Tag Archives: ideas

The V20 Portfolio: Week 33

The V20 portfolio is an actively managed portfolio that seeks to achieve an 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 the last update here . Note: Current allocation and planned transactions are only available to premium subscribers . Over the past week, the V20 Portfolio rose by 3.8% while the SPDR S&P 500 ETF (NYSEARCA: SPY ) increased by 0.4%. Portfolio Update Conn’s (NASDAQ: CONN ) was responsible for most of the gains this week, rising 15.8% from $10 to $11.58. There were no major events other than a credit facility amendment on Friday, so much of this rally can be attributed to shifting sentiment in the market. Some of the amendments relaxed covenants while others were more restrictive. Let’s go over the restricting amendments first. Distributing restricted payments (e.g. dividends, buybacks) will now require a 2.5x interest coverage ratio for two quarters. Borrowing base was reduced by $15 million, which will be waived if interest coverage ratio exceeds 2x for two quarters. Finally, margin on the loan was increased by 25 bps (i.e. making the revolver a bit more expensive). While none of the amendments were crippling, the amendment concerning restricted payments will prevent Conn’s from making any share repurchases in the coming months, as the interest coverage ratio was less than 2.5x for Q4. The positive amendments included eliminating the minimum interest coverage ratio covenant for Q1 and lowering the total coverage ratio to 1x from 2x. Overall, this was a slight setback as buybacks will not be a possibility in the near future. Last week we discussed how Intelsat (NYSE: I ) was buying back bonds at a discount. For whatever reason (possibly the increased likely hood of a rate hike), the bonds in question declined in value from $70s to high $60s. As such, Intelsat lowered its consideration accordingly, lowering the offer by around 500 bps. Our helicopter company was the portfolio’s major laggard. There was no major development. As discussed in last week’s update, the oil and gas division will continue to battle industry wide headwinds, though the recent bounce in commodities may cushion the fall. However, it is unlikely that revenue will suddenly recover to its previous level as the oil and gas industry overall is still at a cost cutting stage. The medical segment should continue to generate profits, as it will not be affected by the commodity downturn. Risk Management Due to additional capital being allocated to Conn’s and its subsequent rally, the position now accounts for more than 10% of the entire portfolio. For a position to account for such a significant portion, it must fulfill two criteria: high expected rate of return and low probability of permanent capital loss. As we’ve seen with Dex Media, even though the shares were undervalued, 100% of the investment will likely be written off. But by allocating a small amount of capital to this speculative position, it only had a tiny impact on the overall portfolio. Conn’s on the other hand fulfills both criteria. It is not under any significant financial distress and is still growing its business. While short-term results have dampened its profitability, its long-term outlook remains bright. Performance Since Inception Click to enlarge Disclosure: I am/we are long CONN, I. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Should You Short S&P 500 With ETFs This Summer?

