Where are Canadian stocks headed? RBC’s bear takes on BMO’s bull in 2018 market standoff

Two prominent strategists are making starkly different forecasts of where Canada’s stock market is headed as a two-month rally stalls.

On the bull side is Brian Belski, chief investment strategist at BMO Capital Markets, who sees the S&P/TSX Composite Index hitting 17,600 by the end of 2018 — about 10 per cent higher than current levels. Taking the bearish view is Matt Barasch, Canadian equity strategist at RBC Capital Markets. Barasch has a 2018 year-end target of 16,300, just 1.8 per cent above Monday’s close.

After struggling through much of 2017 in the red, Canada’s benchmark index is up 4.7 per cent this year, still the third-worst developed market amid a ferocious global rally.

Bull Case

Belski has previously accused Canadian investors of harbouring an “Eeyore complex,” after the morose Winnie-the-Pooh character. He believes strong company fundamentals will eventually override investors’ gloom.

Canadian investors tend to overreact to bad news and then pile into stocks when the outlook starts to brighten, he said.

“In 2016, Canadian investors were positioned for Armageddon and US$15 oil and the banks to go bankrupt; when that didn’t happen, it was a rush to own stocks,” Belski said. “In 2017, it was doubt and rhetoric and what’s going to happen with NAFTA and tariffs and all of a sudden when nothing was happening there’s a fourth-quarter rally.”

He believes Canada is full of strong companies, citing the railways and consumer stocks like Loblaw Cos., Canadian Tire Corp., Dollarama Inc., and Restaurant Brands International Inc. Belski recommends an overweight position in financials, industrials and materials.

Belski has a strong track record of calling the market. In 2016, his year-end level of 15,300 was only 12 points off, and his 16,000 target for 2017 is so far on track — unless a Santa Claus rally gives it another boost.

Bear Case

Barasch, meanwhile, sees Canadian stocks as essentially range-bound for the next year. He lowered his recommendation on the S&P/TSX to market weight from overweight, blaming stretched valuations and a lack of catalysts to drive further multiple expansion.

Possible headwinds include trade threats, central banks unwinding their balance sheets, slowing domestic growth, U.S. tax reform, stagnating oil prices, U.S. election risk, and signs that China is beginning to slow.

“As markets become more fully valued and earnings are recovering, your willingness to look past some of these issues begins to wane,” Barasch said in a phone interview.

Barasch arrived at his 16,300 target by taking his 2018 earnings per share forecast of US$930, a number he calls “fairly aggressive,” and applying a multiple of 17.5 times.

“That would be close to the 90th percentile in terms of valuation historically for the TSX, so it’s not an insignificant multiple,” he said. Barasch recommends an overweight position in real estate, food-staples retail, railroads and life insurers.

Barasch only initiated coverage of the index in May 2016 with a 12-month target for May 2017 of 15,200. It closed out that month not far off at 15,350. He then called for the benchmark to close out 2017 at 16,300 before pushing that target back to 2018.

The biggest risk to his 2018 outlook would be a sudden rise in oil prices, Barasch said. West Texas Intermediate is currently trading at about US$56 a barrel.

“If six months from now oil’s at US$65 and some of these other issues have cleared the deck, then we’re probably going to be wrong, but absent that I think there’s a good chance that 2018’s just going to be a year where you’re going to really have to grind it out for returns.”

Bloomberg.com

Hudson’s Bay investors want debt reduction, payouts from real estate proceeds

TORONTO — As Hudson’s Bay Co steps up the pace of extracting value from its US$5 billion property portfolio, the department store chain’s shareholders want it to reduce debt, return cash to them and not invest the proceeds in traditional retail operations.

Hudson’s Bay is not new to selling real estate, but its actions are under greater scrutiny amid rising tensions between the company and activist hedge fund Land & Buildings, which says it holds about 5 per cent of the company.

The fund wants the owner of Saks Fifth Avenue and Lord & Taylor to sell or convert stores to alternate uses and transform itself into a real estate play. It values HBC’s real estate at about $35 a share, three times more than the company’s current level.

“The perception, and in some cases, the reality, is that (Amazon.com Inc) is speeding bricks and mortar retailers into submission,” said Jonathan Norwood of Mackenzie Investments, HBC’s eighth-biggest shareholder.

“If they sell the real estate, we want to see the money used to reduce debt and returned to shareholders,” added Norwood, who co-leads Mackenzie’s value-focused Cundill team. “We don’t want it going to revitalize or grow the retail operations.”

