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:

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. 

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.

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.

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.

Sleep Country Canada

Why buy a mattress anywhere else? If you're anything like me, you may have been put off by Christine Magee's hollow sales pitches. I always imagined her as a zombie queen preaching to a flock of lobotomized sheep. Even they seemed disinterested.

Mattresses have never been hard to come by. And with the internet revolution, you can now buy mattresses online. I don't know if you've heard of Amazon or not, but they sell them.

I was shocked when I learned that ZZZ trades at 3.5 times book value. I bought my last mattress at Canadian Tire (3.4), and the one before that was Wal-Mart (4.1). I realize p/b isn't the end-all, but I think you'll agree that one of these names is not like the others. On what grounds does it trade at such a high multiple? (Some Canadian value investors like Reitmans in the retail sector because it has no debt; it trades at 0.7)

I suppose some people might enjoy the service that ZZZ offers. You know, walking into a mostly empty store and being stared down by a commissioned sales person who sees you as a meal. Whorls of dust rising in the columns of light slanting in the window. Still air. Sweat. Confusion. Silence except for the $28 Oxfords galloping towards you.

True, ZZZ owns about a quarter of the market today. How does that improve when you can buy a cheaper bed online? Who wakes up and decides that they want to spend their day off visiting mattress stores?

Other considerations include the notion that we may be approaching a recession, when people don't buy as many mattresses. And that with the rise of passive investing, stocks outside the indexes are going to get hurt. ZZZ is not in the S&P/TSX 60.

Shorting, especially for retail investors, is generally a loser's game. But this one is tempting. (I looked at writing naked calls but the options market for this company is tepid.)

Happy Marijuana Day

Today is a great day in Canada for everyone except drug dealers and marijuana investors. 

Smoke if you got 'em.

Smell test

Arguably one of the most important considerations in any investment is the smell test. This is something that the numbers can't tell you. No matter how tantalizing a company may appear, no matter how covered its dividend is, no matter its earnings, buybacks, insider buying or cash position, if a company isn't going to remain a going concern you just can't buy it.

Torstar continually comes up in my scans as a company that should be worth consideration. No debt. Big dividend. Prem Watsa bought 10 million shares last year. Its traditional media business actually makes money. It appears better positioned than any other media company in Canada to survive. But will it?

It has a history of terrible digital investments. Its recent acquisition of the iPolitics site doesn't inspire confidence. Have you ever heard of this site? Me neither. It looks like any other media site from 2006 except that it's got social sharing buttons. If the comments sections are any indication, there doesn't seem to be much of that going on.  

Despite the survival of print channels until now, I don't see how they last much longer. I don't know anybody who buys newspapers, nor do I know anybody who knows anybody. Do you? Are they under 80 years of age? 

Pristine balance sheet and all, I can't picture a happy ending for Torstar. I hope that changes because the death of newspapers isn't good for anyone except the 45th POTUS. 

New feature in 2019: live portfolio

Many of my favourite investors talk about their stock picks publicly but don't share their actual portfolios. There are a lot of good reasons for this, including a lack of tools to do so.

I read Stockchase for ideas. One recent series of posts that particularly annoyed me was a big-time manager pumping a smaller stock. He was the only one talking about it. First at $20, then at $15, then $10. Finally the stock is at less than $5, and his comments are something like, "It's not a good time to be in this name. I used to be in it but got out."

Just like that, eh. This thing is all roses and now suddenly you don't have time for it. At what point did you exit exactly? $16? $7.50? We're talking a potentially massive loss here and now the guy is waving it off like it's air.

Which makes a person wonder: maybe it was air. Maybe it was just something he talked about, for years, without ever taking a position.

Starting in 2019 I'm going to share my Canadian equity portfolio. I don't know how I'm going to do this yet, so if you know of a method please share it.

My plan, for now, is to liquidate my current Canadian holdings and start with just cash. The universe of stocks will include anything traded in Canada.

Rules:

• New positions not to exceed 12.5% of NAV
• No shorts
• No miners

The goal will be a book of 8-12 long positions with as little trading as possible.

