BlastInvest
Blast Investor Real-time Plus           by Henry Lu

Oil,Natural Gas, Real Estate

03/15/2005

BIRTP beat SP500 9% 2005 YTD

After weakness at beginning of 2005, BIRTP model portfolio rallied back and is up 8.23% YTD, beating SP&500 by more than 9% so far in 2005. The main reason for this superior 2005 YTD performance was due to big rally in energy stocks, ticker NRG, WLL, and CHK.

Valuing natural gas or oil stocks

BIRTP model portfolio has been heavily concentrated in energy stocks for more than one year. Although I sold half of NRG position for BIRTP model portfolio, oil stock WLL and natural gas stock CHK are still very cheap right now trading at low price to cash flow multiples so that I do not expect to sell them at this level.  Although the oil sector as whole had big rally recently, I still believe the whole sector and WLL and CHK in particular have potential to rise more in the year ahead. My approach is very straight forward, there is no guess work for finding the top of oil sector. I look at the oil and natural gas price, I look at the valuation of CHK and WLL stocks.  I will continue to hold the oil or natural gas stocks as long as they are significantly trading below their intrinsic value or fair value.

Quick formula:  Fair value of oil/natural stock =  "True PE" of 8 to 10.

The standard metrics to value an oil or natural gas stock is price to cash flow multiple. EPS or price to net income multiple is pretty much useless metrics for valuing an oil or natural gas stock. Although price to cash flow ratio is an informative metrics to use, I myself prefer to use "true Price to Earning" ratio based on Benjamin Graham mining stock modeling method as well as theoretical PV-10 Net Asset Value (PV-10 NAV). In the end, I would like to base my investment on the oil companies'  true business profit , not on their meaningless reported earning per share (EPS). For oil or natural gas stocks, their true business profit per share is significantly larger than their reported EPS. Therefore, their "TRUE PE" is significantly lower than the PE number you can find in Yahoo finance.

WLL CHK recent earning report

Both WLL and CHK reported excellent earning result recently. Oil or natural gas prices are high and their profit is gigantic in per share basis. Although their stock price has been up a lot since I first purchased them one year ago, WLL or CHK is still trading significantly below my fair value estimate. They are still trading at around "true PE" of 6 - 7 or true earning yield of 15% to 17%.

If you followed my old report on WLL or CHK last year,  you should realize that my "true PE" estimate a year ago was around 5 and right now this number is higher than that of last year but still significantly below fair value number of 8 to 10. You may be surprised to see this low valuation number for WLL and CHK after such big run up of their stock price. After all, WLL is up 89% and CHK is up 57% since I invested in them for the BIRTP model portfolio last year. 

Well, the last year stock price run up was partially due to valuation multiple expansion and partially due to the higher oil and natural gas price.  The higher the oil price or natural gas price, the higher the true business profit per share for WLL CHK so that even after big rally, WLL CHK is still under-priced based on their "true business profit per share" number.

Looking forward, I expect the current trend of valuation multiple expansion and high oil price and high natural gas price to continue. After all, there isn't any other better or cheaper sector out there in Wall Street that can offer both rising earning growth potential and single digit cheap valuation multiple at the same time.

When valuation of CHK and WLL reaches or approaches their fair value, I will send all of you trade alert to sell WLL or CHK. That may be at year end of 2005, or that may be next year or even longer ahead. There is no market timing guess work for BIRTP model portfolio transaction, my approach is based on value. When the oil stock price is no longer cheap, I will sell.

CHK - huge insider buying recently

CHK reported huge insider buying recently at $21 level. CHK stock price lagged WLL for past one year. CHK is pure natural gas play while WLL business is mainly in oil drilling and production. Comparing to high flying oil price, natural gas price is under-priced in my opinion. Here I would agree with CHK's CEO and Chairman of Board that high natural gas price is here to stay for the foreseeable future.

High natural gas price is not just because of high oil price, but also because of its own tight supply and demand reality. Currently, the demand of natural gas in USA is increasing every year while the supply of natural gas is decreasing every year.
There is simply not enough of natural gas out there in USA!

Recent CHK's huge insider buying is another confidence vote from CHK's owners on CHK business prospect as well as on natural gas price. In fact, although I like both WLL and CHK here, I would favor CHK as slightly safer and better investment from now on.

CEI - earning report as expected


I continue to like CEI at this level for its 9% dividend yield and its joint venture approach business model.

CEI reported pretty good earning result recently. Due to the transition of business model from direct ownership to joint venture management and ownership of commercial real estate, it is expected to see FFO or cash flow short term short falls in the quarter earning release. 

Real Estate Bubble Burst?

Here I want to talk a bit more about "real estate bubble burst" issue. There has been numerous articles predicting "real estate bubble burst" soon in USA. I disagree with such "bubble burst" talk. I do not see that happening.

Real estate is very local. Even if there is A bubble burst in couple of US cities, that does not mean the whole US real estate market will have sharp drop of real estate price.

What I do see is that residential real estate (RRE) pricing is ahead of itself in short term. Prices of single family houses and condos are rising fast in east coast or west coast of USA. But that does not mean that RRE will have bubble burst soon.

What I do see happening is sharply devaluation of US dollar and potential and "CURRENT" inflation. Inflation is no longer future, it is now.

