Saturday, December 9, 2017

December 8, 2017, Quick Update: Peanut Convertible Debentures Power Rankings

Hi, readers.  This is the 22nd update of the Peanut Convertible Debentures Power Rankings, and is current to December 8, 2017. As one of our quick updates, this article has abbreviated commentary.  Whether you're a retail investor or a research analyst from one of the big bank brokerages, we hope you continue to find value in reading The Canadian Convertible Debentures Project.      

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.  The stats and figures we use for the Peanut Power Rankings we collect from various public sources and calculate ourselves; 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.

If we manage to stumble upon a complete list or if the Financial Post list comes back online first, we will will report it here. 

Market Commentary - Quick Points (December 8, 2017)
  • North American equity markets remain at lofty levels, as strong economic numbers and, quite frankly, a lack of other investable options leave investors with few places to go.  Interest rates on savings remain low, and bonds and real estate remain expensive.  By almost any measure, this bull market is positively ancient, and in our view, caution is warranted.  As always, diversification is your friend. 
  • Since our last update, there have been several new convertible debentures issues of note that have been announced, including issues from Fiera Capital, Melcor REIT, Ag Growth International, and Exchange Income Corporation.  Due to time constraints, we haven't had a chance to extensively analyze any of these new issues in time for this update, but some or all of them may make it onto our Peanut Power Rankings in future updates.
  • Speaking of the Peanut Power Rankings, let's get to our Top-5 convertible debentures (plus additional bonus coverage on other issues of interest) below. 

Peanut Power Rankings Top-5 Convertible Debentures and Additional Bonus Coverage (December 8, 2017)
1. Cargojet, 4.65% 31-December-2021, Series 'C' Convertible Debentures. (Ticker: CJT.DB.C), (Last update's ranking: #1).  Not a whole lot new with Cargojet since our last update other than the company receiving some more positive comments from guests on BNN.  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, we're looking forward to a nice quarter.  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 $112.50, the yield-to-hard-call-date is a positive 0.53% and the common shares only have to rise another 6.7% to hit the conversion price.  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 for our #2 this update either.  The story is still the same: with $88 million of cash ready to be deployed, the market is eagerly awaiting their next royalty acquisition.  So far, their track record has been pretty good. 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 $100.75, we have a yield-to-hard-call-date of 5.04%, and the common shares need to rise 30.4% 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, which management had previously announced that it hoped it would happen before the year's end.  We're not sure if management will hit this target as it's getting pretty late in 2017, but 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. Tricon Capital, 5.75% 31-March-2022, Series 'U' Extendible US Dollar Convertible Debentures. (Ticker: TCN.DB.U), (Previous ranking: #4). Not too much new here either other than the announcement that Tricon had completed a securitization, which should lower the company's cost of capital.  Sounds good to us.  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$107.61, the yield-to-hard-call date is 3.30% and there are 3+ years left until the hard call date. The common shares need to rise only about 16.7% to hit the conversion price.  We've been long TCN.DB.U since it debuted at US$100.00. 

4. American Hotel Income Properties REIT LP, 5.00% 30-June-2022, Series 'U' Convertible Debentures. (Ticker: HOT.DB.U), (Last update's ranking: #3). It's been quiet too for American Hotel Income Properties REIT. This is a nice, pure play on the US secondary hotel market.  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 5.41% and over 3.5 years to the hard call date, we think it's great value here and there is potential for future gains.  The company just needs to continue executing.  It closed Friday at US$98.70 and we're long HOT.DB.U at US$98.00.

