Wednesday, October 31, 2012

What Makes the Perfect Stock? Five Key Components.

There are a lot of different factors that combine to make the perfect stock, and even then, there is no guarantee of success. Nonetheless, this article will try to identify some key components every investor should consider when hunting for the next money-making opportunity.
 
What to look for in your next stock investment?
 
1. Growth: Healthy growth in revenue is a good start for any quality investment. Preferably, a rate of 15% over the last five years would be ideal, but sometimes there may be glitches along the way due to recessions and business restructuring.
 
2. Profit Margins: How much money the company actually earns in profit for each dollar the company generates in revenue. Somewhere in the range of 15% or more would be healthy, and provide some cushion for pricing pressure and new competition in the market. Some businesses, like grocery stores, however, have chronically low profit margins, which is evidence of stiff market competition.  
 
3. Balance Sheet: Essentially, the more money the company has borrowed, the less of a stake in the company its shareholders have should things turn south. Try to find a company that has a lot of assets compared to its liabilities. If a company has no long-term debt, that would be ideal, but of course this is rare. A debt-to-equity ratio is often utilized in this area, and if so, try and keep it below 50% debt.
 
4. Valuation: This is generally a comparison of the price of the stock in relation to its earnings. Anything over 20 times a 3-5 year earnings average is too expensive for most businesses, and under 15 times would be best as long as the company displays other signs of health, like those mentioned above.
 
5. Dividends: A dividend is how much money the company returns in cash to its shareholders. Dividends vary widely, and it is important to remain principled in this area. It is easy to go chasing stocks that do not pay a dividend, but it can become dangerous as dividends can be used as a good indicator of overall financial health. Ideally, a dividend of over 2% would be considered healthy.
 
Cheers,
 
Happy Investing Intelligent Investors, and please remember to share this blog with others!
 
Matthew.

Sunday, October 21, 2012

Why Gold? Inflation and the Dollar.

During economic uncertainty it has become essentially economics canon to purchase and stockpile gold as an investment or hedge. Why is this the case? Clearly, gold has little or no practical uses. Of course, it used as jewellery, and has a number of uses in the field of electronics manufacturing, but not nearly enough to support present-day production and supply. 

Prior to Nixon removing America from the gold standard in 1971, the U.S. dollar was pegged at $35 per ounce of gold. After 1971, the U.S. dollar essentially became a free-floating currency backed by nothing but our imagination. To help hedge against this uncertainty, it became increasingly important for a lot of investors and wealthy individuals to store a certain amount of their savings or reserves in the form of gold to prevent being stung by a collapse in the U.S. dollar. 


Currently at $1721, gold has continued its stratospheric move upward, primarily due to perceived instability and over-supply of the U.S. dollar. So why do people buy gold? They expect inflation, or a general decline in the purchasing power of their currency. One ounce of gold, for instance, could buy a fine suit in 1971 and in 2012, but in dollar terms, the same suit would have increased in cost from less than $100 to $1700... If someone had held their reserves or savings in cash during this period, their buying power would have essentially completely collapsed. If, therefore, you have a reasonable amount of savings, you do not want to hold it in cash or low-interest savings accounts for any extended period of time! It is almost guaranteed to lose its value.

Some other more generalized reasons for why people choose to invest in gold are as follows:

  • It is durable - it doesn't corrode.
  • It is divisible and homogeneous - you can break it up into smaller amounts.
  • It is easily recognisable and hard to counterfeit.
  • It has a stable supply because it is hard to get out of the ground.
  • It is portable.
  • It has a strong history accepted as a medium to facilitate exchanges. 
Keep in mind, however, that gold does experience wild swings in popularity amongst both central governments and investors, and thus can leave even astute and Intelligent Investors in substantial negative territory for some time in dollar terms. So buying gold is not a sure-fire way to curb against inflation, but included in a basket of resources it is a nice start.

Cheers and happy investing!

Matthew. 

Saturday, October 20, 2012

HP (NYSE:HPQ): Un-Loved and Under-Appreciated.

Investors have driven shares in HP down over 41% this last year, and down over 71% in a five year period. The turnaround plan under Meg Whitman seems to be going nowhere, and investors are concerned that a trend toward tablets will destroy personal computer sales. We are seeing this same concern drive down shares in both Intel and Microsoft as well recently.
 
There are, however, some things to love about Hewlett Packard:
 
1) The company is expected to earn over $7 Billion in profits next year. With a market capitalization currently of about $28 Billion, that represents a multiple of only 4 times! Paying four times earnings for a company represents an earnings yield on your investment of 25%! Not bad for a brand-name technology titan that definitely has the balance sheet to stay competitive for some time to come.
 
2) The company recognizes that it is facing problems, is not in denial, and is actively engaging in cost-cutting and turnaround efforts.
 
3) The company pays a dividend of 3.65%. In today's low-rate environment a dividend over 3% represents a reasonable return on your savings, and since the company is currently trading at a low multiple to next year's earnings, there is up-side potential in the stock as well.
 
4) The company is #1 or #2 in a wide number of product markets. Though many think of HP as primarily a PC manufacturer, it has leading positions in servers, storage, networking, software, systems management, and printers as well. Essentially, the company began diversification efforts long-ago, and they have paid-off. As PC sales decline, other units of the company should be able to pick up the slack.
 
Of course, no technology investment is without a higher degree of risk, but HP is definitely worth a look for the Intelligent Investor.
 
Cheers, and happy investing!
 
Matthew.  

Monday, October 1, 2012

Tim Horton's Rises in Zagat Survey. Now 5th in the United States. Expansion Continues.

Tim Horton's is now listed as one of the best fast-food restaurants south of the border. Having put itself up against stiff and entrenched competition from global super-powers, such as Starbucks and McDonald's, Tim's has proven itself to be a formidable Canadian competitor.

Last year, Tim Horton's was ranked 22nd in the same survey, so this represents a small victory for the Canadian chain. Brand recognition is still nowhere near as strong as it is north of the border, but it is successfully using its Canadian stronghold to pour resources into the American market.

There are now over 700 Tim's locations in the United States, and another 80 to 100 Tim Horton's stores will be added in 2012.

Intelligent Investors, be sure to keep a pulse on Tim Horton's shares as they further expand in the United States. The American market is huge and has lots of opportunity.

Cheers,

Matthew.

Sent with the BlackBerry Bold 9900.

Monday, September 17, 2012

Cash Rich Canadian Companies.

Bank of Canada governor Mark Carney has been complaining recently that Canadian businesses are not doing their fair share to boost the economy. He is demanding that they spend some of their cash hoards, or return it to shareholders in the form of dividends so that they can spend it.

About 70 percent of all economic growth is from personal consumption, so the governor's words are warranted in the sense that cash sitting in corporate bank accounts cannot exactly help you and I go buy more stuff to boost national GDP. But what is the other alternative? Raise corporate taxes and use the increased government revenue to pay for infrastructure development and other government programs... Most business leaders, however, would protest at the prospect of tax increases so loudly that any common sense would be quickly thrown aside.

So who are the cash-rich Canadian companies referred to so much by Mark Carney? Below I have listed some of the biggest:

George Weston Ltd. ($3.6 Billion)

Air Canada ($2.38 Billion)

Research in Motion ($1.9 Billion)

Suncor ($5.1 Billion)

Teck Resources ($3.64 Billion)

Bombardier ($2.47 Billion)

For the Intelligent Investor, try to always keep a nice portion of your portfolio concentrated in cash-rich enterprises. As a shareholder, their bank account is your bank account, and you want to make sure to avoid businesses with a poor record of accumulating and saving cash on the side for emergencies.

