I was stopped out of 35% of my position in hwo.to at $2 last month and the timing could not have been any worse. Do I regret it? Not really. Here's why. Prior to getting stopped out, hwo.to represented about 40% of my account. That's a very aggressive position to say the least and in order to justify such, everything has to be in a favorable condition, namely, valuation, balance sheet safety, earnings momentum and technicals (price action). Earnings momentum has stalled, and I'm ok with that given it's not in decline but the technicals were not favorable and had not been for several weeks. I already talked about the large seller out there who was bullying the stock. At first this large seller was only capping upside at $2.35 and wasn't hitting any bids. This caused the stock to trade sideways. I had no problem with that kind of action as I got paid to wait via the monthly dividend. But then the seller starting putting pressure on the stock hitting bids and capping the upside at at a lower and lower price and it got to the point where there was a high risk the stock could break the $2 and head to $1.80. With that sort of action, I could no longer justify the type of exposure I had even though I was quite confident that longer term a $1.80 is not sustainable given the fundamentals. I had to draw a line in the sand and that line got crossed. When I got stopped at $2 this large seller also hit the $2 bid quite hard and then a couple hours later the company announced a new contract, the stock reversed to the upside and this large seller was gone. He has been gone since and without him holding back the stock, it has now surged back to $2.72 where I have sold a bit more and plan on selling even more if the stock lifts further (discussion to follow).
I talked about the delicate balance of conviction vs discipline. I've said it before, that in order to make big money, you gotta have conviction - you gotta have the balls to make a big move. At the same time you gotta have discipline. You make the big moves only when the odds/conditions are heavily skewed in your favor which in turn means you need to take defensive action when those conditions that warranted your position are no longer favorable. I was forced to downsize my position in hwo.to because one of the 3 conditions I require to make a big bet were no longer in place. Had I held say only a 10-15% position in the stock I would have been able to be a stronger holder for the entire position.
Getting whipsawed like this is part of the game even though it makes you feel like a chump.That's just your bruised ego talking. I don't regret getting stopped. I still have a significant position and I'm in a better financial position now that the stock has rebounded quite strongly. If the stock tanked to $1.80 as I feared, I may have felt good about myself for selling some at $2 but would seen my account balance drop nonetheless.
Hwo.to is often influenced by the general trend in the CDN energy services sector, even though only 30% of revenues are in Canada. The sector has been on fire as of late probably because the discount between CDN and US oil prices has narrowed significantly since January plus the price of US oil has gone up quite a bit too. There is also hope that Canadian LNG is going to be a growth driver. Both of these developments are no doubt positive for the sector and resulted in upgrades, but it doesn't appear that these developments will have any material impact until next year and so with earnings for the remained of the year expected to be on par vs last year (which was a lousy) it doesn't give me much conviction to expect the recent surge in the sector to hold up. Regarding hwo specifically, their upcoming Q2 earnings report will no doubt be better than your average service company given that 70% of the business is in PNG which has held it's own, but these operations too are expected to show flat growth this year. Therefore, as a result of everything discussed above, plus the ST concern I| have about the general market, I no longer have the same level of conviction to hold an oversized position in hwo as I once did at the current price and I'm inclined to lighten up further.
gre.v has had a wild ride, touching 1.70 before crashing back to 0.95. Such a thing in not uncommon with illiquid micro cap stocks and so long as fundamentals haven't changed, one should not be fazed. The selling was largely due to one person similar to what happened with hwo and so once he's done, the stock should see a strong rebound immediately. With the company poised to earn 0.40-0.45/sh this year, it's ridiculously underpriced. I'm maintaining my position and may even add to it.
Regarding the markets, they have had quite a run since my last post far exceeding my expectations (and everyone's I'm sure), but there's warning signs in some of the key indicators I track. I suspect we will see one more downside scare before summer's end. Now's the time to raise defenses by lighting up and/or hedging positions but don't overdue it.
Sunday, August 11, 2013
Thursday, July 4, 2013
Lose yourself
If you had one opportunity or one shot to seize everything you ever wanted. One moment. Would you capture it or let it slip?
I can't get this Eminem song out of my head because I've been given a very rare, very lucrative opportunity. I'm given an investment opportunity such that I will be able to buy a shit load of shares of a company that I believe strongly in at a massive discount to the current price which is still undervalued. There's no strings attached either - the shares are free and clear and I can sell anytime although it would not be in good faith to flip it. Right out the gate I would be up an instant 60%. If I take down the full available amount it would put me "all in". It's not a slam dunk though. Liquidity is still fairly low and if things taken a sudden turn for the worse, it would be difficult for me to unload this potentially large position at favorable prices. There is still the chance (albeit small) that I could get badly hurt or even wiped out.
