Wednesday, August 21, 2019

Shopify's stock price is ridiculous

I've been selling puts all year (Linamar, Stars Group, Canadian Tire to name a few) and haven't been assigned a single thing, except for 600 shares of Canfor a few months ago at $13. It's been a good year. Writing puts and selling calls when assigned has been working and I am loathe to fix a thing that ain't broke.

Thing is, Shopify is almost at $500 and trading at 30x sales. This is an outer-worldly valuation that isn't close to peers Amazon, Facebook, Square or Wix, which all have price-to-sales ratios in or near single digits. If Shopify were indeed the Next Great Thing I would probably ignore it like I do every other high flying tech company, but it isn't.

Growing up in the 80s, I remember going to different stores for everything. My parents would drag me around to six different stores every Satruday just to get groceries and other supplies for the week. I hated the process of trying to return something to a smaller store, because they made it feel like you were screwing them.

I fully embrace big box stores. I love going to one big store, like Superstore, and being able to buy everything I need for the week. It's quick and it's cheap. And there's no hassle if I need to return something. I do wonder if the person who made my $12 t-shirt was paid a fair wage relative to their local economy, but let's be honest: I'm not going to buy the same shirt from the small branded store in the mall for $18.

Amazon is like the world's greatest box store. It has the biggest selection on the planet and I can shop from work. Perfect. Shopify is quite different from Amazon. Instead of using its software to sell its own stuff, it enables small and medium-sized retailers, the same ones I happily ditched in the 80s, to sell stuff online.

I've visited dozens of Shopify-powered stores. I made my own store to test it out. The software is really slick and Shopify takes care of payments too. The thing is, I don't want to shop at a bunch of stores online. I want to buy everything from one place and be done with it as quickly as possible.

Shopify envisions a world where the storescapes of countless small and medium-sized businesses litter the internet. Its press releases are written more like sales materials to would-be entrepreneurs than investor information. They try to sell this idea that starting a business is hard, but they make it easy. In Shopify's universe, there will be millions of niche sites selling everything from underwear to tea.

This is my nightmare.

As an investor I'm interested in average people because most people are average. The ones who work paycheck to paycheck, who have three children in school, who drink beers on the weekends and play slo-pitch on Tuesday nights and take one all-inclusive vacation every February to Mexico. These people do not have time for the world that Shopify imagines. These people are busy from the moment they wake up to the moment their kids are tucked in. These are the people who are written about from the standpoint of their collective power. The Voter. The Parent. The Consumer.

The Consumer does not have the patience or inclination to spend her Wednesday evenings poring over the newest immaculately designed online storefronts for sunglasses or blankets. This is frankly territory that's reserved for hipsters, college students, various types of real-world dropouts and dreamers. It's a world that has always existed and always will, but not at 30x sales. Shopify is a niche product that will cater to people who enjoy the process of shopping at smaller retailers. The same people who go to farmers' markets on the weekends and enjoy slow food. It's never going to be something that most people do. That average people do. Like shop at Amazon.

I do think Shopify has created a legitimate business but I don't think it's nearly as revolutionary as the market thinks it is right now. It is not the next Amazon. Shopify is giving some new life to small and medium-sized businesses. That's it.

Today the stock closed at $499. I'm shorting it tomorrow with a target of $300.

Wednesday, April 3, 2019

Some decent names: CTC-A, TSGI, CFP

After the selloff last Christmas we had the inevitable run-up. While prices normalized there wasn't much in the bargain bin. My single buy in Q1, Itafos, is slightly underwater. I also bought some bond and gold hedges. 

Now that we're in Q2 there are some interesting names approaching value territory. 

Canadian Tire (CTC-A)
Name a better retailer in Canada. I bet you can't. At least I can't. 

While I wouldn't touch traditional value names in this sector with a 92-ft pole (looking at you, Reitmans!), there is no denying that people continue to shop at Canadian Tire. I hate the place and I still go sometimes. 

Traditional value metrics like p/b, debt and so forth don't really matter, in my view, when you have the nuthold on the economy that CT does. It pays a growing dividend in case you care about that kind of thing. 

The Stars Group (TSGI)
This company is the Amazon of online poker. No one comes close in terms of traffic or in quality of software. The only real gripe about them is that they continuously downgrade their rebate programs (rakeback, cashback, VIP points) to the chagrin of regulars. But then this company makes its money off of recreational players, not professionals. 

