MY BIGGEST EV TRADE OF THE YEAR EXPLAINED IN SIMPLE TERMS

By
Keith Schaefer
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Nano One Materials Corp. (NNO-TSXv / NNOMF- OTC) — has been one of my biggest winners in the EV battery space this year–and it’s a great example of how I research stocks for my subscribers.
 
I had known Chairman Paul Matysek for 10 years and CEO John Lando for THIRTY years. I had watched the stock trade for since its IPO date, and ask they announced a big financing $1.15, I could smell a big run coming in the stock as this sector became red hot.
 
Subscribers and I loaded up on that financing, and it has paid off. (We actually added at the recent $2.72 financing).
 
I think the IP here has incredible potential. The company has a battery technology that is attracting global attention in the EV supply chain—because their IP can potentially:
 
1.    Greatly reduce costs (estimated 15-30%) for cathode materials
2.    Use a much more environmentally friendly process
3.    Charge a car battery in 12 minutes
4.   For 1000 charges (1 charge=1 tank of gas)—at a tank of gas a week that would be the equivalent of almost 20 year battery life!!
 
I say potentially because it’s all at lab or pilot/demonstration scale still. 
 
But they already have announced collaboration deals in Europe, China and an unnamed Asian company. 
 
They now have $28 million in the bank-including some big non-dilutive financing from governments. That’s at least a five-year runway.
 
Besides the stellar IP, the stock has benefitted from the growing bubble in EV battery stocks—from Tesla all the way down to lithium miners, this sector has been one of the top places to be for retail investors.
 
Investors are due for a correction in this space, but I think the EV Trade has years to run.
 
Now that the stock has almost tripled for my subscribers, I want to give you a simple explanation of how this little company in a suburb of Vancouver Canada could have one of the most heralded technologies of the EV age.
 
I bought Nano One on a simple idea – that they are in the running to make the first million-mile battery.
 
That is still a big part of the story. But there is more to it than just that.
Nano One is a battery material company. 
 
Yes, they are figuring out ways to makes batteries last longer, but they are also hard at work making them cheaper, smaller, and greener – the next-generation of battery.
 
Once the market catches on – that this small Canadian company could be on the cusp of developing the next-gen battery – I think the stock could see further gains.
 

A Focus on the Cathode

 
Nano One is tricky to understand–there are so many technical details. Investors can (and do!) get bogged down with the science.
 
I’ll try to keep it simple.
 
Start with the lithium-ion battery. There are main 4 parts: cathode, anode, electrolyte, and separator.
 
 
Nano One is focused on the cathode. 
 
The cathode is a good place to look for cost reduction. One quarter of the cost of a lithium-ion battery comes from the cathode.
 
There are lots of different materials that are used as cathodes. No one (so far) has found the Holy Grail.
 
Nano One is working with 3 cathode materials:
 
1.     Lithium-iron-phosphate (LFP)
2.    Nickel-manganese-cobalt oxide (NMC)
3.    Lithium-nickel-manganese (LNM) (which has a higher voltage than the other two)
 
The first two (LFP and NMC) are commonly used in batteries. Nano One is trying to make them better. 
 
Nano One has filed a patent on using LNM with some off the shelf products to allow for a very long battery life–this could be a game-changer.
 

The One-Pot Process

 
Nano One’s secret sauce is called the “One Pot” process. 
 
It is called One Pot because all the materials are mixed together in a single step. Fewer steps = lower cost.
 
The standard process for making cathodes has 6 steps:
 
Source: Nano One Investor Presentation
 
One Pot has far fewer steps:
 
 
Source: Nano One Investor Presentation
 
But it is not just simpler. It creates a (much) better cathode.
Cathodes are made of crystals. The standard process creates clusters of crystals. 
 
These clusters are then coated (top-half of diagram):
 
 
Source: Nano One Investor Presentation
 
The One Pot process is different. Each nano crystal is individually coated, not just each cluster (bottom-half of diagram).
 
This has a number of advantages.
 
First, it’s a lot more durable; i.e. longer life battery. Charging a battery is hard on the material. Repeated charging causes coated clusters to break apart. The battery eventually stops working.
 
With One Pot that doesn’t happen as fast. You have a longer-life battery. And that not just more charges, but faster charges. Normally it’s either / or but with Nano One it’s a blend of both.
 
Second, the process produces less A LOT LESS waste.
 
Consider the NMC battery. Today’s process is shown on the left in the diagram below. You can’t just go from raw metal to cathode. There is an intermediate step, called the “precursor”. 
 
It involves a bunch of dirty chemicals like nickel sulphate, sodium hydroxide and sulfuric acid.
 
 
Source: Nano One Investor Presentation
 
That sodium and sulfur come out the other end as waste. 
 
There is 5x more waste than battery material produced! Not only is this much worse environmentally – producers have to pay to get rid of all that waste. 
 
As of now, there is no commercial use for that. So that waste is a large but unknown cost.
 
The One Pot process gets rid of the “precursor”. You go straight from raw metal to cathode. No sulfide, no sodium, less waste.
 
We don’t know how much that waste costs, but it will be A LOT.  
 
This is a game changer on its own for the global EV battery industry! 
 
It means
 
1.    less energy consumed
2.    less material cost
3.    more friendly to the environment
 
This summer, Elon Musk made the request for GREEN NICKEL. Removing this waste from the process is a step in that direction.
 

Lower Input Cost

There is another big advantage of removing the precursor step. The One Pot process can take raw material costs way down.
 
Raw materials make up somewhere between 70 and 80% of the cost of the cathode. One Pot can reduce that by 15-30%.
 
How?
 
First, the nickel. Right now, nickel is refined into nickel sulphate before it can be used in battery production. One Pot can use nickel metal as an input.  
 
Wood Mackenzie Research Director Andrew Mitchell estimates the cost of producing nickel sulphate from nickel metal is US$3,500 per ton Ni. Removing that cost drives down overall cathode costs by 15%.
 
The same applies to manganese and cobalt. Pure metal can go straight into the process. There is no need for refining the metal to sulphate and the costs associated with it.
 
This would be a big disruption to the existing cost centers that have sulphate production built into their process. 
 
It could be a disruptor for new entries that can compete on lower material costs without the need to build out the refining capacity.
 
Next the lithium. The One Pot process is agnostic to the form of lithium that is used. Lithium carbonate, lithium hydroxide, doesn’t matter.
 
With existing technology some cathode materials require that lithium carbonate be used as a raw material while others require lithium hydroxide. 
 
High-nickel content cathodes, which tend to be more expensive, need lithium hydroxide. 
 
Carbonate can be as much as $2,000 per ton cheaper than lithium hydroxide. Shifting to lithium carbonate could take another 5% out of costs for nickel-based cathodes.
 

Go-to-Market

Nano-One has created a better way of making a battery cathode. Now they have to take it to market. They can do it in two ways.
 
First, they can use their process on existing materials–making those materials better, cheaper, and cleaner. 
 
This is what they are doing with LFP and NMC. Both are already standard cathode materials. 
 
LFP is the lowest cost battery type. It is durable and stable over a long period. But it can only handle low voltages and has a low energy density (meaning it takes up more space). 
 
NMC has better energy density than LFP but also has a shorter life span and costs more to make.
 
The One Pot process improves both. 
 
