Margin Trading Risk Disclosure (NASD Rule 2341) - Cobra

TIL that although the Pink Sheets stock market have the reputation for having thinly traded firms of marginal investment value, there are a number of blue chips listed on the Pink Sheets to evade greater disclosure requirements such as Samsung, Nestle, and Volkswagen

TIL that although the Pink Sheets stock market have the reputation for having thinly traded firms of marginal investment value, there are a number of blue chips listed on the Pink Sheets to evade greater disclosure requirements such as Samsung, Nestle, and Volkswagen submitted by vrphotosguy55 to todayilearned [link] [comments]

The imminent slide of UBER

I made this post yesterday, but I wasn't happy with the details so I quickly deleted it in the interest of taking more time on it. For disclosure, I am short on UBER. This post could apply to other gig services, but I am focused on Uber.
As most of us are aware, Uber has not been successful at all in a traditional business sense - that is that they do not make money and have spent the last decade burning investor cash. How bad is it? Let's look at a few fundamentals, sourced from E-Trade:
TTM Net Profit Margin (-50.72%)
Overall, UBER lost 150.72% of the revenue that they collected, meaning that for every $100 they made, $150.72 was spent to "gain" it. Their TTM Operating Margin was -48.90% which indicates to me that it is the main contributer to such a negative bottom line. For the past decade Uber has been fine operating on this loss in order to gain market share - but how long can this unsustainable model be propped up?
TTM Price/Sales (3.77x)
Currently, Uber is trading at a price almost 4 times its sales which result in a negative income anyway. This is a money pit.
TTM Return on Investment Capital (-29.62%)
Need I say more? This is okay for a startup, but is 10 years and global operations still a "startup"?
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So those are bad, but why do I think the slide is imminent? Mostly related to their ongoing and especially current legal issues.
On the first of this year, California's Assembly Bill 5 went into effect. It's a law so there is a ton to it, but the context we care about is the "gig economy worker" part which have to do with classifying gig workers as employees which come with other costs and benefits that Uber (and other Transportation Network Companies, or "TNCs") have been able to get around and limit further losses since their inception, to the dismay of taxis and other traditional permitted transportation operators.
This is America, so Uber has not complied with this. As a consumer, I've noticed drops in availability on their platform lately so I suspect they are now metering workers to some degree to limit full-time employment but that's just anecdotal speculation.
10 days ago, a California judge granted a preliminary injunction essentially saying enough is enough and that these TNCs and other gig companies must comply. There was a 10-day period for the potential to grant an appeal as filed by Uber, which expires at the end of today. Please correct me if I've interpreted this incorrectly but it seems that if TNCs do not receive injunctive relief by the end of today, 08/20, they will cease operating in the State of California as of 08/21. This seems to have been indicated by Uber and Lyft as well.
If it is not easy to see, California is one of Uber's largest markets. I don't know the exact numbers, but I've read that most of Uber's business comes from 5 US cities, two of which are Los Angeles and San Francisco. I would guess that California probably accounts for at least 25% of Uber's revenue. It gets more dangerous than this. Other states have already started to draft their own legislation regarding gig economy workers, especially Illiinois, New Jersey, and New York.
For all of these reasons, I see an imminent drop coming for Uber. What do you think?
Edit: as of roughly 0930 PT Lyft has indicated it will suspend service at midnight tonight.
Edit: as of roughly 1145 PT an emergency stay has been granted meaning the services will continue for now out of compliance with the law
submitted by CoalFlavored to stocks [link] [comments]

ANALysis…..

So, I said I would write a post on this, here it is. The title was partly to get you interested and partly a little cheeky throwback to the bad old days when u/plucky26 went off meds…
Anyhow, this is a longish post about FA and TA so scroll to the TLDR if reading isn’t your thing, or ignore it. Or if you know more about it than me put a comment in…
FA: FA attempts to measure the intrinsic/inherent value of a stonk. You can do this a lot of ways but what your working out is whether the SP represents undeover value or fair value. A lot goes into FA, but if you want a basic cheat sheet then here it is: - What does the company do?
These are the 6 basic questions you need to answer when trying to arrive at a conclusion. So, how do we get answers?
Reading mutha fuckers, reading……
You need to read and understand the product. That’s the answer to question 1. What do these fucks actually do, does anyone care, doe they make tendies?
The answer to question 2 is probably the most undervalued thing in FA IMHO. People, more than products, leave a legacy they transport form place to place. DO NOT DISREGARD THIS STEP…
If old mate is about to get bent over by the Feds for embezzlement, or his wife’s BF has filed a claim against him for watching them through the window, or if he has bankrupted the last 6 places he went then this will impact the SP once its out.
Working out where they are heading runs parallel to the SP more than you might think. The market, in a broader context, is future based. There isn’t a shortcut around this step, its reading, reading reading bitches….
Although Stonk history tells you a story, its more useful for seeing what they have come up against in the past and how the SP reacted to it. What made it Dip, what made it rocket? What is the ROI? And more, all this historical shit gives you a template but not a guaranteed direction.
Question 5 and 6 are where you start to delve into the nuts and bolts. P/E ratio’s, cash runways, market index rankings per sector and all the snooze button shit that hides the details. Im not going to describe what all this is, DR Google is smarter than me and I’m a few stubbies in already so I might lose track of what the fuck I am saying.
Here is a great link https://www.investopedia.com/terms/f/fundamentalanalysis.asp
At the heart of FA is whether you believe the narrative the numbers and words tell you.
IMHO if your only interested in FA, then avoid micro caps.
0.03c - 0.05c SP and a $300 -$500 SP is the same % difference but a world apart in the ability of a Stonk to fluctuate under their market cap and FA just doesn’t give you the type of info you need to accurately make a profit within those margins on micros.
(Happy to be proven wrong on this if you think otherwise.)
That’s fucking great pal you might say, but fast forward to the part where it gets me on the rocket ship before it blasts off….
Ok, well here is a clue. If you have read this far and your already impatient or scrolling down to the TLDR, FA might not be your particular brand of vodka.
So lets get into the occult, the witchcraft that is TA….
TA: Being technically anal is actually easier than you might think.
TA is about trends, historical data and volumes. Sure its about more shit than that but it also kind of isn’t.
Its basically saying this stonk already has a template and I can predict where it will go next if I understand that template.
When stonk go up, what does the chart look like?
When stonk go down, what does chart look like?
Yes, it involves funny squiggly lines and colors.
You’ll also come across all sort of stuff like golden (showers) crosses, cups and handles, head and shoulders, descending triangles and other weird phrases but all they are really doing is describing a pattern.
And patterns are predictable once you can see them.
I am tempted to get super into these patterns, but this post is already long so here is a link: https://www.investopedia.com/terms/t/technical-analysis-of-stocks-and-trends.asp#:~:text=Technical%20analysis%20is%20the%20study,data%2C%20including%20price%20and%20volume.&text=The%20two%20most%20common%20forms,needed%20to%20make%20a%20profit.
If you a commsex user, then send a tendie to chief Tom because as an avid reader of ASX_Bets he has clearly been up to the R&D spooks over there and told them to improve the graphs on the app.
You can’t do the super technical stuff, but go backwards over any of last weeks rockets (CRO, HYD and some of the smaller cap ones) and go to the 1 day, 5 day and 1 month graphs respectively.
Click on the chart style indicator (the funny line that looks like the ‘Stonks only go up symbol’) and change it to candlesticks. This gives you indicative buy/sell data in pretty colors so its easier to work out.
Then look at the uppelower indicators, you can change it to show you volume, price tracking lines, Bollinger etc..
Have I lost you yet? That’s ok…
Zoom out the 3 month charts with the same settings and OMG, a pattern emerges….
Zoom out again to 6 months, another pattern…
Zoom back in, heres that funny old pattern again…
But wait you say, this stonk keeps hitting a certain point on the graph, then those red columns get huge and it stays there or bounces down again.
Hello resistance line, hello seller volume, hello traders with pre determined exit points. These guys are not super interested in the FA or the intrinsic value of a long term hold, they are interested in making the 5/10/15% what-the-fuck-ever percent and bouncing out.
Hold the fuck on, when it hits a different level those green dildo’s start popping out in the bottom graph and it stays there for a bit then heads up again…. Aloha support level…
Just go look at Zippy with the above parameters on commsex app, youll see exactly what short sellers, swing traders and the like see….
Fair warning: going backwards on the app helps you to recognize patterns but to do the proper witchcraft TA you need the proper tools and programs
Yes matey you’ll be saying again, very interesting but how the fuck does this get me on the rocket ship before blast off?
Well IMHO, there are 3 ways to board the rocket.
1: You have a mate who tells you or they post it somewhere.
2: You jump on after blast off and play the gambling game, freaking out when it dips and missing all your sweet tendies or pretending diamond hands are the only way and watching it dump then losing all your tendies, or bag holding forever. Or you get lucky and pop out at a high, but TBH your really only gambling (someone please comment ‘Sir, this is a casino, I love that shit 😊)
3: You do both of these methods.
-TA sets your entry point so you board before take off and exit before crash landing.
Both methods have their role.
Yes you can use OBV and Fibbo numners to scan for potential like I do sometimes, but that’s a whole other spectrum of TA and its already past bedtime.
FA IMHO is better generally for Mid/Large cap because they are generally less volatile and FA has seasons where its super useful (Earnings months etc…) TA is better for bouncy bounce plays on micros and mid/large.
But don’t go neglecting either at any time, TA tells you things the FA misses and vice versa.
You can always subscribe to a service that does this for you. Intellegent investor is good-ish, so is wallet investor. Motley fuckwit has some ok picks sometimes but gets the fuckin dick from me because they just don’t stop with the fucking propaganda….
Disclosure: Generally the posts on here do ok, but you gotta know when to get off… Unless your planning to holder forever like uncle Wazza, but that just doesn’t seem to be the vibe here…
For what its worth , (before you all tell me I don’t know what I’m talking about) I have posted about 3 stonks on here in the last few months. (admittedly I shit-post a lot too…)
AFG, which went up 18% 2 days after the post, then dumped and has dribbled ever since but if you’re a long holder you’ll do OK and… EDIT: up another 3.19% after this post...
ICU, which is a micro and went up 15.5% the day after the post. Both were the result of FA/TA combination and both delivered tendies of the succulent variety. EDIT: ICU went up a further 52% 2 days since posting then retraced a touch...
OPY which went from an open of 3.14 up to a high of 4.80 the next day, a 52.8% raise then leveled out around the 3.70’s EDIT: up another 13.7% since this post...
Sorry about the long post, I got finished washing the wifes BF’s car early and he let me have the WIFI password…
TLDR: Gamble if you want or learn some shit and make tendies…
Edit: some really good comments below. I have made far more $$ by choosing good Stonks and holding them over the years than I have ever made day trading.
FA is my primary method for choosing and accounts for probably 75% of my decision making and TA fills the gaps to help maximize profit making.
submitted by username-taken82 to ASX_Bets [link] [comments]

DDDD - Retail Investors, Bankruptcies, Dark Pools and Beauty Contests

DDDD - Retail Investors, Bankruptcies, Dark Pools and Beauty Contests
For this week's edition of DDDD (Data-Driven DD), we're going to look in-depth at some of the interesting things that have been doing on in the market over the past few weeks; I've had a lot more free time this week to write something new up, so you'll want to sit down and grab a cup of coffee for this because it will be a long one. We'll be looking into bankruptcies, how they work, and what some companies currently going through bankruptcies are doing. We'll also be looking at some data on retail and institutional investors, and take a closer look at how retail investors in particular are affecting the markets. Finally, we'll look at some data and magic markers to figure out what the market sentiment, the thing that's currently driving the market, looks like to help figure out if you should be buying calls or puts, as well as my personal strategy.
Disclaimer - This is not financial advice, and a lot of the content below is my personal opinion. In fact, the numbers, facts, or explanations presented below could be wrong and be made up. Don't buy random options because some person on the internet says so; look at what happened to all the SPY 220p 4/17 bag holders. Do your own research and come to your own conclusions on what you should do with your own money, and how levered you want to be based on your personal risk tolerance.

