One of the reasons I write this blog is that it acts as a release mechanism. Hopefully, discussing all the contempt, frustrations, paranoia, despair and euphoria I feel can help ease them. Also, the logical, savy part of me can be expressed and used as a refuge anytime the George Costanza in me tries to take over.
I'm holding a sizable position in hwo.to (for me). The stock looks poised to make a breakout and although that gets me excited I am in no way complacent....quite the opposite as I have to deal with the Costanza paranoia and anxiety as well. What if the markets turn down hard after making such a big move up? What if something unexpectedly bad happens with the company or its main customer? I know deep down these fears and anxieties are irrational and it's actually a good sign that I'm sweating a bit. If you're feeling complacent after a trade, especially a rather large one, you're almost sure to lose money unless of course you had access to inside info which of course is illegal!
The upside pressure is building with hwo.to. Trading volumes are getting heavier and the stock has been inching up approaching the 52 week high of $2. This behavior hasn't happened with the stock in some time. Something is brewing I can feel it. Either the market is finally warming up to hwo.to giving it the respect it deserves or there's immanent good news like a big contract or a merger/takeover. Either way, it looks like a big breakout is coming to $2.25-$2.50. Exciting times but stressful too. It's not uncommon to see small caps like this have a nasty headfake or two to the downside before making the big breakout you're sensing and so if you're one to use stops you can easily see yourself get whipsawed at the worst possible time. When I rode bev.to from .50 to $3.30 there were several of these whipsaws or flash crashes if you will, whereby you would see the stock drop 10-20% in a day for no reason other than some loser who placed a market sell order into thin bids which of course triggered stops and more selling. The stock would then bounce back immediately. In order to be unfazed by these mini-flash crashes you need to be a strong holder and to do that you need to be confident in the fundamentals and the long term story but even when I am, I still can't help but feel worry, despair and frustration. These are the natural emotions that you have to fight every time. I'm sure I'm going to experience this with hwo.to a few times; in fact I already have, but now that I'm sitting on a big position my convictions will be put the test like never before. All this talk about being right and sitting tight, riding the bigger trend will be put to the true test. We will see what I'm made of.
When I analyze hwo.to from a rational point of view it's the perfect stock. It has everything I look for. 1) cheap valuation on a price/tangible book basis 2) low debt 3) under the radar turnaround with positive earnings momentum 4) early, non-parabolic uptrend. As a bonus it even has a juicy 6.5% dividend! The major successes I've had in the past few years, bev.to, gdc.to, isc.vn, tec.to, wzl.to, all had the same features. Most of my duds were because one or more of the above were lacking.
After analyzing the stock I come to the conclusion that it should go to $3 at the very least within the next 9 months and probably sooner. John Templeton liked to find cheap stocks either on a relative or absolute basis. Hwo is quite cheap on both even with the recent advance to $1.86. In comparison to 13 other small Canadian service companies it has delivered the best earnings during the past 4 quarters by far and has one of the best if not the best balance sheet strength and yet the market cap of the company is middle of the pack. With the earnings momentum likely going to continue getting even stronger it makes no sense for the company to be valued as such. On an absolute basis the valuation is even more compelling. It trades at a price/book of only 1.18, with minimal debt (none if you back out cash) and a laughable p/e of 3.3! And the quality of the earnings are top notch because the cash flows have been enormous. Going forward things are looking good. Although Canadian operations may show stagnation or even a decline from last year activity it's only 1/3 of their revenues; the remaining 2/3 is in PNG where things have been strong and will only get stronger which should more than offset any weakness in Canada. Upcomming Q3 should be good and probably be in the .15-.20 range but upcoming q4 and q1 should be especially good for 2 reasons: 1) these are the seasonally strongest quarters for their Canadian business 2) Additional cap ex in PNG this year will start to bear fruit starting in Q4 and will be fully reflected in Q1 going forward. As a result, EPS are poised to be strong in the coming quarters and I conservatively estimate it should result in additional .70-.80share in additional book value at the end of Q1 which means book value would be at least $2.30-2.4 by then which makes a $3 stock price very doable. I don't see how some larger company doesn't come in and offer to buy out or merge with these guys if they keep producing these numbers with the stock trading where it's at even with this latest move up.
Despite all the good things I see with the stock I still can help but worry about what could go wrong. I could always hedge away macro risk via an index put. I will consider that when think the market is vulnerable to a drop greater than 2-3%. As of this point I don't think it is. AAII sentiment yet again showed neutral reading of about a ratio of 1.11 bulls vs bears. I have NEVER seen an IT top with such sentiment especially if the market had recently made a multi-year year. Given market action, it would actually be justified and thus not a cause for alarm if AAII sentiment showed more bulls here. I realize other indicators are not as bullish for the market as AAII - some of which are outright bearish - but as I've been saying lately, AAII remains an important holdout. Meanwhile, market action this week has been quite good for the bulls. The market was very ST overbought coming into the week and so the bears had every opportunity to do damage and they did fuck all so far and now the market has just about worked off it's ST overbought condition with this sideways action. That's a sign of strength and that the market wants to go higher still.
It's a fucking nuisance for me right now to have to worry about what the general markets do. Although hwo has been trading fairly independent of the markets in general, that can change if we were to see major downside. So, for the sake of prudence and sanity, I will put on hedge once I think the market is ripe for at least some moderate downside. When in doubt though, I won't hedge because despite being heavily in hwo, I have an offsetting cash position and as I said, hwo has been trading fairly non-market correlated as of late. If and when I'm hedged, it would remove a lot of the irrational anxiety I'm feel sometimes. I suppose I could hedge right now for the sake of prudence and to quell my paranoia but that would be a quasi-emotional trade.
I know what I'm doing is close to crossing the line from boldness over to reckless and maybe some of you think I have already crossed it, but you know what? When you see those rare, golden opportunities come your way whether it's in the market or in life you have to try and take full advantage and whip out those brass balls. The greater risk in my view, is not taking full advantage.
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