Category Archives: Portfolio Performance

Energy Services Bets – Postmortem

So I made some bets on energy services company’s over the last 18-24 months or so. I thought now might be a time to do some sort of postmortem on the trades and see how they have performed. Full disclosure: recently I have added to some, sold some and continue to hold some of the company’s mentioned. See the Portfolio page for current holdings.

This post will be structured in 4 parts:

  1. Was it wise to bet on Energy Services sector relative to the overall market for the given time period? This should provide an indication of whether looking at the sector from a top down standpoint was a wise decision.
  2. Within the sector, did I pick stocks that outperformed? This should help me understand my stock picking abilities on an individual company basis for the time frame.
  3. Did the stocks that I chose outperform the market?
  4. Did the stocks chosen produce a positive total return?

Before getting started, below are the 4 companies I bought shares in. The first 3 are based in Canada, with the last one being Nasdaq listed.

Ticker Purchase Price Purchase Date Dividends Current Total Return Hold Time (yr)
psd.to $2.30 22/11/2016 $0.20 $3.10 43.5% 1.22
hwo.to $4.75 11/05/2017 $0.12 $4.01 -13.1% 0.76
ave.v $0.49 16/10/2017 $0.00 $0.53 8.2% 0.33
pfie $1.26 20/07/2017 $0.00 $2.19 73.8% 0.57

*Note the average hold time is 0.75 years (or 9 months)

Was it wise to bet on Energy Services sector relative to the overall market for the given time period?

When grading the bet on energy services vs. the overall market I chose the XIU.to (iShares S&P/TSX 60 Index Fund) and SPY (SPDR S&P 500 ETF Trust) for the overall market. For the energy services sector I chose the XEG.to (iShares S&P TSX Capped Energy Index Fund) and IYE (iShares Dow Jones US Energy Sector (ETF)) for the energy services sector.

Here’s how the bets have panned out:

Date Energy Services Market
22/11/2016 -17.6% 5.0%
11/05/2017 1.9% 2.5%
16/10/2017 -7.1% -2.4%
20/07/2017 4.5% 7.8%
Average -4.6% 3.2%

The results show that buying this sector because it was depressed may not have been the wisest strategy.

Within the sector, did I pick stocks that outperformed?

Using the same dates, how did the stocks that I chose do against their peers in the sector? This is definitely a nuanced question. Especially if you look at all the names in the ETF. Not sure it’s fair to grade a 50mil market cap Canadian company against a much larger company. Regardless, the results are below:

Date Energy Sector Stocks
22/11/2016 -17.7% 43.5%
11/05/2017 1.8% -13.1%
16/10/2017 -7.2% 8.2%
20/07/2017 4.5% 72.2%
Average -4.7% 27.7%

As you can see, on average I did better than the energy services sector during the time frame.

Did the stocks that I chose outperform the market?

When you stack up my picks against the market, you get the following results.

Date Market Dean
22/11/2016 5.0% 43.5%
11/05/2017 2.5% -13.1%
16/10/2017 -2.4% 8.2%
20/07/2017 7.9% 72.2%
Average 3.2% 27.7%

This is with the most recent pullback in the markets.

Did the stocks chosen produce a positive total return?

The results showed an average return of 28% over a 9 month time frame. No complaints here. Not sure I can really draw much of a conclusion over a 9 month period and with only 4 stocks being chosen.

Regardless, I wanted to share the results and invite any feedback readers may have.

 

Thanks,

Dean

Disclosure: See portfolio tab for current holdings.

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What’s Dean been doing??

Once again I have strayed from blogging. Here (for like the 3rd time) is an attempt to rekindle my romance with Petty Cash. The ideas and feedback from readers has more than paid for the time it takes me to write a post, so I should continue to post regularly.

The Market

I don’t have any insight on the market. But it is tough to find anything meaningful to buy. As always I remain cautious, especially on residential real estate in Canada. Deny, deny, deny seems to be the theme. I don’t know if we get a “soft landing”, but things are eerie to say the least. What is the most perplexing, is that as Canadians we are quite certain that a real estate bubble won’t happen to us. I think it’s because we are so polite. I mean it’s like we believe that some sort of greater power will prevent horrible things from happening to nice people. We seem to think that “bad” things only happen to “bad” people. I think even an orangutan would learn not to do something if he seen a friend of his get hurt from doing it. I really shouldn’t say anything as I have made enough mistakes to fill a (near) million dollar house in Vancouver.

