Summer Infant is a profitable company that trades at a quarter of book value.
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Oil and Gas 101
Here’s what I know about the sector so far:
- The independent oil & gas sector as a whole has a poor track record of profitability.
- Reserve estimation is an educated guess. Small changes in assumptions can have a massive effect on the economics of a reservoir.
- One common pattern in the oil & gas sector is for a company to overstate its reserves and to continually raise capital. See #1.
- PUD (proven undeveloped) reserves are especially prone to abuse (overstatement of reserves).
- Most of the value creation in the industry comes from exploration. Exploration is the most open-ended and uncertain aspect of E&P (exploration and production).
- Technology is another area of value creation.
- Historically, debt has often been dangerous to the companies which use it.
- Opportunities are the greatest when overly leveraged companies are forced to sell.
JCP update
JCP released its earnings for Q3 2012 and they are really bad. Comparable store sales have continued their dramatic decline:
Q1 2012: -18.9%
Q2 2012: -21.7%
Q3 2012: -26.1% Continue reading
Leveraged ETFs- a market inefficiency
Here’s how the inefficiency works. Every day, leveraged ETFs have to trade to maintain a constant level of leverage. The transaction costs of trading every day is very high since they often trade illiquid derivatives or swaps. It’s not like they trade liquid products such as S&P 500 futures. In a year with high volatility, a leveraged ETF could lose 20% of its net asset value to transaction costs.
One way to play this inefficiency is to short both the bull and bear versions of a leveraged ETF. If you want, you could also rebalance the ETFs frequently so that you have no risk from a trending market. (In a trending market, one ETF might go up several times while the other goes down close to 0.) Unfortunately, many people seem to have caught on to this trade as leveraged ETFs frequently have borrow costs in the mid single digits.
I personally do not recommend this arbitrage trade… the risk/reward does not seem compelling to me considering the borrow costs.
Advant-e Corporation (ADVC) / Arbitrage opportunity
From the press release, Advant-e has announced that it is essentially doing a tender offer for odd lots (anything not divisible by 10,000 shares) for $0.27 a share. As of today, ADVC was trading between 23 and 27 cents a share. I actually got filled today at 23 cents with Interactive Brokers (I placed my order on the weekend before I knew about the press release).
Reading round-up: books on mining
Here are the resources that I found the most helpful for understanding mining…
Book Review: Only the Paranoid Survive (by Andy Grove, former Intel CEO)
Key ideas in the book are:
- Sometimes there are inflection points in an industry that changes everything, e.g. containerization of the shipping industry and the rise of the personal computer. The trick is to (A) correctly identify what things are and aren’t inflection points and (B) re-invent the business if you are on the wrong end of an inflection point.
- It is difficult for CEOs to make decisions that may be obvious to outsiders and to a company’s customers.
