Why I bought back into RDC ( UPDATED 3.15.2015 )

I'm going to keep this relatively short and sweet. 

Back in late December 2014 I bought ( RDC )  at a cost basis of ~$20 for the following reasons:

  • The bulk of RDC's most critical assets are contracted through 2015 and into 2016
  • Strongest balance sheet (lowest debt leverage) compared to other offshore drillers in the industry
  • Management team considered best in industry
  • Long term buyers appeared to defend the $20 share price level
  • At ~$20 the price to book is an absurd 0.5! Simply put you can purchase a $1 worth of assets of for $0.50!

I was able to take profits at ~$23 and ~$22 for an average gain of ~12.5% on the position. Not bad considering the highest the stock price reached was ~$24, before February's run up to $25. 

Fast forward to today. I bought back in at approximately $20.66 with a stop around $19.25 and a price target of ~$24. All of the above reasons still apply plus the following:

  • RDC took ~$430 million in asset writedowns for its 12 oldest rigs. As a result of the impairment charge they reported a loss in Q4 earnings. Therefore the new price reflects this new negative information.
  • Additionally ( HERO ), another offshore oil driller, recently had a long term contract cancelled by Saudi Aramco. All offshore companies and their investors were put on notice that contracts can and will be cancelled if the day rate is too high, and as a result offshore drillers' share prices tanked. Again the current share price reflects this added revenue uncertainty. 
  • The stock price has once again held the $20 level. 

Considering the aforementioned factors I believe this is a solid entry based on the risk/reward setup.

Remember as traders/investors our only goal is to develop the skills to identify and exploit asymmetries in the market. We will never be right 100% of the time, but with proper due diligence, risk management, and belief in the process we can certainly be profitable over the long term. 

UPDATE: Price action was terrible in the week that followed this post, with a violent break towards $19 violating my stop price. With recent reports of still record supply coming online, ( USD ) strength, the price of oil and market sentiment is likely to be suppressed for some time. ( RDC ) is also exposed to concentration risk per the following Seekingalpha report:

The analyst also sees Saudi Aramco continuing to cause problems for drillers, particularly Rowan (NYSE:RDC), whose exposure to Saudi Aramco is 34.4% of its ~$5.1B backlog, and a potential discount could negatively impact RDC’s gross EPS by $0.45-$0.55/year;
— Mar 11 2015, 15:48 ET | By: Carl Surran, SA News Editor

The lesson is stay disciplined with your trades and mentally flexible. Always be looking for new relevant information that could affect your trades/positions. 

Why I'm Bullish on Facebook (FB) Long Term

facebook-whatsapp feature img

I am bullish on FB because I believe the firm's strategic vision is sound and recent moves have put FB in a position to build on and maintain a competitive advantage well into the future. There are 4 keys to my thesis:

  1. FB is the current market leader in the social networking space
  2. FB has just begun to monetize its user base and ad platform
  3. Whatsapp's potential value is much greater than 19 billion paid
  4. Mobile technology industry will continue to grow globally

Facebook is the undisputed king of social media and still expanding.

FB has a total base of 1.2 Billion monthly active users. It's standalone acquisitions and apps have the following estimated users:

  • Instagram ~200 million
  • FB messenger ~200 million
  • Whatsapp ~500 million (50 million added since acquisition announcement in Feb; 70% of  the total MAU is active on a daily basis)

The last point regarding Whatsapp users is critical; 350 million users are active every day. This is the highest user engagement in the social networking space I am aware of.

FB's size and business model will allow it to achieve greater economies of scale. FB does not sell hardware, it does not sell phones or tv's. FB provides users users a method and platform to communicate and share experiences digitally, instantaneously, globally. I believe all of their acquisitions seek to bolster this user experience. FB sells businesses use of their platform to market and distribute digital ads, products, and services to targeted, engaged users. FB is investing actively in this area in an effort to help drive its adoption as the preferred corporate marketing platform on the web.

All this is to say their model is built on leverage. As their platform gains efficiency costs to run the core services should decline bolstering operating margins. Near term margins are likely to decline due to the recent acquisitions of Oculus and Whatsapp, which will require continued investment. However, this effect may be somewhat neutralized if FB is still growing revenues faster than expenses.

FB has just begun to monetize its ad platform.