Cheers, and Happy Investing!

Wednesday, September 12, 2012

Acquisitions are Good Investment Catalysts for Canadian Investors. Shoppers Drug Mart, Bell Alliant, Manitoba Telecom, and Corus Could be Potential Targets.

One of the most important things to examine regarding a potential investment opportunity is whether or not there might be a catalyst in the coming months or years. What do I mean by a catalyst? Something that will cause the price of the stock, and the associated value of your investment, to change. Potential catalysts might be a dividend increase, an upward revision or increase in a company's earnings guidance, a new product development et. cetera. Another key catalyst, and one which will be examined in this posting is that of a potential acquisition.

A potential acquisition generally causes an upward movement in the price of the company being acquired, and often a downward movement in price for the company making the purchase. Why? Existing shareholders of the company being acquired need to be compensated enough to encourage them to want to sell their stock, and the company making the purchase often has to pay well-over fair or book value for the company it is buying in order to get the shareholders to agree to the offer. 

Are there any Canadian companies that might be the target of an acquisition going forward?

Below I have listed four Canadian companies that appear to be nice targets for a number of large and cash-rich businesses:

1) Shoppers Drug Mart (TSE:SC)

Shoppers is a healthy and profitable company with a loyal following. U.S. Based Walgreen Company (NYSE:WAG) is poised for Canadian expansion. 

2) Bell Alliant (TSE:BA)

A declining land-line revenue stream, but an acquisition hungry and cash-rich partner in Bell Canada Enterprises (TSE:BCE). 

3) Manitoba Telecom (TSE:MBT)

With limited growth, and a declining land-line revenue stream, Manitoba Telecom management could look kindly to cash-in and take a healthy buyout from Telus (TSE:T) or Bell (TSE:BCE).

4) Corus Entertainment (TSE:CJR.B)

With the rampant media consolidation happening in Canada right now, Shaw Communications (TSE:SJR.B) would be a likely suitor for Corus.

Full Disclosure: Matthew Clarke owns or indirectly controls shares in Shoppers Drug Mart and Bell Canada. 

Thursday, August 16, 2012

Maple Leafs, Toronto FC, the Raptors, and the Marlies Under the Control of Bell and Rogers. Great Cash-Flow for Bell (TSE:BCE) and Rogers (TSE:RCI.B).

Good news for owners of Bell (TSE:BCE) and Rogers (TSE:RCI.B) today as the CRTC has approved their purchase of Maple Leaf Sports and Entertainment (MLSE).

As part of the conditions to the approval, Bell and Rogers have to invest $7.5 million over the next seven years on new sports themed programming by independent Canadian producers. Essentially, a drop in the bucket for the billion dollar Canadian media titans.

MLSE, and now Rogers and Bell, own the Toronto Maple Leafs, the Toronto Raptors, the Toronto FC, the Toronto Marlies, Leafs TV, Gol TV and NBA TV Canada, as well as two other services that have not yet launched. As a whole, MLSE will be a cash-cow for its new owners, and an excellent source of new incomes for future dividend increases.

Since Rogers already owns the Toronto Blue Jays, the Rogers Centre, and Sportsnet, and Bell owns CTV and TSN, as well as a minority ownership stake in the Montreal Canadiens, the two companies are cementing a dominating position in Canadian media and entertainment.

Both Bell and Rogers already support healthy dividends and solid business franchises. The new acquisition bodes well for Intelligent Investors if they are looking for reliable income and cash-flow generation.

Full Disclosure: Matthew Clarke owns or indirectly controls shares in Bell Canada (TSE:BCE).

Wednesday, August 15, 2012

Great-West Life (TSE:GWO) Poised for Continued Growth and Dividends. Upgraded to Buy by Catalyst Research.

Canadian based insurer Great-West Life (TSE:GWO) has been upgraded to a buy by Catalyst Research. In their recent report, they noted that Great-West Life is "operating above expectations" and that the insurer "continues to be a steady earnings performer." 

1 Year Performance for Great-West Lifeco
Chart from Big Charts

Earnings per share for the last quarter rose 8%, and operating return on equity is close to 16%, the highest among Canada's life insurance companies. Earnings for 2012 are expected to be in the range of $2.05 per share, and with shares currently selling for about $22, that represents a significant value for shareholders. 

At only 10 times 2012 earnings, Great-West Life provides an excellent earnings stream to its owners at a better valuation than the overall market and many other financial companies. 

The dividend payout ratio (or percentage of the company's earnings that are returned to shareholders in the form of a dividend payment) is expected to be 55%, which is fairly low and sustainable over the longer-term. What is Great-West Life's Dividend Yield? 5.5%! In today's current low-yield environment, a dividend of this stature is hard to pass up, especially when it is backed by healthy earnings power.

For the Intelligent Investor, Great-West represents a strong value and a disciplined choice. 

Cheers and Happy Investing. 

Full Disclosure: Matthew Clarke owns or indirectly controls shares in Great West Life (TSE:GWO). 

Tuesday, August 14, 2012

Netflix CEO Buys More Facebook (Nasdaq:FB). Is Facebook a Good Value? Or are Other Technology Companies Cheaper?

Netflix (Nasdaq:NFLX) CEO Reed Hastings bought 48,000 shares of Facebook (Nasdaq:FB) last week at a price of $21 per share. Hastings already holds about 20,000 shares, which brings his holdings to about $1.5 million.

Hastings currently owns $62 million of Netflix stock, and $5.4 million of Microsoft (Nasdaq:MSFT), so Facebook is not one of his larger holdings. Generally, an insider (like a member of the board of directors) is seen as a positive sign for a company's health. Insiders should know more than the general public, so if they are buying, perhaps they know some good news that might be on the way.

Does Hastings know something that we know? Perhaps, but that does not necessarily mean that Facebook is a good investment at today's levels... and certainly not at its IPO price of nearly $40. Since making their d├ębut on the market, Facebook has lost nearly 50% of its value. Once thought to be a $100 billion company, the shares are now worth about $40 billion.

Facebook is cash-flow positive to the tune of about $639 million over the last 12 months, but technology requires continued and significant investments in research and development to stay competitive... so the valuation has to be right to invest.

Facebook Cash Flows:



So what is a good value for Facebook? Most people have no idea! And that should be scary for any investor. Sure, it has about 900 million users... but how many will continue using Facebook? How many accounts are doubles or fakes? How many users actually click on the advertisements? How many new users will join once it is solidified as the social networking tool for old fogies that graduated from school years ago?

Are there other technology companies cheaper than Facebook? Google (Nasdaq:GOOG), Microsoft (Nasdaq:MSFT), Intel (Nasdaq:INTC), Oracle (Nasdaq:ORCL), Apple (Nasdaq:AAPL), Cisco (Nasdaq:CSCO), the list goes on and on and on...

Cheers and Happy Investing Intelligent Investors.

Home-Depot (NYSE:HD) Reaches Turning Point. Richelieu Hardware (TSE:RCH) a More Interesting Investment.

Atlanta based Home-Depot (NYSE:HD) announced a 12 percent increase in earnings and a positive outlook for the remainder of the year.

