A Short Analysis

First, a disclaimer: this post should be put in the "food for thought" bucket and really wasn't part of my thought process when I bought SHLD LEAPS.  Nonetheless, I hope you find it interesting...

Sears is a pretty controversial stock; some view it as a collection of assets (real estate, brands, inventory, Sears Canada, etc.) and believe it's trading at a sum-of-the-parts discount, others think of it as a slowly-but-surely failing retailer with virtually no chance of a turnaround (which has created a huge short interest).  I invested in Sears b/c I'm part of the first group, yet I totally understand the second group's perspective... HOWEVER, what I don't understand is why anyone would short the stock.  Here's why:

• A small group of VERY patient long-term investors control a huge % of the stock and are unlikely to sell at anything close to current prices.  This group includes ESL, Fairholme, the Tisch family, and probably some others (ex. Francis Chou). 
• Under Eddie Lampert SHLD has been a serial repurchaser of stock, and as long as the stock stays under $100 there's no reason this won't continue.

So where does this leave us?  Click on the image below to find out. 

As you can see, if Eddie keeps repurchasing shares at this pace the short interest quickly becomes 100% of the remaining "free" float!  Hmmm... I'm no expert, but it feels like something's gotta give. 

At this point you may be wondering "so what?"  Well (and this is pure speculation), IF this dynamic is indeed setting the stage for a massive short squeeze, a high stock price can be a very useful tool in the hands of an experienced capital allocator.  Check out this article and maybe you'll notice some parallels, http://www.chicagotribune.com/business/chi-0411190237nov19,0,6287747.story

Lastly, for reference here are the previous posts I wrote when I was buying the LEAPS: 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.

Questions?  Comments?  Email mevsemt@gmail.com.

So why NRG?

Well I'm finally getting around to my NRG write-up, sorry for the delay!  Anyway, here's why I like NRG:

• I think the stock is cheap at $20 a share: EV/EBITDA and FCF yield are quite attractive plus the value of NRG's assets (i.e. power plants) alone could support a stock price in the high $30's.
• NRG's CEO, David Crane, is considered one of the best in the business.  Additionally, he is aligned with shareholders as he owns a significant amount of stock/options (many of which are out of the money).  

And here's why I purchased LEAPS instead of common stock:

• NRG has significant balance sheet leverage (i.e. debt): the more leverage a company has the harder it is to determine its fair value.  However, a high degree of leverage can really boost returns when things work out well.
• NRG has significant operating leverage: profitability for IPP's are highly dependant on commodity markets.  If the price of natural gas goes up (which is by no means guaranteed), NRG's revenue and profitability will go right up with it. 
• At $0.60, the LEAPS were cheap.  When buying out-of-the-money options I look for asymmetrical risk/reward situations.  In the case of NRG, if the stock goes to the mid to upper 30's I'll make a 10x return, if the stock goes to the low 40's I could make a 20x return, which IMO is well worth the risk.

So where does this leave us?  In short, NRG is a potentially cheap stock with quality management.  However, its high level of financial and operating leverage make its future very uncertain - the upside potential is significant but the downside risk is still very real.  Luckily for us the LEAPS were cheap, thereby creating an opportunity with decent odds and a very asymmetrical risk/reward if things go our way.

Questions?  Comments?  Email mevsemt@gmail.com.

Sold Covidien

It's been an active day for me, in addition to buying NRG LEAPS I also sold my shares of Covidien (COV) at $50.99.  I purchased COV in May of 2009 at $32.39 a share, so the returns on this investment were decent (however, the market's return over this time period was also very strong, so I'm not overly thrilled with how COV turned out). 

Questions?  Comments?  Email mevsemt@gmail.com 

NRG Order Filled

It looks like the rest of my order for NRG 2013 $30 LEAPS went through (for a total of 100 contracts).  All in all this order cost just under $6,100.  I'll try to do a write up later this week or maybe this weekend (if time permits). 

Questions?  Comments?  Email mevsemt@gmail.com

New Purchase

On Friday I placed a limit order for 100 contracts of NRG Jan 2013 $30 LEAPS at $0.60, but unfortunately it's only been filled on 5 contracts (thus far). 

I'll keep this order open and hopefully I'll be able to get it 100% filled.  However, rather than write a separate post each time I get another couple of contracts, I'll just post when the order closes (either b/c it was filled or canceled).

Questions?  Comments?  Email mevsemt@gmail.com

Buying some Cisco

I just bought 1000 shares of Cisco (CSCO) at $18.87.  I view Cisco as a high quality company that's somewhat undervalued, so while I don't expect massive returns I still think I'll do pretty well.  Also, IMO holding CSCO is significantly more attractive than holding cash (this transaction took my portfolio from $54K cash down to $35.5K), so it makes sense from an overall portfolio construction perspective. 

Questions?  Comments?  mevsemt@gmail.com

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

Sold KHDHF

A few days ago 226 shares of KHDHF were deposited in my account (KHDHF was spun off from TTT), and today I sold them at $10.20 for net proceeds of about $2,300.

As I mentioned in my year end post TTT has been trading ex div since December, so my 2010 ending balance was artificially low (but with the KHDHF shares finally showing up in my account I'm whole again).

Sold HAWK

I don't have time to do a full write-up, but I wanted to post that I sold my 1,000 shares of HAWK at $7.45 today.  My purchase price was $9.11, so I ended up lossing about $1,660 on this position... oh well, I guess you can't win em all.

Options are weird...

As you may recall I purchased 75 SuperValu (SVU) Jan 2013 $15 LEAPS back in December.  The contract price back then was $.50, so including commissions my cash outlay was $3,810.  Back when I purchased these LEAPS SVU stock was trading around $8.60. 

Earlier this morning SVU released earnings and they were absolutely horrendous, in fact as I type the stock is down about 13% to $7.50.  HOWEVER, I was actually able to sell my contracts for $.70 today, which after commissions came to $5,195!! 

So, just to recap, in the past month SVU's stock has fallen about 15% while the LEAPS have gone up 36%... did I mention options are weird?