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Adam Goldstein

 
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  • Penn West Is Undervalued Compared To Pengrowth, Enerplus And Baytex [View article]
    Jim,

    Aren't you taking the USD/CAD exchange rate into account twice in your analysis? You're already taking into account the recent CAD depreciation when you use the current oil price of US$65/bbl and translate that to CAD$74/bbl. Once you've done that, I think it's double counting if you also use their stated exchange rate sensitivity.
    Dec 9, 2014. 08:18 PM | 1 Like Like |Link to Comment
  • Penn West Is Undervalued Compared To Pengrowth, Enerplus And Baytex [View article]
    You're making a really basic mistake in this article.

    The MarketValue/Reserves and MarketValue/Production ratios are flawed because the numerator refers to an Equity (levered) value while the denominator refers to an Asset (unlevered) value. Analysts typically use EV/Reserves and EV/Production instead, where EV = Enterprise Value = Market Value + Total Debt.
    That way companies with different leverage ratios can be compared to each other on an apples-to-apples basis.
    Dec 7, 2014. 04:23 PM | 3 Likes Like |Link to Comment
  • No Need To Cover The hhgregg Short [View article]
    Marshall,

    Interesting article. Could you elaborate on this sentence: "The risk/reward profile, using our best/worst case price targets, is 1 to 3.2." Could you please derive those numbers?

    I initiated a "starter" (small) long position in HGG yesterday, so I'm trying to seek out the bear case. I find that's the best way to counteract my built-in bias to seek out confirmatory information. On that topic, I'm curious: do you feel your article is unbiased? Or would you say it accentuates the negative and diminishes the positive? Because I have to tell you - while I found your article useful and interesting, it sure seems biased to the negative. Are you sure you're just as open to perceiving and internalizing positive evidence regarding HGG as you are negative evidence?

    Just to be clear, I'm still in the process of due-dilligence for this one and I can't claim to be an expert yet. But I find it odd that you claim to be a "deep value" investor in your profile given some of the arguments you make in this article. For example, you wrote "Its gross margin is down to 29% over the trailing twelve months and operating margin is at 2.1%, decade lows.".

    Ummm... isn't the fact that profit margins are currently at "decade lows" more likely to be a positive argument than a negative one? You are aware the profit margins are the most reliably mean-reverting of all economic and financial measures, right? As a matter of fact, I'd say profit margins reverting to the mean is the basis of the vast majority of "deep value" investment theses, particularly in a case like this where management has a credible business plan, successfully implemented by similar retailers such as CONN's, to shift the product mix away from TV's/Consumer Electronics and towards Home Products (mattresses, furniture) in order to *cause* the profit margins to mean-revert.

    - Adam
    Feb 4, 2014. 12:06 PM | 2 Likes Like |Link to Comment
  • Mechel ADR Arbitrage: New York-Listed ADRs More Than 20% Higher Than Moscow-Listed Shares [View article]
    Well, it's just a matter of how to allocated my time I guess. The fact is, I'm already implementing this trade (long MTL-P, short MTL), so I ought to have already done all the required analysis. But I was lazy and never finished the work.

    MTL-P dividends are not cumulative, because there's no specified annual or quarterly dividend as there is with typical American preferred stocks. Please see my comments to Killerduck below for more details on this.
    Jan 16, 2014. 06:03 PM | Likes Like |Link to Comment
  • Mechel ADR Arbitrage: New York-Listed ADRs More Than 20% Higher Than Moscow-Listed Shares [View article]
    Yes, I'm also unsure why 40% of the preferred stock is in a subsidiary owned by Mechel.

    I think you're correct that this does lessen the protections preferred shareholders have, but if that 95% number is correct (which I'll need to check, since I'm not sure) then it still seems preferred shareholders are protected well enough.
    Jan 16, 2014. 05:58 PM | Likes Like |Link to Comment
  • Mechel ADR Arbitrage: New York-Listed ADRs More Than 20% Higher Than Moscow-Listed Shares [View article]
    Killerduck,

    Thanks for your comments. This is a great thing about forums like this, you get feedback from people you wouldn't otherwise have access to.

