Apr 202017
 

Some people suffer from areophobia, the fear of flying. But this is plane silly. Flying is statistically safer than driving. Yet some people live entire lives without ever getting onto a plane due to this irrational fear. They believe merely walking into an airport could give them a terminal illness. 😄

Borrowing to invest is similar to flying. Nobody ever has to do it, but it can make life a lot easier. I can certainly take a train to get from Paris to Zürich. However, flying is much faster. I can retire comfortably some day without ever going into debt. However, using leverage will enable me to get there much faster. 🙂

If we tend to pick bad investments, then we should probably pay a professional to help manage our portfolio. But on the other hand, if we have a history of making mostly good investment decisions, then rationally speaking we should double down to boost ours returns unless evidence suggests otherwise. Leverage doesn’t change our odds of winning. It merely enhances our gains or losses based on the inherent odds of the underlying investment decision.

Using leverage removes the problem of not having any money to invest. It allows us to be fully invested at all times, but still have access to instant liquidity. This gives investors a huge advantage. Just ask any MBA graduate.

Next week I will blog about my 3 fundamental rules of leveraged investing. A lot of readers have requested this so I will break down my thought process and method. The extended bull market cycle we’ve been in has helped my investments tremendously. But when I use leverage, I also follow specific criterias that are meant to reduce downside risk in recessions and bear markets. 🙂

 

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Random Useless Fact:

Foxes are smarter than most, but not all, dog breeds.

 

Mar 102016
 

Investing in Air Canada Bonds

Don’t expect to eat anything fancy when you’re flying because you’ll just be getting plane food. In last week’s blog post it showed that I had over $7,000 of cash saved up. I usually don’t like to have idle money doing nothing. But it’s hard to decide what to buy when everything appears to be overbought lately. However as I was browsing the fixed income tables on my discount broker site I noticed that Air Canada had issued high yield bonds with a 7.625% coupon, maturing in 2019. This looked like a great opportunity to park some money for the next few years and earn some interest. 🙂 My decision to buy Air Canada bonds at this point was still up in the air. I had to do some research to determine if this was the right investment for me or not.

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The first thing I did was calculate my potential return on this bond by looking at the bond description as of early March.

Coupon: 7.625%
Maturity: 10/1/2019
Worst Call Date: 10/1/2016
Ask Price: 105
Yield to Worst: 3.3%
Yield to Maturity: 5.5%

If someone were to buy these bonds then their expected annual return would be 3.3% to 5.5% depending on when the bonds expire. This range of return is better than leaving money in a savings account. So the next thing I did was research the company’s credit risk, which involves analyzing its financials and common shares in the stock market. 🙂

Air Canada’s Credit Analysis

Standard & Poor’s rates the bond a BB, which makes it slightly below investment grade BBB. From a valuation perspective, Air Canada’s stock (AC) is trading rather cheaply. At around $8 per share today, its P/E ratio is just 8.4 times compared to the broad TSX index which is more than 18 times. Out of 14 analysts covering the stock, the majority agrees that AC will become quite a lot higher one year from now.

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In terms of historical profitability Air Canada has been somewhat of a mixed bag. The credit crisis of 2008 and high oil prices (fuel cost) made it difficult for AC to operate its way out of the recession. It suffered 4 consecutive years of losses from 2008 to 2011. But when the airline became profitable again in 2012 things were looking up. 😉16-03-air-canada-historical-finances

It appears that in 2013 Air Canada’s stock really took off.

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It’s hard to predict how profitable Air Canada will be almost 4 years later when the bond matures, but TD Securities has conducted some estimates of Air Canada’s financials up to 2018. When dissecting tables like this one the most telling figures for me are net income – which describes profitability, and ROIC – which stands for Return on Investment Capital and gives a sense of how well a company is using its money to generate returns. Both metrics are outlined in red below.

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