A lot of crazy shit has happened since my last post. I was sick, my grandfather passed away and I've had to endure some serious financial and personal attacks. Financially, hwo.to had taken quite a drop late last month into early December. From what I could determine, there was no news released either directly from the company or its major customers that acted as the catalyst for the sell-off. Just prior to the sharp drop I was noticing a large shareholder selling out his position quite eagerly (I later determined it could be a former employee) which in turn caused another large shareholder to panic and sell as well ( this one trades using BMO Nesbitt burns who has had a history of flash crashing and flash spiking the stock with his large sells and buys). Insider trading data later reveled that the company had been buying back shares during the sharp drop along with 3 insiders making notable purchases. That gave me some assurance that I'm right about my the theory that the sell-off was liquidity driven rather than fundamentally driven.
While the shitstorm in hwo was taking place, another shitstorm arrived. An important client got upset at me twice...and not because the stock was tanking (he was still showing a profit). With the first incident, he believed I was at fault with the rejection of a money transfer into one of his accounts. I pleaded my innocence which he later realized was correct - it was the broker's mishap. A week later he was furious with me about another issue which again he blamed me for. This was more serious this time because this accusation meant his trust in me had become seriously jeopardized. Once again though, I pleaded my innocence. To make a long story short, he misunderstood a couple of buy orders that were cancelled in his account. Once I explained to him what had happened and he realized nothing shady was going on, he apologized for his accusations and we were "friends" again. I think he was still sour from the previous incident which caused him to jump to conclusions about this other issue (which was really a non-issue - I simply cancelled some unfilled buy orders). In a nice way, I told him that he can't just accuse me of wrong doing like that without giving me a chance to explain to him what's going on, as he is often ignorant or misunderstand things pertaining to his account.
I gotta tell you, 2 week ago with my grandfather recently passed, hwo.to tanking, and my client upset at me all at the same time, I had never felt so terrible like that in a long, long time. I was literally sick to my stomach. I dreaded waking up the next day to see how the stock would open. Despite all the pain and worry I had, I kept my composure. I never once contemplated selling in a panic and I defused the issue I had with my client quickly and effectively. Although hwo.to has snapped back quite a bit from the recent low, I'm still grimacing from the financial and personal attacks I have suffered and it's much too soon to declare that the slide in hwo.to is over.
I know from experience that the market will humble you from time to time. Well....I've been humbled.
Big time.
Monday, December 17, 2012
Sunday, November 25, 2012
Weekend Ramblings
Lots to talk about. First off, the big question regarding the markets is whether we've seen the bottom of the correction last week. When I look at the basket of indicators I use to time the market on an IT basis, I would say that we just barely made the threshold of satisfying the criteria needed to market the bottom. For instance, we saw a ratio of 1.7 bears to bulls in AAII that week. That's a lot of bears but a more ideal reading would have been 2:1. As low as 25% of stocks in the SPX trading were above their 50DMA last week. That's oversold but a more ideal reading would have been 20% or lower. The rydex ratio has been rapidly rising but again, it would have been more ideal for a larger rise. Meanwhile, NAAIM and fund flows haven't shown the capitulation to even quality as a bare minimum bottom requirement. If we got some sort of retest or a sharp pullback towards the lows I think it would probably build a better foundation for a lasting bottom, but we have seen time and time again the market do these "V" bottoms and if you waited for everything to be just perfect, you miss the rally and you'd be forced to chase, or worse, get killed if you went short. At the very least though, we should be in a for mild pullback and I might just very well play that, if for anything, to hedge my long exposure a bit.
I gotta tell you though, I'm sick of having to worry about what the broad market is doing. It's much more enjoyable to uncover and learn about individual stocks and making money being a stock picker. In the past I've done a pretty good job of uncovering winning stocks that have not been correlated with the day to day moves and have been able to have big moves to the upside at times when the markets have been shitty, but I still can't help but worry about what the markets do when I'm in these stocks especially when I'm in big. As a matter of prudence, I think I need to have at least a small hedge in place at times when I think the market could be in for a significant pullback for one can never know for sure if a pullback will turn out to be something worse and your "market resistant" stock succumbs to a market vortex of pain.
