In This Issue

ON TARGET

By Gordon Pape

Target’s long-awaited and much-ballyhooed entry into Canada is finally happening. The giant U.S. retailer will open its first stores in selected markets this month in advance of an Ontario roll-out starting in April. Over the spring and summer, more stores will open in Western Canada with the Quebec stores scheduled for the fall. By year-end, the company will have a total of 124 stores in operation.

Target’s arrival was kicked off by a 60-second television spot that aired during last week’s Academy Awards. It was specially designed to tug at our heartstrings, using the theme song from the old children’s show Mr. Rogers Neighbourhood against a montage of iconic Canadian scenes. The ad also featured Bullseye, the company’s mascot bull terrier. Get ready to see a lot more of the mutt in TV commercials and on billboards in the months to come.

As Target gears up to battle for a share of the Canadian retail market, competitors are preparing to protect their turf. For example, Walmart, which is already well-established here with 379 stores, has announced it will spend $450 million to expand its Canadian operations this year.

Sears Canada, which is widely believed to be the most vulnerable, is already feeling the pain, even before the first Target store has opened. Sears reported that same-store sales were down 5.6% in 2012. That’s a steep decline and it’s likely to get worse as consumers discover Target.

That’s because they’re going to like what they see. Having shopped at Target several times in the U.S., I can report that the stores offer good prices and high-quality merchandise from electronics to clothing, including many exclusive fashion lines. In this country, that will include specially designed clothing from one of our iconic garment makers, Roots.

Target stores are also much more visually appealing than their often drab Walmart and Canadian Tire competition. I predict it won’t be long before Target becomes a hot topic of discussion and a favourite destination for many shoppers.

So if the stores are likely to be a big hit, why not buy the stock? Good question. Let’s take a look at it.

We’ll start with the big Canadian news from last week’s release of the company’s fourth-quarter and year-end 2012 results. The company revealed that its expansion into Canada is costing a lot more than expected. Management originally expected to spend between $10 and $11 million per store, or about $1.3 billion in total. Now the cost is being pegged at $1.5 billion which the company says will translate into a reduction to 2013 projected earnings per share (EPS) of about $0.45. As a result, Target is forecasting adjusted EPS for this year of between $4.85 and $5.05 a share (figures in U.S. currency).

For 2012, adjusted EPS was $4.76 a share, which included a $0.48 charge for the Canadian expansion. That means that projected growth this year will be between 1.9% and 6.1%. At the low end, that’s negligible. At the high end, it’s a big step down from a 7.9% gain in EPS in 2012.

But the company expects to start getting some payback on its big foreign expansion – the first it has ever undertaken – by the fourth quarter. By 2014, the Canadian operations should be making a significant contribution to the bottom line but at this point no one is predicting how much that might be.

Small wonder! Although Target is very popular in the U.S., no one can say with any certainty how Canadians will react. One thing is certain: there will be a lot of media focus on price comparisons during the early days. Journalists and consumers will looking at how much the same item costs in Canada and the U.S. and how Target’s prices compare with its Canadian rivals. If Target comes off badly out of the gate it will put a damper on the launch and slow customer acceptance.

This uncertainty makes the stock a little more risky than it would otherwise be. But it also offers significant upside potential to earnings per share in 2014 if all goes well.

In announcing its 2012 results, Target said its full-year sales increased 5.1% to $72 billion from $68.5 billion in 2011. This reflected a 2.7% increase in comparable-store sales combined with the contribution from new stores and one additional accounting week

As things stand right now, the stock has a trailing p/e ratio of 14.2 and a forward ratio of 11.4. By comparison, Walmart’s trailing p/e is 14.3 while the forward p/e is 12.2. So Target shares are a little cheaper by comparison. According to data compiled by Thomson/First Call, analysts are slightly weighted towards the buy side on their calls with a median target of $71.50 a share.

The stock pays a quarterly dividend of $0.36 a share ($1.44 a year) to yield 2.25% based on Friday’s closing price of $64.13. Also, Target has an active share buy-back program. In 2012, the company spent $1.9 billion to repurchase 32.2 million shares at an average price of $58.96. That represented 4.8% of the shares outstanding at the start of the year.

Action now: Target becomes a Buy for patient investors who believe the company’s entry into Canada will pay off in 2014 and beyond. The shares trade on the New York Stock Exchange under the symbol TGT. My initial target price is $70 which, if achieved, would give us a total return of 11.4% in the first year, including dividends.

 

Gordon Pape’s new books are Money Savvy Kids and a revised and updated edition of his best-seller Tax-Free Savings Accounts. Both are available at 28% off the suggested retail price at http://astore.amazon.ca/buildicaquizm-20

Follow Gordon Pape’s latest updates on Twitter: http://twitter.com/GPUpdates

REVENUES PLACE A FLOOR UNDER THE MARKET

TOP

Contributing editor Tom Slee is here this week with some thoughts on the fourth-quarter earnings reports from major U.S. companies. Tom is a former professional money manager and an expert on taxation matters. Here is his report.

Tom Slee writes:

As I write, 334 of the S&P 500 companies have reported fourth-quarter results and so far it’s mostly good news. Almost 72% of the companies have beaten consensus forecasts. Typically, 62% come in above expectations. Even more encouraging, 67% reported sales numbers that were better than anticipated. To put that into perspective, over the past four quarters on average 50% of the S&P 500 beat their sales estimates. In the third quarter only 41% were ahead of the forecasts.

Of course, these are not earth-shattering figures and they are tempered by the fact that 63 companies reduced their 2013 first-quarter guidance while only 17 upgraded their forecasts. We are, however, seeing some solid, broad-based earnings growth with the Information Technology and Consumer Staples sectors showing particular strength. When it comes to revenues, Telecom Services and Energy companies are turning in much better numbers than expected. It all bodes well for a much better stock market later in the year.

The surge in sales is particularly significant. Companies can only thrive if they are able to generate top-line growth. That’s the life blood. In recent years we have seen a lot of improved earnings resulting from cost cutting as companies struggled with the recession. But there is a limit to trimming. Once the fat has gone managers have to start slashing muscle and dampening their company’s long-term prospects.

Industry sales numbers also reflect the state of the recovery. Ever since 2009, companies have been growing slowly, if at all, as they struggled with a weak economy. Finally, however, we are seeing an uptick in activity and corporate revenues are growing at 3.8%, up from the 2.2% analysts were expecting at the end of last year. Keep in mind, too, that sales numbers are unlikely to be adjusted (massaged is a better word) and are therefore indicative of a company’s progress. That’s more than you can say for some of the earnings. Let me explain.

In the final analysis, despite all the political turmoil and economic setbacks, stock prices are underwritten and driven by corporate earnings. The trouble is these numbers have been produced by chief financial officers (CFOs) and to some extent shaped to meet, even beat, expectations.

