Tag: RSI

I used to own shares in Rogers Sugar, back in the days when it was still trading as an income trust. I had a slab of units in the mid 3’s and sold them in the mid 5’s, citing that the upside was probably limited from that point. This was one of the companies that I loaded up on during the economic crisis and it paid off. My selling timing wasn’t ideal as they’ve managed to get up to about $6/share before moderating:

I’ve been asked whether this company is a buy or not. Normally I don’t entertain these requests, but since I don’t need to do any additional research on this company that I’ve already written about, I’ll comment.

The quick answer is that they are trading within my fair value range. They’ve been well over my fair value range for the bulk of the last couple years. My theory here is that they were perceived as a safe stock with a safe yield, and lumped into every income fund manager’s portfolio as something reliably yieldy but “without risk”. I would say the assessment of income is correct, but the assumption of risk is not, and the market clearly has shown that over the past two weeks of trading.

I’m not sure why they got killed as badly as they have. Their last quarterly report (the catalyst) was not good, but the stock didn’t deserve the 20% bludgeoning they took. There is clearly a lot of other technical factors going on here (stop losses, value investors dumping, margin players dumping, etc.).

Market-wise they are facing a few adverse factors (the crops down south have been better than usual, which will cause over-supply and hence no exports for this year), and also Redpath is seemingly getting good at marketing and beating Rogers – heck, I even notice their product in the local Costco. These margin pressures are not good for the company, but this is the nature of the industry and it has been this way for a long, long time.

They will have to go down further before I’ll consider buying shares.

Also for those wanting to do some fundamental research on the company, just note that reading the GAAP income statement is nearly useless due to the use of derivatives the company engages in to hedge natural gas pricing.

The last little bit of my longest-term holding, Rogers Sugar (TSX: RSI) I have unloaded today. The company is very well run, but substantially all of its free cash flow is sent out the window in dividends – at a yield of roughly 6-6.1%, historically this is expensive and by virtue of being in the sugar refining industry, isn’t exactly in a position to dramatically expand revenues and earnings.

Investors are paying bond-like premiums for equity-like returns. At the rate that yield-chasing is going, investors might even bid up the company to 5.5% or even 5%, but I won’t have any part of it. The golden moment was when in early 2009 it was trading at $3/unit and I did load up during this time since the stable 15% pre-tax returns made much more sense in terms of valuation. The only problem was that most other equities at that time were also exhibiting high risk-reward potential!

Rogers Sugar (TSX: RSI) announced at the end of trading they had a bought offering of debentures, and calling in their existing series of debentures (TSX: RSI.DB.B) effective around December 19, 2011.

Holders of RSI.DB.B will be receiving a nasty shock tomorrow because of this call announcement – they were trading around 104 before this happened, but now the debentures will only be redeemed for 100. Any recent buyers of the debentures will take a bit of a loss. The debentures were trading slightly above par because of the conversion feature embedded within them – they are convertible at $5.10 per share and with the market price recently at $5.14, it is possible there may be further conversions. The debentures will trade at 100 plus the embedded value of a call option that expires on December 19, 2011.

The deal itself is very good for Rogers Sugar – they have extended the term structure of their debentures to April 2017 and December 2018, done so at a slightly lower coupon rate, and an increased conversion price ($6.50 and $7.20 per share, respectively). Overall, Rogers Sugar has performed excellent in my portfolio and I continue to hold a position in the equity, albeit the equity is in my fair value range. Although the investment has been about as exciting as watching paint dry, they have performed solidly.

When you go to a bank and ask for their rates on 1-year GICs, you usually get two responses – the rate for the cashable GIC and the rate for a locked-in GIC. You will receive a larger rate if you are willing to commit your money for a longer time period, at the penalty of having no interest if you want early access to your cash. The rate differences can be considered a payment for liquidity.

In the stock markets today, people are paying heavily for liquidity.

As an example, one of my top holdings, Rogers Sugar (TSX: RSI), tanked in trading because somebody needed liquidity, fast:

At 9:56 (eastern), the bid/ask was already being pushed down. It was at bid/ask 4.90/4.92 and then somebody wanted to get rid of about 100,000 shares quickly. In the span of five seconds, they took down the asking price 44 cents to $4.50 and then in the course of ten seconds there were 58,190 shares traded between 4.46 and 4.90. The bulk of the trade was done at the price of $4.50 where 35,400 shares changed hands.

This is the type of trading activity that occurs when somebody is undergoing a margin liquidation. They are paying a 40 cent per share premium for the privilege of wanting cash right now.

Generally speaking if you were on the opposite ends of these types of liqudiations you will receive a very, very good price. However, the window of opportunity you actually have to react to such liquidations is very, very tiny – you had about 1 second to hit somebody’s ask at 4.50 before somebody else picked it up. This is why computer trading is so prevalent in the marketplace – they are out there looking for such prospects.

When the market needs liquidity it does not matter what the fair value of the underlying security is – it will go at whatever price others want to pay for it. This can be much lower than the existing market value or what would be a rational valuation for the underlying company.