Muddy Waters has accused NQ of being a fraud and falsifying its cash balances. NQ has waged a campaign to defend itself, issuing multiple press releases and holding a 2-hour conference call with investors. What doesn’t make sense is the steps that NQ is willing to go to “prove” that its cash is real. It has transferred a little over $100 million into its account at Standard Chartered Bank, giving up interest on its term deposits to do so. What kind of sane business manager would do this? At best, the CEO is an idiot for throwing away free money.
How would a sociopath fleece investors in mining?
As an investor, I don’t want to be on the wrong end of fraud. But I thought it would be interesting to look at things from a different perspective: what is the best way to commit fraud? What is the best way to fleece investors?
Genzyme contingent value rights (GCVRZ) post mortem
Two years ago (see my post), I traded in and out of a weird security with the symbol GCVRZ (Genzyme contingent value rights). Today, the rights have fallen around 59% to $0.82 due to doubts over whether the FDA will approve Lemtrada, the drug whose commercial success will determine the payments on the contingent value rights (CVRs). The current price is below the price that I bought and sold these CVRs.
New position: Chesapeake put options + other minor trades
This is a small position for me that I bought puts yesterday (Nov 5). At the time, I did not realize that earnings was today. The implied volatility on CHK options is in the low 30s for the 2016 LEAPs and seems to be rather low. The historical volatility in the past 3 years was 40.97 according to Morningstar. I think that the stock is a little overvalued (see my CHK post) and that the put options are a little undervalued. This trade doesn’t have the greatest margin of safety.
TransGlobe Energy: this company is silly
The bulk of TransGlobe’s operation is in Egypt, where all oil production goes through the Egyptian General Petroleum Corporation (“EGPC”). The problem is that the EGPC has not been paying oil companies on time and owes massive debts. At YE2012 TransGlobe had $221M in accounts receivables (the majority of it is due from the EGPC). At this point, some common sense should kick in. Egypt is not a place where you want to do business. The government will likely keep most of the oil profits… if not all of the profits. Despite the obvious, TransGlobe continues to expand heavily in Egypt.
*Disclosure: No position in TGA. I have no intention of shorting it.
Altisource Q3 2013 update: they are shooting for the stars
Altisource continues to take on more debt to fuel its growth. $70M was used to buy Equator, a company that makes software for mortgage servicing companies. (Equator competes with Altisource’s REALServicing platform and Altisource’s Hubzu.) Equator’s sellers are eligible for up to another $80M in earn-outs in the future. Altisource also previously purchased mortgage servicing businesses from Ocwen. On top of that, Altisource has been using debt proceeds to repurchase shares. I believe that the interest rate on the debt (5.75%+) is higher than the earnings yield (~3.5%) on Altisource stock. The repurchases will only work if Altisource continues to grow its earnings.
Canada Lithium update: the end may be near
I’ve previously thought that Canada Lithium’s mine would be extremely uneconomic. It looks like the thesis is playing out. The company is desperately raising capital to shore up its working capital. It hasn’t been able to generate cash flow from the mine yet, which raises doubt about the company as a going concern. I’ve quoted the company’s financial statements below and added my own emphasis:
The Company has secured off – take partners in major Asian markets, but has not generated revenue or cash flows from its operations. The Company has limited financial resources and no current source of recurring revenue and continues to rely on the issuance of shares, debt or other sources of financing to generate the funds required to develop the Québec Lithium Project, for corporate expenditures, and to satisfy debt obligations as they fall due.
Due diligence
Here are places I look for information when researching a stock. There is a lot of useful information online that you won’t find in the 10-Ks and other documents filed with regulators.
Crocs Q3 2013 earnings: smoke and mirrors
Crocs’ latest earnings release is titled: “Crocs Inc. Reports Third Quarter Financial Results and Announces 15 Million Share Increase in Share Repurchase Authorization“. The title clearly highlights the increase in the share repurchase authorization. However, Crocs did not repurchase any shares in the last quarter! The press release is trying to trick people into thinking that Crocs will aggressively buy back more shares, which is unlikely. The intentionally misleading press release is not a sign of a CEO who is honest with shareholders.
My investing mistakes and lessons that I’ve learned
This is a list of the most important things that I’ve discovered. Sometimes I have learned these things the hard way. Continue reading
Glenn Chan's Random Notes on Investing 