by Travis Johnson, Stock Gumshoe | April 26, 2019 5:19 pm
Happy weekend, campers!
Here’s a good quick read for you to start the weekend from Vitaliy Katsenelson, who is a smarter guy than me. It’s called Want to Be a Better Investor? Stop Staring at Your Portfolio… and it got me thinking a little bit. Here’s a little excerpt:
“You spend hundreds of hours on research, you read company financial reports; you talk to management, competitors, customers, suppliers. You build a financial model that looks years into the future to value a business, and also to predict what could kill it.
“If after you’ve done all that, you still find yourself glued to the computer screen watching the price change tick by tick, you are basically giving credence to the idea that what a company is worth should be decided by algorithmic funds, the guy who reads charts but cannot even spell the name of your company, Joe the neighbor, and an ETF with the IQ of a Halloween pumpkin. (I don’t want to insult everyday pumpkins here.)
“In short, the less time you spend looking at your portfolio, the more rational you are going to be.”
Yes, probably the most dangerous thing you can do as an investor is watch your portfolio all day, every day. It leads to an almost compulsive need to do something and react to all of the news that flows around us every day… and, of course, that’s no good for anyone. Especially during earnings season.
But that’s a big part of the life I’ve chosen here, and not only do I get to obsess unhealthily about the Real Money Portfolio each day (it is, after all, my family’s actual money, funds that we’ve saved up over the years and that will be needed as the Little Gumshoes go to college and Mrs. Gumshoe and I think about retiring someday), but I have the privilege of writing about it for you. Which means that I have to figure out how to manage the pressure of not only investing that money and watching it rise and fall in value each day, but I also how to explain what I’m doing… and think, at least subconsciously, about whether or not these trades will make me look smart and wise and provide helpful information or insight for the Great Gumshoe Faithful.
Which is good, though sometimes painful — the discipline of having to write about and explain my investment decisions is probably good, the pain of having to explain my dumb decisions as well as my good ones is the price I pay for that. And the biggest risk to my portfolio, probably, is that I might be tempted to do something that I think makes me look smart to you even if it isn’t the right decision for the money that I plan to put to work over the next twenty or thirty years. But so it goes.
So… let’s talk about what happened in the Real Money Portfolio this week. We’ve got some buying and selling to explain, as well as some news from a few portfolio companies to share and a couple questions from readers to answer.
A big chunk of my Starbucks (SBUX) position was called away today, I had sold covered calls on about 75% of the position and that’s now reflected in a sale in the Real Money Portfolio. The earnings beat was enough to keep the shares elevated above $74 (though not by much, and it was not a blowout or a shocker — though they did raise their estimate for annual earnings by about 1.5%, to $2.77 per share). I’ll continue to hold the rest and will likely either sell some puts on SBUX or buy back into a larger position at some point if we get a dip in the valuation, but over $75 I think we’ve been pushing a little too much SBUX optimism here (a forward PE of 25-30 for 10% earnings growth). We’ll see how it goes… I prefer not to sell dividend growers, and dividend growth potential is one of the hugely compelling reasons I bought Starbucks last year, but I can’t complain too much about a 40% gain in nine months from a large cap company.
Xilinx (XLNX) is a stock I “missed” the last time it surged. It was teased by a newsletter a couple years ago as a high-potential stock for artificial intelligence, and I was wavering in my opinion and didn’t buy it. This week, with a big drop on an earnings miss, I picked up a few shares (it’s now roughly a 0.75% position in the portfolio).
It might not be done going down, of course — it dipped further below my cost basis alomst immediately and this is a stock that, much like NVIDIA a couple years ago, took off almost out of nowhere and doubled in a year, driven by performance that sped past analyst estimates and enthusiasm because of the connection to several hot “stories” in tech world (AI, 5G, etc.). The 15% drop after earnings only brought the shares back down to where they were a couple months ago. It’s still an expensive and momentum-driven stock, trading at 10X sales and with a PE ratio around 40 (27 if you use the 2021 estimates). I’ll be watching the stop loss level of about $95.
