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Posts from the ‘Portfolio’ Category

Week 387: My Recessionary Portfolio

Portfolio Performance

 

Thoughts and Review

I haven’t written in a while.  I don’t have much to say, the markets are brutal and I am in no hurry to start picking new stocks.  So its not a lot of fun writing.

I have continued to sell stocks in the last two months.  My already high cash position is even higher.  I’ve hunkered down.

I see no choice but to continue to sell.  The problem is that with the small and speculative stocks in a bear market the only safe place is cash.  So even as I went into the fall with a very high cash level, over the last 8 weeks I made it even higher.  As of this weekend the online portfolio I track with this blog is at 75% cash.  That trails my actual portfolio, which is now up to 85% and my RRSP is basically now a GIC.

I even sold my long-held bank stocks this week (not reflected in the portfolio below, which I updated for December 7th).  It’s a bit of a personal watershed for the portfolio and the blog.

I rarely have talked about these stocks since they are boring, but they have been great performers for the last 6 years.  I’ve held them through pretty much the entirety that I have been writing this blog.  Which is to say some tough times!  Yet with the yield curve inverting and leading indicators rolling over I decided to finally exit the trade.  I sold Sound Financial, SB Financial, Eagle Bancorp, and ABC Bancorp (they were the firm that took over Atlantic Coast Financial).  It was the end of a era!

That I am selling these stocks, which I held through some crummy times in 2015 and 2016, should tell you something.  I’m pretty bearish on where the economy is at.

The weekly leading indicators put out by the ECRI were at 144 week lows before a slight uptick this week.

The pH report recently said (also in a Real Vision interview which I’m not sure I can reproduce here so I won’t) that they thought we were on the cusp, if not in, a global recession.

Chemicals are the best leading indicator for the global economy. Data for both Chinese and global chemical production are warning that we may now be headed into recession.

On top of that we have the Fed raising interest rates and quantitative tightening, which are reducing the availability of credit.

And then there’s the trade war.

If this isn’t the tide going out, I don’t know what it.

Look, I’m not the smartest guy in the room.  All of the funds and firms and experts undoubtedly know more than I do.  So I might be wrong and maybe this is another pause, another correction, before takeoff.

What I do know is to respect my limitations.  And trying to guess the bottom in a market that is in a downtrend on top of a bunch of negative economic data just seems like a foolish exercise to me.

No one is paying me to take risk.  So when the environment isn’t conducive, why should I?

The last time I did something like this was January 2016.  That period turned out to be a false alarm.  This one might too.

This is what I wrote in my February 2016 blog post.

The point of existence of a hedge fund is to risk money in order to make more of it. You can argue the particulars of that statement, that risk reduction can occur through various hedges, diversification, concentration, whatever your flavor is, but the bottom line is that the money should be at risk somewhere or why is the fund even there?

But that’s not my job. While part of what I am trying to do is of course maximize my profit line, my first mandate is also very clearly and in capital letters, TO NOT BLOW MYSELF UP.

What I guard against with absolute vigilance, is insuring that my capital doesn’t permanently disappear.

You can look back on these comments and say they were poorly timed.  February marked the bottom, the market started to recover, in the fall when Trump was elected it really took off.

But the reality is that I greatly benefited from that rally.  My Year 6 performance (the table at the beginning of this post) from June 2016 to June 2017 was one of my best 12 month periods.  The market turned and so did I.  If that happens again I’ll turn on a dime just like I did then.

But I’m not going to sit around and wait for that turn while the market grinds lower.

You can look through my portfolio and look at what I sold.  I’m not going to go through the whole lot.  What I’ve held, I’ve done so for two reasons.

First, most of these stocks aren’t terribly economically sensitive.  Liqtech isn’t go to sell less scrubber filters because the economy is slowing (in fact a lower oil price probably means they sell more).

Second, the TSX Venture has already gotten creamed.  The few Canadian stocks I hold there have not done great, but they’ve done okay.  This seems like a bad time to throw in the towel there, especially since the positions are small.

And then of course there is Mission Ready which apparently isn’t going to trade again until the next decade.  Not that I’m complaining.  If I had the option to put all my stocks on a trading halt for the next 12 months I think I’d have to consider that.

(As an aside there was a piece of bullish news out of Mission Ready just released on Friday.  One of the company insiders exercised their 15c warrants that expire in a week.  One would think that an insider would not exercise warrants if they thought the Unifire deal was going to fall through).

So I don’t know.  Maybe I will find another compelling recession proof stock that will compel me.  That might be a hard proposition.  If not, and if this is more than your run of the mill correction, then this blog might be a bit boring for a while.

I’ll tell you though that when I see the turn, I’ll be in the middle of it.

So I did take a small Canadian oil position this week.  I don’t know how long I will hold it so take this for what its worth.

Gear Energy.  I owned it before and sold it after Western Canada Select spreads blew out.  The stock fell apart like I thought it would.  But in the last week and a bit the mandatory production cuts implemented by the Alberta government have worked wonders on Western Canadian Select differentials.

Part of the mandatory cut is that companies producing under 10,000 bbl/d are exempt.  In fact companies under 10,000 bbl/d can actually produce up to that level before being affected by the cut.  I was surprised to find this to be the case.

Before being forced to shut-in production in November Gear was guiding to 7,500 boe/d.  They have an acquisition that will bring that up to nearly 10,000 boe/d but those assets are in Saskatchewan and so they shouldn’t count toward the ceiling.

Small companies like Gear (and Altura Energy, which I continue to own) are in the unique position of benefiting from the spreads and having the ability to grow.  I don’t know if the market will see it that way.  I have heard the argument that capital just won’t come back to small-caps period. Maybe so.

I haven’t run the numbers for Gear but I did a detailed type curve model of corporate production for Altura and found that at C$40/bbl realized prices they can drill 5 wells next year, stay within cash flow and grow production slightly.  Right now WCS prices have risen to over $50 (the latest PSAC quote has them at $54).  At those prices Altura can grow production significantly (10-20% I think) while staying within cash flow.  I’ll maybe do a post of my model there shortly.

These companies aren’t in a terrible position any more.

No guarantees I keep any of my positions.  All comments in this market have the life expectancy of a hand grenade.

Portfolio Composition

Click here for the last eight weeks of trades.  Note that this update is of December 8th, so it is a week old and doesn’t have my small purchase of Gear, my bank sales or my sale of Smith-Micro.

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Week 279: Cautious on trade(s)

Portfolio Performance

Thoughts and Review

I haven’t written a post since my last portfolio update.  Up until this last week I did not add a new stock to my portfolio.  I have sold some stocks though.  Quite a few stocks really.

I have been cautious all year and this has been painful to my portfolio.  While the market has risen my portfolio has lagged.  I have lagged even more in my actual portfolio, where I have had index shorts on to hedge my position and those have done miserably until the last couple of weeks.  In fact these last couple of weeks  are the first in some time where I actually did better than the market.

My concerns this year have been about two headwinds.  Quantitative tightening and trade.

Maybe its being a Canadian that has made me particularly nervous about the consequences of Trump’s protectionism.  With NAFTA resolved I don’t have to worry as much about the local consequences.  But I still worry about how the broad protectionist agenda will evolve.

I continue to think that the trade war between the United States and China will not resolve itself without more pain.  The US leadership does not strike me as one open to compromise.  Consider the following observations:

Peter Navarro has written 3 books about China.  One is called “Death by China”, another is called “Crouching Tiger: What China’s Militarism Means for the World” and the third is called “The Coming China Wars”.

In the Amazon description of Death by China it says: “China’s emboldened military is racing towards head-on confrontation with the U.S”.  In the later book, Crouching Tiger, the description says  “the book stresses the importance of maintaining US military strength and preparedness and strengthening alliances, while warning against a complacent optimism that relies on economic engagement, negotiations, and nuclear deterrence to ensure peace.”.  The Coming China Wars, his earliest book (written in 2008), notes “China’s dramatic military expansion and the rising threat of a “hot war”.

Here’s another example.  Mike Pence spoke about China relations last week at the Hudson Institute.  Listening to the speech, it appeared to me to be much more about military advances and the military threat that China poses than about trade.  The trade issues are discussed in the context of how they have led to China’s rise, with particular emphasis on their military expansion.

John Bolton’s comments on China are always among the most hawkish.  Most recently he spoke about China on a radio talk show.  Trade was part of what he said, but he focused as much if not more on the Chinese behavior in the South China Sea and how the time is now to stand up to them along those borders.

Honestly when I listen to the rhetoric I have to wonder: Are we sure this is actually about trade?

Is it any coincidence that what the US is asking for is somewhat vague?  Reduce the trade deficit. Open up Chinese markets. Less forced technology transfer (ie. theft). Now currency devaluation is part of the discussion.

I hope that this is just a ramp up in rhetoric like what we saw with Canada and Mexico.  That the US is trying to assert a negotiating position before going to the table and reaching some sort of benign arrangement.  But I’m not convinced that’s all that is going on.

If this has more to do with pushing China to the brink, then that’s not going to be good for stocks.

I can’t see China backing down.

From what I’ve read China can’t possibly reduce the trade deficit by $200 billion as the US wants without creating a major disruption in their economy.   Never mind the credibility they would lose in the face of their own population.

