New long and short positions Dec 2013

New positions I have initiated without doing thorough research.  (I’m not kidding when I say that I haven’t done much research…)

Longs

Exxon call option (XOM) – Lately I have been looking in the oil and gas space for shorts.  It has always struck me that Exxon was a lot better than most of the independent E&Ps out there.  The company has a very good long-term track record in generating GAAP earnings.  Their accounting seems fairly conservative as they use the “successful efforts” method and capitalize very few expenses.  I don’t believe that Exxon is trying to inflate its profits by capitalizing as many expenses as possible.  Exxon’s free cash flow looks weak because the company is trying to grow production.

Exxon likes to point out its high returns on invested capital.  I think that this is slightly misleading.  Its returns are high mostly because of rising commodity prices and because of its successful efforts accounting.  I doubt that Exxon will see similar returns on its new investments because (A) oil and gas is extremely competitive and (B) size is an anchor on performance.

Exxon is a good business but not a wonderful one.  The company is too big to generate unusual returns and the CEO is too conventional to be a maverick.  Its capital allocation is good as the company isn’t overleveraged and returns excess cash to shareholders.  The company is a little cheap at a P/E of around 12.5.  I can see why Warren Buffett is buying it again (and I am mostly copying him).

As far as the options go, the implied volatility on XOM options is very similar to SPY (the S&P 500 ETF).  One could make an argument that the options are slightly undervalued.  For example:

Suppose the $95 strike LEAP due 770 days from now costs $7.70.
The current share price is $95.65.
Exxon’s earnings yield is 8%.
Dividend yield is 2.63%.
Assuming the multiple stays the same, Exxon’s share price should grow at 5.36%/year.
In 770 days, Exxon will grow roughly 11.6%.  (1.0536^(770/365))
On the expiration date, the option will have a value of $11.79 versus a cost of $7.70.  If the multiple expands, you stand to make even more money.

Aberdeen International (AAB.TO) – I’ve written about Aberdeen previously.  This cigar butt is currently hitting all-time lows.  This is not something I want to hold for a long period of time.

Pinetree Capital (PNP.TO) – Same idea as Aberdeen except management is a little worse.  Again, this is not something I want to hold for a long period of time.

Shorts

Twitter (TWTR) – Twitter’s current advertising platform monetizes poorly and the company is unprofitable.  For example, Twitter’s paid advertising services attract practically zero attention from affiliate marketers (unlike Facebook).  Twitter might be able to monetize its views better if it simply shows (retargeted) display ads on its site like Facebook.  Like Facebook, Twitter may take a long time before it actually tries to monetize its service with semi-obtrusive ads.  Facebook went through Facebook gifts (unobtrusive, likely close to zero revenue) to very obtrusive ads that would show up in users’ Facebook feed to less obtrusive ads on the side of the interface.  If Twitter figures out how to monetize its service in the future, the underlying business will be worth considerably more.  However, this may not happen.

Twitter’s valuation is high relative to Facebook.  Facebook has roughly 5 times the number of monthly active users (*fake users for spam purposes may distort these figures) at 1,189M versus Twitter’s 230M users.  Facebook users should monetize better as they spend more time on the site.  As well, Facebook has minor ad targeting advantages over Twitter (in my opinion).  Facebook’s market cap is only 4.76X that of Twitter’s even though it has 5.17X the users.  Facebook has very strong cash flow while Twitter loses money.

I’ve put down my thoughts on online advertising in a previous post on this blog.

*Disclosure:  No position in Facebook.

Yelp (YELP) – I think their monetization prospects are far worse than Twitter’s.  The company is losing money and its valuation is very high.  The price to sales ratio is 20.34.

The stock has become cheaper to borrow recently.

FuelCell Energy (FCEL) – This hot technology company has a very long track record of losing money.  It has taken on debt in the past few years so I am hoping that the debt (mostly due June 2018… a long time from now) will quicken this company’s demise.  I have done almost no research on fuel cell technology and the industry.  Hopefully the fuel cell industry is like the solar panel manufacturing industry (but with inferior economics).  There is a technology component to this manufacturing industry that may give some players a sustainable competitive advantage; I hope that I am not on the wrong side of it.

Morgans Hotel Group (MHGC) – This company owns several high-end hotels in different cities.  It has a long track record of losing money every quarter since 2007.  The company has a $270M market cap, $557M in debt, and book value of -$182M.

There is currently ongoing drama between OTK Associates (Jason Kalisman) and Yucaipa (Ronald Burkle).  Both are major shareholders who have held MHGC stock since 2009 or earlier.  Both parties have lost a lot of money on the stock.  Both parties have been trying to gain control of the company and are racking up legal fees in fighting each other.  Jason Kalisman is currently the interim CEO of Morgans.  Yucaipa lost control of the company after trying to push through some deals that weren’t the best for shareholders.

It will be difficult for the company to make money after paying interest on its debt; we’ll see if Kalisman turns this company around.  If Kalisman understood the hotel business and is a skilled hotel operator, perhaps he wouldn’t be in this situation in the first place.  I am betting against Kalisman’s ability to turn the company around.  Given the current lack of cash flow and the huge mountain of debt, Kalisman has his work cut out for him.

I can’t buy the debt but there may be interesting opportunities in arbitraging this company’s capital structure.

Imax (IMAX) put options – I’ve written about Imax previously.  I currently own puts and am shorting the common stock.  I don’t see a catalyst that might cause this stock to drop anytime soon.  The implied volatility on the put options is in the mid to high 30s.

Magnum Hunter (MHR) – This is an independent oil and gas company that is constantly selling stock and raising debt.  Its free cash flow looks extremely weak.

SolarCity (SCTY) – I’m guessing that the installation and financing of solar energy installations is a commodity business.  (But I could be completely wrong here…)  I don’t see why SolarCity deserves its high valuation.

Odyssey Marine Exploration (OMEX) – Ryan Morris has an excellent writeup on OMEX.  The company has terrible management and terrible economics.  As the company has recently been taking on debt, it may finally enter bankruptcy in the next few years.

More out-of-the-money Salesforce (CRM) puts – I honestly don’t know what I’m doing here.  I know that a lot of people are shorting Salesforce because its valuation is ridiculous.  However, their software is excellent.  For many areas their software is the best in its class.  Salesforce should ultimately be a wonderful business and I keep saying that shorting wonderful businesses is not a great idea.

Salesforce is a bizarre stock because it used to make money and now it has been sacrificing profitability for growth.  The stock market has been rewarding Salesforce with an ever-increasing share price.  I’m speculating on the share price collapsing even though I have no special insight into when that might happen or if it will happen at all.

Dot Hill Systems (HILL) – This enterprise storage company has a track record of losing money since 2006.  Tech companies rarely turn themselves around.

*Note:  I likely will not post about these stocks when I close the positions.

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One thought on “New long and short positions Dec 2013

  1. Pingback: Enterprise storage will become more commoditized (EMC, NTAP, VMEM) | Glenn Chan's Random Notes on Investing

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