Portfolio Review

BNCC is now up 150% after the announcement that the private offering – which was way below the intrinsic value of the bank – has been withdrawn. I will attribute the first 50% to skill (based on high earnings for BNCC), and the last 100% to luck.

I advise selling at least half at this point – there will be a lot of profit taking going on now, but the stock still has huge growth potential.

I need more powder to load up in case of a crash, so I may need to sell more. Also, GMCR looks extremely attractive here, so I think I will buy more for a fall rally.

My remaining position in IMAX is killing me; it was a mistake to retain half of my position after the Avengers premier. I should have sold it all. I am going to sell out of my position and purchase long-dated calls for January 2013 and January 2014 – yes, I may give up a substantial amount in case of a crash, but the reward:risk is probably around 3:1 for Jan 2013 $20 calls. (I think the stock could go as high as $26 after The Hobbit – which was the level of resistance in early March, and the calls cost $2 a piece.) For 2014, I’m not quite as sure,  but the theater base will be large enough that margins will have come up by then, and there are two knockout blockbusters in late 2013 – the sequels to The Hobbit and Hunger Games.

RLD looks good for the rest of the year. Exactly as the CEO had indicated, the capital expenditures have come down as the theater base has reached saturation, so free cash flow is positive for the first time in several years. This will translate into either decreased debt load or higher cash balances.
At a price/book ratio of ~3, we can’t expect rising cash balances, and thus increasing equity, to have a major effect on stock prices.

However, if management chooses to retire debt, we could get a small boost to the net income to help year-over-year comparisons.

The pre-tax income of RLD last quarter was $7624 k and the cost of interest was $313 k, so we could get a boost to pre-tax income of 4.1%, translating to a post-tax increase of 6.5%. (The post-tax increase is way higher, due to the insane tax rate of 60% that RLD voluntarily pays, instead of taking its deferred tax assets).

Management used the free cash flow last quarter mostly for cash reserves, but devoted about 10% of the free cash flow to paying down debt and buying back shares. If management continues to do more of the last two options with future cash flow, we could get a real impetus higher for the stock. I am all for free cash flow valuation, but the P/E ratio is really what attracts new investors to a stock.

My small position in GLW was most definitely entered prematurely, however, once we see signs of TV sales increasing, it will already be too late to enter the position. I will hold, but if I do not see signs of TV sales increasing this fall, I will sell before the spring.

CJES and HAL continue to dominate a large portion of my portfolio. With oil prices near $100 and rising, I cannot see a GOOD reason for the low prices on oil service names.

The reason for the initially depressed prices for the whole sector is low natural gas prices. However, the negative feedback of these prices has caused less natural gas production, and thus, prices for natural gas are rising. This rise in natural gas prices has still not filtered down to the oil service names in a major way. However, this trend will continue into the fall. The major impetus for this sector could come in the form of an unusually cold winter. Even in the absence of that, I do see an increase of at least 20% for the whole sector by next spring, however the boon of cold weather would take the sector up an additional 20-30%.

Halliburton has another factor of course – the continuing coverage of BP’s Macondo disaster. However, as the court proceedings go on, it seems more and more likely that HAL will not bear any of the liability for the disaster, and the blame will fall squarely on the shoulders of BP, or, possibly, Transocean. Perhaps this is my own biased way of reviewing the events, but until there is more clarity, I am content to hold HAL.

I still consider CJES to be my lowest risk position. The main risk is that of EPA regulations imposing more costs on hydraulic fracturing, however the combined upsides from the inevitable oil-shale trend and its incredibly low P/E ratio make it too good to pass up. The only other concern I could think of is that the company is too good to be true – I will have to do more investigation on the operations of the business in East Texas to assuage that concern.

I sold off GOOG a while ago for more cash. Though the stock has appreciated since, and still remains at a low P/E/Growth, I feel the market overall is getting overheated, and big-cap names like this will be most discounted if there is a sell-off in the S&P 500.

I still have the VIFL I bought at 4.50 and doubled up on at 5.20, so it’s up considerably. I held it too long, I should have sold at $7, but I deceived myself by looking for a wedge pattern to the upside. Now, I must move on and accept the fact that it is tying up far too much of my capital. It is still slightly undervalued with a PEG of .84 and a cash-backed out PEG of .70, and it has an attractive free cash flow yield, however it is not as undervalued as I would like it to be for a hold. I fear I must unload some shares, at a slightly decreased price in the low $6s. An opportunity for a higher price was lost, but if I translate this sale into a better idea, like GMCR or CJES, I think I will end up glad I did.

GMCR is still terribly undervalued here, with PEG of .50. Again, if a cold winter blows through, we could get a big coffee boost, but this is not something to be counted on. Without any winter effect, GMCR is an idea that has been proven in one geography – the Northeast – and is now spreading across the continent, locking in rapid earnings growth as it spreads. Starbucks has been clear in its plan to partner with, rather than compete against, GMCR, and this is perhaps the most important coffee brand.