Sentiment has shifted pretty abruptly here, with a couple analyst downgrades, so I’m not nailing my thesis to the church door here (every investment needs a Martin Luther reference, right?)… just taking a small nibble on a company that, while richly valued, still presents a pretty compelling growth opportunity.
Here’s the narrative for Xilinx: They invented the field programmable gate array (FPGA) a few decades ago, which is basically a customizable microchip that programmers can tinker with and change for new applications or changing needs, even after it’s already installed in a device (whether that’s a router or a car or whatever). It costs a lot more than specifically designed and mass-produced microchips for precise applications, but it is flexible and has turned out to be a hugely valuable tool for new industries. When cell phone networks went from 3G to 4G, for example, the optimal chipsets weren’t finalized and FPGAs were a good choice to get products developed fast, before new application-specific chips (ASICs) could be developed and mass produced.
So as I understand it, the story has been that Xilinx’s products are good for prototyping and new ideas and for some complex tasks, but that they often get supplanted by ASICs as soon as new advances become standardized and the chips can be commoditized. That’s still the prevailing narrative, but it could be that 5G and artificial intelligence (AI) are changing that a little bit… and that’s why XLNX has been surging over the past couple years.
Will it continue? That’s an open question, but I think there is a decent chance that Xilinx could become a much larger player over the next few years. 5G is far more complex than 4G and will require more flexible silicon to handle all the different radio wavelengths and react to real-world testing that’s going on right now, and will likely continue for the next year or two… and AI is all about learning and responding to that learning, and is still in its very early stages with lots of customization being demanded by developers, so the flexibility of FPGA’s is likely to remain in high demand… and, like NVIDIA (a big rival in several of their end markets, though with an entirely different technology), Xilinx is trying to build on its “platform” as they marshal an army of thousands of developers who are trained in its ecosystem and building products dependent on its technology, particularly in AI.
There’s major risk beyond the rich valuation, mostly because the semiconductor industry is hyper-competitive and, in particular, because Xilinx is pretty overwhelmingly dependent on big data center customers for its revenue, and we did see a drumbeat of “slowing down a little for now” in data center capex as Microsoft, Amazon and Intel reported this week. Xilinx is mostly selling into data centers right now, with big tech companies appreciating the flexible and power-efficient chips, but we’ve also seen some hiccups among data center suppliers in the past year or so as fears of overbuilding or price pressures hit the shares of some companies. That hit Intel (INTC) hard today too, for example.
And while the narrative is still there for 5G to be a big and enduring demand driver for semiconductors, and for XLNX specifically, it’s also likely that some of their 5G business will erode over time as ASICs are developed that compete with XLNX’s customizable silicon. The summary from Cowen’s analyst gives a pretty quick idea of what the “new” consensus is after earnings:
“Cowen lowers their XLNX tgt to $120 from $130. Firm notes F’4Q19 were slightly above consensus as benefits from share gains & 5G builds continue. Though above consensus, with shares up 66% YTD, they believe numbers failed to meet lofty expectations following a string of significant beat/raises. Simultaneous GM weakness and recasting of revenue raise questions the analyst day will need to answer along with 5G ASIC potential.”
But really, the company’s performance in the first quarter was fine, and the projections for this year were increased… it’s mostly just a valuation question after the stock surged so dramatically in the past few months, and no one wants to get burned as we roll up to Xilinx’s big analyst day presentation next month, when they will provide more detailed guidance. The big questions seem to be whether the spending cycle with 5G will be stronger and longer than it was with 4G, as seems likely to me but is certainly not guaranteed, and whether there is weakness in their data center business that extends beyond that first quarter… analysts were not surprised by the general weakness in the automotive and industrial markets, which are smaller but more stable, so those don’t seem to be driving the story at the moment.
It wouldn’t be all that surprising to see XLNX either double or halve from here in the next year, but I think it’s worth beginning with a small position on this dip as I continue my research and wait to see how they line things up at their analyst day on May 14. Maybe it’s finally time for the flexible FPGAs to really shine in the mainstream.