Meanwhile quantitative tightening continues, which is a whole other subject that gives me even more pause for concern, especially among the tiny little liquidity driven micro-caps that I like to invest in.

I hope this all ends well.  But I just don’t like how this feels to me.  I don’t want to own too many stocks right now.  And I’m not just saying that because of last week.  I have been positioned conservatively for months.  It’s hurt my performance.  But I don’t feel comfortable changing tact here.

Here’s what I sold, a few comments on what I’ve held, and a mention of the two stocks I bought.

What I sold

I don’t know if I would have sold RumbleOn if I hadn’t been so concerned about the market.  I still think that in the medium term the stock does well.  But it was $10+, having already shown the propensity to dip dramatically and suddenly (it had fallen from $10 to $8 in September once already), and having noted that Carvana had already rolled over in early September, I decided to bail at least for the time being.  Finally there was site inventory turnover, which if you watch daily appeared to have slowed since mid-September.  Add all those things up and it just didn’t feel like something I wanted to hold through earnings.

I was late selling Precision Therapeutics because I was on vacation and didn’t actually read the 10-Q until mid-September.  That cost me about 20% on the stock.  I wrote a little about this in the comment section but here is what has happened in my opinion.  On August 14th the company filed its 10-Q.  In the 10-Q on page 14 it appears to me to say that note conversion of the Helomics debt will result in 23.7 million shares of Precision stock being issued.  This is pretty different than the June 28th press release, where it said that the $7.6 million in Helomics promissory notes would be exchanged with $1 shares.  Coincidentally (or not) the stock began to sell off since pretty much that day.

Now I don’t know if I’m just not reading the 10-Q right.  Maybe I don’t understand the language.  But this spooked me.  It didn’t help that I emailed both IR and Carl Schwartz directly and never heard back.  So I decided that A. I don’t know what is going here, B. the terms seemed to have changed and C. it’s not for the better. So I’m out.

I decided to sell R1 RCM after digging back into the financial model.  I came to the conclusion that this is just not a stock I want to hold through a market downturn.   You have to remember there is a lot of convertible stock because of the deal they made with Ascension.  After you account for the conversion of the convertible debt and all the warrants outstanding there are about 250 million shares outstanding.   At $9.30, where I sold it, that means the EV is about $2.33 billion.  When I ran the numbers on their 2020 forecast, assuming $1.25 billion of revenue, 25% gross margins, $100 million SG&A, which is all pretty optimistic, I see EBITDA of $270 million.  Their own forecast was $225 – $250 million of EBITDA.  That means the stock trades at about 9x EV/EBITDA.  That’s not super expensive, but its also not the cheapie it was when I liked the stock at $3 or $4.  I have always had some reservations about whether they can actually realize the numbers they are projecting – after all this is a business where they first have to win the business from the hospitals (which they have been very successful at over the last year or so) but then they have to actually turn around the expenses and revenue management at the hospital well enough to be able to make money on it.  They weren’t completely-successful at doing that in their prior incarnation.  Anyways, I didn’t like the risk, especially in this market so I sold.  Note that this is an example of me forgetting to sell a stock in my online tracking portfolio so it still shows that I am holding it in the position list below. I dumped it this week (unfortunately at a lower price!).

I already talked a bit about my struggle and then sale of Aehr Test Systems in the comment section.   I didn’t want to be long the stock going into the fourth quarter report.  Aehr is pretty transparent.  They press release all their big deals.  That they hadn’t announced much from July to September and that made it reasonably likely that the quarter would be bad.  It was and the stock felll.  Now it’s come back.  It was actually kind of tempting under $2 but buying semi-equipment in this market makes me a bit nervous so I didn’t bite.  Take a look at Ichor and how awful this stock has been.  Aehr is a bit different because they are new technology that really isn’t entrenched enough to be in the cycle yet.  Nevertheless if they don’t see some orders its not the kind of market that will give them the benefit of the doubt.

BlueLinx. I don’t have a lot to say here. I’m not really sure what I was thinking when I bought this stock in the first place.  Owning a building product distributor when it looks like the housing market is rolling over was not one of my finer moments.  I sold in late August, then decided to buy it in late September for “an oversold bounce”.  Famous last words and I lost a few dollars more.  I’m out again, this time for good.

When I bought Overstock back in July I knew I was going to A. keep the position very small and B. have it on a very short leash.  I stuck with it when it broke $30 but when it got down to $28 I wasn’t going to hang around.  Look, the thing here is that who really knows?  Maybe its on the verge of something great? Maybe its a big hoax?  Who knows?  More than anything else what I liked when I bought it was that it was on the lower end of what was being priced in and the investment from GSR showed some confidence. But with nothing really tangible since then it’s hard to argue with crappy price action in a market that I thought was going to get crappier.  So I took my loss and sold.

Thus ends my long and tumultuous relationship with Radcom.  I had sold some Radcom in mid-August before my last update primarily because I didn’t like that the stock could never seem to move up and also because I was worried about the second quarter comments and what would happen to the AT&T contract in 2019.  I kept the rest but I wish I would have sold it all.  In retrospect the stocks behavior was the biggest warning sign.  The fact that it couldn’t rise while all cloud/SAAS/networking stocks were having a great time of it was the canary in the coal mine.  As soon as the company announced that they were seeing order deferral I sold the rest.  I was really quite lucky that for some reason the stock actually went back up above $13 after the news (having fallen some $4-$5 the day before mind you), which let me get out with a somewhat smaller loss.  The lesson here is that network equipment providers to telcos are crummy stocks to own.

Finally, I sold Smith Micro.  This is a second example where I actually didn’t sell this in the online portfolio until Monday because I didn’t realize I had forgotten to sell it until I put together the portfolio update.  But it’s gone now.  I wrote a little about this one in the comment section as well.  The thing that has nagged me is that the second quarter results weren’t really driven by the Safe & Found app.  It was the other products that drove things.  That worries me.  Again if it wasn’t such a crappy market I’d be more inclined to hold this into earnings and see what they have to say.  They could blow everyone away.  The stock has actually held up pretty well, which might be saying that.  Anyways I’ll wait till the quarter and if it looks super rosy I’ll consider getting back in even if it is at a higher price.

What I held

So I wrote this update Monday and Vicor was supposed to report Thursday.  Vicor surprised me (and the market I think) by reporting last night.  I’m not going to re-write this, so consider these comments in light of the earnings release.

One stock I want to talk about here is Vicor, which I actually added to in the last few weeks.  Vicor has just been terrible since late August.  The stock is down 40%.  I had a lot of gains wiped out.  Nevertheless this is one I’m holding onto.

I listened to the second quarter conference call a couple of more times.  It was really quite bullish.  In this note from Stifel they mention that Intel Xeon processor shipments were up significantly in the first 4 weeks of the third quarter compared to the second quarter.  They also mention automotive, AI, cloud data centers and edge computing as secular trends that are babies being thrown out with the bath.  These are the areas where Vicor is growing right now (Vicor described their core areas on the last call as being: “AI applications including cloud computing, autonomous driving, 5G mobility, and robots”).

Vicor just started shipping their MCM solutions for power on package applications with high ampere GPUs in the second quarter.  They had record volume for some of their 48V to point of load products that go to 48V data center build outs and a broader acceptance by data center players to embrace a 48V data center.  There’s an emerging area of AC-DC conversion from an AC source to a 48V bus.  John Dillon, who is a bit of a guru on Vicor, wrote a SeekingAlpha piece on them today.

I know the stock isn’t particularly cheap on backward looking measures.  But its not that expensive if the recent growth can be extrapolated.  I’m on the mind it can.   Vicor reports on Thursday.  So I’ll know soon enough.

The second stock I added to was Liqtech.  I’ve done a lot of work on the IMO 2020 regulation change and I think Liqtech is extremely well positioned for it.  When the company announced that they had secured a framework agreement with another large scrubber manufacturers and the stock subsequently sold off to the $1.50s, I added to my position.

I’m confident that the new agreement they signed was with Wartsila.  Apart from Wartsila being the largest scrubber manufacturer, what makes this agreement particularly bullish is that Wartsila makes its own centrifuges.  Centrifuges are the competition to Liqtech’s silicon carbide filter.  If Wartsila is willing to hitch their wagon to Liqtech, it tells me that CEO Sune Matheson is not just tooting his horn when he says that Liqtech has the superior product.  I’ve already gone through the numbers of what the potential is for Liqtech in this post.  The deal with Wartsila only makes it more likely that they hit or even exceed these expectations.

Last Thought

I took tiny positions in three stocks.  One is a small electric motor and compressor manufacturer called UQM Technologies.  The second is a shipping company called Grindrod (there is a SeekingAlpha article on them here).  The third is Advantage Oil and Gas.  All of these positions are extremely small (<1%). If I decide to stick with any of them I will write more details later.

Portfolio Composition

Click here for the last seven weeks of trades.

Week 372: Stealth Correction (also updates on Mission Ready, Blue Ridge and Empire Industries)

Portfolio Performance

Thoughts and Review

First off, the portfolio updates in this post are as of August 24th. I’m a little slow getting this out.  So the numbers don’t include what has happened in this last week.

I really got it handed to me in August.  The portfolio was cruising to new highs in July but those were short lived.  Top to bottom I saw a 6% pullback in a little over a month before finally bouncing a couple weeks ago.  Fortunately that bounce has continued this last week so things aren’t as dire any more.

