tell you if your email was already on the free
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blocked by spam filters.

 

This weekend I have been doing analysis regarding whether or not the broad
stock market indexes such as the TSX or the Dow Jones Industrial Average are
fairly valued and what return we can expect on these indexes in long-run if we
purchase these indexes today. This analysis is based on logic and also on
looking at historical relationships between stock market returns and growth in
the economy. I have updated 6 articles that explore this topic. To explore these
important articles, click on the “Articles” link at
the top of this page. A new summary article has also been posted.

 

September 9, 2006

 

Manulife Financial is updated for
its strong Q2 earnings and rated Speculative (lower) Strong Buy at $36.10 (The
rating is better than Buy, better than (higher) Buy but not quite a full Strong
Buy). Few analysts would call it speculative. I think it is moderately
speculative due to the “black box” nature of its earnings calculations. Earnings
are calculated using actuarial assumptions which are rather opaque. In addition,
I don’t think management does as good a job explaining those assumptions as it
could. Howeve, this is a company that hhas really delivered. The stock is up
107% since it was first added to this site as a Strong Buy in late 2002.
Earnings have almost doubled since that time as well. I would consider adding to
my small position in this stock except that right now I have a goal to be a bit
higher weighted in cash.

 

Telus has slipped back a little on its announcement that it will increase
capital spending on its internet facilities. Given there recent successes I am
willing to assume that the investment will pay off and so my opinion of the
company has not changed.

 

September 8, 2006

 

Our stock picks lost some ground this week. Performance figures have been
updated. But they held up quite a bit better than the TSX which was down 2.4%.
Kingsway Financial did quite well this
week. It now becomes even more clear what a bargain it was when it fell to about
$19 in June. It still looks to be a bargain. Even though it is my largest
position I am tempted to add to my position. So far in Q3 the hurricane season
in the U.S. has been tame. And in Canada I have not heard of any major fires or
weather causing property damage. Therefore, I believe Q3 is shaping up to be
quite good for insurance company earnings. However, I always have to caution
that insurance stocks are by nature risky.

 

September 6, 2006

 

The markets took a hit today. Just when they seemed to be reaching for new
highs. It goes to show the market is nervous about a U.S. recession and
therefore it may be a time to be in safer stocks and to raise the cash
percentage somewhat. Still our picks did not get hit as bad as the market today.
With the oil price coming down that is good for many stocks. Also long-term
interest rates have come down which is generally good for stocks (unless that
is, it signals a recession). These are some of the factors the market is trying
to digest at this time.

 

September 5, 2006

 

I did sell my small position in Aeroplan today, as I indicated on September 3
that I might do.

 

Nice gains today in Kingsway and Cognos. It is disappointing to see Western
Financial fall to $3.06 from recent highs over $3.40. But this is the nature of
smaller companies, they do tend to be volatile. Also provides a chance to buy it
at lower prices (I have enough of it already…).

 

September 3, 2006

 

Aeroplan is updated and is rated Speculative Weak Buy at $13.60. On the one
hand I really like the loyalty points business model. It is a virtual business
with few hard assets and it does not actually create a product. It has great
strength as the loyalty program of choice in Canada. It appears to be a cash
generating machine as points are sold and the cash is in hand long before the
members ever cause a cash expenditure by using their accumulated points.

 

However Aeroplan is saddled with problems related to Air Canada. Until 2002,
Air Canada essentially used to take out all the cash and nothing was set aside
to pay for the trips earned by members. Even after raising money from the public
it still retains a billion dollar deficit rather than any equity. That does not
seem exactly a responsible situation. If Aeroplan were regulated like insurance
companies and banks it would have to have equity. Perhaps it should not be a
Trust. As a Trust it is paying out essentially all earnings and does not seem to
be building equity at the current time.

 

Maybe the strong underlying business model will allow it to prosper. But
overall it makes me somewhat nervous. Also I found the accounting to be complex
to understand. Given that I wish to build my cash position, I may sell my small
holding in Aeroplan. (Having said that, I would expect Q3 to be strong from a
GAAP earnings perspective as many points will have been redeemed for air travel
and it books earnings only when points are redeemed.)

 

I understand that ACE aviation may distribute its 75% stake in Aeroplan to
its shareholders. his may be good for ACE shares but could have a temporary
negative impact on Aeroplan.

 

 

September 2, 2006

 

Reitman’s is updated and rated Buy at
$20.61. This company has performed well and if the trend continues it will
provide a strong return.

 

Sobeys is added to our list of stocks
and rated Weak Buy / Hold at $38.88. (the price closed at $39.15 on Friday and
that is the price we will use in any performance figures). Sobeys has an
attractive price to book ratio (which should limit its downside risk) but the
recent growth is quite low and the growth outlook is quite uncertain.

 

Heading into the Fall I am somewhat cautious about the direct of the overall
markets. In any event I expect the Buys and Strong Buys on this Site to continue
to do better than the market averages. The U.S. market rose yesterday based
partly on lower inflation indicators. The danger is that the U.S. will enter a
recession due to high interest rates, stagnant or falling house prices and high
energy costs. Offsetting this is the fact that interest rates are still not high
by historical standards. Also it seems likely that the Q3 earnings reports will
be good.

 

I note that Western Financial came back to $3.15. It may settle at this level
until such time that the company issues further news such as acquisitions.

 

August 28, 2006

 

I sold my Jean Coutu shares (see posts of the last few days) today at a small
loss. Normally I am investing for the longer term. This was a case where I
thought the market might grow to like the Coutu deal more and more over a period
of a week or two. Instead the market decided, the more it understood about the
deal the less it liked it. The original basis for my trade was proved wrong and
I decided to make a quick exit.  When the entire basis for a trade changes
then it probably makes sense to get out.  Coutu could do well in the long
term but since I have not done a detailed analysis I had no good reason to
continue to hold.

 

August 26, 2006

 

FirstService is updated at U.S.
$23.81 or CAN $26.45 and is rated Buy. This is a company with a great history of
growth in earnings per share. With a P/E around 20 it is not necessarily a
bargain but it is reasonably priced if it can grow earnings at at least 10% per
year and historically it has been closer to 17%. This is analyzed in U.S.
dollars, even though it also trades in Toronto, because it reports in U.S.
dollars. Revenue comes mainly from the U.s. with some international and only 22%
from Canada. So it makes sense for it to report in U.S. dollars. Canadian
investors have been hurt by the rise in our currency and that risk continues to
apply if our dollar keeps rising.

 

It was disappointing but not exactly shocking to see
Western Financial Group trade
down 8.7% to close at $3.15 on Friday after reaching $3.45 on Thursday. This is
thinly traded. Possibly what happened was that someone wanted to sell say 25,000
shares. In fact it looks like someone sold about 17,000 at $3.40 and then
another 9,000 or so went at lower prices with probably only 4000 at $3.15.
Basically the $3.15 is meaningless. The bid was at $3.25 at the close. The point
is this stock will tend to be volatile and it may pay to be patient in placing
orders to buy or sell. As mentioned below I let a small potion of my shares go
at $3.40. I considered placing a “stink bid” to buy back at a lower price like
$3.05 but I still have this as one of my biggest holdings and so will probably
sit tight. Possibly I would sell a bit more if it happens to climb to say the
$3.60 range, just to take advantage of the volatility.

 

Wal-Mart is updated and rated Buy at
U.S. $44.09 (it last traded at $43.88).  The investment story of Wal-Mart
is that the stock rose by something like 1800% from the mid 70’s to the start of
1993 (with some volatility but generally pretty steady). During 1993 to about
mid 1997 it declined noticeably. Then it took off and rose sharply about 400% by
the start of 2000, peaking over $80. In the over 6 years since then it has
trended mostly down. This was the moody “Mr. Market” (See Benjamin Graham’s The
Intelligent Investor) at his “finest” given that the earnings per share of the
company advanced in much more steady fashion than has the share price. On a
valuation basis the stock appears to be a  reasonable long-term investment
at this time.

 

My speculation on Jean Coutu shares is not going so well. A major difficulty
is that a large portion of the purchase price will paid to Jean Coutu in the
form of shares of Rite Aid. But Rite Aid is apparently a weak company that will
(especially after this deal) have excessive debt. The future valuation of Jean
Coutu is therefore tied to that of Rite Aid. For one thing that makes it complex
to figure out even if Rite Aid was a strong company. But worse, Rite Aid is
weak. The market is therefore not too excited by the deal.

 

The announcement of
the deal was certainly badly handled as it was leaked Wednesday night and then
hurriedly announced Thursday morning but with no analyst conference until
mid-day Friday. Some news reports indicated that Jean Coutu was getting $3.4
billion for stores it had paid only $2.4 billion in 2004. However the company
indicates it will post a loss of $140 million on the deal. (Just in the past two
days our dollar has moved noticeably higher which will add to the loss.
Coutu also indicates it will take 12 months before its earnings go up as a
result of the transaction and for the first 12 months it would lower earnings.
Apparently there may be some legal challenges about a transfer of debt to Rite
Aid. Overall this is looking very messy. I believe I should exit my position. It
no longer looks like the Coutu shares are about to rise unless somehow an
alternative bid were to materialize and there is no sign of that. The lesson for
me is to stick with investing only after making an analysis of the facts and to
avoid speculating and investing before the facts become clear.

 

Listening to the conference call Coutu seemed less than fully open and also
seemed less than totally “on their game”, in terms of being able to answer the
questions.

 

August 25, 2006

 

Stantec is updated for Q2 earnings and
rated (lower) Buy at $20.75 (note it closed today at $20.48). The graph of the
revenue and earnings per share growth for Stantec is a thing of beauty. It has
truly been a remarkable success for many years. However it now gets about 40% of
its revenue from the U.S. and with a housing slow-down there and a possible
recession looming, we rated it a (lower) Buy rather than a Buy. If the past is
any indication, it would be a good long-term investment, but the share price can
be volatile. This stock is up 730% since it was first introduced to this Site as
a Strong Buy in September 1999.

 

August 24, 2006

 

There are more and more signs of a slowing U.S. economy. Nine or twelve
months ago I worried about energy prices and higher interest rates but the
consumer boom roared on. Now it looks to slow considerably. This is one reason
to have a higher allocation to cash and to generally watch the market closely.

 

I mentioned Jean Coutu yesterday. Like I said, I normally don’t get into
speculating on takovers. By this morning Jean Coutu had confirmed a big deal was
in the works, so that made it a bit less speculative. As expected the price
moved up at the open. It opened up $1.70 at $12.65. Had a range today of $12.46
to $13.24 on huge volume. Therefore existing holders of Jean Coutu were up about
$1.70 at the open and ended up being ahead $1.81 at the close.  That’s
fair, on this kind of positive news it should be existing shareholders who
benefit, which is what happens unless the news gets leaked and then a few inside
players get to scoop the gain from some shareholders who unwittingly sell ahead
of good news.

 

Anyone who bought today paid at least $12.46 so most who bought today are
only up a few cents and some were down. I decided to buy some on speculation. I
have not analyzed the stock. But I understand that the U.S. stores purchased in
2004 were viewed as a big problem. From what I can see they did not lose money
on the sale (may have gained) and so it appears that a problem has been solved
or at least made a lot better. If a big problem has been solved then it seems to
me that the share price might jump a bit more yet and at the same time hopefully
will at least stay where it is. Again, I normally have analysis to back up
opinion, in this case I am speculating on the news event so that is risky.

 

They have an analyst conference tomorrow at noon and maybe the price will
move one way or the other based on the conference. It is not unusual to have the
analyst conference in the middle of the trading day like this. But I find it
unfair and frankly offensive to retail investors since most retail investors
will not be a position to react to the news but the big guys will. If the
conference were after the close then retail investors would get a better chance
to digest the news.

 

There should be a couple or three updated reports on the Site over this
coming weekend including most likely a new stock being added.

 

August 23, 2006

 

It was a good day in the markets for many of our picks. Western Financial
closed at $3.44 on higher than average volume of 88,000 shares – which is still
not that much volume. Based on my order placed when the stock was $3.20 or so, I
sold what amounted to 18% of my Western Financial shares today at $3.40 to raise
cash and possibly take advantage of volatility. It’s hard to say if this will
turn out to be a good move. But based on normal volatility it will likely be
back to the $3.25 level unless it announces news like acquisitions that are
viewed favorably. And despite the fact that we rate the stock a Speculative Buy,
it could also fall noticeably if it happens to announce any bad news.

 

The Wall Street Journal is reporting that Jean Coutu is close to a deal to
sell its problematic U.S. stores for cash and shares in the purchaser (U.S. Rite
Aid Corp). From the figures quoted I suspect Jean Coutu will rise sharply
tomorrow. (Sounds like they would be selling at a noticeable gain over what they
paid in 2004). However I have never looked at the company and so my suspicion is
based on very limited information. The problem with this type of news is that
usually the market reacts so fast that there is no time to trade. But if this
turns out to be a good deal and if the deal is actually struck (they are only
reported to be close) then maybe the price of Coutu will go up only gradually.
The danger is it jumps up and then the deal falls through. Might be okay to
throw some speculative money at it. Overall though my inclination is to sit
these things out since it does seem quite speculative.

 

For the story see:

 

http://ca.news.finance.yahoo.com/23082006/2/biz-finance-jean-coutu-close-selling-u-s-stores-3.html

 

 

August 22, 2006

 

Cognos had moved up nicely to about $35
since our report at $30.29 but now has fallen back to $31.80. It’s always hard
and possibly dangerous to buy into a down-trend. I hold some and I would
consider buying more but will likely just hold tight.

 

Western Financial has been somewhat volatile, with a range today from $3.13
to $3.39 on light volume. On a stock like this it may pay to be patient in
buying or selling to try and get a better price. Of course the danger with that
is is that it then refuses to be volatile in your favor and you fail to buy or
sell as intended. Similarly I sometimes think with a stock like this, I should
put an order to sell  a bit if it moves up say 5% and to buy if it moves
down 5% and hopefully take advantage of the volatility. Since I hold a lot (by
my small standards) of Western Financial I put in an order when it was $3.15 to
sell a bit if it goes to $3.40. Almost got there today. The danger with my
strategy is that if it moves more permanently up I will have sold and miss the
upside. Similarly if I put an order to buy some if it goes to say $3.05 then if
it takes a sustained run under $3.00 I will have bought on the way down. There
are no riskless strategies but I will leave my order to sell a little if it
happens to get to $3.40 in the near term.

 

On the subject of Western Financial. They are trying to grow their little
banking operation. One of their main strategies has been to offer financing for
recreational vehicles including travel trailers, largely in Alberta. A Trailer
dealer that I talked to told me that Bank West had been aggressive in that it
gave financing to some people of lower credit quality. That trailer dealer who
had some experience in loans said he would not have given the loans. That is a
bit scary. I have always said that a bank can wipe out its equity on bad debt if
it is not careful. And I have said in the report that Western Financial Group in
particular faces this danger due to its inexperience. On a positive note though,
the economy is so good in Alberta that it is hard to imagine there would be many
people who default on payments. Also Bank West is only a part of Western
Financial’s operations. Even in a worse case scenario where Bank West lost money
and maybe closed up shop, I see no reason that Western Financial would not
survive. But it would be beaten up by such an event. I hope I am not sounding
too scared about the company. The fact is that every stock has some kind of
risk. If investors always worry too much about worse cases then probably
investing in individual stocks is too risky for investors that would worry too
much or who are not prepared to take the occasional hit. Overall my sense is
that Western Financial is going to continue to do well. (But I wanted to pass
along the the word of caution from the Trailer dealer).

 

 

August 20, 2006

 

Canada Bread is updated for its Q2
earnings and is rated Weak Buy / Hold at $62.40. Our analysis was done at a
price of $62.40. We note that the stock last traded at $61.00. Our rating would
not change with that small price fluctuation.

 

August 19, 2006

 

Our Performance figures are updated above. We are not yet back to where we
were in early May. But the progress in the last few weeks has been quite good.

 

The Q2 earnings reports are mostly in now. From the S&P web Site I calculate
that reported earnings per share on the S&P 500 were up 10% year-over-year,
while adjusted earnings per share were up 13%. That is yet another quarter of
very strong earnings growth. In the long run earnings per share growth in the
stock market does not tend to exceed the nominal growth in GDP which is closer
to 6%. Earnings growth has been running well above the long-run expected level
for at least three years.

 

Market sentiment seems to be strong at the moment as the market is expecting
that interest rates will not rise. Offsetting this is the fact that a possible
recession is the reason that interest rates will not rise. As always the
sentiment in the market can change very quickly, but for the moment thhe trend
is positive.

 

Western Financial Group is
updated and rated Speculative Buy at $3.25. This is one of own largest holdings.
In terms of a trading strategy the price is a bit volatile and it may well be
possible to get it at close to $3.15. I have an order in to sell a bit at $3.40
if it is should reach that price in the very near term. That is just to raise
cash and if it falls to $3.05 or so I would be tempted to add to the position
rather than reduce. I look at this as the chance to buy at a reasonable price –
into a successful company that probably has a lot of growth ahead of it.

 

On Friday I sold half of my Wendy’s because the price was up. I may move that
into Tim Hortons. I was only ever holding Wendy’s because of my interest in Tim
Hortons. Now that I am not rating Tim Hortons and no longer rating Wendy’s it
made sense to move my holdings directly to Tim Hortons which I have largely
done. Still I would not have minded continuing to hold the Wendy’s until it
spits out the Tim’s shares on October 1 because that potentially could work out
well. Also Wendy’s may still get a boost if it splits off its Baja Fresh unit as
some activist shareholders want it to do. For me, though the Wendy’s seemed more
speculative as I am more familiar with the Tim Hortons.

 

August 15, 2006

 

A number of our stock picks moved up nicely today (Kingsway, Telus, Western
Financial) and some others). Tomorrow, (Wednesday) an important consumer price
index will be released for the U.S. If inflation is low, the market will
conclude that the Fed will not raise interest rates in September and therefore
the market could do well tomorrow in that case. If the report shows high
inflation, the market will likely fall tomorrow. Canada will follow to some
extent except that energy stocks as always will march to their own drum.

 

August 12, 2006

 

ING Canada
(Canada’s largest property and casualty insurance company) is updated and rated
Buy at $52.96. Three years ago I began adding property insurance companies to
this Site because I felt that they were going to enter a period of very high
profits on automobile insurance, because rates had been raised substantially and
laws were being changed to limit claims for personal injury and drivers were
becoming ever more reluctant to make claims. All of that came true and remains
true. It appears that ING Canada will continue to be very profitable for at
least the next few quarters. However at some point insurance prices and profits
should come down because the claims are lower.  So far, it seems that the
insurance rates and profits are staying quite high. ING is the most expensive of
the insurance stocks on this Site but also the most profitable. As noted in
comments below on this Site, I sold my ING to raise cash a few months ago. I am
not sure if I will buy any at this point. Possibly I will sell some Northbridge
and move into ING.

 

Western Financial Group’s results look good, net income was up sharply in the
quarter but revenue was only up 12%. (But this moderate revenue growth was
expected because of lower insurance rates). There are also more shares due to a
conversion of some debt to equity. The full financial statements and discussion
of results have not yet been posted. I will wait for the full results before
updating the report. The recent little jump to $3.20 is nice but I note that
this was on low trading volumes. I expect this stock to require patience. It
could certainly retreat back below $3.00 in the short term. Lower insurance
rates are probably hurting revenue growth but this is being offset by the growth
and strength in the Alberta economy.

