The Canadian Investor - Coinbase, SPACs and investment checklist

Episode Date: April 12, 2021

We’re back with another episode of the Canadian Investor Podcast! This week we start by talking about the upcoming Coinbase direct listing and some news. We then go over some of the items on our checklist we go through before starting a position in a new stock. We finish the episode by explaining what Special Purpose Acquisition Companies (SPAC) are and how they differ from the traditional IPO. Tickers of stocks discuss: COIN Want to send us a question? Check out our Anchor.fm link in the description below and leave us a voice message! Getstockmarket.com Candian Investor Pod Twitter: @cdn_investing Simon’s twitter: @Fiat_Iceberg Braden’s twitter: @BradoCapital --- Send in a voice message: https://anchor.fm/the-canadian-investor/messageSee omnystudio.com/listener for privacy information.

Welcome back into the show. This is the Canadian Investor Podcast, made possible by our friends and show sponsor, EQ Bank, which helps Canadians make bank with high interest and no fees on everyday banking. We also love their savings and investment products like GICs, which offer some of the best rates on the market. I personally, and I know Simone as well, is using the GICs, which offer some of the best rates on the market. I personally, and I know Simone as well, is using the GICs on a regular basis to set money aside for personal income taxes in April of every year. Their GICs are perfect because the interest rate is guaranteed, and I know I won't be able to touch that money until I need it for tax time. Whether you're looking to set some money aside for a rainy day or a big purchase is

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Simon, how we doing? And let's jump right into it. The banks are potentially having to comply to some new stress test rules. What's going on here? Yeah. Hey, Braden, I'm doing well. So yeah, let's jump in. The stress test, just to explain what it is from the bank. So that's when people apply for a mortgage. So in order for the bank to approve you for the mortgage, they have to run a stress test. So the stress test is not only looking at if you can qualify for the mortgage with the current interest rates, they actually do a test to see if the interest rates go up, if you would qualify for that as well. So the OSFI, which is the Office of the Superintendent of Financial Institution in Canada, I'm pretty sure that's the full name there,

they're looking at increasing the stress test, so making it a bit more difficult for people to pass that test because they're seeing some signs of the housing markets potentially overeating. So that's one of the things they're looking to do. They would make it a bit more difficult and basically be a bit more conservative in the lending practices for the bank. So it could affect the market. I don't think it's been fully announced whether it's going to go ahead. They're proposing it right now. But it's something to keep an eye on if you're looking to buy a new home or you're looking to refinance.

They got to do something. I mean, I can't speak for all of canada what the market's like but in the big city centers it is crazy hot and if you make 20 a year they'll give you a million dollars on a mortgage like it is absolutely bonkers um so i don't see this being a bad thing but i don't think it's going to slow the housing market down. It is crazy. Vancouver and Toronto especially. I don't know about the rest of Canada.

I'm really not sure. But it is hot, man. The cottage market or like if you're a Westerner, like the cabin market as well, like a second home on the lake. Crazy prices I've seen on my lake lately. So it's hot, man. Yeah yeah it's the same in ottawa ottawa had always been a fairly you know never been too much of a high growth market but it's definitely picked up in the past year i think the prices went up about 30 in the region whether

you're on the ontario and even on the quebec side here has gone up quite a bit as well. I'm not sure if that will resolve the situation. They may need to increase the minimum down requirement to potentially 10% to have some real effects. But I think one of the other things that's really pushing the market up is that a lot of people are also investing in housing, whether it's single family home or multiplexes and so on, because they're seeing as a good investment, especially with the increased risks and inflation. So people are seeing that as a bit of a safe asset. But we'll see how it goes. It's probably one measure that will help, but it probably won't stop it until there's some more drastic measures or interest rates go up. You bought a house in 2019, right? So congratulations, man. Yeah. Was it 2019?

Yeah. End of 2019. And we took possession in January of 2020. So no, it's been a great investment for us, but it's not like we want to sell because if we sell, we're going to have to pay a high price anyway. Yeah, exactly. We don't need to go down the is your house an investment rabbit hole because we'd be here for ages. All right. Let's move on to some other news. Number one celebrity crush of all time, Jessica Alba, has filed for IPO with her consumer-conscious cosmetics and home cleaning brand, Honest. This woman is awesome. She was an actress, and then she was a mom, and then started this company called Honest.

