The last update for this basket was published on 12/19/14: Lottery Ticket Basket as of 12/19/14/Sold QLGC at $11.92/Bough SKIS at $7.4
The Lottery Ticket Basket Strategy will use a deep contrarian value strategy appropriately characterized as catching a falling knife. A common criteria for stock purchased in this basket is a smashed stock price.
See 2004 Study By the Brandeis Institute: Falling Knives Around the World
Selections are made primarily on statistical criteria including price to book, price to sales, forward P/E, cash per share and/or free cash flow. I spend anywhere from thirty minutes to an hour researching a potential purchase prior to purchase.
For many selections, I may be pessimistic about the firm's future, but not as pessimistic as the market. I will also occasionally see a ray of light at the end of a dark tunnel.
Since I expect failures, which are inevitable and unavoidable in this kind of approach, I limit my exposure to $300 per stock plus any prior trading profits.
Since I expect failures, which are inevitable and unavoidable in this kind of approach, I limit my exposure to $300 per stock plus any prior trading profits.
After experiencing some success with this strategy, I now have a requirement that my total investment in all LT holdings can not exceed my total realized gains for this basket strategy. My total exposure is substantially below my net realized gain number, so I currently have a lot of available capacity to expand this basket under this particular risk control rule.
The name of the strategy aptly describes the risk. It is somewhat analogous in many cases to playing a hand of blackjack for the purchase amount knowing that the card count favors the house. It is a form of entertainment and an alternative to a casino visit.
Based on the results to date, this strategy is far more likely to produce positive results than playing Blackjack, even with the LB's skill at the tables. The primary purpose of the LT strategy is to entertain Right Brain, let it swing for the fences with up to $300, and to keep the Nit Wit from interfering with Left Brain's management of Headknocker's portfolio.
Since the last update, I have bought the two selections discussed below and sold the following:
Bought as LT: 50 RFMD at $5.18-Sold 50 RFMD at $16.52-Total Realized Gain 206+% (12/30/14 Post)(snapshot of realized gain $551.08)
Bought: 100 MRGE at $2.48-Sold 100 MRGE at $3.54-Lottery Ticket Basket (1/7/15 Post)(snapshot of profit $90.24)
The name of the strategy aptly describes the risk. It is somewhat analogous in many cases to playing a hand of blackjack for the purchase amount knowing that the card count favors the house. It is a form of entertainment and an alternative to a casino visit.
Based on the results to date, this strategy is far more likely to produce positive results than playing Blackjack, even with the LB's skill at the tables. The primary purpose of the LT strategy is to entertain Right Brain, let it swing for the fences with up to $300, and to keep the Nit Wit from interfering with Left Brain's management of Headknocker's portfolio.
Since the last update, I have bought the two selections discussed below and sold the following:
Bought as LT: 50 RFMD at $5.18-Sold 50 RFMD at $16.52-Total Realized Gain 206+% (12/30/14 Post)(snapshot of realized gain $551.08)
Bought: 100 MRGE at $2.48-Sold 100 MRGE at $3.54-Lottery Ticket Basket (1/7/15 Post)(snapshot of profit $90.24)
Snapshots of realized gains can be found at the end of the Gateway Post on this topic: Lottery Ticket Strategy: New Gateway Post
Net Realized Gains: $14,789.62
Click to Enlarge:
Considering that the strategy started in 2009, and has usually had $5000 to $7000 devoted to it with the severe monetary limitations per stock discussed above, that is a decent return in context.
Net Realized Gains: $14,789.62
Click to Enlarge:
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| LOTTEY TICKET BASKET AS OF 2/20/15 |
I have a few selections that appear to be making runs toward zero, a known hazard when the selections are falling knives.
Generally, I will keep the Lotto until it becomes really tight on whether the sale's proceeds will cover the brokerage commission. I have had several come back into good profits after collapsing in price, so I want to give these selections a lot of room to run to the downside before I pull the plug. When I pull the plug, the result is often a total loss.
I am after all dumpster diving when selecting Lottery Ticket purchases, and consequently expect to come up with nothing but garbage more than just a few times.
Generally, I will keep the Lotto until it becomes really tight on whether the sale's proceeds will cover the brokerage commission. I have had several come back into good profits after collapsing in price, so I want to give these selections a lot of room to run to the downside before I pull the plug. When I pull the plug, the result is often a total loss.
