Thursday, May 19, 2011

NOA - not a good surprise at a small cap

North American Energy Partners(NOA is a small cap Canadian company that provides heavy manufacturing and pipeline development to oil sands projects. Yesterday the stock price fell by 25% and the slide is not yet over today as high volumes continue and the price is now inching down more.

One could say that this is a perfect example of the dangers of investing in lightly covered(by analysts) small cap stocks. The reason for the stock blow-up is an "unexpected" charge for the disruption of an oil sands project whose contract with NOA represented 23% of the company's revenues. Ouch. The interesting, if that's the right word, thing is that the project in question had a fire in JANUARY that caused a shutdown of most of its output. Would some charge not have been obvious to any analyst carefully covering the stock, or so obvious that the company would have publicly alluded to it earlier, and not just as they are closing the books on their fiscal year?

Going into yesterday short interest in NOA represented less than 1% of float, or almost nothing. Of the few and mostly less than familiar firms that covered the stock the ratings ranged from buy to neutral, with one curious sell that emerged from a quant firm on May 13. The best known firm covering the stock from this perspective is Raymond James, and they had a buy. Leading institutional holders Fidelity and Perry Capital presumably are still in the stock as volumes and price action in recent weeks don't indicate any major disruption in the shareholder base.

So for shareholders that bought into an attractive growing NOA several years ago at $15 a share, hopes for a recoup of their investment have been shredded. For shareholders that jumped into a bargain at $3 in 2009, their gains have been almost halved. On both sides of that barbell here, this investor has seen an aggregate profitable investment jump into the red, or maybe just a shade of dirty pink heading to red if the slide continues.

NOA now needs to renegotiate its bank lines as it has breached a covenant. With almost no cash reserve on its books the firm will be at the mercy of its lenders. The deal will almost certainly get done, but the result may be that NOA, practically speaking, now will be working for its bankers and only secondarily for its shareholders. For investors it's become a long term play, and perhaps something to exit with any rebound. As always, buying more at a low has to be considered as an option but with small caps that can be a very risky choice.

Over the last year there have been many market commentators that suggest that the large caps will have a resurgence and that the small cap outperformance can't continue. Yesterday Fidelity S&P index fund was up .70%, their total market index up .90%, and the extended market index fund up 1.54%. There's still gold in those small caps it seems, but surprises can be expected.


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