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Week 163: Knowing when you are not at an advantage

Portfolio Performance

week-163-yoyperformance

week-163-Performance

See the end of the post for the current make up of my portfolio and the last four weeks of trades.

Recent Developments

Note that this update is as of Friday, August 15th.  I have been a few days delinquent in getting it out.

I have strayed from my bread my butter of late, away from the tiny micro-caps that pass everyone else by and into the world of still small but not so obscure caps.  These are stocks like Air Canada, AerCap and Bellatrix among others, still far from being large caps, but big enough to receive the attention of analysts and funds.

I am not so sure of my own advantage with these stocks. I may be overstepping my own abilities to think that I can see something here the market is not.  I am under no misconceptions about my research. There is simply no way that I, as an individual investor with a couple of hours of free time every day, can match the depth and scope of the research that the institutions have. Read more

I added MGP Ingredients because their ingredients are primarily corn and wheat

Sometimes you latch on to a good idea but can’t find a stock that fits it.  That’s what happened to me as I scoured through 10-K’s looking for a way to play the fall in corn, wheat and bean prices.

I spent about a week looking and not having much luck.  Fortunately one of my twitter acquaintances came to the rescue, as @17thStrCap introduced me to MGP Ingredients (MGPI).

The Business

MGP Ingredients looks like a very good way to bet on lower grain prices.  The company operates three businesses, all of which stand to benefit from the decline in the grains:

  1. Distillery Products: via plants in Atchison Kansas and Lawrensburg, Indiana, corn, barley and rye are turned into beverage alcohol and industrial food grade alcohol.  The residue from the process is sold as distillers feed.  A small amount of fuel grade alcohol (not ethanol) is also produced
  2. Ingredient Solutions: specialty and commodity wheat starches and wheat proteins are produced from wheat flour
  3. Illinois Corn Processing (ICP): a 30% ownership in an ethanol plant in Pekins Illinois that produces around 90 million gallons of ethanol per year.  SEACOR owns the other 70% of the plant

Read more

More Quarterly Results: Sherritt Thesis Intact

I’ve owned Sherritt International since January, when I posted about the idea here. The timing of my stock purchase coincided with the start of the Indonesian export ban on ferrous nickel and nickel in pig iron.  I bought Sherritt throughout the low to the mid $3’s (my average cost is $3.48) and did pretty well on with it until the last couple of weeks when the stock has dropped back to the $4 range.

About half of that drop occurred after the release of the second quarter results.  The stock pulled back because nickel production from the Moa joint venture was a bit weak in the first half and because full year guidance for the Ambatovy joint venture was reduced (from the range of 44,000-50,000 tonnes to 37,000 – 41,000 tonnes).  The Cuban oil business saw production in-line with what I had expected and the company has recently signed an extension on its oil production sharing contract with the Cuban government and expects to expand that agreement to include new exploration targets.

The Ambatovy Ramp

The slow ramp at Ambatovy comes as no surprise.  Its been slowly ramping for almost two years now.  The mine has seen one hiccup after another.  Yet there is progress being made towards positive cash flow.  By the first quarter of 2015 Sherritt is expecting the mine to operate at 90% capacity (its currently in the mid-70’s) and when it does cash costs are expected to drop to the $3-$5 per pound range. Read more

Looking at more quarterly results: Air Canada’s miss

Air Canada is a fairly large position for me so I’ve spent a lot of time on their quarterly results in the last two days.  The short story here is that the stock stock got hit because revenue per average seat mile (RASM) was below expectations and because of this, earnings were also below estimates.

There was an expectation among analysts that because load factors (how full the aircraft is) were strong in the second quarter, and because there was anecdotal evidence that ticket price checks showed improvement, Air Canada would pull off a decent year-over-year RASM increase in addition to its cost savings.

Because they didn’t the company missed earnings estimates and, on Thursday, the stock did what the stock did.  The average estimate for earnings per share for the quarter was 51c.  I saw that BMO was as high as 57c.  The actual number came in at 47c.

