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2012 daily comments

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.

  1. 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).
  2. 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.)

 

2014 and 2013 daily comments

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.TONews) 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

  1. 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