Monday, January 15, 2018

Odds and Ends: A Picture in a Frame

http://www.dingobear.com
A unique view of Powell Street on a foggy, misty morning in the Bay Area.  Alcatraz (left) and Coit Tower (right) loom in the distance.  San Francisco, California.  Copyright © 2013 Felix Choo / dingobear photography.  Picture is available for sale as prints and wall art at Fine Art America. Picture is available for licensing at Alamy Images. Photo may not be reproduced without permission. 

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Warning: there isn't really much convertible debentures content at all in this post.  (Please forgive me, but I'm currently targeting an update to the Peanut Convertible Debentures Power Rankings for this coming weekend).

Instead, today I want to mostly talk about photography.  You'll already know this if you've been over to our About + FAQs page, but in addition to being a CFA charterholder and an avid blogger on Canadian convertible debentures, I'm also, by trade, a photographer for various editorial and commercial markets.  Usually, my photos are sold direct to publishers and editors, or via Alamy Images, the agency that represents my work. 

However, in this New Year of 2018, I thought I'd try something a little different and make some of my images directly available for sale as prints through Fine Art America (FAA).  Please click here to view my still-under construction (but functional!) gallery at FAA if all of the profits you are making from investing in convertible debentures are burning a hole in your pocket, and you just also happen to be looking for something new to hang up on your wall, or just can't find that perfect gift for that someone who already has everything!   

Ok, shameless self-promotion over.  Now let's get back to our regularly scheduled programming.

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Heads-up: the Bank of Canada announcement for its benchmark target overnight rate is scheduled for Wednesday, January 17.  The general consensus on Bay Street is that Governor Poloz, Deputy Governor Wilkins, and the gang will hike the rate an additional 25 basis points as the economic data that's been rolling in as of late indicates that the economy is firing on a lot of cylinders.

You'll recall in our last update that we fearlessly surmised that the Bank of Canada would raise rates somewhat less than consensus in 2018 by tightening the spigots only one or two times.  I'm going to stick with that prediction for now but I also want to clarify that I meant the central bank would raise rates one or two net times.  If (when?) our friends south of the border decide to blow up NAFTA, I suspect our Canadian central bankers won't hesitate at all to cut rates quickly to release any stresses that that result from the fallout.

'Til our next update, happy investing.
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Sunday, January 7, 2018

January 7, 2018, Quick Update: Peanut Convertible Debentures Power Rankings

Happy New Year!  This is the 24th update of the Peanut Convertible Debentures Power Rankings, and is current to January 5, 2018.  Consider this another one of our quick updates, with abbreviated commentary.  Thank you for continuing to read and support us!
      
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For a summary of the rankings of our entire convertible debenture coverage universe including the quantitative model prices of, and notes on each issue we follow, click on the table below to view it larger.



The Top-5 picks in the Power Rankings are also described with a little more detail in the corresponding section below.

For background information on the Peanut Power Rankings, please see our FAQs by clicking here

Important: the Peanut Power Rankings are provided as information and opinions only and are not intended to be a provision of investment advice or a recommendation of any investment action in any form.  As with all information concerning investments, it is highly recommended that an individual consult with a qualified investment professional before making any investment decisions.


Public Service Message: the Financial Post Convertible Debentures List
We've received quite a few emails asking about the Financial Post's convertible debentures list, which has apparently vanished from the newspaper's website.  Unfortunately, we don't know of another complete list of Canadian convertible debentures that is available free to the public that has the same depth of information that was contained in the Financial Post list.  The stats and figures we use for the Peanut Power Rankings we collect from various public sources and calculate ourselves (it's a lot of work!); we don't have a complete list of convertible debentures either.

For those of you out there that are clients of a full-service brokerage firm with a research team that covers convertible debentures, you may be able to obtain a complete list if you ask your broker.  Also, as we announced on December 20, thanks to one our valued readers, we were informed that the TSX publishes a basic list on its website approximately monthly.  It's not the same as the old Financial Post list, but hopefully it can still be of use to some of you out there. 

