Insider Play 2: Simon Property Group (SPG). I'm getting interested.

Simon Property Groups is one of the largest and best mall REITs in the US.

Just like NRZ, it also has a lot of insider buying, and the stock price went below the insider buying price.

Many insiders bought from $46-$59. Including both the chairman and the CEO as well, a heafy ~$10M and $9M each. That's a sign of conviction.

But this stock is different from NRZ, NRZ is much more speculative as I write here.

Let me explain why and, why this is an interesting reward-to-risk set up.

Liquidity Matters

NRZ owns mortgage securities, they own mortgages, they are the lenders. SPG is the other side, they own and rent out their properties. NRZ's balance sheet is more shrouded to the outsider. We don't know which of NRZ's lendees can pay them interest, or which may default. NRZ couldn't get immediate funding for their liquidity and had to sell some of their assets at a discount to raise cash. Because of this, there is uncertainity to the investor.

How much book value is lost?

If the US lockdown last for one more quarter, and they cannot get bailout money or loans, or if their borrowers cannot get bailout money, how much more book value is lost?

Whenever there is a situation where imagination goes wild, in a crisis, it's unfairly bearish.

NRZ insiders bought 2 weeks ago. But 2 weeks later, there seemed to be a change, as it seems that NRZ and their customers were not able to access any sort of QE funding in time. So there's a possibility that this caught the insiders off guard. We don't know.

SPG, on the other hand, assumed they had a line of credit, and successfully drawn into it.

So unlike NRZ, everything seems to be going to plan, and hence the greater the chance that the insiders assumptions still hold. We have to try to access whether anything happened that was unexpected to when the insiders did the calculations and bought their stocks. It seems that for SPG, so far, so good. Nothing has changed.

SPG, in March 16, 2020, announced an amended and extended $6.0 billion revolving credit facility and term loan. According to David Simon, CEO and President of SPG: "The newly refinanced $6.0 billion credit facility and term loan enhances our already strong financial flexibility, and when combined with our existing $3.5 billion senior unsecured credit facility provides us with $9.5 billion of total credit capacity. The closing of this facility is a continued endorsement and reaffirmation of the strength of our Company,"

Robert Bertzins does a good job estimating how SPG can last in terms of liquidity, assuming that that operating earnings drop by 65% - that it can last years, not quarters.

SPG has a favorable debt maturity profile. Only 2.62% of ~ $3.2 billion of debt is expected to mature in 2020.

In short, it is unlikely that SPG will have any liquidity problems this year, forcing them to either sell assets at fire sale prices or disrupt their business model; where as NRZ is estimated to already sell some assets at discounted prices to help their liquidity.

I'm not saying you can't make money on NRZ. NRZ is beaten up so badly, that even if their book value gets dropped to $7, you might still make good money since the share price is at $3.50ish. But the destruction of book value is a mental switch that make people wonder how much and how long. SPG doesn't have this issue. SPG's issue is more of how long will earnings be depressed and dividends low but their book value is intact. So, both NRZ and SPG stock prices will behave differently. NRZ's risk and rewards get magnified more the longer or shorter the COVID impact lasts compared to SPG, because NRZ seems to be in asset selling mode as long as they or their clients cannot get access to QE.

Price Patterns

I have always been a guy that people always ask to speculate on prices pattern before they fully form. I hate predictions, you can be wrong hundreds of ways... but it seems that there is a chance ...

There is a probability, not a guarantee, that a double bottom could be forming.

Is the last low at $45 the second bottom of a double bottom, or maybe it will fall to a lower bottom at, say $40?

If it is, then this could set up a good move higher. But, technicals should ALWAYS corroborate a thesis, even if the thesis sounds too simple. You need at least a thesis.

Significant numbers.

At this price, the dividend yield (should everything return to normal) is at a whopping 18%. I know many investors that would consider risking their capital for any dividend yield above 15% as a benchmark price during times of uncertainty. These investors know that the real dividend yield is going to drop this year, or even next year; but they use trailing 15% yield as the benchmark as too cheap to ignore.

Combined with the early analysis that the company doesn't have any near term liquidity problems, I can see many dividend investors willing to buy this company now, even if they can't get a good dividend this year, with the hope that the yield pops back up to 10% next year.

So, if you have a long term prospective, and don't mind sitting out the volatility, buying it at this price means, if I try to made a simple wild estimate, that you might get low % dividend this year, but 8% - 15% in the next couple years.

Unless you believe that the COVID lockdown will much be worse than estimates, it's likely worth putting SPG into a long term diversified portfolio at this price.

No one can say you are stupid for buying at this price, you got it at a discount to the CEO and Chairman of the Board as well!

Technicals make it easy and interesting to play.

This is a short term investors excitement!

