Resverlogix - Plenty of smoke but is there fire?

After writing about a dividend paying retirement home with my last post I will now return to more familiar ground, writing about a speculative stock.  

Resverlogix is a company I've opined on several times here at ATB going back to June of 2016, and over the past year it has certainly performed.  

Here's a link to that first post:  

http://www.avoidthebag.com/2016/06/resverlogix-phase-iii-clinical-trial.html

And here's the 1 year chart:

That's a jump from the $1.20 to $1.30 area to its current price in and around $2 for a gain in the neighbourhood of 60%.  However I must admit to being very greedy on this one because of what I consider to be the "mind blowingly" blockbuster potential of the company's lead compound Apabetalone.  

You know you're in love with a stock when you start inventing words to describe it like "blowingly".  

Those who've followed this blog or the company already know the story.  Apabetalone has shown itself to be an inhibitor of Bromodomain and Extraterminal Domain, (BET for short) proteins.  The biggest promise seems to rest in the area of Cardio Vascular Disease or CVD for short.  CVD affects many people, especially those with conditions like Diabetes and Chronic Kidney Disease (CKD).  

I'm not going to go over old ground except to list some of the potential applications that Apabetalone could have.  Beyond the aforementioned Diabetes and CKD there's also Alzheimer's, at least one form of Muscular Dystrophy, Degenerative Retinal Disease, Thrombosis and more.  

So what's new with Resverlogix that compelled me to write another blog post?  What's this smoke referred to in the subject line?  Relax I'm getting there, but I'm getting older and I like to take my time.  

There are a couple of expressions about smoke that contradict each other.  One says:  'Where there's smoke, there's fire'.  But another is used about someone who talks out of his nether regions, where the bromide goes something like:  'He's just blowing smoke'.  So the question with Resverlogix begs: Is there really a fire cooking up something big, or is it nothing more than the company blowing smoke?

Bottom line answer, I don't know.  I hope the fire is burning hot and cooking up an absolute feast, but I can't say that with any certainty whatsoever.  That's what makes the market game so compelling, it is anything but easy.  If there were no risk and Apabetalone was assured to fulfil its billion dollar potential, then shares wouldn't be trading for Canadian Toonies.  

Okay....so what is this smoke I'm referring to?

The first is FDA approval for the company to proceed with a 2a clinical trial for patients with Chronic Kidney Disease who are undergoing dialysis.  This is on top of the on-going Phase III trial for patients with Diabetes called BETonMACE.  The news about the CKD trial came out on May 15th just passed, here's the link:  

https://ca.finance.yahoo.com/news/resverlogix-receives-approval-fda-cardiovascular-141100850.html

The second "puff of smoke" came out on May 23rd and is much more intriguing for me because it involves mention of Pfizer and the fact that they have applied for a patent for the treatment of a rare disease called Friedreich's Ataxia with BET-family bromodomain inhibitors including Apabetalone. The patent application specifically cites Apabetalone as a compound developed by Resverlogix.  

Here's the link to that news item:

https://ca.finance.yahoo.com/news/recent-publication-patent-application-referencing-110000770.html

And more intriguing (for me) still is that this news was picked up two days later by a portal for Friedreich's Ataxia news stories that had a very interesting take on Pfizer's patent application.  Here's the link:

https://friedreichsataxianews.com/2017/05/25/pfizer-seeks-patent-covering-friedreichs-ataxia-therapy-resverlogixs-has-already-developed/

And here's the intriguing part:

• Resverlogix, which is based in Calgary, Canada, responded to news of the patent application in an understated way. Instead of indicating it would challenge the patent request, the company’s president and chief executive officer, Donald McCaffrey, said that “we welcome the attention drawn to Resverlogix and apabetalone from significant industry groups such as Nature Reviews Nephrology and Pfizer.”

Could there be something brewing between Resverlogix and Pfizer?  Again I don't know, but I do think its a possibility.  Obviously deals of this nature, if they do come together....its not something whipped up on the spur of the moment.  

Still reading?  Good.

Because adding to the smoke was the recent Bio Equity Europe event in Paris where the company was scheduled to present on Monday May 22nd, but didn't attend. That fact was confirmed to me by email from the company's IR department.  No explanation was given as to why Resverlogix decided to forgo this opportunity to present itself to investors.  

All this is happening at a crucial time, because a look at the company's financial disclosures reveals them to be, if not broke, very close.  As of January 31st of 2017 they reported having just under $5 million CDN left in cash with a burn rate of between $2 and $3 million per month.  You don't need to be Stephen Hawking to do the math.

