Am I Blown Away by Pattern Energy Group?

I seem to have a fascination with power, especially when it comes to the stock market. Oil, natural gas, solar power… it doesn’t matter. If it generates electricity, I’m there. Yet there are some segments of the energy market that I haven’t really looked at, but deserve my attention. Let’s talk about wind power. Around 4 to 5% of US energy is generated by wind, and that number is only slated to grow. As a percentage of total power, wind is the fastest growing source worldwide. Wind is clean, renewable, and powerful. I can testify to the powerful part. Last week I had some shingles blow off my house in a windstorm. Wind can also be a hassle, it seems.

I’d like to take a moment to talk about all the ‘green’ energy I seem to be particularly interested in. With my positions in First Solar (NASDAQ: FSLR) and 8point3 Energy Partners (NASDAQ: CAFD), and my newfound interest in wind power, it might be easy to view me as an ‘eco-friendly’ investor, primarily concerned with the planet, trees, and little furry animals. Now I’m all for the planet, trees, and little furry animals, but rest assured, when I’m investing, the only green I care about is money. Cigarettes? Coal? Handguns? Telemarketing? (Well, maybe not telemarketing) I don’t mix my politics with my investing. If I think there is money to be made, legally, then I’m in.

And here’s the thing; I believe there is a real future for renewable energy in this country, and the world. A lot of people think President Trump will be bad for renewable energy. Maybe, maybe not. But that perception, right or wrong, might well create a long-term opportunity for those prepared for it.

That brings us to Pattern Energy Group (NASDAQ: PEGI). Pattern Energy is a yieldco that owns partial interest in 17 wind farms in the USA, Canada, Puerto Rico, and Chile, and has agreed to acquire an 18th from Pattern Development. PEGI owns 100% interest in 7 of the farms, the rest they own between 33 and 82% interest. Pattern Development actually builds the wind farms, and ‘drops’ them down to Pattern Energy through a ROFO pipeline (Right of First Offer). Pattern Development, which is not publicly traded, owns around 20% of PEGI, thereby aligning the 2 company’s interests. This is somewhat similar to First Solar’s relationship with 8point3 Energy Partners, though PEGI seems more open to acquiring projects from 3rd parties. PEGI turns around and sells wind energy from these projects to creditworthy counterparties, mainly energy companies, via long term power purchase agreements.

Pattern Development seems to be on the hunt for projects as well. Remember SunEdison? In 2016 Pattern Development acquired development rights to the proposed 600 megawatt King Pine Wind project in Maine, from SunEdison. PEGI will have ROFO if the project is developed and sold by PD. It seems PD has a opportunistic streak, which could be a very good thing for PEGI.

Another positive is that there are several solar projects on their ROFO list, though they don’t own any as yet. Also interesting are the 4 ROFO properties located in Japan, at least 2 of which are solar. There is the opportunity to diversify by energy type as well as geographically.

As I write this, PEGI is at $20.79, and yields 7.85%. The dividend has a short history, but the company seems set on growing it over time. Take a look at their latest investor presentation HERE.

But as with any investment, there are risks. I get the impression that PEGI is not quite as conservative as 8point3 Energy Partners. I believe PEGI will be more aggressive in the future, but of course the risk is that they could overextend themselves. There’s no free lunch in this game. Also, being a smallish company that isn’t really covered very well, there isn’t a lot being written about it. If I buy in, I have to believe in the story and basically be patient. I’ll keep up on what’s out there, but there probably won’t be much. What IS coming up is the 2016 year end earnings and conference call, on March 1st.

Another thing to keep an eye on is a recent disclosure about a problem with an internal control involving financial accounting… whatever that means. It SOUNDS bad, but it seems like everything is on the up and up. Of course there are lawyers all over it. It’s something to monitor, but my totally unprofessional opinion is that not much will come of it.

I don’t like much in this all-time-high market, but I do like yield. The traditional thinking is that the coming higher interest rate environment will be bad for high yielding stocks, as investors seek the steady safety of bonds. I’m not overly concerned with traditional thinking on this point, although debt becoming more expensive could be an issue for a company like PEGI. But companies with high yield that I believe is sustainable? I am comfortable starting a position now, and buying more if/when it sells off. I believe PEGI is such a company.

As always, feel free to look at my portfolio and see how I’m doing. Usually I own or plan to own stock in many of the companies I write about. Specific numbers I reference may not be completely accurate; different online financial sources often have somewhat conflicting information. Verify information via multiple sources you trust. Please READ MY DISCLAIMER. Do not take action in the market simply because of what you read here. I write about what I am doing and what I think, I am not advising anyone to do anything. Make your own decisions, do your own research, and never rely on any single source for information. Some of my ‘picks’ and strategies WILL lose money, that’s the way the market works. I am not a financial professional; do not rely on me as such.

Thank you,

Michael, the Stock Picking Bartender,

Reno, Nevada

Apparel Retail: Catastrophe or Opportunity?

As those of you reading along know, I’ve been having trouble finding anything to get super excited about in this market. I like to buy things that are undervalued, and I just don’t see a lot of things that interest me. I’m mainly keeping an eye on companies that I like, waiting for the market to take a dive so I can swoop in with my large (percent wise) cash position and make out like a bandit. That’s the plan.

