It has been difficult for me to accept that I should be buying stocks with high P/E ratios, high P/B ratios, and mediocre management teams. Quality rarely comes cheap and without warts. But, I’ve been trying to move away from deep value investing dogma because I want to figure out what actually works. As part of that, I’ve been keeping a model portfolio of 30-35 large cap stocks since October 2017 that you can view in real-time here. It has outperformed the S&P 500 by ~5% annually since October 2017 (!). This is a surprising amount of outperformance for large cap stocks (e.g. large cap mutual funds would be incredibly happy with 2% outperformance).
While it is possible that I am confusing luck with good stock picking, I have to live with imperfect information. I would prefer the feedback from a 30+ stock portfolio than the feedback from a focused portfolio with <10 stocks. Going forward, you should expect me to be heavily biased towards quality companies.
In 2013, Altisource was the best performing long position in my portfolio. In 2014, I unfortunately made it the largest position in my portfolio. Because of that, I am badly lagging the market.
Lately, independent E&Ps have been beaten down due to lower commodity prices. Drilling stocks (e.g. NADL) have been beaten down due to US sanctions on Russia and lower oil prices. Some shipping stocks (e.g. DRYS, PANL) are beaten down. In these situations, I will not be greedy when others are fearful.
Overall, my portfolio is down several percent YTD mainly due to a longshot bet on Yongye put options and mark-to-market losses on Altisource common shares.
On the short side, shorting common stock has worked incredibly well for me this year. Unfortunately, my gains were offset by losses on Yongye puts.
On the long side, I made massive bets on Kinder Morgan warrants and Altisource common stock. The former has been profitable while the latter hasn’t. Altisource has been beaten down -53% YTD and I have been adding to my position on the way down. While Altisource continues to have absurd earnings growth, its share price has fallen dramatically due to fears that regulation may hurt the company.
The warrants may still be slightly undervalued. However, my instinct is to sell stocks/securities on rallies and to reinvest the proceeds into stocks that have dipped (e.g. ASPS).
I sold slightly below $4 (which is terrible trading on my part because I sold near the day low). I still have a few call options which I plan on riding out to maturity. This trade worked out well.
I don’t think that investors should panic over Ruger’s drop in EBITDA and distributor orders. Going forward, I see the company gaining market share as its continues to release new products (which it has done so in the past). Volumes and profitability should recover and grow.
That being said, a huge contraction in the gun market or intense competition can hurt Ruger shareholders. I have no special insight into what will happen to the overall gun market.
Ruger is seeing weak demand for its products and is slowing down production in response.
The press release and quarterly financial statements can be found on the company’s website (PDF). The 10-Q is on EDGAR.
So far I have shorted the common shares of more than 80 stocks this year. On common shares, I have been profitable overall despite a rising market. Unfortunately, losses on put options (mainly YONG) have more than wiped out the gains on my common stock shorts.
I think that I’ve gotten fairly good at spotting bad stocks. My CAPS account is a reflection of that. (*CAPS does not consider the mechanics of borrowing shares. It’s unrealistic.) Unfortunately, I’ve been losing money on put options this year. Part of this may be because I mainly short small cap stocks which are too illiquid to buy put options on. As well, many of my shorts are volatile so the put options would be neither cheap or attractive.
See below for commentary on certain positions. Keep in mind that due to the sheer number of positions, my research on short positions is typically very shallow.
This blog post is an attempt to clarify some things about this blog that may not be obvious.
I’m not a fan of writing about individual short positions. You may see less of it in the future. In general, I am trying not to get into conflicts with the wrong people:
- CEOs who sue short sellers.
- Eccentric CEOs who rant about Sith Lords, stalk short sellers, threaten their children, etc.
- The scumbags behind egregious frauds.
- Etc. etc.
I really don’t want to get sued (or worse). Often when writing about a bad company, I will tone down the rhetoric. I won’t say that a particular company is clearly a fraud even if it ticks off almost every red flag that a fraud can have (see my post on spotting frauds).
Lately, I’ve been organizing all my current and potential short positions into a table (see below). The short positions I am most excited about go into Tier 1.