Aug 2013 Portfolio Update

This year could have been better since none of my major short positions worked out.  The long side is doing well mainly because of Altisource (up 45% since I wrote about it on Jan 10 at $93.57).  The junior mining-related part of my portfolio happen to be up even though the TSX Venture is down a quarter year-to-date.

Long positions

ALS.TO – Altius continues to buy back shares.  Hopefully Alderon will get its mine financed, though it will be tough since fear is high in the mining space and iron ore prices have gone down slightly.

NFD.A – Northfield Capital’s portfolio has been ravaged by the turmoil in the junior mining sector.  The company and the CEO are buying shares, though the stock is extremely illiquid and these purchases won’t amount to much.  This is a buy and hold position for me.

NOT – Nickel prices have fallen this year, which is bad news for Noront.  Cliffs’ Ring of Fire mine continues to experience setbacks and probably shouldn’t even be built in the first place.  I will sell this if the share price rallies.

KWG – It looks like management will spend money on drilling the Black Horse deposit, which I disagree with.  The deposit is too deep to be economic.  KWG will increase its reserves more by simply buying back shares.  The company also needs to maintain liquidity for any cash spent on its joint venture with Cliffs.  However, insiders continue to buy shares.  I will sell this if the share price rallies.

SWN (TSX Venture) – I’m waiting for the activist shareholders to take Selwyn over and dividend out cash.

ASPS common and call options – Altisource’s share price has done incredibly well, exceeding the growth in the underlying business.  In my opinion the multiple on ASPS was a little low in the past and is closer to fair value now (TTM P/E is around 29).

CROX common and calls – Crocs has improved its troubled European business but now has major problems with its Japanese business.  Crocs’ share price has dropped since I first wrote about it (it has fallen 20% since the May 15 close of $17.18).  I hope that the share price remains depressed so that the company can buy back shares.

ESRX calls- I am long.  I first wrote about Express Scripts on August 1 at $65.56.  The underlying business continues to do well.

MCF (no position) – I closed out my position in Contango Oil & Gas.  Unfortunately I lost money on this idea mainly due to lower natural gas and liquids prices.

LMCA/B (no position) – Unfortunately, I did not buy any shares of Liberty Media because my limit order never filled.  In hindsight, I really should have just bought the shares given that management is excellent and was buying back shares.

NRCIB – See my writeup on NRCIB.

MSFT, MCD calls – I don’t have writeups on these companies because I don’t think I can say anything that hasn’t been said.  These are small positions for me.  McDonald’s isn’t that cheap but the implied volatility on the call options is low.

TJX call – This is a well-managed retailer with high returns on capital.  I don’t think that the shares are cheap at all though the implied volatility on the call options is low.  This is a small position for me.

ADVC – I continue to hold my position after the tender offer wasn’t approved by regulators.  I intend on holding these shares for the long run as I like the business and I like management.

CF – I will likely sell this if it makes record highs.

Short positions

JOE common and puts – This hasn’t worked out this year.

FMCN common and puts (no position) – The merger went through, so I lost money since I bet against it.  This was a longshot bet that failed.

TSLA common and puts (no position) – My thesis was wrong since Tesla reached profitability.  While I lost a lot of money, I would have lost even more if I didn’t cover.  Tesla has since doubled from when I covered my short position.  I have covered all my common and sold all my puts.

TLT common (no position in puts) – My Jan 2013 put options on this long-term US treasury ETF expired worthless.  This trade hasn’t really worked out so far.

GME common and puts – I’ll have to wait and see how this turns out.

PSUN – I’ve written about Pacific Sun briefly on this blog.  I’m underwater so far.

BBY – Previously Best Buy’s founder wanted to take the company over but the board of directors has blocked his effort.  Now that Best Buy shares have rallied strongly, the founder is selling his shares.  As long as Best Buy continues to be managed poorly and doesn’t get out of the path of online retailers, I will maintain my short.

Miscellaneous short positions – BBRY (Blackberry), CREE, TRLA, WDAY.  I’m not too excited about these shorts.  Shorting WDAY (Workday) may be a bad idea since the company makes very good software and should ultimately be profitable.  Shorting Workday is like shorting Salesforce (which has been a terrible short for a long time).

IMAX – I’m underwater on this position and still waiting for the axe to fall.