What was funny about the move is that it didn’t feel like things were going that badly.  Usually when I lose 5-6% in a month (this seems to be an annual occurrence for me) I’m tearing my hair out, contemplating throwing the towel in, and generally in a state of disrepair.

Not so this time.  I have been surprisingly unconcerned by the move.

Why have I taken it in stride this time?  Here are a few reasons I can think of.

1. I lost on stocks that I still have conviction in.  Take for example Gran Colombia Gold (which is one of my larger positions).  I’m just not that worried about the move, as painful as it has been.  I’m still up on my position, and it remains cheap with no operating concerns.  I don’t feel like it warrants my worry.  RumbleOn was another (another large position), touching back into the $5’s at various points over that time.  We know what transpired there this last week.

2. I was getting beat up almost entirely by my Canadian stock positions.  Its probably irrational but I don’t worry as much when its my Canadian stocks that are going down.

3. Earnings for most of my positions were pretty good, even if those results weren’t reflected in the stock price.  Vicor was great.  Gran Colombia was stellar.  RumbleOn was fine.  R1 RCM was another stand-out, as was Air Canada.  No complaints.

Anyways it is what it is.  Things have gone better this week.  In the rest of the post I want to talk about 3 stocks in particular and these have turned into rather long excursions.  So I’ll leave any further portfolio comments for another time.

Mission Ready Solutions

Mission Ready has been halted since July 18th.  Nine times out of ten if a stock is on a 6 week halt it wouldn’t be a good thing.  Yet I’m pretty sanguine about the company’s prospects.  The news so far has been pretty good.

The big news happened on July 31st, when Mission Ready signed an LOI to acquire Unifire Inc.  They followed this up with an update on the foreign military agreement on August 2nd.  Then there was another news release August 7th that gave more detail on the foreign military agreement and more detail about the acquisition.  Finally they followed all of this up with a conference call to investors on August 15th.

Having spent some time reviewing Unifire and the deal, I am of the mind that it is a good one.   I am also cautiously optimistic that it will close.  On the conference call the CEO of Unifire was in attendance and spoke at it.  While that doesn’t mean it’s a done deal, his attendance and all the detail provided by Mission Ready points to it being well along.

Here’s the deal.  Mission Ready acquires Unifire for $9 million USD.  The purchase price is comprised of $4 million in cash and 26 million shares (priced at 25c CAD.  They are also taking on at least $6 million of debt (I say at least because Mission Ready didn’t specifically say what Unifire’s total debt was, only that they would be paying back $6 million USD of debt upon close).  With 129 million shares outstanding at $0.25c, $15 million works out to about 50% of the Mission Ready enterprise value.

Unifire is bringing a lot to the table.

As per the first press release Unifire’s “trailing revenue for the 6-month period ending June 30, 2018 was approximately USD$18.3 million”.  Their net income was $750,000 USD.  That’s a lot more than what Mission Ready has (as per the second quarter financials, Mission Ready is running at about $1 million of revenue a quarter).

More importantly, in the second press release (the one where they expanded on the details) Mission Ready pointed out that Unifire was the following:

  • A Department of Defense Prime Vendor.
  • A contract holder for the Defense Logistics Agency (“DLA”) Special Operational Equipment (“SOE”) Tailored Logistic Support (“TLS”) and Fire & Emergency Services Equipment (“FESE”) programs.
  • held “multiple General Services Administration (“GSA”) schedules, blanket purchase agreements and contracts with organizations such as the Department of Homeland Security, the U.S. Army Corps of Engineers, West Point United States Military Academy, Idaho National Laboratories, Hanford Nuclear Facilities, United States Air Force, United States Marines, United States National Guard, United States Navy, and many others”

I dug into this a little bit further.  Turns out that Unifire is actually 1 of only 6 participating vendors from the DLA Troop Support program (from this original Customer Guidelines document issued by the TLS).  Here’s a short list of the types of equipment offered by this program:

What does being a vendor of this program mean?  It means that if, as a government organization, you want to order one of the 9,000 items covered by the Troop Support Program, you can (I don’t believe the program has mandatory participation but I’m not sure about that) do it through one of these 6 vendors via this program and get subsidized product.

So who would order through the program?  According to ADS, “authorized Department of Defense, Federal Government and other approved Federally-funded agency customers”.

The overall amounts of product involved are significant.  According to this article:

With both being small-business set-asides, and continuations of prior contracts, the first contract will be used to procure special operations equipment (SOE) worth $1 billion per year, and the second will allow for the purchase of a total $985 million in fire & emergency services equipment (F&ESE).

These are big numbers.  So when Mission Ready stated the following in the August 7th news release with respect to Unifire’s justification for entering into the merger, they weren’t kidding:

Unifire has been limited in its ability to secure the initial capital required to facilitate many of the larger solicitations. Mission Ready has identified sources of capital that will enable Unifire to pursue TLS solicitation opportunities on a much larger scale than they have been able to at any point in their 30-year history, thereby creating immediate and significant growth potential.

Unifire has been getting maybe $30-$40 million a year in total revenue.  But its sitting in the enviable position of being 1 of 6 companies participating in a $2 billion program.  The lost opportunity is significant.

That said, Unifire is a significant vendor for the Department of Defense.  Here is Unifire’s revenue from contracts over the past few years (from Govtribe.com).  It seems to mesh up fairly well with Mission Ready’s stated revenue numbers for Unifire:

In fact Unifire appears to be the 15th biggest Construction and Equipment vendor with the DOD.

What Mission Ready is apparently bringing to the table is availability of capital.  They are going to raise $15 million USD at 25c [note: it was just pointed out to me that the 25c number wasn’t communicated and there was no pricing specified for the PP.  I could swear I read or heard that number somewhere but maybe I’m getting this mixed up with the Unifire shares.  I’ll have to dig into this].  They are also going to enter into a credit facility of a minimum $20 million USD amount.  The idea is that with the capital, Unifire will have a higher “solicitation readiness” and be able to bid on much more than the $2 million per month that they can right now.

Of course the other thing Mission Ready has is a suite of products that will fit nicely with what Unifire offers, and to which Unifire’s manufacturing capacity can be utilized.  And they also have this massive $400 million LOI with a foreign military that we continue to wait on.

On that matter of the foreign military distribution agreement, it appears the wait will continue.  In the August 2nd press release they explained what we already knew.   They had expected to receive orders by now but that this hasn’t happened and while they expect to still receive orders this year, they really don’t know what to expect any more.

They had more comments on the August 7th news release, which was more upbeat, if not cryptic.  With respect to the foreign military purchase order they said the following:

The Company is working diligently to finalize the Licensing Agreement in advance of the initial purchase order(s) (“Purchase Order” or “Purchase Orders”) and expect to complete the agreement for consideration by all parties no later than August 24, 2018.

You could read into it that they expect of some sort of purchase order soon that they need to get this new agreement in place for?  Maybe?  Bueller?  But who really knows.

Here’s what I do know.  I know that if the LOI for Unifire falls through and no PO comes from the foreign military then this thing is going to be a zero (or at least a “5 center, which is effectively the same thing).

But I also know that if the Unifire deal closes, if Mission Ready closes a $15 million financing and a credit facility of $20 million, if Unifire secures the $100 million of business in the next 18 months that is mentioned as a minimum requirement in the terms of the facility, and if the foreign military PO comes through, this stock is going to have a significantly higher capitalization then the current $25 million (CAD).

Honestly, when I review all the details above, I think the odds are on the latter scenario.

Blue Ridge Mountain

Oh Blue Ridge.  This stock has turned out to be a bit of a disaster.  I bought it at $9 and then at $7 thinking that it could be worth maybe $15 in a relatively short time as they sold the company at a premium.  With the news this week that they are merging with Eclipse Resources that value is likely to be realized over a much longer time period.

I still like the stock and plan to hold my new shares of Eclipse.  But I also recognize that this is a broken thesis.

I think what happened here is two-fold.  First, part of the value in Blue Ridge was in their stake in Eureka midstream, which seemed like it could be valued at $200 million or more itself.  In fact when the company announced the deal to divest their stake in Eureka (back last August), they said that the transaction was valued at between $238 million and $308 million (I’m not going to post the slide that breaks down that value because it has confidential written all over it for some reason).

Well presumably, given that the stock was trading at at $225 million enterprise value before the merger, the market didn’t agree.  The problem was that much of the “value” in the Eureka sale was in the form of fee reductions and the removal of minimum volume commitments (which I don’t believe are going to bring any cash in, though I’m still not sure on this).  So it was different than receiving tangible cash.

The second thing is something I missed originally.  As I wrote about in my original article on Blue Ridge last year, they have a lot of acreage prospective for the Marcellus and Utica.  What I didn’t understand well enough at the time was that much of the acreage in Southern Washington county and northern Pleasant county was outside of what is considered to be the “core” of these plays.  While the step-outs Blue Ridge has had so far have actually been pretty good, there is a lot more work to be done before the acreage gets the sort of value that acres in Monroe, Wetzel or Marshall county get.

I kinda figured this out earlier this year, but by then the stock was in the $6’s, which seemed to more than reflect my new understanding, and honestly even if I wanted to sell it at that level I couldn’t have given the illiquidity.

