Profile cover photo
Profile photo
Michael Sprung
Value investor
Value investor


Post has attachment

“What is right is not always popular and what is popular is not always right.”- Albert Einstein

“It is impossible to produce a superior performance unless you do something different from the majority.”- Sir John Templeton

Geopolitical events continued to make headlines this quarter but did little to quell investors’ enthusiasm as markets continued to advance.  Russia and the Ukraine managed to agree to a temporary ceasefire just as sectarian violence in Iraq exploded driving oil prices higher.  China garnered attention with its hegemonic designs on the South China Sea much to the displeasure of Japan and Vietnam as well as pushing back on any pro-democracy desires in Hong Kong.  In addition, Argentina once again threatens to default on its debt after losing a Supreme Court decision to creditors in the US.

The impact of the events in Iraq and the Ukraine spiked investor enthusiasm for energy stocks in Canada and the US.  The industrial sector in Canada was also strong as the railroad stocks continued their ascent as economic conditions improved.  Materials also posted strong gains as mining stocks in both precious and base metals performed well.  Globally, investors’ confidence generally gained momentum with the exception of Europe where fears of economic stagnation grew.  It was a surprise when the first quarter GDP estimate in the US was revised down to a dismal -2.8% following an initial estimate of  -1.0% as a result of severe weather and curtailed spending.

As North American markets achieve new highs, we note that it has been a nice ride for equity investors since the depths of the market decline in 2008.  In this context, it is prudent to exercise some degree of caution in this environment, as markets tend not to continuously climb, as economies do not continuously grow.  We do not pretend to know when, or if, there is going to be a correction in the near term.  However, we see some signs that could potentially lead to a pullback.
Retail participation in the stock market has been accelerating over the past year.  Overall, equities are now overweight in investors’ portfolios particularly in Europe where fixed income offers little return.  There has been a noticeable recovery in the number of Initial Public Offerings (IPO’s) and merger activity at the corporate level has also increased.  The number of investors utilizing margin (debt) to increase their equity exposure has also risen.

Propelled by the low interest rate environment, debt levels continue to soar in both the public and private markets.  Concerns about consumer debt levels in Canada and the UK have been met with ineffective jawboning from the Canadian government and some restrictions on high ratio mortgages in the UK.  In Europe, deflationary fears have caused the central bank to move to negative rates in the hope of maintaining positive growth in the economy through investment and spending.  European authorities fear of slipping into a prolonged deflationary period like that of Japan following such massive credit expansion must be influencing their decisions.  David Stockman, a former Director of the Office of Management and Budget in the US, remarked: “How could any adult believe that a benchmark rate cut of 10 basis points from an already microscopic level of 25 basis points, move the needle in an economy with $60 trillion of public and private credit debt?”

This appetite for equities is occurring in a slow growth, low interest rate environment.  In the US, GDP forecasts for the year have been sharply curtailed following the drastic revision to the first quarter estimate.  Canada’s growth will be directly affected by the lower US growth.  Low interest rates have pushed investors towards higher risk equities particularly in the last year where smaller capitalized securities have dramatically outperformed their larger brethren.   Official inflation appears to be at low levels to anyone who has lived through the last few decades, but the trend suggests some acceleration in the last few quarters.  From a valuation perspective, multiples are on the high side, although not dramatically so as the profitability of companies has gone up.  Despite the slow growth in sales during this recovery, profits have improved largely as a result of tight cost control, share buybacks and more limited capital expenditures.

So what should investors do in this environment?

Our view is that it would be prudent to take some profits in securities that have substantial capital gains.  When markets are going up it takes discipline to increase cash positions.  Cash can provide a good option to purchase good investments on any market setback.  Despite attempts by governments to eliminate the cyclicality in economic growth, it will persist.  Do not lose sight of your longer term investment objectives.
#stocks   #marketcommentary  

Post has attachment
The financial engineers of Bay and Wall Streets love coming up with new jargon. Typically these terms have more to do with marketing and selling new products than with sound investment principles. The latest one to be bandied about by the ETF industry is “Smart Beta” So, just what is “Smart Beta”?

Beta is a measure of the volatility, or systematic risk of a security or a portfolio in comparison to the market as a whole. The term “Smart Beta” is now being appended to crop of new exchange traded funds (ETF’s). They seem to promise what all investors are seeking: higher returns and lower risk. That should prompt scepticism. Before exploring what the term smart beta actually means, let’s recall what ETF’s are.

