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Investing In Oil Tankers: Frontline (FRO), Euronav (EURN) - YouTube
Channel: TD Ameritrade Network
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as the world tries to assess the
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inflation problem there's been a focus
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on shipping in the supply chain let's
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dive into some of the stocks so with
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direct access to that story john
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chappelle joins us from evercore isi
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senior managing director covering some
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of the shippers john thanks for being
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here this afternoon how's the oil tanker
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trade is there still juice left in this
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because it seems like some of your uh
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recent commentaries kind of pulled back
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a little bit of some of the bullishness
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well i think it depends on which stock
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we're talking about as it relates to the
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relative bullishness but yes i think as
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an industry the cycle is in the very
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early innings of an upturn and really
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it's driven by both supply and demand
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factors with a little bit of
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geopolitical cream on top so to speak
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you know i don't think we're going to go
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back to europe taking russian oil to the
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extent that they did you know three
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months ago and prior to that and as we
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redraw the trade map of crude oil trade
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and refined product trade which has been
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the most direct beneficiary diesel jet
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gasoline
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this market's only in the really early
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innings with very little capacity coming
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online uh in the next two to three years
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so barring a big global recession in
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demand destruction i think the oil
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tankers have a lot more space to go okay
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and so while looking at eight stocks
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that you cover uh in the tankers uh
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category
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seven out of eight of them you've still
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got an outperform rating uh target
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prices uh maybe dialed back on let's see
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about three or four of them but just
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kind of marginally still mostly trading
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above where they are one of the ones
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that catches my attention is uh
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frontline which has had this explosive
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move over the last month and then today
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gap down big what's going on here
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yeah so i mean frontline's a mix of
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broader market trends and also some
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company specific issues last week it was
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up 31 as you noted in five trading days
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and it wasn't one of those up 20 then up
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to it was five six percent every single
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day of the entire week i think people
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are starting to get more comfortable
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with the fact that oil demands
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recovering inventories are very low
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geopolitics are trading the or changing
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the the world trade map and capacity is
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really light and frontline is a big
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liquid proxy that's traditionally had a
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good dividend to pay you directly and
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immediately from these trends in the
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market frontline's also
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in the middle of a pending merger with
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urinab which is another massive oil
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tanker company would create the biggest
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oil tanker company in the public markets
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by a landslide and over the weekend they
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announced that they used some of their
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shares to purchase some of the shares
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from urine ave in the open market on a
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stock for stock basis because one of
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uranus existing shareholders
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is trying to put the brakes on that
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transaction i think the dilution from
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that deal alone plus the fact that the
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stock was up 31
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is what's taking the 16 out of it today
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but still a big winner year to date
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still a very good um kind of runway for
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the next several quarters and years i
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think for frontline especially if this
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potential merger were to go through so
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even with the merger happening a lot of
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times companies merge and uh the prices
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come off but in this case it's seeming
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like the market really likes the scale
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the volume that they're getting from
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this and as you mentioned the potential
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upside on these uh generally looks
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between 30 50 for some of them for
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frontline to your target uh you know
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well i guess it's changing pretty
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quickly here but you still think it's 11
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stock is that the latest so it could be
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fairly valued near those recent highs
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things change very quickly so what i'd
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say is we use cash flow multiples to
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help us get to our fair value of stocks
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however price to net asset value is also
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a metric that's widely used in the
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industry in the early innings of a
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recovery asset values start to move but
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asset values are far
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more liquid and less elastic than you
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know cash flows or earnings or spot
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rates to drive them so based on today's
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asset values i think we get to 11 or 12
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dollars if asset values then tend to gap
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up 20 30 40 as they have in prior cycles
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and you think about the 50 leverage that
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most of these companies have the upside
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could be far more significant but we
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have to do what we have line of sight on
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today we clearly don't know what the
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outcome is going to be in eastern europe
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and exactly what that's going to mean to
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the world as it relates to oil and
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commodity trade
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but based on what we've laid out before
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the capacity side being incredibly
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restricted the lowest amount of new
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capacity set to come online since the
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mid 1990s with those low inventories
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with the geopolitical risk with oil
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demand recovering um again i think we've
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only just begun
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in this industry and really the stocks
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have moved before they actually the
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underlying earnings themselves frontline
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will probably post their first profit in
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eight quarters um in this upcoming
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second quarter wow and uh the dividend
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as you mentioned i mean they pay it
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almost five percent
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dividend which is pretty chunky uh even
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by the standards of this group where
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dividends uh most these companies offer
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some kind of dividend as the merger um
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creating potential for them to expand
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that i just want to come back to that
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point because we've been seeing stocks
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regardless of sector or business they
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pay a dividend they'll be getting a lot
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more attention this year
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that's right i mean to be clear they
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haven't paid one in some time because
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we're coming out of the worst market in
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30 years um as we get closer to cash
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flow starting in the second quarter
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positive earnings that's when their kind
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of formulaic method of paying dividends
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kick in it's important to understand the
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founder and the largest shareholder
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frontline is a tanker titan so to speak
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the way that he gets paid is through the
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dividend so you invest alongside john
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fredrickson you tend to get paid
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in the upturns as well with the
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potential merger going through and
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almost doubling the size of the fleet
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doubling the earnings leverage
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associated with it you don't get any
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cost energies from shipping mergers you
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still need 27 crew on board a tanker 25
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whatever the case may be but what you
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get is bigger market cap
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more liquidity this is a group that has
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never been in an index of any size
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nobody needs to own oil tankers and
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therefore they only own them when things
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are going really well so if you have a
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company that has a four or five billion
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dollar market cap coming out of the
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trough of the cycle it becomes very
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investable you throw a dividend in a
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cyclical recovery on top of that i think
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the eyes and the invest potential
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investors on this stock uh could be far
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greater than at any time since
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pre-global financial crisis very
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interesting okay great context too that
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um
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this has been a
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longer term trough for the business in
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general so coming out of that uh maybe a
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little slingshot action okay john thanks
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a little overlooked uh discussion for us
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that might be getting some more
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attention coming up here this year
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thanks a lot
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thank you oliver yep john chappelle
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senior managing director evercore isi
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the eight tankers seven buys out of the
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eight
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front line with a lot of volatility
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but a dividend coming too
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you
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