Tuesday, May 23, 2017

Great News - Marquette's CQA Team Placed 2nd Globally!

Marquette’s Applied Investment Management (AIM) Team Placed Second in the 2017 Chicago Quantitative Alliance Worldwide Student Portfolio Contest

The Chicago Quantitative Alliance (CQA) is a professional investment organization comprised of leading quantitative investment practitioners.  The CQA membership includes investment managers, academics, plan sponsors, consultants, and other investment professionals.  The primary goal of the CQA is to facilitate the interchange of ideas between quantitative professionals. 

Cqa logoAnnually the Chicago Quantitative Alliance holds a portfolio management contest for university students, where the students must manage a portfolio with strict requirements.  This past year, the contest ran from the end of October until the start of April. 
In only their second year of competing, Marquette’s AIM team placed second!



The CQA’s primary goal is to “promote the interests of the quantitative investment community.”  The graduate and undergraduate students involved in the competition were tasked with creating portfolios and they were provided access to faculty and CQA mentors, who guided them along the way.  When creating the portfolios, the students had to follow certain rules:
  •          The portfolio had to have a beta of +/- 0.5
  •          The portfolio had to be long/short portfolios that were market neutral.
  •          The ‘universe’ of potential stocks that they could choose from, was limited to 1,000 liquid large and midcap stocks.
  •         The portfolio had to have less than 5% of its holdings in cash.
  

Marquette Team 2 members included:  James Hannack, Connor Konicke, Jack Gorski, Jordan Luczaj, and William Reckamp.  Marquette Team 1 members include: Brian Shank, Joseph Amoroso, Tim Milani, and Chengbin (Henry) Lu.

Student groups were judged not only on their returns, but also on their risk-adjusted returns (Alpha and Sharpe Ratio) and a video presentation that they had to make for the competition. The winner was the University of Arizona. 

The table below shows the rankings of the three investment criteria. Note that while Marquette’s Team 2 was ranked 2nd overall, Marquette’s Team 1 had the 3rd highest Alpha (nearly 8%).

As compared to the AIM program which is focused on individual fundamental stock analysis, the CQA is more “hedge-fund like”.  Stock selection is based on factors that are possessed by certain stocks, such are leverage, profitability, value or growth.  In addition to buying stocks that are ranked highly by these factors, a “market neutral” strategy is mandated by CQA.  This means for each stock purchased, another must be “shorted”.  This years Marquette’s teams focused on low volatility correlated with high performance stocks, and were “tweaked” by each team.  Both teams performed extremely well relative compared to a very talented universe.   




The next table shows the overall rankings of all student teams participating in the 2017 CQA Challenge.



Dr. David Krause, AIM program director said, “The past two years have been rewarding for the CQA teams. This is a unique opportunity to manage a market neutral portfolio, interact with quantitative practitioners and compete against other schools. I know all of our team members have gained much and this year’s teams should be especially proud of their results in the Challenge. Thanks to Mr. Bill Walker for serving as the team's mentor - I know this was a rewarding activity for everyone involved. We encourage all of our AIM students to be active in extracurricular activities - the CQA Challenge is an important opportunity for our students to compare this skills against other programs.”

Again, congratulations to both teams. Marquette Team 2 members included  James Hannack, Connor Konicke, Jack Gorski, Jordan Luczaj, and William Reckamp. Marquette Team 1 members included Brian Shank, Joseph Amoroso, Tim Milani, and Chengbin (Henry) Lu. 

To learn more about this contest and read what past participants have thought of the contest, please visit www.cqa.org/investment_challenge.



Sunday, May 21, 2017

Marquette student video on the AIM program

Melissa Gorman created a short YouTube video on Marquette's AIM program


This semester a Marquette student, Melissa Gorman, a Biomedical Sciences major, who also works in the Office of Undergraduate Admissions as a Tour Guide completed a video assignment. 
 AIM video by Melissa Gorman


The Marquette Office of Marketing and Communications took the footage and released the AIM video. Here it is:
https://www.youtube.com/watch?v=0slaTy3y2jc&list=PLiWO5BwmWuI9DtNn5qz31lcqw40xnIlG5&sns=em
  AIM video by Melissa Gorman



We would like to thank Melissa for putting this video together Here is a link to her LinkedIn, if you would like to contact her: https://www.linkedin.com/in/melissa-gorman-63b95ab8


Saturday, May 20, 2017

No Triple Crown Winner This Year – Classic Empire is the Pick for the Preakness!

