Category Archives: insider buying

GTIM More Insider Buying and May Investor Presentation

Insider buying has continued at GTIM. The CFO bought an additional 30,000 shares over the past several days, the CEO bought an additional 3,000 shares, and a director (Robert Stetson) bought 26,300 shares. Stetson is the director who founded US Restaurant Properties, a restaurant focused REIT, and who has held CEO and CFO positions at various restaurant and food companies, so he has deep industry experience. Stetson already owned something like 850,000 shares, so I think the fact that he still wanted to add more says a lot. Stetson had sold around 30,000 shares in September of last year, so he pretty much replaced those shares. So overall, I think this recent bout of buying by multiple insiders shows a strong conviction in GTIM’s prospects.

Also today, there is a new GTIM investor presentation which is part of investor meetings GTIM is attending.

GTIM Valuation and Industry Comparison

I decided to do a more in-depth valuation analysis on GTIM to demonstrate why I think it is so attractive currently.

Before getting into it however, I wanted to mention that there were more insider purchases last week. The CFO bought 30,000 shares and the CEO bought 5,000 shares. The June quarter earnings should be good. June is a seasonally strong quarter, it will have more than double the Bad Daddy’s restaurant operating weeks year over year, there will be no acquisition costs unlike last year, and with only one Bad Daddy’s opened during the quarter and the delay in the next opening, pre-opening costs should be down. So adjusted EBITDA should be strong. Hopefully that gives the stock some support, but regardless of whether it does or not I still believe the long term picture is very bright for GTIM, which I think my valuation analysis will show.

To perform the analysis I looked at all the US listed restaurant stocks I could find which had share prices above $1, positive EBITDA, and were regularly reporting. I ended up with a comparison group composed of slightly over 50 stocks.

I compiled statistics on several measures of valuation including price to sales, trailing and forward PE ratios, and EV/EBITDA ratios. I decided the best measure to use was EV to adjusted EBITDA. For most of the stocks in the group EBITDA and adjusted EBITDA were very close. However for the smaller, faster growing companies there were more significant differences between EBITDA and adjusted EBITDA due mainly to pre-opening costs being a higher percentage of operating income. If these smaller companies weren’t expanding so quickly they would be showing greater earnings, thus I felt that using EV/adjusted EBITDA made for a fairer comparison.

I thought the best way to visualize the data was to plot EV/adjusted EBITDA versus the long term expected growth rate, resulting in a sort of PEG ratio, except using EV/adjusted EBITDA. To calculate adjusted EBITDA, I started with the ttm EBITDA from Yahoo Finance, which it gets from Capital IQ. To arrive at adjusted EBITDA I added ttm pre-opening costs, obtained from company filings. I did not make any other adjustments to arrive at adjusted EBITDA. The long term expected growth rate is the 5 year expected growth rate, also from Yahoo Finance, which it says is from Thomson Reuters.

I also compiled statistics on store counts, restaurant level operating margins, and sales per square foot from company filings. These statistics help gauge how realistic the long term expected growth rate is. Smaller store counts mean longer runways for growth, strong restaurant level operating margins can be indicative of a concept with strong consumer appeal, and high sales per square foot can indicate strong cash-on-cash returns (which were not readily available for all compaines otherwise I would have listed it instead of sales per square foot).

Now I can describe the chart below. On the Y-axis is the 5 year expected growth rate. On the X-axis is the EV/adjusted EBITDA ratio. Next to each data point is ticker symbol, number of worldwide store units, restaurant level margin, and sales per square foot. Lastly the colored backgrounds indicate long term expected compounded annual stock returns (more on this in a bit).

At a given EV/adjusted EBITDA ratio, a higher growth rate is favorable. Likewise, at a given growth rate, a lower EV/adjusted EBITDA ratio is favorable. Therefore, generally, the more towards the upper-left area of the chart the better it is, and the more towards the lower-right area of the chart the worse it is.

The blue diagonal lines are drawn at constant EV/adj EBITDA to growth ratios of .5, 1 and 2. This is referred to as the PEG ratio when using PE ratios, but here I am using EV/adj EBITDA instead. The idea is the same, though. A ratio of 1 (meaning the valuation ratio is equal to the growth rate) is generally considered fair. A ratio of .5 (meaning the valuation ratio is half the growth rate) is considered inexpensive, while a ratio of 2 (meaning the valuation ratio is double the growth rate) is considered expensive. So again, being above and to the left of the 1 line, and especially the .5 line, is good, whereas being below and to the right of the 1 line, and especially the 2 line, is worse.