How Bankruptcies Work

First, what is a bankruptcy? In a broad sense, a bankruptcy is a legal process an individual or corporation (debtor) who owes money to some other entity (creditor) can use to seek relief from the debt owed to their creditors if they’re unable to pay back this debt. In the United States, they are defined by Title 11 of the United States Code, with 9 different Chapters that govern different processes of bankruptcies depending on the circumstances, and the entity declaring bankruptcy.
For most publicly traded companies, they have two options - Chapter 11 (Reorganization), and Chapter 7 (Liquidation). Let’s start with Chapter 11 since it’s the most common form of bankruptcy for them.
A Chapter 11 case begins with a petition to the local Bankruptcy court, usually voluntarily by the debtor, although sometimes it can also be initiated by the creditors involuntarily. Once the process has been initiated, the corporation may continue their regular operations, overseen by a trustee, but with certain restrictions on what can be done with their assets during the process without court approval. Once a company has declared bankruptcy, an automatic stay is invoked to all creditors to stop any attempts for them to collect on their debt.
The trustee would then appoint a Creditor’s Committee, consisting of the largest unsecured creditors to the company, which would represent the interests creditors in the bankruptcy case. The debtor will then have a 120 day exclusive right after the petition date to file a Plan of Reorganization, which details how the corporation’s assets will be reorganized after the bankruptcy which they think the creditors may agree to; this is usually some sort of restructuring of the capital structure such that the creditors will forgive the corporation’s debt in exchange for some or all of the re-organized entity’s equity, wiping out the existing stockholders. In general, there’s a capital structure pecking order on who gets first dibs on a company’s assets - secured creditors, unsecured senior bond holders, unsecured general bond holders, priority / preferred equity holders, and then finally common equity holders - these are the classes of claims on the company’s assets. After the exclusive period expires, the Creditor’s Committee or an individual creditor can themselves propose their own, possibly competing, Restructuring Plan, to the court.
A Restructuring Plan will also be accompanied by a Disclosure Statement, which will contain all the financial information about the bankrupt company’s state of affairs needed for creditors and equity holders to make an informed decision about how to proceed. The court will then hold a hearing to approve the Restructuring Plan and Disclosure Statement before the plan can be voted on by creditors and equity holders. In some cases, these are prepared and negotiated with creditors before bankruptcy is even declared to speed things up and have more favorable terms - a prepackaged bankruptcy.
Once the Restructuring Plan and Disclosure Statement receives court approval, the plan is voted on by the classes of impaired (i.e. debt will not be paid back) creditors to be confirmed. The legal requirement for a bankruptcy court to confirm a Restructuring Plan is to have at least one entire class of impaired creditors vote to accept the plan. A class of creditors is deemed to have accepted a Restructuring Plan when creditors that hold at least 2/3 of the dollar amount and at least half of the number of creditors vote to accept the plan. After another hearing, and listening to any potential objections to the proposed Restructuring Plan, such as other impaired classes that don't like the plan, the court may then confirm the plan, putting it to effect.
This is one potential ending to a Chapter 11 case. A case can also end with a conversion to a Chapter 7 (Liquidation) case, if one of the parties involved file a motion to do so for a cause that is deemed by the courts to be in the best interest of the creditors. In Chapter 7, the company ceases operating and a trustee is appointed to begin liquidating (i.e. selling) the company’s assets. The proceeds from the liquidation process are then paid out to creditors, with the most senior levels of the capital structure being paid out first, and the equity holders are usually left with nothing. Finally, a party can file a motion to dismiss the case for some cause deemed to be in the best interest of the creditors.

The Tale of Two Bankruptcies - WLL and HTZ

Hertz (HTZ) has come into news recently, with the stock surging up to $6, or 1500% off its lows, for no apparent fundamental reason, despite the fact that they’re currently in bankruptcy and their stock is likely worthless. We’ll get around to what might have caused this later, for now, we’ll go over what’s going on with Hertz in its bankruptcy proceedings. To get a clearer picture, let’s start with a stock that I’ve been following since April - Whiting Petroleum (WLL).
WLL is a stock I’ve covered pretty extensively, especially with it’s complete price dislocation between the implied value of the restructured company by their old, currently trading, stock being over 10x the implied value of the bonds, which are entitled to 97% of the new equity. Usually, capital structure arbitrage, a strategy to profit off this spread by going long on bonds and shorting the equity, prevents this, but retail investors have started pumping the stock a few days after WLL’s bankruptcy to “buy the dip” and make a quick buck. Institutions, seeing this irrational behavior, are probably avoiding touching at risk of being blown out by some unpredictable and irrational retail investor pump for no apparent reason. We’re now seeing this exact thing play out a few months later, but at a much larger scale with Hertz.
So, how is WLL's bankruptcy process going? For anyone curious, you can follow the court case in Stretto. Luckily for Whiting, they’ve entered into a prepackaged bankruptcy process and filed their case with a Restructuring Plan already in mind to be able to have existing equity holders receive a mere 3% of new equity to be distributed among them, with creditors receiving 97% of new equity. For the past few months, they’ve quickly gone through all the hearings and motions and now have a hearing to receive approval of the Disclosure Statement scheduled for June 22nd. This hearing has been pushed back a few times, so this may not be the actual date. Another pretty significant document was just filed by the Committee of Creditors on Friday - an objection to the Disclosure Statement’s approval. Among other arguments about omissions and errors the creditor’s found in the Disclosure Statement, the most significant thing here is that Litigation and Rejection Damage claims holders were treated in the same class as a bond holders, and hence would be receiving part of their class’ share of the 97% of new equity. The creditors claim that this was misleading as the Restructuring Plan originally led them to believe that the 97% would be distributed exclusively to bond holders, and the claims for Litigation and Rejection Damage would be paid in full and hence be unimpaired. This objection argues that the debtors did this gerrymandering to prevent the Litigation and Rejection Damage claims be represented as their own class and able to reject the Restructuring Plan, requiring either payment in full of the claims or existing equity holders not receiving 3% of new equity, and be completely wiped out to respect the capital structure. I’d recommend people read this document if they have time because whoever wrote this sounds legitimately salty on behalf of the bond holders; here’s some interesting excerpts:
Moreover, despite the holders of Litigation and Rejection Damage Claims being impaired, existing equity holders will still receive 3% of the reorganized company’s new equity, without having to contribute any new value. The only way for the Debtors to achieve this remarkable outcome was to engage in blatant classification gerrymandering. If the Debtors had classified the Litigation and Rejection Damage Claims separately from the Noteholder claims and the go-forward Trade Claims – as they should have – then presumably that class would reject a plan that provides Litigation and Rejection Damage Claims with a pro rata share of minority equity.
The Debtors have placed the Rejection Damage and Litigation Claims in the same class as Noteholder Claims to achieve a particular result, namely the disenfranchisement of the Rejection Damage and Litigation Claimants who, if separately classified, may likely vote to reject the Plan. In that event, the Debtor would be required to comply with the cramdown requirements, including compliance with the absolute priority rule, which in turn would require payment of those claims in full, or else old equity would not be entitled to receive 3% of the new equity. Without their inclusion in a consenting impaired class, the Debtors cannot give 3% of the reorganized equity to existing equity holders without such holders having to contribute any new value or without paying the holders of Litigation and Rejection Damage Claims in full.
The Committee submits that the Plan was not proposed in good faith. As discussed herein, the Debtors have proposed an unconfirmable Plan – flawed in various important respects. Under the circumstances discussed above, in the Committee’s view, the Debtors will not be able to demonstrate that they acted with “honesty and good intentions” and that the Plan’s results will not be consistent with the Bankruptcy Code’s goal of ratable distribution to creditors.
They’re even trying to have the court stop the debtor from paying the lawyers who wrote the restructuring agreement.
However, as discussed herein, the value and benefit of the Consenting Creditors’ agreements with the Debtors –set forth in the RSA– to the Estates is illusory, and authorizing the payment of the Consenting Creditor Professionals would be tantamount to approving the RSA, something this Court has stated that it refuses to do.20 The RSA -- which has not been approved by the Court, and indeed no such approval has been sought -- is the predicate for a defective Plan that was not proposed in good faith, and that gives existing equity holders an equity stake in the reorganized enterprise even though Litigation and Rejection Damage Creditors will (presumably) not be made whole under the Plan and the existing interest holders will not be contributing requisite new value.
As a disclaimer, I have absolutely zero knowledge nor experience in law, let alone bankruptcy law. However, from reading this document, if what the objection indicates to be true, could mean that we end up having the court force the Restructuring agreement to completely wipe out the current equity holders. Even worse, entering a prepackaged bankruptcy in bad faith, which the objection argues, might be grounds to convert the bankruptcy to Chapter 7; again, I’m no lawyer so I’m not sure if this is true, but this is my best understanding from my research.
So what’s going on with Hertz? Most analysts expect that based on Hertz’s current balance sheet, existing equity holders will most likely be completely wiped out in the restructuring. You can keep track of Hertz’s bankruptcy process here, but it looks like this is going to take a few months, with the first meeting of creditors scheduled for July 1. An interesting 8-K got filed today for HTZ, and it looks like they’re trying to throw a hail Mary for their case by taking advantage of dumb retail investors pumping up their stock. They’ve just been approved by the bankruptcy court to issue and sell up to $1B (double their current market cap) of new shares in the stock market. If they somehow pull this off, they might have enough money raised to dismiss the bankruptcy case and remain in business, or at very least pay off their creditors even more at the expense of Robinhood users.

The Rise of Retail Investors - An Update

A few weeks ago, I talked about data that suggested a sudden surge in retail investor money flooding the market, based on Google Trends and broker data. Although this wasn’t a big topic back when I wrote about it, it’s now one of the most popular topics in mainstream finance news, like CNBC, since it’s now the only rational explanation for the stock market to have pumped this far, and for bankrupt stocks like HTZ and WLL to have surges far above their pre-bankruptcy prices. Let’s look at some interesting Google Trends that I found that illustrates what retail investors are doing.

Google Trends - Margin Calls
Google Trends - Robinhood
Google Trends - What stock should I buy
Google Trends - How to day trade
Google Trends - Pattern Day Trader
Google Trends - Penny Stock
The conclusion that can be drawn from this data is that in the past two weeks, we are seeing a second wave of new retail investor interest, similar to the first influx we saw in March. In particular, these new retail investors seem to be particularly interested in day trading penny stocks, including bankrupt stocks. In fact, data from Citadel shows that penny stocks have surged on average 80% in the previous week.
Why Retail Investors Matter
A common question that’s usually brought up when retail investors are brought up is how much they really matter. The portfolio size of retail investors are extremely small compared to institutional investors. Anecdotally and historically, retail investors don’t move the market, outside of some select stocks like TSLA and cannabis stocks in the past few years. However when they do, shit gets crazy; the last time retail investors drove the stock market was in the dot com bubble. There’s a few papers that look into this with similar conclusions, I’ll go briefly into this one, which looks at almost 20 years of data to look for correlations between retail investor behavior and stock market movements. The conclusion was that behaviors of individual retail investors tend to be correlated and are not random and independent of each other. The aggregate effect of retail investors can then drive prices of equities far away from fundamentals (bubbles), which risk-averse smart money will then stay away from rather than try taking advantage of the mispricing (i.e. never short a bubble). The movement in the prices are typically short-term, and usually see some sort of reversal back to fundamentals in the long-term, for small (i.e. < $5000) trades. Apparently, the opposite is true for large trades; here’s an excerpt from the paper to explain.
Stocks recently sold by small traders perform poorly (−64 bps per month, t = −5.16), while stocks recently bought by small traders perform well (73 bps per month, t = 5.22). Note this return predictability represents a short-run continuation rather than reversal of returns; stocks with a high weekly proportion of buys perform well both in the week of strong buying and the subsequent week. This runs counter to the well-documented presence of short-term reversals in weekly returns.14,15 Portfolios based on the proportion of buys using large trades yield precisely the opposite result. Stocks bought by large traders perform poorly in the subsequent week (−36 bps per month, t = −3.96), while those sold perform well (42 bps per month, t = 3.57). We find a positive relationship between the weekly proportion of buyers initiated small trades in a stock and contemporaneous returns. Kaniel, Saar, and Titman (forthcoming) find retail investors to be contrarians over one-week horizons, tending to sell more than buy stocks with strong performance. Like us, they find that stocks bought by individual investors one week outperform the subsequent week. They suggest that individual investors profit in the short run by supplying liquidity to institutional investors whose aggressive trades drive prices away from fundamental value and benefiting when prices bounce back. Barber et al. (2005) document that individual investors can earn short term profits by supplying liquidity. This story is consistent with the one-week reversals we see in stocks bought and sold with large trades. Aggressive large purchases may drive prices temporarily too high while aggressive large sells drive them too low both leading to reversals the subsequent week.
Thus, using a one-week time horizon, following the trend can make you tendies for a few days, as long as you don’t play the game for too long, and end up being the bag holder when the music stops.

The Keynesian Beauty Contest

The economic basis for what’s going on in the stock market recently - retail investors driving up stocks, especially bankrupt stocks, past fundamental levels can be explained by the Keynesian Beauty Contest, a concept developed by Keynes himself to help rationalize price movements in the stock market, especially during the 1920s stock market bubble. A quote by him on the topic of this concept, that “the market can remain irrational longer than you can remain solvent”, is possibly the most famous finance quote of all time.
The idea is to imagine a fictional newspaper beauty contest that asks the reader to pick the six most attractive faces of 100 photos, and you win if you pick the most popular face. The naive strategy would be to pick the faces that you think are the most attractive. A smarter strategy is to figure out what the most common public perception of attractiveness would be, and to select based on that. Or better yet, figure out what most people believe is the most common public perception of what’s attractive. You end up having the winners not actually be the faces people think are the prettiest, but the average opinion of what people think the average opinion would be on the prettiest faces. Now, replace pretty faces with fundamental values, and you have the stock market.
What we have today is the extreme of this. We’re seeing a sudden influx of dumb retail money into the market, who don’t know or care about fundamentals, like trading penny stocks, and are buying beaten down stocks (i.e. “buy the dip”). The stocks that best fit all three of these are in fact companies that have just gone bankrupt, like HTZ and WLL. This slowly becomes a self-fulfilling prophecy, as people start seeing bankrupt stocks go up 100% in one day, they stop caring about what stocks have the best fundamentals and instead buy the stocks that people think will shoot up, which are apparently bankrupt stocks. Now, it gets to the point where even if a trader knows a stock is bankrupt, and understands what bankruptcy means, they’ll buy the stock regardless expecting it to skyrocket and hope that they’ll be able to sell the stock at a 100% profit in a few days to an even greater fool. The phenomenon is well known in finance, and it even has a name - The Greater Fool Theory. I wouldn’t be surprised if the next stock to go bankrupt now has their stock price go up 100% the next day because of this.