I am after all dumpster diving when selecting Lottery Ticket purchases, and consequently expect to come up with nothing but garbage more than just a few times.
Some of the selections have improved their circumstances sufficiently that I would no longer categorize a buy as a Lotto.
NPBC have already been promoted to the Regional Bank Basket Strategy, but I am keeping the 30 share lot bought as a Lotto in this basket.
ING, FCF and FCE/A no longer fit into the Lotto risk category. I have no interest in acquiring more shares, so they wallow in this lowly risk category. My largest unrealized gain is in Forest City shares.
ING recently resumed its common share dividend after eliminating it back in 2008. The company plans to pay out €.12 per share later this year and has committed to pay at least 40% of Ing Group's annual net profits in dividends. Dividend Policy & Payments | ING
A number of recent Lotto purchases were bought to generate income and are unlikely to produce significant percentage capital gains.
NPBC have already been promoted to the Regional Bank Basket Strategy, but I am keeping the 30 share lot bought as a Lotto in this basket.
ING, FCF and FCE/A no longer fit into the Lotto risk category. I have no interest in acquiring more shares, so they wallow in this lowly risk category. My largest unrealized gain is in Forest City shares.
ING recently resumed its common share dividend after eliminating it back in 2008. The company plans to pay out €.12 per share later this year and has committed to pay at least 40% of Ing Group's annual net profits in dividends. Dividend Policy & Payments | ING
A number of recent Lotto purchases were bought to generate income and are unlikely to produce significant percentage capital gains.
Some Unrealized Gains as of 2/20/15:
FCE/A: 114.8%
ING: 59.92%
IRDM: 36.49%
FCF: 37.96%
NPBC: 31.44%
FHN: 24.17%
Most of my discussions of Lotto purchases are cursory. I am merely summarizing some points viewed as relevant to the Lotto characterization (e.g. risks) and a ray of light for possible capital appreciation.
1. Bought 50 Shares of Gastar Exploration at $2.53 (see Disclaimer):
Snapshot of Trade:
The shares closed at $3.06 last Friday.
Gastar Exploration Inc. (GST) is a small E & P company: Operations
SEC Filings
Gastar has slashed its 2015 capital budget to $103M, of which $79M is budgeted for drilling, completion and infrastructure costs. GST claims that it increased it proved reserves 87% to 102.1M barrels of oil equivalent during 2014. About 53% of those reserves are in liquids and the remaining portion consists of natural gas. The pre-tax "present value of future cash flows of those reserves discounted at 10% (P-V 10) grew 67% to $988.7M. GST Reserves and Budget Update
The first effort at formulating a 2015 budget, made in September 2014, arrived at a $257.3M number, GST 2015 Capital Budget and Guidance That budget was reduced to $173M when Gastar announced third quarter results: GST 3Q14 Financial Results
In September 2014, Gastar sold 17M shares at the public offering price of $6.25, with the usual over allotment option granted to the underwriters who paid Gastar $5.984375 per share. Prospectus That was very fortunate timing for GST. The shares thereafter declined by almost 60% to my $2.53 purchase price.
The hedges in place as of 9/30/14 are summarized starting at page 16 of the 10-Q. I have no qualifications to discuss hedges.
Gastar reported third quarter net income available to the common shareholders of $9.8 or $.15 per share. Revenues before hedging increased by 46% to $35.1M. Revenues from liquids represented about 80% of 3rd quarter revenues. Average daily production was 9.8 thousand barrels of oil equivalent. GST 3Q14 Financial Results
Results-Earnings Call Transcript | Seeking Alpha
I previously made a successful round trip in Gastar shares. Sold 100 GST at $4.1 (11/25/13)(snapshot of profit $126.09)-Bought 100 GST at $2.68 (7/29/13 Post)
A casual reader would notice that I bought back 50 shares rather than my previous 100 share buy at a higher price. Gastar is a small E & P company with how shall I say this politely-"uncertain prospects".
I also own 50 shares of GSTPRB, a 10.75% coupon equity preferred stock and that coupon says a lot about GST's risks. Bought: 50 GSTPRB at $25.3 (12/13/13) During the recent cascading crude oil decline, GST.PB cratered to a low near $18. I actually have a tax profit in the shares due to the dividend being classified as ROC.