I have vowed never to put myself in an all in situation like this. It's the number one rule I set for myself - but clearly this is a very unique opportunity. The prudent thing to do is to only buy a portion of the amount that is available to me but I feel it would be foolish to not take full advantage of the situation. When will I be able to get such an opportunity again? Probably never. The odds of me losing money on this appears to be slim. It would require some really, really bad luck for that to happen. If things stay status quo I will do well and if they go just moderately positive, I stand to make out extremely well.
The final decision hasn't been made yet but I'm leaning about 90% to go for it. If and when I do, it is no doubt going to be mentally taxing to the max but I plan to de-risk the trade by selling an amount that will cover my cost of investment once the stock goes up by a certain amount. Then at that point I can ride the remainder of the position on the house with no stress. I don't want to be too hasty in selling as I believe the stock should go a lot higher in the next year or 2 but given the size of my position I can't let it all ride to the point where I believe the stock will be fully valued - that would be too greedy...I will have to sell a portion before that point.
Several months ago I talked about the need to have brass balls in life...taking a sizable risk when the risk is worth taking. This is clearly one of those moments for me.
This blog will go dark for a while.
I can't get this Eminem song out of my head because I've been given a very rare, very lucrative opportunity. I'm given an investment opportunity such that I will be able to buy a shit load of shares of a company that I believe strongly in at a massive discount to the current price which is still undervalued. There's no strings attached either - the shares are free and clear and I can sell anytime although it would not be in good faith to flip it. Right out the gate I would be up an instant 60%. If I take down the full available amount it would put me "all in". It's not a slam dunk though. Liquidity is still fairly low and if things taken a sudden turn for the worse, it would be difficult for me to unload this potentially large position at favorable prices. There is still the chance (albeit small) that I could get badly hurt or even wiped out.
I have vowed never to put myself in an all in situation like this. It's the number one rule I set for myself - but clearly this is a very unique opportunity. The prudent thing to do is to only buy a portion of the amount that is available to me but I feel it would be foolish to not take full advantage of the situation. When will I be able to get such an opportunity again? Probably never. The odds of me losing money on this appears to be slim. It would require some really, really bad luck for that to happen. If things stay status quo I will do well and if they go just moderately positive, I stand to make out extremely well.
The final decision hasn't been made yet but I'm leaning about 90% to go for it. If and when I do, it is no doubt going to be mentally taxing to the max but I plan to de-risk the trade by selling an amount that will cover my cost of investment once the stock goes up by a certain amount. Then at that point I can ride the remainder of the position on the house with no stress. I don't want to be too hasty in selling as I believe the stock should go a lot higher in the next year or 2 but given the size of my position I can't let it all ride to the point where I believe the stock will be fully valued - that would be too greedy...I will have to sell a portion before that point.
Several months ago I talked about the need to have brass balls in life...taking a sizable risk when the risk is worth taking. This is clearly one of those moments for me.
This blog will go dark for a while.
Friday, June 28, 2013
Half time report
I can't believe half of 2013 is already over! Time sure flies and I've noticed that the older I get the faster it seems to go by. Not good! The market correction that has taken place appears to be just that - a correction. I think most of the damage has already been done given how rapidly pessimism has swelled in the shorter term trading indicators I track. For instance NAAIM sentiment shows active managers are only 34% long which is in the vicinity of where correction lows have taken place.The concern about "Chibor" which added downside fuel to the fire seems to be alleviated at least for now and I think this is the catalyst that sparked the bounce. Not sure if this bounce is the beginning of a sustainable upswing though (I have my doubts). My forecast for choppy markets in the months ahead seems to be on track. Meanwhile I noticed all the same losers on the yahoo message boards squeeling with delight while the market was dropping along with some of the usual permabear suspects calling for a big drop in the market. You know what? Do yourself a favor and delete any bookmarks you have for these jokers if you actually invest/trade the market. They have poisoned your mind. This is not to say you should never be bearish again, just find another way - find a method that will turn you bearish when it's actually the correct posture. Most of today's doomsters are simply broken clocks who have been singing the same tune for several years or even decades and so when a crash happens they look like geniuses. The truth is, if you followed their advice over time, you'd be in the red and maybe even broke. At the end of the day making or losing money is the ONLY thing that matters if you play this game which is why these guys should be totally ignored.
