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Posts from the ‘Rentech (RTK)’ Category

Week 254: Just a Bunch of Company Updates

Portfolio Performance

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Top 10 Holdings

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

Thoughts and Review

First some house keeping.  RBC’s has added new tools to make it easier to show performance for practice accounts.  I’ve maintained my portfolio manually through an excel spreadsheet for the last couple of years because RBC screws up the purchase values on their portfolio holding page and the gain/loss on individual stocks are, at times, ridiculous (my average cost is sometimes negative).

Recreating the results, even after building a visual basic routine to update the month of trades, was quite cumbersome, so I welcome these new tools.   At the beginning of the post I showed a list of my top ten holdings and below are all my positions, both are from the new tools.

The only information that is lost in this new format are the position by position gains and losses. While this is unfortunate, its so much less work compared to the process I had to go through before that this is how its going to be.

With that said…

I didn’t purchase any new stock in the last month so this is going to be a bit of a boring update.  I’ve be dedicated the space below to a discussion of a few of my larger and/or more interesting positions.

With April/May being an earnings period, there is a lot of information to consume.  I had mostly good news from the companies in my portfolio. I’ve tried to stick to names with solid operating momentum, staying away from those that might be turning it around but where good news has yet to trickle out.  And that has served me well.

As I have remarked before, my portfolio has been sitting in a holding pattern for the better part of a year.  While I am still waiting on a break out from the range, I feel better about the stocks I own than I have for a while.  Not all of them will pan out of course, but a few will, and hopefully 1 or 2 will be the multi-baggers that I depend on for out-performance.

Radcom

There is a lot to write about Radcom.

Radcom’s first quarter results were fine.  The company had revenue of $6.5 million and generated non-GAAP income of 15 cents per share. Perhaps the only negative about the quarter came out in a subsequent filing, that over $5 million came from their Tier 1 client, AT&T.

For the first time the company provided revenue guidance for the full year, a range of $28-$29.5 million.  They said that they were very confident in their ability to achieve this guidance as 80% of it was already secured with contracts.  In a later filing they said that 50% of their revenue in 2016 would come from North America.

Putting that together, Radcom is saying that they will generate about $14-$15 million from AT&T, and another $14 million from their existing non-NFV deployment.

Overall this is all as expected to slightly positive.   But the quarterly results and guidance don’t begin to tell the whole story here.  In fact what is most telling about guidance is what is left out; it does not include any contribution from additional Tier 1 service providers.

The company is actively pursuing additional Tier 1 customers for their virtual probe solution (MaveriQ).  They said they are in discussions with carriers from North America, Western Europe and APAC.  I’ve heard that the number of Tier 1’s is in the range of a handful.

It was reiterated on the conference call that MaveriQ is well ahead of its peers. Competitors either haven’t rolled out an NFV product, or if they have they don’t have real world implementation on it, and it is still tied to hardware.

We have competitors in the market but to our best understanding and everything that I am hearing from the CSPs and say they enrolled out an NFV product, some are saying that they have – they don’t have real world implementation on it. Some seem to be still in the hardware area and you cannot monitor an NFV network with the equipment, that’s why we believe they were the first mover and we were widening the gap with our competition.

This is inline of what I have gathered from one of the leaders in physical probes, Netscout, who recently said that their first virtual device would not be released until May.  I listened to Netscout’s webinar dedicated to NFV where they talked about their virtual probe technology and I was not impressed.  It felt like the event was put together to prove that they were in the game.

I note that Mark Gomes wrote the following on Friday, which corroborates with scuttle I had picked up from a different source:

In fact, word is spreading that RDCM’s product (MaveriQ) scored a perfect 100/100 in its lab trials, while the nearest competitor could only manage a 70/100. In other words, RDCM’s technology lead is wide, making them the de facto leader for NFV Service Assurance.

Amdocs provided some color around the cost advantage of virtual probes in this interview.  Justin Paul, head of OSS marketing at Amdocs, said the following:

The fixed video network model uses virtual probes instead of physical probes. This is because traditional, physical probes can’t probe a virtual network and the cost of a virtual probe is significantly lower than a physical one. We’re working with Radcom to implement a vProbe solution with a North American CSP and we’re seeing from the work we’ve done there that physical probe is 20-25% less costly than a physical probe. In addition, you can throw up a ring of probes around a specific area to address a specific peak in demand and redeploy those licences elsewhere when the peak has passed. They’re cheaper to buy and they offer greater flexibility and agility to operators because of that redeployment capability.

Since the results of the first quarter Radcom announced a share offering.  What has followed is an ensuing sell-off in the shares ha culminated Friday when the pricing of the shares came in at a disappointing $11.

Maybe I am too sanguine but I am not worried about the sell-off and while the dilution is unfortunate it is not overly material compared to the eventual upside.

Whether Radcom did a poor job selling their story, were poor negotiators, or just deemed the institutional backing and analyst coverage as being worth the cost of dilution at a somewhat low-ball price is unclear to me.

