Portfolio Update: More Chips
A brief synopsis before I begin. In late December, it started becoming obvious that group think fortified by panic-ridden headlines had gotten the best of Wall Street, creating one of the better buying opportunities of the past decade. By the latter half of January, the markets hit a point where bears should have been able to take control for a time. Instead, what happened was that the Fed basically went back into their cave and we learned that the economy was not running nearly as poorly as most expected. Bears quickly lost what was a key opportunity to take back what they so pridefully controlled through December. Well into February, we are sitting in a market that is the best of all worlds: Fed is no longer a factor Economy running well, but not well enough to prompt a overly-aggressive Fed or stoke inflation fears Earnings estimates have been toned down substantially, allowing upside surprises galore as the year wears on Persistent headline fear that keeps investors completely off-balance, refusing to participate in what has been a rebound that many have missed A perfect environment to be heavily long, in other words. With that said, this past week a lot changed in composition of the portfolios. First, the ETFC that I initiated as a long position recently was acting suspiciously so I let it go. The KL short that was initiated towards the end of January was covered as it just refuses to break, while the gold market remains in a sea of crosscurrents. New positions taken include AMAT, XLNX and TXN. Semiconductors have been leading the tech sector forward, while reporting impressive earnings, all things considered. The continued leadership role of the sector should accelerate as the markets move forward. I'm expecting February to be a bullish affair, with an acceleration of the uptrend taking place this week, through the end of the month. Fortunately, last week's brief interruption of the uptrend allowed us to take advantage and position properly for what's ahead. _______________________________________________________________________________ From time to time, I email commentary and excerpts from my monthly investor letter to those who are interested. If you would like to receive future emails, please write me at mail@T11Capital.com Disclaimer This website is for informational purposes only and does not constitute a complete description of our investment advisory services. No information contained on this website constitutes investment advice. This website should not be considered a solicitation, offer or recommendation for the purchase or sale of any securities or other financial products and services discussed herein. Viewers of this website will not be considered clients of T11 Capital Management LLC just...
Portfolio Update: How Long Is Too Long?
On our last episode I was just beginning to build back into our long positions, taking a position in NFLX, and reversing TXT from the short side to the long side, among other maneuvers. Since then the accumulation of long positions has only increased given that this is a verifiable, legitimate, testosterone induced, shit kicking, fence jumping bull. What's interesting to observe is how investors are being misled by obnoxiously puffed up statistics, mostly related to obscure areas of sentiment and technical analysis that have no relevance. It's purely drivel. The important point, however, is not necessarily that this analysis is being disseminated in rapid fire form. Rather, it's that there is such an appetite for this information that those who create it have a willing audience. This is the tell. Investors currently or only too happy to jump back onto the bearish bandwagon. I tried it a couple weeks back for a short time and it actually felt good. There is a recency bias coming out of the mess equity markets experienced in December that makes the decision to get bearish an easy one. It's like walking downhill. Takes little effort and you feel like you're getting to your destination faster. As so often is the case in the markets, however, what is obvious and easy is obviously wrong. With that said, the markets will likely keep pressing to the upside here until investors get that this is a bull market that is headed to new highs relatively quickly. How long is too long? There's no such thing as too long in a bull market. This week we've added MU, BMY, more NFLX and ETFC. This is in addition to the MSFT and QQQ we took on on the first day of February. Plan on to continue the buying binge in one or two other names this morning. We've only just begun to live. _______________________________________________________________________________ From time to time, I email commentary and excerpts from my monthly investor letter to those who are interested. If you would like to receive future emails, please write me at mail@T11Capital.com Disclaimer This website is for informational purposes only and does not constitute a complete description of our investment advisory services. No information contained on this website constitutes investment advice. This website should not be considered a solicitation, offer or recommendation for the purchase or sale of any securities or other financial products and services discussed herein. Viewers of this website will not be considered clients of T11 Capital Management LLC just by virtue of access to this website. T11 Capital Management LLC only conducts business in jurisdictions where licensed, registered,...
