DUMPING CHEMICAL 2

NCX

Removed NCX (55.67). It was a very frustrating experience. Enough Said. Oh well, at least I did not lose any of my capital (4.5% in three months).

TECHNICALLY MISERABLE

AYT

AYT just broke its 200MA (16.86) the the chart looks terrible. Net support until it hits 14 level. This is the only tech name I have and it gives me heartburn.

DUMPING CHEMICALS

NCX

Nova had a monster quarter, and it was sold off (what else is new!). If you strip the one-time gains, my calculation of its Q4/04 EPS is $0.73, four cents shy of consensus of $0.77. So it was a miss! The management did not provide any guidance in the announcement. I am getting really frustrated with this one and it appears that I could not make any money out of this account. The chemical prices appear to peak at this point. I think I will get out of this position this afternoon after the conference call. So far, this quarter’s reports have no been nice to me. There have been three misses among my approximately 30 holdings (10%). That is a rather alarming number.

On the conference call, Jeff Lipton (CEO of Nova) seems to suggest that the recent price weakness was due to normal seasonality, instead of weakness of demand, and he believes the price will recover by the mid of February after Chinese New Year. While no guidance is provided, Lipton suggests that additional 0.09 from non-recurring items, which will not occur in Q1/05 and pricing increases of 0.05-0.09, starting in February 1, 2005. Based on my back-of-envelop calculation, this would suggest a Q1/05 ESP of 1.10-1.20, significantly greater than the consensus of 0.90-0.95. The tone of the conference call is rather bullish and management seems very confident. This, combined with the very strong Q1/05 number, seems to suggest today’s selloff is not warranted. Part of the selloff may be due to the fact that NCX has run up so much and there are a lot of profits on the table. Should I hold the position for Q1/05’s results, despite the selloff?

ON DRUG

PJC

Opened a small position on PJC today. Again I procrastinated in the morning when I could get it at 16. Believe it or not, I actually had a plan coming into this morning’s earning report that I would take a position in weakness, but for reasons beyond my comprehension, I did not put the plan into action and I have to pay 0.70 more for my sin. The results came worse than expected (although most analysts on the street were expecting a worse report). The SSS numbers appeared to be positive though and growth of its Canadian operations slightly exceeded expectation. It also helped that the market decedes to run up instead of falling down. Despite the weakness, there are a lot of sponsors in the street as they believe that management will be able to turn the Ecker stores around. Also, starting from next quarter, the comparison will be much better for PJC. I also like the sector, unfortunately I am having a hard time with SC’s valuation. If the management is able to deliver the synergies in the next couple of years, PJC should be traded around mid 20s, which would give me a decent 30% return. In the meantime, there is a small dividend for waiting around.

BULL OR DOG?

BDE.A

Added some BDE today. The company has very consistent growth profile in the past, strong management with proven record. The company just recently announced its guidance, therefore, risk of missing production in the coming quarter is pretty much eliminated. The company is traded on the slightly expensive side (4.8X CF, $50K/boe/d). But the market does reward consistency in production growth. The share will move up if it could delivery its production growth in 2005. Initial target $3.0 at the end of winter drilling season, which will generate close to 20% return. I have looked left and right, and it appears the only sector that is working now is energy stocks. Although I have taken some off the table, I am having a hard time not to add them.

SELLING GOOD EARNINGS

Strong earnings are not generating strong buying interests, particularly in the tech arena. So far, reports from technology stocks have been very strong, (INTC, APPL, YHOO, CHKP, IBM, MOT), but NASDAQ has done nothing except falling. This is not encouraging. Would the same phenomena occur in the material and commodity stocks? Cautions are definitely warranted.


Looks like EBAY and QCOM got killed in the after market. It does not look pretty. Good thing I own almost nothing in tech.

JUNIOR AND DELIQUENT

FE

FE warned last night and I dumped everything as soon as market opens. Although the loss is significant (22%), fortunately, my position is relatively small and it avoided a large loss. As bad as it was, it serves a purpose of reminding myself just how risky to invest in juniors. If it fails to deliver its production growth, the punishment will be prompt and severe.

AL-NOT-CAN

AL-NOT-CAN

It turned not as bad as I expected, although I had a hard time to determine what to do with it. In hindsight, I should have taken AA’s poor results more seriously and exited my Alcan position. Having said that the results are not disastrous, valuation remains modest and reasonable, aluminum price continues to be robust, and we have not seen any synergies from the recent acquisition yet. Although the price fell only 6%, the market probably over-reacted. The stock probably will drift from here and downside risk probably will be limited. On the other hand, reasons to take on this position pretty much disappeared in the near term, and the stock is unlikely to do anything until next quarter, if, only if it is able to deliver a better results. I am torn again here and likely end of doing nothing.

TEK

On the other hand, I add a bit of TEK in front of its quarter, and I am pretty sure its quarter would be much better than AL-NOT-CAN’s and we should have a four handle in next few months, a 10%-15% pickup.

GCD

Sold position in GCD as it has gained more than 45% since purchased in September. Again there might be a couple of bucks left on the table, but I am happy with 45% in few months. I would like to replace with CHM. I submitted a bid today at 31.5 and was not filled.

