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Posts from the ‘Willdan (WLDN)’ Category

Week 282: Two Big Events

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

My portfolio bounced back this month.  This was somewhat remarkable given that my two largest positions, Radisys (RSYS) and Radcom (RDCM), continued to perform poorly.  I don’t expect much from either of these stocks until they are able to secure additional contracts with service providers.  With year end coming up, I am hopeful (but not counting on) some news on that front.

The rest of my portfolio did extremely well, benefiting from the rotation to small caps that occurred after the election of Donald Trump.  I didn’t anticipate the market move or the small cap revival.   But I wasn’t the only one, in fact I didn’t hear that prediction from anything I read.  I would be interested if anyone else knows of an expert, newsletter writer or manager that predicted the move?  They would be worth following.

In retrospect it makes sense; expectations of significantly lower taxes and a relaxation of regulations would lead to a market rally with a bias on small caps with domestic exposure and few tax loop holes.  The stocks that have performed the best for me have had that characteristic.

Willdan Group (WLDN) is a text book example.  Willdan has always paid a high tax rate, sometimes over 40%.  If the companies tax is cut in half, which is not impossible under a Republican government, earnings go up by 30%.  They are also essentially an infrastructure play, another positive.  The stock has moved from $16 to $24 in the month since the election.

Adding Healthcare, Infrastructure, Biotech

While I wasn’t positioned for a rally leading into November 8th, I adapted as the market moved higher.  As I’ve written about here, I added Health Insurance Innovations shortly after the election on the expectation that changes to the Affordable Care Act (Obamacare) would open up competition, which would be positive for their business.

I also added an infrastructure play, Smith-Midland (SMID), as it seems that this will be the focus of spending under the Trump administration.  Smith-Midland makes make pre-cast concrete products like barriers, sound walls, small buildings, and manholes.  They have a market capitalization of $25 million and even after having run up to $5 are not expensive.  There is a good article on the company here.  I also added to my existing position in Limbach Holdings, another infrastructure play.

My last move in response to the election result was to add to a few biotech names.  This worked out initially but interest has waned in the last couple of weeks.  I added to my position in Supernus (SUPN), to Bovie Medical (BVX) and added back some TG Therapeutics (TGTX).  I may jettison the latter position soon.

Responding to OPEC

The Trump move was followed by the OPEC move, which I again don’t profess to have predicted.  I was agnostic going into the OPEC meetings; I held my usual weighting of energy positions, but did not pile into them as a bet that a deal would be reached.

Instead, as is my typical strategy, I chased the news, adding to energy names on the heels of the announcement.  By waiting I missed out on the first 10% move, but once the deal was announced it was a far lower-risk entry into stocks on my watchlist.

It can be argued that OPEC’s cut will only lead to high US production, or that it will be diluted by cheating by OPEC members, but nevertheless its difficult to argue that this doesn’t put a floor on prices.  And if there is a floor, stocks that previously had to discount the possibility of another move into the $30’s do not have to anymore.  Therefore stock prices needed to move higher.  I think they still do.

Many of the names I am interested in are small enough that they do not move immediately with the market.  Thus I have been able to add to Journey Energy (JOY) and Zargon Oil and Gas (ZAR) at prices not too different to what they were leading up to the announcement.  There is a good SeekingAlpha article (and comments, in particular note those on the interim CFO hire) on Zargon here.  I haven’t seen any analysis on Journey, and I will try to write up a summary on the stock in the next couple of weeks.

A second energy name that I added to and am in the process of writing up is Swift Energy.  As I tweeted on Friday:

I also added Resolute Energy (REN), a Permian player I have been in and out of over the past 6 months, and added back Granite Oil (GXO).  There was a good comment to my last portfolio update that gave me some perspective on the concerns I had raised about Granite.  I wanted to add to Jones Energy (JONE), but it moved so quickly off of the OPEC news that I didn’t get a chance.

Finally I added to a derivative play, CUI Global.  CUI Global is a bet on Trump as well as OPEC.  The company has said in their presentations that they have struggled gaining traction with their GasPT products in North America because of the dour investment climate for oil and gas infrastructure.  This should change under Trump and with support to oil prices.  Its no guarantee that CUI Global will be the beneficiary, but if their product is as good as they profess it to be, it should be the preferred measurement tool for new projects.

I also added a position in Contura Energy.  It was written up here.  I think this article will move behind the paywall soon, so I would recommend reading it sooner than later.

Where we go from here?

I’ve taken on some risk as the market has moved higher and especially after the OPEC agreement.  But I do not expect this to last long.  I’ll be paring back positions over the next few weeks.

I don’t feel like I know what to expect from this new US regime.  Tweets like the one’s Donald Trump made over the weekend, promising a 35% tax against companies moving production abroad, leave me wondering where we end up?  Are these just empty threats, impossible to implement?  Or is this only going to escalate?

It’s uncharted territory.  If government spending increases significantly, taxes are cut and trade restrictions are imposed, I’m not sure where it leaves us.  Will bond yields rise, setting off a negative market event?  Will investors continue to pile into domestic US equities?  Will stocks based in foreign locales or with manufacturing operations abroad sell-off on concerns over tariffs being implemented.  The answers are just way beyond me.

Lacking confidence in the answers means I have to get smaller.  That’s the only response.  Since July (my year end) I am up nearly 30%.  I feel like I am pushing my luck asking for the same kind of performance in the second half of my fiscal year.

Portfolio Composition

Click here for the last four weeks of trades.

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Third Quarter Earnings Updates: WLDN and RMGN

Willdan

Willdan has put together a number of good quarters in a row and did not disappoint in the third quarter.

Earnings were 28c per share and revenue was $58 million. Revenue was at a similar level to the second quarter but up 75% over the prior year.  Though part of the revenue increase was due to acquisitions, organic growth played a big part as well. Organic growth is up 30% year to date.

Willdan’s strategy has been to expand by acquiring small engineering services firms with complementary skills that operate in areas that expand Willdan’s reach.  These acquisitions have been Genesys Engineering,  Abucus Resource Management and 360 Energy.  The expectation is that the more complete services package will allow them to bid on contracts they previously would not have been able to.

The strategy has worked.  In the third quarter Genesys generated $16.2 million of revenue, up from $8 million the previous year.

Willdan also provided a robust update of projects in the early stages.  They named the following new programs that are ramping in the third and fourth quarter of this year:

  • 6 year $90 million LCR program for SGD&E announced in March is expected to ramp in 2017
  • 2.5 year, $41 million multi-family program for ConEd, announced in June, continues to ramp, will make a larger contribution next year
  • 3 year, $35 million contract, small/medium business direct install and industrial program for PacifiCorp in Utah, will contribute a little in revenue this year, ramp in 2017
  • 2 year $10 million clean energy program in New Jersey will contribute a little this year and ramp 2017
  • NYC housing program is beginning to contribute a “modest amount”, and is “expected to increase considerably next year” – they only have notice to proceed on small amount of the program right now, expect to know more about the timeline by year end

All the major ongoing programs are expected to remain in place in 2017.  With only a few small projects rolling off, 2017 will almost assuredly be a growth year.  The company put a “minimum public target” for growth of 10% for next year.

