Torstar Acquisition

In January, which felt like a very long time ago, I wrote about Torstar. In fact, at one point I owned shares in the company, but during the CoronaCrisis, I dumped my small stake (which to my mystification, was one of the few companies to receive a bid at the time) simply because the rest of the stock market was on sale.

What is ironic, however, is that a couple business days ago, I put in an order to buy in the low 30’s, but never got hit.

A couple trading days ago (Monday, May 25, 2020), the stock rocketed up from about 33 cents up to 48 cents on about 150,000 shares of volume (this is really unusual for Torstar stock, which is very slow moving):

On first glance, this appears like blatant insider trading. How could it not?

Today (May 26, 2020), the stock buying tapered and some people clearly not in the know dumped stock:

And finally, Tuesday evening, the announcement that NordStar will be buying Torstar for 63 cents per share, cash. NordStar is run by a prominent former Fairfax executive (that still sits on the board). Fairfax already owns about 40% of the non-voting Class B shares and got the consent of the Class A owners, who cashed out at a price that is magnitudes different than how things were a decade ago.

I am guessing Fairfax’s involvement will be acquiring some media clout for a relatively inexpensive price. At 63 cents per share, NordStar is paying $51 million (minus FFH’s ownership, $33 million) in exchange for a company with $69 million in unrestricted cash on their balance sheet, with relatively little on the liability side on their balance sheet. The big black eye is the 56% equity investment in VerticalScope, which is barely generating cash but has a $150 million debt on their balance sheet (I suspect when the ownership changes, that NordStar will be jettisoning this anchor in short order). Operationally speaking, however, I suspect advertising revenues are going to continue to crash and it will be interesting to see how NordStar can re-purpose this investment.

Finally, it isn’t quite clear how much influence Fairfax will have in this, but something makes me suspect there is more behind the scenes.

While I am slightly unhappy that I did not get some Torstar shares in the low 30’s (I was rather late to pulling the trigger), the number of shares I was looking to purchase would not have been material even if I had received an execution on my order. Basically I was caught sleeping and this was another instance of a company that had pulled away from my limit orders.

At least I can take this thing off my watchlist now.

Firing on half cylinders

It has been an infinitely frustrating process when you place long orders and have them completely blown away (unfilled) by market action. Like we are not talking about missing by a dime or two, we are talking missing out by 5% gap up trades.

That said, the majority of the portfolio that has been invested in the market has caught a huge tailwind. I expect it to continue.

Remember during the 2008-2009 economic crisis where in retrospect you could just stick your fingers on a multi-year stock chart on those two years and pretty much where things ended in 2007 where were they were trading at 2011? That’s the sort of scenario I envision happening, except about as fast as it did coming down.

I always remember the cliche of that psychologically there is a feeling of regret when there is a winning trade that you always wish that more capital was deployed. Tempering that feeling is knowledge of hindsight bias – one usually never thinks about the scenario where the trade goes south.

I’m going to make an observation which may or may not come to fruition. During the CoronaCrisis, I noticed that Kitco and other physical gold vendors were having significant capacity issues which is a sign of very high retail activity. Most of the inventory was sold out or shipping delayed until well into June. My speculation is as the market and economy makes a recovery that gold will continue to lag again in favour of other commodities despite the extremely loose monetary policy. Once the S&P has peaked, it’ll probably be a better time to get into physical gold – chances are by then the Canadian dollar will also have appreciated.

Marijuana stocks

Why anybody continues to invest in this sector is beyond me. But for whatever reason, over the past 7 trading days, Canopy Growth has skyrocketed – yes, this is over a 50% surge up:

I’m not short the stock, but those that are are obviously hurting. It is a heavily shorted stock, with about 40 million shares short on the US side and 11 million on the Canadian side, with a cost of borrow of around 25% (assuming you can actually get shares to borrow).

While I’m not the type to gamble on these stocks, my gut instinct says that it might Tilray these short sellers before crashing again. In March 2019, they reported CAD$4.5 billion in cash and marketable securities on the balance sheet, and at the end of December 2019, it was about C$2.3 billion, an impressive cash burn trajectory. While Constellation Brands did exercise C$245 million in warrants on May 1st, I’m sure Canopy would love another opportunity to raise cash again!

I’m guessing all of these Robinhood and Wealthsimple investors have been happily buying shares. Who knows, they might have the last high!

Costs and inflation

The post-COVID-19 world is going to incur a material extra cost to doing street level business, at least if they want to do things “by the book”, which includes abiding by yet another layer of regulatory burden from health and worker’s compensation board agencies, lest the authorities pull your business license. Individuals can flaunt the unwritten laws of social distancing with little consequence, but businesses have much more to risk if they do not toe the line.

Getting plexiglass installed, and distributing masks and faceshields to employees, isn’t free. The labour to disinfect everything and to maintain it, isn’t free. Having your square footage utilization ratio decrease by a factor of 2 or 2.5, most definitely is not free, especially in urban centres where retail leasing prices are (or were) sky-high.

Good example of an article: Shops are reopening after COVID-19, and some are adding a new line to your bill to pay for it.

Psychologically speaking, a surcharge is ill-advised in competitive businesses. Customers will feel like they’re getting ripped off. Smarter businesses will embed it into the sticker price.

But the underlying point is that within businesses that have to deal with other human beings close and up-front, fixed and variable costs are going to increase. This is a cost burden that all such businesses will have to face, so it will give a natural competitive advantage to those that don’t have to put up with such costs, or those that can amortize fixed costs over a wider base.

These costs are not going to materially add value to the customer, but because they will be spread amongst all in-person business participants, the customer will have to pay for them.

If it isn’t obvious already, businesses that do not have much in the way of a physical presence will gain one more competitive advantage, relative to those businesses that serve customers in-person.

Minor site administration note – Comments

A few weeks ago, in response to a comment that the “email when there are new comments” function on my previous system was not working at all, I replaced the comments engine with this WP Discuz plugin, which appears to have better functionality in addition to actually supporting the feature.

I’m happy to report this system appears to be working well.

On a recent post, somebody had posted a couple links in the comments, and ordinarily posts with two or more links would go into the moderation queue (a ton of spam contains multiple links per comment). I’ve now raised this limit to 3 links or more before I have to manually moderate comments.