Category Archives: cyclical stocks

2015 Year in Review

My winning streaks (of both positive returns and beating the averages) came to an end in 2015. I was down 34% in 2015, compared to the S&P 500 which was down around 2%.  Yet I feel better about the risk/reward of my portfolio going forward than I ever have.

I entered 2015 with positions in AA, GTIM, SFM, HABT and YELP, with around 12.5% cash.

My first move of 2015 was to sell YELP in mid January for around a 7% loss. I had just bought YELP near the very end of 2014, but was starting to become nervous about the overall markets and wanted to raise cash, and YELP was my smallest and lowest conviction idea.

2015-yelp1

In mid February I sold my entire position in AA, largely because I thought other ideas had better risk/reward. I made around 35% on AA. I put some of the proceeds into more GTIM and raised my cash position some more as I continued to grow concerned about the overall markets.

2015-aa1

In early May I sold my entire position in SFM. SFM had been a core position for awhile, but by the time I sold I had become convinced that the story had fundamentally changed for the worse. I put some of the proceeds into RAVE, and raised my cash levels yet again.

2015-sfm1

At the end of May I sold my entire position in HABT, and I added another new position, BSQR. Despite adding a few new positions which I thought had attractive risk/reward, I was still worried about the overall markets and so wanted to maintain alot of cash. So that led to my opting to sell HABT. I made around 15% on HABT.

2015-habt1

Near the end of July I sold my entire positions in RAVE and BSQR. I continued to grow concerned about the overall markets and wanted to pare back to my highest conviction ideas. I lost around 7% on BSQR and 4% on RAVE. This also marked the high point for my cash levels on the year at around 40%.

2015-rave1

2015-bsqr1

In August I bought and sold a position in GM-B warrants. Despite my concern about the overall markets I thought the risk/reward warranted a position, but I shortly afterwards had a few ideas I liked better, so I sold. I lost around 5% on the GM-B warrants.

2015-gm1

Near the end of August I established a position in a new stock, NEWM, and in early September I bought an unnamed nano-cap stock. By mid September concern about overall markets caused me to want to pare back to my highest conviction ideas again so I sold both positions. I broke even on NEWM and lost 5% on the unnamed nano-cap.

2015-newm1

At the beginning of October I bought positions in BABA, BIDU, and HABT. Despite my concerns about overall market conditions, I felt the long term prospects of these companies were sound and their sell-offs were overdone. I sold all three positions a few weeks later for 10-20% gains.

2015-baba1

2015-bidu1

2015-habt2

The only stock I never sold was GTIM. In fact I added to it as I was selling my other positions. I added to GTIM in July, August, and November. GTIM is my only current position.

2015-gtim1

2015 was largely about managing the portfolio to weather growing concerns I had about overall market conditions while still trying to find ideas I felt had attractive risk/reward profiles. So I tried a few new positions while selling off others. Ultimately I could not gain enough conviction in those ideas and my market concerns caused me to concentrate in the only idea I did have strong conviction in – GTIM.

Overall I think I had the right idea, but my execution was slightly off. I feel if I had I executed slightly better it would have made a significant impact on my performance for the year. I feel good about closing out the positions I entered the year with when I did. YELP, AA, SFM, and HABT were all significantly lower after I sold them. Likewise I was happy closing out most of my new ideas when I did. In some cases the fundamental stories had deteriorated or were not as strong as I originally thought, and in other cases they were not the types of holdings I wanted going into what I thought would be worsening market conditions. All the positions I sold saved me from significant losses.

GTIM, the one position I held on to, was the major negative contributor to my performance for the year. I maintained my GTIM position, and even added to it, because I felt the long term risk/reward was very attractive. Even at $10, I thought GTIM could still be a 5-10 bagger in the long run, and the downside risk was limited to perhaps 50% at worst. Although I was prepared for GTIM to decline 50%, I wasn’t really expecting it to drop that far, which is partially why I did not sell any at $10. Attempting to avoid a potential 20% decline did not seem worth taking the tax hit. And when GTIM did fall 20% from its high, I only saw downside risk of about another 20%, not an additional 50%. So selling again did not seem worth it for tax reasons. Instead I decided to start adding to my position, as the long term risk/reward had only gotten better.  I saw the worsening technicals but thought fundamentals would win out. If I had it to do over, I would have paid more heed to the technicals. I probably still would have started adding too early, but I would have added more shares around the $4 level when GTIM had started to base.

Besides making my average cost on GTIM more attractive, another benefit would have been having more cash available for the few trades I did have strong conviction – my purchases of BABA, BIDU and HABT in October. Not only could I have made those positions larger, but with larger positions I might have held at least a portion of them longer into their rallies, both of which would have significantly improved my performance for the year.

