Sunday, December 27, 2009

Electrifying start to 2010

As I sit in the last week of 2009 to write this blog, 2 thoughts are uppermost in my mind:
  • Performance of my ideas in 2009 vs how the markets have done
  • Ideas for 2010

Performance in 2009

For 2009 I had discussed 2 ideas in this blog. Please see those in Feburary 2009 in this blog. These were far fewer than what I executed in my portfolio for 2009 but there is no point in discussing others since I didn't disclose those publicly. The 2 that I did discuss were:

  1. ACTS - Actions Semiconductor: Buy @$1.49 on Feb 7, Close @$2.46 on Dec 24, Return 65% vs S&P500 (proxy SPY 86.98 & 112.48) return 29% in same period. Outperformance of return 36%
  2. SLT - Sterlite Industries: Buy @$5.45 on Feb 11, Close @18.38 on Dec 24, Return 237% vs S&P500 (proxy SPY 83.6 & 112.48) return 35% in same period. Outperformance of return 202%

As can be seen both the above ideas significantly outperformed the broader market. While the above is extremely satisfying to see, I don't expect this magnitude of outperformance to continue for the new ideas. I would be extremely happy if I can consistently outperform the market by a few percentage points.

Next steps on the above ideas

  • ACTS: I will continue holding ACTS at the current price. While it is extremely cheap based on the inherent value (review my previous blog to understand the value), margin of safety has gone down and I will wait for next quarter results before deciding the next steps.
  • SLT: I did sell 1/5th of my SLT position at 17.50. As metioned in previous blogs, I do expect this stock to continue to outperform the market. For now I will continue to hold this position and will revisit the stock as I get better visibility based on results.

2010 - A new beginning

When I started this blog in 2009 my goal was to be happy if I were to outperform the market by a certain percentage point (10%) over 3 years. 2009 has been a flying start towards that goal and I have thoroughly enjoyed the challenge and the success. It has encouraged me to consider investing more seriously. Going into 2010 I expect to be more active in blogging my ideas. It will serve a few purposes:

  • Put down my justification for any idea that I am considering.
  • More importantly, it will allow me to go back and review the logic vis-a-vis reality a few months/quarters/years out to see the logic in the thinking.
  • Finally, create a community of like minded inidividuals or investors who are either interested in investing or are looking for ideas.

Onto the electrifying start..

I have been considering Mirant for the last few days. Mirant is an electricity generator serving mid-atlantics, north-east and california markets. The company emerged from bankruptcy in 2006 and have been actively realigning its portfolio for assets. A few things stand out for the company:

  • Low Price to Book of only 0.5. Hence you are buying the asset at half its book value where many of the assets on the balance sheet have already been depreciated significantly.
  • The above can be seen from the fact that the enterprise value (money that you will need to buy the firm including debt and equity) of the firm is 2.9 Bn $. This is for a firm that generates around 10,000 MW of electricity. Thus per 1000MW the firm is being priced at 290Mn $. If you were to look at putting a new 1000MW power plant the typical project cost is upwards of 800Mn $. Thus on a simple asset replacement basis only the firm is priced at 35% which shows the high margin of safety of 65%
  • Then there is a matter of earnings and ROE. The firm has been regulary making money while some of its competitors are facing tough going in this highly volatile commodity markets.
  • The demand supply situation is becoming precarious in the north east which should lead to more of a sellers market over the next few years.
  • Finally, there are some restrictions which prevent the firm from having change of control by March 2010. Once that constraint is removed it could provide additional avenues to unlock sharedholder value.

So what could go wrong with the above idea:

  • It is a highly regulated industry and government directives can have big impact.
  • Cap and trade is a big sword that is hanging over the entire industry.
  • Some of the competitors are in dismal shape and if any of them go into bankruptcy it could allow them to get rid of legacy cost and make this space more competitive.
  • Firm can reverse its discipline of only investing in projects where there is sufficient return on capital.

Overall, with the inflation on the horizon, industry that has not been in favor in 2009 and the firm that has gone down in 2009 the +ve factors make this a good stock to own for 2010.