Tax loss selling candidates, 2019

Below are 29 companies that are trading lower than 40% year to date on the TSX, that have a market cap of above $75 million. I’ve also restricted the share price to greater than 50 cents.

TSX tax loss candidates

August 30, 2019 closing prices
Last trade > $0.50
Market Cap > $75 million
YTD change -40% or worse
ItemSymbolNameSectorLastYTD %ChgMktCap ($M)
1TH-TTheratechnologiesBio4.98-40.14394
2AVCN-TAvicanna IncCannibis3.66-41.2588
3IDG-TIndigo Books & Music IncRetail6.6-41.49180
4BIR-TBirchcliff Energy LtdEnergy1.77-41.78503
5SOY-TSunopta IncFood3.07-41.86275
6SOX-TStuart Olson IncEngineering2.89-41.9782
7ATH-TAthabasca Oil CorpEnergy0.57-42.42303
8ADVZ-TAdvanz Pharma CorpBio14.7-42.93673
9CFX-TCanfor Pulp Products IncForestry9.08-43.99574
10UNS-TUni Select IncAuto10.79-44.41456
11MDF-TMediagrif InteracIT5.23-45.2981
12MPVD-TMountain Province DiamondsDiamonds1.04-46.67223
13HNL-THorizon North Logistics IncEnergy Service0.95-47.22155
14IMV-TImmunovaccine IncBio3.58-47.89186
15DII-B-TDorel Industries Inc Cl.B SvRetail Wholesale9.1-48.41292
16LGO-TLargo Resources LtdMetals1.37-51.59728
17PONY-TPainted Pony Energy LtdEnergy0.68-54.36114
18PEY-TPeyto ExplorationEnergy3.2-54.8554
19BNP-TBonavista Energy CorpEnergy0.54-55149
20DR-TMedical Facilities CorpHospitals6.74-55.19211
21NVA-TNuvista Energy LtdEnergy1.61-60.54370
22MAV-TMav Beauty Brands IncBeauty4.11-61.52155
23SNC-TSnc-Lavalin SvEngineering16.41-64.262,858
24OBE-TObsidian Energy LtdEnergy1.27-64.4397
25TRST-TCanntrust Holdings IncCannibis2.3-64.99335
26JE-TJust Energy Group IncEnergy Retail1.46-67.63227
27TRQ-TTurquoise Hill Resources LtdMetals0.58-74.221,187
28ZENA-TZenabis Global Inc.Cannibis1.06-82.33214
29PLI-TPrometic Life Sciences IncBio11.6-95.54280

Comments:

1: A bio company with an FDA approved small scale HIV medication (used in cases where mainline HIV treatments do not work), and a new product that is used for something called hard belly – which is a symptom in some long-term HIV patients as a side effect of the anti-retroviral drugs that they take to keep viral loads down. Stock is down because sales aren’t exactly going anywhere and those sales and marketing expenses are indeed quite high. Market cap is trading as if the company will get sold off (drug companies don’t capitalize their R&D expenses it takes to get a drug to market, so there is a bunch of hidden balance sheet value in the drugs, despite the relatively little revenues they get from them).

2, 25, 28: Are Marijuana companies, and I have no interest in analyzing them.

3: Indigo is a typical retail story. Their stock chart in the past 18 months is a straight line down. Aside from their lease commitments, their balance sheet isn’t in terrible shape and management has some time to decide what to do, but they are bleeding money at a frightening pace.

4, 7, 13, 17, 18, 19, 21, 24: Canadian oil/gas extraction companies, so I do not need to write further why they are trading down. 13 is an energy service company. My big surprise here is why there aren’t more companies on the down 40% list (doing some quick investigation, it is because most of them already got hammered in 2018 so the losses in 2019 relatively speaking isn’t as big).

5: A low margin food producer with a ton of debt on the balance sheet and bleeding cash. Not looking pretty.

6: Engineering firm impacted somewhat by oil and gas-related spending. Income statement shows they are treading water. They were able to raise financing from Canso at 7% for unsecured debt (rolling over an existing debt issue) and the balance sheet is not in terrible shape. May be a good possibility for a turnaround – given its market cap of $80 million in relation to its overall size (revenues will be roughly a billion in 2019), something to watch. Has a similar feel to IBI Group.

