wildpixel
I have some good news to report. My VBR lists have outlined solid progress on the performance front. All 34 picks since inception in late June, as an equally-weighted group (excluding dividends and trading costs), “outperformed” diversified U.S. indexes for price change over the last week of trading. In addition, the 23 VBR stocks mentioned over the past 5 weeks (pictured below) are slightly outperforming both the S&P 500 and Russell 2000 indexes, measured from the Friday closing prices when each was chosen (14 of 23 were outperforming the Russell 2000). Granted the median and mean average outperformance is very slight over 5 weeks or less (for example, mean +1.65% better than Russell, median +1.42% better than Russell), but this is an improvement from several weeks ago, when overall gains were struggling to keep up with the small-cap Russell 2000, our closest peer index for the vast majority of individual VBR selections.
Statistically, my experience and research with the momentum-focused formulas used for the Volume Breakout Report is outperformance typically follows for the next 6-8 weeks. And, this should be primary in your thinking when trading them. A second-level idea is a number of choices will turn into big gainers 6-12 months down the road. The key is to let winners run for a spell, while being quick to cut sizable losers. Specifically, losses of -20% or greater can be a signal previous bullish chart patterns have been overridden by bad operating news at a company. The world is always changing, and rearview mirror chart reading can never predict the future with 100% accuracy (I’ll take 60%).
VBR Picks from August 12th Closing Price VBR Picks from August 5th Closing Price VBR Picks from July 29th Closing Price VBR Picks from July 22nd Closing Price VBR Picks from July 15th Closing Price
New VBR Buy Signals
Barnwell Industries
The first pick this week is a small ($29 million market cap) Hawaiian land owner and real estate developer that has been investing money into Canadian oil/gas production assets. The 2022 spike in oil/gas prices has been a boon to earnings and cash flow, but the stock quote has yet to figure out the super-positive financial returns may continue for years. Barnwell Industries (NYSE:BRN) operates in three areas: 1) acquiring, developing, producing and selling oil and natural gas in Canada and Oklahoma (oil and natural gas); 2) investing in land interests in Hawaii (land investment); and 3) drilling wells and installing and repairing water pumping systems in Hawaii (contract drilling).
Company Webpage - August 19th, 2022
The bullish investment argument is dramatic improvement in oil/gas sales and earnings have yet to be fully discounted in the stock price. Last week, the company announced here an end to its regular share issuance program (which raised cash for new investments on a rolling basis) and its first dividend payout in years. With rising oil/gas production volumes intersecting with sharply higher energy pricing vs. a year ago, management is very confident cash generation for the business will continue at a high rate. Climbing from just 55% of sales in the first half of 2021, oil and natural gas sales now represent 80% of total company revenue. However, the stock still appears to be valued by Wall Street as a Hawaiian land development and contract water-well drilling company.
Barnwell, June 2022 10-Q
Price to trailing 12-month earnings of 4x (including oil asset shuffling gains), sales of 1.1x, and cash flow of 6.3x are not any different than a year ago, when the quote was just above $2 vs. almost $3 today (+40% YoY gain). In combination, these three valuation ratios are the lowest readings since early 2009.
YCharts - Barnwell, Basic Fundamental Valuation Ratios, 1 Year
Tangible book value stood at $1.80 per share at the end of June, with $12 million in cash and $20 million in total current assets. This compares quite favorably with $8 million in current liabilities and $18 million in total liabilities. So, whatever income and cash flow can be derived from oil/gas revenue the remainder of 2022 and all of 2023 will be a surplus number directly helping shareholder worth.
The rapid rise in extra tangible assets (cash and reinvestments into Canadian well volumes) over the last 12 months, combined with a flat stock quote have raised the underlying net assets of the company closer to its equity market capitalization. Looking forward, if oil/gas prices remain high another year, I don’t see where the downside of an investment in Barnwell will come from (assuming management doesn’t engage in overly ambitious acquisition plans).
