Monday, May 24, 2010

Transaction Alert: Bought AHS

When I sold SandRidge Energy (SD) last Friday I used the proceeds to immediately buy AMN Healthcare Services (AHS). I purchased 1200 shares, for a total outlay of about $9,600. The stock is currently at $8 a share, but I think it's worth about $15 to $20.

AHS is a staffing company for nurses and other healthcare workers. They are somewhat economically sensitive, and as a result their revenue fell from $1.2B in 2008 to $760MM in 2009. However, AHS generally produces pretty stable EBITDA margins in the high single digits, for 2008 their margin was 7.9% and for 2009 it was 7.5%.

I expect their revenue to rebound to about $1B within a year or two and probably grow at 5% to 10% thereafter. At $1B in revenue I conservatively expect them to generate about $70MM of EBITDA. With this type of margin/growth profile I think a EV/EBITDA ratio of 10x is quite reasonable, which implies an EV (enterprise value) of $700MM. Their current EV is just over $300MM, so it's really not much of a leap to get to my fair value range of $15 to $20 a share.

From a high-level perspective this new purchase did not alter my portfolio very significantly. I made the AHS purchase with cash from the sale of SD, so I'm still about 30% cash.

Sunday, May 23, 2010

Transaction Alert: Sold SD

On Friday (May 21st) I made the tough decision to sell my shares of SandRidge Energy. I still think the stock is significantly undervalued BUT I'm also concerned there's a lot of downside risk, specifically:

1. A lower outlook for oil prices.
2. High leverage and a diluted shareholder base due to an ill-timed acquisition.
3. My portfolio already has significant exposure to the energy sector.

The SandRidge acquisition of Arena Resources will shift the company's focus to oil and away from natural gas in a significant way. Unfortunately, SandRidge made its bid when the price and outlook for oil was significantly higher - if the price of oil stays at its current level there's a very real possibility this merger will destroy shareholder value. If the price of oil falls further SandRidge could experience financial distress.

SandRidge is a very hard company to value - when I initially purchased the stock my estimate of the fair value was somewhere from $10 to $20 per share. Currently I think it's more like $5 to $15, but there's also a very real chance it could be worth even less. Ultimately, the risk/reward isn't as attractive as it used to be, but I'm going to keep an eye on SD b/c there are still a number of attributes that could make it a good investment.

Thursday, May 20, 2010

Random Musings

A little over a month ago I wrote a post entitled "Feeling Fearful" (which can be found here During this time I sold several stocks (SHLD and USG) and allocated about 30% of my portfolio to cash - in retrospect, it looks like my timing couldn't have been more lucky. Since then, the market has turned decidedly more fearful as the Eurozone mess has drawn an increasing amount of investor attention and oil gushes into the gulf.

Ironically, the oil spill disaster could prove beneficial for some of the stocks I own. A likely consequence of this mess is increased government regulation and decreased offshore drilling in the short to medium term. This in turn could lead to an increase in the price of oil and natural gas (natural gas in particular, b/c it can't be imported from overseas nearly as easily). IF this does indeed play out I'd expect SD, GMXR, and EXC to reap the benefit (SD and GMXR have onshore operations and EXC would benefit from an environment with higher energy prices in general).

On a negative note I expect the call options for FAF to expire worthless. In my initial post I wrote that a broad market sell off could cause this, and of course within a couple days the market began selling off...

HOWEVER, I think any further market sell off could present an attractive buying opportunity. So, with about 30% (about $34K) of my portfolio in cash, I am constantly refining and evaluating my watch list. Current stocks that I find interesting include BAX, APOL, CNX, GENZ, AHS as well as existing holdings SD, GMXR, and EXC.

As always I'll post about any transactions.

Monday, May 17, 2010

Transaction Alert: Exelon LEAPS Part 2

I just bought 10 contracts for EXC January 2012 $50 Calls at $2.00. I previously purchased 10 identical contracts earlier in the month, the only difference being that I paid $2.10. So, now I have a total of 20 contracts for EXC January 2012 $50 Calls.

Transaction Alert: FAF Call Options

On Friday I purchased 2 sets of call options in FAF for a combined outlay of about $2,000. The first was 10 contracts of FAF October 2010 $40 Calls at $1.10 and the second was 20 contracts of FAF June 2010 $37.50 Calls at $0.50. The price of FAF is currently around $35 a share, so both these call options are currently "out of the money."

This bet falls a little outside the realm of normal value investing. FAF is splitting into 2 companies on June 1st, one that focuses on title insurance and another that focuses on information services. My current thinking is that FAF has a fair value of about $50 a share, and my hope is the spinoff will act as a catalyst for FAF shares to appreciate.

The danger with this investment is that it's very short term - so if there's a broad market selloff these options could easily expire worthless. On the flip side, if the market rallies in the near term these options could be worth a lot of money.

In conclusion, this "investment" is 1/3 special situation, 1/3 value investing, and 1/3 luck - my guess is there's a 50% it'll make money and a 50% chance it won't. HOWEVER, if it does make money it'll be 3x to 4x my initial investment, which is why I felt comfortable making the bet in the first place.

Tuesday, May 4, 2010

Transaction Alert: Exelon LEAPS

I just purchased my first option - 10 contracts of "EXC January 2012 $50 Calls at $2.10." In other words, anytime between now and January 2012 I have the right to buy shares in Exelon for $50. Each contract includes 100 shares, and I bought 10 contracts, so my sunk cost in this investment was $2,100 (plus a small commission of ~$11).

Since the contract price was $2.10, I make a profit if the share price exceeds $52.10 (50+2.10). Due to the leveraged nature of LEAPS, for each incremental $1 above this price I make a $1,000 profit! My hope is the economy continues to rebound and both power prices and energy consumption rise along with it. If this happens my guess is EXC could be worth $60 to $80 a share, which would generate a profit of $7,900 to $27,900, respectively - not bad for a $2,100 investment.

On the other hand, there is a decent chance my investment thesis could be flat-out wrong. If this is the case and EXC never gets above the $52.10 threshold then I only stand to lose $2,100.

Saturday, May 1, 2010

Time to lever up?

LEAPS, or Long-term Equity AnticiPation Securities, have recently grabbed my attention. LEAPS are simply a long-term call option, or in other words the right (but not obligation) to buy a stock at some point in the future at a predetermined price.

Here's an example: let's say stock XYZ is being investigated for some alleged wrongdoing. Currently the stock is trading at $100 a share, but it's worth $200 assuming they're innocent. However, if they're guilty the stock is probably only worth $50. If I were to purchase XYZ common stock, based on my current portfolio size, I'd probably buy $10,000 - and I'd either lose $5,000 or gain $10,000.

However, let's say I could buy XYZ LEAPS (expiring 1/2012) with the following terms: a strike price of $150 and a contract price of $5. In other words, for $5 I reserve the right to buy one share of XYZ for $150 anytime between now and 1/2012. If I were to invest $5,000 in XYZ LEAPS I could potentially lose it all if the stock never gets to $150 (which is the same amount I'd lose with the common stock).

But what happens if the stock goes to $200? Well, since I invested $5,000 I have the right to buy 1,000 shares at $150. Since I could immediately sell them for $200, I'd realize a $50,000 profit! So, with LEAPS I'd either lose $5,000 or gain $45,000 (50K profit less the initial investment of 5K).

Obviously this is a very simplistic example - the real world is much murkier. However, the economics of buying LEAPS can be extremely attractive, and in some cases it just makes more sense. I'm specifically looking at Jan. 2012 LEAPS for EXC and MON and as always I'll post about anything I decide to do.