I’ve also been looking at companies that have not really participated in the recent good times on Wall Street. There are some parts of the market that have been downright horrible the past few months. I’ve been looking into clothing retailers, mainly department stores. I have a history in retail myself. I owned a large thrift store for nearly 10 years. Retail is a different animal than anything I’ve covered here on my blog before. Unfortunately, my little one shop operation doesn’t really give me a lot of insight on investing in large, publicly traded apparel companies. I never had to report same store sales to my (nonexistent) investors. I didn’t have to answer analyst questions on a quarterly conference call. What I did do was a lot of hard work. Which is also what I’ve been doing to get up to speed on investing in retail companies.

By now we’ve all heard about the ‘death of retail’. Amazon (NASDAQ: AMZN) is crushing traditional brick and mortar retailers. Malls are basically dead. People only go to stores to look at merchandise, maybe try it on, then order it (probably from Amazon) right from their smartphone before they get out the door. A lot of that is actually true, in my humble opinion. But I also believe that most forms of traditional retail are here to stay. And if that’s true, they are worth something.

Other than negative sentiment, I’m looking for safety. I’m generally looking for companies with stable balance sheets that pay nice dividends that aren’t going to be cut. One thing I’m learning is that most retail businesses don’t seem to keep a lot of cash on hand relative to their liabilities. That’s something that would usually bother me, but I guess that makes sense. Retailers use that cash to buy inventory, and rely on turning it for cashflow. So I’ll have to be a bit lax on that aspect of the balance sheet.

Another thing I’m looking for is an online presence to compete with Amazon. No small task, that. But EVERYONE has an online presence, so I’m looking for management that is taking it seriously.

One company that I’m interested in is DSW Inc. (NYSE: DSW), a shoe retailer. I’m already invested in Skechers (NYSE: SKX), which is a shoe retailer, but I consider them a shoe manufacturer first and foremost. Now before anyone gets the idea that I have some weird fascination with feet, let me tell you why I like the idea of a shoe retailer in this modern age. Who buys shoes online? Ok, a lot of people, my wife included. But, really? Unless I was going to order the EXACT same shoe from the same company, that I already knew fit, I would NEVER order a shoe online. I just can’t wrap my head around it. My wife probably gets around 50% of her shoes online, and has to return (or wants to but doesn’t because it’s too much of a hassle) about 1 in 4 of them. I honestly don’t understand that mindset, but whatever.

In early 2016 DSW bought Ebuys, an online footwear and accessories retailer. They offer hassle free returns at their 500 or so U.S. based DSW stores, as well as a successful ‘buy online, pickup at a store program’, which makes sense to me. Order online to get exactly what you want, go to the store to try it on, and if it isn’t what you want, BOOM, return it right there. And you happen to be in a shoe store, while you’re in the market for shoes… seems like a good idea to me. This company seems to have the online/brick and mortar thing figured out. They should complement and feed off of eachother.

DSW has had issues with same store sales lately, and they expect that problem to continue for the current quarter, though their revenues continue to grow. Their inventory numbers are also getting better, meaning they might not have to discount as aggressively going forward as they have in the recent past, which could mean better margins. The revenue growth seems to be coming from opening new stores, which I’m of 2 minds on. More stores is great if they work out, but right now closing stores seems to be in vogue for a lot of the bigger retailers, as we’ll see below. So it’s risky.

One thing I really like about DSW is the dividend, around 4%, and the fact that they’ve been buying back stock. The buybacks tell me that their dividend is pretty safe. Financially this company seems fine. While there are risks to the company’s strategy, I feel as though the negativity is overblown. I’m thinking of starting a position soon.

I’m also interested in Macy’s (NYSE: M). First of all, let me say that I REALLY dislike Macy’s. Pretty much every woman I’ve ever been involved with has dragged me through multiple Macy’s, multiple times. I’ve seen people accosted by perfume sprayers, and have often wondered how they can get away with that. Blatantly ridiculous, if you ask me. Macy’s is not my kind of shopping experience, but I’d be happy to make some money off the stock.

Macy’s has been experiencing sluggish sales and earnings the past few years, and has suffered from a disappointing holiday season. Same stores sales have been declining for seven straight quarters. The current big news is their plan to close 100 if its 870 stores, 68 of which have been identified. This of course involves the elimination of thousands of jobs. Macy’s will redirect effort and capital from these underperforming stores to better performing stores and their already successful online business.

Macy’s plans to open more Backstage stores (think discount) within existing stores, as well as BlueMercury beauty outlets. Another thing Macy’s has going for it is real estate ownership. Many investors are pushing for the company to spin-off the real estate holdings into a separate investment vehicle. The company has partnered with Brookfield Asset Management (NYSE: BAM) to look into their real estate options. I honestly don’t know if that is a good idea or not, but the fact that they own enough real estate for it to be an issue makes me feel good about the stock. Some of the locations that are closing will be sold, generating cash for the company.