YCharts - Barnwell, Price to Tangible Book Value, 1 Year
When we subtract out the negative EBITDA years of 2017-21, the enterprise value of Barnwell (market cap + debt – cash) is today trading its lowest multiple vs. basic cash earnings in modern times (1.55x). The 35-year graph below highlights this setup in the middle of 2022, alongside the ultra-low 0.66x EV to Revenue calculation.
YCharts - Barnwell EV Ratios, 35 Years
For comparison, Warren Buffett is excited to pay 4.5x EV to EBITDA for Occidental Petroleum (OXY) or 5.5x for his Chevron (CVX) investment. Some other oil/gas names, many from Canada are pictured below for quick review. Measured against this group of admittedly larger and more diversified petroleum industry peers, Barnwell is selling at a 65% discount to the average EV ratio on basic cash generation for owners.
YCharts - EV to EBITDA, Oil/Gas Industry, 1 Year
Explaining a similar bargain situation vs. sales, the EV to Revenue number is selling at a 60% discount to this peer oil/gas list of companies.
YCharts - EV to Revenues, Oil/Gas Industry, 1 Year
Thursday’s daily trading volume was the highest in 9 weeks, and price is nearing a 3-month high breakout. Douglas Woodrum, a company director, purchased 100,000 shares on June 14th at $2.66 per share, while no insider sales have been reported since March. Depending on different economic scenarios and oil/gas market zigzags, I have a potential price targets for Barnwell shares during 2023 between $2 and $6 per share. Price spiked on the Russia invasion of Ukraine to $6.25 in early March, as investors scoured the world for benefiting oil/gas production. There are a number of similarities in the chart and momentum pattern today vs. late February, drawn below.
A return to $6 per share is entirely possible if natural gas prices remain high and crude oil moves above US$100 a barrel again in 2022 or early 2023 (which is not my current forecast, but could play out under certain circumstances).
StockCharts.com - Barnwell Industries, 1 Year
CPS Technologies
A specialty maker of custom ceramic products and materials out of Massachusetts, CPS Technologies (CPSH) has many of the turnaround traits found in another nanomaterials favorite CVD Equipment (CVV). I mentioned the bullish setup for CVD Equipment weeks ago in my full-length article here. CPS Technologies’ primary advanced material solution is metal-matrix composites [MMCs], a combination of metal and ceramic. Both CPSH and CVV have been restructuring operations to meet the challenging pandemic operating environment, while refocusing sales on new markets like the parts and materials required for rapid electric vehicle [EV] demand growth. Both have completely cleaned up their balance sheets, with plenty of cash and little debt now part of the equation, which better prepares the two stocks for future investor returns/performance.
CPS outlined its highest “free” cash flow reading since 2013 over the trailing 12-month period. On the balance sheet, $5 million in cash and nearly $15 million in total current assets were matched against a minor $500,000 in debt and $4.7 million in total liabilities during early July. A liquid tangible book value of roughly $1 per share now exists vs. today’s $3.69 stock quote. Sales ran +30% higher in the first 6 months of 2022 vs. the equivalent 2021 period, and the price to operating earnings multiple is around 30x. Profit margins are running about 5% better than last year per sales dollar.
StockCharts.com - CPS Technologies, 1 Year
Supernus Pharmaceuticals
A variety of medical product names, drug companies, and health-related enterprises have been under accumulation in 2022, as a defensive play on weak stocks/bonds and a slowing economy. I have written about many smaller-cap biotechs and pharma companies this year. Another interesting pick in this sector is Supernus Pharmaceuticals (SUPN) located in Maryland, which outlined a new 52-week high price on Friday. Smartly growing sales of Qelbree for adult ADHD, stable growth in its Parkinson-treatment portfolio and research into a first-in-class molecule for treatment-resistant depression are the main fundamental reasons for ownership. The organization has specialized in developing prescription drugs for central nervous system disorders for over 30 years. I great breakdown of company growth-drivers was presented this week by Seeking Alpha contributor Jonathan Faison in an article linked here.