If huge inflation comes in the next few years and RRE price does not rise as fast as inflation in the future, then homeowners will see their home value less valuable. Hypothetically, if inflation is 7% a year, and real estate price rise 5% at same time, the real estate is 2% less valuable than a year before due to inflation. That itself will correct RRE "ahead of itself" problem. That process is not bubble burst, the home price still rise 5% a year ahead! That hypothetical case is in theory only. In reality, not many investment tools are better than real estate in high inflation times. If we do see high inflation in next few years, stock and bond will not be good, and most likely, real estate will rise faster than inflation. That was exactly what happened in 1970's.

Real estate is great inflation and dollar devaluation hedge. It is going to be great investment vehicle for quite long time. With inflation becoming more and more real, now it is more and more like the times in 1960's and 1970's when real estate rose together and faster than inflation while stock market in general did poorly then. 



Blast Investor Model Portfolio Update

(as of 03/15/2005)

Model Portfolio - Performance


Portfolio inception date
 12/31/2003
Portfolio inception value
 $89,000
Portfolio 12/31/04 value
 $141,981.00
2004 Portfolio Performance
 59.53%
2004 S&P500 Performance
 8.78%
2005 Portfolio YTD Performance
 8.23%
2005 SP&500 YTD Performance
 -1.17%


Model Portfolio - Open Positions
Symbol Last Shrs Value Paid Gain
ADGO.OB 1.60 9,000 $14,400.00 0.78 $7,370.00 +104.84%
CEI 16.39 1,500 $24,585.00 16.63 -$380.00 -1.52%
CHK 21.86 1,100 $24,046.00 13.90 $8,746.00 +57.16%
EXX-A 1.83 6,500 $11,895.00 1.638462 $1,225.00 +11.48%
GKIS 16.96 1,500 $25,440.00 15.68 $1,910.00 +8.12%
LIBHA.PK 4.55 1,200 $5,460.00 5.10 -$670.00 -10.93%
NRG 37.68 335 $12,622.80 23.05 $4,891.05 +63.26%
SOHU 18.19 700 $12,733.00 24.882857 -$4,705.00 -26.98%
USG 33.36 950 $31,692.00 18.425789 $14,167.50 +80.84%
WLL 43.08 600 $25,848.00 22.683333 $12,218.00 +89.64%
$$CASH -35,056.3 -$35,056.30 - - -
11 symbols Total(USD):
$153,665.50




Model Portfolio Transactions
Date  Type Symbol Shares Price Comm Amount Notes
Feb 28, 2005 Buy GKIS 1,500 15.68 10.00 23,530.00
-
Feb 28, 2005 Sell NTES 150 41.88 10.00 6,272.00 +14.22%
Feb 25, 2005 Buy CEI 500 16.39 10.00 8,205.00
-
Feb 25, 2005 Sell NRG 335 38.42 10.00 12,860.70 +66.57%
Jan 31, 2005 Buy CEI 1,000 16.75 10.00 16,760.00
-
Nov 24, 2004 Sell HRB 350 47.35 10.00 16,562.50 - 12.31%
Nov 4, 2004 Sell NTES 100 46.50 10.00 4,640.00 + 27.05%
Oct 19, 2004 Buy EXX-A 1,500 1.60 10.00 2,410.00
-
Oct 6, 2004 Buy EXX-A 5,000 1.65 10.00 8,260.00
-
Oct 6, 2004 Sell NEN 100 80.00 10.00 7,990.00 + 48.15%
Oct 5, 2004 Buy USG 250 18.75 10.00 4,697.50
-
Oct 5, 2004 Sell NTES 100 39.12 10.00 3,902.00 + 6.9%
Sep 30, 2004 Buy USG 700 18.31 10.00 12,827.00
-
Sep 29, 2004 Sell NEN 100 79.65 10.00 7,955.00 + 47.5%
Aug 5, 2004 Buy WLL 250 23.50 10.00 5,885.00
-
Aug 2, 2004 Sell NEN 100 69.95 10.00 6,985.00 + 29.5%
Jun 17, 2004 Sell HCA 250 40.30 10.00 10,065.00 - 4%
Jun 17, 2004 Buy NRG 670 23.05 10.00 15,453.50
-
May 24, 2004 Sell ADGO.OB 13,000 1.55 10.00 20,140.00 + 98.7%
May 10, 2004 Sell HCA 250 39.97 10.00 9,982.50 - 4.8%

Date  Type Symbol Shares Price Comm Amount Notes
May 10, 2004 Buy SOHU 200 15.59 10.00 3,128.00
-
Mar 5, 2004 Buy WLL 350 22.10 10.00 7,745.00
-
Jan 26, 2004 Sell WRP 700 17.40 10.00 12,170.00 - 5%
Dec 31, 2003 Buy CHK 1,100 13.90 10.00 15,300.00
-
Dec 31, 2003 Buy NEN 300 54.00 10.00 16,210.00
-
Dec 31, 2003 Buy HRB 350 54.00 10.00 18,910.00
-
Dec 31, 2003 Buy NTES 350 36.60 10.00 12,820.00
-
Dec 31, 2003 Buy SOHU 500 28.60 10.00 14,310.00
-
Dec 31, 2003 Buy LIBHA.PK 1,200 5.10 10.00 6,130.00
-
Dec 31, 2003 Buy ADGO.OB 22,000 0.78 10.00 17,170.00
-
Dec 31, 2003 Buy HCA 500 42.00 10.00 21,010.00
-
Dec 31, 2003 Buy WRP 700 18.30 10.00 12,820.00
-
Dec 31, 2003 Cash In -
-
-
-
 89,000.00 Inception