Friday, February 10, 2012

PEP EXIDE/Bought 50 BHB at $30/Bought 50 KWK at $5.3-LT Category/Bought 50 of the Stock ETF VEU at $44

Pepsico hit an air pocket yesterday after the company announced 8,700 job cuts, reported its 4th quarter results, and provided guidance for 2012. Press Release on Job Cuts Press Release on 4th Quarter Results The forecast for 2012 is for a decline of 5% in core E.P.S. growth from its $4.4 2011 number.

Typically, I will own more PEP shares than KO, primarily due to favorable opinion on its snack food business. Currently, I own just 30 shares of PEP bought at $59.95 last October and 132+ KO shares. PepsiCo fell $2.45 in trading yesterday to close at $64.29.

Exide Technologies reported after the close yesterday. Since I own its senior secured bond, I will discuss the particulars, possibly in next Tuesday's post. As usual, I am running a few days behind. I mentioned in Wednesday's post that this earnings report needed to validate the recent upward move in the stock. XIDE Unfortunately, the report did not validate that move, as confirmed by the after hours trading where the stock declined almost 22%. It was just a bad report, though not disgustingly bad, and the guidance was negative also. SEC Filed Press Release

1. Bought 50 KWK at $5.3 Last Tuesday as LT (Lottery Ticket Basket Strategy)(see Disclaimer): The stock of Quicksilver Resources (KWK) has been on a tear lately. The kind of tear common to many lottery ticket selections-hopefully before their purchase-a downward spiral in price. The stock is no doubt hated by investors for many good reasons. The company is focused on natural gas production (about 80%), and the prices of that commodity have plummeted over the past several months. And, it does not appear likely that natural gas prices will recover anytime soon either. Part of the problem is the supply created by hydraulic fracturing. As a result of low prices, many firms have cut back on their capital expenditures devoted to natural gas production, which does not include Exxon.  MarketWatch  The other 20% of KWK's production does not consist of just oil but natural gas liquids and oil.   

KWK recently announced that it planned to spend $370 million this year for drilling and completion activities.  SEC Filed Press Release  Of that amount $82 million is budgeted for "emerging oil plays in the Sandwich Basin in Colorado and the Permian/Delaware Basins in West Texas". The company also announced that it is pursuing joint venture possibilities. This budget represents a substantial decrease from $696 M for 2011.  

Quicksilver Resources also has a lot of debt for its size. The debt is summarized starting at page 15 of KWK's last filed Form 10-Q.

The foregoing discussed negatives and others have driven the price down from a high of $41.49 on 4/30/2008 to the current price action, as the stock struggles to keep its head above $5. KWK Stock Charts That kind of price action will discourage most investors, as those who still own the stock throw in the towel in evident disgust. Potential buyers do not want to take a risk on a stock whose chart looks so awful. All of that is the sine qua non of LT selections.  

Another characteristic is that I see a few rays of sunshine, sometimes at a distance, but enough to encourage the RB to take a flyer. For Quicksilver, the silver lining may turn out to be potentially successful efforts to produce more oil. I do not believe the sellers of this stock consider those efforts likely to bear much fruit in the foreseeable future. Otherwise, they would quit selling and start buying at current prices.  

Two of KWK's plays to increase its oil production are discussed in this article found at  Investopedia. This article was a primary driver underlying this LT selection. According to that author, KWK claims that one of the projects, located in Colorado and called Thunderhead, has the "potential" for 500 million barrels of oil. This project involves drilling in the Niobrara Formation. The other project, called Wolfpack, has the reserve "potential" for 300 million barrels of oil. The company is test drilling those sites. 

The Thunderhead project is also discussed in this Seeking Alpha article. 

See also investor presentation at 1/5/2012.pdf

To retire some debt, the company mentioned late last year the possibility of selling master limited partnership interests in its Barnett Shale assets, Bloomberg, but I have not seen anything come to pass on that plan. (ADDED: After publishing this post early this morning, Quicksilver issued a Press Release announcing that it had filed a registration statement for Quicksilver Production Partners)

SEC Form 10-Q for the Q/E 9/30/2011 For that quarter, the company reported net income of 17 cents per share on 208+ million in revenues. As of 9/30/11, the Darden family and entities controlled by them beneficially owned about 32% of KWK's common stock. 

