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. 

Conclusion
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." - http://martinshkreli.com/uncategorized/12-14-2018/
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:



Thursday, December 13, 2018

2018 Year in Review

This has been a pretty crappy year for investing in Canadian stocks. I have two duds in my portfolio right now that will be sold off before the end of the year. They are BCE and Emera, both of which I purchased near 18-month highs right before the interest hikes began. My philosophy has changed since I bought these -- I am no longer investing in mature, heavily indebted companies except railroads.

I got lucky on timing for a few different stocks. I bought and sold BMO, CM and QTRH for small gains right before the floor fell out of all three. I sold BMO and CM because there is better value outside of the Big 6, and sold QTRH because I thought I was going to switch brokers, but changed my mind. It's dropped 40 cents since I sold it and looks better than ever. I will get back into QTRH in 2019 unless the Apple case is worked out before I get around to it.

Rounding out my Canadian portfolio is CNR with a covered CNR call that is going to expire worthless, and Tag Oil (TAO). Tag is a $30-million New Zealand oil company that sold substantially all of its assets for $40 million. I will hang onto the shares until the sale goes through, or fails. 

Despite a mediocre year and some mistakes, I beat the index by 13 percent. It's worth noting that my choices lagged until mid-year though. 




Friday, November 16, 2018

Do you like gambling?

I occasionally sift through the dregs of the Canadian exchanges for treasures. Most of the time I turn up jack squat.

Someone who knows about turning up jack squat.

Today I stumbled upon Senvest Capital (TSX:SEC), which is among the oddest public issues I've ever seen. It's a holding company. From their Q3 2018 filing:
"Some of the largest holdings as at September 30, 2018 were, Paramount Resources (POU), Tower Semiconductors (TSEM), Mellanox Technologies (MLNX), Radware (RDWR), and TrueCar (TRUE)."
That's a great start. A lil energy, mostly tech. But that's as specific as the disclosures get. Yep, if you invest in Senvest you're basically tossing your money in a black box and hoping for a good quarter. This is at once ridiculous and sort of interesting. I appreciate a good troll job and tip my cap to this one.

SEC doesn't attempt to track any indexes but most of its investments are in the U.S., so the S&P 500 might be a reasonable-ish yardstick. SEC is about 30 percent below the index this year.

You could gamble on worse things. A sheet of scratch tickets or three hours at a blackjack table.

I'm surprised that SEC's lack of disclosure is even legal. The more you know, I guess.

Thursday, November 8, 2018

Watching: STEP Energy Services



This stock is getting absolutely throttled today for no good reason. If they hadn't added a quarter-billion in debt last quarter (!!) I'd probably be buying. Nevertheless I think there are worse places to invest your spare doubloons if you don't mind a little in-flight turbulence.


Wednesday, November 7, 2018

New buy: TAG Oil Ltd.

Fifty cents for 36 cents is not a terrible deal.
Hot diggity. I've been trying to liquidate my Canadian positions so that I can start from scratch in 2019 and share my trades as I go, but sometimes an opportunity comes along that I cannot refuse. Today is one of those days.

TAG Oil has many excellent things going for it. Price to tangible book of 0.3, no debt, 5 percent insider ownership. And, despite trading on the TSX, it is not affected by Canadian pipeline capacity because its operations are largely in New Zealand.

Or were.

Yesterday TAG announced that it was selling all of its NZ operations to Tamarind Resources in a deal that will bring in US$30 million at closing:

"Following completion of the Transaction, TAG expects to have over C$0.50 per share in cash and working capital, continued exposure to the current operations and upside of the NZ Assets."

There are some risks, of course. Shareholders could reject the deal (it represents a loss for long-term shareholders) or it could fall apart for other reasons. The company doesn't pay a dividend, so I could potentially baghold without income. (Memories of the eBay fiasco of 2008-2010 dancing through my head).

Other risks are the general aversion to the energy sector right now and the sort of mild antipathy that some investors feel for companies that cross hemispheres to finance their ventures.

But there are other upsides too. The deal comes with a 2.5 percent royalty on the sold properties, which could theoretically free up the company to further explore its Australian lease. We shall see what the future holds.

EDIT: Added 6000 more on November 8 at 32 cents.