What is the smart money doing - DIX & GEX

Alright that’s enough talk about dumb money. What’s all the smart money (institutions) been doing all this time? For that, you’ll want to look at what’s been going on with dark pools. These are private exchanges for institutions to make trades. Why? Because if you’re about to buy a $1B block of SPY, you’re going to cause a sudden spike in prices on a normal, public exchange, and probably end up paying a much higher cost basis because of it. These off-exchange trades account for about one third of all stock volume. You can then use data of market maker activity in these dark pools to figure out what institutions have been doing, the most notable indicators being DIX by SqueezeMetrics.
Another metric they offer is GEX, or gamma exposure. The idea behind this is that market markets who sell option contracts, typically don’t want to (or can’t legally) take an actual position in the market; they can only provide liquidity. Hence, they have to hedge their exposure from the contracts they wrote by going long or short on the stocks they wrote contracts to. This is called delta-hedging, with delta representing exposure to the movement of a stock. With options, there’s gamma, which represents the change in delta as the stock price moves. So as stock prices move, the market maker needs to re-hedge their positions by buying or selling more shares to remain delta-neutral. GEX is a way to show the total exposure these market makers have to gamma from contracts to predict stock price movements based on what market makers must do to re-hedge their positions.
Now, let’s look at what these indicators have been doing the past week or so.
DIX & GEX
In the graph above, an increasing DIX means that institutions are buying stocks in the S&P500, and an increasing GEX means that market makers have increasing gamma exposure. The DIX whitepaper, it has shown that a high DIX is often correlated with increased near-term returns, and in the GEX whitepaper, it shows that a decreased GEX is correlated with increased volatility due to re-hedging. It looks like from last week’s crash, we had institutions buy the dip and add to their current positions. There was also a sudden drop in GEX, but it looks like it’s quickly recovered, and we’ll see volatility decreased next week. Overall, we’re getting bullish signals from institutional activity.

Bubbles and Market Sentiment

I’ve long held that the stock market and the economy has been in a decade-long bubble caused by liquidity pumping from the Fed. Recently, the bubble has been accelerated and it’s becoming clearer to people that we are in a bubble. Nevertheless, you shouldn’t short the bubble, but play along with it until it bursts. Bubbles are driven by pure sentiment, and this can be a great contrarian indicator to what stage of the bubble we are in. You want to be a bear when the market is overly greedy and a bull when the market is overly bearish. One of the best tools to measure this is the equity put / call ratio.
Put / Call Ratio
The put/call ratio dropped below 0.4 last week, something that’s almost never happened and has almost always been immediately followed up by a correction - which it did this time as well. A low put / call ratio is usually indicative of an overly-greedy market, and a contrarian indicator that a drop is imminent. However, right after the crash, the put/call ratio absolutely skyrocketed, closing right above 0.71 on Friday, above the mean put / call ratio for the entire rally since March’s lows. In other words, a ton of money has just been poured into SPY puts expecting to profit off of a downtrend. In fact, it’s possible that the Wednesday correction itself has been exasperated by delta hedging from SPY put writers. However, this sudden spike above the mean for put/call ratio is a contrarian indicator that we will now see a continued rally.

Technicals

Magic Markers on SPY, Daily
With Technical Indicators, there’s a few things to note
  • 1D RSI on SPY was definitely overbought last week, and I should have taken this as a sign to GTFO from all my long positions. The correction has since brought it back down, and now SPY has even more room to go further up before it becomes overbought again
  • 1D MACD crossed over on Wednesday to bearish - a very strong bearish indicator, however 1W MACD is still bullish
  • For the bulls, there’s very little price levels above 300, with a small possible resistance at 313, which is the 79% fib retracement. SPY has never actually hit this price level, and has gapped up and down past this price. Below 300, there’s plenty of levels of support, especially between 274 and 293, which is the range where SPY consolidated and traded at for April and May. This means that a movement up will be met with very little resistance, while a movement down will be met with plenty of support
  • The candles above 313 form an island top pattern, a pretty rare and strong bearish indicator.
The first line of defense of the bulls is 300, which has historically been a key support / resistance level, and is also the 200D SMA. So far, this price level has held up as a solid support last week and is where all downwards price action in SPY stopped. Overall, there’s very mixed signals coming from technical indicators, although there’s more bearish signals than bullish.
My Strategy for Next Week
While technicals are pretty bearish, retail and institutional activity and market sentiment is indicating that the market still continue to rally. My strategy for next week will depend on whether or not the market opens above or below 300. I’m currently mostly holding long volatility positions, that I’ve started existing on Friday.
The Bullish case
If 300 proves to be a strong support level, I’ll start entering bullish positions, following my previous strategy of going long on weak sectors such as airlines, cruises, retail, and financials, once they break above the 24% retracement and exit at the 50% retracement. This is because there’s very little price levels and resistance above 300, so any movements above this level will be very parabolic up to ATHs, as we saw in the beginning of 2020 and again the past two weeks. If SPY moves parabolic, the biggest winners will likely be the weakest stocks since they have the most room to go up, with most of the strongest stocks already near or above their ATHs. During this time, I’ll be rolling over half of my profits to VIX calls of various expiry dates as a hedge, and in anticipation of any sort of rug pull for when this bubble does eventually pop.
The Bearish case
For me to start taking bearish positions, I’ll need to see SPY open below 300, re-test 300 and fail to break above it, proving it to be a resistance level. If this happens, I’ll start entering short positions against SPY to play the price levels. There’s a lot of price levels between 300 and 274, and we’d likely see a lot of consolidation instead of a big crash in this region, similar to the way up through this area. Key levels will be 300, 293, 285, 278, and finally 274, which is the levels I’d be entering and exiting my short positions in.
I’ve also been playing with WLL for the past few months, but that has been a losing trade - I forgot that a market can remain irrational longer than I can remain solvent. I’ll probably keep a small position on WLL puts in anticipation of the court hearing for the disclosure statement, but I’ve sold most of my existing positions.

Live Updates

As always, I'll be posting live thoughts related to my personal strategy here for people asking.
6/15 2AM - /ES looking like SPY is going to gap down tomorrow. Unless there's some overnight pump, we'll probably see a trading range of 293-300.
6/15 10AM - Exited any remaining long positions I've had and entered short positions on SPY @ 299.50, stop loss at 301. Bearish case looking like it's going to play out
6/15 10:15AM - Stopped out of 50% of my short positions @ 301. Will stop out of the rest @ 302. Hoping this wasn't a stop loss raid. Also closed out more VIX longer-dated (Sept / Oct) calls.
6/15 Noon - No longer holding any short positions. Gap down today might be a fake out, and 300 is starting to look like solid support again, and 1H MACD is crossing over, with 15M remaining bullish. Starting to slowly add to long positions throughout the day, starting with CCL, since technicals look nice on it. Also profit-took most of my VIX calls that I bought two weeks ago
6/15 2:30PM - Bounced up pretty hard from the 300 support - bull case looks pretty good, especially if today's 1D candle completely engulphs the Friday candle. Also sold another half of my remaining long-dated VIX calls - still holding on to a substantial amount (~10% of portfolio). Will start looking to re-buy them when VIX falls back below 30. Going long on DAL as well
6/15 11:30PM - /ES looking good hovering right above 310 right now. Not many price levels above 300 so it's hard to predict trading ranges since there's no price levels and SPY will just go parabolic above this level. Massive gap between 313 and 317. If /ES is able to get above 313, which is where the momentum is going to right now, we might see a massive gap up and open at 317 again. If it opens below 313, we might see the stock price fade like last week.
6/15 Noon - SPY filled some of the gap, but then broke below 313. 15M MACD is now bearish. We might see gains from today slowly fade, but hard to predict this since we don't have strong price levels. Will buy more longs near EOD if this happens. Still believe we'll be overall bullish this week. GE is looking good.
6/16 2PM - Getting worried about 313 acting as a solid resistance; we'll either probably gap up past it to 317 tomorrow, or we might go all the way back down to 300. Considering taking profit for some of my calls right now, since you'll usually want to sell into resistance. I might alternatively buy some 0DTE SPY puts as a hedge against my long positions. Will decide by 3:30 depending on what momentum looks like
6/16 3PM - Got some 1DTE SPY puts as a hedge against my long positions. We're either headed to 317 tomorrow or go down as low as 300. Going to not take the risk because I'm unsure which one it'll be. Also profit-took 25% of my long positions. Definitely seeing the 313 + gains fade scenario I mentioned yesterday
6/17 1:30AM - /ES still flat struggling to break through 213. If we don't break through by tomorrow I might sell all my longs. Norwegian announced some bad news AH about cancelling Sept cruises. If we move below $18.20 I'll probably sell all my remaining positions; luckily I took profit on CCL today so if options do go to shit, it'll be a relatively small loss or even small gain.
6/17 9:45AM - SPY not being able to break through 313/314 (79% retracement) is scaring me. Sold all my longs, and now sitting on cash. Not confident enough that we're actually going back down to 300, but no longer confident enough on the bullish story if we can't break 313 to hold positions
6/17 1PM - Holding cash and long-term VIX calls now. Some interesting things I've noticed
  1. 1H MACD will be testing a crossover by EOD
  2. Equity put/call ratio has plummeted. It's back down to 0.45, which is more than 1 S.D. below the mean. We reached all the way down to 0.4 last time. Will be keeping a close eye on this and start buying for VIX again + SPY puts we this continues falling tomorrow
6/17 3PM - Bought back some of my longer-dated VIX calls. Currently slightly bearish, but still uncertain, so most of my portfolio is cash right now.
6/17 3:50PM - SPY 15M MACD is now very bearish, and 1H is about to crossover. I'd give it a 50% chance we'll see it dump tomorrow, possibly towards 300 again. Entered into a very small position on NTM SPY puts, expiring Friday
6/18 10AM - 1H MACD is about to crossover. Unless we see a pump in the next hour or so, medium-term momentum will be bearish and we might see a dump later today or tomorrow.
6/18 12PM - Every MACD from 5M to 1D is now bearish, making me believe we'd even more likely see a drop today or tomorrow to 300. Bought short-dates June VIX calls. Stop loss for this and SPY puts @ 314 and 315
6/18 2PM - Something worth noting: opex is tomorrow and max pain is 310, which is the level we're gravitating towards right now. Also quad witching, so should expect some big market movements tomorrow as well. Might consider rolling my SPY puts forward 1 week since theoretically, this should cause us to gravitate towards 310 until 3PM on Friday.
6/18 3PM - Rolled my SPY puts forward 1W in case theory about max pain + quad witching end up having it's theoretical effect. Also GEX is really high coming towards options expiry tomorrow, meaning any significant price movements will be damped by MM hedging. Might not see significant price movements until quad witching hour tomorrow 3PM
6/18 10PM - DIX is very high right now, at 51%, which is very bullish. put/call ratio is still very low though. Very mixed signals. Will be holding positions until Monday or SPY 317 before reconsidering them.
6/18 2PM - No position changes. Coming into witching hour we're seeing increased volatility towards the downside. Looking good so far
submitted by ASoftEngStudent to wallstreetbets [link] [comments]

