Switching to Call Options on GSAT

Globalstar has not performed as I anticipated post-approval, so I sold my recently GSAT stock at $1.68, and switched to $2 April 21st call options at a cost of $0.39/share. I may purchase more longer-dated call options in the future if no catalyst occurs by April 21st. The likelihood of bankruptcy is too high for me to sit comfortably on the stock itself.

With the FCC low-band spectrum auction set to end favorably for the telecom giants within a matter of months, I would expect potential partners to start sniffing around mid-band spectrum holders. The conference call was interesting, but I think the bull valuation thesis is pricing GSAT’s spectrum far too high. Rhetoric aside, management will have to keep the lights on for the next year. They have 4 options.

  1. Dilute the common stock now
  2. Issue something that is eventually dilutive
  3. Issue more debt
  4. Sell the company

I think option 2 is potentially the most likely outcome, followed by 1, 3, and finally 4.

I do still believe the spectrum has value per my initial post. However, spectrum can lay fallow for years and GSAT is going to have to dilute or take a painful loan at some point in the future.

Options for partners probably include VZ, Softbank, DISH. Alternatively we could see some sort of merger with another one of the odd-ball spectrum firms out there like PDV Wireless or Ligado Networks.  An important question right now is why would anyone mess around with GSAT right now with other options available, especially when potential buyers or partners can force better terms in a few months?

At a time when the FCC is looking a lot more relaxed than the old Wheeler regime, GSAT seems like small potatoes for Verizon, SoftBank, or Dish. Why dink around with a $2.2b company sitting on a sliver of spectrum when you could buy DISH, TMUS, or S?

Due to the technical aspects of the spectrum, SoftBank would seem to be the most likely partner/buyer. Globalstar’s spectrum footprint aligns with what SoftBank has both inside and outside the U.S. and should be conceptually appealing to an empire builder like Masayoshi Son. So what does or does not happen here could be a telegraph for Masa’s long-term Sprint plans.

I could absolutely be wrong here, and so I view long-date call options as the best way to invest in GSAT. If the company can announce progress in the U.S. within the next couple of months I would expect the stock to go gangbusters (2-3x within 1-2 years). So I regard rolling long-dated calls as a relatively cheap and safe way to take a position until we get clarity on the real interest level from telecom giants.

Energy Services of America – Energy and Infrastructure Upside at a Firesale Price

  • Trading below tangible book value with decent operational and growth trends.
  • Positioned for additional energy and infrastructure spending in the Mid-Atlantic region.
  • Undervalued due to minuscule ~$20m market cap, which makes it “uninvestable” for institutional firms.
  • Management has a large stake and a history of being shareholder friendly.
  • High potential for margin expansion, revenue growth, and increased shareholder returns.

Business Overview

Energy Services of America is a dirt cheap holding company with exposure to two different types of infrastructure. Based in Huntington, West Virginia ESOA operates two service companies, CJ Hughes for pipeline construction and maintenance and another, Nitro Electric which handles electrical and mechanical services. Revenue split is about 50/50.

From the 10-K issued in December:

Wholly owned subsidiary C.J. Hughes is a general contractor primarily engaged in pipeline construction for utility companies. C.J. Hughes operates primarily in the mid-Atlantic region of the United States. Nitro Electric, Inc. (“Nitro Electric”), a wholly owned subsidiary of C. J. Hughes, is an electrical and mechanical contractor that provides its services to the power, chemical and automotive industries. Nitro Electric operates primarily in the mid-Atlantic region of the United States.

CJ Hughes builds and maintains but does not own intrastate pipelines and sewer systems in the vicinity of the Marcellus Shale. So we’re looking at a relatively asset-light, regionally focused subsidiary, which services some pretty big corporate energy, chemical, and utility names, as well as some (probably more predictable) municipal and state customers.

cj001

Energy Services’ customers include many of the leading companies in the industries it serves, including:

EQT Corporation

Columbia Gas Distribution

Marathon Petroleum

American Electric Power

Toyota Motor Manufacturing

Bayer Chemical

Dow Chemical

Kentucky American Water

Various state, county and municipal public service districts.