I guess it's more like conscious, organic, and I guess they don't harm animals for the makeup and stuff. So I know almost nothing about it other than Jessica Alba runs the joint, and she has filed for IPO with this company. So good for her. It's called The Honest Co. All right, Simon, tell us about coinbase because this is huge like this is massive and i don't know how well you know the business but i have some questions for you if you don't know the answers that's fine but this ipo is going to be bonkers like what's going on here yeah yeah the ipo is going to be uh really big from what I've read. So far, obviously, there's limited information.

And let's just say it's actually not an IPO. It's their public listing. It's actually a direct listing. So they're not issuing any new shares or an IPO. It's an initial public offering. So the company is actually putting new shares and getting some funds out of that. A direct listing, which I believe Spotify did as well when they went public, is they go public, but they don't issue new shares. So usually that

is an indication of a company that has a lot of funding available because they don't really need the money. The whole point of IPOing is you get funds from the IPO. So for them, just an overview. So the ticker is pretty awesome. It will be COIN. So I tweeted that I was surprised that it was already not taken. What a good ticker, eh? Yeah, I know. It's kind of very perfect.

Someone tweeted to me another one that would have been good. I can't remember offhand, but it is a good ticker. Their revenues have been phenomenal. They released Q1 preliminary results. They had revenues of $1.8 billion in the first quarter versus $190 million last year. So that's really bonkers, like 10x. Obviously, it has something to do with crypto just seeing a real takeoff um towards the end of 2020 and we're still seeing it right now being at all-time high for not only bitcoin ethereum but a lot of altcoins or i beat coins i'll just say um net income between 730

million and 800 million again their preliminary results. So I think that's why they gave a kind of a bracket there. They had 43 million users in the Q1 versus 53 million versus 43 million at the end of last year. So that's a pretty significant increase. The monthly transaction more than doubled versus the end of 2020, not even Q1 of 2020. Their direct listing will be this upcoming week, April 14. And the figures I've seen in terms of what it could achieve for market cap range from $60 billion in the more conservative estimates to the more bullish ones that are 100 plus billion. So quite a phenomenal IPO.

It'll be something really interesting to keep an eye on. Personally, I won't buy any shares. I'm not saying I will not ever. I will want to see a bit how it plays out, especially if the crypto market kind of cools down throughout the year and how that affects their results. As do-it-yourself investors, we want to keep our fees low. That's why Simone and I have been using Questrade as our online broker for so many years now. Questrade is Canada's number one rated online

broker by MoneySense. And with them, you can buy all North American ETFs, not just a few select ones, all commission-free, so that you can choose the ETFs that you want. And they charge no annual RRSP or TFSA account fees. They have an award-winning customer service team with real people that are ready to help if you have questions along the way. As a customer myself, I've been impressed with Questrade's customer service. Whenever I call or email, every support rep is very knowledgeable and they get exactly what I need done quickly. Switch for free today and keep more of your money. Visit Questrade.com for details. That is Questrade.com. Yeah, good point. Because I mean, you can't see the growth of transactions and the growth in the price of these coins continuing on this trajectory, not to say that they won't, you know, continue to perform well. But I mean, things can't go up 1000% every year. So yeah, good, good point. Okay, so question for you. And I've seen some discussions about this on on Twitter, and there's no right or wrong answer here. By the way, follow me at Brado Capital on Twitter. There's my plug. Why Coinbase?