Home-Depot, the largest home improvement retailer in he world, struggled under the weight of the American housing collapse, but now looks poised for continued strength going forward.

Citing its performance this year, Home-Depot raised its earnings guidance to a respectable $2.95 per share. At a price of $54 per share, that represents a valuation of 18 times one year of earnings. For a fairly mature retailer, a valuation of 18 times earnings is not cheap, so at present levels growth in earnings would be needed for the Intelligent Investor.

The balance sheet of Home-Depot, however, is clean, with about $10 to $11 billion in long-term debt under assets of about $40 billion, so there is little concern in this area:




Should the housing market continue to improve, Home-Depot will show more strength, but since the stock is already up almost 80% during the past year, an improvement in the American housing market is clearly already priced into the shares.

For those interested in something a little off the beaten path in the hardware area, investigate Richelieu Hardware Ltd., (TSE:RCH) a Canadian concern with steady growth, a reasonable valuation, and little debt.

Cheers Intelligent Investors.

Tuesday, July 31, 2012

Lowe's Attempts Hostile Takeover of Rona. Quebec Government Vows to Protect the Canadian Company.

American based Lowe's announced an offer to buy Canadian based Rona for $14.50 per share. Lowe's (NYSE:LOW) is seeking to acquire all outstanding shares of Rona (TSE:RON), which amounts to about $1.78 billion. If accepted by Rona's shareholders, the acquisition would mark a massive expansion for Lowe's into Canada, but would only amount to about 6% of the U.S. based businesses $30 billion market capitalization.

Rona's Board of Directors has unanimously refused the bid, and is advising that shareholders do the same.

Interestingly, the Quebec government has announced that it might intervene to block the offer from Lowe's as it is is not seen to be in the best interests of the province. The Quebec government has already contacted Rona and informed the directors that the provincial government will provide all necessary assistance in helping the company fend off American takeover. 

Thursday, July 19, 2012

American Conglomerate GE to Develop Home Natural Gas Stations for Cars. United States Government Money to be Invested.

American conglomerate General Electric has announced plans to develop an at-home station to fuel natural gas cars (Businessweek). With the help of United States government research money, the company is striving to make it quick, easy, and safe for people to fuel natural gas cars.


Without natural gas stations, natural gas vehicles have largely been relegated to large fleet transport, such as municipal governments and trucking fleets. The hope is that with easier access to the fuel, conventional consumers will be able to use natural gas to fuel their personal vehicles as well. 


According to Businessweek: 


"GE will team with gas processing company Chart Industries Inc. and the University of Missouri to develop an inexpensive home refueling station that would connect to home gas lines, compress the gas and deliver it to vehicle fuel tanks. The project will receive $2.3 million through an Energy Department program called the Advanced Research Projects Agency for Energy." 


The goal is to bring the price of the at-home stations down to $500, a far cry from the present $5,000. But the current low price for natural gas is encouraging research in this area, as is the plentiful North American reserves, which could secure America's energy future for some time. Currently, Honda is the only manufacturer to produce a natural gas powered car, but others will soon follow. 


This is great news foe Intelligent Investors in the natural gas arena, as well as for investors in General Electric. GE is rapidly expanding into the energy technology and infrastructure sector, and through intensive research and acquisitions, it has become the most prized asset in the company. They will be able to use their size and government connections to actually get this idea off the ground. 


For natural gas companies, such as Canada's EnCana (TSE: ECA), new sales are crucial if the current glut in natural gas supplies is going to subside and increase prices. Compelling consumers and businesses to use natural gas to fuel transportation is a long-term prospect, but one very much worth pursuing. 


Cheers Intelligent Investors.


Disclosure: Matthew Clarke owns or indirectly controls shares in General Electric (NYSE: GE).

Wednesday, July 18, 2012

Canada's Cogeco Cable Expanding into the United States. Atlantic Broadband Sold for $1.36 Billion to a Canadian Company.

Canada's Cogeco Cable is expanding into the United States with a $1.36 Billion acquisition (Cogeco Cable Buying Atlantic Broadband to Expand in U.S. - Bloomberg). The Canadian cable operator, centred in Ontario and Quebec, will be buying Atlantic Broadband of the North-Eastern United States.


The purchase of Atlantic Broadband by Cogeco represents Cogeco's second ambitious move beyond Canada's borders. Cogeco's previous foray outside of the country was into Portugal with the purchase of Cabovisao- Televisao por Cabo SA. The company's European expansion strategy cost Cogeco $600 million and has been a disaster, bleeding the company of almost $250 million last year. 


An expansion into the United States is another risky move, and one which shareholders punished Cogeco for today, sending shares down 15% during trading. The United States is a highly competitive market, with large players such as Time Warner willing to spend a lot of money to maintain customers. However, Atlantic Broadband does make a profit, and Cogeco paid 8.3 times estimated annual earnings before interest, taxes, depreciation and amortization for the company. 


If you are a Cogeco shareholder, this is definitely a wait and see moment. Selling after today's decline would be rash and unwise, as Atlantic Broadband is a profitable concern in a stable market. The expansion into Portugal has failed so far, but the current European climate is not conducive to a lot of businesses. So wait and see with this one... Cogeco might actually be utilizing some of its strengths by entering a market so close to its home turf.


Cheers Intelligent Investors.  

Monday, July 9, 2012

Central Banks are Net Buyers of Gold for First Time Since 1965! Mexico and Russia top the List. An Investment Opportunity?

Central Banks are now net buyers of gold again (Barron's Commodities Corner). For those that might think this information is not important for the gold market, it is important to consider that they have been net SELLERS of gold since 1965! Personally, I have never been a big gold bug, but this is indeed interesting news.

In the 12 months leading up to March 31st, central banks around the world have increased their gold reserves by 400 metric tonnes, or 2,205 pounds. The financial crisis and global instability have led many investors and bankers to warm to gold again as a viable asset. Prior, under the Bretton Woods system, the world's central bankers needed gold as a reserve for their currencies, but when that system collapsed, many central bankers began dumping their gold as it was no longer needed to back the purchasing power of their fiat money. 

Are central bankers moving back towards gold as their primary reserve? The Intelligent Investor should not bet on it, as pure fiat money (or money that has value by fiat or decree of the government) is much easier for the world's bankers to manipulate. Nonetheless, it is clear that at least Mexico and Russia have started to buy gold in huge amounts, with Mexico alone accumulating 100 tonnes. Is Russia demanding gold for oil in some instances? Some speculators and investors think that may be happening.

Canadian Life Insurers: An Area of Great Opportunity and Dividend Rewards. Manulife, SunLife, and Great-West.

The Globe and Mail's Boyd Erman wrote today that it is "another quarter to avoid life insurers." Canada's life insurance stocks have been in the basement for some time now. Collectively, Manulife (TSE: MFC), SunLife (TSE: SLF), Great-West Life (TSE: GWO), et. al. have been languishing behind the rest of the TSX since the financial crisis reared its ugly head in 2008-2009. Of course, many prices have started to begin a slow recovery, but they are still well-off their peaks. Generally, a stock with the bad news already priced-in presents a buying opportunity for the Intelligent Investor, and this is especially the case if profits and dividends are intact and reasonably attractive.

