by Travis Johnson, Stock Gumshoe | December 14, 2018 5:21 pm
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with this volatility, i am reluctant to invest in anymore equities. will sell any losing positions and park in cash for awhile. maybe consider more NRZ with its 13% yield. i first bought it when discussed here a couple of years ago. Travis, are you still confident in NRZ?
I don’t remember looking at or writing and NRZ, though I have been intrigued by the folks who buy servicing rights in the past. With that yield I assume they’re pretty levered to the spread, which might be tough about now, but haven’t looked at them closely.
when you say you will sell any losing positions, would you include in that stocks such as APPLE, GGOGL and BERK.B ?
Damn I love this site and the insights this “possibly” brilliant Travis guy has. You’re the bomb bro. Thank you very much.
Errata:
The Hartford is misspelled. Selling Life products, like annuities, almost sunk us. Also, we sold off the annuity book, this year, and are now a Property / Casualty, Group Benefits and Mutual funds Company.
Thanks for the info, have never really looked at HIG — was it the 2008 market collapse and low rates that clobbered the annuity business, or something else? Who bought the annuity business?
And sorry for the typo 🙂
Yes, it was the run up to 2008 that caused the issues. Falling rates did not help as these Annuities were ironclad. You had a contractual rate guarantee…
The Business sold was Talcott Resolution. It was sold for $2.05 BN to a Group of investors lead by: Cornell Capital LLC, Atlas Merchant Capital , TRB Advisors LP, Global Atlantic Financial Group, Pine Brook and J. Safra Group. This completed our exit from the Life and Annuity Business.
Lastly, The Hartford is purchasing Navigators Group Inc. a Specialty Insurer. Closing to occur in 2019.
Thanks for the detailed response, very helpful!
Bitcoin is no better than a pet rock, but at least you can see the rock
Thanks charlie1030, you gave me an opportunity to air one of my pet peeves.
I have been trying to understand the concept of Bitcoin. I have come to the conclusion that it is a game. Here is my over simplified reasoning:
Satoshi Nakamoto and associates developed a very challenging mathematical computer game . There has been lots of discussion about the identity of Satoshi Nakamoto but it doesn’t matter. Unlike other computer video games, this game requires players to be able to write computer software code to solve it. The maximum number of tokens awarded will be 21 million.
Verified Bitcoin transactions are gathered into a block. Players called ‘miners’ are rewarded with Bitcoins when they calculate a solution. The block is then added to the ledger called a blockchain. The next block is then processed. The best analogy for a blockchain is to think of a real estate title search.
You have seen pictures of bitcoin but they do not exist in a tangible way.
Using computing power to calculate the winning hashtag number does not add value to the Gross domestic product (GDP) and therefore bitcoins should not be called a currency.
Hi Travis, do you short MTEC and buy warrants in equal quantity (1 warrant to buy 100 shares long, 100 shares short?)
Generally yes, unless I want to have a long or short bias. Warrants are typically 1:1, though, not 1:100 like options. I have a few more warrants than I do short shares in this particular case.
Thanks, I have followed you into this trade. There is a small borrow cost on the short, so that has to be considered. In general, what I think you are taking advantage of is the fact that the warrant underprices the likely eventual volatility once the SPAC is a real company in a very volatile market segment – for now the SPAC’s volatility is muted by the fact that it’s quasi cash. I guess a concern is that the borrow gets more expensive once this is a bonafide Marijuana stock. It’s an interesting idea. Thanks.
That’s a good summary. The MTEC deal is expected to close early next year, and I haven’t seen any indication that it might not get approved — but you never know for sure, particularly with tiny ones. DOTA has been a very odd one, with the huge drop before the deal vote, most of the time I’m betting that the deal will close but the stock, since it’s going to be a small cap and SPACs have historically done poorly, on average, will be volatile.
I think two things are true: that 5-year warrants are usually underpriced, and that SPACs usually end up being overvalued after the deal closes… but those are both broad tendencies, not specific rules that work every time. It’s nice to have something to allocate capital to that I think has very good odds of success, a lack of direct correlation to the broad market, and a low (and pretty certainly known) cost of failure.
Cost to borrow has been very low for me so far, if it were high (for a hard to borrow stock, or a stock that’s already heavily shorted), it would change the math pretty dramatically.
Hey Travis you are the best!!
If you can take the time to explain, the actual price and process of shorting a position, we would appreciate it. Keep up your amazing work!!
Hi JackInTheBox
I can volunteer to save Travis some time.
The first requirement is that you need a margin account. One of the choices whenever you place an order is ‘sell short’ , so just like any sell order, you specify the stock, the amount of shares and a price limit or market price. Behind the scenes, your broker borrows the shares from the supply of shares in customer accounts and sells them for your account.