Gold has been getting hammered quite badly this year and I'm a bit surprised it hasn't been able to get a bounce bigger than the short lived ones it has had so far. Maybe we will finally get a big bounce soon soon but I wouldn't hold my breath. I'd like to know where all those "gold will do well in inflation or deflation" guys are now and I wonder how the doomer gold bugs like Schiff are preforming. They certainly know how to brainwash people into believing the end of world is coming and yet they and their followers must be taking quite a beating. I must say, I have no sympathy for miserable SOBs who lose money. Gold stocks are now closing in on the 2009 bear market lows and gold companies are scrambling to shut down mines and cut costs. Gold stocks have been hit hard by a perfect storm of cost overuns from the likes of the majors like Kinross and Barrick and now a free falling gold price. In fact, Barrick is now trading at where it was in 2001 when the gold bull market had just started! Wow! I can't tell you how many times I saw Barrick recommended on BNN by the "experts" when it was above $40. So, with gold stocks getting hammered so badly even with gold still comfortably above $1000, does this mean that the sell-off is overdone and maybe even over?When you have these conditions where the gold price still hasn't found a bottom and the companies are hurting, slashing payrolls and shutting down mines it's best to avoid the sector no matter how tempting for it usually takes several months for the dust to settle in such cases...sometimes years. Think housing. There will of course be tradable rebounds but they are often elusive and you know what? I used to be interested in such opportunities but as the years have gone by I have passed on committing my capital on ST speculative endeavors like this. I'd much rather look for situations where I can buy a fundamentally strong company trading on the cheap which therefore gives "substance" to my positions or bet on some LT secular trend that I believe is its early innings. Bigger and easier money is made this way and in such situations I can have the conviction to make large bets whereas I can only bet small when I'm looking to "play a bounce" in some sector.
So far I've had a very good first half of the year but I gotta say, it's a bit unsatisfying because it's all due to my holding of gre.v while hwo.to has been stuck in a rut and is flat on the year. The company just announced a 3 year renewal of the big contract it has in place with its customer in PNG. This customer accounts for the bulk of the company's revenues and so it pretty much guarantees significant cash flows for 3 years and when you're trading at sub 4 times earnings, close to book value, no net debt and with a 7% yield, it makes the stock quite a bargain even though the company did say it expects flat EBITDA this year.There is this one huge seller of the stock out of UBS who continues to keep a lid on the stock putting up a brick wall at 2.10. This guy has sold over 1 M shares so far this year which is huge overhang for a microcap. If not for this big seller the stock would be a lot higher because anytime he's not there the stock lifts quite easily. I've been trying to find out who this seller is but I've had no such luck. It's not any insider otherwise it would show up on the insider trading report. Maybe it's a former insider. It's really frustrating to see this action in hwo but in time, the fundamentals always assert themselves and so the stock should work higher but in the meantime its been dead money and I don't like dead money. If I see something else equally enticing out there I might as well just pull the plug and move on.
Greenstar on the other hand has done quite well for me so far this year. Interest in the company is slowly building. When I was buying shares at .50 I was literally the only one buying. Although the company operates out of China which is struggling right now, most of its business is international and the domestic part of it involves the sale of fresh produce which is always going to have steady demand rain or shine. With significant growth pretty much baked in the cake for the next 2 years and stock still trading very cheap, the upside momentum seems poised to continue. The dividend is likely going to be hiked as well sometime down the road too given that it's only a tiny slice of cashflows which are growing. So far mgmt has done a good job in trying to separate the company from the bad image Chinese stocks have thanks to Sino Forrest and some others.
Gold has been getting hammered quite badly this year and I'm a bit surprised it hasn't been able to get a bounce bigger than the short lived ones it has had so far. Maybe we will finally get a big bounce soon soon but I wouldn't hold my breath. I'd like to know where all those "gold will do well in inflation or deflation" guys are now and I wonder how the doomer gold bugs like Schiff are preforming. They certainly know how to brainwash people into believing the end of world is coming and yet they and their followers must be taking quite a beating. I must say, I have no sympathy for miserable SOBs who lose money. Gold stocks are now closing in on the 2009 bear market lows and gold companies are scrambling to shut down mines and cut costs. Gold stocks have been hit hard by a perfect storm of cost overuns from the likes of the majors like Kinross and Barrick and now a free falling gold price. In fact, Barrick is now trading at where it was in 2001 when the gold bull market had just started! Wow! I can't tell you how many times I saw Barrick recommended on BNN by the "experts" when it was above $40. So, with gold stocks getting hammered so badly even with gold still comfortably above $1000, does this mean that the sell-off is overdone and maybe even over?When you have these conditions where the gold price still hasn't found a bottom and the companies are hurting, slashing payrolls and shutting down mines it's best to avoid the sector no matter how tempting for it usually takes several months for the dust to settle in such cases...sometimes years. Think housing. There will of course be tradable rebounds but they are often elusive and you know what? I used to be interested in such opportunities but as the years have gone by I have passed on committing my capital on ST speculative endeavors like this. I'd much rather look for situations where I can buy a fundamentally strong company trading on the cheap which therefore gives "substance" to my positions or bet on some LT secular trend that I believe is its early innings. Bigger and easier money is made this way and in such situations I can have the conviction to make large bets whereas I can only bet small when I'm looking to "play a bounce" in some sector.
