Sell in May and Go Away?

I did take the trouble to have a look at the statistics on the return of the S&P500 index in the month of May for the past 20 years. As a result, I found that the market did not always fall in May. Moreover, growth was observed much more frequently, namely, in about 65% of cases. The past 6 years in a row were characterized only by market growth.

The times of low-interest rates took their toll. One of the oldest postulates of the stock market is in doubt.

S&P500 returns
S&P500 returns


Does these intriguing statistics presuppose that the market will now grow in May? Of course not. It rather shows a concurrence of circumstances and a combination of market-friendly factors.

Therefore, today there are equal chances to see the continuation of recent years’ tendency as there are to see a confirmation of the old good saying.

What should you do in the first case? Hold positions in stocks and buy new interesting ideas. In the case of the second scenario, it is time to mind the defensive assets. In fact, there are many of them: inverse ETFs (SH, SDS, DXD, SPXU), gold ETFs (GLD, IAU, SGOL), shares of gold mining companies (Barrick Gold, Newmont, etc.), and the buying volatility. Here I would like to provide more details.

VXXB (single-long) and TVIX (double-long) are the main instruments for the buying volatility. These are the notes (ETN) based on the index consisting of short VIX futures (Volatility Index of Chicago Board Options Exchange), short-term practical tools for speculation and hedging.

How does it work? Suppose you hear negative news, there is confusion in the market, and everybody is running around shouting “Nightmare!”. This would naturally lead to higher volatility. In this case, VXXB and TVIX show solid growth. Interestingly, the dynamics of TVIX is more aggressive, which is explained by the fact that it is double-long.

Seems like everything is quite simple – when the market is growing, just short the VXXB and TVIX; when the market is falling, buy and start counting your profit. However, I would like to alert my readers and give a warning to them. You need to be very careful when dealing with these instruments. What do I mean?

First, the position size should be smaller in comparison with the portfolio as a whole, in particular, not more than 10%. Secondly, in no case should you hold this position for a long time since these tools are affected by the time variable (by analogy with options, theta). If the market has been growing for a long time, it is necessary to cut down the position in volatility proactively, since a loss on this position can “gobble up” a significant part of the earnings from the growth of stocks – even despite its small share of the portfolio.

There is no direct relationship here. Suppose you bought VXXB for $40 when the S&P500 level was 2700. The market started to go up and, accordingly, your volatility position rapidly is weighing down on a portfolio. However, when the market again fell to 2700, VXXB rose to only $37. This means that even reaching the benchmark level, you still remain in the red. This is how the time variable works in VXXB and TVIX.

These instruments can and should be used. But it is important to make sure you use them in a short-term (in no case should you hold a position for too long) and do it in small volumes (not more than 10% of the portfolio).

The article was written by Evgeny Kogan, Ph.D., investment banker, the author of the telegram-channel Bitkogan.

Why Pension Funds Invest in Cannabis?

Pension funds are getting exposure to Canadian cannabis producers

In 2018, the AP7 Swedish fund bought the shares of Canopy Growth (WEED CN) and Aurora (ACB CN) for about 63 million Swedish crowns (~ $7 million). The main reason is that these stocks were included in the MSCI All Country World Index (ACWI). This does not happen only in Sweden. Last year cannabis producers were acquired by Canadian and US pension funds, in particular, Canada’s Public Sector Pension Investment Board (PSP) and the California Public Employees Retirement System (CalPERS).

It is quite gratifying to note that pension funds are diversifying their portfolios by the producers of “Herb”. I believe this suggests that more and more investment managers in the world (even conservative ones like pension funds) come to believe in the idea of “Cannabis”. I think that, apart from the inclusion in MSCI ACWI, the legalization of cannabis in Canada also played a significant role.

Many companies continue to expand into export markets, in particular, European markets. Canopy Growth recently announced that they had completed the purchase of Cafina, a certified Spanish manufacturer. In my opinion, this asset will allow the company to strengthen positions in the EU. After all, Canopy already has facilities in Denmark and Germany.