In the same article I quote above Gomes commented about over-subscription.  I have heard similar comments from another source.  The price action on Friday where the stock traded enormous volume and did not dip below the offer price suggests significant demand even as some shareholders throw in their cards in frustration after what could be perceived as a poor deal.

So the evidence is that the offer price is not a function of lack of interest and not a reflection on investor enthusiasm for their business prospects or for the strength of their MaveriQ solution.  And that was the real negative here; does $11 reflect poorly on Radcom’s business?  If it does not, and is a function of their willingness to concede in order to improve their balance sheet and get institutional support then really its not very negative at all.

I added to my position in the days leading up to the pricing.  That’s unfortunate.  I could have gotten those shares lower on Friday. But I do not see any reason to back track on those purchases.

I sat on a 1-2% position with Radcom for a couple years, all along thinking that this was an interesting little company with a promising technology that was worth keeping close tabs on in case they were able to step into the big time.  That is exactly what they’ve done with AT&T and are on the cusp of doing with other Tier 1’s.  I would be want not to do exactly what I anticipated doing in the event of such a progression.   And in the long-run I don’t think I will care too much that I bought the stock a day or two too soon.

Radisys

The first quarter results marked another step along the trajectory towards transforming Radisys’s business. The company continues to add to its suite products and services designed to facilitate the migration of service providers towards virtualizing their networks.

The company hit the high end of their guidance and then raised their guidance for the rest of the year.  They raised revenue to the range of $195-$215 million from $180-$200 million previously.  They left earnings per share guidance with the range of 22-28 cents on the expectation that additional costs would be incurred to support the expected revenue ramp.

he guidance raise was in large part due to the new DCEngine product.

DCEngine is a rack frame pre-installed with open-architecture software and white box hardware.  Its designed to be an alternative to the “locked in architecture” sold by the incumbent providers, and is consistent with the move to virtualize network functions (as opposed to tying them to hardware) so that upgrades, additional capacity and new functionality can be installed via software installs rather than hardware swaps.

DCEngine had its first order from Verizon, a $19 million order, at the end of the fourth quarter and this order was fulfilled in Q1.  On the first quarter call the company said the order from this service provider was expanded to $50 million, with the rest of the order expected to occur in the second quarter.

While this a large order for a company Radisys size, what is most interesting is that Brian Bronson, the CEO, referred to it as a “rounding error” in comparison to what Verizon needs to build out.

DCEngine is a low margin product, somewhere south of 20% gross margins.  But volumes could be significant, and management said that once the product gains traction that DCEngine orders “should be in the hundreds of millions.”

In addition, there is ancillary revenue to be gained from DCEngine sales.  Right now Radisys populates each rack with two white box switches.  In the second half of 2016 the company’s FlowEngine product will be upgraded and allow Radisys to replace those switches with it.  FlowEngine is a 60%+ gross margin product.

Second, the move from central office to data center is complicated and often requires support services from Radisys.  Providing the rack positions Radisys as the natural support resource, which on the call the company said can add another 10 points of operating income.

The company painted a positive picture of growth going forward.

They said that in addition to the Verizon order they were in discussions with a dozen service providers for DCEngine and expect to have 4 to 6 in trials by the end of the year.

With MediaEngine Radisys continues to ship product to their Asian servicer provider customer and said they are  “increasingly confident in our ability to secure further orders.”

They also see strong orders for FlowEngine in the first half from their Tier 1 carrier and while that might taper off somewhat in the second half they are still expecting revenues for FlowEngine to double year over year and there is the opportunity that more orders will materialize in the second half.

There are a lot of evolving parts with Radisys which make it difficult to pinpoint a forecast.  If I assume that revenue can grow 10% in 2017 on top of midpoint of guidance growth in 2016, that gross margins stay constant and SG&A and R&D costs increase modestly, I easily get to an EPS above 40c in 2017.  This seems like pretty conservative projections and yet it should easily support a stock price that is 50% higher.

guidanceWhat is interesting is how sensitive the numbers are to incremental revenue growth.  15% revenue growth produces and EPS above 50c while 20% revenue growth in about 60c.

What this makes clear is that there is real upside if the product suite begins to gain traction and realizes some of the expectations management alluded to one the conference call.  The speed of the move up above $4 makes it difficult to pinpoint exactly where one should add to their position, but I feel like somewhere in the low $4’s, high $3’s will look like a good price in the long run.

Medicure

I was pleased with the first quarter results announced by Medicure.  Sales were down to $6 million from $9.5 million in the fourth quarter.  Earnings per share were 5c again down from the fourth quarter.  None of this was unexpected after the run-up in earnings in Q4 due to Integrillin shortages.

Earnings as reported by the company are also being depressed by higher intangible amortization due to Medicure reversing some of the write-down of intangibles related to Aggrastat in the fourth quarter of last year.  These intangibles show up in the cost of goods sold (which is why margins were down to 86% in the quarter) and most drug companies exclude them from their adjusted earnings.  Without the intangible earnings would have been 8c per share.

