Monday, July 26, 2010

Transaction Alert: Sold DFS Part 2

Today I sold my remaining 475 shares of DFS at a price of $15.49.

After this transaction my cash balance has increased to almost $40K, which is a bit higher than I'd like. Hopefully some new investment opportunities will present themselves, but I also think several of my portfolio holdings are very cheap, so I could always just add to those...

Tuesday, July 13, 2010

Transaction Alert: Sold DFS

The portfolio churn continues...

Today I sold 475 shares of DFS at $15.25. This was only half my position, so I still have 475 remaining shares. I originally purchased DFS in late 2008 and early 2009 for an average price of $10.34.

Sunday, July 11, 2010

Transaction Alert: Bought MYGN, Sold WTM

This is a two part post. Last week was a busy one for me - in addition to buying Seahawk Drilling (HAWK), I also sold White Mountain (WTM) and purchased Myriad Genetics (MYGN).

I purchased 30 shares of WTM on 2/24/2009 for $203.58 and sold on 7/9/2010 for $331.17. While the returns on this investment were good, they weren't significantly different than the broad market, so I can't really call it a win. I still think WTM is undervalued and has a top notch management team, HOWEVER I think there are better opportunities elsewhere. Despite selling my shares, I'm going to keep this one on my watch list.

I purchased 650 shares MYGN on 7/9/2010 for $15.05, and as with most purchases this position is now approximately 10% of my portfolio. MYGN hit its 5-year high in early 2009 in the low 40's, so it's really been quite a fall since then (in fact, the stock hit its 52-week low the same day I bought it). Anyway, Myriad essentially does 2 things:
  • It's predictive medicine products help determine the likelihood that a patient will get breast/ovarian/colon/skin cancer.
  • It's personalized medicine tests allow doctors to customize the treatment received by cancer patients for the best possible results.

This is pretty heavy stuff - predictive and personalized medicine. So why has the stock been hammered?

  • It's not growing as fast as the market predicted and priced. Obviously lowering growth forecasts has a significant impact on valuation, and my guess is many "growth" investors are dumping their shares.
  • There is significant uncertainty around the company's patents, and weaker patent protection could make MYGN vulnerable to increased competition.

My guess is the market is overreacting to these negatives, and as a result the stock has been punished too harshly. Here's my thesis - I think MYGN can grow in the mid-teens for at least the next 5 years, but really it has the potential to grow at this clip for next couple of decades. It's trading at less than 8x EV/EBITDA and a PE ratio of 12x for the ttm - this is VERY cheap for a company with this kind of growth profile. Also, since capital requirements are low, free cash flow is quite strong.

So what are the expected returns? Well, if MYGN grows in the mid-teens for the next 5 years before leveling off, I'd expect the stock to be worth somewhere in the high 20's. If it grows in the mid-teens for the next couple decades then the stock's worth significantly more. Finally, if I'm wrong and the market is right, then the stock is probably fairly valued at today's prices. So, I guess we'll see what happens...

On a side note, my portfolio is now about 25% cash. This feels OK, but I may look to increase my cash allocation in the near future. Afterall, there's a lot wrong with the world - municipal/state/sovereign defaults are all a possibility, deflation could be around the corner, with inflation around the corner after that... As PIMCO's Gross/El-Erian say - we're driving down a bumpy dirt road in the dark without a spare tire...

Transaction Alert: Bought HAWK

This post is a couple days late, so my apologies. On 7/7/2010 I purchased 1000 shares of Seahawk Drilling, symbol HAWK, for $9.10 a share. As with most purchases, this new holding makes up about 10% of my portfolio.

By way of background, HAWK is a shallow water offshore drilling company in the Gulf of Mexico. They became a public company in August 2009 after being spunoff from Pride International. In addition to the typical market inefficiencies that can accompany a spinoff, the BP Gulf disaster has contributed to make the price of HAWK shares very very cheap IMO.

I've been following HAWK since it was spunoff almost a year ago, and as a result I stumbled upon an excellent blog, Greenbackd's analysis of HAWK is perhaps the single best write up I've ever seen on a blog - this is serious stuff here, in fact it's more insightful and intelligent than just about any Wall Street report I've read (and I've read quite a few). So, rather than try to do my own write-up (which would pale in comparison), I'm just going to link to Greenback'd's.

The above links are a long read, so here is a summary of the most pertinent information I used to make my decision:

  • HAWK is probably worth $154 MM in a forced liquidation scenario where it's rigs are sold as scrap. However, even in this type of scenario the rigs would probably be sold as operational, in which case the liquidation value is probably closer to $300 MM. (As of 7/9/2010, at a stock price of $10.71, HAWK had a market cap of $126.6 MM!!)
  • In the good old days (2006 to 2008), HAWK generated a pro forma net income in the $150 MM range on an annual basis. It probably won't ever get back to those results, but given it's PE ratio is less than 1x peak earnings shows how cheap the stock has become.
  • On July 29th, an 8K was filed that basically said the CEO and board members wouldn't receive a cash salary for the rest of 2010, but rather they would get an equivalent amount of restricted stock based on the June 25th closing price - so effectively they're "buying" a huge slug of stock. However, what's so interesting about this isn't the stock "purchase," but rather the timing - ALL of the stock is being awarded at the June 25th price (as opposed to a monthly price). If I were to read between the lines my guess would be management thinks the stock is CHEAP and it's NOT going to stay this cheap for long.

So, that's basically my investment thesis boiled down to a couple of bullet points. In a way, HAWK reminds me of my experience with USG. I purchased USG in March of 2009 when the outlook couldn't have been bleaker for the home builder supply industry. Things didn't get materially better, BUT the outlook went from bleak to slightly-less-bleak, and the stock went from a purchase price of <$5 to a selling price >$21 over my 13 month holding period. Will HAWK do the same? (Obviously I have no idea, but I've placed my bet!)

Tuesday, July 6, 2010

My Returns as of Q2 2010

I started 2010 with $107,514 in my portfolio and finished the quarter with $101,294. I didn't make any deposits or withdrawals, so the decrease in value was driven by a decline in aggregate of my stocks.
  • On an absolute basis, my portfolio declined 5.8% during the first two quarters of 2010. Annualized, this rate of return is -11.3% (although negative, this is still slightly better than the S&P).
  • I've been tracking my returns for 4 years and 6 months, during which time my annual rate of return is 13.4%. Over the same period the S&P returned -1.9% annually. In other words, over 4 and half years I've outperformed the S&P by over 15% annually.

Obviously, beating the S&P by 15% every year is quite good. HOWEVER, as I've said before, I have a very concentrated portfolio - a few good picks can make a huge difference in performance - so I still have no idea whether I'm just lucky or if I'm doing something right...