Quarterly Update: RDC

Rowan (RDC) reported earnings beating analyst expectations and are focusing on continued expansion and operation of their fleet in an environment where new drillships/jack ups are increasingly coming online and oil prices (and dayrates) are dropping.

Their strategy is to use capital to finish building the drillships they commissioned and get those operating around the Middle East and Africa where they have good relations with customers. The Gulf of Mexico and Asia are softer markets with more competition where they are seeing the majority of drops in dayrates so they aren't expecting long term contracts to come from there.

Interestingly Rowan sees their stock price as undervalued and considered initiating a share buyback. As CEO Thomas Burke mentions "we like the idea of doing a share repurchase, and we believe that where our stock price is, it's a good use of capital" but they opted to wait and use the capital for longer term revenue generation. "To just stay the course at the moment is more about getting our drillships out on contract and not borrowing additional funds in these uncertain times" is a smart plan when you consider their current market cap. Rowan is growth focused and once they establish layered long term contracts with deep water drillships they can shift focus on share buybacks and increasing the dividend.

Portfolio Update: Good bye PE and ESV

With cratering oil prices I re-balanced my portfolio to reduce my exposure to the energy sector.

Removed:
Parsley Energy (PE) shale oil producer - When investors return to the energy sector, best of breed companies will benefit first before money trickles down to the smaller operators.

Ensco (ESV) offshore driller -  I was holding two offshore drillers so I choose to sell Ensco and hold Rowan because Rowan has the younger fleet.

Added:
EOG Resources (EOG) shale oil producer - Was able to lower my cost basis. This is a best of breed producer that will benefit first from any energy market turnaround.

Under Armour (UA) active wear retailer - I like the products and management and the stock finally pulled back from all time highs.

Starbucks (SBUX) coffee retailer - I like management and their embrace of technology to stay relevant to a younger generation.

More importantly I consolidated my holdings from 10 to 8 so it will be much easier to re-balance in the future without having to close out positions.

Quarterly Update: RAD

Why the 20% sell off? After reading the latest Q2 2015 earnings call from Rite Aid (RAD) I can understand the frustration of investors and why the massive sell off occurred after guidance was reduced again.

First a primer on the pharmacy business. On one side you have hundreds of drug manufactures and on the other you have hundreds of pharmacy benefits managers (PBM). Rite Aid, like Walgreens sit between the two and negotiate wholesales prices with the manufactures to buy drugs at the cheapest price possible and then negotiate with the PBMs to sell those drugs at maximum profit to their members. For example, on a pill valued at $20 that Rite Aid is purchasing for $18, they would charge the customer $5 and expect a $15 reimbursement from the PBMs which leaves Rite Aid a $2 profit. In our current economic environment, both PBMs and drug manufactures are pricing more competitively which is shrinking the pharmacy's margins.

Remodeled Rite Aid Beverly Hills

The transition to using McKesson, a global wholesale drug distributor, was presented to investors as a way to increase profits by utilizing their larger scale to negotiate prices better than Rite Aid could by itself. While this is helping, PBMs are still reimbursing less so it's a wash. In the latest conference call management now attributed the low earnings to less generics and lower reimbursements. Basically McKesson is just keeping Rite Aid afloat and it will require outside revenue to spur growth which is expected to come from the expansion of RediClinic and Wellness stores, however at this point investors are sick of waiting and annoyed with management.

Remodeled Rite Aid Beverly Hills

As an investor this position has turned from a spec into a long because Rite Aid has lost their tailwind. Now we need to focus on the ROI of their RediClinic and Wellness store remodels since we should assume profits from drug pricing will erode as the industry becomes more efficient.

To quote CEO John Standley, "But I think over time there is only so many dollars we are going to be able to squeeze out of the drug spends, particularly on the generic side. And so, it's really going to come down to then what differentiates you in the marketplace....So at some point, I think the model migrates to something more where maybe there is a reimbursement for the service that you are providing to the patient versus trying to make gross margin on the script. Is that going to happen tomorrow, it's not. But I think if we look over the longer-term, that's really probably the model that our industry needs to begin the migration to over some period of time."  

