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Exits: Know When To Hold ’em, Know When To Fold ’em

Originally published March 29, 2016 We all focus a lot of attention, perhaps too much attention, on where to buy and sell a market, on where to enter trades. Today, let’s spend some time looking at the other side: where are you getting out? Some categories are useful here, and they are not complicated. First, we have exiting at a loss, or at a profit. (This is not necessarily the same as saying exiting on a stop or at a profit, because a (trailing) stop can often be a profit-taking technique.) Both of these can then be divided into two more categories: Exiting at the initial loss or a reduced loss, and profit taking against a stop or at a limit. Let’s spend a few moments thinking about each of these. Initial stops The most important think about initial stops is that you have one. Though so many trading axioms and sayings do not apply universally, one that does is “know where you’re getting out before you get in.” For every trade, you should have a clearly defined maximum loss, and you should work hard to make sure that loss is never exceeded. In practice, bad things will happen. You will have the (hopefully rare) experience of a nasty gap beyond your stop, and sometimes will see losses that are whole number multiples of your initial trade risk. (I remember one lovely -4.5x loss in Yahoo (NASDAQ: YHOO ) years ago. Though these events are rare, they are also a good reminder of we do not, for instance, risk 10% of our accounts on a trade. A 45% loss on a single trade would be a disaster, but 4.5x a reasonable risk (1%-2%) is merely annoying.) Initial stop placement is an art in itself, but, in general, I think too much of the material on the internet probably uses stops that are too tight. I’ve never seen anyone trade successfully with stops that are a few ticks wide. For me, initial stops usually end up somewhere around 3-4 ATRs from the entry. These stops are wide enough that many traders find them uncomfortable, but simply reducing position size to manage the nominal loss is an obvious solution. Taking losses is perhaps the most important thing you will do as a trader, so do it well and do it properly. Click to enlarge Reduced stops We have defined that initial “never to be exceeded” (ideally) stop at trade entry, but many traders find it effective to move that stop rather quickly. Another possibility to consider is the time stop, in which we take steps to limit the position risk if the trade does not move in some defined time. There are many possibilities here, ranging from tightening the stop, to reducing the position, to exiting completely. I have made a good case for not reducing the position at a loss because it effectively “deleverages” your P&L in the “loss space.” (See the chart above, which is drawn from pages 242 and 243 of my book.) Personally, I’ve found that simply taking whole, but smaller than initial, losses is more effective, but your experience may be different. A key point here is that all of this – entry, exit, position size, moving stops, taking targets, re-entries, adding to positions, partial exits, etc. – all of this must work together. You change one piece, and the whole system will change. This is why some techniques may be effective in some settings but not in others. To simplify, think of reduced stops as being moved when the trade does not immediately go far enough in your favor, and consider the use of time stops. Profit targets Profit targets are usually limit orders, as opposed to stops (which, not surprisingly, are usually stop orders). In general, I find that it makes sense to have profit taking limit orders working in 24-hour markets, though we may not wish to work stops in the same after-hours environments. People sometimes make mistakes or do silly things in after-hours, and I’m always happy to provide liquidity at the right prices. There is a school of thought that says that all trades should simply be exited at profit targets, while there is a conflicting school that says we must let our winners run. How to reconcile these two approaches? I think the answer lies in trading style. For trend traders, we must let our profits run. As countertrend traders, we must take quick profits, usually at pre-defined areas. I have not found chart patterns or points to be any more effective than simply setting a target 1x my initial risk on the “other side” of the entry. Many people like to use pivots or trendlines, but I’ve executed well tens of thousands of trades (one of the advantages of spending years as short-term trader) and have simply not found these to be that effective. (For intraday traders, highs and lows of the day do deserve respect.) Consider the tradeoffs in simplifying your approach. Trailing stops Trailing stops can be managed in many ways, and I have found these to be very effective in many types of trading. We can trail at some volatility-adjusted measure, and there are even times we trail a very tight stop, effectively hoping to be taken out of the trade. This is a good problem to have: sometimes you may trail a stop at yesterday’s low, and be shocked as the trade grinds in your favor week after week – there’s nothing to be done in these cases but be forced to stay in the trade and make more money, but guard against hubris: many of the times this has happened to me; I have been properly positioned into a climax move. When these moves end, they often end dramatically, so simply ring the register and step away from the market. Putting it all together This is certainly not an exhaustive list of all the possible ways to exit trades, but it will get you started in the right direction. I find that combining these techniques, using a pre-defined target for part of the trade, trailing the stop on the rest, and moving quickly to reduce initial risk on my rather wide initial stops, this works very well for swing trading the markets I follow. Consistency certainly matters, but consistently doing something that works will, not surprisingly, lead to consistently losing money. Make sure you have a well-designed system with an edge, and that the system is one you can follow in actual trading. Make sure you trade with appropriate size and risk, and that you monitor your performance accordingly. With these guidelines, you can be a few steps closer to developing your own system and approach to trading.

