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Joseph Poma
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- Bachelors Degree in Mathematics Education - Masters Degree in Mathematics - Series 6, 63, 65 Completed Successfully (All three completed within 6 months, No longer registered) - High School Teacher - Former Personal Banker for Chase Bank - Amateur Photographer -Options Enthusiast
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  • Herbalife And The Easy Money Trade

    Investing is difficult. Regardless of the number of big headed investors saying otherwise, the fact that the majority of mutual funds underperform their appropriate benchmark is proof that investing is not easy. That said, every so often you come across a trade that is a can't miss, one that you just know in the depths of your soul will make you money. If you act quickly, Herbalife (HLF) may give you that very opportunity.

    An opportunity like this requires 4 ingredients that factor into the success of the trade: volatility, impending news, time and pricing. If you are missing one, you might swing by with a small gain but ideally all four are desired. Herbalife, to our good fortune, has all four and in a big way.

    Volatility - I don't think I need to address this because I think the Carl Icahn v. Bill Ackman battle has garnered plenty of attention, but I may as well rehash for those unfamiliar. Bill Ackman, founder of the Pershing Square hedgefund with several billions of dollars under management is the Herbalife Perma-Bear, with a short position claimed to be over 20 million shares. His beliefs are that there may be accounting discrepancies, but even worse, he has been the recent leader in a vocal opposition of those calling Herbalife's sales methods a pyramid scheme.

    Carl Icahn on the other hand has acquired 17 million shares (using his own funds and NOT a hedgefund) and has been vocal regarding the undervaluation of the company. Joining Icahn in his corner are George Soros, William Stiritz and Dan Loeb. I don't think any further explanation for how much money is in the game between these 5 major players. With 30% of shares held short as of the last semi-monthly check and well over 30% of the shares held by money grubbing, revenge seeking hedgefunds, the volatility of the "common" stock has been significantly increased.

    *Note: While I have my opinions on the Herbalife debate, the great thing is they need not matter! Personally I think Herbalife has a strong business model that isn't violating any regulations, but if you disagree with me that's no big deal, because we're taking both sides of this trade! Just a little teaser there, you'll find out more a little further on down!

    Impending News - Pricewaterhouse Coopers will be auditing the companies past financial records and in the coming months will be releasing the results of such an audit which will help sway the needle in one direction or another. Furthermore, Bill Ackman has been vocal in trying to get the FTC to look into HLF for its business practices. If the FTC decides to come out with a statement regarding their "looking into" of HLF's business practices, regardless of whether the statement is positive or negative, there will be significant market action. Further impending news could be brought upon by any actions the major investors take. This includes even a tender offer by Carl Icahn, an idea that many see as possible, maybe even likely.

    Time and Price - These final two variables don't actually deal with the company itself but instead with the underlying option contracts currently existing on the stock. At last check, an investor (large or small) could purchase February 2014 expiry call and put options which have approximately 157 days on their life at very reasonable prices. 70 strike call options for this expiry last traded at $11.50/contract while put options at the same strike trade for $12.25/contract.

    The Trade

    Given the extreme impending volatility, $23.75/straddle seems like a relatively fair price to pay. If there is regulatory action on the company, assets could be frozen and the stock's price could plummet rather quickly following the news. Using the 70 strike straddle, the breakeven point would be $46.25. Given that when the stock traded in the 20's when Mr. Ackman announced his short position, I see a breach of the $46 level very plausible with the right negative news.

    On the flip side, the upper breakeven point is 93.75/straddle. It's much more difficult to place a realistic potential profit on the high side because it is unlimited, the benefit of being long vs. being short. That being said, several analysts have seriously mentioned $130 as being a viable price target, which would imply $36.25 of potential profit from the straddle. With 30% of shares being held short, which amounts to approximately 8.5 days worth of volume, a short squeeze pushing the stock above $94 is quite likely.

    So after reading the likes of Mr. Matt Stewart's articles and the lengthy debate that is derived from them, how about we all put our differences aside and no matter who you are or what you believe, put yourself in a position to profit nicely from the inevitable future volatility? Remember, investing is difficult, I think we could all use an easy road to travel once in a while!

    Disclosure: I am long HLF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

    Additional disclosure: I am long both Call options and Put options on HLF.

