I want to discuss part two of my Investment Philosophy series, Portfolio Concentration and Diversification. Although this is not the most important part of my philosophy (that was discussed in part 1), it is still very important for you as a potential investor in the Fund to understand how I think about such matters like diversification and the concentration of my portfolio.
There are a few companies that I have on my radar that I could potentially pull the trigger on if the price action works in my favor. Oddly enough, all of these positions are on the long side. I say oddly enough, because if you’ve been reading this website for a while, you’ve picked up on my bearish overall macro view of the markets. Yet, like I mentioned, my macro view doesn’t infiltrate into my ability to find value in bullish or bearish situations.
I’ve dug through the fundamentals of each of these companies, and I haven’t necessarily written a post about each of them, because I’m thinking about writing pieces about companies after I’ve bought them. It seems like a weird concept to think about, but I am focused on the long term. If I start to manage money for people, I don’t ever want to feel like I’m front running a trade. This is also the reason I am considering not being specific in the companies that I invest in once I start managing capital. It’s a fine balance between transparency and integrity.
I’ll take y’all through some of the companies on my watch list, as well as my current portfolio as it stands to this day (August, 17th, 2017).
Watch List Wonderings
- GameStop (GME)
I wrote a piece on GameStop that you can find here in which I outlined the bullish thesis for the company. For the sake of time, I will not rehash the article. The one thing that kept me from buying into my thesis was the price action. That is close to changing. Let’s take a look at the chart:
You can see the descending wedge chart formation on the daily charts is long in duration. I am looking for price to break that descending resistance level. At first, I thought about entering on that triple bottom price around $20, but that is something I am still internally debating when it comes to entry point. Part of me knows I am missing out on some alpha by waiting for a break in resistance, but at the same time, I know that I increase my odds of being right if I enter on a breakout from resistance levels. I will continue to adapt, hypothesize, and test those strategies until I feel comfortable entering on either one without hesitation. Haven’t bought in yet, still staying patient.
2. XG Technology (XGTI)
I became bullish on XGTI months ago, never got around to writing a piece about it, but it has come up very frequently when Jacob and I discuss potential investments. Since that time, the stock had somewhat of a false breakout and has since retreated below its 50 MA in a bearish manner. However, what is perplexing is that the latest quarterly results were very impressive. Most impressively, the company no longer has to file a “going concern” notice on their SEC filings, indicating sustainable cash flows, profits, and revenues. That is huge. I don’t know why the selling is happening, but I want to get to the bottom of it. If I can’t find a good reason for the selling, I will be patient and wait for the price action to turn so I can hop in. I hope I’m patient enough to wait for the drop to continue down to the 1.60s area, in which the company has support technically.
Ah yes, silver is back on Rockvue Capital’s radar screen. Truth be told, it never left. I wrote a longer piece about a potential breakout formation on silver, but soon after that post, the bullish thesis depleted. I ended up taking the short side of the silver trade and making close to 250bps of profit on the trade. That remains one of my favorite trades simply due to the fact that I wasn’t gun-ho on my thesis, and I was able to change my mind when the narrative and the price action changes. That is something that you as a reader or potential investor will and should know about myself. I make predictions, I make hypotheses about the future based on evidence, research, and macro settings. However, I am very quick to reverse my thesis if news changes, or if price doesn’t react how I thought. I am not in this game for ego’s sake. In fact, if I wanted to bolster my ego, I would stay doing strictly analysis, instead of putting my money where my mouth is. If I pick a loser, I get out quickly. I don’t care about being wrong. I care about making sure I don’t lose money. Period.
After scoring a large profit on the short side, I dismissed any trade in silver for a month or so, however, the price action is looking tantalizing. With the threat of North Korea at all time highs, racial tensions not seeming to improve, the psychology of the investor may want to moveinto something more “stable”, such as precious metals. The charts are looking interesting with silver flirting a break of the 50 and 200 MA.
This trade won’t happen for a couple of weeks if I go through and decide to pull the trigger. I am looking at the weekly charts to give me the green light, but I want something real, something expansive for me to make my entry. I would more than likely put my stop below the support line drawn there around the 15.85 – 16 region.
