Discussion in 'Stocks' started by gaussian, Nov 9, 2019.

  1. gaussian


    Following my posts on value analysis I figured maybe I'll post a few of these here and if they get some interest I'll probably post more (feedback is useful here).

    PVAC is the Penn Virginia Corporation - a growing company whose business is primarily NGL and NG.

    I've been pouring over PVACs 10-Qs recently as the company came up on my screens for undervalued stocks.

    Starting off with some Graham-based analysis:

    • The P/E ratio is relatively low compared to it's competing energy companies.
    • When I entered the trade the P/B was 0.86. This is low even for the industry. It's important to compare P/B in-industry as each industry has different P/B characteristics based on the way they handle accounting.
    • Few analysts cover it and never makes the news. This means banks aren't looking at it.

    Comparing their free cash flow to similar growth energy companies such as XOG and MR they are performing relatively well. While their FCF is still negative, they are expanding so this wasn't as much of an alarm.

    An interesting aspect of these companies is their involvement in derivative markets. I tend to look at their derivative investments as a sign of company health relative to their total sales. As an example of this comparison, MR appeared to derive most of their earnings from profits on derivatives, with their LNG/NG business lagging y/y. PVAC didn't seem remarkable in this regard. In fact, they've apparently derived most of their business from selling their product. Their quarter-by-quarter total revenue across each of their products is improving.

    I took a look at their Asset-To-Equity ratio. I find this ratio useful as it gives a gauge of how much stuff they own versus how much stuff they have. If the company liquidates, the ratio is useful to see just how much shareholders could see back. Interestingly enough their Asset-To-Equity ratio is around 2.34. So they are running around 2x leverage relative to what shareholders can get back. They are very slightly more leveraged than MR for example.

    However, what intrigued me was a few things. Their free cash flow, while still negative (indicating they are growing, but with debt) was significantly larger than their less leveraged partners. Additionally, while being more leveraged, they present (to me) less risk in total because they are deriving their income primarily from sales. This seemed to be reflected in the notes as well. Comparing them to MR, their accounting process was far more simple. MR used a new accounting method for their 10-Q that obscured some of the details which were not clarified in the notes. I always read the notes and take my own notes on them, and MR rubbed me the wrong way.

    Finally, PVACs return on invested capital is exceptionally high at 27.05%. While this number can't be totally trusted, this is a good indicator of a great value company in the presence of the other metrics above.

    In general, I think PVAC is a pretty good buy especially in the near term due to the increased demand on heating oil with the recent cold fronts. I don't have any problem saying they should not have a problem handling an increased demand. I've got a near term target of $33.71, but I would not be surprised if they went further in the next year. Their last earnings report missed EPS but crushed revenue. I am looking at LEAPS on PVAC.

    Obligatory this is not financial advice and not a trade recommendation.
    Nobert and vanzandt like this.
  2. dozu888


    I had a discussion with a friend mine still living in China... he had success this year doing stock picking like this on the A shares...

    I think this kind of stock picking is long dead on the US market.... too many people digging thru this stuff.... but emerging markets may still have opportunities.
  3. vanzandt


    There's a lot to look at with this one. They did use Chapter 11 back in 2016 and it appears they still have a lot of debt, which you addressed. I mean you really have to be a strong strong forensic accountant and have a strong background in corporate finance in general and E&P specifically to really get a feel for what's going on within an operation like this using their 10Q's. Good on ya if that's one of your fortes.

    Anyway, that said.... when doing research on a company like this one of the first things I like to do (I like KISS)... is to go to their website and see who, what, how many, and in what career specialty are the people they are currently hiring.
    Penn looks kind of moribund right now and tbh that can be a red flag. Not saying it is in this case, just pointing it out for now.
    Good work though.
    gaussian likes this.
  4. gaussian


    Thanks for the feedback!

    Looking at job postings as a metric is a good idea for a growing company. I didn't do this, but I will try to incorporate it in the future as another data point. Though it must be weighed against the current environment they are operating in. They have some new proved grounds, but they seem to be producing most of it from ground they own, moreover they provide employee-based stock compensation and so they may be incentivized to keep a smaller staff until necessary. As long as they can run, I don't know if it's super important to put much weight to that (just my opinion).

    The bankruptcy is an interesting point. I hadn't really considered it because it was so long ago and the company's ratios have been improving since. On my next analysis I will look further into the company's history to provide more information on these events. Since they didn't convert into a liquidation (chapter 7) perhaps it was a successful reorganization.
  5. dozu888


    I would even add - strong industrial knowledge. Eg if I were to do this type of thing I’d focus on technology and consumer goods. 2 areas I have worked a couple of decades in.

    No matter your field of work is. It will greatly enhance your chance.

    After all. An edge is when you understand something better than others do.
    gaussian likes this.
  6. gaussian


    I take the other opinion. Buffett has good advice with this line of thought. However, with the power of the internet it's not hard to get an overview of the industry. If you needed a ton of industry experience bank analysts would be composed of 60 year olds from their respective industries!

