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Nature, Sports, & Money: Cycles of Life.

Tag: stocks

Blackberry Valuation Study: What is $BBRY worth?


I love the keyboard and email!

Update (25-Sept-2013): Fairfax came in with a sweetheart $9 bid for BBRY not 4 trading hours after they announced horrible results and material staff reduction as part of broad restructuring.  As suggested below, BBRY is worth $7-9. Thanks to Prem Watsa et al for validating the following fundamental analysis.


Having lived in Southern Ontario my entire life, and worked briefly near Waterloo-area Blackberry (formerly RIM) headquarters I am very frequently asked my opinion on the stock price.  Mostly I tell people to ignore it, and sell if they own, but more on that later.

Throughout the agonizing drop from pinnacle of the mobile phone pantheon BBRY has always been top of mind.  The goal of this post is to KISS and answer the question in the title: what is the stock worth?

During early 2010 the nascent post-GFC recovery pushed shares of BBRY upwards from ~$40 bottom to reach $60-80.  After this run I started advocating employees of RIM, and other holders of the shares, divest themselves in favour of the iPhone-producing Apple $AAPL (for the risk takers) or cash (for those less apt to stay in the market).  Since then, as we all know, RIM dumped their founders Jim & Jim, overhauled their branding, and oh yea, watched their stock price drop ceaselessly from $80 to $10.

What is the true value of BBRY shares?

To find the rock-bottom valuation we’ll use tangible book value (TBV).  This strips out many assumptions that go into valuing a business as a going concern by assuming the worst: BBRY will immediately enter bankruptcy, never sell another device, or collect another nickel from subscribers (which is not going to happen anytime soon).

Using this hypothetical scenario gives us the most basic and reliable valuation.  By adding together the Co’s real assets and subtracting their long-term debt we find BBRY tangible book value (TBV) is roughly $7.

To find this value we add two their 2 core assets: cash + real estate ($5.86 + $1.31 = $7.17) and then subtract LT debt ($0) to arrive at TBV of $7.17.  This is the theoretical minimum price at which shares should trade around.

As a value investor, it would thus be prudent to buy BBRY if and only if it trades below $6, which will likely to occur IMO sometime in tax-loss season (Nov/Dec 2013).

What about Book Value?

Plain old book value (BV) incorporates some assumptions into our valuation, specifically intangible assets and cash flows.  The resultant mixture of data muddies the waters as the value of these elements is less clear and reliable.  Adding in these murky elements has ramification on the range of potential valuations and should evoke more scrupulous analysis of the figures below.

Why Bother?

Some investors would stop here and proclaim that value is only found below $6 per share and that anything higher is rip off since BBRY is a complete disaster and they have no chance to survive since their sales are about to vapourize.  Maybe so.  However valuing BBRY as going concern is only fair given they have millions of customers which generate +$3 Billion in sales every 3 months!  It’s not the struggling coffee shop in Miramichi, New Brunswick but a massive global enterprise.

Taking a fair outlook on their future business prospects by assuming a significant, but not catastrophic, decline in operational cash flow will boost the value per share.  Additionally,  we must add the other intangible assets like patents & intellectual property to round out our KISS study.

Starting with the latter, intellectual property & patents where some analysts have suggested BBRY owns $4.00 per share worth of assets.  Adding $4 to TBV makes a potential stock price of $10-$11 seem reasonable.  However, over the course of the past 6 weeks shares have traded for ~$9 (ignoring the huge leg up over last few days).  This is our first of 2 example of the market doubting BBRY through ‘discounting’.  By discounting their intangible assets (and cash flow, as well see below), the market doesn’t view the patents value as $4, but more like $9-$7 (Stock Price -TBV) = $2.

You might ask, “Why is the market doubting the patent values and not the cash or RE value?” and the answer is simple: assets which are easy to value (cash & RE) are discounted LESS than that which is complex or valued less reliably (patents etc).  We can be fairly confident that TBV is more static and reliable than BV for this reason.

Furthermore, the market is fully discounting cash flow that BBRY generates. Analysts from CIBC modelling their cash flows over the next 5 years and suggest — even with considerable drop off in sales and subscribers — BBRY generates $2 bil/year, which adds $10 of value to each share.  The market, however, is calling BS and is valuing BBRY operations at $0.  Using these optimistic assumptions, some firms have $20 price targets.