4. Russian Ruble vs. US Dollar (RUBUSD)
I’ve written extensively on how bullish I am about Russia, their economy, and the future of their agriculture. I am a huge follower of Jim Rogers and I read his stuff daily. Although the US Government increased their sanctions on the country, I see positive price action in their currency against the dollar. The ruble is close to breaking the 50 and 200 MA on the daily charts, and on the weekly charts, the 50 MA is acting support for price. I am already short the dollar in my portfolio, but I keep this on my watchlist for a longer trend play.
5. Cotton (in USD on Forex Market)
I went 3/3 on cotton trades so far this year, going long once, and short twice. Cotton is approaching a key support level, so I’m waiting to see what the price action does once it hits that point. It’s had 7 straight red days up until this point. If it breaks down below support, I’ll take the short side of the trade. However, if it bounces, I might take the long, place my stop extremely close to my entry, and play for a bounce back gap up. When it comes to commodities, I am still betting small around 25 – 45 bps per trade.
6. Ovascience (OVAS)
This net net company peaked my interest a few weeks ago, and I wrote a report on them which you can find here. OVAS is a net cash play, trading less than its net cash value. I love these investments. For the most part, these are the investments I want to comprise most of the portfolio on the equity side, however, I cannot predict with any certainty the type of investments that will compromise the fund except for the fact that the fund will be comprised 100% of investments that are undervalued. OVAS is breaching the 50 MA again, and I am looking for a more solid move upwards on the backs of a healthy quarterly earnings statement.
Truth be told there are about 20+ companies that are on my radar right now, the price just isn’t right for a buy. If prices fall to where I would like, I would be much more frequent with my analysis and updates on where I am looking. I am steadfast in my patience not to overpay for any company. No company deserves to be bought at a premium. I am content looking for dollars trading at $0.40.
Now, onto the current portfolio as of today August 17th, 2017. The portfolio has 13 positions split between currencies and equities. This shouldn’t come as a total surprise if you’re a frequent reader of my blog, but I will continue to stress: My general thesis of the market in no way, shape, or form influences my individual investment selections. I am still finding value in US Equities. Even amongst these insanely high multiples there is value to be found and extracted, to say otherwise is naive and shortsighted. Not all of my equity positions are long, however. I am short two.
- Short USD (DXY) – Risk: -30bps ($233 gain)
I’ve been on the bearish side of the dollar trade for a while now, even getting out too early on the short before getting back in to ride the trend I am currently on. The dollar is at a precarious point in price action, with any break below support being the windfall of the collapse of the dollar (boy that sounded all doom and gloom, I must be reading too much Jim Rogers). I still think we will see a bump in the dollar as people chase into it when equities and global economies collapse, seeing the dollar as the worlds save haven currency. Of course, the dollar as a save haven is the equivalent to a water fall mirage in the desert … It’s not really real, and it’s not really there. I’m debating on whether to move my stops closer, or farther back to play a potential retrace from the 50 MA. Will keep y’all updated.
2. Short British Pound (GBP) – Risk: 42 bps ($322.49)
The pound broke its 50 MA in a bearish manner and I took the short side of the trade risking 42 bps. If you remember, I played the pound on the long side and made a handsome profit, so I’m taking my chances on the short side.
- Valeant Pharmaceuticals (VRX)
Yep, the company that famous hedge fund manager Bill Ackman bought in the near $200s and sold in the $8 – $9 is the same company I am going long on. It’s completely unfair to use VRX as a pedestal for my investment decisions compared to Ackman because every investor makes mistakes, the best of them. What I hope to do and continue to do is learn from the bests’ mistakes, that way I do not repeat them with your or my own money. All that I will say on the matter of this company with regards to Ackman. Ackman let his ego get in the way of him cutting losses and moving on. That, I can assure you, will never happen at Rockvue Capital.
Anyways, Valent is an interesting play in terms of their debt restructuring. They still have a very long way to go, but their price action on the weekly charts indicated a buy signal, and I am risking not too much on this trade (24 bps as of today).
2. Mechel Pao (MTL) – Risk: 23 bps ($174.8)
MTL is a Russian oil company that is trading around 3 times earnings, and about 1.05 times free cash flow. Russia’s VEB also just approved of MTL’s debt restructuring program, so it will enable MTL to start reducing its debt rather quickly, while at the same time keeping its most valuable assets under house. I like the play because there is a population boom in Russia as I’m typing this. MTL is the leader in oil and gas distribution within Moscow and the surrounding areas.
