Posted by Andrew Bell on August 24, 2009

Investors are buying into the starchy, white appeal of K-Bro Linen Income Fund, bidding the units up to a 52-week high of $12.80 today.

Cormark analyst Aleem Israel says K-Bro, Canada’s largest provider of laundry and linen service, offers "78% of revenue under long-term contracts, a strong management team and a robust balance sheet."

Aleem calls the units a buy, with a $14 target. "We believe that K-Bro is attractively positioned to continue capturing market share and capitalizing on robust population growth in Western Canada," he said in an Aug. 10 report. 

National Bank’s Trevor Johnson is a little more cautious, leaving K-Bro unchanged at Sector Perform, although he raised his target to $13 from $12.50 after the release of Q2 results this month.

Johnson says he’s wary of "K-Bro’s small size, illiquidity, overexposure to temporary foreign workers… and recent evidence of limited top-line growth…” 

K-Bro, which has a market capitalization around $90 million, operates in Quebec City, Toronto, Calgary, Edmonton, Vancouver and Victoria. About 75% of revenue comes from hospitals and other healthcare institutions and the rest is from hotels and restaurants.

The company told investors in March that because of tight labour markets in Alberta, it has been importing foreign help under the Temporary Foreign Worker Program but "there can be no assurance" that the federal scheme will be continued in its current form given rising unemployment.

At current prices, the units offer a yield of nearly 9% and National Bank’s Johnson is confident that the payment looks secure. "Distribution stability continues to be a non-issue, both before and seemingly after 2011 trust taxation, given K-Bro’s low existing payout and ability to shield tax through depreciation and linen purchases." He reckons that the trust will pay out just 60% of its available cash this year and only 58% in 2010.

Cormark’s Israel says K-Bro has "plenty of ammunition to pursue growth either by taking market share from struggling public or private laundries or via acquisition."

 

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Posted by Andrew Bell on August 21, 2009

News that U.S. sales of previously owned homes surged 7.2 percent in July from June – and posted the first year-on-year increase since 2005 – mirrors apparent strength in the Canadian market.

Canadian home resales in July hit a record high last month and the year-over-year gain of 18 percent was the biggest in two years.

According to Brian Ripley's Canadian Housing Price Charts site, Canadian house prices have held up pretty well so far. Data from real estate boards around the country indicate that Vancouver is down 8 percent from its peak, Calgary has dropped 14 percent and Edmonton is down 13 percent. But Toronto is down just 2 percent, Ottawa only 4 percent and Montreal is actually at record highs.

Mind you, Ripley is pessimistic about the housing market. "July 2009 sales are down M/M (month over month) across Canada with Montreal sales plunging 20 percent," he says. "Momentum is breaking down again as we head into the fall despite the government's attempt to create inflation by enforcing near zero interest rates…  the alpha trend of commodity deflation will wreck the faulty tower of central planning and its already showing up as rising real (interest) rates."

House prices in big U.S. cities are down about one-third from their peak but nationwide the decline may be much smaller says personal finance columnist Brett Arends at wsj.com. He warns that the real problem in America is the destruction of home owners’ equity.

He reckons that from the end of 2006 through March 31, the total market value of U.S. homes fell 18 percent to $17.9 trillion US or just over $13,000 for every person in the country. But total outstanding mortgage lending rose from $9.9 trillion to $10.5 trillion.

"Home owners' equity collapsed,” Arends says. “Even if we take the Fed's conservative estimates for the decline in house prices, that equity has fallen about 40 percent from the peak."
 
He says that as of March 31, owners' equity accounted for just 41.4 percent of real estate values. "The levels are the lowest on record, and of course they are far below those which were standard a generation ago.

"This is a major difference with the last real estate bust, in the early 1990s, and it's why historical comparisons can be so dangerous. In the late 1990s, when the last slump was tapering off, home equity levels stayed in the high fifties."
 
He warns those looking for a sustained recovery that "many potential sellers have a desperately weak hand. And many potential buyers lack enough equity in their current home to trade up… Homeowners can't tap their equity to spend. Instead they are likely to be paying down their debts."

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Posted by Andrew Bell on August 21, 2009

Versant analyst Douglas Loe says the offer of $3.55 US per share for contract drug manufacturer Patheon Inc. (PTI-T) from new bidder Lonza AG isn’t good enough. "We do not recommend shareholders tender."

The brokerage has a one-year target price of $4.50 Cdn on Patheon. Loe, who’s set to join us on The Close today, says the stock "is still fundamentally undervalued at any bid below our target price."
 
Patheon shares soared 35% on the TSX today to trade at $3.47 or $3.21.

The approach from Swiss-based Lonza, a leading European contract manufacturing firm, trumps the $2-per share offer from private equity firm JLL Partners, a bid that Patheon executives have spurned.

"We believe JLL could respond with an offer above $3.55," Loe says. But he thinks that a bid from JLL will be worth less than the $4.20-to-$5.00 per share "independent valuation" that Patheon has obtained from BMO Capital Markets.