As it stands, I was down 34% for 2015, compared to the S&P 500 which was down about 2%. The main lesson I take from 2015 is respecting technicals, no matter my level of fundamental conviction in an idea. Had I done that my performance for the year would have been much closer to the S&P 500, and my upside would be that much greater.

As I stated at the beginning of this post, I feel as good about the risk/reward of my portfolio as I ever have, and am comfortable holding just GTIM going into 2016. I will review my current thinking on GTIM and what else I have on my radar in another post.

New position – GM B Warrants

I bought some GM B warrants this week under $14. I like GM’s fundamentals for the next several years. GM is widely covered so I won’t go over the fundamentals much other than to say I think it is undervalued here and I don’t think we are near a cyclical peak in auto sales, based on pent up demand, average age of cars on the road, improving employment figures, etc. Even if growth isn’t much from here I think a leveling off is more likely than a cyclical downturn. I also think GM’s quality is vastly improved and their leadership in trucks and SUVs is a positive. Mary Barra seems like the right leader for GM, and I think worries about the ignition switch problem, slowing sales in China, and a cyclical downturn in North America have provided an attractive entry point here.

The reason I established a position in the B warrants this week is because I thought the risk/reward was particularly attractive. Technically GM looks like it has good support around the $30 level, both from a long term support line and the 200 week moving average. Fundamentally I think there is good support with the dividend yield around 4.5%. There are a couple value investors with positions in GM (Berkshire Hathaway, Doug Kass, Mohnish Pabrai) and there was some activist investor activity recently which helped return more cash to shareholders. So if GM were to fall far from the $30 level I think it would quickly find support from an even higher dividend yield, and it becoming even more attractive to value investors.

The B warrants appeared to offer an especially attractive risk reward with where they were trading this past week. The B warrants have a strike price of $18.33 and expire in July 2019. During the past week they were at times trading only $0.50-$0.60 above intrinsic value, with around 4 years until expiration. That is only around $0.12-$0.15 per year to benefit almost dollar for dollar from any appreciation in GM’s shares above current prices.

When I have found these sorts of situations in warrants in the past where they are trading mostly at intrinsic value with very little time premium, and there is a long time remaining until expiration, they have proven not just to be bargain priced, but also a contrarian indicator of sorts. Perhaps the market is so doubtful of the underlying company’s future potential that they believe the underlying shares are likely to trade down and thus the warrants should not carry a premium over intrinsic value. However this could prove to be a beneficial time to go long among the prevailing pessimism.

The last time I encountered such a situation was my trade on ROIC warrants. The warrants were trading only a couple of percent above intrinsic value with almost two years remaining until expiration. Soon after a roughly 17% move in the underlying caused the warrants to more than triple.

On other occasions I have noticed warrants which appeared to be trading significantly below almost equivalent call options. Such was the case with my trade on Ubisoft warrants, which also produced a triple. This also appears to be the case with the GM B warrants currently. There  are Jan 2017 $18 calls on GM which traded last around $13.50 ($13.20 bid, $14.10 offer). The B warrants also traded as low as around $13.5 last week.  Remember that they have a strike of $18.33 (pretty close) but don’t expire until July 2019, around 30 months later. Compared to the Jan 2017 $18 calls, the warrants cost the same for basically the same strike price, but offer an expiration around 2 1/2 years further out.

The GM B warrants don’t have as much leverage as my previous ROIC and Ubisoft warrant trades, but with nearly 4 years until expiration and my belief that GM is undervalued I think the upside is significant, especially in comparison to the downside. I could easily see GM trading at $50-$60 in the next couple years, which would result in a triple in the warrants. I don’t see GM heading much lower than $25 and if that were to occur it seems unlikely to stay there long as it would be approaching a 6% yield at that price. So I think the downside in the warrants could be limited to around 30% or so resulting in an attractive risk/reward ratio.

With my purchase of the B warrants I am down to around 20% cash. I would be willing to double down on my position in the warrants if they were to drop significantly. I didn’t anticipate using my cash so soon, especially with the market looking weak of late and many stocks I follow taking hits after earnings. However I felt strongly about the risk/reward of my recent moves.

2014 Year in Review

I started 2014 with holdings in  several bank warrants (BAC-WS-B, STI-WS-B, ASBCW, VLYWW), old school tech stocks (IBM, INTC, CSCO), a Chinese online game publisher (KONG), and a couple of Vanguard ETFs (VXF and VXUS). By the end of 2014 my portfolio was completely turned over with none of those holdings remaining.

My first move of 2014 was to go long Alcoa in mid January. I added some more AA afterwards but the bulk of my holdings were bought in this first purchase. I thought AA would be a good balance to the rest of my portfolio and could become a core holding.  Thus far it is proving to be.

In February I began initiating small positions in several small to mid-cap growth stocks (SFM, YELP and BNNY). My intent was to average into the stocks I grew most confident in over time. I also bought some calls on KongZhong, expecting the stock would benefit from the release of Guild Wars 2 in China.