I mean, they've established that they are the biggest player. They've established that they are the biggest player. And maybe it has that brand equity that is associated with safety or security in a market where you don't really even know what's going on. Like your money just kind of just goes into the abyss. But Coinbase, I mean, the user interface, the branding feels very safe. It's the biggest one. So maybe you have some assurance with that. But why Coinbase? Like, this is not a high moat business, right? It's an exchange, or it's like a brokerage for buying crypto. And I mean, the numbers speak for themselves. Clearly, they're doing something right. But do you have any takes on that? Like it a security thing is it a branding thing yeah i mean it's it's definitely yeah it's an interesting one obviously you're investing in it because it's an exchange people i think are investing or looking to invest in

coinbase because of crypto just taking off and it's pretty much one of the closest things that you can invest on the stock market in terms of pure play aside from the ETFs or some of the funds that are listed are specifically on Bitcoin or Ethereum so I think that's kind of the basis of it they do have a pretty strong portion of the market so I think they're saying on their platform, the assets that they have is 223 billion. That represents about 11% of crypto assets market share, including about half, a bit more than half of that is from institutions. So you're really looking at an institutional play using, I think, their their coinbase pro platform which is an enhanced kind of platform a lot of it is used by institutions i wait sorry to cut you off

yeah over half of the assets under management in crypto on coinbase is institutional buying yeah according to their uh their q1 results is assets on the platform, $223 billion, includes $122 billion of assets on platform from institutions. Holy shite. That's a lot. Yeah, it seems like it is the go-to platform from institutions. From what I've read, again, these are all preliminary results. It might change going forward. But yeah, I think it's more of a first mover kind of market leader play right now. Who knows if they will remain the market leaders for cryptocurrency. But like I said, I think it's an interesting play for people that may want to dip their toes into crypto without holding the actual assets, you know, on cold storage or on an exchange

or investing in a Bitcoin ETF, for example. So I think that's probably the case behind it. I'm more of the view that I will wait and see, especially with all the hype right now surrounding cryptocurrency. I want to see if that goes down a bit, how it will affect coinbase's results that's wild stuff okay moving on uh something that i think we should just touch on

more and more because as investors you know simon and i are constantly learning things, constantly using new tools, using new things we learn from books we read, metrics to look at, qualitative things we like to see in businesses. So we're just going to talk about our process. And I'll kick us off here. And this is how I would define the process into what I would call an investable idea. So this list usually is about 30 businesses, some on the TSX, some on the American exchanges and global businesses. And how I start typically, this is, this is just what I like to do. Because I'm an engineer, I have, I'm a complete math nerd. So I usually start with like a quant strategy, like looking at the

numbers. So like screening for certain things that are common among great businesses. And then metrics, I always look at it, put on a spreadsheet, and I rank them on what's called the SI score for Stratosphere members. And I look at all kinds of things and keep them updated, but these are the always I'm looking at on the spreadsheet for the members, which is revenue growth, free cash flow growth, EBITDA growth, the market cap, the price to earnings, price to sales, price to free cash flow, the dividend, like what's the payout ratio, what's the yield, return on invested capital, return on equity, like those profitability metrics.

Gross margins, EBITDA margin, the current ratio, debt to equity, some balance sheet type metrics. Now, do you understand the business from knowing these numbers? No, absolutely not. You might not even know how they make a dollar. But for me, it's a good place to start because if a company is consistently like 10 year median producing like 25% year over year revenue growth, some, that kind of sustained growth is very interesting to me. And I'm, I'm, I'm very curious about how, why that business is so great. Um, so then I go through some qualitative stuff.

Now this requires doing some, some research on the business. You don't have to be an expert in the business to fill out this checklist, but you might have to know a little bit. And again, this is the basis for investable ideas for me. Once I know, once I've come up with a number and find it's an investable idea, the business is very interesting, the numbers look good, then I'm going to actually dig into the business more and more. But before that, some qualitative stuff. So when I'm looking at the moat, I want to see, you know, do they have switching costs? Aka, is it challenging for the value to be created elsewhere? And is there high switching costs? So say, say you're a subscriber to Autodesk's platform, and all your engineers know how to use

AutoCAD, you know, using another platform has high pain, like, it's a lot of pain and switching costs to changing platforms. Okay okay so there's an example does it have scale like can the business scale uh their customer base like fairly easily without having to invest a lot into infrastructure um and that's that's interesting to me does the business have network? Like the more people that use the goods and services that the business creates, does that actually add in a loop back to how good the service is? Does the network effects? Does the business have recurring revenue, like fairly recurring revenue and cash flows? And not every company has to have the typical recurring revs, but that stability is definitely nice.

