TSX long-term value investor ideas for 2016

For the long-term value investor, here are some compelling stories to think about in 2016. Metro Inc.

Canada’s third-largest grocery retailer is also its most profitable. The Montreal-based Metro operates in Quebec and Ontario, gaining clout in the latter with its 2005 purchase of the Dominion and A&P banners (since rebranded Metro). With cost efficiencies and a comparatively lean workforce, Metro boasts a net profit margin of 4.3 per cent, while that of rivals Loblaw Cos. Ltd. and Sobey’s owner Empire Co. Ltd. are each less than 2 per cent. Even long-term, it’s difficult to identify significant risk potential at Metro given the recession-resistant character of grocery and drug retailing, and the sheer heft of Metro’s market coverage with its 800 or so supermarkets, drugstores and specialty food chains. The latter include corner store operator Marché Richelieu and Marché Adonis, a top Quebec ethnic food purveyor. What makes the value investor’s eyes pop is the Metro’s low stock-market valuation relative to its competitors. Metro stock trades at a price-earnings multiple of just 15.4 times its estimated 2016 profit per share, far below the industry average p/e of 27.2. Linamar Corp. Few companies in today’s market offer Linamar’s growth potential, with a stock affordably priced at less than 10 times’ forecast 2015 earnings. The Guelph-based auto-parts maker has the markings of a longterm outperformer, having emerged unscathed from the Great Recession’s collapse in vehicle sales, and posting a near quadrupling in profits since 2011. Linamar has mastered geographic expansion (48 plants on four continents), new product development (more than 150 product launches in 2014 alone), and fiscal discipline (revenues were up 45 per cent between 2011 and 2014, while costs increased just 35 per cent). Skilled balance-sheet management enables Linamar to finance continued expansion, including its recent $1.2-billion friendly bid for France’s Montupet S.A., a specialist in aluminum castings that will reinforce Linamar’s own prowess in aluminum components and further expand its global reach. Much larger peer Magna International Inc. is more diversified in products and capabilities, but the yawning revenue gap between the two firms (Linamar’s $4.2 billion to Magna’s $48.9 billion) suggests a great deal of room for Guelph-based growth. That goes for Linamar’s dividend yield, as well, which is currently just 0.59 per cent. Procter & Gamble Co.

P&G is in one of its periodic swoons, its stock having slipped by 26 per cent from its all-time peak just 12 months ago. P&G has been here before. Its stock plummeted 48 per cent in the late 1990s, and fell 38 per cent in the late 2000s, only to recover each time to set new all-time highs. Now as then, there are panicky calls on the Street to break up the company. Fair enough: P&G is a $102 billion (in sales) behemoth whose products are used about 4.6 billion times a day worldwide. But P&G is already shedding two-thirds of its brands. In the past year, oncecherished P&G brands like Cover Girl, Max Factor, Wella and Duracell have been shed at handsome prices in P&G’s largely completed campaign to downsize a product portfolio that had become bloated. That still leaves P&G with market-leading brands collectively worth about $120 a share in earnings power. And that’s before a leaner P&G boosts profits now that it’s able to focus on its highest-margin products, including Tide, Gillette, Olay, Pantene and Pampers. The stock also boasts an industry-leading dividend yield of close to 4 per cent. Honeywell International Inc.

Honeywell is not a contrarian play, its stock having outperformed the S&P 500 by a factor of three in the past decade. The company is best known for its thermostats and other control systems, though its monitoring systems actually control everything from household furnaces to liquefied natural gas (LNG) plants.

The New Jersey firm’s mastery of controls gives Honeywell a head start in its bid to become a dominant player in the emerging “Internet of Things” market. Honeywell is hedging its bets by establishing itself in dozens of IOT sectors, many still nascent. The $54 billion (2014 sales) Honeywell has the R&D heft to devise machine-tomachine IOT systems for building contractors, commercial property managers, factory and mining operators, and municipal supervisors aiming to create “smart” cities. Growth in IOT revenues will be measured in the tens of billions of dollars per decade, giving Honeywell stock unusually big upside potential for such a large and stable company.

The stock also yields a generous 2 per cent yield, above average for this sector.

Oil - Canada- TSX And 2016 Predictions

That’s the truth at the heart of the collapse in oil prices in 2015, a force that will shape our personal finances in the coming year. In the GTA, it’s good news. The commute is cheaper and so is the cost of heating our homes. It adds up to a tax cut as good as the one the Liberals are giving us.

In the west, where 40,000 industry-related jobs have disappeared, more pain is on the way because the energy rout may only be midstream. Even if it isn’t, more jobs will likely go. Until the price of oil stabilizes, the only thing companies can do is guess and keep cutting to ensure their costs remain below their falling revenues.

It’s hard to recall that 18 months ago, oil was at $110 (U.S.) a barrel. It traded Monday at a little under $37, two-thirds lower. The current price per barrel is enough to buy 24 bottles of Sleeman’s Original Draft at the Beer Store — but not the cans, which cost a few dollars more. If you think about that in terms of your household, how would you fare if your family income was cut by 67 per cent?

This is all about a fight for control of the world’s oil market, dominated by the Organization for Petroleum Exporting Countries (OPEC), of which Saudi Arabia is the lead. As China’s insatiable demand for energy drove up prices, a search for cheaper supplies made sense. New technologies made it easy to drill into shale formations and fracture the rock to release oil, creating a plentiful supply of energy in North America.

A sign of the times is that this month the U.S. lifted a 40-year ban on the export of domestically produced oil.

