SEPTEMBER MONTH END SUMMARY AND LOOKING AHEAD TO OCTOBER
September Performance: +2.96% ------------ S&P 500 September Performance: +2.42%
YTD Performance: +46.60% ------------------ S&P 500 YTD Performance: +14.55%
Portfolio Highlights For September:
- SPRT, a position that was originally re-initiated in August, with an addition to the position taking place on September 6th, saw its share price increase 37% during the month. This is turning out to be the third, round-turn, double digit percentage profit in SPRT for 2012. It has, needless to say, been a kind stock for the entirety of the year. The bulk of the gains for the month of September came as a result of the move in SPRT, which was the largest position in the portfolio for a majority of the month.
- WMIH saw its share price rise 6% during the month. This is essentially the spread between the bid and ask. I won't be putting too much faith, therefore, in the viability of the increase. I have a very long-term objective in mind for WMIH. This isn't a company that is going to suddenly blossom into a pretty flower due to a magical sprinkle of stock market good fortune. The opportunity equation here is very simple to understand. WMIH is a company with very defined risk as a result of their .38 cents per share in cash, no debt and very little cash burn. At its current price of .50 cents, I am essentially risking .12 cents to participate in an investment that has potential to yield 300%, 500% or upward of 1000% depending on the outcome. Whenever I am allowed to participate in an opportunity that defines my risk clearly while offering as much reward as WMIH, I will grab the bull by the horns, so to speak, prepared for a tussle.
- BWC was exited for a tiny profit since the investment was initiated in August. The reason for the exit was purely to make room for a new small-cap play that took priority over BWC, which is a mid-cap company. The portfolios seek out small-cap opportunities first. Every other class of security comes second in terms of priority. I continue to believe that BWC will move into the 30 range over the intermediate term and much higher over the long-term. The company remains undervalued inside of a niche that has a barrier to entry 5 miles high and 100 miles long.
- UPIP is the newest portfolio investment. I issued a research report for the company on September 24th. It is a very simple formula that I use to choose my investments. UPIP embodies that formula extraordinarily well. It comes down to three things: (1) A company that is experiencing accumulation and stability/predictability in price structure (2) A company that is undergoing a circumstance that is difficult for investors to understand (3) A company that is involved in a sector or business that is difficult, if not impossible, for Wall Street to value correctly. UPIP embodies all of these factors. It is involved in a newly spun off business that is expressly going after patent enforcement as its business. Patent enforcement/licensing is a relatively new business that is impossible to value correctly. The company has a clear pattern of accumulation and price stability occurring with a fundamental structure that has no debt and $80 million in cash. A recent catalyst was announced in their pursuit of damages against both Apple and Google. Detailed information is available in the research report.
- For a majority of September, portfolio exposure stood at 100% net long. What little cash was available coming into September was put to work in SPRT, which turned out to be the best performing stock in the portfolio during September.
Portfolio Lowlights For September:
- PXLW, which started off with a bang after it was initiated in early August, fizzled during the month of September. It ended the month down 13% from where it started. It was a moderate volume pullback on no news. It recently bounced from its support area in the 2.80 range. I expect that risk in the stock from these levels is extremely low. I am expecting that PXLW will be on the highlights list for the month of October. This becomes especially true as they are set to report earnings in the coming weeks.
- ATNY has firmly implanted itself on the "lowlights" list for sometime now. It ended the month of September down another 6%, right on the borderline of its last support area. Their earnings are set to be released in the coming weeks. With the price action in the stock, I am not sure I will be holding into an event that has the potential to blow the bottom out of the stock price. ATNY is undoubtedly an extreme value at these levels. I have, however, been involved in value plays in the past that simply don't care how cheap they are, choosing to favor downside momentum over value. It is important to make sure that one does not forego all forms of risk management simply because a company is a value. That is how the best portfolio managers and investors are blown out of the water time and again.
- SPNS continues to be the most frustrating position in the portfolio, as their business is increasing substantially, the CEO is making positive remarks and the company is undervalued, yet the stock price simply remains stagnant. I believe this is due to two factors. The first is because they are a small-cap Israeli company that is easily ignored by both institutional and retail investors. The second is due to a large seller that was awarded shares as a result of a merger and is actively liquidating a large number of shares into a stock that lacks the ability to absorb the selling. SPNS is a company that will experience a "sudden" burst of value creation, making up for these months of stagnation. I plan on being there when it does. It remains a mid-sized position. SPNS was down 3% for the month of September.
Looking Ahead
In the first paragraph of last month's "Looking Ahead" segment, I said, "I can’t overstate enough the ramifications of a break of 13,500 on the Dow, with positive momentum attached." The break of 13,500 came, the positive momentum attached did not. This and a number of other factors, have caused me to actually agree with my trend indicators that are starting to weaken here, although they haven't flipped to the bearish side as of yet.
What are those other factors?
1. I am seeing an unusually large number of individuals and articles speak about the positive attributes attached to being long the market, making this dip a must buy. Yes, this is data of the anecdotal sort, but it is something that is worth paying attention to. It speaks of a certain comfort level for market participants that I haven't witnessed for a majority of 2012.
2. The market is stalling at a point that has caused the Dow much grief in the past. What point is that? Just slightly above its generational trajectory dating back to the Great Depression era. You can see in the chart here that the Dow is now on its sixth attempt to clear this area, once again getting its leg stuck on top of the hurdle and falling on its face in front of a live, global audience.
3. The market is starting to get sloppy, in terms of daily price action, right at the point where it needs to stay tight, in tip-top shape. It is the equivalent of eating a dozen Krispy Kreme donuts right before a 100 meter sprint. Sloppy behavior that doesn't bode well for near-term upside. By sloppy I mean that daily ranges are expanding, becoming more unpredictable. Volatility is increasing. Key levels are not being shown the levels of respect they deserve. The market is essentially becoming an undisciplined glutton.
With all of this said, I am in no rush to liquidate the portfolio or even hedge the portfolio at this very moment. I have started the process of raising a little bit of cash on Friday and will continue into Monday. I won't make any further moves until when and if my trend indicators have flipped.
I want to remind everyone that we have had quite a few of these close calls, so to speak, in my trend indicators for all of 2012. The main difference here is that my own personal feelings are now starting to correlate with my trend indicators. This is the first time in quite awhile that this has been the case.
October is a wildly unpredictable month, as all of you know. This October will be even more so than usual due to the upcoming election, as well as earnings releases that have very little potential in the way of upside surprises. Other than Fed intervention, in the form of the already announced QE3, I don't see any available upside catalysts for the market. This becomes especially true now that the market has shown susceptibility to the aforementioned generational trajectory.
Simply put, the momentum needed to overcome the negative fundamental catalysts has dissolved over the past couple of weeks. This is as we are entering a precarious space in time that has the potential to eat a loss in momentum alive.
As bullish as I am over the longer-term, I believe that October may be a point to turn cautious until we see how the market wants to resolve these important levels.
Regards,
Ali Meshkati
