abstacey's Profile
abstacey's Posts
Invest in clean water with this junior tech stock
H2O Innovation designs, produces and installs integrated water treatment solutions based on membrane filtration technology to municipal, energy and mining end users. The recent acquisition of Utility Partners could eventually help turn this growth stock into a takeover target.
H2O Innovation Inc. (TSXV—HEO), the Quebec City-based integrated technological water treatment system designer and producer, reported respectable results for the fourth quarter of its 2016 fiscal year.
For the period in question, which ended June 30, the company’s revenues came in at $11.04 million, which was roughly in line with Beacon Securities analysts George Trapkov and Ahmad Shaath’s projection. Earnings before interest, taxes, depreciation and amortization (EBITDA) of $157,000, meanwhile, handily exceeded the analysts’ $26,000 projection.
The analysts keep their ‘buy’ recommendation and their 12-month target price of $2.25 per share for the company.
They say that H2O’s selling, general and administration expenses were loftier on account of hiring to keep up with this growth stock’s increases in selling costs and commissions.
H2O reported a $99.7-million overall backlog as of Sept. 26. The analysts add that Utility Partners’ (UP) results were not reflected in the quarterly results since the acquisition was finalized on July 1.
The company actually paid US$17 million to acquire UP. Because of the deal, H2O will now be able to offer operation and maintenance of water and waste-water treatment facilities to clients. Thus, it will become a fully-integrated provider of water solutions.
Over the course of its fiscal 2016 fourth quarter, H2O achieved a gross margin of 33.4 per cent, which was more than Messrs. Trapkov and Shaath’s prediction of 31.2 per cent. Meanwhile, the company’s earnings per share (EPS) was actually a loss of -$0.032.
The analysts note that H2O is Canada’s only remaining publicly listed water company. They say it has been a leader when it comes to water and waste-water treatment systems.
In fact, Messrs. Trapkov and Shaath say that given the company’s large backlog and enticing sector fundamentals, it is ideally positioned to expand is earnings. This could turn H2O into a takeover candidate, add the analysts.
Getting back to the UP deal, the analysts say that the transaction was a smart one for H2O. Specifically, a lot of the small water utilities in North America don’t have operating expertise and have not made technology investments, which Messrs. Trapkov and Shaath argue should heighten demand for water operations and management businesses such as UP.
“The acquisition of Utility Partners was a very important step in H2O’s development as it allows the company to offer complete leasing, operations and maintenance services. UP has long term contracts with 34 utilities located in six states,” say Messrs. Trapkov and Shaath.
“We believe H2O’s management can expand the geographic footprint of UP and acquire additional clients while up-selling supplies from the high-margin specialty product and services division.
“The company is starting to work with the utilities to help them achieve economies of scale and achieve cost savings while offering H2O’s products.”
The company added that it is mulling over the possibility of launching more acquisitions to bulk up its operation and maintenance division.
According to the analysts, the favourable sector fundamentals and the substantial growth opportunities should help the company to achieve loftier profitability and higher stock value.
Oil prices up 2 percent on hopes of OPEC output cut
November 14, 2016 9:08 PM EST
By Christopher Johnson
LONDON (Reuters) - Oil prices rose more than 2 percent on Tuesday, bouncing back from multi-month lows on expectations that OPEC will agree later this month to cut production to reduce a supply glut.
North Sea Brent crude oil was up $1.05 a barrel at $45.48 by 1045 GMT (5:45 a.m. ET) after hitting a three-month low of $43.57 on Monday. U.S. light crude was up $1.15 a barrel, or 2.7 percent, at $44.47. It reached a three-month low of $42.20 on Monday.
Oil producers in the Organization of the Petroleum Exporting Countries are due to meet on Nov. 30 to agree to limit output. An outline deal was reached in September but negotiations on the detail are proving difficult, officials say.
OPEC is a diverse grouping, politically and economically, and several members wish to increase production.
