Category: Equity

A minor follow-up on BP

I note that BP (NYSE: BP) traded as high as 44.37/share – I had projected during the brunt of the Gulf of Mexico oil spill that BP would likely rise to about $42-$47/share by the end of the year. It’s pretty close to the end of the year, so I would consider this to be a successful prediction.

There are so many other factors affecting BP’s valuation that there is no longer any “political edge” to the stock valuation, beyond the usual political considerations that go around with oil companies. All of the transient effects of the oil spill have been well priced into the stock – notably the implied $50 billion cost of clean-up, which has been cleanly lopped off BP’s market capitalization.

The company took a massive charge-out, so it will be showing negative net income for the next 9 months, but after this they will be showing their usual large profits – around $18 billion or so. This gives them a valuation of about 6-7 times projected earnings, or about a 15% earnings yield. Assuming the market mania for yield continues to maintain itself, whenever BP gets around to re-instating its dividend (which was historically 84 cents per share per quarter), this will give it an 8.1% dividend yield, and then the lemmings will buy into the company, raising its valuation.

General Motors IPO trading on the market

It was a virtual guarantee that General Motors would start trading above its IPO price ($33/share); given that this company is purely a political entity at this point, it would have been disastrous for the IPO to crash on the initial day in the marketplace.

Given the fact that GM has not really solved any of its fundamental business problems (high costs, inferior products) it will be able to successfully use its government-held ownership to bend rules toward its favour.

Suffice to say, I would avoid this company by a long mile.

Whistler Blackcomb public one week

The reorganized entity of Whistler Blackcomb went public and has been trading for one week:

It has been trading narrowly around its (reduced) $12 price. With the announcement of inclement weather in the Greater Vancouver area and the early opening of the ski resort, it has not resulted in a budge in the share price.

I earlier covered Whistler Blackcomb and was not terribly positive on them at their IPO price.

The First Uranium Whiplash

Although I don’t have a stake in the equity of First Uranium (TSX: FIU), I note with some mild amusement how a company can go up and down so rapidly in a short period of time – makes you wonder whether it is the same participants buying and selling, or what the motivations of the market are at the time:

From a high of $1.36 intraday to 93 cents a share at the close is a 32% drop. Wonder who those people were that bought at $1.36, and what they are thinking now.

The debentures and notes were relatively stable – a trade went off at 110 cents on the notes (closing with a bid-ask of 95-100), and the debentures have creeped up to 74 cents, but nothing near the volatility seen in the equity.

Figuring out First Uranium’s trading

Over the past five days, First Uranium equity has gone up approximately 50%:

Nothing public has happened to the company in the past five days, and the last major piece of news coming out was on October 20th when they announced their Q2 production results (which one can extrapolate into a quarterly report). The only explanation here is that either there is some insider news that is leaking into the marketplace, or there is a technical factor, such as very short term covering of short positions, or institutional demand on the stock.

The stock trades an average of $500k-$1M/day in volume, while not Microsoft-style liquidity, it is sufficient for most investment funds that wish to accumulate a position.

Something interesting is the effect on the debentures – if the equity trades higher, then it is more likely the debentures will mature at par because the company can recapitalize the debt by doing an equity swap. The subordinated debentures have not moved too much – up from roughly 70 cents to about 73-75 cents, while the notes (where I was a little more fortunate on my timing) have moved up from about 90 cents to par value.

There is an embedded call option in the notes to buy equity at $1.30/share, expiring at maturity (March 31, 2013) that has to be priced into the valuation of the notes – obviously if the equity is trading above $1.30/share, then the notes will be trading above par.

With an equity value of $1.07/share at present, the notes at 90 cents are a very compelling value. This price is now gone.

Readers should be cautioned that I do own the notes and subordinated debentures of First Uranium, but not the equity.