The most popular DDs on Wallstreetbets so far this week
Most commented: u/consciousnes5 - “BlackBerry Stock Is a Top Turnaround Play”
BlackBerry stock: It’s still a sexy play in my books
BlackBerrry’s collaboration with Amazon.com Web Services (AWS) is truly something to get really excited about, global agreement to develop and market BlackBerry's Intelligent Vehicle Data Platform, IVY. BlackBerry IVY is a scalable, cloud-connected software platform that will allow automakers to provide a consistent and secure way to read vehicle sensor data, normalize it, and create actionable insights from that data both locally in the vehicle and in the cloud. Automakers can use this information to create responsive in-vehicle services that enhance driver and passenger experiences.
BlackBerry IVY addresses a critical data access, collection, and management problem in the automotive industry. Modern cars and trucks are built with thousands of parts from many different suppliers, with each vehicle model comprising a unique set of proprietary hardware and software components. These components, which include an increasing variety of vehicle sensors, produce data in unique and specialized formats. The highly specific skills required to interact with this data, as well as the challenges of accessing it from within contained vehicle subsystems, limit developers’ abilities to innovate quickly and bring new solutions to market. BlackBerry IVY will solve for these challenges by applying machine learning to that data to generate predictive insights and inferences, making it possible for automakers to offer in-vehicle experiences that are highly personalized and able to take action based on those insights… to see full post
Top comments:
u/Manureprenuer “The confirmation bias I was looking for. Thank you”
u/Marnox1 “who else is real excited about BBagholder's IVY
In for a 100 @ 18 ish!”
u/Trunckdruck “ahh some fellow idiots. This is where I belong with 100 at 19.20. I'm Gonna average down when it gets to $5 or maybe I'll wait until they have to dilute the shares who knows”
Most Positive Sentiment: u/claykan - “Why Tilray is Positioned for Success in the Cannabis Industry”
At this point in time, the cannabis industry is still in its infancy. There are over 60 large cannabis companies competing for the largest market share, and the race to have the greatest presence is only beginning.
Tilray, which currently ranks 3rd in the list of the largest cannabis companies in the world, already has an incredible amount of leverage over the majority of its rivals. After the mega-merger with rival company Aphria, Tilray will overtake both Curaleaf and Canopy Growth in terms of revenue, making it the largest cannabis company in the world.
In an industry that has not even begun to reach its formal formation, infrastructure and revenue are by far the most important traits a company can have. Tilray, which will own dozens of diverse subsidiaries after its Aphria merger, has a global presence in over 18 countries:
Tilray Supply Locations
Although a portion of these countries only allow hemp-related products and/or clinical trial exports, the infrastructure is still there. Tilray has a massive global presence, giving it a launchpad to build its brand name and form agreements across the world. Although companies like Curaleaf, Trulieve and Cronos Group already have market share in the U.S, Tilray's strategy of aggressively expanding its operations on a global scale will prove to be the most successful method in dominating the industry. It allows for long-term growth, that can adapt to the endless demand for cannabis in the future of our society.
And that's not to say Tilray doesn't already have infrastructure in the United States. Currently, Tilray owns the goliath hemp-food company Manitoba Harvest, the world's largest hemp food manufacturer which has products in over 16,000 retail stores globally. In addition, Tilray will own SweetWater Brewing Company, a popular brewing company headquartered in Atlanta, Georgia, after the Aphria merger this quarter. Not only do both companies offer a steady stream of revenue, but they provide an opportunity for U.S exposure once federal legalization occurs. In addition, Tilray's diverse brand segmentation will allow them to generate revenue from a broad range of sources.
In the coming years, attitudes towards marijuana will drastically change. It's been almost a decade since Colorado and Washington legalized cannabis in 2012, and since then 16 states have followed. If expectations are met, the federal prohibition on marijuana could end as early as this year. With government support and an overwhelming increase in positive views towards legalization, it's only a matter of time until cannabis will become a destigmatized substance integrated into adult society.
U.S public opinion on legalizing marijuana
The legal marijuana industry is only beginning. Worldwide legalization and embracement will take years or decades to reach, but when it does, cannabis will be a universally accepted substance with an endless demand. After the Tilray/Aphria merger this quarter, it will become clear which company has the greatest chance of capitalizing off this rapidly expanding industry.
Long on $TLRY 900 shares @ 18.14
Most Bearish Sentiment: u/veradico - “UPDATED: The coming CMBS market correction and why I'm buying $LADR puts”
TL:DR The Commercial Mortgage Backed Securities ("CMBS") market is primed to retract due to overstated earnings propping up bad loans, just like the CDO market in 2008. So, I picked one of the worst offenders, $LADR, and bought puts.*
Note: This is my first true DD here. I am not a financial advisor and this is not financial advice. This is only my opinion about the stock and any action you take based on my opinions is done at your own risk. In my opinion, I do not like this stock.
