BNN's Stars and Dogs

Although I’m not much of a stock picker, professional or otherwise, I was one of three guests on the Business News Networks’ Stars and Dogs show on December 18th (they ran it over the Christmas holidays). We had to pick a “2009” version of each, which I must admit wasn’t easy. Finding a single choice and then having to wear it all year requires certain assumptions.

For the dog, I did the unusual thing and chose something that I owned (and also happens to be in the Decade of Daddy Mirror Fund™ (see prior post “Decade of Daddy Mirror Fund™ Bi-weekly Report” January 25-09): Canadian Oilsands Trust (COS-UN:TSX). I was concerned about the ~$500MM of debt coming due during the summer of 2009, plus the fact that at $40 oil, COS might not have any free cash flow to pay us Unit holders much, if anything, on a quarterly basis. When another of the other panelists advised that he too wanted to pick COS as his dog, I was left to come up with something else:

Nortel? Already at $0.40.

O’Leary Global Equity Income Fund? At that point the value of the Units had slipped from November’s $11.25 to $8.50, so it was a month late.

Allen Vanguard? Bankruptcy / hard workout is certainly a potential outcome, but the stock was already down 90%, so it seemed a bit too obvious.

Open Text? The stock market certainly expects perfection in 2009 and 2010, at least that’s what most of the earnings forecasts imply. Recessions are a tough backdrop for perfection. But the chance of a takeover bid will keep the stock from getting too low, even if there is a quarterly earnings hiccup.

Fortunately, my fellow panelist chose another name, so COS is was. At the time of the show’s taping, hosted by Kim Parlee, COS was trading around $20/unit (now at $18.40). According to Genuity Capital Market’s Research Analyst, this might have been the right call:

Earnings season has started and the key focus is not if, but how much does COS.un cut its distribution for Q1/08? (To be announced with Q4/08 results on January 28 after the market close.) Given that management wants distributions to reflect free cash flow, we estimate that distributions can be cut as much as 79% to $0.16/unit. The other question is if they can go lower when the trust is faced with debt maturities of $200 million and $246 million in Q2/09 and Q3/09, respectively. The outcome can be significant; therefore, we reiterate our SELL recommendation.

On the Stars front, that was even harder. If you are planning for a long, deep recession, how can you be buying stocks?

The Canadian banks? The timing of a major rebound isn’t certain given their client base.

Brick Brewery? The fact that the Ontario government has increased the minimum amount that the Brewers Retail must charge per case will undoubtedly be a financial windfall for BRB, but the marketcap and float are a bit small to pick it.

Research in Motion? Talking up your own book is a time honoured tradition for business television guests, but since I can’t explain the last $25+ drop in the share price (from C$75 to C$48 at that point), I’ll be at a loss to articulate why it’ll jump back in 2009.

Which left me with Certicom (CIC:TSX). RIM had already bid $1.50 at that point, and the stock was trading at $1.80 in anticipation of a sweetened offer. The original $66MM offer didn’t cut it, with $30MM in cash on hand at CIC, and tens upon tens of millions of tax losses for RIM to enjoy post-closing. They were getting it for free.

The question wasn’t: will the company be acquired? Just the price was in doubt. So that was my “Star”, on the basis that you could make 10-25% guaranteed (almost), which seemed to be more than I could say for any other stock in 2009.

Last Friday, VeriSign and Certicom agreed to a friendly takeover of $2.10, and the stock raced to $2.34. With $0.54 in your jeans, you are up 30%. Phew. My work is done. If that was your 2009 portfolio gain, it’d be a very good year indeed. And you still have more than 48 weeks to find another place to hide. But don’t ask me; I’m out of ideas. What those portfolio managers do on TV every day is tough work.

MRM