Friday, July 29, 2011

Weston Family Buying Ogilvy Department Store. Loblaw, Weston, and Holt Renfrew Owners Expanding Selfridges in Canada

Canada's Weston family, the controlling shareholders of Loblaw Companies Ltd. (TSE: L) and George Weston Ltd. (TSE: WN), are buying the Ogilvy luxury department store in Montreal. This store will be a great addition to the family's growing international portfolio of high-end retail / fashion stores.

The Weston family operates its department stores under the corporation Selfridges Group Ltd., which is headed by the family patriarch Galen Weston

Selfridges also owns a number of other retailers:
Holt Renfrew in Canada (founded 1837, nine stores).
Selfridges in the U.K. (founded 1909, four stores).
Brown Thomas in Ireland (founded 1849, seven stores).
De Bijenkorf in Holland (founded 1870, 12 stores).

Canada Maintains Stellar Credit Rating. Canada Rated AAA by Moody's. Global Investors Pour Money into Canada.

Amidst a spreading financial crisis, and an effective default in Greece, Canada has maintained its status as a safe-haven for global investors. Though a number of analysts are expecting that there might be a housing downturn sometime soon, Canada's overall financial situation is a bright spot in today's gloomy economic climate.

Moody's stated that Canada has a "high degree of economic resiliency, a very high government financial strength, and low susceptibility to risk." This is in stark contrast to the United States, which is drowning in government spending and soaring deficits. Will the United States default? Probably not considering the calamitous consequences that it would have on international finance. American businesses and their bankers would much rather ensure that the United States experiences inflationary pressures from monetary easing rather than a default on its debt. 

Canada's triple A credit rating is the highest possible, and it has maintained this rating since 2002. Of course, if the Harper government continues on its current course of deficit spending, we will not be able to maintain this rating, and higher interest rates will surely result for the government. Interestingly, only 16 countries in the world still possess a triple A rating, so Canada is in an elite pool, and this has caused investment to pour into the Canadian market. This has caused our currency to increase and for interest rates in Canada to stay relatively low as compared to most other nations. Globally, investors feel safe keeping their money here, and that means that the federal government does not have to offer competitive rates in order to attract the loans that it needs to operate.

Some additional information concerning this topic is in the Toronto Star.

Tuesday, July 26, 2011

How to Value Stocks? The Dividend Discount Model (DDM), a Rational but Clumsy Approach that Focuses on Dividend Growth.

Often investors ask me how they should "value" a stock. There are a number of interconnected ways that the Intelligent Investor can value a stock and determine what they believe to be a fair value for it. One way that has fallen out of favour in more recent years is the traditional approach of the "Dividend Discount Model."

(Fair Stock Price) = (Current Annual Dividend) / (r) - (g)

Be aware, the dividend discount model has a number of assumptions that must be made by the investor in order to arrive at your "fair price," but it is a nice start, and it at least ensures that the investor engages in some rational analysis at the start of their quest for the right company.

The first assumption that the Intelligent Investor must make when using the dividend discount model (ddm) is something called the "discount rate," (r). I like to think of the discount rate as the amount of money that you could rationally be making if you simply invested elsewhere, plus inflation. For this rate, I like to use a corporate bond index, other investors often use other metrics, but like I said, the ddm has many inherent assumptions that must be made. Currently, the rate on High Yield Corporate Debt in the United States is 7.35% (Bloomberg).

The second assumption that must be made by the Intelligent Investor is the growth rate of dividends, (g). Here, it is wise to use the historical 5 year average of the stock you are examining. However, remember that dividends can be reduced! So be very conservative in your estimates of dividend growth. The more stable the company and business, the more accurate this will be. To add an extra level of caution, I also like to subtract the current inflation rate, which is always making your money less valuable in the future than it is now. Currently, inflation is 3.1% in Canada.

Now here is a real world example to illustrate how the model works.

