Random Thoughts and Musings

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scomac
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Random Thoughts and Musings

Post by scomac »

It has been a busy few weeks following up on the Great Correction of the late summer/early fall trading period. Earlier in the summer as I reviewed our portfolio’s performance over the past number of years I decided to embark on a major strategic change that I wrote about in a previous thread. Pursuant to this I sold off a number of minor positions that had been mediocre performers and raised a fair bit of cash. I also began to think about things from a top-down perspective incorporating into my thinking what I saw going on around me in a few businesses that I was familiar with.

It has been over 6 years now since the beginning of the Great Recession and during that time I have maintained a fairly defensive posture. Our collective economies have struggled to recover in the traditional sense, but sooner or later real growth had to return. With the lofty valuations that defensive stocks, particularly those that paid healthy dividends had reached, it seemed time to place a bit more emphasis on businesses that would respond favourably to some real growth particularly if they could be had at a decent price. All we would need was some sort of catalyst to make that happen, but what. Pie in the Sky thinking considering the full power of the Federal Reserve hadn’t been able to fashion much more than an end to the liquidity trap.

It would appear to me that the catalyst that we are so desperately seeking has come in the breakdown of the price of oil and the resultant correction in the CAD. This may not be good news in Alberta, Saskatchewan or New Foundland, but it’s a godsend to central Canada and our neighbour to the south. This is like a giant tax break to any business that’s in the business of exporting. We also can’t underestimate the impact this will have on spending in general as lower oil prices will create more free cash within the economy to spend elsewhere. Is this a short term dip in the price of oil? I don’t think so. If you notice, all the other commodity groups have also broken down from gold and metals to grains and now finally oil. I believe this to be a secular change as we are awash in most commodities as demand has adapted to higher prices that the super cycle brought about.

Finally, with yesterday’s mid terms in the books and the GOP having gained control of the Senate, it is looking increasingly like another run at approving Keystone XL is only months away. This time though, the chances of success look pretty good as the Whitehouse has indicated they won’t stand in the way ideologically. It’s a bit of good news for Alberta to soften the blow of the price collapse, but more importantly a major capital project potentially in the works.

Over the past few weeks I’ve initiated a number of new positions based on the above. Previously I had indicated that I began to pick away at ATCO and I finally filled out the position this morning. In addition, I initiated a position in ShawCor (SCL-T) in direct response to yesterday’s events. The USD that I had raised earlier have been soaked up with purchases of interlisted stocks in NY, namely Brookfield Infrastructure Partners LP (BIP.UN) and CGI Group (GIB.A). In addition, I also started positions in Parkland Fuels (PKI-T) and Intertape Polymer Group (ITP-T). That’s an eclectic group of stocks, but each has a strong catalyst to drive the share price forward and they all have maintained good relative strength technically during the correction with existing long term trends still intact despite recent weakness (although short lived it would appear!) Call it a foray into momentum investing with a bit of a value tilt.

[Edit for grammar]
Last edited by scomac on 05 Nov 2014 23:49, edited 1 time in total.
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ghariton
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Re: Random Thoughts and Musings

Post by ghariton »

Thanks scomac. Very interesting to read what others are thinking quasi-real-time.

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Re: Random Thoughts and Musings

Post by Mike Schimek »

Call it a foray into momentum investing
That it is!
with a bit of a value tilt.
That it isn't!
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Re: Random Thoughts and Musings

Post by scomac »

Mike Schimek wrote:
Call it a foray into momentum investing
That it is!
with a bit of a value tilt.
That it isn't!
Different strokes for different folks then. While you may not care for my terminology from your point of reference, it seemed to suit James O'Shaughnessy just fine.
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Re: Random Thoughts and Musings

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scomac wrote:started positions in Parkland Fuels (PKI-T)
That's on my radar list, too, mainly as a copycat move mimicking Mawer New Canada fund, the most successful mutual fund position I own (closed to new purchases), who has started a holding in it in the last quarter. My rationale is if they consider it a good buy at price $x, as long as I can buy it at or below that price, I'm happy.
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Re: Random Thoughts and Musings

Post by scomac »

It's amazing what clarity can be provided by committing one's thoughts to words and then reviewing the situation. Following Mike's comment, I went back across my notes and figures and discovered: One of these things is not like the other things, one of these things just isn't the same! I feel a bit foolish, but nevertheless I just ended up speeding up the process of repatriating a few dollars into Canadian currency as this stock was initially entered into to soak up some US funds for that very purpose. Exit stage left BIP (following journaling to the CAD side of the acct.) a la Norbert's Gambit. The proceeds will be used to flush out a few existing positions.