 

August 11, 2006

 

Telus (non-voting shares) is updated for
its Q2 earnings ad rated (higher) Buy at CAN $51.35. This has done very well
since we called it a Speculative Buy back on October 6, 2004 at $28 (that was for
the voting shares, the non-voting were a bit lower). At that time, our theory
was that the GAAP earnings were under-stating the true value and that GAAP
earnings would rise and that the company was generating more cash than the GAAP
earnings suggested. Our theory was correct and the price has risen. Perhaps most
of the “easy money” has been made. But if the company continues on its current
trend then the shares should continue to rise. As always, there are risks. In
this case more intensified competition with Shaw Communications is a risk.

 

For interest the old Telus report from October 2004 happens to be one of our
example reports and is available here:

http://www.investorsfriend.com/ExampleTelusOct6sdfg.html

 

August 10, 2006

 

Good earnings reports out from ING Canada and Western Financial Group today.
By Sunday, we will have some updated reports for these or other companies that
have recently reported.

 

After today’s terrorist scare (threats to blow up large passenger jets) I was
pleasantly surprised to have a good day in the market. Our stock picks have
recovered much of the ground lost in the recent market down-turn. The Q2
earnings releases have been strong, as expected.

 

But I am getting nervous being about 91% invested in equities. Historically,
a high equity allocation is best over the long run. But if the market takes a
dive due to recession/interest rates or terrorist attacks, I am then going to
regret being so heavily weighted to equities. I am therefore going to look at
trimming my equity position. I find this hard to do because it might mean
selling some stocks that I really like and which I think will continue to rise.
But I won’t sell whole positions on any buy or strong buy rated stocks, rather I
hope to just trim some of those.

 

Given today’s terrorist scare and given all the problems in the middle east,
we certainly should not be surprised if there does come major terrorist attacks
in North America. It seems there are millions of people with a seething hatred
for the United States. Partly this is due to the U.S. support of Israel. I make
no judgment who is “right” in these wars. But I can imagine that when people
have family members or fellow citizens killed, emotions run extremely raw. Also
many of the survivors are leading bleak lives and see no bright future. Under
that scenario, it is really not that hard to imagine someone deciding to become
a suicide bomber. Unfortunately that is starting to lead me to think that a
major terrorist attack(s) in the U.S. will occur.

 

Having said that, North America is a resilient place and stocks will
eventually do well in almost any imaginable future. Still, I think I will feel
more comfortable if I can raise my cash position to say 25%.

 

For those with exposures to oil stocks I would think that recent events bode
well for the price of oil. I also think Alberta will continue to do very well.
This would benefit any Alberta-based companies including Stantec, Canadian
Western Bank, Western Financial Group. Even if oil prices drop, I would think
that North American governments would desperately want to see the Alberta oil
sands developed as fast as possible. More Alberta oil supplies mean less
dependence on the middle east and it also means that less money flows into the
hands of the potential enemies of the United States.

 

August 9, 2006

 

I added to my Tim Hortons today as I
had entered a price below the market and ended up buying as the price fell. This
stock is now below the $27 IPO price and certainly well below the $36.21 that it
opened trading with on its first day back on March 24. Remember back in March
there was a frenzy to buy and you could not get your hands on any at the $27 IPO
price and so it “popped” into the mid-thirties when it started trading. Now it
is available in the market at $27 and apparently few people want it at this
price. The frenzy is long gone. I only rated it (lower) Buy at $28.37 so I too
think it is not a screaming bargain. Still, I am happy to hold some and may buy
more if the price keeps going down.

 

Apparently one reason for the decline is the fear that all the American
Wendy’s shareholders will dump it when they are handed their shares on October
1. Well maybe so, but that has exactly zero impact on what the shares are
actually worth, and will affect the share price only temporarily. Also Wendy’s
went to great pains to insure that the Tim Hortons shares would be received
without a capital gain by those American Wendy’s shareowners. They will have to
keep the Tim Horton’s if they want to avoid the capital gain.

 

Maybe Tim Hortons will not have any kind of spectacular growth but I am
willing to bet that this company which has been growing fast in Canada for 40
years has a bit more growth left here. And maybe it will stumble in the U.S.,
but on the other hand maybe it will start to slowly build up in the U.S. as
well. I like its chances.

 

August 7, 2006

 

The market has now recovered half or more of the losses from the recent
down-turn – although this depends on an individual’s portfolio composition.
Investors may be wondering if it would be best to reduce the equity position and
move into bonds or cash. I believe that such a decision is very much dependent
on individual circumstances and risk tolerances. For that reason, I will have
little to say on that subject.

 

Personally, I do see some risks in the overall market. There is the risk of
higher interest rates and a consumer recession due to interest rates and high
energy prices. The events in the middle east are indicative that major terrorist
attacks in the U.S. are certainly a possibility. For that reason I would prefer
to be adding to my cash position (given I am about 91% in equities and only 9%
in cash). However, right now I not holding stocks that I would like to sell. I
will be reviewing that and may sell some lower rates stocks just to raise cash,
although I have nothing definite in mind. For the next week or two I am hopeful
that strong earnings releases will out-weigh the negative influences of oil
prices, possible recession and the middle east situation.

 

Home Capital is updated and rated
speculative (lower) Buy at $31.80. The value ratios indicate it would be a Buy
but I am worried about the possibility of bad debt losses if house prices turn
down and a recession causes some people to be unable to make their mortgage
payments. The company has been highly profitable and for that reason may
continue to do well. But given higher interest rates and the possibility of
recession, I am cautious on this stock at this time.

 

August 5, 2006

 

Kingsway Financial is updated and rated
Speculative Strong Buy at $CAN 21.97. The market sent it up $1.45 on Friday
based on its strong Q2 earnings. The stock certainly appears to be good value
but the market gives it little respect – the stock price certainly has not kept
pace with its earnings growth. The earnings graph shows that the annual earnings
have gone up fairly steadily over the years. Meanwhile, the stock price has been
very volatile. This stock is likely to continue to require patience but such
patience seems likely to be rewarded in the long run.

 

August 3, 2006

 

Note, that a number of the companies we rate here have released Q2 earnings,
watch for more updates in the next few days and weeks.

 

Loblaw is updated and rated Speculative
(lower) Buy at $49.01 (it closed slightly higher than our analysis price today
at $49.21). Loblaw a long-time market darling and strong performer has struggled
in 2005 and 2006 and its stock price has fallen about 33% from highs around $75
in 2005. We call it speculative because it is trending down and that could
continue. On the other hand if the earnings start to climb in Q3 then this may
turn out to be a great opportunity to buy into this company. The grocery market
has become more competitive and Wal-mart may enter it. On the other hand, Loblaw
has an extremely strong operating and profit history prior to the problems of
the last year or so. I am tempted to buy some at this price but may wait for
further word of how Q3 is progressing.

 

Kingsway Financial came out with excellent earnings today. This was after the
close of trading, so we will not see the market reaction until tomorrow. It
seems to me that Kingsway should rise on this news. But, when it comes to
property insurance stocks the market always seems to look for something negative
to react to. Kingsway did increase its claims estimates for prior years by a
small amount. The market may see that as a negative since it means that
management was apparently not as conservative in estimating those claims at the
end of 2005 at it claimed to be. The other way to look at this is that
Kingsway’s earnings would have been even higher in Q2 2006 without this charge
related to prior years. I’ll update my report over the weekend. I continue to
view the stock as very attractive. If it keeps making profits like this, the
stock price will rise, it just becomes a question of when. Of course there is no
guarantee that the earnings will continue to rise, but I am certainly happy to
hold it given the current strong earnings and low premium to book value.

 

August 1, 2006

 

Northbridge financial is updated and
rated (higher) Buy at $29.76. It’s Q2 report included a big surprise earnings
hit related to the 2005 hurricanes. In many ways that should be treated as a
one-time cost since it related to a prior year and since Northbridge is no
longer offering new policies in the areas that caused the hurricane losses.
Absent the 2005 related hit, the profits in 2006 are very strong. It appears
that overall the Canadian auto and property insurance is very profitable. While
that will not last indefinitely Northbridge appears quite attractive at the
current price. However its parent (Fairfax Financial) may run into further
problems which could affect Northbridge. Overall I still like Northbridge but my
enthusiasm has been tempered by the added hurricane loss estimates from 2005.

 

Rogers communications (not covered here)  had strong results today. I
would expect Telus to have good results on
Friday driven by cell phones although Shaw
Communications is taking away significant numbers of land-line phone
customers. Shaw should continue to do well but it will not be reporting results
until perhaps late October as it has an August year-end.

 

 

July 30, 2006

 

Tim Hortons is added to the Site and
rated (lower) Buy at $28.37. Tim Horton’s on Thursday released strong Q2
earnings and sales growth. As discussed in the report Tim Hortons is a very
strong company. It is not bargain priced, but this may be a case where it is
worth paying the price to hold a high quality company.

 

Wendy’s is removed from the Site since our interest in Wendy’s was always
driven by its ownership of Tim Hortons. Also, it would be difficult to calculate
a fair value of what Wendy’s will be worth in the absence of Tim Hortons since
Wendy’s itself has recently been losing money. Wendy’s has potential but needs
to restructure further before it will become profitable again.

 

For purposes of the model portfolio, I will notionally sell the Wendy’s and
replace it with Tim Horton’s at tomorrow’s opening prices. I intend to soon do
the same with my own Wendy’s shares. With Tim Horton’s I feel I am getting a
known quantity but by continuing to hold the Wendy’s I take the risk on what
those shares will be after it distributes out all its Tim Horton shares
(scheduled for October 1).

 

Boston Pizza is removed from the site as the report was well out of date. I
hope to add some more Income trusts in future.

 

July 29, 2006

 

Dalsa is updated for its Q2 earnings and
rated Speculative Weak Buy. The earnings had declined in 2005 and this makes the
value ratios continue to look weak. But profits are now recovering and my sense
is that the company is better than its current value ratios would suggest. I am
comfortable holding a small position here, partly because i have little other
exposure to high-tech and I do like the potential here.

 

The latest version of the free newsletter has
just been sent out.

 

In regards to Fairfax, which I mentioned on Thursday. I decided to “get out
of Dodge” and sell my few shares on Friday. I bought it as a speculation based
on the very low price to book value. Ultimately is should recover. But it is
extremely complex and is undergoing some serious problem at this time. The
company itself says not to trust the financial statements so I decided to take a
small loss and get out.

 

July 27, 2006

 

TSX Group is updated for the Q2 earnings
release and rated Buy at $45.95. This is an extremely profitable operation.
Growth has recently been very strong.

 

Not surprisingly, Tim Hortons reported strong growth today, I continue to
like this stock. It is a bit difficult to analyze since it is so new as a public
company. However, I plan to add an analysis report for Tim Hortons to this Site
soon. Wendy’s reported more troubles. I am only holding Wendy’s (in my own
portfolio and notionally in the model portfolio) because it will spin off Tim
Horton shares to me on October 1. For those not facing capital gains taxes on
Wendy’s, an equally valid strategy would be to sell Wendy’s and put the money
into Tim Hortons directly.

 

On July 11 and June 14, I mentioned Fairfax as a speculative pick. There has
been more bad news about this company. Yesterday it announced it would sue some
hedge funds. Maybe the hedge funds did something wrong. If so, I think that
should be left to the police and regulators to pursue. I believe Fairfax should
get its own house in order and not focus on such a lawsuit. Today, after the
close, it released earnings which included bad news and indicated that its past
financial statements would be restated and are not reliable. I expect the stock
to fall tomorrow and now consider it to be extremely risky. I hold a few shares
and I may sell tomorrow.

 

July 26, 2006

 

The TSX group released – after the close of
trading – another quarter of astounding earnings growth (after adding back a
one-time income tax charge). Due to accounting rules free cash flow tends to
materially exceed net income. The market may worry that the TSX group cannot
continue such torrid growth. However, based on the earnings I would expect the
stock to rise. I will consider adding to my position in this stock tomorrow if
the price remains no higher than $45 to $46. This company is unregulated as to
its pricing despite holding a near monopoly position in Canada. Nice for
investors. I will update the report on this stock after I see where the stock
goes in reaction and after the financial statements are made available. (It is
very disappointing, and I think unfair to retail investors, that financial
statements did not seem to be posted tonight).

 

Strong markets the past three days were a welcome relief from the recent poor
markets. This illustrates that while the market has seemed risky lately, it is
also risky to be out of the market because rally’s like this are unpredictable
and those hoping to buy at the market risk being left out when the market and
various individual stocks eventually recovers to new highs.

 

July 24, 2006

 

Today, Monday, saw a great start to the week for the market. Many of the
Canadian companies will be reporting earnings in the next few weeks. We will
soon have a number of updates as a result.

 

July 21, 2006

 

Cognos is updated for its earnings release
this morning and is rated Speculative (lower) Buy at $30.29. After its big price
drop, I had hoped it would look cheap but it still does not look exactly cheap.
But it may be a good opportunity to buy into a strong company at a reasonable
price. And an RBC analyst has speculated that IBM would like to buy it and if
so, I would think there would be a reasonable price premium paid. A reasonable
strategy here would be to buy 1/3rd to 1/2 of an ultimate position and look to
add to it over a six to twelve month period.

 

Canadian National opened at $48.40 but then fell and is at $46.49 as I write
this. So, the stock has dropped despite stellar earnings and operating
performance. I believe that this is a reflection of the current overall
pessimistic mood in the market. Investors are afraid of higher interest rates
and a recession and therefore nervous investors are cashing out which drives
down prices. Taking a long term view I believe CNR represents good value.
However, it could very well go lower before recovering. A strategy of averaging
into this and other strong stocks that are down may be wise. On the other hand
those with cash may wish to stay on the sidelines and wait for signs of a
general market recovery before buying.

 

Northbridge was down 6% on no news today (see update just below), the same comments would apply in
that it looks like good value but that does not mean that it will not continue
to decline. The action on CN suggests that investors should wait for Q2 results
before investing. Most stocks seem unlikely to jump even if earnings are good,
so it seems best to wait until the Q2 reports are out. UPDATE – I have now
learned that Northbridge did release an earnings estimate for Q2 which was the
cause of the 6% slide. Northbridge revealed that losses from the 2005 hurricanes
were significantly larger than earlier estimated. This was partly offset by
realized gains on securities (unrealised gains have fallen). Northbridge has now
sharply reduced its exposure to hurricane losses for hurricanes in 2006.
Northbridge indicates that profit on its standard Canadian operations remains
very high. This bodes well for the results from ING and from EL-Financial. Given
that Northbridge has sharply reduced its exposures to hurricanes, it does
continue to look attractive, however this latest development does illustrate the
risk of this stock.

 

July 20, 2006

 

Canadian National is updated and now rated
(higher) Buy at $47.45. CN reported Q2 earnings after the market close today and
those earnings showed a very strong increase year-over-year as well as
sequentially versus Q1. The updated report indicates the reasons why CN seems to
offer good value at this time. Of course, there are always risks and counter
arguments – like CN cold suffer in a recession. But I would rather invest in a
company where one has to think of reasons why it is not as good as it first
looks, rather than the usual approach of investing in high P/E companies that
will only be good investments if in fact predicted growth materializes.
Consider too, that Bill Gates is a big investor in CN and Bill may well have
been advised to buy this by his good friend Warren Buffett. I regret that I took
profit on CN and sold some years ago. I plan to buy tomorrow if the price does
not jump too much. Logically I would expect the price to jump somewhat tomorrow,
but given the recent market pessimism it may not do much tomorrow. for the model
portfolio, I will notionally double the position in CN at tomorrow’s opening
price.

 

July 19, 2006

 

There have been many times when the market has been going strong and many or
most stocks start leaping up often for n apparent reason. Clearly now is not
such a time. In fact the market seems in a negative mood. In this type of
situation, good news is often oer-looked and the market seems to pounce mostly
on bad news and fear leads to a situation where stocks go down easier than they
go up. This is depressing. However, he silver lining is that at some point it
definitely leads to bargains. A strategy of averaging into stocks at current
lower prices may turn out to be wise. For the stocks on this site, I have the
following thoughts. (In many cases these stocks are in down-trends so keep in
mind they may g lower before they start to recover. Also keep in mind tha
individual companies can be hit by surprises. Read the latest updates above on
these companies for further information. In many cases Q2 earnings will soon be
released and that could change the picture).

 

Target and Wal-Mart look quite reasonable at about 16 times earnings.

 

Loblaws will likely be a good investment assuming that thir current
turn-around strategy starts to work soon.

 

Cognos, looks like a Buy and its P/E ratio is lower than it has been in
years.

 

Stantec, Alimentation Couche-Tard, and the TSX Group have all declined and
look like reasonable bets. CNR has also declined, and this may be a good
opportunity. There was news about a strike this morning but so far the stock
reaction is minimal and therefore I suspect this is a minor strike but I have
not seen full information yet.

 

Manulife has been a perennial performer and continues to look reasonable.

 

Cryptologic is a very speculative pick and declined sharply yesterday. For
aggressive investors it may be a good pick but I have to wonder about the reason
for its big decline.

 

I have not analyzed Tim Hortons partly because I believe it will take some
time of it operating as a separate public company to get a sense of its
earnings. I believe the stock is not necessarily cheap but that it will do well
do to profitability and growth. The maritime provinces are said to be saturated
with Tim Hortons. However, I have recently been traveling in the martimes and
all the Tim Hortons I saw were very busy. That hardly seems like saturation. As
I stood in line yesterday waiting for a coffee I thought, “how can I not own
this stock?”. I think it will do well. If not, at least when I have to wait in
one of its lines I will feel good abut owning a piece of it. It seems like the
more locations they put in, the more customers they generate. I bought a few
shares yesterday and this will add to the shares I will receive (on October 1)
from my Wendy’s holdings.

 

 

July 17, 2006

 

ebay is added and rated Speculative Weak
Buy/Hold at $25.66. The report is dated July 14 as it was posted prior to the
market opening today, Monday. This is certainly not a very definitive rating but we think ebay is worth watching. Recently we have been adding more U.S. stocks and we do
intend to add more of the well known U.S. names, on a selective basis.

 

July 13, 2006

 

The markets continue to be on a negative sentiment. At some point it will
turn around but it is unclear when. We are hoping that the Q2 earnings reports
will be quite strong, particularly for our strong buys. Property Insurance
Company earnings should do well on an operating basis but may have capital
losses due to the market decline. The market tends to ignore insurance company
capital gains but may not be as forgiving of capital losses (when they sell
stocks and bonds at a loss). Overall, in this period it seems patience is
needed.

 

Alarmforce is updated and rated
Speculative Weak Buy at $4.42. We have followed the company for a few years and
it has done well operationally. However, the accounting has undergone changes
which lowered reported net income. My sense is that the accounting earnings are
understated. But the market price seems to already reflect that fact. If we held
it we would likely continue to do so. I do not hold it at this time but might be
interested below $4.00.

 

July 11, 2006

 

The Bank of Canada interest rate was left unchanged today which should be
good for stocks.

 

The Q2 earnings reports will begin to come in very shortly and we will soon
have updated reports for many of the companies here. I mentioned Fairfax under
June 14, it did fall further since then but then recovered. I think it may be a
good pick although it is quite speculative. As a speculative pick, I will buy
some today.

 

Jul 7, 2006

 

Stantec has fallen under $21 and I would consider it a buy at that price.
Cognos was down 4% today to $30.70, on no additional news. I am going to buy
some shortly. As mentioned under June 11 this might be a good entry point
although it may be risky due to an on-going accounting investigation by the SEC
and delay in reporting results. I continue to view Kingsway very favorably
although it is apparent that “the market” has little interest in the stock and
therefore patience will be required. I hold Wendy’s which has risen lately. My
tentative plan is to hold Wendy’s until October 1 to collect my Tim Hortons
shares and then I would likely sell the Wendy’s which at that point would likely
fall to the $20 range or below when they no longer own 83% of Tim Hortons.

