2 Tax Bounce Candidates: Apple And Genoil, And What Investors Are Missing

Dec. 15, 2012 9:44 AM ETAAPL, GNOLF21 Comments
Tyson Halsey, CFA profile picture
Tyson Halsey, CFA

Apple, Inc. (AAPL) and Genoil, Inc. (OTCPK:GNOLF) are two very promising tax bounce candidates. AAPL is seeing especially high tax selling because it is the greatest profit generating stock in history with most of those gains realized just in the last eight years.

Long-term tax rates will rise from 15% to 20% and will be levied an additional "unearned income Medicare contribution tax" of 3.8% as part of the Patient Protection and Affordable Care Act also known as "Obamacare." Capital gains tax rates will rise from 15% to 23.8% tax - a 58.667% increase in capital gains tax rates-if those gains are taken in 2013 instead of this year. Consequently, this year, the stock market is experiencing more intense tax selling as a result of the new capital gains tax rates which becomes effective in 2013. Investors are selling AAPL in particular due to the extraordinary capital gains it has generated for its shareholders. Other stock winners and losers will be sold more aggressively to avoid the near 59% rise in capital gains taxes. GNOLF, a speculative heavy oil upgrading and environmental company, is experiencing heavy tax related selling as it is down 60% this year from 11 cents to 4.5 cents, but GNOLF offers some unusually attractive fundamental prospects that prompt its mention.

AAPL at $508 per share trades at 7.7 times Sept. 2013 earnings estimates and 6.6 times Sept. 2014 earnings estimates as we head into the Christmas selling season. AAPL pays a $2.65 quarterly dividend and yields 2.1%. AAPL's market capitalization is $480 billion and has $121 billion in cash and equivalents as of September 2012.

AAPL witnessed robust iPhone sales in the September quarter, but had somewhat disappointing iPad sales. I believe that iPads are viewed more as a gift whereas iPhones are viewed more as a utility. Consequently, iPads should exceed expectations as America's most coveted Christmas gift this year and lead to a very strong December quarter which will be reported around January 24, 2013. AAPL is "entering this holiday season with the best iPhone, iPad, Mac and iPod products ever, and we remain very confident in our new product pipeline" reported AAPL CEO Tim Cook on the company's fourth quarter conference call on October 25th, 2012.

AAPL sells premier products and consequently is not likely to be drawn into a price war with Samsung (OTCPK:SSNLF) and/or Google's (GOOG) Android as that is not their business model. Their business model is simply to try to sell more units of each product at a premium price, whether it is iPods, Macs, iPads, or iPhones. That is why AAPL takes the lion's share of profits in their markets.

AAPL's stock price weakness is the combination of fears of competition like that from Google's Android and Samsung combined with the fact that no company has made more people more money than AAPL and capital gains tax rates are about to rise by 59%. Investors are selling AAPL shares to avoid paying 23.8% instead of 15% on what might be a $100,000 or a $100,000,000 capital gain for some investors. Never has a company been more logically sold for tax planning purposes than what we have witnessed in AAPL this Fall. Additionally, competitive fears following a parabolic move at the end of a multi-year run in AAPL stock has broken upside momentum and psychology adding to the selling pressure and driven AAPL stock from $705 to $508, a 27.5% decline off its high.

The combination of the elimination of tax related selling, an exceptional valuation proposition, strong earnings, strong foreign demand, and a positive earnings surprise should drive the stock to $650 by the end of January.

The stock will need more time technically to consolidate before it breaks above $700 per share, but that will likely happen when the company is able to introduce a new product to its portfolio, which might occur in the back half of 2013 or 2014.

We bought AAPL stock this week for our client portfolios.

Genoil, Inc. is a speculative stock with a "going concern" auditors note. However, its heavy oil upgrading technology makes it a potentially tremendous investment speculation as its technology could help defuse the Hubbert Curve or Peak Oil Theory since GNOLF's desulfurization and hydroconversion upgrading technology could convert an estimated 600 billion barrels of flowing heavy and sour crude oil into synthetic light sweet oil in the years and decades ahead. GNOLF's oil water separating (OWS) technology is just beginning its worldwide rollout as announced with its first order received from Vela International Marine Limited (a division of Saudi Aramco) following a two year testing period on October 22, 2012. GNOLF uses its OWS technology in its Crystal Sea bilge cleaner to remove oil with industry leading two parts per million separation rates. The Crystal Sea has received certification from the US Coast Guard, the American Bureau of Shipping, and other obligatory international licenses.

