Back in May I wrote a post titled "Cash and Cojones," (http://mevsemt.blogspot.com/2011/05/cash-and-cojones.html) in which I said the following:
Recently I've read a handful of articles that basically say the same thing in different ways: proceed with caution. Or, to put it more colorfully, in early 2009 you only needed two things to make a killing: cash and the cojones to commit it. Ironically, if you had those two things in 2005-2007 you probably got killed. So what does the market feel like today? Well, while we may not be quite at the excesses of 2005-07, we're definitely nowhere near the palpable fear of early 2009.
So the real question is what’s an investor to do? Obviously I have no idea what the right answer is (remember, I'm just some guy with a blog), but I’ve been focused more and more on mitigating risk and less and less on reaching for returns.
So, out of a general sense of concern and nervousness I managed to keep a large % of my portfolio in cash. In fact, at the end of Q2 my cash position was 37% (http://mevsemt.blogspot.com/2011/06/q2-2011-returns.html). However, over the recent days/weeks the fear in the market has grown steadily and, while it might not be 2009 all over again, I'm wondering if maybe now is the time to start using some of that dry powder...
With that in mind I decided to dip my toe in the water by adding to my SHLD LEAPS. Specifically, I bought Jan 2013 $95 call options (10 contracts at $3.00) for a total outlay of $3,010.76.
On a side note there are a ton of stocks I've added to my watch list, some of them are new (MS, JEF, AMD) and some are old friends (SD, USG, NRG). As always, if I buy or sell anything I'll do a quick write up that day. Good luck everyone, and for those of you worried about the market decline just remember - this too shall pass.
Questions? Comments? Email mevsemt@gmail.com.
Showing posts with label Watch List. Show all posts
Showing posts with label Watch List. Show all posts
Wednesday, August 10, 2011
Saturday, February 12, 2011
Sold SD Call Options
On Friday I sold my Sandridge call options, which have appreciated nicely since I purchased them a little over 5 months ago (here's my original post: http://mevsemt.blogspot.com/2010/08/fool-me-once.html ). Specifically, I bought 50 contracts for $1.07 (or a total cash outlay of $5,387) and sold them at $3.65 (for proceeds of $18,211), netting me a profit of just under $13K.
Interestingly enough, while my gut tells me Sandridge OPTIONS aren't a good risk/reward bet after their recent appreciation, I still think Sandridge STOCK is undervalued and could have a much better risk/reward profile. Earlier this year I also sold HAWK, so my portfolio is about 40% (or $54K) in cash. This being the case, I'm considering buying SD common stock, especially if it pulls back. Other stocks on my watch list include CSCO, NRG LEAPS, JOE, BAC, and ESI... stay tuned.
Questions? Comments? Email me at mevsemt@gmail.com
Interestingly enough, while my gut tells me Sandridge OPTIONS aren't a good risk/reward bet after their recent appreciation, I still think Sandridge STOCK is undervalued and could have a much better risk/reward profile. Earlier this year I also sold HAWK, so my portfolio is about 40% (or $54K) in cash. This being the case, I'm considering buying SD common stock, especially if it pulls back. Other stocks on my watch list include CSCO, NRG LEAPS, JOE, BAC, and ESI... stay tuned.
Questions? Comments? Email me at mevsemt@gmail.com
Saturday, January 1, 2011
All's well that ends well???
2010 was interesting, for most of the year my returns lagged the S&P (click "Returns" under labels for all the details). In fact, going into Q4 my portfolio was DOWN 2.8% whereas the S&P was UP 3.5%. This being the case, I didn't think I'd actually beat the market this year (btw I'm sure there will be PLENTY of years where I lag the S&P). Luckily, during the fourth quarter things turned around, and several of my holdings did quite well:
Now with all that out of the way, what are my thoughts going into 2011? Well, the recent market rally has made me pretty nervous about both valuations in general and my portfolio in particular. Following is a brief discussion about my portfolio as well as a few names on my watch list:
[1] The $126,967 is understated because TTT is trading ex-div BUT the spunoff KHDHF shares haven't been deposited in my portfolio yet (b/c KHDHF is traded in Germany). Anyway, my 2,268 shares of TTT translates to 226 shares of KHDHF. Since KHDHF closed the year at $9.00 these shares are worth $2,034. This means my portfolio balance is really $129,001, giving me a return of about 20%, but for consistency I'm going to stick with my official statements as reported by TradeKing.
