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.