The company has two equity preferred stocks:
Gastar Exploration Inc. 8.625% Cumulative Preferred Series A (GST.PA)- Prospectus
Gastar Exploration Ltd. 10.75% Cumulative Preferred Series B (GST.PB)- Prospectus
There is also $325M outstanding in a 8.625% lien bond maturing in 2018: Bond Detail; Prospectus
While the prospectus refers to that bond as "senior secured", it is in effect a second lien bond subordinate to the first lien credit facility.
GST seems to have taken prudent steps given the current energy price environment. For its size, GST is leveraged with a lot of debt due in 2018, and also has some high cost preferred stocks. The company will need a significant recovery in prices during 2015, or early in 2016 at the latest, in order for the stock to have a decent shot at returning to that $6.25 September stock offering price. There is at least a chance, and I really can not put odds on it, that GST's share price will reward my small bet placed with the house's money.
GST's stock price certainly fits the Lotto criteria of being smashed to smithereens. The stock closed at $8.99 last June and was bouncing near $2 during January: GST Interactive Stock Chart
The chart highlights risks. The company discusses risks incident to its operations starting at page 26 of its last Annual Report: GST- 2013-10K
2. Bought Back Tetra Technologies (TTI) at $4.94 (see Disclaimer):
SEC Filings for TTI
Snapshot of Trade:
I have bought and sold this stock as part of the LT basket: Sold 50 TTI at $9.97 (2/25/13 Post)(snapshot of profit=$140.89)-Bought 50 TTI at $5.98 (10/16/12 Post)
When playing small ball, harvesting a good percentage profit with a short term trade and then buying the shares back at a lower price is the equivalent of a home run.
Tetra Technologies (TTI) is an oil service company that is focused on "completion fluids and associated products and services, water management, after frac flow back, production well testing, offshore rig cooling. compression services and equipment, and selected offshore services including well plugging and abandonment, decommissioning, and diving". 2014 3rd Q 10-Q at page 6.
The company is organized into four divisions: Fluids, Production, Testing and Compression.
Products & Services
TTI has a small oil and gas E & P business, known as Maritech Resources, that is causing the company to report losses. Martiech sold most of its oil and gas properties in 2011 and 2012, and is incurring abandonment and decommissioning costs in its remaining operations. (e.g. $222.25M of 79% of Martitech's proved reserves to Tana Exploration).
An increase in liabilities associated with the production exit required a "significant increase" in Maritech's liabilities during the 2014 third quarter. The cash burn problems associated with those activities since 2010 is described at page 5 of the last earnings call transcript. From what I am able to gather, the work is just almost complete.
Part of the compression business segment is through TTI's interest in a publicly traded MLP CSI Compressco L.P. (CCLP), a company the provides natural gas compression in the U.S.
TTI is CCLP'S general partner and owns 44% of the common units. The market cap of CCLP was about $552M at a 2/20/15 closing price of $16.66. TTI's common unit ownership interest in CCLP is about $243M as of last Friday, assuming no change in the ownership interest stated at page 11 of the 9/30/14 10-Q. TTI's market cap at last Friday's closing price of $5.12 is about $408M.
If I subtracted the value of TTI's CCLP interest from its $408M market cap, the remaining businesses are valued at $165M. Possibly, that math may interest an acquirer using the temporary decline in energy prices to expand their business footprint on the cheap.
TTI had $340M in long term debt and $90.288M of short term debt as of 9/30/14. The maturity schedule is set forth at page 13 of the 10-Q. There is a 6.56% senior note in the principal amount of $90M maturing in April. A 5.9% senior note in the principal amount of $90M matures in April 2016 with three other senior notes maturing in 2017 and 2020. The amounts and dates of those maturing senior notes is worrisome given TTI's recent operating numbers.
The company reported a loss of $.13 per share for the 2014 third quarter, compared to a profit of $.15 per share in the 2013 4th quarter. The loss was attributed to continued losses in the Maritech segment ($23M pre-tax), "transaction costs" and "unusual items". SEC Filed Press Release Those three categories nipped earnings after tax by $.25 per share.
Q3 2014 Results - Earnings Call Transcript | Seeking Alpha
The consensus E.P.S. estimates, which appear to be ex-item numbers, is for $.31 in 2015: TTI Analyst Estimates
TTI Key Statistics (YF at $5.12 and Through 9/30/14):
Price to Book: .76
Price to Sales: .41
Total Cash: $36.22M
The P/B and P/S ratios are consistent with Lotto selection criteria.