The V20 Portfolio: Week #31

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 declined by 5% while the SPDR S&P 500 ETF (NYSEARCA: SPY ) dipped by 0.3%. Portfolio Update It would appear that the saga of Dex Media (NASDAQ: DXM ) (OTCMKT: OTCPK:DXMM ) will soon come to an end. It was my hope that the management could come to an amicable agreement with lenders given the company’s massive cash flow. Unfortunately, we cannot control the outcome of the negotiation and according to the most recent press release from company, an agreement has been reached with lenders, the outcome being that equity holders will be completely wiped out. Evidently the thesis has failed to play out, but the risk of total loss was something that we accepted all along. For myself, what’s troubling is that the management voluntarily defaulted for reasons that are still unclear to me. When the company defaulted in 2015 by withholding an interest payment, the company still had plenty of cash and was on track to generate more. What really boggles my mind is that the management was somehow able to gain support from both senior and junior debt holders. To put things into perspective, the management withheld $8.9 million of cash interest back in September from junior debt holders and pushed the company into default. Now that negotiations are finished, junior debt holders will get wiped out save a $5 million payment and warrants on the new equity. Clearly it was absolutely not in their interest to consent, yet the improbable has occurred. In any case, Dex Media will likely be a write-off unless a miracle happens in court. While this investment has been a failure, the impact on the overall results of the V20 Portfolio has been minimal, which is one of the reasons why the investment was attractive in the first place, as the downside was limited when the position was viewed in the context of the whole portfolio. The V20 Portfolio began the year with just 0.5% of assets being allocated to Dex Media. On to better news. Our sole insurance company reported Q1 earnings and as expected, the company continued to demonstrate strong growth and profitability. The market reacted favorable as well, boosting the stock by roughly 10% since earnings as of close on Friday. Turning our attention to Conn’s (NASDAQ: CONN ), the company recently reported April sales data, meaning that now we have all the sales numbers for Q1. Overall, sales grew 8% year over year from $296 million to $319 million. While growth will continue to add value in the long-run, the company must show some improvement in the credit segment in the near term to get rid of the negative sentiment surrounding the stock. Spirit Airlines’ (NASDAQ: SAVE ) performance mirrored the sustained pessimism in the airline industry, shedding 6.5%. In comparison, AMEX Airline Index declined 3.9%. This has occurred despite Spirit Airline’s leading profitability and growth potential. Due to our earlier trim, the position has declined to less than 10% of the overall portfolio, hence more capital will be allocated to Spirit Airlines. Click to enlarge Disclosure: I am/we are long CONN, SAVE, DXMM. 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. Editor’s Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.

Spark Energy’s (SPKE) CEO Nathan Kroeker on Q1 2016 Results – Earnings Call Transcript

Spark Energy (NASDAQ: SPKE ) Q1 2016 Earnings Conference Call May 05, 2016 11:00 AM ET Executives Andy Davis – Head, Investor Relations Nathan Kroeker – President and Chief Executive Officer Georganne Hodges – Chief Financial Officer Analysts Mike Gyure – Janney Montgomery Scott Dan Fidell – U.S. Capital Advisors Operator Good morning, ladies and gentlemen. Welcome to the Spark Energy, Inc. First Quarter 2016 earnings conference call. My name is Andrew, and I will be your operator for today. As a reminder, this conference is being recorded for replay purposes, and this call will be posted on Spark Energy, Inc.’s website. I would now like to turn the conference over to Mr. Andy Davis, Head of Investor Relations for Spark Energy, Inc. Please go ahead. Andy Davis Good morning and welcome to Spark Energy, Inc.’s first quarter 2016 earnings call. This morning’s call is being broadcast live over the phone and via webcast, which can be located under events and presentations in the Investor Relations section of our website at www.sparkenergy.com. With us today from management is our President and CEO, Nathan Kroeker; our CFO, Georganne Hodges; and our Executive Vice President of Retail, Jason Garrett. Please note that today’s discussion may contain forward-looking statements, which are based on assumptions that we believe to be reasonable as of this date. Management may make forward-looking statements concerning future expectations, projections of our operations, economic performance, and financial condition. These statements are subject to risks and uncertainties that could cause actual results to differ materially from these statements. Although we believe that the expectations reflected in such forward-looking statements are reasonable, we give no assurance that such expectations will be realized. We urge everyone to review the Safe Harbor statement provided in yesterday’s earnings release as well as the risk factors contained in our SEC filings. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise, except as required by law. During this morning’s call, we will refer to both GAAP and non-GAAP financial measures of the company’s operating and financial results. For information regarding our non-GAAP financial measures and reconciliations to the most directly comparable GAAP measures, please refer to yesterday’s earnings release. With that, I’ll now turn the call over to Nathan Kroeker, our President and Chief Executive Officer. Nathan Kroeker Thank you, Andy. I’d like to welcome our shareholders and analysts to Spark’s first quarter 2016 conference call. We’ve had a phenomenal quarter and we’ve got some exciting news on the M&A front I want to talk about. And then I will turn he call over to our CFO, Georganne Hodges, to provide some detail on those financial results. We will then conclude with questions from our analysts. Yesterday we announced two significant acquisitions that will nearly double the size of our business to approximately 750,000 RCE. Combined, these two deals will provide us with access to two new states and 24 new markets and approximately $30 million in annual adjusted EBITDA. I will discuss the two transactions in more detail after I talk about the first quarter, which was a record setting one. We earned $21 million in adjusted EBITDA and $40 million in retail gross margin as we continue to see expanded unit margins in both electricity and natural gas driven by the current soft commodity environment. In addition, we saw increased volumes in our electricity segment primarily as a result of CenStar and Oasis acquisition in July of last year. As we previously signaled, our RCE count for the quarter remain flat at 415,000. Our attrition improved to 4.3% for the quarter and continues to trend favorably as we are seeing the benefits of our focus on sales quality. This improvement in attrition combined with our higher quality customer adds allowed us to replenish our attrition at a significantly lower cost than in the past. As you saw last night, Spark announced the dropdown acquisition of Major Energy from our parent National Gas & Electric. Major Energy is a retail energy business with approximately 210,000 RCE serving electricity and natural gas customers in eight states. This acquisition adds 15 new utilities to Spark’s current footprint. Major has a very strong management team that has built a very efficient and profitable business and Spark look forward to working with them to share ideas and grow this business. The purchase price is estimated to be $75 million with $40 million payable to NG&E in Spark stock at closing, $5 million in assumed liabilities and an estimated $30 million in earn-outs that are subject to a variety of performance metrics over the next three years. This transaction is back-to-back with NG&E’s acquisition of Major, including the earn-out mechanism that de-risks the transaction by lowering the total purchase price and protecting the EBITDA multiple in the event certain performance metrics are not met. Also announced yesterday, Spark has entered into a purchase and sale agreement for the acquisition of all retail business operations of Provider Power LLC representing approximately 125,000 electricity RCEs in Maine and New Hampshire both of which are new states to Spark and include nine new utilities. The purchase price is $28 million plus a potential $4 million earn-out that is subject to performance metrics for the first year. While the Provider transaction was a direct purchase from the third-party sellers, Spark is working closely with its founder in financing the purchase price payable at closing through the issuance of 900,000 primary shares to Retail Co. LLC for a total of $18 million in cash. While our record first quarter results and anticipated midyear closing of two significant acquisitions, renders our earnings guidance somewhat outdated at this point. I will simply say that we are highly confident in achieving our initial 2016 guidance range of $44 million to $48 million. We are currently reevaluating our guidance to reflect the positive changes we’ve discussed. As previously announced, our first quarter dividend of $0.3625 per share will be paid on June 14. And as we’ve stated in the past, we expect to pay this quarterly dividend on a go-forward basis. Thanks for your attention. And with that, I will now turn the call over to Georganne for her financial review. Georganne? Georganne Hodges Thanks, Nathan, and good morning, everyone. The first quarter was indeed a record setting one for us. We are very proud of our results as well as the two M&A transactions that we signed during the quarter. Our adjusted EBITDA surpassed $21 million compared to $10 million last year, as both of our mid-2015 acquisitions continue to contribute above our expectation. Our gas and power unit margins expanded during the quarter, as we continue to optimize our supply cost in this low commodity price environment. And although the weather continue to be mild, our power volume increased of almost 60% year-over-year combined with the strong margins we just talked about lead to a record growth margin of $40 million for the first quarter. On the customer acquisition side, we maintained a flat customer portfolio of 415,000 RCEs on $2.3 million of spend. This optimized spend result was achieved through our declining attrition rate of 4.3% combined with our improved commission structure with our vendors, which is volume based. G&A expenses were up 2.7 year-over-year, increased customer billing and care cost on our 35% larger portfolio are the primary driver of that but we also had to increase our CenStar earn out due to