Archive for

Apr 2

Week 39: Slipping

Portfolio Performance

Portfolio Composition:

Trades:

The annoying theme that has punctuated my performance over the past few weeks has been the out-performance by my regional bank and mortgage financial service companies and their eclipse thereof by the under-performance of the oil and gold stocks that I own.

Some of the things I am doing are working. Some of them are not. Its time to go back to the simple axiom that I first heard from Dennis Gartman: Do more of what works and less of what doesn’t.

That is exactly what I have been trying to do over the past month. I have slowly (and probably less then efficiently) been reducing my gold and oil positions. With each subtraction I add to my banks, my mortgage originators and servicers. I’ve also been looking to other places to invest.

No question I would be better off (financially) today if I had dumped the majority of my oil and gold stocks a month ago and focused on my current convictions in banking and mortgage servicing. Unfortunately,my thinking takes more of a plodding pace, and I rarely am so quick to recognize the truth. It took me a month to begin to recognize the impact of the LTRO. It took me about the same amount of time to recognize that I should be out of all the golds and oils but the one’s I truly have conviction in.

This week I sold out of Coastal Energy. With the proceeds I added to Newcastle Financial, PHH Corporation and Nationstar Financial. Earlier in the week I added to a couple of my bank holdings, Rurban Financial and Bank of Commerce Holdings, while subtracting a portion of Esperenza Resources.

I also returned to Canaco Resources this week. I wish that I had done with my other gold stocks what I had the sense to do with Canaco a month ago.

As for the week that comes, I don’t see many more changes on the horizon. I am comfortable with most of the stocks I own. I have become heavily weighted to US Financials and to Mortgage originators and servicing. Now it is time to wait and see if the scenario plays out in the way I expect it to.

Apr 1

Selling: Coastal Energy, after the mistake of buying back

Two weeks ago I looked pretty smart when I sold 2/3 of my position in Coastal Energy at a little over $18. Last week I looked shrewd when I bought back that position at $16.50. This week I looked stupid as the stock tanked and I sold.

Its quite possible that I sold at what will prove to be the bottom in the stock. That would be unfortunate. But while the timing of my transaction may have sucked, I believe the spirit and intent was right on the ball.

I sold out of Coastal on Thursday after they announced their end of year results. They had also announced disappointing results at Bua Ban South on the same day (actually the night before) but that had nothing to do with why I sold. I sold because the year end results showed a disturbing decline in production offshore. The company did not address this decline very clearly in the news release.

Here is what the company said:

“2012 has also begun extremely well. We have drilled and tied in a handful of additional wells at Bua Ban North which have further boosted production. These wells were tied in during the month of February and brought average offshore production for the entire first quarter up to 21,100 bbl/d. Our current offshore production is 22,500 bopd.

The company had previously announced a little over a month ago that they had 26,000 boe/d of production offshore.

The Company has two more wells to bring online at Bua Ban North. Current offshore production is averaging 26,000 bopd, bringing total company production to 28,000 boepd. The rig is now being mobilized to Bua Ban South and is expected to spud the first well there by the end of February.

Now I may have gotten worked up over nothing, and I know of a few players smarter than I that used the dip as a buying opportunity. $15 is a reasonable price for the production that Coastal has, and there is the opportunity that they will find much more.

Nevertheless, it was what I didn’t hear as what I did hear that made me sell. I have been in too many situations that followed this script. And more often than not, the reason that the reasons aren’t stated is because they are something to worry about.

Is that the case here? I have no idea. Maybe its operational, mechanical, one-time, short term, or some other adjective that can be dismissed and forgotten. But the company didn’t say that, when they could have said that, and instead they didn’t say much at all. So I took the approach that I will ask questions later.

Coastal has been a great stock for me. Even though I sold out for good after a 25% decline (from $20 to $15) I still pulled off almost a 4-bagger. It was probably my history with the stock that kept me in it as long as I was.

So of course I wish I would have sold it 3 weeks ago. But I have learned that decisions need to be made based on current circumstances. If you do not do what you believe is right today because of a mistake you made in the past and if you hope instead for a return to those past conditions to correct the mistake, you will get killed more often then not.

When I couple the uncertainty of the news release with the opportunity I see to redeploy that capital somewhere else where I believe the opportunity is greater (see my recently finished post on Mortgage Servicing Rights and my post from last week’s portfolio update where I stepped through the breakouts of numerous regional banks), it seemed to me the right thing to do. Perhaps in a couple more weeks it will look stupid for having sold it when I did. Be that as it may, you can’t forsee the future, you only have the past as a guide.

Apr 1

Buying: Back into Canaco Resources

I think things have gotten a little stupid with Canaco. It goes down and it goes down and it goes down.

I bought the stock on Thursday at 87 cents.

A quick look at the company’s March presentation shows that cash on hand is $110M. The market capitalization of the company is down to $174M. That puts a value on Magambazi of $64M.

As Steve T has pointed out in the comments, subtracting cash on hand from capitalization for a junior is not a best practice. The cash will inevitably be eaten up by drilling. But Canaco can do a lot of drilling for $110M and I don’t think its a terrible bet to think that they find some more gold before they go through the cash.

I still have concerns about the Magambazi deposit. The fact that the resource is being delayed until May suggests that some of my original concerns are valid (I did a detailed analysis of the Magambazi deposit here). The company stated it this way:

However challenges encountered with final assembly of the large volume of project data necessitates a revision to the completion date of the initial mineral resource, now anticipated by May 15, 2012.

If I were to read between the lines, final assembly would suggest to me that there has been some trouble outlining the resource, perhaps, as I noted in my original post, because it pinches out so abruptly in spots.

So things are not perfect. But there is a price for everything. The stock is down from $5 to less than $1. Even when I was at my most conservative I figured they had at least 1.5Moz at Magambazi. Its still a decent deposit and it has the opportunity to get bigger. The market clearly overreacted to the upside in the stock last year. In my opinion, it has now overreacted to the downside.