- SandRidge - I purchased SandRidge 2012 LEAPS at the end of August for $5,387 and as of year end they're worth $13,600 (for a total return of 152% in just over 4 months). Click here for the original post: http://mevsemt.blogspot.com/2010/08/fool-me-once.html
- Jackson Hewitt - I bought Jackson Hewitt call options in the middle of September. This started as a very speculative $525 bet, but now these options are worth $4,140. Here are the related posts: http://mevsemt.blogspot.com/2010/09/all-or-nothing.html and http://mevsemt.blogspot.com/2010/12/jtx-follow-up.html.
- Sears - I bought 2013 LEAPS in November and December (http://mevsemt.blogspot.com/2010/11/transaction-alert-sears-holdings-2013.html and http://mevsemt.blogspot.com/2010/12/more-sears-leaps-in-eddie-we-trust.html) for a total outlay of $9,323. Sears stock has jumped since then, and so has the value of the LEAPS (which are now worth $13,500).
- On an absolute basis, my portfolio gained 18.1% for the year while the S&P (w/ dividends reinvested) was up 14.6%.
- I've been tracking my returns for 5 years, during which time my annual rate of return is 18.4%. Had I invested in an S&P index fund (and reinvested dividends) my annual returns would be 4.4%. In other words, I've outperformed the S&P by 14.0% per annum.
- Click on the "My Returns So Far..." link to the right for full details and to see how this outperformance translates into real dollars - it's actually pretty significant.
Now with all that out of the way, what are my thoughts going into 2011? Well, the recent market rally has made me pretty nervous about both valuations in general and my portfolio in particular. Following is a brief discussion about my portfolio as well as a few names on my watch list:
- I'd like to increase my cash position after the recent run up. In fact, I could see it going over $30K in the near future. I have to sell JTX b/c the options expire in a couple weeks. I'm also considering selling COV/HAWK outright and maybe trimming a few other positions.
- My watch list is perhaps as small as it's ever been. It includes CSCO, BAC, NRG, and maybe 2 or 3 other names. These names haven't participated in the recent market rally and IMO could be somewhat resilient if the market pulls back.
- Call me crazy, but I think something could happen with Sears in 2011. Of course I have no idea what that "something" might be, but the possibilities include selling real estate, increased brand distribution, a short squeeze... heck, I've even read speculation that Sears, Autozone, and/or Autonation could merge one day. I should also emphasize that my purchase of Sears LEAPS had nothing to do with any of this (but it's fun to speculate!).
- I think SandRidge will continue to do well. It was one of the first natural gas E&P companies to focus on oil and it did so very aggressively. Also, recent (and future) asset sales have given the market a glimpse into how valuable this company could be, and the stock has responded accordingly.
- Lastly, I think we might see TTT make an acquisition. I think the company's significant cash hoard is burning a hole in Michael Smith's pocket, and I'm very interested to see if he can come up with something.
[1] The $126,967 is understated because TTT is trading ex-div BUT the spunoff KHDHF shares haven't been deposited in my portfolio yet (b/c KHDHF is traded in Germany). Anyway, my 2,268 shares of TTT translates to 226 shares of KHDHF. Since KHDHF closed the year at $9.00 these shares are worth $2,034. This means my portfolio balance is really $129,001, giving me a return of about 20%, but for consistency I'm going to stick with my official statements as reported by TradeKing.
