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Preparing for 2016
#1

We'll start afresh in 2016 as time didn't allow us to keep the previous effort up to date.

Here we'll start with a watchlist of companies we might be interested in buying.

InterOil (IOC)

  • Like many names in the industry, it has been the victim of the energy selloff, not only in oil, but also in LNG
  • However, it still has a few things going for it, its balance sheet is relatively clean, it isn't selling at today's low prices, and more especially, we are awaiting two resource evaluations to which a considerable payment from Total is tied. This is likely to happen next year, although we had delays in the drilling process that is preceeding this.
  • The main risks are:
    • A further leg down in energy markets
    • Delays in the certification process
    • A continuing glut in the LNG markets that will make it more difficult to build new LNG plants. Although the Total/IOC/OilSearch plant is one of the lowest cost, there is no guarantee it will win out.

Here is the chart, it doesn't look pretty at all.

However, we believe that if the oil markets stabilize and we get nearer to, and have more certainty about the Total resource payments, things could turn around fairly quickly.

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#2

C-trip (CTRP)

  • C-trip is the leading online travelagency in China, needless to say that it is a big market opportunity, not only because of the size of China, but especially because mass tourism is a relatively new phenomenon in China and this market will grow at double digit rates for some time to come.
  • C-trip has also cemented its position as the leading platform through a network of alliances, which will take some of the competitive sting out of the market and improve margins
  • Margins will also likely improve as C-trip has invested a lot in its platforms, and when these scale up margins will improve, we already saw something of that in the last couple of quarters.
  • There are risks, but in our view these are mainly macro risks like a Chinese economic collapse, which we don't think is very likely. C-trip has had no problems with the economic slowdown in China so far. Retail sales in China are still growing at a double digit rate, it's mostly the old smokestack industries where the trouble lies.

The chart does look rather friendly

The couple of jumps in the latter part of the year come from exceeding expectations in October and an aliance in November. There has also been a 2:1 stock split early December.

We have good memories of these, as we first recommended the shares on Seeking Alpha in 2012 when the price (pre-split) was just $15, so by now that has seven folded. We subsequently wrote more on SA (here and here).

We might already start to nible at these prices (below $50) but ideally would like a cheaper entry point as the stock isn't cheap.

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#3

Ellie Mae (ELLI)

  • We first picked this in 2012 on Seeking Alpha, when the share price was just $15, basically on the basis of the business model
  • That business model sure has delivered. In essence, it makes the whole mortgage origination process simpler, faster, easier cheaper and by cutting duplication it's less prone to error. It's basically a problem solver by re-engineering the industry supply chain.
  • The most impressive thing is that revenues and profits have kept on rising, no matter what the state of the mortgage market (as shown in this article)
  • The main risk, a slowdown of the mortgage market because of rising interest rates (and a drying up of refinancing existing mortgages), seems therefore somewhat overblown to us, without entirely discard it as the stock, although off the highs, is still priced as having little margin of error.

The graph is nice:

And you see that we're at crucial support levels, so picking up a few stocks on Monday (even if it's not yet 2016) might seem a good idea. We're not going all in, and should it decisively break these levels one might have to sell the initial position, even if market expectations are for a considerable rise in EPS. Look also at the number of times Ellie has been able to beat expectations:


EARNINGS TRENDS 


Earnings History & Projections

 Actuals  Estimates   Surprises Mouse over chart for more details


 


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#4

Jinko Solar (JKS)

  • Another one of our previous favorites is a company that is market leader in the biggest solar market in the world; China.
  • Considering the extreme pollution in many Chinese cities and their commitment to arresting climate change after the Paris agreement, we think we're still in the early innings of the solar build out.
  • The big risk in the solar sector is the cyclical nature of the industry. If too much capacity is build, this leads to inventory build-up (and write-offs), reduced sales and, more especially, price declines and margin contraction. We have been through such a cycle recently in which many solar companies actually went down, like Suntech, previously the biggest solar company in the world. The subesequent price declines, while terrible in the short-term for producers, sets up accelerated growth by increasing demand in the medium term, and that's what we're now experiencing.
  • There are few signs yet that there is such a downturn around the corner, quite the contrary, the recent Paris climate deal has committed many countries (like India) to expand alternative energy.
  • Another risk is the decrease or abolishment of subsidies, but only last week the US renewed tax deduction for alternative energy in a budget deal.

So, one should keep an eye on module pricing to see weather there is any sustained weakness (some weakness can be absorbed as costs and efficiencies of cells are improving steadily). Jinko's shares have been volatile:

We're now at important resistance levels, but we think these are going to be broken out as the last quarterly results and guidance from Jinko were very good. Keep in mind that the shares are very volatile, some trading and picking up on wild swings downward seem a good idea to us.