For NMC, it can increase the cathode life by 4x compared to an uncoated cathode. And it brings down the cost:
 
 
Source: Nano One Investor Presentation
 
For LFP, Nano One can make the cathode cheaper and last even longer. 
 
Nano One has a partnership with a Chinese company called Pulead Technology Industry, a large supplier of LFP cathodes for e-buses and grid storage. 
 
The partnership is focused on improving the manufacturing to take out costs.
 
One Pot can do a lot for existing battery materials.  But Nano One has another way of making an even bigger splash – by creating a better cathode.
 
The company thinks they have done just that – In January Nano One patented a new cathode material – lithium nickel manganese oxide (LNM). 
 
This material is also referred to as “high voltage spinel” (HVS) because it can operate at a whole volt higher than existing cathode materials – up to 4.7 volts.
 
One volt is actually a bit deal. Battery makers have been trying to create a higher voltage battery out of LNM for years. But they run up against a wall – at higher voltages the material degrades faster and battery life plummets.
 
But Nano One has overcome that. By using the One Pot process to create an LNM cathode, together with an off-the-shelf electrolyte and anode, Nano One has found a combination that works. And now Nano One has patented the process. 
 
Nano One has shown that their LNM battery can last up to a thousand fast charge cycles. Think of one charge cycle = one tank of gas refill. 
 
So if you fill up the gas tank in your car once a week, that’s an EV battery equivalent of lasting 19.23 years.
 
Now, that’s MY math; I’m pretty sure the company would not phrase it like that—they’re quick to say “Lots more testing to do before we can say that.” But that is what it really means.
 
And let’s talk about “Fast”. Right now, a gentle charge is 10 hours. A more aggressive charge is one hour. 
 
But there’s the possibility that the new Nano One spinal can charge in 12 minutes with limited degradation of battery life. (This is still just lab scale so it may end up being a bit longer!)
 
If you tried that on an existing lithium battery you would damage it.
 
LNM (or HVS) is also cobalt free.  Cobalt is a big problem for battery manufacturing because it comes from countries that use child labor. 
 
The Democratic Republic of the Congo (DRC) is now tracked by both industry and NGOs and they want it stopped. Sourcing cobalt outside of these countries is expensive.
 
Nano One has the first lab scale battery with no cobalt. Problem solved.
 
All this, and a higher voltage too – which has big implications of its own. 
 
Consider that a power drill operates at 18 volts. With existing batteries, you need 5 cells to run that drill. With the LNM battery, you will need 4.
 
Translate that to a car or a bus – 4 cells instead of 5 or whatever—and you’ve just reduced the battery footprint by 20%. Smaller. Lighter. Cheaper.
 
Nano One’s LNM cathode is a brand-new material.  Nano One announced the patent in January. Evaluations with EV OEMs (Original Equipment Manufacturers) and battery supply chain companies are taking place now.
 
Those evaluations will take time. But the pay-off could be huge. We are talking about a candidate to be the next generation of batteries: a battery that lasts longer, charges faster and operates at a higher voltage.

Patents and Partners

All of this is patented. The One Pot process is patented. The LNM material is patented. The LNM battery design using the off-the-shelf anode and electrolyte is patented. 
 
The company has 16 patents right now and more applications pending.
 
There is the partnership with Pulead. There is a partnership with Volkswagen – focused on improving the durability of the cathode. 
 
There is a partnership with Saint-Gobain, a French multinational.
 
And there is a recent Joint Development Agreement deal with the (as of yet unnamed) multi-billion-dollar Asian cathode material producer. 
 
Nano One has described the JDA as “developing and evaluating cathode materials”. That language suggests the target here is a new material, like LNM, where a deal would be a game-changer.
 

CONCLUSION

I hope I’ve made this simple; I’ve tried to explain the features of the NNO technologies. The benefits don’t need explaining:
 
1.    Much longer lasting battery
2.    Much faster charge times
3.    Much lower cost battery
4.   Much more environmentally friendly
 
I couldn’t see ALL of this back in January, but I could see enough to know this stock could become a major player in one of the three largest memes of 2020 (EVs, Gold and COVID trade). And it has worked well so far!
 
With $28 million cash, they get to decide their own destiny–unless one of a dozen automakers, major OEMs or parts companies or nickel miners decides to buy them out first.


 
 

A SECOND BACK TO WORK TRADE IS ON

By
Keith Schaefer
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0

BUY THE BANKS

A few weeks ago, I spoke to the Credit Suisse X-Links Monthly Pay 2xLeveraged Mortgage REIT (REML – NASDAQ) as a way of playing The-Back-To-Work Trade (as opposed to the Stay-At-Home trade that dominated during the first part of the COVID pandemic).

REML is a play on commercial REITs. It tracks the iShares Mortgage Real Estate ETF (REM -NASDAQ), but with 2x leverage.

As we anticipated, REML has exploded higher. Today it sits at $5.40. Before the Pfizer vaccine news the ETF was $3.80.

Today, I look at a second Back-To-Work-Trade: U.S regional banks.

Why regional banks? To put it simply – banks are well positioned to benefit from a vaccine. 

By all accounts we are in for a very tough winter – we are already seeing lockdowns and scaled back access to restaurants, travel and malls.

Those businesses have a tough few month ahead. 

They also represent the primary borrowers of many regional banks. 

But now there is a light at the end of the tunnel. A vaccine means the pain will end.

One thing matters to the banks – collateral. The businesses will continue to suffer for the next few months. But the bank does not own the business, just the loan.

To take one example, regional banks are big lenders to the hospitality industry – hotels.

These loans were generally made at 50-60% loan-to-value. That is a big cushion. The replacement value of a hotel room is at least double the loan amount. 

Now maybe replacement value was a wish and a prayer a few months ago, when COVID was as far as we could see. But now we can say that in 6-9 months, those hotel rooms will be booked again. Those loans don’t look so bad.

US Regional Banks Stocks Have Already Broken Out

Like REML, the regional bank stocks have had a nice run. But even now, many remain well below pre-COVID levels. If you believe we are months away from normalcy, it sets up an interesting trade.

Consider the ETF, the First Trust Community Bank Index (QABA – NASDAQ). An ETF is the simplest play.  QABA currently trades at $44 but began the year at $50.

Not too bad. But drilling into individual names you can ferret out even better bargains. 

Consider OceanFirst Financial (OCFC – NASDAQ). OceanFirst is a New Jersey based regional bank. They also have locations in New York City and one in Philadelphia.

OceanFirst is not a small bank, with a market capitalization of $1 billion. The stock has had a nice run off its summer lows at $13 to a current price of $17. But take that in context – pre-COVID, OceanFirst was a $23-$25 stock.

With news of a vaccine, it is worth asking the question – why would a bank like OceanFirst not get back to its pre-COVID level?

OceanFirst has non-performing loans that remain extremely low – only 0.37% of their total loans by dollar volume. They have already more than provisioned against losses from these loans. The bank even sold off $81 million of problem loans in the third quarter. What remains on the balance sheet is mostly high-quality lending.

Prior to COVID OceanFirst was always a solid performer. The banks return on assets was north of 1.2%, while return on equity was close to 14%.

