Nov 212016
 

Why I Sold 100 shares of Canopy Growth Corp (CGC)

About a year ago I wrote about buying 300 shares of Canopy Growth Corp (CGC:TSE). It is a federally regulated cannabis producer. It caught my attention last year when it became the first marijuana grower in North America to graduate from a venture exchange to be listed on a major exchange (the TSX.) This strengthens the sector and is expected to bring Canopy Growth to international institutional investors. 😀

Last year the company was making about $5 million in revenue, but now it’s making closer to $20 million a year. This figure still falls short compared to the sales of most other TSX listed stocks but it goes to show how quickly this company has grown. The share price more than quadrupled from $2.50 in last November to over $10.00 today. 🙂 Woohoo! This calls for a…

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Clearly investors are euphoric over this stock. Canopy Growth has the first mover’s advantage and it’s the largest player of its kind in the budding pot industry. But as a long term investor, I can’t just blindly buy into the hype. I also have to consider the sustainability of the stock’s growth over a long period of time, and Canopy Growth’s track record is currently too narrow for me to get an accurate assessment. I recently reviewed my position in CGC, and decided the stock is now overvalued by 50% compared to its fundamentals. So last week I sold 1/3rd of my holdings in it at $12.10 per share.

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Back when I purchased this stock at $2.55/share the price was still worth the risk. But the CGC’s valuation today is a lot higher. The stock is currently trading at a 2018 forward price-to-earnings (P/E) ratio of 448 times. This kind of multiple isn’t unheard of for small and fast growing companies, but a lot of things in the future will have to go right for Canopy Growth to justify it’s currently market capitalization of $1.5 billion. It would be great if the U.S. were to follow Canada and legalize recreational marijuana usage at the federal level, but that could still be decades away if it happens at all. The current shares are factoring in a market that is much larger than what exists today.

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Oct 312016
 

Last month I blogged about opening up a new Interactive Brokers account to invest in stocks. I’ve received some reader’s questions since then. So in today’s follow-up post, I’d like to discuss the following topics. 🙂

  1. How to Open an IB Account
  2. How to transfer funds between your bank and IB
  3. How margin accounts work with IB
  4. How to enter a stock trade
  5. Overall thoughts and Review of Interactive Brokers

1) How to Open an Interactive Brokers Account

To begin the process of creating an IB account, go to https://www.interactivebrokers.com and choose the “OPEN ACCOUNT” option near the top right of the page. Then follow the online instructions.

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Sometimes Interactive Brokers may need to verify your identity before you can start using its service. This means you’ll have to take your ID to an accredited professional such as an accountant or doctor and get them to guarantee your identity. This happened to me. So I took my Driver’s License to a notary public and paid $35 to verify my identity. This extra security measure makes it more difficult for criminals to open fake trading accounts under someone else’s name.

2) Transferring Funds to Your IB Account

There are 2 ways to deposit funds into an IB account.

  • Fund Transfers. Use this to deposit cash into the account.
  • Position Transfers. Use this to transfer your current stocks & balance from an existing account at another brokerage to IB.

For example, in my case I used the Position Transfer method because I wanted to move my existing stocks from TD to IB. Make sure to choose the correct settings when creating the transfer instructions. For the transfer method, choose ATON if you are transferring from a Canadian broker like TD. For the transfer type choose “Full” rather than “Partial” if you want to make a complete switch like I did. Choose the correct institution and your account number that the portfolio will be transferred from.

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I noticed that TD Direct Investing breaks up Canadian and U.S. margin accounts. So I had to put in 2 separate transfer orders; one for my $CAD account, and another one for my $USD account. If both instructions are not entered around the same time then TD will reject the transfer instructions because the pair of accounts must move together. Transferring funds from TD to Interactive Brokers will take about 1 week. TD charges a $135 fee for closing an account, which will happen automatically once all the funds have transferred out.

Getting money out from your IB account is more straightforward.  🙂 Just use the Fund Transfers option again. But this time, choose to withdraw funds, and select the currency. Then choose a method such as Electronic Funds Transfer.