The Great Unwinding: Why WSB Will Keep Losing Their Tendies

The Great Unwinding: Why WSB Will Keep Losing Their Tendies
I. The Death of Modern Portfolio Theory, The Loss of Risk Parity, & The Liquidity Crunch
SPY 1 Y1 Day
Modern portfolio theory has been based on the foundational idea for the past 3 decades that both equities and bonds are inversely correlated. However, as some people have realized, both stocks and bonds are both increasing in value and decreasing in value at the same time.[1] This approach to investing is used pretty much in everyone's 401K, target date retirement plans, or other forms of passive investing. If both bonds and equities are losing value, what will happen to firms implementing these strategies on a more generalized basis known as risk-parity? Firms such as Bridgewater, Bluecrest, and H2O assets have been blowing up. [2,3]
Liquidity has been drying up in the markets for the past two weeks.[4] The liquidity crisis has been in the making since the 2008 financial crisis, after the passage of Dodd-Frank and Basel III. Regulations intended to regulate the financial industry have instead created the one of the largest backstops to Fed intervention as the Fed tried to pump liquidity into the market through repo operations. What is a repo?
A repo is a secured loan contract that is collateralized by a security. A repo transaction facilitates the sale and future repurchase of the security that serves as collateral between the two parties: (1) the borrower who owns a security and seeks cash and (2) the lender who receives the security as collateral when lending the cash. The cash borrower sells securities to the cash lender with the agreement to repurchase them at the maturity date. Over the course of the transaction, the cash borrower retains the ownership of the security. On the maturity date, the borrower returns the cash with interest to the lender and the collateral is returned from the lender to the borrower.[5]
Banks like Bank of New York Mellon and JP Morgan Chase act as a clearing bank to provide this liquidity to other lenders through a triparty agreement.[6] In short, existing regulations make it unfavorable to take on additional repos due to capital reserve requirement ratios, creating a liquidity crunch.[7,8,9] What has the Fed done to address this in light of these facts?
In light of the shift to an ample reserves regime, the Board has reduced reserve requirement ratios to zero percent effective on March 26, the beginning of the next reserve maintenance period.[10]
II. Signs of Exhaustion & The Upcoming Bounce is a Trap, We Have Far More to Go
A simple indicator to use is the relative strength index (RSI) that a lot of WSB is familiar with. RSI is not the be all and end all. There's tons of indicators that also are indicating we are at a very oversold point.
SPY 1 Y1 Day RSI
Given selling waves, there are areas of key support and resistance. For reference, I have not changed key lines since my original charts except for the colors. You can check in my previous posts. 247.94 has been critically an area that has been contested many times, as seen in the figure below. For those that bought calls during the witching day, RIP my fellow autists. The rejection of 247.94 and the continued selling below 233.86 signals to me more downside, albeit, it's getting exhausted. Thus, I expect the next area in which we start rallying is 213.
SPY 10 Day/30 min
Another contrarian indicator for buying calls is that notable people in finance have also closed their shorts. These include Jeffery Gundlach, Kevin Muir, and Raoul Pal.[11,12,13]
III. The Dollar, Gold, and Oil
As previously stated, cash is being hoarded by not only primary banks, but central banks around the world. This in turn has created a boom in the dollar's strength, despite limitless injections of cash (if you think 1 trillion of Repo is the ceiling, think again) by the Fed.
DXY
Despite being in a deflationary environment, the DXY has not achieved such levels since 2003. Given the dollar shortage around the world, it is not inconceivable that we reach levels of around 105-107. For disclosure, I have taken a long position in UUP. However, with all parabolic moves, they end in a large drop. To summarize, the Fed needs to take action on its own currency due to the havoc it's causing globally, and will need to crush the value of the dollar, which will likely coincide with the time that we near 180.
If we are indeed headed towards 180, then gold will keep selling off. WSB literally screams bloody guhhhhhh when gold sells off. However, gold has been having an amazing run and has broken out of its long term channel. In times of distress and with margin calls, heavy selling of equities selling off of gold in order to raise cash. As previously noted, in this deflationary environment, everything is selling off from stocks, to bonds, to gold.
/GC Futures Contracts 5 Y1 Wk
What about oil? Given the fall out of the risk parity structure, I'm no longer using TLT inflows/outflows as an indicator. I've realized that energy is the economy. Closely following commodities such as light crude which follow supply and demand more closely have provided a much better leading indicator as to what will happen in equities. Given that, oil will also most likely hit a relief rally. But ultimately, we have seen it reach as low $19/barrel during intraday trading.
/CL Futures Contracts 1 Y1 D
IV. The Next 5 Years
In short, the recovery from this deflationary environment will take years to recover from. The trend down will not be without large bumps. We cannot compare this on the scale of the 2008 financial crisis. This is on the order of 1929. Once we hit near 180, the Fed crushes the dollar, we are in a high likelihood of hitting increased inflation, or stagflation. At this point the Fed will be backed into a corner and forced to raise rates. My targets for gold are around 1250-1300. It may possibly go near to 1000. Oil could conceivably go as low as $15-17/barrel, so don't go all in on the recovery bounce. No matter what, the current rise in gold will be a trap. The continued selling in the S&P is a trap, will bounce, forming another trap, before continuing our painful downtrend.
I haven't even mentioned coronavirus and unemployment until now. I've stated previously we are on track to hit around at least 10,000 coronavirus cases by the end of this month. It's looking closer to now 20-30,000. Next month we are looking to at least 100,000 by the end of the April. We might hit 1,000,000 by May or June.
Comparison of the 2020 Decline to 1929
------------------------------------------------------------------------------------------------------------------------------------------------
Chart courtesy of Moon_buzz
tl;dr We're going to have a major reflexive rally starting around 213, all the way back to at least to 250, and possibly 270. WSB is going to lose their minds holding their puts, and then load up on calls, declaring we've reached a bottom in the stock market. The next move will be put in place for the next leg down to 182, where certain actors will steal all your tendies on the way down. Also Monday might be another circuit breaker.
tl;dr of tl;dr Big bounce incoming. Bear trap starting 213. Then bull trap up around 250-270. We're going down to around 182.
tl;dr of tl;dr of tl;dr WSB will be screwed both left and right before they can say guh.
Hint: If you want to get a Bloomberg article for free, hit esc repeatedly before the popup appears. If it doesn't work, refresh the article, and keep hitting esc.
Remember, do not dance. We are on the cusp of a generational change. Use the money you earn to protect yourselves and others. Financial literacy and knowledge is the key to empowerment and self-change.
Some good DD posts:
u/bigd0g111 -https://www.reddit.com/wallstreetbets/comments/fmshcv/when_market_bounce_inevitably_comesdont_scream/
u/scarvesandsuspenders - https://www.reddit.com/wallstreetbets/comments/fmzu51/incoming_bounce_vix_puts/

Update 1 3/22/2020 - Limit down 3 minutes of futures. Likely hit -7% circuit breaker on the cash open on Monday at 213 as stated previously.
Do not think we will hit the 2nd circuit breaker at 199.06. Thinking we bounce, not too much, but stabilize at least around 202.97.
Update 2 3/23/20 9:08 - Watching the vote before making any moves.
9:40 - sold 25% of my SPY puts and 50% of my VXX calls
9:45 - sold another 50% of SPY puts
9:50 - just holding 25% SPY puts now and waiting for the vote/other developments
11:50 - Selling all puts.
Starting my long position.
11:55 - Sold USO puts.
12:00 - Purchased VXX puts to vega hedge.
2:45 - Might sell calls EOD. Looks like a lot of positioning for another leg down before going back up.
It's pretty common to shake things out in order to make people to sell positions. Just FYI, I do intraday trading. If you can't, just wait for EOD for the next positioning.
3:05 - Seeing a massive short on gold. Large amounts of calls on treasuries. And extremely large positioning for more shorts on SPY/SPX.
Will flip into puts.
Lot of people keep DM'ing me. I'm only going to do this once.

https://preview.redd.it/uvs5tkje1ho41.png?width=2470&format=png&auto=webp&s=c6b632556ca04a26e4e08fb2c9223bfcb84e0901
That said, I'm going back into puts. Just goes to show how tricky the game is.
3:45 - As more shorts cover, going to sell the calls and then flip into puts around the last few min of close.
Hope you guys made some money on the cover and got some puts. I'll write a short update later explaining how they set up tomorrow, especially with the VIX dropping so much.
3/24/20 - So the rally begins. Unfortunately misread the options volume. The clearest signal was the VIX dropping the past few days even though we kept swinging lower, which suggested that large gap downs were mostly over and the rally is getting started.
Going to hold my puts since they are longer dated. Going to get a few short term calls to ride this wave.
10:20 - VIX still falling, possibility of a major short squeeze coming in if SPY breaks out over 238-239.
10:45 - Opened a small GLD short, late April expiration.
10:50 - Sold calls, just waiting, not sure if we break 238.
If we go above 240, going back into calls. See room going to 247 or 269. Otherwise, going to start adding to my puts.
https://preview.redd.it/ag5s0hccxmo41.png?width=2032&format=png&auto=webp&s=aad730db4164720483a8b60056243d6e4a8a0cab
11:10 - Averaging a little on my puts here. Again, difficult to time the entries. Do not recommend going all in at a single time. Still watching around 240 closely.
11:50 - Looks like it's closing. Still going to wait a little bit.
12:10 - Averaged down more puts. Have a little powder left, we'll see what happens for the rest of today and tomorrow.
2:40 - Closed positions, sitting on cash. Waiting to see what EOD holds. Really hard trading days.
3:00 - Last update. What I'm trying to do here posting some thoughts is for you guys to take a look at things and make some hypotheses before trading. Getting a lot of comments and replies complaining. If you're tailing, yes there is risk involved. I've mentioned sizing appropriately, and locking in profits. Those will help you get consistent gains.
https://preview.redd.it/yktrcoazjpo41.png?width=1210&format=png&auto=webp&s=2d6f0272712a2d17d45e033273a369bc164e2477
Bounced off 10 year trendline at around 246, pretty close to 247. Unless we break through that the rally is over. Given that, could still see us going to 270.
3/25/20 - I wouldn't read too much into the early moves. Be careful of the shakeouts.
Still long. Price target, 269. When does the month end? Why is that important?
12:45 - out calls.
12:50 - adding a tranche of SPY puts. Adding GLD puts.
1:00 est - saving rest of my dry powder to average if we still continue to 270. Think we drop off a cliff after the end of the quarter.
Just a little humor... hedge funds and other market makers right now.
2:00pm - Keep an eye on TLT and VXX...
3:50pm - Retrace to the 10 yr trend line. Question is if we continue going down or bounce. So I'm going to explain again, haven't changed these lines. Check the charts from earlier.
https://preview.redd.it/9qiqyndtivo41.png?width=1210&format=png&auto=webp&s=55cf84f2b9f5a8099adf8368d9f3034b0e3c4ae4
3/26/20 - Another retest of the 10 yr trendline. If it can go over and hold, can see us moving higher.
9:30 - Probably going to buy calls close to the open. Not too sure, seems like another trap setting up. Might instead load up on more puts later today.
In terms of unemployment, was expecting close to double. Data doesn't seem to line up. That's why we're bouncing. California reported 1 million yesterday alone, and unemployment estimates were 1.6 million? Sure.
Waiting a little to see the price action first.
Treasuries increasing and oil going down?
9:47 - Added more to GLD puts.
10:11 - Adding more SPY puts and IWM puts.
10:21 - Adding more puts.
11:37 - Relax guys, this move has been expected. Take care of yourselves. Eat something, take a walk. Play some video games. Don't stare at a chart all day.
If you have some family or close friends, advise them not to buy into this rally. I've had my immediate family cash out or switch today into Treasury bonds/TIPS.
2:55pm - https://youtu.be/S74rvpc6W60?t=9
3:12pm - Hedge funds and their algos right now https://www.youtube.com/watch?v=ZF_nUm982vI
4:00pm - Don't doubt your vibe.
For those that keep asking about my vibe... yes, we could hit 270. I literally said we could hit 270 when we were at 218. There was a lot of doubt. Just sort by best and look at the comments. Can we go to 180 from 270? Yes. I mentioned that EOM is important.
Here's another prediction. VIX will hit ATH again.
2:55pm EST - For DM's chat is not working now. Will try to get back later tonight.

Stream today for those who missed it, 2:20-4:25 - https://www.twitch.tv/videos/576598992
Thanks again to WallStreetBooyah and all the others for making this possible.

9:10pm EST Twitter handles (updated) https://www.reddit.com/wallstreetbets/comments/fmhz1p/the_great_unwinding_why_wsb_will_keep_losing/floyrbf/?context=3, thanks blind_guy
Not an exhaustive list. Just to get started. Follow the people they follow.
Dark pool and gamma exposure - https://squeezemetrics.com/monitodix
Wyckoff - https://school.stockcharts.com/doku.php?id=market_analysis:the_wyckoff_method
MacroVoices
Investopedia for a lot. Also links above in my post.

lol... love you guys. Please be super respectful on FinTwit. These guys are incredibly helpful and intelligent, and could easily just stop posting content.
submitted by Variation-Separate to wallstreetbets [link] [comments]

On UP-C IPO, Reverse Merger and TRA : PRPL, PBF, GNW, CCC

On UP-C IPO, Reverse Merger and TRA : PRPL, PBF, GNW, CCC
Disclaimer : I'm not a tax attorney or CPA, I trade from my mom's basement and my day job is handing out flyers while wearing a hotdog costume.
Previous Post https://www.reddit.com/wallstreetbets/comments/ia18vv/prpl_lousyand_kind_of_shady_tax_receivable/
Right since wsb like small caps now, let's take a moment to learn about public companies with Umbrella Partnership C Corporation (UP-C) IPO structure. This won't actually give you any trading edge whatsoever, but will help you to lose money more slowly or flatten the loss porn curve shall we say. PRPL went public by a reverse merger with a shell company but ended up having pretty much the same corporate structure as a typical UP-C IPO.
We will compare last week favourite meme stock PRPL with other small caps PLC that also have UP-C structure. I couldn't do it with sector peers because none of TPX, SNBR and CSPR have it.
TRA and UP-C started in early 2000s have been gaining popularity since.