A Bank with a Free SPAC

Another name that remains well off its pre-COVID level is Customers Bancorp (CUBI – NASDAQ).  Customers has, admittedly, already had a run off the lows, but the stock is still over $4 off the $22-$23 level it held in January.

Customers Bancorp is centered in Pennsylvania but operates in states all along the east coast.  

Source: Customers Bancorp Investor Presentation

The albatross around Customer’s neck has been their hospitality loan portfolio. The segment accounts for 3.5% of total loans. 

At the COVID peak, loan deferrals from hospitality loans (ie. hotels) were 73% of the total loans held. But this is dropping:

In Q3, deferrals from hospitality were down to $126 million, or 31% of the loan portfolio.  Total COVID related loan deferrals were only 3% of loans. The majority of these are principal only, meaning the borrower is still paying interest. 

Digging into the hotel loans, the average loan-to-value of 65%, meaning that the bank is likely to recover most of the loan even if it defaulted. But with the vaccine on the horizon, it is unlikely to come to that. 

Customer’s stock comes with an added bonus – a free SPAC share. Customers announced in the summer that they would be spinning off their BankMobile division to the Megalith Financial SPAC.

BankMobile is a digital banking platform that provides deposit services to college students who receive student loans and government grants.

BankMobile acts as a customer acquisition channel. Customers wanted to spin out BankMobile because:

 

  1. BankMobile was expanding their customer acquisition to other banks that did not want to be dealing with a competitor

 

  1. BankMobile was butting up against regulatory limitations on the fees it could charge as long as they were part of Customers

The original plan was for Customers to keep a 47% minority stake in BankMobile. But recently Customers announced that those shares would be passed on to shareholders. Each Customer share will give ~0.16 shares of BankMobile.

Very little of the value of BankMobile is currently in the Customer’s share price. Customers trades at 0.7x Price to Tangible Book and only 6x this year’s earnings. In many ways these shares are like a free punt on the BankMobile business.

The Tiniest of Banks

If you do not mind wading into smaller and more illiquid names, the opportunities are even more evident. Many of the microcap community banks have only started to move off their lows.

Two names that fit the bill are Codorus Valley Bancorp (CVLY – NASDAQ) and Malvern Financial (MLVF – NASDAQ).  

Codorus was a $22 stock in February, 30% higher than today. Malvern is a 40% discount to its pre-COVID level.

Neither of these banks is particularly memorable, but that is not really the point. The idea here is to buy “boring” at levels less than they were a year ago.

Codorus Valley serves parts of Pennsylvania and Maryland. The bank was hit just before COVID by a fraudulent borrower, resulting in a $7.5 million loan loss in Q1. Since then the company has taken more normal loan loss provisions of $2.5 million in Q2 and $2 million in Q3.

Even with the larger than normal loan losses, earnings were $1.43 per share for the first 9 months of the year.  The stock trades at 9x their pre-COVID 2019 earnings, and at 86% of tangible book value.

Malvern is also located in the Northeast. It is headquartered in Philadelphia and operates in Pennsylvania, Delaware, New Jersey and Florida. 

By any account Malvern’s loan book was not well positioned for COVID. 5.6% of loans outstanding were hotels. Another 4.2% were fitness centers.

But thanks to a combination of loan deferrals and government support of its borrowers, the bank has muddled through. Malvern had 20 loans totaling $93 million in forbearance at the beginning of November. This is down from $313 million at the end of Q2 and $147 million at the end of September.

Malvern has always been a bit of an underperformer.  Nevertheless at $17 the stock trades at 80% of tangible book value and 13x their pre-COVID earnings.

I could go on. There are so many regional banks in the United States. As a Canadian it is almost unfathomable – literally thousands of banks, some of them operating in only a single city or county. 

Many of these are public and those that are – especially the small one’s – remain at steep discounts to their price at the beginning of the year.

If you believe the vaccine is coming and that it will bring back normal – as I do – there is simply no reason for this to be so. The trade is simple. Buy these banks at a discount to where they were 12 months ago and wait for the world to return to normal. Terrible boring, but profitable, nonetheless.

I know we are still months away and that seems like a lifetime, but in company-speak – it is only a couple quarters.

A PICK AND SHOVEL PLAY FOR DIGITAL CURRENCY ON THE NYSE

By
Keith Schaefer
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0

It is tough for retail investors to play digital currencies like bitcoin or ethereum. 

Buying a position means wire transfers and digital wallets, the worry of hacks or hard drive failures. Many of us are still nervous about sending a sizable chunk of our net worth out to the crypto-ether.

For a time, it seemed like digital currency miners might be a viable alternative. But that had its own pitfalls – not the least of which was that the miners were not very profitable. 

There was constant equipment upgrades and accelerating mining difficulty – not to mention the volatile price – and most of the public miners have had to dilute to keep the lights on.

At InvestingWhisperer I am on always on the look-out for new ways to play digital currencies without having to buy the tokens. We made a good bet recently by betting on blockchain adoption – a key part of the Overstock (OSTK – NASDAQ) story that has become a huge winner for subscribers.

Another way to play the adoption angle is via Silvergate Capital (SI – NASDAQ). Silvergate stands to benefit as more investors get into the space.

Silvergate is a picks and shovel play on digital currencies.  They do not operate on the blockchain or even directly hold Bitcoin.  Instead, Silvergate is a bank; in many ways, a plain vanilla bank—but one with a twist.

Most of Silvergate’s operation looks a lot like any other small bank. Silvergate takes in deposits and lends out money. They lend to all same, traditional borrowers that any other bank does. They make loans to single family homes, multi-family residences, commercial real estate, and mortgage loan warehousing.

Source: Silvergate Third Quarter Earnings Presentation

Where Silvergate is different is on their deposits. 95% of their deposits are from digital currency participants.

Silvergate’s depositors include 64 crypto exchanges, including some of the largest, like Coinbase, Genesis Kraken, and Bitstamp. They also have nearly 600 institutional investors as well as 250 other participants such as miners, stablecoin issuers, and blockchain platform operators.

A couple of points about these deposits:

1)    these are ALL US dollar deposits. Silvergate does NOT hold Bitcoin or any other digital currency directly.

2)   These are non-interest-bearing deposits. 

Non-interest-bearing means just what you’d think—the bank does not pay interest. HELLO! That is attractive because the bread and butter of banking is net interest margin – ie. the difference between the yield on the loans less the yield on deposits. It’s kind of like having zero cost on your COGS (Cost Of Goods Sold).

When Silvergate started out on this path in 2014 they were just looking to attract a cheap source of deposits.  But as they began to onboard large exchanges and investors, they realized they were uniquely placed to help their customers solve their problems.

Silvergate saw that their customers had a lot of friction with money transfers. 

Getting cash from one exchange to another…or…from an investor onto an exchange…had to follow all the traditional channels – and that meant it took days. Transfers had to be completed during banking hours, they had to pass through manual human touchpoints, paperwork often had to be signed.

Silvergate realized that since they had the customers all under one roof, they could automate these processes, make them available 24/7 and reduce the time and resources required to get money moved.

This ended up being the Silvergate Exchange Network (SEN).

Source: Silvergate S-1 Filing

The above slide may look a little cluttered, but it tells the story. Each one of the little bank-like structures in the diagram represent exchanges, each one of the groups of people represent investors or funds or other market participants. 