Does the company have pricing power? This is like, how can I stress this enough? The business has to have some pricing power, ability to at least match inflation and hopefully more and be able to flex that pricing power over time. That's always good. Is the business bottleneck in nature? Like, is it difficult to replace them in the value chain and achieve the same result? That can create a bottleneck and that's good. The secular trend, does the business have a good macro environment or is there a theme behind it? When I think of like gaming, like video games, it's a secular trend that I want to be a part of because the

growth trajectory is incredible. Does the business have some capital lightness? You know, not every business has to be capital light. This favors, you know, the software businesses that have very low capital costs. But if all else is equal, a business that can achieve the same results without having to expend, like have huge capital expenditures to build factories, I mean, That's kind of ideal. Does the company have some organic growth? I love roll-up M&A strategies as much as the next person, if the management team is good,

like the Constellation Softwares of the world. They don't really have any organic growth, but that's okay in that business because they're really good at it. But it is better overall, all else being equal, if the company has organic growth. And then some qualities. Can this business be easily understood?

You know, if something drastically changes in the business and I don't know how to react, that's not going to be a good time. And then the management team is the is if a founder led business. I love it. I love founder led businesses, the performance of founder led businesses speak for itself. Company have some stable geography and some decent glass door ratings. So you know, what's the company culture like? This all comes together roundabout way of coming up with a number for investable ideas for me. And then I start digging into the business.

But that is my investable ideas in a nutshell. I know I just threw tons of information at you. So maybe you'll just listen to it five times over. Pump our numbers up, right, Simon? Get the podcast analytics up. but that's it in a nutshell and uh i hope you guys can use something from there and there's uh so i use a lot of the similar things however i kind of do it reverse from brayden uh so i'll usually look at a company i'll want to get a better idea of like what the company is, if I really like what

their products or services are, I'll have a look at how big they are. And then if I can get a good sense of what they're doing, if it's interesting, if there's some growth into that, then I will dig in into the numbers. I'm not big on screeners. Personally, I tend to get my ideas whether it's on Twitter from you know people whether it's tweeting at us or people I follow articles I read not to say that I never use screeners I think they can be really useful especially if you're looking to invest in the smaller cap companies or micro caps because you'll probably have trouble finding articles or finding people or analysts reviewing those companies so you'll most likely have to rely a bit more on screeners

but then I'll look I'll dig a bit more into the numbers a lot of what Braden said obviously you want to look at revenue I put a lot of importance as well on debt, debt maturity of the company as that, how fast it's growing, how, you know, the track record of the company and management as well, especially when, like Brayden said, when it comes to acquisitions, it can be acquisitions can be a great thing, but it can also be really dangerous. So there's a you can just google it and you'll see you can find like hundreds if not thousands of acquisitions that company either overpaid or thought there'd be efficiencies and they ended up never happening and ended up being a terrible acquisition overall one that comes to mind is Under Armour a few years ago got into the I think the tracking fitness like the overall like the future of fitness and that

blew up in their face um so that's really something i like to keep an eye on um the moat like you said is really important um there's different types of modes i think we've talked about railroads before um why they're so great in terms of modes because there's a big barrier to entry. There's very unlikely there's going to be new railroads built across North America because of how expensive they are to build, but also the regulatory approval. But then Glassdoor, something else I look at, gross margin, return on invested capital, free cash flow. Obviously, I talk about that a lot. Dividend, the yield, if it has a yield, the payout ratio. So these are just some things. The last thing I'll definitely do, and I know I'm kind of intense on those, but I love to listen to the earning conference calls, especially the annual ones. However, it's possible depending how recent the company is on the public

markets you may not have access to several years of annual conference calls so you may need to listen to a few quarterly calls as well but i want to see consistency from management when it comes to that and when they make promises year over year if they're actually you know those promises, because it's not unusual to have management promise these wild things and then they don't really come true. So those are kind of some of the main things I look at. One of the things I can't remember if you mentioned it, but share count and dilution is something that's really important to me. And yeah, and executive compensation. I think you might have mentioned that, but I something that's really important to me. And yeah, and executive compensation. I think you might have mentioned that, but I think that's important as well. But yeah, share count and dilution tends to be I find overlooked by a lot of people. And it's something

