BNN Market Call Tonight December 11, 2013
Here is the complete transcript of Mark Bunting interviewing Michael Sprung on BNN Market Call Tonight
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Mark Bunting: Tonight on Market Call we have Michael Sprung, President of Sprung Investment Management, he is taking your questions on Canadian Large Caps.
Michael Sprung on BNN Market Call Tonight with Mark Bunting
Hello and welcome to Market Call Tonight, I’m Mark Bunting, we have Michael Sprung as mentioned, thanks for joining us, the topic is Canadian Large Caps. Here are the ways to get in contact with us, you’ll probably know, but in case you don’t we’ll show you here, the email address, you’ve got the toll free number that you can use or tweet us at Market Call if you prefer. Mr. Sprung, good to see you.
Michael Sprung: Good to be back, thanks very much!
Mark Bunting: So a fair-sized deal after hours of a company or involving a company that you own, Fortis Inc (TSE:FTS), buying UNH, UNS or UNH?
Michael Sprung: UNS Energy Corp (NYSE:UNS)
Mark Bunting: UNS out of Arizona has over $4 billion including debt. Is it a good move?
Michael Sprung: Well I’ve only had the chance to scratch the surface on it, but on the surface it does look pretty good, it’s a real game-changer for Fortis. Here we have a 6.5 billion market cap company taking on a 4.3 billion acquisition, that includes 1.8 in debt.
Now they say that it’s a creed of from year one, and from everything I’ve been able to see it looks like UNS Energy is a very profitable company, it’s in a good area, there seems to be good fundamentals for growth in that area, they’ve managed to grow their net income fairly steadily. I think that the largest utility they operate has allowable ROE around 10% and that’s based on about 43% equity in that part of the utility, and all of them seem to line up about that along those sort of metrics.
Mark Bunting: So the state allows a certain amount of return on equity?
Michael Sprung: That’s correct. Now they only operate in Arizona so they are one state utility but they have several divisions in that state. They service about 650,000 customers.
Mark Bunting: All right. So Fortis makes this move because they’ve run out of growth opportunities here or what do you think?
Michael Sprung: Well, this is a very substantial growth opportunity. Once this acquisition is done I think about 35% of Fortis’ business will now be in the U.S. So this is a really big deal but this is very much along the lines of the utilities that they are used to operating. This is largely electricity and natural gas distribution and things like that. So I think not knowing too much about UNS Energy at this point in time, but certainly from what I’ve seen so far I’m pretty impressed.
Mark Bunting: All right, Michael, let’s broaden it out to the markets here, what do you see before the end of 2013, but more importantly into 2014 are the building blocks still in place for continuation of this rally?
Michael Sprung: I think this rally has gone ahead very quickly particularly in the U.S., I think. There the market perhaps is a little bit ahead of fundamentals. So it could be subject to some sort of shock whether we end up with some more political infighting in the U.S. although they did have somewhat of a budget settlement announced yesterday and that sort of alleviates some of those concerns, but still there is going to be the fear of the markets of what’s going to happen.
If the economy is as strong as the market would indicate there then certainly they will begin tapering at some point next year and the market seems to live in fear of that liquidity moving out of the market. So there is that that could happen. There is also always the possibility of some geopolitical event perhaps in the Middle East upsetting the apple cart.
So I wouldn’t be surprised to see some sort of a correction, but the good news is that overall the economy, the business economy does appear to be getting stronger, and I think the good news for Canada in all that is, that it is global economies begin to expand again, the demand for commodities will come back. I think that going into 2014 it could be a much better year for Canada relative to the U.S. than 2013 has been, certainly we lacked quite a bit.
Mark Bunting: Yeah, for sure, so you think it’s a time may be for Canada to actually outperform.
Michael Sprung: Yes, I think it could well be.
Mark Bunting: Or at least match the rest of the global markets.
Michael Sprung: I think there is a bit of catch up to be played there. Let’s face it, our financials have done wonderful this year but the energy and the material stocks have certainly held back quite a bit.
Mark Bunting: Okay, Michael, we’ll take a short pause and we’ll get straight to the questions after that on Canadian Large Caps, stay tuned.
Mark Bunting: We have an email to start here, this is from Dee, it’s on Sherritt International Corporation (TSE:S), do you own the stock, what would be a good entry point for a new investor and let me tag on a third question, do you even want to be a new investor in this company, it’s been an ugly stock for a couple of years, where are the catalysts?
