I might be too old to be investing anymore – Mogo Finance

Look what popped up on my radar today – Mogo Finance (TSX: MOGO), primarily due to its massive price increase.

I’ve been looking at them on and off since they merged with Difference Capital a couple years back (this was to save MOGO as an entity since they were heavily indebted and no proper refinancing routes with their ultra-expensive line of credit). I had a prior investment in the debentures of Difference Capital, and hence the interest (they had an equity interest in MOGO).

Mogo also had a matter with their convertible debentures, which were extended, this was back in April of last year.

My very quick take of Mogo at the time was that they were not making money, and they were quite unlikely to make money given that their credit facility was priced at 12.5% plus LIBOR, although this was re-priced to 9% plus LIBOR (effectively 10.5%). They also had a non-publicly traded debenture that was also expensive (note 10 in their Q3-2020 financial statement if you care to look).

So when you look at the stock chart above, instantly, you realize that the business is now going to get an extension on its life because they will be able to raise equity financing.

Why did they get such a bounce?

Just take a look at their website. They are trying to be like a Canadian version of Robinhood, mixed in with some consumer finance.

And now, of course, they are getting into Bitcoin.

I can see why the market is ramming up the stock of this company, which did $2.3 million in operating income for the first nine months in 2020. A market cap of CAD$500 million is cheap in comparison to what Robinhood’s last secondary offering was reported to do (apparently during the Gamestop fiasco their revised valuation was at US$30 billion).

I am somewhat mystified and frustrated at my lack of imagination to correlate the two together. Was this thing worth a stab at a valuation of CAD$50 million (plus debt?). The convertible debentures would have been a relatively cheap entry point, with some seniority over the common.

When I look at my portfolio at present, it is most definitely an “old man’s” portfolio of very real-economy type stocks. The most technological of them is Corvel (Nasdaq: CRVL) which produces software that is in a dominant niche (my one and only post on it is here), but this is hardly a millennial starling! I can’t be the only investor out there that is getting this type of feeling that I am getting too old for the markets.

It’s chilly in North America!

Natural gas producers are getting a spike today because of spot demand:

Just remember a couple years ago AECO was at nearly negative pricing due to the glut caused by US shale oil producers (and this resulted in a lot of associated natural gas production).

Different story today. US shale peaked at the end of 2019.

The other story will be how every piece of “clean renewable” electricity generation is going to be a stealth increase in future natural gas demand. The higher the potential volatility peaks in electricity generation, the higher the requirement will be for dispatachble sources – this comes either in the form of hydroelectric or natural gas. Ultra-large batteries are possible but they suffer from significant losses and they depreciate relatively quickly.

Hydro is pretty much tapped out – most of the good sites are built, and here in British Columbia, we’re having incredible difficulty building the 900MW Site C project (indeed, it might even be scrapped even though a few billion have been dumped into it).

The flip side of the equation will be some “demand management” applications where people will be compelled to use the bulk of their electricity generation in off-peak times (e.g. charging your electric vehicle after 9pm) and giving pricing incentives to doing so. Still, the efficiency gains to be made using demand management will be limited. Are factories going to be compelled to operate between 8pm to 6am because of electricity load factors? I don’t think so.

Until such a point where policy makers become serious about increasing base load power supplies, these sorts of problems will increase as intermittent sources become increasingly large fractions of the electric grid. You can stall the problem with using imports as buffers, but this solution only goes so far as California discovered last summer.

Similar to the concept of liquidity in the financial marketplace, intermittent electricity generation sources (wind, solar) are much more expensive than their numbers would seem because it involves a surrender of “power liquidity” – getting the power when you want it, not when it passively is received by you. Right now the cost of this liquidity is being outsourced to others, but as the value of this liquidity continues to increase, the true cost of intermittent sources becomes much more known.

The crazy times we live in

Another miscellaneous ramblings post.

Let’s play a mental game. Imagine if you lived in a world where the public markets consisted of only the following choices: AMC, Bitcoin, Canopy Growth, Gamespot, Microstrategy, Nio and Tesla.

There would be little purpose in investing in the public markets beyond gambling. It would more or less be a zero-sum casino for the most part (until, at least in the short term, Gamespot and AMC went bankrupt). Perhaps the public would feel more “secure” investing in a “index ETF” that would be a “well diversified basket” of these companies, but of course since they are usually capitalization-weighted, it would be like splitting your money between Tesla and Bitcoin. Who reads the fine print on these ETFs beyond their titles anyway?