3. Michael Kors (KORS) – Risk: – 79 bps ($604.89)
Jacob brought this company to me a few weeks ago and I really liked it from the fundamental standpoint, it was the price action that I wasn’t thrilled about. However, after a stellar earnings report, absolutely crushing Wall Street estimates (much to the estimation of both Jacob and myself), the stock exposed itself to a tremendous buying opportunity. I will not go in depth on the fundamentals, earnings, or outlook of the company for the sake of length in this post. Needless to say, KORS could potentially be one of our biggest trade winners of the year. My entry point to this trade was right as price moved above 50 MA on heavy buying volume (technically always a nice sign to see when fundamentals match the technically bullish thesis). From that point I held on for the ride and was extremely lucky to catch the major gap up movement in price seen in the chart below.
Right now the trade is sitting at a worst case scenario 80 bps profit. If KORS can break through its next resistance level, we could see it really start to take off. This is a trade where I will let run as long as possible, moving my stops up like a sniper. KORS has the fundamentals to run.
4. Intrepid Potash (IPI) – Risk: 26 bps ($197.87)
I wrote a large piece on water and how IPI works into that dealing for the guys over at Macro Ops. I do work for them as well since I expressed interest in joining their group as a volunteer intern gig. Any chance I get to surround myself with those that know more than me is a win for me, and this was huge. Alex and the guys at Macro Ops are some of the sharpest people I’ve personally come to know in the investment space. It’s been a pleasure working with them for a few months now, and I am very optimistic about our future relationship. Nevertheless, IPI came out with great earnings, beating analyst expectations, and the price action presented a buy signal. I like IPI for the water rights they own, as water will become scarce the greater the population increase.
I entered right as price action broke resistance, and as a perfectionist, I missed the best timing by a day, but I’m still in the black on this trade so I can’t nitpick too much.
5. Urban Outfitters (URBN) – Risk: 59 bps ($453.12)
I don’t know what it is with Jacob and teenage retail clothing stores, but he sent me URBN along with AEO and the like, and even wrote an excellent piece on L Brands, the parent company of Victoria’s Secret … I might have to have a talk with him about that. Humor aside, URBN crushed earnings and the stock catapulted 17%, I bought on that rally as price action broke key resistance levels. It has since then retreated, and I am moving my stop loss up right below the 50 MA. If the stop loss gets hit, I’ll know it was a false breakout. However, if it bounces from the 50 MA it could merely be a patented bullish retracement.
6. Streamline Health Solutions (STRM) – Risk: 40 bps ($307.80)
STRM came across my radar after breaching the 50 MA in a bullish manner. There is good reason for their shares to be reaching new highs. In late June the company recorded record revenues and net income. Revenues jumped 26% and Net Income increased 79%. Those are good numbers. The company is currently trading at a 20% discount to its sales, and it is trading slightly above book value. Not a deep value play, but a value momentum play nonetheless.
7. Rubicon Technology (RBCN) – Risk: 50 bps ($385.73)
Rubicon Technology Inc is an electronic materials provider that develops, manufactures and sells monocrystalline sapphire and other crystalline products for LEDs, RFICs, blue laser diodes, optoelectronics and other optical applications. This is a NCAV play. RBCN trades at a 43% discount to NCAV, which is an extremely comfortable margin of safety (focusing on minimizing the losses). Their most recent earnings report reaffirmed my beliefs that the company can turn it around. The company is reducing their general expenses, cutting staff where it can, and slowing the overall cash burn of the company.
8. PDL Biopharma (PDLI) – Risk: 18 bps ($135.47)
Good ol’ PDLI. This is a stock that Jacob and I have watched since the very first thoughts about Rockvue Capital came into our heads. I wrote an overview about them, which you can find here. In it I expressed my impression of the company’s CFO Jeff Garcia, as well as my confidence in its cash and balance sheets to ride out the turbulent times of healthcare limbo.
I will be transparent and say that although I am long term bullish on this company, I did short it after it first failed to break resistance. I walked away with a small, scratch profit. I do not know if that is something I will do into the future as a defacto put option, per say. However, I took the long side on the weekly charts as it broke price resistance as well as 50 MA. It is also important to note that when both daily and weekly charts are offering a buy signal, it is usually a higher probability of being a true breakout (notice I didn’t say sure bet, there is no such thing).
