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Posts from the ‘Portfolio’ Category

Week 304: More on Edge

Portfolio Performance

Top 10 Holdings

Thoughts and Review

In my June update I took space to describe some of the attributes of my edge.  At that time I didn’t define it specifically, and so I wanted to extend that discussion here.  To repeat the definition that I put forth back then:

An edge is essentially the advantage that allows you to beat the market more than it beats you.  For many of these traders understanding their edge; a system, a pattern, a money management technique; has been a major step toward consistent success.

I think I have put up enough years of out-performance to tentatively conclude I have some sort of edge.  Its still possible that I don’t; maybe I will blow up yet and these past years will prove to be a statistical aberration.   But as times goes on those odds become less likely.

So what is it?

First, I do quite a bit of research.  Not that I am the most exhaustive researcher; I know some that will spend more time, read through the last 5 years of 10-K’s before pulling the trigger.  Nevertheless its fair to say I am on the heavy side of the research spectrum, and that I make a decision somewhat more informed than the average investor is.

Second, I’ve come up with a methodology that works, both absolutely and for my personality.  I take small positions that let me be wrong a lot without losing a lot of money.  I rarely add to those positions if they fall and sometimes cut them if they fall too much even if I have no news to suggest anything has changed.  And I add to the positions as they rise and reinforce the thesis.

This works for me because in the real world I’m not very good at making decisions.  I don’t like having to choose the TV show we watch at night, what food we will have for dinner, or where we are going to go on vacation.  I would rather have someone else make the decision and just go with the flow.  I am extremely fortunate to have an understanding wife.

Nevertheless my nature is attuned to the way I invest.  I never really commit to an idea.  I’m not really an owner of Identiv or Combimatrix or even Radcom.  I’m more of a renter.  Even with large positions I remain lukewarm to the ideas, not really sure if they will pan out, ready to run if something goes awry.  It’s much easier for me to pick a stock then what’s for dinner because I know it’s not for good.

The final element of my edge is the type of stocks I look for.  I try to find companies that, while they may only have a small probability of going up, have the chance to go up by multiples if things play out in a certain way.

To put it another way, if I am right 30% of the time and on average my gains are 20% and my losers are 20%, I am going to lose money.   But if my gains can be 100% and my losers 20% then I am going to do quite well even if I’m wrong most of the time.  So I am wrong a lot, I change my mind a lot, but when I’m right its often for a double, a triple or even more.

What I did last month – Aehr Test Systems

Its actually been 5 weeks because we were on vacation for the last week or so.  But even with the extra week, I didn’t do too much.  In fact I only made three trades.  One, Catalyst Biosciences, was a fluke that I discussed in my last update.  The stock is back down to where it was and I didn’t actually buy it anywhere but the practice account so who really cares.

The other two were new positions.  The one I’m going to mention in this update is Aehr Test Systems.  They are a tiny company ($90 million market capitalization) that makes testing equipment.  They have a unique design (I don’t believe there is a lot of direct competition) that can test at the wafer level rather than the module level, which eliminates much of the potential for mechanical failure and improves quality controls.  They started selling a multi-wafer testing machine called the Fox-XP system back in July and they have started to see orders come in.  Their test equipment is sold to some large companies, like Apple and Texas Instruments (Apple and TI accounted for 47% and 32% of revenue in 2016) and they have made references to being in talks to sell product to a Korean firm that seems likely to be Samsung.

The stock doesn’t appear cheap at a glance.  Revenues in the last 9 months were only about $12 million so on a trailing sales basis the stock looks wildly overpriced.

What makes it interesting is that we are only starting to see orders for the Fox-XP system.  So far these orders have been for prototypes to verify the concept.  The units sell for $4 to $5 million, so even a trickle of prototypes are incrementally material to the company.  But the orders could scale substantially if the proof of concept testing goes well.  The company doesn’t give a lot of guidance, and there isn’t much of an analyst following to prod information out of them, but on the third quarter conference call management said that if successful with their lead customer (probably TI?) they could ship 10 systems a program and that they are currently working on 2 programs.  So the lead customer alone could amount to a $40 million to $60 million opportunity per program.

If the Fox-XP takes off, the stock is going to move significantly.  Will it?  I don’t know.  It has a chance though, and that is worth a small position.

The dangers of short-term funding

In October of last year I wrote that I was short Canadian alternative lenders and mortgage insurers in the wake of the Federal government mortgage rule changes.  For 5 months those positions did poorly.  I began to think my puts would expire worthless and shorts would be tax loss candidates.  But last week the bet was vindicated as I took profits after the alleged fraud at Home Capital.

My thesis was not premised on the discovery of fraud.   I thought there was a reasonable chance something would be uncovered as the market unwound but that wasn’t my primary reason for going short.  Instead I thought the measures the government put in place in October would finally cool down the housing market and that, given that many of the measures were targeted at alternative lenders and insurers, these companies would suffer the most.

That hasn’t happened, so in that way I was lucky.  But what I did get right was how things would unravel once the ball got rolling.