Nitro Electric primarily services utility companies and municipalities.

nitropiechart
Nitro Electric Revenue Mix

ESOA overpaid for a pipeline company which it has since sold at a loss. In December of 2012, the company emerged from a forbearance agreement, and the company has executed nicely since then, with very high asset turnover >200%, growing EBITDA margins, and annual ROIs >20%.

Valuation 

Price to Tangible Book Value: 0.87

EV/EBITDA: 4x

Price to FCF: 7x

TTM Dividend Yield: 3.6%

The dividend is new as of this year, and is higher than all of the profitable energy service comps I could find. These metrics all indicate an undervalued stock relative to the oil services industry as a whole.

Energy Industry Outlook

I am not an expert on oil or natural gas fields, which is why I prefer to buy an energy services company with significant utility and municipal exposure rather than a pure-play owner of well or pipeline assets. From the research I have done it seems that while energy prices will likely be lower than the past decade, we may be near the bottom of the industry trough. Marcellus/Utica specifically is established and has cheaper cost of production than other shale fields.

Over the past several years, companies operating within the U.S. energy sector, and in shale particularly, have continuously lowered operating costs. OPEC’s recent agreement could further bolster the industry.

Management

ESOA is headed by Douglas Reynolds, the representative of District 17 in the West Virginia House of Delegates, and son of local Huntington business magnate Marshall T. Reynolds.

Since taking the helm at ESOA in December of 2012, Douglas Reynolds has increased tangible book value per share of the company from $0.43 to $1.43/share, a more than 3x increase. ESOA’s share price has grown by 150% over the past 4 years, vs the S&P500 at 50% and the Russell 2000 at 64%. The CEO has also been modestly buying the stock, and issued this letter to shareholders explaining why he felt shares were presently undervalued.

“I am extremely pleased with the improvements that have been made over the last four years with one exception: the under-valued price of our stock. In December of 2012, our stock value fluctuated wildly between $0.50 and $1.00 per share, and rightfully so, as we were under a forbearance agreement and were restructuring our balance sheet. On December 28, 2016, our last trade was at $1.38. This value represents less than the tangible book value per share of $1.58 at September 30, 2016. Our price to earnings ratio is 6.57 at December 28, 2016, and our backlog was $78.5 million at September 30, 2016 compared to $71.3 million at September 30, 2015. Members of the Board and management have been consistent insider buyers of the stock and hope that you will continue supporting us in what is poised to be a great fiscal year 2017.”

His father Marshall Reynolds also happens to be the chairman of ESOA and CEO of Champion Industries, a printing company which has not had a great couple of years, but keeps the lights on. Mr. Reynolds also sits on the boards of several banks financing the debt portion of ESOA’s capital.

Neither Douglas nor Marshall Reynolds appear to have significant experience in the energy services business. What they do both have is a significant personal stake. Insiders own >30% of the shares and Douglas Reynolds takes a modest salary around $100k/year. I would expect that both Doug and Marshall bring valuable Rolodexes to the business as well, both from local government and business connections. Additionally, they appear to be smart enough to leave the general management of both companies to experienced industry veterans.

Biggest Risks 

Customer concentration risk varies by year and project with such a small company, but Marathon Petroleum (Ticker:MRO) and EQT Corporation (Ticker:EQT) represented >10% of revenue for ESOA in 2016.

“The two customers, Marathon Petroleum and EQT, represented 18.2% and 17.6% of revenues and 40.6% and 11.3% of receivables net of retention, respectively. The Company had two customers that exceeded 10.0% of revenues for the year ended September 30, 2015. These two customers, Marathon Petroleum and Rice Energy, represented 14.6% and 22.8% of revenues and 14.5% and 32.6% of receivables net of retention, respectively.”

In a sector as wild as energy, accounts receivable write-offs are one way to look for issues with customer payments. Rising write-offs indicate that customers cannot afford to pay their bills. A/R write-offs have been negligible for the past two years. The company wrote-off ~$11k in A/R in 2015, which increased slightly to $14k in 2016, on roughly $100m in revenue.

