Dark Horse Traders' Hedge

Long/short equity, long only, growth at reasonable price, portfolio strategy
Dark Horse Traders' Hedge
Long/short equity, long only, growth at reasonable price, portfolio strategy
Contributor since: 2010
Company: Vickrey Brown Investments, LLC
I just received the 10/31/13 updated figures of 21.2% and 6.6 days to cover. We should receive the 11/15/13 updated figures soon.
I couldn't agree with you more. This lease guarantee is a big risk and creates a potential further downdraft on future earnings. In general, the financials for Tesla have been prepared taking the most aggressive position on all items. The rush to produce a "profit" and get a short term boost in share price comes at significant cost down the road.
I think you got the answer after the bell today.
Good point Bryce. Given the new technology, etc I compare the accrual to GM and other companies whose cars have been in production longer and hypothetically should have worked out more of the kinks. I just point the warranty accrual as a possible concern down the road but don't make an earnings adjustment for it now. My biggest concern is margin and the warranty accrual IF necessary to increase will further decrease margin which I believe is still in the single digits.
Best, Scott
Charles, I love the car Tesla and Elon Musk have made. No 2 ways about that. Awesome car.
Awesome car in the luxury price doesn't make for an awesome company though. They should apply the same safety to investors in making sure their accounting represents the real performance of the company. Recall that Musk had no intention of raising any public money 7 days before raising $850M. Keep an eye on the cash position as these "profits" keep getting announced because so far (and I don't underestimate their ability to turn things around) they are relying on accounting gimmicks to claim profit when they are burning cash.
Margin is the key and Musk has claimed a 25% margin by end of year 2013. I believe in Q1 and Q2 the margin was less than 10% while the claim is over 24%. Without margin the growth won't make a difference because at the end of the day investors are buying earnings.
BTW, I am a KISS fan and have listened to most every song produced in 40 years (yes, some where very hard to listen to....insert MUSIC FROM THE ELDER and any Gene Simmons solo album :) The key for KISS is that they used the hype and theatrics to create a huge earnings machine. Their show was innovative and took concerts to a new level in the 70's much like Tesla Model S has to cars. The key to success for TSLA will be IF they can turn the technology into a profitable business with real sales growth. In my opinion, the car speaks for itself and they don't need to rely on the accounting gimmicks to artificially boost sales, margin and earnings.
I am hopeful that in the end this company is a huge success on all fronts. I just believe that the $175 price is/was grossly overvalued given all the above today. Let's see what happens and perhaps the company performance can equal the impressive car one day.
sc2000, It sounds like you have done very well with TSLA stock and there is nothing at all wrong with that. I agree with you on the technical study of the charts. However, I become a technician on stocks with good underlying growth, valuation, etc. My problem with the "growth" story on TSLA so far (this could be corrected with future real growth) is that it is being fabricated through accounting gimmicks thus far. I try to back out these gimmicks to get to real sales and real margins which will be key in projecting growth and more importantly the ability to make a profit if they get growth.
You may not be a professional but sounds like you are doing very well. Best
I saw this article and could be a prelude to a not so pleasant earnings announcement.
The key the the companies success in the middle class is the margin which is why I spent time explaining what the true gross margin is. With those type margins they have very little chance of making money no matter how successful.
What is wrong with the short interest calculation? This morning the short interest is 33.5% of float.
As to your second question, may I assume you weren't an investor in 2001 when the internet bubble based on these same blind valuations burst. And it wasn't anything to do with the SEC. You see companies can say anything as long as there is a footnote describing it in filings. That satisfies the SEC but rarely do investors look at anything other than the headline #'s in these filings.
I am a L/S investor as far as the portfolio I publish on SA. I have 10 Long positions to every 1 short in 2013. So it isn't accurate to label me a bear.
I completely agree with you on SEC. I am counting on the market (maybe another bad choice) to see through the #s and equate share price with performance.
Hyeduk, Do you see the "horror" in what you just stated. News or hype drives the stock higher (no doubt this has and probably will happen again) but fundamentals of the company discussed could drag the stock down by a few $s. All stocks, in time, have to have valuation metrics that line up with performance and not news. My point in this article is to point out that the news has pushed the stock well past any reasonable valuation.
As President of Sabrient Systems and Gradient Analytics I am prohibited from owning or shorting shares in a single company. We publish indexes and research for ETF, UIT, BTN and portfolio managers who do short.