That is because fracking is making the U.S. virtually energy self-sufficient, just as China’s economy is slowing — and so is its need for oil. In the meantime, Iran is adding two million barrels to world markets as part of its nuclear deal.

The Saudis, seeing a long-term threat to their oil power, have ensured that OPEC continues to produce at the same pace to maintain market share. The Saudi goal is to drive the higher-cost fracking industry under. Our even more expensive oilsands are caught in the crossfire.

OPEC shows no signs of standing down. It reaffirmed its strategy at a December meeting, and last week its World Oil Outlook forecast that a barrel of oil would only cost (in real terms) around $70 by 2020.

So here’s what it means for us: The dollar

In June 2014, with $110 oil, the loonie sat at 92 cents (U.S.). It cost us $1.09 for an American dollar. On Monday, it was at 72 cents, a drop of 22 per cent. It was $1.40 to $1 at the consumer level.

If oil rebounds, so will the dollar; if not, it may fall further which is something readers care a lot about. How to get a better U. S. exchange rate deal was the most popular column of the year. Canadian stocks

Toronto share prices are down 9.8 per cent year to date. Energy stocks make up about 10 per cent of the TSX and have fared much worse. The TSX Energy Index is down 26 per cent.

If oil prices improve, these shares will too. Ditto for our banks, which are big lenders to the oilpatch and are another big part of the main TSX composite index. They’ve had a lousy year too, down 5 per cent. Inflation

We climbed out of our 61-centdollar hole in 2000, gradually getting to par in 2009 without much inflation. Our exports to the U.S. were cheaper and so more attractive, creating profits and jobs. By substituting Mexican avocados for California ones, we energized our economy without higher prices. Cross your fingers we can do that again. Interest rates

If we can’t and inflation starts picking up, rates may rise even though the Bank of Canada doesn’t want them to. If so, housing will cool, consumer spending will fall and we’ll all have a harder time.

There are a lot of ifs, ands and maybes here and, as always, beware of forecasts. In June, when I wrote about the dollar, the consensus was that it would be between 77 and 80 cents now. Between now and this time next year, anything can happen. Adam Mayers writes about investing and personal finance on Tuesdays and Thursdays.

Sell-offs always set the stage for recovery,

although it’s hard to think good times won’t return

Human nature tends to work against us when the stock markets turn.

Now is one of those times, particularly for readers who have turned to stocks reluctantly as the only way to stay ahead of inflation. As share prices have moved wildly and largely lower this year, concern has mounted. Some think they should sell now, which may be the worst time to do it.

Wednesday, the U.S. Federal Reserve raised interest rates for the first time in nearly a decade, and the news offered another example of a day of lurches. North American stocks sank before the announcement, then soared once the hike was official. Both Toronto and New York ended the day with triple-digit gains.

The last two trading days aside, it’s been a lousy year for investors. The main index on the Toronto Stock Exchange is down 10.7 per cent on the year as of Wednesday’s close, largely because of the commodity and energy rout, which hurts many areas of our economy. The Dow Jones has fared better, but is still down a little less than half of 1 per cent.

Toronto reader P.N. has had a small portfolio of stocks for 30 years. She wanted a higher return without too much more risk, so her adviser put her into a portfolio of dividend stocks.

She doesn’t need the quarterly dividends for day-to-day living, so instead of cash she opted for a dividend reinvestment plan (DRIP), which adds the equivalent of the dividends as shares. But as the face value of her holdings has fallen, she wonders whether it’s smarter to take the money.

“With the erosion of the stock market, I admit to feeling some anxiety,” she wrote. “I feel I should stop the DRIP method and receive the dividends in cash.”

After some to and fro, P.N. has decided to stand pat, reasoning that her DRIPs buy more shares as the stock price falls. And given the high quality of her holdings, the companies she owns will fall least and rebound first. They will also pay dividends along the way, so there’s no reason to sell.

Her thinking is similar to Brampton reader S.W., who has watched his portfolio shrink almost 10 per cent in the last few months, losing $107,000 on paper, he says.

His holdings are also top-quality. They include large real estate investment trusts and preferred shares of Canada’s banks. All pay monthly or quarterly dividends. S.W. wanted to know whether he should hang on. He uses the dividend income to live on, but does not need to touch his seven-figure capital. He has also decided there’s nothing to be gained by selling and believes his holdings will rebound.

Diversification and investment quality are the keys to long-run investment success and if you have both you’ll come out ahead. But we live in the short run, where emotions are always at play.

Bernard Baruch, a Wall St. financier and adviser to five U.S. presidents, once noted that emotions constantly set traps for our reasoning powers. We tend to react to the urgency of today’s news and lose sight of our goals. Here are a few things to keep in mind: Stocks can seem risk-free for long periods, but they aren’t. When they fall, it can be a rude shock for those who are in the markets as a last resort. If you need to preserve capital, you shouldn’t be there. If you can accept some risk, high-quality funds and shares offer a higher return.

Market sell-offs always set the stage for recovery, although as Baruch observed, it’s human nature during bad times to think the good times will never return.

On Black Monday in October 1987, U.S. shares fell 22 per cent in one day. They recovered all of that in a few months. Crashes in 2000 and 2008 were all followed by big rebounds.

Lower share prices mean a higher dividend yield. For example, shares of TransCanada Corp. tumbled following the U.S. rejection of its Keystone pipeline. A year ago, the shares were worth $52.83 with a dividend yield of 3.6 per cent. The shares closed at $48.30 Wednesday with the dividend yielding 4.3 per cent. On top of that, TransCanada raised its dividend this year, a sign of confidence in its outlook.