 

July 6, 2006

 

Manulife indicates that investor sentiment was at a high in June. This may be
a contra-indicator given that this sentiment had a record high in early 2000
(just before a market crash) and was at a low in early 2002 not long before a
long bull market that started in the Fall of 2002.

 

Canadian Tire is updated and rated
Weak Buy at $65.61. This is a great company and has done extremely well over the
past five years. At this time it seems fairly priced rather than particularly
attractively priced.

 

July 3, 2006

 

Shaw Communications is updated and rated Buy
at $31.55. It just release very strong earnings for its Q3 fiscal 2006. We began
rating this a Buy around 18 months ago at $21.50 (see Jan 21, 2005 below). Since
then earnings have increased sharply as we expected. If current trends continue,
the stock should continue to do well. I particularly like the strong levels of
insider ownership and buying in the past few years.

 

June 29, 2006

 

The market went up sharply when the Federal Reserve Bank in the U.S. raised
rated only 0.25% to 5.25% instead of a feared 0.5% and softened its tone on
inflation warnings. Given the market may still expect the the rate to go to
5.50%, this optimism on the interest rate outlook may soon fade. However for
July we can hope that earnings announcements will dominate the market’s
direction and I expect the Q2 earnings reports to be mostly strong.

 

Loblaw is updated and rated Weak Buy at
an analyzed price of $52.50 (closing price today was $52.02). This has been a
great company but earnings recently fell on some restructuring problems largely
related to a change to large more centralized warehouses and partly due to
competition. Based on the lower earnings and uncertain outlook it is rated a
Weak Buy. If growth was to return to it’s long term history of double digit
percentage earnings growth then this would be a Buy. More aggressive investors
could consider buying now on speculation earnings growth will resume. However
conservative investors should wait to see the results of Q2 and possibly Q3.

 

I would like to review some history for this stock. We first covered it as a
Weak Sell on January 3, 2001 at $50.50. At that time the adjusted P/E was 29.5
and the price to book was 4.7, so we considered it expensive. Since then the
stock generally continued to look expensive to us and got as high as $76 in
early 2005. As the price fell throughout 2005 we started to find it looked
reasonably priced, but were a little early. Now the P/E is more attractive than
it has been in many years, but the earnings have declined and earnings growth
seems more uncertain. While it may be best to wait for an earnings turn-around,
my sense is that this stock will turn out to be a good investment at this price.
Despite only a Weak Buy rating, I will retain it in the Model Portfolio.

 

An interesting point – in our analysis when a stock has a current P/E of say
30 (Like Loblaw in 2001) our analysis assumes that the P/E will regress to some
more sustainable level such as 18 by the end of an assumed five year holding
period. Sometimes that is too conservative since if the company keeps growing
strongly the P/E can stay high. But in the case of Loblaw the P/E did indeed
regress to about 18 over five years. Ideally we would like to buy when the the
price is reasonable even assuming the P/E will decline, then if it stays high we
earn a bonus return over and above the minimum hoped for level of 8 to 9%.

 

June 26, 2006

 

Well the week is off to a positive start…

 

Very interesting news that Warren Buffett will begin giving away his fortune
starting in July. In depth news about this is available here

http://www.berkshirehathaway.com/donate/webdonat.html and particularly in
the Fortune article

 

http://money.cnn.com/2006/06/25/magazines/fortune/charity1.fortune/index.htm

 

I am not much interested in the giveaway. What fascinates me is how he
amassed this fortune. The combination of returns averaging well over 20% per
year and his 60 years of investing means that he did not have to start out with
all that much money in order to obtain his fortune.

 

Mathematically, if he had $70,000 at age 15 as a one-time lump-sum investment
and made 25% per year (after tax) it would compound up to $46 billion in 60
years. In reality he had far less I think than $70,000 at age 15 but he also
made and invested money from employment and from large  profit commissions
on his Buffett partnerships (essentially a hedge fund).

 

The point is that at a very young age he absolutely KNEW he was going to be
very rich because he was confident he could make 20% plus on money and he knew
that over time it was going to compound up to a huge amount.

 

This should be pretty motivating to younger investors. For people that are
planning to be alive in 30 plus years and who are willing to let money compound
for that period it does not take all that much money to compound up to several
$million if one can find higher returns through finding under-valued stocks. And
if you think of teenagers who have 60 years and more ahead of them to compound
money, there is every possibility of reaching mega millions. I will do some more
math on this…

 

In this charity he continues his amazingly loyalty to his friends. It has
long been reported that he is very good friends with Bill Gates. Carol Loomis
wrote the Fortune article. Carol is over 70 and has been a friend of Buffett’s
since the mid-sixties. Fortune and Carol Loomis get to do articles on Buffett
frequently with access to Buffett while other publications do not get that
access.

 

June 21, 2006

 

We are now announcing a new referral program. If you recommend the Site to
someone and that person subscribes, (and you let us know) then we will
immediately refund you $20 via PayPal. If you pay monthly, it will come off your
credit card. If you pay annually or by cheque it will come as an email link and
can be transferred to your bank account. (Naturally, the expectation is that
these subscribers will remain our customer for several months or possibly much
longer – as indeed most of you have, or that they take an annual subscription.)

 

It’s my expectation that this referral program will work to the advantage of
InvestorsFriend Inc. as well as offering a reward for referrals.

 

If you wish to participate in the referral program, simply refer someone to
subscribe (for example, send them an email link to the Site with your
recommendation) and if and when they indicate that they have done so, email me
(shawn@investorsfriend.com or
editor@investorsfriend.com) with
their email address that they used (preferred) and/or their name.

 

A nice move in the markets today – but one day does not make a trend. Given
higher interest rates and inflation and higher consumer spending, the markets
are in a tug-of-war between, earnings growth pulling it up and higher interest
rates and a feared recession pulling markets down. This volatility seems likely
to continue.

 

FirstService corporation is updated
and remains rated (lower) Buy at $U.S. 25.87 or $CAN 28.83. The report is
updated extensively to reflect the recent 2006 fiscal year earnings and annual
report release. While it is not compelling, it has a great long-term history of
earnings growth, although the stock itself has been volatile even while earnings
were growing relatively steadily. I own a small amount and have no immediate
plans to Buy but may consider adding to my position particularly if the price
should fall.

 

June 20, 2006

 

After three and a half years of almost uninterrupted gains in our stock
picks, the past month has clearly been a less happy time. As the saying goes –
this too will pass. I don’t think anyone can say when things will improve or how
much worse the market decline might get. But I am confident that over time our
performance will continue to be strong. Over longer periods of time the general
market will rise and although it it can not be guaranteed, we definitely expect
to continue to out-pace the market.

 

In times like this I am most comfortable holding stocks of companies that are
making good returns on equity, that have growth and that are trading at
reasonable prices. While I did move 20% of my funds to cash I don’t plan to move
any more to cash. In fact I am trying to hold myself back from buying as prices
go down. I see no reason to panic and sell out of good companies. But everyone
has to consider their own particular circumstances and time frame.

 

Canadian Western Bank is updated and remains
Buy rated at $41.00. This is not a screaming Buy but it has been a very steady
performer and the outlook is good. This stock is up 315% since we first placed
it on this Site as a Strong Buy on August 5, 1999 at $9.88 ($9.88 after
adjusting for the stock split). Over the years since then we have not always
rated it a Buy but often we have and it has generally surprised to the up-side.
Check out, the very nice graph of its growth on a per share basis. It’s
interesting to note that by December 31, 1999 the stock was down 13.5% to $8.55
– we hung in with it and it rose 32% in 2000 and another 283% since then!

 

June 17, 2006

 

E-L Financial is updated and rated
Buy at $622. Last year (See Aug 26, below) we rated this a Buy at $392.
Unfortunately I failed to buy it myself at that time. Since then the earnings
and book value are up quite a bit. It’s not as tempting as it was back then but
still looks like a good long-term pick. However it may fall somewhat when the Q2
earnings come out since it will take an earnings hit due to the lower stock
market as it has investments that it must mark to market. Therefore, it may be
best to wait for the Q2 earnings before buying. If bought now, the best strategy
would be to be prepared to add to the position on a significant dip in price. In
other words the Buy is more a long-term rating. This company is more complex
than the other property insurance stocks tat we follow because it also has a
large component in life-insurance and because at the holding company level it
has additional investments. The accounting for each of property insurance, life
insurance and the holding company is different with repect to gains on market
investments and that adds to the complexity. Also note the thin trading and
largetr bid /ask spread. It may pay to be patient and place an order below the
asking price when buying this stock.

 

June 16, 2006

 

Performance figures are updated. While the picks hare have suffered in the
market drop, they are still doing well for the year to date and better than the
market and with less volatility.

 

Cryptologic is updated and rated
(highly) Speculative Strong Buy at CAN $27.14 or U.S. $24.14. On the face of it
the financials suggest that this is a highly profitable fast growing company
with no debt and is available at under 15 times earnings. That seems quite
attractive. But as mentioned in our report here and under April 24 below, it
seems that this company has been accused of being a criminal organization. I
note that the market price has not done well lately in spite of stellar Q1
earnings and a very large increase in the dividend. Perhaps that is a warning
sign.

 

Overall, I am very tempted to buy back into it but given these accusations I
would avoid taking a large position. It would be nice to think that because it
is audited by KPMG and listed on several stock exchanges that we can trust it.
But that is not necessarily the case. (On the other hand the accusations may
simply be from people who lost large amounts of money gambling and also some
former casino customers that were hurt perhaps partly by the decision of U.S.
credit card companies to stop processing payments for on-line casinos in
December 2001). I spent several hours reading the 2005 annual report and
everything certainly looked legitimate – but I can’t be sure. The notion that a
company that makes software for on-line gaming would be highly profitable is a
believable storey.

 

June 14, 2006

 

I added to my Kingsway position today. While there can never be any
guarantees and while insurance companies are risky, I believe that at a price of
around 1.25 times (diluted) book value Kingsway should be a good investment. No
doubt it will have suffered somewhat from the stock market decline, but most of
its investments are in relatively short term bonds. Clearly market sentiment is
not in favor of the company and therefore it is unlikely to recover much until
and unless it can continue to report strong earnings, and it may take several
quarters of strong earnings. If it continues to report reasonable to strong
earnings then the growth in book value should pull its share price up.

 

I have recently been looking at Fairfax Financial as a very speculative pick.
The following will only be of interest to more aggressive investors. Fairfax is
a large property insurance holding company headquartered in Canada. However the
great majority of its operations are in the U.S.

 

The earnings (and losses) and share price has been extremely volatile and
currently the company is somewhat under siege.

 

Right now, the shares at $U.S. 107 are trading at only 69% of (diluted) book
value per share. In isolation that is very attractive. If the company can put
its troubles behind it the share price could easily double (but even if it
occurs, that could take many months at least).

 

However the company has had poor earnings over the period since 1999. In 2005
it really got hammered with hurricane related losses. Prior to 1999 it had a
very good record with an average 20.5% return on equity.

 

Most recently the stock has been hammered down because of the losses in 2005
and because the Securities and Exchange Commission was investigating certain
accounting practices and it has been targeted by a number of class-action law
suits claiming improper financial disclosure. In many ways that is reason enough
to avoid this stock.

 

Fairfax’s debt ratings are poor with most at bb+ by A.M. Best.

 

In the first quarter of 2006, Fairfax reported strong earnings.

 

This is clearly a highly risky company, the share price has been falling and
may continue to fall.

 

It also certainly faces the risk that 2006 could be another bad hurricane
year.

 

However, it is a large company with strong subsidiary companies. It is
certainly very possible that it will put its troubles behind it and the stock
could rise substantially. However even in a positive scenario, that could easily
take 6 to 12 months or more. Several of its subsidiaries are not 100% owned
trade separately (most notably, Northbridge and Odyessy Re). It appears that
Fairfax as a holding company trades at a discount to the value that would result
from the sum of its parts (only some of which trade on the market).

 

My conclusion is that this is a risky stock that has potential to move in
either direction. The company is very complex and certainly its legal and
regulatory troubles are very complex and I am not in a position to have a good
understanding of all of its risks.

 

It may be wiser to wait for a partial recovery before touching this. I may
consider a very small position now with a view to averaging UP if it starts to
recover. If I do so I will be prepared to hold while the stock price drops
because I would be buying into a downtrend. Again, it may best to wait for more
positive news.

 

June 13, 2006

 

I sold the rest of my ING Canada today as well as just a small amount of my
Northbridge and a small portion of my Wendy’s all just to raise some cash. At the
moment I don’t plan to sell anything else.

 

Kingsway credit rating was reaffirmed at BBB- by Standard and Poor’s which
could be viewed as a minor positive. Wednesday there is a consumer price index
report coming out that should move the market one way or the other. Hopefully
the market already expects it to be based (high inflation) and if so then their
might be little reaction if it is high as expected.

 

For those in oil, it is interesting that oil stocks have come down so much
when oil itself is not really down all that much… (In any event I don’t follow
commodities…)

 

June 12, 2006

 

Another ugly day for stocks. And this could certainly continue if more people
decide to cut their losses and get out. I understand that certain economic data
that will come out this week as well as speeches by the U.S. “Fed Governor” will
be closely watched and could throw the market either higher or lower depending
if the market likes what it hears.

 

Hopefully before two many more weeks the market can start to focus on Q2
earnings which are likely to be strong…

 

It would of course be nice to be sitting on some cash to take advantage of
bargains at some point… I may possibly trim some of my positions to raise
cash. Possibly the rest of my ING Canada, maybe some Wendy’s. I may consider
somewhat trimming anything that we are not rating a Strong Buy at or above the
current price. The decision to try to cut losses in a market decline is very
specific to each individual and includes the tax status, the risk tolerance, the
stage of life and other factors.

 

I’m certainly hopeful that the down-turn will not get much more severe. On
the other hand it is hard to feel optimistic about the markets direction in the
next few weeks at least. As always the market tends to do well in the long terms
but the bumps along the way can be tough to live through.

 

June 11, 2006

 

Dalsa is updated and remains rated
Speculative Weak Buy / Hold at $15.00. It seems like a good small technology
company but it definitely had some struggles in 2005. If profit returns to the
2004 level the stock price would definitely rise. I hold shares and will likely
continue to hold. I would consider buying more if it dropped under $13 again.

 

Note that an edition of the free newsletter was sent out late on Friday. If
you did not receive it, you can access it here.

 

Cognos has fallen hard since we last
updated it at $43.42 on April 8. At that time we rated it Weak Buy / Hold. The
company announced that Q1 earnings would likely be only 15 to 19 cents per share
compared to last year’s 25 cents. The earnings decline is partly due to the
higher Canadian dollar. But the biggest reason for the share price drop is that
the Securities and Exchange Commission (SEC) is looking at how it allocates or
recognizes revenue. This caused a delay in filing the last fiscal earnings
report in the U.S. and a delay for Q1 as well.

 

The SEC investigation at first glance appears to be much ado about nothing.
They are looking at the allocation of revenue between the actual software and
the support services. Cognos apparently provides both the software and at least
some support for a bundled price. An SEC investigation sounds like an ominous
thing. But in this case the issue seems less than ominous. The Cognos press
releases do not suggest that any changes in earnings will result. (I am not so
sure of that, I think there could be some change in earnings as the revenue
recognition could affect how the software development cost is amortized).

 

I note that Cognos has no debt and has a about $6 per share in cash and
short-term investments. Therefore it would appear to be in absolutely no danger
of any financial difficulty. I also note that it’s free cash flow generally
exceeds earnings, which is normally a sign of conservative accounting. It would
be well positioned to buy back shares after the accounting issue is settled.
Over the past seven years that I have followed the stock it has always had a
high price/earnings ratio. Now it is trading at a much more reasonable 21 times
trailing earnings (although note that earnings may decline this year).

 

This could turn out to be a wonderful opportunity to pick up the stock at a
more reasonable price. However, wading into an SEC investigated stock is
certainly somewhat risky. At this point it is probably best to wait until the
SEC issue is resolved and the Q1 report is released. That should also provide an
indication of the earnings and revenue outlook.

 

More aggressive investors could consider starting to average in at this
price.

 

June 9, 2006

 

Note that the TSX has recently been simplifying a number of stock symbols.
For example SJR.nv.b becomes SJR.b, ATD.nv.b becomes ATD.b. If you are tracking
stocks, be careful to update your symbols. If a stock is shown as not trading,
it may be because the symbol has changed. On this site it is going to take some
time before all the symbols are updated.

 

Performance figures are updated. The last
month has not been good. But we did lose less ground than the TSX market and the
return this year to date is still relatively good and are well ahead of the TSX
market.

 

I decided today to sell most of my ING Canada and entered a sell at the bid
of $56.05 I have approximately zero in cash and 100% in equities and I thought
it prudent to move something to cash, in light of recent market weakness. ING is
very strong but it also trades around 2.5 times book value which is aggressive
for an insurance company. I had mentioned a number of times in the past that at
any time I might lighten up even on stocks that we still rate highly. I am very
highly concentrated in the top picks here and for diversification may sell some.
Right now, I have nothing else in mind to sell. I will not be selling any
Kingsway. I will also treat the ING Canada in the model portfolio to be sold at the opening price on Monday (that is more fair than me assuming it sold
today)

 

June 7, 2006

 

It has been an ugly few days in the market and the markets have trended down
significantly since May 10. I can offer no assurance that things will not get
worse. On the other hand earnings are strong and stock market valuations are
generally reasonable. Strong companies that make double digit returns on equity
and that trade at reasonable prices will, on average, be good investments in the
long term. The short-term however is always unpredictable. Hopefully what we are
experiencing is short term pain in return for long term gains.

 

June 5, 2006

 

The DOW and the TSX were both down 199 points today…

 

Kingsway was down 4% to $20.81. This is
now well below its high of around $25. I don’t know of any material specific
reasons for the decline. It just seems investors are nervous about this stock.
With the overall stock market being down, Kingsway may not have gains on any
investments stocks it sells this quarter and may report losses. Certainly its
unrealised gains will decline unless the market recovers in June. But these are
non-operating items. The market usually focuses on underwriting profit and on
cash yield on investments. I know of no reason that Kingsway should not continue
to report good underwriting results. The higher Canadian dollar hurts it
somewhat but not to a huge extent since it also has substantial costs in U.S.
funds. The company is facing a low growth period but the stock price appears to
assume that growth will be stagnant for several years…

 

It is disappointing that the company does not appear to be buying back its
own shares – as it indicated it would. Perhaps it will start to based on the
latest price decline. There was also a small amount of insider selling lately
which is not encouraging. Overall the stock looks attractive and I am
comfortable holding. However, property insurance stocks do tend to be risky and
volatile.

 

It is always depressing to see prices fall on the stocks one holds, but in
the long run it is long-term earnings per share growth that matters most and not
the short-term volatility in stock prices.

 

June 3, 2006

 

Wal-Mart is updated and rated Buy at
$48.34. The growth chart for annual earnings and revenue per share is a thing of
beauty for this company. Future growth may slow but I would not bet against a
track record like this. My theory is that when it comes to earnings per share
growth consistent Winners usually continue to Win and losers usually continue to
lose. Note that Canadian investors face currency risks investing in this stock.
Gains in the Canadian dollar hurt the returns in Canadian funds versus U.S.
funds.

 

June 2, 2006

 

Target, the big U.S. retailer is added as a new stock on our list. Our
initial rating is Buy at $48.82. (This was evaluated at the closing price of May
29, but today’s price was about unchanged at $49.19). This stock has an
excellent history of growth in earnings per share. The valuation of big U.S.
“blue-chip” stocks like this has recently come down to attractive levels in
terms of P/E. For that reason we have been adding more U.S stocks to the Site.
Note that Canadian investors face currency risk.

