Category: Equity

What to do if the Robinhood traders grip one of your stocks

Perhaps my most speculative holding is Centrus Energy (AMEX: LEU). I wrote about their predecessor back in 2013 (they went through a recapitalization and name change) and have been keeping track of them ever since.

I won’t get into the investing thesis (or valuation) but LEU is a uranium processor for nuclear fuel. They originally took nuclear missile warheads and reprocessed their uranium cores into fuel for nuclear power plants, but now they obtain their raw material through Russian and French sources.

However, given the current hype on anything nuclear-related, and especially considering that LEU is one of the few publicly traded companies that are into such businesses, over the past couple months they have received obvious retail activity:

We look at the chart and see a stock that has more than doubled, but also with a serious amount of stock volume (after the secondary offering, there is a float of about 11.3 million shares). Examining the social media, we see that there is clear retail activity.

During these periods of retail mania there are extreme ups and extreme downs. You see this in any stocks that were relatively inactive but then gain a mass following – the daytraders, speculators and short-term technical traders dive in, and then it causes intensive volatility when they jointly decide to buy and sell. These ups and downs are very difficult (if not impossible) to time, but this is where you get people on Youtube making daytrading videos as they scale in and out of such positions.

Sometimes it is right to bail out in these situations, and sometimes you just have to hold on for dear life and get used to the notion of seeing a position in your portfolio gravitate 10% a day. I guess we’re all Bitcoin holders these days, even when we’re not holding them.

AcuityAds Holdings – Part 2

Merry Christmas and Boxing Day everybody.

I can’t get enough of looking at AcuityAds (TSX: AT), which is one of the best TSX performers of the year.

I gave some brief thoughts back in October, questioning the $200 million market capitalization, but fast forward a couple months and look what happened – they quadrupled again!:

Look at the huge amount of volume since December 14th (quadruple over the previous few months of trading). Obviously this got on the radar of the daytraders and pancake flippers, but the straight-line accumulation since July looks to be a steady algorithmic “buy a little bit each day” without regards to price.

On November 16, 2020 the company did a bought deal offering (roughly 3.8 million shares with greenshoe) at $6.10, partly from the treasury and mostly from insiders.

Even the insiders sound surprised at all of this price action, which they been selling willy-nilly since September for roughly $3.50/share. One insider recently got out at $20.69/share, which was pretty damn good market timing considering he cashed out 500,000 shares out of his 542,462 share ownership at the time of sale.

Just imagine if you were one of those people that purchased the stock on December 21st for $22/share. Right now you’re sitting on a loss of 22% for four days of effort.

This is how volatility looks at market peaks. I’m not saying this will not go any higher and resume the course along the blue line that I drew on the chart above. But it is instructive how these kinds of stocks trade.

Note this post is devoid of any fundamental analysis of the company itself – I have no idea whether their technology warrants such price action or not. It could be the case they are the next Google. You’d never see it by reading their financial statements.

Suffice to say, no positions. Also, don’t take advice from people holding the much-worse performing (NYSE: AT) either.

Atlantic Power / Update

The most underperforming stock in my portfolio in 2020 has been Atlantic Power (TSX: ATP, NYSE: AT – note you would have done much better had you invested in AT on the TSX!). My original write-up on Atlantic Power was in July of 2018. I’ve owned the common and preferred shares since then, but currently hold only the common shares.

Rule one of investing is don’t lose money, and rule two is to look at rule one. The reason why this company is still in my portfolio is because they haven’t lost (too much) money, and because there is opportunity for appreciation that hasn’t yet been reflected in the equity value of the company. People investing in the preferred shares (specifically AZP.PR.B and especially fixed-rate AZP.PR.A) would be sitting on a higher quantum of capital by virtue of dividends and some minor capital appreciation, but I do suspect the better days ahead will be for the equity owners. Since January 2015 (which is when the current CEO, James Moore, was hired), the stock has meandered around the CAD$3/share level and has been relatively uncorrelated to the overall markets.

