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Week 95: Setting the table (hopefully)

Portfolio Performance


See the end of the post for a full portfolio breakdown.


Since my last update I exited Radian Group, Arkansas Best and MBIA.  The sales reflect a desire to redeploy cash in other opportunities as well as some lingering concerns about each company.

With Arkansas Best, its my uncertainty about the outcome of union negotiations.  The negotiations were extended this week for a second time.  An escalation to a strike does not seem out of the question.  If a strike occurs the stock price may or may not get hit; while a positive resolution could be quite good for the stock in the long-run (see my original post about how Arkansas Best would benefit from a contract structured in a similar manner to the one that YRC Worldwide operates with) the uncertainty may drive panic selling.  I’ve decided to wait this one out for a few weeks and see how it plays out. Read more


One Poor Decision with ChipMos, Hopefully not Another

I took a ~3% position in ChipMOS Technologies (IMOS) last week.  It hasn’t quite worked out the way that I had hoped.  I’ve had a tiny starter position in the stock for a while, but I up-sized that position significantly when I added at $16 last week.  It closed at a little under $15 on Friday.  As I wrote in an email to a friend:

I overreacted with IMOS.  Totally misread the TW emerging market exchange listing.  Thought the closing price of 8150 was a game-changer event.  Not so much.

Perhaps not as eloquent as I would like but it gets the point across.  I’ll elaborate below.

ChipMOS provides assembly and testing for memory and logic/mixed signal semi-conductors.  The following diagram illustrates where ChipMOS fits into the semi-conductor manufacturing process.


In 2012, the company derived 29% of revenue from testing of memory semi-conductors, 33% of revenue from assembly of memory semi-conductors, 23% from testing and assembly of LCD semi-conductors, and 16% from bumping (gold plating) of semi-conductors.

The company generated about $200 million in EBITDA last year and has an Enterprise Value of about $430 million (their cash position is about the same as their debt) which makes the company cheap on an EV/EBITDA basis.  While ChipMOS doesn’t look quite as good on an earnings basis (they earned 94c per share on a GAAP basis last year) that number will improve going forward as their depreciation expense declines significantly (depreciation was $157 million in 2012 but should be nil by the second half of 2013).

A key point with ChipMOS is that the stock trades at a significant discount to its competitors on the Taiwanese exchange.  ChipBond, which is a close competitor, trades at a 50% premium on a earnings basis, and, according to one brokerage report,  a 200% premium on other industry metrics.

The primary reason for the premium seems to be nothing more than the Taiwanese exchange listing.   The catalyst with ChipMOS is therefore a listing later this year for its Taiwanese subsidiary, of which ChipMOS owns 83%.


The first step in that process took place last week when the ChipMOS subsidiary was listed on the Taiwanese emerging markets exchange, which is a junior exchange.  Stock quotes can be accessed on Bloomberg with the trading number 8150.

The stock opened with a bang.  The original pricing on 8150 was $15tw.  On the first day of trading the shares opened at $20tw and closed at $40tw.  Since that time they have settled back to $33tw.

The $40tw price implies a value of $33USD for ChipMos shares on the NASDAQ. The current price of $33tw translates into a price of ~$27USD for ChipMos.

Presumably this gap will narrow.  One of the reasons it has not is because the float on the subsidiary is quite small (ChipMOS did not release a large amount of shares for trading because of the low offer price.  It was testing the waters), the volumes are tiny, which limits any arbitrage between the two companies, and its still not trading on the main Taiwanese exchange.

I jumped the gun when I bought into the run-up after the first day of trading of the Taiwanese sub.   At the time I thought that the price of the sub would be enough to validate a higher price for the NASDAQ listed equity.  That wasn’t the case.  My spidey-senses seem to be a little off lately; I have been having a tendency of wrongly predicting the market reaction, both to the high and low side, of late.  But that’s another story.

Nevertheless, the story remains intact, even if it will not be realized as quickly as I had hoped.  I am going to hold my shares with the hope that the re-valuation occurs in the weeks and months ahead, as we come closer to a listing on the main Taiwanese exchange.

A look at the Gastar’s Hunton Play

I took a position in Gastar (GST) as part of a basket of stocks I bought to play the natural gas price recovery (which I wrote about here).

Soon after I added the company released news of a transaction with Chesapeake to acquire a significant amount of acreage in Western Oklahoma.  At the same time they unveiled that their secretive mid-continent play was the Hunton in Oklahoma (not an unfamiliar name to us Equal Energy bagholders), and that the acreage being acquired from Chesapeake would expand their position in the Hunton significantly.  As it was, I bought more.