Unless humans suddenly bore of gambling, I don't see anything standing in the way of this company in the short term. 

Canfor (CFP)
Yeah there are trade tensions and Trump and blah blah blah, but wood is a fundamental material to human existence. I don't know how someone could be bearish on wood except in the very short term. 

This one weighs better on value metrics than the other two with low debt, low p/b, low p/s, etc. It is also the most beaten-up of its woodsy peers. 

Disclosure: I'm short puts on Stars Group and Canfor. No position of any kind in CTC.

Friday, March 29, 2019

Blog name change

The old named, Old-School Canadian Value Stocks, was too similar to other blog names. What we're really after are mispriced equities - if there weren't any, indexing would be optimal.

Monday, March 11, 2019

Q1 2019 update - boredom rules

Aside from a tiny speculative position in Itafos (IFOS), I made my first purchase of 2019 today. And it was just a bond hedge.

I watch about 50 companies but haven't seen anything worth buying since December.

I am short puts in several companies - Canfor, Linamar and Stars Group. At this time I think they'll all expire worthless.

Covered calls on BCE and Emera look like they will be exercised, which will provide more capital I don't really need at the moment.

One solid argument in favour of indexing is that you don't spend much time on the sidelines.

Tuesday, January 8, 2019

New position: short LNR puts

There is an excellent write-up about Linamar (LNR) at Canadian Value Stocks. It's also been mentioned recently on Financial Uproar. We won't re-hash their points but we will say what we like about it.

Good stuff
It's down 40 percent over the last year. Compared to auto-parts peers Magna (down 16 percent) and Exco (down 9 percent), that is quite a lot. Here at OSCVS, we like beat up companies the best.

It has high insider ownership at 31 percent (Exco has 27, Magna around 1). Insiders have been buying at a frenzied pace lately, especially over the last three months while the stock has been in the $45 range. 

LNR has aggressively grown earnings every year since 2009.

LNR pays a dividend (good) with a low payout ratio (also good). At OSCVS we are not dividend nerds but we do prefer companies that pay dividends because it generally signals more stable revenues versus those that don't.

Bad stuff 
LNR has the worst balance sheet of the auto-parts triumvirate.

There could be a recession around the corner. 

Like other value investors, there's something about auto parts companies that just doesn't sit well with us. Perhaps it is our general fear of being in or even near automobiles speaking here, but we wouldn't invest our last dollar in the sector. Perhaps it is Elon Musk's new moustache striking fear in us. This isn't our last dollar though and we are interested in making money, not waxing philosophic about our personal likes and dislikes. So who cares what we think about auto parts, really. 

Here at OSCVS we are bullish on LNR, but we do not necessarily want to own it. Selling puts allows us to express our bullish sentiment without necessarily locking in for the long term. If we are assigned, we will fire up our call writing apparatus and sell contracts until assigned. 

We are short 2 JUL 40 puts. 

Thursday, January 3, 2019

January 2019 portfolio update

My plan to sell my losers on Christmas Eve crumbled after the historic sell-off. Part of investing is adapting to conditions so I've modified my gameplan accordingly.

BCE and EMA - looking to unload these as soon as is prudent. I will use some combination of waiting, collecting dividends and writing covered calls to garner an appropriate return.

CNR - I believe this is worth much more than it's currently trading for. There are some decent call-writing opportunities but like BCE and EMA, I'm waiting for a better price.

TAO - This is a CDN$30-million company that was sold for US$30-million last November. The market is not giving any credit for the sale, which is expected to close by the end of the quarter. I'm waiting it out and will likely sell at closing.

Watch list - I watch about 40 stocks. Once a stock is on the list, price is the most important catalyst for a buy. There is nothing imminent right now.

Goal - I'm looking to create a book of 8-12 stocks with as little turnover as possible. That doesn't mean I won't trade, but quick profits aren't the goal.

Monday, December 17, 2018

Martin Shkreli, opening your mind and a definition of value

The man, the myth, the legend. 
Martin Shrekli
If you don't already read Martin Shkreli's prison blog, you should. Put aside the brash personality and multiple felonies, and you're left with a brilliant mind. His biopharma picks won't help us a lot in Canada but his thinking will.

