Friday, December 5, 2014

Bought Back 100 ORKLY at 7.285-Flyer's Basket/Added 100 PNNT at $10.47

Big Picture: No Change

Stable Vix Pattern (Bullish):

Recent Developments:

The government reported that 321,000 jobs were added last month, much better than the consensus estimate of 235,000. The unemployment rate remained unchanged at 5.8%. The data for September and October was revised to add 44,000 more jobs. The average work week rose by .1 hour. Average hourly earnings increased by 9 cents to $24.66. Employment Situation Summary The U-6 number decreased to 11.4 from 11.5. Table A-15. Alternative measures of labor underutilization

U-6 Historical
Total unemployed, plus all marginally attached workers plus total employed part time for economic reasons-St. Louis Fed

The FRB's Beige Book, based on reports from the twelve Federal Reserve Districts, noted that manufacturing activity and consumer spending increased in most districts, and employment "gains were widespread across the Districts".

S & P downgraded Italy's debt to BBB-, one notch above junk.

Saudi Arabia cut prices again for its U.S. and Asian customers. MarketWatch

Royce Micro-Cap Trust (RMT) declared a quarterly distribution of $2.19 per share. I have sold this CEF down to 433+ shares earlier this year with an average cost per share of $7.91 (snapshot of current position at Item # 6 Sold Taxable Account: 126 RMT at $12.6.

The Swiss Helvetia Fund declared a long term capital distribution of $2.195 per share. I own 901+ shares, and I am reinvesting the dividends.


1. Bought 100 ORKLY at $7.285 ($500 to $1,000 Flyer's Basket Strategy)(see Disclaimer): 

Snapshot of Trade:

1 ADR Share=1 Ordinary Share

The ADR shares are traded on the U.S. pink sheet exchange. ORKLY Orkla ASA

When the symbol ends in a "Y", rather than an "F", the investor is buying an American Depository Receipt rather than the ordinary shares.

The ordinary shares trade on the Oslo Stock exchange in Norway. Those shares are priced in Norwegian Krone (hereinafter "NOK"). Those shares closed on the day of my purchase at NOK 51.60 -0.40 (-0.77%).

Bloomberg Page for ORK:NO (Oslo Stock Exchange)

Security Description: Orkla ASA ADS (ORKLY) is a conglomerate based in Norway that owns outright, or has an interest in a hodgepodge of unrelated businesses. The company is making slow progress in jettisoning, or forming joint ventures for businesses unrelated to consumer products.

Its most important core business is branded consumer products which "consists of a portfolio of well-known brands . . . that hold mainly No. 1 and No. 2 positions in their categories".  About Orkla The primary geographic area for those positions would be in Orkla's home markets of Norway, Sweden, Denmark, Finland and the Baltics, but the company claims to have  "good positions in certain product categories in India, the Czech Republic, Austria and Russia".

Consumer products:  

Orkla Foods is the most important business with  2013 operating revenues of NOK 9.797 billion. This business is "concentrated" in Orkla's "own strong brands, which largely hold no.1 and no. 2 positions in their home markets"

The Orkla Confectionery & Snacks business  reported  2013 revenues of NOK 4.784B. These products are sold in the Nordic and Baltic regions.

The primary service ares for the Orkla Home & Personal products businesses is the Nordic region. The products include detergents, toothbrushes, personal care products, dietary supplements and health products, underwear, socks, painting tools and cleaning products, etc. This grouping of consumer products generated NOK 4.77B in revenues in 2013.

Orkla Food Ingredients

Orkla has a 42.5% interest in Jotun, referred to by Orkla  as one of the "world's leading manufacturers of paints, coatings and powder coatings with 58 subsidiaries, four joint ventures and severn associated Companies. Page 23-2013 Annual Report 

Jotun Website

The company also owns the Sarpsfoss hydroelectric power plant and has a 85% stake in the hydroelectric facility AS Saudefaldene's. That hydro plant has normal production volume of 2.4TWh. The hydro business reported EBITA of NOK 46M in the third quarter.

