Bold Move – Sell ScotiaBank Buy SNC Lavalin

At the end of March, I introduced another feature for my DSR members; Mike’s BUY List. The list is composed by 5 US and 5 Canadian dividend stocks I would buy right away if I had another 10K to add to my portfolio. At the end of this post I also provided a “special play”. This is the kind of trade you do only if you feel very confident about the rest of your portfolio and only if you don’t mind losing in the end. Because catching a falling knife is a hard thing to do. But I have and now I just hope that looking at my hand doesn’t include seeing a trail of blood leaking on the floor…

I bought SNC Lavalin (SNC.TO) since the stock is down 30% since August 2014. Since I had no cash in hand to make my purchase, I also sold ScotiaBank (BNS.TO). Let’s take a look at both trades:

 

Selling ScotiaBank

Over the past few weeks, I’ve seen a few bloggers actually buying this stock. My Dividend Growth & Dividend Mantra recently purchased or added more to their existing positions. This even more surprising considering both bloggers are solid investors and AMERICANS. Therefore, buying a Canadian bank for them requires more research. To be honest, I don’t think BNS is the best pick among Canadian banks right now. For the record, my favorite picks right now in the banking industry are Royal Bank (RY.TO) and National Bank (NA.TO). They both shares two common things; they have lots of revenues coming from their trading market divisions and both focus on private wealth management; which is, in my opinion, the future of investments in Canada.

 

BNS

 

Now back to BNS, I sold the stock for three reasons:

#1 I already own NA.TO & GS.TO in the financial sector, I have enough already

#2 ScotiaBank is well diversified in Latin America countries… but the countries’ economies suck at the moment

#3 I don’t see any solid growth perspective over the long haul (the Canadian debt ratio is through the roof)

In other words, I don’t think ScotiaBank is a bad investment. This stock will continue to do okay and pay a solid dividend, but I simply think there are better opportunities on the market. Such as….

 

Buying SNC Lavalin

The main concern around SNC right now is the criminal charges against the company and previous management. These accusations are definitely serious and come as a result of the RCMP investigation regarding its Libyan business. SNC’s reputation is standing on thin ice at the moment and if there is one thing the market doesn’t like; it’s uncertainty. Legal actions usually lead to lots of uncertainties!

 

snc

 

On the other hand, the company has a solid book of orders and trades under its real value. The dividend payment is not at risk and a stock price is so low that it makes for a good candidate for a takeover. We saw last year another engineering firm coming out of similar criminal charges nightmare, WSP Global (WSP.TO), previously knowns as Genivar. WSP Global made a major purchase last year (Parsons Brinkerhoff for $1.3B) and the stock is up by 77% over the past two years. Not so long ago, nobody would have considered this scenario possible for Genivar. I hope a similar situation will happen with SNC.

I’m not the only one thinking SNC can be a great buy. The Quebec’s Caisse de Depot (which manages the pension plan for the Quebec population) is actively buying the stock and SNC’s new management has also made several stock purchases.

I believe the moment charges will be settled, investors will look at the SNC $12B order book and forget about the past. After all, even with the current shadow over its head, the company continues to win contracts around the world. Their expertise is among the most solid in the world in their field. The problem came from greedy management looking to cut corners. This must be punished, but there are solid engineers working at SNC and the company should survive this storm.

What do you think about my move? Bold or gambler move?

Disclaimer: I hold shares of SNC.TO & NA.TO and sold my shares of BNS.TO.

I do not hold shares of RY.TO & WSP.TO.