    I agree with you that you should know the industry. However, I think it is more than sufficient for a trader to get a good overview and understand the nuances (for example derivatives desks in O&G) rather than dedicate a significant portion of time in the field. I actually learned a ton about O&G from doing analysis on XOG, MR, and PVAC. I consider myself more of a doctor, taking the temperature of companies and determining their health, rather than a specialist in any particular industry. I think this alone gives you some edge. You're not susceptible to your own internal biases when you only know enough to be dangerous.
    Last edited: Nov 9, 2019
  7. vanzandt


    Yeah sock that one away, it can be a great tool for the right company. I mean obviously if you look at Google or Amzn etc, any huge company, its pretty much useless... but every now and then, it can be pure gold.

    Back in 2013/2014 ish... $ISRG (Intuitive Surgical), which is a great company that I have followed pretty much forever it seems just because its such a cool stock to follow and its easy to understand really since in a way its a one trick pony... (in a way lol).... the stock fell out of favor a bit. When you look at a chart now it reflects a 3 for 1 split, but you can see it flattened out a bit compared to its ascent the prior decade as the analysts figured its potential for growth had slowed somewhat.

    Now don't get me wrong, I traded the thing long and short because it was (is) a great stock for that, but I always loved the company, I mean its pure American success story. Buy and hold types have been well rewarded. I think percentage-wise it might have even out-performed AMZN over the last 17 years or so. Or close to it.

    Anyway... long story longer.... I always checked its "career opportunities page" just as a metric and I kept a running tab in my head from Q to Q.... nothing official or scientific.... just seeing what kind of scientists and programmers they were hiring, if they were hiring in assembly for graveyard shift, etc... Just seeing if they were staying busy lol.

    So one quarter back in 2014 or so I'm looking and out of the blue they had started advertising for technical writers and engineers that were fluent in Japanese. It was right there for the world to see and the qualifications were quite stringent. Now they had been approved years before to sell in Japan already... but they never mentioned anything about it. I started telling people to buy the stock because somehow they had made some kind of significant inroad in Japan. Of course I didn't. (Story of my stock-trading life... ) but look what happened at the end 2015. That's when they started talking about their future growth outlook in Japan and other parts of Asia. The story was back in vogue and up went the stock. 300% since then. Good company.
    Sooo, its just a (sometimes) useful tool if you're gonna have a go at this stuff from a fundy pov.

    (One of these days CMG is gonna post something about needing mid-level corporate types fluent in Mandarin.... get long that day )
    Last edited: Nov 9, 2019
    gaussian likes this.
  8. vanzandt


    I think if I ran a hedge fund with a limited budget and I had to pick between the two, either a highly accomplished industry specialist or an accounting super-guru... I'd pick the accounting guy.

    How many dozens of Wall Street's finest energy analysts missed Enron? That's an extreme example of course since they also hid it in the books I guess but still, if a company is on the up and up with its SEC filings, its not hard to spot an overpriced stock that's up only on hype and/or a low float squeeze.
    And vice-versa for a company that's printing cash.
  9. vanzandt


    But with that said btw... I realize we aren't hedge funds. So yes, your expertise in a particular area matters as we can't all be in your 'pro boys' club. That's why you see me, aside from the daytrade type posts, talking about stocks that are easy to understand. Biotech... forget it. Energy... ditto.
    Restaurants, builders, retail, etc... not too hard.

    And Gaussian.... Since you're actually being one of the smart ones here, and you like value with a little risk to boot....
    I'm not committing on this one yet because it needs a little more serious DD and it appears you like that.... but if it does turn around, it'll be a 100% gainer with dividends while you wait. Its not going away. Too much retail brain power there. I'd leave one more quarter, Xmas, where the experts talk bad and the stock gets sold off. Let them even cut the dividend and tank on that. But at $17 its a good place to open a position.... just average down if it drops and don't be ADHD. Give it a 3 year time frame if not more.

    "What stock VZ?"
    Its $LB. Limited Brands. Wexner's baby.

    I know its hated. It even has some Epstein blowback on it. Look at the chart and look at when his name came up in all that. It got sold off. Then a bad quarter. And lets not forget Victoria's Secret is about as politically incorrect in the eye's of your generation...(which is stupid imo but whatever)... as it gets.

    It currently sports a 6.7% yield.
    It trades 16.5X free cashflow... Compare that to $VFC @ 180 X FCF, Columbia Sportswear ($COLM) @ 49X, Levis @ 52X, Lulu at 86, and Under Armour and Oxford with none at all.
    Wexner is gonna die soon. He was brilliant in his own right. I have to believe he has planned for the future in his hiring. Let him die and let your generation take over $LB.
    All the parts are in place, including the brains.

    $17.75 now...
    Last edited: Nov 9, 2019
    gaussian likes this.
  10. gaussian


    Hey glad I spurred some conversation on this. It's very interesting to me. I like the idea of using LEAPS on some of these to get more efficient capital usage. Either slightly OTM or ITM depending on my appetite for risk. I'll give $LB a look!

    If you want to chat more on this stuff in general feel free to PM me!
    #10     Nov 9, 2019
    vanzandt likes this.