MARCH MONTH END PERFORMANCE SUMMARY AND LOOKING AHEAD TO APRIL
*This is a copy of my letter to investors summarizing the month of March.
February monthly report can be found here.
2012 Return: +58.61%
2013 Return: -0.33%
Portfolio March Performance: -2.26% S&P 500 March Performance: +3.60%
Portfolio YTD Performance: -0.33% S&P 500 YTD Performance: +10.03%
Total Return Since Inception (1/1/12): +58.20% vs. S&P 500 +24.18%
Portfolio Highlights For March
- SPNS gained nearly 13% during the month of March after releasing their quarterly and full year earnings highlights during the first week of the month. The company saw annual revenue increase 63%, as growth of their insurance and relatively newly released financial suite of software continued gaining strength. Additionally, SPNS generated $18.8 million in cash during 2012, an increase of $8.4 million from 2011. The momentum within SPNS is clearly defined as the CEO continues to deliver on promises that he has been making for the past 18 months. I don't see any signs of this momentum decreasing in the near future due to a number of factors: 1) Insurance companies are still inundated with the need to upgrade from legacy systems that are inefficient relics of the past. As these companies continue to get comfortable following the financial crisis of 2008, more attention will be paid to allocating capital towards efficiency of operations 2) DECISION suite of software targeting financial institutions and their increasing need for seamless integration of compliance/regulatory requirements into their business systems. Sapiens has already signed one "major financial institution" in what is early validation of their DECISION software. 3) The markets have not even come close to factoring in the progress that SPNS has made over the past 18 months. The company continues to trade at less than 2 times sales in an industry where the average is 3 to 4 times sales for companies that are nowhere near the growth cycle that SPNS finds itself in.
During the second half of March, I increased the position in SPNS, going from a medium to large position. This increase in exposure puts the portfolios at roughly 90% invested and 10% cash.
- IWSY is a new position highlighted in the February monthly report. During the month of March IWSY gained roughly 19%, giving the portfolios a nice profit cushion on the position right from the onset. IWSY announced what seems to be a furthering of their relationship with FUJITSU during the month of March, as the Imageware CloudID product suite will be integrated on the Fujitsu Global Cloud Platform. This type of alliance with a major company puts the Imageware suite of products on the radar screen of other major companies and possible acquirers. Any success IWSY sees in this early adoption of their platform will result in a snowball effect from other companies who are increasingly paying attention to the future of identity protection and security. IWSY is essentially participating in an industry whose time has come. On April 1st, IWSY will release earnings that should provide further insight into their growth.
- MITL gained 3% during the month of March in what was mostly sideways trading for the stock. The company continues what seems to be a clear pattern of accumulation within a narrow base. MITL is currently a small position. I am willing to make it mid-sized on further positive performance. The eventuality for this company is clearly weighted towards being acquired by any one of a number of competitors that are cash rich giants looking for a way to get into an innovative, international presence within their sector.
- JMBA is a new position taken mid-month in the 2.90 range. The research report for the company is available here. JMBA is essentially a very low-risk bet on a burgeoning industry (healthy juices and related products) that is seeing increased attention from health conscious consumers. The low-risk nature of this opportunity comes from the fact that there has been a substantial restructuring in the business and revenue model since experienced CEO James White took over leadership of the company in late-2008. JMBA is basically a new company with a brand name that is globally recognized. A market cap below $300 million for a leader in a sector that is just beginning to gain sustained vigor is an enormous opportunity. I look forward to making JMBA a large position in the portfolios over the coming months.
Portfolio Lowlights For March
- Both UPIP and PRXI were liquidated from the portfolios. UPIP was a breakeven trade from initiation in September. PRXI was a loss of roughly 10% from inception in November. Getting out of these positions was more a result of better opportunities being available in the markets than anything company specific.
- The TZA hedge initiated in early February was taken off in early March for a roughly 1 point or 10% loss. The technical basis which was the foundation for this trade was invalidated early in the month. I no longer had a reason to hold onto the position except for "the market is up too much", which should never be a reason to counter the prevailing the trend. I remain vigilant in the face of such strength, however, with continued focus on protecting the portfolios should the trend begin showing signs of deterioration.
