Playing defense

I was stopped out of 35% of my position in hwo.to at $2 last month and the timing could not have been any worse. Do I regret it? Not really. Here's why. Prior to getting stopped out, hwo.to represented about 40% of my account. That's a very aggressive position to say the least and in order to justify such, everything has to be in a favorable condition, namely, valuation, balance sheet safety, earnings momentum and technicals (price action). Earnings momentum has stalled, and I'm ok with that given it's not in decline but the technicals were not favorable and had not been for several weeks. I already talked about the large seller out there who was bullying the stock. At first this large seller was only capping upside at $2.35 and wasn't hitting any bids. This caused the stock to trade sideways. I had no problem with that kind of action as I got paid to wait via the monthly dividend. But then the seller starting putting pressure on the stock hitting bids and capping the upside at at a lower and lower price and it got to the point where there was a high risk the stock could break the $2 and head to $1.80. With that sort of action, I could no longer justify the type of exposure I had even though I was quite confident that longer term a $1.80 is not sustainable given the fundamentals. I had to draw a line in the sand and that line got crossed. When I got stopped at $2  this large seller also hit the $2 bid quite hard and then a couple hours later the company announced a new contract, the stock reversed to the upside and this large seller was gone. He has been gone since and without him holding back the stock, it has now surged back to $2.72 where I have sold a bit more and plan on selling even more if the stock lifts further (discussion to follow).

I talked about the delicate balance of conviction vs discipline. I've said it before, that in order to make big money, you gotta have conviction - you gotta have the balls to make a big move. At the same time you gotta have discipline. You make the big moves only when the odds/conditions are heavily skewed in your favor which in turn means you need to take defensive action when those conditions that warranted your position are no longer favorable. I was forced to downsize my position in hwo.to because one of the 3 conditions I require to make a big bet were no longer in place. Had I held say only a 10-15% position in the stock I would have been able to be a stronger holder for the entire position.

Getting whipsawed like this is part of the game even though it makes you feel like a chump.That's just your bruised ego talking. I don't regret getting stopped. I still have a significant position and I'm in a better financial position now that the stock has rebounded quite strongly. If the stock tanked to $1.80 as I feared, I may have felt good about myself for selling some at $2 but would seen my account balance drop nonetheless.

Hwo.to is often influenced by the general trend in the CDN energy services sector, even though only 30% of revenues are in Canada. The sector has been on fire as of late probably because the discount between CDN and US oil prices has narrowed significantly since January plus the price of US oil has gone up quite a bit too. There is also hope that Canadian LNG is going to be a growth driver. Both of these developments are no doubt positive for the sector and resulted in upgrades, but it doesn't appear that these developments  will have any material impact until next year and so with earnings for the remained of the year expected to be on par vs last year (which was a lousy)  it doesn't give me much conviction to expect the recent surge in the sector to hold up. Regarding hwo specifically, their upcoming Q2 earnings report will no doubt be better than your average service company given that 70% of the business is in PNG which has held it's own, but these operations too are expected to show flat growth this year. Therefore, as a result of everything discussed above, plus the ST concern I| have about the general market, I no longer have the same level of conviction to hold an oversized position in hwo as I once did at the current price and I'm inclined to lighten up further.

gre.v has had a wild ride, touching 1.70 before crashing back to 0.95. Such a thing in not uncommon with illiquid micro cap stocks and so long as fundamentals haven't changed, one should not be fazed. The selling was largely due to one person similar to what happened with hwo and so once he's done, the stock should see a strong rebound immediately. With the company poised to earn 0.40-0.45/sh this year, it's ridiculously underpriced. I'm maintaining my position and may even add to it.

Regarding the markets, they have had quite a run since my last post far exceeding my expectations (and everyone's I'm sure), but there's warning signs in some of the key indicators I track. I suspect we will see one more downside scare before summer's end. Now's the time to raise defenses by lighting up and/or hedging positions but don't overdue it.