Stock Watch – Michael Sprung on BNN Market Call with Mark Bunting

Stock Watch – Michael Spung on BNN Market Call discussing his market outlook and top stock picks – Alaris Royalty, Cascades Inc and George Weston

Stock Watch Michael Sprung BNN Market Call Alaris Royalty Cascades Inc George Weston

Stock Watch – Michael Sprung on BNN Market Call discussing Alaris Royalty, Cascades Inc and George Weston

Stock Watch – Market Outlook:

We anticipate that the US economy will continue to accelerate as the year progresses, barring any major geopolitical disruption. Canadian markets have thus far outperformed many of their international counterparts, propelled in part by greater activity in the energy sector and strong agricultural commodity prices. Fears of slower growth have negatively impacted the emerging markets, while European markets have been shaken by events in the Ukraine. Going forward, we would not be surprised to see a pullback in Canada as fundamentals catch up with valuations. Such a pullback will be an opportunity for prepared investors.

Stock Watch – Top Stock Picks:

Alaris Royalty Corp. (TSE:AD, Mkt cap 836.96M, P/E 24.08, Div/yield 0.12/4.94, EPS 1.21, Shares 28.72M), owned by clients, last purchase April 22 2014, $26.73

Alaris Royalty is a unique investment firm that invests in a diversified range of private companies with solid long-term histories and dedicated management teams. The nature of the investment allows Alaris to participate in future growth while the entrepreneurs maintain control provided certain agreed upon benchmarks are met. Management has had a successful track record in identifying good investment opportunities. We anticipate this trend will continue and the stock will provide investors a means by which they can participate in a growing cash flow.

Cascades, Inc. (TSE:CAS, Mkt cap 599.12M, P/E 67.84, Div/yield 0.04/2.51, EPS 0.09, Shares 93.91M), owned by clients, last purchase February 28 2013, $4.43

Cascades is a producer, converter and marketer of tissue and packaging materials in North America and Europe.   As the economy expands, the price of packaging material will increase. In recent years, management has taken steps to realign the company and address any balance sheet concerns. The recent pullback in the stock’s price affords a good entry point for investors,

George Weston Limited (TSE:WN, Mkt cap 10.43B, P/E 18.02, Div/yield 0.42/2.06, EPS 4.53, Shares 127.91M), owned by clients, last purchase December 18 2013, $75.74

Weston will continue to benefit from their 46% ownership of Loblaw as it generates more reach through their innovative extensions into cultural markets as well as product delivery through the integration with Shoppers Drug Mart. The WN Food division is currently facing some pressures that should see some benefits before year-end as new plants come online and efficiencies are gained through their relentless focus on optimizing the production platform. The commodity input hedging should also lead to more stable cost control.

You can see Michael on BNN’s Market Call by visiting our Video Page

Here is a transcription of the complete BNN Market Call broadcast:

Mark Bunting:          Tonight on Market Call, we have Michael Sprung, the president of the Sprung Investment Management and he’ll be taking your questions on Canadian Large Caps.

 

Hello and welcome to Market Call Tonight. This is the Thursday edition, thanks a lot for joining us. Canadian Large Caps is the topic, Michael Sprung is the guest as you saw and see now. We have three ways to — you can contact with us here, email address: [email protected] Here’s our toll free number: 1855-326-6266 or tweet us if you like @marketcall. Hello!

 

Michael Sprung:        Hello!

 

Mark Bunting:          It’s nice to see you.

 

Michael Sprung:        It’s good to be back, thanks!

 

Mark Bunting:          Would you say that the investors need to exercise a bit of precaution right now?

 

Michael Sprung:        Yes, I think so. The markets were good last year, they continue to forge ahead and particularly in Canada, I mean we’ve got markets. Well, I mean today, we’re off a bit but still on total return basis. We’re probably up about 9% on a year; the U.S., not so much, closer to 1% or 2%. I just think that the fundamentals aren’t moving forward that quickly; the economies are not expanding that quickly.

 

People are looking for 2% to 2.5% GDP growth in a lot of instances and I think that at some point, the markets got to take a pause here. But when they do, that will probably be an opportunity. Let’s face it, we’ve been in a “bull market” now for a number of years and they just don’t go straight up all the time. I think people should be prepared for a pause here.

 

Mark Bunting:          Do you think Toronto Stocks are valued sort of ahead of their fundamentals?

 

Michael Sprung:        Yes, I do.

 

Mark Bunting:          Across the board?

 

Michael Sprung:        Oh, pretty much. I mean it’s getting much harder to find things that you’re really comfortable stepping in and buying unless your outlook is extremely long-term, but we always try to evaluate a stock when we’re looking at it. We’re looking for more potential upside than what we see on the downside. And usually, some sort of ratio of two or three to one upside versus downside risk on percentage basis and that’s getting more and more difficult to find those stocks that you really think that, “Gee, if I buy it today at 10, it’s likely to go to 7, as it is to go to 12 or 13.”

