ERF, Risk, and Portfolio Adjustments
Volatility is a simple way of thinking about equity risk. A share price that changes only a little over time is relatively low-risk, whereas a share price that changes a lot over time is relatively high-risk. Buying stocks in expectation of large capital gains necessitates a willingness to take bigger risks than buying stocks in expectation of stable prices over time.
Yesterday I sold my position in Enerplus Corp (ERF). It was yielding 14.17%, up from 6.47% when I first bought it last August. When I added to my position last September, my yield had risen to 6.72%. For my yield to increase to 14.17%, the share price had to fall 55% from my original purchase price.
ERF is an income stock. When I purchase an income stock, I expect a stable income stream over time, which means I’m not expecting earnings growth. The trick for this kind of a company – one that pays out a large percentage of its cash flow – is to replace reserves at a rate that will keep production levels relatively flat over time. Earnings growth can only come about due to an increasing price for the underlying commodity or surprisingly good drill results, and yields are higher than normal because reserve replacement is an on-going and uncertain venture. For ERF, these ordinary challenges have been exacerbated by declining commodity prices.
ERF has performed worse than its peers over the past year; Progress Energy Resources (PRQNF), for instance, is down 21%. Still, ERF might now be considered a good buy from a value perspective. Stocks meet value investment criteria when future downside movement seems less likely than future upside movement. ERF has good price ratios and the company recently announced a dividend cut. However, I did not purchase ERF as a value play, so I am cutting my losses.
At the opposite extreme from ERF are spec plays, undertaken with the expectation of extreme volatility. Resource spec plays rarely pan out, and when they do, gains need to be large enough to cover the several losses. I closed three spec plays this week, HTRRF, CPMNF @.85, and LBRMF @ 2.73. The Labrador Trough outlook is weak near-term, due to expectations of a growth slow down in China and world-wide reductions in steel demand, and with losses mounting, I decided to limit my exposure for the time being to Alderon (AXX).
My gold trades looked good earlier in the week, but weakened at week’s end. RIC was the weakest, so I closed it @ 5.72. All others are still open. I opened a new portfolio position in Agnico Eagle Mines (AEM) @ 41.50 and added to my position in Brigus Gold (BRD) @ .95. In other sectors, I reduced my position by 25% in Tag Oil (TAOIF) @ 8.15 and added to my positions in Heinz (HNZ) @ 54.6 and Avista (AVA) @ 26.33. I am concerned about weakening oil prices. I continue to try to balance the portfolio for a future market movement in either direction.
