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Teacherman1 (47.61)

Waiting for the Overshoot.

Recs

13

February 26, 2013 – Comments (11) | RELATED TICKERS: AXAS , SD , NES

One thing I have learned in 7 decades of observing the actions of mankind, is that almost everything we do, we tend to "overdo".

This applies to both positive and negative actions.

Someone decideds that "something" needs to be done about a "problem", either real or perceived, and they set out to make it happen.

It usually starts out with relatively small steps, with the hope of making it "better", then over time, it takes on a life of its own (with others joining in), and it goes way past what was actually needed in the first place. Often with unforseen consequences, and sometimes disasterous effects.

The "market" is not immune to this type of action, and in times of "economic stress", it tends to become exagerrated.

This is what I refer to as the "overshoot".

This is when the price of a stock starts to go in a certain direction, either positive on "good news", such as earnings and revenue "beats", and good "future forecasts", either by the company or by analysists; or in a negative direction on "bad news", which tends to be more easily propagated.

This then results in stocks of a particular company, or a sector, becoming either "overvalued" or "undervalued", usually in the "short term".

While it is difficult, (some would say impossible) to determine the top or bottom, either for a certain stock, or the market as a whole, you can use the idea of "overshoot" to get in at the "right price", more often than not.

An example of this is the small oil and gas company, AXAS.

This company got "blind sided" in 2009, when the plan to take AXAS Partnership public went down the tubes. The current AXAS, which was then "known" as AXAS Petroleum, was the general partner, and had no debt of its' own.

With the "great crash", and the total collapse of the firm that was to underwrite the IPO, AXAS had to start over.

It has taken a great deal of time, with many "starts and stops" to get to where they are today, and things have not always gone the way they planned, but overall, it has been positive.

Insiders own about 13% of the outstanding stock, and institutions own about 43%. There was a recent move by one of the institutional holders (not the largest or the longest term) to try and get  management to take steps to get the share price up closer to their opinion of what the "true value" should be, (in the $4-$5 range).

I do not expect that they will have a "great" Q4 report, but it should not be a bad one either. I do expect that over the next couple of quarters, they will start to show much better results than many expect.

While there is a "hard core" group of shorts who tend to drive the share price down in the short term, this has recently been compounded by negative news surrounding other companies in the energy sector, both exploration and production companies, as well as service companies.

Look at SD, HEK, CHK, HK, etc , all of which I am long on, except for CHK.

The over all market action of the past few days has not helped, and the relatively light volume has made it fairly easy to control the action of AXAS.

They currently have a market cap of about $185M, with proven reserves of $262M, and probable reserves of another $60M to $70M.

They do not show sufficient working capital, but use their "revolving credit facility" to cover this need.

Their overall strategy is to concentrate in two areas, the Baken, and Eagle Ford, and are using a "manufacturing" like model to bring up their earnings and cash flow. They are also selling off non-core assets and paying down their credit line.

AXAS is now in a "very oversold" range, and is likely to drop even further as we await their mid-March results. In my opinion, this provides an overshoot opportunity, to either initiate, or add to your position for the longer term.

There has been speculation that they may be a buy out candidate in the $3 to $4 range, but I hope this does not occur. I expect that they have the potential to become an $8 to $10 stock in the next couple of years, if they are not bought out.

This is being presented for your consideration, after doing your own DD, and anything can happen over time, negative as well as positive. In my opinion, this could be a good opportunity to take at least a small position, and see how it plays out.

I apologize for any typos or incorrectly spelled words, but I think it is understandable.

Good luck with your investing, whatever you choose to do.

The above is JMO and worth exactly what I am charging for it.

11 Comments – Post Your Own

#1) On February 26, 2013 at 1:35 PM, Mega (99.97) wrote:

using a "manufacturing" like model to bring up their earnings and cash flow

What does that mean?

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#2) On February 26, 2013 at 1:50 PM, Mega (99.97) wrote:

This company got "blind sided" in 2009, when the plan to take AXAS Partnership public went down the tubes. The current AXAS, which was then "known" as AXAS Petroleum, was the general partner, and had no debt of its' own.

With the "great crash", and the total collapse of the firm that was to underwrite the IPO, AXAS had to start over.

I don't think this is a good excuse. Oil & gas companies with good risk management were not hurt that badly in 2008-2009.

What happens the next time credit dries up and oil falls? Companies with aggressive balance sheets will get hammered again.

