Any good leads? // Portfolio Update

[Andrew Stepner]

I am still bearish and remain weary of a potential recession. However, my opinion is more weakly held than ever. I still own a net neutral/bearish mix of things. Here's what I own:

Cash-like

Cash

$GLD

$SHY/$IEI 2-5 US Treasuries

Short $LQD - corp bonds

Shorts

Short basket - $MAT/$CPB/$SWK/$DE/$LQD

Short $TSLA synthetically via options

Small Puts basket - small lottery tickets on Jan 2020 expiration ($DB/$F/$BX)

Longs

$DELL - weird corporate structure play

$CMG - recovery play

I just cashed out my $CELG/$BMY acquisition arbitrage pair trade. Any ideas where I should park some cash given my bearish outlook? I wish there was another merger arb or CVR play or something like that.

My most appealing thesis is long $DELL but I kinda waiting to see how it acts before I add more. It is more of a 6-18 month play. Plus I don't love the idea of long market exposure (and exposure to the economy).

Or if you have any comments on my positions above, I am happy to discuss that too. So far $CELG and short $TSLA have helped to offset my incorrect call of being bearish on the overall market. The one I am most mad for having sold off is $SHOP.

Stepner

[Richard M]

Will with in tomorrow. I, too, got short positioned and hit a personal ATH when SP fell to low 2800. 

Then Powell opened his mouth at Chicago conference (NOT at the FOMC MTG 2 weeks later) and that incredible surge absolutely torched me.  It's a joke that Powell's official calendar isn't updated on the site and he does this stuff.

Long Berkshire, Square, Google, Blackstone, RLI, Aercap, QSR (Burger King). Kicking the tires on GE mainly because hard to fall much more.  I'm doing a lot of covered calls.

Short Mattel, and in and out of Tesla short.  Interesting stuff on shorting Micron: they've been building inventory like crazy.

Long this weird Chinese stock Qudian. Check it out and let me know.

Looking at getting long FOX, and short T. DirecTV is dying hard and they have a ton of debt.

Abbvie Allergan is your new deal.  IBM red hat

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sent on the go

[Andrew Stepner]

Interesting stuff, thanks.

I am intrigued by a potential $T short. I prefer to short either with existing downward momentum (not yet present) or with some sort of pending catalyst. What do you think are the catalysts and key dates that will affect the stock price? 

Red Hat seems like it will go thru soon, but the 1% premium is a bit bland to be waiting on China, because can we really trust China to be predictable these days?

$AGN seems quite interested as you said. Quite a bit of spread left. I just don't know too much about its odds of approval.

Stepner

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[Richard M]

Here is T after their last earnings announcements.  https://take.ms/0NsM1

That has been my catalyst; I've done long put verticals into it.  Also long OTM puts can be decently cheap and AT&T would re-rate...in a BIG way...if they cut the dividend.

Risks are that they financially engineer a spinout - which they should, by the way.  Buying TimeWarner was an expensive way to solve all the incentives problems of media companies fighting for $ vs. distributors.  Now they should ink an information-sharing agreement, and then spin out the DTV and wireless business into an MLP, or just a company with a dividend.  Meanwhile, TimeWarner retains the content and direct consumer play and can target ads via viewership data that the MLP now actually provides.  (Previously media companies couldn't target b/c they didn't know the audience, and distributors wouldn't share that info b/c then media companies would capitalize on it.  Now TimeWarner can statistically even target ads to NON-directv customers by using the statistically-significant data from DTV.)

But the dividend really isn't sustainable.  DirecTV NFL package may go non-exclusive, DTV is shedding customers, 5G buildout is expensive, huge amount of debt, Game of Thrones is over, and the DTC VOD offering will be $17 vs. Disney's $7/mo.

Disney's streaming solution is going to be a smash success.  Something I think is overlooked is that even though it's "only" $7/mo, if they are stricter enforcing password-sharing than Netflix is, via limiting simultaneous streaming or geofencing, they may capture more revenue than expected.