Also mentioned on the call was the improving growth landscape in California.  Right now in California 20% of energy efficiency services are outsourced by utilities.  The total ultities budget is around $1.8 billion.  The California Public Utilities Commission (CPUC) has mandated across the board that outsourced volumes needs to exceed 60%, and they have used language that they would like to see it  “as high as 100%”.  This will “dramatically increase the market as new procurements are initiated”.  Basically it is a 3-fold to 5-fold increase in contracted services.  Willdan will be well positioned to take some of this business.

Finally the Tom Brisbin, the CEO, made comments about how he would like to expand the company into more industrial projects, specifically oil and gas and refining.  Industrial end users are larger users of electricity.  The amount of savings per user will be higher and so these will be larger contracts.  Given past history, an acquisition in this area would not surprise me.

I was tempted to add to my position in the stock, but its already quite large.

RMG Networks

RMG Networks had what I would consider pretty decent results, and the color on the conference call was very positive.  Yet the stock has floundered flat to down.

In my opinion investors are being too impatient with the story.  Everyone is looking for a big top line number.  When it doesn’t come they are ignoring what is happening under the surface.

Everything is moving in the right direction: pipeline, partners, pilots, and products.  One of these quarters, maybe even the next one, the momentum will break through to the surface with a big revenue number, $12-$13 million, and it will be off to the races.

The company continues to make inroads into the supply chain vertical.  On the third quarter conference call they said that they had 40 supply chain prospects that were in various stages of negotiation and that the 3 previously mentioned pilots had “been extended” to investigate functionality roll-out in 2017, Each of these pilots can be $1 million of revenue or more.

They also put aside some time to give us more detail on their 3 recently signed partners:

  • Manhattan Associates – Manhattan manages supply chains, sells supply chain products, has 1,300 products, performed account planning in Q3, training to Manhattan sales team, expect initial sales in early 2017
  • Regan Communications – Regan is a leading corporate communications consulting company – are specifically educating and promoting Inview.  The relationship will materially expand reach into the internal communication market.  The partnership kicked off on Sept 29th at Global Employee Communication Conference at Microsoft.  Robert Michelson, Chief Executive Officer was MC for part of event and delivered a keynote presentation.  The presentation demonstrated Inview.  RMG has received 30 new leads on Inview from summit
  • Airbus DS Communications – Airbus is a 911 call leader, 60% of 911 calls are received by Airbus. A new RMG-Airbus solution puts real time data displays into the Airbus system.  RMG closed their first two Airbus customers in Q3 for $100,000 in revenues.  There are a total of 2,800 Airbus customers.

They believe these channel partners can generate $5-$10 million of revenue annually once they are trained and ramped.

Michelson also reiterated that large deals in the pipeline have “increased dramatically” over the past couple of quarters.

Looking at geographical strength, the United States and Europe have been strong but the Middle East has not.  Michelson said with regard to the Middle East that (I’m paraphrasing here):

[We have] orders in the millions but need to see the down payments, the customer has signed the contract… we need things to clear up with the economies there because price of oil has such a disproportionate impact on economy, it gives more beta there.

If oil can return and stay at the $50 level we could see some upside there.  On the other hand at current prices, the Middle East may continue to be a drag on results.

Finally, some color was given on the recently filed S-3.   Michelson was clear that they believed the stock was under priced and any move to raise funds would only be done because growth led to the need for additional working capital.  He said that they would “protect stockholders” and keep them from being diluted, leading me to think it may be a rights offering.   Michelson also said the raise would not be for anywhere near the $10 million shelf that was filed.

I didn’t add to my position but continue to sit tightly.

Week 266: Loving the lack of volatility

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

Its been a good market for my approach to investing.  Volatility is low and the market isn’t really making any big moves.  Individual companies are being judged on the merits of their business and the macro picture is taking a back seat.

I believe I have also benefited from being more selective.  As I have written previously, I’m taking fewer flyers, being more suspicious of value, staying away from dividend payers and focusing on growing businesses and emerging trends.

As a result these have been the best couple months that I have had in a while.

I made a number of changes around the edges of my portfolio, adding starter positions in a number of names, reducing position size in others, but I remained relatively constant in spirit: I have two large positions: Radcom and Radisys, and a number of small 2-4% positions where I am waiting for a reason to make them bigger.

With respect to my two biggest positions, nothing was said or reported over the last month, including their second quarter results, that deters me in my allocation.  I will give a quick synopsis of Radcom’s quarter below.  With Radisys I spent a lot of time on them a couple of months ago so I will wait until the next update to say more. In short though, the results were fine, they are engaged with a lot of carriers, they seem extremely confident that those engagements will lead to more deals and we will wait and see what new business the second half brings.

I did add five new positions to my portfolio in the last month.  I’m not sure what it was about this month that made it such a boon for ideas.  It wasn’t because I worked unusually hard to find them.  I just went about my usual process and for some reason kept coming up with interesting stocks.

I’ll talk about 3 of those positions (Bovie Medical, Hudson Technologies and Sientra) in this post.  In the interest of space I will leave the other two, Mattersight and CUI Global, for next month.  This being an August update I have a lot of earnings news I want to talk about and I don’t want things to go overly long (though I suppose it always goes overly long, so relatively anyways).

With that I will cut-off my general comments and get straight to it, starting with some company updates followed by my new positions.

Radcom – waiting on the next deal

Radcom announced results on August 8th but more importantly was a separate news release giving an official endorsement of Radcom’s technology from AT&T along with the recognition of the role Radcom will be playing in AT&T’s open source NFV backbone ECOMP.

The press release from AT&T validates the work that Radcom has done, and should make the company the go-to player for other service providers following in AT&T footsteps with ECOMP.  I have always felt the big risk with Radcom was the execution of such their large and cutting-edge deployment with AT&T and that something went off the rails.  That seems off the table now.

As an aside, I found this webinar, which includes a description by AT&T of what they are trying to accomplish with ECOMP, to be quite useful in trying to understand the platform.

While the second quarter results were inline, on the conference call Radcom’s CEO Yaron Ravkaie made a number of bullish comments.  He said that Radcom was now in discussions with 9 carriers, up from 5 in the first quarter, and that the earlier discussions had progressed positively, with feedback coming back from carriers that “this is exactly what we need and we want to progress with it”.

Interesting new opportunities are also opening up.  Radcom has soft launched a new adjacent product to MaveriQ that Ravkaie called a “very important component of NFV implementation”.  I am assuming this was a joint effort with AT&T to some degree since the product is already being used by AT&T even though they have only started marketing it to other carriers.