It cannot be overstated how precarious a company is if they lend long, borrow short and have a funding source that is easily called away.  If any uncertainty develops about their lending book, the run on funding can be swift and fierce.

The collapse of Home Capital was precipitated by their dependence on high interest deposits to fund part of their loan book.  Those deposits were available on demand, so at the first allegation of wrongdoing, many were pulled.  Why not?  Who wants to take a chance with their money for an extra percent.  Adding to this outflow, there is and will continue to be a slow motion run on their GIC funding, many of which will mature over the next year and almost assuredly not be renewed.

This capriciousness is why I don’t have the stomach to hold non-bank financials through any bouts of turmoil (think back to New Residential or Northstar).  You just never know when the funding side is going to tighten, and when it does an extremely profitable business model can be flipped to insolvency in a heartbeat.  Again, and I know I’m repeating myself, but I don’t think you can over-state how precarious it is to lend-long, borrow short and have funding callable on demand.  Everything is great until it isn’t, and then it’s all over.

As for the Canadian housing market, it continues to tick on.  It will be interesting to see how the events of the last week interact with the price rise of homes in Southern Ontario and coastal BC.  We are all familiar with how the US played out.  There the topping out of prices was the catalyst that collapsed the loans and tightened of credit.  I wonder if it has to play out that way, or whether causality could be reversed in Canada, as lenders for marginal buyers lose their funding sources in the wake of Home Capital?

We’ll see.   We sold our rental property a few weeks ago so I don’t even have that chip in the game anymore.  However that wasn’t driven by macro worry; instead we realized that renting is very time consuming and not very profitable (unless you live in the GTA or the coast and your house can appreciate in value by 30% in a year).  Our last tenant also turned out to be a convicted criminal which didn’t help my stress level last year.

It will be another interesting week.

Portfolio Composition

Click here for the last five weeks of trades.  I had to make two adjustments to the portfolio that show up as trades because of name changes that weren’t automatically updated in the practice portfolio.  Accretive Health recently changed their named to R1 RCM and a while ago Limbach changed their symbol to LMB.  The Limbach situation was brought to me by a reader.  Its been wrong in my update for a while (displaying the old symbol and last traded price of it).  This has been corrected now.

Week 298: Keep on Truckin

Portfolio Performance

 

Top 10 Holdings

See the end of the post for my full portfolio breakdown and the last four weeks of trades

Thoughts and Review

No great insights this month.  My portfolio continues its upward climb even as the market stalls.  I continue to be buoyed by my large position in Identiv and more recently my large position in Radcom.  Combimatrix is consolidating in the $4’s but it looks healthy and I am hopeful it will break out on another leg up soon.  Silicom has helped a lot and I will talk more about that shortly, as has Supernus.  I still have a bunch of stories that I think are on the cusp and waiting for that final catalyst, Radisys, Vicor, and maybe even CUI Global, which I wrote about a little earlier this week.  Overall, no complaints.

New Position: Daseke Inc.

I added a new position in Daseke after reading this write-up by Dane Capital.  The story seems pretty straightforward.  Daseke is born of a special purpose acquisition company (SPAC) that acquired the previously private company, its trading cheaply relative to its peer group (see chart below from their presentation) and is in an industry that should see a tailwind as economic activity, infrastructure spending and oil and gas capex pick up.  There is not point repeating what Dane Capital already wrote so I recommend going to the article for the details.

I added both warrants and shares.  I’m not really sure whether the warrants are fundamentally overvalued or undervalued compared to the shares, I just thought they represented a good upside given that the stock is probably around two times EBITDA lower than it should be and that if it traded up to an appropriate level it would get to the high teens, which would be a triple for the warrants.

What I added to

I added to four companies over the past month.  In each case I was persuaded by an upbeat outlook about the future that was given by management on the calls.  I’ve already written my thoughts on Vicor.  Likewise I wrote up CUI Global just the other day.

I also added to Accretive Health, which has changed its name to R1 RCM.  I last talked about R1 RCM here.  Not much has changed, they are making progress on-boarding Ascension and finally moved their stock over to the NASDAQ.  I figured the NASDAQ listing would be a bit of a catalyst, so I added the day prior to that.

Finally I added to Silicom on this news.  This is just a huge contract for the company with an $17 million initial purchase order and $30 million expected annual run rate.  I read somewhere that the customer is likely with Gigamon.

I do intend to write-up Silicom, I just keep getting tied up with other stories, and I wanted to spend time understanding their whole product suite before putting any post up.  The good news is that as I have dug more, I have become even more comfortable with the company.

What I sold

On the sell side of the ledger, I already wrote about my sales of Nuvectra and Rubicon Project, and my reduced position in Bovie Medical.

In addition to these names I also sold the last of Willdan Group.  Willdan has been a great name for me.  I added the stock in the single digits, around $8, and am selling the last of my shares in the low-$30’s.  The business is still humming, and the company seems to have shifted to an acquisition strategy that so far is fueling further growth.  Yet at this price I just feel like the upside is priced in, with the stock trading at 25x the upper end of their 2017 guidance (which is $1.20 diluted EPS).