ETF’s are investment funds that trade on stock exchanges, much like stocks. As with mutual funds, ETF’s holds assets such as stocks, commodities, or bonds.  Many ETF’s track an index, such as the S&P/TSX Composite here in Canada or the S&P 500 in the US. Others track market sub-sectors, such as the S&P/TSX Capped Energy index.

Why are ETF’s so popular? Low management fees are likely the main reason. ETF fees are in the 0.5% range, compared with 2% to 3% for many large Canadian mutual funds. The pitch from the ETF industry goes something like this: your mutual fund isn’t out-performing the market, so why are you paying high management fees? Why not just buy the index? Your performance will match the index and you will pay much lower fees.

Many ETF’s are ‘capitalization-weighted’, meaning that stocks in the funds are weighted in proportion to their market capitalization. For example, in a fund that tracks the S&P/TSX Composite Index, Royal Bank, with a market capitalization of $105.66B, will form a higher proportion of the fund than Westjet, with a market capitalization of $2.97B.

In smart beta funds, the component weightings are based on other criteria, such as valuations, dividends, momentum or volatility. By a curious coincidence these are the same sort of criteria that active managers use to look for stocks. Of course, active managers use these criteria simply as a screen: stocks that meet a given criteria are then subject to thorough analysis prior to being selected. In a smart beta fund all stocks that meet the criteria are included in the fund.

The ETF industry has said that active management can’t beat the index, so investors should just hold index ETF’s. Now they are saying, that they are smarter than traditional managers and that their smart beta products offer better than market returns at low cost. Sound too good to be true, doesn’t it?

Post has attachment
Canadian energy infrastructure company TransCanada Corporation (TSE:TRP, Mkt cap 35.73B, P/E 21.30, Div/yield 0.48/3.80, EPS 2.37, Shares 707.71M) plans to invest $1.9 billion in the construction of a pipeline that will transport fuel to a liquefied natural gas plant near Kitimat, British Columbia.

The gas facility is co-owned by the local units of US energy majors Chevron Corp and Apache Corp, which have signed a deal with TransCanada to deliver around 1.9 billion cubic feet of gas per day through the pipeline.

TransCanada's Merrick Mainline Pipeline will run 260 kilometres from Dawson Creek to Summit Lake, where it will connect with Kitimat LNG's proposed Pacific Trail Pipeline. Pacific Trail will transport gas the rest of the way to the coast, where the gas will be liquefied and sent by tankers to customers abroad.

The Merrick Mainline Pipeline is expected to go on stream in the first quarter of 2020. Initial work for the pipeline is proceeding well and later this year the company will lodge a request with the National Energy Board to get approval for building and operating the project, CEO Russ Girling said in a statement.

The pipeline will also need to undergo an environmental assessment before it gets regulatory clearance.

Work on the Merrick pipeline is in its early stages but construction will go ahead only if it gets regulatory go-ahead and if Chevron and Apache decide to proceed with the Kitimat LNG project.

TransCanada currently has four gas projects under development in the region, representing a total investment of $12.6 billion.

#transcanada   #TRP  

Post has attachment

Post has attachment
Canadian oil sands producer  #CenovusEnergy  (TSE: #CVE , Mkt cap 24.20B, P/E 36.61, Div/yield 0.27/3.33, EPS 0.87, Shares 756.51M) has bought steam-assisted gravity drainage facilities from French oil and gas major Total SA that will be used at its planned Grand Rapids oil sands project.

The processing facilities, which have the capacity to produce around 10,000 barrels of oil a day, were built for Total’s Joslyn oil sands project but were eventually abandoned after an over-pressurized well blew up. The equipment will be now moved to the Grand Rapids site where Cenovus expects to produce 180,000 barrels of oil a day.

The Calgary-based company, which ended the first quarter with higher-than-expected earnings, obtained approval from the Alberta Energy Regulator for the Grand Rapids thermal oil sands project in northern Alberta in the first quarter of the year. The first phase of the project is expected to start producing oil in 2017.

CEO John Brannon said in the company’s quarterly conference call that the facilities have been adequately maintained but he declined to disclose the price Cenovus paid for the assets, saying that the information was confidential.

Cenovus reported net income of C$247 million, or C$0.33 a share, for the three months to March, up from C$171 million, or C$0.23 a share, in the same quarter of 2013. Its operating earnings slipped 3% on the year to C$378 million, or C$50 per share, but were above the average estimate of C$48 a share among analysts polled by Thomson Reuters.