A final interesting comment was made at the end of the call when Ravkaie referred to a Tier 1 carrier that was recently in their office in Tel Aviv, their “head of their NFV program spend hours with them”, he went “deep into their NFV strategy” and was interested in “partnering” and “co-creation of cutting edge stuff”.

The negative with the story is timing; we don’t know when the next deal signs and telecom providers are notoriously slow footed.  I felt like Ravkaie was cautious about timing, making the following comment on the second quarter call:

the next coming quarters is going to change some of these into deals, and again I can’t really comment on when it’s going to happen, and on exactly when is the next order is going to come in, because everything is so new, so it’s hard to predict. And because as of the end of the day, big solutions in the telecom’s environment, so it does take time

Nevertheless it remains a great story.  The stock has moved up strongly since earnings.  I’m not sure where it goes in the short run, it all depends on the “when” with the next deal, but I see no reason to believe they won’t get that next deal done at some point.

Willdan looks good

The single sentence story on Willdan is that the company had very strong second quarter results, beat estimates significantly, guided higher for the year, said on the conference call that they have signed contracts that will be deployed in 2017 that they just can’t announce yet, said that revenue in 2017 will show further sequential growth, and said that their micro-grid strategy is taking hold with “increasing evidence to suggest that overall spending on microgrids will increase significantly in the coming years and we are well positioned to capitalize on this emerging market opportunity.”

Willdan reminds me of Argan, which was a little engineering, procurement and construction company that I found on the Greenblatt Magic Formula list back in 2011 (I just checked and its still there!) when the stock was $8.   I bought the stock but sold it a few months later at $14.  Argan continued to run from single digits to almost $50 now on the back of successful growth of their engineering services.

Argan demonstrates how engineering services can be very profitable if you have a team of the right professionals and you are delivering a service along the right trend.  I have said before that I think that we are on the cusp of changes to the power grid that will mirror what we saw first in computing and storage (ala the advent of the datacenter) and currently in telecom service providers (which is why Radcom and Radisys are my biggest positions).  If I am right about that Willdan is positioning itself to be in the middle of the build-out.

Oclaro was fine but Infinera made it a bit of a debacle

Oclaro had an excellent quarter, beating estimates and putting out strong growth guidance which was good news.  Unfortunately I only held about half the position that I had only a few days before.

I got turned around by a report out of Needham entitled “Optical Super Cycle”.  I don’t get Needham research, but I caught wind of a report they had in mid-July that described an optical upgrade super-cycle and managed to get my hands on it. Its compelling; the explosion of data is causing metro, long-haul and data-center interconnect to require upgrades simultaneously.

Its exactly the reason I am in Oclaro.  But after being convinced by Needham, I felt like I needed more.  So I went with one of their recommendations, a company called Infinera that seemed to be well positioned in long-haul, had the ability to take market share in metro, and wasn’t expensive compared to its peers.  No problem right?

Well Infinera announced results three days later and gave probably the worst guidance I have EVER seen.  Ever.   The company guided third quarter revenues of $180-$190 million versus Capital IQ consensus of $271 million.

This caused a couple of things to happen.  First I lost a large chunk of my investment in Infinera.  Second, it really shook my confidence in Oclaro, which is a much larger investment for me.  After some back and forth I decided to cut the position in Oclaro in half.

My reasoning hear was admittedly a bit suspect.  Infinera didn’t appear to be a big Oclaro customer.  Oclaro has significant business in China, a market where I don’t think Infinera plays at all.  The evidence from the call was that much of Infinera’s problems were internal, in particular that they weren’t gaining share in the metro market like they had anticipated and that a recent acquisition wasn’t bearing expected fruits.  Nevertheless what Infinera’s disaster highlighted to me is something that I have always worried about with Oclaro; that I will be the last to know when the optical cycle turns, and that these cycles turn quickly.

Well Oclaro announced their results and they were stellar.  Both their results and those of some others suggest that the cycle hasn’t turned yet.  Oclaro said they expect at least 30% growth in 2017.  Gross margins are expected to expand into the mid-30s from the high 20’s they were only a quarter ago.  Their 100G transceiver business has doubled in the last year.  The company is well positioned with the two vendors in China (Huawei and ZTE) where their growth depends.   The stock has continued to go up since, nearly hitting $7 on Friday.

But I can’t add.  I’ll stick with my half position but that’s it.   The cyclicality scares me, in particular the fact that they don’t really get to pass through price increases even when the cycle is in their favor, so the benefit is all volume and when the cycle ends or when inventory builds they will be smacked.   Needham could very well be right and maybe that doesn’t happen for 3+ years.  But I haven’t been able to put together enough knowledge to feel really confident about that.   So I think I’ll just leave that one as is.

What is going on with BSquare and DataV is interesting

Here is why I added to BSquare.   They had a crappy quarter. The stock tanked.  The company has a market capitalization of $54 million but subtracting cash the enterprise value is only $27 million.  The market has left them for dead but I’m seeing data pointing to how their new DataV product might on the cusp of taking-off.

Right now DataV has one announced customer, a $4.3 million 3 year contract with an industrial company.  Because this company is so small, and because DataV has 70% margins, it won’t take many contracts to be meaningful.

In my last blog post I highlighted a career opportunity I read about on the BSquare site.    In particular I noted the following language in one of the sales job postings:

Bsquare is investing significantly in marketing demand generation tied to its industry leading DataV IoT platform.  Market response has overwhelmed our current sales capacity, and we are looking for proven inside sales dynamos to join our team

I thought that was pretty positive.  Last week I went and looked at the job postings again.  There were a bunch of new one’s for android developers but also I found they updated the posting I referenced before, (its here) with the following additional language about responsibilities:

Responsible for making 30-70+ outbound calls (including follow up) per day to inbound leads

I don’t know if this is saying what it reads, but an inbound lead should be a company that has first contacted BSquare, so 30-70+ calls to those leads is an awful lot.  Are they exaggerating?  Or is there that much interest in the product?

They also quietly published this interview on their website, describing the integration of DataV with a heavy-duty truck environment.   Whats confusing about this is that there was a question on the first quarter call that suggested to me that the one DataV customer they had was VF Corp, which is not a trucking or industrial company.

The company has like zero following.  There were no questions at all on the last conference call.  The only intelligent questions I’ve heard in the last few calls is some private investor named Chris Cox who I am presently trying to hunt down (feel free to drop me a line if you read this Chris!).  I don’t think anyone cares about this name.  Maybe there is good reason for that.  But maybe not.

RMG Networks – will have to wait another quarter for the inflection

RMGN results were somewhat lackluster, the CEO had said that they would be growing revenues sequentially from here on out on the first quarter call and that didn’t happen. Revenues were flat, the issue was that the international business lagged and some timing of sales issues.  In particular it sounded like the Middle East was down a lot sequentially.

