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Darren McCammon
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Darren owns ProActive Financial LLC. He manages private family and individual accounts as well as the yield focused, 50+ Portfolio. He has a Bachelors in Economics, an MBA and a Certificate in Financial Planning. Darren is most proud of having successfully managed income producing portfolio's... More
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  • Why I Decided To Short Hexagon AB (HEXA-B.ST, HXGBF)

    Hexagon AB, headquartered in Sweden, makes high tech measurement equipment and software. We are not talking a fancy ruler here. Think laser devices where they can so accurately measure the time between when a laser fire's and when the light bounces back that they know the distance and angle in between (at 5,000+ points per second). Machines mounted on planes which can create highly accurate digital maps of an area. Machines and software that can measure everything from tolerances in an automotive or aerospace plant, to managing data for oil and gas engineers, to producing in a few hours a million plus point scan of any structure at millimeter accuracy. The company markets products and services under more than 35 brands worldwide including: Leica Geosystems, Intergraph, Erdas and Hexagon Metrology.

    Because Hexagon's products are high tech and very useful for a variety of construction, manufacturing, mining, oil & gas, and other industries, they enjoy high margins. Hexagon is a solid company which spends a lot of money on R&D and makes high quality products. I admire them and a long time ago used to work for a startup which they indirectly purchased (Cyra Technology). So why have I initiated a short trade?

    Put simply they are facing two headwinds, neither of which they have any control over.

    First, Switzerland decided recently to remove their currency (the Swiss Franc, CHF) peg to the Euro. In response the Swiss Franc rose 16% relative to the Euro and most other currencies including the Yen and US Dollar. Hexagon does not split out cost data by region but based on the employee headcount by region they do provide, I estimate 20-25% of Hexagon's overall costs could be Swiss based (primarily Leica Geosystems R&D, production and other employees located in Heerbrugg, Switzerland). The net result is Hexagon could see a 300+ basis point hit to their margins. I estimate this one factor could reduce Hexagon's net operating margin from 18.5% to 15.3%. Realize Leica Geosystems can't just pass on these increased costs since they face direct competition from Trimble (NASDAQ:TRMB) and TopCon (OTCPK:TOPCF) whose costs are primarily based in USD and Yen respectively.

    The second factor Hexagon has no control over is the decline in oil prices. As pretty much everyone is aware by now this 50%+ reduction in price has caused havoc in the oil production industry. Per their latest reports, 18% of Hexagon's business comes from the oil and energy industry, primarily via Intergraph but also to some extent via Leica Geosystems. While Intergraphs software and maintenance licenses should have some sticking power, one should also assume a fair amount of software and services Hexagon provides are tied to their customers trying to increase production. Something few oil and gas companies are focusing on right now. This is going to be a meaningful headwind to Intergraph and their parent Hexagon. While it is hard to estimate just how much of a hit to sales Hexagon will take, I'm assuming it eliminates sales growth for Hexagon while oil prices remain low. So forecast 0 sales increase while oil prices remain low rather than the 8% they have historically been able to achieve.

    Now would you pay 25 times earnings and 3 times book for a company exhibiting no sales growth and shrinking margins for the next couple years? I wouldn't, and when the rest of the world realizes the headwinds Hexagon currently faces, I don't think they will either. This however should be considered a short term trade with no greater than a normal sized position. Longer term I expect Hexagon's focus and expertise in measurement technology to eventually overcome these immediate disadvantages.

    Disclosure: The author is short HXGBF.

    Additional disclosure: The 50+ portfolio which the author manages is actually short HEXA-B.ST (Hexagon on the Stockholm exchange). The author was laid off 10 years ago in a restructuring due to Hexagon's purchase of Leica Geosystems. The author holds no ill will regarding this and indeed benefited from it; never the less, readers should probably assume the author is biased. This blog is intended to provide information to interested parties. As I have no knowledge of individual investor circumstances, goals, or portfolio diversification, I can not recommend any specific equity. Readers are expected to complete their own due diligence before purchasing or selling any equities mentioned.