Note 2: I originally posted this on Friday and it got stuck in deleted status for 7 hours while I was trying to get in touch with the mods to get it posted. It was suggested I repost it this morning, so I am, and as part of that I have included some helpful updates based on some of the comments I did receive. If you read the original, you can just look for the Updates:.
1. Intro
Greetings Apes and Apettes! I'm excited and a little scared to post my first DD here. I learned of WSB like many of you and have been commenting and trying to be a good ape since January when I jumped on the GaymeStonk hype train. While I knew quite a bit about the market due to my work and education, I will admit that my investment strategy up to this point has been "buy Vanguard Index Funds." Safe, but boring. Being a part of this community has pushed me to go out of my comfort zone and finally make an ape gamble on something other than buying GaymeStonk shares.
So, I've been reading your DDs, watching the financial news, and just generally paying more attention to the markets in search of my first options play. I need to earn my stripes, one way or another, and I have found my first target: $LADR.
2. The Target: $LADR
Ladder Capital Corp is a REIT traded on the NYSE with a market cap of just under 1.5BN. It's not a huge company by any stretch and options volume is a little low, but hopefully not so low that this post gets clipped. The company was started after the 2008 crash by three former executives who all worked for an internal real estate hedge fund at UBS. That HF collapsed after making investments in the subprime housing market. I'm sure they learned their lesson and vowed never to do that again. RIGHTTTTT.
In fact, what they're doing now is probably worse, though the fallout may not be on the same scale as what happened in 2008. After all, the entire CMBS market is only ~$500B, as opposed to the residential housing market at ~$8T just before the crash (btw, current housing market sits at ~$35T ***whistles***). So, even if the entire CMBS industry goes tits up, we're not looking at a complete economic meltdown like we had in 2008, unless it causes other dominos to fall, but that's another topic... Anyway, we can still make money if the thesis is correct, right? So, read on, dear apes.
What set me down this path was this recent article, which someone coincidentally linked in a GaymeStonk thread. Weird, I know, but take a read if you have a few minutes as it forms the basis of my thesis.
Update: If you're an ape who can't read, you can watch this video that the author of the Intercept article and Flynn did with The Hill last week: https://www.youtube.com/watch?app=desktop&v=pRHwhvUc54A Thanks /u/_dmm for the link!
Reading this article first is sort of putting the cart before the horse, but the main point is that Professor John M. Griffin from UTA, decided to do a forensic analysis of claims made by an SEC whistleblower and found those claims to be correct. The claims will be discussed in one second, but just know that this guy's specialty is "forensic finance, or understanding the role of anything that is potentially illegal, illicit or immoral in financial markets." If you want to read the actual paper Mr. Griffin published, you will definitely develop some extra brain wrinkles. The paper can be found here. It's a good, but technical, read.
Anyway, according to Griffin, the worst offenders when it comes to income overstatement are shown on the right side of this graph:
Most of the shadow banks above the line on this chart are probably decent put plays
Smol aside: I was curious if John Griffin and Kenny Griffin from Shitadel are related or if it's pure coincidence that they have the same last name. I can't find anything saying they are related, so let's chalk it up to a common last name. That said, it appears that Shitadel thinks $LADR is garbage, too, as they have been getting rid of their shares and have purchased substantial additional puts. I feel dirty that I may be on the same side of a bet as Kenny G, but what's an ape gonna do???
Anyway, the genesis of the Griffin study was a 2019 SEC whistleblower complaint that is discussed in this Pro Publica article from May of 2020: https://www.propublica.org/article/whistleblower-wall-street-has-engaged-in-widespread-manipulation-of-mortgage-funds. The article describes a complaint filed by John Flynn, a veteran of the CMBS industry, which alleges rampant overstating of borrower income to prop up shitty loans that were packaged into CMBS by 14 major lenders including Deutsche Bank, Wells Fargo, and our target Ladder Capital Corp. The world renowned plaintiff's class action attorneys at Quinn Emanuel have taken note of the impending CMBS market correction and issued a very detailed and easy to read firm memo on the subject, which explains the myriad ways this thing could fall apart.
Anyway, $LADR isn't just taking loans originated by unrelated mortgage loan officers from various banks around the country and packaging those up into shitty CDOs. No no; they are originating the loans themselves and then packaging those crap loans together with other, better looking loans, and then securitizing the garbage for their customers in an inflated CMBS. I shit you not. Seems weird to risk your reputation by selling crap, but more on that later.