So it wasn’t a great press release but the color on the call was very positive.  In a separate news release they said they had a sales agreement with Manhattan Associates and gave further color on that relationship on the call.  RMG Networks had previously been something called a bronze partner with Manhattan which meant they would be recommended by sales if it came up but there was no compensation to the sales staff for any sales they created.  The new agreement integrates them into the selling package, most importantly now is that sales gets commission on the RMG products that they sell.  Because the products are complimentary this is expected to drive sales.  Manhattan Associates is a supply chain solution company so the partnership is right in line with what RMGN is trying to expand into and is also a $4B company so much bigger than RMGN.

They also said they have similar relationships that have been agreed to in principle but are not press releaseable quite yet with two other partners.

The second positive is that the 3 supply chain trials that they have referred to in the previous quarter has progressed into the purchase phase.  We should start to see revenues from those in the coming quarters.  The CEO gave a lot more color around the sales pipeline and how many leads they are generating and also with respect to the team that they have put together.  He really tells a good story, though that can be taken both ways I guess.  He is bringing people aboard that the market likes, signing agreements and getting their foot in the door where needed so I am inclined to believe this is just a waiting game to see how it translates into revenues in coming quarters.

Medicure has lots of catalysts, have to wait for them to materialize

As for Medicure, results again were probably a bit weak, I would have liked to see revenue at $8 million but $7.7 million is still pretty strong.  The bottom line was hurt by a large stock option expense, and they price their options as awarded so it all hits in a single quarter, you don’t get the spreading out of the option effect that most companies see.

Overall the idea is still there, they are continuing to gain market share with Aggrastat, hospital bags purchased increased 16% sequentially, the company said that June was their highest sales quarter since December and in a response to one of the questions on the Q&A they implied that the disconnect between sales and scripts should resolve itself into high sales, likely in the third quarter.

They are on-track to hear back from the FDA with respect to the bolus vial in the second half of the year, and the Complete Response they got from the FDA back in June for the STEMI indication sounds rectifiable.  They said there were 7 concerns that FDA had identified, 6 have been addressed and agreed to by the FDA and the seventh they have sent in their modification and are awaiting the response.

They also provided some color on Apicore.   It sounds like they expect to plan to purchase the other 95% of the company, said that Apicore  continues to grow over and above the $25 million of revenue they generated last year, and they have a new cardiovascular generic that they are developing along with Apicore that they expect to submit.  They were asked again about the price for their purchase option on Apicore and they again said they wouldn’t disclose, which is unfortunate.  They commented that they have built out their sales and administrative staff in response to the higher Aggrastat demand and it now has the ability to support multiple products.  In particular they can add this new generic with no additional staff increase.  They are also on the hunt for acquisitions of other drugs that are complimentary and low risk.

Vicor was Disappointing

I was disappointed in the second quarter results from Vicor given the expectation they had set the last quarter.  Much of Vicor’s backlog depends on a server standard called VR13.  The new server standard is in turn dependent on a new Skylake chipset being delivered by Intel and the chipset has been delayed (again), this time until the second half of 2017.

The consequence is that rather than orders beginning to ramp beginning in the second half, they likely won’t start receiving order for another 6 months.

I reduced my position on the news.  The company still is a technology leader and they still have the best power conversion solution for the next generation of datacenters, but six months is a long time and I’m betting I can build back the position at lower prices.

As I do continue to hold Vicor, I’ll be sure to follow Intel more closely to see where they are at with the chipset. In the mean time the best Vicor can hope for is to tread water.

New Position: Bovie Medical

I came across Bovie Medical doing a scan of 52-week highs on barchart.com.  This is a scan I like to do as much as possible during earnings season; you can catch stocks that are starting their next leg up because of recently released results.

Unfortunately I was on vacation at the time and so I caught Bovie a little later than I might have otherwise.  I bought the stock at $2.60, which was a couple of days after they had announced earnings. That was up from $2.05, which is what it had opened at the day of their earnings announcement.

Bovie Medical operates in 3 segments:

The “core business” is made up of electrosurgical medical devices (desiccators, generators, electrodes, electrosurgical pencils and lights) and cauteries.  This segment makes up largest percentage of revenues and has flat to low single digit growth historically.   Bovie has said they want to grow the business at mid-single digits which they were able to accomplish in the first half of this year.

The OEM business segment manufactures electro-surgical generators for other medical device companies.  It generated $1.6 million of revenue in the second quarter, up from $941,00 in Q1 and $648,000 in Q2 2015.

The growth from the OEM segment this year was somewhat unexpected.  It was partially due to contract restructuring that staggered contracts – they said that contracts are typically front-end development, back end production so they staggered the contracts to even out the revenue.  The company did say after the second quarter that the expected the growth rate to slow in the second half of the year but still show growth.  From the Q2 conference call comments:

…second quarter performance benefited from purchase orders signed last year and several new contracts were signed in the second quarter that should contribute to revenue growth over the next several quarters.

So the OEM business is posting some interesting numbers but the real reason I bought the stock is a new product called J-Plasma that Bovie recently developed.   J-Plasma is a tool that improves the outcomes of surgeries through an ionized helium stream of plasma. The result is better precision and coagulation without significant heating of the tissue.

The J-Plasma system consists of a helium plasma generator and tool disposable.  Here’s a screen cap of the disposable tool just to get an idea of what it looks like.

j-plasma

The generator (called the ICON GS plasma system) ionizes helium and produces a thin beam of the ionized gas.  You use the beam for cutting, coagulating or ablating the soft tissue.  The disposable is the hand piece for delivering the ionized gas stream.  It sounds like you replace the disposable with nearly every surgery.  There are different disposable hand pieces offered depending on the surgery being performed.  The procedure can be used on delicate tissues like fallopian tubes, ureters, the esophagus, ovaries, bowels and lymph nodes.

The initial generator purchase is in the $20,000 range, and the hand tools average $375.  Bovie said on its second quarter call that they are shifting to a pay per use option with a leasing program to bypass the upfront capital expense of the generator.

The success of J-Plasma didn’t happen immediately.  The company has had the product on the market since January 2015.  For the first year growth was in fits and starts.  In particular, the capital required from the up-front generator was a stumbling block.  The company said the following about the slow progress as recently as the fourth quarter conference call:

The operating metrics and leading indicators for J-Plasma product adoption were strong in the fourth quarter, but sales were below our expectations. We continue to face an exceedingly slow pace of J-Plasma generator sales. While we know that the long sales cycle for capital equipment is an industry wide issue, we also know that our VAC approval track record has been outstanding at over 92%, which makes this situation even more frustrating.

The company is targeting two verticals.   They are currently selling J-Plasma into gynecology (estimated total addressable market, or TAM, of $2 billion) and are moving into the plastic surgery business (estimated TAM of $440 million).

j-plasma-TAMThere are a number of other markets they can expand into including cardiology, urology, oncology and ENT.