Days Sales Receivables is a metric which gauges credit risk from customers as well as project completion, with a lower number of days being better. Days Sales Receivables in the energy services industry ranges between 65-90 days for the largest energy services companies. We should expect a company this small to have higher DSR. Days Sales Receivables have declined slightly from 112 to 106 days for 2016 and are on-track to decline further in 2017 due to sizable project completions in 1Q17.

The biggest A/R customer currently, Marathon, is highly levered, but does not appear to be in danger of bankruptcy in the near-future. MRO bonds are trading at or around $100+, signaling that creditors are not worried about Marathon’s ability to pay its bills. I could not find much on MRO’s break-even cost in the areas which ESOA services, but according to this EQT is one of the lowest cost natural gas producers in the Marcellus field. EQT actually seems well-positioned to roll-up other operators, which could be a good thing for ESOA’s backlog. Marathon’s outlook seems a bit murkier, but neither EQT nor MRO show signs of serious financial distress.

All employees of CJ Hughes are union members, which means some collective bargaining risk is baked-in. In total, ESOA employs 920 people. I would expect some pressure on SG&A in the form of wages. Additionally the company contributes to a few multicompany pension funds which are currently underfunded. I could not find any indication that ESOA itself is not paying it’s allotted portion.

The company’s debt schedule shows $9.1m coming due in 2017, which could result in lower FCF compared to 2016. I expect some of the additional debt repayment to be offset by about $1m less in CAPEX; the company purchased a building which Nitro Electric had been leasing in early 2016. The 10-K also mentions that management expects to renew the current line of credit. Given the strong local banking ties and solid balance sheet, I would expect some revolver debt to be rolled over to 2018.

Outlook for 2017 and Beyond

Energy Services of America is well-positioned to benefit from any increase in energy or infrastructure investments in the Mid-Atlantic region. The company reported a backlog of $78.5m as of the end of September vs $71.3m in September of 2015. First quarter is typically when you can get a good idea of the expected annual revenue, but 10% higher y/y backlog sounds encouraging.

Year over year the company grew revenue by 25.8% in 2015, and 32.5% in 2016, while at the same time improving operating margins and asset turnover. These improvements occurred in-spite of a tough 2-year stretch for energy service companies due to the global collapse in oil prices. The company is trading slightly below net tangible book value, and looks cheap relative to cash flow and EBITDA, which are both under 5x. The company also maintains a modest debt/leverage ratio of 2x. I’m not betting on lower tax rates, but ESOA also pays a current effective tax rate >40%. Tax reform would be yuuuuge for this company.

While the company is not the sort to provide detailed guidance, I found the recent 10k management commentary to be interesting:

“We were awarded several major projects in fiscal year 2016 that will be completed in the first quarter of fiscal year 2017. We will need to replace those projects in fiscal year 2017, but we feel the opportunities we are already seeing and our strong relationships with our customers will allow us to do so.”

The atypical shareholders letter issued on January 4th, and recent insider purchases seem to indicate that management is confident that recent growth and operational trends will continue.

Conclusion

I like nano and micro-cap stocks lately for several reasons.

  1. They tend to be much harder for big investors to buy put meaningful cash into without significantly moving the share price.
  2. They generally don’t have the same tax expertise as Apple or GE, so they stand to benefit inordinately from lower tax rates.
  3. They are often under-followed and consequently mispriced.

Due to an incredibly small market capitalization, ESOA is a difficult company for institutional investors to buy at any scale. The company has shown impressive operation improvements and has strong growth prospects. I believe ESOA is undervalued relative to the business prospects and to peers. The business fundamentals warrant another 2-3x turns in EV/EBITDA, which would put the stock price above $2/share in the short-term. A nano-cap penny stock like this should continue to maintain a valuation discount relative to larger names, but I expect management to continue to return capital to shareholders or to achieve an eventual sale of the company. To me this stock seems like a good long-term buy-and-hold prospect.

2016 Year-End Summary and 2017 Rankings

2016 was a pretty crazy year for me both personally and professionally. Professionally, I walked away from a couple of corporate fast-track opportunities in pursuit of a smaller company with more ownership opportunities and personality.

I also (finally) got to start living with my wife and kid, and now we have another one on the way! These confluence of events had me doing really weird stuff with my money. At one point I was something like 50% in cash in my 401k alone, aside from pulling all of my individual trading account cash out of the market as well.