A couple late Biotech Buys

I also bought starter positions in a couple of mid-stage biotechs at the end of last week: Eiger Pharmaceuticals and Inotek Pharmaceuticals.  I got both of these names from Daniel Ward, who comes up with a lot of good ideas.  I’ll try to write up some details on both companies in the near future, but you can get a pretty good overview of the investment thesis if you listen to their recent conference presentation (Eiger at the BIO CEO and Investor conference and Inotek at the Cowen Healthcare conference).

The Catalyst Biosciences Catastrophe

Finally there is Catalyst Biosciences.  This is so painful.  So on Friday I put in a market order for Catalyst in the practice portfolio.  I always use market orders with the practice portfolio because it doesn’t always work to put in limit orders.  With limit orders sometimes you get filled, sometimes you don’t, even if the stock moves below your limit.  But because I didn’t like the bid/ask spread on Catalyst (it was something like 5.20/5.45 at the time, so really big), and because the stock bounces around a lot, in my actual account I put in a limit order at 5.10.  I liked the stock because it was at a big discount to cash, but it didn’t seem like there was any reason to chase it.

It was with great pain that I watched the open this morning.  Catalyst opened in the $9’s and proceeded to move to as high as $18.  I made a killing in my practice portfolio (its not reflected in the update because this update is for the four weeks ended last friday) but I made nada in my actual account.

I hate, hate, hate limit orders.  I rarely use them and this is a big reason why.  If you want to buy a stock, buy it.  If you want to sell it, sell it.  All the pennies I may save putting in limit orders over the next year will not amount to what I should have made on Catalyst today.  It makes me a little ill to think about it.

Portfolio Composition

Click here for the last four weeks of trades.

Week 294: It doesn’t matter how you get there

Portfolio Performance

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Top 10 Holdings

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See the end of the post for my full portfolio breakdown and the last four weeks of trades

Thoughts and Review

It’s a seminal moment for the blog!  For the first time in what seems like forever my largest position is something other than Radcom.  Thanks to more than doubling in price in the last four months (and even after pulling back from $6 to $5), Identiv now holds that honor.

At the beginning of November I wrote the following about Identiv:

I tweeted a couple of times this morning that I don’t think this stock makes sense at a $20 million market cap… The company has a $55 million trailing twelve month revenue run rate, they are showing growth, they are EBITDA positive now and it’s not an insignificant amount of EBITDA.  That feels like it should warrant at least 1x sales.

We are already at a $55 million market capitalization but with momentum at the company’s back I haven’t sold a share.

A second position, RMG Networks, has also ran up the ladder, and now sits as my fourth largest position at a little less than 5%.

I wrote this about RMG Networks when I first took the position in late June:

With the focus on the new verticals and improve productivity of the sale force new opportunities in pipeline are up over 40%.  And here is where we start to see an inkling that the strategic shift is bearing fruit.  In the sales pipeline, Michelsen said that the number of deals $100,000 or greater has increased by 50% in the last year while the number of $1 million deals have tripled…My hope is that these early signs of sales improvements lead to an uptick in revenues in short order.

We are starting to see that pipeline bear fruit.  The entire move has come in the last two weeks.  The stock has moved from 70 cents to a dollar on news that they had secured contracts in the healthcare vertical and converted one of their previously announced trials into revenue in the supply chain vertical.

Finally, a third company, Combimatrix, which I wrote about earlier this week, is beginning to run and take a more significant position in my portfolio after releasing solid fourth quarter results.

So that’s all great, but the reason I mention these three examples is because they illustrate how bad I am at predicting how things will play out.   In the second half of last year had you asked me what my portfolio would move on I would have replied it will rise and fall on the fortunes of Radcom and Radisys.

Flash forward a few months and my portfolio has moved significantly higher and Radcom and Radisys have done nothing.  Radisys has actually went backwards to the tune of 20%.  Whodathunkit.

This is why I carry so many positions.   A. I’m a terrible timer.  The events that I think are imminent take months or years to play out, while the events that I think are distant have a habit of manifesting much faster.

Second, my favorite ideas are often not my best one’s.  I have no idea why this is.  If I did I would change my favorite ideas.  But it’s uncanny.  I’ll sit on a thesis like Radisys, work it into the ground to understand it in depth, and then along will come a Health Insurance Innovations, which I will buy on a bare thesis (in this case that the Affordable Health Act will be repealed and this is going to be good for HIIQ) and when the dust settles I’ll have more gains from the latter than the former.  Its kinda crazy.

I guess as long as you are moving in the right direction it doesn’t really matter how you get there.

Portfolio Changes – Adding Silicom

I added a couple of new positions this month.  The Rubicon Project and Silicom.

Silicom got hit after releasing what I thought was a pretty good fourth quarter.  The company traded down to $35 from $39 pre-earnings.  I’ll try to get a more detailed write up out on Silicom at some point, but the basic points are:

  • This is a $250 million market capitalization company with $36 million of cash and no debt
  • It’s trading at a little over 2x revenue and just guided 15% growth in the first quarter and double digit growth for the year
  • Their past seven year compounded annual growth rate is 26% and growth was 21% in 2016.