On top of that they have a loan with Citi-Bank that is coming due in August for a little under $70 million CDN.  That loan is guaranteed by one Kenneth Dart who's investment arm Eastern Capital is a major shareholder.  The loan is collateralised by the company's intellectual property, including Apabetalone...default on the loan and Eastern gets pretty much everything.  

All this makes for anxious investors....I can see it it going both ways.  Either we open the kitchen door to find a huge feast laid out, with the possibility of Chef Ramsey being represented as Pfizer stepping in to satisfy the appetite of Resverlogix shareholders.  That or its just smoke coming from the kitchen stove for an overdone pot of Mac&Cheese.

The clock is ticking.  Standard boiler plate disclaimer, please see the very bottom of this blog.  I'm a shareholder, that is to say I eat my own cooking.  I'm hopeful that its prime rib I smell and if it is that its isn't over cooked but instead is juicy and reddish pink.  

Short interest makes dividend paying retirement home company EXE.TO an intriguing play

This blog tends to focus mostly on speculative stocks, companies that often have little to nothing in revenue and certainly don't distribute dividends to investors.  But there is certainly a place in most portfolios for some solid performers, companies that pay investors to own them with regular dividend payments.  

And in my opinion you can do a lot worse than to look at retirement homes for one simple reason, the baby boom generation.  Those hippy dippy teens who were once skinny dipping at the Woodstock Music Festival, they're now moving into their golden years.  Gone are the days of stripping down with friends for a cool refreshing swim in a lake, now comes the age when they're looking for help getting in and out of the bath.  

The post war baby boom started in 1946, which means the front end of the boomer generation is now entering their 70's.  And that's just the front end, the boomers have been called 'the pig in the python' and those who study demographics have been sounding alarm bells for a while now about the impact this generation is going to have on society as they enter old age.  

One inescapable fact of human existence is that we all need somewhere to live, no matter what age we are.  People are living longer and healthier now than at any point in history, but there's no defeating father time, it gets us all eventually.  While some older people will be healthy enough to maintain their independence for a very long time, many will also have to look at moving into assisted living facilities and retirement homes. 

That's the business Extendicare is in.

My legion of regular readers, all three of them, know that I pay close attention to short interest and that I have a healthy respect for bears.  When I see a stock with short interest at 10% of the issued shares, or higher....that to me is a warning sign.  However the level of short interest in Extendicare is well below 10%, sitting at just 2.3% of the 88.8 million odd shares that are issued as per stockwatch.com, that's current up to May 15th 2017.  

Over the long term I don't see anything to worry about with an investment in EXE.TO.  That's not to say I don't expect pullbacks and periods of consolidation, that's par for the course with stocks.  But over the next 10 to 20 years I view retirement homes as being almost as sure a bet as running a Casino. And we all know that when running a Casino that the house always wins, unless its someone named Donald Trump at the helm,  Thankfully his name isn't on Extendicare's Board of Directors.

But back to Extendicare's short interest, 2.3% of the issued shares represents a little over 2 million. My suspicion is that bears would like to cover, but they're pinched.  You can't buy unless there are others willing to sell after all.  Back in 2014/2015 when they were divesting the U.S. side of the business there was some uncertainty, but that issue has long since been resolved.   

This isn't some tech company that's been around for 10+ years, surviving by selling its shares and engaging pumpers and promoters to drum up interest.  Extendicare has paid a monthly dividend for years of 4 cents per share, which at current prices represents a yield of just under 4% which is better than a GIC, with the share price growing steadily over the past 5 years.  

That 4 cent monthly dividend means that bears have to dig into their collective pockets every month for roughly $80,000 at current short levels, that's almost $1 million per year.  Extendicare doesn't have to cover the dividend payments for shares that have been sold short, that's up to the bears who sold them.  

Recently analysts covering the company poured a bit of cold water on things, but I've never been one to trust analysts, I don't think they have my best interests at heart.  And certainly with EXE some price targets have been brutally wrong, but in a very good way for longs.  

RBC just boosted their Price target from $9 per share to $9.75, which to me is like targeting 20 wins at this point in the season for the Blue Jays, even though they've already won 23.  But it is what it is, perhaps its just a matter of industry players helping out the bears who seem to be stuck.  You can read about it here:

https://sportsperspectives.com/2017/05/19/royal-bank-of-canada-boosts-extendicare-inc-exe-price-target-to-c9-75.html

I'll leave it there and, as always, strongly suggest further research.  Take note that I am a shareholder and as such my opinions should be viewed as heavily biased.  

