Tag Archives: stocks

The V20 Portfolio Week #7: Outperformance

Summary The V20 Portfolio appreciated by 5% against S&P 500’s increase of 1%. Don’t celebrate my “win” on MagicJack. Spirit Airlines was pitched by a hedge fund manager. Conn’s boosted overall performance, likely as the result of buybacks. The V20 portfolio is an actively managed portfolio that seeks to achieve annualized return of 20% over the long term. If you are a long-term investor, then this portfolio may be for you. You can read more about how the portfolio works and the associated risks here . Always do your own research before making an investment. Read last week’s update here ! It was another great week for the markets, and an even greater one for the V20 Portfolio. The S&P 500 was up 3%, lagging behind the V20 Portfolio’s performance of 5%. Month to date, the index is up by less than 1% while the V20 Portfolio has appreciated by 5.3%. Portfolio Update MagicJack (NASDAQ: CALL ) continued to underperform this week, falling 6%. There were no news, so it would appear the investors have become bearish again. I was rather fortunate in that I reduced MagicJack’s stake by 50% last week after earnings. Since then, the stock has dropped by almost 20%. Did I foresee this sharp decline? The answer is no. My original rationale for the position reduction was that because the investment thesis has shifted to more of a growth story, the company no longer deserved the exposure that it had. If I had the foresight to realize that the market will again be pessimistic about MagicJack, I would’ve sold the entire stake and rebought at current prices (or whatever prices that I deem to be the “bottom”). The point is that there is no need to celebrate this “win” on MagicJack as you should not let price dictate the validity of your original decision. Had MagicJack shares appreciated significantly after I sold my stake, the mentality would’ve been the same. This reminds of Icahn’s sentiment on his Netflix exit: You’re never going to get the top. Once in a while you get the timing right, but that’s like Vegas. As MagicJack slides further, the odds tip more and more in my favor. Similar to Conn’s, at a certain point, I will add to the position once again. In other news, one of our major positions was brought into the limelight by Whitney Tilson , who coincidentally owns MagicJack as well. Spirit Airlines (NASDAQ: SAVE ) was one of the top performers this week, with its shares rising 7%. If Spirit Airlines was not the top performer, then what was? It is none other than Conn’s (NASDAQ: CONN ). The stock remains controversial for investors, just look at the comment section in my past articles ! With the buyback program in place, there will be more upward pressure in the near-term. This week, the position rose by 12%. I cannot determine how much of this increase can be attributed to higher demand caused by the buyback program (as opposed to market participants), but I do believe that this upward trend will likely continue until the buyback program is halted. Looking Ahead From a risk perspective, I continue to look for a cheap energy company to offset my commodity exposure stemming from Spirit Airlines. As for Dex Media (NASDAQ: DXM ), the forbearance agreement will expire on Monday, so I do expect news regarding the restructuring proceedings soon. Since the position is so small (