I believe the correct value based on the company performance is a range of $20-$50.
For anyone who has followed the Apple trade in this post I would Sell to close the Feb $500 put protection purchased at $62.13. I am still evaluating rolling options on the Call and put but feel that $425 is a technical bottom that should hold for the time being.
Options are a great investment tool when used properly. I don't understand why SA made such a decision and perhaps will realize the mistake soon. Likely they confuse option strategies that buy options with lots of risk. My use of options is to limit risk and create an additional yield while holding fundamentally sounds companies. Until such time I will always publish on http://bit.ly/YdvO62 and always anwser any and all questions at sbrown@sabrient.com or in my inbox on SA.
Best to you and you are on the right path with learning how to use options to your advantage.
I want to apologize to anyone who has followed the Dark Horse Trader's Hedge on SA for the last 2 years. Thank all of you for the dialogue. I submitted the continuation of this portfolio to SA for the January 2013 options last night. I was informed that they have adopted a new policy denying articles that in their opinion are "mostly options". Those of you who have followed my articles know that I try to present the thesis behind each trade and advise on the options to increase the return and manage the risk.
I made 4 attempts to resolve the editor misunderstanding but was unsuccessful. It is apparent that SA no longer wishes to have articles such as Dark Horse Trader's Hedge on their site. Anyone wishing to contact me or read the posts can find them at http://bit.ly/YdvO62 . I will continue to monitor my inbox for a while on SA so feel free to contact me here or my email of sbrown@sabrient.com.
I apologize again but don't have any control over the decisions made at SA.
Hi djohnson,
I agree that the intraday support is at $505 and remains to be seen if we have a close below $529 (which appears likely at this point in the day but had the same set up on 11/16/12 intraday).
I would love to see your charts so please do post. If we break the close level of $529 I will look to take a profit and roll the Feb $500 put bought in this trade to capture profit on the down draft but still believe the long case will play out in January.
I always appreciate discussion on all sides of positions so thanks for the dialogue.
Agreed on patent suits Financehulligan. Nokia and a few others have won some recent cases causing Apple to add some additional royalty payments. I need to dig into the balance sheet to determine any reserves Apple likely has to cover these results. They don't alter my thesis that Apple has been oversold and support remains solid at $529. A break of that support would be a negative in the short term. I have a strong belief that Q4 and Q1 2013 results will be ahead of expectations after 2 consecutive misses. The supply issue in Q3 has been corrected which will allow those sales not reported in Q3 to be recognized in Q4. By the end of Q1 we should have more transparency on the success in China and plans for Apple TV.
Best and Happy Holidays,
I like KKR quite a bit and wish you the best on the trade.
Hi Joe,
I am sorry cash and lack of debt aren't a part of your program. I believe that balance sheet analysis is key and comparing accounting based earnings to cash flow. It is a starting point in my analysis but no an ending point. The market share, margin extraction or contraction, forward P/E, growth in EPS, etc. all play a role.
Hi djohnsonhot,
There are a multitude of option strategies that can be used depending on the investor belief for the underlying security. I believe that $529 is providing solid support for Apple and so my objective is to set up a trade with limited cash, reduced margin over simply selling a put and a trade that has incrementally positive returns as Apple moves higher.
All down-drafts are one upward break out away from being an up-draft :). I believe (all things being equal in Washington) that Apple is going to go higher from here. Therefore the purchase of the call provides participation in that up-draft. Obviously, if I am wrong and Apple trades lower or even sideways then I made a bad recommendation.
The acquisitions yesterday certainly came out of left field. I have discussed it with many on Wall Street and it is a divided bunch. Some think there is great value and some think it smells from here to China.
Those who argue it is a "bargain" on these Gulf oil properties lose me when I compare it to Apple deciding there is a "bargain" on some Ralph Lauren brand assets in the clothing business and making the acquisition because it is a "good deal".
I have always considered FCX equivalent to an ETF that is a proxy for exposure to Copper.
I am still undecided on the Oil additions. There is definite arbitrage going on just over the deal so now isn't necessarily the time to sell. For Dark Horse Traders' Hedge we have sold calls and puts which will provide some income while this is digested.
Best and I will keep you updated on my thoughts as things develop.
Thanks DJohnson,
I very appreciate your comments and clearly you are well versed in the technical studies of equities. I have studied them for 20+ years and believe they are quite valid for choosing entry and exit. My ideas start based on valuation and growth with a dash of cash flow analysis. Once I like the stock on that basis I study the charts recognizing that it is nearly impossible to pick the exact high or low. I agree 100% with you that SELLING premium on both sides is a key to successful investing.
