Greed is Good; Higher Risk = Higher Returns?

#Follow the Falcon
Instagram
Facebook
Follow by Email
RSS
Google+
http://sneakyfalcon.com/greed-good-higher-risk-higher-returns/
SHARE

The following was adapted from the “Greed is Good; Higher Risk = Higher Returns?” investment recommendation presentation shared with the team on April 13, 2016. As always, this was only an internal recommendation to be deliberated by the group, and does not constitute financial advice or an endorsement of the stock. See full legal disclaimer.

Is Our Portfolio Where We Want it to be?

Despite strong performance through Q1 2016, including hitting a 10% overall return as well as beating the S&P 500 through April 1, the overall risk level of our portfolio is relatively low. Beta, the most common measure of stock volatility, can be used to measure our portfolio risk as well.

TickerCompanyBuy DateSharesBuy PriceBeta
CVSCVS Health12/11/201512$93.250.85
SAVESpirit Airlines12/11/201540$41.941.06
TFXTeleflex1/22/201610$135.110.88
UAUnder Armour2/19/201618$80.130.62
FBFacebook3/28/201610$113.390.73
LCLending Club12/11/201575$13.78n/a
FMSAFairmount Santrol2/19/2016800$1.92n/a

Our weighted average portfolio Beta is 0.84. With a Beta of less than one, that means our portfolio is expected to move up and down less than the market on average. This can protect our downside, but isn’t going to send our portfolio to the moon!

Bigger Beta Please

Instead of starting off with a specific company or industry in mind, I worked backwards from the goal of seeking to add riskier stocks to the portfolio. Specifically, I was looking at stocks with higher than average Beta scores.

I also included stocks that had fallen out of favor but still appeared to have a strong upside. Finding these stocks at the bottom may help generate big returns! The final list of stocks considered was:

  • Crestwood Equity Partners – Ticker: CEQP – Beta: 2.57
  • GigPeak Inc – Ticker: GIG – Beta: 2.42
  • Astrotech Corp – Ticker: ASTC – Beta: 2.21
  • ARM Holdings PLC – Ticker: ARMH – Beta: 1.71
  • Eaton Vance Corp – Ticker: EV – Beta: 1.62
  • Celadon Group Inc – Ticker: CGI – Beta: 1.445
  • Echo Global Logistics, Inc – Ticker: ECHO – Beta: 1.38
  • SharkReach Inc – Ticker: SHRK – Beta: 1.32
  • Avery Dennison Corp. – Ticker: AVY – Beta: 1.08

 

Ultimately through my screening, I landed on digging deeper into CEQP and GIG. More details about each can be found below.

Crestwood Equity Partners

Description

Crestwood Equity Partners is in the oil & gas refining & marketing industry. They develop, acquire, and operate primary assets and operations in the energy midstream sector. CEQP is comprised of 3 business segments:

Gathering & Processing – This segment provides natural gas gathering, processing, treating, and compression services to producers in multiple unconventional shale plays located in West Virginia, Wyoming, Texas, Arkansas, New Mexico, and Louisiana.

Storage & Transportation – This segment owns and operates natural gas storage facilities

NGL – The NGL segment operates crude oil rail terminals, the Arrow gathering system, and a fleet of over-the-road crude oil and produced water transportation assets.

Competition

  • Spectra Energy Corp – Large cap natural gas producer and crude pipeline operator
  • Targa Resources Corp – Similar structure & product diversity to CEQP, however Targa has greater exposure to crude oil through their storage and refining units
  • Chesapeake Energry Corporation – Focused entirely on natural gas extraction & production; stock jumped 60% in last 5 days on debt restructuring & avoiding potential bankruptcy

 

Crestwood Equity Partners Competitor Chart

Recent Financial Performance

Crestwood Equity Partners 3mo Chart

Reasons to Buy

Severely oversold

  • Down 83% off the split adjusted 52 week high (1:10 reverse stock split in Nov 2015)
  • Appears to finally hit a floor, rallying 34% in the last month