As the slide below, from their first quarter presentation, demonstrates, first quarter sales of Aggrastat were down sequentially as wholesalers that had stocked in the fourth quarter due to shortages of Integrillin purchased less but still up from the third quarter.

q1salesThe company also provided data for hospital bag demand, which was down again from the fourth quarter but to a lessor extent than sales, and up significantly from Q3.

q1bagdemandInterestingly, the company gave a couple data points to help investors normalize their sales data.  They said that first quarter sales understated demand by “a couple million dollars” because of the destocking.  They also said that they are currently shipping 1,700 bags per week, which works out to 20,000 per quarter and means that bag demand has continued to ramp subsequent to the first quarter.

The day before earnings Medicure announced that they are in the process of filing for bolus vial format approval – this will make it easier for hospitals to use Aggrastat. Some hospitals struggle with delivering high dose bolus via intravenous pump instead of syringe. The company provided the following clarification on the conference call:

Although the current bag format can be used to deliver the HDB as well as the maintenance infusion, some physicians and hospital catheterization labs prefer to administer the initial bolus dose with a smaller volume of drug product.  Moreover, the availability of a ready-to-use bolus vial will provide greater operational similarities and efficiencies for hospitals transitioning to AGGRASTAT.

Finally, although there is nothing concrete yet, the company reiterated its interest in purchasing Apicore, the generic supplier that they own 5% of, have a purchase option on the remaining interest, and are in partnership with for the production of a as of yet unnamed generic later this year.

There were a couple of questions in my last post about Medicure.  In particular what generic Integrillin meant to Aggrastat and second, whether Aggrastat itself would have a generic equivalent soon.

The second question came up because when you look at the patents that Aggrastat has, some of them run out as soon as 2016.  While its still not totally clear to me everything I have read suggests that when a drug is approved for a new indication it extends the exclusivity of the drug.   Medicure was granted patent until 2023 on the high dose bolus.

I still haven’t found the smoking gun that addresses this type of situation specifically but I did find a number of resources that indicate that generics will not be allowed until the high-bolus patent expires. This link to the FDA describes the periods of exclusivity for various NDAs. This slide show describes how a new drug is patented and how the exclusivity period is determined.  This q&a describes how a patent is extended with a label change for a new indication and how that will keep a generic off the market. In the book “Cracking the Code” authors Jim Mellon and Al Chalabi write:

Quite often, drug companies therefore try and extend patent life by tweaking the molecular structure of their drugs, changing the dosages or combining their drugs with other therapies to try and create a novel but similar product that allows the patent life to be extended.

Also worth noting is that Medicure does not refer to generic tirofiban (the drugs name) competition as a risk factor in their AIF.

As for the generic competition from Integrillin, it is real and occurring but Medicure allyed concerns by updating their price competition slide to include the cost of the generic.

pricecomp

Aggrastat remains the cheapest of the bunch.

I have added to my position around the $5 range and even caught a couple purchases in the $4’s.  Unless I am wrong about the direct generic competition being years away I think the stock is too cheap and should trade up to a high single digit number on the current level of Aggrastat sales alone.  If there is a positive event with Apicore, the new generic introduction, or additional sales from new indications for Aggrastat, then all the better.

Air Canada

I continue to believe that Air Canada is misunderstood.  Maybe some day I will be proven right.

The stock trades at a significant discount to all of its peers.  The justification behind the discount amounts to:

  1. Air Canada has a lower operating margin
  2. Air Canada has a comparatively higher debt load
  3. Air Canada’s strategy of capacity additions is bound to end in tears

I get that (1) and (2) validate a somewhat lower multiple than a debt free, high margin peer.  But the current discount is too much.  As for the third justification, I think it fails to recognize what Air Canada is trying to accomplish.

Air Canada is adding capacity, but it is not to serve a slow Canadian economy. Capacity is being added to international flights in what they see as under-utilized Canadian/international hubs in Toronto, Montreal and Vancouver.  The strategy is to pin-point international demand where the location of the hub and cost structure puts them at an advantage against the competition.

Air Canada is also taking advantage of what is actually a lower cost structure on some routes (due to Canadian dollar based expenses and new airplanes with better efficiency) to claw back trans-border traffic that they lost to US carriers during the dark period of their bankruptcy and near-bankruptcy.

Finally Air Canada has added new planes and routes that increase their flexibility to redistribute the fleet during slowdowns like the one that we have seen in Alberta.  It didn’t seem to get a lot of focus in the first quarter follow-up but the Alberta slowdown barely blemished their results.

