Canadian Stock Returns

With the rather volatile and poor performance of the Canadian stock market since last August, I thought it would be interesting to determine if there was a flight of capital away from small cap stocks towards large caps. As the table below indicates, the poorest performing stocks have been those with a market cap between $50M and $150M which shouldn't come as a surprise but is important to know. Please note that dividends are not included in the price returns.

McCoy Corp

From McCoy's web site:

McCoy Corporation (TSX:MCB) is a publicly traded company comprised of three main operating segments: Energy Products & Services, Truck & Trailer Products & Services, and Trailer Manufacturing.

Inotec Coatings and Hydraulics Inc., Farr Canada, Superior Manufacturing and Hydraulics Inc., Precision Die Technologies LLC and Rebel Metal Fabricators Ltd. represent our first segment. Energy Products & Services include computerized torque turn monitoring equipment ("WinCATT"), hydraulic power tongs for land and off-shore rigs, tong trucks, trailer mounted hydrovac and vacuum tanks, the application of specialized coatings for the prevention of wear, erosion and corrosion, and the manufacture and service of hydraulic components.

The Truck & Trailer Products & Services includes "The Real McCoy Service Centres" in Edmonton and Red Deer. These service centres specialize in equipment installation, suspension work, welding, safety inspections, brake service, alignments, frame straightening, axles and hydraulics for heavy-duty and some light-duty trucks.

The Trailer Manufacturing segment is comprised of Scona Trailer Manufacturing in Edmonton and Peerless Limited in Penticton B.C. Scona Trailer Manufacturing produces lowboys, flat decks, step decks, oilfield floats and specialty trailers. Peerless Limited also serves customers in the oil and gas industry and is a market leader in the development of quality manufactured logging trailers for Western Canada.

McCoy Corporation currently employs approximately 900+ individuals in Alberta and British Columbia, Canada and Lafayette, Louisiana.

Over the past six months, insiders have purchased over 170,000 shares with the majority of these shares being purchased by Board Director David MacDonald. From the Globe and Mail site, McCoy has a TTM P/E of 9.90 and a Forward P/E of 7.64. The dividend yield is 3.5% and the price/sales ratio is 0.38.

I am hoping that McCoy was oversold and now is about to start a nice upward movement.

OM Group

I bought OM Group this morning and then sold June 70 calls resulting in a breakeven price of $59.50. OM Group's profile can be found here on Yahoo.

Timer Gives Long Signal

With yesterday's rising US stock markets, my timer generated a long signal last night. Anticipating that this would happen, I recently purchased some US stocks.



On my watchlist today is Key Energy Services. Key Energy Services, Inc., together with its subsidiaries, operates as an onshore, rig-based well servicing contractor in the United States. It operates in three segments: Well Servicing, Pressure Pumping Services, and Fishing and Rental Services. The Well Servicing segment provides a range of well services, including rig-based services, oilfield transportation services, and other ancillary oilfield services to complete, maintain, and workover oil and natural gas producing wells, as well as offers cased-hole electric wireline services. The Pressure Pumping Services segment offers well stimulation services, such as fracturing, nitrogen services, and acidizing; and cementing services to oil and natural gas producers. The Fishing and Rental Services segment involves various services for recovering lost or stuck equipment in the wellbore, as well as offers a fishing tool, which is a downhole tool designed to recover equipment lost in the well to oil and natural gas production companies. This segment also offers rental equipment, including tubulars, handling tools, pressure-control equipment, and a fleet of power swivels for use on land and offshore for drilling and workover services. The company operates primarily in the continental United States and internationally in Argentina. Key Energy Services was founded in 1977 and is based in Houston, Texas.

Key Energy Services Inc.'s Corporate Governance Quotient (CGQ®) as of 1-Feb-08 is better than 96.5% of CGQ Universe companies and 81% of Energy companies.

Corporate Governance Quotient

While on the Yahoo Finance site this evening to view the Profiles of companies whose stock I own, I noticed the Corporate Governance Quotient ratings. The following is from the Yahoo site:

Corporate Governance Quotient (CGQ®), a corporate governance rating system provided by Institutional Shareholder Services (ISS) on over 8,000 companies worldwide, evaluates the strengths, deficiencies, and risks of a company's corporate governance practices and board of directors.

CGQ uses a comprehensive set of objectives and consistently applied criteria for each of the companies rated. The database features corporate governance rankings on more than 8,000 companies worldwide, and includes underlying data points for up to 63 corporate governance variables, categorized under four areas of focus: 1) board of directors, 2) audit, 3) anti-takeover provisions, 4) executive and director compensation. Some of the variables are reviewed together under the premise that corporate governance is enhanced when selected combinations of these variables are adopted. To facilitate analytical comparison, each company is scored individually, relative to its market index and its industry group.