First, let me say that I added to position on Thursday afternoon.  I actually pretty much picked the short-term bottom on this one, a rare occurrence indeed, getting in at $8.50.   I added because while the stock was down hard on the RASM miss, I thought that once everyone wrapped their heads around why, we would see it quickly move back up. Read more

Week 161: Earnings so far – Pacific Ethanol and my other ethanol plays

I agreed to this deal with Seeking Alpha where they post my articles from the blog and I don’t have to do anything. Its a pretty fair deal; the reason I never published them before had more to do with me being lazy then anything else. The only downside is that everything I write will get posted and I don’t want everything I write to get posted because much of what I write is blog-worthy but not publishing-worthy.  Sometimes I just want to post my thoughts here, and not have to reference and review every data point to make sure I have all my t’s crossed.  Therefore I created a simple rule whereby if I put the words Week XX in the title of my post they do not get published on Seeking Alpha.  And that is the long winded, paragraphical description of why I continually make the rather banal observation of how many weeks I have been writing this blog  in the title of so many posts.

With that out of the way, lots of earnings reports for companies I own came out this week and I am going to give my thoughts on a few of them.  We will start with the biggest of the bunch, at least in terms of my own P&L: Pacific Ethanol and my other ethanol plays.

Pacific Ethanol

This is a very large position for me and so obviously I was paying close attention to their report on Thursday.  I was a little surprised that the earnings per share number was below a buck.  It turns out that I had missed a couple things.

First, I didn’t realize that the company wasn’t able to utilize their net operating losses (NOLs) in the second quarter and would therefore have to pay tax.  This was mentioned in the Q1 10-Q but I didn’t read through the details carefully enough.  So the company was taxed at 30% and that was a big reason the earnings per share number did not hit the magic $1 mark that I had expected. Read more

Week 159: Blog Days of Summer

Portfolio Performance

week-159-yoyperformance

week-159-Performance

See the end of the post for the current make up of my portfolio and the last four weeks of trades.

Recent Developments

I haven’t done a lot of writing since my last portfolio update four weeks ago. I have made only a couple changes to my portfolio, and added only one new position, Midway Gold, which I wrote about last week.

I remain reluctant to add positions.  As I stated previously (here and here) I remain wary of the market reaction to the post-QE era.  So far nobody seems to care, tapering has had no negative impact on stock prices, and we continue to march to higher highs.  Nevertheless I’m not convinced.  I don’t have a lot of insights into the specific mechanism by which quantitative easing leads to higher stock prices or how the end of it will cause them to go lower  but I know from experience that you can’t overstate the importance of liquidity, particularly where small and micro caps are concerned.  Now we’re in the process of draining a bunch of it and I just don’t think that is a great time to be too far out on the ledge.  Why take the chance when you don’t have to?

I’m also not having an easy time finding stocks that I want to buy.  I’ve spent the last four weeks rather diligently investigating new ideas.  I’ve probably gone through 100 names.  Nothing I have looked at has stood out as something I have to own.

In fact, I’ve come back to old names.  In particular, I’m currently betting the farm on Pacific Ethanol. Below is a list of my top ten positions.  Pacific Ethanol was a 20% position that has grown to 24% because of price appreciation.

07-21-14 topholdings Read more

Pan-ning for Midway Gold

I originally intended this post as a weekly update where, among other things, I would talk about my new position in Midway Gold and about my large increase in my Pacific Ethanol position.  But my description of Midway has turned into a post of its own, so I will leave the details about Pacific Ethanol until later, and only say here that I think the stock presents a good near-term risk/reward and that my current position (20% of my portfolio) reflects my enthusiasm.

As I remarked in my last portfolio update, the only new positions that I have taken of late have been gold stocks.  This has turned out to be a well timed endeavor.  My first three positions, Argonaut Gold, Endeavour Mining and Rio Alto Mining, are all up 30%+ in only a little over a month.

I continued my move into the miners by adding another (soon to be) producer shortly after my last post.  I took a position in Midway Gold (MDW).  As I tweeted at the time:

Midway has three deposits in various stages of development in Nevada as well as other prospective lands.  Midway’s 3 deposits are Pan, Gold Rock, and Spring Valley.  At the current price its market capitalization is a little more than $150 million.  The company has $48 million in preferred share debt and $70 million in cash.  Much of its cash will be spent over the next 6 months as the company brings its Pan deposit into production.  Read more

Week 155: Still Cautious

 Portfolio Performance

week-155-yoyperformance

week-155-Performance

See the end of the post for the current make up of my portfolio and the last four weeks of trades.