8: The old Concordia Pharma. Classic case of what happens when you over-leverage cash flows too much. They make a ton of cash, but they have a ton of debt and a ton of interest expenses.

9: Lumber has been killed for various reasons. Despite being from British Columbia, I should know more about the industry. Just a year ago it was trading at $27 and today it is nearly $9. The stock graph looks like a normal distribution curve. Despite the fact that their cash flows has been decimated year-to-year, they don’t have any debt and look like they can survive the cycle. Jimmy Pattison trying to take over Canfor Corporation (not the pulp subsidiary) for $16/share seems to be a case of trying to take them on the lows. Canfor owns 55% of Canfor Pulp.

10: I know less about automobile companies than forestry products. Skimming the financial statements, they just appear to be losing profitability and racking up debt.

11: A small IT firm that is undergoing a strategic change and also still looking for a new CEO. Still profitable, and with a relatively blank canvas balance sheet.

12: Owners of a 49% interest in a diamond mine in the N.W.T., and barely making enough to pay off their bank lenders. Will pass.

14: Early clinical stage biotech working on some cancer therapies, P2 studies have samples of less than 20 patients, and skimming the science, looks questionable.

15: Legitimate larger company that has been in a slow straight-line descent for the past three years. Three major product lines (babies, sports and furniture) are sold to major retailers worldwide. Management (Schwartz – family-controlled dual-stock corporation) has been around for a very long time, albeit they seem to be highly overpaid. They resolved an upcoming debt maturity last June with a 7.5% unsecured debt note (not convertible) and this will buy them time to figure out how to improve margins. Cash flows from operations have been diminishing, and they already once cut their dividend, and it is due for another cut. However, given the ~$300 market cap and $2.5 billion in revenues, the potential for a turnaround here is reasonably good, except for this looming worldwide recession coming which would surely impact this company’s fortunes!

16: They mine a commodity I know nothing about (Vanadium), in a country I know very little about (Brazil).

20: This one is interesting. A company that owns majority or near-majority stakes in a few hospitals in the USA and distributes most of its free cash. The only problem being that in the past few quarters, they have really underperformed. If they can figure out what they did wrong and reverse it, then the stock is an easy double from their depressed price. It was bond-like until the bottom fell out of it in the May and August quarterly reports. If there was a candidate for year-end tax loss selling, this one would be it. Another interesting quirk is that their distribution rate on a historical basis is now at a 17% yield. This distribution was below their cash generation in prior years, but not from the first half of this year. It’s likely they’ll cut this dividend unless if they think the past couple quarters was temporary. Knowing about the US healthcare industry, especially in the states that DR operates in, coupled with competitive dynamics of healthcare and competitors will help.

22: Cosmetics company that went public in July 2018 for CAD$14/share (proceeds to pay down debt with IPO). Now it is trading at $4.11/share, which is a fairly good 70% negative return on investment. The company is now barely profitable, but still isn’t at the level which supports the debt on its balance sheet. Still, cosmetics is a pretty high leverage industry to be in if your revenues start to take traction – and their revenues are growing. Might be interesting, considering that beauty products sell in any economic climate! Unfortunately, you won’t see me wearing any…

23: SNC. Enough said. There’s tons of industry analysts out there looking at this one. Their partial sale of the 407 freeway around Toronto will buy them a lot of time to get their act together, but in the meantime, their operations are a total mess. There will probably be a time to buy this one but it will take awhile, and likely more corruption from the federal government is required for a positive outcome (i.e. if Trudeau gets re-elected, it would be a positive for SNC for sure).

26: Balance sheet is a train wreck, company is exploring a recapitalization, and the business model itself is highly broken. Good luck!

27: Another mining company working in a jurisdiction I know hardly anything about (Mongolia), let alone I can’t even pronounce the name of its main flagship mine. Don’t have any more insight than that, sadly.

