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#61
Strategies / Re: LEAPS
Last post by Dexter - May 30, 2016, 06:19:30 PMTo add a little color to my comment about Cornwall Capital....
Cornwall Capital is a private investment company that made a fortune by shorting mortgage bonds during the 2007 credit crisis. The individuals involved in this trade (Jamie Mai, Charley Ledley, and Ben Hockett) were profiled in the Michael Lewis book "The Big Short: Inside the Doomsday Machine."
In "The Big Short," Michael Lewis detailed not only Cornwall's short mortgage trade, but also some of their previous trades. I found these previous trades just as interesting as their mortgage bond short.
In one of these trades, Cornwall used LEAPS to bet that Capital One Financial's (COF) stock would rebound.
To provide some background...in July 2002, Capital One's stock fell 60% in two days. This came on the heels of a management announcement that they were in a dispute about how much capital they needed to reserve against potential subprime losses with their two government regulators, the Office of Thrift Supervision and the Federal Reserve. The market feared that Capital One was hiding losses and assumed that regulators had discovered fraud.
Cornwall had done a deep dive on Capital One and come to the conclusion that the company's dispute with its regulators was trivial and that the company was basically honest.
In the six months following the announcement of Capital One's dispute with its regulators, COF stock traded in a narrow band around $30 per share. However, it was clear to Cornwall that $30 was not the right price. The company was either a fraud, and worth nothing, or the company was honest and worth around $60 per share.
Cornwall decided to use LEAPS to put on a trade. Cornwall bought LEAP options which gave them the right to buy Capital One's shares for $40 at any time in the next two and a half years at a cost of a bit more than $3. Cornwall bought 8,000 LEAPS, which meant their potential losses were limited to the $26,000 their paid for the options.
The result, according to "The Big Short": "Soon after Cornwall Capital laid their chips on the table, Capital One was vindicated by its regulators, its stock price shot up, and Cornwall Capital's $26,000 option position was worth $526,000."
This is just one example of Cornwall Capital executing a successful trade using long-dated options.
Cornwall Capital is a private investment company that made a fortune by shorting mortgage bonds during the 2007 credit crisis. The individuals involved in this trade (Jamie Mai, Charley Ledley, and Ben Hockett) were profiled in the Michael Lewis book "The Big Short: Inside the Doomsday Machine."
In "The Big Short," Michael Lewis detailed not only Cornwall's short mortgage trade, but also some of their previous trades. I found these previous trades just as interesting as their mortgage bond short.
In one of these trades, Cornwall used LEAPS to bet that Capital One Financial's (COF) stock would rebound.
To provide some background...in July 2002, Capital One's stock fell 60% in two days. This came on the heels of a management announcement that they were in a dispute about how much capital they needed to reserve against potential subprime losses with their two government regulators, the Office of Thrift Supervision and the Federal Reserve. The market feared that Capital One was hiding losses and assumed that regulators had discovered fraud.
Cornwall had done a deep dive on Capital One and come to the conclusion that the company's dispute with its regulators was trivial and that the company was basically honest.
In the six months following the announcement of Capital One's dispute with its regulators, COF stock traded in a narrow band around $30 per share. However, it was clear to Cornwall that $30 was not the right price. The company was either a fraud, and worth nothing, or the company was honest and worth around $60 per share.
Cornwall decided to use LEAPS to put on a trade. Cornwall bought LEAP options which gave them the right to buy Capital One's shares for $40 at any time in the next two and a half years at a cost of a bit more than $3. Cornwall bought 8,000 LEAPS, which meant their potential losses were limited to the $26,000 their paid for the options.
The result, according to "The Big Short": "Soon after Cornwall Capital laid their chips on the table, Capital One was vindicated by its regulators, its stock price shot up, and Cornwall Capital's $26,000 option position was worth $526,000."
This is just one example of Cornwall Capital executing a successful trade using long-dated options.
#62
Books / Re: "The Outsiders" by William...