TransCanada – It’s Not The End Of The World, Rather A Buying Opportunity

The president has finally rejected TransCanada’s Keystone XL pipeline. The decision seems more political than economical, but it is bad for TransCanada which has already spent $2.4 billion on the project. Although the market has been focusing on the future of Keystone XL, TransCanada has other projects in its pipeline that could fuel its growth in the coming years. Energy East could be the biggest growth driver in the long term, but the management has laid emphasis on a number of small projects. Earlier this month, the Obama administration finally rejected TransCanada Corp. (NYSE: TRP )’s Keystone XL pipeline on the grounds that the project was not in U.S. national interest and could reflect poorly on the country’s global leadership in protecting the environment. The decision, which was widely anticipated, finally concludes TransCanada’s seven-year efforts in getting an approval for the 830,000 barrels a day pipeline from the current administration. The decision seems more political than economical. It is difficult to imagine how a 1,179-mile pipeline spread over six states which would have mostly carried crude from Canada’s oil sands, but also up to 100,000 barrels a day of North Dakota oil, to Gulf Coast refineries would not lead towards meaningful economic benefits for the U.S. and Canada. Besides, the State Department’s environmental review , released in Jan. 2014, had already stated that the construction of the pipeline will not have any substantial negative impact on the climate. On the contrary, the rejection could increase the Canadian oil sands producers’ reliance on rail for delivering the crude to the U.S., which is far more carbon-intensive than the pipeline. Nonetheless, the decision is bad for TransCanada which has already spent C$2.4 billion on the project. A significant chunk of the expenditure could be written off as non-cash pretax charges in the coming quarters. The investment which related to the physical pipeline and equipment, however, can be utilized on other projects. As I have discussed previously , TransCanada has several options on its table following the rejection. The company can seek remedies under the energy chapter of the North American Free Trade Agreement, construct a rail loop that would connect U.S. and Canadian pipelines, or simply wait until a new U.S. president arrives in 2017 and then file another application. However, it is also important to note that the rejection is not the end of the world for TransCanada. Although the company’s stock declined 5.2% on the day of the rejection and has failed to completely recover completely since, I believe this could be an interesting buying opportunity. Although Mr. Market has been largely focusing on the future of Keystone XL, TransCanada has several other projects in its pipeline that could fuel earnings and cash flow growth in the coming years. This includes the giant Energy East pipeline which is bigger than Keystone XL in terms of investment, capacity and impact on the bottom line. Energy East, which comes with a price tag of more than C$12 billion as opposed to Keystone XL’s C$8 billion, will be able to ship up to 1.1 million barrels of crude per day from Alberta to Eastern Canada. Once Energy East becomes fully operational by 2020, it can lift TransCanada’s annual earnings (EBITDA) by C$1.8 billion. Keystone XL, on the other hand, was supposed to generate annual earnings of C$1 billion. Overall, excluding Energy East and Keystone XL, TransCanada has a backlog of C$15 billion of commercially secured major projects that can lift its annual earnings by more than C$1 billion in the long-term, according to my rough estimate. Energy East pipeline What’s even more interesting is that during the recently held investor day (Nov. 17), TransCanada emphasized that in addition to the major projects, it also has a C$13 billion backlog of eleven smaller projects, none of which require investment of more than C$1.4 billion, which will drive its growth over the next two years. Some of these projects, such as the Houston lateral and terminal, Topolobampo, Mazatlan and Canadian Mainline, will begin to contribute to earnings in 2016 while some of the bigger ones with capital cost of at least C$1 billion each, such as the liquids pipelines Grand Rapids and Northern Courier, will fuel earnings growth beyond 2016. Overall, the small and large projects are forecasted to drive 8% to 14% increase in annual earnings through the end of the decade. This will lead towards an average of 8% to 10% increase in dividends in each year through 2020. That’s higher than the CAGR of around 7% witnessed over the last fifteen years. Thanks to the recent drop following Keystone XL’s rejection, the stock is already offering an attractive yield of around 5%, which is higher than the industry’s average of 3.2%, according to data from Thomson Reuters. I believe the recent weakness could be an opportunity to buy this pipeline stock and earn strong returns in the long-run.

