My Portfolio's Latest Casualty And Addition
Last Monday, I discussed how I had recently reviewed Railpower Tech with a view to potentially adding to my position on grounds that: (a) the company had a fair amount of cash in the bank, which reduced the need to go to capital markets for financing for a while; and (b) that it was getting badly battered by general market conditions, potentially offering an attractive entry point. Although my portfolio has taken a beating in recent weeks, I remain ready to take small positions in stocks if I feel they are being unfairly bashed, including in penny stocks. The current situation is bad to be sure, but I don't think we are at the point yet where every small and medium business faces certain bankruptcy.
I noted in the article that the reason why I decided not to commit any more money to Railpower for the moment was the lack of contracts being signed given the operating leverage the firm was taking on by building a new factory. Unfortunately, this exact problem forced Railpower to materially alter its plans, and on Monday evening it announced it was canceling construction of the plant on grounds that new orders were not coming in (PDF). I fully exited my position on Tuesday morning at a pretty handsome loss on a percentage basis, although luckily my position was very small and the cash loss wasn't needle-moving.
With my portfolio, I keep a log and always record the reasons why I enter and exit positions and what I've learned from different investments. What are main lessons I took away from this one? First, as money rarity spreads into non-financial industries, capital expenditures, especially for big-ticket items, will be some of the first things to be delayed or canceled. Prudence is therefore in order with firms that derive a large portion of their revenue from the capital expenditures of other firms. However, as pointed out by Tom yesterday, it is not impossible that the government may try to invest in infrastructure as a counter-cyclical measure.
The second thing I noted down was that in uncertain times, it is cautious to start out a position small and see how things develop. If the market turns in your favor, you can build up your position and the only real cost is an opportunity cost. If you missed something in your analysis or if the market ceases to pay attention to fundamental value as it is currently doing, you can exit the position at a smaller cash loss or you can try to weather the storm without loosing sleep over it.
Lastly, the balance sheet weighs a lot more heavily in my analysis in tough times in three main ways: (1) the cash position - it's gotta very strong; (2) debt levels - there has to be little or no debt and ideally refinancing isn't needed in the near-term; and (3) the value of tangible assets per share must compare favorably to share price (notably with the Price-to-Book-Value ratio). For penny stocks, I would look for firms with no debt, a completely depressed Price-to-Book ratio and assets that can be readily sold off to unlock some shareholder value should the going get too rough.
Last Thursday, I purchased ABB Ltd. (NYSE:ABB) for the first time. I am down quite substantially since but it doesn't bother me very much. This is a long-term buy (3 to 5 years) that I had had my eyes on for quite some time but that I had always found too rich on a PE and Price-to-Book basis. ABB, a stock Tom has discussed on several occasions, is a prime play on the transmission infrastructure build-out and energy efficiency. I also applied my rule and took a very small position, which I stand ready to increase.
The Positive News
A stock that I've held for quite some time now, AAER Inc. (AAE.V or AAERF.PK), an emerging Canadian maker of utility-scale wind turbines, finally signed its first major contract on Monday. It is to deliver 100MW of turbines to a large Canadian wind project.
The next step in closing this transaction is for both parties to show they have secured financing within three months. This could prove tough in the current environment, so this is not a done deal just yet. However, if AAER can pull this through successfully, it could be the beginning of what patient investors such as myself have been waiting for for a long time - a buildup of the order book. The supply/demand situation for large turbines continues to be heavily skewed in favor of turbine companies and AAER should in principle be able to find customers.
Ironically, after the stock experienced a 40% pop last Friday probably because the news was leaked, I put in a sell order to exist most of my position Monday morning in case this was just an aberration. The company asked for a trading halt and I was never able to sell before the news came out. I wrote down in my log that I had been quite lucky on this one.
DISCLOSURE: The author is long ABB and AAE.V and does not have a position in RPWRF.PK
DISCLAIMER: I am not a registered investment advisor. The information and trades that I provide here are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.