Key market players continue to increase their production capacity

In particular, Aurora recently announced that they had expanded the product growing areas from 1.3 million to 1.62 million square feet (+25%). Theoretically, this will increase the company’s annual productivity to 230 thousand kg, making Aurora one of the leaders of the industry along with Canopy Growth.

It has been reported recently that CannTrust (TRST CN) also had similar progress. The company made an announcement on the purchase of large areas for the cultivation of cannabis. The company has acquired 81 acres of land (about 33 hectares) and plans to purchase a total of about 200 acres (81 hectares), which would allow increasing the production capacities to 300 thousand kg per year.

The sector continues to grow and develop. An important factor is that most companies are already listed at the New York Stock Exchange. The recent pullback, in my opinion, has more to do with technical factors rather than fundamental ones.

Besides, the market’s expectations were probably over-inflated. This factor clearly illustrates the fall of CannTrust, which is explained by the fact that the Net loss was below the consensus. The company will report on the first quarter of 2019 on May 15. I am looking forward to it.

From early 2019 to about mid-March, single stocks showed quite impressive growth, in particular, CannTrust and Organigram doubled their market cap; Canopy Growth and Aurora grew by 70%, and Aleafa by 60%… It was followed by a completely natural correction. I have to repeat that the correction was more of a technical rather than fundamental nature.

Although it is impossible to predict everything, I believe that the downtrend will hardly last long. I still believe that this sector has great growth potential. CannTrust, Organigram, Canopy Growth, and Aurora are still my favorites. Small manufacturers like Aleafia and Wayland, which may be pulled up with the sector.

The article was written by Evgeny Kogan, Ph.D., investment banker, the author of the telegram-channel Bitkogan.

Investing in Champions as Quarter Finals Start

Several famous football clubs are publicly traded on the stock market

Of those teams who made it to the Top 8 in Europe, you can become a shareholder of Amsterdam’s Ajax (AJAX NA), Juventus (JUVE IM) and Manchester United (MANU US).

The most important question is whose shares are more attractive. After all, you will have to choose between personal preferences and the opportunity to earn money. Anyway, I know people who make bets at bookmakers on the opponents of their favorite teams so as not to be very upset because of head-to-head games.

I would not call AJAX NA a dark horse, though, at the previous stage, they drove out of the tournament none other than Real Madrid, after which the club’s asset prices jumped by 8%. Besides, AJAX NA looks quite convincing from the financial point of view. It is the only profitable one among the three clubs (see the table).

The asset prices of teams are primarily influenced by specific results rather than financial statements. The first quarter-finals with Juventus started on April 10. I believe that Turin’s team led by the great Christiano Ronaldo has more chances to reach the semi-finals. In response to Juventus’ previous success in the match against Atletico Madrid, the asset prices rose by 18% in the market.

In terms of market capitalization, Manchester United is the most outstanding among our “triplet”. In the quarterfinal, Manchester United stands against Barcelona led by the genius of world football Leo Messi. I still believe that the Spanish club has chances to victory in the two-legged tie.

You can probably guess that football’s representation in the stock market is not limited to these three clubs. There are not many of them but they do exist. The table below presents the largest European teams in terms of capitalization. There is a European stock index, STOXX Europe Football Index that includes all football clubs (except for Manchester United). This is not an ETF, but a simple index that tracks stock performance.

Ajax Juventus Manchester Borussia AS Roma

How should an investment banker assess the attractiveness of such an asset?

A creative question, indeed. Very often, people who own or buy a club do not view this component of their activity as a business, but rather an expensive trendy toy that may not even bring any profit. On the other hand, the owner of a large football team is always in the spotlight, receives the constant attention of the media and has access to “the high and mighties” who are interested in football… If we apply the traditional approach, I would look at the profitability (EBITDA margin) and leverage (Net debt/EBITDA). From this point of view, Manchester United, AJAX:NA, and Borussia Dortmund (which only falls behind the leading United by revenue) are the most attractive ones.

