Sunday, February 5, 2012

Buying and Selling a Stock: Part 2

Article started February 5th, 2012, 7:40 PM. (Yep, I'm not watching the Superbowl.)

I'm still sticking with a P/E low, below 15x on the stock screener but hopefully below 5. Also and Price to book below 1, preferably below .7. In other words, I'm still researching and I'll spare you the details of the dozen companies I have passed over in the last few days. Most of them you have never heard of, which is most of the reason I passed on them. However, I passed on Citigroup and Credit Suisse because I also have more than 10% of my account in one financial company and I don't trust banks enough to dump everything into banking stocks despite the fact that I expect most bank stock to go up 20-40% this year.

I changed some of my search criteria until I found the following combination:
This particular group led me to DHT, or Double Hull Tankers.
DHT 6 Month Chart and Overview
I have had greater quick success with micro cap stocks than the larger stuff. So here is the pertinent information that I gleaned reading through the tabs. The price of the stock was around $15 per share a few years ago. The company owns and operates nine large double hull tankers for the oil industry, but has only five employees. Their book value is around $200M, which means if they threw in the towel tomorrow, they could sell everything at market value and settle their debts and the five employees would walk away with tens of millions each. Their most recent quarter they beat analyst expectations, thus the recent jump from $0.80 to $1.10. Their sales are almost as great as their market cap, which is great. A terrible analogy is imagine that you have a renter property with with a $100k mortgage, and pretend you put $0 down for this example. Now imagine if you brought in $70k in rent in one year. Sounds like a good deal?

However, there is never a perfect paradise. One of the largest shareholders, an investment company, MMI, recently dumped over a million shares some 2% of the company or more. That is partly responsible for the price decline over the last two months. Why did they sell? Well, as they are an investment company I figure that they don't hold stocks less than $1.00. It's a mental thing. Stocks in that range feel cheap. Below $5 is another perfect example, most large investment companies dump at that level. Bank of America had that kind of moment a few months ago dropping into the $4.90s a few times one week. Now it's up to $7.84. The point being large shareholders selling is not a good sign, but it is not always a bad sign.

How do I personally connect to DHT? I like the idea of double wall tankers. Single wall tankers are the kind that seems to always be getting into oil spills. Plus, with the situation in Iran, oil trafficking might be of increased importance over the next few months or even years, in other words, the price will go up. Even if we do not get any oil from Iran, say Russia and China do get oil from Iran. If they no longer get oil from Iran through a pipeline or local tankers, they will need oil transported the long way, using tankers, preferably double hull tankers. Secondly, the economy is better than the media is portraying, the same way it was worse than they portrayed in 2007 and 2008 and 2009. So I expect more people to vacation in the US this year, thus using more oil. So I expect the price to go up significantly this summer. The more money each tanker cargo goes for at port the more the companies owning the tankers will be paid.
Buy Order for DHT
So I put in a limit order for 1000 shares. Yep, I'm betting over $1000 that this is a good bet even though I had never heard of the company an hour ago. That does mean a few things though, I will be skittish to sell the stock relatively early because I am not 100% familiar with it like I would be with Apple stock or John Deere. In other words, in my magic calculator I have a target price of $1.94 for this stock. Don't ask to share that on my blog, that's part of my secret. But I will show you in person if you want to look at my laptop. Basically it's an algorithm based on my priorities and selected financials of the company.

One last comment pertaining to microcap stocks I am unfamiliar with and my value formula. I sold GRVY stock this week for $1.82 a share after buying it at $1.42 per share about 22 days earlier. I had a target price on the stock of $1.88 but it went up so quick that I sold it a little early even though it is now trading at $1.96 or something ridiculous.

Gravity Company Win
The point is, Benjamin Graham and Warren Buffet are not geniuses by any stretch of the imagination, but they sure understood the idea of value investing.

Article completed 8:45 PM. (Still not watching the Superbowl.)

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