Please Critique My 2018 RRSP Investments

Please Critique My 2018 RRSP Investments

Have you kids made your RRSP contributions yet? Don’t sweat it, you’ve got hours left until you miss the deadline.

God, you people and your procrastinating make me sick. I got my contribution in more than a week before the deadline. There’s no need to say it; I am a better person than you are.

I used to be very patient when putting money to work, waiting for an outrageously good opportunity to pile into some obscure value stock. While I still follow such a strategy in my TFSA, I’ve started to take a different approach in my other accounts. I’m looking for high quality businesses trading at half decent prices. Yes, kids, I’ve turned into one of those guys.

In fact, as you’ll see, not only do my new investments pay a dividend, but they also have a history of consistently upping their payouts over the years. That sound you just heard? It was Dividend Growth Investor getting a bit of a chubb.

Let’s not delay any longer. Here’s what I bought with my latest RRSP contribution.

The Keg (18.2%)

I touched on the logic behind buying The Keg Royalty Fund (TSX:KEG.UN) when revisiting my Pizza Pizza shares.

There’s a lot to like about the restaurant royalty business. The cash comes directly off the top line, which insulates it from a lot of the challenges that keep down operators. The bad news about this arrangement is it stymies hardcore dividend growth since there’s virtually no operating leverage. If a restaurant can grow sales by 5% while keeping costs the same, it has a huge impact to the bottom line. A royalty trust would see profits go up by about 5%. Big whoop.

I chose The Keg over some of its competitors for one important reason. Cara Operations just announced it would be acquiring the restaurant operations. Cara, which owns brands like Swiss Chalet, Harvey’s, New York Fries, and many others, is a hell of an operator. It’s capable of taking The Keg to the next level, which will likely include further expansion into the United States.

In the meantime, I’m paid 6.3% to wait. If same store sales go up 2% a year and the company expands operations by 2% a year, I’m looking at a 10%+ return over time. I think 2% expansion is a pretty achievable goal, since the company only has 106 locations today.

Essentially, I’m buying a 6% yield that I believe has the ability to grow slightly above inflation for a long time. I expect capital appreciation to be somewhat minimal, although keep in mind that shares are up 53% in the last decade.

BCE (45.1%)

I think Canada’s so-called Big 3 telecoms are pretty much like legalized crack dealers. Have you seen how often the average person checks their phone? It’s bananas.

While I do prefer Telus over BCE (TSX:BCE)(NYSE:BCE) because the former is a pure-play telecom, there’s a lot to like about BCE too. It boasts nearly 14 million customers between its wireless, internet, and television divisions. Management continues to grow the company by making smart acquisitions, including picking up a former member of my borrow to invest portfolio, Manitoba Telecom. And thanks to a recent sell-off, shares are down nearly 10%. This has boosted the yield to a succulent 5.4%.

BCE isn’t necessarily cheap, but companies like it never really enter value territory. It did approximately $3.5 billion in free cash flow in 2017, putting shares at just over 14 times that metric. Or, if you’re a traditional P/E guy, shares trade at about 17 times earnings. Again, not really cheap, but hardly expensive.

Canadian Utilities (33.5%)

Fun fact: Canadian Utilities (TSX:CU) shares are down approximately 13% over the last five years despite:

  • Increasing revenue from $3.0 billion in 2012 to $4 billion in 2017
  • Investing nearly $9 billion in capital expenditures from 2013 to 2017
  • Hiking the dividend nearly 40%

Of course, it’s not all sunshine and blowjobs for Canada’s second-largest utility. 2017’s results were weighed down by a charge associated with one of the company’s big new growth projects. But normalized earnings were $2.23 per share, putting the company at just 15 times earnings.

Free cash flow was even better. CU generated $1.3 billion in cash from operations. It spent $1.2 billion on capital expenditures, but the vast majority of those expenses were for growth projects. I estimate true free cash flow (which would be cash from operations minus maintenance capex) to be approximately $1 billion. Shares today have a current market cap of $9.1 billion.

Oh, and shares yield 4.7% today. They haven’t yielded this much since Nortel was very much a thing.

Let’s wrap this up

There you have it, kids. These are the three stocks I bought with this year’s RRSP contribution. All are expected to be core holdings for a long period of time. As dividends accumulate in my account I’ll put those back to work. It’s all pretty simple.

Let me know what you think of these buys. Am I a genius? A maroon? Or something in between? The comment section awaits. I might even respond.