Saudi Arabia's energy minister has said it is imperative OPEC reach a consensus on a deal to curb production, Algeria's state news agency APS said on Sunday.
"Reports of a diplomatic push by OPEC to strike a deal are supporting the markets," said Tamas Varga, oil analyst at London brokerage PVM Oil Associates. "The rally could last a little while but the underlying fundamental picture is still bearish."
IG Group market strategist Jingyi Pan said market sentiment has been buoyed by reports that key producers including Iran and Iraq were thinking about restraining production.
"News of Qatar, Algeria and Venezuela leading the push for the OPEC deal were music to the ears for oil traders, boosting crude oil prices," Jingyi Pan said.
Prices were also buoyed by expectations that U.S. shale oil production will in December fall to its lowest since April 2014 at 4.5 million barrels per day (bpd).
Technical analysts said oil markets were due to an upward correction after a month of falls.
Philips Futures investment analyst Jonathan Chan in Singapore said crude prices were supported by short-covering.
"The current active contract (for U.S. crude) is expiring. The last trading day is next Monday, so some oil traders are already starting to close out their positions to roll over," Chan said.
But rising Libyan oil production could cap gains.
A tanker carrying the first freshly produced cargo of Libyan crude to be exported since the Ras Lanuf terminal reopened in September left the port on Monday.
Libya's oil production has almost doubled to around 600,000 bpd in recent weeks.
Beware of manipulated utopias
Martin Conlon | 09 Nov 2016
Schroders' Martin Conlon remains extremely wary of the unintended correlations that are likely to appear when the current process of artificial wealth creation abates.
As a fan of dystopian classics such as Huxley's Brave New World and Orwell's 1984, I find their insights into the perils of searching for a manipulated utopia alarmingly relevant to today's financial world.
As rationalists, we'd suggest the benefits of manipulating asset prices and interest rates in the name of a healthier economy is, at best, an exercise in futility. To borrow from John Tuld in Margin Call: "It's just money; it's made up. Pieces of paper with pictures on it so we don't have to kill each other just to get something to eat."
The recent ructions created in markets by relatively small shifts in bond yields serve to highlight the hypersensitive nature of financial markets given decades of accumulated intervention.
At the risk of oversimplification, it is worth summarising the themes that have dominated our thinking for many years now and the reasons for this hypersensitivity as we see it:
Asset values are the ledger that records respective claims on the resources of the economy. The quantity and price of money can only alter the distribution of ownership of these resources. "It's just money; it's made up."
The debt problem faced by most of the world is the accumulation of decades of permitting credit to grow too quickly. Rather than focusing on credit as the amount of additional money that is permitted to enter the economy, central bankers and economists have focused on artificially constructed inflation measures that concluded that 10 per cent to 15 per cent per annum credit growth was resulting in 2 per cent inflation, justifying ongoing interest-rate reductions.
This cavernous gap between credit growth and measured inflation facilitated a multi-decade asset-price boom and wildly disproportionate growth in the size of the financial economy relative to the real economy.
Most western economies shifted production to lower-cost countries and have become disproportionately consumption-based. Asset-price booms and bubbles triggered massive wealth redistribution and rewarded speculation rather than labour.
Ongoing stimulus to consumption and a desire to support asset prices required ever-lower interest rates to spur more credit growth.
Stability, equitable distribution of wealth and productive use of capital are promoted when credit growth is kept low and focused on productive uses. This has not been the case.
The words "wrong" and "mistake" do not feature prominently in central-banker vernacular. Decades of exacerbating earlier "mistakes" have created an ever-larger financial system balanced on an ever-lower interest rate. The "real" economy, which produces goods and services and pays wages to eventually support the value of financial assets, has continued to develop and grow. This growth rate, however, has been nowhere near the rate of credit growth for many years.
Financial-market volatility and risk emanate from the relative size of the numerator (the value of financial assets--stocks, bonds, property et cetera) and the denominator (interest rates and profits).
