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In This Issue

TRUMP ESCALATES WAR WITH AMAZON

By Gordon Pape, Editor and Publisher

The red-hot darlings of the market have suddenly become pariahs. Facebook,
Alphabet, Twitter, Apple, and Amazon all saw their shares take big hits last week.

The tech-heavy Nasdaq Composite, where most of these issues trade, lost 271 points on Tuesday and Wednesday. Only a Thursday rally kept the loss for the week from being a lot worse; as it was the Composite was down 1.44% for the shortened four-day week. That pulled down its gain for the year to a modest 2.3%.

Facebook made most of the headlines when it was revealed that the company has compiled immense amount of data on its clients which in turn was used by a third party to attempt to influence the 2016 election. More on that in Glenn Rogers’s update on the stock elsewhere in this issue.

Amazon took a hit for an entirely different reason. President Trump has made it clear he doesn’t like the company, ostensibly because he wants to protect small businesses from its massive marketing power and force it to pay more taxes.

He has attacked the company several times in the past two years. The latest was a tweet on Thursday in which he claimed the company pays “little or no taxes to state & local governments” and uses “our Postal System as their Delivery Boy (causing tremendous loss to the U.S.)”. Oh, yes, and of course they “are putting many thousands of retailers out of business!”

That may play well with his base, although many of them are probably regular Amazon users because of its low prices, vast selection, and fast delivery.

But it is unusual for a sitting President to attack a single company in so blatant a manner. Mr. Trump has targeted others in the past, including Boeing, Apple, and General Electric, but never in such a sustained and virulent manner.

Many suspect that the real reason for these threats is the fact that Amazon founder Jeff Bezos owns The Washington Post, which, along with The New York Times and CNN, the President regards as the “fake news” leaders of U.S. mainstream media.

If that is what is really behind this vitriol, it represents an assault on freedom of the press that is reminiscent of Putin’s Russia. The President is attempting to use the weight of his office to bring pressure to bear on the owner of one of the most influential media outlets in America.

Amazon’s stock dropped from a high of $1,617.54 on March 13 to a low of $1,386.17 on March 28, a loss of 14.3%. But, interestingly, the stock rallied on Thursday after Mr. Trump’s latest tweet was posted. The shares gained almost $16 to finish the shortened trading week at $1,447.34. That’s still well off the mid-month high but investors appeared to be sending a signal that they aren’t taking the President’s complaints too seriously – at least not yet.

On Friday, The Wall Street Journal commented in an editorial that there doesn’t seem to be much the President can do to hurt the company. An antitrust suit probably wouldn’t fly since government “would struggle to prove consumer harm, the most basic criterion for an antitrust case. Amazon has disrupted the retaining business by delivering online consumer goods conveniently and often at lower prices”.

As for the President’s rant about taxes, Amazon says it does collect sales tax in all states where it is required. The post office could try to raise the rates on Amazon packages, which the President would love to see. But that would probably result in the company switching to another carrier with the loss of hundreds of millions of dollars to the already financially strapped postal service. The U.S. Post Office collected $19 billion from package deliveries last year, a large part of which was from Amazon.

Amazon founder Jeff Bezos is one of the wealthiest men in the world and he has remained silent in the face of the President’s outbursts. But if Mr. Trump keeps up his attacks and finds some way to initiate measures that would hit Amazon’s bottom line, shareholders won’t be so patient.

I said in a column at the start of the year to keep a close eye on Amazon’s share price. I regard it as the most vulnerable stock in the high-tech sector because of its excessive p/e ratio, which now sits at 229. As long as investors focused more on the stock’s momentum and the company’s future, the p/e hasn’t been a huge concern. But if Trump manages to put action to his angry words, and the result could be messy.

I originally recommended the stock in January 2017 at $817.14. It closed on Thursday at $1,447.34 for a gain of 77%. I think the shares will eventually trade much higher but the next several months could be rough.

At this point, I suggest selling half your position and pocketing the gain. Then sit back and see how this battle of the heavyweights unfolds.

Follow Gordon Pape on Twitter @GPUpdates and on Facebook at www.facebook.com/GordonPapeMoney

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WHEN THE GOING GETS TOUGH, HAVE FUN

Contributing editor Glenn Rogers is with us this week with some comments about the turmoil in Washington and a suggestion for a stock that may be relatively immune from politics. Glenn is on the boards of Linksoul and Poler Inc. He has worked with private equity and venture groups on a variety of projects leading to successful exits for the investors. Previously he worked in senior executive positions in both Canada and the U.S. and is a successful investor himself. He lives with his family in southern California.

Glenn Rogers writes:

Readers in Canada can be excused if they are scratching their collective heads over antics of the irrational administration in Washington. Every day brings a new outrage and the Trump White House gives every appearance of having no clue as to what it is doing.

After the massive tax cut was pushed through late last year I thought we would have a few months of solid market performance based on a sugar high brought about by these highly simulative tax programs. But after that, things look bleak. I believe that in 2019 and 2020 we will start seeing the deficit explode. The pace of interest rate increases will accelerate, and the combination could tip us into a recession.

On top of all this, Mr. Trump has now decided that instigating a trade war with China and disrupting global commerce would be a great thing to do and easy to win. The market predictably reacted negatively to those initiatives. There’s good reason for investors to worry; tariffs are just another tax on manufacturers and consumers. Fortunately, Canada dodged the bullet on steel and aluminum (at least for now) but once these trade disruptions begin it’s very hard to know when they will end. Perhaps some of the extreme positions will get scaled back and bring some relief to the markets but in the meantime, we can expect more volatility. We can live with that as long as the trade situation does not deteriorate significantly.

To add to everyone’s concerns, Mr. Trump has now assembled a wartime cabinet and, as his personal problems mount, who knows what these people will dream up to distract American voters. Historically, focusing on an external enemy, real or imagined, in times of domestic turmoil has saved many a politician from oblivion.

In these circumstances, we want to find stocks that are somewhat protected from the vicissitudes of this administration and won’t be affected by trade wars and heaven knows what else.