Versus $1.8 billion in stock capitalization, Supernus held $360 million in cash and $625 million in total current assets. $400 million in debt and $825 in total liabilities are the IOU and leverage story. During the past 12 months, the company delivered $1.02 in EPS and $2.25 per share in free cash flow on $630 million in revenues. Sales and earnings are expected to flatline by analysts into 2023, so growth “beats” will be required in the coming quarters to keep the stock in a rising trend. Again, safety considerations in portfolio construction, plus potential new drug approvals as value kickers, are the reasons to consider ownership. A lack of sellers in the stock in recent weeks is a positive sign for chart technicians.
StockCharts.com - Supernus Pharma, 1 Year
Texas Mineral Resources
This selection is a highly speculative idea, more of an educated gamble actually on quick short-term gains. Texas Mineral Resources (OTCQB:TMRC) is an exploration company currently targeting heavy rare earth, industrial and technology metals through its 20% ownership interest in the Round Top Mountain project in Texas. The Round Top deposit hosts 16 of the 17 rare earth elements including uranium, plus lithium, gallium and other high-value tech minerals. Round Top hosts nearly half of the 50 minerals and metals on the U.S. Government’s Critical Minerals List with more than 60% of the materials from Round Top expected to be used directly in green or renewable energy technologies.
During 2021, TMRC agreed to a potential ownership stake of 50% in a silver-focused asset in the Black Hawk District, Grant County, New Mexico, after certain conditions were met. At the end of July, the company announced preliminary magnetic investigations of the silver property indicated the possibility of several high-grade metal veins relatively close to the surface (75 feet in depth), with the likelihood of associated Critical Metals of cobalt, nickel, arsenic and uranium found in the same area over the years. Actual drilling for resource confirmation is the next step. Separately, in June it was announced by USA Rare Earth (80% partner at the Round Top Mountain project) that $100 million would be invested into a new processing facility in Stillwater, Oklahoma, slated for operations by late 2023. This could be a precursor to developing a formal Texas mining plan.
I cannot find a concrete public explanation for the price gains of late. The price advance could be a function of ongoing New Mexico discoveries, or perhaps general optimism by Wall Street over the recently passed, global-warming fight incentives in the Inflation Reduction Act.
The company has not built and does not run any operating mines generating revenue and profits, but it could do so in the years ahead. I view the stock as a short-term trading vehicle, with the potential for swift gains of 20%-50% in coming weeks on a news event. Taking quick profits is suggested. On the flip side, if no news is approaching, the stock may fall back toward $2.00 per share (the 200-day moving average) for a 10% or 15% loss. I would exit on prices under $1.80, for a stop-sell level.
StockCharts.com - Texas Mineral Resources, 1 Year
Final Thoughts
My goal is to provide readers with above-average performance ideas for the immediate future. The gains during August are the best example (so far) of what I am shooting for. Hopefully, today’s new VBR suggestions will help the building market outperformance trend in coming months.
If new to the Volume Breakout Report series, you can read past efforts to get a better understanding of this research effort. The July 9th update is a good place to start, with strategies on how to use VBR picks. High volume (vs. the recent past) advances in price are just one part of the system and proprietary formulas I have invented. Daily computer searches that utilize as many as 15 indicators of technical trading momentum are ranked against thousands of equities, to find the best opportunities. Then, a review of company fundamentals and growth prospects (using 35 years of investing experience) narrows each sort list to the picks I write about.
I suggest readers take the time to do further research into any of the VBR selections that appeal to you, a function of your risk appetite or sector exposure needs in portfolio construction. Please understand small-cap choices should be a limited portion of portfolio design. Holding a diversified number of stocks (at least 20-30) is the prudent risk-adjusted way to play them. Volatile price swings are part of the investing process for smaller companies on Wall Street. Please consider using preset stop-loss sell orders to reduce downside potential in individual names. Depending on your risk tolerance, 10% to 30% stop levels are recommended.
Thanks for reading. Please consider this article a first step in your due diligence process. Consulting with a registered and experienced investment advisor is recommended before making any trade.