Stock market volatility has been one of the biggest reasons why Canadian life insurance stocks have taken it on the chin. In particular, guaranteed retirement incomes, or variable annuity plans, which promised investors an income stream of 5% for life, with adjustments upward if markets did well. At the time they were issued, 5% seemed like a reasonable rate for both parties... but with long-term interest rates as low as they are, the insurance companies are on the hook for what now seems like a fairly healthy guarantee. In addition, when stock markets rise and decline with so much volatility, the insurance companies have to keep forking over money into side accounts reserved for segregated funds, or funds that guarantee the investor 75% to 100% of their account value should the markets decline and they pass away, or if they have held it for ten years. When there was a time where it seemed stock markets never decline over a 10 year period, this guarantee did not seem expensive... now many insurance companies are experience significant costs associated with these products.

The current stock market and rate environment, however, is highly unusual. Interest rates are extraordinarily low, and this will not continue indefinitely. It is a historical anomaly, and when it is rectified, the insurers will be able to earn significantly more cash from their invested premiums.

For the Intelligent Investor, the company that seems to present the least risk is Great-West Life (TSE: GWO). It has healthy profits, a nice dividend (5.44%), and it does not have as much exposure to volatile equity markets. The company that may present the most opportunity? Probably Manulife if you include its significant growth prospects in South-East Asia. 

Disclosure: I own or indirectly control shares in Great-West Life and Manulife Financial.

Wednesday, July 4, 2012

Irving Fisher, Valuing Investments, Ridding Yourself of Emotion... an Investment Rant.

In the early twentieth century, the economist and mathematician Irving Fisher helped pioneer the wider adoption of statistical models and quantitative analysis in the fields of investment and finance. If widely adopted and blindly followed, any model that attempts to eliminate the subjective nature and qualitative side of security valuation and stock price movements is prone to failure and can lead to massive losses, which was witnessed recently during the 2008-2009 financial crisis.

One aspect of Fisher's work, however, that can be very valuable to the Intelligent Investor and armchair investment analyst, and this is his general insistence on finding some dollar valuation of a security based on its present day value of future income payments. Far too often investors can forget that the true underlying value of any investment most often lies in its ability to return a stream of income payments over time back to the owner. For a bond, this stream of payments would be the present value of interest payments added to the present value of the principal payment being returned at maturity. Thus, if one was evaluating a bond, they would need to decipher what the value of all inflation adjusted interest payments would be, in addition to the inflation adjusted value of the principal when it is returned at maturity. If inflation is high, the value of the security is less, and vice versa.

For a bond, the above thought process is almost always entered into by the investor, but for a stock, it is often absent. Emotion plays far too large a part into the psychology for why the average investor buys or sells an equity. For a stock, an investor should be able to decipher, albeit with a lot of assumptions, the present value of the dividend payments, and the present value of the shares if the equity had to be redeemed at a future date in time. If the corporation, let us call it Canadian Steel, is valued at $100,000, and it pays $5,000 in dividends per year, that is a cash return to us of 5%. Now, let us also assume that Canadian Steel retains $4,000 per year in income and uses it to acquire land and machinery to grow its business and, hopefully, its future dividend payments, that also must be taken into account by us as a 4% return on our investment. For most, this would be a reasonable investment if its future could be determined as somewhat stable and predictable. However, what if we re-name Canadian Steel... International Solar Power, and its name was plastered all over the Globe and Mail as a hot new business of the future? This should mean nothing to us unless we can, with a high degree of certainty, determine that it will be returning dividend payments, or utilizing its retained earnings for growth, from which it will pay us higher dividends in the future.

Essentially, follow the cash. Read the balance sheet and cash flow statements, look for rising cash and asset balances or increasing payments of dividends to shareholders; analyse the income statement for steady and stable earnings flows; look for declining or low liability levels. Try to eliminate the white noise of the media and make informed and rational decisions. Think, if I had to own all of this company for the next 5 to 10 years, how much cash would be in my pocket after expenses? And how certain can I be of that?

Thursday, June 28, 2012

Canada's Manulife Financial Expands Deeper into Asia via Cambodia. Poised to Have $4 Billion in Income by 2015.

Canada's Manulife Financial (TSE: MFC) spreads expands its Asian business and plans to reach $4 Billion in net income by 2015. This report, from Bloomberg, notes that Manulife will be opening an office Phnom Penh, Cambodia, its first in the Southeast Asian nation.

Manulife has recently been searching for broad expansion opportunities in Asia as the market is currently underserved by insurance corporations, unlike at home in North America, where the market is largely saturated. Currently, Manulife is the owner of Boston-based John Hancock Financial, as well as insurance businesses in Hong Kong, China, Malaysia, Vietnam, and Japan.

Regarding Cambodia, Manulife officials state:

“We see an emerging middle class here... These are people starting families with steady jobs, fairly good jobs, where the average age is 25.”

This is in stark contrast to the North American market where the rapidly aging population provides insurance companies with little room for base expansion. Also, in a wise move, the company has decided to begin by offering basic term-life insurance plans to Cambodian consumers, which should feed them a steady stream of premium income with less risk.

At present levels near the $10 range, Manulife yield almost 5% per annum, which for the Intelligent Investor is a good steady stream of dividend income.

Asian Governments See Canada's Natural Gas Resources as Very Cheap. Petronas to Pay 77% Premium for Progress.

Petronas Energy of Malaysia is going to pay a 77% premium, or $5.5 Billion for Canada's Progress Energy. Foreign companies like Petronas are racing to secure Canadian natural gas properties, and build a Liquefied Natural Gas facility on the country's west coast in British Columbia.

One the Progress' key owners is the Canada Pension Plan, and they have already signed-on to the deal, which indicates that most others will follow, and that it is doubtful that this deal will be held-up by the Federal Government.

Officials for Petronas state that:

"The proposed transaction will combine Petronas’ significant global expertise and leadership in developing LNG infrastructure with Progress' extensive experience in unconventional resource development to build a strong and growing world class energy business based in Canada."

Undoubtedly, the purchase is a boon for shareholders of Progress, and most of them will side with the deal and choose to tender their shares. 

What does this announcement mean for the Intelligent Investor? In the eyes of energy hungry Asian government's, Canada's natural gas supplies look abundant and severely undervalued at present levels. At about $20 per share, and with a fat dividend yield of almost 4% per annum, Canada's EnCana Corp. is also looking like a deep value play (TSE: ECA) (NYSE: ECA).

Questions or comments? Leave them below : ) 

Wednesday, June 27, 2012

What Country has the Highest Stock Market Returns Since 1900? Australia and Canada Near the top of the List. Here is a Way to Invest.

Banking giant Credit-Suisse highlights Australia as the stock market with the highest real return over the last 112 years. The country, blessed with vast amounts of natural resources and fantastic weather, boasts an average annual real rate of return of 7.2%. Over the same period, Canadian stocks have returned 5.7% per year, which is also above the world-wide average of global stocks. The global average return for stocks since 1900 has been 5.4% per year.

The Australian Stock Market, or ASX, is now the sixth largest equities market in the world, and the nation boasts one of the world's highest rates of "economic freedom," according to the Heritage Foundation. Currently, half of the Australian stock market is composed of banks and mining companies, which is very similar to the Canadian stock market, with the exception of our preponderance of oil and gas stocks. Big names include companies like BHP Billiton and the Commonwealth Bank of Australia.

With Australian Debt to GDP levels for 2012 at around 23%, the country is also in excellent financial shape. So what can the Intelligent Investor do with this information? Focus some of your international exposure on Australia. 10% of a portfolio could be invested in a basket of Australian stocks by buying a exchange traded fund (ETF). One such ETF trades under the ticker (EWA) on the NYSE. Over the last year the iShares MSCI Australia Index Fund has declined by about 13% and represents a good value at today's level.

