How to not get ruined with Options - Part 3a of 4 - Simple Strategies
Post 1: Basics: CALL, PUT, exercise, ITM, ATM, OTM Post 2: Basics: Buying and Selling, the Greeks Post 3a: Simple Strategies Post 3b: Advanced Strategies Post 4a: Example of trades (short puts, covered calls, and verticals) Post 4b: Example of trades (calendars and hedges) --- Ok. So I lied. This post was getting way too long, so I had to split in two (3a and 3b) In the previous posts 1 and 2, I explained how to buy and sell options, and how their price is calculated and evolves over time depending on the share price, volatility, and days to expiration. In this post 3a (and the next 3b), I am going to explain in more detail how and when you can use multiple contracts together to create more profitable trades in various market conditions. Just a reminder of the building blocks: You expect that, by expiration, the stock price will … ... go up more than the premium you paid → Buy a call … go down more than the premium you paid → Buy a put ... not go up more than the premium you got paid → Sell a call ... not go down more than the premium you got paid → Sell a put Buying Straight Calls: But why would you buy calls to begin with? Why not just buy the underlying shares? Conversely, why would you buy puts? Why not just short the underlying shares? Let’s take long shares and long calls as an example, but this applies with puts as well. If you were to buy 100 shares of the company ABC currently trading at $20. You would have to spend $2000. Now imagine that the share price goes up to $25, you would now have $2500 worth of shares. Or a 25% profit. If you were convinced that the price would go up, you could instead buy call options ATM or OTM. For example, an ATM call with a strike of $20 might be worth $2 per share, so $200 per contract. You buy 10 contracts for $2000, so the same cost as buying 100 shares. Except that this time, if the share price hits $25 at expiration, each contract is now worth $500, and you now have $5000, for a $3000 gain, or a 150% profit. You could even have bought an OTM call with a strike of $22.50 for a lower premium and an even higher profit. But it is fairly obvious that this method of buying calls is a good way to lose money quickly. When you own shares, the price goes up and down, but as long as the company does not get bankrupt or never recovers, you will always have your shares. Sometimes you just have to be very patient for the shares to come back (buying an index ETF increases your chances there). But by buying $2000 worth of calls, if you are wrong on the direction, the amplitude, or the time, those options become worthless, and it’s a 100% loss, which rarely happens when you buy shares. Now, you could buy only one contract for $200. Except for the premium that you paid, you would have a similar profit curve as buying the shares outright. You have the advantage though that if the stock price dropped to $15, instead of losing $500 by owning the shares, you would only lose the $200 you paid for the premium. However, if you lose these $200 the first month, what about the next month? Are you going to bet $200 again, and again… You can see that buying calls outright is not scalable long term. You need a very strong conviction over a specific period of time. How to buy cheaper shares? Sell Cash Covered Put. Let’s continue on the example above with the company ABC trading at $20. You may think that it is a bit expensive, and you consider that $18 is a more acceptable price for you to own that company. You could sell a put ATM with a $20 strike, for $2. Your break-even point would be $18, i.e. you would start losing money if the share price dropped below $18. But also remember that if you did buy the shares outright, you would have lost more money in case of a price drop, because you did not get a premium to offset that loss. If the price stays above $20, your return for the month will be 11% ($200 / $1800). Note that in this example, we picked the ATM strike of $20, but you could have picked a lower strike for your short put, like an OTM strike of $17.50. Sure, the premium would be lower, maybe $1 per share, but your break-even point would drop from $18 to $16.50 (only 6% return then per month, not too shabby). The option trade will usually be written like this: SELL -1 ABC 100 17 JUL 20 17.5 PUT @ 1.00 This means we sold 1 PUT on ABC, 100 shares per contract, the expiration date is July 17, 2020, and the strike is $17.5, and we sold it for $1 per share (so $100 credit minus fees). With your $20 short put, you will get assigned the shares if the price drops below $20 and you keep it until expiration, however, you will have paid them the equivalent of $18 each (we’ll actually talk more about the assignment later). If your short put expires worthless, you keep the premium, and you may decide to redo the same trade again. The share price may have gone up so much that the new ATM strike does not make you comfortable, and that’s fine as you were not willing to spend more than $18 per share, to begin with, anyway. You will have to wait for some better conditions. This strategy is called a cash covered put. In a taxable account, depending on your broker, you can have it on margin with no cash needed (you will need to have some other positions to provide the buying power). Beware that if you don’t have the cash to cover the shares, it is adding some leverage to your overall position. Make sure you account for all your potential risks at all times. The nice thing about this position is that as long as you are not assigned, you don’t actually need to borrow some money, it won’t cost you anything. In an IRA account, you will need to have the cash available for the assignment (remember in this example, you only need $1800, plus trading fees). Let’s roll! Now one month later, the share price is between $18 and $22, there are few days of expiration left, and you don’t want to be assigned, but you want to continue the same process for next month. You could close the current position, and reopen a new short put, or you could in one single transaction buy back your current short put, and sell another put for next month. Doing one trade instead of two is usually cheaper because you reduce the slippage cost. The closing of the old position and re-opening of a new short position for the next expiration is called rolling the short option (from month to month, but you can also do this with weekly options). The croll can be done a week or even a few days before expiration. Remember to avoid expiration days, and be careful being short an option on ex-dividend dates. When you roll month to month with the same strike, for most cases, you will get some money out of it. However, the farther your strike is from the current share price, the less additional premium you will get (due to the lower extrinsic value on the new option), and it can end up being close to $0. At that point, given the risk incurred, you may prefer to close the trade altogether or just be assigned. During the roll, depending on if the share price moved a bit, you can adjust the roll up or down. For example, you buy back your short put at $18, and you sell a new short put at $17 or $19, or whatever value makes the most sense. Assignment Now, let’s say that the share price finally dropped below $20, and you decided not to roll, or it dropped so much that the roll would not make sense. You ended up getting your shares assigned at a strike price of $18 per share. Note that the assigned share may have a current price much lower than $18 though. If that’s the case, remember that you earned more money than if you bought the shares outright at $20 (at least, you got to keep the $2 premium). And if you rolled multiple times, every premium that you got is additional money in your account. Want to sell at a premium? Sell Covered Calls. You could decide to hold onto the shares that you got at a discount, or you may decide that the stock price is going to go sideways, and you are fine collecting more theta. For example, you could sell a call at a strike of $20, for example for $1 (as it is OTM now given the stock price dropped). SELL -1 ABC 100 17 JUL 20 20 CALL @ 1.00 When close to the expiration time, you can either roll your calls again, the same way that you rolled your puts, as much as you can, or just get assigned if the share price went up. As you get assigned, your shares are called away, and you receive $2000 from the 100 shares at $20 each. Except that you accumulated more money due to all the premiums you got along the way. This sequence of the short put, roll, roll, roll, assignment, the short call, roll, roll, roll, is called the wheel. It is a great strategy to use when the market is trading sideways and volatility is high (like currently). It is a low-risk trade provided that the share you pick is not a risky one (pick a market ETF to start) perfect to get create some income with options. There are two drawbacks though:
If the share dropped too much, you are stuck with it.
You will have to be patient for the share to go back up, but often you can end up with many shares at a loss if the market has been tanking. As a rule of thumb, if I get assigned, I never ever sell a call below my assignment strike minus the premium. In case the market jumps back up, I can get back to my original position, with an additional premium on the way. Market and shares can drop like a stone and bounce back up very quickly (you remember this March and April?), and you really don’t want to lock a loss. Here is a very quick example of something to not do: Assigned at $18, current price is $15, sell a call at $16 for $1, share goes back up to $22. I get assigned at $16. In summary, I bought a share at $18, and sold it at $17 ($16 + $1 premium), I lost $1 between the two assignments. That’s bad.
If the share goes up too fast, you missed some opportunity for gain, potentially big gains.
You will have to find some other companies to do the wheel on. If it softens the blow a bit, your retirement account may be purely long, so you’ll not have totally missed the upside anyway. A short put is a bullish position. A short call is a bearish position. Alternating between the two gives you a strategy looking for a reversion to the mean. Both of these positions are positive theta, and negative vega (see part 2). Now that I explained the advantage of the long calls and puts, and how to use short calls and puts, we can explore a combination of both. Verticals Most option beginners are going to use long calls (or even puts). They are going to gain some money here and there, but for most parts, they will lose money. It is worse if they profited a bit at the beginning, they became confident, bet a bigger amount, and ended up losing a lot. They either buy too much (50% of my account on this call trade that can’t fail), too high of a volatility (got to buy those NKLA calls or puts), or too short / too long of an expiration (I don’t want to lose theta, or I overspent on theta). As we discussed earlier, a straight long call or put is one of the worst positions to be in. You are significantly negative theta and positive vega. But if you take a step back, you will realize that not accounting for the premium, buying a call gives you the upside of stock up to the infinity (and buying a put gives you the upside of the stock going to $0). But in reality, you rarely are betting that the stock will go to infinity (or to $0). You are often just betting that the stock will go up (or down) by X%. Although the stock could go up (or down) by more than X%, you intuitively understand that there is a smaller chance for this to happen. Options are giving you leverage already, you don’t need to target even more gain. More importantly, you probably should not pay for a profit/risk profile that you don’t think is going to happen. Enter verticals. It is a combination of long and short calls (or puts). Say, the company ABC trades at $20, you want to take a bullish position, and the ATM call is $2. You probably would be happy if the stock reaches $25, and you don’t think that it will go much higher than that. You can buy a $20 call for $2, and sell a $25 call for $0.65. You will get the upside from $20 to $25, and you let someone else take the $25 to infinity range (highly improbable). The cost is $1.35 per share ($2.00 - $0.65). BUY +1 VERTICAL ABC 100 17 JUL 20 20/25 CALL @ 1.35 This position is interesting for multiple reasons. First, you still get the most probable range for profitability ($20 to $25). Your cost is $1.35 so 33% cheaper than the long call, and your max profit is $5 - $1.35 = $3.65. So your max gain is 270% of the risked amount, and this is for only a 25% increase in the stock price. This is really good already. You reduced your dependency on theta and vega, because the short side of the vertical is reducing your long side’s. You let someone else pay for it. Another advantage is that it limits your max profit, and it is not a bad thing. Why is it a good thing? Because it is too easy to be greedy and always wanting and hoping for more profit. The share reached $25. What about $30? It reached $30, what about $35? Dang it dropped back to $20, I should have sold everything at the top, now my call expires worthless. But with a vertical, you know the max gain, and you paid a premium for an exact profit/risk profile. As soon as you enter the vertical, you could enter a close order at 90% of the max value (buy at $1.35, sell at $4.50), good till to cancel, and you hope that the trade will eventually be executed. It can only hit 100% profit at expiration, so you have to target a bit less to get out as soon as you can once you have a good enough profit. This way you lock your profit, and you have no risk anymore in case the market drops afterwards. These verticals (also called spreads) can be bullish or bearish and constructed as debit (you pay some money) or credit (you get paid some money). The debit or credit versions are equivalent, the credit version has a bit of a higher chance to get assigned sooner, but as long as you check the extrinsic value, ex-dividend date, and are not too deep ITM you will be fine. I personally prefer getting paid some money, I like having a bigger balance and never have to pay for margin. :) Here are the 4 trades for a $20 share price: CALL BUY 20 ATM / SELL 25 OTM - Bullish spread - Debit CALL BUY 25 OTM / SELL 20 ATM - Bearish spread - Credit PUT BUY 20 ATM / SELL 25 ITM - Bullish spread - Credit PUT BUY 25 ITM / SELL 20 ATM - Bearish spread - Debit Because both bullish trades are equivalent, you will notice that they both have the same profit/risk profile (despite having different debit and credit prices due to the OTM/ITM differences). Same for the bearish trades. Remember that the cost of an ITM option is greater than ATM, which in turn is greater than an OTM. And that relationship is what makes a vertical a credit or a debit. I understand that it can be a lot to take in. Let’s take a step back here. I picked a $20/$25 vertical, but with the share price at $20, I could have a similar $5 spread with $15/$20 (with the same 4 constructs). Or instead of 1 vertical $20/$25, I could have bought 5 verticals $20/$21. This is a $5 range as well, except that it has a higher probability for the share to be above $21. However, it also means that the spread will be more expensive (you’ll have to play with your broker tool to understand this better), and it also increases the trading fees and potentially overall slippage, as you have 5 times more contracts. Or you could even decide to pick OTM $25/$30, which would be even cheaper. In this case, you don’t need the share to reach $30 to get a lot of profit. The contracts will be much cheaper (for example, like $0.40 per share), and if the share price goes up to $25 quickly long before expiration, the vertical could be worth $1.00, and you would have 150% of profit without the share having to reach $30. If you decide to trade these verticals the first few times, look a lot at the numbers before you trade to make sure you are not making a mistake. With a debit vertical, the most you can lose per contract is the premium you paid. With a credit vertical, the most you can lose is the difference between your strikes, minus the premium you received. One last but important note about verticals: If your short side is too deep ITM, you may be assigned. It happens. If you bought some vertical with a high strike value, for example: SELL +20 VERTICAL SPY 100 17 JUL 20 350/351 PUT @ 0.95 Here, not accounting for trading fees and slippage, you paid $0.95 per share for 20 contracts that will be worth $1 per share if SPY is less than $350 by mid-July, which is pretty certain. That’s a 5% return in 4 weeks (in reality, the trading fees are going to reduce most of that). Your actual risk on this trade is $1900 (20 contracts * 100 shares * $0.95) plus trading fees. That’s a small trade, however the underlying instrument you are controlling is much more than that. Let’s see this in more detail: You enter the trade with a $1900 potential max loss, and you get assigned on the short put side (strike of $350) after a few weeks. Someone paid expensive puts and exercised 20 puts with a strike of $350 on their existing SPY shares (2000 of them, 20 contracts * 100 shares). You will suddenly receive 2000 shares on your account, that you paid $350 each. Thus your balance is going to show -$700,000 (you have 2000 shares to balance that). If that happens to you: DON’T PANIC. BREATHE. YOU ARE FINE. You owe $700k to your broker, but you have roughly the same amount in shares anyway. You are STILL protected by your long $351 puts. If the share price goes up by $1, you gain $2000 from the shares, but your long $351 put will lose $2000. Nothing changed. If the share price goes down by $1, you lose $2000 from the shares, but your long $350 put will gain $2000. Nothing changed. Just close your position nicely by selling your shares first, and just after selling your puts. Some brokers can do that in one single trade (put based covered stock). Don’t let the panic set in. Remember that you are hedged. Don’t forget about the slippage, don’t let the market makers take advantage of your panic. Worst case scenario, if you use a quality broker with good customer service, call them, and they will close your position for you, especially if this happens in an IRA. The reason I am insisting so much on this is because of last week’s event. Yes, the RH platform may have shown incorrect numbers for a while, but before you trade options you need to understand the various edge cases. Again if this happens to you, don’t panic, breathe, and please be safe. This concludes my post 3a. We talked about the trade-offs between buying shares, buying calls instead, selling puts to get some premium to buy some shares at a cheaper price, rolling your short puts, getting your puts assigned, selling calls to get some additional money in sideways markets, rolling your short calls, having your calls assigned too. We talked about the wheel, being this whole sequence spanning multiple months. After that, we discussed the concept of verticals, with bullish and bearish spreads that can be either built as a debit or a credit. And if there is one thing you need to learn from this, avoid buying straight calls or puts but use verticals instead, especially if the volatility is very high. And do not ever sell naked calls, again use verticals. The next post will explain more advanced and interesting option strategies. --- Post 1: Basics: CALL, PUT, exercise, ITM, ATM, OTM Post 2: Basics: Buying and Selling, the greeks Post 3a: Simple Strategies Post 3b: Advanced Strategies Post 4a: Example of trades (short puts, covered calls, and verticals) Post 4b: Example of trades (calendars and hedges)
My experience so far with the new 2020 Spectre x360 (Max config, OLED)
So since I've finally got my new Spectre x360 in (I powered through and stuck with the delays on HP's site, lots of folks on here got me worried about quality issues with Best Buy/MS models, plus the exact config I wanted wasn't available), I figured I'd make a post about all the things I love about it!
