At the Quarter Pole

By David Dittman • April 4, 2014 • In Brief

Editor’s Note: What follows is the executive summary of the April 2014 issue of Canadian Edge. Thanks for reading.

The first quarter of 2014 is in the books.

Canadian stocks, as indicated by the S&P/Toronto Stock Exchange Composite Index, have enjoyed a solid start to the year, with a total return in local terms of 6.1 percent. Accounting for the decline in the Canadian dollar versus the US dollar, recently a rather grim reality for US-based investors who hold Canadian stocks, the S&P/TSX Composite is up 2.1 percent.

Both return numbers best the S&P 500 Index’s 1.8 percent and the MSCI World Index’s 1.4 percent.

Canadian stocks, after three years of underperformance, appear to be back in favor.

The Canadian Edge Portfolio has fared well in this environment, with an average total return of 3.2 percent in US dollar terms.

Our 19 Conservative Holdings have posted an average gain including dividends of 1.9 percent, while our 16 Aggressive Holdings are up an average of 4.8 percent.

Brookfield Renewable Energy Partners LP (TSX: BEP-U, NYSE: BEP) posted the best performance among Conservative Holdings, with a total return of 12.5 percent. The stock’s rally was catalyzed by a strong fourth-quarter and full-year 2013 earnings report, which included announcements of a 7 percent dividend increase and the addition of new assets in the US.

EnerCare Inc (TSX: ECI, OTC: CSUWF), which reported its best attrition rate numbers in several years, was the No. 2 Conservative Holding in US dollar total return terms for the first quarter at 11.8 percent, while Pembina Pipeline Corp (TSX: PPL, NYSE: PBA) produced a gain of 9.1 percent.

At the other end of the performance spectrum, TransForce Inc (TSX: TFI, OTC: TFIFF) trailed the Conservative field with a loss including dividends of 9.7 percent. Sluggish Canadian growth led to a 1 percent decline in 2013 revenue, but management continues to consolidate trucking and logistics assets in a North American transportation segment that remains highly fragmented.

TransForce, despite recent weakness, is well positioned for the longer term.

Likewise, Innergex Renewable Energy Inc (TSX: INE, OTC: INGXF), which posted a loss of 8.1 percent, is building a portfolio of clean power assets that will serve investors well for the long term. In fact Innergex posted double-digit growth in revenue, earnings and generation during 2013. Its underperformance could be a function of profit-taking after the share price approached all-time highs early in the year.

A 3.4 percent dividend increase announced along with fourth-quarter and full-year 2013 results instills a large degree of confidence in Innergex’s underlying business.

Cineplex Inc (TSX: CGX, OTC: CPXGF), meanwhile, shed 7.3 percent during the first quarter. Canada’s largest movie theater operator closed out 2013 near its all-time high on the Toronto Stock Exchange. Investors reacted with understandable negativity to fourth-quarter box office results that reflected a relatively weak slate of Hollywood offerings.

At the same time, management’s successful diversification of revenue streams as well as its ability to maximize revenue per customer by introducing advanced projection technologies across its system bodes well for a future that is still generally defined by a successful movie-making formula based on “tentpole” features capable of supporting multiple sequels.

Aggressive Holding Magna International Inc (TSX: MG, NYSE: MGA), which we added in the December 2013 issue, posted the best first-quarter total return figure in the entire Portfolio, 17.9 percent.

Magna reported 2013 sales growth of 13 percent and boosted its dividend by 18.8 percent. Management guidance for 2014 reflects some caution about the global auto industry, but long-term prospects for what must be considered one of Canada’s “national champions” are very bright.

Four other Aggressive Holdings posted double-digit total returns for the first three months of the year: Parkland Fuel Corp (TSX: PKI, OTC: PKIUF), 12.9 percent; Peyto Exploration and Development Corp (TSX: PEY, OTC: PEYUF), 12.5 percent; Newalta Corp (TSX: NAL, OTC: NWLTF), 11.9 percent; and Enerplus Corp (TSX: ERF, NYSE: ERF), 11.7 percent.

Recent dividend cutter Lightstream Resources Ltd (TSX: LTS, OTC: LSTMF), which reduced its payout by 50 percent in November 2013 in an effort to shepherd cash for debt reduction, posted a negative total return of 6.1 percent, “leading” five Aggressive Holding in the red for the first quarter.

Lightstream has actually come off its recent lows, as management attempts to sell non-core assets while maintaining production at a level that will generate enough cash flow to support the new dividend rate as well as ongoing balance-sheet repair. That’s going to be a difficult row to hoe, which is why Lightstream is strictly for very aggressive investors.

Noranda Income Fund (TSX: NIF-U, OTC: NNDIF) posted a loss of 4.3 percent during the first quarter. But financial and operating numbers could get a boost along with rising zinc prices on renewed Chinese infrastructure stimulus.

Crescent Point Energy Corp (TSX: CPG, OTC: CSCTF) was in the red by 4.2 percent from Dec. 31, 2013, through March 31, 2014, but the stock price has actually responded extremely well to management’s extremely bullish fourth-quarter and full-year 2013 earnings report.