The data provided in CGQ is derived primarily from public disclosure documents, press releases and corporate websites. It then goes through a rigorous verification process by ISS' senior corporate governance analysts and is put in to the CGQ database.

I thought it would be interesting to check the CGQ ratings of the US stocks that I either own or have shorted.



From what I have read over the past few years, companies that have high corporate governance standards tend to outperform their peers. With the exception of Warren Resources, I am satisfied with the CGQ ratings of the stocks I own.

Writing Covered Calls on AMX and USU

In keeping with my belief that we are in a sideways market, I am considering writing (selling) April, 2008 calls on my America Movil and Usec shares. The tables below present analyses of the maximum returns if the stocks are called away on the day the options expire.





For privacy reasons, I have whited out some of the numbers.

The "Premium Received" values are today's highs (or close to it) for the two options. The "Theoretical Call Price" and "Delta" were obtained from the I Volatility site.

Harvest Natural Resources

I went long Harvest Natural Resources today. Harvest Natural Resources, an independent energy company, engages in the acquisition, exploration, development, production, and disposition of oil and natural gas properties in Venezuela. It operates the South Monagas Unit comprising the Uracoa, Tucupita, and Bombal fields. The company was founded in 1988 and is based in Houston, Texas.

Despite weakness in the overall market US stock market today, Harvest was up over 4% which I'll take as a good sign. This is a short term (2 month) play.

America Movil, Janus Capital, UBS and XL Capital

I am going to try my hand at going long and short at the same time. Today I went long on America Movil and short on Janus Capital, UBS and XL Capital.

Two days ago I purchased Parker Drilling and Usec. These are short term plays that I plan to hold for only two months.

So You Think You Can Short (The Market) Part 2

A longer term study was required after my last post to determine which index I should short when my timer gives a short call. In terms of selecting an index to short and therefore a contra ETF to buy, the Russell 2000 is best suited to my timer.

So You Think You Can Short (The Market)

If I have faith in my US market timer, I should consider how to make money during a short call. I don't have the time that I feel is necessary to short (and then monitor) stocks so the best avenue may be to purchase contra ETF's. The choices for me are DOG (Dow 30), PSQ (Nasdaq), SH (S&P500) or RWM (Russell 2000). Unfortunately, these ultra ETF's are relatively new so I can't backtest beyond the March 01, 2007 short call. The tables below indicate that the performances of DOG, SH and RWM are quite similar on average. For the narrow time period tested, my market timer appears to be best suited to shorting the NASDAQ. Of course, this is much too strong an assertion to make on a sample size of three observations so this study will have to continue into the future.

Review of My US Market Timer Performance

Sometimes market timing works, sometimes it doesn't. If only we knew ahead of time when it was going to work! My US market timer would have kept me out of the market from late April, 2002 to late October, 2002 which would have been a tremendous help to my portfolio. Likewise, the timer would have kept me in the market from March, 2003 to March 2004 again providing excellent guidance. There is no timer out there that can perfectly catch the tops and bottoms. If you are going to use a market timer, you have to find one that is neither too fast nor too slow for you. I will always be searching for a better timer but, based on the table below, my current timer works well for me.

Review of My Canadian Market Timer Performance

Over the past five years the Canadian stock market has been so strong that even when my timer gave a short signal, the market still went up. Mind you, from the table below, the market went up less after a short signal than after a long signal.



One of the things that strikes me in the table is that the two most recent short signals were followed by declines in the Canadian market. This may signal that the bull market which we enjoyed for the past five years is over. If that is so, my market timing signal may prove to be helpful.

Recommended Books

In my opinion, great investment books are few and far between. Of the books that I read lately and would recommend are The Only Three Questions That Matter by Ken Fisher, Fooled By Randomness by Nassim Taleb, Active Value Investing by Vitaliy Katsenelson and Reminiscences of a Stock Operator by Edwin Lefèvre. Click on the titles to be taken to customer reviews on Amazon's site.

Canadian Stock Selections. 02/16/2008

Jazz Air Income Fund (JAZ.UN) is one of only two stocks that pass all my criteria for stocks which I am willing to buy and hold for a two month period. Jazz Air Income Fund is a trust created to indirectly acquire and hold limited partnership units of Jazz Air LP. Air Canada Jazz is the second largest airline in Canada based on fleet size and the number of routes operated. Air Canada Jazz operates more flights and flies to more Canadian destinations than any other Canadian carrier. Air Canada Jazz forms an integral part of Air Canada's domestic and trans-border market presence and strategy.

