PORTFOLIO UPDATE: A SLIGHT ADD
During the trading day, I tweeted the following: I've expressed my affinity for regional bank shares many times over the past 12 months. It is not so much that these names have tremendous, instantaneous upside due to a misinterpretation of future growth potential. These are, after all, old economy companies with a very defined pattern of top and bottom line growth. Their businesses are dependent on local economies. It is regional labor growth and the subsequent resulting growth in both commercial and residential real estate that creates prosperity at companies like SBCF. What is special about regional bank names at present is the fact that the downside is so very well defined. The balance sheets of these companies, in most cases, are now back to pre-crisis levels of prosperity. The net losses are slowly turning into consistent quarterly profitability. SBCF, as an example, announced just yesterday that they are no longer subject to government oversight for the first time since 2008. Their balance sheet is now considered "well capitalized." This allows the company to become more aggressive in their operations as they seek to increase profitability over the coming quarters. In the meantime, the company has barely been rewarded for its increased health. The stock price is only slightly above its 2012 highs, when the future of the real estate market and regional economies throughout the country was much more murky than it is now. This creates an opportunity that is very low risk in a general market environment that has become exponentially more risk-laden since that start of 2013. By "risk-laden" I don't mean that the markets are prone to collapse by next Wednesday. What I mean is that risk/reward opportunities where you were exchanging say 1 unit of risk for 6 units of reward are no longer available. You now have to settle for much less reward with much greater risk. SBCF presents the kind of compelling lack of downside risk that makes it a no-brainer type of investment at these levels. It just requires patience as they aren't going to announce a buzz-worthy mobile advertising initiative in the next few months that is going to potentially triple revenues by 2015. At best, a guy from Tallahassee will want to finance his boat through Seacoast Bank while maintaining a $50,000 CD. In other words, it is not going to be a barn burner to the upside, but a slow and steady gainer over the next several years. As it stands today, the portfolios consist of WMIH, CIDM, HMPR, SBCF and EVOL. A tight...
PORTFOLIO UPDATE: A SLIGHT TRIM
During the trading day, I tweeted the following: On Friday, I said that the 10 level was the most significant level of resistance EVOL will face during this uptrend. The reaction to the level had enough downside velocity attached to it that it caused me to cut the position in half following a nice two and a half month profit in the stock. There is also that little issue of the market being in an unpredictable, reactive phase right now as it attempts to digest the upside we have seen throughout September. A slight bit of defense certainly isn't a bad thing here. As of the close today, the portfolios consist of WMIH, HMPR, EVOL and CIDM. There is one more name that I have been accumulating and will be announcing before month end, as long as I have the shares I would like in place. Current allocation is 85% long and 15% cash. Per the usual, I will have a detailed discussion of the developments in each individual name during the month end performance summary due out next week. If you would like to be added to the monthly email list to receive a full PDF version of the performance summary, please email me at...
PORTFOLIO UPDATE: THE 3 LEAKS OF THE SUBLIMINALLY BLIND
During the trading day today, I tweeted the following: Back to the default stance of 75% invested with 25% in cash. This is a default allocation, so to speak, for my strategy. I'm comfortable with it, actually. It helps with cushioning volatility in what is otherwise a volatile sector: small/micro-cap companies. It is interesting that in bull markets the aura of prosperity seems to blind the lessons of time. I can promise you that a vast majority of those who are making money in this environment will not be able to maintain that success over the next 2, 3, 5 or 8 years. It is the nature of the beast. The markets cannot cater to a majority of participants making money most of the time. For that reason, an investor must be conscious of the leaks that cause those around them to bleed equity at a much faster rate than they can create it. The leaks that plague investors across all categories are too many to mention. I will make note of three that immediately come to mind: 1. Love: Investors love to fall in love with shit. I don't mean shit in terms of investments that seem wonderful but turn out to have putrid underpinnings. I mean shit in the blanket sense of the word. It is as if investors view the market as an extension of their lives instead of an arena where capital is constantly shifting. The markets are not the place to make up for your mommy, girlfriend or mistress issues by becoming starry eyed in the face of abuse. The only thing you should fall in love with as an investor is your equity curve. The moment it starts suffering, you had better make that relationship right. 2. Confidence: We are all terrible at investing. To date, those of us who are positive on the year are simply lucky. You are a footstep away from disaster. Enter the markets each and every day with these thoughts and I promise you that prosperity will follow. Confidence in your ability to profit consistently leads to a slippery slope of mistakes that will not be corrected because your confidence doesn't allow for adjustments to take place. I'm not saying that investors should be a shivering, scared, pale bunch that jumps at every shadow that shows up in the marketplace. I'm just saying that questioning yourself often can make the difference between remaining in the game long-term or just being a flash in the pan. The delicate balance between questioning and being an overly-emotional debutante can only with time...lots of it. 3. Activity: Having the need to act...
PORTFOLIO UPDATE: WHAT WOULD YOU DO IF I SANG OUT OF TUNE?
