ECN Capital Preferred Shares Is Victim Of Collateral Damage

My latest article on Seeking Alpha is on the drop on value of ECN and its preferred shares on March 16th. It turns out that the drop in share prices has nothing to do with its fundamentals or any related bad news. Below is a short summary of the article. Full article at Seeking Alpha.

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ECN Capital Preferred Shares Is Victim Of Collateral Damage

Reposted from Seeking Alpha
By Brian Langis

Summary

• Both classes of preferred shares fell for unexplained reasons.
• ECN preferred shares seem victim of collateral damage by the company’s association to Element Financial.
• The recent selloff provides an interesting investing opportunity.
• Both classes of preferred shares provide a yield of +7%. More upside once they reset.

 

ECN Capital (OTCPK:ECNCF) [TSX:ECN] is primarily traded on the Toronto Stock Exchange under the ticker ECN.

Note: Dollar amounts are in Canadian $ unless mentioned otherwise. USD-CAD 1.2839 Price of 1 USD in CAD as of March 23, 2018.

I just wanted to drop a short note on the ECN Capital (ECNCF, ECN.TO) preferred shares. Both classes of preferred shares have taken a hit on March 16, 2018. Why it happened is not exactly clear, and this article will dive into the possible causes. I’m not the first one to look at the unusual drop. KT Investments has his take on what happened to ECN Preferreds here. For a more in-depth analysis on ECN Capital, you can read my article here and the one by Montrealer.

In short, ECN is commercial finance company. ECN Capital operates in four verticals: Home Improvement Finance (Service Finance), Manufactured Housing Finance (Triad Financial Services), Rail Finance, and Aviation Finance. It is well managed and is led by Steve Hudson. Hudson’s focus on capital allocation has created value for shareholders, especially when he was the CEO of Element Fleet Management (OTC:ELEEF) (EFN.TO). Hudson eats his own cooking; he owns millions of shares of ECN. ECN is profitable and has plenty of assets to back the preferred shares.

The purpose of this article is to try to make sense of the drop of ECN Capital Preferred Shares Class A and C. ECN Capital Class A (ECN.PR.A) was trading above par back in November with a 52-week high of $26. It’s now down to $22.60. Class C was trading in the high $23 range for most of the year until recently. It’s now trading at $20.60 a share. ECN’s financials are fine, there wasn’t any bad news, and the rise in interest rates should benefit both classes of shares because of their fixed reset features. It’s worth pointing out that other fixed-resets preferred shares have been doing well. So what’s going on with the preferred?

First let’s look at the criteria of each class:

ECN Capital Class A – ECN.PR.A – Reset: Dec 30, 2021. (Issued November 2016) (Prospectus on SEDAR)

• Shares Capital: 4,000,000 shares @ $25 for $100,000,000
• 5 Yr Canada Gov Bond + 5.44%. Yield Floor: 6.50%
• Price: $22.80
• Current Yield: 7.17%
• DBRS Rating: Pfd-3 (low)

ECN Capital Class C – ECN.PR.C – Reset June 30, 2022 (Issued May 2017) (Prospectus on SEDAR)

• Share Capital: 4,000,000 shares @ $25 for $100,000,000
• 5 Yr Canada Gov Bond + 5.19% Yield Floor: 6.25%
• Price: $20.73
• Current Yield: 7.51%
• DBRS Rating: Pfd-3(low)

Both Class A and C took a tumble this month.

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Li Lu – Himalaya Capital

Here’s the latest addition to my investment collection of useful resources. Li Lu manages Charlie Munger’s money and one of the candidate to manage part of the Berkshire Hathaway’s portfolio. He’s a very interesting investor to follow.

Li Lu (Himalaya Capital)

• Li Lu —Know What You Don’t Know (Graham & Doddsville)
• Foreword to the Chinese Edition of Poor Charlie’s Almanack (PDF)
• Li Lu – The Prospects for Value Investing in China (PDF)
• Li Lu – From Tiananmen Square to Possible Buffett Successor(PDF)
• Li Lu’s Talk at Columbia 2006 (PDF)
• Li Lu’s 2010 Columbia Lecture (PDF)
• Reflections On Reaching Fifty (ValueWalk)
• Video: Li Lu’s 2006 Columbia Lecture (Youtube)
• Video: Li Lu’s 2010 Lecture at Columbia (Youtube)
• Video: Li Lu’s Presentation at the FAME Student Investment Conference (Part 1, Part 2, Part 3)
• Book: Moving the Mountain
• Book: Poor Charlie’s Almanack (Chinese Edition)

How to Evaluate Businesses

“So how do you really understand and gain that great insight? Pick one business. Any business. And truly understand it. I tell my interns to work through this exercise – imagine a distant relative passes away and you find out that you have inherited 100% of a business they owned. What are you going to do about it? That is the mentality to take when looking at any business. I strongly encourage you to start and understand one business, inside out. That is better than any training possible. It does not have to be a great business, it could be any business. You need to be able to get a feel for how you would do as a 100% owner. If you can do that, you will have a tremendous leg up against the competition. Most people don’t take that first concept correctly and it is quite sad. People view it as a piece of paper and just trade because it is easy to trade. But if it was a business you inherited, you would not be trading. You would really seek out knowledge on how it should be run, how it works. If you start with that, you will eventually know how much that business is worth.” -Li Lu

Li Lu is the only guy that manages Charlie Munger’s money. And he has an incredible story about his up bringing. Twenty-one years ago, Li Lu was a student leader of the Tiananmen Square protests. Now a hedge-fund manager possibly one of the successor to he is in line to become a successor to Warren Buffett at Berkshire Hathaway.

His book seems rare and hard to find. There’s a copy on Amazon: Moving the Mountain. He’s expensive so it’s probably one of these rare books that you might find by accident somewhere. Li Lu also wrote the foreword to the Chinese version of Poor Charlie’s Almanack.

 

California

Here’s my missive on my recent trip to California. Because of its large size, I decided to break down in different posts.

I spent two days in Los Angeles to attend Charlie Munger’s Daily Journal meeting and various related investment events. Then I headed to the San Francisco-Silicon Valley area to have a better understanding of what’s going on in that special part of the world. Here are the posts:

• Los Angeles
• DJCO AGM (Seeking Alpha)
• San Francisco – Silicon Valley
• Alphabet (Google)
• Apple Spaceship
• Tesla, SpaceX, and Elon Musk

As always, your feedback is welcome,

Brian Langis

Alphabet (Google)

I use Google every day. I use its search engine, gmail, Youtube, Chrome, cloud, photos and calendar. My phone runs Android. Google organized my life. It’s hard to imagine a world without Alphabet-Google. Today, Google is a global icon that regularly pushes the boundaries of innovation in a variety of fields.

I had the chance to visit their campus. Google’s campus is famous. Google is well known for doing things differently. Not only it is an awesome working place, it is famous for throwing tons of perks at its employees. Free gourmet cafeterias, massage rooms, nap pods, haircuts and onsite. Why would a company offer so much? Well they want to keep their employees happy and productive. They put in 12-14 hours day and they need them at their best. It’s good to have your employees on site. I worked for a company that hired a catering service for lunch because leaving work site brings too many distractions. Another reason for the generous perks is that the Silicon Valley area is competing for their services. Their talent are highly sought after, not just in the Valley for everywhere in the world. The lesson here is to attract smart-creative people and give them an environment where they can thrive at scale.

Google organized the world’s information. This is an organization that has improved our lives. The world is certainly a better with Google. Alphabet’s business model is to collect data on users and sell that data for targeted ads. Alphabet, already one of the largest companies on the planet, seems to be defying the laws of physics by continuing to grow like a startup. Despite being over $100 billion, revenue is still growing at a rate of over 20% per year. Here are some financials:

San Francisco Bay Area – Silicon Valley

Perhaps the strongest thread that runs through the Valley’s past and present is the drive to “play” with novel technology, which, when bolstered by an advanced engineering degree and channeled by astute management, has done much to create the industrial powerhouse we see in the Valley today.

— Timothy J. Sturgeon

I didn’t have official business in the San Francisco Bay area but I wanted to go see for myself what is going on in this part of the world. There’s something truly unique going on there. I had to go. Some of the companies that have a major influence on our life are all located in the area. Silicon Valley, the nickname for the region, is populated with the Google, Apple, Facebook, Amazon, Netflix and Intel of the world. Even traditional brick and mortar businesses like Walmart have a presence with a tech lab. I don’t think we realize how much these companies have penetrated our daily lives. We use their products all the time. We use our iPhone to go on Facebook or Youtube. Google Maps to get around. On a flight, Netflix and the iPad are great at averting a kid crisis. Our methods of communication, work, and the way we get our entertainment are all in the hands of a couple companies. And is it a coincidence that they are all located in the same area? How did that happened?

Silicon Valley, California. Credit: Credit: Samykolon/Wikimedia Commons

Silicon Valley is a unique place. It’s a place of dreamers. The belief is that if you can think it, you can code it. And if you can code it, you can make products that will improve our lives. Silicon Valley has the ability of attracting the smartest brains. The region has everything to gets things done. Money is not an issue with its legions of venture capital funds looking to fund the next big revolutionary idea. Some of the best schools in the world, Berkeley and Stanford, are located there. It attracts and retains some of the smartest people in the world. Silicon Valley has created this virtuous circle of attracting money and brains that build companies that improve our lives.

Apple’s Spaceship

Flawless curves, milled aluminum, endless glass, walled garden, it sounds like an Apple product. I had a chance to visit Apple’s new $5 billion “spaceship” headquarter.  Visiting is a strong word. I was allowed to look at it from the across the street. The spaceship is not open to the public. It’s not open to must Apple employees. Only Apple employees that have been transferred are allowed in. I’ve been told that 200 employees a week are making the transfer. The spaceship is expected to hold ~13,000 employees.

The Apple Park seen under construction in Cupertino, California in this aerial photo taken on Jan 13, 2017. Photo: Reuters

The centerpiece of Apple Inc.’s new headquarters is a massive, ring-shaped office overflowing with panes of glass, a testament to the company’s famed design-obsessed aesthetic. Apple’s latest campus has been lauded as an architectural marvel. The achievement is to make a building where so many people can connect and collaborate and walk and talk. A “statement of openness, of free movement” as Apple states it. The building, crafted by famed architect Norman Foster, immortalized a vision that Apple co-founder Steve Jobs had years earlier. My Apple “guide”, a guy named Joe, told me that the building is more than 90% Steve Jobs’ vision. The concepts and design were in place way before he passed away. He hated the current headquarter (the one on Infinite Loop) but that’s all Apple could afford at the time. Today Apple’s balance sheet situation has since improved enough for them to afford a fleet of spaceships if they wanted to.

Tesla, SpaceX and Musk

Tesla’s marketing budget: $0.

We all have seen the picture. The picture. The one that features Starman clad in a SpaceX astronaut suit. It is nothing short of epic. Musk’s SpaceX launched the Falcon Heavy rocket to much fanfare. The 27-engine behemoth is the most powerful rocket in use today. Because Musk though the launch wasn’t exiting enough, he put his own cherry red Tesla Roadster in the rocket to be released into space. There’s a live video feed of the Tesla floating through space.

If you work in marketing, I wouldn’t be surprised if your clients ask you to have a “stunt” marketing campaign with a $5,000 budget.

Its successful launch was a significant step forward for SpaceX and Musk’s eventual goal of sending people to live on Mars. President Kennedy was fixated on the moon. Musk is fixated on Mars.

I had the opportunity to visit the Tesla factory in Fremont but it didn’t work out. There are plenty of documentaries on the factory such as this one (Youtube).

I have written a post on Elon Musk after reading his biography. Musk and his accomplishments are an incredible story. We need more Elon Musk in this world. Musk has his share of critics. But he is also an easy target. I have no investment in Tesla and I don’t plan too. I would like a Tesla roadster but there’s no way I’m touching the shares. I can’t justify its valuation (TSLA). Tesla is currently trading at a $60 billion market cap and an enterprise value of $70 billion. And it makes no money. I know this is a bet on the future, but let’s say that once it is profitable, what will be its margins? 5-8%? I haven’t got into its financials. Tesla has a lot debt, losses, and burns a lot of cash. If you think its financials are bad, the critics are trashing the new Model 3 that just came out. The quality of the car has been compared to the 1990s Kia. In a normal rational world, none of this is good for the price of a stock.

So why, knowing what we know, is Tesla trading at astronomical levels? Tesla’s shareholders are like members of a religious cult. They don’t invest based on fundamentals (things like profits, cash flow, and assets), but instead the investment is based on faith. They believe that Tesla will revolutionize the world and they want a piece of the action (or wealthy). In my mind, they have no idea what’s about the hit them. But as long as the capital markets are there to support Musk’s vision he might succeed in accomplishing it.

But am I ready to bet against Musk? Hell no.

Two Days In Los Angeles

I was in town on business and I only stayed two days. I need to come back to spend more time. I liked LA. I enjoyed my short stay. Here are some observations.

Population-Sanctuary City

Ask locals what is the population of LA and you will get different answers. There’s the official count which is 4 million people, according to the Census Bureau. And then there are the off the book numbers that range from 12 to 17 million. The answer varies on who you ask and what you consider to be Los Angeles.  If you include the greater LA area, the number jumps to 10-12 million. If you add illegal aliens, we could be taking about 17 million. Nobody really knows because how do you know how many illegals are there? It happens to be thaT Los Angeles is a sanctuary city. While there’s no clear definition of what a sanctuary city is, it understood that it limits local law enforcements cooperation with federal authorities. In other words, city employees are not assisting Immigration and Customs Enforcement (ICE) in enforcing federal immigration laws. Sanctuary cities are controversial and Trump has promised to crack down on them. It’s estimated that there are between 5 to 7 million illegal immigrants in LA. It’s near Mexico, the weather is nice, and it seems like everybody speaks Spanish, so why not immigrate there. LA is a majority-minority city. Latinos and Asians make a large percentage of the population. LA also has a huge homeless population problem. The official count underestimates L.A.’s homeless population according to a study. So who knows how many people are in the city of Angels.