HBC is exploring the sale of its Vancouver flagship store, estimated at about $800 million (US$628.4 million), after selling its Lord & Taylor property in Manhattan for US$850 million last month.

Selling properties will further expose HBC to a brutal retail market but has not deterred the company from opening new stores in the Netherlands this year.

“It’s hard for an investor to get excited about new store openings when existing stores are on rocky ground,” said Joshua Varghese, portfolio manager at CI Investments, HBC’s sixth-largest shareholder.

The company should “seriously consider” a 3 billion euro offer from Signa Holdings for its German stores, Varghese said, noting HBC shares are unlikely to see significant gains without clarity on the company’s strategy.

An HBC spokeswoman declined to say whether the company has identified areas to deploy the proceeds from any future asset sales. It will use funds from the Lord & Taylor sale to pay down debt, which totalled $3.4 billion as of July 29, excluding its two joint ventures.

HBC’s net debt was 4.7 times earnings before interest, taxes, depreciation and amortization after the Lord & Taylor sale, compared with an industry average of 2, according to Royal Bank of Canada.

“If Richard (Baker, HBC’s executive chairman) sells the Vancouver store, he’ll probably pay off debt on the operating company,” said an HBC shareholder who declined to be identified. “I don’t think they’ll sell all the stores; they’re monetizing individual stores where demand is good.”

 

© Thomson Reuters 2017

Supergirl actor’s claim that Chipotle food almost killed him sends shares on roller-coaster ride

Chipotle Mexican Grill Inc. said there’s no connection between the company and an illness suffered by Supergirl actor Jeremy Jordan, who blamed the burrito chain for making him severely sick.

“There is not a link and there are no other reports of illness at the restaurant,” Quinn Kelsey, a spokeswoman for the Denver-based company, said in an email. The location — in Houston — hasn’t been closed, she said.

The incident threatens to renew concerns about food safety at Chipotle, which has struggled to bounce back from an E. coli crisis in 2015 that sickened customers. Jordan said last week that he was hospitalized after eating at the chain.

The actor, who plays Winn Schott on “Supergirl,” posted an Instagram story on Thursday from his hospital bed, saying that “the food did not agree with me and I almost died,” according to People.

The celebrity’s complaint sent Chipotle shares tumbling in early trading on Monday, extending a rout this year. Chipotle’s denial of a link prompted a brief recovery for the stock, but the rebound was quickly erased in regular trading.

The shares fell as much as 5.9 per cent to US$263, bringing them to the lowest level in almost five years. They had already declined 26 per cent in 2017 through the end of last week.

The company said on Monday morning that it had reached the actor to determine where and when he ate, Kelsey said.

“We were able to confirm that there were no reports of illness, all employees were healthy, and that all food protocols were followed and logged,” she said. “We take all claims seriously, but we can’t confirm any link to Chipotle given the details he shared with us.”

The company had begun to restore its reputation in the past year, but a norovirus incident in Virginia and a viral video of mice at a Dallas location sparked a fresh round of negative headlines.

Chipotle also suffered a data breach earlier this year, an incident that hurt its earnings and contributed to another stock slump. This year’s hurricanes rocked Chipotle as well: It had 425 restaurants in the direct path of the storms.

Bloomberg.com

Canadian penny stock West High Yield dives 83% after $750 million deal vaporizes

A Canadian penny stock plunged 83 per cent in the first day of trading after its US$750-million mining deal collapsed, bringing an end to a wild ride that saw its shares surge almost 1,000 per cent in a single day.

West High Yield (W.H.Y.) Resources Ltd. dropped to 34 cents at 10:20 a.m. in Toronto after resuming trading for the first time since Oct. 5. That was the day the tiny Calgary-based explorer announced what would have been one of the year’s biggest mining deals — the sale of its main magnesium assets to an obscure buyer, Gryphon Enterprises LLC.

The deal fell through after Gryphon failed to come up with a deposit of less than 1 per cent of the transaction value, or US$500,000, by a Nov. 6 deadline. The collapse of the deal spelled the end of the brief but extraordinary rally that had propelled a company with no revenue to a market value of $114 million (US$90 million). Trading under the ticker WHY, its stock jumped to as high as $3.80, from just 36 cents the previous day, and ended the session at $2, sparking a review by regulators in Alberta.

From the beginning, however, there were questions about the deal. It wasn’t clear why Gryphon, which doesn’t have a website, was prepared to pay US$750 million for West High Yield’s assets in British Columbia, when the whole company was worth only US$16 million. According to the purchase and sale agreement, Gryphon’s chief executive officer used an AOL email address and the firm was based at a residential house built in 1992 in Swanton, Maryland.