 142nd Preakness Predictions

The 142nd running of the Preakness will be held on Saturday with a much smaller field than the Kentucky Derby. Although I correctly picked Always Dreaming (#4) to win the Derby two weeks ago, his amazingly low 4-to-5 line is way too rich for me. While I believe Always Dreaming will run near the front and finish in the money, I believe that Classic Empire (#5) will win the second leg of the Triple Crown.  Most experts feel that these two horses have the only chance to win the Preakness; however, I also like a long-shot, Conquest Mo Money (#10) at 15-1 odds.
Related image
Classic Empire

Best Pick: #5 (3:1) Classic Empire.  Classic Empire has a solid trainer in Mark Casse and a great jockey with Julien Leparoux in the irons. Classic Empire was fourth in the Derby and was coming on strong – despite being bumped numerous times throughout the race. Winner of the Arkansas Derby earlier this year and winner of last year’s Breeder’s Cup Juvenile, Classic Empire is a strong closer who will lie back and run down Always Dreaming in the home stretch.  If you believe in smart horses, Casse says this is one of the highest intelligence horses he has ever trained! I like Classic Empire to win the Preakness.

Image result for always dreaming
Always Dreaming, winner of the Kentucky Derby
In the Money: #4 (4:5) Always Dreaming.  Although Always Dreaming is not the next American Pharoah, he is a horse on a hot streak. He has won his last four races (including the Kentucky Derby) by over 23 lengths. The Derby had too many horses and jockey John Velazquez kept Always Dreaming out front on a wet track, so I believe that the 4:5 odds are too rich for me. I just don’t believe he’s going to be headed to the Belmont looking to win the Triple Crown – he's a good horse, but I think Classic Empire will catch him before the wire because Conquest Mo Money will be pushing the pace.


Image result for conquest mo money
Conquest Mo Money
Long-shot: #10 (15:1) Conquest Mo Money. This is my long-shot in the Preakness Stakes field. Conquest Mo Money is the son of one of my favorites, Uncle Mo. CMM is a hard charger out of the gate and has run strong this year - winning three races and placing in two others. He looked like the winner until he was beaten down the stretch in the Arkansas Derby by Classic Empire (I believe the same thing will happen in the Preakness). With a relatively unknown jockey, Jose Carreno, and Conquest Mo Money's owners having to pay a $150,000 supplement to race in the Preakness (since he was not nominated to the Triple Crown series earlier in the year), he is clearly a long shot. Nevertheless, he is a very fast horse, who will run near the front the entire race, and while I think he will hold on to third today - don't be surprised if this long-shot captures headlines.

Good luck!

Friday, May 19, 2017

AIM Class of 2017




AIM Class of 2017

AIM Class of 2017 Annual Report

Class of 2017 AIM Students Delivered Annual Report This Week

On Monday, May 8, 2017, the AIM students in the Class of 2017 presented the performance of the three AIM Funds over the 1-year period they managed the portfolios.

Attending the presentations were Marquette's Chief Investment Officer, Sean Gissal, and Dan Tranchita of Baird Advisors, an important supporter of the AIM program.

Link to the AIM Funds Report

AIM students in Class of 2017






Sean Gissal and Dan Tranchita attended the presentations


Tuesday, May 16, 2017

A current AIM Fund holding: LendingTree (TREE) by Catherine Strietmann: “Will Money Continue to Grow for LendingTree?”


LendingTree, Inc. (TREE, $146.88): “Branches Continue to Emerge and Grow for LendingTree”  
By: Catherine Strietmann, AIM Student at Marquette University


Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.

 Summary
LendingTree, Inc. (NASDAQ:TREE) operates an online loan marketplace for consumers seeking loans and other credit-based offerings, using online tools to help consumers find the best loan for their needs. Lending Tree’s online marketplace provides consumers with access to product offerings from different lenders, which include mortgage loans, home equity loans and lines of credit, credit cards, auto loans, student loans, small business loans, and other related products.

• TREE has emerged to be one of the leading marketplaces for online consumer loans, with no end in sight for the continued growth in the promising FinTech industry. Q1 2017 results beat expectations, with the company’s consumer and lender platforms both growing substantially.

• Non-mortgage loans have surpassed 50% of LendingTree’s loan revenue, providing immense diversification benefits for the company.

• Competitive efficiency among marketing channels has driven the growth behind LendingTree’s consumer platform, with 4.9M MyLendingTree subscribers, as compared to 3.3M in Q4 2016.