Two hedge funds own more than 4% of the stock, based on filings as of 12/31/14:
Daruma Capital: 8.18% Schedule 13-G
Fuller & Thaler Asset Management - Behavioral Investing: 4.26%
The T. Rowe Price funds owned 6.43% in the aggregate: TTI Major Holders
There has been recent insider buying: TTI Insider Transactions
One columnist included TTI as one of 10 oil service companies "ripe to be taken over". The stock price was then $8.36 (11/14/14).
The stock was selling at over $13 last April: TTI Interactive Stock Chart Just another awful looking chart inherent in Lotto stock selections.
The company discusses risks incident to its operations starting at page 11 of its last Annual Report: 10k-2014
FCE/A: 114.8%
ING: 59.92%
IRDM: 36.49%
FCF: 37.96%
NPBC: 31.44%
FHN: 24.17%
Most of my discussions of Lotto purchases are cursory. I am merely summarizing some points viewed as relevant to the Lotto characterization (e.g. risks) and a ray of light for possible capital appreciation.
1. Bought 50 Shares of Gastar Exploration at $2.53 (see Disclaimer):
Snapshot of Trade:
 |
| 2015 Bought 50 GST at $2.53 |
The shares closed at $3.06 last Friday.
Gastar Exploration Inc. (GST) is a small E & P company: Operations
SEC Filings
Gastar has slashed its 2015 capital budget to $103M, of which $79M is budgeted for drilling, completion and infrastructure costs. GST claims that it increased it proved reserves 87% to 102.1M barrels of oil equivalent during 2014. About 53% of those reserves are in liquids and the remaining portion consists of natural gas. The pre-tax "present value of future cash flows of those reserves discounted at 10% (P-V 10) grew 67% to $988.7M. GST Reserves and Budget Update
The first effort at formulating a 2015 budget, made in September 2014, arrived at a $257.3M number, GST 2015 Capital Budget and Guidance That budget was reduced to $173M when Gastar announced third quarter results: GST 3Q14 Financial Results
In September 2014, Gastar sold 17M shares at the public offering price of $6.25, with the usual over allotment option granted to the underwriters who paid Gastar $5.984375 per share. Prospectus That was very fortunate timing for GST. The shares thereafter declined by almost 60% to my $2.53 purchase price.
The hedges in place as of 9/30/14 are summarized starting at page 16 of the 10-Q. I have no qualifications to discuss hedges.
Gastar reported third quarter net income available to the common shareholders of $9.8 or $.15 per share. Revenues before hedging increased by 46% to $35.1M. Revenues from liquids represented about 80% of 3rd quarter revenues. Average daily production was 9.8 thousand barrels of oil equivalent. GST 3Q14 Financial Results
Results-Earnings Call Transcript | Seeking Alpha
I previously made a successful round trip in Gastar shares. Sold 100 GST at $4.1 (11/25/13)(snapshot of profit $126.09)-Bought 100 GST at $2.68 (7/29/13 Post)
A casual reader would notice that I bought back 50 shares rather than my previous 100 share buy at a higher price. Gastar is a small E & P company with how shall I say this politely-"uncertain prospects".
I also own 50 shares of GSTPRB, a 10.75% coupon equity preferred stock and that coupon says a lot about GST's risks. Bought: 50 GSTPRB at $25.3 (12/13/13) During the recent cascading crude oil decline, GST.PB cratered to a low near $18. I actually have a tax profit in the shares due to the dividend being classified as ROC.
The company has two equity preferred stocks:
Gastar Exploration Inc. 8.625% Cumulative Preferred Series A (GST.PA)- Prospectus
Gastar Exploration Ltd. 10.75% Cumulative Preferred Series B (GST.PB)- Prospectus
There is also $325M outstanding in a 8.625% lien bond maturing in 2018: Bond Detail; Prospectus
While the prospectus refers to that bond as "senior secured", it is in effect a second lien bond subordinate to the first lien credit facility.
GST seems to have taken prudent steps given the current energy price environment. For its size, GST is leveraged with a lot of debt due in 2018, and also has some high cost preferred stocks. The company will need a significant recovery in prices during 2015, or early in 2016 at the latest, in order for the stock to have a decent shot at returning to that $6.25 September stock offering price. There is at least a chance, and I really can not put odds on it, that GST's share price will reward my small bet placed with the house's money.