This is not to say that sell-offs don’t hurt. It’s just that if can look beyond them you often find that better things lie ahead. Adam Mayers writes about investing and personal finance

USA Interest Rate Bump Up - Helps Canada

Confident American consumers, low-flying loonie could bring prosperity north of the border when Fed raises benchmark rate

Never has so much attention been paid by so many to something so small.

With apologies to Winston Churchill and his Battle of Britain speech, the greatest American economic experiment in the post-Second World War period will probably end Wednesday.

It’s been a battle of another sort, as the U.S. Federal Reserve ends its zero-interest policy, letting a key rate rise by as much as a quarter of a point. It would be the first increase there in almost a decade.

The increase isn’t much; more important is that it signals a swing toward normal conditions. And it is actually good news for Canadians.

The Fed pushed rates down sharply in 2008 to stave off a financial collapse, creating trillions of dollars out of thin air. That did the trick, encouraging consumers to borrow and spend. It brought U.S. housing back from the brink and has pumped up stock prices.

It’s no accident that a decision to raise rates is being made nine days before Christmas, when the financial world is winding down for the two-week holiday period. Nobody is quite sure how this will play out; stock markets have been behaving erratically at the thought. A rate hike may mean more lurches, or the bump may already be factored into prices. Nobody knows. So all the better to make a move when attention is focused elsewhere.

With the U.S. still our biggest trading partner, here is how their decision could bring energy here: Energizer No. 1: Confident Americans The move signals that the U.S. economy is humming after seven lean years. Consumers account for the bulk of American economic activity, and they are back in a big way. Their economy is creating jobs and the unemployment rate has fallen to 5 per cent, which is considered full employment. Wages are rising and wallets are open.

These forces usually create inflation, and policy-makers want to act sooner rather than later to stop it from building.

Our economy tags along. Demand rises for everything we sell to the U.S., from energy and resources to manufactured products. One sign of the good times this year is car sales. They’ll set a record in the U.S., exceeding a high set 15 years ago in 2000, according to Automotive News. Many of the cars Americans drive are made in Ontario: Oshawa, Brampton, Cambridge, Woodstock or Alliston.

Autos are just one sign of the times. Scotiabank economist Aron Gampel said in a recent briefing that Canadian exports have increased at a 9-per-cent annualized rate since February. Expect more momentum in 2016. Energizer No. 2: A 70-cent dollar Our dollar ranks among the worstperforming major currencies against the greenback in the past year. Canada and Australia have seen their currencies fall by about 25 per cent and 30 per cent respectively against the U.S. currency. Both of those countries are huge exporters of energy and minerals.

This week’s 72.5-cent (U.S.) level for the loonie is an 11 1⁄ 2- year low. That may seem awful, but more may be in store, CIBC economist Avery Shenfeld says. In an interview with the Star last week, he said, “I think a 70-cent Canadian dollar is now in sight.”

That’s bad news for those heading to Florida or the Caribbean, where things are priced in U.S. funds. Mexico may be a better deal this year.

But a weaker dollar is more fuel for our economy. This is especially true in industries that are exchange-rate sensitive. Beyond cars, this includes industrial machinery, electronics, aircraft and consumer goods. Energizer No. 3: Low inflation If these changes can come without inflation, as during the days of the 66-cent dollar in 2000, that’s a third boost. Meanwhile, the slide we’re seeing in energy prices helps us — it’s effectively a tax cut, making it cheaper to heat, drive and manufacture. Inflation held steady at 1 per cent in October and our central bank has made it clear things aren’t going up any time soon in Canada.

The one inflationary worry is that rock-bottom interest rates are fuelling an unhealthy housing market in the GTA and Vancouver. Mindful of that, federal Finance Minister Bill Morneau on Friday tightened the minimum downpayment for high-end homes from 5 per cent to 10 per cent.

If the Fed raises its rate, it will be a small move with a big implication. For us, long-term gains may well outweigh short-term pain.  

http://torontostar.newspaperdirect.com/epaper/pageview.aspx?issue=10382015121500000000001001 

Will the Fed stick to its rate-hike strategy?

The chase by Frances Horodelski:

What were you doing June 29, 2006, the last time the Fed hiked rates (to 5.2%)? That was the last hike after a series of 17 hikes over two years that moved the rate from 1% to 5.25%. That stair step of increases was followed by a water fall of cuts beginning in September 2007 and ending with ZIRP on December 16, 2008. With great symmetry, seven years to the day, Janet Yellen and the Fed is widely expected to put ZIRP to bed this Wednesday , Dec. 16, 2015.
Last week ended badly, so is it time for some good market news? We’re starting the week with bad news if you’re an oil trader. The price of oil dropped below $35 as the U.S. dollar is strong, the momentum from last week continues and all the concerns with supply continue (Iraq, Libyan peace agreement, etc). According to CFTC data, the commercial shorts are at the lowest level since the Spring while speculative longs are at the lowest levels since January 2013. But the catalyst for a reversal is hard to see (there is no risk premium and remains driven by supply). Natural gas is trading at the lowest level since 2001 (when the low was $1.83, right now the commodity is $1.88) – a reversal here is also hard to see.
Weather remains unusually warm and even when it does get cold later in the week in the North East and in Canada, it couldn’t be called frigid. These are tough times. And another sign of these times is Encana which has “reset” its annual dividend from seven cents/share to six cents/year. Reset is euphemism for slash I guess.
Meanwhile, the world continues to reel from high yield collapse including last week’s closure of Third Avenue’s fund (which was very high yield) and another this morning (Lucidus) which was triggered by a significant investor wanting out in October forcing the fund to wind down. One measure of credit risk (junk yields versus the 10-year) is stressed having risen 437 basis points since June (from 2.21% to 6.585 spread) but still well below five year highs at 8.33% and crisis high of 20.55%.
Last week’s CNN fear/greed index has moved to the highest fear level in a month at 24 – but the index can go to zero. But fear is [palpable. According to one pundit, when the market falls by more than 1.5% on a Friday, 86 out of 90 times, the market is down on the following Monday. Right now, markets are showing green but weakening as I type.
Meanwhile, news continues – especially in the record setting M&A space. Another big deal on the table as Newell Rubbermaid and Jarden merger in a cash and stock deal. Each JAH shareholder will receive $21 cash plus 0.862 NWL. The combination will be a bit of a branded powerhouse with Jarden bringing things like Sunbeam, Coleman, Rawlings, Yankee Candle, Bicycle playing cards and the list goes on. M&A activity so far this year is running at a record $5.5 trillion globally (announced deals). Interesting item on the DowDuPont merger from last week. According to Barron’s, DuPont paid US$500 million to investment bankers on its spin-out of Chemours. Some more suspicious than me suggested that the big chemical merger was more to line the coffers of the bankers than for strategic or shareholders reasons!
Speaking of Barron’s, the 2016 outlook from strategists look for an average year from stocks in 2016 (2200 on the S&P 500). Stocks that were profiled positively include Macy’s, XL Group, Disney. Also a note that the correlation between stocks has risen to 71%-- the highest since 2012. What does that mean? The macro backdrop is more important than the micro and stocks are moving together. So your stock-picking prowess is less important. There is an old adage on Wall Street that suggests just when you need it most, that is when markets fall, diversification helps you the least. We’re in one of the moments. They do end – but I have found that this “tough” time happens when a transition of some magnitude is unfolding just beneath the surface.
We’ll talk transitions with Scotia’s chief strategists this morning and what his 10 themes are for 2016. MKM Partners chief derivatives strategist also uses the term transition in his daily missive. Pivot and transition – watch for these words in the strategy pieces for 2016.
From street research this morning – RBC getting more conservative on Valeant (by reducing the target to $194 from $206 U.S.); Scotia says now is the time to buy Paramount Resources (with a $15 target), BMO upgrades Mattel to outperform from hold ($33 target); Barclays introduced its global stock picks last week that included four names that are Canadian – Suncor, CNQ, Vermillion and Goldcorp (these have been the same Canadian names for some time) and Scotia introduces its 2016 featured stocks list that run from Aecon through to WPT Industrials with 41 names between. Barclays also initiates on two recent IPOs Square and Match Group with outperform.
Stick with BNN as we stick-handle these markets with guests. The futures are now in negative territory and European markets are also lower across the way. From Art Cashin at UBS: “Crude is bothering markets but it's the high yield thing that has the most market risk. Friday's Option Expiration is rumored to be enormous, which could make this a very volatile week. Stay wary, alert and very, very nimble.”
So there you have it.

Survival of the fittest

The chase by Frances Horodelski:

From the reading pile:

-Goldman Sachs is making a head and shoulders pattern and is vulnerable to $120 (!) (Bottarelli Research)

-FANG stocks are ridiculously overpriced (Facebook, Amazon, Netflix, Google) and require increases in net income of 473%, 5017%, 1752% and 81%, respectively to get p/e levels to market multiple (720 Global)

-Global exposure to USD appreciation is highest ever (at 18% of world GDP, ex-U.S.) and $9.8 trillion (National Bank Financial)

-Beware of Sovereign Wealth Funds (from China to Saudi Arabia) where selling could exacerbate global debt market valuations. Oil country SWF’s total $4.2 trillion. China’s reserves have dropped from $4 trillion to $3.43 trillion (an old number, but still falling) (Financial Times)

-Resistance on the S&P 500 is around 2072 and then about 2100 – will we take another run today (traders)

-Suncor made the front page of options newsletters yesterday as the shares have seen two days of heaving call buying (50:1 over puts) – 9 of 10 most active contracts are all calls especially the January 2016 $25 (U.S.) calls

-Not surprisingly, Caterpillar and Exxon are these most oversold Dow stocks (deeply oversold), the most overbought Dupont and Procter & Gamble (Bespoke)

-CNN’s fear/greed index is in the fearful territory (35)

-But maybe fear is justified – from Walter Murphy, CMT looking at chart patterns notes “the long-standing internal deterioration suggests that in early 2016 the market could be in its most fragile condition since 2007”

In the news cycle we have Cenovus lowering its 2016 capex budget by 19% to $1.6 billion (there will be a call at 11 am); we have a report from CIBC that 80% of millennials have no idea how to invest; there are earnings to asses including Hudson’s Bay Company after the close (watch in particular the impact of the U.S. dollar’s strength on the flagship 5^th Avenue store of Saks and commentary about the Christmas selling season), DavidsTea (third earnings release post IPO, first earnings saw the stock collapse and has never recovered trading 41.6% below $19 offering price), and Transat (reported already and outlook shows 15% improvement in first half 2016 bookings).