 

May 30, 2006

 

With the market decline today it continues to look like markets are going to
be difficult, probably for some months. Things could turn around quickly but it
seems like markets overall are going to be tough. I don’t like the cliche that
it is “a stock pickers market” since I think it always makes sense to pick the
best stocks if you can. But it is true that in any market some stocks will still
rise. Still, it is always difficult to escape some pain if the markets in
general are going down.

 

Reitmans Canada is updated and rated
Speculative Buy at $20.15. (Price today was $20.39). In some ways it does not
get much more boring than a women’s clothing store. Then again this stock is up
25% since we first added it to the Site as a speculative (higher) Buy at $16.06
– which is not so boring at all!

 

Stantec is updated and rated (lower) Buy
at $22.72. This is a stock we first rated as a Strong Buy back in 1999 at
(adjusting for two splits..) $2.50. Most recently we called it a Buy in march at
$19.90 ($39.79 before the recent split). It’s a great company and the graph of
its 10-year earnings per share growth shows very steady and strong growth. The
share price has been somewhat volatile over the years but the earnings on an
annual basis have grown steadily. It does look fully valued at this point
however. And there is the risk it will be hurt as the construction industry in
the U.S. appears to be softening. Still, in the past 10 years it has managed to
grow every year…

 

May 29, 2006

 

Another good day in the markets… ING Canada has been volatile but seems to
bounce back well after any declines – up $1.01 today. They will start offering Aeroplan points in September so that may be a competitive advantage – but then
again they must pay for those points and it will cost a lot to buy the Aeroplan
points for existing customers. But they can entice new customers with these
points.

 

May 27, 2006

 

It ended up being a good week in the markets. Nevertheless with interest
rates still climbing it’s not clear that the market decline has ended.

 

Canada Bread is updated and rated Weak
Buy /hold at $59.50. That’s back up from a recent decline to the $50 range in
response to a good Q1. It seems about fully valued now… It’s a good company
though and so we would not sell it at this price.

 

May 25, 2006

 

A welcome jump in the market today. It would be nice to see two positive days
in a row… We will have several updated reports by Sunday.

 

May 22, 2006

 

The decline in the markets in the past two weeks or so is certainly dis-heartening.
But in many ways it comes with the territory. Markets tend to go up in the
long-run but certainly not in a straight line. It’s tempting to feel bad about
about not jumping out of the market two weeks ago. And it’s tempting to think
about getting out now. It’s hard to feel optimistic about the market in the next
few weeks or months. It seems like inflation and high energy prices are finally
having an impact and pulling markets down and that could certainly continue and
get worse.

 

On the hand it is very hard to time the markets. Those who got out a couple
weeks back may still be out when the market turns around and may miss a big
rise. The list of of famous rich investors who are successful market timers
seems conspicuous by its absence. The market has risen by a huge amount since
the bottom about three-and-one-half years ago. Over that time there were periods
that I felt quite pessimistic and might have gotten out. But I would have
regretted it as the market pulled ahead.

 

So… while I don’t feel optimistic about the markets in the short term, I am
reluctant to sell the shares I own. Possibly I will trim some positions just to
be prudent but I will not be bailing out of the markets.

 

Each individual investor has to make their own choices in these situations.
For younger investors it may make a lot of sense to stay in the market and
continue to buy in on a steady basis from savings. For older investors who are
not investing new money, it certainly may not be prudent to be 100% in equities.
But if a retired investor is well diversified and has a suitable asset
allocation in equities, bonds, cash and other assets then it may make sense to
stay in the market. The point is that the asset allocation decision and any
attempt at market timing are very much individual decisions that depend on
individual circumstances and preferences.

 

Insurance  Stocks

 

The material below reviews how insurance companies work and then reviews
data for our insurance company picks – a bit of a long story, I may move it to
the articles section later..

 

Property and liability (casualty) insurance stocks can be though of as being
two businesses. The first business is the insurance or “underwriting” business.
The second business consists of investing the insurance premiums that always
build up in an insurance company.

 

Profits on the insurance business itself are measured by the “combined ratio”
which is the ratio of the total of claims and operating expenses divided by the
insurance premiums related to a particular period of time. A combined ratio of
less than 100% means that the company is making a profit on its insurance
operations.

 

For each year an insurance company can only estimate its combined ratio
because it can only estimate what its ultimate claims pay-out will be for
accidents and claims related to that year. When a company reports its combined
ratio for each year we can break that ratio out into an “accident year” combined
ratio relating strictly to that year plus or minus an adjustment related to
prior years.

 

For example Kingsway reported a combined ratio of 97.2% for 2005, which is a
good ratio. However, Kingsway reports that its accident year combined ratio for
2005 was even better at 95.8% prior to recognizing a loss of 1.4% related to
prior years (this prior years adjustment is called unfavorable development).

 

On the one-hand a 95.8% combined ratio is excellent. On the other hand the
market gets nervous about the unfavorable development related to prior years.
Kingsway has had a history of unfavorable claim expense development and the
market wonders if it can trust that the accident year ratio for 2005 will really
turn out to be as good as 95.8% – or will Kingsway have unfavorable development
related to 2005?  Kingsway maintains that it has learned its lesson and
that it is now conservatively reserved. If so we should expect positive reserve
development in future years.

 

For some reason analysts usually focus largely on the reported combined ratio
even though it may be affected by prior year adjustments. I would prefer to
focus on the adjusted or accident year combined ratio, excluding prior year’s
impacts.

 

My thesis on insurance has been that rate increases (particularly for
automobiles) probably over-shot the mark by 2003 and that we would now see
positive developments in relation to 2003, 2004 and 2005. To a large extent this
has been the case.

 

The other big business for insurance companies is the investment of their
equity and debt capital as well as the investment of un-paid insurance claims.
The balance sheet of a property insurance company will show a large liability
ear-marked for future payment of claims. This is often referred to as a
“reserve”. Most of this money is not actually owed on any particular claim.
Rather it is a pot of money set aside that is meant to be an estimate of the
amount that will eventually be paid out on claims incurred as of the balance
sheet date. Some of these claims may have not even been reported yet to the
insurance company but they still need to notionally set the money aside for
payment.

 

The pot of money that is notionally ear-marked for future payment of claims
is meanwhile invested in bonds and stocks to earn a cash yield. Insurance
companies count on this cash yield for much of their profit. In fact, in many
cases an insurance company that merely breaks even on its insurance operations
can still achieve an acceptable overall return on equity through its profits on
investments.

 

Typically an insurance company invests mostly in shorter term bonds although
it also usually has some funds in longer-term bonds, dividend paying stocks and
other stocks. Recently cash yields on such investments have been in the 3 to 5%
range. However this can translate into 6 to 15% return on equity given that the
pot of money that an insurance company has invested is often two to three times
(or more) larger than its common equity value. The leverage comes from investing
the money that is ear-marked for future claims payments and in some cases
additional leverage is created through debt on the balance sheet.

 

In addition to the cash yield on investments, insurance companies often have
capital gains on investment and occasional capital losses. They also typically
have some “unrealised” capital gains or losses since they are not always
required or allowed to mark their investments to market. These gains or losses
usually add to profits in the long run but are usually ignored by analysts in
the short term as they are so unpredictable.

 

With the above background, we can now take a look at some ratios for our
insurance company stock picks.

 

	% U.S.	% Auto	% Commercial.	2005 reported Combined Ratio	2005 Accident year Combined Ratio
Kingsway	70%	41%	53%	97.2%	95.8%
Northbridge	16%	38%	90%	92.9%	95.9%
ING Canada	0%	56%	44%	86.0%	92.2%

The table above reveals that Kingsway does most of its operations in the U.S.
while ING Canada has no exposure to the U.S. All else being equal I would prefer
a 100% Canadian exposure. We can also see that ING has the largest exposure to
automobile insurance (which I believe has been the most lucrative segment in
recent years). ING also has the least exposure to commercial insurance, which is
probably riskier than personal insurance.

 

The above table also shows that all three companies have good reported
combined ratios. They are all making money even before considering investment
cash yield and investment gains and losses. With a 97.2% combined ratio Kingsway
made 2.8% on its insurance (good but not exceptional). Meanwhile ING made an
incredible 14% on its insurance which extraordinarily good.

 

But we should also look at these figures after adjusting for retroactive
insurance profits related to prior years. On this basis the companies look a bit
more equal. Kingsway and Northbridge both made around 4.1% on insurance in 2005.
ING made 7.8% which is exceptional. However we also have to be aware that these
are only estimated figures. Kingsway has a habit of over-estimating its profits
and then faces negative retroactive adjustments later. ING and Northbridge have
more often under-estimated their profits and then had positive adjustments
later. But Kingsway claims it has reformed…

 

Based on the above table in isolation ING would look best.

 

	Price	P/B	Yield	Interim P/E	fiscal P/E adjusted	Interim ROE	fiscal ROE adjusted
Kingsway	22.25	1.37	1.1%	8.53	9.7	16.1%	15.0%
Northbridge	33.61	1.59	2.0%	8.42	8.6	18.8%	21.0%
ING Canada	52.26	2.29	1.9%	8.63	16.9	26.6%	16.7%

The above table shows that Kingsway is trading at only a 37% premium to book
value while ING is trading at a 129% premium. All three companies have very
attractive P/E ratios below 9. But these are distorted upward due to capital
gains and for Northbridge and ING, due to retroactive recognition of increased
profits that actually occurred in prior years. It is very difficult to precisely
adjust the figures, but our adjusted P/Es remain very attractive for Kingsway
and Northbridge but is somewhat high for ING.

 

On this basis, in isolation, Kingsway and Northbridge look quite good and
appear preferable to ING.

 

	Invested Money	Book Equity	Book value Leverage	Market Cap	Market Value Leverage	Debt
Kingsway	3,398	925.5	3.67	1,271	2.67	416.5
Northbridge	2,593	1,080.3	2.40	1,713	1.51	–
ING Canada	6,466	3,046.0	2.12	6,989	0.93	127.0

The above table reveals the leverage on investments. For every $1.00 in book
equity Kingsway has $3.67 in invested assets. All else being equal this is very
attractive. ING has “only” $2.12 in invested assets for each dollar of book
equity. All else being equal if both companies made the same on their insurance
operations, Kingsway would have a higher ROE since its cash yield on investments
is more leveraged. Partly this is due to Kingsway’s use of debt (which however
adds to risk) and I believe it would also be partly due to the fact that
Kingsway’s claims liabilities take longer to settle (They are able to hold onto
the money longer due to the nature of their business.

 

The leverage available to new investors is reduced because the shares trade
above book value. For every $1.00 invested in Kingsway, the investor effectively
owns $2.67 in invested assets. This is an attractive leverage. Due to the high
price to book ratio of ING, an investor owns $0.93 in invested assets.

 

Therefore it appears that an investor in ING is counting on growth and /or
higher profits on the insurance itself while an investor in Kingsway could
expect a reasonable return from the cash yield and needs a smaller boost from
growth or profit on the insurance. Northbridge is somewhere in the middle.

 

Based on this last table, Kingsway appears to be the most attractive.

 

Overall considering that insurance companies are inherently unpredictable and
have different exposures to weather impacts, I prefer to spread my insurance
investments across all three.

 

I believe that insurance companies should continue to make high profits on
their insurance operations particularly in automobile insurance. However, the
impact of storms and hurricanes is very unpredictable. Kingsway had little
exposure to hurricanes last year while Northbridge had some but Northbridge has
reduced its exposure for 2006. ING was unaffected by hurricanes last year but
would be affected if hurricanes or other storms hit Canada.

 

Due to the recent market downturn, these companies will likely have lower
unrealized gains at the end of June. They may also face realized losses on
investments. On the other hand rising interest rates are good for them in the
intermediate and long term in terms of their cash yields. They have generally
reduced the term of their bond investments and seem well positioned for higher
interest rates.

 

Overall Kingsway and Northbridge look quite attractive and ING also looks
like a Buy. In the long-run they should do well, but the short-term is less
certain. At this time I believe there is relatively less down-side risk in
Kingsway and so I see this stock as the best risk/reward ratio.

 

Ultimately, subscribers must decide for themselves which stocks to invest in.

 

May 21, 2006

 

Western Financial Group is
updated and rated Speculative Buy at $3.02. This is a small company with big
ambitions and is available at a reasonable price. I don’t see any near-term
reason to think that the price will jump. Instead it will probably be a longer
term performer. The price could be volatile in either direction. In the past 18
months the shares fell from $2.70 to $2.00 then rose to over $3.30 but then fell
back to about $3.00. Trading volume is up to about 60,000 shares per day and
there is recently more interest from small cap analysts. The company is
converting $10.5 million in debentures into 4.2  million shares (13% of the
existing share count) on June 30 this year . This could cause down-ward pressure
on the share price as these debt investors may not be interested in holding
shares.

 

May 20, 2006

 

Manulife Financial is updated and remains
rate Speculative Strong Buy at $72.83. With yet another quarter of growth over
20% it seems like somebody forgot to tell Manulife that a huge company doing
over $30 billion in revenue per year can’t grow fast. I call it speculative
because the accounting is a “black box”. But based on the P/E ratio of 17.1 it
is not pricing in all that much growth. It could certainly fall a bit if the
market continues down but in the long term it seems quite likely to do well. I
would like to add to my position in this stock.

 

May 19, 2006

 

Home Capital is updated for Q1
earnings and rated Weak Buy / Hold at $31.97. For the first time in over 10
years quarterly earnings fell. The stock price fell about 25% in response.
Perhaps this is an opportunity to buy it at a more reasonable price. But I
prefer to wait and see if growth resumes this quarter. It could be considered a
Speculative pick for more aggressive investors. (Our report is dated May 15,
there was a delay in getting it posted but the analysis was done May 15).

 

This was clearly a bad week. Our Picks lost ground but not as much as the
overall markets did. Performance figures are updated and still look quite strong
for the year to date.

 

May 17, 2006

 

While the drop in the market is scary, it is very difficult to guess if it
will keep dropping. For prudence reasons I would like to built up some cash and
may sell some smaller positions. At most I might trim some of my insurance
positions (maybe Northbridge) but I am not going to abandon these stocks when
they still have such strong earnings. Western Financial could drop just because
it is a small company and those tend to be more volatile. Listening to the
conference call Western is making steady progress but as a longer term play it
could well fall back if investors grow nervous due to overall market conditions.

 

The markets could also turn to the upside quickly… The Q1 earnings reports
were strong and the P/E on the DOW and S&P is lower than it has been in years.
That should limit the damage unless interest rates rise a lot more. Overall this
correction is a reminder that markets do not always go steadily up. We have been
a bit spoiled with strong markets for the past three and one half years.

 

May 16, 2006

 

Cognos fell hard today for the reasons I
mentioned yesterday. It could always fall further but then again it is a strong
company with no debt so I it may not fall any further. I would definitely be
interested in starting a position at this price. I would buy some and then wait
and see what happens, I would not take a large position all at once until we see
where it is going. However, I am about fully invested at the moment so not sure
I will be able to Buy any.

 

A nice recovery on the insurance stocks today.

 

May 15, 2006

 

I was surprised at the announcement that Sleeman’s was for sale. I did not
think John Sleeman would sell it. Also in some ways I am surprised it is worth
much to say Molson or Labatt. But maybe each will bid on it just to keep it out
of the hands of the other. I would have thought it would be better to stay as an
independent and go the Income Trust route. Some analysts think Sleeman’s could
be worth $19. It’s hard to say what it is worth to a “strategic buyer”. I have
no plans to Buy.

 

Cognos had a couple of troubling press releases. First they will be late
filing 2006 fiscal earnings with the Securities and Exchange Commission. It
appears to be a non-cash accounting debate but I imagine what the SEC wants to
do will lower the reported earnings. Also they hired a new VP for sales/
operations and did not explain if someone had left or been fired. I would not
buy the stock yet. But if it falls a lot a some point it should be great value.

 

Today was the third bad day in a row in the markets. That is scary even for
longer term investors. It was good to see the DOW up today because the DOW is a
much better broad market indicator than is the TSX index. I had mentioned under
May 10 that I thought moving more to cash would be a good idea. However, it is
always hard to decide what to sell and I did not end up selling anything.
Certainly our picks could continue to move lower since there is always that risk
in the market. However the TSX has fallen faster than our picks these past few
days. I am hopeful that things will look better the rest of this week. I tend to
look at things one stock at a time and will be adding more Q1 updates…

 

May 13, 2006

 

ING Canada is updated and rated Buy at
$52.40. The stock fell about 10% on its earnings release of Thursday. By any
reasonable standard I believe that the earnings were quite good. The company
estimates it made 3.5% on its insurance operations in 2006. Because insurance
companies often make most of their money on investments it used to be that just
breaking even on the actual insurance was considered pretty good. They would
have made around 5% absent some unusual expenses. Counting retroactive profit
from past years they reported 9.5% total profit on insurance operations which is
stellar. They also obtained a 4.8% pre-tax cash yield on their large investment
portfolio which is good. In addition there was very strong realised gains on
investment trading but that is usually considered as a one-time unsustainable
gain.

 

My basic thesis that auto insurance is highly profitable is intact for this
company. ING Canada gets 50% of its business from auto insurance. The company
has relatively little re-insurance with other companies. It has essentially no
foreign currency risk. It has very little debt. Overall this is probably the
highest quality property insurance company in Canada. The only problem is that
much of the quality is already reflected in the price and it does have a high
price to book multiple at 2.3. Given that the stock price fell on strong
earnings it seems the market was perhaps pricing in unrealistic short-term
earnings expectations.

 

Overall I am comfortable holding this insurance company along with the others
on this Site. ING provides higher quality but is relatively more expensive.
There is always a risk it can fall further but in the long-term I suspect it
will do well.

 

May 11, 2006

 

ING Canada fell almost 5% in spite of reporting excellent earnings. Partly
this probably reflects fears of lower income ahead. Also it probably represents
the fact that investors are generally feeling nervous about higher interest
rates. I’ll update my report on ING by Sunday.

 

Western Financial reported “okay” earnings. Not great but still progressing
in its growth plans. Also announced it will redeem convertible debentures which
will add to the share count. I would hae thought the shares might fall on this
report but they rose.

 

I note the Manulife CEO is selling a small portion of his shares to diversify.
I have sometimes overreacted to insider selling, but certainly it gives me less
confidence in holding the stock. I will update the Manulife report soon as well.

 

May 10, 2006

 

Some good gains today … Western Financial has fallen from its high of over
$3.40 to $3.05 to $3.09 today.  I already have a lot or would be tempted to
Buy here. This is really not that much volatility considering this is a small
cap stock. Volumes are lower now than when the stock was reaching its highs. I
look forward to the Q1 earnings report in the next few weeks and will likely
neither Buy nor Sell until that comes out. ING Canada reports tomorrow and I am
hoping for good things there…

 

Interest rates rose again today in the U.S. putting their Federal Funds rate
to 5% and consumer prime rates around 8%. The market has done well in the face
of these increases. When it comes to the general markets I am definitely worried
due to higher interest rates and higher energy costs. When it comes to oil and
commodity related stocks I can’t guess which way those will move.

 

The Canadian dollar has really jumped lately. I expect this to hurt many
Canadian companies that have operations or sales outside of Canada (Manulife is
an example). Companies that import goods to sell in Canada will be helped.
Canadian Tire is an example. American companies that do a lt of business in
Canada (Wendy’s is a prime example due to its 82% ownership of Tim Horton’s)
should be helped by the higher Canadian dollar as far as their U.S. share price
goes. Some of these currency impacts are hedged away in the short term but
hedges are usually only temporary. Even with currency pushing a stock in a given
direction, many other factors could cause the stock to move the opposite way.

