Another Form of Value - The Company's Owned Assets
You set me on a new investment quest two years ago which shows one can always learn new investment "value" themes. It was the buying a basket of small E&P companies that had (or could eventually realize) value from the assets they owned, specifically the Oil & NG under the ground.
These companies are difficult to manage in a large portfolio as one could trade the large price swings even though the long term potential value has not yet been met. Many times I would see a 30% gain in the price over just a few days/weeks but knowing the potential value of the assets the company owned, I would not sell. There are no earnings usually in these small E&P companies and investor's expectations change daily/weekly/quarterly when new wells come in dry, cash reserves dry up, oil prices fall and many other negative factors make the news wire.
I am no trader buy I am learning to begin to trade the swings selling some shares on these rallies and loading up on my position at the extreme lows. The key continues to be the land assets these E&P companies own. Using some basic valuation criteria like current and estimated BOPD production, acreage owned (especially if it is contiguous to other producing acreage), recent sales of property to large developers and other "real asset" valuations typically not reflected in the company's balance sheet.
I am seeing this in many of the Jr. Miners I follow too. It's all about developing the asset (an oil well and/or a mine) bringing the resource into production and generating a new income stream (w/ some extended long life). For both the Jr. Miners and the E&P companies, we are generally early to the party and the true values will take months if not years to realize.
The traditional valuation metrics do not work on these types of companies and one can be patient for only a certain amount of time too. I think your approach of owning a basket of these companies knowing there will be losses in a few and very large gains in others is the best approach.
It's still quite hard to determine a hard set approach on selling (at least for me). I cleaned house at the end of 18 months, selling many of my losers at a loss and took equivalent gains from my winners. Some of my winners lost 50% or more of their value after my initial sell. I then proceeded to add more share as the potential land values were/are still there IMO.
I am still figuring out the best (and most profitable) way to generate a good return w/o letting go of the potential long term value.
FWIW, my recent Copper Mountain Mining Corporation (CPPMF) buys are up almost 80% from my lowest buy point in August this year, but long term there is another double or two left. I may peel off some shares to cover my seed money and load up again on any sell off. Aurcana Corporation (AUNFF), a Jr Silver producer is another one of these companies that I believe have some very valuable land assets. This one has been a huge winner for me from my recent buys in August @ $0.76/share.
On these speculations, I keep my investment amount per company small but like to spread it around to many companies (ie basket approach). I am still looking for that 10 bagger (which all of these IMO are capable of achieving) to arrive.
Just another example where you can not use the usual valuation metrics like PE (they have no earnings), BV and/or TBV (the real assets are valued at cost not their potential worth), FCF small or negative (usually put back into production costs), debt (usually quite large and leveraged to achieve the big payoff) or other standards.
Keep posting your valuation ideas on these and anything that triggers a "sell" for you and/or a "red flag" to watch.
EKS |