So the specs I got specifically are:
4K OLED Display
Intel Core i7-10750H, 6 core (12 thread) 5Ghz
NVIDIA GTX 1650 Ti (4 GB)
256GB NVMe SSD
Further, I'd also like to clarify that in the end, HP's site was indeed wrong about the Thunderbolt ports! I was worried that there would only be one Thunderbolt and one USB-C on the US model (unlike other models), but it turns out that the eb0000 does indeed have TWO Thunderbolt ports! A number of people were also wondering about the RAM speed. I downloaded CPU-Z to check. Not sure what I'm looking for exactly, but NB Frequency hovers around 3200 MHz at idle, so I'm guessing that means it's 3200 MHz RAM? It peaks up to like 3900 MHz though. (The SPD tab is blank.)
Now you may be thinking to yourself... "Why on earth did he buy the max specs but go for the smallest 256GB SSD?" Well, I'll tell you why... It's called a Samsung 970 Evo Plus 1TB! This is pretty much regarded as the absolute fastest SSD on the market, even trading blows with some of Intel's PCIe offerings! Now that's impressive. On CrystalDiskMark, I previously got around 3110/1430 MB/s (Seq Read/Write), while I'm now getting 3560/3290 MB/s. Plus that performance should be more sustained thanks to a larger cache. Nice! However, as you can see, the SSD that was in the machine previously actually isn't too terrible on paper (I expected worse), though the thing is, that doesn't tell the whole story. There was definitely some noticeable stuttering/waiting for disk access in practice when using the PC for regular tasks, ex. opening and working on large PSD files.
Long story short, my advice is 100% install a fresh copy of Windows. This alone sped up my PC like double and eliminated the chug that it had at first (leaving me a little concerned initially). Fortunately it seems to have been due simply to bloatware. That sheer measurable performance difference fresh Windows the absolute number 1 way to speed up your PC, in my eyes. The SSD swap by comparison (I installed fresh Windows twice, on both SSDs, for testing purposes), did speed up my computer by a noticeable margin, and eliminated that slight chug/overall system slowdown whenever trying to open a large file... Not something you notice that much until it's gone... But overall I'd say it was a much smaller boost in performance (especially relative to the risk of damage to the PC) than a fresh Windows install. Granted it was also a big cost saver versus the overpriced hot garbage HP will toss in there if you pick the 1TB option! Between both upgrades, my PC is now literally fully usable and logged in with Windows Hello within 8.2 seconds of pressing the power button after replacing the SSD, timed, down from 18 seconds out-of-box. Another recommendation of mine is, after installing all your software, to run msconfig.exe and switch to the services tab. This has the advantage over the regular Services app of having a "Hide all Microsoft services" checkbox. Very helpful to avoid disabling anything that you probably shouldn't have! Now just avoid anything that says Intel, NVIDIA, etc, and you should be fine to disable whatever you please! And while you probably already know this, my final tip is after installing fresh Windows, you can go to HP's support site at any time to redownload any HP utilities you think you'll actually use. Bang & Olufsen EQ will also be installed automatically by Windows Update. I find having an audio EQ pretty useful, as I like to tweak it till it's just right. Also loving the quad speakers on this PC, the sound stage is fairly expansive, and I'm not disappointed by the audio quality at all, it's not tinny at all, and fairly well balanced, in that voices are clear and easy to understand, while music also pops. Beyond that, I'm also surprisingly pleased with the pen input! Whether it be due to the digitizer or just simply having more horsepower, the pen latency feels like almost half my Surface Book! A rather significant improvement for an artist.
And finally the display... Oh yes, the display, the absolute best part of this machine! I won't lie, this was part of the reason I went with the Spectre, primarily the XPS 2-in-1... And I'm not disappointed! The OLED is absolutely stunning in person! Now you'll want to pay attention to this part, if you're getting a machine with an OLED display... The first thing I did when I got it out of the box was a gray uniformity test, then a color uniformity test. Make sure all your pixels, red, green, and blue work, and ensure that the picture is even at very low brightness levels! Do this in a dark room to make sure you don't miss anything. The second thing I did was go into display settings in Windows and set the display from 59Hz to 60Hz. I'm not sure why this is a thing that happens, but many, many laptops seem to do this and I don't know why. Just make sure it's set to true 60Hz or you could get minor screen tearing during video playback. Finally the last thing I did was an HDR test. I did post about one issue, here, but other than that, I'm fairly satisfied with the HDR, and with the display overall! It's absolutely gorgeous. As for some other things you might want to consider... Make sure to set your PC to dark mode under Personalization -> Colors. I also set my Chrome theme to black (New Tab -> Customize -> Color and Theme -> Black), and downloaded an extension that forces websites into a dark mode! I've tried a few extensions that do this, and so far I'm happiest with this one: https://chrome.google.com/webstore/detail/dark-mode/dmghijelimhndkbmpgbldicpogfkceaj
How does it game?
Surprisingly well! The thermal management in the Spectre is no joke, two fans and some nice thick vapor chamber heat pipes, plus a pretty good layout for the vents, I'd say it manages to stay cool better than most high-spec laptops I've seen/used, especially thin and sleek ones. Granted, by that I mean it barely manages to stay cool at idle, but again, that's better than most. This is hardly my first high end laptop, haha. Anyway, I may update this portion with benchmarks later on, but subjectively, I can tell you the 1650 Ti has a lot more horsepower than I was expecting! The Surface Book 2 was a total moot point as far as gaming went... Like seriously, that thing struggled to handle Minecraft Optifine at native res 60fps. This thing will run MC at a cool 4K 60 smoothly... More than that, it'll take mid-range shader packs without breaking a sweat! It's also handled a few other games I threw at it, including Far Cry 5 (4K Medium), and Tetris Effect (4K Epic with AA). I'll test soon whether or not it can handle VR, taking advantage of this newer reprojection tech that's come out... Who knows!
Keep It Cool Baby
Also, I should clarify my results here... If you expect to game on a laptop that isn't designed for it, USE AN EXTERNAL COOLING SOLUTION. The Surface Book 2 performed poorly even with one, but that was about the only exception. The Spectre's cooling is quite impressive, but even that isn't enough on it's own. Here's the solution I went with... I bought this USB fan to help cool my previous PC (a Surface Book 2 as I mentioned), which did tend to get pretty toasty (tended make my fingers sweaty while drawing, as an artist). It works great for this purpose, and having three fan speeds means it can either stay quiet or suck a ton of air. https://amazon.com/gp/product/B083TL8P4K I also tried a laptop cooling pad, but they can be a bit bulky and cumbersome, I ended up not using it much.
Intro: Bought into M1 Plus from a $60/yr Promotion 2 months ago. I had an investment account already, and even one of the first spend accounts. I had declined the offer for M1 Plus at $125/yr. This is a first review of M1 Plus after two months of use and a bit of a dive into the value of its features from a financial and user experience point of view. Value: This is a pretty simple one. Do the math. The interest vs. your other checking account multiplied by the amount of cash you’d be keeping in there for M1 Spend. If you’re borrowing from M1 too, the 1.5% difference (or whatever difference there is between M1 Borrow and your next best offer) multiplied by the amount of money you’d like to borrow. If all these add up to greater than whatever annual fee is offered, go for it. Otherwise, it’d be a very expensive metal card. But if 4 waived ATM fees go a long way to save you money, that should be worth considering too, however, there are tons of cards and products that’ll waive said fees, some even for unlimited transactions and no upfront cost. Just because M1 is offering this benefit as part of a premium package doesn’t mean it’s impossible to find for free somewhere else. XP: It is a great experience. I constantly invest lumps of $500 into my portfolio all the time. It’s quick, easy, and immediately fulfilling. Not that other brokerages don’t do this. But M1 is clearly focused on showing you your long term progress on your investment goals. It uses a money weighted return formula so that you know how much your capital has been making you to easily compare to the return of bank accounts and investments. There’s a reason their product is called “Invest” and not “Trade”, more on that later. But this means it’s primarily suited for this purpose. During the Covid crash, I took to Robinhood to place my Put Options on the S&P because high frequency derivatives trading and M1 basically speak different languages. All this to say, it feels amazing to watch your investments accounts slowly creep up as you continue to dollar cost average into the market, but this has some drawbacks. Pies. While fun and easy to build, mix and match, they are not a very common mechanic to implement on amateur portfolios. Selling stocks can be quite the process on M1, and the platform will try its darnest to discourage you from making any but the most basic adjustments to your portfolio. Its really only suited for the “set it and forget it” mindset, which is not to say you can’t mess around with your money as you please, but it’s just so perfect for investing and watching your money grow with a long time horizon. The plots will show you your progress and encourage you to keep a regular deposit schedule. But try trading into and out of a stock, or a set amount of shares, or even thinking about playing with derivatives and other financial instruments: slim pickings. The numbers make a lot of sense, too. I’ve been investing for about 5 years now, and my latest craze has been leverage. I’ve read about how the optimal leverage ratio for the S&P on average was 2.0 or 100% levered up, and looked up the historical comparisons to corroborate. Shopping around for margin accounts and available capital, it’s tough to beat the 2% rates at the moment. I’ve been slowly levering up during the latest market rally to great effect and the low interest really pumps up those numbers. Having this much cheap capital, not just for leverage, but also for life is worth more than just the time value of money. I would make the point that this is made even more valuable by having all your financial services on the same platform, as you really get to do with your money as you please and move it around to withdraw it to your hearts content. My real issue was with Spend. Not a problem with the product but myself, in trying to justify the annual fee. I weighed how much money it would make sense to keep in Spend as opposed to an online savings account. To keep cash a couple of months ago, it made more sense to opt for ally or marcus as they were offering close to 1.55% on cash. But as their rates have plummeted, getting 1.0% on a CHECKING account has been an absolute godsend in this crazy economy. This account works for just about anything with the notable exception of checks... in a checking account which I suspect is the reason for the “Spend” branding the product was marketed with. When it’s hard to even find 1% on a savings account, a 1% APY on checking is no-worries approach to cash investment. Ultimately, having all of these balances displayed together on the Transfers tab is huge in terms of consumer experience. This, however, should not be a replacement for true “Dashboard” that could show an overview of all your money moves and account balances. Ideas: M1 Trade. Admittedly, I do see how this can be very contrary to the philosophy, product and experience that M1 has worked to create. That being said, thinking that your customer will always prefer to have their money invested into automatically allocated pies is a little short-sighted. Opening a much more DIY Trading product on M1 would of course have them incur tons of costs in handling and verifying transactions of all the individual financial, but many places already offer such services for free, some are even profitable at it. An M1 Trade product would also need integrating the Invest product because regardless of what you’re doing on the platform, you still consider your money your investments and want to see it all together. Pies and individual Buys would have to play nice together, and that does sound like a difficult endeavor. I keep a couple of accounts with different mixtures of my pies for all my purposes. I also handle the investments for a few of my family members, which will become relevant shortly. You can obviously set up as many accounts as you wish and move money into them as you desire, but this can get you into some warmer water. If two of your pies hold most the same securities and you just want to have a different pie for a different account, you’ll have to call up to pause trading so that your pies have a chance to get to know each other and not force you to sell and buy right back into the same assets just to incur the taxes. It’s a bit of a hassle, and I would argue, on purpose. For Pies themselves, I often find myself wanting to make small tweaks to pies but then quickly let it go as removing slices would automatically trigger a massive sell off that incurs taxes. From a conversation with tech support, I gathered that the best way to do this was simply pause trading on your account, and change the pie you want all your money to go into. Editing pies is fine and easy, but completely swapping a pie for another one led me to believe that it would sell put of all my holdings even if the old and new pie had many of those same holdings. If this is me being stupid, good, if it’s a gap in features, I hope M1 lets you simply swap a pie for any other and gives you the option either sell everything, sell only what is 0 in the second pie, or sell nothing and simply continue aiming for the allocation of the new pie without touching your previous investments. Lastly, an iPad app. I’m a big fan of the iPad and the iPad Pro in particular. I’ve found myself using it far more than my laptop which is now strictly reserved for long work sessions (I write and edit for a YouTube Channel) and watching content in groups of people (15” MBP Speakers are the stuff of legend). But for anything else, I subconsciously grab the iPad. It’s annoying to have the website be the best M1 experience on the iPad. I understand that making a compelling iPad investing app is its own mountain to climb, but a lot of the Mobile app’s functionality can be ported over without too much of a hassle. Charles Schwab has an iPad app based 99% on the iPhone app that still performs all the same functions, just on the bigger screen, which is the whole point of the iPad in the first place. While it’s not a top shelf iPad app (there are only a select few) the Schwab app is lovely and I’m begging M1 for anything that doesn’t force me to use my iPad in portrait mode to use a blown up iPhone app. Again, this app doesn’t have to be a world beater, just a decent looking and bigger version of the iPhone app that would go a long way to boost the M1 customer experience. Closing Remarks: Obligatory YMMV disclosure: it’s about the math, I won’t bore you with my own, but I was just over the line when it made sense for me to opt into the $60/yr promo. That being said, M1’s value has been a lot about the experience. The future of finance is free. No brokerage should be making money on transaction commissions or administrative fees, it’s a relic from the before times when you needed people who knew people on wall street to do your trading. At this point its not even worth any perceived convenience. The clever ones reading this will point out that, while true, many brokerages already offer a wide variety of free services. Many of them, even, that M1 doesn’t offer. The true spirit of this review is to express my personal opinion on the value of M1 Plus and how the customer experience is its edge in the ebrokerage market. Rates are competitive, but it is a brand new way to consider finance and its role in your life and society. TL;DR Spend is pretty competitive for a checking account, and as long as you’re not using checks too often, its a no brainer for anyone with close to $10,000 in cash just sitting somewhere. Invest is beautiful, but the free version is exactly as good, more windows means very little with the limited trading you’re allowed to do anyway. Borrow is brilliant, hella flexible and competitive rates. 8/10 Would recommend to a friend.
