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.
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