Leave your comments or questions below and I will be sure to reply.

Monday, June 25, 2012

Search Wider to Profit from Natural Gas. Asian and North American Price Differentials Present an Interesting Opportunity.

Trying to profit in natural gas is difficult. The United States Department of Energy estimates that production of natural gas liquids hit a high in March and is now 50% above production levels in 2009. As a result, prices of some natural gas liquids have plummeted by 60%. Natural gas producers are becoming strapped for cash and there is now a lot of uncertainty about the viability of another of natural gas properties throughout North America. 


This is actually good news, however, for some chemical manufacturers that may need to use natural gas liquids, such as butane, in their processes. Examples of such companies include Dow Chemical (NYSE: DOW) and Dupont (NYSE (DD). 


The market for natural gas, however, is not the same throughout the world. While in North America supplies have spiked and prices have plummeted due to basic supply and demand dynamics, Asian prices have increased over 30% in the last year. Demand for Natural Gas Liquids in Japan, China, and India have all increased for 2011, meaning there is a huge spread between North American and Asian prices.

Essentially, if a North American producer can develop the terminals and infrastructure necessary to ship the natural gas liquids overseas, they will profit handsomely. Statoil (STO) out of Norway is a very interesting and reliable choice in this area. They currently have the only LNG production facility in Europe, and they have a terminal in Singapore, and soon Malaysia as well. This will bode every well for future cash flows.

Conclusion: For the Intelligent Investor, natural gas prices are making it very difficult for North American natural gas producers, but for those interested in profiting from the current low-price environment, try Statoil or other producers that have the capacity to profit from the differential between prices in Asia and Europe or North America.

Thursday, June 21, 2012


If you’re considering buying a new home or refinancing/renewing your current mortgage, it would be a wise to carefully consider the following changes that will take effect on July 9th, 2012.

The Federal Government announced this morning four new clampdowns on insured mortgages that will quickly come into effect. The federal government's changes include:


  1. Reducing the maximum amortization period to 25 years from 30 years.
  2. Reducing the maximum amount of equity homeowners can take out of their homes when refinancing to 80% from the current 85%.
  3. Limiting the availability of government-backed mortgages to homes with a purchase price of more than $1 million.
  4. Fixing the maximum gross debt service ratio at 39% and the maximum total debt service ratio at 44%.


The first two changes will have the biggest impact on Canadian borrowers and real estate investors.

If you’d like to review your options or if you have any questions, please give me a call or send me an email, and I’ll be happy to discuss how these changes may affect your personal situation.

Wednesday, June 20, 2012

CIBC is estimating that the Canadian economy will barely keep its head above water over the course of the next year. The national economy is expected to grow at 2.1%, and along with a slowing global economy, this is expected to hold interest rates low for the foreseeable future.

Canadian consumers have exhausted much of their savings and their spending has almost reached its limit. Borrowing rates are high, which leaves Canadian consumers with little room to increase spending in case wages increase in the near-term, which is very unlikely.

Personal consumption, as the largest component of GDP or gross domestic product, plays the primary role in determining our nation's growth rate. Net exports (exports - imports), however, also play a major part, and with growth in the United States at a standstill, there is little room for expansion here in the near-term.

Harper's conservative government has been trying to diversify Canada's export market through trade negotiations with China and South-East Asia, but finalizing international trade agreements takes a lot of time, and may not even contribute to net exports over the long-term, especially if imports remain high.

So what does this mean for the Intelligent Investor? Mortgage rates and borrowing terms should remain favourable for the average Canadian household, and real estate prices, as a result, should still experience some near-term support.

As always, if you have any questions or comments, post them below!

Thursday, April 26, 2012

RIM Turnaround Could Take Three to Five Years, Watsa Says - Bloomberg

RIM Turnaround Could Take Three to Five Years, Watsa Says - Bloomberg:

Below is an interesting excerpt from Bloomberg's article:

A turnaround at Research In Motion Ltd. (RIM) may take three to five years and the BlackBerry maker’s stock is undervalued, one of RIM’s biggest investors said today.
Prem Watsa joined RIM’s board in January and days later said his Fairfax Financial Holdings Ltd. (FFH) had doubled its holding, making it RIM’s third-largest investor, now with 5.1 percent. After Fairfax’s annual meeting today, he said he’s confident about RIM’s future.
“Is it going to turn around in three months, six months, nine months? No,” Watsa said. “But if you’re looking four, five years -- we make investments over four, five years. “Here’s a company with $2.1 billion of cash and no debt.”

Wednesday, April 18, 2012

Canadian Owner of Mac's to Conquer European Convenience Market with Norwegian Purchase.

Canadian convenience store operator Alimentation Couche-Tard Inc. is making a powerful foray into northern Europe and its first into overseas markets. Currently, the owner of Mac's convenience stores operates in Canada and the United States, and now it is expanding into Norway. 


The Canadian company is paying $2.8 billion for retail assets of Norwegian oil giant Statoil ASA. The plan is ambitious for the Canadian retailer and it represents a key and important peg in a new European growth strategy.


Couche-Tard shareholders were pleased and bidding on the shares shot up 15 percent on the news today. Some analysts are estimating that the deal could increase annual earnings by 20 percent. The deal will include 2,300 gas and retail stations in six Scandinavian and Baltic countries, including: Norway, Sweden, Denmark, Latvia, Estonia, and Poland. 


To ensure some continuity, the existing European management team will be left in place. To improve performance, they plan on streamlining operations and increasing profit margins with different mixes of new product and enhanced store designs.

Tuesday, April 10, 2012

Social Media Investment Bubble: Watch-Out! Advertising is Limited.

The Atlantic Wire recently published an article concerning the existence of a new bubble in the stock investment community. Facebook's recent purchase of Internet company Instagram for $1 Billion highlights The Atlantic's thesis, and I would have to second their opinion. Now, this is not to say that Facebook and other social networking corporations like LinkedIn cannot increase in valuation, but simply that sooner or later they have to come crashing down if they do not better learn how to profit from their users.

Instagram has no clear source of revenue, and at $1 Billion is valued far beyond its current earnings. As a business owner, one should expect a reasonable return over a reasonable period of time. Of course, proponents of many social media businesses would say that future earnings and future growth are coming, but investing based purely on expectations of future profitability with no clear path how to get there is a fools game and makes one inherently susceptible to market crashes irrecoverable losses.

Revenue comes from getting customers to buy something, or by selling advertising. Every social media company is largely claiming that their earnings will simply come from advertising, but it is not that simple. AOL, for instance, for years had an established network of users, but only recently by selling its patents to Microsoft, was it able to realize any significant value for shareholders. If all AOL had to do was simply rake in money from advertising, it would have made its investors a fortune by now. Remember GeoCities? Yahoo paid almost $3.6 Billion for GeoCities in 1999, and it is now defunct and shuttered. Why didn't Yahoo just utilize the magic of Internet advertising to make everyone rich? Because company's already have pre-existing advertising relationships that are often difficult to break. Ford, for example, cannot advertise via every medium, it has to select what it thinks will realize it the largest return. This often means it shells out lots of money to traditional outlets like CBS, but not necessarily to Instagram, which it might see as a flash in the pan.

