We Don’t Believe It Will Happen…

  • The best thing we do
  • We agree — it’s worth nothing

 

They’ve done it.

Or rather, they’ve started it.

The UK has officially informed the European Union of its intention to leave the EU in March 2019.

To be honest, we’re surprised they’ve gotten this far.

But we’re still standing by our prediction that the EU and the ‘Deep State’ bureaucracy that exists in Westminster won’t actually allow the UK to leave.

We don’t know exactly what trick they have up their sleeves, but we’ll put our money on a type of ‘force majeure’ clause that will allow either side to pause exit negotiations for an indefinite period.

We hope we’re wrong…but we don’t think so. That’s all we’ll say on that matter.

On with the show…

Markets

Overnight, the Dow Jones Industrial Average fell 42.18 points, or 0.2%.

The S&P 500 gained 2.56 points, or 0.11%.

In Europe, the Euro Stoxx 50 index added 10.2 points, for a 0.29% gain. Meanwhile, the FTSE 100 gained 0.41%, and Germany’s DAX index added 0.44%.

In Asian markets, Japan’s Nikkei 225 index is down 55.61 points, or 0.29%. China’s CSI 300 is down 0.15%.

In Australia, the S&P/ASX 200 is up 14.78 points, or 0.25%.

On the commodities markets, West Texas Intermediate crude oil is US$49.47 per barrel. Brent crude is US$52.31 per barrel.

Gold is trading for US$1,249.53 (AU$1,629.60) per troy ounce. Silver is US$18.15 (AU$23.67) per troy ounce.

The Aussie dollar is worth 76.67 US cents.

The best thing we do

You may have seen the ‘2-minute challenge’ we recently issued.

That’s where your editor, bizarrely, allowed a complete stranger and one of our staff members to fiddle around with our personal stockbroking account.

That said, we didn’t mind. Because, in one instance, less than two minutes later, our brokerage account was $323 healthier for it.

What did we do? Did we day trade? Did we speculate like a lunatic? Did we trade the FX markets, hoping to grab a ‘few pips’ by placing a super-sized bet?

No, we didn’t. In fact, the method the stranger (Colin) and our staff member (Dan) used is actually a relatively conservative way to buy a stock — but only when done the right way.

To be precise, when done the right way, the financial risk of using this method can be less than if you buy a stock outright.

I know. That sounds outrageous. So outrageous that we’ve received a number of emails telling us so. Some have suggested the method employed is in fact risk-taking madness. Others have complained that $323 is too puny, and not worth it.

We’ll rebut those questions below. First, this email from subscriber Margaret:

Yes, I was impressed with your demo on what you can earn for not having to buy the shares, but to convince me, I am not impressed that in the last 15 months, you only earned that amount of money.

That amount of money would not even cover the cost of the subscription, not a good business investment.

Thanks anyway, you have to convince me that I can make a profit from your system.

Ah, we don’t try to convince anyone. We just lay down the evidence. The convincing is in the eye of the beholder.

As for the comment on how much I’ve made from the system over the past 15 months, Margaret is right, it’s not a huge amount.

But here’s why: Our company share-trading policy doesn’t allow us to trade on the recommendations made in our investment advisories. Because of that, I can’t follow the precise advice that Matt Hibbard issues in Options Trader.

That means I have to make the time to do my own research and find my own trades. That severely limits my cash-generating potential from Matt’s strategy. But even so, without using Matt’s direct advice, I have been able to employ his strategy to good effect.

A good example is a trade I did on Woolworths Ltd [ASX:WOW] a few weeks ago. The company put out some good news (at last). It’s a stock I’ve owned for years.

The share price bounded higher on the news. I’ve circled on the chart below when I placed the trade:



chart image

Source: Bloomberg
Click to enlarge


The trade was to sell a put on Woolworths’ stock, with a strike price of $26. Because the stock had spiked higher that day, the volatility was high. Volatility is an important input into options pricing.

Therefore, with high volatility, the premium was high too. For my trouble, I was able to sell the put for 80 cents per share. It meant that, if the share price was below $26 at expiry (today), I would have to pay $26 per share.

But that wouldn’t be the net amount I’d have to pay. Remember, I received 80 cents in premium. So my breakeven amount was actually $25.20.

Only if the share price fell more than a dollar would I lose on the trade. I was confident it was a good trade. Plus, it was a cash-covered trade — for just a small amount. I sold two contracts, which gave me an underlying trade value of $5,200.

As I say, a small amount.

The point is that I’ve owned Woolworths in my portfolio for years. And I had no problem adding an extra five-grand’s worth if it came to it.