That about does it for me in terms of year-end machinations. It has been a busy fourth quarter for me. Time to let my efforts steep for a while and see what the market decides to brew up in the coming quarters.
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Re: Random Thoughts and Musings

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adrian2 wrote:
scomac wrote:started positions in Parkland Fuels (PKI-T)
That's on my radar list, too, mainly as a copycat move mimicking Mawer New Canada fund, the most successful mutual fund position I own (closed to new purchases), who has started a holding in it in the last quarter. My rationale is if they consider it a good buy at price $x, as long as I can buy it at or below that price, I'm happy.
I owned this one before and have a loss on the books that I'd like to recover. PKI's purchase of Pioneer Petroleum is the catalyst that should help drive growth going forward. It will substantially increase their retail footprint, particularly in the east. It never hurts to own downstream assets when oil prices are declining as margins tend to expand on that segment of the business, so timing appears to be pretty much ideal.
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Re: Random Thoughts and Musings

Post by JaydoubleU »

Interesting post, Scott. I've been thinking about it for awhile.

I remember reading an article a few years ago about investing for the oil price collapse. It was written in the middle of the commodity supercycle when oil prices were sky-high and there was a lot of talk about peak oil. I did a search, and a few years ago turns out to be 2008!

Here it is here: http://www.marketwatch.com/story/invest ... pse-part-1
Here is Part 2: http://www.marketwatch.com/story/invest ... pse-part-2

The author was spot on, though it was the crash of 2008-09 that lead to the collapse. Nonetheless, his arguments seemed so sharp at the time that I printed the article out and still have a hard copy in my files. Some interesting observations and investing tips in there.

I think it is a good idea to have some large themes in investing. For the past year I have been reading a lot about climate change, and it seemed to me that there would be huge increases globally in alternative energy investment. I bought several utilities with this in mind: NPI, AQN, and RNW. I also bought some NFI, as I thought cities would naturally want to replace bus fleets with cleaner burning gas and hybrid alternatives. AQN and NFI have done very well, while the others are steady but pay a high dividend. (Mawer also holds NFI---they have an uncanny ability to get into these long before anyone else has heard of them or sees the potential!)

Another theme that has been on my mind for a few years is the aging population. Great numbers of retiring boomers have created a demand for steady income products and this has helped push up the price of dividend stocks. But companies that service these aging populations also should prosper: healthcare, and healthcare REITs. I bought some DR and LW with this in mind, and these have done well. I think this a theme that will continue to play out for years to come.

About five years ago I would drive to work and see line-ups at the local McDonalds at all times of the day and I thought, "that must be a good company to invest in." And I did. But once it had just about doubled, I began to think: "older people don't eat at McDonalds because they are more health conscious, and the population is getting older." In fact, I noticed that none of my friends or older relatives ever ate there. So I sold MCD. Same store sales at McDonalds Japan fell 30% in August this year.

I am afraid the collapse in the oil price will put pressure on the alternative energy sector because fossil fuels are now more competitive. Also, a Republican congress may be less sympathetic to environmental causes than Obama and some of his supporters were. Still, I think climate change is real and it will have serious effects on water supplies, agricultural production, and energy demand. Solar panels apparently cost 99% less than they did 20 years ago and may continue to gain market share, though I have doubts about the economic competitiveness of wind energy. Grain prices are low because of record harvests, but low prices could cause farmers to plant less, thus reducing next year's supply. And when will the next drought occur causing prices to soar again? I continue to see agriculture as a strong sector for long term investment, and accordingly I hold AFN, VIC and CVL in Canada.

Cheaper energy leads to greater consumption of energy, unfortunately. Indeed, I read somewhere just the other day that sales of "gas guzzlers" were on the rise again. Here's one article, though it isn't the one I read:
http://www.myfoxal.com/story/27272682/a ... lers-surge

We are awash in oil, but shale oil wells have a rapid decline rate (so I read), and I am not so sure how long production can rise. The collapse in oil will slow production, reducing supply just as demand is picking up . . . what is very uncertain (to me) is just how long this will take. A few years?

Incidentally, I own PKI too. Was very pleased to hear Jason Donville say he was looking at it again, and also noted that Mawer started a position. PKI gets hurt at the commercial level by falling oil prices but benefits at the retail level. Not certain if this is a perfect balance, however. Nevertheless, gas stations/convenience stores . . . PKI is also a consumer staple.

Just a few of my own musings.
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Re: Random Thoughts and Musings

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Just when I said that I was done for the year, I'm back at it again this morning! Jeez, I'm feeling a bit like a portfolio manager that's dressing up the portfolio so I look smarter it looks better for the annual report that my unit holders will not even bother to open next spring. :twisted:

Investor's Group (IGM) -- I've owned this off and on for what seems like forever. In fact, I've more-or-less owned it straight through rotating between the commons and the preferreds depending upon how cheap/expensive the commons were. The commons are back to being reasonable again at <15 times earnings and ~2.5 times book which corresponds with the lower end of the valuation range for this name over the last number of years. The announced dividend increase brings the yield close to 5%. Add in the potential for about a 15% capital gain if the shares move back to the top of the valuation range over time. Seems like a reasonable reward for the additional risk visa vie the preferreds, so I've made the switch here as well.
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Re: Random Thoughts and Musings

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I cover off the commons for this industry with holdings in PWF and IAG. I am uncomfortable with too big a slice in the IG business as it is having to reduce its fees to compete (and the reason I would never own CI Fiancial). Why do you specifically pick IGM?

