More Misc market notes

Too much going on today, so will consolidate it into one post.

Everything that is going on is liquidity-fuelled. Central banks buy bonds. Bond yields go down. The equity to bond spread goes in conjunction with this, and hence prices rise. Doesn’t matter what the heck happens to the economy and it will drive most people crazy that do not see this relationship. Eventually they will capitulate and buy at the top, but right now there is a huge wall of worry which favours further equity upside.

* A week ago, I told you about Birchcliff preferred shares – they’re up today and as natural gas strengthens these present a good risk-reward, coupled with some income to boot. I’m sure there are better ways to play the natural gas space with equity (TOU, ARX?). The floor is pretty much in. Dollar-cost average on anything fossil-fuel related over the next couple months and a year later I’m sure it’ll work out.

* Atlantic Power’s performance (and utilities in general) has been disappointing in the COVID-19 recovery, mainly because power demand has dropped as a result of the economic slump. It doesn’t really matter for them as the price of their power generation is secured through power purchase agreements, but it doesn’t bode well for the residual value of their power plants after the agreements expire. After repurchasing 12.5 million shares of their own stock on May 1st, they will not be able to repurchase further equity until 20 business days after the offering concluded (i.e. not until June). I would expect them to resume share repurchases in June, so I suspect that the common shares will be a reasonably good bargain in May. I won’t be adding since this company is a low-medium reward and low risk entity, so it will be like watching paint dry compared to many other offerings in the stock market. But I’m pretty sure that June will see higher prices for ATP than in May.

* I watched Planet of the Humans, available on Youtube until mid-May, which puts a huge hole through the motivations of various environmental activists. Surprise surprise, it’s all about money and not the Earth! Blair King (a professional chemist which I have a very high degree of respect for) has an excellent review on the movie.

The only reason why I mention this movie is because they tear a good strip out of biomass plants as being “renewable energy”, and for a very brief moment, Atlantic Power’s Cadillac plant (the one which had a major explosion and plant fire earlier this year) was mentioned.

* Firms are going to be throwing everything under the bus for the first and second quarter, citing COVID-19. There will be write-downs of all sorts of junk on the books that have been accumulating. Firms that do not blame COVID-19 during the two quarters for various one-time write downs of financial performance are likely to be more honest than not.

* An example of this is BWX Technologies (NYSE: BWXT), which reported earnings yesterday. They have a competitive advantage in nuclear engineering services. They did not blame COVID-19 for anything, probably because nuclear engineering services are booming and they should become at least a US$65/share stock by year’s end. Yes, I own shares. The most profit to be had in the nuclear value chain is not in uranium, people!

* There is an interesting tug-of-war happening in the Yellow Pages right now, which traded more shares today than it has in a long time. Somebody at RBC is very interested in shares, while Canaccord has been on the selling side of the large blocks, mostly around the $10 range. Just announce the takeover bid already, folks!

* I find it probable that the central banks will target a stabilization of equity levels, so they will adjust the rate of their liquidity injections that go into the market. Still, the trend is for further liquidity until unemployment metrics begin to moderate. I will have a comment on unemployment/employment rates in a future post, as this is an interesting topic in itself which has market implications.

* REITs, financials, and insurance companies, in general, I think will disappoint. You can almost take anything that somebody is bullish on whatever that is posted on Reddit CanadianInvestor and just take it off your list of consideration. It is quite remarkable how useful it is, entirely for the oppositely intended reason.

COVID-19 false positives

Apparently Nunavut’s first COVID-19 case was a false positive.

From what I remember reading, it is possible that tests have false positive rates of up to 30%, depending on what’s being tested. Conversely the false negative rates I’ve seen quoted are around 15%, again, depending on tests. I haven’t taken the time to seriously dig into what precisely the numbers are, but you can be sure that in most instances, false positives are rarely corrected to negative and subsequently not reflected in the statistics, while false negatives will eventually become positives later (at least in symptomatic cases).

One of the whole issues of this social isolation is that it’s basically impossible, short of precision testing, to contain it, so efforts are basically about buying time. If these studies of anti-body testing in the San Jose, and NYC area of people having 20-30% antibody rates for COVID-19 are true (hence being already sensitized to it and not being prone to further viral infection), once further confirmation of this broad “already infected” cohort becomes more confirmed, you will see a very suddenly policy change of just freeing up everybody.

The residual hysteria will be with us for at least a year as long as these “second wave” scare-and-fear media reports continue.

Late Night Finance with Sacha, Episode 2

Late Night Finance with Sacha, Episode 2

Date: Thursday, May 7
Time: 9:00pm, Pacific Time
Duration: Projected 1 hour.
Where: Zoom

Frequently Asked Questions:

Q: What are you doing?
A: Thursday’s conference will be about analyzing BMTC Group (TSX: GBT). The company was suggested for review by somebody on the first Late Night Finance episode. Prior, I had never heard of this company before. Short of doing some very superficial research on it, I will keep myself mostly ignorant until I analyze it on Thursday, so it will be like going through a company from scratch. I’ll share screens and go through financial statements and annotate (verbally or otherwise) and go through my thoughts. I might even come to a valuation opinion, or at the very least give you my hunch. This can most certainly be used as a sleeping aid for you.