Lastly the colored backgrounds indicate expected long term annual compounded stock returns if the company grows earnings at the expected rate for 10 years and trades at a valuation ratio equal to its growth rate at the end of those 10 years. For example, consider a stock which currently has an EV/adj EBITDA ratio of 10 and an expected long term growth rate of 20%. It is in a green region (an expected compounded annual return of between 20% and 30%). So if the stock grew earnings 20% a year for 10 years, and at the end of those 10 years traded at an EV/adj EBITDA multiple of 20, the stock price would appreciate from both the increase in earnings and an expansion of its multiple, resulting in a 20-30% compounded annual return. Conversely, stocks which currently have a relatively high EV/adj EBITDA multiple compared to their growth rates would sit in orange or red regions, actually resulting in negative annual compounded returns if the stock grew earnings at the expected rate for 10 years and traded at a multiple equal to that growth rate at the end of those 10 years.

Restaurant-Group-2

The average EV/adj EBITDA ratio for the group is 12.43 with a standard deviation of 7.19. The average expected growth rate for the group is 15% with a standard deviation of 6.2%.

GTIM compares very favorably to the group. It is nearest to the upper-left corner of the chart, and is one of only two stocks in the darker blue region (40-50% compounded annual return). This is due to GTIM’s high expected growth rate (30%) compared to its EV/adj EBITDA ratio (12).

Just to show what a difference pre-opening costs can make for smaller, faster growing companies, the average difference between EBITDA and adjusted EBITDA for the entire group is 6% (adjusted EBITDA is 6% higher than EBITDA) whereas for GTIM the difference is 100% (adjusted EBITDA is double EBITDA).

The number of units, restaurant level margin, and sales per square foot listed for GTIM are for Bad Daddy’s only since Bad Daddy’s will come to represent the vast majority of GTIM’s growth and sales. With only 17 Bad Daddy’s units, GTIM has the longest runway by far, and the restaurant level margin is solid at 15.9% compared to the group average of 18.0%, and the sales per square foot is above average at $693 compared to the group average of $587.

If GTIM can grow as expected I have no doubt the stock will provide spectacular returns. So I wanted to review once more the reasons why I think GTIM will grow as expected.

  • I think Bad Daddy’s is taking share from all the large, established casual dining chains such as Applebee’s, Chili’s, Outback Steakhouse, Olive Garden, etc.
  • I think Bad Daddy’s is appealing to millenials who like trying new places instead of going to the aforementioned chain restaurants.
  • Reports suggests that contrary to the popular narrative, millenials are increasingly moving to the suburbs. However they still want the things urban living provides ready access to – farm to table restaurants, craft beers, walk-able areas. There is even a name for it – “hipsturbias.” This is fueling demand for the types of lifestyle centers that Bad Daddy’s is locating in.
  • I like that Bad Daddy’s is positioned in the casual dining space instead of the overcrowded fast casual space.
  • User reviews for Bad Daddy’s continue to be very good.
  • Bad Daddy’s is proving itself. The locations opened so far are meeting the target economic model.
  • With only 17 locations so far, the runway for growth is very, very long.
  • I think there are some trends favoring the restaurant sector such as increased eating out versus cooking at home, consumers increasingly spending on experiences as opposed to goods, and more recently lower commodity prices.
  • I feel I can understand restaurants fairly well and I do not think they can be “Amazoned.”
  • I think management really gets it. On the most recent earnings call they mentioned where they believe their sales are coming from. They mentioned that they don’t want to appear anything like a chain restaurant. They mentioned that they don’t want to do any big media advertising for Bad Daddy’s for fear of ruining the local, independent feel. They mentioned Texas Roadhouse as a model for using local and social advertising. Texas Roadhouse (TXRH) is one of the few restaurant stocks near an all time high, so I would be very happy if GTIM could emulate TXRH’s success.
  • I think management has really zeroed in on where to place new locations. Management has mentioned how the best leading indicator for store openings is the level of outperformance of competing local chains. Coincidentally I happened to catch a feature on Nightly Business Report the other day on the CEO of Texas Roadhouse where he mentioned that that was one of his best indicators for new location success as well.
  • I think management is honest and forthright in its communication. Having held the stock for around 21 months now, and having listened to numerous conference calls and presentations, and having increased my knowledge of the restaurant sector, I feel that management has been transparent, has largely delivered on what they said they would, and has not clammed up when addressing their problems. I also feel that management is long term oriented, and are good capital allocators.

