There have been some significant changes to my portfolio over the past couple weeks, including adjustments to positions I hadn’t even posted on here yet. I figured, therefore, it would be worth posting a quick update on the major position additions and reductions.
Here is how my portfolio has changed over the past week:
| Name | Ticker | December 14th | December 18th |
| Ambac stock | AMBC | 17.5% | 16.9% |
| Ambac calls | AMBC | 4.3% | 0.0% |
| Liberty Global | LBTYK | 9.3% | 6.5% |
| Discovery | DISCA | 5.8% | 3.7% |
| ViacomCBS | VIAC | 4.2% | 4.2% |
| Howard Hughes Corp | HHC | 6.1% | 3.4% |
| NYT | NYT | 5.5% | 2.1% |
| TWTR | 4.3% | 2.5% | |
| Madison Square Garden | MSGS | 6.9% | 5.6% |
| Interactive Corp | IAC | 5.0% | 4.6% |
| Visa | V | 3.4% | 3.4% |
| Penumbra puts | PEN Puts | 5.5% | 11.6% |
| GSC puts | GSX Puts | 3.4% | 9.9% |
| Joyy puts | YY Puts | 3.4% | 0.0% |
| Cash | 15.4% | 22.6% |
Ambac
I wrote about Ambac not long ago, and have continued to push forward with research. While I’m still digging into their Puerto Rican court cases, the Countrywide financial catalyst is by far the largest part of this thesis.
The court held a hearing on the 15th to determine the date of the trial. Ambac is arguing for an in person trial (therefore pushing it back further) while Countrywide is looking to start the trial as early as possible. The case was officially off the record, but covered by the only reporter allowed in the online conference here. During the hearing, Ambac mentioned that they are planning to appeal the fraud decisions, potentially pushing out the trial date even further. The judge does want this to go to trial as quickly as possible, and the parties all met again today to continue discussions. I’ll be continually refreshing the online web portal this weekend to see any outcomes, but it looks like timing could go either way on this.
The appeal instantly make the settlement catalyst less likely, but also has the ability (if successful) for Ambac to double the damages they’re claiming from ~$2B to ~$4B. As a non-legal professional, it is hard for me to judge what this would mean for EV (probability of success), but I think it is an overall positive.
However, I did end up deciding to enter into some call positions earlier this week after watching the vol, with an expiry in April ’21. Now that the court date is being pushed out further, this seems less and less likely to pay off in time, and so I exited them as quickly as a I could. I lost approx the bid-ask spread round trip, so I can’t really complain.
Overall, this is still my favorite position. I know there are investors that have been waiting around on this case for years and years. Hopefully I’m late enough to the party that I can pick up the scraps over the next six months!
Taking risk off the table – weekly macro environment
After a fantastic day on the 15th, with my portfolio up >2% in one day, I was a little uneasy about some mean reversion hitting me hard. Then I took to reading the wall st journal later in the day and realized there was a whole bunch of catalysts that could be nasty for my portfolio.
First, there was the fed meeting was on Wednesday, and although they have committed to not raising rates, there are always indicators they could give about future outlook that might shake the economy. Then there were the stimulus talks, which could be on the fritz, and news could come out any day that they had fallen through. Then there was the possibility of a government shutdown. The GA runoff early voting starts, and there may be some developments that give an indication Dems have the advantage. There was the weekly unemployment claims that we now know have been weakening. Some regional governments are beginning to shut down businesses again.
None of these things were immanent, and potentially they were all priced in. However, the stock portfolio is really a cash management tool for me. My focus is on, and my edge is in, finding special situations to profit from. Because of that, I am not concerned about missing a giant upswing in the market. But i am worried about some of the tail risk, and the attached volatility.
If there is one thing I have learnt from my previous firm, it is when you expect high vol (or experience high vol) it is a good time to scale down.
Howard Hughes Corp
HHC was the first company I wrote about on this blog. While initially the stock seemed like a beautifully convex trade with a ton of upside, as it appreciated it became more and more fairly valued. As time went on it seemed like a good cash management trade, but is becoming less and less attractive. Then, this week I decided to take even more money off the table.
The biggest concern I have is that as a commercial real-estate is highly correlated with the COVID recovery. If bad news comes out about deaths, or shut downs, this position could take a big hit. It’s already appreciated a ton, I don’t need it to become a value trap.
Puts
I started looking at the puts a couple weeks ago as both (i) a way to piggy back on some of the best activist investors around while simultaneously (ii) hedging my portfolio. I am a big fan of Spitznagel, and believe there is some extreme utility in a negatively correlated and convex portfolio. Especially because my long special sit investments generally take some implicit beta, which I usually don’t both to hedge out (though if I were running an institutional portfolio I likely would.)
