AUGUST MONTH END SUMMARY AND LOOKING AHEAD TO SEPTEMBER
August Performance: -0.34% S&P 500 August Performance: +1.98%
YTD Performance: +42.38% S&P 500 YTD Performance: +11.85%
Portfolio Highlights For August:
- A new position was taken in PXLW at an average price of roughly 2.80 at the beginning of August. PXLW specializes in enhancing video quality, with an increasing focus on the mobile market. Fundamentally, the company possesses all the attributes I like: Cash flow positive, earnings increasing across top and bottom line, zero debt, positioned well for tech spending, niche business, insider buying, and an activist hedge fund involved. On a technical basis, the price and volume patterns are confirming the positive fundamental picture. PXLW has already achieved a 20% plus gain since initiating the position earlier this month. It is currently the largest position in the portfolio.
- SPRT was re-initiated at an average of roughly 3.05. This has been the go to stock when exposure is necessary since the research report was published in late January. I have traded in and out of the company numerous times throughout 2012, each time with a double digit percentage profit.
- SPNS, initiated in mid-June, managed to finish the month with a 6% gain. In August, The company reported a 91% increase in revenue and an 77% increase in net income versus Q2 2011. Additionally, they increased cash balance by $10 million over the past 6 months with zero debt. The CEO remains bullish on the prospects for the company. Who can blame him? SPNS is in a prime position to take advantage of a much needed IT upgrade cycle taking place in the insurance industry.
- During the first half of the month exposure increased from 70% invested to the current level of 95%. This is in line with where I want to be at this stage of the market rally. My mechanical trend indicators are all in a bullish stance, which demands a 100% invested position. They are, however, beginning to see some signs of a reversal, which is at odds with my opinion of where the market will go over the next couple of months. Bottom line is that the mechanical trend indicators dictate my exposure levels. If they begin turning over the next couple of weeks, the cash position in the portfolio will increase and long exposure will be hedged.
Portfolio Lowlights For August:
- WMIH finished the month of August down 16%. This is not unusual for a company listed on the pink sheets. Volatility will be substantial until the company becomes listed on a major exchange, which I expect within the next 12 months. WMIH is a long-term holding, as stated in the research report from July. The market is awaiting clarity on what form the company will take moving forward. It is essentially a shell company at this juncture. The point is that paying what amounts to roughly $20 million ex-cash for that shell is an opportunity in uncertainty. I eventually feel that what is now a shell will evolve into something that justifies a share price much higher than where we are presently. Patience is the key here.
- ATNY continued its record of poor performance, finishing the month down slightly more than 6%. The pattern of accumulation paired with what seemed to be a positive restructuring situation when I initiated the position in April has slowly devolved into a pattern of distribution paired with a restructuring that is costing far more than expected. I believe the eventual outcome will be a rush towards the exit in the form of a takeover or merger. I am not sure, however, if I will be sticking around long enough to witness this transaction.
- BWC is a new position in the portfolio. It is a mid-cap energy company, which is why I chose to make it a small position. The company is the largest builder of nuclear power plants and facilities in the world. Obviously, following Fukushima in 2011, the prospects for the company dimmed as nuclear power plants were purported to go the way of the dinosaurs. The fact that BWC is a relative newcomer to the public markets didn't help. BWC was spun off from MDR in 2010. An early interruption in value creation by way of natural disaster paired with a spin off creates opportunity if a company possesses the fundamentals to justify investment. BWC does: Earnings growth, large percentage gains in revenues across key sectors, bookings increases, dominant market position, management plans for stock buyback or dividend to increase shareholder value, niche business. It is all there for BWC. It is listed as a lowlight because BWC finished the month down 3% from where it was initiated.
Looking Ahead
Technically we are at levels that are probably the most significant a market can be at during any bull or bear cycle. It is the equivalent of The Berlin Wall for the markets, with a break of that wall leading to new possibilities and developments. I can't overstate enough the ramifications of a break of 13,500 on the Dow, with positive momentum attached. It can indeed lead to a new bull market that should last into the middle of 2013 before a substantial pullback is witnessed.
This comes on the heels of a retail investor class that has completely evacuated the stock market. And an academic Wall Street class that doesn't see a reason in hell the markets can put together a sustainable rally for more than a few months, let alone years.
Imagination, flexibility and intestinal fortitude are all essential traits of any above average investor. Unfortunately, these traits are lacking from the typical retail investor class due to a lack of experience. These traits are also lacking from your traditional academic investor class due to an incompatibility with what academic achievement imparts. Imagination, flexibility and intestinal fortitude are surgically removed over years of thinking within a windowless box of theories that must be adhered to in order to continue the facade of the correlation between academic achievement and Wall Street. This leads to a culture of fund managers and analysts who know everything but achieve nothing. Their theories on the markets lead them to over-diversification, making them an overpaid, hybrid version of the SPY. Their reluctance to look outside their academic upbringing leads to a rigidity that is incompatible with above average returns. The problem of Wall Street will always be Wall Street itself. In other words, the very image that must be cultivated in order to make the sale to investors is precisely the incorrect formula needed for what is promised in the sales literature. The end result: Wall Street is seen as a wasteland of suits, ties and hair gel that seeks to devour all but their own.
In order to put together a sustainable bull run, you want to see retail and academic investors on the same side. That current side is bearish for both. Ignore the sentiment indicators and other measures of love or hate you have been trained to watch. These indicators are not nearly as effective as they used to be. How can they be when the retail investor class that they measured has now been eradicated like a bag of fleas at a convention of Siamese cats?
Every incentive is there for a breakout to the upside that results in a substantial run. The fundamental incentive may not appear to be there, and it most likely will not until the markets have achieved the first stage of their run. Fundamentals won't ring a bell for you when it is time to invest. Understanding price will.
With all that said, I am still a slave to my mechanical trend indicators. I now have both short and intermediate term trend indicators pointing down. Pointing down is different than turning down. They still have not turned, but pointing in a direction is the first step towards turning.
If they do turn I will have no choice but to evacuate my bullish stance, at least position wise, and move from near 100% invested down to between 50 and 75 percent. I will say that 2012, thus far, has been a year that has had several near misses in terms of turning the indicators to the downside. I can see September creating another near miss, being able to remain at a fully invested position throughout the month and hopefully into the end of the year.
That's my hope, at least. I have been doing this too long to invest on hope, however. If I need to move to cash, I will, regardless of the conviction I have in my long-term bullish thesis.
Portfolio management 101.
Regards,
Ali Meshkati
