Input Capital – Really suspicious

Input Capital (TSXV: INP) announced they were going to be bought out by a company (Bridgeway, trading as BDGY) for $1.75 in cash.

This represented nearly a double in share price and a total purchase price of nearly $100 million dollars.

The only problem is that when I am doing research on Bridgeway, I am getting the shell of an entity with a market cap of about $600,000 (yes, six-hundred thousand dollars).

I dig into the SEC filings. They are late on their 10-K and 10-Q filings. Their last snapshot comes from their S-1 (registration statement) where on page 47 we see a financial statement, as of September 2019, that contains nowhere close to $100 million in cash. Indeed, it is about $1.7 million in cash and a whole bunch of liabilities (about $40 million).

There are no 8-K filings indicating they are in the receipt of any further financing except for about $750k (not million) they raised in March 2020.

I couldn’t find shares to borrow, hence this post. While I don’t give investing advice, I think my conclusion from this post is quite obvious.

Ag Growth International – Q2-2020 – steady as she goes

My thesis in Ag Growth International (TSX: AFN) was written in a very condensed form back in “we are all going to die of COVID” April, which seems like an eternity ago.

After reviewing AFN’s quarterly report, business is even better than I was thinking post-COVID. The stock price is now a closer reflection to where it will be going, i.e. still higher.

In fact, if I didn’t already have as high a position in this stock as I did (I took a fairly large position in early April and that has ballooned due to appreciation), I would be buying more.

Nearly nobody in retail-land follows this stock – the lack of commentary on places like Seeking Alpha or Stockhouse is comforting. I don’t see people on Robinhood flipping this stock around. Even after reporting what is unarguably a good quarterly report, the stock only traded a shade under 200k shares.

There are some related companies with somewhat less in the way of competitive advantages that are trading relatively cheaply as well, but business-wise AFN is in the sweet spot. I managed to get shares of one of these other related companies, but it was a ridiculously small position before their stock took off as well.

Transforce is run by a genius

Alain Bédard is very good in capital allocation. TFI International (TSX: TFII) announced they are going to sell 4 million shares to the market.

Their stock chart looks like this:

When you have a stock chart like this, what do you do? Raise equity capital while the going is good. Especially after you’ve exercised and dumped a bunch of stock options (he still owns about 4.1 million shares at present, so still plenty of skin in the game).

I took a small shot at them last February for selling equity after buying back shares, but this move I think is admirable – will also get their debt down to something a little more comfortable. They’ve acquired a couple companies since the Covid-19 debacle began.

August 11 – unusual market day

A few things caught my attention today, and it is likely that means that the next few days (i.e. the short term) there is going to be some turbulence in the stock markets. If you have some leftover cash, after this storm purges some weaker holdings out of their positions, it’ll be a better time than not to load up.

First, the commodity that seemingly everybody in retail has talked about ad nauseum as the salvation to currency depreciation (gold) has cratered today:

This ~US$100 drop in gold is significant. The last time it got dumped badly was during the Covid-19 crisis where people were seeking liquidity in the form of cash at any price possible. Beyond that you have to go back to late 2016, and I think this was due to threats of interest rate normalization (does that feel like a long time ago!).

The psychology of the situation is telling. Gold was the crowded trade where everybody piled in because they were comfortable in ordering the shiny yellow metal. It was the hedge against the collapse of the currency and economy due to COVID-19. After it eclipsed $2,000/Oz, that was a catalyst for people to assume it was all systems go, and people were pronouncing price targets of $2,500, $3,000, etc., per ounce. Instead, the bottom is falling out, and the question is how low this price will have to go for the people that got in at $2,000+ to bail out.

What’s even more interesting is the rise up (some 10bps or so) of the 30-year US treasury bond:

This is not a huge rise, but it is sharp. Rising long-term interest rates have many spin-off consequences. Since the Federal Reserve effectively controls the yield curve at present, they may be pushing for larger spreads. Tough to tell at present. The assets of the Federal Reserve continue to be flat in the month of July.

I’m going to guess there will be a spike of equity volatility in the next few days that will follow this minor tremor. It will be enough to get weak hands out of the market and confuse people about future market direction – negative headlines and worries will once again permeate. A great time to deploy more incremental cash, similar to when the markets vomited in the second week of June.

Bitcoin Bubble #2

My goodness – Microstrategy adopts a treasury policy where half of their cash ($250 million) is invested in bitcoin:

MicroStrategy® Incorporated (Nasdaq: MSTR), the largest independent publicly-traded business intelligence company, today announced that it has purchased 21,454 bitcoins at an aggregate purchase price of $250 million, inclusive of fees and expenses. The purchase of Bitcoin cryptocurrency was made pursuant to the two-pronged capital allocation strategy previously announced by the company when it released its second quarter 2020 financial results on July 28, 2020.

The company addressed the first prong, which called for returning a portion of its excess cash to shareholders, when it announced today that it had launched a cash tender offer for up to $250 million of MicroStrategy’s class A common stock via a modified Dutch Auction offer. By acquiring 21,454 bitcoins, MicroStrategy addressed the other prong of its capital allocation strategy, which called for investing up to $250 million in one or more alternative investments or assets.

This is the first instance I can think of a company that doesn’t specialize in the field (i.e. an ETF dedicated towards purchasing bitcoins or mining them) that has thrown bulk quantities of cash into Bitcoin.

What’s even more amazing is that their stock went up about 10% on this news (in conjunction with the Dutch Auction Tender they proposed on the same day). I’m guessing the bulk of it was due to the dutch auction rather than the bitcoin acquisition, but who knows?

Will other companies follow suit and diversify their US cash holdings into alternative assets? If so, things will get quite interesting – and will likely inflate the price of Bitcoin. I also don’t know if this had anything to do with the huge drop in gold today, but I also note that long-term US bond interest rates took quite a leap as well. Interesting times we live in.

Finally, if you feel like you are missing out, take solace that the best store of value historically has been in ownership of competently managed businesses that will continue to produce goods or services that will be in demand for the foreseeable future.