Now I am not for one moment saying that most companies cook their books. However, as one leading analyst recently put it, a lot of published profits are lightly seared. We are not talking about Enron-style fiddling, just fine tuning by imaginative managers. Duke University conducted a confidential survey of 169 financial officers of large public firms and found that about 20% made material adjustments to the raw income numbers. The participants conceded that their reported earnings met accounting standards but failed to reflect the underlying operations. It seems that compiling and releasing reserves has become an art form.

This fine tuning has never been a great secret. We all know that managers are on a bit of a treadmill. As the chief financial officer of drug maker Perrigo Company pointed out, once management issues earnings guidance there is a great incentive to meet it.

The trouble is that the necessary adjustments can be significant. Duke’s survey showed that earnings misrepresentation was about 10% on average. Professor John Graham, the survey’s author, found that surprisingly high. It is! So you can see why here at Internet Wealth Builder we spend a lot of time studying sales and cash flow figures as well as reported profit. We also set a lot of store by trends as well as specific numbers.

On balance, therefore, I think the fourth-quarter revenues and to a slightly lesser extent profits are building a floor under the market. The current forward 12-month price earnings ratio for the Standard & Poor’s 500 is a modest 13.4. Forecasters anticipate earnings growth of approximately 2.4% for first quarter 2013 followed by a spurt to 5.1% in the second quarter.

Stocks on both sides of the border should be reflecting this growth before too long. As a matter of fact, I think that the markets would already be in much better shape if there was less volatility. This is an increasing problem and something that we will have to learn to live with and factor into our considerations.

Of course, volatility is nothing new. It has always been part and parcel of our stock markets. Since 1928 the S&P 500 has averaged a 13.5% drop at some point during each calendar year and then recovered. Recently, the turbulence has significantly increased. According to research conducted by the Leuthold Group of Minneapolis from 1928 to 2011, the S&P 500 fluctuated by over 1% on about 20% of all trading days. It is now moving over 1% on almost 40% of trading days. As we all know, sometimes it seems that both the New York and Toronto markets are in constant turmoil.

Part of the problem is that short-term trading has increased as time horizons have shortened. Years ago investors measured companies and advisors on their annual performance. Then we reduced everything to quarterly results and now, thanks to instant communications, information and responses are non-stop. Computer-generated trading drives stocks up and down for no particular reason and with the advent of exchange-traded funds (ETFs) stock and bond volumes have soared.

Small investors are often alarmed by all this activity and are understandably worried when their stocks drop, then recover. I know that the constant trading actually deters some people from buying common shares even if they are suitable, which is a pity. A lot of it is just “noise”. Moreover, some experts think that increasing volatility is a good thing.

North American stocks, even the multi-national, inter-listed companies, are much more volatile than their foreign counterparts. In fact, overseas markets in general tend to be more stable. Analysts found that this was not due to North American day traders churning their positions. Arguably, our increased activity resulted from more efficient trading mechanisms, superior corporate disclosure rules, and intense widespread research as well as constant media coverage. In short, the activity to a large extent resulted from improved investor protection. It’s difficult to imagine but in some developed countries small investors are almost excluded from equities and companies disclose as little as possible. There is stability but at a price.

My suggestion is that you accept market volatility as a fact of life. Stay with your personal investment program and keep market timing to a minimum. Above all, try to invest for the long term. Volatility itself is not necessarily a bad thing but when markets go berserk, as they have been prone to do in recent years, step back and focus on your long-term goals.

 

NEW FLYER ADDED TO RECOMMENDED LIST

TOP

When I compiled the IWB Growth Portfolio last August, I included New Flyer Industries (TSX: NFI, OTC: NFYEF). This was a new suggestion and I am now adding it to our Recommended List. Here is a summary and description of the company.

Founded in 1930, Winnipeg-based New Flyer has grown from a small truck body works to the leading producer of heavy duty buses in Canada and the United States. With 2,200 employees and about 35% of the total North American market, the company generated $926 million of revenues last year and an operating profit of $80 million. Twenty of the 25 largest transit authorities operate New Flyer buses and there is no reliance on any single customer. With about 22,000 of the company’s vehicles in operation, New Flyer also benefits from an active aftermarket and service and parts account for 28% of its operating profit.

As with Bombardier in the aircraft production business, the company’s quarterly results fluctuate depending on orders and deliveries. For the nine months ending Sept. 30, revenues totaled $663 million (New Flyer reports in U.S. currency) and profit was $47 million compared to $64 million in 2011. This year’s numbers were impacted by a delay in an order of 90 buses from New York City Transit but these units are not lost – just being moved to the 2013 production schedule. The current backlog is 6,206 units and New Flyer expects to maintain a production line rate of 236 units a week in 2013. Earnings of about $0.40 a share in 2012 are expected with an increase to the $0.70 range this year.

After completing a restructuring in 2012, New Flyer has established a dividend rate of $0.585 a share which represents an 83% payout this year and about 60% in 2014. It appears to be safe.

Looking ahead, there are still constraints on U.S. municipal spending but everything points to a pick-up in bus orders next year as the present equipment ages. New Flyer is well positioned to benefit from this pent-up demand, especially as Daimler’s withdrawal in 2012 has opened up 10% of the market. Longer term, the fundamentals are extremely attractive. Buses are a growth industry as cities take steps to reduce the number of cars on their clogged arteries.

There is another big plus. On Jan. 23, Brazilian giant Marcopolo SA, the world’s third-largest bus maker, established a 20% stake in the company by taking down 11.1 million new shares at a price of $10.50 each. It’s a huge vote of confidence in New Flyer and injects $116 million of new money for growth and diversification. The two companies have also signed an agreement to cooperate on engineering and other operational matters. This deal moves New Flyer to the next level.

I think that the stock, now trading at C$10.30, US$10.04 and yielding 5.68%, offers growth as well as above average income.

Action now: New Flyer is a Buy with a target of $11.50. I have set a $7.50 revisit level.

 

BUY ALIMENTATION COUCHE-TARD

TOP

Another stock that we added to our Growth Portfolio in August was our old favourite Alimentation Couche-Tard (TSX: ATD.B, OTC: ANCUF). Here is an update.

Alimentation is one of the world’s largest convenience store owners with more than 13,000 outlets across North America, Europe, and Asia. Established with one store in Laval, Quebec in 1980, the company’s successful expansion has been astonishing. Market capital exceeds $9 billion and revenues of about $33.4 billion are expected this year with operating profit in the $1.3 billion range.

Last year, on June 19, Alimentation acquired Statoil Fuel and Retail, a Scandinavian retailer, for US$2.8 billion. This gave the company a whole new dimension. Statoil’s chain of 2,300 stores provides a foothold in the Northern European countries and Russia. It was a substantial deal to digest but since then Alimentation has continued to expand, acquiring more than 100 new outlets in the United States during the last six months.

We expected earnings growth to slow as the European operations were absorbed and so avoided the stock for a while. Now, however, the company appears to be picking up steam. A large part of Alimentation’s revenues revolve around transportation and North American road traffic volumes are increasing. Moreover, because of higher gas prices, it looks as though fuel margins are likely to increase to $0.19 a gallon from $0.14 last year. Better product mix will also contribute to the bottom line and management remains on the acquisition trail in this highly fragmented industry.

