Fusion Investor Chatbox

This chatbox is for fundamental, technical and related discussions on investing in Bursa Malaysia. Registration is required to join. Please email me at fusion.investor@gmail.com with your preferred name and password and I will inform you when registration is confirmed.

Disclaimer: As usual, you are solely responsible for your trading & investing decisions.

Wednesday, April 23, 2008

Why I like EPIC

It's been a long time since I last posted an article in this blog. Personally, I prefer to chat in my chatbox, but since a few people has asked "Why EPIC", I thought I pen my thoughts here for future reference.

Firstly, a Disclaimer: I own EPIC, EPIC is a low volume stock at the moment, so, if you buy EPIC and cause its price to rise, you may be buying off my hands ... so, if in doubt, best to avoid this stock. Nevertheless, you may find the discussions and reasonings beneficial, and it may be useful to you to trigger other ideas about other O&G stocks.

Ok. Well, if you've been following the chatbox, you will know that I've been quite bullish on Crude Oil for quite some time. Here's a reason why:

This is a weekly candlestick chart of NYMEX Crude Oil (Light). As you can see, there was a strong resistance back in 2006 and 2007 when Crude Oil failed to break $80 in mid 2006, and fell to a low of nearly $50 in early 2007. Subsequently, it tried again in late July and failed temporarily for a few weeks, before surpassing $80 in Sep 2007.. Even after surpassing that, it hesitated and took quite a long time (several weeks), before conclusively breaking out above that. And note that after that, there is a "double bottom" around Nov 2007 and Feb 2008, before shooting up to close at nearly $120 last night. A lot of effort has been extended this week, perhaps we might see some pullback in the next coming weeks, and it is still important to ensure that this charts makes higher highs and higher lows, but one thing which seems safe to say is that we are unlikely to see US$80 price for perhaps the entire 2008 year, if not longer. In fact, there are 2 other higher support levels, the first around the double bottom area (say $86), and the next at around $98-$100 level, so, in my opinion, it would take a dramatic and serious bad news to see Crude Oil retesting the US$80 level again.

Ok, that's the TA observation, but there are also some fundamental reasons why I think Crude Oil will also stay high for the rest of this year.

1. Weakening US$ trend. As we all know, the Feds have been cutting interest rates, and everytime they do that, the attractiveness of the US$ bonds and assets in general falls. This is bad news for the US$ currency.

2. Crude Oil contracts as hedges against weakening US$. It's becoming obvious to me that when US$ starts to weaken, Crude Oil contracts in US$ rises. Increasingly, funds are using Crude Oil contracts as hedges against their US$ positions. Since US$ is a global currency used everywhere in the world, one can only expects large usage of crude oil contracts as hedges. The Fed rate cuts are not going to reduce these hedging activities.

3. Speculative activities. There is no doubt that when something like this happens, hedge funds behave like vultures looking for prey. Often, their activities fuels and escallates the trend further.

4. Demand factors. In the latest figures for March, Chinese Demand for crude oil reached a record 4 millions barrels per day (bpd), and diesel imports quadrupled ahead of summer Olympics! There is still strong and booming demand for crude oil.

5. Supply jitters factors. Some examples are security issues in Nigeria - recent attack on the pipeline disrupted 1/5th of Nigeria's export flow. Recent attacks on Japanese oil tanker near Yemen - not much damage, but contributed to the jittery sentiment. Potential shutdowns of 200,000 bpd at Grangemouth refinery in Scotland as the unions plan to strike for 2 days, Etc. Etc. Etc. Again, when markets are like this, these sort of news do not help.

In short, when you look at both the fundamental factors and the technical factors, the outlook for crude oil is still bullish this year. Prices never goes up in a straight line, we can expect pullbacks, but the longer-term trend is up. As they say, you want to trade with the trend.

Ok, so, that's the story with Crude Oil. Bullish for this year. But why EPIC? Why not something else?

Well, if you followed my writings in the cbox, there was that "something else", and not just one stock. When trends first start, it pays to trade with the leaders as a general rule. So, what were those leaders? Well, SAPCRES comes into mind, and many of you probably have seen me Fu-Yoh-ing many times as prices keep going up from $1.31 onwards :-) And SAPCRES has done very well, going from $1 to $1.67 at lunch time. That's an amazing gain of 67% and a tremendous amount of energy has gone into this stock. Does it mean it will end? Well, that's hard to say. I still have SAPCRES at the time of writing, bought at various prices on the way up, but when we look forward, it's hard to say that we are going to see another 67% gain from $1.67. In other words, the easy gains have been had, and now, probably it will get harder.

