Monday, October 9, 2017

October 6, 2017, Update: Peanut Convertible Debentures Power Rankings

Happy Canadian Thanksgiving! This is the 16th update of the Peanut Convertible Debentures Power Rankings.  This update is current to October 6, 2017.     

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.

Market Commentary - Quick Points (October 6, 2017)
  • The Bank of Canada has raised its benchmark target overnight rate twice in 2017, and the market is closely watching whether a third is on the way during the Bank's next rate announcement, currently scheduled for October 25.
  • Our guess is that the Bank will hold off this time around.  The Canadian dollar remains elevated (just below 80 US cents as at the time of writing), the future of trade with our biggest trading partner remains an open question given the policy positions of the new US administration, and we suspect there are worries what a third rate increase in rapid succession might do to heavily-indebted Canadian homeowners on variable-rate mortgages.
  • Since our last update, North American equity markets have continued to move higher, with the S&P/TSX up 1.77%, S&P 500 up 1.87%, and NASDAQ up 2.52%. In Canada, the trusty big banks have led the rally. 
  • The Canadian convertible debentures market continue to truck along.  Big news for us here at the Canadian Convertible Debentures Project, the DHX Media 5.875% Convertible Debentures (ticker: DHX.DB) we've had ranked in the Top-5 all summer (finally) hit the market October 2, unfortunately on the heels of some pretty poor earnings.  We wrote up a special update on October 5; DHX.DB remains in our Top-5 at #5.  More on the Top-5 below.    
Peanut Power Rankings Top-5 Convertible Debentures (October 6, 2017)
  1. American Hotel Income Properties REIT LP, 5.00% 30-June-2022, Series 'U' Convertible Debentures. (Ticker: HOT.DB.U), (Last update's ranking: #1). This issue has been trading stronger in recent weeks, no doubt helped by the slowing surge of a previously runaway Canadian dollar.  Acquisitive in the last couple of years, the hotel REIT's revenue mix is now approximately two-thirds from branded midmarket hotels in secondary US markets, and one-third from so-called rail hotels, where revenue is generated via long-term contracts with rail companies.  The accommodations sector is among the most volatile of the investable real estate sectors, with economic and interest rate risks.  That said, we think the REIT and this convertible debenture are trading rather cheaply, and management is considered top-notch.  Insiders have also put their money where their mouth is and have recently bought units of the REIT.  (See September press release here). The bottom line: HOT.DB.U has traded below par in the months since it debuted.  With a yield-to-hard-call-date of 5.75% and almost four years to hard call date, we think it's a bargain and it's at #1 for the second update in a row.  It closed Friday at US$97.50 and we're long HOT.DB.U at US$98.00. 

  2. Cargojet, 4.65% 31-December-2021, Series 'C' Convertible Debentures. (Ticker: CJT.DB.C), (Last update's ranking: #4).  Cargojet just keeps quietly executing.  The air cargo carrier is estimated to have a +90% share in the overnight air cargo market, and with growing movement towards e-commerce and online retail, the future looks friendly.  Cargojet has long-term contracts with Canada Post (Purolator Courier) and UPS, and also has a developing relationship with Amazon in Canada. The bottom line: Cargojet continues to have a superb market position in an area of long-term, secular growth, and even at current prices, it's not a bad entry point for CJT.DB.C.  There are still 3+ years to the hard call date and based on Friday's close of $111.25, the yield-to-hard-call-date is 1.10%.  We really like this one.  We've been long CJT.DB.C since it debuted at $100.00.      

  3. Tricon Capital, 5.75% 31-March-2022, Series 'U' Extendible US Dollar Convertible Debentures. (Ticker: TCN.DB.U), (Previous ranking: #2). Higher interest rates, the stronger Canadian dollar and the fact that REITs and real estate operating companies have been somewhat out of favour on the TSX haven't helped Tricon in the last few months.  This said, there is organic growth in the company, scale in its US single family rental portfolio, good management, a decent US-dollar denominated coupon, and a reasonable company valuation.  The bottom line: there's still lots to like here, and quite frankly, we think this current sale is nice opportunity to get in if you're looking for USD-denominated convertible debenture exposure with possibility of future upside.  At Friday's close of US$106.51, the yield-to-hard-call date is 3.74% and there is about 3.5 years left until the hard call date. We've been long TCN.DB.U since it debuted at US$100.00.   

  4. Innergex Renewable Energy, 4.25% 15-August-2020, Series 'A' Convertible Debentures. (Ticker: INE.DB.A), (Last week's ranking: #5). Innergex isn't necessarily a fast grower, but as a renewable energy producer, it is a solid company in an industry that has good prospects for the future.  The bottom line: at Friday's close of $108.00, INE.DB.A has a yield-to-hard-call date of 0.04% and is just under 2 years to hard call.  Importantly, INE is trading only 2.2% away from INE.DB.A being in the money.  We're long INE.DB.A at $102.75. 

  5. DHX Media, 5.875% 30-September-2024, Convertible Debentures. (Presumed ticker: DHX.DB), (Previous ranking: #3). Ok, lots has happened with this one in the last little while.  Please read our special update on DHX Media, which was published on this blog on October 5.  Given the poor price action of DHX's common shares since its disastrous Q4 earnings, it's likely a bit controversial we still have DHX.DB in our top-5, but we continue to believe the IP assets are unique and hold considerable revenue-generating potential, and that the company remains an acquisition target for a larger media company hungry for DHX's content portfolio.  Quite frankly, this is a tricky company to value, and the market doesn't quite seem know how to do it.  If the strategic review nets a buyer, we're guessing that the company gets sold in the $8 to $10 range.  Just a wild guess.   The bottom line: it's not without risk, but DHX.DB is an alternative way to play DHX's unique media content proposition.  At Friday's close of $99.25, DHX.DB has a yield-to-maturity of 6.01% (note: there is no hard call provision for DHX.B) and the underlying common shares closed Friday 65.6% away from DHX.DB's conversion price.  Recovery may take awhile, but if it happens, investors may be handsomely rewarded.  This said, there are risks and this doesn't appear to be a play for the meek.  We've initiated a position in DHX.DB at $101.00, and we also have a position (ouch) in DHX's Series B common shares (ticker: DHX.B). 
Picture of the Day
Peafowl in fall. Beacon Hill Park, Victoria, British Columbia. Copyright © 2015 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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