Category Archives: portfolio management

2016 Year in Review

My 2016 Year in Review is going to be really easy because I didn’t make any changes in 2016. I added a small amount of GTIM early in the year, but that was it. I was down around 34% in 2016, compared to the S&P 500 which gained 12%.

I continue to hold all my GTIM, I have not sold a share. I think my investment thesis is still intact. Fundamentals have become a little tougher in the industry, and sentiment towards the industry has become decidedly worse, but I think GTIM continues to perform largely as management indicated they would. GTIM is a young growth story in the sector, taking share from the larger players, so I do not think their growth is as dependent on the macro conditions in the industry.

Importantly, same store sales, average weekly unit volumes, and restaurant margins at Bad Daddy’s are still at management’s target model in this tougher environment. 2017 guidance for new store openings and revenue are still on track, despite the company deciding to shift planned new openings from the Phoenix market to the Midwest and Southeast instead due to a minimum wage/health care law that was passed in Arizona.

I think the next 12-24 months will be key for GTIM. If new markets perform as expected, then the Bad Daddy’s concept will have proven itself in roughly a dozen metropolitan markets in roughly a half dozen states, with no reason to think that the concept cannot continue to expand nationwide.  As revenues, margins, and profits continue to grow, I would expect GTIM’s multiple to expand. If new markets do not perform as expected, then it would be cause for me to reevaluate my investment thesis in GTIM.

New Year’s Thoughts Part 2

I plan to be far more selective in my investments in 2016. I am still concerned about the overall markets, and I think a lot of the types of trades that worked for me in past years are not suited to what I expect to be a slower growth environment going forward.

For example, options and warrants have been big parts of my strategy in past years. I do not think short term options with the potential for complete loss of your investment, and even most warrants with several years until expiration, are a good risk/reward trade in a slow growth environment.

Swing trading growth and momentum stocks has also been a strategy I have used with success in the past. I do not think that will be as attractive a trade as it has been. I think many of the glamour stocks, with sky high valuations, may stay down for a long time instead of bouncing back up like they have before.

Small and micro-cap stocks have been an important part of my strategy, and while they will remain so I plan to be far more selective in the ones I am willing to bet on.

I have ventured into higher yielding dividend stocks at times, but I do not think that area will provide good risk/reward in a rising rate environment.

At other times I have added a few value stocks to my portfolio. However my confidence in that area has also declined as I think some of the changes in fundamentals which have led to depressed valuations in certain sectors are more structural and long term in nature rather than short term.

With my caution towards so many groups of stocks, that doesn’t seem to leave much left to invest in. However, there are a few areas I hope will still provide attractive opportunities.

I will always keep scouring the smaller cap space for what I believe to be those unappreciated compounders which are still available at attractive valuations.

I think some large caps are reasonably valued and may grow faster or for longer than is built into their valuations.

I think special situations and turnarounds could continue to work.

And if I do not find anything which meets my criteria, I will be happy to remain highly concentrated and/or sit on cash.

Thoughts entering the New Year

As I mentioned in my year end review, I feel very comfortable entering 2016 with GTIM as my only position. The big picture reason I like GTIM is simple.  With its Bad Daddy’s Burger Bar concept,  it is a classic regional retail/restaurant stock with national expansion potential. However there are many such stocks, most of which will go nowhere. So why do I feel confident betting that GTIM can fulfill its potential? There are several reasons.

1) I believe that the Bad Daddy’s concept is appealing to consumers. It was named by Zagat as one of the best burgers in the country and it is getting good scores on the review sites (Yelp, Google, Urbanspoon, Tripadvisor, etc). The food covers the biggest segments (burgers, sandwiches, and salads) and has options for different diets, and customizable build your own burger and salad options. While Bad Daddy’s is not for the healthier eating conscious, they do have options for vegetarian, gluten free, and low carb diets.

2) I like that Bad Daddy’s is positioned in the full service segment, rather than the fast casual segment. I believe that fast-casual has become very crowded – Bad Daddy’s would have to compete with Chipotle, Panera, Zoes, all the fast casual better burger places like Shake Shack, Habit, Five Guys, all the other fast casual upstarts in other categories too numerous to count, and even all the fast food chains which are trying to upgrade their offerings.