    Jan 28 3:19 PM | Link | Comment!
  • Introducing The Mechanical Investing Portfolio

    This post will introduce the reader to a trading strategy I'll call the Mechanical Investing portfolio (NYSE:MI). This trading strategy is based on three screens back tested on the Motley Fool message boards of the same name, each of which produces a list of 10 stocks for a total of 30. Out of the 30 stocks, I will then choose 10. The following month I will generate a new list. First I will see whether an existing stock is still anywhere on the new list. If it is, it will be kept. If it is not, it will be sold. This is commonly referred to as hold till drop. The empty positions will then be filled from positions not already held (no doubling up).

    Cost considerations - at worst this could entail 240 trades per year with trading fee's totally about 1% percent of the account value, but practically I expect at least 25% less as each stock will not necessarily fall of the lists each month. The spread will be a bigger cost issue. Additionally, since it is a tax protected account, no short term capital gains taxes due. This high trading strategy would likely not work for an account which did not enjoy both tax protection and very low trading fee's. I'm not sure it is going to work even with them nor am I sure about the amount of time the research and trading may take. However, I suspect the process will uncover stocks I might wish to hold longer term in other accounts.

    Generally, I will use my own judgment to choose which 10 out of the 30 equities to invest in. Terminating trusts for instance will be eliminated as the ratio's the screens are utilizing assume the companies are ongoing concerns. Additionally, sometimes these screens can produce significant concentration in one sector (e.g. mREIT's) so I might go further down the list to diversify a little more. I could also skip a stock simply because I don't think the industry it is in or the specific business is attractive. So despite the name, there will still be a fair amount of judgment involved. The screens are predominately there to insure I am fishing in a good pond loaded with big fat fish. Since this will be high frequency trading of generally small and mid cap stocks, considerations like using limit orders on thinly traded equities and rounding out odd lots will be utilized. Therefore each investment will not be exactly 10% and it is possible I will end up with 9 stocks or 11 stocks in a particular month. Risk is likely to be high and is not being controlled via stock selection (e.g. Exxon or JNJ is unlikely to show up on any of these screens) but diversification and position size may help mitigate overall portfolio risk somewhat.

    Here is where I like to fish:

    Relative Value Screen (RV)

    -Price > $5, Average 3 month Volume > 25,000, Price*Average Volume > 100,000, Price within 10% of latest year high

    -P/E, P/Cash Flow & P/Sales in top 10% of industry

    -Top 10 when sorted by 10 day volume / 3 month volume

    Note this screen is subject to high turnover and picks stocks in a variety of industries.

    Dividend Growth Screen (NYSE:DG)

    -Top 35 equities when ranked by Current Yield divided by P/E Ratio

    -Top 10 when sorted by 1yr return

    Note typical yields of this screen are in the 2-4% range. It is roughly 50% more volatile than the S&P 500 but with more than twice the return.

    High Yield Screen (NYSE:HY)

    -Price > $5, Average Volume > 10,000 shares / day

    -Yield > 10%

    -Top 10 when sorted by 6 month price change

    Note this screen is subject to yield traps. It is also about twice as volatility as the S&P 500 but delivers on return and over 10% yields.

    From those equities which passed at least one of the screens above, here are my specific initial choices:

    IDT 10%

    AMC 10%

    SAIC 9%

    NEWT 9%

    ABR 9%

    ANH 9%

    AHC 8%

    BGCP 8%

    WMC 8%

    BX 8%

    NLY 5%

    Cash 7%

    I'll try to update at least the new specific equity choices monthly either in the comments or as a new blog post.

    Disclosure: The author is long IDT, AMC, SAIC, NEWT, ABR, ANH, AHC, BGCP, WMC, BX, NLY.

    Additional disclosure: This blog is intended to provide information to interested parties. As I have no knowledge of individual investor circumstances, goals, or portfolio diversification, I can not recommend any specific equity. Readers are expected to complete their own due diligence before purchasing any equities mentioned.