They say there are two types of traders - investors and speculators - and if you’re not in it for the long haul, you’re basically gambling. After a little over four months on Robinhood, I don’t know that I agree fully with that statement, but I can say that the last two months have definitely felt like playing craps, where the market rolled Teslas and Amazons over and over before finally hitting a seven and resetting the board. The volatility in the market has been insane, but within that chaos is also a path forwards. And for me, that way was forged by using spreads, first credit spreads, and now almost solely debit spreads. But what are spreads, you might ask? To answer, first we need to understand options. In the simplest terms, an option is a contract that says, “I want the ability to do something with this stock by this date.” The “do something” part can consist of buying at a certain price (known as a “call”) or selling at a certain price (known as a “put”). The terms call and put are simply to allow people to distinguish between buying and selling the overlying option. Otherwise, you’d have to say things like, “I’d like to buy a buy of Microsoft” and people would think you’re stuttering. The price that you’re buying or selling the underlying stock is called the “strike”, and the payment that comes from buying or selling the option itself is called the “premium”. And finally, all options are sold in a contract for 100 shares, so whenever you see the price for an option, you’ll have to remember to multiply it by 100 to see the amount you’re paying or getting. So, with this knowledge, something like this: I bought AMZN 7/17 3120C for 7.6K becomes something like this: “I bought an option of Amazon, with an expiration date of 7/17/2020, which allows me to buy 100 shares at $3,120 each, and I paid $7,600 for this ability”. So, that’s what an option is. And options can be bought or sold just like a normal stock, but unlike normal stocks, they can also be opened or closed. Opening and closing options is a far riskier endeavor, and requires Level 3 Options in Robinhood, which you can only get after having made a large enough number of options trade. When you open an option, you’re writing the option that others can then buy or sell, and there are responsibilities and requirements that come along with it. For starters, you have to have collateral, which is to say, you need to have enough cash on hand to cover the entire loss of the option. This is because Robinhood does not allow uncollateralized (otherwise known as uncovered or naked) trades. Secondly, because you’re the one writing the contract for someone else to then buy or sell, the option binds you far more than buying or selling an option normally would, because again, Robinhood treats you as the banker for that option. But you can get around part of these requirements by doing a credit or debit spread, which gets us into spreads. Spreads are when you both buy AND open an option for the same underlying stock, usually at the same expiration date, and almost always for different strike prices. When you do this, you’re in effect hedging your bets, removing risk (and profit) from the equation. There are two main types of spreads - credit spreads and debit spreads - and judicious use allows you to profit from any direction in the stock market. I will go into detail on each of them below. Credit Spreads Credit spreads are made using either a pair of calls or puts. In both cases, the goal is to open an option at a specific strike price, and then buy the option at the next cheapest strike price. For calls, this will be the next-highest strike, and puts will be the next-lowest strike. Done correctly, this creates a net credit on your account, hence the term “credit spread”. This credit is the maximum profit one can attain from this position, while the maximum risk is equal to the difference in the strike prices (which Robinhood will hold as collateral). The breakeven point will be the sold strike price minus the credit you received when you opened the position. Put credit spreads are best used when you have a neutral to positive outlook on a company’s stock, while call credit spreads are used when you have a negative to neutral opinion. If you do both, you’ve created an iron condor, which is a more advanced strategy that can increase your profits, and even sometimes help mitigate a losing trade (when you know what you’re doing). Credit spreads can be risky because the maximum risk is almost always more than the profit margin, but placing the spread well outside of the money can mitigate some of that risk. Debit Spreads Debit spreads are basically the inverse of credit spreads. They are made by opening an option at a specific strike price, and then buying the next-lowest strike (for calls) or next-highest strike (for puts). This will create a debit that you will have to pay to open the position, but in exchange, your maximum risk is capped at the debit you pay. The max profit is the difference between the strikes minus the amount you paid to open the position, and the breakeven point will be the sum of the lower-priced strike plus the amount you paid. Debit spreads are more directional, so a call debit spread works best when you expect the price to go up, and put debit spreads work best when the stock price goes down. You can make a neutral position debit spread, but you will need to place both strikes well in the money (usually at a significant premium for a very small profit), making the overall position very risky. And those are the two main types of spreads. Iron condors and butterflies are just combinations of credit and debit spreads, while the other trading strategies (like strangles and straddles) are really just buying a combination of options.
How to not get ruined with Options - Part 3b of 4 - Advanced Strategies
Post 1: Basics: CALL, PUT, exercise, ITM, ATM, OTM Post 2: Basics: Buying and Selling, the greeks Post 3a: Simple Strategies Post 3b: Advanced Strategies Post 4a: Example of trades (short puts, covered calls, and verticals) Post 4b: Example of trades (calendars and hedges) --- In the previous post 3a, I explained simple strategies like cash covered put, rolling, selling covered calls, and bullish and bearish spreads (also called verticals). Now let’s do some more advanced strategies, they can be quite interesting. First, let’s quickly introduce the concept of a leg in options. It simply describes a specific combination of expiration / strike / call or put, said differently it groups the same options contract together. A long call or put is a single leg, whether you have 1 contract or 20, it has one kind of contract. A cash covered put, or a covered call have also a single leg. A vertical has 2 legs, one for the short strike, one for the long strike. It used to be that the trading fees were different depending on how many legs you had in your position, like a fixed price per leg plus the number of contracts, or $15 for exercise or assignment per leg regardless of how many contracts. In the past couple of years, the trading fees dropped quite a bit, so it does not seem to be happening anymore, but some brokers may still do that. Calendars A calendar is a 2 leg position. Both legs have the same strike, but they have different expiration dates. The closest expiration is a short position, the farthest position is a long position. It can be constructed with both calls and puts, and will have roughly the same cost either way. But if your strike is far from ATM, you should pick the variant that is OTM to avoid assignment on your short position. Here is how a calendar looks like: SELL -1 ABC 100 17 JUL 20 17.5 CALL @ 1.00 BUY +1 ABC 100 17 AUG 20 17.5 CALL @ 1.50 2 legs, both calls, strike of $17.50, you are shorting the July 17 contract, and long the August 20. Because Aug 20 is farther, it costs more than the July 17 contract. Total cost of that position is $50 per contract (($1.50 - $1.00) * 100 shares). This is your maximum risk. Despite having one short position, your long position has the same strike, and will be worth always more. Both values will move in tandem. This will be the case for both calls and puts. If your short position becomes somehow assigned because it is deep ITM, your long position will protect you, with a bit more extrinsic value. Why would you take this position? As time passes, the short position will lose theta much faster than your long position. At the first expiration date (the one from your short position), if that’s OTM, then that short position expires worthless, and you are left with just a long position with extrinsic that now you can sell. If the share price and volatility stays the same, the short leg will go from $1.00 to $0, the long leg will go from $1.50 to $1.00. You paid $50 per position, you got $100, i.e. 100% profit in a month. This position is positive theta and positive vega. You will benefit if the volatility increases (both legs will have their extrinsic values increase). However, if the volatility crashes, you may not make money, or even lose some. The long leg could drop from $1.50 to $0.50. You paid $50, you got $50. No gain. Worse, this position works best when the share is around the strike you picked. If the share moves up or down significantly, you’ll lose money (potentially your full $50). The profit curve looks like a gaussian curve, with the top at your strike price. This position excels in two cases though:
The short leg volatility is significantly higher than the long leg volatility. I will show in Part 4 how I took advantage of that.
You want to buy some black swan event protection. You buy a deep OTM put calendar, because it is a very low probability event it will be very cheap, much cheaper than buying a straight put or bear spread. As the market drops, the share price is getting closer to your strike, so your calendar will naturally increase in value, and a market drop also means a significant volatility increase, so the calendar will go up in value even more. You will have to play with the numbers a bit to see if it makes sense. You will lose small sums every month that the market does not drop, though.
And did you notice that when you rolled your short puts or covered calls from month to month with the same strike, your trade was the same as selling a calendar? Talking about rolls, you can also buy a much longer-term long position (like 6 months away, or even a year), and roll your short position each month, bringing you an additional premium. If the market complies, you can pay your 6 months options in 2-3 iterations of your monthly short, and maximize your profit. Diagonals Diagonals are a mix of calendars and verticals. You have a short position in the front month, and a long position in the back month while having 2 different strikes. Here is how a diagonal looks like: SELL -1 ABC 100 17 JUL 20 15.0 CALL @ 1.00 BUY +1 ABC 100 17 AUG 20 17.5 CALL @ 1.10 Diagonals can be tricky to set up, and you will have to play with the numbers a bit. It allows you to have a calendar-like position (but not exactly the same, the peak and profit/risk profile are different) at a lower cost. Notice in the example that the short position has a strike of $15, and the long position has a strike of $17.50. We pick these in a way that the cost of the short position is roughly the same as the cost of the long position (long position is farther so higher cost, but we pick a higher strike to lower its overall cost). Total cost is $0.10 per leg ($1.10 - $1.10). With this position, you will lose up to $250 in the worst-case scenario if the price shoots up (as both extrinsic values will go towards $0, and you will be left to pay for the strike difference between $15 and $17.50 - The extrinsic value of the short call will drop much faster than the long call though, so a $250 loss may not happen in practice). If the price in the short expiration is a bit below $15, you may earn $50 to $100 with the leftover extrinsic value of the long call. Diagonals are usually positive theta, and vega neutral. Unlike for calendars, in general, the volatility change will not make a big difference in the position. Something to note: When you roll your short puts, covered calls, or even calendars with a different strike, you are actually selling a diagonal. Synthetic Share Now let’s talk about a quite simple position, a synthetic share. Did you notice that if you buy a call, and sell a short, you will have the same profit/risk as if you bought the shares? ABC is trading at $33.05, here is a 2 leg version of a share with options: SELL -1 ABC 100 17 JUL 20 33.0 PUT @ 1.80 BUY +1 ABC 100 17 JUL 20 33.0 CALL @ 1.85 Cost of this position is around $0.05 per share. If the share is at $40 by expiration, you will earn $7 per share (minus $0.05). If the share is at $20 by expiration, you will lose $13 per share (plus $0.05). The exact same way as if you bought the share at $33.05. Magic. And you can pick a strike of $20 instead, that you will pay $13.05 or so. Why? Because your call has $13.05 of intrinsic value, and you pay for that. The extrinsic value of the call is paid by the extrinsic value of the short put. Same if you pick a $40 strike, you will get a $6.95 credit. The market is quite efficient, and this holds pretty much true on all strikes, and both calls and puts. They all get repriced automatically as the share price changes and the extrinsic of the call will match the extrinsic of the put at the same price. Think of it this way, if there were some inefficiencies, someone would automate the arbitrage to profit from it. And they do. The same way market makers arbitrage ETF price with its holdings so they are close in sync, they will arbitrage options. Something important to note is that the cost of this synthetic share will take into account the cost of money (close to zero these days) and the dividend. So no free lunch by buying the share, and selling a synthetic share to pocket the dividend with no risk. :) Given that formula that we just discovered: 1 share = 1 call - 1 put You will notice that: 1 call = 1 share + 1 put On the way up, this moves the same way as a call (due to the long share) Lose theta like a call (due to the long put) On the way down, it cannot lose more than the premium (due to the put offsetting the long share). And this: 1 put = 1 call - 1 share On the way down, this moves the same way as a put (due to the short share) Lose theta like a put (due to the long call) On the way up, it cannot lose more than the premium (with long call offsetting the short share) So when you buy a call, the market makers will do the opposite side of the trade and will hedge in a way that they have no risk. The MM will buy / sell shares/calls/puts as needed, arbitrage constantly, earn money on the slippage between the bid and the ask, and each of their trades will partially cancel each other, so at the end of the day, they have little to no risk, nor even a position. Now that we deconstructed a share with puts and calls, you could build a trade like this: SELL -1 ABC 100 17 JUL 20 26.0 PUT @ 0.60 BUY +1 ABC 100 17 JUL 20 40.0 CALL @ 0.60 This is a bullish position. Theta and volatility neutral. You will lose money only if the share price drops below $26 by expiration, you will get assigned the share if you don’t sell before. It won’t move 1:1 with the share price though, but depending on the range you pick, you can still make some good profit with a lower risk. Note that despite the value being correlated with the share price before expiration, it won’t be 1:1 especially if the strike difference is big, and both are OTM. So if you look at this synthetic share, you should realize by now that you don’t need cash to profit from a share price going up. As long as you are not assigned, no need for margin anymore. You can even do this trade with additional credit, at a greater risk for assignment though. Collars A collar is the opposite of a synthetic share: BUY +1 ABC 100 17 JUL 20 26.0 PUT @ 0.60 SELL -1 ABC 100 17 JUL 20 40.0 CALL @ 0.60 It is used to protect against the drop of your existing shares (through the put), and the protection is paid by selling the covered calls against your shares. Years ago, company execs would build collars on their existing, or soon to be vested, stock options and RSUs so they would have a steady income with little risk. Nowadays, most companies’ policies prevent you from trading options with company shares. Straddle and Strangle A straddle is buying a call and a put at the same strike and expiration. BUY +1 ABC 100 17 JUL 20 33.0 PUT @ 1.80 BUY +1 ABC 100 17 JUL 20 33.0 CALL @ 1.85 The idea is to profit from the movement in the share price. It is theta negative and vega positive (both due to the double long). The hope is that the stock will move faster in one direction than the theta loss. This position is regularly used by gamma scalpers and they will go in and out and adjust as the stock moves. The strike is usually around the ATM strike, to reduce the intrinsic value that you may waste as the stock moves. A strangle is similar except that the strikes are not the same between the call and the put. BUY +1 ABC 100 17 JUL 20 26.0 PUT @ 0.60 BUY +1 ABC 100 17 JUL 20 40.0 CALL @ 0.60 Because you use OTM strikes, the cost is cheaper, with less sensitivity to theta and vega. Depending on the strikes you pick, you can also have a bullish or bearish bias in your position. If the volatility is very high, and you like to yolo, you can actually build a short straddle or strangle. You expect that the share price will not move more than the implied volatility and that the double theta will provide a good income. Because only one of the legs will be at risk if the share moved up or down at expiration, you improved your profit/risk profile because you got a double premium. However, you are also exposing yourself to two risks. Don’t do it, unless you are looking forward to being ruined. It will work until it won’t, and you will blow up your account. Also, straddles and strangles have a special tax treatment, another reason to avoid them. Iron Condors and Butterflies I am going to add two last strategies, mostly for completeness. I played with Iron Condors in the past. I used to say “I could get a 5% return pretty much every month”, and that is true (although with the current volatility that would be more like 7-10%). However, my next sentence was “But once in a while, I would lose most of it.” That part is also true. :) It is built with 2 credit spreads, one bullish, one bearish, both OTM: BUY +1 SPY 100 17 JUL 20 245 PUT SELL -1 SPY 100 17 JUL 20 250 PUT SELL -1 SPY 100 17 JUL 20 330 CALL BUY +1 SPY 100 17 JUL 20 335 CALL This position can be sold today for $0.32 per share with a $4.68 risk. As long as by expiration the share price is between $250 and $330, you would keep the premium, so around 7% (minus trade fees) for 3 weeks, so around 120% annualized profit. It is a bit more advantageous right now because the volatility is quite high, and we kind of have some bounds between the top and the bottom of these 6 last months, but you can still blow up the trade, and lose everything. If you did an Iron Condor in February for a March expiration, you would have incurred the maximum loss. This can be a very stressful position, as the market goes up and down constantly. As it gets closer to the edges, the Iron Condor gets more expensive. Then what do you do? Do you buy it back? Do you hope it gets back to the middle? If it passes the edges, do you buy it back at 50% loss? But what if you close, and the market reverses suddenly and you would have been in the green if you kept the position? Very stressful. Avoid. :) However, if the market goes up on and on, you may want to build a far OTM bearish spread (thinking that the market could revert to the mean). Then when the market drops back and continues dropping, again and again, you could build a far OTM bullish spread. You would end up with an iron condor with a much better profit/risk profile than if you built it on a given day. This situation happens rarely though. Remember, as indicated in part 3a, to close the side of the spread that reached 90+% profit. No need to keep some risk there for a few more dollars of profit. A butterfly has a similar behavior as an Iron Condor but expects even less movement: BUY +1 SPY 100 17 JUL 20 300 PUT SELL -2 SPY 100 17 JUL 20 310 PUT BUY +1 SPY 100 17 JUL 20 320 PUT This can be built with PUT and CALL, it can be extremely profitable if the stock ends in your middle strike by expiration. But it won’t, and you will probably lose your money. :) The names of Condor and Butterfly are after the shape of their profit curve for the long version that (very) loosely looks like a condor and a butterfly. :) Again, they are fun for shit and giggles, but can be very stressful. Just don’t do it. You have been warned. The next post will explain the various trades I made recently using these strategies, and taking advantage of this very volatile market. --- Post 1: Basics: CALL, PUT, exercise, ITM, ATM, OTM Post 2: Basics: Buying and Selling, the greeks Post 3a: Simple Strategies Post 3b: Advanced Strategies Post 4a: Example of trades (short puts, covered calls, and verticals) Post 4b: Example of trades (calendars and hedges)
Due Diligence: Toromont Industries Ltd. - Building Together For An Exciting Future
Hi, This is my first attempt at writing a DD report. I hope it makes sense. Just a few cautionary words:
Grammar (and English in general) is not a skill of mine. There will be a few parts that you might have to decipher, good luck.