So far I've had a very good first half of the year but I gotta say, it's a bit unsatisfying because it's all due to my holding of gre.v while hwo.to has been stuck in a rut and is flat on the year. The company just announced a 3 year renewal of the big contract it has in place with its customer in PNG. This customer accounts for the bulk of the company's revenues and so it pretty much guarantees significant cash flows for 3 years and when you're trading at sub 4 times earnings, close to book value, no net debt and with a 7% yield, it makes the stock quite a bargain even though the company did say it expects flat EBITDA this year.There is this one huge seller of the stock out of UBS who continues to keep a lid on the stock putting up a brick wall at 2.10. This guy has sold over 1 M shares so far this year which is huge overhang for a microcap. If not for this big seller the stock would be a lot higher because anytime he's not there the stock lifts quite easily. I've been trying to find out who this seller is but I've had no such luck. It's not any insider otherwise it would show up on the insider trading report. Maybe it's a former insider. It's really frustrating to see this action in hwo but in time, the fundamentals always assert themselves and so the stock should work higher but in the meantime its been dead money and I don't like dead money. If I see something else equally enticing out there I might as well just pull the plug and move on.
Greenstar on the other hand has done quite well for me so far this year. Interest in the company is slowly building. When I was buying shares at .50 I was literally the only one buying. Although the company operates out of China which is struggling right now, most of its business is international and the domestic part of it involves the sale of fresh produce which is always going to have steady demand rain or shine. With significant growth pretty much baked in the cake for the next 2 years and stock still trading very cheap, the upside momentum seems poised to continue. The dividend is likely going to be hiked as well sometime down the road too given that it's only a tiny slice of cashflows which are growing. So far mgmt has done a good job in trying to separate the company from the bad image Chinese stocks have thanks to Sino Forrest and some others.
Friday, June 14, 2013
Taper your tapering fears
The buzzword of the month seems to be "fed tapering" and it's this worry that is the apparent culprit of the correction. Isn't it funny how when QE was first introduced it was widely criticized and dismissed? Very few people if any, believed that it would have a lasting impact on the markets. The consensus view was that all it would do is crater the dollar and stoke inflation. Then as the bull market progressed without the dollar disaster that was expected, you heard all this griping about how the bull market is solely due to QE. Wait a minute, wasn't QE supposed to be useless? Where is the mea culpa from all the pessimists? This is why I show so much hostility towards the legions of permabears that are still out there. They have shown ZERO in the way of admitting how hideously wrong they have been about pretty much everything.
As far as the effectiveness of QE I would speculate to say that it has more of a security blanket effect than anything. I doubt very much that it is the underpinning of the bull market despite the charts that show the correlation between the initiation of QE rounds and market performance. At best, it's a moderate contributing factor. If for instance, QE was implemented in early 2001 I doubt very much it would have stymied the bear market that was in place because the excesses of the late 1990's had only begun to be purged. Only when that purging was completed did favorable monetary policy gain traction. I remember clearly how when the fed slashed rates by 50 bps in January 2001 the financial media got all excited pointing out how anytime the fed cut rates like this the market was up a year later every time with the exception of 1931. It turned out that despite drastic easing, the fed was rather powerless to stop the purging that was in process. Once the economy is purged from the excesses and pessimism has swelled, then the path of least resistance is up and so any kind of "push" from the fed/government will be much for effective but it's NOT the main reason the market will go into bull mode - the market has to be primed for it. You do not get a 4 year 140% bull market making new all time highs solely due to the actions of the fed/government. You have to be really delusional to believe that and yet there's so many people who do. It just goes to show you how badly scarred and bitter so many still are from the 2008 collapse. I think this is the true underlying cause of the pervasive pessimism out there. It takes lot's of time to heal from such a devastation and I suspect a lot of people will remain a pessimist for life much like investors who got burned during the depression. Life is too short to be a perpetual pessimist like this.
I'm sure there's a significant cohort of reluctant longs out there who are only long because they think the fed is propping up the market. These people will be very quick to run for the exits at any hint that the fed is going to let off the pedal even just a bit. I'm quite sure these folks have been selling. So far this pullback looks like a run of the mill correction as opposed to something more nasty. Trader types were very quick to run for the exists and the put/call ratio was very quick to zoom higher. I suspect we will see choppy markets for the rest of the summer with a possible downside scare or 2 to work off the very IT overbought condition the market reached in late May. One thing that is concerning is the weak action in bonds. Typically, correction bottoms are accompanied by a strong rally in bonds and that has not been the case. We'll see how things play out. As always I'll make adjustments if warranted.