On top of the above, the firm appears to be engaging in some pretty shady practices when repackaging loans acquired from other lenders that had been part of a previous a CMBS that was unwound. Flynn's whistleblower complaint states that Ladder has been revising the previous income statements of the borrowers such that their net profits were overstated anywhere from 10-30% from what was reported by the prior lender, meaning they were given much larger loans than they are capable of paying off.
All of this just screams SHORT THIS SHIT, but if you want another reason to hate on Ladder, and I'm not trying to make this political, note that one of Ladder's largest investors is Steven Ross. If you don't know him, let's just say he's a billionaire BFF with 45 and, get this, Ladder is one of the Trump organization's biggest creditors. Whatever you think about Trump as a President, one thing we know for certain is that he's not that great at real estate. Seriously, don't make this political. This is about fraud and bad bets in the CRE market, not politics.
The final point I will make here is that the outlook for CRE for 2021 is just not that good overall, to say nothing of the CMBS market. The National Association of Realtors is predicting Q1 2021 CRE prices "to decrease in the office market (-3% y/y), retail (-6% y/y), and hotel/hospitality (-6% y/y)." Guess what markets $LADR is heavily invested in? That's right; office, retail, and hospitality.
3. Timing
So, this shit is shady and Ladder seems ripe for a fall, along with the rest of the CMBS market. In fact, I think you could make this bet against most of the offending lenders identified in the Griffin study, but especially against the shadow banks like Ladder. Thus, the real question is; when lambo???
This is a REALLY tough question and where this play certainly opens the door to either major gain or major loss porn. Please, only bet what you're able to lose.
The problem, of course, is that the market was made aware of this malfeasance when Flynn filed his complaint in February 2019. Flynn was under the assumption that 10 year commercial loans sold in the run up to 2008 crash would be defaulting in 2017-2018, but that didn't happen. From the Quinn Emanuel memo: "Commercial loans backing CMBS typically have a shorter term than the residential mortgage loans backing RMBS, and a different amortization schedule. For example, a standard CMBS loan will have a 10-year term during which it will pay mostly interest and very little (or no) principal, with a large “balloon” payment of principal at the end. Often, the loan is refinanced at the end of its term, meaning that some or all of the balloon payment becomes the subject of a new loan, with a new term, which is frequently then secured in a new CMBS." So, when the original CMBS 1.0 loan defaults didn't show up in the market, Flynn started digging and found that the original loans had simply been repackaged and papered over to new investors based on the newly restated and inflated NOI numbers, which triggered his SEC complaint.
But, the SEC hasn't acted on the complaint (AFAIK) and the market just didn't give a shit. Oh yeah, his complaint isn't actually public, either. What's more, Feb 2019-Mar 2020 was a banner year for CMBS returns and commercial real estate in general. Further, most analysts of the CMBS market agree that the new "CMBS 2.0" market is much healthier than the CMBS 1.0, i.e. pre-2008, market, so there's a chance I am completely wrong on this.
All that said, the $LADR stock price did plunge from its ATH of $19 in Feb 2020 to about $3 in March 2020 due to the COVID scare that caused a broader market downturn at that time, but it has steadily inched back up to where it is today, at around $11. How can that be if their business is built on a pack of lies?
Well, as the Pro Publica article mentions, the Fed threw a bunch of money at the CMBS market via the CARES Act last April (PPP, mortgage forbearance, etc.), which likely kicked the can down the road. And while Biden's recent $1.9T American Rescue Plan doesn't contain any direct support for the CMBS industry, it's clear that the QE provided by that plan will likely push any widespread CMBS correction further into 2021 or 2022. This aligns with some speculation by the Motley Fool (*throws up a little*) back in June that people should keep their eyes open for CMBS failures "over the next 12 to 24 months." There's also an outside chance that the 2020 Hope Act, which "establishes an equity facility in the Department of the Treasury to assist commercial mortgage borrowers," could still pass and kick this failure can further down the road.
All that said, my prediction is that we'll likely see a short term uptick in the CRE market as businesses come back on-line following the easing of COVID restrictions, but this won't be enough to save the market from bad underwriting. The Griffin study supports this when it says, on page 4, that "the difference between dubious and duteous originators will persist after the current COVID crisis." So, we'll eventually see the house of cards collapse and I'm going to bet it does so by the end of this year or early next year. Now, if there is some wider market correction ***cough CLO/Treasury collapse***, this could all happen much sooner. Note, the farthest out you can buy puts on this stock is 12/17/2021. ***sad trombone***
I will also be paying close attention to the $LADR Q1 earnings release on May 3, 2021. Current EPS consensus is .08/share, which is the same as it was for Q4 2020, but which the company missed by .03/share (actual EPS was .05/share). Note, the company issued a dividend of $.20/share in the lead up to their Q4 2020 earnings report, and they have done the same for Q1 2021. Accordingly, I'm also predicting a 30% miss on EPS for Q1 2021, just like Q4 last year. I don't anticipate, however, that this EPS miss will have a huge impact on share price. Might drop it a buck or so in the short term. The real fall will come when their shitty loans start going bad later this year.
