Bryan Moore

Bryan Moore
Contributor since: 2007
I think this strategy does provide some merit in keeping overall movement to a minimum while adding some alpha to your portfolio as a whole. Commodity ETFs make horrible long-term investments due to the nature of the premium they pay for the futures contracts; however, the same premium is what makes them an ideal short candidate. While Ernie is exactly right about the commodity (ETF) deviating from that of the oil and gas equities at times, I still feel that, in the long run, this strategy can generate profitable returns outpacing those of an unhedged energy portfolio.
The investment thesis is that oil by itself pays no dividends and is costly to inventory, but one can hedge the price risk of that commodity and allow the energy companies in the portfolio to create value through operating efficiently and through shareholders rewards, such as dividends and buybacks. This can take out the biggest variable in the total movement of energy equity holdings.
If you follow this link ( you can see a graph of the two strategies, showing both unhedged and hedged; it shows the performance of the two strategies over the past month. It is always wise to test a strategy such as this over the long term before putting money towards it, but I felt that it is worthy of mention to other investors to keep in mind for future opportunities.
Thank you for your comments. It is always nice to get a good commentary going on the companies that I look at because it helps me complete further due diligence for each of them.
I appreciate your comment on The Bon-Ton (BONT), and I do see the risk associated with the company. I agree that risk is inherent in any regional retailer, especially BONT, which has a history of citing regional situations as to why they failed to deliver on their forecasts. It is difficult to value BONT, due to its relatively small size compared to the bigger, more stable companies in the retail sector. However, I did run a Comparable Ratio Valuation on BONT and, excluding the Price to Sales ratio, which was excessively high due to the amount of leverage employed by BONT, I came out with an intrinsic value estimate of $43.43. I then apply a 20% discount to this estimate (due to the regional nature of this company); this gives me a one-year price target of $34.75, or an approximate 60% undervaluation at its current trading price.
This valuation does come at the idea that the retail sector will recover and stabilize from this point forward. Due to the historic weakness in the retail sector over the summer months, I think a buy of BONT in the months of September or October, which has represented the bottom of the stock each year over the past five years, represents an ideal time to ride the strong 4th quarter that BONT has historically experienced. BONT does employ a great deal of leverage as a result of acquiring additional store brands over the past two years, and eventually because of that leverage it will suffer in a declining retail environment, but I don’t feel that its time to suffer is now.
Furthermore, I do have some concerns over the insider trading activities of their executive chairman, Mr. Tim Grumbacher, who sold stock at the very top of the 52 week price range back in May, but did not feel it necessary to raise more equity and bring BONT debt ratios back more in line with historical levels. Now the company is feeling the pains of being leveraged more than is normally accepted in a negative retail environment, thus a 60% drop in stock price from the $50+ level.
Another point to consider is the increase in institutional ownership, which has been on the rise since the stock started falling; I always see this as a buy signal because it shows that the institutional investors are at least showing support to the company at these levels.
Thank you for the suggestions on companies in the retail sector and I will really take a good look at those for an additional and safer play into the retail market. At this point, BONT is a very speculative play; if the retail market recovers in some capacity, you can expect a strong outperformance despite potential declining same store sales due to the amount of leverage the store currently has. It just depends on how much risk one is willing to undertake in his portfolio.
Again, thank you for your comment and I hope that this response further clarifies my reasoning for the BONT recommendation.
Bryan Moore