This is a mighty kick in the groin to a former titan of the mobile industry, but investors might view this as a sign that market is wrong and has undervalued BBRY since you can buy the assets of the business and get the cash flow for free.

Note the previous recommendation of staying away until BBRY sells for around $6 still hold to ensure margin of safety and reasonable rate of return to compensate for risk.  Will it ever regain former glory?  No, at least this author is highly doubtful.  Will it reach $6 per share or less?  Yes, I believe it will before Xmas this year, but what the hell do I know?

So, what do you think $BBRY is worth?


Equity Style Variance As Tool for Tactical Asset Allocation


There is plenty to observe in this chart. The primary thesis is summarized in the top right hand side: does buying by value investors (relative to all stock investors) indicate a high likelihood of stocks outperforming bonds? Over the past three years there is some evidence that eager buyers of value stocks signal bottoming in broader stock market, thus sell bonds, buy stocks.

Bottom Fishing: Comstock Resources a value pick? $CRK

*Originally published on 7 Feb 2013, for an update on 16 Mar 2013 please click here.

The idea behind this trade is buying an out-of-favour security with a reasonable probability of turning their string of quarterly EPS losses into gains in 2013.

Comstock Resources is an oil and gas company in the energy-production friendly US jurisdiction with all of their assets on-shore.  The stock traded around $30 for most of past 6-7 years despite a brief rip to ~$90 during 2008 oil rally.  Technically it is setting up a nice pattern for a long entry with well-defined buy/stop loss levels.


The fundamental case has both pro’s and con’s.  Asset quality is average-to-above average, but cash flow has been negative and they are indebted heavily.  If they can get their operations in order the consensus sees profits in 2013 which could be a major upside catalyst.  

Disclaimer: No position in $CRK.  This is not investment advice.  Do your own research and consult with a qualified investment professional before purchasing any security.  The purpose of this post is to encourage discussion about the merits of bottom fishing and/or value investing and is for educational purposes only.  


FROM MOVING SCRAP TO PUSHING PAPER: What is the best fund option for my investments? 


 The trend within the financial planning industry is towards greater adoption and usage of exchange-traded funds (ETF).  Many advisors and investors have warmed up to their low costs, simple diversification, and potential tax advantages.  While an ETF does not always serve as a direct substitute for an individual stock, bond, or actively managed mutual fund, it has rightfully earned a place in the portfolio of many savvy investors.


Our dynamic economy changes by the minute with each industry moving at different speeds.  The smartest firms compete the hardest often end up with a game-changing innovation that forces a paradigm shift unto the world.  The laggards bemoan their struggles caused by a reluctance to venture into new and previously undiscovered territory while the leaders stride ahead to confidently face the next challenge.

The financial sector has taken due pressure from regulators, shareholders and others following the financial crisis for creating and selling the ‘Financial Weapons of Mass Destruction’- derivatives!  Insiders know these securities themselves are not inherently evil, but that didn’t stop the media from running with a good story.  It’s a shame that as the ETF industry was reaching critical mass in the United States their housing bubble was bursting.  It overshadowed the remarkable success of ETFs and the dynamism between investors and their wealth.  When they put cash back to work following the Great Financial Crisis, investors chose ETFs as the vehicle with stunning abundance. 

In the US, ETF inflows from 2000-2007 totaled over $500 Billion USD, raising assets under management (AUM) from $80 Billion USD to nearly $600 Billion USD.  In that period the total number of ETFs listed in the US went from 81 to over 600.  After a slight lull in 2008 & 2009, growth of total AUM and number of ETF offerings shot up over 50%, now boasting 1000+ different vehicles stewarding well over $1 Trillion USD in capital. Image

Globally the story is the same for over 200 ETF providers on 54 exchanges worldwide: in the first half of 2012 ETF assets have increased by 11% from US$1.35 Trillion USD to $1.5 Trillion. In early 2013 ETP’s surpassed $2 Trillion in AUM.  This capital flow is indicative of numerous trends in the markets, many of which will be discussed here.

