This is a comment on Friday’s markets plus some thoughts on convertible debentures.
Friday saw the S&P 500 up 0.2% but Toronto down 0.8%.
lulu lemon was up 5.1% after reporting earnings. This has been a wonderful Canadian success story.
The big construction / infrastructure project company Aecon Group was down 9.5% after reporting Q3 earnings. I respect this company for the important projects it builds but it seems to be a tough way to make money. I am working on an update for this one. (See below for some thoughts on its convertible debenture).
Starbucks was down 6.3%. In part this was due to the fact it warned about certain cost pressures.
TFI International was down 7.4% after reporting earnings. Probably a case of expectations having gotten too high.
In my own accounts I am inclined to raise some cash. It’s always hard to know what to sell. I may sell some more Costco. It’s a fantastic company but I don’t like its high P/E.
I now have several convertible denture holdings and one non-convertible. I mentioned these at the times when I bought and three of them were bought as new offerings. These are like investing in a bond but have the additional upside of being convertible and this can lead to a gain but only if the common shares rise quite substantially. I also like that, unlike non-convertible debentures / bonds they trade on the exchange. They can be considered as a part of the fixed income allocation in a portfolio. They are NOT as safe as the highest quality bonds however.
I mentioned before I like to buy these only if they are at around par of $100 or lower. If bought around par then they should be decent investments earning in most cases around 5% and that is if all goes well and they mature for cash and pay their interest as scheduled and if the stock never rises to the conversion point. If the stock rises somewhat past the conversion point then they can return more, possibly substantially more. My thinking is I am not buying these with the idea that the stock will increase and I will gain that way. If I was quite bullish on the stock I would just buy the stock.
One that I hold is from North American Construction Group. It trades as NOA.DB.B It pays 5.5% and does not mature until June 30, 2028. It’s convertible at a stock price of $24.75. That might well happen but the current stock price is only $21.30 and the stock has a rather flat history. Still, with over six years until maturity this debenture could very well trade higher in future. I got it at the initial offering at $100. It is trading at $112. Therefor I would not buy it now. Due to the capital loss if it matures at $100 the return would only be about 3% compounded. Buying at $112 requires the conversion to payoff (or the debentures to rise even temporarily in anticipation of that) in order to make a decent return. At $112 it seems to me that this has turned into more of an equity investment. I bought it for the 5.5% interest. So, I am more inclined to sell now and put the proceeds into some other fixed income investment. It trades very thinly. I had the chance to sell some at $114 on Thursday or Friday but I saw the the offer price was at $127 (weirdly high) and I ended up trying to get $117. I may lower my offer to sell down to about $114. Also I was not going to sell all I hold as it would be annoying to do that and then see the price rise to say $120. So far since I have owned it is has traded up to about this $112 level at least once before but then fell back closer to $100. Decisions, decisions…
Another one that I was tracking (I wrote about it last November 1) is from Aecon Group paying 5.0% and maturing in just over two years December 31, 2023. It is convertible at $24.00 It trades as ARE.DB.C and last traded at $103.70. Aecon’s shares are at $18.46 so the conversion option is well out of the money. But Aecon shares have recently been as high as $22.28. So, going somewhat higher than $24 is certainly possible although Aecon also has a relatively flat history. I’d be a potential buyer here at more like $101 or lower. An investor could always put in an order at $101 and leave it for a month or so and see what happens.
Another convertible debenture that I hold is one issued by the Melcor REIT paying 5.1% and maturing in just three years and convertible at $8.90. I had bought this during the COVID crash in 2020 at a very steep discount. I should have bought more. I basically had a mental block against buying more at say $85 when I had earlier got some at say $65. Now it trades right around $100. The symbol is MR.DB.B. The Melcor REIT units are at $6.73. I like the chances for these units to get somewhat above the $8.90 price within three years but that depends on the Alberta economy and therefore oil and gas prices. But I am confident (this is not a guarantee) that if it never rises above $100 it will pay the 5.1% and mature on schedule.
Note that convertible debentures tend to be quite thinly traded. Therefore always use limit orders at set prices and not market price orders.