So, against that disturbing back drop what do you do to make some money? Well, when the chips are down let’s try and have some fun. As Warren Buffett said last week, don’t watch the market, just take the kids out for some ice cream.

As it turns out, we have just the stock that fits that advice, one with the perfect trading symbol of FUN. The company is Cedar Fair LP. The company is in the theme park business with 13 parks throughout the U.S. and one near Toronto: Canada’s Wonderland. They also have five hotels adjacent to their parks with 1,600 rooms. As well, they own 1,400 acres of undeveloped land adjacent to their parks for future expansion.

Many of you will have heard of Knots Berry Farm, which is located beside Disneyland in Anaheim, California. That’s one of their properties. Think of Cedar Fair as a junior Disney in some ways, without the media properties and international exposure. The company offers 850 rides and 120 roller coasters and attracts more than 25 million visitors annually.

Last year, the company had record revenues and attendance. Net revenue was $1.32 billion, with adjusted EBITDA of $479 million. Cedar Fair logged 27.7 million visitors and out of park revenues of $144 million.

Overall the company has enjoyed steady growth with a long history of paying dividends, which they are committed to grow by 4% every year.

However, a word of caution to Canadian readers. The company is set up as an Master Limited Partnership, which allows for a tax efficient return of capital to U.S. shareholders but may pose some tax problems for Canadians. Therefore, I strongly advise Canadian residents to discuss the tax implications of buying shares with their financial advisor before acting.

The annual total return to U.S. investors has been 17% since the company went public in 1987. At current prices the stock yields 5.57% Additionally, Theme Parks are expensive to construct so there is a high barrier to entry.

The company’s parks are geared toward middle income people and are situated so customers can drive to their locations. The recent tax bill will generate some additional disposable income for the middle class (although not nearly as much as the 1% folks will enjoy) so that should set Cedar Fair up for a very good 2018.

The stock pulled back a little after the last earnings report because profits were slightly down from the previous year, due largely to extreme weather which kept attendance slightly below budget. I think this is a good entry point for a relatively Trump-proof stock. The shares closed Thursday at US$63.88.

Action now: U.S. readers should buy with a target of $75. Canadian members should carefully assess the tax implications before taking action.

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GLENN ROGERS?S UPDATES

Facebook (NYSE: FB)

Originally recommended on Sept. 30/13 (#21335) at $51.24. Closed Thursday at $159.79. (All figures in U.S. dollars.)

Background:This social media giant, which was founded in 2004, had over 1.37 billion daily active users as of the end of September. The company also owns such popular websites and services as Instagram, Messenger, Oculus, and WhatsApp. The stock has a market cap of over $520 billion.

Performance: We recommended the stock in September 2013 when it was trading at $51.24. The last update was in November, at which time the shares were rated as a Hold at $179.Since then the shares reached a high of $195.32 and the stock looked unstoppable. But then – well, you’ve read the headlines.

Recent developments: Facebook is in deep doo-doo. The company has admitted to massive data leaks, some of which were used by outside companies to attempt to influence the 2016 presidential campaign. Several U.S. television reports have been shown displaying stacks of paper containing data that Facebook collected on them personally. One reporter showed a pile more than two feet high and said there was more – she didn’t want to waste paper to print it all. The records included everything from personal tastes and political views to phone and text logs.

The pubic was appalled. Most had no idea this was being done, much less to the such an extent. Ostensibly, the strategy was to use the data to direct personalized advertising to individuals, but it now appears it has been put to more nefarious uses. Company founder Mark Zuckerberg has been summoned to testify before a Congressional committee and legislation cracking down on the extent and use of data collection may follow.

Not surprisingly, the revelations have hammered the stock and the fact that the entire market also tanked did not helped either.

The shares are now down 18% from its highs, closing last week at $159.79. This is obviously still way up from our original recommendation, but the question now is whether this a sell or a buy?

Personally, I have sold my position, despite knowing that earnings will still be strong this quarter. The headline risk is just too great right now and several jurisdictions have started investigations that will keep the heat on the stock for some time.

We may get some pops here and there, but it will be tough sledding for the next several months, so you are better off in cash or another security while this situation plays itself out and we see what measures, if any, the government takes.

Action now: Sell for a gain of 212%.

Alibaba Group Holding Company (NDQ: BABA)

Originally recommended on Sept. 18/15 (#21535) at $59.24. Closed Thursday at $183.54. (All figures in U.S. dollars except where noted.)

Background: Alibaba is the Chinese equivalent of Amazon. There are several ancillary businesses attached to this massive e-commerce company, which operates under the Alibaba Group Holdings banner. They include Taobao, Tmall, eTao, and Juhuasuan. The company has 434 million active buyers.

Performance: We recommended this stock in September 2015 when it was trading at $59.24. The last update was April 2017 when we reiterated the Buy call. Since then the stock has traded as high as $206.20 before the intense volatility of the last few weeks pulled it back along with the rest of the market.

Recent developments: Alibaba has been growing at an impressive rate for the last several years. Since last year’s revenues increased by 80.3%, leading to strong earnings growth of 52%. The company has excellent cash flow, which increased by 66.7% in the same quarter year-over-year.

Recent sword rattling by the Trump administration has hit Chinese tech stocks as the market is wondering about the short- and long-term effects of a possible trade war. That’s one reason the stock pulled back from $190.50 at the start of last week. However, Chinese reaction to the President’s threats has been very muted and it is likely, although not certain, that a trade war can be avoided. In any case, once the market settles down as we head into earnings season in April I think adding to a position in Alibaba would be a very good idea.

Action now: Buy with a target of $206.

Baidu Inc. (NDQ: BIDU)

Originally recommended on Feb. 21/11 (#21107) at $128.80. Closed Thursday at $223.19. (All figures in U.S. dollars except where noted.)