I've been doing more DD on this little Chinese company I've been talking about lately and man, do I like what I see and as result I've been quietly buying more shares at a dirt cheap price.. I met with one of the directors and he gave me some tidbits of useful information (all legal of course). Just last week the company announced a significant addition to their farmland leases, which if you crunch the numbers suggests that they could earn about $14-$15 million in profit for 2013. Right now the market cap of the company (fully diluted) is $15.5 million! This is absolutely fucking ridiculous especially with how clean the balance sheet it. I know what your thinking... it's too good to be true right? This has been my suspicion as well, but as far I can tell, the company is legit and there's no hidden liabilities or anything like that. I voiced my concerns to the director I met with about the validity of the company's assets and he told me he actually flew over to China a year ago to check out their operations and he had the auditors (who are Canadian) verify their bank statements at the branch and head office level and everything checked out.
So, why is this stock asininely dirt cheap? I think there's a few reasons why. One reason is the Sino Forrest effect which I talked about before. I discovered another reason - 2 groups of disgruntled minority shareholders. One of them is an underwriter that took the company public who still has shares on their books which they no longer care to hold (they were probably hoping to unloaded them shortly after the IPO). Another group of shareholders who want out are some Chinese investors that have been with the company from earlier days and were not keen on taking the company public nor do they probably understand stock markets in general. So, these guys are willing to sell at current prices because they will still have probably made a profit given that they got in near the beginning when the company was only a fraction of the size it is now. To put things in perspective, the company earned $1 Million in 2007 and by the end of this year they are poised to earn about $10 Million.
The wheels are in motion to clean out these disgruntled shareholders putting the shares into strong hands. Once that happens then the stock will be clear for take off as there will be very few sellers at this ridiculous price. I've been doing my part taking shares from these morons who are just giving away the stock. I've seen the disgruntled shareholder effect before. With hwo early this year, some guy blew out about 1 Million shares between $1-$1.20 right at the bottom. At that time I was shaking my head saying "how the fuck can someone be willing to dump so cheap given how well the company has been doing?" I was also worried. I was wondering "what am I missing here?" "Does this guy know something I don't?" So, I did something I rarely do because it goes against my rules. I averaged down because the stock was simply too cheap and after giving it some thought I believed that I wasn't in fact missing anything and that this seller was probably some old shareholder who for one reason or another decided to blow out a large position. I was right. After this guy was done puking his position, it marked the bottom of the price and the stock more than doubled from that low a few months later.
I have never seen a better risk/reward opportunity EVER! Hands down, this company is the cheapest of all time. Here you have company that has been exhibiting solid, steady growth. In 2010 they earned $7.7 Million, in 2011 $8.9 Million. They will probably earn $10-$11 Million in 2012 and next year they will earn about $14-15 Million given recent land acquisitions. They have a rock solid balance sheet, trivial debt levels, gushing cash flows and a recession resistant business given their business of selling canned fruits and fresh produce. So, despite all these great fundamentals, the company trades at just over 1 times forward earnings and less than 50% of book value! Well, either this company is fraud and I'll get burned or I'm gonna be right and make big money on this stock....there's no in between because it's pretty much impossible for the company to be valued so low longer term if the company is kosher and they keep producing the way they have been.
There's more I wanted to talk about but I'm getting tired....I'll save it for another post.
I gotta tell you though, I'm sick of having to worry about what the broad market is doing. It's much more enjoyable to uncover and learn about individual stocks and making money being a stock picker. In the past I've done a pretty good job of uncovering winning stocks that have not been correlated with the day to day moves and have been able to have big moves to the upside at times when the markets have been shitty, but I still can't help but worry about what the markets do when I'm in these stocks especially when I'm in big. As a matter of prudence, I think I need to have at least a small hedge in place at times when I think the market could be in for a significant pullback for one can never know for sure if a pullback will turn out to be something worse and your "market resistant" stock succumbs to a market vortex of pain.
I've been doing more DD on this little Chinese company I've been talking about lately and man, do I like what I see and as result I've been quietly buying more shares at a dirt cheap price.. I met with one of the directors and he gave me some tidbits of useful information (all legal of course). Just last week the company announced a significant addition to their farmland leases, which if you crunch the numbers suggests that they could earn about $14-$15 million in profit for 2013. Right now the market cap of the company (fully diluted) is $15.5 million! This is absolutely fucking ridiculous especially with how clean the balance sheet it. I know what your thinking... it's too good to be true right? This has been my suspicion as well, but as far I can tell, the company is legit and there's no hidden liabilities or anything like that. I voiced my concerns to the director I met with about the validity of the company's assets and he told me he actually flew over to China a year ago to check out their operations and he had the auditors (who are Canadian) verify their bank statements at the branch and head office level and everything checked out.