Because all these customers belong to SEN they can all transact with one another via the network. They can do so with less friction, no counterparty risk and more liquidity.

The traditional wire transfer/ACH transaction pathways are circumvented.  

Silvergate does not charge to be part of SEN. Silvergate rightly realizes this is early days, and that barriers to adoption need to be low.

That means all the money Silvergate makes from SEN are from the same, boring banking fees (wire transfers, ACH transfers, foreign exchange transfer) as any other bank.  

But those fees add up and they are growing fast. Fee income from digital currency customers grew 36% quarter-over-quarter.

Source: Silvergate Third Quarter Investor Presentation

Silvergate benefits as transaction volume increases and as customers on the exchange increase. 

In the third quarter the price of Bitcoin (which has gone up) certainly helped fee income. but a large part of Silvergate’s growth is just plain old-fashioned customer adoption. Silvergate added customers in the third quarter and many of those customers were large – their average institutional client added in Q3 brought onboard $9 million versus an average of $1 million from the existing cohort. 

Source: Silvergate Third Quarter Investor Presentation

Silvergate is not a huge bank (a market cap of $450 million) so the increase in fee income is material. Net income for the quarter was $7.1 million.

The next steps for Silvergate are to expand their offerings.

First, Silvergate just launched a lending product backed by Bitcoin – called SEN Leverage. This will allow institutional investors to apply for loans backed by their bitcoin. 

Silvergate speculated that if their 600 institutional investors each asked for a $0.5 million loan, that would be $300 million – which would generate a decent return at the expected mid to high single digit interest rate.

The second area that Silvergate seems likely to turn is to custody services. 

A custodian for digital currencies is a bit of a different beast because it means physically holding the Bitcoin in some digital storage. 

Silvergate admits that building a custody solution from the ground up might not be the best path. Instead, expect existing partnerships to expand (they are partnered with the custodian Anchorage) or they may buy an existing custodian to get into that space.

 

Competition

 

Silvergate has a head start but the big banks are starting to get in the game.

In June, the Office of the Currency Controller (OCC) announced that banks could now be custodians of digital currency. This opens the door for the traditional prime brokers (like Goldman Sachs, JP Morgan and the like) to wade their foot into the space.

JPMorgan is the first to get their feet wet. While still not quite offering a “platform” JPMorgan has opened the door to deposits from digital currency exchanges.  In June they took on Coinbase and Genesis as customers.

Silvergate’s “moat” is really their mover advantage and the network they have built. Silvergate has a network of clients onboarded and transacting with one another. 

The “network effect” is a catch phrase, but it is appropriate here. The more clients Silvergate onboards, the more these clients benefit from frictionless transactions within the network. 

On top of the existing 800+ customers, Silvergate has another 200 in the pipeline. 

Expansion of their customer base and expansion of offerings is their recipe for success. 

Meanwhile Silvergate’s stock does not trade like a digital currency moonshot. It trades like what it actually is – a bank.

Bank stocks are valued off book value and Silvergate has a valuation of 1.5x their tangible book—a middle of the road valuation.

Silvergate has a relatively low-risk portfolio of assets, with nearly 50% of their assets in securities, not loans. While this weighs on interest margins and earnings, it is aligned with their strategy to rely on fees to grow the bank.

The stock, however, has had a huge run-up into their third quarter earnings. Even though those earnings were good, the stock has taken a pause. It may pullback further. 

Despite the fact that SI doesn’t OWN any Bitcoin, the Market will almost certainly trade it (for awhile anyway) as a bitcoin pure play; i.e. if Bitcoin tops out then the stock will almost certainly do the same. That’s just what the Market does.

But a couple things could happen in the coming year. If the next few quarters show good traction on these Bitcoin backed loans, well, that’s a high margin business by bank standards these days. And they don’t pay interest on the deposit. That sounds like a banker’s dream!

And if, over time, their first mover advantage gives them traction, they obviously become a big takeover candidate by a larger bank.

But if you want exposure to digital currency adoption without having to buy the coins directly, Silvergate is an intriguing pick and shovel play.

I’m long 1000 shares at $23.67.

A Small Cap Play That Solves Pfizer’s Cold Storage Problem

By
Keith Schaefer
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0

TFF PHARMACEUTICALS—TFFP-NASD:
A (POTENTIAL) SIDE PLAY
ON THE PFIZER COVID VACCINE
GETTING AROUND COLD STORAGE

 
The Market got very excited this week—right before market open on Monday—as global drug giant Pfizer (PFE – NYSE) and their partner BioNtech (BNTX – NASDAQ) announced their mRNA vaccine was 90% effective in preventing COVID-19.

But there are a still a few hurdles before we are back to regularly scheduled life.   Pfizer needs to continue the trial and request emergency use authorization from the FDA. 

But Pfizer is also aware of a potential stumbling block:  The vaccine’s cold-chain storage requirements.

A small cap NASDAQ stock—TFF Pharmaceuticals—TFFP-NASD—may have a solution for that.  And there are indications at least they may already be working together.

 

Pfizer’s vaccine only has a shelf life of a few days at typical freezer temperatures.  To keep the vaccine from spoiling it needs to be kept at extremely low temperatures – minus 70 degrees Celsius.

This could limit distribution.  It opens the door for competing vaccines (it has been reported that the Johnson & Johnson and Novovax candidates do not have this problem) to leapfrog Pfizer and takeaway their head start.

Rural distribution will be a particular problem, as hospitals do not have the resources or equipment for long-term storage.  Even in the big cities, hospitals will have to purchase ultra-cold freezers.  While freezer costs – ($10k-$15k) – are not insurmountable for a large institution, manufacturing those freezers fast enough may be a problem.

Pfizer is already looking at alternatives.  Two days after the vaccine was announced, FiercePharma.com, a biotech focused news site, reported that Pfizer is already at work on a next-gen formula that will alleviate the storage issues.

According to FiercePharma, Pfizer chief scientist Mikael Dolsten said:
“for the COVID-19 disease, I think we’ll roll out next year a vaccine in powder format”

The powder form of the vaccine would be stored at typical refrigeration temperatures.

One question that could be asked is–where Pfizer is going for the technology to powder-form their vaccine?

We don’t know the answer to that yet.  But TFF Pharmaceuticals (TFFP – NASDAQ), with their proprietary process called Thin Film Freezing, could satisfy Pfizer’s need for a powder that gets around ultra-low temperatures.

Their thin film freezing technology encapsulates a drug in a “brittle matrix powder”. 

This powder has a few advantages. 

First, the technology improves solubility in the body.  Solubility is a technical term that simple means how much of the drug is absorbed at the place it is needed. 

Poor solubility is often a show-stopper for what otherwise might be promising drug candidates.

Second and most importantly for the Pfizer scenario, the dry powder from the technology is well-suited for long-term storage without the need for cold chain storage.

Vaccines have been on TFF’s radar as potential product candidates.

In their 10-K, TFF boasts that their platform is a potential solution for vaccines that require much less stringent cold-chains than Pfizer does (2-8 degrees Celsius)

Now let me be clear: so far there is no direct evidence that Pfizer is working with TFF to solve their cold-chain problem.  All we can do is try to connect the dots. 

We know that Pfizer is working on a powder solution for their vaccine.  We know that a powder solution is what the TFF platform delivers. 