Michael Sprung: There is some share in some accounts that came in while primarily with those accounts. We have not really bought share broadly for our accounts, we’ve been focusing on other players in the mining sector, and the main reason being that, Ambatovy, which is their big project, that’s almost a make it or break it project for them, and so far we’ve seen a bit of cost escalations there and delays and so on.
Certainly on a price basis share it looks very, very cheap and it is somewhat attractive from just a price point of view, I mean it’s selling at a fraction of book value at this point in time, but it’s hard to say how solid that book value really is.
So I think that there is other more diversified place I would rather be in, in the materials segment, but for someone who wants, if it’s more of an aggressive posture that you are taking, if you are really looking for some leverage you certainly have found Ambatovy gets going in production in the next couple of years, a share could do extremely well.
Mark Bunting: This is the Madagascar mine?
Michael Sprung: Yes, it is.
Mark Bunting: I thought they are in the early stages of production now or —
Michael Sprung: Well, yeah, I think they are just beginning to ramp it up now. So I think by — oh when is it? Sometime in second half of 2014 may be we’ll see — we’ll have a better feel for how well that’s going.
Mark Bunting: Okay, and one of your topics and ideas in material of players so you can stick around for that, Dee Jackson, Niagara Falls. Dee has the next question, go ahead Jack.
Dee Jackson: How are you doing tonight both?
Michael Sprung: Great!
Mark Bunting: Very well, how are you?
Dee Jackson: Just fine, thank you! Best of the season to you guys.
Michael Sprung: You too, thank you!
Mark Bunting: You too!
Dee Jackson: I have a portfolio that is a dividend-producing portfolio and we’ve been having some difficulty lately with dividends being cut in half, especially in the energy sector. We’re looking at just energy and our primary concern there is the sustainability of the dividend.
Michael Sprung: Yes, you raised a good point, their payout certainly has been an access of a 100%, and so that’s not sustainable. Now a lot of analysts are projecting that next year, in fact the payout should drop to below a 100% and over the next few years some analysts project the payout going down to as low as 65%, that’s still fairly a high level. I would be a little bit concerned about it, I mean, their last few quarters have not been great, there has been some churn in customers and so on. But in that sector I would probably want to look at Enercare Inc. (TSE:ECI) I think as an alternative.
Now you are not going to get an 11% yields that you have on just energy, but you do get a pretty good deal and I think that things seem to be working out fairly well, for Enercare currently, particularly with the installation of those smart meters that they’ve been doing. Anyway that would be my take on it.
Mark Bunting: Enercare Inc. has a yield of 7%, do you hold that one?
Michael Sprung: We have a little bit of it, but we’ve been looking at adding more.
Mark Bunting: Okay, so you prefer that one. If you look at Enercare, it’s certainly a nicer looking chart and as you said a more sustainable dividend in payout ratio. Ross is in Woodbridge with the next question, go ahead Ross.
Ross: Hi gentlemen! My question is on Goldcorp Inc. (TSE:G) I recently bought quite a bit of it, only because I feel that there is a world deflation coming along and all these are drawing money into the problem and I think they are going to hopefully solve that but they are going to end up with hyperinflation, and I think that’s only good for gold, plus the gold stock that gets so hard. I think there is more less risk downturn. So I think your rewards will be greater. I’ll hang up and listen to your call. Thank you!
Mark Bunting: Okay, thanks, Ross! So that’s been a bold argument for a long time, inflation, and if not hyperinflation because of all the money printing.
Michael Sprung: Yes, actually in times of inflation there is not necessarily a correlation that gold does very well at that particular point in time. As you recall leading up to about 1980-1981 we had a real run on gold, but then after that we had considerably more inflation but gold really went in the other direction.
So it’s not just a function of that one. I look for a mining company, particularly a gold mining company. We do have a position in Goldcorp. As a matter of fact it’s our primary position in that area and the reason we like GoldCore is because we think that it’s such a well-run company, it’s a fairly lower cost producer and it’s got a fairly good production profile going forward.
Now you could argue that Barrick may be have a little bit more leverage on the price of gold but with Goldcorp I think you’ve got a well-managed diversified base of mines that they operate and of much better balance sheet, and so we like GoldCore, we own it, but as I say, we try to limit our exposure to gold to 5% or less of the portfolio.
Mark Bunting: I saw something today and it’s not the first time that we’ve come across something like this but that gold stocks are trading at the cheapest levels compared to the price of gold in something like 30 years. So is it almost like a possibly a generational play, is it just a matter of when the gold stocks take off or it just doesn’t work that way?
