Unfortunately, I’ve had a bad start in 2014. My long positions and my short positions are moving against me. I suppose that this is bound to happen because stocks are never perfectly correlated. (If they were perfectly correlated then there would be no point in trying to pick stocks or to profit from short selling.)
While I have a large number of short positions (30+), I have managed to find many stocks (mainly Chinese and solar stocks) that have quickly moved against me.
To maintain liquidity, I have been closing out profitable trades and mediocre short positions that are underwater. If I were not constrained by liquidity, I would likely be shorting CGA (discussed briefly here) and CNIT (writeup). The table below shows a rough outline of how I rank my short positions. An asterisk (*) indicates stocks which I have no position in.
Commentary on some short positions
Yongye put options: I never wrote a post dedicated to this company because the thesis is incredibly simple. Either the going private proposal goes through or it blows up. If other short sellers are right about the company being a fraud, then there is a chance that the merger will fail. (Of course, short sellers have alleged fraud for HRBN and FMCN. Those companies were taken private regardless.) Currently, it looks like the merger has failed and my put options are up a lot. Hindsight being 20/20, I wish I bought a lot more. Because my FMCN puts did not work out, I only took a very small position in YONG puts.
CHGS: On January 8, 2013, Mr. Ningfang Liang tendered his resignation as Chief Financial Officer of China GengSheng Minerals, Inc. for “personal reasons” (8-K filing). The company’s auditor resigned on July 1, 2013 (8-K filing).
TransGlobe Energy (TGA): I’ve written about this company in the past. The EGPC has essentially defaulted on its debt and is “restructuring” it. According to this Reuters article, it will repay some of the debt in Egyptian pounds. I expect the Egyptian pound to devalue. Effectively, the EGPC will be shortchanging the oil and gas companies that it “borrowed” money from. However, I am definitely not an expert on Egyptian politics and things may not be that bad in the future.
Twitter: I’m not sure what I was thinking about this one. (I lost money.) What will Twitter look like a decade from now? They will probably figure out how to monetize their service effectively and they will probably make lots of money like Facebook. In the long run, I think that Twitter will become a wonderful business. While what they’re doing currently may be a little silly, it’s where the company is headed that matters.
Zulily: I actually covered my short position at a small profit. In hindsight, I think it was a mistake for me to mess around with this stock. It should have gone into the too hard pile.
Solar panel manufacturing: I’m not sure if I should be making macro bets on a sector. However, I think the sector is overvalued when many of the stocks are trading well above recent secondary offerings. The solar industry seems to be massively oversupplied.
PVCT: I don’t really know that much about pharma. However, PVCT seems like it is reasonably easy to analyze. Its flagship drug candidate, PV-10, has not been tested in a phase III trial yet. The chances of FDA approval seem small. If the drug were to receive FDA approval, competitors may be able to bypass PVCT’s patent and find other ways to manufacture the drug (which is basically Rose Bengal, a chemical you can easily purchase yourself). If you multiply the two probabilities together, it seems that value of the candidate drug is extremely low. The company also seems to waste a lot of money on G&A.
Adam Feuerstein of thestreet.com has an excellent article on the company.
NVAX: I screwed up in initiating a short position in this stock (though I’ll probably break even after covering).
Stocks with expensive borrows: I generally try to avoid these nowadays.
Commentary on some long positions
Altisource: This stock has dropped by about a third since the beginning of the year. I think that fears over Ocwen and Altisource have been blown out of proportion. According to Fannie Mae, Ocwen is actually one of the best servicers out there. I strongly believe that Ocwen will become the #1 or #2 mortgage servicer in the US in the coming years. Ocwen and Altisource have been buying back their shares (at higher prices).
Ruger call options: I’m excited about Ruger’s future prospects. I think that this is a wonderful company (their return on invested capital is something ridiculous) at a low P/E ratio. I have no idea what the shorts are thinking. While this stock has dropped since the beginning of 2014, I’d buy more if I could. I prefer the call options to avoid withholding tax on dividends (I am Canadian) and because I can’t otherwise get paid to lend out my shares. To be fair, the company is no longer buying back its shares and the CEO is selling some of his shares.
Kinder Morgan: Yet another major long position of mine that has dropped since the beginning of 2014. The company is buying back shares and there is lots of insider buying by the CEO and other officers.
Altius Minerals: The stock has gone up around a fifth in 2014. At higher prices I may or may not trim my position.