Silicom designs a wide range (over 300 SKUs) of networking, cybersecurity, telecom and storage products. These are generally board level and appliance level hardware solutions.

They expect their security vertical will grow double digits, their cloud vertical will “grow significantly” and that a contribution from SDWAN will kick-in in 2017 and is expected to become a “major growth area”.  They said that over the intermediate term they see a larger opportunity in their pipeline than they have have in the past.

Already the stock has rebounded on news of a significant contract for encryption cards that will ramp in 2017 and reach $8 million in sales in 2018.

I’ll talk more about Rubicon Project in an upcoming post.

Apart from these new positions I did a bit of tweaking of my positions, adding a little to Nuvectra and Combimatrix, reducing my position in Bsquare and selling out of DSP Group.  I also have added to my Vicor position in the last couple of days (subsequent to the update end so not reflected in this update).

Taking advantage of Bovie Medical Weakness

I also added significantly to my position in Bovie Medical.  The stock sold off on news that their pilot project with Hologics for selling the J-Plasma device would not be extended.    As I tweeted at the time, I didn’t think this was as big of news as the market did.

To expand on my reasoning, Hologics has a particular business model they follow for their instrumentation and disposable business, of which J-Plasma would have been a part (from 10-Q):

we provide our instrumentation (for example, the ThinPrep Processor, ThinPrep Imaging System, Panther and Tigris) and certain other hardware to customers without requiring them to purchase the equipment or enter into a lease. Instead, we recover the cost of providing the instrumentation and equipment in the amount we charge for our diagnostic tests and assays and other disposables.

So they go “full razor blade”.  Bovie on the other hand, generates significant sales from generators.   The average selling price (ASP) for a generator is much higher than hand piece so Bovie generates a significant slice of their revenue from it.  From the 2015 fourth quarter conference call :

I guess when you think about it, the generator ASP is north of $20,000, the hand piece ASP is $375

So the models aren’t aligned.

Second, Hologic’s Gyn Surgical business segment (consisting of the NovaSure Endometrial Ablation System and our MyoSure Hysteroscopic Tissue Removal System) is a $400 million business so J-Plasma is microscopic for them.  They may not have been inclined to bend their model for Bovie.

Also worth noting is that Hologics wasn’t even mentioned in the Bovie 10-Q whereas the agreement with Arteriocyte that was mentioned favorably.

Finally the language used on the third quarter conference call around Hologics wasn’t exactly definitive:

Well, as you know, the sales channel partnership with Hologic,right now,is in a pilot phase.  So we wouldn’t be in a position, if we were to disclose the economic relationship, until that’s a permanent agreement.  So the pilot portion of our partnership will go until the end of February.  So you could look at some period after that before we can announce a permanent relationship and we’ll decide at that point in time if we’re going to elaborate on the economics of the relationship.

The agreement with Hologics hadn’t generated material revenue so there is no hit to the bottom line.  And in a separate press release (which oddly was released on the same day as the Hologics information but didn’t get on their website for a couple days after), Bovie reiterated guidance for 2017, including “accelerated growth for J-Plasma”.

I think the stock sold off in the following couple of days because its small, illiquid and under followed, not because this agreement was meaningful to the company.  So I bought.

Portfolio Composition

Click here for the last four weeks of trades.

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Week 290: Renewal

Portfolio Performance

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Top 10 Holdings

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See the end of the post for my full portfolio breakdown and the last four weeks of trades

Thoughts and Review

I came into the new year wanting to reduce my exposure.  I had racked up gains last year that I had held onto for tax gain reasons.  It’s also been a good run, and there are at least a few signs that the market is topping out.

I also find too much exposure leads to poor decisions.  The lack of cash causes me to ignore ideas I might otherwise pursue and I start to feel stuck with the positions I have.  I end up “hoping”.

When it comes to investing “hope” is a dreaded word for me.  Hoping that a takeover happens.  Hoping that a news release comes out.  Hoping that this quarter is different.

Moreover, hope is inextricably tied to patience and patience, while not so toxic as hope, has a love/hate relationship with me.  Patience is necessary.  You have to wait to have your ideas play out.  And I do this.  I sat on Willdan for 3 years before it decided to more than triple in 6 months. You can’t cash out on the first gain or jump ship on the first sign of loss.

But too much patience, at least for my style of investing, is counterproductive.  It wastes capital of all kinds.  When I am too patient with my positions it also means I am not looking for new and better ideas.

So every so often, maybe once or twice a year.  I take a hard look at every position and ask myself if I really want to own it?  Do I really believe in this idea?  And I force myself to sell at least some of them.

I have to go through a renewal.  I sell off a bunch of positions, reduce a bunch of others, and, at least in terms of my own mindset, I start over.

I did my last big reset last January and that one was sparked by the market moves.  It was not pleasant.  This reset was more minor.  I shook things up enough that I could refresh my perspective.  It seems to be working so far.

Changes to the Portfolio

I sold a number of energy positions: Jones Energy, Resolute Energy, Gastar, Granite Oil and Key Energy Services.  I didn’t time these sales particularly well, as many of these names have rallied further after I sold.