Michael Sprung: Certainly they have lacked severely the price of the Boolean, but there is a lot of reason for that and most of the reason have to do with the cost escalations that we’ve seen in getting these mines off the ground, just recently with Barrick stopping development at Pascua-Lama, that originally was projected to cost $4 billion and it was now costing $8 billion to develop that mine, and who knows if it will really ever be developed given its remote location and so on.
So you’ve got the cost escalations and so the margins despite the fact that the price of gold arguably it’s down from its peak but it has done fairly well in the last number of years but still there has been some margin pressure on the mining cover themselves.
Mark Bunting: Right, another reason for the press gold stocks is the escalation or the — well, so many ETFs are out, especially the GLD Peter Munk even mentioned that, he was influential in bringing in the GLD back in whenever that was ’04, but he didn’t realize that so much money would flow into that and out of gold stocks.
Michael Sprung: That’s right, there was some cannibalization there away from the people owning the actual stocks. But I think that again, any mining company pretty much, you can look at it over a cycle and you can argue whether or not it really owns its cost of capital but you do tend to see companies going from very depressed prices to very good prices, and if you’re very smart about buying it when people don’t really want them, and I think that’s largely the case today with gold stocks, chances are over the next cycle you are going to make some money on them.
Mark Bunting: Okay, Michael, a short pause here, we’ll get back to questions on Canadian Large Caps after this.
Mark Bunting: — that tie, very festive, what’s the history of that tie, how long have you owned that?
Michael Sprung: Well I have had this tie for a few years.
Mark Bunting: Oh yes?
Michael Sprung: Yes. We’ve got candy canes, we’ve got REITs, Snowman —
Mark Bunting: It’s a nice seasonal touch.
Michael Sprung: Absolutely, we have gone a lot.
Mark Bunting: We appreciate it. All right so Clayton is in Terrace, BC, he has got the next question, go ahead Clayton.
Clayton: Hello! Thank you in advance for any advice you can give me. I currently own Bonavista Energy Corp (TSE:BNP) and I am certainly not unhappy with it, but analysts seem to prefer Enerplus Corp (TSE:ERF), I am wondering if now is a good time to switch from Bonavista to Enerplus especially since Bonavista has done I believe better in the last few weeks than Enerplus, now a good time to switch or should I stay with? I will hang up and listen. Thank you!
Mark Bunting: Thanks Clayton!
Michael Sprung: I agree Bonavista has done relatively better, but it has always been such a well-run company. So I would hesitate to run out of Bonavista into Enerplus or into another stock, if you’ve got exposure in this sector. It’s still paying a pretty decent dividend yield a little over 6% and being primarily a natural gas producer, I think it’s held back a bit, it’s about 80% natural gas, so it has been penalized to some extent there, but again as I say they have very good properties that’s extremely well-managed, their balance sheet is fairly good, and it pays a fairly good yield, so I would hold onto it, if I owned it.
Mark Bunting: And do you hold it for clients?
Michael Sprung: No, we don’t.
Mark Bunting: What about Enerplus?
Michael Sprung: No, we don’t.
Mark Bunting: No. Thanks for that Clayton, here’s Roger, he is in Frankfurt, Ontario, go ahead Roger.
Roger: Good day Mark and good day Mike!
Michael Sprung: Good day!
Roger: I bought the stock called Liquor Stores N.A. Ltd (TSE:LIQ) for the dividend and the dividend is right but the share value is dropping, I am just wondering what’s happening, so should I hold or start drinking?
Mark Bunting: Anymore?
Michael Sprung: All right, thanks Roger! It doesn’t hurt to support your company’s loan. I am all in favor of that.
Mark Bunting: You need that kind of empirical knowledge for sure, for a company like this.
Michael Sprung: Yes, I believe in doing research.
Mark Bunting: Yes.
Michael Sprung: But that aside I think that what’s sort of knocked the share price back a bit is, they are same source sales over the last 12 in the U.S. and particular in Canada to some extent has been negative. It’s been offset a little bit by some new bigger box wine stores that they have been trying to open, but then again it’s cannibalized with some of their other stores at the same time.
So I think really it’s been more of a function of just growth and particularly the operations that they have in the U.S. have not really performed up to expectations, and that’s what’s held it back. It’s paying a very generous dividend at this point in time and it’s well over 7% yield. So I am not sure that unless things turn around for them a bit more I am not sure how long that will be sustained.