Saturday, September 25, 2010
uU Investing
I just read a fascinating essay that really resonated with me, it's called "Investing in the Unknown and Unknowable," by Richard Zeckhauser. It can be found here: http://www.hks.harvard.edu/fs/rzeckhau/unknown_unknowable_PUP.pdf
Basically, the article asserts that by seeking out situations where the outcome is unknown and unknowable (uU) an investor can potentially make outsized returns. Now let's look at an example of what a uU investment is and what it isn't:
I don't know exactly what Coke's (KO) finances are going to look like in 5 years, but I know the company is still going to be selling sugar water and I can make a reasonable guess about their cash flow - this is NOT a uU investment. IMO the large integrated banks, such as Citigroup, Bank of America, or JP Morgan, are great examples of uU investments. I have no insight into potential government regulation and capital requirements, and coming up with an estimate of their loan losses is quite difficult. In other words, these companies are "black boxes." Further, I have no idea what the economy will look like - will we be in the middle of a "lost decade" like Japan in the 90's, or will be experiencing devastating inflation, like the late 70's?
The problem with investing in the Coke's of the world is even though I can come up with a good estimate of their fair value, so can everyone else. In other words, even if I decide Coke is undervalued and therefore an attractive stock, there's someone on the opposite side of the trade who did the same analysis and decided Coke was overvalued - and she's probably smarter than me (having gone to Harvard or Wharton for her MBA). And it's not just the Coke's of the world, there are very smart people EVERYWHERE in investing; and they're arb'ing away the pricing inefficiencies in small-caps, micro-caps, bonds, distressed debt, etc. - this is why it's so hard to beat the market consistantly and over long periods.
BUT if I decide to invest in a big bank I don't have this problem, i.e. everyone is having a huge degree of difficulty figuring out their fair value - so what type of environment does this create? Well, I think people in general have a natural aversion toward uncertainty, so a lot of current holders are dumping their stock. Additionally, our friend with her Wharton MBA isn't interested in buying these stocks - afterall if she's wrong she is subject to "Monday morning quarterback" risk, which in the investment world can get you fired. In other words, uU investing sidesteps the normal mechanisms that generally keep securities priced efficiently.
If you already read the linked essay you'll notice the author makes a strong case for Warren Buffet being a uU investor. You can also make the case that Mohnish Pabrai with his "low risk, high uncertainty" mantra fits in this camp. Morningstar's fund manager of the decade Bruce Berkowitz is also a uU investor: he's investing in the banks right now, he invested in health care companies while (i.e. not after) the government was overhauling health care, he owns stocks like SHLD, JOE, LUK, and FUR - all of which are classic uU stocks. And of course there are many other value investors who are also uU investors in disguise: David Tepper, Ian Cumming, Michael Burry, Prem Watsa, Seth Klarman, Carl Icahn, etc. etc.
This brings me to my next point: I love it when I hear value folks talk about whipping out Excel, plugging in financial statements, explicitly projecting bull/bear cases for 7 years, trying to figure out the right cost of equity (BTW it's 12%, it's always 12%), and then passing b/c there's too much uncertainty. Rather I'd argue, for some portion of their portfolio, investors should seek out uncertainty, try to quantify the downside (or like B. Berkowitz says, "Kill the company"), make sure you're not overpaying, and let the upside take care of itself.
As for my portfolio, I consider LUK, SD, and HAWK to be uU stocks to one degree or another. On my watch list I'd consider CHK, NRG, BH, FUR, SHLD, TTT, MFCAF, BAC, COF, and JPM to be uU's. Of course it's tricky figuring out what to buy, but if you go several posts back I disguss my checklist, which is my starting point.
Basically, the article asserts that by seeking out situations where the outcome is unknown and unknowable (uU) an investor can potentially make outsized returns. Now let's look at an example of what a uU investment is and what it isn't:
I don't know exactly what Coke's (KO) finances are going to look like in 5 years, but I know the company is still going to be selling sugar water and I can make a reasonable guess about their cash flow - this is NOT a uU investment. IMO the large integrated banks, such as Citigroup, Bank of America, or JP Morgan, are great examples of uU investments. I have no insight into potential government regulation and capital requirements, and coming up with an estimate of their loan losses is quite difficult. In other words, these companies are "black boxes." Further, I have no idea what the economy will look like - will we be in the middle of a "lost decade" like Japan in the 90's, or will be experiencing devastating inflation, like the late 70's?
