Thursday, August 26, 2010

Fool Me... Once?

In my previous post I mentioned the possibility of selling GMXR, and today I did just that (at a price of $4.13). I purchased GMXR on separate occasions in February and March at an average price of $9.57, so with my 1400 shares I ended up losing about $7,600... ouch!

Basically, GMXR has been killed recently along with a lot of other natural gas companies, and since my account is taxable I decided to lock in my losses (since I have significant gains from selling SHLD, USG, WTM, and DFS earlier in the year) and simultaneously buy Jan 2012 $5.00 CALL OPTIONS (50 contracts at $1.07) in a similarly punished E&P company that I've previously owned, SandRigde Energy (SD).

SandRidge is a company in flux, and IMO there's been quite a bit of selling pressure due to it's recent transformation. In fact, apparently the only people buying SD (other than me) are the company's insiders! Check out these two articles for a great introduction to the company: and

Anyway, I'll try to do a separate write up on my estimate of SD's fair value if time permits, but for the time being suffice it to say that I think SandRidge MIGHT be significantly undervalued. However, because SD is highly levered and because the price of gas & oil are huge drivers of the company's results, my fair value estimate has a large degree of uncertainty - I'm going keep my fingers crossed and hope for the best!

Wednesday, August 25, 2010

Current Holdings and Random Musings

Well so far it's been a very tough Q3, both in absolute and relative terms. After marginally outperforming the S&P through Q2 things have taken a turn for the worse, and YTD I'm underperforming the S&P by a wide margin. However, with a highly concentrated portfolio, big swings in performance are bound to happen, and hopefully recent history isn't indicative of things to come.

For my current holdings, AHS in particular has been a thorn in my side. The company recently reported results, which weren't bad by any means. HOWEVER, the company also announced an acquisition which will be completely paid for with newly issued stock, thereby materially diluting existing shareholders. My estimate is this will destroy about $2 to $4 in value for existing shareholders. Of course, the stock has gone from $8'ish to $4'ish, which I think is an example of a typical "Mr. Market" over reatcion. All things considered, I think this stock is worth $10 to $15 per share (assuming management doesn't make a habit of diluting shareholders).

GMXR has also been a big thorn in my side. Natural gas stocks in general have been hammered, and GMXR in particular has been killed because of its high level of debt. I think the risk/reward proposition at today's price is pretty compelling, and I'm considering doing one of two things; 1) doubling down 2) trading GMXR for a similarly punished E&P company. The logic behind #2 is that my account is taxable, and with significant gains from SHLD, USG, WTM, and DFS, I'm sitting on roughly 28K of capital gains for 2010 (ouch!).

Generally I try to stay away from making broad market predictions, I figure I'm better served by trolling for pockets of opportunity. HOWEVER, I do read the predictions and observations of other smart investors, and I try to incorporate any inferences/insight when I make high-level portfolio allocation decisions. IMHO the two best sources for this are John Hussman's weekly comments ( and pretty much anything published on PIMCO's website (although I'm partial to Bill Gross's monthly commentary). Again, this is just my opinion, but if you read everything they've published over the last six months (which will probably take a day or so) you'll automatically become a better investor.

Anyhow, right now I've got about 40K (or 43%) of my portfolio in cash (obviously this is a huge %), so clearly I'm worried about downside risk. This is in the realm of gut feel, but personally I'd be much more surprised if the DOW goes to 12K than if it goes to 8K. And assuming it does go to 8K it'll be nice to have some cash on the sidelines waiting to be deployed.

Sunday, August 1, 2010

Why'd I sell DFS?

This was the question I got after my previous 2 posts, which was a simple disclosure that I sold my stake in DFS where I didn't really provide any rationale (my apologies)...

My guess is DFS is worth about $20 to $25 dollars, so I don't see a huge potential upside. Additionally, given the current state of the economy, there is a relatively large amount of uncertainty in my guess of DFS's fair value - who knows, maybe its fair value is $10, or maybe it's $30... only time will tell.

Also, the stock has basically tripled from its March 2009 lows, and this type of run-up always makes me a little nervous. This is similar to when I sold USG and SHLD after their run-ups, see my previous posts on those former holdings for details (you can click on the "zzClosed Position..." labels on the right to easily navigate there).

Anyway, someone said that when it comes to investing the science is buying and the art is selling... and someone else said there's no rule that says you have to get 100% of the upside. So maybe DFS will continue higher and I'll end up kicking myself, or maybe it'll go back down to the single digits and I'll buy more...