All Things Being Equal, I’d Rather Have a Beef ‘n Cheddar

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In this “Spring-Fresh” edition:

  • Nortel? No way!
  • An update on Manitoba Telecom
  • Trading Notes: BFI Canada Income Fund, Transalta Power, Riocan
  • Closing Bell: A Pilgrimage to Arby’s

Nortel? No Way!

Since the last column, I’ve heard from a number of readers asking:

a) If I were planning a new column.
b) If I were still alive.
c) If I were interested in Nortel at these levels.

Here are my answers: a) Yes; b) Most days, yes; c) You’ve got to be kidding? In fact, every time I get together with investors, I ask what’s on their radar screen and 9 times out of 10, I hear “Nortel.” What is this world coming to? Surely the apocalypse is upon us (my money is on a swarm of malevolent locusts devouring us all). The only acceptable reasons for succumbing to the Nortellian impulse are the following:

  • you’re interested in a speculative trade
  • you’re drunk
  • you’re really, really drunk
  • you’re stoned
  • your money shredder is on the fritz
  • you’re being threatened at gunpoint, and the only way out is to consider buying Nortel

I can’t imagine any other circumstances. In fact, let’s make each of these a rule. Allow me to continue: Investing in Nortel reminds me of David Cronenberg’s movie, Crash. The film follows the lives of people who get aroused by car accidents. So if you enjoy car accidents, you might also enjoy investing in Nortel. I think that about covers it.

An update on Manitoba Telecom

As you know, I’ve been following with great interest the saga surrounding Manitoba Telecom (MBT). I bought in on the expectation that MBT would do something wonderful with the $650 million owed to them by BCE. I was giddy about the possibilities of the company converting to the income trust structure; excited about the prospects for a large, one-time payout; I even laughed myself to sleep thinking of a massive share buyback. It was like being at Arby’s. Do you go for the hall-of-fame sandwich that is the Beef ‘n Cheddar or the smokey, beefy goodness of an Arby-Q? It’s one of those rare instances in life when you can’t go wrong. The market clearly had its preference and was pricing in a trust conversion. When the company announced they were putting a shareholder proposal regarding trust conversion on the agenda for the annual meeting, the shares took off. However, MBT was low-key and tight-lipped about the whole affair. Did they have other plans?

In March, we learned there was a method to their being mum. Manitoba Telecom announced a $1.7 billion takeover of Allstream, a provider of telecom services for business clients. You might recall that Allstream is what became of AT&T Canada, post-bankruptcy. Of particular interest was MBT’s take on Allstream’s $3 billion in unused tax losses. MBT noted these losses would be used to offset future income, generating considerable tax savings. But to be honest, I’m not thrilled about any company that had $3 billion in losses to begin with. I’d be just as impressed if the Ottawa Senators framed losing to the Leafs as an effort to save on travel expenses.

I can’t help but wonder what Olaf Kolzig would have done for the Sens. Maybe when the lockout is over and hockey returns in a few years, we’ll find out.  

MBT had a nifty little monopoly within the friendly confines of Manitoba. With the takeover of Allstream, they’re going head to head with BCE and Telus, and every other provider of telecom services. Sure, MBT will continue to generate piles of cash. However, this is an ultra-competitive sector with an ever-changing technological landscape. Worst of all, the managers of these companies always seem to find a way to destroy investor capital with questionable takeovers (e.g., BCE buying Teleglobe). MBT may find a way of bucking this trend. But I have no interest in risking my capital to find out for sure.

Many investors are upset, feeling they were misled by MBT dangling the prospect of income trust conversion and then heading in a completely different direction. I’m not, because I don’t think the onus is on MBT to telegraph their every thought to the markets. If they had spent the past few months stressing the need to make an acquisition, it’s entirely possible that Telus would have felt some pressure and then swept in to acquire Allstream themselves. I would have been fine with that, but MBT’s management team had other ideas.

In any event, nobody saw this acquisition coming and the shares of MBT promptly collapsed. After the dust settled, I sold the entire position at just under $49. As mentioned in MG #18, I had sold 1/3 of the position earlier just in case trust conversion didn’t occur. This proved to be a good move and illustrates the wisdom of booking some profits on the way up. Simply, it’s prudent risk management. The initial position was acquired a few months ago at prices just under $40, so this was a worthwhile investment. Time to move on.