He notes that because JLL owns 57% of PTI, the firm must tender its stock for any bid to be successful. One major roadblock here, he warns, is that the "Lonza bid represents a sizable discount to the price JLL paid for 38.0 million of the 72.4 million PTI shares it currently owns." 

A defiant JLL said in a statement today that it won’t negotiate with Lonza.

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Posted by Howard Green on August 20, 2009

Another legend of television journalism is gone. Don Hewitt, the creator of 60 Minutes died this week, just a month after the passing of Walter Cronkite. Hewitt was 86. I had the pleasure of spending an hour or two in his company a few years ago in New York City.

He’d come to speak at Columbia University. At the time, I was there on a year-long fellowship so I went to hear him and sat in the front row. It had been a few years since he’d been ousted from the executive producer post at the program he’d founded. But he was not retiring. There he was, trying to convince students to contribute to an online news service he was creating which would give a true account of what was happening on university campuses. He was looking for stories.

At the time, he was already in his early 80s, clomping around on a snowy Manhattan night, his thick corduroy pants tucked into his winter boots. A smattering of students showed up, most of them probably with grandparents younger than Hewitt. They listened to his spiel, given with the panache of an expert pitchman, a guy who knows how to get your attention.
 
Remember, this was the man who had been there through the evolution of television news, from the first network newscasts on CBS in 1948. In a throwaway line to the group that night, he said he had started them. In 1960, he directed the famous television debate between JFK and Nixon during the U.S. presidential election campaign. Few people have had a more powerful impact on the development of a medium.

At the heart of it all was Hewitt’s love of a good yarn.  

"Let me tell you a story," he said with a smile when one student asked a question that so clearly reminded him of a good tale. 

Ultimately, that’s what he did best. He told stories. And he knew how to get his staff at CBS to tell them. That’s because he, more than anyone, loved a good one. You could see it in his eyes that night and you can still see it when 60 Minutes puts together a good show, informative and gripping at the same time. The Don Hewitt stamp lives on. 

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Posted by Frances Horodelski on August 20, 2009

During our conversation this morning with Dennis Gartman, the editor and publisher of The Gartman Letter, we talked about lessons learned and how, sometimes, we have to learn them not just once but over and over again. 
 
He focused on the lessons learned by those who try to call market turns, which he calls "the worst of mug’s games."  He noted that markets "will go farther and for longer than almost anyone is willing to believe."

He first found this lesson in his dog-eared copy of Reminiscences of a Stock Operator by Edwin Lefevre.  Published in 1923, the book is an account of the early years in the career of Jesse Livermore, a stock trader who moved up the trading chain from New England’s "bucket shops" to Wall Street and tells of the lessons he learned while he made and lost a fortune more than a few times.  

Gartman said nobody should be allowed to trade stocks or work at a brokerage firm – or be involved in the world of trading in any way – without having been thoroughly tested on the lessons that Livermore learned during his trading life.
  
Over the years, a copy of Stock Operator could often be found at my bedside (last purchased copy missing in action). Pat Bolland also has a well-used copy as do many successful investors that I have met over the years.  

If you want to trade successfully, Stock Operator may be able to teach you a few things from the hard-won lessons learned by Livermore.  (The full interview with Dennis Gartman can be found here: )

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Posted by Andrew Bell on August 14, 2009

We do so hope that tempers haven’t been flaring at Chartwell Seniors Housing REIT (CSH.UN – TSX), which is cutting its distribution by 27 percent to 54 cents a unit on an annual basis.

The trust, which runs old folks’ homes and housing, is taking a $31-million writedown on so-called mezzanine loans, a low-ranking form of debt.

"This is a testy topic, in light of the related party relationship," says RBC analyst Neil Downey, cutting his rating on Chartwell to Hold from Buy.

You see, some of the damage involves Chartwell’s dealings with developer Spectrum Seniors Holdings LP. In the first quarter, Chartwell completed acquisitions of Spectrum’s 50-percent interest in four seniors housing communities in British Columbia and Ontario.

Chartwell now says it has "recorded an impairment provision of $6.2 million related to accounts receivable due from Spectrum and $5.4 million related to mezzanine loans due from Spectrum."

The twist here is that during the second quarter, "Stephen A. Suske, who held a significant interest in Spectrum, resigned as CEO and Vice-Chair of Chartwell," the REIT discloses.

It also says that Brent Binions, its current president and CEO, has "made arrangements with respect to his holdings in Spectrum such that the Trustees of Chartwell are satisfied that no conflict exists between him and Chartwell."

Oh yes, and Richard Noonan, chief operating officer of Chartwell, has a small (less than 3 percent) interest in Spectrum.

Investors seem irritable, with Chartwell units dropping around 17 percent today.

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Posted by Frances Horodelski on August 12, 2009

During the past few months, there have been a number of high profile thefts of people’s investments by Ponzi schemes and other fraudulent activities. While the situations may have been different in how these individual made off with people’s investments, the methods for protecting oneself from thieves is the same. Here are a few ways to make your home strong.

