Fairmount Santrol Holdings Inc. (FMSA-N)

A fine company that pays a good yield. It won't set the world on fire, though.

(A Top Pick March 23/17 – Down 31%) A player in fracking sand. Sometimes you are wrong on the stock even if you are right on the fundamentals. A space that is not exciting anymore. Q4 is probably going to be very bad for them.

The frac sand names where bad last year and cost him 10%. He had exposure to names where he thought demand for frac sand would explode, and it did. Thought these companies would experience record margins, and they did. The concern was that there would be too much buildout of capacity in Texas, and the market got caught up in this 16-million ton number in a 70-80 million ton market, believing the economics justified the buildout and expansion. There were a lot of flaws in logic, and the market has caught up and started to agree with him, because the sands had a pretty good tear later in the year. Despite very good economics for the frac sand in the US, there is always going to be, for the next couple of quarters, too much capacity addition, so he has eliminated all his US frac sand exposure and put the money into pressure pumpers. This company is merging with another company and will be the dominant frac sand producer.

The most financially leveraged fracing company. The whipping boy if you are bearish on oil, fuel activity and sand. This is the one you would Short. The Short interest is back up to about 32% of the float. As you are seeing money come back into the market, we should step back. The backdrop is, we’ve had a good week this week. He is waiting to see if Long money comes into the market. He is bullish for frac sand, but this is not his favourite, because of the financial leverage.

Frac sand. Sees a very, very bullish underlying thesis, combined with a market that just isn’t seeing it, so stocks have sold off by 40%-70%. Of the frac sand companies, this one sold off the most because 1) they have more financial debt than the others and 2) there is a growing narrative that there will be growth in supply in Texas. As 75% of the cost of sand is transportation, there is a fear that supply growth in Texas will displace those deposits that are further away. He feels demand growth will exceed supply growth, so the market will remain tight. (See Top Picks.)

If you are a bull and looking for $60-$70 WTI, these guys are one of the biggest fracing sand producers in North America. His basic concern is that they have $833 million US, against $243 million of equity. Has over $200 million of cash. The problem is, when the price of oil goes down they take impairments, and impairments knock the equity component down. Also, have $60 million in interest payments a year on their debt. If we ever go down to $30 oil, this stock will go back down to $1.

The volatility has been unbelievable. For frac sand, most of the capacity for the industry is in 4 states, far from where the major increase in drilling is. In the past 6 months, there has been a slow development of finding a regional supply, which happens to be premier quality sand than in the North. It is also a lower price. His best estimation is that you have a market for frac sand that is about 75 million tons a year, growing to about 100 million tons next year, and 130 million tons in 2019. His best guess is that this market will remain very tight. However, there have been a lot of US hedge funds that have been selling this base. You have to be a little patient on this company. (See Top Picks.)

With the freak out by the market about the sell-off in oil. Fracking sand has doubled. The increase in demand will offset any increase in capacity. This one has been hit the hardest of the sand producers. (Analysts’ target: $12.25).