Essentially, resources are limited and social media sites have to compete with other forms of media for advertising dollars. In tough economic times, this is not easy!

Friday, March 30, 2012

BlackBerry Maker RIM Rises About 7% in Trading as Bears Starting to Run for Cover.

News of the departure of CEO founder Mr. Jim Balsillie, and news that Research in Motion is seeking strategic alternatives sent shares in the BlackBerry maker sharply higher during Friday's trading session. Still over 70% down from its year ago price, the Canadian technology titan is giving shareholders a brief sigh of relief.

500,000 PlayBook tablets were shipped last quarter, well above the 150,000 shipped during the previous quarter. With the release of the 2.0 software upgrade, along with price reductions, demand is starting to pick-up.

Research in Motion ended the quarter with 77 million subscribers, which is an increase from the 75 million it had at the end of last quarter.

RIM's revenue for the quarter was $4.2 billion, which is at the higher end of analyst expectations.

BlackBerry 10 is still on track for release later this year, which will give a much needed boost to its revenues and subscriber base.

Lower-end BlackBerry 7 models are being developed for the many foreign markets to help stem erosion from new competition, such as many low-end Android models.

Desperately, however, the company still needs a more targeted and forceful marketing initiative. So many consumers are swayed by games and gimmicks on their devices, which has not been BlackBerry's hallmark. Going forward, the company needs to find a way to attract a more fickle audience... less concerned with quality and more concerned with fashion and fun.

Happy Investing and Happy Friday : )

Tuesday, March 27, 2012

Median Weekly Earnings of Graduates Versus Non-Graduates and their Associated Unemployment Rates.


The above illustration from the Bureau of Labor Statistics in the United States highlights the advantage that graduates of various levels experience in terms of both pay rates, and employment prospects. Taken from 2009, one would only assume the discrepency is even worse during today's poor economic climate. Without a post-secondary education, many individuals are now finding themselves underemployed and underpaid relative to many of their contemporaries.

Monday, March 26, 2012

The Millennial Generation of Lost Car Buyers. Those in their 20s are Bewildering Car Makers as they Show Little Desire to Own a Car.

The Millennial generation, those born in the 1980s and 1990s, are bewildering car manufacturers as, in contrast to previous generations, they do not seem nearly as interested in buying or owning a car.

At a conference last year, Toyota USA President Jim Lentz said the following:

"We have to face the growing reality that today young people don't seem to be as interested in cars as previous generations. Many young people care more about buying the latest smart phone or gaming console than getting their driver's license."

Indeed, less than half of potential American drivers under the age of 19 had a license in 2008. This is down from a rate of 66% only a decade before. But the important questions for auto-makers is whether they are buying less cars and not obtaining their licenses because of money and the economy, or because of a genuine shift in their tastes, preferences, and priorities.

In particular, the Millennial generation is known for delaying adulthood and its hallmarks. They are delaying marriage, delaying moving out, delaying getting full-time jobs, and now delaying purchasing auto-mobiles and houses.

Interestingly, in The Atlantic, it is noted that the Millennial generation has a rising preference for urban living, in contrast to their parents' desire to live in sprawling suburbs. If this is true, there will be a large dent in auto-mobile sales as this generation and their children grow older. Expanding suburbia after the end of World War II was a key contributor to the growth of auto-mobile culture in North America, and if the suburb begins to wane, so too will car sales.

So how to increase car sales? The Millennial generation often loves fun toys that look cool, more than they appreciate a product's practicality. Engineer cars that make them feel like they are somehow rejecting the idea that they have to be responsible or grow older. Make a fun car with lots of gadgets, and one that helps them to identify more with a culture that rejects the conformity of previous generations for a new... while, conformity. But one that this time is so self-concious and worried about conforming that it desperately tries to be different and unorthodox for the sake of it.

Will this work? Perhaps not, but watch closely and you will see Ford, GM, Toyota, Chrysler, Honda, BMW, Volkswagen, Mercedes, and others beginning to fall all over themselves trying to preach unconformity and difference to the lost generation of car buyers.

Ally Financial Still Owes A Huge Sum to the Government. The Financial Crisis is not Over, and Canadian Banks Might Still be Left Holding the Bag.

Ally Financial, the Detroit based former finance unit of General Motors, is still owned 74 percent by the United States Treasury. This stake was received in return for over $17 billion in government investment during the height of the U.S. financial crisis. Though it intends on fully paying back the taxpayer's investment, recent news from Bloomberg indicates that the the company will be unable to fetch a large enough sum if it engaged in an initial public offering, or IPO.

It is now being suggested that Ally Financial split into an automotive finance unit, and a retail bank. The retail banking unit, which is what most of us are familiar with from their advertisements, already has $28 billion in deposits. The albatross around the company's neck is Ally's residential mortgage unit, which issued a flurry of bad loans prior to the housing and associated mortgage meltdown in the United States.

Thus far, Ally has paid back $5.4 billion to the United States Treasury. It also almost reached a deal to sell itself to TD Bank and General Motors last year, but those talks fizzled. Buying the beleaguered lender, however, might leave a Canadian bank with significantly more exposure to bad debts than it can handle, which might reverberate back to the Canadian marketplace and its shareholders. TD Bank already paid $6.3 billion for Chrysler Financial, which is not exactly always a prime lender.

Ally's current situation is an indication that though the financial crisis might be in our rear view mirror, it might still be closer to us than it seems. Shareholders of Canadian banks have to be careful that they know what they really own and watch out for their own bankers left holding a big bag of defaulting U.S. debt. The American government would be more than happy to let us share some of the risk.

Monday, March 12, 2012

China Experiences Worst Trade Deficit in a Decade. Demand for Resources Reaches Record Levels. Will the Chinese Consumer Force the Government to Spend its Currency Reserves?

Primary resource industries are poised to continue reaping record profits as China's demand surges and the country experiences its largest trade deficit in over a decade!

Chinese imports in February rose almost 40%, leaving the country with a trade deficit of $31.5 Billion. Exports rose at a slower pace of 18.4%. The primary contributor to the deficit was imports of fossil fuels, which Chinese consumers are demanding in ever increasing numbers as their preferences for American and European styled vehicles reaches record levels.

Inflation in China is heating up, but the administration is still apt to try and keep domestic demand growing in fear of growth collapsing amidst a European recession. Inflation, however, is trying to be reigned in at 4% per annum, a difficult prospect with oil reaching $125 per barrel recently on the international markets. Chinese demand for copper, iron, and oil all rose during February.

It was only a matter of time, but the Chinese consumer is now forcing the state to funnel some of its cash reserves back to the world market, and thankfully for Canada, we are selling the goods that they are buying.

Thursday, February 16, 2012

Steam and Netflix Show Old Media How to Profit and Generate Revenue in the New Era. With $350,000 per Employee, Steam Leads by Example.

For anyone familiar with Steam, they are aware of the success it has experienced in the video game industry by shirking the traditional brick and mortar distribution model, and deciding on an exclusive on-line presence. Paul Tassi in a recent issue of Forbes notes that Steam has a model for success that other media distribution company's need to follow and emulate. He is absolutely right, and the sooner the better for many of the media dinosaurs.

Amazingly, he notes that at Steam, developers get 70 percent of revenues... traditionally they get 30 percent. Utilizing Steam to sell your software, therefore, is a huge win for developers, and Steam is smart in developing a loyal base among those who develop and create the content that consumers want to buy.