    1) I agree with you regarding bankruptcy, but that just means preferred is no better than common in this case; it certainly doesn't justify common trading at a 153% premium!

    2) I agree it's complicated, but again, under no circumstances can common receive any dividends without preferred getting at least as much. So why does common trade 153% higher? Makes no sense.

    3) Now this is very interesting, what you said about a merger/acquisition of Mechel and how it's possible for common to benefit much more than preferred. I was unaware of that, and if true, it certainly represents an important hole in my arbitrage argument. I'm going to research that matter further and I'll let people know what I find out.

    4) Yes, this is true what you said about Igor and that he owns no preferred, but I can't think of any way he can screw over preferred given that preferred has to vote 95% on any matter that affects their rights. But yes, I agree there's always a risk that he'll think of something...

    5) Yes, you are extremely correct about the fees. I own a large number of MTL-P shares, since I am actually implementing the arbitrage I've described here, and I was shocked to see a not-too-insignificant amount of cash disappear out of my brokerage account one day not that long ago. There may be some way to address this... I was thinking, how about a reverse split? Then the $0.03/share fee wouldn't hurt so much. I may complain about this in the future to somebody...

    6) How are you deriving this 70% number? My math says, as of the close today, common is trading at a 153% premium to preferred.

    7) Yes, you're correct that preferred dividends are not cumulative, but neither are common.

    Overall, I disagree with you claim that preferred and common are "different securities" so it's comparing apples and oranges. If these were normal American-style preferred shares I'd agree with you, because the preferred stock most Americans are familiar with is the fixed-income variety where it's very similar to a bond.

    But these Russian preferreds are very different; the dividends *grow* as the company grows, just like common dividends. Therefore the price of the preferred stock should grow over time, just like the price of common stock normally grows over time.

    But actually these are even better because their dividends are normally much *higher* than common since they have what amounts to a 80% payout ratio and the common payout ratio is normally much lower.

    The one issue you've raised that I'm worried about is #3, so as I said I'll take a closer look.

    Thanks,
    Adam
    Jan 16, 2014. 05:50 PM | Likes Like |Link to Comment
  • Mechel ADR Arbitrage: New York-Listed ADRs More Than 20% Higher Than Moscow-Listed Shares [View article]
    Actually, there's a whole other issue to consider when contemplating the MTL-P / MTL pair trade, and that is how to actually implement the trade. That's another aspect of the whole thing I may cover in a future article.

    The issue is, I have no clue which one of (a), (b), or (c) I wrote about above is going to happen in the future, and I'd rather not take a view on that. So how do you set up the trade if you want it to work *both* if Mechel goes bankrupt, which most likely means both MTL and MTL-P go to zero *and* if MTL goes back to 30? You can't just set up a static position where the number of shares long of MTL-P is equal to 2x the shares short of MTL (the factor of 2 comes in because of how the MTL-P ADR is set up), because if MTL goes up by a factor of 10x then the dollar value of the spread between MTL and 2xMTL-P may blow out even if the *percentage* difference between the two collapses.

    So I went through a bunch of algebra to derive how to trade it under certain assumptions.

    As you can probably tell I did a bunch of work on this already, so I should probably finish it and actually publish the article.
    Jan 15, 2014. 11:15 AM | 1 Like Like |Link to Comment
  • Mechel ADR Arbitrage: New York-Listed ADRs More Than 20% Higher Than Moscow-Listed Shares [View article]
    Studioso,

    Yes, I'm aware of those papers, and a while back I did read one or two.

    I do think you should be aware that there have been some changes to Russian law since these were written. I can't remember the details right now, but there were some earlier abuses of preferred shareholder rights that were corrected by the law. Also, the specific detail of MTL-preferred are important since I believe these factors weren't present in earlier cases. For example, 20% of US GAAP net income must be distributed to preferred, and since preferred represent only 25% of the capital base, that means 80% of net income attributable to preferred must be distributed as a dividend. I believe that percentage is substantially higher than the cases mentioned in those papers.

