TSX Bargain Hunting – Stock Screen Results

I’ve been doing some shotgun approaches to seeing what’s been trashed in the Canadian equity markets. Here is a sample screen:

1. Down between 99% to 50% in the past year;
2. Market cap of at least $50 million (want to exclude the true trash of the trash with this screen)
3. Minimum revenues of $10 million (this will exclude most biotech blowups that discover their only Phase 3 clinical candidate is the world’s most expensive placebo)

We don’t get a lot. Here’s the list:

September 1, 2017 TSX - Underperformers

1-Year performance -99% to -50%
Minimum Market Cap $50M
Minimum Revenues $10M
#CompanySymbolYTD (%)1 Year (%)3 Year (%)5 Year (%)
1Aimia Inc.AIM-T-74.89-72.74-86.9-84.6
2Aralez Pharmaceuticals Inc.ARZ-T-73.77-76.19-56.6
3Asanko Gold Inc.AKG-T-62.86-71.4-38.8-58.1
4Black Diamond GroupBDI-T-58.41-56.78-93.7-91.4
5Cardinal Energy Ltd.CJ-T-60.91-51.8-79.7
6Concordia InternationalCXR-T-42.81-85.24-95.6-69.2
7Crescent Point EnergyCPG-T-53.04-56.72-80.8-79.1
8Dundee Corp.DC.A-T-51.6-51.76-84.7-87.4
9Electrovaya Inc.EFL-T-42.72-61.8822201.2
10Home Capital GroupHCG-T-55.42-52.16-74.3-45.2
11Jaguar MiningJAG-T-54.31-62.14-55.8-99.7
12Mandalay Resources CorpMND-T-53.75-66.36-65.7-52.6
13Newalta CorpNAL-T-56.9-59.68-95.5-92.7
14Painted Pony EnergyPONY-T-64.97-60.94-77.4-65.9
15Pengrowth EnergyPGF-T-60.62-59.57-88.9-88.6
16Redknee SolutionsRKN-T-51.92-64.95-78.2-41.4
17Tahoe ResourcesTHO-T-53.04-66.27-78.2-66.9
18Valeant Pharmaceuticals Intl.VRX-T-15.25-56.68-87.4-67.3
19Western Energy ServicesWRG-T-61.61-55.09-88.6-82.7

Now we try to find some explanations why this group of companies are so badly underperforming – is the price action warranted?

1, 8, 10 and 18 are companies with well-known issues that have either been explored on this site or obvious elsewhere (e.g. Valeant).

2 is interesting – they clearly are bleeding cash selling drugs, they have a serious amount of long-term debt, but they have received a favorable ruling in a patent lawsuit against (a much deeper-pocketed) Mylan. There could be value here, and will dump this into the more detailed research bin.

3, 11, 12 and 17 Are avoids for reasons I won’t get into here that relate to the typical issues that concern most Canadian-incorporated companies operating foreign gold mines, although 12 appears to be better than 3 and 11. 17 has had huge issues with the foreign government not allowing them to operate their primary silver mine.

4, 13 and 19 are fossil fuel service companies.

5, 7, 14 and 15 are established fossil fuel extraction companies with their own unique issues in terms of financing, profitability and solvency – if you ever predicted a rise in crude oil pricing, a rising tide will lift all boats, but they will lift some more than others (specifically those that are on the brink will rise more than those that are not). 14 is different than the other three in that it is mostly natural gas revenue-based (northeast BC) which makes it slightly different than the other three which warrants attention.

6 If you could take a company that clearly makes a lot of money, and drown it in long-term debt, this would be your most prime example. It just so happens they sell pharmaceuticals. Sadly their debt isn’t publicly traded but if it was, I’d be interested in seeing quotations.

9 A cash-starved company selling a novel lithium-ceramic battery at negative gross margins would explain the price drop. Looks like dilution forever!

16 Lots of financial drama here in this technology company. They went through a debt recapitalization where a prior takeover was interrupted by a superior bid. Control was virtually given at this point and the new acquirer is using the company for strategic purposes that do not seem to be in line with minority shareholder interests. A rights offering has been recently conducted that will bring some cash back into the balance sheet, but the underlying issue is that the financials suggest that they aren’t making money, which would be desirable for all involved.

Dividend suspensions – Aimia, and soon-to-be Teekay Offshore

Aimia (TSX: AIM) suspended their common and preferred share dividends today. While this decision could have been entirely anticipated, the market still took the shares down another 20-25%. If you read between the lines from my previous post on them, this should not have been surprising. Nimble traders that were awake around 9:40am Eastern Time could have capitalized on an intraday bounce, but the current state of the union is likely to be short-lived since the company still has to figure out how to work its way out of a negative $3 billion tangible equity situation and pay the deluge of rewards liabilities. This will probably not end up well.

