Eye on Technicals

By Roger Conrad • April 5, 2013 • Portfolio Update

Canadian Edge’s perspective is long-term. We look for companies that are building shareholder wealth by growing their businesses. And we hold onto them so long as they’re doing that.

Sometimes our companies lag the market for months or even years, such as budding transportation firm TransForce Inc (TSX: TFI, OTC: TFIFF) did before it gained favor on Bay Street last year.

Sometimes they outright stumble, as Newalta Corp (TSX: NAL, OTC: NWLTF) did during the 2008-09 market crash/credit crunch/recession before returning to growth the past few years.

But so long as the company continues building its underlying business, we’ll generally stick with the stock, regardless of the ups and downs. That’s even the case for the four current Aggressive Holdings that have cut their dividends over the past 12 months, which I reviewed in the March 27 Flash Alert Colabor’s Earnings and a Roundup of Recent Dividend Cutters.

All four have given us our share of headaches, both this year and last. And many investors have given them up for dead.

Nonetheless, Colabor Group Inc (TSX: GCL, OTC: COLFF) is still building its food distribution business in eastern Canada. IBI Group Inc (TSX: IBG, OTC: IBIBF) is expanding its global franchise of architectural development firms.

Just Energy Group Inc (TSX: JE, NYSE: JE) is taking its energy marketing franchise to the UK, even as it relentlessly expands its reach in North America.

Even with its recent retrenching, Atlantic Power Corp (TSX: ATP, NYSE: AT) still has its eyes set on expansion. And that task should be made easier by the hiring of former AES Corp (NYSE: AES) executive Ned Hall as its new chief operating officer.

As I wrote in the March 27 Flash Alert, I’m currently holding all of these companies to performance benchmarks in order to keep them in the Portfolio. And Atlantic’s task could be made more complicated if any of the shareholder suits against it unexpectedly prevail.

But so long as they meet those benchmarks–which are largely concerned with continuing to grow businesses–we’ll be keeping them in the Portfolio.

Fortunately, these were the outliers in what was otherwise a very positive earnings season for Canadian Edge Portfolio Holdings. Here, one last time, is where to find my analysis of the news and numbers.

Conservative Holdings

Aggressive Holdings

So long as these companies continue to grow underlying businesses, they’ll be on track to build wealth for their investors. That’s no guarantee their stocks won’t be volatile, particularly in an environment beset by the four horsemen I highlight in In Brief.

Those are competition from a suddenly popular US market, a Canadian energy patch weakened by pricing differentials due to transportation constraints, economic weakness in part brought on by government efforts to the slow the housing market and dividend cuts that have undermined investor confidence.

As we learned from the 2008-09 crash, the 2010 Flash Crash and the lesser selloffs of the past two years, stocks of companies that stay strong as businesses always recover, no matter how bad near-term conditions get.

And even if the four horsemen ride a bit longer, that should be true of all of these companies in the coming months.

A Look at Technicals

Our analysis of underlying businesses focuses on several criteria, including payout ratios (dividends as a percentage of earnings), earnings visibility, the absolute level of debt a company carries, debt maturing between now and the end of 2014 and reliability of revenue and dividends.

The table “Technical Ratings” looks at our stocks in a slightly different way, by considering more technical factors. They are:

Market capitalization (in billions of Canadian dollars)–This is basically the market value of each company, measured by multiplying the total number of units by the unit price. It’s shown in Canadian dollars, which for comparison purposes is worth about USD0.987.

Larger companies are usually more adept at weathering market cycles. Smaller companies have an easier time moving the profit meter, and a low market cap can attract takeover interest as well.

Shorts/Float–This measures the total short volume as a percentage of total shares of stock in circulation. Short sellers borrow units of a company and sell them in the market, with the goal of buying them back later at a lower price.

Higher short volume indicates more bets against a company, but if shorts are wrong they can be forced to sell at rising prices. A very high volume of shorts can cause a short squeeze, as short sellers are forced to buy at any price to stanch losses.

Institutional Ownership–This measures mutual funds and other large shareholders’ percentage ownership of each Canadian company. Higher numbers can indicate greater volatility.

Insider Ownership–I like to see large percentages of insider ownership, but bigger companies usually have more spread ownership and less influence from insiders.

Insider Additions–This shows the percentage change in insiders’ total holdings of a company over the past six months. Obviously, I like to see a rising percentage here, though a falling percentage isn’t necessarily the kiss of death.