I think its instructive that with few exceptions when Air Canada comes up on BNN’s Market Call, the pat responses is:

  1. The Airline industry is always terrible
  2. Air Canada has gone through bankruptcy before
  3. It can’t be different this time

What is unfortunate is that there is no quick fix to this perception.  The past couple of years of mostly excellent results are proof that it is going to take time, maybe a full cycle, before portfolio managers become comfortable with the idea that Air Canada has positioned themselves to withstand economic weakness and grow the business in good times. Perhaps when oil prices recover and we see the Canadian economy turn up investors will start to conclude that hey, that was the downturn, and look, Air Canada is still standing.  I’m willing to wait that out as long as the company continues to perform.

Health Insurance Innovations

Health Insurance Innovations turned in a very good first quarter but they haven’t gotten a lot of credit for it.  Revenue was up 88% to $42.5 million. EBITDA grew from a negligible amount in the first quarter of 2015 to $4.2 million in 2016.   Policies in force grew from 195,100 to 258,000 sequentially while submitted applications grew from 153,300 to 192,200.  They saw growth from all their sales channels but in particular Agilehealthinsurance.com, their online sales channel, doubled from 11,000 policies submitted in the fourth quarter to 23,000 policies submitted in the first quarter.  Both revenue and EPS guidance were increased for the year.

I’m not sure why the stock hasn’t responded better.  There is a large short interest, which I don’t really understand, so maybe those players have been doubling down on their bet.  The mid point of EPS guidance is 40c, so the stock trades at 15x this years earnings which does not seem expensive given the growth they are beginning to experience.  I suspect that comments on the conference call are partially responsible for the muted response.  They said their baseline assumption is that growth will level out at Agile until the next open enrollment:

we’re taking a view that says a lot of people bought it during open enrollment that’s why we’re still strong and things are going to level off until the fourth quarter when open enrollment comes in.

Hopefully, we’re wrong and we have dramatic sales in between these open enrollment periods, but frankly given the dynamism of this market, we’re not sure and so we’ve done our best to forecast sales at Agile and the rest of the company over the next six months and that take place in our guidance.

I think this might be conservative.  The story seems to be getting better.  At the current price the growth trajectory that has began to emerge over the last couple of quarters is not priced in. While something has held the stock down since the release of the first quarter results, I doubt that can continue with the release of another strong quarter.

Shorter thoughts on a few other names

Granite Oil

Granite Oil had their credit line reduced from $80 million to $60 million.  While I expected some reduction, this was a bit larger than I had anticipated given that the company has such modest debt levels compared to its peers.  Fortunately the company only has $40 million drawn so the reduction is not really an impediment.

Intermap

Intermap still hasn’t received initial payment to allow it to start its SDI contract in the Congo.  I never expected this to be easy and I acknowledge that the stock is a flyer so I have it sized accordingly.   The bottom line is that the risk reward remains attractive if you treat the position like an option that could expire worthless (or close to it anyways) but also could be a ten bagger.  I note that Mark Gomes, who I quoted above, is involved in Intermap as well and has written a number of good posts on the name.

Rentech

Rentech had a not unexpectedly terrible quarter.  In the fourth quarter the company was pretty clear that the ramp at Atikokan and Wawa wasn’t going smoothly, needed more equipment, that they were still tweaking operation plan, and that they were not even sure Wawa would reach original capacity.  In the first quarter they appeared to get Atikokan on-track which leaves Wawa.  Here is what they said about Wawa on the conference call:

Our production shortcomings appear to be the product of limited experience operating the plant at higher levels of throughput and sustained operations as a result of our past conveyor problems. We are now experiencing the operational and production issues that we should have witnessed last year, but for the conveyor problems.

Even with these recent challenges, we’re still learning how to respond to or prevent these causes of production disruption that are typical of ramp-up of new pellet mills, such as sparks, jams, plugging, dust, moisture content, silica content, truck dump outages, hammer mill clogging, et cetera.

On top of that they experienced weather related weakness at NEWP.  The warm winter in the North East reduced demand for wood pellets.

I have only taken a small position in the stock and I don’t plan to add more until we see positive momentum from the Canadian operations.  But I look at these plants like a mine, which I have quite a bit of experience investing in, and the two things I have learned about starting a new mine is that A. it never goes smoothly and B. the initial start-up problems are typically figured out after some time.  So I think Rentech will get their hands around this, and I want to be ready when they do.

Mitel

I sold out of Mitel, at least for now.  The acquisition/merger with Polycom takes the company further down the path of being a hardware provider for enterprise telecom solutions, which is not really why I found the stock interesting.  The justification around the deal is mostly about cost reductions and synergies, not growth, which again is not inline with my original thesis.  And the combined entity still has to compete against Cisco which is significantly larger and has been taking market share from Polycom.  Until I get a better understanding of where Mitel is going from here, I thought it best to exit my position.

TG Therapeutics

I bought back into TG Therapeutics at $7 last week.  There hasn’t been any negative data to justify the fall in the stock of late.  My original investment thesis still stands, just at a price now that is about 2/3 of what it was at the time.  Really, if anything we are getting closer to the conclusion of their Phase II and Phase II studies.