I tried not to provide too much commentary and stick to the facts. I know you are spending your valuable time reading this and you probably don't want to listen to some random guy on the internet pontificate.
For those of you who are easily offended/triggered, can't take a joke, or sarcasm isn't your taste, DO NOT click the spoilers.
Lastly, the following is just my findings, by no means is it a representation of all the information out there. It is just the baseline for me to have confidence in becoming an owner of the Company. Do your own due diligence or talk to a financial advisor to find what is best for you and your financial situation. Happy reading!
Over the last 5 years the stock price has more than doubled.
Toromont dominates market share over everything east of Manitoba in Canada.
Customer base is heavily diversified, giving the Company many opportunities to expand into multiple industries.
Dividend has increased for 31 consecutive years. It has been paid for 52 consecutive years
The management team is extremely knowledgeable and have a good track record
Toromont Industries Ltd. (TSE:TIH) provides specialized equipment in Canada and the United States. The Company operates two business segments: The Equipment Group and CIMCO. The Equipment Group supplies specialized mobile equipment and industrial engines for Caterpillar Inc. (NYSE:CAT). Customers for this business segment vary from infrastructure contractors, residential and commercial contractors, mining companies, forestry companies, pulp and paper producers, general contractors, utilities, municipalities, marine companies, waste handling companies, and agricultural enterprises. CIMCO offers design, engineering, fabrication, and installation of industrial and recreational refrigeration systems. The Company was founded in 1961 and operates out of Concord, Ontario. As at December 31, 2019, Toromont employed over 6,500 people in more than 150 locations across central/eastern Canada and the upper eastern United States. The primary objective of the Company is to build shareholder value through sustainable and profitable growth, supported by a strong financial foundation.
Description of the 2 Main Business Segments
The Equipment Group includes the following 6 business units:
Toromont CAT:one of the world’s largest Caterpillar dealerships which supplies, rents, and provides product support services for specialized mobile equipment and industrial engines
Battlefield Equipment Rentals:supplies and rents specialized mobile equipment as well as specialty supplies and tools.
Toromont Material Handling:supplies, rents, and provides product support services for material handling lift trucks
AgWest:an agricultural equipment and solutions dealer representing AGCO, CLAAS and other manufacturers’ products
SITECH:provides Trimble Inc (NASDAQ:TRMB technology products and services. Trimble is a SaaS company that provides positioning, modeling, connectivity, and data analytics software which enable customers to improve productivity, quality, safety, and sustainability. Target industries: land survey, construction, agriculture, transportation, telecommunications, asset tracking, mapping, railways, utilities, mobile resource management, and government.)
Toromont Energy:supplies, constructs, and operates high efficiency power plants up to 50 MW, using Caterpillar's leading power generation technologies. Toromont Energy operates plants that supply energy to hospitals, district energy systems, and industrial processes.
Performance in this segment mainly depends on the activity in several industries: road building and other infrastructure-related activities, mining, residential and commercial construction, power generation, aggregates, waste management, steel, forestry, and agriculture.
Revenues are driven by the sale, rental, and servicing of mobile equipment for Caterpillar and other manufacturers to the industries listed above.
In addition, Toromont is the MaK engine dealer for the Eastern seaboard of the United States, from Maine to Virginia.
MaK engine is a marine diesel engine manufactured by Caterpillar
CIMCO is a market leader in the design, engineering, fabrication, installation and after-sale support of refrigeration systems
Performance in this segment is dependent on the activity in several industries: beverage and food processing, cold storage, food distribution, mining, and recreational ice rinks.
CIMCO has manufacturing facilities in Canada and the United States and sells its solutions globally.
CIMCO services the ice rinks of 23 out of 31 NHL teams. So if you are watching a game and the ice is shitty, you know who to blame… the Ice Girls, obviously.
For those of you who live in the GTA and have skated on The Barbara Ann Scott Ice Trail at College Park, the trail was created using CIMCO proprietary CO2 refrigeration technology.
CEO, Scott J. Medhurst has been with the company since 1988. He was appointed President of Toromont CAT in 2004 and he came into his current position as President and CEO in 2012. He is a graduate of Toromont’s Management Trainee Program. CFO, Mike McMillan joined the executive team in March of 2020. His predecessor, Paul Jewer is retiring this year and has been working with McMillan during the transition period. VP and COO, Michael Chuddy has been with Toromont since 1995. On average, leaders have 29 years of business experience and have served at Toromont for 19 years. Seeing long tenures, good stock performance, excellent business planning and execution is usually a sign of strong leadership. In addition, insiders hold more than 3% (~$175 million) of the company’s outstanding shares. Medhurst owns more than 170 thousand shares, Chuddy owns just under 100 thousand shares and the former CEO and current Independent Chairman of Board of Directors, Robert Ogilvie owns more than 2 million shares, making him the 4th largest stockholder. High insider ownership typically signals confidence in a company's prospects. Compare this to Toromont’s main Canadian competitor, Finning, where insiders own less than 0.4% ($12 million) of the company (this number varies depending on where you look, I just took the highest one I found). Recently insiders have been selling stock (Figure 1). I cannot speak to the reasons why insiders are selling but the remaining position owned by the insider is sizable and demonstrates that the executive still has confidence in the company. Some of the reasons insiders sell are: they don't believe in the company’s future, they need money for personal use, they are rebalancing their portfolio, among others. Figure 1: Buy and selling activity of insiders (the data is from MarketBeat, so take that for what it's worth). On a somewhat unrelated but still related note, 50% of Toromont employees are also shareholders.
Toromont has five growth strategies (expand markets, strengthen product support, broaden product offerings, invest in resources, and maintain a strong financial position). I chose to focus on the following two strategies, as they seemed most prevalent.
Toromont serves a wide variety of end markets: mining, road building, power generation, infrastructure, agriculture, and refrigeration. This allows for many opportunities for growth while staying true to their core competency. Further expansion into new markets doesn't require Toromont to build a whole new business model or learn the intricacies of the new industry because their products stays the same. Thus, the main concern is the application/selection of the products for the customer.
Expansion is generally incremental. Each business unit focuses on market share growth and when the right opportunity presents itself, geographic expansion is archived through acquisitions.
Strengthening Product Support
In an industry where price competition is high, product support activities represent opportunities to develop closer relationships with customers and differentiate Toromont’s product and service offering from competitors. After-market support is an integral part of the customer's decision-making process when purchasing equipment.
Product support revenues are more consistent and profitable.
Growth Through Acquisition
Rapid growth in this industry is generally driven through acquisitions. Toromont has gone through multiple acquisitions since the 90’s:
Acquisition of the Battlefield Equipment Rentals in 1996
Toromont grew Battlefield from one location to 82 locations
Acquisition of two privately held agricultural dealerships in Manitoba to form AgWest Equipment Ltd
Acquisition of Hewitt Group of companies in Q3 2017 for a total consideration of $1.0177 billion
$917.7 million cash ($750 million of which was finances through unsecured debt) plus the issuance of 2.25 million Toromont shares (equating to $100 million based on the 10 day average share price)
Acquisition of Hewitt Group of companies This acquisition allowed Toromont to make headway into the Quebec, Western Labrador, and Maritime markets, as Hewitt was the authorized Caterpillar dealer of these regions. Hewitt was also the Caterpillar lift truck dealer of Quebec and most of Ontario and the MaK marine engine dealer for Québec, the Maritimes, and the Eastern seaboard of the United States (from Maine to Virginia). Toromont had total assets of $1.51 billion before the acquisition, the acquisition added $1.024 billion in assets, nearly doubling the balance sheet (look at Figure 2 for more details about the acquisition). Figure 2: (all numbers are in thousands) The final allocation of the purchase price was as of Dec 31, 2018, Note 25 of 2018 Annual Report. $1.024 billion was added to the Toromont’s B/S Large acquisitions like this one can be the downfall of a company. Here are some of the risks highlighted by management at the time of the acquisition:
Potential for liabilities assumed in the acquisition to exceed our estimates or for material undiscovered liabilities in the Hewitt Business
Changes in consumer and business confidence as a result of the change in ownership
Potential for third parties to terminate or alter their agreements or relationships with Toromont as a result of the acquisition
Whether the operations, systems, management, and cultures of Hewitt and Toromont can be integrated in an efficient and effective manner
In 2018, the Company started and successfully completed the integration of the Maritime dealerships acquired through Hewitt under Toromont’s decentralized branch model (bottom up approach). Under a decentralized model, regional leadership make business decisions based on local conditions, rather than taking top down mandates. A bottom up approach is an advantage in businesses like Toromont where the customer mix can vary vastly from region to region. It allows for decision-making that is better aligned with customemarket needs and more attuned to the key performance indicators used to manage the business. In 2019, the integration of the decentralized branch model was implemented in Quebec after its success in Atlantic Canada in 2018. Successful integration of Hewitt into the Toromont family shows the depth of industry and business knowledge possessed by the management team. Being able to maintain inherited customer relationships and ensure low turnover is no easy feat. Many companies have completely botched these kinds of acquisitions. One that comes to mind is Sobeys (the second largest food retailer in Canada) acquiring Safeway for $5.8 billion. Three years later, they wrote off $2.9 billion as a loss because they did not anticipate the differences in consumer habits in Western Canada vs Eastern Canada, among other oversights. The result of the acquisition and Hewitt’s integration with Toromont’s existing business produced a 39% increase in EPS in 2018 and 14% increase in 2019.
Toromont pays a quarterly dividend and has historically targeted a dividend rate that approximates 30 - 40% of trailing earnings from continuing operations. In February 2020 the Board of Directors increased the quarterly dividend by 14.8% to $0.31 per share. This marked the 31st consecutive year of increasing dividends and 52nd consecutive year of making a dividend payment. The five-year dividend-growth rate is 12.09%. Table 1: Information about the last eight dividends
Risks/Threats and Mitigation
Dependency on Caterpillar Inc. It goes without saying that Toromont’s future is heavily dependent on Caterpillar Inc. (NYSE:CAT). For those who don't know, Caterpillar is the world’s leading manufacturer of construction and mining equipment, diesel and natural gas engines, industrial gas turbines, and diesel-electric locomotives. It has a market cap in excess of $68 billion. All purchases made by Toromont must be made from Caterpillar. This agreement has been standing since 1993 and can be terminated by either side with 90 days notice. Given that the vast majority of Toromont’s inventory is Caterpillar products, Caterpillar’s brand strength and market acceptance are essential factors for Toromont’s continued success. I would say that the probability of either of these being damaged to an unrecoverable point are low, but at the beginning of this year, I would have said the probability of the world coming to a complete stop was very low too and look at what happened. Anything is possible. The reason this is a major consideration is because it's a going concern issue. Going conference is an accounting term for a company that has the resources needed to continue operating indefinitely until it provides evidence to the contrary. This term also refers to a company's ability to make enough money to stay afloat or to avoid bankruptcy. If there was irrevocable damage to Caterpillar’s brand, Toromont is no longer a going concern, meaning the company would most likely be going bankrupt or liquidating assets. The whole Company might not go under because the CIMCO, SITECH, and AgWest business units would survive but, essentially ~80% of the business would be liquidated. In addition to the morbid scenario I laid out above, Toromont is also dependent on Caterpillar for timely supply of equipment and parts. There is no assurance that Caterpillar will continue to supply its products in the quantities and time frames required by Toromont’s customers. So if there is supply chain shock, like the one we just saw, there is the chance that Toromont will not have access to sufficient inventory to meet demand. Which in turn would lead to the loss of revenue or even to the permanent loss of customers. Again, both of these threats have low a probability of occurring but either could single handedly cripple Toromont’s business. As of now, Caterpillar continues to dominate a large market share (~38% as per Gurufocus) in the industry against large competitors like John Deere, CNH Industrial, Cummins, and others. Caterpillar's stock has been on a slow decline for a couple years but that is due to reasons beyond the ones that directly concern Toromont’s day-to-day operations. I would say if you don't believe in Caterpillar’s continued market share dominance, investing in Toromont is probably not for you. Shortage of Skilled Workers Shortage of skilled tradesmen represents a pinch point for industry growth. Demographic trends are reducing the number of individuals entering the trades, thus making access to skilled individuals more difficult. Additionally, the company has several remote locations which makes attracting and retaining skilled individuals more difficult. The lack of such workers in Canada has caused Toromont to become more assertive and thoughtful in their recruitment efforts. To combat this threat, Toromont has/is:
Recruited 303 technicians to achieve growth targets
Created 208 student apprenticeship programs
Working with 19 vocational institutions in Toronto to teach about best practices and introduce the Company as a future employer to students
As a result of these initiatives and others, Toromont saw their workforce grow by ~8% 2019. Growing the workforce is one of the primary building blocks for future growth. Cyclical Business Cycle Toromont’s business is cyclical due to its customers' businesses being cyclical. This affects factors such as exchange rates, commodity/precious metal pricing, interest rates, and most importantly, inventory management. To mitigate this issue, management has put more focus on increasing revenues from product support activities as they are more profitable than the equipment supply business and less volatile. Environmental Regulations Affecting Customers Toromont’s customers are subject to significant and ever-increasing environmental legislation and regulation. This leads to 2 impacts:
Technical difficulty in meeting environmental requirements in product design -> increased costs
Reduction in business activity of Toromont’s customers in environmentally sensitive areas -> reduced revenues
Threats such as these come with a business of this type. As an investor in Toromont, you can't do much to mitigate these kinds of threats because it's out of your hands. Oil and gas, mining, forestry, and infrastructure projects are major drivers of the Canadian economy, so I think there will always be opportunity for Toromont to make money, regardless of government action. Impact of COVID19 While the company had been declared as an essential service in all jurisdictions that it operates in, Q1 2019 results were lower as a function of COVID19 reducing activity in many sectors that Toromont services. Decline in mining and construction projects lead to a decrease in demand for Toromont products in the latter part of the quarter. Revenues were trending for 5-7% growth for the quarter before the effects of COVID19 were felt. Management cannot provide any guidance on how to evaluate the impact of COVID19 on future financial results. They are focusing on ensuring the continued safety of employees and working with customers and the jurisdiction they operate in to evaluate appropriate activity levels on a daily/weekly basis. Lastly, management is keeping a close eye on how this crisis has led to an increase in A/R delinquencies and financial hardship for customers. The Executive Team and the Board of Directors have taken a voluntary compensation reduction. Wage increase freezes and temporary layoffs have been implanted on a selective basis. Management believes that expanding product offerings and services, strong financial position, and disciplined operating culture positions the Company well for continued growth in the long term. Competition Toromont competes with a large number of international, national, regional, and local suppliers. Although price competition can be strong, there are a number of factors that have enhanced Toromont’s ability to compete:
Range and quality of products and services
Ability to meet sophisticated customer requirements
Distribution capabilities including number and proximity of locations
Financing through CAT Finance
Main Competitor in Canada: Finning International Inc.
