Thursday, March 16, 2017

Gardening, Investing And The Art Of Harvesting

Today I pulled out the last of my carrots from the ground, the seeds of which had been laid last fall when the days had begun to look grim. The evenings were coming in and the nights were getting overwhelming. This was an experiment of sorts. I had read that carrots can survive through winter and still be harvested in spring as long as you don’t let the ground freeze. As improbable as it might sound, the carrots did come through and not only survived but thrived in the warmth of the spring to give a full harvest.

Like anything else in life, investing, much like gardening, requires a great deal of patience, determination and self confidence. As is the case with sowing, your initial investment comes with a lot of excitement. There is hope and optimism about the choice made and a high level of conviction. Then comes the dark clouds and the dreary looking winter days or the blaze of the summer sun. The investment starts looking rather wilted and improbable. The whole venture is now under question as things get tougher. It does not help that a whole bunch of people will tell you that you are crazy to hold on to the thesis. At some point the agony becomes unbearable and it becomes impossible to look at what you have gotten yourself into. At the height of self doubt is the temptation to give up and end the pain.

A year back, I was having a discussion with a friend of mine regarding one of my rather perilous investment thesis that is Arcelor Mittal(MT). As I walked through my thesis once again, he asked a very pertinent question. Why hold on to an investment that is in dire straits when you could be investing in any number of other options. It is a valid question when your investment is down nearly 50% and you are staring down a 35% dilution with no end in sight. I could have been in almost any other stock and done better, goes the argument. And while that is a fairly accurate statement, the question is how would I pick that alternate investment to avoid this debacle.

The only conclusion I have come up with is that much like gardening, you have to pick your seeds based on what you see in terms of good value and sow them. The journey of the investment from seed to fruit will inevitably be strewn with challenges and perils. At the end of the day you can only conduct your duties as a good farmer and care for the investment as best you know and wait for the fruit to come. Sometime it comes at the turn of spring and sometimes it takes a few years for the roots to take hold and finally flower. But at least you know what you have invested in over the years and have some understanding of how strong the roots are.

All this requires a great deal of self-confidence and a willingness to be wrong and learn from it. The market will certainly hand you lemons once in awhile. But the confidence to hold on for better days can only come from the underlying thesis and a belief that you will be right more times than not.

Friday, December 30, 2016

2016: A year of optimism

Even before Trump won the elections things started looking up again. After what was a blinding fall of MT to below $3, I played into the dilution event that happened in February. With some return to sanity in Iron ore prices I am finally up on the MT trade after 3 long years. I think MT will outperform SPY in the coming years as commodities turn around and so does MT's balance sheet. I look forward to holding on to MT through the recovery.

MSFT once again was a winner this year and I cannot seem to beat the performance I got out of it. Still my best investment to-date and a hold for now. It is getting expensive, but I think there is some more upside to this play as the market is progressively getting positive on this stock and will reach euphoric levels soon.

GE was dead money this year, but it was due for a breather given the run it has had for the size of the company. I suspect it will have a better 2017.

Some of the trades that did not work:

- Tried my hand again on SPY puts that did not work AGAIN
- DDD did not come back and is now dead money. I think it is ready for a turnaround, but my trade was too early and does not really matter anymore as my call options run out

Trades that worked:
- TGT call at 67$
- IBM turnaround from $120
- APPL turnaround from $94
- TBF turned around after the elections.
- XLF split into XLF and XLRE and then rallied after elections
- MT was a great success after the depths of despair on the dilution event.

Year end bet is on FIT. A risky one. Will need to see how that plays out.

Happy New Year!

Thursday, December 17, 2015

2015: Another humbling year

This was the year I waited for the market to crash or get volatile. I had been on the SPY puts trade from more than a year and finally when the time arrived in August I had lost my nerve and sold out early. That was close to $8000 that I left on the table in trade that I had and let go because of my unwillingness to lose any more money on this trade. When the volatility began I once again thought that it was a head fake and that if I did not get out of the trade I would lose my gains (as had happened a couple of times earlier). So I traded $1000 in gains and gave up 8 times that amount in lost opportunity.

The adage "The market can stay irrational longer than you can stay liquid" rings true in my mind once again. The two disastrous trades of the year have been the call options on DDD and the long position in MT that I have been adding on. DDD was a speculative trade and I make no apologies for the moonshot. It was always going to be a risky bet and could be a hit or a miss. The part that I dislike about that play is the fact that I added on to the speculative trade hoping for things to turn and it didn't. I am still long DDD till 2017, but I wish my cost basis was a lot lower.

The thing that busts by chops though is the MT position. The degradation of the underlying commodity has literally destroyed this stock to an extent that I never thought possible. This is where my thesis is keeping me grounded in the value of a globally diversified vertically integrated steel company in a globalized world economy that is always looking for growth and infrastructure build out. But the market is testing my ability to stay liquid in that trade and I have to admit I am holding on to all my confidence to stay in.

The trades that worked were:

- A put position in VMW before it disappointed in earnings
- A call position in MSFT before they surprised to the upside last quarter.
- GE finally played out back to levels last seen before crisis and my cost basis now looks very attractive
- MSFT once again had a pretty good year. My best investment to-date.