By the way, if anyone can recommend any good books for understanding biotechnology please send me an email liverless@hotmail.ca.  Thanks!

Portfolio Composition

Click here for the last four weeks of trades.  Note that the 224 share AdjIncr transaction is because when Swift pink sheet equity converted to new equity I lost my shares in the practice account and so I had to restore those manually.

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Week 250: Getting back to even

Portfolio Performanceweek-250-yoyperformance

 

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See the end of the post for the current make up of my portfolio and the last four weeks of trades

Thoughts and Review

I’ve been trying to stick to core ideas over the last four weeks, not taking fliers and taking a very close look before I purchase anything.  If you remember, last month I reflected back on the last year, where I really didn’t do all that well, and concluded that my so-so performance could be attributed to too many mistakes with peripheral ideas that I either held too long or should not have gotten into in the first place.

At the same time I’ve been willing to tweak my exposure to stocks up a notch because my two main worries have abated.  As I wrote in my February post what worried me was:

  1. The collapse of oil bringing about energy company bankruptcies that a. lead to investor losses that start to domino into broad based selling, and b. lead to bank losses and bond losses that cause overall credit contraction
  2. The collapse of China’s banking system leads to currency devaluation and god knows what else.  Kyle Bass wrote a terrifying piece (which I would recommend reading here) about how levered China’s banking system is, how their shadow banking system is hiding the losses, and about how government reserves are not large enough to pacify the situation without a significant currency devaluation.

Both of these events seem off the table, with the first maybe completely eliminated and the second at least postponed.

Still the market is back to that 2,100 level and it is difficult for me to get excited about another move higher.  Where I can I have added some index shorts and also some individual tech name shorts to balance in case of a pullback.

Still finding new ideas

Even as I try to be cautious, I still have found a lot of new stocks this month.  I added positions in Swift Energy, Clayton Williams Energy, Granite Oil, Medicure, Rentech and Oclaro.  It was a busy month and there are lots of stocks written up below.  I feel pretty good about all the ideas, with the usual caveat that if oil starts to go south my oil stock positions will be reduced quickly (not Swift though, which is a special situation as I will describe).

Canadian Dollar Doldrums

I’ve had some decent gains in the last month and am back within a a few percent of my highs.  But quite honestly my portfolio would be back to its high already if this damn Canadian dollar wasn’t killing me.

About half of my portfolio is in US stocks but as a Canadian I report my gains and losses in Canadian dollars.  Lately, every day the market is up the Canadian dollar is up (usually a lot) and because of that a chunk of my gains disappear.  To give it perspective: since the beginning of the year the Canadian dollar has gone from about 1.38 US to 1.27.  Every $100,000 I had in US dollars was worth $138,000 at the beginning of the year; today its worth $127,000.  Its been a headwind.

I’ve been saved by picking some US stocks that have done very well.  Radisys continues to be huge.  Apigee is a big winner off its lows.  Clayton Williams has doubled in a few weeks.  Both Iconix Brands and Patriot National have had big runs off their lows.  Things would really be rolling if I didn’t have to deduct 10% from the aggregate sums.

Oh well.  The Canadian dollar going up means that oil is going up, and living here in Calgary I can tell you that is a good thing.  Things are unquestionably slow in the city.  If you are in the oil and gas sector, its depressing.

Cowtown Slowdown

As an aside with respect to my home town; I honestly don’t see the Armageddon situation that some have described. I bike past downtown condos every day and while the sun is up so I can’t count the lights, I can count bbq’s and bicycles on the balcony in these supposedly empty apartments.  I live in one of the downtown “high-end” neighborhoods where its been said that “every second house is for sale” and yet I see only a smattering of for sale signs and a number of them sold.  The restaurants I walk by still seem busy.  To be sure, things are slow and if you work downtown in the patch they are miserable, but overall it seems not very different than a year ago.  Is this what depression looks like?  Or do I just not have the clear perspective of an outsider, what I see being distorted by a home town bias?

Oil move

I’ve given up trying to predict whether this is the real move in oil  and if not when that move will come.  So just like all the other head fakes, I’ve added positions on the move up with the expectation I can be nimble enough to squeeze out some profits even if this turns out to be another short term blip.

I will repeat what I wrote in September about oil, which could be paraphrased to say “I don’t think anybody really knows”:

But with all that said, I remain neutral in my actions.  I’m not going to pound my fist and say the market is wrong.  I’m just going to quietly write that I don’t think things are as certain as all the oil pundits write and continue to be ready to pounce when the skies clear enough to show that an alternate thesis is playing out.

With that let’s talk about some stocks because I have a lot to say, starting with two of the three oil stocks I bought (I’ll talk about Clayton Williams at a later date).

Swift Energy

I think this would could be a legitimate 20 bagger if it all pans out.  If only I had the confidence to make a Cornwall Capital style bet on it.  I tweeted about this last week because I wasn’t sure if I’d be able to mention it in a post before the effective date.  Unfortunately that looks to be the case as the stock was halted all day Friday.