 

Despite being in a battered energy industry, still a diversified company

  • Beyond just natural gas extraction, operate in transportation, storage, & logistics

 

Upside of being a Master Limited Partnership (MLP)

 

GigPeak Inc

Description

GigPeak Inc (formerly GigOptix) is a fabless supplier of high speed semiconductor components that enable end-to-end information streaming over optical & wireless networks, operating in two segments:

High Speed Communication – Focusing on the manufacture of high performance semiconductor devices and multi-chip-modules, the High Speed Comms segment provides components for the telecom, data communication,  consumer electronics and consumer wireless devices.

Industrial – The Industrial segment products include new digital & mixed-signal application specific integrated circuits (ASICs) as well as conversions of field-programmable gate array (FPGA) devices into ASICs. These products serve military/defense, avionics, automotive, security & serveillance, medical, and communication needs.

Competition

  • Analog Devices Inc – ADI is involved with the designing, manufacturing, and marketing of analog, mixed-signal & digital signal processing (DSP) technology. Their products include integrated circuits, algorithms, software, and subsystems.
  • Inphi Corporation – Inphi is a fabless provider of analog and mixed-signal semiconductor solutions for the communications, datacenter, and computing markets.
  • Intel – Intel is engaged in the design and manufacture of digital technology platforms for the computing and communication industries.
  • Qorvo Inc – Provider of core technologies and radio frequency solutions for mobile, infrastructure, defense, and aerospace applications.

 

Recent Financial Performance

Reasons to Buy

Q1 Earnings Release Monday 4/18

  • Have hit or beat earnings every quarter since late 2013, generating short-term positive momentum
  • Q4 ‘15 earnings were in-line, but stock dropped due to slightly lower guidance

 

Strong financials in 2015, driven by continually accretive M&A activity

  • 8 acquisitions in the last 8 years, more recently focusing on growing Cloud, Internet of Things, & Big Data segments
  • 20% CAGR of revenue in that time frame
  • Strong balance sheet for continued acquisition fueled growth

 

Highly Bullish analyst sentiment

  • Unanimous BUY rating (7 of 7 analysts) on MarketWatch
  • #1 Strong Buy from Zacks

 

Final Investment Recommendation

Given that I couldn’t decide between the two, I’m bringing both recommendations to the table.

CEQP Investment Recommendation

  • Purchase ~$1,000 worth of Crestwood Equity Partners, with two potential holding strategies:
  • Short term hold (~3 months) – Continue to ride momentum and sell off if market begins to recorrect or if energy sector doesn’t begin to rebound
  • Long term hold (1+ years) – Bet on energy upside (or limited further decline) + collect high payments ($345 in remainder of 2016 assuming no change in distribution) resulting in a 34% return even with 0 price appreciation

 

GIG Investment Recommendation

  • Purchase ~$750 now + optional $750 after earnings release, with two potential holding strategies:
  • Short term hold (1-2 months) – Capture gains from a strong earnings release and resulting short term price movement.
  • Long term hold (1+ years) – Leverage price averaging if stock dips after earnings release Monday. Bet on continued revenue growth, strong management, and further exposure to growing tech trends.

 

Despite recommending to choose one of the above options, after much discussion, the group opted to vote on purchasing both.

Vote: CEQP – 5-3 (1 abstain) in favor of the purchase

Vote: GIG – 6-3 in favor of the purchase

Sean S

Sean S

Sean has combined his banking experience, analytical & financial background, and passion for business to lead Sneaky Falcon Enterprises as a founding partner and its CFO. He's also still patiently waiting for Lending Club's stock price to rebound.
Sean S

Latest posts by Sean S (see all)

Sean S

ABOUT THE AUTHOR

Sean S
Sean has combined his banking experience, analytical & financial background, and passion for business to lead Sneaky Falcon Enterprises as a founding partner and its CFO. He's also still patiently waiting for Lending Club's stock price to rebound.

Leave A Comment