I put most of my excess cash into Lending Club notes where I could earn a 2-5% annualized return (pretax) and not have to worry about a market downturn. As this money comes back out of the notes, I am building up my cash again.

asset-allocation-snapshot-12302016
Asset Allocations End of 2016

I’ve been stepping back into the market over the past 6 months in a mix of value, growth at reasonable price, and special situations or “workouts” as Warren Buffett used to call them, and a fourplex apartment complex as well (not captured in the above graph due to no significant equity stake at this point)!

I have only recently gotten back to blogging, so the closest thing I have to a 2016 ranking is from 3Q. Keep in mind that the results do not fully reflect my actual portfolio weightings.

3q-to-2016-end-performance
Performance from October 14th to December 30th

Crossed out tickers represent stocks which were either not owned or sold. I failed to anticipate a Trumpictory on November 8th, and I bought CSAL too richly. I expect the 9.5% dividend and growing appreciation for the business to improve the stock’s performance in 2017. A 5.8% gain in a single quarter is pretty fantastic, but is overshadowed by the market’s 8% return over the same time frame. The market usually returns 6-8% annually, so I think expectations could cool down in the next month or two, and the likelihood of a mini-selloff is high.  Consequently I’m attempting to position myself to hold onto my existing gains rather than stretch for more. I sold INTC recently because I bought it on March 9th at a lower price and after a 20% gain I do not believe there is a strong catalyst to justify continuing to own at this valuation. I am also considering liquidating my investment in VTI if I can find more attractive investments elsewhere.

allocation-2
Current Allocation

I also plan to add WellCare (Ticker: WCG), as part of my recent interest in healthcare stocks, which seem to have been inordinately beaten down over the past year. I am sort of astounded that defensible sectors like telecom and healthcare aren’t doing better this late in the cycle, and I’m pretty happy to jump in.

I am still developing my strategy, but I don’t believe the M&A spreads which I have been seeing will persist over the next couple of years. With greater regulatory clarity post-election, I expect more traditional players to start sniffing around again. So I’m looking to rotate into small stocks which are more likely than mid or large cap stocks to be severely undervalued. A $16 million market cap liquidating trust like my most recent investment ENZN, is much harder for an institutional investor to step into, and I’d rather look for solid returns of capital than lots of greater fools after 7 years of strong stock market returns in 2017.

 

 

 

 

 

 

 

 

 

 

 

Enzon Pharmaceuticals Still Has a Few Puffs Left

I recently opened a small position in Enzon Pharmaceuticals (Ticker: ENZN). Where I normally would disregard a nano-cap penny stock, I was intrigued when I noticed that Carl Icahn is invested in it. The guy is a billionaire. What is he doing fiddling with a $16m market cap company? Additionally, he has already shaken down this very same company multiple times… why take a big stake in November?

Here’s a pretty good Seeking Alpha post which lays it all out, but I’ll recap some points here. Enzon Pharmaceuticals, Inc receives royalty revenues from existing licensing arrangements with other companies primarily related to sales of four marketed drug products: PegIntron, Sylatron, Macugen and CIMZIA. Enzon conducts no R&D and has no operating business at this point, it simply collects royalties on 4 existing drugs The company has no employees, only contractors at this point, and has not even updated its own website in some time apparently.

The company is slowly self-liquidating via dividend distributions over the coming years, and the stock traded down to $0.35/share after distributing a 15 cent dividend in December on a stock price of 45 cents per share. I expect the 2017 distribution will be in the 10 cents range, accounting for a 27.7% yield at the current share price. The stock is a cigar butt investment for Icahn from which he is clipping the dividend, with optionality to the upside from increased royalties from pending FDA approval of SC Oncaspar by Shire and a potential legal win against Nektar. The FDA approval in particular should yield another $5m in royalties.

Currently the company is sitting on $0.14/share in cash, and the stock is currently priced at $0.36. Management disclosed that they expect to receive approximately $29m in royalty revenues from the beginning of 2016 thru 2021 when they will likely liquidate the remaining assets. This estimate does not appear to include either of the two scenarios mentioned above.

