2013 Turkey of the Year: Dry Holes in the Ocean

Happy Thanksgiving from your friends at Stock Gumshoe! Plenty of turkey here for a week's worth of sandwiches.

By Travis Johnson, Stock Gumshoe, November 27, 2013

Fanfare, please! It’s time, once again, for the Turkey of the Year announcement!

Every year, as millions of American families place a golden-brown turkey ceremoniously on their Thanksgiving table, we here at Stock Gumshoe try to pick out the most overcooked, overyhyped, and overstuffed turkey from among the hundreds of stocks we’ve written about in the past year. And yes, we make sure to pick only the one that’s already been chewed down to a carcass.

I should start by telling you that we’re really not trying to be mean, or to claim that the person who suggested this turkey is necessarily a lousy stock picker — everyone makes lousy picks sometimes, and we don’t know the “real” record of many of the folks we write about, we know only about the huge, outsize promises they make in their hyperbolic advertisements. The ads are pretty much all over-the-top, which is why we love them, but it’s only fair to see if their picks ever match that promise.

Nor are the stocks that we single out as Turkeys each year necessarily terrible investments for the year to come — though they tend to be lousy in more than one way. Gasfrac (GFS.TO, GSFVF) made the cut last year as our Turkey of the Year and is actually up a little bit over the last twelve months since that selection, though the neck-and-neck second choice, Poseidon Concepts, ended up going bankrupt a few months after Thanksgiving. Before that it was Tengion (TNGN) earning the coveted Turkey spot, a stock that was a regenerative medicine darling for a brief while and fell about 80% after it was teased … and has fallen another 90% since, serving as a nice cautionary tale to all the “regenerating body parts” investment enthusiasts out there (I’m looking at you, Organovo, you scare me!) as well as all the folks who see a stock that has fallen 80 or 90% and say, “hey, it can’t fall much further!” Remember — a stock, at whatever price it might be on a given day, can always lose 100% of its value.

Previous winners include Raser Technologies, which went bankrupt, and SuperMedia, which ended up going through a “lets go bankrupt together” party with Dex One and then merging with them, to create a new “new Yellow pages” company, Dex Media (DXM) that for some reason continues to attract at least a few shareholders (if you’re counting, yes, that means three bankruptcy filings for the combined company in less than five years), but at this point the stock — for those persistent few who held on through the bankruptcy — is, I think, only down about 50% or so since that won the Turkey Prize in 2010.

It’s been an unusually good year in 2013 (and late 2012) for the teasermeisters — we’ve been tracking the stocks that are teased and promoted by investment newsletters since 2007, and rarely have we seen a spread of stocks like you’ll see today in the Stock Gumshoe tracking spreadsheets. There are not a lot of stocks that have doubled or put up spectacular returns of several hundred percent as we were led to believe they would by the over-hyped ad pitches, but there are more that have gone up than down, and by a wide margin. And the average pick is up — only 11%, but still up (this is all simple averages from the time the stock was teased to today — nothing annualized or relative to the S&P, so for many of them the luck of when they were picked is important … like the lousy timing of the Mortgage REITs that were picked as “spread trusts” just before the interest rate panic in the Spring, some of those were down almost enough to be Turkey candidates).

It shouldn’t be a big shock that the teased stocks have largely been halfway decent, I suppose — it’s been a nice bull market for most of the past twelve months, with the S&P 500 index up better than 25% and a rising tide lifting almost all boats (unless your boat was made of silver, gold, graphite or another mined commodity), so we should expect that some stock pickers did well. Personally, my portfolio return has trailed the S&P this year, mostly because of a heavy weighting in commodity-related stocks.

So even though the overall picture for teased stocks is better than in a typical year — partly because we haven’t seen any of the stocks picked this year go to zero yet or lose 99% of their value, which usually happens for at least one or two of ’em — we do like to take the chance every Thanksgiving to, well, give thanks for the reality check that a nice strong whiff of the hyperbolic teaser ads gives us, for the interesting ideas that they sometimes send our way.

And more importantly, we like to emphasize the risks of buying a “story” or falling head-over-heels for a pitch by singling out one “Turkey of the Year” — one of the worst offenders in the world of hype and tease, and one of the worst few performers over the last twelve months. Pretty much every stock pitched by the newsletters and their copywriters in this way is a “guaranteed double” or a “possible 1,000% gain” or opportunity for “life-changing wealth” so we can’t narrow it down based on who makes the silliest promise … but we can find the promise that we think led to the most disastrous performance.

So who’s our “Turkey” this year? Well, even in a good year there were several decent candidates that lost more than half their value after we’d been “promised” that they were headed for the moon. We restrict the search to just the last twelve months, and base it on the overall return, not on any kind of annualized return or a “versus the S&P” relative return, we’re simple folk and we look just at the basic numbers for this purpose.

