Annual Review — Watchlist

by Travis Johnson, Stock Gumshoe | January 31, 2014 2:59 pm

Checking in on more of our Irregulars stocks, and one personal sell

Just as I catch up on some of the favorite stocks in the Gumshoe universe at least once each year, so too I need to check in with all of our watchlist companies — but first, a trade to note for you:

Among the non-watchlist stocks that I own or have covered recently, I’m tempted to buy more Apple with it getting under $500 again, even though it’s already one of my top couple holdings, and also tempted to buy Invensense (INVN) personally after the price dropped on a weak quarter. But the trade I did make today is that I just sold my shares of Americas Petrogas (BOE.V, APEOF) on a stop loss order — that was one that I had speculated on based on the possibility that the Vaca Muerta shale in Argentina would inspire the big players to throw some money at them, given the somewhat more outsider-friendly talk coming out of the Argentinean government … but with the country trending down again the fears of government seizures or rule changes have hit and perhaps scared off dealmakers. I have never been committed to the stock for real fundamental reasons, it was just a speculation that the sentiment was turning and a big deal might get done as they were shopping themselves, but without any other information to rely on the price is telling me to get out of the speculation at a small loss.

And now, on to updated thoughts on some of our watchlist companies (in alphabetical order):

C&J Energy Services (CJES) — It was clearly a good idea to drop Canyon Services last year and look at C&J instead, largely because C&J was cheaper and was more broadly focused on well services and not just on the oversupplied frac pumping market. At current prices, without having ever gotten around to buying shares myself, I think it’s now a “take profits” sell just based on expectations — analysts see them boosting earnings to $1.50 or so next year, but that means they’re trading at a forward PE of over 15, fairly high for their sector. They were for quite a while cheaper than most, now they’re about the same and growth looks fairly tepid. There is probably opportunity for CJES to outperform given the huge interest in the Cline/Wolfcamp shale and other unconventional areas of the Permian Basin, among other unconventional oil plays, but they disappointed last quarter and have seen estimates come down for next year, which isn’t a great sign. C&J is a really well-run company, and it’s probably a fair price here under $25 if you want to be patient and see them opportunistically build the company over many years, but it was certainly more appealing in the high teens over the Summer so I missed that opportunity to buy. They are in the right place, with a focus on the Eagle Ford and Permian in Texas, but with relatively lackluster growth and a still oversupplied market, according to their commentary in recent investor presentations, it’s hard to argue for a purchase of C&J over a much larger, cheaper, and faster-growing company like Halliburton (HAL).

Clublink (CLK.TO, CLKXF) — I’m taking Clublink off the watch list. It may still end up being an interesting speculation, but at this point I think we’re looking at no real growth, and no growth in the dividend, and a relatively unexciting stock. The company’s tourist railway in Alaska is growing fairly nicely still, and with good margins, but gold memberships and rounds are not growing in Canada, their core territory, and the Florida golf courses are still trying to build memberships. They did buy the Florida golf courses cheap, and the balance sheet is excellent and they’re buying back stock and paying a decent dividend, but my guess is that the stock will be pretty flat for the foreseeable future at roughly $10, and with a 3% dividend and no meaningful growth in their core operations that’s not really worth a lot of attention.

Input Capital (INP.V, INPCF) — I was perhaps too bargain-focused when looking at Input last, saying that it was tough to buy such a new company at a huge premium to the money they had just invested into new streaming deals, because from that point (that was when they were doing a $40 million secondary in the Fall) the stock has done tremendously. In the year since they went public, however, the price of canola has dropped 20% because of the huge harvest expected/happening this year, so that will temper their cash results somewhat (they essentially pre-buy the canola at about $75/ton and it’s still over $400/ton on the open market, so it’s still profitable but they do better with higher canola prices). It’s certainly possible that I’ve underestimated the company, given their strong management and good history in private ag investment over the prior decade, but I don’t think the returns they’re likely to get on existing streaming deals justify a $140 million market cap. I’ve been wrong so far, and I do like the model very much, but I just think this business will end up earning a lower margin than commodities streaming investors have gotten used to in the mining space, and I think the stock has gotten ahead of itself primarily because of the novelty and uniqueness of the stock. At closer to book value it’s a lot more attractive, I’d still prefer to see the shares down around $1.50.

MFC Industrial (MIL) — I’m continuing to be patient with MFC Industrial shares, which I also own personally. They’ve just come through a contentious board battle with Peter Kellogg, a large shareholder, and effectively settled by giving Kellogg’s group two board seats, so I’m curious to see if anything changes about their operations or their plans in the next couple quarters. The company did not move to monetize their undervalued natural gas assets as quickly as I thought they would, I thought it was more likely that they would sell or partner the gas plant they bought back in 2012, but they are getting underway with a partner to develop some of their gas fields and they will process the gas themselves and collect a royalty, so that should start to generate meaningful cash flow soon. They just acquired another supply chain company as they continue to transform themselves into a global materials supply firm (like a junior Glencore), and I still think it’s likely that CEO Michael Smith will create value here as he has so often done in the past, even if he likes to keep his cards close to his vest. Since they continue to do reasonable deals in a down market, and since they pay a decent dividend, I’m still holding this one. Their iron ore business, which used to be a pillar of the company, continues to be weak — if it’s iron ore that you think is compelling about MFC, then go look at Altius instead.