The point being, while I could have bought Woolworths shares on that day, there’s no guarantee I would have been able to buy them for $26. And I absolutely couldn’t have bought them for $25.20, because the share price didn’t trade that low for more than a week.

The fact is, I was happy to add the Woolworths stock to my portfolio. But I was even happier to collect the cash, and potentially own the stock for a lower price if it closed below $26 by today.

As it turns out, at the time of writing, Woolworths is trading for $26.68. The result is that I get to keep the cash, and I don’t have to buy Woolworths shares — although I would have been happy to do so.

That cash remains in my savings account for me to do as I wish. For me, that means just boosting my cash savings.

You see how it works? And that’s just with one trade.

To be honest, when I do trades like this, I wish I could use Matt’s direct trade recommendations. Because if I could, rather than the paltry grand or so that I’ve eked from the market, Matt’s recommendations would have allowed me to cash $5,795 from the market.

In most cases, that’s without buying a single share, and it’s purely from using a $5,000 underlying position. If you have the means to take larger positions (and have the cash to cover it), then the cash credits from this strategy can be even greater.

Obviously, there’s a lot more to explain. But that gives you a taste. All I can say is, even my feeble attempts at this strategy would more than cover a subscription to Matt’s service, but following Matt’s advice could see you double, triple, or even quadruple (or more) your cash credits, compared to the cost of a subscription.

In my view, Matt’s Options Trader service is the best thing we do here at Port Phillip Publishing. I strongly endorse his service. You can check it out here.

We agree — it’s worth nothing

Finally, let’s follow up on last week’s Port Phillip Insider, where we took a hatchet to ASX-listed company Quintis Ltd [ASX:QIN]

If you recall, Quintis is an Aussie timber and sandalwood oil producer. Until last week, it went by the name of TFS.

It came to our attention due to a report issued by US-based hedge fund and research firm Glaucus Research. The research report valued Quintis as zero…hence its short-sell recommendation.

The consequence of that research report was that the stock price sunk in price. On 21 March, the stock price closed at $1.41. Three days later, it traded as low as 97.5 cents.

Today, it is trading at $1.05.

As we mentioned last week, our cursory and superficial analysis told us that investors should stay well clear of the stock. We said it reminded us of the managed investment schemes of the early and mid-2000s, and of the ‘Macquarie model’ and ‘Babcock & Brown model’ of structured companies that resulted in booming fees for the management company, but not much joy (in the long run) for investors.

After further assessing the lay of the land…after looking at Quintis’ response to the Glaucus report…after reading Glaucus’ response to Quintis’ response…and after checking a few more details for ourselves, our advice is: Get out while you can.

We’ll explain why in a moment. But first, not every investor was happy with our snap analysis of Quintis. Subscriber James W offered this riposte:

Kris, a little knowledge can be a dangerous thing, as your article clearly highlights.

I’ve known TFS Corp since they IPO’d at 20c in December 2004 & have invested with them personally, so I’m obviously biased but for your info:

They are the only independent listed company which survived the GFC, unlike Great Southern, Gunns, ITC, Wilmotts etc;

They have a vastly different business model from the above, in that they charge substantial ongoing lease & management fees which provide ongoing operational cash flow;

Their main product — Indian sandalwood oil — has increased in value at >15% pa compound for the last 15-20 years & now sells for US$4,000/kg — liquid gold !

They are the largest grower of such indian sandalwood globally (some would say they’re building a monopolistic position) with supply contracts to a number of major multinationals;

The clinical benefits of Indian sandalwood oil are well known & a number of products have been developed for the mass market with FDA approval sought for others which will likely translate into significant additional demand & hence further pricing pressure for this product;

Investing in their MIS / HNW products IS tax effective, however some of the largest SWFs in the world have invested on essentially similar terms & conditions as HNW investors, but without the tax breaks ergo, these are not tax driven investments given forecast IRRs of circa 20%pa compound for 15 years based on realistic assumptions;

They recently refinanced their long term debt at more attractive rates given they have now three years of commercial harvests under their belt;

Those investors have seen returns greater than comparable returns from cash, term deposits & Aussie equities over the past 15/16/17 years (since investment);

Why are they cash flow negative? Because they are continuing to grow their estate & they need to buy & develop land before it can be leased to investors;

And by the way, they didn’t pay dividends from listing until 2013, which didn’t stop the share price rallying 11 fold from its IPO in a less than a decade;

Don’t believe my version of the fundamentals? Then read what UBS / Moelis / Wise Owl have to say on the stock. And ask other hedge funds like Regal (a substantial shareholder) who have a track record of >20%pa returns since inception of their long/short funds.

