Switch out of SNC into Aecon Group

The Public Prosecution Service of Canada announced that it would not allow SNC to negotiate a settlement in regards to past corruption charges. This means that SNC will have to go to court to settle this charge and this may take quite a long time.

In the interim the company will not be viewed in a favourable light by the investment community as this creates a lot of uncertainty.

After its recent sharp price decline the stock is now trading at a substantial discount to its peers.

The company does become a takeover target at these prices.

However should the company lose its upcoming court case, it would be banned from bidding on government contracts for up to ten years.

Aecon Group has a strong order backlog and solid 3% dividend with a low payout.

The company is experiencing good cash flow growth.

The company was recently awarded a 50/50 joint venture to construct Trans Canada’s new  pipeline to transport natural gas to the LNG facility in Kitimat. This contract is worth $263 million to Aecon.

Removal of Dollarama from Growth portfolio

  • Company has seen 2 consecutive quarters of declining same store sales growth rates
  • According to the company, this trend is expected to continue
  • Company has decided to limit price increases as a result of more competition
  • Stock is still trading at over 25 times earnings compared to only 14 times for Canadian Tire
  • The projected earnings growth rates are similar for both Dollarama and Canadian Tire
  • Canadian Tire offers much better value relative to their earnings growth
  • Dollarama’s share price has rebounded 7% from its recent low, making this recommendation a little less painful

Shopify – Adding back common shares to Growth Portfolio Technology Sector

  • Latest quarter saw revenues up 62% year over year
  • Remains one of best positioned companies in application software
  • Remains closely associated with Amazon, differing from their competitors
  • Continues to outperform its peers
  • The share price is still off over 18% from its recent high despite today’s strong rebound
  • Aurora Cannabis has recently signed an E-Commerce deal with Shopify to sell both medical and recreational cannabis
  • While the shares still look expensive using traditional valuation parameters, Amazon also perplexed investors from its infancy by not reporting any profits for many years.
  • We all know how well Amazon is doing now

 

 

US Protectionist Trade Policies Escalate

Today the US Administration has slapped import tariffs on steel and aluminium from Canada, Mexico and the European Union.

Both Canada and Mexico have retaliated by implementing their own import tariffs on a dollar for dollar basis.

These events make any NAFTA renegotiations much less probable.

Nobody wins in a trade war.

Short term effects are higher domestic inflation globally and a lower loonie.

Justin Trudeau has exhibited very strong leadership this week both on the Trans Mountain pipeline issue and by retaliating from the US punitive tariffs.

Removing Sienna Senior Living from both portfolios

A class action lawsuit was recently filed against Sienna and Extendicare for failure to provide proper care in some of their Long Term Care facilities.

While any possible settlement will be paid for by their insurance protection, this will lead to an increase in government intervention.

More government regulation in the Long Term care area will lead to higher costs and even lower operating margins.

All industry players will be attempting to diversify away from Long Term Care into the higher margin Retirement Home segment.

Even after their recent acquisition in the Retirement area, Sienna will still derive 56% of their net operating income  from their lower margin Long Term Care facilities.

I have just reduced my REIT exposure to 1.15% of the total North American equity exposure and selling Sienna will help to accomplish this objective.

 

Equity Sector changes – Increasing Energy to Market Weight

  • 2018 global oil demand expected to continue to outpace global supply, despite rising US shale production
  • Almost 50% of global supply is subject to restraint
  • Total oil stocks have been falling steadily since May of last year and are now very close to five year average levels
  • Energy sector is very underowned in both Canada and the US
  • Equity sector rotation into cyclicals is happening now
  • Energy sector weight for TSX is 18.5% and for S & P 500 is 5.7% in April
  • Using my 60% US and 40% Canada exposure, the benchmark weights are 10.82%
  • My recommendation is to increase the weight to 10.82% benchmark from my former 9%