The problem with investing in the Coke's of the world is even though I can come up with a good estimate of their fair value, so can everyone else. In other words, even if I decide Coke is undervalued and therefore an attractive stock, there's someone on the opposite side of the trade who did the same analysis and decided Coke was overvalued - and she's probably smarter than me (having gone to Harvard or Wharton for her MBA). And it's not just the Coke's of the world, there are very smart people EVERYWHERE in investing; and they're arb'ing away the pricing inefficiencies in small-caps, micro-caps, bonds, distressed debt, etc. - this is why it's so hard to beat the market consistantly and over long periods.
BUT if I decide to invest in a big bank I don't have this problem, i.e. everyone is having a huge degree of difficulty figuring out their fair value - so what type of environment does this create? Well, I think people in general have a natural aversion toward uncertainty, so a lot of current holders are dumping their stock. Additionally, our friend with her Wharton MBA isn't interested in buying these stocks - afterall if she's wrong she is subject to "Monday morning quarterback" risk, which in the investment world can get you fired. In other words, uU investing sidesteps the normal mechanisms that generally keep securities priced efficiently.
If you already read the linked essay you'll notice the author makes a strong case for Warren Buffet being a uU investor. You can also make the case that Mohnish Pabrai with his "low risk, high uncertainty" mantra fits in this camp. Morningstar's fund manager of the decade Bruce Berkowitz is also a uU investor: he's investing in the banks right now, he invested in health care companies while (i.e. not after) the government was overhauling health care, he owns stocks like SHLD, JOE, LUK, and FUR - all of which are classic uU stocks. And of course there are many other value investors who are also uU investors in disguise: David Tepper, Ian Cumming, Michael Burry, Prem Watsa, Seth Klarman, Carl Icahn, etc. etc.
This brings me to my next point: I love it when I hear value folks talk about whipping out Excel, plugging in financial statements, explicitly projecting bull/bear cases for 7 years, trying to figure out the right cost of equity (BTW it's 12%, it's always 12%), and then passing b/c there's too much uncertainty. Rather I'd argue, for some portion of their portfolio, investors should seek out uncertainty, try to quantify the downside (or like B. Berkowitz says, "Kill the company"), make sure you're not overpaying, and let the upside take care of itself.
As for my portfolio, I consider LUK, SD, and HAWK to be uU stocks to one degree or another. On my watch list I'd consider CHK, NRG, BH, FUR, SHLD, TTT, MFCAF, BAC, COF, and JPM to be uU's. Of course it's tricky figuring out what to buy, but if you go several posts back I disguss my checklist, which is my starting point.
Thursday, May 20, 2010
Random Musings
A little over a month ago I wrote a post entitled "Feeling Fearful" (which can be found here http://mevsemt.blogspot.com/2010/04/feeling-fearful.html). During this time I sold several stocks (SHLD and USG) and allocated about 30% of my portfolio to cash - in retrospect, it looks like my timing couldn't have been more lucky. Since then, the market has turned decidedly more fearful as the Eurozone mess has drawn an increasing amount of investor attention and oil gushes into the gulf.
Ironically, the oil spill disaster could prove beneficial for some of the stocks I own. A likely consequence of this mess is increased government regulation and decreased offshore drilling in the short to medium term. This in turn could lead to an increase in the price of oil and natural gas (natural gas in particular, b/c it can't be imported from overseas nearly as easily). IF this does indeed play out I'd expect SD, GMXR, and EXC to reap the benefit (SD and GMXR have onshore operations and EXC would benefit from an environment with higher energy prices in general).
On a negative note I expect the call options for FAF to expire worthless. In my initial post I wrote that a broad market sell off could cause this, and of course within a couple days the market began selling off...
HOWEVER, I think any further market sell off could present an attractive buying opportunity. So, with about 30% (about $34K) of my portfolio in cash, I am constantly refining and evaluating my watch list. Current stocks that I find interesting include BAX, APOL, CNX, GENZ, AHS as well as existing holdings SD, GMXR, and EXC.
As always I'll post about any transactions.