Background: Baidu is the Chinese equivalent of Google. In addition to its core web search product, it powers several popular community-based products. These include Baidu PostBar, the world’s first and largest Chinese-language query-based searchable online community platform; Baidu Knows, the world’s largest Chinese-language interactive knowledge-sharing platform; and Baidu Encyclopedia, the world’s largest user-generated Chinese-language encyclopedia.

Performance: The shares were recommended in February 2011 at $128.80 and last updated as a Buy in April 2017 at $172.60. The stock has been very volatile since, hitting a high of $274.97 in October, then falling to the $210 range in February. It rallied back to above $260 in early March but then was caught in the tech downdraft we saw last week, although it recovered some ground on Thursday before the markets closed for the long Easter weekend.

Recent developments:Everything I said about Alibaba applies to Biadu. Financial results have been great, with revenue growth of over 65% last year leading to earnings growth of over 34% with plenty of free cash flow. Biadu’s return on equity exceeds both the industry average and the S&P 500.

Once again this is a market timing issue. Right now, the stock is trading nearly 20% below its high of last October. I would start adding your position over the next couple of weeks as we move into earnings season.

Action now: Buy with a target of $240.

Heineken N.V. (OTC: HEINY)

Originally recommended on July 7/07 (IWB #2725) at $28.60. Closed Thursday at $53.86. (All figures in U.S. currency.)

Background: Heineken has grown from its start as a single brewery in Amsterdam almost 150 years ago to become one of the world’s largest beer producers. Its products are sold in 170 countries around the globe. The shares trade as American Depository Receipts on the U.S. over-the-counter market with two ADRs representing one corporate share.

Performance: We recommended this Dutch beer company back in July 2007 when it was trading at $28.60. Since then the company has been a nice steady grower and the share price has more than doubled in value.

Recent developments: The company recently got into some hot water with a television ad that was perceived as being racist but that is really been its only stumble in the last few years. Given the volatile market, this is a nice steady company to have in your portfolio. The projected dividend for this year is $2.14 per share for a yield of 2.1% at the current price.

Action now: Hold

– end Glenn Rogers

 

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SHAWN ALLEN’S UPDATES

Stantec Inc. (TSX, NYSE: STN)

Originally recommended by Tom Slee on Aug. 28/06 (#2632) at C$10.24 US$9.23 (split-adjusted). Closed Thursday at C$31.79, US$24.65.

Background: Stantec is a large Edmonton-headquartered consulting firm offering engineering, architecture, and related professional services. It operates largely on a fee-for-service basis but more recently it has provided some fixed-price construction services. It has about 22,000 employees operating out of about 400 offices worldwide. Through acquisitions, Stantec has become a global company. In 2017, 58% of revenues were from the U.S., 23% from Canada, 10% from the U.K., and 9% other international. The proportion of revenues earned in Canada has declined rapidly while the portion of revenues earned in the U.S. and, more recently, internationally has risen quickly. For many years, Stantec has successfully pursued a business model of rapid growth by acquisition.

On May 6, 2016 Stantec closed the purchase of privately held MWH Global for US$793 million. This deal made it a global engineering firm and significantly reduced the company’s reliance on Canada and the energy sector.

Performance: Stantec’s share price has been relatively flat since late 2013. However, looking at the longer term, Stantec’s share price is up 210% since it was first featured in the IWB in 2006.

Recent developments: A new CEO was promoted from within effective Jan. 1, as the prior CEO of eight years (age 63) retired but will remain on the board.

Recent earnings: In the fourth quarter of 2017, Stantec stumbled, with an adjusted earnings decline of 8% per share caused by cost overruns on certain fixed-price construction service contracts from its MWH acquisition. Management indicates that these issues have been resolved. In 2017 overall, adjusted earnings per share were up a modest 5% while revenues per share were up 12%. Organic growth was slightly positive in 2017.

Dividend: The company increased its dividend by 11% in 2017 and by 10% 2018 to $0.1375 per quarter ($0.55 a year). The shares yield 1.7% at the current price.

Valuation:Based on a price of $33.10, the trailing adjusted p/e ratio is 18.8, the price to book ratio is 2.0, and the dividend yield is 1.7%. Stantec retains most of its earnings and currently has an earnings payout ratio of 31%. The ROE (return on equity) at 10.4% has been reduced by a recent earnings decline. These ratios, in isolation, would support a rating of hold.

Outlook: The acquisition of MWH has not yet led to much growth but should lead to strong earnings per share growth in 2018. The first quarter of 2018 should show good growth (barring any reoccurrence of cost overrun issues) as the first quarter of 2017 was relatively weak. The second quarter of this year will be a tough by comparison with last year while the third and particularly the fourth quarter should be strong compared to weak quarters in 2017. The long-term outlook is also strong as the company continues to target increasing revenues by 15% annually by continuing its growth-by-acquisition (and organic growth) approach.

Conclusion: Stantec has a long history of being an exceptionally well-managed Canadian company that has aggressively grown by acquisition. It has provided very strong returns to investors since it began trading in 1994. But earnings per share and the stock price have been relatively flat for the past several years as its energy and resource business declined due to weakness in those industry segments. The stock should rise when the benefits of its large MWH acquisition start to materialize as an increase in earnings, which should occur starting in the current quarter.

Action now: Continue to Hold.

Linamar Corporation (TSX: LNR, OTC: LIMAF)

Originally recommended on Nov. 27/17 (#21742) at C$68.36. Closed Thursday at C$70.38, US$52.83.

Background: Linamar describes itself as a diversified global manufacturing company of highly engineered products. Its products include precision-machined engine blocks, cylinder heads, and camshafts, to name just a few. In addition, its Skyjack division makes scissor lifts, aerial work platforms, telehandlers, and booms. It has 28,600 employees in 60 manufacturing locations, six R&D centers, and 25 sales offices in 17 countries. Annual revenues are $6.5 billion, and assets are $5.9 billion. In 2016, the automotive sector accounted for 73% of its sales. In 2016 sales were 47% in Canada, 33% in Europe, 10% in the U.S., and 5% in each of Mexico and Asia/Pacific. (The 2017 figures are not yet available.) The company has grown aggressively by acquisition as well as organically.