- WMIH lost roughly 10% during the month of March in what I would classify as continued, textbook consolidation following a volume and price surge during December. I will quote from the research report for WMIH published in July of 2012: The question here for investors in WMIH is a question of time? My biggest concern with the company as an investment is not the potential for success but rather the length of time it will take to achieve that success. The question of time should gain clarity over the coming months, into the end of the year. In the meantime, my time horizon for this investment is not several months, but years. I think this type of mentality towards WMIH as an investment is what will yield the greatest results without the burden of unrealistic expectations for magic to happen at the snap of two fingers.
Thus far WMIH has lived up to expectations for being an investment that will require patience to achieve maximum results. There remains minimal risk involved in the act of sitting tight in an investment that is behaving exactly as it should at this stage of its life cycle as a public entity.
Looking Ahead To April
With the markets continuing to surge, marked by global recognition once more that the United States remains the least of all investment worthy evils, the question of how far this market can go over the very long-term deserves some discussion. Market analysis does not begin and end with finding potentially winning individual investments, riding them out to some indefinite price point and magically exiting when the time is right. We have all found over the past dozen or so years that being able to judge the entire market accurately or at the very least, remaining vigilant of the dynamics that drive the general market is an important component to success.
What is the use of creating portfolio gains in excess of any benchmark when those portfolio gains are at the whim of the next downward cycle in the economy, marked by an equity market hell bent on punishment? Looking at the market from a standpoint of "what next?", not just for individual equity positions but for the market as a whole is imperative. Strictly bottom up investors who hide under the blanket of ignorance punctuated by arrogance will consistently be subject to monsters crawling up, snatching whatever gains they have managed and rendering the entire intellectual facade they have been operating under flaccid.
Looking at the long-term picture for the markets exclusively from a technical standpoint presents some interesting findings:
- The S&P 500 has been functioning in what is essentially a wide ranging sideways range for 13 years now. An expansive consolidation relative to any period the market has faced over the past 100 years. Consolidations are most often launching points for sustained moves in the market lasting many years. From a traditional technical standpoint, a sustained move up to continued records going into the end of 2013 has significant bullish consequences, especially in the face of participation that is generally lacking and timid despite what the sentiment indicators of the day are telling you.
- From a technical standpoint, the Nasdaq hasn't even started to run yet. It is pinching into a narrow range right around trajectory points that have enormous significance, especially if they are broken in a convincing manner similar to what the Dow and S&P have done this year. What happens to the Dow and S&P once the Nasdaq becomes the focal point of acceleration? This is a question that must be pondered given the important technical point that the Nasdaq is on the verge of breaking. And the answer is decidedly bullish over the long-term.
- Leadership in the market has come from transportation, financial and industrial names thus far into this run. The second half of the year may just be a rotation into technology that drives the markets further forward.
The elusive pullback that everybody is waiting for isn't so much the issue as the means that investors have in place to deal with such an event. If the markets are in a long-term bull phase as evidenced by recent technical developments, allocation to equities should remain relatively high with pullbacks used to supplement positioning after some stabilization during a correction is observed.
Since my method of allocation is 100% mechanical in nature, there won't be too much in the way of deviation from my plain vanilla approach of raising cash and adding hedges during periods of price deterioration.
The most important aspect for investors to grasp given the current state of the markets is that the mentality should shift to opportunistic in nature as opposed to defensive. New all-time highs are a signal. The fact that investors generally are greeting all-time highs with a shrug of the shoulders is another signal.
I have said it many times in the past, in order to function with maximum efficiency as an investor you must develop an image of the markets as your enemy. It is a manipulative, devious opponent that knows how to get you into a mental frame of mind that will cause you to be turning your back when you should be looking forward. The intuition you have gained throughout life will be used against you. As will your dedication to attention and hard work. More is less and less is more.
Regards,
Ali Meshkati