So, why is this stock asininely dirt cheap? I think there's a few reasons why. One reason is the Sino Forrest effect which I talked about before. I discovered another reason - 2 groups of disgruntled minority shareholders. One of them is an underwriter that took the company public who still has shares on their books which they no longer care to hold (they were probably hoping to unloaded them shortly after the IPO). Another group of shareholders who want out are some Chinese investors that have been with the company from earlier days and were not keen on taking the company public nor do they probably understand stock markets in general. So, these guys are willing to sell at current prices because they will still have probably made a profit given that they got in near the beginning when the company was only a fraction of the size it is now. To put things in perspective, the company earned $1 Million in 2007 and by the end of this year they are poised to earn about $10 Million.
The wheels are in motion to clean out these disgruntled shareholders putting the shares into strong hands. Once that happens then the stock will be clear for take off as there will be very few sellers at this ridiculous price. I've been doing my part taking shares from these morons who are just giving away the stock. I've seen the disgruntled shareholder effect before. With hwo early this year, some guy blew out about 1 Million shares between $1-$1.20 right at the bottom. At that time I was shaking my head saying "how the fuck can someone be willing to dump so cheap given how well the company has been doing?" I was also worried. I was wondering "what am I missing here?" "Does this guy know something I don't?" So, I did something I rarely do because it goes against my rules. I averaged down because the stock was simply too cheap and after giving it some thought I believed that I wasn't in fact missing anything and that this seller was probably some old shareholder who for one reason or another decided to blow out a large position. I was right. After this guy was done puking his position, it marked the bottom of the price and the stock more than doubled from that low a few months later.
I have never seen a better risk/reward opportunity EVER! Hands down, this company is the cheapest of all time. Here you have company that has been exhibiting solid, steady growth. In 2010 they earned $7.7 Million, in 2011 $8.9 Million. They will probably earn $10-$11 Million in 2012 and next year they will earn about $14-15 Million given recent land acquisitions. They have a rock solid balance sheet, trivial debt levels, gushing cash flows and a recession resistant business given their business of selling canned fruits and fresh produce. So, despite all these great fundamentals, the company trades at just over 1 times forward earnings and less than 50% of book value! Well, either this company is fraud and I'll get burned or I'm gonna be right and make big money on this stock....there's no in between because it's pretty much impossible for the company to be valued so low longer term if the company is kosher and they keep producing the way they have been.
There's more I wanted to talk about but I'm getting tired....I'll save it for another post.
Friday, November 9, 2012
November rain
It's been a nasty November so far. Seems like my "bears have accomplished diddly squat" comment a couple weeks ago motivated Mr. Market to dish me out some humble pie! With this week's decline, the medium term trend is clearly down and so assuming this is just a correction, we need to look for some signs of extremes which in the past have marked the end of such corrections. Specifically, I'm looking for 2:1 bears vs bulls in AAII, NAIIM to show a net long reading of sub 40 and a sizable weekly outflow in equity mutual funds. Despite the market showing weakness over the past few weeks there has been a reluctance of the above indicators to reach the extremes I'm looking for...they have been stubbornly too bullish but I think after this weeks damage, we will see this change very soon. Anyone who bought stocks on the basis of things like "favorable Nov-May seasonality", "no more election uncertainty" and other flimsy reasons are weak longs and such weak longs have probably been shaken out this week adding to the selling pressure as they capitulate. Other weak longs were those under-invested managers I talked about in September who panic bought stocks on the announcement of QEX. These guys are now underwater sucking wind and likely puking stocks because they panic bought while never really truly believing in the bull market to begin with.
This brings me to my next point...conviction. I believe that when you take a position you need to have a certain degree of conviction so that you can be a strong holder and not get shaken out by ST volatility. I've seen instances where those who are LT bears try to go "long for a trade" and they usually lose on such trades because they are inherent bears and have little conviction in their long trades and so they get easily shaken out if they get caught during one of these corrections. In order to have conviction you need to truly believe in your trade and to do that you need to have "substance" behind your trade...you have to have solid reasons to believe in it. I will never take a position because of seasonality, elliot waves, fibonacci retracements and the like because this is the equivalent of building your house on air...there's no substance. It's all useless bullshit. If you want to see what I mean by substance, read on.