Last post by Dexter - May 30, 2016, 05:32:56 PMI just finished reading Chapter 2 of "The Outsiders" last night, and I thought I would jot down a few thoughts I had about Henry Singleton and Teledyne.
Henry Singleton was a mathematician and scientist who never earned an MBA, but he racked up one of the best records in corporate history at Teledyne.
The book states on page 52: "From 1963 (the first year for which we have reliable stock data) to 1990, when he stepped down as chairman, Singleton delivered a remarkable 20.4 percent compounded annual return to shareholders (including spin-offs), compared to an 8 percent return for the S&P 500 over the same period and an 11.6 percent return for other major conglomerate stocks....A dollar invested with Henry Singleton in 1963 would have been worth $180.94 by 1990, an almost ninefold outperformance versus his peers and a more than twelvefold outperformance versus the S&P500."
On the Chapter 2 title page, their was this quote from Warren Buffett in 1980 that I thought was pretty interesting: "Henry Singleton has the best operating and capital deployment record in American business...if one took the top 100 business school graduates and made a composite of their triumphs, their record would not be as good as Singleton's."
Teledyne was a midsize conglomerate that was founded in 1960 by Henry Singleton and Georgy Kozmetzky (Singleton's colleague at Litton Industries). Shortly after starting Teledyne, Singleton and Kozmetzky acquired three small electronics companies and bid for a large naval contract. In 1961, Teledyne went public.
In the 1960s, conglomerates were the hot stocks to own (similar to the internet stocks of the 1990s). They sported nosebleed stock prices and high Price-Earnings (P-E) ratios. The investing public couldn't get enough of them -- and Teledyne was no exception.
Singleton took full advantage of this situation. Between 1961 and 1969, Singleton purchased 130 companies in various industries (aviation electronics, specialty metals, insurance, etc.). In all but two of these acquisitions, Teledyne's pricey stock was used. During this time period, Teledyne's P-E multiple ranged from 20 to 50, while Singleton never paid more than 12 times earnings for a company.
Then, in 1969, with the P-E multiple of his stock falling, and acquisition prices rising, Singleton stopped acquiring businesses. He never made another material purchase after that, and never issued another share of stock.
In 1969, Singleton and George Roberts (then President of Teledyne) worked to improve existing operations and free cash flow. The freed up cash was sent to headquarters to be allocated by Singleton.
In 1972, Singleton realized that Teledyne's stock was cheap. So, he initiated a tender offer for the stock. Between 1972 and 1984, in eight separate tender offers, Singleton bought back an unprecedented 90 percent of Teledyne's stock. Singleton believed that this was a far more tax-efficient method for returning capital to shareholders. Singleton bought back these shares at attractive prices. According to the book, Singleton generated "an incredible 42 percent compound annual return for Teledyne's shareholders across the tenders." (It's important to remember that all of this took place before share repurchases became popular.)
Then, during the period from 1984 to 1996, Singleton shifted his focus to optimizing shareholder value when results at some operating divisions had stagnated. Singleton began spinning off companies to unlock value. (He was also a pioneer in this field.) He spun off Argonaut, the company's worker's compensation insurer, in 1986. And in 1990, Singleton spun off Unitrin, the company's largest insurance operation -- which accounted for the majority of Teledyne's enterprise value at the time.
Later on, in 1987, when acquisition and stock prices were high (and no other attractive investment opportunities were available), Singleton declared the company's first dividend.
Singleton retired as chairman of Teledyne in 1991, but returned in 1996 to help negotiate the merger of Teledyne's remaining manufacturing operations with Allegheny Industries and to fend off a hostile takeover.
Henry Singleton was an interesting individual. He took time to think through his options and make rational choices. Many of these choices led him to pursue capital allocation actions that were different than his peers. However, Singleton's facts and reasoning were generally correct, and thus, his actions translated into superior shareholder returns.