Performance: Linamar’s stock had surged from about $20 in 2012 to a peak of about $85 in May of 2015. The stock then declined, bottoming out at about $46 in June of 2016. It then staged a strong recovery peaking at about $80 in late October 2017. It then declined to about $66 with the release of its third-quarter results but recovered with the release of its fourth-quarter results and with some optimism about progress in the NAFTA talks.

Recent developments: In the first quarter, the company closed the acquisition of a Canadian agricultural harvesting equipment manufacturer for $1.3 billion. That’s a large acquisition given the fourth-quarter 2017 asset total was $5.8 billion. In the first quarter of 2016, Linamar had closed the acquisition of Montupet S.A. in France for about C$1.2 billion (for comparison, assets at the time were $3.8 billion). These two large acquisitions illustrate the fact that Linamar is a growth-by-acquisition company.

Recent earnings growth: In the past four quarters, starting with the most recent (fourth quarter of 2017), earnings per share were up 3%, down 12% (but management claims up 9% if adjusted), up 3%, and up 15%. For all of 2017, earnings per share were up 2.1% (but would have been higher if adjusted). In 2016, earnings per share were up 19%.

North American vehicle production declined 4.7% in the fourth quarter of 2017 after a 7.7% drop in the third quarter. For the full year, the drop was 3.9%. Linamar’s content per vehicle produced in North America rose 10% in the fourth quarter and was up 3.4% for the full year of 2017.

In Europe vehicle production units soared 8.8% in the fourth quarter and was up 3.4% for the year. The content per vehicle was up 12% in the quarter and up 9.5% in 2017 overall. In Asia, which is a small part of their business, the content per vehicle rose 10.7% in the fourth quarter and 16.1% for the full year 2017.

Dividend: Linamar pays a very small quarterly dividend of $0.12 per share for a yield of 0.7%. This represents a payout ratio of only 6% of trailing year earnings. The great majority of earnings have been retained for growth. This has been beneficial to investors, as the company has grown substantially while not adding to its share count.

Valuation: Based on a price of $71.90, the price to book ratio at 1.5 (and 1.9 times after deducting goodwill) does not seem excessive. The return on owner’s equity is extremely good at 19%. The price to (trailing GAAP) earnings ratio is very attractive at 8.9. The earnings per share in the past five calendar years have grown at a compounded average of 29% per year. The revenue per share growth in the past five years has grown at a compounded average of 15% annually. These value ratios, in isolation, would easily support a Buy recommendation.

NAFTA and other risks: The possible end of NAFTA could be a risk, but the company believes that the impact would be minimal given that the applicable duties would range from only 2% to 2.5%. The main risks to Linamar are probably competitive pressures in a cyclical industry.

Outlook: In the third-quarter conference call, the company projected double-digit earnings per share growth for 2018. The accompanying press release indicated that the company “continues to see new business wins at a blistering pace”. In the fourth quarter results, the company referred to its excellent outlook. However, the auto parts industry is known to be cyclical.

Conclusion: Based on its numbers and on management’s outlook for growth, Linamar appears to be very attractively priced. On that basis, it merits a rating of Buy. However, given the risks to NAFTA and a recent decline in North America auto production, the stock is not without risk.

Action now: Buy. But consider taking only a half position due to the cyclic nature of the company.

 

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YOUR QUESTIONS

Needs 4% income

Q – I have been lucky over the years in investing and now have sufficient funds that an average 4% return would be enough to support my wife and I without touching the capital. As banks and utilities pay decent dividends, and have very low chances of going out of business, would investing in them for the long term be a good idea? This would allow me worry free long-term security, free of concern about the market’s ups and downs. – Charles D.

A – This is a good strategy as long as you are comfortable with the probable dips in the prices of interest-sensitive stocks as rates rise. As I pointed out in a recent issue, there are many high-quality companies that offer good yields and are unlikely to go out of business no matter what the economy does. Your portfolio could include shares in companies like Scotiabank, CIBC, BCE, Telus, Fortis, Canadian Utilities, and TransCanada Corp. If you want to add some high-yield U.S. stocks to the mix, look at AT&T, Verizon, and Southern Company.

One suggestion: don’t invest everything at one time. With rates rising, yields are likely to improve in the coming months. Take positions gradually to take advantage of that. – G.P.

AI ETFs

Q – Please advise what ETFs and/or mutual funds that you would recommend that focus on artificial intelligence and in blockchain technology. Thanks very much! – Ed P.

A – There is only one Canadian fund that focuses on blockchain. It was launched by the Harvest Funds last month under the name Blockchain Technologies ETF (TSX: HBLK). So far it has been a loser, dropping from a high of $11.29 on its first day of trading (Feb. 7) to $8.42 as of Thursday’s close. I regard any blockchain funds as risky at this point – the technology is new, and it is too soon to know which companies will prosper and which will end up on the scrap heap.

There are several U.S.-based artificial intelligence ETFs but the only Canadian one I know of is the Horizons Active A.I. Global Equity ETF(TSX: MIND), which was launched last fall. It has fared better than the blockchain entry, although it is down from its high of $26.49, reached in January.

The best-known AI fund is the Global X Robotics and AI ETF (NDQ: BOTZ), which was launched in September 2016. It’s coming off a very good year, gaining 49.5% in the year to Feb. 28. However, it has been soft recently, so you may want to watch it for a while before investing.

We have not recommended any of these funds in the IWB. – G.P.

 

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MEMBERS? CORNER

Tax software

Member comment: In the recent IWB newsletter you asked for readers tax software comments. I have always used and never had problems with Ufile. I have never had CRA dispute the forms Ufile produces. I recommend Ufile because:

  • One software package handles employment income, investment income, and rental income.
  • It can be loaded on more than one computer, so other family members can use the software.
  • It is reasonably priced.
  • It is a Canadian based company. – Cal C.

Response: Thanks for this comment. There must be many more members using tax software at this time. Let’s hear about your experiences, good or bad. – G.P.