So far, Goldman, Needham and Cowen have all downgraded the shares to “hold” and cut their price targets to the low $120s (from the $130s), so there’s no reason to expect the shares to bounce back immediately unless there’s a real change to the “story” that develops quickly… though at least one analyst did reportedly jump in with an upgrade (Credit Suisse, to “buy” with a $135 target). I imagine it will be flat to weak going into the analyst day, but we’ll see, the weaker Intel earnings report certainly shook semiconductor investors this week and much rides on sentiment and that widespread expectation that the second half of the year will be better than the first.
As I briefly noted in my Trade Note yesterday that was primarily about Nokia and Xilinx, I did also finally close out my Intel (INTC) call option position going into earnings, and I took partial profits on my Qualcomm (QCOM) options.
Those sales were made just because they had large embedded profits that would disappear if the market drops by 10% this year… and since they’re January 2020 options, the time value will start to erode in the coming months.
That doesn’t mean I knew Intel was going to have a disappointing quarter and drop today, just that I thought the chances of it surging to the mid-$60s by January were low enough that I didn’t want to risk this capital… particularly since they were reporting this week and ran up into the quarter following the Qualcomm news, and will also see an analyst day in a couple weeks that could change expectations markedly.
This kind of churning around of 5-10% in the share price wouldn’t be a big deal for an equity position, and if I held the stock here I would have just let it ride, but a 3% move in the stock here could lead to a 50% drop in my option position quite easily, and given the large size of Intel the odds of in-the-money options participating particularly lustily in a surge from here seemed low to me. We’ll see, that might end up being a mistake in the end, but I’ve no regrets at taking a 1,000% gain finally off the table.
And likewise, after Qualcomm’s huge surge I didn’t want to risk all of that gain on the possibility that QCOM will surge above $100 by January. In the case of Intel, I sold down this option position in a few chunks over the past year and it’s now gone… in the case of Qualcomm, I sold enough this week to guarantee a solid profit on the whole position even if the balance goes to zero, which will make it easier to let the balance ride for a while longer while we see how the Qualcomm/Apple/5G story develops into the second half of 2019.
Those were small positions, like most of my options speculations, and they happened to work out very well, but it’s important to note that these are really gambling stakes in my portfolio — I do end up with a good number of 500% or 1,000%+ gains when things work out, but those are matched by long strings of 100% losses on the options that expire worthless, and since my overall exposure to this kind of options speculations is usually only about 1-2% of my equity portfolio, I’ll be able to sleep fine at night even if they all go to zero… which is absolutely within the realm of possibilities, particularly if this lovely bull market finally ends. To a large extent, I speculate on options to satisfy the (usually destructive) urge to speculate on specific short-term stories or ideas without causing any meaningful damage to the core of my portfolio — if you can resist the urge to gamble better than I can, good for you, options speculating is high risk and is likely, on average, to be a waste of time and money. Sure is fun, though, and more convenient than the closest blackjack table.
If you’re curious about how this all shakes out, with my large number of small-sized options and warrants speculations, I just went back and checked. Over the past couple years, the average gain on these derivatives (options and warrants) in my portfolio, including those that are currently still owned (most of which are in the red), is about 30%. About 25 of the 75 or so positions that are closed have expired worthless or nearly so, with losses of 100%, and about 10 have gained more than 500%… and if you take away the best couple positions that were relatively sizable and had 1,000%+ gains, that 30% average return quickly disappears. The total money at risk in options positions is very small as a percent of the portfolio, but there is much more churn than I have in my larger equity positions so the actual cash running through these options speculations is fairly big if you think of it cumulatively — about 20% of the total profit booked in the Real Money Portfolio over the past two years has been from derivatives, though, of course, most of the gains in my portfolio are not booked because I haven’t sold many large positions.
So while I do post the details of these options positions in the portfolio because I’ve promised to share most of what I’m doing with my portfolio, I do not encourage anyone to follow me specifically on these speculations.
And speaking of Nokia (NOK), I noted my add-on purchase yesterday as well. Nokia (NOK) had a rough quarter, missing on earnings and disappointing analysts by not upgrading their forecasts for the expected 5G rampup this year, and further disappointing with their commentary about competition and challenges in the early build of the 5G marketplace.
