The MoneyLetter published this report by Keith Richards of ValueTrend Wealth Management in mid-March. What would you have done with a stock that traded in the $50s for much of the last three years and dropped about 28 per cent on one day in January, 2019?
I recently had a reader contact me to ask about Canadian engineering and construction stock SNC-Lavalin (TSX—SNC). Normally, I would tell him to phone BNN on my next Market Call appearance with the question. But I thought it’s probably worthy of an article—given the news on the company of late.
I’ll start this article off with a disclaimer that we at ValueTrend own a position in SNC. Thankfully, we have 3 main position sizes when we buy a stock. They are 3, 5, or 7 per cent. The choice of these three weightings comes down to the risk/reward potential we foresee via our analysis.
We had traded SNC twice in the past within its former trading band. Both times, we had bought at $52 and rode it to $58 before selling. We were aiming at making it a hat-trick via a similar trading strategy back in the second half of 2018, when we once again acquired the stock at the bottom of that trading range.
Kept investment to a minimum
Because there were some risks surrounding a fine they were facing for a contract bribe, we elected to purchase our smallest position size on this stock, which is 3 per cent. The prior two trades were executed with 5 per cent positions.
At the time of buying, we were unaware that the current federal government, which has already been found guilty of violating federal ethics regulations in the past, was involved so intimately with SNC. Given the other calamities the current Prime Minister’s Office has been involved in, we tend to avoid stocks that could have close ties to the current government.
Frankly, we don’t trust them—and now, as cabinet members and key advisors to the Prime Minister resign in disgust or fear, ordinary Canadians are learning how deep the corruption of the current Canadian government really is.
So, what do we do now?
My associate Craig Aucoin, who does the fundamental analyses around here, told me that approximately $30 of the value of SNC shares lay within its ownership share of the 407 toll highway in Ontario. It’s a profitable investment that SNC made many years ago, and they have eager buyers—should they desire a sale. The stock currently trades near $35. So that leaves the rest of this global stock trading for about $5 a share.
[Ed. Note: On April 5, SNC Lavalin announced that it had agreed to sell a 10.01 per cent stake in 407 International Inc. (owner of the private portion of Ontario’s toll highway 407) for $3.25 billion reducing SNC’s ownership interest in the toll highway to 6.76 per cent. SNC stock continues to trade in the mid-$30s.]
So now the fundamental guys have to figure out if the global operations, which will be curtailed going forward, are worth that $5. Being a technical analyst, I’m not the guy to ask that question.
So, I thought I’d get a quote from Craig on the subject: “Significant risk still remains with the engineering portion of the company. If SNC is found guilty and are banned from future business projects in this country, the effects would be devastating. However, if the court case projects more positively, the stock might be looked back on as one of the better bargains out there. Only time will tell.”
‘Wait and see’ may be best approach
In other words, it’s too early to make any fundamental predictions on this global stock’s future.
Technically, the stock broke that $52, then $44 support line with vigor recently. Right now, it’s hard to say if the stock will rally back to first support (now resistance) at $44. It’s hanging out at a support zone last seen in 2015—which resides in the low $30s.
Will the stock rally back to $44 or plunge into the abyss? I can’t offer too much guidance on the stock, other than to say I still hold it. I must admit that I am playing this one by ear—something I prefer not to do under most circumstances, given my structured approach to trading. It may rally a bit at some point before the court case results are concluded as rumors begin to emerge during the proceedings. Or not. After all, there is no sure way of predicting the outcome of that case. Meanwhile, the best path may be to wait and see what happens.
Keith Richards, Portfolio Manager, can be contacted at email@example.com. He may hold positions in the securities mentioned. The information provided is general in nature and does not represent investment advice. It is subject to change without notice and is based on the perspectives and opinions of the writer only. It may also contain projections or other “forward-looking statements.” There is significant risk that forward looking statements will not prove to be accurate and actual results, performance, or achievements could differ materially from any future results, performance, or achievements that may be expressed or implied by such forward-looking statements and you will not unduly rely on such forward-looking statements. Every effort has been made to compile this material from reliable sources; however, no warranty can be made as to its accuracy or completeness. Before acting on any of the above, please consult an appropriate professional regarding your particular circumstances.
This is an edited version of an article that was originally published for subscribers in the March 2019/Second Report of The MoneyLetter. You can profit from the award-winning advice subscribers receive regularly in The MoneyLetter.
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