https://preview.redd.it/wdvyi08slkh51.png?width=696&format=png&auto=webp&s=401a90effe15f988b826f46f67ee88e9cb8b540d
Despite it's name, Tax Receivable Agreement (TRA) functions mostly as a way for pre-IPO owners to siphon cash from public companies. There are plenty of other ways for a public company to get step up basis on tax without TRA, it's just the only one that siphon cash back to the pre-IPO owners. It has always been somewhat controversial and challenged many times, several legislation was introduced but on all occasions congress chose not to pass it.
Now a UP-C IPO is when the income generating company is actually a LLC or partnership. in PRPL case this is Purple LLC. It's basically a clever way for the pre-IPO shareholders/partners to retain pass trough treatment of income and to avoid double taxation (corporate and shareholder level). Here's a small diagram of what it looks like

https://preview.redd.it/upzadeixlkh51.png?width=996&format=png&auto=webp&s=c2b72c62746cb77aaf1e673d5476c4f5c6905699
This UP-C structure have added inherent risk for public shareholders such as
  1. Dividends and assets
The public company have no material assets besides ownership of common units in the partnership, thus the ability to generate revenues and pay dividends will depend on the partnership results and distributions received.
  1. Control
The original partners may have majority voting power in the partnership after IPO, this is not the case for PRPL but this relates to PRPL income statement, where they state the income due to non controlling interest in EPS calculation
  1. Tax Receivable Agreement (TRA)
Which we are about to discuss

For PRPL, Purple LLC would be the original partnership and PubCo would be Purple Innovation PLC. Also similar is the class A and Class B stocks. Class B which are retained by the original partners exchangeable to Class A stock. When they actually exchange/sell the class B stock into Class A, on a typical UP-C this will trigger a step up basis under TRA(Tax Receivable Agreement).

https://preview.redd.it/1vy252zylkh51.png?width=544&format=png&auto=webp&s=b1e310c2ae1d16d473bcbe5bbc224420b6ec7fd1
So when the partners of the partnership sell, they not only get the proceeds but also a amortizable tax deductions from goodwill. Example of a simplified case; if the pre-IPO value is 10$ and current stock price is 30, the basis step up would be 20$ x amount of shares sold booked as liability in the public company. Say Partner X exchange and sells 1 million of class B stock in the market, besides getting 30 MM USD, he will also get a certain percentage of the step up basis (usually 80%) or about 20 MM USD * 0.8 = 16 MM USD. This 16 MM USD is booked as TRA liability in the public company. Payable by cash to the partner when that tax benefit is realized, on the basis of with/without calculation. Some TRAs may even include the Net Operating Loss (NOLs) and other tax assets in the partnership on stock sale. A typical TRA sharing percentage is about 80% for the partner and 20% for the public company with a duration of 10-15 years. TRA is not specifically tied to stock ownership, for example in PRPL, innoHold may sell all their stake when PRPL stock reaches an all time high. Besides the sales proceeds they would then continue to receive cash for realized stock benefit from the step up for 10-15 years after they ceased to be stock holders.
Furthermore the way this is recorded in the balance sheet may use a "more likely then not" threshold so it won't actually appear until the company starts making a taxable profit. But they usually have a little note in the income tax section regarding it.
FROM PRPL 10-Q Q1 in notes on financial statements (income taxes)
Early Warning of Possible Valuation Allowance Reversal in Future Periods
The Company recorded a valuation allowance against all of the deferred tax assets as of March 31, 2020 and December 31, 2019. The Company intends to continue maintaining a full valuation allowance on the deferred tax assets until there is sufficient evidence to support the reversal of all or some portion of these allowances. However, given the current earnings and anticipated future earnings, the Company believes there is a reasonable possibility that within the next 12 months, sufficient positive evidence may become available to allow the Company to reach a conclusion that a significant portion of the valuation allowance will no longer be needed. Release of the valuation allowance would result in the recognition of certain deferred tax assets and a decrease to income tax expense for the period the release is recorded. In addition, the full potential future TRA Liability will be required to be recognized. The exact timing and amount of the valuation allowance release are subject to change on the basis of the level of profitability that the Company is able to actually achieve.
FROM PRPL 10-Q Q2 in notes on financial statements (income taxes)
For the period ended June 30, 2020, and in assessing the realizability of deferred tax assets, management determined that it is now more likely than not that its net deferred tax assets will be realized and that a full valuation allowance for its deferred tax assets is no longer appropriate. As of the period ended June 30, 2020, the Company is no longer in a three-year cumulative loss position. As a result of the removal of this negative evidence and other items of positive evidence, the Company has determined that the deferred tax assets are now more likely than not to be realized.
Due to the release of the Company's valuation allowance on the deferred tax assets to which the Tax Receivable Agreement liability relates, only $78.7 of the $81.5 million has been recorded to date ($0.5 million in 2019 and an incremental $78.2 million through June 30, 2020). Of the total liability recorded during 2020, $45.3 million relates to current year exchanges and was recorded as an adjustment to equity and $32.9 was recorded to expense in order to reestablish the TRA related to prior year exchanges. The additional $2.8 million is expected to be recorded in the third and fourth quarters of the year ending December 31, 2020.
Great now that the company have started making money, time to surprise public stock holders with instant liability.
PRPL Balance sheet Q2
Another cool feature of TRA is the Indemnification/clawback obligations.
No assurance can be given that the IRS will agree with the allocation of value among our assets or that sufficient subsequent payments under the tax receivable agreement will be available to offset prior payments for disallowed benefits. As a result, in certain circumstances, payments could be made under the tax receivable agreement in excess of the benefit that we actually realize in respect of the increases in tax basis resulting from our purchases or exchanges of LLC Units and certain other tax benefits related to our entering into the tax receivable agreement
And even more wicked
Some companies pay interest on their TRA liability, even before the tax benefit is realized
To top it off on a few TRAs spotted in the wild
Furthermore, payments under the tax receivable agreement will give rise to additional tax benefits and therefore additional payments under the tax receivable agreement itself
Yep, paying the TRA will lead to another tax benefit attributed to the TRA leading to an increase in the TRA liability. It's like a perpetual motion machine.
Besides PRPL, The public markets have a history of underestimating and not fully understanding TRA impact
Let's take a look at PBF Energy TRA liability,
pre IPO it was estimated to be only about 96.8 MM USD
https://preview.redd.it/yttj5bg7mkh51.png?width=802&format=png&auto=webp&s=bdb041cf455bf0e74daf55ec2fef7ed42b97703d
The drop you see in 2017 was due to the TCJA legislation enacted reducing corporate tax rate. Because of rona PBF market cap has fallen off a cliff since then, but you get the point, TRA liability increases in size along with company market cap and assets.
In order to avoid the swelling cost of TRAs,
Some companies have negotiated a cap on TRA payments. For example, when Genworth Financial (GNW) entered into a TRA with General Electric following their separation, the companies agreed on a maximum aggregate payment to GE of $640 million. As described in Genworth’s March 1, 2005 10-K filing: To put that number in context, $640 million is 35% of Genworth’s 2004 EBITDA. PRPL currently doesn't have any such cap.
For getting out of a TRA,
Clarivate Analytics(CCC) recently sought early termination / buyout of their TRA
https://www.prnewswire.com/news-releases/clarivate-analytics-announces-buyout-of-tax-receivable-agreement-300905700.html
The amount is usually NPV of potential tax benefits, which as you can imagine is very imprecise and will depend a lot on partners discretion.

Comments from Tax Professionals on TRA:
TRAs fundamentally change the nature of IPOs by transferring value from public shareholders to the pre-IPO owners. This Article shows that TRAs have rapidly risen in popularity and have very recently evolved in ways that make them universally available to any IPO. This Article analyzes the ways that TRAs transfer wealth from public companies to pre-IPO owners, presents previously overlooked economic and disclosure issues arising in these transactions, and argues that the SEC should require companies to publicly disclose these material risks.
Vanderbilt Law Review
A few theories have emerged as to why the public markets do not factor a TRA in to the valuation of a business and its stock price. Foremost is the argument that public companies are valued in terms of multiples of their earnings before interest, taxes, depreciation, and amortization and that “accounting items like a reduction in a deferred tax asset or a tax expense aren’t reflected in EBITDA.”
Taxnotes, Special Report August 2017

What those lawyers are saying is basically that TRAs are made possible by retards buying stocks and not reading the fine print.

TL;DR: When you do DD on a company it's not just about topline and gross margin, verify the corporate structure and liabilities agreements so you won't be surprised come earnings.

submitted by indonesian_activist to wallstreetbets [link] [comments]

Your Pre Market Brief for 07/22/2020

Pre Market Brief for Wednesday July 22nd 2020

You can subscribe to the daily 4:00 AM Pre Market Brief on The Twitter Link Here . Alerts in the tweets will direct you to the daily 4:00 AM Pre Market Brief in this sub.
Updated as of 4:00 AM EST
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Stock Futures:
Tuesday 07/21/2020 News and Markets Recap:
Wednesday July 22nd 2020 Economic Calendar (All times are Eastern)
News Heading into Wednesday July 22nd 2020
NOTE: I USUALLY (TRY TO) POST MANY OF THE MOST PROMISING, DRAMATIC, OR BAD NEWS OVERNIGHT STORIES THAT ARE LIKELY IMPORTANT TO THE MEMBERS OF THIS SUB AT THE TOP OF THIS LIST. PLEASE DO NOT YOLO THE VARIOUS TICKERS WITHOUT DOING RESEARCH. THE TIME STAMPS ON THESE MAY BE LATER THAN OTHERS ON THE WEB.
Upcoming Earnings:
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Macro Considerations:
Most Recent SEC Filings
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The Ultimate Quick Resource For the Amateur Trader.
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It is up to you to judge the accuracy and veracity of these headlines before trading.
submitted by Cicero1982 to pennystocks [link] [comments]

Defense stocks - what the heck is going on

I've had discussion with a couple people on why defense is doing so poorly right now, wanted to get a broader general opinion. I'm going to leave BA and RTX out because of their large commercial exposure but leave in GD, HII and LHX since it's much smaller. I'll focus on a core of LMT/NOC/GD/LHX/HII but this can be extended to others like KTOS, LDOS, CACI etc. Here are today's closing prices for reference:
LMT - $354 / NOC - $304 / GD - $145 / LHX - $168 / HII - $168
Defense stocks - what the heck is happening?
Taking a look over the last month:
LMT is down 15% / NOC is down 12% / GD is down 13% / LHX is down 19% / HII is down 18%
And the question is why? Particularly in the case of NOC and LMT that are as close to pure plays as you can get - why are defense contractors hemorrhaging? Some of these are trading near their post-March crash lows
1 - Revenue is nearly unaffected by COVID, and backlogs keep growing
Defense contracts have long award processes and are usually multi-year and booked in advance. Here are some of the ridiculous backlog sizes from the first quarter
LMT - backlog of $144 billion
NOC - backlog of $64 billion
GD - backlog of $86 billion
LHX - not sure? Didn't see it in the May earnings call - It's somewhere near $20 billion for the end of last year and the book to bill increased slightly, so somewhere around there
HII - backlog of $42 billion
LMT and NOC noted that COVID would have insignificant impacts to revenue and fronted payments to their suppliers in some cases to help them out. Most contractors had a positive book to bill with increased sales and increasing margins
2 - Target prices are miles away and a ton of buy ratings
I'm going to pull some average target prices from WSJ
LMT - average $430, upside of 21%
NOC - average $389, upside of 28%
GD - average of $171, upside of 18%
LHX - average of $240, upside of 42%
HII - average of $222, upside of 32%
3 - Defense spending is not shrinking any time soon, tensions are rising
The new National Defense Authorization Act (NDAA) has been flying through approvals, and allocated $741B for spending. The current bill is allocated at $738B. This flew through the Senate Armed Services Committee with a 25-2 pass and will probably pass both Senate and House, as it seems defense spending is the one thing every one agrees on. And we are not the only nation increasing spending
US and China relations have deteriorated. Australia just announced a big beef up, raising their spending goal over the next decade from $135B to $187B. Japan's been increasing their spending for years, as has SK and everyone else in the region. Big wins for companies like RTX, LMT and others involved
Europe has been flat but Middle East is buffing up. India over the winter announced the purchase of several billion in US helicopters and imports will probably grow if tensions with China continue
4 - Not dependent on a China trade deal
Sticking this here due to futures crashing briefly overnight after Navarro made his late night comments a couple weeks ago. If things do go south with that deal, it will not effect revenue
Not to mention pluses such as a nice dividend, industry preference towards established giants due to high entry costs, etc. Hilariously enough, I found an old article from the end of 2018 that had the same feeling I do now
https://www.barrons.com/articles/defense-stocks-are-lagging-and-there-are-no-good-reasons-why-51544614201
After this article was written, defense had a major major outperform year in 2019. LMT stock price grew 50% in 2019 for instance, similar to NOC
So - what gives? Is defense really just not sexy? Are these companies just thrown in with industrials and traded in step with the rest of the market? Am I crazy?
EDIT: full disclosure I do have calls on NOC and LMT
submitted by dweeegs to stocks [link] [comments]

