Author Archives: Scalper1

AMLP Shareholders Beware

By hidden design, the ALPS Alerian MLP ETF (NYSEARCA: AMLP ) robs shareholders of 37% of their upside gains. It was the first ETF do this, and when I revealed AMLP’s dirty little secret to owners and potential buyers, many did not seem to care. “It’s all about the dividend,” they emphatically stated. “Plus, in a down market, AMLP will only fall 63% of the underlying index,” they crowed. AMLP clips 37% of performance because it is a C-corporation that is liable for federal and state taxes, estimated to be about 37% of any capital appreciation and taxable income. The supposed “benefit” of this horrendous tax drag is that it would act as a buffer during down markets, limiting declines to just 63% of those experienced by the underlying index. However, AMLP is failing to live up to those expectations. The fund has been falling like a rock the past ten weeks. Shareholders missed out on the lion’s share of gains on the upside, and now they are getting screwed again as the fund loses more than its underlying Alerian MLP Infrastructure Index. The promise of smaller losses in a down market is now history. Evidence of this can be found on AMLP’s website , where the one-month performance of the fund was -7.96% for November, while the underlying index is showing a 7.95% loss. The problem began in mid-September, so the three-month performance of -13.36% doesn’t reveal this discrepancy, yet. The performance table also shows that since inception, AMLP has had a cumulative return of +14.63%, while its index returned +34.56%. AMLP has returned less than 38% of the underlying index return. The other 57% has been eaten up by taxes and fees. Owners of AMLP are blinded by the yield. Based on its fourth-quarter distribution of $0.299 and Friday’s (12/4/15) closing price of $10.91, this C-corporation disguised as an ETF has a seductive yield of 10.96%. What many owners do not comprehend is the degree of principal being robbed in order to support the illusion of a high yield. Fortunately, the UBS ETRACS Alerian MLP Infrastructure Index ETN (NYSEARCA: MLPI ) tracks the same Alerian MLP Infrastructure Index, making it easy to see AMLP’s shortcomings. Using data and software from Investors FastTrack , I was able to produce charts making a revealing comparison. Please note that MLPI uses an exchange traded note (“ETN”) structure with its own drawbacks , but its performance helps to understand the flaws of AMLP. Here is a long-term performance graph comparing the two. AMLP is in red, MLPI is in green, and the light-blue line in the lower half shows the relative strength of AMLP to MLPI (a rising line indicates AMLP is performing better than MLPI). From AMLP’s inception on 8/25/2010 through its performance peak on 8/29/2014, it had a total cumulative return of 67.4%. During the same period, MLPI had a total cumulative return of 110.5%. During this rising market, AMLP only returned 61% of what MLPI captured. (click to enlarge) During that up market, MLPI’s price went from $26.74 to $46.22, resulting in 72.8% capital appreciation. Meanwhile, AMLP’s price went from $14.98 to $19.31, resulting in just a 28.9% capital appreciation, or only about 39.7% of what MLPI delivered. One of the unwritten promises of AMLP was that while it lagged on the upside, it would shine in down markets because its deferred tax liabilities would become assets, greatly reducing the downside impact. However, AMLP’s price fell 43.5% from 8/29/2014 through 12/4/2014, while MLPI’s price fell 48.6%. The ratio of AMLP’s price decline to MLPI’s was 89.4%-much worse than the “promised” 63% and nowhere near the 39.7% of the upside it captured. From a total return perspective, AMLP fell 43.5% to MLPI’s 48.6% decline. For the entire cycle, AMLP’s price went from $14.98 to $10.91. This principal erosion of 27.2% is the cost of supporting the 10.96% current yield. Since inception, AMLP has returned 3.8% (0.71% annualized), and MLPI has returned 15.4% (2.75% annualized). AMLP had an upside capture of 61% (39.7% based on price) and a downside capture of 89%. It won’t take too many cycles like this to completely obliterate AMLP’s principal. Zooming in reveals AMLP’s most recent problem. During falling markets, AMLP is supposed to fall much slower than MLPI. That was true from mid-May through mid-September of this year, and it can been seen in the rising light-blue relative-strength line. However, beginning around September 11, that changed. The relative-strength line went flat as AMLP plunged 19.54% between 9/11/2015 and 12/04/2015. Over this same period, MLPI dropped slightly less-19.49%. (click to enlarge) AMLP’s touted downside buffer has disappeared. Presumably because it used up all of its deferred tax liabilities/assets, exposing the more than $6 billion of shareholder assets to the full brunt of the MLP market decline. History has shown that AMLP investors don’t care. They only care about the yield. The erosion of principal helps to exaggerate the current yield while robbing long-term holders of principal. Owners who bought their shares on in 2014 at $19.31 per share do not receive the new 10.96% yield. They are getting a 6.2% yield on their initial investment, and it has cost them 43.5% of their principal. Maybe now they will start to care. Note: In early trading today (12/7/2015), AMLP plunged another 9% to a price of less than $10. Disclosure: Author has no positions in any of the securities, companies, or ETF sponsors mentioned. No income, revenue, or other compensation (either directly or indirectly) is received from, or on behalf of, any of the companies or ETF sponsors mentioned.

