WEDNESDAY, NOVEMBER 13, 2019 | THEGLOBEANDMAILO B11
EYE ON EQUITIESDAVID LEEDER
HUDBAY MINERALS (HBM-TSX)
CLoSE $4.44, DoWN 41¢
CERVUS EQUIPMENT (CERV-TSX)
CLoSE $7.72, UP 5¢ORGANIGRAM (OGI-TSX)
CLoSE $3.57, DoWN 89K-BRO LINEN (KBL-TSX)
CLoSE $39.75, UP 47¢CHARTWELL (CSH.UN-TSX)
CLoSE $14.34, UP 18¢Scotia Capital analyst Orest Wow-
kodaw downgraded Hudbay
Minerals Inc.to “sector perform”
from “sector outperform” after
the release of largely in-line third-
quarter results. “While we view
the Q3 update as neutral, the on-
going uncertainty with respect to
the company’s growth initiatives
represents a significant overhang
on the shares in our view,” he
said.
Target:Mr. Wowkodaw reduced
his target to $5.25 from $5.75. The
consensus target is $7.17.
Seeing no positive catalysts on
the near-term horizon and “more
pain likely yet to come,” Ray-
mond James analyst Ben Cher-
niavsky downgraded Cervus
Equipment Corp.to “market per-
form” from “outperform.” “Cer-
vus served itself a healthy dose of
medicine in 3Q19, liquidating
used Ag inventories and taking a
related write-down on its remain-
ing stock of equipment,” Mr.
Cherniavsky said.
Target:His target fell to $9 from
$12. Consensus is $10.30.BMO Nesbitt Burns analyst Tamy
Chen cutOrganigram Holdings
Inc.to “market perform” from
“speculative outperform” after
the release of weaker-than-antici-
pated preliminary fourth-quarter
results. “We previously consid-
ered the company to be a relative-
ly stronger operator,” she said.
“We now believe Organigram is
also experiencing the challenges
that have impacted some of its
peers.”
Target:Her target dipped to $4
from $6. The consensus on the
Street is $9.66.K-Bro Linen Inc.is a “stable oper-
ator with meaningful growth op-
tions” following its “ambitious”
five-year, $200-million capital
spending program, said Ray-
mond James analyst Michael
Glen, who initiated coverage of
the Edmonton-based company
with an “outperform” rating.
Target:Pointing to its leading
market position in its areas of op-
eration, he set a target price of $45
a share. Consensus is $47.43.Chartwell Retirement Residen-
ces’svaluation “has started to
look a lot more interesting,” said
Scotia Capital analyst Himanshu
Gupta upon assuming coverage
with a “sector perform” rating.
“CSH units have underperformed
in 2019 (price return of 3 per cent
vs. sector at 18 per cent) due to
new-supply concerns,” he said.
Target:Mr. Gupta has a $15.75 tar-
get, which falls below the $16.07
consensus.WHAT ARE WE LOOKING FOR?
How to evaluate oil companies in
the decades-long shift to a green
economy.
THE SCREEN
November began with Exxon Mo-
bil Corp. and Chevron Corp., the
two largest oil companies based
in the United States, both report-
ing third-quarter earnings that
were billions of dollars lower than
the same period a year ago. The
price of West Texas Intermediate
and Brent crude are both down
roughly 30 per cent from last Oc-
tober as regulation and consumer
preferences have shifted demand
to cleaner forms of energy. How-
ever, the world’s largest crude oil
producer, state-owned Saudi
Aramco, will soon have to start re-
porting quarterly earnings, too, as
it prepares for its long-awaited ini-
tial public offering early next
month. There seems to be a dis-
connect between a global push
for cleaner energy and the timing
of history’s biggest IPO by a crude
oil giant.
It stands to reason that an ac-
celerating and persistent push for
cleaner energy sources will con-
tinue to drive down the price of
oil. Only the largest companies
that can operate at scale, with the
lowest marginal cost of produc-
tion and the smallest carbon foot-
print will be able to survive in the
medium term and will be left
standing to drill the last barrels of
oil the world consumes. We will
look at the listed oil companies
that produced more than 1.5 mil-
lion barrels a day last year and
compare them on these qualities.
First, we look at the companies’
operating margins to see how
much of a price decline in oil they
can experience and stay profit-
able under the current model inwhich they operate.
Next, we look at operating ex-
penses for the past fiscal year and
calculate the total operating ex-
penses per barrel of oil per day
produced.
