Thursday, January 26, 2006

Eternal Technologies... Again

I've been in a love/hate relationship with this tiny little agricultural biotech company from western China for a while now. The stock has lost me a good 300 bps over the past couple of months. I haven't really thought about the stock as much as I should... but maybe that's a good thing. Investors who think too much get scared; sell off shares due to a lack of news, or let the best of the personal demons of loss-aversion get to them. One can almost always find a thousand reasons why a stock will go up, and a thousand reasons why a stock will go down. In the case of Eternal Technologies, the two arguments seem to weigh equally. The mega-attractive quantitative aspects are off-set by a less than comforting realization that the numbers could be wrong. And the repurcussions from the downside of 3Q can still be felt in the silent wake of losses taken from the mini "bubble" bursting.

Are things starting to look different? After all, as investors, we want to know what will happen in the future, and detach ourselves from what has happend before. I can't claim I know with absolute certainty that the stock will experience the upside that we had expected when we first presented the company. I do know, however, that the story/hype are starting to look better.

The acquisition that we had doubts about--E-Sea Biomedical--is apparently in the process of handling government orders for breast examinations in the city of Shenzhen, and netting a good 400-600k from its operations. Despite the shaky merger and pro-forma numbers due to incompetent accounting/auditing, the business seems real enough. Does this mean that the company, on top of what we originally had valued as only the core agricultural biotech business of Eternal Technology, will be even better than we had originally hoped?

Again, I can't predict the future. But I am fairly confident that 4Q earnings, on top of what we had originally expected from embryo transfers and meat sales, will also include positive net effects from E-Sea. Only time can tell whether or not holding on to the stock is the right thing to do; but boy, am I glad I held on despite the poor performance of the past 2 months.

Thursday, January 19, 2006

Pioneer Companies, Inc.

In the form of a trade letter to the board

Hey guys,

Bought 550 Shares of Pioneer Companies, Inc. -- Ticker PONR -- at today's closing price of 29.55.

Pioneer Companies seem like a regular commodities business at first glance. They specialize in the production of Chlorine and Caustic Soda (baking soda and the like). One might expect the super cyclicality and the macroeconomics of the business to make this investment suck. But...

Ever since the emergence of bankruptcy, Pioneer Companies has focused on the reduction of costs and closing unproductive and uncompetitive production plants within its portfolio. It is now a formidable player in the industry due to:

1.) Monopoly-like presence in the western part of the U.S. -- They have the only producing plant of Chlorine and Caustic soda there, and are able to out-price most of the competitors located in southern U.S. because of their geographic proximity to their markets. Plus, there's a huge issue with railroads that prevent their competitors from entering their markets effectively. Pioneer also own three pipelines in the area that allow them to transfer products more efficiently than competitors who have to use trucks and rails.

2.) Industry capacity being reached. As of Dec 2004, 97% of the industry capacity is filled. Prices have been on the rise like mad. Pioneer still has a 20-something percent discount relative to market average prices because of their geographic location. They expect their price to become the market average in time, AND THEY DON'T HAVE TO WORRY ABOUT COMPETITORS while raising prices... at least, not for another year or two. The industry isn't expected to increase their capacity though.

3.) Strong cash position/balance sheet by the end of 2005. Most of these will be used to exclusively pay down their 10% senior debt (issued during bankruptcy), thus reducing interest expense and improving free cash flow to equity. Also... since the notes are due in 2006, the company should have no problem refinancing them on better interest rate terms due to its good financial performance.

On top of it all, the company is also selling 60-acres worth of empty land sometime in 1Q 2006. They recently sold a 11-acre land for 2x the book-value... so we can expect a pretty nice cash inflow from those things. Management stated that the proceeds will be used to pay down existing debt.


With all these things in mind, the company trades at a market cap to free-cash-flow multiple of just 5-6x, and an EV/EBITDA multiple of 3-4X

I think its cheap because chemical companies and the industry as a whole is seen as a super-cyclical business... and earnings are generally unreliable. Pioneer Companies, specifically, might have been mistaken for a "general" chemicals producer, and the special situation of Chlorine and Caustic Soda may not have been taken into consideration. Also, there is virtually no analyst coverage for Pioneer.


Our target price for this investment holding will be $44.90

If any of you want more details, please let me know.

Best regards,

Monday, January 02, 2006

Initiative Update - Winter 2005

There's really no REAL trades going on during the break for the initiative. Most of it was trying to exit an illiquid position (MRCBF). The portfolio value as a whole is $100,723.55, a roughly 2% underperformance relative to the S&P 500. We have only $6,504 in cash, meaning we are roughly 94% invested. We are still actively looking for ideas to replace ones that will soon be taken out of the portfolio when 4th quarter earnings hit.

