THE COMPLETELY IRRATIONAL REASONS WHY I BOUGHT YELP STOCK TODAY
You cannot rationalize the current $1.5 billion market cap for YELP. That is why I tweeted earlier that this is purely a concept type investment rather than my typical value/restructuring play. I bought into YELP for numerous reasons. Here is my thinking: Social Media in 2012 reminds me of where the internet was in 1996. I was sitting at a trading desk for Waterhouse when Yahoo went public. I was surrounded by traders who were skeptical. I had customers who called in and were even more skeptical of the prospects for this burgeoning industry. Why the skepticism? There were no metrics or relative comparisons. When you tried to put together the numbers they just didn't add up. The market couldn't assign or rationalize a proper valuation. The same problem is evident in social media. Here we have companies going public with market caps that are blowing people away. The words "fraud", "overvalued" and "hype" are often attached to these companies. Rationalizing a nearly two billion dollar market cap for YELP is impossible. Rationalizing a nearly eleven billion dollar market cap for LNKD is mind-blowing. And rationalizing a one hundred billion dollar market cap for Facebook seems outrageous. Rationality fails in these situations. The market proves it time and time again. Yet traders continually turn to rationality in an effort to decipher the mystery of the newest and greatest sectors that consistently cause over-thinking charlatans and articulate incompetents to look mediocre at best and foolish at worst. I've spent years using YELP to help assist with restaurant reviews and anything else I want an opinion on in the service space. If an individual was to come to me pre-IPO and ask me to guess what the market cap should be? I would not put it past $500 million. $1 billion seems absolutely absurd. $1.5 billion seems like insanity. Now here is where I am different than most. When I see that my internal compass is off by so much, I don't keep walking in the same direction knowing that I am correct until I fall into the mouth of a volcano. I begin wondering why it is that the market thinks of a company like YELP 200% differently than I do? That 200% is a premium that the market is assigning to the company above and beyond what the normal mind considers acceptable. In addition, that 200% premium to what the normal mind considers acceptable keeps most out of the stock and attracts short sellers. The perfect combination of events to have a clean and steady uptrend that further reinforces doubt until that singular moment where realization of what the market...
PORTFOLIO UPDATE
All the positions I accumulated during the first quarter have now been sold. All were sold for a profit, with the most significant being PTGI gaining close to 40% since January. During the trading day today I tweeted the following: PTGI today announced the sale of their Australian unit for roughly $200 million US. While it is debatable whether or not they received adequate value for the unit, what can be said is that the company balance sheet continues to improve with the proceeds from this sale. It also shows you that there was indeed value here that was awaiting the right environment to be unlocked. The sale of the Australian unit seemed like a culminating event over the intermediate term for PTGI. Paired with the fact that I was looking to get into a larger cash position, the temptation to lock in some nice gains simply proved too much. I look forward to buying back into PTGI as I believe the company has substantial upside remaining over the next 1-2 years. Continuing to hold positions in SYNC and CIS. Have a very small position in DPTRQ, which suffered through a disappointing day today. I am expecting to see some news with respect to whether shareholder value will be preserved or not by the end of this month. Have a busy schedule of meetings during the day and entertaining a couple clients from out of town through Wednesday. If there is anything substantial or interesting to report, you'll see it on Twitter first. Follow me...
WHAT TO DO IN THE MARKET NOW? KEEP IT SIMPLE STUPID
You have to make it simple for yourself here. It is the only way to get past this period unscathed. Yes, unscathed. You cannot make money in every single market environment. There hasn't been a man on Earth who has been able to accomplish this feat over a long period of time. Those that have tried typically end up being talked about in the past tense with respect to their financial careers. Get out of difficult periods in one piece and you are 10 steps ahead of the competition. How do I plan on making it simple for myself here? I discussed earlier this week how I have developed ways of dealing with weaknesses I have in trading and investing. I have created mechanical methods to take ME out of the equation completely. This way I will not, under any circumstance, allow the market to do exactly what it is trying to do at such junctures within the greater trend: Confuse, dismay and create a smoke screen that causes me to begin giving away my gains for the year as if I was an bikini manufacturer in Afghanistan. My short-term (3-4 weeks) trend indicator turned down on Tuesday for the first time since November. This is part of the systematic portion of my investing that takes over during difficult periods. I have learned not to go against it. Seasonals, technicals and fundamentals are all screaming CHOP here. Chop is meant to throw you off course. It is the equivalent of throwing a well-seasoned, 8oz. steak in front a hungry guard dog. No matter how hard it tries to guard the fort from that point, the confusion of hunger will drive the dog to do its job much less effectively. You are much the same. No matter how smart you think are, choppy seas will have a profound effect on your psychology. A sideways range creates self-doubt, anxiety and worst of all over-analysis of the situation at hand. You begin to over-think. You begin to rely on the opinions of others. You begin to dwell on decisions you make or choose not to make. You begin looking at the market through a completely different lens than the one which made you money in the past. This is all by design to force you off balance so that you will take your eye of the ball, missing the big move that lies ahead. Every experienced trader has different ways of dealing such periods. The key word is experienced. You can always separate an experienced trader or investor from an amateur from observing how he or she deals with such periods. The...