There's a lot that we can and should learn from Henry Singleton and Teledyne.
Henry Singleton was a mathematician and scientist who never earned an MBA, but he racked up one of the best records in corporate history at Teledyne.
The book states on page 52: "From 1963 (the first year for which we have reliable stock data) to 1990, when he stepped down as chairman, Singleton delivered a remarkable 20.4 percent compounded annual return to shareholders (including spin-offs), compared to an 8 percent return for the S&P 500 over the same period and an 11.6 percent return for other major conglomerate stocks....A dollar invested with Henry Singleton in 1963 would have been worth $180.94 by 1990, an almost ninefold outperformance versus his peers and a more than twelvefold outperformance versus the S&P500."
On the Chapter 2 title page, their was this quote from Warren Buffett in 1980 that I thought was pretty interesting: "Henry Singleton has the best operating and capital deployment record in American business...if one took the top 100 business school graduates and made a composite of their triumphs, their record would not be as good as Singleton's."
Teledyne was a midsize conglomerate that was founded in 1960 by Henry Singleton and Georgy Kozmetzky (Singleton's colleague at Litton Industries). Shortly after starting Teledyne, Singleton and Kozmetzky acquired three small electronics companies and bid for a large naval contract. In 1961, Teledyne went public.
In the 1960s, conglomerates were the hot stocks to own (similar to the internet stocks of the 1990s). They sported nosebleed stock prices and high Price-Earnings (P-E) ratios. The investing public couldn't get enough of them -- and Teledyne was no exception.
Singleton took full advantage of this situation. Between 1961 and 1969, Singleton purchased 130 companies in various industries (aviation electronics, specialty metals, insurance, etc.). In all but two of these acquisitions, Teledyne's pricey stock was used. During this time period, Teledyne's P-E multiple ranged from 20 to 50, while Singleton never paid more than 12 times earnings for a company.
Then, in 1969, with the P-E multiple of his stock falling, and acquisition prices rising, Singleton stopped acquiring businesses. He never made another material purchase after that, and never issued another share of stock.
In 1969, Singleton and George Roberts (then President of Teledyne) worked to improve existing operations and free cash flow. The freed up cash was sent to headquarters to be allocated by Singleton.
In 1972, Singleton realized that Teledyne's stock was cheap. So, he initiated a tender offer for the stock. Between 1972 and 1984, in eight separate tender offers, Singleton bought back an unprecedented 90 percent of Teledyne's stock. Singleton believed that this was a far more tax-efficient method for returning capital to shareholders. Singleton bought back these shares at attractive prices. According to the book, Singleton generated "an incredible 42 percent compound annual return for Teledyne's shareholders across the tenders." (It's important to remember that all of this took place before share repurchases became popular.)
Then, during the period from 1984 to 1996, Singleton shifted his focus to optimizing shareholder value when results at some operating divisions had stagnated. Singleton began spinning off companies to unlock value. (He was also a pioneer in this field.) He spun off Argonaut, the company's worker's compensation insurer, in 1986. And in 1990, Singleton spun off Unitrin, the company's largest insurance operation -- which accounted for the majority of Teledyne's enterprise value at the time.
Later on, in 1987, when acquisition and stock prices were high (and no other attractive investment opportunities were available), Singleton declared the company's first dividend.
Singleton retired as chairman of Teledyne in 1991, but returned in 1996 to help negotiate the merger of Teledyne's remaining manufacturing operations with Allegheny Industries and to fend off a hostile takeover.
Henry Singleton was an interesting individual. He took time to think through his options and make rational choices. Many of these choices led him to pursue capital allocation actions that were different than his peers. However, Singleton's facts and reasoning were generally correct, and thus, his actions translated into superior shareholder returns.
There's a lot that we can and should learn from Henry Singleton and Teledyne.
#63
General Discussion / Re: Biotech Stocks
Last post by Dexter - May 29, 2016, 01:23:26 AMI look forward to your post on your biotech stock.