Near the end of February I sold my large cap tech stocks (IBM, INTC, and CSCO), to raise cash. I was pretty much break even on all three. I added Zillow (Z) to my collection of mid-cap growth stocks.

IBM

INTC

CSCO

In March I sold two of my bank warrants (BAC-WS-B and VLYWW). I just broke even on both. I wanted to raise more cash and position my portfolio more conservatively.

BAC-WS-B

VLYWW

Near the end of March I added a couple more high growth mid-cap stocks to my holdings with DATA and FEYE.

Near the end of April I bought a couple large cap growth stocks – AMZN and CMG.

By early May growth stocks had been beaten down so low that I thought it best to focus on my best ideas in that space and significantly accelerate my averaging into those names. So I sold BNNY, FEYE, AMZN, and CMG. I was down varying percentages on them when I sold, but they had not become meaningful portions of my portfolio so it was not really material to my overall return for the year. I also sold my KongZhong shares and calls. Those were more meaningful positions, and I made around 10% on both the shares and calls. I used the cash I raised to buy a lot more of the stocks I thought were my best ideas – SFM, DATA, YELP, and Z.

BNNY

FEYE

AMZN

CMG

KONG

In the second half of May I added some large cap growth stocks back to my portfolio, buying back AMZN, and adding BIDU, LNKD, and also VIPS.

In early June I decided to dedicate a portion of my portfolio to buying stocks with insider buying. I added DKS, TFM, and MTDR.

In the first half of July I made several more moves. I sold my remaining bank warrants (STI-WS-B and ASBCW). Those were big positions which I made 50% on each. I also sold my insider buying stocks (DKS, TFM, and MTDR) because I wanted to increase my focus even more. I was near break even on all three and again none of them were big enough positions to make a difference to my overall returns. In July I also added yet two more high growth stocks to my portfolio (ZU and TWTR).

STI-WS-B

ASBCW

DKS

TFM

MTDR

At the end of July I sold Z. I had intended Z to be a long term holding but it ran up so fast I decided to sell. I ended up catching the top almost exactly, locking in big gains and avoiding giving them back.

Z

To start August I added another growth stock, SGEN.

In early August I also started building a position in a micro-cap stock, GTIM, which I continue to hold.

In the second half of August I unloaded most of my growth stocks. I sold AMZN, TWTR, LNKD, BIDU, VIPS, YELP, and SGEN. Like Z I had intended them to be longer term holdings but they ran up so much in so short a period of time that I couldn’t resist locking in profits. I made between 10% and 50% on these trades, with most of them between 30% and 50%. At the same time I added to my SFM, DATA, ZU and GTIM positions, and established a new position in AWCMY.

AMZN2

TWTR

LNKD

BIDU

VIPS

YELP

SGEN

In mid September I sold DATA, same story of too fast a move up as my other growth stocks I sold.

I didn’t make many moves after that until November, when I sold AWCMY, after deciding the falling Australian dollar was too strong a headwind to battle. I was near break even on this trade. I also added a little to some of my existing positions.

AWCMY

Towards the end of November I bought some shares in The Habit, a new IPO. I had an order in on the IPO day but the stock opened above it so it was not filled. However when the stock came down several days later I began building a position.

Near the end of November I sold ZU, taking a small loss but deciding to focus on my very best ideas.

In December I bought a little Lending Club (LC) and an unnamed micro-cap stock, both of which I sold a week later. Neither was meaningful to my returns. And near the very end of the year I went long YELP again.

I also sold VXF and VXUS in stages throughout the year. I had intended for them to be a core and growing part of my portfolio over time, but as I found more opportunities I liked in specific stocks I sold off these two ETFs. I made a small percentage on both of them but they weren’t significant to my overall returns.

2014 was a year with a lot of turnover in my portfolio. I could have timed some of my entries and exits slightly better, but overall I am happy with all the moves I made. I think it was the right decision to exit all the positions I started the year with in favor of the new opportunities throughout the year. Overall I think I did a good job of buying when I thought the risk/reward was favorable and selling when it had become much less so.  And I think I am positioned well at year end with all the positions I am holding going into 2015 having favorable risk/reward profiles. AA and GTIM are both around 25% of my portfolio, SFM and HABT are both around 15%, YELP is around 7.5%, and I have around 12.5% in cash.

AA

SFM

GTIM

HABT

YELP2

In my past year in review posts I ended with some statistics about my trades. This year I went ahead and calculated my returns for this and prior years.  I have a few accounts in which I do my investing, some retirement and some taxable, and I had to account for contributions and withdrawals, so it took awhile to accurately figure out.

I calculated that my return in 2014 was roughly 44%. Here are my returns since I started this blog, and a comparison to the S&P 500 with dividends reinvested.