P.S. I also hold a few prefs here too... IAG and GWO specifically.
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Re: Random Thoughts and Musings

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AltaRed wrote:Why do you specifically pick IGM?
Because I know it. It's simple, easy to understand and seems to have two distinct advantages versus other non-bank/insurance competitors -- a captive sales force and like the lifecos, they offer their own versions of all their competitors popular funds without the black box that constitutes a lifeco's liabilities or a bank's for that matter. That's a big advantage in my book! They may not offer the best funds and they may charge the highest fees, but don't underestimate the inertia of the AUM. Me thinks the rumour of their demise is greatly exaggerated... :wink:
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Re: Random Thoughts and Musings

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I've owned IGM for a few years, but I'm considering dumping IGM and replacing it with CIX. Over the past few years, IGM's AUM growth has been poor compared to CIX. Also, I'm not sure IGM's captive sales force is a significant benefit over CIX. As I understand it, the captive sales force only applies to the IG funds. The MacKenzie funds portion of IGM do not have a captive sales force, as they are sold through 3rd parties. CIX has a semi-captive sales forces with it's ownership of Assante. On average, the performance rating of IGM funds has been lower than average rating of CI funds. I think a lot of mutual fund buyers rely on past rating performance to make their purchase decisions, so I'm concerned that IGM's future AUM growth will continue to lag CIX.
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Re: Random Thoughts and Musings

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I don't take issue with what you are saying, Arby. It simply comes down to what you have to pay for what you are getting. At the current price, I believe there is a profitable trade in IGM regardless of growth in AUM.
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Re: Random Thoughts and Musings

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I am curious on why you chose SCL.to instead of TRP.to as a play on the keystone decision?
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Re: Random Thoughts and Musings

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kenwood wrote:I am curious on why you chose SCL.to instead of TRP.to as a play on the keystone decision?
I obviously won't answer for Scomac but I would consider buying SCL as a direct link to the coating of pipe for the construction of Keystone. TRP, if not already held, is simply a proxy for Keystone. No immediate benefit, indeed a cash draw until built, and then cash flow from tolls for 30 years thereafter. So, SCL will be the one to have early and direct benefits. SCL also stands to gain from any pipelines built by any pipeline entities. That said, I personally find SCL's P/E and P/B metrics too rich for me at these levels.

Added: TRP's metrics are in the ozone. I wouldn't buy at these levels.
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Re: Random Thoughts and Musings

Post by brad911 »

As always a great start of a conversation Scomac. I share a lot of the same sentiments about the market.
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Re: Random Thoughts and Musings

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AltaRed wrote:
kenwood wrote:I am curious on why you chose SCL.to instead of TRP.to as a play on the keystone decision?
I obviously won't answer for Scomac but I would consider buying SCL as a direct link to the coating of pipe for the construction of Keystone. TRP, if not already held, is simply a proxy for Keystone. No immediate benefit, indeed a cash draw until built, and then cash flow from tolls for 30 years thereafter. So, SCL will be the one to have early and direct benefits. SCL also stands to gain from any pipelines built by any pipeline entities. That said, I personally find SCL's P/E and P/B metrics too rich for me at these levels.
Not bad AR. That sums things up nicely. I should hire you to be my press secretary! :wink:
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Re: Random Thoughts and Musings

Post by Taggart »

Based on P/E, P/CF, PSR or P/B, SCL is presently quite a bit more expensive than I'd be willing to pay. If the analysts are right, then forward P/E looks half decent though.

However, even though this equity historically has a low average yearly dividend yield, at least it's growing and today's yield is higher than it's been since the 2008 crisis. The company creates positive free cash flow most years, it's growing it's book value and has splendid ROE's. D/E isn't bad either, although up until recently the company was almost debt free.

The above are just observations after a quick cursory glance. I'm sure the rest of you will go a lot further in your financial analysis.
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Re: Random Thoughts and Musings

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FWIW, I tend to get pretty hung up on financial metrics, including ROE/ROCE, when looking at investment opportunities and thus being a 'value' investor by definition, I tend to lose out (in hindsight) on opportunities which 'take off'. Good examples I missed in the past year are EMA and FTS which where on the cusp of being bought but didn't. They recently took off for any number of reasons, perhaps one of them being 'safe haven' from the crash in commodity stocks. I suspect they will come back to me when the cycle shifts yet again and/or interest rates increase.