Sandvine and Lumenpulse have also reported results. Economically, housing starts for Canada (which traders say is unlikely to move the dial on the Canadian dollar which is oil focused) as well as initial claims (the last jobs related number before next week’s Fed meeting). BNN will have more 2016 outlooks, some small cap high tech ideas in the “disruptor” space, we’ll talk about the dollar and the results of an IIROC study into High Frequency Trading. CVE’s CEO will also join BNN.

From the analysts on the street – interesting discussion on Dollarama which had a good quarter and opened higher yesterday got pummeled on what CIBC calls “detailed” guidance that was below their forecasts and admittedly “conservative” according to the company. DOL has a history of beating its own outlook but street worried about stocks trading at about 30x earnings. RBC has a detailed report out on the short interest in specialty pharma companies. The companies with the largest % of float short positions include Insys (82%) and Lannett (36%). Biggest changes higher include Teva (+49%), Perrigo (+24.5%) while Valeant has seen its short position drop modestly.

On the U.S. active list, Men’s Wearhouse missed its Q3 numbers and looks like it will miss the next quarter as well (stock down 21%), Canadian Solar also down 14% while Adobe, Box and GoPro are modestly higher on discussions that they could be targets for Apple.

U.S. futures are higher, European markets are lower, the smart money index is high but rolling over, bonds are getting a little bit of love, gold is up, oil is flat, the Canadian dollar is a little higher.

There isn’t much to read into the action so far. Glencore is a topic of conversation as it looks potentially to IPO is agriculture assets as it pledges to cut debt further (stock up 11% in London), Uni-Select and Cott remain at the top of the performance list in Canada (+109% and 82%, respectively YTD) while the biggest bounces today may come in the mining space.

Remember that there have been three bull market bounces (+20% or more) in oil since the collapse from last June. These quick bounces are very tough to play – we’re probably due for another bounce for the very nimble only. When the turn comes, there will be plenty of time to get one board.

Enjoy the day.

What to do as the oil trade crumbles

The chase by Frances Horodelski:

It’s tough out there. The oil trade is falling apart (and taking the Canadian banks and the Canadian dollar with it) as the amount of oil sloshing around is at record levels (see below for more oil details). All 59 components of the TSX energy sub-sector were lower (led by Paramount down 23%, with Enbridge taking the most points off the index) and all 40 components of the S&P 500 energy sub-sector were also lower (led by Consol Energy down 15%). This morning we have a modest respite as oil prices are bouncing very modestly but global equity markets are lower everywhere. Some will cite weak Chinese export (-3.7%) and import (-5.6%) data although the latter was better than expected. But these are momentum trades now combined with end of year tax loss selling and positioning (don’t under estimate the impact ETFs are having on this).

Japan reported better than expected Q3 GDP numbers (revised to positive from negative) although as always with these things details and math are important to know as capital spending, for example, has been rising at the fastest pace in eight years (according to Scotia Capital) and that number was known before today’s revision. All of these tick-by-tick numbers are likely noise. Global growth is soft but generally positive. The U.S. growth trajectory is soft compared to previous cycles, but trending okay. The Fed, unless something really crazy happens, will be raising rates next week. The unknowable knock-on-effects from the end to ZIRP against a back ground of central bank divergence will make for tricky trading – and investing too.

Some energy details from Yardeni Research this morning include this nugget “a cartel that can’t control the production of its members isn’t a cartel.” True enough. According to Oil Market Intelligence OPEC production in October was a near record pace of 38.8mbpd with Non-OPEC at 57.2mbpd. The former figure is a bit of an aberration and the estimated average for the year is closer to 32-33mbd. Although consumption is rising (+2.2% to a record high in October), it isn’t enough to cause a supply constraint. And of course, Iran is coming. Oil producers have seen a huge decline in revenues – about 56% from last year’s peak or $2.1 trillion from last year’s annualized rate of $3.8 trillion. Yikes. We’ll be talking energy ratings with S&P’s analyst on the liquidity constraints for many Canadian companies – who is in good shape and who isn’t.

Today, the stories will focus on takeovers. For example, CP Rail will be holding a conference call for investors to highlight their arguments for its multi-billion dollar offer for Norfolk Southern and to refute NSC’s charges of the offer being grossly inadequate and substantially undervaluing the company. The WSJ is reporting that CP will be revising its bid offering less cash and more stock – but the cash will come sooner (May 2016) and with a temporary trust structure until the regulatory bodies approve a merger (which would take upwards of two years). Note that NSC has hired two former Surface Transportation Board officials who advise that approval is “highly unlikely to be approved.” The new offer (based on unnamed sources) is worth $91.71 U.S. (based on last night’s closes) versus $92.13 for the previous offer. Conference call begins at 9 am.

In other takeover activity (which is running at record levels), note that Staples is going to fight with the FTC over its denial of approval for its takeover of Office Depot. Nasdaq to buy Canada’s Chi-X for an undisclosed amount.

In corporate news, Home Capital Group announced a reduction in its long term ROE target to 16%+ versus 20%+ previously although its earnings growth range 8-13%) is unchanged. The company argues that its substantial equity cushion is the reason for the ROE target reduction. The Street has been modelling something close to 17% for next year and the consensus earnings growth for 2015-2017 is 2%, 5% and 8%, respectively. In Canadian economics, housing starts came in better than expected at 211,900 annualized. Housing remains a strong point.

The problem with market routs is that we all tend to get paralyzed. The babies get thrown out with the bathwater (join us for that discussion at 9 am ET this morning). I think 2016 will be a challenging year but it doesn’t mean that there aren’t some good companies that should be bought at good prices. Have a shopping list, check your numbers and make sure that you step up when the gift is given. But a plan helps.

