Thursday, 5 August 2021

Xilinx (XLNX) and Advanced Micro Devices (AMD) Deal Spread: 40% Discount But...

The deal-

Under the terms of the agreement, Xilinx stockholders will receive a fixed exchange ratio of 1.7234 shares of AMD common stock for each share of Xilinx common stock they hold at the closing of the transaction.
Source: AMD

If you buy XLNX now and the deal goes through, you are getting AMD shares at ~40% discount. With the big discount, the market is probably pricing the deal to fall through. All that's left with is China.

In 2018, China the Qualcomm & NXP merger. In more recent news, China also blocked the merger of Huya and Douyu.

Chart from TradingView

If the merger falls through, would you be willing to own XLNX at a 40+ forward P/E with 21% annual growth? I'm not going to pretend like I know what XLNX actually does but here's a rough comparison with other fabless companies.

Company

Forward P/E

Revenue Growth (YoY, Q2 2021)

XLNX

40

20.9%

AMD

43

99.5%

QCOM

18

64.5%

AVGO

27

15.2%

At a more reasonable 20-30 P/E, XLNX will have to drop by 20%+. While a 40% discount on AMD seems tempting, the price of XLNX will most likely suffer should the deal fall through. 

With China clamping down on their own companies, would they allow this deal to go through?
Would you be willing to stomach a 20-30% drop in share price for a 40% discount on AMD?

Sunday, 16 May 2021

Options Assignment or Exercise Shouldn't Matter (Other than commissions) - Cash Secured Puts / Covered Calls

Previous post about "The Wheel" here.

When writing Cash Secured Puts (CSP) or Covered Calls (CP), most think assignment is getting the stock at a discount. While true, it doesn't really matter since you can always close your options and buy back or sell the stocks.

Since I'm too poor to pay for historical options data, too dumb & lazy to calculate the price based on Black Scholes model, I just plug it into a calculator and use screenshots instead.  AAPL was at $127.10 when I took this screenshot.

Apple options pricing. Source: tastyworks, Friday 14 May 2021.

Plugging the figures into a calculator, we get a $0.90 or $90 premium which is close enough.
Source: GoodCalculator

Maybe the interest rate is too high but it doesn't affect the 0 DTE option price.

The 14 May 2021, $128 put was last done at $0.58/$58.

Source: Optionistics

AAPL Closing Price: $127.45
$128 Put Premium: $0.58
Strike - Premium:  $127.42  ($128 - $0.58)

Barring afterhours movement, the strike minus premium of expiring options are more or less the same as the closing price.


If you wrote the same 14 May 2021, $128 put a month ago when AAPL was $132.03, you would have received a ~$2.74 / $274 premium.

Source: Google, Optionistics, GoodCalculator.

On expiry, you would get assigned or choose can close your option for $0.58 / $58.

Scenario 1 - Take assignment.

If you take assignment, you would have an unrealized loss of $0.55 / $58 ($128 - $0.58) and a realized profit of $2.74 / $274 (Premium received)
Total gain = $2.16 / $216 ($2.74 - $0.58 / $274 - $58)

Scenario 2 - Close the position, buy shares.

If you bought back the option for $0.58, and bought 100 shares of AAPL, you would have a realized gain of $2.16 / $216 ($2.74 - $0.58 / $274 - $58). This is exactly the same as getting assigned.


With the opton premium, your 'margin of safety' would be $125.26 ($128-$2.64). If AAPL had fallen to $125, your option would be worth closer to $300. Taking the $128 assignment would result in an unrealized loss of $300 ($12,500 - $12,800) and a realized gain of $274 (premium received).
Total loss:
$26.

If you bought back the option for $300 and bought 100 shares of AAPL, you would have the same $26 loss. ($274 - $300, premium received - cost to buy back, 0 loss on shares).

The same applies to covered calls, you can simply close your call options and sell the stock for the same difference, the only thing that you pay is the commission (and tax implications but it doesn't affect me).

Saturday, 6 February 2021

Rocket Companies (NYSE: RKT) - Technology Mortgage Origination Play But With Questionable Ownership Structure

Rocket Companies is a primary known for Quicken Loans which operates the mortgage origination business and generates the bulk of their revenue. As a mortgage originator, Quicken Loans does not have exposure to credit risk as they simply sell off the loans to banks and other financial intermediaries who then repackage, or sell them off.

Source: Company's Form S-1/A, SEC.
Source: Company's Form S-1/A, SEC.

They also own other companies under the following segments. Home Financing, Home Sale & Search, Auto & Personal Financing, Media and Client Services & Technology Solutions. The Auto & Personal Financing does not have exposure to credit risks as they consist of an online platform rental and sales, and act as a broker for auto loans, similar to the Quicken Loans model. This segment contributed to about 4.6% of their $11,036,240,000 net revenue for the 9 months of FY2020

Rocket had a 6.7% marketshare of the Mortgage Origination volume in 2019 and 9.22% in the Pro Forma Three Months Ended March 31, 2020, up from 6.9% in the comparable quarter.