Key points: Being the AIM Fund’s second highest contributor to return as of 05/05/2017, TREE has proven to be a wise investment with a strong outlook based on the growing FinTech industry, and strong quarterly performance. For the fiscal year end 31 December 2016, LendingTree revenues increased 51% to $384.4M, reflecting an increase in demand for the company’s products and service due to the favorable and growing market.

Continuing with this trend, TREE presented strong Q1 2017 results, outperforming with both mortgage and non-mortgage products.  Revenue grew 40% Y/Y, being $132.5M, above the high end of the company’s guidance ($122MM-$126MM). This was driven by high purchase loan volume, as well as high credit card and home equity performance, with non-mortgage growing 75% Y/Y. The company is positioned to gain market share in the industry with continued product offerings, most recently launching an online auto insurance comparison service in March. The roll-out of products within the non-mortgage segment is expected to continue.

Although higher interest rates will stop refinance mortgage demand over the next several years, LendingTree has a wide product scale and high revenue conversion that will continue to generate organic profit growth. Non-mortgage loans now exceed more than 50% of TREE revenue for the first time since the company was founded in 2008, providing great diversification benefits and lessening risk. A large part of this is due to the acquisition of CompareCards in November 2016, and still the company continues to grow organically. Additionally, online advertising spending by large banks has provided strong growth for LendingTree, and provides an area of business where management expects to expand.

The great momentum for LendingTree has all necessary opportunities to be sustainable, with new branches growing and emerging every earnings release. The company has impressive operating leverage, as well as a brand well known in the marketplace. As interest rates are expected to rise, the online loan market will become more competitive, but LendingTree management claims that it is 30%+ more efficient across marketing channels, including paid search, TV, and display. This sets up the company for continued success in the growingly competitive environment, being able to direct traffic to their business and bring more qualified customers to lender partners.

What has the stock done lately?
Since LendingTree released its Q1 2017 earnings on April 27, 2017, the company’s stock is up 18% ($125.75-$148.55), trading the higher than ever. Equity researchers are increasing price targets to around this positive performance, with targets on average near $160. Drivers behind this growth are deeply rooted in the success of the FinTech industry, and LendingTree’s ability to gain share in a competitive market.

Past Year Performance: In the past 12 months, TREE has increased 122% in value, from $67.14 to $148.75, with a 52 Week High/Low of $150.95/$64.07. Since the initial pitch of TREE in December 2015 at a price of $95.73, the company has experienced great upward momentum in the market due to its ability to effectively grow its consumer base and optimize web marketing. With revenue growing 40% Y/Y in Q1 2017, as well as an adjusted EBITDA margin of 18% improved 130 bps Y/Y, TREE continues to beat street estimates.

Source: FactSet

My Takeaway
Since the initial pitch of TREE in December 2015 at a price of $95.73, the stock has nearly reached its price target of $151.80. However, the Q1 2017 earnings release and the growth of the FinTech market set TREE to far pass this price target. LendingTree holds competitive presence among the online loan industry, with platform such as MyLendingTree that provide a more relationship-driven model for consumers, having a very high operating margin. 

Although interest rate increases will increase competition for LendingTree, the company has a competitive advantage with its marketing strategies in the industry. TREE is positioned well for the coming rate increases, and continues to prove performance for the AIM fund.




Monday, May 15, 2017

A current AIM Fund holding: Exact Sciences (EXAS) by Tim Donovan. "Future Remains Bright for EXAS"

Exact Sciences Corp. (EXAS, $32.10): “The Test Results are Looking Positive”
By: Tim Donovan, AIM Student at Marquette University
Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.

This is a re-post following today's Citronresearch.com article about Exact Sciences.

• Exact Sciences Corp. (NYSE: EXAS) is a molecular diagnostics company, which focuses on a non-invasive, cost effective screening to detect early stage colorectal cancer in its target market of individuals above the age of 50.
• EXAS generates its revenue ($99.38MM in 2016) in the United States from the sale of Cologuard, its FDA approved non-invasive colon cancer screen.
• Aetna has agreed to provide Cologuard as a commercial product to its clients who are not enrolled in Medicare. 
• With 135,000 new cases of colorectal cancer in 2016 the demand for a cost effective and accurate screening product is very high.
• A successful marketing campaign for Cologuard has created a spike in SG&A expenses in 2016, but provides EXAS with an opportunity to decrease its cash burn moving forward.  
• 69.5% growth in share price since the beginning of 2017 was a result of over 240,000 Cologuard tests being delivered throughout 2016. This is a 134.5% increase in sales compared to 2015.