The quarter was expected to be bad, all of the 5G equipment companies have been telling investors to expect the real revenue impact to begin in the second half of 2019, it was just a little worse than expected. Guidance for both this year and next year is essentially unchanged, so they expect to earn 30 cents per share this year and 42 cents next year. The surprise loss in the first quarter (they lost a couple cents per share, versus an expectation that they would earn a few cents) seems to have been caused largely by the timing of some of their 5G contracts — they said that they had about $220 million of sales into North America 5G projects that they expected to realize in the first quarter but that are delayed “due to the evolving readiness of the 5G ecosystem,” which more than accounts for the shortfall of about $100 million on the revenue line. I don’t know whether those delays are due to customer indecision or slower investment, which might be the case for some who are waiting to see if the Huawei situation gets cleared up, or due to Nokia’s own challenges in delivering their initial wave of 5G-enabled equipment.
The stock was downgraded by Goldman last week, to sell, with the sentiment that consensus analyst estimates were too high and that they faced serious risks to their market share. So far that’s right, at least on the estimate side, though not dramatically so (their guidance is still within a penny or so of the analyst expectations, so analysts have not exactly gone out on a limb), and it’s too early to know what their market share will be in the future — but there is certainly risk, particularly because so many companies (Ericsson, Qualcomm, Samsung, Huawei, etc.) are trying to get built into 5G networks that there’s some price competition in the initial pilot projects. The fear, it seems, is a price war, particularly among Ericsson, Huawei, Nokia and Samsung, as the giants try to stake out (or keep) important customer relationships in this first wave of 5G — particularly because they know that successful early-stage installations will probably lead to much larger deals in the next couple years.
I don’t see a major problem here. At least, not a new problem. The stock got perilously close to hitting the stop loss trigger of $5.19 yesterday, though hasn’t gotten there yet, but I decided to look to add to this position at a better price, not to sell and cut my losses. Nokia should be well-positioned to maintain its global market share with 5G as the infrastructure buildout continues, and they’re rationally valued (the forward PE is now below 13) and pay a solid dividend (they’re expected to authorize a 22 cent dividend soon, which would now provide a dividend yield of slightly above 4%).
We didn’t get the hoped for “5G is gonna be Yuuuuge” forecast upgrade that some folks were talking about, particularly the newsletter pundits who have been betting (too aggressively) on Nokia driving 5G enthusiasm, so perhaps that’s scaring some people away, but the 5G infrastructure buildout is going to be a multi-year story and I still think Nokia is one of the lower-risk ways to play it. I’m adding today and lowering my cost basis a little bit.
If you want a more pessimistic take on the story, there was a good column in Bloomberg yesterday on the competitive challenges (and fears of a price war) that’s worth a quick read.
My judgement about Nokia being more appealing than Ericsson (ERIC) has, so far, been wrong, perhaps because Ericsson was in a little bit darker position before 5G or, as some analysts say, has a stronger position in the software side of the business. I own both (my NOK position is about 3X the size of my ERIC position), and I expect both to do well over the next few years, though Nokia’s valuation and dividend focus is still more compelling to me.
But the real story in 5G this week, of course, is Qualcomm (QCOM) settling with Apple and setting itself on a ludicrous price recovery, really reminding us of how much QCOM should have been the expected winner in 5G all along and how much of a drag that AAPL legal situation was on the share price.
So what does one do when one of the biggest companies in the world increases in value by $30 billion in one week? Well, we can first remind ourselves that this is not uncharted territory for Qualcomm — despite the tumult of the past couple years as they’ve seen management shakeups, the failed takeover of NXPI, IP/royalty issues in China and, most recently, the battle with Apple that was just resolved on the courthouse steps, this is a company that has seen its valuation range from $50 billion to $140 billion in just the past ten years.
It has also, however, seen some serious plateaus and declines in revenue in the past… and to some extent, it seems those plateaus have coincided with the transitions in cellular generations. They saw revenue drop from a peak in 2000 just as 3G cellular was becoming the norm, then again in 2009 as 4G was beginning to be released, and they saw a pretty long period of revenue growth as each cellular generation went mainstream — from 2002 to 2009 for 3G, then 2011 to 2015 for 4G. The past five years have seen a gradual revenue decline, but with Apple back in the fold now and one deep-pocketed competitor out of the game (Intel), will that turn around again and bring us a 5-10 year revenue ramp as QCOM sees increasing revenue from both 5G royalties and sales of its 5G enabled Snapdragon chipsets?