In my previous post I asked what you would pay for the company I had described but nobody answered. Fine be like that. I asked the same question on facebook and only 1 person responded (a business owner). He said he would pay $50 Million. The business has $13 M in net cash. Let's assume $3 M is required for working capital; that means if he buys the business for $50 M he gets to pocket $10 M in cash making the effective purchase price only $40 M. Based upon annual earnings of $9.5 M, that gives you an annual return of about 24% on your money and in just over 4 years, you'll recoup your investment cost (p/e of 4). That's pretty sweet isn't it? Especially if the business has proven to be very steady over the years.
This business I just described is not being valued at $50 Million, which as I proved, would be more than a fair price for a prospective buyer. The business is actually being valued at only $15.5 Million! This company I'm talking has its stock trading in Canada but it's business is located in China and so perhaps there deserves to be some discount for a foreign buyer due to political risks but a $15.5 Million valuation for a company poised to earn at least $9.5 M this year, represents a discount that's beyond asinine considering the company's pristine balance sheet and stability/predictability of future earnings. When I buy a stock that's so grossly undervalued like this I'm a strong holder and I don't care what the market does. My convictions have "substance" behind them and a result, I'm not going to get shaken out if the stock dips from when I bought it because in time, unless the company is a scam, it's practically guaranteed that the stock will go up substantially due to the earnings it's generating vs its valuation and since the company has no net debt, it can't go bust. Why is the company valued so low? It's probably because the company is a Chinese RTO and there have been cases where such companies have turned out to be frauds. Sino Forrest is the biggest of such cases. Nobody wants to touch these stocks because of these scams but I see that as an opportunity as I'm sure not every Chinese RTO is a scam. Based upon my DD, this company I've been talking about appears legit.
The way I look at it is this. If the company is legit it's pretty much guaranteed the stock price will at least double within a year. Of course if it's a scam it goes to zero and as I said, the company appears to be kosher so the risk/reward is well worth taking a LT position. I'm going to meet one of directors of the company next week and so hopefully that will increase my knowledge and confidence in the company.
This brings me to my next point...conviction. I believe that when you take a position you need to have a certain degree of conviction so that you can be a strong holder and not get shaken out by ST volatility. I've seen instances where those who are LT bears try to go "long for a trade" and they usually lose on such trades because they are inherent bears and have little conviction in their long trades and so they get easily shaken out if they get caught during one of these corrections. In order to have conviction you need to truly believe in your trade and to do that you need to have "substance" behind your trade...you have to have solid reasons to believe in it. I will never take a position because of seasonality, elliot waves, fibonacci retracements and the like because this is the equivalent of building your house on air...there's no substance. It's all useless bullshit. If you want to see what I mean by substance, read on.
In my previous post I asked what you would pay for the company I had described but nobody answered. Fine be like that. I asked the same question on facebook and only 1 person responded (a business owner). He said he would pay $50 Million. The business has $13 M in net cash. Let's assume $3 M is required for working capital; that means if he buys the business for $50 M he gets to pocket $10 M in cash making the effective purchase price only $40 M. Based upon annual earnings of $9.5 M, that gives you an annual return of about 24% on your money and in just over 4 years, you'll recoup your investment cost (p/e of 4). That's pretty sweet isn't it? Especially if the business has proven to be very steady over the years.
This business I just described is not being valued at $50 Million, which as I proved, would be more than a fair price for a prospective buyer. The business is actually being valued at only $15.5 Million! This company I'm talking has its stock trading in Canada but it's business is located in China and so perhaps there deserves to be some discount for a foreign buyer due to political risks but a $15.5 Million valuation for a company poised to earn at least $9.5 M this year, represents a discount that's beyond asinine considering the company's pristine balance sheet and stability/predictability of future earnings. When I buy a stock that's so grossly undervalued like this I'm a strong holder and I don't care what the market does. My convictions have "substance" behind them and a result, I'm not going to get shaken out if the stock dips from when I bought it because in time, unless the company is a scam, it's practically guaranteed that the stock will go up substantially due to the earnings it's generating vs its valuation and since the company has no net debt, it can't go bust. Why is the company valued so low? It's probably because the company is a Chinese RTO and there have been cases where such companies have turned out to be frauds. Sino Forrest is the biggest of such cases. Nobody wants to touch these stocks because of these scams but I see that as an opportunity as I'm sure not every Chinese RTO is a scam. Based upon my DD, this company I've been talking about appears legit.