First a comparison of two very familiar businesses: Canadian investment funds and internal-combustion engine automobiles.  Astonishingly neither has changed much from their original incarnation.  Nips and tucks around the edges perhaps, but the obvious limitations of mutual funds & automobiles put them at risk.


Over a century has passed since a near-deaf Thomas Edison shouted in a young Henry Fords’ ear, “Yes, that hydrocarbon, an excellent fuel!” and our cars perilously burn the same noxious petroleum.  The automobile industries’ absence of innovation has left them some vulnerable to slumping sales, government bailouts and public acrimony.  Readers of this passage familiar with the financial industry will immediately see the paralleled plight.

Both the Canadian fund management and automobile industries manage titanic amounts of financial and intellectual capital.  Heavy investment in existing operations can prohibit these goliaths from pivoting swiftly in response to changing market dynamics as plants, parts and people too familiar with time-tested procedures operate comfortably numb to new ideas and competitive threats. 

However, as the likes of Tesla, T. Boone Pickens and others embrace the emerging trends in alternative fuels, so goes various ETF providers in relentless pursuit of alternative investments.  Spirited innovation and progress has brought investors a suite of ETF options that offer diversification and value-for-money in a time of dire need.

OH NO CANADA: Funds and Fees

Fees are a 100% ‘tax’ on your capital.  While it is accepted and understood that prudent investment management is worth paying for, clients should be mindful of how fees impact their returns.  Canada is a notorious jurisdiction for mutual funds fees.  Over the past decade competition has decreased average MERs, but it remains stubbornly north of 2% overall and lags behind all of developed economies. 

Savvy investors’ aversion to these prohibitive fees created a gap that ETFs are bespoke-tailored to fill. With meaningfully lower MER’s (ranging from less than 25bps to +80bps) ETFs can provide similar market exposure at markedly reduced costs.  A hypothetical investor with $100,000 stands to pocket $1500 tax-free in unpaid fees per annum (MF fee 200bps = $2000 per year vs ETF fee 50bps = $500 per year) by switching from mutual funds to ETFs. 

Intuitively we know unpaid fees are a benefit the growth of our savings.  This money remains invested and accrues interest & dividends adding significantly to long-term capital appreciation. However, the magnitude of this positive impact is far greater during periods of ultra-low interest rates as some bond instruments may yield less than the MER of the fund!  Starting off ‘in the hole’ leaves average investors little chance of positive absolute returns in difficult markets.

There is plenty of room to run for ETFs in Canada. The distribution of investable assets heavily favours mutual funds.  BMO estimated recently that only 5-7% of fund allocations are in ETFs.  The massive expansion possibilities for this market have banks and stand-alone ETF providers (now 7 in total, offering 200+ ETFs on TSX) jostling for market share in a burgeoning arena. The industry has exploding in popularity with AUM growth rates of 20% year-on-year over the past 5 years; few question that this trend will continue.


Another cost advantage arises when considering brokerage commissions on purchase and sale of ETFs vs. stocks.  If an investor seeks exposure to the Technology sector they may purchase dozens of different individual securities prior to achieving sufficient diversification.  An ETF tracking a similar basket, or index, of tech companies can be acquired with a single transaction and achieve instant diversification.  The simplicity and savings are driving factors in ETF adoption.


ImagePerhaps an unintended benefit of ETF adoption is their value as a tool for gauging market sentiment.  For example, comparing sector-specific ETFs against one another over time becomes a valuable tool.  By measuring the relative strength of these securities and reporting their activity to other investors many small boutique research firms have flourished.



Some are critical of ETFs going as far as to blame them for the flash crash.  Others, often precious metal fans, portray ETF providers as straw men who may or may not hold the underlying security in question.  Their effort to undermine ETF’s is largely misguided.  Like the mutual fund industry ETFs are heavily scrutinized by regulators and savvy investors.  As they approach $2 trillion in assets worldwide people are displaying their trust in this asset class — by buying ETF shares.