I am not concerned about the patent expiration, because the only competitors to release on the Keurig platform are low cost store brands. Since GMCR has a high upfront cost and typically high K-cup costs, the customers already on the system are those with disposable income who are willing to spend for high-quality, branded coffee. I would only be concerned if a more premium brand, like Peet’s or Starbucks, decided to offer their own K-cups.

The SEC investigation is ongoing, and is the biggest risk with this investment. However, the potential reward is at least 100% from the $23-24 level. The risk is hard to quantify, but probably less than 60%, so I feel comfortable deploying up to 20% of capital, though I currently hold closer to 7% of my capital in GMCR.

That is everything I hold right now. The take-aways are: Load up on cash for a potential market crash, and sell off on the least undervalued options to move into the few incredible values out there.

Disclosure: I own shares of BNCC, GMCR, IMAX, HAL, CJES, GLW, and VIFL. I may purchase more shares of GMCR in the next 72 hours.

Speculation Diary

No speculation yet, though I may get long the Singapore dollar if I see a good technical entry point. Cannot bet on the dollar/euro with this much uncertainty out there. AFK looks like a decent long on my general speculation that Africa will really emerge in an environment of high oil and commodity prices and a lack of other high growth emerging markets. Gold may be a good long here, but I am not well enough versed in the fundamentals of gold trading to speculate.

The S&P may be a good short in the next few days. I would have to wait for a break and an unsuccessful test of the 1400 level. The fundamentals in the United States are much worse than the market is suggesting here.

Spain

The perception on Spain was more positive last week, or at least less negative, causing a pullback in the downtrend in Spanish stocks. However, this was short lived.

The expectation was some sort of “grand fix” that would rescue the Spanish banks, and thus, the economy. What the market is hoping for, and will not get for the foreseeable future, is an insurance on deposits to defend against a run on the bank, similar to the FDIC guarantee in the United States. However Germany and the Sweden have both signaled that this would be unacceptable. As Germany’s finance minister has said, joint liability would not be acceptable without joint decision making.

Instead, Europe has agreed to lend to Spain $100 billion euros that Spain will then use to purchase equity in its banks.

I think this is actually a good idea. Rather than indebting the banks with more loans, as the United States did with TARP funds, a purchase of bank shares boosts the value of the banks’ equity, which will then allow the banks to directly lend MORE, by reducing the debt-to-equity ratio.

However, the market turned negative after the announcement. The package was not as robust as was hoped, and further, the new loans will have to be paid back before other Spanish bondholders are paid. This does not secure the bondholders place, so yields are rising, and going to continue to rise for the near future.

The worry now is about the Spanish government‘s ability to raise new capital, and to meet its existing payments. Reflexively, these worries are causing them to come to true – as pessimism increases, yields on Spanish bonds increase, and Spain will have to pay higher rates on new debt issued.

These worries are new. Previously the only real concern was the banking system within Spain; the Spanish government itself has a debt to GDP ratio much lower than the other at-risk countries – Portugal, Ireland, Italy, and Greece.

However, it is the original concern about Spanish banks that will have the greatest impact on Spanish stocks. The credit contraction is sharp and will continue – banks cannot lend, because their borrowing costs are high and increasing. Spanish homeowners are saddled with debt, and at least 20% are unemployed.

A reflexive process is also at work, further exacerbating the situation. Ratings agencies are downgrading the debt of the Spanish banking sector, causing borrowing costs to rise, which may trigger further negative perceptions.

The link is clear, and the situation will deteriorate. However, the process is not sustainable, and it will not continue forever. The bailout package, or a future move by the ECB, may have a positive effect in the coming months. But in the short term, I continue to be bearish on the Spanish stock market.

I have a short out via puts on the iShares Spain ETF (EWP). Luckily I was patient enough to wait out the pullback, and I got in late late last week. I am hovering at about cost basis on them, but I believe that perceptions will worsen as we near the Greek elections. The puts are only worth about 1% of my portfolio, so I am not too worried about being wrong – which is likely – because the other 99% of my portfolio is long and will rise if perceptions suddenly turn around. On the other hand, if I have read the market correctly here, I will be able to mitigate the fall in my stocks and maybe end up with greater profit than if I had done nothing.

In the meantime, I am looking to accumulate shares of profitable U.S. stocks, and stocks in Europe that do business outside Europe, like Catering International Services (CTRG) and Petroleum Geo Services (PGS), both of which are linked to commodities. I think we are nearing a bottom on oil, as the Saudis have reached their goal of $100 oil prices (Brent crude) and will probably start to reduce production. So, I might like to accumulate more oil service names, like C&J (CJES) and Halliburton (HAL), but I am hesitant because I am already so overweight on the sector (it represents more than 50% of my portfolio).

Spain Looks Like A Perfect Short

Shares of the ISCI Spain Index Fund ETF (EWP) have been in a tailspin for the last two months, as depositors have withdrawn from major banks fearing for their cash. It is looking like Greece’s withdrawal from the Euro is almost certain, and Spain will be up as the weakest link after Greece withdraws.

The withdrawal of Greece from the Euro will probably have a domino effect, causing shares of Spain’s Index to tumble as well. However, in the short term, if regulators announce some sort of a guarantee for depositors, EWP could pop temporarily. I will be watching this closely as a possible short for the next few days.