During the trading day Thursday, I posted the following: First, you will have to excuse my propensity for absence as of late. I have been busier than usual with spreading my gospel of uncorrelated, risk-adjusted market returns utilizing a small-cap strategy layered on top of a tactical asset allocation method in order to control risk. This involves more meetings and travel than I am regularly used to. I prefer a secluded life, frankly, that involves snarling at my children when they make me angry and scolding my wife when she cuts my apples too thin. The markets, while being gracious in their demeanor towards all those who sing its praises, have become somewhat monotonous in nature. This monotony makes for difficult story telling or blogging, if you prefer. We are in the midst of an uptrend, within an uptrend, within an uptrend. This type of one-sided market movement is an intellectual market observers worst enemy due to the fact that any seemingly wise analysis is rendered useless upon arrival. That is not to say that those who are long the market are moronic by any stretch of the imagination. It is just to say that being an intellectual on Wall Street is about as overrated as cupcakes. Its a piece of cake cut into a small circle. There is nothing cute about it. The idea of this ultra-smart, number crunching machine analyzing spreadsheets and making sophisticated business decisions is part of the image. It doesn't stand up to reality. The reality of it is that the ones who have longevity in this industry possess vision, discipline and an edge that sets them apart from the stampeding, drooling and robotic herd. The same herd that things trading for a few points here and there is going to drive their net worth into the stratosphere. The same herd that believes diversification is a method of risk control. The same herd that thinks applying stale ratios of value to an emerging technology sector will tell them whether a company is a long or a short. Let's get back to the subject at hand: I am now up to a 100% invested as a result of putting back on a small position in IWSY. I have also added to SPNS over the past couple of weeks. There is a nice performance cushion in place for this month as well as a cushion for the year that is allowing me to take on a little more risk than I usually would. I am a big believer in leveraging gains to create more gains when you have them. That is how big years are built....
PORTFOLIO UPDATE: PROBING POCKETS OF RISK
During the trading day, I tweeted the following: IWSY has turned into a bit of an enigma for me recently from both a technical standpoint and a fundamental standpoint. The price action in IWSY has always been a confusing mix of erratic volume and volatile price movement. This is why the stock never made it past a mid-sized holding, despite being the strongest performer in the portfolios for 2013. It is one thing to be an erratic, unpredictable stock when a company is being valued at an unreasonably low valuation given the transformation of the business, as IWSY was in February and much of March. It is another thing entirely to be an erratic, unpredictable stock when your valuation has appreciated by 140%, with increasing pressure on management to deliver. The biggest risk in IWSY from here on out is execution risk, specifically in the form of signing big name contracts over the next several months. Without those contracts, IWSY becomes a sideways drifting asset at best. At worst, it moves back into the $1.50 range before the market is able to gain clarity into what the company can become. Without a doubt, what is occurring at IWSY has substantial upside potential. I believe that the company is a virtual shoe-in for acquisition should they experience a revenue ramp brought on by partnering with big name wireless companies that can showcase their technology appropriately. However, again, this comes with a fair share of execution risk at a near $200 million market cap. Given the opportunities that exist in the market today, I can't justify taking on 30% downside in order to gain 100% from these levels in IWSY. There are companies like CIDM that are offering up less than 20% downside here in order to gain well in excess of 100% over the intermediate term and much more longer-term, without the pressure of execution given the depressed share price. The research for CIDM is here. It is now a mid-sized, bordering on large position going into August with the additions that have taken place during the second half of July. As it stands at the end of July, the portfolios are 90% long and 10% cash. Current holdings include: WMIH, HMPR, CIDM, SPNS and...
THE B9 ENVIRONMENTAL CONTROL ROBOT AND SOME OTHER STUFF
Let's start with the meat and potatoes of this segment, followed by the appetizer. As of the close today, the portfolios are long: WMIH, HMPR, SPNS, CIDM, EVOL and IWSY. Overall exposure sits at roughly 85% long and 15% cash. SPNS has been reinitiated after I took profits on the position in May, after holding it for 11 months. Even after the run SPNS has had over the past 12 months from the mid-3 range to near 6, there remains considerable upside for the name, as the recognition of the role the company is playing with financial sector compliance software continues to be underestimated. The company continues to make progress with their DECISION software, specifically targeted at larger financial institutions. This brings about a completely new revenue stream that the market hasn't factored into the price here. In fact, the market is just starting to get the significance of the progress the company has made in their bread and butter - the insurance space - over the past 12 months. Here is the original research PDF from June of last year http://www.t11capital.com/wp-content/uploads/2013/07/T11-SPNS-Research.pdf I tweeted the position earlier today: Since B9 Environmental Control Robot (aka my mechanical system of allocation) has calmed down over the past several days, I now feel safe enough to up exposure closer to the 100% invested level. This is irrespective of how I feel about having this level of exposure personally. If I was to invest based on how I felt personally about the state of the markets at any given moment then I wouldn't get very far in terms of adding exposure. Additionally, I would be running for the exit door at the first whiff of bad guys. I worry too much about everything to allow myself to personally get involved with opinions regarding general market direction. This is exactly why I turn to the B9 Environmental Control Robot as well as the chart work I do on a daily basis. It is all a way of getting away from my own personal worry, instead relying on what I observe to be facts. The facts tell me it is time to get even longer than the 85% exposure that I currently have. Who am I to...