Oh well! Another year goes by with new lessons learnt.

Tuesday, February 17, 2015

A take on Tesla

Carefully treading the high beta TSLA

Saturday, November 15, 2014

DDD: My fix for the end of the year.

Occasionally I get this urge to take on some risk in my portfolio. Not for any other reason but to keep investing interesting and exciting. For the last six  months I have found the market just too hard to invest in. My core holdings, the nine stocks that I hold are either fairly valued or expensive by my analysis and I have no interest in adding to them at these levels. I obviously don't want to sell them either because I don't want to keep trading core positions. Though I feel like the markets are extended, they seem to be in a funky state were there is a great deal of faith that the markets will continue to go up for the rest of the year and even if it doesn't the downside risk is limited due to portfolio rebalancing by bug funds. With that in mind, playing the short side of the market is just too hard. Does not bode well for my remaining short positions on the SPY for the end of year, but I leave it there as my insurance.

So what can I do for now. This is were options are so vital in my investments. It helps me place bets on long odds with minimal capital. So here I am talking about DDD.

At the beginning of the year this stock was flying high and was atrociously expensive. But just like everything else, the good times had to end. Today DDD suffers from all kinds of negative sentiment. Lets list a few:

1. System upgrades and production delays hurting revenue growth
2. Profit margin pressure from product mix
3. Big players stepping into the market in the form of HPQ and GE
4. General negative sentiment on the market segment

So what does DDD have going for it at these levels

1. A 35% short position that will be squeezed at some point
2. Cleaning up of the production delays
3. A balance sheet that looks pretty clean for a company growing at these rates
4. Cash and debt levels that keep the company finances fairly healthy through rough times
5. A positive cash flow that does not eat into the financial health of the company.
6. Another year or more of time before the big competitors get into the market
7. A market cap of $3.6 Billion that is palatable as an acquisition target

So what is the trade? It is a 2016 call option for a strike of 35$ for the price of $6. The assumption here is that by the start of 2016 DDD would have worked through its production issues and would be firing on all cylinders and at that point the shorts would be squeezed out. They would also be a lot closer to the $1 Billion mark in revenue which at 41$ (my "in the money" for the option) would mean that DDD would be trading at 4 times revenue which would not be a stretched valuation anymore. This should also be time enough for them to show new market segments and some additional partnerships that fend off the competition. If they keep up their growth I think the stock should be in the mid 60s by 2016 with a market cap closer to $7 billion.

Clearly this is a speculative trade. But that is what makes it exciting and at a cost of $600 it is worth the price to keep me engaged in the market.

Only time will tell.

Expanding horizons

I had started this blog in an effort to chronicle my investment ideas. I did find a nice outlet for this in Seeking Alpha. So, for the last few months I have been blogging there. I am posting the links here so that I can find them years from now in case I forget. What Seeking Alpha gives me is a feedback loop from complete strangers on the ideas that I propose. This has great value since the feedback is unbiased (towards my writing) and not watered down by association with these people. It is a great outlet for my need to put out ideas and get some thoughts on it. I do hope to continue posting here when I want to put up a quick trade.

But for now, here are my postings from Seeking Alpha.

Thoughts on a three way deal between EMC, HPQ and VMW:

Bailing on Sears (just too hard):

Lessons learnt the hard way:

A security story for VMW:

My big bet for 2016:

By best investment thus far. I still hold that value for MSFT is at 44$. The market might take it higher, but I will add if it falls below 40$.

Tuesday, July 15, 2014

An Earnings Hedge with INTC

As mentioned in an earlier post, I have been looking to get out of INTC. Not because I think INTC is done with its run, but I have some apprehensions of a run up in INTC based on history. Following are my reasons to get out of it:

1. INTC has run up 22% this year over a lot of bullish talk in the semiconductor space
2. INTC has mode most of its run up in the last 3-4 months.
3. Semiconductors are a precursor to capital spending and generally runs up before the overall technology run
4. Semis are cyclical and by the time the capital spending theme takes hold, they have built up too much inventory
5. I just have too much technology in my portfolio and INTC is not the one I want to continue to hold.

Having said all this I say goodbye to a 4% yield with a heavy heart. So lets see what I like about it.

1. The tremendous tail winds it is experiencing right now
2. The 4% yield
3. A capital spending cycle that has just started
4. The confidence with which management took up its earnings projections for the year

The last point potentially bodes well for the current earnings call going to happen today. But I really cant afford to hold INTC through another disappointing cycle. So here is the hedge.

Sell 60% of my INTC holdings. This is all of my buy from 10 years ago at a cost of 30$. So the tax implications of the sale would be very minor as opposed to selling the remaining 40% which has a higher profit and hence greater tax implications. But I do want my upside if there is a surprise today on the call.

So Friday expiring call options with a strike of 31 at a cost of 90 cents. Anything above 40 cent upsdie will pay for the trade.

Fingers crossed. Hopefully with an upside... I will continue to hold the 40% for some more time bfore dumping it later this year.