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David Chan
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Been trading since the age of 6. Mixed results the first 15 years hehe. Now 24 and finally starting to cross the line of profitability. Technical analysis is a big part of my strategy, prefer trading quality names. Aside from investing in stocks I am also invested in rental residential real... More
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  • Overcome Your Reservations: Apache Is In Gear To Go Much Higher

    The stock market can be such an irrational place. Hopes and dreams (or perhaps just simply delusion) often resurrect stocks of companies without a future. Yet at other times, it leaves behind resurging titans with a tarnished or tragic past until it is too late as facts come screaming through the monthly statements of those tragic shorts.

    In the past 2-3 years of this raging bull market, irrational exuberance often limited the number of opportunities of discovering hidden value when everything has been breaking up on a tear. However, I believe Apache (NYSE:APA), the FORMER international oil giant, with huge emphasis on "former", is one of those situations investors should focus into this emerging DOMESTIC oil exploration powerhouse play.

    In my previous article here, I noted that while Apache had some great successes expanding internationally in the Middle East and in offshore drilling areas during the time of the financial crisis of the late '00s, the company found itself unloved and in the bargain bins, largely left by the sideline from political instability and operational risks emanating from these regions. The company found itself with cumbersome assets and a poor cash flow picture stemming from costly LNG projects that will not become productive for years to come, and investors rightfully sold off shares as the company fell from grace in 2011 and 2012.

    However, management has been anything but tone deaf on the situation. Under Steven Farris the company started selling off and monetizing assets that were not adding to organic cash flow generation or were operating in too high risk operational segments that may sour investor sentiment. With this laser focus on sustainable organic growth, the company turned back on its roots as a domestic US energy explorer, and did so in a big way. Today Apache is one of the most active drillers in the Permian, with substantial acreages in Texas and also aggressively pursuing new potentials in nearby regions.

    When I first wrote about Apache, the company was trading at $89/share. I argued that on a comparative basis on book value, EV/EBITDA, and P/E, Apache was trading at discounts ranging anywhere from 30-60% compared to other domestic players such as EOG (NYSE:EOG), Pioneer Natural (NYSE:PXD), and Anadarko (NYSE:APC). What is even more perplexing is the future growth potential for Apache far exceeds those of these companies above, as Apache consistently rank as one of the most aggressive and active driller of new wells, and is also a top 3 producer in the Permian region for numerous years. Shares has risen to ~$100 since then for a gain of about 10%, but recent news and developments suggests this story is just shifting into gear.

    As the company was restructuring overseas assets and repurchasing shares, I forecasted that the company has a potential to narrow the gap of its discount to peers and projected upside to $115, which admittedly I had said that I would like to see more clarity with LNG asset performance before becoming more bullish.

    As recent new events unfolded, I had to ask myself whether I needed to revisit my valuation methods for an update.

    In the last 3 months, several events have occurred:

    1) Jana Partners Discloses stake in company worth $1B, pushes for more aggressive actions

    The company led by Barry Rosenstein, whose niche seems to be shaking things up at numerous energy companies including Marathon (NYSE:MRO), QEP (NYSE:QEP), and Oil States International (NYSE:OIS). The shares of companies that Jana has, to put it kindly, "participated in" often has risen 20-40% in the following months after their ownership announcements.

    The fund in late July disclosed a stake in Apache and suggested management accelerate the sale and disposal of cash flow restricting projects such as the LNG export terminals in Australia and Canada. In my opinion considering Apache's shareholder friendliness, and shown in the next point, I had no doubt Rosenstein will have open ears in the C-suite of Apache.

    2) Apache announce exit from LNG project in Q2 2014 Earnings Call

    In Apache's earning release, Farris announced the exit of the company from the Australian and Canadian LNG export projects. These projects were not expected to generate cash flow or earnings for the company for at least 2-3 more years. One of the key headwinds for Apache's stock has been the relatively weak organic cash flow of Apache as a whole entity due to the billions of CapEx required to develop these LNG assets. Management officially announced during the earnings call of Q2 2014 the intention to accelerate the exit of these projects and to have "Apache's future centered on our tremendous North American onshore resource base" per Farris. With this exit, Apache immediately can realize a saving of over $2 billion in cash expenditure annually, as well as boost profitability as these are not projects that are online.

