I've been wrestling with myself about hwo.to. I mentioned how this is my largest holding which comprises about 1/3 of my account now. Keep in mind, I did not initially bet 1/3 of my capital on this stock (which I think crosses the line as being reckless) ...I bet about 20% and it has now grown to 1/3. I am contemplating adding more to the stock. Here's the issue...I have been looking at a lot companies recently and although there's a couple interesting ones, I can't find any that can match hwo's fundamentals both with respect to defensive features (price to book value, quality of the balance sheet) and growth prospects.
This stock reminds me a lot of bev.to (a big winner I had in early 2010) in that despite the upward progress in the stock it's still fundamentally cheap on a book value and p/e basis with what appears to be very good earnings viability. With bev.to they had a government contract in place which guaranteed a fairly certain range in EPS in the subsequent quarters and based upon those numbers, the stock price was quite undervalued. It was almost too good to be true and I kept wondering if I was missing something...shouldn't the market "know this" I said? Well, it turns out I was dead right and the market isn't as efficient as they claim in the finance textbooks after all (thank God for that). The stock went from .50 where I bought it to 3.45 in only 7 months and I top ticked that SOB. My only regret is...you guessed it...I should have bought more. I made out pretty good of course, but I didn't take full advantage of the opportunity.
Now here we have hwo.to. It's somewhat of a similar situation to bev.to prior to it's meteoric rise. It's trading a bit above book value despite having contracts in place that makes it reasonably certain their book value will grow substantially in the coming quarters. The company has contracts in place until the end of 2013 that are applicable to 2/3 of their exiting revenue stream. Given this, I conservatively estimate that by the end of 2013 the book value per share will rise from current the current $1.60 to $2.60. A reasonable multiple to book value of 1.5 gives you a price target of $3.90.
What are the risks? Unlike with bev.to where their contract was with the Canadian government which meant zero chance of customer default risk and zero political risk, hwo does have these risks. They derive 2/3 of their revenue stream (which I mentioned is contracted until the end of 2013) from one single customer which operates in PNG. So if anything should bad happen to this customer, hwo would be seriously harmed. Next you have the third world country of PNG which presents a significant political risk. Right now though, their main customer is in great shape financially and their stock price just hit an all time high. The political environment in PNG is stable at the moment although that could easily change.
The other risk is in regards to the remaining 1/3 of their revenues which is primarily tied to the Canadian natural gas market. Despite low gas prices, the company has been able to thrive because of the producer focus on natural as liquids (NGL). However, this summer NGL prices have come down substantially. This poses a threat to hwo but based upon a discussion I had with an industry expert, despite the drop in NGL prices, Canada's premier NGL play in Montney is still economical. In addition, pretty much every service company is Canada has been focusing on oil plays which has allowed hwo to increase it's market share in gas. Even if there is no growth in Canadian operations for the next year, the booming business in PNG will more than make up for the slack.
There are also significant upside opportunities in both in PNG and Canada. Their main customer in PNG is a part owner of a LNG terminal which is set to start making deliveries in 2014. Based upon recent discoveries, they are now considering expanding the project and that means more growth potential for hwo. The company also hinted that in 2013 there may be opportunities for new customers in PNG as well. In Kitimat BC, we are awaiting a decision before year end as to whether the proposed LNG terminal is go. If it is, and I think it will be, that would result in a significant benefit to nat gas producers although the impact would not be felt immediately.
So, WTF am I do here with hwo? Do I press my position by adding more and put myself at risk having too much exposure to one stock? It's starting to break out now and so now I will have to chase the stock a bit if I want to add. I hesitated when the stock was a 1.65 a month ago. This morning it's at 1.91 although only a measly 1200 shares caused that print....it should come back to 1.80 unless we see bigger buying at 1.91. By the end of the day I'm going to make a decision as to what to do.
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