Another good thing is that the stock offers around a 5% dividend that looks pretty safe, especially considering the upcoming real estate sales. There is also an ongoing stock buyback and talk about debt repurchases. Despite the company’s current problems, I don’t see any major financial issues cropping up.

2-2-17 UPDATE: The day after this post, I started a position in Macy’s at $28.84

I’m also keeping an eye on Kohl’s Corporation (NYSE: KSS). Much of what I’ve written about Macy’s is practically interchangeable with Kohl’s: similar stable dividend, nice buybacks, etc. Kohl’s doesn’t have the same real estate buzz, so the factors in play are different. Kohl’s is also closing stores, though not nearly as many as Macy’s. One thing I like about Kohl’s is their aggressive customer loyalty program. I’m more inclined to buy Macy’s at current prices, but KSS is one to watch.

There’s no question that traditional apparel retailers are up against a tech-savvy consumer with changing buying habits. Some won’t make the transition, some will. I believe that negative sentiment for the future of these 3 companies is overblown. Could it get more overblown? Sure. But I’ve listened to conference calls for each of them, and I don’t get any sense that these are doomed companies. All are relatively near points where I plan on starting to buy, but the key word here is ‘start’. I realize that they could continue to go down, at which point I will buy more. As with most of my purchases, my first buy is more or less 25% of a planned position; I’m giving myself room for more downside. I welcome it, in fact.

As always, feel free to look at my portfolio and see how I’m doing. Usually I own or plan to own stock in many of the companies I write about. Specific numbers I reference may not be completely accurate; different online financial sources often have somewhat conflicting information. Verify information via multiple sources you trust. Please READ MY DISCLAIMER. Do not take action in the market simply because of what you read here. I write about what I am doing and what I think, I am not advising anyone to do anything. Make your own decisions, do your own research, and never rely on any single source for information. Some of my ‘picks’ and strategies WILL lose money, that’s the way the market works. I am not a financial professional; do not rely on me as such.

Thank you,

Michael, the Stock Picking Bartender,

Reno, Nevada

2016 in Review

I know we’re well over a week into the new year, so I may be a bit late for the traditional ‘year in review’ post, but as you might expect, the holidays are a hectic time in the casino bar biz. So after getting my butt kicked at work for a couple of weeks, I got a few extra days off. So here we are.

What was 2016 like for me, as an investor? It didn’t start off very well. February was my lowest point in this investing/blog project, down over $700. But overall the year was very good. Since that low, my profits more or less shot straight up for the rest of the year. I beat the market by a wide margin in 2016, which is even more impressive considering that I usually had more than 50% of my portfolio in cash. Toward the end of 2016 I got increasingly nervous about the market, selling many of my positions. I ended the year with about 75% cash, and even bought a few put options which I still own. Below I have a chart of all my current positions, and everything I sold in 2016. The charts are to the current date, so we can see if those sales were timed correctly or not. SPOILER: It’s a bit of a mixed bag, but I’m generally pretty happy. I’ve written a piece on most every company listed below, so I’m just hitting the highlights here.

 

CURRENT POSITIONS

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Here we have Chesapeake Energy (NYSE: CHK), the first thing I bought, and I’m still holding. I may be down 18%, but that’s nothing. At one point I was down about 83% on this. I can do 18% standing on my head. When CHK hit $1.50, being down 18% would have seemed like a distant fantasy. But as you can see, Chesapeake is clawing its way back. The company is slowly taking care of its debt problems, and I think the future of natural gas is bright. I’m holding this one long term. It may well go back down some before heading higher, but I’m a believer.

 

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8point3 Energy Partners (NASDAQ: CAFD) is a company I’m really excited about. I’m excited because it’s kinda boring. It owns solar projects and collects money from long term contracts on those projects. It plans to slowly grow its already nice dividend over time. I like the solar industry, and I plan on holding this a long time as well. In fact, I’ll own a lot more if the price goes significantly below my lowest buy point. If it hit single digits maybe?

 

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First Solar (NASDAQ: FSLR) is another solar company I am really excited about. I made money on it in 2015 and got back in when the price plummeted after I sold out. Well, it kept plummeting. I hope it plummets some more! Everyone seems to think 2017 will be a tough year for the solar industry, and that may be true, but FSLR has a great balance sheet and a management team willing to make tough, long-term decisions. I’m down now, but not worried one bit. People say a Trump presidency will be bad for the solar industry. I say bring on the negativity.

 

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Skechers (NYSE: SKX) shares were hit a few months ago on fears of slowing domestic growth. I love the shoes, and the company seems great as well. So far the timing of my first buy point seems really good, though as with most things I own, I’m willing to buy more if the price goes lower. I believe Skechers will continue to be a force in the shoe industry, and not a fad stock. Time will tell.

In late November I bought my first option for my investing/blog project. I bet against CSX (NASDAQ: CSX), a railroad company. The puts haven’t done much, but they are good until January, 2018.

 

POSITIONS CLOSED IN 2016

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PayPal (NASDAQ: PYPL) was a decent holding for me. I could have sold it for a bit more had I waited, but overall it hasn’t really done much since I sold it. I got out because I believed the market was overheated, though of course the market has risen quite a bit since I sold. I like the company, but obviously not at these levels.

