No Random Walking!

It's not the money, it's what we get for the money.

InterOil (IOC) crashed from a high of $44.25 to $23.0 at its lowest today, a drop of over 48% in less than 2 sessions, after its latest drilling report on well Elk-2 was delayed and, when it was finally released, it said that the well had yet to reach the target limestone zones. This was after it must have been over one month of delay due to technical difficulties such as high pressure.

Note that the latest well report didn't really report anything bad [unless something was withheld or the target zone was the Mendi limestone which has already been penetrated.]. Still the investors are starting to have doubts about the well however.

I am glad that I didn't buy into the hope (or hype rather). IOC until its crash was exactly the kind of stocks that one should avoid, even though it was technically trending up. The rationals were the following:

1. Past data suggested a high rate of failure for the kind of well at Elk-2. Unless it's a development well in a mature field, the drilling of any new well is risky and the probability of failure due to geological or operational issues is higher than 50%. Investing on a success ratio of less than 50% is a gamble to start with. Investing should never be such a a gamble!
2. My principle of risk management suggested that one should avoid a stock with a known discontinuity-triggering event ahead. The anticipated completion at Elk-2 is an expected event that everyone knew that would occur but nobody could predict what the exact outcome would be. Even the insiders, including the people working on site, couldn't tell the outcome before-hand. In geological term, the event constitutes a "fault" - or a discontinuity of which its location and its effects on fluid are so hard to predict that the most prudent way to manage the issue is to avoid them. Remeber, No Random Walking!
3. I have seen this before in Syntroleum (SYNM), when it drilled the well in offshore Nigeria that the geologists in Houston were so sure of its potential but were proven very wrong. SYNM's stock ran up from $4 to $16 in anticipation of favorable drilling results. After the dry-hole, the share price of Syntroleum crashed from $16 to $9 in a single day.  Now the price is around $2.8. [For SYNM or IOC, a single well/project can make or break the company.]
4. The monetary risk due to failure at Elk-2 is greater than the reward for its success. The success may result in either a price surge (of say 50%) or a drop in price (profit taking, sell in the news). The failure may fail the whole company, i.e., an almost 100% downside.

With all the above said, let's be clear that Elk-2 is still being drilled and, if the final outcome turns out to be a good success (thick gas and/or oil column found), the price of IOC could double from the current level. However the above rationals to stay away from it are still true. Doing otherwise amounts to random walking!

[See Also:]

1. Previous Blog: Elk-1 Update

2. Elk-2 Appraisal Well Drilling Report No. 4 June 27, 2007

From Wall Street Journel/Reuters:

Last week, Syntroleum signed a contract to supply 500 gallons of fat-based jet fuel for testing to the Air Force, which already has tested the company's natural-gas-based fuel. Syntroleum's chief executive met last week with Paul Bollinger, an official in charge of the Air Force's effort to develop alternatives to oil. "You've got to be kidding," Mr. Bollinger says he thought to himself when the Syntroleum CEO showed up in his office bearing vials of animal fat and fuel made from it. Still, Mr. Bollinger says it's worth a look. "Lord knows," he says, "there's no shortage of chicken or hog fat in this country.

... ...

The Tyson and Syntroleum plant, to be built somewhere in the South Central United States, will produce 75 million gallons of fat-based fuel annually, about 5 percent of the output of a typical modern oil refinery, the Journal said.

What I learned (or rather re-learned) from last two market sessions, specifically w/r/t Sohu:

1. Level-2 size doesn't mean much. The big boys' bidding and asking shares at not listed.
2. Honor the data, do not over-analyze;
3. Honor the data, do not over-trade!

Basically he confirmed what I said six weeks ago in May. I would put the target price much higher than $33.5 though.

In a note to clients Friday, Credit Suisse analyst Wallace Cheung raised his rating on Sohu  shares "Outperform" from "Neutral."

Sohu's new online massive multi-player online game, "Tian Long Ba Bu," is doing well and its success can help the company's earnings, he wrote.

Cheung thinks Sohu, which is the operator for the 2008 Beijing Olympic Games' official Web site, will get Olympics video rights by way of a partnership with CCTV.com. Though he estimates these rights will cost Sohu $10 million in 2008, they would be "a key share price catalyst," he wrote.

Cheung increased his target price from the stock to $33.50 from $26.

Source: Sohu Peaks After Analyst Upgrades Stock: Financial News - Yahoo! Finance

Nice rooms, good service and affordable price - that sums up my first-hand experience with my stay in Home Inn (??, Nasdaq: HMIN), one of the fastest growing budget hotel chains in China. The rate in Hongzhou is RMB 202 yuan for a two-bed room with membership (219 yuan w/o). Broadband internet connection comes free. I also liked its wood-flooring instead of carpet.

Now the question is: Is it a good candidate for investing? It's tempting to put money in the company since it's growing very fast and it's doing good business. However my main concern is the competition. It seemed that similar budget hotels are popping up in major cities everywhere. The names I saw in Shanghai and Hangzhou include JinJiangZhiXing (?????, 168 Motel and Super 8. This blog (Link) at Whampoa Financial talks about the same concern.

By the way, don't you think the logo for Home Inn looks familiar? However I looked at it, it reminds me of Best Western! Interestingly in Hangzhou, I've seem other budget hotels popping up now, with almost the same look and feel of my beloved Home Inn, probably with even cheaper price! 

Home Inn definitely has a first-mover advantage, but it also has the risk of becoming the victim of its own success.

Chen Yizhou (???), CEO of Oak Pacific which operates one of the most popular web 2.0 sites (mop.com) in China,  had this to say when asked about the business potential of web 2.0 related companies and whether his company will go public in the near future: [Source: Sina.com]

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... visited the following cities: Shanghai, Suzhou, Hangzhou, and Shaoxin. Will post some pictures here in the following days.