March 5, 2019

On Tuesday, the S&P 500 was down 0.1% while Toronto was up 0.3%.

There was not much movement in most of the stocks on our list.

But AutoCanada slipped 2.7% and Toll Brothers was down 2.3%. Dollarama was up 2.4%.

Regarding interest rates. It appears that this latest round of interest rates hikes has once again fizzled out without rates getting back to any definition of “normal. The 5 year Canada bond yield is at 1.75%. That’s nicely above the lows of a few years ago but also sharply lower than the near 2.5% of last Fall. The 10 year Canada bond yield is at 1.86%. Meanwhile if a stock has a P/E of 20 (which historically would be considered high and expensive) that is an earnings yield of 5%. It’s not a dividend yield but if it is a good company and it is earning 5% on the price you pay and will retain some or all of the earnings for growth, it should do well. And very often the ROE on the retained earnings is over 10%. Buffett would say that on average a stock with a P/E of 20 is very likely to be a better investment than a bond at 1.9%. In fact vast numbers of stocks have a cash dividend yield well higher than the 1.86% of the ten year bond and that dividend is extremely likely to grow. But of course the bond has the advantage of certainty. If the expectation for higher interest rates has diminished then that supports higher P/E ratios for stocks.

I look at things like preferred shares paying 5% or more and Boston Pizza paying around 8% and it seems likely they will certainly do better than bonds. But as always there are risks and we have to put up with market value fluctuations even if the dividends are steady.

And also on interest rates, I saw today that HSBC is out with a 5 year mortgage rate at 2.99%. TD Bank is still paying 1.6% on TDB 8150 which is a sort of “high” interest account that I have access to in TD Direct. It seems quite likely that could decline.

Checking some insider trading (specifically buy-backs) for selected companies, I see that Melcor is continuing buying its little maximum of 1262 shares per day. Canadian Western bank only reports the buy backs monthly. They were buying back about 60,000 shares per day in December and up until January 22. I am fairly certain that the only reason they stopped is that they had completed the full amount of their announced buyback. They paid up to about $29.60 per share as the price rose in January. I will also mention that several CWB insiders grabbed some of the 6.0% rate reset preferred shares that CWB issued on January 29 and which I mentioned at that time.

I had mentioned previously that CRH Medical began a buyback program on October 19. They report it only monthly. I see they have continued to buy back shares steadily in January and February. The amounts per day vary. Recently the maximum is about 9,000 per day. Unfortunately, I also see some insider selling in December. In two cases they exercised 30,000 options and sold only 15,000 so that is not as bad as selling all 30,000. It may be nothing to be concerned about and fairly normal for executives to sell since they often get compensated with options as opposed to cash. But it is a case of buying shares with the company’s money, while selling some of your own…hmmm.

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