As far as the effectiveness of QE I would speculate to say that it has more of a security blanket effect than anything. I doubt very much that it is the underpinning of the bull market despite the charts that show the correlation between the initiation of QE rounds and market performance. At best, it's a moderate contributing factor. If for instance, QE was implemented in early 2001 I doubt very much it would have stymied the bear market that was in place because the excesses of the late 1990's had only begun to be purged. Only when that purging was completed did favorable monetary policy gain traction. I remember clearly how when the fed slashed rates by 50 bps in January 2001 the financial media got all excited pointing out how anytime the fed cut rates like this the market was up a year later every time with the exception of 1931. It turned out that despite drastic easing, the fed was rather powerless to stop the purging that was in process. Once the economy is purged from the excesses and pessimism has swelled, then the path of least resistance is up and so any kind of "push" from the fed/government will be much for effective but it's NOT the main reason the market will go into bull mode - the market has to be primed for it. You do not get a 4 year 140% bull market making new all time highs solely due to the actions of the fed/government. You have to be really delusional to believe that and yet there's so many people who do. It just goes to show you how badly scarred and bitter so many still are from the 2008 collapse. I think this is the true underlying cause of the pervasive pessimism out there. It takes lot's of time to heal from such a devastation and I suspect a lot of people will remain a pessimist for life much like investors who got burned during the depression. Life is too short to be a perpetual pessimist like this.
I'm sure there's a significant cohort of reluctant longs out there who are only long because they think the fed is propping up the market. These people will be very quick to run for the exits at any hint that the fed is going to let off the pedal even just a bit. I'm quite sure these folks have been selling. So far this pullback looks like a run of the mill correction as opposed to something more nasty. Trader types were very quick to run for the exists and the put/call ratio was very quick to zoom higher. I suspect we will see choppy markets for the rest of the summer with a possible downside scare or 2 to work off the very IT overbought condition the market reached in late May. One thing that is concerning is the weak action in bonds. Typically, correction bottoms are accompanied by a strong rally in bonds and that has not been the case. We'll see how things play out. As always I'll make adjustments if warranted.
Wednesday, June 5, 2013
So, is this it?
Are we getting the long awaited correction? The one that has foiled both bulls and bears alike? If a bull like me was inclined to buy puts just over a month ago and got ran over with them, I can only imagine the destruction that was laid upon the bearishly inclined...which I reckon makes up the 80+% of the trading community. I'll say this again, it doesn't matter how bad the market gets from here because if you've listened to the bears and followed their advice or what they implied you should do, you're broke.
Correction or not, I don't think this bull market is in danger of being over for the reasons I've cited here before many times. But let's not get complacent here. We've had a huge run and so protect yourself or lighten up if you know you'll end up panicking or staying awake at night if the market were to drop further.
I'm still holding my protective puts (which are underwater from where I bought them) along with my 2 longs which make up 80% of my account. Yeah I know, I'm nuts but you know what? These 2 longs I have are financially solid, trading very cheap and so I can be a strong holder of them throughout any volatility.
Hwo has been disappointing giving up just about all the gains for the year. The main reason of the latest sell-off is probably because mgmt says it expects no growth in earnings vs last year. Now, if the stock had a p/e of 20+ that would be a concern but when it has only a p/e of 4 it's already pricing in very pessimistic assumptions about growth (making it a bargain) and so I don't think this sell off is warranted nor sustainable. The stock now has dividend yield of 7% and is trading close to book value and so I believe downside should be limited. In fact, insiders of the company have been buying shares on the open market at these prices and the company announced a buyback plan - both of which signal the stock is quite undervalued. The last time insiders and the company were buying shares like this was in late November when the stock was near a major bottom. Although this year may not provide any fireworks, the longer term outlook (1-2 years) from now looks very good given what appears to be a forthcoming LNG boom in Canada and with further LNG development in PNG. In the meantime, I collect the generous monthly dividend.
My other holding China Greenstar is looking very good. It looks pretty assuring to me that they will see 20-30% growth in earnings this year. They are in the process of acquiring one of their suppliers for a bargain basement price in Q3 and so that will assure that next year's earnings will grow significantly as well. Meanwhile, the stock is still grossly undervalued even with it's move up to $0.98 since it has a book value of $1.42/share and company will likely earn $0.40-$0.45/share this year. I think I can hit a home run with this stock like I did with bev.to in 2010....but this time I loaded up with a lot more shares than I did with bev and so it could turn out to be a grand slam! So long as I don't get any really bad luck, the stock should easily hit $2 by this time next year. The beauty of this company is that the earnings are constant and rather predictable given that their business consists of selling tomato paste, fresh produce and canned fruits. It doesn't sound very exciting but if you look at the cash flows this company generates, i's future growth rate and how ridiculously cheap the stock is, it is indeed very exciting! Of course the so called "catch" is that the company is based in China and there's been some bad apples there with Sino Forrest being the biggest one. This is why the stock is so cheap. Well, I've done my DD and I'm more than comfortable in believing the company is legit. If they keep producing these kinds of results, it's simply a matter of time that they will get the proper respect by the market and be able to break free of the China stigma and it seems this process could just be starting. If the company is indeed legit, then this is as close as a sure thing as you are going to get in the market. It trades at 2.4 times 2013 earnings and the company has been growing earnings around 15% each year for the last 3 years with this year poised for 20-30% growth and more growth pretty much assured for 2014. You might be thinking if it's too good to be true then it probably is. Well, that's usually the case but you can indeed find these types of situations in the microcap/small cap space since they are overlooked by analysts. My big score with bev.to is a perfect example. When I bought the stock at $0.50 it was pretty much assured that over the next 4 quarters the company was going to earn at least $0.80 a share thanks to a government contract they won. When I realized this I said to myself "I must be missing something here, this is too good to be true" Well it wasn't! The market was quite frankly dumb and I took advantage of it.Only when that cashflow actually started coming in did the stock respond even though the news and mgmt's forecasts made is quite clear that it was coming several months prior. The stock ended up going to $3.40 close to where I sold everything. I sold because I sensed euphoria in the stock and I wanted to cash in on a big winner. I figured I could always get back in on a dip, but as time passed I realized that I no longer had the conviction to buy back the stock because there was no significant earnings to come after that big contract was over which after the big run up, was priced into the stock. With Greenstar I don't have this issue. I can be assured that people are going to be consuming the food they sell year after year after year without worrying about it going obsolete/out of style.