Having progressed to a level at which the numerator is exceedingly large versus history and the size of the underlying economies supporting the financial assets, while the denominator moves progressively closer to zero, hypersensitivity relative to history is a mathematical certainty.
Having tracked the "financialisation" of the Australian economy over the past few decades, the equity market engine has become ever more susceptible to asset values and discount rates for fuel.
This creates great debate for us internally, as we attempt to assess the probability of sustaining an elevated and artificial numerator (policymakers will undoubtedly use every tool in their arsenal to this end) versus a reversion to higher levels of interest rates and necessarily lower asset prices.
One thing in our mind is certain; while a benign period of stable and low interest rates and elevated asset prices is a distinct possibility, the possibility of a less orderly path is not insignificant.
Additionally, lower asset prices do not necessarily need to be accompanied by falling goods and services prices. Intuitively, after a period when credit has flowed disproportionately into asset prices rather than consumer prices, it should be feasible for the reverse to occur.
Translating this picture to a sector and stock level, these debates take different forms.
For some sectors, metals and mining, for example, revenues and costs that are grounded in the "real" economy leave our concerns largely limited to the levels of financial leverage used to amplify risk in what are generally volatile businesses.
Although cycles of supply and demand and the often-savage impact that these have on commodity prices will remain intact--evidenced in skyrocketing coal prices, relatively buoyant iron ore prices and languishing oil prices--demand growth on a global scale is relatively stable.
Even in markets such as steel, in which China has been guilty of adding excessive supply, global volume growth cannot hold a candle to global credit growth levels.
We remain extremely comfortable in the ability of these businesses to digest more challenging times in interest-rate and asset-price markets, given the limited impact of credit on their cycles.
We also believe the diversification benefit to portfolios that are now wildly over-sensitised to asset-price and interest-rate moves is dramatically underappreciated.
Our views on the value of businesses remain anchored on a longer-run view of prices, with most remaining attractive on this basis.
Possibly the most contentious is the banking sector. At more than 25 per cent of the S&P/ASX 200's market capitalisation, it is massively important for investors and the domestic economy.
Our simplified picture of the banking sector is as follows: since 1991 credit has grown from around $350 billion to $2.6 trillion.
Housing loans have totally dominated growth, moving from $80 billion to $1.6 trillion.
Net interest income for the four major banks has grown from around $14 billion to $60 billion, allowing profits to rise from just over $2 billion to more than $30 billion.
These profits are effectively a tax on the asset value ledger, recording the liability that mortgaged homeowners have to depositors in return for the capital protection provided by bank equity holders.
Even after tighter capital requirements from APRA, tangible equity is only around $200 billion, while bad debts are close to zero as booming house and asset prices virtually extinguish bad debts.
Our conundrum is this; having presided over a massive increase in the leverage of the economy, disguised by ever-lower interest rates, we feel low credit growth and fairly stable revenue is the best-case scenario for banks, but even with an assumption of higher levels of bad debts, stability would see banks as fairly attractively valued.
Profits of $30 billion are providing a more than adequate return of around 8 per cent (fully franked) on major bank equity value of $380 billion or so.
Every 25-basis-point increase in loan losses will extinguish around $6 billion of profits, however, unless these are recurring, the profit damage is one-off and profits are recurring.
Loan losses of between 2 per cent and 3 per cent of loans (similar to the early 1990s) would extinguish $50 billion to $75 billion, while losses less than 1 per cent of loans could be digested with less than a year's profits.
All this condenses to valuations that appear reasonable unless the deleveraging of the economy is more severe.
To put this in perspective, if house prices were to collapse and bad debts skyrocket, extinguishing the total equity of major banks against housing loans would still leave loans of $1.4 trillion (assuming no losses elsewhere!), an amount still around 90 per cent of Australian GDP.
This explains why we don't give central bankers an A for engendering financial stability. Pragmatically, it is why we believe they will move heaven and earth in trying not to utter that horrible phrase: "We were wwwrrrongg!"