Third-quarter 2013 results (the company has an April year-end) should be announced shortly and I think that we could see earnings of $0.90 a share (Alimentation reports in U.S. funds) compared to $0.48 in 2012. Keep in mind though that year-over-year numbers are not really comparable because of the addition of Statoil.

Looking ahead, I expect the company to make about $3.50 a share in 2013 with an increase to $4 the following year. That means the shares, priced at $52.85 and paying a $0.30 dividend, are trading with a 15.1 earnings multiple. They represent good value, especially for more aggressive investors.

Action now: Alimentation Couche-Tard is a Buy at C$52.85, US$51.40 with a target of $62. I will revisit the stock if it dips to $45.

 

UPDATE ON BOMBARDIER

TOP

Bombardier Inc. (TSX: BBD.B, OTC: BDRBF)

Originally recommended on Oct. 19/09 (#2937) at C$5.03. Closed Friday at C$4.11, US$4.01.

Bombardier reported apparently respectable fourth-quarter earnings but when you scratched the surface its numbers were disappointing. Earnings of $0.10 a share (Bombardier reports in U.S. funds) were in line with expectations but the overall profit margin of 3.4% was well below the 5.6% analysts were expecting. Transportation revenues were weaker than anticipated. Final profit for the year was $0.43 a share compared to $0.47 in 2011.

A lot now hinges on the new C Series aircraft’s initial flight scheduled for June. Hopefully, this will be successful but it’s something that doesn’t lend itself to fundamental analysis.

Action now: Bombardier becomes a Hold.

 

MORE UPDATES


TOP

Exco Technologies Ltd. (TSX: XTC, OTC: EXCOF)

Originally recommended by Ryan Irvine on Feb. 27/12 (#21208) at C$4.25, US$4.22. Closed Friday at C$5.70, US$5.79 (Feb. 25)

With roots that date back to 1952, Exco is a global supplier of innovative technologies servicing the die-cast, extrusion, and automotive industries. Headquartered in Markham, Ontario, Exco, through its ten strategic locations, employs 2,100 people and services a diverse and broad customer base. Exco’s Casting and Extrusion division account for 62% of sales and its Automotive Solutions division accounts for the remaining 37%.

On Jan. 30, Exco reported that consolidated sales for the first quarter of fiscal 2013 (to Dec. 31, 2012) were $58.7 million. This marked a slight increase (0.5%) compared to last year. Consolidated net income was $5.8 million ($0.14 per share) compared to $5.3 million ($0.13 per share) in the same quarter the year before.

The improvement in the latest quarter’s earnings was led by the Automotive segment with $3.8 million in pre-tax income compared to $3.3 million in the same quarter last year, or a 14% increase. The Casting and Extrusion segment reported pre-tax income of $5.6 million compared to $5.4 million in the same quarter last year, a 4% increase. Extrusion earnings in the current quarter were consistent with prior year, though mildly impacted by integration and setup costs of an acquisition in Colombia.

Operating cash flow before net changes in non-cash working capital increased to $8 million from $6.8 million in the same quarter last year. This increase is primarily the result of improved earnings. The company’s cash position decreased by $1.7 million to $29.5 million ($0.73 per share), down from $31.2 million at the beginning of the year. The balance sheet remains very strong with $88.6 million in working capital and zero debt.

Exco announced that its quarterly cash dividend will increase 20% to $0.045 per share with the next payment due March 29 to shareholders of record on March 15. At the current prices, the annual yield is 3.16%.

Exco announced that its Castool business will establish a 20,000 sq. ft. machining facility in Thailand at a cost of approximately $5 million. This will enable Castool to better serve its fast-growing market share in this sizable and competitive Asian market.

The overall outlook for Exco over the next several quarters has not materially changed from the last quarter. The two major trends of strong light vehicle production volumes in North America and steady introduction of new or refreshed vehicles and power-train systems by virtually all OEMs (original equipment manufacturers) remains intact. These trends continue to benefit the company’s components businesses, Castool, and its large mould businesses.

The emphasis at these operations is on maintaining sufficient inventory and meeting delivery dates. At the extrusion businesses, the focus will be on integrating the company’s latest acquisition in Texas, executing the recently announced Greenfield extrusion plant development in Sorocaba, Brazil, and bringing the company’s recently acquired operation in Colombia to profitability.

In Europe, the situation is much more subdued as production volumes are expected to contract further in 2013, although to what extent continues to be unclear. The dire overcapacity situation in Europe and erratic OEM production scheduling leads Exco management to expect overall results for its Polydesign operation to be generally in line with last year’s performance.

Exco is no longer as cheap as it was in when we recommended it 12 months ago. Having said this, the company has a strong balance sheet, just announced another dividend increase, and holds a moderate growth profile in the near and mid-term. Fundamentally, with the stock trading at 9.5 times earnings cash in and 8.3 times cash out, it continues to look attractive. This year will not produce the tremendous growth in earnings that we saw in 2012, but 5%-10% growth is anticipated nonetheless. We estimate current fair value in the range of $6.50-$7.

Action now: We maintain our Buy recommendation in both the near and long term, but would not chase the stock past $6.25 near term. – R.I.

MacDonald, Dettwiler & Associates (TSX: MDA, OTC: MDDWF)

Originally recommended by Gordon Pape on July 16/12 (#21225) at C$56.63, US$54.10. Closed Friday at C$71, US$69.41.

The company’s shares hit an all-time high last week after release of fourth-quarter and year-end financial results that beat expectations.

Consolidated revenues for the full year of 2012 increased to $880 million compared to $761 million for 2011. Revenues for the Communications segment were $387 million, up from $238 million for 2011. MDA completed the acquisition of Space Systems/Loral (SSL) on Nov. 2 and the results of SSL are included in the Communications segment from the date of acquisition. Revenues for the Surveillance and Intelligence segment were $493 million compared to $523 million for 2011.

Operating earnings for 2012 increased to $127 million ($3.98 per share) compared to $117 million ($2.99 per share) in 2011. However, net earnings from continuing operations dropped to $86 million ($2.71 per share) compared to $130 million ($3.31 per share) in 2011. The company said this was due to “certain large, non-operational items that affected comparability of financial results to prior year. These items included transaction costs related to the acquisition of SSL, amortization expense of acquisition related intangible assets and unrealized mark-to-market adjustments on share-based compensation awards”. 

The order backlog increased dramatically during the year. On Dec. 31 it stood at $2.2 billion, up from $805 billion a year earlier. Moreover, the backlog does not include the $706 million contract signed with the Canadian Space Agency in January to build, launch, and provide initial operations for the RADARSAT Constellation Mission.

As expected, the company did not increase the semi-annual dividend, leaving it at $0.65 a share. The next payment is due on March 28 to shareholders of record as of March 15.