Bottom line is do some real homework before publicly trashing a world leading Aussie company. And if you consider yourself an analyst, then more fool you for ignoring their balance sheet & not bothering to try to understand their business / business model.

Finally, if this is the best short in the Aussie market, God help Glaucus Research is all I can say.

We can only hope that James W hasn’t drunk too much of his own medicine in this instance.

On the issue of the sandalwood price, Glaucus offers this interesting take on whether the price of US$4,500 per kilo really reflects the market price. Glaucus notes in its response to Quintis’ response (emphasis ours):

Since 2014, each year, the Company has purchased MIS-owned sandalwood harvests at auction. These hectares are managed by TFS but owned by its retail and institutional investors. In theory, MIS-owned trees were supposed to be sold at auction after harvest. Instead, TFS raises money from the capital markets to buy the harvested trees. In one case, it foolishly bragged that it paid 10% above the next highest bidder at auction. In 2016, the Company admitted that it raised AU$ 60.5 million from the equity markets to purchase 221 hectares of MIS plantations from retail investors due to be harvested over the next five years. In our view, this is Ponzi-like behaviour. TFS is using funds raised from new investors to buy out previous investors. In doing so, the Company is bidding up the price of sandalwood at auction, thereby artificially inflating the price of the thinly-traded commodity to justify its own ludicrous price forecasts.

If there was one damning statement in the Glaucus report, it would be that. If true, then Glaucus is right; it’s the hallmark of a Ponzi-style scheme, or ‘bucket shop’ or ‘boiler room’ scheme.

Fast-talking stock-selling scammers who operate out of temporary warehouses in Eastern Europe and Southeast Asia utilise the same tactics.

They’ll load up on a thinly-traded stock, usually by executing an off-market transfer with a large shareholder. They’ll then manipulate the price higher, while at the same time offloading stock to unsuspecting clients.

However, in order to reduce the chances of the clients selling their stock at a profit, thereby forcing the share price down, the stock scammers will hold the stock on the clients’ behalf.

If they insist on selling, the scammer will find some other mug to buy the stock, ensuring that no one can force down the stock price…at least until the scammers have offloaded all the stock held on their books.

Then, the poor punter is left with a truckload of stock they can’t sell. We can only wonder what will happen to the price of the premium Indian sandalwood oil, once a true market develops.

But that’s not all; we decided to check out Quintis’ financials a little deeper — just a little, mind you. And again, we can’t say we really liked what we found.

Over the past three financial years, from 2014 to 2016, Quintis has recorded revenues of $144.3 million, $174.6 million and $188.1 million respectively.

But, interestingly, over the same three years, the company has generated ‘Other Operating Income’ of $64.6 million, $147 million and $77.1 million respectively.

What, we wondered, counted as ‘Other Operating Income’? After all, without this income, the company’s profits would be negligent, if not non-existent.

As you can perhaps imagine, it’s not easy to find the details. Checking the last annual financial report, it refers us to ‘Note 2’. Perhaps we’ll have more luck there.

Arriving at Note 2, the main line item is ‘Gain on revaluation of biological assets — TFS interest’; it then refers us to ‘Note 11’.

At that point, we don’t need to look any further. The game is up. But we go through the motions regardless. At Note 11, we find an almost unfathomable account of the changes to the value of the company’s ‘biological assets’.

By ‘biological assets’, we presume they mean ‘trees’.

Maybe it’s because we run a cash business that has very few, if any, non-cash items on the income statement. And sure, we understand that non-cash entries are valid accounting principles.

But, regardless, there’s no getting away from what appears to be clear: More than a quarter of Quintis’ income is derived from revaluation of assets it is yet to sell.

In effect, the company is booking a profit today on an asset, which may or may not attract the forecast price when it tries to sell the asset in the near or far future.

If the company can sell it for greater than the amount it has booked today, good luck to them, they’ll get to add that to their income in the future. But here’s the thing: What if they can’t sell the Indian sandalwood oil for anything near US$4,500 per kilo?

What if it’s only half that? What will that do to the income statement and balance sheet? It will make mincemeat out of it, that’s what.

As I say, we’ve by no means done a thorough examination of Quintis’ business, or its financial statements.

But, in truth, based on what we’ve seen, we don’t need to. We’ve seen this set-up before. If even half of what Glaucus claims is right, add that to our own research, and you’ve got a stock where the true value is likely a long way from the current $425 million market cap.

If we had to put a value on it, we think we’d side with Glaucus. Something around zero looks pretty close to the mark to us.

Cheers,
Kris