By positioning itself in the full service segment instead, I think Bad Daddy’s competition is rather places like Buffalo Wild Wings, BJ’s, higher end burger places like Zinburger and Hopdoddy’s, steakhouses, gastropubs and sports bars. Still crowded, but far less so than fast casual in my opinion.

3) I think the positioning as full service, slightly higher priced, fits well with where new retail developments and remodels are going – more upper scale, experiential, lifestyle type developments instead of the declining legacy malls and strip mall sites. I think this opens up different, and better long term site opportunities for Bad Daddy’s than if it were competing for the same spots that all the fast casual places are vying for.

I think some of the details of the Bad Daddy’s concept, such as the addition of rooftop bars to some locations,the selections of local craft beers, and the build your own burger and salad options fit in well with the trend towards experiences in both restaurant and retail.

4) Whereas in most industries being the dominant, established player brings tremendous advantages (economies of scale, brand recognition, etc), I think that in a few cases it actually starts to work against the industry leaders, such as when a brand becomes associated with fast or cheap (McDonald’s or Walmart) rather than better-for-you or upscale. In food in particular, I think the trend among the younger demographic (call them millenials if you want) is to discover and try new places rather than the old familiar chains. I think Bad Daddy’s is designed to appeal to this demographic in particular, with its small-box concept.

I think Bad Daddy’s is doing well to avoid the chain perception, even as it adds locations, by making each location feel like a one-off by doing things such as not having all the exteriors look exactly the same, and having the local craft beer selections in different regions.

5) Bad Daddy’s unit economics are attractive, with a high average unit volume (around $2.5 million), high sales per square foot (above $700/sq ft), good restaurant level operating margin (target of 20%), and attractive cash-on-cash returns (40% return after second year open). If Bad Daddy’s maintains those targets as they open more locations I think GTIM will become quite profitable.

6) I think the restaurant sector has some tailwinds which make it attractive for the foreseeable future. Data has shown a long term trend towards eating out versus cooking at home, with recent data showing  spending on dining out surpassing spending on groceries for the first time.

I think restaurants and other small-luxury type indulgences are benefiting from lower gas prices. Even if gas prices were to move up, I am not too concerned because I think these types of small luxuries are among the few indulgences still affordable to the increasingly squeezed middle class consumer.

Dining out is not in danger of being ‘Amazoned’, as many other retail sectors have been. In fact shopping site developers are courting more of the types of businesses which are resistant to online shopping, such as restaurants, exercise/workout places, and other experiential destinations.

7) I think food commodity prices, in particular beef prices, have peaked for the foreseeable future. As they come down that should help restaurants margins. While wages are increasing, to the extent that they are the product an improving economy, I do not think it is something to be overly concerned about.

8) GTIM’s senior management is experienced in the restaurant business. Board members include  former CFO experience at Burger King and Pizza Hut as well as experience in restaurant property REITs.  Directors and executive officers collectively own a lot of GTIM’s shares.

I believe that management is honest and forthright in their communication with shareholders, and have the long term interests of the business at heart. I think management is being prudent in their expansion plans, waiting for the right sites to come along instead of pursuing growth at all costs.

Management has largely delivered on what they said they would do in the roughly year and a half I have been following the company. They acquired complete ownership of the Bad Daddy’s concept and they have mostly met their store opening schedule. If I had one complaint about management it would be that they have been slightly optimistic in their store opening guidance, with the shortfall due mostly to factors outside of their control. I would prefer if they accounted better for such uncertainty.

9) GTIM’s insiders have bought shares recently. Although it could be called just a token amount, the CEO bought 2,000 shares around $6.10 in August. Perhaps more encouraging, the CFO bought 30,100 shares around $4.24 last month (December).