Finally, we look at the compa-
nies’ total emissions intensity as
measured by tonnes of CO2 equiv-
alent per barrel per day (and Re-
finitiv’s estimate in the case of Pe-
troChina, which doesn’t disclose
emissions). Note that “total emis-
sions” refers to Scope 1 and Scope
2 emissions, that is, all direct and
indirect emissions associated
with producing the oil (and other
company operations). The bulk
of emissions associated with oil
are Scope 3 emissions, meaning
when they are ultimately burned
downstream as fuel, but company
disclosures around their Scope 3
emissions are far too sparse andunreliable at present to be used as
a valid basis for comparison.MORE ABOUT REFINITIV
Refinitiv, formerly the financial
and risk business of Thomson
Reuters, is one of the largest pro-
viders of financial markets data
and infrastructure, serving more
than 40,000 institutions world-
wide. With a dynamic combina-
tion of data, insights and technol-
ogy, as well as news from Reuters,
our customers can access solu-
tions for every challenge, includ-
ing a breadth of applications,
tools and content – all supported
by human expertise.WHAT WE FOUND
The screen yields nine companies
from seven countries. Perhapssurprisingly, Russia’sRosneft Oil
Co. PJSChad the lowest annual
operating expenses for each bar-
rel of oil produced and the lowest
reported emissions for each bar-
rel, as well has the highest forecast
dividend yield and second health-
iest operating margin. Rosneft al-
so appears undervalued relative
to these peers as it had by far the
highest production last year but
the second-lowest market cap.
However, the only company with
a lower market cap isLukoilPJSC,
also Russian, and a discount on
Russian companies is hardly sur-
prising given the current geopol-
itical situation. Last week, Rosneft
also reported earnings and came
in 5 per cent higher than the con-
sensus expectation.
Investors are advised to do
their own research before trading
in any of the securities shown.WhatinvestorsshouldlookforwhentheylookatBigOil
Select global oil companiesCOMPANY IDENTIFIER COUNTRYMKT.CAP.
(US$MIL.)OPERATING
MARGIN(%)CRUDEOUTPUT
(B/D,MIL.)ANN.OPEX
(US$MIL.)ANN.
OPEXPER
B/D(US$)CO2E
EMISSIONS(MIL.
TONNES,ANN.)CO2E
(TONNES
PERB/D)DIV.YLD.
(%,NTM)1Y
RTN.
(%)RECENTCLOSE
(NATIVECURRENCY)
RosneftOilCo.PJSC ROSN-MCX Russia 75,283 13.0 4.7 102,899 22,020 76 16.3 7.8 4.2 453.00
PetroChinaCoLtd 601857-SS China 140,404 5.0 2.4 325,171 133,677 280 115.2 2.8 -28.4 5.63
ExxonMobilCorp XOM-N USA 297,616 7.5 2.3 258,493 114,075 122 53.8 5.1 -7.7 70.34
BPPLC BP-L UK 131,432 5.0 2.2 283,904 129,577 54 24.7 6.3 2.0 506.70
PetroleoBrasileiroSA PETR4-SA Brazil 100,497 18.5 2.1 73,436 35,323 62 29.7 2.632.5 30.45
LukoilPJSC LKOH-MCX Russia 67,809 9.5 1.8 104,419 57,818 36 20.1 5.5 23.7 6,048.00
RoyalDutchShellPLC RDSA-AS Netherlands 236,854 8.7 1.8 354,723 196,850 82 45.5 6.1 4.1 27.20
ChevronCorp CVX-N USA 228,436 9.7 1.8 143,316 80,424 63 35.4 4.1 7.1 120.81
Total SA TOTF-PA France 145,150 9.0 1.6 167,524 106,976 58 37.0 5.8 3.7 49.41
Source:RefinitivHUGH SMITH
NUMBER CRUNCHER
CFA, MBA, manager of Refinitiv’s
investment management business
for the Americas and a director on
the board of the Responsible
Investment Association of Canada
I
f you invest a sum of money at 10
per cent for five years, you will
multiply your wealth by 1.6 times.
If you invest your capital at that
rate for 10 times as long (50 years),
you will not multiply your wealth by
16 times.
You will multiply it by more than
117 times.
Does this strike you as surprising?
It should, because exponential
growth (also known as com-
pound growth) is difficult for the
human mind to grasp.
Understanding it, however, is
the wellspring of successful in-
vesting. Albert Einstein is reputed
to have said, “Compound interest
is the eighth wonder of the world.
He who understands it, earns it;
he who doesn’t, pays it.”
Your success as an investor is a
function of two things:
Your net investment return
over time;
The length of time you re-
main invested.
What determines your long-
term rate of return? Studies have
shown that by far the most im-
portant factor is the asset class
you invest in.
Investing in a portfolio of
growing businesses, through
ownership of publicly traded or
private companies, will produce
the highest unleveraged return.
The only return that matters is
your long-term return, and, for
most asset classes, your long-
term investment return is reason-
ably predictable. History teaches
us that, over 20 or more years, as-
suming inflation is reasonably
muted, your average annual re-
turn from investing in a portfolio
of listed companies (stocks) is
likely to be between 7 per cent
and 10 per cent, before taxes.
