Monday, November 28, 2005

Regarding the (underperforming) Initiative

It's no news that the initiative has been negative compared to the S&P 500 over the past couple of weeks (5% as of today). It gives me no pleasure to have to report these dismal results to you, and I am very worried myself at these seemingly horrible results. But I am nevertheless optimistic about the future performance of the portfolio. Let me first explain some of the things that have killed the initiative over the past couple of weeks:

Eternal Technologies Group (ETLT) came out with third-quarter earnings... and the results were less than satisfactory. Only five million dollars in revenue compared to the ten to fifteen that they enjoyed in the same quarter of last year. Market expectations have been disappointed and the stock was punished... hard. We went from our $0.75 high to a low today of $0.43. Ouch.

Big Sky Energy Corporation (BSKO) had some issues with Fraud from a former employee. He had tried to conspire with another company, pretending to be the president of Big Sky, and had tried to deal with the government in signing the rights of Big Sky's oil rights to him. In dealing with situation, the company has missed the filing of their 10-Q, and the stock took a huge hit, from about $1.20 to the current $0.96. Ouch again.

Those two were perhaps the most damaging to the performance of the portfolio. We lost around 300 basis points on these downfalls. The other 200 basis points was due to the fact that the markets have gained momentum and overtook the portfolio over the past couple of weeks.

But rest assured, all is not lost. I am going to say something that you guys probably hear everybody say when they are down, and that is: THIS IS SHORT-TERM. Except, I mean it. I can promise with a 95% certainty that the portfolio will eventually rebound. Let me explain:

The problem that Eternal Technology faced was that it had missed market expectations for the quarter. A very daunting press release came out, saying that its earnings and profits both were down some 50% over the same quarter last year. But please keep in mind that the earnings on the company is very volatile, and that whatever they don't make in Q3, they will make up in Q4--and that is just what we are expecting. I've gotten in touch with the firm in charge of investor relations for the company, and they have specifically stated that this quarter, and the year as a whole, is expected to over-perform last year's, and that due to the unexpected extension of warm weather, they had to delay fulfilling some of their Q3 contracts into Q4. What this means is, all else aside, fourth quarter earnings is expected to make up for all the underperformance of Q3. This means that despite some short term volatility with the realization of earnings, this company is ultimately still growing and turning a profit every quarter. And maybe we can expect to see that same degree of upside that we saw when we were at around 70 cents when the markets realize the potential again.

To tell you guys the truth, I actually plan to add more into the position if the stock drops any lower (anything below 40 to 41 cents). If you have any questions or big objections, please feel free to contact me. I am quite certain that the stock's drop is only temporary... although, that's only because none of the facts about the company's great performance has changed (the minute something changes, you can rely on me to be the first one out).

Now, for the other killer. Big Sky Energy Corporation (BSKO) has been very generous in giving me information regarding the current fraud issues that it is facing. I got on the phone with one of the board members today, and she has told me some things and assured me of some facts that have given some confidence to me regarding the future of the company. After all, how do you deal with fraud, and how should the markets discount for this sort of thing?

The board member kindly assured me that the fraud is not on Big Sky's part (thank heavens); they were actually the victims of it and is fighting to the death to defend their rights as victims (albeit in a Kazakh environment). Second, the whole fiasco has been a terribly embarrassing situation for the Kazakh government as a whole, and this is very advantageous to the firm because if they don't reinforce the laws and rule in favor of BSKO then it looks very bad on the international scene, and would scare away future investors which the government definitely does not want. Third, Big Sky is very confident that this issue will be resolved, although they declined to give a time-line. They don't feel that this impediment is too important to the production capabilities of the company in the long-run, and in the long-long run, this is but a blip in the stock ticker. They have also assured me that the non-timely filing will be filed sometime this week--that made me more comfortable holding the stock.