RPX Corp (RPXC) — I’m holding off on RPXC for one more quarter. I’ve never bought it myself, but I have continued to overvalue the stock over the last couple years — the model should be appealing for customers, but their new customer additions have never really snowballed (they’ve added not much more than 25 new clients a year since we covered them two years ago), and analysts seem pretty sure that the growth has now plateaued. They should earn about a dollar a share in 2013 (they report next week), which means they’re trading at about 16X earnings and only expected to grow revenue by perhaps 5%. That’s not enough to be worth sticking with this one, it is quite possibly a reasonable slow-grower, I think the stability of their subscription-based revenue is probably underappreciated, and I still like their patent aggregation and insurance model, but apparently it’s not appealing enough to their clients to drive meaningful earnings growth. It’s still on the list, but if nothing looks more interesting in their next quarterly release I’ll bump it off.

Westport Innovations (WPRT) — I suggested Westport five or six years ago, when it was emerging as a natural gas engine technology company with appealing prospects in the heavy truck business. It has suffered from “overpromise/underdeliver” almost every year since then, with waves of enthusiasm for the story crashing as it became clear, again and again, that the future promise of actual earnings was continually pushed further out into the future. The stock has had two bad years now, so is it finally looking appealing again?

Not really. Every time I look at them when the price is falling I think it should be attractive, but then I look at the financials and the company just can’t generate any kind of profitable volume. Revenue climbs every year, but costs climb too — and often their huge R&D investments mean that costs climb faster — I think there’s a great place for natural gas engines, particularly in heavy trucks and fleet vehicles, but the business case has never caught up with the promise, partly because it would probably take a really strong sustained government incentive program to make natural gas engines and natural gas refueling stations get to the kind of critical mass that could make companies like Westport or Clean Energy Fuels (CLNE) profitable. As investors we continue to look at the potential of, say, the 16,000 heavy drayage trucks in Southern California ports where the air quality concerns are high and think WPRT should get a huge boost in business, but then we note that competitors are selling other solutions there, too, and Westport has probably gotten less than 10% Of that fleet in the five years since they started trying to spur alternative development for that specific market. And that’s with natural gas at bargain prices, and, depending on who you ask, a reasonable business case for switching to natural gas engines even without government subsidies. In five years, WPRT has seen revenue grow by about 120%, but operating costs have grown by almost 400% and the share count has more than doubled. (Westport is again saying that it thinks it can effectively generate an operating profit by the end of 2014, similar to promises they’ve made regularly since 2007). I’m going to keep WPRT on the watchlist, because it’s such an appealing story that I’m sure it will be actively teased again soon, and it may end up working eventually — but it’s not the potential growth stock that I thought was worth speculating on back in 2008, it’s now a “show me” stock that has to do something to get their costs under control or prove the scalability of their business (ie, the potential that they might someday grow revenues faster than they increase their costs) before I can buy it again. It sure looks cheap for folks who remember seeing it at $40 or $50 in past years, and they raised cash fairly recently so they’re not on the verge of going bankrupt or anything like that, but in my opinion it’s not cheap enough to be worth buying just on potential. After this kind of multi-year beating you’d at least like to see the company have some insider buying. Nope, none for WPRT on either the US or Canadian exchanges — though they hand out shares to employees like candy and it looks like the employees often sell them.

Pulse Seismic (PSD.TO, PLSDF) — I think it’s finally getting close to a reasonable price, though would like to see it under C$3.50. 2013 was a bad year and the little price spike at the end of the year seemed misplaced.

The business model is good, they have a lot of recurring value in their seismic data, but what has held me back from buying Pulse personally (and what sent me to TGS Nopec [1]instead last year, for a similar model on a much larger scale) is the very focused territory — they’re really dependent on natural gas in Western Canada, so when gas had a rough year last year and there weren’t a lot of corporate takeovers or actions (which necessitate the new buyer re-buying the seismic data, data doesn’t transfer in corporate transactions), Pulse’s comparables were really bad — substantial drop from 2012 to 2013 in almost every area. Who knows, maybe this year the gas mania will reheat following the price spike and the “polar vortex”, but I’d still look for buying below C$3.50 if possible (it’s around C$3.90 now) and the shares could easily drop below $3 if there’s any sustained market pessimism. It’s a very lumpy business with their participation surveys and their big data sales not being that predictable or steady, and valuing the shares at even $3.50 assumes that something like an average of 2012’s boom year and 2013’s relative bust will be the norm going forward. It’s well-run and high-margin, with good cost controls, so they won’t lose money even in a weak year like last year, which is good, but they look a lot better in a good year. Last year the company got a lot of attention for 2012′s record revenue, but the lack of follow-through on continued revenue increases probably scared a lot of investors away, particularly because 2012’s record revenue was concentrated in a big fourth quarter sale that meant year over year results for the fourth quarter will look lousy. They’re still doing buybacks, still paying a small dividend, still a good cash-flowing company, but the shares are trading for 13X the trailing EBITDA and that’s pretty steep if the earnings aren’t bottoming out here. I don’t necessarily like the business less, but it’s a good reminder of the volatility of their business and I’d want to err on the side of buying cheap — there’s no particular indication from the company that this first quarter is going to provide a burst of enthusiasm.

So what does this tell me? Well, first of all, that I need to keep an eye out for some compelling investment ideas because a lot of the stocks on the watchlist are either not looking so good operationally or are at just ho-hum valuations without much prospect for big gains or tempting buy points … and second, this reinforces my opinion that even after our minor correction in the markets this month many of the stocks I’ve been looking at still look like they’re built on more optimism than I’m ready to stomach. I’m still trying to hold on to a chunk of cash, which is hard for someone like me who tries to be fully invested most of the time, and I’m hoping to have some washouts in appealing stocks to make their prices look more appealing … we’ll see. Have a great weekend!

Endnotes:
  1. TGS Nopec : http://www.stockgumshoe.com/tag/tgs-nopec-tgsgy/

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