There is also the opportunity for the J-Plasma system to be used in robotic surgeries.  Bovie has an expert in robotic surgeries on their medical advisory board that has begun to use J-Plasma in trials.  Results are expected in the first half of next year,  Bovie is also developing an extension to the product, due to be out in 2017, that will integrate into existing robotic surgical systems.  They said on the second quarter call that they are exploring relationships with “existing and emerging surgical robotic systems”.

Sales of J-Plasma increased substantially in the second quarter.  J-Plasma sales were $766,000.  This was up from sales of J-Plasma of $356,000 in the first quarter, which was up from $284,000 in the first quarter of 2015.

The company made a couple of moves in the second quarter that should increase exposure of the product further.  On the second quarter call they announced sales partnerships with two large distributors: Hologix (developer, manufacturer and supplier of premium diagnostic and surgical products) which will add them to their GYN and GYN Surgical line of products ($300mm line), and Arteriocyte, which will start selling J-Plasma to their network of plastic surgeons.

Given that Bovie’s sales force currently consists of a mere 16 employees and 30 independent sales reps, this should increase the reach significantly.  The company said that the two agreements are going to expand their salesforce “by multiples”.

One thing I like about Bovie is that they have a small revenue base to grow from.  In the second quarter revenue was $9.2 million.  This is up from revenue of $7.2 million in the first quarter.

Even though J-Plasma revenue remains in its infancy, incremental growth is still quite accretive to the top line because of the simple math that comes along with the company not being very big.

So we will see how things go in the upcoming quarters.  The one negative of note is when I model the growth out to next year, the company is still only borderline profitable after assuming a similar sales pace to the last couple of quarters.  So we may be a ways away from a real earnings inflection.  Nevertheless, I’m not sure that will matter much if J-Plasma sales can continue at the pace they are at.  If they do, profitability is an eventual inevitability and that is what the market will focus on.

New Position: Hudson Technologies

In an unfortunate turn of events I was listening to the Hudson Technologies presentation at the ROTH conference (the presentation is no longer available but I could send a copy I made if someone wants it) on my bike ride home a few weeks ago.   I was thinking wow, this sounds like a really interesting idea.  So I get home, take a look at the chart and boom!  The stock had jumped from like $3.50 to $5 that very day.

Sigh.

Nevertheless I continued to dig and found that in some ways the stock is actually a better idea now than it was pre-spike.

Hudson is the biggest refrigerant reclaimer in the United States.  The stock jumped on July 18th (the day of my bike ride) because of the announcement of a contract with the department of Defence:

[Hudson] has been awarded, as prime contractor, a five-year contract including a five-year renewal option, by the United States Defense Logistics Agency (“DLA”) with an estimated maximum value over the term of the agreement of $400 million in sales to the Department of Defense.  The fixed price contract is for the management and supply of refrigerants, compressed gases, cylinders and related items to US Military Commands and Installations, Federal civilian agencies and Foreign Militaries.  Primary users include the US Army, Navy, Air Force, Marine Corps and Coast Guard.

So this is a big deal for a little company.  But it wasn’t the primary reason I was looking at the stock.  The story that intrigued me centered around their reclamation of R-22 refrigerant volumes.

R-22 refrigerant, also known as HCFC, is an ozone depleting substance, much like the CFC refrigerant that we all remember from the 1990s.  In fact, R-22 took the place of CFC’s in many applications.  But because R-22 also has an negative environmental impact it was decided by a number of governments t phase the refrigerant out.  In the United States, between now and 2019, production of virgin R-22 will go to zero, as ruled on by the Environmental Protection Agency.

This article did a good job outlining the phase-out cycle by the EPA:

In October 2014, the EPA announced its final phasedown schedule regarding the production and importation of HCFC-22. The order called for an immediate drop from 51 million pounds allowed in 2014 to 22 million pounds in 2015, 18 million pounds in 2016, 13 million pounds in 2017, 9 million pounds in 2018, and 4 million pounds in 2019. No new or imported R-22 will be allowed in the U.S. on or after Jan. 1, 2020.

With R-22 production being phased out, the remaining source of R-22 will be from reclaimed refrigerant.  This is where Hudson comes in as the largest reclaimer in the U.S.  Hudson should benefit from the production restrictions as they gain market share as well as benefit from price.

Its price where things get really interesting.  Over the time period where CFC’s were phased out the price spiked from $1 per lbs to $30 per lbs.

Already we are seeing the price rise.  R-22 ended last year at $10/lbs (up from$7.50), it rose to $12/lbs in the second quarter and prices are currently at $15/lbs.  The company said on their second quarter call saying they are “showing signs of further price improvement.”

Hudson benefits directly from the price rise.  The company has said that they expect that for every $1/lbs rise in the price, 50c should fall as margin.

The opportunity won’t continue forever, but it appears to me that the runway will be measured in years.  While new air conditioning units do not use R-22, the economics of repairs for existing units work in favor of R-22.  At the Roth conference the company said the following:

…lets say you want to repair unit outside of your house, has 10lbs of refrigerant, repairs are $2,500, even if refrigerant is $100/lb its $1,000… [in comparison] new unit is going to cost you $8,000

Hudson has a market capitalization of around $165 million and there is about $30 million of debt.  The company announced 15c EPS in the second quarter.  Keep in mind that this number includes no impact from the department of Defense contract and that R-22 prices have risen another $3 in the third quarter.

I honestly thought the stock was going to take off after the second quarter.  While it flew in after hours (and sucked me in for a few more shares) it gave up those gains the next day and actually traded down 10% in the in suing days.

It turns out that company executives sold a bunch of stock over that time.  The company released a press release on the 10th saying that various executives had sold 1.1 million shares.  That’s a lot of shares for a little company to absorb.

You could of course look at this negatively, but keep in mind that these say executives still hold 20%+ of the company, and so they sold down their positions by about 10%.  They’ve waited a long time for some sort of pay day, its hard for me to put too much stock in them cashing in a bit once it comes.

I really like this idea.

It seems to me that R-22 prices have no where to go but up, that upwards trend has already affirmed itself, and the stock really isn’t reflecting this.  Nor is it reflecting the full impact of the DoD contract, which should be worth around $40 million in annual revenue at similar to higher margins than the existing business right now.  While the stock hasn’t really moved up from my original purchase price so I haven’t been adding much, the size on the high side of what I usually allocate to a new position.

New Position: Sientra

I honestly can’t remember how I came across Sientra.  It was probably some sort of screen, but I have no recollection of what I was screening with.   I’m not getting enough sleep.

At any rate, I came upon the stock the day before it released earnings, which forced me to do some quick work and decide whether I knew enough to take a position or not.

I took a position on that day only an hour before the close.  I tweeted my thought in this tweet (as an aside I’ve decided to try to return to Twitter to comment on my portfolio adds.  I feel like I am missing out on a level of feedback that was often useful).

