Newsletter February 23, 2002 Newsletter February 23, 2002


Canadian Tire (Weak Buy)

MapleLeaf (Weak Buy)

Canadian Western Bank (Buy)

Boardwalk (Buy)

More updates are coming…

Thank You:

To those members who have purchased reports that I have offered for sale. I have not added any new reports for sale at this time but the link to the three that I have offered is

Of the three, only 1 has risen so far, but I still think they are all good long-term picks.

Insider trading Reporting:

I am disgusted with the lack of available timely information on insider trading.

Access is completely ludicrous. Investors can view insider trade reports at the Ontario Securities Commission Offices in Toronto. Isn’t that special in this internet age?, we can all just go to downtown Toronto and thumb through paper copies. Of course even those copies will be filed weeks after the fact. Another option is to pay for these reports from various services. The information will be weeks or months old and pretty well useless by the time you get it.

The Ontario Securities Commission was supposed to start posting the reports to the Web in October. Then February. They still have not got their act together to do this.

Meanwhile in the U.S. it’s little better. I just noticed “new” insider trade data posted for Calpine today (at least it’s free). The most recent trade listed was from December 17, over two months ago! This is absolutely unacceptable. That data should be available free in days, not weeks after the fact.

Are All Stocks Holds (and None Buys or Sells)?

The efficient market hypothesis says that at any given time all stocks are priced efficiently given the available information. Thousands of investors and analysts have set a market price for the stock that is by definition a fair price at that moment. Under this hypothesis you should not expect to find many bargains or many over-priced stocks in the market. According to this theory, finding a bargain stock is about as likley as finding a bargain on something like gasoline. The market quickly adjusts to elimiante bargains or too high priced stocks.

I don’t accept that this hypothesis is valid. I tend to think that there are bargains to be found. But I also recognize that there is a certain amount of validity to the theory. We should not expect to find large numbers of bargains. Instead we are more likely to find that bargains are somewhat difficult to find. It should also be easier to find bargains in smaller less well known stocks.

It’s disappointing to me when I analyze a stock and can’t call it either a clears sell or a clear buy but instead end up calling it a Weak Buy or Weak Sell, which is essentially a neutral or Hold rating. But the reality is that given at least some efficiency in the market the vast majority of stocks should be reasonably priced at any given time which means that they are in fact holds and not clearly buys or sells. That’s just the way it is.

Lately I am trying to combat this by pre-screening stocks so that I only analyze stocks that seem likely to be bargains based on the pre-screening.

All Stocks Are Risky:

Naturally it’s disappointing to me when I rate a stock a Buy and it ends up “cratering”. But, the fact is that no amount of analysis will prevent the risk that any given company could sail straight into bankruptcy. Sometimes completely unforeseen or even unforeseeable things happen such as major strikes, product quality problems, huge lawsuits, accounting irregularities and many other things.

Investors have to understand that any given stock is always risky. The best solution is to have at least some diversification.

There are certainly some things that analysts should have seen earlier such as the high valuation at Nortel or the accounting problems at Enron.

Investors like to think that if they had known of problems earlier, they could have sold out at higher prices. But if the bad news came earlier and publicly who would they have sold to anyway? The price would simply have collapsed earlier. The only good thing is that the executives would not then have had the chance to sell out before the rest of us found out, and that would be a very good thing.

Investors need to understand that fundamentally stocks are unpredictable. Analysts such as myself try to improve the odds, but realistically no analyst is going to get it right more than say 70% of the time in the long run. In fact it might be that even batting 55% would be pretty good in the long run. My performance indicates that I have been running at over 70% but I’m not sure that I can sustain that in the long run.

Limitations on My Research

As a candidate in the Chartered Financial Analyst program, I am obligated to disclose limitations on my research report. You will see a new section in my latest reports that details limitations including the fact that I do not typically talk to management nor do I research the competitors to each company. In fact there is an unlimited amount of things I could do but  I focus on analyzing the financials and thinking about the general competitiveness of the industry. I think my Performance has been excellent despite any limitations. I find it interesting that despite the requirement to discuss such limitations, I have never seen such a discussion stated in other research reports. Have you?

My disclosure of limitations is in keeping with my commitment to be completely independent, honest and transparent with you. You will also note that I disclose my exact share holdings. Have you seen others do that?

The Price for our Low Dollar

As I mentioned previously Canadian’s have been relatively unaffected by the slow but massive devaluation of our currency (at least those that do not travel outside of Canada). For reasons that I do not understand, the low dollar has not resulted in high price inflation. Instead, many goods are now much cheaper in Canada than they they are in the U.S. Even European cars are apparently much cheaper here than they are in the U.S.  This is not a sustainable situation.

If our dollar remains low, we will (I believe) pay a price through significant price inflation (Foreign manufacturers are not going to accept lower prices in Canada indefinitely). As investors we need to guard against this. One safeguard is to maximize U.S. investments. But this carries a risk that our pathetic dollar will actually appreciate against the U.S. dollar and we will lose money on the currency translation back into Canadian dollars.

A better solution particularly for those who invest in Bonds, is to invest in Canadian inflation protected real return government bonds. Such bonds are in fact available (though the minimum purchase amount might be very high). I personally would not invest in regular government bonds due to the inflation risk. But I would definitely consider placing some money into real return bonds.

Goofy Management Awards:

So Quebecor has reported that it may have to write-off some $1.5 to $2 billion in goodwill associated with its Vidiotron cable T.V. business. This is not a surprise to long-time members of this Web Site. Here is exactly what I said about Quebecor’s purchase of Vidiotron when I analyzed it back in September 2000:

RISKS: There is some risk that the price offered for Vidiotron is too high. I understand the price is about $3000 per subscriber. As I pay my $25 per month cable bill it is hard to imagine that my business is worth $3000, considering that some of that $25 must be paid out in expenses and royalties. Also I can now choose satellite service. I don’t “get” this math. The company already has high debt and has little cash, so the new debt level will be quite high.

It was all too clear from the start that $3000 per subscriber was a ludicrous waste of money. As I recall they even got into a bidding war so eager were they to enter into this goofy transaction.

I knew this was a mistake, but I must admit I did not realize at the time just how big of a mistake that they had made.

In another move brought on by goofy management, Bombardier is suing DaimlerChrysler for $1.4 billion due to problems with the Adtranz acquisition that Bombardier purchased from DaimlerChrysler. This certainly calls into question Bombardier’s ability to do proper due diligence on acquisitions. I have long been leery of Bombardier’s management due to what I consider obscene compensation, the multiple voting share structure, and due to what I consider to be limited financial disclosure. Now I must also question their competency.


This newsletter is kept brief and usually only sent once each two weeks. I hope that you will all stay on the mailing list of this site. However, you can unsubscribe by simply replying with the word “unsubscribe”. I would appreciate knowing the reason.

Regards and thanks for your interest,
Shawn Allen