Portfolio Update: The Persistent Shuffle
We came into January with a 200% long position based on a confidence that nearly everybody had the market wrong at the end of 2018. As the month wore on, it became apparent, at least for a period of time, that there were some issues with overall stability. At the beginning of this week, we came in close to 100% net short. Following a Fed that absolutely gave it up to both the stock market and the President (not sure which yet) this week, I covered all of our shorts between yesterday and today, leaving us at a close to 100% long position as we enter February. Needless to say, it was an active month of near persistent rotation. It all came together, however, as we managed to absolutely obliterate our benchmark (S&P 500) for the month of January. I have eleven months now to turn something very good into something spectacular. This will be my focus. With that in mind, the shuffling continued today. The morning consisted of both covering all of our remaining shorts (covered NVDA and C yesterday) while initiating a small long position in NFLX and reversing from our short TXT position into a long position. Towards the latter half of the day I took another shot at KL on the short side as the gold trade, especially in this name, has become overcrowded, begging for a rinse to reset some of the foaming at the mouth taking place among investors. Much like January, I'm going into February with a bullish outlook on technology and interest rates. One of our better trades in January was long rates, which is something that is looking tempting again here very soon. Unlike the beginning of January, however, where I was bullish on metals, I think that gold and silver are due for a reset. This could be a trade that makes me look foolish, I acknowledge that fact ahead of time. Gold and silver could morph into a runaway train on the upside. However, the risk/reward here warrants a position on the opposite side of the consensus long metals trade. It will be important in 2019 to remain fluid in one's approach. This isn't a one size fits all type of market environment. Rather it is one that should be adapted to continuously as it evolves based on a volatile economic and geopolitical cycle. Any investor who is clingy or possessive of their thesis should just check out now. This isn't the time or the place. _______________________________________________________________________________ From time to time, I email commentary and excerpts from my monthly investor letter to those who are interested. If you...
Portfolio Update: Radical Transparency Performance Heat Map Style
Over the past few years, I've been hamstrung to a certain extent by an oversized position that those of you have been browsing this forum from time to time and following me on Twitter are probably all too familiar with. As a result, I had been unable, for a much more prolonged period than I originally anticipated, to capitalize on other opportunities. The resolution came during the final months of last year, allowing the rest of the markets to open up to us. The timing couldn't have been better, as I am of the opinion that this is one of the better environments for experienced investors to extract alpha from the market since the mid to late 90s. Since we are now running at full speed again, I am going to be introducing things like this performance heat map as a means of keeping track of where we are so that all the names we are juggling don't get lost in the daily shuffle. It should be noted, that the performance heatmap is month to date, excluding today's trading. The heatmap contains not just current positions, but positions that have been closed out during the month, as well. Basically, anything that we touched during the month is listed here. Quite a number of changes took place today that should be noted before continuing. I shifted to a net short position in the portfolios, by initiating short positions in UTX, LNC and ULTA. This is in addition to MCO, C and NVDA that I shorted yesterday. I also liquidated long exposure in ALL, PAYC, SNAP to name a few. Our tech exposure has been cut down to zero more or less. It's defensive long names and core long, deep value holdings from here until further notice. Here is the performance heat map for the month. Each symbol listed is how much of a contribution to overall performance the position has made: All of the trading positions I take on are for incremental gains only. The deep value plays are for the homeruns. In a properly functioning portfolio, the trading positions will mitigate downside in the deep value plays when they are underperforming and will enhance the gains of the deep value plays when the value side is performing. Since we already have the homeruns covered, it would be idiotic of me to swing for the fences in our trading positions. Trades are for the purpose of singles and doubles only. Ideally, a loss on a trade never exceeds 1% of total assets, preferably much less. As the year progresses, this is going to be a good way of keeping progress...