Today that leads me to the next point of Tesla getting in on the Bitcoin zero-sum game bandwagon – Michael Saylor (Microstrategy) is the big winner here. However, note that $1.5 billion for Elon is approximately 0.2% of Tesla’s market capitalization, while it is more than what Microstrategy invested (at cost) into Bitcoin. I’d be really curious to know what would happen if Tesla decided to float a $5 billion convertible debenture (which would receive a very low coupon rate because of the huge implied volatility in the stock’s options) and dumped the proceeds into Bitcoin – who else would be compelled to jump in, fearing the miss-out on the bandwagon?

The good news is that because a bunch of capital is being thrown at a zero-sum asset doesn’t mean that I have to. Fortunately there are more than two options to invest in the public markets beyond Telsa and Bitcoin.

Let’s play this mental game again, and throw in some boring, relatively unremarkable positive income/cash generating company that has a very high probability of being around for the next 50 years: Fortis (TSX: FTS). What happens? Almost by default, the “natural valuation” of Fortis will rise because of the contrast provided in comparison to the other companies. Believe it or not, there are some people out there investing in publicly traded securities not for gambling purposes.

The point is that we have multiple currents flowing in the public equity ecosystem – those that get most of the attention (the Teslas and the like) versus the ones that creep a thousand feet under the surface. Right now there are enough of them, but even they, to a large extent, have been recipients of financial attention due in part to the monetary environment (low rates) and the availability of automated data screening to find them out (just imagine in Warren Buffet’s growing up days where you had to write into companies to obtain their financial statements and this was the only way to discover they are trading at 3 times earnings).

Investing in part is a choice of alternatives and priorities. If you want immediate safety and liquidity, there is cash. There used to be the GIC/government bond option for those that wanted to make a small return on their cash, but this choice is now more or less gone. You can speculate on commodities (gold, silver, oil and gas, etc.) but the underlying commodity does not give a return, although it should retain some form of value because there will be future demand. Finally, there are stocks and they provide a huge range of risks and potential rewards. I am just thankful the stock market still has companies that are trading well under the radar of the Reddit and Robinhood retail traders!

Divestor’s Canadian Oil and Gas Index

This post is for future reference.

In general, the status of Canadian oil and gas (no doubt due to ESG investors, coupled with our federal administration) has suppressed asset prices to the point that is reminding me of how Philip Morris was trading in 1999-2000 (single digit free cash flow multiples). Needless to say, I think we are in the early stages of a mean reversion process.

I introduce Divestor’s Canadian Oil and Gas Index (DCOGI), which covers a good swash of upstream production, and some downstream as well. It is a pretty simple index which covers most of the Canadian oil and gas production, and some downstream refining –

20% of: CVE, CNQ, SU
10% of: TOU, WCP
5% of: ARX, BIR, MEG, PEY

I will set the index at 100, and construct it off of a notional index of $1M invested at the prices closing February 5, 2021. No rebalancing. Dividends/distributions will NOT be reinvested but cash drag will be tracked. I’ll post more details of the index composition this weekend and track it periodically.

(Update, December 14, 2021 – I have posted a Re-Balancing Policy)

Update at the end of the trading day:
Ticker – Shares:
ARX – 7,426
BIR – 20,325
CNQ – 6,196
CVE – 24,600
MEG – 8,993
PEY – 10,482
SU – 9,066
TOU – 4,662
WCP – 19,048

The index performance can be viewed here!

The most profitable industry on the planet

At this time, the most profitable industry has to be mortgage insurance in Canadian real estate markets.

Genworth MI (TSX: MIC) reported Q4 earnings.

The loss ratio reported was 10%. The expense ratio was 21%.

This means out of every dollar recognized in revenues leads to 69 cents of pre-tax profit.

Needless to say, this is a gigantic amount of economic extraction from an industry that is somewhat protected (by virtue of the federal government taking the mountain’s share of profits through CMHC).

It is funny how the public hasn’t connected the dots on how this makes borrowing with large-ratio mortgages extremely expensive – a 10% down mortgage can incur a 3.1% mortgage insurance fee. While 3.1% may not intuitively seem expensive, it is a huge fee considering that the bulk of the risk of default in a mortgage occurs in the first 5 years (where in a typical 25 year amortization, about 15% of the loan is amortized) while the rest of the time period is generally “home free” for the loan provider. This effectively results in a 60bps accretion to a loan’s profitability (compare that to a bank that makes less spread than that on the mortgage loan itself!).

Brookfield is in the very late stages of taking MIC into its fold at CAD$43.50/share. At the rate they reported net income in 2020, that works out to about 8.5 times earnings.

Normally industries with such large profit margins attract competition. The barrier to entry is access to the Government of Canada guarantee (CMHC gives a 100% guarantee, backed by the Crown, while MIC is 90% guaranteed by the Crown, with the residual guaranteed by their shareholders), and access to the mortgage networks (which can give approvals based off of customer profiles). Not an easy industry to crack for a new entrant, and the only real basis of competition would be price.