On the negative side, CEO Daniel Friedmann told analysts in a conference call last week that he expects the $85 billion in U.S. government spending cuts that went into effect on Friday – “sequestration” as it is called – will have a negative impact on the company’s revenues. Much of MDA’s business is from government contracts in such fields as aeronautics and satellites. He suggested the cutbacks could have a “multi-million dollar impact on revenues”.

With the price at an all-time high, I suggest taking a quick profit and exiting. The uncertainty created by the effects of U.S. sequestration plus the likelihood of a pull-back after this strong run are major factors in my thinking. I still like the company a lot but it is looking very pricey right now. Let’s take the profit and see if we get an opportunity to re-enter on a correction.

The stock has gained 25% in the seven months since it was recommended. Plus we have received one dividend for a total return of 26.5%.

Action now: Sell. – G.P.

Brookfield Asset Management (TSX: BAM.A, NYSE: BAM)

Originally recommended by Gordon Pape on April 7/97 (#9713) at C$6.13 (split-adjusted). Closed Friday at C$39.49, US$38.43.

Brookfield shares pulled back by 3% on Feb. 15 following the release of mixed financial results that left some analysts and investors disappointed. The year-end results revealed that net income for 2012 fell to $1.4 billion ($1.97 per share), down from almost $2 billion ($2.89 per share) in 2011 (note that Brookfield reports in U.S. currency). The company said the 2011 results included “significant valuation gains”.

On the good news side of the ledger, funds from operations (FFO) for the year increased 12% to $1.4 billion and the company raised its dividend by 7% to $0.15 a quarter ($0.60 annually). In making the announcement, management said the dividend increase “reflects our policy of raising the distributions over time by an amount that corresponds to the growth in cash flow from our businesses, while ensuring we retain capital to maintain our assets and take advantage of growth opportunities”.

The company said that the intrinsic value of the stock was $44.93 a share as of Dec. 31, an increase of 9.6% from $40.99 at the start of the year.

Brookfield said it announced or completed acquisitions and capital expansions totaling $13.1 billion during the year, deploying $7.7 billion of equity capital in the process. “We expect these businesses will make a significant contribution to our future cash flows and value increases,” management said. The company now has $175 billion in assets under management.

Action now: Buy. – G.P.

 

B.C. FIRST INTO PRPPS

TOP

British Columbia has become the first province to introduce legislation enabling the creation of Pooled Retirement Pension Plans (PRPPs). The announcement, which received little media attention, was contained in the provincial budget which was tabled on Feb. 19.

PRPPs have been touted by federal Finance Minister Jim Flaherty as an answer to the country’s evolving pension crisis. They would enable small employers and self-employed people to pool their assets in defined contribution plans which would be professionally managed by companies in the private sector.

So far, the program has received a frosty reception from the provinces, which must pass enabling legislation for them to take effect. In last September’s budget, then-Ontario Finance Minister Dwight Duncan dismissed the whole concept and called instead for an expansion of the Canada Pension Plan.

Only residents of Yukon, Nunavut, and the Northwest Territories along with employees of federally chartered companies have been able to use PRPPs. No figures have been published on the number of people who have entered into such plans but it is believed to be extremely small.

In announcing B.C.’s decision to move forward with PRPPs, provincial Finance Minister Michael de Jong said it will “help a lot of families save for the future”. He noted that only one in three B.C. workers belongs to a pension plan and commented: “It’s difficult to save for retirement on your own – especially while you’re raising a family. Too often, parents are forced to choose between the needs of today and the needs of tomorrow. We intend to give those families a break.”

Details about how the PRPPs will work are to be released at a later date. – G.P.

 

YOUR QUESTIONS

TOP

TFSA overcontribution

Q – I enjoy your newsletter very much. My question is this; I think that I might have overcontributed to my TFSA. Is there any way of finding out if I have done so? The maximum amount at this point in time is $25,500 but I have $30,500 in the account. It is possible that the extra amount may be due to earnings but I am not sure. Also, if there is an overcontribution, what should I do? Do I just take out an amount that will get me back to the allowable maximum? – Richard C., Toronto

A – It’s very possible that the extra money is profit earned within the plan. If so, it would not represent an overcontribution. The best person to answer your question is the advisor who handles your TFSA. He/she can quickly review the records to see if any overcontribution was made. You can also check through the My Account feature of the Canada Revenue Agency website at www.cra-arc.gc.ca/esrvc-srvce/tx/ndvdls/myccnt/menu-eng.html.

If you have made an overcontribution, it should be withdrawn from the plan as soon as possible to minimize any penalty. – G.P.

 

MEMBERS’ CORNER

TOP

More on MJNA

Member comment: As a long-time subscriber, I’m always impressed and appreciative by how quickly and thoroughly you answer any question. Thank you!
 
As a ‘pre Baby Boomer Generation’ I never did have the chance to enjoy products like MJNA (Medical Marijuana Inc.) so after reading your last newsletter I tried to “gamble” some fun money on it.

First, I found you could not buy on-line at TD Waterhouse but had to go through an agent. After a little snicker, the agent placed my order at a limited price. An hour later I discovered my order had been cancelled!

On calling, the agent sincerely apologized, saying that this was a new experience for him as well, but none of numerous U.S. trading desks that TD dealt with traded in MJNA, so they could not deliver the shares if I had purchased them (even though over 30 million shares had traded by 10 a.m. that day). So much for my gamble! Probably for the better as the stock did little last week.
 
Thanks again for a great and profitable newsletter! – Al H., Buckhorn ON

Response: Thanks for sharing that experience. After reading it, I dug a little deeper. MJNA trades on the over-the-counter Pink Sheets market in the U.S. with an average daily volume of almost 16 million shares. Some Canadian brokers are able to trade through the Pink Sheets if you really wanted to make the effort but I wouldn’t encourage it. The stock has been extremely volatile recently. It went from $0.14 a share on Jan. 28 all the way to $0.50 in intraday trading on Feb. 13. It then proceeded to plunge all the way to $0.22 on Feb. 21. It closed on Friday at $0.32 (figures in U.S. currenecy).
 
It appears that there has been a lot of Internet hype for this stock. The Pink Sheets website carries a warning saying that “investors should be aware that no firm is making a market in this stock…all prices reflect unsolicited customer orders and investors may have a difficult time selling this stock”.

The warning includes a link to an SEC page which says to be wary when you see “unsolicited quotations” posted for stocks. That page includes this caution: “Spammers and fraudsters often count on investors to call their broker or place an on-line order for the hyped stock. Such an order may be reflected as an ‘unsolicited’ quotation in the quotation service – which is a quotation reflecting an order that has not been solicited by the customer’s broker. So you should be cautious when you see quotes that are marked as ‘unsolicited’ quotations, and make sure that you obtain current and accurate information about the company before making an investment decision.” – G.P.

 

CORRECTION

TOP

In last week’s issue, I wrote that the MER of the Mawer U.S. Equity Fund was $22.04. Of course, this should have read NAV (net asset value). I apologize for any confusion. – G.P.

 

That’s all for now. We’ll be back on March 11.