I'm interested to hear what characteristics you look for when investing in this industry.
Hope you enjoy your weekend, too.
I'm interested to hear what characteristics you look for when investing in this industry.
Hope you enjoy your weekend, too.
#64
General Discussion / Re: Biotech Stocks
Last post by Mark P. - May 29, 2016, 01:05:49 AMDexter,
I appreciate the feedback and opinion on the biotech industry. I would be happy to share with the forum one or two biotech stocks that I currently have in my portfolio, and as you suggested I will put that in the Investment Ideas with the name of the company and the stock ticker.
While I feel like the biotech sector is extremely volatile in nature, I feel that with some research it can be discovered which ones are possible winners and have a bright future ahead of them vs. the ones that keep losing and sucking investors money down the drain over the course of many years. I think it's important to obtain an intimate knowledge of the product the company is presenting by going deep into the SEC filings. Personally I like the high risk high reward aspect that biotech stocks present, and that is what has drawn me to them.
Look for my post in the next week or so when I introduce of the biotech stocks I personally really like. Enjoy the long weekend.
Mark P.
I appreciate the feedback and opinion on the biotech industry. I would be happy to share with the forum one or two biotech stocks that I currently have in my portfolio, and as you suggested I will put that in the Investment Ideas with the name of the company and the stock ticker.
While I feel like the biotech sector is extremely volatile in nature, I feel that with some research it can be discovered which ones are possible winners and have a bright future ahead of them vs. the ones that keep losing and sucking investors money down the drain over the course of many years. I think it's important to obtain an intimate knowledge of the product the company is presenting by going deep into the SEC filings. Personally I like the high risk high reward aspect that biotech stocks present, and that is what has drawn me to them.
Look for my post in the next week or so when I introduce of the biotech stocks I personally really like. Enjoy the long weekend.
Mark P.
#65
General Discussion / Re: Biotech Stocks
Last post by Dexter - May 28, 2016, 08:57:13 PMGlad to hear you've had a good experience in biotech. My experience has been pretty limited.
A number of years ago, I researched a few small biotech companies because they were trading in the market as net-nets (i.e., their market capitalization was less then the discounted value of the their current assets minus all liabilities). I was looking at them because they were cheap, not because I knew that much about their products (usually just one or two experimental drugs or therapies) or their prospects.
I don't think I ended up investing in any of these biotech firms. I think most of these companies went under or raised more money and severely diluted existing shareholders. However, there was one biotech firm that received FDA approval for one of its drugs and the next day its stock price went up 7x.
If I were to invest in a biotech stock (especially one that didn't have consistent profits for the foreseeable future), I would need to buy it on an asset basis (for example, when it is a net-net) and I would need a large margin of safety in my purchase. In other words, I'm not willing to pay for uncertain future prospects, just net assets (and at a discount). Any upside beyond net asset values would just be gravy.
Biotech companies can be extremely lucrative if you pick the right ones, but how do you do that consistently? Biotech stocks can be very tricky to get right. Many times, these companies go public by telling their initial investors that they have this revolutionary product or drug that just needs some additional development, testing and governmental approval. However, the company's projections and financial forecasts are usually too rosy. In reality, many of these companies are consistently losing money (in the form of R&D and SG&A expenses) in the hopes that their drug works, gets FDA approval, and then is embraced by customers. There are a lot of hurdles to clear in order to achieve success.
I don't have any specific expertise or industry contacts in the biotech space -- I'm a true outsider. So, there is a very low probability of me guessing which company or companies are going to succeed. And even if I was an expert or insider, it could still be extremely difficult to pick the winners. In fields with constant and dramatic change, the future is not that clear.
I know some people try to trade biotech stocks based on investor expectations or quarterly earnings, but that's not my game.
If you have any specific biotech ideas that you want to share, please feel free to post them in the Investment Ideas board by stock ticker and name.
