Tag Archives: financial
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%.
We Eat Dollar Weighted Returns – VII
Photo Credit: Fated Snowfox I intended on writing this at some point, but Dr. Wesley Gray (an acquaintance of mine, and whom I respect) beat me to the punch. As he said in his blog post at The Wall Street Journal’s The Experts blog: WESLEY GRAY: Imagine the following theoretical investment opportunity: Investors can invest in a fund that will beat the market by 5% a year over the next 10 years. Of course, there is the catch: The path to outperformance will involve a five-year stretch of poor relative performance. “No problem,” you might think-buy and hold and ignore the short-term noise. Easier said than done. Consider Ken Heebner, who ran the CGM Focus Fund, a diversified mutual fund that gained 18% annually, and was Morningstar Inc.’s highest performer of the decade ending in 2009 . The CGM Focus fund, in many respects, resembled the theoretical opportunity outlined above. But the story didn’t end there: The average investor in the fund lost 11% annually over the period. What happened? The massive divergence in the fund’s performance and what the typical fund investor actually earned can be explained by the “behavioral return gap.” The behavioral return gap works as follows: During periods of strong fund performance, investors pile in, but when fund performance is at its worst, short-sighted investors redeem in droves. Thus, despite a fund’s sound long-term process, the “dollar-weighted” returns, or returns actually achieved by investors in the fund, lag substantially. In other words, fund managers can deliver a great long-term strategy, but investors can still lose. That’s why I wanted to write this post. Ken Heebner is a really bright guy, and has the strength of his convictions, but his investors don’t in general have similar strength of convictions. As such, his investors buy high and sell low with his funds. The graph at the left is from the CGM Focus Fund, as far back as I could get the data at the SEC’s EDGAR database. The fund goes all the way back to late 1997, and had a tremendous start for which I can’t find the cash flow data. The column marked flows corresponds to a figure called “Change in net assets derived from capital share transactions” from the Statement of Changes in Net Assets in the annual and semi-annual reports. This is all public data, but somewhat difficult to aggregate. I do it by hand. I use annual cash flows for most of the calculation. For the buy and hold return, I got the data from Yahoo Finance, which got it from Morningstar. Note the pattern of cash flows is positive until the financial crisis, and negative thereafter. Also note that more has gone into the fund than has come out, and thus the average investor has lost money. The buy-and-hold investor has made money, what precious few were able to do that, much less rebalance. This would be an ideal fund to rebalance. Talented manager, will do well over time. Add money when he does badly, take money out when he does well. Would make a ton of sense. Why doesn’t it happen? Why doesn’t at least buy-and-hold happen? It doesn’t happen because there is an Asset-Liability mismatch. It doesn’t matter what the retail investors say their time horizon is, the truth is it is very short. If you underperform for less than a few years, they yank funds. The poetic justice is that they yank the funds just as the performance is about to turn. Practically, the time horizon of an average investor in mutual funds is inversely proportional to the volatility of the funds they invest in. It takes a certain amount of outperformance (whether relative or absolute) to get them in, and a certain amount of underperformance to get them out. The more volatile the fund, the more rapidly that happens. And Ken Heebner is so volatile that the only thing faster than his clients coming and going, is how rapidly he turns the portfolio over, which is once every 4-5 months. Pretty astounding I think. This highlights two main facts about retail investing that can’t be denied. Asset prices move a lot more than fundamentals, and Most investors chase performance These two factors lie behind most of the losses that retail investors suffer over the long run, not active management fees. Remember as well that passive investing does not protect retail investors from themselves. I have done the same analyses with passive portfolios – the results are the same, proportionate to volatility. I know buy-and-hold gets a bad rap, and it is not deserved. Take a few of my pieces from the past: If you are a retail investor, the best thing you can do is set an asset allocation between risky and safe assets. If you want a spit-in-the-wind estimate use 120 minus your age for the percentage in risky assets, and the rest in safe assets. Rebalance to those percentages yearly. If you do that, you will not get caught in the cycle of greed and panic, and you will benefit from the madness of strangers who get greedy and panic with abandon. (Why 120? End of the mortality table. Take it from an investment actuary. We’re the best-kept secret in the financial markets.) Okay, gotta close this off. This is not the last of this series. I will do more dollar-weighted returns. As far as retail investing goes, it is the most important issue. Period. Disclosure: None