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J Mintzmyer is a CFA candidate (testing Level 2) and investment enthusiast who utilizes Seeking Alpha to provide a free exchange of trading and investment ideas and to provide online visibility for his developing business. J is the Founder and President of Mintzmyer Investments LLC, a financial... More
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  • March 1-8 Reflections

    Last month I started a reflection series on my trades and investment approaches. My hope is this will provide useful journal to evaluate my investment style so I can discover what I'm good at and what I'm downright awful at-- hopefully more discoveries of the former!

    I also hope these reflections can serve as food for thought for my followers-- perhaps they will be useful musings. For the Feb-13 + 2013 thoughts scroll down to next article.

    RECENT TRADES & THOUGHTS (1-8 March):

    1 March: Rolled $LNKD hedge to $185.

    As was my rule, once the hedge becomes in the money, I roll forward to take profits. I secured a credit of approx $6.20, but once again LNKD shot up and I 'wished' I'd waited a few days to roll.

    I now have $9 ($185c) + $6.20 + $6.30 = $21.50 instead of a hypothetical $30 if I had kept the $150c open.

    The key difference is that 58% of that $21.50 is 'locked-in' whereas with the $150c, nothing would be guaranteed.

    If $LNKD suffered a flash crash in the latter, my $30 could easily go to $0. I believe my rolls are worth the peace of mind. I will roll the $185 if it becomes in the money (credit) for if we get to within 1m of expiry (expense). The latter scenario could be expensive.

    Due to my recent $NFLX short, I didn't have the capital to increase my LNKD to 70/100 -- I pondered 65/100, but decided to stick with the current level of exposure of 60/100 with the caveat that if I perform another 'credit roll,' the boost to 70/100 is required.

    REFLECTIONS ON RECENT TRADES:

    $KSS: The Q4-12 earnings were mediocre and it looks like my options ($48c March 2013) will expire worthless. No point in selling for a few cents-- I'm hoping if the broad market rallies and data continues to be strong, $KSS might raise a bit on adjusted consumer spending...

    $SPY: I'm set to lose a lot of money this year on speculative trades (Apr $135 and $140 puts) and investment hedges (May $145 put). I am baffled by the meteoric rise in the stock market. Sure it's the transition from those worthless 10y notes into stocks that yield similar amounts, but still... I expected panic mode this spring. So far I was very wrong.

    THOUGHTS LOOKING FORWARD:

    Coal: I have a heavy position with $ACI and I won't be able to generate any meaningful cash flow here until the options expire in July. I'd like to add some $BTU, but I don't have the capital. I clearly got in a bit too early, my average basis is $6.65, but with the options, my basis shifts down to $5.77 in July and the average call price is $7.25. I think I'm sitting in a pretty good spot, only slightly underwater and a max gain of 25% in an average holding frame of under 6m. I'd love to see $ACI hit $6-7 around July so I can write another bundle of calls.

    $CSCO: I'm getting nervous on the gains here and unfortunately I'm not a good seller. I'm not sure what multiple is fair to give them-- 10x P/E ex-cash? I always discount tech cash by 50% since most is overseas and the companies have a habit of burning it on worthless acquisitions. That gets me roughly $3 per share. I like to use avg of trailing 4 + forward 1, but Cisco is a mess here... Assuming we can reach $1.80 fwd, that gives me $1.37-- then what multiple do I use? I usually am very conservative and apply 10-15. 15x gets me $23.55. What if I assume sustainable 10% growth and fwd of $1.80-- that's $21? I haven't really decided what to do here--- buying CSCO at $17.35 was a much easier decision last November. I resolve to absolutely sell if we pass $25, and watch May earnings figures very closely in the meantime.

    $BRK-B: This one is easier, I'm looking for 125% of next year's book. This year's book was $76.14-- assuming 15% growth and 1.25 multiple gives me $109.45.

    $CMRE: I'm going to wait for the Q1-13 results, but I have a hunch we're going to see a secondary offering here. My current target assumes I want a 'high-yield' equivalent and ties the $1.08 yield to the corporate rate index-- that gives me roughly $18. People argue my approach is bad since these stocks can have more risk than even 'junk' bonds, but there's also the upside of dividend increases if the market improves. Costamare appears to be well-run, I'm okay at $18.

    $WEN: I've been here for 2 years and am really getting impatient. I loved the Arby's sell-off, and I'm encouraged by the company reports, but the market seems not to care. I thought WEN had much more 'upside potential' than $MCD, and I was clearly wrong. I'm bearish on the market and am looking to clear away dead money-- $ARO was my long overdue sell last week-- I'm giving Wendy's one more quarter to prove their worth.