I see evidence based on FB's revenue growth. Sequentially revenues grew at ~55% year over year with Q1FY14 revenues up ~72% compared to Q1FY13. This is incredible considering revenues are already closing in on double digit billions.

FB's platform has now garnered international credibility and support considering the Publicis deal which is estimated at $500 million. Instagram has just began monetizing its user base via ads within the last year. Whatsapp hasn't even started yet...

Furthermore, I believe the popularity of FB ads will increase due to the largely unobtrusive ad placements in newsfeeds. People love to complain about the data mining that FB has to do in order to provide its ad services but I've noticed the ads have grown more relevant and often appear similar to stories, news, or videos any one of your friends would share with you.

I believe this is a major catalyst that will lead to greater corporate adoption of the FB platform.

Whatsapp's potential value is much greater than 19 billion paid.

Ultimately a bullish bet on FB is a bullish bet on Whatsapp. It is my belief that most investors were initially stunned with the $19B purchase price especially considering Whatsapp had negligible revenues to speak of, no marketing, and a CEO and management team whose slogan is literally "no ads, no games, no gimmicks". I know because I was also stunned.

After mulling it over and modeling some scenarios the price tag seems wholly justifiable and could potentially be a bargain... First lets review the press release FB issued regarding the Whatsapp deal.

FB_Whatsapp Key Stats_Acquisition

FB_Whatsapp Key Stats_Acquisition

These numbers are staggering. Using these data points as a foundation I modeled what I thought was a reasonable growth sensitivity table. (Feel free to download the model and input your own assumptions in the blue cells)

Click here for the free downloadable spreadsheet version

If FB is able to monetize Whatsapp's projected user base at the current $1 per user, the present value of those sales is ~1.1B. If we use the current industry average P/S multiple of 11x (large cap, internet information providers), then those revenues are worth an additional $12B in market cap or $5 per share. I believe this is NOT priced into the stock as FB has declined ~5% or ~$3.50 since the announcement on Feb 19, 2014. This is also aligns somewhat closely to my current DCF price target of ~$69.

The value of $42 per user implied by Whatsapp's purchase price may be bargain according to Forbes. I suggest you read the entire article as it presents an alternative bull case not being considered by the market.

CitingForbes:

...How can it be that WeChat's users are worth $231, Line's are worth $73, WhatsApp's are worth $42 and Viber's are worth $9...It turns out that an international user is only worth less than a Western user if you only sell ads. It all comes down to monetization of those users.  The Asian messaging companies are vastly ahead of the North American messaging companies in terms of how they monetize...Unlike in America, where the only way we seem to monetize a consumer app is through shoving ads at us constantly, over there, WeChat and Line make money through selling stickers, games, and also buying things. For example, you can now pay for taxis and food in China through the WeChat app.  In Thailand recently, Line did a group-buying flash sale which was incredibly successful.  It turns out, if you aggregate the users, you can sell to them.  Ads are not really part of this equation...


The mobile phone market is still growing faster than GDP:

The International Data Corporation (IDC) projects mobile smartphone growth is expected to decline from current year's estimates of ~19% to ~7% by 2018. This is straightforward as a growing industry projects as a tailwind even though growth is projected decline sequentially y/y. To me this implies increasing competition between hardware manufacturers and a bifurcation in the mobile technology industry. Incorporating this into my analysis the base case has the market growing above the commonly used 5% long term stable growth rate. This is critical for attracting continued investment flows.

This is the foundation of my thesis and as long as the evidence skews in support of this thesis I will keep looking to invest in FB.


Disclosures: I am long FB.

My First Stock Call Part II

Atwood Condor Atwood Osprey

Atwood Oceanics stood out. Its market cap hovered around 2 billion with a P/E of  10. It was a smaller player in an industry of Oil drilling behemoths- RIG, DO and et al. The industry average Price to Earnings ratio at the time was almost 26x. I wondered; relative to industry P/E why was this firm so "cheap"?

I began delving into the firm’s financial statements. I was looking for answers to key questions.

What is ATW’s true business?

How stable are the revenue streams and margins?

What is ATW’s competitive edge?

How competent is management?

What are the growth prospects?

What are the risks to their business?

After doing my homework I was able to answer these questions. Without being redundant (the powerpoint I produced is attached) I will summarize a couple key factors I found that made this a compelling investment.

