Gazprom

After the massive gas deal between Russia and China, Gazprom looks like it might be an interesting play.

  • We know it will be doing $400 billion of business over the next 40 years.
  • The market has discounted the price of Gazprom over concerns that Europe may stop buying its gas. However, this is an unlikely scenario.
  • The company trades at a P/E of 3. Part of this may be because of distrust of accounting at Russian companies. However, the valuation looks extremely low.
  • Russia’s market as a whole has been discounted because of the invasion of Crimea. This discount may subside as the situation de-escalates.
  • The key risk is the cost of building the pipeline. China will front $25 billion for the deal. However, the excess costs will come out Gazprom’s capital expenditures. These costs will come over the next several years, while the revenues from the deal will not come until 2018. Equity markets are notoriously short-sighted, typically with a time horizon of 18 months. So any gains in the stock may not come until 2016-2017, while in the near term the stock may be weighed down by costs.

Outlook and Ideas

After re-evaluating from a defensive position, I have a few solid gains.

Recent Investments

The majority of my recent gains have come from a large upward move in Penn West Virginia (PVA). This was the undervalued natural gas play I bought earlier in the year. My theory was that natural gas prices were rising, yet natural gas companies had failed to respond in kind, so I expected this to be corrected by the year’s end. As it turns out, the thesis was actually false – natural gas did not remain in an uptrend for long. However, two things added up to make this play successful: 1) I purchased a company trading at a price/book of 0.4, which gave me sufficient margin for error, and 2) the company had recently used its financial position to purchase oily shale acreage in the Eagle Ford.

The oil acreage allowed the company to accumulate significant income, so it is growing its book steadily. Even now, it trades at less than 0.6 price/book, so for the time being, I am leaving the full amount invested. I will likely hold until it reaches a price/book of 0.8.

In addition, I have made a few successful short term bets. I took some modest profits shorting XONE on the way down, but I did not get out in time, and the majority of the profit from the trade was lost. In addition, I took small profits from catching the bottom of the S&P 500 ETF last week. I also entered a trade on the Euro. I had intended to hold this for some time, as I believed the continuation of United States’ QE at the same time that periphery Euro countries pay down their loans would lead to an upward surge in the Euro. However, I do not believe I adequately understand the situation to profit from this, so I took today’s pop as an opportunity to get out with some profits.

New Investments

My largest new position is in Take Two Interactive (TTWO). Though the stock has already had a big run, I believe that the success of Grand Theft Auto V has not been fully accounted for. This is the best selling game of all time, and the stock has not reacted since the game broke all expectations in late September. Further, I have noticed that companies which turn from unprofitable years to profitable ones generally have a large pop on the announcement. I am hoping to take advantage of such a move when Take Two announces its earnings for both this quarter and the subsequent one. In addition, the company has poured significant cash expenditures into both developing the game and marketing it. Now that the game is out, the cash flow situation should change dramatically, with massive cash inflows against much lower expenditures. I have established a position in call options for next March, and I am slowly accumulating a stock position as well.

New Ideas

I keep questioning when the bubble in speculative stocks will collapse. Salesforce (CRM), Workday (WDAY), Tesla (TSLA, of course), 3D Systems (DDD), Stratasys (SSYS), and the like continue higher. The trend has gone too far, and I am at an impasse about what to do. To short would likely be suicide – the market still has legs, and these will run up more than the market. How long until general economic weakness forces a re-evaluation of all of these names? I could attempt to play alongside the market – but I fear I have missed my entry point (last week, when the market bottomed). Thus, I have no clear strategy here.

I am still investigating stocks in other countries. The trend of capital seems to be flowing into the United Kingdom.

The stock that has been on fire in the London Stock Exchange is Ocado (OCDO). It seems to be in the midst of a reflexive boom, but the process may be too far along to begin a speculation. The company does have a truly revolutionary product – they have actually been able to build a working business model on home delivered groceries. As a result, the fundamentals have been improving at the same time that the stock price and perception have been improving. I expect this trend to accelerate. The company is using financing for its growth, turning mostly to the debt markets rather than equity. As a result, it may be an ideal candidate for making a speculation.

As the company is already in a strong uptrend, I am wary of entering, because I may be caught in a correction to the downside. Usually, trends like this are tested by a wave of negative perception. Because the company is rapidly improving fundamentals and the idea does seem to be catching on with the public, I believe it will survive such a test. After surviving a test, the trend should emerge stronger than ever. So I will wait for such a point before considering entering a position.

I am also looking for extremely undervalued cases in European countries, but the search is yielding no strong candidates so far.

Market Position May 15, 2013

I have had some big successes in the market lately. The short yen position has been yielding truly incredible profits lately. Almost simultaneously, the long position in Tesla (TSLA) has nearly doubled. Nearly every day after the earnings announcement has given us a new breakout to higher prices. This signals that there is a big money position being established in the stock, or that short covering is occurring now. If the huge money behind these moves are capable of mobilizing so quickly to positive news, this signals to me that they will be equally quick to mobilize in reaction to negative news.

I am not sure how long this continuation move will last. Eventually there will be a pullback – that is almost certain. But I still suspect we are only in the early phases of this boom for Tesla. I expect Tesla to generate more buzz and excitement as the year goes on.

In addition, I re-established the position in 3D Systems (DDD), according to the logic outlined in my article. Events are playing out as I had expected, with upgrades in the stock, and higher prices. This lends credence to the idea that we experienced a test phase from January to March, and we are now in a phase 4 type boom. Therefore, there should be additional room to go with the DDD long.

C & J Energy  (CJES) continues to be a dead weight in both the portfolio. The bad news about the state of the hydraulic fracturing market is out, and I believe it has been priced in. I think we have put in a bottom in this range (~$18). I dont expect the stock to dip below $17 unless the market turns worse.

I expect the market to improve as the year goes on and higher natural gas prices lead to renewed excitement in dry gas plays.

I am working up a position in some dry gas E&P companies as we speak. I do not want to reveal names and tickers, as they are tiny companies, and I have to be very cautious to establish a position at the prices I would like. I have been able to find several that are trading well below book value currently, and I have reason to expect that the book value itself is artificially low, because it is based on a past price environment, where natural gas prices were much lower than today. I will write an article soon explaining the logic.

I am using my unleveraged portfolio to purchase the dry gas companies. I am selling off a previous purchase of Halliburton (HAL). Halliburton has also come to a fair valuation in the current environment. After the settlement of the Deepwater Horizon litigation, the shares have been relieved of the pressure that was depressing them. I suspect HAL will benefit if the activity in the North American gas market picks up, but I believe the benefit will be more pronounced in CJES, so I prefer an investment in the latter.

I also sold my shares in Petroleum Geo Services (PGSVY). It is a shame to sell off such a well run company, with such growth potential. It is still undervalued, and I expect that investors at these prices would do reasonably well holding this for the long term. 3D and 4D seismic technology is only becoming more and more important, and PGS has already accumulated the Multiclient studies for the vast offshore Africa fields. However, I think there are better opportunities, like BBBI.

I am slowly accumulating more shares of Birmingham Bloomfield Bancshares (BBBI). It is currently trading at a price to book of .5, and it seems to be generating earnings at a comparable pace to BNCCorp (BNCC). The deep discount offers a considerable margin of safety, and the growth, fueled by the automotive industry boom, is bound to continue for the foreseeable future.