Category: Finance

Lumber has gone nuts, especially in relation to its ambient trend over history.

Since 1978 we have the following (nominal) pricing data:

And in the past year:

Similar to crypto, nothing shows proof of work more than a sawed 2″x4″x8′ stick of wood available at Home Depot!

Not surprisingly, given the completely out-of-history price rise in lumber pricing (right up there with government bond pricing), we have seen lumber producers skyrocket in price from their Covid lows. The previous rise up in 2018 also caused a spike in lumber producers, but this time the prices are even much higher.

However, lumber is like most other commodity markets that are highly cyclical – I suspect pricing is at the point where there will be an element of demand destruction and when this occurs, watch out below. It’ll probably happen in 2021 when the current backlog of “must-construct” projects abates and supply continues to stream in.

The times are good right now – lumber companies will be posting insanely high profit numbers in Q1 and Q2, but the question remains how sustained this massive commodity boom will be. The phrase “leaving the party while people are still drinking the hard liquor” seems apt – it seems so contradictory, but you want to unload your commodity shares at a point where the historical price to earnings is the lowest (typically a mid-single digit). The market has a very good sense of being able to detect when the commodity company has reached its peak profit.

Just doing a brief equity scan of the winners and losers of 2021 to give me an idea where the trends are going.

Losers

The TSX is littered with the carnage of gold mining companies. They’ve performed well for the year, but in the past two months, they are all trading down. Notables include Gran Colombia (TSX: GCM) and New Gold (TSX: NGD), both down roughly 30% for the year. New Gold is still well up (about 80%) year-to-date, while Gran Colombia is roughly flat.

The first non-gold corporation of any significance that hits the scanners is Docebo (TSX: DCBO), down about 28% for the year. They went public in the summer of 2019 at CAD$16/share, so they’re still massively up from their IPO. Their primary business is educational software, which needless to say, was a very timely sector to be in during COVID-19. With a market cap of nearly $2 billion and “annual recurring revenues of $73 to $74 million”, it trades like a typical SaaS COVID company. Their stock performance is likely a reversion to the mean scenario.

Next down the non-gold list is Ritchie Brothers (TSX: RBA), down 22%. They’ve done reasonably well post-Covid, but had a mild miss on year-end earnings. While the company itself is solid, they are still at valuations that I’m not tremendously interested in the stock.

Moving further down the list, we have Trillium Therapeutics (TSX: TRIL), down 21%. I don’t see any obvious reason why they are trending down.

Then in the 20% or greater category, we have BBTV holdings (TSX: BBTV) which is down 21% for the year as well. They went public last autumn for CAD$16/share and let’s just say they’re an interesting company.

Winners

There are many, many more winners on the TSX scan than losers. There’s about 80 companies that are up more than 50% year to date. I won’t talk up my own book, but I’ve generally been surprised to see some names that I own in this list!

The highest performers have been, interestingly enough, in marijuana. Aphria (TSX: APH), Canopy Rivers (TSX: RIV), Supreme Cannabis (TSX: FIRE) and Village Farms (TSX: VFF). Another tier has been what I consider to be ‘marginal’ mineral miners. I won’t name them. There are also a lot of other marginal companies as well on the list (associated with crypto, but also oil and gas). The next tier down is a mix, but mostly non-gold commodity companies. Notables include: CRH Medical (TSX: CRH) which got bought out by Well Health (TSX: WELL), Denison Mines (TSX: DML). Other standouts include Canada Goose (TSX: GOOS) and Cineplex (TSX: CGX).

Interesting times. Will gold continue to show weakness? Will there be a huge mean reversion with the rest of the market?

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!

The month came and went, and despite all of the theater of Gamestop and the rest of the overall market, there weren’t any portfolio actions of note (some minor tweaking here and there, but it was some minor trimming and minor purchasing of existing positions, less than 1% of the portfolio).

In general, since the November “Biden jump”, many targets of opportunity out there have jumped up in price and presented themselves of being far less compelling than in 2020.

As a consequence of the two takeover offers that occurred in January (FLIR Systems (Nasdaq: FLIR) and Atlantic Power (TSX: ATP)), coupled with an imminent call of Gran Colombia Gold Notes (TSX: GCM.NT.U) and Bombardier’s inevitable debt repurchase offer, my effective cash position is in the teens at present. I’m still being paid to wait with these positions (merger arbitrage and collecting bond coupons is great, but oh-so-less exciting than watching Gamestop get volatility halted 8 times a day) so I’m in no rush to clear them out due to the lack of compelling alternatives.

There was one TSX stock that I performed an intensive research deep dive on, at a valuation that was compelling enough to put in an order to take a small starter position if the market allows for it. Price-wise, it did crash about 50% peak-to-trough during the Covid crunch (March 2020) but its recovery has been tepid, in a manner that I believe is relatively unwarranted. It is most definitely not a household name. It is also unlikely to triple overnight, but it should continue to retain value. Consider this a low risk, medium-reward type opportunity – a base hit single type investment.

Other than this, I’m happy to accumulate cash.

With vaccinations on the way, we will start to focus on the real economy again, the economy that has not been artificially inflated by fiscal spending in the name of COVID-19 mitigation. This is going to present itself as a very ugly picture.

For instance, when we look at the November 2020 snapshot of Canada’s Fiscal Monitor, we see the following:

Note the GST collections: In April to November 2019 (8 months), the government collected $27.2 billion. In April to November 2020, the government collected $18.8 billion, a 31% decrease.

GST collections form the purest indication of end-consumer activity of GST-able products – i.e. non-food, non-export, non-residential rent consumption. This part of the real economy has exhibited a gigantic depression in activity. It is inescapable that this will take a very long time to recover to pre-COVID levels.

For historical context, during the same time periods, here were the GST collections for 2016 to 2020, April to November:
2020: $18.8 billion
2019: $27.2 billion
2018: $27.8 billion
2017: $25.8 billion
2016: $23.5 billion

What’s interesting is that the real economy was already going south before COVID-19 occurred.

Finally, in the belief that lightning can strike twice, the retail crowd that took Gamestop up to the roof is trying the same with the silver commodity. I couldn’t have picked a worse commodity to try to engage in market manipulation with. It all makes me wonder if this is part of some massively elaborate joke. That said, you might wish to be rounding up the cutlery in your grandmother’s kitchen – if silver heads up to $420 an ounce (funding secured), I’ll definitely be selling it.