Finning International Inc. (TSE:FTT) is the world's largest Caterpillar dealer that sells, rents and provides parts and service for equipment and engines to customers across diverse industries, including mining, construction, petroleum, forestry and a wide range of power systems applications. Finning was founded in 1933 and is headquartered in Vancouver, Canada.
Toromont Industries Ltd
Finning International Inc.
Number of Employees
Trailing P/E Ratio
Places of Operations
Manitoba, Ontario, Québec, New Brunswick, Prince Edward Island, Nova Scotia and Newfoundland & Labrador, most of Nunavut, and the Northeastern United States
British Columbia, Yukon, Alberta, Saskatchewan, the Northwest Territories, a portion of Nunavut, UK, Ireland, Argentina, Bolivia, and Chile
Table 2: A quick comparison between Toromont and Finning. I am sure there are some people looking at this table and thinking Finning looks rather promising based on the metrics shown, especially in comparison to Toromont. Finning’s dividend yield, P/E, and price/book look more attractive. Their top line is 2x. Not to mention it operates worldwide and is the only distributor in the UK, while Toromont only operates in half of Canada.>! Before you go off thinking “I need to use my HELOC to buy some Finning,” as some people on this subreddit are prone to do, ask yourself: do you see any cause for concern in the metrics listed above? !< One glaring question I have is: why is Finning trading at half of Toromont’s market cap given that it operates internationally and has twice the number of employees and revenues of Toromont?
Q1 2020 Financial Results
Figure 3: Q1 2020 Income Statement Overall operating income, net earnings, and EPS all decreased even though Toromont saw an increase in revenue for the quarter compared to Q1 of 2019.
All of these decreases were contributed to COVID19, as the pandemic lead to increases in costs
Historically, Q1 has always been Toromont’s weakest quarter. Q1 accounts for ~20% of yearly earnings and is consistently the least profitable quarter. Toromont’s profit margin generally ranges from 5%-9% progressively increasing into the later half of the year. This is good news for investors with the thesis that the economy will return to "somewhat normal" in the latter half of this year. The majority of the earnings for 2020 are still on the table for Toromont to earn. If current conditions persist, or there is a second wave and lockdown later in the year, we will most likely see a regression in Toromont’s growth to last year’s levels or even lower. Assuming the world does return to “normal,” many of Toromont’s customers (especially in mining and construction) may try to catch up for lost time with increases to their operational activity, leading to an increase in Toromont’s sales for the remainder of the year. Of course this is a major assumption but it’s a possibility. Below is a comparison of the last eight quarters. You can see the clear cyclical nature of their business. Figure 4: Last eight quarters of earnings
Sources of Liquidity
Toromont has access to a $500 million revolving credit facility, maturing in October 2022
On April 17 2020 they secured an additional $250 million as a one year syndicate facility
Cash increased by 22.6 million for the quarter
Cash from operations increased 13% Q1 2020 compared to Q1 2019
The company also drew $100 million from their revolving credit facility
$4 million dollars of stocks were repurchased during Q1 2020
Given their access to $750.0 million dollars of credit and cash on hand equaling $388.2 million, the Company should have sufficient liquidity to operate if COVID19 and its aftermath persist for an extended period of time.
Analysis of Debt Historically, Toromont has had very low debt levels. The spike in late 2017 was due to the acquisition of Hewitt. Management paid off the debt aggressively in 2018. At the end of December 2019 Toromont had $650 million of debt maturing between 2025 and 2027. As a result of COVID19 the company has taken on more debt. This additional access to debt accounts of the slight uptick in historical debt in 2020 (Figure 5). Figure 5: Toromont’s historical debt, equity, and cash The long-term debt to capitalization ratio is a variation of the traditional debt-to-equity ratio. The long-total debt to capitalization ratio is a solvency measure that shows the proportion of debt a company uses to finance its assets, relative to the amount of equity used for the same purpose. A higher ratio means that a company is highly leveraged, which generally carries a higher risk of insolvency with it. The debt-to-equity ratio is at 47% and debt-to-capitalization ratio is 32%, Toromont has $388 million in cash that could be used to pay down debt by nearly 50% and bring the net debt-to-equity to 23% and net debt-to-capitalization to 18%. As mentioned before, management is holding on to cash to insure sufficient liquidity during these times. The implication of these ratios is that Toromont does not take on large amounts of debt to finance growth. Instead the Company leverages shareholders equity to drive growth. For comparison, Finning has a debt-to-equity ratio of ~100% (it differs between WSJ, 99%, and Yahoo Finance, 101%). The nominal amount of their total debt is ~$2.2 billion, which gives them a long-term debt to capitalization ratio 62%. Finning carries $260 million in cash. Figure 6: Toromont’s debt-to-capitalization and debt-to-equity ratios Profitability Ratios Return on equity (also known as return on net assets) measures how effectively management is using a company’s assets to create profits. Toromont’s return on equity is generally around 20%. Go to Figure 6 to look at the ROE for the last 4 years. In comparison, Finning has had a ROE of ~11% for the last three years, about 3% in 2016 and a negative ROE in 2015 (as per Morningstar). Return on capital employed (ROCE) tries to find the return relative to the total capital employed in the business (both debt & equity less short-term liabilities). Toromont’s ROCE (ttm) for March 31 2020 was 22%. This means for every dollar employed in the business 22 cents were earned in EBIT (earnings before interest and tax). Finning had a ROCE of 11% as of December 2019. Liquidity Ratios Working capital is the amount of cash and other current assets a business has available after all its current liabilities are accounted for. In the last ten years, Toromont’s working capital has fluctuated between 1.6 at its lowest (2018) to 2.8 at its highest (2016). At the end of 2019 it was at 1.8. Meaning current liabilities equate to 60% of current assets. Interest coverage ratio is used to determine how easily a company can pay their interest expenses on outstanding debt. Toromont has an interest coverage ratio 15x (as per WSJ). Finning on the other hand is at 4x. At this point I feel like I'm just beating up on Finning. For those of you who made it this far, I have to admit something to you. This whole post is just a facade to ask you a question that has never been asked on this subreddit before: Should I buy BPY.UN? It keeps going down and I'm worried if I buy it, it will keep going down and I'll lose money. I don't want to lose money. Although if you go through my post history, you'll see I've been looking at/buying penny stocks.
Key Performance Measures
Below is a chart with key financial measures for the last four years. A few things I want to highlight:
Toromont had large capital expenditure last year (most of it went to increasing inventory) so they have the choice to keep capital expenditure down this year and preserve cash
From the start of 2018 (aka end of 2017) to the end of 2018 Toromont stock was down about 3% while the TSX Composite was down more 12% and S&P was down 7%. This stock has a history of out performance not only on the upside but also on the downside. I'll go into a bit more detail in the next section.
I don't do technical analysis. To those who do, good luck to you because let's be real, you'll need it. This section is just to get an idea of past performance and evaluate the opportunity cost of investing in Toromont compared to a competitor or a board based index fund. I thought it would be easier to look at pictures as opposed to reading a bunch of numbers off a table. For the sake of not creating a picture album of screenshots, I just looked at charts for the last 5 years. If you're interested in looking at different time intervals you can do so on google finance.
Toromont Industries Ltd v. Finning International Inc.
Figure 8: Five year price chart of TIH v. FTT These are the only two Caterpillar distributors on the TSX, making them direct comparisons. If I was looking for exposure to this industry, I would be choosing between these two companies (on the TSX anyways). There isn't really much to evaluate here. It's like they saying: “A picture is a thousand words,” or in this case, it's 128%. If you have time, go look at the graph from August 1996 to now. I can safely say it hasn't been much of a competition. Toromont has outperformed by ~2500% in stock price appreciation alone. If you're a glass half full kind of person, I guess you could look at this disparity as Finning having enormous upside. LOL
Toromont Industries Ltd v. S&P 500 Index
Figure 9: Five year price chart of TIH v. VFV If I'm not buying individual stocks, I’m buying the S&P 500 and to a lesser extent a Nasdaq index fund. This gives me a second look at the opportunity cost of my money. The story is not as bad as the Finning comparison. If you had bought $100 dollars of Toromont stock 5 years ago, it would have turned into $207 today, whereas the same $100 dollars in VFV would have became $157. Just a quick aside, you can see the volatility in Toromont’s stock is much higher compared to the VFV. VFV has a relatively smooth trend upwards while Toromont trends upwards in a jagged path. This is the risk of single stocks, they move up and down more erratically, leading inventors who don't have a grasp of the business or conviction in their pick to panic sell or post countless times on Reddit asking why their stocks keep going down. “I bought the stock last week and it's done 3% already, do you guys think it’s going bankrupt? I thought stonks only go up???”
Toromont Industries Ltd v. S&P/TSX Capped Industrials Index
Figure 10: Five year price chart of TIH v. ^TTIN The S&P/TSX Capped Industrials Index isn't my favourite comparison for Toromont because its constituents cover many industries ranging from waste management (WCN), to railways (CNCP), to Airlines (AC, lol, had to mention it. I miss the days when there were double digits posts about AC. I wonder where those people have gone, because I can tell you where AC stock has gone... absolutely nowhere). Regardless, I used TTIN because I deemed it a better comparison to Toromont than the entire TSX. The story is on par with the other two comparisons. Toromont’s out performance is significant. I just threw this bonus chart in here because when I saw it, I was like BRUHHH (insert John Wall meme)… It's completely unsustainable but that's impressive given the vast differences between the two.
Toromont Industries Ltd v. NASDAQ-100
Figure 11: Five year price chart of TIH v. ZQQ Now, of course, past performance does not dictate future results and all that good stuff, but it really gets you thinking about how the rewards disproportionately favours winners compared to the overall market. People are generally happy getting market returns (i.e. the just buy VGRO people) but being able to pick even a few winners really pays. This reminds me of the Warren Buffet quote: “diversification is protection against ignorance.” The context of the quote is that if you are able to study a few industries in great depth and acquire a wealth of knowledge, you can see returns astronomically higher than those who diversify across the board market. The problem then becomes you put yourself at risk of having all your eggs in one basket. Look at what's happening with Wirecard in Europe right now. This is why the real skill in investing is managing risk.
Analyst Price Targets and Estimates
The prince targets set for by analysts range from $63-$81. The average price target is ~$72, with the majority of targets within the 70-$71 range. Given the current price of $65.66, there is a ~10% upside. These price targets haven't changed much due to COVID19 even though revenues and EPS forecasts have been downgraded for 2020. The consensus estimate on 2020 revenues is $3.36 billion, down from the actual revenues of $3.69 billion in 2019 and the consensus EPS for 2020 is $3.01 down from actual EPS of $3.52 for 2019 and $3.10 for 2018. The fact that revenues and EPS forecasts have been downgraded, yet price targets remain untouched, for the most part, indicates that the effects of COVID19 are expected to be short-lived. Figure 12: Earnings and estimate ranges for Toromont. Note: EPS numbers in this graphic are diluted EPS numbers.
Multiples Assuming P/E ratio stays the same as it has been for the last 12 months (~19x) and EPS goes down to ~$3.00 (as per analyst consensus), the implied price would be $57. Using the last 12 months of revenues, the EV-to-Revenues ratio is at 1.56x. Assuming that ratio stays the same and with revenues estimated to be ~$3.36 billion, enterprise value (EV) comes out to $5.2416 billion. Using Q1 2020 figures for shares outstanding (82.015 million), cash ($388.182 million), and debt ($745.703 million), the implied price for a share is $58.94*. \Note: Enterprise Value is equal to market cap plus total debt minus cash.) Dividend Discount Model The dividend discount model (DDM) is a method of valuing a company's stock price based on the theory that its stock is worth the sum of all of its future dividend payments, discounted back to their present value. The average dividend growth rate is 12% for the last 5 years is 12%. There is no way Toromont can increase the dividend at this pace in the long term, thus, I chose a long term dividend growth rate of 5%. This is the assumed rate in perpetuity. The required rate of return will equal WACC, 6.85% (averaged from 2019 Annual Report). The dividend over the last year is $1.16 (two payments of $0.27 in 2019 and two payments of $0.31 for 2020). The fair value equals $65.84. Figure 13: DDM calculation.
There is no doubt that Toromont trades at a large premium. The current P/E is 19x and the CAPE ratio (Shiller P/E) is 26x. The fair value of the Company as per Morningstar research is in the mid $60 range. Based on all valuations I did and analyst price targets, I would start buying in the high $50 range or maybe the very low $60 range, but my belief in the company has to do with long term thematic trends and how the Company operates, rather than today's price. Although I have to admit, the price does look more attractive now than it did in the beginning of June when the stock hit new all time highs. It seems like the only companies hitting new all time highs these days are tech companies, so it's refreshing to find a non-tech company achieving the same feat. Toromont is not going to double next year or the year after that. It is a relatively low margin business, with slow growth and a cyclical business cycle. I like that the Company has strong financials, low debt, and good management. They don't take shortcuts or unwarranted risk. Future growth will mostly be driven through acquisition, but management is cautious with acquisitions and don't overextend themselves. One of the biggest problems Finning has been facing for the last couple years is political and social turmoil in South American countries which is affecting their mining clients and thus affecting revenues/margins. The Q2 earnings are reported on July 22 202. We should have a clearer picture on the prospects of the Company from management. Hopefully we have a better idea of the COVID19 situation by then too. Regardless, I think the company is in a position where its services will always be in demand so short term fluctuations are not something that shake my confidence in this pick.
Limitations and Further Areas of Research
By no means is this an exhaustive due diligence report. This is enough for me to feel confident in the business and its trajectory. Limitations/further areas of the research include:
Looking into the growth of each sector Toromont services and extrapolating that growth to calculate Toromont’s future growth opportunity.
As per IBIS Research the heavy equipment rental market in Canada is ~$8.3 billion. It grew 1.1% yearly for the last 5 years.
The US market is estimated to be $47 billion, with an average growth of 2% for the last 5 years
Sorry but I couldn't get my hands on future projections as each report is $750
More research into competitors
I chose to include Finning only for simplicity’s sake. But there are many other competitors like:
United Rentals (NYSE:URI) provides similar services to Toromont/Finning in 49 U.S. states, 10 Canadian provinces, Puerto Rico and four European countries. The only thing being they aren't distributors for Caterpillar.
Rocky Mountain Dealerships Inc (TSE:RME) sells, leases, and provides product and warranty support for agriculture and industrial equipment in Western Canada
Holt Cat, N C Machinery, Ziegler CAT (none of these companies are publicly traded)
Further analysis can be done on the B/S and accounting treatments.
The effects of automation in the industry
Distributors in the US have started working with industrial automation companies to provide autonomous construction equipment on rent to contractors
Sunstate Equipment Co.'s partnership with Built Robotics
I was not able to do a discounted cash flow, which would be critical to finding the intrinsic value for Toromont and having true confidence in the company and its trajectory.
Further analysis of CIMCO and prospects of future growth
Based of the financials, CIMCO seemed like a small part of the business, which is why I mainly focused on the Caterpillar dealership side
These are not all the limitations or areas of further research, they are just the glaring one that came to mind. >! I know I took a few shots at people in this post. It's all in good jest. If you're offended well.... maybe you should be. I don't know, you have to figure that out on your own or you could make a post on Reddit asking random people on the internet whether you should be offended or not. !< Remember I'm not an expert, I'm just a random guy on the internet.