 

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I’ve had several successes in 2016, more so than failures, but Energy Transfer Equity (NSYE: ETE) is what ensured that I beat the pants off the market even while usually maintaining over 50% of my portfolio in cash. When I sold at $18.25 and it went down to around $14 over the next couple of months, I was feeling pretty good. If I had stuck with it I’d have been even better off. I can’t complain.

 

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Ambarella (NASDAQ: AMBA) is perhaps my ‘best’ trade from a technical standpoint. My entry points were great, my exit was very timely, and the stock has been weak ever since. I certainly believe in the long term viability of this company, and am considering buying in again soon on any further weakness. This is another well managed company with a great balance sheet, and I think it’s worth owning long term.

 

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I’m going to give the ‘missed opportunity of the year’ award to Baker Hughes (NYSE: BHI). I never felt I understood this company in quite the way I understood my other investments. I think it’s because they didn’t have webcasted conference calls for awhile because of the proposed buyout from Halliburton (NYSE: HAL). Conference calls are so important to my understanding of a company. I liked the business they were in, I liked the money they were going to get from HAL if they didn’t get bought out, and I liked all of the negativity. I made a profit, but at the end of the day I simply didn’t understand things well enough to stay in, and got out too soon. Oh well, as far as mistakes go, I’ll take it.

 

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Speaking of mistakes, here’s one I’d rather have not made, although it wasn’t really that bad. Daktronics (NASDAQ: DAKT) makes large digital signs, stadium scoreboards, that sort of thing. This was an early pick of mine, but it slowly bled away after I bought it. The problem here was that this was such a small company that there really wasn’t much to keep track of. I go to several financial websites to keep track of articles about each of my positions, and all of the companies that I’m following. DAKT was such a small company that aside from a few dry newswire type reports, there was hardly ever anything being discussed or written about the company. I kept watching the price go down, and didn’t have a good understanding of why. So I sold for a loss, while I should have had faith in my original plan and bought more. It would have turned out very well. I want to invest more in small companies, so I have to work on a system to do that. Live and learn.

 

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Mattel (NASDAQ: MAT) is another position that looks pretty awesome from a technical standpoint. Mattel was struggling from revenue problems, especially in its Barbie line, and negativity had gotten overblown. I believed in the turnaround story and bought in. Pretty soon everyone and their brother seemed to believe in it as well, so I got out. It didn’t really do a lot for awhile after I sold, but it’s been in a slight downtrend for months. If it returns to the lows, I’d buy more. But I believe that at the current price, it’s overvalued. If it got much higher than where I sold it, I’d consider buying puts.

So that covers it for my 2016. The year gives me some confidence that how I do things works, but what about 2017? I’ll be honest, I’m nervous about this year. I don’t think things are as good as the market makes them out to be. People have asked me if the election changes my views on the market, and I’d have to say no, not really. I felt this way before the election, and I don’t think either possible outcome would have made me feel any different. The market seems to like the Trump win, and that’s fine. And while I know that there is a definite possibility that the market goes up from here, perhaps significantly over Dow 20,000 (as of this writing it’s ALMOST made it), I believe there is a significant correction coming sometime soon. When? Well, if I knew that I’d be dating a supermodel, probably several.

So how do I handle 2017? Simply sit on my cash like I seem to be doing now? Buy put options on everything and hope for a crash? That might turn out to be exactly right, who knows? My general plan is to be extremely cautious and only go long on stocks that are DEEP values, and buy a few long-term put options here and there on things I feel would be worst hit in a market downturn. Sounds simple right? I found myself in some pretty sweet deals in 2016, and it would be easy to look back and oversimplify them, or feel that I have the ‘golden touch’. Buy ETE at $6.75 and $4.85, then sell a few months later at $18.25, all while collecting a few dividend payments? Cake.

But I have to remember the hard work I put into understanding what I was getting into, and the sweat dripping off my brow as I bought things that were falling like rocks. I have to keep my perspective. If it were really that simple, then I have a fool’s luck to thank for my success in 2016. Rely on that, and it’s sure to run out.

As always, feel free to look at my portfolio and see how I’m doing. Usually I own or plan to own stock in many of the companies I write about. Specific numbers I reference may not be completely accurate; different online financial sources often have somewhat conflicting information. Verify information via multiple sources you trust. Please READ MY DISCLAIMER. Do not take action in the market simply because of what you read here. I write about what I am doing and what I think, I am not advising anyone to do anything. Make your own decisions, do your own research, and never rely on any single source for information. Some of my ‘picks’ and strategies WILL lose money, that’s the way the market works. I am not a financial professional; do not rely on me as such.

Thank you,

Michael, the Stock Picking Bartender,

Reno, Nevada

So Does This Make Me A Silver Bug?

I’ve been looking to expand my knowledge in the financial world, and I’ve stumbled upon precious metals. More specifically, silver. Where did I get the idea to look at silver? I listen to a lot of talk radio, not always voluntarily, and these shows are always advocating buying gold, mainly because they’re paid to do so. ‘Buy gold from this company, it’s the only gold company I trust.’ Hey, everyone’s got to make a living, but this isn’t where I get my financial advice. I’m sure these companies were paying them to advocate gold in 2011, when gold topped $1800. It’s now around $1130.