Year / TSAnalysis / S&P 500 / delta

2011 / +171% / +2% / +169 points

2012 / +22% / +16% / +6 points

2013 / +63% / +32% / +31 points

2014 / +44% / +14% / +30 points

In 2011 I had the majority of my portfolio in a stock which I got a triple on in a couple of months (COOL), which was the main driver behind my phenomenal return that year.

In 2012 I again had a trade which I got a triple on (warrants on UBSFY), however it was not as large a portion of my portfolio this time. I had a major position (KONG) I held for 7 months which I ended up just breaking even on. Still, I ended up beating the S&P 500 return by 6 points so I can’t complain.

In 2013 I had quite a bit of turnover, much of which didn’t contribute to my returns. However I had another significant position which I ended up getting a triple on (ROICW), which was the main driver of my strong return in 2013.

I am perhaps most proud of my performance in 2014. Unlike 2011 through 2013, most of my potential home-run plays in 2014 (such as my bank warrants, KONG options, and AWCMY) didn’t work out as well as planned yet I still managed to handily beat the S&P 500. My 2014 return was driven by strong gains in GTIM and AA, and well timed trades in several growth stocks.

My goal for the years ahead will remain to maximize after tax returns while minimizing risk. However I do not expect to continue to beat the S&P 500 by as much as I have the past four years, especially as I continue to increase my emphasis on after tax returns and minimizing risk.

Portfolio Update

I made a lot of moves this week. I bought some more SFM, DATA, and ZU. I also bought more of the micro-cap stock I mentioned in the previous post and I started a new position in Alumina Limited. I sold AMZN, TWTR, LNKD, BIDU, VIPS, YELP, and SGEN. I know that is a lot of changes and must seem like a drastic departure from the long term strategy I have outlined many times in the past year. So let me explain my reasoning.

I bought more SFM when it dropped below $30 on the share offering by Apollo and some other shareholders. Like I mentioned before, anytime SFM drops below $30 it is almost like an automatic buy for me.

I also bought some more DATA and ZU. Like SFM, both DATA and ZU are about a year past their IPOs and are trading near 52 week, post-IPO lows. That made them attractive to me here given their strong growth. Incidentally, research I have read has said that around a year after an IPO is often the best time to buy into new issues.

I accumulated more shares of the micro-cap stock but I still have more to go so I won’t be writing about it just yet.

Lastly I started a position in Alumina Limited (ticker AWC on the Australian stock exchange, AWCMY for the ADRs on the Nasdaq OTC, which is what I bought). Alumina is basically a pure play on Alcoa’s upstream businesses (bauxite mining and alumina refining). Alumina’s sole interest is a 40% stake in AWAC (Alcoa World Alumina and Chemicals). Alcoa owns the other 60%.

While I like Alcoa for its transformation into more of a light metals value added component supplier to the aerospace and automotive industries, I also think that the mining and refining businesses are due for a rebound and AWCMY provides a more leveraged play on that.

I not only depleted my cash on all those buys I also went a little bit on margin. So I had to do some selling. The first stock I sold was AMZN. AMZN was my largest market cap holding and the one I probably expected the lowest return from, so I always knew it would be the first to go if I found better opportunities.

But what about the other stocks I sold? In the case of TWTR, LNKD, BIDU, VIPS, YELP and SGEN I felt that perhaps they had simply moved up too far too fast, particularly the larger cap names. I accumulated the bulk of my positions in those stocks near their May lows. Since then they have gone up between 20% and 50% in two or three months. That is 100% to 200% annualized returns.

I asked myself, what if I didn’t sell any of them and just held them for around 10 years? What sort of gain would I expect? Google has been in the news recently because of the 10 year anniversary of its IPO, and over 10x increase since then. Could my stocks become 10 baggers in 10 years like Google, I wondered? That seemed unlikely because of the already larger market caps of most of them. BIDU would be a $700 billion market cap company. TWTR and LNKD would have $270 billion market caps. YELP and SGEN would have market caps of over $50 billion. As much as I like TWTR and LNKD, I don’t think they are the next Google, and as much as I like YELP I don’t think it is the next Priceline. A 5 bagger in 10 years seemed like a more reasonable expectation.

So then I worked backwards, calculating what annual return was required for a 5 bagger in 10 years. It is 17.5%, compounded. A 10 bagger would require a 26% annual return compounded over 10 years. The 100-200% annualized return I had gotten in the stocks I sold was just so far beyond that that it tipped me over to deciding to sell, even taking taxes into consideration. Also, some of my holdings are in retirement accounts so holding period was not a consideration there.

Another way I looked at it was, how many 50% gains would be needed to result in a 5 bagger? The answer is four. A 50% gain, compounded four times, would result in a 5 bagger. 6 times would result in a 10 bagger. Say I could make two 50% trades a year (it wouldn’t necessarily have to be in the same stock). In two years I would have a 5 bagger. That seemed far better than what I could expect from a strict buy and hold strategy.