Best regards,

Gordon Pape

In This Issue

ON TARGET

By Gordon Pape

Target’s long-awaited and much-ballyhooed entry into Canada is finally happening. The giant U.S. retailer will open its first stores in selected markets this month in advance of an Ontario roll-out starting in April. Over the spring and summer, more stores will open in Western Canada with the Quebec stores scheduled for the fall. By year-end, the company will have a total of 124 stores in operation.

Target’s arrival was kicked off by a 60-second television spot that aired during last week’s Academy Awards. It was specially designed to tug at our heartstrings, using the theme song from the old children’s show Mr. Rogers Neighbourhood against a montage of iconic Canadian scenes. The ad also featured Bullseye, the company’s mascot bull terrier. Get ready to see a lot more of the mutt in TV commercials and on billboards in the months to come.

As Target gears up to battle for a share of the Canadian retail market, competitors are preparing to protect their turf. For example, Walmart, which is already well-established here with 379 stores, has announced it will spend $450 million to expand its Canadian operations this year.

Sears Canada, which is widely believed to be the most vulnerable, is already feeling the pain, even before the first Target store has opened. Sears reported that same-store sales were down 5.6% in 2012. That’s a steep decline and it’s likely to get worse as consumers discover Target.

That’s because they’re going to like what they see. Having shopped at Target several times in the U.S., I can report that the stores offer good prices and high-quality merchandise from electronics to clothing, including many exclusive fashion lines. In this country, that will include specially designed clothing from one of our iconic garment makers, Roots.

Target stores are also much more visually appealing than their often drab Walmart and Canadian Tire competition. I predict it won’t be long before Target becomes a hot topic of discussion and a favourite destination for many shoppers.

So if the stores are likely to be a big hit, why not buy the stock? Good question. Let’s take a look at it.

We’ll start with the big Canadian news from last week’s release of the company’s fourth-quarter and year-end 2012 results. The company revealed that its expansion into Canada is costing a lot more than expected. Management originally expected to spend between $10 and $11 million per store, or about $1.3 billion in total. Now the cost is being pegged at $1.5 billion which the company says will translate into a reduction to 2013 projected earnings per share (EPS) of about $0.45. As a result, Target is forecasting adjusted EPS for this year of between $4.85 and $5.05 a share (figures in U.S. currency).

For 2012, adjusted EPS was $4.76 a share, which included a $0.48 charge for the Canadian expansion. That means that projected growth this year will be between 1.9% and 6.1%. At the low end, that’s negligible. At the high end, it’s a big step down from a 7.9% gain in EPS in 2012.

But the company expects to start getting some payback on its big foreign expansion – the first it has ever undertaken – by the fourth quarter. By 2014, the Canadian operations should be making a significant contribution to the bottom line but at this point no one is predicting how much that might be.

Small wonder! Although Target is very popular in the U.S., no one can say with any certainty how Canadians will react. One thing is certain: there will be a lot of media focus on price comparisons during the early days. Journalists and consumers will looking at how much the same item costs in Canada and the U.S. and how Target’s prices compare with its Canadian rivals. If Target comes off badly out of the gate it will put a damper on the launch and slow customer acceptance.

This uncertainty makes the stock a little more risky than it would otherwise be. But it also offers significant upside potential to earnings per share in 2014 if all goes well.

In announcing its 2012 results, Target said its full-year sales increased 5.1% to $72 billion from $68.5 billion in 2011. This reflected a 2.7% increase in comparable-store sales combined with the contribution from new stores and one additional accounting week

As things stand right now, the stock has a trailing p/e ratio of 14.2 and a forward ratio of 11.4. By comparison, Walmart’s trailing p/e is 14.3 while the forward p/e is 12.2. So Target shares are a little cheaper by comparison. According to data compiled by Thomson/First Call, analysts are slightly weighted towards the buy side on their calls with a median target of $71.50 a share.

The stock pays a quarterly dividend of $0.36 a share ($1.44 a year) to yield 2.25% based on Friday’s closing price of $64.13. Also, Target has an active share buy-back program. In 2012, the company spent $1.9 billion to repurchase 32.2 million shares at an average price of $58.96. That represented 4.8% of the shares outstanding at the start of the year.

Action now: Target becomes a Buy for patient investors who believe the company’s entry into Canada will pay off in 2014 and beyond. The shares trade on the New York Stock Exchange under the symbol TGT. My initial target price is $70 which, if achieved, would give us a total return of 11.4% in the first year, including dividends.

 

Gordon Pape’s new books are Money Savvy Kids and a revised and updated edition of his best-seller Tax-Free Savings Accounts. Both are available at 28% off the suggested retail price at http://astore.amazon.ca/buildicaquizm-20

Follow Gordon Pape’s latest updates on Twitter: http://twitter.com/GPUpdates

REVENUES PLACE A FLOOR UNDER THE MARKET

Contributing editor Tom Slee is here this week with some thoughts on the fourth-quarter earnings reports from major U.S. companies. Tom is a former professional money manager and an expert on taxation matters. Here is his report.

Tom Slee writes:

As I write, 334 of the S&P 500 companies have reported fourth-quarter results and so far it’s mostly good news. Almost 72% of the companies have beaten consensus forecasts. Typically, 62% come in above expectations. Even more encouraging, 67% reported sales numbers that were better than anticipated. To put that into perspective, over the past four quarters on average 50% of the S&P 500 beat their sales estimates. In the third quarter only 41% were ahead of the forecasts.

Of course, these are not earth-shattering figures and they are tempered by the fact that 63 companies reduced their 2013 first-quarter guidance while only 17 upgraded their forecasts. We are, however, seeing some solid, broad-based earnings growth with the Information Technology and Consumer Staples sectors showing particular strength. When it comes to revenues, Telecom Services and Energy companies are turning in much better numbers than expected. It all bodes well for a much better stock market later in the year.

The surge in sales is particularly significant. Companies can only thrive if they are able to generate top-line growth. That’s the life blood. In recent years we have seen a lot of improved earnings resulting from cost cutting as companies struggled with the recession. But there is a limit to trimming. Once the fat has gone managers have to start slashing muscle and dampening their company’s long-term prospects.

Industry sales numbers also reflect the state of the recovery. Ever since 2009, companies have been growing slowly, if at all, as they struggled with a weak economy. Finally, however, we are seeing an uptick in activity and corporate revenues are growing at 3.8%, up from the 2.2% analysts were expecting at the end of last year. Keep in mind, too, that sales numbers are unlikely to be adjusted (massaged is a better word) and are therefore indicative of a company’s progress. That’s more than you can say for some of the earnings. Let me explain.

In the final analysis, despite all the political turmoil and economic setbacks, stock prices are underwritten and driven by corporate earnings. The trouble is these numbers have been produced by chief financial officers (CFOs) and to some extent shaped to meet, even beat, expectations.