Years back, Stephen King wrote a book on writing (called On Writing), where he shared his reading lists and admitted to not fully understanding half of the books on them. Why read these? Well, he argued, reading genius writing makes you a better writer. Even if you don't fully absorb it.

Shkreli has the same sort of mind for investing. I've watched many hours of his YouTube videos where he dissects particular aspects of the biopharma industry. I've retained almost nothing of the videos (high science is beyond me), except the distinct impression that he operates on a different plane than the rest of us. Genius is rare and contemporary genius even more so.

One night, MS was clicking through some pharma website to find the meat. He described the website as the typical "perfunctory nonsense" that you often see in that industry - stock photos displaying multi-ethnic people smiling and having a good time all to make you, the visitor, buy in to some clinical trial or drug. It was a necessary marketing tactic, if not a bit dull.

40 oz dreams
Opening your mind
That phrase, perfunctory nonsense, has stuck with me. I find myself asking this question with most sites I visit. The great majority fit the bill - just a few cheap carnival tricks slung together to rob you, dear visitor, of your hard-earned shekels.

I will admit to having a sort of envy of companies that don't have websites. It's so backwards that it comes fill-circle and becomes sort of avant-garde. Almost hip. Companies like E-L Financial (ELF) and Becker Milk (BEK-B) are perpetually on my watch list. (ELF at least has a logo on their financial report; BEK-B has no visual identity whatsoever.)

Which brings me to a related matter. E-L and Becker have earned the right to not have websites by being decades-old profitable companies. If you're a company still trying to make your mark you have to put a lot of effort in to your brand. It's not hip at all to neglect the website in such cases. That sort of neglect is earned.

Street Capital Group (SCB) hit a 52-week low this morning at 59 cents. There might be some decent value here. Strip out the property, goodwill, intangibles and equipment from the assets and you're left with 80+ cents a share. There are mortgage-related risks but certainly something to look at. SCB became a schedule-1 bank in 2017 and have begun rolling out GICs as their first deposit product.

As an investor I could maybe overlook SCB's semi-competitive GIC rates if their website wasn't hot garbage. You could literally build something better using Wix in an afternoon. At this stage in SCB's development, the website is an important sales and marketing tool. They should be throwing a lot more money at it. Middling GIC rates and a tire fire of a website are not going to help differentiate SCB from the other banks in the country. At this stage the perfunctory nonsense is, you know, non-negotiable. You gotta make your mark, SCB.

A definition of value
Finally, a definition of alpha that leads us to a definition of value:
"Alpha, which we can define as human-discoverable arbitrage opportunity, is a variable that has specific behavior. I conjecture alpha is correlated to the VIX. When volatility is high and markets are in panic, alpha opportunities exist as investors lose it." -
Losing it is what investors appear to be doing over The Stars Group (TSGI), another name that is perpetually on my list. The problem with TSGI is that it's really not a value stock by any metric. It's a growth stock. It's swimming in debt, it's swallowing competitors so fast that it's hard to keep track of them and it's barely profitable most quarters.

What is value, though, if not opportunities exposed by investors losing it? Call yourself a value investor, a growth investor, a whatever-investor. Any active investor is after the same thing, alpha, however we can find it.

Since PokerStars swallowed Full Tilt Poker in 2012, they have been the market leader and it's not close. They have eight to 12 times more traffic than any online poker room in the world at any time of the day. Even more if you exclude IDN, which is only accessible in Asia. It is no stretch to say that TSGI is to poker what Amazon is to retail, or Google is to search. The question is, how much is that worth.

TSGI's ownership, in its current form, began in 2014 (it was privately held before then). Here is their revenue as a public company, in millions USD:

  • 2014: 593
  • 2015: 988
  • 2016: 1,156
  • 2017: 1,312
  • 2018: 1,737

Over that span, book value has increased from 7.50 per share to 20 but the stock price has remained flat (it hit 50 at one point but fell on lower revised guidance this year).

This stock is definitely outside of my comfort zone despite the obvious value. There is money there. It's sort of giving me an existential crisis to tell you the truth. If I buy into this then what's to stop me from buying into any other wild fad? Micron? Snap? HMMJ?

I don't think I'm going to buy anything else in 2018. I've designated Dec 24 as my day to sell the losers. I am hoping for a week-long rally between now and then.

I will end this post with a link to my favourite Christmas music video: