Bombardier Financing Good or Bad?

Bombardier (BBD.B) Financing FEB. 20th 2015 - Quick Analysis

News: $750M bought deal offering that's been upped to $938M. Click here 

Analysis: Using Peter Hodson's article on "5 Signs of Good Financing", let's digest Bombardier's deal.

1. A new share issue should be priced higher than the prior one
I can't find any thing on recent financing, but it's safe to say this new share issue will massively dilute existing shareholders and priced below a 52 week low. In fact, the share price hasn't hit 2.20s since March 9th 2009. On the day of the announcement, the stock closed at $2.45, which mean't a 10% discount. Do keep in mind, the financing usually takes weeks to structure, so they've been planning this for a while. The massive discount reflects the risk involved.
2. No increase in the deal size
Definitely an increase in deal size, that means all the excess demand will be soaked up so those that want to buy will be able to buy at $2.21. I wonder if the shares are being shorted now, as the short sellers can buy back the shares easily after the financing...
3. Insider participation
Bombardier family will purchase $50M worth. Always good to see the insiders participate and have faith in their own company.
4. No sweeteners
One point for the BBD.B longs
5. A clearly defined use of cash
Cash will be used to fund C-Series, a larger jet with greater margins. Note: the C300 is a new jet for Bombardier and the development has exceeded the estimated cost many times. Not to mention the numerous delays. BBD.B hopes to have at least 300 orders of the new jet but they only have around 243. 


In short, BBD.B is no doubt struggling, but it's doing the right things eliminating the dividend, changing the CEO, and of course shoring up the balance sheet. Assuming all the bad news is out, this financing may temporarily stop the share price from bleeding. Hopefully, all goes well in the upcoming test flight scheduled for Feb. 26th 2015 - Feb. 28th 2015 depending on the weather. That may the catalyst we need for the SP to respond. 
Technical Analysis: Over the last 10 years, BBD.B has bottomed at around 2.22-2.30 per share. 

My target is roughly 2.50-2.75 in the near term.

Disclosure: Long BBD.B

Profiting from Dividends

I know I know investing in dividend companies aren't the sexiest investments, but trust me those dividends add up over time. Plus there are actually quite a few benefits when investing in quality dividend paying companies.

1. They're usually stable (i.e. utilities or telecommunications)
2. Dividends are taxed less than capital gains.
3. A DRIP (dividend reinvestment plan) will have a compounding effect.

It's also easier to manage because your objective is to collect the dividend stream and not worry too much about share price fluctuations. If the business is thriving, the company will raise their dividends. One of the best dividend stocks out there is McDonald, since the year 2000, they have raise their dividends by 28.2% annually, which means the payout doubles every two and a half years!

One more thing, invest in quality stocks (google dividend aristocrats for some examples). I learned my lesson when I invested in RBS pre-recession, at that time the dividend yield was 17%, however the dividend collapsed along with the dividend. So here a few tips to keep in mind when doing your DD.

1. don't chase high dividend yields - 5% should be the maximum, any higher is too risky
2. look at the dividend payout ratio (div./ net income) - make sure it's less than 55% or else the company can't grow
3. make sure the div. are consistent, preferably with increases at regular intervals

- The Hawk

Payout Ratio Checker:  http://dividendinvestor.ca/?symbol=t&submit=GO

Dividend Aristocrats:  http://www.thepassiveincomeearner.com/2011/01/dividend-aristocrats-canadian-tsx.html

Profiting from Operating Cash Flow

This may come as a surprise, but not all companies make money. There are tons of small cap stocks out there that look like the next Microsoft, but chances are they're bankrupt within 5 years. So what the hell happens?!?! Well companies need cash to survive, and if they're not getting it from operating activities they'll have to sell more shares or issue corporate debt to fund operations. Eventually, the business will collapse under the weight of the debt, as operating activities aren't making enough money.

First what is operating cash flow (OCF)? In simple terms, it is the cash flow that comes from operating activities, i.e. the main business, minus the costs of running the business i.e. paying the suppliers. In my opinion, OCF is a more accurate measure of a company's profitable and subsequently its growth. A successful company will have a strong profitable business model that generates money.

For a manufacturer or any company for that matter, the first thing to check should be always be operating cash flows. IF it's negative, do a little more digging, and chances are you'll something fundamentally wrong. For example, customers are leaving. Remember, just looking at the net income won''t be enough, because it is possible to use sneaky accounting techniques to fudge the depreciation, interest expenses, and taxes to alter a company's net profit.

