The state of the Canadian wireless telecom market

Back in the 1990’s, the players were the telecoms we know today (Telus, Bell) and three companies that the younger generation doesn’t know much of today – CanTel (which was taken over by Rogers), Microcell (which is most known as Fido, but was taken over by Rogers) and Clearnet (which was taken over by Telus).

Putting a long business story short, all the original competitors went away except for Telus, Bell and Rogers. Telus and Bell had their landline markets subsidizing the wireless capital construction, while Rogers had (and still has) their cable business. CanTel, Microcell and Clearnet were exclusively wireless providers and did not have enough financial capacity to remain as businesses. Microcell was the last holdout before it got munched by Rogers in 2004; although it should be noted that Microcell was in dire financial straits well before this date.

Fast forward ten years and the consolidation, and we now have some new entrants into the Canadian wireless market. They are Public Mobile (concentrating exclusively on the low end user of Toronto/Ottawa/Montreal); Wind Mobile (recently introduced in Vancouver and currently concentrating on a broad approach across metropolitan centers in Canada minus Quebec) and Mobilicity (in the same market space as Wind).

I predict that none of these companies will be making any money, but the consumer, over the next couple years, will be receiving some excellent deals for mobile voice/data service.

In particular, Wind Mobile should be a formidable competitor by virtue of having a deep-pocketed parent, Orascom. I am less certain that Mobilicty will last as long, simply because they likely are less capitalized. I have no idea how Public Mobile will do, but they appear to have a very low cost approach which may work simply because the major companies have too much fixed overhead to compete properly (on a cost basis) against Public.

I also highly suspect that the reason why Shaw Cable is waiting so long to get into the mobile market (even though they have made the proper wireless spectrum purchases) is because they want to see who consolidates with who – or maybe consider its entry into the Canadian wireless market through a purchase once Wind and Mobilicity have lost enough money and want to give up.

So my deep suspicion is that Shaw Cable and the retail consumer will be the big winner in the Canadian wireless market over the next few years.

Merits of technical analysis

Some people claim they can trade by just reading charts. I am not one of them.

However, marketplaces that are crowded with technical traders will have the ability to be successful in the short run. The technical end of the stock market are zero-sum gamers employing algorithms that take advantage of weaker algorithms.

Thus, I do believe in the validity of technical analysis. I just don’t think many people can do it – at a minimum if you are not cognizant of your “enemies” (i.e. other traders) are up to, then you are the proverbial fish around the poker table.

One branch of physics, called econophysics, heavily depends on technical data to drive conclusions. Back in my university days, I dabbled in an econophysical model which was an interesting study. Some professors have taken it to the next level, and have mined technical data to try to predict market crashes, with partial success.

In absence of fundamental data, the model might be successful in predicting algorithmic activity, rather than being a crash predictor.

The danger of yield chasing

I love nearly everything David Merkel writes, and this is a gem:

The lesson is this: in investing, ignore yield to the greatest extent possible. Focus instead on earning a good return, with safety, and ignoring the payout. It is a little known secret that REITs with the lowest payouts tend to be the best performers over the intermediate-to-long term. It is easier to earn money off of taking equity risk than credit risk.

So, aim for best advantage in investing. Don’t trust yields, but rather look at the underlying economics of the business that you are investing in or lending to. Yes, it is a lot more work, but it is work that you should be doing.

One issue I have with a lot of “Dividend stock investors” is that they do not look at the underlying fundamentals of the company to determine whether yield (and growth of that yield) is sustainable. During the Canadian Income Trust mania (roughly in 2003-2006 before the government shut the whole operation down) you had corporate entities converting into a trust that had absolutely no chance of being able to sustain such distributions. To list all of the offenders in this post would be burdensome, but one of my “favourites” (not that I had ever invested in it, but because they were a local business I paid attention to them) was Hot House Growers Income Trust.

HHG went public in late 2003 after they had a good year. They had distributions which were higher than their net income and they had a significant amount of debt. They began to suffer operationally (too many people were crowding into the business sector) and a couple years later they collapsed and had to be taken over by the surviving entity, Village Farms, which is a penny income trust that will not be giving any yield because their business still has too much debt. They are still publicly traded, although they will likely have to recapitalize again to pay for their debt.

People were buying income trusts in droves simply because they saw the yield and did not consider the return on investment, i.e. whether you would be able to retain the capital in the investment.

My own income trust investments are quite “yieldy”, but their underlying business fundamentals are solid, and generate significant net income (not just cash flows) to sustain the business, after required capital expenditures. Probably the easiest screen you can perform is making sure that net income and cash flows are above the yield (dividend/distribution) rate and ask yourself if the business that is underneath it all can be sustained for the indefinite future.

The other question you should be asking is whether the company has the ability to invest capital that is left over after distributions and debt payment into other capital projects that will continue to give yields that are above the current cost of capital. If so, such companies should not have excessively high payout ratios.

Most dividend stock investors have the right idea, but they don’t do the rigorous research to ensure that they will be paid out without taking a disproportionate risk of capital loss – instead, they just look at the yield/dividend number, and just care that it has gone up historically over a period of many years. This blind-style of investment is akin to driving while looking at the rear view mirror.

BC Property Tax Deferment

The BC government in the previous budget is now enabling people that own homes and financially supporting somebody that is 18 years old or younger to defer their property taxes, at the rate of interest of the bank prime rate. Previously only seniors (55 and older) were able to exercise this option.

Essentially homeowners are given the option of borrowing money (the amount of their yearly property taxes) at the prime rate, and will only have to repay this amount when your property is transferred (i.e. you sell the place).

Almost everybody that is financially sophisticated that is eligible to do this should be exercising this option. Getting money at the prime rate outside a mortgage is not that easy, and at the prime rate you can very likely make an investment that would give a higher rate of return.

The trick is making the interest amount tax-deductible, and if you use the deferred property tax amount for income-generation purposes then in theory you should be able to deduct the interest.

British Petroleum and the drilling companies

I have done nothing other than look at the summary financial statements of BP, but on paper they look undervalued. The mess in the Gulf of Mexico, however, will be costing them considerable amounts of money. I’ve projected a couple years of earnings ($40 billion) that will likely go down the tubes as a result of this environmental incident.

The market will take BP down to the point where nobody will expect, and when everybody has written off the stock, that is usually the time to buy. In essence, this is a psychological play, so it involves more game theory than financial analysis since it is likely that BP will remain a continuing entity in the future. Their balance sheet is fine – about $40 billion in debt and $7 billion in free cash flow ($20B income) in 2009, so they won’t be facing any solvency issues.

The better question is whether one should invest in the drilling companies. It is likely lease rates will drop since offshore drilling will have significant demand drops and the market has already been pricing this in. As an example, Transocean has also been slaughtered.

I generally do not look into companies that are not trading in Canada or the USA, and BP is a British company, so I will not be considering them seriously. However, the other companies (e.g. the aforementioned drillers) I will be investigating. Since there are so many eyeballs on this sector, there must be other circumstances (e.g. panic) that would be required to ensure that you are getting good value for your investment. It is also exceedingly difficult to predict when to catch the falling knife and the investment to invest in BP is essentially that – you need to place your purchase orders when everybody has gotten their hands so bloodied up trying to catch the knife that they have given up trying.

I would not bother thinking about this until BP has cut their dividend.