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!

Buffett on his AGM

He sold out his airlines. Not a surprise since the Form 4 of him dumping Delta and Southwest Airlines. He’ll be able to apply the capital losses to previous capital gains and do okay. He’s correct in saying that aviation will not be the same as it is today for a long time. Just looking at YVR inbound traffic, it is a dim shadow of its former self – apparently passenger flow is down about 90%. This is going to take a very long time to recover (indeed, if at all). You want to go to another country? Most of them will require you to spend 14 days in a virtual prison – in Canada, you get less of a jail sentence for most petty crimes!

We learn that Berkshire’s still sitting on over $130 billion in cash and equivalents, and there are a few ways to spin this:

1) “He’s holding onto so much cash, so the markets are still expensive!”
2) “He’s holding onto so much cash that will have to find its way into the market!”
3) “Buffett’s totally lost it, he missed out on the investing opportunity of the decade!”

Personally I think he’s at the point where if he isn’t going to be investing $50 to $100 billion into something, why bother? I would think that taking over Boeing would be in his ballpark, especially after his comments on the airlines… I will point out that Boeing’s market cap is $75 billion and needless to say, would be Buffet going out with a huge bang (one would have thought Burlington Northern was the crowning achievement, but I always remember the phrase “Planes, Trains and Automobiles”, and how would you get closer than by buying out Boeing?).

Either that, or he could pay a few bucks and put Bombardier out of its misery!

Late Night Finance with Sacha

I am going to be trying something new in today’s virtual age of online meetings. It might work, it might be a bust, who knows. But I’ll try.

Late Night Finance with Sacha

Date: Friday, May 1, 2020
Time: 9:00pm, Pacific Time
Duration: Projected 1 hour, but if it leads to something interesting, longer.
Where: Zoom

Frequently Asked Questions:

Q: What are you doing?
A: This will be a Q&A session. Ask me about any company on the TSX/Nasdaq/NYSE and I will dissect it. Other questions about an economic/financial nature are accepted as well. I’ll share screens and go through financial statements and annotate (verbally or otherwise). This can be used as a sleeping aid for you.

Q: Why are you doing this?
A: 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?

Q: How do I register?
A: Send sacha@divestor.com an email. Subject line “Late Night Finance May 1”, 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 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: 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, although there isn’t much of a Q&A without at least one of you asking questions! I’ll start off with a small commentary and we can head on from there.

Q: Is there an archive of the video I can watch later if I can’t make it?
A: No.

Q: Is there a limit to the people that can participate?
A: Given the last-minute nature of this posting, I’d be surprised if there will be ANYBODY showing up, but until I get a better idea of how to manage these conferences, I’ll figure this one out if the situation occurs. This also includes me learning aspects of video meeting moderation.

Q: If nobody shows up, what then?
A: To be perfectly frank, I’m expecting this particular outcome. I’ll host another meeting with more notice.

Q: Will there be something in the future?
A: Yes, I’ll give a little more notice.

Better to be lucky than good

With sentiment on nearly everything getting better (“Economies to open up”), (“Remdesivir positive results”), (“Deaths less than models projected”), etc., stocks have received a flood of bidding from people sitting on the sidelines.

Things never work in straight lines. Markets never move continuously up. There will be spouts of fake news now and then to throw some sand in the gears. You’ll hear about (“Second wave”), (“Shutdown to last until December”), (“Food shortages”), etc.

This is all media noise. The paradoxical thing is that even though the media is spewing mostly noise these days, one has to pay attention to it since it gives you a very general barometer as to sentiment – if you assume something to be false, but others believe it is true, the fact that you know others think it is true is in itself a valuable piece of information.

Placing orders is always an inexact science. On the buy side, sometimes it makes sense to pound asks, but in most of the cases it is more efficient to just passively place orders on the bid and let the market come to your own price.

However, I have a phrase which is “better to be lucky than good”, which is to say that sometimes you get a clairvoyant fill on your orders, and sometimes it comes up annoyingly short.

A couple days ago I had a limit order in for a stock, and I missed it out by two cents. This wasn’t a penny stock either. That stock is now up about 13% from where I initially placed the order, so I am kind of steamed about it. Unlucky. It was definitely a case of ‘too much too fast’, and they will regress down, but I very much doubt to the price where I nearly hit my limit order.

You probably are asking, “Why not just hit the ask when it is two pennies to your order?”. I usually don’t set my orders in the middle of the trading day, and if the price I set for this particular security was 5 cents higher, I probably would have gotten filled. That’s just the roll of the dice occurring. That’s trading life – psychologically it is irritating (hence this post) but you have to forget it and move on and deal with the reality the market gives you, not how you wish it to be.

Next chart, the May 2020 VIX futures, where you can see my liquidation on blue triangles:

I liquidated my VIX short orders in the market euphoria, and I say I did pretty well on this one. The last order to cover the short was at 31.50 and the low was 31.45. Needless to say – lucky on the exit. I’m looking to get back into this trade at higher prices.

Investing involves a lot of skill, but in short-term situations as these, sometimes you need a good dose of luck.

Birchcliff Energy preferred shares

The market is starting to normalize again. We’re about half-way done on the up-side, and I estimate while there will be some minor panics here and there that will bring things down 3-5%, in balance you’re going to see things get back to at least where they were before the end of the year.

I’ve taken my fair share of these shares (earlier in the month), so I’ll post it to the public since there is plenty of upside. I’ve written about them before, so this is going to be somewhat redundant.

Birchcliff Energy (TSX: BIR) is a natural gas heavy producer. They are a low cost producer, refine their own gas, and they will survive. They are primarily financed by a low cost line of credit which is not in any danger of having the plug pulled. While their equity remains undervalued (and insiders also believe the same, especially those that were buying when the stock was under a dollar), the even better risk/reward are the preferred shares.

There are two series. BIR.PR.A is a standard fixed-reset perpetual preferred share, currently 8.374% coupon with a +6.83% reset rate, resetting September 2022. Even at the present Government of Canada’s 5 year bond yield of 0.41%, at current market rates it will reset at a 10.5% yield. It is conceivable that they will trade up to par again, just as they were for most of 2017 to 2019. A ‘quick’ capital gain of roughly 50%, plus you’re given a very healthy 12% eligible dividend. Even with the Bank of Canada turning our currency into toilet paper, your real return will be positive.

BIR.PR.C is a straight perpetual share with a coupon of 7%. After June 30, holders can put their preferred shares back to Birchcliff at par, which BIR has the option of paying cash, or giving stock at the 20 day VWAP or $2 minimum per share. Considering BIR is trading at $1.57/share, this works out to a discount to the current preferred share value ($17 for the preferred shares vs. $19.60 in BIR stock). I don’t know what the term is in finance, but it creates a “Mexican standoff” situation where if this continues past June 30th, I don’t think holders will be too eager to redeem, nor will Birchcliff be too eager to redeem either. In the meantime, you can collect a 10.3% yield (assuming a $17 purchase price) for waiting. The obvious price target is par, although if you get fancy you might be able to get a mild premium.

I generally believe the worst is over for oil and gas, and as a result, all of this is going to be a moot point when BIR goes higher later this year. Why not buy the equity? There are worse things you can do, but the preferred shares are pretty much a lock for appreciation on a risk/reward spectrum. For every 1% the equity goes up, the preferreds will probably get around 75% of it until they get closer to par.

Of course there aren’t any guarantees of 50% gains in a few months’ time, but this one seems feasible. The risk scenario is that the common stock meanders about and you collect an ultra-high coupon while waiting for natural gas demand to rise. In the case of BIR.PR.C you end up with 12.5 shares of BIR.