Printable PDF

In This Issue

TRUMP ESCALATES WAR WITH AMAZON

By Gordon Pape, Editor and Publisher

The red-hot darlings of the market have suddenly become pariahs. Facebook,
Alphabet, Twitter, Apple, and Amazon all saw their shares take big hits last week.

The tech-heavy Nasdaq Composite, where most of these issues trade, lost 271 points on Tuesday and Wednesday. Only a Thursday rally kept the loss for the week from being a lot worse; as it was the Composite was down 1.44% for the shortened four-day week. That pulled down its gain for the year to a modest 2.3%.

Facebook made most of the headlines when it was revealed that the company has compiled immense amount of data on its clients which in turn was used by a third party to attempt to influence the 2016 election. More on that in Glenn Rogers’s update on the stock elsewhere in this issue.

Amazon took a hit for an entirely different reason. President Trump has made it clear he doesn’t like the company, ostensibly because he wants to protect small businesses from its massive marketing power and force it to pay more taxes.

He has attacked the company several times in the past two years. The latest was a tweet on Thursday in which he claimed the company pays “little or no taxes to state & local governments” and uses “our Postal System as their Delivery Boy (causing tremendous loss to the U.S.)”. Oh, yes, and of course they “are putting many thousands of retailers out of business!”

That may play well with his base, although many of them are probably regular Amazon users because of its low prices, vast selection, and fast delivery.

But it is unusual for a sitting President to attack a single company in so blatant a manner. Mr. Trump has targeted others in the past, including Boeing, Apple, and General Electric, but never in such a sustained and virulent manner.

Many suspect that the real reason for these threats is the fact that Amazon founder Jeff Bezos owns The Washington Post, which, along with The New York Times and CNN, the President regards as the “fake news” leaders of U.S. mainstream media.

If that is what is really behind this vitriol, it represents an assault on freedom of the press that is reminiscent of Putin’s Russia. The President is attempting to use the weight of his office to bring pressure to bear on the owner of one of the most influential media outlets in America.

Amazon’s stock dropped from a high of $1,617.54 on March 13 to a low of $1,386.17 on March 28, a loss of 14.3%. But, interestingly, the stock rallied on Thursday after Mr. Trump’s latest tweet was posted. The shares gained almost $16 to finish the shortened trading week at $1,447.34. That’s still well off the mid-month high but investors appeared to be sending a signal that they aren’t taking the President’s complaints too seriously – at least not yet.

On Friday, The Wall Street Journal commented in an editorial that there doesn’t seem to be much the President can do to hurt the company. An antitrust suit probably wouldn’t fly since government “would struggle to prove consumer harm, the most basic criterion for an antitrust case. Amazon has disrupted the retaining business by delivering online consumer goods conveniently and often at lower prices”.

As for the President’s rant about taxes, Amazon says it does collect sales tax in all states where it is required. The post office could try to raise the rates on Amazon packages, which the President would love to see. But that would probably result in the company switching to another carrier with the loss of hundreds of millions of dollars to the already financially strapped postal service. The U.S. Post Office collected $19 billion from package deliveries last year, a large part of which was from Amazon.

Amazon founder Jeff Bezos is one of the wealthiest men in the world and he has remained silent in the face of the President’s outbursts. But if Mr. Trump keeps up his attacks and finds some way to initiate measures that would hit Amazon’s bottom line, shareholders won’t be so patient.

I said in a column at the start of the year to keep a close eye on Amazon’s share price. I regard it as the most vulnerable stock in the high-tech sector because of its excessive p/e ratio, which now sits at 229. As long as investors focused more on the stock’s momentum and the company’s future, the p/e hasn’t been a huge concern. But if Trump manages to put action to his angry words, and the result could be messy.

I originally recommended the stock in January 2017 at $817.14. It closed on Thursday at $1,447.34 for a gain of 77%. I think the shares will eventually trade much higher but the next several months could be rough.

At this point, I suggest selling half your position and pocketing the gain. Then sit back and see how this battle of the heavyweights unfolds.

Follow Gordon Pape on Twitter @GPUpdates and on Facebook at www.facebook.com/GordonPapeMoney

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WHEN THE GOING GETS TOUGH, HAVE FUN

Contributing editor Glenn Rogers is with us this week with some comments about the turmoil in Washington and a suggestion for a stock that may be relatively immune from politics. Glenn is on the boards of Linksoul and Poler Inc. He has worked with private equity and venture groups on a variety of projects leading to successful exits for the investors. Previously he worked in senior executive positions in both Canada and the U.S. and is a successful investor himself. He lives with his family in southern California.

Glenn Rogers writes:

Readers in Canada can be excused if they are scratching their collective heads over antics of the irrational administration in Washington. Every day brings a new outrage and the Trump White House gives every appearance of having no clue as to what it is doing.

After the massive tax cut was pushed through late last year I thought we would have a few months of solid market performance based on a sugar high brought about by these highly simulative tax programs. But after that, things look bleak. I believe that in 2019 and 2020 we will start seeing the deficit explode. The pace of interest rate increases will accelerate, and the combination could tip us into a recession.

On top of all this, Mr. Trump has now decided that instigating a trade war with China and disrupting global commerce would be a great thing to do and easy to win. The market predictably reacted negatively to those initiatives. There’s good reason for investors to worry; tariffs are just another tax on manufacturers and consumers. Fortunately, Canada dodged the bullet on steel and aluminum (at least for now) but once these trade disruptions begin it’s very hard to know when they will end. Perhaps some of the extreme positions will get scaled back and bring some relief to the markets but in the meantime, we can expect more volatility. We can live with that as long as the trade situation does not deteriorate significantly.

To add to everyone’s concerns, Mr. Trump has now assembled a wartime cabinet and, as his personal problems mount, who knows what these people will dream up to distract American voters. Historically, focusing on an external enemy, real or imagined, in times of domestic turmoil has saved many a politician from oblivion.

In these circumstances, we want to find stocks that are somewhat protected from the vicissitudes of this administration and won’t be affected by trade wars and heaven knows what else.