Well now with the Eclipse merger there is liquidity.  I think what you saw in the subsequent days was a lot of the bond funds that had picked up the stock in bankruptcy and who were now stuck with equity (which could very well be outside of their mandate) selling Eclipse in order to neutralize their Blue Ridge position and effectively get out of the stock.

That this seems to have waned on Friday, in particular given a pretty rough Stifel report on Eclipse, is likely a good sign.

My take is that the combined entity is not expensive.  Here is a little table I put together of what the individual parts and the new Eclipse looks like (my $6.64 for Blue Ridge is based on the conversion of Eclipse at $1.50 per share):

If you look at the comps, the combined Eclipse doesn’t stack up too badly.  5x EBITDA for a company anticipated to grow 20% in 2019 is probably a little cheap compared to peers.

Peer comparisons are hard though because there aren’t a lot of smaller, all natural gas, players in the Marcellus/Utica.  From what I can see its dominated by big companies like Range, Southwestern and EQT.  These companies are 10x the size or more.  They generally trade at higher multiples but that isn’t necessarily instructive.  The smaller “peers” are more oil weighted and in other basins.

So what do I conclude?  I’m going to stick with Blue Ridge/Eclipse because A. it’s not expensive, B. the Blue Ridge management team is leading the combined entity has done a good job operationally with Blue Ridge, C. There is a lot of undeveloped acres between the two companies and if they can prove up even a fraction of them the stock price should reflect that, and D. this is a nice way to play the upside option on natural gas.

But it didn’t turn out the way I expected.

Empire Industries

Empire announced second quarter results on August 27th.  It was another “meh” quarter.  But patiently I wait.

The reality is that Empire has been a perpetual “just wait till next quarter” story since last September when they announced the co-venture partnerships.  They have an incredible backlog of business.  Contract backlog as of June 30, 2018 was $280 million.  The co-ventures have a tonne of promise.  But neither the backlog or the co-ventures have translated into results yet.

They continue to struggle to turn the backlog into profits.  In the second quarter gross margins reversed (again) to 16.7% from 19.6% in the first quarter.  Remember that the magic number the company has said they should be able to achieve is 25%.

The problem has been the continued work through of three first generation rides that are being built at very little margin.  In fact the company said on the conference call that these contracts contributed no margin in the second quarter.  I had hoped that by the second quarter we would see the impact of these essentially unprofitable contracts abate.  But that wasn’t the case.

I talked with investor relations about this and it appears that in the third quarter we should see less of an impact.  But whether this means 22% margins or 18% margins is anyone’s guess.

Management also seem to recognize that their cost structure just isn’t low enough right now.  Part of the problem appears to be that they operate much of their manufacturing out of Vancouver.  They hinted that there are going to be changes in this regard in the next few months.

One of the key opportunities was how rapidly the growth — the market was growing, but with this growth came an increasingly apparent need to improve our cost competitiveness to capitalize on this growth. As a result, Empire has undertaken an aggressive action plan to reduce its cost structure, as described in detail on previous calls by Hao Wang, President and Chief Operating Officer of Dynamic Attractions, a wholly owned subsidiary and the primary business unit for Empire…The organization-wide cost-reduction initiative is well underway, reducing our headcount and fixed costs. Furthermore, we’ve identified and implemented design, procurement and production efficiencies that can improve our execution capabilities and our financial results.

They went on to say that “margin expansion is a top priority”.  This is a good thing because it’s crazy to be letting this backlog pass without making any money from it.

The other piece is expansion.  Again they touched on this (“we’re actively looking at innovative ways to increase our production capacity”) in the second quarter call.  It’s clear that right now they are capacity constrained. For instance, the backlog has essentially doubled over the last year and a half and yet the quarterly revenue is pretty much the same.  Its nice to have a backlog that extends out 3 years but it would be nicer if they could grow revenue a bit.

And then there is the co-ventures.  Nothing to announce but still on-track to be announced this year.

Just to recap the co-ventures, last August Empire announced the creation of two co-venture attractions companies.  The intent of these companies were to partner with “tourist-based locations” to co-own and operate Flying Theatre rides.  One of the companies, called Dynamic Entertainment Group (DEGL), would partner with US locations, while the other, called Dynamic Technology Shanghai (DTHK), would partner in Asia (China most likely).

It was a complicated structure with a rights offering (at 50c) and a private placement to their Shanghai partner Excellence Raise Overseas (EROL) also at 50c.

In total Empire invested $12 million in the ventures.  They own 62.5% of DEGL and (I think) 22% of DTHK.  The ownership in DTHK is via DEGL, which is makes things complicated.  The other 28% of DEGL and 78% of DTHK is owned by their partner EROL.  EROL and Empire invested at the same valuation.  Got that?

This somewhat ridiculously complicated ownership structure can be summed up with the following graphic (from the September 2017 presentation):

At the end of the day Empire gets to own 63% of a venture that will build and operate attractions in the United States and about 20% of a venture that will do the same in China.  Empire also gets to build the attractions that these ventures market.  Originally this was going to be at a low margin of 15% but given the recent results that margin is looking to be pretty much right in line <rolls eyes>.

Way back when the venture opportunity was finalized I was able to dig up more information on the economics of the attractions business.  First, I found information on the economics of what appears to be a fairly similar existing ride called FlyOver Canada.  The attraction is part of Canada place in Vancouver.  Flyover Canada is a virtual flight ride experience.  Its also owned by a public company named Viad, so unlike every other attraction I read about, there is actually publicly available information about its performance. Here is a quick summary from the 2016 Viad 10-K:

Flyover Canada showcases some of Canada’s most awe-inspiring scenery from coast to coast. The state-of-the-art, multi-sensory experience combines motion seating, spectacular media, and special effects including wind, scents, and mist, to provide a true flying experience for guests. FlyOver Canada is ideally located in downtown Vancouver, Canada. FlyOver Canada is rated by Trip Advisor as the #1 “Fun & Games in Vancouver” and has been awarded with the Trip Advisor Certificate of Excellence.

Flyover Canada is essentially a flying theater, which is the exact same attraction that Empire is looking to co-venture.  Empire has built numerous flying theaters in the past and references a number of them on their website’s Flying Theatre description.  It doesn’t appear that Empire built Flyover Canada (it was a competitor Brogent) but they did build Flyover Italy, Soaring over California, and Soaring, a Florida attraction.

Viad purchased Flyover Canada from Fort Capital at the end of 2016.   According to the Fort Capital press release at the time of the sale, the purchase prices was $69 million Canadian (remember if all goes well Empire and its ~$50 million market capitalization is going to own 63% of one of these in the US and 20% of another in China).  Flyover Canada had 600,000 guests and generated $11 million in 2016, so it’s a $20 a pop ride.  In their 2016 10-K Viad gave the following 2017 forecast for FlyOver Canada:

FlyOver Canada is expected to contribute incremental revenue of $9 million to $10 million with Adjusted Segment EBITDA of $5 million to $5.5 million.

The numbers are in US dollars.  Flyover Canada ended up doing $10 million of revenue in 2017, and though there was no EBITDA breakdown I have to assume it was close to expectations.  So it’s margins of 50%+

At the time I talked to IR about the opportunity.  The information I got was that depending on the size of the ride, revenue would be around $8-$14 million USD per year depending on the size.  Margins on the ride would be around 50%. A smaller ride would cost $10 million to $12 million to build, while a larger attraction would cost $18 million.  So these numbers are all pretty much inline with Flyover Canada.

The idea was (and is) that net to Empire’s 60% ownership, and assuming a split with a landowner, they should get somewhere between $3 million to $4 million of recurring EBITDA (CAD) out of the US deal.  I didn’t get any information on the Chinese opportunity.

Empire (via Dynamic Entertainment Group) would partner on the attraction with a landowner in a tourist destination.  The deal would be structured so that Empire got a preferential return until the cost of the ride is paid off.  Empire would make 10-15% margins on the design and construction of the attraction as per their contract with DEGL.  There is also a $3 million subsidy for developing creative content in Canada which would reduce the overall manufacturing cost to $7-$9 million.

The expectation was that the EBITDA should get a multiple of 10x.  Viad bought FlyOver Canada for about that multiple.  Again, if Empire got a 10x multiple on $3 million of EBITDA, that would eat up much of the current capitalization right there.

Overall, it’s always seemed like a decent venture for Empire once it gets off the ground.  The company invested $12.1 million via $8 million in equity and $4 million in debt.  In return they would eventually get the $2-$4 million of recurring EBITDA from the US venture, add two near-term attractions to their construction backlog (one for the US and one for China), and get some additional EBITDA (I don’t know how much) from the Chinese venture.

Of course like everything else with Empire this is a waiting game.  On the call they said “Before the end of the year, we expect to announce our first co-venture location. We expect to have an opening sometime in 2019”.  Hopefully we get an announcement soon.

Portfolio Composition

Click here for the last six weeks of trades.  Note that this is August 24th, so I’m a week behind here.

Week 359: Buoyed by the CAD

Portfolio Performance

Thoughts and Review

Another quiet month for my portfolio as I only added and subtracted a few stocks around the edges.  But I had quite a good month.

I can’t take credit for all of it however. I have been getting a boost from the Canadian dollar.  Since March the dollar has fallen from 81c to 77c.  Last spring I talked about this when I was going through a period of massive headwind from a rising Canadian dollar. Now it’s the opposite.