Now I am not for one moment saying that most companies cook their books. However, as one leading analyst recently put it, a lot of published profits are lightly seared. We are not talking about Enron-style fiddling, just fine tuning by imaginative managers. Duke University conducted a confidential survey of 169 financial officers of large public firms and found that about 20% made material adjustments to the raw income numbers. The participants conceded that their reported earnings met accounting standards but failed to reflect the underlying operations. It seems that compiling and releasing reserves has become an art form.

This fine tuning has never been a great secret. We all know that managers are on a bit of a treadmill. As the chief financial officer of drug maker Perrigo Company pointed out, once management issues earnings guidance there is a great incentive to meet it.

The trouble is that the necessary adjustments can be significant. Duke’s survey showed that earnings misrepresentation was about 10% on average. Professor John Graham, the survey’s author, found that surprisingly high. It is! So you can see why here at Internet Wealth Builder we spend a lot of time studying sales and cash flow figures as well as reported profit. We also set a lot of store by trends as well as specific numbers.

On balance, therefore, I think the fourth-quarter revenues and to a slightly lesser extent profits are building a floor under the market. The current forward 12-month price earnings ratio for the Standard & Poor’s 500 is a modest 13.4. Forecasters anticipate earnings growth of approximately 2.4% for first quarter 2013 followed by a spurt to 5.1% in the second quarter.

Stocks on both sides of the border should be reflecting this growth before too long. As a matter of fact, I think that the markets would already be in much better shape if there was less volatility. This is an increasing problem and something that we will have to learn to live with and factor into our considerations.

Of course, volatility is nothing new. It has always been part and parcel of our stock markets. Since 1928 the S&P 500 has averaged a 13.5% drop at some point during each calendar year and then recovered. Recently, the turbulence has significantly increased. According to research conducted by the Leuthold Group of Minneapolis from 1928 to 2011, the S&P 500 fluctuated by over 1% on about 20% of all trading days. It is now moving over 1% on almost 40% of trading days. As we all know, sometimes it seems that both the New York and Toronto markets are in constant turmoil.

Part of the problem is that short-term trading has increased as time horizons have shortened. Years ago investors measured companies and advisors on their annual performance. Then we reduced everything to quarterly results and now, thanks to instant communications, information and responses are non-stop. Computer-generated trading drives stocks up and down for no particular reason and with the advent of exchange-traded funds (ETFs) stock and bond volumes have soared.

Small investors are often alarmed by all this activity and are understandably worried when their stocks drop, then recover. I know that the constant trading actually deters some people from buying common shares even if they are suitable, which is a pity. A lot of it is just “noise”. Moreover, some experts think that increasing volatility is a good thing.

North American stocks, even the multi-national, inter-listed companies, are much more volatile than their foreign counterparts. In fact, overseas markets in general tend to be more stable. Analysts found that this was not due to North American day traders churning their positions. Arguably, our increased activity resulted from more efficient trading mechanisms, superior corporate disclosure rules, and intense widespread research as well as constant media coverage. In short, the activity to a large extent resulted from improved investor protection. It’s difficult to imagine but in some developed countries small investors are almost excluded from equities and companies disclose as little as possible. There is stability but at a price.

My suggestion is that you accept market volatility as a fact of life. Stay with your personal investment program and keep market timing to a minimum. Above all, try to invest for the long term. Volatility itself is not necessarily a bad thing but when markets go berserk, as they have been prone to do in recent years, step back and focus on your long-term goals.

 

NEW FLYER ADDED TO RECOMMENDED LIST

When I compiled the IWB Growth Portfolio last August, I included New Flyer Industries (TSX: NFI, OTC: NFYEF). This was a new suggestion and I am now adding it to our Recommended List. Here is a summary and description of the company.

Founded in 1930, Winnipeg-based New Flyer has grown from a small truck body works to the leading producer of heavy duty buses in Canada and the United States. With 2,200 employees and about 35% of the total North American market, the company generated $926 million of revenues last year and an operating profit of $80 million. Twenty of the 25 largest transit authorities operate New Flyer buses and there is no reliance on any single customer. With about 22,000 of the company’s vehicles in operation, New Flyer also benefits from an active aftermarket and service and parts account for 28% of its operating profit.

As with Bombardier in the aircraft production business, the company’s quarterly results fluctuate depending on orders and deliveries. For the nine months ending Sept. 30, revenues totaled $663 million (New Flyer reports in U.S. currency) and profit was $47 million compared to $64 million in 2011. This year’s numbers were impacted by a delay in an order of 90 buses from New York City Transit but these units are not lost – just being moved to the 2013 production schedule. The current backlog is 6,206 units and New Flyer expects to maintain a production line rate of 236 units a week in 2013. Earnings of about $0.40 a share in 2012 are expected with an increase to the $0.70 range this year.

After completing a restructuring in 2012, New Flyer has established a dividend rate of $0.585 a share which represents an 83% payout this year and about 60% in 2014. It appears to be safe.

Looking ahead, there are still constraints on U.S. municipal spending but everything points to a pick-up in bus orders next year as the present equipment ages. New Flyer is well positioned to benefit from this pent-up demand, especially as Daimler’s withdrawal in 2012 has opened up 10% of the market. Longer term, the fundamentals are extremely attractive. Buses are a growth industry as cities take steps to reduce the number of cars on their clogged arteries.

There is another big plus. On Jan. 23, Brazilian giant Marcopolo SA, the world’s third-largest bus maker, established a 20% stake in the company by taking down 11.1 million new shares at a price of $10.50 each. It’s a huge vote of confidence in New Flyer and injects $116 million of new money for growth and diversification. The two companies have also signed an agreement to cooperate on engineering and other operational matters. This deal moves New Flyer to the next level.

I think that the stock, now trading at C$10.30, US$10.04 and yielding 5.68%, offers growth as well as above average income.

Action now: New Flyer is a Buy with a target of $11.50. I have set a $7.50 revisit level.

 

BUY ALIMENTATION COUCHE-TARD

Another stock that we added to our Growth Portfolio in August was our old favourite Alimentation Couche-Tard (TSX: ATD.B, OTC: ANCUF). Here is an update.

Alimentation is one of the world’s largest convenience store owners with more than 13,000 outlets across North America, Europe, and Asia. Established with one store in Laval, Quebec in 1980, the company’s successful expansion has been astonishing. Market capital exceeds $9 billion and revenues of about $33.4 billion are expected this year with operating profit in the $1.3 billion range.

Last year, on June 19, Alimentation acquired Statoil Fuel and Retail, a Scandinavian retailer, for US$2.8 billion. This gave the company a whole new dimension. Statoil’s chain of 2,300 stores provides a foothold in the Northern European countries and Russia. It was a substantial deal to digest but since then Alimentation has continued to expand, acquiring more than 100 new outlets in the United States during the last six months.

We expected earnings growth to slow as the European operations were absorbed and so avoided the stock for a while. Now, however, the company appears to be picking up steam. A large part of Alimentation’s revenues revolve around transportation and North American road traffic volumes are increasing. Moreover, because of higher gas prices, it looks as though fuel margins are likely to increase to $0.19 a gallon from $0.14 last year. Better product mix will also contribute to the bottom line and management remains on the acquisition trail in this highly fragmented industry.