 

Mark Bunting:          Right.

 

Michael Sprung:        The risk reward is just not enough unless you’re just buying it to carry the dividend yield, which I think is what caused the market to maintain the strength that has. I mean, given the alternatives and fixed income, investors are largely just buying for yield.

 

Mark Bunting:          Are there certain stocks, Michael, though in certain sectors where there are areas of opportunity? Maybe they’ve lagged a little bit?

 

Michael Sprung:        We don’t look at sector specific basis. We look at it stock-by-stock. But in terms of where can you find the things that maybe you feel more comfortable, I think the Energy areas, one where perhaps we can identify one or two more stocks. Materials actually are becoming more interesting in here, I think, because they have certainly lagged significantly given commodity prices where they are.

 

Should we have a bit of a pause and then the economy begins to build again, that’s where you’re going to make money because particularly in materials, you want to buy them when they’re out of favor. You just have to have the holding power to wait out until the next run.

 

Mark Bunting:          We have an email here from Albert and before I get to this on the Silver Wheaton, let me just tell you quickly here about Silver Wheaton. After hours, coming out with their numbers in the first quarter, earnings per share 22 cents revenue which I have estimates at $165 million. Analysts we’re expecting about $187 million. They’ve also instituted a dividend reinvestment plan.

 

We’ll get Michael to talk about Silver Wheaton now. This is from Albert once again, could they get your opinion, is it a buy at this level?

 

Michael Sprung:        Well, as I’m saying, there are some opportunities in Silver Wheaton and the royalty takers as they call them, they look still quite expensive. You’re still paying in the neighborhood of 25 times projected earnings for this year.

 

Now, if you think there’s going to be a slight recovery here, yes, their royalties are going to go up fairly significantly. Silver Wheaton’s pulled back from a high of over $30 to close to where it is today $20, $23, $59. I think that it’s getting close to an area where — again, if you’re a longer term thinker, you could think about buying it. Certainly, with respect to some of its peers, I think it looks reasonably valued.

 

Mark Bunting:          Do you hold anything in this area, Franco-Nevada or Sandstorm Gold?

 

Michael Sprung:        No, we don’t know any of the royalty takers.

 

Mark Bunting:          What about a Goldcorp?

 

Michael Sprung:        Yes, we have Goldcorp and we do own Barrick as you know.

 

Mark Bunting:          Right.

 

Michael Sprung:        We tend to participate directly, I guess, rather than indirectly.

 

Mark Bunting:          So that’s your precious metal exposure for the most part?

 

Michael Sprung:        For the most part, we always limit precious metals to about 5% or less of the portfolio. We tend to run pretty conservative portfolios and it’s there usually more as a hedge against inflation or adverse geopolitical events or whatever. The thing with buying gold stocks, you’ve got to buy them when people just don’t want them.

 

Mark Bunting:          A bear market for gold. Michael, we’ll talk more about it a little later on the show. Jim is in Massey, Ontario. Go ahead, Jim.

 

Jim:                       Michael, do you like CIBC Bank and when do you think they’ll split the stock? Thank you.

 

Michael Sprung:        Well, they’re getting close to $100 again. CIBC, was few years back over a $100. They’re finally getting back to that level. I wouldn’t be surprised to see them split it if it goes through that marker again. I like CIBC. It is one of our primary holdings in the banking group.

 

The thing I do like about it is the fact that — I don’t think they ever get the appreciation for how much since McCaughey has been in charged — they’ve de-risked this bank. Yes, they still have one of the best capital ratios and yet, it earns one of the highest returns on equity. I think that’s a pretty safe bet. They are a little bit vulnerable being largely a Canadianized bank now. If one really believes the worries about the Canadian mortgage market and things like that, that would be one concern. But we think that’s a little bit overblown, we think that Canadian mortgages are much safer than people outside the country generally perceive them to be.

 

So, no, we like CIBC. Even today, I think on a relative basis, it’s selling at a fairly reasonable, multiple relative to the other banks. It is slightly higher multiple of book value but it’s a lower multiple of earnings. You’ve got a trade off there.

 

Mark Bunting:          Which other banks do you hold?

 

Michael Sprung:        We hold the Royal and the Bank of Nova Scotia. Nova Scotia is probably our largest hold.

 

Mark Bunting:          Okay, so those three. Jeff is in Toronto. Good evening, sir.

 

Jeff:                      Hi, how are you?

 

Mark Bunting:          Very well, how’s going on?

 

Jeff:                      Good, I’d appreciate your comments on CGI group. It announced the strong earnings last week and it has been downhill ever since. I’d appreciate your comments of where you think the stock is going to be going from here. Thanks, bye.

 

Michael Sprung:        Well, CGI group, they basically are a software firm that contracts out largely to governments and so on. They got badly tarnished with the Obama Care in the U.S. when that came out, and I think that was largely overblown and not really particularly germane just to them.