This weekend I listened to the Gastar presentation at the IPAA Oil And Gas Investment Symposium and I was happy to hear how well their second Hunton well is performing. Read more

Arch Coal: Taking a Side on an Uncertain Outlook

I bought Arch Coal (ACI) last week on the thesis that the rise in natural gas prices along with the colder than expected March would lead to a change in perception from investors about the coal market.  I added to that position on weakness this week and now have what I would consider a full position (which is still only moderate in size because, as I described last week, my confidence in the natural gas thesis is somewhat tentative).

On Thursday I was pleased to see comments from Peabody Energy (from Seeking Alpha) that will contribute to the perception shift.

Now turning to the U.S. market, we have seen a dramatic improvement in coal fundamentals from this time last year. We now project 60 million to 80 million tons of increased coal demand in 2013 as the industry reclaims the majority of demand lost in 2012 to natural gas.

Within the U.S. market, winter was 17% colder than last year and natural gas prices have more than doubled from last April driving a 15 million ton increase in the first quarter coal burn at the same time the gas generation dropped 11%. Coal now accounts for approximately 40% of total generation, while gas has fallen to 24%. The supply side of the equation was also favorable in the first quarter as U.S. coal shipments fell 10%.

The end result is that PRB and Illinois Basin stockpiles have improved 20% over the last year, and over the next five years, we expect the low cost PRB and Illinois Basin demand to grow more than 125 million tons to a greater capacity utilization and regional switching, and this is after taking into account an estimated 60 gigawatts of retirements during that time.

You see U.S. generation only ran at 55% of full capacity in 2012. These plants can run much harder and utilities have invested more than $30 billion in new equipment over recent years to allow them to do just that. Read more

Some Conclusions on the Natural Gas Market

I have spent much of my weekend researching the state of the Natural Gas market. In this post I am going to outline what I’ve learned and draw some tentative conclusions.

My interest in natural gas was piqued after the abnormally cold March that we’ve had and the coinciding decline in natural gas storage to below the 5 year average.


Subsequently, after reading an article posted by @Dedwardssays on his blog and a couple of articles on Seeking Alpha, I took a position in Gastar Exploration (GST).  At the same time I added a call position in Exco Resources (XCO).   Since then I have added a small position in WPX Energy (WPX), which appears to have had a large Niobrara discovery in the Piceance Basin.  I also, of course, have held a position in Equal Energy (EQU) for the last number of weeks.  I am actively looking for undervalued natural gas biased companies producing the in the lower 48. Read more

Getting Comfortable with Walker and Dunlop

I was originally put on to the idea of Walker & Dunlop (WD) by a reader of the blog back in September (while I will leave the name of that tipster anonymous, many thanks for the idea).  The call was prescient and I can only wish I had made my purchases sooner.

As it was, I initiated a position in Walker & Dunlop about 4 weeks ago, doing so after the stock had fallen 10% from its 52 week high of $21.76.  Unfortunately that turned out to be at least $2 too soon.

The stock has subsequently fallen further.  As usual being wrong has compelled me to re-evaluate my thesis, which I did this week.  After some waffling I have decided not only to hold on to the position but add to it, which I did on Thursday and again on Friday.

What they do

Walker & Dunlop is the commercial lending equivalent of Nationstar Mortgage. Their business is the origination and servicing of commercial mortgage loans.  The vast majority of those loans are multi-family and are passed along to Fannie Mae, Freddie Mac or into HUD insured Ginnie Mae securities. The company generates revenue from origination fees and on the servicing of its loans.  They are the eighth largest originator of commercial mortgage loans in the United States, and the second largest originator of multi-family loans.

Extending the analogy to Nationstar, Walker & Dunlop recently acquired its fellow commercial originator CWCapital from Fortress Investment Group, who became a large shareholder after acquiring 11.6 million shares as part of the sale. Read more

Week 91: Consolidating

Portfolio Performance



Patience is a difficult virtue. I’ve had 3 weeks of pretty so-so performance, some stocks going up and some stocks going down and overall not much of anything happening. With the market going up seemingly every day its hard to not let that play on your mind.

But you have to have a balance of patience and impatience to do well in stocks. You need to have a healthy level of impatience so that you don’t hold onto positions for too long, but tempered with an equal dose of patience because, as I read some time ago from a cagey market veteran, you will make 80% of your gains for a year in 2-3 weeks, and figuring out which weeks those are is nearly impossible.

In the last few weeks I think I demonstrated a little bit both; witness impatience in my selling of gold stocks and of my position in Tricon Capital and patience as I held on to falling positions in MBIA, Impac Mortgage and watched YRC Worldwide and Yellow Media correct substantially from their highs. Read more