New Position: Hibbett Sports

New Position: Hibbett Sports

Somebody prepare the fainting couch. Nelson is about to do two blogs in a month. MY STARS.

Shitty retailers are pretty much my kryptonite. I just can’t help myself. They continue to be the cheapest stocks out there today. If the market’s outlook can only improve slightly from “this thing’s going to zero,” then I”m in business. Sometimes this works (I’ve made money on Hudson’s Bay twice now), and other times the investment turns into Reitmans, which continues to languish under my purchase price despite reporting pretty good numbers.

After selling Dream Office REIT and Cloud Peak Energy for nice gains, I found myself with a 39% cash position in my TFSA. That is way the hell too much, even if you think the market is long overdue for a correction. So I put a bit of it to work.

The stock

I went ahead and took a relatively small position in Hibbett Sports (NASDAQ:HIBB). It’s about 5% of my TFSA at this point, and my cost is $13.90 per share.

Canadian investors should think of Hibbett as a mini version of Sport Chek. It operates more than 1,000 stores in small and medium-sized communities across the United States. They call themselves a “sports-inspired fashion retailer,” which basically means they sell a lot of shoes, athletic wear, and so on. The average store size is about 5,000 square feet.

The stock has really gotten hammered of late. Shares peaked at just over $45 each in November, 2016. A few quarters of disappointing results later, the stock currently sits under $14.

While earnings have taken a hit, the company is still solidly profitable. Hibbett earned $2.02 per share in earnings over the last year, despite posting a loss in its most recent quarter. Free cash flow was even better; its been just over $49 million in the last 12 months. The company has less than 21 million shares outstanding.

The balance sheet is a fortress. Hibbett has no debt and a cash hoard of nearly $53 million. This gives it an EV/EBITDA ratio of just 2.5. You won’t find many stocks cheaper than that. Shares also trade comfortably under book value.

Management are doing exactly what they’re supposed to be doing when shares are this depressed. The company continues to buy back its own shares (shares outstanding went from 22.03 million to 20.75 million in the last year) while insiders buy with more gusto than a horny 1860s teen waiting for the latest copy of Chicks Showing Their Ankles from the Pony Express. FINALLY, A PONY EXPRESS JOKE ON FINANCIAL UPROAR.

Insiders have bought more than 25,000 shares at between $10 and $13.

That’s really about it. This isn’t a very complex story. It’s just an obscenely cheap stock that just needs to go from insanely cheap back to merely cheap and I’ll make a decent return. Hibbett will likely get punted from the portfolio if it gains 25 to 50%. It just isn’t the kind of stock you want to own over a decade or two.

Tender Your Shares: A How-To Guide For Canadian Investors

Tender Your Shares: A How-To Guide For Canadian Investors

Back in that magical year of 2016, I revealed to y’all that Dream Office REIT was, the largest holding in my TFSA. It alone made up approximately 31% of all assets in my special tax-free fund, or about an 8% total weighting in my portfolio.

I liked Dream because it was stuffed with what I thought was undervalued assets. When the shares dipped below $15 and net asset value was close to $30, I backed up the proverbial truck. NAV was subsequently wrote down to $22, which I thought was a little aggressive. I figured the trust’s true NAV was closer to $25.

Management has been busy in the last year and a half. They ended up selling much of the company’s portfolio, raising a tonne of cash in the process. The proceeds will be used to pay down debt, purchase other assets, and, most importantly for the purposes of this blog post, the company will do a big share buyback.

The rules of this share buyback are relatively simple. Dream has offered to buy 24.444444 million shares from current shareholders for $440 million. It will pay anywhere from $18 to $21 a share. What investors who are interested in selling have to do is tell their broker they’d like to tender their shares to Dream’s offer.

Here’s how you do that.

 The Tender Process

I’m not even sure why I’m writing this blog post, to be honest. Tendering your shares is really easy.

First of all, any company who is going through the tender process will send you the full offer. Spend a little time and read it, but most of the important information will be on the very first page. It’ll tell you the price offered, the total number of shares that’ll be purchased, and so on.

Most tenders are pretty straightforward. The company offers to buy x number of shares for y price. Y is often a range, like with Dream, but it can also be a single amount. If too many shareholders say yes to the offer, then you’ll only sell a pro-rated amount. If it’s a range of values and the company buys the whole allotment at a level below your asking price, you’ll get nothing.

Odd Lot Tenders

One thing of note are odd-lot tenders. If you own an odd number of shares (anything not in equal increments of 100), then you’ll often get first dibs. A provision will be put in the offer saying that all odd-lot tenders will be filled first.