If you do the math, the move in the Canadian dollar has added about $25,000 to the tracking portfolio totals since the beginning of March.  So I’m looking somewhat better than I actually deserve (which is quite the opposite of last spring, when I looked like a schmuck as the CAD rose some 15% in a few months!).

Much of the rest of the move (which I can take credit for) is the move in Gran Colombia Gold.

Gran Colombia

In the last 5 weeks Gran Colombia completed the redemptions of their 2020 and 2024 debentures and announced first quarter results.    The results were great.  AISC of under $900/oz and EBITDA of $27 million.

After accounting for debentures redemptions and share conversions (including all the in-the-money warrants and the not yet converted 2018 debentures) I get about 60 million shares.  So that’s a market capitalization of about $200 million (CAD) or USD$153 million at the current conversion.  There is another USD$98 million of the new debt and they should have about USD$41 million of cash once all the warrants are converted.

The company did USD$27 million of EBITDA in the first quarter.  It seems pretty reasonable that they should do at least USD$100 million of EBITDA in the full year.  So even after the big jump in the stock price, Gran Colombia only trades at 2x EBITDA.  I realize the gold stocks are cheap and unwanted, but even the most unloved get at least 3x EBITDA and some are getting 6-7x.

I think the re-valuation still has a ways to go.

Tornado Hydrovac

Here’s a stock I haven’t talked about in a while.  I took a closer look at it after the first quarter results and had someone on Twitter ask about it which got me thinking about the stock a bit more.

Tornado is a $6 million enterprise value company with almost $5 million of cash.  However, most of the cash ($3+ million) is in China and not readily available for the North American business.  They have an established hydrovac business in North America, and one they are trying to get off the ground in China.

These are the same trucks that Badger Daylighting rents out.  But Tornado’s business is not quite like Badger, as they are primarily building the trucks not renting them out.  Tornado has had a few rentals (1-4 trucks per quarter) over the past year, so its not a significant business.

The first quarter wasn’t great.  I had been hoping for a follow-up on the fourth quarter, where revenue hit a 3+ year high at $9.4 million.  But they only had $4.8 million of revenue in Q1.

So it was disappointing and the stock hasn’t really done much.   But to be fair, the stock has never really done much so let’s not read into that too much.  Still I’m inclined to think the business is turning for the better.

The poor results were partially seasonal – in 2014, 2015, and 2016, there was a significant slip in first quarter revenue from Q4 to Q1 (2017 was a bit of an anomaly because the industry was recovering from the downturn).

Also, inventory ticked up from $6.49 million in Q4 to $9.1 million in Q1.  Inventory has been a pretty good indicator of the next quarter revenue, which I imagine is because of the part procurement and build cycle.  The company said the following in the MD&A.

For the three months ended March 31, 2018, inventory was $9,072 compared to inventory of $6,490 as at December 31, 2017.  The increase in raw materials is due to stocking up for production ramp-up in the second quarter.  The increase in finished goods is due to 3 completed trucks held in finished goods as at March 31, 2018 that were not delivered and sold to customers until early Q2 2018.

The other angle with the company is China.  They are getting closer to generating revenue from China.  Tornado expanded into China over a year ago.  Since that time most of the efforts have been establishing a footprint, starting up a manufacturing operation and developing relationships.

In the first quarter they sent out their first three demonstration units in China.  Overall, China has overhead of $300,000 per quarter and no revenue.

The inventory related to the three demo units was $1.14 million.  Assuming 15% gross margins (margins for the company are around this level), they need to sell about 5 trucks per quarter in China to break even.

But that’s only assuming sales of trucks.  The model is China is both sales and services and I’m not sure about what the economics of the services side will look like.

Bottom line is that the stock is reasonable and I think its not a bad bet that they can have a breakout quarter one of these days.   Book value is over $17 million while the enterprise value is $6 million.

On the other hand, margins are super-thin and the operating history isn’t exactly stellar.  This remains a pretty small position for me, but an interesting one and one worth reviewing from time to time.

Oil Stock sales

I sold out of a few oil stocks last week.  I can’t say that I had foresight into the carnage.  A lot of my selling was done on Friday, so after the plunge had occurred.  I sold Black Pearl, Whitecap and Spartan.

I have to admit, having missed a better opportunity to lighten up earlier in the week, I was a bit reluctant to do so after these stocks sold off.  Nevertheless I had a couple of reasons that led me to decide to sell anyways.

First, I was just getting a little too overweight into oil.  In particular, I took on a big position in Altura, which I wrote about, and hadn’t really sold anything.

I was getting particularly uncomfortable with my exposure to heavy oil.  The Western Canadian Spreads are looking good but I was long Gear, Zargon, Black Pearl, and now Altura.  It was a bit too much exposure.

Spartan was really now a bet on Vermillion and I don’t really know enough about Vermillion to want to take a position there.

Whitecap was just because I was nervous about Canada and Transmountain.   I know Whitecap isn’t heavy oil so maybe my logic doesn’t string together that well, but I didn’t want to sell Gear, Zargon or Altura and yet wanted to get my Canadian exposure down a bit more, so there you have it.

The other consideration I weighed was the build in crude last week.  It was a surprise, to say the least.  It could be a one-off and there seem to be indications that this week will look much better.  My thought was that the crappy number last week puts a lot of pressure on this weeks numbers.   What if, for whatever reason, its another surprise build?

With the Trans-mountain decision out of the way I might look at buying some of these names back.  But I think I will wait until after the Thursday numbers (delayed a day because of Memorial day) come out before doing anything.

Solaris Infrastructure

My services companies aren’t doing that well.  Cathedral has been terrible, down to almost $1.20 and if it goes much lower its going to hit the 52-week lows of when oil was $20 less.  I already gave up on Essential Energy.  Energy Services of America is always a next quarter story.

The problem is that none of these service companies can seem to generate any gross margins.

One story that is not a problem for is Solaris Infrastructure, where gross margins are a pretty amazing 60%.  But the stock is suffering nearly as much as these other names anyways.

Solaris provides a last mile solution for storing and delivering frac sand.  They don’t actually sell sand.   They rent out silos and conveyor systems that are installed on the well site and act as a sand buffer during the completion process.

The silo solution seems like it’s a big improvement over the Sand King trucks that are typically used.  Costs are lower, trucks don’t have to sit and wait, and the footprint on the well site is smaller.

Solaris builds the silo units and rents them out on a monthly basis.  The gross margins are as high as they are because of the rental model of the business.

Solaris is growing like crazy.  Revenue grew at over 205% in 2017.

Here’s my back of the napkin math for a theoretical 2018 exit.  At the end of the first quarter they had 98 systems in operation.  On May 9th, the date of the conference call they had 108.  They are adding systems at 8 per month.

So lets say they have 170 systems at year end.   Solaris gets roughly $100k per month of rental revenue per system so that works out to $204 million of annualized revenue.

There is no reason to think they don’t maintain their EBITDA margin of 60%, which would mean they are annualizing $122 million of EBITDA by year end.

In the first quarter they had $3.2 million of depreciation on an average of roughly 90 systems in operation during the first quarter.  That works out to $142,000 D&A per system or on 170 systems $24 million annually.

There is no debt so that means income before tax is $98 million and after tax is $77 million at a 21% tax rate.   On 47mm shares that would be $1.63 EPS.

If I assume they slow down their build to 6 systems per month in 2019, I get EBITDA of close to $180 million and EPS over $2.50.

None of this includes their new sand terminal in Kingfisher.  Or their sand supply chain management tool Propview.

There are a lot of things I like about Solaris but the one thing that I don’t like, that actually gives me a lot of pause, is the stock performance.  It is such a good environment for oil stocks and here is a fast growing service company right in the middle of it. And the stock price is as dumpy as can be.

That makes me think that maybe I’m wrong about it.  I’m hoping the market is just slow to jump on board, but its also possible that I’m too optimistic.  Maybe margins will decline and growth vanish as competition comes on the scene.  I have to think that’s what the market is worrying about.  Because otherwise the current share price doesn’t make a lot of sense.

One last Buy

The last thing I did was buy a small position in 3 copper stocks.  I’m not quite ready to talk about these, meaning I’m not sure I should have bought these stocks or not yet.  So I’ll leave that for now.

Portfolio Composition

Click here for the last five weeks of trades.

Week 354: Winners and Losers

Portfolio Performance

Thoughts and Review

My method of investing generates a lot of losers.  I think it’s a pretty good bet that over 50% of the stocks I pick for my portfolio lose money.

My performance is generated primarily by a few winners that end up being big winners.  When I went through a slump in late 2015 – early 2016 I pointed out how few multi-baggers I had.  I was generating lots of losers of course, but I didn’t see that as a problem.  The problem was that the winners weren’t winning enough.  For my method to work, I need at least 2-3 stocks a year that go up 2-5 times.

The math on that works in my favor.  If I have 2 stocks a year that make up 4% of my portfolio each (I usually start out at 2-3% positions but add as they go up) and they go up 3x then my portfolio gains 24% from those positions.  If they double then I gain 16%.  If I can manage the rest of the portfolio to limit the damage; sell the losers before they get too destructive and have a few other smaller wins to help offset the losses, then overall I’ll do okay.