Now if I didn’t see any opportunities for more 50% trades then perhaps I might have decided that sticking to a buy and hold strategy was preferable. However there were several opportunities in names I was already familiar with, like SFM, DATA, ZU, AWCMY, and the microcap as I already mentioned. So I would say that it was the combination of those opportunities I wanted to take advantage of along with the rapid gains in some of my existing holdings which made me decide on the course of action I did.

I ended up making about 10% on AMZN, 20% on SGEN, 30% on TWTR and VIPS, 40% on BIDU, and 50% on LNKD and YELP.  After all of my activity I am about 90% invested and 10% cash. However I like the risk/reward of my overall portfolio more now with the changes I made.

Mid Year Review Part II

In this second part of my mid year review I am going to review the stocks I am holding going into the second half – both the new positions I opened in 2014 as well as the positions I carried into 2014 which I have held on to.

I feel good about my portfolio makeup at this point and think that I will be holding on to most of these positions for the long term. My overriding goal remains maximizing gains after taxes. That means an increased focus on positions which I think will be good multi-year holdings. If I come across any shorter term trades which appear too good to pass up, I will make those in tax deferred/tax free accounts.

I’ll start with the positions I carried into 2014 which I am still holding. First off are the two ETFs I am long, VXF and VXUS. Together these currently account for around 5% of my portfolio. My long term goal is to have these two ETFs account for around 50% of my portfolio, but for now I am finding too many attractive opportunities in individual stocks to add to these. However over time I do expect to grow these two ETFs as a percentage of my overall portfolio.

Next are STI-WS-B and ASBCW, the two bank warrants which are the only other positions I started 2014 with which I am still holding. Together they account for roughly 12% of my portfolio. I once held warrants on more bank stocks, but over time I sold them off until only these two remained.  I think these warrants have the best chances of making big moves. I feel my original thesis on the bank warrants may finally be close to playing out with the macro picture continuing to improve and the end of the taper and the beginning of rate increases now within sight. If the underlying stocks make moves of around 25% higher that would be enough for the warrants to double just from their intrinsic value since they are only slightly out of the money. However I am watching these positions closely because if the underlying stocks were to trade sideways (or up or down slightly) for a long period of time that could result in the warrants steadily losing value (both from the loss of time value as well as the decreased volatility). I would like to be completely out of these positions well before two years prior to when they expire. Time value could really start to decline rapidly at that point, and one never knows what a given stock may do over a one or two year period, so I feel holding these warrants with less than two years to expiration is very risky. Right now I am up slightly on both STI-WS-B and ASBCW, and they have just about reached the one year holding period, qualifying for long term capital gains. My plan is to average out over the course of the next twelve months or so.

Now on to the new positions I added in 2014, the largest of which is AA. Alcoa is also my single largest position at around 24% of my portfolio. I have a high level of conviction that AA will be a great multi-year holding. I think that the adoption of full Aluminum body vehicles is a huge trend which will play out for a decade and which Alcoa will be a prime beneficiary of. Alcoa is moving more towards its value added businesses and away from its commodity businesses. But even there I think things are improving with Alcoa moving down the cost curve in its smelting operations and global supply/demand finally coming into balance. So I think Alcoa is both a cyclical play as well as a turnaround/transformation play. I feel AA also balances the rest of my portfolio which is heavy on tech and consumer names. For all those reasons I am comfortable making AA my single largest position, a core holding.

Next are four stocks I group together as my small/mid cap high growth stocks – DATA, SFM, YELP and Z. Each is about 7% of my portfolio. Each of these stocks has around a $4-$5 billion market cap, and I think all of them are leaders in their niche and have many years of strong growth ahead. My cost basis on these four names is close to their May lows and I think they will make great long term holdings. For each I just wanted to mention a few points which I felt demonstrates their leadership positions.

DATA – Of all the smallish market cap big data stocks I looked at, Tableau seemed the best, in terms of growth, profitability and balance sheet. Tableau was named a leader in Gartner’s most recent Magic Quadrant for Business Intelligence and Analytics Platforms report. I think Tableau’s product has a large, diverse addressable market which can fuel growth for years to come.

SFM – I think Sprouts Farmers Market is the best play in the healthy/organic food space. Sprouts recently ranked among the top supermarkets in Consumer Reports Ratings. Sprouts’ publicly traded peers such as Whole Foods and The Fresh Market did not fare as well. Sprouts’ same store sales have been coming in much stronger than its peers as well, nearly 13% in the most recent quarter compared to 5% for Whole Foods and 2.5% for The Fresh Market. Compared to Whole Foods, Sprouts has cheaper prices and I feel a better, less intimidating layout both of which give it wider appeal. Sprouts only has around 170 stores still, with potential for around 1,200 according to their projections. And in contrast to The Fresh Market, Sprouts has been successful in expanding into new markets whereas The Fresh Market is retreating from some of the new markets it expanded into.