A number of years ago, I researched a few small biotech companies because they were trading in the market as net-nets (i.e., their market capitalization was less then the discounted value of the their current assets minus all liabilities). I was looking at them because they were cheap, not because I knew that much about their products (usually just one or two experimental drugs or therapies) or their prospects.
I don't think I ended up investing in any of these biotech firms. I think most of these companies went under or raised more money and severely diluted existing shareholders. However, there was one biotech firm that received FDA approval for one of its drugs and the next day its stock price went up 7x.
If I were to invest in a biotech stock (especially one that didn't have consistent profits for the foreseeable future), I would need to buy it on an asset basis (for example, when it is a net-net) and I would need a large margin of safety in my purchase. In other words, I'm not willing to pay for uncertain future prospects, just net assets (and at a discount). Any upside beyond net asset values would just be gravy.
Biotech companies can be extremely lucrative if you pick the right ones, but how do you do that consistently? Biotech stocks can be very tricky to get right. Many times, these companies go public by telling their initial investors that they have this revolutionary product or drug that just needs some additional development, testing and governmental approval. However, the company's projections and financial forecasts are usually too rosy. In reality, many of these companies are consistently losing money (in the form of R&D and SG&A expenses) in the hopes that their drug works, gets FDA approval, and then is embraced by customers. There are a lot of hurdles to clear in order to achieve success.
I don't have any specific expertise or industry contacts in the biotech space -- I'm a true outsider. So, there is a very low probability of me guessing which company or companies are going to succeed. And even if I was an expert or insider, it could still be extremely difficult to pick the winners. In fields with constant and dramatic change, the future is not that clear.
I know some people try to trade biotech stocks based on investor expectations or quarterly earnings, but that's not my game.
If you have any specific biotech ideas that you want to share, please feel free to post them in the Investment Ideas board by stock ticker and name.
#66
General Discussion / Biotech Stocks
Last post by Mark P. - May 28, 2016, 12:41:19 PMDexter,
I wanted to get your take on the biotech industy and whether or not you like stocks in this industry as investments. Do you have any experience investing in this industry? I personally have a couple of biotech stocks in my portfolio and they have done quite well for me over the last few months. I just wanted to pick your brain and see if you had any experiences or stories you would like to share.
Thanks,
Mark P.
I wanted to get your take on the biotech industy and whether or not you like stocks in this industry as investments. Do you have any experience investing in this industry? I personally have a couple of biotech stocks in my portfolio and they have done quite well for me over the last few months. I just wanted to pick your brain and see if you had any experiences or stories you would like to share.
Thanks,
Mark P.
#67
Investment Ideas / Re: TWTR - Twitter Inc.
Last post by Mark P. - May 28, 2016, 01:29:25 AMYes it was definitely a nice bump today. I didn't read that they only tried to make money in the 4th QTR of last year. It will be interesting to see how everything shakes out with tech stocks such as Twitter, Facebook, and LinkedIn over the next year, and if an IPO of Snapchat occurs in the near future.
#68
Investment Ideas / Re: TWTR - Twitter Inc.
Last post by Dexter - May 27, 2016, 07:23:21 PMMark -- thanks for your thoughtful responses. And that was a nice bump in the stock price today, wasn't it? Hopefully you benefited from that.
I found your mention of Snapchat's valuation pretty interesting. I did some searching and came across this article from Fortune:
http://fortune.com/2016/05/26/snapchat-worth-20-billion/
Basically, Snapchat is still growing like crazy and the company only really tried to make money off their users in the last quarter of 2015. But the $20B valuation is still amazingly high for this company.
I found your mention of Snapchat's valuation pretty interesting. I did some searching and came across this article from Fortune:
http://fortune.com/2016/05/26/snapchat-worth-20-billion/
Basically, Snapchat is still growing like crazy and the company only really tried to make money off their users in the last quarter of 2015. But the $20B valuation is still amazingly high for this company.
#69
Investment Ideas / Re: TWTR - Twitter Inc.
