Beaten down Weston, Loblaw cheap at the moment

Beaten down Weston, Loblaw cheap at the moment


Dianne Maley
Wednesday, August 26, 2009

The Source:

Paul Gardner, partner and portfolio manager, Avenue Investment Management Inc.

The Idea:

Buy shares of George Weston Ltd.

Given how much stocks and bonds have rallied from their recent lows – 40 per cent to 50 per cent in some cases – good buys are difficult to find, Mr. Gardner says.

“You have to hope the economy comes out of recession because that's what the markets are pricing in.”

An ideal investment candidate would be a company with a strong balance sheet, trading at an attractive price that has the ability to grow. “That's where Weston comes in,” he says. At just shy of $57 a share and yielding 2.6 per cent, “It's a value trade,” he says. Weston shares traded in the $80 range as recently as 2007.


Weston's main asset is the grocery retailer, Loblaw Cos. Ltd., which accounts for about $44 of Weston's $57 share price, he estimates. Weston has $10 a share in cash, largely from the sale of its U.S. bakery business. Add about $2 a share for the real estate under Loblaws stores and, “You're getting what's left, the bakery business in Canada, for next to nothing.” That business earned $1.50 of Weston's earnings before interest, taxes, depreciation and amortization (EBITDA) last year.

Loblaw, at about $33, is also looking cheap, Mr. Gardner figures. After subtracting the value of the company's real estate, which accounts for about $25 of a Loblaw share, “in a way you're getting Loblaw for next to nothing” too, he says. Loblaw shares have been held back over the past few years because of management and supply chain problems, issues Mr. Gardner thinks have been largely resolved. This year, the shares have been lifted along with the market but are still well below their historic highs.

“They've worked on the supply chain and warehousing problems, renovated stores and initiated real change on the operational side,” he notes. The company's second quarter earnings “surprised on the upside,” although it warned of a difficult second half.

Loblaw is also expanding into the ethnic food market, announcing the purchase of T&T Supermarket, with 17 stores, in July. (Loblaw also owns Zehrs, Fortinos and Real Canadian Superstores.) T&T's big takeout Chinese food business “gives them some higher margins.”

The Payoff:

A potential double-digit capital gain in a relatively short time if the economy recovers, price cutting abates and Loblaw and George Weston shares come to be looked on more favourably by the market, Mr. Gardner says. What would a more “normal valuation” for Weston be?

“I don't like to put a number on it, but you could see a 30-per-cent return over the next year and a half.”

The Big Risk:

Fierce price cutting among grocery retailers squeezes profits more than expected at Loblaw as the economy struggles, leading to a long stretch of disappointing earnings and depressing the share price of both Loblaw and its parent, Weston.

Why Listen to Paul Gardner?

Mr. Gardner has more than 20 years' experience in the investment business, much of it on the fixed-income side. Avenue Investment Management is an independent investment counsellor and portfolio manager for individuals with $500,000 or more to invest.

© Copyright The Globe and Mail

TSX may rise with commodity prices, eyes CIBC

CANADA STOCKS-TSX may rise with commodity prices, eyes CIBC


08:12 EDT Wednesday, August 26, 2009

TORONTO, Aug 26 (Reuters) - Toronto's main stock index may rise at the open on Wednesday, bolstered by higher commodity prices, while investors will also digest quarterly results from Canadian Imperial Bank of Commerce .

The S&P/TSX composite index <.GSPTSE> finished Tuesday's session 1.21 percent higher at 10,920.53, boosted by financials as Bank of Montreal reported solid results.

Quarterly results from the country's big banks this week remain the key focus for market direction. Financials are the most heavily-weighted group on the TSX, about a third of the weighting.

Here is some of the news that may affect the market.

CIBC

Canadian Imperial Bank of Commerce, the country's fifth-largest bank, reported a higher quarterly profit, mainly on strong performance of its core retail and wholesale banking businesses and lower expenses. [ID:nN24133906]

ELDORADO GOLD

Eldorado Gold Corp said it will buy Sino Gold Mining for C$2.0 billion, in an all-share transaction to give it greater exposure to China's growing gold industry. The offer was worth A$7.24 per Sino Gold share, a premium of 21.3 percent, based on the companies' closing share prices on Tuesday. [ID:nSYD472825]

COMMODITIES

Gold rose towards $950 an ounce as the dollar weakened against the euro, boosting interest in the precious metal as an alternative asset. [ID:nLQ723905] Oil prices recovered early losses but remained below the 10-month high hit in the previous session. [ID:nSP475982]

CAE

Flight simulator maker and aviation training company CAE Inc said it received a series of military contracts valued at more than C$100 million. Key customers included Eurocopter, Airbus Military and L-3 Communications Holdings Inc , the company said. [ID:nBNG489391]

RESEARCH ROUNDUP:

Following is a summary of research actions on Canadian companies reported by Reuters on Wednesday. For more, please double click [RCH/CA]

* Genuity raises Bank of Montreal price target

* RBC raises Alimentation Couche Tard price target

($1=$1.09 Canadian)

(Reporting by Ka Yan Ng, Editing by Chizu Nomiyama)

Petrolifera rolls on desperation financing

Petrolifera rolls on desperation financing
Andrew Willis
RTGAM






Shedding debt can be tough on equity holders, as Petrolifera Petroleum showed with a recent financing.

