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Scorched by a bad stock? Look in a mirror
No use in pointing fingers over CIBC bombshell – it’s buyer beware
By Gyle Konotopetz - Business Edge
Published: 08/18/2005 - Vol. 5, No. 29
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C'mon class, haven't we learned ANYTHING yet? We're talking about the shockwaves that have been emanating over the Canadian Imperial Bank of Commerce fiasco by everyone - by ordinary investors, by money managers, by analysts. These people say they're shocked and dismayed at the bombshell that CIBC dropped in their laps - a $2.4 billion US legal settlement over a lawsuit brought by former Enron Corp. investors.
Among those feeling shortchanged by CIBC is Lex Kerkovius, senior research analyst with McLean & Partners Wealth Management. Investors were ambushed, Kerkovius tells me. And he questions the bank's disclosure prior to the settlement and wants retired CEO John Hunkin to shoulder more than token responsibility for "destroying shareholder wealth."
I don't doubt that CIBC and that merry yachtsman John Hunkin, who oversaw the company's dealings with the fallen energy trader Enron, are worthy of playing the dartboard to the street's angst. My problem is that once again not enough people are taking responsibility for bonehead investing.
The CIBC affair has driven home the point once again that the investment environment hasn't changed all that much in the aftermath of a series of investment scandals. In a raging bull market, it seems the lessons of Enron and WorldCom and Nortel and others are being forgotten yet again. Finger-pointing and the American pastime, class-action suits, still rule the day.
Investors blame analysts and money managers. Analysts and money managers blame CEOs. And the CEOs take the money and run. Boards fiddle while shareholder value burns.
Geez, isn't it high time people started looking in the mirror when they get burnt by investments in companies, particularly those with dark litigation clouds looming over the share price?
Asked if investors need to take some responsibility for owning CIBC stock, Kerkovius told the Edge: "We can only go on information available."
That's about the gist of what we were hearing from those Enron analysts a few years back when the Mother Of All Accounting Scandals rocked the investment world.
Added Kerkovius: "You can't be held responsible for an ambush."
Indeed, investors may have been ambushed by CIBC, which had approved a reserve of $300 million US against litigation risk involving its dealings with Enron. But let's be honest. Ambushes and stunning revelations are all part of the investing game and CIBC ranked as a heckuva prospect for coming out with a nasty surprise, based on the company's history of dubious investments - CIBC had the largest exposure of any of Canada's banks in the collapse of Dome Petroleum in the 1980s - and the fact that everyone knew a settlement over Enron was pending.
Furthermore, CIBC had already paid U.S. regulators $80 million US in 2003 in settlement with U.S. regulators for its Enron dealings in 2003.
While CIBC's settlement was the largest of any of the banks, U.S. banking giant JP Morgan Chase & Co. (NYSE:JPT) settled for almost as much - $2.2 billion US - just two weeks before CIBC's settlement and JP Morgan's stock tumbled on the news.
Just three days after CIBC announced the $2.4-billion US tab that ranks as the largest one-shot payout in Canadian banking history, it settled with Enron itself for $250 million US. CIBC also announced it was taking a $2.5-billion Cdn charge as a result of the Enron episode, a staggering figure considering that figure exceeds the bank's 2004 earnings.
Of course, Hunkin didn't pilot CIBC into this fine mess for peanuts. Before his successor Gerry McCaughey had the pleasure of dropping this bombshell in his first 24 hours on the job, Hunkin punched out of the corner office with $67 million, including a $52-million retirement package and $15 million in salary and bonuses since taking the job in 1999.
While investors cry for Hunkin's head (and wallet) on a platter, they ought to be really outraged with a CIBC board that permitted such obscene compensation.
Maybe if they cry long enough, the merry yachtsman will give back some dough. But, don't hold your breath, gang. Yachts don't come cheap.
Meanwhile, McCaughey certainly has his work cut out in restoring the bank's soiled credibility in the eyes of irate shareholders. While some investment firms are still downplaying CIBC's fall from grace, McLean & Partners promptly sold its position in CIBC (TSX:CM) on the news, citing a lack of dividend growth potential, suspension of the company's share buyback and limited growth vision. Just two days after the news, CIBC stock had plunged 11 per cent or $8.89 to $71.75.
"It (CIBC) is dead money for at least 12 months," said Kerkovius, whose firm emphasizes dividend-growth investing.
Kerkovius said the Calgary firm still owned a position in Toronto Dominion Bank (TSX:TD), which has yet to settle its Enron-related suits.
In the aftermath of the CIBC settlement, analysts were doing their usual stellar work, downgrading the shares after they'd tanked. Scotia Capital's Kevin Choquette, for one, downgraded CIBC to "sector perform" from "sector outperform" and slashed his 12-month target from $95 to $85.
Prior to the CIBC settlement, Bay Street had been carrying on a steamy love affair with the big banks for years and complacently shrugging off issues relating to Enron that ought to have been taken more seriously. The wakeup call for CIBC investors also caused a severe plunge in share prices of Canada's other big banks.
Meanwhile, one thing is sure. The honeymoon with CIBC is over for those investors who couldn't see the writing on the wall.
Say, gang, if you must sell the yacht, perhaps I can connect you with a merry yachtsman with one impressive money clip.
* LET THEM EAT (YELLOW) CAKE: Hey, there is something to be said for the dog days of summer.
In early July, investing legend Jim Dines was cheerfully trumpeting the virtues of speculating in small uranium stocks he refers to as his "chihuahuas.”
Since then, the two juniors of the TSX Venture Exchange he mentioned - Laramide Resources (TSXV:LAM) and Maple Minerals (TSXV:MPM) - are up 40 per cent and 30 per cent, respectively.
So, is it too late to make a play on yellow cake (milled uranium oxide) as an energy play?
"No, it is not too late," the San Francisco-based Dines wrote in his recent investment letter (www.dinesletter.com). "The public is not into uraniums yet, professionals have only a vague idea of which uranium stocks to recommend, oil and coal are still attracting the most attention (as plays on energy), uraniums are in screaming uptrends, on and on ... Chinese energy buyers are already sniffing around Canadian producers but nobody has yet led them to (the Dines Letter's) chihuahuas that could be bought with their pocket change even if they had already risen to sky-high levels."
Dines believes one of the red flags for uranium investors to watch for would be the time when investment houses start hiring uranium research specialists to appease demand from investors.
HOT STOCK:Connacher Oil and Gas TSX:CLL $2.25 Up 66 cents (+41.5 per cent) on five million shares (based on weekly stats through Aug. 11 for Canadian stocks over $1)
Until recently, UTS Energy was the hot stock in the sizzling oilsands sector but speculators banking on the next big play have set their sights on Connacher, driving the stock up almost 100 per cent since the Calgary company announced a reserve and resources study for its massive Great Divide property near Fort McMurray. Connacher also has oil and gas projects in Saskatchewan, Peru and Argentina.
COLD STOCK:Bioscrypt Inc.
TSX:BYT $1.00 Down 56 cents (-35.9 per cent) on 3.2 million shares (based on weekly stats through Aug. 11 for Canadian stocks over $1)
Bioscrypt boasted increased revenues from its fingerprinting technology but unimpressed stockholders pointed to the bottom line. The Markham, Ont., company announced a loss of $1.97 million US (three cents per share) for the second quarter compared to $1.08 million (two cents per share) a year ago. The stock, which traded as high as $11.50 during tech go-go days of 2000, is down 66 per cent since February.
(Gyle Konotopetz can be reached at gyle@businessedge.ca)