West High Yield had continued to trade on Oct. 5 as more red flags appeared and volume soared. That sparked criticism from some that the regulators should have stepped in earlier to take control of the situation. Trading was halted on Oct. 6.

The Investment Industry Regulatory Organization of Canada has said it won’t reverse trades from that day because the announcement “did not contain information which was either misstated or inaccurate.” The Alberta Securities Commission has declined to comment on whether it’s still reviewing the company and the deal.

–With assistance from Danielle Bochove

 

Bloomberg.com

Equitable Group earnings hit by funding done to address Canadian banks liquidity issue

TORONTO — Equitable Group Inc. says earnings were up in the third quarter but profit growth was tempered by the need to shore up liquidity through funding facilities from Canada’s major banks.

The company says net income came in at $37.9 million or $2.21 per diluted share for the quarter ending Sept. 30, up from $35.2 million or $2.16 per share for the same period last year.

Equitable says earnings were, however, reduced by $0.42 per share in the quarter because of actions it took in the second quarter to address liquidity issues.

The company says those actions included securing a two-year, $2-billion funding facility from Canada’s six largest banks, and insuring and securitizing an $892-million portfolio of existing residential mortgages to protect itself during what it says was a period of funding market volatility.

Equitable says deposit principal was $10.5 billion at the end of the quarter, up 14 per cent from a year earlier and up five per cent from the end of June.

The company says it is Canada’s ninth largest independent schedule I bank, running branchless operations including its EQ Bank digital banking arm which provides services to more than 43,000 Canadians.

The $750 million mega mining deal that came up $750 million short: Why the deal flopped

It was one of 2017’s mega mining deals. And then it wasn’t.

West High Yield (W.H.Y.) Resources Ltd. — the tiny Canadian explorer that surged nearly 1,000 per cent last month after announcing a pact to sell its main assets for US$750 million — said the deal has collapsed. The buyer couldn’t come up with a deposit for less than 1 per cent of the transaction value, or US$500,000.

“The purchaser failed to pay the deposit” by the Nov. 6 deadline, Calgary-based West High Yield, which trades under the ticker WHY, said in a statement late Tuesday. “The board of directors of the company decided to terminate the agreement.”

The collapse ends a transaction that sparked a review by regulators following West High Yield’s extraordinary surge on Oct. 5 after it announced the deal. The stock jumped to $2, from just 36 cents the previous day, giving the company with no revenue a market value of $114 million (US$89 million). The cash deal to sell the magnesium deposit in British Columbia to Gryphon Enterprises LLC would have been worth about 46 times West High Yield’s value the day before the announcement, making it one of the biggest mining asset sales in the world this year.

From the beginning there were questions about the deal, and the stock surge raised eyebrows among some investors in Canada, where the junior stock exchange has been dubbed the “wild west” for its volatile penny stocks.

Little information could be found on Maryland-based Gryphon Enterprises or its chief executive officer, Stephen Cummins. According to a West High Yield filing, the Toronto office of law firm Baker McKenzie represented Gryphon. Immediately following the announcement, Baker McKenzie’s global head of mining said he was unaware of the transaction.

Named in Error

In a statement last Friday, West High Yield said the law firm had been named in error and that Gryphon “has received advice” from Houston-based Thomas J. Kenan. It also had warned then of “substantial risk” that the buyer might not obtain financing for the deal. The company also warned last week that its prior claim that the assets hold about 3,000 years of magnesium supply “should not be relied upon.”

When reached by phone Monday, Kenan confirmed that he represents Cummins in the U.S., and that two or possibly three companies want to loan Gryphon money. “We’re dealing with reputable companies and people,” he said.

“He’s not a crook, I’ll just tell you that right now, I wouldn’t associate with one,” Kenan said of Cummins. “But sometimes he’s not very practical; he reaches very far and is always working on great big deals.”

West High Yield said that while it’s disappointed the deal was terminated, it “continues to believe, based on testing done to date, that the assets have significant value.” It intends to continue its efforts to secure mining and rock quarry permits for the property, it said.

Stock Halted

The stock has been halted since Oct. 6 amid an inquiry by the Alberta Securities Commission.”The company is in discussions regarding when its shares will resume trading,” West High Yield said Tuesday. Hilary McMeekin, an ASC spokeswoman, as well as Cummins and West High Yield CEO Frank Marasco didn’t immediately respond to a requests late Tuesday seeking comment.