Last post by Mark P. - May 27, 2016, 02:32:26 PMIt took over a month of being in the $14 range, but this stock finally broke the $15 mark.
http://finance.yahoo.com/q?s=TWTR
http://finance.yahoo.com/q?s=TWTR
#70
Investment Ideas / Re: TWTR - Twitter Inc.
Last post by Mark P. - May 27, 2016, 02:30:16 PMMatt,
I appreciate your continual feedback and analysis. Let me take a few moments to answer your questions that you posed a week or so ago.
1. and 2. I am not quite sure why the MAU growth has slowed almost to a halt. Perhaps it has to do with the fact that users feel that Twitter is not changing fast enough and adding new important features that would make the app even better. However twitter has said that they will no longer count media attachments as part of the 140 character count. Dorsey has emphasized in recent weeks that stock holders need to be patient and that the innovation will come. He has also mentioned that soon longer tweets will be allowed over the current 140 character limit. I think this is a temporary slowdown and with the general president election, and new innovations coming the MAU will increase, along with new ideas to increase revenues.
3. As of right now some analysts are suggesting that Facebook (FB) can fill the void and replace Twitter. In my personal opinion with the MAU that Twitter has and the innovation that I feel Twitter will continue to bring, I feel as though FB or any other company will not be able to overtake what twitter provides, which is a quick way to get sports, world, or political news in a matter of seconds or minutes.
I have also been doing a lot of reading about an IPO of Snapchat that is supposedly going to happen in the next year or so. In my reading they are suggesting that analysts are planning on setting a Market value of $20B when the IPO occurs. I find that odd since their revenue for last year was under $60MM. Twitter on the other had over $2B of revenue in 2015 and their current Market CAP is only $10B.
Overall I still firmly believe that twitter will double or triple their market cap within the next 3-5 years, and could happen in as soon as two. I think it will follow Facebook's trend of falling significantly after their IPO and then rebounding even stronger. Change is coming, and I think now is the time to get in while their is a large opportunity ahead of achieving significant gains.
http://www.nbcnews.com/tech/tech-news/twitter-making-changes-allow-longer-tweets-n579521
Thanks,
Mark
I appreciate your continual feedback and analysis. Let me take a few moments to answer your questions that you posed a week or so ago.
1. and 2. I am not quite sure why the MAU growth has slowed almost to a halt. Perhaps it has to do with the fact that users feel that Twitter is not changing fast enough and adding new important features that would make the app even better. However twitter has said that they will no longer count media attachments as part of the 140 character count. Dorsey has emphasized in recent weeks that stock holders need to be patient and that the innovation will come. He has also mentioned that soon longer tweets will be allowed over the current 140 character limit. I think this is a temporary slowdown and with the general president election, and new innovations coming the MAU will increase, along with new ideas to increase revenues.
3. As of right now some analysts are suggesting that Facebook (FB) can fill the void and replace Twitter. In my personal opinion with the MAU that Twitter has and the innovation that I feel Twitter will continue to bring, I feel as though FB or any other company will not be able to overtake what twitter provides, which is a quick way to get sports, world, or political news in a matter of seconds or minutes.
I have also been doing a lot of reading about an IPO of Snapchat that is supposedly going to happen in the next year or so. In my reading they are suggesting that analysts are planning on setting a Market value of $20B when the IPO occurs. I find that odd since their revenue for last year was under $60MM. Twitter on the other had over $2B of revenue in 2015 and their current Market CAP is only $10B.
Overall I still firmly believe that twitter will double or triple their market cap within the next 3-5 years, and could happen in as soon as two. I think it will follow Facebook's trend of falling significantly after their IPO and then rebounding even stronger. Change is coming, and I think now is the time to get in while their is a large opportunity ahead of achieving significant gains.
http://www.nbcnews.com/tech/tech-news/twitter-making-changes-allow-longer-tweets-n579521
Thanks,
Mark