M1 Plus Review

Intro:
Bought into M1 Plus from a $60/yr Promotion 2 months ago. I had an investment account already, and even one of the first spend accounts. I had declined the offer for M1 Plus at $125/yr.
This is a first review of M1 Plus after two months of use and a bit of a dive into the value of its features from a financial and user experience point of view.
Value:
This is a pretty simple one. Do the math. The interest vs. your other checking account multiplied by the amount of cash you’d be keeping in there for M1 Spend. If you’re borrowing from M1 too, the 1.5% difference (or whatever difference there is between M1 Borrow and your next best offer) multiplied by the amount of money you’d like to borrow. If all these add up to greater than whatever annual fee is offered, go for it.
Otherwise, it’d be a very expensive metal card. But if 4 waived ATM fees go a long way to save you money, that should be worth considering too, however, there are tons of cards and products that’ll waive said fees, some even for unlimited transactions and no upfront cost. Just because M1 is offering this benefit as part of a premium package doesn’t mean it’s impossible to find for free somewhere else.
XP:
It is a great experience. I constantly invest lumps of $500 into my portfolio all the time. It’s quick, easy, and immediately fulfilling. Not that other brokerages don’t do this. But M1 is clearly focused on showing you your long term progress on your investment goals. It uses a money weighted return formula so that you know how much your capital has been making you to easily compare to the return of bank accounts and investments. There’s a reason their product is called “Invest” and not “Trade”, more on that later. But this means it’s primarily suited for this purpose. During the Covid crash, I took to Robinhood to place my Put Options on the S&P because high frequency derivatives trading and M1 basically speak different languages. All this to say, it feels amazing to watch your investments accounts slowly creep up as you continue to dollar cost average into the market, but this has some drawbacks.
Pies. While fun and easy to build, mix and match, they are not a very common mechanic to implement on amateur portfolios. Selling stocks can be quite the process on M1, and the platform will try its darnest to discourage you from making any but the most basic adjustments to your portfolio. Its really only suited for the “set it and forget it” mindset, which is not to say you can’t mess around with your money as you please, but it’s just so perfect for investing and watching your money grow with a long time horizon. The plots will show you your progress and encourage you to keep a regular deposit schedule. But try trading into and out of a stock, or a set amount of shares, or even thinking about playing with derivatives and other financial instruments: slim pickings.
The numbers make a lot of sense, too. I’ve been investing for about 5 years now, and my latest craze has been leverage. I’ve read about how the optimal leverage ratio for the S&P on average was 2.0 or 100% levered up, and looked up the historical comparisons to corroborate. Shopping around for margin accounts and available capital, it’s tough to beat the 2% rates at the moment. I’ve been slowly levering up during the latest market rally to great effect and the low interest really pumps up those numbers. Having this much cheap capital, not just for leverage, but also for life is worth more than just the time value of money. I would make the point that this is made even more valuable by having all your financial services on the same platform, as you really get to do with your money as you please and move it around to withdraw it to your hearts content.
My real issue was with Spend. Not a problem with the product but myself, in trying to justify the annual fee. I weighed how much money it would make sense to keep in Spend as opposed to an online savings account. To keep cash a couple of months ago, it made more sense to opt for ally or marcus as they were offering close to 1.55% on cash. But as their rates have plummeted, getting 1.0% on a CHECKING account has been an absolute godsend in this crazy economy. This account works for just about anything with the notable exception of checks... in a checking account which I suspect is the reason for the “Spend” branding the product was marketed with. When it’s hard to even find 1% on a savings account, a 1% APY on checking is no-worries approach to cash investment.
Ultimately, having all of these balances displayed together on the Transfers tab is huge in terms of consumer experience. This, however, should not be a replacement for true “Dashboard” that could show an overview of all your money moves and account balances.
Ideas:
M1 Trade. Admittedly, I do see how this can be very contrary to the philosophy, product and experience that M1 has worked to create. That being said, thinking that your customer will always prefer to have their money invested into automatically allocated pies is a little short-sighted.
Opening a much more DIY Trading product on M1 would of course have them incur tons of costs in handling and verifying transactions of all the individual financial, but many places already offer such services for free, some are even profitable at it. An M1 Trade product would also need integrating the Invest product because regardless of what you’re doing on the platform, you still consider your money your investments and want to see it all together. Pies and individual Buys would have to play nice together, and that does sound like a difficult endeavor.
I keep a couple of accounts with different mixtures of my pies for all my purposes. I also handle the investments for a few of my family members, which will become relevant shortly. You can obviously set up as many accounts as you wish and move money into them as you desire, but this can get you into some warmer water. If two of your pies hold most the same securities and you just want to have a different pie for a different account, you’ll have to call up to pause trading so that your pies have a chance to get to know each other and not force you to sell and buy right back into the same assets just to incur the taxes. It’s a bit of a hassle, and I would argue, on purpose.
For Pies themselves, I often find myself wanting to make small tweaks to pies but then quickly let it go as removing slices would automatically trigger a massive sell off that incurs taxes. From a conversation with tech support, I gathered that the best way to do this was simply pause trading on your account, and change the pie you want all your money to go into. Editing pies is fine and easy, but completely swapping a pie for another one led me to believe that it would sell put of all my holdings even if the old and new pie had many of those same holdings. If this is me being stupid, good, if it’s a gap in features, I hope M1 lets you simply swap a pie for any other and gives you the option either sell everything, sell only what is 0 in the second pie, or sell nothing and simply continue aiming for the allocation of the new pie without touching your previous investments.
Lastly, an iPad app. I’m a big fan of the iPad and the iPad Pro in particular. I’ve found myself using it far more than my laptop which is now strictly reserved for long work sessions (I write and edit for a YouTube Channel) and watching content in groups of people (15” MBP Speakers are the stuff of legend). But for anything else, I subconsciously grab the iPad. It’s annoying to have the website be the best M1 experience on the iPad. I understand that making a compelling iPad investing app is its own mountain to climb, but a lot of the Mobile app’s functionality can be ported over without too much of a hassle. Charles Schwab has an iPad app based 99% on the iPhone app that still performs all the same functions, just on the bigger screen, which is the whole point of the iPad in the first place. While it’s not a top shelf iPad app (there are only a select few) the Schwab app is lovely and I’m begging M1 for anything that doesn’t force me to use my iPad in portrait mode to use a blown up iPhone app. Again, this app doesn’t have to be a world beater, just a decent looking and bigger version of the iPhone app that would go a long way to boost the M1 customer experience.
Closing Remarks:
Obligatory YMMV disclosure: it’s about the math, I won’t bore you with my own, but I was just over the line when it made sense for me to opt into the $60/yr promo.
That being said, M1’s value has been a lot about the experience. The future of finance is free. No brokerage should be making money on transaction commissions or administrative fees, it’s a relic from the before times when you needed people who knew people on wall street to do your trading. At this point its not even worth any perceived convenience.
The clever ones reading this will point out that, while true, many brokerages already offer a wide variety of free services. Many of them, even, that M1 doesn’t offer.
The true spirit of this review is to express my personal opinion on the value of M1 Plus and how the customer experience is its edge in the ebrokerage market. Rates are competitive, but it is a brand new way to consider finance and its role in your life and society.
TL;DR
Spend is pretty competitive for a checking account, and as long as you’re not using checks too often, its a no brainer for anyone with close to $10,000 in cash just sitting somewhere.
Invest is beautiful, but the free version is exactly as good, more windows means very little with the limited trading you’re allowed to do anyway.
Borrow is brilliant, hella flexible and competitive rates.
8/10 Would recommend to a friend.
submitted by TomasFCampos to M1Finance [link] [comments]

Due Diligence: Toromont Industries Ltd. - Building Together For An Exciting Future

Due Diligence: Toromont Industries Ltd. - Building Together For An Exciting Future
Hi,
This is my first attempt at writing a DD report. I hope it makes sense.
Just a few cautionary words:
  • Grammar (and English in general) is not a skill of mine. There will be a few parts that you might have to decipher, good luck.
  • I tried not to provide too much commentary and stick to the facts. I know you are spending your valuable time reading this and you probably don't want to listen to some random guy on the internet pontificate.
  • For those of you who are easily offended/triggered, can't take a joke, or sarcasm isn't your taste, DO NOT click the spoilers.
Lastly, the following is just my findings, by no means is it a representation of all the information out there. It is just the baseline for me to have confidence in becoming an owner of the Company. Do your own due diligence or talk to a financial advisor to find what is best for you and your financial situation.
Happy reading!

Highlights

  • Over the last 5 years the stock price has more than doubled.
  • Toromont dominates market share over everything east of Manitoba in Canada.
  • Customer base is heavily diversified, giving the Company many opportunities to expand into multiple industries.
  • Dividend has increased for 31 consecutive years. It has been paid for 52 consecutive years
  • The management team is extremely knowledgeable and have a good track record

Introduction

Toromont Industries Ltd. (TSE:TIH) provides specialized equipment in Canada and the United States. The Company operates two business segments: The Equipment Group and CIMCO. The Equipment Group supplies specialized mobile equipment and industrial engines for Caterpillar Inc. (NYSE:CAT). Customers for this business segment vary from infrastructure contractors, residential and commercial contractors, mining companies, forestry companies, pulp and paper producers, general contractors, utilities, municipalities, marine companies, waste handling companies, and agricultural enterprises. CIMCO offers design, engineering, fabrication, and installation of industrial and recreational refrigeration systems.
The Company was founded in 1961 and operates out of Concord, Ontario. As at December 31, 2019, Toromont employed over 6,500 people in more than 150 locations across central/eastern Canada and the upper eastern United States.
The primary objective of the Company is to build shareholder value through sustainable and profitable growth, supported by a strong financial foundation.

Description of the 2 Main Business Segments

  1. The Equipment Group includes the following 6 business units:
  • Toromont CAT: one of the world’s largest Caterpillar dealerships which supplies, rents, and provides product support services for specialized mobile equipment and industrial engines
  • Battlefield Equipment Rentals: supplies and rents specialized mobile equipment as well as specialty supplies and tools.
  • Toromont Material Handling: supplies, rents, and provides product support services for material handling lift trucks
  • AgWest: an agricultural equipment and solutions dealer representing AGCO, CLAAS and other manufacturers’ products
  • SITECH: provides Trimble Inc (NASDAQ:TRMB technology products and services. Trimble is a SaaS company that provides positioning, modeling, connectivity, and data analytics software which enable customers to improve productivity, quality, safety, and sustainability. Target industries: land survey, construction, agriculture, transportation, telecommunications, asset tracking, mapping, railways, utilities, mobile resource management, and government.)
  • Toromont Energy: supplies, constructs, and operates high efficiency power plants up to 50 MW, using Caterpillar's leading power generation technologies. Toromont Energy operates plants that supply energy to hospitals, district energy systems, and industrial processes.
  • Performance in this segment mainly depends on the activity in several industries: road building and other infrastructure-related activities, mining, residential and commercial construction, power generation, aggregates, waste management, steel, forestry, and agriculture.
  • Revenues are driven by the sale, rental, and servicing of mobile equipment for Caterpillar and other manufacturers to the industries listed above.
  • In addition, Toromont is the MaK engine dealer for the Eastern seaboard of the United States, from Maine to Virginia.
  • MaK engine is a marine diesel engine manufactured by Caterpillar
  1. CIMCO is a market leader in the design, engineering, fabrication, installation and after-sale support of refrigeration systems
  • Performance in this segment is dependent on the activity in several industries: beverage and food processing, cold storage, food distribution, mining, and recreational ice rinks.
  • CIMCO has manufacturing facilities in Canada and the United States and sells its solutions globally.
  • CIMCO services the ice rinks of 23 out of 31 NHL teams. So if you are watching a game and the ice is shitty, you know who to blame… the Ice Girls, obviously.
  • For those of you who live in the GTA and have skated on The Barbara Ann Scott Ice Trail at College Park, the trail was created using CIMCO proprietary CO2 refrigeration technology.

Management

CEO, Scott J. Medhurst has been with the company since 1988. He was appointed President of Toromont CAT in 2004 and he came into his current position as President and CEO in 2012. He is a graduate of Toromont’s Management Trainee Program.
CFO, Mike McMillan joined the executive team in March of 2020. His predecessor, Paul Jewer is retiring this year and has been working with McMillan during the transition period.
VP and COO, Michael Chuddy has been with Toromont since 1995.
On average, leaders have 29 years of business experience and have served at Toromont for 19 years. Seeing long tenures, good stock performance, excellent business planning and execution is usually a sign of strong leadership. In addition, insiders hold more than 3% (~$175 million) of the company’s outstanding shares. Medhurst owns more than 170 thousand shares, Chuddy owns just under 100 thousand shares and the former CEO and current Independent Chairman of Board of Directors, Robert Ogilvie owns more than 2 million shares, making him the 4th largest stockholder. High insider ownership typically signals confidence in a company's prospects. Compare this to Toromont’s main Canadian competitor, Finning, where insiders own less than 0.4% ($12 million) of the company (this number varies depending on where you look, I just took the highest one I found).
Recently insiders have been selling stock (Figure 1). I cannot speak to the reasons why insiders are selling but the remaining position owned by the insider is sizable and demonstrates that the executive still has confidence in the company. Some of the reasons insiders sell are: they don't believe in the company’s future, they need money for personal use, they are rebalancing their portfolio, among others.
Figure 1: Buy and selling activity of insiders (the data is from MarketBeat, so take that for what it's worth).
On a somewhat unrelated but still related note, 50% of Toromont employees are also shareholders.