Any club has its own accounting. How do teams make money? They basically make money through the sale of broadcast rights and sponsorship income. I chose Manchester United, the largest and most famous club, and examined the structure of its revenues (see the diagram) and operating expenses, including salaries and other payments to the staff (more than 50%):

Revenue of Manchester United for 2018
Revenue of Manchester United for 2018

Interestingly, the players of the club are recorded as intangible assets on the balance sheet. As of the end of 2018, the cost of players was estimated at about 800 million pounds ($ 1,125 million) on the balance sheet for Manchester United. This means that the purchase/sale of players is taken into account when changing intangible assets and is not reflected in the P/L.

If you want to have a little fun and “play” with the assets of football teams instead of a sweepstake, I believe Juventus will be the most logical choice for you. Juventus steadily walking towards the first place in the championship of Italy and has good chances in.

The unpredictability of football is one of the reasons we love it. The possible victory of a dark horse can be more profitable than the desired win of the favorite.

The article was written by Evgeny Kogan, Ph.D., investment banker, the author of the telegram-channel Bitkogan.

Defensive Assets and How Should You Use It

To anybody who is seriously interested in defensive instruments, I highly recommend taking the time and studying in detail the questions listed below.

  • First, let us speak about the beta coefficient. We need to realize that such tools as SDS (2x leveraged inverse S&P 500 ETF), DXD (inverse Dow Jones ETF) and, for example, SPXU (3x leveraged inverse S&P 500) have a negative beta coefficient. This is due to the fact that they move against the market, shorting it and leading at the same time. For example, the beta coefficient of SDS and DXD is -1, and SPXU is characterized by a -1.7 beta coefficient.

If we secure our portfolio through buying volatility, namely VXXB and TVIX, they have a positive beta coefficient value since for these tools, the index is the short-term total result of VIX index futures – a strategy index that maintains positions in the two closest monthly futures contracts of the CBOE volatility index (VIX), and in no way the S&P 500 or Dow Jones stock indices. In this case, the beta coefficient is 1 and 1.5 for VXXB and TVIX, respectively.

  • Secondly (and, in my opinion, most importantly), we should stress the importance of the FUNCTION OF TIME when using these tools. By analogy with options (theta function), the time factor is also important here. These tools should not be kept in a portfolio for long or used as a long hedge. We need to try to get rid of them on time so as not to have hang-up adverse positions in our portfolio.

Here is an example. Suppose there is a decline in the market or there is going to be a correction. We are opening a long position in VXXB. For the period of time when the indices fall it provides an excellent hedge that compensates for our losses of positions in equities. Nevertheless, it is necessary to get rid of this protection on time because when the market direction changes, our defensive assets will incur our losses.

Keep in mind and memorize it! You should not keep defensive assets in your portfolio for long if you do not want them to work against you. Gold-mining stocks are excellent for the long run. First, they are not as volatile as reverse ETF, VXXB or TVIX. Secondly, they will give you an extra cash flow in the form of dividends.

You should not use insurance happy go lucky. It is necessary to monitor the market and make sure you study the material. All of my statements are of the utmost practical importance. In this case, time will either become your friend or your worst enemy.

Perhaps I’ve used gibberish, the language of an investment banker to write this text, so not everybody will understand all the aspects. Should you have any questions, you are free to ask me. But don’t forget the good old rule – “Study, study, study!” Whose words are these? I don’t even remember.

The article was written by Evgeny Kogan, Ph.D., investment banker, the author of the telegram-channel Bitkogan.

Barrick’s Gold Rush for Newmont

  • Barrick is the initiator of the transaction. Actually, this is not the first attempt by these companies to unite. If my memory serves me right, the latest attempt, an unsuccessful one, was made in 2014.
  • Barrick proposes to purchase Newmont’s shares at a discount to the market price. In particular, the merger would offer 2.5694 Barrick shares for each NEM share. Friday’s closing price is about $33.5, which implies a discount of 8% to the market price. Thus, the entire company is valued at $ 17.85 billion.
  • The birth of a giant. If the merger takes place, a real giant with a production volume of about 10 million ounces of gold and revenue of about $ 16 billion will appear in the market.

