Macquarie Power & Infrastructure Income Fund - (MPT.UN)

Macquarie Power & Infrastructure Income Fund invests in essential infrastructure assets, with an emphasis on power infrastructure.

MPT's POWER PORTFOLIO INCLUDES:

-Gas Cogeneration – Cardinal, a 156 MW gas cogeneration plant, is located in Cardinal, Ontario.

-Wind – MPT owns the 99 MW Erie Shores Wind Farm in Port Burwell, Ontario, which currently represents about 6% of Canada's installed wind capacity.

-Hydro – MPT owns four hydroelectric facilities, located in Dryden and Marathon, Ontario, and Sechelt and Dease Lake, British Columbia, totalling 36 MW.

-Biomass – MPT owns a 28 MW biomass facility in Whitecourt, Alberta, and holds investments in a 31 MW facility located in Chapais, Quebec.

MPT's SOCIAL INFRASTRUCTURE INCLUDES:
An indirect 45% investment in Leisureworld, which is currently the fourth largest provider of long-term care (LTC) homes in Ontario.

FINANCIAL HIGHLIGHTS:
-I have listened to the last conference call and management seemed to be very conservative and selective in any growth opportunities that they’ll investigate in the future.
-12.2% yield
-They have provided 2008 payout ratio guidance in the range of 95%-100%
-Trading at approximately book value
-Involved in recession resistant, government regulated industries.
-S&P stability rating of SR-2 which is the second highest rating and described by S&P as “An entity rated ‘SR-2’ has a VERY HIGH level of distributable cash flow generation stability.”
-Estimated 2008 PE - 21X
-Estimated 2009 PE – 17X
-Although this trust is fairly small ($420 million market cap) their income streams are diversified with 23% of distributable cash from their investment in Leisure World with the remainder coming from their power generation facilities.
-One note of caution is they do pay relatively high fees to their Australian based parent company “The Macquarie Group”
-TDWaterhouse rates them a very strong buy with a $10.00 one year target price (recently reduced from $10.50).

[I do not own units of MPT.UN. As always please do your own research and consult your own financial advisor before making any decisions.]

Stock Selection Process

Here is the general process I use to evaluate a stock.

1. Are their products/services in a growing or stable industry?
-for me this would exclude companies such as newspapers, tobacco etc. Basically, I look for companies that I think will still be around in 50 years.

2. Do they have a competitive advantage or are there large barriers to entry?
-for example companies like TRP and CNR have huge barriers to entry. Other than the billions of dollars that would be required to build the infrastructure it would takes year and years to get the proper approvals.

3. Do they have a history of returning value to shareholders?
-for example, JNJ has raised their dividend for the last 44 years. MMM has paid a dividend since 1916. A history of share buy backs would also be a plus.

4. Are they trading at a reasonable price?
- I use my fair value calculation when appropriate.

To calculate fair value I use a modified discounted cash flow model. Basically, I calculate the present value of the future dividend income and the present value of the future estimated EPS (multiplied by the PE ratio that I think the company SHOULD be trading at) and the sum of those two numbers is the fair value

My stock selection process has evolved over the years and I find it effective to select companies for my particular investing style. However, for other strategies or investing styles my selection process would be very ineffective. I’d also just like to note that the formula I use to calculate fair market value is not valid for all types of companies. For example, it’s not effective for many REIT’s or resource companies as their share prices are generally based on NAV, FFO, or reserves which are not included in my formula.

25 Stocks to Avoid

I recently read an article by Jon Markman over at MSN Money Central. In his article he explains his rational for avoiding the following 25 stocks.

To read the entire article please click here.

25 COMPANYS JON MARKMAN SAYS TO AVOID

1. Merrill Lynch (MER, news, msgs)
2. Lehman Bros. (LEH)
3. Bear Stearns (BSC)
4. Bank of America (BAC)
5. Citigroup (C)
6. Washington Mutual (WM)
7. KeyCorp (KEY)
8. Wachovia (WB)
9. Moody's (MCO)
10. McGraw-Hill (MHP)
11. YRC Worldwide (YRCW)
12. JB Hunt Transport Services (JBHT)
13. Con-Way (CNW)
14. Knight Transportation (KNX)
15. Old Dominion Freight Line (ODFL)
16. McClatchy (MNI, news, msgs)
17. The New York Times (NYT)
18. Gannett (GCI)
19. Arctic Cat (ACAT)
20. Bed Bath and Beyond (BBBY)
21. Williams-Sonoma (WSM)
22. La-Z-Boy (LZB)
23. Stanley Furniture (STLY)
24. Bassett Furniture Industries (BSET)
25. News Corp. (NWS)