YELP – To me Yelp is the modern day equivalent of the yellow pages and the clear leader in local search. Additionally I love the moat provided by their user generated content and scale. I think a key trend is specialized apps gaining market share in mobile search. eMarketer recently singled out Yelp as one of the players emerging from the pack in mobile search. I also think Yelp has many avenues for potential expansion. For example I think Yelp could more easily move into OpenTable or GrubHub’s businesses than they could move into Yelp’s.

Z – Zillow is the clear leader among real estate sites. I like Zillow’s business model with the agent subscriptions and that they are not dependent on just advertising. Z appears to be pulling away from the competition with more than double the traffic of the number two player Trulia, according to recent comScore data.

Next are four stocks I group together as my large cap growth stocks – AMZN, LNKD, BIDU and VIPS. Each of these is about 4% of my portfolio. And while they are larger cap I think they have many years of strong growth ahead.

AMZN – Amazon has the largest market cap of all my holdings. Despite being a $150 billion market cap company I think it is still early days for Amazon’s growth story. E-Commerce still has plenty of room to grow. And I think Amazon Web Services, Prime streaming video, Amazon Fresh, Amazon Pantry, Amazon Supply are all exciting opportunities. I also think Amazon has an interesting search angle with all of its data on customers shopping history. Top it all off with the leadership of Bezos, Amazon’s customer satisfaction ratings, and Amazon’s wide moat, and I think AMZN makes a great long term holding. The stock’s pullback to $300 gave me the opportunity I wanted to go long.

LNKD – LinkedIn has an enviable moat as the leading social network for professionals. And again I like that it has diversified revenue streams and is not dependent solely on advertising. LNKD’s company and CEO ratings on Glassdoor are superb. I bought most of my position around the May lows of around $150.

BIDU – I wanted some exposure to the China internet space and Baidu was a natural choice. BIDU has shown in its recent results that it is handling the transition to mobile successfully. With a dominant position, strong multi-year growth potential and a reasonable valuation, I thought BIDU was a great choice for a long term Chinese holding.

VIPS – I wanted a little exposure to another mega Chinese growth trend – e-commerce. VIPS has unbelievable growth and is profitable. I thought that VIPS had an interesting model combining flash sales and discount outlets.

Lastly are my most recent additions, my insider buying stocks – DKS, TFM and MTDR. Each of these is around 1.5% of my portfolio.  I also have around 10% cash currently.

One thing I had worried about was with my move away from having only a few concentrated positions, was I ‘diworsifying’ my portfolio down to where I would end up with index like performance? I do not think that is the case. My portfolio is still pretty focused with only around a dozen core positions, each of them a ‘best idea’ for me. I didn’t add any of them simply for the sake of diversification (not counting my two ETFs). Furthermore I feel all of them have significant upside potential. AA is a cyclical/turnaround play which can typically make explosive moves on the upswing. STI-WS-B and ASBCW have multi-bagger potential. DATA, SFM, YELP and Z are young growth companies. AMZN, LNKD, BIDU and VIPS are larger companies but still with plenty of growth ahead. My insider buying stocks and cash are aimed at targets of opportunity.

Overall I am up only slightly so far in 2014, but I feel all the changes I have made position my portfolio well for the long run.

Mid Year Review Part I

My portfolio has gone through quite a few changes in the first half of this year so I decided to do a mid year review again. In this part I wanted to cover all the positions I closed out in the first half of this year and in a second post I will go over the stocks I continue to hold going into the second half of the year.

As a reminder, I started 2014 with holdings in BAC-WS-B, STI-WS-B, ASBCW, VLYWW, IBM, INTC, CSCO, KONG, VXF, and VXUS.

In late February I sold my tech stocks – IBM, INTC, and CSCO.  I only held them for around 3 months, having bought them in early December. I only made a couple percent on each of them. My main reason for selling them was to raise cash for other positions I had started to open. INTC has moved up a bit recently, while IBM and CSCO have mostly traded sideways since I sold them.

In early March I sold my BAC-WS-B warrants. This was a position I had held for close to a year, buying my original positions in April and June of 2013.  BAC shares themselves performed decently over that time frame, moving from around $13 when I bought the warrants to around $16 when I sold them, or around a 23% gain. The warrants didn’t move much however, and I ended up barely above break-even on them. I listed that possibility (that the underlying stock may advance, but not enough to move the warrants) as a risk when I bought the warrants, and that ended up being the case. With one less year, roughly, left on the warrants, I started to worry that with another year of sideways to slight upward movement in the underlying, or worse yet a decline, the warrants could suffer. That ended up happening when BAC had a correction back to around $14.50 and the BAC-WS-B warrants fell around 20% to around $.73. So selling turned out to be a good move.