What do I think about this transaction? I am not an industry person so I will bring forth my arguments from an investor’s point of view.

First, the transaction is far from a given. I believe that Newmont is obviously undervalued. Barrick valued Newmont at an EV/EBITDA of 7, while the average of the sector is about 8.6, according to Bloomberg. According to the EV/Reserves and EV/Output multipliers (which are used to evaluate gold mining companies), the valuation of the company was done almost in accordance with market prices. Nevertheless, there is no premium for any multiplier. What are the benefits of Newmont shareholders? Moreover, it seems like this transaction is more important for Barrick than Newmont.

Secondly, if Newmont merges with Barrick, most probably, the merger with Goldcorp will not take place. As I understand, the process is already close to the final straight. Is the deal with Barrick worth sacrificing Goldcorp? I am not ready to answer this question at this point.

Thirdly, I believe that a huge hypothetical company carries high risks associated with corporate governance. It will not be easy to manage such a sockdolager.

$17.8 billion Barrick’s bid

I guess we should avoid drawing conclusions as to whether the transaction will take place or not and who will benefit more ahead of time. By the way, why not fantasize and imagine that Warren Buffett is standing behind the transaction. He could be trying to somehow get out of under after the fall of Kraft Heinz

Joking aside, shareholders of Newmont, in my opinion, must not be happy with this proposal, which makes me believe that the merger will not take place under the terms proposed. Moreover, I do not exclude that Newmont will sink a bit (many people have purchased shares against this transaction) in the event of cancellation, which will be a good opportunity to purchase shares at a discount.

The very fact of Barricks’ proposal confirms my arguments about the active process of consolidation in the sector. Judge for yourself. Gold mining is one of the most fragmented sectors in the global economy – two leaders and a whole bunch of medium and small-sized companies.

What do potential buyers seek? First of all, they check on the quality of assets, the size of reserves and resources, as well as the total cost of extracting one ounce of gold (all-in sustaining costs or AISC). In addition, a potential buyer will pay attention to the amount of debt, perspectives of operational performance, and profitability.

Will Barrick try to catch a smaller bird?

I have made a list of medium-sized companies, which, in my opinion, could be absorbed by larger ones. For example, if the purchase of Newmont fails, Barrick may well focus on some other smaller company. Moreover, we cannot rule out the factor of Newmont. Agnico, Newcrest, Anglogold, Kinross and, finally, our dear Polyus are also there.

Gold Companies

Barick Newmont Yamana Semafo IAMGOLD Endeavor Detour New GoldI have to stress once again that each of the companies above may become subject of acquisition in the foreseeable future. Each of these companies is quite promising in terms of production and revenue growth and is characterized by fairly high profitability. Besides, none of them has had a high level of debt (if the Net debt/EBITDA ratio is lower than 3, I believe there is nothing serious to worry about).

In terms of the current market valuation, I liked B2Gold, Centerra, and IAMGOLD. I think B2Gold had the most coherent valuation (taking into account one of the lowest AISC on the list; see chart). Centerra and IAMGOLD seem like the most undervalued.

I do not claim that these three companies will definitely become objects of acquisition in the near future. I am just pointing out their advantages.

The sector is in the process of intensive consolidation. Now all attention is paid to the possible transaction between Barrick and Newmont. After the transaction takes place (or fails), M&A processes may still continue in the sector. Or, the other way around. While the giants are arguing about how they should merge or whether they should unite at all, somebody may make a couple of deals on the sly…

A quite interesting period is awaiting the gold sector! I have my popcorn already.

The article was written by Evgeny Kogan, Ph.D., investment banker, the author of the telegram-channel Bitkogan.