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Richard Mordini

[Andrew Stepner]

Yeah, earnings announcement for $T is a very good call.

Incidentally for $DIS, it seems like everyone is already long and streaming success already looks priced in. Although I wouldn't want to bet against it so maybe I'm wrong.

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[Andrew Stepner]

And Red hat just closed today. Wrong call by me I guess.

[Richard M]

I made the "i missed it" mistake too many times.

there is a tremendous power in smoothing their cash flows and making them more reliable.

But for the full long thesis:

Disney will NOT be netflix doing this:

• They will protect the theater business
• They will protect (as much as they can) the home video business
• They can plug Dis+ into their merchandising, their video games, and their park business.  (ideas: separate lines at parks for D+ members...you wouldn't even be offering discounted park tickets). Trailers for upcoming films can "launch" first on D+.
• the price will rise over the next 5 years.  $1 inc on $7 is 14%.

Disney had traded $80-120 last 5 years before breakout to $140.  That's only a 14% premium to old highs.

They had $60B in revenue last year.  If they get 50 million subs that's $4.2B/year revenue, 7% increase that should be very profitable.

I don't understand why IBM Red Hat didn't need China's approval.  TheRegister thought they did https://www.theregister.co.uk/2019/06/21/red_hat_last_results_before_ibm_acquisition/

Also the merger docs were RIDICULOUSLY VAGUE on this.  Here's the text.  It's tough to parse, but to me it says "No approvals needed, except the obvious stuff, and oh, C) the non-obvious stuff that, taken together or individually, would be immaterial to our ability to close.  We actually need those, too!" https://take.ms/isSpg

No consent, approval, order or authorization of, registration, declaration or filing with, or notice to, any Federal, state or local, domestic or foreign, government or any court, administrative agency or commission or other governmental, quasi-governmental or regulatory authority or agency, domestic or foreign (a “Governmental Entity”), is required...

except for (A)...

(E) such other consents, approvals, orders, authorizations, registrations, declarations, filings and notices the failure of which to be obtained or made would not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect.

That last part is - correct me if I'm wrong - saying "stuff that would NOT constitute a Material Adverse Effect are STILL REQUIRED."

Ginny Rometty had mentioned in October that no Chinese approval was needed, but I specifically thought it was one of those "easier to be confident now and wrong later 'due to unforeseen developments.'"

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Richard Mordini

[Andrew Stepner]

I may short $T right before tomorrow morning's earnings announcement. Although I don't love that it has already been moving down the last 3 days which I missed.

Separately, I may get long $MGLN on a potential deal. It was up $65 to $75 on deal rumor. Then drifted back to $70. Now broke back down to $65 on news of a deal price issue: https://thefly.com/landingPageNews.php?id=2936727&headline=MGLN-Magellan-Health-talks-with-Centerbridge-hung-up-on-price-Dealreporter-says. It kind of feels to me like that may be a negotiating thing and it may be destined to ultimately go through. Upside seems like roughly $75 and downside doesn't seem all that bad so I am probably going to make it a merger arg position shortly.

Stepner

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[Andrew Stepner]

Unfortunately $MGLN just announced an earnings date, so that is not as good of a sign.

Stepner

[Richard M]

Welp, the one time T doesn't drop on earnings.  DirecTV was terrible, as expected.  Potentially the drop in the lead-up is what softened the blow.  Stock was down pre-hours.

LOTS isn't making sense now.  For example, Chipotle is at an ATH, but if you compare it to pre.coli, it's current Operating Income is less than it's 2015 Net Income, AND it has 25% more stores.  Think about that.  Revenues are slightly higher but they are a less profitable company despite expanding the store count 25%.  Also, even though they bought back shares like crazy during the drop, EPS is down very significantly compared to 2015.  Surely it's growth prospects can't be greater now than in 2015.

