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150% after the announcement that the private offering – which was way below the intrinsic value of the bank – has been withdrawn.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

Today’s ideas

I was considering speculating on the power outage occurring in the Eastern U.S., but I am not seeing what I thought I would see.

In the power outage of the Northeast in 2003, the company most affected, First Energy (FE), dropped a lot after taking blame and the brunt of the damage. However the most affected companies in the power outage, AEP and FE, have increased since the outage. Something else is at play here… or these are good short candidates.

GMCR is up another buck today. I am feeling foolish for not trading out my ATVI this morning.

But perhaps there is a silver lining. Vivendi is seeking a buyer for its majority stake in ATVI. I think this could be bought out at a significant premium – but only if Vivendi pushes for it. ATVI is probably worth close to $17 a share, but Vivendi has to hold out for a company to step in and buy.

Who might the buyer be? Perhaps media giants like Viacom (VIA), Disney (DIS), or News Corp (NWS) after it splits. But who really knows? Corporations are still sitting on a lot of cash, so they may be willing to pay up.

Ideally, multiple companies will start a small bidding war for the ATVI stake, and we will get a price that is between $14-20/share. Worst case, Vivendi is desperate to raise cash and sells to the first bidder it can get for a price that may be slightly lower than the current price. I’d say that $11 a share is a minimum in the worst case scenario.

Vivendi does probably want to shore up its balance sheet – as a French company, it needs to insulate itself from the worst of the crisis, which is yet to come. This means that the maximum upside of $20/share is unlikely.

So we are looking at a risk/reward of about a 10% loss to a 15% gain, with a remote possibility of as high as a 65% gain. The risk/reward ratio dictates that I should hold my ATVI shares.

With GMCR, I’d say that we have seen a bottom of $20 ($19.83 to be exact), which is a 15% downside at least, and the stock could tank further if the SEC brings up charges. However the upside is probably around $60 a share, which is 155% higher, albeit over a longer time period.

The rises in the price must have scared out short sellers, which explains why the upward momentum has lasted for three sessions.

There is a similar story playing out across three different stocks, GMCR, TPX, and DMND. Let’s call them the “fallen angels”; stocks that were once revered and pumped up by Wall Street, rising in a reflexive manner as highly-leveraged momentum players ploughed in, that crashed precipitously as problems arose. There is even similarity in the prices of the stocks post crash – with GMCR and TPX almost mirroring each other down to $20, then back up $23.50.

However the fundamentals of each situation are far different. The problems facing GMCR have already been discussed – concerns about competition, patent expiration, an accounting question, and a slowing growth rate coupled with ridiculously high expectations. The margin call on the founder pushed the stock downward in a reflexive deleveraging.

The concerns on TPX are verified by management – a low guidance, and an expectation of an earnings decline by 50% or more. The concerns on DMND are also quite justified – an accounting problem seems more likely, and DMND has missed a crucial filing deadline, suggesting a real management problem.

So short sellers have been making a killing on these stocks – and perhaps these are the same entities on all of them. This would mean that rises in one might trigger short covering in the other. But whether or not that is true, all three have been rising, which should trigger shorts to cover and propel the stocks higher in a reflexive fashion.

The real question is are the shorts done covering? Which stocks are they leaving hanging, and which ones are the jumping out of? To answer this we can consider the short interest as a % of Float.

“Fallen Angels” Short interest as a % of Float
GMCR 17.74%
TPX 7.92%
DMND 49.11%
So DMND is the most heavily shorted, but probably for good reason. TPX is the least, which is odd, but perhaps all the shorts have exited.

The short interest in GMCR has decreased since June 15, when it was 19.7%, but it is still substantial – shorts have a ways to go before they finish covering, or they are holding out for the accounting questions to come back with some negative news.

The spike at the end of today signals that there was a rush to cover… perhaps this could continue into Friday. I am thinking that a short seller would not want to hold the short over the weekend… but I have not been a short seller before, so I don’t have a good understanding of the mental state…

On the macro side… the European regulators cut rates, leading the Euro down against the CAD. I am continuing to watch at this point, though I am kicking myself for my cautiousness in avoiding the trade. I am waiting for some sort of a pullback before I enter. After such a sharp move, it should experience a pullback and some kind of consolidation around a price. Around that time it may be good for entry.

Canada is probably the strongest bet I can think of currently – it has the safety of a developed nation coupled with an export economy. Plus, it has the upside of the Keystone pipeline.

I expect that Obama will concede to the Keystone pipeline after the election. If Romney takes it, he will certainly pursue the pipeline. Obama likely could not agree to the pipeline pre-election because he was depending on environmental groups for campaign financing. By delaying the decision, he has ensured their support in the election, and to a large degree, the nation is not really upset that the pipeline was not acted upon, because most people are not really aware of the benefits.

Japan has been having problems obtaining funding from its parliament. It seems that after years of sitting on massive debt/GDP levels, they are finally starting realize that this may become a problem, after seeing how investors have been treating European nations with high amounts of sovereign debt. However, the effect of this realization has been detrimental. I am reminded about something that George Soros remarked in Alchemy of Finance – once regulators recognize the problem, they tend to take action that actually makes it worse, before taking any action to make it better. That seems to be the case here.
The situation is similar to what the U.S. experienced last fall, when Republicans in Congress threatened to block the raising of the debt ceiling. If the result is similar, then one would expect a lower yen against the dollar. The dollar dropped versus the yen 250 ticks during the debt ceiling debacle, but the largest drop happened in the wake of the Standard and Poor’s downgrade of U.S. debt, which triggered massive volatility in U.S. markets. The drop in the dollar probably occurred because of outflows from the equity markets and treasuries…
We might get a similar flight from Japan if the debate really reaches a fevered pitch, but I have not seen enough evidence to act yet.

The Norwegian Kroner has been bullish versus the Euro pretty consistently over the last 5 years.  The Kroner ought to do well in an environment of $100+ Brent, which it looks like we are entering – provided the oil worker strike in Norway ends soon. And my Norwegian seismic companies, PGS and TGS, may finally see some profit. They are seeing growth coming from West Africa… which leads me to wonder who is ordering these seismic studies…

Oooh, a juicy one here: Chariot Oil and Gas. It trades on the Grey Market here in the states, but it is a stock listed on the AIM market of the London Stock Exchange. It has a large acreage position offshore West Africa, and it has done huge 3D seismic studies on its acreage. The sheer size of the play involved is mind-boggling – it may end up dwarfing the North Sea plays…
The plus on this acreage is that it is not a salt basin, like the huge offshore South American reserves.
Chariot looks pretty good, with a low estimate of prospective reserves sitting at 7,032 bbls, unrisked. With a market cap in the 300 millions, this looks like a solid bet.

Chariot has not gotten very far in exploring this find – it has only finished one exploratory well, which was a dud. It has 4 more exploratory wells planned, with one that is to be completed at the end of this month. If even one of them pans out, the stock could double, triple, or… ?