Long and Short Investment Ideas, with follow up on prior shorts

Here are some new ideas, with information as of October 21, 2011.

Buy Husky Oil (HSE) at about half of its peak price of a little over $50 in mid 2008. Since then, the price has hovered between $25 and $27, sometimes reaching as high as $30 before falling back. Over the last three weeks, the price has fallen to a new low of $21 and jumped back up to $25, a 20% gain. The momentum is impressive, and the fundamentals are sound (P/E of 12, debt-to-equity of 21%). All I worry about is that $21 was the lowest price the stock has reached since 2005.

Buy Metro (MRU.A) near a new high. The all-time high price is $49.15 and the stock now trades at $47.75, not much of a discount. However, the earnings are good because the P/E is only 12; the debt-to-equity ratio is a little more worrisome, but manageable, at 40%. The momentum isn’t great, but it’s positive, which is better than many other stocks.

Sell short Agnico-Eagle (AEM). This is not certain by any means. It already fell 25% over the last week. I haven’t looked at the news. It’s likely to recover all at once, but it’s hard to say whether it would drift up or down.

The last time I shared short sale ideas was October 7th. Here’s how they have fared since. For reference, the TSX has climbed from 11,588.36 to 11,949.49 over the same period.

 Company  Price Oct 7, 2011  Price Oct 21, 2011
 Bombardier (BBD.B)  $3.96  $3.99
 First Quantum (FM)  $15.70  $15.99
 Inmet Mining (IMN)  $49.21  $50.61
 Research in Motion (RIM)  $24.30  $23.00
 Teck Resources (TCK.B)  $33.65  $34.80
 Yellow Media (YLO)  $0.22  $0.26
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Investment Ideas

Imperial Oil (IMO) has turned up. This company has little debt, with a debt/equity ratio of just 7%. With a P/E of 12.7, the shares appear attractively priced. In 2008, the shares peaked just over $60, and they recovered as far as $50 in 2011 before falling back to around $37. The shares have moved a little over $40 and are a good buy if they are headed up to $50 or even $60. This assumes that the price of oil continues to provide profits for the foreseeable future and the economy continues to recover; neither of which are sure bets.

Sun Life (SLF) shows a little less momentum, but enough to make it interesting. From 2009 to 2011, the share price has moved between $25 and $33. It has now moved up over $26.55 and provide a good opportunity for profit if they continue up to $33. Before 2008, they went as high as $55, but the economy has changed since then, and it isn’t reasonable to expect a near-term recovery to that level.

Assuming that the outlook for the economy recovers and brings the stock market with it, each of these investment ideas could produce approximately 25% increase over a relatively short period of time. That assumes, of course, that the investor has cash available and the stomach to commit it at this time.

N.B. “Current” prices as of Oct 14, 2011.

Short sale ideas

Warning: The following does not constitute advice. There are a number of risks inherent to short sales beyond normal stock investing. There are risks to investing in stocks. The market is volatile and could trigger a margin call, forcing an investor to realize a loss that might otherwise turn to a gain in time. The biggest risk is that some of these stocks may simply magnify market performance, and the market could turn positive.

As of September 30, 2011, the following companies appear to present an opportunity to profit by selling their shares short.

Bombardier (BBD.B) – The last three months have been extremely painful for holders of Bombardier shares, which lost 40%, while the market lost only 13%. The shares appear very cheap relative to earnings, so the future price movement will depend on future earnings announcements. If earnings are positive, the shares could recover rapidly (eg. they are up 8% between Sept 30 and Oct 7); if earnings are negative, the low stock price would be justified.

First Quantum Minerals (FM) – First Quantum shares have performed almost exactly the same as Bombardier. However, the current week has been better to First Quantum, which has risen 16%. This may be an example of a high beta stock, which will produce strong positive returns as the market turns positive, especially since it’s a commodity producer.

