Category Archives: Blog Post

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%

Adding Vermilion Energy to both portfolios

  • Vermilion currently pays a dividend just shy of 6%
  • The company did not cut the dividend in the last crude price downturn
  • Vermilion has just made an offer to acquire Spartan Energy, a light oil producer in Saskatchewan for $1.4 billion
  • The purchase will be immediately accretive to Vermilion as Spartan is trading at a much lower valuation
  • Analysts do not expect another competing bid for Spartan as there is a $40 million breakup fee if the deal falls through
  • This purchase will add an additional 23,000 barrels per day of oil equivalent taking its new output to 95,000 barrels per day
  • Vermilion currently operates in France, Holland, Germany, Ireland and Australia where it receives the higher Brent crude price

Trade Wars – Nobody wins

  • 1929’s US trade protectionist policies extended the Great Depression by ten years
  • Trade Wars result in domestic inflation
  • Positive effects of US tax reform muted by threat of trade wars
  • Robert Shiller, an American Nobel laureate and Yale economics professor, said that US  trade wars with China would result in an economic crisis if they continue to escalate.
  • The US needs China to help negotiate with North Korea in regards to their nuclear arms
  • The US needs China to continue buying their government debt to finance the American’s massive $1 trillion annual budget deficit.
  • The ongoing trade rhetoric between China and the US will get worse before any agreement is reached

Buy US Bank Stocks

  • Rising interest rates are resulting in improving net interest margins
  • The strength in the US economy helping to propel both mortgage and overall loan growth higher, while keeping default rates low
  • The recent pickup in market volatility will lead to stronger capital market profits
  • Rising security markets positive for wealth management divisions
  • Less Government Regulations will improve profitability

Trump’s new import tariffs a threat to global growth

  • Trump imposes massive steel and aluminium import tariffs
  • This is a threat to global economic growth, affecting Canada and the European Union as much as it does China
  • May lead to a global trade war with other countries imposing import tariffs on US exports
  • US protectionism will lead to higher domestic prices and rising US domestic inflation
  • This can mitigate all the positive growth drivers from US tax reform

What to do after recent stock market selloff

Use recent market drop to increase equity exposure

  • Restrict new purchases to US equities
  • No signs of an impending recession.
  • Market Valuation correction only

Headwinds affecting Canadian equities

  • Ongoing NAFTA uncertainty
  • US corporate tax reform makes Canada less competitive
  • Canadian pipeline disputes between BC and Alberta causing Western Canadian Select crude prices to trade at a very large discount relative to West Texas Intermediate
  • Crude prices trending down once again on increasing US shale production

Reduce Canada’s North American equity weight to 40% with the US increasing to 60%

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Is the current stock market selloff a buying opportunity?

What to consider:

    • Probability of Recession remains low
    • US Corporate Earnings and Revenue Growth expanding
    • S&P 500 Market 2018 PE at 19.5 times, only marginally higher than 17 times long term average
    • US yield curve steepening
    • US Corporate bond spreads over Treasuries remain low

Conclusion:

  • Ensure that you are well diversified by: Asset Mix, Currency, Equity Sectors
  • Always maintain a cash reserve to minimize volatility
  • Gradually use market declines to buy quality companies that have solid earnings, cash flow, dividend and revenue growth
  • Do not be tempted to buy bitcoin and pot stocks despite their price declines
  • Buy equity sectors like banks and insurance companies that benefit from rising interest rates.
  • Take your time investing your cash surplus. You will have plenty of opportunity to look at the fundamentals of companies. Do not just look at the companies’ share price.

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I’ll also send you a complimentary copy of my latest newsletter and model portfolios.

Try for free here

 

Learn more about my newsletter and portfolios here and my portfolio review service here.

Reduce your portfolio’s volatility

Beta is a measure of a stock’s volatility relative to the overall market.

A stock with a beta of 1.5 indicates its share price is 50% more volatile than the market

If the market goes down by 20%, this high beta stock will fall by 30%

Recommendation:

Rotate out of high beta stocks into lower beta ones to minimize portfolio volatility

PNC Financial – Adding this large US Regional Bank

The US banking sector is operating on all cylinders and is greatly benefiting from the following:

  • Higher interest rates and steepening of yield curve
  • Wealth Management operations aided by strong equity markets
  • Rising loan demand aided by stimulative tax reform policies
  • Less Government Regulations in the financial services sector

PNC is one of the largest US Regional banks and acquired all of RBC’s divestiture of its US branches in 2008-2009.

PNC  is well positioned to benefit from the above industry trends and its equity interest in Blackrock is another positive.

Dividend growth is strong and this is expected to continue in a period of increasing profits and a low dividend payout ratio.

Sell Apple and Knowles

iPhone X sales for the first half of this year are expected to fall significantly and much more than analysts had been predicting

This is based on research obtained from interviews with its suppliers

The price of the iPhone X is just too pricey for most cunsumers

Knowles derives a large percentage of its annual revenues from Apple

My recommendation is to take profits in both Apple and Knowles at this time.