Slim pickins: Alamos Gold

Estimated reading time: 17 seconds

This is one of the leanest periods I can remember since the financial crisis. The closest thing out there to a bargain right now, in my view, is Alamos Gold: low p/b, recent insider buying, no debt, small dividend. I don't buy gold companies though because I use a variant of the permanent portfolio in my TFSA: one third broad equities, one third bonds, one third physical gold. (Six percent annualized return with no negative years in the last 20, in case you were wondering.)

In other news I exited my position in Brookfield Property Partners. I've seen it mentioned as a value pick of late but it's not for me. I hate everything they're doing: increasing debt, the foray into U.S. malls, and Brookfield's complicated corporate structure. It was an old investment from a different time.

Watching: The Stars Group

Estimated reading time: 234 seconds

A brief history of online poker
In the late 2000s the global online poker business was booming. The two most popular cardrooms in the world at that time were Full Tilt Poker and PokerStars.

Full Tilt was where the real poker players went to play. It had young, exciting pros on its roster like Phil Ivey, Tom Dwan and Patrik Antonius. It was not uncommon at that time to see Texas hold 'em and pot-limit omaha running at $200/$400. For the uninitiated, $200/$400 is the price of the blinds, and the typical buy-in is 100 big blinds. These were games where the players were buying in for $40,000 at a time. In U.S. dollars. Millions could be won and lost in a day.

In fact, over a million dollars has been won and lost in a single hand. This US$1.5 million pot from late 2009 remains the biggest cash game pot in online poker history:

Things hummed along for a short while after that until, out of literally nowhere, to poker players at least, the United States Department of Justice seized the domains of the three largest poker operators (PokerStars, Full Tilt Poker, Cereus) and forbade U.S. players from gambling online. Ostensibly this was done in support of a 2006 law, but in reality the United States government wasn't getting a penny of revenue from online gambling within its borders and felt it needed to act.

This is known by poker players as Black Friday and was the catalyst for the end of the salad days and the beginning of austerity for players, operators and gambling enthusiasts.

It's worth mentioning at this point that, while PokerStars had been the most popular cardroom for most of online poker's history, it was viewed by pro poker players as sort of lame. The software was never as good as Full Tilt's, the action wasn't as frenzied and it just wasn't cool to talk about. Sort of like the old Mac vs. PC commercials - Stars was the PC.

Black Friday changed all that though. As it turns out, Stars was the only operator of the three that had segregated its players' funds. In other words, it was the only operator able to refund U.S. players now they they were wholly, and suddenly, no longer its clients.

Things got worse from there. After Black Friday, Full Tilt quickly became insolvent and couldn't refund its players; an investigation led by then-United States Attorney Preet Bharara opined that Full Tilt was a US$330-million Ponzi scheme. The cardroom never recovered.

PokerStars bought Full Tilt from the Department of Justice in 2012 for:

• US$225 million cash
• US$547 million in forfeitures 
• US$184 million to refund players 

Under PokerStars' ownership, Full Tilt faltered for a number of years and was eventually folded into PokerStars' operations as a skin. But during that time, PokerStars greatly improved its software, became the most trusted place to play in the world in large part because of its actions related to Black Friday, and to this day has a choke hold on the global online poker market:

This chart from pokerscout.com shows how far PokerStars is ahead of the competition. IDN is only accessible in Asia, Winamax in parts of Europe and GG in Asia. The next most popular room accessible in Canada is PartyPoker with about 12 percent of PokerStars' traffic. The number fluctuates but since Black Friday, PokerStars has been destroying the competition.

Which brings us to the real point of today's post: is The Stars Group, owner of PokerStars, worth your money?

Well, let's ask ourselves a few questions:

Is it immune to competition?
No. In fact, you could probably set up your own poker room right now. But for whatever reason, players love PokerStars.

Does it have good underlying ratios?
No, not really. The price-to-sales and price-to-cash-flow numbers are okay. It's hard to get excited about a price to book of 5-to-1. It has lots of debt.

Does it pay a dividend?
No, it doesn't. And paying a dividend is one of my core criteria. It might not be one of yours though.

What's a fair price?
I have no idea. As a starting point I would consider it near its 52-week low. It's not there right now, although it did fall 10 percent today.

What's the big picture?
The big picture is that PokerStars has no real competition at present; that people gamble and will continue to gamble; and that the United States is slowly re-opening its doors to (fully taxed) online poker, but doing it on a state-by-state basis. PokerStars is back in New Jersey, for example. But only New Jersey.