    $WM: I have a few shares in my charity fund-- recent developments have been interesting primarily related to a REIT-approach to their landfill ownership. I like their idea to transition the fleet to natural gas-- WM needs to prove the cost savings though...

    Disclosure: I am long WEN, CMRE, KSS, ACI, MCD, WM, CSCO, BRK.B.

    Tags: WEN, CMRE, KSS, ACI, MCD, WM, CSCO, BRK.B, SPY
    Mar 08 8:02 PM | Link | Comment!
  • Reflections ON February Trades-- ETC

    I've decided to start a journal/instablog documenting my weekly trades and investment decisions.

    I've admittedly made a ton of mistakes- 2012 was probably my worst year (of 5 total), most of them tying to emotional decisions or over-allocation.

    Private notes are good, but I think it's good to have a public exposure as well for due credit or ridicule when it is deserved.

    It's easy to tout my $RIMM load up around $7 last summer, but that ignores the fact I started $RIMM at $28 on the way down without a key understanding of the cycle delays.

    Hopefully this process will provide myself a goldmine for future reflections and also give my followers a chance to provide inputs or perhaps gain an idea or two.

    I have 4 different portfolios--

    IRA (primarily blue chips and income-generators (corporate bond yield is sadly too low), with 15% or so to riskier positions) / No shorting or options.

    Partnership account- primarily long-term positions, no shorting allowed, limited options (covered calls, SPY hedges)

    Charity Account- all blue-chips / aiming for near-monopolies (MSFT, MCD, WM, etc). The idea is I build a solid principal up and then donate the dividends each year. I'm young- the account is small.

    Trading account- options (wild cards, otm lottery-tickets, etc), shorts (pretty much long-term valuation correction plays), and quick longs (speculation).

    ---Anyways// I'm going to sum up my Jan/Feb actions with a tiny bit of reflection since I have some 'catching up' to do:

    RECENT TRADES & THOUGHTS (FEB):

    Feb 27: Sold $ARO and bought $COH.

    $ARO: This was a real stinker and I really let my emotions go on this. Opened a position in May 12 for around $20 (with $GPS)-- shocked when the repurchase plan was stalled. Realized $ARO was not a quality company like $GPS and the management were dolts. I should have re-assessed the value at $10, but I was too shell shocked to react. I watched $ARO return to $18, I sold my IRA stake but held on to my partnership stake. Why did I hold on? Momentum was behind them and I wanted to log a break-even. DUMB. Horrendous decision based on emotions and reputation. I criticize the Wall Street managers for their window dressing and I'm no better. I finally gave up on this poorly managed, no-moat company. Buying 2 (mid-high quality) jeans online for $35 was enough evidence of their 'pricing ability.' To be fair to myself, I bought $GPS for $18 and sold for $30 in under a year, I correctly called the false-alarm on clothing retailers, but didn't do enough DD on brand/pricing-power and mgt. I also shorted ANF for a quick 30% gain. In hindsight I should have went American Eagle instead of Aeropostale-- my closet is 50% $AEO and I never bought a single $ARO item in my life until those $15 jeans last month. On a side note, Guess ($GES) has piqued my interest-- will follow their results over the next year. I think 2013 will be brutal to retail, might try to pick them up if they get slammed.

    $COH: I see $COH as unfairly beat up by the 'rise of $KORS.' The latter is a come-and-go fad imo. I believe $COH has a strong name and the weakening was inevitable with base broadening. I don't have enough capital to short $KORS, otherwize I would open a small position. Value is strong, but the market is clearly giving Coach the Apple-shoulder. Apple is much more impressive/intrenched than Coach, but it also sells for 31x more. I don't hold much (or any) stock in the buyout rumors, but why not? Probably just as good of a buy as Heinz. If anything is getting bought out it's going to be $CROX. I added them to my watch list last night.

    Feb 22: Realized I had some capital available, that I was well-set for a bear-turn, and decided to deploy it. Bought $KSS $48 May 13 calls, added to $ACI and wrote $6 calls for Jul 13, opened a $NFLX short, bought $SPY $145 May 13 puts.