Toronto housing bulls can relax - Buyers should take advantage of the lull

Emotion can have a big impact on a market in the short term, you see it with stocks all the time. Bad news will hit an otherwise profitable company with solid fundamentals, and the stock price will fall. Then sanity returns as the market realizes that nothing truly important happened and the PPS recovers.  

The same thing happens in reverse with highly speculative money losing companies.  Good news comes out and excitement takes over as buyers storm in and push the PPS up to often insane levels. And then reality sets back in and the PPS collapses as people wake up and look at the balance sheet and see nothing but red.  

With housing there are 3 fundamental metrics that drive the market.  The two most important are obviously supply and demand.  The third factor has a big impact on the first two, and that is affordability.  In housing affordability is largely driven by mortgage rates, most people would not be paying $1 million+ for a detached family dwelling in "The Six" if mortgage rates were in and around five or six percent.  

But with interest rates sitting under three percent and a lot of household incomes well into six digits, GTA families can afford to assume hundreds of thousands of dollars in mortgage debt.  

A note of caution though, interest rates are key.  If mortgage rates go up even one full percent, then the supply/demand dynamic will change dramatically.  Many current homeowners would no longer be able to afford to keep up with mortgage payments and would be forced to sell, and the number of buyers would drop as would the amount they could afford to spend.

But absent a sharp jump in lending rates, if mortgages continue to be handed out at less than 3%, then GTA housing bulls have little to fear in my view.  Why?  Let's face it, when it comes to Canada the greater Toronto area "IS DIFFERENT".  Immigration is a big factor, probably the biggest reason that GTA real estate has been a rocket ship performer over the past 10+ years.  

There are lots of people who go to work in UAE states like Dubai and Bahrain or in Saudi Arabia where they make big bucks and pay $0 in income taxes.  After ten years working in the Gulf States its not unusual for a couple to emigrate to Canada with $1+ million in the bank, often in U.S. funds. They can afford a $1 million dollar home in The Big Smoke because they can buy it free and clear, with $0 needed to finance a mortgage.  

There's a very popular blog called Greater Fool authored by shameless self promoter Garth Turner that has been predicting an imminent correction in the housing market for a while now.  Turner is so excited by the recent pull back that I understand he's cancelled the prescription for his boner pills. 

Take note however that Garth Turner has been the Chicken Little of the Canadian housing market for nearly ten years now, starting in 2008.  The Über Moron was telling homeowners to "sell now if you want out at the top" when a single detached dwelling selling for $1.5 million now was going for a paltry $500 or $600K.  

In fairness to Mr. Turner he's an effective communicator and very successful financial adviser.  He goes on cross Canada tours offering seminars to the sheeple who follow his blog, and you have to sound brash and confident if you want the herd to free up the capital in their homes and invest it in the vehicles you're flogging.  

For those who still think Garth's the man, here's what he was saying in October of 2008.  Homeowners, how much has your property gone up since then?

You will be basically unable to sell your home, unless you slash the price or take back financing. Even then, it will take months and months to find a buyer. Your line of credit will be withdrawn, called or the interest rate doubled. Double-digit rates will be common for car loans, if you can get one.

So relax housing bulls, unless interest rates make a big jump, then this latest fear driven dip caused by the foreign buyer tax and Capital Inc's recent troubles will be just another blip like we've seen before over the past 10 years.  By the fall market things will be back to what they've been, steady increases.

Capital Inc will probably survive, and even if they don't...other B class lenders will step in to fill the void.  Foreign buyers might represent 5% of the market, and even that is probably being generous.  When bidding wars start up again, it might mean 18 offers instead of 20.

But if you prefer doom and gloom and like drama....go read Greater Fool.  

  

Gasoline turning into barley and oats?

Its said that a good way to make the wrong decisions in the public markets is to listen to the news. The concept of contrarian investing/trading is to do the opposite of what the news says.  To run in the opposite direction of the sheep and ignore where the media shepherds are leading them.

But the media isn't always wrong, sometimes they're telling it exactly as it is.  As Freud once famously said:  "Sometimes a banana is simply a banana".

I was listening to the radio yesterday and heard a report about a professor of economics at Stanford who put out a paper called "Rethinking Transportation 2020-2030".  Among predictions of driverless vehicles dominating the roads it has some chilling forecasts for the Oil/Gas sector.  Among them a suggestion that gas stations are going the way of the horse and carriage.  Cars and busses and other mass transit systems will be running almost entirely on electricity and battery power if this report is right.  

I have to admit that hearing that news item spurred me to check the story out on-line, and then today I disposed of my oil stocks.  There were only two, and neither was an especially large position, totalling less than $5K.  Both were down from where I'd bought them, but as the saying goes...Pride cometh before a fall.  The stocks were EGL and PWT both on the TSX, Eagle and Penn West respectively.