I also want a dividend yield of a minimum of 2% and that has eliminated some of the consumer stocks (CTC, ATD) property management (BAM) and Industrials (CNR, CP). Maybe I need to adjust my thinking more aka Taggart and look more to dividend growth as a primary (rather than secondary) criteria and dividend yield as a more distant factor. It really does not (should not) matter to me whether the return is capital appreciation or dividend.

I am cautious about getting ahead of the curve with upcoming trends, as perhaps Scomac and Jay above are engaged in. It is my belief that this results in a 'too early' approach since things always take longer to actually occur than anticipated, be it renewable energy, baby boomer retirement homes, pharma, etc. Example: A legacy holding of mine, PFE, just has not done that much over 10? or 15? years, and I am now in the process of shedding that stock as I rid myself of individual US domiciled stocks and use the funds to buy interlisted Cdn stocks when the loonie is soft.
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Re: Random Thoughts and Musings

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AltaRed wrote: I would consider buying SCL as a direct link to the coating of pipe for the construction of Keystone. TRP, if not already held, is simply a proxy for Keystone. No immediate benefit, indeed a cash draw until built, and then cash flow from tolls for 30 years thereafter. So, SCL will be the one to have early and direct benefits. SCL also stands to gain from any pipelines built by any pipeline entities. That said, I personally find SCL's P/E and P/B metrics too rich for me at these levels.
Alta,
Is the pipeline coating done before or during installation?

There have been reports of pipe stockpiling in several area in readiness for an XL approval. IOW, some (or all?) pipe has already been procured. SCL had a large coating contract for Keystone back in 2011. Will SCL likely receive additional coating contracts IF Keystone is approved?

Given condition of existing pipelines and expansion in various regions, it would seem scl should have a strong future. But maybe not for me - low div yield and growth dependent on contracts that they have no control over.
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Re: Random Thoughts and Musings

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Springbok wrote:Is the pipeline coating done before or during installation?

There have been reports of pipe stockpiling in several area in readiness for an XL approval. IOW, some (or all?) pipe has already been procured. SCL had a large coating contract for Keystone back in 2011. Will SCL likely receive additional coating contracts IF Keystone is approved?

Given condition of existing pipelines and expansion in various regions, it would seem scl should have a strong future. But maybe not for me - low div yield and growth dependent on contracts that they have no control over.
Done in SCL's mills before delivery to site/stockpiles. I know some pipe has been coated and stockpiled but TRP would not have procured very much for the northern leg until approval was relatively certain. I suspect TRP's default would be if the northern leg was not approved, they might still have used the pipe to get to the Dakotas.....or ship it off to a new project (theirs or sold to say ENB). One might be able to find out a bit more about this looking into Keystone documents directly and/or TRP's annual report.
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Re: Random Thoughts and Musings

Post by Mike Schimek »

Over the past few weeks I’ve initiated a number of new positions based on the above. Previously I had indicated that I began to pick away at ATCO and I finally filled out the position this morning. In addition, I initiated a position in ShawCor (SCL-T) in direct response to yesterday’s events. The USD that I had raised earlier have been soaked up with purchases of interlisted stocks in NY, namely Brookfield Infrastructure Partners LP (BIP.UN) and CGI Group (GIB.A). In addition, I also started positions in Parkland Fuels (PKI-T) and Intertape Polymer Group (ITP-T). That’s an eclectic group of stocks, but each has a strong catalyst to drive the share price forward and they all have maintained good relative strength technically during the correction with existing long term trends still intact despite recent weakness (although short lived it would appear!) Call it a foray into momentum investing with a bit of a value tilt.
* strong catalyst to drive the share price forward
* good relative strength technically
* existing long term trends
* foray into momentum investing

Investment doesn't work out and you talk about Buffet?
I've often thought that one of Buffett's key tenets was really a poor piece of advice: He counsels investors to never lose money and then re-emphasizes that by saying don't forget number one! I've often thought that those words prevent people from taking losses and exiting poor positions before long term damage is done.
Take a look at the 4 reasons you quoted for the purchase, do you really think any of those is in the list of things Buffet looks for in a company he buys?
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Re: Random Thoughts and Musings

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Slow day Mike?

OK, so I'll bite. I'm not sure what the point of your post was other than to discredit my reference to Buffett. It really has nothing to do with how I chose those certain basket of stocks to draw the conclusion I have with the merits of the single piece of advice he gave. They are completely unrelated.

With respect to the reasons I gave and whether or not Buffett would use or even care of such things is also irrelevant. I'm not trying to be Buffett and I've never claimed that his methods were faulty. Nice try, but your strawman isn't standing up to the bluster.
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