    $KSS: Adib Motawala's report got me onto Kohl's. He also got me onto Dolby ($DLB), but I really don't understand the business. It doesn't seem very sustainable, and nobody seems to explain what they do after 2017. Back to Kohl's, never really heard of it-- but my parents like it-- especially online. Seems kinda like slightly more budget Macy's ($MCY)/Dillard's but above JC Penny ($JCP). The latter has destroyed itself. No joke- I bought lots of stuff there in high school (2004-2008), took a friend there to buy some dress shirts in January on a Saturday. Store was DEAD. Customer service was atrocious. If you are empty on a 2-3pm Saturday trip, you're done. $JCP is a value trap-- anyways. So my knowledge is $KSS is lacking, and I really want to see their quarterly results and projections before I commit to a long (see my below reflection on $AAPL). However, I think the sentiment is bearish (more chance for a surprise), and I expect a substantial dividend increase. Even if the results are mediocre (value trap), I expect the dividend increase to bring enough value/divvy types to jack the price 10%. Anyways, I picked these otm options up for cheap to keep my options open. Good results and no bump? I'll take the option loss and go long. Good results and good bump? I'll exercise a contract or two and sell the rest. Bad results and divvy bump? Option gain, no long. Bad results and no bump? Minimal option loss. I like my chances

    $ACI: With the extreme option premiums I plan to keep a substantial amount of my portfolio in this as an income generator. I think coal is a clear long-term bull play on asset undervaluation. Joe Springer seems to know a lot more about the actual fundamentals. I don't think $ACI can go much more below $5.50, if it drops under $5 without something insane (US coal use banned or something), I'll add another piece with probably $6 covered calls, maybe $5 covereds.

    $NFLX: I'm back on this horse! Last time I started around $160-$170 with no protection, averaged up as it hit $305, got really scared, but stayed with my gut. Only regret was selling a lot of exposure around $170 and only keeping maybe 25% of the shares to $70. Almost bankrupting my trading account (bk point if $NFLX hit maybe $440) scared me and I learned to either limit my initial short exposure or use hedge protection. I made the largest gain of my life on an otm lottery ticket play bought a few 1w on 3Q-11 for $1.70, sold for like $14-- more money on that single trade then I think I've made combined in 4 years. Anyways-- point is, $NFLX and I go way back, the business model is broken beyond belief and the balance sheet is even more broken. Thanks to Rocco Pendola for keeping my comfortable in my short during early-mid 2011. I opened a very small position (-2/-3%) and the hedges were too expensive. It seems like momentum has hit a stop, but it wouldn't surprise me if some rediculous press release gets up temporarily above $200.

    $SPY: I'm a public policy Masters student with an Econ degree. From all I can see/tell, our economy and government system (sequester/budget ceiling/taxes/etc) is broken and the market is partying-on. The disconnect is crazy. My previous two (failed) plays at $135 and $140 for Apr were speculations, but this $145 May is an actual portfolio hedge. I'm getting nervous, but I can't sell out because nothing else gives a reasonable return. I'm protected on my partnership at around 105% below $145 and the rest is allocated to my speculative section. Charity account is too small and secure (blue-chips) to warrent a hedge allocation as at $145, even $7.25k (It's smaller) would be 200% hedged. I don't want to deal with partial contracts in my Excel-splits either.

    Feb 1-8: Sold $DCIX, sold $DELL, bought $SPY $140 Apr puts, added to $ACI and wrote $7 calls, wrote $20 Jan 14 calls on $BBRY, rolled $LNKD hedge and increased short.

    $DCIX: Long story short, I made a bad call this summer, but glad to be out with a substantial profit (been long for over a year). The dividend isn't sustainable and the industry is questionable. Here's the article with more details: seekingalpha.com/article/1151191-time-to...-containerships

    $DELL: They're going private-- not worth the arbitrage risk. I think $DELL is worth $18-$20, but I can't fight it. If the deal falls through or is blocked, I'll gladly get back in at a discount. Bought this one for around $9 in November 12.

    $SPY: Speculative play on market crash. I've explained my rationale clearly above (and below).

    $ACI: I think I've explained my approach pretty clearly above. In hindsight, maybe I should have waited? I obeyed my allocation strategy though, so pretty sure the hindsight stuff is just spare emotions.

    $BBRY: I had a $20 price target, so I didn't want to sell. Figured I'd lock in gains with a sizeable $2.91 premium. Need to wait and see how they execute.

    $LNKD: I rolled my $150 May 13 call to a $170 May 13 call and received about $6.30 in premium. I used this premium to finance a move from 50/100 to 60/100. Since this is my first discussion of my approach, I see $LNKD as an extremely over-valued company, but I'm afraid of 2 things: 1) crazy $NFLX style momentum 2) being wrong. I really don't see the value of $LNKD at all... anywhere near these levels anyways. I think a serious foray by $FB could kill them, but for whatever reason $FB (and $GOOG and $MSFT) are sitting on their hands. My guess is because this is a worthless business-- Monster never made a decent profit at it. This clear ignorance of the value here, when the market is screaming value adds to the importance of my hedge. Anyways, either way this thing goes, I'm assuming a lot of momentum, thus the 2x hedge. I'm technically now on a 1.67x hedge.