Again, I might even add more to Big Sky depending on where its stock takes us tomorrow. I will definitely add more before Thursday or Friday's end to take advantage of the upside we might derive from the 10-Q coming out which will probably reassure some investors of the company's solidity. When I do add, this stock will be no more than an 8% position, as the risk of Kazakhstan is still rather large.

So... why did I sell out of TransMontaigne and Bonso Electronics? To be completely honest with you guys, I haven't felt comfortable about these two stocks ever since I started owning them. Bonso wasn't that big of a position so I could still sleep at night, but TransMontaigne kept me awake pretty much this whole thanksgiving break. Both were pretty much bets on commodity sales and prices, and they both traded at pretty good multiples that I was comfortable when I first looked at it. But as the lack of "certainty" dawned upon me. TransMontaigne, for one, had all the things a value investor could want: 4x current earnings, near-monopoly in the southern oil pipeline transmissions, very high sales volume, but the thing that bothers me is the slim margins. A wrong bet in the derivatives markets can kill this company and tank it to the ground because they are literally holding all the inventory risk in the highly volatile oil markets. So I said fuck it. With BNSO it's the same ordeal, they have many inventories and production capabilities, except demand is slowly dying, and there are just way too many players out on the markets that do the same thing they do.

With both these companies, I reiterate, multiples are VERY attractive, but the certainty of the cash-flows were grossly miscalculated on my part, and I should have looked at the qualitative side of things more and discovered some really disgusting things that should have kept me away.

The initiative team has been working extra hard to mitigate these results and bring future performance upside all the while the portfolio has been hit. Please bear with the short-term underperformance, as we truly do not believe that this is permanent. While expecting ETLT and BSKO to normalize, we are continuously on the lookout for ideas that could benefit our portfolio. And we are sticking to our vision at the beginning of the semester: 10%+ overperformance by the end of the school-year.

Thank you all for your time and consideration. Again, if any of you have any questions or comments, or suggestions, please feel free to give me an e-mail or a ring.

Wednesday, November 23, 2005

Rishi's Concerns

I got an interesting e-mail from our beloved member Rishi Trivedi today, I thought I should share it on here (with his permission of course) Hope this helps some of the built up angst in IAG regarding the performance of our portfolios.

-----Original Message-----
From: Rishi H Trivedi []
Sent: Wednesday, November 23, 2005 2:30 PM
Subject: Portfolios

Krish & Ming,

How's it going? I thought last week sparked some of the most involved debate at IAG in a while. Take what I say in this e-mail, don't take what I say, I don't care. The portfolios are seriously lacking this year. I guess you guys need the money for obvious reasons, we can't fund a lot of our stuff without it also it's been sort of a thing where we outperform the S&P just because. There are NEVER a lack of investment ideas.

First off Ming--if a company is a good buy at $5, then it is a good buy at every price below that. If information comes out and changes the value and say you think then the company is below $5, you should have never invested in it in the first place because your margin of safety wasn't adequately accounted for. It is a logical and rational error to say that at $5 it's a good buy but at $2.50 it's not and I rather not have IAG members walking around thinking otherwise. If you're willing to buy milk at $5, of course you would buy it at $4.99 and every price below. You do not buy stocks because they have risen, this is when you sell. You do not sell stocks when they have sunk, this is when you buy. This of course, all adjusted for margin of safety. Stocks are bought like groceries and not jewelry as Charlie would say. At a lower price, we buy a little more bread, milk (stock up), at a higher price we do not. Secondly Ming, what are you doing to look for companies?

Krish, you're holding a lot of cash, I'd like to see you do something with it. What are you doing to look for companies?

I was over the S&P 500 by 10% and before I resigned last year I told Ming to sell for a reason. Then Ming fiddled with it and brought us under the 10% mark. Please do get back to me, I'd like to hear your thoughts. I also want to know exactly what you are doing to look for companies and if you want to fill me in on how you start to analyze companies (again--how you start to analyze companies), then that would be nice too.

You can forward this along to anyone who you please.