That’s my best guess, though much will likely depend on how things shake out with the companies who are likely to be its major chipset competitors in 5G, particularly Huawei and Samsung.
Qualcomm also did some massive share buybacks in both 2015 and 2018, so the share count is now back to where it was in 1999 — they used their huge cash hoard, generated through massive royalties on 3G and 4G phones, to buy back almost 30% of the company over the past five years (15% over just the past year), and this week is the first time in a long time that that decision looks brilliant (the buybacks were mostly in the high $60s and low $70s). We’re just starting to see the upgrades and improved forecasts that incorporate the resumed Apple business and the return of iPhone royalty payments… and we can’t go back in time and load up at $50 a share, so what should we do now that it’s in the mid-$80s? As always, the past won’t tell us what the stock should do — for that we have to depend on the future.
I increased my position in Qualcomm both in January and back in October (when I first really started focusing on building 5G exposure in the portfolio), but, as I have noted a few times, I also limited the size of my position because of the risk of a catastrophic legal outcome in their disputes with either Apple or the FTC. I’m no longer worried about that risk, and if I were going in today Qualcomm would be my first purchase for 5G exposure — the dividend yield is still decent at almost 3%, they still have plenty of cash, and now the near-term cash flow situation is a lot less frightening and earnings growth should pick up quickly. Analysts estimate that earnings of about $4 a share this year will increase by more than 50% by 2021, which is remarkable for a large company, and that’s before we get real specific guidance from Qualcomm on their current financial situation (their first quarter earnings will be out next week, on May 1).
And though I sold some of my Qualcomm Jan 2020 call options, reflecting the risk of near-term price fluctuations, I do want to own more Qualcomm shares. The story could change noticeably next week, particularly because Apple reports on Tuesday and Qualcomm on Wednesday, but I took some of those call option profits and added a little bit to my equity position in QCOM shares today as well. I think of it this way: the little that was announced when they settled the legal dispute was that the Apple relationship is now expected to add another $2 a share to earnings… the stock jumped by $30, so you’re effectively paying a PE of 15 on that additional earnings bump. It’s hard to buy a stock that has risen, but that doesn’t mean Qualcomm is overvalued. I wouldn’t go crazy here, things could change a lot on Wednesday and we could easily see the stock price 15% lower or higher following earnings, but buying a little more of the now de-risked 5G handset leader and the best patent portfolio at a forward PE of 17 is not bad. I’ll let you know if my opinion changes after the earnings report… and yes, we should be seeing Qualcomm’s dividend announcement for this quarter soon as well, and I would expect the dividend to grow by at least 8-10% (it’s currently 62 cents/quarter). QCOM is now just under a 2% position in the portfolio.
Hershey (HSY) had a nice “beat” this quarter, thanks partly to a late Easter (Easter moves around, sometimes it’s in the first quarter but this year it was well into the second quarter — which meant there was more time to stock up on candy before the holiday), and helped somewhat by strength in their Pirate’s Booty and Skinny Pop businesses, though it’s not the kind of stock I’m ever likely to want to “chase” as it rises, so it remains a small position.
They have bucked the negative trend in packaged foods, mostly because of innovation in the candy aisle and aggressive expansion in the snack food aisle, and I’m particularly excited about the dark chocolate mint Kit-Kats coming later this year… but Hershey is not ever likely to be a nosebleed growth stock, they get revenue growth of 2-3% a year and turn that into earnings growth of 5-10% by controlling costs. It’s a solid dividend grower that’s trading at a premium to the market (though not as huge a premium as they did years ago) and is doing well, no real shocker other than that their earnings are a little better than analysts had expected.
If I were focused on the short term, I’d probably take some profits on Hershey here… but, as I noted with Starbucks, I’m generally reluctant to sell solid dividend-growth compounding companies just because they get a little expensive, and Hershey’s business should be pretty resilient if the past 100 years of history are any indication, and they’re still generating tons of cash and still innovating to keep the future demand growing (unlike, say, Kraft Heinz), so I will keep holding.