I estimate that the company will receive $1.5m in royalties for 4Q16, approximating $9m this year, with the remaining $20m  coming through 2017-2021. I would expect operating expenses to decline to about $1.5m per year. So the company has good line-of-sight to pull in another $20m in cash over the next 5 years, minus $7.5m in expenses ($1.5 x 5), yielding an additional $14.5m in cash flow. Added to the current balance sheet assets of $21.74 million and subtracting the December dividend payment of $6.63 million, I get a fair value of $29.61m, or $0.67/share vs the closing price today of $0.36/share. Getting more conservative and only adding in the cash on the balance sheet (ignoring $8.61m in tax deferred assets) gives me a fair value of $21m or $0.48 /share. This is not including the Shire and Nektar optionality mentioned above.

Normally I stay away from penny stocks, but this is a legitimate business, and investors appear to be mispricing the future royalty streams. Additionally, when the company was delisted from the NASDAQ this likely forced several institutional investors to sell their positions due to internal investment policies. They typically can’t invest in over-the-counter stocks, or stocks trading under $5/share, or nano-caps.

On top of that, liquidating trusts (which Enzon will eventually become) currently have very odd tax penalties associated with them. This actually makes the most tax-appropriate investment in ENZN a tax-protected account in an amount small enough that it does not risk hitting the $1,000/year UBTI taxable threshold. We have to be careful about sizing so that the liquidated value returned to shareholders in any year do not exceed $1,000. For small investors like me, this is an attractive stock to open a small position in, and will remain highly unattractive to institutional investors as a nano-cap penny stock with taxable liquidation distributions. But we aren’t buying it on the expectation of share price appreciation we’re buying it for cash flow.

If the existing royalties do not collapse, and no additional royalties or immunity fees pan out, investors are conservatively looking at a cash return over the next 5 years of between  130-180% at the current price of $0.36 per share.

So, I Bought a Quadruplex Apartment

For the past two years I’ve increasingly been looking at ways to generate income outside of the stock market or my job. I also stumbled across a podcast called BiggerPockets, which aside from being genuinely entertaining is  a great resource if you want to learn more about real estate. I currently own and rent out a former primary residence in Georgia, and clear about $200/month in cash flow after paying the mortgage, maintenance, and property management fees. The financial factors driving real estate are pretty attractive to me at this point in my life, and the more I learned about duplexes, triplexes, and quadplexes the more excited I became.

I have found that no matter what the market is, illiquid investments are where the most attractive mispricings occur. 2-4 unit apartment buildings occupy this weird mid-market niche that makes them unloved and illiquid relative to larger apartment units or single family homes.

  • Too small to be gobbled up by commercial investors, and tend to have a stigma attached for first-time home buyers. It just isn’t what they picture as the American Dream. This increases the potential to find diamonds in the rough.
  • Treated like a single family home for financing purposes, with the same government subsidy benefits attached. VA loans and FHA loans are both options. A typical apartment complex would cost an extra 1-3% in mortgage interest compared to the financing which I can get in a fourplex.
  • Easily house-hacked.
  • 4 doors instead of 1 door reduces occupancy and turnover risk compared to a single-family residence.

Do you see where I’m going with this? My family is currently in the process of building a house, but being fans of Maslow’s Heirarchy we could also use a place to stay while we sell our current home and build the new one. I also happen to love anything that yields a cash flow of >10% per annum.

Each unit is a 2 bedroom, 1 bath which rents for approximately $600/month. 3/4 occupied units will fund our mortgage, allowing us to live rent free while also putting equity into the building. When we (eventually) move out the building should conservatively cash flow $100/door after setting aside money for maintenance and property management. The downside is that we will have neighbors and live in a relatively small space.

It is important to note that I used VA loans on both my single-family residence in GA and my new multi-family property. These loans effectively guarantee 25% of my mortgage with government backing in case of default, meaning that I do not have to put much money down up to a certain level. In my case, I was covered for $417,000 initially, with ~$225,000 of coverage after my initial home purchase in GA for $190,000.