And we have some recent comments from TFF that make you wonder whether those dots connect.

It starts with the TFF third quarter conference call. 

Dr. Bill Williams, the inventor of the TFF technology, spoke on the call.  Williams works out of the University of Texas in Austin, as head of the Molecular Pharmaceutics and Drug Delivery department.  Williams is also a consultant for TFF.

The TFF technology was licensed out of the University of Texas at Austin. 

On the call Williams began by listing off several biologics that TFF is currently working on.   mRNA and vaccines were among them. 

Williams then went on to talk more specifically about COVID-19 vaccines that require cold storage, saying:
Cold chain refers to the requirement that a therapeutic product must be maintained at cold temperatures during its storage and distribution, all the way to the point of administration to a patient. 

A relevant example of a biologic product that requires cold chain storage is the mRNA liquid vaccines currently in Phase 3 testing for COVID-19.

He went on to describe how the TFF technology can solve the problem for these vaccines by converting them “into dry powder forms that are stable at room temperature and thus do not require such cold chain storage”.

Nothing was said specifically about Pfizer.  We are left to speculate whether Williams just decided to speak hypothetically about an unrelated case?

Later in the call TFF’s Chief Operating Officer Chris Cano gave more color on projects that TFF has in development.

In particular, Cano highlighted work with a “top-5 pharma company”.  This company sent TFF their “proprietary compound” and “was so pleased with the TFF technology and the work being performed” that they sent TFF a second compound.

The top-5 pharma companies include Pfizer.  Also on the list are Merck (MRK – NYSE), Roche (RO – SWX), Johnson & Johnson (JNJ – NYSE) and Novartis (NOVN – SWX).  GlaxoSmithKline (GSK – LON) comes in a close sixth.

I scraped the newswires and filings for mentions from any of these companies that they were evaluating a powder technology for any of their drugs. 

The only recent hits were from Pfizer and their vaccine candidate.

TFF also noted their pharma partner in a presentation slide that described internal potential programs (see the New Chemical Entities box to the far right):
 
 

Source: TFF Pharmaceuticals Investor Relations

There is also a connection at UT-Austin.  As I said earlier, Williams comes out of UT Austin. On the call Cano made note that the business development efforts, including that of the top-5 pharma company, are supported by their UT Austin partners.

The University of Texas in Austin just happens to be where the team of scientists that co-invented the spike protein being used in the Pfizer trial are from.

Finally, there is the matter of expanded manufacturing.  At the end of October TFF announced that they had “expanded their engagement” with one of their contract manufacturing organizations (CRO), Experic, in Cranbury NJ. 

The expansion will give TFF “the capability and capacity to develop and produce additional products currently in assessment with pharmaceutical company partners” – so the expansion is for one of their new engagements.

Of course, none of this “scuttle” gives investors a definitive answer to whether TFF is the technology of choice for Pfizer’s powder solution.  Even if it is, just how profitable that ends up being to TFF is a whole other question without a good answer. 

As well, Pfizer may not end up with the preferred vaccine, or the trials for a powder solution may just not work.

But if there is indeed a connection here, it would be a validation of the thin film freezing platform.  It would lend support to the very optimistic assessment of CEO Glen Mattes at the end of the third quarter conference call (my highlight):

“We have a remarkable technology that allows us to rapidly investigate, prototype, and develop a wide variety of compounds. The market and potential partners are recognizing our unique capacity and capabilities. And this is creating a world of opportunities for us.”
 
Disclosure: I’m long 1000 shares at $17.50, with a stop loss in at $15.

The Back to Work Trade Is On

By
Keith Schaefer
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One ETF that I have followed closely over the past 9 months has been the Credit Suisse X-Links Monthly Pay 2xLeveraged Mortgage REIT (REML – NASDAQ). 

REML is a levered way to play the REITs.  It tracks the iShares Mortgage Real Estate ETF (REM -NASDAQ), which tracks the FTSE Nareit All Mortgage Capped Index, but with 2x leverage.

I bought REML as a trade back in April when I saw that the residential housing market appeared to be coming out of the lockdown on stronger footing than ever.  That turned out to be the case and REML moved from $2.50 to $4 over the next few months.

Since then I have been watching REML but the ETF has been trading in a channel since August–until Monday, when Pfizer’s news on a potential vaccine for COVID was announced.
 
Monday REML broke out of its long-held channel–and Tuesday that that break out was extended.
 
 
Source: Stockcharts.com

What happened to REML the last two days?

Simply put, the stay-at-home trade just became the back-to-work trade.

With the announcement of positive results from the Pfizer vaccine trial the market has gained confidence that COVID will end.  The expectation now is  that a vaccine will be available by year end and administered to the majority of those who need it in 9-12 months.  We should see life returning to some kind of normal by this time next year.

What does that have to do with REM and REML?  Well these ETFs are really made up a few different kinds of REITs.

The first type of REIT in the index is the reason I bought REML back in April.  These are residential mortgage REITs. 

The two biggest positions in the underlying REM ETF are Annaly Capital Management (NLY – NYSE) and AGNC Investment REIT (AGNC – NYSE).

These are companies that investment in residential mortgage securities.  Looking further down the list and you will find that other residential mortgage REITs like New Residential (NRZ – NYSE), PennyMac (PFSI – NYSE) and Two Harbors Investment (TWO – NYSE) are also 3% holdings in the ETF.

These stocks have done well the last two days, but they are not where the real moonshots lie.  That comes from the other kind of REIT that the ETF is composed of – the commercial REITs.

REM’s third biggest position (at 7.5%) is Starwood Property Trust REIT (STWD – NYSE).   Starwood is a commercial real estate REIT.  Loans on office space makes up 34% of their lending book.  Another 22% of their lending book is hotels.

Starwood’s stock has soared on the Pfizer news.
 
 
Source: Stockcharts.com

The fourth biggest position in the fund, with a 5.6% weighting, is Blackstone Mortgage Trust REIT (BXMT – NYSE).

Like Starwood, Blackstone is a commercial REIT.  60% of their loan portfolio is office space.  Another 13% comes from hotels.

Blackstone’s chart looks a lot like Starwood’s.
 
Source: Stockcharts.com

Scroll down the list and there are several other commercial REIT’s with 2-3% weighting in the index that have exploded on the vaccine news.

On top of that, the fifth largest position in REM is Hannon Armstrong Sustainable Infrastructure REIT (HASI – NYSE).  Hannon is not a pure-play on commercial real estate, but they are into something just as good – they make loans on renewable energy and energy efficiency projects.  Which is a now a Biden play.

You can see why REML has exploded.  Up until now the REIT index has been supported by a single leg – the residential REIT’s in the index.  But now the commercial REITs have added their own rocket fuel.

This may just be the start.  The commercial real estate stocks remain well off their pre-COVID levels. 

Blackstone was $35 stock pre-COVID and even after the two-day pop it is only $26.  Likewise, Starwood was worth $23 in February versus $17 right now.

There is plenty of room for these stocks to run on more good vaccine news.
 