I recently heard a commercial from a local coin/silver dealer, talking about buying silver directly from his store, and I though ‘wow, what an inefficient way to invest’. I buy it from him, at a premium, of course. And when I want to sell it back to him, he buys it at a discount to the current price. Ok, everyone’s still got to make a living. But it got me thinking how I could invest in silver without having to store the actual metal. Although owning some metal would be kinda cool, and probably a good idea, I’m not really focused on that right now. I do have a couple of nice gold coins that I wanted to sell a few years ago when gold was much, much higher, but my wife (sorry ladies, I’m taken) wouldn’t let me. Oh well. So how to invest in silver via my trading account?

An exchange traded fund, of course! iShares Silver Trust (NYSEArca: SLV). This ETF buy’s silver and sits on it. They own nearly $6 billion in assets, namely over 10,000 tonnes of silver. It doesn’t pay a dividend, nothing is actively managed, it just holds silver and tracks its price. In fact, if silver does nothing, you’ll lose money slowly over time because of the 0.5% fee. Hey, nothing’s free. But if I buy in, I’ll want a good reason. Let’s talk about silver.

If you look at a 20 year chart of silver prices, you’ll see the first third of the chart was pretty boring: low $4’s to low $5’s, per ounce. The middle is a rocky climb to the high teens. The last third more or less starts with a high in the mid $40’s in 2011 and falls off to about $14 in late 2015. Over the past year it’s gone up to about $20, and back down to where it is now, around $16. People have made a big deal out of the rise to $20 this year, but on a long-term chart it doesn’t look like that big of a deal. Silver is in a long-term bear market.

So what is silver good for? Like gold, silver is used in jewelry, and as an investment vehicle (think coins and bars). But more so than gold, silver has a very wide range of industrial uses. I won’t go into too much detail here, but silver has some interesting electrical and antibiotic qualities that are in demand. For one thing, silver is used in solar panels, and anyone following along knows I love the solar industry. Over half of the global demand for silver is industrial. This might tie silver to the economy more so than gold, but demand is demand.

So how else to play silver? Miners of course! I have my eye on three companies. Pan American Silver Corp. (NASDAQ: PAAS) is headquartered in Canada, and has most of its operations in South America. First Majestic Silver Corp. (NYSE: AG) is also headquartered in Canada, but focuses on silver mining in Mexico. Hecla Mining Company (NYSE: HL) is headquartered in Idaho, and is the largest sliver producer in the US, but it also deals in gold, and is the third largest zinc producer in the country. It’s a little more diversified than the first two companies.

Why do I like these three over the many other publicly traded silver miners? Mining is a very capital intensive undertaking, and these companies have decent balance sheets. (There are a couple of others on my radar, but at the end of the day you can’t get too detailed about everything, all the time.) Mining companies are notorious for financial problems, and that makes sense considering that their revenue is so closely tied to commodity prices that they have almost no control over. And those problems are good for the last company I’ll be talking about in this article.

Silver Wheaton Corp. (SLW) is precious metals streaming company headquartered in Canada. Well what exactly is a ‘streaming company’. When we’re talking about precious metals and mines it’s a very intriguing concept. The first important fact is that most silver mined in a given year doesn’t come out of ‘silver mines’. Most silver ‘produced’ is a byproduct of mining copper, lead, zinc, etc… So say you have a copper miner that’s in financial trouble, or in need of funds to expand, or simply needs funds to open in the first place. That’s where Silver Wheaton comes in. SLW will provide money (or SLW stock) upfront, in exchange for the right to buy a percentage (sometimes 100%) of a mines silver production at a set price for a set time (usually the entire life of the mine).

The typical price they purchase silver at is $4 to $6 an ounce. Silver is about $16 at the moment. They also enter agreements with miners for gold, though to a slightly lesser extent, with a typical buy point at around $400 an ounce. They have agreements with 22 mines currently in operation and 8 that are in development. So basically they are paying upfront for future production at a set price that is WAY below the price most anyone believes precious metals will ever hit. This means that SLW is HIGHLY levered to the price of precious metals. Silver Wheaton has an excellent presentation of their business model, including more nuance than I have described here, at their website. Check it out.

Streaming companies have the advantage of being tied to precious metals, but are perceived to have less risk than miners. They aren’t out exploring for metal, and they aren’t hiring people to go down into dangerous holes in the ground. They aren’t taking all the risks that miners are. That said, there is risk involved. By paying out money upfront they are making an investment in each mine they are involved in, and investments can go sour. Workers can strike, mines can be depleted, and political volatility can hurt production, but in my view these issues aren’t so much of a problem. Their investments are spread out in multiple countries across three continents, as well as multiple mining companies. There is risk, but I believe the real risk is their overall average upfront costs vs. the future of precious metals, especially silver. On the surface the business sounds amazing: pay $5 for something you can turn around and sell for $16, but remember their upfront cost. They are competing with other streaming companies, as well as other sources of capital. Mining companies have other options. Any upside in SLW will be from an increase in precious metal prices AND smart deals made in the past. Another risk to touch on is an ongoing dispute with Canada’s version of the IRS over income generated from foreign mines. This issue has been around for years, but it deserves attention.

