Five weeks ago I wrote that I was walking away for a while. And so I did that. It didn’t last as long as I had anticipated.
At the time I had taken my portfolio to about 60% cash and I had a number of shorts that helped hedge out the exposure from my remaining longs. In early October I had basically stepped away because I had made some mistakes and lost confidence in my decisions. It had started with the mistake of not looking closely at the oil supply/demand dynamic, which was compounded by the mistake of selling the wrong stuff when the bet began to go wrong. As I lost money on a few oil and gas holdings, rather than reducing those positions I reduced other positions, presumably with the intent of reducing my overall risk. Unfortunately this isn’t really what I was doing. What I was actually doing was selling what was working while holding onto what wasn’t. A cardinal mistake.
The consequence was that I saw my portfolio dip 12% from its peak by the second week in October. More frustrating was that as stocks recovered in late October, I watched as some of the names I had sold near their bottom, in particular Air Canada, Aercap, and Overstock, recover their losses and were on their way back up.
I wrote my last post on a Friday afternoon after the market had closed. Over that weekend I was virtually unencumbered by the markets. My portfolio was cash, my blog was on hiatus, I had nothing to prevent me from thinking clearly. I don’t remember exactly when the moment came, but at some point that weekend I had a realization.
For those who have followed this blog over the past few years, you will remember that in December of last year I made a very large bet on New Residential. The stock had gotten hit down to below $6 at the time. I thought this was rather ridiculous and so I bought the stock. I bought a lot of the stock. I made it a 25% position in my portfolio.
In a narrow sense, the trade worked out. By the end of December the stock had jumped close to $7 and I sold the position for a tidy profit. But in the broader sense, it was an abject failure. Read more
Two weeks ago I made the following tweets describing my latest and last investment decision:
I meant to get around to writing a post acknowledging the same sentiments but I never did until now. Since that time I have watched the market go down a lot and then come all the way back up. I haven’t done much of anything during the whole see-saw.
And that is because I think I’m done. I have a lot of cash, a few positions and no plans to chase anything up or even add to anything as it comes down. Maybe when the Fed (or perhaps the ECB) decides to get back into the game I will change my mind. But for now I don’t really have a strong inclination to do anything. So I’m going to walk away while I’m ahead. Maybe there will be a better set-up in the future. But until then…
My portfolio had a tough week and has had a weak September. As it goes when I show weakness, I am quick to clean house and start anew. This week I jettisoned a number of names (including Sherritt, Mart, Straight Path Communications and Aercap), made a number of positions much smaller (including Overstock, IDT, Transat, Sanderson Farms, and Supercom) and raised a bunch of cash. When the dust settled I had 10 positions remaining of significant size.
One of those positions is Bellatrix, of which, in the midst of oil and gas carnage everywhere, I bucked the trend and added to this week. This after I had mentioned in a tweet a couple weeks ago that a recent add would be the last one.
Well I lied. With the stock dropping to the mid-$6’s I decided to revisit the whole idea, and after doing so, I added fairly aggressively. I do not make this decision lightly; as I have written before, once I have a full position I rarely add to it if it starts losing money. There’s just too much chance that I am wrong. At the time of the tweet Bellatrix was a 4% position for me. Its now the largest position in my portfolio at 12%. My average cost base is down to around $7.17.
Why was I willing to add so significantly? Because the work I did helped reassure me that my original idea is most likely correct; that the company is suffering from a short to medium term processing bottleneck that should be alleviated by the commissioning of their own plant in mid-2015.
Most of my work focused around a production/decline model that would help give me a better idea of how production should trend under various drilling scenarios and capacity constraints.
My model is simplified, but not too simplified. I think that oil and gas models are some of the most difficult to make. The inputs require estimates of decline rates, which changes over the life of each of the wells in the field, drilling schedules, which are impacted by weather, rig and processing availability, and in the case of the Western Sedimentary Basin, by spring break-up. There are so many difficult to determine parts that I think it is better that one not try to confuse precision with accuracy.
See the end of the post for the current make up of my portfolio and the last four weeks of trades.
I don’t know if the chart of performance really does justice to the volatility my portfolio has had over the last couple of weeks. It feels like much more of a roller coaster than that little blip in the trend that you see on the screen.
I sold out of the rest of Pacific Ethanol and Rex American Resources in the first half of this week. I hemmed and hawed through the weekend, even briefly added to my position to Pacific Ethanol on Monday (at the same time I was reducing my position in Rex American), but the volatility of the stocks, the declining price of ethanol, and specific to Pacific Ethanol, my uncertainty with respect to their corn basis (I concluded tentatively it is actually quite a bit higher than Q2) led me to capitulate on many of my shares on Tuesday. I followed that up by selling the rest on Wednesday in the minutes that followed a very bearish EIA inventory report (+800,000bbl!). I tweeted on my sales at the time.
My caution turned out to be fortuitous as the stocks continued to fall the rest of the week. I was even able to catch a few dollars of profit on the way down; always remembering the old classic to which this blog takes its namesake, I took the lesson that if a stock is to be sold it is likely just as well sold short, and so I took a small short position in Rex American and a few $18 puts on Pacific Ethanol. The puts were sold Friday and my short position has been cut more than in half, so these were merely short term trades taking advantage of a clearly bearish dynamic. Read more
Over the last week I have played some parts of the ethanol yo-yo well and other parts not so well. Let me review.
On the well side, I significantly reduced my extremely over-sized position in Pacific Ethanol (25% of my portfolio at its peak) at prices of about $23 per share. On the not-so-well side, I added/subtracted and then added back my position in Rex Energy on continuously declining prices and held on to a still not insignificant percentage of Pacific Ethanol (about 5% position) through the declines of Thursday and Friday. What is yest to be determine is that I added back some of Pacific Ethanol at $20.15 on Thursday. While I sold half of that on Friday morning for a bit of a profit, I held the other half through the decline on Friday and now sit with those shares at a lower price than I had purchased them for.
How this all ends remains to be seen. This blog is not intended to be an account of my infallibility. Unlike many others on the blogosphere and on twitter, I have no omniscient insight into what can be absolutely stated as a good or bad decision. Thus it is that you rarely see me laying out the ridicule, condescension or my favorite, the passive-aggressive rhetoric, that seems to be so prevalent in these mediums. I can only wish for such certitude. Unfortunately my world is far too gray to not feel empathetic for those who hold a different opinion than mine.
The beauty and horror of the ethanol stock is that it only takes a small difference of opinion to lead to a drastically different conclusion. To take an example that I tweeted earlier tonight, in my model I get a $1 quarterly earning swing by adjusting the ethanol price by 20 cents – from $2.05 to $1.85 per gallon (note I originally had written 80c but I hadn’t been making an apples to apples comparison in my model). A similar point could be made about Pacific Ethanol. The significance of course is that 20 cents is about the swing that ethanol prices took in the last week. Read more
See the end of the post for the current make up of my portfolio and the last four weeks of trades.
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
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).
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:
- 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
- Ingredient Solutions: specialty and commodity wheat starches and wheat proteins are produced from wheat flour
- 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
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
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
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.
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