The projections I have seen for funds available for distribution are not quite at that level at this point in time but that could turn around fairly quickly.
Mark Bunting: I don’t know a lot about Liquor Stores, the company per se, but it was seen like a no-brainer, I don’t know how the people seem to go there, not daily but at least weekly, and I don’t quite understand why they can’t make a goal, a better goal of it, with something that people buy all the time.
Michael Sprung: They are largely in Alberta and they do have a very good distribution of stores and so on, and I think it’s just a matter of time really until things work out better for them. But right now it’s being questionable and the trends have not been paused over the last little while.
Mark Bunting: All right we’ll see how Liquor Stores does, thanks for that call. Here is Joe, he is in Parry Sound. Hi Joe!
Joe: Good afternoon sir! Gentlemen, I have been watching West Fraser Timber Co. Ltd. (TSE:WFT) for the last couple of months and I am kind of interested in it. I see it had a range between $85 and $99. Now what do you think of this corporation? Do you think this is a good entry point or should I wait until it’s around $90 again? I’ll just hang up and hear what your answer is.
Mark Bunting: Okay, thanks very much, Joe. West Fraser announcing at 2 for 1 stock split.
Michael Sprung: Yes, we don’t currently own it, we have some exposure through Western Forest Products to Timber but not through West Fraser Timber. I think that we are in a very positive Timber cycle right now, particularly with the U.S. housing beginning to pick up a bit, and these cycles tend to go for years, they don’t tend to be that short-lived. So I think that if you are looking at an entry level into West Fraser, yes, you could wait for a pullback, but I think that over the next few years Timber stocks in general are going to do very well.
Mark Bunting: Interesting how they did this. They are declaring a stock dividend of one share per each share issued. So it has the effect of a two for one, why would they do it that way?
Michael Sprung: I don’t really know what the rationale would have been to come to that conclusion, but certainly it sounds like an easy way to do it, just dividend out another share.
Mark Bunting: Just sort of mildly unusual I guess.
Michael Sprung: The interest is see how that share is valued for tax purposes.
Mark Bunting: I wouldn’t be able to call that up just now but I know that —
Michael Sprung: I guess it will be done at the price of the data record or something.
Mark Bunting: Payable on January 13, 2014 to shareholders of record on December 23rd of this year.
Michael Sprung: There you go.
Mark Bunting: And just quickly here, do you hold any of the lumber players or housing related kind of stocks like that?
Michael Sprung: Western Forest Products.
Mark Bunting: Western Forest Products, all right.
Michael Sprung: Yes, WEF.
Mark Bunting: We will come right back and take a look at the past picks of Michael Sprung.
Mark Bunting: Let’s have a look at the past picks now of Michael Sprung, President of Sprung Investment Management. December 21st of 2012 you recommended these three, we’ll start with Manulife Financial Corp. (TSE:MFC) A great call here, you clearly saw value and you’ve been rewarded as have your clients of 50%.
Michael Sprung: Yes, and we continue to own it and I still see value in this stock. I think that right now, the life goes in particular in a cycle where they are really going forward. But there is going to be more operating efficiency in these companies, they are very, very cost-conscious now, and in addition to that I think you are going to get some operating leverage as the volume of business continues to expand, and let’s face it.
If interest rates start to rise that’s generally good for life companies and the same with positive stock markets. So right now I think they’ve got the wind behind them and we own Manulife, we own Sun Life, those are primary to exposures in this area, but we continue to like both of them.
Mark Bunting: All right, and you’ve got to be happy with that return for sure. Talisman Energy Inc. (TSE:TLM) is a choice or was a choice last year, in December, down by 22%, we know Mr. Ichan is in there agitating for some change of some sort, where are you now with this company?
Michael Sprung: We still like it. I think that this is a case where certainly the parts are worth more than the whole to some extent and I think management has been divesting of a lot of assets, they’ve reached their goal of divesting of about $3 billion worth of assets so far and I think the prices they’ve been getting for those assets has been pretty good overall. So I think people should be happy with that, they just recently sold the exposure to a pipeline in South America the other day, they got nearly $600 billion for it, which was at the top of some analysts’ range, some analysts had higher expectations than that.
But I think overall the new management team in there is very, very focused on capital allocation and going two projects with more immediate returns than the former management was really attempting to do.
Mark Bunting: What’s your average cost here approximately, do you know for clients?