5. Exchange Income Corporation, 6.00% 31-March-2021, Series 'G', Convertible Debentures. (Ticker: EIF.DB.G), (Last update's ranking: #5).  This volatile issue moved up $5.00 since our last update, but remains undervalued according to our quantitative models and stays in our top-5.  The underlying common shares of EIF are trading in-the-money and the convertible debenture issue closed Friday at $115.00, for a yield-to-hard call date of negative -4.93%.  At this price, consider EIF.DB.G somewhat equivalent to holding the common shares directly, except with an effective floor on the downside.  The price is not receiving any positive yield in the way of dividends or coupon.  As you probably already know, the Winnipeg-based company is a bit of an odd-duck conglomeration of northern-focused aviation businesses and manufacturing, and has a very acquisitive management team.  Recent quarterly results seemed strong but the company has also been a favourite target of aggressive US short sellers, including the infamous Marc Cohodes. In addition, Exchange Income Corp. is also a serial issuer of convertible debentures.  Lo and behold, they announced yet another new convertible debenture issue this week.  Moreover, the company has also developed kind of a negative reputation for aggressively redeeming its outstanding convertible debenture issues, much to the chagrin of investors.  And, hey, lo and behold, they did it again(!) this week. Maybe EIF.DB.G is good value for good reasons?  Good question.  The bottom line: our quantitative model says this issue is good value but as you can see, there is also a lot of noise here, which means you play this issue at your own risk.  We have no position in EIF.DB.G.

6. DHX Media, 5.875% 30-September-2024, Convertible Debentures. (Ticker: DHX.DB), (Previous ranking: #7).  As suffering DHX and DHX.DB investors are well-aware, the market has flat-out hated this company the last little while.  We continue like it, so I guess that makes us contrarians on this one.  Since our last update, DHX announced a streaming deal with Chinese giant, Tencent.  Financial details were not disclosed, but it does provide further evidence that DHX's content has value.  With DHX, our views (hopes?) continue to be buoyed by its decent fiscal first quarter and the potential of the Peanuts and Strawberry Shortcake acquisition. 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) is making a slow comeback and closed Friday at $95.50.  At this price, DHX.DB has a yield-to-maturity of 6.71% (note: there is no hard call provision for DHX.B, which is good for investors), but the common shares closed the week 99.0% away from DHX.DB's conversion price of $8.00.  Recovery may take awhile, but if it happens, investors could be very handsomely rewarded.  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).

7. Surge Energy, 5.75% 31-December-2022, Convertible Debentures. (Ticker: SGY.DB), (Previous ranking: #8).  This relatively new convertible debenture issue has mostly been trading below par since its debut.  Oil prices have been trending higher, and remains at two-year highs.  As we indicated last time, with the impending Saudi Aramco IPO still slated for next year, the Saudis have good incentive to keep OPEC production in line to fetch the best possible price in the biggest IPO there ever was.  I'm not going to go so far and say that we're back in a roaring bull market for oil since I think the groundswell for a cleaner, fossil fuel-free future is real and gaining momentum, but conditions are setting up for a possible positive trade for Canadian juniors like Surge. The bottom line: if you have a positive outlook on energy prices, SGY.DB is the top oil convertible debenture on our list.  At Friday's close of $98.50, the yield-to-hard-call of SGY.DB is 6.17%, and the common shares need to rise about 41.8% to hit the conversion price.  Surge seems to be sustainable at current oil prices, and this convertible debenture provides an opportunity for participation in the optionality of oil prices heading higher, but at lower relative risk to holding Surge common shares directly.  One word of caution: a lot of investors were badly burned in the long bear market in oil that began in mid-2014, and it may take some time before investors are willing to put money back into the beleaguered Canadian energy sector.  We have no position in SGY.DB.   

8. Liquor Stores, 4.70% 31-January-2022, Series 'B' Convertible Debentures.  (Ticker: LIQ.DB.B), (Last week's ranking: #9).  Will Liquor Stores be soon selling marijuana, too?  It might happen sooner than we think.  Cannabis will  hit the market in Alberta by July 1, 2018, and this past week, Liquor Stores decided to hire one of its directors to head up its cannabis strategy.  This news comes on the heels of the company announcing that it would be retreated from its ill-advised foray into the lower 48 US states.  The bottom line:  Long-suffering Liquor Stores investors have been eager for a new direction, and the new board and management at the helm seem ready to deliver it.  To boot, the underlying shares of the LIQ are more volatile than you'd expect, and this helps the valuation of the LIQ.DB.B convertible debenture.  At Friday's close of $102.25, LIQ.DB.B has yield-to-hard call date of 3.93% and the underlying common shares need to rise 42.4% to hit the conversion price.  We no longer have a position in LIQ.DB.B.

Picture of the Day
Winter wonder. Edmonton, Alberta. Copyright © 2016 Felix Choo / dingobear photography.  Picture is available for licensing at Alamy Images. Photo may not be reproduced without permission. 

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