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.