What is Los Angeles?

If you tell somebody that you are going to New York, you are probably referring to Manhattan. Or else you would say I’m going to Brooklyn or Long Island. If you are going to LA, it’s not exactly clear where you are going. Los Angeles is a collection of neighborhoods. There’s Hollywood, Malibu, Beverly Hills, Inglewood, Anaheim, Compton, Santa Monica, Pasadena, Long Beach and many others.  Logistically speaking, these neighborhoods don’t connect well.  People in Pasadena don’t hang out in Inglewood and so forth.

There’s a downtown. Sort of. LA has been investing a lot in the last couple years to create regenerate downtown. The reason why LA is structured the way it is today is due to the way it was grown. LA’s growth exploded in the post-World War II suburbanization, thanks in part to defense spending. So its growth was sprawled out resulting in all these different neighborhoods. As the move to more suburban neighborhoods continued, the city’s population surged. Signs of decline in the central city, however, were becoming apparent. Downtown LA has declined in metropolitan importance for decades.

But in the last couple year gentrification began to take hold in downtown. I was only in LA for two days and I spent 90% of my time downtown. It was nice and clean but unfortunately it has a major homeless problem. I found that even though it was nice, it lacked “life”. I don’t have the exact words I’m looking for. They have this new art district. It’s beautiful. But it doesn’t feel organic. An art district has to look like it has grown on its own. You can’t put a painting up and call it the art district. Just like when there’s a Chinese restaurant that opens on your block, you can’t just call it Chinatown.  A local told me that you only go downtown if you need to, which is like never.

Sports

When I visit a major city, I like to get a vibe of the sports scene. In LA, the Lakers are #1 by far. It’s a Lakers’ city. The Dodgers come in 2nd. After that it’s college sports and the Clippers. When I asked somebody about the LA Kings (NHL), he thought I was talking about the Sacramento Kings (NBA). Nothing on soccer and zero mention of two NFL teams they have. After twenty years without a team, they now have two. You probably heard about the indifference toward the Rams and the Chargers in LA. The moves looks like a failure at the moment, but let’s give it some time. They will have a new stadium in 2020. My guess for the failure is that LA is a neighborhood city, so they probably don’t have the sentiment that its “their” team.

2020

I consider both current mayor Eric Garcetti and former mayor Antonio Villaraigosa great presidential candidates, in 2020 or later. They have done a good job with LA. Their diverse background could provide them with a broad appeal. Also California Lt. Gov. Gavin Newsom could be an interesting candidate. You can’t count out California Senator Kamela Harris which is increasingly positing herself for a White House run. It could be a crowded race.

Charlie Munger At The 2018 Daily Journal Corporation AGM

It’s been a while since I posted anything on Seeking Alpha. I was due. The post is part of my California trip. More posts on the subject will come later. Here’s the part of my trip at that concerns Charlie Munger.

The article is available on Seeking Alpha. They have exclusive rights. Here’s a preview:

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Reposted from Seeking Alpha
From Brian Langis

Summary

• Charlie Munger did a two-hour Q&A. He answered questions on a variety of topics.
• DJCO is a cult stock. It’s not in an attractive business, but the company has gained a following with Munger as its Chairman.
• In 2009, DJCO invested its excess cash in a portfolio of securities that has gained in value. This portfolio of securities and dividend provides a cushion to DJCO.
• DJCO is not a mini Berkshire Hathaway.

*I was in LA for the DJCO AGM. If you are reading this article for an advance analysis on DJCO, you won’t really find it. This article is about the AGM and Charlie Munger.

I recently attended the annual shareholder meeting of Daily Journal Corp. (DJCO) in Los Angeles. I am not a shareholder in DJCO, and I don’t plan to be one anytime soon. But I wouldn’t overlook the company either. I will explain later. So, why attend? The main reason for attending a DJCO AGM is not for its results or the company itself, but for the opportunity to hear Charlie Munger’s wisdom in his Q&A segment, who is the chairman of DJCO. Also, part of the reason for attending is the DJCO meeting reveals itself as a community gathering of fun, fellowship, and learning. There are dinners, lunches, and social gatherings related to investing. It’s great to see familiar faces and to meet new people. Ideas are generated and exchanged. You learn a lot. Attending these investment events is a way for me to regenerate myself. It’s like adding wood to a fire. It fuels the core of why I do this for a living. I can’t wait to get back to my desk. Value investing is a lone wolf business. You spend a lot of time in your bubble. Sometimes, you can drift, so it’s good to re-center yourself. Like the Berkshire Hathaway (BRK.A) AGM, the DJCO one offers a great experience for any serious investors on a much smaller scale.