You might ask why I sold Key Energy Services so soon after buying them?   Partly it was logistics; in the account I track with the practice portfolio I wanted to raise cash and so I had to look for names to sell.

Second, it had appreciated 20% from my original price and, in light of my first reason, seemed like an easy gain.  Energy services is a tough business and so this isn’t a stock I wanted to hold for a long run.  Nothing has changed with the company though, and in my actual account I still hold my warrants, which give me exposure to upside in the stock.

I also sold Contura Energy.  I did more research on the met and thermal coal market and I concluded it was more likely that coal prices would decline than increase.  In particular, much of the increase seemed to be because of closures in China that could just as easily be reopened and there was evidence that was already happening.  I’ve been in and out of the coal market since 2006, I know how volatile it can be (especially met) and I also have experienced that when the coal price is declining it doesn’t necessarily matter how cheap the company appears, the stocks will follow the price of the commodity.  Maybe that won’t happen in this case, maybe Contura is “cheap enough”.  But I couldn’t ignore the precedents I had seen.

Even with these changes I still don’t have enough cash in the practice portfolio.  I’m running about 20% cash in my regular portfolio and am a little less than flat with the online account.

As for my remaining positions…

I still have reasonably big positions in Radcom and Radisys, but along with many other stocks I reduced these positions as well.  I am balancing my expectation that the first and second quarter results from each of these names will likely be modest with the awareness that positive news in terms of new contracts could happen at any time will send each stock much higher.  However I did decide to add a little Radcom back on Monday, which is not reflected in the update.

I also reduced Willdan.  Its just gone up so much.  I took some off at $27 and $29, which turned out to be a little early as the stock briefly hit $31.  I don’t plan to sell any more; I still really like where the company operates (energy efficiency), they should see some benefit from infrastructure plans, have the ability to pull together cheap accretive acquisitions and will also benefit from changes to the tax code (their tax rate has typically been above 40%).

Finally I reduced my positions in Attunity, Hudson Technologies and Nimble Storage.  I’m not completely confident that the results for these companies in the next quarter are going to be stellar.  I prefer to wait to see the results an add back depending on the reports.

And a few new positions…

I took five new positions in the last month.  I wrote up two of them, Ichor Holdings and Nuvectra.

I tweeted that I took a position in Vaalco Energy (hat tip to @teamonfuego)

And I tweeted that I took a position in Combimatrix:

I have a write-up in the works about Combimatrix and have plans for one on Vaalco after that.

The last position that I took was in Gigamon.  I have written in the past that I been waiting for this stock to correct and continually regretted not buying it when it was lower.   The company announced poor numbers for the fourth quarter and the stock took a massive beating.  I was happy to step in.  The stock could go lower but I am not convinced that their announced portends a trend so I wanted to get at least started with a position here.  If the stock dipped into the $20’s, I would double down.

Last Thought

I’m very edgy about Trump and his economic agenda.   Given the role that Steve Bannon has taken on, its worthwhile to read and listen to what he has said.  I might do a more detailed write-up on this in the future, but for now consider this speech.    Bannon’s ideas remind me of what you hear from gold bugs and all those economic podcasts that portend the financial end of the world.    He talks about the contingent liabilities, the trade deficit with China, its all those things you hear from the newsletter writer/economic podcast cohort.  Some of what he is saying has merit, but if he is going to attack what he sees wrong I don’t know if this plays out well.

Portfolio Composition

Click here for the last four weeks of trades.

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Week 286: On being wrong a lot

Portfolio Performance

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Top 10 Holdings

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See the end of the post for my full portfolio breakdown and the last four weeks of trades

Thoughts and Review

The other day I was considering posting an article on SeekingAlpha.  I couldn’t muster the energy.  I wasn’t sure why, but I felt a strong resistance against it.

So I put it aside and in a couple of days it came to me why.

Take a look at my SeekingAlpha history.  I’ve written a few articles for it.  The list of names is, at best, uninspiring.  Hercules Offshore went bankrupt not long after I wrote about them.

The fact is, I’m wrong a lot.  At least a third of the time I pick a stock it doesn’t even go in the right direction.  In a bad market that number is likely well north of 50%.  And even when I’m right, I often miss by degree.  The last couple of months, while my portfolio has done pretty well, it would have done much better if I was not weighted most heavily in two positions that have done absolutely nothing (Radcom and Radisys).  My biggest winners are often afterthoughts where credit should only be taken with qualification.

If there is one redeeming feature about my strategy it is that I am fully aware of my own limitations.  I am never certain.  In my blog write-ups I try to phrase every position in terms of what might happen, both the positive and negative, with the expectation that I may have the thesis totally ass-backwards.  If anything, the limitations of the medium (writing) convey more conviction than I generally have.

This doesn’t play well when writing an article that is trying to convince others about what a great idea you’ve just found.  It might be, it might not. Who knows.  What I can say is that as long as I cut my losses quickly, it presents a pretty good risk/reward.  But I have no particular insight into whether its going to pan out or not.

It doesn’t make a compelling narrative.