Inmet Mining (IMN) – Inmet has been slightly less volatile, falling only 30% in the last three months, including the recovery of 12% in the current week. Inmet shares are extremely inexpensive relative to their earnings, which makes this a dangerous stock to sell short; bargain hunters may begin to buy it up.

Research in Motion (RIM) – This company has gone from a darling to a dog of the market. The share price has fallen 55% in the last six months, compared to -18% for the market. It appears that investors have lost faith in the company’s ability to innovate and compete. RIM appears cheap, all right, but no one expects those earnings to last.

Teck Resources (TCK.B) – The shares of Teck rose from under $4.00 in early 2009 to over $60 in January 2011. Since then, the share price has dropped back to $33, where there seems to be a lot of support.

Yellow Media (YLO) – This is a company I’ve never felt comfortable with. I think I just hated that they would dump their dead-tree directory on my front porch and expect me to haul it off to recycling. They’ve also made some serious M&A missteps recently. Which probably explains why the price is going toward zero. The distribution has been stopped, so it’s now easier to sell short, but there’s not much room to go down from $0.22.

After putting forward all those ideas, I realize why short selling goes against my nature. My experience is as a value investor, so when stocks are going down, I’m thinking: “This is a bargain”, rather than “This is going to go further.” So it’s an interesting exercise to try and see it from both sides.

Large cap investment ideas

Here is another look at TSX 60 companies (as of September 16, 2011) to find companies that are reasonably priced, but also present a good probably for price appreciation.

CIBC (CM) does not appear expensive, with a P/E of 11.4. That’s lower than Royal Bank and TD Bank, but the same as BMO and ScotiaBank. CIBC’s debt to equity ratio of 0.37 is highest among the big five banks, but price action is also the best. Perhaps investors were worried about debt levels, but now the price is “catching up”? The price is 3.6% higher than a month ago, compared to between -3% and -10% for the other banks. All the bank shares are lower over 3 and 6 months, but CM has performed the best. CIBC is the only one with positive performance over the last year, although it’s had disappointing performance, hence my catching up theory.

Canadian Tire (CTC.A) has a P/E of 9.9, which is relatively cheap. It’s currently among the 10 cheapest stocks (by that measure) in the TSX 60. The debt to equity ratio isn’t impressive, but at 0.57 it isn’t unreasonable either. The price action is positive, rising 6.3% over the last month. The 3 and 6 month numbers aren’t positive, like the rest of the market. But beating the market by 8.7% over the last month, to me, indicates potential for continued appreciation.

Gildan Activewear (GIL) is a little more expensive than the prior two entries, with a P/E of 12.9, but its debt to equity ratio is just 0.21, making this company appear well balanced between price and risk. It’s 5% cheaper than a year ago, and it’s 12% lower than just three months ago. That may not prove that it’s a bargain, but the share price has moved up 10% over the last month, while the market has fallen another 2.5%. This implies that money is moving into Gildan, and it may be possible to profit by getting in front of that demand.

Inmet Mining (IMN) is the most impressive looking of this group. With a P/E of 8.4, almost no debt (1% of equity) and a price that’s 4% higher than a month ago, outperforming the market. There aren’t many stocks right now that have positive price movement, so it makes sense to look among these for investment ideas.

Yamana (YRI) instead of Kinross (K)

These are two large cap gold producers. They have similarities and differences. The title gives away the conclusion to a simple review of these two stocks: Yamana appears to offer more potential than Kinross (as of September 9, 2011). Here is the comparison.

Kinross

Kinross has low long-term debt, at only 3% debt to equity, which puts it among the strongest balance sheets of the TSX 60. Earnings are positive and produce a P/E of 18.6, which is reasonable, but falls within the bottom 1/3 of the TSX 60. The price momentum of these shares is positive, coming in 8th of the TSX 60. The price has risen 18% over the last three months.

Yamana

Yamana also has low long-term debt, at 6% debt to equity; this is not as strong as Kinross, but is still 9th best among the TSX 60. Earnings are positive and the P/E is currently 20.4, a little higher than Kinross. In both cases, the low debt offsets the relatively high price. The high price is also a result of the positive price momentum. Momentum for Yamana is 5th of the components of the TSX 60, having risen 50% over the past three months.