I'm not investing anything now but will continue to keep an eye on developments.

Not buying: Torstar

Estimated reading time: 74 seconds

I want to like Torstar. It has all of the traditional value markings (low p/b, p/s, no debt, etc) but is probably quicksand for your money. 

In my younger days I spent time as a newspaper reporter. I've seen the value of good journalism first-hand. But even before the internet took completely over (early 2000s), I remember wondering how tuned in the public was to what we were doing. Many of the publications I worked for were free, but I still saw overflowing newsboxes all over the city. My friends, aside from the working journalists, did not seem to know or care what was happening in the news. Being a newspaper reporter 15 years ago didn't carry much stroke.

Now I'm not sure if it carries any.

Torstar's flagship publication, the Toronto Star, has had some famous reporters. And it is, somewhat ironically, Torstar's traditional media assets that are keeping it in the game. Its digital investments have flopped badly.

What's more, they're nerfing Torstar by re-adding a paywall. Not only are paywalls dumb - they are exceedingly easy to get around. I empathize with the need to keep revenues coming in but a paywall seems like an old, failed solution to me. I'm not sure what would be better - using Snapchat so your paper vaporized after a while? 

I have no idea how to fix newspapers but restricting access to content that people are only semi-interested in isn't going to do you any favours. Remember, interest was waning even in the bad old days. 

I truly hope I'm wrong about this one but I would not invest one nickel in Torstar at this time.

New buy: Quarterhill

Estimated reading time: 71 seconds

Quarterhill is having a tough time. They are trying to diversify out of their primary patent trolling business and into the internet of things. Companies diversifying into areas they have no history in is a huge flag and not something I would normally consider. The market feels the same way as the stock treads near its all-time low.

For a value investor it has a number of things going for it though:

• A tiny sliver of debt
• Lots of cash
• Price to book of 0.5
• Price to sales of about 1
• Price to cash flow under 2.5
• Increasing insider ownership 
• A dividend of about 3.5 percent 

That last bullet is important to me. I don't invest in companies that don't pay a dividend for a couple of reasons. First, a dividend usually means that a company is in a position to return cash to shareholders. Second, and more important to me, is that it shows that a company is returning cash to shareholders. It's well and good to say that you want to but it's another thing to actually do it.

I have no idea how QTRH will perform over the next year, but with the dividend I'm happy to wait it out.

Tbe price of the stock ($1.45 entry point) is a bit of a nuisance because of the commissions that Interactive Brokers charges to buy large quantities of shares. I'm going to try to beat them at their own game and purchase blocks of shares over the next several months so that the purchases count against the $10 USD monthly minimum charge. QTRH is about 0.5% of my portfolio now and I'm aiming for about 2 percent by the end of 2018.

QTRH reports on August 9 and I haven't found many reports suggesting an earnings beat. I'm actually hoping it falls because I don't like averaging up.

My price target is about $2.50. Unlike CNR (my favourite stock), I don't plan on holding QTRH forever.

Canadian National Railway

Estimated reading time: 54 seconds

Canadian National Railway is my favourite stock. It is not an old-school value stock, which makes it a contradictory thing to write about. It has something that nearly no other stock in Canada has though: a moat.

The term moat is bandied about in investment circles carelessly. Analysts like to describe the levels of moats that they think certain companies have: wide moat, narrow moat, etc. I do not agree with this.

In the same way that something is unique or isn't (sorta unique doesn't exist!), I believe stocks have moats or they don't. The invaders and their horses will drown on the attack, or they won't.

In my view there are only two companies with moats in Canada, and they are both in the same industry. Together, CNR and CP have a duopoly on the rail business. No one is building a new railroad. I can't think of any other companies in the country that are so protected from competition.

Because of their duopoly, traditional value analysis goes out the window. I do not care about the price-to-book, price-to-sales or price-to-cash-flow ratios of either company.

In terms of which to invest in, you could  easily choose both. I've never owned CP myself, primarily because of its dividend policy. I like dividends. The fact that CNR has more market share is only icing on the cake.

I wouldn't buy either one at current levels, though I would add to CNR in the double digits. CP - below $200? It would have to be seriously lagging CNR in any case, and that is not true today.