So, against that disturbing back drop what do you do to make some money? Well, when the chips are down let’s try and have some fun. As Warren Buffett said last week, don’t watch the market, just take the kids out for some ice cream.

As it turns out, we have just the stock that fits that advice, one with the perfect trading symbol of FUN. The company is Cedar Fair LP. The company is in the theme park business with 13 parks throughout the U.S. and one near Toronto: Canada’s Wonderland. They also have five hotels adjacent to their parks with 1,600 rooms. As well, they own 1,400 acres of undeveloped land adjacent to their parks for future expansion.

Many of you will have heard of Knots Berry Farm, which is located beside Disneyland in Anaheim, California. That’s one of their properties. Think of Cedar Fair as a junior Disney in some ways, without the media properties and international exposure. The company offers 850 rides and 120 roller coasters and attracts more than 25 million visitors annually.

Last year, the company had record revenues and attendance. Net revenue was $1.32 billion, with adjusted EBITDA of $479 million. Cedar Fair logged 27.7 million visitors and out of park revenues of $144 million.

Overall the company has enjoyed steady growth with a long history of paying dividends, which they are committed to grow by 4% every year.

However, a word of caution to Canadian readers. The company is set up as an Master Limited Partnership, which allows for a tax efficient return of capital to U.S. shareholders but may pose some tax problems for Canadians. Therefore, I strongly advise Canadian residents to discuss the tax implications of buying shares with their financial advisor before acting.

The annual total return to U.S. investors has been 17% since the company went public in 1987. At current prices the stock yields 5.57% Additionally, Theme Parks are expensive to construct so there is a high barrier to entry.

The company’s parks are geared toward middle income people and are situated so customers can drive to their locations. The recent tax bill will generate some additional disposable income for the middle class (although not nearly as much as the 1% folks will enjoy) so that should set Cedar Fair up for a very good 2018.

The stock pulled back a little after the last earnings report because profits were slightly down from the previous year, due largely to extreme weather which kept attendance slightly below budget. I think this is a good entry point for a relatively Trump-proof stock. The shares closed Thursday at US$63.88.

Action now: U.S. readers should buy with a target of $75. Canadian members should carefully assess the tax implications before taking action.

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GLENN ROGERS?S UPDATES

Facebook (NYSE: FB)

Originally recommended on Sept. 30/13 (#21335) at $51.24. Closed Thursday at $159.79. (All figures in U.S. dollars.)

Background:This social media giant, which was founded in 2004, had over 1.37 billion daily active users as of the end of September. The company also owns such popular websites and services as Instagram, Messenger, Oculus, and WhatsApp. The stock has a market cap of over $520 billion.

Performance: We recommended the stock in September 2013 when it was trading at $51.24. The last update was in November, at which time the shares were rated as a Hold at $179.Since then the shares reached a high of $195.32 and the stock looked unstoppable. But then – well, you’ve read the headlines.

Recent developments: Facebook is in deep doo-doo. The company has admitted to massive data leaks, some of which were used by outside companies to attempt to influence the 2016 presidential campaign. Several U.S. television reports have been shown displaying stacks of paper containing data that Facebook collected on them personally. One reporter showed a pile more than two feet high and said there was more – she didn’t want to waste paper to print it all. The records included everything from personal tastes and political views to phone and text logs.

The pubic was appalled. Most had no idea this was being done, much less to the such an extent. Ostensibly, the strategy was to use the data to direct personalized advertising to individuals, but it now appears it has been put to more nefarious uses. Company founder Mark Zuckerberg has been summoned to testify before a Congressional committee and legislation cracking down on the extent and use of data collection may follow.

Not surprisingly, the revelations have hammered the stock and the fact that the entire market also tanked did not helped either.

The shares are now down 18% from its highs, closing last week at $159.79. This is obviously still way up from our original recommendation, but the question now is whether this a sell or a buy?

Personally, I have sold my position, despite knowing that earnings will still be strong this quarter. The headline risk is just too great right now and several jurisdictions have started investigations that will keep the heat on the stock for some time.

We may get some pops here and there, but it will be tough sledding for the next several months, so you are better off in cash or another security while this situation plays itself out and we see what measures, if any, the government takes.

Action now: Sell for a gain of 212%.

Alibaba Group Holding Company (NDQ: BABA)

Originally recommended on Sept. 18/15 (#21535) at $59.24. Closed Thursday at $183.54. (All figures in U.S. dollars except where noted.)

Background: Alibaba is the Chinese equivalent of Amazon. There are several ancillary businesses attached to this massive e-commerce company, which operates under the Alibaba Group Holdings banner. They include Taobao, Tmall, eTao, and Juhuasuan. The company has 434 million active buyers.

Performance: We recommended this stock in September 2015 when it was trading at $59.24. The last update was April 2017 when we reiterated the Buy call. Since then the stock has traded as high as $206.20 before the intense volatility of the last few weeks pulled it back along with the rest of the market.

Recent developments: Alibaba has been growing at an impressive rate for the last several years. Since last year’s revenues increased by 80.3%, leading to strong earnings growth of 52%. The company has excellent cash flow, which increased by 66.7% in the same quarter year-over-year.

Recent sword rattling by the Trump administration has hit Chinese tech stocks as the market is wondering about the short- and long-term effects of a possible trade war. That’s one reason the stock pulled back from $190.50 at the start of last week. However, Chinese reaction to the President’s threats has been very muted and it is likely, although not certain, that a trade war can be avoided. In any case, once the market settles down as we head into earnings season in April I think adding to a position in Alibaba would be a very good idea.

Action now: Buy with a target of $206.

Baidu Inc. (NDQ: BIDU)

Originally recommended on Feb. 21/11 (#21107) at $128.80. Closed Thursday at $223.19. (All figures in U.S. dollars except where noted.)