Because the thesis is simple, and it's at the exact bottom point: that it's either a double bottom, or it isn't. Either we get a short term upside or longer if the COVID is not as bad as what many expect or the price falls further because the COVID is even worse than anyone thought.

This is how a short term player would play this.

They would buy it NOW, at what seems like a bottom. Or wait a little longer just to make sure that bottom holds in a more convincing way.

If it really is a bottom, it will likely go between $60-$70. That's a gain of 28%-50%

But, if you put a cut-loss price of $45 meaning that if the price closes under $45, just assume that something no one expected is happening. Maybe another virus from China breaks out, or the CCP virus mutates and causes another wave of infection, then you can cut your position and take a loss of 3%-5%.

The reward to risk ratio is heavily in your favor. If you are right, you make between 28%-50%, if you are wrong, you lose 3%-5%.

Of course, if you wait for another bullish candle for confirmation (say it goes up tomorrow to $50, it makes it easier to imagine a double bottom. But your reward-to-risk changes. You now have to risk a 10% loss to $45, and 22% - 40% gain if correct.

This is the nature of the stock market, probabilities and risk and reward. Nothing is absolute. We can only put the odds on our side by looking at signs. Do you have a fundamental thesis why the stock is worth more? Is there recent significant insider buying to corroborate? Are the technicals encouraging? Can you set up a plan of action such that you are either willing to cut your losses at a pre-determined point, or be willing to sit through all the volatility while collecting dividends? Each box you check off increases your odds of making money. I want to reinterate that I write these posts so that you might have a framework to think about these things, instead of just shooting in the dark, as one of my readers said.

My guess is that if indeed the bottom holds, that SPG is going to bounce in a range. I don't think it gets past $70, but at the same time, it won't get back to the bottom at $46 either. It will consolidate, bouncing up and down, but generally higher, but not getting past $70, until there is more clarity in terms of mall traffic and how many shops have not renewed their lease etc.

That's why we set up rules in case we are wrong, if the bottom falls out, this thesis is in question. But the risk reward is good.

Important to note: Bottom fishing guidelines.

Remember when you are bottom fishing in the crisis, we have to adjust our minds to ask the following questions:

1) What's the state of the broader market? If the broader market is weak, might be prudent to be patient.

2) There is a chance there could be a short bounce, a longer bounce, an absolute bottom, or there might be a lower bottom. Do you have enough cash if the broader market makes a new low?

3) When you are bottom fishing, you are hoping to make 100+% gains on the long term if you correct, but some of these companies may either not survive (you lose almost everything), or have their assets impacted (maybe they drop 30%++).

4) You have to do your own due diligence. Understand their business model and their biggest risks. Read their latest quarterly reports. Read what other people say about them. Try to have a thesis why the insiders are correct, and the others wrong.

5) If you are unsure, give the stock a pass.

6) Risk management is important. During the crisis, some stocks will rebound and soar but some stocks will be impaired or not survive, so you have to be diversify your bets. You cannot bet too large on certain companies, unless they are blue chips and have a large margin of safety. For example, those companies with high debt and potential liquidity problems have the highest risk reward, you might lose everything, or might make 3x. Companies like Valuetronics, have no debt and have so much net cash, that the maximum loss is likely to be at only -25% more, but if it recovers, you make 60%.

Also, you have to think about the probability that a lower bottom occurs, do you have any cash for that? Or are you mentally prepared to hold on to those stocks through all the volatility?

How much portfolio are you going to invest in high risk stocks like NRZ where it's hard to detect the extent of downside, and lower risk stock like Valuetronics that has downside protection because of pure net cash?

Knowing the business models of those companies will make you more comfortable in your allocation.

These are things you have plan ahead of time.

CONCLUSIONS

If you are a long term investor:

SPG looks like a reasonable investment at these prices if it's in a diversified portfolio. But I insist you do your own due diligence by reading their financial statements, as well as other analyst opinions.

No one can say you are stupid for buying at this price, you got it at a discount to the CEO and Chairman of the Board as well!

But if you are too concerned with volatility, here's an idea for the short term trader.

If you are a short term trader:

Make a thesis that this could be a double bottom.

If you are wrong, cut your position at a close under $45. If you are right, consider taking some profit between $60-$70 UNLESS there are clear signs that everything is getting better... infection rates and death rates are decreasing, there is more clarity on foot traffic and lease renewals etc.

If you in-between long and short investor/trader like me

You could do something like this, buy 50% of your position now, and save the other 50% if it makes another bottom. But if it doesn't go lower, put the other 50% somewhere else.

All the best!

...

My Secret Ingredient for making 3x.

Especially at crisis times, I can honestly tell you that if it weren't for my Christian faith, I wouldn't have been able to survive the 2009 GFC. In market panic, it's so easy to lose your head. It's so easy to either miss the bottom, or to make more losses getting whipsawed.

