Tag Archives: investing ideas

Optimists Survive By Eating Bears

Yesterday (9/10/15) David Tepper came on CNBC for an hour. The whole discussion is worth watching, but one thing he said is missed time and time again by many investors. I’m not real comfortable being short stocks because there’s a bias for stocks to go up over time” – Tepper Tepper has been putting up 25-30% returns for over 20-Years with billions under management. He is one of the best traders in history, great at sizing up risk-reward, security selection, and timing… and yet he says, “I’m not real comfortable being short stocks because there’s a bias for stocks to go up over time.” One of the sub-segments of the investment/econ space that I enjoy are the “end of the world as we know it” genre. They are mainly published at market bottoms while the super bullish books are published at market tops (remember Dow 40,000?) but we also see a lot of them mid-cycle as well. For whatever reason, doom and gloom sells very well. The short argument always sounds like the intelligent argument. To make it worse, there is always a lot of data that shows real reasons to be worried. Look at any of the books in the picture below and they are filled with data and charts showing impending doom. If you look at the publishing dates, however, they either missed the crash or just got the entire thesis wrong. (BTW, I recently moved and have not unfinished packing or I could have shown a stack four feet high of end-of-the-world books. For whatever reason, I cannot resist the urge when I am in a used bookstore). (click to enlarge) The end of the world What the perma-bears get wrong is that over time, civilization has indeed improved its lot in life. Yes, there are downturns but more often than not stocks go UP and not down. If someone as smart as Tepper is wary of shorting, then what does that say about what you should be doing? Looking at US assets over time using data from the Credit Suisse Global Investment Returns Yearbook , we can see that stocks go up… a lot… over time. Even after taking into account inflation, you would have 1,396 times your money from 1900-2014. Bonds and bills are less explosive, but even there, they go up over time. Cumulative Real Returns USA Over the past 115 years, you would have been fighting a 6.5% annual upwards drift by shorting stocks. That means that you are fighting a 0.54% hurdle each month. And, of course, that doesn’t even include any borrowing costs, commissions, or taxes. Annualized Real Returns USA Now all of this is not to say that we don’t short because we do. We have had success going long and short across asset classes to include stocks. What I am saying is that you need to have a really good reason to fight long-term trends in markets. If you can’t figure out why you have an edge on any given trade, then you are probably better off not doing it. Oh, and in case you are wondering “stocks are overvalued” or “Because the Fed” are not sufficient answers. If you want more info on the long-term bias of stocks to go higher, or just want to get a lot smarter, pick up a copy of the book “Triumph of the Optimists” by Dimson, Marsh, and Staunton.

NRG Energy – Leading The Green Transition

Summary While NRG Energy’s conventional fossil fuel business continues to underperform, the company’s renewable business is more promising than ever. NRG Energy’s distributed solar business is growing at a rapid pace and should be a huge growth engine for the company moving forward. NRG Energy’s diversified energy portfolio should provide the company with unique advantages. The turbulent energy commodities market will likely continue to pose challenges for NRG Energy in the near-term. NRG Energy (NYSE: NRG ) clearly believes in the potential of clean energy as it has put a large emphasis on solar PV. Despite this, the majority of the company’s business is still based on conventional generation(i.e. fossil fuels), which commands ~70% of the company’s capital allocation. NRG Energy largely disappointed during its Q2 due to the underperformance in its conventional generation business, which is not so surprising given the turmoil in the energy markets. Despite the fact that the company missed on both EPS and revenue, which came in at $0.06 and $3.4B respectively, the company still has much to look forward to. Renewables currently receives ~30% of NRG Energy’s capital allocation, which is a figure that is bound to skyrocket moving forward. Although conventional generation still makes up for most of NRG Energy’s business, the company is making a rapid and smart transition to solar PV. During the Q2 earnings call, the company gave much more insight into how important it thinks solar will become. In fact, CEO David Crane even stated that “The future is going to be increasingly solar-powered and increasingly distributed.” This optimism surrounding solar PV will likely propel NRG Energy past its competitors moving forward. Ramping Up Distributed Solar PV Operations NRG Energy has put a heavy emphasis on developing its distributed solar PV business. As this is perhaps the most promising solar PV segment in the U.S., NRG Energy is definitely on the right path. During Q2, the company’s bookings nearly doubled on a YOY basis, recording 90% higher bookings. This translates into 19,410 NRG Home Solar customers as of Q2, which shows that the company is clearly building a respectable distributed solar infrastructure. Even more impressive, the company has maintained ~20% QOQ since the end of 2014. Such a promising distributed solar business places NRG Energy among the top distributed solar providers. NRG Energy still has enormous growth ahead of it as the company has barely scratched the surface of the home solar market. As the company is one of the first conventional energy companies to make a large-scale transition to solar, it has a meaningful first mover’s advantage. Not surprisingly, NRG Energy is rapidly climbing the ranks of top rooftop solar providers, even challenging the likes of Vivint Solar (NYSE: VSLR ) and Sunrun (NASDAQ: RUN ). Given that NRG Energy also has the advantage of maintaining a conventional energy business that could provide base-load generation for intermittent renewable energy sources, the company has an advantage over pure-play rooftop solar companies. Diversified Business While NRG Energy is putting a clear focus on distributed solar PV, the company is nonetheless diversified across the energy sector. This means that no matter how the future turns out, NRG Energy should be well-prepared. The company has assets ranging from wind and solar all the way to oil and gas, making it one of the most diversified energy companies in existence. As was previously stated, having both renewables and fossil fuels assets is advantageous in that fossil fuels can provide renewables with base-load generation. As renewables like wind and solar still do not have a cost-effective means of storing energy, fossil fuel assets certainly come in handy. NRG Energy is an extremely diversified energy company, with assets in nearly all the major energy markets. (click to enlarge) Source: NRG Energy Obstacles NRG Energy has all the tools to become a powerhouse in the renewable arena. While NRG Energy’s renewable prospects are looking bright, the company’s conventional business will likely continue to face some volatility and difficulties in the near-term. Given the instability in the energy markets, NRG Energy will likely continue to face difficulties moving forward. The company has seen its valuation decrease by approximately 50% over the past year alone. In the long-run however, NRG Energy is well-positioned to outperform the market. The company will also face increasingly stiff competition from the distributed solar pure plays, mainly from standout SolarCity (NASDAQ: SCTY ). While NRG Energy is indeed has an early mover’s advantage in the distributed solar industry, SolarCity is already building an unparalleled brand presence. Given that brand presence in this arena is much more important than many had expected, NRG Energy will have to make its own imprint on the market soon or risk losing market share. Given NRG Energy’s vast resources and growing infrastructure, the company is more than capable of doing this. Conclusion NRG Energy has much more room to grow at a valuation of $5.9B . While the challenging commodity market will likely continue to plague NRG Energy in the near-term, the company is making all the right moves to secure a dominant role in the long-term future. NRG Energy’s home solar business will likely push the company to greater heights, especially given how fast the distributed solar industry is growing. As the company is at the forefront of the current energy transition, it will likely reap enormous rewards as a result. Despite NRG Energy’s underperformance over the last year, the company should outperform expectations in the years to come. Disclosure: I am/we are long SCTY. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Paladin Energy Is Trying To Survive