Now the fun begins. You are obligated to buy the shares at some point in the future to cover your sell order. It can be days, months or years from now. In order to profit, the stock must go down. If you get the picture, you are at first selling high and at some later point, you hope to be buying low. You can buy at any time and your order would be ‘buy to cover’. If the stock goes up, you will start to incur a liability that is the difference between the cost of theoretically buying the stock at the current price and the cash in your account. The brokerage outfits call this process ‘mark to market’ and they start charging your account for this liability at rates that are currently around 10%.
The other way to do this is with options. Your account must be qualified to buy and sell options. So in this case you would indicate ‘buy to open’ and purchase a put contract (each contract is for 100 shares). The put option gives you the right but not the obligation to sell shares at a given price (the strike price) between now and the expiration date. There is a premium that is paid. If the stock goes down, that premium goes up and that’s where you derive a profit. You would issue a ‘sell to close’ in that case. If the stock goes up, your option would expire worthless. One of the advantages of put options is that there are no margin charges incurred if the stock goes up but you must weigh that against the cost of the premiums.
This is great information. Thank you.
Hey thanks! very clear!
Teladoc hit my stop level and I sold out today — I still think TDOC has a good chance of being the “winner take most” leader in virtual office visits in medicine (and counseling), but my impulse is to sell a momentum stock when it breaks to the stop loss, and TDOC is certainly a momentum stock.
What do I mean by that? Mostly just that there is no strong valuation basis for the share price that makes any sense — you’re buying growth and a story and a vision of their future profitability, but that vision is at least a few years down the road, so there’s no real “backstop” to the shares if sentiment shifts… other than their cash balance and sales level, though the shares are still trading at almost 8X trailing sales, which isn’t likely to be enough to attract valuation-minded investors.
With the COO/CFO finally resigning after his awful behavior has come to light, further illuminating some apparent incompetence on the board, apparently that was enough to get sentiment down to a new level.
I’m still interested in the stock, and may buy back in if it keeps falling — but it would have to fall at least 20% or so more, when sentiment shifts the road down can be tough. The next positive news would really be widespread adoption of hteir platform for government insurance programs, with heavy patient use, which could, if it happens and goes well, send the stock soaring if sentiment returns to the positive, but I’ll risk missing that in order to avoid the potential continued downside.
If you want to justify staying in the stock, the best number is that they’re trading for about 5X sales if you back out their cash… and the most encouraging thing about their future is that they are very well-funded, with close to $500 million in cash, which should help them to hold off the competition. That was enough to keep me in the stock until the stop loss trigger hit, but it’s no longer enough… if we get back to the $30s and give up this year’s gains, I’ll reconsider and may buy back in.
Travis, Thanks for your summary. This is so helpful. How do you set a stop level on a stock, is there a formula or algorithm you follow. Thanks for your help!
I use the TradeStops.com VQ% as my guideline most of the time, which basically sets the stop loss at the bottom of what would be a “normal” trading range — but there are plenty of studies that reasonable stop losses in the 15-25% range all fare pretty similarly over the long term.
It’s important to think of not just the stop loss, but the “amount of your portfolio at risk” — In general I like to give riskier stocks a wider purview, but preferably they’re also then smaller positions in the portfolio so the overall impact will be muted if they drop 50-90%..
Thank you!
$TDOC
That’s the tough medicine I’ve been waiting for, and needed to hear.
“Winner takes most” is generally reserved for technology leaders. TDOC is more like Amazon – it brings a new “modus operandi” to field (and like Amazon it is not even, technically, the first but it does it at scale). The longer term differentiator will be, like in the case of Amazon, if they develop differentiating technology internally (sensing, support software, better use of expensive devices, etc.). In any case it will take several years to judge. For me (in invested a small amount in TDOC) I will keep them without a stop loss as long as they are the only ones providing the service in a significant geography and keep adding paying subscribers.
Things will be different if a significant other company shows up or if somebody shows a significant liability in this way of doing medicine (not in the behaviour of their CFO :-)).
Good points. For a network effect company like this, it also depends on who gets the best scale first — the sticky relationships with insurers, including Medicare, and the happy customers… in terms of competition, it’s still early and there are a bunch of competitors, but so far none of the discrete ones (the separate companies, not projects by bigger companies that we don’t know much about) are anywhere near as well-financed as TDOC. The combination of good financing and “first to scale” gives me some confidence, but not enough to hold through the stop loss given the valuation. I may be back.
With all this extreme volatility hearing from you more often is reassuring Travis.
Travis, Love the service you offer.
Question I have is WyattResearchNewsletter is offering information on a Private Alert exclusive opportunity to grab Pre-IPO shares for just $0.51 each.
Which he is predicting to open between $ 1.50 – $ 2.00.
Is there anything to this or anyone know what he is talking about?