GOOD YEARS ALL COME DOWN TO A FEW GREAT TRADES…THIS IS ONE OF THEM
The market requires you to be actor. You have to adjust to its nuances the same way a good actor adjusts to the demands of different directors and costars. You must be an aggressive, singular minded profit machine at times. And then manage to morph into a timid lizard sitting on a rock and running at the first shadow that appears from the distance. You can't always be a profit machine or you'll go bust. You can't always be a timid lizard or you'll never make money. You can't always be anything or you are not adjusting. Get it? I've adjusted thus far in Q2 by pulling back from my aggressive posture that marked most of Q1. I wrote back then about a potential intermediate term top occurring in the April or May. We are now in April and the market is beginning to act like it wants to move into sideways mode is here. Sideways mode has always been a challenging area for me as a trader/investor. I have tried on numerous occasions over the years to stick through sideways markets, despite foreseeing their arrival. Never once have I found the decision to slosh through the mud that is a sideways market rewarding. Sideways markets have the tendency to turn stock picking into mush. You know where I excel? Stock picking. That is my scrambled eggs and chocolate milk. When the market turns my specialty into random acts of volatility based on absolutely nothing, it makes my methodology about as effective as throwing darts. Backing away is the only choice. I'm not looking to get into 100% cash. I am, however, looking for opportunities to get more liquid. Good years all come down to a few great trades. Preserving your gains during an unpredictable Q2 will be one of those great trades in 2012. Tread...
QUESTION OF THE DAY: ARE YOU VIEWING THE MARKET OUT OF THE WINDSHIELD OF AN OLD DATSUN OR A BRAND NEW ASTON MARTIN?
I know my strengths and I know weaknesses. My greatest strength: I am a very good stock picker during bull runs. I have put together triple digit percentage years many times in the past based on a combination of stock picking talent and advantageous market conditions. I doubled the return of the nearest hedge fund in the 2003-2004 based on stock picking alone. Pay no mind that it was Peter Thiel that was in second place to me that year. Just several months later he invested in Facebook while I was in the process of discovering my greatest weakness for the upteenth time. My greatest weakness: I am a terrible seller. Every stock I buy I believe has the potential to go to $1000 per share. I want to hang on in order to extract every single dollar of profit. I am greedy in this respect and I know it. I've developed a way to deal with my weakness while capitalizing on my strengths to the best of my ability. The only means of dealing with being a terrible seller or profit taker, if you will, is to create a mechanical system that takes you - the human greed machine - out of the game. I have done this by creating three trend indicators that slowly pull me into cash whenever the market is turning. My opinion of the markets be damned. These trend indicators take precedent over all else. When they begin turning...I take profits. It is that simple. My short-term trend indicator turned firmly to the downside today. That is the bad news. The good news is that the intermediate and long term trend indicators are nowhere near turning yet. However, the severity with which the short-term trend indicator plummeted, particularly today, is disturbing. Fortunately, over the past couple of weeks I have been taking profits on the names I bought in January and February. I sold PRGS, SPRT in March. I sold GSIG on Monday. The only original holding from Q1 is PTGI. I continue to hold SYNC and CIS that I have purchased over the past couple of weeks. I am also holding a very small position (less than 2% of portfolio) in DPTRQ. I have been battling myself in this profession long enough to know when things are getting foggy for me and I should simply back away. There are moments in the market when the picture is so crystal clear for me and the trading so fluid that I can't help but win. It is like looking out the window of a brand new vehicle. The smell, look and feel of the road...
MORE CHANGES: WHERE THE PORTFOLIO IS AFTER TODAY’S ACTIVITY
I'm going to getting a lot more active in the coming months. Again, Twitter is the best means of following in real-time. I'll be updating the website with all the daily activity around my usual time each night. Here are my tweets sent out during the trading day today: The liquidation of GSIG was purely a function of the stock underperforming all other names in the portfolio since January. I wanted to raise cash and I decided to cut out the weakest first. I wouldn't at all be surprised to see this company substantially higher by year end. Fundamentals are great. Management is magnificent. The recent earnings report was wonderful. I don't get what is pressuring the stock and/or why it hasn't been recognized yet? When I start scratching my head I have found that I should just bail out. I bailed with a 5% profit. Can't complain really. I took a long position in LGF today. It is a company I have been bearish on for the past couple of weeks. I nailed the blowoff top to the day but didn't take a position due to my market stance at the time. I am hoping some of you took advantage of the call. I decided to get long today based on what I believe will be some impending short covering. LGF has quite a bit of short interest and I know that short sellers aren't necessarily in "let your profits run" mode. The type of pattern the stock is exhibiting can get reversed quickly and I am expecting this to be the case here shortly. My entry point was off today, which was annoying. But I am willing to give the stock some room to work itself out. This is one that I will, more than likely, be out of before the end of the week. And it should be with a profit. Here are the individual positions as of the close today: PTGI http://www.zenpenny.com/?p=3412 SYNC http://www.zenpenny.com/?p=3794 CIS http://www.zenpenny.com/?p=3777 DPTRQ http://www.zenpenny.com/?p=3759 LGF - a short term trade The portfolio of champions and you don't even need...
