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?