Orkla formed a 50/50 joint venture with Norsk Hydro known as Sapa that is the "world's leading aluminum solutions provider" Sapa-Orkla Investments The asset contributions made by Orkla to this JV were greater than Norsk Hydro, so Orkla received NOK 1.8 billion in compensation for this difference.

The company also owns real estate and various investments. Orkla Financial Investments

The company is in the process of divesting Graenges, a maker of roiled aluminum for the heat exchanger industry. Orkla sold a 60% stake in Graenges in an IPO raising Swedish Krona 3.22B. SEK/USD Interactive Chart

Granges AB - Bloomberg;

Closing Price Day of Trade: GRNG.ST: SEK47.50 -0.50 (-1.04%)

Largest shareholders-Gränges (Orkla shown as owning 23,138,286 shares valued at SEK 1,099,068,585 or about USD146,610,896 on the 12/4/14 exchange rate)

I was glad to see that Orkla sold Orkla Confectionary Brands Russia since I last looked at the company.  For most companies, it is best just to stay away from place like Venezuela and Russia. 

The FPA Crescent mutual fund, managed by Steve Romick, owned over 23 million ordinary shares as of 6/30/14: Semi-Annual Report at page 14

In the October 2013 Art of Successful Investing conference, hosted by Barron's, Orkla was mentioned as a value stock by Oscar Schafer who believes that the shares "could be worth NOK75 to NOK 80." The shares were then trading a USD equivalent of NOK 45 or $7.63. Schafer references the ongoing efforts to improve profit margins and to the Chairman's 20% stake in the company.

There are SeekingAlpha articles discussing this company. One was published last November and another, more comprehensive one, in  June 2013.

Prior Trade: Item # 4 Sold  100 ORKLY at $9 (9/6/14 Post)(snapshot: total return $164.16)-Item # 2 Bought 100 ORKLY at $7.61 (1/13/14 Post)

I also view it as a victory when I profitably exit a position and then buy back the shares at a lower price than the previous purchase.

Chart: The charts for both the ordinary shares priced in NOKs, ORK.OL, and the ORKLY chart provide no solace for a buyer. The ordinary shares have performed better than the USD priced ORKLY due to the weakness in the NOK that flows through into the pricing of ORKLY.

On the day of my purchase, Yahoo Finance had the ORKLY's 200 day SMA line at $8.58 and the 50 day SMA line at $8.01 with the stock in a clear downtrend. So, once again, I am catching a falling knife in the Flyer's Basket risk category. 

Dividends: The dividend history can be found at Orkla's website. Dividends are generally paid annually, but there was a special dividend of 5 NOKs per share for the 2010 accounting year. The last payment, which I received for the prior 100 share lot owned, was NOK 2.5 per share which translated into $41.68 for 100 ORKLY shares (250 NOKs).

2014 Annual Dividend on 100 ORKLY Shares:

Norway's withholding tax was 15% of the total dividend amount ($41.68) before the annual ADR fee charged by the ADR custodian, generally somewhere in the 1 to 3 cent per share range. I was charged 2.5 cents per share or $2.5 for 100 shares which came out of the total dividend paid by Orkla.

I will not own a foreign security in an IRA when a foreign withholding tax is taken from the distribution. When the distribution is paid into a retirement account, it is not recoverable.

If 250 NOKs were paid as the annual dividend next dividend next year, and the currency conversion was then the same as on 12/4/14, then the USD value would be $35.40, in effect a dividend cut for the owner of ORKLY compared to the 2014 payment, even though the payment in NOKs was assumed to be same.

If I further assume in this hypothetical that the total cost for 100 shares was $729, then the dividend yield with all of those assumptions would be about 4.86% before Norway's withholding tax and the annual ADR custodian fee. That yield would go up or down depending on the exchange rate at the time of conversion from NOKs to USDs.

Recent Earnings Report: The market was disappointed with this report. This report is discussed in a Reuters article that noted that third quarter EBITDA was reported at NOK860M, slightly below the consensus forecast of NOK873M. The shares fell 6% in response to this report. The primary problem was a decline in revenues and EBITA from Orkla Foods.

At the time of that earnings release, $1 equaled $6.7172 NOKs.