Key points:
Exact Sciences currently has one FDA approved product called Cologuard, which generates all of the company’s revenues. Cologuard is a non-invasive colorectal cancer screen based on stool DNA science. This in-home procedure has yielded accuracy of above 90% and has been recently accepted as a more cost effective method to detect colon cancer.

2016 was a critical year for Exact Sciences. Cologuard’s shaky start during 2015 left EXAS in a tight spot moving into 2016. While the 104,000 tests delivered in 2015 showed promise, a report written on cancer screening methods left Cologuard off of the list, and referred to it as an alternative test, resulting in a price drop of over 70%. Fortunately for EXAS the damage caused by this report was rectified, resulting in a more widespread acceptance of Cologuard as a screen for colorectal cancer.

This past year was a period of rebuilding and growth for Cologuard. 2016 SG&A of 223.2MM for 2016, a 31.4% increase from 2015, was in part a result of a large marketing push for their FDA approved screen. This promotion aided in the 240,000 tests delivered in the year. This number of tests represents about 72% of the addressable market, leaving room for new market penetration during 2017. This successful marketing campaign has also given EXAS the opportunity to ease back on marketing expenses resulting in lower cash burn moving forward.

A feature of Cologuard that will drive revenues into the future is the fact that it is a test recommended to be conducted once every 3 years. This repeat usage will not be seen for the next few years, however it will give EXAS the ability to maintain healthy levels of revenue when new market penetration growth slows down.

With strong support from Medicare and an increase in the commercialization of Cologuard by other healthcare providers we see EXAS reaching 80% of its target market so far in 2017. These new partnerships in 2017 will drive its market capture closer to its 100% goal.

What has the stock done lately?
So far this year Cologuard’s performance has driven the share price of EXAS up 69.5% to a near 52 week high. Much of this growth can be attributed to the release of 2016 Q4 and annual performance data. Cologuard’s 2016 growth reached 134.5% increasing to over 240,000 delivered tests growing from 104,000 tests in 2015. 

On top of this in March Cologuard has received commercial coverage by Aetna, a large healthcare insurance and service provider in the United States. This new partnership has expanded Cologuard’s market coverage to 80% of the addressable market from their pervious 72% coverage. With new partnerships being formed Exact Sciences has set the goal in front of themselves to reach close to the 100% coverage mark in 2018.

Past Year Performance:
EXAS has increased nearly 300% in value since this time in 2016. Much of this can be explained by a significant decrease in share price at the beginning of 2015 followed by strong growth during the 2016 year. Positive test results and an increase in the acceptance of the non-invasive test have given EXAS the opportunity to climb out of the $5.36 per share hole that it found itself in at the beginning of 2016. EXAS currently sits near the top of its 52-week high of $32.

 Source: FactSet

My Takeaway
Cologuard’s strong performance throughout 2016 has driven a large rebound in Q1 of 2017. With robust growth in the number of tests being delivered and new relationships being developed to further the product’s exposure, EXAS could cater to nearly 100% of the addressable market by the end of next year. Despite no new products in the foreseeable pipeline this growth teemed with a decrease in marketing expenses will provide EXAS with an opportunity for increased margins, lower cash burn, and continued growth throughout 2017. We still like Exact Sciences in the long-term.


Source: Yahoo!Finance





Sunday, May 14, 2017

A current AIM Fund holding: Nidec Corp. (NJDCY) by Matthew Holldand. “Nidec - An Intriguing Opportunity Ready for 2018”

Nidec Corporation (NJDCY, $23.45): “Nidec Keeps Motoring Along”
By: Matthew Holland, AIM Student at Marquette University

Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.

Nidec Corporation (NYSE: NJDCY) develops, manufactures, and markets electric motors and related components and equipment.  NJDCY have customers across the globe, with the majority of customers based in the Asia Pacific and the United States.

• NJDCY’s business portfolio transformation increases diversity and growth opportunities.

• NJDCY could see margin improvement with new initiatives.

• Global solar energy trends show promising growth capabilities for NJDCY.

• Share repurchase plan could lead to price increases.

Key points: With SSD’s emerging as an alternative to HDD’s, NJDCY has decided to expand its portfolio.  This updated portfolio will shift from an IT focus to the automotive, appliance, commercial, and industrial markets.  This will provide a diversification benefit against the IT market.  Furthermore, it allows NJDCY to expand through high efficiency and motor drive systems.

