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Sherritt Investment Is Good On Risk / Reward Basis

|About: Sherritt International Corp. (SHERF)

In this article, I will be exploring the various elements and aspects of the investment in Sherritt International corp.(OTCPK:SHERF). I have been active in monitoring the sharritt's from last one year. In my opinion, opportunities are much more higher compared to the risk involve.

Technical Analysis

 

       
Current Price 3.29    
       
52 weeks high 6.24 5 years high 10.04
52 weeks low 3.11 5 years low 1.35
  Low Mid High
Ranges (Based on 5 years) 1.35 4.25 7.14
4.25 7.14 10.04
Mean 2.80 5.69 8.59
  Low Mid High
Ranges (Based on 52 weeks) 3.11 4.15 5.20
4.15 5.20 6.24
Mean 3.63 4.68 5.72

Table : SHERF price ranges of 52 weeks / 5 years

The current price of SHERF is $3.29 as on Nov 29, 2013. Its 52 weeks high is $6.24 and 5 year high is $10.04. SHERF low price in 52 weeks is $3.11 and in 5 years is $1.35. The description below further highlights the facts.

 

Expected gain vs loss analysis      
Estimated Investment     1000
# of Shares Purchased     304
Ranges
(Based on 5 years)
Mkt value (Based on Mean (Mid)) 1,731
Expected Gain (Loss) $ 731
    73%
Based on mean of 5 years the expected gain is 73%
Ranges
(Based on 52 weeks)
Mkt value (Based on Mean (Mid)) 1,421
Expected Gain (Loss) $ 421
    42%
Based on mean of 52 weeks the expected gain is 42%

Table : SHERF Gain / Loss based on mean of High / Low prices

For example, If we invest $1,000 in the stock of SHERF with the assumption of investing for long term, the mean of price of 5 years low and high is $5.69. If our sale price is $5.69 , the gain will be 73%. In the same way the gain will be 42% if our selling price is mean of 52 weeks high / low price.

 

Ranges
(Based on 5 years)
Maximum Loss   -$590.27
    -59%
Maximum Gain   $1,611.35
    93%
Based on 5 years High / low the expected maximum gain is 93% and expected maximum loss is -59%
Ranges
(Based on 52 weeks)
Maximum Loss   -$54.71
    -5%
Maximum Gain   $896.66
    90%
Based on 52 weeks High / low the expected maximum gain is 90% and expected maximum loss is -5%

Table : SHERF Maximum Gain / Loss based on High / Low prices

In an another example, we can determine maximum gain based on 5 years high price and maximum low based on 5 years low price. In other words, we take 5 years / 52 weeks high / low and enumerate the maximum gain and loss. The assumption here is that the prices of the stock will be volatile within the historical ranges. This will give us quantification of maximum exposure to risk and reward. Based on 5 years high / low, the maximum gain will be 93% and maximum loss will be 59%. Based on 52 weeks high / low, the maximum gain will be 90% and maximum loss will be 5%.

Fundamental Analysis

Sherritt runs its business in four segments which are Metal, Coal, Oil and Gas & Power. Based on the their 2013.Q3 financial, all the segments are generating positive return on assets except the metal segment.

Metal segment is behind in earning compare to prior year due to nickel and fertilizer prices. The price of nickel and fertilizer are down since whole basic material sector is not doing well. I considered this as a temporary issue. Another problem Sherritt's metal sector is facing is Ambatovy project in Madagascar. This project is expose to political risk as well as operational risk. In worst scenario, this project will not be recovered from its problem. The maximum loss associated to Ambatory project is $7.14 ($5.3B [project costs] / 296.9M [outstanding shares]). Sherritt's book value is $9.46. The book value after writing off Ambatovy will be $2.32. The current price is $3.27, maximum risk involve is $0.95 (29%). The maximum return can be $6.19 (189%)

Insider Trading Report

As per the chart below, which shows the insider trading of the Sherritts. it shows that In the last one year there is no sale of stocks by insiders rather there is a purchase of $900k by insiders which also support my analysis.

Conclusion

I think market is reacting very pessimistic on Ambatovy project. Sherrits price is discounted for the problems company's metal segment is facing is more than it should be. This all is creating an opportunity for the investors. I think to go long on the sherrits can give a return of around 50% in a year.

Disclosure: I am long OTCPK:SHERF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.