This stock has the makings of a grand slam homerun. In fact, I've never felt so excited about owning a stock like this ever! The CEO has a very ambitious goal of making this a $1 Billion in sales company. Pipe dream? Maybe, but if we see just 1/5 of this goal reached I'd make out extremely well. Even if the company doesn't grow and simply pumps out the $10 M in profit it made last year every year going forward, I'd still make out very well in the long run. For me to be on the losing end, I'd have to be really unlucky here like for instance if China suffers a complete collapse and goes into lockdown mode.
Correction or not, I don't think this bull market is in danger of being over for the reasons I've cited here before many times. But let's not get complacent here. We've had a huge run and so protect yourself or lighten up if you know you'll end up panicking or staying awake at night if the market were to drop further.
I'm still holding my protective puts (which are underwater from where I bought them) along with my 2 longs which make up 80% of my account. Yeah I know, I'm nuts but you know what? These 2 longs I have are financially solid, trading very cheap and so I can be a strong holder of them throughout any volatility.
Hwo has been disappointing giving up just about all the gains for the year. The main reason of the latest sell-off is probably because mgmt says it expects no growth in earnings vs last year. Now, if the stock had a p/e of 20+ that would be a concern but when it has only a p/e of 4 it's already pricing in very pessimistic assumptions about growth (making it a bargain) and so I don't think this sell off is warranted nor sustainable. The stock now has dividend yield of 7% and is trading close to book value and so I believe downside should be limited. In fact, insiders of the company have been buying shares on the open market at these prices and the company announced a buyback plan - both of which signal the stock is quite undervalued. The last time insiders and the company were buying shares like this was in late November when the stock was near a major bottom. Although this year may not provide any fireworks, the longer term outlook (1-2 years) from now looks very good given what appears to be a forthcoming LNG boom in Canada and with further LNG development in PNG. In the meantime, I collect the generous monthly dividend.
My other holding China Greenstar is looking very good. It looks pretty assuring to me that they will see 20-30% growth in earnings this year. They are in the process of acquiring one of their suppliers for a bargain basement price in Q3 and so that will assure that next year's earnings will grow significantly as well. Meanwhile, the stock is still grossly undervalued even with it's move up to $0.98 since it has a book value of $1.42/share and company will likely earn $0.40-$0.45/share this year. I think I can hit a home run with this stock like I did with bev.to in 2010....but this time I loaded up with a lot more shares than I did with bev and so it could turn out to be a grand slam! So long as I don't get any really bad luck, the stock should easily hit $2 by this time next year. The beauty of this company is that the earnings are constant and rather predictable given that their business consists of selling tomato paste, fresh produce and canned fruits. It doesn't sound very exciting but if you look at the cash flows this company generates, i's future growth rate and how ridiculously cheap the stock is, it is indeed very exciting! Of course the so called "catch" is that the company is based in China and there's been some bad apples there with Sino Forrest being the biggest one. This is why the stock is so cheap. Well, I've done my DD and I'm more than comfortable in believing the company is legit. If they keep producing these kinds of results, it's simply a matter of time that they will get the proper respect by the market and be able to break free of the China stigma and it seems this process could just be starting. If the company is indeed legit, then this is as close as a sure thing as you are going to get in the market. It trades at 2.4 times 2013 earnings and the company has been growing earnings around 15% each year for the last 3 years with this year poised for 20-30% growth and more growth pretty much assured for 2014. You might be thinking if it's too good to be true then it probably is. Well, that's usually the case but you can indeed find these types of situations in the microcap/small cap space since they are overlooked by analysts. My big score with bev.to is a perfect example. When I bought the stock at $0.50 it was pretty much assured that over the next 4 quarters the company was going to earn at least $0.80 a share thanks to a government contract they won. When I realized this I said to myself "I must be missing something here, this is too good to be true" Well it wasn't! The market was quite frankly dumb and I took advantage of it.Only when that cashflow actually started coming in did the stock respond even though the news and mgmt's forecasts made is quite clear that it was coming several months prior. The stock ended up going to $3.40 close to where I sold everything. I sold because I sensed euphoria in the stock and I wanted to cash in on a big winner. I figured I could always get back in on a dip, but as time passed I realized that I no longer had the conviction to buy back the stock because there was no significant earnings to come after that big contract was over which after the big run up, was priced into the stock. With Greenstar I don't have this issue. I can be assured that people are going to be consuming the food they sell year after year after year without worrying about it going obsolete/out of style.
