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Week 107: Back to Commodities

It’s a huge structural advantage not to have a lot of money. I think I could make you 50% a year on $1 million. No, I know I could. I guarantee that – Warren Buffett

yoyperformance

I’m adding a simple year by year and quarterly performance table to the start of every portfolio update.  I’ve had the on-line portfolio going for over 2 years now, and I find that the chart is less informative the longer the time horizon gets. The quote, which I have mentioned before, is more of a goal than a statement.  Buffett says it’s possible, let’s try to prove him right.

I’ve already written about most of the new stocks that I added in the last month (Ainsworth Lumber, Tronox, Novus Energy,smaller positions in Lightstream Resources and Penn West, and lastly Niko Resources. In this post I will focus on some of the stocks I sold (including most of my large position in YRC Worldwide), and add some thoughts on oil and Canadian oil juniors.

I’m getting this update out a day late so all of the numbers are are of Friday July 19th.

Portfolio Performance

week-107-Performance

Portfolio Composition

week-107The last four weeks of trades are available here.

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The (hopefully) Hidden Earnings of Tronox

I was going to write up a short piece on Tronox as part of my monthly portfolio update but as I started to write it the length became significant.  I think it justifies its own post, so here you go.

Basically what you’ve got with Tronox is a housing/economy play whose earnings are being obscured by a trough in the price of their commodity and the fresh start accounting associated with an acquisition.

What they do

Tronox produces titanium dioxide, which is used as a whitening agent in paints, plastics, and paper but of the three its application in paints are the primary end use (made up 77% of consumption in 2012).   Tronox produces titanium dioxide from manufacturing facilities in The US, the Netherlands and Australia (called their pigment business).  The company is the third largest producer of titanium dioxide in the world, and they sell their product to major paint suppliers like Benjamin Moore and Sherwin Williams.

Tronox was spun out of Kerr-Mcgee in 2005 with a boatload of debt.  The company filed for bankruptcy after the recession in 2009 and emerged from bankruptcy in 2011.  There is about one clean year of financial statements (2011) but then things start to get messy again as the company took over a miner of TiO2 feedstock, Exxaro, in the middle of 2012 in order to become a vertically integrated titanium dioxide producer. Read more

My Meandering Method for Finding Stocks: Novus Energy

You just never know the path that will lead to an investment idea.

From time to time I get asked what sort of screens I use to come up with ideas. And the truth is, I don’t use much. Sometimes I go to one of those technical analysis sites that lists names that have broken through key technical barriers and I use that as a starting point. So that is something of a method I guess, except that I don’t really pay any attention to the technicals themselves, I use the information as a somewhat randomized starting point, and I am almost as likely to look at a long idea from the ‘break the 52 week low’ bucket as I am from the ‘break the 52 week high’ bucket.

Just as often I use no method at all. I follow a totally inefficient, fairly random path whereby I start with a name that comes up in an article, in a tweet, or that is mentioned on a site, and from there I look at that name and in the process I am usually lead to a few other names, or if I like the theme but not the specific company in question I give some thought and time to search out other names that might be equally leveraged to the idea but more suited to my tastes. I end up bouncing around from company to company and sometimes I find something and more often I don’t. Read more

A Bet on Housing Starts: Ainsworth Lumber

I have been waiting for the right time to get back into lumber stocks. I owned a number of the companies in 2010 and early 2011 but I sold too soon and missed the big moves in names like Western Forest Products, International Forest Products and West Fraser Timber. Since then I have been reluctant to start a position without a significant correction in the stocks first because I know that these companies are extremely volatile and will go into big corrections on the first whiff of macro-worries (because of their cyclical dependence on economic growth and the thin line separating over and under supply).

So I’ve waited and waited and was beginning to think that a correction would never come, but in the last couple of months the price of lumber came off significantly  and so have some of the stocks. While the tree-cutting plays, like Western Forest Products and West Fraser, haven’t sold off enough to entice me in, the milling and manufacturing companies have seen bigger corrections.

So I took a position in Ainsworth Lumber. I tweeted the following last Friday:

half-position

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Tying up Loose Ends with the last of my June Position Changes (FFEX, IMH, MBI, TVL,)

As I mentioned in my June update, I was away on vacation for a couple of weeks and at the same time the city I live in was hit with the flood of a century, and these two events transpired to put some delays on the posting all the details of the monthly portfolio update that I put out.

In subsequent posts I have talked about the two major theme changes that I made in June, with those being that I sold all of my gold mining stocks with the only exception being Midas Gold (the decision to sell is looking rather prescient right now) and that I had bought a number of REIT’s that I believed were being sold off indiscriminately by investors lumping together all REITs into a single bucket (maybe not quite as prescient as the gold miner sell but I’m doing okay on this one so far).

There were, however, a couple of other portfolio changes that I made in the month of June that I didn’t get a chance to mention.  I want to use this post to do some house-cleaning, talking about the remaining portfolio changes I made in June. Read more

Reviewing the Opportunity in India presented by Niko Resources

I have been tweeting about my position in Niko for a few weeks now.  I built a small position in the $7’s which I added to in the $8’s and $9’s as news on the new gas contract in India has been confirmed.  As I’ve said before, I am often slow coming out with posts and updates on all of the stocks I own because it takes time to write these opuses but I do try to make fairly timely updates on twitter when I add new positions or decide to exit others.  Feel free to follow me there.

Niko Resources is a pretty simple story. The stock is a former Bay Street darling that has struggled mightily with reserve write downs and exploration disappointments.  The stock has been pretty much left for dead by analysts and fund managers who have watched their dollars disappear as it fell from over $100 to less than $10 (bottoming at $5 and change a few months ago).

I owned Niko briefly before Christmas.  My short stint with the stock is an example of needing to own something in order to be motivated to think a bit harder about it. After having  gone through that process, I sold the stock and wrote the following:

The discomfort I developed with Niko was partially the result of another batch of less than stellar drilling results, but mostly the result of my conclusion that this isn’t the right time yet. The driver of the share price will be the settlement of a new gas price contract in India. I don’t think this is likely to occur until the existing contract expires, which is not until next year. In the mean time Niko will continue to experience production declines in India, and they are open to negative news flow on drilling.

Of course you could argue they are also open to positive news flow, and that’s totally true. But the point is, its a gamble. If they report a hit then I will miss out (though I suspect that such news might get me to jump back in). Absent that, I’m going to keep watching Niko until we get closer to year-end and to where the market can begin to price in a new contract.

Since that time I have continued to watch Niko, and indeed there has been positive news flow on the exploration front (the company had a new significant discovery in India), and terms of a new gas contract were released.   And honestly, with all the news that has come out, I would have expected the stock to be higher.  Nevertheless, I have been pleased that the stock has traded below where I sold it back in December when, in my opinion, the uncertainty surrounding the company’s outlook was much more unclear. Sometimes the market is fickle and that has given me a chance to get back in. Read more