Portfolio Update: Desperately Seeking A Zen-Like Balance
Perhaps I'm asking for too much? Given the rampant chaos that is all around us it would seem that to achieve any portfolio balance would be an overly-ambitious wish. However, I'm not seeking balance in the traditional, market-neutral sense of the word. I'm seeking balance in the fact that we are up significantly enough for the month that I can push for alpha from both sides of the market. This means that when short opportunities pop up, I'm going to be swinging with the intention of busting the pinata wide open. And that's what experienced investors should do. It's imperative to leverage gains to create further gains. Too many investors look at alpha as a almost a rarity that must be preserved and cherished. Alpha is a tool to create more alpha, not to be squirreled away for fear of irreversible loss. In my case A Zen-Like Balance encompasses seeing the markets well enough to be able to capitalize from both sides of the volatility coin. With that said, I initiated some shorts today: MCO, C and NVDA to start. I have a few more candidates behind them. I also shed more of our long exposure. If you'll remember, last week I started taking down our tech exposure with the idea that the markets were getting ready to change the game just when investors were getting comfortable. I continued shedding our aggressive long exposure by taking a small profit on our INTC position and a small loss on our position in Z. Our defensive longs are performing well for us, as one of our larger positions - ALL - was green on the day and we even managed to see one of our tech names - PAYC - close in the green during what was an all around bad day for equities. Investors basically have two ways to approach every market environment: In a proactive manner or a reactive manner. There are some circumstances, like being long in 2017, where being reactive works. The markets weren't difficult then. They were an amateur investors dream. A lollapalooza of sorts where smiles, neon bracelets and equity gains were being handed out like drug laced candy. Now that the anomalous ease with which investors became all too comfortable has passed, investors are forced to become proactive. In other words, it's an environment where those who are familiar with the terrain will excel. Those who simply react to obvious data points will fall flat. This will be a consistent theme for sometime to come. My decision to get begin scaling into short opportunities was a proactive one that allows us to take this...
A Portfolio Update: Embracing Discomfort
This market doesn't waste a minute telling an investor when they are wrong. It's up to the investor whether they want to listen or not. I'm currently in a listening only mode so I'm open to all suggestions the market puts forward. As a result, I had to quickly evacuate a small long position in gold I put on just as quickly as I took the position. The reason? Market is telling investors it is in love with the idea of risk, whereas gold is a risk off asset. I'm listening. I also had to cover our QQQ short that was put out last week in a quick tail between my leg move, allowing our long positions room to breathe. The market very simply is expressing the fact that it's too early for a defensive posture of any sort. Once again, I'm listening. In the meantime, we took a position in SNAP that was immediately rewarded with a gain of 6% from the point of entry for the day until the close of trading. Generally speaking, it seems that the market did a very good job of convincing nearly everyone that a bear market/recession was on the horizon. As a result, investors have been slow in coming back to the market. Now we have a market that is in runaway freight train mode, making the decision to gain long exposure as uncomfortable as possible for investors. The fact that taking long exposure here for most investors is such an uncomfortable proposition bodes well for a continuation of this rally. A broad mix of defensive names (insurance, pharma) mixed with aggressive technology exposure is a reasonable position to take and one that has been rewarding as we approach the final trading days of January. I may sporadically take shots on the short side in the weeks ahead in select financial and retail names, depending on how this cookie crumbles as we progress. ______________________________________________________________________________ From time to time, I email commentary and excerpts from my monthly investor letter to those who are interested. If you would like to receive future emails, please write me at mail@T11Capital.com Disclaimer This website is for informational purposes only and does not constitute a complete description of our investment advisory services. No information contained on this website constitutes investment advice. This website should not be considered a solicitation, offer or recommendation for the purchase or sale of any securities or other financial products and services discussed herein. Viewers of this website will not be considered clients of T11 Capital Management LLC just by virtue of access to this website. T11 Capital Management LLC only conducts business...