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#3) On February 26, 2013 at 3:17 PM, Teacherman1 (47.61) wrote:

Manufacturing-

They have the crews, equipment, and locations in place to repeat the drilling in their two main locations, over and over.

Blind sided-

Simply that it is as if they started out as a new company in 2009. The "partnership" had been supplying the working capital to run the operation.

They have non-core assets in place to sell, and further pay down their debt, but it is taking more time than expected. They sold some and paid down $22M late last year.

They have a very good relationship with their bank, but that is mainly to cover short term needs, they have gone through a learning curve and now have their system, and personnel in place to move ahead.

They also have a significant portion of their production hedged to insure cash flow to run their operation.

I don't expect to convice you MagaShort, and did not intend to, just to express how I feel about them as an investment and why. Just in case anyone else was interested. 

 If they go down under $2 again, and they could, I will be a net buyer and add to my position.  

JMO and worth exactly what I am charging for it.

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#4) On February 26, 2013 at 3:22 PM, Teacherman1 (47.61) wrote:

The blog actually started out to talk about the concep of "overshoot" to use as a tool to get some idea of when to buy or sell shares of a particular company.

I used AXAS as an example of how it might work, and I guess I got a little carried away with it.

Have a good day.

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#5) On February 26, 2013 at 4:03 PM, Mega (99.97) wrote:

I thought your write-up was interesting and appreciate the response Teacherman. If I hated the investment idea I would say so :)

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#6) On February 26, 2013 at 4:12 PM, Mega (99.97) wrote:

I checked my scorecard and I have red thumbed AXAS once, at $3.16 in 2011.

I actually agree with you, it seems like their value has improved over the past two years, so I would not red thumb it now at $2. (Of course it still seems quite speculative to me.)

Cheers.

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#7) On February 27, 2013 at 3:21 AM, portefeuille (99.65) wrote:

It might take quite some time to see whether something really overshot. I think AMZN was never really "overvalued", not even in 1999/2000. At the 2001 low it was trading at around 2% of what it should have been trading at (I think (now ;)).



enlarge

Buying (and then "holding" until now) a basket of the usual internet darling stocks in March 2000 you would have done alright, as can bee seen in good old HHH, the Internet HOLDRS ETF, that ended in 2011.

Amazon.com, Inc. AMZN 45.63% (of assets as of Nov 29, 2011)
eBay Inc. EBAY 18.36%
priceline.com Incorporated PCLN 12.58%
Yahoo! Inc. YHOO 10.86%
Time Warner Inc. New Common Sto TWX 6.19%
Time Warner Cable Inc Common St TWC 3.13%
TD Ameritrade Holding Corporati AMTD 1.84%
EarthLink, Inc. ELNK 0.57%
AOL Inc. AOL Inc. Common Stock AOL 0.36%
E*TRADE Financial Corporation ETFC 0.23%

The same holds true for biotech.

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#8) On February 27, 2013 at 3:28 AM, portefeuille (99.65) wrote:

#7 I have been holding the view that there never really was an internet/biotech bubble ending in 1999/2000 if you "look at the whole sector market capitalisation". Quite a few of the 2000 internet/biotech mega caps have done alright, as have reasonably (even by 2000 standards ;)) selected baskets or reasonably designed indices ... The "dramatically silly" prices are to be found not in 1999/2000, but in 2001/2002/2003/... for quite a few of the blue chips of those sectors. Oh well ...

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#9) On February 27, 2013 at 9:57 AM, Teacherman1 (47.61) wrote:

Thanks for the comments and graph Port.

I was looking at this in terms of a shorter term, and looking at points to add to a position at the lower end, for a longer term hold,and taking partial profits when there is a "spike", to free up some cash, or to temporarily reduce your position; especially if you do what I sometimes do, and "overbuy" to get my longer term hold price down.  

Biotech is something I know nothing about and would not even consider getting into because of the volatility, at least in the smaller companies.

CDXS is about as close as I come to a biotech, and it is not really in that category.

Good luck to all as we wait for the "Sequestration" to kick in, and for the Italians to bring on the next act of their ".political circus"

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#10) On February 28, 2013 at 5:02 PM, Tagit (46.52) wrote:

Great write up, you da man.

Fool on!!

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#11) On March 07, 2013 at 11:32 PM, SoccerFool1 (< 20) wrote:

New to the sceen and appreciate all the comments on AXAS.

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