Michael Sprung: Oh, it’s certainly a little north of where it is today. I would guess our average cost is probably around $16, but I could be wrong on that.
Mark Bunting: Okay then, and how HudBay Minerals Inc. (TSE:HBM), you’ll be talking more about later on, on the show, but this was a past picks up by over 12%?
Michael Sprung: Yes, I think again, as we were saying earlier, the materials have certainly not really performed well this year largely because of commodity prices, but I think HudBay in particular has been making great strides in getting its book in order and they’ve got some big development projects coming up that we’ll be talking about and they seem to continually be making efforts to make sure that the financing is in place for that.
Mark Bunting: All right, Michael, HudBay Minerals, Talisman Energy, Manulife Financial, you still own all three of them in your fund and Manulife personally, as you may have seen on the disclosure boards.
We’ll take a short break here, we’ll come back and lots of questions on the other side for Michael on Canadian Large Caps.
Mark Bunting: Moving along to Oakville and Salim, who has a question, good evening!
Salim: Good evening! Great show Mark!
Mark Bunting: Thank you!
Salim: The caliber of your guests is topnotch; I really, really enjoy the show.
Mark Bunting: Great, thanks!
Salim: My question is about Magna International Inc. (TSE:MG), this has been falling relentlessly, over the last few weeks, but what is the future for it given that the auto companies are doing very well, and will this highly cover in the coming months?
Mark Bunting: Okay, I’ll take slight issue where there is a characterization of how the stock is doing relentlessly, I am just going to look at the percentage drop, but you can tell us what do you think about Magna, it has such an amazing run.
Michael Sprung: Yes, it has.
Mark Bunting: It’s dropped, it was brought to 8% since then, since the top.
Michael Sprung: If it was to drop a little bit more, I’d be seriously looking at it because I think the auto cycle is continuos to be in a recovery phase, I think Magna is extremely well-positioned to take advantage of that, and as the chart shows it’s done wonderfully over the last couple of years, but I think that that cycle remains in place and we are seeing the U.S. consumer beginning to have a little bit more disposable income now, their balance sheets in a little bit better order than Canadian consumers generally speaking.
And with sort of more stability in the European economies I think that the car companies and the parts makers will continue to do well. So I would be seriously looking at a company like Magna or Linamar for that matter on any good correction here another 10% or 15% when I think I’d be really seriously looking at it.
Mark Bunting: Right, almost amazingly it’s still only trading at 12 times next year’s earnings, so what would be the key metrics that you would look at to jump in?
Michael Sprung: 12 times next year’s earnings but again those earnings can be pretty elusive. I started looking at it over a normalized earning cycle what are you paying for, and I suspect that today going forward it’s a little bit more than that, but as I was saying before the pricing is getting fairly compelling, and Magna does have a very good balance sheet as well. So you don’t have to worry about the leverage like you did years ago.
Mark Bunting: So sub $80 would interest you?
Michael Sprung: Oh yeah, very much.
Mark Bunting: All right, trading at almost 83 right now. Next, I have John in Bridgewater in Nova Scotia. Hi John!
John: Hello! When the tapering does take place, what will the effect be on Canadian stocks and U.S. stocks, and what will be the immediate effect and what will be the delayed effect?
Michael Sprung: I think we have seen in the past year or so, just the thread of tapering coming into place has caused the markets to really take a hiccup, and it’s tended to be fairly short-lived when they say, oh well, we are not going ahead and really start tapering right-away we didn’t mean to employ that, but I really believe that the markets will take a hit when the tapering begins to phase in.
I think they will not begin to taper though until they are fairly convinced that the economic recovery is strong enough to exist on its own merits without this liquidity being put into the market.
So I think it’s good news/bad news sort of thing, I think if anything it should probably present a little bit of a buying opportunity when that happens because I believe that if the economy is really improving to that extent then the effects of the tapering going away will largely be mitigated by improvements in earnings and so on.
The only downside of that is that I do believe at that point in time you are going to see interest rates begin to ratchet up, so I would not want to be in the long end to the bond market.
Mark Bunting: Just for anybody who is sitting at home and maybe is a new investor, wondering what the heck tapering is and who they are and —
Michael Sprung: Sure! Well, basically the Federal Reserve buying their bonds in the open market at creating liquidity for their paper in the market, so they are buying at a rate of about $85 billion per month right now, and they are talking about how are they going to ease out of that program, and let the market really run itself like it should.
