Today we kick off with look brief look at Black Friday sales which set the stage for the key retail season – we look at a few winners and losers from this segment including Canadian-based Spin Master Corp. (TOY:TSX) and we tease a recent recommendation – a US-based electronics toy maker which has already gained 40% this month. As well, we give a brief take on how the recent pipeline approvals by the Canadian government might affect markets. Our Star of the week is oil and finally we end with our Your Stock, Our Take segment we review a listener question on hot pot stock Aphria Inc. (APH:TSX-V).
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Now, let’s dig into the show.
I would like to welcome again, myhost, KeyStone’s Senior Equity analyst, father of 1, and a man could not be more excited about the release of Netflixx’s Gilmore Girls Revival, Mr. Aaron Dunn.
Intro:
- Black Friday/Cyber Monday
Black Friday 2016 breaks US online sales records
Adobe has revealed that this year’s Black Friday shopping frenzy broke online sales records in the US, with $3.34bn being spent online and a 17.7% increase on sales last year.
It also found that retailers who invested in mobile, email and social saw 30% more sales on average than those concentrating on just one or two channels.
Winners: The big online retailers – Amazon, Target, and Wal-Mart
All saw double digit increases in online sales.
Winner: Mobile sales
With $1.2 billion, Black Friday became the first day ever to drive over $1 billion in mobile revenue, according to Adobe Digital Insights. That’s 33% growth year-over-year.
Losers: Physical stores
More consumers are shopping online, which means fewer are going to stores. Malls were certainly not deserted, but the numbers were clearly down most places. Cowen & Co analysts forecast in a note before Black Friday ended that store traffic would likely fall 3% to 4% this year on Black Friday, Reuters reported.
Loser: Macy’s
Macy’s (NYSE:M) has been struggling to find its footing in the current digitally driven economy and it has been investing heavily in its online operations. Those efforts might be fine on a normal day, but on Black Friday the worst thing that could happen did — Macys.com crashed.
The chain’s website went down in the morning and was still experiencing outages as of 2:30 p.m., according to posts on social media. It’s hard to know the exact impact of the off-and-on outage, but it’s likely the company took a hit. That could end up being a bigger negative for the long term as some of those holiday shoppers might have been first-time customers whose credit card and login info Macy’s could have captured.
HOT TOYs
Lego is the top-selling toy
Adobe’s results from Black Friday show that Lego is still a hot favourite this festive season, with Lego Creator Sets coming out as the top-selling toy.
This was closely followed by Razor electric scooters, Nerf guns, DJI Phantom Dronesand Barbie Dreamhouse. So some traditional names there…
With items under $300 being 20% more likely to sell out, this gives us a good indication of the toys parents need to snap up if they still want to get them in time for Christmas.
The five bestselling electronics from Black Friday were Apple iPads, Samsung 4k TV’s, Apple’s MacBook Air, LG Televisions and Microsoft Xbox.
Spin Master had high hopes when it rolled out the Hatchimals in early October, but it didn’t expect the ensuing response, said James Martin, the company’s head of robotics.
The company had expected the toy would be a hit with girls between the ages of six and eight, but found it was also popular with boys and older kids.
Toy sales tracked by the NPD Group market-research firm showed that in late October, different versions of the Hatchimals were holding the first, second, sixth and ninth spots in a list of the top 10 items sold in the United States.
Hatchimals are no longer among the top-selling items, but only because they are no longer on the shelves, said Juli Lennett, senior vice-president and U.S. toy-industry analyst for NPD Group.
“There is always a hot toy at Christmas. This is definitely different,” she said, adding that the Hatchimals’ popularity was on a scale similar to past runaway successes such as the Cabbage Patch Kids dolls in 1983-84 or the Tickle Me Elmo plush toy in 1996.
What really ties the company into our show is that the toy is produced by a Canadian Toymaker Spin Master which is listed on the TSX, appropriately under the symbol TOY.
The stock is up 60% YEAR-TO-DATE – so you can see what a very successful toy can do for this company.
Valuations.
The company has a market cap of $2.75 billion and a price-to-earnings ratio of 32.34.
For our clients this year we actually put out a NEW BUY recommendation less than a month ago in our US small-Cap research on a Consumer Electronics company who’s products are aimed at 8-15 year olds…
Big promotional orders from Walmart and Amazon helped power record third quarter results released last week – driving the stock up over 40%. This was our way to profit from this year’s holiday sales….
I think the best way to save money around the holidays is to make money from a holiday sales driven stock…this year our selection in this arena has already helped pay the holiday bills.
Let’s shift gears from Black Friday to Black gold…there was big news in the Canadian energy sector this past week.