Oil bulls might see this as part of some conspiracy to convince them to part with their oil stocks at what they consider cheap prices. I've been guilty of that type of thinking many times myself. Sometimes I've been right and other times wrong.  I'm more willing to accept this paper though because it comes from academia as opposed to traditional media.  If this were an analyst providing this info, then I'd be less willing to weight it as strongly as I have.

I don't think its as urgent for players in major oil stocks like ExxonMobils, but for smaller and heavily leveraged companies like the two I owned, I think the worm will turn more quickly.  

100 years ago there were people who thought gasoline run cars would never replace horses, wagons and carriages.  We all know how that worked out.  Sometime last year I had an appointment with a consultant whose office was in a building that was once a thriving business, a carriage works.  

The paper says this will happen in just 8 years....that gas stations will be hard to find and that people will be zipping around in EVs that drive themselves.  Eight years is both a long and a short period of time, and if it does come to pass, no doubt the oil sector will have pops and drops during the run up to this brave new world.  But over the longer haul, whether its eight years or longer, I do think the days of big oil are numbered.  There will always be a need for oil, but if we're all using EVs, whether self driven or not, then predictions of oil at $25 per barrel going forward for the long term are probably close to the mark imo.  

Reverse my ass!!! Its a mortgage

I hate it when I see what I consider to be deceptive advertising, I'm one of those cynics who believes in simple and easily understood language.  Some time over the past ten or so years dead end streets became "cul de sacs".  And the French word Faux, which means "fake", has been slapped on all kinds of plastic products to make them seem sexier,  as in faux oak or faux mahogany. 

And now we have the so called "reverse mortgage".  I don't allow profanity here, but what the FRICK is that???   I'll tell ya what it is, its a mortgage, but the marketing geniuses flogging this vehicle knew that wouldn't fly, so they found a new angle.  And in my view the way seniors are targeted, its on the cusp of being unethical.  Call it what it is, a payment free mortgage but underline that interest owed is added to the principle and compounded.  

Canada's population is ageing, which brings on many challenges for people who've retired, and financial considerations are often top of mind.  There are lots of Canadians retiring without a pension plan beyond CPP, and insufficient RSP holdings to fund their golden years.  But....many own their homes, often free and clear.

Its a big accomplishment in people's lives, paying off the mortgage, some still celebrate by having a party and burning the actual paper.  But there's an old saying in financial planning circles, you can't eat your house.  While it may be feasible and perhaps even desirable to move from a strictly financial perspective, many people in their sixties and older, they don't want to relocate.  And who can blame them?  You've spent 25, 30, 40 or maybe even 50+ years in a home.  So why not stay?

And that's where marketing comes in.  Knowing that many older Canadians have only one valuable financial asset, one they've spent a good chunk of their working lives paying off, these wizards know that the thought of taking out a mortgage is repugnant.  So instead of calling it a mortgage they call it a "reverse" mortgage.  How do they get away with this?

The ads tell people they can unlock up to 55% of their homes value, "and never have to make a payment".  But make no mistake, there is a cost, a big cost.  The interest rates on these so called "reverse mortgages" can range between 5 and 6% and even higher.  All that happens is the interest is tacked onto the principle owing.  

Why borrow money at prices that can be double what traditional mortgages are charging???

Imagine a couple with a property valued at $300,000 who want to "unlock" 55% of their home's value. That's $165,000 which leaves $135,000 of equity.  At a 5% annualized interest rate that's $8,250 worth of interest expense being added to the total amount owing, and its compounding, owing interest charged on interest.  The equity of the home is going to erode pretty quickly, and with people living longer and longer lives this could spell financial disaster. The one asset they've spent years paying off could end up being worth nothing to them.  

Imagine this scenario, a couple takes out this "reverse" mortgage then live another 15 years and get hit with a major expense, like having to move into a care facility.  They can sell the home, but then they have to pay off the mortgage, and the mortgage company is first in line for any debts.  It ain't a reverse mortgage any more.  Its conceivable they could be broke, all the equity in the home pffffffffffft, gone.  

  

I'll end this here....but I would urge anyone considering a "reverse" mortgage to consult with a financial advisor and to explore less costly options before taking out a high interest no payment mortgage.  Even one that uses the term "reverse" to make it seem like something else.  

If you want to read a more detailed, and better written article....here's one from The Globe & Mail from 2010 that still applies today, maybe more so.

http://www.theglobeandmail.com/real-estate/mortgages-and-rates/the-reverse-mortgage-quandary/article1391748/