Part of what makes the stock market so lucrative, is that it often responds in unexpected ways to new data—offering outsized profits to those that take advantage of these opportunities. Take the curious case of Aimia Inc (AIM – Canada) which I wrote about previously. The bear argument at the time, was that the Aeroplan business was permanently impaired by the pending termination of a partnership with Air Canada in 2020. At the time, I made the case that as long as the Aeroplan business did not have a negative value, the rest of the company’s assets were basically worth the current enterprise value, offering plenty of downside protection along with sizable upside if Aeroplan had true value. Aeroplan could only have negative value if there was a run on the bank where redemptions rapidly spiked and forced the current deferred redemption liability to become a real liability. Meanwhile, there would be substantial cash flow accruing to equity owners over the next three years until the partnership terminated.
Fast forward a few weeks and the second quarter earnings are out. There was indeed an increase in redemptions, $9 million, or a 1% increase in annual redemptions—in finance, this is called “immaterial.” Even better, Aeroplan is not dying. Card spend was up 3% and new card issuance in June was basically in line with prior trends. Basically, the number one fear of equity holders did not happen. All the talk of a crisis at Aeroplan was just a media echo-chamber. At the time, I was an optimist on the business, but even I was surprised at how resilient it has been. Aeroplan is growing—no one expected that.
Why do I bring this up? When I first wrote about AIM shares, they traded for a few pennies over $2.00. Now they trade for about a dime less, yet the investment has been dramatically de-risked. If the market were intelligent, the shares would have rocketed higher to account for the dramatic reduction in risk at the company. Instead, you can buy into a de-risked version of the same investment at a lower price, as the market basically shrugged its shoulders. I added a good deal more and AIM is now one of my largest positions.
Of course, good news can sometimes be “priced in” and that accounts for the lack of price movement. However, I don’t think this is the case as management reiterated guidance of $220 million of cash flow in 2017, with sizable cost savings starting to occur in 2018. This clearly isn’t priced in at a $300 million market cap.
I always ask myself why the market gives you a gift. I think this remains a situation where most logical equity investors are Canadians who are either too lazy or too stupid to actually analyze the company beyond the fact that the partnership with Air Canada terminates in 2020. In any case, that’s what creates this highly unusual opportunity to buy the same investment, with a much lower risk profile at a slightly lower share price. I tend to REALLY enjoy opportunities like this—they also tend to correct themselves pretty quickly once new investors figure it out.
Disclosure: Funds that I manage are long AIM CN