Production at company’s Foster Creek operations stood at 54,706 b/d in the quarter, down 2% from 2013, while the company’s other major oil sands project, Christina Lake, had an average output of 65,738 b/d, an increase of 48% year-on-year.

Post has attachment
“Shaken and not stirred, please.”- James Bond, Dr. No (1958) by Ian Fleming

The euphoria of the past year carried into the first quarter of 2014 only to be rudely interrupted by geopolitical events as Russia took over the Crimea.  The hue and outcry was heard around the world and global markets were shaken by this event.

In addition, market participants reacted negatively to the news that China’s economic growth rate was unlikely to achieve the previously expected 7.5% target.  European markets were the most effected by the events in the Crimea as Europe has much closer economic ties with Russia particularly since much of Europe is dependent on Russian oil and gas.  Naturally, the Asian markets reacted negatively to the news from China, but the fallout also affected resource rich economies like Canada and Australia.  The US markets were the most negatively impacted by a statement made by Janet Yellen, the new Chair of the Federal Reserve Board, that interest rates would likely start their ascent by early 2015.

Despite these jolts, returns to Canadian investors finished the quarter looking quite robust. Foreign returns in particular improved, largely due to the decline in the value of the Canadian dollar.

The Toronto Stock Exchange Total Return Index finished the quarter up 6.1% almost 5% of which was recorded in the first two months and a substantial portion of the remainder on the last trading day of the quarter.  The strength in the Canadian market can be attributed to Materials (+9.2%; driven in large part by the precious metals sector), Energy (+8.7%) in reaction to the Crimean situation, Utilities(+7.5%) and Health Care (+12.6%; note that Health Care is a much smaller component of the index).

The S&P 500 Index managed to finish the quarter with a 1.8% total return.  It was a bumpy ride in the US as the quarter started with the index declining 3.5% in January, recovering 4.6% in February and adding another 0.8% in March.  March was the most tumultuous period as investors had to contend with several issues: the inevitability of interest rates rising in the future, the redrawing of the European map in spite of protestations and denunciations form political corners, as well as, come to terms with the prospect of slightly lower growth in China and hence lower demand for American goods and services.  Note that the Dow Jones Industrial Average posted a negative 0.7% return in the quarter.

The Russian action in the Crimea caused many European markets to decline in March.  However, with the exception of the UK, most of the European markets posted positive returns in US dollars for the Quarter.  Several markets were surprisingly robust as several of the most problematic nations during the financial crisis continued to make progress: Greece and Portugal both up 15.1%, Italy up 13.6% and Ireland up 10.3%.  The emerging markets were more affected by the slower Chinese growth prospects and they declined 0.5% in the quarter.

So, what are we to make of these statistics as they pertain to investment strategy going forward?

Disruption and calamities are a necessary part of market adjustment in the continuum of price discovery.  

While many connoisseurs argue the merits of the perfect martini and the merits of shaken versus stirred, I believe that the evidence comes down in favour of shaken.  While the gin may be partially oxidized in this process and hence come out looking somewhat cloudy (bruised?), studies have shown that many benefits accrue as well.  At the University of Western Ontario, a study showed that the level of hydrogen peroxide in a shaken martini was half that of a stirred martini.  Hence, a shaken martini has more antioxidants than a stirred one thus lessening the risk of cataracts, cardiovascular disease and stroke.

In periods of market euphoria, it may be prudent to take the advice of Mae West and “slip out of the rain and into a dry martini”.  Markets may well benefit from being shaken on occasion lest we suffer more strokes like that of 2008.  We will stay the course and seek securities that achieve desirable price levels in these periods of disruption.

Post has attachment
#Goldcorp may review its Osisko offer after Yamana agrees to pay $441.5M in cash and 95.7 million Yamana shares for a 50% stake in Osisko

Last week, Goldcorp Inc.(TSE:G, Mkt cap 22.52B, P/E - , Div/yield 0.06/2.40, EPS -3.59, Shares 812.93M)  chairman Ian Telfer expressed confidence that no other company would offer a price high enough to trump its hostile offer for fellow Canadian miner Osisko Mining Corp. (TSE:OSK, Mkt cap 3.22B, P/E - , Div/yield - ,EPS -1.04, Shares 439.60M). He suggested that rivals would prefer to stay on the sidelines to recover from write-downs incurred in previous acquisition rounds.