-If it’s too good to be true, it probably is: Although this old adage may seem trite, in the investing world, it is nonetheless true. Markets and returns are volatile and performance substantially and consistently at high rates of return for long periods of time are difficult, maybe impossible, to achieve. An advisor claiming that he or she is able to do so should be a red flag. Indeed, other promises such as special deals, special rates, exclusive clubs, etc. should also be red flags.

- Deal only with regulated and/or licensed professionals: There are a variety of government and self-regulating organizations that can offer you assistance and protection. Registration with the OSC as a portfolio manager, IIROC for investment dealers and advisors, Advocis for financial planners, the Mutual Fund Dealers Association for mutual fund distributors, the Quebec Securities Commission, etc. provide you with among other things an opportunity to verify that your advisor remains in good standing and is qualified to advise you on investments that he or she is selling. By being a member of these organizations, professionals are held to high standards, subject to regular compliance checks and ensure appropriate safekeeping of assets.

- Insurance protection: Look for organizations that are covered by the Canadian Investment Protection Fund and the Canadian Deposit Insurance Corporation.  This can protect your assets from bankruptcy. Also look to see that your assets are held in segregated accounts that are independently verified and audited regularly.  If investors had asked Bernie Madoff or Earl Jones where his assets were held and then verified that indeed they were held there, they may have found the fraud out much earlier.

- Don’t have all your advice in one basket: While there may be considerable convenience in dealing with just one person for all your needs, it may be more appropriate to have different people providing different services. One of the red flags in the Earl Jones situation appeared to be his willingness to do it all for his clients. In this way, it appears, he was able to gain full trust but also full control of assets. Be careful when it seems too easy to have all your assets and control of those assets in one spot. Independent verification by other professionals can help prevent this control. And certainly, ensuring that the first three items have been checked off before consolidation is important.

-Review documents, regularly and thoroughly: Read your statements and follow the transactions. Understand what you own and how it got into or out of your account. Make sure that you receive statements on a regular basis and they are consistent and independently audited. There is never a reason why documentation should be withheld, diverted or otherwise amended without your consent.

- Finally, ask questions, lots of them: It’s your money and you have a right to understand what is going on with it. Any attempt to deflect a question or suggest that the answer is too complicated should be taken as a red flag. And remember, second opinions are valuable and a valid request. No reputable advisor should be offended by such a request.

There are a variety of resources out there to help you understand how to protect your investments including information provided by the regulatory bodies referred to above.   Here are their websites for reference.

The OSC has created a "Protect Your Money" site:

www.osc.gov.on.ca/Investor/ProtectMoney/pm_index.jsp

The Investment Industry Regulatory Organization of Canada (IIROC) has recently published a brochure that also highlights its services and the benefits of working with an IIROC registered firm or advisor:

http://www.iiroc.ca/English/MembeerResources/Brochures/Documents/WhyMatterBrochure_en.pdf

Other websites include those for the Canadian Association of Financial Planners (Advocis), the Mutual Fund Dealers Association of Canada, the Securities-administrators of Canada and the Quebec Securities Commission. They all provide of wealth of information and services to help you protect yourself.

Remember the old adage: Opportunity makes the thief.  Don’t give them the opportunity.

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Posted by Mark Bunting on August 6, 2009

Awfully bad…the worst…stressed and depressed.

These aren’t rejected album names. It’s how U.S. retail sales in July are being described by Thomson Reuters, the Conference Board and Retail Metrics, a consultancy.

The question remains: are we witnessing a cultural sea change among U.S. consumers after years of frantic buying of McMansions, SUVs and whatever other brick-a-brack they felt compelled to consume?

Brian Sozzi, retail analyst with Wall Street Strategies, says yes. In an interview in which I joined Pat Bolland to discuss the U.S. retail landscape, Sozzi said that consumers are being far more "discriminatory" in their purchase habits. He thinks this shift will continue for several years.

Consumers in the U.S. have been scared straight by the recession. They’re displaying a new found caution and frugality as evidenced by the rising savings rate. One of the reasons for this awakening is the spiking unemployment rate.  Also, with retailers carrying much leaner inventories, there are fewer discounted products to scavenge and it’s still discounts that people want.

That’s apparent in the continuing sales strength of Family Dollar (FDO-NYSE), Dollar Tree (DLTR-NASDAQ) and Big Lots (BIG-NYSE). Some spending dollars have been diverted lately from these names, but Sozzi says consumers will return at some point because he’s not expecting a rapid recovery in the U.S. economy.

Sozzi focuses on profit margins, free cash flow, inventory and capital expenditure when appraising retailers. One of his favourites is Urban Outfitters, (URBN-NASDAQ). He, surprisingly, also likes Abercrombie and Fitch (ANF-NYSE), which has seen same-store sales fall for fifteen straight months. But, the retailer with the barely-clad models has been ‘"spending aggressively" lately and Sozzi considers it a good long-term investment.

But, overall, August U.S. retail sales are not expected to be much better than July. Ken Perkins, the president of Retail Metrics says, ‘"back-to-school shopping season is going to be very late."

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