Recent Developments

In my last update I stated that I had about a 20% cash position and wanted to increase that position heading into the summer.  We are now one month further along and my cash position stands at something less than 5%.

Nevertheless I do remain somewhat uneasy about what happens to the market post QE.   As I wrote about in my last update:

Twice the quantitative easing policies of the Federal Reserve have ended and twice the market has gone into a tailspin.

I came across what I thought was a very good interview of Richard Duncan on the website Valuewalk.  I read his first book, The Dollar Crisis, a number of years ago and I still pull the book out every year or so to go through the concepts another time.  I have followed Duncan ever since.  The video rather long, but in my opinion Duncan describes what current drives the market right now and summarizes why I am uneasy.

 

I view a number of the stocks I own right now as shorter term trades with (hopefully) immediate catalysts.  I have been reducing positions that I would consider likely to have a lower bottom in an event of a correction.  And I have been buying gold stocks.  So even though I have added a few positions and reduced my overall cash position, I feel like I am continuing to reduce risk.   I tweeted the following about my purchases of gold shares: Read more

Taking advantage of the disappointment with Bellatrix

This is a company I should have owned 12 months ago when I was looking around the Canadian oil and gas universe but instead pissed around trying to buy the cheapest thing.  When investing in an oil and gas company buying the cheapest thing is simply not the way to make money.  I’ve been investing in the sector for 10 years now; every time I walk away and return I have to learn that lesson again.  Hopefully that will end now.

Bellatrix Exploration (BXE) is simply a company with lots of land in very prospective areas and a history of being able to grow production on a consistent basis. The stock is on sale because of a bungled private placement and I think that presents an opportunity.

Background about the company

Bellatrix owns one of the largest positions in the Cardium (in Alberta) in the industry.

 

land_holdings

 

They’ve proven they can develop that land in an efficient manner.  The company has grown its production the last 4 years and expects another strong year of growth in 2014 (note though that the 2014 production number is being buoyed by the acquisition of Angle Energy, which closed late last year). Read more

A New Bet on Hercules Offshore

I have owned Hercules Offshore (HERO) for a couple of weeks now.  I tweeted about my position right after I bought the stock.  I think the stock has been hit too hard on concerns about drilling rig supply/demand and that a change in sentiment could send the stock back up to the $6 to $8 range.

Hercules performs drilling services in the offshore market.  Their focus is shallow water drilling; their marketed fleet consists of 27 jackup rigs and 23 liftboats.  Fifteen of their jackup rigs are contracted in the Gulf of Mexico with the rest located internationally in the Middle East, Southeast Asia and Africa.  In 2013 jackups made up 83% of revenue, with the liftboats taking the rest.

Why I took a position

I took a position in Hercules based on the following:

  1. The stock was hit pretty hard at the beginning of the year because of concerns about supply/demand of new build jackup rigs and the impact this could have on Gulf of Mexico day rates
  2. Those concerns have some validity but are not immediate.  For 2014 the new supply (32 rigs total, 24 rigs that aren’t contracted) will be absorbed by the market.
  3. Looking out to 2015 there is significant supply of new builds but much of the supply is being ordered on spec and by buyers who are not established operators.  It remains to be seen how much is built or who will operate it if it is built.
  4. The Gulf of Mexico is also not the most profitable destination for a new build, which should help insulate Hercules from the new builds to some degree
  5. The current price of the stock (I add at $4.50 but its now a bit higher at $4.80) reflects the concern about supply/demand and very little optimism that day rates will remain strong in 2014 and continue to hold up for 2015
  6. Hercules is quite levered (their market capitalization is around $700 million and they have $1 billion of net debt) so a small change in sentiment about the company (either via a reappraisal of the Gulf of Mexico situation or one of the other catalysts I will get to shortly) can have a big effect on the stock.
  7. Based on the first quarter results the stock is trading at a reasonable 4.5x EV/EBITDA multiple

Read more

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