Coca-Cola is a name most are familiar with.


(Fair Stock Price) = (Current Annual Dividend) / (r) - (g)

FSP = $1.88 / (0.0735) - (0.09 - 0.031)
FSP = $1.88 / (0.0735) - (0.059)
FSP = $1.88 / (0.0145)
FS = $129.66

Clearly, since Coca-Cola (NYSE: KO) is trading at $69.31, Coca-Cola's Fair Value seems extremely high. Why did the model produce this result. Two main reasons. First, very low current bond rates have created little reward for investors seeking an alternative to stocks. This makes stocks seem more valuable. Secondly, Coca-Cola's unusually high average of dividend increases. Coca-Cola has a very strong record of increasing its dividend every year, which makes it appear particularly valuable when a model that favours dividends is utilized. 

Happy Investing : )

Monday, July 25, 2011

Research in Motion Layoffs. RIM Laying-Off 2000 Employees to Save Costs. Number in Canada not Announced.

Canada's Research in Motion (TSE: RIM) will be laying off 2000 employees in order to save costs. This represents more than 10 percent of the company's workforce, and is more lay-offs than many analysts had previously expected. Some think that this might mean that the situation at the company is worse than expected, but others maintain that it is just an important part of their restructuring efforts to increase corporate profits.

According to RIM, the reduction is: "a prudent and necessary step for the long term success of the company and it follows an extended period of rapid growth within the company whereby the work force had nearly quadrupled in the last five years alone.”

RIM has not announced where the lay-offs will take place, but if the company hopes to save any substantial amounts of money, they will probably be from North America. More information on the cuts will be announced on September 15th, and chief financial officer Brian Bidulka will oversee the cost-cutting program.

The major worry with the investment community is that these lay-offs may not be focusing much on the future, but on quickly shaving costs for short-term gains in profits. However, it is important that the company is moving quickly and indicating to the public markets that it is actively looking after shareholder resources. A major danger, however, is that human capital is crucial in the technology industry, and having your employees move elsewhere means that they can take their valuable ideas and intellectual capital with them.

Happy Investing : )

Friday, July 22, 2011

Loblaw, Shoppers, GE Announce Earnings for the Quarter. Corporate Profits are Healthy in Canada and the U.S.

General Electric (NYSE: GE)

Revenues and profits soared for the world's largest manufacturer of jet engines and turbines for power plants. Second quarter profit came in at $3.69 billion, up from $3.03 billion last year. On a per share basis this is 35 cents versus 28 cents. This is a healthy gain for a company once written off by many during the recent recession.

Revenues fell slightly to about $36 billion as it sold the majority of its stake in NBC Universal to Comcast Corp. Considering, however, that analyst estimates for GE had been $35 billion, the slight decline is good news. The major developments in the company during the quarter were in the area of its energy business, which made acquisitions totalling over $11 billion. In the future, the upside potential in this business for GE could be substantial.

For more on GE check out Reuters News Service.

Loblaw Companies Ltd. (TSE: L)

Canadian grocery heavyweight Loblaw Companies Ltd. announced stronger second quarter results today. Loblaw's earnings came in at $197 million, or 67 cents on a per share basis. Last year, Loblaw's earned $181 million or 64 cents per share. Revenues also rose by a small margin to $7.28 billion.

However, all is not good news at Loblaw. Already competing against Wal-Mart, Sobeys, Metro, and Costco, the company will soon by vying with Target, which will surely take a bite out of both its grocery business and new Joe Fresh line.

Employee wages, however, have been under intense pressure at the retailer and the UFCW has been unable to effectively keep wages much higher than they are at competitors. Cheaper labour costs will undoubtedly give Loblaw a fighting edge, even though its employee morale is said to be in the basement at most stores.