Late last year, KWK formed a joint venture with KKR dedicated to construct and operate natural gas midstream services for customers in British Columbia and the Northwest Territories of Canada. SEC Form

I would not expect much, if any, positive price action in this security until more is known about its emerging oil plays. KWK is in the dog house and is a show me the money story. 

I suspect that most individual investors do not consult original source material before making a stock selection. I would view that approach to be grossly negligent. Research does not involve reading a recommendation made by some pundit or financial journalist and then monitoring whether the security goes up or down in value. Competent investing is difficult enough when the investor spends time with original source material and attempts to make rational judgments based on known information. ERROR CREEP and the INVESTING PROCESS With so much original source material available to anyone now with an internet connection, there is no excuse for laziness. 

2. Bought 50 Bar Harbor Bankshares (BHB) at $30 Last Tuesday (REGIONAL BANK BASKET STRATEGY)(see Disclaimer): Bar Harbor is a small bank, headquartered in Maine, that has twelve branch locations dotting the Maine coast.

In the 4th quarter of 2011, this bank reported net income of $2.4M or 61 cents per share, up from 53 cents in the 2010 4th quarter. A few items caught my attention. The Board recently increased the quarterly dividend 5.6% to 28.5 cents. The bank is currently well capitalized with the total risk based capital ratio at 16.06% (10% > well capitalized). The bank's   equity capital does not include any government preferred stock either.

As of 12/31//11, the efficiency ratio was 58.6% down from 59.2% at the end of 2010; the tangible equity to tangible assets ratio was 9.86%; the tangible book value per share was $29.61 (just below the current price); and NPAs to total assets stood at 1.45%.  

Bar Harbor Bankshares closed yesterday at $30. The next ex dividend date is 2/13/12.

3. Bought 50 of the Stock ETF VEU at $44 Last Wednesday (see Disclaimer): I am more than a little suspicious of the longevity of this rally. However, given the movement in the VIX below 20, it is possible that this may actually be the prelude to the formation of a Stable Vix Pattern, though that is far from certain at this time.

During a Stable VIX Pattern period, I will increase my exposure to stocks in a variety of ways, including the purchase of stock ETFs. If a Stable VIX Pattern forms, then my VIX Asset Allocation model would require me to hold rather to trade stock ETFs. I have been trading them since the first Trigger Event, announcing the arrival of the Unstable VIX Pattern, in August 2007. The prior Unstable VIX Pattern period lasted from October 1997 until March 2004. Mark Hulbert and the Use of the VIX as a Timing Model 

Normally, when I buy this ETF, I will initiate a position with a 100 share purchase. My skepticism about the current rally makes me more cautious, so I bought just 50 this time.

VEU is one of the low cost Vanguard ETFs that seeks to replicate the FTSE All-World ex United States index. In short, it is an international stock fund for a U.S. investor. The expense ratio is just .22%. The fund owned 2332 stocks as of 12/31/2011. Vanguard - FTSE All-World ex-US ETF - Overview

My last trade in this ETF was to sell 100 shares at $49.19 (March 2011). I had a more profitable round trip when I purchased 100 at $29.8 (April 2009) and later sold those shares at $38.6 (June 2010):

2010 VEU 100 Shares +$862.98
This ETF was part of the total liquidation of stock ETFs during 2007, with shares sold at close to $56. This is a snapshot of the Vanguard stock ETFs sold that year in one account: 

Vanguard Stock ETF 2007 Liquidations/VEU 100 shares +$401.91 
I did not have a Vanguard brokerage account in 2007. Now, I have one and will use that firm to execute trades in Vanguard ETFs since I do not pay a brokerage commission for such transactions.

Vanguard FTSE All-World ex-US ETF closed at $44.13 yesterday. 

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