Nevertheless after another pretty successful year, despite a whole lot of mind-changing and almost constant self-doubt, I can say that it worked pretty well once again.  To summarize:

  1. I freaked out in January when my portfolio lost over 10% in a couple of weeks.
  2. I only tentatively added back as the market bottomed.
  3. I sold out of the years big winner, Clayton Williams, about $100 too soon.
  4. I mostly missed anticipating the Trump rally apart from a position in Health Insurance Innovations and a couple of construction plays I bought in the days immediately following the election.
  5. (As I will describe below) it only donned on me that community banks should be firing on all cylinders in the last few days.

Yet I’m up about 35% since July (my portfolio year end) and about 40% in 2016 (though with the asterisk that it is with far less than $50 million in capital 😉 ).

Most occupations don’t tolerate excessive uncertainty.  I am fortunate to be involved in one of the few that reward it.

The last Month

Last month most stocks in my portfolio stagnated.  The gains I had were fueled by a few oil names (Gastar Oil and Gas, Jones Energy, Resolute Energy) as well as Health Insurance Innovations, Identiv, DSP Group, and a last day move back up by Radisys.

Health Insurance Innovations has been a big winner for me.  If only I had bought more!  The stock has more than doubled since Trump took office.  I sold some of my position in the last days of the year (I mistakenly sold all of it in the practice portfolio so that is why it doesn’t appear in the list below).

The second big winner has been Identiv.  Unlike Health Insurance Innovations, I have not taken anything off the table.  Identiv remains quite cheap, with only a $35 million market capitalization.  There is a rumor that after a presentation given at the Imperial Conference the company suggested some recent business with Amazon, which, if done in mass, could be quite a big contract for the company.  I have no idea if its true though.  The stock has pulled back in the last few days, but I’m not too worried.  As long as business continues along its current trajectory, the stock should do well in the coming year.

Key Energy Services

In mid-December I took a position in an oil services firm, Key Energy Services (KEY).  I was given the idea by someone in the comments section of the blog.  Key Energy operates a number of well services rigs, as well as having businesses in water management, coil tubing, and wireline services.  This is a tough business, and has been a disaster over the last two years.  At least 3 competitors in the space have been through bankruptcy.

At the time I bought the stock it was still trading in bankruptcy.  Similar to Swift, existing shareholders received a piece of the new company and warrants.

Since exiting bankruptcy in late December the stock has traded up quite a bit but I think there is still some value there as oil services demand rises.  What I remember from past cycles is how leveraged these companies are to improving fundamentals.  They gain on both pricing and volume. With both natural gas and oil moving up, this may be the first time since 2012 where Key Energy has had pricing of both commodities as a tailwind.

The company has reduced its G&A, reduced interest expense via the bankruptcy process, and is the first of  its brethren to make it through the restructuring process.

On the negative side, its a low margin business, I don’t get the sense that management was particularly astute heading into the slowdown, and in the current pricing environment even after restructuring they are still EBIDA negative.

Nevertheless I am willing to see if I can ride the cycle here.  Its probably no multi-bagger, but I am looking for a move into the $40’s where I would sell.

Community Banks

The last thing worth mentioning is that after a month and a half of rallying, and the astute comment of Brent Barber asking me why I wasn’t looking at them, I finally spent some time on the community banks.  Its soooo obvious, its painful to think that if I had spent a few hours on November 9th I would have quickly realized the same conclusion and ended up a number of dollars richer as a result.

Nevertheless, a good idea is a good idea.  Though the names I bought are up between 10-20% in the last month and a half, I still think they have much further to run.  I added positions in SB Financial (SBFG – former Rurban Financial, which I’ve talked about in the past and owned a small piece of of for some time), Sound Financial (SFBL – another bank I’ve owned for years), Atlantic Coast Financial (ACFC – which I have owned and written about in the past), Home Federal Bancorp of Louisiana (HFBL), Parke Bancorp (PKBK), and Eagle Bancorp of Montana (EBMT).  I took a basket approach because all of these namess are illiquid and difficult to accumulate in too much size.  I will write these up in more detail shortly.

Portfolio Composition

Click here for the last four weeks of trades.

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Week 282: Two Big Events

Portfolio Performance

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Top 10 Holdings

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See the end of the post for my full portfolio breakdown and the last four weeks of trades

Thoughts and Review

My portfolio bounced back this month.  This was somewhat remarkable given that my two largest positions, Radisys (RSYS) and Radcom (RDCM), continued to perform poorly.  I don’t expect much from either of these stocks until they are able to secure additional contracts with service providers.  With year end coming up, I am hopeful (but not counting on) some news on that front.

The rest of my portfolio did extremely well, benefiting from the rotation to small caps that occurred after the election of Donald Trump.  I didn’t anticipate the market move or the small cap revival.   But I wasn’t the only one, in fact I didn’t hear that prediction from anything I read.  I would be interested if anyone else knows of an expert, newsletter writer or manager that predicted the move?  They would be worth following.

