Can you explain why Brookfield Renewable Partners LP (BEP.UN) jumped this week? I can’t find an explanation anywhere.
The catalyst for Brookfield Renewable’s BEP-UN-T rise was the U.S. government’s announcement of an US$80-billion partnership to build up to eight new nuclear reactors across the country. The reactors will be designed by Westinghouse Electric Co., which is jointly owned by Brookfield Asset Management Ltd. (BAM-T) and Cameco Corp. (CCO-T), and they are intended to help meet soaring power demands of data centres and artificial intelligence.
Although Brookfield Renewable wasn’t specifically named in the news release, it holds roughly an 11-per-cent stake in Westinghouse alongside institutional investors. That explains why shares of the partnership and its sister company, Brookfield Renewable Corp. (BEPC-T), jumped 4.6 per cent and 5.7 per cent, respectively, after the deal was announced on Tuesday. Both stocks also rose sharply over the previous three sessions, suggesting details may have leaked out in advance.
Even though construction of the reactors is still several years away, analysts hailed the deal as a long-term positive for Brookfield Renewable. Nelson Ng, an analyst with RBC Dominion Securities, said Brookfield Renewable’s stake in Westinghouse “offers a significant cash flow growth opportunity, with further upside potential” if certain financial milestones are met and the U.S. government exercises its right to trigger an initial public offering of Westinghouse.
“With an $80-billion U.S. government-backed investment commitment, we believe BEP’s partnership positions it to benefit from a transformative nuclear revitalization,” Mr. Ng said.
He maintained an “outperform” rating and hiked his target on Brookfield Renewable Partners’ units to US$35 from US$31. Several other analysts also boosted their price forecasts. As of late Friday morning, the units were trading at about US$30.40 on the New York Stock Exchange and about $42.50 on the Toronto Stock Exchange.
According to LSEG Data & Analytics, the median 12-month price target is US$29.47. Of the 14 analysts who cover the stock, there are 10 buy ratings, three holds and one sell.
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Regarding your column on selling BCE Inc. (BCE) for a tax loss and buying it back after the required 30 days, couldn’t an investor sell BCE and immediately purchase a call option? If BCE’s stock price rises, the call option would also increase in price, so the investor would participate in the gains.
The government is one step ahead of you on this. According to the Canada Revenue Agency, one necessary condition for a superficial loss is that “you, or a person affiliated with you, buys, or has a right to buy, the same or identical property (called ‘substituted property’) during the period starting 30 calendar days before the sale and ending 30 calendar days after the sale.”
A second condition is that “you, or a person affiliated with you, still owns, or has a right to buy, the substituted property 30 calendar days after the sale.”
The key words here are: “has a right to buy.”
A call option gives the owner the right (but not the obligation) to buy an underlying asset at a specific “strike” price on or before the option’s expiration date. In this case, the underlying asset would be shares of BCE BCE-T. As such, buying a call option and holding it through the full 30-day waiting period would trigger a superficial loss just as if you had repurchased the stock itself.
In a paper titled “Superficial loss rules and planning strategies,” RBC Wealth Management says a superficial loss could be avoided if the call option is no longer owned on the 30th day following the sale of the shares.
“Since call option transactions are generally settled on the next business day, this means that you must sell the call option by the 29th calendar day after the settlement date of the disposition of the security.”
After the 30th day, the investor could then buy back the underlying shares. However, RBC cautions that “call option strategies may entail significant risk and are not suitable for all investors. Please consult with an option licensed adviser prior to investing in any option strategy.”
Also keep in mind that if you realize a gain on the call option, you will be responsible for paying tax on your winnings. Moreover, because options are generally a leveraged play on the underlying asset, the strategy could backfire if BCE’s stock goes south.
So, unless you’re an options expert, you should probably give this strategy a pass.
Disclosure: the author personally owns units of BEP.UN
E-mail your questions to jheinzl@globeandmail.com. I’m not able to respond personally to e-mails but I choose certain questions to answer in my column.