Investment management firms and financial institutions are churning out new ETFs with increasing breadth and specificity.  The combinations are endless allowing unimaginable diversification with great ease.  Advisors have constructed index ETF portfolios with 6 or fewer holdings that give the investor access to 1500+ underlying securities for as low as 10-20bps.  Active ETF’s are have also emerged where for a slightly higher MER, say 60-80bps, you gain the added professional management and asset allocation from a firm (or individual) acting as sub-advisor to the issuer.  Competition further driving down fees (as we’re witnessing in the US) suggests a structural change in the investment fund industry is upon us. 


Sound tax planning is a cornerstone of good investing. Paper-based returns are flashy, but the bottom line — after-tax returns – pay the bills.  Generate alpha for show, tax plan for dough.  Many are familiar with tax-friendly options for mutual fund investors with non-registered assets.  Corporate class funds for example helpfully eliminate deemed dispositions during tactical re-balancing of a portfolio.  How can ETF’s be utilized in a tax friendly manner? 

Tax Loss Harvesting:  this strategy is a swap of like-for-like asset to record a capital loss.  It is a risk- and asset allocation-neutral rebalancing with low costs and high potential rewards, in this case using corporate bonds (a segment of the market which is heretofore uninhabited by most retail investors and many advisors). 

Through greater liquidity, access to institutional bond pricing, and reduced risks via broad issuer diversification overall returns can be enhanced.  In practice corporate bonds can be difficult to access and complicated to manage.  Using a bond ETFs as an alternative to holding individual corporate fixed income securities provides transparency and aids accurate forecasting of expected yield-to-maturity.  Many pay a monthly floating distribution are offered with maturities ranging from 2013 through to 2021 providing a full range of options for short- and long-term goals. 

 Assume you own the Target 2017 Corporate Bond Index ETF and in November you are stuck with a 10% loss.  Sell Target 2017 to crystallize the capital loss and immediately repurchase Target 2018 Corporate Bond Index ETF with the proceeds. 


This allows an investor to:

  1. remain in the market,
  2. create a tax asset (capital loss to offset future/previous capital gains)
  3. avoiding being penalized by the superficial loss rule
  4. rebalance by shifting one-year down the duration curve. 


Because you utilizing the proceeds for the purchase of a very similar, but not identical, security your overall risk level and asset allocation change only marginally. 

 [Note: The interpretation of likeness between ETFs is critical. If deemed identical this strategy would not have merit.  This strategy is thus limited to those instances where longer-dated versions are sufficiently different according to local tax code.  You could employ this tactic successfully by sliding further away from 2018 into 2019, or 2020, etc versions.]

Hot Money & Glacial Migration: US GDP to Melt Your Face Off…Slowly

Regardless of their style smart investors take great care in knowing how the Worlds’ largest economies are functioning at a given time.  Whether you accept the Euro crisis as being wholly unresolved or not, the upcoming volatility will erode economic strength as if leaves were dropping off malignant trees throughout Europe.  The blight of debris covering the underlying soil will smother the growing buds with the haste and devastation of a German Autumn-turned-Winter.

However, drawing from recent history I expect the reverberations to be dampened in the near-term (H12012) as bailout cash is bazooked, firehosed and helicoptered onto Greece via the ECB, which should allow the USA to grow modestly in the interim.  For more on a troubled Europe see this recent analysis from Robert Sinn, the remainder of this post will focus on potential for growth in the US in spite of headline risk elsewhere.

Jelly Bean Jar Contest: Guess the Sum

2011 IMF estimates for Global GDP (nominal, $USD) show the Eurozone controls ~1/4 of the global economic activity ($17 Trillion annually; 25.65% of Global), with the USA close behind producing over 1/5  ($15 Trillion ann., 21.5% share)

Much like Wall Street forecasters, I expect H1 2012 to be slightly positive for the US economy (1.5-2% growth) and there are numerous reasons for this:

  • Election Year + Normal positive seasonality
  • Tepid Inflation
  • Healthy trends in employment and industrial production (expanding PMIs)
  • Rotation into growthy sectors, commodity strength on back of soft-landed China?

Additionally, we are 5-to-6 years deep into the US housing crisis and finally seeing some ‘Green Shoots’:  Construction spending is no longer declining and initial unemployment claims continues to leak lower.  Most experts are in agreement that there is no longer significant downside risks to residential housing.