I always wince when I make a decision like this; I’ve been bitten by acting too fast before.  Yet what drove me to act quickly was because Sientra seemed like a time sensitive situation.

Here’s the scoop with Sientra.  The company sells a breast implant.  Their product was approved by the FDA in March 2012.  By most accounts it is a better product than those that already on the market from Allergan and Johnson & Johnson.  The company was taking market share and sales were increasing.  In the first six months of 2015 sales were $26 million, up from $21 million in the comparable period the year before.  In the third quarter sales were $13 million, up from $10 million in 2014.  Unfortunately the results were overshadowed by manufacturing problems that led to the company taking a $3 million allowance for product returns and suspending further production of the impants.

A few weeks before they announced their 3rd quarterr results the company announced that on October 2nd they had “learned that Brazilian regulatory agencies announced that, as they continue to review the technical compliance related to Good Manufacturing Practices (GMP) of Silimed’s manufacturing facility.”

On October 9th Sientra released a letter that they had sent plastic surgeons regarding the issues with the facility.  Sientra relied on a single source manufacturer.  The compliance issue caused the company to put a voluntary hold on sales.  The stock dropped from over $20 to $10.

Sientra did its best to come clean.  They worked with the FDA and hired a third party firm to verify the safety of the product.  The company was silent for two months and the stock continued to fall, eventually settling at $3 in December.

On January 8th, in a published letter to doctors, the company announced that they had “submitted all of the third testing data of its products to the FDA. He says that, in the company’s opinion, the results show that all are safe and present no significant risk to patients. If the FDA agrees, then their implants will be back on the market.”

The company said that while their investigation found that there were microscopic levels of particulate matter on the products, that data also revealed that even with well controlled manufacturing processes the presence of microscopic particles is unavoidable, and the level of particles from the shedding of a typical laboratory pad would have more particles than their products.

They started selling their implants again in March.  The second quarter was their first full quarter of results. Along with the results the company provided an update on their search for a new manufacturing partner.  As I had hoped, they announced a new partner.

Sientra has entered into a services agreement with Vesta, a Lubrizol LifeSciences company and a leading medical device contract manufacturer of silicone products and other medical devices…Under terms of the agreement, Vesta is establishing manufacturing capacity for Sientra and is working with the Company to finalize a long-term supply arrangement for its PMA-approved breast implants. Sientra anticipates that all project milestones will be achieved for the Company to submit a PMA Supplement to the FDA during the first quarter of 2017.

Sales in the second quarter were $6.2 million, which is only about half of the $14.2 million in sales they had the previous year, but still a very successful initial level considering their limited launch.  In fact the company has to be very careful about how much product they sell before they get manufacturing back up and running.  They do not want to risk another supply disruption.

The response to their return to the market has been positive.  The reason I was so interested in getting into the stock sooner rather than later is because management gave a very positive review of how quickly customers were coming back.  On the first quarter call by CEO Jeffrey Nugent:

We were removed from the market voluntarily and our primary competitors naturally came in and took over those customers that we were no longer able to serve. So what encourages us, and me particularly, is the relative speed and ease of converting those previous customers to come back from those products that they used as a replacement.

So, I could give you a number of other statistics. We have a very high level of analytics inside the Company. We know exactly who is ordering what. We’re following that on a very detailed basis. But as far as pushback, we’re not seeing much. There are virtually no concerns about the safety issues that were raised and we’ve been able to convince those customers that we have the confidence and are giving them the assurance that we are not going to allow them to go back on backorder.

So customers want the product and the market for growth is there.  The breast implant market is large compared to the size of Sientra.  I had to do some searching, and most of the numbers are behind expensively priced reports, but I was able to gather that the US implant market is at least $1 billion.  Sientra had a revenue run rate of around $50 million before it ran into troubles.  It seems that there is plenty of market share left to capture.

The one negative consideration is that this story isn’t going to play itself out in the next couple of months.  The company remains supply constrained and are relying on inventory for sales.  While the details about the manufacturing partner are great, its going to be a while before they are producing new product.  The company said the fourth quarter of 2017, which I believe is probably conservative, but regardless new product is still some time off.

Nevertheless, with a positive response from customers and the path to new product clearing, I suspect we will see the stock move higher as we inch towards that date.  My hope is that we eventually get the stock back to the $20 level, where it was before the roof caved in.

What I sold

I reduced my positions in Air Canada, Granite Oil and Intermap.  Air Canada and Granite continue to be slow to develop.  I did like what I read from Granite’s second quarter earnings release on Friday, and I may add to the position again in the coming days.

Air Canada just continues to lag regardless of what results they post.  I’m keeping what amounts to a start position here, but after seeing the stock struggle for the better part of two years even as the business continues to improve, I just don’t know what it will take for a re-valuation to occur.

Intermap just keeps dragging along with no financing in place.   I sold a little Intermap in the high 30’s but mostly decided to reduce after lackluster news along with the quarterly results released Friday.

In all three cases there is also the consideration that I have come across a number of new ideas as I discussed above and prefer to make room for them.

I also sold Iconix in mid-July but bought back my position before earnings.  However, as I am want to do, I neglected to add back the position in my tracking portfolio and didn’t realize that I had not done so until I reviewed the positions this weekend.  So I will add it back Monday morning.

Portfolio Composition

Click here for the last four weeks of trades.

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Week 189: Playing the oil trade from all angles

Portfolio Performance

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week-189-Performance

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

Updates

One of the themes  over the last few months has been a shift in methodology towards taking what I can get.  Less have I been holding out for the big gain, and more have I been booking 10-20% gains when they materialize.

The change arises from my confidence, or lack thereof.  I know we are in a bull market and still at all-time highs but it doesn’t feel like that and so I remain somewhat cautious.   I’m just not comfortable waiting for upsides to play out in full.  So I take what I can get.

Sticking with the Airlines for now

This business of scalping, for lack of a better term, worked quite effectively with Hawaiian Holdings.  Leading up to Hawaiian Holdings earnings report on January 29th I held a fairly large position.   But believing that caution is the better part of valor, I reduced that position to its shadow in the days leading up to the earnings release.   The stock was subsequently pummeled after reporting lower guidance than anticipated.  While I still took some lumps, it was not nearly to the degree it would have been and I was left to decide where to go from here.

After much review I decided to add back, at least part way.   Here’s what I think.  The stock was hit because their revenue per average seat mile (RASM) is being squeezed on a couple of fronts.  First, on their Asian destinations fuel surcharges are shrinking down to nothing because of the drop in the price of oil.  Second, the strength in the US dollar is hurting their competitiveness to book flights from Asia; naturally the majority of Hawaiian’s customers on their Asian routes are traveling from these destinations and flying to the US: Hawaiian’s US dollar cost structure is hurting them here.  Third, the company said that North American capacity would be at a record high this year, with capacity growth peaking in the first half and this would put some downward pressure on prices.