PORTFOLIO UPDATE: NEW RESEARCH AND POSITION
During the trading day, I tweeted the following: You know the story with TZA. No need to elaborate any further than I have recently regarding this position that was sold at a loss today. There are going to be some changes to Zenpenny, as you noticed by the release of the EVOL research today. My capital management website will be the home of all future research. In fact, all the research from the past is in the process of being moved to this site, as well. I want to separate my research from my blogging, charts etc. The EVOL research is in PDF format and available here. EVOL is a very well managed company with minimal risk and tremendous upside potential over the long-term. All of my investment decisions, with respect to new positions, are based on risk/reward equations that are technically based. Fundamentals come in second, but are a necessary component of initiating any new position. With my grasp of the technical outlook for a company, I feel that I am better able to model the potential risk and reward than the traditional financial modeling that is so prevalent on Wall Street. This is why you won't see me get into detailed forecasts of future earnings and cash flows. It is not an area where I excel, having found that most attempts to use this type of methodology is hit and miss, at best. The price when paired with outstanding fundamentals based on any number of components that I like to look at basically sings to me. That is the best way I can put it. I can clearly see the future price potential when combining both the fundamental and technical aspects of an attractive opportunity. I cannot see anything without combining the two. If I was blind to fundamentals, then it would be like a quarterback attempting to throw a ball down field after getting 3 of his fingers chopped off. If I was blind to technicals, it would be much the same. I think that what I do is pretty unique in the small-cap space with respect to combining these methods of analysis, allowing them to fully complement each other in as many ways as possible. I'm attempting to put together more detailed research as my experience with developing these reports grows. Now that I have my company's image attached directly to the research, it should only serve as impetus to improve even...
PORTFOLIO UPDATE: HEDGING AIN’T EASY
During the trading day Friday, I tweeted the following: To date, the strategy I am using to hedge the portfolios via TZA during perceived turbulent periods has been the biggest losing trade(s) of 2013. In fact, it has cost the portfolios some 600 basis points of performance. If I was up 35% for the year thus far, I wouldn't sweat 6 percentage points of performance. But when I am up close to 10% for the year, 6 percentage points becomes quite a lot. In fact, looking back at my results, I am hard pressed to find another asset that has cost the portfolios 600 basis points of performance. It is a testament to how well I control position size in losing investments. I rarely, if ever, average down, instead choosing to lighten the load if a stock doesn't perform as I suspect it should. This causes losing momentum to be dulled down in the individual investments that I make. The question I must ask myself at this moment is whether utilizing TZA in the portfolios is actually increasing the risk profile given my already stringent methodology of controlling position risk? The TZA hedge is a play against market risk when the portfolios I manage may not play into general market risk at all due to the fact that the positions run separate from the general market. These aren't stocks like AMZN and CSCO that run with the Nasdaq and S&P. They are companies with market caps below $300 million typically that are thinly traded, having a mind of their own. I'm simply thinking out loud here in an attempt to refine my methodology further. The work never stops. Thanks for...
PORTFOLIO UPDATE: YOU NEVER GO BROKE…
Taking profits. Or so they claim. In the case of IWSY, a 185% profit from inception paired with a stretched stock price made it time to trim 25% more from the position. If you'll recall, I trimmed 33% off last week. During the trading day, I tweeted the following: I mentioned on Twitter that it looked like A top had formed on IWSY not THE top. A high volume reversal, such as what was experienced today, takes some effort for a stock to overcome. With the absence of any fundamental news that turns the stock nuclear, it should take IWSY, at least, a couple of weeks to overcome today's highs. Just some portfolio maintenance. Nothing more. Happy...
PORTFOLIO UPDATE: POUR SOME SUGAR ON ME
During the trading day, I tweeted the following: There comes a time in the life of every investor when they must admit satisfaction with a certain position, trimming that position down in an act of reverence for the profits allowed. IWSY has grown in the portfolio into a large position as a result of the 130% gain that it has seen since the position was taken in late February. That position size, given the volatility exhibited by IWSY, makes me a bit uncomfortable. I certainly do not want to see the portfolio overwhelmed by the volatility in one name, which is what tends to happen when positions swell in size due to appreciation. As with everything, the decision to take profits in IWSY was a risk management move today. Again, I am holding a majority of the position for what I believe will be higher prices into Q3 and Q4. I'll provide further details into my thoughts on IWSY and the remainder of the names in the portfolio in the June monthly performance summary due out this coming...