In the past 5 years, the SLV chart has been all over the place, from a high of over $40 to a recent low of around $10. It’s currently about $17.50. Last quarter’s results were released in early November. The market didn’t approve, even though year over year revenues were up over 50%. I’m thinking of starting a position soon on any significant weakness from here.

So what’s my overall silver strategy? I’m not looking to turn a quick profit here. While my recent performance has given me some much-needed confidence in my abilities and strategies, I understand that people have speculated in precious metals since way before there WAS a stock market, and a good deal of them lost their shirt. I’m seeing this as more of a long-term proposition. If I start to buy silver related stocks, and silver goes down, I’ll buy more and hold. Pretty much the same strategy I tend to use for stocks. But silver being what it is, it might take longer. There are people out there saying silver is dead because of the strong dollar, interest rate increases, low werewolf population, whatever. I like how the chart looks. And right now, it’s kind of a crazy world. (Ok it always is, and there are always people more than willing to shout it from the rooftops, but you get my point.) I think people will bid silver up once they start to worry about it more. Let silver go down to the more recent lows, and I think I’ll grab some, probably through SLV and SLW, though I may throw a pure miner in there as well.

As always, feel free to look at my portfolio and see how I’m doing. Usually I own or plan to own stock in many of the companies I write about. Specific numbers I reference may not be completely accurate; different online financial sources often have somewhat conflicting information. Verify information via multiple sources you trust. Please READ MY DISCLAIMER. Make your own decisions, do your own research, and never rely on any single source for information. I am not a financial professional; do not rely on me as such.

Thank you,

Michael, the Stock Picking Bartender,

Reno, Nevada

Betting Against CSX?

CSX Corp. (NASDAQ: CSX) is a relatively easy business to understand. Ever play Monopoly and buy up all the railroads? CSX is in the business of transporting goods via train on its vast network of track in the eastern United States. Around 21,000 route miles of track in 23 states, and extending into parts of Canada. Not too difficult to understand what’s going on here, but why am I looking at CSX?

A few of my latest posts have been about looking for something to short (via put options). The problem is, while the market jumped to all-time highs (or near all-time highs depending on what index you favor) after Trump’s victory, the things I’ve considered betting against haven’t done that well. Which would be fine if I HAD bet against them, but I haven’t yet. I was, and still am, waiting for higher stock prices to buy my puts against. So I got to thinking, what WAS making new 52-week highs lately. To my surprise, CSX was on the list. I’ve never seriously looked at the railroads before, but I’m always reading about what’s going on in the market. For the longest time I’d heard about how the rails were hurting because of the decline in coal shipments. Coal is some pretty nasty stuff, and apparently we aren’t going to be using as much of it going forward. So why is CSX on the new high list?

On November 9th, CSX presented at Baird’s 2016 Industrial Conference, laying out its long-term strategy and updating its fourth quarter 2016 guidance. Now, keep in mind that as I write this, the stock is at a 52-week high of about $34.60, and the highest it’s EVER been was $37.99 in late 2014. Here’s one piece of what was said during the presentation. (It’s available via webcast online, and is highly recommended)

In the fourth quarter, they expect an 8 cent EPS impact from costs associated with refinancing near term debt. The company expects earnings to reflect prior guidance of flat to slightly down, if you EXCLUDE the 8 cent hit. So here’s how I see this. It’s going to cost them 8 cents a share to refinance their debt, which will obviously mean that their EPS isn’t going to be as good. But if that hadn’t happened, their earnings would be consistent with prior guidance. (Similar or perhaps down a little from last year) Does that sound like a company that should be on the 52-week high list? ‘Oh yeah, it’s gonna cost us to repackage this near-term debt, but if we didn’t have to do that, we’d make the same or a little less than this time last year.’ Hummmm…

They also talked about transitioning away from coal, toward more service-sensitive and international markets. There was talk of the CSX of Tomorrow, but not a lot of detail on it. They did estimate that over the past 5 years they’ve lost $2 billion in revenue due to the decline in coal, and they weren’t too hopeful about a near term recovery.

They did, however, talk about cost cutting and efficiencies. Train length has grown 20% since 2014. They talked about reduced labor, fuel efficiency, technology, predicitive analytics, etc… Over the past few years revenue has stalled, as well as earnings, but cost cutting and efficiency improvements are going to lead the way? Does that sound like a company that should be on the 52-week high list? Ok, so I’m a little skeptical.

I listened to their Q3 earnings call, held in October, and wow. Revenue declines (8% vs prior year!), earnings declines, volume declines, coal declines… Just like the Baird Industrial Conference, there was a lot of talk about efficiency. Here are a few snippets from the call. I would encourage anyone interested to listen to the call to get the full picture of what’s going on.