28: The big loser in the TSX is due to a debt-to-equity recapitalization and a 1:1000 reverse stock split. After the recap they did get rid of a bunch of debt on the balance sheet and raised some cash, which they need in order to bide their time to get FDA approval for their lead product. They burnt about $50 million cash in the first half of the year and have about $80 million left on the balance sheet, so looks like they’ll have to raise more financing…

Redeemable Preferred Shares – only 2 remaining

I’m going to track back to my previous post on the matter of redeemable preferred shares and point out today that Birchcliff preferreds (TSX: BIR.PR.C) traded at $24, which if you put back to the company on June 30, 2020 will result in roughly a 12% YTM. There is the equity risk of the company choosing to redeem in shares at 95% of weighted average trading prices, or a $2 minimum, which BIR equity is trading awfully close to. The company itself, however, even with depressed natural gas markets, is in no danger of becoming insolvent as its line of credit is healthily above the redemption amount of the preferred share series (CAD$50 million), coupled with the fact that the equity itself (despite management shrewdly engaging in a self-enrichment process at their last annual general meeting) appears relatively cheap.

Mentioning that you purchased these preferred shares is not going to draw much of a crowd at cocktail parties, however.

Kinder Surprise – KML taken out by PPL

Kinder Morgan Canada (TSX: KML) has agreed to be taken out by Pembina Pipeline (TSX: PPL), subject to a 2/3rds shareholder vote of KML holders, which will most certainly be approved. Details on this news release.

KML shareholders will get 0.3068 shares of PPL, which based on the closing price today (not the date of announcement) is about CAD$15.06/share for KML.

My comments are the following:

1. I thought this would happen in 2020 – my guess is while doing the strategic review they received a bunch of low-ball offers (and did not take any), but after the review ended they received a credible offer which was close to the initial KML IPO price of CAD$15/share (guessing their target price).

2. With regards to the preferred shares, I will point out that PPL has two preferred share series with minimum rate resets: PPL.PR.K (575bps, resets at +500bps with a 575bps mininmum rate) and PPL.PR.M (575bps, resets at +496bps with a 575bps minimum rate). Both trade above par value and both reset in the middle of 2021.

KML.PR.A (525bps, resets at +365bps with a 525bps minimum rate) and KML.PR.C (520bps, resets at +351bps with a 520bps minimum rate) are significantly worse featured – a reset rate of about 140bps adverse and a minimum rate of 50bps adverse. Both are trading slightly up (about a dollar) to ‘synchronize’ with the above – as PPL is a better credit.

Note that PPL is under no obligation to take out the preferred shares at par. Holders of KML preferred shares can keep clipping their coupons and have a little more confidence that the size of PPL will back it up.

3. Pembina is in a great position to take over the Trans-Mountain pipeline project (KML’s Vancouver terminal and Edmonton storage project synergize greatly with the pipeline). Although they claim they are not interested in it due to the obvious political mess, you can be sure if the Canadian government is going to give it away for cheap, Pembina will be right there bidding.

As such I think PPL was a great strategic buyer for these assets.

Thoughts on Canadian preferred shares (Reply)

Chris posted a comment with the following question:

Do you have any thoughts on Canadian Pref shares? I’m watching a few for potential multi-year hold.

I asked for his thoughts first, and he replied:

I’m seeing a few yielding around 7% (taxed as dividend), with resets 3 to 4 years out. I can’t predict where they 5 year bond will be at that time, nor can I pick the bottom on these moves, but 7% for a few years followed by a reset at 5 year bond + 2.9% (based on $25, as you know) seems like a decent place to put some longer term money to work. BAM.PF.A is an example. Prefs are a bit outside my wheelhouse, but it seems that they present an opportunity every now and then. Thanks for any insight.

…

I forgot to mention that Brookfield has been buying back some of their prefs in the open market recently.

Chris – One thought is fairly obvious and you touched upon – those 5 year rate resets are awfully sensitive to the bond yield!