    REFLECTIONS ON JAN/FEB 2012:

    Huge success:

    --Hit a jackpot with $DELL, acquired last Nov around $9, sold about $13.50 in early Feb. I personally thought Dell was worth up to $20, but I'll take the short term gain. Solid exection- good buy/forced sell.

    --Writing a $20 call (Jan 14) on $BBRY near the peak. Gained a nearly $3 premium, but I didn't sell since I had allocated a $20 price target. Didn't get emotional on the rise, locked in some gains. Happy as a clam.

    Mixed success:

    --My HPQ credit LEAP (long Jan 14 $18c/long $13p - short $15p). I bought in early Nov and sold in mid-Jan for a very impressive gain. I sold to finance increasing my short position in $AMZN and $LNKD. I would have doubled my gains if I would have waited for $HPQ earnings. When I opened the position in November, I meant to hold long-term, but emotions and impatience (lack of capital) took the better of me. Great buy-- weaker sell. I probably should have closed 50% or so of the position instead.

    --Bought $AAPL around $500 right before earnings. I'm not a big earnings surprise (long) kinda guy. Never had any sucess at it really. I should have waited for the results since I saw $AAPL as more of an investment. I'm still long. I don't regret buying $AAPL, but I regret the way I blindly rushed in.

    --Entering and building a substantial $ACI position with covered calls. Coal isn't going anywhere long-term. It's under $40 in the US, but $100+ in china (per ton). Unfortunately environmental activists are stalling the building of export facilities in Washington or Oregon. Natural gas prices hit all-time lows in 2012, so many dual-use electric plants cycled over. I see the long-term use for natgas as vehicle fuel and heating. Coal, even with strong cleaning tech, is far cheaper per BTU in the long-run. I believe oil is the most over-priced commodity here. I'm down on the stock, but the losses are minimal considering the impressive option premiums I generated ($8,$7,$6 Jul calls). If the stock stays low, I'll roll these all over to $7-$8 Jan 14s when July expires.

    --Realizing $DCIX was far overvalued and bailing with a substantial profit. This is only a 'mixed' sucess since I made a public 'buy' call last summer. Insufficient DD last summer for sure.

    Huge Failures:

    --THQI bankruptcy. This one was more of a 2012 mistake, but the recorded loss hit me in 2013. I should have seen this with management's slimy history. Value-- whether perceived or actual, means nothing if management has thrown in the towel. Unfortunately nobody poweful had a 'dog in the fight' so the lawsuit is likely to fail. I've only been around this game for 5 years, but this was the largest scandal I've ever encountered. I'm embarrassed to have rushed in without listening to Warren Buffet's advice.

    --Not buying otm calls on $BBY for the Holiday results. I gave a radio interview where I called the $GME disappointment and then posted on SA that $BBY had potential for a surprise. I was on vacation (Jan 7) and using my mobile trading device and I literally had my finger on some February $13c for something like 40c. I decided to...get this... save my capital for the $AMZN and $LNKD shorts. Lesson learned-- if you have a solid conviction (I've been long $BBY since $25 or so), then make the play. Nothing worse than believing in the trade, cowering out, and watching it unfold. I made a similar decision last summer not to go long $SWY (although I bought $RIMM and $NOK instead, so arguably not a bad trade-off).

    --otm lottery ticket put on NFLX earnings and on AMZN earnings ($85 and $240 1w puts respectively). I lost a bundle here and essentially gave back all of my $HPQ gains. The former I misread entirely-- no excuse there. $NFLX momentum should have been more clear to me. The latter is mind-boggling, I correctly modeled the sales shortcoming-- AMZN misses sales far under expectations, and some financial gimmics bump the stock up. I increased my short exposure to $AMZN by 100% the next day.

    --SPY puts // Bought Apr $135s in late December, Bought Apr $140s in early February // Bought May $145s last week. The former were speculative plays-- I couldn't have been more wrong on overall market sentiment. The latter is allocated 40% to hedge the partnership and 60% speculation account.

    THOUGHTS LOOKING FORWARD:

    --$SPY bear: Sequester, budget insanity, a timid economy, tax woes, and the stock market near all-time highs doesn't add up. Already adequately (if not over) prepared for this potential scenario.