Anyways, that’s my plan.  Its why I invest in a lot of businesses with high upside but questionable paths to achieve that upside.  I’m fine with those that don’t pan out, as long as a few of them do.

Since last summer my big(gish) winners (this is off the top of my head) were: Combimatrix, R1 RCM, Gran Colombia,  Aveda Transportation, Vicor, Helios and Matheson and Overstock.

Combimatrix was taken over and ended up being between a 2-3 bagger.  R1 RCM was a triple.  Gran Colombia is almost a double so far from my original purchase at $1.40.  Aveda Transportation got taken over a couple weeks ago and was nearly a double.  Helios and Matheson was a little less than a triple (I sold out well before the top, in the $9-$10 range) and Overstock was about a 70% gain.

Both Helios and Matheson and Overstock turned out to be flops in the end, but that’s okay too.  A big part of my strategy is to know what I’m getting into, and not fall in love with it because there is a good chance it ends up going south.  In both those cases I was pretty cognizant of the company’s faults, and I freely admitted there was a lot of uncertainty with both.  As the faults materialized, or as too much optimism was priced in, I reduced my position in each and eventually sold out.

Vicor Results

I had been going through a drought in the new year before I finally got the move I had been waiting years (literally years!) for with Vicor.  Finally the rest of the tech-world is catching up with Vicor’s 48V converter technology.  Applications are popping up all over.  There are the 48V servers, which were the original reason I got into the stock, but also low voltage GPUs (from Nvidia and AMD) requiring power on package, new areas like electric vehicles and AI, and most recently the evolution of a reverse 12V to 48V datacenter application.  All these customers seem willing to pay for Vicor’s superior and patented technology.

I looked at Vicor way back in March of last year and worked out the numbers on an optimistic trajectory for the company.  At the time I pointed out that while the stock didn’t appear cheap on most metrics (it had no earnings and was at a fairly high P/S ratio given the lack of growth), if they could follow through on their growth plan, the earnings they could generate were pretty impressive.

I updated that model recently based on new projections and the fact that after the first $100 million of earnings Vicor is going to have to start paying taxes (they have about $34 million of valuation allowances right now).

It looks to me like a $450 million of revenue run rate gives Vicor about $2.10 EPS when fully taxed.

The first quarter numbers were strong.  Bookings and backlog have been outgrowing revenue.  Backlog grew 23% sequentially.  Bookings grew 15% sequentially.  Revenue grew 11% sequentially.

After the first quarter numbers its looking more like that first $450 million of revenue could happen sooner than you think.  $450 million is roughly what Vicor can do in their current facility.

Vicor is expecting to double capacity with a second facility later this year.    If you assume that Patrizio (Vicor’s CEO) hasn’t gone off the deep end and that they can fill that second facility, the earnings numbers get much higher.  Given that right now they are growing at 10% sequentially and that is before the larger orders that are expected in the third quarter start hitting.

I am inclined to hold the stock with the view that we are just getting started.

What I did in the Last 5 weeks

As I said I will always have a lot of losers.  An important part of the strategy is to sell that which I perceive as not working out.

In the last month I did more selling than buying.  This is partly due to broken theses but also because I remain cautious about the market.  But to be honest, this caution has hurt me more than it’s helped.

Much of my selling has been poorly timed.  For example, I sold Largo Resources at 1.30, only a couple of days before the stock made a run up to $1.90.  I’ve written about the Largo story before: Largo is a great theme play on vanadium but it has always been hard to make the stock look cheap by the numbers.  That has nagged at me and it finally won out.  I took a nice gain on Largo, having bought it at 80-90c, but it still hurt to watch the stock subsequently take off.

I also sold Aehr Test Systems shortly before it ran from $2.20 to $2.60.  With Aehr I took a loss.  I’m still not sure whether I did the right thing selling it.  On the one hand it feels late in a semi-equipment cycle, and the company has had very few announcements of new contracts lately.  On the other hand it appears their relationships with Intel and Apple are intact and so the next big deal could happen at any time.  It’s a tough stock to judge.

I also had poor timing with Essential Energy, which I sold at 55c range after listening to their fourth quarter conference call.  The call painted a depressing picture of drilling in Western Canada.  I didn’t get the sense they had any pricing power and the year over year utilization rate appeared to be flat.  Now maybe that has changed as oil has risen another $10 since I sold.  As well, the lawsuit with Packers Plus is in appeal (so its still not settled), which means a takeover is unlikely.   I decided to focus instead on US leaning servicing companies like Aveda Transportation (which subsequently got taken over for a double, though it was a modest position for me) and Cathedral Energy Services, which I continue to hold.

I had somewhat better timing with my exit of Sherritt International, as the stock sank after I sold.  But even the jury is still out as the share price has come back with nickel skyrocketing.

I likewise sold my position in both Orocobre and Albemarle.  This fits into the “loser thesis” even though I made small profit on Orocobre.  My thesis was that the consensus for lithium had under-estimated demand and over-estimated supply.   However, the more I’ve learned about the supply/demand dynamic the less sure I am.  It’s not so much that I’m a believer in the coming lithium supply tsunami.  It’s just that I’m unsure enough to not want to make the bet either way.   I’ll revisit these names again, especially Orocobre, but I need to study lithium some more and make sure I’m not wrong about it.

I also exited my position in Foresight Autonomous.  I mentioned the stock last month and its just not working.  They are going to need capital at some point and the recent death that was at the hands of an autonomous car isn’t helping.  But probably my biggest reason for the turnaround is that this just doesn’t seem like a good market to be holding many nano-caps in.

Finally I reduced my DropCar position (which is heavily in the red) by about 20%.  I probably should have reduced this stock earlier, but it was a tiny position to begin with (~1%) and so I’ve been more willing than maybe I should have been to give it some leeway.  I still think they could pull off some big growth but the revisions of their option strikes, the share offerings and the lack of news has worn me down.  Being down 40% on the position means at this point it so small that its a bit of a lottery ticket.  Which is really what it always was.

Gold and Oil

What’s been working for me are my gold and energy stocks.  Those that follow the blog know that I’ve been holding a number of gold and energy stocks for months now and that number has been increasing.  Up until recently they have done nothing.

I wrote up my reasons for owning Golden Star Resources a few weeks ago.

I also continue to hold Gran Colombia Gold.  I admit that I am a little nervous about selling pressure in the near term.  I don’t totally understand what the short term outcome of the 2018 debenture conversions will be and whether sellers of those debentures will pressure the stock over the next while.  Nevertheless, I think the company is on track for a re-rating at some point and I’m happy to wait out the weakness.

I also have positions in Jaguar Mining, RoxGold and Wesdome.

The idea with these stocks isn’t really about gold prices.  I don’t feel like I am making a bet on whether gold will imminently go through the roof.  I feel like I’m just buying stocks that are really cheap.

All the miners I mentioned above have EV/EBITDA ratio of between 2x and 5x.  Those multiples are trailing ratios that are based on lower gold prices then what we have now.  Each of the miners  has good growth prospects and an exploration upside if drilling comes up positive.  Apart from Gran Colombia, they are all well off their 52 weeks highs.

I also recently took a small position in Asanko Gold.  The stock has been written up a number of times on the IKN blog.  Gold Fields recently did a deal with Asanko, taking 50% of their property in return for enough cash to pay out their debt.  Otto Rock, who writes on IKN, thinks Asanko should trade back to at least 1x book value now that Gold Fields is available to provide their expertise and hopefully right the ship at the Asanko Gold mine.

So if the gold price breaks out, that’s an added bonus.  But these stocks are more of a play on sentiment.  I think all I really need on the commodity side is for gold not to crash.

I don’t really have a crystal ball with what gold will do.  I will note that the chorus of the gold bears on twitter seems very loud right now.  “It didn’t go up with North Korea”, “It can’t break $1,360”, “It’s setting up a technically bearish formation (a compound fulcrum top?)”, “The Australian dollar, the Canadian dollar are canaries in the coal mine that the rally isn’t real”, and so on.

Who knows?  Maybe they will be right this time.

I have been reading about the 70s, and in particular what Nixon did that led up to the Smithsonian agreement.  The circumstances today are different of course, but not so different, and I was surprised how much of what Nixon did rang true to what Trump is doing now.

Nevertheless,  I own tiny companies that are not in the GDX or GDXJ, typically don’t follow gold prices all that closely (Golden Star went down nearly 40% during the last gold rally!), and have unique attributes that I believe will lead to price appreciation. Gran Colombia, which is up 90% since I bought it last summer, is the poster child for this.

On the oil side I have all my old names: Gear Energy, Spartan Oil and Gas (which got taken over so now I effectively hold Vermillion shares), Zargon Oil and Gas, and InPlay Oil and Gas.  I also bought WhiteCap as another way to play the run.

On the US side I continue to hold SilverBow and Blue Ridge Mountain.  I also added Extraction Oil and Gas, which looks to be generating a lot of free cash in the coming years at these prices.  I’ll write something up on them shortly.

The summary of what I have read on oil is that things are potentially tighter than we realize, that they are getting tighter, and that relying on a small patch of west Texas to supply the world’s growth is likely not the best strategy.

I’ve been surprised by the strength in the oil stocks.  They seem to go up every day, and a lot of days they start down big and recover throughout the day.  It’s hard to see that as bearish.  I’ve read about the big net long positions, and I suppose that means we get a correction here at some point soon.  But I’ve held these stocks for this long, I might as well see it through.