Orkla 2014 Third Quarter .pdf

2013 Third Quarter Presentation

Q3 2014 Results - Earnings Call Transcript | Seeking Alpha

Rational: The dividend will provide some support to the share price at current levels.

The dividend is paid in Krone which will be converted into USDs for the ADS shares. The value of that dividend to an owner of the ADS shares will be impacted by the conversion rate on that applicable date.  The dividend is paid annually.

There is some potential here for a turnaround based on the ongoing restructuring and refocusing efforts.

There are assets that can be readily sold to expand the consumer products businesses.

As noted below, currency risk is material, but currency conversion is both a potential risk and benefit. The NOKs value in USDs has already depreciated to the March 2009 lows:

Long Term NOK/USD Chart:

The USD priced shares will outperform the ordinary shares when and if the NOK rises in value against the USD.

Risks: With any foreign stock, currency risk is important. If the Krone fell in value against the USD after my purchase, that decline will flow through to the ADS price.

The Norwegian Krone is widely view as a commodity currency due to the importance of oil revenues in Norway's economy. CNBC;  Bloomberg The recent slide in oil has caused a significant slide in the value of NOK against the USD. NOK/USD Interactive Chart (13 year low) On May 9, 2014, 1 NOK would buy about $.1696 and that conversion rate has declined to $.1415 on 12/4/14 or about a 16.57% decline. That decline flows through into the pricing of the the USD priced ORKLY.

Over the past year, the currency conversion decline in the NOK's value has caused the USD priced ORKLY shares to underperform the NOK price ordinary shares by over 12% through 12/4/14.

Orkla's operations in Russia appear to be a problem for the company.

The restructuring, downsizing and refocusing efforts may not produce the hoped for results.

I am not expressing much confidence in Orkla's future by classifying the investment as part of the Flyer's basket strategy which limits my total exposure to $500 to $1,000.

Future Buys and Sells: I am not likely to buy more unless I see significant improvements in revenues and profits. I do not have a price target for selling the shares. As noted above, the stock appears to be undervalued, but is undergoing a restructuring process that creates valuation problems. Recent earnings reports have also been disappointing. I am basically nibbling at the shares before it becomes apparent whether or not the company can grow its remaining businesses at a higher than currently anticipated rate.

Closing Prices 12/5/14:
ORKLY: $7.25 +0.01 (+0.14%)
ORK.OL: 51.90 +0.30 (+0.58%)
NOK/USD= .1397 -0.0003 (-0.18%)

2. Added 100 PNNT at $10.47 (see Disclaimer): 

Snapshot of Trade: 

Closing Price Day of Trade 12/5/14: PNNT: $10.48 -0.17 (-1.59%)

Security Description: PennantPark Investment (PNNT) is an externally managed BDC.

PNNT sold shares last September at a public offering price of $11.63 per share. The underwriter's paid $11.2811 per share. PennantPark Investment Corporation Prices Public OfferingProspectus

PNNT SEC Filings

Since early in 2010, this stock has traded mostly in a narrow channel between $10 to $12 after crashing in 2008 and early 2009. PNNT Interactive Stock Chart

Since 4/19/2007 and through 12/4/14, the annualized total return with dividends reinvested was 7.14%. Calculator That is better than SPY, the S & P 500 ETF, which produced a 6.78% annualized return over the same period. To secure the PNNT return, however, the owner would have had to experience the near total collapse in PNNT's price during the Near Depression and to keep reinvesting the dividend at those low single digit market prices.

If I start that total return calculation on 1/2/2010, the PNNT annualized return increases to 13.47%. Starting the calculation on March 9, 2009 after the price had cratered to the low single digits, the annualized total return increases to a whopping 39.88%. In short, a lot depends on when you buy.

PNNT Net Asset Value Per Share History: 
Sourced 10-K and  10-Qs
9/30/14:     $11.03
6/30/12:     $10.16
6/30/11:     $11.08
6/30/10:     $10.94
6/30/09:     $11.72
9/30/08:     $10.
6/30/07:     $12.83
3/31/07:     $12.08
April 2007: IPO at $15  Prospectus (underwriters paid $14.025)

The external managers are paid 2% of gross assets plus a generous incentive fee.

