See the end of the post for the current make up of my portfolio and the last four weeks of trades.
I don’t have a lot to say about the macro picture or generalized musings about my portfolio this month. The macro continues to be a party-on atmosphere so I guess we’ll keep dancing. My portfolio is still not performing as well as I would like but I don’t have any insights into why that is or what I should do different. I had a very good first seven months of the year, and now I am having a lull. These things ebb and flow. Onto the stocks.
Adding Jones Energy (JONE)
I really like this stock. It’s a recent IPO (it went public at the beginning of August), I don’t think it’s well covered or known by many, but it looks to me like they have been drilling extremely profitable gas-condensate wells in the mid-continent, and they have plenty of undeveloped acreage to drill more. I took a big position in it right off the bat at 6%. Read more
I was going to put this in my update post but its gotten a little long so I thought I’d pop it out on its own. I’ve talked a lot about New Residential and how much I like mortgage servicing rights as a play on a stronger economy and on rising rates. Well a few weeks ago a fellow who follows the blog wrote me about Cherry Hill Mortgage, a company that, like New Residential, is a REIT that holds mortgage servicing rights. It took me a few weeks to find the time to look at the company and another week afterthat for it to really sink in just how cheap it was comparatively. But once it did I felt compelled to take a position.
It was a bit of unfortunate timing; I had to sell about 25% of my (albeit unreasonably large) position in New Residential to fund the purchase. I wasn’t comfortable going on margin to fund the purchase. So I took that New Residential position down from 20% to 15%. Of course the day after I sold New Res at $6 the stock popped to $6.30. Maybe my sacrifice to the gods of trading was appreciated.
Nevertheless, in the long run I hope to be well compensated for my position in Cherry Hill. Cherry Hill is being spun out of the mortgage originator Freedom Mortgage. Soon after the IPO, the company purchased two pools of mortgage servicing rights from Freedom Mortgage. I ran some quick numbers and it looks like the company paid a reasonable price for these assets. In the table below the assets have been valued at cost: Read more
I ended the week on a sour note for a couple reasons, with one of those being that Gastar got shellacked, presumably on a report put out by a firm named Noble Financial. Noble downgraded the stock from Buy to Hold apparently because of concerns about valuation. I haven’t heard of Noble Financial before but apparently they have some clout if they can send a stock down nearly 10% on their musings. If anyone can get their hands on this report I would love a copy.
With the stock in the dumps I took yet another look at Gastar to make sure I hadn’t forgotten anything. The company has had a lot of transactions since the end of Q3, so below is my reconciliation of the current enterprise value and the company’s valuation on a few common metrics. This is a bit back of the envelope so the numbers might not be dead-on.
I’ve talked before about my “rule” to average down when a stock gets underwater by 20%. This 20% threshold is not so much a firm line in the sand as it is an alarm bell to remind me to review my position and clarify exactly what it is I am doing. While in most cases at the end of it all I do decide to reduce my position or exit it entirely, there are also cases where my review leads me to become more confident in my position, and where I do not reduce but instead even add to it.
The 20% threshold was recently broken with Timmins Gold. The stock dropped past $1.10 (it has since recovered to $1.20 and, to give away the ending, I did buy more at $1.10 so I am now down about 10%). I bought both Timmins and Argonaut Gold back in October (I wrote about the positions here) as a way to trade my expectation of higher gold prices in the near term. Obviously that thesis did not play out the way I had hoped, at least not yet.
As I wrote at the time, my research into both names was not exhaustive and I ended up taking the analysis of a few brokerage shops with more faith than I usually might. Well that was my first mistake. It turned out that the original brokerage analysis was quite flawed and two of the firms have since downgraded their estimates and the stock significantly, after the release of an updated mine plan for the San Francisco mine. In the case of BMO, the downgrade was from $2.75 to $1.50! Read more
New Residential has performed poorly over the last few weeks. Pretty much since the release of their 3rd quarter results, the stock has tumbled. As I mentioned in my previous post, I think that this move in unwarranted, and I have added to my position significantly at and below $6.
I suspect that the market is lumping in New Residential with all the other mREITs. They are being compared on standard book value metrics and New Residential trades at a significant premium to its book value (20%) while most other REITs trade at a discount to it.
I wouldn’t be surprised if there are algorithms picking up on the book value discrepancy and automatically shorting the higher price to book companies against longs on the lower ones. It would seem like a natural trade – short what is expensive, go long what is cheap, and look for opportunities where the dividend of the long exceeds that of the short. Read more
See the end of the post for the current make up of my portfolio and the last four weeks of trades.