Any tax paid on your invest-
ment return will, of course, re-
duce this. This is one of the few
certainties in investing. Investors
are taxed on their capital gains
only when the asset is sold. There
is, therefore, a huge advantage to
holding each of your investments
for the long run. As Warren Buf-
fett has said, “Tax-paying inves-
tors will realize a far, far greater
sum from a single investment
that compounds internally at a
given rate than from a succession
of investments compounding at
the same rate.”
Almost everyone focuses more
on the rate of return than on the
length of time for which their
capital will be invested. However,
to benefit from compound
growth, it is essential to thinkabout both factors – and your
ability to change the investment
time period is far greater than
your ability to change the long-
term rate of return. “Buy right
and hold tight” is a slogan adopt-
ed by some of the world’s most
successful investors.
This hold-for-the-long-run ap-
proach explains why almost all
the world’s great family fortunes
have been created by owning
shares in a growing business over
many decades, thereby allowing
their value to compound over
time on a before-tax basis.
There is, however, a limitation
on how long individuals can com-
pound their wealth, tax-free. On
your death, you are, for tax pur-
poses, deemed to have disposed
of your investments. Conse-
quently, your estate is taxed on
your capital gains up to that date.
So, for individual stockholders,
buy and hold works best if you
live to be as old as Methuselah.
If you own your investments
through a company that you con-
trol through fixed value preferred
shares, and set it up so the com-
mon shares are held by a trust for
your children or grandchildren,
you avoid paying capital gains tax
on your death.Howcompoundingworks
Long-termstrategy
offersexponential
growth–butrequires
investorstosittight
R.B. MATTHEWS
DOUG McCUTCHEON
'EIGHTHWONDEROF THEWORLD'
$100,000cONpOunded at10% per yearTiNe periOd in yearsCapital$35-NilliOn3030 35 40 45 50 55 602525202015151010550
0JOHN SOPINSKI/THE GLOBEANDMAIL, SOURCE:LONGVIEWASSETMANAGEMENT$161, 000
after five
years$11. 7 - million
after 50
years$30.4-million
after 60
yearsANALYSISR.B. (Biff) Matthews is chairman,
and Doug McCutcheon is president,
of Longview Asset Management
Ltd., aToronto-based investment
management firm.
CANADIAN STOCKS
Canada’s main stock index reached a record-high close even
as North American stock markets were relatively flat amid a
lack of news on trade talks between the world’s largest econo-
mies.
The S&P/TSX Composite Index closed up 26.55 points at
16,909.38, beating the high set in late September.
Leading the index were Wesdome Gold Mines Ltd., up 6.1
per cent, Semafo Inc., up 4.6 per cent, and Exchange Income
Corp., higher by 4.5 per cent.
The most heavily traded shares by volume were Prairiesky
Royalty Ltd., Bombardier Inc. and Encana Corp.U.S. STOCKS
The benchmark S&P 500 stock index eked out a slim gain as
President Donald Trump said the United States is close to
signing an initial trade deal with China, but offered no new
details about negotiations.
The S&P 500 and Nasdaq hit all-time highs during trading,
but stocks ended off session highs after a highly anticipated
midday speech from Mr. Trump, with investors concerned
ahead of time about any comments that would worsen the
tariff dispute that has convulsed markets for more than a year.
On Tuesday, the Dow Jones Industrial Average remained
unchanged at 27,691.49, the S&P 500 gained 0.16 per cent, to
3,091.84, and the Nasdaq Composite added 0.26 per cent, to
8,486.09.
Among stocks, Walt Disney Co. rose 1.3 per cent as the com-
pany said demand for its much-anticipated streaming ser-
vice, Disney Plus, was well above its expectations in a launch.COMMODITIES
Oil prices ended little changed after paring gains of about 1 per
cent following a speech from Mr. Trump that offered few new
details about Washington’s trade talks with Beijing.FOREX AND BONDS
The Canadian dollar was little changed against its U.S. coun-
terpart, holding near a one-month low it hit earlier in the day
as the greenback broadly climbed and investors adjusted to
the Bank of Canada’s more dovish position.
The U.S. dollar rose against a basket of major currencies,
although its gains stalled after Mr. Trump in a speech offered
no new details on the state of the administration’s trade war
with China.
Canadiangovernment bond prices were lower across a
steeper yield curve as trading resumed after a holiday on
Monday. The two-year fell 2.5 cents to yield 1.598 per cent and
the 10-year was down 17 cents to yield 1.599 per cent.
U.S. Treasury yields held below three-month highs after Mr.
Trump’s speech. Treasury yields on 10-year notes fell to 1.9173
per cent.REUTERS,THE CANADIAN PRESSMarketssummary
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