Market Commentary - Quick Points (January 5, 2018)
  • On the heels of some hot jobs data, the Canadian dollar soared past 80.5 US cents on.  It's interesting to see where the loonie goes in 2018.
  • If I were to guess, I'd say that the Canadian dollar probably has some room to run as we head towards spring, after which expected rate hikes by central banks on both sides of the 49th parallel may begin to tilt the table either way. 
  • Based on the economic forecasts I've read, it seems as if many are expecting the Bank of Canada to raise rates as least twice this year, and maybe three times.  The US Fed? Also three times, though the potential for some kind of surprise (four times?) seems higher there.  The US economy is arguably running in excess of full capacity, and the additional stimulus brought on by the Republicans' (unnecessary) tax cut for those who needed the tax cut the least has the potential to be inflationary. 
  • That said, there are many unpredictable variables beyond pure fundamentals that could alter the Fed's action plans, not the least of which is the current US administration itself.  Traditionally, the Fed has tried to act independent of the politics in Washington but with the current guy at the helm in a mid-term election year, this is inevitably going to be more difficult. 
  • Our fearless prediction: the Bank of Canada raises rates less than consensus (only one to two times, because the future of NAFTA is shaky at best), while the new Fed Chairman Jerome Powell bucks the political pressure and raises rates three times anyways.  The corollary: the  Canadian dollar ends the year somewhere around 76 US cents.
  • We are now over nine years removed from the financial crisis, which means stocks have pretty much been in a bull market for almost a decade.  This is a long time.  There's a generation of investors who have yet to experience a serious market correction, but whether it stocks, tulips, or bitcoins, corrections always inevitably occur.  Stay alert out there.
  • As such, against a backdrop of rising rates and an aging bull market, the Canadian convertible debenture market isn't a terrible place to be, but as is usually the case, being selective is best.  For 2018, we are focusing on higher quality credits that have a better probability of withstanding higher interest rates and exogenous economic threats.  In addition, placing emphasis on convertible debenture issues of companies with compelling opportunities in areas of the economy that are experiencing secular growth is never a bad idea. 
  • Good luck and good fortune with your investments in 2018.  Let's get to the Top-5.  


Peanut Power Rankings Top-5 Convertible Debentures (January 5, 2018)
1. Cargojet, 4.65% 31-December-2021, Series 'C' Convertible Debentures. (Ticker: CJT.DB.C), (Last update's ranking: #1).  Since our last update, shares of CJT have gone up enough such that CJT.DB.C is now trading in-the-money.  Cool.  The story remains the same here: Cargojet is a winner.  The company has approximately 90% market share of the overnight air cargo market in Canada, and remains a terrific growth story.   The bottom line: Cargojet is effectively a play on the growth of online retail and continues to have a dominant market position in an area of long-term, secular growth.   At current prices, an investment in CJT.DB.C is effectively an alternative to buying shares of CJT outright.  One should essentially participate in-step with with any upside associated with the common shares, less the dividend.  In return for giving up the dividend, debenture holders effectively get a worst-case scenario floor on downside (important: this of course assumes there are no solvency issues with Cargojet) represented by the current annualized yield-to-hard-call-date of -0.39%.  Seems like a decent trade-off for us.  As such, even at current prices, it's still a reasonable entry point for CJT.DB.C.  We continue to believe that this debenture issue is a cornerstone holding of any diversified convertible debenture portfolio.  We've been long CJT.DB.C since it debuted at $100.00.

2. American Hotel Income Properties REIT LP, 5.00% 30-June-2022, Series 'U' Convertible Debentures. (Ticker: HOT.DB.U), (Last update's ranking: #4).  This hotel REIT had a busy corporate 2017, making acquisitions and trying to improve operations.  Another characteristic of HOT.UN: insider buying. The bottom line: HOT.DB.U has traded below par in the months since it hit the market, and will be negatively affected if the Canadian dollar continues to be strong. That said, with a yield-to-hard-call-date of 6.30% and about 3.5 years to the hard call date, we think it's great value.  The company just needs to continue executing.  It closed Friday at US$96.00 and we're long HOT.DB.U at US$98.00.