A list of investments can be found starting at page 61 of the recently filed Annual Report:10-K

Prior Trades: The prior trades are summarized in Item # 2: Bought 100 PNNT at $10.66-Regular IRA This last purchase brings me up to 300 shares.

I last sold PNNT when the market price was at a premium to NAV per share, viewed as substantial for an externally managed BDC in my opinion. Item # 5 Sold 50 PNNT at $11.92 (12/17/13 Post)(profit $71.68)- Item # 6 Bought 50 PNNT at $10.2-ROTH IRA (11/21/12 Post) When I sold that 50 share lot, the last reported net asset value per share was $10.49 as of 9/30/13, so an $11.92 market price was a 13.63% premium to that NAV number.

Last Earnings Report: For its 4th fiscal quarter which ended on 9/30/14, PNNT reported core net investment income of $.34 per share. The net asset value per share was reported at $11.03. The weighted average yield on debt investments was 12.5% as of 9/30/14.

As of 9/30/14, this BDC had a significant exposure to subordinated debt, preferred stock and common equity:

SEC Filed Press Release

Rationale: As with all BDCs, my goal is to harvest a 10% annualized total return and will consider doing so when and if I achieve that objective. I could achieve that annualized return by collecting 4 dividends and selling the shares at a slight loss. I am not likely to sell the shares for a loss unless I become spooked about this BDC's performance.

The current quarterly dividend is $.28 per share. At a total cost of $10.43 per share, and assuming a continuation of that rate, the dividend yield would be about 10.74%.

The general idea is to harvest that yield and to escape without losing money on the shares. Easier said than done is my motto for externally managed BDCs.

This last purchase was at a 5.4% discount to the last reported net asset value per share.

By buying at below the last reported net asset value per share, I simply improve my chances of getting out with a share loss.

PNNT is not a serial issuer of common stock like PSEC which unfortunately also has a history of selling shares before net asset value per share. I view PSEC's continuing share sales at below net asset value, which is dilutive to existing shareholders, to be a major negative for owning PSEC shares.  

Risks: As with all BDCs, PNNT has considerable risks summarized in a very long discussion found in its F/Y 2014 Annual Report staring at page 18, 10-K

BDCs invest in risky companies and do not retain much of a capital after paying dividends to their common shareholders. The shares will perform badly during a recession.

PNNT has an usually large allocation to riskier subordinated debt and a large second lien debt weighting (see above snapshot)

Loans made by BDCs are generally not rated by Moody's or S & P. If the loans were rated, most of them would be at CCC+ or lower. An average portfolio yield of 12.5% adequately describes the risk when the ten year treasury is hovering around 2.3.%.

PNNT had about a 9% exposure to the oil and gas sector as of 9/30/14. The largest exposure appears to be to New Gulf Resources, L.L.C. at 5%, a company that closed on a $500M loan last May to buy some assets from Halcon Resources. That exposure may have contributed some to the recent price weakness in PNNT's shares. That investment is shown as second lien debt with an 11.75% coupon with a value of $45.675M and a cost of $44.615+M as of 9/30/14 (page 61, 10-K) There is shown some subordinated debt at page 62, with a cost of 13.030+M and a value of $10.665M that looks like a 12% PIK note (which I call pretend interest payments, though the correct name is payment-in-kind) PNNT also owns some warrants (cost $495,000, valued at 2.97M as of 930/14, page 63)

Another smaller E & P investment is in a company called Energy & Exploration Partners which filed for an IPO in September 2014. S-1S-1/A The share symbol was shown as ENXP in the prospectus. I believe that this company is still private. The last few months have not been an opportune time to bring an E & P public.

Future Buys and Sells: I will not buy more shares. I was full at 200 shares, given my analysis of the potential rewards and risks, but decided to add another 100 shares anyway that only slightly increases my overall risk.

I am hoping that most of the BDC weakness late this year is related to tax loss selling. I hope to sell 100 shares next year, when and if the market price per share returns to a slight premium to net asset value per share. When I discussed buying just 40 shares of BDCL, I mentioned that tax loss selling was one explanation for the persistent weakness in BDC stock prices during the current quarter. I also noted other possible explanations that may extend the selling onslaught into next year and beyond.  

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