Analyst Buy–Hold–Sell–Starting from the left, the first figure shows the number of analysts who rate the stock a “buy,” the second shows the number of “holds” and the third the number rating the stock a “sell.”

I like to see more “buys” than “holds” or “sells” all else equal. However, a large number of skeptics can bring a lot of upside by shifting sides, should a company beat expectations.

Beta–This is a measure of volatility relative to the S&P/Toronto Stock Exchange Composite Index. Higher numbers indicate greater volatility. Not surprisingly, Conservative Holdings tend to have lower betas than Aggressive Holdings due to less commodity-price sensitivity.

2012 Total Return and 2013 Total Return–This is the bottom line for each recommendation and provides a good gauge for price momentum of these holdings. The 2013 figure is through April 2.

What are these numbers telling us now about our holdings? Takeaway No. 1 concerns performance. In contrast to the past four years, we’re underwater thus far in 2013 in US dollar terms.

As “Loonie Turbulence” shows, that’s partly due to the weakening of the Canadian dollar this year. We’d be in positive territory were it not for the roughly 2 percent decline in the loonie thus far in 2013.

It’s also due, however, to a sharp slide in a handful of stocks, which are led by dividend cutters Atlantic Power and Just Energy. These losses have far offset the gains from the handful of double-digit winners we’ve had as well as the rather flat performance of the majority of stocks.

A glance at performance in 2012 reveals the same divergence between winners and losers. The primary difference is there were more companies in the first camp than the second.

Not surprisingly, the biggest losers also had the most negative sentiment among analysts. Of the eight analysts covering Atlantic Power, for example, there are currently three “sells,” five “holds” and no “buys”–and that’s actually up from five “sells” and three “holds” a month ago.

On the other hand, extremely positive analyst sentiment was no guarantee of gains either this year.

Newalta Corp, for example, is underwater by more than 7 percent, despite nine of 10 analysts covering it rating the stock a “buy.” Just like negative news, negative opinion has had a much greater impact on share prices than their positive counterparts.

Insider buying and selling is frequently cited as a harbinger of stock price moves.

Although one would expect executive and close owners to know more about their companies than outsiders, there’s been little or no correlation in performance of stocks and insider buying so far this year.

EnerCare Inc (TSX: ECI, OTC: CSUWF) has seen both an 18 percent-plus rise in its insider ownership this year and a nearly 14 percent gain in its share price.

But PetroBakken Energy Ltd (TSX: PBN, OTC: PBKEF) insider ownership has risen by more than 1,000 percent, while its share price has tumbled by roughly 20 percent.

And that’s despite reporting generally solid business results that affirmed the safety of the dividend.

A high or low absolute level of insider ownership has been an equally ineffective predictor of performance. My column shows insider ownership as a percentage of a company’s total shares outstanding.

Just Energy, for example, is nearly 5 percent owned by its insiders. They’ve been net buyers the last six months, particularly in calendar 2013. That didn’t stop the company from announcing a dividend cut in February, however, or its stock from plunging nearly 50 percent.

What about short sellers? IBI Group has attracted the most of any stock on our list, with total short positions equal to roughly 7 percent of total float and 1.5 days of daily volume–which has been elevated recently in the wake of earnings news.

But most of these trades appear to have been placed after the stock had already suffered most of its damage. Most short sellers, it seems, are just as much trend-followers as buyers.

Institutions can be a fickle lot, since managers are typically paid to meet relatively near-term performance benchmarks. And one might expect stocks they own most heavily to show the biggest gains and losses as a result.

This, however, has definitely not been true thus far in 2013. Neither has relative market capitalization had much impact on the relative performance of these holdings, as winners and losers can be counted among both great and small.

Where They’re Useful

So what are these so-called technicals good for? Like everything else about a stock they should be viewed along with everything else about a company, including business fundamentals.

Heavy insider buying at PetroBakken, for example, may not prevent near-term selling from investors convinced a dividend cut is imminent. But it is a pretty solid vote of confidence from management that backs up its frequent assuring words of recent weeks.

Conversely, the net drop in insider ownership at Parkland Fuel Corp (TSX: PKI, OTC: PKIUF) over the past six months did precede the drop in the company’s stock following its late February earnings announcement.

Those numbers were hardly disastrous. In fact the company actually raised its dividend for the first time since cutting it when converting to a corporation in January 2011.

The selling did confirm what the share price was already saying as it traded well above my buy target.