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Then enter your bank’s information like its transit and inst. number, as well as your personal account number. After a few business days the money will deposit into the bank account of your choice. The deposit description at your bank will say something like “INTERACTIVE BRO MSP.”

3) Using Margin Inside an IB Account

Interactive Brokers allows traders to buy stocks on margin. This means you can borrow money to buy stocks using your existing holdings as collateral. In the past I’ve described how margin accounts work, and walked through how to execute a trade on margin, so I won’t go into that here. This section will be specific to using margin with IB.

Interactive Brokers calculates margin based on Regulation T for US accounts, and CDN margin rules for Canadian accounts. The maintenance margin is the amount of equity which must be maintained in order to continue holding a position. If this number is too low then traders will risk getting a margin call. The actual calculations for the maintenance margin requirement depends on a number of different factors. So the effective maintenance margin is often within a range between 30% to 40% depending on the makeup of your securities. In my case it’s about 35%. This means that at least 35% of my stock holdings have to be covered by my own money. In other words IB will lend me no more than 65% of the value of my portfolio.

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Oct 172016
 

So Long, Air Canada Bonds

Earlier this year I purchased some Air Canada bonds for $5,305, with an attractive coupon of 7.625% annual interest rate. Very nice! They weren’t suppose to mature until 2019. However Air Canada decided to be a jerk and redeem them early at the beginning of this month. So all the bonds were bought back, including mine.

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As we can see, I lost $305 on my principal amount. However I’ve collected more money back from interest payments. So overall I still came out with a small profit. This concludes my first junk bond investment. I wasn’t able to earn the attractive return all the way to the end as I hoped, but at least I didn’t lose any money. 😀

Anyway, redeeming the bonds means Air Canada returned the $5,000 cash back into my RRSP account. 🙂 So I used the money to purchase 2 relatively defensive stocks, Boardwalk REIT and Enbridge Inc. The stock market reached a new high this year and it’s been over 8 years since a major correction so I believe we are overdue for a pull back any day now. Both Boardwalk REIT and Enbridge generate stable cash flow so they are more resistant to market corrections than most other stocks.

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Boardwalk REIT – New Addition to my Retirement Portfolio

I purchased 60 units of Boardwalk REIT (BEI.UN) at $50.56 each. The total came to $3,043.59 including commissions.

I like REITs because they own and operate properties, and pass on the profits to their unit holders. This means investors can make money in the growing real estate industry without all the hassle of dealing with tenants. 🙂 Boardwalk specializes in multi-family residential properties.

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Normally we determine the value of a stock based on its earnings, but in the real estate business we use funds from operations (or FFO) instead to measure a company’s performance. According to Boardwalk’s forward guidance the company expects its annual FFO to be in the $3.20 per unit range. This gives BEI.UN an equivalent earnings yield of about 6.4%. Which translates to a P/E ratio of about 16x. To me 6.4% isn’t a bad return in today’s market. 🙂

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Boardwalk owns property across the country, but about half of its portfolio sits in Alberta, including some in Fort McMurray. Alberta is struggling due to the unfortunate wildfires this year and the continuous low price of oil. Calgary’s unemployment rate last month was 9.5%. Ouch! 🙁 As a result BEI.UN is down 10% compared to a year ago. However, I believe this is a good opportunity to get in before the REIT recovers. Oil has already bounced off the bottom. And forest fire season is over. A lot of people are pessimistic about Alberta’s economy. But I think their concerns are overblown.

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Sep 222016
 

Lower Cost with Interactive Brokers

Everyone likes a discount, especially personal finance enthusiasts. We tend to get hyped over even marginal deals. 😀

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Speaking of margin-al discounts. I recently lowered my stock margin rate from 4.45% to just 1.95%. Hot damn! It’s even lower than my mortgage now, haha. 😁

One of the best things investors can do to increase our net returns is to reduce the cost of investing. When it comes to leverage, or borrowing money to invest, the best way to reduce our cost is to find a broker which charges the lowest interest rates. 🙂

In the past I have held my margin account with TD Direct Investing. The current interest rate they offer is 4.25% or 4.75% per year, depending on which currency investors borrow in.