Keith Schaefer
 

DAVE WATKINSON at EMGOLD MINING (EMR-TSXV) is The Warren Buffett of Mineral Properties

By
Keith Schaefer
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DAVE WATKINSON HAS HIS 15-CENT
EMGOLD MINING (EMR-TSXV) PERFECTLY POSITIONED

The Warren Buffett of Junior Mining Has Millions in Profits
From Property Deals To Spend Drilling–Right NOW


Dave Watkinson is the Warren-Buffet-style CEO of Emgold Mining Corporation (EMR:TSXV/ EGMCF-PINK), who has brought millions of non-dilutive capital into the treasury—and positioned his shareholders to Win Big with THREE upcoming drill programs.

Just yesterday, Emgold announced that a subsidiary of global mining giant Rio Tinto (RIO-NYSE) had just received their drilling permit for their New York Canyon play in the Walker Lane trend of southwest Nevada.

The Rio Tinto sub (Kennecott) has cash and spending commitments to US$22.5 million to earn a 75% interest in New York Canyon. Watkinson bought the asset for US$250,000, and was able to flip it to Kennecott immediately.

If Rio Tinto finds the economic porphyry they’re looking for, the remaining 25% that is still in Emgold’s hands will be worth—well, A LOT.  Emgold is trading for just 15 cents.

If they do spend the full US$22.5 million, that’s a 90x return Watkinson gave us shareholders.  (Yes I’m long! Consider me biased!)  Rio Tinto obviously has very deep pockets—the perfect JV partner for a potentially monster asset like New York Canyon.

I think it’s going to be one of the most anticipated drill programs in Nevada in the coming months. Porphyries are HUGE deposits—low grade and broadly disseminated mineralization (i.e. spread out over a large area); there is no such thing as a small porphyry.

This is a dream-come-true-deal for a tiny junior like Emgold. Rio Tinto has to hit of course—this is exploration.  But to be in front of this big a play this cheap is what investing in junior mining is all about.

Before I tell you about the Nevada play they love so much they’re about to drill it themselves—let me show you a couple hugely value-add deals that Watkinson has completed.
 

Emgold Deal #2 – Troilus North



Emgold management keeps a huge database of gold projects with a focus on Nevada and Quebec.  Watkinson is VERY good at knowing where to stake around the edges of new discoveries—so that he can flip those assets as the new discoveries grow in size.  In Quebec and Nevada there are ALWAYS buyers circling.

Watkinson waits, waits and waits until his opportunity arises to grab a high potential asset at a bargain price.  Sometimes it takes years.  Then he waits again after acquiring it for the perfect time to monetize it.

At the rock bottom of the junior gold cycle in 2018 Emgold moved in quickly to opportunistically acquire a property in Quebec called Troilus North.  The seller was a private exploration company.

It was a smart deal…because Troilus Gold (TLG-TSX) was successfully advancing and expanding their own nearby property. 

Emgold bought Troilus North for a combination of cash and shares that totaled $995,000.  One year later Emgold flipped Troilus North to…….you guessed it, Troilus Gold.  The all-in sale price was $250,000 plus 3.75 million shares of Troilus Gold. 

Back then, in November 2018, TLG was trading for 60 cents.  It recently hit $1.70! This was a huge, non-dilutive win for Emgold shareholders.  Watkinson says they have been monetizing that stock—keeping dilution down, and building the treasury for their own drill programs.

This is one deal.  Emgold has a portfolio of them.  Here’s two quick ones:
  1. Their CASA SOUTH property is adjacent to Hecla’s (HL-NYSE)Casa Berardi Mine (32% of Hecla’s revenue comes from Casa Berardi; produced 130K oz @ $1,051/oz cost).  Casa South will get drilled this winter.
  2. Their EAST-WEST property is sandwiched between Wesdome Gold Mine’s (WDO-TSX) Kiena Property and O3 Mining Inc.’s (OIII-TSXV) Malarctic Properties in the Val D’or Gold Mining Camp…and it has VERY high grade historic drilling results.  It’s a small property but is surrounded by well funded companies—all of which have incentive to buy East-West.
There are more, but you get the picture—Watkinson knows what he’s doing.  And what he’s doing is bringing in millions of non-dilutive capital to fund his drill campaigns.  (The only thing he’s not so good at is telling investors how smart he is!)
 

Golden Arrow – Gold Ounces
Bought For Under $2 Per Ounce



Still today, despite the obvious homeruns with Troilus North and New York Canyon Emgold’s enterprise value (market cap – cash) is well under $20 million.

But now THREE drill programs will be starting—New York Canyon in Nevada, Casa South in Quebec and #3 is what Watkinson sees as his prized asset right now—aptly named Golden Arrow.

Golden Arrow is a property that Emgold again acquired at the very bottom of the cycle in 2017—for a total purchase price of $564,000.  As I’m going to show you, this works out to $1.63/Au Eq—per gold equivalent ounce.

Here’s the math:

A 2018 Technical Report completed by Emgold outlined a measured and indicated resource (M&I) of 296,500 ounces of gold and 4.0 million ounces of silver for the property.
 

On a per ounce basis that puts the $564,000 acquisition price tag at:

Acquisition cost = $564,000 / 346,900 oz = US $1.63 per oz

$1.63 per ounce……..how does that compare with how the stock market normally values ounces in the gold?

One recent comprehensive study (1) that combed through every company listed on the Toronto Stock

Exchange (TSX) and the TSX Venture Exchange (TSX-V) got these numbers as how ounces are being valued today:

• US$20 per ounce Inferred
• US$30 per ounce for M&I
• US$160 per ounce for P&P

That would suggest that Golden Arrow could be worth $20 to $30/oz across 346,900 ounces—at $25/oz that’s just over US$8.67 million, or CAD$11.2 million.

The Market is NOT going to value this resource at these valuations when it’s that small.  But if Emgold can get this up to 700,00 AuEq ounces—then that could happen. As an at-surface, oxide gold asset in Nevada that can be put into production with a very cheap heap leach operation—there will be LOTS of buyers.

But if Watkinson’s hunch is correct, and drilling is successful and Golden Arrow becomes a major deposit—then shareholders obviously benefit.

In one sense, you have to call ALL exploration drilling is high-risk.  And it is!  But when you can use so much non-dilutive capital to drill such big projects like New York Canyon and assets like Golden Arrow where there is already a deposit…this is the kind of lower risk punts I like—that still have huge upside IF THEY HIT A GREAT HOLE.

Look folks, Watkinson is one of the most unsung CEOs in the business. He has given shareholders a chance to Win Big if any of these upcoming drill programs hit economic mineralization.  His only fault is his humility!  And that’s why the stock is 15 cents—despite three near term drill programs that could change the company forever.

Watkinson clearly has a nose for good properties.  Three of them are about to get drilled.  That’s why I’m long NOW, right before the action starts. 
 
 
Emgold Mining Corporation has reviewed and sponsored this article. The information in this newsletter does not constitute an offer to sell or a solicitation of an offer to buy any securities of a corporation or entity, including U.S. Traded Securities or U.S. Quoted Securities, in the United States or to U.S. Persons. Securities may not be offered or sold in the United States except in compliance with the registration requirements of the Securities Act and applicable U.S. state securities laws or pursuant to an exemption therefrom. Any public offering of securities in the United States may only be made by means of a prospectus containing detailed information about the corporation or entity and its management as well as financial statements. No securities regulatory authority in the United States has either approved or disapproved of the contents of any newsletter.
 