GNOLF appears poised to turn profitable in the first or second quarter of 2013 based on sales of its Crystal Sea bilge cleaning units. GNOLF's OWS technology has a port application for bilge dumping and has begun experimenting with the treatment of fracking fluids.

I recently returned from Edmonton, Alberta, Canada where I visited the company and observed the Crystal Sea in use at an industrial oily water waste disposal facility. I met with the Crystal Sea's inventor Paul Costinel and gained an appreciation for the exceptional fluid dynamics which achieves the two parts per million oil to water ratio without a filter. The fact that the Crystal Sea operates without a filter gives it an operating cost advantage of $16,000 per year. Top of the line bilge cleaners cost about $130,000.

On the upgrading front, Lukoil requested a new proposal for its GHU. Six years ago, Lukoil had flown by jet 100 barrels of crude oil from the Yarega oil field to Two Hills, Alberta, Canada, where GNOLF has its upgrading pilot plant. The results from that set of tests were excellent, however, Lukoil did not proceed at that time. Now Lukoil has requested an updated proposal for its GHU which desulfurizes over 99.5% without the need for external hydrogen or natural gas and with an operating cost saving of 61% compared with conventional competing technologies. Prompted by a Lifschultz family connection to the Russian Ministry of Energy, Lukoil has asked for an updated presentation. President Tom Bugg mentioned this Lukoil request at GNOLF's annual meeting.

If GNOLF were to meet the engineering specifications requested by Lukoil and Lukoil implemented the GHU, GNOLF could see significant price appreciation. Lukoil is one of the largest oil companies in the world as measured by hydrocarbon reserves. GNOLF has been marketing its GHU throughout the Middle East for the last several years. Five years ago, GNOLF had two former Saudi Aramco executives working for the company. Three times in 2011, GNOLF mentioned in press releases that it was close to a major contract in the Middle East. If GNOLF were to have its GHU technology adopted by either Lukoil or Saudi Aramco, this would be an enormous technological endorsement.

GNOLF has a "going concern" note from its auditors and $77 million in accumulated losses. Those accumulated losses equal approximately 19 cents per share or 6 cents per share of value to a profitable operating entity. We believe the company's Crystal Sea opportunity alone could address a 50,000 large ship market and sell units in excess of $100,000 per, and a 1% penetration rate could be achieved in two years. Their other OWS prospects offer other attractive value propositions which are additive to the Crystal Sea technology value.

GNOLF is a tremendous asymmetric risk to reward profile. GNOLF looks close to finally commercializing both its oily water separator technologies and its desulfurization hydroconversion upgrading technologies after years of delays. At current prices and given the prospects for commercialization at this point, this tax bounce could exhibit a powerful move after January when most tax bounces begin to lose momentum.

Before I invested in this company, I discussed its technology with a Julian Robertson protégé Tiger Cub hedge fund called North Sound Capital. This $3 billion entity had hired four Bechtel engineers to evaluate its upgrading technology, before it took a 13d position 7 years ago. Tom McAuley ran North Sound Capital and is a billionaire investor in Greenwich, CT. North Sound Capital has closed, but there are some other sophisticated professional investors among Genoil's shareholder base.

Disclosure: I am long AAPL, OTCPK:GNOLF.

Business relationship disclosure: I wrote this article myself and am not being compensated to write it. I have been given stock options for consulting to Genoil, Inc. I own Genoil personally.

Additional disclosure: I have been compensated by Genoil with stock options for work as a business consultant. I am an Investment Advisor and my clients own both Apple, Inc. and Genoil, Inc.

This article was written by

Tyson Halsey, CFA profile picture
Tyson Halsey, CFA, founded Income Growth Advisors, LLC, a South Carolina based Registered Investment Advisor. Halsey has invested in Master Limited Partnerships (MLPs) since 2000. Through his career, Halsey has researched and invested in technology, energy, quantitative strategies, managed hedge funds and has been an activist investor on behalf of shareholder rights. Halsey has appeared in major media including The Wall Street Journal, Barron's, Charleston Post & Courier, South Carolina Public Radio and CNBC. Halsey won the USA Today CNBC Investment Challenge in 1992 in the options division.Halsey formed Optima Process Systems, Inc. in 2018 and used economic cost modelling for ESG solutions. We analyzed heavy oil upgrading in South America, bunker fuel desulfurization for IMO 2020, and biofuel and biomass processing. Halsey has moderated panels on the energy transition "ESG 2.0" for the Ivy Family Office Network (IVYFON).

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