Ex­plain­ing the big ‘drop’ in Loblaw’s stock

The Globe and Mail (Ottawa/Quebec Edition) - - GLOBE INVESTOR - JOHN HEINZL E-mail your ques­tions to jheinzl@globe­and­mail.com.

I was alarmed to see that my Loblaw Cos. Ltd. (L) shares took a steep dive on Nov. 2, but I am even more con­fused as to why the drop doesn’t show up on GlobeIn­vestor.com charts. What caused the de­cline and why doesn’t your web­site show it?

Loblaw did in­deed suf­fer a big tum­ble on Nov. 2 – it fell 20.1 per cent. But let me as­sure you that you didn’t ac­tu­ally lose any money in the process.

To un­der­stand what hap­pened here, let’s back up to Septem­ber, when the gro­cery chain an­nounced that it would spin out its in­ter­est in Choice Prop­er­ties Real Es­tate In­vest­ment Trust (CHP.UN). Un­der the com­plex trans­ac­tion, Loblaw Cos. Ltd. par­ent Ge­orge We­ston Ltd. (WN) ac­quired Loblaw’s 61.6per-cent stake in Choice REIT.

In re­turn, Loblaw mi­nor­ity share­hold­ers re­ceived 0.135 of a Ge­orge We­ston share for each Loblaw share as com­pen­sa­tion – a swap that was eco­nom­i­cally neu­tral for Loblaw in­vestors. So why did Loblaw’s shares fall? Well, the spinout was com­pleted on Nov. 1, which meant that an in­vestor buy­ing Loblaw stock af­ter that date was not en­ti­tled to re­ceive any Ge­orge We­ston shares.

As a re­sult, on Nov. 2, Loblaw’s share price fell by $13.10, which, not co­in­ci­den­tally, was very close to the mar­ket value of 0.135 of a Ge­orge We­ston share at the time.

A Loblaw share­holder who held the stock through the spinoff clos­ing date, how­ever, was en­ti­tled to re­ceive the 0.135 of a Ge­orge We­ston share. So, al­though the price of Loblaw dropped, the in­vestor would have been made whole by re­ceiv­ing Ge­orge We­ston shares.

The way data providers de­picted the price ac­tion in Loblaw’s stock only added to the con­fu­sion.

The rea­son the drop doesn’t show up on GlobeIn­vestor’s charts is that the data provider retroac­tively ad­justed Loblaw’s stock price prior to Nov. 2 to ef­fec­tively re­move the value of 0.135 of a Ge­orge We­ston share. Pre­sum­ably, the ra­tio­nale for smooth­ing out the chart in this way is that the spinoff did not cre­ate or de­stroy any value for Loblaw share­hold­ers, so it could be mis­lead­ing to de­pict a large drop in the share price.

GlobeIn­vestor wasn’t the only web­site to ad­just the data this way. Stock charts on Bloomberg also don’t show the big de­cline in Loblaw’s share price, while on Yahoo Fi­nance – de­pend­ing on the type of chart you cre­ate – some charts show the drop and oth­ers don’t.

The TMX web­site does show the drop, both on its stock charts and in Loblaw’s price his­tory data.

Where all of the charts agree is that Loblaw’s shares have ral­lied strongly in re­cent days, which ought to pro­vide com­fort to all Loblaw in­vestors – not just those who were con­fused by the spinout.

I’d like to trig­ger cap­i­tal loss for tax pur­poses on a Cana­dian in­dex ex­change-traded fund that I own. Can I im­me­di­ately pur­chase an­other Cana­dian in­dex ETF with­out trig­ger­ing the su­per­fi­cial loss rule and hav­ing the loss de­nied, or do I have to wait 30 days?

With the S&P/TSX com­pos­ite in­dex down about 6 per cent year to date, this is a ques­tion that’s prob­a­bly on a lot of in­vestors’ minds.

Ac­cord­ing to the Canada Rev­enue Agency, a su­per­fi­cial loss oc­curs when you sell a cap­i­tal prop­erty for a loss and then you (or your spouse or com­pany con­trolled by you or your spouse) buys “the same or iden­ti­cal prop­erty … dur­ing the pe­riod start­ing 30 cal­en­dar days be- fore the sale and end­ing 30 cal­en­dar days af­ter the sale.”

So, it’s clear that you couldn’t, for ex­am­ple, sell 100 shares of Bank of Mon­treal and then im­me­di­ately re­pur­chase 100 shares of Bank of Mon­treal. In that case, the loss would be de­nied for tax pur­poses. Nor could you sell an ETF that in­vests in the S&P/TSX com­pos­ite in­dex – such as the iShares Core S&P/TSX Capped Com­pos­ite In­dex ETF (XIC) – and im­me­di­ately buy an­other ETF that holds the same in­dex – such as the BMO S&P/TSX Capped Com­pos­ite In­dex ETF (ZCN). Th­ese are ef­fec­tively iden­ti­cal prop­er­ties in the eyes of the CRA.

Now for the good news. You could sell a Cana­dian ETF that in­vests in one in­dex and im­me­di­ately re­place it with an­other ETF that in­vests in a sim­i­lar, but not iden­ti­cal in­dex, and still claim the loss. If you are sell­ing XIC or ZCN, for ex­am­ple, you could pur­chase the Van­guard FTSE Canada All Cap In­dex ETF (VCN), which in­vests – as the name im­plies – in the FTSE Canada All Cap In­dex. Be­cause the S&P/TSX com­pos­ite and FTSE Canada in­dexes hold many of the same stocks and are highly cor­re­lated, you will re­main in­vested in the broad Cana­dian mar­ket but will still be able to claim a cap­i­tal loss.

Where all of the charts agree is that Loblaw’s shares have ral­lied strongly in re­cent days, which ought to pro­vide com­fort to all Loblaw in­vestors – not just those who were con­fused by the spinout.


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