Petrolifera found itself in a bind after cancelling a planned sale of oil and gas properties in Argentina. The properties went on the block as the junior oil company moved to pay down loans, only to find there no buyers at an acceptable price. Tristone Capital was the financial advisor on the failed sale.

A debt-heavy balance sheet meant a sea change in sentiment on Petrolifera, which was a market darling last summer, selling stock at $9.

This year, the stock has underperformed oil and gas peers, touching lows of 75 cents.

To put its finances back in order, Petrolifera raised $50-million in a deal that closed last week/ The company sold 56.8 million units at 88 cents each. Each unit consists of a Petrolifera share and half a warrant, and the warrant can be converted into stock at $1.20 per share over the next two years.

Thomas Weisel Partners, Cormark Securities and RBC Dominion Securities led the financing. Connacher Oil and Gas, a minority shareholder, bought a portion of the underwriting to maintain a 24 per cent stake in Petrolifera.

"While highly dilutive, the financing materially improves Petrolifera's balance sheet," said a report Monday from CIBC World Markets analyst Robert Par�. He said the company now has considerable financial flexibility, with $50-million available on a $100-million credit facility, and Mr. Par� has a $1 target price on the stock, down from $1.50, to reflect the dilution that came with last week's financing

Gold Bugs AN INTERVIEW WITH BOB HOYE

AN INTERVIEW WITH BOB HOYE AND D. PESCOD

We are here today with Bob Hoye, who writes “Pivotal
Events” and he is one of those guys that had actually pre-
dicted what we’ve gone through for much of the last year.
And was it ugly! Now things seem to be going back to a
little bit of normality, and Bob is still not all that comfort-
able looking forward.

Dave Pescod: Bob, one thing that you do see with a good
future down the road is gold. First of all, how good do
you see it? Secondly, how long?

Bob Hoye: The thing about gold is that it is backwards to
what the gold bugs think. They get this idea that if the
U.S. dollar is going to go to zero, the price of gold will go
to $10,000. The gold miners will make so much money it
will make your head spin. The thing that they are missing
out is that for the last 20 years or so, every time the dollar
has been hit hard, commodities outperform gold on the
way up. If you have commodities such as crude oil out-
performing gold on the way up, then the cost of mining
gold is going up. So the ideal condition for your basic
gold bug is backwards.

What you want to do is watch
what happens and study previous post-bubble contrac-
tions and the evidence is reliable over 300 years. On
every bubble, the real price of gold declines and gold min-
ing underperforms the market because everybody is in
love with base metals, stocks and high-tech stocks.

Once the bubble is over, then the price of gold outperforms eve-
rything else as stocks, corporate bonds and commodities
head down.

That then restores profitability to the gold
mining business. This is where we are now.
With the belated boom our gold divided by commodity
index declined to 143 in May of 2007 and it was that May
and June that we were also expecting the credit market to
reverse eventually to a disaster.

So what you’ve had
since that spring is the real price of gold went up, and the
credit markets went down and commodities went down.

By our index, the real price of gold got up to over 500 and

then we saw that the crash was getting close to ending in
which case things could get rather good until around mid-

With the good stuff coming back into the orthodox world,

our real price of gold then has declined to about 300.

The main thing is on gold is just that increase over the

last two years reflects an increase in operating margins

and it has not been fully priced into the senior stocks

yet. The reason for that on the initial rebound out of the

disaster, we figured that most stock sectors would out-

perform gold stocks. Once this daylight in here rolls

over, then stocks and corporate bonds and commodities

are going to head down. That won’t be good for gold

stocks, but what it is building to is by late in the year,

this could be another disaster in which case it’s time to

be buying your favorite gold stock from the seniors

down to the juniors.

What you end up with in a few years after the top of any

bubble, the gold stocks will be very much up and the rest

of the stock market i.e.: New York and Toronto will be

very much down. This is just not imagination going be-

cause this is the way gold, the real price, and gold min-

ing stocks have performed through and following previ-

ous great bubbles.

D.P: Now according to your issue of August 6th, you

were expecting gold and related shares to start doing

some significant moving, potentially as early as the New

Year. You have these own ratios that you’ve got in the

gold price, but for the average investor out there, what

kind of a gold price and American dollar do you think

we’ll be looking at down the road?