Thanks for your input Rishi. We appreciate the concern you are showing regarding the performance of the portfolios. We love to let you know more about the portfolios and you are more than welcome to stay after the club at anytime to come talk to either of us and we'd be more than happy to address anything you have to say or ask.

Regarding the "good buy" at $5 theory, while it's true for a carton of milk that I will still buy it, it's not so when we have a time horizon like we do at IAG. Remember, the markets can stay solvent much longer than we can... and to add to a losing position no matter how much is goes down is suicide in the short term.

I know you like using the example of me fiddling with the performance of the initiative last year, so I'll use that example to illustrate the previous paragraph. When RURL and CHAR was bought last year, RURL was 5.50, and CHAR was 2.60. When the year ended, RURL dropped to 4.40 and CHAR dropped to 1.90. The initiative did indeed underperform because of that.

But throughout the summer, RURL has risen to about 10.00 and CHAR has risen to 6.00, right in line with our target prices.

Considering that they are good stocks, and they would have eventually performed the way we wanted them to, buying more shares then--as buying more shares now--would be suicide for the IAG time horizon. Now, I know you love using Warren Buffet and Charlie Munger as the guru of investment quotes, and I know how Warren Buffet and Charlie Munger has pulled through some hard times adding onto their losing positions, but keep in mind that they had an unlimited time horizon to wait it out, while we only have about 8 months. The Warren Buffet and Charlie Munger strategy of adding to losses will not work for IAG. If last year's initiative portfolio could have been carried onto this year, it will probably be outperforming by about 30-40%, but we don't have that fortune here.

About what I'm doing to look for companies, you can check out for more info is Krish's in case you are wondering what he's doing. We are also available anytime after the club to talk to you personally.


Also, please keep in mind that the way you are conducting yourself might be considered inappropriate by some standards. Krish and I are both working very hard for the sake of earning IAG's keep, and we are always out on the markets scouring for ideas. We really appreciate you giving us your opinion, but we aren't quite particularly taken with the way that you do so. However, again, we do appreciate your concerns, and it serves us a much needed reminder of how bad the portfolio has been performing. But believe us, we are well aware of the consequences of bad performance as much as you do, and we actively monitor the portfolios, and constantly try to find good ideas the best we can. The next time you have concerns, please let us know personally, and not through e-mail, because writing something is much more damaging than saying something, and there are a million ways in which we can take your e-mail the wrong way, though we know your intentions are good.

Anyway, enough said, Thank you again for your input. I hope you have a great thanksgiving!

Best regards,
Ming Che


Arg! ETLT is killing the initiative!!!
there will be no thanksgiving break for me :(

Thursday, November 17, 2005

Eternal Technologies Thesis Revision

Oh man.
Thanks to Steve, here is something really fishy about the stock:

"As of August 5, 2005, 30,679,630 shares of Common Stock of the issuer were outstanding.
As of November 14, 2005, 39,683,407 shares of Common Stock of the issuer were outstanding."

That completely dilutes the value of the company to cash level. Bastards!
I'm going to have a better explanation for this on Friday as I do more research into this.

Tuesday, November 15, 2005

Eternal Technologies 3Q

OMG, stock price tanked 32% today on 3rd quarter earnings... woe is me! I guess you really can't foresee these things. After a fateful long and arduous climb up over the past couple of weeks, we are right back where we started with this company--0.50, no gains and no losses... yet.

Now the earnings isn't exactly spetacular, especially compared to the figures from the same period last year in Q3. Some notable failings are: revenues decreased by 4m or 44.6% to 5m from 9m. Gross margin loss on sale of sheep of 17.3%. Leaving a EPS of .03 compared to .09 same quarter last year.

But should we really be worried?