    I believe there's also a provision in the bylaws stating that 95% of preferred shareholders must vote on any changes that affect preferred rights; that's very important for shareholder rights and I don't think it was present in earlier cases.

    So here's the bottom line. There were some earlier loopholes in Russian law that have been corrected, and more importantly, the specific provisions in MTL preferred are new and different. (But again, let me repeat that I'm not sure about these details, it's been a while and I don't think I ever fully understood these issues.)

    So here are my thoughts. I believe the current situation with MTL is unsustainable. I think one of 3 possible resolutions will ultimately occur, and all of these result in the spread between MTL-P and MTL collapsing: (a) coking coal prices rise back to previous levels, US GAAP net income is generated, preferred dividends are reinstated, (b) bankruptcy, (c) some combination of asset sales, new share issuance, and debt paydown causes the debt to become sustainable, US GAAP net income is generated, preferred dividends are reinstated.

    The nice things about a long MTL-P / short MTL pair trade is it doesn't matter which of those 3 happens.

    I may end up writing an SA article on this pair trade if I go through the effort of fully understanding the changes in Russian law and I can show that this case is different than those previous ones. As of now I'm relying on the logic given above to force the spread to collapse, but I admit I haven't fully understood if that same logic has failed in previous cases, and if so why.
    Jan 15, 2014. 10:12 AM | 2 Likes Like |Link to Comment
  • Mechel ADR Arbitrage: New York-Listed ADRs More Than 20% Higher Than Moscow-Listed Shares [View article]
    Studioso Research,

    Thanks for the heads-up on the ADR premium, but doesn't this 20% disparity pale in comparison with the far more interesting disparity between MTL Preferred (MTL-P on Yahoo) and MTL Common (MTL)?

    It can be shown that MTL Preferred is a more valuable security than MTL Common (i.e., higher in the capital structure and therefore liquidation preference if bankruptcy, dividends paid out always exceed or are equal to common dividends in all cases), yet it trades at an almost impossible to believe 61% *discount*! So MTL-P would need to increase by 156% to reach the value of MTL despite it being a more valuable security.

    Therefore, if you're going to write an article about arbitrages related to Mechel, isn't a 156% premium more interesting than a 20% premium?
    Jan 13, 2014. 03:05 PM | 1 Like Like |Link to Comment
  • Veris Gold Is 80-90% Undervalued And Benefiting From Improving Production Trends [View article]
    Cowboy,

    Umm, in saying the stock is 80-90% undervalued, aren't you leaving out something rather important: debt? Come on now, you can't compare the roaster asset value of $2.84/share (which I believe is unrealistically high as a fair value estimate, by the way) to the then-current equity price of $0.47/share. After all, equity = assets - liabilities, and the company has about $170M of long-term debt + working capital deficit.
    Nov 28, 2013. 11:59 AM | Likes Like |Link to Comment
  • Lightstream: The Cheapest Oil Company, Priced At Half NAV And 13.4% Yield [View article]
    Well isn't that was stock market investors care about? If you tell someone "here's a stock trading at 50% of EV" they have one reaction, but if you tell them "here's a stock trading at 27% of NAV" they'll have a very different reaction. Remember, NAV is defined as the fair the equity, not the asset.
    Nov 6, 2013. 12:33 PM | Likes Like |Link to Comment
  • Lightstream: The Cheapest Oil Company, Priced At Half NAV And 13.4% Yield [View article]
    MLP Trader,

    I believe you're significantly understating the upside potential of this stock if you're correct about the true asset value. The title for this article is, "The Cheapest Oil Company Priced at Half NAV...", and your table shows a market EV that's trading at a 49% discount to true asset value. So you're making it sound like the stock is a double if your analysis correct.

    You need to keep in mind that this is a *levered* equity, with debt equal to $2.3B and an equity market cap equal to $1.25B. So the market is currently saying the assets are worth $3.55B, which is the market EV shown in your table. Well if the assets are truly worth $6.9B as your table indicates then the market cap should be $3.35B higher, or $4.6B, which is 3.7x the current market cap. Therefore, the *equity* is not trading at half of NAV, it's actually trading at 1/3.7 = 27% of NAV.

