The Globe and Mail - 02.11.2019

SATURDAY, NOVEMBER 2, 2019 | THEGLOBEANDMAIL O B9

GLOBEINVESTOR

REPORTONBUSINESS|

O

ne of the enduring mys-
teries of stock markets is
why companies insist on
changing their names more of-
ten than fugitives in a witness-
protection plan.
Encana Corp.’s announce-
ment on Thursday that it plans
to relabel itself as Ovintiv Inc. is a
particularly puzzling example.
What is an Ovintiv, anyway? Ac-
cording to Encana, “the new
name stands for our commit-
ment to deliver unmatched val-
ue through continuous innova-
tion.” Of course.
Whatever the clunky new
name means, it puts Encana on
trend. Over the past couple of
decades, a steady stream of other
high-profile companies have also
undergone an identity shift.
In Canada, Research In Mo-
tion transformed itself into
BlackBerry Ltd., Valeant Pharma-
ceuticals International became

Bausch Health Cos. Inc., TransCa-

nada Corp. morphed into TC En-

ergy Corp. and Penn West Petro-

leum Ltd. rather awkwardly be-

came known as Obsidian Energy

Ltd.

Outside of Canada, Google re-

dubbed itself Alphabet Inc., Phi-

lip Morris rebranded as Altria

Group Inc. and Andersen Con-

sulting started life anew as Ac-

centure PLC.

In some cases, the name

changes were obvious attempts

to distance management from

memories of falling share prices.

In other cases, they seemed

aimed at papering over other un-

pleasant associations. In still

other cases, such as Google’s,

they were about indicating

broader corporate ambitions.

The only common denomina-

tor? None of these new labels

had any noticeable effect on the

trajectory of their owners’ share

prices.

Alphabet continues to thrive

and BlackBerry goes on strug-

gling, despite their new monik-

ers. Investors in Altria still realize

they are buying a tobacco com-

pany with all the challenges that

entails, while shareholders in

Bausch still recognize they are

buying a drug company with a

lot of debt on its balance sheet.

There is a message here. It

seems the market is smart

enough to look beyond a snazzy

new label when assessing the

value of a company.

Academics who have studied

the matter generally conclude

that any boost from a new name

is transient. A 2013 study by Rob-

ert Mayo of George Mason Uni-

versity found that companies

listed on the New York Stock Ex-

change enjoyed a small lift in

their share prices during the first

30 days after they adopted a new

name. Longer-term, though, the

news wasn’t so happy. A 2007

study by a team of British re-

searchers discovered that re-

named U.K. companies signifi-

cantly underperformed the mar-

ket over the next three years.

It’s easy to see why renamed

companies might fail to thrive.

Businesses usually choose to re-

label themselves when they are

under pressure or struggling

through a big shift. Encana, for

instance, is moving its head of-

fice from Calgary to the United

States and attempting to reposi-

tion itself as a player in the U.S.

energy sector. All this refocusing

involves risk and the possibility

of disappointment.

What is unclear, though, is

why a name change has to be

part of this change. That seems

an unnecessary extra twist to the

geographical move. Encana says

its shift to the United States is

motivated in part by its desire to

get bigger exposure to the large

amount of money in U.S. index

funds, but index builders don’t

exclude companies on the basis

of their names.

Big investors, too, are intelli-

gent enough to see beyond his-

torical associations. Sharehol-

ders in Wells Fargo don’t assume

they are buying a stagecoach

company; shareholders in Texas

Instruments aren’t shocked to

discover the company does busi-

ness in other states, too. Presum-

ably, any serious investor looking

at Encana’s investment merits

would be able to get beyond the

veiled allusion in its name to

Canada.

So why change names? It

seems to be an admission that

management doesn’t have many

other dials to turn. Since it is

having trouble transforming the

fundamental nature of its busi-

ness, it is now turning to cosmet-

ic changes instead.

If history is any guide, the re-

labelling will do nothing for En-

cana shareholders, who have al-

ready seen their shares lose

three quarters of their value over

the past five years. In fact, the

question those long-suffering in-

vestors should now be asking is

this: Do you really want to put

your faith in a company that can

decide Ovintiv is an attractive

new name?

Encana’snamechangeisadesperatemove

RebrandedasOvintiv,

energycompanyseeks

tocastitselfanew–but

theswitchisn’tlikelyto

quellinvestors’concerns

IAN
McGUGAN

OPINION

INSIDETHEMARKET

Various high-profile companies have recently undergone an identity shift

similar to Encana, whose pump jacks are seen above near Standard, Alta.

TODDKOROL/THEGLOBEANDMAIL

D

id your bet on marijuana
stocks blow up in your
face? Do you own energy
stocks – or other companies –
that are deeply underwater? With
the end of the year approaching,
you may want to consider selling
your dogs so that you can claim a
capital loss for tax purposes.
Today, we’ll explore the strate-
gy in detail.

WHAT IS TAX-LOSS SELLING?

