Cogeco Communications (CCA.TO)

(A Top Pick Jun 28/17, Down 16%) It was a disappointment. It has a reasonable combination of price, price momentum and he sold it. It still has good return on equity but it missed on earnings due to a problem with integrating a new SAP system. There is always a chance that Rogers takes them in.

This is a sector they are not attracted to presently. There is slow growth in the sector and they hold a fairly high level of debt. In a rising interest rate environment it could create headwinds.

(A Top Pick July 14, 2017. Down 13%). He sold it at a loss. He thinks it might be OK to buy again but his model tells him to wait a bit longer before buying it back.

(A Top Pick July 14/17 Down 14%). This is a great example where you need to trade with a stop loss – he uses a 7-10% stop. Poor earnings, along with a pullback below their stop, resulted in them selling off their holdings.

This has done very, very well over the last couple of years with a lot of the other telecommunication companies. It has always been held out as an acquisition that Rogers (RCI.B-T) has to make to get a hold of Oakville, Burlington area. The company has continued to diversify by buying more US assets. He would Buy Rogers or BCE (BCE-T) instead.

He has nothing in particular against this stock, but look at his Top Picks. Dividend yield of 1.8%. (See Top Picks.)

When you compare this to the other cable companies it is obviously better. It has a higher return on capital and is cheaper. Technology is not going away and we are going to need bandwidth. They are cousins of the utilities. This one is at the top of the list of cable companies.

Recently acquired some US cable operations. Earnings per share were up 37%, a 4% earnings surprise. Free cash flow was up 113% year over year. Free cash flow yield increased from 6.5% last year to 10.4% this year. Trailing ROE is 21%. PE to growth is .35. Dividend yield of 2.1%. (Analysts’ price target is $82.50.)

One of those stocks that hits all the boxes for him. It has strong price momentum, but still has great valuation, scoring in the top 10%. The only business they are not in is wireless. Cheap at 14X earnings and 16X ROE. Reasonably priced on an EV to EBITDA basis. They beat on their recent quarter and have some US growth opportunities with the cash flow that they generate. Dividend yield of 2.2%. (Analysts’ price target is $78.50.)

His model price is $68.16. If it went down in price he would be a buyer but it trades right on its model price usually.

Ranks 262 out of 700 stocks, so kind of a lukewarm ranking. Earnings momentum and cash flow are both negative. Year-over-year cash flow, was down 13% and earnings were down 19%. There are better opportunities elsewhere.

Just reported and the quarter looked sort of OK. There were some areas with good news. The cable business itself was doing very well, but their Internet services for business wasn’t doing so well. On a multiple basis, relative to its competitors, it looks very inexpensive, but wonders if that isn’t for a reason. He doesn’t see any catalyst to drive the stock up. Trading at around 2X book. He would be much more comfortable at 1.5X book. Dividend yield of 2.7%.

(Market Call Minute.) Sell this and Buy Bell Canada (BCE-T).

Thinks valuations across the board are relatively stretched for these companies. Has some secular concerns when it comes to cable and telecommunication businesses, which have kept him out of it. You are going to see a tremendous amount of cord cutting i.e. consumers opting for skinnier cable packages or no cable package. That could significantly pressure pricing in the future.

This has been a phenomenal story. The most important thing is free cash and what the companies do with it. This company is diversifying by getting into networking, data storage, and into other markets. Rogers (RCI.B-T) owns 32% of them and he doesn’t think it is properly reflected in Rogers’ stock price. He would buy more if this sold off.