Swift is in bankruptcy.  At the end of last year they prepackaged a plan with bondholders.  That plan has been approved by a judge and the company should be coming out of BK shortly.  In the plan existing equity actually does quite well, retaining 4% of the new company shares plus 30% of equity via warrants.  The warrants are well out of the money compared to the current pink sheet price.  But they are also very long term, with half of them expiring in 2019 and the other half in 2020.

The bankruptcy plan converts ~$900 million of bonds into equity.  The company that emerges from bankruptcy will have $325 million of bank debt and, net of cash, somewhere around $250 million of net debt.  So the balance sheet is very de-levered compared to the company pre-bankruptcy and also compared to its peers.

The pink sheet implies a market capitalization of around $240 million and an enterprise value of  just under $500 million.  That means that the market is giving Swift an EV/flowing boe valuation of $16,000.  Checking that against the RBC universe, peers trade at between $30K and $100K.  On an EV/cf basis, which I again compare off of the RBC price deck for 2016 ($40 oil and $2.50 gas), Swift gets a 5.5x multiple versus 10-20x average for the RBC coverage universe.

As I said the warrants are way out of the money but by my calculations they provide an extremely healthy upside scenario.  You get 7.5 warrants per share.  Half of those warrants are in the money at ~72 cents, with the other half at ~78 cents.  If you get a stock price of 90 cents by 2019 you are looking at nearly a $2 return on your ~20 cents purchase.  $1 gets you close to $3 return.  See the model below:

pinksheet-returns

Of course a lot has to go right for all this to happen but its a long runway and even at 90 cents you are looking at an EV/flowing boe of around $43K and EV/cf of 15x assuming flat production, $40 oil and $2.50 gas.

The dream scenario is that natural gas prices go up some time between now and 2019.  If we hit $4 gas again Swift is going to make a lot of money, and a $2 billion enterprise value is not impossible (would still only be $62,000 per flowing boe on current production).  That would give you a 26x return on a 20 cent stock purchase.

On the downside, obviously management is not ideal.  Went into downturn with no hedges and way too much debt.  Operationally it actually seems like they’ve done pretty well though.  And the acreage they own, particularly Fasken, looks like some of the best of the Eagleford.

Granite Oil

This is an oil stock I’ve held in the past and that I bought again after it appeared that oil was going to make a legitimate run. I have added to it in the last week as oil has stayed very firm in the face of some bad news (Doha, Kuwait).

But I’m a bit worried.  Granite just doesn’t seem to be performing like it should. Below is a performance comparison I stole from this Investorvillage post:

peercompapr2016

The problem with investing in any of these Canadian juniors and intermediates is that production data comes out semi-publically through a subscription you pay for via IHS.  I of course, do not have access to this data.  So there is a chance that some are seeing declines in January and February and getting a head start selling on what will be a weak first quarter.

Granite also hasn’t put out a new presentation since February, which you can construe a few different ways, both positively and negatively.

Granite may also be in the penalty box because the same management team sold out their shareholders when they took an offer for Boulder Energy (of which Granite had split last year) at around $2.50 per share, or about one quarter of what Boulder traded at last year.  I imagine there are pre-split shareholders of both names that decided to jettison Granite in disgust after the Boulder news.

Granite currently trades at a $200 million market capitalization and has $40 million debt.  In the third quarter they produced 3,476 boe/d.  Their valuation is roughly inline with peers, though Granite’s low debt position should allow for some premium in my opinion.

They have proven themselves to be solid operators; in 2015 they “decreased capital costs by 29 percent through the year to $2.0 million per well” and operating costs from $7.50 per boe to $6.00 per boe (source).

What I have always found exciting about Granite is that they have a low-decline and relatively low risk development opportunity applying a gas injection enhanced oil recovery technique on known reserves.  But they also have a very large surrounding land position, which allows for a significant expansion of the program if oil prices recover and make them attractive to a larger acquirer.  Below is a map from their presentation to give you an idea of their current drilling focus and more importantly the expansive land package that surrounds it:

landposition

So I like Granite as a reasonably safe way to play a price recovery.  I am optimistic that the poor share price activity is an opportunity and not an omen.  The company remains reasonably priced with low debt and is one of the very few oil companies in Canada that can squeak out profitability with oil prices above $40.

Medicure

I got the idea for Medicure from a radio program we have in Canada called Moneytalks.  It used to be that Moneytalks was full of gold and silver interviews and end of the world enthusiasts so for a long time I did not make time to listen.   But lately Michael Campbell has been interviewing more real managers who have been giving out the odd gem of an idea with Medicure being one that I was enticed to buy.