Having highlighted the imminent need to moderate an over-geared economy skewed towards asset speculation and consumption, it will come as no surprise that we expect plenty of landmines.
Outlook
The high-level picture above illustrates the tendency towards myopia when the gradual impact of seemingly innocuous short-term moves accumulates into very large moves in the longer term.
The fact that a wage-and-salary earner on a good salary of $100,000 a year could toil earnestly to save $10,000 a year for 10 years for a 10 per cent deposit on a $1 million Sydney apartment, while the same amount can be made flipping an investment property held for 12 months bought with borrowed money, highlights the extent to which a system can become perverted.
We remain extremely wary of the unintended correlations that are likely to appear when this process of artificial wealth creation through creating more pieces of paper with pictures on them abates.
The financial and consumption-centric businesses that have dominated over an extended period are likely to require the same adjustments as the businesses in the real economy that have endured far tougher conditions over past decades. They will also emerge more efficient and stronger as a result.
We remain strongly of the view that the time for investments strongly reliant on asset-price rises and declining interest rates has passed, while the sensitivities (in both directions) that accompany an artificially large financial economy may be more durable.
Morningstar
It's time for our weekly podcast.
Today we kick off with a preview of the OTC QX market and the construction of our US Small-Cap Discovery Portfolio in our US Growth Stock Research, in our Your Stock Our Take Segment we review a viewer question on the wildly volatile healthcare Small-Cap Nobilis Health Corp. (NHC:TSX).
And in our Stars and Dogs of the week we review two Internet Behemoths, Alphabet Company (GOOG:NASDAQ) and Amazon.com Inc.(AMZN:NASDAQ).
Link to Stock Talk Podcast Episode 10
A manufacturing stock for growth and dividends
Investor's Digest of Canada•10/27/16 •
New Flyer Industries is a bus manufacturing company that builds municipal transit buses and larger intercity motor coaches for North American markets. AltaCorp Capital gives New Flyer an ‘outperform’ rating and recommends the stock to investors looking for capital gains based on strong business fundamentals and potential dividend increases.
Strong growth in terms of its return on capital metrics with percentages in the mid-teens, combined with a stronger order backlog and the potential for further dividend growth, AltaCorp Capital analysts Chris Murray and Samarth Modwal continue to recommend transportation equipment manufacturing stock New Flyer Industries (TSX—NFI) to investors looking for a growth stock with strong business fundamentals.
Messrs. Murray and Modwal maintain their ‘outperform’ recommendation for the company and they also raise their 12-month price target to $53 a share from $50 a share.
For the second quarter ended July 3, the company reported revenue, adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) and adjusted fully diluted earnings per share (EPS) of $586.9 million, $80.3 million and $0.58, respectively.
By comparison, AltaCorp had forecast $587.2 million in revenue, $72.5 million in adjusted EBITDA, and $0.55 in adjusted fully diluted EPS. Meanwhile, the consensus had pegged revenue, adjusted EBITDA and adjusted fully diluted EPS at $578.6 million, $71 million and $0.46, respectively.
Messrs. Murray and Modwal’s 2016 full-year EBITDA forecast rises to $293.1 million from $285.1 million. They also raise their 2017 and 2018 EBITDA estimates for New Flyer to $314.2 million and $331.3 million, respectively, from $314.9 million and $324.9 million.
The analysts’ projections for adjusted fully diluted EPS in 2016, 2017 and 2018 change to $2.09, $2.35 and $2.49, respectively, from $2.09, $2.41 and $2.48.
New Flyer had earlier received a notice requiring an immediate shutdown on ongoing work to build 184 commuter coaches for New Jersey Transit due to a lack of funding.
Messrs. Murray and Modwal say management has adjusted its production schedule by bringing other customers’ orders forward to allow more time for an acceptable funding resolution. In early September, management expressed confidence in a statement that the changes to production schedule would not impact its overall 2016 delivery goal of 3,450 equivalent units, or EUs.