“…we continue to see a soft but stabilizing industrial economy with volume down year-over-year…”

“…Chemicals will be down with continued weakness in drilling related products, especially crude oil due to low crude oil prices and unfavorable spreads…”

“…Domestic coal will again be down, however, in the fourth quarter we will cycle the start of the pronounced market weakness, which took hold in the fourth quarter last year…”

There were a few points where they talked about upcoming easier comps for specific business metrics, which I took to mean that in the past things looked so bad that their current mediocre forecasts look almost good.

Ok, I’m obviously focusing on the negative here. They talked about positive things as well. But most of the ‘good’ were cost and operational efficiency improvements, things that any company should be focused on all the time. It seems to me that the market has priced in a strong near term recovery in CSX, a recovery that I just don’t see evidence of. I believe if the company falters, or if the overall market does, this stock will be hit hard. Very hard.

What are the risks? Well, it sounds like CSX is working hard on these efficiency improvements. What if the economy takes off? What if they get a lot of business? They could earn a ton of money if they generate more revenue. It could happen. I have an order in betting it doesn’t.

As always, feel free to look at my portfolio and see how I’m doing. Usually I own or plan to own stock in many of the companies I write about. Specific numbers I reference may not be completely accurate; different online financial sources often have somewhat conflicting information. Verify information via multiple sources you trust. Please READ MY DISCLAIMER. Make your own decisions, do your own research, and never rely on any single source for information. I am not a financial professional; do not rely on me as such.

Thank you,
Michael, the Stock Picking Bartender,

Reno, Nevada

My First Short?

I have to admit to being a bit lazy when it comes to the market the past three weeks or so. Why? A number of reasons. First, I was using an old computer that would barely browse the internet, and my new, custom computer was delayed a couple of weeks because of some week long holiday in China. I was at the point where my old computer couldn’t handle having a couple of tabs open in Firefox, and keeping track of the market was a huge pain. I kept on top of my positions, but I didn’t do a whole lot more than that.

I’ve had my new computer almost a week now, and I’ll even admit to some binge PC gaming since I got it up and running. I hadn’t been able to game for a couple of years on my old PC, so who can blame me? I mean, the PC provides the ultimate gaming experience, right? But you’re not here for my controversial gaming opinions. In a slightly more market related note: I bought Office 365, and so far I’m very happy with it. My rather complex 2003 Excel file that I use to keep track of all my market related activity converted without a hitch.

So what about the market for the past few weeks? Boring, if you ask me. Some of the stocks I’ve talked about recently have come down to attractive levels, like Cal-Main Foods (NASDAQ: CALM), and The Mosaic Company (NYSE: MOS). I even started a position in Skechers U.S.A., Inc. (NYSE: SKX) last week, but I’m very cautious about the market right now. I’m hesitant to buy anything else until I buy SOMETHING on the ‘short’ side. Still, further significant weakness in any of those three names would be very hard for me to resist. Meanwhile, most of the stocks and ETF’s I’ve been keeping track of for the purposes of buying put options have gone down slightly over the past few weeks, so no excitement there.

While I don’t see anything I want to buy puts in RIGHT NOW, I am taking a very close look at KraneShares CSI China Internet ETF (NASDAQ: KWEB). What if there is a very significant market correction in the near term? China is usually pretty volatile, internet stocks can be as well. Chinese internet stocks? Sign me up on the way down.

So what’s in KWEB? Around 12% of the ETF is Alibaba Group Holding Limited (NYSE: BABA), China’s E-Commerce giant. Tencent Holdings Limited (0700.HK) takes up 10%. Trancent is an investment holding company with subsidiaries in a lot of economic sensitive sectors such as media, advertising, entertainment (including gaming), as well as mobile phone services. I’m sure there in a lot of other things as well, but I’m not getting into too much detail here. 8% of the ETF is JD.Com (NASDAQ: JD), one of Alibaba’s largest competitors in the E-commerce space. Baidu, Inc. (NASDAQ: BIDU) takes up another 8% of the ETF. Baidu is a search and web services company. Another 8% is NetEase, Inc. (NASDAQ: NTES), an internet technology company that is involved in games, advertising, and a few other things.

So those are the top 5 holdings of KWEB. They mostly scream ‘Growth, Growth, Growth!’, and I don’t have anything against these companies, but they seem to me the kind of equities that will get dumped in a market downturn. Those of you who caught my recent post on buying puts, found here, know that I’m not taking the inherent risk of options lightly. Also, I’m only planning to risk a couple of hundred dollars. As I write this, options on KWEB only go out to May of 2017. I’m watching to see when ones further out become available. I’m also watching to see if KWEB shows some strength (it’s been a little weak lately), thereby bringing down the put prices. I’m not necessarily predicting that everything falls apart in the very near term out of nowhere, so I can be somewhat patient.

I also continue to watch Mattel (NASDAQ: MAT) for an opportunity to buy puts. I like the company, and did well with it before, but I’m not sure the current price is justified, despite all of the positives of their turnaround efforts. I’m hoping that their upcoming analyst day bumps up the price even further. Hopes for the upcoming holiday season might do the same thing. Taking the other side of any significant strength might be a good opportunity.