you definitely have to keep in mind of because, you know, more shares there are, the smaller your ownership of the company is, you know, it can be fine depending if it's reasonable versus the growth of the company, but definitely something to keep an eye on. As do-it-yourself investors, we want to keep our fees low. That's why Simone and I have been using Questrade as our online broker for so many years now. Questrade is Canada's number one rated online broker by MoneySense, and with them, you can buy all North American ETFs, not just a few select ones, all commission-free, so that you can choose the ETFs that you want. And they charge no annual RRSP or TFSA account fees. They have an award-winning customer service team with real people that are ready to help if you

have questions along the way. As a customer myself, I've been impressed with Questrade's customer service. Whenever I call or email, every support rep is very knowledgeable and they get exactly what I need done quickly. Switch for free. That is questrade.com. Yeah, a lot of great points there. And there's two examples of, we kind of arrived at the same place, but we started at two different sides. I'm starting with the numbers

and you're starting with the qualitative and we kind of meet in the middle, right? And that's an important takeaway because there's not one way to do investing. There's lots of ways to do pretty much everything. This goes for not just investing, but you do what works for you. As a numbers person, that's what works for me. Look at Simon's track record on some of the businesses he's found. And maybe I should start on the other side.

But again, that's what makes this fun is no one is really telling you what you have to do. And that's why we manage our own portfolios from the first place. We have that control over it. Okay, yeah, lots of good takeaways there. Simon, it's been a crazy trailing 14 months in the stock market, and we have seen the rise of the Special Purpose Acquisition Co., the SPAC. Co. the SPAC. Can you talk to us and me about SPACs? Because I'm still I still don't get it, man. Like, obviously, I get it. But I don't understand why they're doing this as much as I probably should. So tell us about SPACs. Okay, so SPACs, it's probably a word that you've heard a

lot. Like you just mentioned the past year they've been really popular so like Braden said it's a special purpose acquisition company really these companies the easiest way to understand them is these company are created for the sole purpose of acquiring another company so when they IPO they typically IPO at ten dollars a. And what happens is there is a sponsor will be an institutional grade investor who will basically tell the people I'll IPO. And my purpose is to find a company to merge with the investor buy into the company, the money is put in a trust and then that money is kept until there's an acquisition target that's found. There's typically a time limit of about two years. If there's no acquisition found after that time limit, there's usually two things that will happen. One, the investor get their capitals back. Or second, there may be a vote for a shareholder to extend that time period. The incentive to find an acquisition can be quite high for the sponsor and does not necessarily align with investors in the actual SPAC because they do get a pretty big return in terms of shares.

I don't have the exact numbers that they typically get, but I think it's close to like 20% of the company for a much smaller investment. So their incentive to find a merger, whether it's good or not, can be a bit of an issue. But people will typically invest in SPACs because they'll either believe in the sponsor that has a really good track record of finding businesses to invest in. Again, people may invest in those with the idea that a certain sector is on fire, so they are pretty excited about that. The problem is there's a lot of speculation, and if you see the SPAC trading at more than $10, it means that it's probably overvalued, at least in terms of its net assets, because people are really excited about the potential prospect of the new business, even if there is no business to be purchased just yet.

So that's why they're a bit tricky. Why would a company want to go public via SPAC versus either IPO or a direct listing? Well, the SPAC is probably a better alternative to an IPO if a company is looking to go public and wanting to get funds because the big advantage of it is they would not issue an S1, they would actually issue an S4 because the S1 is for a new IPO and the SPAC has already gone IPO. That's why their shares are trading $10 share. The S4 is actually when there is a SPAC. So when the merger actually happens, so the shell company purchases the private company and then they become one. So they have to file an S4, which in terms of regulatory requirements is much lesser than an S1. So that's why some companies will prefer to do that. And then when the SPAC actually happens, so all that investment

