Monster run

These last 2 weeks have been huge for me with hwo.to breaking out and closing out the week at a fresh 52 week high at $2.30. A few weeks back I had a really good feeling it would break out to this level and it did! But now after this big run it's going to be tempting for people to take profits. I won't be one them. No, this is not greed, it's about principles. I've been right about hwo...very right and I will continue to sit tight until the stock goes to where it fundamentally should go to. The stock still trades at under 4 times trailing earnings and on a forward earnings basis, it's even cheaper which means the stock is still dirt cheap; as a result, I'm not going let an overbought RSI indicator or any other technical indicator cause me to sell when the fundamentals are still very attractive like this. I've seen my fair share of situations whereby RSI and other indicators are rendered useless when an asset price is in the midst of a big, long directional move up or down and there's no telling if hwo is in such a situation until after the fact. Like Partridge, I don't want to sell to get back in on a pullback and risk losing my position. It's not worth such risk given where I believe the stock should eventually go to. However, I did pull the trigger on a macro hedge today (more on that below).

I believe the catalysts for the recent advance in hwo are as follows. 1) On Monday, National Bank Financial started coverage of the stock with an outperform rating. I think this is the only firm who has officially covered the stock in over 4 years. 2) Their PNG customer Oil Search recently announced a partnership with S.A. Total to explore for gas with the hopes of creating an offshore LNG plant. Drilling is to start in early 2013. 3) natural gas prices have been firming and are at YTD highs. 4) Exxon's purchase of Celtic this week is a positive signal for Montney plays which I believe is hwo's main market in Canada. People have been saying that it also signals Exxon's intention for LNG exports and that too can only be a positive for hwo longer term. 

Despite the move in hwo, I think the story is just starting. It's just now starting to land on people's radar. Having said all this though, given shaky markets as of late and how the stock has had a big run, I need to be mentally prepared for a pullback in the stock. I pulled the trigger on a hedge this afternoon. I bought some puts on the XLE, Jan 77 puts to be exact.  I chose to hedge via XLE because hwo.to is an energy stock. Market action suggests we're in the midst of a correction. Although I don't think the correction will be severe, I don't think it's over either and so why chance it remaining unhedged while sitting on a big winner. This hedge is only 4% of my account. To my delight, hwo.to has been bucking the market trend trading completely independent of the market but, as a matter of prudence/discipline, I can't assume this will continue if markets were to slide substantially. This hedge was bought and paid for just on today's move in hwo alone!

We've seen the markets get spooked by weaker than expected earnings in IBM and GOOG. These are heavy hitters. I'll give the bears some respect here. Action like today whereby the market gets slammed and closes near the low of the day usually indicates more downside is to come even if there's a bounce the following day. Despite the big down day the market is not ST oversold (broad market is right at neutral, Naz is mildly oversold). Remember after the QEX announcement  I saw anecdotal evidence of panic buying from underinvested fund managers? Well, it's those guys who are selling now or are about to. But having said that,  any of the ST bullish froth that was in the market is rapidly unwinding. AAII sentiment is almost at the 2:1 bear to bull ratio that has market significant bottoms in the past few years. Next week AAPL reports and I get the sense that people are worried about it given tech's weakness as of late and glitches with the Iphone 5. 

I don't want to get overly fixated about the general markets as my one and only holding has been trading in its own little world. Should I even care about what the markets do given that hwo doesn't give a rat's ass about it? I should....at least a little because if the macro picture were to take a turn for the worse it could eventually have an impact on the stock. 2008 was an extreme example of when macro trumps micro.....literally every stock got hammered. The bear market of 2000-2002 however did not have the same impact. Some stocks, like small cap value stocks and gold stocks for example actually thrived. But don't kid yourself....in bear markets it's a lot tougher to make money stock picking. I don't think we're in a bear market (we're only a few % off  theYTD high for cripes sake) but I don't think the downside is done and so either way, a partial hedge at this point is prudent and wise given my circumstances.

   

Partridging

So far things are goings good with hwo with the breakout above $2 to a new 52 week high last week and it did this despite markets having a down week which makes it even more encouraging.  As I had noted in the prior post, I sensed something was brewing with the stock. There was relentless buying pressure that had never been present like this since I made my first purchase late last year. There was strong resistance at the 1.90 level as there were a couple of large sellers keeping a lid on the stock. About 1 million shares have been mopped up in 1.80-1.90 level which means that old, tired shareholders have been replaced by new ones creating a solid foundation for the stock to make at attack to higher levels. Now, I'm just talking about "market action" here. It's the fundamentals or "story" that drives such action and thus is more important. Last week, hwo's main customer in PNG, Oil Search Ltd, announced a partnership with French O&G giant S.A. Total to explore for gas in the hopes of creating an offshore LNG facility. This potentially bodes well for hwo as they have been doing the drilling for Oil Search in regards to their existing LNG project. I'm not sure if the stock brokeout because of this news or if it was just a coincidence. What may have contributed to the breakout was that an analyst at National Bank Securities initiated coverage last week with an outperform rating. This is the first time any analyst has covered the stock in 4 years. It's quite satisfying when see the "bigger players" start to take notice of a small cap stock you've been in and even more satisfying to know that you were one step ahead of them.

This latest move up makes me breathe a bit easier and sure, I'm getting excited (who wouldn't) but I'm still on edge. There's a decent chance the stock will pull back and consolidate a bit now that it made this little flurry to the upside especially if we continue to see weak markets. So far though, hwo has been trading independent of the market which is what I had hoped it would do. One of the things I need to make sure I don't do is sell prematurely. I don't have part of my position designated as trading because a) there's a high chance of positive news coming down the pipe shortly via q3 earnings and the Oil Search-S.A. Total partnership and b) the stock is still fundamentally undervalued. As per the wisdom of Partridge I'm going to be right and sit tight.  If you haven't read my post about Partridge I suggest you do....it has gotta be one of the top 3 most important post I ever made.

As far as the markets go, I'll admit that the action has been bearish, namely, that the market has been grinding down relentlessly, albeit modestly but big picture wise it's barely noticeable. Let's keep in mind that the market had quite a big run from the June lows and so a pause is normal, plus, the market is only down about 2.5% from the YTD high... but it sure doesn't feel that way does it? The financial media makes it feel as if it's a lot worse. I continue to notice how quick people are to embrace downside but they tend to be slow embracing upside and that's a LT bullish sign.  While further downside won't be surprising, I don't think we'll see more than an additional 2-3% more. The main reason why is because overall, ST sentiment wasn't as excessively bullish as it was just prior major corrections of recent years and some indicators are rapidly unwinding already and would probably reach the opposite side of the ledger if markets continue to go only modestly lower 

Everyone seems to be bracing for a weak Q3 earnings season but since expectations are already lowered it makes it tough for there to be major downside surprises. Remember the motto of this blog. If we do get such surprises then that would be a red flag of an major turning point in the cycle. 

So for me, I'm staying the course. I will stick with my oversized position in hwo and my cash reserve. Given that hwo has been dancing to its own tune and given that I don't believe there's high chance of serious downside in the intermediate term I will stay unhedged. However, out of discipline, I will not be making any new additions until I have good reason to believe the correction has ran its course unless I see a really, really compelling opportunity similar to that of hwo.