Questions during this presentation, both on and off topic, are accepted. If they become too distracting, I’ll be sure to get back to the original topic.

Q: Do you own this company, is this a pump and dump?
A: No, and no. Entirely up to you whether you want to buy, short, hold, or whatever.

Q: Why are you doing this?
A: Continuing my experimentation in video broadcasting. Who knows, I might learn something from you as well.

Q: Why so freaking late? I live in the eastern time zone.
A: It is late night finance, is it not? I might do ‘afternoon finance’ another time, but not this time.

Q: How do I register?
A: Send sacha@divestor.com an email. Subject line “Late Night Finance May 7”, and in the message body tell me what city and province/state you’re from (or if you’re international, city and country). I’ll reply later (Thursday afternoon) with the zoom channel and passcode to get in.

Q: Are you trying to spam me, try to sell me garbage, etc. if I register?
A: I can hardly manage a mailing list without breaking my own website, what makes you think I will spam you? No, if you register for this, I will not harvest your email or send you any solicitations. Also I am not using this to pump and dump any securities to you, although I will certainly offer opinions on what I see.

Q: Why do I have to register? I just want to be anonymous.
A: I’m curious who you are as well.

Q: If I register and don’t show up, will you be mad at me?
A: No.

Q: Will you (Sacha) be on video (i.e. this isn’t just an audio-only stream)?
A: Yes. You’ll get to see me.

Q: Will I need to be on video?
A: I’d prefer it, and you are more than welcome to be in your pajamas. No judgements!

Q: Can I be a silent participant?
A: Yes.

Q: Is there an archive of the video I can watch later if I can’t make it?
A: No. Eventually when I figure out a good procedure I will enable this.

Q: Is there a limit to the people that can participate?
A: Zoom limits me to 100. I really hope the number isn’t higher than 10.

Q: Will there be some other video presentation in the future?
A: Yes.

Oil tankers

Oil tankers are a very crowded trade at the moment (Kupperman, et al) because of the very obvious contango in the oil futures. You can see how they are a crowded trade because many of these companies trading have trading volume that is a ridiculous volume of shares outstanding. The day traders are flipping shares like pancakes. The various stocks have been very volatile, and options trade at implied volatilities of over 100%.

Today is the first day I can recall in awhile that the tanker stocks have gone up despite the contango converging a little bit – spot oil today is up $1 while futures 2.5 years out are up about 20 cents.

Usually when you see that situation in trading (stocks going up despite the fundamental being in rough shape) it aligns well for a reasonable probability short-term trade.

Just be warned the sector is full of foreign players that do not in any way have a long-term sense of shareholder value. All of these shipping companies are going to report gigantic profits in at least the next quarterly reports, however.

I’ve attached a few names of companies in the shipping field. Again, it’s a miserable industry that gets their day in the sun once a decade, and that time is definitely now. Their time in the sun usually lasts for half a year before they get a massive case of sunburn and become cancer for shareholders again.

Yellow Pages aftermath

I couldn’t think of a worse stock to be holding (other than cruise ships, airlines and tourism stocks) than the Yellow Pages (TSX: Y) during the CoronaCrisis. It ticks the Corona-Avoidance investment list of “non-essential”, “small business” parameters. On the flip side, the type of work they can do can be done remotely by employees, if they have the right mechanisms for remote work. Not helping is that their headquarters is in Montreal, Quebec, and the province of Quebec is nearly competing with Italy for the COVID-19 management award (for those sensitive readers out there with relatives in elder care homes in Quebec: this is not to make fun of what is going on – it is indeed very tragic, both in Quebec and around the world).

A very smart investor I respect (John Cole) dumped out in early March, noting the stock’s bad liquidity and getting an opportunity to bail out just as the Coronacrisis was coming into full steam, but also citing customer comments over the internet as being incredibly adverse. Indeed, it doesn’t take too much searching to find people incredibly angry at the perceived value they received, coupled with being locked into one year contracts that they can’t get out of mid-term. These concerns came up to me in my initial due diligence screens (indeed, it was pretty difficult to avoid it) but I will just retort with two words – Rogers Wireless. You (mostly) only hear about the complainers that have experienced some sort of injustice (name it – roaming fees, data overages, billing issues, long distance, SMS scams, whatever). This is exactly why every telecommunications company has developed ‘flanker’ brands, so their primary names don’t get sullied (Rogers – Fido/Chatr, Telus – Koodoo/Public, Bell – Virgin, Shaw – Freedom). When you have 153,000 customers with an average annual billing of about $214/mo, you’re going to get some pissed off people over anything, especially if they are sold some $25/mo web package and they don’t discover their sales quadruple overnight.

Some companies have gotten smart about this (“reputation management”) and have started to overtly hire third parties to manage the image of certain brands, by basically spamming the internet with false reviews, and so forth. Explicitly note this is not an accusation of Rogers/Bell/etc. doing this, but in a world where it is perceived that having a positive reputation on Google Reviews, Amazon, Yelp, etc., make a difference, you can be very sure that there will be entities out there that will explicitly game the system.

