Canadian Finance and Economics
There is a cliche and that is that markets do not crash when everybody is fearful.
Glossing over a few headlines today, we have:
Almost nobody out there is saying “buy stocks”.
I’m not saying GME is going to a thousand dollars, but I wouldn’t bet my life on it NOT happening.
Dorel announced the unloading of its sport division today for US$810 million.
This company was trading for less than CAD$2/share during the pits of Covid-19 and made its way back up to $16 (management attempted to go private at this price) before sliding down again to $10.42 on the last Friday close.
I have held the company in the past, although it was one of the ones that I jettisoned during Covid in favour of others (which turned out to be a mistake, but c’est la vie).
My chief complaint about this company was that the entrenchment of management and their very large compensation was a bit off-putting. The business itself is quite diversified, one level up from retail on the value chain – still very low margin and they probably will be facing significant cost and logistical pressures with all of the supply chain anarchy going on.
After they conclude their sports division sale, however, they’re going to have a lot more cash to deal with. If you zero out their debt and cash, and the added proceeds of US$810 million from this sale, you are left with about US$446 million net cash at the end of the day.
On 32.5 million shares outstanding, that’s about CAD$17/share in cash alone.
The company will have a capital gains tax bill to pay off as a result of this transaction, but it still will be in a strongly cash positive position, which means it is most likely they will give out one huge special dividend when this is over with.
It will be interesting to see how this stock will trade on Tuesday morning – undoubtedly it will be higher, but how much?
In these strange times where Facebook employees can’t get into their own building because of some technical issue, and half the world has to resort to the indignity of SMS because WhatsApp is down, I bring you some observations on which companies have fared the worst over the past 52 weeks.
In general, the list contains a lot of gold and silver miners that have done the worst, coupled with some biotechnology companies. Marijuana has also not done very well.
I try to avoid gold mining companies like the plague and hence I do not really want to dive into any of them, but notable names which stood out include New Gold (TSX: NGD), Sandstorm (TSX: SSL) and an old friend in Gran Colombia Gold (TSX: GCM).
Outside of this sector, the known and recognizable names on the loser lists is quite sparse. Mediagrif, now mdf (TSX: MDF) is a company that I’ve looked at in the past but have not invested in them. They were a fairly benign SaaS company (probably their most known software offering was MerX) that recently executed on a large-scale acquisition last August with a subsequent equity offering. This acquisition sucked up the cash on their balance sheet and added some leverage to purchase a company that is barely profitable. Large acquisitions very rarely work out and the stock price is certainly reflecting this. People tend to view the entire SaaS sector monotonically when in reality, there are huge valuation rifts between various software offerings – you can’t simply slap on a Constellation Software-sized price to sales ratio on every company that does SaaS!
Another name which caught my attention was MAV Beauty Brands (TSX: MAV). This is a branding reseller company (i.e. take generic products, put a brand label on them, and get them on the shelves of stores). Some of you may guess that I am not the biggest consumer of hair products. You would likely see this company represented in the shelves of Shopper’s Drug Mart. The company is mildly profitable, but they’re not exactly in the best competitive position – just go to the hair-care section at the store and you’ll see why. At a market cap of CAD$90 million they might seem cheap, but they also have a US$140 million term loan to deal with which really guts the valuation proposition.
Moving further down the list of 1-year losers, we have Ballard (TSX: BLDP) which I won’t dissect further – they continue to execute on their very successful business model of raising equity financing every decade when there is hype regarding hydrogen power: “On February 23, 2021, the Corporation completed a bought deal offering with a syndicate of financial institutions for 14,870,000 shares of the Corporation at $37.00 per share, resulting in gross offering proceeds of $550,190,000 and net offering proceeds of $527,291,000” – this will last them another 6 or 7 years!.
The first name which got me legitimately interested was Richards Packaging Income Fund (TSX: RPI.UN), which looked like they were a somewhat-COVID victim, but upon subsequent research I also tossed this one in the discards pile. If they were trading at half of what they were currently, I might have been more interested.
We all remember the toilet paper craze from Covid-19 and KP Tissue (TSX: KPT) was one of the companies that benefited from Covid-19. No longer – you can take a look at them now. They are an extremely leveraged entity.
Finally, something else that caught my attention was Saputo (TSX: SAP), the dairy conglomerate, and they are reaching 52-week lows and are likely candidates for year-end tax-loss selling. Covid-19 has disrupted the business and its profitability. While the stock is still at a healthy price, if it depreciates by another 1/3rd or so, it may get into value territory. Dairy is effectively controlled and protected in Canada by Saputo, Agropur (a co-op) and Parmalat (European-owned), which gives it some monopoly-type characteristics.