Ironically, the oil spill disaster could prove beneficial for some of the stocks I own. A likely consequence of this mess is increased government regulation and decreased offshore drilling in the short to medium term. This in turn could lead to an increase in the price of oil and natural gas (natural gas in particular, b/c it can't be imported from overseas nearly as easily). IF this does indeed play out I'd expect SD, GMXR, and EXC to reap the benefit (SD and GMXR have onshore operations and EXC would benefit from an environment with higher energy prices in general).
On a negative note I expect the call options for FAF to expire worthless. In my initial post I wrote that a broad market sell off could cause this, and of course within a couple days the market began selling off...
HOWEVER, I think any further market sell off could present an attractive buying opportunity. So, with about 30% (about $34K) of my portfolio in cash, I am constantly refining and evaluating my watch list. Current stocks that I find interesting include BAX, APOL, CNX, GENZ, AHS as well as existing holdings SD, GMXR, and EXC.
As always I'll post about any transactions.
Saturday, May 1, 2010
Time to lever up?
LEAPS, or Long-term Equity AnticiPation Securities, have recently grabbed my attention. LEAPS are simply a long-term call option, or in other words the right (but not obligation) to buy a stock at some point in the future at a predetermined price.
Here's an example: let's say stock XYZ is being investigated for some alleged wrongdoing. Currently the stock is trading at $100 a share, but it's worth $200 assuming they're innocent. However, if they're guilty the stock is probably only worth $50. If I were to purchase XYZ common stock, based on my current portfolio size, I'd probably buy $10,000 - and I'd either lose $5,000 or gain $10,000.
However, let's say I could buy XYZ LEAPS (expiring 1/2012) with the following terms: a strike price of $150 and a contract price of $5. In other words, for $5 I reserve the right to buy one share of XYZ for $150 anytime between now and 1/2012. If I were to invest $5,000 in XYZ LEAPS I could potentially lose it all if the stock never gets to $150 (which is the same amount I'd lose with the common stock).
But what happens if the stock goes to $200? Well, since I invested $5,000 I have the right to buy 1,000 shares at $150. Since I could immediately sell them for $200, I'd realize a $50,000 profit! So, with LEAPS I'd either lose $5,000 or gain $45,000 (50K profit less the initial investment of 5K).
Obviously this is a very simplistic example - the real world is much murkier. However, the economics of buying LEAPS can be extremely attractive, and in some cases it just makes more sense. I'm specifically looking at Jan. 2012 LEAPS for EXC and MON and as always I'll post about anything I decide to do.
Here's an example: let's say stock XYZ is being investigated for some alleged wrongdoing. Currently the stock is trading at $100 a share, but it's worth $200 assuming they're innocent. However, if they're guilty the stock is probably only worth $50. If I were to purchase XYZ common stock, based on my current portfolio size, I'd probably buy $10,000 - and I'd either lose $5,000 or gain $10,000.
However, let's say I could buy XYZ LEAPS (expiring 1/2012) with the following terms: a strike price of $150 and a contract price of $5. In other words, for $5 I reserve the right to buy one share of XYZ for $150 anytime between now and 1/2012. If I were to invest $5,000 in XYZ LEAPS I could potentially lose it all if the stock never gets to $150 (which is the same amount I'd lose with the common stock).
But what happens if the stock goes to $200? Well, since I invested $5,000 I have the right to buy 1,000 shares at $150. Since I could immediately sell them for $200, I'd realize a $50,000 profit! So, with LEAPS I'd either lose $5,000 or gain $45,000 (50K profit less the initial investment of 5K).
Obviously this is a very simplistic example - the real world is much murkier. However, the economics of buying LEAPS can be extremely attractive, and in some cases it just makes more sense. I'm specifically looking at Jan. 2012 LEAPS for EXC and MON and as always I'll post about anything I decide to do.
Thursday, April 15, 2010
Feeling Fearful
It's been quite a ride over the last year! I remember in March 2009 the fear in the market was almost palpable. Now, 13 months later, all the major indexes continue to soar, seemingly defying gravity. IMO the market, in aggregate, has turned greedy - so is it time for the individual investor to turn fearful? I think so...