In retrospect it makes sense; expectations of significantly lower taxes and a relaxation of regulations would lead to a market rally with a bias on small caps with domestic exposure and few tax loop holes.  The stocks that have performed the best for me have had that characteristic.

Willdan Group (WLDN) is a text book example.  Willdan has always paid a high tax rate, sometimes over 40%.  If the companies tax is cut in half, which is not impossible under a Republican government, earnings go up by 30%.  They are also essentially an infrastructure play, another positive.  The stock has moved from $16 to $24 in the month since the election.

Adding Healthcare, Infrastructure, Biotech

While I wasn’t positioned for a rally leading into November 8th, I adapted as the market moved higher.  As I’ve written about here, I added Health Insurance Innovations shortly after the election on the expectation that changes to the Affordable Care Act (Obamacare) would open up competition, which would be positive for their business.

I also added an infrastructure play, Smith-Midland (SMID), as it seems that this will be the focus of spending under the Trump administration.  Smith-Midland makes make pre-cast concrete products like barriers, sound walls, small buildings, and manholes.  They have a market capitalization of $25 million and even after having run up to $5 are not expensive.  There is a good article on the company here.  I also added to my existing position in Limbach Holdings, another infrastructure play.

My last move in response to the election result was to add to a few biotech names.  This worked out initially but interest has waned in the last couple of weeks.  I added to my position in Supernus (SUPN), to Bovie Medical (BVX) and added back some TG Therapeutics (TGTX).  I may jettison the latter position soon.

Responding to OPEC

The Trump move was followed by the OPEC move, which I again don’t profess to have predicted.  I was agnostic going into the OPEC meetings; I held my usual weighting of energy positions, but did not pile into them as a bet that a deal would be reached.

Instead, as is my typical strategy, I chased the news, adding to energy names on the heels of the announcement.  By waiting I missed out on the first 10% move, but once the deal was announced it was a far lower-risk entry into stocks on my watchlist.

It can be argued that OPEC’s cut will only lead to high US production, or that it will be diluted by cheating by OPEC members, but nevertheless its difficult to argue that this doesn’t put a floor on prices.  And if there is a floor, stocks that previously had to discount the possibility of another move into the $30’s do not have to anymore.  Therefore stock prices needed to move higher.  I think they still do.

Many of the names I am interested in are small enough that they do not move immediately with the market.  Thus I have been able to add to Journey Energy (JOY) and Zargon Oil and Gas (ZAR) at prices not too different to what they were leading up to the announcement.  There is a good SeekingAlpha article (and comments, in particular note those on the interim CFO hire) on Zargon here.  I haven’t seen any analysis on Journey, and I will try to write up a summary on the stock in the next couple of weeks.

A second energy name that I added to and am in the process of writing up is Swift Energy.  As I tweeted on Friday:

I also added Resolute Energy (REN), a Permian player I have been in and out of over the past 6 months, and added back Granite Oil (GXO).  There was a good comment to my last portfolio update that gave me some perspective on the concerns I had raised about Granite.  I wanted to add to Jones Energy (JONE), but it moved so quickly off of the OPEC news that I didn’t get a chance.

Finally I added to a derivative play, CUI Global.  CUI Global is a bet on Trump as well as OPEC.  The company has said in their presentations that they have struggled gaining traction with their GasPT products in North America because of the dour investment climate for oil and gas infrastructure.  This should change under Trump and with support to oil prices.  Its no guarantee that CUI Global will be the beneficiary, but if their product is as good as they profess it to be, it should be the preferred measurement tool for new projects.

I also added a position in Contura Energy.  It was written up here.  I think this article will move behind the paywall soon, so I would recommend reading it sooner than later.

Where we go from here?

I’ve taken on some risk as the market has moved higher and especially after the OPEC agreement.  But I do not expect this to last long.  I’ll be paring back positions over the next few weeks.

I don’t feel like I know what to expect from this new US regime.  Tweets like the one’s Donald Trump made over the weekend, promising a 35% tax against companies moving production abroad, leave me wondering where we end up?  Are these just empty threats, impossible to implement?  Or is this only going to escalate?

It’s uncharted territory.  If government spending increases significantly, taxes are cut and trade restrictions are imposed, I’m not sure where it leaves us.  Will bond yields rise, setting off a negative market event?  Will investors continue to pile into domestic US equities?  Will stocks based in foreign locales or with manufacturing operations abroad sell-off on concerns over tariffs being implemented.  The answers are just way beyond me.

Lacking confidence in the answers means I have to get smaller.  That’s the only response.  Since July (my year end) I am up nearly 30%.  I feel like I am pushing my luck asking for the same kind of performance in the second half of my fiscal year.

Portfolio Composition

Click here for the last four weeks of trades.

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Week 241: Surviving

Portfolio Performance

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See the end of the post for the current make up of my portfolio and the last four weeks of trades

I had more than one acquaintance send me news that Orange Capital was shutting down.  I found this sad.  Those of you that have been following the blog know that Orange Capital and myself came into large positions in Bellatrix at about the same time.  The fall of 2014.  Both of us saw a company with excellent assets, the potential for significant growth, and a valuation that was compelling.

