Tag Archives: stocks

Faltering Thursday – Here Come Those Tears Again

Summary The S&P is still knocking on that 2,000 line. Our Option Opportunity Portfolio ends month 2 up 15.1%. A quick review and a look at a couple of trade ideas we’re still hot on. And the struggle continues. As you can see from Dave Fry’s SPY chart, this is the worst kind of ” rally ” where we get big volume sell-offs followed by low-volume, bot-driven pump jobs aimed to sucker the retailers into buying the dips so the guys driving the tradebots can dump more shares on them. Wash, rinse and repeat until the big boys are all cashed out (we already are!) and then they pull the rug out and crash the market . The crashing part will be easy – all they have to do is not prop it up but, for good measure, ” THEY ” can always send their minions out to TV stations with a few well-placed downgrades to really send things into a tailspin. Suddenly, Russia bombing Turkey Syria, China’s collapsing economy, Europe’s slow economy, the refugee crisis, Fed raising rates, terrible US Jobs and Manufacturing numbers, Brazil or Venezuela’s collapsing economies, Greece (again) or even our Debt Ceiling (again) will suddenly matter and the markets will quickly drop 10%. I was on Benzinga’s Pre-Market Show yesterday morning talking about my value reasons for being short up here (S&P 2,000): It’s not that we’re all bearish – we have a lot of material stocks and our portfolios are at record highs this week so THANK YOU manipulators – it’s just that we think the stocks we already cashed out of have further to fall before they are ” correctly priced ” – like the many material stocks we stuck with when we cashed out the rest. Having a materials-heavy portfolio this past week turned out to be the perfect way to play this bounce. In fact, today is the end of month 2 for our Option Opportunities Portfolio over at Seeking Alpha, where our goal is to make $5,000 a month (5%) in a $100,000 portfolio and I’m very happy to say that our closed positions are, in fact, up $14,905 (14.9%) after 60 days: (click to enlarge) As you can see, we only had to close 12 positions, averaging better than $1,000 per position with an average hold time of just over 2 weeks but, as we do that, we’ve been putting some of our profits back into longer-term positions that are much more relaxing to manage but still give us those great monthly returns. If you are interested in this kind of trading, you can check out our open positions by signing up here and, if you don’t like our strategy after looking – SA has a generous satisfaction guarantee. (click to enlarge) One of our long positions, Lumber Liquidators (NYSE: LL ) is going to be having a good day as they settled up with the justice department over their importation of wood that violated EPA standards by paying a $10M fine . “Ow, my wrist” said a LL spokesman! This fine is NOT related to their flooring issues but it lets investors know that fears of fines that break the company are almost certainly unfounded (which was our investing premise back on 9/25). The stock should be up 10% this morning so even if you didn’t use our option play – which is on the way to a 100% gain – it’s still a pretty good return for 2 weeks, right? This is what we mean by ” Option Opportunities ” – we seek out mispriced stocks and then use options to make hedged and leveraged bets to take advantage of the situation. You can always just play the stock – but it’s way more fun with options! Our OOP Members also have access to our Live Weekly Webinars (Tuesday’s 1pm, EST) and you can view a replay of this week’s here , where we had a wide-reaching conversation about the current market situation and our featured trade idea was for NLY – which then did this: (click to enlarge) We’re value investors and that means we know how to find opportunities in any kind of market – even the ones we’d rather not play in like this one. Still, my overriding concern about the S&P’s ability to take out the 2,000 line is keeping us ” Cashy and Cautious ” in our 4 Member Portfolios, as we wait to see how the situation resolves itself. As I noted at Benzinga yesterday, I think we fail here and leg back down to 1,850 but that is good and health and we’ll be happy to do a bit more buying down there (we already have an offer on AAPL at around $100, but using short put options to drop our net entry to $75). As we come into earnings season, there are going to be tons of fun short-term trades we can take. Just yesterday we did a hedged short on Netflix (NASDAQ: NFLX ) for our OOP and our short play on oil using the Ultra-ETF (NYSEARCA: SCO ) is going well as yesterday’s inventories were a bust. There’s always something to trade – that’s why we have no fear keeping our portfolios 90% in cash – if we can make 15% in 2 months using just 10% of our cash – why risk exposing ourselves to the downside?

