Welcome back to another edition of Market Moves, where I chronicle my trades and trading strategy. We are in the midst of the 1Q2021 earnings season, so there is a ton of volatility in the markets right now. I have been very pleased with how my stocks have reported so far, and I am optimistic that this will continue. Most of my trades recently have been small adds to existing positions, but I am planning a big one totally unrelated to earnings. Before we get into it, remember: this is not investment advice.
First, the buys. I have been scooping up more Helix Energy (HLX) on dips. I believe in my thesis, and I think people are overreacting to their earnings report. Sure, it would have been nice to see a profit, but sometimes companies lose money for a quarter or two. I can weather the storm. In addition to HLX, I also bought some more Tutor Perini (TPC). It has been getting crushed lately, and I am happy to average down.
My final buy was to get deeper in Cannae Holdings (CNNE). This is actually my first mention of CNNE in any of my articles - that is an accident. I meant to analyze it in one of my portfolio articles, but I just missed it. I will go through my full analysis now. I first bought CNNE on March 31, 2021. My average cost is $39.60 per share now, with CNNE making up 4.8% of my portfolio. As of writing, I am 0.01% red on the trade. CNNE is a relatively new stock - it only started trading in 2017 - but I am fairly bullish on it. The company has done a great job of growing its book value, as you can see in Figure 1.
My linear model assumes the company will grow its equity at the (seemingly conservative, based on recent results) rate of $219 million per quarter. Using this number in an IV calculation, I find that the intrinsic value of CNNE is $63 per share. This price target represents a return of 60% on my position.
What if I am wrong about the shareholder equity growth? If the real value ends up being a factor of 5 lower, then the IV is still around $52 per share, a 31% return on my investment. There are other reasons to be bullish here, though. The price-to-book ratio for CNNE is show in Figure 2.
CNNE has never been this cheap before in P/B terms. If we were to go back to the high valuations of 2019, CNNE would be almost $90 per share. I am very confident in this trade, and I hope that their next earnings report will prove me right yet again.
The final bit of news that I have for this article is on Earthstone (ESTE). It has been a roller coaster for me. My position has gone from -7% to +30% (on acquisition news) back down to -11%. Currently, it is around -6%. My data provider had led me to believe that the book value per share for ESTE was in the $30 range, which would have meant the stock was ridiculously undervalued. It turns out that this number did not subtract some types of shares that should have been taken out before calculating it. The real value is actually more like $12.48 per share. I realized this mistake only recently, and it definitely changes my calculation here. I am now looking to sell my ESTE shares as soon as my trade goes green. I could probably make more money on the stock than that, but I am so averse to surprises that I just want to liquidate the whole thing. The valuable lesson here is to double-check your data!
That’s all for this article! I hope you enjoyed it. I will be back next week with more earnings reports. May 5 and 6 are my big days with lots of reports, and they will either send my portfolio soaring or crashing. Make sure you subscribe or get my 30 day free trial so you don’t miss anything! See you next time!