A second statistic is that Steam rakes in $350,000 per employee. This is more than even Apple or Google, and unparalleled in the technology industry.

Essentially, Steam's "ease of use" and fair prices are making piracy a manageable problem for the video game industry according to Paul Tassi.

Instead of trying to use legislation to fight against the headwinds of new technology, developers, content providers, and distributors need to emulate company's like Netlflix and Steam. Revenue and profits are there to be made in the new era of media, company's simply have to innovate and modernize their operations. The examples are already there to follow.

Sunday, February 12, 2012

Education Reaps Huge Financial Rewards. $570,000 in Gains! The Best Investment for the Future.

"Where is the best place to invest $102,000?" asks a recent study by the Brookings Institute. Their finds are clear and strikingly decisive. It is not stocks, bonds, real estate, et cetera, but education. The average undergraduate degree in the United States will cost approximately $102,000 to earn, but will net about $570,000 more in lifelong earnings than somebody with a high school diploma. Someone with a two year college diploma or associate degree will net $170,000 more during their life.

As a return on investment, this amounts to a 15.2 percent return per year for a 4 Year Degree, and an astounding 20 percent return on a college diploma. Why the higher return on a college diploma? A college graduate will make less money, on average, per year than someone from university, but the opportunity cost was lower. The college graduate started earning money two years earlier, and they paid significantly less money for their education.

Thursday, February 2, 2012

A Chance to Own Facebook. IPO Values Company at $80 to $100 Billion. Zuckerberg Maintains Control.

Facebook plans to raise between $5 and $10 Billion in its upcoming Initial Public Offering, but CEO Mark Zuckerberg should contain complete control. With 854 million active users, the company is expected to be valued at approximately $80 to $100 billion. Zuckerberg's current stake would be worth over $28 billion at estimated levels.

According to Thomson Reuters:

"Its IPO prospectus shows that Facebook generated $3.71 billion in revenue and made $1 billion in net profit last year, up 65 percent from the $606 million it made in 2010."

This would make Facebook one of the most expensive stocks on the market, with a price to earnings multiple of almost 100 times. For investors to generate any kind of long-term profits, this company is going to need to continue growing at a rapid pace for years. Given that it is failing to generate any meaningful income from mobile media devices, this is going to be very difficult.

There will, however, be a tight supply of shares when they issue. With $10 billion being floated, that leaves about 90 percent of the shares locked-up. Of course, insiders could begin liquidating after the IPO, but buying interest should give a floor to share prices. Nonetheless, Intelligent Investors beware of a hot IPO or a technology darling coming to market. Multiples are very, very, high. 

Tuesday, January 31, 2012

Oil Sands Realizes Massive Profits for Imperial Oil Shareholders. IMO Dividend Increase and Kearl Oil Sands Expansion on the Horizon.

Imperial Oil raises dividend after profits rise 26%. For 2011, the Canadian oil giant is finishing the year with its second highest profit ever, which should make Intelligent Investors very happy. Earnings for the quarter rose from $799 million to $1 billion, and total revenue rose to $8.12 billion.

Annual revenues for 2011 were an astounding $30.71 billion, but the dark spot for quarter was total production levels, which declined to 291,000 barrels per day. The Cold Lake oil sands project, however, was very strong, with daily production increasing to a whopping 160,000 barrels per day.

The end of this year should bring Imperial shareholders another profit jump as the Kearl oil sands mine comes on line with 110,000 barrels of production per day. By 2015, the Kearl mine should be producing 270,000 barrels per day, almost as much as the entire Imperial operations did this quarter

Imperial, which also runs the Esso brand stations across Canada is a good long-term hold for Intelligent Investors, and one of the few companies that already has production increases scheduled into its pipe.

Full Disclosure: Matthew Clarke owns or indirectly controls shares in Imperial Oil Corporation. (TSE: IMO).   

Friday, January 27, 2012

Warren Buffett of the North Buys Huge Stake in RIM. Research in Motion Appoints Prem Watsa to Board of Directors. More Shareholder Friendly Company.

The CEO of Fairfax Financial, Prem Watsa, has increased his stake in Research in Motion (TSE: RIM) to 5.12%. Often referred to as the Warren Buffett of Canada, he succeeded in making a fortune while others failed during the great financial crisis of 2008-2009. Mr. Watsa has now been named to the board of directors for the BlackBerry maker. 


According to Canada's Globe and Mail:
"Mr. Watsa, Fairfax, and other companies related to them bought 6,499,500 shares of RIM on Wednesday and an additional 7,550,700 on Thursday, according to filings with U.S. securities regulators."


Fairfax Financial spokesperson Paul Rivett is quoted as saying that the company is very excited to be buying RIM below book value. Furthermore, the company is interested in buying more shares as Research in Motion continues a restructuring program. With a new CEO and an increased presence for investors on the board, shareholders should be pleased with recent changes. 

Wednesday, January 25, 2012

Low Interest Rates to Extend Until at Least 2014. U.S. Federal Reserve Wants to Keep Cheap Money Flowing.

The Federal Reserve Bank of the United States has announced that it intends to keep rates in the basement until at least later 2014. In response, both Canadian and U.S. stock markets moved higher as expectations for a continued economic recovery improved. The reserve indicated in its statement that high unemployment and low economic growth leave it with little option but to keep the overnight lending rate steady between 0 and 0.25 percent, as inflation does not seem to be picking up much steam.

In Canada, job quality has been worsening, with more self-employed and lower wage positions being created. Increased downward wage pressure will help reduce inflationary pressure in the Canadian economy, which helps the Bank of Canada follow its U.S. counterpart in continuing a period of record low interest rates at home as well.

Apple Confirms Entrance into Digital Textbook Marketplace. Education Publishers Realize More Money to be Made from Digital Copies with no Used Marketplace.

Flush with almost $100 Billion in cash and vibrant earnings numbers, Apple (NASDAQ: AAPL) has confirmed its plan to enter the textbook marketplace. It is teaming up with major educational publishers to publish digital copies of textbooks to be read on its iPad tablets. The textbooks will incorporate graphic manipulations, videos, testing, note taking and more. 

At least 12 educational textbooks are already available via the iPad, and surprisingly they cost less than $14.99 each. Students will not be able to re-sell or pass-on their textbooks to other students, eliminating the ability to buy used books for less. Major publishers are already realizing that this ability will enable them to make more from many books than they do now.

Apple also announced a number of lecture courses already available for free on iTunes that will hopefully help them to build a stronger brand in the educational marketplace. 

Clearly, Apple already has reaped huge benefits in the publishing market with iTunes, and now iPublishing should be able to generate even more commissions on digital media sales. As the early adopter, Apple is developing an excellent competitive edge over other late entrants.


Monday, January 23, 2012

Starbucks to Sell Alcohol at More Locations. 75 Percent Mark-Up on Starbucks Beer and Wine Will Keep Profit Margins Healthy.

Starbucks (NASDAQ: SBUX) is going to add alcohol to more locations in an effort to increase afternoon and evening traffic in its stores. Starbucks first began selling alcohol in 2010 in Seattle, and it hopes to sell beer and wine to a wider audience. Stores in Atlanta and Chicago will be among the first locations to enjoy the new additions to the menu.