Added more GTIM

I bought more GTIM this week around $4.50. I think GTIM’s fundamentals are as good or better than at any time since I bought my first shares, as evidenced by GTIM’s recently announced preliminary results.

I also think GTIM’s valuation currently is as attractive as it has been since I’ve owned shares. When I first bought shares around 15 months ago, GTIM was trading at around .7x forward EV/sales (since GTIM is an extremely small, emerging story, I like looking at EV/sales instead of earnings based metrics. I have confidence that earnings will follow sales growth since GTIM’s key metrics like restaurant level contribution, sales per square foot, and same store sales are healthy).

Despite dilution, GTIM is now trading at a similar forward EV/sales ratio as it was 15 months ago. However GTIM now owns Bad Daddy’s, has a wider store base, has continued to prove the concept for an additional 15 months, and has a fuller pipeline of stores in development.

Growth stocks, small cap stocks, and restaurant stocks have all been out of favor of late. Still, I never expected GTIM to fall all the way back to the $4 level (GTIM’s CEO bought some shares recently around $6). If I did, I would have sold some shares around $10 (despite my inclination to hold for very long term gains and defer taxes as much as possible) just so that I could buy back twice as many shares at current levels. While I did not do that, at least I had some cash on hand so that I could add some shares at current levels.

I still think GTIM could be a multiple bagger over the next several years. In that sense it doesn’t matter as much what GTIM does in the short term. However the difference between shares bought at $10 and shares bought at $5 could ultimately result in having either a 5 bagger or a 10 bagger on those shares, which is huge. I am now down to around 10% cash.

Long New Media Investment Group

The new position I added last week and this is New Media Investment Group (NEWM). New Media is in the business of owning local newspapers and websites, and providing digital marketing services. It was a spin-off from Newcastle Investment Corp in February of 2014.

I like local newspapers as an out of favor industry where things are not as bad as believed. I favor the smaller, more local outfits, which I believe will face less competition from other news sources.

Print advertising is in secular decline, but the rate of decline appears to have stabilized. NEWM’s model is to acquire local papers at between 3-5x EBITDA. Since their spin-off NEWM appears to be executing well on that strategy. You can read more in their most recent presentation.

I liked NEWM here for several reasons. It is back near its spin-off price around $14, down from its all time high around $25, despite improved financials. At my average price of a little under $15, it pays nearly a 9% dividend, which is well covered by free cash flow. The balance sheet is in decent shape. There was insider buying by both the CEO and CFO a couple weeks ago. Leon Cooperman (a respected value investor) is a 10% owner and has also been a buyer the past two weeks. NEWM also has around $200 million in NOLs and owns around $200 million in real estate.

Often very high dividends are a red flag, an indication that the business is in trouble. A double whammy of a reduced/eliminated dividend and stock price depreciation could occur. In the case of NEWM I think the dividend is safe, and even likely to grow.  So I do not see much downside from current prices.

If things work out on the upside, I think the dividend could grow modestly over the next few years and the stock could appreciate to where the dividend yield is around 5-6%, resulting in a total return of around 100%. The worst case scenario I see is skepticism remaining high, causing the stock to continue to trade near its current 8-9% dividend yield. So overall I see the potential for a double with minimal downside, resulting in a favorable risk/reward ratio.

I like NEWM better than its peers (such as GCI, NYT, TPUB, JMG, LEE, etc) because it is among the largest operators of smaller town papers with the least exposure to larger metropolitan/regional papers, and also because of the dividend and insider buying.

While the GM-B warrants I sold had more upside, they also had more downside, and in the current environment I felt trading some upside for less downside was the right move. I also added some more GTIM this week. With these moves I am now at around 10% cash.

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.

