Tag: C&J Energy Services

Portfolio Review

On By Jay UnniIn Investing, Speculation1 Comment

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150% after the announcement that the private offering – which was way below the intrinsic value of the bank – has been withdrawn.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.

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Overview, part 1

On By Jay UnniIn InvestingLeave a comment

My funds are up significantly to-date, but so is the market.

The market feels overheated, so I am cautious, and looking to reduce my exposure where I can. Any securities that I had been holding as value investments may be approaching correct valuation, so I am going to have to re-evaluate.

Core Labs (CLB) is a position that has been great for my portfolio. Up until now, there has been a two-fold case for the investment – the undervaluing of its shares, and its position as THE dominant player in reservoir analysis and management. In addition, its perforating products had been selling like hotcakes to many of the shale E&P companies. However, there is evidence that growth in the latter is slowing, and recent reports of drilling rigs being pulled from dry gas areas may negatively impact these products performance. Core’s management has even stated that they did not expect the past levels of growth in these products to be sustainable.

Core is also approaching a good valuation for the shares. I would place a good target price at $140/share. However, the whole oilfield sector is due for major appreciation, as geopolitical risks show no signs of cooling down, and oil prices continue to rise, and a rising tide tends to lift all ships. Core will likely appreciate along with the likes of Halliburton and C&J.

Can I still justify my investment in CLB, with HAL and CJES sitting at such ridiculously low valuations? Especially with C&J, the latest quarterly report has just confirmed the trend of earnings growth, and indicates a speeding up of growth, as three new fleets will be deployed in 2012. This is a 50% growth in its fracking business, which itself brings in over 80% of its revenues. C&J is also set to grow its coiled tubing business this year.

Further, C&J is a 100% liquids play now. They have moved their last fleet out of dry gas regions, and enter 2012 with all of their fleets in liquids rich regions. The only problem that seems to be occurring with the trend is a delay further upstream – there have been well delays because of constriction of supply in drilling rigs. When demand is outstripping supply, is that not a good thing?

With over 25% of my portfolio in this single stock, I am reluctant to commit to it further. Especially because its shares have appreciated so much since my initial buy-in – I feel I missed out, and now must wait.

This is probably foolish, but I should not ignore the effect of this emotion – does it have merit? If not, I can safely disregard it, hold my nose, and continue to load up.

But it is true – CJES does not represent the same value proposition that it once did. Buying it at $22 a share is much different than buying it at $17.

But how can I value this company properly? Because it is also a reflexive process – CJES is fueling its growth through share issuance – does my traditional value measurement even apply?

It has a 13.66% earnings yield, and a P/E of 7.32. From a return on my equity, it gives 64%, similar to its ROA of 42%, since it carries no debt. A price to free-cash-flow 4.83, almost all of which is used for the new fleets.

To value it from a PEG ratio, I expect anywhere from a 50%-100% earnings growth this year, which would translate to a PEG .14 to .07.

But can a GARP approach make sense here? There is a reflexive influence. It inflated the market cap by about 10% last year – this year we might expect something similar. If that were to occur, at today’s prices, CJES would still have a P/E of 8.05, still leaving significant margin for safety.

And the reflexive relationship may decrease over time – as CJES’s operating cash flow increases, it can increase the proportion of capital expenditures financed by operating cash flow and decrease the amount funded by share issuance.

Well, at least three questions remain –

1. At what price would I stop being a buyer?

2. At what price would I be a seller?

3. How much of my portfolio am I comfortable with allocating to this one stock?

1. I don’t have an exact answer, but I believe that a P/E of 10, it would cease to be such a screaming value. The stock does carry some risk – perhaps regulations, but more likely the ceasing of the trend, caused by decreasing oil prices (a resolution to the Iran crisis, Saudi Arabia flooding the market, or extensive oil finds outside of CJES’s core areas). The resolution of the Keystone pipeline could provide another risk to this stock, by flooding the United States with new, potentially cheaper, oil.
A P/E of 10 would give a top buying price of $30, which is still 36% higher than today’s price. Wow.

But that is my top purchase price. I get a feeling that buying at any price higher than $25 would not be prudent. If I want to allocate any more of my portfolio to this position, it should be at prices below this. If it so happens that I get a flood of capital after the stock has appreciated, I will have to evaluate the current market at that time – maybe there will be an abundance of great values by that point (i.e. maybe a crash will occur before then).

2. To gauge this, I would normally use the valuation of a current oil service major. But with much of the sector depressed, current valuations of BHI and HAL seem too low to correctly gauge. And SLB and CLB, with P/E’s of 22.6 and 32.9, respectively, are given high valuations because of competitive advantages that I don’t believe are present in CJES.
The growth rate will slow as the company’s installed base increases, at the same time that every other oil service major is increasing their installed base.

3. I would be comfortable below a max allocation of 50%. Anything more would be too much in one basket.

So that is an analysis of two of my holdings. Since CJES is below my stop-buying price, and provides significant upside from here, I am going to stick with it, and move over some funds from the hot CLB.

But what about the rest of my holdings? I want to make my allocation to CJES much closer to 50% than it is currently. I will have to do a follow up post on some other stocks that look less compelling that I am holding.