This stock has the makings of a grand slam homerun. In fact, I've never felt so excited about owning a stock like this ever! The CEO has a very ambitious goal of making this a $1 Billion in sales company. Pipe dream? Maybe, but if we see just 1/5 of this goal reached I'd make out extremely well. Even if the company doesn't grow and simply pumps out the $10 M in profit it made last year every year going forward, I'd still make out very well in the long run. For me to be on the losing end, I'd have to be really unlucky here like for instance if China suffers a complete collapse and goes into lockdown mode.
Monday, May 6, 2013
Fresh all time high and still no respect by the herd
Better than expected payrolls and significantly revised March payrolls caught everyone flat footed Friday morning. Given the trend in the disappointing economic data as of late, nobody expected that 165 K print or last month's upward revision. It looks like my protective put purchases on Thursday are going to indeed turn out to be a sacrifice to the trading gods...and I don't have a problem with that at all! Any of you who have been bullishly positioned should thank me!
With the market at a fresh all time high do you think it's changed the ingrained miserable SOB herd mentality out there that have dismissed this bull market from day one? Not one bit. I still keep seeing the same "blow off top!" "It's rigged by the Fed", type comments which have been ongoing for over 3 years. So pathetic, so delusional. Keep reading articles from zerohedge doomers...it's done you really good I'm sure. Keep following Roubini, Schiff, Hussman and the rest of the miserable permabear SOBs who have been utterly humiliated by the market for 4 years and yet continue to display arrogance without giving any mea culpa for being as horribly wrong as they have been. Unbelievable these guys are. I for one don't feel sorry for anyone of their devotees. And as I said before, it doesn't matter if the market were to make a bull market peak shortly and descend into a new bear...these jokers have been wrong for far too long and the market has gone up far too high for them to have any credibility as far as I'm concerned.
Tough to say where the market goes in the ST at this point. The rule of thumb is that when a market breaks out to an all time high it's a powerful signal and more ST gains are likely but there obviously has to be a limit to this and given that the market is already overbought, it doesn't seem likely the market will be able to advance a lot further without some sort of consolidation first. I've outlined some factors that support both the bull and bear case in the ST. One thing's for sure though is this...you must respect a market that is making a new high or low and more often then not you get ran over if you try and step in front of it betting the other way. Just look at what happened when I bought those puts last week!
Two weeks ago I posted that global leading indicator chart which suggests that the data is going to start looking a lot better in the immanent future. Is this why the market has been able to ignore any bad news? We are certainly going to find out! This should be an interesting summer. Given my partially hedged position, I can sit back and watch the show with less anxiety. And have you noticed that sovereign yields in PIGS have collapsed to multi year lows? That's the complete opposite of what happened in the springs of 2010, 2011, 2012 when yields were creeping higher until they blew out to "crisis" levels which helped trigger the major spring/summer corrections.
I also want to say something about Doug Kass. This guy has gotta be an ego maniac. He's short Buffett's Berkshire and was invited to Buffet's annual shareholder meeting to challenge Buffet with some bearish questions. Out of all the stocks to short, Kass chooses Berkshire. Jesus. I think he's trying to pick a top on Buffet rather than the stock itself. I remember reading an article by Kass a few years back claiming Buffett has lost his touch. Well Kass, it's YOU who has lost your touch. Buffett proved you wrong then and (so far) again this year. I'm not sure at what price Kass is short, but whatever it is, he's underwater as the stock made an all time high Friday. From my knowledge, Kass has been mostly short the market since the year began as well and so before being critical of others, especially legends like Buffett he should be more critical of himself.
Friday, May 3, 2013
Getting it out of my system
Alright I did it. I bought some index puts to hedge my portfolio. There...fuck off now George Costanza. For now it's a rather small hedge making up 2% of my account value. They may very well end up being a sacrifice to the trading gods because I have to admit there's a bit of paranoia in this trade.