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Although TD’s rates are already competitive relative to the other large banks in Canada, it is not the lowest. After doing some research online I’ve discovered that a U.S. based brokerage firm called Interactive Brokers offers the lowest margin rates, and has cheap trading commissions. So I recently transferred my entire margin portfolio from TD to IB to reap the benefits of lower cost borrowing. 🙂

Interactive Brokers Advantages

Here are 4 reasons why I switched to IB.

  1. Reduced margin rates for more cost-effective leverage. I currently have about $54,000 of margin debt. I was paying on average 4.45% a year for this massive loan with TD. But with Interactive Brokers I’m now paying only 1.95% on average because I have both US and Canadian dollars. This represents a difference of 2.50% between the two brokers, which translates into $1,350 of interest rate savings every year! 😀 “BM” in the table below refers to the benchmark rate set by Central Banks.16-09-interactive-brokers-margin-rates
  2. Cheaper trading commissions. TD and many other brokers charge a flat fee of $9.99 per trade when buying stocks. But IB charges 0.5 cent per share for U.S. accounts, and 1 cent per share for Canadian stocks. The minimum cost per transaction is $1. For example if I buy 200 Shares of BMO (Bank of Montreal) shares, then my total commission would be $2.00 CDN. My trades are typically worth between $1,000 to $3,000. This means I rarely buy more than a few hundred shares of anything because most companies I prefer to own are dividend growth stocks, which tends to be priced at $20 per share or higher.
  3. Access to global markets. This isn’t a big deal for most people, but for more advanced investors Interactive Brokers allows trading in foreign currencies outside of North America. This means we can buy European stocks in Euros, or Australian stocks directly from the ASX using Aussie money. 🙂 TD used to have a platform that lets Canadians like myself trade internationally, but they cancelled that service last year. 🙁 I’ve mentioned in a previous post, that I want to diversify into other countries and there could be some good opportunities in the U.K. after the Brexit event earlier this year. So having access to a global trading platform is important for my financial goals. 😉
  4. Great for options trading. $0.70 per contract; $1 minimum order; volume discount available. And in the unlikely chance that our open options are exercised or assigned, there is $0 assignment fee, unlike $43 for TD or BMO.

Disadvantages of IB

Here are a couple drawbacks with IB.

  1. Penalty for not being an active trader. If investors do not spend at least $10 in commissions per month, we will be charged the difference. Furthermore, there’s a $10 fee for real-time quotes each month which is waived if at least $30 in commissions is spent. I typically trade once or twice a month so I will be paying these fees.
  2. $10,000 USD minimum balance to open up an account. This isn’t an issue for me, but some investors might have trouble coming up with $10K.

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Jul 182016
 

Advantage of Long Term Thinking

There’s an advantage in the business world for thinking long term. If a company only makes short term goals then it will be forced to compete with many other businesses in the same industry. It doesn’t take a lot of foresight or planning to run a company for 1 or 2 years, so that’s what a lot of other competitors will do. But if a company is willing to invest in a longer period of time, such as 5 to 10 years, then it will gain a competitive edge because there are fewer companies that set those kinds of lofty goals. 🙂

For example McDonald’s owns the real estate of its fast food restaurants. Leasing might be cheaper in the beginning, but owning property directly is more profitable in the long run.

New video games that take a long time to create, such as the Grand Theft Auto franchise or The Elder Scrolls series are typically released once every 5 years or so. Not many game studios spend 5 years developing a single product so these types of games will often have less competition in their genre, and receive more favorable critic and user reviews due to their quality than other franchises which have a much shorter development cycle, such as Call of Duty.

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Netflix would have higher earnings if it focuses more on near term profit and not spend so much cash on creating new original content. But from a long term perspective its executives have decided that investing in additional content with more market penetration is better for shareholders in the long run, because there’s not a lot of other streaming services with that level of long term dedication to their brand. But Amazon.com is another company that thinks long term.

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