If you’ve been using the TFSA to save, please visit http://bnn.ca for a review of the proposed changes by the new Liberal government on this savings plan which include a roll-back to $5500 for an annual contribution (from $10,000) effective January 1 2016. Contributions will be indexed to inflation. We also have an interview with Finance Minister Bill Morneau for a full discussion.

Finally, the governor of the Bank of Canada will be giving a speech today. Might be useful to get a sense of his thoughts for 2016 although the topic is on the evolution of unconventional monetary policy.

Right now the Dow futures are now some 186 points. The opening might be miserable – 2064 could be one place to watch for the S&P 500. For the S&P/TSX the 13000 level isn’t far away but may be important.

Head’s up trading.

Scammers : Missing mutual funds seller is focus of 3 investigations

VANCOUVER— At least three investigations are underway in the case of an investment dealer and former Canadian Olympic rower who has gone missing from Victoria.

Investia Financial Services Inc. has launched a probe into the activities of Harold Backer, who is also the subject of two missing-persons investigations — in his hometown and in Washington state.

The Victoria Police Department has said Backer, 52, told his wife on Nov. 3 that he was going for a bike ride but failed to return home.

“Harold’s family needs to know that he is safe,” the department said in a statement asking for the public’s help in finding Backer.

Police in Port Angeles, Wash., said last week that an officer who viewed video from a street security camera on Nov. 3 noted a man fitting Backer’s description was aboard a ferry from Victoria, a 90minute trip away.

Pierre Picard, a spokesman for Investia in Quebec City, issued a statement saying Backer has been a representative for the company since June 2005 and it has never received complaints from clients.

“Although Investia has no reason to believe that there has been any wrongdoing on the part of the representative, the company takes this situation very seriously and is conducting a full investigation into Mr. Backer’s professional activities with Investia.”

The Canadian Securities Administrators lists Backer as a seller of mutual funds in B.C. and Ontario, and its website says he agreed to be supervised. Investia said that is “in no way related to his mutual fund dealings with clients.”

“Investia’s thoughts are with the family of Mr. Backer during this difficult time,” the company said.

Backer competed in rowing in the 1984, 1988 and 1992 Olympic Games.

A report in the Victoria Times Colonist said Backer wrote a letter to his clients before he disappeared and apologized for mismanaging their money.

Reasons for yesterday’s big rally...

More job cuts in energy sector 
The chase by Frances Horodelski:

Born on this day in 1938 – Gordon Lightfoot. A favourite: “In the early morning rain with a dollar in my hand, With an aching in my heart and my pockets full of sand, Now, I'm a long way from home and I miss my loved ones so, In the early morning rain with no place to go.

There are lots of reasons for yesterday’s big rally (continuing tomorrow) but the simplest is that stocks had been falling pretty dramatically for a week and needed a respite. Drying had dried up during the decline (4.5% from intra-day peak to intra-day low November 3 through November 13 for the S&P), slicing through two major moving averages (100 dma and 200 dma) and nearing the 50. The markets were somewhat oversold. It was an opportunity. The other reason maybe that central banks will blink (the Fed) or be even more generous with liquidity (ECB). Will it last? Is there a bond buying opportunity here as well. The bulls say yes. The bears are quiet. Today, we begin with green all around the world with the exception of mainland China markets (down modestly in Shanghai).

Our news will focus on the continuation of job cuts in the energy sector – the latest includesEnbridge’s 5% reduction. At the same time, we’ll be watching its major comparative TransCanada which is having an analyst day today where TRP will focus on its portfolio of projects and the sustainability and growth of its dividend. While the stock isn’t cheap, the 5% dividend yield will be supportive in this market environment. U.S. retail will also be in focus. Westaim is also having an investor meeting today. Scotia is hosting Air Canada and CP Rail executives (among others) at its transportation conference.

Home Depot reported a decent beat $1.35 vs $1.15 last year and expectations of $1.32 and look for $5.36 for the year (the high end of its outlook range). While apparel retailers are feeling the heat of warm weather (and let’s admit it, little in the way of must have fashion trends), Home Depot (maybe Lowes this week too) are enjoying the benefit of a very strong U.S. housing market and warm weather (except, I’m sure, for shovels). HD is higher by 2.7% this morning on the numbers. Walmart’s report slightly better than expectations with five quarters in a row of same store sale gains. Outlook narrowed for the year ($4.50-$4.65 versus the street’s $4.40-$4.60 range). The stock is up 2.4% after a 2.5% jump yesterday.

It is the persistence of decline that kills you. In 1982, that’s what it felt like with stocks as the averages made new lows and then more new lows. Gold and silver (and many other commodities) feel that way today. Silver has been down 12 of the last 13 trading sessions falling 13% and feeling bottomless. Gold has also seen a relentless sell-off, down more than $100 in a month and trolling five year lows. The day the bear ended and the markets took off in the summer of 1982, it was a surprise with lots and lots of denials. Are we there yet? Don’t think so for commodities – but to state the obvious, we’re closer than we were.

Speaking of trolling, the U.S. new low list (of large cap names) from yesterday included 10 retailing names (out of 16 new lows) such as Macys, Fossil, VF Corp., Bed Bath & Beyond, the Gap, CarMax, Urban Outfitters. In Canada, the new low list includes Rona, Aimia, Alaris Royalty, Corus and Ensign.