Although Yamana is marginally more expensive (P/E) than Kinross, it also has far better price momentum. It is clearly the current favourite, and with money flowing into Yamana, an investor would be wise to join in and ride the wave while it lasts.

Different investment ideas

Here are a couple large-cap stocks that look promising at the moment (September 3, 2011). As usual, this is only an idea, for the reader to research further and produce their own opinion. It is not advice.

Agrium (AGU) is a global producer and marketer of agricultural products. With a P/E ratio of just 12.8 and debt to equity ratio of 36%, the shares appear cheap and the company seems stable. The share price has risen 13% over the past year, compared to the market at just 4%. Due to the economic difficulties that have persisted over the last three years, food products are seen as a defensive investment.

Iamgold (IMG) is engaged primarily in the exploration for, and the development and production of, mineral resource properties throughout the world. Shares in this company have a low P/E of 9.9 and the corporation has no long-term debt. The share price has risen almost 8% over the past year. With high gold prices, this company should be profitable, especially while gold is used as a defensive investment.

Shoppers Drug Mart (SC) is the licensor of full-service retail drug stores Shoppers Drug Mart and, in Quebec, Pharmaprix. The P/E is currently 14.6 and the corporation has a low debt to equity ratio of 16%. Over the last year, the share price has risen just over 8.5%. Again, this can probably be considered a consumer staple, preferable during times of economic uncertainty.

Tim Hortons (THI) is a quick service restaurant chain in North America. The Company’s offerings includes premium coffee, flavored cappuccinos, specialty teas, home-style soups, fresh sandwiches, wraps, hot breakfast sandwiches and fresh baked goods, including its trademark donuts. The shares seem to be bargain priced at a P/E of just 12.8. The company has a debt to equity ratio of 38%. The price performance is impressive, returning 21% over the past year, far in excess of the 4% market return. I don’t understand it, personally, but Timmy’s seems to always be busy, whether the economy is booming or busting.

These ideas represent companies whose share price has outperformed the market recently, but which also appear to be reasonably-priced and where the balance sheet is not over leveraged. They should produce relatively good performance over the next few months, but as always the responsibility remains with the investor to perform due diligence and monitoring.

Coast Wholesale Appliances CWA

The Facts (as of July 27, 2011)

Share price: $2.85. Book value per share: $8.66. Market cap: $28.6 million (small). Distribution: $0.035 per month or $0.42 per year. Current yield: 14.7 P/E: 6.5. Debt/equity ratio:0.18. Payout ratio 72%.

The Story

Coast Wholesale Appliances Inc. (Coast) is a leading independent supplier of major household appliances based in Vancouver, BC. Coast sells to developers and builders of multi- family and single-family housing, designers and retail customers across Western Canada and in the Greater Toronto Area of Southern Ontario.

Coast Wholesale has taken a real beating in the market. Their recent earnings report wasn’t very good, but it wasn’t as bad as might have been expected, given the economic environment. Some of it was due to seasonality, which will be reversed over the next two earnings reports.

Pros

The level of debt is very reasonable and the company normally enjoys positive free cash flow (except this quarter, due to a one-time cost). They appear to have good management and they have expanded into the GTA, which should give them opportunity to expand their market. There have recently been some small purchases by insiders around $4.50.

Cons

The prior CEO appears to have been fired, although the company is now being run by one of the founders, who was CEO for 20 years. The severance cost the company $805,000, but that was a one-time cost. The fortunes of this company are tied to the housing market which, in Canada, is still not out of the woods.

Impression

I own these units, and I have decided to buy more. Unfortunately, I put my order in at $2.75 just before the stock dropped to $2.20. I believe that the extreme volatility is at least partly due to the thin trading volume. The current yield is very generous and I expect results to be better, if not for Q2, then for Q3 in about four months time.