    3) Completion of monetization of Gulf of Mexico and Canadian gas assets, potential separation of International assets into new company

    Planned asset sales in Canada and the Gulf of Mexico continued to proceed smoothly for the company, further increasing cash on the balance sheet. Farris also announced the potential to separate the international assets via the capital markets, suggesting a potential spin off or breakup of the higher risk Egyptian assets into a separate listing. While this may take several months to organize and arrange, it would immediately clear up the picture for Apache's North American operations and allow investors to focus more on the breakup value of the company instead of this awkward soup of assets that to most may be difficult to value correctly.

    With these new catalysts, it is my belief that 2 events will happen:

    Firstly, analyst expectation for the company is far too low. According to Bloomberg, Apache is expected earn $6.90 in 2014, vs $7.92 in 2013. However we do see Apache's results to stabilize and deliver generally positive surprises in the upcoming quarters. With the convergence of the aggressive stock buyback, reduction in non-performing assets in the LNG terminals, and a lower debt level, none of this has been factored into the current slate of earnings estimates. Barring a collapse in energy prices, it looks likely analysts will begin upping their earnings estimates.

    Secondly, financial engineering will begin to take hold and improve the valuation picture for the core Apache holdings as the company shed overseas assets. We have already seen recent earning reports to be a largely North American ordeal and with the LNG exit, by year end the forward looking statements will primarily focus on the company's performance in Texas, which will be directly comparable with the likes of EOG and Pioneer Natural.

    The cash flow situation is also looking far better compared to just a few months ago by eliminating the costly LNG projects, which in my opinion is more suitable for a major like Chevron (NYSE:CVX), but Apache simply does not have the large financial base to take it on without straining the balance sheet. The removal of these deadweight projects will provide the lift for forward guidance.

    The change of perspective I foresee will happen in the next 6-12 months as the street adjust to the new Apache. It is under this pretext that many of the previous restructuring uncertainty has been removed, thus offering a much more clear path to higher prices.

    Looking at the stock chart, we also see that the company broke thru a key resistance of $95 a share, in what appears to be a massive multi year long head and shoulder bottom forming since March of 2012. Technically, if we trace the distance from the $95 neckline and the bottom of around $70 in April of 2013, from a technical theory one could expect to see the same degree of upside in the stock, which will put it back to $120-125.

    Coincidentally, at the presently depressed earnings estimate of $6.90/share, $125 is the price by applying industry average forward P/E ratio of 18x of the North American drillers. Apache is cleaning house and the street is not properly valuing it. By raising the earnings estimates, which I believe it will, it continues to give further margin of safety and additional upside to the stock.

    Risks to this analysis revolves mostly around the energy prices. Recently despite instability in Iraq, we have not seen the widespread disruption of energy output experienced in the past during times of conflict. We could very well see lower oil prices in Brent in the following months. This could very well hit the valuations of the high flying energy exploration plays, which is key to Apache's upside potential of closing in the valuation gap, as I predict the WTI to go mostly in tandem with Brent. Thankfully due to Apache's relatively cheap P/E and P/B rations, Apache's risks is more of a question of a limited upside vs significant downside. I remain neutral on the oil market as a whole, as the fickleness of the market can also change on a whim from events such as hurricanes in the gulf or more severe unrest from the Middle East.

    2014 may be the year that Apache will finally earn some credit on the street. Based on my fundamental and technical analysis, I would not be surprised whatsoever to see shares hitting $125-130 within the next 6-12 months as we look towards the future for the company. At a last print of around $98 a share, this provides a fantastic entry point into an emerging domestic powerhouse.

    Tags: APA
    Aug 15 10:19 AM | Link | Comment!
  • Post-Mortem Of The First Horrendous 14 Years Of Investing Career

    To explain why I am still here trading today after numerous years of disastrous results and losses, I decided to put in writing how I got myself here, perhaps as a reminder, or as an open solicitation to others for more insight on what other lessons I should take away in developing my portfolio.

    The Nightmare That Was

    I turned to the stock market to invest for growth and I fell into a series of mistake for years.