If we take a look at the fundamentals again, this slow-down doesn't really seem to be anything out of the ordinary. Now, it's very easy to frame this company in a growth perspective--as in--well, the market expected the moon and now they have been failed. Punish this stock because it didn't live up to its expectations for the quarter. Yet, if we look closer, this stock shouldn't have been punished this much. After all, quarterly revenues and earnings are supposed to be sporadic... management discussed this throughly in previous statements. This is especially true when it comes to quarterly earnings, where the breeding cycle for animals and the demand for meat isn't too consistent over time. The markets love consistency and stability more than anything, but ETLT has failed this requirement this quarter because most of its contracted revenue did not occur from the months of June to September.

We should not consider this a failing though.

While 3Q earnings doesn't seem to live up to the legacy of the company. A 15m dollar contract "recognized mostly in the third and fourth quarter" is probably now going to be mostly recognized in the 4Q instead, making the REAL catalyst for growth in this company a year-over-year report or the 4Q report rather than this current quarterly report. In fact, year over year numbers have already beaten last year's in just three quarters. Meaning, if 10m in revenue is realized in 4Q, that will give us a year over year increase of over 30% in sales.

Not to mention, the cash position is probably going to increase even more.

I'm not without my due share of skepticism, however... but here is a summary of why I still like the company:

1.) 4Q Earnings will now come from high-margin Embryo transfers instead of meat sales
2.) $3m in cash have just been collected from accounts receivables, and 7m accounts receivable is still in the pipeline for collection over the next few months.
3.) Cash position is now $24m
4.) Costs are variable, so even though sales are down, ETLT still raked in 1.5m in earnings this quarter.
5.) Year over year increases and more news releases will be kinder to the stock in the future.

The stock is now trading at around 14m again... keep in mind they've actually EARNED 1/10th that this quarter, and will be expected to earn more in the 4Q... now, that fat cash position is still very attractive and real too. 14 million dollars to buy into this opportunity. Sounds like the stock is a great deal again...

This might be crazy, but I'm willing to place more bets now that I've seen the potential over the past few weeks.

Friday, November 11, 2005

Portfolio Update 11-5-2005

Sorry I can't be at IAG this week. Got an engagement going on with the girl :)
Here's a written portfolio update:

We are up quite a bit compared to last week.

The main drivers for this is the upside in ETLT, which amounted to a 50% increase.
- We plan to remain in the position until third quarter earnings which should be around Friday of next week (during which a portion of the $15m contract will be realized)
- Although we feel our fingers getting itchy, and want to sell out of this already very lucrative gain, we feel that we are currently do not have enough information to change our thesis of at least 100% upside from an earnings multiple standpoint.
- We maintain… “The show is not over until the third-quarter fat lady sings.”

Sold out of Ampex…
- Yes we did buy it only last Thursday
- But we feel that perhaps we were too trigger happy when we bought the company. Most of the licensing revenues they realized are actually not expected to repeat too much over the next couple of quarters, at least not until April, and even then, the revenues that they will be able to get from Sony remain very unpredictable.
- The low earnings multiples we are seeing currently is a result of one-time pre-payments from their licensees that are not expected to appear on subsequent statements, or if they are—they will be impossible to quantify.
- We hate things we cannot at least quantify to with a reasonable degree of certainty.

- We want to halve the position due to some uncertainty regarding some written agreements with the Kazakh government
- It has just dawned upon us that a 15% position might be a bit excessive considering the new political risks that have just surfaced.
- We plan on reducing the position until it comprises 5% in the portfolio.
- Plus… we feel that with the gains already made by the portfolio, the excessive risk with BSKO is unnecessary.

YELL… maintain position until price reaches target of $50

We will be approximately $70,000 cash soon, and we hope that we can find other ideas to put in the portfolio. We are well on our way to that 10% alpha :D

Monday, November 07, 2005

ADE Corp

This company has crazy cash on their balance sheets. Thats all I wanna say :D
Lets see if this is a good investment

Thursday, November 03, 2005

Yellow Roadway 3rd Quarter

Nothing feels better than having your thesis completely validated.
w00t w00t!