Readers who are not veterans could do something very similar using a FHA loan, which only requires 3.5% down. Mortgage coverage limits for these programs often vary by region, so readers on the coasts are hopefully not crying just yet…Going over the numbers using the remainder of my VA loan coverage after accounting for the $190k house which I bought with no money down in Georgia:

Remaining VA mortgage principal coverage: ~$225,000

Final Price of Multi-Family property: $262,000

Remainder after VA coverage: $262,000-225,000 = $37,000

Required initial equity from me: 25% * 37,000 = $9,250

After inspections and fees my all-in initial cash costs was $15,000. During the first year on that $15,000 I am budgeting a return of zero, because we plan to inhabit one unit for free. After that first year, with a minor rent increase our cash flow should be approximately $8,000. That’s roughly a 50% return within two years, with full payback by the end of year 3 assuming no major emergencies. This is not counting the associated tax benefits or potential for price appreciation for the structure.

“You make your money on the buy” is a phrase real estate investors like to say, and so when my agent told me this property was $20k cheaper than comps, and my home inspector put it in his top 10% for overall quality I got pretty excited. The Kansas City area is doing well. Over time, rents tend to rise along with housing prices, and so I expect that our cash flow from the property should increase in-time. I am also interested in buying trailer parks (easy financing, depreciation benefits, and low overhead), as well as practicing the BRRR strategy on more multi-family units. If anyone has experience doing either one please let me know!

M&A Speculation in Healthcare and Spectrum – New positions in HUM, CI, DISH, GSAT, and TSL

Over the past month I added several new positions as I think about the evolving M&A landscape. A new wind is blowing in Washington and I want to be positioned to catch some updrafts, so I’ve purchased a mix of value and catalyst driven investments.

positions

New Healthcare stocks – HUM and CI

I’d mentioned interest in Humana previously, and decided to take the plunge along with Cigna.I already owned UNH, and it seems that all 3 have good catalysts in there favor:

  1. Fundamentally low valuations at times of purchase. Trading less than 10x EBITDA, 10x FCF.
  2. More favorable Medicare outlook for HUM in particular, but really a better regulatory outlook for all 3.
  3. Potential to benefit from rising interest rates.
  4. Higher probability of M&A approval post-election.
  5. Enough cash on hand and deal-break-up fees to provide meaningful shareholder returns should either deal fall through.

The ultimate catalyst would be for the acquisitions to go through, but even if they fail I think health insurers (along with telecom and cable providers) face a much more favorable regulatory environment than they did 6 months ago. Cigna is the longer M&A shot between HUM and CI, but also has about 2x the potential return upon deal close.

Speculating on spectrum – DISH and GSAT

Spectrum is a fascinating asset. It is as ethereal as property can get, akin to owning yelling rights at a certain note, and yet it appreciates in value over time in a manner similar to real estate or guns. To that end, I have been thinking about two companies which hold a lot of spectrum assets: DISH and Globalstar. It is becoming clear that 5G is still 3-4 years away from mass implementation. Furthermore, it seems to be the case that new transmission technologies are moving towards higher bands.

Crazy Old Coot Charlie Ergen may have overpaid for AWS3 spectrum, but let’s think about the cards which this well-known gambler is holding now. He owns a legacy satellite service company which he can either milk for cash or spin-off in the future, and separately he’s sitting on a lot of mid-band telecom spectrum. I opened a small placeholder position, but it is hard to get too excited about DISH at this level. There could be more attractive entry-points in the coming months.

I would be a rabid buyer under $50. Not for the legacy company or for Sling TV, which is meh, but solely for the spectrum. Even with the current Broadcast Incentive Auction’s crappy $/mhz-pop numbers as a potential detractor, I think eventually that mid-band spectrum will be valuable. 5G is looking to be similar to 4G, except also utilizing mid and high band spectrum. If anything it should result in a higher premium for Dish’s ~75MHz of mid-band spectrum holdings, which the market is currently not valuing appropriately.

Reports started swirling this week that GSAT was finally going to receive TLPS approval from the FCC, so I bought in at $1.81 yesterday. The official FCC approval came out today. This is another small speculative position. 11.5Mhz of spectrum that sits alongside 2.4 GHZ is worth something. Many wireless devices already have the hardware in place to use the extra spectrum, requiring at most a firmware update. I don’t fully understand what Globalstar is working towards at this point, but the stock has been so heavily  beaten down from these proceedings (and is so heavily shorted), and I expect some upside in the near-term.

