Friday, March 3, 2017

Inaugural Peanut Convertible Debentures Power Rankings

This is the inaugural installment of the Peanut Convertible Debentures Power Rankings, which are current to March 3, 2017.

For a summary of the rankings of our entire convertible debenture universe including the quantitative model prices of each issue we follow, please click on the table below to view it larger. 



The top-5 picks in our power rankings are described in more detail 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.


General Commentary (March 3, 2017)

Here in early March 2017, the Western world is in a strange, anxious place.  The Chicago Cubs have started spring training as World Series champions(!), scientific data states that 2016 was the warmest year on record (surpassing previous records in 2015 and 2014), and the daily Orwellian drama out of Washington, DC, is exhausting and disturbing.  Yet, with all of this, North American equity markets have rocketed to record levels on a post-election sugar high, fueled by the three-pronged hopes of fiscal stimulus, tax cuts, and loosened financial (and other) regulation.  

The actors might be slightly different but we've seen this movie before in various forms - and arguably, they all ended badly when the music stopped, most recently with the 2007-08 financial crisis.  With equity valuations now looking stretched, a dose of caution seems warranted.  And, as always, diversification is very, very important.

Regarding the Canadian convertible debentures market, this might not be a bad place to park as world events swirl this way and that.  The downside protection may come in handy if equity markets become unhinged in the next year or so, but if you choose the right issues, you may still get to participate in the equity upside if markets continue to surge ahead, seemingly unabated by reality.  Several interesting issues have come to market in the last six months or so, many of which have made the Peanut Power Rankings.

Peanut Power Rankings Top-5 Convertible Debentures (March 3, 2017)
  1. Tricon Capital, 5.75% 31-March-2022, Series 'U' Extendible Convertible Debentures. (Ticker: TCN.DB.U).  This US dollar-denominated convertible debenture is part of a brand new offering intended to help finance Tricon's proposed transaction for Silver Bay Realty Trust.  In fact, this offering is so new, it's not even trading on the TSX yet - the offering is expected to close on March 17.  There are a number of things to like here.  Tricon, an established real estate asset management firm, is purchasing Silver Bay in an earnings-accretive deal which will establish Tricon as a top-5 owner of mid-market single family rental homes in the United States.  In other words, the underlying equity is quite attractive on its own.  In this interest rate environment, the 5.75% US dollar denominated coupon is also attractive for the perceived credit risk, as Tricon is not especially leveraged, even with this issue.  Further, the conversion price associated with the debentures is a reasonable 29.1% above today's closing price of the underlying shares.  Based on the issue's characteristics, my quantitative model is valuing the debentures at $114.73, which makes the offering price of $100.00 attractive.  One caveat: if the deal for Silver Bay falls through, the debentures immediately mature, but even if this happens, I don't believe there is any downside associated with this event.  Bottom line: this is a clear #1 in the rankings for our purposes.  I've subscribed to the issue and will be long the debentures at $100.00 on the expected closing date of March 17.

  2. Gibson Energy, 5.25% 31-July-2021, Convertible Debentures. (Ticker: GEI.DB). This Alberta-based energy services firm currently holds some appeal as the conversion price associated with the debentures is only 15.8% above the closing price of the underlying shares.  The underlying shares have some volatility associated with them, which increases the value of the conversion option.  Gibson has some leverage on its balance sheet, and I think you have to like the outlook for energy prices to be in this one as at its closing price of $108.56, the yield-to-hard-call-date is only 2.58%.  My quantitative model indicates that it is 6.28% undervalued.  I have no long position in GEI.DB.

  3. Innergex Renewable Energy, 4.25% 15-August-2020, Series 'A' Convertible Debentures. (Ticker: INE.DB.A). This renewable energy producer is mostly focused on hydro.  I tend to think that renewable energy is a big secular theme, and an attractive place to invest despite of the obvious interest rate sensitivity of utilities.  The conversion price associated with the debentures is only 4.0% above the closing price of the underlying shares today.  My quantitative model indicates the debentures, based on their closing price, are 5.49% undervalued.  I like this issue.  I'm long INE.DB.A at $102.75. 

  4. Liquor Stores, 4.70% 31-January-2022, Series 'B' Convertible Debentures.  (Ticker: LIQ.DB.B). This consolidator of private liquor stores and outlets is mostly exposed to western Canadian markets (especially Alberta).  The company has struggled with poor economic conditions in Alberta.  However, cash flow generation is decent and I think it's a reasonable credit risk with some rather deep out-of-the-money optionality on growth based on any recovery in the oil (and Alberta) economy.  At a debenture price of $102.00, it has a yield-to-hard-call-date of 4.14%, which is ok.  All-in-all, not bad.  My quantitative model indicates the debentures, based on its current close price, is 9.26% undervalued.  I'm long this issue at $99.96.

  5. Cargojet, 4.65% 31-December-2021, Series 'C' Convertible Debentures. (Ticker: CJT.DB.C). The air cargo carrier has strong market share in the Canadian market (including a $1 billion-plus Purolator contract) and is effectively a play on the growth of online retail and shopping.  This is certainly a growth industry and a great secular trend to play.  The underlying shares have done exceedingly well since the depths of the financial crisis.  Cargojet recently increased the dividend on its shares and has good free cash flow generation.  The conversion price of the underlying debentures is 22.7% above the closing price of the shares; yield-to-hard-call-date is 2.45% based on a debenture price of $108.00.  Lots to like about this issue.  I've been long this issue since the offering, at $100.00.
Picture of the Day

http://www.dingobear.com
Jaume Plensa's spectacular 'Wonderland' sculpture in downtown Calgary, Alberta, Canada. Copyright © 2016 Felix Choo / dingobear photography.  Photo is available for licensing at Alamy Images. All rights reserved. Photo may not be reproduced without permission. 

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2 comments:

  1. If Peanut endorses it, I will buy it!

    ReplyDelete
  2. Peanut thanks you for reading, but reminds you to speak to a qualified investment professional before making any investment decisions! :)

    ReplyDelete