 

Overall, I think that the company is very well-managed. It has a good long-term growth strategy. It has pulled back a little bit but it’s still relatively high over the last few years. I think on a multiple bases, it still looks somewhat expensive from our point of view. But if we were to pull back another 10%, I think we’d be quite interested in looking at it.

 

Mark Bunting:          Let’s talk to Bob. He’s also in Toronto. Good evening, sir.

 

Bob:                       Good evening! My question for Michael is on SNC-Lavalin. I bought this when — a while back as you say when “it was out of favor” and in the high 30’s. It’s now up about a third. My question is, is there anymore upside or would you sell this and buy something else in that area? Thank you.

 

Michael Sprung:        Well in that area, you really have got sort of the engineering and then the engineering construction firms and so on. SNC, they are still negotiating with the government to see what the size of fines they might pay for the past transgressions with respect to getting contracts in foreign countries and so on.

 

The recent sale that they made over $3 billion for that franchise, that was much more than people thought they would get and that should easily cover any sort of fines that might come up. I think SNC under Mr. Card, they have managed to sort of get their hands around management and straightening out procedures; if anything, they’re going to try to be cleaner than anyone else.

 

I think that’s going to stand them well. I think they gained quite a bit in contracts going forward. On a multiple bases, I think that they do stock up pretty well relative to the competition. We don’t own it currently. We used to own Stantec in this area, but it got two levels where we thought that most of the gains have been already discounted into the stock. We don’t own that one any longer, but SNC is certainly one that I would look at today.

 

Mark Bunting:          The company — with earnings today are raising their profit target after the AltaLink sale which you talked about and Robert Card, whom you alluded to, the CEO, saying that they’re going to look hard to find the next AltaLink project. So, they sold one, they’re going to look for another one. Let’s take a break here and we’ll get back to your questions after this.

 

 

Mark Bunting:          We’ll get back to questions in just a second. A breaking news here on Apple, multiple reports here, including the Financial Times saying that the company is close to buying Beats, the headphone company that the rapper and producer, Dr. Dre, is behind. $3.2 billion would be the price tag. Interesting deal for Apple, not usually the kind of deal that it would make, but using that gigantic cash pile to buy Beats, it looks like $3.2 billion.

 

Back to Canadian Large Caps, we have Anne in Edmonton kicking off a bunch of questions here on Energy. Go ahead, Anne.

 

Anne:                     Good evening, gentlemen. Thanks for taking my call. I would like an opinion on Penn West, is there a whole sell or a look for a better stock. Thanks for your good service.

 

Mark Bunting:          Okay. Thanks, Anne!

 

Michael Sprung:        Well, I’ll admit I own Penn West, personally. I think it is a bit of a turnaround story, although it is a little higher risk than we might own in client portfolios in general. In their latest quarter, they really were showing higher capital efficiency, they’re under budget in a lot of areas, drilling cycle-times and the Cardium and Viking areas were improving.

 

The big risk with Penn West is their balance sheet and the debt. I think that if they continue to take the steps that they have been taking lately, they can get through this period and hopefully, again, it is a little bit higher risk but hopefully, you will see a fairly good return.

 

In the meantime, you’re being paid 5.6% on their dividend which that would be in jeopardy if their balance sheet got anymore in trouble, but they’ve already cut that distribution earlier. If you look at it in a portfolio context and this is what I always try to tell people, “If it’s not so big in your portfolio that it’s really going to hurt and you can afford to take a little bit of risk here, then this one is one that you could invest in.”

 

Mark Bunting:          Would you say that they’re potentially here, if they get it right, this stock could really do well because it’s still under $10, it used to be a $38-stock back in the day.

 

00:15:11

 

Michael Sprung:        Well, I don’t know if I’ll ever see $38. Certainly, if they really get it right and they really started to get this company going again, $20 wouldn’t be out of the question.

 

Mark Bunting:          Okay, another Energy question here from Mark. He is in Vaughan, Ontario. Good evening, Mark.

 

Mark:                     Good evening, how are you?

 

Mark Bunting:          Very well.

 

Mark:                     Today, Whitecap and Crescent Point came out with earnings and the questions on Crescent Point, of course — basically, production is up, numbers were up, net earnings were up and the stock pullback. Is this the selling news and would you use the weakness in the stock to be picking it up at this price?

 

Michael Sprung:        Well, Crescent Point’s over $43, it’s almost $44 I think. At these levels, I don’t think I’d be jumping in right here. If it were under $40, I would certainly be taking a close look at it. We own it in a lot of accounts but we have owned it for a long time and have quite a good capital gain in it. In the meantime, it still pays that $2.76 a year.

 

That used to be very, very dependent upon their dividend reinvestment plan. It’s not nearly as dependent upon that anymore and they are very good operators and they’re very good acquirers. My opinion would be — I don’t think it’s a sell here, but I wouldn’t be jumping in to buy it right now.

