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Playing the Weak Loonie

Richard Croft
June 22, 2015
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The Canadian dollar has fallen on hard times. The Canadian dollar tends to follow West Texas Crude so it’s not surprising to see our Loonie trading close to 80 cents US. With lower Canadian interest rates and a US rate hike all but assured the Loonie may week stay in its current range for some time.

If you buy into that scenario you want to look for companies that benefit from a lower dollar. Specifically exporters like West Fraser Timber (symbol WFT, Fridays close: $68.13) which derives close to 50% of its revenue from sales to the US.

To that point, we could see a pickup in sales as the US job market strengthens which plays into WFT’s prime demographic, specifically 30 to 40 something first time home buyers. Low oil prices means more disposable income for this demographic and by extension continued easing in 30 year fixed mortgages rates.

The company made some decent gains in the first quarter but has since settled back to the point where the share price is effectively flat on the year. As such we may not see significant improvement in the share price through the remainder of the year, but on the other hand, I don’t see significant downside either.

In other words, WFT may remain in a trading range which plays into a covered call strategy or cash secured put strategy. If the Canadian dollar continues to decline and the prime home buyer demographic plays out as anticipated, WFT could pick up steam sometime in the first quarter of 2016.

In the interim, you could buy the shares and write the January $70 calls at $4.55 per share. There is not much liquidity in these options so consider this as a six month position. If the shares are called away in January, the six month return is 9.4% excluding dividends (note the company pays a 28 cents annual dividend). If the stock remains the same, the return is 6.7% with downside break even at $63.58.

Another approach would be to sell the WFT January $68 puts at $5.25 per share. With this trade’ you are committing to buy the shares at $68 per share less the $5.25 per share premium received. The net cost should the shares be put to you is $62.75. There is good support at $60 per share but should the stock break below that level, consider closing out the short puts.

Richard Croft
Richard Croft http://www.croftgroup.com/

President, CIO & Portfolio Manager

Croft Financial Group

Richard Croft has been in the securities business since 1975. Since February 1993, Mr. Croft has been licensed as an investment counselor/portfolio manager, operating under the corporate name R. N. Croft Financial Group Inc. Richard has written extensively on utilizing individual stocks, mutual funds and exchangetraded funds within a portfolio model. His work includes nine books and thousands of articles and commentaries for Canada’s largest media channels. In 1998, Richard co‐developed three FPX Indexes geared to average Canadian investors for the National Post. In 2004, he extended that concept to include three RealWorld portfolio indexes, which demonstrate the performance of the FPX portfolio indexes adjusted for real-world costs. He also developed two option writing indexes for the Montreal Exchange, and developed the FundLine methodology, which is a graphic interpretation of portfolio diversification. Richard has also developed a Manager Value Added Index for rating the performance of fund managers on a risk adjusted basis relative to a benchmark. And In 1999, he co-developed a portfolio management system for Charles Schwab Canada. As global portfolio manager who focuses on risk-adjusted performance. Richard believes that performance is not just about return, it is about how that return was achieved.

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