Third-quarter 2013 results (the company has an April year-end) should be announced shortly and I think that we could see earnings of $0.90 a share (Alimentation reports in U.S. funds) compared to $0.48 in 2012. Keep in mind though that year-over-year numbers are not really comparable because of the addition of Statoil.

Looking ahead, I expect the company to make about $3.50 a share in 2013 with an increase to $4 the following year. That means the shares, priced at $52.85 and paying a $0.30 dividend, are trading with a 15.1 earnings multiple. They represent good value, especially for more aggressive investors.

Action now: Alimentation Couche-Tard is a Buy at C$52.85, US$51.40 with a target of $62. I will revisit the stock if it dips to $45.

 

UPDATE ON BOMBARDIER

Bombardier Inc. (TSX: BBD.B, OTC: BDRBF)

Originally recommended on Oct. 19/09 (#2937) at C$5.03. Closed Friday at C$4.11, US$4.01.

Bombardier reported apparently respectable fourth-quarter earnings but when you scratched the surface its numbers were disappointing. Earnings of $0.10 a share (Bombardier reports in U.S. funds) were in line with expectations but the overall profit margin of 3.4% was well below the 5.6% analysts were expecting. Transportation revenues were weaker than anticipated. Final profit for the year was $0.43 a share compared to $0.47 in 2011.

A lot now hinges on the new C Series aircraft’s initial flight scheduled for June. Hopefully, this will be successful but it’s something that doesn’t lend itself to fundamental analysis.

Action now: Bombardier becomes a Hold.

 

MORE UPDATES


Exco Technologies Ltd. (TSX: XTC, OTC: EXCOF)

Originally recommended by Ryan Irvine on Feb. 27/12 (#21208) at C$4.25, US$4.22. Closed Friday at C$5.70, US$5.79 (Feb. 25)

With roots that date back to 1952, Exco is a global supplier of innovative technologies servicing the die-cast, extrusion, and automotive industries. Headquartered in Markham, Ontario, Exco, through its ten strategic locations, employs 2,100 people and services a diverse and broad customer base. Exco’s Casting and Extrusion division account for 62% of sales and its Automotive Solutions division accounts for the remaining 37%.

On Jan. 30, Exco reported that consolidated sales for the first quarter of fiscal 2013 (to Dec. 31, 2012) were $58.7 million. This marked a slight increase (0.5%) compared to last year. Consolidated net income was $5.8 million ($0.14 per share) compared to $5.3 million ($0.13 per share) in the same quarter the year before.

The improvement in the latest quarter’s earnings was led by the Automotive segment with $3.8 million in pre-tax income compared to $3.3 million in the same quarter last year, or a 14% increase. The Casting and Extrusion segment reported pre-tax income of $5.6 million compared to $5.4 million in the same quarter last year, a 4% increase. Extrusion earnings in the current quarter were consistent with prior year, though mildly impacted by integration and setup costs of an acquisition in Colombia.

Operating cash flow before net changes in non-cash working capital increased to $8 million from $6.8 million in the same quarter last year. This increase is primarily the result of improved earnings. The company’s cash position decreased by $1.7 million to $29.5 million ($0.73 per share), down from $31.2 million at the beginning of the year. The balance sheet remains very strong with $88.6 million in working capital and zero debt.

Exco announced that its quarterly cash dividend will increase 20% to $0.045 per share with the next payment due March 29 to shareholders of record on March 15. At the current prices, the annual yield is 3.16%.

Exco announced that its Castool business will establish a 20,000 sq. ft. machining facility in Thailand at a cost of approximately $5 million. This will enable Castool to better serve its fast-growing market share in this sizable and competitive Asian market.

The overall outlook for Exco over the next several quarters has not materially changed from the last quarter. The two major trends of strong light vehicle production volumes in North America and steady introduction of new or refreshed vehicles and power-train systems by virtually all OEMs (original equipment manufacturers) remains intact. These trends continue to benefit the company’s components businesses, Castool, and its large mould businesses.

The emphasis at these operations is on maintaining sufficient inventory and meeting delivery dates. At the extrusion businesses, the focus will be on integrating the company’s latest acquisition in Texas, executing the recently announced Greenfield extrusion plant development in Sorocaba, Brazil, and bringing the company’s recently acquired operation in Colombia to profitability.

In Europe, the situation is much more subdued as production volumes are expected to contract further in 2013, although to what extent continues to be unclear. The dire overcapacity situation in Europe and erratic OEM production scheduling leads Exco management to expect overall results for its Polydesign operation to be generally in line with last year’s performance.

Exco is no longer as cheap as it was in when we recommended it 12 months ago. Having said this, the company has a strong balance sheet, just announced another dividend increase, and holds a moderate growth profile in the near and mid-term. Fundamentally, with the stock trading at 9.5 times earnings cash in and 8.3 times cash out, it continues to look attractive. This year will not produce the tremendous growth in earnings that we saw in 2012, but 5%-10% growth is anticipated nonetheless. We estimate current fair value in the range of $6.50-$7.

Action now: We maintain our Buy recommendation in both the near and long term, but would not chase the stock past $6.25 near term. – R.I.

MacDonald, Dettwiler & Associates (TSX: MDA, OTC: MDDWF)

Originally recommended by Gordon Pape on July 16/12 (#21225) at C$56.63, US$54.10. Closed Friday at C$71, US$69.41.

The company’s shares hit an all-time high last week after release of fourth-quarter and year-end financial results that beat expectations.

Consolidated revenues for the full year of 2012 increased to $880 million compared to $761 million for 2011. Revenues for the Communications segment were $387 million, up from $238 million for 2011. MDA completed the acquisition of Space Systems/Loral (SSL) on Nov. 2 and the results of SSL are included in the Communications segment from the date of acquisition. Revenues for the Surveillance and Intelligence segment were $493 million compared to $523 million for 2011.

Operating earnings for 2012 increased to $127 million ($3.98 per share) compared to $117 million ($2.99 per share) in 2011. However, net earnings from continuing operations dropped to $86 million ($2.71 per share) compared to $130 million ($3.31 per share) in 2011. The company said this was due to “certain large, non-operational items that affected comparability of financial results to prior year. These items included transaction costs related to the acquisition of SSL, amortization expense of acquisition related intangible assets and unrealized mark-to-market adjustments on share-based compensation awards”. 

The order backlog increased dramatically during the year. On Dec. 31 it stood at $2.2 billion, up from $805 billion a year earlier. Moreover, the backlog does not include the $706 million contract signed with the Canadian Space Agency in January to build, launch, and provide initial operations for the RADARSAT Constellation Mission.

As expected, the company did not increase the semi-annual dividend, leaving it at $0.65 a share. The next payment is due on March 28 to shareholders of record as of March 15.