The third quarter earnings season is shaping up a lot like the second. Lots of volatility, lots of disappointment, and dramatic falls followed by recoveries.
I think its a symptom of our malaise. Things just aren’t that good. Yet stocks are juiced by all the money sloshing around. So you get this dynamic during earnings where numbers come out and aren’t that good, which leads to a steep sell-off in the stock because the current price can’t be justified based on the earnings and outlook. But then the liquidity effect kicks in, arresting the decline, changing the momentum on its head, and sending the stock back up. Read more
While I was investigating Vonage I was introduced to their competitor magicJack by an acquaintance on twitter. Interestingly, in the process of talking me into magicJack he talked himself out of his own position. Let this serve as foreshadowing that this is not an investment without its warts.
magicJack, like Vonage, provides voice over IP for telephone services for consumers. magicJack sells a little dongle like device that plugs into the USB port of your computer. You plug in the device, plug in your phone to the other end, and are off to the races. The company is best known for the incessent commercials they have pummeled at people for years. They also have a mobile app available on Android and the iPhone that allows you to make free long-distance and international calls as long as you are connected to Wifi.
magicJack has an enterprise value of about $250 million, comprised entirely of its market capitalization less $45 million of cash. In the first 6 months of the year the company generated a little over $21 million of cash, which puts the stock at an attractive 6x Enterprise Value to Free Cash Flow. If you step back to prior years, free cash flow generation as per the balance sheet was even stronger. The company has also been able to grow its customer base over the last few years, though this growth has tapered off some in the first half of 2013. A new device was launched in June that should provide a boost to growth, with the extent of that boost likely determining the stocks price in the short run. Read more
This is the last of a series of posts I’ve written over the weekend discussing a number of changes to my portfolio over the last two weeks.
Why I took a position in Glacier
While I love it when my stocks go up, it can be frustrating when they go up before I have a chance to talk about them. I bought a starter position in Glacier last week. Here is the buy for my practice portfolio:
I had been planning to say something about Glacier but I wanted to spend a little more time on both the name and the sector to make sure it was indeed a stock I wanted to hold before talking about it. I’m still trying to get comfortable with this whole newsprint theme and Glacier has a few warts on it that I’m still not completely sure about.
However I waited too long. On Friday the stock jumped 10% and closed the day at $1.45 per share.
I have no idea why the stock popped. I thought for sure someone on BNN must have recommended it, but I scoured their on-line videos and found nothing. Who knows, maybe someone said something at a conference or a presentation. We will probably never know. Read more
Third short post summarizing some recent portfolio moves. First two are here and here.
Thoughts on Rock
Every once in a while you luck out and get in just ahead of the crowd. It doesn’t happen very often; usually you have to wait months before an idea begins to play out (ie. my extended comatose with Extendicare). So when it does happen quickly, you have to enjoy it.
I first bought Rock back in August in the $1.60′s. I added to it in the $1.80′s and again in the $1.90′s. Two months later its sitting at $3.35 and has been as high as $3.70. That’s quite a move.
Nevertheless, the biggest thing that has happened to the stock between then and now are people waking up to it being cheap (I am told that Keith Schaefer for one, a newsletter writer, has apparently said some positive things about the stock). And that gives me pause. Read more
In my post from earlier today I mentioned that I had made some portfolio changes over the past fews weeks and would be sharing them in a series of short posts. In this one I want to talk about what I did and then undid because of the debt ceiling.
In my last monthly update, posted on the 12th, I wrote about how I was reducing exposure to stocks in response to the uncertainty about the debt ceiling.
In my accounts I go into the weekend with more than 25% cash (I’m a little under that in the practice account I show here, at around 23% including my remaining Novus position, as I didn’t quite keep up with the selling I was doing elsewhere). I should perhaps be at an even higher level, but many of the stocks I own are so obscure and out of the mainstream that I feel some confidence that they will be spared some of the carnage that will occur if the debt ceiling is not raised out of indifference alone. The stocks I trimmed the most were the one’s that have proven most volatile to market swings.
By Tuesday of the next week, October 15th, I had moved to a little over 35% cash in my accounts. I received a few comments that this was a silly move, that the US government wouldn’t be stupid enough to let its interest payments lapse. They turned out to be right. Nevertheless, I stand by my decision; I work hard to grow my portfolio and putting that hard work at risk on the assumption that the people in positions of power will do the sensible thing is, in my mind, an unnecessary risk. Remember Dick Fuld? Read more