Bought SGEN and a couple other moves

I have wanted to add a small/mid cap biotech to my portfolio for awhile and in particular I have had Seattle Genetics (SGEN) on my radar. I am far from knowledgeable in the biotech space, and I consider having just one small/mid cap biotech rather risky. So I liked SGEN because besides appearing to me to be a leader with their next generation ADC cancer therapy technology, they have growing commercial sales already, a strong balance sheet, a robust pipeline, and agreements with major drug companies. And although I place more importance on insider buying by executives, it is nice to see that well known biotech hedge fund, Baker Bros, has been accumulating more SGEN recently and it is their top holding.

SGEN is about 33% off of its high and reported good results and outlook yesterday yet the stock didn’t move much this morning. So I thought this was an attractive entry point for me finally into SGEN.

I also bought a little more ZU today, to bring it up to the same proportion of my portfolio as my other small cap growth stocks.

In addition I bought more SFM today. The SFM shares I bought today were mostly for a trade. In addition to the overall down market I think SFM was down today because of Whole Foods disappointing results yesterday. However I think SFM is taking share from WFM and so shouldn’t have traded down on WFM’s results. I thought this provided a good trade opportunity ahead of SFM’s earnings next week.

In addition to Alcoa, Sprouts is one of the stocks in my portfolio I have the most conviction will be a strong grower for the next 10 years. SFM is just a little expensive however so I felt it may take a year or so for it to grow into its valuation before it starts to take off, which is why I haven’t made it a bigger part of my portfolio yet. I didn’t think I’d get another opportunity to buy SFM under $30 however, so I decided to pull the trigger on some more shares today. If SFM doesn’t gain on earnings like I expect, I wouldn’t mind holding onto the shares I bought today for the long term.

With my most recent moves I am down to about 5% cash. Although I had been raising cash to adopt a slightly more conservative positioning, I didn’t see a lot of risk in the moves I made today. Anytime I can buy SFM under $30 is just too attractive an opportunity for the long run for me to pass up. I don’t think there is more than a couple dollars of downside to SFM from these levels. Similarly SGEN and ZU appeared to have minimal downside risk at these levels.

So I am comfortable with having a smaller cash buffer than normal despite the broader averages looking perhaps a bit toppy still even after the pullback of the past week.

Additions and Subtractions

I added a couple new positions this week and sold some positions as well. As I mentioned in my mid year review, I want to be alert to ‘diworsification’ and avoid my portfolio becoming too index fund like, with index fund like returns. So as I evaluate potential new positions I also consider my existing holdings and whether any should be sold to maintain the focus of my portfolio on my best ideas. I’ll start with the positions I sold.

I sold both of my remaining bank warrants, ASBCW and STI-WTB. Both had recently reached the 1 year holding period. I had gains in both so I wanted to wait until they qualified for those long term capital gains before I considered selling them.

The main reasons I sold them both now is because I saw better risk/reward potential elsewhere, and I wanted to eliminate the possibility of a zero outcome. From current levels I estimated upside on the warrants to be around 400% and downside was 100% (if the warrants expired worthless), for a reward/risk ratio of around 4:1. In some of the small/mid caps I am tracking I saw similar upside, but downside risk of only 25-50%, resulting in much higher reward/risk ratios.

It was the possibility of a zero outcome which really sealed my decision. If I were to hold the warrants for another year and the underlying stocks moved sideways and the warrants lost 25% of their value, I would not want to average down because the chances of a zero outcome only increased. With the small/mid cap stocks however I could average down as long as I believed the fundamentals remained intact.

I had originally thought that I would average out of the warrants over the course of 12 months or so, but after weighing everything I decided to sell my entire positions now. I made around 50% on both ASBCW and STI-WTB, so I have no complaints.

The other positions I sold were my insider buying stocks – DKS, TFM and MTDR. I decided the idea of dedicating a portion of my portfolio to following insiders was not worth it. The positions were too small to make a big difference and were diluting my focus. I made about 4% on MTDR, 2% on DKS, and lost about 4% on TFM.

Now on to the additions. I added Zulily (ZU) and Twitter (TWTR). Both stocks had their IPOs less than a year ago, shot up, and have since fallen well off their highs to near post-IPO lows. I think both have strong growth prospects for many years and their corrections provided compelling entry points.