A week later in mid March I sold my VLYWW warrants. This was a warrant play on a smaller regional bank, Valley National. I opened this position in Aug 2013. These warrants expire in June 2015, so they were riskier than my other bank warrant holdings which didn’t expire until October 2018. This was a small position which I was willing to hold until expiration for their home run potential. However I started to see other trades which I thought had better risk/reward profiles so when I saw an opportunity to exit this position at break even I took it.

In early May I sold my holdings in KONG (they recently changed their symbol to KZ) – both the shares I had purchased in November 2013 and Sep $10 calls I bought in February 2014. I had strong conviction that KONG would reach around $15 when Guild Wars 2 officially launched in China. After all, KONG spiked to $15 in September of 2013 just on the announcement of open beta testing for Guild Wars 2. KONG only reached a high of around $12 about a month before GW2’s release, however. Had I sold my shares and calls then I would have made a nice profit, but my conviction was strong that KONG would reach around $15 so I didn’t. However when KONG continued to act weak after GW2’s launch I decided to sell, settling for around 10% gain on both the shares and calls.

Also in early May I sold some new holdings I had started buying just a couple of months earlier. In the first quarter of 2014 I started establishing small partial positions in several mostly small to mid cap higher growth stocks which I thought would make good multi-year holdings. At the time I thought these stocks were expensive so my aim was to open small initial positions just to become familiar with them and average into larger positions if they pulled back. By May these stocks had pulled back significantly, and I had gone through my first earnings reports with them. I wanted to accelerate my averaging into those stocks that I had become most confident in and sell the others. Those others included CMG, BNNY, and FEYE. I lost varying percentages on those three names, but they were all small positions and so the losses were not meaningful to my overall portfolio.

Collectively the positions I sold in the first half of 2014 accounted for roughly half of my portfolio. That freed up a lot of cash to deploy, which leads into my next post.

Portfolio Changes

I made some changes to my portfolio this week.  The drop in small cap/momentum stocks has significantly improved their risk/reward profiles in my opinion.  With most of them already having reported Q1 earnings, I sorted through which ones I thought were really the best long term plays.

I settled on four which I felt most confident about – Sprouts Farmers Market (SFM), Tableau Software (DATA), Yelp (YELP), and Zillow (Z).  All four reported great earnings which validated my original investment thesis on them.  I think Sprouts will be a long term winner in organic foods – I think Whole Foods is still too expensive and the older traditional supermarkets and Walmart will have trouble gaining significant mindshare in organics.  I think Tableau has a nice niche and clear lead in data visualization which I think is a large market but not as crowded as some other software/cloud spaces.  And I think both Yelp and Zillow are increasing their leads in their respective spaces and both have long runways still and many avenues for expansion. I wanted to increase my exposure to those stocks while still maintaining the same or greater cash position I had.

So I sold Annie’s Homegrown (BNNY), Fireeye (FEYE), Amazon (AMZN), and Chipotle (CMG).  I also sold KongZhong (KONG) – both the shares and Sep $10 calls I had bought.  Annie’s hadn’t reported earnings yet, but I wasn’t as confident in their ability to successfully expand their product line and I thought Sprouts was a safer play on organic foods. Fireeye was a tough decision to sell.  It was down so much I felt there was little downside left, and I really felt the Mandiant acquisition was great.  In the end however I decided their product being so expensive might lead to a longer sales cycle giving competitors time to catch up. There was nothing really wrong in my mind with either AMZN or CMG, just being more mature and not having dropped as much recently, I felt they wouldn’t bounce back as much on the upside either.

As for KONG, my plan had always been to hold the shares until around GW2’s release and then sell for hopefully around $15, for around a 50% gain.  With the drop in the small cap/momentum stocks I mentioned I felt those now had more upside potential (around 50% in the short to medium term and even more in the longer term) and thus had more attractive risk/reward profiles. Now it may well turn out that when KONG reports earnings in a couple weeks the stock takes off, but I will be OK if that happens.

On the KONG calls, I could have had more than a double on them had I sold them when KONG reached $12 recently.  However at that time I felt that KONG would continue to steadily increase to $15 leading up to Guild War 2’s official launch.  That turned out not to be and I don’t like holding options with only a few months remaining until expiration so I decided to just sell them for a small profit.

I ended up losing about 40% on FEYE, losing 10% an BNNY, breaking even on AMZN and CMG, and gaining around 10% on both my KONG shares and options.

So I used some of the proceeds from those sales to increase my pace of averaging into DATA, SFM, YELP, and Z. I suppose that kind of defeats the purpose of dollar cost averaging, but I really felt that current levels for those stocks were quite attractive here.  I also bought a little more Alcoa (AA).  I also saved a lot of cash, bringing my cash position up to around 35%.  I will continue to average into my small cap holdings over several months, perhaps until the end of this year, and will also continue to maintain some cash for any other opportunities which may arise.