9. Short Netflix (NFLX) – Risk: 27 bps ($206.32)
I have wanted to short NFLX for the longest time, not because I hate the company (I love Stranger Things, Sherlock, and being able to watch The Big Short almost monthly), but because I hate how the company is run. Much like TSLA, NFLX funds its content through mountains and mountains of debt. At some point investors should realize that this isn’t a sustainable way to fund a business, no matter how many people enjoy using the service (a la SNAP, APRN, etc.). At the end of the day, when I delve through the pages of the Intelligent Investor, I’m reminded that no company is too big or too different to be withheld from the same analytical integrity as the rest.
10. MannKind Corporation (MNKD) – Risk: 43 bps ($332.80)
MNKD is a developmental biotechnology company that specializes in diabetes and cancer drugs. MNKD is also a discounted cash flow play, with their DCF intrinsic value weighing in around $14 per share, so the current share price of 1.43 is trading at a hefty discount. I really liked the price action in the stock, and I am interested to see how far it will run. Not a true net net stock, not the deepest of value, but there is still momentum from solid earnings.
11. Short High Yield Bond ETF (JNK): Risk – 17 bps ($131.89)
This trade was something that I have been trying to figure out the best way to do, and I still don’t think its the best way in terms of overall net profit, but its the best way given what I can do right now on the paper account. There is a bubble in the bond market and the first place I am looking to short that bubble is the high yield market, which is overvalued more-so than the rest. As interest rates continue to rise, it will make lending more expensive, which in turn will make investing less appetizing. The price action confirmed my bearish narrative as it broke key support levels both in price and in 50 MA.
Now I just need to really see if price can fall below 200 MA. If that happens, it could be a much larger winner than I had thought.
If you would like further explanation on the positions in the portfolio, or if you are interested in some of the companies that are on my watchlist, please don’t hesitate to drop me an email. I would love to take the time to explain it in further detail if you express the desire.
For the sake of record keeping, this post marks the 50th post of this website, which is something I consider a success in terms of hoping to create a pool of information and resources for those who are interested in my investing philosophies and results. This is a short and sweet piece about a short position I took on earlier this week in the Voyager Fund portfolio. Longs are still not at prices I would consider buying (at least positions I am looking to add to the portfolio), and I am content with the longs I have in my book currently.
On Wednesday (07/05) I shorted TSLA in my paper Voyager Fund portfolio. My short position was filled at 338.57, risking 0.50% of my trading capital, and setting my stop loss at 380. Technically, we got exactly what we’ve been looking for in a short signal. The weekly charts so an engulfing bearish candle completely encompassing the bull run up to the point. The charts are slowly starting to reflect the terrible business that is TSLA. I love the product, and I wish to own the car one day, but the way the business is ran is putrid. TSLA burns through cash like nobodies business, consistently asking for money from the government and its shareholders. I hate companies that burn through cash, without apology, while asking for more cash in return.
In the long run, I hope Musk can stabilize the company, because I truly believe in the product, and I believe in the future of the industry that Musk is trying to shape. However, I cannot overlook the massive cyst that is TSLA’s balance sheets and income statements.
Hopefully Musk keeps Space-X private so he doesn’t get into the same problems there like he’s gotten into with TSLA.
Be on the lookout next week for another article. I am trying to focus my time on one company a week, doing a thorough analysis on one company a week and providing detailed analysis and review.
I want to start making monthly posts about the state of my portfolio, why I have positions the way I do, and what I am planning going forward. This will be more of a bulleted style list of things, whereas my companies analyses are droves of paragraphs. Without further hesitation, let’s roll.
British Pound (GBPUSD – Forex): 10.80 : 1 Risk Reward Set – Up
When Theresa May announced the Snap Election that would take place on June 8th, it got me really thinking about the state of the British Pound, and the state of the British Economy as a whole. Technically the charts set up beautifully. Looking at the weekly charts I noticed an extended triangle / wedge pattern forming, and I was waiting for the price action to shoot through the resistance line of around 1.252. I put my Buy Limit order in right above the resistance line, it got filled, and I’ve been moving my stop up ever since. I trade started out as a 3:1 risk reward ratio (my ideal setup), but when the trade quickly went my way, I moved my stop loss up proportionally, while keeping in mind my long term thesis on it. As it sits, I’m risking only 0.11% of my capital from the previous 1% entry risk, and any movement upwards over the course of next week could put me in the breakeven / small profit category WORST CASE scenario.