B.H: It’s already gone up significantly in real terms. It

will go up and continue to go up. In previous post-

bubble contractions (can be called Great Depressions)

they’ve lasted for about 20 years and through that period

gold mining became the premier and the most reliable

side of the economy. So this one is what we are shaping

up for. There is very little point in forecasting the price

of gold in dollar terms. For those who want to trade gold

against US dollars or gold against Canadian dollars or

gold against sterling or gold again the Yen, go ahead –

do it. But if you want to invest and make some money

out of the gold mining business, you will watch the real

price of gold.

Most gold-bug clichés are just distraction.

D.P: Another commodity that you have been looking at

as well is oil. I think a lot of peak oil people or people in

Calgary will be a little concerned when you use the anal-

ogy of oil to peak coal?

B.H: Yeah! In a long period of rising prices, intellectu-

als go weird! The 1860’s were the end of a 20-year pe-

riod of rising prices when prices went up and politics

got hysterical.

The leading economist of the day was

Stanley Jevons and he did some important work in eco-

nomics, but he also suddenly came up with a personal

revelation that the world was about to run out of coal.

He calculated all of the reserves and all the mines in

England and Wales and Europe and he assumed a min-

ing depth of 4000 feet and said the world was going to

run out of coal and civilization as they knew it, will end.

We will all go back to hardship and hard labor and all

that sort of stuff. Then he flattered his readers in his

book called “The Coal Question” by saying that you had

to have a special intellect to be able to understand the

disappearance of coal and that is was almost a religious

experience! Now the thing that Jevons didn’t grasp was

that you had exceptionally high prices at the end of a

long period of rapid price inflation.

And then it all goes

away and nature being what it is, there are still ample

reserves of coal. The price will go up and down and I

expect the same parallel would work on the guys who

dressed up this peak oil thing. The work that Jevons did

was painstaking in documenting all of the reserves and

he proved that they were going to run out!

D.P: If you were someone advising Calgary, you’d be

saying that oil could see $50 again or is it worse?

B.H: Probably worse. We had sort of a favorable sea-

son through the summer for crude oil and we had an

overbought (a couple of months ago) at first to $73 and

expected a correction. That’s run its course, but now

what we’ve got is that we are at an important low for the

U.S. dollar index.

It stabilized the last few days, so it’s

not like anybody is going to firm up the U.S. dollar. What

it seems to be is that when the street wants to speculate

in oil or base metals, then the dollar will go down. Then

when that speculation has run its course, then the dollar

goes up. Last year, one of the best calls we did based

on this historical work was that we were expecting the

deterioration in the credit markets would continue. Last

fall, we expected another 1873, 1929 crash which we did

get. We knew that in both of those crashes in the fall,

the price of gold fell with the crash and so did gold

stocks. So it was very easy this time around to say yeah

– if we have another crash, the price of gold is going to

go down…like it did.

So at any rate, the credit markets have been quite

happy lately along with the recovery being quite ani-

mated and is close to running its course, so I think that

you can have another credit crisis and it could get

rather nasty in the fall and I think you will see most

stock sectors go down including the gold sector. What

we do when we see the probability of that is to advise

people to lighten up on the senior gold’s. If you had

some really good joy in some small cap stocks, great –

take some money off the table and short the big silver

stocks. On any hit in a post-bubble credit contraction,

silver will plunge relative to gold.

That’s what we had

last year. So you can make some nice money being

short silver stocks and then reposition in gold stocks

on the next low.

D.P: All this is rather depressing. Are you suggesting

down the road we are going to see 15% unemployment

and businesses going bust all over?

B.H: You know that last fall the establishment was very

quick to defend itself by saying this is not another de-

pression because in the last depression, unemploy-

ment got to 25%. Unemployment didn’t get to 25% until

1933, so what you are interested in is what the rate of

unemployment is the year after the stock market had

its high. It was 9% in 1930 and now it’s around 9%, but

that’s on a new calculation of unemployment. I just

saw one today by John Williams and if you use the old

method of 15 years ago, we are already at 12% or 14%

in the U.S.

D.P: So an average person these days should be

what? And once again, the key work is “average” per-

son…

B.H: The average person’s portfolio whether it is in an

RRSP or not will have had a very good appreciation

since the disaster ended in early March.

Time to take

some money off the table on most stock groups. On

corporate bonds – they have had a fabulous rally. Junk

bonds were yielding 10% at the high of the market in

October 2007 and early March they were yielding 42%.

A bond at par would have fallen to about $28.00 and

now it has rallied all the way to a 17% yield.

The whole

world is playing it leveraged so if you have any of these

lovely corporate bonds, long-dated, it is time to get out.

If you are long commodities, it’s time to get out and

then I would apply that money to your mortgage and

your house to get rid of debt.