Taking an investing break until after the election

So far, this has been a crappy quarter to date. Although thankfully it isn’t a quarter where I should have gone all-index (the S&P 500 is down ever so slightly), I really feel like I have badly unperformed – so far I’m underwater about 150bps or so, which is not a good feeling. My decision-making faculties have not been in focus. For the year, I’m still barely in the black, but my relative performance benchmark has been horrific. If I was an 8 cylinder engine, I’m firing on about 2 of them.

That said, I have sold off and cashed a lot of the portfolio and I will only start to consider re-deploying after the upcoming Canadian election. There will be a lot at stake, especially with respect to the oil and gas industry.

It is pretty evident by the non-presence of the Canadian government at the Trans-Mountain pipeline appeal that the incumbent Liberals are not really interested in seeing the project proceed – or at least they’re happy to stall it out. The six motions (concerning the second round of consultations with First Nations) received no evidence from the government – it seemed pretty likely that if the government did provide evidence, the appeal court would have likely struck down the appeal application.

So this is a pretty polarizing election. If the Conservatives don’t get a majority government, it is likely that status quo will continue – avoiding Western Canadian investments will generally be wise as Liberal governments tend to focus on Toronto and everything east of it (Bombardier, SNC Lavalin, etc.).

The oddsmakers at 338 right now are projecting a 70% chance that the Liberals will get the most seats, but this will undoubtedly change through the campaign. In 2015, at this point the NDP were leading polls nationally, but this changed pretty quickly!

In 2019 we have the following:

In other words – the campaign will matter. Those lines will shift trajectory as people start to dial in – I figure around mid to late September.

A comprehensive list of TSX Exchange Traded Debt

(Most recent post on this was September 4, 2020)

Over two years ago I lamented there was no good consolidated list of TSX-traded debentures available.

I’ll give Felix Choo some credit for resurrecting a digital version of this. In general, his lists are about half of the exchange traded debentures on the TSX.

After consolidating a bunch of information together and going through a hundred documents or so on SEDAR, I am finally in a position to publish an authoritative list of debentures (109) and notes (3) that are trading on the TSX.

I have not included TSX Venture, but in case if you were wondering what you were missing on the TSXV, only a handful – 22 tickers among 18 issuers. Maybe I’ll add them in the future.

The entire list (as of September 3, 2019) of TSX-listed debt instruments (convertible debentures, exchange-traded notes) can be accessed at the following shared Google Sheet linked here.

I’ll give the standard disclaimer: I have tried to make it very accurate, but things can slip through the cracks.

Other than trying to make this a “real-time” sheet (can anybody give me a good automated source of debenture quotations that doesn’t involve a $2,000/month Bloomberg Terminal?), comments to improve this would be appreciated.

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.