Portfolio Review

I am no longer as confident about my hypothesis that 3D systems (DDD) is in a bust phase. The better-than-expected revenue and earnings at competitor Stratasys (SSYS) has buoyed optimism in the space. I am worried that this will turn around the tide of negative perception that has driven DDD lower in recent weeks.

However, I am encouraged by the fact that 3D systems has not made any recent acquisitions. This would seem to fit with the thesis – that as the stock price declines, the ability of 3D systems to trade overpriced stock for companies with real earnings will decrease. Now 3D systems will have to be measured by its organic growth alone, which is not enough to sustain its lofty multiple – a P/E ratio above 70.

Stratasys seems to be at a different place in its own reflexive process. The results reported were better than expected partly due to a large acquisition. However, the boom has not been as strong as 3D systems’. Reflexivity plays a smaller role in Stratasys’s earnings – the company does not rely as heavily on stock sales to finance its acquisitions, thus the effect of perception on fundamentals is less direct. In addition, the organic growth rate (i.e. growth rate independent of acquisitions) seems to be larger than that of 3D systems.

For now, I am in wait-and-see mode. But I am edgy. I upped my short position on Friday, after reading 3D systems earnings report and seeing the fall on Monday at a much larger volume of transactions followed by a rise that was sustained by fewer transactions. Thus, I established that the rise was temporary, an effect of smaller-sized market participants, and the big money is still selling the stock.

In addition, I have been killed on my puts for March 14. This was a trading mistake. I never should have bought options that close to expiration, and I have paid for that lesson. The time value depreciation is much larger than the potential gain from a stock fall, unless the stock breaks $30/share before they expire. My May puts are hovering at profitability as well. In the future, I will probably steer clear of options as a tool – my type of reflexive reasoning has been better at predicting eventual results than the timing of those results. I purchased the options to take advantage of the short-sale restrictions that had been in place, and these options should have been replaced by short stock positions at a good opportunity.

As for my other positions, they are not fairing as well as I would have hoped. Though C&J Energy (CJES) finally broke its resistance at $23-$23.50, it is still testing this price, now as a support line. It remains to be seen whether the price will hold. WTI Crude has been in a steady decline for the past few weeks, so I believe that CJES holding above $23 is dependent on WTI holding above $90.

I have more confidence in Core Labs (CLB), because of its dependence on overseas operations. However, Core Labs does not offer an attractive value at this price. I would be willing to trade it for something more undervalued that is exposed to the same trends.

Bassett Furniture (BSET) has been a reliable play in my portfolio, as the housing boom seems to be continuing uninterrupted. It still has not reached a multiple of book value that I would be uncomfortable with, and the housing boom is far from over, so I am sticking with BSET for now.

The banking stocks (BNCC.pk and BBBI.ob) are relatively flat since purchase. They likely will not move much without a major announcement.

But BNCCorp’s annual statement provides an insight to a potential weakness in the company. Though it has been making a killing issuing mortgages in North Dakota, profiting off of the Bakken Shale explosion in the region, BNCCorp’s interest income has been steadily falling in an environment of low interest rates. If the mortgage banking revenue begins to fall off, the company will not be able to sustain its current level of earnings. At a 40% discount to book value, the stock is still worth owning at this point, but this is something to watch.

PGS (PGSVY) has declined significantly in recent weeks. It released fantastic earnings for 2012, however the guidance was below analyst expectations, and the stock dropped. It is sitting at an attractive price; with Price to Free-Cash-Flow ratio is sitting below 10, excluding expenditures on its MultiClient operations (P/FCF is a useful ratio to evaluate PGS because it has to depreciate those large Multiclient expenditures over time). I have confidence that PGS will be able to find buyers for its current MultiClient projects, since they are in high interest areas like offshore Africa. With Brent Crude prices above $110, offshore Africa will become more and more attractive to the big exploration and production companies. I would be willing to accrue more shares if I can get a price in the low $16 range.

As for Food Technology Services, Inc. (VIFL), I am waiting for the next earnings release and conference call to review the investment.

Overview

It is hard to find any other ideas that are as good as CJES, VIFL, or IMAX right now.

VIFL and CJES both provide compelling values right now. VIFL’s P/E of 18.88 is still too low for its growth rate, and CJES’s P/E of 7.66 is ridiculous.

VIFL is pressed on cobalt prices, but they are loaded up for the next several years (one reason the cash flow was drained last year). They are getting good deals occasionally from Nordion, below market price. One can only hope that their prior relationship allows these sorts of deals to occur. However, even if the capital injections required for the cobalt have a substantial effect on VIFL’s cash generation ability, they have so much buffer on their cash flow that VIFL will still beat the market five years from now.

The natural gas prices have me worried. At these rates, E&P companies are pulling their rigs from shale fields. CJES has an advantage in being located in oily plays, but as other fracking companies start pulling their fleets from gas rigs, they will increase the supply of frackers for oily plays. The extra competition may drive day rates lower.