Trading Notes

  • I sold the remaining position of BFI Canada Income Fund (BFC.UN) at $18.95 after selling 25% of the holding in March (see MG #18). With the advancing unit price, the yield had declined to such a level that the risks of holding seemed to outweigh the risks of selling. Every time I see a BFI garbage bin out back of a pizza parlour, every time I take out the trash, every time I see a garbage truck making its noble journey to a landfill, I’ll think fondly of the few months I spent with BFI. In the short term, the sell proved to be a good move, as the units have since given investors a rough ride. Speaking of that…
  • I continued the trimming of interest-sensitive income trusts, selling my holdings in Transalta Power LP (TPW.UN). A couple of unexpectedly strong US jobs reports and the expectation that interest rates are headed up have sent income product into a tailspin. The prevailing wisdom is the raising process will begin later this year (some say the Fed will move as early as June). The Canadian economy is decidedly less robust and rate hikes are less likely in the near term. So why all the panic about Canadian rates? The last time I checked, the rate on a one-year GIC was 2.5%, with the five-year coming in at 4%. Risk-free Government of Canada 10-year bonds are yielding around 4.6%. Not very exciting, if you ask me. It would take much higher rates to get me interested, but the trend is certainly up. In any event, the inflated nature of the income trust sector probably contributed as much to the selling pressure as interest rates. Simply, many of the units were frothy, leaving them highly vulnerable for a pullback. 

  • Speaking of tailspins, the REIT market has been especially hard hit. One of my longtime holdings is Riocan (REI.UN) and it wasn’t immune to the selling pressure. In MG#3, I mentioned feeling nervous about its valuation and subsequently pared the holding in September (MG#10). The strong start to Riocan’s year left me feeling even more nervous. Once the units started to shift down, it was easy to dump a few shares back into the market just south of $16. I haven’t eliminated the position, but I’m happy to have taken more profits. But I should have trimmed when the units had advanced to such an extent that the yield on any new purchase would have been only 7%. I remember telling myself it was the right thing to do, and yet I failed to act (heck, I did it with BFI, why not Riocan?). I suppose much of it has to do with the fact that I had committed one of the cardinal sins of investing: I’d fallen in love with a stock and its company. Of course, if you’re going to fall in love, why not pine for the real deal? As a company, Riocan is top-notch, as evidenced by their most recent quarter and 10th consecutive year of increasing distributions. Occupancy levels are stable and they have lots of cash to pursue acquisitions. My position is now relatively modest, but I’m content holding on. My average cost is well below $10, so the yield on my original purchase price is roughly 14%. Where am I going to get that on newly-invested capital?Roughly 25% of my portfolio is allocated to the income trust market. In speaking of the sector as a whole, I’d like some stability to return to unit prices so I can just sit back and enjoy the distributions. But if the downtrend continues, the crystal ball shows a buy or two in my future. As always, I’ll keep you posted on what I’m up to.

Market Guy’s Closing Bell: A Pilrimage to Arby’s

Now I’m thinking about Arby’s, so I might as well tell you an Arby’s story. I live in Ottawa, a town that has been Arby’s-free for about 15 years. For some reason, all the public servants and high-tech people don’t appreciate slow-roasted, lean beef marinated in barbecue sauce. I know, I know….I can’t believe it either. Anyway, one day I decided to take matters into my own hands. So I piled into the car with Bouch from Embrun and Ozner from Barrhaven. We decided to head for the nearest Arby’s. Only one thing: The nearest franchise was in the United States. No problem. This was pre-September 11th so you could tell the border guard that, yes, you were traveling from Canada for the sole purpose of getting beef sandwiches at the St. Lawrence Centre Arby’s in Massena, New York. True, border guy wanted clarification, but he was a good sport and I’d like to think that deep down, he understood. If memory serves, I had 4 Beef n’ Cheddar’s and an order of curly fries. Bouch had 5, but told his wife he ate only 3. I can’t recall how many Ozner had, but he got it done. And all that pleasure cost about the same amount as a couple of Nortel shares.

Don’t forget to ask for extra Arby’s sauce!  

The Market Guy is an Instructor with the Department of Psychology at Carleton University. He’s not a professional advisor. He’s just a guy who loves investing and talking about the markets. He’d like to thank The Flyers for conquering the dark side of the force. As the Sens are out, it’s Go Flames Go over at