With that said, here is an overview of all the investments we are currently holding:

Yellow Roadway (YELL) - 16%
Avg Cost: 41.13 - Current Price: 44.61

Yellow Roadway is a very solid play on the transportation industry and the wellbeing of the economy as a whole. Although it is somewhat market correlated, we believe that it is still a good investment in light of the low valuation multiples it's currently trading at relative to most other businesses in the industry. 3rd quarter marked the highest earnings quarter the company has ever seen in its entire operating history. I expect to see the same trend in the 4th quarter.

SFBC International (SFCC) - 17%
Avg Cost: 17.92 - Current Price: 16.01

SFBC is an event driven investment that was attractive to us because of the ability for the company to generate earnings despite tremendous negative publicity that has hit it over the past couple of months. They lost 2 clients (which were no more than 2% of their revenue). This company was accused of violating human rights by treating human testers in drug trials with negligence, sometimes causing painful disabilities and death. Two independent law firms were set to review the company's activities, and both of them have exonerated the company and called the recent bad press "wholly unfounded". The employee that was said to have threatened illegal immigrants with deportation resigned, and we should see a good solid 4Q with SFBC coming up.

Terra Nitrogen (TNH) - 14%
Avg Cost: 24.52 - Current Price: 19.04

To be honest, this is a stock that is killing the portfolio. It is a Nitrogen/Ammonia producer that makes fertilizer products for the agriculture industry (Nitrogen/Ammonia is made out of natural gas as its base cost by the way). It has close ties with its parent company, Terra Industries, in the UK. There has been recent announcements that Terra Industries has closed many of Terra Nitrogen's peer companies in the Oklahoma area, and have started massive imports of Nitrogen products outside of UK due to the unproportionally high LNG prices there. We have reasons to believe that most of the imports will come from Terra Nitrogen. This company is a highly volatile investment with tremendous short-term downside risk, depending on where the natural gas prices go. In the long-term it is more solid due to fertilizer prices adjusting for any increases natural gas prices might have. Im not too comfortable holding this company into the 4Q... but I don't plan in exiting the position unless a better investment comes along to replace it. Even with all the downside risk, it is still a very attractive investment should our thesis play out that the results of 4Q will be favorable due to a significant decrease in Natural Gas prices over the last quarter from the Sept 30, 2005 levels.

Keystone North America (KYSNF) - 17%
Avg Cost: 6.67 - Current Price: 7.50

Keystone North America deals with death care services in North America. As far as I know, this is a stable company with predictable earnings because death is about the most solid kind of certainty one can get in life. It is still trading at a discount relative to many of its peers in its industry due to the fact that it is a rather illiquid stock, under the radar, and traded on the Toronto Stock Exchange. This is also a stock that pays out an estimated 3% ROI every quarter due to its income trust status. It is a solid play offering us a stable return. The only concerns we might have with this stock is its status as an income trust in Canada, and also the trend towards "cremation" instead of burial--where the company gets most of their revenues from.

Morguard Corporation (MRCBF) - 1.2%
Avg Cost: 26.01 - Current Price: 26.34

We are currently trying to exit this position for reasons mentioned in the sell e-mails.

Great Basin Gold (GBN) - 15%
Avg Cost: 1.48 - Current Price: 1.55

Great Basin Gold is a gold explorations/mining company with properties in Nevada and South Africa. This is a very attractive company due to the prospects it has in its Burnstone property located in South Africa, which is estimated to be able to produce a sizable amount of gold in the next couple of years once the explorations stage is complete. In fact, the company's prospects is so attractive, that it has attracted one of the most successful gold moguls in South Africa--Mr. Dippenar--to become president and CEO. We expect this to be the next Big Sky Energy as we wait and see what news the company will unfold.

Eternal Technologies (ETLT) - 14%
Avg Cost: 0.47 - Current Price: 0.40

This is another stock that is currently killing the portfolio second to TNH. The only thing we are waiting for on this company is 4Q release, and then we are going to exit the position no matter what the results are. We don't believe 4Q will have a negative impact on the stock price of the company, as it is expected to report record earnings for the company, surpassing 4Q of last year, and also last year as a whole when the entire fiscal year is taken into account. However, there is a very good possibility that the market has already taken that into account. We have enough downside protection, however, to warrant us taking this risk.


Some current ideas that we have been looking at over the past few weeks are Innotrac (INOC) and Rent-A-Center (RCII). If anyone would like to help me with these stocks, please feel free to let me know. But again, I'm still looking for better ideas out there, and I can't quite get comfortable enough with those two. Overall, other than TNH which doesn't let me sleep at night, I have a very optimistic outlook for the initiative in the second semester, and hopefully, the markets will be more agreeable for us.

If you have any questions, please feel free to let me know.

Best regards,