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Weekly rollup | July 04-10 2022

Stocks Mentioned: ZIM Integrated Shipping (ZIM), Danaos Corp (DAC), Lundin Gold (LUN.TO), West Fraser Timber (WFG), Knight-Swift Transportation (KNX), First Solar (FSLR), Scorpio Tankers (STNG), Dorian LPG (LPG), Ardmore Shipping (ASC)

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July 04 2022

July 05 2022

This is an account with 156.3k followers. If my fund loses money and has to shut down, I'd stay humble rather than act like an angry old fart.

Contrast Brent Johnson, the owner of Santiago Capital, with James Cordier of James apologized to his clients on video after his oil & gas fund blew up. The hedge fund community laughed at him and the video went viral (schadenfreude much?) but at least he had the guts to own up to his mistakes, as did Victor Niederhoffer after his first blow up. Big egos are tolerated when accompanied with great returns. But I'd personally never invest in a money losing hedge fund manager with a big ego.

Alexco gets taken out at 47 cents. Likely less, given it's a share swap deal and Hecla $HL shares are sure to drop on this news. I'm sure glad I got out at 74 cents and didn't hold on, hoping for the much awaited turnaround (which never did happen). With small cap gold stocks, hope is never a good strategy.

July 06 2022

My fair value estimate of ZIM is a lot closer to the Jeffries estimate of $120 than the BofA estimate of $40. I'd agree if BofA said they expect $40 in dividends for 2022, representing a payout of 100% of net income. To recall, the company earned $39.02/share in 2021 and $14.19 in Q1 2022. Based on 2022 guidance, the company should generate $42.94 in 2022 EPS assuming the average rate/TEU drops from $3848 in Q1 to $3700 for the full year. Danaos Corp (DAC) is probably panic selling its ZIM stake and helping the share price lower (we'll know once Q2 results are published).

ZIM is my largest position and I'm holding.

July 07 2022

Lundin Gold (LUN.TO) CEO: "Lundin Gold remains firmly on track to meet or exceed its 2022 production guidance and meet its 2022 cost guidance. I look forward to a strong second half of this year."

The company produced 233,555 gold oz in H1 2022 as compared to 212,936 gold oz in H1 2021. This is why I'm not worried about the price action or the protests in Ecuador. Or even the sharp drop in the gold price. Fundamentals always matter. Just a matter of waiting for the market to go risk-on again.

PotlatchDeltic paid a 55% premium for CatchMark. Paper Excellence paid a 64% premium for Resolute Forest Products. High premium deals in an industry that's supposedly dead along with housing starts doesn't make sense. I think this industry is set for earnings growth, and I'm comfortable holding on to my West Fraser Timber WFG position even though we're slightly down from the 4/20 entry at ~$83.17.

I'm exiting Knight-Swift Transportation (KNX)

My first trade in this stock was for the AAO newsletter last September, with entry at $53.18 and exit at $51.39 on 9/2 and 9/9 for a loss of 3.37%. It was a technical trade which got stopped out.

This time around, I'm exiting for another non-fundamental reason - I'm overleveraged. Containerships and trucking are different industries but with one commonality: they move freight. My containership allocation is massive and I fully believe in it, drawdowns and all. My fair value estimate of ZIM is over $100, same for DAC. I see tremendous upside from current levels on these two picks. With KNX, the story is different. Their 2022 EPS guidance is $5.2-$5.4. Trucking is a low margin business. I don't think the industry deserves more than a 10-12x earnings multiple. The fair value would therefore range between $52 to $64.8.

KNX is highly dependent on its top customers. From the 2021 Annual Report: "Our customers are typically large corporations in the retail (including discount and online retail), food and beverage, consumer products, paper products, transportation and logistics, housing and building, automotive, and manufacturing industries. Services provided to our largest customer generated 16.1% and 16.8% of total revenue in 2021 and 2020, respectively. In 2021, our top 25, top 10, and top 5 customers accounted for 54.9%, 40.9%, and 29.4% of our total revenue, respectively. In 2020, our top 25, top 10, and top 5 customers accounted for 56.5%, 40.8%, and 30.7% of our total revenue, respectively."

So far, the bullish case for freight has hinged on the low inventory to sales ratio at retailers and consumer demand remaining strong. That won't hold true in a recession. We're already seeing signs that the used car market is in trouble. Retailers like Target and Wal-Mart are dealing with inventory bloat.

"Walmart’s inventories at the end of its first quarter were about a third higher than a year ago at $61.2 billion. Target was carrying $15.1 billion of inventory as of April 30, about 43% more than a year earlier."

Given this backdrop, plus the limited upside I see in KNX, I'm exiting the position. Based on the 4/11 re-entry at $46.34, exit price of $48.47 and 12 cents in dividends, the trade returned 4.85%.

Source here

This isn't going to end well. UK faced a power crisis in the 1970s which led to regime change.

July 08 2022

Added First Solar (FSLR) to my watchlist. Looking at the weekly chart, the stock has support at the $60 range. The stock cleared the 20 day EMA on 7/7 and looks set to move above the 100 DMA. I like the stock because it has a history of trending. No fundamental reason to be bullish - just bringing it to the radar of other traders who might like the setup.