Investor expectations had risen too far and too fast for the company’s actual fortunes to keep up. Potential for disappointment was great, as was potential share-price downside.

That might also be true for Shaw Communications Inc (TSX: SJR/A, NYSE: SJR), which has enjoyed quite solid gains since I added it to the Portfolio in early 2012.

Over the past six months insiders have cut their share in the company by nearly 10 percent. That’s somewhat extraordinary considering the high degree of ownership by the managing Shaw family.

And it’s good reason not to pay more than my buy target of USD22 for the stock.

Parkland today trades below my target of USD18 and is ripe for buying. The buying momentum that pushed the stock as high as USD20 for a time earlier this year has clearly been broken for now. And only more good operating results and time is likely to bring back interest.

Damage has already been done to the most heavily shorted stocks on our list. That doesn’t mean there can’t be more bad news ahead to take them lower. But expectations are also very low. Just as is it’s much harder for a stock that’s risen far and fast to go higher, it takes a lot more to push a fallen stock lower by missing expectations.

The exceptions, of course, are the companies that wind up evaporating entirely, as Yellow Media Ltd (TSX: Y, OTC: YLWDF) did between 2008 and 2011. In those cases short selling can be profitable all the way down.

Unfortunately, there are few sure-fire tipoffs to the real Yellows. But they are thankfully rare. And following the rules of diversification, periodic portfolio balancing and not averaging down will spare you the worst when you wind up staying too long.

Nine times out of 10 high levels of short selling will be yet another sign that the bottom is near if not already laid in. And if shorts aren’t careful they’ll be caught in a squeeze and forced to buy back stock at big losses.

The companies on our list with significant (over 4 percent of float) levels of short interest now are (in order) IBI Group, Wajax Corp (TSX: WJX, OTC: WJXFF), Parkland Fuel, IBI Group, Enerplus Corp (TSX: ERF, NYSE: ERF) and Shaw Communications.

At this point Shaw is the only company that’s still trading at or near a 52-week high. That’s another reason not to chase the stock here.

The company I’m most concerned about, however, is Wajax, a provider of heavy equipment to a range of natural resources industries. The stock has recently slumped to a new 52-week low, as betting has grown that management won’t be able to maintain the current dividend level amid currently weak conditions.

My view is they will. But the company’s stock isn’t likely to act well until the numbers support management’s contention, and first-quarter results, to be released on or around May 8, could make for some tough comparisons.

The yield of nearly 9 percent is just compensation for the risk.

But Wajax is now a hold, even for more aggressive investors. And any indication of real weakening in May could prompt me to exit.

What about on the buy side?

A brief look at our Holdings reveals that most have had net insider buying over the past six months, regardless of how their stocks have performed.

That has to be considered a plus and a good reason to continue holding them, particularly those with especially heavy buying such as Brookfield Renewable Energy Partners LP (TSX: BEP-U, OTC: BRPFF).

We’re still waiting for Brookfield Renewable to list its units on the New York Stock Exchange (NYSE) as promised.

But in the meantime it’s continued to build its business to last, acquiring Western Wind Energy Corp in a hostile deal turned friendly last month as well as arranging favorable financing for a host of projects.

Brookfield Renewable Energy has backed off and is a buy up to USD32.

Crescent Point Energy Corp (TSX: CPG, OTC CSCTF) has seen a more than 10 percent boost in insider ownership the past six months. Analyst opinion has remained relentlessly positive, with 19 “buys” versus three “holds” and one “sell,” despite generally souring opinion on Bay Street toward many energy companies.

That’s in addition to continued favorable business fundamentals, as the company has continued to ramp up production. Buy Crescent Point up to USD48.

EnerCare’s insider buying is a good reason to pick up shares below my target of USD10, even after the stock’s solid performance this year.

IBI’s swelling insider ownership should be heartening to long-suffering shareholders that management is far from giving up and sees brighter times ahead. It should also sound a cautionary note to those who’ve shorted the stock.

Few now question the strengths of RioCan REIT (TSX: REI-U, OTC: RIOCF). But the nearly 12 percent rise in insider ownership over the past six months is a good reason for non-owners to buy in on dips to USD27 or lower.

Finally, PetroBakken does carry its share of risks, starting with pricing-differential risk for its light oil output. But that kind of insider buying on the heels of the stock’s six month decline is a good sign that a rebound is ahead, if only investors can wait out the near-term downside and volatility.