The economic calendar is empty in Canada. In the U.S., we have inflation, industrial production, investment flow data and some housing data. European data included lackluster inflation data in the UK and a decent ZEW survey in Germany.

BNN’s line up today includes a plethora of great things including Jameson Berkow’s continuing look at Fort McMurray. We have CEOs from Skyline REIT, Kelt Exploration, Total Energy Service, Canyon as well as the Business Development Bank of Canada. We’ll also speak to a Trillion Dollar Titan – Russ Koesterich, global chief strategist at Blackrock.

Canada's New Energy 
The chase by Frances Horodelski:

I believe, I hope not naively, that the world is a better place than the events in Paris on Fridaynight. Let’s start the week with solemnity but hope for peace and light to overcome.

After a nasty week (S&P down 3.6%, TSX down 3.5%, Nasdaq down 4.3% while oil dropped 6%), the markets are stable in Europe and the U.S. futures are modestly higher. Bond prices are a little higher. Most commodities are a little stronger while currencies (except the U.S. dollar) are weak-ish. Despite concerns that the after-close announcement of the doubling of margin requirements in China would sink stocks there, the Shenzhen popped 2% The Hang Seng that trades as much with the west as the east did close 1.72% lower.

This week on BNN will be the week-long look at Canada’s New Energy beginning today. Watch for special items all week including a focus on the changes in Fort McMurray.

Here’s the results of a peripatetic walk through the blogs and the papers on the weekend. First, according to ModernGraham.com, the most undervalued of Dow stocks based on analysis of “intrinsic value” are Wal-Mart (70% of that value), Apple (45%), Travelers (43.5%) and IBM (39%). The most expensive stock: Merck (666% of intrinsic value). For those watching, with the Fed, the economic data points that justify a December rate hike, here are a few – November jobs number was the highest in a year and 100,000 jobs about the six year average, U.S. auto sales are rising at the quickest pace in a decade, housing markets are growing at the fastest pace in 15 years and the 2.5% rise in earnings is at a six year high. Rising non-market risk events could result in a “blink” but the fundamentals don’t justify it. For the stock market, from oversold to overbought to oversold again, here are some points. The ratio of highs to lows is now moving back to levels seen when the market was oversold in August/September. And the number of markets trading above their respective 200-day moving averages dropped to zero. Some use these as decent “oversold indicators”. But if you want to be bearish – look at charts of art sales (off the charts), U.S. corporate debt levels (2x levels prior to the financial crisis), corporate spreads are widening. And finally, from a New York Times article on oil (which totally erred on the inventory levels), a market pundit noted “the market isn’t pricing in any risk, geopolitical risk, for oil.”

From Barron’s (which yells “Trump is wrong” on its cover), items of note: 70% of Chinese companies missed earnings expectations in the most recent quarter (versus 75% beating in North America); Bonds bulls are at an anemic 58% (some technicians are saying bonds should be bought), the biggest big board shorts are in General Electric, Corning and Synchrony (the first and third of these connected through a tender offer), Tempur Sealy (highlighted bullishly in the magazine) has 10,000 stock keeping units (SKUs). 10,000! Mattresses! For every 1% move in interest rates, Bank of America revenue changes by $4.5 billion (or 5%). Other bullish stories include Emerson and Genesee & Wyoming Railroad.

This week, items of note include the continuation of retail earnings (Home Depot, Walmart, Lowes in the U.S., Loblaws and Metro in Canada as well as Canadian retail sales at the end of the week), IPO prices for hot deals like Square and Match.com (Wednesday), Kelloggs meets with analysts on Friday (I like the new Special K commercial), Cisco’s new CEO meets with analysts on Thursday), CPR’s President and COO speaks at a conference in Toronto on Tuesday (and BNN will be speaking with him too), The annual Robin Hood conference starts today in New York – Bill Ackman and Jamie Dimon will be there. Today, we’ll have an indepth look at 13F activity. For reference, there were lots of sales and lots of purchases in Valeant during the quarter – some stand outs include initiation of positions at Teachers, Arrow Street, Point 72 and Iguana Health. Sequoia Fund added 2 million shares. For Suncor, William Blair Investment Management initiated a position with 8.3 million shares and Findlay Park almost tripled its position to 6.1 million from 2.1 million shares. We’ll speak to the CEO of DHX Media. We’ll talk energy, we’ll speak to a trillion dollar titan and get lots of Canadian perspective and ideas. Big hotel deal today with Marriott buying Starwood for more than $12 billion. The week begins.

Finally, don’t trust what you read and check the facts. There was a Facebook post circling the globe about the nasty events that closed last week – and nasty it was – Paris, Beirut, Baghdad, Mexico, Japan (the latter were earthquakes). But the conclusion was that 115,000 people had died in all these horrible events. Each life lost is precious – don’t worsen that loss by over-estimating death tolls. Heartless.

Short seller accuses drug giant Valeant of fraud

Price of Valeant shares swelled by 2,631 per cent before plunge wiped out $50 billion in value

 

The share-price meltdown at Montreal-based Valeant Pharmaceuticals International Inc. serves at least one useful purpose. It’s a primer on stocks to avoid.

Valeant, the largest Canadian drugmaker, has been a stock-market darling, its shares skyrocketing in price by 2,631 per cent between 2008 and August of this year.

But the stock has plummeted since reaching its peak value of $263.52 (U.S.) per share in August to its current $111.51. That’s a two-thirds plunge, wiping out close to $50 billion in shareholder value.