A Portfolio Update: Carrot On A Stick
This past week liquidations in the portfolio: Out of AVGO Out of JPM Out of NFLX This past week additions to the portfolio: Purchased Z Added to TLT short Currently long: COOP, EIGI, INTC, MSFT, PAYC, USB, Z Currently short: TLT While I believe the market is going remarkably higher over the next several months, there are very short-term setups on the bearish side of things that may prove too mouthwatering to pass up in the weeks ahead. There remains a good deal of alpha to be juiced in January from both the bull and bear side of the trade. Just as the market carrot and sticked short sellers on NFLX on Friday with a seemingly alluring gap up on a weak open for the broad markets - enticing them to take the short trade thinking that the gap would be retraced, followed by grinding up the price almost all day - the same dynamic will continue to take place in the general markets. Bears are salivating for an entry point, erroneously thinking that we have embarked on a secular bear market that has dramatic downside left. All indications point to bears being naive in their elementary analysis of the situation at hand. Their persistence will cause the markets to continue grinding higher, until they are forced to capitulate the secular bear theory at new highs for the major averages. In the meantime, investors can take jabs on the short side, but the hooks and uppercuts should be saved for the long side of the trade until further notice. _______________________________________________________________________________ From time to time, I email individual company research, commentary and excerpts from my monthly investor letter to those who are interested. If you would like to receive future emails, please write me at mail@T11Capital.com Disclaimer This website is for informational purposes only and does not constitute a complete description of our investment advisory services. No information contained on this website constitutes investment advice. This website should not be considered a solicitation, offer or recommendation for the purchase or sale of any securities or other financial products and services discussed herein. Viewers of this website will not be considered clients of T11 Capital Management LLC just by virtue of access to this website. T11 Capital Management LLC only conducts business in jurisdictions where licensed, registered, or where an applicable registration exemption or exclusion exists. Information contained herein is not intended for persons in any jurisdiction where such distribution or use would be contrary to the laws or regulations of that jurisdiction, or which would subject T11 Capital Management LLC to any unintended registration requirements. Visitors to this site...
PIH IS COOL AGAIN
Have been adding to our position in PIH since last week when it was announced that 1) the company would be making their long awaited expansion into Florida to write homeowners and wind-only coverage 2) Larry Swets Jr. CEO of a previously researched company and investment of ours KFS would become Chairman of the company. Mature Florida property and casualty insurers are selling well above 1 times book in most cases and above 2 times book in a few cases. PIH all the meanwhile is basically being neglected in a dark, moldy closet trading at less than 1 times book, despite have some pretty outstanding prospects for accelerating return on equity dramatically moving forward, while currently maintaining an overcapitalized balance sheet that will assist greatly in the process. This conservatively positioned balance sheet also mitigates a great deal of risk for shareholders at these levels. A diversified geographic base also mitigates the worry of having too much exposure to disaster prone regions such as their primary market in Louisiana. The company nevertheless has been effective in their reinsurance strategy, having faced an inordinate number of weather events over the past few years in Louisiana. Additionally, the company has an activist presence with Fundamental Global, PIH's largest investor. Although shareholder activism by hedge funds has now become more of a marketing strategy as opposed to an investment strategy, Fundamental Global has waged some successful campaigns in the past, proving to be beneficial to shareholder interests over the long-term. Maintaining growth in Louisiana while responsibly underwriting policies in Texas and now Florida should easily yield a near 20% return on equity, which will result in a premium to book value reflecting this new growth. A 1.5-2 times accelerating book value is easily achievable here upon some relatively straightforward execution moving forward. And, of course, barring any anomalous, weather related events. In a market of premium valuation, PIH remains an attractive, undiscovered proposition. Disclaimer This website is for informational purposes only and does not constitute a complete description of our investment advisory services. No information contained on this website constitutes investment advice. This website should not be considered a solicitation, offer or recommendation for the purchase or sale of any securities or other financial products and services discussed herein. Viewers of this website will not be considered clients of T11 Capital Management LLC just by virtue of access to this website. T11 Capital Management LLC only conducts business in jurisdictions where licensed, registered, or where an applicable registration exemption or exclusion exists. Information contained herein is not intended for persons in any jurisdiction where such distribution or use would be contrary...
