In the fourth quarter of 2023, I reviewed prospects for eight companies I thought might be interesting investments - Bank of Nova Scotia, Bank of Commerce, Baytex Energy, First Quantum, MEG Energy, Rubellite Energy, Denison Mines and Fission Uranium. In all cases except MEG, where I chose to short the stock as a short-term trade, I considered the shares undervalued. In the case of the two bank stocks, I thought the lack of a meaningful premium on longer term options made the options that expire in January 2026 better investments than the shares of these companies.
Now it is 2024 and I will report on these ideas and update readers on the outlook for the names
Report first. Not everything worked out so far, but it is early days for all of these investments except the short term short call on MEG which I closed out at tidy gain.
The best bet was the Canadian bank stocks, which I judged (and continue to judge) to be deeply undervalued. Gains of 33% or 114% in one month or less are rare. I will hold this position in the expectation of higher gains before the option nears its expiry, but the current state of the bet is fine with a book vain of over $75,000 on an investment of less than $65,000 in one month. That can disappear as quickly as it came if CIBC stock tanks but I am betting it will keep rising for a while yet, and expect similar outcomes from the BNS Call position. These two large Canadian banks are trading at low ratios to book value, a rarity for these profitable and well-managed banks. My 117% gain in a few weeks suggests I was likely right they were undervalued.
Uranium prices have come to life and the outlook for Fission and Denison is robust if prices remain firm. Both have high grade deposits not yet in production but with significant profit potential if ultimately permitted, constructed and operated. Permitting risk remains as does the commodity price, but I see uranium as a reasonable bet in a world short of energy.
Baytex and Rubellite are long term bets on oil prices. Baytex is in the doghouse for debt levels increased materially by recent acquisitions but at today’s oil price Baytex is generating substantial free cash flows which, if the price environment remains reasonable, will bring debt down quite quickly. Rubellite has little debt, fast growth and profitable operations. Both have significant exposure to heavy oil prices. They are not without risk but could quite readily double or triple in value over a few short years. I like the risk-reward profile of both names.
First Quantum is embroiled in a spat with Panama which has led to the closure of a mine comprising half the value of the company. Geopolitical risk is real and hard to call but the non-Panamanian assets of First Quantum more than support the current share price and there is at least some chance the Panamanian issue will be resolved either with a new operating license or a court ordered compensation in the billions payable to First Quantum. Very high risk but significant gains possible.
My next review of actual outcomes will follow the close of Q1 2024. Happy New Year.
This fall was the first time I have ever owned Canadian banks. They've always been way overpriced but this fall they were all in the discount bin. They've had a little fear instilled in the boards which helps as well. I bought them all and hope to keep them for a very very long time. Your other picks are also in my portfolio except Rubellite which is on my radar. Glad to be on the same page as you Mr Blair.
Happy 2024!!