Background: Baidu is the Chinese equivalent of Google. In addition to its core web search product, it powers several popular community-based products. These include Baidu PostBar, the world’s first and largest Chinese-language query-based searchable online community platform; Baidu Knows, the world’s largest Chinese-language interactive knowledge-sharing platform; and Baidu Encyclopedia, the world’s largest user-generated Chinese-language encyclopedia.

Performance: The shares were recommended in February 2011 at $128.80 and last updated as a Buy in April 2017 at $172.60. The stock has been very volatile since, hitting a high of $274.97 in October, then falling to the $210 range in February. It rallied back to above $260 in early March but then was caught in the tech downdraft we saw last week, although it recovered some ground on Thursday before the markets closed for the long Easter weekend.

Recent developments:Everything I said about Alibaba applies to Biadu. Financial results have been great, with revenue growth of over 65% last year leading to earnings growth of over 34% with plenty of free cash flow. Biadu’s return on equity exceeds both the industry average and the S&P 500.

Once again this is a market timing issue. Right now, the stock is trading nearly 20% below its high of last October. I would start adding your position over the next couple of weeks as we move into earnings season.

Action now: Buy with a target of $240.

Heineken N.V. (OTC: HEINY)

Originally recommended on July 7/07 (IWB #2725) at $28.60. Closed Thursday at $53.86. (All figures in U.S. currency.)

Background: Heineken has grown from its start as a single brewery in Amsterdam almost 150 years ago to become one of the world’s largest beer producers. Its products are sold in 170 countries around the globe. The shares trade as American Depository Receipts on the U.S. over-the-counter market with two ADRs representing one corporate share.

Performance: We recommended this Dutch beer company back in July 2007 when it was trading at $28.60. Since then the company has been a nice steady grower and the share price has more than doubled in value.

Recent developments: The company recently got into some hot water with a television ad that was perceived as being racist but that is really been its only stumble in the last few years. Given the volatile market, this is a nice steady company to have in your portfolio. The projected dividend for this year is $2.14 per share for a yield of 2.1% at the current price.

Action now: Hold

– end Glenn Rogers

 

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SHAWN ALLEN’S UPDATES

Stantec Inc. (TSX, NYSE: STN)

Originally recommended by Tom Slee on Aug. 28/06 (#2632) at C$10.24 US$9.23 (split-adjusted). Closed Thursday at C$31.79, US$24.65.

Background: Stantec is a large Edmonton-headquartered consulting firm offering engineering, architecture, and related professional services. It operates largely on a fee-for-service basis but more recently it has provided some fixed-price construction services. It has about 22,000 employees operating out of about 400 offices worldwide. Through acquisitions, Stantec has become a global company. In 2017, 58% of revenues were from the U.S., 23% from Canada, 10% from the U.K., and 9% other international. The proportion of revenues earned in Canada has declined rapidly while the portion of revenues earned in the U.S. and, more recently, internationally has risen quickly. For many years, Stantec has successfully pursued a business model of rapid growth by acquisition.

On May 6, 2016 Stantec closed the purchase of privately held MWH Global for US$793 million. This deal made it a global engineering firm and significantly reduced the company’s reliance on Canada and the energy sector.

Performance: Stantec’s share price has been relatively flat since late 2013. However, looking at the longer term, Stantec’s share price is up 210% since it was first featured in the IWB in 2006.

Recent developments: A new CEO was promoted from within effective Jan. 1, as the prior CEO of eight years (age 63) retired but will remain on the board.

Recent earnings: In the fourth quarter of 2017, Stantec stumbled, with an adjusted earnings decline of 8% per share caused by cost overruns on certain fixed-price construction service contracts from its MWH acquisition. Management indicates that these issues have been resolved. In 2017 overall, adjusted earnings per share were up a modest 5% while revenues per share were up 12%. Organic growth was slightly positive in 2017.

Dividend: The company increased its dividend by 11% in 2017 and by 10% 2018 to $0.1375 per quarter ($0.55 a year). The shares yield 1.7% at the current price.

Valuation:Based on a price of $33.10, the trailing adjusted p/e ratio is 18.8, the price to book ratio is 2.0, and the dividend yield is 1.7%. Stantec retains most of its earnings and currently has an earnings payout ratio of 31%. The ROE (return on equity) at 10.4% has been reduced by a recent earnings decline. These ratios, in isolation, would support a rating of hold.

Outlook: The acquisition of MWH has not yet led to much growth but should lead to strong earnings per share growth in 2018. The first quarter of 2018 should show good growth (barring any reoccurrence of cost overrun issues) as the first quarter of 2017 was relatively weak. The second quarter of this year will be a tough by comparison with last year while the third and particularly the fourth quarter should be strong compared to weak quarters in 2017. The long-term outlook is also strong as the company continues to target increasing revenues by 15% annually by continuing its growth-by-acquisition (and organic growth) approach.

Conclusion: Stantec has a long history of being an exceptionally well-managed Canadian company that has aggressively grown by acquisition. It has provided very strong returns to investors since it began trading in 1994. But earnings per share and the stock price have been relatively flat for the past several years as its energy and resource business declined due to weakness in those industry segments. The stock should rise when the benefits of its large MWH acquisition start to materialize as an increase in earnings, which should occur starting in the current quarter.

Action now: Continue to Hold.

Linamar Corporation (TSX: LNR, OTC: LIMAF)

Originally recommended on Nov. 27/17 (#21742) at C$68.36. Closed Thursday at C$70.38, US$52.83.

Background: Linamar describes itself as a diversified global manufacturing company of highly engineered products. Its products include precision-machined engine blocks, cylinder heads, and camshafts, to name just a few. In addition, its Skyjack division makes scissor lifts, aerial work platforms, telehandlers, and booms. It has 28,600 employees in 60 manufacturing locations, six R&D centers, and 25 sales offices in 17 countries. Annual revenues are $6.5 billion, and assets are $5.9 billion. In 2016, the automotive sector accounted for 73% of its sales. In 2016 sales were 47% in Canada, 33% in Europe, 10% in the U.S., and 5% in each of Mexico and Asia/Pacific. (The 2017 figures are not yet available.) The company has grown aggressively by acquisition as well as organically.

