August 20, 2015

On Thursday, the price of owning a share of Corporate America or of Corporate Canada fell 2.1%.

It will be said that investors pulled money out of stocks. Not really. For every share sold there was a buyer. Investors as a population trade shares with each other and no net money flows in or out in the trading process. Money does flow into companies when they issue shares through IPOs, secondary offerings and DRIPs. And money flows out of company’s through dividends, share buy-backs and the occasional dissolution and liquidation of a company.

So, what happened today was that investors bid the prices of stocks down by an average of 2.1%. It is rational for investors to do this in the event of lower growth expectations or when interest rates are expected to rise. Whatever growth expectation that investors had (on average) as of yesterday it appears that they have a lower one today.

Investors may or may not be correct. At any given time the “true” value of corporate America and corporate Canada or any individual company is likely to be above or blow the trading price.

It is always up to individual investors to decide if the market or any given individual stock is attractive at any given price.

Stock market declines are nothing new. Many of us have lived through several cycles. Some people claim to know which way stock prices are headed on average. I have never claimed to know that. I merely try to find some individual stocks that seem cheap or reasonable compared to an estimate of their true value. Over time buying such stocks has worked out well. In the shorter term it has sometimes certainly produced temporary losses on the portfolio and sometimes permanent losses in certain stocks.

Almost all of the stocks on our list were down today. Bombardier was a rare exception with a little bounce up on news that 80% of the test flight hours on the C-100 are complete.

AutoCanada also managed to be up a small amount today.

P.S. Just checked and three of the Boston Pizza insiders that had bought in the past few days added more shares today. They appear to think BP Royalties Income Fund is a fine value here and increasingly so as it slipped below $18, closing at $17.47 today to yield 7.4%. And what is the worst case in terms of the dividend here? I expect the distribution to rise. But say restaurant sales fell off by 10% which is a LOT then the distribution might have to be cut to $1.17 per year from $1.30 and would still yield 6.7%. I mean maybe there is a remote case of something worse but the risk reward looks very good to me. Of course the share price can fall further because if people sell in fear then the price has to keep dropping to attract new buyers. If you owned a Boston Pizza restaurant and were paying that 7% or so royalty fee every month (BP Royalty gets 5.5% and BP International gets the rest) as a top line skim off the top would you feel like the guys receiving that were at much risk? If your sales fall 10% your profits could fall much more (you could even move into a loss given many of your costs are fixed)  but your royalty bill is only falling that 10%. And I am not expecting BP sales to fall anything like 10% except maybe in a few locations.

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