On Friday, the S&P 500 rose 0.3% and Toronto rose 0.6%.
Similarly, most of our stock picks were up.
There was an interesting development for Melcor on Friday. RBC Capital markets has initiated overage with a rating of outperform and a $35.00 price target.
I am surprised they would “cover” it given the very low trading volume. Their report alone could certainly push the price up.
I have occasionally been concerned that even my own recommendations could push up a stock price. If a stock were under-valued and any analyst said so and the stock rose as a result, there is technically nothing wrong with that. It’s fair game if the stock was truly under-valued. But the worry would be that if an analyst pushes a stock price up, then who would be there to buy when that analyst and his “followers” wanted to sell? Out of caution I never want to push a stock price up. I want to identify under-valued stocks and then ride them up. The seedy side of pushing up stock prices would be “pump and dump” where an analyst purposely pushes a stock price up and then sells ahead of his followers. That of course is highly unethical. About 10 years ago I briefly removed Melcor from this site when its price kept rising and I was afraid I was causing that. (It turned out it was a Calgary brokerage company that had recommended the stock).
So I am surprised that RBC is covering this thinly traded stock. I suspect it will push the price up. I am perfectly happy with that.
The stock initially rose about a $1.00 on Friday but closed up 44 cents. Volume was several times higher than normal but still quite low. Near the end of the day the graph shows a lot of very small trades. I am not sure what to make of that.
Part of the reason for RBC covering the stock may be that Melcor now has someone dedicated to investor relations. Also the company has grown and it makes sense that eventually the bigger brokers would take notice.
In looking into this I also found the following comment about the RBC report:
“A number of other analysts have also recently weighed in on MRD. Analysts at Laurentian raised their price target on shares of Melcor Developments from C$28.00 to C$29.50 in a research note on Monday, March 17th. They now have a “buy” rating on the stock. Analysts at LB Securities raised their price target on shares of Melcor Developments from C$28.00 to C$29.50 in a research note on Monday, March 17th.” (I think that would be just one analyst but the quote implies more than one)
This probably explains much of the recent surge in Melcor’s price. The Laurentian coverage does not seem to have had any great impact on volume however. A worry with Melcor is that if someone were to rush to sell 10,000 shares or more they could push the price down.
I would buy Melcor at this price if I did not already have such a large position in it. My thought has been to not even trim this position unless it gets closer to $30, although prudence would suggest I should be thinking about trimming now.
I will be interested to see how the price reacts this week to the RBC report.
Overall I am happy with my large investment (as a percentage of my portfolio) in Melcor and look forward to (probable) gains ahead. If it happened to fall back to the $21 range I suspect I would buy more despite already owning what most would advise is too high a position in one company.
Today I am reading the annual report for Agrium. I really like what I see. It’s also trading at a reasonable P/E. I plan to add it to the list above when my analysis is complete and I suspect it will be rated Buy or higher.
P.S.
On Friday there was news about a very large acquisition by a Canadian gaming company.
“Amaya Gaming Group (TSX:AYA.TO – News) announced a jackpot of a deal Friday as the Montreal-based company said it will pay US$4.9 billion in cash to buy the world’s largest online poker company, operator of popular brands PokerStars and Full Tilt Poker.”
.. So a $4.9 billion acquisition. Looking up Amaya Gaming I see that it last reported assets of $519 million and equity of $238 million. I saw some information about how this would be financed including issuing shares through a subscription receipts method at a price of $20, some 42% above the previous days closing price. Most of the purchase price would be raised by issuing $2.9 billion in debt and $1.0 billion in convertible preferred shares at $24 per share in a private placement.
It all seems very strange indeed to me. It appears that the the new pref share holders will eventually own about 30% of the company if the conversion is exercised. (It would make more sense to me if they ended up with over 50% in which case this would be a sort of reverse takeover deal.)
It simply baffles me how the market could so quickly decide that this is a good deal and that Amaya’s shares are now worth some 42% more than they were the previous day. Usually acquisitions are viewed with skepticism.
The reason that the stock price ahs risen close to $20 appears to be that:
Amaya has entered into an agreement with a syndicate of underwriters led by Canaccord Genuity Corp. (“Canaccord Genuity”), Cormark Securities Inc. (“Cormark”) and Desjardins Capital Markets (“Desjardins”) (collectively, the “Lead Underwriters”), and Clarus Securities pursuant to which the Lead Underwriters and Clarus Securities have agreed to purchase from treasury, on a bought-deal private placement basis, 25 million subscription receipts of the Corporation (the “Subscription Receipts”) at a price of C$20 per Subscription Receipt (the “Subscription Price”), for aggregate gross proceeds to Amaya of C$500 million.
I remain quite baffled and skeptical of this deal.