On the negative side, CEO Daniel Friedmann told analysts in a conference call last week that he expects the $85 billion in U.S. government spending cuts that went into effect on Friday – “sequestration” as it is called – will have a negative impact on the company’s revenues. Much of MDA’s business is from government contracts in such fields as aeronautics and satellites. He suggested the cutbacks could have a “multi-million dollar impact on revenues”.

With the price at an all-time high, I suggest taking a quick profit and exiting. The uncertainty created by the effects of U.S. sequestration plus the likelihood of a pull-back after this strong run are major factors in my thinking. I still like the company a lot but it is looking very pricey right now. Let’s take the profit and see if we get an opportunity to re-enter on a correction.

The stock has gained 25% in the seven months since it was recommended. Plus we have received one dividend for a total return of 26.5%.

Action now: Sell. – G.P.

Brookfield Asset Management (TSX: BAM.A, NYSE: BAM)

Originally recommended by Gordon Pape on April 7/97 (#9713) at C$6.13 (split-adjusted). Closed Friday at C$39.49, US$38.43.

Brookfield shares pulled back by 3% on Feb. 15 following the release of mixed financial results that left some analysts and investors disappointed. The year-end results revealed that net income for 2012 fell to $1.4 billion ($1.97 per share), down from almost $2 billion ($2.89 per share) in 2011 (note that Brookfield reports in U.S. currency). The company said the 2011 results included “significant valuation gains”.

On the good news side of the ledger, funds from operations (FFO) for the year increased 12% to $1.4 billion and the company raised its dividend by 7% to $0.15 a quarter ($0.60 annually). In making the announcement, management said the dividend increase “reflects our policy of raising the distributions over time by an amount that corresponds to the growth in cash flow from our businesses, while ensuring we retain capital to maintain our assets and take advantage of growth opportunities”.

The company said that the intrinsic value of the stock was $44.93 a share as of Dec. 31, an increase of 9.6% from $40.99 at the start of the year.

Brookfield said it announced or completed acquisitions and capital expansions totaling $13.1 billion during the year, deploying $7.7 billion of equity capital in the process. “We expect these businesses will make a significant contribution to our future cash flows and value increases,” management said. The company now has $175 billion in assets under management.

Action now: Buy. – G.P.

 

B.C. FIRST INTO PRPPS

British Columbia has become the first province to introduce legislation enabling the creation of Pooled Retirement Pension Plans (PRPPs). The announcement, which received little media attention, was contained in the provincial budget which was tabled on Feb. 19.

PRPPs have been touted by federal Finance Minister Jim Flaherty as an answer to the country’s evolving pension crisis. They would enable small employers and self-employed people to pool their assets in defined contribution plans which would be professionally managed by companies in the private sector.

So far, the program has received a frosty reception from the provinces, which must pass enabling legislation for them to take effect. In last September’s budget, then-Ontario Finance Minister Dwight Duncan dismissed the whole concept and called instead for an expansion of the Canada Pension Plan.

Only residents of Yukon, Nunavut, and the Northwest Territories along with employees of federally chartered companies have been able to use PRPPs. No figures have been published on the number of people who have entered into such plans but it is believed to be extremely small.

In announcing B.C.’s decision to move forward with PRPPs, provincial Finance Minister Michael de Jong said it will “help a lot of families save for the future”. He noted that only one in three B.C. workers belongs to a pension plan and commented: “It’s difficult to save for retirement on your own – especially while you’re raising a family. Too often, parents are forced to choose between the needs of today and the needs of tomorrow. We intend to give those families a break.”

Details about how the PRPPs will work are to be released at a later date. – G.P.

 

YOUR QUESTIONS

TFSA overcontribution

Q – I enjoy your newsletter very much. My question is this; I think that I might have overcontributed to my TFSA. Is there any way of finding out if I have done so? The maximum amount at this point in time is $25,500 but I have $30,500 in the account. It is possible that the extra amount may be due to earnings but I am not sure. Also, if there is an overcontribution, what should I do? Do I just take out an amount that will get me back to the allowable maximum? – Richard C., Toronto

A – It’s very possible that the extra money is profit earned within the plan. If so, it would not represent an overcontribution. The best person to answer your question is the advisor who handles your TFSA. He/she can quickly review the records to see if any overcontribution was made. You can also check through the My Account feature of the Canada Revenue Agency website at www.cra-arc.gc.ca/esrvc-srvce/tx/ndvdls/myccnt/menu-eng.html.

If you have made an overcontribution, it should be withdrawn from the plan as soon as possible to minimize any penalty. – G.P.

 

MEMBERS’ CORNER

More on MJNA

Member comment: As a long-time subscriber, I’m always impressed and appreciative by how quickly and thoroughly you answer any question. Thank you!
 
As a ‘pre Baby Boomer Generation’ I never did have the chance to enjoy products like MJNA (Medical Marijuana Inc.) so after reading your last newsletter I tried to “gamble” some fun money on it.

First, I found you could not buy on-line at TD Waterhouse but had to go through an agent. After a little snicker, the agent placed my order at a limited price. An hour later I discovered my order had been cancelled!

On calling, the agent sincerely apologized, saying that this was a new experience for him as well, but none of numerous U.S. trading desks that TD dealt with traded in MJNA, so they could not deliver the shares if I had purchased them (even though over 30 million shares had traded by 10 a.m. that day). So much for my gamble! Probably for the better as the stock did little last week.
 
Thanks again for a great and profitable newsletter! – Al H., Buckhorn ON

Response: Thanks for sharing that experience. After reading it, I dug a little deeper. MJNA trades on the over-the-counter Pink Sheets market in the U.S. with an average daily volume of almost 16 million shares. Some Canadian brokers are able to trade through the Pink Sheets if you really wanted to make the effort but I wouldn’t encourage it. The stock has been extremely volatile recently. It went from $0.14 a share on Jan. 28 all the way to $0.50 in intraday trading on Feb. 13. It then proceeded to plunge all the way to $0.22 on Feb. 21. It closed on Friday at $0.32 (figures in U.S. currenecy).
 
It appears that there has been a lot of Internet hype for this stock. The Pink Sheets website carries a warning saying that “investors should be aware that no firm is making a market in this stock…all prices reflect unsolicited customer orders and investors may have a difficult time selling this stock”.

The warning includes a link to an SEC page which says to be wary when you see “unsolicited quotations” posted for stocks. That page includes this caution: “Spammers and fraudsters often count on investors to call their broker or place an on-line order for the hyped stock. Such an order may be reflected as an ‘unsolicited’ quotation in the quotation service – which is a quotation reflecting an order that has not been solicited by the customer’s broker. So you should be cautious when you see quotes that are marked as ‘unsolicited’ quotations, and make sure that you obtain current and accurate information about the company before making an investment decision.” – G.P.

 

CORRECTION

In last week’s issue, I wrote that the MER of the Mawer U.S. Equity Fund was $22.04. Of course, this should have read NAV (net asset value). I apologize for any confusion. – G.P.

 

That’s all for now. We’ll be back on March 11.

Best regards,

Gordon Pape