August 3, 2018, Update: Peanut Convertible Debentures Power Rankings

Hi, again.  I know it's been awhile since our last update - I appreciate you sticking with us.  This is the 33rd update of the Peanut Convertible Debentures Power Rankings, which is current to August 3, 2018.  Thank you for continuing to read and support the Canadian Convertible Debentures Project.
      
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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 (August 3, 2018)

• There's a word for a system of government where cult of personality prevails while political opponents and news media are declared as enemies of the people. 
• If it wasn't already abundantly clear, what's happening right now is disturbing and dangerous.
• The above points aren't meant to be political statements. 
• Let that sink in for awhile.
• From a financial perspective, you already know that markets hate instability.
• The current US administration is exacerbating trade tensions with China, Canada, Mexico, and a host of other nations and economic regions.
• The current US administration pushes democratic allies away while embracing dictators and adversaries. 
• The current US administration forced through an unnecessary tax cut that blatantly benefits the more wealthy over the less wealthy, which will help raise the US deficit above a trillion(!) dollars a year.
• The current US administration has taken measures to further cripple Obamacare, which, beyond the headlines, amounts to another unnecessary tax cut that benefits the more fortunate over the less fortunate. 
• The current US administration has taken measures to seriously cripple environmental regulations across the board. The myopic may cheer this as "pro-business" and "being competitive", but longer term, beyond the next quarterly earnings or annual earnings, this has serious (and expensive) implications for public health, safety, and wellness.  Resulting long-term costs will be socialized by the tax-paying public while the short-term profits will be privatized.  
• The current US administration has taken further measures to cripple public education.  Draw your own conclusions as to whether this makes an electorate easier to govern and/or rule.
• The current US administration has put badly needed investment in crumbling (productive) infrastructure on the back burner in favour of (pointless) infrastructure such as a wall on the Mexican border. (Sidebar: if you're paying attention as investors, there's going to be an opportunity here to invest in productive infrastructure once (if?) the craziness subsides). 
• The current US administration is starting to show signs of threatening the US Federal Reserve's independence to conduct monetary policy, which may impinge on the Fed's ability to take measures to manage inflation and the economic cycle. 
• Sigh, this is a lot to digest.  2018 makes one nostalgic for 2015 when that nice fella who read books and played basketball was still president and the Chicago Cubs still hadn't won a World Series in 106 years.
• Despite all of this, for now, the S&P 500 is managing to chop higher (albeit at elevated volatility) as summer progresses. 
• Given all of the above, this would seem counter-intuitive but maybe there is a logic to this: as a whole, the stock market represents collective financial wealth.  This financial wealth is distributed unevenly.  To the extent that current policies favour those who control more of this financial wealth than those who don't, then, in the stock market, why worry, right?
• The question of course is whether this is sustainable. This bull market is already old, equity valuations have been stretched for awhile, and after the unnecessary tax cut, exactly what catalysts remain? It feels like we're playing musical chairs inside a log cabin while the forest outside is on fire.  One way or another, at some point the music stops for awhile just like it did in 2008 or 2000 or 1987 or 1929 ...
• Here in Canada, the trade situation for us is either bad or worse. Sometimes, you just get dealt bad hand and you play it as best you can, which is what I think our federal government is trying to do now.
• Here in Canada, I can feel an increase in the hyper-partisan elements that define the political environment south of the border.  This is troubling.  We've already been through elections in British Columbia and Ontario, with Alberta and federal elections on tap for 2019.  
• Here in Canada, those who whinge about weak Canadian competitiveness relative to an American position that has been shaped by short-sighted policies (see points above about US tax cut, repeals of environmental regulations, lack of investment in infrastructure and education, etc.) are being similarly myopic.  An opinion: those who whip up this whinging to incite the impressionable public are doing so for their own (short-term) political and/or financial gain.   
• Here in Canada, we should expect better of ourselves than this.
• Here in Canada, previous tightening by the Bank of Canada is starting to show in economic data.  Most economists think there will be one more rate hike in September, but I'm not even sure this is a slam dunk. 
• Here in Canada, I (still) think it's best to stay broadly diversified and protect your capital.
• Let's get to the Top-5 convertible debentures.  As usual, any and all comments on this blog are my opinions only,       