Sold BAC warrants

I sold my Bank of America warrants (BAC-WS-B) warrants this week.  I decided that they are just too far out of the money still for the warrants to be a big winner in the near term.  I could be wrong and maybe they are about to really move, but I’ll take my chances.  I ended up just slightly above break even on them, but not enough that holding them for a few more months for long term gains would have made a big difference.  I also added significantly to my KONG and AA positions this week, and dollar cost averaged into a little more SFM, BNNY, YELP and Z this week. I am now at around 30% cash with these moves.

A couple portfolio additions and subtractions

I established a long position in Zillow (Z), the online real estate company.  It appears to me that Zillow is pulling away from its competition, and similar to Yelp, Sprouts, and Annie’s, I think it can grow for many years to come.

I sold my long positions in IBM, INTC and CSCO.  My thinking on them hasn’t really changed, but they were always really more of a place to park some money for awhile.  With the positions I have been adding and/or growing recently my cash levels had gotten pretty low and I wanted to raise that up again.  I made a couple percent on each of them, but the main benefit was raising cash as I said.

With the changes I have been making of late, I thought it a good time to review my latest thinking as far as my portfolio management. Maximizing gains after taxes remains the top priority.  And my thinking on this has evolved a little bit that the best investments to achieve that are young growth companies which I am confident can grow and that I can hold for 10 or 20 years.  As best I can judge right now, the stocks I have added recently (BNNY, SFM, YELP, Z) have that potential. Of course if the market consensus is that odds are good of a company growing that consistently for that long, it will be priced into the stock to some extent so you won’t necessarily be buying at bargain valuations.  However I have tried to counter that as much as possible in the following ways: 1) by buying stocks which I think still have low enough market caps/big enough markets to grow for a long time to come, 2) by buying these stocks on pullbacks and 3) by dollar cost averaging into these stocks.  The big benefit is that if these companies can grow for a very long time, I can hold them for that long, and their growth can compound for that long before I sell them and have to realize capital gains.

Until these recent additions, my portfolio was heavy with stocks which were not geared towards being very long term (by which I mean 10 years or more) holdings.  With the tech stocks I sold (IBM, INTC, and CSCO) I was only looking for around a 50% return before I would have sold them.  AA is a cyclical.  KONG is in a hit driven business.  And my bank warrant positions expire in 2018 and I would probably want to be out of them well before then.  In all those cases my holding period is probably only a couple of years.  The only positions I had which really fit the very long term holding period were my two ETFs, VXF and VXUS.  I really wanted to add some individual stocks which I felt I could hold for almost as long a time but which had greater potential.

Now I feel my portfolio has a little better balance.  I have added some young growth companies which I hope can be very long term holdings.  I will continue to average into them.  I will continue to average into more VXF and VXUS.  My bank warrant positions will be reaching the 1 year holding period around mid-year and I will probably start dollar cost averaging out of them after that time so that I end up out of them well before their expiration. AA and KONG will likely have shorter holding periods and I will trade them as appropriate.  With my recent sales I have also raised my cash level back up to around 25%, giving me a nice buffer for any opportunities which may arise.

New position – long AA

I went long Alcoa this past week.  I first looked into Alcoa a little deeper when they were dropped from the Dow (along with Bank of America and HP).  Then this past week the news was announced about the new Ford F-150 having an aluminum body.  I think this will spur a race among more car makers to shift to aluminum.  I think this could be a very positive dynamic for the Aluminum industry over the coming years.

I am no expert on the industry, and I found the aluminum industry was a little more complex than I thought it would be when I started looking more into Alcoa.  So I won’t go into much detail, but it appears that over capacity is still a concern, and there are dynamics involved beyond straight supply and end-user demand, with a large amount of Aluminum produced being tied up in financing deals, leading to rising premiums (the amount paid to deliver Aluminum from warehouses) despite the still downward trend in Aluminum prices on the LME.  Bottom line, I do think that supply/demand are coming into better balance, but if/when Aluminum prices start to increase I would expect some of that Aluminum tied up in financing deals to start to come onto the market, limiting upside price movements.  I don’t think all of that supply would be released at once however, so a gradual increase in Aluminum prices could be sustained on rising demand for Aluminum from both automotive and construction industries.

An additional reason I was positive towards Alcoa is that they are moving to generate more of their revenue from value-added downstream Aluminum products while reducing their expenses in their upstream businesses.  So, AA looked reasonably priced still, with potential positive trends underway.  Also the technicals looked pretty good on Alcoa currently. I estimated the downside risk to be a couple dollars per share, and the upside potential as much as $10/share, resulting in a favorable risk/reward profile.  With this purchase I am now around 16% cash.