    --$AAPL bull: The cheapness is approaching insanity. This is from a guy who always though Apple was kind of a silly fad and never bought a product except for an iPod. Clearly iPhone=phone is as Google=search. Academia is obsessed with Apple. Seriously 4x laptop penetration at UMD. The PCs/Laptops (Apple is a PC btw) and Phones are entrenched and here to stay. Not so sure about iPads... Do you need iPads to stay entrenched to win with these valuations? None-the-less waiting until sub-$400 before I'd add to my position.

    --$AMZN confused: When will the market wake-up? Idk... I'm prepared to wait a long time if that's what it takes.

    --$NFLX deja vu

    --$KSS/$DECK curious

    --$CROX interested

    --$WMT sorta curious: Hoping they flop next quarter so I can pick some up in my charity account for $55/$60 (is that too low?)

    --$DIS, $NKE, $TGT and $PEP impressed: Following, but too rich for my present tastes

    --$EXC, thinking a midAmerican/Buffet play could happen if this one keeps slipping

    --Too much more to count.

    Disclosure: I am long COH, KSS, ACI, AAPL, NOK, BBRY, BBY, EXC.

    Additional disclosure: I am short AMZN, LNKD, NFLX, SPY via options. If I missed something in this section, it's clearly in the article.

    Tags: DELL, COH, ARO, DCIX, SPY, ACI, LNKD, AMZN, AAPL, KSS, DLB, BBRY, BBY, NOK, MSFT, MCD
    Feb 27 4:32 PM | Link | 3 Comments
  • My Napkin Calculation For A Netflix Bankruptcy

    I AM CURRENTLY SHORT 1W PUT OPTIONS ON NFLX. PLEASE KEEP THAT IN MIND, AND UTILIZE DUE DILIGENCE BEFORE INVESTING BASED ON MY CLAIMS.

    Background

    For a background basis- check out my original hypothesis last February. I missed the mark on revenues which has pushed my date for a liquidity crunch back a few months to a year. There's a chance I could be wrong again IF subscribers can grow fast enough.

    Numbers are based on an annualized basis from the Q3-12 letter to shareholders data.

    My recent article sums up the earnings miss and related events.

    The Napkin Calculation

    Please keep in mind this assumes 4 quarters at the annualized rate of Q3-12. It's very likely that revenue will increase slightly and that other expenditures will also increase. The question is whether or not revenue growth will outpace additional expenditures, especially international expansion.

    Revenue at $905M*4= 3620M in cash inflows

    Content liabilities are estimated at $2.1-$2.2B --> $2150M

    $1470M left.

    interest+g&a+marketing+techdev+fulfillment ($291.7*4=1167M)

    $303M left. (please note that fulfillment will likely slightly decrease due to less DVD traffic, marketing and G&A increases should more than comp)

    Subscription costs are difficult to breakdown... What is the cost of bandwith/servers/etc. What are the costs of tech support, and other related fees? The best method I can figure is to take the $602.1M in "subscription costs and subtract the $410.9M amortization of streaming content liabilities that is include in the operating cash flow statement. I am taking out the $410.9M since this figure would already be included in the upcoming $2.15B liability bomb.

    This leaves $191.2M per Q X 4 = $764.8M annually

    Netflix will burn $461.8M in cash in the next 12 months if revenues do not outpace related expenses!

    Netflix has $790M in cash and STI, but the next 12m will not be much better. Plus NFLX will be forced to stop buying new content which will drive subs away. Any way you slice it, going cash flow negative on a large scale will spell the end for NFLX.

    To avoid this end, they need to find $435M more revenue in the next 12m while holding expenses constant. Since it's impossible to hold these other expenses constant, I'll be extremely genererous and assume 50% growth. They need $870M.

    How Many Subscribers Do They Need?

    As DVD continues to go away, the revenue/sub continues to fall, although it appears to be stabilizing around $30/q--> $120y. Effectively they need 7.25M subs TODAY to breakeven, and that is WITHOUT counting DVD exits.

    Let's assume DVD exits are extremely slow- only 250k leave each qtr. Since it takes approx 1.5 streamers to replace the revenue of a DVD user, we need a qtrly gain of 375k subs just to break even.

    For the 7.25M mentioned above, assuming equal quarterly gains, and 0 gains today, they need approx 14.5M at the end of the year/4 qtrs = 3.625M subs + .375M from DVD = 4M each quarter.

    In Summary

    I'm being VERY generous to Netflix here, and they still need to gain 4M streamers each quarter for all 4 next quarters just to stay cash flow neutral.

    The past 4 quarters from Q4-11 to Q3-12, NFLX has added .1M, 2.83M, 1.28M, and 1.78M.

    Good luck!!

    Disclosure: I am short NFLX, AMZN.

    Oct 24 12:01 AM | Link | 3 Comments
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