Posts from the ‘Portfolio’ Category

May 29

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 9^th, 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.

May 1

7 Comments

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 1/10^th 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.

Mar 24

18 Comments

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.

Jan 15

13 Comments

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 7^th 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.