    2001 - CMGI - Lost 97%

    2004 - Creative Labs - Lost 210% (Margins)

    2005 - Penny Stocks - Lost 20k at the age of 17

    2008 - AIG - Lost 97%

    That was my track record. Awful. Horrendous. My only saving grace was that at least I was whiz kiddy enough that I could make enough money from my own startup ventures to cover those holes.

    I was ambitious. I was naïve. I was arrogantly stubborn.

    I've paid dearly for those mistakes, and in 2013, with the markets where they are, plenty of traps are set for the novice in the coming months. While I do not predict 90%+ losses, there could still be plenty of pain if you are not careful.

    How did I get here?

    Sin #1 - The Hot Trade - CMGI

    2000. The tech bubble. It was a fantastic time, a fun time. I turned $200 into $2,500 from 1998 to 2000 at the age of 10. I thought I was invincible, "whiz kid". You could practically buy anything and it would go up. It was all decisions on emotions and feedback loops. I didn't even bother understanding what CMGI was when I got the tip.

    Today we are hit with a deluge of information. Analysts tout new picks on CNBC as filler, pundits screaming into your screen, articles on Yahoo! Finance and Seeking Alphas flying by left and right, and tweets popping up like mushrooms after a rainstorm on StockTwits. We are hit with opinions all around and "noise".

    The takeaway: Step above the crowd and filter.

    John Paulson; A superstar in the hedge fund world. Made a killing in 2008 shorting subprime. He's now down 30+% in 2012 and I know plenty of people who followed his picks that went right with it.

    Be a stock picking hipster. (Or a hippie, whatever your vintage may be.) Have a free, independent mind. Ask why does the stock belong in your portfolio. Does it execute your investment thesis in the broad picture??

    Shoot down 99% of the noise and theories you come up with until you find that hardy idea, that top 3 or 5 ideas that stand tall in the face of relentless ridicule and bombardment of your own logic. When you do find it, hold onto it and be stubborn with it: don't let a 3% down move shake you out.

    My pans: Apple (NASDAQ:AAPL) and (NYSE:CRM) falls into this category.

    I would ask anyone who invests in these names to really scrutinize their reasons in investing. Is it really a business you believe in the long term? Do you have conviction in your own projections? Does it fit your investment strategy? Or are they just a distant reminder of a Jim Cramer call?

    Both Apple and Salesforce are names with a halo around them, and I am avoiding them here both names could suffer drastic pullbacks if they disappoint. Both stocks are in a "show me" year, and I personally am uncomfortable with that prospect. With the size of Apple, it will require an potent catalyst for the stock to move from here and I see numerous names with better upside potential.

    Sin #2 - Stubbornness - Creative Labs

    So you found that idea. You bought the shares and you're now in deep. Then the shares tank. Maybe it's news of a new competitor. Maybe its event driven. Maybe it is broad market. Or maybe it is just plain stupidity.

    I bought Creative Labs believing in their products and their business. I rode it all the way from $17 to $3. I kept doubling down on margin by buying on dips too. It imploded spectacularly.

    Only I didn't ask why. What caused the stock to collapse? Why is my thesis not playing out?

    Takeaway: Review and scrutinize your portfolio, hard and clear.

    While it is important to be stubborn about your best ideas, you also cannot be overly stubborn. Ask yourself, is the portfolio you have today something you want to hold onto going into the debt ceiling talks?

    Set a threshold and take your loss no matter how painful. Every bet in the market is like a look into the barrel of a gun. Learn to bail if wrong. You might just live to die another day.

    My Flavor: Curb your position in weak names and take your losses. We are in a volatile year and you don't want to be riding names down hard. We don't have the luxury of an oversold market of 2009-2010 for buy-and-hope.

    My picks and pans: Semiconductors and Biotech

    Intel (NASDAQ:INTC) and HP (NYSE:HPQ) also have similar issues with a cloudy visibility in their business model in the long run.

    I would consider Intel as a more speculative contrarian play here at this point and avoiding HP with its SEC investigation like the plague.

    Biotech - Are you sure you have enough knowledge to bet assuringly on the next FDA announcement is going to be positive?