Medicure was recommended by a PM at Maxam Capital.  I found this excerpt on the company in one of Maxam’s recent letters to clients:

maxamposition

Located in Winnipeg Medicure is a small pharmaceutical company with a drug called Aggrastat that prevents thrombosis and is used intervenously in hospitals.  Sales of Aggrastat have been growing rapidly since FDA approval first of recommended dosage in 2013 and then an expanded dosage regime in April of 2015.

aggrastatsales

On top of their ownership of Aggrastat, Medicure also has an option to purchase a growing generic manufacturer in India called Apicore.  This is where things get a bit fuzzy.   As part of a financing they orchestrated for Apicore in the summer of 2014 Medicure received a 6% interest in Apicore stock and an option to acquire the remaining shares at any time before July 2017.  But in a strange twist, the purchase price of the remaining shares of Apicore is undisclosed.  I looked all over trying to find an indication of what the option price is, but to no avail.  So trying to value the option is a bit of a guessing game.

Medicure gives a small hint in their presentation that it is probably worth more today than it was in the summer of 2014.  They provide the following information with respect to Apicore’s sales each of the last 4 years:

apicoresales

Clearly there has been significant revenue growth at Apicore since Medicure was granted the option to purchase the company.

The balance sheet accounting of the Apicore interest doesn’t help much because the only changes Medicure has made to the value of their position is due to currency fluctuations.

Medicure trades at a market capitalization of a little under $90 million.  They generated operating cash flow of $7 million in 2015 and do not have significant capital expenditures.  Aggrastat is growing and so one should expect increasing cash flow going forward.  And then you have Apicore on top of that, which must be worth something, though its not clear what.  So adding it all up, it seems that the current price of the stock does not reflect the cash flow generation capacity of Aggrastate let alone the value of the purchase option for Apicore.

Rentech

I got the idea for Rentech from @alex_estebaranz on Twitter.  Up until this year Rentech has operated two businesses: the first being wood processing (wood chips and pellets) with operations in Canada and the United States, and the second being fertilizer, with two plants producing nitrogen based fertilizer.

In 2015 the company decided to get out of the fertilizer business in order to reduce debt.  In August Rentech sold their East Dubuque fertilizer plant to CVR.  They followed this up with the sale of their Pasadena facility in March of this year.

The sale of East Dubuque to CVR was the more significant of the two deals.  Rentech received 1.04 units of CVR Partner stock in addition to $2.57 cash.   The proceeds have allowed Rentech to pay off about $150 million of debt.  Even after the payoff of Rentech retains 7.2 million units of CVR (valued at about $60 million).  They have $95 million of cash.

Rentech has 23 million shares outstanding so at $3.30, it holds an $82 million market capitalization.  The remaining debt they have is about $136mm. Subtracting what’s left of the CVR units and cash on hand and the enterprise value is low, only about $60 million.

What do you get for $60 million? A wood chip business called Fulghum Fibers, a US wood pellet business and a Canadian wood pellet business.  Below was 2015 EBITDA by segment in addition to an EBITDA forecast, which I will talk about shortly.

ebitdaforecast

As you can see the Canadian business is a bit of a mess.  They are ramping up new two new facilities and having trouble doing so.  It’s costing more money than anticipated, they’ve had to replace equipment and there is some question whether one of the facility can be ramped up to the original capacity expectation.

Nevertheless, even with reduced expectations Rentech expects that these facilities can generate between $13 to $16 million of EBITDA.  They sell their pellets to Quebec and Ontario Power for power generation, so they have steady customers for their product.

Rentech has also said they are in the process of taking out $10 million to $12 million out of SG&A.

Basically with the sale of the fertilizer businesses it’s a story about turning around the Canadian business and cutting some costs.  If the cost cuts materialize and they can generate the expected EBITDA in Canada, EBITDA can probably touch a number north of $30 million.  That would make a $60 million valuation far too low and something at least double that would be more reasonable.

Oclaro

I got the idea for Oclaro from a friend who is always coming up with off the radar ideas.  Oclaro makes optical transceivers.  The optical transceiver business is not a great business; competition is high and there is always a higher speed device on the horizon to upset any market share gains that you might have scraped together.

You can witness this by taking a look at Oclaro’s gross margins, which tend to hover around the 25% range historically.  But Oclaro is on the right side of the cycle right now.  The move in the high end of the optical market is towards 100G transceivers, and Oclaro has a leg up in this segment.

In particular there is a large build of long-haul optical in China that Oclaro has been winning business from.  They have a contract with China Mobile for 21,000 plus line side 100G long-haul ports.  The China Mobile contract is going to be delivered in Q1/Q2.  There are also contracts with China Unicom and with China Telecom for 8,000-10,000 ports each so similar size to China Mobile, and these are scheduled for early second half of the year.  On top of this there is regional demand from metro China customers that is ramping.