It seems that the S&P 500 has left its sunny days behind! This key U.S. index last hit a record high of 2,131 on May 21, 2015, and lost about 4.3% in the last one year (as of the May 19, 2016). As a matter of fact, the index suffered corrections ( down over 10% from previous highs) during this timeframe and could not really regain its lost ground. The hollowness of this one year becomes more prominent when you look at 45 record highs in 2013 and 53 in 2014, as per Wall Street Journal. Though the start of 2015 was equally grand with 10 highs till May 21, the journey afterward was simply lackluster. This makes it imperative to understand investors’ perception on the S&P 500 before it approaches its anniversary of highs on May 21, 2016. What’s Behind This Decline? There are plenty of reasons. One of the main factors is the global market crash that was induced by the Chinese currency devaluation and extreme plunge in oil prices last summer. Since then China and oil have been a pain in the neck. In addition to this, earnings recession, overvaluation concerns, Fed liftoff in December and ambiguity over the Fed’s next moves amid global growth issues challenged the broader market. If this was not enough, when market watchers were almost sure about a delayed policy tightening in the wake of threats to the stability of the U.S. economy, the latest Fed minutes hinted at the possibility of a June hike. As an instant reaction, the S&P 500 fell to its lowest level since March on May 19. The reason for this fall was the fear of shrinkage in liquidity in the stock market. Turbulent Times Ahead for S&P 500? A volley of upbeat data released lately on retail, housing, inflation and consumer sentiments may boost the Fed’s confidence that the economy can now digest an additional hike. Then again, the global market is still edgy and has all the power to derail the U.S. index if the Fed acts alongside. In today’s concept of an open economy, it is hard to bet on a large-cap stock index just on the basis of domestic market recovery. First, if the Fed strikes, the greenback will jump hurting the profitability of companies with considerable exposure in foreign lands. More than 30% of the S&P 500 revenues depend on international economies. Plus, investors should note that IMF, while slashing global growth forecasts recently, reduced the U.S. growth forecast for 2016 too from 2.6% to 2.4% . After all, though inflation is rising, it is yet to reach the level where it can digest further hikes comfortably. In April 2016, American inflation was at 1.13%. Notably, a rise in rates lowers inflation. Also, uncertainties regarding election in November flares up risk in the S&P investing. Earnings of the S&P 500 index are likely to decline 6.7% in the first quarter of 2016 while revenues are expected to fall 1% as per the Zacks Earnings Trends issued on May 18. Though the trend looks up from the second quarter onward with expected earnings reduction of 6% for the ongoing quarter, earnings growth of 0.4% in Q3 and again growth of 7.3% in Q4, it is less likely for the S&P 500 to jump before late second half. Analyst Bearish on S&P 500 In March 2016, Goldman commented that the index in overvalued. It recently noted that “the forward P/E multiple of the S&P 500 index ranks in the 86th percentile relative to the last 40 years. They note that the median stock in the index trades at the 99th percentile of its historical valuation on most metrics.” Goldman also noted that historically the S&P 500 index is fairly range-bound until November in a presidential election year. Bank of America believes that the S&P 500 could slip to its February lows, while Morgan Stanley has applied the famous maxim “Sell in May and go away” to stocks at least till November. All in all, no great news is expected from the S&P 500 in the coming summer. Short via ETFs? Going by the above thesis, the S&P 500 will likely see rough trading ahead, but investors could easily profit from this decline by going short on the index. There are a number of inverse or leveraged inverse products in the market that offer inverse (opposite) exposure to the index. Below we highlight those and some of the key differences in each: ProShares Short S&P500 ETF (NYSEARCA: SH ) This fund provides unleveraged inverse exposure to the daily performance of the S&P 500 index. ProShares UltraShort S&P500 ETF (NYSEARCA: SDS ) This fund seeks two times (2x) leveraged inverse exposure to the index. ProShares UltraPro Short S&P500 (NYSEARCA: SPXU ) Investors having a more bearish view and higher risk appetite could find SPXU interesting as the fund provides three times (3x) inverse exposure to the index. Direxion Daily S&P 500 Bear 3x Shares (NYSEARCA: SPXS ) Like SPXU, this product also provides three times inverse exposure to the index. Bottom Line We would also like to note that the relative strength index of the S&P 500 based ETF (NYSEARCA: SPY ) is presently 43.92. This indicates that the fund is yet to enter the oversold territory. Original post

The Sweet Spot Of Zero Leverage Equity?

Global economic momentum is modest at best, equities and bonds are overvalued, and while allocating your funds entirely to gold, cash and shorts is enticing, it isn’t possible for the majority of money managers. What are investors to do then? The ranking of creditors and equity in the capital structure suggest that high-grade corporate bonds – and sovereigns – is the optimal allocation. When the going gets tough, the equity is wiped out, but as creditor, you are at least assured a recovery on your investment – even if it may be a slim one. This time could be different, however. As an alternative, I propose equities with zero leverage. There aren’t many around, and those that do remain unlevered are looked upon with suspicion by the market. After all, if the CFO hasn’t jumped on the bandwagon and issued debt to finance dividends and buybacks, she must be an idiot. But if you believe – as I do – that corporate bonds is the new bubble, being overweight equities with no leverage isn’t a bad idea. These securities won’t be immune to a crisis, but they offer two key advantages. Firstly, they likely will decline less than their overlevered brethren, and the risk of a bankruptcy is smaller. If a repeat of 2008 really beckons, capital preservation may turn out to be the key metric of survival, no matter the drawdown. Secondly, buying equities with zero, or very low, leverage is also a free option. If we are wrong, and the debt finance buyback and dividend party goes on, a portfolio of equities with zero leverage eventually will join the party too. In all likelihood, that means excess returns for your stocks. Once leverage has increased, you can sell and go looking for another batch of firms with no leverage, primed to lever their balance sheet to hand out money to shareholders. We concede that this latter rationale partly is a contradiction. But we would rather buy firms with a clean balance sheet than the alternative of buying equities that have already maxed out their potential for debt-financed shareholder gifts. Confusing charts; no directional clarity Meanwhile, looking at the macro, strategy and technical charts has left me confused – a bit like Macro Man , I suppose. Macroeconomic leading indicators have stabilised based on the most recent data. The year-over-year rate in the U.S. and EZ headline indices have climbed marginally, and have risen strongly in China. In Japan, however, the message from the headline index is grim. Global money supply growth has turned up further, helped by the U.S. and China. It is particularly encouraging to see that M1 growth has accelerated slightly in the U.S. On the contrary, my short-term charts of the market are sending a very unclear message. In the U.S. put-call ratios point to further upside despite the recent rally, while the advance-decline ratio continues to roll over. My equity valuation scores point to a slow grind higher in coming months, before a sell-off takes over towards the end of the summer. On sovereign bonds I remain bearish.