 

There are earnings today. As you said, they beat people’s estimates of production, but I think that’s always somewhat suspicious because they always beat people’s estimates of production. So, you wonder if maybe they’re under estimating production to some extent ahead of time. I think that’s something you got to watch for.

 

On a cash flow basis, I think they came in just about where people were expecting them to come in. As I say, it is one of the better managed companies in the oil patch. If you’re holding it for the dividend, that’s fine. In terms of great capital gain from here, I’ve seen some analyst estimates of $50. That’s possible but I wouldn’t expect to see it in the short-term.

 

Mark Bunting:          A better entry points, 40, 41 maybe?

 

Michael Sprung:        Forty would be good.

 

Mark Bunting:          Forty, yeah. All right! Daryl is in Burnaby, B.C. Hello, sir.

 

Daryl:                     Hi! How are you doing?

 

Mark Bunting:          Very well, how’s it going?

 

Daryl:                     Yeah, ShawCor. I bought it a few months ago. I was away last week and over the weekend, I came back and it was up 11% and I was quite happy, but I couldn’t figure out quite why — it looks like they have a good first quarter and then it stopped. They had about, I think, 5% or something. Yeah, just thoughts on the stock itself of where it might be going.

 

Mark Bunting:          Okay. Thanks, Daryl.

 

Michael Sprung:        Well, I think with ShawCor in particular, stocks tend to go up in sort of lumpy chunks here and there. With ShawCor, activity in the oil patch is picking up, activity in pipelines and so on. ShawCor is going to benefit from all that activity. They’re one of the major players in it, in providing services to the oil and gas companies. I think that from the point of view, that might explain why it shut up as it did. However, on a valuation basis, it’s discounting quite a good future in the short-term here. If I owned it, I think I would hold on to it, but I wouldn’t be surprised if there was a bit of a lull in the Energy stocks to see it pull back.

 

Mark Bunting:          What do you prefer in the oilfield services sector?

 

Michael Sprung:        Well, we own Precision Drilling and we think that they’re very good. Some of the drilling companies, I think, are well-placed to participate.

 

Mark Bunting:          All right. We have another caller here. This is from Terry. He is in Sault Ste. Marie. Go ahead, Terry.

 

Terry:                    Yeah, good evening! I love your show.

 

Mark Bunting:          Thank you.

 

Terry:                    I was just wondering about Tourmaline Oil. Now, they came out with their first quarter and here, they’re down $3 today. Maybe you can tell me a little bit more what’s going on.

 

Michael Sprung:        Well, it was the natural gas liquid’s pricings that pulled them down. They got lower prices on that and people were expecting, which lowered the cash flow. Production was pretty much in line with what people were looking at. Tourmaline is a very, very well-run company and I would say a pullback like this could almost be looked at as an opportunity. It’s one that we’ve certainly been following for some period of time and just because they miss on a quarter due to lower pricing on NGL’s, that’s not a reason to really bail on the stock.

 

00:20:17

 

Mark Bunting:          Do you love the management like everybody else seems to?

 

Michael Sprung:        They are very good management, they are. Yes.

 

Mark Bunting:          Okay, Michael, a short pause here. We’ll get to your “Past Picks” right after this break.

 

(Break)

 

Mark Bunting:          Let’s have a look at the “Past Picks” here of Michael Sprung, the president of Sprung Investment Management. April 26th of 2013, you recommended Barrick Gold. This one is flat but it’s been a rocky road as we know since then. There’s lots of news. What do you think of Barrick now?

 

Michael Sprung:        Well, here’s a stock that a year or so ago, they talked about they’re going to concentrate on capital discipline and so on and so forth. And then, their changing of the old card with Peter Munk retiring and Brian Mulroney and some of the old members of the board retiring, and bringing a new fellow from Goldman Sachs. And then, you get close to the annual meeting and they talk about, “Hey, let’s merge with Newmont Mining and we’ll get a billion dollars worth of synergy.” And you just sort of say to yourself, “No. Concentrate on the efficiencies, capital discipline, spending money on your good projects — would’ve got shorter term profitability in line. Don’t look at the Pascua-Lama’s and so on, and so forth.”

 

I think that given that the Newmont deal at least has been put off for now, I think that the stock should go up again. It should accelerate because certainly on a multiple bases relative to all of the other gold, this is still good earnings, cash flow producer. And so, I think that right now, it is undervalued and that’s why we were continuing to hold on to it. Let’s face it. The fellow now in charge is an investment banker. It wouldn’t be surprising to see them looking for deals.

 

Mark Bunting:          Right. Although, you could argue that Don Lindsay is a former investment banker over Teck and since the Fording deal, he really hasn’t done anything in that area.

