Saturday, December 23, 2017

December 22, 2017, Christmas Update: Peanut Convertible Debentures Power Rankings

Merry Christmas!  This is the 23rd update of the Peanut Convertible Debentures Power Rankings, and is current to December 22, 2017.  Call this one a very quick update, as it's Christmas and I have a turkey to attend to. :) Thank you for your support during our inaugural year, and we all wish you a Merry Christmas, Happy New Year, and the best of the holiday season.  See you in 2018.
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 (December 22, 2017)
  • No real commentary this update, too busy with Christmas! 
  • That said, just want to say that the cryptocurrency craze feels like bubbly tech stocks circa 1999, doesn't it? When your Uber driver brings up Bitcoin before you do, experience tells me it's time to take some money off the table.  Blockchain technology may well be the future, but picking winners and losers with our limited capital in a frenzied, opaque market is a risky proposition.  Yes, we couldn't imagine life without Internet today, but back in 1999, none us had any idea that the world would today be dominated by the likes of Google (what? a better search engine than Yahoo!?); Amazon (no one succeeds at being everything to everyone!); Apple (you couldn't even get Microsoft Office on a Mac!); Facebook (Mark Zuckerberg was just a nerdy 15-year old); and Netflix (they were selling DVDs through the mail!).  And if you're wondering, no, we don't have any financial interests in cryptopcurrencies at this time - we'll just sit this one out for now. 
  • The US administration got their tax cut through.  We don't want to get too much into politics (and sorry for the times that we do), but let's face it, this is a thinly veiled reverse Robin Hood maneuver - blatant stealing from the poor to give to the rich.  The horrid bill also further cripples health care and green lights drilling in the Arctic National Wildlife Refuge.  Merry Christmas, America.
  • Canadian economics figs including retail sales remain hot.  This will give Poloz, Wilkins, and crew at the Bank of Canada to raise rates in 2018.  Brace yourself. 
  • Let's get to the Top-5.  

Peanut Power Rankings Top-5 Convertible Debentures and Additional Bonus Coverage (December 22, 2017)
1. Cargojet, 4.65% 31-December-2021, Series 'C' Convertible Debentures. (Ticker: CJT.DB.C), (Last update's ranking: #1).  Up, up, and away! You know the drill here: Cargojet has approximately 90% market share of the overnight air cargo market in Canada, and remains a terrific growth story.   With the busy Christmas season upon us and more of us shopping online than every, it's ho-ho-ho all the way to the bank. 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.   Even at current prices, it's still decent entry point for CJT.DB.C.  There are still 3+ years to the hard call date and based on Friday's close of $114.00, the yield-to-hard-call-date is a positive 0.02% and the common shares only have to rise another 0.9% to hit the conversion price.  In effect, buying CJT.DB.C at $114.00 is an alternative to buying the common shares outright, participating in future gains but putting a floor on your downside (as represented by the yield-to-hard call).  We continue to believe it is a cornerstone holding of any diversified convertible debenture portfolio.  We've been long CJT.DB.C since it debuted at $100.00.

2. Diversified Royalty Corp, 5.25% 31-December-2022, Convertible Debentures.  (Ticker: DIV.DB), (Last update's ranking: #2).  Not much new here but it doesn't look like these guys will hit their previously announced target of closing another royalty acquisition before year's end.  However, the story is intact: with $88 million of cash ready to be deployed, the market is eagerly awaiting their next royalty acquisition.  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 $100.25, we have a yield-to-hard-call-date of 5.18%, and the common shares need to rise 30.0% 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.  We also have a position in DIV common shares.

3. DHX Media, 5.875% 30-September-2024, Convertible Debentures. (Ticker: DHX.DB), (Previous ranking: #6).  The underlying stock of DHX has moved significantly in the last two trading days, which is curious as the company got booted from the S&P/TSX Composite Index earlier in the month.  We continue like this company, which makes us contrarians on this unloved name. The bottom line:  Despite the market being very skittish on DHX right now, the company 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.  The convertible debenture (DHX.DB) closed Friday at $94.30.  At this price, DHX.DB has a yield-to-maturity of 6.94% (note: there is no hard call provision for DHX.B, which is good for investors), and the common shares closed the week 80.6% 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. American Hotel Income Properties REIT LP, 5.00% 30-June-2022, Series 'U' Convertible Debentures. (Ticker: HOT.DB.U), (Last update's ranking: #4).  More insider buying! The CEO decided to buy another 164,000 units of the REIT, and has decided to take all of his 2018 compensation in the form of REIT units.  So while this one's been sleepier than one of the quiet rooms in AHIP REIT's growing portfolio of US hotels,  you can be confident that senior management at least believes in the value present.  The bottom line: HOT.DB.U has traded below par in the months since it hit the market.  With a yield-to-hard-call-date of 5.24% and over 3.5 years to the hard call date, we think it's great value here too.  The company just needs to continue executing.  It closed Friday at US$99.25 and we're long HOT.DB.U at US$98.00.

5. Tricon Capital, 5.75% 31-March-2022, Series 'U' Extendible US Dollar Convertible Debentures. (Ticker: TCN.DB.U), (Previous ranking: #3). Not too much new here as the company puts a cap on a successful 2017.  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.  At Friday's close of US$109.00, the yield-to-hard-call date is 2.85% and there are 3+ years left until the hard call date. The common shares need to rise only about 15.5% to hit the conversion price.  We've been long TCN.DB.U since it debuted at US$100.00.

Picture of the Day
Christmas on the water. Victoria, British Columbia. Copyright © 2012 Felix Choo / dingobear photography.  Picture is available for licensing at Alamy Images. Photo may not be reproduced without permission. 

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