A Substantial Issuer Bid Will Create Huge Value for GamehostThese are the key points to focus on:
- GH is 37% - 45% below intrinsic value
- GH stock has to increase by 59% - 82% from its current price of $7.85 to attain fair value.
- It makes no sense to pay a dividend and not buy back stock in a big way until our stock reaches fair value.
- GH throws off a lot of free cash flow other than when it is forced to close, as in the pandemic. From the time it converted to a corporation in 2011 up until 2019 (pre-pandemic) it produced $19.2M in free cash flow in its worst year, which was 2016 the year of the wildfires. Its normalized free cash flow, including the Deerfoot purcahse recently, is $22.6M per year. This is normalized. The future will be significantly higher. GH produces high and dependable free cash flow.
- Given the above significant and relatively predictable free cash flow, GH should lever up. Even after renos, debt is not even close to being an issue. Even if interest rates triple, highly unlikely, our coverage is very strong.
- Major value can be created by buying in a very big way at these extremely depressed prices.
I think you may find that there is more stock available to buy than you think.
Don't just look at the market depth and the daily volume. That can be deceiving. Shares become "available" under certain circumstances and when potential sellers become aware that they can sell bigger lots in an illiquid stock rather rapidly instead of piecemeal. Not institutions but bigger retail investors.
Anything below $9.00 is too cheap for words.
Anything under $10 is excellent value. Five years from now those purchases will look really good. And don't forget to factor in the reduced share count increasing free cash flow per share and therefore the stock price.
I think we can purchase a relatively hefty number of shares at $10 or less over the next 12 to 18 months.
Just look at the possible catalysts for this: high headline inflation numbers spooking retail investors. Increasing interest rates impacting all assets. Stock market levels overpriced and in a panic everything sells off - that is why it is a panic. Geopolitical current issues and future unknown issues. I'm not predicting doom. What I'm saying is that the stock can easily sell off in a bad environment and GH should be ready. The stock traded for high volume, relatively speaking, after earnings. Would have been nice if GH were there. It all adds up. Debt can be repaid later if needed. GH throws off a lot of cash.
More shares can be purchased than you think if you plug away at it on a daily basis. These cheap prices won't be around forever. You get the same increase in stock price if Gamehost increases its free cash flow organically by 5% or if they simply buyback 5% of their stock. Both combined act like steroids.
Don't forget that the market correctly takes notice of large amounts of stock being bought back and starts to attribute an increased multiple due to the better capital allocation practices.
The market will pay a higher multiple if a company can create more than $1 of value with each dollar of retained earnings. So it's not just the direct effect of the decreased share count that creates value but the indirect response from investors of associating a higher multiple due to it signifying superior management to have done so as a result of superior capital allocation skills.
This signifies that all future retained earnings will grow faster on a per share basis and so the increased multiple is justified. Stock buybacks are that good when your stock is cheap.
1) Chipping away here and there really adds up over time. NCIB could be increased.
2) Sellers appear when really bad market days occur. Remember the New Year’s Eve fire sale last year with prices being sub $7? Nice to be buying at those prices even if they occur infrequently.
3) SIB at $8.50 (not more because the market may have a tough time going higher. No need to pay more than $8.50 in a bear market. If you can't get enough at $8.50 you increase the SIB price to $9. You wait and take up as much as you can. You can go up to a maximum of $10 and get great value.
Again, we are in a period of uncertainty and this creates a lot of opportunity. I have been investing for a long time and continue to study market history to this day. Sometimes really bad periods happen and volumes rise on all stocks – even illiquid ones.
Fast forward 5 years from now. What price do you think GH will be trading at? Not a crazy price relative to GH's value but a fair price given their top quality assets, top quality management and strong oil environment? You know it’s a nice price. It makes you smile.
Taking into account the free cash flow from the Deerfoot purchase and all stock repurchases from 2020 onwards, GH has normalized free cash flow per share of exactly $1.00. This will grow significantly over the next 5 years. GH will trade at a nice price.
Now, you are still in the year 2027, and you think back to your additional purchases 5 years before at $10. Now you are really smiling.
Well that is what GH can do by buying more now except the story is even better because we can purchase from current prices all the way up to $10 over the next 6 months or so. Markets will likely not be strong for this period and will give time to acquire more stock. But the SIB has to start.
Saying the Company shouldn't buy more stock now because they can't pick up a large amount is like saying you should not buy your lay's potato chips on sale at your grocery store because while they are $1.00 off the regular price, you can't buy too many bags because of the expiry date and so the $1.00 off is not worth it to you. No, you will buy the potato chips on sale because they represent a 33% reduction in price and you are saving money.
Well GH is 37% - 45% on sale now. The Company should be buying as much as they can. SIB. Start at $8.50 see what you get. Move it up to $9 see what you get. Don't think you need to go higher in this economic and market environment. Instability creates opportunity.
Lots of retail investors with maybe 20K or 30K or 40K shares that may want to sell when the blank hits the fan. Fear, Panic, Margin calls etc.
Here are some of the factors that could create panic:
- A big battle with inflation
- Interest rates rising significantly higher
- Oil prices not coming down in any big way anytime soon. Structural supply issues will see to that
- Possible recession
- Supply chain issues
- War in Ukraine
- Have we heard the last of COVID?
Now, the S&P is down 19% and the NASDAQ is down 30%. Relatively speaking, these are not big declines.
Here are just some bear markets in the Dow:
1929 – 1932: -89.2%.
1937 -1938: -50.5%
1940 – 1942: -34.5%
1968 – 1970: -36.1%
1973 – 1974: -48.2%
Aug 1987 – Dec 1987: -33.5%
2000 – 2001: -36.8%
Oct 2007 – Mar 2009: -53.4%
I am seeing a certain level of fear already in the people who invest and the Dow is only down 15.4%
What happens if the market starts to fall much more rapidly? As usual, it will be panic. It is very easy to predict how people will behave. It is not easy to predict when they will behave in this fashion.
Fear and panic always bring great prices. That is why I always have cash on hand to take advantage of opportunities. The big opportunities happen rarely but it is good to have cash when they do.
The average bear market lasts 13 months and declines by 33%. A bear market typically starts off slowly. You see modest declines at first. Some seesawing. It then picks up speed and this is what starts to cause fear. Some more ups and downs and then a faster pace of decline.
Impossible to know when the last phase starts but it is typified by the decline really picking up speed. Basically it falls like a heavy stone in water and this eventually cause capitulation. People get so scared and all they hear is bad news everywhere and so they want to get out and will sell at any price. That is the end of the bear market. Just when you least expect, the market starts to rise. It is now looking past all problems.
I am not saying doom will occur. I am an optimist. What I am saying is that things can get much worse and if they do GH will fall on volume. Shares suddenly become “available” when everything looks bleak and if there is a SIB in place, they will tender to it.
We need to be ready. The next 4 to 5 months will be interesting. We may see great prices.
Just wanted to put this up tonigh because I'll be focusing on that stock that I had mentioned for the next few weeks or so.