 

Despite some danger signs I still am optimistic that InvestorsFriend’s stock
picks will do well on average. But if the market turns down it will be hard to
escape some damage. Therefore it may be prudent to move some funds out of stocks
and into cash especially for anyone who is fully invested in stocks and/or
bonds. Bonds will not do well if interest rates keep rising.

 

May 8, 2006

 

Kingsway was up nicely today, hopefully more to come as the recent drop in
price seems unjustified.

 

May 7, 2006

 

Telus is updated and remains rated (higher)
Buy at $45.95. I have switched to using the non-voting shares in the analysis as
those shares are a bit cheaper and in this widely held company the value of the
vote to a retail investor is approximately zero, in my opinion. The non-voting
shares exist so that Americans can hold a high proportion of the company without
violating Canadian voting ownership restrictions on telecommunications
companies. Buying Telus is basically a bet that their current huge momentum in
wireless sales will continue and that higher profits on wireless will outweigh
declining profits on the fixed wireline business.

 

May 6, 2006

 

Those who chose annual subscriptions through Paypal. I want to remind you
that as indicated in the subscription sign-up page,
the annual subscriptions do renew automatically on the renewal date, unless they
have been canceled. However, recognizing that a year is a long time and that in
some cases the renewal may not be wanted, simply notify me within four weeks of
an automatic renewal and if requested I will cancel the renewal and make a full
refund through PayPal. Unfortunately our system is not set up to issue reminders
when the renewal date is approaching, but you can see it by clicking “My
Account” when you log in.

 

Performance figures are updated. Some of the picks were quite volatile this
week but in the end there was only a small loss for the week.

 

Kingsway Financial is updated and rated
Speculative Strong Buy at CAN $22.36. Property and casualty insurance companies
are exceedingly difficult to analyze because of lumpy realized gains and losses
on (mostly) stock sales and because of very lumpy retroactive changes to claims
expenses of prior years which flow through the current year’s income statement.
I am attracted by the fact that the stock sells at 1.4 times book value and
appears to be earning about 15% on equity. My hope is that the claims reserves
for 2005 were too high (given the price increases of 2003 and 2004 and given
reluctance of people to make claims and given lower limits on injury claims for
Ontario). It’s less clear if that situation also applies in the U.S. Over the
years the company has produced strong earnings but the share price has been very
volatile.

 

All else being equal I would prefer to invest in Canadian insurance
operations. Kingsway operates mostly in the U.S. which introduces currency risk
for Canadian investors.
I would also prefer to invest in personal standard auto insurance while Kingsway
is into mostly commercial and high-risk insurance. Overall Kingsway seems to be
well valued and I am comfortable with a large position in it but I am prepared
to accept near-term volatility. In the next few months I am hopeful that the company
will be buying back its shares and that the price will rise to at least $24. If
the company were to recognise retroactive lower claims expenses for 2004 or 2005
this would create an up-side potential but even if this occurs it might not be
until the end of this year. Higher interest rates hurt the investment value but
increase the investment income yield.

 

May 4, 2006

 

I was disappointed by the the drop in Kingsway Financial. Earnings were down
but insurance companies are usually judged on operating earnings and that figure
was up 11%. Clearly this sector of the market remains out of favor and perhaps
Kingsway is particularly out of favor. When I read the report and listened to
the conference call I thought it was a good quarter. In their report TD Bank
also thought it was a good quarter but they believe the stock only deserves a
price to operating earnings multiple of 10 and a price to book value ratio of
1.3. To me those kind of multiples look low. I added to my position today. Given
a current price to book value ratio of under 1.35, I don’t see why the stock
should fall. I would expect the company to now begin to buy back shares. Overall
it looks like this is going to require a lot of patience. I’ll update my report
by Sunday.

 

May 3, 2006

 

Kingsway Financial released earnings after the close of markets today. Net
income was down due to a small loss in investments sold. But operating profit
from insurance and from yield investments was up. Normally the market focuses on
operating earnings and so I would expect the price to rise on this news. However
there are always lots of factors to consider. I will wait and see how the market
reacts before I update my report but I would be prepared to buy tomorrow unless
it happens to jump too fast at the open. I continue to think of this as a solid
long term investment although I am not expecting it to move up very quickly. One
negative factor is the currency risk since it does most of its business in the
U.S. But I believe there also many positive factors including the strong current
profits and strong balance sheet.

 

I sold half of my New York Stock Exchange shares today. I still like it long
term but it’s not a stock I have evaluated (other than at a very high level for
reasons I have stated earlier), though I have made comments on it
earlier (search below using Control-F if interested). It was a speculative pick
that I made money on although I certainly missed selling it at the top. Given
the trend in our dollar and given that NYSE seemed to keep sliding I decided to
sell half and limit my exposure. For consistency I will also notionally sell
half in the Model Portfolio.

 

May 2, 2006

 

Based on our recent report, I added a few shares to my Northbridge position
on Monday. I note that Monday was a negative day in the markets but today was
positive. Strong earnings reports are so far holding the market up in the face
of higher interest rates and Higher energy prices. I would not be surprised to
see the overall market retreat. My hope is that the Buys and Strong Buys on this
site will continue to outperform the market. Perhaps tomorrow will be strong in
Canada based on the Federal budget. Also I am expecting more good earnings
reports in the next week or two.

 

April 30, 2006

 

I have reorganized the stock table above to show separately those stocks that
trade in the U.S. or in both Canada and the U.S. U.S. residents generally do not
have access to trade stocks on Toronto (there are special procedures and higher
costs involved). Therefore showing these stocks separately will allow any U.S.
subscribers to this site to see which stocks they can easily access. Some of the
other stocks also trade on “Pink Sheets” in the U.S.

 

Canadians will generally want to trade these stocks on the Toronto exchange
to avoid currency conversion charges. However some Canadians may have U.S.
dollar accounts and in that case it makes sense to trade the stocks on the New
York or NASDAQ exchange.

 

This Site will continue to focus on Canadian companies but will likely also
include more U.S. stocks. Canadian investors should be aware that the rise in
the Canadian dollar lowers the Canadian return when U.S. stock prices are
converted back to Canadian. For Canadians it is difficult to completely avoid
U.S currency risk. Some Canadian companies report in U.S. dollars. And some
large Canadian companies do most of their business in the U.S.  Currency
risk is driven mostly by where a company does business and not much by the
exchange that it trades on. Most U.S. based companies do most of their business
in U.S. dollars – as do some Canadian companies.

 

Thomson Corporation is updated and rated
Buy at U.S. $39.91 or Canadian $44.68. With a P/E of 27 it does not look like a
bargain stock. But I believe that it’s earnings are understated and the price to
free cash flow ratio at 20 may be more representative. I like that that it is in
the information business and I like the subscription based revenue model.
Customers are probably reluctant to switch to other products after they have
integrated Thomson products into their work. Possibly an entity like the New
York Stock Exchange would like to acquire its bond trading platform TradeWeb and
if so I suspect that would be at a large gain. Canadians face currency risk on
this stock even when we buy on Toronto because the great bulk of its revenue is
in U.S. dollars.

 

April 29, 2006

 

Northbridge Financial is updated and
rated Strong Buy at $32.60. While insurance companies are inherently risky, my
view is that a company which has earned over 20% on equity for the past three
years and which has a very long history of profitability and which trades at
1.54 times book (and just 1.30 times book adjusted for unrealized gains) is a
good bet.

 

In valuing Northbridge many analysts will discount realized gains on
investments entirely. That is in spite of the fact that it has had such gains in
each and every one of the past 20 years!

 

Analysts also worry that insurance prices are dropping in Canada. That is
true but the company indicates that prices are still more than high enough to
achieve its target of a 15% ROE. Analysts also worry about Northbridge’s
exposure to further losses from hurricanes. However, the company has stopped
writing the Marine wind policies on which most of those losses occurred. It
still has some exposure in 2006 for policies written in 2005 but the exposure is
declining. There certainly can be no guarantees but the figures suggest to me
that Northbridge is likely to be a good investment both in 2006 and in the
long-term.

 

Note that I could have updated Northbridge on Thursday night after it
released the positive earnings report. But it would do little good for me to
rate it a Strong Buy at Thursday’s close of $31.09 given that the opening price
on Friday would be expected to already reflect to some degree the earnings
report. Some stock rating sites inflate their performance by resorting to such
tricks -rating stocks at prices which are not available even at the instant
their report is published.

 

My own portfolio was down just a bit this week as I lost ground on Wendy’s
and the New York Stock Exchange Group and some others but made gains on a number
of stocks as well. I will update the performance figures at the end of next
week.

 

April 28, 2006

 

Northbridge Financial released very strong earnings after the market close.
The profitability on insurance (before profits on investments) continued to be
very high at 9%. I am not sure if it will go up tomorrow or not. Ordinarily I
would think it should, but from past experience analysts seem to be very
conservative on the stock. There will be a conference call tomorrow at 9:30 am
and we shall see which way it moves after that. If it is trading about unchanged
first thing tomorrow then I believe it would be attractive to Buy at that point.
So far it still appears to me that this company is very profitable and should
continue to be profitable. Even if the market is unexcited about it I believe
that the increase in book value through earnings will push the stock price up. I
will update our report over the weekend based on Friday’s closing price.

 

The TSX Group is updated as (lower) Buy at
$48.50. The Q1 earnings were tremendous. By some measures like price to book,
the stock is very expensive. But the ROE is huge and the P/E is high but perhaps
reasonable given the ROE. The company announced some fee reductions which caused
its stock price to drop. My sense is that Q2 earnings will be very good and
therefore I bought some shares today. But given the uncertainty my approach is
to average in, not taking too big a position.

 

April 27, 2006

 

I did buy a small amount of TSX Group today, my strategy would be to average
in since the market price may not yet have fully reacted to the news of lower
fees ahead.

 

April 26, 2006

 

The TSX Group reported extremely strong earnings today. But the stock fell
because the TSX is lowering some of its prices to be more competitive. I have
almost completed my update and will post it tomorrow night. I will be rating the
stock a Buy. But be aware of the concern about increasing competition. I may buy
some TSX stock tomorrow and I am even thinking of selling part of my NYSE shares
and buying the TSX to have some of each. I may do the same in the model
portfolio but have not yet decided.

 

I note the insurance picks are creeping up and I am hopeful this foretells
good earnings reports on the way.

 

April 25,2006

 

New York Stock Exchange, a stock which I have no rating on but which is in
the Model Portfolio (for reasons why, search below using control-F for
Archipelago), has been volatile and trending down after having delivered big
gains earlier. In retrospect perhaps I should have sold at higher prices and I
have indicated all along that this was speculative. I also own it personally. I
find myself unwilling to see this partly because (quite honestly) that would
make me feel worse about not selling earlier. Also I still really like the
potential of this stock in the long term. So I would not be surprised if it does
trend lower partly because the NYSE is about to sell more of this stock… Still
I will likely hold onto it.

 

I bought a bit more Western Financial today at the $3.21 level. I am not much
bothered by this pull-back because it did run up rapidly to the $3.40 level.
Hopefully, the Q1 earnings report will support the recent price rise and more,
but that remains to be seen.

 

We should have some earnings releases and updates by this weekend.

 

I did sell half my Cryptologic today, per my comment yesterday. I felt I
owned too much of what is fundamentally a more speculative stock. I will also
notionally sell it in the Model Portfolio
and replace that half with CN.

 

 

April 24, 2006

 

I note cryptologic fell today. A subscriber pointed out that there is a site
called www.cryptologicsucks.com
that has a major hate on for this company. I don’t know what to make of it,
maybe just a very disgruntled former licensee. Still I may lighten my position
in this stock tomorrow out of caution.

 

Click for a look at the chart of
Wal-Mart’s price versus its earnings per share growth. Clearly the market is
predicting some trouble or slow-down a Wal-Mart. It’s far from clear if the
market be be correct.

 

April 23, 2006

 

CNR is updated and rated Buy at $53.49. It
release very strong Q1 earnings last week. Possibly I am being a bit aggressive
calling it a Buy after its recent strong price increase, but the earnings growth
has really been strong. I should add it into the Model Portfolio but right now I
don’t have anything that I should really sell in the model so I will hold off
putting it into the model for now.

 

April 22, 2006

 

An exceptional week. I updated the Performance figures after Thursday. I
should have waited until after Friday since it was another good day. The Model
Portfolio composition is updated for the addition of Wal-Mart. My personal
portfolio composition is also updated. See links above.

 

Western Financial Group
has risen quite a bit lately. It seems to me that this was eventually to be
expected given that it had been trading near book value ($2.13) no so long ago.
However, it could well fall back from here probably temporarily since stocks do
not often rise in straight lines. The company might decide to take advantage of
the higher price to issue shares. While that would hurt the price, it would
probably be good for the company long-term and if they need the money it simply
makes sense to raise it when the share price is higher. I’m willing to accept
volatility and I am not planning to sell any shares in this. Having built my
position at lower prices, I also am not planning to buy at this price because I
probably have sufficient exposure at this point.

 

April 20, 2006

 

Wal-Mart is added as a new listing rated
Buy at $46.47. Look at a stock price chart of Wal-mart and you will not be
excited. The stock touched over $60 way back in early 2000 and again in early
2002 and early 2004 and is well down from that level. But check out the earnings
per share and revenues per share growth in our report. (The graph is a thing of
beauty!) The company has been growing earnings quite steadily even as its stock
gyrated to probably unjustified heights and then came back down. Sure, growth
will not likely be as strong in future as in past but it still seems to be
growing at a health pace. And it is now available at a pretty attractive P/E
around 17.5.

 

I don’t have immediate plans to buy it myself but I will notionally sell the
HUB International in the model portfolio and replace it with Wal-Mart at
tomorrow’s opening price.

 

Our Picks may have lost a little ground today, although some were up. But I
was pleased that any losses today were minor on a day when the TSX market was
down 1.4% and this was after several very strong days for these picks.

 

Google releases strong earnings after the close. I will not hazard any guess
as to whether this stock is a good investment and I have not done any analysis
of it. What I can’t believe is that analysts and the media are quoting their
earnings on a basis that excludes stock based compensation. They report $2.29
per share non-GAAP and actual GAAP earnings 15% lower at $1.95. The biggest part
of this is stock based compensation. For years companies argued that stock
option compensation was non-cash and somehow irrelevant. They LOST that argument
big time. In my view, the fact that Google is reporting on this basis at $2.29
means they just don’t get it. They may have a fantastic business model but it
scares me that they they don’t seem to understand that giving out stock options
like candy, is an expense. And it’s also scary that the business media is going
along with this. Remember the last time that this sort of pro-forma nonsense was
happening big-time was back just before the market crash of the early 2000’s.
It’s unbelievable how investors can fall for this again. I have no opinion on
the value of Google stock, but certainly this nonsense is not comforting.

 

The New York Stock Exchange Group is not a stock I cover, but I had picked
the predecessor stock Archipelago as a speculative Buy earlier this year. As an
update, I continue to hold NYSE but I have no rating on it at this time. They
just released earnings which were 34 cents per share on an adjusted (ex-items)
basis. Annualized this would be $1.36 per year in earnings. This implies a P/E
ratio of about 55. Also the price to book value ratio is about 6.6. Again I have
no rating on the stock but clearly stock is “pricing in” a lot of earnings
growth. I believe that the underlying business is in a very strong position and
likely has a certain amount of ability to increase prices. It also probably has
the ability to expand into bond trading and to do further partnerships or
acquisitions. Nevertheless I consider my own position in it to be rather
speculative.

 

April 19, 2006

 

At the top of this page is a link to
how to use this page. At the
request of a subscriber I just added in there a ranking of how the ratings are
ordered from Strong Buy down to Strong Sell.

 

The ranking order is as follows:

 

(higher) Strong Buy

 

Strong Buy

 

(lower) Strong Buy

 

(higher) Buy

 

Buy

 

(lower) Buy

 

Weak Buy /Hold

 

Weak Sell / Hold

 

Sell

 

Strong Sell

 

The word a “Speculative” or
particularly ‘(highly) Speculative” at the front of the rating would indicate
more speculative… but all stocks can be considered speculative to some degree
especially if too large a position is held in one stock.

 

 

It was a nice day in the markets for our picks today. Nothing spectacular but a good
number of our picks were up and this is on top of a good day yesterday.
(Logically I should have a longer term outlook and not care about day to day but
let’s face it as internet connected investors most of us check our progress at
least daily).

 

It a cliché to say that we are in uncertain times but I know that while I am
pleased with the gains this week, my mood will turn somewhat fearful, if we get
a couple of down days. I think that matches the overall sentiment of the market.
We are happy to still ride this bull up but we know that the bull market will
end some time, and we know there are dangers lurking from higher interest rates
and a possible slowing economy, people getting into trouble with debt etc. I’m
certainly hoping that the stock picks here will weather any storm better than
most portfolios but at the same time I am just saying that I think the market
could very well turn or even lurch down at any time. So far it seems the Q1
earnings reports are keeping the market momentum going. (Also oil prices and
gold when it comes to Canada although high oil prices are bad for many
stocks…)

 

April 18, 2006

 

Forzani Group is updated and rated Weak
Sell at $15.60. It did have a strong Q4 and apparently a good start to Q1. But
it looks quite expensive especially since the price has already moved up
materially due to the strong Q4. Management has a bit of history of missing
targets. Maybe it will turn around but much of the turn-around potential already
seems to be baked into the price. I have largely lost interest in this stock and
plan to remove it from the Site soon to focus on other companies.

 

Based on my recent comments about Shaw Communications, I added to my position
in that stock on Monday. In order to raise cash I sold my SICO at $19.86 rather
than wait and get $20 (and avoid the commission) when the announced take-over at
$20 is completed.

 

April 17, 2006

 

The week has started off with my property insurance picks moving higher.
Western Financial was down which I would view as a buying opportunity. It was
announced after the market close that the CEO of Wendy’s has quit. It will be
interesting to see if the stock moves up on that news or down, I would think up
but, we shall see… It may tend to gyrate in the morning as investors try to
figure out if this is a good thing or a bad thing.

 

It seems like a consensus is building that long-term rates will keep rising
for a while at least. I certainly cannot be sure of that but if anyone is really
confident that this will happen then one way to trade on that would be to sell
short a 30 year Government Bond. I know this can be done through TD Waterhouse.
I view this as quite risky, but if an investor is strongly convinced that long
term interest rates will rise then this is one way to profit if long-term rates
do continue to rise. One tip, would be to try to negotiate the price at which
the bond is sold short. The big brokers profit by charging a bid-ask spread of
probably 1% or more for small trades but it may be possible to negotiate.

 

 

April 16, 2006

 

I have just sent out an email with a link to a new edition of our free
newsletter. If you did not get that email, you can link
to it here. The free newsletter is sent to a separate list, you can check if
your email is on that list by entering it in the box on our home page.

 

April 15, 2006

 

As long-term interest rates continue to move up, it is worth thinking about
what to do. Raising cash and trimming both equities and any longer term bonds
might be a good idea. Income Trusts and higher dividends stocks would likely be
hit earliest by interest rate increases. Stocks that have the potential for big
earnings gains even if the economy cools a bit should be better bets. It’s hard
to say where insurance stocks fit in that picture, on the one hand I expect
there profits to be strong and to be fairly recession resistant. But they would
likely face some losses on the market value of their bond and equity portfolios
later in the year if interests rates rise. But on the other hand their cash
yield on bonds and preferred shares are rising with higher interest rates. So
overall I still the insurance stocks as better than most stocks as interest
rates rise.

 

Brampton Brick is updated and remains rated Speculative Buy now at $13.85.
This company was added to this site only on January 22. While it does not seem
that exciting, it did move from $12 to $13.85. In the initial report I indicated
that there was a risk of a write-off of goodwill and this indeed happened with
the Q4 earnings release. It looks like the company is taking some actions to
improve earnings. The biggest risk here is probably the risk that housing
construction slows.