In certain situations, this is an easy way to make some guaranteed money. A couple of years ago, a company called Tier REIT did a tender offer. Shares were trading at $17.50 each. The offer was between $19 and $21 per share, with the guarantee odd-lot tenders would be processed first. So I did what any rational person would do — I bought 99 shares in both my accounts, tendered at $19, and pocketed the guaranteed $300.

The Dream Office tender also guarantees all odd-lot purchases will be filled first. The problem is setting your price. Shares trade hands at $19.40 as I type this. It’s likely people aren’t going to tender for anything under $19.50. But still, where do you set your price? Do you go for the full $21 and maximize your profit? Or do you take the conservative route and go for $20? Or even $19.75? Is such a trade even worth it for $50?

Why am I Tendering?

It’s pretty simple, really. The strategy is to lock in $21 per share today and then buy back at $19.50 or so. I may also decide to move on from Dream, since the dividend going forward is only going to be $1 a share annually. Remember, it was $2.25 annually a couple of years ago. $2.25 was too high, and $1 is probably too low.

$21 will also be a nice ~50% gain on my investment, not including the dividend. I’ve done well on it.

How to Tender

I can only speak of how to tender your shares using Questrade and Qtrade, the two brokers I use. Although the process is likely very similar with every other broker.

Questrade has a really easy system. First you go to My Questrade, and then click on requests. Then you hit corporate actions and fill out the form. Mine looks like this:

tender screen

That’s some high quality account number removin!

It’s a tad bit more difficult if you’re doing this using QTrade. You have to physically call in and talk to someone. I can attest that at least once I’ve talked to someone who had no idea the tender offer existed, which is hella annoying. It’s usually a pretty painless process though.

And that’s it. You’re done. The tender process is easy.

How I Made a 93% Return in 2 Days (Plus Other Portfolio Updates)

How I Made a 93% Return in 2 Days (Plus Other Portfolio Updates)

That’s not even clickbait, either. I really did that well.

Let me take you kids back to a special time in my life, last week. Ah, last week. What a time to be alive. We weren’t at war with North Korea and the UTTER HORROR of the Fyre Festival was yet to be upon us.

And your BOY Nelly was buying himself a stock.

That stock was Canam Group Inc. (TSX:CAM), which might be in the most boring business in the history of the world. The company is the largest fabricator of steel components in North America. These steel structures are then used in buildings, stadiums, bridges, and so on.

Canam has also historically been in the stadium roof business. If you know a stadium with a retractable roof, chances are Canam was involved in it. The roof business isn’t as steady as the steel structures business, since these roofs are complex. In 2011, Canam posted big losses because the new roof for Vancouver’s B.C. Place ended up costing much more than anticipated. The same thing happened in 2016 with some unnamed roof project that was probably the new Atlanta Falcons stadium. So management officially announced they are getting out of the stadium business.

Canam shares ended up reaching a low of $3.19 in late 2011 before recovering to more than $15 in 2014. A similar decline just happened, shares fell from a peak of $15 to below $6 before recovering a bit.

There was more to like about Canam, too. Earnings came in at $1.08 per share in 2015, $0.70 in 2014 and $0.74 in 2013. The company was clearly capable of posting decent earnings when things went right. Shares also traded approximately 50% lower than their stated book value. And I was paid a decent dividend of around 2.5% to wait.

So I jumped in on Tuesday and bought shares at $6.30 each. I set a target price of between $13 and $14, expecting the stock to trade at that level in 2-3 years.

It didn’t take nearly that long. On Thursday morning I woke up to news the founding family (along with a private equity firm) were taking the company private with a bid of $12.30 per share. Shares immediately opened at $12.15 each, and I sold into the strength. I got $12.17 each for my shares.

That translates into a 93.2% return in just two days. If we want to get frisky (or if I just want to brag), that works out to a 17,009% return annualized. Hot diggity daffodils!

And it was in my TFSA account, so that bad boy was all tax free. Now I just need to figure out where to put my new cash. I’m thinking all on red, baby!

Other stocks I bought

I won’t spend too much time on these, mostly because I have other crap to do. What? Video games count.

The first stock I bought was Yellow Media (TSX:Y). Yes, I’m well aware the Yellow Pages are no longer a thing. Approximately 70% of the company’s revenue in 2017 will be from its digital business, which is growing well and has plenty of potential for consolidation.