And it’s why I continue to rate PetroBakken, the highest-risk of my producer picks, a buy up to USD15.

These are just factors to consider in conjunction with the business data we’ve collected and analyzed for our companies. But they’re a valuable piece in building a portfolio of Canadian companies. And occasionally, following them can save you from mistakes.

The Next Numbers

Here’s when Canadian Edge Portfolio Holdings will report numbers for the first quarter of 2013. Those that have announced dates for announcements are noted as “confirmed,” while we provide an “estimate” for those yet to make specific commitments.

The timing is much faster than it was for fourth-quarter numbers, which also required a series of annual filings.

Conservative Holdings

  • AltaGas Ltd (TSX: ALA, OTC: ATGFF)–April 26 (estimate)
  • Artis REIT (TSX: AX-U, OTC: ARESF)–May 7 (confirmed)
  • Bird Construction Inc (TSX: BDT, OTC: BIRDF)–May 14 (estimate)
  • Brookfield Real Estate Services Inc (TSX: BRE, OTC: BREUF)–April 17 (estimate)
  • Brookfield Renewable Energy Partners LP (TSX: BEP-U, OTC: BRPFF)–June 7 (estimate)
  • Canadian Apartment Properties REIT (TSX: CAR, OTC: CDPYF)–May 9 (estimate)
  • Cineplex Inc (TSX: CGX, OTC: CPXGF)–May 10 (estimate)
  • Davis + Henderson Income Corp (TSX: DH, OTC: DHIFF)–May 8 (estimate)
  • Dundee REIT (TSX: D-U, OTC: DRETF)–May 3 (estimate)
  • EnerCare Inc (TSX: ECI, OTC: CSUWF)–May 15 (estimate)
  • Innergex Renewable Energy Inc (TSX: INE, OTC: INGXF)–May 14 (estimate)
  • Keyera Corp (TSX: KEY, OTC: KEYUF)–May 8 (estimate)
  • Northern Property REIT (TSX: NPR, OTC: NPRUF)–May 8 (confirmed)
  • Pembina Pipeline Corp (TSX: PPL, NYSE: PBA)–May 3 (estimate)
  • RioCan REIT (TSX: REI, OTC: RIOCF)–May 3 (estimate)
  • Shaw Communications Inc (TSX: SJR/A, NYSE: SJR)–April 12 (confirmed)
  • Student Transportation Inc (TSX: STB, NSDQ: STB)–May 9 (estimate)
  • TransForce Inc (TSX: TFI, OTC: TFIFF)–April 18 (confirmed)

Aggressive Holdings

  • Acadian Timber Corp (TSX: ADN OTC: ACAZF)–May 1 (estimate)
  • Ag Growth International Inc (TSX: AFN, OTC: AGGZF)–May 15 (confirmed)
  • ARC Resources Ltd (TSX: ARX, OTC: AETUF)–May 2 (estimate)
  • Atlantic Power Corp (TSX: ATP, NYSE: AT)–May 7 (estimate)
  • Chemtrade Logistics Income Fund (TSX: CHE-U, OTC: CGIFF)–May 9 (estimate)
  • Colabor Group Inc (TSX: GCL, OTC: COLFF)–May 2 (estimate)
  • Crescent Point Energy Corp (TSX: CPG, OTC: CSCTF)–May 10 (estimate)
  • Enerplus Corp (TSX: ERF, NYSE: ERF)–May 10 (estimate)
  • Extendicare Inc (TSX: EXE, OTC: EXETF)–May 8 (estimate)
  • IBI Group Inc (TSX: IBG, OTC: IBIBF)–May 10 (estimate)
  • Just Energy Group Inc (TSX: JE, NYSE: JE)–May 17 (estimate)
  • Newalta Corp (TSX: NAL, OTC: NWLTF)–May 8 (estimate)
  • Noranda Income Fund (TSX: NIF-U, OTC: NNDIF)–May 15 (estimate)
  • Parkland Fuel Corp (TSX: PKI, OTC: PKIUF)–May 8 (estimate)
  • PetroBakken Energy Ltd (TSX: PBN, OTC: PBKEF)–May 2 (estimate)
  • Peyto Exploration & Development Corp (TSX: PEY, OTC: PEYUF)–May 9 (estimate)
  • Vermilion Energy Inc (TSX: VET, OTC: VEMTF)–May 3 (estimate)
  • Wajax Corp (TSX: WJX, OTC: WJXFF)–May 8 (estimate)

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