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Tom Armistead
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I'm a well-informed retail investor and post on SA in order to expose my thought process to critical examination and comment from readers. It makes me a better investor. I'm particularly proud of bullish macro articles posted in 2009 and later, in which I presented ideas that encouraged me to... More
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  • California Resources Now In Play

    Back in early December, I did an instablog on California Resources (NYSE:CRC), mentioning a small position and taking a wait and see attitude. With the stock under $6, the potential of $20 if oil would go back up to where it was came into view.

    As oil continued to tank, CRC followed it down, and I started systematically adding to the position. At first, it was 100 shares every time it went down another 10 cents. Then it was a fixed position size, 70% of my normal, and buying another 100 shares every time I needed to bring the dollar amount up to the target size. Sort of an exercise, how many midgets can you cram into a Volkswagen.

    That really isn't much fun, and I finally gave it up somewhere under $4 and let the last little bit of the bottom go by without adding. But I worked the average cost down to $5.23, from a $5.90 starting point.

    So now we learn Soroban has taken up a 9.98% position. Predictably, and also driven by the increase in WTI, the shares made their way back up over $6. I sold a few hundred, at 10 cent intervals, and brought the position down to 100% of normal.

    Now What?

    Morningstar updated their analysis, and they now have a target of $17 on the shares, based on oil futures as they now stand and the assumption that eventually oil stabilizes somewhere between where it is now and where it was for several years before.

    CRC has hedged their production for 6 months at $50 a barrel. They have a variable capex plan, to respond to the situation as it develops over time. Their financials provide enough information that you can project based on the prices of oil and natural gas. I sort of browsed it a bit and then I figured let's wait another quarter when we can see what their realized prices have been compared to the benchmarks.

    There is quite a bit of debt here, a private placement, somehow I just couldn't seem to get the details. There is also a large credit line, by several of the big banks, with covenants. The thought does come up, the interest rate on the private placement was probably a little bit on the high side. But if a major oil company with a strong credit rating bought CRC and assumed the debt, it would be easy to trade publicly at a higher price than it originally commanded.

    Major oil companies have a problem, to grow reserves in the face of ongoing production. Extensions will be more difficult than they have been recently, for the fact that economic feasibility is more difficult with the commodity priced at current levels. So there will be some motivated buyers out there.

    Hedge funds are like a bunch of jackals, they're all over any opportunity for easy pickings. It wouldn't be surprising if Soroban had some company, soon enough. The most likely thing is that they will agitate for a sale of the business.

    Perils of Pauline?

    If the price of oil doesn't go back up, at some point cash flow will go negative and covenants will start to come into play, then there will be waivers to discuss and pay for, then things will get complicated. I don't think it will go that far.

    Stay Right Size

    After looking at this for a while, I plan to sell into any increase in price, so as to keep my position at normal size. There's nothing wrong with taking a few bucks off the table. I won't be selling covered calls, because there's always the possibility that it will gap up.

    Tags: CRC, Energy
    Feb 05 5:50 AM | Link | 5 Comments
  • Chubb: Quantifying Lowball Guidance

    Chubb (NYSE:CB) reported fine earnings for 2014, but guidance for 2015 was characterized as "light" by the press, and the shares have been giving up some of their recent gains.

    The company has a history of lowballing guidance, strong enough to be worth tracking and quantifying. Here's a table:

    Over the period tracked, the company has beaten guidance by an average 18.61%, and missed only once.

    Based on this analysis, I'm looking for EPS of $8.90 for 2015. The earnings will be deployed to benefit shareholders, some to the dividend, the bulk of it to buybacks. With that in mind, I'm not too concerned about the share price. The lower the price, the more profitable the buybacks will be.

    Tags: CB
    Feb 03 12:15 PM | Link | 2 Comments
  • Continuing The Harmonic Trade

    A little over a year ago, I did a diagonal call spread on Harmonic (NASDAQ:HLIT) long July 2014 5 calls and short April 2014 7.5 calls. This trade has worked well for years, given the company has relatively high volatility combined with a strong balances sheet. So it's possible to earn premium by selling covered calls, without worrying unduly about the downside of the long position.

    I've been rolling this along all year, and I'm now long the April 2015 5 calls and short the April 7.5 calls. The stock has gone from $7.60 when I opened the trade to $7.69 when I sold the latest set of calls.

    If shares are above $7.50 at expiration in April, the IRR will be 42%.

    I've been doing this thing on and off since April 2009, and so far I've always made money. Basically I just keep selling calls at 7.50 and buying the next strike down to cover the short position. From time to time I roll the thing forward another 90 or 180 days. IRR has been between 20% and 1,000%, and probably averages about 40%.

    This is like a penny slot machine that is somehow rigged in the gambler's favor. Just sitting in a quiet corner of the almost totally deserted Green Room, put in a $20 dollar bill and sooner or later you get tired of pushing the buttons and close out with $35 or $40. At this point, I don't really care how it ends: it's more of an experiment, how long can this go on?

    Feb 02 11:53 AM | Link | 1 Comment
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