Nidec Corporation has maintained rather steady margins the past few years.  New initiatives by management could soon change that, with goals of increasing gross margin to 31% and operating margin to 15% by fiscal year 2021.  This effort will be led by increasing automation and decreasing the current workforce by nearly 50%.  Additionally, internal manufacturing is expected to decrease direct materials costs.

NJDCY currently offers motors and control electronics utilized in the photovoltaic power generation system.  Solar capacities reached nearly 230 GW in 2015, and these capacities are expected to increase.  China, Japan, and the United States represent the three largest markets in solar energy.  Conveniently, these three nations account for nearly 64.1% of NJDCY’s revenues, representing strong growth capabilities.

NJDCY currently utilizes a share repurchase program.  Repurchasing shares below their accounting book value can help drive price increases in the near future.

What has the stock done lately?
Since NJDCY’s release of fourth quarter earnings, NJDCY’s stock is up roughly 2.17% in barely two weeks.  NJDCY’s stock is up 8.46% year to date.  With promising growth opportunities on the horizon, NJDCY’s stock may continue to trend upwards.

Past Year Performance: NJDCY has increased by 24.40% over the past year.  Much of this increase was driven by a strong stretch in July 2016 in which the price increased by 5.29% leading up to the release of first quarter earnings.  This strong streak can primarily be credited to a solid fiscal year 2015 and optimism for a strong first quarter.

Source: FactSet

My Takeaway

NJDCY remains an intriguing option considering strong past performance and future capabilities.  While NJDCY’s margin goals may be difficult to match in a short period of time, their efforts seem likely to improve margins at the very least.  Furthermore, their growth opportunities in solar energy and their expanding portfolio provide optimism for improved success.  Coupled with NJDCY’s share repurchase plan, these events provide a positive outlook for NJDCY going forward.


Saturday, May 13, 2017

A current AIM Fund holding: Franklin Electric (FELE) by Stephen Arcuri. “FELE has Primed the Pump - Ready for Infrastructure Spending”


Franklin Electric (FELE, $37.40): “Franklin Electric has Primed the Pump”
By: Stephen Arcuri, AIM Student at Marquette University


Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.

 Summary

Franklin Electric (NASDAQ:FELE) is an international developer, manufacturer, and distributor of pumps that move groundwater, wastewater, and fuel. FELE operates in three segments, Water Systems (80% of revenue) and Fueling Systems (20% of revenue), and an “other” segment which is used to house corporate and administrative costs.

• FELE recently announced a series of acquisitions to establish the new Headwater Companies entity, a new distribution segment that will report separately. The purchase of Western Hydro Holding Corporation, and California and Drillers Service, Inc. and 2M Company Inc. are all set to close by the end of 2Q 2017.

• FELE is set to recognize gains from a more favorable product mix as Fueling Systems (9% organic growth) takes up a larger share of revenue compared to Water Systems (-1% organic growth).

Key points: Investors were disappointed in late April by Franklin Electric’s earnings miss, as both Water Systems and Fueling Systems saw operating margins fell to 13.0% and 20.7% respectively. This along with a weaker than expected first quarter sales and higher than expected acquisition costs seems to have caused many investors to think Franklin Electric has run dry.

Franklin Electric’s shocking strategy will soon jump start its shares again. Domestically, Franklin Electric looks to cut costs by vertically integrating and starting a distribution segment. This move will improve Franklin Electric’s footprint and service capabilities, with 60 new locations and 500 new employees. The new segment is expected to bring additional annual sales of $275 million and have an operating margin from 4-6%, bringing management’s 2017 estimate to between $1.77 and $1.87.

Only 30% of emerging markets currently utilize pressure pumping technology, an industry standard in the developed world. Franklin Electric’s diverse revenue stream, only 46% of revenues come from the United States, is positioned to capitalize on international organic growth. Fuel revenues saw 11% organic international growth YOY in Q1. Improving tailwinds, namely stable oil prices, suggest that infrastructure in emerging markets related to gas and oil will continue to increase. A weakening of the dollar relative to the last two years will also present foreign investors with a better buying opportunity for at least the near future.

Market penetration is key for Franklin Electric, as 80% of revenue comes from replacement parts rather than first time sales. Organic growth sales have, and still largely do, represented initial sales rather than revenue from replacement parts. As these markets mature, FELE will be able to further capitalize on their initial success. Until then, the diversification of their business with the new distribution segment will help to generate more consistent revenues.

What has the stock done lately?
Franklin Electric has experienced a 16.42% drop in price since their earnings call on April 28th, 2017. This presents buyers with an excellent opportunity to take a long-term position while Franklin continues to recognize one time transaction costs that drag earnings per share.

