Tag Archives: stocks

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%.

Will GLD Keep Losing Its Shine?

Summary The gold market is expected to be pressured down as the U.S. dollar resumes its upward trend and the Fed moves towards raising rates. The focus is shifting towards the Fed’s normalization path. The market estimates only two to three rate hikes next year. Shares of the SPDR Gold Trust ETF (NYSEARCA: GLD ) and price of gold climbed back up last week, in part as the U.S. dollar changed course and fell following the lower than expected rate cut by the ECB. In her recent testimony to Congress, FOMC Chair Yellen signaled the U.S. economy is ready for higher rates. And the last non-farm payroll report , in which 211,000 jobs were added back in November, reaffirmed market expectations for the Fed to raise rates this month. Labor market continues to improve The recent NFP report showed a bit higher than expected growth in number of jobs. Wages rose by 0.2%, month over month and by 2.3% for the year. And while not all figures in the report were good — the real unemployment (U6) edged up to 9.9% — it was still overall good enough to pave the way for a December rate hike. Thus, this jobs report along with Yellen’s testimony should have raised the implied probabilities of a rate hike but for now the odds are at 79% — little changed from the previous week. The problem with raising rates at this stage is that the core inflation is still low. And it will be even harder for inflation to rise as the Fed’s cash rates moves up. Nonetheless, as the Fed moves towards raising rates in the next meeting, the price of GLD could resume, even if over the short term, its downward trend. And once the FOMC raises rates this month, the median outlook the Fed targeted in September will be met, as indicated in the table below. Source: Fed’s website Even though the labor market is doing well enough to prompt the Fed to raise rates this month, this week the JOLTS report will provide another perspective about the progress of the labor market. The recent depreciation of the U.S. dollar, mainly against the Euro, came after the ECB didn’t introduce stimulus as the market expected. The recent break we had from the rally of the U.S. dollar has helped pull back up GLD. And the U.S. dollar is expected to resume its rally, which will keep pressuring down GLD. Looking beyond the upcoming rate hike, and assuming the Fed moves forward and raises rates this month, the outlook for the future hikes suggest only a few rate raises in 2016. If rates were to rise at a slower pace than previously expected, this could hold the price of GLD from falling next year. (click to enlarge) Source: Fed-Watch The table above shows the implied probabilities over the next FOMC meetings 2015-2016. Based on these figures, the market expects the target rate to reach 0.84% by the end of 2016 – over 0.5 percentage point lower than the FOMC’s median outlook of 1.375%. Based on the Fed-watch outlook, this implies two rate hikes next year of 0.25% (again, assuming the Fed were to raise rates this year). If this outlook will coincide with FOMC members’ estimates, then the Fed will revise down its projections in the next meeting. And downward revisions could partly offset the expected adverse impact the rate hike will have on GLD. If rates were to remain lower than currently expected next year, the downward pressure on GLD will be less intense. Bottom line The gold market isn’t expected to shine or see rising prices anytime soon, especially as the Fed moves towards raising rates in December and U.S. dollar keeps climbing against other currencies. But following the initial rate hike, which is likely to have a short term negative impact on gold prices, it will be more important to see how the Fed plans raising rates in 2016. The current market outlook aims towards only 2 to 3 hikes next year. Lower than previously estimated rates could hold GLD from plummeting, albeit this won’t stop the general downward trend. For more please see: ” Gold and Inflation – Is there is relation? ”

Market Lab Report – Premarket Pulse 12/8/15

Major averages fell yesterday on mixed volume. The price of oil continued to plunge, sending stocks lower at home and abroad. The Commodity Research Bureau Index (CRB) is now a hair away from lows not seen since the early 1970s. This confirms the ongoing global economic malais. Airline Jet Blue Airways (JBLU) had a pocket pivot on a base breakout as airlines are perceived to benefit from lower oil prices. Earnings are soaring, group rank 37. The price of oil continues to trend lower which is bullish for the airlines. Heating and A/C service company Select Comfort (FIX) had a pocket pivot. It gapped higher on its prior earnings report, earnings are strongly accelerating, group rank 78. The success of recent pocket pivots and buyable gap-ups has been dicey at best, with most names going nowhere while some have moved slightly higher and others have moved lower. In an environment where making big money is difficult to pull off, investors have to adapt by taking smaller positions and keeping tighter stops. We tend to think that the standard O’Neil dogma of a 7-8% downside stop is too large in this environment. Investors who wait this long to sell stocks are probably down for the year in 2015 as losses can build up rapidly if one is sitting around waiting to get hit 7-8% before dumping a position. Therefore, it is far more prudent to use nearby moving averages, generally the moving average or moving averages from which the pocket pivot originated, as tighter selling guides. Both Apple (AAPL) and Tesla Motors (TSLA) remain short-sale targets, with AAPL showing resistance at the 120 price level while TSLA’s resistance lies at the 200-day moving average, currently at 234.10. Shorting as close to these levels of resistance as possible is optimal, while they also serve as guides for tight upside stops.