Chinese reverse merger shorts

CBPO, CO, YONG

It might be a good time to short Chinese reverse mergers.  I should probably do more research and possibly add more short positions.

Oil & gas shorts

MILL, TPLM

Junior mining shorts

CLQ.TO – I am net long CLQ since I own Northfield Capital.  I currently have a very small short position because I think that the shares will collapse when the new mine fails.  It is hard to get shares to borrow, so this will likely remain a very small position.

NUS.TO – Nautilus Minerals wants to be a pioneer in deepwater mining, which is an unproven mining technique.  The economics haven’t been proven (I think they’re lying about the project’s economics anyways) and there are serious environmental concerns.  Other forms of underwater mining such as dredging are known to cause environmental damage.  Their project would likely be blocked in first-world countries.  There is political risk too.  Paupau New Guinea residents are opposed to the project (other mining projects in their country have caused a lot of environmental problems).  The PNG government has stiffed Nautilus Minerals on a payment and the two parties are in arbitration.  It just so happens that they have every risk imaginable.

I shorted Nautilus stock way too early and am losing money on my position so far.

Homebuilders

KBH, CHCI

In hindsight, I shorted homebuilders too early.  However, I added to my short position when homebuilders continued to rally and now the short is starting to work out.  I have no position in HOV (Hovnanian), though I will short it if its price gets a little higher.

Commentary

I tend to sell my winners and buy more of my losers.  So this is a reason why many of my current positions have lost money.

In some cases I will sell my losers because my thesis is wrong (e.g. Tesla) or the stock isn’t undervalued anymore (e.g. I sold Selwyn at 6.5 cents, and Pinetree at 45+).

Mining Mania

I’m scared.

Mining has generally been very good to my portfolio.  My Canadian TFSA has more or less been invested in mining stocks.  It currently has slightly more than double the amount of money I put into it.  I made a lot of money on Queenston Mining and dodged a bullet by selling my position after Osisko took it over.  At the time, I thought that most senior gold miners were overvalued and that there was a lot of overvaluation happening in the sector.  But I didn’t really understand how perverse the mining sector really is.  Shareholders are going to ultimately lose a lot of money because most CEOs don’t care about shareholders and many of the CEOs don’t know what they’re doing.  The historical practice of overpaying for mining assets and chasing dumb projects may not continue forever.  I need to seriously reduce my exposure to the excesses of the mining sector.

Short selling

Short selling has been frustrating this past year because:

  1. Not a single one of my major short positions have worked out.
  2. There is too much short selling going on.  Practically all of the best short ideas have high short interest, which is a recipe for a short squeeze.  Many of them have tight borrows and high borrow rates.  I did not enjoy paying 40% interest to short ATPG (later on it shot up to 100%).  I did not enjoy paying credit card interest rates to short Tesla (which in hindsight was a terrible short).
  3. I got bought in on CMED(Q), pump and dump penny stocks, etc.  It’s frustrating to be right about a stock going 0 and not make money on it.  It’s frustrating that I can’t go after easy stuff.

For some reason, I really like the idea of having a portfolio that is hedged against a market meltdown (even though I often argue that hedging doesn’t always work). This could be a mental bias that could be a mistake.

As well, I have an emotional love affair with short selling.  It’s contrarian.  And it usually feeds into my sense of justice.  I feel good seeing frauds go to 0.  However, this isn’t really rational behaviour on my part.  Short selling common stock is a waste of time since I keep my positions very small for risk management reasons.  I should keep my short selling impulses in check.  Currently, I am using my Motley Fool CAPS account as an outlet for every degenerate trade that I want to make.

First class businesses with first class management

I’m trying to put more of my focus on these types of stocks, as opposed to a pure Ben Graham style of investing.

Stocks like QXM(CF)/XING(F), JTC (Jemtec, on the TSX Venture), and DRYS (Dryships) have shown me the importance of honest management.  It just makes sense to me that dishonest management will lead to poor shareholder returns.  My current model is that the performance of a stock depends on the following four factors:

  1. The economics of the industry.  Some industries obviously have bad economics (e.g. Hollywood visual effects studios).
  2. Management’s skill.  A bad manager can run any business into the ground.
  3. Management’s integrity.
  4. Valuation.
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