 

00:24:56

 

Michael Sprung:        Yes. I mean, that was a huge deal and it came along just at a bad time, but they have managed to more than pull out of that. Their balance sheet is much better than it was and I think that they learned a lesson there. Again, I was on a few weeks ago when the Barrick-Newmont calls were coming in. I said, if there’s going to be a merger of this sort, it’s nice to see it happening when the stocks are somewhat depressed, when that industry, gold prices are down. What you hate to see is when the prices are really running and everybody says, “Oh, we’re getting lots of money. We better go buy so and so.”   They’re buying with very expensive currency and that’s usually not a formula for success.

 

Mark Bunting:          Next stop as a past pick is Scotiabank. You mentioned you held this among the three of the big banks. Is this primarily because of the international exposure?

 

Michael Sprung:        I would say it’s primarily because of all of the banks, Scotiabank has traditionally always had the best credit discipline. If you will look at their credit record and their provisions for credit losses over the years, this has always been an extremely disciplined bank and I think it’s a very smart bank, too. They are international. Diversification will pay off in the long run. I think under Brian Porter — we saw today the deal with Canadian Tire. That’s a smart move.

 

Mark Bunting:          Maybe we’ll talk more about that a little later on at the bottom of the hour. We’re running out of time here. A quick thought on Encana?

 

Michael Sprung:        Encana we like — Encana continues to surprise people almost daily lately. First of all, there is the sale off of Prairie Sky and then the next thing you know, they are buying a $3.1 billion worth of assets in the Eagle Ford. These are very smart operators. They are still primarily gas but they are diversified more into oil and liquids.

 

Michael Sprung:        So, “Past Picks” from Michael: Encana, Scotiabank and Barrick. He is still holding them all. Just after this break, we will allow Michael to talk a little bit more about Scotia and maybe Encana as well and we will come back with your questions, too. Stay tuned.

 

(Break)

 

Mark Bunting:          Join us tomorrow on Market Call. We’ll have David Baskin on the show, the president at Baskin Financial. He will be taking your questions on North American Large Caps.

 

Back to the phone calls in just a second but we got a little shortchanged on time there. Probably my fault asking a follow-up on Barrick, but give us 30 seconds each on Encana and Scotia, a little bit more information about your past picks.

 

Michael Sprung:        Sure. Well, as I was saying, with respect to Encana, here is a company that was 85% gas and they talked about a year or two ago of diversifying more into oil and liquids. I think that this purchase will take them very quickly to maybe 25% liquids. The thing about the property in the Eagle Ford though is they’re paying $3.2 billion for something that on that price looks like it should be accrued(ph) of, but it’s a very short life asset. That’s asset of a three to five-year reserve life and it’s going to be very tight to really make that work but it should be incremental within that asset value of the company.

 

Mark Bunting:          And then, give us your thoughts on the Scotia-Canadian Tire deal.

 

Michael Sprung:        Again, as I said, I think this is a very smart deal. They are taking 20% of the financial services aspect of the Canadian Tire card receivables. They are providing credit backstops for the company. But Scotia now, some time ago that they were going to increase their credit card business and this was a very smart way of doing it. I think that they are sort of expanding their footprint. People won’t necessarily identify that right away that it’s Bank of Nova Scotia but maybe someday, they will be buying more of it in as time goes on and running up more efficiently. I think this is a very smart thing to do.

 

Mark Bunting:          Okay. Johnson, thanks for holding on the line in Toronto. Go ahead with your question.

 

Johnson:                 I’ve waited half an hour to get through.

 

Mark Bunting:          You’ve waited for half an hour. Wow!

 

Johnson:                 Is it worth it?

 

Mark Bunting:          But in the meantime you’ve been enjoying the show, right?

 

Johnson:                 I always watch it.

 

Mark Bunting:          Go ahead.

 

Johnson:                 Hello, what is your opinion on Potash? Is it a fair value or is it an overvalued stock or is it in the declining stock?

 

00:29:58

 

Michael Sprung:        Well, I wouldn’t say it’s in the declining stock but I’d say that certainly potash and fertilizers have had their troubles this year whether they have been phosphates, nitrates or potash. We prefer Agrium because it’s a little bit more balanced. It’s not sort of involved in just one’s part of the commodity cycle but it’s also involved in the retail aspect as well. I think on a multiple bases too, potash still looks a little expensive to us at these levels.

 

I think given the problems that they have been having in sort of the fertilizer agriculture markets right now and with the — particularly with respect to potash which has had more competition against Canpotex with Belarusian and some of the other, I guess, buying group or selling groups. It’s becoming much more competitive and let’s face it, Chinese are very, very smart buyers.

 

00:31:00

 

The one thing about potash is it’s not that hard to get it out of the ground but it’s a very heavy material to ship to wherever you have to get it shipped to.

 

Mark Bunting:          Next stop is an email from James on Thomson-Reuters. Is this a good time to sell? It seems to be ranged bound. Let me follow up with a question about Barclays cutting a 7,000 people or a third of their investment banking business. That’s the bread and butter to a degree of Thomson-Reuters. I don’t know if Barclays is a client or whether they’re with Bloomberg, but that kind of news can’t help?