New Purchase: Ideal Power

The one stock I bought that I will mention in some detail is Ideal Power.   This is the perfect example of a high risk, tiny little micro-cap that has a chance (maybe not a big chance but a chance) of being a 5-10 bagger.

Ideal Power sells inverters into the solar industry.  One of their inverter products, called the Sundial, has been built into a Flex solar plus storage offering called NX Flow.  NX Flow, interestingly enough, uses a vanadium battery.

Flex initially had huge expectations for NX Flow.  Leading up to the product launch in December, Flex was saying they could sell 15MW per week of their product.

Now if you do the math on 15 MW per week, considering that Ideal Power sells their Sundial for about $10,000 per unit, that there is one Sundial per  30 KW capacity, you get a very, very big revenue number.

The reason the stock is at a buck and change is that those sales forecasts haven’t materialized.  Maybe they never will. Flex is trying to “educate” their customers on the vanadium battery.   The real benefit of a vanadium battery compared to its lithium-ion competitor is that the vanadium battery doesn’t degrade over time.   The life span can be significantly longer and performance doesn’t suffer.  The problem is that customers are used to buying a battery strictly on a per MW basis.   On that metric alone the vanadium alternative appears more expensive.

Nevertheless Flex is a big company and I don’t believe they just pulled these numbers out of their ass.  I feel like it’s worth a bet that the NX Flow begins to get some traction.

The stock has one other lottery ticket in its back pocket.  Ideal Power has developed an alternative switch for converting between DC and AC power called a B-Tran device.  Pretty much every inverter out there has some combination of IGBTs, MOSFETs and diodes that let you switch power back and forth from AC to DC and vice versa.   The B-Tran can do this too, and it can do it while reducing losses to 1/10th of what an existing IGBT solution will have.  The double-sided nature of the device means that you can replace two IGBT’s or MOSFETs, and two diodes with a single B-Tran.  So there is a cost savings.

The company just finished prototyping the device using their anticipated manufacturing process and it appears to work as advertised.  The power semi-conductor market is $10 billion and the company has said that if all goes well B-Tran could address 50% of that.

Look I have no idea if this concept flies.  It seems to have some merit based on what I’ve read from various electrical sites and papers but its very technical, there is incumbency at play, lots of factors will determine the success.  My main point is if you are going to throw a hail Mary you might as well go for the end zone and that is exactly what this is.

The stock has a $20 million market cap and $12 million of cash, which they are burning as we speak.  I could easily see myself selling this stock at 80c in 6 months time.  In fact, that’s probably the base case.  But the bull case is so big that I believe its worth the risk.

Portfolio Composition

Click here for the last five weeks of trades.

Week 349: Company updates, a couple new positions but mostly sitting pat

Portfolio Performance

Thoughts and Review

I’ve been slow on the updates.  This is the second time in a row that its been 8 weeks between them.

I’m slow because my portfolio has been slow.  I still have a high cash level.  I took advantage of the stock decline in February, but not enough to have much of an impact on my results.  Since then I sold down a few positions and so I’m back to a high cash level.

Portfolio Additions

I’ve already written about my new positions in DropCar and Precision Therapeutics, as well as reestablishing a position in Radcom and Silicom.

In addition I took a position in Sonoma Pharmaceuticals and Foresight Autonomous.

I’ve got something written up about Sonoma that I will put out in a couple of days, so I’m not going to talk about them right now.

Foresight Autonomous

My position in  Foresight Autonomous is small (less than 1%), so I’ll just mention the thesis briefly.

The company is developing automobile detection systems (called advanced driver automation systems or ADAS).  They have had successful trials with Uniti Sweden, and three successful pilots with Chinese companies.

The stock trades at a $110 million market capitalization.  That’s not really cheap but I think the potential here is significant if they can land a deal with a large car companies.

Foresight also has a 35% interest in Rail Vision.   Rail Vision provides detection systems for rail systems.  Rail Vision was looking to IPO last fall at a $100 million valuation.

Worth noting is that this article said that Foresight’s technology has tested better than Mobileye.  Mobileye was bought out for $15 billion.

Good News from existing positions

While my portfolio has only benefited at the margins, there were a number of positive news events over the last couple of months that do bode well for the stocks I own.

Vicor gave a very positive outlook on their fourth quarter conference call.  They are making progress on the 48V servers, automotive and high end power on package applications.  It seems very likely that they are working with a large FPGA producer (maybe Nvidia?) for high end power converters on the the chips.

Gran Colombia is doing very well at both of their mines.  They provided a February update on Tuesday.  They are on track to do more than 200,000 ounces if they can keep up the mining rate from the first two months of the year.

The next day the company amended terms to the debt exchange deal.  The 2018 debentures will be redeemed, not refinanced.  It means more shares and less debt.

The amendment doesn’t change my opinion on the stock.    With the new terms they will have about $95 million of debt and 54 million shares outstanding.  It doesn’t really impact the enterprise value much, with less debt there is somewhat less leverage to the price of gold but also less interest charges.

DropCar announced they are going to be doing maintenance and cleaning on the Zipcar fleet (transport,prep, cleaning, maintenance) in New York City.

The stock only moved a little on the news but it seems pretty significant to me.  Zip Car has 3,000 cars in NYC according to their website.

While I’m not sure how b2b revenues on a per car basis compare to the consumer business, 3,000 cars is a lot of cars.   Compare this to the 1,500 consumer clients they have right now.

The only question is what sort of revenues do they get on a per car basis for the B2B business?  I need a bit more detail from the company on this.  I suspect there are a lot of investors feeling the same way.

I wasn’t thrilled to see the $6 million private placement.  It conveniently gets Alpha Capital Anstalt their position back without breaching the 10% rule (its a convertible preferred sale).  But I still think the business could have legs. The recent Zipcar deal suggests that is the case.  So I’ll hold on.

Precision Therapeutics (formerly Skyline Medical) has been announcing all sorts of news with respect to its Helomics joint venture.

I honestly don’t know what to make of this.  I bought the stock because it looked like Streamway sales were going to launch, but all the news is about precision medicine, which is maybe (??) a bigger deal, but I don’t really know.

Some have pointed to Helomics revenue being in the $8 million range (which I’m not sure if it is), and that Helomics has spent over $50 million in research over the past 5 years (which appears to be the case based on the past capital raises).  If either of these points are accurate then Helomics is potentially more valuable than the single digit million valuation that Precision paid for the first 25%.

But I’m not going to lie, I don’t really understand the precision medicine area very well.

If anything, the company seems to be prioritizing the precision medicine business and I would think, given that the Streamway business is not profitable, that would put Streamway on the block.   If I’m right about the value in Streamway, then my original reason for buying the stock will work out, and maybe even sooner than I had hoped.

R1 RCM reported fourth quarter results at the beginning of March.  They see revenue at $850-$900 million in 2018 versus $375 million of revenue in 2017.  They are expecting adjusted EBITDA of $50-$55 million this coming year.

EBITDA is going to be depressed by the continuing onboarding of Ascension, new customers Intermountain Health and Presence Health, and the Intermedix acquisition.

In 2020 once the onboarding of Ascension is complete the company expects $200 million to $250 million of EBITDA.   At $7.70, which is after the big move over the last month, that puts them at a little under 7x EBITDA.  That’s still not super expensive and the path to get there seems straightforward so I’m holding on for now.

Gold stocks suck right now but I am adding.  In addition to Gran Colombia, I’ve added positions in Roxgold and Golden Star Resources this week.  Neither is reflected in my portfolio below, which is as of the end of last week.  Taken collectively, gold is my largest position right now.

My thought is simply that this trade war stuff seems to be real and and getting more so, and how is that not bullish gold and gold stocks?  Meanwhile I am picking these stocks up at discounts to where they were 6-12 months ago.  And we just had the takeover of Klondex at a pretty fair valuation.  It seems like a decent set-up.

I sold Essential Energy this week (this was after the portfolio date so its still in the list of stocks below).  I listened to their fourth quarter conference call.  Its hard to get excited about their prospects.  Drilling activity in Canada just isn’t coming back.  I’m going to stick with names like Cathedral and Aveda that have more US exposure.

I also sold Medicure this week after the news that Prexarrtan won’t be launching on the original time line.  I may be jumping the gun, after all Medicure has 3 other drug launches in the next year or so.  But Prexarrtan was the first and without it I don’t see much of a catalyst for the stock in the near term.

Portfolio Composition

Click here for the last eight weeks of trades.  NOTE: I didn’t go back far enough in my trade search.  These are the trades from Jan 15th to Jan 29th that I had previously missed.

Prices below are as of Friday, March 16th.

 

Week 340: Back Writing but Staying Cautious

Portfolio Performance

See the end of the post for my full portfolio breakdown and the last four weeks of trades

Thoughts and Review

I’m back!

Its been a month and a half since I have written.  I was on vacation for the last 3 weeks and before that I was so focused on learning about blockchains (and Overstock) that I didn’t have much time to put my thoughts down.  I should get back to more regular posting going forward.

Overall, my portfolio is doing okay.  I’m keeping up with the S&P, primarily thanks to Overstock.  I have a high cash level, which hurts when the market is going up like it is, but I just can’t bring myself to larger exposure when the market seems so lofty.  If the S&P keeps going up like it has been, and barring another Overstock type move in one of my small-caps, I will likely continue to struggle to keep up with the index.  I’m okay with that.