    Tags: HLF, options
    Sep 16 9:16 PM | Link | Comment!
  • Search And Site Analytics: A Tech Company Ready To Move

    At the close of trading today Zynga (ZNGA) will announce the results of its fourth Quarter. Current estimates stand for the company to report a loss of 3 cents per share on revenues of $212.11 million. Recently analysts have given conflicting statements with BofA/Merrill giving the tech company a two notch upgrade and Credit Suisse downgrading the stock to underperform. To help determine which of these analysts is making the right move, I've considered the site's web analytics and the results were surprising.

    Over the recent 3 months, Zynga's website has seen significant improvements in the time users spend on the site, up 28% to 4:58 minutes, and pageviews/user, up 5.6% to 3.01 pages. These are significant changes given that one year ago the site managed to only capture it's audiences attention for approximately 2 minutes and the number of pages viewed per user stood at approximately 2.4 pages. The 28% increase in time on site could be a result of successfully delivering video advertisements to users.

    It is important to note also that Facebook (FB) has also seen users spend 8% more time on its site (28:09 minutes) over the past three months. While this increase in time may be a direct result of Facebook's own initiatives, gains may could also be attributed possibly to users spending more time on "high-engagement" titles. During its Q3 conference call, Mark Pincus, Zynga's Chairman and CEO, announced that Zynga would pursue a mobile gaming lineup that would include more "high-engagement" titles. Mobile bookings accounted for 20% of its bookings at the time and with the increasing migration to mobile devices that number is likely to increase this quarter.

    A wild card factor in the earnings call today will be the development of the company's own advertising platform. The company, though deriving a significant portion of revenues from the sale of virtual goods, has sought initiatives to grow advertising revenues to bolster its top and bottom lines. Advertising generated $41 million in revenues for the company in it's second quarter, a 170% increase year over year. It is likely that analysts will keep a hawk's eye out for the status of this project as it is a crucial step in the company's efforts to generate greater advertising revenue.

    One last statistic cites that the Zynga website has experienced fewer users "bouncing", viewing one page and then leaving, from the site. During the last three months the site's bounce % decreased 9% to 40.4%, this being approximately 20% lower year over year from when the site's bounce percentage was in the low 50% range.

    If search and website analytics can offer any insight for the upcoming earnings report, it may be that the picture is not as bleak as Credit Suisse's downgrade claims it to be.

    Disclosure: I am long ZNGA, FB. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

    Additional disclosure: I am long both Zynga and Facebook using call options with January 2014 and 2015 expiry.

    Tags: FB, ZNGA, long-ideas
    Feb 05 2:59 PM | Link | Comment!
  • Amazon Identity Crisis?
    It started as an online book store, moved into music, videos and games, took on apparel, entered into the electronics field, started streaming movies and shows, and now has a tablet. With the deviation from the online retailers original purpose, has the company lost its identity? I think not. The company has been able to transform the publics perception of the company from a book store to an all purpose retailer. Whether it's vitamins, DVD's, TV's, a box of granola or a pair of shoes, it can be found on Amazon.com. 

    The company has done well in expanding the product offering while maintaining the largest online retail customer base. With all this success it is no wonder that the company felt compelled to take their success to the next level and compete with the Apple iPad with its launch of the Kindle Fire. With a surprisingly low price tag, the Kindle Fire has real potential to steal market share from Apple, a potential that was never quite reached by Research in Motion's PlayBook or by HP's TouchPad. The tablet has a stunning display, an app store that already has popular titles available, and great streaming content through the companies Amazon Prime service. With a $199 price tag on the tablet, I expect the Kindle Fire to make a huge impact this holiday season. What does concern me is the impact the low cost tablet will have on overall margins. This however I believe will be offset by the company's sale of apps, books, and streaming content.

    If the rollout of the Kindle Fire was not enough to make some ground breaking news, the company has also worked on expanding its streaming content library to take a bite out of Netflix. Amazon Prime offers customers streaming content right to their laptop, PC, TV or newly purchased Kindle Fire. This all offered at a single low annual fee of $79, making Amazon's streaming service cheaper than Netflix's. Along with the streaming content, Amazon Prime also offers customers free 2 day shipping and discounted next day shipping. With the holiday season coming along, I greatly expect to see Amazon take advantage of their new position in the tablet and streaming content markets.

    This holiday, if your looking for great deals you can certainly find them at Amazon.com. If you don't feel like waiting till Christmas though, buying AMZN should certainly result in an early Christmas present. Unfortunately the stock trades at $239/share which means if your looking to be long the stock, the best route may be through the use of Calls expiring in April.


    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Additional disclosure: At the moment liquidity prevents me from going long AMZN, however once cash is freed up I would like to go long the 250 April Calls.
    Oct 24 2:21 PM | Link | Comment!
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