As always, feel free to look at my portfolio and see how I’m doing. Usually I own or plan to own stock in many of the companies I write about. Specific numbers I reference may not be completely accurate; different online financial sources often have somewhat conflicting information. Verify information via multiple sources you trust. Please READ MY DISCLAIMER. Make your own decisions, do your own research, and never rely on any single source for information. I am not a financial professional; do not rely on me as such.

Thank you,
Michael, the Stock Picking Bartender,

Reno, Nevada

Does Cal-Maine Foods Fit in My Portfolio?

 

So I decided to skip the obvious egg puns that I could have used in the title. I just didn’t have it in me. So what’s this about eggs? Cal-Main Foods (NASDAQ: CALM) is the largest producer of shell eggs in the United States. They have somewhere around 23% of the U.S. egg market, and are located mainly in the southeast.

So the first thing you might notice about this company is that it isn’t very sexy. I’d say that it’s downright boring. They don’t produce the latest silicon chips, or promise day-trips to the Moon, or even (to my knowledge) create entertaining YouTube videos. They produce eggs, lots and lots of eggs. They are a fully integrated egg producer. They own feed mills, hatcheries, processing and packing plants, distribution centers, pullet growing facilities, breeder flocks… etc. Soup to nuts, if it’s involved in producing eggs, this company has it, and for the most part OWNS it. I like that. Very little of their production is contracted out, only 4% according to their website. Still not too interesting?

So what’s been happening in the sleepy little egg industry lately? How about the government mandated slaughter of tens of millions (of chickens) to stop the spread of a disease threatening to wipe out entire populations (of chickens)? This happened a little over a year ago and sent wholesale prices of eggs soaring! How’s that for interesting? It may not be the latest episode of The Walking Dead, but it got my attention. Cal-Maine chickens were unaffected by the Avian flu, so guess who had a steady supply of fresh eggs to sell into the demand? Record profits! This more or less sent the stock from the mid $30’s to over $60 about a year ago.

Big deal, right? That was in the past, how does this help me now? Well, the laying population has recovered. The supply/demand imbalance has tipped the other way. Egg prices are near 10 year lows. GASP! When they reported Q4 results this July, they LOST a penny a share. Not bad considering they were expected to lose 19 cents a share. Yesterday, the 26th of September, they reported a loss of 64 cents a share, totally missing the expected loss of 33 cents. Revenues were down 60% from the same period last year. The share price hit a low of $40, which seems to be a strong level of support. But if it breaks below the support, there could be a major selloff. Expectations for near-term earnings are not good due to the low egg price environment. You know what happens to companies with shrinking earnings? Look out below… or so I’m hoping.

Cal-Maine Foods has a variable dividend policy. Basically it pays dividends only after profitable quarters, at a rate of one third of the income. Their dividend is all over the place, but it’s almost always THERE. But of course there is now a two quarter gap in dividends. But I think there’s something here.

Eggs are a cheap source of protein. For that and a zillion other reasons I won’t go into, it seems pretty obvious to me that demand for eggs isn’t a thing of the past. They industry isn’t going anywhere. I think Cal-Maine Foods is simply going to get bigger and bigger. They have a history of acquiring smaller egg companies. In one of their investor presentations, in a slide titled ‘ACQUISITION OPPORTUNITIES’, they list about 60 competitors by name. (How ballsy is that?) In fact, on August 2nd they announced their intent to acquire Foodonics International, Inc. and its entities doing business as Dixie Egg Company. The timing seems good, and Cal-Main’s balance sheet is great. It would only take about half of their cash and short term investments to pay off all of their liabilities. Why not buy up some smaller competitors while egg prices are low and the industry is at a discount?

Let’s talk specialty eggs. Nutritionally enhanced eggs! Organic Eggs! Cage Free Eggs! Anything ‘organic’ is hot, but look at the cage free egg phenomenon. Here’s a
Motley Fool article about all the companies that are demanding cage free eggs, and how CALM can benefit from it. Specialty eggs represents between a quarter to half of revenue for Cal-Main Foods, (depending on regular egg prices it seems) and the business is pivotal in the company’s growth strategy. Specialty eggs are less subject to price declines in the current environment, and tend to have higher margins.

So what eggxactly is the plan here? (sorry, I had to put one in somewhere). I’m going to take a wait and see approach to this. That seems to be a common theme for me. I’m hoping continued weakness in egg prices, the lack of a dividend for a few quarters, and some good old fashion general market weakness bring this down a considerable bit. Will it happen? Who knows, but I’m thinking that about $32 might be a good place to start a position. If I’m feeling brave I could start buying around $36.50. I could see myself holding this long term if things work out in my favor. Egg based dividends spend as well as silicon ones.

As always, feel free to look at my portfolio and see how I’m doing. Usually I own or plan to own stock in many of the companies I write about. Specific numbers I reference may not be completely accurate; different online financial sources often have somewhat conflicting information. Verify information via multiple sources you trust. Please READ MY DISCLAIMER. Make your own decisions, do your own research, and never rely on any single source for information. I am not a financial professional; do not rely on me as such.

Thank you,
Michael, the Stock Picking Bartender,

Reno, Nevada