In This Issue
Responding to your requests Future plans IWB Trading Portfolio launched Tesma International Inc. (TSE: TSM.A) Member's Corner - more on Nigeria Updates - Hurricane Hydrocarbons (HHL.A), Pengrowth Energy Trust (PGF.UN) Clarification - ITT Hartford Guaranteed Equity Indexed Annuity Seminars New book - The Best of Pape's Notes New delivery system Labour Day delivery schedule
Dear Member,
Every week, I receive numerous requests to deal with specific issues or
securities in the IWB. I welcome all these ideas, but I'm sure you
realize there is no way I can cover every topic. I simply don't have the
time to research every security that comes along (remember, I do all the
work myself; I'm not blessed with a big staff like RBC Dominion or
Nesbitt Burns). And even with a weekly publishing schedule, there is not
enough space to deal in depth with more than a couple of new topics each
week and stay abreast of the latest developments affecting previous
recommendations as well.I'm saying this because some members have expressed disappointment that
I am not able to comment on a particular stock in which they are
interested, or haven't provided coverage of some new IPO that their
financial advisor has recommended. In the latter case, members have
often been seeking a second opinion before making a decision. However, a
second opinion based on inadequate knowledge and research is worthless.
So if I don't have anything useful to contribute (and which all members
would find of interest since I can't provide individual advice), I won't
say anything at all.Therefore, I screen all suggestions carefully and focus on those I
believe will have the widest appeal to readers or which break new
ground. So do keep your ideas coming. Just understand why I can't deal
with them all.FUTURE PLANS
I've reached the stage where I don't have any stocks I want to add to
the Blue Chip Portfolio at this time. I intend to expand it in future,
both through new additions and by buying more shares of companies we
already hold when bargain opportunities present themselves. And I will
update the Portfolio periodically, so you'll always be aware of how we
stand.For now, however, I want to move on to other areas. There are many
different types of investment portfolios, each suited to a particular
person's style, current needs, risk tolerance, etc. Earlier this year, I
asked members if they would be interested in an IWB Trading Portfolio,
one which would be much more active than I intend the Blue Chip
Portfolio to be. The response was very positive, so I am launching this
portfolio today.I have also received many requests for an IWB Income Portfolio,
designed for investors whose emphasis is cash flow. In these times of
low interest rates, there's a special need for a portfolio of this type
so my plan is to get this project going within a few weeks. I intend to
have two versions of this portfolio, one for non-registered securities
and the other for RRIFs (although there will certainly be some overlap).So that's what's coming up this fall, along with all the other usual
features of course. Busy times!IWB TRADING PORTFOLIO
Whereas the Blue Chip Portfolio is essentially a buy-and-hold
proposition, the IWB Trading Portfolio will be actively managed. While I
will not be including speculative stocks in the holdings, the companies
selected will represent more aggressive positions (hence higher risk)
than you would normally expect to find in the Blue Chip Portfolio.The Trading Portfolio will be run along highly disciplined lines. Every
recommendation will include a target price on both the up and down
sides. When a stock reaches either price, it will be subject to a
thorough review and a decision taken as to whether to continue to hold,
sell, take part profits, or add more.Each initial position will be in the $2,000 to $3,500 range, although I
may choose to increase the holding at a later date. I intend to own a
maximum of 15 stocks in the portfolio at any given time.It's important to understand that the total portfolio is what counts
for score-keeping purposes, not individual stocks. The advantage of a
portfolio is that it offers diversification, thereby providing a cushion
if a couple of the stocks take a dive. So I advise against trying to
cherry-pick here, because you'll be exposing yourself to more risk. As
an alternative, buy smaller quantities of the recommended stocks, or go
with a high-grade equity mutual fund that's based on a growth strategy.For starters, I will bring into this portfolio two stocks I have
recommended in the past. I have selected these because they are priced
at levels where I still consider them to be in a buy range. To keep my
tracking consistent, I will base future updates on the price at the time
when I originally made the recommendations.Here are the starting positions for the trading portfolio.
Euro-Nevada (TSE: EN; originally recommended in IWB #9715, April 28/97,
at $19.78, adjusted for split. Closed Friday at $22.50.) This is a
high-quality gold royalty company that is managed more aggressively than
sister firm Franco-Nevada, which is in our Blue Chip Portfolio. The
price is up 14% since the original recommendation, but there is still
good value here at the current price. For tracking purposes, our
portfolio holding will be 100 shares. Upside target is $40, downside
target is $15.Global Equity Corporation (TSE: GEQ; originally recommended in IWB #
9722, June 23/97, at $2.80. Closed Friday at $3.14.) This one is up 12%
since June, but I don't think we've scratched the surface of the
potential that's here. Our portfolio holding will be 1,000 shares.
Upside target is $6, downside target is $2.Now for the first new stock to be added to this list.
TESMA INTERNATIONAL INC. (TSE: TSM.A)
You've undoubtedly heard of Magna International, Frank Stronach's great
success story. Well, Tesma is a spin-off from Magna, run by several of
the key managers who helped take the older company to the top level
among auto parts manufacturers (the CEO is Manfred Gingl, who was
Magna's president from 1981-93). Magna owns a large stake in Tesma
(almost two-thirds of the common shares), and they share some marketing
operations, so the destinies of the two companies are closely
inter-related. The company went public in mid-'96.Tesma's role is to focus on under-the-hood automotive components,
specifically power trains, fuelling and cooling systems. The technical
language can be daunting if you're not a car buff, but their rotational
drive technology (drive belt tensioners, drive shaft assemblies, etc.)
is used by manufacturers throughout the world, including very demanding
firms like Lexus. They are also leaders in such fields as rotational
products technology (e.g. alternator pulleys, air conditioning rotors),
power transfer technology (e.g. transmission components, clutch
systems), liquid transfer technology (e.g. oil caps, vapour recovery
valves), and power train modules (e.g. oil pumps, water pumps).They're very good at what they do. One of Tesma's divisions won the
supplier of the year award from General Motors last year, a high
accolade indeed.This is an international company, both in terms of its structure (2,500
employees in 18 manufacturing facilities in North America and Europe)
and its markets (39% of last year's sales were outside North America).
J.P. Benson, who follows the company for Gordon Capital Corporation,
notes that Tesma's export potential is enhanced by the fact the parts
and systems it builds are relatively small, but with a high dollar
value. He points out that the company currently has less than 1% of the
world's power train market, so there is amble opportunity for growth.Certainly growth is the key here. Tesma's nine-month sales (to April
30) were a record $405 million, up 19% from the previous year, thanks
mainly to increased exports. Profit for the period was $20.7 million (up
42%), while fully diluted earnings per share were 90c (up 32%). The
current share price is a fair reflection of all this, so future gains
will depend on the company continuing to grow and expand.Analysts expect that to happen. RBC Dominion is forecasting final 1997
earnings at $1.15 a share, increasing to $1.38 in 1998 and $1.70 in
1999. Based on a current p/e ratio of 15.9, that would suggest a target
price of around $27 by 1999.I expect the stock to do better and I'm setting an upside target of $30
a share on this one by the end of '99. One of the reasons for my
confidence is the present strong climate for auto parts suppliers in
this country. A report released by Scotiabank earlier this month found
that industry revenues on average are advancing at a double-digit pace
and that operating margins are at their highest levels since the late
'80s. The bank's Canadian Auto Report went on to say that the Canadian
parts industry has consolidated in recent years and is now gaining
market share. The authors expect this trend to continue as parts makers
benefit from continued outsourcing by the Big Three manufacturers and
from an increase in the percentage of North American components in
domestic cars from 50% this year to 56% next year.Put it all together and you have a well-managed company with growing
sales and profits, good management, leading-edge technology, and a close
affiliation with one of the world's auto parts giants. I see this one as
potentially a big winner over the next few years.We'll buy 100 shares of Tesma (TSE: TSM.A) for our IWB Trading
Portfolio at a price of $21.30. Upside target is $30 a share, downside
target is $15. The stock pays a quarterly dividend of 5c a share, for
an annual yield of slightly under 1% at the current price.MEMBERS' CORNER
Wow! I must be the only person in Canada who hasn't been invited to
participate in the Great Nigerian Swindle. Several members sent e-mail
messages saying they or people they know have been contacted, and that
this scam has been going on for several years. Some of the tales they
related were downright frightening. Here are a few examples:"So they're still at it. I had my first of two invitations to
participate I think in 1991 (and I don't even have a company, never mind
$35 million). It came snail mail on National Petroleum Company
letterhead and offered me 40% of $75 million for my assistance - they
hadn't got round to fax technology at that time. Apart from his
technological sophistication, comparison suggests that Dr. Gumel is only
a bit player - and a cheapskate in the bargain! His letter appears also
to lack the vital request for three signed pages of blank letterhead and
three blank company invoices - incompetent too!! At least my guys
sought to arm themselves with my authority for the bank manager to empty
my account."The last letter I saw was in the hands of (name mentioned), maybe two
years ago. I advised him to call RCMP, which he did. They laughed, he
said, having had over a hundred calls that year."60 Minutes covered it, maybe two years ago, and claimed, I think, that
over $60 million had been lost by gullible Americans that year. They
recounted threats on the life of some "investor" who went to Nigeria to
try and recover his funds. The Globe and Mail also carried a piece,
maybe 18 months ago, in which a Lindsay realtor related his
experiences. He ended up going to Nigeria, being held against his will
in Lagos, rescued in an armoured car by Canadian High Commission staff
and put on a plane for Toronto (you and I paid for that, I guess). The
pitch to him was that they wanted to invest the loot in Canadian real
estate and had chosen his company for its well known influence and
prestige. His loss? I believe he put it between 50 and 60 thousand,
including the three Rolex watches (at $5000 each) which he was asked to
bring with him to 'facilitate' the transaction and some first class
fares to Europe to close the deal!
Canadian authorities got involved when his bank manager called them to
report receipt of an unusual fax request for funds received from him in
Nigeria (pretty good service on everyone's part, I'd say)."This scam is world-wide - at least in USA, UK, Germany, Australia.
I'm inclined to share the view of Nigerian friends that the gullible and
greedy deserve all they get! As for the perpetrators and the firing
squad - there's quite a strong indication that they ARE the firing
squad!"Here's another:
"You're right - It's amazing how some people expect other people to be
so gullible as to subscribe to that scam from Nigeria! I saw through it
immediately after I received it a couple of weeks ago and the following
morning faxed all the info to the RCMP Commercial Crimes Division in
Ottawa near where I live. From the address on the letter it appears that
these people scanned the yellow pages of the local phone book for the
Winchester - South Mountain area of Ontario south of Ottawa or used a
Pro-Phone CD-ROM package to get the address."And one more:
"I receive a financial magazine designed for British expats
published in U.K. This scam has been mentioned several times both in
articles and the letter column, mainly from people who have been
scammed. Apparently, this scam is quite a common one in the UK and
Europe. A response to this letter brings a request for either a sum of
money, to show good faith, or a ticket to Lagos where one unfortunate
responder was beaten up, robbed and held for ransom. There have been
arrests and trials of some of the ringleaders but it seems the scam
continues and is now spreading to NA."In some cases, the initial letters contained detailed personal info
about the person being contacted, including their banking arrangements.
This raises concerns as to how these details were obtained."Finally, for more information:
"Details of the more common scams are available as an annex to a March
13, 1997 travel advisory issued by Dept. of Foreign Affairs and
International Trade and posted to their web site. Their web site address
is http://www.dfait-maeci.gc.ca"UPDATES
Hurricane Hydrocarbons (TSE: HHL.A; originally recommended in IWB
#9707, Feb. 17/97, at $6.45. Closed Friday at $8.70.) Another good week
for this stock, with a gain of $1.30 despite the generally weak tone of
the markets. Interest is being fuelled by the fact that some U.S.
financial advisories are discovering this stock as a result of its
recent recommendation by an influential New York brokerage house. For
example, the latest issue of Investors Digest quotes the New Jersey
based Smart Money newsletter, edited by Yale Hirsch, as saying Hurricane
is one of "America's most undiscovered companies", one that is "storming
on to the international oil scene". While recognizing the risks
involved in doing business in Kazakstan, he describes the stock as being
cheap on the basis of projected earnings, assets and cash flow.
(However, the price has risen considerably since he made that
observation.)In the meantime, Hurricane recently announced it has expanded its
operations in Kazakstan by acquiring the interests of Canadian
Occidental Petroleum in Turan Petroleum Cyprus Ltd. The deal is a
complicated one, but the end result is to give Hurricane 100% of the
South Kumkol oil field and a 75% interest in three other fields in the
central part of the country. The company is currently producing more
than 47,000 barrels of oil daily from the Kumkol field alone.This is still a great story and right now we're up 35% on my original
recommendation and over 70% from my renewed buy signal at the end of
June after the price had slipped to $5.10. But don't lose sight of the
risks here. Kazakstan can be a difficult place in which to do business.
You may have seen the recent articles on the problems being encountered
by several Canadian mining companies that have been trying to do
business there. The latest involves World Wide Minerals Ltd. of Toronto,
which had a contract to operate a uranium mine revoked by Kazakstan
government officials. Since Hurricane owns its properties outright, I
don't expect similar problems, but remember that this is a country in
which state control of virtually every business has been deeply imbued
for decades, and where free capitalism is still not much more than a
concept. So you have to expect the unexpected.Action now: I recommend continuing to hold your positions, which is
what I am doing. However, if you're nervous about the political
situation in Kazakstan, you may wish to take half profits at this stage,
especially if you bought in at around the $5 level. The decision comes
down to your personal risk tolerance level. I will continue to track the
stock.Pengrowth Energy Trust (TSE, ME: PGF.UN; originally recommended in IWB
#9708, Feb. 24/97, at $15.60. Closed Friday at $20.75.) What a
blockbuster deal! Pengrowth's announcement on Wednesday that it is
purchasing Imperial Oil's interests in three major producing light oil
properties rocked the markets and was the front page story in both The
Financial Post and the ROB the next day. Investors clearly thought it
was a good deal for both parties. Imperial Oil stock (part of our Blue
Chip Portfolio) rose $3.75 last week to $76 ( a 5.2% gain), while
Pengrowth was up $1.95 (a 10.4% advance).The transaction shows why I have long favoured Pengrowth over some of
the other energy-based royalty trusts which currently offer higher
yields. Pengrowth's management, particularly president James Kinnear, is
extremely well-connected in the oil patch. As a result, he can pull off
deals like this which many other trusts won't even get a sniff of.If you're a Pengrowth and/or Imperial investor, you probably read all
the details in the media, so I won't repeat them here. The key point
from Pengrowth's perspective is that the acquisition of 110.6 million
barrels of oil equivalent (abbreviated as boes) significantly extends
the life of the trust's reserves. As Kinnear puts it, this changes
"Pengrowth's production profile from a moderate decline to potential
growth in volumes over the next several years". That should translate
into higher revenues and continued good cash flow for investors.Pengrowth plans to finance the $595 million acquisition by issuing new
trust units from their treasury on an instalment receipt (IR) basis. A
special meeting of unitholders has been called for Sept. 22 to approve
the details. Current investors will be given preferential treatment in
buying the new IRs. In effect, they will be allowed to subscribe for one
new IR for every five shares they currently own. So if you own 500
shares, you'll be able to buy 100 instalment receipts commission-free.