In my original post, I posted the basic metrics from 2012 to 2017 and they were in a reasonably positive trajectory. I will update this for 2020:

Debt / Revenues / EBITDA / Shares Outstanding (millions, and USD)
Year-end 2012: 2071 / 440 / 226 / 119.4
Year-end 2017: 821 / 431 / 288 / 115.2
Year-end 2019: 649 / 282 / 196 / 108.7
TTM 2020-Q3: 585 / 267 / 180 / 89.2

The highlights here are that revenues are dropping (because of the expiry of the power purchase agreements) and this will continue. Management continues to spend much capital paying down debt and repurchasing a huge amount common stock for roughly US$2/share, and to a lesser degree, preferred shares. There was a fire at the Cadillac biomass power plant that caused a few million in damages (the remainder was picked up by insurance) which didn’t help, coupled with the usual COVID-19 theatrics (which didn’t affect the company too much operationally). Power supply drama in California also is giving a lifeline to the company’s sole plant in the state, which is a natural gas plant.

Biomass is not a preferred form of energy which lead to the company pulling the trigger on the acquisition of some biomass plants. Year-to-date, this consists of about 8% of the company’s EBITDA; due to the Cadillac fire, the Williams Lake re-start (which a power purchase agreement was finally reached with BC Hydro) and some maintenance issues at the newly acquired biomass plants, the rest of the segment’s performance has been mediocre, although this will likely pick up in future years.

The CEO continues to say all the right things, and unlike a lot of others that talk about capital allocation and give the Buffett talk, I believe he walks it as well. One interesting highlight from his previous quarterly report is the following slide:

With the following remarks:

We continue to see signs of slight improvement in markets as reliability issues from an overreliance on intermittent power sources emerge. On a broader level, we may be near a bottom in the long down cycle in commodities. The chart on page 5 shows the relative performance of a commodities index against the S&P 500. The ratio is at its lowest level in 50 years.

Considering that to recent memory he hasn’t reflected upon the valuation of the broad commodity environment (he has commented on relative valuation of various power generation methods), this was worth noting they’d take 10 seconds to dwell upon it. ATP does hedge natural gas exposure with commodity futures so it isn’t entirely unrelated.

Atlantic Power is a relatively boring company from a cash flow perspective – a lot of it is locked in, so most analysts leave it alone since they believe the market has predicted the future of the company with the stock price – indeed, there are only three covering the company. The downside appears to be relatively low, and there does appear to be a few pathways for upside. So I continue to hold.

Riocan Distribution Cut

The big news yesterday that made ripples was Riocan REIT (TSX: REI.UN) slashing its monthly distribution from 12 cents to 98 cents.

I’m surprised they didn’t cut it further. Their cash flow statement shows that most of their operating cash flow goes out the door in distributions, not leaving a lot left over for construction capital:

A few comments:

1. Riocan is mostly a GTA REIT; about 50% of their revenues come from Toronto, another 1/8th from Ottawa, and almost 1/5th from Alberta. Understanding the GTA environment is key to a proper projection of Riocan’s fortunes, which brings me to point #2:

2. Retail conversions to residential is a component of Riocan’s new business model. This will require capital, a lot more of it. The last moment you want capital markets to constrain your inventory building is in the middle of a construction project. Although Riocan is not in any danger of not being able to raise capital (indeed, they made an impressive unsecured capital raise in March of this year at 2.36%), one never knows in the future.

3. My aversion to the REIT sector has not changed since the COVID-19 crisis occurred.

4. Most importantly – the reaction to this highly suggests that many people in retail-land have units in Riocan. It has been the most commented post on Reddit’s /r/CanadianInvestor in ages, and also it got comments on the Globe and Mail, etc, etc. This is a widely-looked at and widely-owned investment and it highly suggests that there are going to be smarter people than myself out there that will be getting the pricing correct. There are more obscure REITs out there which are more likely to have mispricings if you choose to venture into the sector.

Rogers Sugar Q4-2020

A very small research note.

Rogers Sugar (TSX: RSI) reported their year-end yesterday.

The sugar side of the industry remains rock-solid stable (and this is primarily the reason why the stock has been trading as a bond-like security). There are glimmers of hope that they are slowly turning around their maple operations – although gross profits are still relatively flat on a comparative basis, the top line is up and presumably they are still ironing out the issues on this segment of the business.

As a result, the stock has risen – from the beginning of the month to today, by just over 10% which is an unusual fluctuation for the stock.

In terms of cash generation, while the underlying business is indeed making plenty of it, they are over-leveraged. After subtracting interest, taxes, lease payments and capital expenditures, they pulled in $34 million in cash for the year, while their dividend payout is $37.5 million. In the previous fiscal year, that was $29 million generated. In light of the current stock price, just in terms of cash generation, it would make them fairly expensive – about 17 times, unadjusted for leverage. The only solace is the relatively safe moat of having control of most of the sugar refining industry in Canada, and having the industry mostly trade-protected.