(An equivalent unit translates to one heavy-duty transit bus or motor coach between 30 feet and 40 feet long. Extra-long articulated buses with a joint linking two passenger compartments are counted as two EUs.)
Management reiterated guidance to deliver 3,450 EUs during the 53 weeks of business in 2016, compared to 3,265 EUs during the 52 weeks of 2015. It also expects the aftermarket segment to grow about five per cent this year.
Messrs. Murray and Modwal note that management continues to guide for $10 million in synergies from the acquisition of fellow bus manufacturing company Motor Coach Industries. New Flyer management points out that the company has already achieved about $5 million of the targeted cost savings.
The analysts say: “While there remains a risk that the recent shutdown of production for New Jersey Transit may impact the delivery schedule for the remainder of 2016, we view it as a timing issue, likely to be resolved over the coming weeks.”
Investor’s Digest of Canada, MPL Communications Inc.
The MoneyLetter •10/26/16 •
Behavioural finance analyst Ken Norquay observes that investors love to read the financial news and study its impact on stock prices. But what should be more relevant for investors and their strategic investment objectives—long-term financial trends—doesn’t always make the daily news cycle.
In the financial world, people get addicted to the news. Most believe that the ups and downs of daily market activity are caused by financial news. But conservative investors claim not to be interested in the daily fluctuations of the market. They are interested in the long-term financial trend. They like to own securities in up trends and have someone else own the securities that are in down trends. Fluctuations are mostly irrelevant.
So why do some investors find financial news so intoxicating? Although short-term news keeps us amused, it can distract us from more important investment factors. What is relevant for us is change in long-term financial trends. The financial media never reports that.
In the long term . . .
A few weeks ago, OPEC (Organization of Petroleum Exporting Countries) announced production cutbacks. These cutbacks could affect the balance between demand and supply of oil. In my investment book, Beyond the Bull, I explain in detail how changes in supply or demand affect price: in the stock market, changes in supply and demand are the root cause of price changes. OPEC production cuts lower the supply of oil to the market: this tends to push price of oil up. Did it work? Have oil prices risen?
Obviously not. There hasn’t been enough time for the supply of oil to be affected. It will take weeks, maybe months, for the cutbacks to be felt. Their well-staged news release was more signal than substance. It showed that after years of being ineffective, OPEC was finally able to cooperate, at least in a small way.
What are the factors that will affect the price of oil in a big way? The oil business is important to Canada, to our economy, our currency and our personal retirement savings. Let’s examine what really determines the long-term supply and demand for oil. What really determines oil’s price over the long term?
Supply and demand for oil
‘Demand’: Oil is used by cars, electrical generation companies, farms, aircraft, for heating buildings, etc. These factors are common knowledge, as are the factors that influence them– weather, the overall health of the economy, etc. None of this is noteworthy, because it is all common knowledge.
The same could be said for ‘Supply’. Oil companies produce oil at some price, and hope to sell it at a higher price. Saudi Arabia produces oil for about $10 to $28 US per barrel. Canadian tar sands produce oil for $55 to $95 a barrel. Not all oil is equal: Saudi oil is very high quality; tar sands oil is very low quality. Saudi Arabia holds the largest reserves of oil in the world; Canada, the second largest.
If oil prices rise substantially, Canadian tar sands oil will be profitable again, and the supply of oil to the world will be increased by additional Canadian production. At lower prices, the tar sands are unprofitable and supply decreases. These factors are widely known and hundreds of experts follow them every day. Every oil company and every major investment firm have experts who follow the supply and demand for oil. Price is determined solely by supply and demand.
Up or down?
It is not important that we outsmart all these experts. Let’s just ‘stick to our knitting’. Let’s do what we can do, and leave the detailed studies to those who think they can outsmart the market. For our part, we need to know if the price is going up or going down. If it’s going up, we want to invest in it. If it’s going down, we don’t.