 

April 14, 2006

 

Shaw Communications is updated and rated
Buy at $28.49. It released strong earnings on Thursday morning, but the market
was unexcited by the figures. As we had expected earnings and cash flow were up.
Subscriber growth in terms of basic cable, digital cable, internet and the new
digital phone service were all very strong. This is a company that becomes more
profitable with scale and it is growing. I am very much attracted to the growing
profits and cash flows. However, the price / earnings ratio is very high and
there are reasons for caution as explained in our report. The accounting is very
complex and I spent more hours than usual studying the annual report and notes.
Overall I am very comfortable holding this stock and intend to buy more. I
believe this stock has a good chance of providing a 15 to 20% annual return or
better over the next two years and I see relatively little risk of down-side if
held for the next 12 months to 24 months (although it could certainly fall a few
dollars if the general market turns down – and as with all stocks there is
always some chance of a bigger decline).

 

April 11, 2006

 

I note that long-term interest rates have been moving up the ten-year Bank of
Canada bond yield has gone up to 4.40% today up from about 4.20% in most of
March. This is a negative factor for all stocks but particularly for Income
Trusts and higher dividend paying stocks. It’s also very negative for longer
term bonds which fall in price as interest rates rise.

 

These higher interest rates as well as high energy prices are definite
negative factors for the market. I was hoping that strong Q1 earnings would
overcome this negative factor, but that remains to be seen. I am considering
trimming some of my positions to build cash and protect against the down-side.
However, it is always challenging to decide which positions to trim. I will post
any trades I make to this Site.

 

It seems that the market is cautious on the property insurance companies
perhaps partly due to recent Tornados in the U.S. Given the mild winter we had,
and the strong markets, I believe that the insurance companies will generally
report very strong earnings for Q1. But the market may focus continue to focus
on storm risks. I believe ING
Canada and E-L Financial have
very little exposure to hurricanes as they operate strictly in Canada.

 

April 9, 2006

 

Clemex Technologies returns to the list
above rated (highly) Speculative Buy at $0.38. This stock disappointed me deeply
in the past with both losses and (unforgivably) big revenue declines. But they
appear to have cut costs way back and refocused on the core product and have
been profitable for the past five quarters. This is an extremely small company
(that really should never have gone public). It now appears to have good
potential, but due to past mistakes and volatility caution is warranted. Still,
it is not a bad pick for a small amount of speculative money.

 

April 8, 2006

 

Cognos is updated and rated Weak Buy /
Hold at $43.42. I was hoping it would rate higher as I do like the company. It
may have hidden value, but the valuation based on achieved earnings seems too
high. A recent decline in earnings seems to be turning around but still
management is projecting an earnings decline in the next 12 months. I would not
want to bet against the company but the timing does not seem right to buy this.

 

On Friday I added a small amount to my holdings in Western Financial Group.

 

April 6, 2006

 

This week I purchased some shares in
Manulife, based on our recent rating of (lower) Strong Buy.

 

Tonight I was listening to the conference call for
Western Financial Group. It
sounded like this company will continue to grow steadily. It can be volatile and
if it issues shares the price could certainly drop. At times in the past it has
had to issue shares below book value to finance growth. Now the shares are above
book value and so at least any share issue should be above book value and that
may help  avoid a price drop if shares are issued. (Issuing shares below
book value is unfortunate because it dilutes both earnings per share and book
value per share). But it appears that over the next few years this is likely to
continue to do well. I own a reasonable amount but I am tempted to buy more.

 

April 5, 2006

 

A big day today with many of our Stock Picks up. Most notably
SICO has a take-over offer at $20 (which is
acceptable to management / insiders that own 34% of the shares and so it jumped
42% to close at $19.82.  Our last rating on the Stock was “Buy” and it was
in the model portfolio as well as in my own portfolio. Our first rating on this
stock was (lower) Strong Buy back in July 2003 at $10.53.

 

The takeover offer is for cash. For small holdings like 100 or 200 shares I
would wait for the cash (although I suppose it could easily be 6 or 8 weeks or
more before we see the cash)  and get the full $20 and avoid the trading
charge. For somewhat larger holdings like 1000 shares a $29 trading charge is no
big deal and maybe it would be wise to sell at about $19.80. It also depends if
you intend to put the cash to work right away or just sit on it. It seems
remotely possible that at some point it would trade above $20 but then again
management has basically accepted the bid so there seems to no reason the bid
would increase. On occasion I have seen a stock trade above the offer when the
acquiring company is trying make sure they get enough shares. But today it
locked in pretty tight at $19.81…  Also to get the cash you have to
tender to the offer through your broker, but note that after you tender you
don’t get the cash until the deal goes through. There is always a small chance
that the deal will not proceed, that risk can be avoided by simply selling
now…

 

April 3, 2006

 

There was possible good news about
Northbridge at the close of
markets today. A.M. Best the insurance company rating agency removed a negative
indicator that they had placed on Northbridge because of a problem at Odessey Re
which is controlled by FairFax Financial which also controls Northbridge.
Apparently not all of the problems of Odessey Re are yet resolved so I am
therefore not sure if this news will help Northbridge all that much. But it did
seem that it was partly the negative action by A.M. Best that had hurt
Northbridge recently so therefore this latest news should be beneficial. See the
news at
http://biz.yahoo.com/bw/060403/20060403006294.html?.v=1

 

McKenzie Financial a large division of IGM
Financial just reported strong sales for March. I suspect IGM has had a good
first quarter.

 

April 1, 2006

 

The first quarter of the year is over and we will start seeing earnings
reports in about 3 weeks. I believe that the earnings reports will generally be
quite strong, which, in isolation, should be good for the market. However,
interest rate increases are starting to have an effect. The Government of Canada
10-year bond yield has moved up to 4.27% from lows that were well under 4%. This
increase and fears of further increases will tend to hold the market back. Also
higher energy prices and stalling real estate prices may cool the economy.
Still, the economy so far has remained strong. Overall, I am feeling somewhat
cautious about the market. But I hope to continue to do well by being invested
in stocks that represent good value and which generally have good prospects.

 

March 31, 2006

 

IGM Financial is updated and rated Buy at
$48.35.  This has been a great and steady performer.

 

March 28, 2006

 

Canadian Western Bank is updated and rated Buy
at $40.71.This has been a steadily growing bank. Profitability has increased
with growth. It’s move into auto insurance probably came at a good time and
appears to be successful.

 

Reitman’s is updated and rated
Speculative (higher) buy at $20.50. This also has been showing steady growth.

 

March 27, 2006

 

I am not sure why Shaw
cable has fallen back to about $27.70 (from about $30 recently). Possibly
the market is worried about more intense competition and maybe higher capital
spending. But I like the increasing profits and cashflow they have reported. In
early February there were rumors a take-over offer of $45. If there was any
truth to that (even though Shaw denies it) it gives me added comfort. I would
like to buy more at this price.

 

March 24, 2006

 

Tim Hortons IPO price was $27 Canadian, it opened at $36.21 and closed at
$33.10. A nice gain of 23% for those who obtained it at the IPO price. 29
million shares were sold in the IPO and there were 44 million shares traded
today. This indicates that probably most of the lucky institutions that obtained
it at the IPO, sold their shares already (talk about lack of commitment to a
stock!). Many of the shares that were sold then traded hands again during the
day. It’s hard to say how many of the shares are now owned by Canadians.

 

Wendy’s hardly budged with the strong opening for Tim Hortons and then
Wendy’s fell as Tim H. fell during the day. This suggests that the Wendy shares
as of yesterday were already “pricing in Tim H. at around CAN $32. When Tim fell
below that Wendy’s dropped.

 

Tim H. made $1.19 per share in 2005 but management indicates that on a
pro-forma basis (as if the new shares were added) this was $0.99. I adjust that
to $1.18 when a goodwill impairment is added back net of tax. There it appears
that Tim H. is now trading at 28 times earnings. High but perhaps not outrageous
for this high quality company.

 

It’s hard to say if the shares will now trend up. Certainly there should be a
demand from Canadian investors. However if Tim H. goes up, so will Wendy’s and
then many Wendy share holders might sell to cash out their gains in Wendy’s.

 

Each Wendy’s share “owns” about 1.35 Tim H. Shares currently at U.S.$28.17,
therefore the market appears to be saying that Wendy’s without Tim H. is worth
62.88-1.35*28.17=$24.85. Wendy’s shareholders will push for more value out of
Wendy’s such as by selling its Baja Fresh chain and perhaps by handing out the
cash just raised on the sale of Tim Horton shares.

 

I’m still hoping for some increase in Tim H. and Wendy’s as the Canadian
retail investor jumps in. But that is certainly speculative.

 

My insurance stocks have not done well lately – Part of the reason is that
Fairfax Financial (parent of Northbridge) has some serious accounting and
regulatory concerns to deal with. It seems the whole sector is being looked at
as more risky. On the plus side, there is no indication that the above average
profits in the industry will not continue. With recent price drops these stocks
sport quite low P/E ratios. So I remain optimistic about these stocks, while
acknowledging that the sector is a risky one by nature.

 

I will update the Performance figures for all the stocks at the end of next
week.

 

March 23, 2006

 

The big story for tomorrow will be what the new Tim Hortons shares trade at.
Wendy’s based on its total earnings looks overvalued -using a normal P/E of 20
or lower. (That’s why my last rating on Wendy’s above is a low rating)  BUT
with Tim Horton’s now trading separately and with Wendy’s still owning some 82%
of Tim Hortons, Wendy’s now has to be valued based the fact that each Wendy’s
share now represents about 1.35 shares of Tim Hortons plus a share of Wendy’s
without Tim Hortons (including about $5.70 per share of extra cash just now
received from selling 18% of Tim Hortons). It’s hard to say what Wendy’s should
trade at absent Tim’s but I have heard figures of around $25 to $30. Assuming
$30 then with Tim’s at $23 U.S. Wendy’s would be worth $23 times 1.35 plus $30 =
$61. On that basis if Tim Hortons jumps to U.S. $30 tomorrow then Wendy’s would
be worth about $70.

 

Tomorrow for those who want Tim Hortons you could either buy it on the market
or Buy the Wendy’s (which will spin off Tim’s to you by December 31). In taxable
accounts there will be tax to pay on the Tim’s stock dividend so be careful
there.  Presumably Wendy’s and Tim Hortons will move together. Both up or
both down. I am hoping for both to go up. If Tim’s gets up into the mid-thirties
(in U.S. dollars) and Wendy’s is up accordingly then I will sell some Wendy’s to
lock in profit. I did buy some options on Wendy’s today so I need a noticeable
jump in Wendy’s to make money on those options.

 

Canadians will presumably be buying Tim Hortons tomorrow, but Americans might
decide to take profits and sell Wendy’s and as the two will move together the
selling of Wendy’s may prevent Tim’s from going too high.

 

March 22, 2006

 

Today brokers took orders for Tim Horton shares. A TD Waterhouse rep. told me
the book was open for only about 2 minutes in Canada. The shares were snapped up
immediately. They will announce the price tomorrow. The shares start to trade
Friday. While many commentators are cautious I suspect the shares will jump on
Friday. If that happens, Wendy’s should also jump somewhat on Friday. A
speculative play would be to buy Wendy’s tomorrow – but remember Wendy’s is
already up a LOT because of Tim Hortons IPO and there is only so much up-side
left. The really brave could buy call options on Wendy’s I am considering it
myself, but any money invested in call options has to be money a person is
prepared to lose 100% if the Wendy’s does not pop.  Whether or not it would
be a good idea to buy the Tim Hortons in the market cannot be known until they
start to trade on Friday.

 

Fairfax Financial got hammered today after a subpoena from the SEC. This is
the parent of Northbridge and so Northbridge could see further damage from this
before it is all over. I am not selling my Northbridge because so far I don’t
see why Northbridge should be damaged by this in the longer term

 

 

March 21, 2006

 

After a very strong week last week, and a good day yesterday, I lost
noticeable ground today on Wendy’s, NYSE Group and ING Canada. I am still
hopeful that Wendy’s will pop somewhat on Friday as Tim Hortons begins trading.
I added to my Wendy’s position today… just as a speculative play. I suspect
that ING Canada is having a strong quarter and so I am not worried about it in
the long term (although as always there are no guarantees)

 

Western Financial Group adopted a shareholders rights plan today. Essentially
this looks like an action to prevent a take-over. It’s probably a good sign in
that management is afraid that some other company would see the shares as
under-valued and mount a take-over offer. Short-term a takeover might be nice,
but I prefer to stick with current management for the long term. Basically this
shareholder rights plan appears to have no impact on shareholders, until and
unless a take-over offer materializes.

 

March 19, 2006

 

Bank of Nova Scotia
is updated and rated Weak Buy at $46.92

 

March 18, 2006

 

I have just sent an email to all paid subscribers reminding you to check for
updates. If you did not receive it, let me know (see my email link at the top of
this page), as it is probably getting marked as spam.

 

Alimentation Couch-Tard (the
owner of the Mac’s and Circle-K store chains) is updated and rated (lower) Buy
at $24.41. It has a great history and seems to be executing well on growth
plans. But it is not bargain-priced at this time. Formerly I called it
Speculative but on reflection it is not unusually speculative although it is
priced based on an assumption of continued growth.

 

March 17, 2006

 

The Thomson Corporation is updated
and remains rated Buy now at U.S.  $37.77 or CAN$43.68. With a P/E of 26 it
does not look cheap but I believe that earnings may be conservatively stated due
to amortization of intangibles (these are a lot like goodwill, which is not
amortized – except these intangibles are viewed to have finite lives, but in
fact may not be a wasting asset). It should do well as long as the stock market
and the general U.S. economy remains strong. It’s worth remembering that the
Thomson family are the richest family in Canada and they hold a big percentage
of their wealth in this company. Dare I suggest that the richest family in
Canada may be smarter than your average day-trader and may not be a bad group to
follow along with?

 

Late today A.M. Best announced that its ratings on Northbridge were
under review with negative implications. This was not directly related to
Northbridge but instead is related to OdyessyRe a re-insurance company that is
owned by FairFax Financial which also owns about 58% of Northbridge. The problem
at OdyessyRe relates to an accounting restatement at that company announced on
February 9 (as I learned today). This may explain why Northbridge has been sliding down of late. In
reviewing the re-insurance receivables of Northbridge it is not clear that it
has any exposure to OdysseyRe. Certainly it has some exposure to FairFax which
in turn owns most of OdysseyRe. As a result of the A.M. Best announcement we may
see Northbridge slip further on Monday. While I am concerned about the
situation, I am not planning to sell any Northbridge shares at this time. Since
FairFax lost money in 20005 and seems to be under some cloud of suspicion, I
would be glad if FairFax sold off its interest in Northbridge, but there is no
indication that this will happen anytime soon.

 

March 16, 2006

 

Performance is updated and is very good even
considering that the three Strong Buys are down on average. The 18 Buys are up
an average of 9.9%.

 

Northbridge has continued to slide down. Kingsway and ING Canada had done
well earlier this year but are weak lately. I still like these stocks and I added to my
position in Northbridge today. Yesterday, the Consumers Association of Canada
had a short press release “accusing” this industry of making record profits and
basically being too embarrassed to tally up the total as an industry. I believe
that is true as that is the reason I have been investing here for over two
years. Hopefully when the profit story becomes better known, more investors will
get interested in this out of favor industry.

 

Stantec is updated and remains rated
Buy at $39.79 It’s been a bit volatile lately. It is not exactly cheap but if
management keeps performing the way that they have in the past then this will be
a good long-term investment.

 

March 15, 2006

 

I note that Home Capital
unfortunately fell quite
a bit to $33.45 on an announcement that its earnings would be disappointing in
Q1 with lower securitization gains. On Feb 21, we updated our report rating it
Weak Buy at $41.85. On that date I indicated I had just sold my own shares. We
did not expect this fall (otherwise we would have called it a Sell)  In our report under quality of earnings we indicated
that securitization gains might not be sustainable. The company would also likely
be hit with loan losses if we get a housing recession. It’s been a great company
and so maybe it is a buying opportunity but I am reluctant to buy back in until
I see the Q1 report. If I held it a this point  would probably hold on.

 

March 14, 2006

 

Western Financial group is updated for 2005 earnings and rated Speculative
(higher) Buy at $2.70. At first glance it looks fairly valued rather than cheap.
But I believe it has excellent growth prospects and that earnings are somewhat
understated as it invests in the start-up of its Bank operation. I call it
Speculative due to the small size but actually barring some disaster it is seems
like a safe investment. I suspect that the customer base that it has built up
would allow it to be sold profitably to another financial institution at any
time and that marketability provides some safety to this investment. However it
could be volatile. In the past it has issued shares and that can easily
temporarily knock 15% of the price off the shares if it should occur again.

 

March 13, 2006

 

Western Financial Group released 2005 earnings today. I have not updated my
analysis but the earnings looked good. Earnings were up 53% while they were down
slightly on  a per share basis. I normally focus on the per share results.
However, in this case I think we have to understand why the shares were issued
and consider if more shares are likely to be issued. My sense is that the share
issue in 2005 was a necessary evil but eventually the company will grow without
share issues and will be a good investment. … But I still need to update my
analysis in the nest few days. The market was unexcited by the results – but
that is okay as it gives more time to build a position at a low price.

 

ING Cnada will become past of the TSX 60. Fundamentally this changes nothing,
but still it will likely help support the stock price.

 

NYX (formerly Archipelago had a great day today).

 

As a speculative short term pick, I added to my Wendy’s position today. My
hope is that the stock will rise somewhat soon after the Tim Horton’s IPO. At
that point I may sell half the Wendy’s to lock in gains and then keep the other
half until Wendy’s spits out my share of Tim Hortons to me.

 

March 11, 2006

 

Manulife Financial is updated and
upgraded to Speculative Strong Buy at $74.28 based on its strong 2005 results
and particularly the strong Q4. Over the past few years I have sometimes been
bullish on the company, in fact a few years ago I believed it was a “no-brainer”
at around $40,. But in 2005 I became concerned by its opaque accounting. In 2004
I was worried about the impact of the rise in our dollar and I remain perplexed
why that did not hurt it more. I still call it speculative because of concern
about the accounting and how it escaped problems due to our dollar and due to
lower interest rates. But given the tremendous profit and sales growth I am once
again bullish on it. I am definitely thinking of buying back into this stock. I
am also adding this to the model portfolio

 

The overall market as well as many of our picks were down a bit this week –
although some like Archipelago/ NYSE Group were certainly up. The model
portfolio as well as our Buys and my own stocks are all ahead of the market for
the year to date – and the TSX itself is up a healthy 5.0%. The Strong Buys are
down for the year but it should be noted that was a small group of only 3
stocks. I plan to update the performance figures next weekend. I usually update
at least every two weeks.

 

Regarding NorthBridge Financial I know of no reason other than pessimism on
the part of analysts for it to have dropped. See also comments below
particularly Feb 18 and Feb 24. I remain quite optimistic about the outlook for
the property and casualty insurance companies that we rate here. It seems to me
that in Canada we have had a mild winter and this should reduce car accidents.
Nevertheless, I believe I have always indicated that insurance stocks are risky
and can be unpredictable. I like to hold more than one of these to help spread
the risk. Although I have a very heavy exposure to this area, I am thinking
about adding to my position in Northbridge. As always subscribers invest at
their own risk. There are never any guarantees when it comes to investing in
stocks, particularly when it comes to looking at one individual stock, as
opposed to a portfolio of stocks.