Shoppers Drug Mart (TSE: SC)

Canada's largest drug store chain announced higher quarterly results today. Even without a permanent CEO, the company edged out many of its rivals and reported a second quarter profit of $148 million, or 68 cents per share. Last year, the company earned $146 million or 67 cents per share. Since analysts were looking for a per share profit of $67 cents for Shoppers, they beat estimates by a penny, and, overall, performed reasonably well.

Performing particularly well were its "front-of-store" sales, which include the items most commonly thought of at Shoppers next to prescriptions... cosmetics etc. Non-prescription sales at Shoppers were up 3.8 percent, which more than made up for a decline in prescriptions of 1 percent.

Many Shoppers' shareholders, including myself, have been worried as of late about the decline in prescriptions due to generic drug pricing in Ontario, and the loss of the company's CEO, but as the numbers indicate, profits are rising, albeit slightly, and good money is being made. Hopefully a new CEO is found soon,  but until then, just stay the course with this Canadian retail gem.

Happy Investing : )

Wednesday, July 20, 2011

Some U.S. Stocks to Watch. IBM, BAC, TOL, JPM. American Dollar Hits New Lows.

IBM (NYSE:IBM) recently announced that it expects to earn $20 per share by 2015. Of course, any prediction that is so many years down the road has many inherent assumptions, and thus is almost certain to be wide of the mark. IBM, however, has been on a tear recently and business is booming. Currently trading at $183 per share, and up over 40% on the year, many investors have missed the party... but buying a well-run business at a reasonable price is a lot better than buying a poorly-run business at a discount.

Bank of America (NYSE: BAC) has recently fallen below $10 per share. This price is a 25 % discount to the company's tangible book value, which will surely be a buying signal for many value investors. Bank of America is highly levered to a recovery in the U.S. economy, so if the American economy does well, look for Bank of America to experience some serious up-side in price.

JP Morgan & Company (NYSE: JPM) - Best in class U.S. bank. Recently J.P. Morgan announced a solid quarter with increased revenue, lower credit losses, and rising income.

Toll Brothers Housing (NYSE: TOL) - For anyone wishing to invest in U.S. Real Estate, Toll Brothers Housing is up 25% for the year and is really showing signs of gaining momentum. The stock is finally getting some positive traction amongst investors and it is beginning to stop the bleeding as it posts lower losses in recent quarters. Keep in mind, however, that this company is still dicey, as its bonds were placed in junk status.

Happy Investing : )

Tuesday, July 19, 2011

Canada's New Pension Plans. Another Victory for Canada's Financial Institutions.

The Canadian government is moving ahead with plans to create another retirement savings plan for Canadians. As if RRSP's, RPP's, TFSA's, LIRA's, LIF's, CPP, OAS, etc. are not enough for the public to juggle, a new optional pension plan, which will run in addition to CPP and OAS, might receive parliamentary approval as early as this fall. 

The plan would offer small businesses and employees who do not already have a company pension plan an option to add to a privately managed "pooled pension." Given that 60 percent of Canadians do not have a company pension plan, something had to be done, but whether this is the answer is far from certain. The investment options that will be allowed to be included inside the new plans have not even been decided yet.

If the legislation passes, AND receives approval from provincial ministers, then Canadians will be choosing from options that are to be managed by private institutions. So the same institutions that manage our RRSP's etc. will probably manage the new plans as well. New entrants could include some of the country's major pension plans as well, which will charge for their management services and pool the money together with their existing members. Overall, this plan will be a great boon for Canada's financial companies, which will have yet another, government sponsored, way to charge Canadians more fees.

Surely there will be more news on this plan as it develops, but for now, expect the banks to be gearing up for another marketing bonanza. TFSA's were not that long ago, and now they will have another opportunity from the Canadian government to attack our wallets.

More information is at the Vancouver Sun.

Happy Investing : )

Friday, July 8, 2011

Why Microsoft Should Buy Canada's Research in Motion. It is a Better Target than Nokia or Yahoo.