I am continually worried about a supply glut coming in fracking fleets. That is the major concern with CJES. Like I said earlier, there is no sign of that happening yet, given Q3 margins, but the supply glut in natural gas may eventually trickle back to the frackers.

In order to get clarity on the situation, I will have to wait for the conference call. I am sure analysts will ask about this. I will need to hear what management is saying about possible oversupplies in frackers. If they do not guide down, I am likely to stick with this investment until the 10-Q numbers show some sort of warning sign.

I do not believe that CJES will turn completely down within the three month time period between conference calls. No major shift in a fundamental play like this happens that fast. The entire E&P industry couldn’t shift that fast. Could it?

Where would they shift to?

The obvious answer is that E&P’s are pouring more of their energy into international and deepwater markets. Which makes me lean towards NE or RIG or ESV or SDRL. Wow, I wish I had followed my gut on a RIG speculation at 39. It was trading at book value, with a positive cash flow, share repurchases, and a strong underlying trend. Now I do not feel that my margin of safety is so intact, though I still feel that the stock is going higher.

HAL may be a better play right now. I feel that they are the most innovative in fracking techniques, and they are going to revolutionize fracking before any other company will. There may be some other smaller companies in this space that are being overlooked as well. But HAL is trading at a discount STILL because of its Macondo involvement. This cannot go on forever. Even if there was wrongdoing at HAL, it will not damage the reputation of HAL. Across the industry, it is still trusted. I need to research this more. The perception has been turning positive among some analysts. I need to decide whether or not to get shares before they get expensive.

IMAX may not provide an obvious discount anymore. If we use the income from a previous big year (2010) as a baseline for what they could do in 2012 (since they have many more theaters now, 2010 income should be lower than 2012), then we get a P/E of 28. Not exactly value investment numbers. That P/E was based on earnings that have the tax benefits backed out of them. I don’t think those tax benefits will be recurring, because 2010 was the first time I saw tax assets on the balance sheet, and IMAX used those immediately.

Is the margin of safety on IMAX gone? Where is my protection of downside risk? The stock is hovering near the top of the RSI – around 60.

But I can’t help thinking that the stock will trade up when the obvious big hits start hitting the screens. The market perception would have to get more positive when the major blockbusters hit the screens. Most of the move should be complete by summer.

Is it worth it to sit and wait?

How could I be wrong about IMAX? Will people really start shunning the more expensive IMAX theaters? Or, alternatively, do studios prefer to work with RealD rather than IMAX?

Just occurred to me that RealD might  be a discount at current prices. It is way oversold, and has been for a long time. Star Wars 3D is coming out soon, and I believe it will be very successful. RealD did the 3D technology for this, and it derives its revenue from admissions-based licensing fees. Therefore, I believe that RealD will rake in a nice chunk of change from Star Wars.

RealD is trading SOO low right now. Its 6-month trailing P/E is 25.70. That is insane. And with the Disney movies, and Ghost Protocol, there must have been substantial revenues generated this last quarter.

I will have to come to a decision on this soon. Something will happen to the stock when it announces on Feb 1.

Greece and Europe

Greece. Wow. What a bad situation. Is there a reflexive process occurring here? The government’s implementation of austerity measures might be further fuelling Greece’s inability to collect revenue. I am reminded of the Laffer Curve – maybe Greece is edging further into the right-hand portion.

Maybe its economy will never recover.
But what will happen? Surely the other European countries will not let Greece default. The fear of the consequences to THEIR economies is too great.
There is only one recourse for the Eurozone. Let the printing presses fly.
Perhaps by printing huge amounts of money, and loaning at low interest rates, contagion spreading from Greece can be avoided. But the situation for Greece itself will be awful for years to come.

If the rating agencies devalue Italy’s debt, or Italy’s creditors themselves get scared and jack up interest rates, Italy could be in danger of a default as well, and also require a bailout. If this occurs, the ripple effects would be enormous. Likely Portugal, and perhaps Ireland, would be next on the list.
No matter what happens, the Euro is going to MASSIVELY devalue over the next several years. The dollar is a possible benefactor, but the obvious benefactors are the currencies of Asia. I am particularly interested in Southeastern Asian countries. Those south of China, with more free currency policies.

I wonder what the impact of the massive influx of Euros will be on the energy industry.
Norway is a strong benefactor here, and perhaps Europe’s most important source of oil (1). I was so impressed by the description of integration of 4D technology in offshore Norway – this technology will become a staple of the industry in the future (2).
While (1) points out that Norway oil exports have hit a peak already, I would argue that the integration of new technologies such as 4D seismic will allow for greater recoveries than had ever been imagined in the past, and that Norway’s fields still have many good producing years ahead.
I did not realize that Denmark was also a significant producer.
I do not imagine demand will be very high in Europe over the next few decades. It will probably remain at current levels – the only impetus for price increase here is the constriction of supply. Further, increasing demand in other parts of the world also constricts supply.

(1) http://www.spe.org/ejournals/jsp/journalapp.jsp?pageType=Preview&jid=EREE&mid=SPE-96400-PA
(2)http://www.theoildrum.com/story/2006/9/22/95855/4850