-The Hawk

Profiting from Supports and Resistances Part 2 (Breakouts)

So here's the second part, I'm pretty sure I alluded to this in one of my previous posts, but here it is again. When a stock busts through its resistance on higher than average volume, the former resistance becomes the new support. Vice versa. This is also known as a breakout.

In my experience it's best to wait for a confirmation, as I've been suckered more than once, thinking it's a real breakout, and it falls flat in my face. Please check my post on profiting from pullbacks. An option would be to fade in to your position, but I'll leave it for another posts.

-The Hawk

Breakout:  http://www.investopedia.com/terms/b/breakout.asp#axzz1Za23weZb

Profiting from Supports and Resistances Part 1

There are two parts to this section because there are two ways to play supports and resistances. Picking the correct method will require you to study the behavior and personality of the stock. This first strategy will treat the stock as range bound.

First what is a support and what is a resistance?

A support is a price where demand is equal or greater than supply. In other words, it is the "bottom", and the stock price will usually rebound until it meets resistance. On the other hand, resistance is a key price level in which stocks lose their upward momentum and drops due to short sellers and profit takers.

Looking at the chart, it's easy to spot the strategy, buy low and sell high. Well in real life emotions get in the way and the average trader will buy high and sell low. Here's an illustration. The average Joe will buy the stock after it rebounds from support level. It might go up a 3-4% after they buy into it, and that's when they start getting cocky. They continue to hold on the stock even as it approaches the overbought or resistance territory. The Pros that bought early will start locking in their profits and the short sellers will realize that the stock is overvalued, and the stock starts tanking. The cockiness kicks into overdrive and persuades them to hold on, as "it's just a small correction, nothing to worry about". When the selling continues and the stock drops another 10%, they are in the red. To preserve their capital, they sell near the support, and then the Pros come in again taking the stock to new highs. The moral is, buy when people are scared and sell when people get greedy. BUFFET style.

-The Hawk

Support and Resistance:  http://stockcharts.com/help/doku.php?id=chart_school:chart_analysis:support_and_resistan

Profiting from Relative Strength

When I say buy the industry leaders I don't mean buy the stock with the highest market capitalization. No No, BUY stocks that show relative strength in a strong industry (do the opposite if you're short selling). 

For example, if the uranium sector is hot take five stocks from that sector and compare them with each other. The one with the best return has relative strength, and will most likely rebound faster than its peers (assuming you're buying at a dip). In addition, you can compare the chosen stock with a broad index like the S&P 500 to double check.

For me, I like to look at a 6 month to 1 year chart. If the stock is consistently outperforming an index then I know I’ve made the right choice, because stocks don’t just move upward for any reason. There must be a fundamental reason!

WARNING: 

1.     Stocks that have relative strength may not outperform the index in an intraday basis, medium to long term would be best.

2.     Relative strength is NOT the RSI index. The RSI index is an overbought/oversold indicator.

3.     Past performance is not an indicator of future performance. If a stock is super overbought then it is not a good entry point.

Profiting from Short Sellers

To start, short selling is the act of borrowing someone else's stock, selling it on the open market and buying it back at a lower price, therefore making money on the difference.  However, the plan may backfire, and the share price may skyrocket. Then they're in trouble because they HAVE TO buy it back no matter what the price is. The short seller will only make money if the share price falls, while the amount of money they can lose is limitless.

Q: Well if shorters have unlimited liability why do they short in the first place?

1. they know something is fundamentally wrong with the company.
2. the company is in a weak industry or the market in general is weak.
3. other people are shorting it and they're just following the leader.

In my experience, if there's a high short interest in a stock I would definitely do extra DD before touching it. Shorters are resilient and will not go down without fighting. In some really orchestrated short attacks I've seen whole reports (i.e. Alfred Little) written, stock bashers badmouthing in forums, level 2 scare tactics (big walls), and online defamatory articles. So if there's a crap load of shorters, the stock price may be depressed for some time.

Q:  How do I make money if they're constantly shorting the stock?

First make sure there's nothing wrong with the company (i.e. no fraud, healthy business), no external problems (i.e. political unrest), strong industry, etc....Then calculate the short ratio, by dividing the outstanding shares shorted by the average daily volume. A ratio of 2 means it'll take about 2 days to cover all the shorted shares. In addition, the company's attitude towards its share price is important as well. Some may not care and others will counterattack via dividends or buybacks, and that's when the fun starts. The stock will rise 5% or so with a strong news release. The professional shorters that began the short attack will most likely cover and buy back the stock sending it even higher. As the share price increases, shorters will panic or get margin calls forcing them to buy the stock as well. How fast and how big the movement is will depend on the float and volume.

- The Hawk

short squeeze article:
http://alphatrends.blogspot.com/2006/09/short-squeeze-article.html