The bottom line of all of this is a year over year total RASM decline of 3.5%-5.5% in the first quarter (including 3% that is attributable to currency and fuel surcharges).  I think that the market looked at that and said, whoa that’s a lot of headwinds for a stock that is up some 100%+ in the last year, and promptly sold it off.

While it’s a fair assessment, they are a lot less of a concern now that the stock is down some 30% in the last few weeks.   What is easily overlooked is that all of the negatives are more than made up for by the drop in jet fuel prices.  Using the company’s 2015 fuel guidance I calculate that the savings will be $230-$240 million for the entire year.  That is over $4 per share.

If the experts are right and oil prices are going to stay in the $50-$60 range for 2015 I simply do not see how a company like Hawaiian Holdings, or for that matter the other airline stock I continue to own, Air Canada, will continue to trade at such low PE multiples.  I have based this discussion on Hawaiian but I could have made similar arguments with Air Canada, with the primary differences being different events leading to a perceived earnings miss (in Air Canada’s case it was employee benefits, adjustments to pension assumptions and a lower Canadian dollar) and that the stock has quickly gained back its losses.  But Air Canada, like Hawaiian, will see gains from the lower price of jet fuel that far exceed any currency or revenue headwinds they encounter.

Getting back to Hawaiian, using the company’s guidance leads to earnings of about $2.75 per share.  Do they really deserve a mid-single digit multiple in a market where the average multiple of an S&P stock is somewhere north of 20?  I feel like the upside potential is, as they say, asymmetric to the downside risk.

The downside risk, of course, is that the price of oil rises  significantly.  While this is something to keep a close eye on, particularly with disruptions in Libya and Iraq, I feel well hedged by the oil stocks I own in my portfolio.  My positions in RMP Energy, Mart Resources, and my recently taken position in Rock Energy will all do very well if the price of oil spikes.  And as always, if things start to go south, I plan to exit my positions quickly to limit my losses.  But I don’t think I will have to.  I think this is probably at least a somewhat new paradigm for oil, which means its also a new paradigm for the airlines, something that even with the run up in the fourth quarter last year I don’t think the market has fully appreciated.

New Position: Willdan

I got the idea for Willdan from a couple of SeekingAlpha articles that outlined the investment case for the company (here and here).

Willdan provides consulting services.  They separate their business into four segments: engineering services (Willdan Engineering), energy efficiency services (Willdan Energy Solutions), public finance services (Willdan Financial Services) and homeland security services (Willdan Homeland Solutions).  Of these, the energy and engineering services make up the bulk of the revenue.

revenue_breakdownTo get a sense of the sort of consulting Willdan performs, its worth taking a closer look at a few of their contracts.  In 2009 Consolidated Edison awarded Willdan with one of if not the largest contract, $67 million to perform the role of “program implementation contractor” for an energy efficiency program directed at small businesses.  The contract was extended in August of last year.  Willdan’s role as contractor includes:

providing outreach to small businesses, completing on-site energy efficiency surveys, implementing energy-saving projects, and partnering with the community and local businesses.

As another example, Willdan provides engineering services to the city of Elk Grove California. After a bit of investigation I found that the services Willdan provides are things such a road construction and repair, drainage construction, lighting design and maintenance and traffic engineering.  Basically all the civil engineering tasks that one would associate with maintaining a city.

So this gives you an idea of what Willdan does.  Its probably not a bad business, not terribly reliant on the economy, but not really much of a moat beyond the skills of the individuals you employ who do the work for your customers.

Willdan is a small company, trading at a market capitalization of about $100 million.  When I first stepped through their historical results, Willdan looked somewhat interesting to me but I could have easily passed.  But what caught my attention were two recent acquisitions for $21.2 million. Both of these businesses are complimentary; typically Willdan provides energy audits and consulting but does not perform the engineering services for energy efficiency projects; these companies will expand that offering to the latter.  The businesses also expand Willdan outside of their core areas of California and New York and into the Pacific Northwest and Midwest.

So Willdan benefits on two fornts: they can expand their energy services auditing into new territory, and can market the engineering services of the new businesses within their own operating regions, presumably for energy efficiency audits they already have under contract.

On the conference call to discuss the acquisitions management said they paid 4.3x EBITDA for the guaranteed portion of the acquisition price.  The acquisition structure is tiered, by which Willdan pays 60% of the price (about $12.7 million) up front, with the balance contingent on the performance of the acquired businesses.  In particular each business has to grow operating earnings by 25% to obtain the full payment. It seems to me like a great structure for Willdan.

The acquisition price implies that businesses are generating about $3 million of EBITDA in the trailing twelve months.  Before the acquisitions Willdan said they could grow their top line organically by 15% in 2015.  Below is a rough estimate of earnings per share assuming that Willdan achieves their top line growth, maintains their existing margins, and that the acquired businesses perform sufficiently to achieve the full acquisition price.

earningsIts not unreasonable to assume that a company with $1.30 earnings and a growth profile over the last few years would be given a multiple of greater than 10x.

This is a small company and small position for me, and not one I am likely to add to.  I think there is a decent chance I will make a few bucks on it as it has a run to $17 or $18 or if I’m lucky even $20.

One new Energy Position: Rock Energy

As I mentioned in my last update, I had been in and out of Penn West a couple of times during the first month of the year.  I held Penn West for perhaps the last time a couple weeks ago when I bought the shares for a little under $2 (Canadian) and sold them at $2.60.  Regretfully I sold much too soon, the stock kept roaring all the way up to $3.30. But consistent with my theme this month and with the thesis I presented in my last update, the nature of my purchase was a short term scalp and to stray from the nature of my intent would have been little better than a blind gamble.

But having some conviction that oil prices have hit bottom, and as I mentioned already, having an eye on the production shut-ins in Libya and Iraq, I did peruse the energy universe for other names that I might want to take a position in.  I am by no means convinced that oil prices have bottomed, we may have, may not have.  Thus I was looking for companies that could weather a continuing storm but still pose a decent upside to a stabilization in price.

A lot of the stocks I looked at had gone too far too fast; reviewing Baytex, Suncor, the larger Canadian names, and they all seemed to be already pricing in an oil recovery.  Ditto for smaller names like DeeThree Energy, which I should have been looking at $2 ago.  Others, like Penn West and Lightstream, certainly have a lot of upside if a truly bullish scenario develops, but they run too much risk of a big drop on some bad news event driven by lenders getting skittish.  I don’t want to have to worry about that.

