March 11, 2019

Markets were higher on Monday with the S&P 500 up a hefty 1.5% and Toronto up 0.7%

Among the gainers were: Apple, up 3.5%; Canadian Western Bank, up 2.0%, FedEx, up 2.7%; Toll Brothers up 2.2%, Visa up 2.2%; and Amazon, up 3.1%.

Linamar reported Q4 and 2018 earnings after the close. Apparently, slightly higher than expected although a little lower than last year’s Q4 on a normalized basis. Analysts will likely be more concerned about Linamar’s outlook. The stock appears to be very cheap but investors worry about slowing auto sales and about trade disputes.

Shopify rose another 5.5% to $U.S. 200.30. (I will use the U.S. price since it reports in U.S. dollars.) This was because it was announced it will become part of the TSX 60 index. That means many ETFs will be obligated to buy Shopify and many other mutual funds and investors who seek to mimic the TSX 60 will do so as well. There can be no doubt that more buyers, and especially buyers who must buy, pushes up the price of a stock. But fundamentally, that seems like a poor reason for a price increase. I mentioned before that by far the bulk of Shopify’s assets are actually held in cash and marketable securities. The cash and marketable securities amount to U.S. $18.29 per share. So, we might say that the remaining $182 per share represents the value of Shopify’s business. The book value equity in that business minus the $18.29 per share value of the cash adn securities (and I will add in their accumulated losses on the basis that the losses were mostly meant to be investments in the future) is just $2.98 per share. It may well be that Shopify’s future earnings will more than justify its current share price. But it is extremely richly valued in relation to book value and richly valued in realtion to revenues (run rate of revenues $12.77 per share but rising rapidly). The stock has been on a sharp uptrend. But it will likely have its downturns as well. I had added Shopify to the list and analysed it for information but was not prepared to put a rating on it other than “Speculative”.

Some of the rate reset preferred shares were down. The Enbridge shares on our list ENB.PF.A are down to $16.65 (asking price). At that price the yield is 6.6% ($1.10 per year). They will reset on December 1. If the five year Canada bond stays at its current yield of 1.64% the reset will be 1.64% plus the reset spread of 2.66 %to total 4.3% of $25 or $1.075 to yield about 6.5% at the current price. Even though rates are still low, the “going” or market rate on rate reset preferred is now about 5.2% for the big banks and probably around 6.5% for the likes of Enbridge.

If an investor is looking for cash yield, especially in a taxable account, these shares are worth considering. It is possible that they could rise in price if the market becomes more convinced that rates will stay lower for longer. For example GIC rates could slip back which could cause the market yield on rate resets to fall (and their prices to rise). Of course, investors in the past bought these things for yield back when the market yield on bank rate resets was around 4%. Despite buying for yield and even if committed to holding for the long term, it was very disappointing to see the capital losses that have occurred.

Meanwhile Canadian Western Bank announced that it will not be redeeming its CWB.PR.B shares when the five-year anniversary date arrives on April 30. I did not expect them to renew these. Why would they redeem shares that are set to reset at (2.76 +1.64) 4.4%. when they just had to pay 6.0% on a recent issue of rate reset shares? The $19.25 price of these shares suggests a yield after the reset of 5.7%. The discounted price of these shares reflects the fact that the pending reset dividend at 4.4% of $25 is below market. If the market yield for CWB rate resets is 6.0%, then these shares should perhaps be a little cheaper yet. CWB reminded people today that they have the option to convert these to floating rate shares. The floating rate will be the three month Canada T-Bill rate plus 2.76% and would float quarterly. The 3 month T-Bill is currently very similar to the 5 year Canada bond yield. That would mean that the floating rate shares would start out paying just around precisely the same rate as the five year fixed reset. In this circumstance the floating rate option might be the better option. Certainly it is is you expect rates to rise over the next five years. That might explain why these shares are trading to yield “only” 5.7% upon reset. That is, the price might be a little lower than $19.25 if not for the option to convert to quarterly floating at the end of April.

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