After hitting a 2014 closing low of CAD37.66 on Feb. 3 the stock rallied to CAD38.72 on March 11. The March 13 earnings release has carried the stock to CAD40.66 as of April 4.

We have more on Crescent Point in this month’s Portfolio Update.

Wajax Corp (TSX: WJX, OTC: WJXFF) has struggled with the burdens of a significant mining industry slowdown and a cutback in spending by oil and gas exploration and production companies. Stronger global growth should drive a return to health for the former as well as the latter.

We’ve restored Wajax to a “buy,” as we explain in this month’s In Focus Feature.

Extendicare Inc (TSX: EXE, OTC: EXETF) continues to post solid operating and financial numbers for its Canadian operations. Its US results have improved, but the stock nevertheless posted a loss of 0.8 percent for the first quarter.

We await definitive word on the strategic review of the business that could see a sale or spinoff of the US segment.

Jobs

The US posted another month of non-farm payroll gains, making it three straight months of gains for the first time in three years.

The payroll gain of 192,00 was decent, but other details of the report were actually quite promising. The Bureau of Labor Statistics reported a significant increase in the length of the average workweek to 34.5 hours from 34.3 hours in February, which was revised up from 34.2 hours. This will have a meaningful impact on personal income.

A one-tenth increase in the workweek is the worker-hour equivalent of roughly 350,000 payrolls. The weather-related rebound in hours should have a significant impact on household income creation, which has been evident in tax receipts. But we’re not seeing material wage inflation yet.

The US unemployment rate was steady at 6.7 percent, as the labor force participation rate rebounded two-tenths to 63.2 percent, the highest reading in seven months.

Meanwhile, Canada added 42,900 net new jobs in March, nearly double the consensus expectation, as the jobless rate up north declined to 6.9 percent from 7 percent. Employment grew by 1.1 percent on a year-over-year basis.

Statistics Canada also reported that annual hourly wages rose 2.2 percent in March.

The Canadian dollar gained against the US as investors digested a potential sign of economic strength into the spring.

David Dittman
Chief Investment Strategist, Canadian Edge

Portfolio Update

It’s a final four of a different stripe in the April Canadian Edge, as the last set of Holdings reported fourth-quarter and full-year 2013 financial and operating numbers since the March issue was published.

Bird Construction Inc (TSX: BDT, OTC: BIRDF), after reporting expectations-meeting fourth-quarter and full-year 2013 operating and financial numbers, announced on March 24, 2014, that it had been awarded new construction contracts totaling approximately CAD300 million.

Ag Growth International Inc (TSX: AFN, OTC: AGGZF) posted record trade sales and adjusted earnings before interest, taxation, depreciation and amortization (EBITDA) for 2013.

For the fourth quarter and for 2013 Crescent Point Energy Corp (TSX: CPG, OTC: CSCTF) once again posted “under-promise/over-deliver” results.

Lightstream Resources Ltd (TSX: LTS, OTC: LSTMF) rallied off recent lows after management reported year-end reserves as well as fourth-quarter and full-year 2013 results. The market sees some very early signs that the dividend cut was a long-term positive that will help the company fund a turnaround.

Yet the needle to thread–with reducing leverage being management’s top priority–is to fix the balance sheet via asset sales that typically reduce debt but cut cash flow at the same time.

We also have news from two Portfolio REITs, and we revisit the details that go into our monthly “technical” tables.

Portfolio Update has the last reports on fourth-quarter and full-year 2013 financial and operating highlights, with positive indications from three companies and inconclusive data from one more.

Best Buys

ARC Resources Ltd’s (TSX: ARX, OTC: AETUF) most recent dividend increase was announced in July 2008 for the payment to be made in August 2008. Since then the oil and gas producer reduced its monthly payout five times, to the current rate of CAD0.10 per month.

Artis REIT (TSX: AX-U, OTC: ARESF) last raised its monthly distribution in June 2008, from CAD0.0875 to the current rate of CAD0.09. The good news is the REIT has never cut its distribution.

The key to the ARC story is that management continues to boost production and add reserves in an efficient manner, generating wealth for shareholders at the wellhead and for the long term. An explicit decision has been made to maximize the share of cash flow devoted to reinvestment in the business, and that decision is paying off: ARC is now trading at its post-Global Financial Crisis/Great Recession high.

Artis, meanwhile, has posted a 16.7 percent, price-only rally on the Toronto Stock Exchange (TSX) since bottoming in September 2013 amid the fear-of-rising-interest-rate-driven selloff that afflicted yield-focused equities. There’s still headroom up to a near-term closing high of CAD17.03 established April 30, 2013, and financial and operating results certainly support a higher valuation.

Best Buys has more on the Portfolio Holdings that represent our top ideas for new money in April.

In Focus

The possibility that growth will come in below the government’s stated target, as evidence continues to mount that the domestic economy is slowing, has inspired another round of policy movies designed to stimulate growth in China.