Thanks in advance
I haven’t scouted it out, most likely he is talking with IR at some pot startup and is publicizing a private placement deal to his members for a company that’s planning one last fundraising to get them over the hump to an IPO (and also trying to ingratiate itself with a publisher that can steer a few thousand investors their way someday). Sometimes these are really thinly-disguised pitches for stocks that ARE actually publicly traded but are just on the verge of being uplisted to a major exchange, but my sense is that most of the private pot stock pitches are for actual startups that haven’t listed anywhere yet.
Those can sometimes create windfalls, I’m sure, but they also quite often are money-losing disasters… usually they’re sold on the basis of “getting in early” and the danger is minimized (since the stock is not traded, you can’t sell — and often you have to “lock up” your shares for a period of time, so even if they do get a listing there may be restrictions on selling for a while, and they generally provide a lot less data than publicly traded stocks, so it’s hard to really gauge the valuation… especially when you’re in the throes of “I’m getting in early, I’m special” self-love over the idea of a private placement).
The best private placements work out really well, mostly because the warrants they typically include give you free leverage… the worst lose 100%, often quickly, and it’s hard to get any perspective when you’re not deeply embedded in the business and you’re considering only a single deal, and there’s an urgent deadline, and you’ve paid $1,000 or something to Ian Wyatt (or whoever) for the right to get in on the deal.
On balance, my guess would be that it’s safer to wait until stocks are listed and traded and have some liquidity and make your decision then — you’ll miss the occasional delight, but will also miss a lot of stress and stomach aches, and often these junior stocks will have plenty of bad days after being listed and can give you similar buying opportunities if you’re so inclined. For the ones you do commit to, it can be like pulling a slot machine lever and having to wait six months or a year (or sometimes a few years or more) before you can tell whether it comes up cherries or bupkis.
Thanks Travis,
Curiosity can get to me. I know I am happy to pass on this.Your explanation was clear and to the point.
Looks like bear market has started. Buying anything is not good in this environment. I am going to sell all long stocks and start buying short ETF’s and qqq, iwm puts
I admire your certainty. When will you know that the bear market is over and you should start buying stocks?
Travis: you’ll know that the bear market is over when everyone on this forum is talking about their short positions, and the folks at Agora are pitching a Melt Down newsletter.
Probably true! People are so terrible at predicting the future, and mass sentiment shifts are probably the best contrarian indicators.
It wasn’t long ago that Markel finally dipped below 1.5x book value and let me start nibbling again, and this is a long-term holding that I’m likely to nibble on more as it dips into new lower valuations… so I’ve got some mental signposts set for 1.4X book, 1.2X book, etc., to give me reasons to think about buying a stock that’s falling. Which is hard to do, of course, since sometimes the falling keeps up for a while.
And that first trigger hit today — the stock dipped below 1.4X book value (book value per share at the end of the quarter was $704.70, so that would be about $986.50), and I nibbled some more at $985 per share. The book value per share will probably drop next quarter, but not nearly as sharply as the stock has fallen (Markel has historically managed its portfolio of value stocks very well, but most of the portfolio is still boring old bonds… this is still an insurance company that has to have a pretty conservative portfolio to meet its obligations).
The story hasn’t changed in any big way, Markel’s regulatory “issues” remain very likely to be non-issues as far as I can tell (it’s all about how they allocated loss reserves for their CatCo business after the last 18 months of horrible catastrophes), and this is one company where I feel very comfortable with management and their long-term perspective and performance. It was too expensive at $1,200, and I think it’s too cheap now. That brings Markel up to about a 6.5% holding in the Real Money Portfolio.
Managing these kinds of buys is emotionally difficult in a falling market (or in a sharply rising one), because you never feel like you get the right price or catch the perfect moment — even though finding the bottom is impossible, just like selling at the top, you can at least manage your psyche by breaking it up — don’t waste your mental power searching for an unfindable treasure, identify a range of values at which a stock makes sense for you and buy little nibbles as it moves through that range. This particular buy increases my Markel position by about 7%, so it’s not going to drive my portfolio… but if Markel does as well over the next decade as it has in the 12 years I’ve owned the stock, I’ll be happy to have more money invested with them.
And I have very little concern that there will be a catastrophic failure for this company, so I don’t use stop losses for Markel (if I did, it would have stopped out around $1050).
Speaking of Blockchain Technology, do you know anything about XY and XYO. They are selling their cryptocurrency only outside the US, but also are selling shares directly. They use blockchain for location technology and have some big companies checking them out. It would be kind of a Vegas trade as the company is just getting known.
That’s funny … I have been following IQ since its public offering this year and it was very good to me. So today I bought a few lots because I still believe in their potential. Also took a few JUNE 21 22.50 calls. We will see 🙂 … Merry Christmas to you and the Gumshoe family
Travis, do you have your own sense of how long this bear market will last for?
No. Didn’t know when it would start, and don’t know when it will end…. though I’ll probably be buying more if it keeps falling.