Growth Strategies

Toromont has five growth strategies (expand markets, strengthen product support, broaden product offerings, invest in resources, and maintain a strong financial position). I chose to focus on the following two strategies, as they seemed most prevalent.
  1. Expand Markets
  • Toromont serves a wide variety of end markets: mining, road building, power generation, infrastructure, agriculture, and refrigeration. This allows for many opportunities for growth while staying true to their core competency. Further expansion into new markets doesn't require Toromont to build a whole new business model or learn the intricacies of the new industry because their products stays the same. Thus, the main concern is the application/selection of the products for the customer.
  • Expansion is generally incremental. Each business unit focuses on market share growth and when the right opportunity presents itself, geographic expansion is archived through acquisitions.
  1. Strengthening Product Support
  • In an industry where price competition is high, product support activities represent opportunities to develop closer relationships with customers and differentiate Toromont’s product and service offering from competitors. After-market support is an integral part of the customer's decision-making process when purchasing equipment.
  • Product support revenues are more consistent and profitable.

Growth Through Acquisition

Rapid growth in this industry is generally driven through acquisitions. Toromont has gone through multiple acquisitions since the 90’s:
  • Acquisition of the Battlefield Equipment Rentals in 1996
    • Toromont grew Battlefield from one location to 82 locations
  • Acquisition of two privately held agricultural dealerships in Manitoba to form AgWest Equipment Ltd
  • Acquisition of Hewitt Group of companies in Q3 2017 for a total consideration of $1.0177 billion
    • $917.7 million cash ($750 million of which was finances through unsecured debt) plus the issuance of 2.25 million Toromont shares (equating to $100 million based on the 10 day average share price)
Acquisition of Hewitt Group of companies
This acquisition allowed Toromont to make headway into the Quebec, Western Labrador, and Maritime markets, as Hewitt was the authorized Caterpillar dealer of these regions. Hewitt was also the Caterpillar lift truck dealer of Quebec and most of Ontario and the MaK marine engine dealer for Québec, the Maritimes, and the Eastern seaboard of the United States (from Maine to Virginia).
Toromont had total assets of $1.51 billion before the acquisition, the acquisition added $1.024 billion in assets, nearly doubling the balance sheet (look at Figure 2 for more details about the acquisition).
Figure 2: (all numbers are in thousands) The final allocation of the purchase price was as of Dec 31, 2018, Note 25 of 2018 Annual Report. $1.024 billion was added to the Toromont’s B/S
Large acquisitions like this one can be the downfall of a company. Here are some of the risks highlighted by management at the time of the acquisition:
  • Potential for liabilities assumed in the acquisition to exceed our estimates or for material undiscovered liabilities in the Hewitt Business
  • Changes in consumer and business confidence as a result of the change in ownership
  • Potential for third parties to terminate or alter their agreements or relationships with Toromont as a result of the acquisition
  • Whether the operations, systems, management, and cultures of Hewitt and Toromont can be integrated in an efficient and effective manner
In 2018, the Company started and successfully completed the integration of the Maritime dealerships acquired through Hewitt under Toromont’s decentralized branch model (bottom up approach). Under a decentralized model, regional leadership make business decisions based on local conditions, rather than taking top down mandates. A bottom up approach is an advantage in businesses like Toromont where the customer mix can vary vastly from region to region. It allows for decision-making that is better aligned with customemarket needs and more attuned to the key performance indicators used to manage the business. In 2019, the integration of the decentralized branch model was implemented in Quebec after its success in Atlantic Canada in 2018. Successful integration of Hewitt into the Toromont family shows the depth of industry and business knowledge possessed by the management team. Being able to maintain inherited customer relationships and ensure low turnover is no easy feat. Many companies have completely botched these kinds of acquisitions. One that comes to mind is Sobeys (the second largest food retailer in Canada) acquiring Safeway for $5.8 billion. Three years later, they wrote off $2.9 billion as a loss because they did not anticipate the differences in consumer habits in Western Canada vs Eastern Canada, among other oversights.
The result of the acquisition and Hewitt’s integration with Toromont’s existing business produced a 39% increase in EPS in 2018 and 14% increase in 2019.

Dividend

Toromont pays a quarterly dividend and has historically targeted a dividend rate that approximates 30 - 40% of trailing earnings from continuing operations.
In February 2020 the Board of Directors increased the quarterly dividend by 14.8% to $0.31 per share. This marked the 31st consecutive year of increasing dividends and 52nd consecutive year of making a dividend payment. The five-year dividend-growth rate is 12.09%.
Table 1: Information about the last eight dividends

Risks/Threats and Mitigation

Dependency on Caterpillar Inc.
It goes without saying that Toromont’s future is heavily dependent on Caterpillar Inc. (NYSE:CAT). For those who don't know, Caterpillar is the world’s leading manufacturer of construction and mining equipment, diesel and natural gas engines, industrial gas turbines, and diesel-electric locomotives. It has a market cap in excess of $68 billion. All purchases made by Toromont must be made from Caterpillar. This agreement has been standing since 1993 and can be terminated by either side with 90 days notice.
Given that the vast majority of Toromont’s inventory is Caterpillar products, Caterpillar’s brand strength and market acceptance are essential factors for Toromont’s continued success. I would say that the probability of either of these being damaged to an unrecoverable point are low, but at the beginning of this year, I would have said the probability of the world coming to a complete stop was very low too and look at what happened. Anything is possible. The reason this is a major consideration is because it's a going concern issue. Going conference is an accounting term for a company that has the resources needed to continue operating indefinitely until it provides evidence to the contrary. This term also refers to a company's ability to make enough money to stay afloat or to avoid bankruptcy. If there was irrevocable damage to Caterpillar’s brand, Toromont is no longer a going concern, meaning the company would most likely be going bankrupt or liquidating assets. The whole Company might not go under because the CIMCO, SITECH, and AgWest business units would survive but, essentially ~80% of the business would be liquidated.
In addition to the morbid scenario I laid out above, Toromont is also dependent on Caterpillar for timely supply of equipment and parts. There is no assurance that Caterpillar will continue to supply its products in the quantities and time frames required by Toromont’s customers. So if there is supply chain shock, like the one we just saw, there is the chance that Toromont will not have access to sufficient inventory to meet demand. Which in turn would lead to the loss of revenue or even to the permanent loss of customers.
Again, both of these threats have low a probability of occurring but either could single handedly cripple Toromont’s business. As of now, Caterpillar continues to dominate a large market share (~38% as per Gurufocus) in the industry against large competitors like John Deere, CNH Industrial, Cummins, and others.
Caterpillar's stock has been on a slow decline for a couple years but that is due to reasons beyond the ones that directly concern Toromont’s day-to-day operations. I would say if you don't believe in Caterpillar’s continued market share dominance, investing in Toromont is probably not for you.
Shortage of Skilled Workers
Shortage of skilled tradesmen represents a pinch point for industry growth. Demographic trends are reducing the number of individuals entering the trades, thus making access to skilled individuals more difficult. Additionally, the company has several remote locations which makes attracting and retaining skilled individuals more difficult. The lack of such workers in Canada has caused Toromont to become more assertive and thoughtful in their recruitment efforts.
To combat this threat, Toromont has/is:
  • Recruited 303 technicians to achieve growth targets
  • Created 208 student apprenticeship programs
  • Working with 19 vocational institutions in Toronto to teach about best practices and introduce the Company as a future employer to students
As a result of these initiatives and others, Toromont saw their workforce grow by ~8% 2019. Growing the workforce is one of the primary building blocks for future growth.
Cyclical Business Cycle
Toromont’s business is cyclical due to its customers' businesses being cyclical. This affects factors such as exchange rates, commodity/precious metal pricing, interest rates, and most importantly, inventory management. To mitigate this issue, management has put more focus on increasing revenues from product support activities as they are more profitable than the equipment supply business and less volatile.
Environmental Regulations Affecting Customers
Toromont’s customers are subject to significant and ever-increasing environmental legislation and regulation. This leads to 2 impacts:
  1. Technical difficulty in meeting environmental requirements in product design -> increased costs
  2. Reduction in business activity of Toromont’s customers in environmentally sensitive areas -> reduced revenues
Threats such as these come with a business of this type. As an investor in Toromont, you can't do much to mitigate these kinds of threats because it's out of your hands. Oil and gas, mining, forestry, and infrastructure projects are major drivers of the Canadian economy, so I think there will always be opportunity for Toromont to make money, regardless of government action.
Impact of COVID19
While the company had been declared as an essential service in all jurisdictions that it operates in, Q1 2019 results were lower as a function of COVID19 reducing activity in many sectors that Toromont services. Decline in mining and construction projects lead to a decrease in demand for Toromont products in the latter part of the quarter. Revenues were trending for 5-7% growth for the quarter before the effects of COVID19 were felt.
Management cannot provide any guidance on how to evaluate the impact of COVID19 on future financial results. They are focusing on ensuring the continued safety of employees and working with customers and the jurisdiction they operate in to evaluate appropriate activity levels on a daily/weekly basis. Lastly, management is keeping a close eye on how this crisis has led to an increase in A/R delinquencies and financial hardship for customers.
The Executive Team and the Board of Directors have taken a voluntary compensation reduction. Wage increase freezes and temporary layoffs have been implanted on a selective basis. Management believes that expanding product offerings and services, strong financial position, and disciplined operating culture positions the Company well for continued growth in the long term.
Competition
Toromont competes with a large number of international, national, regional, and local suppliers. Although price competition can be strong, there are a number of factors that have enhanced Toromont’s ability to compete:
  • Range and quality of products and services
  • Ability to meet sophisticated customer requirements
  • Distribution capabilities including number and proximity of locations
  • Financing through CAT Finance
  • E-commerce solutions
  • Reputation
  • Financial health

Main Competitor in Canada: Finning International Inc.

Finning International Inc. (TSE:FTT) is the world's largest Caterpillar dealer that sells, rents and provides parts and service for equipment and engines to customers across diverse industries, including mining, construction, petroleum, forestry and a wide range of power systems applications. Finning was founded in 1933 and is headquartered in Vancouver, Canada.

Toromont Industries Ltd Finning International Inc.
Market Cap $5.84B $3.02B
Price $65.66 $18.49
Dividend Yield 1.87% 4.36%
Number of Employees >6,500 >13,000
Revenues (ttm) $3.69B $7.57B
Trailing P/E Ratio 19x 11x
Price/Book 3.71x 1.35x
Profit Margin 7.71% 3.54%
Places of Operations Manitoba, Ontario, Québec, New Brunswick, Prince Edward Island, Nova Scotia and Newfoundland & Labrador, most of Nunavut, and the Northeastern United States British Columbia, Yukon, Alberta, Saskatchewan, the Northwest Territories, a portion of Nunavut, UK, Ireland, Argentina, Bolivia, and Chile
Table 2: A quick comparison between Toromont and Finning.
I am sure there are some people looking at this table and thinking Finning looks rather promising based on the metrics shown, especially in comparison to Toromont. Finning’s dividend yield, P/E, and price/book look more attractive. Their top line is 2x. Not to mention it operates worldwide and is the only distributor in the UK, while Toromont only operates in half of Canada.>! Before you go off thinking “I need to use my HELOC to buy some Finning,” as some people on this subreddit are prone to do, ask yourself: do you see any cause for concern in the metrics listed above? !<
One glaring question I have is: why is Finning trading at half of Toromont’s market cap given that it operates internationally and has twice the number of employees and revenues of Toromont?

Q1 2020 Financial Results


Figure 3: Q1 2020 Income Statement
Overall operating income, net earnings, and EPS all decreased even though Toromont saw an increase in revenue for the quarter compared to Q1 of 2019.
  • All of these decreases were contributed to COVID19, as the pandemic lead to increases in costs
Historically, Q1 has always been Toromont’s weakest quarter. Q1 accounts for ~20% of yearly earnings and is consistently the least profitable quarter. Toromont’s profit margin generally ranges from 5%-9% progressively increasing into the later half of the year. This is good news for investors with the thesis that the economy will return to "somewhat normal" in the latter half of this year. The majority of the earnings for 2020 are still on the table for Toromont to earn. If current conditions persist, or there is a second wave and lockdown later in the year, we will most likely see a regression in Toromont’s growth to last year’s levels or even lower.
Assuming the world does return to “normal,” many of Toromont’s customers (especially in mining and construction) may try to catch up for lost time with increases to their operational activity, leading to an increase in Toromont’s sales for the remainder of the year. Of course this is a major assumption but it’s a possibility.
Below is a comparison of the last eight quarters. You can see the clear cyclical nature of their business.
Figure 4: Last eight quarters of earnings

Sources of Liquidity

Credit
  • Toromont has access to a $500 million revolving credit facility, maturing in October 2022
  • On April 17 2020 they secured an additional $250 million as a one year syndicate facility
Cash Position
  • Cash increased by 22.6 million for the quarter
  • Cash from operations increased 13% Q1 2020 compared to Q1 2019
  • The company also drew $100 million from their revolving credit facility
  • $4 million dollars of stocks were repurchased during Q1 2020
Given their access to $750.0 million dollars of credit and cash on hand equaling $388.2 million, the Company should have sufficient liquidity to operate if COVID19 and its aftermath persist for an extended period of time.