 

Michael Sprung:        Well, I would assume that Barclays — they might be primarily a Bloomberg client, but they’re probably also buying services from Thomson-Reuters. I think most of these large investments and banks around the world do subscribe to Thomson-Reuters in one fashion or another.

 

Thomson has always been very smart. I mean they own a big chunk of the legal business as well through Westlaw and they’ve managed to diversify their sort of professional information services to a great extent. But they took a big bet on this revamp of the provision of factors in the financial services. They used to be primarily news and quotes and they’ve tried to upscale into a Bloomberg competitor. That has not gone as smoothly as it had originally been hoped and we’ve seen changes in this CEO of Thomson-Reuters since and the changes on the board.

 

Let’s face it, this stock has now gone from — it was lingering in the $20’s for quite a while and now it’s up around $38, I think. I think it’s getting to the point where we own it and we’re sort of wondering, “Okay, where are we going to sell it from here probably,” because I think it’s come up a fair amount in the last year or so and it’s beginning to reflect full value.

 

Mark Bunting:          All right, Michael, a short break here and we’ll get back to questions on Canadian Large Caps.

 

(Break)

 

Mark Bunting:          In Fredericton, here is Lewis. Hello?

 

Lewis:                    Good evening, sir. May I please have your guest’s opinion on ATCO? Thank you!

 

Michael Sprung:        ATCO is a very interesting company. We did own some about two years ago and sold it at that point in time and then saw it drift down. And since then, it’s going up and I think it’s probably even past where we sold it at, but you know as activity particularly, out west(ph) picks up, that’s going to be good for ATCO.

 

They service a lot of industries, not just oil and gas and forestry and so on, but this is a stock that I think the Southern family has run very well over the years. It always looks a little bit expensive but for people that have held onto it for a long period of time; they’ve tended to do very well.

 

00:35:04

 

Just on a valuation basis though, I would not be jumping in today but that’s where I sit on it anyway.

 

Mark Bunting:          Okay, Audrey is next in Mississauga, Ontario. Hi, Audrey!

 

Audrey:                  Hi, thank you for taking my call.

 

Mark Bunting:          You’re welcome.

 

Audrey:                  I hold a TransCanada Pipes in my TSSA, at a cost base of $32.50. It’s one of about six that I have but I want to add to it, but at what price should I jump in when it’s what it is today?

 

Mark Bunting:          Thanks Audrey.

 

Michael Sprung:        Yeah, well you know if you’ve owned it since $32.50 and we’re over $50 now, and the yield on TransCanada is about 3.8% at current levels. I don’t think TransCanada as dependent or hopeful about the KXL Pipeline as they would have been four or five years ago, but if that does come through, that will certainly be good for the stock and then that it would probably have a balance from there. It is a company that it continually adds to it and improves their base of assets and they are the primary pipeline facility through Canada.

 

I think that at current levels, so I look at the multiples, it’s selling at roughly 20 times, 20 times current years expected earnings. That’s fairly expensive and I would be probably looking elsewhere. It’s on a cash flow basis, yes, and the dividend is likely to keep going up but I prefer one or two other stocks in that sector.

 

Mark Bunting:          Which ones?

 

Michael Sprung:        Well, Inter Pipeline would be one.

 

Mark Bunting:          Okay, hold your thoughts. Let me just ask an email about that company because that’s next up. Habib – is it a buy at this price? Is the dividend safe? Is this overvalued here, do you think?

 

Michael Sprung:        Well again, on the multiple bases, it looks somewhat similar but the thing about Inter Pipeline is they always seem to have a lot of projects. They’re getting better results in the oil sands and in their NGL projects right now. They’ve had some interesting possibilities with the expansions in Cold Lake and so on. I think that Inter Pipeline is going to have a continually expanding rate base from here and I think the dividend is safe here.

 

Mark Bunting:          Okay, so that’s Inter Pipe hitting an all-time high today up by 17 cents to $30.37. Here is Richard. He is in Welland. Go ahead, Richard.

 

Richard:                  Thank you very much for taking my call. I would very much appreciate your outlook on Painted Pony. Would it be a buy, sell or hold? Thank you very much.

 

Michael Sprung:        Painted Pony is one that we don’t own and I haven’t followed too closely, but I do know some things about it and I have admired the progress that they’ve made over the last few years. I mean they’ve expanded their production and considerably, they’d seemed to be very efficient operators and very, very good buyers of assets.

 

It’s certainly one that we’re constantly looking at and it’s one that we could certainly be buying in the near future. I think that it’s one of the up-and-coming companies in the oil patch and I would be certainly looking at it today.

 

Mark Bunting:          It’s often said it has a nice parcel of land in Montney, in BC and it could be a Take-out Candidate. Do you see it as that as well?