Performance: Linamar’s stock had surged from about $20 in 2012 to a peak of about $85 in May of 2015. The stock then declined, bottoming out at about $46 in June of 2016. It then staged a strong recovery peaking at about $80 in late October 2017. It then declined to about $66 with the release of its third-quarter results but recovered with the release of its fourth-quarter results and with some optimism about progress in the NAFTA talks.

Recent developments: In the first quarter, the company closed the acquisition of a Canadian agricultural harvesting equipment manufacturer for $1.3 billion. That’s a large acquisition given the fourth-quarter 2017 asset total was $5.8 billion. In the first quarter of 2016, Linamar had closed the acquisition of Montupet S.A. in France for about C$1.2 billion (for comparison, assets at the time were $3.8 billion). These two large acquisitions illustrate the fact that Linamar is a growth-by-acquisition company.

Recent earnings growth: In the past four quarters, starting with the most recent (fourth quarter of 2017), earnings per share were up 3%, down 12% (but management claims up 9% if adjusted), up 3%, and up 15%. For all of 2017, earnings per share were up 2.1% (but would have been higher if adjusted). In 2016, earnings per share were up 19%.

North American vehicle production declined 4.7% in the fourth quarter of 2017 after a 7.7% drop in the third quarter. For the full year, the drop was 3.9%. Linamar’s content per vehicle produced in North America rose 10% in the fourth quarter and was up 3.4% for the full year of 2017.

In Europe vehicle production units soared 8.8% in the fourth quarter and was up 3.4% for the year. The content per vehicle was up 12% in the quarter and up 9.5% in 2017 overall. In Asia, which is a small part of their business, the content per vehicle rose 10.7% in the fourth quarter and 16.1% for the full year 2017.

Dividend: Linamar pays a very small quarterly dividend of $0.12 per share for a yield of 0.7%. This represents a payout ratio of only 6% of trailing year earnings. The great majority of earnings have been retained for growth. This has been beneficial to investors, as the company has grown substantially while not adding to its share count.

Valuation: Based on a price of $71.90, the price to book ratio at 1.5 (and 1.9 times after deducting goodwill) does not seem excessive. The return on owner’s equity is extremely good at 19%. The price to (trailing GAAP) earnings ratio is very attractive at 8.9. The earnings per share in the past five calendar years have grown at a compounded average of 29% per year. The revenue per share growth in the past five years has grown at a compounded average of 15% annually. These value ratios, in isolation, would easily support a Buy recommendation.

NAFTA and other risks: The possible end of NAFTA could be a risk, but the company believes that the impact would be minimal given that the applicable duties would range from only 2% to 2.5%. The main risks to Linamar are probably competitive pressures in a cyclical industry.

Outlook: In the third-quarter conference call, the company projected double-digit earnings per share growth for 2018. The accompanying press release indicated that the company “continues to see new business wins at a blistering pace”. In the fourth quarter results, the company referred to its excellent outlook. However, the auto parts industry is known to be cyclical.

Conclusion: Based on its numbers and on management’s outlook for growth, Linamar appears to be very attractively priced. On that basis, it merits a rating of Buy. However, given the risks to NAFTA and a recent decline in North America auto production, the stock is not without risk.

Action now: Buy. But consider taking only a half position due to the cyclic nature of the company.

 

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YOUR QUESTIONS

Needs 4% income

Q – I have been lucky over the years in investing and now have sufficient funds that an average 4% return would be enough to support my wife and I without touching the capital. As banks and utilities pay decent dividends, and have very low chances of going out of business, would investing in them for the long term be a good idea? This would allow me worry free long-term security, free of concern about the market’s ups and downs. – Charles D.

A – This is a good strategy as long as you are comfortable with the probable dips in the prices of interest-sensitive stocks as rates rise. As I pointed out in a recent issue, there are many high-quality companies that offer good yields and are unlikely to go out of business no matter what the economy does. Your portfolio could include shares in companies like Scotiabank, CIBC, BCE, Telus, Fortis, Canadian Utilities, and TransCanada Corp. If you want to add some high-yield U.S. stocks to the mix, look at AT&T, Verizon, and Southern Company.

One suggestion: don’t invest everything at one time. With rates rising, yields are likely to improve in the coming months. Take positions gradually to take advantage of that. – G.P.

AI ETFs

Q – Please advise what ETFs and/or mutual funds that you would recommend that focus on artificial intelligence and in blockchain technology. Thanks very much! – Ed P.

A – There is only one Canadian fund that focuses on blockchain. It was launched by the Harvest Funds last month under the name Blockchain Technologies ETF (TSX: HBLK). So far it has been a loser, dropping from a high of $11.29 on its first day of trading (Feb. 7) to $8.42 as of Thursday’s close. I regard any blockchain funds as risky at this point – the technology is new, and it is too soon to know which companies will prosper and which will end up on the scrap heap.

There are several U.S.-based artificial intelligence ETFs but the only Canadian one I know of is the Horizons Active A.I. Global Equity ETF(TSX: MIND), which was launched last fall. It has fared better than the blockchain entry, although it is down from its high of $26.49, reached in January.

The best-known AI fund is the Global X Robotics and AI ETF (NDQ: BOTZ), which was launched in September 2016. It’s coming off a very good year, gaining 49.5% in the year to Feb. 28. However, it has been soft recently, so you may want to watch it for a while before investing.

We have not recommended any of these funds in the IWB. – G.P.

 

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MEMBERS? CORNER

Tax software

Member comment: In the recent IWB newsletter you asked for readers tax software comments. I have always used and never had problems with Ufile. I have never had CRA dispute the forms Ufile produces. I recommend Ufile because:

  • One software package handles employment income, investment income, and rental income.
  • It can be loaded on more than one computer, so other family members can use the software.
  • It is reasonably priced.
  • It is a Canadian based company. – Cal C.

Response: Thanks for this comment. There must be many more members using tax software at this time. Let’s hear about your experiences, good or bad. – G.P.