I was wrong in saying that the Scorpio Tankers (STNG) share price couldn't continue its parabolic up move. It did. The move ended last week and the correction has set in.

"Scorpio Tankers has recently repurchased 364,474 of its common shares in the open market at an average price of $29.17 per share."

This is from the latest press release. Presumably, the shares were purchased on 7/6 when STNG had that huge drop. The company spent $10.63 million on share repurchases. Adding the repurchase of $1.5 million in aggregate principal amount of its Convertible Notes due 2025 in the open market, the company has blown $12.13 million of its cash balance. In addition, the company is re-purchasing vessels sold under a sale and leaseback agreement in 2018, which means paying down $95 million in debt by August to complete the transaction. As of Q1 2022, the company had a working capital of $94.4 million. Q1 net loss was $84.4 million on revenue of $174 million. Net loss was just from regular operations and financing expenses, not any extraordinary items. For 2021, the company reported a net loss of $234.4 million on revenue of $540.8 million. 2020 was better, with a net profit of $94.1 million on revenue of $915.9 million.

2020 was a great year for tankers due to the tanker-for-storage trade driving up TCE rates. Even with that unexpected boost, the company barely achieved a 10.3% profit margin. Let's say Q2 TCE rates were so high that revenues tripled q-o-q. And that the company manages to post a profit of $54 million, an extraordinarily generous assumption given the -48.5% net profit margin in Q1 2022 and the -52% margin for 2021.

The cash walk through is simple.

Q1 working capital

$94.4 million

Reduction from repurchases

$12.13 million

Addition from Q2 profits

$54 million

Reduction from debt repayment

$95 million

Remaining working capital

$41.4 million

This without considering declaration of dividends, changes in assets/liabilities, movement of long term liabilities to short term liabilities, and further share/debt repurchases. Maybe the working capital figure improves a bit since depreciation is a non-cash expense. But the company's current moves are window dressing - an attempt to look good in the market while sacrificing long-term balance sheet health. When you add in the fact that insiders and related parties purchased shares at much higher levels, this strikes me as an attempt to manipulate perception ahead of the blackout period prior to the earnings announcement.

But what if I'm wrong on the company's profitability? What if Q2 was so profitable that share repurchases and blow out earnings will send the shorts screaming Tesla? It's a possibility. I've followed this company long enough to reckon that if Q2 were indeed wildly profitable, President Bugbee would have purchased call options (nope, not kidding - he does it often enough) to play the upswing that usually follows earnings surprises.

I think Q2 is going to be a movement from net loss to net profit, but the company's working capital and balance sheet health deteriorate further. I continue to remain short. The PSAR indicator on the weekly chart flipped from long to short this week. On the daily chart, the stock made a rounded top. The quiet period ahead of earnings implies no more share repurchases. Time to be short and let gravity do its thing.

KuCoin exchange has reported 9.75 million new registered users so far in 2022, a 219% increase from the first half of 2021. KuCoin is in the top 5, so I'd take this as an indication that interest in crypto is still alive. Oh, and Cathie Wood's funds saw a YTD inflow of $1.3 billion as of May 10, 2022. Guess there's interest in buying the dip is tech stocks as well. Buying the dip has been a profitable strategy for so long now, it's not hard to imagine why even scary looking corrections get bought. Do we rally from here? I have no idea. Is the bottom in? I have no idea. Fortunately, I don't need to make such predictions in order to trade.

Scorpio Tankers (STNG) is forming a hammer candle on the weekly chart. That's not going to deter me from being short, but it does call for placing a stop at $37.95. That's 2 ATR (20-day) above the current price and just shy of the $38.07 peak on 6/21.

Hammer candle forming on the weekly chart of Dorian LPG (LPG) as well. Between BWLPG, LPG and GASS, I'd cut Dorian LPG if I wanted to lower my allocation to this space. GASS is down from our $2.9 entry but I take that display of momentum over last month as a sign that something is up with that stock. I remember ASC started moving following a day of massive volume. GASS has had a month of massive volume, which is why I'd give that trade more time. I still like all 3 names, but if natty rolls over next week, I'll be out. For now, I'm waiting and watching.

July 10 2022

First the Freeport LNG plant fire, now this. When processing capacity goes down, LNG exports take a hit. This will impact Natural Gas prices within the US and the pricing power of LNG vessels, especially coming on the heels of the Freeport news. It's time to cut LNG/LPG exposure. Let's see how BW LPG opens tomorrow.

The German city of Augsburg wants to switch off traffic lights to conserve energy as costs for electricity and natural gas run high. Facade lighting on historical buildings and museums will be switched off, fountains will be switched off except for the ones at UNESCO, and a light festival has been canceled. Street lighting has been dimmed, room temperatures in city offices will be lowered in the fall and winter and some building complexes may be shuttered entirely.

I paid $160 in utilities for the last two months. My wife insisted we switch from having one cylinder of LPG (cooking fuel) to two, as a buffer against supply chain disruptions. A friend in Sri Lanka who updates me on the ground situation simply says "no food, no fuel" - not just recently, but for the past couple of months. Pakistan LNG failed to receive a single offer on its $1 billion LNG purchase tender amid massive heatwaves.

These could just be anecdotes, but as the German news shows, electricity and energy are fast becoming a problem even for the civilized West.

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