CPG – Divestor

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

#	Company	Symbol	YTD (%)	1 Year (%)	3 Year (%)	5 Year (%)
1	Aimia Inc.	AIM-T	-74.89	-72.74	-86.9	-84.6
2	Aralez Pharmaceuticals Inc.	ARZ-T	-73.77	-76.19	-56.6
3	Asanko Gold Inc.	AKG-T	-62.86	-71.4	-38.8	-58.1
4	Black Diamond Group	BDI-T	-58.41	-56.78	-93.7	-91.4
5	Cardinal Energy Ltd.	CJ-T	-60.91	-51.8	-79.7
6	Concordia International	CXR-T	-42.81	-85.24	-95.6	-69.2
7	Crescent Point Energy	CPG-T	-53.04	-56.72	-80.8	-79.1
8	Dundee Corp.	DC.A-T	-51.6	-51.76	-84.7	-87.4
9	Electrovaya Inc.	EFL-T	-42.72	-61.88	22	201.2
10	Home Capital Group	HCG-T	-55.42	-52.16	-74.3	-45.2
11	Jaguar Mining	JAG-T	-54.31	-62.14	-55.8	-99.7
12	Mandalay Resources Corp	MND-T	-53.75	-66.36	-65.7	-52.6
13	Newalta Corp	NAL-T	-56.9	-59.68	-95.5	-92.7
14	Painted Pony Energy	PONY-T	-64.97	-60.94	-77.4	-65.9
15	Pengrowth Energy	PGF-T	-60.62	-59.57	-88.9	-88.6
16	Redknee Solutions	RKN-T	-51.92	-64.95	-78.2	-41.4
17	Tahoe Resources	THO-T	-53.04	-66.27	-78.2	-66.9
18	Valeant Pharmaceuticals Intl.	VRX-T	-15.25	-56.68	-87.4	-67.3
19	Western Energy Services	WRG-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.

A nice time to be holding cash

This is a rambling post.

Downward volatility is the best friend of an investor that has plenty of cash.

You will also see these punctuated by magnificent rallies upwards which will get everybody that wanted to get in thinking they should have gotten in, until the floor drops from them again which explains today.

By virtue of having well over half cash and watching the carnage, I’m still not finding anything in fire-sale range except for items in the oil and gas industry which are having their own issues for rather obvious reasons. Examples: Penn West (TSX: PWT) and Pengrowth (TSX: PGF) simultaneously made announcements scrapping and cutting the dividends, respectively, and announcing capital expenditure reductions and their equity both tanked over 10% today. Crescent Point (TSX: CPG) had a fairly good “V” bounce on their chart, but until oil companies as an aggregate start going into bankruptcy and disappearing, it is still going to be a brutal sector to extract investor value from.

I just imagine if I was one of the big 5 banks in Canada and having a half billion line of credit that is fully drawn out in one of these companies. Although you’re secured, you don’t envy the train wreck you have to inherit if your creditors pull the plug.

The REIT sector appears to be relatively stable. Looking at charts of the top 10 majors by market capitalization, you don’t see a recession in those charts. If there was a true downturn you’d expect to see depreciation in the major income trusts. I don’t see it, at least not yet.

Even when I exhaustively explore all the Canadian debentures that are publicly traded, I do not see anything that is compelling. The last debt investment which was glaringly undervalued was Pinetree Capital (TSX: PNP.DB) – but this was in February. They recently executed on another debt redemption which puts them on course to (barely) fulfilling their debt covenants provided they can squeeze more blood from their rock of a portfolio. I wouldn’t invest any further in them since most of what they have left is junk assets (Level 3 assets which will be very difficult to liquidate). One of those investments is a senior secured $3 million investment (12% coupon!) in notes of Keek (TSXV: KEK) which somehow managed to raise equity financing very recently.

The preferred share market has interesting elements to them as well. Although I’m looking for capital appreciation and not yield, it is odd how there are some issuers that are trading at compellingly low valuations – even when factoring in significant dividend cuts due to rate resets (linked to 5-year Government of Canada treasury bonds yielding 0.77%!). I wonder if Canada’s bond market will go negative yield like some countries in Europe have – if so, it means those rate reset preferred shares will have even further to decline!

Market musing while being inactive

I hate to sound like a broken record, but I’ve still been doing nothing other than research but nothing worth investing in at the moment except for one illiquid play mentioned in an earlier post.

Here is a series of miscellaneous observations:

* I note that Apple (AAPL) continues its slide down to the point where I am wondering if they are pricing that the company is not going to be able to keep its premium pricing strategy. On paper, they are still massively profitable, but if competition continues to chip away at their product line (mainly through Samsung on the phone front and a variety of other realistic competitors on the tablet front), they might run into revenue growth problems. The company in their last fiscal year (ended September 2012) made $156.5 billion in revenues and this year the analysts are projecting an average of $182.8, which is a $26.3 billion increase year-to-year. This is a huge amount of growth and the law of large numbers will likely be catching up to Apple in short order.

* CP Rail (CP.TO) is trading at absurdly high valuations at present. They performed a change in management and the market is giving the new CEO a lot of credit, but the railroad business is very mature and I don’t have a clue why they are giving the equity such a huge premium at the moment. I’d be a seller at this price range (the C$130 mark).

* Anybody remember the big scare about rare earths a couple years ago when China started restricting the supply and most of those stocks went crazy? The big play here, Molycorp (MCP) has continued to slide into the gutter now that the market reality of the perceived shortage has completely gone away. The substitution effect is very powerful and MCP shareholders are holding the bag.

* Likewise, most other fossil fuel commodity companies, including my favourite company that has been so overrated by many, Petrobakken (PBN), are continuing to suffer. It is similar to how most gold mining companies are not faring nearly as well as the underlying commodity – it costs an increasing amount of money to extract the resource, so even if the commodity price is increasing, if your costs are increasing, you are not going to make much money. Even Crescent Point Energy (CPG.TO) is starting to lose its lustre.

* The other commodity market that is continuing to get my curiousity up is currency trading – the US dollar has continued to outperform most of the other global currencies. The only way that I play this is that I try to hedge my portfolio by having some US-denominated securities rather than using leveraged speculation.

* The two Canadian Real Estate financing proxies, Home Capital (HCG.TO) and Equitable Group (ETC.TO) warrant a further look. HCG has faded somewhat off of its 52-week high, but Equitable is still there. If people are still hyper-bearish on the Canadian real estate market, these two companies should be the first on anybody’s short selling list. Non-performing loans are still around the 0.3% level and currently still do not show any real signs of distress in the market. I am still riding the wave on Genworth MI (MIC.TO) and believe there is still a reasonable percentage gain to be realized from current price levels. The loan companies, however, are hugely leveraged and I’m finding it difficult to see value there when book values are so significantly below market prices.

* Long term interest rates have also taken a nose dive – the Canadian 10-year bond was skirting at the 2% yield a month ago, but now they are back down to 1.8%. The world is awash with capital and there are few places to deploy it where you’ll generate yield at an acceptable risk level. Eventually the leverage party will end and the fallout is going to be very brutal. Whether this happens in 2013, 2014 or later, nobody knows. But there will be fallout, and figuring out how to brace yourself for the fallout will be a big financial challenge over the next decade.