Mark Bunting: Right. Okay, and a little added bonus there, little one-on-one on tapering as it’s called, let’s move along to another break and we’ll come back with more questions after this.
Mark Bunting: Saskatchewan we have Dennis on the line. Hi Dennis!
Dennis: How are you?
Mark Bunting: Very, well. How are you?
Dennis: Good! Stay in warm, it’s chilly.
Mark Bunting: I can imagine.
Dennis: I have an interest in WESTSHORE TERMINALS INVESTMENT CORP (TSE:WTE) and I’ve noticed lately they’ve been bouncing all over the map. I was wondering if your guest had any insight to it. I’ll hang up and listen. Thank you!
Michael Sprung: That’s a very good question and the only insight I can say is, their last quarter, there was a slight miss and that was because shipments were really quite a bit lower than people had anticipated they would be. But that’s something that can always be made up the next quarter and so on, and the demand for coal really seems to be coming back to a great extent as China continues to really burn a lot of that.
But overall the only problem I have with Westshore is I find it a very expensive stock at this point in time. On a multiple basis it really looks like it’s trading at a pretty significant multiple to cash flow and so on. So for that reason we haven’t really seriously looked at buying at these levels anyway. But they are the primary shipper of coal from the west coast and they did have some problems with some of their birth, but a lot of that has been corrected over the last year or so.
So I think efficiency wise, they are operating very well. You just have to wait until those shipments start going out again.
Mark Bunting: The stock broke, it’s 20-day moving average for today and it’s sitting right sort of just above, it’s 50-day average. So here is Elton, he is in Winkler, Manitoba. Hi Elton!
Elton: Hi! My interest is in Canadian Tire Corporation Limited (TSE:CTC) It had a pretty good run, and now I think in the last couple of days it’s down about 5 bucks, what do you think of this going on? I’ll hang up and listen to the answer.
Michael Sprung: A stock like Canadian Tire can be very, very sensitive to how people feel particularly at this time of the year, well what the spending particularly around Christmas time is going to be like, and lately I’ve seen a lot of people saying that overall spending is not going to reach the levels that they thought was possible in Canada, in particular, which could have a lot to do with the fact that a lot of consumers are carrying a lot of debt right now.
The other side of Canadian Tire though is I think that we’re entering a very, very competitive retail landscape and Canadian Tire although they have very good customer loyalty, they have very good store positionings and so on, but I think that more-and-more of their alliance whether it’s Mark Work Wearhouse or the actual Canadian Tire goods themselves, competition in that area is going to be fairly severe over the next couple of years.
So at current prices I don’t think that I would really be looking at entering into Canadian Tire.
Mark Bunting: Okay, just looking at the stock here at peak in ’06 at 134 and just recently a few weeks ago got up to 128 or so, more than a double in the last couple of years, but you are still unclear on that one. Here is Ted in Agassiz BC. Hi Ted!
Ted: Oh, hi! How are you doing, Mark?
Mark Bunting: Very well, thanks! All right, what’s your question?
Michael Sprung: Yes.
Ted: I’m really thinking about – let me put it this way, I am 80 years old, we are heavy into financials, oil, pipelines, things like that, I am looking at Canadian National Railway Company (TSE:CNR). What do you think of senseless split, what’s the chance for growth, and may be an increase with dividend?
Michael Sprung: Well, I think there is a chance for an increase in the dividend with respect to CNR. Their dividend is fairly small relative to their earnings in cash flow at this point in time, so they’ve got lots of room to increase that dividend.
The only problem I have with the Canadian railroads is they’ve done so well, so fast that they are trading now at paying 20 times earnings for a railroad to me seems that’s 20 years worth of earnings that you are paying upfront for and that seems to be fairly aggressive.
In an industry that overall really can’t grow a whole lot more than the GDP of the economy that they sit in, they are a reflection of how well the economy is doing, and I think the fact that the economies have been improving in North America and don’t forget CN is a major North American railroad. I think that has carried the stock up to these levels, but it’s certainly as far as I’m concerned out of my reach. It’s trading at over four times book value now and as I have seen 18-20 times earning.
So I find that quite expensive for what you’re getting is a very modest yield at this point in time. So I would be looking in other areas I think, other industrials to try to participate in their recovery.
Mark Bunting: So you are out of all the rails?
Michael Sprung: Yes.
Mark Bunting: When was the last time you held one?
