Sunday, December 5, 2010

Compton Petroleum Truly Confounds Me

I bought a lot then pushed the hell out of Compton Petroleum a couple months ago, namely on my Motley Fool Blog. The blog has become one of the most popular on the site but despite that and me being ranked 18th out of 70,000+ people on the site I have the opportunity to look like an ass again with one of my "locks". Last year I pushed Opti Canada big time and got dozens of people to follow me on the pick on the Motley Fool site. It pushed its way up 40% then crashed and is now sitting happily down 50%. Luckily I managed to sell that stock at $2+ so I saved myself from real life losses despite massive egg on my face for my e-self.

Now I have my new dog, Compton. This one is truly confounds me and I find it very annoying that any doofus that's a late bandwagon jumper onto the gold rush has made money while I am now down on this. Now that they have settled a major portion of their debt and are no longer distressed financially, there's only two arguments I see that are bearish on the stock.

1. It's a penny stock that doesn't trade on fundamentals. Well, what a stupid argument that is. First off, any bear using this argument admits that Compton is severely undervalued. Their main argument is that they think it'll remain severely undervalued in perpetuity for some reason. Secondly, Nortel and Microstrategy and the like all traded well over $200 in the tech bubble craze in 2000. They didn't trade on their fundamentals, but were well over $1, so does that mean we should have bought them?

2. Natural Gas prices will remain low in North America. While this is up for debate exactly how long natgas prices will remain at the bottom of its cycle, at least this is somewhat of a coherent argument.

I counter with my blog on the Compton's and other's fundamentals. Ignoring the obvious value seen in the Price to Book, Price to Sales and Price to Cash Flow metrics, we see that their profit margin is ONLY -2.5% at these low natural gas prices. Natgas prices don't need to rise very far before they start making money again and are only at the mercy of the FX markets to determine if they are profitable on their bottom line.

Analysts expected them to lose 6 cents this past quarter and they lost 2. Their expectation is a 4 cent loss next quarter so what will they do, breakeven maybe? People are greatly underestimating the leanness that the company is headed towards under the guidance of the new CEO. Look at the numbers I put together prior to Q3. Their margin was -14.6%, and now its -2.5%, mostly thanks to the cost savings because natgas prices did not do well in Q3 vs Q2. One day when natgas prices recover this company will be rolling in cash after they've restructured themselves.

Another consideration to take into account that I just touched on above is their debt is denominated in US dollars. While this is not an operational thing, as the USD declines, they'll make money based on the decline in value of their debt. In effect, they are currency traders "shorting" the USD. An aggressive decline on the USD next year could see Compton earning 10 or more cents. Then they'll own a 4th of the 5 categories in my fundamental analysis list if they remain under 50 cents.

What can I say? I have people on Motley Fool listening to me, I have people on Yahoo Finance posting my stuff to the and boards and I even have a Kitchener-born, right-wing wannabe Afghani terrorist stealing all my picks. What I don't have are the goofs at Canaccord, RBC Dominion, Scotia Capital and the like supporting my pick. They should though since I am smarter than them. I know since I had an interview at Canaccord. I'm smart enough to be able to walk away from the prospect of working a 10-14 hour work day everyday. You don't need to be working that long to come up with the garbage recommendations that they toss out.

Incidentally, I give this blog about 24 hours before someone finds it and posts it on Yahoo Finance. I am sure there are some very eager people there to show that thing called cooper godfrey what an idiot he is for constantly saying that Compton is terrible because it doesn't trade on its fundamentals.

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  1. Hahahaha, Cooper too funny.

    One question, based on your analysis and what has happened would you pick this stock now? Or are you just holding on because you had already picked but wouldn't open a new position if you hadn't already had a position.

  2. Based on fundamentals it totally destroys all other companies in the industry. It trades at 10-15% of its book value. I like the direction that the CEO is taking this company both in cleaning up the balance sheet and becoming lean on the expense side. You'll notice from their Q3 report they were 85% of the way there to hitting their $10M STRETCH TARGET savings on G&A. Given that Q3 is only 75% of the way through the year they are on pace to beat even that.

    And let's not forget the cold and snow dump that's been happening has been wreaking havoc on natgas prices lately.

    All that being said, the technicals look like sh*t. If you buy based on TA I would wait for a buy entry but it is certainly a good idea to go long on the stock at some point in time soon. Then again what do I know? I bought based on what I thought was a good entry point around 50 a couple months ago and I was wrong, so maybe now that I think the technicals look crummy it's a good time to get in?

    I very seriously see a net income for Q4 based on where gas prices, the USD and their G&A is headed. My best guess is their earnings will be between 2 cents and -2 cents for Q4. Consensus is -4 cents.