I see the underlying assets of FCX improving with Copper and Gold without consideration for the technical stock chart. In theory, growing earnings and cash flow will trump technical support and resistance lines. I see that the 200 day MA has been holding recently as support since 9/7.
My recommendations are based on the idea that I felt FCX was undervalued in March 2012 and feel that way today. You may be correct in that we may not have hit the bottom yet. My point is that I was willing to own the shares at $40 (less premium) in March. That hasn't happened by rolling put positions and earning premiums. I am still willing to hold the other 1/2 of the position at $40 (less premiums) in January but feel it is unlikely given the rise in Copper fundamentals especially.
I believe your system of technical analysis works for you because you obviously have a disciplined approach and rules you follow. I just put more weight into value and growth which is what makes all trading systems unique.
Best to you and always appreciate the dialogue,
You may find QCOR and interesting study :)
Thanks so much for the thoughful note 22thoroughbred. You and I began trading at the same age :). Options are very useful since you almost always have the option to roll forward to a different month and strike while earning premium. GCI for example in 2011 was a value buy at $13 and the stock really never moved the entire year. We used the call and put scenario to roll 4 times and ended up with a cost basis of just above $3 on a stock that really didn't move. In the cases like STX where there is a nice move to the upside which the call covered us at $24, the premium from the put gave us virtually the same return with the stock at $30 with less capital invested. I have studied technical analysis, fundamental analysis, forensic accounting and options over the last 30 years and believe they all play a role in finding the best stock, timing the entry/exit and gaining exposure through options to reduce volatility and risk. I look forward to hearing your results.
Absolutely on the dividend premium kicker. The free cash flow indicates we can count on that and if you like the underlying security plus earn some option premium for waiting. Well, that is why I won't give up on FCX.
My apologies MilkChaser. You are exactly right that I meant call.
It is only human nature to look back on trades and wonder "what if" but after 25 years of study I can attest to the fact that you are doing the right thing when you settle on the price you will be happy being called away at. You can always roll that call forward by buying to close the call when it gets close to expiration (probably for less than $2.20 if WDC hasn't run too high and sell a forward month call for more premium.
Thanks Nightjoe, A good pattern on a value stock is what I look for with good option premiums. In AFL case, it has all the underlying fundamentals of a value stock and has built a nice pattern that I believe we are catching on the rise. Best to you.
Thanks Yaron, my recommendation to take the profit at this point is based on the risk return today. The current really bad news (lower guidance, missed badly on March results, ex-Chairman and Director margin call sales, SEC investigation, etc. is in the price of the stock at $24-ish. The stock has based since the May news that dropped the price by 50%. My experience leads me to believe that it is more likely the stock may bounce from this level and present another opportunity to short at higher prices than the likelihood it will drop lower in the neartime. As always, I could be wrong but felt like the current news has played out for the time being.
Much like my feeling on COL and HBI, they are part of our short exposure for hedging purposes and in the short term I recommend trying to let them drift lower with the overall market weakness but would recommend closing them to capture the profit on the first sign of a bounce. The market has passed the 7.5% correction mark and appears headed for the 10% line which continues to shift the risk/reward on shorts in the near term toward closing short positions.
Hi Leokaplin,
August may be early but we can always roll the Aug to a forward month and earn some time premium. Lets say it drifts up to $37 near mid-August. Then we could buy back the Aug $40 for around $3 and sell out 3 more months to say an Oct $40. I always prefer to sell the time premium on stocks we want to own eventually.
I agree with you rvn0. I see no reason to take him back. My point was just to paint a bit of his failures and compare it to his request to overlook it. Personally I believe GMCR has more problems than can be solved but clearly bringing back more of what led to this would be a poor decision.
Ok, thanks Piccaso. I must have misread the statement.
Hi Piccaso, Had I known about the SEC investigation, which it now turns out has been going on since Sept 2010, I would never have suggested covering the position in this article. The stock mostly tanked based on news that HUSA, with very limited cash resources, drilled 2 holes that were worthless and would need to be plugged. The SEC investigation, just announced yesterday, was simply the second leg. Any informal SEC investigation automatically becomes formal after 60 days so the fact that the company just acknowledged this yesterday would be a concern to anyone who owned the stock in 2011 or 2012.