Peanut Power Rankings Top-5 Convertible Debentures (August 3, 2018)

1. Diversified Royalty Corp, 5.25% 31-December-2022, Convertible Debentures.  (Ticker: DIV.DB), (Last update's ranking: #1).  As per usual, DIV pre-releases sales results of its royalty interests prior to the release of its quarterly financial results.  As a pleasant surprise, AIR MILES® seems to be bouncing back after a six negative quarters in a row, with Q2 miles issued up 2%.  Meanwhile, Mr. Lube and Sutton Realty same-store-sales look in-line with expectations.  So generally, the sentiment is positive. 
   The bottom line: DIV is an interesting royalty company that focuses on well-known trademarks, and 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.  DIV.DB is holding steady in the current volatile market environment.  We continue to think that the underlying stock has the potential to pop at the announcement of the next royalty acquisition - but it's unclear when that will be - it's been a year since the company's last royalty acquisition. We're long DIV.DB at an average price of $100.08, and quietly await along with everyone else.  We also have a position in DIV common shares.

2. American Hotel Income Properties REIT LP, 5.00% 30-June-2022, Series 'U' US Dollar Convertible Debentures. (Ticker: HOT.DB.U), (Previous ranking: #3).  The CEO keeps buying units on the open market, but the market keeps not caring.  What the market does care about: the Q2 results, which will be announced on August 10.  This REIT needs to post a good quarter to bolster its flagging unit price.   

The bottom line: HOT.DB.U has traded below par in the months since it hit the market. This is a play for those who have confidence in the REIT's highly regarded management, believe in the strength of the US economy, and have a negative forward view on the Canadian dollar.  Arguably, the trust units of the REIT are trading cheaply, but the company does need to start hitting earnings estimates.  We're long HOT.DB.U at US$98.00.

3. Tricon Capital, 5.75% 31-March-2022, Series 'U' Extendible US Dollar Convertible Debentures. (Ticker: TCN.DB.U), (Previous ranking: #4).  Since the last update, Tricon has entered into a $2 billion joint venture with a couple of institutional investors to acquire more more rental houses in the US.  (Read the press release here).  They are building a nice critical mass in the US residential home rental business.  Q2 results are expected on August 9.

The bottom line: TCN.DB.U is a very good quality convertible debenture issue, and has a nice combination of potential upside, yield, and USD-denominated exposure (for those who believe the Canadian dollar will depreciate somewhat, as we still do).  We've been long TCN.DB.U since it debuted at US$100.00 and will continue to hold it unless there's a change in fundamentals.

4. Surge Energy, 5.75% 31-December-2022, Convertible Debentures. (Ticker: SGY.DB), (Previous ranking: #2).  The 2018 increase in oil companies has kind of taken a breather for now, and so has the price in Surge's underlying stock.  Q2 results are expected shortly. 

The bottom line: If you have a positive outlook on energy prices or even just a neutral one, SGY.DB might be worth a look here.  Please note, however, investing in an junior Canadian resource company - even in its convertible debentures - requires a relatively higher risk appetite.

5. Morneau Shepell, 5.00% 30-June-2021, Series 'A' Convertible Debentures. (Ticker: MSI.DB.A), (Previous ranking: #5).  The share price of Morneau Shepell, the human resources, retirement benefits, and technology company, remains at lofty levels.  Q2 results are expected as soon as this week, and it'll be interesting to see if the company can maintain its earnings momentum. 

The bottom line: This is a quiet but solid company that executes very nicely in its niche, and the convertible debenture is now trading in the money thanks to the continued strength of the MSI common shares.  MSI stock isn't cheap, but should it continue its positive price momentum on the back of earnings growth, the MSI.DB.A convertible debentures will come along for the ride.  We have no position in MSI.DB.A.

Picture of the Day


Sundown, from the other side of the Pacific.  Yokohama, Japan. Copyright © 2018 Felix Choo / dingobear photography.  Photo may not be reproduced without permission. 

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