In June of 2014, the price of oil (over $100 US per barrel) began a down trend that lasted until February of this year, to under $30 US per barrel. The price bounded up to about $50 in June and has zigzagged slightly lower since. Our study of price trends tells us that often, after a major decline in price (oil’s 70%+ decline was a major decline!), we should expect a bounce up followed by another decline to the vicinity of the previous low.
In this case, we saw a bounce from under $30 to about $50. We should expect to see a decline to about $25 or $30 again. If that occurs, we could consider investing in the energy sector again. This price trend pattern is called ‘testing the lows’. If the post rally decline holds above or near the previous low price, the ‘test’ is considered a success, and the trend has reversed from down to up.
The legendary New York Yankees catcher, Yogi Berra, once said: “It ain’t over ’til it’s over.” The down trend of oil prices? It ain’t over yet. Wait for ‘the test’. However, there is a possibility that ‘the test’ has already occurred. From its high (just over $50) in June, oil dropped to just under $40 in early August. Since then it has moved back up to the high 40s.
While it is unlikely that this was ‘the test’, it IS possible. We recognize the possibility that the down trend of oil prices ended in February of 2016. If this is true, oil’s price should hold above $40 and rise to over $50 in the next few months.
As for the market . . .
Although oil prices got most of the media’s attention, the more interesting news occurred in the stock market. In the month of September, volatility increased sharply. Volatility refers to the range of price change in a fixed time period. For example, all summer, the S&P 500 Index traded in a 10 – 20 point daily range. In September, that number doubled. Higher stock market volatility means the participants in the market are more emotional than on days of low volatility. In September, traders and investors were more emotional than in July and August.
But in spite of that added emotion, there was no trend change. The U.S. stock market is still going sideways following a multi-year up trend (2009 to 2014). Our advice remains unchanged: use this sideways period to reduce your exposure to the stock market. There is a strong possibility that an important down trend will emerge from this 22-month sideways US market.
In my last MoneyLetter article, I outlined a bullish scenario for the U.S. stock market. Maybe my bearish outlook is incorrect. Maybe the market will emerge from 22-months of non-progress into an up trend. My bullish scenario was:
■ The market would increase by about 10% above the previous high.
■ It would decline, giving back approximately what it had just gained, then
■ It would continue up.
A watered down form of this bullish scenario did occur. In late August there was a mini pop up to a new high in the S&P 500, and within the volatile trading of early September, a sharp drop did occur. Although the actual percentage was less that the 10 per cent in my theoretical bullish scenario, the emotionality (volatility) was there. I will keep you informed about this bullish possibility. Maybe one of America’s two presidential candidates really can prevent the decline that the stock market is foretelling. If the long term up trend does reassert itself, we will want to throw caution to the wind and reinvest in American stocks.
Precious metals: The price of gold changed from a down trend to an up trend in December 2015. Investors can continue to increase their exposure to gold and silver. Gold and silver mining stocks continue to provide opportunity for experienced traders. Caution: many gold mining stocks have doubled or tripled since I first recommended them as trading vehicles. Please review your trading rules now, especially your exit strategy.
The Canadian dollar down trend is still intact, although the day-to-day changes are miniscule. Those who invest in non-Canadian markets may receive some benefit from this continuing down trend. Please review earlier comments on the price of oil. The Canadian dollar is a petro-currency and will trend with the price of oil.
The U.S. dollar index has been in a trendless sideways range since spring of 2015. This stability helps the world’s banking system, but doesn’t leave much opportunity for profit in our personal investing.
2016 has been The Year of Big News. The United Kingdom voted itself out of the European community, the Arab nations are once again trying to fix the price of oil, and soon our American friends will elect a new president. In the long term, will any of this make a difference to your personal investing?
Ken Norquay, CMT, is the author of the book Beyond the Bull, which discusses the impact of your personality on your long-term investments: behavioural finance.