10) It is still early enough in GTIM’s story that I feel saturation is not a near term concern, and GTIM’s valuation is still reasonable enough that I think just a couple years of expansion could have a significant impact on GTIM’s share price. This is in contrast to the plethora of fast casual IPOs of the past few years, which debuted with high valuations and were much further along with their store counts. In almost all of those cases I could envision a scenario in which they grow store counts as expected for several years but the stock price hardly appreciates as it grows into its valuation.

In the case of GTIM, I would be more concerned if they were already at 200 Bad Daddy’s locations, or even 100. But at only 15 or so units, I think Bad Daddy’s should be able to grow to at least 50 units easily. There are numerous public restaurant stocks with 100+ units which are profitable and have much higher market caps than GTIM, but whose concepts don’t have the potential I think Bad Daddy’s does.

11) Although Bad Daddy’s base is very small at only around 15 units, it has been proven in 4 states (Colorado, North Carolina, South Carolina, and Tennessee) in 6 metropolitan areas. One of the Colorado locations has the highest average unit volume in the system. This, plus the appeal of the concept, give me confidence it will work as GTIM expands the concept to other geographic locations.

12) GTIM has a healthy balance sheet, with around $14 million in cash and $3 million in debt. With cash on hand, cash from operations, and a modest amount of debt, GTIM has the resources needed to fund their expansion plans well into 2017 with minimal dilution.

13) As it stands currently, GTIM is trading at around 10-11x fiscal 2016 (which ends in September, not December) EV/adjusted EBITDA. I think adjusted EBITDA is appropriate to look at in GTIM’s case since they are growing off such a small base and pre-opening costs are a meaningful percentage.

I think GTIM can open roughly 10 Bad Daddy’s units a year for the next several years. At $2.5M AUV, that will add $25 million in sales each year. Add in a little same store sales growth, and perhaps a few new Good Times units each year and I think GTIM could increase sales by $30 million a year for the next several years. GTIM has guided to around $70 million in revenue for fiscal 2016. So I think they could do $100 million in fiscal 2017, and $130 million in fiscal 2018. GTIM has guided to adjusted EBITDA at around 6.5% of sales for fiscal 2016. That should expand by a couple of percentage points over the next few years.

If GTIM’s growth pans out as I think it could, then I think GTIM would deserve to trade at least at industry average EV/EBITDA ratio (around 15x) or EV/sales ratio (around 2x) for healthy, growing concepts. Either way I arrive at a price target of at least $15-$20 by the end of 2018. That represents compounded annual growth of over 50% over the next three years.

14) GTIM is a company I think I can easily understand. I feel I understand the restaurant industry fairly well. And GTIM is a purely domestic story so there are no foreign macro conditions to consider. I can follow the user reviews to see if ratings are slipping. As new locations are opened I can monitor if they are producing unit volumes and economics equal to the system average. If things play out as I expect, then sales, earnings, cash flow, cash and margins should all grow and be fairly easy to track.

15) I think the risk/reward at current prices is very attractive. I think the downside at current levels is only around 10-20% and the upside is 200% or more.

So all the above are why I am comfortable with my GTIM position going into 2016, and also partially explain why I was reluctant to sell any GTIM last year, even as I grew more nervous about the overall markets.

This turned into a rather long post, so I will go over the rest of my New Year’s thoughts in a follow-up.

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.

portfolio changes

I sold BSQR and RAVE this week. Concern about the overall markets, some stocks on my radar starting to look interesting, and company specific issues  combined to cause me to decide to sell.

I know I have been expressing my concern about the overall markets for awhile. However market leadership seems to have narrowed considerably of late, while various metrics such as market cap to gdp ratio and margin debt have continued further into concerning territory. At such times I like to pare back to my strongest conviction ideas and maintain a larger cash cushion. At the same time some stocks on my radar are starting to look interesting, so I wanted to have more cash ready to deploy in an instant.