I am long Toromont. This information is not financial advice. Please do your own research and/or talk to a financial advisor. All data provided is current prior to the market opening on June 29, 2020. Inconsistencies in data can be due to many reasons, the foremost being that data was spruced from multiple different websites.
https://preview.redd.it/it6vqxvxzci51.jpg?width=900&format=pjpg&auto=webp&s=d5ba4c7f80a1439c4283f4b30e3514629fcf504b Now that we have passed the opt-out deadline and are only about three weeks away from the Chiefs and Texans kicking off the 2020 NFL season, I wanted to put together my pre-season power rankings and put all 32 teams in separate tiers, to give you an idea of where I see them at this point. When putting together this list, I considered the talent on the roster, coaching staff and what will be a more important factor coming into this season than it has been in previous – the continuity as a franchise, since the COVID situation has limited the amount of preparation and ability to build chemistry as a team. That will be especially tough for new head coaches and inexperienced teams. With that being said, this is how I would group them:
Super Bowl contenders:
This group of four represents what I think are the four elite teams in the NFL. They all feature complete rosters, excellent coaching and continuity as a franchise. I think these are the franchises that will most likely square up against each other in the conference championship games on either side of the bracket. 1. Kansas City Chiefs We have heard this many times over the course of the offseason – the reigning Super Bowl champs bring back 20 of 22 starters (actually 19 now) on offense and defense combined. They have the best player in the league, the most dangerous receiving corp, above-average O-line play and a still improving defense, that just added some much-needed speed at the second level, which will allow DC Steve Spagnuolo to even more versatile. So at this point I can not have anybody unseat them. I think Clyde Edwards-Helaire (LSU) will be a star in that offense, they get a couple of guys back that missed their playoff run and there are plenty of young, developing players on that roster. What general manager Brett Veach has done this offseason in terms of securing Patrick Mahomes for the next decade and still opening up cap room to also sign their best defensive player in Chris Jones is amazing to me. My only two concerns for Kansas City at this point are a lack of depth in the secondary and the fact they will have to go on the road when they face the four best teams on their schedule – Baltimore, Buffalo, Tampa Bay and New Orleans, which has me favoring the second team on my list for the number one seed in the AFC and which this year means having one more game in the playoffs on their road to another Super Bowl for Andy Reid’s troops. 2. Baltimore Ravens Right behind the Chiefs, as the biggest competitor for the AFC is Baltimore. They were the best team in the regular season from this past year, but the Titans handed them only their third loss of the season in the Divisional Round at home. While they did lose what to me is a first-ballot Hall of Fame guard in Marshal Yanda, outside of that the Ravens to me have an even better roster. The reigning MVP Lamar Jackson is only entering his third season in the league, the Ravens just added a top prospect in J.K. Dobbins (Ohio State) to a backfield that set a league-record in rushing yards and some of these young receivers will continue to develop. On defense, they addressed the two areas that needed some help, when they brought in Calais Campbell to boost their pass-rush and two top-six linebackers on my board in the draft (Patrick Queen & Malik Harrison). They may not have as many superstar names as some other teams, but without a full offseason to prepare for it, that Greg Roman offense could be even tougher to stop if Marquise Brown becomes a more dependable deep threat (now fully healthy) and I love how multiple Wink Martindale is with his defense, combining the different pressure looks to go along with more versatile pieces up front and one of the elite secondaries in the game. You combine that with a rising young special teams coordinator in Chris Horton and a great motivator and in-game decision-maker in John Harbaugh – I just can’t find a lot of L’s on their schedule. 3. San Francisco 49ers Obviously the Super Bowl hangover will be brought up a lot of times with the loser of that contest, but unlike a lot of these teams coming off the big game – yet similar to the actual winners in the Chiefs – John Lynch did a great job re-tooling for the few losses they did have and didn’t overspend on some of their talented guys. Kyle Shanahan to me is the best offensive play-caller and game-designer in football, with a diverse rushing attack and the type of personnel to match it, while Jimmy G, despite some issues, is coming off his first 16-game season in his career. Defensively, they are losing what I thought was their best player in DeForest Buckner, but they did replace him with a top ten prospect in Javon Kinlaw (South Carolina) and Fred Warner is an emerging superstar. Their Seattle-based scheme under Robert Salah may not be very complex, but the Niners have a ferocious pass-rush, fast-flowing linebackers and a great safety tandem to be very sound in their execution. The Deebo Samuel injury is definitely a concern for me and if he doesn’t get back a few weeks into the season, I might drop San Fran a spot or two, plus I don’t love what they have at that second cornerback spot, but as for now I see the recipe that made me predict them winning the NFC West ahead of 2019 and what allowed them to be up double-digits in the fourth quarter of the Super Bowl. 4. New Orleans Saints One of the themes this offseason for me has been how loaded this Saints roster is and that they just need to win this year. This is the final season with Drew Brees at the helm, they are already in a horrible place with the cap – before that even goes down in 2021 – and to be honest, a lot of their key contributors are getting pretty old now. While I have seen a significant drop-off in the arm-strength of Brees, other than that I don’t see any offense with this Sean Payton-led offense – the front-five is elite, Alvin Kamara should be back to 100 percent as a dynamic dual-threat back and they finally found a number two receiver in Emmanuel Sanders. When healthy, that defensive line is a dominant unit, I think third-round pick Zack Baun (Wisconsin) gives that linebacker group some versatility and they have a lot of experience in the secondary, including a guy I thought would be a future star on the outside in Marshon Lattimore. Before anything else, they need to take care of divisional-rival Tampa Bay – which is a very tough challenge already – but if they can do that, they are fairly in the hunt for the NFC’s top seed. There’s a lot of pressure on this group because of the cap situation, their all-time great QB having his “Last Dance” and brutal playoff losses in recent years, but they have all it takes to finally break through all the way.
This second tier consists of eight teams that to me have only or two holes on their roster, while their coaching gives them an advantage over the majority of teams in the league and they bring back most of their pieces from a year or at least improved in those areas. I expect all but one of these squads to make the playoffs in 2020, as long as they don’t suffer significant injuries along the way. 5. Tampa Bay Buccaneers Number five in the entire league seems pretty high for a team that finished below .500 last season, but this is not just about Tom Brady coming in, but rather the roster Tampa Bay has built around him. To me Mike Evans and Chris Godwin are the top receiver duo in the league, the Bucs arguably have the best tight-end room in the league and the offensive line only got better with superhuman Tristan Wirfs (Iowa) playing one of those spots on the right side. I have talked about this a lot over the offseason, looking at the match between Bruce Arians’ vertical-based passing attack and what Brady is used to, in terms of spreading the field and getting the ball out of his hands quickly. My bet is they go to a bit of hybrid and figure things out. Maybe more importantly, I don’t think people realize what they have put together on defense. Last season the Bucs finished number one against the run, they forced the fifth-most turnovers (28) and tied for sixth with yards per play (5.1) in the league. Todd Bowles is excellent defensive mind, who now enters his second season with as much talent as he has had since his Arizona days. Jameis turned it over 35 times last year (12 more than any other player in the league), while Tom didn’t even crack double-digits once again, and he immediately improves their situational football awareness and overall execution. This is a very dangerous squad. 6. Dallas Cowboys When you talk about some of the most talented rosters in the league, the Dallas Cowboys come to mind right away – especially on the offensive side of the ball. Dak Prescott now has one of the premiere receiver trios with the selection of Ceedee Lamb (Oklahoma) in the draft, still probably a top-five offensive line and Zeke looking to re-establish himself as a top-tier back, after looking a step slow for most of last season. Defensively they are getting back Leighton Vander Esch, whose energy they desperately missed for stretches last season, and they have a very deep rotation at the defensive line (even though nobody knows what we’ll get from a couple of guys that were out of the league), while Mike Nolan will change things up a little more and get his guys into the face of opposing receivers. We have yet to see how much Mike McCarthy will want to have say in the offensive play-calling, but I like that they retained a young and creative OC in Kellen Moore, and as far as in-game control and CEO duties go, I certainly believe McCarthy is an upgrade. There are some questions with the secondary after the loss of Byron Jones and losing Travis Frederick to retirement hurts, but I think those are things that can be overcome. Something that I think should not be overlooked is the signing of former Rams kicker Greg Zuerlein and his special teams coordinator John Fassel, after converting only 75 percent of their field goal attempts last season (6th-lowest in the league) and missing a couple of crucial kicks. 7. Philadelphia Eagles Right behind the Cowboys, I have their division rivals from Philadelphia. I think the Eagles actually have a better quarterback, the best defensive player among the two teams in Fletcher Cox and a more experienced secondary. However, with Brandon Brooks out for the season and maybe the worst group of linebackers in the NFL, I could not put this group ahead of Dallas, even though they have come up victorious against them in the big games recently. Last year Carson Wentz carried a group of skill-position players from the practice squad and a banged-up O-line to a division title. This upcoming season he will go from already wasn’t an overly dynamic receiving crew to a group of track stars, most notably with first-round pick Jalen Reagor (TCU) and a hopefully healthy DeSean Jackson, plus Miles Sanders I think is ready to emerge as a star back for Philly. The defense did lose some long-time stalwarts like Malcolm Jenkins and Nigel Bradham, but I loved the addition of Javon Hargreave in the middle to free up the other guys to attack upfield and with Darius Slay as their new CB1, not only does that move everybody one spot lower on the depth chart, but it also finally makes more sense for Jim Schwartz to be as aggressive with those zero-blitzes, since he has the guys to cover. Those two newcomers also fit perfectly when matching up against Dallas, because of an improvement interior run defense and having a guy who can match up with Amari Cooper, after the other guys got toasted for the most part. 8. Buffalo Bills For the first time in about twenty years, a team not named the Patriots will enter a season as favorites in the AFC East – and it’s actually not that close for me. Buffalo made a switch last season offensively to more 11 personnel and quick-tempo with Brian Daboll moving to the booth. This offseason they finally got the big-armed Josh Allen a dependable deep threat in Stefon Diggs, who averaged 12.0 yards per target last season (second-highest in the league), which – similar to what I just talked about with the corners in Philadelphia – moves everybody else down one spot in the food chain. And I love what they do defensively, with Sean McDermott and Leslie Frazier’s game-plan specific zone pattern coverages, with a versatile secondary to execute those, to go with a deep D-line and two super-rangy linebackers. Even outside the Diggs trade, Buffalo has made some sneaky-good deals since losing that Wildcard game at Houston in such heart-breaking fashion. Whether that is Mario Addison as double-digit sack guy in four straight years, added depth on the O-line or a really solid draft class to complement what they already had. I don’t want to crown them at this point, but to me they are the favorites for the AFC’s number three seed as for right now, since I think the South doesn’t have that clear front-runner to win the majority of their divisional games. 9. Seattle Seahawks I would have probably had the Hawks as the final team of this group or right at the top of the next one a couple of weeks ago, but after acquiring Jamal Adams, I think they have re-established themselves as that second team in the NFC West, since I had them very close with Arizona originally, I did not love what they did in the first two days of the draft (somewhat of a trend with them), they lost their second-best defensive player at that point in Jadeveon Clowney, I’m not sure if they upgraded on the offensive line and we don’t even if know if Quinton Dunbar will be suspended at this point. With that being said, Seattle has finished above .500 every single year with Russell Wilson under center and while I’m not a fan of their conservative approach offensively, where they don’t allow Russ to throw the ball on first downs and push the tempo a little at times, they are one of the most effective rushing teams and they have two lethal weapons to catch those trademark rainbow balls from the Seahawks QB. Defensively there are still some questions about the edge rush and at second corner spot, but Pete Carroll at least has what he wants most in a team at those positions – competition – and you already saw them go to more two-high looks in coverage than we are used to, telling me they utilize Jamal’s versatile skill-set more than what that strong safety mostly does in that system. 10. Green Bay Packers The whole Aaron Rodgers-Jordan Love drama has been looming large over the offseason and that has brought us some interesting discussions, but let’s not allow this to take away from the fact Green Bay just had a first-round bye in the playoffs and made it to the NFC title game. While they were 8-1 in one-score games and should regress more towards the mean in terms of the success rate in those close games, the North is still wide open and they have a few things going for themselves – they have the best quarterback in the division, the best offensive line, the most versatile and effective pass rush and a lot of young talent in the secondary. The first-round selection of a future signal-caller aside, I wasn’t too fond of what they did in the draft. Even though I liked Cincinnati’s Josiah Deguara and can see what they want to do with him as H-back/move guy in this offense, I thought they did not get Aaron Rodgers help in the receiving corp, which has no proven commodity outside of Davante Adams. Their defense got absolutely steamrolled in two games against the eventual conference champion 49ers, but I hope to see Rashan Gary develop in his second season and I think Christian Kirksey was a very under-the-radar signing as a run-stopping linebacker. I think schematically with Matt LaFleur’s offense based on what they did under Sean McVay and Mike Pettine being very creative himself they are one of the better coaching staffs in the NFC, but I would like to see them open up the offense more for Rodgers and break tendencies more often with their coverage calls. 11. Pittsburgh Steelers Another very dangerous squad for me is the Steelers. I have talked many times about how bad the Steelers quarterback situations was last season, as both Mason Rudolph and Devlin Hodges finished near the bottom in air yards per attempt, percentage of throws beyond the marker and many others. We have only seen Big Ben throw in some short clips on the internet, but if he is just 70-80 percent of what he was in 2018, this team is bound for a playoff berth. There are some question marks with this group of skill-position players, but I expect Juju to bounce back in a major way with a capable QB and being healthy himself, I have already picked Diontae Johnson as a breakout candidate for this season and I like the diversity of this group of backs. Pittsburgh’s defense was already elite last year, finishing top five in both yards and points allowed, tied for first in yards per play (4.7), the most takeaways (38) and sacks (54). If former Raven Chris Wormley can replace Javon Hargreave as a two-down run-stopper at least and rookie Antoine Brooks Jr. (Maryland) can fill a very specific role as their second sub-package linebacker in place of Mark Barron, I think they will one of the scariest units in the NFL once again. So the best all-around defense for my money and an offense who I would say has top ten potential at the very least is a tough match-up. Maybe not quite battling with the Ravens for the North, but the top Wildcard spot for sure. 12. Indianapolis Colts If there is one team in the AFC that could go from finishing sub-.500 to making it all the way to the conference championship game, the Colts would be my pick. I thought Philip Rivers had a really rough 2019 campaign, in which his arm looked rather weak and his decision-making hurt the Chargers on multiple occasions, but he will play behind by far the best offensive line he has ever had and they will run the heck out of the ball. Indy already had a pretty good back in Marlon Mack, but Wisconsin superstar Jonathan Taylor, who they selected in the second round, will be one of the front-runners for Offensive Rookie of the Year if given the chances in combination with what I believe is the best front-five in the entire league, plus their other second-rounder Michael Pittman Jr. (USC) will be that Vincent Jackson/Mike Williams type target for Rivers. More importantly, with the trade for a top 50 player in the league in DeForest Buckner, this entire Colts D immediately takes a step forward, since he is a perfect fit as that 3-technique in their front and help them disrupt plays at a much higher rate, to go with range in zone coverage behind that, including the “Maniac” Darius Leonard chasing people down. I’m a big fan of Frank Reich and the coaching staff he is has put together, in terms of in-game decision-making, offensive gameplans and just the intensity his team plays him.