Concentrated Mutual Funds: Leaving Too Much To Luck

Summary The International Monetary Fund had raised caution on US mutual funds with large positions in high-yielding bonds that are issued by risky companies in the country or in emerging economies. To tap the low-rate environment, many mutual funds had stacked up these high-risk securities. Investors must note that mutual funds with a concentrated portfolio offer plenty of risks. The International Monetary Fund had raised caution back in September on US mutual funds with large positions in high-yielding bonds that are issued by risky companies in the country or in emerging economies. To tap the low-rate environment, many mutual funds had stacked up these high-risk securities. What this also indicates is a risk of concentrated holdings. While we are well acquainted with the benefits of having a diversified portfolio, investors must also note that mutual funds with a concentrated portfolio offer plenty of risks. The latest example of a mutual fund fiasco due to a concentrated exposure takes us back to the Valeant Pharmaceuticals (NYSE: VRX ) stock, which has seen a freefall since after mid-September. Eventually, Sequoia Fund (MUTF: SEQUX ) that has nearly 30% of its assets invested in Valeant suffered a nosedive. While this is one example, data from Thomson Reuters’ Lipper show that 13 other US equity funds (having over $1 billion worth of assets) have over 10% exposure to a single stock. Valeant’s Loss Drags SEQUX Down Valeant’s stock nosedived after it increased the price of two drugs (Nitropress and Isuprel) in Sept. 2015. Since Sept. 18, Valeant has slumped nearly 70%. Better-than-expected third-quarter earnings failed to halt the plunge, as allegations of debatable transactions with specialty pharmacies surfaced. Investors questioned the accounting and business practices of Valeant, in particular its relationship with specialty pharmacies. Valeant had issued a press release defending the accusations on its financial reporting and operations. The company clarified in its statement that it does not draw sales benefit from any inventory held at these specialty pharmacies. Valeant emphasized that its revenue recognition policy and accounting plan are in compliance with the law. However, these efforts were wasted as Valeant shares continued to decline even after a presentation in favor of the company by Bill Ackman, Chief Executive of Pershing Square Capital Management. Incidentally, Ackman is also the third-largest shareholder at Valeant. The stock’s slump affected its investors and the largest mutual fund holder, Sequoia Fund, ended up as a big loser. Since Sept. 18, SEQUX has lost 25.3%. Recent events related to this perhaps highlight the risks of concentrated holdings or investing too much in one stock. In late October, Vinod Ahooja and Sharon Osberg , two of the five independent directors of Sequoia Fund, resigned from the board. Separately, the fund house had to post a letter on its website to defend its significant investment in Valeant. The letter stated, “We have been asked by clients and friends why we own such a company. In our view, Valeant is an aggressively managed business that may push boundaries, but operates within the law… We believe the company will learn from the current crisis the importance of reputation and transparency to all stakeholders, especially the shareholders.” Focused Funds and Risks Focused funds are ones that invest in a limited number of companies, rather than having a diversified portfolio. The advantage of a diversified portfolio is that losses from certain investment instruments can be offset by gains in others. So the risk is diversified. However, for the concentrated or focused funds, the fate solely rests on the direction that the limited numbers of stocks are taking – either north or southward. A counter argument here is that well-chosen stock picks that are surging can also translate into significant gains for mutual funds. However, does that terminate the risk of the stock stumbling on hurdle and slipping into the bear territory? A case in point is Putnam Equity Spectrum A (MUTF: PYSAX ), which has 20.3% exposure to Dish Network (NASDAQ: DISH ). While in 2014 Dish Network gained 26.4%, PYSAX registered gains of nearly 3%. However this year, DISH’s 11.7% year-to-date loss of 11.7% is in tune with the 10.5% loss slump in the Putnam Equity Spectrum A fund. At the end of last year, Fairholme Fund (MUTF: FAIRX ) had almost half of its assets invested in American International Group, Inc. (NYSE: AIG ). However, Fairholme has diluted the holding to 19.59%, while 19.16% of its assets are invested in Bank of America (NYSE: BAC ) and 10.9% in Sears Holdings (NASDAQ: SHLD ). Funds with Above 10% Exposure to Single Stocks Some market experts are of the opinion that the purpose of a mutual fund is questionable when it has over 10-15% exposure to a single stock. However, we do have some examples of funds having at least 10% exposure to a certain stock. To begin with, Blue Chip Investor (MUTF: BCIFX ) has 30.8% of its assets invested in Berkshire Hathaway Inc. (NYSE: BRK.A ). While Berkshire Hathaway is down 9.6% so far this year, BCIFX has lost 3.4%. As of Jun 30, the total issues in the stock holdings for this Zacks Mutual Fund Rank #4 (Sell) fund was 14. Fairholme Allocation (MUTF: FAAFX ) and Fidelity Select Computers Portfolio (MUTF: FDCPX ) also have at least 20% invested in a single stock. FAAFX has invested 23.3% in Sears Holdings, while FDCPX has a 20.6% exposure to Apple Inc. (NASDAQ: AAPL ). FDCPX has also invested 9.2% in EMC Corporation (NYSE: EMC ). Year to date, Fairholme Allocation has lost nearly 7% while SHLD is down 33.7% in the same period. FDCPX has slumped 10.1% year to date. While Apple is up 6.3%, EMC has slumped 15.4% year to date. FAAFX has just 9 issues in the stock holding, FDCPX has 30. Both FAAFX and FDCPX carry a Zacks Mutual Fund Rank #3 (Hold). Separately, Fidelity Select Telecommunications Port (MUTF: FSTCX ) and Putnam Global Technology A (MUTF: PGTAX ) are two funds that have at least 10% invested in two separate stocks. Moreover, total issues in these stock holdings are also fairly high. FSTCX has invested 24.4% and 15.4% in AT&T, Inc. (NYSE: T ) and Verizon Communications Inc. (NYSE: VZ ), respectively. In case of FSTCX, year-to-date losses of respectively 0.2% and 3% for AT&T and Verizon were in contrast to the 2.5% gain for the fund. Perhaps, having 50 total issues in stock holdings helped to mitigate the loss. For example, among other holdings T-Mobile US, Inc. (NASDAQ: TMUS ) and Telephone & Data Systems Inc. (NYSE: TDS ) have gained 38.5% and 14.1 and FSTCX has invested 4.5% and 2.7% in them, respectively. FSTCX carries a Zacks Mutual Fund Rank #1 (Strong Buy). Coming to PGTAX, it has 11.9% invested in Alphabet (NASDAQ: GOOGL ) and 10.6% invested in Apple. Year to date, PGTAX has jumped nearly 12%, riding on Google and Apple’s year-to-date gains of 43.2% and 6.3%, respectively. PGTAX holds a Zacks Mutual Fund Rank #2 (Buy). So, taking a call to either invest in or abstain from concentrated funds depends on investors’ investment objective as the element of risk stemming from the direction of the largest stock holding decides their fate. While investing in PGTAX and FSTCX has proved fortunate, SEQUX, BCIFX and FAAFX have not been too lucky. Original post