Of course you should do your own research as it's been my experience that the best buying opportunities are often when everyone else says don't buy (however sometimes they're right)

Alimentation Couche-Tard

I initiated a position in ATD.B on Friday. I revisited this name shortly after my last Wednesday’s posting “Where is the Value?”. I’ve provided a brief description of ATD.B as well as my reasons for buying:

“Couche-Tard is the largest convenience store operator in Canada with a network of over 2,000 stores in Canada as well as a considerable presence in the U.S., with more than 3,000 additional stores. Over 3,600 of the total number are Company-operated stores and nearly 1,400 stores are operated under our affiliate program. The Company sells fuel in 65% of its Company-operated stores. The Canadian stores are located in Quebec, Ontario, Alberta, British Columbia, Manitoba, Saskatchewan and the Northwest Territories. The U.S. stores are located in 28 states. The stores are primarily operated under the Couche-Tard® and Mac’s® trademarks in Canada and the Circle K® trademark in the U.S."

"In addition to the North American Couche-Tard network, there are approximately 3,500 Circle K licensed stores located in seven other regions worldwide (Japan, Hong Kong, China, Indonesia, Guam, Macao and Mexico).”

-Trailing P/E 20
-2008 estimated P/E 16
-2009 estimated P/E 14.5
-ROA 10.46
-ROE 23.46
-Recession proof industry
-Recognizable and strong brand (I personally like the layout of the Mac stores)
-Stock has been under pressure recently due to declining US fuel margins (at the pump) as well as the integration of the 236 convenience stores purchased from Shell in Dec 2006.
-In my opinion the last couple of quarters were decent despite the unfavourable fuel margins. I believe that when margins turn around these guys will surprise the street.
-TDWaterhouse has a 12 month target price of $28 (up about 30% from current levels)
-Successful history of growing by acquisition (in both Canada and the US)

Stock Splits

I’ve got a great deal for you…..you give me a one 100 dollar bill and I’ll give you ten 10 dollar bills. Sound like a good deal? Interested? Of course your not interested...it’s not a good deal. Well this is exactly what happens when a stock splits. Essentially, you’re left with the exact same amount of pie…it’s just cut into more pieces.

So if stock splits don’t effect the overall valuation of a company why do they bother to split their stock?

• Make shares seem more affordable to small investors (although the intrinsic value of the company remains the same)
• Could increase the liquidity of the stock as there are more shares available on the market (thus making it easier to trade)
• Could split as a signal to the market that the company's share price has been increasing (the resulting attention could increase demand for the name)

I know many of you that read this blog completely understand what happens when a stock splits, but I just thought that I should go over it for those of you that don’t as I find it really frustrating listening to “water cooler” talk speculating about the potential of stocks to split.

JNJ

I purchased JNJ yesterday for a long term hold and here are my reasons why:

- 44 years of consistent dividend growth.
- Dividends issued to shareowners every quarter since 1944.
- Dividend raised each year for 44 consecutive years.
- Sales have increased each year for 73 consecutive years.
- Double digit Earnings increases for 21 consecutive years.
- Current yield of 2.50%
- 44% of sales outside of North America (built-in currency hedge)
- ROE levels of above 21% for the past 10 years
- Current P/E – 16.18
- Projected 2007 P/E – 15.3
- Projected 2008 P/E – 13.44
- 4 Star rating from S&P - $74 one year target
- Argus rates it a buy with a $76 one year target
- I like their diversified holdings within the healthcare sector particularly their consumer products.

(Disclaimer: I’m not your boss or your spouse so do you own research and make your opinions on when to buy or sell. Nothing I say should be bastardized or construed in any way to be advice)

How Many Securities Should You Have?

I’ve been asked this question before and my general rule of thumb is 20. I touched on this in my January post about diversification however I’ll just rehash it a little bit. I think that if you own over 20 stocks you run the risk of becoming too diversified. If you’re too diversified you basically become the market and if that’s the case why waste the time and commission fees buying individual stocks? Simply buy some low MER index funds and get it over with, because if you diversify too much you’re going to mimic the index anyways.