    Names like Vivus (NASDAQ:VVUS), Arena Pharma (NASDAQ:ARNA), and Dendreon (NASDAQ:DNDN) all have promising pipelines. However, none of which qualifies for my portfolio as I have little to no confidence level in what the FDA could do with their key drug pipelines. I would scale these names accordingly to your risk appetite at this junction.

    Sin #3: Ambition - Penny Stocks

    High beta: It doesn't get any higher than penny stocks where one tick can push you up 20%+. I traded these names for a while making massive gains for months on end. The adrenaline rush was palpable. In the words of Gordon Gekko: "It was better than sex."

    I always thought that was an exaggeration, until that year, he was not kidding. At least until that last trade, where my entire profit was wiped out and I realized I was $20,000 in the hole.

    Takeaway: Set your expectations and manage your exposure accordingly to scale with your returns. Put on hedges on your top bets.

    Being 24, I now realize even if I achieve a gain of 20% on average a year, I will be a very, very potent and successful investor by the time I hit my 40s.

    Time the market and analyze. Know when it is the right time to cash in and call it quits.

    If you had a solid skill for analyzing a business and you find just 1 ticker that could double that year, that might be all you need. You might only need 6-7 trades like this in your entire investing career to make bank, even if it takes 2-3 years before you find just that 1 single trade.

    Law of probability that if you made 20 trades a year, it's next to impossible you will have a total winning streak. Hoping is not a strategy.

    My flavor: I make one big bet when I find it. But only when I have utmost conviction in the name and I have to hedge the portfolio one way or another.

    My Picks and Pans: High Beta names post political showdown, and panning Chinese growth plays

    The coming year pose many uncertainties for the US political arena. This would create a fantastic buying opportunity playing on sentiment. (see the fiscal cliff rally)

    I am currently keeping a fair amount of dry powder aside. Even though we still have 2 months before the next Washington drama-session begins, I would rather defend my portfolio than to squeeze alpha from an extended market.

    I am also negative on speculative Chinese names in the face of a slower Chinese economy. While growth in the past decade has been spectacular and the opportunity to generate massive long term growth is there in many names in this space, the quality of growth in China has been problematic in the last decade (see the ghost cities here) and I believe we are entering a phase of moderating growth.

    To those playing basic materials: A structural rebalancing of the economy to focus on higher quality of growth could prove disastrous for names like Freeport McMoRan (NYSE:FCX) and Rio Tinto (NYSE:RIO). I would strongly recommend hedging with some puts or other options play, as the market is still betting too heavily on a Chinese recovery.

    Sin #4 - Trusting the management (or not) - AIG

    After a disastrous run in with the penny stocks my risk appetite swung the other way fully to buying blue chip stocks. I developed a fascination with the insurance business model and after research in 2007 I bought into AIG. Only a sudden announcement of writedowns one morning in Q3 2008 did I realize how much filth management had hidden from the public until it was too late.

    Takeaway: Not much you can do when management engages in fraud, but just take note of what they are doing, and try to write an insurance policy on your investment if it makes sense and if you can afford it.

    This is the trickiest of them all. Sometimes a fraud is just that good. Enron, WorldCom, AIG, Chinese reverse mergers, there's plenty of blame to go around. These are the nightmare scenario every investors should be afraid of, and sadly, it will always keep happening.

    My flavor: Out of the money puts on risky names. Again, proper risk management hedging.

    My pans: Herbalife (NYSE:HLF) and Hewlett-Packard

    Issues with management's creditability have dampen stock prices in the past year. I am avoiding these names due to the controversial nature of these tickers. Until these issues are resolved there would most likely be a cap in the stock price in the foreseeable future, despite their supposed attractive valuations here.

    There are plenty of other tickers with far better stories and fundamentals offering better risk-reward structures (see picks below).

    Only investors with the highest degree of risk appetite should consider these turnaround/validation names and they would be a gamble at best.

    The Story That Is…

    I have only made 3 major bets since 2009.

    Wynn Resorts at $16 and International Paper at $5 in 2009

    Take Two Interactive at $11.50 in 2012

    But I'll take what I got out of them.

    Jan 07 4:50 AM | Link | Comment!
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