Reasons to shut the radar off IPOs and SPACs entirely

Here is a prototypical example. MDA (TSX: MDA) has gone public yet again. Most people here probably know the financial history of the firm – purchased by Maxar (TSX: MAXR), and then taken private so that Maxar could de-leverage, and then now it is taken public again with a price of CAD$14/share.

The company had its founding in the Greater Vancouver area, and continues today to perform engineering services in the space satellite domain, among other things.

The offensive thing about the public offering is page 65 of the 275 page prospectus:

The overlords of MDA knew perfectly well that they were probably going to go public again, and in the process granted themselves a ton of cheaply issued stock (noting that the right-hand table contains the applicable prices because of the 6:1 reverse split they performed before the IPO). They were looking to raising more money (at a higher share price) but had to taper it back to CAD$14 due to the tepid reception – probably partly due to this table. The other is the financial status of the company (it isn’t making that much money).

At the very minimum, I’d wait until the 180 day lockup period is over before even considering it, but knowing that space is a hype sector, I’m sure it’ll take off soon before then. Comparisons to SpaceX, however, is incredibly misguided – SpaceX has the reusable rocket technology which contains a massive competitive advantage on launch costs, while satellite construction and manufacturing is a much more competitive (and hence lower margin) industry, albeit played by a much fewer number of participants.

Late Night Finance with Sacha – Episode 12

Date: Wednesday April 7, 2021
Time: 6:00pm, Pacific Time
Duration: Projected 60 minutes.
Where: Zoom (Registration)

Frequently Asked Questions:

Q: What are you doing?
A: I’ll give my Q1-2021 performance report and some forward-looking observations. Any time left will be for Q&A.

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 my web browser and PDFs from SEDAR 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.

Q: Is there an archive of the video I can watch later if I can’t make it?
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.

The search for yield is yielding a wasteland

The title says it all, but the market is again at a point where if you want a double digit return on your money, it has to come from the equity side. With equity comes risk.

Over the past year there has not been a lot of TSX-traded debenture issuance (indeed, the list of traded debentures is down to 94 and there does not appear to be much compelling value in the list – anything trading below par is doing so for what I consider to be a valid reason).

On the preferred share space, while it is easy to make a relatively stable 5% return, the risk you have to take to move up the yield chain goes higher and higher – e.g. Aimia’s preferred shares give you an extra 250bps or so based off of the 5yr reset rate, but you’re more or less investing in a hedge fund with a current market cap of half a billion.

Want less risk? Canaccord’s preferreds reset at about 100bps less than Aimia’s, have much higher revenues, but when the investment banking gravy train stops (and indeed – it will) you can be sure that people like me will be buying these preferred shares for less than half of par value, like we did back in 2016.

The surest 500bps I can find at present appears to be Pembina Pipeline’s minimum rate preferred shares that they acquired from Kinder Morgan Canada (PPL.PF.A/C/E), and in the case of the C and E series, likely to get called out in less than 2 years. Aside from a mention of Birchcliff Energy’s preferred shares, Pembina’s is probably the closest instrument that you can treat as a term GIC instrument with a ‘probable’ fixed maturity. Between now and then, however, things can always change and there could be some credit crisis that’ll blow the capital value of the stock – as witnessed during the CoronaCrisis – what trades at par value today traded at 44 cents on the dollar on “Margin Call Day”, March 23, 2020. It does an effective job of wiping out people that take out excessive leverage to buy these types of issues.

All in all, if your target is to make a 5% income stream, there is still plenty of selection (with capital risk in the event of market stress), but this is a far cry from the days of last year or in early 2016 when finding low risk double digit yields in fixed income was like the proverbial shooting fish in a barrel.

This environment is making me suspicious and indeed elevates my sense of paranoia that we are ripe for something bad to happening.

1 Year Losers

About a year ago was the bottom of the COVID-19 market crash (March 23, 2020). It was a very fateful day where the maximum amount of margin selling hit the street and prices were at their lowest.

So it is instructive to run a stock screen and find out which stocks have NOT risen over the past year. We get the following (I’ve limited it to those with a market cap of above $50 million):

Over 50% loss:
Just Energy – JE (they’re still trading in the USA for US$1.78 a share, but in today’s topsy-turvy world where Hertz is still over a dollar, maybe bankruptcy will be good for their common stock!)
Medipharm – LABS
Calfrac Well – CFW
BELLUS Health – BLU

30-50% loss:
Helix BioPharma – HBP
AKITA Drilling – AKT.b
Aptose Biosciences – APS
Oryx Petroleum – FORZ
Wall Financial – WFC

20-30% loss:
None

10-20% loss:
Nighthawk Gold – NHK
Patriot One – PAT
Morguard – MRC
Transat – TRZ
Postmedia – PNC.b
Shore Gold – DIAM
Noranda Income Fund – NIF.UN
Resverlogix – RVX
Tetra Bio Pharma – TBP

0-10% loss:
Trilogy International – TRL
Currency Exchange – CXI
VIVO Cannabis – VIVO
Knight Therapeutics – GUD
Metro – MRU
Aurinia Pharma – AUP
Invesque – IVQ.u
Loblaw – L

Casual observations

A lot of biotechs in the list, and then seconded by some oil drillers.

The names that stick out at me are Morguard (perennially trading well under book), but this is not my typical type of investment. There might be a time for them to shine once again – when you mention “perpetually trading under book value”, E-L Financial comes to mind (TSX: ELF) and even they have received a tailwind recently. I also note two of the major grocery chains are on this list (albeit with minor amounts of changes for the year), but these companies are well known, well valued and quite frankly not interesting. In the smallcap realm, Currency Exchange is a very odd business which got my attention during COVID as a travel recovery stock, but for various reasons I declined to pursue it.