US Total Construction Spending  Chart


This screen shows many in the General Building Materials category are performing respectably in H22011, a trend that should accelerate in H12012 assuming slow, but positive growth manifests itself in the US economy.

We also have indications of growth coming in the form of increased basic materials prices, which traditionally occurs concurrently with positive returns for stocks: http://chart.ly/p4ukkkh

The increase in commodity prices may be attributable to sector rotation as asset managers bail on their high-yielding dividend stocks for more growth-oriented fare.  Whatever the explanation risk appetite is being priced into the market.

The risks are clear: any slip up in Europe causing significant distress to the financial system and subsequently confidence render the above data null.  However, many smart macroeconomic analysts are constructive, if not outright bullish, on the US economy near term and the bearishness coming out of Europe shouldn’t fully dissuade risk-taking activities across the pond.


Robert Sinn: “Sage Weekly Letter” — http://www.robertsinn.com/2012/01/08/sage-weekly-letter-9/

US Total Construction Spending Chart by YCharts

Bloomberg EconBrief — http://chart.ly/users/EconBrief

Wikipedia – IMF Global GDP forecasts http://en.wikipedia.org/wiki/List_of_countries_by_GDP_(nominal)



Demographics, Asset Allocation and Bond Bubbles

I was having cocktails with a bunch of financial planners and investment advisors recently and the oldest-of-old money management axioms was readily bandied about:

“Asset allocation should be determined by ones age: match your weighting in bonds/cash to your Age, make up the difference in stocks.”

While this old saw has many interpretations that will be exploited by great planners, the broader implications are clear: as boomers age their Marvin Milktoast advisors will continue to pound the table on the merits of investing in fixed income in ample proportions.  Your 70yo clients will invest $700,000 of their $1MM in bonds/cash and sprinkle the remaining $300000 around in the equity markets.  Foolproof right?

The detractors will caution of a bond bubble given the uber-low rates and distress in European sovereign credits.  Others worry bond yields pushing on the lower-bound thanks to ZIRP and #lowforlong themes have distorted the whole space causing them to avoid the space. 

But how much of this is rhetoric, what does the data tell us? 

Quite possibly my chart of the month: Nations with Younger Po... on Twitpic

For an answer see the commentary from Jerry Khachoyan ( @armotrader here: http://jerrykhachoyan.com/bond-rates-low/ ).  The post is accompanied with many helpful graphics that illustrate the reality: bond prices can and likely will stay elevated for some time as slow economic growth fueled by deleveraging and demographic headwinds will temper the appetite for equities. 

Unless the wealthy, aging and mostly ignorant developed world start to disobey their financial advisors advice, we’re all turning Japanese.

Forget Operation Twist, We Need Operation Debt Jubilee

In a recent blog post  @bondtrader83 makes the following commentary on  Operation Twist (emphasis added):

Of the 400bil in purchases [by the Fed], 29% is in the 20-30yr range, much higher than expected.  The 30yr, as expected, rallied hard on the news and as of ~3pm was trading around 3.04% up over three points. As far as MBS goes, the Fed will begin re-investing MBS runoff into new current coupon MBS – presumably they will focus on 30yr current coupons.

It prompted me to post the following in the comments:

Ratio skewed to the long end is a big let down, it stifles the recapitalization effort and hurts traditional banking operations by flattening the curve, no? @FrankSIII views flattening at the long end of the curve as ineffective in stimulating the meager demand for a refi, as most of the eligible borrows have already taken advantage of ZIRP. A marginal reduction in mortgage interest costs won’t provide any tangible benefits to the real economy this go around.

There is no inflation because of the dearth of income growth in Developed Markets. There will continue to be deflation so long as debt servicing plunders the lions share of total income: whether household or government.  Given that markets panicked in full deflation mode at various points this week, we know that QE is BS and its not going to cure the lack of confidence in markets, or the economy in general.

Easier money vis a vis lower rates doesn’t stand a chance at reversing this vital lifeblood of modern capitalism: confidence.  Growth in AMPLE quantities is the only cure for the insolvent Euro banks and as @M_McDonough astutely points out the European PMIs (growth metrics) look like dog shit:

European PMIs: on Twitpic

So its jubilee or bust.  We must look at reasonable ways to exercise a GLOBAL debt jubilee. That is the how the Jigsaw Will Fall Into Place.