Past Year Performance: FELE is down only 3.86% year to date, despite experiencing a drop of 16.42% since April 28th. Year over year, however, Franklin Electric is up 14.79% as they have continued to improve their margins and strategically position themselves both domestically and internationally.

Source: FactSet

My Takeaway

Despite the Q1 earnings miss, Franklin Electric has a strong long term outlook as they expand internationally and vertically integrate domestically. Short term profitability will likely be hurt as the synergies and integration with the distribution segment take time to materialize, but the decrease in stock price represents a buying opportunity to long term investors. 


Friday, May 12, 2017

A current AIM Holding: Dominion Diamond Corporation (DDC) by Andrew Crossman: “A Canadian Diamond in the Rough”


Dominion Diamond Corporation (DDC, $12.78): “This is truly a diamond in the rough”
By: Andrew Crossman, AIM Student at Marquette University


Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.

 Summary
Dominion Diamond Corporation. (NYSE:DDC) mines, sorts and markets rough diamonds to a worldwide clientele base. It operates two mines in northwestern Canada.

• DDC’s Ekati diamond mine shift in production from high-value ore to lower-value ore and production shutdowns lead to lower gross margin.

• Management concerns continue as demonetization of India, a sales site of DDC, attributes to a poor economy and lower sales figures.

• Expansion potential leaves management optimistic for the future of development for the Lac de Gras region within the boundary of the Ekati mine.

• Institutional investors increased positions signify a bet on expansion of reserves.

Key points: Dominion Diamond Corp. exercises controlling interest of their Ekati mine. It has been long anticipated that proven reserves of high quality diamonds would expire in 2016. Management has emphasized a switch to lower-quality diamonds and emphasized increased production quantity to mitigate lower gross margins (CY16 7.2% gross margin CY15 25.5%). Additionally, lower margins were partially affected by a jeweler strike in 2016.

India’s federal government announced the demonetization of two bank notes in an attempt to end forgery. One of Dominion’s two sales sites (the other located in Brussels) felt the effect of the subsequent shock to the Indian economy. In their latest earnings call, management stated they were expecting a price drop of 5% to an average price of $55 per carat. The exact effect that demonetization on sales cannot be directly measured as Dominions sales figures were increased in Q4 by the unloading of inventory.

DDC holds ownership of a large area around current mining sites at Ekati and Diavik which they plan to us as expansion to current reserves. Especially at Ekati, management has emphasized extensive testing of 110 known kimberlites (rock type known to potentially contain diamonds) on current mining property. An R&D budget for 2017 of ~$8 million (263% increase over $2.2 million in CY16) is an example of management’s actions to expand current reserves.

As existing mining methods deteriorate, expansion of reserves is crucial to the survival of DDC; institutional investors continue to take positions indicating that they believe Dominion has found the answer (institutional ownership has increased $191.2 million since Q4 FY15). Three long term growth projects promise to increase proven reserves by up to 104.7 million carats. Not on currently mining property, but close enough to take advantage of established transportation, the Jay, Sable, and A-21 pipe could be the driving sources behind future earnings. These projects are currently in early stages of development, and the largest of the three (Jay) could promise 84.4million carats as soon as FY19.

What has the stock done lately?
On March 20 2017, the company was the subject of acquisition from Washington Companies for $13.50 per share. Since March 14, the stock has surged 42.94% although management has not yet accepted the acquisition offer. It has been assumed that this acquisition offer could draw competition from other groups looking to expand their materials portfolio.

Past Year Performance: DDC has increased 14.72% over the past year. The current price of $12.78 represents a discount of 28.4% over accounting book value per share. The market’s concern about decreasing production and performance could explain why the stock is currently trading at a discount to its intrinsic book value. 

Source: FactSet

My Takeaway
Dominion Diamond Corp poor performance detracted from share prices since it was added to the AIM portfolio in November 2013. Poised for a turn around of operations driven by expansion projects, DDC finds itself as a qualified candidate for acquisition as shown by the offer by Washington Companies. Managements hesitation to accept the offer which falls below the book value per share indicates confidence in future performance which will drive stock price ultimately towards a price target of $15.

Currently, the AIM international portfolio is overweight in Canada and despite management’s expectations the stock, this tender acquisition offer could represent an opportunity to exit a position which has underperformed. Rebalancing the portfolio to be more geographically neutral and lowering exposure to macro risks in the Canadian economy.


Source: FactSet