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#5

SunPower (SPWR)

  • Another company that, like Jinko, might do well in the alternative energy boom is SunPower, which we prefer over First Solar (FSLR) because the 2016 guidance has been significantly better from them.
  • This is also been a long-term favourite of ours, first advising to buy in 2012 when the stock was trading at just $4 (so they have almost seven folded, no less..)
  • The recent tax credit extension in the US, it's home market removes a lot of uncertainty, hence their strong showing at the end of the week even in a rather large market selloff.
  • SunPower makes high-efficiency panels and is majority owned by Total of France
  • Fresh from a beating that pertained to many solar stocks with so called yieldco's (SunPower has one together with First Solar), the stock price has recovered, but we think they will pause, before taking the resistance. Considering the volatility in the shares, they could even retreat quite a bit, we'll keep an eye on this one. 

Here is an interesting bit from an interview with the CEO about the consequences of the Paris climate deal for the secor (but the whole interview is a good read):

This Paris agreement will effect policy. So you take a country like India, which has a heterogeneous policy for energy. One state has one program, another state has another program, and they are at a real energy crossroads. They can go big coal, they can go big renewable. It’s difficult to translate into a homogenous set of policies, but this sends a strong signal to help accomplish that.

SunPower's CEO chats about Paris, tech and solar in India - Fortune

The attach rate [of batteries to solar projects] is still in the low single digit percentages. But I think that it will go up with a meaningful growth rate at 20% to 40% a year. I think it becomes a meaningful part of our business within 5 years.

SunPower's CEO chats about Paris, tech and solar in India - Fortune

And this was before the ITC was renewed, of course:

Does SunPower publicly support the extension of the ITC [which would maintain a 30% tax credit for clean energy projects]. Definitely. I would say that our position is clear. If there’s no ITC, you disrupt the solar industry, and in fact it already is being disrupted. The question is by how much? Will the industry go away? No. We’ll continue to innovate and get solar costs down. But 2017 will be a lot harder without the ITC. Will it be good for the solar industry for a longer term or even more intermediate view, like five years out? Yes. It’s abrupt changes that are hard to manage.

SunPower's CEO chats about Paris, tech and solar in India - Fortune

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#6
We bought 500 ELLI at $60.40
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#7

We're fretting a bit about our only (small) purchase for 2016, ELLI. Generally, housing related stocks do not tend to perform well in a rising interest rate environment. However, consider the following:

"If we do see some rate increases coming, because it reflects a stronger economy, nobody is going to not buy a house because the mortgage rates went up," Wells Fargo CEO John Stumpf said the Goldman Sachs Financial Services Conference earlier this month. "They can choose a different product and probably get the same rate. The same thing is true for small businesses." But Bank of America CEO Brian Moynihan doesn’t agree with Stumpf. "If you see rates rise, you'll see the mortgage market slow down," Moynihan said at same event earlier this month, before the Federal Reserve raised rates. At still the same event, Blackstone Group CEO Steve Schwarzman noted that most interest-rate hikes have typically resulted in an uptick in home prices. "Twenty-five out of 26 times when interest rates went up, home prices went up," Schwarzman said.

Housing impact of rising interest rates

Then there is the fact that ELLI has been capable of increased revenues and profits even in a declining market, and the other fact that it is already considerably off its 52 week high. I guess we know a lot more when Q4 and full year 2015 earnings and guidance come out. So far the technical support at around $60 has held.

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#8

One of the stocks we're following closely has some disappointing news out:

China's Yibada.com reports Alibaba (NYSE:BABA) is ending its travel services partnership with Ctrip (CTRP -2.7%), through which Ctrip's offerings are promoted on Alibaba's travel platform, on Jan. 1. The report comes two months after Ctrip struck a deal with Baidu to obtain a major stake in rival Qunar in exchange for Ctrip shares. Alibaba and Baidu compete in numerous markets (III). Alibaba launched its Alitrip travel brand in late 2014.

Ctrip slumps as Alibaba reportedly ends travel deal - Alibaba Group Holding Limited (NYSE:BABA) | Seeking Alpha

It isn't entirely surprising, considering the rivalry between Alibaba and Baidu. Difficult to assess the impact though. We're holding off buying, for now.

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#9

Another one we are watching is InvenSense (INVN), which didn't have a good year despite the Apple win, due to margin pressure

INVN InvenSense, Inc. daily Stock Chart

At $10.30 now (these charts are self-updating) we're also holding off, knowing that there is a firm bottom at $9:

INVN InvenSense, Inc. monthly Stock Chart

On the one hand, they are market leader and sales are growing at an impressive clip, but on the other hand, products are getting cheaper and what they gain on sales is often wiped out by falling prices and margins. Still, we're inclined to think that margins aren't going to fall forever.

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#10

We had some comments about Sphere 3D (here). They're in a very difficult financial situation but shorts are covering and there is still a fair amount of buying. We're not going to move in until there are clear signs the troubles are over. One is likely to miss the first couple of points upward, but avoid the risk of a wipe-out.

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