    - Adam
    Nov 6, 2013. 10:44 AM | 1 Like Like |Link to Comment
  • American Capital Agency: What Will The Dividend Cut Yield? [View article]
    Douglas,

    You wrote, "Given the choice between reinvesting the $263mn in MBS at market prices, AGNC took the step of effectively buying more of their own portfolio at a deep discount of 87 cents on the dollar."

    Unfortunately that's inaccurate. This is a highly leveraged equity, so the percentage discount from NAV is very different than the percentage discount from assets. If we use 7.5x as the portfolio leverage multiplier, then buying equity at a 13% discount is consistent with buying MBS at a .13/7.5 = 1.73% discount to current market price.
    Sep 22, 2013. 02:35 AM | 5 Likes Like |Link to Comment
  • MORL Dividend Drops Again In September But It's Now Yielding 32% On A Monthly Compounded Basis [View article]
    Lance,

    I think you're missing a key point here, and my concern is that your academic credentials may result in people taking more risk than they should.

    You wrote, "The recent dividend cuts by mREITs were primarily due to caution or if you prefer fear, on the part of their management. They are conserving cash in order to reduce leverage and possibly use more cash for hedging activities such as buying swaptions."

    No, this explanation is false. The reason mREIT stock prices and dividends have declined is that their *book value* has declined significantly. The mREITs had to sell MBS and pay down debt because MBS prices fell, since they're levered at something like 8:1 and if they didn't sell assets and pay down debt then their leverage ratio would have *grown* far too high. So they weren't selling to de-lever and conserve cash, as you wrote, but rather to avoid *increasing* leverage. I don't know what leverage levels the mREITs are allowed to have given their repo contracts with their lenders, but it doesn't really matter because it would be far too risky for them to let their leverage ratio grow much higher given the risk of further interest rate increases.

    Ironically, MORL is the ETN you've been advocating the most, and it has the issue discussed above, only doubly so. Not only do the underlying mREITs have to sell MBS when MBS prices decrease in order to prevent their leverage ratios from blowing up, but MORL itself has to sell shares in the underlying mREITs when the stock prices fall for the same reason (i.e., to keep MORL's leverage ratio at 2:1). These forced sales at both levels - mREIT and MORL - cause the dividends to be cut.

    Note: the two forced selling issues I discussed above can both happen (actually, have already happened would be more accurate)even if it turns out you're right about the "depression" we're in and that short-term interest rates will stay near zero for many years to come.

    Now I'm not saying either mREITs or MORL are necessarily bad investments. But I am saying they're risky, and investors - especially retired ones who will be very tempted by the dividend yields - need to fully understand the risks.

    This brings up a point I'm curious about - what percentage of your net worth have you invested in mREITs and/or MORL? I'm curious how you personally allocate your assets given what you've written about mREITs and MORL.

    - Adam
    Sep 4, 2013. 09:32 PM | 1 Like Like |Link to Comment
  • American Capital Agency Corp.'s Mid-Q3 2013 Composition And Valuation Analysis - Part 1 [View article]
    Scott,

    Thanks for the quick response. Actually, I have to say I'm pretty amazed that you have such a major responsibility for your full-time job yet you also have the time to publish very detailed analyses *and* do the best job of replying to comments that I've ever seen on SA. Man, if I had even 50% of your productivity I'd be thrilled...

    I'm a bit surprised at one of your answers though. You're saying that you analyze and own AGNC mainly because they give the best disclosure and therefore it's easiest to analyze most accurately. This sort of reminds me of what someone once said about scientists and engineers being so obsessed with the study of "linear systems", given that such a large majority of real-world systems are non-linear. The reason linear systems are studied so much is simply that they're easiest to analyze mathematically. It's very much like the person who lost a valuable piece of jewelry at night and looks only near the lamp posts because those portions of the street are the best lit.

    I mean, from an investment return standpoint, disclosure is certainly an issue to keep in mind, but it seems like there are many other factors - most prominently, discount to book - that are more likely to influence how much money you make.

    - Adam
    Aug 20, 2013. 12:46 PM | 1 Like Like |Link to Comment
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