Let off some steam Bennett

The market continues to grind higher. We've seen this "creeper" type action before during the past few years.  These moves tend to last longer than even the bulls think and when a correction does eventually take hold, it usually takes a few weeks of choppy action marked by minor dips before the real correction takes place. So, I don't think the market is in danger of falling apart in one or two days when this rally does eventually run out of steam especially since there's been high put/call ratios on most days which tells me there's plenty of top picking going on, but when the correction does come it will probably be in 7-10% range. We'll see how things unfold.

As expected, I've given back some of the gains I made in January with hwo.to now in full correction mode. For a company that has been producing best in class profitability metrics and EPS (relative to its asset base) it trades so volatile and hasn't gotten the respect it deserves despite being up more than 100% from a year ago...it should be up much more. In a recent news release the company said it expects flat to modest EBITDA growth in 2013 vs 2012 which means at the low end of guidance (which tends to be conservative) the company trades at 4 times forward earnings and 3 times forward EBITDA. This is ridiculous. I've seen so many other companies earn either the same or less and yet they have much higher market caps and not as as good a balance sheet or outlook. This valuation gap has been narrowing but it should be closed and then some. hwo deserves to be trading at a premium not a discount to its peers given that 70% of its business is in PNG which is still thriving while most CDN service companies have operations in North America which for the most part are showing a decline in activity vs last year and a decline in y-o-y  EPS to go along with it. hwo is probably going to experience a drag from its CDN operations this year but it's only 30% of their revenues. Meanwhile thing are still booming in PNG and the company is spending a lot of growth cap ex this year over there which signals they see plenty of room for growth.

I read an article in the Post today by some fund manager talking about a company he liked. He said that it was trading at 7 x EBITDA which he says is a decent valuation and how it has more potential for upside. Well, he's right. Generally speaking, 7 x EBITDA is a decent valuation. So if that's the case, wtf does 3 x EBITDA represent for a company that has a clean balance sheet, fantastic margins and excellent earnings visibility with 70% of it's business given that's secured by LT contracts? Ya, I'm venting.

During my studies in obtaining my finance degree and passing all 3 levels of the CFA program, it embraces the notion that markets are efficient because they instantly discount all public information. Well, I can tell you without a shred of a doubt that this theory is one big crock of shit.  It's been my experience that the market can be terribly inefficient especially in the small cap space. But this is actually a good thing...a very good thing....because it allows for the market to be exploited by rational and patient investors. Mispriced assets do eventually get priced correctly but often not in the instantaneous manner that the finance textbooks claim and that can be quite frustrating. Although I've done well with hwo, the stock deserves to be comfortably above $3 at the very least.

Let's not even talk about my other holding Greenstar which is actually more attractive on a valuation basis than hwo, which I already made the case is a fantastic value! Greenstar has about the same profitability metrics as hwo and yet it trades at 60% of book and 2 times (conservative) forward earnings! I have the majority of my capital invested in these 2 stocks. While it's quite a risky thing to only own 2 stocks, I have my money in companies that have strong fundamentals, solid balance sheets and low valuations which provides me with a margin of safety. Both these companies are cash flow generating machines paying healthy dividends with a payout ratio under 20%.  They have top of the line profitability stats on everything from ROE, ROA, gross margins and net profit margins. To me, these stocks are the equivalent of being dealt pockets aces and so when you have such a hand you have to bet big.  I can be a strong holder of such companies during the nasty corrections they go through, even though it has made me sick to my stomach at times. I may have to go through one of those times again with hwo.

Blazing start to the year

What a month! Both hwo and gre have had big moves so far this year putting me up over 20% on the year already. At one point last week, hwo tagged $2.99 and gre tagged an insane $1.20 intraday. Had those levels held  I would be up a ridiculous 50% on the year! With gre, the move to $1.20 was due to one buyer who aggressively bought stock and once he was done the sellers quickly moved in knocking the stock back to $0.75, but even at $0.75, it's still a healthy move up YTD, and it seems the stock is starting to attract attention. With hwo, I took 10% of my position off the table at $2.92 and the stock has been pulling back after briefly tagging $2.99. Anytime in the recent past that hwo got this overbought and turned down, it would lead to a nasty correction of at least 20%. I never took profits when the stock got overbought in the past because I still believed it was cheap and I felt if I traded I would risk being left on the sidelines if the stock kept going higher despite overbought conditions - something I've seen happen with other stocks plenty of times. This time around though,  for the sake of prudence and to keep my sanity  in the event of another nasty correction, I took a little off this time. I really, really, hope my sale turns out to be a bad one and the stock will bounce back shortly to new highs. The company is set to release cap ex plans next week with the potential for a dividend hike. This news release will be critical in the short run and I'm hoping it's a good one. Although hwo got overbought, the move feels a little different this time. Not only did it breakout to a 4 year high, but it seems as if a new batch of investors have discovered it and so the stock may be more resistant to dips this time around. There are certainly a few potential catalysts this year that could move the stock north of $3. Hopefully the news next week will do the trick.

As far the markets go, it's a tough call here in the short run. Earnings season seems to be pretty good with about 2/3 of companies beating expectations so far. We tagged 1500 as I expected and with the market being up 5% YTD, it's on pace for a 60% annual return which tells you it's very ahead of itself. I said the same thing around this time last year and what happened was that the market managed to climb higher still and starting a topping process in mid March. When the correction occurred in May it almost wiped out the entire gain for the year. I expect something similar to happen again this time but I'm not going to take any action (i.e. a hedge) until I get a good vibe that the market has made an IT peak. There are some danger signs but there's also some hold outs as well. IT peaks are usually a multi-week process anyways and so I don't feel the need to jump the gun especially now that I increased my cash position a bit with my sale of hwo. I'm now at 25% cash.

I know for myself that a 20% gain in a month is unsustainable as well and I have to be mentally prepared for lean months ahead. I will do my best to mitigate or even avoid them but I also know it's a mistake to take profits just for the sake of taking profits. Riding the bigger trend is the way to go although at times it can make you really sick to your stomach to have to endure the set backs. I'm still smarting from that nasty November I had.