The way I look at it is this. If the company is legit it's pretty much guaranteed the stock price will at least double within a year. Of course if it's a scam it goes to zero and as I said, the company appears to be kosher so the risk/reward is well worth taking a LT position. I'm going to meet one of directors of the company next week and so hopefully that will increase my knowledge and confidence in the company.
Saturday, November 3, 2012
How much would you pay for this business?
First of all, I feel like such a dufus for selling my puts Thursday given Friday's tankage but you know what, I'm over it. This leaves my longs exposed without a hedge, but my longs (primarily hwo.to) continue to not be market sensitive, so for now it's not a concern.
Ok let's get on topic here. Let's say I have a business which I'm willing to sell because I've decided to spend the rest of my days playing golf (even though I've never played a round of golf in my life). Here are some key facts about this business:
Ok let's get on topic here. Let's say I have a business which I'm willing to sell because I've decided to spend the rest of my days playing golf (even though I've never played a round of golf in my life). Here are some key facts about this business:
- The primary operation of the business is the selling of canned fruits and vegetables which are derived from farmland that I have a 30 year pre-payed lease on.
- 2012 profit is expected to be about $9.5 Million with historical profit margins of about 27%.
- Although the 2nd quarter tends to be the weakest, I have been steadily profitable every quarter
- By the end of 2012 I will likely have about $13 Million in net cash (cash -debt) and another $13 Million in net receivables (receivables - payables).
I'm running near full capacity right now so there there won't be much growth in profits without capital investment but I can certainly maintain existing levels of profits indefinitely as is.
Based on the above facts what do you believe is a fair/reasonable value for this business? Please post your answer in the comments.
Based on the above facts what do you believe is a fair/reasonable value for this business? Please post your answer in the comments.
Friday, November 2, 2012
Mixed Signals
Market indicators are mixed at this point. Based upon my analysis, both downside and upside appear limited in the short run. Given this, the wildcard of the non-farm payrolls tomorrow and the fact that the market still has room to have another day like today to the upside before becoming ST overbought, I closed out my XLE put hedge today. It would have been better to have done so yesterday but I'm not going to lament on that. Still came out with a profit though. It's gotta be pretty disappointing if you've been a bear. They had the ball for 3 weeks now and they've managed to accomplish pretty much diddly squat and now it could be that the bulls have the ball for a week or 2, although as I've said, I don't think upside potential is great in the ST and so if we get ST overbought again I'd probably put back on the hedge.
Meanwhile, hwo has had quite a dip to 2.19 after making a run as high at 2.69 (although not much shares changed hands at 2.69...the true high was more like 2.55). Well, I knew such a dip was possible after the torrid run it has had but I have no regrets not selling shares near the recent highs given where I believe the stock should fundamentally go to. There were no red flags from a pure trader/speculator perspective either, specifically, there was no "blowoff top" type behavior as the price spike was not accompanied by massive volume which would indicate possible buyer exhaustion. When it comes to microcap/small cap stocks, they tend to exhibit this pump-and-dump-like signature at major tops.
A few weeks back I said I wouldn't add to long exposure unless I found a very compelling opportunity....well, I believe I have found one and I have started accumulating shares. This stock is the most grossly undervalued stock I have ever come across! More on this in the next post....
Meanwhile, hwo has had quite a dip to 2.19 after making a run as high at 2.69 (although not much shares changed hands at 2.69...the true high was more like 2.55). Well, I knew such a dip was possible after the torrid run it has had but I have no regrets not selling shares near the recent highs given where I believe the stock should fundamentally go to. There were no red flags from a pure trader/speculator perspective either, specifically, there was no "blowoff top" type behavior as the price spike was not accompanied by massive volume which would indicate possible buyer exhaustion. When it comes to microcap/small cap stocks, they tend to exhibit this pump-and-dump-like signature at major tops.
A few weeks back I said I wouldn't add to long exposure unless I found a very compelling opportunity....well, I believe I have found one and I have started accumulating shares. This stock is the most grossly undervalued stock I have ever come across! More on this in the next post....
Saturday, October 20, 2012
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.
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.
Sunday, October 14, 2012
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.
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.
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