I expect the stock to continue to drop for at least two more quarters where I may try to reduce my cost basis but a return to over $8 is out of reach as of now.

Portfolio Update: EOG

My target entry price for EOG Resources (EOG) came in so I took the opportunity to purchase some shares around $100. Looking at the daily chart it's nearing its 200 moving average of $98 and if it drops below I'll pick up some more. Considering I am a little heavy on the energy sector in my portfolio it would have to be at a good discount.

It's a love hate feeling that oil is around $92 bucks a barrel. The money I'm saving in filling up my car I'm losing in holding capital intensive sea drillers like Ensco, but now is a great opportunity to load up on oil stocks while they are cheap and I'm looking at a price point in the low $40s before adding more ESV.

Stock Research: USB

With returning talks of the Fed raising interest rates I thought I'd start looking into financial stocks so I'm ready whenever it happens. U.S. Bancorp (USB) is of interest because it's one of Buffets new favorite banks and it has a reasonable market cap of 74 billion compared with my other favorite bank Wells Fargo (WFC) at 261 billion.

From Barclays Conference 2014 Presentation

Interest rates are still low so banks are finding ways to boost their non-interest income through expansions of investment management and fee-based services with U.S. Bancorp having a good 50/50 split. When evaluating financial companies ROA and ROE are the important metrics to check. Basically you want to see how well the company uses its assets to generate money and compared to its peers US Bank is one of the best.

Company	ROA	ROE
U.S. Bancorp	1.60	15.10
Wells Fargo	1.43	14
J.P. Morgan	0.6	7.29
PNC	1.26	9.42

U.S. Bancorp is first and foremost a bank with a clean balance sheet of high quality loans, excellent operating margins at 40%, and consistent EPS. When interest rates rise they will benefit from increased profits but currently everything is status quo and I don't see any drivers of short-term growth or expansion that would cause the stock to jump. US Bank would be a good place to park some money for long term appreciation and would qualify for me as a core financial holding.

Portfolio Update: PE and CNI

There are two strategies to picking stocks: studying the fundamentals or the technicals. Fundamental analysis involves researching a company's balance sheet and management plans to make an investment decision. You are betting on the company's ability to grow and generate more income. Technical analysis involves looking at past metrics of the stock price's performance to model a future trajection. You are betting on other investor's ability to recognize the company's potential and drive the price up (or failures and down if shorting).

As an investor you want to do both by creating a buy list of stocks that satisfy the fundamentals but hold out on trading until it meets the technicals. This is the boat I'm in with a list of stocks that are great fundamentally but priced far from my technical entry point.

With that in mind I have doubled my Parsley Energy position (PE) based on the technicals and news of their expanded field purchases. Looking at the daily chart Parsley has reached a bottom on its MACD indicator (I bought right as the black line crossed the red line) and trading volume is below 50 on the RSI indicator.

For Canadian National Rail (CNI) I'm paying attention daily for the sign to lock in my profits. It's my only stock in the oversold territory (note the RSI around 80) but the MACD isn't leveling off for a crossover yet. As soon as it does and turns downward I'll put in my sell order.

Stock Research: WYNN

I was recently in a conversation about Las Vegas so I decided to do some research on the casinos stocks and of all the resorts Wynn Resorts (WYNN) and really Steve Wynn has impressed me the most.

I first read the conference call of Las Vegas Sands (LVS) and found they have the largest presence in table and room space in Macau. In contrast, Wynn is operating on a scale one tenth of Sands but are seeing a better rate of return. To quote Steve Wynn from his 2014 Q2 call, "...we are approximately half as profitable in Macau as The Sands, with only 10% of the rooms." Wynn is careful in deploying capital for expansions and does not under estimate his competition. Wynn Palace is a new property under construction in Macau scheduled to be open in 2016 with the focus being on not cannibalizing their existing properties consistent 98% occupancy rate.

On the finance side Wynn has operating margins above 20% and excellent EPS of 8.11. Looking at their chart the stock price is close to the 50 day moving average, RSI is below 50 and MACD is tracking close for a crossover. The casino stocks have all come down from fear of Chinese government intervention and tourist exhaustion from the World Cup which makes now a good buying opportunity.