I'll comment in more detail on this offer once all the information,
including the pricing, becomes available.By the way, as a bonus Pengrowth announced earlier this month that the
August cash distribution will be 15c a unit, comprised of the regular
11c a month payment plus a bonus of 4c. The trailing one-year cash
distributions now stand at $2.08 a unit, which works to a yield of 10%
based on the current, higher share price.Action now: Hold. As a tax-advantaged income vehicle, Pengrowth looks
even better now over the long term than when I originally recommended
it.CLARIFICATION
I received the following communication from a member who is with ITT
Hartford, clarifying one point I made about their Guaranteed Equity
Indexed Annuity."Hartford's product does not have a minimum guarantee, other than the
fact that 100% of premiums will be returned (at death or maturity only)
if the market declines below the starting index value."The 7% maturity bonus is not a minimum guarantee but additional
participation. 'Participation' is the % of the index increase the
client will be credited. We currently offer the client 100%
participation. This means that the client will be credited with all of
the increase the G7 basket of indices may experience. We have enhanced
this participation for the offering of June 30, 1997 - August 31, 1997
to include an additional 7%. This means that the client in this
offering will be credited with 107% of the basket's increase. Here's an
example:"Client invests $5,000, G7 basket increases 50%. Client will be
credited interest of 53.5% or $2,675."Thanks for that.
SEMINARS
I have two seminars coming up in southern Ontario during the first week
of September. Here are the details:Sept. 3 - Oshawa. Oshawa Holiday Inn, 1011 Bloor St. East, 7 p.m.
Topic: How to Beat Low Interest Rates. Sponsor: Tom Corby, Fortune
Investment Corp. Phone number for reservations: 905-432-8767Sept. 4 - North York. Westin Prince Hotel, York Mills Road at Don Mills
Road, 7.30 p.m. Topic: Investment Alternatives to GICs for Conservative
Investors (there will also be quite a bit on RRIFs). Sponsor: Patrick
Wong, Fortune Financial. Phone number for reservations: 416-412-4300.NEW BOOK
My latest book, The Best of Pape's Notes, is due off the press this
week. It's a compilation of the best of my CBC radio transcripts over
almost 15 years of broadcasting. Each script has been annotated to place
it in the context of the time and to update readers on what has happened
since. I think you'll find it lively reading. My wife (who normally
doesn't react strongly to financial matters) was so steamed after
reading the chapter on federal taxation policies over the years that she
didn't even want to vote in the election (although I persuaded her
otherwise). It will be a couple of weeks before it shows up in stores
across the country, but you can place an order for immediate fulfilment
through my web site bookstore (www.gordonpape.com). Publisher is ITP
Nelson.NEW DELIVERY SYSTEM
A few members have asked us to go back to our old delivery system
because they find the new one isn't working as effectively for them. We
have identified two main problems:1) A few members are using servers that are not currently linked to our
new system through iStar. When we are made aware of this, we deliver the
IWB individually rather than using the general system. In the meantime,
our new partner, Communicopia, is working with iStar to establish the
necessary links.2) We're received a couple of complaints about poor formatting - broken
lines and the like. This appears to be rare, although if you've noticed
a significant difference in the way the IWB arrives in your e-mail box,
let us know. We're working with Communicopia to identify and correct the
problem.On the whole, however, it appears the new delivery system is working
much better than the old one, judging by the number of problems
circulation director Kim Pape-Green has to deal with each week. So
there's no question of reverting to the old system (anyway, we've
invested a lot of money in the new one). Rather, it's a case of
fine-tuning to ensure the best possible service for everyone.NEXT WEEK
The Internet Wealth Builder will be published next week. However,
because it is a long weekend, the issue will be transmitted on Tuesday,
Sept. 2, instead of Monday (Labour Day) so that all of us associated
with the IWB can enjoy the long weekend too. In future, this will be the
regular schedule on holiday weekends. So please make a note and don't
contact Kim about non-delivery unless your IWB hasn't arrived by Tuesday
evening. Thanks.Best regards,
Gordon Pape