Source: United Whole Mortgage Company Investor Presentation, SEC

While not the leader in the mortgage origination business, Rocket comes in at a close second and has potential to gain more marketshare with their technology-driven platforms and verticals.

Source: Replay Acquisition Corp, Finance of America Presentation

Even their competitors are not able to deny their advantages in their own investor presentations.

Financials

Q3 2020 Results Press Release
Source: Rocket Companies, Inc. Third Quarter 2020 Earnings Call

At a market cap for 42 billion, this almost triple of United Wholesale Mortgage which has double the origination volume of Rocket.

Source: Company's 10-Q, SEC.

In their press releases, Rocket paints a very nice picture showing a 198% revenue growth and a 637% net income growth YoY. However, if you look at their actual 10-Q filings, things do not appear as rosy as they seem to be.

In the last line, the non-controlling only owns a small portion of the company's income due to the ownership structure. This is a prorated net income as Rocket only went public in August.

The Ownership Structure









From the IPO Prospectus, Dan Gilbert owns majority of the company's voting power AND the economic interest via Rocket Holdings Inc. Public shareholders only own 8% of the company's economic interest.

Source: Company's Form S-1/A, SEC.

Source: Company's 10-Q, SEC.

However, in the actual 10-Q filings, this economic interest has beem reduced to 5.31% as of their latest 10-Q filing.

This ownership structure makes its questionable whether the company is an attractive company or not. As per Finviz on 4 Feb 2021 market close, the company trades at a P/S of 3.39 and P/E 276.54 at a 40 billion market cap. If public shareholders only own 5.81% of the economic interest, shouldn't the market cap be closer to 688 billion? You wouldn't start a joint-venture with someone and take a 30% stake but only ge 5.81% of the profits.

Next, the company announced a 1 billion dollar share repurchase effective 10 November 2020 which is about 2.4% of the company's market cap with the closing price of $21.74.

The non-controlling interest holders have the right to exchange Holdings Units, together with a corresponding number of shares of our Class D common stock or Class C common stock (together referred to as “Paired Interests”), for, at our option, (i) shares of our Class B common stock or Class A common stock or (II) cash from a substantially concurrent public offering or private sale (based on the price of our Class A common stock). As such, future exchanges of Paired Interests by non-controlling interest holders will result in a change in ownership and reduce or increase the amount recorded as non-controlling interest and increase or decrease additional paid-in-capital when Holdings has positive or negative net assets, respectively. As of September 30, neither our Chairman or RHI has exchanged any Paired Interests.

While reducing the oustanding shares may be helpful, the non-controlling interest is still able to convert their shares. This is similar to United Wholesale Mortgage Company which completed their SPAC merger recently and shareholders only own ~6.4% of the company's economic interest.

There are also some questionable activities going on like a 3.79 billion transfer to the parent in the last quarter.

Conclusion

U.S. Pending Home Sales Index Create Alert
U.S. Pending Home Sales Index. Investing.com

While there's no doubt that 2020 has helped to increase the volume of home transactions thanks to low interest rates, work from home becoming more commonplace and Californiaxit, the mortgage industry is a cyclical one and we are most likely at the top of the cycle.Source: 

There is some speculation on Rocket because the secret position that Berkshire is building given Dan Gilbert's and Warren Buffet's relationship but we won't know until its announced.

Rocket may be an attractive "PropTech" play with multiple complimentary verticals to be an "one stop solution". However, the ownership structure makes this a very unattractive investment.

Thursday, 4 February 2021

European Exposure via ETFs

Most people don't have much exposure to Europe, even total world ETFs, the European region only represents a small percentage of the total  holdings. Some even skip Europe and choose to invest in just the US, China or Emerging Markets.

Source: Vanguard Total World Stock ETF (VT)

Source: Yahoo Finance

Its no secret that Europe has been underforming the US markets in the recent years, yet excluding them seems to be chasing recent performance.

Vanguard S&P 500 ETF (VOO)

Europe doesn't have the tech powerhouses that the United States have. The S&P 500 is about 40% "tech" if you include Facebook and Google as tech instead of Consumer Discretionary and Communication Services. While not mega-tech, some countries do have dominant companies but not on the scale of the United States (Korea - Samsung, Taiwan - TSMC).

Source: Wikipedia

Europe's GDP has not been really been growing, even for the non-eurozone countries.

Source: Vanguard FTSE All-World UCITS ETF

VWRA is a total world ETF and the largest Europe holdings are United Kingdom, France, Germany, Switzerland and Netherlands.

While the holdings in IEV are definitely big companies, they simply do not have the same growth as the tech giants.

Average P/E from WSJ
Unless the data is wrong, SPY isn't that much expensive compared to Europe stocks. Moreover, most of them do not have much tech stocks that trade at higher multiples. Its hard to make a 'return to value' arguement here when they're not cheap either. Maybe they'll work as a sector rotation play but probably with not much growth.