Canadian Pot Firms – The Triggers for Future Growth

I am still convinced that the cannabis industry is nothing less than a new economy rather than just another bubble. What is equally important, it is a very actively growing economy that looks for ways for rapid expansion.

Let us recall that after the official legalization in Canada in October, the stocks of ‘plant growers’ sank. “Buy the rumor, sell the fact” came into play. The depth of correction was quite strong, which, I have to confess, was a surprise for me.

Interestingly, January was marked by return to growth, and some people managed to partially (some even completely) recover from October. Today I would like to focus on a few points concerning individual names and the field on the whole.

What are the triggers for the future growth of companies in the field?

Increased risk appetite. It feels like the ‘green’ stocks bounced back after the correction that took place in early February. Recently, stock prices have grown at a decent pace, which, in my opinion, was due to several reasons. First, the general market, on the whole, is in a positive mood. Secondly, investors’ risk appetite is likely to increase against this background.

Growth in the sales of therapeutic ‘plants’ in Canada. Many believe that the first results of the sales are disappointing. Excuse me, gentlemen, only a few months have passed since the legalization and if anybody was waiting for fantastic sales right away, that was a mistake. I wrote about these overstated expectations, as well as the risks of this field back in May. I assume that we will observe a real sales’ growth in Canada in the 1st-2nd quarters of 2019.

Development of export destinations. Many companies expand into international markets. CannTrust, Canopy and others supply the medical ‘plant’ to Europe and Australia. The growth of cultivation capacity will lead to a growth in export flows. Moreover, we should keep in mind that the cost of the product in Europe is significantly higher than in Canada.

Cooperation with related fields. According to some estimates, due to legalization, the companies that produce ‘appetite supporting products’ will be able to attract some of the alcohol producers’ clients. I have to note that alcohol producers are aware of the danger of losing some part of their consumers and are down to taking certain actions. For example, the company Constellation Brand has increased its stake in Canopy Growth to 40%. I do not exclude that the transaction activity of M&A in this field may grow further, which implies that larger players will swallow up the smaller ones. The goal of the larger ones is obvious: they plan to scale up their business. I do not exclude that the activity of large funds may grow and they will probably want to increase their stake in the market leaders of this dynamically growing sector. In this regard, medium-sized companies ($ 1.0 – 1.5 billion) will be in the spotlight. There is also a possibility that two average performers will merge with a view to confronting leading players. In addition, sensing a competitor in the market of sedative agents, alcohol producers and pharmaceutical companies may also be active in this field.

NYSE listing. A lot of Canadian cannabis producers are musing about and planning to be listed in New York, which would be quite favorable for their stocks. With all due respect for Canada, there is more liquidity and a “higher quality” of investors in the United States.

Possible legalization in the United States. There is much talk about the possible full-scale legalization of the plant in the United States. The healing ‘plant’ is currently legalized in a dozen states, but it is likely to spread to the entire country in the coming years. By that time, Canadian cannabis producers will spring up like mushrooms, increase production and be ready to expand. I suppose that any speculation on the legalization in the United States will become a serious trigger for the Canadian sector.

In anticipation of reports

Several companies, in particular, Aleafia (ALEF, March 4), HEXO (HEXO, March 13) and CannTrust (TRST, March 29) are expected to publish financial reports in March. Organirgam (OGI) and Canopy Growth (WEED) have already published reports. In general, the results were received quite favorably in the market. I do not exclude that the situation may repeat itself in one form or another in March.

The ‘green meadows’ are going to be quite interesting in the near future. The field continues to grow. At the same time, the stocks of ‘plant growers’ are still quite volatile, and there is a possibility of dips, possibly strong ones. Such dips allow me to plan for a cheaper buyback.


I keep a positive view on the sector. Use temporary dips in stocks to increase and average your position. No fanaticism, please.

I expect a significant improvement in companies’ financial indicators and an increase in stock prices and continue to hold stocks of companies such as TRST, ALEF, HEXO, OGI and EMC in expectation of significant mergers.