 

Michael Sprung:        Oh, I think it could be, yes. But buying a stock on the basis that it might be Take-out Candidate is always a little chance.

 

Mark Bunting:          No, not the only reason, but one of the reasons.

 

Michael Sprung:        But one of the reasons.

 

Mark Bunting:          Yeah.

 

Michael Sprung:        But I mean the reason it would be is because it is a very good company, very good assets and people are looking for good assets these days.

 

Mark Bunting:          Let’s take a pause here and we’d get back to questions on Canadian Large Caps after this.

 

 

Mark Bunting:          Let’s head out to Truro, Nova Scotia for David. Good evening, sir.

 

David:                    Thank you again for taking my call. I have a question for your guest on Linamar. I recently sold some. We had a real good gain on it and then, I still had some more and I had an awesome pop today. I just didn’t know what your fumes were to let it cool off and look at, picking up a little more or just stay with what I got and let it run? I’ll hang up and listen, thank you.

 

Mark Bunting:          All right thanks, David.

 

Michael Sprung:        Well, I’ll say upfront, I own a stock personally but I’ve owned it for a long time. My cost base on this stock is negligible. I’ve always admired how well this company is run.

 

 

What they have done recently, which I think really caused the pop today is when the earnings came out today, people looked at the margins and they were way above the normal level of margins for Linamar and that’s because they are going into products that take a lot more capital expenditures to build and therefore, they have to build in a lot more margins to make that up over the lifecycle of the project. Going forward, I think they are going to do more of that and so, what we’re seeing is a company transforming itself from a relatively low margin company into sort of a medium to medium margin company, I guess.

 

It’s a new ballgame and that’s why the stock is as high as it is but I take your point, we saw a big jump today. The stock has gone pretty much up and up and up for the last while on a multiple bases. It better keep growing earnings at the rate it is in order to justify the valuation.

 

On the other side today, we saw Magna with earnings that were known as robust. I think right now, we are in a fairly strong automotive cycle. Certainly, Linamar services more than just the automotive industry. I think that it’s such a well-run company that if I owned it, well I do own it, I will hold onto it.

 

Mark Bunting:          Let’s just stay out of this for Mike who is in Dartmouth. Go ahead, Mike. Hi Mike, what’s your question?

 

Mike:                      Yes, thank you, Mark! Sorry. Michael, my question is in reference to CN Rail. Certainly, it’s a very strong company with strong market capitalizations. I wonder how/what Michael feels with the progress will be for the company going to 12 months out. I appreciate your call. Thank you for calling. Goodbye.

 

Michael Sprung:        Well, you know, I’m a little mystified by the valuations on the railroads these days. When we see the railroads trading at sort of 20 times earnings and significant multiples of cash flow, I think we’re seeing that more in CP and yet CN has always been sort of the benchmark railroad in North America.

 

On a relative valuation basis, if I was buying one of them today, I would certainly be buying CN. But in the long run, you know, railroads can’t really grow any more than the economies in which they participate and yes, occasionally, you get bumps from all of a sudden in a commodity like oil, less pipeline capacity, therefore, more rail capacity. I think the regulators are going to step in and that’s going to slow down as they have to upgrade the cars that the oil is shipped in and so on.

 

As the North American economy improves, I think CN overall stands to benefit a little bit more than CP. Therefore, on that basis, I think that I would be willing to buy CN today just on the participation in the overall economic recovery.

 

Mark Bunting:          Across the country, in Vancouver, here is Pam. Hello, there!

 

Pam:                      Yeah, hi there.

 

Michael Sprung:        Hi, Pam!

 

Pam:                      Yes, my question is on Kinross. I purchased it about two years ago and it has been going down and down. I was wondering when it’s going to pick up. Yeah, that’s my question.

 

Mark Bunting:          All right, thanks Pam.

 

Michael Sprung:        Well, a couple of years ago, they bought a mine, Tasiast, and it has been quite controversial but just lately, things have been improving in that mine. Certainly, the feasibility studies of building it out further have been getting better and the last feasibility study that just recently came out so that it’s possible for it to earn 17% rate of return on investment, I guess, going forward from here. That’s based on a lot of assumptions of scores and it doesn’t necessarily hold up. But just the latest quarter, they had which I think was — was it today?

 

 

Mark Bunting:          Yesterday. I saw it.

 

Michael Sprung:        Oh, yesterday. They did have better operating cost. They were getting higher grades at some of their mines. I guess within the gold sector as I mentioned earlier, we own some Goldcorp and we own some Barrick, and we would prefer those relative to Kinross ourselves. Another thing holding Kinross back right now is it does have some exposure to Russia and that’s sort of, I think, influenced investors and has held it back quite a bit.

 

Mark Bunting:          Still with “Resources”, Bruce is in Edmonton. Hi, Bruce!