Fullsize


iShares MSCI Netherlands (EWN)

Netherlands stands out as their ETF that has a large exposure to "tech" at 35.63%

Source: iShares

This ETF tracks the MSCI Netherlands IMI 25/50 rather than the AEX  so the holdings are a bit different, you get 56 holdings instead of 25 and Royal Dutch Shell and Unilever are not included in it. ASML, Prosus and Adyen alone contribute to 40% of the ETF. Koninklijk means "Royal" which is given to companies that have been around for more than 100 years.

Top 10 Holdings

  • ASML - Monopoly on the EUV Lithography Machines used in the chipmaking process
  • Prosus - Venture capital firm that invests in startups and has a 31% stake in Tencent,
  • Adyen - large payment processor that trades at questionably high mutiples. 
  • Phillips - I don't think it needs much introduction but giant healthcare equipment supplier looking to divest their domestic appliance business.
  • ING Group - Largest Dutch bank with global operations
  • Ahold -  Multinational Grocer with more than 50% of their revenue coming from the United States
  • DSM - Science based company(?) focusing on Nutrition, Materials and Innovcation (Business Incubators and IP Licensing). Not an easy company to understand, kind of like trying to explain what Bayer does.
  • Akzo Nobel - Paints and coatings company
  • Heineken - More than just Heineken (Like how Pepsi and Coca Cola own various brands)

With the large concentration in ASML, this ETF could work as a proxy to ASML. A similar thing can bee seen in EWT (Taiwan) for TSMC, EWY (Korea) for Samsung, or ES3 with the 3 banks. After removing ASML from the ETF, tech exposure drops to 8.35, and 3.17 without Adyen, making it much more 'diversified' and gives you a proxy to the rest of Europe and most of these companies also operate globally. Other than AerCap, an aircraft leasing company, there is no exposure to airlines and automakers which aren't really great industries to own. One downside is that you don't get much exposure to healthcare or big pharma since there's on Pharming Group that is about 0.28% of the ETF, and Phillips is more of a healthcare equipment supplier. Maybe DSM or some other companies are classified "wrongly" like how Facebook and Google are classified as Communication Services.


iShares MSCI United Kingdom ETF (EWU)

The United Kingdom is the largest Europe holding in Total World and Europe ETFs despite having a smaller GDP thatn Germany. In this, market cap weightage matters a lot more to the ETFs.

iShares MSCI United Kingdom ETF (EWU)
The sector allocation are 'boring' companies and much more diversified than Netherlands. The FTSE 100 looks like the Strait Times Index (STI) in terms of growt- stagnation. Unlike the US, their Communication sectors are really communication companies that consist of publishing, advertising and telecommunications. The top 10 holdings should be farmiliar to most people and certainly does not inspire much confidence for long-term growth. I don't doubt that these companies will be around for a long time though.


iShares MSCI Germany ETF (EWG)

iShares MSCI Germany ETF (EWG)
Slightly different from the UK, you have SAP and Siemens occupying the top spots. SAP is large player in the ERP business and imbedded in many old companies but also faces competition from newer software competitors like Microsoft. Siemens while big, is "too big to grow", or at least doesn't grow at the pace that the US tech giants do.


The common theme is that while most of these companies are big and operate globally, they simply do not have the growth that the US tech giants have. There are 2 main Europe Tech ETFs but they are only listen on Europe and London exchanges.

iShares STOXX Europe 600 Technology UCITS ETF (EXV3)

Source: iShares STOXX Europe 600 Technology UCITS ETF (EXV3)

  • Infineon - German Integrated Device Manufacturer semiconductor company
  • Amadeus - Spanish Travel IT company that helps with corporate bookings, kind of like Travago but for corporates.
  • Dassault Systèmes - French software company that owns SolidWorks and other software, primary competitor to AutoCAD owned by AutoDesk (ADSK)
  • STMicroelectronics - Swiss Integrated Device Manufacturer semiconductor company, larger supplier of chips to Apple, Tesla and SpaceX.
  • Hexagon - Swedish information technology solutions provider for geospatial and industrial landscape
  • Capgemini - French Technology consulting firm (Think Accenture)
  • Logitech - Swiss computer peripheral provider, I don't think they need much introduction.

SPDR® MSCI Europe Technology UCITS ETF (ITEC)

SPDR® MSCI Europe Technology UCITS ETF (ITEC)
Similar names in the top holdings here except for Adyen, Ericsson and Nokia.
Source: Yahoo
 The "QQQ of Europe" or tech ETFs have performed comparably to the SPY but loses out when compared to the US tech ETFs which doesn't make them very compelling investments.

The common arguement for not having to invest in Europe is that "US companies already operate globally". I don't disagree with this and more bullish on US + EM (Including China) for the long-term. The lack of tech or innovative companies probably hinders their abiliy to grow and most of them are heavily weighted in Industrials or Consumer Staples. It also doesn't help that most European startups are bought out by US companies
 
Europe exposure really may just feel like diversification for the sake of it or hedging for the moment when "value" starts to outpeform growth or sector rotation. I do like the Netherlands ETF for large ASML and Prosus which I think are great companies to own. The rest of the holdings act as a good proxy to Europe as well.