The company plans to use the spectrum in question for “low-power operations that support traditional mobile broadband services, including a variety of voice, data, and text applications. With its future terrestrial partners, Globalstar would operate these low-power systems in a variety of settings across the United States to support high data rates and provide consumers with additional terrestrial broadband capacity.”

I honestly think GSAT’s business plan is not great, and I am also wary of the secondary offering which GSAT will need to issue within the next 6 months. Alternatively, GSAT has lots of issued debt.With a company this precarious, I prefer to open a small equity position and await the announcement of some sort of partnership, and I think it could go to $3 by springtime on the news. GSAT has been a seemingly endless story of FCC bludgeoning, so I expect shareholder interest to rise. This is a highly speculative and very small holding at this point given the debt load and lack of operating cash flow.

As an aside -I haven’t been following Maglan Capital much, but they have both a position in GSAT and in FairPoint Communications which is now being acquired. Merry Christmas to them. This might be a fund worth watching in the future.

Thinking about where the telecom space is going I am still most excited about CSAL, CHTR, and TMUS based upon the fundamental cash flow growth and potential for M&A.

Trina Solar is acquiring itself with cash

I am putting a premium on cash liquidity right now for the most part, and most of my recent positions involve catalysts within the next 12-24 months.So why am I messing around with a Chinese solar manufacturer?

The offer is all cash for $11.55/share. The current price is $9.25. If the deal closes by April 2017, it would yield a 24.7% return, or 92.6% annualized.

The story here is pretty simple. Trina Solar happens to make solar panels in China. The biggest shareholder, CEO, and founder Jifan Gao wants to take the company private. China is working to restrict capital flight from the country. From what I’ve read, it doesn’t look like TSL will be impacted by this new rule. The small market cap and dominant solar market position increases likelihood that the deal gets approved in my mind. My reading is that China primarily wants to slowdown the overseas acquisitions rather than stop a company from buying itself back. TSL is also not trading expensive at 6x EV/EBITDA, even with modest expectations going forward.

Intel – Rebuilding the Old Moat Unlikely

I bought into INTC in March of this year at a price of $30.85. I looked at INTC as short-term valuation reversion play. It was simply too cheap at the time relative to the market at the time. Having my holding appreciate >20%, and with no near-term catalysts within sight to drive the stock higher, I recently sold the position.

The basic reasons are as follows:

  1. INTC no longer has the same monopolistic powers which it’s alliance with Microsoft once provided. A new PC cycle could continue to serve as a minor catalyst, but Intel already relies too much on its PC and server segments for cash flow.
  2. Nvidia GPUs are ripping away INTC’s former bread and butter high-end performance market. I expect this trend to continue.
  3. ARM CPUs have captured a large portion of the mobile market, with QCOM and a bevy of other mobile semiconductor manufacturers waiting in the wings.

The intense demands associated with GPUs and mobile processor workloads, both fields which Intel chose to ignore for long periods of time, have forced Nvidia and ARM to become area experts with strong market positions. I don’t believe that Intel can overcome its own organizational entropy at this point, and decided to exit my position in favor of cash.

The counter-argument would likely be that Intel’s recent acquisitions like Nervana will put INTC on an equal footing with NVDA, but I don’t personally find the story that INTC is pitching to be very compelling at this point. FPGA could be an interesting avenue of development, but I am not sure that management fully comprehends the bind that it is in. Intel’s history is replete with examples of expensive tech acquisitions which fizzled.

Additionally, Google, Apple, Facebook, and even Microsoft have become adept at playing hardware vendors off of one another. A great example is what Alphabet and Microsoft each accomplished with specialized software defined networks, which helped them avoid being locked-in to a single network vendor.

While Intel is still cheap relative to peers, I don’t see a return to the good old days of monopolistic dominance. I also want to see more proof that INTC is all-in on Nervana and that the corporate culture is not broken. Consequently I sold my shares, and will be looking to see how FPGA develops. If it is truly a game-changing must-have solution which only Intel is capable of providing I may reconsider.