Revisiting GoPro

Summary Shares of GoPro, a top stock pick of a social data startup in late September, tumbled to a 52-week low on Friday after an analyst downgrade. According to the social data startup’s co-founder, more recent social data on GoPro has been “concerning”. We look at the status of an October hedge on GoPro and discuss possible courses of action for hedged GoPro shareholders. Sourcing Securities For Hedged Portfolios In a series of articles earlier this fall, we wrote about constructing hedged, or “bulletproof” portfolios. The general idea of hedged portfolios is to buy and hedge a handful of securities that have high potential returns net of their hedging costs: if the securities do well, you’ll do well, and if they don’t, your downside will be strictly limited. Broadly speaking, there are two methods of finding securities to include in a hedged portfolio: Start from scratch, rank every hedgeable security by potential return net of hedging cost, and select the highest-ranked names with share prices suitable for the size of your portfolio (to facilitate purchasing round lots, which lowers hedging costs). This is the method Portfolio Armor’s automated hedged portfolio construction tool uses if you don’t provide security symbols of your own when using it. Start from a smaller list of securities, such as a list of recent purchases by top investors, the top holdings in a leading fund, or the top names surfaced by a firm with a quantitative ranking system. This a more feasible approach if you aren’t using an automated tool, since you will have fewer names to calculate potential returns and hedging costs for. In an October article (“Building A Bulletproof Portfolio Of Top LikeFolio Picks”), we built a hedged portfolio using the top picks of a startup called Likefolio. As we mentioned in that article, Likefolio aggregates social media mentions of brands, and ties them to the publicly traded stocks those bands roll up to. In late September, Likefolio highlighted five stocks as have having promising social data metrics: GoPro (NASDAQ: GPRO ), Michael Kors (NYSE: KORS ), Amazon (NASDAQ: AMZN ), Crocs (NASDAQ: CROX ), and Wal-Mart (NYSE: WMT ). One of those stocks, GoPro, has dropped precipitously since our article was published. In this post, we’ll revisit GoPro and discuss courses of action for hedged GoPro shareholders. GoPro Hits 52-Week Low Shares of GoPro, maker of wearable cameras such as the ones pictured above (image from the company’s website ) hit a 52-week low intraday Friday, after downgrade by Baird, as Mamta Badkar reported in the Financial Times over the weekend (“GoPro slopes back to the bush league after broker downgrade”). Badkar noted Baird had cut its price target on the stock from $36 to $18, and quoted Baird analyst William Power on his firm’s view of GoPro’s sales trend: “Our checks have not suggested a meaningful pick-up in GoPro camera sales.” A Former LikeFolio Top Pick As of Friday, December 4th’s close, GPRO is down 38% from when we wrote our LikeFolio article. Given the drop and the recent downgrade, I reached out to LikeFolio co-founder Andy Swan via Twitter over the weekend to see what his company’s current social data metrics were saying about GoPro. His response, as you can see in the image below, indicated the recent data wasn’t positive. Considerations For Hedged GoPro Shareholders Given the stock’s precipitous drop, the Baird downgrade, and the inauspicious updated data from LikeFolio, hedged GoPro shareholders may be considering their next moves now. We’ll look at the status of the October 9th GPRO hedge we included in our previous article below and discuss possible courses of action for GPRO investors. A Closer Look At The October 9th GPRO Hedge: The optimal collar below was designed to limit an investor’s downside to a drawdown of no more than 20% by mid-April, 2016, while capping his potential upside at 71.2%. The reason the cap was set as 71.2% was because 71.2% was the potential return calculated for GPRO at the time using the consensus