I even look at people that complain about Interactive Brokers, and having used the platform now for more than 15 years (and still finding it superior to anything I have seen out there, which in itself is an amazing accomplishment), hearing people talk about it negatively makes me chuckle. Questrade has a small staff that is dedicated to their online reputation management. (Indeed, if you want some amusement, go read this Reddit thread claiming the poster lost a bunch of money trading options due to Questrade being down, and apparently at some point the police got involved because he threatened to burn down their offices).

Angry customers love to make noise. They’ve been burnt, it is personal, and emotional, and emotions cause people to do very strange things, some of which gets online. They will do so 10 times, if not 100 times more in magnitude than happy customers will openly praise.

It leads to the conclusion that Yellow Pages’ big mistake on this front was not engaging in more proactive “reputation management”, which is a mild slight against them given that they’re now in that business sector! (Hint hint, if anybody from Yellow Pages executive management is listening, this is a pretty good business segment to get into…)

But anyhow, I go back to the original topic. Prior to Covid-19, and especially after their February quarterly report, all of the stars were lining up on the astrology charts for their stock to break out into the upper teens. It was really obvious. Then Covid-19 hit, and everything went to crap. I managed to get some liquidity on the way down and it is no longer my largest holding, but I do own a moderate amount of stock, although I would have preferred to diversify it into some other holdings, especially in late March and early April. At the price they were trading at those times, there was really no point in liquidating (my estimate had them still worth more).

Also, it was very peculiar that Goldentree Asset Management was purchasing shares of Yellow in the upper 6’s (the last purchase being on April 15) and prior to this they were a 30.3% owner in the company. Were they doing this for value, or were they doing this to keep the asset value on their balance sheet at an acceptable level? One will never know. Although they filed twice to sell shares (February 3, 2020 and March 5, 2020) they never sold any.

What are we going to see in the upcoming May 13, 2020 quarterly report? Oddly, I’m expecting a reasonably decent quarter, but with cautionary notes of collections and uncertainty regarding Covid-19. The biggest problem going forward deals with the following line on their AIF:

Furthermore, the Corporation has entered into Billing and Collection agreements with Bell (up to 2020) and Telus (up to 2031), whereby each performs billing and collection services on behalf of the Corporation, including billing and collecting directory advertising fees from certain Yellow Pages customers who are also customers of the Telco Partners.

Bundling of YPG billings in Bell Canada’s billings ends on December 31, 2020 (page 37 of the MD&A) and most business owners will pay consolidated phone bills, but it is less likely they will pay for separate billings.

A few other notes of mention:

The company on April 15 announced they opened an NCIB to repurchase YPG.DB, which makes sense as they were going to do so at par in May 2021. Might as well do so now (and even at a mild discount) and save the coupon, although the total amount they can obtain is limited to liquidity and a block purchase every week.

Finally, the CEO has a significant carrot that is dangled in front of his nose as per the following in the management information circular:

Pursuant to Mr. Eckert’s Long-Term Incentive Plan Grant Agreement, a one-time grant covering the three-year term of his agreement of 701,875 Options at a stock price of $7.97 per share was awarded to Mr. Eckert on September 15, 2017. The Options are to vest and be exercised on September 15, 2020 at 9:30 EST. The Corporation is to cause a cashless exercise of the Options, whereby the cash proceeds are to be paid to Mr. Eckert as soon as practicable after the settlement of the sale of the underlying Shares. Further, pursuant to Mr. Eckert’s Long-Term Incentive Plan Grant Agreement, a grant of 701,875 Share Appreciation Rights (‘‘SARs’’) was awarded to Mr. Eckert on September 15, 2017. The fair market value per share on the September 15, 2017 grant date was $7.97 per share. The SARs are to vest on September 15, 2020 at 9:30 EST. Upon vesting of the SARs, Mr. Eckert will receive a payment in cash representing the excess of the fair market value of Yellow Pages Limited’s shares on the vesting date less the fair market value of Yellow Pages Limited’s Shares on the grant date. Mr. Eckert’s Long-Term Incentive Plan Agreement also included a grant of 156,839 RSUs. The fair market value per share on the September 15, 2017 grant date was $7.97 per share. The RSUs are to vest on September 15, 2020 at 9:30 EST.

Can anybody say “incentive to get the stock as high as possible on September 15, 2020?”.

I still believe the end game for the company is to be taken over in a strategic acquisition by some other marketing company. Possession of a 150,000 customer base paying an average of $2,500/year is not a trivial asset, and it would merge quite well into a digital marketing firm looking to increase its customer count and penetration into a wide market across Canada.

Overall, however, COVID-19 has put a huge dent into the thesis. Part of the ultra-bull case was reliant on momentum trading combined with ETFs blindly getting in because the company is going to be a dividend stock. I still believe they will issue a dividend, but a smaller one than the 11 cents per quarter they originally intended on from their February announcement. Fundamentally, businesses still need to reach out to the universe, and they will do so digitally. But if the underlying businesses are hurting (which they are), it will most certainly lead to continued revenue pressures, which does very little to “bend the curve” since everybody else is so focused on trying to flatten it!