Late Night Finance with Sacha, Episode 9

Date: Thursday, December 10, 2020
Time: 8:00pm, Pacific Time
Duration: Projected 60 minutes. Could go longer.
Where: Zoom (Registration)

Frequently Asked Questions:

Q: What are you doing?
A: I’m going to do a rambling overview of screens for companies that appear to be sold off due to tax-loss selling, or other relative weakness. There aren’t a lot left after the “Biden surge” in the stock market, but after screening, I’ll do a deep dive in likely one or perhaps two companies. I may consider questions and comments, time depending.

Q: How do I register?
A: Zoom link is here. I’ll need your city/province or state, and if you have any questions in advance just add it to the “Questions and Comments” part of the form. You’ll instantly receive the login to the Zoom channel.

Q: Are you trying to spam me, try to sell me garbage, etc. if I register?
A: If you register for this, I will not harvest your email or send you any solicitations. Also I am not using this to pump and dump any securities to you, although I will certainly offer opinions on what I see.

Q: Why do I have to register? I just want to be anonymous.
A: I’m curious who you are as well.

Q: If I register and don’t show up, will you be mad at me?
A: No.

Q: Will you (Sacha) be on video (i.e. this isn’t just an audio-only stream)?
A: Yes. You’ll get to see me, but the majority will be on “screen share” mode with my web browser and PDFs from SEDAR as I explain what’s going on in my mind as I present.

Q: Will I need to be on video?
A: I’d prefer it, and you are more than welcome to be in your pajamas. No judgements!

Q: Can I be a silent participant?
A: Yes. I might pick on some of you though. Bonus points if you can get your cat on camera.

Q: Is there an archive of the video I can watch later if I can’t make it?
A: No. I’ve been asked why, and this is because it is not at all close to a professional level.

Q: Will there be a summary of the video?
A: A short summary will get added to the comments of this posting after the video.

Q: Will there be some other video presentation in the future?
A: Yes.

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.

Bitcoins taking a hit

Today was the first day since the Coronacrisis where Bitcoin took a huge dive:

Speculating on reasons, I’ll offer three potential factors (it is likely a blend of these and other hidden factors):

1. US Thanksgiving resulted in all the automatic buying (ETFs and the like) taking a vacation, resulting in a demand drop and thus price correction.

2. A typical market reaction that occurs when things rocket up continuously for about two months – you get plenty of long players (FOMO!) and a lot of them decide at once to suddenly cash in their chips. Subsequently you get supply dumps of everybody’s trailing stops getting hit which causes a mini-cascade as we have seen. Happens with momentum stocks as well.

3. Speculation that the US Treasury Secretary will make privately held bitcoin wallets illegal. Most people own bitcoins through intermediaries (mainly crypto exchanges), but remember that the whole origin of bitcoin was to decentralize monetary policy. It is a myth that Bitcoin is anonymous – rather it is completely the opposite, with all transactions completely transparent for all to see. The blockchain database is just over 300 gigabytes at present and is available for anybody to download. The bitcoin wallet addresses don’t have peoples’ names on them, but presumably there will eventually be an association made unless if the transactions are done very carefully (i.e. with two parties that aren’t caught up in the usual electronic monitoring sweeps of large value transactions).

Transactions in bitcoins are also internalized off the blockchain and batched until some point where it is economical to post them on the chain itself. This is what practically happens as transactions cost about US$5 to post. This will get more and more expensive over time.

There are a couple analogies I can think of to the speculation of outlawing Bitcoin private wallets: Forbidding people to own (paper) cash without it being deposited into a bank, or forbidding people to own gold. These two were functionally the same thing since when (large scale) gold ownership was forbidden in 1933, US dollars were directly interconvertible into gold at US$20.67/troy ounce.

Another analogy is the pervasive usage of free web-based email providers and communication privacy. Even if you use an external email service, if you communicate with any individuals on a standard (obviously subject to government monitoring) web-based email services, your communication is going to be compromised by virtue of one side of the communication chain being monitored. Essentially the US Treasury is trying to forbid email communications between any individuals that do not use one of the sanctioned services.

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Finally, it is well known that Microstrategy (Nasdaq: MSTR) adopted a treasury policy of holding bitcoins and their CEO gave an interview on CNBC today. The narrative is fairly well known, but at around 1:30 in the interview, the following words were said:

“What they don’t understand is bitcoin is a monetary network. And as a monetary network it is capable of storing and channeling energy over time without power loss.”

The words “storing and channeling energy over time without power loss” triggered my physics background on perpetual motion machines.

Indeed, crypto currency networks are huge consumers of energy. The amount of power being dumped into semiconductors keeping the bitcoin transaction network alive is very high. I’m not saying this is a good or bad thing (there are many other uses of electric power which are wasteful), but Bitcoin is structurally designed to incentivize more and more consumption (the larger the share you have of the network, the higher the chance you have of mining a block of bitcoin, or confirming a transaction for a fee) and hence one of the fundamental limitations of bitcoin will be how much silicon and electricity can be thrown into what (I claim) is the monetary equivalent of stacking one pile of rocks into a corner and then moving them to the other side of the room, repeated many times over.

Since cooling costs are one of the major costs of running a data centre, will it be a structural competitive advantage if you operate your data centre in a country that has very low average temperatures (can use outdoor air ventilation for cooling), coupled with being next to your own privately held nuclear reactor? Siberia anybody?