So, this naturally lead to the search for the "2nd tiers", or the "laggards" - those O&G stocks which hasn't yet moved up much. Now, this is a trickier proposition, because laggards don't always follow. In fact, when the underlying moves are weak, laggards usually don't move much. However, when you look at the strength of the Crude Oil moves (see weekly timeframe chart above for Crude Oil), and when you look at how much the O&G leaders have moved, these are NOT small moves, but MAJOR moves. And if these Major moves are sustained, experience tells us that usually, the "2nd tiers" will eventually move. Of course, the risk is that if these moves are not sustained, and even if the leaders themselves fall, then, the 2nd tiers may not move up much. But they are unlikely to fall down much too, as they have not risen by much.

Now, this question about rising and falling by much or little needs some objective measurement. There are many ways to do this. One way is to compare the size of the fall of stock prices from the peak to the low, and to then compare how much the stock prices have gained from that low.

So, taking SAPCRES and closing prices as example. Sapcres reached a peak of $2.59 (closing price) on 26 July 2007, then, fell to a low of $1.02 (closing price) on 17 Mar 2008, before rebounding back by nearly 65% to $1.67 (lunch time today). In proportional terms, Sapcres has regained 41% of the fall from the peak.

As for EPIC, EPIC reached a peak of $3.20 on 26 July 2007, then, fell to a low of $1.67 on 10 Mar 2008, before rebounding back by nearly 18% to $1.97 (lunch time today). In proportional terms, EPIC has regained only 20% of the fall from the peak.

You can see that both numbers for EPIC - 18% regain vs 65% regain for SAPCRES, and 20% vs 41% shows that EPIC is not a leading O&G stocks like Sapcres. Sapcres is leader, EPIC is laggard. But if the high crude oil prices story remain good for the rest of this year, then, maybe, from a forward looking perspective, it might just be a matter of time before the 2nd tier stocks starts to follow. IF this happens, then, you might find EPIC returns to be more interesting from a forward looking perspective, due to its current "lower" price.

Technically, chart-wise, EPIC price chart has that familiar W "double-bottom" shape. It looks like it's about to break-out / has broken out, although the volume isn't terribly convincing. This morning, the stock price inched forward, and now may be a good time to publish this article From a fundamental perspective, EPIC isn't too shabby either. Just a few stats and comments.

1. Last TTM (Trailing 12 Months) Earnings = $30.7 Million, representing 299% growth over the prior year. That's nice to see, and when Crude Oil prices rise further, one can only be optimistic that the figures should eventually be higher than this.

2. Last quarter earnings annualized is $6.8 M x 4 = $27.2 Million. I normally look at this figure and compare against 1 to see if there might be signs of slowing down, and there seems to be a slight indication there, indicating that EPIC might not be "risk free". In fact, there is no such thing as a "risk free" stock.

3. Using 1, EPIC trades at a P/E of 10.8, using $1.97 price. This is actually quite reasonable and not expensive at all for an O&G stock where the sector trades at a much higher P/E.

4. EPIC has a nice Net Cash position of $80M at last Balance Sheet date. That's nearly 47 sen per share. Again, it doesn't guarantee anything, but it's a nice head start. The Net of Cash or the Business P/E is priced quite attractively at around 8, making it even more attractive.

5. Naturally, if you glance at the Annual Reports, etc., you will see quite optimistic statements about the company's future prospects. As usual, exercise your own discretion since such statements coming from such sources are naturally optimistic.

In short, both technically and from a fundamental perspective, these are some of my reasons for favoring EPIC. I actually hold a number of O&G stocks, and EPIC is just one of them. However, since I've been asked about the reasons why I like EPIC, I'm writing it here for my own convenience. Again, this is not a Buy Call, just sharing with you some of my reasons with my own reasoning. If you decide to trade the stock, don't forget your Stop Loss. As usual, pay attention to the Position Size (don't be too greedy, but don't be too fearful either). And always remember that stock prices never move up in a straight line. Be prepared for pullbacks, and know how you will react in advance to both price increase and decrease in future.

Good luck!

Disclaimer: As usual, buy/hold/sell at your own risk. And I own EPIC, so, don't be surprised if I sell when you buy! :-)