At first glance, a pretty boring month – as much of the month’s losses appeared to be attributed to currency. A closer look reveals a balancing act between some profit taking in the tech companies versus gains in preferred shares (except for one)
Key Gainers & Losers
LOSS: Apple Inc. (AAPL) [-11%] If there’s one thing about using options, the volatility can test your patience. Last month we were rewarded with a double digit gain after what I thought was a pretty quiet quarter with no growth in the iPhone segment. Which is why I guess after an unexpected move up for no real reason, a move back down probably could have been expected. Decision [Hedging with October 2017 Puts]: After listening to the conference call, I’ve decided to hedge my current options by buying October $145 put options. The purpose is two fold – 1) to protect the gains made in my existing January options (the cost was ~10% of the gains) but 2) listening to the call, CEO Tim Cook believed folks were holding back buying phones for the iPhone 8 – rumoured to have an incredibly new feature set to commemorate the iPhone’s 10 year anniversary. If that is the case, I can expect the next two quarters to be as flat or even worse than the last quarter. So, why not benefit from a potential dip in price (maybe even a significant if you consider the stock is up more than 30% this year alone), cash in the gains from the puts, and roll my January 2018 calls out to 2019 at a price hopefully well below $150? To me, losing 10% of my existing gains was worth having that scenario play out.
LOSS: Mercadolibre Inc. (MELI) [-12%] Much like all the other tech companies that showed gains consistently every month this year, a breather was more than justified – as the stock had run up as high as 90% this year alone! I also did think about hedging or protecting the gains made so couldn’t find a good catalyst or a reason to. As opposed to Apple, I’m not as worried protecting gains holding shares instead of options – the stock might continue to be volatile, but a 10% drop is a 10% drop with shares; unlike what could be a 30%+ drop with options. Add in that options are only available until March 2018 and the price would have been expensive (i.e. today, a January 2018 $250 put costs ~$14.50 – at today’s price, shares would have to drop 15%+ just to start making money on the hedge). Moreover, the company results last quarter showed the company was firing on all cylinders across all areas of the business so I didn’t see any short term play here.
LOSS: Aimia Inc Preferred Series 3 (AIM.PR.C) [-21%] After receiving news last month that Air Canada was going to manage it’s own loyalty program, the thought did occur to me that Aimia could potentially stop its dividend. The other part of me didn’t think it would happen though since the deal would expire in 2020, and the company was certainly able to pay the dividend until the preferred share rate reset in 2019. Well, turns out that was a wrong assumption as the company suspended all dividends due to a “technical test on capital impairment”. I’m no financial professor but I suspect that with word of Air Canada leaving, a “run-on-Aeroplan-redemptions” could occur and the company may not have the resources to handle this mass influx of redemptions. The company’s 2016 annual report makes reference to a “major Accumulation Partner” with a total consolidated liability of $2.2B! Without looking at anything else, I’m pretty sure the company would find it difficult to cover that if they cannot find a replacement loyalty program soon. At this point, I’m inclined to sell – but also want to hold on the change they get a new loyalty partner but it certainly hurts going from a 40% gain with a 12% yield to a 30% loss with no yield *sniff*.
Despite all the above drama, the month actually turned out reasonably well as individual preferred shares and US financials went up as the US Federal Reserve raised rates again increasing rates and a surprising 180 degree turn by the Bank of Canada stance on interest rates.
Saying Hi & Bye
Nothing new to report this month.
Some Key Decisions
We already mentioned the Apple hedge that we’ll hope plays out according to plan.
Over this month and next month, we’re going to have some lots of extra capital available from trimming our Shopify (SHOP) position; but also from the eventual sale of Sandvine (SVC). In terms of what to with the extra capital (the two companies made up ~6% of the portfolio), there wasn’t an exciting Canadian investment to be made and I was debating increasing my international market exposure through a Vanguard index ETF. However, with the Bank of Canada stating rate hikes were imminent, the immediate action was keep putting the foot on the gas and adding more preferred shares. This turnaround in the Bank of Canada’s view has led to a 30 point spike in June and looking into our crystal ball a month later, another 30 point spike in July.
Expand the picture out to 5 years, and we’re starting to see the yield today be about the same as it was 5 years ago.
If our original preferred shares thesis holds true, and interest rates keep rising, those preferred shares resetting in the next 3-4 years will likely get reset with yields higher than when they were issued. Assuming risk tolerance for fixed income is somewhat fixed (i.e. spread between preferred shares, bond, and short-term yields is about what it was 5 years ago), preferred share prices might actually go back to face value ($25) where as most have been languishing below $20 for the past 2 years. Add in what are yields even now still around 5% (only to increase) + capital appreciation, it’s hard even for me to ignore this type of fixed income investment.