Tax-loss selling – also known as
tax-loss harvesting – is an invest-
ing strategy that can lower your
tax bill. When you sell a stock for
a capital loss, you can use the loss
to offset realized capital gains
and reduce the tax you ultimate-
ly have to pay.
Any stock that has dropped in
price since you bought it can be a
candidate for tax-loss selling.
This year, two sectors in partic-
ular – cannabis and energy – will

probably see plenty of tax-loss

selling given the hefty losses suf-

fered by investors.

WHAT EXACTLY CAN I OFFSET

WITH MY CAPITAL LOSS?

If you sell a stock for a loss in

2019, you must first use the loss

to offset capital gains realized in

2019. Any unused net capital loss-
      es may be carried back up to
      three years, or forward indefi-
      nitely, to offset capital gains in
      those years.
      Tax-loss selling only applies to
      non-registered accounts. If you
      have a loss in a registered retire-
      ment savings plan (RRSP), regis-
      tered retirement income fund
      (RRIF) or tax-free savings ac-
      count (TFSA), you can’t use the
      loss to offset taxable capital
      gains.

I HAVE SOME STOCKS THAT I

WANT TO SELL FOR A TAX LOSS.

WHEN IS THE BEST TIME TO DO

THAT?

If you intend to claim the loss for

the 2019 tax year, you must sell

the shares on or before Dec. 27.

Stock trades settle – that is, the

cash and shares actually change

hands – two business days after

the trade date. With Dec. 28 and

29 falling on a weekend this year,

a trade executed on Dec. 27 will

settle on Dec. 31 – just in time for

the loss to be claimed for 2019.

However, it’s best not to leave it

too close to the deadline or you

could forget and be out of luck.

HOW ARE CAPITAL GAINS TAXED?

Only half of capital gains are in-

cluded in income and taxed at

one’s marginal rate. For example,

if you live in Ontario and have in-

come of $100,000, your com-

bined federal and provincial mar-

ginal tax rate on regular income

is 43.41 per cent. If you report a

capital gain of $10,000, you

would pay tax of $2,170.50

($5,000 multiplied by 0.4341).

If you also had a capital loss of,

say, $2,000 in 2019, your net cap-

ital gain would be $8,000, so you

would pay tax of $1,736.40

($4,000 multiplied by 0.4341).

CAN I IMMEDIATELY BUY BACK

THE STOCK I JUST SOLD?

No. When you sell a stock for a

loss, you must wait at least 30

days before you repurchase it.

Otherwise, it will be considered a

“superficial loss” and you won’t

be able to use it to offset capital

gains. The rule is designed to pre-

vent people from selling a securi-

ty and immediately buying it

back for the sole purpose of

claiming the loss.

Also, you can’t get around the

superficial loss rule by buying the

stock back in a different account

controlled by you or your spouse.

For example, if you sold a stock in

your non-registered account and

immediately repurchased it in

your TFSA or RRSP – or in your

spouse’s TFSA or RRSP – the cap-

ital loss would be denied for tax

purposes.

WHAT IF I WANT TO CLAIM A

CAPITAL LOSS, BUT I STILL LIKE

THE STOCK OR SECTOR?

There are strategies to consider

that allow you to remain invested

during the 30-day waiting period.

For example, if you intend to sell

an energy stock for a tax loss but

are concerned that the sector

may rebound, you could immedi-

ately repurchase a different ener-

gy stock or fund – preferably one

with a high correlation to the

stock you sold – without trigger-

ing the superficial loss rule. At

the end of the 30-day window,

you could sell the second securi-

ty and repurchase the original

one.

CAN I TRANSFER A LOSING STOCK

TO MY TFSA OR RRSP AND STILL

GET THE LOSS?

Nope. You don’t get to use the

capital loss in that case because,

by transferring the shares instead

of selling them outright, you are

maintaining control. To avoid the

superficial loss rule, you could in-

stead sell the shares, contribute

the cash to your TFSA or RRSP,

and then wait 30 days to repur-

chase the shares in your regis-

tered account. Alternatively, as

discussed above, you could pur-

chase a similar but not identical

security immediately.

On the other hand, if you

transfer shares that have appre-

ciated in value to a registered ac-

count, you’ll still have to report

the capital gain for tax purposes.

Hey, nobody said life is fair.

Special to TheGlobe and Mail

E-mail your questions to

[email protected].

Thosedogsinyourportfoliocanthrowyouaboneattaxtime

JOHN
HEINZL

OPINION

INVESTORCLINIC

F

airfax Financial Holdings
Ltd.has made big, long-term
investment bets in the name
of value. After the dismal per-
formance of some of those high-
profile Canadian names in the
third quarter, the company had
some explaining to do.
BlackBerry Ltd., Stelco Hold-
ings Inc. and Ensign Energy Ser-
vices Inc. are all among Fairfax’s
10 biggest equity positions, and
all fell 25 per cent or more in the
third quarter. Resolute Forest
Products Inc., another huge
holding, fell 35 per cent in the
quarter and has declined another
22 per cent in the month of Octo-
ber.
All told, Fairfax posted a loss
of US$160-million in the quarter
on the portion of its stock port-
folio that it held through the
whole quarter. That unrealized
loss was offset by some profit-
able stock sales, but all told, the
company posted a loss of nearly
US$100-million on its invest-
ment portfolio in the third quar-
ter.
That’s the main reason Fairfax
shares are in the doldrums, trad-
ing at multiples not seen since
the depths of the financial crisis.