Zayo (ZAYO) has been causing some market jitters as we wait to see if their negotiations with a private equity consortium bear any fruit in the form of a takeover agreement. The chatter for several weeks now has been that they are negotiating with a single group of buyers, and that the takeover, if it happens, will likely be in the $34-38 range… but that’s just chatter and gossip and could be leaked by folks involved to sway things one way or the other, we don’t really know.
In situations like this, analysts and investors will do just about anything they can to read the tea leaves, and from what I can tell the latest weakness has been caused by conferences — we started earlier in the week with schedule release for the Nareit investor conference in early June, and Zayo is one of the companies scheduled to do an individual company presentation. So theoretically, if you’re obsessing over tea leaves, that means they’re going forward with the REIT conversion that they have talked about instead of just getting taken over.
That seems like a silly thing to worry about… if they’re going to go through with REIT conversion, they should be talking to REIT investors to get them interested. That just makes sense. If they’re certain of a takeover, sure, cancel the presentation… but a takeover is never certain until the deal is agreed to and the shareholders vote, you don’t stop operating the business just because your executives are also involved in possibly selling the business.
And then today, word came that they canceled their presentation at the Citi Data Points Conference on May 10… which maybe is because there will be news, but just as likely could be because they’re scheduled to release their earnings quarter the day before.
So I’m not reading tea leaves anymore on this one, that brings too many pointless headaches… I’ll just wait. I did a little speculating on the deal happening faster than usual, selling off some of those gains (and losing on the options speculation I did with a piece of my gains), so now I’m just sitting with my position and waiting to see whether we get mid-$30s next week, or mid-$30s in a year or two, or if I’m just wrong and the stock never recovers. I judge it as still being likely that I’ll get another 10%+ return out of this position, and given the cheapness of money and the drive to build or buy fiber networks for 5G backhaul I think the takeover is more likely than the REIT conversion, but nothing, of course, is guaranteed. That earnings date is now May 9, about two weeks away, so presumably they’d like to be able to say something definitive about the takeover negotiations either before or during the earnings call, but if there’s nothing to say they don’t have to.
CoreSite Realty (COR) reported this week, too — still a well-run and slowly growing data center REIT, though they disappointed with this quarterly update (funds from operations were a little light, and their guidance remains right in line with analyst estimates for the year). They are pitching themselves as a “keep it going in 2019, then start growing again in 2020” story, and that may well be how it ends up — the focus this year is on financing and building out capacity so that they have more data center space to sell going into next year, with expansions now going on in Boston, Chicago, New York, Virginia and Santa Clara, but, of course, we don’t know what the pricing environment will be like or how the competitive landscape will look.
I cut down on my COR position over a year ago because of the fact that the crazy phase of dividend growth was over, and it seems that was right — they’re on pace to be growing the dividend at 8-10% a year instead of the 30-50% that we enjoyed for several years — but the stock has held up well despite that… so now the dividend yield is catching up, and COR has a 4% dividend and the chance for a better growth year next year than this year. That’s fine for a hold, and I’ll keep it in my portfolio and let those dividends keep compounding.
I’d like to see the shares lower before considering a buy, but this is not a crazy price — if they keep raising the dividend at 8% a year, then the forward yield will be 4.3% or so… I’d prefer to be able to count on 5% dividends for a buy here given the likelihood that they’ll do some more equity fundraising, which would now be about $95, assuming they have a decent dividend raise announcement next month as they have for the past couple years, but it’s a good company and interest rate expectations have come down dramatically and made 4% yields more impressive of late, so I won’t try to talk you out of it.
And in one final transaction note to share, I also closed out most of my long/short position in Mtech Acquisition (MTEC). I had a long position in the warrants, hedged against a short position in the underlying stock of this SPAC that is in the process of merging with a marijuana tech business into what they will eventually call Akerna.