Today, Osisko Mining Corp. announced that it had agreed to a $1.37B partnership with Yamana Gold Inc. (TSE:YR, Mkt cap 7.19B, P/E - , Div/yield 0.04/1.73, EPS -0.65, Shares 753.31M). Montreal-based Osisko said the deal would see Yamana pay $441.5M in cash and 95.7 million Yamana shares worth $929.6M for the 50% stake in all its mining and exploration assets. The share portion is based on the $6.88 closing price of Yamana's shares in Toronto on Tuesday April 1st.

The deal is complex and unusual.  Osisko has tapped two big Canadian pension funds for additional funding of $550M. Under this agreement, Osisko will increase an existing credit facility with the Canada Pension Plan Investment Board. It will also sell the rights to buy a stream of gold from its Malartic mine in Quebec to the Caisse de dépôt et placement du Québec. This C$550 million, together with the cash from Yamana, will generate about C$1 billion to be distributed to Osisko shareholders, the miner said.

Goldcorp Inc., which lodged its C$2.82 billion bid for Montreal-based Osisko in mid-January, had previously said that it did not see a need to increase its price. As of last week, Goldcorp's offer for Osisko was valued at C$6.42 per share. Today the shares are up 6.5% to $7.33, implying that investors expect both suitors to improve their offers.

When Goldcorp announced its bid for Osisko, it represented a 15% premium to its share price. While that seemed relatively low compared with other transactions made in the industry in the past, Mr. Telfer said it was in the range of premiums gold investors should expect going forward. Today announcement by Osisko will likely force Telfer and the Goldcorp board to review this assumption.

Post has attachment
The Alberta Energy Regulator has given the thumbs-up to Canadian oil producer #Cenovus Energy Inc (TSE:CVE, Mkt cap 23.78B, P/E 35.97, Div/yield 0.27/3.39, EPS 0.87, Shares 756.51M) to develop a new oil sands project with an expected production capacity of up to 180,000 barrels of oil per day. The news sent the company’s stock 1.8% higher in Toronto on Friday, closing at C$30.50 after touching C$30.63 earlier in the session.

The Grand Rapids thermal oil sands project is located in northern Alberta and will be developed in several phases. It is the company’s fourth approved oil sands project and is expected to have a life of 40 years. Calgary-based Cenovus said it would decide on when to start developing the field later in 2014.

Cenovus has been producing oil in the area for over 15 years from the Wabiskaw formation and has operated a steam-assisted gravity drainage (SAGD) pilot project at the site for more than three years. The oil producer said that it has so far drilled around 180 stratigraphic test wells at Grand Rapids to qualify for the permit and support its development plans. The results have confirmed that the reservoir is “very consistent.”

Cenovus’s other oil sands projects include Foster Creek, which has a production capacity of some 110,000 barrels of oil per day, and Christina Lake, which has a daily output of 130,000 barrels of oil. The company plans expansions at both fields and expects that its third project, Narrows Lake, will start production in 2017. Cenovus owns these three projects together with ConocoPhillips.

Post has attachment
How do stock brokers choose investments for their clients? Most investors assume that stock brokers (who call themselves investment advisors,) assess their client’s risk tolerance and investment objectives and select investments that best match them. Indeed, stock brokers are legally required to select investments that are ‘suitable’ for their clients. Unfortunately, ‘suitable’ is a very broad term.

Have a look at your investment account statements. Ask yourself the following question: how did my broker choose the investments that I currently hold?

Mutual Funds
There are over 5,000 mutual funds are available in Canada. They're classified into more than 30 categories: bond funds, equity funds, sector funds, specialty funds, regional funds, diversified funds, balanced funds, index funds, etc. Stock brokers like mutual funds because they are paid sales commissions and ongoing trailer fees that are invisible to their clients. Did your broker choose a fund that meets your risk tolerance and investment objectives, or the one that pays him the most? How many funds are enough? 

There are thousands of stocks available on Canadian, US and international equity markets. One of the pitches that stock brokers make to prospective clients is, “as a client you will have access to our analysts’ propriety research.”  Brokerage businesses earn large fees by raising capital for publicly traded companies (known as IPO’s or initial public offerings,) and from mergers and acquisitions advice, (M&A’s). The vast majority of analyst reports are buy recommendations, rather than hold or sell recommendations.