I bought some Aug SPY 155 puts and did so in the first 15 minutes of the trading day which means I got subsequently ran over, but it's all good. I have to treat this position as portfolio insurance, not as an individual position. I have to admit, I have a hard time doing this because I have rarely used hedges in the past 4 years. I have opted instead to raise cash if I had general market concerns but I don't wish to do so this time because the stocks I own (only 2 of them) are still quite cheap and have been able to trade fairly independently of the market. Why then buy index puts if the stocks I own have been able to trade on their own accord? Because you never know. That's the reason you get any type of insurance. If the market was to have a deep correction it's not hard to imagine my non-market correlated stocks will eventually get sucked into the market downdraft.
I pulled the trigger today for a few reasons. First, I can't deny that the economic data has for the most part, been weaker than expected. The market has been able to shrug it off for a month now which could suggest it believes the weakness is only temporary. It's also possible that the market is wrong (yes wrong) and has been able to ignore the bad news because of the strong upward momentum fueled by stubborn top picking. If that's the case, it's just a matter of time before it will acknowledge reality. We saw this behavior in the past few springs whereby there were flare ups in Europe and other bad news but the market ignored it and kept chugging along untill it eventually couldn't ignore the bad news any longer. So, we will only know in hindsight whether the market is correct or not in ignoring the bad news. Given the strong run up we've had YTD and given my long exposure, having at least a small index hedge makes prudence sense at this point while we see which fork in the road Mr Market will take. Another thing that prompted me to pull the trigger was that NAAIM spiked to 80% longs and Rydex traders bought Wedneday's dip which is something they don't do often and the fact that these wrong way traders got away with it makes likely that Thursday's rally will get completely undone and then some in the near future. AAII sentiment is only at 1:1 bulls/vs bears which is still supportive for the market rally and bonds are still strong and so it's certainty not a slam dunk for the bear case in the ST/IT. In fact, we could easily power higher still given the condition of these 2 indicators.
The bottom line is that I no longer feel comfortable with an unprotected 80% long position while we enter a seasonally weak period with the market overbought while the economic data has been deteriorating. While a 2% hedge is not much, the puts have quite a bit of leverage and I may be inclined to add more. I still don't believe that any market weakness we will see is going to be severe given the bullish points I made in my previous post. In, fact I think there's a pretty good chance we will only have a mild 3-4% dip this summer, but given my situation, I don't want to risk being wrong while unprotected.
I've said this before a few times - know yourself. If you know you'll be weak if the market moves against you, you have to either reduce exposure or hedge otherwise you'll end up making an emotional trade.
I bought some Aug SPY 155 puts and did so in the first 15 minutes of the trading day which means I got subsequently ran over, but it's all good. I have to treat this position as portfolio insurance, not as an individual position. I have to admit, I have a hard time doing this because I have rarely used hedges in the past 4 years. I have opted instead to raise cash if I had general market concerns but I don't wish to do so this time because the stocks I own (only 2 of them) are still quite cheap and have been able to trade fairly independently of the market. Why then buy index puts if the stocks I own have been able to trade on their own accord? Because you never know. That's the reason you get any type of insurance. If the market was to have a deep correction it's not hard to imagine my non-market correlated stocks will eventually get sucked into the market downdraft.
I pulled the trigger today for a few reasons. First, I can't deny that the economic data has for the most part, been weaker than expected. The market has been able to shrug it off for a month now which could suggest it believes the weakness is only temporary. It's also possible that the market is wrong (yes wrong) and has been able to ignore the bad news because of the strong upward momentum fueled by stubborn top picking. If that's the case, it's just a matter of time before it will acknowledge reality. We saw this behavior in the past few springs whereby there were flare ups in Europe and other bad news but the market ignored it and kept chugging along untill it eventually couldn't ignore the bad news any longer. So, we will only know in hindsight whether the market is correct or not in ignoring the bad news. Given the strong run up we've had YTD and given my long exposure, having at least a small index hedge makes prudence sense at this point while we see which fork in the road Mr Market will take. Another thing that prompted me to pull the trigger was that NAAIM spiked to 80% longs and Rydex traders bought Wedneday's dip which is something they don't do often and the fact that these wrong way traders got away with it makes likely that Thursday's rally will get completely undone and then some in the near future. AAII sentiment is only at 1:1 bulls/vs bears which is still supportive for the market rally and bonds are still strong and so it's certainty not a slam dunk for the bear case in the ST/IT. In fact, we could easily power higher still given the condition of these 2 indicators.
The bottom line is that I no longer feel comfortable with an unprotected 80% long position while we enter a seasonally weak period with the market overbought while the economic data has been deteriorating. While a 2% hedge is not much, the puts have quite a bit of leverage and I may be inclined to add more. I still don't believe that any market weakness we will see is going to be severe given the bullish points I made in my previous post. In, fact I think there's a pretty good chance we will only have a mild 3-4% dip this summer, but given my situation, I don't want to risk being wrong while unprotected.
I've said this before a few times - know yourself. If you know you'll be weak if the market moves against you, you have to either reduce exposure or hedge otherwise you'll end up making an emotional trade.
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