I didn’t like the way BSQR was acting so I did some more research to see if I could understand the story a little better. One of the main potential catalysts I thought existed for BSQR was growth of their proprietary software sales. Proprietary software is their highest margin division by far, and last quarter saw a huge jump up in those sales. Management cautioned that proprietary software sales were lumpy and should not be extrapolated to the full year, however I thought it could still signify the beginning of an important trend. Only upon reading the 10q however did I discover that the jump in proprietary software sales was due mainly to unexpectedly large sales of legacy product in the quarter. In other words, it was not due to increased sales of their newer products, and so I felt it was way less likely to be the beginning of a sustainable trend. BSQR was already my lowest conviction idea, and since it was near my mental stop limit I decided to sell and cut my losses short on this one, at around 7%.

BSQR was my smallest position and I wanted to raise more cash so I took a harder look at RAVE. While I still think RAVE is attractive, I ultimately felt GTIM was clearly the better longer term play. RAVE’s sales per square foot on its two concepts, Pizza Inn and Pie Five are considerably less than those on GTIM’s two concepts, Good Times and Bad Daddy’s. I also felt GTIM was more attractively valued after figuring in their recent acquisition of entire ownership of Bad Daddy’s and the North Carolina locations, which will be partially reflected in GTIM’s results starting with the upcoming June quarter earnings report.  I ended up losing around 4% on RAVE.

I added a little GTIM under $8 but most of the cash I raised from the sale of BSQR and RAVE remains, so I am now at around 40% 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.

Sold LC and micro-cap

I sold my small positions in LC and the unnamed micro-cap today.

After the rally of the past few days I felt as though things had gotten a bit too easy, the market a bit too complacent. It seems recently that whenever I think we are finally headed towards a pullback of some significance, it is over before I know it. Back in October we almost reached correction territory (down 10% on the major averages) and within a couple of weeks we had made it all back and more. And then the past week it looks like we may be due for a serious pullback or at least some consolidation and then the Dow adds 700 points in two days.

I am a grounds-up investor and the macro picture has little influence on my core positions. However it does have an influence on my non-core positions. I think the markets are due for a correction, not necessarily a steep one, but one which doesn’t erase all its losses within days or weeks. With that in mind I wanted to raise a little cash, become slightly more defensive, and pare back to my core positions.

LC was a stock I just wanted to own a little of and I was prepared to wait quite awhile for it to grow into its valuation. The micro-cap, as I mentioned, was based as much on the company’s characteristics as it was my belief in the company’s fundamentals. So those were both situations where I didn’t really feel like holding into a pullback. Even though I have sold the micro-cap, I do not plan to name what it was because I could see returning to it at the right price.

I made 10% on LC and broke even on the micro-cap but neither had become a big enough percentage of my portfolio to be significant to my returns. With these sales I am back up to 20% cash.

Portfolio Update

I haven’t posted in awhile because I hadn’t made any changes to my portfolio. I have been pretty happy with my current holdings but I did make a few moves recently.

I bought a little more ZU after the stock went down after they reported earnings. I bought a little more SFM after it dropped again on the latest share sale by Apollo. I  bought a little more GTIM. I also wanted to raise cash because I was hoping to buy some shares in The Habit (HABT) which had its IPO yesterday (more on that in a bit).

So, I decided to sell AWCMY. I ended up right around break even on the trade. The shares of Alumina which trade on the Australian exchange (AWC) actually went up a fair amount since I bought. However the Australian dollar dropped quite a bit against the US dollar, so the Nasdaq listed shares which I bought (AWCMY) were negatively affected and I ended up around break even. I really have no idea where the Australian dollar is going versus the US dollar going forward, but the trend has been down. I felt the currency exchange factor was adding a layer of complexity which I preferred not to have to deal with.

As I mentioned I had hoped to buy some shares of The Habit. I think The Habit will do well over the long run, and has much better prospects than other restaurant IPOs of the past few years (such as LOCO, ZOES, NDLS, PBPB). I had limit orders in as high as $27, but the stock opened at $30 and has not looked back. At current prices I think the stock has gotten ahead of itself, so I did not end up buying any shares.

So, that actually left me back up at around 20% cash. I am in no hurry to deploy it as I think the markets are kind of high now and I like having some cash ready to deploy if opportunities present themselves.

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.