Category Archives: Blog Post

Laurentian Bank rate reset preferred H -Avoid

Recently a friend was given very bad advice in regards to this issue.

I wish he had checked with me  first, but he got his advice from someone who was not qualified to give it.

I am only offering objective advice and am not selling product.

I am asking all of you to consult with me first before you make a decision you will regret later

This preferred was issued five years ago at an issue yield of 4.3%

The issue is rated P-3 Low by S&P

The current yield is 6.4%

The shares are callable at$25 on June 25 of this year

The shares are subject to being reset on the same date with a reset spread of 255 basis points plus the 5 year Canada yield of 1.53% to total 4.08%.

My friend was told that this issue will be called at $25, a substantial premium  from the current price of $17

This is very poor advice. There is absolutely no incentive for the company to call this issue. Current yields are higher than the issue yield for the same credits.

The company can purchase shares on the open market at $17 rather than calling the issue at $25

All the company will do is to reset the dividend in June to 4.08%, assuming 5 year Canada yields remain the same as today.

This reset yield of 4.08% is lower than the issue yield of 4.30%.

Conclusion

Rate reset preferreds do not perform well when rates are falling

Very illiquid reset preferreds like this one perform even worse

This issue will not be called.

Avoid this issue.

 

 

 

 

 

 

 

 

 

Always get a Second Opinion

Why do some of us blindly listen  to our doctors telling us we have sleep apnea and need to buy an expensive $5,000 machine?

Why do some of us listen to our eye doctors’ advice suggesting we have expensive laser surgery costing  $5,000 or more?

To our astonishment, some doctors’ opinions are based on profit and not on our health

Why are some of you not questioning your current financial advisers’ recommendations, knowing that they are selling products, not objective advice?

Where is the logic?

Always obtain a second opinion whether it be your finances or your health and make sure that the opinion is an unbiased one.

 

 

Parex Resources

Today Parex reported estimated 1st quarter production of 51,200 barrels per day, up from 49,300 in the 4th quarter of last year

This is the company’s 27th quarterly increase in production

Company expects 2nd Quarter production to reach 52,000 barrels per day

Trailing twelve month Return on Equity is over 36%

Many domestic analysts and portfolio  managers have mistakenly ignored investing in the stock as a result of its energy exposure in Columbia

While Columbia is not Canada, the country has been actively pursuing foreign investment and is very much pro business

The shares continue to outperform most Canadian energy stocks

 

 

 

Canadian Apartment REIT – New Issue provides buying opportunity

Announced a $300 million new issue at $49 per share representing a 3.9% discount from yesterday’s closing price

While the new issue was sold out quickly, the shares are still trading at $49.46 or almost 3%  below yesterday’s close

Concurrently with the new issue announcement, the company announced the acquisition of $182 million of Manufactured Community Housing units.

The acquired properties are located in Atlantic Canada, Ontario and Alberta with an overall occupancy of 95.4%

This purchase is expected to be immediately accretive to their NFFO per unit.

This high quality apartment REIT’s portfolio still has a high concentration in the GTA, the most favourable apartment market in Canada.

Recommendation

Use the current price weakness to add to your positions.

 

 

Inverted Yield Curve – Signal to Raise Cash and take risk off the table

US yield curve turned negative on Friday for the first time since the last recession of 2007.

This has occurred every time before the last eight recessions since 1968

Economic growth continues to fall sharply in both China and Europe

An inverted yield curve where 10 year Treasury rates fall below 3 month Treasury Bills, implies that investors are losing confidence in the economy

If this inverted yield curve persists, banks will materially reduce lending as it becomes unprofitable with a negative spread

US / China trade wars continue without any clear signs of compromise from either side

The probability of an economic recession within the next 12-18 months has increased significantly from last month

Conclusion

While it is still too early to be 100% certain of an impending recession, it is critical to take risk off the table at this time

The recent market rebound has provided us with an opportunity to do so

Raise cash if you have not already done so

Maintain high cash levels. My Income and Growth sample portfolios have 35% and 30% cash respectively

Reduce cyclical equity sector exposure including financials

Increase equity weight to the more defensive sectors including utilities, Reits, consumer staples and telecoms.

Northland Power – Buying opportunity

New secondary offering has taken the share price down by 10%

Current market price of $23.16 is below issue price of $23.35

Secondary issue has no effect on treasury stock – no dilution

Chairman is selling a large chunk of his stock for estate planning purposes

Company has strong projected growth in cash flow and earnings over next two years – better than average of its peers

Stock is attractively priced at current levels relative to peers at 14.25 PE on this year’s eps

Current dividend yield of 4.66% with reasonable payout

 

Parex Resources – Positive Fundamentals

Parex’s share price has been one of the best Canadian energy stocks both year to date and in 2018.

Year to date its total return is up almost 26% vs 7.6% for the iShares XEG ETF.

Even in a bad year last year for energy stocks, Parex only fell 10% vs a 27% decline for the XEG sector benchmark

The company receives the higher Brent crude prices

Parex has a strong balance sheet with no  debt and working capital at the end of last year of $215 million US

Proven and probable reserves rose 27% last year

The company has strong self funded organic production growth

The company is expected to report its quarterly earnings this week.

While the shares are not cheap relative to its peers, the company continues to deliver strong results

 

 

Chartwell Retirement REIT – Headwinds

The long term demographic trend of an aging population remains positive for Chartwell

However the immediate supply / demand outlook is only in balance with no supply shortages anticipated

For Chartwell’s top markets – Ottawa, Durham region of GTA and Calgary, the company is actually experiencing an oversupply of product

As a result of these current headwinds, Chartwell will only be able to increase their dividend distribution modestly

Conclusion: Favour both apartment and industrial / logistic REITS more than retirement homes as they have better industry fundamentals.

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