Why Seeking Alpha Recommendations Outperform Mutual Funds And Brokerage Analysts

Summary Academic research indicates that, on average, Seeking Alpha recommendations outperform mutual funds and brokerage (sell-side) analysts by substantial margins. The SA coverage universe includes many small company stocks that are ignored by sell-side analysts, despite the longstanding and significant negative correlation between returns and market cap. SA contributors are far more likely than sell-side analysts to issue sell recommendations when circumstances warrant, thereby avoiding losses and exploiting opportunities to short. SA taps the “wisdom of crowds” via large numbers of highly trained contributors who are freer than brokerage analysts to develop and express individual stock ideas in great detail. Given the findings of academic studies at NYU and Purdue , there can be little doubt that Seeking Alpha (SA) recommendations, on average, actually do deliver substantial positive alpha. Nor can there be much doubt that actively managed equity mutual funds typically deliver negative alpha . With respect to sell-side analysts, a 2014 academic study of their performance found that only “about 50% of ‘buy’ recommendations issued by industry and market benchmarkers meet or beat their objective.” (Roughly as reliable, in other words, as basing one’s investment decisions on coin flips.) Fundamental Advantages of SA Research 1. Microcap and small cap stocks have a long history of outperforming large caps. As the NYU study noted, SA analysts often cover companies that are too small to attract coverage by brokerage analysts – or to be owned by mutual funds. When my Data Driven Investing co-author, Mitch Hardy, and I analyzed Compustat data for over 20,000 companies between 1951 and 2002, we found that an annually rebalanced portfolio of the 100 smallest stocks (with a minimum market cap of $10 million in 2002 dollars and assuming reinvestment of dividends at year end) would have grown from $1 to $4,418 ( 17.52% compounded annually ) during this 52-year period. This figure assumed that buys and sells were done for zero commission at year end closing prices, which is certainly an overly optimistic assumption. Nevertheless, it is a meaningful indicator of a powerful negative correlation between company size and investment returns when compared to the terminal values of $1 invested in similarly constructed portfolios with higher market cap minimums: $100 million minimum market cap – $1,293 terminal value (14.77% compounded annually) $250 million – $667 (13.32%) $500 million – $289 (11.51%) $1 billion – $303 (11.62%) S&P 500 – $254 (11.23%) 100 largest market caps – $148 (10.08%) From 1/1/03 through 10/2/15, this correlation has persisted. The Russell Mega Cap 50 has returned 139.9% (with dividends reinvested) vs. 199.9% for the Russell Microcap Index. 2. SA contributors are far more likely to issue sell recommendations when warranted than are sell-side analysts. Because brokerages have little to gain and much to lose from issuing negative reports, they make very few of them , thereby exposing their clients to avoidable losses, as well as causing clients to miss out on profitable short sale and put buying opportunities. Whereas almost all investors are potential buyers of the individual stocks that brokerage analysts recommend, relatively few are in a position to act upon sell recommendations. That is, unless an investor either owns a stock already or is inclined to short it (or buy puts), that investor will not act upon a sell recommendation. As a result, the potential commission revenue to be derived from making a negative call is relatively small. In addition, there are strong disincentives in play. Not only is the subject of a sell recommendation quite likely to look askance upon doing investment banking business with the brokerage that makes it, but it’s also possible for a single negative research piece to harm relationships with an entire industry . At the very least, going negative on a company can impede an analyst’s access to its management and the information needed to do his or her job. Moreover, these analysts have strong incentives to defend the stocks of companies that are either investment banking clients or prospects of their brokerages – even when short sellers put forth solid evidence of existential product liability problems and unsustainable business models. The next time Citron Research makes one of its “emperor has no clothes” calls, watch for one or more brokerage analysts to leap to the stock’s defense, however compelling the sell case might be. The more troubled the company, the more opportunity there may be to profitably pursue investment banking opportunities with it. Such companies may well be in the market for assistance from accommodative Wall Street firms in raising cash and/or dumping the stock owned by their managements upon unsuspecting investors. 3. SA contributors can focus far more attention than brokerage analysts on each opportunity they research. The SA posts of Citron provide us with prime examples of the thoroughness that brokerage analysts lack. (Click on the link in the preceding sentence to see what I mean.) The focus of sell-side analysts is necessarily diluted, due to the number of stocks they are assigned to cover, as well as their sales responsibilities. Academics have noted a negative correlation between analyst workload and accuracy (as well as a negative correlation between workload and research timeliness). Whereas it’s commonplace for a single sell-side analyst to have coverage responsibility for a dozen stocks or more (e.g. at Raymond James ), SA contributors have far more freedom to focus on developing one individual stock idea at a time. And when an important sell-side prospect or client needs handholding from an analyst, be it an institutional investor or investment banking-related, this may take precedence over research . 4. As the preeminent aggregator of crowdsourced investment research, SA is uniquely positioned to harness a large and growing pool of individuals with underutilized talent who are highly motivated to produce quality work. Many SA contributors (like yours truly , for instance) earn CFA designations with the hope of becoming an equity analyst or portfolio manager with an established firm. For those of us who will never realize this hope, SA provides an attractive means of pursuing our analytical passions, as well as a platform for sharing our analyses with, and receiving feedback from, thousands of viewers. Whether or not one has secured such a position, the rewards for writing insightful analyses can extend beyond the intellectual challenges, kudos from viewers, and penny per page view. There’s a reasonable chance that one’s audience will include someone impressed enough to make a suitable job offer or open a new account. The CFA charterholder population has roughly doubled during the past decade and now stands at over 123,000 – and there are more on the way, with more than 210,000 exam registrations received in 2014. Inevitably, this crop of CFA wannabees will ultimately yield a bounty of well-trained SA contributors. There are, of course, many highly competent SA contributors who do not hold CFA charters. Their numbers include underemployed MBAs, downsized financial services personnel, and those with no relevant formal training who have enough sense to know a good investment opportunity when they see one. In fact, when flooring contractors have something to say about Lumber Liquidators (NYSE: LL ), their observations carry more weight with me than whatever a desk-bound CFA/MBA type might have to offer. Whereas Wall Street firms offer no effective way for small investors to band together in challenging the assertions of their brokerage analysts, SA gives users the opportunity to publicly point out errors, unwarranted assumptions, and other shortcomings in the analyses submitted by its contributors. In addition, SA provides a convenient venue for critiquing the alleged wisdom of Wall Street. SA’s sharp-eyed editors constitute a first line of defense against the publication of factually incorrect or otherwise misleading submissions. And if significant deficiencies remain after publication, SA users’ multitude of eyeballs can generally be counted on to catch them. To the extent that the “wisdom of crowds” exists in the investment world – in contrast to the “madness of crowds” that is the Wall Street norm – it can be found at seekingalpha.com.