Are Technical Analysts the Best Options Traders?

Dear Options Experts:

Do you feel technical analysis and option straddles are a perfect complement to one another given the ability of a savvy technician to spot upside/downside targets effectively via charts?  What proportion of successful options traders do not rely heavily on technical analysis? 

For example, this chart of $RIMM http://chart.ly/ywv7g2v seems like a ‘good bet’ to touch $33.60 on bullish earnings, and sag to $27.56 – $26.12 on bearish earnings.

It is exactly the topic of Greg Harmons’ (@harmongreg ) post regarding Research in Motion, suggesting a straddle to play RIM earnings http://stks.co/Efa where following a thorough multi-time frame analysis of RIM, Greg concludes:

Sell September 34 Strike Call and Buy September 26 Strike Put for 21c debit.

This gives upside protection for a 16% move. It should also allow a profitable exit on the downside as long as the stock stays under 30, and much more if it falls the full 12.5% or more priced in options. If the stock gaps higher over 34 on earnings you should buy stock to hedge the short call until the morning. If it plays out as the charts suggest let the short call expire and sell the put on any stall that might happen at support at the 27.50 area.

How can one learn the art of positioning around these levels in a similar fashion to a pro?  When the levels are ‘obvious’ such as this, how can one gain an edge when all the pros see the same levels?

What Caused the August 2011 Panic? The Damn Europeans

So much ink has been spilled explaining the causes of crises over time that another iron in the fire is welcomed (if to only displace one of the others amongst the crowded indiscernible pile).

This time is different, so we’re led to believe, because debt levels are excessive on both public and private balance sheet.  So overtaxed by these burdens is the developed Western world that governments have opted for an eyes-wide-shut solution: make up new rules.

The rule in question was proposed was by newly appointed Chairman of the “International Accounting Standards Board”  Hans Hoogervorst.  Mr. Hoogervorst suggested a solution to the European debt problem that closely resembles the solution to the panic of 2008: suspend Mark-to-Market accounting (of sovereign debt on Euro bank balance sheets and companies listed in the EU).

Discussing the parallels to the USA’08-09 and EU’11  Jason Schwartz writes (emphasis added):

“Mark-to-market was repealed at 8:45 a.m on April 2, 2009, which finally put a stop to the short term liquidity crisis … Banks no longer had to raise capital as long term stability was brought back to the system.  The exact same scenario would have happened in 2011 Europe under Hoogervorst’s plan. Without the threat of failure by those banks who hold high amounts of euro sovereign debt, investors would be free to move on from the European crisis and the stock market could resume its fundamental course.”

During a panic, Mark-to-Market forces liquidation of holdings in order to satisfy the collateral requirements of counterparties.  When everyone has this issue, margin-call-like forced liquidations are like the tide going out: it lowers all ships in the Harbour as cash is raised as quickly as possible, often without tactical discretion.   Mr. Hoogervorst describes the importance of this rule (IFRS 9) and its impacts on markets as follows: 

“Under IFRS 9, impairments will still be painful but I am convinced it would be more timely done because the cliff effect is much less severe,”

The premise is one the financial community is very familiar with: lets make life a little easier for the banks and relieve some potential stress from our already taxed system (in the absence of the appetite or wherewithal to write-down the bad debts).  Moral hazard aside this seems reasonable given current economic conditions and the lustful bedfellows banks and big government.  

However, a voracious opponent to this approach has emerged and on August 4th 2011 announced that Jan 2015 would be the earliest implementation date.

We have been in a panic ever since.  http://chart.ly/pyd78w6 HT @traderstewie . How does this end?  Who knows.  Markets will bounce around and if they aren’t closing higher by the weeks end, well then they’ll be closing lower.

What I do know is that tinkering with the rules of engagement by big brother always has unintended consequences.  This time around it caused trillions in paper losses within a week and forced Gold up to $1800 per oz.  These risk-off assets are soaring against their own fundamentals (UST’s rally) due to fear.  Greed will step in eventually.  For more perspective see this video from @chessNwine from iBC .

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