Air Canada Jazz has a commercial agreement with Air Canada that is the core of its business. Under the Capacity Purchase Agreement (CPA), Air Canada currently purchases substantially all of Air Canada Jazz's fleet capacity based on predetermined rates. The CPA provides commercial flexibility, low trip costs and connecting network traffic to Air Canada. Also, the CPA significantly reduces Air Canada Jazz's financial and business risks, and provides a stable foundation for day-to-day operations and future growth.

A review of the insider transactions over the past six months reveals that one of Jazz's directors, Richard McCoy, purchased 10,000 shares on November 13, 2007.

Enervest Income Fund (EIT.UN) is the other stock that passes my criteria. EnerVest Diversified Income Trust is an investment trust which invests in a diversified portfolio of income, royalty and real estate investment trusts, and limited partnerships, all of which trade on the Toronto Stock Exchange. The investment manager of the trust is Cypress Capital Management Ltd.

The RiskGrade of JAZ.UN is 103 and EIT.UN has a RiskGrade of 111.

Should you feel confident that the Canadian market is going to propel higher in the coming two months, you may also want to consider Hanfeng (HF), Mercator Minerals (ML), Petrobank Energy and Resources (PBG), and Red Back Mining (RBI). These four stocks have RiskGrades of 285, 270, 278 and 256 respectively.

A review of insider transactions since July, 2007 indicates that insiders have been net sellers of Red Back Mining and Mercator Minerals. Some Petrobank insiders have been purchasing shares while others have been selling.

Analyst recommendations in the past two months for the six stocks mentioned in this post are as follows:

Hanfeng: Buy (Peter Hodson)
Mercator Minerals: Speculative Speculative Buy - Jennings Capital, Buy - Blackmont Capital, Buy on Weakness (Mark Lackey)
Petrobank Energy and Resources: Buy - UBS, Buy (Hugh Cleland), Hold (David Burrows), Don't Buy (Bill Harris)
Red Back Mining: Buy (Jennings Capital), Buy (Alex Lane), Buy (Bill Harris), Buy (Robert Cohen)

Market Timing Signal

On February 13, my timing signal for the Canadian market switched from short to long. Since August 31, 2004, the S&P/TSX composite index average return after one of my long signals was 3.9% and the average return on the index after a short signal was 1.4% indicating that the indicator may have value. If you look at a chart of the S&P/TSX from 2003 to present it has been a great upward ride. I think that market timing will prove to be of greater importance going forward than it was in the past five years since there is absolutely no chance that the S&P/TSX is going to generate the performance in the next five years that it did in the past five years.



My US market timing signal remains short even though it was very close to going long over the past ten days but then failed to follow through with positive market performance.

RiskGrade Review

I have far too little data to yet make a determination of the usefulness of RiskGrades as they apply to my stock selections but I thought that I would post what I have seen thus far.

Every weekend I run Vectorvest searches and record the top five stocks from a variety of searches in a spreadsheet. In this same spreadsheet I record the two month returns for the stocks. I began recording the US stock selections on 11/30/2007 so I only have three sets of two-month returns.

For the three sets of two-month returns for the six Vectorvest searches the median return is -14.8%, the average is -14.2% and the standard deviation is 17.4%. If I remove the stocks that have RiskGrades greater than 300, the median is -12.7%, the average is -11.1% and the standard deviation is 15.8%. If I remove all stocks having a RiskGrade greater than 250, the median is -10.3%, the average is -6.6% and the standard deviation is 18.7%.



With regards to Canadian stocks, I only have 38 stocks for which I have recorded both the RiskGrade and the two-month return but the results are somewhat similar. For all the stocks, the median return is -3.8%, the average is -8.1% and the standard deviation is 15%. If I remove the stocks that have RiskGrades greater than 300, the median is -4.4%, the average is -7.3% and the standard deviation is 16.1%. If I remove all stocks having a RiskGrade greater than 250, the median is -2.7%, the average is -3.1% and the standard deviation is 17.2%.



About one month ago I would only buy stocks if the RiskGrade was less than 300 but I may change that to only buying stocks that have a RiskGrade less than 250. I want to see how stocks with a high RG react in an uptrending market. Perhaps the higher RG stocks will outperform the lower RG stocks in a bull market.

Looking at the 30 stocks that I currently own, only four have a RiskGrade greater than 250 and none are greater than 300. The overall RiskGrade for my stock holdings is 85.