price target of sell-side Wall Street analysts (since Portfolio Armor only calculated positive potential returns for two of the Likefolio picks included in our October article, AMZN and CROX, we used analysts’ consensus price targets to calculate potential returns for all of them). How That October 9th Hedge Responded To GoPro’s Drop Here is an updated quote on the put leg of the collar as of Friday. And here is an updated quote on the call leg: How That Hedge Protected Against GPRO’s Drop GPRO closed at $29.08 on Friday, October 9th. A shareholder who owned 1800 shares of it and opened the collar above then had $52,344 in GPRO stock plus $9,990 in puts, and if he wanted to buy-to-close his short call position, he would have needed to pay $1,548 to do that. So, his net position value for GPRO on October 9th was ($52,344+ $9,990) – $1,548 = $60,786 GPRO closed at $18 on Friday, December 4th, down 38% from its closing price on October 9th. The investor’s shares were worth $32,400 as of 12/4, his put options were worth $18,450 (using the bid price of $10.25, to be conservative, as that particular put option didn’t trade on Friday) and if he wanted to close out the short call leg of his collar, it would have cost him $198. So: ($32,400 + $18,450) – $198 = $50,652. $50,652 represents a 16.7% drop from $60,786. Slightly More Protection Than Promised So, although GPRO had dropped by 38% at the time of the calculations above, and the investor’s hedge was designed to limit him to a loss of no more than 20%, he was actually down only 16.7% on his combined hedge + underlying stock position by this point. Courses Of Action For Hedged Sketchers Shareholders Being hedged gives an investor breathing room to decide what his best course of action is. A GPRO investor hedged with this collar could exit his position with a 16.7% loss now (instead of a 38% loss), he could wait to see what happens, or if he remains a long term bull, he could buy-to-close the call leg of this collar, to eliminate his upside cap. If he’s even more bullish, he could sell his appreciated puts, and use those proceeds to buy more GPRO. When backtesting the hedged portfolio method , we tested variations of the first two of those four scenarios. Specifically, we looked at securities that fell below the decline threshold we hedged them against (which was 20% in the case of GPRO), and whether, on average, hedged portfolio performance was better if those losing positions were exited 3 months into the duration of the portfolio, or held for 6 months, or until just before their hedges expired, whichever came first. We found that, on average, investors were better off holding their losing positions for six months or until just before their hedges expired, whichever came first. Tradeoff: Time Value Versus Time for Recovery The tradeoff involved there is this: the longer you hold the position, the more time the price of the underlying security has to recover; on the other hand, the sooner you exit the position, the more time value your in-the-money put options have (time value is why the GPRO hedge offered slightly more protection than promised in the calculations above). In this case, given that there’s not a lot of difference between the current drawdown (16.7%) and the maximum drawdown for this hedge (20%), GPRO shareholders hedged in this way may want to consider holding a bit longer. A positive surprise in holiday sales might boost the stock, while, in the worst case scenario, shareholders hedged with the collar above will be down another 3.3%.

Kite, Juno CAR-T Therapies Get FBR’s Thumbs-Up

Biotech rivals Kite Pharma (KITE) and Juno Therapeutics (JUNO) were up Tuesday after FBR issued a bullish response to their presentations at the American Society of Hematology (ASH) conference. Analyst Ed White lifted his price target on Kite stock to 72 from 65, though he retained his rating of market perform. He made the change Monday afternoon after Kite released an update on its phase-one trial of its treatment KTE-C19 for diffuse large B-cell