The potential for a significant surge in US capital spending, with aging capital stock in the context of strong cash flows and cheap money, has teased investors for several years now. But signs suggest this time there could be a real payoff.

A consistent thread for us is dividend growth, a sure sign of solid underlying business fundamentals and a good indication of management’s confidence in the future.

The first two themes are more specific to 2014, while the third is an expression of general preference for the long term.

In Focus explores Chinese stimulus, US CAPEX and dividend growth, with actionable advice on all three themes.

Dividend Watch List

Capstone Infrastructure Corp (TSX: CSE, OTC: MCQPF) has signed a new 20-year non-utility generator contract with the Ontario Power Authority for its 156 megawatt (MW) Cardinal combined-cycle, natural gas-fired facility. The new contract will be effective Jan. 1, 2015, and will expire Dec. 31, 2034.

In one sense the deal took much longer than anticipated, as the negotiation of a new power purchase agreement with the OPA had been hanging over Capstone’s share price for more than a year.

In another sense it came together quickly, as recent OPA dealings with other power generators, including TransAlta Corp (TSX: TA, NYSE: TAC), suggested the bargaining process would play out through the summer.

Timing issues aside, the highlight for Capstone shareholders must be management’s assertion that the new PPA “provides certainty…on Cardinal’s longevity and contribution to Capstone’s cash flow profile and dividend sustainability following 2014.”

Capstone provides the highlights from a month that featured no dividend cuts in the CE How They Rate coverage universe.

Dividend Watch List has the details on members of the How They Rate coverage universe whose current dividend rates are in jeopardy.

Canadian Currents

Canada’s economy has delivered a number of stronger-than-expected data during a challenging period, a performance that suggests even greater momentum in the months ahead, notes CE Associate Editor Ari Charney in this month’s Canadian Currents.

Bay Street Beat–Reporting season for fourth-quarter and full-year operating and financial results is now complete.

Here’s how Bay Street has reacted to report and how it sees the CE Portfolio early in the second quarter of 2014.

How They Rate Update

Coverage Changes

Note that we have discontinued coverage of Armtec Infrastructure Inc (TSX: ARF, OTC: AIIFF), and Imvescor Restaurant Group Inc (TSX: IRG, OTC: IRGIF).

Our evaluation of the coverage universe will be ongoing, as we streamline our focus to companies with realistic opportunities to build wealth for investors for the long term, keeping in mind too that part of the rationale for building a coverage universe is to provide context and comparison.

Advice Changes

Boralex Inc (TSX: BLX, OTC: BRLXF)–From Hold to Buy < 14. The declaration of its first-ever dividend came ahead of schedule, though a stronger cash position, steady cash flow and long-term contracts support the now-quarterly payout.

Revenue for 2013 was down 5.5 percent, though cash flow from operations per share grew by 7.9 percent.

Wajax Corp (TSX: WJX, OTC: WJXFF)–From Hold to Buy < 35. Management reported a 2.6 percent revenue decline, while net earnings slid 27.6 percent, as the company continues to struggle with spending slowdowns in the mining and oil and gas sectors. But stimulus measures in China and, more directly, reviving North American economic growth suggest that improvement may not be far off. And the current dividend appears to be well supported.

Rating Changes

ARC Resources Ltd (TSX: ARX, OTC: AETUF)–From 3 to 4. The 2013 payout ratio of 42 percent is strong relative to its Oil and Gas peer group and is likely to remain so for the foreseeable future. Overall debt is low, and there are minimal obligations coming due before the end of 2015. Energy production is inherently volatile, and there is a dividend cut in the last five years. But ARC earns on the other four criteria.

The core of my selection process is the six-point CE Safety Rating System, which awards one point for each of the following. A rating of “6” is the safest:

Payout Ratio–A ratio below our proprietary industry baseline.
Earnings Visibility–Earnings are predictable enough to forecast a payout ratio below our proprietary industry baseline.
Debt-to-Assets Ratio–A ratio below our proprietary industry baseline.
Short-Term Debt Ratio–Debt due in next two years is less than 10 percent of market capitalization.
Business Stability–Companies that can sustain revenues during recessions are favored over more cyclical ones.
Dividend History–No dividend cuts over the preceding five years.

Resources

The following Resources may be found in the top navigation menu at www.CanadianEdge.com:

Ask the Editor–We will reply to your queries via email or in an upcoming article.
Broker Guide–Comparison of brokers for purchasing Canadian investments.
Getting Started–Tour of the Canadian Edge website and service.
Cross-Border Tax Guide–What you need to know about taxes and Canadian investments.
Other Websites–Links to other websites to help you get the most out of your Canadian stocks.
Promo Stocks–Guide to the mystery stocks we tease in our promotional messages.
CE Safety Rating System–In-depth explanation of the proprietary ratings system and how to use it effectively.
Special Reports–The most recent reports for new subscribers. The most current advice is always in your regular issue.
Tips on DRIPs–Details for any dividend reinvestment plan offered by Canadian Edge Portfolio Holdings.