No fewer than six U.S. government probes are underway into alleged Valeant price-gouging; unusual accounting and acquisition practices; and alleged bilking of Medicaid, the U.S. program that provides assistance to the poor and elderly.

Valeant stock began to soar after Valeant appointed as its turnaround CEO one J. Michael Pearson, 54, a London, Ont., native and son of a phone installer. Pearson propelled himself from a lower-middle-class upbringing to a 23-year career at management consulting firm McKinsey & Co. Pearson eventually headed McKinsey’s global pharmaceutical practice.

A troubled Valeant, then based in California, was so impressed with Pearson, its McKinsey consultant, that it hired him as CEO in 2008. Pearson’s business plan at Valeant hasn’t changed since Day One. 

 
He cut the company’s R&D budget to less than 5 per cent of revenues. (Pfizer Inc., by comparison, spends the industry norm of 14 per cent.) He began buying scores of small, run-down drugmakers that possessed one or two potentially lucrative drugs in their otherwise dustgathering product lines.

Quebec-based Valeant’s business model of buying drugmakers and hiking prices on their products created unsustainable growth, David Olive writes.

Pearson immediately hiked the prices of those selected drugs by as much as 500 per cent, while laying off many of the acquired companies’ employees.

In 2010, Pearson engineered a reverse takeover of Montreal-based Biovail Corp. Valeant inherited Biovail’s lingering legal woes, including the recent U.S. probe into possible Medicaid fraud. But in acquiring Biovail, Pearson was able to domicile Valeant outside the U.S., in a corporate-friendly Canada where Valeant’s tax rate dropped to 5 per cent.

Valeant isn’t alone in the drug industry’s relatively new practice of imposing outrageous price hikes. But, as the New York Times recently noted, “the company leading the pack in drug-price increases is Canada-based Valeant.” Fair enough. Between 2011 and 2015, Valeant raised prices on its drugs by 20 per cent at least 122 times.

Why haven’t prospective buyers balked at Valeant’s apparent pricegouging? Some have.

Express Scripts and CVS Health, the two biggest U.S. drug benefit managers, said this year that they would no longer pay for drugs whose sticker shock was not accompanied by any improvement. That describes most of the products peddled by Valeant, Horizon Pharma, Mallinckrodt PLC and other firms in this unattractive niche.

Pearson has snapped up obscure drugs that are used by small patient populations, are life-saving drugs and for which there are few if any alternatives. On Feb. 10, for instance, Valeant bought the rights to two life-saving heart drugs, Nitropress and Isuprel. That same day, Valeant hiked their prices by 525 per cent and 212 per cent, respectively, without doing a thing to improve their efficacy.

These two drugs have been around for decades. Isuprel is used in treating heart-rhythm abnormalities, and Nitropress is administered in emergencies when a patient’s blood pressure has increased to lifethreatening levels. Doctors insist there are few reliable alternatives to these drugs.

But baked into the Valeant business model are dangers. Acquisition targets with hidden gems might dry up. And eventually there could be pushback on spectacular pricehikes, from the U.S. medical community and consumer-rights regulators such as the U.S. Federal Trade Commission.

That backlash has indeed begun, with several drugmakers this summer rolling back triple-digit price hikes within days of trying to impose them.

Where does that leave Valeant, whose M.O. is to maintain its shareprice momentum purely through nosebleed pricing of highly specialized medications? With financial engineering, claims Citron Research, a short seller based in Beverly Hills, Calif.

Short sellers have a bias. They are trying to drive down the price of a stock.

That said, the “shorts” are often right in calling out bad corporate actors.

On Oct. 19, Citron accused Valeant of engaging in fraud, saying it has been propping up its reported sales figures by making “phantom sales” to a network of shell companies. That is a commonplace, if dubious, practice known as “channel stuffing.”

Valeant denies the Citron allegations, which Pearson says are “completely untrue.”

Just the same, an already declining Valeant share price fell off a cliff the day Citron’s allegations were released. And there’s plenty more downside risk to Valeant’s current $111.51 share price, given the U.S. government probes and the likelihood of class-action lawsuits against Valeant.

Do investors really need reminding to stay clear of stocks like Valeant? Yes, obviously.

Valeant has a debt load of about $30 billion resulting from its scores of junk-bond-financed acquisitions. The peak $90-billion valuation that credulous investors placed on a company with a debt-equity ratio so radically out of whack was a triumph of hope — or greed — over experience.

That same lofty stock valuation was placed on a Valeant that lost a staggering total of $1 billion in 2012 and 2013, on sales that, to that point, hadn’t surpassed $6 billion. Any enterprise losing $1 for every $6 it takes in is flirting with a one-way trip to the bone yard.

Growth exclusively by acquisition is a sign that a company can’t or doesn’t care to manage its existing operations. That kind of growth is unsustainable.

Valeant’s revenue growth has exceeded profit growth by a wide margin. Any dealmaker can add sales growth by simply buying another company. A dealmaker CEO always has dozens of deals in his head, and hasn’t the time to properly manage the companies he has bought.

Don’t buy a stock because the “smart money” is doing so. Among the many prominent investors in Valeant are funds controlled by U.S. activist investor Bill Ackman, which have taken a $9.3-billion paper loss on the company.

And don’t expect your broker to save you. On Oct. 22, BMO Capital Markets, an erstwhile cheerleader of Valeant’s “limited R&D and aggressive M&A-driven strategy,” downgraded Valeant stock, saying “we cannot defend” Valeant’s business model.

By that point, Valeant shares had already lost close to 60 per cent of their value.