money, the $10 assured that shareholder invested in this ghost company, if you'd like, or this shell company, then that goes to the purchasing company, the private company. So it's another way for them to get funding other than the classic IPO process. There's been a lot of SPACs right now. There's over 400 of them that are looking for acquisition targets. So that's a very, that's an indication that there might be a bit of a bubble there. I know there are some of them that were trading at like $60 versus original price of $10 without having an actual acquisition target. So 6x the actual value. So right there, that's also a warning sign. In terms of examples of some well-known SPACs that happened in the last couple years. So Virgin Galactic is one of them, DraftKings, Opendoor, Nikola, and we all know what happened with Nikola. So

you have to be careful with SPACs, especially because there is less regulatory scrutiny with the S4 when they do go public. So there is an increased chance that you may be dealing with a company that might not be that great or there might be some, you know, some red flags behind it. But that's that's kind of the, you know, the breakdown of a SPAC. I know it can be a little bit a little bit complex, but it's basically another way to go public with less regulatory scrutiny. But if you're investing in the actual SPAC before it merges with another company, just be aware that you're essentially investing in a company that has no operation whatsoever, no revenue, no money coming in. Your money is basically, you know, you're buying a share, that money is held in a trust until they do find an acquisition. And if they don't find an acquisition, you get that money back plus interest. But again until they do find an acquisition and if they don't find an acquisition you get that

money back plus interest but again they could find an acquisitions that's complete dog poo if you'd like so you have to keep you have to keep in in mind i would not invest in that because you're really gambling and you're putting a lot of faith on the uh the sponsor of the actual spec it speaks to a lot of the speculation out in the market and yeah yeah exactly 14 months and although on paper it seems like a fairly good idea. I mean, if you go file with an S1 for IPO, it's expensive, costs a lot of money, there's investment banks involved, there's a lot of regulatory scrutiny, you know, you got to pump out these massive reports. It's expensive, time consuming, a little bit complex, confusing. a little bit complex confusing so i mean the the appeal is there for like these direct listings and spacks um but again with with it there has been a lot of frothiness on on this and uh it speaks to what has been the kind of feel in the market in the last 16 months, which is a lot of speculation. Yeah.

A lot of speculation. And there's one last thing I just thought about. Even though they seem to be almost a bit in a bubble territory right now. And I know like even the past couple of weeks, things have slowed down a little bit for SPACs. But like I mentioned, if you see a SPAC trading for $60 when it was initially, you know, the share, the actual value is $10 a share. Well, if there's a big correction in it

and you start seeing SPACs trading at half the value and they have a good sponsor, let's say they're trading at $5 when the net asset value, the NAV, is actually $10 per share, then there might be some opportunity for people for that kind of arbitrage between the two. I'm not saying it will happen, but that's kind of the other side of the coin, that there could be some opportunities there, but you have to be really careful about it. Yeah, you got to really know what you're doing, because there could be some fat arbitrage, but you could also be out of the loop on something. And that would not be so fun.

Yeah, exactly. You know, it's easier than anything like that is buying good companies, and then pretty much doing nothing. And that's, that's what I do. That's what you do. And it's a good time. All right, before we sign off, can we just have a quick moment to dunk on our favorite pump and dump on the TSX Venture? FaceDrive is down 69, nice, percent

since we talked about it. uh now trades for 1848 so it only has about 1847 to go uh to the the one cent that it's worth all right guys thank you so much for listening if you have not yet given us five stars and left us a rating. I get all kinds of email on the Stratosphere Forum. I get all kinds of, thank you guys so much for what you do. We appreciate those emails, but you know what you can really do to help the pod and help more people see it is give it a rating and write a little two-sentence, three-sentence, whatever you want to review on the podcast platform you're listening to.

If you're on Spotify, you can go to the top and press follow there on your podcast player there. And it really helps us grow the podcast. More people can see it. More people can listen. And ultimately, a lot of people benefit from that. So thank you so much for listening. We appreciate you all. Go guys five stars. We will see you next week. Take care. Bye bye. The Canadian investor is not to be taken as

investment advice. Braden or Simone may own securities mentioned on this podcast. Always make sure to do your own research and due diligence before making investment decisions.