There are of course exceptions, for example if you’re pursuing a high risk strategy such as penny gold stocks it would probably be wise to create a basket of these high risk stocks and hope for a few big winners. Additionally, if your portfolio is under $70,000 I don’t think that you should be aiming to hold 20 stocks. I believe that if you can’t commit a minimum of 2.5% to 3% of your portfolio to a stock you probably shouldn’t buy it. I will often buy a half position ie- 2.5 to 3% of a stock and if it increases and grows into my target 4 to 8% of my portfolio great! but if not I will wait and average down to increase the weighting. You might have noticed that I have a few holding under 2.5% (which I better explain) --- BA.UN was spun off of BCE and the commission to sell it doesn’t make it worth while. The other 2 mutual funds I’ve owned since I was 16 – bought on the recommendation of a broker and haven’t looked at or added to since. Incidentally they are some of my worst performers.

(Disclaimer: I’m not your boss or your spouse so do you own research and make your opinions on when to buy or sell. Nothing I say should be bastardized or construed in any way to be advice)

Limit vs. Market Orders

This question was asked recently on the www.moneysense.ca forum whether it’s better to use limit orders or market orders. Personally, I always use limit orders. I usually put them in for a 5 day period but will occasionally adjust them (depending on the market). Using limits has caused me to miss some opportunities in the past (sometimes within a penny of my strike price) but it has also allowed me to buy some good companies 3% to 5% lower than a market order would have. I am a long term investor so the 5% initial savings will add up over the long term and will hopefully make up for any missed opportunities. Although, there’s no problem with market orders I would definitely advise that investors who purchase low volume stocks use limit orders in order to avoid any spikes caused by liquidity issues.

Proctor and Gamble

I recently came across this post on the moneysense forum. It was posted by a savvy amateur investor (investor99). I believe him to be competent and have asked his permission to post his comments.

“I decided to bite on PG today, and leave the U.S. financials for another day.

After PG's dramatic 5% fall and recovery I thought I had missed my opportunity, however the stock fell again to the low $62 level where I got in. I've wanted to own this one for quite some time now, but it was never cheap enough. It's still not cheap but I think the multiple is warranted and I like the technical clue that I got when huge amounts of buying came in at $61.25. Obviously there is major resistance at that price so the risk reward was tilted IMO, to the reward side. One dollar down and a fair amount more than that up. If it falls lower over the next few days or weeks I'm going to double my position.

2007 EPS estimate = +15% YOY
2008 EPS estimate = +14.5% YOY
Not bad growth for a $197 Billion company. Their stated goal is 10% EPS growth annually.

I like the play on the developing world including the BRIC countries, and the stability of earnings due to the fact that many of their products are 'essentials'. Everyone reading this post has probably used a P&G product today. Also the fact that they have raised their dividend at a pretty healthy rate (10%+), every year for the last 50 years doesn't hurt either. 10/16 analysts have it as a buy and S&P has it as a 'Strong Buy'.”

Here are some other stats for P&G.

P/E – 22
Forward P/E - 20
Price/Sales – 2.66
Price/Cashflow – 15.5
Yield – 2%
S&P – 5 star, strong buy
Half of it’s sales are outside of North America

(Disclaimer: I’m not your boss or your spouse so do you own research and make your opinions on when to buy or sell. Nothing I say should be bastardized or construed in any way to be advice)

When Do you Sell?

For some stocks I know the answer – never. Companies I own such as TD, GWO, POW, CSH.UN, TRP and PFE I don’t ever plan to sell. Now some of you may be wondering “Why on earth would I plan on holding those to the grave? Won’t there be an optimum time to sell and rebuy?” Well ya there probably would be an optimal time but if your smart enough to figure that out than stop reading this stupid blog, go make a few hundred million dollars and retire in luxury. Additionally, I plan on holding the above stocks for their cashflow. For example, I’m now making 6.1% in dividends from TD (based on my initial buy price 5 years ago). What kind of yield will I be making in 2012? I’m betting significantly higher than 6.1%, not a bad return in my opinion plus the share price has appreciated about 150%. Now compare that to a 10 year government bond maybe 5% (if your lucky).

Now that brings me to all my other holdings. The more cyclical, resource based companies. Historically, I’ve been pretty good at buying (and mediocre at selling) but how do you know when to sell. Who hell the hell knows? But if you want my opinion on it I think that oil and gas stocks are going to be range bound for the next little while. So after writing this I’m going to take a good hard look at TLM and decide if selling some might be in order.

Remember you don’t make anything until you sell and there is no shame in taking a profit.

(Disclaimer: I’m not your boss or your spouse so do you own research and make your opinions on when to buy or sell. Nothing I say should be bastardized or construed in any way to be advice.)