3. DHX Media, 5.875% 30-September-2024, Convertible Debentures. (Ticker: DHX.DB), (Previous ranking: #3).  Back in the December, the much-hyped Disney acquisition of the film, television, cable assets of Twenty-First Century Fox highlighted the value and importance of quality content and IP in a digital world.  This put a bit of a spotlight back on the much-maligned DHX Media, which had a terrible last few months of 2017.  Will the market learn to appreciate the content that DHX brings to the table in 2018?  Not sure, but we continue to like this unique little company.  The bottom line:  DHX has attractive media content assets. Its Peanuts IP assets (Charlie Brown and Snoopy) have cash cow characteristics, and the company is currently undergoing a strategic review and could be sold at a premium (see our previous update on our theory as to why it could sell for $9.32 a share).  Nevertheless, there are considerable risks here.  The company is highly levered (outstanding net debt of about $1 billion), and the company has lost the confidence of Bay Street.  That said, we think the unique nature of the assets are potentially worth the risk if you can stomach the volatility, and the underlying common shares have been acting better as of late.  The convertible debenture (DHX.DB) closed Friday at $95.85.  At this price, DHX.DB has a yield-to-maturity of 6.65% (note: there is no hard call provision for DHX.B, which is good for investors), and the common shares closed the week 72.0% away from DHX.DB's conversion price of $8.00.  Recovery may take awhile, but if it happens, investors could be very handsomely rewarded.  Management needs to execute, though.  We are long DHX.DB at an average price of $99.22.  We also have a position in DHX's Series B common shares (ticker: DHX.B). 

4. Diversified Royalty Corp, 5.25% 31-December-2022, Convertible Debentures.  (Ticker: DIV.DB), (Last update's ranking: #2).  Well, 2017 came and went and Diversified Royalty Corp. only completed one new royalty acquisition (AIR MILES®).  Management had hoped to complete a second by the end of the year, but it never materialized.  However, the story is intact: with $88 million of cash ready to be deployed, the market is eagerly awaiting the company's next move.  The bottom line: this is an interesting royalty company, which currently owns the Sutton Realty, Mr. Lube, and AIR MILES® trademarks in Canada.  Management is highly regarded, and are aligned with shareholders through their own shareholdings.  Finally, the terms of the convertible debenture seem positive and this is a reasonable credit risk, in our view.  At Friday's close of $100.50, we have a yield-to-hard-call-date of 5.11%, and the common shares need to rise 29.3% to hit the conversion price.  We continue to think that the stock has the potential to pop at the announcement of the next royalty acquisition. We're long DIV.DB at an average price of $100.08, and patiently await with everyone else.  We also have a position in DIV common shares.

5. Tricon Capital, 5.75% 31-March-2022, Series 'U' Extendible US Dollar Convertible Debentures. (Ticker: TCN.DB.U), (Previous ranking: #5). This blog's inaugural #1 atop the Peanut Power Rankings, this company made a transformative acquisition in 2017 and really well-positioned for 2018.  The bottom line: this is a very good quality convertible debenture issue, and has a nice combination of potential upside, yield, and USD-denominated exposure.  The latter does leave it exposed to a rising Canadian dollar, but on the flipside, it will also benefit should the Canadian dollar drop.   At Friday's close of US$109.00, the yield-to-hard-call date is 2.82% and there are 3+ years left until the hard call date. The common shares need to rise only about 15.6% to hit the conversion price.  We've been long TCN.DB.U since it debuted at US$100.00.

Picture of the Day

http://www.dingobear.com
In 2018, we go up the staircase to higher ground.  Remai Modern Art Gallery.  Saskatoon, Saskatchewan. Copyright © 2017 Felix Choo / dingobear photography.  Picture is available for licensing at Alamy Images.  Photo may not be reproduced without permission. 

Drop Us a Line

Thank you for reading this blog.  As always, if you have any comments or questions about convertible debentures or this blog, please leave us a comment at the bottom of the page or email us at convertibledebs@gmail.com. 

In addition, for media, sponsoring and/or financial institution inquiries, please email us at convertibledebs@gmail.com.  Thank you for your interest!

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