Keith Schaefer is not registered with the United States Securities and Exchange Commission (the “SEC”): as a “broker-dealer” under the Exchange Act, as an “investment adviser” under the Investment Advisers Act of 1940, or in any other capacity. He is also not registered with any state securities commission or authority as a broker-dealer or investment advisor or in any other capacity.

Meet The Warren Buffett of Mining Properties

By
Keith Schaefer
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THE WARREN BUFFETT OF MINING PROPERTIES

 
I want to introduce you to the Warren Buffett of  mining & exploration properties.

Like Buffet trades stocks, this man trades  gold and copper  properties.

His best deal (so far) went like this:

A junior gold company switched management teams, and the new team was wanting to divest a Nevada asset to focus on Saskatchewan (a little out-of-the-box, but whatever…).  As soon as The-Warren-Buffett-of-Gold-Properties found out this asset was available, he didn’t just rush out and buy the asset—for $250,000.

He ALSO found a buyer for it—a subsidiary of one of the world’s largest mining companies, who was willing to lay out US$22.5 million in cash and drilling commitments to earn-in to just a 75% interest.

For those of you without a handy calculator, that’s a 90x return.  Not 90%–90x, or 9000%.

That didn’t happen over years, or months, or weeks…this man had the property sold to a major before the buying had actually been completed.

This global mining giant is set to drill this copper gold property—in the next three months. 

If this major finds an economic porphyry deposit (which by definition would have to be quite large), the value of that remaining 25% would be in the tens of millions of dollars. 

In another deal, this CEO bought a Quebec asset in 2018 for just under $1 million.  A year later, he flipped it to another junior for cash and 3.75 million shares of their stock—which has now more than doubled to $1.25 per share.

Normally these mining entrepreneurs do these amazing transactions inside their own consulting firm, and reap huge amounts of stock and cash for their own portfolio.

But not this man. He puts all these deals inside a public company—where shareholders get the benefit of the incredible inflow of his non-dilutive capital.

Tomorrow, I’m giving you his name, and the name & ticker symbol of his company. Not only was he able to survive the low times in gold a few years ago, he exploited the commodity cycle like few others, buying up high quality assets and now he is selling them—for up to 90x returns for his shareholders.

Not only has he been able to bring in millions of dollars of non-dilutive capital, he has been able to find The One Property that he wants to drill himself. 

It’s in Nevada, already has several hundred thousand ounces of gold and he thinks it has potential to be a million ounce deposit.

Between his own company and joint venture partners, three high priority properties—all in Nevada or Quebec—are getting drilled in the next three months. Success on any one of them makes this 15 cent stock a big winner.
 

STRATEGIC M&A BRINGS IN WINNING DEALS


In 2017/2018—when this Buffett-style-CEO was buying—junior mining companies were in the darkest times this sector has been through. 

You can see what the capital rushing out of the sector did to share prices of junior gold miners in the chart of the VanEck Junior Gold Miner ETF below.  The sector dropped 80% from 2010 despite the price of gold remaining flat.

 



And remember, that chart represents the public market for gold stocks.  Sources of private capital for junior gold miners and their assets was even more scarce…which is where our Buffett-style-CEO was a rare buyer.

Now, in 2020, the gold price has touched $2,000, and many of the companies in which he received stock as part of the deal—have gone up as well.

So, for very few dollars, he has now positioned his company for huge potential success—with THREE properties getting drilled in the coming quarter.

I’ve brought you a lot of winners in the junior mining sector this year, and it may make this business look easy.  It’s not.  Finding an economic deposit is hard, so there is risk here. 

But you’re reading my stories because you want to own a penny stock with multi-dollar potential.  These are all high-risk stocks, but my job is to use my connections and experience to find ones with the best shot with the lowest risk.

Using other people’s money to drill, and using a lot of non-dilutive capital to drill yourself—is a very good way to do this business!

So, yes, I hope this company does as well as Vizsla Resources, Kodiak Copper and Fosterville South—three huge winners I brought to you early—but the drill has to find an economic deposit.

There are two things I would tell you about this man:
  1. He is very humble (much like Mr. Buffett).  When he walks into a deal, people like him and want to do business with him.
The flip side of this is…he never tells shareholders how good he is at his job.  So, his stock sits in obscurity until someone like me comes along and realizes the potential and says…WOW!!!.

And now is the time—after a lot of horse-trading properties for years, he has found The One he wants to drill himself!
  1. He has a very specific strategy with his property acquisitions.  First, he focuses on only Quebec and Nevada.  There are ALWAYS buyers for assets in these top two places.  They both produce a HUGE amount of gold and have very pro-mining governments.
 
Because of that, the value of gold assets in these two places is the highest—so he gets maximum leverage for his shareholders.
 
Second, he focuses on buying or staking land around existing mines and new greenfield discoveries.When this is all you do, you get pretty good at it!There are often properties that are deemed too small or too far away—at first, when something is discovered.This CEO is often in there buying.
 
He also keeps a long and meticulous list of private owners who have mineral interests in these areas (in Nevada there must be thousands!).If there is ever a hint of one of these people needing money or an exit, this CEO is one of the first there.
 

DO NOT MISS MY E-MAIL TOMORROW MORNING!!!



Tomorrow I’m going to introduce this man and his public company to you—and tell you everything that you need to know.

Here is what you will be learning:
  • Specific details on the company’s 90x score—the name of the property, and the major about to drill it
  • The Nevada oxide asset they intend to drill themselves
  • A peek at other properties and the mines they’re near
  • A look at the catalysts that are coming
  • And, of course, the name and ticker of this stock
Like Warren Buffet did in 2008, this CEO swept in during the darkest days of the junior gold market and began buying an incredible suite of assets—dirt cheap during the biggest capital crunch that the junior gold mining sector has ever experienced.

Now those same assets are being monetized into a roaring bull gold market with gold prices up 70% from when these assets were purchased…and you know that junior gold assets have exponential leverage to the rise in gold.

His disciplined strategy has now positioned his shareholders to benefit from any of one THREE near term drill programs—all in the best mining jurisdictions in the world—at almost no cost.

Summer COVID Stocks are Fall-ing… What’s Next?

By
Keith Schaefer
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A surprise group of winning stocks this summer were “outdoor stocks”—you’ll see I mention CWH Camping, Thor Industries, Winnebago and more below.

While most investors were focused on online stocks (my Big Win was Overstock; $13 – $90 in weeks!), stocks that benefited from people not travelling overseas also did amazingly well.  

That was a little surprising as most of them have no online presence.

But after a big run—many were up 5-10x trough to peak—almost all of them have the same chart, recently dipping under all their moving averages after peaking in August.

These stocks have been “falling” you could say. And that may happen right through year end tax loss selling. 

But will they be a buy in January, in preparation for another massive seasonal run if COVID is still a big issue? They could be the tax loss buys of the year.

 

The Outdoor Stocks—Are They A Buy This Winter?

 

Here’s a few examples:

Let’s start with the RV makers.  Camping World Holdings (CWH – NYSE) was a $4 stock in March. 

Before COVID it was $15. It hit $42 this summer!

Why the big move? Simple – the company is generating heaps of cash. 

Camping World generated about $200 million in free cash flow in all of 2019. Flash forward a year. Free cash flow for the second quarter was $525 million. 

