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
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
I originally intended this post as a weekly update where, among other things, I would talk about my new position in Midway Gold and about my large increase in my Pacific Ethanol position. But my description of Midway has turned into a post of its own, so I will leave the details about Pacific Ethanol until later, and only say here that I think the stock presents a good near-term risk/reward and that my current position (20% of my portfolio) reflects my enthusiasm.
As I remarked in my last portfolio update, the only new positions that I have taken of late have been gold stocks. This has turned out to be a well timed endeavor. My first three positions, Argonaut Gold, Endeavour Mining and Rio Alto Mining, are all up 30%+ in only a little over a month.
I continued my move into the miners by adding another (soon to be) producer shortly after my last post. I took a position in Midway Gold (MDW). As I tweeted at the time:
Midway has three deposits in various stages of development in Nevada as well as other prospective lands. Midway’s 3 deposits are Pan, Gold Rock, and Spring Valley. At the current price its market capitalization is a little more than $150 million. The company has $48 million in preferred share debt and $70 million in cash. Much of its cash will be spent over the next 6 months as the company brings its Pan deposit into production. Read more
This is not a full update of my portfolio so I will not be providing all the details of my current positions and trades over the last few weeks. I’ll do that again in the next week or two. Below are my current top 10 holdings and their percentage weighting in the portfolio.
In this post I want to write about the tenuous nature of most of the stocks I hold. While I make many purchases based in part on the judgment that an undervaluation exists, I’m not really a value investor in any strict sense of the definition. I don’t really look for stocks that are simply cheap to their intrinsic/discounted/net asset value and then wait for something to happen to change that.
In addition to cheap I’m always looking for a catalyst. Something that will change perception of the stock and where the stock has enough leverage to the change to make for meaningful upside.
Because of these two criteria I find that I am drawn into an inordinate number of cyclical, indebted, tenuous or heavily capital dependent businesses. They are not great businesses over the long-run. Their true value is usually wildly erratic depending on the assumptions used. While this characteristic represents the opportunity it also means I have to continually re-evaluate the thesis and sometimes admit that I am wrong and give up. Read more
See the end of the post for the current make up of my portfolio and the last four weeks of trades.
Four weeks ago I wrote:
I think an important pillar of my strategy to take advantage of the concentration that I can have. I don’t have anyone pressuring me to be diversified or questioning my risk level or anyone to answer to if something goes wrong. So I don’t hesitate to have a large percentage of my portfolio tied to the names I think will perform the best.
With that said, the names that I am currently of the heaviest weight are, of course, Pacific Ethanol, which remains my largest position by far
Today Pacific Ethanol represents a 2% position for me. Read more
Being invested in Pacific Ethanol (PEIX) is like riding a yo-yo. Up and down, up and down. It can get a bit nauseating.
As I tweeted earlier this week, I got tired of the motion sickness and reduced my position in Pacific Ethanol considerably.
Since that time I’ve sold a bit more and it’s now about 25% of my original position. It’s still a reasonable size but its not going to hurt me (I will remind you that as of my last portfolio update, when Pacific Ethanol was at about $14, the stock was a 16% position for me. That number jumped closed to 20% as the stock rose, but now sits at about 4% with my sales last week and the current price).
As the tweet explains, I didn’t like that the stock was going up because of rising ethanol prices while at the same time corn prices were creeping higher. This wasn’t the dynamic I had invested upon. I wanted sustainable ethanol prices and low corn prices. Ethanol can’t trade at nearly a dollar above RBOB gasoline and you saw that on Wednesday when the weekly EIA statistics showed imports of ethanol. The market was suitably spooked and the price of ethanol has since tanked. More on the ethanol price dynamic in a minute, but first let’s talk about Pacific Ethanol. Read more