  • I found the firm had robust operating and net income margins of almost 50% and 40% respectively, that had proven stable over the time period I analyzed. The margins were extremely competitive compared to the Industry and ATW’s competitors.
  • They had a substantial revenue backlog of a little more than half of their $2.2 billion market cap for the next four (4) years. Furthermore, their contracts were constructed as multi year commitments from heavy hitters that could only be broken by acts of God and featured term extension options for their counterparties.
  • Most of their rig fleet was new and built specifically to compete in the most highly demanded specialty in oil drilling-deepwater and ultra deepwater rigs. These rigs were experiencing 85+% and 100% utilization rates respectively.
  • I also liked that their CEO, Mr. Saltiel came to ATW from Transocean (RIG) where he was previously employed as Chief Operating Officer & Executive Vice President during multiple business cycles. There’s more but I will let my powerpoint speak for itself.

 

My First Stock Call

1240229471-capital_markets_link_4 2010 - A year or so after my first "professional" foray into finance failed I had been upset, disillusioned and burned out. At the time I questioned my whole interest in capital markets. Was my B.S. in Economics (no pun intended) worth it? Why did I bother with such a specialized degree?

I had grown up with a passionate interest in what I commonly refer to as the ‘greatest game on earth’. As a developing youth I had innumerable questions about the ‘game’-- how it was played, who were the players, what were the rules, and what were the objectives...

…Why is the U.S. so wealthy and other countries so poor? ·What is this nebulous “global economy” that TV is always referencing? ·How is the internet changing the world? ·What is money? ·Why is this green paper so valuable? ·Why did the financial media say Alan Greenspan was more powerful than the President? ·Who was Bill Gross and why is he considered the bond king? ·Who are the masters of the universe? ·How do you earn that title? ·What is an arbitrage and how did Ken Griffin do it until he was rich as a college student? ·Why is outsourcing so controversial? ·Why isn’t real estate a good way to get rich? ·What is the housing bubble? ·How did tech entrepreneurs make fortunes with IPO’s without earning any profits? ·Who was Soros and Druckenmiller and how did they break the bank of England? Forex? ·Sounds sexy, what is it? ·LTCM? ·Why was Clinton’s administration considered the best economically? ·Was the prosperity real? ·How has Warren Buffett maintained his longevity? Global markets, decoupling and recoupling? BRICS? ·What is the council of foreign relations, the Bilderberg group? ·Are these nefarious cabals plotting and planning or just mutual intertwining and intersecting interests among the global elite? ...

I sought to find answers to these questions in a largely unstructured way, never really sure if my entrepreneurial, independent, free thinking personality could ever fit into the conservative, drone-like good ole-boy industry I perceived finance to be.

Fast forward to the past, and my job at the time (a lower level CSR role) put me in a position to interact with a lot of portfolio managers, research associates, analysts, and CEO’s, not to mention attorneys, various political figures and other executives. I would hear them discussing various industry news including policy debates, regulatory issues, portfolio positionings, and sector leans. The synaptic sparks started shocking my brain again, causing embers to drift their way into my belly slowly reigniting my fire.

I began to follow the markets again, doing basic research, getting a feel for the major issues and the opposing sides, you know, to do my job better. I needed something to discuss with these industry titans and fortunately I was smart enough that I could engage any of them in a critical discussion.

Then I met “Mr. White”, a man who galvanized me. Mr. White was a true leader in every sense of the word. Always moving with purpose, he possessed a supernatural discipline matched with soul piercing eyes which betrayed only the focused intensity that raged from within him. An incredibly sharp mind, he ascended to CEO and guided his firm into one of the most successful institutional investment firms in Boston with AUM of $20 billion+. After a conversation with him, it was a wrap. The slow burning embers were doused in liquid accelerant and now the dull glow in my stomach became an inferno. Needless to say I tried to pick Mr. White’s brain at every conceivable opportunity but that’s a story for another post.

From those interactions my question was answered. I knew what I wanted to do with my life. The objective was clear; the path however, was not. I needed affirmation that my decision was correct. I began looking for an investment opportunity that I could tout as the fruit of my own research and analysis.

Which finally leads me to my first stock call…I researched and found a little known gem called Atwood Oceanics. Click here for my PowerPoint and analysis…