Top candidates included a few explorers and miners, like Eurasian Minerals (EMXX) teased by Karim Rahemtulla and Exeter Resource (XRA) teased by Chuck de Castro, both of which are down about 50% since they were pitched earlier this year … but really, that’s just too easy and none of them stand out from their peers much — most of the small gold stocks are down roughly as much or more.

And I was sorely tempted to give the win to North American Palladium (PAL) as teased by Peter Krauth, partly because he wasn’t teasing just the stock but also call options on that stock, which would have probably meant a 100% loss instead of the 70% loss we’ve recorded on the common stock on the spreadsheet.

We might even have to almost call it a tie, since PAL has collapsed in price even though the core metal they are mining, palladium, has only dropped about 15% since the teaser pitch came out in the Spring, holding up better than gold, silver, copper or most other commodities. So they can’t blame the metal for this one.

But no, we’ll stick with our guns and I’ll make the call for a single winner of the “Turkey of the Year” — and I’ll give this one the edge not only because it could have made it as the “Turkey of the Year” in 2012 as well (and arguably even in 2011), but because it was the single worst-performing teaser pick of this past year… and because I also owned it for a little while.

So yes, the Turkey of the Year for 2013 is HRT Participacoes (HRP in Canada, HRTPY on the pink sheets), the Brazilian oil explorer that has found gas in the Amazon, where no one seems to want it, and has found not much after drilling three expensive holes offshore Namibia, where hopes were high for the next big deepwater oil find to rival the nation-changing discoveries across the South Atlantic in Brazil.

Disagree? Feel free to share your favorite turkey candidate with a comment below.

HRT Participa is also a good example of the kinds of “story stocks” that can work out either very well or quite terribly — a company with a high-profile CEO and lots of cash to spend on a big exploration program … and these kinds of stocks have a tendency to catch the imagination of novice investors on the search for potential 1,000% gains on a big oil discovery … especially when, as with HRT, they’re relatively large and have a “name brand” and some media coverage — even after falling quite a bit for two years, HRT was still a That’s the sentiment that these kinds of newsletter pitchmen use to get new subscribers — in this case the pitch for HRT Participa was made by Byron King for his pricey Energy & Scarcity newsletter, and he stuck with it for a very long time (he may have been in and out of it over the years, I don’t know, but he first touted the predecessor in 2010).

The initial tease for this stock came before it was HRT Participa — back when it was little explorer UNX Energy in 2010 Byron King promised great things as they searched for oil in the “oil kitchen” offshore Namibia, a known gas area that geologists were convinced also hid a big oil field that was the “kitchen” feeding the large (and as yet untapped) offshore natural gas field in the same neighborhood. It was a convincing story, partly based on the fact that this part of offshore Namibia would have been right next door to the huge oil discoveries beneath the deep water offshore Brazil back in the days before the African and South American continents separated. It just made sense.

But little UNX, after being driven up by this potential and hope, ended up being acquired by HRT Participa early in 2011 — which would have worked out well for many UNX shareholders if they had sold then, since they got more than half of a HRT share in the takeover and that would have been worth close to $5 if sold at the peak (a several hundred percent gain from King’s first teaser pitch), but, of course, many of those shareholders continued to believe in the as-yet-undrilled promise of offshore Namibia and they held on. And why wouldn’t they? HRT Participa was led by CEO Marcio Mello a man who many believed was a key figure in the discovery of the Tupi field and other discoveries offshore Brazil (he was a Petrobras executive before founding HRT as an oil services firm, then turning it into an oil and gas explorer).

But after HRT took over, and in taking over UNX also got a Canadian listing, we were left with a stock that fell precipitously in 2011 to $2 and then doubled in the first few months of 2012 on optimism again until HRT ended up being just under $4 when King teased the Namibian offshore promise again, again using the “oil kitchen” pitch, in March of 2012.

In the months that followed the stock was on a pretty steady slope downward — which is why I say this could have been a “Turkey of the Year’ contender in 2012 … but by Thanksgiving last year it was only down by about 60-70%, not enough to bring it to the top of the list in a year that had quite a few stinkers. And while things looked tough, since the only other explorer who was drilling offshore Namibia anywhere near HRT’s blocks had failed to find commercial oil on their try in the fall of 2012, HRT still hadn’t done any drilling. There was still considerable promise and hope, and they also did a nice job finding some significant gas reserves in the remote Amazon.

Which brings us to the most recent tease, the one that finally earned them the “Turkey of the Year” in 2013. It was in late March that Byron King’s Energy & Scarcity Investor told us this little 91-cent oil company was about to take on “Energy’s last great frontier” with a drill just hitting the seabed — with King’s special secret contact at the company calling him in the middle of the night to alert him to this exciting development.