So why sell? Mostly just because of risk. I like SPACs as a short, particularly when they merge with financially unpromising companies like we might have here, though it’s always tough to tell with an early stage marijuana company since the risk of the shares becoming wildly overvalued is high, but given the delays in the shareholder vote and the updates to the prospectus I’m guessing we might end up with a lot of SPAC holders redeeming their shares, which could create a low-liquidity problem after the conversion is over and cause the shares to spike if investors get interested in the “story” (as we saw with Phunware, for example). That’s fine if you hold the warrants, or if you can short the shares after the spike, as I did with PHUN, but if you’re short going into the spike and the shares aren’t registered yet (meaning the warrants can’t be exercised, so they don’t protect you), then the risk is that you could have your short position called at an inopportune time.
So I’ll let discretion be the better part of valor here, particularly because the combined position is profitable now, and cover the short and sell most of my warrants. I’ll hold on to a smaller warrant position that I might use as a hedge against a short position after the deal is approved (or profit from if the stock soars, as is certainly not impossible), we’ll see how it shakes out. My sentiment about Akerna is still pretty skeptical, but you never know what will happen with these small SPAC conversions and my sentiment is not strong enough that I want to get stuck with a big short-covering bill.
So I guess I should be on the hunt for short positions — shorting Tesla (TSLA) was a huge temptation this week, and would have been a good move after earnings, at least so far, but I’ve thought that of Tesla half a dozen times in the past year and would have been burned each time, so I’ll not rush into shorting Elon Musk’s baby, but maybe something else that looks crazily overvalued or fraudulent will come up… fingers crossed. And feel free to throw your ideas on the pile with a comment below.
Altius Minerals (ALS.TO, ATUSF) announced their quarterly royalty revenue numbers, which surged over last year as they added new projects and potash and base metal prices improved. They also updated the guidance, royalty revenue of C$77-81 million is expected now for this year, which would pretty much be all “attributable royalty revenue” (some of that is actually owned by subsidiaries, some in the form of dividends, but it eventually passes through to the parent).
That means Altius is currently trading at about 7.5X expected royalty revenue, ignoring their prospect generation portfolio and their other smaller investments and joint ventures that are currently not generating cash (or costing much). That’s comparable to the only other real base-metals royalty company, Anglo Pacific, though I think Altius is far less dependent on a single royalty (Kestrel for Anglo Pacific is more than half of their revenue) and is much more diversified, and it’s dramatically cheaper than the 12-20X revenue valuations of the precious metals (mostly gold) royalty companies (RGLD, FNV, SAND, WPM, etc.)
I also got a question from a reader about Altius this week…
“Travis, since you own Altius how much quarterly royalty income does it produce per share. Dan Ferris claims you receive .04 cents per quarter royalty payment or 16 percent per year. Is it the same as a dividend? What is your experience?”
Dan Ferris over at Stansberry has been a huge Altius booster for years, and is the reason I first learned about the stock (it’s been in my portfolio, mostly as a drag on returns, for more than 10 years now — and I still like it, though I got a little too optimistic and overpaid for some of my position in 2011 and 2014).
On this question, I think there might be confusion over “cents” and “percent,” though I haven’t heard Ferris talk about Altius recently. Altius does pay a dividend, it is four cents per quarter, and they’ve raised it a few times (though not since late 2017), so shareholders do currently get 16 cents per share in dividends each year, though that’s nowhere near a 16% yield. It’s more like a 1.2% yield at current prices.
Altius’ royalty revenue does not flow directly to shareholders — some of it covers overhead, some covers taxes, some pays for their prospect generation or is rolled over into acquiring new royalties or projects, or is used to pay down debt, and, yes, some of it pays the dividends. Altius has an enterprise value (market cap plus net debt) of about C$700 million, and hopes to generate about C$79 million in revenue, so while some of their royalties certainly do pull in 16% a year or better returns on their investment, that’s far from being the return that the company as a whole earns on the capital it has raised, earned and deployed over the years. I’m happy owning Altius, and think it’s still a solid buy here for long-term exposure to the commodity cycle, but it will probably continue to underperform unless we get another strong bull market for base metals and commodities like copper, potash, coal, and iron ore
And since we’re in the commodity space now, I got this question too:
“So much ado about largoRes but shares keep falling….
Are you still accumulating LargoRes?.
Thanks for the great work and your fantastic site!”
Well, it sure hasn’t been “fantastic” when it comes to my Largo Resources (LGO.TO, LGORF) — that one’s pretty deep in the red, though I did add to it just four weeks ago (at prices above where it is now).