Example (above): TRP.PR.B (current coupon 2.152%, resets at 1.28% above 5yr, the reset is June 2020) – an investor since October 2018 will have lost 45% of their capital to date (when the 5yr yield was roughly 240bps)! That’s very heavy, and a double-whammy because the equity from October 2018 to present has gone up! Normally you’d expect capital gains/losses for preferred shares to be muted to the equity. The company itself hasn’t materially changed in credit profile.

Currently the 5yr government yield is 121bps – at present rates you’ll get a reset at 6.2%, but you can be sure if 5yr yields go down to 60bps (which is conceivable and mirrors the lows a few years back) TRP.PR.B will be trading at around $7.60-ish, all things being equal, or almost another 25% of capital loss!

There also appears to be a law of dividing by small numbers effect going on. Let me illustrate with an example – pretend something yields 3% at present. Going from 3.0% to 2.5% is a 17% difference. Going from 2.5% to 2.0% is an 20% difference. Going from 2.0% to 1.5% is a 25% difference – low-rate reset preferred shares such as TRP.PR.B are getting absolutely killed because of the small denominator.

So if you want to take your 6-7% coupons and run with them, you need to take into consideration that there’s a good chance that you won’t be able to unlock the capital without taking losses, and ultimately you want to eventually see a day where interest rates are higher than when you initially purchased the preferred securities – who knows if/when this will be?

Hence, those 5 year rate resets are much more risky than people probably thought – they have been wildly volatile in the past five years.

You can dampen the risk by buying rate resets that are further out in time (e.g. resetting 3, 4 years from now) but they still trade quite sensitively to the overall 5yr government bond rate. Fixed rate (straight) preferreds are another option (albeit with different rate sensitivity). Most minimum-rate guaranteed preferreds trade very expensive (e.g. PPL.PR.K).

Of course if you anticipate 5yr government rates will increase, the inverse of the above scenario applies (i.e. potential for significant capital gains).

With the US Fed anticipated to drop short term rates, there’s a good chance Canada will be following to some extent and this will continue to depress the entire yield curve. I’m not offering an opinion on future rates, but the trend clearly has been negative (i.e. bias towards lowering rates) since the beginning of the year.

Another comment I will make is that I’ve generally noticed equity presents a much more attractive risk/reward than the preferred shares in a lot of issuers. If you’re just buying for income, why not just buy equities that give out nearly the same yield with a lot more potential for upside (including dividend increases)?

Also, I have not seen another asset class that is so ripe for tax-loss selling. If you were sitting on a 45% loss on TRP.PR.B but really wanted the exposure, I’d sell it and buy something very related instead (e.g. TRP.PR.C) and this avoids the 30-day wash sale rule.

So to conclude, there appears to be quite an element of risk unless if you’re planning on holding these securities strictly for income for a considerable period of time.

Drudge on the doom of the stock market

Most times I have no idea where things are going in the macro sense – speculating is entertainment but I don’t find I have superior insights on the matter. However, it is important to read the market psychology and when non-financial media start to comment on financial happenings, more often than not it is a contrarian indication:

I find this paranoia regarding Trump, China, recessions, etc., to be very alarmist. I’m pretty sure at this stage in the economic cycle that we are due for an economic purge sometime – there’s a lot of excess out there (does anybody seriously think Beyond Meat is worth a third of Tyson Foods?). Instead, we have a very low interest environment, with short term interest rates likely to head lower over the next year, and it all brings you to the fundamental question:

What else are you going to invest in?

Clearly as real rates go negative (let’s not get into the scenario where nominal rates go negative!), institutions have found safe passage in gold.

But, as Buffett says, there isn’t much economic value to storing a bunch of yellow metal in a fort somewhere. Where are you going to find a return?

You can put money in a BBB or A-rated bond and get your 340bps, but that isn’t going to be enough.

Real estate gives a yield (on rent) but even REITs have their yields compressed, and in Canada, you have commercial property cap rates that are getting ridiculously low (mid single digits). The favourite residential REIT of most retail (TSX: CAR.UN) gives out a whopping 270bps in distribution yield. Looks expensive (unless if real estate continues to rise).

What’s left if you actually want a return?

There’s only one game in town – equities.

There’s a lot of old-school value out there that’s really getting hammered in anticipation of this recession.