These days I find myself asking, "Where is the opportunity, where is the value, and most importantly where is the risk?" I've been struggling to find individual stocks that offer an acceptable margin of safety and potential return. Additionally, several portfolio holdings of mine are approaching my guess of their intrinsic value. As a result, my portfolio's cash position has grown to about 30% and I'm very seriously considering selling several more holdings. Specifically, these are USG, WTM, and COV. However, this is only half the story. I have found a small handful of stocks that seem attractively priced. Among these are GENZ, EXC, SD, MON, ISCA, APOL, and FNF.
My sense of it is that a lot of investors spend a great deal of time picking stocks at the expense of portfolio management. David Swensen is the master of this - in his excellent book, "Unconventional Success," he lays out a fairly simple but powerful plan based primarily on portfolio management. Additionally, I'd argue that one of the main reasons the Magic Formula works so well is because there is a defined, rigorous plan around portfolio management (although everyone seems to focus on the stock picking aspect).
I have to admit, holding on to USG is tempting because it has the potential to be my first 10-bagger. And it was difficult for me to sell SHLD because I kept thinking it might be the next Berkshire. But the fact of the matter is "hope" isn't an investment strategy. SHLD hit my estimate of its intrinsic value and USG is quickly approaching it. IF I can find stocks that are priced at a greater discount to my estimate of their intrinsic value then, by definition, they have a better margin of safety and better potential return. Of course I could turn out to be wrong for any given stocks I buy/sell, but I think the process I've laid out is right.
As always I'll post about any stocks I buy or sell.
These days I find myself asking, "Where is the opportunity, where is the value, and most importantly where is the risk?" I've been struggling to find individual stocks that offer an acceptable margin of safety and potential return. Additionally, several portfolio holdings of mine are approaching my guess of their intrinsic value. As a result, my portfolio's cash position has grown to about 30% and I'm very seriously considering selling several more holdings. Specifically, these are USG, WTM, and COV. However, this is only half the story. I have found a small handful of stocks that seem attractively priced. Among these are GENZ, EXC, SD, MON, ISCA, APOL, and FNF.
My sense of it is that a lot of investors spend a great deal of time picking stocks at the expense of portfolio management. David Swensen is the master of this - in his excellent book, "Unconventional Success," he lays out a fairly simple but powerful plan based primarily on portfolio management. Additionally, I'd argue that one of the main reasons the Magic Formula works so well is because there is a defined, rigorous plan around portfolio management (although everyone seems to focus on the stock picking aspect).
I have to admit, holding on to USG is tempting because it has the potential to be my first 10-bagger. And it was difficult for me to sell SHLD because I kept thinking it might be the next Berkshire. But the fact of the matter is "hope" isn't an investment strategy. SHLD hit my estimate of its intrinsic value and USG is quickly approaching it. IF I can find stocks that are priced at a greater discount to my estimate of their intrinsic value then, by definition, they have a better margin of safety and better potential return. Of course I could turn out to be wrong for any given stocks I buy/sell, but I think the process I've laid out is right.
As always I'll post about any stocks I buy or sell.
Monday, April 12, 2010
Opportunity in Natural Gas?
I wrote an article for the awesome website http://www.gurufocus.com/ called "EMT, 'Ick' Investing, and Natural Gas." Readers can access the article here: http://www.gurufocus.com/news.php?id=89642#89677
This article basically outlines my thoughts on efficient market theory, why I'd be considered a "contrarian" investor, and why I think there are currently opportunities in natural gas exploration and production companies.
I specifically discussed SandRidge, which is one of the top stocks on my watch list. Other stocks high on my watch list that weren't discussed are MIR and EXC, and obviously I already own GMXR. I'll keep you posted if I decide to make any purchases...
This article basically outlines my thoughts on efficient market theory, why I'd be considered a "contrarian" investor, and why I think there are currently opportunities in natural gas exploration and production companies.
I specifically discussed SandRidge, which is one of the top stocks on my watch list. Other stocks high on my watch list that weren't discussed are MIR and EXC, and obviously I already own GMXR. I'll keep you posted if I decide to make any purchases...
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