The article was written by Evgeny Kogan, Ph.D., investment banker, the author of the telegram-channel Bitkogan.

Please let us know what you think in the comments below.

Gold Producers – Buying Opportunity if the Reports Disappoint

As a matter of fact, Newmont is one of the world’s leading gold producers. After combining with Goldcorp, the volume of the company’s production will be about 7 million ounces. The Competition Bureau of Canada recently approved the deal, which is expected to be completed in the second quarter of this year.

Newmont NEM US ratios
While Newmont is getting ready to publish reports, let us discuss the market expectations. The quarterly report forecasts a slight increase in revenue and EBITDA and a decrease in net profit and EPS. If we compare changes from year on year, we can expect a more substantial decline. I believe that this is primarily due to the decline in gold production. Let us analyze how things will actually go. Guessing whether the market will hit the spot or not is quite a thankless job.

On the whole, I have a positive opinion on Newmont and Barrick Gold (GOLD US) and regard them as defensive assets. In terms of multipliers, they look about the same (Barrick is slightly more expensive). The difference is that the beta coefficient of Newmont is positive, while Barrick has a negative beta coefficient. Therefore, Barrick has had my preference for all seasons since it works better against the market.

Getting back to Newmont, I have to say that I don’t actually expect anything bad from the reports. If the results are lower than predicted (without force majeure), and the asset prices fall down, it will obviously be a good buying opportunity for a quality asset at a discount price, especially against the background of rising prices of gold. I expect that at this level some will enter the position, and those who already did, will increase it.

Anyway, let us wish good luck to everybody!

The article was written by Evgeny Kogan, Ph.D., investment banker, the author of the telegram-channel Bitkogan.

Russia – Not the Rating it Needs but the Rating it Deserves

But let us not focus on the glorious admirers of Karl Marx. The very question of Russia’s rating is quite amusing.

Three large agencies, in particular, S&P, Fitch and Moody’s, currently provide an investment rating for Russia. Interestingly, the first two did not even lower Russia’s rating (despite the sanctions). Moody’s, in its turn, lowered it and then returned it to the previous level.

The main intrigue is whether this will have any effect. At this stage, the effect will most likely be a purely speculative one. The truth is that a rating is not valid unless it is awarded by two of three agencies. This means that the decision of Moody’s will not affect the situation with Russian assets. Let us see what will happen next. The picture may change if Russia’s rating continues to grow and at least two of three agencies ‘grant’ Russia one more level.

Does Russia actually deserve its current rating? Russia’s current rating implies that it is in the same line with such ‘locomotives of the global economy’ as Hungary, Morocco and Portugal. The ratings of Poland and Mexico, for example, are only one level higher. Only a little higher are the ratings of China and Ireland.

Does Russia deserve this indicator? The numbers, alas, give a negative answer.

Sovereign Dept as percantage of GDP

Let us analyze the ratio of Russia’s sovereign debt to GDP. In Russia, this ratio is one of the lowest in the world and the lowest among the countries presented in the tables below.

We can also review the ratio of gold reserves to GDP and budget replenishment.

The figures obviously speak of Russia’s underestimation. International reserves as percentage of GDP Credit Rating EM

Now let me summarize. According to real macro-economic indicators, Russia should have at least a BBB+ or A- rating. We can assume that geopolitics and sanctions have directly affected the decisions of the world’s leading credit agencies.

I prefer to keep away from excessive optimism. There are too many problems in the economy. Commodity dependence is still there. The ruble is very volatile. Let alone small and medium businesses that suffocate under the burden of bureaucracy and barely make ends meet instead of pushing the economy forward. Not all of them, of course, but the majority. The Russian economy is in dire need of reforms and the reduction of the state’s role. Anyway, this is a completely different story and I’ll certainly get back to it.

The article was written by Evgeny Kogan, Ph.D., investment banker, the author of the telegram-channel Bitkogan.