From a Macro Perspective, I am taking the bet that the British economy is going to be better than most people think. Yes they will have some difficulties, and if the Scots decide to leave the EU, they will take their oil with them, which is a huge factor in the success of the British economy. However, I remain long term bullish on the Brexit situation, and I believe capitalism will help bolster the nation’s currency higher. I don’t necessarily have an initial profit target, however, if the trend goes against me, I hope I am smart enough to have my stop in place.
Ocean Rig UDW INC (ORIG) – US Equity: 26.6 : 1 Risk Reward Ratio
Betting only 0.82% of my capital on this little trade here. ORIG is about as distressed a company as one can find. With mounting debt and pressure from distressed debt collectors, ORIGs life line as a company is hanging in the balance. So why would I want to invest in something like this? I am looking for a restructuring deal to take place. ORIG has a lot of assets that it can liquidate, making it a cash play for a potential buyout or restructuring process. It received over 75% support from shareholders for its new restructuring deal, and given the value of the company ($0.25 / share), the risk reward is very asymmetrical. I put my stop in at $0.21, so anything below that would stop me out of the trade.
This might be one of my most confusing bets in terms of the company itself, however I believe that in order to achieve abnormal returns, one must be willing to look in the depths and the cobwebs of the market.
US Dollar (DXY – Forex): -4.61 : 1 Risk Reward Ratio
On April 10th I entered a short position in the US Dollar. After looking at the price action, I noticed that on the daily charts, DXY had crossed its 50 MA in a bearish manner. So, towards the end of the trading day, I shorted the currency risking 1% of my capital, with an initial profit target for a 3:1 risk reward. As luck would have it, the trade has gone in my favor, so much so that I am able to move my stop loss to the point where if my stop does get triggered, I walk away with 1.04% profit. That’s not bad, worst case scenario is a 1.04:1 risk reward, I like the positivity about that.
Obviously I hope the trend continues to fall in my direction, as I think it might. The last three days look like a patented pullback, and hopefully the dollar moves lower into next week. Once again, no profit targets on this trade, just hoping to move my stop loss further and further down the trade.
Netflix Inc. (NFLX – US Equity): 4.01 : 1 Risk Reward Ratio
Risking only 0.50% of my capital on this bet, I decided to short Netflix from a technical and fundamental perspective. Looking at the fundamentals, Netflix has tremendous amounts of debt, and to me, a good deal of the optimism around Netflix is already discounted in the price. Netflix also failed on international subscriber numbers, which is the metric that I care about the most with the company. What I realized about companies like Netflix and Tesla is that its not the earnings numbers themselves that move the stock, its what makes up those earnings numbers. For Tesla its the amount of cars they sell, for Netflix its the amount of subscribers. In other words, Netflix could lose tremendous amounts of money each year, but if their subscriber base kept growing, investors wouldn’t care.
Looking at the weekly charts, NFLX appears to be trading in the midst of a channel, with most recently crossing below its 50 MA. I have my stop loss set at $149, which technically would indicate the reversal of my bearish hypothesis, and I would lose 0.50% of my capital. Its a trade that is completely emotionless to me.
Apple, Inc (AAPL – US Equity): 17 : 1 Risk Reward Ratio
I know I know. Go ahead. Comment and rant about how I used to be IN LOVE with Apple from a fundamental perspective and how much I LOVE their cash position and their PE Ratios. I’ll wait, don’t worry … In all seriousness, I do love the company. Last summer when it fell below $90, I remember having the conversation with my investment partner Jacob about how we should buy AAPL at these levels, because below $90, the Margin of Safety was freaking nuts. As luck would have it, that would’ve been a nice position to get into. However, at these levels, I would like to see a pullback from the all time highs.
Don’t get me wrong, I am still long term bullish on AAPL, I just don’t think current price valuations are warranted even though the company is trading less than 20 times earnings. To me, I smell a lot of animal spirits driving up this price, and I believe that a perfect release of the latest iPhone is already discounted into the price. I am only risking 1.03% of my capital on this trade, and if AAPL ticks higher than $143, I will get stopped out for a loss.
It will be interesting to see where these positions play out. I am happy having a concentrated portfolio, and I think that I will continue to lean that way as I grow as an investor. As Stan Drunkenmiller once said, “put all your eggs in one basket, then watch that basket very carefully.”