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Resonant buyback, plus international & trading thoughts +3

09:31 26-Nov-18


Resonant has announced a 1-year $4M buyback program.  At current prices, that's about 9.5% of floating shares.  It's also about 4.7 days worth of trading at recent average volume.  I will be watching trading between now and year-end carefully.  Astute readers will already know that I am less fond of buybacks than most, and a company with Resonant's negative cash flow buying back shares makes no fundamental sense at all.  However, I still see this move as a positive inasmuch as it can be taking as a signal that management believes it can reach positive cash flow without further dilution.  Open market insider buys would typically be even more convincing, but if my thoughts on Resonant's buyout possibilities are correct, those are off the table.  Either way, there is reason to hope that current pricing represents a bottom in RESN while noting that, without the other factors, that would not be reason enough to hold shares.

That said, I continue to think that there is a place for calculated gambles like RESN, CUI and WPRT in the current market environment.  That's because dividends help provide stock price stability, but even big ones take too long to make up for market volatility on their own.  With our biggest dividends (from VOD and CTL) just past, I'll also be studying the trading in those shares, and looking forward to new ones from CVA, and ABB next year. 

Another undervalued high-yielder is BGCP, whose first post-split dividend is closer than ABB's, but still 3 months off.  I had an interesting conversation on the lack of drop in BGCP shares, following the ex-date for the NMRK distribution, and though it worth sharing:

Yes, it should have dropped to the extent that entities that own BGCP have not completely hedged the distribution, AND if the market were valuing either stock correctly to begin with, AND to the extent that market participants are paying attention on this shortened, post-holiday trading session.  As per all my writing in this context, though, I see plenty of evidence of the first, and very little on the latter two.  As per my last note, be prepared for a wild ride over the next few months. <shrug>
In my view, BGCP was severely under-priced pre-split.  So maybe the hedging is putting us in the middle ground both before and after.  In this context, it's important to realize that there is no real transparency in the market, at least not for the likes of individual investors like us.  The short #s are always behind, and they're not accurate anyway, thanks to dark pools, etc.  Options can and do drive equity pricing, and now there's CFDs (contract for difference) in addition to ISDA instruments that are only available to Big Money.  It's why I consistently opine that it's unwise to enter any position that one would be unwilling to hold for the long-term. 

If you want to consider something I consider truly interesting, my study has indicated that there are some predictable long-term effects to consistent hedging and swing trading.  I keep the details confidential, but gave some hints about them in this article.  In any case, that only applies to high volume long/short battleground stocks.  The deal arbitrage surrounding BGCP/NMRK is a completely different situation.

Finally, I've learned not to underestimate pure ignorance.  I often say that the hardest part of my job as an investor is not valuation, it's figuring what the market is going to pay attention to and what it's going to miss.  Experience has shown that whenever I begin a line of reasoning with, "people couldn't possibly be so..." I'm setting myself up for potential pain.  So for all I know, investors are confusing the ex, record and distribution dates.  It wouldn't happen with a normal dividend on a stock like CTL, but in this case...?

We'll see what happens next week and beyond.

Getting back to ABB, I think that the sale of its grid business could result in a special dividend, since the company already has a very strong balance sheet.  I see vague, yet confirmed, reports of a humongous deal in China as a sign that the sale will take place, quite possibly to Hitachi.  Either way, ABB stands to benefit from the electrification of everything as well as the move toward automation, which is being lead by Germany and Asia rather than America.  

Further along the line toward speculation from income, but still safer than the GRoDT stocks, is EBIX.  The stock goes ex-dividend on the 29th, but its 7.5 cent dividend is inconsequential, at half a percent yield.  Thus, I will usually not mention it.  However, I do think the macro factors are significant and note that we've already seen over 14% appreciation in the rupee (against the dollar) in less than a week since I introduced the stock.  MX is now down below $7 and may represent a similar, though longer-term, opportunity as it rides a wave of foldable mobile devices and new power profiles resulting from the electrification trend that I mentioned above.

The one thing that unites all of these stocks is their global businesses.  Unlike the rupee, the Euro is not showing immediate response to E.U. approval of May's Brexit deal, probably for the reasons mentioned in my last note.  That makes the post-dividend rise in VOD all the more impressive, and the ABB opportunity more compelling, despite American efforts to retain influence.  I see the shift as just a matter of time, and one factor that is often overlooked in it is the importance of what I call the Dark Economy, which I think has contributed to some of the volatility we've seen recently, and not just in stocks.  That's why I'm mildly positive about December, but very leary about 2019 and beyond.  When it comes, I continue to think that turmoil is likely to hit mainstream stocks the hardest.  Trouble for the likes of Google is one thing that the U.S. and E.U. have in common.  Whereas just a few months ago it was hard to find any bargains, there are a wide range of them now.  It's just a matter of doing the research and being choosy.