Financial Analysis

Analysis of Debt
Historically, Toromont has had very low debt levels. The spike in late 2017 was due to the acquisition of Hewitt. Management paid off the debt aggressively in 2018. At the end of December 2019 Toromont had $650 million of debt maturing between 2025 and 2027. As a result of COVID19 the company has taken on more debt. This additional access to debt accounts of the slight uptick in historical debt in 2020 (Figure 5).
Figure 5: Toromont’s historical debt, equity, and cash
The long-term debt to capitalization ratio is a variation of the traditional debt-to-equity ratio. The long-total debt to capitalization ratio is a solvency measure that shows the proportion of debt a company uses to finance its assets, relative to the amount of equity used for the same purpose. A higher ratio means that a company is highly leveraged, which generally carries a higher risk of insolvency with it.
The debt-to-equity ratio is at 47% and debt-to-capitalization ratio is 32%, Toromont has $388 million in cash that could be used to pay down debt by nearly 50% and bring the net debt-to-equity to 23% and net debt-to-capitalization to 18%. As mentioned before, management is holding on to cash to insure sufficient liquidity during these times.
The implication of these ratios is that Toromont does not take on large amounts of debt to finance growth. Instead the Company leverages shareholders equity to drive growth.
For comparison, Finning has a debt-to-equity ratio of ~100% (it differs between WSJ, 99%, and Yahoo Finance, 101%). The nominal amount of their total debt is ~$2.2 billion, which gives them a long-term debt to capitalization ratio 62%. Finning carries $260 million in cash.
Figure 6: Toromont’s debt-to-capitalization and debt-to-equity ratios
Profitability Ratios
Return on equity (also known as return on net assets) measures how effectively management is using a company’s assets to create profits.
Toromont’s return on equity is generally around 20%. Go to Figure 6 to look at the ROE for the last 4 years. In comparison, Finning has had a ROE of ~11% for the last three years, about 3% in 2016 and a negative ROE in 2015 (as per Morningstar).
Return on capital employed (ROCE) tries to find the return relative to the total capital employed in the business (both debt & equity less short-term liabilities). Toromont’s ROCE (ttm) for March 31 2020 was 22%. This means for every dollar employed in the business 22 cents were earned in EBIT (earnings before interest and tax). Finning had a ROCE of 11% as of December 2019.
Liquidity Ratios
Working capital is the amount of cash and other current assets a business has available after all its current liabilities are accounted for. In the last ten years, Toromont’s working capital has fluctuated between 1.6 at its lowest (2018) to 2.8 at its highest (2016). At the end of 2019 it was at 1.8. Meaning current liabilities equate to 60% of current assets.
Interest coverage ratio is used to determine how easily a company can pay their interest expenses on outstanding debt. Toromont has an interest coverage ratio 15x (as per WSJ). Finning on the other hand is at 4x. At this point I feel like I'm just beating up on Finning.
For those of you who made it this far, I have to admit something to you. This whole post is just a facade to ask you a question that has never been asked on this subreddit before: Should I buy BPY.UN? It keeps going down and I'm worried if I buy it, it will keep going down and I'll lose money. I don't want to lose money. Although if you go through my post history, you'll see I've been looking at/buying penny stocks.

Key Performance Measures

Below is a chart with key financial measures for the last four years. A few things I want to highlight:
  • Toromont had large capital expenditure last year (most of it went to increasing inventory) so they have the choice to keep capital expenditure down this year and preserve cash
  • From the start of 2018 (aka end of 2017) to the end of 2018 Toromont stock was down about 3% while the TSX Composite was down more 12% and S&P was down 7%. This stock has a history of out performance not only on the upside but also on the downside. I'll go into a bit more detail in the next section.
Figure 7: Summary of key financial measure for the last four years

Price Chart Comparisons

I don't do technical analysis. To those who do, good luck to you because let's be real, you'll need it. This section is just to get an idea of past performance and evaluate the opportunity cost of investing in Toromont compared to a competitor or a board based index fund.
I thought it would be easier to look at pictures as opposed to reading a bunch of numbers off a table.
For the sake of not creating a picture album of screenshots, I just looked at charts for the last 5 years. If you're interested in looking at different time intervals you can do so on google finance.

  1. Toromont Industries Ltd v. Finning International Inc.
Figure 8: Five year price chart of TIH v. FTT
These are the only two Caterpillar distributors on the TSX, making them direct comparisons. If I was looking for exposure to this industry, I would be choosing between these two companies (on the TSX anyways). There isn't really much to evaluate here. It's like they saying: “A picture is a thousand words,” or in this case, it's 128%. If you have time, go look at the graph from August 1996 to now. I can safely say it hasn't been much of a competition. Toromont has outperformed by ~2500% in stock price appreciation alone. If you're a glass half full kind of person, I guess you could look at this disparity as Finning having enormous upside. LOL

  1. Toromont Industries Ltd v. S&P 500 Index
Figure 9: Five year price chart of TIH v. VFV
If I'm not buying individual stocks, I’m buying the S&P 500 and to a lesser extent a Nasdaq index fund. This gives me a second look at the opportunity cost of my money. The story is not as bad as the Finning comparison. If you had bought $100 dollars of Toromont stock 5 years ago, it would have turned into $207 today, whereas the same $100 dollars in VFV would have became $157.
Just a quick aside, you can see the volatility in Toromont’s stock is much higher compared to the VFV. VFV has a relatively smooth trend upwards while Toromont trends upwards in a jagged path. This is the risk of single stocks, they move up and down more erratically, leading inventors who don't have a grasp of the business or conviction in their pick to panic sell or post countless times on Reddit asking why their stocks keep going down. “I bought the stock last week and it's done 3% already, do you guys think it’s going bankrupt? I thought stonks only go up???”

  1. Toromont Industries Ltd v. S&P/TSX Capped Industrials Index
Figure 10: Five year price chart of TIH v. ^TTIN
The S&P/TSX Capped Industrials Index isn't my favourite comparison for Toromont because its constituents cover many industries ranging from waste management (WCN), to railways (CNCP), to Airlines (AC, lol, had to mention it. I miss the days when there were double digits posts about AC. I wonder where those people have gone, because I can tell you where AC stock has gone... absolutely nowhere). Regardless, I used TTIN because I deemed it a better comparison to Toromont than the entire TSX. The story is on par with the other two comparisons. Toromont’s out performance is significant.
I just threw this bonus chart in here because when I saw it, I was like BRUHHH (insert John Wall meme)… It's completely unsustainable but that's impressive given the vast differences between the two.
  1. Toromont Industries Ltd v. NASDAQ-100
Figure 11: Five year price chart of TIH v. ZQQ
Now, of course, past performance does not dictate future results and all that good stuff, but it really gets you thinking about how the rewards disproportionately favours winners compared to the overall market. People are generally happy getting market returns (i.e. the just buy VGRO people) but being able to pick even a few winners really pays. This reminds me of the Warren Buffet quote: “diversification is protection against ignorance.” The context of the quote is that if you are able to study a few industries in great depth and acquire a wealth of knowledge, you can see returns astronomically higher than those who diversify across the board market. The problem then becomes you put yourself at risk of having all your eggs in one basket. Look at what's happening with Wirecard in Europe right now. This is why the real skill in investing is managing risk.

Analyst Price Targets and Estimates

The prince targets set for by analysts range from $63-$81. The average price target is ~$72, with the majority of targets within the 70-$71 range. Given the current price of $65.66, there is a ~10% upside. These price targets haven't changed much due to COVID19 even though revenues and EPS forecasts have been downgraded for 2020. The consensus estimate on 2020 revenues is $3.36 billion, down from the actual revenues of $3.69 billion in 2019 and the consensus EPS for 2020 is $3.01 down from actual EPS of $3.52 for 2019 and $3.10 for 2018. The fact that revenues and EPS forecasts have been downgraded, yet price targets remain untouched, for the most part, indicates that the effects of COVID19 are expected to be short-lived.
Figure 12: Earnings and estimate ranges for Toromont. Note: EPS numbers in this graphic are diluted EPS numbers.

Valuation

Multiples
Assuming P/E ratio stays the same as it has been for the last 12 months (~19x) and EPS goes down to ~$3.00 (as per analyst consensus), the implied price would be $57.
Using the last 12 months of revenues, the EV-to-Revenues ratio is at 1.56x. Assuming that ratio stays the same and with revenues estimated to be ~$3.36 billion, enterprise value (EV) comes out to $5.2416 billion. Using Q1 2020 figures for shares outstanding (82.015 million), cash ($388.182 million), and debt ($745.703 million), the implied price for a share is $58.94*.
\Note: Enterprise Value is equal to market cap plus total debt minus cash.)
Dividend Discount Model
The dividend discount model (DDM) is a method of valuing a company's stock price based on the theory that its stock is worth the sum of all of its future dividend payments, discounted back to their present value.
The average dividend growth rate is 12% for the last 5 years is 12%. There is no way Toromont can increase the dividend at this pace in the long term, thus, I chose a long term dividend growth rate of 5%. This is the assumed rate in perpetuity. The required rate of return will equal WACC, 6.85% (averaged from 2019 Annual Report). The dividend over the last year is $1.16 (two payments of $0.27 in 2019 and two payments of $0.31 for 2020).
The fair value equals $65.84.
Figure 13: DDM calculation.

Closing Thoughts

There is no doubt that Toromont trades at a large premium. The current P/E is 19x and the CAPE ratio (Shiller P/E) is 26x. The fair value of the Company as per Morningstar research is in the mid $60 range.
Based on all valuations I did and analyst price targets, I would start buying in the high $50 range or maybe the very low $60 range, but my belief in the company has to do with long term thematic trends and how the Company operates, rather than today's price. Although I have to admit, the price does look more attractive now than it did in the beginning of June when the stock hit new all time highs. It seems like the only companies hitting new all time highs these days are tech companies, so it's refreshing to find a non-tech company achieving the same feat.
Toromont is not going to double next year or the year after that. It is a relatively low margin business, with slow growth and a cyclical business cycle. I like that the Company has strong financials, low debt, and good management. They don't take shortcuts or unwarranted risk. Future growth will mostly be driven through acquisition, but management is cautious with acquisitions and don't overextend themselves. One of the biggest problems Finning has been facing for the last couple years is political and social turmoil in South American countries which is affecting their mining clients and thus affecting revenues/margins.
The Q2 earnings are reported on July 22 202. We should have a clearer picture on the prospects of the Company from management. Hopefully we have a better idea of the COVID19 situation by then too. Regardless, I think the company is in a position where its services will always be in demand so short term fluctuations are not something that shake my confidence in this pick.

Limitations and Further Areas of Research

By no means is this an exhaustive due diligence report. This is enough for me to feel confident in the business and its trajectory. Limitations/further areas of the research include:
  • Looking into the growth of each sector Toromont services and extrapolating that growth to calculate Toromont’s future growth opportunity.
    • As per IBIS Research the heavy equipment rental market in Canada is ~$8.3 billion. It grew 1.1% yearly for the last 5 years.
    • The US market is estimated to be $47 billion, with an average growth of 2% for the last 5 years
      • Sorry but I couldn't get my hands on future projections as each report is $750
  • More research into competitors
    • I chose to include Finning only for simplicity’s sake. But there are many other competitors like:
      • United Rentals (NYSE:URI) provides similar services to Toromont/Finning in 49 U.S. states, 10 Canadian provinces, Puerto Rico and four European countries. The only thing being they aren't distributors for Caterpillar.
      • Rocky Mountain Dealerships Inc (TSE:RME) sells, leases, and provides product and warranty support for agriculture and industrial equipment in Western Canada
      • Holt Cat, N C Machinery, Ziegler CAT (none of these companies are publicly traded)
  • Further analysis can be done on the B/S and accounting treatments.
  • The effects of automation in the industry
    • Distributors in the US have started working with industrial automation companies to provide autonomous construction equipment on rent to contractors
      • Sunstate Equipment Co.'s partnership with Built Robotics
  • I was not able to do a discounted cash flow, which would be critical to finding the intrinsic value for Toromont and having true confidence in the company and its trajectory.
  • Further analysis of CIMCO and prospects of future growth
    • Based of the financials, CIMCO seemed like a small part of the business, which is why I mainly focused on the Caterpillar dealership side
These are not all the limitations or areas of further research, they are just the glaring one that came to mind.
>! I know I took a few shots at people in this post. It's all in good jest. If you're offended well.... maybe you should be. I don't know, you have to figure that out on your own or you could make a post on Reddit asking random people on the internet whether you should be offended or not. !<
Remember I'm not an expert, I'm just a random guy on the internet.

Disclosure

I am long Toromont. This information is not financial advice. Please do your own research and/or talk to a financial advisor. All data provided is current prior to the market opening on June 29, 2020. Inconsistencies in data can be due to many reasons, the foremost being that data was spruced from multiple different websites.
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