Michael Sprung: Well, last year we had CP and we bailed on it probably around — I think it was around $90 bailed.
Mark Bunting: And did you kick yourself?
Michael Sprung: I always say you should never feel bad when you make a profit. We made a great profit with CP. So you’re always going to leave a little bit on the table for the next guy otherwise you are going to be caught in the tailspin.
Mark Bunting: So no complaints there. Let’s take another pause here and we’ll get back to questions from Michael after this break.
Mark Bunting: Here’s Dave in Toronto, good evening sir!
Dave: Good evening! Thanks for taking my call!
Mark Bunting: You are welcome!
Dave: I was wondering what you thought about the banks. Recently I sold out in my BMO and CIBC. I am a longer term holder but I can trade in and out. My average cost and BNS is three bucks a share so I can hold things for a while. But recently I sold out of BMO and CIBC. I was wondering if you could tell me at what price points you might consider getting back and again? Thank you very much! Have a nice evening.
Mark Bunting: Thank you Dave!
Michael Sprung: Primarily we own CIBC, Royal Bank and Bank Nova Scotia, those are the three that we own, primarily because with Bank Nova Scotia I like their international diversification, I like their tight, tight credit. Royal Bank I think, they seem to be firing on all cylinders at the moment, there is going to be a change of management occurring, well, actually DNS as well, and TD for that matter.
But I think that Gordon Nixon has done an excellent job fixing the problems that Royal Bank had in the U.S., I think the bank is well-positioned. Overall I think that the banks are things that there is an area that we’re going to continue to hold those stocks for the time-being at various times the pricing of one bank relative to another, you really have to measure it by what business lines they are in as well in terms of determining what sort of multiple you want to put on a particular bank. But I would have no hesitation in buying them, I think we’re going to continue to see dividend growth in the banks over the next few years.
And again, as the economy continues to strengthen we might see a weak period in Canada for a long growth and so on, and if there were any sort of slow down or correction in housing at all, we might see some credit losses occur, but I don’t think that there is anything going to happen that the banks can’t really handle here, and they are well-capitalized. So I wouldn’t be looking to be allowed here and as a matter of fact I think I today would be a buyer of the Royal and the commerce particularly.
Mark Bunting: There you go, Dave, and thanks for that question. Let’s talk to Bruce now, he is in Calgary. Hi Bruce!
Bruce: Good evening there in Toronto, Mark and Michael! I’m calling about Suncor, I have quite a few dividend stocks but Suncor is one I’ve been looking at that might provide some capital growth. I’m just wondering how far do you think it could slide before it would be a good time to buy? Thank you!
Michael Sprung: Well, thank you for the question! Suncor actually is probably our primary holding in the oil and gas area. We own a number of stocks in that area, but Suncor is probably one of the main ones that we own, and I think that you are going to see significant capital appreciation. I think Suncor is involved in — it’s such a well-diversified company.
You’ve got the oil sands, you’ve got the upstream and the downstream operations, you’ve got the retail operations. Overall I think that this company until the last years too it has always sold at a rather unfair discount in my view to a lot of its competitors and I expect to see that discount close even further than it has as time goes forward. So I would be a buyer of Suncor today.
If you are really looking for some significant capital appreciation I might also mention that I would look at Cenovus which we also own.
Mark Bunting: Okay, and next up is Gary, he is in New Westminster, BC. Hi Gary!
Gary: Hi! Good evening! Thanks for taking my call! I own or have Saputo, it was doing quite well, I was very happy probably for a couple of years, a year-and-a-half now and ever since this takeover had been in Australia there, I am getting killed. I keep saying, it’s about this aging market. Everybody tells me they are way overpaying.
I guess my question is should I hold it or should I buy some more, and if they do end up taking this over and get them into Asia, roughly how long would it take to get them in there? Thanks for taking my call and I am waiting to hear your answer!
Mark Bunting: All right, thanks Gary very much! The latest reports today that the takeover’s panel in Australia would force Saputo to raise a bit, a 9.56 per share versus I guess 9 was the offer. And something that was a tax credit passing out to shareholders.
Michael Sprung: Right, I think for the very reason that this bid has gotten so competitive as it has, we wouldn’t be a buyer of Saputo today. I think that we are going to wait and see whether they do buy it or what they do end up paying for it, and then I think from our point of view, just operationally we’re going to wait and see how that integration is done. From a management point of view, how are they going to manage this company in Australia and what are the synergies really going to be between the north American and the Australian.