4. Target Price
As far as price goes, this is where I get out of my depth. I am just not equipped to crunch all these numbers from the articles and read financial statements and all that shit in order to say the company is going to drop by X%, so I'm just going with my gut feeling here. I would really love some help on this point from some wrinkly brain apes who are good with numbers.
So, I'm just going to look at what happened to the stock back in March 2020 and say that it will probably happen again when the shit hits the fan; the price will drop to around ~$4-5/share.
5. Counterarguments
So, there are obviously a lot of counterarguments on which I would be happy to get some feedback. I have considered these, but maybe not weighted them strongly enough, in drawing my conclusions. I welcome your comments and criticism on these and any other counterarguments I may have missed:
Even if $LADR is chronically overstating the income of their borrowers, the value of the underlying real estate may be sufficient collateral to stem any losses from widespread defaults.
Most analysts are bullish on this stock, with the consensus rating now being to buy. Current analyst price target range is $12.50 - $14.00 with an average of $12.80/share.
As the Intercept article posted above notes, Ladder's "three largest tenants are Dollar General, BJ’s, and Walgreens.” This is good for Ladder given the current inflationary economic environment as consumers are looking for ways to save money and discount retailers benefit from this. In fact, Dollar General is having an amazing year. Their stock price has gone up about 55% from $140 following the March 2020 crash to $218 yesterday. So, if Ladder's largest tenants continue to do well, Ladder may be able to absorb/mitigate any loses from their poor underwriting for other borrowers.
Update: /u/steveressi12 and /u/_dmm both note that DG isn't actually doing that well. DG apparently has a Debt:Asset ratio of 75% (I haven't been able to independently verify this number). DG is also going to hire an additional 20,000 employees soon, which will significantly increase their expense load. This is bad news for their ability to pay back their debt. Lots of bearish DG articles on Yahoo! Finance in the last week. I may do some further DD on DG, as it looks like that may be another good bearish play. Guess I'm becoming a 🌈🐻?
Ladder's business is not limited to CMBS origination and securitization. They also are a commercial landlord, which could, again, offset any losses from their CMBS shenanigans.
Ladder won't be holding the bag if these CMBS fail; their investors will. As the Flynn study notes; "the loan originator is not paid according to the loan’s future performance, but from fees and markups when the loan is sold... [Accordingly,] originators and underwriters may have incentives to build and burn their reputation." So, there's always a possibility that these securities fail, but Ladder survives.
Update: /u/steveressi12 notes that Ladder's weighted LTV is about 67% (another number I did not independently calculate), which should be sufficient to weather a few defaults, "barring a major uptick in cap rates across different CRE spectrums." S/he also notes a weighted average remaining term of 13 months might be "odd for a portfolio of that size" and that "their unencumbered asset to unsecured debt ratio is relatively thin (1.74x vs. 1.50x typical unsecured facility covenant) and loans that are struggling are typically marked down more aggressively within 12 months of maturity... All in all it should be an no [sic] interesting two quarters to see what they do."
6. Closing
Boy, if you've read this far, I really appreciate you and would welcome your thoughts and criticism.
I feel pretty good about this thesis, but not good enough to YOLO, since it's my first time doing something like this. In fact, I've only made a very small investment by purchasing the following Puts:
20 x 12/17/2021 $7.50p @ $.25/share
Update: The following math is just the easiest way to calculate a potential gain on this play. /u/greenday10Dsurfer pointed out that the EV/IV of these options could actually result in a bigger gain than this depending on if/when the stock crashes. The thing I will be watching is the premium on these contracts. If it goes above $2.25/share I will be doing better than the below scenario.
If I'm correct, my potential gain is ~900%:
Cost of Contracts (20 contracts @ .25/share = 2000 shares x .25 = $500) + $20 commission
$520
Cost of 2000 shares @ $5 price target
$10,000
Right to sell 2000 shares @ $7.50 strike
$15,000
Profit from share sale
$5,000
Profit minus cost of contracts
$4,480
Total Return (4480/500)
896%
Yes, a ~$4.5K profit on a $500 investment is small potatoes, but I want to dip my toe in the water and see if my ape brain is working properly before taking bigger risks.
Let me know what I missed, fellow apes and, again, thanks for reading!
*Proof of position:
My $LADR Puts
Update: You crazy fucks. I hope we all win!
Apes buying $LADR Puts