Largo is a one-asset miner, and pretty much the only “pure play” vanadium stock around. And they warned this week that lower vanadium prices will hurt their first quarter results, so the stock dipped further still. They are now expecting to break even this quarter instead of earning a profit, which was a surprise and is primarily due to their offtake agreement with Glencore — they recognize revenue when they deliver to Glencore, but then they have to adjust that for the actual prices that Glencore gets when the final sale is made to the end customer, and with prices dropping sharply in the first quarter (primarily because of slower demand from China, I gather, though we don’t really know).
That’s frustrating, to be sure, but we’ll learn more when they report on May 14 and I don’t see a reason to change my long-term expectation that vanadium demand will stay high and eventually lead to a steadier and higher price, and that Largo will begin to see some more benefit from that as the Glencore deal rolls off and they make a new offtake or commercial sales agreement with someone (or handle sales themselves). So I’m holding into earnings and will see what happens, though as with any other commodity stock, particularly those dependent on a single commodity or single mine, or on Chinese demand, the story can change quickly due to micro factors (conditions and production at that mine) or macro (sentiment about economic growth or Chinese trade negotiations, for example). The post I shared when I added to my position at the end of March is here if you’d like more of my thinking, wrong though it has been so far.
And, still in commodity-land, one more question…
“In your writing this March about Dan Ferris and Sprott you wrote, ‘Well, this is where I need to tell you that I now own a little bit of Sprott.’ I’m considering purchasing Sprott too, but was weighing the pros and cons of purchasing on the Toronto Exchange “SII” vs. OTC “SPOXF”. I’m a US citizen and probably would use one of my IRA’s to hold the position. May I ask which Exchange do you hold your position, and why? Thanks in advance for your thoughts.”
The short answer is, “it doesn’t really matter.” In most cases it’s better to own a stock on its home exchange, since that’s where the price is really set (because that’s where most of the trading volume is)… and for foreign stocks that pay a meaningful dividend, like Sprott, you generally want to think about holding them in taxable accounts so that you can claim a tax credit for the foreign tax paid on the dividend tax withheld by the home country (my understanding is that you can’t claim that credit if you’re using a tax-deferred account, even though the foreign tax was paid… I’m not a tax expert, so don’t rely on my word).
For Canada, though, it’s a little simpler — Canada doesn’t withhold dividend taxes from US retirement accounts, though it does withhold 15% from taxable accounts, so you don’t have that lost tax revenue to worry about (as long as you file that foreign tax credit on your return to cover the dividend taxes withheld). So you don’t have to avoid IRAs for Canadian dividend-paying stocks like you should for stocks from many other countries.
And ties between US and Canadian financial markets are so tight and easy to manage that there’s no real price differential between the two (that’s both because most US investment brokers also deal directly in Canada, at least for the Toronto exchanges, and because the markets are open at the same time — since Toronto and NY have the same open hours, your order of a US OTC Canadian stock can easily be filled by your broker just buying it in Canada for you).
So it comes down to fees and liquidity. If you’re a small investors and intend to hold for the long term, liquidity is less of an issue, so figure out whether your broker would charge you more to buy OTC in the US (many big US retirement account companies like Fidelity can charge $50 fees for trades in foreign stocks on top of the regular commission, while a taxable account through someone like Interactive Brokers would probably incur a commission for a trade in Canada of less than $10.
The company itself is the same, whether you buy SII or SPOXF you’re getting the same share of the same firm. I’d still generally lean toward buying direct on the home exchange when you can, since you never know when rules might change or OTC shares might face a liquidity drought in a crisis (I think that’s very unlikely given the close connection between Toronto and OTC US shares, but unlikely is not the same as impossible), but in reality, for most small investors who don’t intend to be jackrabbit traders, you should be fine just buying where your fees and commissions are lowest.
And that’s all for me, folks, feel free to post your questions or comments below, and have a great weekend — I’ll be back with more teaser solutions and blatheration next week.
Disclosure: I own equity or call option positions on most of the companies mentioned above, as noted in the Real Money Portfolio. I will not trade in any stock covered for at least three days after publication, per Stock Gumshoe’s trading rules.
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