I can understand from a seasonal and a geographic diversification point of view then wanting to have presence in Asia, but really the price that they are paying for this cheese company just seems very high to me.
Mark Bunting: Okay, lots of demand for you tonight, Michael, we’ve wrapped a bunch of these questions together in the market comments.
Michael Sprung: All right.
Mark Bunting: Now Scott in Grenfell, Saskatchewan had called in about PotashCorp.
Michael Sprung: Yeah, I would not be buying Potash right now, we own Agrium in that sector which is a little bit more diversified and it also has the retail side of it. Potash prices remain under pressure and I think they will be for some time here.
Mark Bunting: Okay, Chris in Toronto, he found in about Pengrowth.
Michael Sprung: Pengrowth seems to have improving fundamentals recently and it’s certainly one that I would look at even entering where it is today. I think that operationally they’ve done some great improvements in that company.
Mark Bunting: Frank in Montreal on the Trinidad Drilling.
Michael Sprung: Trinidad has done extremely well and we own just from evaluation perspective we own precision drilling in that space but certainly Trinidad Drilling has excellent management, they are well-placed.
Mark Bunting: We got a call from Walker in Pitt Meadows, BC on Vermillion Energy.
Michael Sprung: Vermillion again, a very well-managed company, it’s done very well. I’ve always wanted to buy a position in this company but it’s always running a little bit ahead of what I am willing to pay for it.
Mark Bunting: All right, one more, Shirley in London, Ontario, another energy player she called about Crescent Point (CPG).
Michael Sprung: Yes, we own Crescent Point as well, I think a lot of people do. They enjoy that $2.76 distribution. They are getting closer-and-closer to actually having cash flow to cover that, although they have had a significant drop in their DRIP program their Dividend Reinvestment program which was largely supporting that distribution.
So again, we continue to hold it for the time-being.
Mark Bunting: Okay, very good, Michael! We’ll take a pause here, and we’ll come right back with your topics.
Mark Bunting: We have the top picks for you now from Michael Sprung, President of Sprung Investment Management. HudBay Minerals was the past pick, it is also a top pick. You bought this most recently in late October, at 870 or so, so tell us why you like this one so much?
Michael Sprung: We really think that this company is finally getting its hose in order here. They were criticized for taking on this constancy approach in South America because of the large capital cost, but they have done a lot lately to defray the fears of how they are going to finance that, they did a streaming deal with Silver Wheaton which means they get capital upfront today to help them. They have issued some unsecured notes and raised some capital that way and I think next year is going to be a much better year for them.
I suspect that we are going to see REIT come on in the first half of the year, Lalor Lake is on time and on budget. So I think that we have got a few projects that are coming to fruition here that we should finally see some capital appreciation in HudBay Minerals.
Mark Bunting: Next up, Encana, which finally revealed its strategy today, what did you make and what you heard?
Michael Sprung: I think the setback today certainly presents a good buying opportunity in this company. For a long time they are the third largest natural gas producer in north America, but today they announced that they are going to diversify much more into liquids and do so fairly rapidly over the next few years and everybody was criticizing them for being so heavily weighted in natural gas, and now they are addressing that problem.
The other think that they said that I really liked was they talked about living within their means, living within what their cash flow will allow them to spend, maintaining credit rating is a priority for them, and the integrity of the balance sheet, so those are all words that I like to hear.
Mark Bunting: All right. George Weston has been under some pressure again today, but you are recommending this as a top pick, you bought this at 79 just a few days ago, tell us why?
Michael Sprung: Again right now we have a very competitive landscape particularly in Ontario and Loblaws, which Weston owns a large piece of, has felt that pressure as well, but Loblaws is also recovering from a few years of a large capital spending program with respect to distribution and SAP systems and so on. I think we are going to see some efficiencies come out of that. I think that they are the largest in the food distribution business in Canada by far, and so I think that this pullback that we have seen it is a real opportunity, and don’t forget a number of years ago they paid a pretty generous special dividend at one point in time, they have a lot of cash.
Mark Bunting: George Weston Limited, Encana, and HudBay Minerals, top picks tonight of Michael Sprung, it was good to see you, sir.
Michael Sprung: Thank you!
Mark Bunting: Thanks for the festive tie, and have a good holiday!
Michael Sprung: You too!
Mark Bunting: Okay, Michael Sprung, our thanks to him. David Cockfield tomorrow night on Canadian equities, just get your questions ready, and we’ll see you then. Take care!