I settled on Rock Energy, a name I used to own at prices not far off what I bought it for now. Here are the reasons I like Rock:

  • Their debt is nearly non-existent at $20 million as of the end of third quarter and now, after a recent $13.2 million bought deal (done at $2.32 per share) debt is even lower.  There is no question that this company survives.
  • Rock revised their 2015 guidance and cut capital expenditures to the bone, to $25 million for the year, down from their original guidance of $90 million.
  • At an average price $40 USD WCS, with a US/CAD exchange rate of 1.25, they will generate $35 million of cash flow for the year, more than covering capital expenditures.
  • At this low level of capital expenditures the company would exit the year at somewhere in the neighbourhood of 4,600 boe/d. That values them at $28,000 per flowing boe upon exit.

The sensitivity analysis I did below shows how the company will cover its capital expenditures even at current WCS prices and illustrates the upside to an increasing oil price.

earnings-forecast

Rock will rise when the price of oil rises.  If the price of oil does not rise, Rock will flounder, but I doubt it will crash much further.

Hammond Manufacturing

I’ve been on the look-out for Canadian manufacturers that stand to benefit from the dramatic fall in the Canadian dollar. I haven’t had a lot of luck.  There aren’t a lot of manufacturers left in Canada, and most of the big one’s move dramatically in November, anticipating the move, and I wasn’t quite so quick to the trigger.

However I did find one overlooked name a couple weeks ago.  Hammond Manufacturing.  Hammond is engaged in the heavily moated business of electronic enclosure manufacturing.  I’m kidding of course, but when your business is one of commodity manufacturing there is little more that could be asked for than for a 20% currency devaluation to bring down your unit costs.

Hammond is a pretty simple story so I’ll keep this short.  The company manufacturers electronics enclosures, so racks, cabinets, wire troughs and a few more technically complicated items like air conditioners and heat exchangers.  They manufacture these products in Canada (Guelph) and thus they incur their costs in the Canadian dollars.  That means their costs have declined significantly of late, and that puts them at a competitive advantage.  The company is expanding production to meet the increased demand brought on by what is likely increasing market share.

The stock is also cheap.  Looking back at the trailing twelve months, at the current price the stock is at 6x free cash flow.  That free cash flow is going to decline in the upcoming quarters as the company looks to expand their business which means an increased level of capital expenditures.  I think there is a reasonable chance that capital translates into meaningful growth, and in turn, a higher stock price.

The Tanker Trade – DHT Holdings

I have remained patient with my position in Frontline even as it sank significantly from my original purchase.  When the stock hit $2.90 I reluctantly reduced because it had crossed my 20% loss threshold.  I held onto the rest as it sank further and subsequently added back as it recovered.  The thesis still seems intact and my position sizing is not so big as to make me uncomfortable with the wait for it to play out.  In addition to Frontline I continue to own Nordic American Tankers (which I mistakenly referred to as Navios Marine Acquisition Corp in my last update).

I added another name to the trade a week ago: DHT Holdings.  DHT is a bit safer way to play the thesis, insofar as any of these stocks can be considered safe.  Their ships are newer, they have a number of new builds scheduled for delivery over the next two years, they do not have the debt overhang, and with ~60% of their ships on the spot market they still stand to benefit from improved rates.

DHT has 14 VLCC tankers and another4 Suezmax tankers.  There are another 6 VLCC new builds that will be delivered over the next two years.  When I look at DHT’s earning performance at rates even slightly below today’s level, I am left to conclude there is significant upside in the stock if the thesis does play out as I expect.

forecast

A couple of weeks ago I posted Teekay Tankers monthly update video onto twitter.  It is available here.  In the video it was noted that supply growth over the next year or two for the three classes of ships used for crude transport (VLCC, Suezmax and Aframax) is non-existent. Meanwhile demand is expected to increase, including further pressure given the fall in the price of oil, and a number of VLCC tankers are being taken off the market for 1 or 2 years for storage.  I think that what we have seen over the past month is a short attack on the tanker stocks from those that believe we are seeing a repeat of last year; a brief spike in rates that will soon be followed by a collapse down to marginal levels.  What I think the shorts are failing to realize is that the dynamic is quite different then last year.  Indeed as we move through February you are not seeing significant weakness in rates and as a consequence the tanker stocks are being to firm up again.  I suspect (and am anticipating) that this is the precursor for another move up.

Scaling back on US names

I sold out of a number of positions in the last month, most of them for reasonable gains.  Included on this list was Engility Holdings, Rosetta Stone, CGI Group, Electromed and ePlus.  Each is an excellent illustration of the scalper trade in action.

Of the group, I most reluctantly sold out of CGI Group.  I think there is a decent chance it continues to trade higher.  But I also note that they are predicting somewhat weaker results in the first half of the year, followed by strength in the second half, they may experience some currency headwinds with the Canadian dollar falling, because they trade in the US and its not clear to me whether it is the Canadian or US ticker that determines the price they may also face share price headwinds if the Canadian dollar rises, and they simply aren’t as cheap as they were when I bought them 20% lower.  But really, my primary reason for selling the stock is because when I bought it I assessed that there was an easy 20% of upside but that my outlook was cloudy after that. I’ve gotten that first 20%, so to hold on without a change in thesis feels like a bit of a gamble.

I was pleased with the results from ePlus but surprised that the stock took off to the extent it did after earnings.  Shares were up nearly 15% at one point.  Much like CGI Group, ePlus is coming up on weaker seasonality in the next two quarters.  Also much like CGI Group, the discount I saw originally has been eaten up with the 20% gain in the share price.  Were I convinced we were in a bull market I may have held out for another leg up.  I’m not so sure though, so I just took my profits and walked away.

I spent a lot of time thinking about Rosetta Stone.  You can read my comments on a couple of short articles that were posted on Seeking Alpha.  I finally sold out of the stock for about a 10% gain and with some reservations about whether I am doing the right thing.  I still don’t really buy the short argument.  But I also didn’t feel confident enough about the business to hold the stock through its fourth quarter results.  I think the fourth quarter is going to be good; seasonally it is the best quarter by far. I’m less sure about guidance.

My actual 2014 portfolio performance

As I have noted before, I write this blog based on the performance of a tracking practice portfolio that is made available from RBC.  This portfolio is intended to mimic the general trend of my most risky investment portfolio.  However the practice portfolio has some limitations, in particular that you can’t short stocks in it and you can buy and sell options.  Every year I try to give a quick update on my actual portfolio performance as comparison.  In this last year the gap between the real portfolio and the one I track here was a bit bigger than usual, and mostly for a single reason: Pacific Ethanol.  In my actual portfolio, when given the fat pitch that was ethanol back in the early months of 2014, I not only loaded up on Pacific Ethanol stock but on options as well, with the result being very large gains on the calls.  Thus below, you can see the discrepancy between my more speculative account, where the options were bought, and the more restricted retirement account where you can only buy stock.  I had a pretty good year in my retirement account, but my investment account flourished particularly well thanks in large part to our good friend Pixie.

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Portfolio Composition

Click here for the last four weeks of trades.  Note that the name change of Yellow Media to Yellow Pages removed that ticker from the practice account so there are a couple of transactions there to add back the 1,000 shares that disappeared.

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