As of my last update, the $10,000 portfolio achieved a triple, but has since slipped below $30,000 thanks to Research In Motion's (RIMM) bounce off of its lows. I tied my hands by stipulating that I had to hold onto my RIMM March $20 puts through the company's next earnings report, due around mid-December.
If I could have unloaded last Friday, as I did with my other positions, I would have preserved a total portfolio value of over $30,000. Instead, the $10,000 portfolio has a cash balance of $14,667 and the value of the 30 RIMM puts stands at $11,550, using the bid price of $3.85, as of noon Thursday. That's a formidable total of $26,217.
Truth be told, I'm a bit concerned about the RIMM position. Any inkling of good news in the earnings report could either send the stock higher or keep it right where it is. I'm not sure full implosion takes place until 2012 when BBX finally gets released, falls flat and RIM fails to regain market share from Apple (AAPL) and Android. Other catalysts include the usual talk of M&A and the possibility that investors are actually gaining traction with efforts to alter RIM's management structure. Bottom line - this is one that, without my hold through earnings rule, I would have taken profits and moved on from, for the time being, at below-book-value.
Now, as for what to do with the $14,667 cash balance.
Netflix (NFLX). It's difficult to resist a short as juicy as Netflix. As Michael Pachter at Wedbush Securities noted when he downgraded the stock, sooner or later, sell-side analysts will have no choice but to lower their estimates for FY2012. When they do, the stock really has nowhere to go but down.
It's all about reality setting in. Netflix told us in its Q3 letter to shareholders that it would lose money for a "few quarters" in 2012. When it announced its $400 million financing scheme, it clarified that it expected to lose money for the entire year. Once these losses actually get reported, expect the stock to continue to crater. And, as Pachter noted, estimate revisions, downgrades and fresh price targets should provide downward pressure before then. That said, where in the world is the sell-side?
What are the sell-side analysts waiting for?
For example, has anybody heard from Ingrid Chung at Goldman Sachs? I asked her for an interview when Netflix was momo-ing its way to $300, but she refused, noting that her firm does not allow her to do interviews. After Netflix's disastrous Q2 and weak Q3 guidance in July, Chung waxed bullishly, not only reiterating a buy rating and her $330 price target, but raising EPS estimates from 2011 through 2013.
Before you read this next sentence, call some family, friends or co-workers over to your computer screen, because there's nothing like sharing a laugh with others around the holidays. For 2012, Chung predicted Netflix would post EPS of $7.69.
How will investors react when she (and other equally as culpable analysts) finally comes out of hiding? There's simply no floor on this thing.
I am using a considerable portion of the $10,000 portfolio's cash balance to buy 25 NFLX June $40 puts at this afternoon's most recent ask price of $3.85. That sets me back $9,625 and leaves a cash balance of $5,042. For the record, I own these puts in a "real life" account. As of this writing, they're up by about 90%.
It's clear that both companies blew the doors off of Black Friday. Of course, Amazon reported strong sales of Kindle Fire, but it received 50% more traffic than any other retail site on that day. Not only will consumers load their Kindles with content purchased through Amazon (as was the intent), but they'll also buy from Amazon as they would have otherwise, Kindle Fire or no Kindle Fire. As for Apple, many accounts have them absolutely crushing it on Black Friday.
But there's a difference between Amazon and Apple having a big Black Friday and traditional retailers like Best Buy (BBY) doing the same. Amazon and Apple have staying power. Both companies built highly-popular consumer platforms. Amazon has become an online one-stop shop for everything from books to vitamins to audio/video content. Meantime, Apple delivers the devices that people feel like they simply must have. Neither company does this with flashy one-day gimmicks. Both build a bond with consumers that fosters a loyalty the brick-and-mortar shops lost a long time ago.
I think investors will continue to give Amazon a pass on its spending, as the cash simply goes back into a business with multiple strong and synergistic revenue streams. Really, Amazon serves as the perfect contrast to why people no longer have any faith left for Netflix. Apple does not need to worry about any of that. I think Andy Zaky hit the nail on the head when he called Apple the most undervalued large-cap stock in America in his excellent analysis.
As such, I am using the remaining cash balance of $5,042 to step into three AAPL July 2012 $500 calls for $9.45 each and one AMZN July 2012 $210 call for $21.65. That leaves me with a cash balance of $42.
I thought about branching out and taking up completely different positions for the next leg of the portfolio, but RIMM, NFLX, AAPL and AMZN have provided practically all of my gains. And, despite some near-term trepidation on RIMM, my view of each company's mid- to long-term outlook remains intact. While not without considerable risk - this is a speculative portfolio that requires I take some chances - I'm going with the view that if ain't broke, don't fix it.