Zulily appears to have broken through in the flash sales space. I kind of view Zulily as an online QVC. I think sometimes even online shoppers prefer being presented a curated selection of items at a steep discount. I think there is a chance for Zulily to thrive there in a niche not in direct competition with Amazon. There are some concerns about Zulily’s slow shipping but I think ZU will work on that. They won’t be as fast as other online retailers with their model, but I don’t think they have to be.

As for Twitter, while concerns about user growth and monetization, especially in comparison to Facebook, have driven shares down post IPO, I consider those opportunities. I think TWTR has better engagement and is more inherently a commerce/advertising platform than FB. I expect that to ultimately lead to better share performance for TWTR.

I didn’t use all the cash from my sales on these additions so my cash position has increased to 20%.

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.

New Longs – DKS, TFM, MTDR

I made the first three purchases of my insider buying strategy this week – Dicks Sporting Goods (DKS), The Fresh Market (TFM), and Matador Resources (MTDR).  Each is about 1.5% of my overall portfolio, so collectively the ‘insider portion’ of my portfolio currently stands at about 4.5% of my overall portfolio.

Since stocks purchased as part of my insider strategy are not the ones I would have picked were it not for the insider buying, and because they may fall further outside my sphere of competence, I will not go into great depth on each one.  Rather I will review how they fared on my insider buying checklist.

First up is Dicks Sporting Goods.  DKS has a $5.4 billion market cap. Last week the Chairman and CEO bought $4.9 million worth of shares, the CFO $100k, and a director bought $1 million worth of shares.  This week another director bought $110k worth of shares. So there was buying by key executives, and also cluster buying.  The CEO already owned a massive number of shares, and the insider buying appeared targeted and strategic.  Dicks has been a consistent growth story for awhile but the recent disappointing quarter brought the stock down near a greater than two year low.  The company is profitable with a healthy balance sheet.  So I consider DKS a textbook example of checking all the boxes on my checklist.  I bought my position about 4% above the insiders price of around $42.50.  There are obvious concerns, about their golf and hunting sales, about competition from Amazon.  But that is what creates opportunity and where trust in the insiders comes into play.

Next is The Fresh Market.  TFM is a healthier/organic grocer with a $1.6 billion market cap.  About a month ago the CEO bought $660k worth of shares, and two directors bought $260k and $100k worth of shares.  What pushed TFM over the edge for me however was this week when another director (who is actually the company founder and original CEO) bought $13.2 million worth of shares.  Again we have the check boxes of significant buys by key executives who already owned a significant number of shares.  We also have the cluster buying which appeared targeted and strategic.  TFM also had a fairly strong track record of growth in sales and EPS, although not as good as DKS.  TFM has a healthy balance sheet.  The company’s recent missteps and poor quarters brought the stock down to the lowest since its IPO over three years ago. I got my shares a little higher than the founder’s recent purchase price than I would have liked, but in-line with the other insiders purchases of a month ago, at around $33.  Honestly I wouldn’t have touched this one were it not for the insider buying.  Comps have been week lately and expansion in parts of California failed and those stores are being closed.  As you know, Sprouts Farmers Market is one of my favorite stocks for the long run. Comps at Sprouts have been much stronger and expansion into new markets are proving successful – I think Sprouts will be one of the long term winners in this space.  However, TFM management says they are going to refocus on filling out their existing markets first and if that can restore the level of profitability from before the missteps and grow them from there again, TFM could be a winner.  Again, the element of trust in the insiders comes into play.

Last of my purchases this week is Matador Resources, a $1.9 billion market cap independent energy company with operations in the Eagle Ford and Permian Basin.  Last week the CEO, CFO, and several other officers and directors bought shares as part of a secondary offering.  The CEO bought $250k worth of shares, in addition to $120k worth of shares he bought two weeks prior.  The CEO and most of the other buyers already had significant holdings.  Buying by key executives, cluster buying, and targeted buying.  MTDR has been growing revenues strongly and last year reached profitability.  The balance sheet is healthy.  The secondary offering knocked the stock down a couple dollars from where it had been trading.  I got my shares at almost exactly the price the secondary occurred at and in which the insiders participated, at around $25. MTDR is an example of a sector I have found interesting but not invested in before because I felt it was too far outside my sphere of competence, unless I went with one of the safer, large cap majors.  Here especially trust in the insiders is key, but I am glad that my insider buying strategy led me to add a smaller, higher growth exploration company to my portfolio.