Similarly, Texas Instruments just hit an ATH on a quarter that beat expectations but was -9% Revenue, -3% earnings YoY and they guided in-line for Q3.  As in, they confirmed sales and profits will be lower than last year.  Plus the trade issues continue.  Companies shouldn't hit highest valuation in history the year they are shrinking.

I'm having a very hard time reading the market.  I would have been much happier if the Fed just maintained it's course of getting to "normal" and letting capitalism be capitalism.

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Richard Mordini

[Andrew Stepner]

I think I'll probably keep the $T short on, at least for now.

Yeah I am also having a hard time reading the market.

I am long $CMG and I think the stock price is about 1) frothy overall market conditions relative to poor economic fundamentals related to the Fed; 2) business recovery with continued momentum, 3) same store sales up 10% last two quarters is probably hard to find elsewhere and sentiment is that the growth is poised to just keep continuing. I'm not sure I would buy the stock at this price though.

I also just got onto another merger arb type play, $HOME. Roughly dropped from like $20 to $6 despite early spring rumors of it being acquired. It is really tempting me to buy in in the hopes that there is way more upside than downside.

Stepner

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[Richard M]

You may remember on this thread I was a big bull during e.coli days.  I sold out before; I just don't see how people can value this at a higher level than 2015 given it's making less money with more stores.

When did you get long CMG?  You said you were about 0% long in late November, and then in December shared a Druckenmiller video.  Did you go long right at the nadir?

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Richard Mordini

[Andrew Stepner]

I think the thesis is the momentum/trajectory for future, rather than that they have achieved max profitability yet.

$CMG I sort of held but it was offset by other shorts...

$CMG history:

I was short Jan 2016 thru April 2016.

I pivoted and got long as of June 2016. I added April 2017.

I sold half my position Jan 2019 towards the end of my portfolio liquidation/repositioning, and I kept the other half. It is one of the last stocks I held on to and it has been offset by other shorts that I had at the time. I was still something like net 0% long around that time.

Side note, I am currently ~30-40% short, ~10-20% long, ~60-70% defensive (treasuries/gold)

Stepner

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[Andrew Stepner]

This guy agrees with your take:

https://twitter.com/evantindell/status/1154009614989635584  

"Pretty wild... $CMG currently trades at a 70x PE on a trailing basis. Even if you assume a full return to peak 2014 margins, it's still about 29x."

[Andrew Stepner]

$MGLN CEO is retiring and earnings have been reported with no comment on acquisition. I may exit here since M&A may be dead. I'm not sure why he would retire if there was a pending sale that had not yet been announced.

[Andrew Stepner]

Regarding $CMG I think I am going to start to exit by selling half my holdings. I said above that my thesis was "the momentum/trajectory for future"  and the stock price momentum seems like it may have plateaued. So looks like it might be time for me to head to the exits.

[Richard M]

CMG is so overpriced. it could be the future but it makes less operating income than in 2015, with 25% more stores, and is "worth" more. that is pre.coli hype compared with now.  it's 25% bigger via stores, and pulls in less aggregate profit.

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Richard Mordini

[Andrew Stepner]

I read somewhere how $MCD and $YUM have way higher net income margins than $CMG, the theory being that $CMG had a lot of room to grow into higher margins.

(Data confirms CMG is like 6%, MCD 29%, YUM 23%)  

Richard, any view on where that analysis is off?

Stepner

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[Richard M]

I previously posted here that CMG may be one of the best growth stories of our life. Haven't been following it as it's richly priced. Add is almost everything. 

Food space is crazy right now. I've been watching YUMC hoping for a big drop on virus but it's not even at 52 week lows despite store closings everywhere. It's ridiculous: how can it's business outlook not be worse today?Similarly GRUB made back almost all its 50% drop despite worse earnings and worse forecast. 

FWIW I like $MO. 7% yield and recession proof. I'll get paid to wait in this market. 

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[Andrew Stepner]

Yeah, $MO is intriguing to me as well

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