Free cash flow in 2016 was $97 million. Shares have a current market cap of $207 million. That puts shares at just a little over 2x free cash flow. Yellow Media might really be the cheapest stock in Canada.

Debt is a bit of a concern, with approximately $400 million outstanding. There are about $300 million worth of secured notes with a 9.25% interest rate that mature on Nov 30th, 2018. If free cash flow doesn’t fall off a cliff, I think $150 million of additional debt could be paid off by the maturity date. They also have the right to refinance starting May 31st.

I paid $7.95 each for my Yellow Media shares, so I’m down a little today. My target price is $18.

The other stock I picked up in the last month was Canaccord Genuity (TSX:CF). Now that I think about it, it’s a lot like Canam. Canaccord has a decent niche in the investment banking world, as well as an active wealth management business. Investment banking in Canada was the shits in 2016, but has recovered somewhat this year.

Canaccord also has a mountain of cash on its balance sheet and only a tiny bit of debt. Shares were just a little above tangible book value when I bought (I paid $4.83) and the company had posted earnings of $0.39 per share as recently as 2014. Management also bought back shares when the price was low.

Canaccord shares get crushed every time the capital markets part of the business falls into the toilet. It happened in 2008, 2011-12, and 2014-15. Each time Canaccord shares either doubled or tripled off their lows in a couple of years. I’m hoping to do the same. My target price is $12.

Investing in the Canadian Mortgage Market: Home Capital vs. First National

Investing in the Canadian Mortgage Market: Home Capital vs. First National

Joel writes in with an interesting question.

I’ve noticed you’re not a fan of Home Capital Group (TSX:HCG) and from your comments it makes sense to me. On  the other hand though, you’ve written about First National Financial (TSX:FN) and their juicy yield. Any reason why you like FN over HCG?

Good question Joel. Unlike all those other questions I get, which are pure dog crap.

Who are you?

What are you doing here?

Why are you taking off your pants?


First National and Home Capital have a lot in common. They both heavily securitize their mortgages, which means they package them together and sell them to investors. The difference is one packages up (mostly) CMHC insured loans, while the other packages up some CMHC-backed loans and some non-CMHC loans.

Home Capital has just under $26 billion worth of loans outstanding. Here’s how they break down:

home capital insured vs. uninsured

Now the way the mortgage market works is Home Capital has traditionally been able to buy bulk mortgage insurance on at least some of its uninsured loans (I explained more about the bulk insurance practice here). But certainly not all of these loans are protected by insurance. There’s also close to $1 billion in credit card loans, lines of credit, and “other consumer retail loans.”

In other words, I’m not a huge fan of the portfolio. There’s too much crap I think gets impaired in a big way when the Toronto housing bubble pops.

Compare that to First National. This is from March, 2016 but is still accurate. Note the last line:

first national

About 80% of First National’s mortgages are backed by a mortgage default insurer. The next 15% are conventional mortgages with more than 20% down. These aren’t much of a risk because First National has focused on AAA customers. That leaves us with just 5% of the portfolio in multi-unit, commercial loans or bridge financing.

Basically, I like First National’s portfolio much more than Home Capital’s. First National deals with prime borrowers. Home Capital doesn’t.

The mortgage servicing business

Both Home Capital and First National heavily securitize their mortgages. The loan is sold off to whoever while the company gets paid to service it. The servicing business is fantastic.

In 2016, First National did $1.05 billion in revenue and made $196 million after tax. This gives it post-tax margins of just under 20%. That is a succulent business.

First National also makes a little money when it sells the loans to investors and also makes money doing bridge loans.

Growth in the broker market

I also like First National as a way to play growth in the mortgage broker market.

The internet has democratized the mortgage process. All it takes is four seconds on Google to see if you’ve gotten a good rate or not. People with good credit will insist on getting the lowest rates possible.

This is good for the mortgage broker market. They’re done a decent job marketing themselves as the low rate leaders. First National is one of the biggest mortgage broker lenders with consistently low rates. It’ll benefit as this trend continues.

The dividend

I think First National is a somewhat decent value stock, although I don’t own any myself. It trades at less than 9x trailing earnings; it’s obvious the market thinks earnings go down next year, most likely thanks to the new mortgage rules making it tougher to qualify.

Even if earnings do fall, I still think the dividend is relatively safe. The annual payout is $1.95 per share while the company made $3.28 in 2016. That represents a 7% yield.

Disclosure: No position in any stock listed and no plans to buy, either.