Prem Watsa, who founded Fair-

fax in 1986 and whose musings at

the company’s annual meetings

are gobbled up by value inves-

tors, emphasizes that the compa-

ny is investing with a decades-

long horizon, not a quarterly

one.

And Fairfax is not just a stock-

investing vehicle, by any means.

Its bond portfolio, at US$16-bil-

lion, is roughly three times the

size of Fairfax’s equity invest-

ments. And the visible failures in

the quarter obscured a solid per-

formance at the company’s in-

surance operations, Fairfax’s pri-

mary cash generator. The com-

pany said that even with two nat-

ural disasters in the quarter – a

hurricane in North America and

a typhoon in Japan – it took in

more insurance premiums than

it paid out in claims, and premi-

um growth hit 14 per cent.

Yet, Fairfax’s recent stock woes

are an indication that investors

are focused on the near-term in-

vestment performance. Analysts

say the company’s shares can re-

bound if Fairfax can persuade in-

vestors it can get back on track

for big annual gains in the com-

pany’s value, led by its investing.

Cormark Securities Inc. ana-

lyst Jeffrey Fenwick said on a

conference call Friday that he’s

getting “pushback” from con-

cerned investors because “Fairfax

isn’t afraid to take some bigger

swings at stocks and have some

larger positions like the Black-

Berry and Stelco in there.” He

asked Paul Rivett, Fairfax’s presi-

dent, if the company is consid-

ering selling some of the names

to “reorient the portfolio,” re-

duce volatility and improve per-

formance

“We’ve heard that from our

shareholders,” Mr. Rivett replied.

“But for us, we’re always going to

be value-focused and there may

be larger positions from time to

time. Generally speaking, we

don’t want to go any bigger than

the current position sizing that

we have. But we continue to be

focused on the names we have,

and we will always be value in-

vestors. And there may, from

time to time, be larger positions

as value investors.”

Even a US$1-billion position

“is relatively small in the portfo-

lio,” Mr. Rivett said, as Fairfax’s

insurance operation has US$40-

billion in money to invest.

Fairfax’s nearly 47 million

shares in BlackBerry, worth

about US$350-million at June 30,

decreased in value by more than

US$100-million, as the compa-

ny’s shares dropped by 30 per

cent in three months.

A US$151-million position in

steelmaker Stelco fell by nearly

40 per cent, or about US$60-mil-

lion in the quarter. And Calgary’s

Ensign fell by more than 25 per

cent, trimming about US$15-mil-

lion from Fairfax’s portfolio.

Fairfax doesn’t record quarter-

ly gains or losses in its 30 million

shares of Resolute Forest Prod-

ucts. It owns more than 20 per

cent of the company, so account-

ing rules dictate that it be consid-

ered an “associated invest-

ments.” But its position lost

more than US$75-million in the

third quarter as the stock fell 35

per cent, plus another 23 per

cent, or US$33-million, in Octo-

ber.

Fairfax recorded a realized in-

vestment gain of nearly US$171-

million in the quarter, in part

from exiting a hugely profitable

position in Indian insurer ICICI

Lombard General Insurance Co.,

which Fairfax established in 2001

with co-investor ICICI Bank Ltd.

Mr. Rivett told investors Thurs-

day that Fairfax recorded a

US$150-million gain in the quar-

ter from the sale of its final 9.9

per cent of the company. All told,

Mr. Rivett said, Fairfax invested

US$347-million in the company

and sold its stakes for US$1.64-

billion.

Fairfax shares rose 3 per cent

Friday to $575,a bit higher than

the 52-week low of $542.70 reac-

hed Oct. 18. Its share price was

around 0.9 times the book value

of the company’s balance sheet,

a standard metric for evaluating

financial companies. The last

time Fairfax’s price-to-book val-

ue averaged 0.9 for a quarter, it

was the depth of the financial cri-

sis in 2009, according to S&P

Global Market Intelligence.

CIBC World Markets Inc. ana-

lyst Paul Holden sees double-di-

git premium increases contin-

uing in the insurance business

and believes that with sales of

some profitable positions, Fair-

fax could achieve a 10-per-cent

investment return in 2020. He

sees Fairfax meeting or slightly

exceeding insurance-industry

profitability in next year – and

with a 1.1 multiple. He’s set his

12-to-18-month target price at

$750.

FAIRFAX FINANCIAL HOLDINGS (FFH)

CLOSE: $575, UP $17

Fairfax’sstockwoesshowinvestorsfocusingonnear-termperformance

DAVID MILSTEAD
INSTITUTIONALINVESTMENT
REPORTER

INSIDETHEMARKET

Fairfaxpostedalossof

US$160-millioninthe

quarterontheportion

ofitsstockportfoliothat

itheldthroughthe

wholequarter.That

unrealizedlosswas

offsetbysome

profitablestocksales,

butalltold,the

companypostedaloss

ofnearlyUS$100-million

onitsinvestment

portfolio in the third

quarter.