The product wins are leading to a ramp of their 100G production lines:

We will ramp both manufacturing lines for the ACO over this calendar year and we expect to go from shipping hundreds per quarter to thousands per quarter by the end of this year. We continue to believe that the majority of the early demand will be focused on data center interconnect

On their last conference call (second quarter) management made the following interesting comment that demand is exceeding their capacity to build the transceivers:

Our growth in Q3 will not be gated by demand. We’re running very tight on capacity for most of our 100G products, as well as our tunable 10G offerings. As a result, we’re adding significant capacity in all these areas. Our ability to grow will be governed by how quickly our capacity comes online, as well as the capability of some of our piece-part vendors to respond to our increased demand.

In the spreadsheet below I’ve tried to model out what I see happening to Oclaro over the next couple of years and their strong 100G position takes hold.  Their fiscal 2016 is half over, with revenues of about $180 million, so I am forecasting some growth over the next couple of quarters there.

forecast

In 2017 I am making what is probably a pretty optimistic forecast, with 20% growth in revenue and gross margins increasing to 35%.  I’m doing this to get an idea of what Oclaro might be able to generate if things go well.   I suspect that the 40 cents of EPS that I estimate would lead to a share price in the $8 range, maybe higher if growth is expected to continue to be strong.

Health Insurance Innovations

I sold some of my Health Insurance Innovations position.  Not a lot, but enough to reduce my risk if something goes wrong.  I got this across my google alerts and while I don’t know what to make of it, it doesn’t sound positive.

Arkansas News Bureau

LITTLE ROCK — State Insurance Commissioner Allen Kerr said Monday he has issued a cease-and-desist order against a Florida-based company over allegations it has used deceptive practices to try to sell short-term health insurance plans in Arkansas.

Kerr also released a list of tips for avoiding falling prey to dishonest telemarketers trying to sell health insurance plans.

The cease-and-desist order directs Health Plan Intermediaries Holdings, doing business as Health Insurance Innovations, to stop immediately the sale, solicitation or advertising of any insurance plans using unlicensed agents and to stop intentionally misrepresenting the terms of contracts or applications.

Kerr said in a news release that in a phone call with Insurance Department investigators, a Health Insurance Innovations employee offered insurance plans and gave price quotes despite admitting he was not a licensed insurance agent. Also, several company representatives falsely told investigators that two short-term plans, HealtheFlex and Principal Advantage Plan, were in compliance with the federal Affordable Care Act, according to Kerr.

I don’t really know what to make of this news.  It’s probably nothing.  Still, I felt a little better with a little less exposure to the name.

Radcom

A couple of data points occurred with Radcom in the past month.

First of all Netscout did a call on the NFV market and their service assurance offering.  The call was broken into two segments, with the first segment being the more interesting of the two.

In the first segment is an industry expert from Analysys Mason gave a pretty good overview of the NFV opportunity, its risks and why service providers are inevitably going to move towards an NFV solution. His projections for assurance seem a little light based on what I see so far from Radcom, but I guess we will see how that plays out shortly.  The call is worth listening to in full.

Second, I listened to the Amdocs fourth quarter conference call.  Amdocs gave lots of commentary around what they are doing with NFV and even provided some reference to how RDCM fits in.  Here are the comments I note (I highlighted a couple comments in particular):

When speaking about who will be the winners in this new market:

we think that actually the early adopters would come and the disruptor will come from the small companies. There is a lot of startups in this field, and we believe that some of it will go to the tradition, Cisco or Ericsson and the like but a lot of it will go to smaller companies.

Speaking of carrier advantages of NFV and their role as consolidator:

You can imagine that if you have a network that is all software devices, if you want to accelerate capacity or to change features instead of sending a technician that go to the box and do something, you just tweak it on a control plane in the data center. It’s like managing a huge data center. So the bottom line is that the trend is absolutely there. The nets are trying to fight it as much as they can, we are the disruptor, there are very few others, definitely not in our scale. We believe we could be the integrator of small companies.

And in terms of which carriers are getting a head start on their deployment:

In terms of the geographic spread that you asked, AT&T is probably by far the most advanced company with its theory and its power line under the Domain 2.0. You see some activities in Singapore Telecom, in Bell Canada, in Vodafone Group.

So in the next 12 months to 18 months, you will see the big guys making decisions, that is to say Bell Canada in Canada, AT&T and Verizon in the USA, Singapore Telecom in Asia, Telefônica probably, Vodafone, these are the guys that will make decision.

Finally, what Amdocs will and will not do:

We will not try to build a better virtualized probe than the people that I expect on this or virtualized– if you see packet core (50:39) or something like this, we would not. So we are mainly after the high-end NFV component and maybe some services and integration on the SDN.

Radcom hasn’t performed terribly well as the market has recovered.  The stock has been essentially flat.  But this isn’t unexpected.  It’s still a $100 million dollar company that reported revenue of a little over $2 million last quarter.  I don’t expect a significant move in the stock until it either reports some big numbers, announces another contract, or gets bought out.  The problem is that the last two items are game-changing events, and you can’t predict if one of them is going to happen tomorrow or next year.  So I wait patiently.

Portfolio Composition

Click here for the last four weeks of trades.

week-250