SNC…another Canadian disaster stock

I had a reader personally ask me about his SNC stock. Normally I would tell him to phone into BNN with the question, but I thought it’s probably worthy of a blog—given the news on the company of late. I’ll start this blog 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%. The choice of these three weighting comes down to the risk/reward potential we foresee via our analysis. We had traded SNC nicely within its former trading band of $52 to $58 twice in the past, and we were aiming at making it a hat-trick via a similar trading strategy.  This time, 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 a few months ago.

At the time of buying, we were unaware that the current Federal government, which has already been found guilty of  violating a federal ethics regulations in the past, was involved so intimately with SNC. Given the other calamities the Canadian Fed 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, ordinary Canadians are learning just how deep down the rabbit hole the corruption of the current Canadian Federal government has gone.

In order to better understand the SNC situation, this video might help. Yes, it’s a PC video, but its factual, and undeniably disturbing to me as a shareholder of SNC, and as a Canadian citizen.

So what do we do now?

My associate Craig Aucoin, who does the fundamental analyses around here, tells me that approximately $30 of the current value of SNC shares lies within their ownership 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 the company trading for about $5/ share. Ok, now the fundamental guys have to figure out if the global operations, which will be curtailed going forward, are worth that $5. 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.”

Technically, the stock broke that $52, then $44 support with vigor recently. Right now, it’s hard to say if the stock will rally back to first support (now resistance) at $44. Its hanging out at 2015 support in the low $30’s. I must say that I am playing this one by ear. I’ll look for an opportunity to sell, but I do think that the wait might be worth it, given the floor of its $30/sh 407 highway value built into the stock.  It may rally a bit before the court case results are concluded.

Keith’s BNN show on Friday of last week can be viewed here. 

Invitation to students in Toronto to learn about Technical Analysis

I’ll be involved in a free event for students interested in learning the basics of Technical Analysis. See below for details of the event, which is taking place at Ryerson University this Thursday at 6:00pm.