Pipeline Approvals
Prime Minister Justin Trudeau late on Tuesday approved Kinder Morgan Canada Inc.’s Trans Mountain pipeline and Enbridge Inc.’s Line 3 to the U.S. Midwest. Both projects still face resistance from environmentalists and some First Nation groups, but the decisions should give large oil sands companies some confidence to contemplate growth after more than two years of contraction and project shelving.
Specifically in that regard, Cenovus Energy Inc. may look to revive its phase G expansion at its flagship Christina Lake project. Imperial Oil Ltd. is also likely to proceed with its steam-driven Aspen development. This means more work and huge dollars again will likely flow down to some service stocks in this area.
As far as the pipelines specifically, Kinder Morgan said it aims to start construction on the $6.8-billion (Canadian) pipeline expansion by September next year, with start-up pegged for late 2019. The project is supported by 13 major oil sands companies. It would boost capacity on the Edmonton to Burnaby, B.C. network from 300,000 barrels a day to 890,000 barrels.
Enbridge has said its $7.5-billion Line 3 could start up in 2019, restoring capacity on the system to 790,000 barrels per day, from about 390,000 barrels today.
Star: Oil
OPEC confounded its doubters and sent crude oil prices soaring by agreeing to its first production cuts in eight years. Apparently the agreement is 7-months of meetings…
The deal, designed to drain record global oil inventories, overcame disagreements between the group’s three largest producers — Saudi Arabia, Iran and Iraq — and ended a flirtation with free markets that started in 2014. It was also broader than many had expected, extending beyond OPEC. Most strikingly, Russia agreed to unprecedented cuts to its own output.
The impact on the energy world was immediate: benchmark oil prices gained as much as 10 percent in New York and is now up around 15% in the wake of the news. Share prices of energy companies around the globe jumped alongside the currencies of large exporters. Whether that’s sustained will depend on how strictly members of the Organization of Petroleum Exporting Countries stick to the agreement, something they haven’t always done in the past.
The news does appear to be a wake-up call for skeptics who have argued the death of OPEC – it does appear many in the group want to push inventories down.
Questions on implementation – not all parties historically follow their stated cut to the letter or at all.
Russia is a total wildcard as they are on many economic issues – will they actually cut – the proof will be in the price 1 year out.
KeyStone has had very little direct exposure to energy over the past several years – the one energy service stock we have covered has been the best performing TSX stock over the past couple years and the one TSX listed energy producers has also bucked the trend posting decent gains over the past 2-years, where almost every North American energy stock has cratered.
We continue to be cautious, but the pick-up in oil has caught our attention.
The jump in oil makes it this week’s star.
Aphria Inc (CVE:APH; Price: $5.40; Market Cap: $565 million)
· Licenced marijuana producer and distributor based out of Ontario.
· Just put out their first quarter fiscal 2017 results.
· Revenues were $4.4 million, quadrupling from last year and up 58% compared to the last quarter.
· EBITDA in the quarter was just over $1 million which was up from a loss of 370 thousand last quarter.
· The company did manage to squeak out a modest profit of around $400 thousand on the bottom line.
· I actually came across this company in one of my screen about a year ago.
· I liked what I saw relative to other companies in the industry.
· They seemed to be the furthest along with achieving profitability.
· I understood and respected management’s plan and I liked the fact that the CEO Vic Neufeld had a very successful background as former CEO of Jamieson Laboratories where he oversaw the company’s growth from $20 million to over $250 million in revenue.
· But they were still not quite profitable at that point and didn’t meet our minimum criteria.
· Now the company is starting to break through into profitability.
· Unfortunately for people that don’t own it, the stock is up 350% over the past 12 months so even if they are able to together some half decent earnings over the next year, the valuation becomes a key consideration.
· Unlike some companies that have ventured into the marijuana industry, Aphria is a real business and I think it will have a future and be fully profitable one day.
· Right now there are too many unknown to make an informed investment decision about these companies.
· The regulatory framework hasn’t been flushed out yet and we don’t know what the competitive landscape is going to look like.
· One concern I’ve heard discussed is that once the legalization is complete there will be widespread and aggressive price competition which could hinder the industry’s ability to be meaningfully profitable.
· But we have seen the scenario play out many times before where the market aggressively pushes a new theme and share prices run up precipitously due to speculation and the theme because basically uninvestable.
· Once reality kicks, stock prices across the board usually come tumbling down.
· It’s at that point that the few actually strong and profitable companies in the space can be purchased at a nice discount and they will be the companies that will eventually go on to recovery because they are real businesses capitalizing on real growth opportunities.
· Shares prices for marijuana stocks did fall 30% in a single day a few weeks ago. They have stabilized since but when the market decides to bail on these speculative style stocks it can be swift and furious.