    Jan 16 8:29 PM | Link | Comment!
  • Fishing In The Oil Patch

    No one, except maybe a few members of the Saudi rulling elite, has a good idea when or if oil prices will go up. As one can tell from my last blog post, I think the House of Saud is currently much more motivated by retention of power than money. So they could reasonably allow prices to remain low for 2 or 3 years. However, even given this possibility, I think there are still some cases in the oil sector where sell offs are overdone. Investors have been throwing the baby's out with the bathwater, which in turn has been further exacerbated by tax loss selling. I thought I'd record a few of the bargains I picked up here. This is not meant to be a comprehensive nor even meaningful analysis but rather just documentation and a list of stocks others may want to look in to.

    CPLP leases ships. Nothing much company wise has changed from my last blog post and article on them so I'll just let you read about CPLP in that article (seekingalpha.com/article/2571765-capital...). The short version is according to Teekay tankers day rates are still doing fine and I still expect CPLP to raise their dividend in Q1 2015. The only thing that has changed significantly is at $7 per share CPLP is an even cheaper buy now than when I wrote the article above.

    OTC:BRYFF is a company I have never mentioned before. Part of the reason for that is they are small and thinly traded so mentioning it here was counterproductive to me being able to pick up the amount of shares I wanted. I now have, so there is not as much limitation. Just be aware they are very thinly traded and limit orders are advised. BRYFF (BRY.TO in Canada) is a distributor of drilling supplies and makes drilling mud. They have been expanding from Canada into the US over the last year. Certainly, upstream companies will cut heavily back on drilling. Bri-Chem will likely see much less demand for it's products. However, in this case thanks to their expansiion that may mean they see equal demand vs. last year instead of large increases. They are probably in for a very rough patch, but at $1 per share, I found the P/B, expected P/E, and expected EV/EBITDA cheap.

    LINE, everyone knows LINE. You can find dozens of articles on it on seeking alpha. There's not much for me to add. The acreage trades LINE has made in the last 6 months were very insightful (or lucky). It's almost as if they knew the Saudi's were going to cut oil prices. Between these low decline, gas heavy, acreage trades, their hedging and the timing and profile of their debts, I think at $14 LINE represents a good investment. They may cut the dividend, but if they do, I think it will be more because they choose to than they have to. A way to de-risk and store up potential in order to buy more acreage later at bargain basement prices. While I would probably get a better price immediately after a dividend cut, I'm not sure that's ever going to happen so I'm taking what I can get now. If a dividend cut is followed by a price dive similar to SDRL's, you can expect me to be on the opposite side of that trade.

    MILL-pD is the 10.5% cumulative preferred issue of Miller Energy, an Alaskan upstream E&P. Like BRYFF I've never mentioned it before because it is thinly traded and I wanted to add to my position. MILL announces tonight and has a conference call tomorrow. I'm looking forward to their clarification of capex plans, cash flows, hedging, etc. With the preferred you don't have to bet they will thrive, surviving is enough. Actually, with the preferred trading at such a discount to par, you don't even need that. As long as there is enough value there to cover the debt and preferred you are golden. So I made my own estimate of PV10, saw that it covered EV very well and that's good enough. Add in the 90% hedging, opportunity to focus on gas, cut exploratory capex, etc. and I think the dividend is probably good to. But even if it's not, the dividends are cumulative and at $12 per share we are buying at less than half of par so, good enough.

    CPLP, LINE, BRYFF and MILL-pD, those are the greedy bets I made in the oil sector while many are running scared. Wish me luck!

    Disclosure: The author is long MILL, CPLP, LINE, BRYFF.

    Additional disclosure: The poster is actually invested in MILL-pD not MILL however seeking alpha does not recognize the preferred symbol. This blog is intended to provide information to interested parties. As I have no knowledge of individual investor circumstances, goals, or portfolio diversification, I can not recommend any specific equity. Readers are expected to complete their own due diligence before purchasing any equities mentioned.

    Dec 09 5:36 PM | Link | 20 Comments
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