Overstock

Since the last time I wrote the only big thing that has happened is that Overstock worked. After a big run up I reduced my position down to a more reasonable level before Christmas.  It was simply too big.  Its not very often that an investment causes me to lose sleep, but when Overstock was a 30% position, a level that is unheard of for me, it was doing that.  I reduced too early of course, in the low-$70’s.  I remain holding a more modest 5% position in the stock, which means it remains large, but not to the ridiculous degree it was before.

Apart from position size, I had a few other reasons for reducing Overstock.

First, after reading the offering memorandum for the tZero ICO, it looks like Overstock hasn’t started developing the ICO trading platform.  So this is still early days.

Second, in that same documentation there was no mention of the stock lending platform, which I had been hoping for an update on.

Third, and I might be wrong about this because I’ve heard to the contrary, but it appears to me that the tokens are locked up for a year before they can be traded, which if true removes the upside of “price discovery”, or maybe bubble-discovery if you prefer, that I had been hoping for when the tokens became free trading.

Fourth, Byrne has been on the circuit giving interviews and his comments aren’t always consistent.  I’m still not exactly sure what his plans are with e-commerce, yet I feel like at $75 the stock is pricing in some expectation of sale and a premium price.  Take for example these comments.  They were actually made after I reduced my position, but illustrate how uncertain the direction here is.

“Maybe it’s about time we stop seeing Overstock as two separate businesses,” he said. “Our retail platform had 40 million unique people come to it last month. So as we’re developing these blockchain applications, these blockchain companies, the retail business is an extremely valuable retail business to have in terms of bringing awareness and traffic to the blockchain properties that we anticipate developing.”

It doesn’t seem like the thing you would say if you were in the mid-stages of selling the business.  So I’m not sure what to expect next.

Blockchains

More broadly, while I am very excited about blockchains and what they can do, I also think this is a long game and we are in the very early innings.  I dedicated a significant amount of time over the last two months to blockchain research.  I read books and a whole pile of white papers on individual companies.  I think the opportunity is real, but it is mostly still in a very speculative stage where picking winners is hard.

I started to make some investments in the token space over the past couple of months. They have gone well, but mainly because the whole sector went crazy in December and not because of any particular insight I had.  The token space is insane of course.  It makes no sense to me that they have valuations in the $100’s of millions or billions of dollars when in many cases there isn’t even a platform yet.  Moreover when you read many token white papers, the structure is often premised on a reasonable transaction fee that would seem to me to be negated by the current token valuations.

Nevertheless, the momentum could continue for some time yet.  This is because A. there is a real value that will eventually be realized in blockchain applications, much like there was real value the internet in the 90s, so there is a basis for the enthusiasm, and B. the moves thus far have been mostly retail dollars and if even a sliver of fund gets involved in the next year the bubble should inflate further.

Apart from the tokens, I’ve been in and out of a few different blockchain related stocks over the last couple of months but I’m reluctant to mention them because they are generally pretty sketchy and you buy them for the single reason that you think someone else will buy them higher in short order.

Its all pretty insane.  On the token side, let me just take Factom for example, which I pick because it actually seems like a solid platform and could eventually have all kinds of uses, it has backing and is established and it has an Overstock connection.  It also has a $525 million capitalization for the token.  If you assume that all of the economic benefits of the platform confer to the token holder, that means the platform is worth $500 million already?  This isn’t a hit on Factom, they are really interesting and maybe someday when services use their platform to tie in mortgages and deed titles and stock ownership into their platform then that valuation will be reasonable, but man, $500 million?  All these tokens are trading at multiples that suggest the platforms are mature and with robust usage.  And we just aren’t that far into the game yet.

The irony is that the valuations perpetuate themselves.  You end up trading on relative values and picking up “cheap” tokens that are in reality extremely expensive in their own right.  I bought another token called Tierion because it seemed like a reasonable alternative to Factom at ¼ of the price.  But its still a $100 million market cap for a platform with still limited utility.

It’s all pretty crazy, but I bet it has further to go before it ends.

On the stock side of blockchain the only one (other than Overstock) that I find somewhat interesting is Global Blockchain Technologies.  The stock is expensive (around $175 million market cap at current prices), they provide only a fuzzy idea of what their assets are (crypto mining and a token fund) and they have a ton of cheap warrants outstanding that are likely keeping a lid on the price.  So those are the reasons not to own it, or maybe to short it.

But I think there could be an interesting short-term play with the stock.  The chairman of Global Blockchain is Steve Nerayoff.  He seems to get a lot of flack on twitter, many think he’s nothing more than a promoter.  They may be right.  But he also happens to be a strategic advisor to tZero.  In these two positions it would seem to me that Nerayoff basically has two responsibilities.  A. to find tokens for Global Blockchain to invest in, and B. to help make the tZero ICO successful.  So it seems like a reasonable speculation that Global Blockchain picks up a piece of the tZero ICO.   News of the Kodak ICO investment (which is only about $2 million), briefly sent the stock up 45%.  I have to think that similar news with tZero would be regarded with equal or even more exuberance.

Commodities

As I alluded to earlier I have been reducing exposure to stocks.  Apart from a speculative blow-off its hard for me to add to positions with the market having run so far and with it being so long since the last correction.

However I have been willing to add to my commodity stocks. I continue to hold a number of base metal names, mostly those with ties to electric vehicles and batteries.  I note that Largo Resources has had a nice run up, even after the company diluted shareholders once again at bargain basement prices.  I also continue to own Lynas, Ascendent Resources, Leading Edge Materials, Bearing Lithium, Mkango Resources (very small position), Sherritt International and Norilsk Nickel.  Ascendent Resources announced fourth quarter production numbers on Friday and while mixed, they are still making progress on the mine ramp. The stock is trading at roughly 4x free cash flow if they can reach their 2018 guidance.

Gold stocks have not done much of anything and interest in the miners must be at record lows.  I’ve heard a few people articulate the theme that bitcoin interest is eclipsing gold and that the metal will continue to suffer as a consequence.  I’m not so sure about that.  Gold dynamics are so complicated, with factors from jewelry demand, Indian economics, Central bank proclivities and of course investment interest from individuals and institutions.  I have found that trying to predict the direction of gold from any single thesis usually turns out to be wrong.

What seems to be the best predictor of gold and gold stock movements is sentiment.  When everybody hates gold stocks, that is when they will go up.  And vice versa. This is primarily what my thesis is here.  Nobody wants to own gold stocks, so I think they will do well.

My largest gold stock position for some time has been Gran Colombia, and I really like the way the chart is setting up here.  I think the agreements they signed back in the summer with the artisanal miners give a legitimacy to their business that they haven’t had in the past.   If the market agrees with me the stock will go higher.

I have smaller positions in Jaguar Mining, Wesdome, Alamos Gold, New Gold and Orvana Minerals.

I also have a bunch of oil positions, though I’m a little more reserved about these.  Oil just seems to have such a dismal longer term outlook to me.  I know that the dominance of electric vehicles and renewable power is still a ways off, but I think its inevitable, and I wonder if it accelerates faster then anyone expects as the momentum snowballs.

But in the short term I doubt the market will look far enough ahead to care about that eventuality.  Right now oil inventories are dropping and with oil prices at current levels, the stocks look pretty attractive.  I still like the Canadian services names the best.  The three I own are Cathedral Energy Services, Aveda Energy Transportation Services and Essential Energy Services.  All of these companies trade well below book and have seen improving results over the past few quarters as oil prices have firmed.  I would expect that to continue in the coming year.

On the producer side I still own Spartan, Gear Energy and InPlay on the Canadian side and Silver Bow and Blue Ridge Mountain on the US side.  Blue Ridge Mountain is one of the few gas names that hasn’t moved at all over the past month.  This is because it doesn’t trade at all.  The company sold their Eureka Midstream interest in September for almost double of what the assets were held at on the balance sheet.  In the process they reduced their operating costs, gave them more flexibility for drilling and freed up prospective land that had previously been tied up due to proximity to the pipeline.  The company is now a pure play on the Utica/Marcellus.  It’s got to be worth at least $12 or $13 if not much higher, given the run up in other gas names.

Other Stocks

Just some brief mentions of a few other names in my portfolio.

Aehr Test Systems had a good quarter and announced a new customer for their FoxXP test system.  There is still a lot of selling pressure on the stock, pretty much every pop is sold. If you read through the third quarter conference call its hard not to come away enthused about their prospects.  They have unique technology that provides a tangible efficiency benefit for testing many of the new components that are being developed.  Its just a matter of bringing in more customers and building momentum.  I’ve added to the stock on weakness in the last couple of months.

I’m still holding Mission Ready Services even though the company hasn’t announced its first PO yet.  I came away from their December 7th conference call with many of my fears allayed, in that they seem to be building a legitimate business.  The research I have done on the people they’ve brought on-board and what I’ve already described about the products (and technology) itself make me inclined to wait it out until the first order and hopefully some other good news.  However, the stock is under pressure and probably will continue to be as long as there is no announcement and more existing investors get frustrated and leave.

Portfolio Composition

Click here for the last eight weeks of trades.  Note that the prices below are as of Thursday, January 11th.