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Tim has made our Canadian index boom

Summer’s come and gone; three-quarters of the year is already in the books. Fear not because the Leaside Stock Index is just getting started. August saw the LSI deliver its biggest gain of 2014 thanks to Burger King’s (BKW) $12.5 billion offer to acquire Tim Hortons (THI.TO).

The offer, which calls for $65.50 in cash plus 0.8025 common shares in the soon-to-be-merged company pushed Timmy’s stock up 44 percent in a single month providing more than a few double doubles for its shareholders. It’s too bad the LSI is only a hypothetical portfolio. These kind of quick strikes don’t come around very often. Kudos for anyone holding its stock. You’ve done well.

So, let’s forget about reality for a second and think about what should be done with the LSI’s position in Timmy’s? I have three options:

1. Sell the 170 or so shares received in the newly merged company investing that cash along with the $13,780 received for the 210 shares held in Tim Hortons in another stock that’s LSI eligible; or

2. Keep the 130 shares in the newly merged company and use the $13,780 to buy more shares in a Tim Hortons/Burger King tie-up; or

3. Keep the 130 shares of the newly merged company but invest the $13,780 in another stock that’s LSI eligible.

John Heinzl is a business columnist with the Globe & Mail. He recently wrote (http://bit.ly/1nK8BAp) that he sold his Tim Hortons stock after the takeover announcement because once merged the new company wouldn’t pay nearly as nice a dividend as Tim Hortons routinely did because it would be too busy paying off a boatload of debt. If you’re an income investor — as Heinzl most definitely is — the logic is sound.

However, both Tim Hortons and Burger King possess excellent management. The combination should make for a very formidable opponent to McDonald’s (MCD) and I for one think Tim Hortons is in better hands with 3G Capital (which owns 51 percent of the new company) behind the scenes making sure costs are kept under control.

3G Capital’s Jorge Lemann is one of the smartest minds in business having orchestrated several big takeovers including Anheuser-Busch in 2008. With Warren Buffett lending $3 billion in the form of preferred shares, the merged business is going to do just fine, taxes aside.

While I’m leaning toward rolling everything into the merged entity I don’t have to make a decision for several months as the deal’s not expected to close until early 2015.

In the meantime let me quickly update other significant happenings for the LSI in August.

The LSI gained 5.5 percent in August, handily beating its ETF benchmark (XIC.TO, SPY) by 268 basis points (almost three percentage points in layman terms) and is up 6.2 percent year-to-date through August 29. While the LSI still trails its ETF benchmark by almost eight percentage points it managed to close that gap by a significant margin in August.

The American stocks had a bang-up month from top to bottom with nine out of 10 delivering positive gains including contributions of 5 percent or more from Home Depot (HD), Berkshire Hathaway (BRK.B), Best Buy (BBY), Lincoln Electric (LECO) and PetSmart (PETM).

This compares to only two Canadian stocks: Canadian Tire (CTC-U.TO) and Tim Hortons. In fact, if you take Tim Hortons 44 percent gain out of the equation it wasn’t even close. The Americans ran away with August.

After a terrible start to 2014 the 10 American stocks in the LSI are making their may back to within striking distance of positive returns. They are down 2.91 percent through August 29. While this pales in comparison to the 11.84 percent total return for the LSI’s Canadian stocks as well as 14.1 percent for the ETF benchmark, three months ago I wouldn’t have believed they’d have any chance of making it into positive territory by the end of the year.

Now, it’s entirely possible and that’s great news for the LSI.