 

March 9, 2006

 

If you did not receive an email with a link to the free newsletter, you can
check if your email address is on the list by entering it again on our
home page. (If your email is already on the list the
system will indicate this). If your email is on the list and you did not receive
my email about the free newsletter then it probably got caught as spam.

 

While is was disappointing to see a decline in ING Canada and Kingsway
Financial today, we must remember that even good stocks tend to have occasional
setbacks.

 

I read this morning that some investor group was pushing Telus to turn into
an Income Trust. While that may be unlikely, the very possibility is music to my
ears.

 

My NYX stock (rated a Buy in early January at $50 when it was called
Archipelago before it acquired the New York Stock Exchange in a reverse
take-over that left the NYSE seat holders an the majority owners of the new
company) had another interesting day, after the big gain to $80 yesterday, it
got as high as $88 today but then closed at $76.10. Clearly the market is still
feeling its way with this new company. While I expect volatility, my plan is to
hang on. It will be very difficult to value this stock until it has at least a
year of earnings under its belt. Therefore it has to be considered speculative,
but I like its potential.

 

March 8, 2006

 

The latest edition of the free newsletter has been posted,
see it here. You should receive a copy by email
soon as well.

 

In a big development today, Archipelago was renamed NYSE Group Inc. as
expected and began trading as NYX. This was as expected. In a nice surprise it
jumped 23% to day to U.S. $80. We rated this stock a Buy at $50 on January 2, so
this is a nice 60% gain. This gain today more than offset a decline in ING
Canada and Kingsway today.

 

With ING Canada now down noticeably from its recent high and with Archipelago
(now NYSE Group) now at a new high (by a wide margin) the question arises as to
whether to try to sell at the peak. In the case of ING, we last rated it a
(higher) Buy at $56. Therefore I am comfortable holding it at today’s price of
about $59. Perhaps I should regret not having at least trimmed when it was about
$62. But this is a strong company and quite often when I have tried to take
profits on such companies I have regretted it as the company often tends to
continue to make new highs even after pull-backs.

 

In the case of NYX I indicated all along that this was a speculative pick and
that I was not able to analyze it. Therefore I probably should take some profit.
But I really like the idea of holding a past of the New York Stock Exchange and
I am inclined to hold on. But I would not likely be a buyer at this point even
if I held none.

 

I am removing Archipelago from the stock list above given that the rating
there is now well out of date

 

March 7, 2006

 

I got hit with some declines today especially in Archipelago which is
certainly a volatile stock. Archipelago will soon be renamed New York Stock
Exchange Group. I bought it without being able to really analyze it for a
variety of reasons. I have  made money on it. Even though it seems to be
sinking now, I like the idea of owning a piece of the New York Stock Exchange
and so I will likely hang on to what I have. But I do consider this a
speculative pick. It was nice to see Kingsway going up today when many stocks
were falling.

 

Longer term interest rates have started to move up and this will be a drag on
the market. Bonds and especially those longer than two or three years will
automatically decline if/as interest rates rise.

 

March 5, 2006

 

Canada Bread is updated for Q4
earnings and upgraded to (lower ) Buy partly due to a recent price decline. It
has a great recent history of earnings growth except for a decline in Q4.

 

Trades – On Friday I added some shares to my Wendy’s position. I had
mentioned this as being speculative at the recent higher price of Wendy’s but I
just wanted a bit bigger position in case the Tim’s IPO goes really well. Further
to my note from Feb 19, I did put in an order to sell Alarmforce and those
shares have been sold. I mentioned on Feb 21 that I had placed an order to sell
some ING Canada if it got to $58. In a fortunate mistake, I made that a day
order and it expired and therefore I did not sell any ING Canada. Whenever I get
nervous I may reduce my position in some of my large holdings, even if I still
rate them as Strong Buys. But right now I am inclined to just hold. My personal
portfolio holdings have been updated at the link above the dated comment
section.

 

March 4, 2006

 

Warren Buffett released this morning his latest letter to shareholders. This
is a must-read for those investors who happen to believe that it is a good idea
to understand business and how companies make money. When the world’s most
successful and respected investor shares his ideas, how can you afford not to
read it? See his latest letter at

www.berkshirehathaway.com (It would be a good idea to read some of the past
issues as well).

 

Performance is updated. This
past week saw some very satisfying gains indeed.

 

March 3, 2006

 

Cryptologic is updated for Q4
earnings and rated Speculative (lower) Strong Buy at U.S. $26.60 or CAN $30.27.
It appears to be reasonably valued given its strong profit growth. It is more
speculative and can be expected to be volatile in price. By (lower) Strong Buy I
mean that it is somewhere between a buy and a Strong Buy based on this analysis.
Q1 tends to be one of its stronger quarters so based on seasonality, this may be
a good time to buy.

 

March 2, 2006

 

Some very nice gains today…, ING Canada is at a record high. It was only a
couple of weeks ago it had fallen from $58 down to just over $51 but has now
rocketed up to $61. It does not look very cheap at this price but I am inclined
to held rather than sell. In fact I ha intended to sell some at $58 on the way
up but luckily I failed to  do so. If the mood strikes me I may take
partial profits at any time or I may just hang on to see where it goes. Even if
I take partial profits I will definitely still hold some.

 

I note that in Alberta we had an incredibly mild January and February. I
understand most of Canada was pretty mild with a lack of snow in the cities.
Therefore I expect a lower auto insurance claim rate in Q1. Even house fires may
be down due to warn weather. This should be good for the property insurance
stocks.

 

Some news after the close today that Wendy’s will complete the sale of 100%
of Tim Horton’s by the end of 2006 and look at options for its Baja Fresh
division and look at ways to return cash to shareholders. All of this should
push Wendy’s up tomorrow.

 

March 1, 2006

 

It appears that the overall market is holding up very well. At the start of
this year I was hopeful that the general market would see another leg up on high
Q4 earnings. The TSX is not really a general market anymore as it is so heavily
influenced by oil and gas and other commodities that it cannot be expected to be
move with the general economy. I view the DOW as more tied into the general
economy.

 

Regarding the general economy it’s hard to be very optimistic in the face of
higher interest rates and higher energy costs for consumers and with housing
prices possibly starting to fall. Therefore I think investors have to be
cautious and perhaps move more towards cash and be ready to sell some stocks.
However, there will always be some bargain stocks.

 

This week some of my stocks have moved up including ING Canada and
Archipelago…

 

I have been bullish on Telus and Shaw, in some ways Shaw seems like a stock
with little down-side risk and quite a bit of upside potential. But it does
worry me that Shaw recently started to heavily discount its telephone offering.
If these two get into a price war, customers will win and not investors. But so
far, I am still comfortable holding these two.

 

February 28, 2006

 

Our stock picks are doing well despite a flattish market. Definitely a lot of
volatility though.

 

Wendy’s announced the IPO price on Tim Hortons which values Tim Horton’s at
U.S. $3.67 billion or 55% of the total  Wendy’s value of $6.73 billion. I
have not looked at the Tim’s prospectus yet, but my sense is that the stock will
go higher as soon as it it is issued. That would push Wendy’s higher as well as
they will still own some 82.5% of Tim Hortons. A speculative play would be to
buy Wendy’s now and hope for a quick gain after the IPO. And if there is no gain
one could hold on to the Wendy’s and eventually collect Tim Horton shares when
the rest of Tims is spun off to the Wendy shareholders in about 1 year.

 

Canadian Tire is updated and
still rated Weak Buy at $64.99. This is a great company but seems to be fully
priced. I would not bet against it but I am also not a buyer at this price.

 

February 24, 2006

 

Friday finished out a good week. I’ll update the performance figures next
week. I’m away from the computer this weekend and so will have no updates.

 

Regarding Northbridge, I was listening to the conference call from last week
and noticed several things. Management just seemed incredibly boring to listen
to, they should probably show a little more enthusiasm for what they are doing.
At least one analyst was very concerned that the bad hurricane seasons of the
last two years will repeat again this year.  That seems quite pessimistic
to me, but I guess who knows given climate change. This may explain a large part
of the drop in Northbridge. The other frustration for analysts is that it seems
impossible to get a base level of earnings, they simply can’t predict how
profitable the business will be even long term. In this scenario they tend to
err on the conservative side. The unpredictability of earnings is one reason
that price to book value becomes more important for this sector. Given
reasonable price to book values and high reported earnings and a reasonable to
strong outlook, I like the sector. Northbridge indicated that while insurance
rates will not rise in 2006 (may fall) they should nevertheless be more than
adequate to achieve at least a 15% return on equity.

 

February 23, 2006

 

Northbridge was down over 3% today which hurts but which could be a buying
opportunity. Back on Nov. 17, I mentioned I was buying some EGI Financial at its
IPO. As it is yet another property insurance company and it is new I did not add
it to the Site. Tonight it is out with some pretty strong earnings. To me it is
one more confirmation that my faith in insurance companies these past two yeas
has been well placed. Since I have not analyzed it in depth I have no strong
opinion on the stock but I do hold it.

 

While Northbridge fell today, two of my speculative U.S. picks were up
nicely. Wendy’s was up almost 2% and Archipelago was up over 3% and has been
rising lately.

 

February 21, 2006

 

Home Capital is updated and rated
Weak Buy at $41.85. This company has a fantastic history of earnings per share
growth. The chart of annual earnings growth is a thing of beauty. But it seems
quite richly priced. The market s essentially assuming that the growth will not
slow down much and it always dangerous to pay prices that reflect over 20%
annual growth. Then again this company has delivered the goods for  a
number of years and I would not want to bet against it. Still, after a quick
recent run-up I sold my position in it. I put that money into Telus non-voting
shares.

 

Yesterday I also cleared out my small position in Quebecor (a stock I have
not featured on this Site for some years). I entered an order to sell a portion
of my ING Canada if it reaches $58. Also I entered an order buy a bit more
Western Financial Group if it falls to $2.60.

 

February 19, 2006

 

Telus is updated and rated (higher)
Buy at $44.55 I spent several hours reading its excruciatingly detailed 72 page
quarterly report (and this excluded any notes to the financial statements which
are not yet published).  I wish they could summarize the info a bit more
succinctly but I have to admire the ability to put this report together and all
the factors they report on.

 

To me, the Telus story is one of impressively increasing cashflow and
earnings. Going back about 4 years ago their reported earnings were quite low
and I speculated that the accounting was conservative by expensing so much of
the cost of acquiring customers. I speculated that cashflows would increase
sharply and this has now happened and appears set to continue. The company looks
reasonably priced based on its current earnings and growth. There are risks due
to competition but I suspect it will do well in 2006. I may add to my position.

 

I may sell a bit of some recently purchased ING to take profit and also I may
sell some other small positions including Alarmforce – which is above the price
at which I called it only a weak Buy.

 

February 18, 2006

 

In the past week I have updated three property and casualty stocks. I am
personally WAY over-weight this category (which is risky). The following
table attempts to compare the three.

 

	Price	P/B	P/B adjusted	Yield	Interim P/E	fiscal P/E adjusted
Kingsway	23.74	1.45	1.41	1.1%	8.29	10.6
Northbridge	31.03	1.54	1.31	2.1%	7.97	15.9
ING Canada	55.99	2.59	2.30	1.8%	9.56	18.1

 

	Interim ROE	fiscal ROE adjusted	% U.S.	% Auto	% Com.
Kingsway	17.4%	14.7%	70%	41%	53%
Northbridge	19.3%	10.5%	16%	38%	90%
ING Canada	27.0%	16.7%	0%	56%	44%

 

 

While I like all three, each has different pros and cons. I believe in
holding more than one of these in order to spread risks. I have attempted here
to adjust earning to remove realized gains (gains tend to usually be positive
each year but are lumpy and could go negative if interest rates rise). I also
adjusted for reserve developments in 2005 which are essentially retroactive
recognition of profits or loss from prior periods. Well-managed insurance
companies like ING may have ongoing positive reserve developments but to be more
conservative I assumed zero development in the adjusted figures. And for
Northbridge I adjusted for hurricane losses. But even on an adjusted basis, the
earning and P/E ratios may not be representative due to the volatility of
earnings. Adjusted P/B figures add back unrealized gains on investment.

 

Kingsway appears to be the best value but it has currency risk with a huge
U.S. exposure. Also it is in higher risk business and has a history of negative
reserve development. But at this time my theory is (from listening to the
company) that its claims liabilities are very conservatively stated and
therefore on the insurance profitability I expect positive retroactive profits
to show up in 2006 although the company may try to hoard the “excess” reserves
(if they really exist) and use when needed in a future bad year. Kingsway may
also benefit from acquisitions although these can also be viewed as risky.

 

Northbridge appears more expensive and suffered from hurricane losses. It may
do quite well in 2006 if we have a mild hurricane season.

 

ING has the best recent record of profits. I also like the big exposure to
standard Canadian auto insurance. ING may also benefit from more acquisitions.
But ING looks more expensive than the others…in particular the price to book
is much higher.

 

Property insurance companies do tend to have volatile share prices, so
investors should be prepared for that and consider their own tolerances for
risk. As always, there are no guarantees in the market.

 

ING Canada is updated and
remains rated (higher) Buy at $55.99.

 

This stock fell quite sharply in the past few weeks before recovering much of
the loss after the earnings were released. This illustrates the fact that even
though these insurance stocks seem to be excellent value, they can certainly be
volatile.

 

The automobile segment of the property and casualty (liability) insurance
sector is the segment that I have been most interested in since I first started
looking at insurance companies in 2003. ING has the highest percentage exposure
to Canadian standard (non high-risk) auto of the companies that I cover. ING’s
report confirmed my hypothesis that auto insurance remains highly profitable
because of sharp rate increases of 2002 and 2003, combined with government rules
that have limited claims in some provinces and a customer base that is basically
scared to  make claims unless absolutely necessary, for fear of driving
their future insurance costs up. Basically rates were jacked up too high by 2003
and the auto insurance industry has since been enjoying a gusher of
profitability. ING’s underwriting profitability on personal autos in 2005 was an
obscene 22.5% (Historical industry average would be under 5%), but some of the
22.5% came from retroactive recognition of profits from prior periods.

 

ING Canada appears to be the most successful and profitable of the Canadian
property insurance companies. However it also has the highest price to book
value.

 

I expect strong underwriting profits in personal auto to continue in 2006.
However, commercial underwriting profits are less certain due to high building
costs and a possible increase in major storms. I also expect lower or even
negative realized investment gains for all property insurance companies,
particularly if interest rates rise (which leads to losses on bonds and possibly
stocks)

 

February 17, 2006

 

Bank of Nova Scotia is
added to the site as a new listing rated Weak Buy at $46.92 (The analysis was as
of Feb 10 price, but today’s close was very similar at $47.17). The large
Canadian chartered banks have been very good investments. However, they are very
large and complex and therefore difficult to predict. Also their earnings can be
hit quite hard in recessions due to loan losses.

 

Feb 16, 2006

 

ING Canada earnings were released before the opening of trading today. At
first glance they look very good. Strong results and a good outlook for 2006.
ING is set to open higher today.

 

Feb 15, 2006

 

I just sent an email with an edition of the free newsletter, You can access
it at the link to the free newsletters below the stock table above.

 

Performance figures are updated and have taken a hit in the last 10 days or
so. Thursday morning ING Canada will release earnings before the market opens.

 

Feb 13, 2006

 

A big fall in ING Canda today. They will release earnings in a few days and
it makes one wonder if some bad news has leaked out. On the other hand ING had
really been climbing in the last few months and even since January 1 was
recently up about 15%. So maybe it had just risen too fast and some profit
taking has resulted. This last week has been negative for me and it is a
reminder that markets tend to be volatile they do not always go up. In the last
few months until about Feb 6, the market had been almost steadily up for many of
my stocks. It is easy to get lulled into thinking that will continue. In reality
experienced investors should be willing to accept some bumps along the way.

 

In terms of ING I will not be a buyer or a seller until I see their results
and which point I will re-evaluate. I did as noted on January 19, sell some ING
at that time to take profits. I am optimistic that the earnings will be at least
reasonably good, but one never knows. Also ING has been extremely profitable in
the past year so it actually has a hard act to follow due to its own past
success.

 

It is starting to loom like some negative sentiment is coming into the market
and it might be wise to consider moving some money into cash. I sold my Boston
Pizza Income Trust shares today partly to raise cash and partly because I was
just not that committed to holding that particular position and it had been up
noticeably in the last few days. I will be updating my report on Boston Pizza
soon.

 

I also bough a few more Kingsway shares today. That was very aggressive of me
since I am very over-weight in that sector. I do not have a well-diversified
portfolio. Instead I have chosen to place a big bet on insurance stocks. It
should be understood that this is quite risky, at least in the short term. In
the long-term I believe the risk is mitigated by the fact that these stocks are
generally trading at low multiples to earnings and I believe reasonable
multiples of book value.

 

Feb 11, 2006

 

Northbridge Financial is
updated and rated Strong Buy at $32.75. I have stated many times that insurance
company earnings are very difficult to predict. On a reported earnings basis
Northbridge looks cheap with a P/E of 8.4.  It’s difficult to say if
earnings will rise or fall in 2006 but I would expect earnings to rise in the
long term. Even if earnings fell in half in 2006, that would be a P/E of 16.8
which does not strike me as particularly excessive in today’s market. The price
to book value is 1.63 but falls to 1.40 considering unrealized gains. To my way
of thinking, the opportunity to buy into a established company that is
apparently quite profitable at 1.4 times book value is attractive. Most
profitable companies certainly trade at higher multiples than that.

 

I do note that most analysts tend to be very conservative in valuing
insurance stocks. They have probably been burned by periods of lower earnings in
the past and are reluctant to pay high multiples. So perhaps I should be more
conservative here, but the numbers indicate to me that this will be a good
investment if held for say five years. In the shorter term it could of course
fall. As an example I first looked at this stock around $20 in late 2003 it went
quite quickly to $26 but then fell to about $22.50. But I stuck with it and it
has certainly been a good investment for me so far, being up 63% since I
initiated my rating on this stock at $20.10 on Dec 7, 2003. Interestingly the
P/E and price to book at that time were quite similar to where they are today.
Of course 2004 and 2005 turned out to be great years for this sector and I can’t
say that the next few years will show similar gains, but I still think buying a
profitable company at what looks like a good price will work out well.

 

When it comes to insurance companies they are volatile and so I prefer to
hold several rather than place all of my bets on one company.

 

Feb 10, 2006

 

Kingsway is updated and remains
rated Strong Buy at $24.55. With a P/E of 8.6 it is clear that the market tends
to be very unexcited by this stock. In 2005 it earned $2.32 per share. This was
despite a charge of about 40 cents per share related to higher than booked
claims from prior years. Many analysts view this as a big negative and yet in
any other industry they would probably add it back as an usual charge. Earnings
included about 64 cents per share from realized gains on investments. Manu
analysts are quick to deduct this as a one-time unreliable source of earnings,
despite the fact that realised gains tend to occur more often than not in any
given quarter. Overall Kingsway was recently making 19% return on equity and
12.5% return on market value. If Kingsway can continue to earn at this level,
even without growth it would be a good investment. And in the long term I do
expect growth. For 2006 revenues may decline due to rate reductions but it is
entirely possible that earnings in 2006 will increase over the 2005 level. The
stock has been quite volatile in the past although the earnings have grown
reasonably steadily although with some declines. Overall this appears to be a
very good investment. Although it is my largest holding, I am tempted to buy
more at this price.

 

Feb 9, 2006

 

Kingsway rose only 38 cents today. I saw on analyst report (TD Bank) that
focused on the one negative aspect of a very good earnings report. The TD
analyst deducts realized capital gains on investments to get a lower income. He
then applies a P/E of only 10 because U.S. peers trade at 10. I don’t much like
that approach (which led to buying the likes of Nortel at say a 40 P/E based on
peers at one time) but we are all entitled to our opinions. Even without much
analyst enthusiasm Kingsway has done well. And if it keeps on showing good
earnings it will continue to do well. If analysts ever decide they like it that
will be a bonus. There are no guarantees but I feel that Kingsway will likely be
a good investment at its current price.