In a recent article for the Rhodes Capital Blog, Sean Farhy outlines an excellent argument in favour of Microsoft's acquisition of Canada's Research in Motion. The price he mentions that would be appropriate is $49 per share, well above today's current price of around $27 and a healthy premium for investors should a deal like this ever materialize. To be sure, if the situation at RIM gets much worse, the management will shop around for a suitor and happily take a fat golden handshake... leaving their shareholders with a wad of cash on hand, or ownership in a stronger combined entity. 

"Microsoft (MSFT), like City Hall, is the established bureaucracy and its stakeholders often feel like powerless constituents. Unfortunately for the small investor, the lack of a democracy in a stock proxy only empowers Steve Ballmer and his administration. Mr. Ballmer will play the role of our Mayor, a career politician who has done absolutely nothing for the stock price since he has come into office." 

Microsoft sits on almost $50 billion in cash, or $5.78 a share and also pays a dividend of 2.7%. Earnings are expected to be over $20 billion going forward- Mr. Ballmer, surely you can do better than maintaining your failed policy of executing the status quo? The first trial into the smartphone market failed within weeks and the likelihood of creating another profitable organic hardware system like the X-Box is virtually nil. What needs to be done is something extremely logical and affordable. Rumors were that Microsoft was going to partner with Nokia (NOK) and there was even more speculation that Microsoft was then going to buy some or all of that company. Forget about buying Nokia (which you’ve done, correctly I might add). If Microsoft is on the acquisition path, Research in Motion (RIMM) is more compelling purchase.

"Research in Motion’s market cap is now under $20 billion, with no debt, plenty of cash flow, and a solid footprint in the smartphone market. Nokia on the other hand is larger, leveraged with high-yielding debt, and offers product lines not applicable to Microsoft’s core business. Blackberry currently supports Windows and MS Office so further integration would appear to be easy to accomplish. So if the rumors are right, and Microsoft is going to make an acquisition- Research in Motion would appear to make the most sense."

Abstracts are from the Rhodes Capital Blog

Happy Investing : )

Optimism Café. Kraft Opens Maxwell House Coffee Shop in Toronto. Free Cookies and Kool-Aid.

Kraft Canada (NYSE: KFT) has embarked on a clever piece of marketing recently. On Queen Street in Toronto, the company has opened up a Maxwell House coffee shop. Titled the "Optimism Café," the food juggernaut hopes to increase brand awareness for its number one home-made coffee franchise.

The location only has limited weekday hours, and for now, is only planned to be open for the month of July. Early signs, however, are revealing that the concept is a success. Already receiving free press (including this article), and positive reactions from a number of customers.

Part of the reason for the shops early success is its touting of free Wi-Fi Internet, dog biscuits, cookies for kids, and Kool-Aid Jammers. Other immediate plans include book signings and live music. The new Maxwell House coffee shops are part of an overall "optimism" marketing strategy that includes "feel-good" messages and commercials that give the impression to the public that the glass is "always half-full" with the company.

So far, Kraft says that they have "got a lot more out of the café than we put into it — worth every penny and more.”

For the Intelligent Investor, this is a sign of an innovate company that is in touch with the public and able to utilize fresh marketing to increase sales. Maxwell House sales, for instance, have been up 10 percent since the start of the campaign. 

Happy Investing, and be sure to give Kraft a look as a conservative part of your portfolio. 

For more information:

Thursday, July 7, 2011

Can RIM Recover? New Article from Maclean's on Research in Motion.

A recent article in Maclean's highlights more of the issues and uncertainties at Canada's technological giant Research in Motion (TSE: RIM).

"RIM’s hopes are pinned on an operating system made by QNX Software Systems, an Ottawa-based company RIM scooped up last year. The software is already running the PlayBook and will eventually power every BlackBerry in RIM’s lineup. But the PlayBook’s troubled launch—reviewers have seized on a lack of key applications, like native email—has raised nagging questions about RIM’s ability to execute its plan. Nor does it help that the updated BlackBerries that were supposed to whet consumer’s appetites in the meantime using the new BlackBerry 7 operating system have been delayed—reportedly because RIM realized midway through their development that the phones would be outdated before they hit store shelves."