As well there seems to be renewed vigor for stocks again. Though my portfolio often goes in the opposite of the market, I remain skeptical of a liquidity fueled stock market that is now priced at greater than 18 times earnings. I have been hearing “pro-forma” and “adjusted” more than ever and analysts have been reaching up to 18-24 months into the future to justify valuation. Not a market call, but I doubt you can see anywhere near 10% returns over the next 10 years.

2013 Performance

Umm. Well, fine. I guess. I have done better than the market and made up much of the losses I had relative to the market when I questioned if I should be running my own portfolio. Having said that, I could do a 180 in no time flat. I constantly reassess holdings and position sizes. Currently north of 35% cash.

New Position

As per Chip’s suggestion in a previous post (see comments), I researched and added HWO.to to the portfolio.

The company is really cheap (less than 3.o ev/ebitda) and pays a monthly dividend. Management admitted that growth is limited and elected to pay a monthly dividend. A large shareholder is looking to liquidate, so we could see a depressed share price for awhile yet. 65% of revenue is from Papua New Guinea. The 3 rigs there are now under contract for a few years, so earnings and cash flow should be pretty certain.

Other Position Changes

I have been adding to OML.v and I have a few other positions that haven’t been blogged about. I think I will do a post with a quick thesis/summary on all unmentioned positions in the near future. I want to emphasize how many of my ideas are robbed/borrowed from others.

Thanks for reading,

Dean

Disclosure: long HWO.to

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Filed under Portfolio Performance, Random Thoughts

Queue the top…

Pretty dramatic headline. I mentioned in a previous post that I would be doing something to minimize my exposure to the Edmonton housing market. I have already slowed down the pace of making extra mortgage payments in favour of investing in my RSP and TFSA. The only reason I post this publicly is because I wanted to allow for feedback and experiences to help be get a better understanding of what can go wrong.

I have decided to try the Smith Manoeuvre. It is really risky if you don’t understand the potential outcomes to your thesis. What I am essentially doing is borrowing against my house to invest. It is really a function of cost to borrow vs. total return. Right now the cost to borrow is 3.5% FOR NOW. We all now that it will move up. If I invest in a Canadian dividend paying company that pays a 3.5% dividend then I will have enough dividend income to cover my interest expense. This factors in tax deduction on the interest expense as well as the dividend tax credit at my marginal tax rate (36%).

Though this sounds simple enough, there are huge risks to employing leverage. For one thing my cost of borrowing can (and most certainly will) go up. I could also buy at a market top and suffer a significant decrease in my holdings paper value.

The biggest advantage I have is that my outstanding mortgage is only 20% of the appraised value of my house. Secondly the household income will cover the outstanding mortgage balance more than 2x in one year. A rise in interest rates won’t affect my debt load too much.

I have the following rules for my Smith Manoeuvre:

  • Outstanding balance will remain small relative to money that can be readily accessed (liquid securities).
  • Negative net value (LOC – securities) will not be allowed for more than a few months. If I have to stop putting money in an RSP and pay down some HELOC balance, then I will.
  • Dividend yields must be 4% or larger.
  • Companies must employ minimum debt and have a history of raising dividends.
  • An assumption that borrowing costs will be 5% in 3 years has be factored in to the model.
  • All purchases will be tracked against an index to monitor the author’s ability to pick stocks. The Smith Manoeuvre stocks will the their own separate portfolio that will be different from the “growth” names and bench marked accordingly.

I only plan on doing this while it makes sense. I doubt that it will make sense to do this for more than a few years. I have essentially planned a 4 year timeline where dividend income covers interest expense and I get the capital appreciation as a bonus.

I have read a ton of blogs (like this one) and articles on the fallacies of this type of investment. From what I can figure, most people lose on this investment because they bet the farm on it. They get a 350k house,  it goes up and then they maximize leverage at the wrong part of the cycle. Then they panic and sell at the worst time.

There are 2 things that give me confidence in this decision.

1) I feel that a methodical approach to picking stocks will give me enough margin  of safety to employ this strategy.

2) I haven’t changed my lifestyle even though my income has risen dramatically over the last 5 years. I mean value investing doesn’t just happen in the stock market. It transcends into the rest of your life.

Any feedback is welcome.

Dean

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Filed under Portfolio Performance