GST's stock price certainly fits the Lotto criteria of being smashed to smithereens. The stock closed at $8.99 last June and was bouncing near $2 during January: GST Interactive Stock Chart
The chart highlights risks. The company discusses risks incident to its operations starting at page 26 of its last Annual Report: GST- 2013-10K
2. Bought Back Tetra Technologies (TTI) at $4.94 (see Disclaimer):
SEC Filings for TTI
Snapshot of Trade:
I have bought and sold this stock as part of the LT basket: Sold 50 TTI at $9.97 (2/25/13 Post)(snapshot of profit=$140.89)-Bought 50 TTI at $5.98 (10/16/12 Post)
When playing small ball, harvesting a good percentage profit with a short term trade and then buying the shares back at a lower price is the equivalent of a home run.
Tetra Technologies (TTI) is an oil service company that is focused on "completion fluids and associated products and services, water management, after frac flow back, production well testing, offshore rig cooling. compression services and equipment, and selected offshore services including well plugging and abandonment, decommissioning, and diving". 2014 3rd Q 10-Q at page 6.
The company is organized into four divisions: Fluids, Production, Testing and Compression.
Products & Services
TTI has a small oil and gas E & P business, known as Maritech Resources, that is causing the company to report losses. Martiech sold most of its oil and gas properties in 2011 and 2012, and is incurring abandonment and decommissioning costs in its remaining operations. (e.g. $222.25M of 79% of Martitech's proved reserves to Tana Exploration).
An increase in liabilities associated with the production exit required a "significant increase" in Maritech's liabilities during the 2014 third quarter. The cash burn problems associated with those activities since 2010 is described at page 5 of the last earnings call transcript. From what I am able to gather, the work is just almost complete.
Part of the compression business segment is through TTI's interest in a publicly traded MLP CSI Compressco L.P. (CCLP), a company the provides natural gas compression in the U.S.
TTI is CCLP'S general partner and owns 44% of the common units. The market cap of CCLP was about $552M at a 2/20/15 closing price of $16.66. TTI's common unit ownership interest in CCLP is about $243M as of last Friday, assuming no change in the ownership interest stated at page 11 of the 9/30/14 10-Q. TTI's market cap at last Friday's closing price of $5.12 is about $408M.
If I subtracted the value of TTI's CCLP interest from its $408M market cap, the remaining businesses are valued at $165M. Possibly, that math may interest an acquirer using the temporary decline in energy prices to expand their business footprint on the cheap.
TTI had $340M in long term debt and $90.288M of short term debt as of 9/30/14. The maturity schedule is set forth at page 13 of the 10-Q. There is a 6.56% senior note in the principal amount of $90M maturing in April. A 5.9% senior note in the principal amount of $90M matures in April 2016 with three other senior notes maturing in 2017 and 2020. The amounts and dates of those maturing senior notes is worrisome given TTI's recent operating numbers.
The company reported a loss of $.13 per share for the 2014 third quarter, compared to a profit of $.15 per share in the 2013 4th quarter. The loss was attributed to continued losses in the Maritech segment ($23M pre-tax), "transaction costs" and "unusual items". SEC Filed Press Release Those three categories nipped earnings after tax by $.25 per share.
Q3 2014 Results - Earnings Call Transcript | Seeking Alpha
The consensus E.P.S. estimates, which appear to be ex-item numbers, is for $.31 in 2015: TTI Analyst Estimates
TTI Key Statistics (YF at $5.12 and Through 9/30/14):
Price to Book: .76
Price to Sales: .41
Total Cash: $36.22M
The P/B and P/S ratios are consistent with Lotto selection criteria.
Two hedge funds own more than 4% of the stock, based on filings as of 12/31/14:
Daruma Capital: 8.18% Schedule 13-G
Fuller & Thaler Asset Management - Behavioral Investing: 4.26%
The T. Rowe Price funds owned 6.43% in the aggregate: TTI Major Holders
There has been recent insider buying: TTI Insider Transactions
One columnist included TTI as one of 10 oil service companies "ripe to be taken over". The stock price was then $8.36 (11/14/14).
The stock was selling at over $13 last April: TTI Interactive Stock Chart Just another awful looking chart inherent in Lotto stock selections.
The company discusses risks incident to its operations starting at page 11 of its last Annual Report: 10k-2014