Abstract is from: Maclean'

Wednesday, July 6, 2011

More Canadians are Expanding into the Wine Business. How to Invest in Canadian Wine.

An increasing number of Canadians are choosing to make their fortune an old fashioned way, in the wine business. In this country, growth in the wine industry is outstripping growth in the other beverage sectors. Having grown at annual rate 7.6% since 1998, growth in wine production in Canada is outstripping many other areas of the economy. But beer, however, remains the beverage of choice for Canadians as this country has about 10 million beer drinkers. 
The dominance of beer in the country, however, is coming under attack, and producers like Molson Coors (NYSE: TAP) are taking note. The stock is essentially flat on the year, but profit margins have been coming under increasing pressure from foreign competition, spirits, and now wine. 
"However, domestic vineyards are facing a number of challenges and are going to have to fight to retain their share of the Canadian market," says the Bank of Montreal. Our industry is heavily reliant on domestic consumption. This basically means that it is mostly Canadians who buy Canadian wine, with little being exported abroad. Indeed, between 2001 and 2010 exports actually dropped from 15% to 4% of production volume. With countries like Australia, Argentina, Italy, and France all producing very good wine, it is difficult for Canada to compete.
But for those investors looking for something different in their portfolio, there are a couple of Canadian stocks you could look at:
Andrew Peller Ltd. (TSE: ADW. A)
Magnotta Winery (TSE: MGN)

Tuesday, July 5, 2011

Canadian Mortgage Rates on the Rise. Royal Bank, TD, and Laurentian Charging Customers More Interest.

It is getting more expensive to buy a house in Canada as mortgage rates in this country are rising. Amidst inflation fears Royal Bank (TSE: RY), TD (TSE: TD), and Laurentian Bank (TSE: LB) are raising their rates by 0.10 percentage points. 1/10th of a percentage point does not sound like a significant amount, but given the lengthy duration of many Canadian mortgages, small amounts make a big difference over time.

Because of the clout of TD and Royal in particular, their raising of mortgage rates will be an indication to the other big banks to do the same. BMO, CIBC, Scotiabank, and National should not be too far behind.

For those Canadians currently on variable rate mortgages, you will be paying more interest soon enough when the Bank of Canada eventually indicates that it will raise its benchmark. For those of you on fixed-terms, you will not notice a rate change until your current mortgage term expires and you have to renew it at current market rates. So for everyone sitting on variable mortgages, be careful, inflation might be biting at your heels and compelling the banks to charge you a little more money every month.

Happy Investing, and for a short video with this news:

Monday, July 4, 2011

Look Here for Dividend Growth. Many Investors are Looking for General Electric to Raise its Dividend Again.

General Electric could be well on its way to becoming a dividend aristocrat again. Having once paid a dividend of 31cents per quarter, the company was forced to slash its dividend to 10cents during the height of the financial crisis. MarketWatch, among others, have begun reporting that the company is poised to raise its dividend again. 

GE, (NYSE: GE), has now boosted its dividend for the last three quarters and it now stands at a healthy 15cents per share. Half of what it once was, but rising quickly. The CEO, Jeff Immelt, noted that the company's financial health is back on track, and that he hopes to have GE back to issuing annual dividend increases... something the Intelligent Investor should look for. 

The company has a much simpler group of businesses than it did pre-recession, having downsized its financial wing, and spun off its entertainment division into a joint-venture. On the horizon is big growth in its energy infrastructure unit, which has been making key strategic acquisitions during recent years. So, to include some dividend growth in your portfolio, and help you diversify away from your Canadian bread and butter, take a look at General Electric. 

For more information: 

Happy Investing.