Tuesday was another down day for the markets. The S&P 500 fell 0.7% and Toronto fell 0.9%.
Among the more notable decliners were certainly some that I have rated as Strong Buys or Buys and which I have a heavy allocation to in my own portfolio.
Melcor was down 6.0% to $13.30. That was on small volume but clearly some investors are throwing in the towel. That will almost certainly prove to be a mistake with this company trading at under 50% of book value per share. I added a small amount to my position today.
Canadians Western Bank was down 1.2% to $23.28 and now trades at just a 5% premium to book value. Banks are highly leveraged and can be risky for that reason. But this Bank has not reported a single quarter of losses in about 27 years. And it does not expect to do so in 2016 either.
Boston Pizza Royalties fell 0.6% to $17.40 and now yields almost 7.5%. This entity simply collects and passes along (with almost no operating expenses) a share of the franchise fees. I don’t think there is much risk of a dividend cut here in the near-term. In fact I am expecting a small increase before too long. Even in the event of moderately slower same-store sales we would likely see the distribution maintained. If the downturn was longer-lived a modest cut would likely be made. In the event of a really large decline in same-store sales and/or a net reduction in the store count then a larger cut in the distribution would be needed. I don’t think that is likely at all. It’s hard to imagine a scenario where more than a 10% cut to the distribution would be needed, though anything is possible. Investors can bid the unit price down or up, but the distributions are affected by customers not investors.
Toll Brothers was down a hefty 7.0% as it released Q4 earnings that were somewhat below expectations. However, based on signed contracts for houses sold in 2015 which will be recognised in earnings upon delivery in 2016 we know that its revenues will be up by about 25% in 2016. Barring major cost increases it appears to have as much as a 25% increase in earnings per share basically baked into the numbers in 2016. I will update the report for this company tomorrow and it looks like it will be rated (higher) Buy.
Wells Fargo was down 1.8% to $54.40.
These five stocks are my largest holdings and all five were down today. Such is life in the markets. At least the lower Canadian dollar partially offset the losses on the U.S. stocks.
I notice that TransAlta was down 7.5% to $4.35. I don’t have that stock on our list. Despite its poor management and its coal plants, I suspect that at $4.35 it would be a good speculative pick. At this price it seems quite possible that it would be acquired at a decent premium. Berkshire Hathaway Energy surprised me greatly by having some joint ventures with this poorly-managed company dating back a few years. So Berkshire is a possible purchaser although they may decide they just don’t want the coal plants at any price. Capital Power would be a logical purchaser except that the government would not like the market concentration that would result. AltaGas is smart and might be a buyer. Surely there is some company that could pick this up on the cheap. It’s amazing how toxic the very notion of coal fired power plants has become. Contributing to the company’s woes is the fact that the wholesale power price in Alberta is currently incredibly low. But that will change.
Among the few winning stocks. Costco was up another 1.75% to $168.87 in advance of releasing earnings which it did after the close. Costco was briefly under $120 on that market dip of August 24. It had been above $140 just prior to that day. This goes to show that having some stink bids in can be a good strategy. Costco is a fantastic company but it won’t go up in straight lines. Pull-backs of 10 to 20% tend to occur and have been buying opportunities. The stock is too expensive for my tastes at this time.
Returning to the topic of oil. Energy analysts moan that Saudi Arabia has lowered the price by increasing supply. They decry this as politics. But that is what normally happens with commodities. The keeping of prices high via a cartel was the anomoly. As Kevin O’Leary has said may times, commodity prices rise quickly on shortages and then when there is a surplus, prices fall “without touching the sides”. Based on the last figures I saw, Canadian oil producers have not decreased production but have increased it. They seem to expect Saudi Arabia to eventually cut production. The price of oil is what it is and remains unpredictable. Wise oil companies would not have taken on much debt. The unwise did and must pay the price which for some means insolvency. Given that the oil is still flowing there is still a LOT of work and spending and jobs in the oil patch. Some bank or other today was projecting that the Alberta GDP will still grow 0.8% in 2016. That’s not great but it may mean that the collateral damage to companies like Canadians Western Bank and Melcor and even Boston Pizza is being over estimated. If Alberta starts shutting in a major amount of oil rather than merely canceling planned projects then the collateral damage would be greater.