Fringe playoff teams:
This middle tier is made up from all those teams who I expect to be at .500 or above, firmly in contention for a Wildcard spot at least. They can be some areas of concern, but overall they have the roster ready to compete with the big dogs and/or feature above-average coaching. With a couple of these there is a change at quarterback and head coach respectively, but they have enough around those to overcome that. 13. Tennessee Titans This definitely seems a little low for a team that is coming off an AFC Championship game appearance, but people seem to forget the Titans were 8-7 ahead of week 17 and if it wasn’t for the Steelers losing their final three games, this group wouldn’t have even been in position to lock down the six seed. Things were also made a lot easier by their division rival Texans, who sat most of their starters after beating Tennessee two weeks prior. So as impressive as their playoff run was, you have to think of what happened before that and put it into perspective a little. With one more playoff spot in each conference, their chances of making it to the tournament should be at least equally as good, but I believe the Colts are the favorites to win the South and for me the Steelers are the favorites for the fifth seed. With all that being said, there is plenty to like about this team still – they can pound you with the Derrick Henry and the run game, Ryan Tannehill at least gives them the threat of pulling the ball and going deep off play-action, they have some young weapons catching the ball and defensively they are very versatile in how they set up gameplans. I also like the mind-set Mike Vrabel installs in these guys and I was impressed with what OC Arthur Smith did in 2019. If there are two spots that could decide if this group is fighting for a division title or that final playoff berth, it will be their rookie right tackle Isaiah Wilson (Georgia) and recently signed edge rusher Vic Beasley. 14. Cleveland Browns While I don’t see them competing for the AFC North – just because of how loaded the Ravens are – the Browns are pretty clearly the most talented team that is considered to be third in their division. In terms of their group of starting skill-position players at least, they are near the top of the NFL, the O-line to me already just made my top ten ranking with room to move up, if healthy they are at least in the conversation for that with the D-line as well, with a Defensive Player of the Year candidate in Myles Garrett, and I like how they have assembled their secondary. Now, they have some unproven guys at the linebacker level and Cleveland’s potential is largely dependent on which Baker Mayfield we will get. With Kevin Stefanski coming and installing an offense that will be built on the zone run game and bootlegs off that, where his quarterback is put on the move, I could see much more efficient play and more comfort in that system. Something that really jumped out to me on tape was how many times Baker seemed to not be “on the same page” with his receivers, expecting routes to break off differently and unfortunate drops in certain situations. Even though the preparation for the season does look a lot different and QB & WRs haven’t been able to spend too much time together, I expect this to improve and more suitable roles for those pass-catchers overall. And if they are ahead in more games, that pass rush will be a problem. 15. Arizona Cardinals There are certainly still some issues here, but the Cardinals are probably the most exciting young team in all of the NFL. Kyler Murray was a one-man show last season and is due for a big jump, with DeAndre Hopkins being added to a receiving corp that severely lacked dependable weapons, to go with some other youngsters fully healthy, Kenyan Drake looked like a different player once he came over from Miami and the O-line should at least be marginally better. Defensively they transitioned a little up front, with big gap-pluggers on the line and Isaiah Simmons being that ultra-rangy player on the second level, who can run guys down on the edges, if those ball-carriers forced to bounce outside, plus they have maybe the most underappreciated edge rusher over the last four years in Chandler Jones. I don’t think they are very deep in the secondary, but Budda Baker is an absolute baller, Jalen Thompson emerged late last season and I already predicted Byron Murphy would have a breakout second season. With Kliff Kingsbury and Vance Joseph, Arizona has creative play-calling on both sides of the ball and they now have the personnel to execute at the needed level as well. Like I mentioned, I was ready to have the Cardinals at least go toe-to-toe with Seattle for a playoff spot, but the addition of Jamal Adams has shifted the balance again to some degree. And if you just go based off my rankings, two NFC Wildcard spots already go to teams from five to seven. 16. Denver Broncos A team that has been getting a lot of love this offseason is the Broncos. They have pretty much all the pieces that you usually see with those rising squads – a promising second-year quarterback with a lot of weapons surrounding him, a ferocious defensive front and having shown signs late last season. My belief in them has taken a bit of a dump unfortunately since I thought they did well to improve the offensive line, with Garrett Bolles on the left end being the only weak-spot, but now that Ja’Wuan James won’t be available at right tackle for the second straight year (injury last season and now opting out), their duo of OTs is a concern for me. Defensively you have to love what they have in the front seven, with Von Miller and now again Bradley Chubb coming off the edges, Jurrell Casey added to the interior to go with Shelby Harris and Alexander Johnson being an under-the-radar standout at linebacker. I’ve always been a big fan of Justin Simmons, but that second corner spot is still up in the air. I like Vic Fangio and that coaching staff they have put together in Denver, with Pat Shurmur providing a QB-friendly offense, the game’s best O-line coach in Mike Munchak and most of the people that have helped Fangio put out elite defenses at multiple stops before. So the Broncos are still the most dangerous opponent of the Chiefs in the AFC West, but now I’m not sure if they can add some drama over the fourth quarter of the season. 17. Minnesota Vikings At the same time, a team that has been a little overhyped to me this offseason is Minnesota. While I don’t love how the Packers have operated since February, what have the Vikings done to really improve? They traded away the best deep threat in the league last season in Stefon Diggs, stalwarts on the D-line in Everson Griffen and Linval Joseph are now gone, their entire group of corners has combined for less than 1500 career snaps and their offensive coordinator is now in Cleveland. I’m intrigued by the combination of Adam Thielen and Justin Jefferson, who could be pretty interchangeable in their roles and I like their 12 and 21 personnel groupings, but they lack depth at the receiver position. And the defense will be relying on several inexperienced pieces to step in. I mean their three starting corners from last year are off the team now. So I don’t really get how most people all of a sudden put them ahead of the Packers. With that being said, I like the offensive scheme and always thought Gary Kubiak was a huge factor in their success on the ground at least. On defense there are certainly question marks – especially in the secondary – but Minnesota could easily have a top five player at their respective position at all three levels, with Danielle Hunter, Eric Kendricks and Anthony Harris, plus they still have some promising young guys like Ifeadi Odenigbo, Mike Hughes and a deep rookie class. Their only true shade nose Michael Pierce opting out hurts though. 18. New England Patriots This offseason must have been a rollercoaster for Patriots fans. First, Tom Brady leaves and everybody goes crazy. Then people start getting onto the Jarrett Stidham hype train and talk about how good the rest of this team still is. Out of nowhere they sign Cam Newton for the veteran minimum basically and they are back in the conversation for the top teams in the AFC all of sudden. And now, they lead the league in players opting out of the season, with key defensive pieces like Dont’a Hightower and Patrick Chung, to go with a couple of role players on offense at least. So now they are right at the bottom of these fringe playoff teams for me, because purely based on the roster, they are not even in the top 20 league-wide, but they still have maybe the greatest defensive mind in NFL history in Bill Belichick and one of the best offensive play-callers right now in Josh McDaniels. Obviously a lot of this will come down to what version of Cam Newton we will get and even if he is and can stay totally healthy. Not only is New England the most adaptable team in terms of how they can adjust to personnel and how flexible they are with their game-plans, but Cam is a great fit in that offense, where he can spread the field and make decisions based on defenses adjusting. The one area that took the biggest bump – outside of quarterback I’m guessing – is the offensive line, because they lost a legendary position coach in Dante Scarnecchia and their probable starter at right tackle in Marcus Cannon. While the Pats do have some young players, who can replace part of the losses, they were already more in plan for the pieces that left before there was any virus outbreak.
This broad group of seven teams represents all those franchises who will be dancing around .500 mark in the win-loss column. A couple of teams have the potential to win nine or ten games, while others could see those numbers on the wrong side of the column as well. There are obvious question marks in certain areas, even though they might feature top-tier players and/or coaches. 19. Houston Texans It’s kind of tough to put a team here that has won its division the last two years, but I think the Texans are pretty clearly number three in the South now. I love Deshaun Watson and I think he has fairly established himself as a top five quarterback in the NFL, but Bill O’Brien just took away an elite wide receiver in DeAndre Hopkins and replaced him with an injury-prone Brandin Cooks to go with another always banged up Will Fuller and a declining Randall Cobb, to go with a David Johnson in the backfield, who was unrecognizable last season. I think the O-line is improving, but outside of Laremy Tunsil maybe, they don’t have anybody other than Deshaun who is clearly above-average in their role. And defensively they finished in the bottom five in yards allowed and tied with Cincinnati (who picked first overall in the draft) for an NFL-high 6.1 yards allowed per play. Hopefully having J.J. Watt back for a full season should help, I like the selection of Ross Blacklock (TCU) on the inside and there are some talented young corners on this roster, who could be better much in 2020. I would not be surprised if they are that .500 team at heart and their quarterback carried them to a couple of wins that they weren’t supposed to get – which we have seen him do many times before – but it’s more likely to me that they are fighting for one of the two bottom Wildcard spots. 20. Atlanta Falcons Very rarely do you have a team that was among the worst over the first half of the season and among the best over the second half. The Falcons started out 2019 with a 1-7 record, but would go on to win six of the final eight games. Their defense was absolutely atrocious early on last season, with no pass-rush impacting the opposing quarterback and several miscues in coverage. With Raheem Morris taking over the defensive play-calling, they showed a lot of improvement already and there are signs that trend will continue. While there are some questions about the back-end and if they can get consistent production from their rush outside the top two guys, I think Dante Fowler is an upgrade over Vic Beasley, I like Marlon Davidson (Auburn) as a guy with inside-out flexibility on sub-packages and Keanu Neal is back healthy, as that Kam Chancellor-type, who can be that extra defender in the box in their system and punish receivers when catching the ball over the middle or in the flats. Offensively I believe this is still a team that can move the ball – they just have to start doing so earlier in games. While the top NFL receiver duo is in their own division with the guys in Tampa Bay, Julio Jones and Calvin Ridley could easily be that next one. They lost a very productive tight-end in Austin Hooper, but I believe Hayden Hurst can replace at least 80 percent of that production, and while we have no idea what we get from Todd Gurley and his knees at this point, last year the Falcons had one of the least effective per-touch backs in Devonta Freeman. Plus, the O-line should take a step forward with former first-round pick Chris Lindstrom returning from injury. 21. Las Vegas Raiders To me the Raiders are still in transition, not only moving to Las Vegas, but also in terms of roster construction and the culture Jon Gruden and Mike Mayock are trying to establish. Outside of Tyrell Williams, that entire group of receivers was overhauled, they have a lot of young pieces on the defensive line and the secondary, plus they will have at least two new starters on the second level of their defense. By far the biggest thing they have going for them is the offensive line and second-year back Josh Jacobs running behind it. When I did my top ten offensive lines in the NFL a couple of weeks ago, I had the Silver & Black at number five, and Jacobs was already a top 100 player in the league for me, with how physical and elusive a runner as he is. I could easily see the Raiders finish near the top in terms of ground production, and I also like the young guys they brought in around that, with Henry Ruggs III (Alabama) keeping the defense honest with his speed, Bryan Edwards (South Carolina) as a physical receiver, who will get hands after the catch, and Lynn Bowden Jr. (Kentucky) as that chess-piece potentially, that you can use in a multitude of way. My bigger question here is if Derek Carr is willing to push the ball down the field. Defensively I like the rotation they have on the interior D-line and the two linebackers they brought in via free agency, most notably Corey Littleton. There are still some questions about how snaps will be split between their corner group, but I’m excited to see a full season of Jonathan Abram hopefully. These guys have some attitude and an energetic head coach. 22. Los Angeles Rams Oh, how far we have come. Just one-and-a-half years ago the Rams were officially 20 spots higher basically, when they lost the Super Bowl to New England. Ahead of last season, I predicted them to miss the playoffs and while they made a bit of a run at it late, that’s what ended up happening. Now I see them as the fourth team in their own division – even though that says more about the competition they face rather than them. I still believe in Sean McVay and his ability to win on paper with play-design and game-planning, but Jared Goff has turned out to be an average quarterback, they don’t have a prime Todd Gurley setting the table anymore and the offensive line had some major issues, for large stretches of last season, especially in the run game. I was very high on Cam Akers, who they selected in the second round out of Florida State, but he will obviously be a rookie with shortened preparation, rather than an Offensive Player of the Year like Gurley was for them. Defensively, they have two elite players in Aaron Donald and Jalen Ramsey and I like some of the other guys in their roles, but overall the high-end talent beyond the two biggest names isn’t overly impressive. Leonard Floyd might be their top edge rusher and he has always been more of a Robin, they have no proven commodity as stand-up linebacker and I have yet to see if Brandon Staley can actually be an upgrade over Wade Phillips as their defensive coordinator. 23. Detroit Lions While I was going back and forth with putting the Lions third or fourth in the NFC North, I recently said they are among the top two teams that could go from worst to first in their division and I would not be surprised if they were in the hunt for a Wildcard spot in the last couple of weeks of the season. His second year in a system under Darrell Bevell – where he wasn’t just going in shotgun 40 times a game and asked to make magic happen – Matthew Stafford looked like an MVP candidate as long as he was healthy in 2019. That duo of Kerryon Johnson and my top-ranked running back in the draft D’Andre Swift (Georgia) could be one of the most dynamic ones in the league, the receiving corp is highly underrated and I like those rookies competing for the two guard spots. Defensively, they seem to finally look like what Matt Patricia wanted, when he came over from New England, in terms being versatile with their fronts and having guys who can take on receivers in man-coverage. With that being said, there is also a good chance that the Patricia experiment could go to shambles, if some of the veterans get turned off by his style of coaching without having established that winning culture, and this team has simply been dealing with too many injuries to key players. I don’t think there is much of a gap between the Lions and Vikings for example, but Detroit has not shown the stability of some other organizations. 24. Chicago Bears A franchise that I don’t really hear anybody talk about – unless it’s their quarterback competition – is that team from the Windy City. I understand that the Bears aren’t really sexy because they lack those superstars on offense that people will recognize, but I’m higher on some of the guys they do have on that side of the ball and on defense they could be much closer to 2018, when they led the league in points allowed and turnovers forced, rather than being just inside the top in most categories last season. A guy I already predicted to break out for Chicago this upcoming season with a bigger workload is running back David Montgomery, to go with Anthony Miller as a gadget player and developing young pass-catcher and one of the more underappreciated receivers out there in Allen Robinson. Defensively, I thought the biggest issue last season was Akiem Hicks missing double-digit games, as a table-setter with his ability to disrupt plays from the interior, and Leonard Floyd didn’t provide much on the opposite side of Khalil Mack, who they upgrade from with Robert Quinn, who just had his best season since the Rams were still in St. Louis. Now, I don’t love what they have at that second safety spot to complement Eddie Jackson, someone will have to fill that second corner spot – even though I’m a fan of second-round pick Jaylon Johnson (Utah) – and nose tackle Eddie Goldman opting out is a huge loss. If the quarterback position can just complement the rushing attack and the defense plays up to their potential, this group could be competing for second in the North, but Foles or Trubisky could still hold them back. https://preview.redd.it/aep6uj385di51.png?width=1060&format=png&auto=webp&s=07674898e4de7d73699c065907983e69612c56a4 The final tier is in the comments!! If you enjoyed this breakdown, I would really appreciate if you could visit the original piece - https://halilsrealfootballtalk.com/2020/08/18/ranking-all-32-nfl-teams-in-tiers-pre-season/ You can also listen to my analysis on the Youtube channel - https://www.youtube.com/watch?v=zz7WE0epZw8
[OC] CASH ME OUTSIDE: Which future free agents have the most to gain or lose if basketball resumes in the Orlando bubble ?