Grant McGlaughlin, a partner at Toronto law firm Goodmans LLP, said the Baker McKenzie error was a “red flag.”

Lawyers and companies on both sides of large asset sales are always “intimately” involved during discussions leading up to an agreement, McGlaughlin said Monday by phone. “I’ve never seen it in 21 years where someone hasn’t had direct contact with a buyer’s counsel on a US$750 million deal.”  

–With assistance from Joe Deaux and David Scanlan

 

Bloomberg.com

TSX falls in broad retreat as rate hike talk bites

By Alastair Sharp

Canada’s main stock index fell on Thursday in a broad retreat as investors turned cautious in response to a more hawkish tone from the Bank of Canada and as they position their portfolios for the end of the quarter.

The Toronto Stock Exchange’s S&P/TSX composite index ended down 142.16 points, or 0.93 per cent, at 15,213.42. All 10 of its main sectors ended in the red.

The utilities and telecom sectors, where stocks typically pay chunky dividends and are sensitive to changing expectations for interest rates, both fell at least 1 per cent.

Bank of Canada Governor Stephen Poloz earlier this week said that rate cuts in 2015 had done their job, part of a dramatic shift to a more hawkish tone from the central bank that startled analysts who had not expected a hike until 2018.

The market is now fully pricing in a hike by October.

Shift

“It’s a combination of a shift in stance from the Bank of Canada which is maybe accelerating fund flows heading into quarter-end,” said Bryden Teich, portfolio manager at Avenue Investment Management. “There’s no fundamental reason why something that was up yesterday should be down today.”

The index is expected to edge up to set a new high by the middle of 2018, a Reuters poll found on Thursday, boosted by moderate economic growth offsetting depressed oil prices and worries about the country’s housing market.

Industrials fell 1.2 per cent, with Canadian National Railway Co down 2 per cent at $105.45 and Bombardier Inc off 1.2 per cent at $2.42 after the company confirmed its transportation unit plans to cut up to 2,200 jobs in Germany as part of a sweeping savings plan.

Alimentation Couche Tard Inc declined 2.5 per cent to $62.75. The convenience store operator’s shares had jumped earlier in the week on news it had won U.S. antitrust approval to buy rival CST Brands Inc.

Heavyweight energy and gold mining stocks also weighed, with pipeline operator Enbridge Inc down 1.3 percent and gold miner Agnico Eagle Mines Ltd off 3.8 per cent at $58.24.

Overall, there were nine decliners for every two advancers.

Vice Media is now valued at US$5.7 billion after new funding from private equity firm TPG Investment

Vice Media Inc. got a US$450 million investment from private equity firm TPG, valuing the irreverent chronicler of youth culture at US$5.7 billion.

The funding will help Vice produce more video through a new in-house studio, and create online subscription services to sell those videos to consumers, Chief Executive Officer Shane Smith said in a statement. The company continues to consider an initial public offering, Smith said in an interview on CNBC.

Vice already produces a slew of reality and news programs for its cable network Viceland, such as series about the culture of marijuana, gay and lesbian issues and food. Vice also publishes video for services like YouTube and Snapchat along with a daily news show for HBO. The company has more recently begun producing scripted programming, and will use this new money to do more.

Vice has already raised money from some of the largest media companies in the world. Walt Disney Co. and 21st Century Fox Inc. both own stakes in Vice, which was valued at US$4 billion at the time of Disney’s latest investment. Vice’s value has gained on the strong reception to its weekly news magazine for HBO, an award-winning documentary about the Islamic State terrorist group and the growing viewership for its videos online.

Smith talked openly about selling the company last year, and mentioned Disney as a potential buyer. Yet Disney didn’t participate in this latest fundraising round, and, with the latest valuation, Vice would now be more expensive than two of Disney’s biggest acquisitions — Marvel Entertainment and Lucasfilm — were at the time.

Those two companies own a fertile library of intellectual property, be it comic books or “Star Wars.” Vice, producer of “Balls Deep” and “Bong Appetit,” is now trying to amass the equivalent.

“This will allow us to build up the largest millennial video library in the world — enabling Vice to widen our offering to include news, food, music, fashion, art, travel, gaming, lifestyle, scripted and feature films,” Smith said in a statement.

TPG made the investment using capital from its flagship buyout fund, for which it finished raising US$10.5 billion in 2016, according to a person with knowledge of the matter. David Trujillo, who spearheaded TPG’s investments in ride-sharing company Uber Technologies Inc. and talent agency Creative Artists Agency LLC, led the Vice transaction.

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