Joyy
This is the simplest position of the three puts I had, and the only one I have and exited (and haven’t double downed on). The theory going in was that Muddy Waters had issued a pretty damning piece on Joyy, showing that they were almost entirely a fraud, and that almost all the metrics they had given to US investors were false. It is a pretty incredible piece of what I would call investigative journalism, and made a very convincing case that over the next couple years it would go to zero.
Directionally, puts were cheap, and if I went in with a small enough size and the positioned double, I wouldn’t lose too much, while If the position went to zero, it would 5x. The biggest risk was the timing risk — would it happen in the next two and a bit years. Likely yes, but not necessarily so. Either way the EV looked very good.
But then I dug into it more, and Baidu had actually made a bid to acquire YY’s subsidiary for $3.6 billion. This seems like an inherent risk to the short thesis, and could end up fundamentally changing the put deliverable.
I still think the EV is positive, there are just more ways for this to go wrong, and so I sold it for a 15% profit.
GSX
GSX was similarly torn apart by Muddy Waters recently, but the stock has remained at an elevated level. Carson Block’s reasoning is that there is some market structure reasons that the stock hasn’t crashed and I am inclined to believe him. The report they have put out is pretty damning, and I think the chance that they go to zero over the next two years is fairly high on the issues Muddy Waters uncovered alone.
But recently, the US regulators are coming down more and more on Chinese frauds. There is regulation passing that is only going to benefit GSX shorts, and as Jim Chanos always says, the fraud cycle follows the market cycle, and the market crashing is just another great catalyst for this short. This week I also saw a lawsuit that was brought against GSX just this past week, in which 7 insiders corroborated the fraud, and explained their role in it. As the lawsuit progresses, I think there are just more and more ways for this to un-tangle.
The best part, is that the market isn’t paying attention. The share price is still elevated and there is a real opportunity to follow Carson Block, and benefit from their deep research and analysis.
On seeing how cheap the options still were this week (directionally), I actually ended up doubling my position. There just seem to be more and more ways for this to go right the more I look at it, and there is easily the opportunity for this to 4x.
Penumbra
This is the most interesting short I’m involved in, and it has only gotten more interesting as time has gone on.
It started when QCM issued a short paper about the dangers of Penumbra’s catheter. Basically, doctors will stick these long tubes up central arteries to remove blood clots in patients brains when they are suffering from strokes. However, the catheters have design flaws, and over the past couple years more than thirty patients have died from the catheters expanding while they were in the body, bursting the blood vessels, and killing the innocent victims.
Then last week, QCM issued a follow up paper, proving almost without a shroud of doubt that Penumbra attempted to hide the authorship of many of the papers upon which it’s technology is based. The issue isn’t that the company tried to hide the authors identity, but that they didn’t disclose the conflicts of interest in their papers– enough to get any company in significant trouble in the academic community.
Then, in another twist, yesterday the FDA actually recalled 3 of the 4 models of catheters in the market.
Based on their most recent margin data, extrapolated out for the year, in my mind, the math works like this:
Equity research reports claim that ischemic stroke accounts for ~41% of the total revenues. If we assume they lose 80% of this business (both from recalls, and brand impairment), that equates to a ~$50M hit to sales, and if we assume that is proportionate to COGS, a $30M hit to Gross profit (approx ~33%). S&G would likely go up due to legal issues, as would R&D as they work to update their product to get it re-approved by the FDA, so let’s assume a 10% rise in both of those.
Under that scenario, The quarterly loss from operations goes from -$20M to -$60M, and their EBITDA will go from $-11M to -$52M.
EBITDA multiples are obviously hard to go off of, so instead, let’s look at EV/sales of their competitors:
With a quick google online, the only direct competitors on this list are Medtronic, Boston sci, Stryker and Terumo. Nevro, Edwards, and Glaukos all make other medical hardware, but for other (likely slower growing) markets. If the average EV to sales then goes to ~6, the EV could go from $6.6B to $2.4B — a price target of less than $70 per share.
That price target doesn’t include any potential litigation, both from securities fraud as well as those relating to the death of the 30+ patients whose death was entirely avoidable (though both of these items may only make up a hundred million or so total).
When QCM first announced this deal, they were betting that the FDA would recall a faulty medical device, and that the stock market would react. Now, the FDA has recalled the catheters but the price is still high. This is an incredible time to continue adding to the position, which is why I doubled my position size over the past week.
Other considerations
I’ll admit that 20% of my portfolio in puts is very risky. While I do have the cash reserves to soften the liability a little bit, this is absolutely not what I would do for an institutional portfolio. Because I am so young, my peronsal account can take a tremendous amount of volatility. I belive the EV for these bets to be strongly positive, and understand the inherant risks.
I also believe the risks to be counter cyclical. If the market drops 30% again on a second wave of credit defaults, the rest of my portfolio will be heavily impacted. Where as in a state of market euphoria, the rest of my portfolio will likely make up for the 10% loss, which will slowly spread out over the next 6 – 24 months.
The short story here is don’t try this at home. Nothing on this blog is investment advice, and there are significant risks involved with options like this.