Unfortunately for us, while company specific factors lined up, the macro backdrop was quite the opposite.  As a consequence in the last year and a half Bellatrix has dropped from my original average cost of $6 down to, at one point, below $1 and current $1.42.

How Orange Capital and I responded was quite different.  Strong in their conviction that Bellatrix had solid assets and weather the storm, Orange Capital held their position and continued to buy more.  Myself, never all that sure whether I am missing some vital information, always wary of “giving it all back”, threw in the towel at around $4.50 in late November, capitulating into an interim low.

That I happened to be right in this case isn’t the point.  I didn’t forsee $20 oil or a $1 handle in front of the AECO spot contract.  I am positive that Orange had a better researched position than my own.  That I was right was, to a large extent, just luck.

What is demonstrated though is a difference in philosophy between what I am trying to do versus many money managers. I’m not a big believer in my own infallibility.  As my positions go down, I try to reduce them.  I’m not perfect in this respect, but its something I try to follow.

This is a methodology that I am finding has its shortcomings in this bear market.  You end up selling a lot of stock only to see bounce back shortly after.  I’ve been whipsawed on a few positions.

The other point I want to discuss, which is semi-related to Orange Capital, is the topic of blowing up.

The point of existence of a hedge fund is to risk money in order to make more of it.  You can argue the particulars of that statement, that risk reduction can occur through various hedges, diversification, concentration, whatever your flavor is, but the bottom line is that the money should be at risk somewhere or why is the fund even there?

But that’s not my job.  While part of what I am trying to do is of course maximize my profit line, my first mandate at this point in my life is also very clearly and in capital letters, TO NOT BLOW MYSELF UP.

I see some of the funds shutting down and stories about others that are down 15 or 20% this year already.  If a hedge fund is down big going into this weekend (I suspect that this is not completely uncommon and that there are many I have read about that are down far more) their primary motivation has to be to get it back.  They need to make money to survive.

I am down 9% since the beginning of the year as well.  But while it would be nice to get it all back, my primary motivation right now is not that.  My motivation is simply to make sure that my family and I are in a position to live comfortably regardless of what happens.  Whether that is 9% higher or not is really not the fundamental point.  Most important, and what I guard against with absolute vigilance, is insuring that my capital doesn’t permanently disappear.

With that said, my biggest transaction over the past month is irrelevant to this blog.  I paid down my mortgage in full. I also went to a mostly cash position in my RRSP (the Canadian equivalent of an IRA).  My investment account, which I track here, has more risk to it at the moment than I would perhaps like, but that is because, as I tweeted on last Wednesday, I thought there was a decent chance of a rally, which we seem to be getting.

So what do I see that is making me take such a bearish, worried stance? A couple things, and I will get into those in a minute, but the overriding factor is the same one that led me to sell Bellatrix in November 2014.  It simply isn’t working.  And when it doesn’t work I have to stop doing it before I suffer a permanent and significant capital loss.

As for those other things, the two legitimate concerns I see are the same one’s everyone else is talking about (which is partly why I think we might be due for a rally).

  1. The collapse of oil bringing about energy company bankruptcies that a. lead to investor losses that start to domino into broad based selling, and b. lead to bank losses and bond losses that cause overall credit contraction
  2. The collapse of China’s banking system leads to currency devaluation and god knows what else.  Kyle Bass wrote a terrifying piece (which I would recommend reading here) about how levered China’s banking system is, how their shadow banking system is hiding the losses, and about how government reserves are not large enough to pacify the situation without a significant currency devaluation.

Just how and to what extent these things come to pass is about as certain to me as $20 oil was in November 2014.  I have no clue.  But they are there, they are clearly worrisome, and what I have been doing is not working.  So I have to act accordingly.

What I did this Month

Not a whole heck of a lot.  In my online portfolio I added back two stocks and sold a few other. I bought small positions back in Relypsa and TG Therapeutics a few weeks ago.  I also made a couple of more buys on Wednesday of last week, adding (very small) positions in Cempra, Apigee, Five9, Ardmore Shipping and DHT Holdings (I subsequently sold DHT on Friday in favor of Teekay Tankers).

This week I added a small Air Canada position back and made two adds to existing positions: Radcom and Intermap.  Radcom gave a very positive quarterly update, said that the recent contract for NFV deployment is much bigger than the $18 million originally announced and that we should expect more contracts in the second half of 2016 or beginning of 2017.  I’m pretty sure this contract is with AT&T.  And while Radcom doesn’t give guidance they did say they expect $20 million of cash by the end of the first half of 2016.  This would be up from current $9 million.  They clarified that the cash is due to new revenue not deferred payments which exemplifies how profitable the new NFV contract is.  I think its quite a good growth story in a landscape bereft of them.

Intermap closed their $125 million SDI mapping contract and I don’t think the market is giving them full credit it for it.  I would expect that as the money rolls more believers will jump into the stock.  Intermap remains highly speculative but if they can follow up this contract with another large contract the upside for the stock would be significant, making it just the sort of market-insensitive story that I like to have in this environment.

Portfolio Composition

Click here for the last four weeks of trades.

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