Overall, the pickings are very, very slim. The companies that have dropped over the past 52 weeks have really done so for proper reasons. I’m not finding a lot of value out there, and the low P/E names are mostly in the fossil fuel space and they have appreciated extremely.
Date: Thursday, October 7, 2021
Time: 7:30pm, Pacific Time
Duration: Projected 60 minutes.
Where: Zoom (Registration)
Frequently Asked Questions:
Q: What are you doing?
A: Third quarter, 2021 results. Will discuss various portfolio on-goings and where I see things headed forward. This is in lieu of my typical lengthy quarterly report that I write up which I no longer make publicly available. There should be some time left for Q&A, so please feel free to ask them on the zoom registration.
Q: How do I register?
A: Zoom link is here. I’ll need your city/province or state and country, and if you have any questions in advance just add it to the “Questions and Comments” part of the form. You’ll instantly receive the login to the Zoom channel.
Q: Are you trying to spam me, try to sell me garbage, etc. if I register?
A: 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, but the majority will be on “screen share” mode with MS-Word / Browser / PDFs as I explain what’s going on in my mind as I present.
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. I might pick on some of you though. Bonus points if you can get your cat on camera.
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A: No.
Q: Will there be a summary of the video?
A: A short summary will get added to the comments of this posting after the video.
Q: Will there be some other video presentation in the future?
A: Most likely, yes.
It’s been a good run up in the market in the past month. Just last month I thought I was headed for the first negative quarter since Covid hit. Now it’s a race for the finish in the last two weeks of September.
There’s been a component in my portfolio (you can guess which one it is, I’ve written about it before) that almost has GME-like properties at the moment, albeit the business model is slightly more viable and I think the hype cycle is around the 3rd inning of this particular baseball game.
One always needs to ask themselves when enough is enough.
The trading mechanics of stocks nearing a mania high is punctuated by intense volatility both on the upside and downside.
Gamestop is a perfect illustration of this.
You had a few trading days (look at late January) where it ranged from $200 to $450 in what could be classified as insanity.
Even a week before that, when it spiked from $40 to $100, that was considered insanity.
Nobody wants to be the person selling GME at $40 on its way up to $400, but you had to wait four trading days (not to mention a weekend) to make this happen. Retrospect makes for 20/20 vision, but doing this in the heat of the moment is a hugely difficult endeavour.
What’s funnier is if you set your limit order at $300, psychologically you would have still felt ripped off since you had the potential for another 50% gain ($450)… “If only I set the limit sell price at $400 instead of $300 that day”.
That said, share dispositions do not have to be a binary decision – you can choose to trim tiny amounts as prices rise. This is my personal approach to things, although logically it doesn’t make sense.
Overall, however, we are seeing a commodity-driven boom. There is a lot of forward expectation and you can see this with the single digit P/Es projected in most of these companies.
ARCH, for instance, is trading at 6 times projected 2021 earnings. Coking coal is going crazy and Arch is down 4% today. What gives?
My Divestor Oil and Gas index has Q2 guidance below current spot prices and even with that guidance, companies are trading at EV/(free cash flow) levels of the high single digits (and if you ignore debt leverage, the price to cash flow ratio is even lower). Natural gas is spiking – you’re seeing Henry Hub gas prices this winter heading north of US$5/mmBtu, and AECO is north of CAD$4 and it’s still September.
It’s a really difficult decision to be selling equities that are trading at single digit multiples of cash flows when prevailing investing options for near-safe money is so terrible. You can’t even go to the debenture or preferred share markets, which are more or less a wasteland in my humblest of opinions.
Still, I sold a small holding of Western Forest (TSX: WEF) earlier this year, when they were on track to earn about a quarter of their market capitalization in 2021.
Embedded in each of these companies is an implied bet on the future of specific commodities (met coal, gas, oil or otherwise). There is also an embedded skepticism that current prices will remain in each of the share prices. It could entirely be the case that the market is assigning a gigantic discount to future cash flows for whatever reason. If this is the case then buying and waiting for the returns to flow in is logical. Inevitably, it will happen – the most conservative approach companies make is paying down their debt, and then after that, they will have the choice of raising dividends or buying back stock.
This is unless if the real economy crashes and takes the commodity market with it. Then, those single-digit P/Es will rise very quickly.
As for the title of this post, I do not know. As much as it makes mathematical sense, margin investing always makes me nervous. The proper time to do it is when you are feeling absolutely sick in the stomach to buy and right now it just makes too much damn sense to borrow at 1.5% and buy these single digit P/E stocks. This is why I’m not doing it and am slowly raising cash instead, because the decision to increase zero-yield cash in my portfolio hurts the most. It won’t be an extreme move – just enough to make me a little more comfortable.