 

Northbridge reported earnings that were hurt by hurricanes. I don’t expect
the stock to move much tomorrow. I will update my reports on Kingsway and
Northbridge by Sunday.

 

February 8, 2006

 

Aeroplan Income Fund is updated and
downgraded to Speculative (lower) Buy at $12.84. My opinion of this business has
cooled somewhat after reading the earnings release which showed little growth
compared to 2004. I find is annoying that distributable cash figures for 2004
were not released. This makes it hard to understand the growth. I can see that
GAAP earnings were flat in 2005 but the that was because earnings were lower in
the first half of 2005 and I am not clear why, possibly it was the costs of the
IPO. Also management indicates some unusual gains in 2004. I am taking a wait
and see attitude on this one at this time. This is a “stock” tat looks expensive
and one has to make excuses as to why it is actually better than it looks. I
prefer Kingsway which looks very cheap and people have to make excuses as to why
it is maybe not as good as it looks.

 

Kingsway Financial released earnings today. The earnings were very good. At
the today’s stock price around $24.25 I would definitely maintain my Strong Buy
rating. However, the earnings have been very good all year and yet the stock
price has not moved up all that much. I will update my report after I see how
the market reacts in the next day or two. Analysts can always find negative
aspects if they want to focus on negatives. For Kingsway, possible negatives are
lower prices and lower revenues in 2005 (even though profits were higher).
Kingsway had a small negative reserve development (retroactive loss) in the U.S.
and analysts that want to be negative will focus on that. I prefer to focus on
the low P/E at 8.5 and lowish price to book value at 1.5. Also I continue to
think that book value is conservatively stated as the company appears to have
conservatively calculated its liabilities for future claims. Higher short-term
interest rates also benefit the company. While insurance rates have declined due
to competition, I believe that claims are still running at low rates and
therefore insurance company profits have remained high so far.

 

I was encouraged by the rise in the DOW today because this tends to
illustrate that the market decline in Canada is focused on commodity stocks and
not so much the general market.

 

February 7, 2006

 

A large drop in the TSX today but only a small drop in New York. I don’t know
if today’s action is the start of a trend but I do know that the market has been
up a LOT recently and therefore there certainly is the risk of a general market
pull-back. I had been hoping that the strong earnings season would at least hold
most stocks up in the short term. Those who are more worried about a pull-back
could consider trimming positions to raise cash. In New York the market has not
risen much and so at least I would not expect a pull-back there (which if it
happened would affect Canada).

 

I was encouraged by today’s rumor that the
Shaw family had
turned down a $45 offer from Rogers. Shaw denied the rumor but thought it made
some sense given what looks like a strong outlook for Shaw and the insider
buying by the Shaw family. It also makes sense that they are not interested in
selling. I am tempted to increase my position in Shaw.

 

Wendys is updated as Speculative Weak
Buy / Hold at $57.50. I am interested in the stock at this price solely for the
value of the Tim Hortons side. However a lot of that value has been now
reflected in the stock price and it has to be considered speculative at this
price. My strategy now will be likely to be to hold my Wendy’s shares until the
Tim Horton IPO. At that point I may sell the Wendy’s shares to buy Tim Hortons
in the market. (or I may hold the Wendy’s until they give me Tim Horton shares
in 2007) I would also be interested in buying Tim Hortons at he IPO but believe
it will be difficult to get any.

 

February 4, 2006

 

Performance figures are updated for yet another strong week.

 

Wendy’s released Q4 earnings on Friday. These shares are priced higher than
current earnings would support and are essentially being valued as a special
situation due to the value of the Tim Hortons IPO. The company will hold an
analyst meeting on Monday and information to be released at that time could
affect the stock price on Monday. I recently added to my position in this stock
although I do consider it to be speculative. I’ll update my report after I see
where the stock price moves in response to Monday’s meeting.

 

The TSX Group is updated and remains
rated Weak Sell / Hold at $48.90. This near monopoly makes totally obscene
profits but has become quite expensive. A recent required accounting change has
lowered its reported earnings materially, making the P/E look rather high. While
this would have been a great investment back when I rated it a Buy in October
2003 at $14.43 (adjusted for split) and it turns out would also have been a
great investment if bought almost anytime since then, I think it is now
expensive and this would not likely be a good time to buy – although it is such
a strong company that I would never short it or bet against it.

 

FirstService is updated and
remains rated (lower) Buy now at U.S.$26.83. A good company with a strong
history of growth. Not particularly cheap at this time but earnings have been
rising faster than management expected.

 

February 1, 2006

 

Our picks are really doing well. My account was up over 1% today, on a day
the TSX was about flat. Most or all of my insurance stocks were up nicely today.
I’ll have some updates by this weekend as earnings reports are starting to come
in.

 

January 30, 2006

 

Gains today in ING and in Kingsway. Also Alarmforce was up as it released
good results. The earnings press release did not include full financials at this
time.

 

Dalsa is updated and upgraded slightly
to Speculative Weak Buy / Hold at $12.50. Q4 was poor as expected. 2005 in
general was disappointing with the company essentially forced to make excuses
for poor results in several areas. Still this company is cheap on a book value
basis and may be quite valuable for its technology. Also it will be a good
investment if it can regain the profits it had in 2004. Managements seems
optimistic about 2006. Having been disappointed by the company in 2005 I am
inclined to wait for results to improve before I would buy more shares. But I
will likely hold what I have.

 

January 29, 2006

 

2006 Performance figures as well as the
composition of my own portfolio have been
updated.

 

I added to my position in Wendy’s even
though I only rate the stock a Weak Buy/Hold at its current price. I had reduced
my position on fears of a short-term slide some months ago and I should have
bought it back much earlier. I wanted to hold a meaningful amount of it on
speculation of a further gain when the Tim Hortons IPO occurs and also I expect
to receive Tim Horton Shares when Wendy’s divests the rest of Tim Hortons
hopefully, within one year.

 

Canadian National Railroad is updated
and remains rated (lower) Buy now at $103.25. Their press release was short and
concise. I guess not that much needs to be said when you are reporting yet
another great quarter. I have long said that this was a great company but I have
tended to underestimate its growth. I did rate it Buy with some very positive
comments at times in 2005 (See April 22, July 20, Oct 19, Nov 17 comments). At
$103.25 it is not cheap but nevertheless could be considered at this price. As
always it would be of more interest if there was a pull-back. Given that CN is
confident that it can pass on fuel price increase with its fuel-price surcharge,
this tells me that it has “pricing power”. A lot of its traffic may not have
much other choice than to pay CN’s rates as trucking or other railroads may not
be viable. If so, it should continue to do well.

 

January 25, 2006

 

Kingsway fell another 50 cents today on no news. While its possible there is
a reason for it is also possible that it is just volatility as we wait for
earnings news. ING was up. Overall my portfolio was up today despite having
Kingsway as one of my largest holdings. This illustrates the benefit of owning
several of these insurance companies rather than just one.

 

January 24, 2006

 

Today I took a hit as Kingsway fell 70 cents on no news. I’m looking forward
to seeing its Q4 earnings report in the next month or so. I don’t have any
reason to think it will be anything but good, but one never knows.

 

Western Financial also fell today but to my mind that is just the normal
volatility with this stock and is pretty meaningless. Telus was down also on no
news and I continue to think its Q4 report and growth will be strong.

 

Other than those most of the other stocks I follow did well today.

 

January 23, 2006

 

Well, here’s hoping that the conservative government elected tonight will be
good on balance for all Canadians including investors.

 

Today, Western Financial Group
announced an initiative to buy into more insurance brokerages in B.C. The stock
fell a bit on news. Perhaps out of fear that WES will issue shares at a price
below the market as it has done before. Overall, I think WES is doing what it
has done which is growing incrementally with reasonably priced acquisitions.
Bringing privately owned businesses into its publicly traded fold. I think it is
a good strategy. I expect and am prepared for volatility but if the company
continues on its current course this will be a good investment. Due to the
volatility and bid /ask spread it is a bit tricky to buy as one does not want to
pay the high of the day but then if one wants it one might have to just buy at
the offer. One strategy, buy some by bidding the last traded price and try to
add to it 5 to 12 cents below that (over the next 30 days) with a bid that may
or may not be taken. You could even consider a “stink bid” to buy more maybe 20
cents or more below the market. Not likely to be hit and if it is hit it then
you are probably buying into bad news. But if one likes the company long term,
that may not be a bad strategy. Remember too, when it releases earnings, which
may be not for some time, it might jump in one direction or the other on the
news. (I am hoping it jumps up but more realistically it probably just creeps up
even if the news is good).

 

January 22, 2006

 

Brampton Brick Ltd. is
added as a new company and is rated Speculative Buy at $12. This is a chance to
buy a long-established company with strong historic growth at a price equal to
book value. However, earnings have declined recently and if this continues the
share could fall further. The cash flow is good and there is little debt and so
overall I think this could be a good investment but I am not willing to take a
large position at this time. In fact I am not sure if I will buy or not. I do
note that a few large private and institutional investors have taken very large
positions, which I find encouraging.

 

January 19, 2006

 

I was pleasantly surprised by a strong day for most of my stocks today. I was
starting to fear that negative sentiment was starting to take hold. In my own
particular case I have a very large percentage exposure to property insurance
stocks. I decided to sell about one third of my ING Canada this morning. I
definitely still like the stock but it was my largest holding and I just decided
it might be prudent to take some profits and build up some cash – just in case
of a downturn.

 

Fear of a downturn raises the question of, Should investors try to trim
positions with a view to timing the market? I think that depends on each
investor’s personal situation. For example young investors just starting put can
more easily afford to ride out any downturn since their annual new contributions
to stocks should be relatively large compared to their portfolio and in the end
lower stock prices are good for young investors. Those with larger portfolios
may find that that any new money thy are putting in is small compared to what
they already have. These investors are probably more risk adverse and also may
not need to swing for the fences. These investors might want to move more
towards cash if they sense a downturn. But as I say this asset allocation
decision is a very personal one depending on each persons age, portfolio size,
plans for the money, new savings rate, risk tolerance etc. I pretty much rode
out the last down-turn in the early 2000’s and in the end that worked out well
for me. But I am less inclined to do so if I sense a downturn now. Therefore,
you may see me announce that I am trimming positions even in stocks I like. That
is, I will do so if I think a down-turn is taking hold, which I don’t yet think.

 

Loblaw’s fell had today on a negative announcement about Q4. I still think
this will at some point be a great opportunity but it’s hard to guess where the
bottom will be. I would consider averaging into it very slowly. At this point I
will likely wait for the annual earnings release and update my report before I
buy any.

 

January 18, 2006

 

Canadian Western Bank is
updated and rated (lower) Buy at $38.02. This has been a great company and has
grown steadily. It is not cheap at this price but give the strong Western
economy it will likely continue to do well.

 

January 17, 2006

 

Well, a down day today and I was down a bit yesterday as well. My hope is
that strong Q4 earnings reports will bring at least one more little surge to the
market. But overall we can’t expect the market to always rise.  I’m worried
that very high energy prices will finally begin to pull the rest of the economy
down. If the overall market falls then of course almost all stocks would fall
but I think most of the Buys and Strong Buys here would perform better than most
stocks. Anyhow one or two down days certainly does not make a trend…

 

I doubled up my small position in Shaw Communications.

 

January 14, 2006

 

Shaw Communications
is updated for a strong Q1 and remains rated Speculative Buy at $25.60. While it
still looks expensive on a P/E basis, earnings have been rising rapidly and free
cash flow exceeds earnings. The part of the story that I really like is that a
few very wealthy insiders including the Shaws and at least two outside investors
have been buying heavily. This may be a case where it is wise to assume that
multimillionaire investors might know what they are doing.

 

January 13, 2006

 

Performance is updated and is off to a great
start for 2006. The model portfolio is
updated as well.

 

January 11, 2006

 

Canada Bread is updated and
rated Weak Buy / Hold at $58.61. This update was strictly for a price increase,
no new financials at this point.

 

Well, the strong start to the year is certainly continuing.

 

Wendy’s has announced that its shareholders will receive Tim Hortons shares
sometime soon after the IPO of Tim Hortons. This is exactly the scenario
I was hoping for and have discussed. (It’s nice to see a plan come together like
this) My initial Strong Buy rating on July 23, 2004 at $35.90 was certainly a
good call. And I have talked about liking the stock for its Tim Hortons division
many times since. Since it hit $45 or certainly $50 I have considered it
speculative since the price could not be justified by the earnings but only by
financial engineering including the sale of Tim Hortons. It may not be too late
to speculate on it but it would definitely be a speculative pick at this point.
If I were to Buy more now it would be with the intention of collecting the Tim
Horton shares at some point and then selling the actual Wendy’s. I like Wendy’s
but I like Tim Hortons more. As Canadians realize that one way to get shares in
Tim Hortons is to Buy the Wendy’s we could see the Wendy’s price drive up.

 

The recent strong market performance cannot be sustained indefinitely.
However, I have noted with surprise that long-term interest rates have continued
to fall in Canada. The 30-year government of Canada Bond yield is around 4.16%
having almost got down to 4.0% over the Christmas break. In comparison a market
P/E of around 20 does not seem so expensive. Effectively stocks are earning, on
average about 5% and that may be expected to grow in the long-term. Therefore
stocks look like a good return compared to bond yields on this basis. It is
possible that I have been conservative in assuming that stock P/Es over 20 are
expensive. In this low interest environment a P/E of 25 is not exactly
outrageous. On this basis this market could continue to do well. On the other
hand we have to watch for any signs of recession or a consumer slow-down. If a
recession occurs then I would think many stocks could easily decline 20%.

 

In any event I always focus on looking for good stocks to hold on a
one-stock-at-a-time basis. There are never any guarantees on performance but
so-far-so-good!

 

January 7, 2006

 

This week was a remarkable start to the 2006 investing year. The TSX was up
an astounding 3.1% in four days. The Buy rated stocks on this site also mostly
did well.

 

Cognos jumped 9.6% on Friday despite
no news. Possibly someone knows positive news is coming or maybe this will
correct next week. I may have been hasty selling my shares in this company since
I did state it was a great company, but was afraid of a short term dip.

 

Wendy’s released news yesterday of
same-store sales and more detail on the Tim Hortons IPO and ultimate divestiure.

 

see
http://ca.us.biz.yahoo.com/bw/060106/20060106005227.html?.v=1

 

Once again, the U.S. financial press focused on the declining sales at
Wendy’s and largely overlooked the strong growth at Tim Hortons. They fail to
realize that Tim Hortons accounts for over half of the combined company’s
profits and therefore on a profit-weighted basis the same store sales were
clearly up. The market itself seemed to understand and sent Wendy’s higher on
the news. The Wendy’s share price is already “pricing in” a high value for Tim
Hortons and therefore it is not clear if one should buy Wendy’s at its recent
price. My hope is that the Tim Horton IPO price will be quite high and then will
rise higher in the market. That scenario would likely drive Wendy’s up as well.
My understanding is that Wendy’s will ultimately divest all of Tim Horton’s and
given their comments about doing it tax efficiently I hope that  they do
this by simply giving the Tim Horton Shares to the Wendy shareholders sometime
after the IPO. But I don’t know if that is what they plan and maybe investment
bankers would discourage that.

 

January 5, 2006

 

I have just updated two analysis articles that look at the
P/E ratio of the various segments on
the TSX and also look at the
exchange traded funds for buying some of these segments. The valuations of
most of the segments certainly appear to be high. This is a reminder that when
the market goes up rapidly it can get a bit risky in terms of valuation.
Hopefully my approach of picking individual stocks will be better than going
with entire segments. However, if the overall segments fall then most stocks
will certainly be affected to some degree. I don’t mean to be alarmist because
certainly market momentum seems strong, but we should remember the market is not
cheap and therefore there are always risks being invested.

 

January 4, 2006

 

Nice gains on ING Canada and Archipelago. Meanwhile KFS fell today. No news
in either case. ING has the higher profits and momentum but I like holding
several property insurance stocks. IGM Financial reported strong December mutual
fund net sales and – predictably – its assets were up strongly in December. It
should report a strong Q4. My own portfolio breakdown is updated (see link
above). Most analysts would consider my portfolio to be too concentrated in
financials and particularly in the property insurance segment. However, I am
comfortable with it in my circumstances which include having a long time horizon
to recover from any set backs. It is a fact that different people in different
circumstances should have different portfolios suited to their own, time
horizon, risk tolerance, risk capacity and needs for cash, and perhaps other
factors. My own portfolio has become more concentrated in the past year. In the
next year I may try to consolidate some of the smaller positions.

 

January 3, 2006

 

Okay, this great start to the year is too good to last, but meanwhile it is
very nice indeed!

 

January 2, 2006

 

Stocks that were not very recently updated are carried forward for the start
of trading for 2006 at their current rating (and at the Dec 31 price). An exception to this is that
Canadian Western Bank is upgraded to (lower) Buy and Canada Bread is downgraded
to (lower) Buy for performance tracking purposes.

 

I have added Archipelago to the stock table as a Speculative Buy at $50.00.
Archipelago is an electronic stock exchange that will effectively merge with the
New York Stock Exchange in early 2006. I am not in a position to analyze the
company but figures I have indicate that the stock is trading at a P/E of 45
based on projected 2006 earnings and just under 30 based on 2007 earnings.
Therefore, it is no screaming bargain. However, stock exchanges have done very
well recently and I am rating this a speculative Buy on the possibility that the
privatized company will be able to grow earnings rapidly. It is definitely
speculative and certainly could fall in price, but nevertheless I like it as a
speculative pick.

 

January 1, 2006

 

Stantec is updated for its Q3
earnings and rated Buy at $39.75. This company has been performing extremely
well. It seems likely to be a good long-term investment. In the shorter term the
performance in 2006 may depend on how well the integration of the very recently
acquired The Keith Group goes. Also the 2006 results will depend on the strength
of the construction economy in Canada and the U.S. I believe that a reasonable
strategy would be to purchase a moderate amount and then be prepared to buy more
if the price happens to drop.

 

In reviewing the stocks picks for the beginning of 2006, I have removed
several stocks that had not been recently updated and which I have lost interest
in for various reasons. Stocks removed were Transcontinental and Sino-Forest.

 

Canadian National Railroad is
updated and slightly downgraded to (lower) Buy due to its recent price
increase. Given that Q4 is likely to have been strong it should do well in the
very short term. However I believe there is a definite risk of a pull-back in
this stock sometime in 2006 due to higher energy costs (as fuel hedges expire)
higher pension costs and a possible slow-down in the economy. At this point, my
own strategy would be to re-evaluate after the year-end figures are released.

 

Northbridge Financial is
updated and slightly downgraded to (lower) Strong Buy due to its recent price
increase.

 

The Thomson Corporation is updated and rated Buy at CAN $39.66 or U.S.
$34.60. The adjusted earnings figures would justify only a Hold rating. However,
earnings appear to be conservatively presented and trail free cash flow by a
significant margin. If the U.S. economy remains strong, this stock should do
well in 2006. Note that Canadian investors face currency risk and this stock
should be considered to be a $U.S. holding even if purchased in Canadian funds
on the Toronto Stock Exchange. While the stock could be volatile in the short
term it should be a conservative long-term investment. It is worth noting that
Canada’s richest person, Ken Thomson has a very significant amount of his
family’s wealth in this stock. (Copying from extremely rich investors may not be
a bad strategy).

 

See older comments back to 2001