Summary Paladin could be breaking even this year, as it will be able to reduce its production costs per pound of uranium at Langer Heinrich. However, the main unknowns here are the overhead costs and the expenses to keep its Kaleyekera mine on care and maintenance. Paladin bought more time with its debt restructuring, but the clock is ticking and a higher uranium price would be very welcome. Introduction As the current glut in the uranium market will have to end sooner rather than later, I am keeping my fingers on the pulse of some uranium companies to make sure I’m making an informed decision when I’m ready to sharply increase my exposure to this commodity. Paladin Energy (OTCPK: PALAF ) has released its full-year financial results and has updated its outlook for the current financial year, so it could be a very interesting moment to check up on how the company is doing. Source: annual report Paladin Energy has more liquid listings on both the Toronto Stock Exchange and the Australian Stock Exchange, and I’d recommend to trade on the ASX. The ticker symbol there is PDN and the average daily volume is a pretty decent 9 million shares. The current market capitalization is approximately $230M, so its market cap is almost twice as high as the information page on Seeking Alpha would want to make you believe. The full-year financial results are showing the impact of selling uranium at the spot price Paladin has produced 5.04 million pounds of uranium and has sold almost 5.4 million pounds as it had some uranium in inventory which it sold during the financial year. Unfortunately, Paladin has not entered into any long-term contracts and it was definitely feeling the pain of the low uranium price on the spot market as the average received price was just $37/lbs for a total revenue of $199M . Source: financial statements This resulted in a gross profit of just $1.8M as Paladin also had to record an $8M impairment charge on the value of its inventory as the uranium price continued to decrease. The after-tax net loss was a stunning $300M and this was predominantly caused by a $240M impairment charge (of which $1M was attributed to an aircraft). I’m a little bit relieved the net loss was mainly caused by an impairment charge as that’s a non-cash charge and shouldn’t have an impact on the cash flow numbers. Source: financial statements So, let’s have a look at those cash flow statements; unfortunately, the situation doesn’t look much better here as the operating cash flow was negative, resulting in a total negative free cash flow of $40M. Keep in mind the cash flow statements exclude the impact of an impairment charge so there are no excuses at all here. What will Paladin do different this year? The company has now just one mine which is still in production, Langer Heinrich in Namibia. The mine will produce approximately 5-5.4 million pounds of uranium in the current financial year so there might be a small production increase, but the impact will be minimal. However, there will be an impact on the total production rate attributable to Paladin Energy, as the company sold a 25% stake in Langer Heinrich to a Chinese consortium for $190M last year. This cash infusion was be very welcome, but it also means Paladin is giving up on a lot of future potential cash flow. Langer Heinrich has a total resource estimate of 150 million pounds, so the company has sold 37.5 million pounds for $190M, or just $5 per pound. This decision is understandable, as it needed to improve the balance sheet, but should the received price per pound of uranium increase to $50+ again, Paladin might regret the sale. Paladin expects the production cost per pound to decrease by 7-14% to $26/lbs, but despite an uranium price of $35/lbs, this doesn’t mean the company will be free cash flow positive. There still is an ongoing cost of approximately $12-15M per year, which equals approximately $4 per attributable pound of uranium produced at Langer Heinrich. Throw in an additional $20M for exploration and administration (another $5/lbs) and you clearly see Paladin needs an uranium price of approximately $35-38/lbs to be able to even start thinking about breaking even. And that will be a difficult task in FY2016. Don’t get me wrong, it is possible as Paladin expects to receive a premium of $4/lbs over the spot price, but you surely shouldn’t expect any miracles from Paladin this year. Investment thesis Paladin’s re-financing activities in the past financial year have reduced the pressure on the balance sheet, but Paladin has just bought some more time, as it doesn’t look like the company will be able to generate a substantial amount of free cash flow in the current financial year, which could have been used to reduce the net debt. Paladin is a leveraged play on the uranium price and there will be a huge difference between a uranium price of $35/lbs and $50/lbs as, at the latter price, Paladin should be generating a pretty decent amount of free cash flow. Editor’s Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.