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And most compellingly, though he was careful to say it was a penny stock and that he thought the odds were 50/50 that they’d hit paydirt on this first hole, with two more wells to be drilled after that to give more chances, he talked about it as a lottery ticket kind of play and put some numbers out there to get us daydreaming:

“If the drilling finds what I believe is down there, I could see the share price going to $5 when the results are announced. And then, over time, I wouldn’t rule out $15-$20 per share.”

King wasn’t the only one to see exciting possibilities in HRT, of course — not only did Marcio Mello keep talking up the potential (he said — not long before they released their first well results — that he thought investors who sold “would be sorry” and that he was baffled at the doubters), but others were clearly on board as well — the talk of 10 billion barrels of oil maybe being in these offshore blocks in Namibia was enough to make a lot of folks want to take a chance that their geologists were right.

Including me. I took a small speculative position to ride out the first drilling and see if the stock might become a gusher on an oil discovery (as Africa Oil did, quite pleasantly, the year before, and as happens every year when a few explorers hit the big time around the world).

Here’s what I said when I wrote up that teaser:

“The stock might end up doing well if they discover a good quantity of commercial oil, but to make life-changing amounts of money on the stock, unlike with a $1 lottery ticket, you’d have to risk a meaningful amount of money. So get the lottery ticket idea out of your head, think instead about option trading — HRT Participacoes is more like a call option on oil exploration offshore Namibia. It might go to zero, the last two years teaches us that it might drop gradually over a long period of time and frustrate you, or it might go up several hundred percent quickly if good news comes. And if you know which of the three is most likely, well, then you’re better at predicting what’s under two miles of water and a mile of dirt, rock and salt than I am.”

Unfortunately for all concerned, the drilling did not go so great. The first well, Wingat, found important source rocks … but no oil reservoir, and Marcio Mello either resigned or was forced out as CEO less than a week before those highly anticipated results were published. That’s when I sold my shares, at about a 30% loss. The second well, Murombe, found more evidence of an oil system … but no commercial oil potential. The third one, Moosehead, was officially called a “dry hole.” So, as they noted in that last press release for Moosehead, they learned a lot about the potential offshore Namibia from this first drilling campaign (which cost upwards of $200 million), but it’s time to step back and make new plans for 2014 and 2015.

What will become of HRT Participa? Well, it’s down to 14 cents a share now in Canada, stepping down further in price each time results of those first three wells were released, and then continuing to dwindle down in the month following. And they still have some cash and liquid assets, though the liabilities on the balance sheet have caught up to those assets to some degree and so investors have traded the shares down to less than their cash on the books. That’s a pretty hefty level of pessimism, but given their performance this year it’s hard to say it isn’t deserved — HRT Participa was shooting for big fish and caught nothing, and they seem to not quite know what to do with themselves now.

So there you have it — the risk was clear from the beginning for those who saw it without the blurring effect of those potentially dramatic riches, and sometimes when you take a risk there isn’t any reward. That’s what “risk” means.

Except the pumpkin pie, which ain’t a bad reward. Enjoy your Thanksgiving… and if, like me, you had a little slug of HRT Participacoes in your portfolio this year, well, I think you deserve maybe even a second piece of the pie. And some extra whipped cream.

P.S. Did I mention that my portfolio has not been spectacular this year? Well, in the interest of fairness I’ll also tell you about my own personal “Turkey” of this year — I write up a stock idea that looks appealing to me almost every month for the Irregulars, and of those the worst one I’ve suggested in the last twelve months has been Rosetta Stone (RST), which is down about 30% from when I suggested it as an appealing idea from the Value Investing Congress in the Spring (and yes, I own it too).

I’ve had stocks go down more than that in the past, and have sold some stocks this year at losses of greater than 30% (like Sandstorm Metals & Energy, for example), but that’s the worst performer of the last twelve “Idea of the Month” picks in these parts. Of stocks that I own personally and write about often but that haven’t been a monthly pick this year, the worst performer for the year among that group has probably been Sandstorm Gold (SAND), which I still own as a large part of my gold allocation and which is looking super-ugly after gold’s fall this year. I even singled that one out as one of my favorites for the year back in January, so I can certainly pick some stinkers and have bad timing, too.

Shall we have a group cleansing as we approach the end of the year? Anyone who wants to step up to the front of the class and admit to their worst buy or sell of the year, feel free to share — just use the friendly little comments box below. Sometimes you have to grieve publicly to really cleanse yourself, it’s good for the soul. Who knows, maybe we’ll all learn something.

If you’ve never lost money, you can stay quiet. Stuff some turkey and cranberry sauce in your mouth. We love you, but we don’t wanna hear it.



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December 2, 2013 4:20 pm