Exchange Traded Funds
Why have Exchange Traded Funds (ETFs) become so popular? Low cost diversification and low management fees are the main benefits touted by the industry. ETF fees are in the 0.5% range, compared with 2% to 3% for many large Canadian mutual funds. However, in many cases, investors are switching to ETF’s without fully understanding what they are buying. You can read more about the risks associated with ETFs here>>  

While #ETF’s may offer low fees, stock brokers often charge clients a management fee to select funds on their behalf.  Holding a large number of ETFs can lead to over-diversified and potentially inappropriate portfolio diversification in relation to clients’ risk tolerance.

Alternative Asset Classes
Over the past few years, there has been growing interest in ‘alternative assets’ such as hedge funds and private equity funds. These funds often promise higher returns than public equity markets and paradoxically, lower risk. Not surprisingly, many have failed to deliver either. 

 Hedge and Private Equity fund managers typically charge clients based on a ‘2 and 20’ fee structure: an annual management fee of 2% of assets, plus 20% of profits above a pre-set threshold. This means managers have a big incentive to take on more risk. They also share those fees with stock brokers who sell their funds. 

How can you protect yourself from the many conflicts of interest inherent in the brokerage business? 

In each of these cases, there is a potential conflict of interest between the clients’ best interest and stock brokers’ incentives to earn higher fees. The OSC is reviewing the potential benefits of imposing a fiduciary, or ‘best interest’ duty on stock brokers.  Not surprising, their self-regulating body, the Investment Industry Association of Canada (IIAC) is resisting this initiative. 

At Sprung Investment Management, we are discretionary investment managers, not stock brokers. We are independent of any bank or broker and our only source of revenue comes directly from our clients. We do not receive any kind of commissions or trailer fees from stock brokers or fund managers. We are committed to meeting a fiduciary duty. A fiduciary duty or best interest standard (already the norm for lawyers, accountants and some other professionals) is a legal requirement that we put the client’s interests first. Our investments are made in your best interest.

At Sprung, our investment management approach is based on the value investing principles developed by Benjamin Graham.  Graham explained that “the essence of investment management is the management of risks, not the management of returns.”  The management of risk begins when a new client joins us. You will meet directly with Michael Sprung and other members of our team. We take the time to get to know you in order to understand your investment objectives and risk tolerance.

Based on that understanding, we begin to build a portfolio that includes high quality stocks and investment grade bonds. Whereas mutual funds often hold a large number of stocks, our client portfolios typically hold 20 to 30. If you hold more, gains in any single stock will hardly affect the total value of your portfolio. If you hold fewer, losses in any single stock can have an adverse effect on your portfolio.
On the fixed-income side, we hold good quality investment grade bonds. We manage the duration of your holdings to reflect our view of the existing interest rate environment.

In summary, the benefits of portfolio management include:
• A personal relationship with the person who is actually making investment decisions on your behalf;
• Holding a well-diversified portfolio that properly reflects your risk tolerance and investment objectives;
• Avoiding the conflicts of interest inherent in the broker/ fund manager relationship;
• Transparency—no hidden fees or commissions;
• Lower cost.

Post has attachment
#CAE Inc. (TSE:CAE, Mkt cap 3.88B, P/E 22.01, Div/yield 0.06/1.63, EPS 0.67, Shares 263.19M) a Canada-based manufacturer of simulation equipment, has signed four contracts that will see the company supply training systems and services around the globe. The contracts have an aggregate value of over $140 million, the company said on its website.

One of the customers is the United States Navy, which has ordered four P-8A simulators in a deal through Boeing Co. The equipment is intended to support the Navy's expansion of its long-range anti-submarine warfare aircraft.
The Montreal-based firm will also sell an SW-4 helicopter full-flight simulator to the Polish Air Force School in Deblin, Poland. The simulator for the multi-role light utility helicopter will be delivered in 2016 to assist the Polish Air Force's training program for air force cadets. CAE considers Poland to be a promising market offering a variety of opportunities for simulation-based solutions, according to its group president for defence and security, Gene Colabatistto.
CAE has also been contracted to deliver on-site services to support the flight simulation activities of the German Air Force. This deal includes maintenance and logistics support for the German Forces' Tornado, C-160 Transall, P-3C Orion and Mk-41 Sea King flight simulators, as well as its pilot selection system.

A separate order came from Malaysia's PWN Excellence Sdn Bhd (PWN), an Authorized Synthetic Training Centre for AgustaWestland, which has a CAE 3000 Series AW139 full-flight simulator installed on its premises. This contract will see CAE providing lifecycle support and maintenance services for the simulator over the next ten years.
Wait while more posts are being loaded