BEING WILDLY BULLISH ISN’T KEEPING ME FROM HAVING THE FOLLOWING CONCERNS
On January 14th of this year, prior to starting my equity buying bonanza, I posted the following "Surprise: Call Buyers Returning To The Market May Not Be As Bearish As Advertised." This was one of many studies that I pursued during January that led me to have the conviction to buy into individual equity names for the first time in months. In addition, this was one of the many studies I pursued during January that pointed to an April-May intermediate-term top for the markets. The primary motivation behind my call for an April-May top was rooted in the way I interpret various sentiment measures. In my studies, it is not the absolute levels of sentiment indicators that determine reliable buy or sell levels. It is, in fact, the way in which the sentiment measures (put/call ratio being the primary) get to their final destination that is of importance. Meaning the velocity and time it takes the put/call ratio, as one example, to get to what is considered a contrarian based buy or sell area is the most important consideration of all. The theory behind this is very simple. The longer it takes a group of investors to embrace one side of the market, the more sure you can be that the prevailing sentiment of that moment has fully engulfed the heart and soul of market participants. This leads to extended runs in the market that defy any logical expectation for price targets and the like. We have seen that recently as the market runup in 2012 has been nothing short of amazing. This is not because fundamentals are flying through the roof, with economic utopia knocking on the door of both emerging and developed economies. No, it is rather a function of the deeply-ingrained bearish mindset that prevailed during the second half of 2011 and the extent that the market has to go through to recalibrate the hearts and minds of investors. I was reminded of my call for an April-May top because of the market action this week. It was the worst week for the S&P for all of 2012, thus far. We have now seen two red weeks out of three, lending some credibility to an interruption in the fields of green that have been prevalent during 2012. On Friday the jobs report came in weaker than expected. At last check Dow futures were off some 130 points on Friday. I am sure that we will see a triple digit down open on Monday that gaps us down right through the all important generational trajectory that was expected to be a support point for the markets. It...
SORRY BEARS: THE ONE GROUP OF INVESTORS THAT SIGNAL MARKET TOPS ARE NOWHERE TO BE FOUND
More and more traders seem enamored with the idea of the market topping in spite of the massive rally and generous market conditions. In order to entertain their obsession I am going to remind everyone of Phase 4 Investor theory. It is my own invention...and it works. Case in point: On February 17th, 2011 I wrote the following article for TheStreet, "Beware the Phase 4 Investor Stampede." In the article I mentioned a certain group of investors who are reliably incorrect in their market assessments on a frequent basis. They pile into the same stocks. They exhibit sloppy behavior in their buying causing expansions in both volume and the trading ranges. They signify impending tops in the market with such great accuracy that they deserve a title of their own: Phase 4 Investors. Phase 4 Investors like to pile into Phase 4 stocks. Phase 4 stocks are led by names like FNSR, JDSU and CIEN. The same names that the most speculative investors were trading 12 years ago are still bringing in the same types. To quote the article from February of 2011: It's not just the fact that they are going up; it's the manner with which they are going up that should of the greatest concern. Phase 4 stocks tend to attract Phase 4 investors, meaning sloppy, run-with-the-herd type investors who simply pile in. The price action and volume seems to be confirming that Phase 4 investors are moving into Phase 4 stocks and throwing everything they have behind them. Get cautious, get some cash and get ready. Phase 4 bulls are going to be having a change of vocabulary in the coming months, and the path to get there is never pretty. The article called the top in these names to the week, with the exception of CIEN. Six months later FNSR was down 65% from that point. JDSU was down 65% from that point. And CIEN was off 60%. The Nasdaq 100, in the meantime, had fallen 15% from the time Phase 4 Investors began french kissing their favorite stocks in public. Phase 4 Investors proved, yet again, to be an invaluable tool towards accurately assessing sentiment at that moment. So it proves worthwhile to check on them from time to time to see where they stand. Here are the charts of the Phase 4 names with commentary provided: click chart to enlarge Phase 4 Investor theory leaves us with one very solid takeaway: The most speculative of investors have yet to return to the market pushing up their favorite stocks. With that said, sentiment may not be as frothy as you are being led to believe...