CenStar’s strong performance. That earn out winds up at the end of June this year. The increased costs were offset by bad debt that has returned to normal levels of less than 1% of our revenue as well as the expected savings on our MSA with Retailco that we talked to you about last quarter. In April, our strong rental results allowed us to completely pay off our working capital loan and begin to build cash. In conjunction with the acquisition that we just announced, we are in the process of increasing the size of our working capital facility from $60 million to between $90 million to $100 million to accommodate those acquisitions and we’re hoping to have that rapped up by the end of the month. That is all that I have, so back to Nathan. Nathan Kroeker Thanks, Georganne. As you can see, we’ve had a great start to the year in terms of profitability, sales quality, and attrition improvement, and we are very pleased with the way CenStar and Oasis continue to perform. We do have our work cut out as we move towards closing and integrating our two new acquisitions in the third quarter and hopefully by this time next quarter, we will be giving you an early indication of how they are performing. With that, we’ll now open up the line for questions from our analysts. Operator? Question-and-Answer Session Operator [Operator Instructions] We have one question from the line of Mike Gyure from Janney. Your line is open. Mike Gyure Yes. Good morning. Can you guys talk a little about the metrics you’re using for the acquisitions? I guess big picture when I look at it looking at the purchase price I guess all-in if you include all the earn outs and everything and your EBITDA, it seems like a pretty low multiple which obviously is a good thing but I guess I’m surprised or am I missing anything when I’m taking a look at that? Georganne Hodges Mike, that’s a good question. And the way we look at it is, we are issuing 2 million shares for major 900,000 shares for provider. So 2.9 million shares call it $60 million and we’re buying $30 million of annual EBITDA. So upfront, we are only looking at a two multiple. When you add in the earn outs that are in both transactions, that total purchase price goes up to our estimated $107 million, so that gets you to about 3.5 multiple. In terms of other metrics of these businesses, I mean the earn outs are tied to EBITDA and customer count in the case of major and some gross margin target and customer count in the case of provider. So I feel like we’ve really projected ourselves around that EBITDA multiple range with the way we’ve structured the deal. Mike Gyure Great. And then maybe a quick follow-up. I guess when you look at the potential for $30 million of EBITDA, I guess what you’re thinking of using that EBITDA to do more acquisitions or what you’re thinking for? How you’re going to use that cash flow once these things close ultimately? Georganne Hodges So both transactions have earn-outs in final payments on them, indicates providers for a year in the case of major through three years. So we anticipate funding those additional payments out of the operating cash flows of those businesses. Any additional cash flow that is available will be used for either organic acquisitions or to fund future M&A transactions whether they would be direct purchases or dropdown transaction. Mike Gyure Great. Thanks very much. Georganne Hodges Thanks. Operator [Operator Instructions] We have a question from the line of Dan Fidell from U.S. Capital Advisors. Your line is open. Dan Fidell Good morning guys and congrats on couple of great acquisitions here it looks like and good prices paid certainly. Just one very quick question from me just on major energy, can you – I know they’re across eight states, can you give us some sense maybe not specifically but some sense on customer concentration across those eight states? Are they more lumpy in a few states rather than others? Nathan Kroeker They are all up in the northeast and their markets that we’re very familiar with all of their customers are in ISOs that we currently have operations in. So when we talk about adding 15 new markets, there are new utility service territories that directly overlap or are adjacent to utility and service territory that we already operate in. So we really look at it is being a great complement to our existing footprint. Dan Fidell Sure. Just wondering in terms of the eight states they are about evenly divided in terms of customers or – of all the states there are couple that are just in terms of concentration, are there a few that are lumpier than others just generally? Nathan Kroeker I would say there is not a big concentration in any one market. They are distributed across markets just like we are. Dan Fidell Very good. Okay. That’s all I have. Thanks very much and congrats again. Nathan Kroeker Thank you. Operator Thank you. [Operator Instructions] And it looks like no other questions that we have in the queue at this time. So I would like to turn the call back over to management for closing remarks. Nathan Kroeker Thanks again for participating in today’s call and we look forward to talking to many of you again soon. Operator Ladies and gentlemen, thank you again for your participation in today’s conference. This now concludes the program and you may all disconnect your telephone lines at this time. Everyone have a great day. Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited. 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