Back in 2016, young Danielle Bregoli appeared in a Dr. Phil segment eloquently titled: "I Want To Give Up My Car-Stealing, Knife-Wielding, Twerking 13-Year-Old Daughter Who Tried To Frame Me For A Crime." She made the most of it, and even gained fame for her instant catchphrase "cash me outside". Usually, that's where a viral moment ends. However, Bregoli (now known as Bhad Bhabie) has actually parlayed that one moment into a legitimate career. She's a rapper signed by Atlantic Records, and her videos have millions and millions of views. We see this happen often in sports and in basketball specifically. The national media and even front offices start paying more attention to high-profile televised games -- the NCAA tournament, the NBA playoffs, etc. If a player can make the most out of their time in the spotlight, then they can parlay that into huge success themselves. College players who have big tournaments shoot up draft boards. NBA players who have good playoff performances can drive up their prices in free agency. We've seen it time and time again, from Austin Croshere, to Jerome James, to Ian Mahinmi. The continuation of the NBA season (barring a Kyrie Irving led rebellion) means that some players are going to get their time in the spotlight again. That's hugely important for players who are about to reach free agency. Now, there are a lot of big name free agents that are going to cash in regardless. Anthony Davis has a player option; I suspect he'll do all right. Similarly, there are veteran players like Danilo Gallinari or Joe Harris who are more "known commodities." We've seen plenty of them, and we understand their skill sets and values. Their prices are somewhat fixed (aside from concerns about a COVID-infected cap.) Alternatively, there are a group of future free agents that have more volatile stock. They have a lot to gain -- but they have a lot to lose. This is their moment. This is their last impression. They're heading into the Orlando bubble to do business, with the hope that teams will cash them outside.
READY FOR THEIR CLOSE-UP
C Jakob Poeltl, San Antonio If you just glanced at the raw stats, you might not understand why anyone would fuss about Jakob Poeltl. He averages 5.3 points and 5.3 rebounds per game. Ho hum. He's only started a grand total of 38 games in his four-year career so far. Yawn. He's a true center who can't shoot threes? Yikes, go back to 1973. Can we move on to free agents who actually matter? Not so fast, my friend. Jakob Poeltl is a lot more interesting than those numbers suggest. He may be a 7-foot true center from Austria, but he's hardly a stereotypical "stiff." He's more nimble than you'd expect, and shows good defensive instincts inside. Overall, he's a smart player with a natural feel for the game. Those skills are born out in the advanced stats, which LOVE Poeltl's impact. Over the course of his career (4-year sample size here), teams with Poeltl on the court have scored 126 points per 100 possessions, and only allowed 107 per 100 possessions. That's the type of difference (+19) that ranks up with the elite in the NBA. Now, we have to take those numbers with a grain of salt. On/off figures rely heavily on your teammates, and Poeltl's had the good fortune of being on some great bench units in Toronto and now San Antonio. Still, you'd have to guess that he's contributing to those units in a major way. Fortunately for teams and for Poeltl, we don't have to "guess" much more. LaMarcus Aldridge (who had been playing 95% of his minutes at center) is out for the season, clearing a huge pathway for Poeltl to play 25-30 minutes a game and prove his worth. Or not. This is exactly the type of volatility we're looking for in this exercise. upside/downside: If the season had ended prematurely, the Spurs could have effectively "hidden" Jakob Poeltl and retained him for a modest price. As a restricted free agent, his value may have been depressed even more. He may have returned on his qualifying offer ($5M) or signed a team-friendly extension in the neighborhood of $6-8M a year. However, if he has a monster bubble-bracket showing, then teams are going to look at him as a potential starter and pay him accordingly. Gone are the days when Ian Mahinmi or Timo Mozgov would get $15M a season, but $10-12M isn't unrealistic. Heck, Mason (the good one) and Miles (the bad one) Plumlee both got more than that. PG Shabazz Napier, Washington Shabazz Napier knows all about shining under the spotlight. He helped UConn pull off an upset NCAA title, and consequently boosted his draft stock. LeBron James even publicly praised him as his "favorite player in the draft." The Miami Heat then acquired Napier (perhaps as a way to keep the King happy?) However, James left in free agency that summer anyway, and the Heat never seemed too invested in Napier after that. He'd be in Orlando the next year, and Portland the following year. Napier's kept bouncing around since then. In fact, he's already been traded SIX times in his young career. In his journey around the league, Napier has been up or down. Sometimes he flashes and makes you think he could be a high-end backup or even a low-end stopgap starter. Other times, he disappears or shoots poorly, and you start using his name as a trade filler contract. This bubble in Orlando may represent Napier's best chance at latching on to a role and a landing a decent contract. At the moment, he's soaking up minutes for the Washington Wizards, who have lost John Wall to an Achilles injury and have lost Isaiah Thomas to awful defense-itis. In their wake, Napier and veteran Ish Smith are platooning at PG, and both trying to show their competence. If Napier can take advantage of these 25-30 minutes he's getting, then he will go a long way to securing his future in the league. upside/downside: If Shabazz Napier can outplay Ish Smith and hold the fort well at PG, then teams may start viewing him, as mentioned, as a high-end backup/low-end starter. That may not sound like any great shakes, but that's a lucrative role. Ish Smith himself makes $6M a year -- D.J. Augustin makes $7M. Those figures would represent a major pay raise for Napier, who's never made as much as $2.5M in any season so far. On the other hand, if he flops and the Wizards fold, then he'll be back to looking at 3rd PG spots and fighting to stay in the league.
BREAKOUT STARS WHO CAN'T AFFORD TO BREAK DOWN
PG Fred VanVleet, Toronto Fred VanVleet had to work hard to convince NBA teams to buy into him. That's bound to happen any time you're an undrafted player who looks like he should be selling pretzels at a game at not playing point guard. But finally, after several years of proving himself, Fred VanVleet put himself in prime position to cash in this summer (or whenever free agency actually happens.) He carried over his great Finals performance to this regular season, averaging 17.6 points and 6.6 assists. He can shoot -- he can defend. Hell, he can even defend across positions despite his limited height thanks to his strength and his basketball IQ. In fact, basketball-reference listed VanVleet at SG for 54% of his minutes this season. Presumably, FVV will be a lead guard going forward, but that versatility only adds to his value. You can make an argument that he offers similar value to a player like Malcolm Brogdon, who got over $20M in salary in Indiana. What's the "volatility" here? Why can't we lock in VanVleet for a fat contract yet? Well, VanVleet needs to finish the job, essentially. We all remember how great he played in the Finals, but we tend to forget how badly he played in the playoffs prior to that. In their seven game war against Philadelphia, VanVleet shot a combined 3-24 from the field (12.9%) and averaged 2.0 points per game. Perhaps he was distracted by issues at home, but he was also rattled by the Sixers' length. He can't have that happen again, or else it'd leave a sour taste in the mouth of the NBA front offices, and scare them from trusting him as a surefire starter going forward. upside/downside: If Fred VanVleet plays well (the same level as he's played throughout the year), then he's looking at a healthy deal. He's 26 right now, so he may land a 4-year deal in excess of $60M ($15M per year). But if he struggles in the playoffs, then that may go down to something like 3 years, $40M ($13M per year) as teams view him as more of a fringe starter instead. C Montrezl Harrell, L.A. Clippers Doc Rivers and the Los Angeles Clippers will enter the bubble with genuine and realistic title aspirations. They're loaded from top to bottom, and as deep as any team in the field. That said, they may be too deep for their own good. In some ways, it still feels like two teams fused together like the Man with Two Heads. On one shoulder, there's the "old Clippers" from last year -- the plucky overachievers fueled by the chemistry of Lou Williams and Montrezl Harrell. On the other shoulder, the "new Clippers" -- the would-be Super Team featuring two superstars in Kawhi Leonard and Paul George. Because the Clippers have been coasting through the regular season and load managing their stars, they haven't gotten the chance to lock in rotations and nail down their final form as a cohesive group yet. That's especially apparent in terms of the PF/C spot. Like last year, the team starts young center Ivica Zubac, but then cedes major minutes and a bigger role to Harrell off the bench. However, they've also brought in PF Marcus Morris, fresh off a strong half-season for the Knicks. There are contenders here, but no clear plan. When push comes to shove, is the team going to play a traditional lineup with a PF and a C? And if so, which center will close out games? And if the team needs to adjust and go to a "smallball" approach against a team like Houston, who will that lone big be -- Harrell or Marcus Morris? For Harrell, winning that role will be important as a matter of pride, but also important as a matter of market value. He'll be an unrestricted free agent (as will Marcus Morris). But unlike Morris, Harrell hasn't gotten a huge contract in the NBA yet. This summer was supposed to be his year to cash in. However, if Doc Rivers and the Clippers don't feel like he can hang on D at the end of games, then that will give his stock a big hit. upside/downside: If you're a free agent coming off a championship team, you're bound to get paid (and likely overpaid.) Of course, to benefit from that ring, you'd have to be seen as a key member of that team. As a result, Harrell needs to lock down the closing minutes at center. If that happens, then he's in line for a big contract in the range of $15M per year. However, the nightmare scenario for him would be if he gets played off the court due to his defense; if that happens, then he'll be seen as a niche role player and his contract will likely go down to the $10-12M range.
LAST CHANCE FOR A BIG CONTRACT
SF Jae Crowder, Miami Veteran Jae Crowder is a great addition to any contending team. He's a strong, dogged defender. He can hit threes. In a world that craves 3+D players, he fits the bill to a T. At least, that's his reputation. In reality, Crowder has never reached the heights that he did back in Boston (a familiar trend among former Celtics, it appears.) The most obvious issue is the inconsistent shooting. He had never been seen as a shooter originally, but he worked on that aspect of his game. In 2016-17, Crowder hit on 39.8% of his three-point attempts. The presumption is that he'd finally clicked into another gear, and could only get better from there. He became a valuable trade piece (and ended up going to Cleveland in the Kyrie Irving deal.) More and more, it's starting to look like that one season was an outlier. Crowder's three-point percentage has fallen back down to Earth, registering 32%, 33%, and 32% over the next three seasons. His defense also may have been overrated. At 6'6" with a 6'9" wingspan, he has only average size for a SF and only registered an average impact in terms of advanced stats. He's bounced around lately, from Cleveland to Utah to Memphis and now to Miami. Interestingly enough, Crowder got off to a hot start in Miami, and may have started to resurrect his stock. The Heat had been playing him more as a smallball four (basketball reference listed him at PF for 60% of his minutes), and he looked rejuvenated by that change. He hit on 39.3% of his threes (13 game sample size) and also looked better defensively as well. The question now is... can that continue? Miami will be healthier coming back from the break, and may not envision heavy minutes for Crowder in this playoffs. Are they going to rely on him? Or bury him? TBD. These next few months will be crucial for Crowder's stock as he heads into unrestricted free agency. upside/downside: If Jae Crowder can continue to play well as a smallball PF (and also soak up minutes at SF), then it'd give credence to the idea that he's a legitimate starter. And as a result, he'd be looking at salaries in the $10M+ range. However, there's also a lot of potential downside here. If his shooting stumbles again, it's difficult to imagine smart teams viewing him as anything more than a depth player at this stage (29, turning 30 in July.) He may have trouble matching his current salary of $7.5M. C Derrick Favors, New Orleans We're trying to focus on players with "volatile" stock and some unknown elements to their game. I'm not sure that describes New Orleans big man Derrick Favors right now. After some very high expectations as the # 3 pick, he appears to have settled into a known commodity right now at age 28. He's never going to be an All-Star, but he's developed into a capable starter (9.2 points, 9.9 rebounds this year) who is particularly sturdy on the defensive end. So what's the lingering question here? For Favors, it's more about a matter about whether he's a long-term "fit" with this New Orleans team. After rotating between PF and C in Utah, Favors has been locked in as a true center with the Pelicans, playing 100% of his minutes as a 5. That certainly feels like his best position moving forward. But the question is... do the Pelicans need a center? They just invested the # 8 overall pick in Jaxson Hayes, a naturally springy 7-footer. Moreover, there's still the lingering question about whether Zion Williamson may be best served as a smallball center himself. Between the two, there may not be loads of minutes at the 5 in New Orleans. Realistically, the team could retain Favors on a 1 or 2 year deal and utilize him as a placeholder until Hayes fills out and develops into a viable starter. At the same time, Favors is likely looking for a longer-term deal than that; this may be his last big contract. The Pelicans haven't had their full roster together all season, so they still need to work out their rotations. Will coach Alvin Gentry want to lock Favors in at the 5 (with Zion Williamson at the 4)? If push comes to shove, will Favors be squeezed out? Those decisions may go a long way to determining his free agency future. upside/downside: As mentioned, Derrick Favors' "value" may be more locked into place than his peers on the list. He's likely worth around a 3 year, $40M contract ($13.3M per year.) But for him, the question will be where that money will come from. A lot of the playoff teams that could use him (say Boston, for instance) don't have the cap space to offer those prices. If he wants to get bowled over with money, it'll likely come from a young team with cap room (like an Atlanta or Charlotte). But for them to justify paying big money to a big man, he'll have to keep playing heavy minutes and keep putting up solid numbers.
THE COMPLETE WILD CARD
SG Andre Roberson, Oklahoma City Remember him? There are younger fans out there (the babies and toddlers among us) who may not even recall the extreme strengths of weaknesses of Andre Roberson. It's not an exaggeration to say that, at his peak, Andre Roberson was the best perimeter defender in the NBA. Armed with length (6'11" wingspan), nimble feet, and a tenacious style of play, he could slow down anyone from 1-4. In 2017-18, ESPN's real plus minus metric graded his defensive impact as a +4.3 per 100 possessions, second best in the league behind Rudy Gobert. Alas, Roberson only checked one box on the 3+D prototype. He's a career 25.7% shooter from beyond the arc, and a particularly ugly 46.7% at the free throw line. That free throw percentage even dipped as low as 31.6% in that 2017-18 season. So why do I keep citing the 2017-18 season? Because that's the last time we actually saw Andre Roberson play. He ruptured a patellar tendon, then had setbacks in rehab. All in all, he missed the entire 2018-19 season, and he's missed the entire 2019-20 season so far as well. Allegedly, Roberson is ready to come back now. If that's true, that would be a huge boon to his stock as he approaches unrestricted free agency. If any team is going to pay Roberson, they want to see that he's healthy and that he can keep up his defensive impact. And hey, if his shooting form looks like it's improved, then that'd be a major bonus. The mystery is likely to continue though, because we're not sure if Roberson is healthy, and we're not sure if he'd actually play even if he is healthy. Oklahoma City has found a good rhythm right now, and has had success combining their guards in lineups together. If Shai Gilgeous-Alexander can serviceably guard SGs and SFs, then there's not a huge need for Roberson in the starting lineup. At the same time, the wing depth is still pretty thin, so a healthy Roberson could help on the margins. upside/downside: It's difficult to imagine Billy Donovan throwing Andre Roberson out there for 20+ minutes a night after such a long layoff. Given that, the most likely scenario is that we see faint glimpses of Roberson this season, which forces him to take a modest one-year "prove it" deal in 2020-21 to rehab his stock. However, IF Oklahoma City finds itself struggling to contain a player like James Harden in the playoffs, then you'd figure they'd break the glass in case of emergency and call in Roberson. If Roberson can prove that he's back to his old stopper ways, then he's a valuable piece for a team. He'll never get HUGE money if his shooting continues to suck, but he can be a $8-10M role player. And if he ever learns to shoot at a modest clip (even 33% from three) then his stock will balloon.
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