And in a “tomorrow’s news today” feature, it is more probable than not you will see Teekay management finally tuck in their tails and suspend dividends entirely on Teekay (NYSE: TK) and distributions from common and preferred units of Teekay Offshore (NYSE: TOO). When the announcement will be made is entirely up to management but it will likely be before the end of the month. What is funny is that I called it a couple weeks in advance (post is here), while it took a Morgan Stanley analyst a few days ago to actually cause a significant market reaction in the share price while everybody rushes for the exit. Teekay Offshore unsecured debt is now trading at 17% and with their preferred units still at 12%, it doesn’t take a rocket scientist to figure out what’s going to happen next – they desperately need a few hundred million in an equity infusion and they will be paying for it dearly.

As a bondholder in Teekay’s unsecured debt, I’m curious to see how management will bail themselves out this time. Since I do not believe they are interested in losing control, I still believe the parent company’s unsecured debt looks fairly good since there isn’t much ahead of it on the pecking order in the event of an unlikely liquidation event.

Mad Retail Muppet – on Aimia debt

Daniel Austin has transitioned to a new site, the Mad Retail Muppet. On his first post in his forays with Aimia’s corporate debt, I am happy to bring his site to your attention.

I’m sure the 10 or 20 human visitors here will find excellent reading on his site.

I’ll add some value by saying:

* Aimia’s 2018 debt matures on January 22, 2018 and will likely mature. Their 2019 debt matures on May 17, 2019 and has a 5.6% coupon. They’re not actively traded via IB, but via Questrade they are currently being asked for at 84 cents (or YTM of 15.3% – noting these are the regular bonds and not the strip bonds). Retail bond pricing typically incorporates a VERY healthy price spread over what should be the existing market price (i.e. an institutional investor would likely get at least a couple cents better pricing, thus a higher YTM).

* The YTM of this debt issue should give you an idea of what I think about the preferred shares, which are trading at a yield of roughly 11% at present (AIM.PR.A/B).

* Taking a $456 capital loss (pre-tax!) on this debt transaction is a very low tuition cost. It’s even less than the cost of a typical 3-credit course at my old university!

* Daniel’s deferred revenue/cost analysis is spot-on: if Aeroplan members go on a Home Capital Group-style bank run on their Aeroplan accounts, Aimia is hard-pressed to pay – such is the perils of investing in a company with a negative tangible equity of some $3.1 billion! This alone is a major reason why I would not touch anything in this corporation’s capital structure.

* It’s obvious Aimia has another choice they will execute on in the future – watering down their rewards pricing. Legally speaking, if they were to double the price of all rewards, what recourse does the consumer have?

Let’s check the terms and conditions

In particular, you acknowledge and accept as a condition of continued membership that:

1. Aeroplan Miles have no monetary value whatsoever and cannot under any circumstances form the basis of a monetary claim against Aeroplan.

5. Aeroplan assumes no liability to members whatsoever by reason of the termination of, or amendment to, the Aeroplan Program, in whole or in part, the addition or deletion of reward partners (including Air Canada), limitations on the availability of flights or seats, changes made by Aeroplan Partners to their terms and conditions, or any change made in accordance with sections 6 to 8 below.

Looks like the program (similar to Air Miles) is an unregulated confidence game – the only recourse Aimia has to watering down their product (or Air Miles) is the loss of consumer confidence. Not much of a remedy.

As a side note, I’m anxiously awaiting my $100 gas gift card in the mail.

Avoided another time bomb – Aimia

Aimia (specifically their preferred shares) were suggested to me a year ago as a reasonable risk/reward and a relatively high yield.

I declined. Today is the reason that I saw would likely happen.

Air Canada will be ending their business with them in 2020.

Everything in their capital structure is trading massively down – common shares are down over 50%, and preferred shares are down about 30%.

Good market timers could have bought when the margin calls were starting to flood in at around 10:00am Eastern time. The preferred shares at one point in time were down even more than the common shares.

(Update, I have included the chart of AIM.PR.A for illustration below)

I have no idea what the business prospects of Aimia is (although this news about Air Canada is VERY negative) and thus I will still not touch them.

I will, however, be a little more diligent at liquidating the meager amount of Aeroplan points I still have remaining – companies like Aimia can decrease deferred revenue liabilities by simply increasing the cost of “rewards” that their customers have already pre-paid for (can you tell what I don’t like about their business?).