 

Bruce:                    Hi, Mark! Thanks for taking my call. My question is on chemical. On the last couple of weeks, they have been trending downwards at a pretty good clip but they have been talking about with the Cigar Lake coming on line and demand in Japan and everything. I’m just kind of wondering what you feel the turning point would be on the chemical and do you feel it’s a buy? I’ll hang up and listen, thank you very much.

 

Male:                      All right, thank you, Bruce.

 

Michael Sprung:        Well, you know, it certainly has drifted down over the last while. I mean, it was well over 28 not too long ago and now we’re seeing it at about 21.5. I’ve always had trouble with uranium because it’s not just a supply-demand metal; it’s also a political metal. I’ve never been that successful myself in guessing where the uranium cycle is going to go and people talk about the increasing demand. A few years ago, Japan was going to get out of nuclear, now they’re going to get back into it.

 

We just saw it recently, wherein in Ontario, they decided not to go ahead and expand some nuclear facilities or refurbish them. Even at today’s price, I just would be weary of it. I think that they certainly — lately, the spot prices have been weighing on the stock and the sector in general, but for uranium place, I’d almost rather find small companies or bodies that are likely to be takeovers in a way than look at just a big chemical.

 

Mark Bunting:          Right. So maybe like a Denison?

 

Michael Sprung:        Yeah. Maybe like a Denison or something like that.

 

Mark Bunting:          All right, we have “Top Picks” coming up from Michael Sprung and he’s got some interesting ones here that you might not expect and we’ll look at those after this.

 

 

Mark Bunting:          It is time for “Past Picks” with Michael Sprung, the President of Sprung Investment Management. Here is a new pick up for Mr. Sprung and his clients: Alaris Royalty Corp. He bought this just a few weeks ago at $26.73. You said you’ve been watching this for a while, why did you finally pull the trigger?

 

Michael Sprung:        Well, for a long time, it just kept running ahead and ahead and ahead of where I felt comfortable buying it. Recently, we’ve seen it sell off. Now, it sold off for a couple of reasons. One of them was they’re having a dispute with CRA right now, so they’ve put up a deposit on that. I think they have more than enough.   This is going to take a while to sort it out and in the meantime, I think they’ll have more than enough cash flow to cover whatever liability might be there.

 

They own a host of diversified investments. They invest in private companies but they do so in a very unique fashion and that they tend to invest by issuing preferred shares to those companies that under certain circumstances, the cash flow to Alaris keeps increasing and if they failed to meet certain benchmarks, then that can convert into equity at some point.

 

Mark Bunting:          I see.

 

Michael Sprung:        But they tend to look at companies that have got at least 10-year track records of solid management. Typically, they might be largely family-centered owned companies to some extent but they all tend to have very, very good positions in the industries.

 

00:50:04

 

As time goes on, they are diversifying more and more of the industries that they’re in, so they’ve got selection of industrials from rebar to other and healthcare from mental health to other healthcare providers, physiotherapy and so on, and even into retail. Right now, their biggest investment is about 17% of their cash flow but that will be probably reduced down to 10 very shortly.

 

Mark Bunting:          Cascades is a top pick as well, Michael. You bought this most recently in February at $4.43

 

Michael Sprung:        Yes. You know, Cascades, I think is a company that a few years ago, people were very concerned about the balance sheet and so on. I think they’ve taken a lot of steps to address that. Their earnings today were a bit light on just lower tissue shipments and prices in tissue, but their packaging products as the economy is expanding are doing quite well. We’re seeing them do better in boxboard, in containerboard and so on. We’ve seen them invest in facilities, plant, and equipment over the last few years.

 

I think to a great extent, they are addressing concerns about the balance sheets. It’s not pristine yet by any means, but it’s certainly getting better, slipped a little bit in the latest core. But overall, we think that Cascades has pulled back a little bit recently. It’s at a level where we’d feel comfortable buying it again because we can see a fairly significant capital appreciation potential.

 

Mark Bunting:          And George Weston is a top pick as well. You’ve got about three seconds here.

 

Michael Sprung:        Weston is one that we’ve owned for some time, too. I guess our main thesis there is, they will continue to participate with the things that Loblaws is doing. Loblaws has been very smart at expanding into ethnic food areas. They bought T&T with primarily Chinese food shops a few years ago. They just recently bought some Middle Eastern ones. There’s a lot of cross-fertilization they can have between the products there but they had to spin out of their choice properties.

 

The bakery division right now is suffering a little bit with input cost and so on, but I think they are addressing that by investing a gain in plant and operations.

 

Mark Bunting:          All right, very good. George Weston, Cascade and Alaris Royalty were the top picks this evening. Michael Sprung — good to see you, Michael!

 

Michael Sprung:        Good to see you, thank you.

 

Mark Bunting:          Okay. Michael Sprung, thanks to him. Thanks to you for all your questions. We have tomorrow night on Seasonal Investing & Technical Analysis. Get your questions ready for them and we’ll see you at that time. Take care.

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