CONCEPT STOCK

I took a look of P today, and this sounds to me like a "CONCEPT STOCK", although I would concede that it’s not a pure CONCEPT as the company does have a rather impressive order book. Nonetheless, the company has an EV of $250 million, with no revenue whatsoever. Even we assume it deliver all of its order in next two fiscal years, for 50-60 million revenues, which could, on my back-of-envelop calculation, translate into about 0.10 – 0.15 EPS for fiscal year 2006, assuming that it does not need to issue more shares (which is highly likely). The valuation is simply too wild and too speculative for me.

PJC
PJC’s quarter is on deck next week and I am a little tempted, due to reasonable valuation. (Part of the lure was that I like Shoppers, but valuation’s simply too high for me). I took a look, and I was disappointed. The company missed everything in last quarter Q3/04, estimates were cut across the board, management’s guidance was vague. I guess there’s a reason why PJC’s valuation is low because it deserves it. I guess I have to wait for its Q4/04 report before doing anything.

OMINOUS

WLE
Talking half of WLE off the table. It has gone up by more than 60% since purchased in late September. Even though I hate to sell this stock, I have to take some off the table as it grew into close to three percent of the portfolio. I will let the balance run until the end of winter drilling season and I shall reassess.

SELLING RALLY MODE

SELLING RALLY

The earning returns for the first week have been mixed, and you can’t ask a better report from INTC (better earnings, higher guidance, and greater capex). However, the mood of the market is clearly "SELLING RALLY". This simply does not bode well to the Q4 reporting season. Material sector is also under pressure, although for a different reason. The only sector appears to work presently is the energy, which continues moving up. I have selectively put stops on a number of material and base metal stocks. While I remain confident on these stocks, I do not want losses from these positions to exceed 6%-7% for here. I also put a bid for CEY at 1.25 for valuation purposes (3XCF, EV/BOE/D nder 30K). (and it was filled).

EARLY WARNING SIGNS

CWH Q4/04 RESULTS
While top-line growth remained robust (65%), bottom-line growth was a tad light (6.4%) and EPS actually fell by 20%. This was due to increase GSA expenses, expensing stock options, expensing deferred development costs, and increasing count of average outstanding shares. When stock runs up as much as CWH, there are a lot of in-the-money options. While the results were slightly disappointing, other metrics, (CF, BV, ROE) were all very strong. For year-to-year comparison, the growth profile remained intact. Valuation (P/E 27X, PEG 0.07) remains reasonable as long as CWH maintains its top- and bottom-line growth in the future.

AA
On the other hand, AA’s results were awful, missing everything despite the strong metal prices. On the conference call, management sounds defensive and uninspiring. I am a little concerned of its impact to AL’s stock, but more importantly, its implications to AL’s Q4 results. DNA also missed and AMD warned. The Q4/04 does not look to promising and that 15% growth may proof to high to reach.

ALL-CAN

ALL-CAN

Could Alcan becomes ALL-CAN? Add some AL@50.60, in front of Alcoa’s earnings. AL was the lager of material stocks. It was actually down slightly in 2004, compared to triple-digits advance for most of base metal stocks. Aluminum price is actually quite strong and demand remains far exceeding supply capacity. AL had a very strong Q3/04 (positive surprise) and I believe the Q4/04 results should be strong as well (Alcoa’s earning announcement shall provide further confirmation). Moreover, expectation for AL is fairly low compared to other material stocks and its valuation remains reasonable. High-flying material stocks have not trended well recently, and base metal prices have shown signs of peaking. If this is the case, high-flyers with great expectations might be vulnerable to profit taking while lagers may benefit from potential rotation. AL also has a few near term catalysts in its favor . On the negative side, input costs remain high and foreign exchange exposure unfavorable. The bigger picture question is, like all other material stocks, CHINA. Looking for at least 10% return for 2005.

TARGET SET

It’s New Year’s day and 2004 did not appear as bad as expected. Total return for investment portfolio is up by 23.9%, in which savings account for 12.8% and investment for another 11.1%. This is a return that will be very difficult to duplicate in the coming years. I exceeded my plan for Year 1 significantly. For the new year, I am looking for another 20% return with 11.6% from savings and 8.6% from overall investment gains. While the plan appears modest and reasonable, I have learnt that it’s not easy to achieve an overall 8.6% return.

A few thing to pay attention to: (1) economies; (2) China; (3) commodity prices. While I believe the portfolio is in a reasonably good shape, it continues to skew towards commodity stocks (energy, drillers, chemical, metals and coal). If there are any signs of weakness in the above three key factors, I must promptly rebalance the portfolio by reducing the exposures in commodity and increase bond, cash, utilities, and may be some consumer staples. Coming Q1/05 earnings season will be very important. Returns from oil patch should be very good with very strong production, cash flow and earning growth. Drillers should deliver very strong results as well. Pay attention to earning guidance for Q2/05. I plan to significantly reduce my exposures to energy and drillers during the next two quarters. Given the strong run of the energy sector, my return expectation is rather modest (10-20%), particularly for domestic producers. Chemical price has turned a little in the last few weeks. Is this the sign of tops? It could very well be. The momentum of chemical stocks appears to have slowed. Steel price is also topping, and this will not bode well to coal price going forward. When steel stocks start to unravel, it will be the time to cut exposures in coal.

The overall expectations for economies are rather positive. Consensus are at 3%-3.5% for North America and 7%-8% in China. If this level of growth is achieved, commodity will have another strong year. I am a little bid suspicious as the bullish sentiment appears too strong.

New Year Resolution: avoid blow-ups. If I could avoid blow-ups, or limit their overall impact, I believe I will be able to achieve my modest target for 2005.