MADE A U-TURN ON RELY: THE REASON WE ARE ALL OUT
In what is an unusually swift u-turn for the portfolios, I exited our position in RELY during the month of August, resulting in a roughly 1% hit to overall performance, after initiating the position in July. With every position that is established within the portfolios, there are certain fundamental elements that should remain intact or on track in order for us to remain in an investment. Every situation is different, making the list of fundamental faux pas vary among our investments. In the case of RELY, the CEO Craig Bouchard was a key element in the overall strategy, as it was abundantly clear that the first acquisition made was the first in a series of acquisitions, with subsequent acquisitions being what would drive profitability going forward. In order for their strategy to be successful, the presence of an excellent asset allocator was of obvious importance. Mr. Bouchard struck me as an excellent asset allocator, understanding the various nuances of rolling up several companies in an effort to create a highly profitable entity with significant tax attributes. So when it was revealed during August that Mr. Bouchard had resigned his position, it struck me as both extremely surprising and a sign of trouble in a highly leveraged company that simply cannot handle trouble in the slightest given their current debt load. Perhaps more than any other company in the portfolios, RELY was CEO dependent in order to see their mission through. The fact that they switched out quarterbacks in the 2nd quarter during a game that they seemed to be winning is an oddity at best and a sign of a failed initial acquisition at worst. Oddities in leveraged situations, especially in the volatile field of raw materials, are best left to the daredevils among us, of which I don't count myself as one. Further, admitting that the first acquisition was ill-advised, which is essentially what Bouchard resigning or more than likely, being fired, points to, means that the company has a very long road ahead in terms of righting that initial wrong. A process that I am not necessarily interested in being part of due to the leverage involved. Lastly, it should be noted, that among value/special situation/event driven managers, I consider myself to be especially cognizant of risk. One of the worst habits of your typical, garden variety value manager is the belief that a value stock becomes that much more valuable when it moves lower. The tendency among the traditional investment community is to see greater value in the name instead of question their own thesis. My initial reaction whenever a position goes against us, especially right...
BACK IN REAL INDUSTRY (RELY)
There is some history here with this company, so let's do a brief review. I originally released the research report on RELY (back then it was SGGH) in October 0f 2014. The company had just made its acquisition of the aluminum recycling subsidiary of Aleris Corporation. Just a short while later, in December 2014, I exited the position due to a number of reasons, including wanting to raise cash to allocate into Impac Mortgage. On Monday, I reinitiated our position in RELY at what is roughly the same price I exited in December 2014. There have been some material improvements taking place at the company that are worthy of mention. Also, the fact that RELY escaped what was a brutal year for commodities (aluminum included) unscathed, marks an important test for management that they passed surprisingly well. For me, this is an example of the market telling a story through price that fundamentals have yet to properly capture. For all intents and purposes, given a depressed commodity market in 2015 and the newly minted, leveraged state of the company, RELY should have suffered much more than it did. The fact that it did not is a clear tell. Here are some of the material improvements/catalysts coming into play for RELY: RELY generated $81 million in EBITDA in 2015. One of the best performances for the company during a terrible year for commodities. Issued a "CEO Challenge" in 2015 to reduce costs by 1% ($13.4 million). Managed to cut costs by $15 million. The target for cutting costs in 2016 has been raised to $17 million. Consumption of aluminum is slated to grow by 6% globally in 2016. Additionally, the automobile aluminum supercycle is in its infant stages, with RELY positioned to be a significant supplier in the automobile space. Only 30% of the companies revenues are unhedged. The remaining revenues come from either tolling or are hedged. Free cash flow machine that has allowed for a $50 million reduction in debt in 2015. The company possesses some $900 million in NOLs that haven't been tapped into as of this date. It has been stated that Aleris is not the platform to utilize the NOLs due to significant depreciation expenses. The company is looking for bolt on acquisition candidates, passing on a myriad of deals in 2015 because they did not meet the company's requirements. Management is committed to making accretive future acquisitions while preserving ownership for current equity holders. In other words, very little future dilution. A strong movement taking place in government towards import tariffs...