Q3 is typically a seasonally better quarter. The results, which are expected November 2nd, could be truly blow-out numbers.

If Camping World can keep it up (and I think that’s a BIG If), it is not expensive. The company has a market capitalization of only $2.4 billion. 

One person willing to bet on Camping World is CEO, Marcus Lemonis. Lemonis is better known for his role on the CNBC series “The Profit”. But he has been CEO of Camping World since 2006.

Lemonis has made his bets. Between August 10th and September 4th Lemonis bought $3 million of Camping World stock.

Source: Ink Research

Lemonis purchased stock at well above the trading price today. He clearly doesn’t buy into the bear thesis that this is a one-time surge in demand.

The bears argue that as demand abates, inventory will pile up, beginning a cycle of markdowns. 

But that does not appear to be playing out – at least not yet. 

In its fiscal fourth quarter, Winnebago Industries (WGO – NYSE; $17 – $72) reported a record backlog in October. They described “depleted dealer inventory” caused by “high levels of consumer demand”.

Thor Industries (THO-NYSE; $35 – $115 this year) another large manufacturer of recreational vehicles, made a similar comment in late September. 

Thor saw “increasing retail demand over the course of the quarter, driving dealer inventories to historically low levels by year end and our year-end backlog to”.

 

Sporting Goods Stores

RV sales are not the only outdoor product category producing eye-popping second quarter numbers. 

All the big-box sports retailers delivered eye-popping numbers in Q2.

Top of that list is a recent IPO, Academy Sports and Outdoors (ASO – NASDAQ).

ASO owns 259 sporting good stores, mostly in the southern United States. ASO went public on August 2nd. They were previously owned by the private equity firm KKR.  

The IPO was not well received by investors. An expected range of $15 to $17 had to be reduced to $13. 

The lack of enthusiasm could not be attributed to ASO’s recent results, which were quite impressive.

According the company’s S-1 filing, adjusted free cash flow for the first half of this year was $775 million. 

This is against a market capitalization of roughly $1.3 billion.

That is a big pile of cash and a significant improvement over the past. In 2019, which was ASO’s best year of the 3 years disclosed in their filings, free cash was $200 million.

The growth is coming from a combination of e-commerce and in-store purchases. E-comm grew from $115 million in the first half of 2019 to $300 million in 2020. 

But bricks and mortar business grew as well, up 11% on a much larger $2.2 billion base.

One of the largest names in the sporting goods sector, Dicks Sporting Goods (DKS – NYSE) saw strong cash flow in Q2.

Dicks is a bigger company, with a market capitalization of $5.3 billion. They operate 726 sporting goods stores across the United States.

Like many bricks and mortar stores, Dicks shut all their doors in March. They did not begin to reopen them until late April. 

By the end of June all the stores were back open.

The shutdown of stores did not seem to hurt their results. Dicks second quarter free cash flow was over $1 billion. 

This single quarter free cash flow is more than the annual cash flow that Dicks has generated in any prior year.

While the quarterly number was buoyed by working capital changes, even before changes to working capital, free cash was still $280 million.

Source: Dicks Sporting Goods SEC Filings

Dicks saw a big jump in online sales–194% year-over-year, representing 30% of total sales in the second quarter.

These tremendous online sales from companies like Dick’s and ASO may prove sticky. That could change the way these retailers do business. 

In a recent note Morgan Stanley said that due to “higher eCommerce penetration post-COVID” they expected “retailers to rationalize their store footprints to a degree to focus on their most productive locations.”

Morgan Stanley analyzed their universe of retailers, including Dick’s. 

They determined that 10% of stores could be shutdown while maintaining the same customer coverage assuming a 5-mile wider radius.

Source: Morgan Stanley

By now we are all accustom to ordering online and curb-side pick-up. An extra couple miles seems unlikely to deter us.

The unintentional trend of doing more with less is evident in the results of another sports retailer, Big 5 Sporting Goods (BGFV – NASDAQ). 

Big 5 operates over half of their 431 stores out of California. When COVID hit in mid-March, these stores all shut down.

Big 5 has little online presence. They generated negligible online sales before the pandemic as well as after.

Yet while the closures dented their top-line results – Q2 revenue fell from $241 million to $229 million yoy – their bottom-line did better than ever.

Big 5 generated $63 million of free cash flow, $32 million excluding working capital adjustments. 

Things appear to have improved even more in July. 

Big 5 announced that they had ended July with $38 million of cash and had repaid their credit facility. 

That implies that Big 5 generated another $57 million of cash in July alone! This for a company with a $175 million market cap.

Big 5 has been a laggard in the past. The stock has floundered in the single digits. The company has never consistently generated free cash from their operations.

One has to wonder whether Big 5 management is asking how they blew the doors off in Q2 with less stores open? The conclusion may be, why did they have so many stores in the first place?

 

What Happens Next

 

 There are two trends at work here. One is that COVID cases are again trending badly…so does the shift to the outdoors continue into the winter? 

The stocks “falling” below their moving averages suggest not. 

But even with a vaccine next year, does international travel pick up much?

Q3 numbers are likely to be strong…but will that mark the top (fundamentally; as in cash flow) and these stocks continue to discount a much quieter winter?

Investors are for now rightly cautious. When Thor Industries reported in September, they saw EPS increased from $1.67 to $2.14 yoy. Backlog increased 186% yoy. 

Thor guided to 20% growth for calendar 2021. Yet the stock has fallen from $94 to $85 (from a high of $120 in August).

Investors are obviously looking ahead to the world after COVID. While that may still seem like a long way off, in “company-years” it is only a few more quarters.

 

Lower Rents and Higher Online Sales May Be Coming?

 

But there is reason to think the future will remain bright. These bricks & mortar retailers exit the pandemic with some tricks up their sleeves.

First, they have more leverage on landlords. Lower rent translates into higher margins. 

Second, online is here to stay and these retailers have learned that they can sell their product even as less stores are open. 

Bank of America expects 8% of stores to close by 2025.

Source: Bank of America

Poor performing locations will be fast to shut down. For the last 9 years online sales have been a margin headwind. That is going to change.

Third, these companies will leverage their new customer base. Take Camping World for example. 

Camping World reports 5.2 million active customers including 2.1 million Good Sam members (think of Good Sam as a brand club membership).

This is a large base of customers with an interest in the outdoors. To capture more value from these customers, Camping World plans to provide collision repair services, a servicing and repair subscription service, and a peer-to-peer RV marketplace including RV rentals.

What makes this kind of expansion more doable now than a year ago is the windfall of cash. Rather than just trying to stay alive, a company is like Camping World now has the war chest to fight back. 

Finally, contrary to the frequent pronouncements that COVID is over, the reality is that we are still hip deep in it. 

COVID is looking more like a seasonal disease and we are just entering the high season. The cash may keep coming for longer than guessed.

These companies will not be able to continue their cash-printing ways for ever. But neither are they likely to go back to pre-COVID levels. 

The answer of where they deserve to be valued likely lies somewhere in the middle, and in large part will depend on what they have learned from COVID and how they deploy their cash.

The Market is a forward discounting mechanism by 5 – 9 months. 

That means January trading in these outdoor stocks should give investors a sense of what to expect.

I’ll be watching to see how much these stocks keep “falling” through year end tax loss selling , and I’ll update you in late January.

 

Keith

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