Currently, there are six stores that offer alcohol, and prices range from $5 for a beer, to $9 for some wines. The bar menu is meant to reflect local tastes and preferences, and it will not be standardized. Initially, there are 25 locations that have been selected. Most alcoholic drinks have a 75% profit margin, according to Sara Senatore of Sanford C. Bernstein & Co., which is about the same as coffee. This means that they are not at risk of depressing margins. The incremental costs associated with this concept would primarily be staffing and licensing, but it is a great way to utilize the existing locations for more hours.


For the Intelligent Investor, this should be taken as a healthy sign of innovation at Starbucks. They are thinking of more ways to make money from existing store locations, much more cost effective than simply cramming more stores on the same block, which caused them significant amounts of trouble in the United States.

NOKIA / Microsoft Lumia Phones Reported to Have Strong Sales. Over 1 Million Sold and Counting. Microsoft Could Finally be Gaining Some Steam in Smart-Phone Market.

According to the Financial News Network, Nokia may have already shipped over 1 million Lumia handsets. The Lumia is the first handset that runs Microsoft's software. The product is considered a must-sell for both Nokia and Microsoft as they have been struggling to gain any traction in the hyper-competitive smart-phone marketplace. 
According to analyst projections, Nokia could be undervalued by over 20% at a current price of $5.71 and an average price estimate of $6.96. Does this mean go in guns blazing and purchase your lots of Nokia or Microsoft shares right off the hop, of course not. But Intelligent Investors should definitely be considering some Microsoft (NASDAQ: MSFT) shares for their portfolios. If reports of Lumia sales are accurate, the two companies could be starting to gain some steam in this lucrative market.

Thursday, January 19, 2012

Bank of America Records $2 Billion Gain. But Investors Beware, Read the Fine Print!

Bank of America has reported a profit of $2 billion for the fourth quarter. This amounts to 15 cents per share. However, reading the numbers closer, there is clearly some financial engineering behind the scenes. In its earnings, Bank of America (NYSE: BAC) includes a $2.9 billion gain on the sale of its stake in China Construction Bank, and another $1.2 billion gain from swapping preferred shares for common shares on its balance sheet.

To be sure, the bank's capital ratios and overall balance sheet levels have improved (The Tier 1 Capital Ratio is now 9.86%), which means it should be far from having to raise new equity capital. But nonetheless, with one-time items excluded from the income calculation, Bank of America recorded a net-loss of around $2.1 billion! And that is for only a 3 month period.

Word of Caution: Intelligent Investors beware. Bank of America is doing better than it was during the peak of the financial crisis, but it has such disastrous loans remaining on its books that it is still bleeding billions of dollars every quarter.

Wednesday, January 18, 2012

BK Wheels. Burger King to Offer Delivery for $2. Virginia and Maryland First. Will BK Delivery be a Flop?

Burger King has begun offering delivery service in Virginia and Maryland. With over 7,500 restaurants, the burger-chain is trying to remain number two in sales behind McDonald's, with many analysts predicting that it has already lost that ground to Wendy's International.

The service will be available from 11am until 10pm, and will cost users $2. Burger King Holdings was recently purchased in 2010 by 3G Capital for $3.93 billion, and it is desperately searching for new ways to generate much needed cash-flow in a crowded fast-food marketplace.

Will hungry Americans be willing to shell out an extra $2 to ensure that they do not have to go anywhere at all to eat a Whopper and fries? Many analysts are predicting the program to be a flop, but with waist lines bulging across the country, this program definitely has a chance.

TD Looking to Increase American Exposure, Could Issue $1 Billion in New Stock. Intelligent Investors Beware.

TD Bank (TSE: TD) is hoping to close a deal to buy America's BankUnited. Currently, the bidding war between BB&T and TD is thought to be in the neighbourhood of $2.4 Billion... at least $1 Billion more than BankUnited's Book Value.

TD is long used to digesting American banking assets, especially since its purchase of BankNorth. Nonetheless, more goodwill (or the amount paid above book value for assets) on TD's balance sheet is the last thing the company needs during a credit crunch. Undoubtedly, should the deal go through, TD is going to have to raise more capital to fulfill Basel III requirements. Many expect that the extra capital needed could require a new stock issue by the bank of between $500 million and $1 billion. For the Intelligent Investor, new stock issues should not be something to look forward to. It dilutes the value of your shares, and leaves you with a smaller share of the profit pie. 

To be sure, TD could make this acquisition work, but investors should be careful. A primary reason why Canadian banks did not find themselves in the terrible mess of their U.S. counterparts is because they were not as heavily leveraged, and because they were not as exposed to the American housing marketplace.

A point of caution for Intelligent Investors: TD has been aggressively increasing its risk profile and its exposure to the United States for years. It now has more branches in the United States than Canada, and it is looking to expand further on its American base. If you are looking for a more clean-cut Canadian investment, investigate CIBC (TSE: CM).  

Friday, January 13, 2012

American Trade Funds Deficit with Rest of the World. Canada Trade Surplus Balloons to $1 Billion in November.

November was a great month for Canadian exports. The international economy is doing Canada well as exports climbed to over $40 billion in November 2011, and imports dropped to $39 billion. That left Canada with a trade surplus of over $1 billion for the month, and leaves the country with more cash coming in the door to spend on its own people and economic recovery.

Analysts on average had been expecting a DEFICIT of about $500 million, so this turnaround is great news for the economy. Where did the burst come from? Energy exports climbed over 6 percent to around $6.4 billion. In particular, exports to the United States climbed by almost 2 percent, creating a surplus with our southern neighbour of over $4.5 billion. So what does this mean? Basically our sales to the United States are funding a deficit with the rest of the world.... Thank You American consumption! 

Wednesday, January 11, 2012

Twinkie Maker Hostess Brands Going Bankrupt. Retired Workers and Health-Care Costs Suffocating Business.

Iconic North American snack producer Hostess Brands is filing for bankruptcy protection. The maker of Twinkie and a plethora of other sugary and salty junk food is blaming three things for its failure to turn a profit:

1. Pension obligations from retired workers.
2. Health-care costs for both retired and current employees.
3. Tough economic conditions.

It was only two years ago that Hostess emerged from bankruptcy court, and private investors had hoped to turn the company around. Its major hurdle is the pension fund, which is owes more than $944 million.

Currently, the company is trying to negotiate its pension and medical benefits with its union membership, as the overwhelming obligations simply make the company uncompetitive with Pepsi-Co and its Frito-Lay subsidiary.

The company will maintain production and sales throughout the restructuring process, but any further expansion is out of the question. Surely, consolidation will be in order, and perhaps be a boon for Pepsi (NYSE: PEP).

Tuesday, January 10, 2012

KODAK Prepares to File for Bankruptcy. An American Icon and its Drastic Failure to Foresee Technological Change.

Resisting change and embracing the status-quo inevitably leads to failure in the technology industry. American Icon Eastman Kodak is teetering on the brink of bankruptcy, and it provides investors with an interesting and valuable case study examining the failure of a once profitable contender at the advent of the digital revolution. 

Bankruptcy is a final reversal of fortune for the company that actually invented the digital camera in 1975, but failed to embrace and foresee the true game-changer that this technology, and then later the camera-phone, would be for its market. 

On September 30th, the company issued a statement declaring that it was not going to declare for bankruptcy, but in the investment world, 'where there is smoke there is fire,' and with Kodak, the building has been burning down for years. 

The primary store of value left in this company is its digital photography patents, which are estimated to be worth about $2 Billion, but which no company has yet to reveal an interest in... so probably, in true Kodak style, even these are underestimated by the company.