The Spirit you received does not make you slaves, so that you live in fear again; rather, the Spirit you received brought about your adoption to sonship. And by him we cry, "Abba, Father." (Romans 8:15)

When we are in-Christ, stop fearing more losses, or condemnation because you will never be able to make up what you lost. Remember your sonship in God. God is your Father. Even if it takes you 2 years to make back what you lost, God can create new paths for your life. That's what any loving Father will do for His sons.

God hath not given us the spirit of fear; but of power, and of love, and of a sound mind. (2 Tim 1:7)

With this security of love, knowing that God has a good purpose for you, forget your past mistakes, and start making sound moves with a sound mind from today, We make the worst mistakes when we are slaves to greed or fear.

Ask God for supernatural wisdom that cuts deeper than the hysteria of the masses.

If any of you lacks wisdom (Greek: Sophia) (Hebrew: יְבַקְשֶׁנָּה binah from biyn), you should ask God, who gives generously to all without finding fault, and it will be given to you. (James 1:5)

The wisdom mentioned in James, is not "common sense", or the ability to have a financial degree. It's not street smarts or financial skills. That wisdom is "chakam".

The wisdom explicitly mentioned in James, when interpreted by Hebrew scholars of the New Testamtent in Binah. Binah relates to discernments and understands of things that are hidden. Understanding the human heart, the ways of God, leanings of what the future might hold. This is the same type of discernment that both Joseph and Solomon had, and they were both the pinnacle of fund managers if you think about it. (I will write more on this topic later)

We need this wisdom especially so when the market is losing their heads. We need to see what others don't see or cannot see.

But here is what I want to emphasize, the fullness of wisdom (Biyn) is found being in-Christ. Christ is the personification of wisdom.

Remember that the New Testament reveals that the ultimate Wisdom is found in the person of Jesus and when you have Jesus, you will have everything.

Solomon, the famous king of wisdom wrote both Proverbs and Ecclesiastes.

Wisdom gives: a long, good life, riches, honor, pleasure, peace. Wisdom is a tree of life to those who eat her fruit; happy is the man who keeps on eating it. The Lord’s wisdom founded the earth; his understanding established all the universe and space. Prov 3:17-19

But, the summation of Solomon's voyeuristic journey to investigate life, wisdom, riches and fulfillment ended with this verse below. He basically says that everything that helps us have a good life or honor, pleasure, peace is WIsdom. And then he says something amazing, that all the wisdom of all men, if you put it together to get the maximally best life, is not only found in Jesus, but there is nothing else or better.

Solomon saw Jesus before Jesus came to be. His investigation into an earthly pursuit of wisdom was rewarded with a prophetic picture of Jesus.

The Conclusion of the Matter

Not only was the Teacher wise, but he also imparted knowledge to the people. He pondered and searched out and set in order many proverbs. The Teacher searched to find just the right words, and what he wrote was upright and true. The words of the wise are like goads, their collected sayings like firmly embedded nails—given by one shepherd. Be warned, my son, of anything in addition to them.

Ecc 12:9-11 (See also Proverbs 8:12-36)

As a child of God, you MUST remember that you are sitting in two places at the same time.

Right now, I am sitting at my computer, reading financial articles, looking at the markets from different angles. I have to struggle through second guessing my analysis, the nitty-gritty in life, looking after my health (I am 70% better from where I was 10 years ago, when I was close to death), shaking off impulsive trading decisions I made ... I am journeying through the chaos of the universe.

But at the same time, you are seated on the right hand of Christ (Col 1:3, Eph 2:6).

You are seated in the secret place, under the shadow of God's wings. (Psalm 91).

The more you acknowledge and claim your position in-Christ, the more wisdom (biyn) can take root, and you'll find that you can make trading decisions not based on fear, but of a sound mind. You will make decisions that will end up in peace, and not panic.

When I caught the bottom of the stock market in March 2009, I was strangely at peace. That's why I put my money in, and then I sought after God and went to Seminary because I knew that's where He wanted me to go. 1 year later, I was up 3x when other traders who were more experienced than me sold at only 50% gain.

Wisdom must be correlated.

How do you know if you are moving in wisdom, and not your own ignorance? We humans are notorious of having a religious spirit, and fooling ourselves thinking it's God. How many times have I counseled those Christian girls that are convinced that God wants them to marry that bad boy because of "signs", only to have a terrible marriage later? If it is of God, it would have the fruits of the Spirit - love, peace, joy, patience, kindness, self-control... etc. It was so obvious that the relationship was bring it out the worse in her. Yet, she was convinced.

Similarly, true (binah) wisdom is always correlated when we center ourselves after God's purposes. When we want to further God's kingdom first, and ourselves second; that is a good sign that Wisdom is working

For the Gentiles strive after all these things, and your heavenly Father knows that you need them but seek first the kingdom of God and His righteousness, and all these things will be added unto you. (Matt 6:32,33)

Take care all!

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