What a crazy couple of weeks. I have had one screen on actual work, and the other on GME and twitter for longer than I care to disclose at this point. But I figure now is a good time to step back and log some performance metrics, as well as updates on my 5 top positions (which have changed somewhat since the last time I posted).
Portfolio updates
My portfolio saw it’s first down month in January, driven mostly by rally’s in my two largest short positions, GSX and PEN. These rally’s were partially offset by some interesting trades in GME, BB, (discussed below) and NVRO.
On January 22nd, GME (and others) had what was at the time one of the craziest days I had ever seen in a stock. I decided around mid day to execute longer dated puts, as I knew this mania was going to be somewhat short lived, and wouldn’t mind absorbing the volatility for what seemed to be a sure thing.
Over the next week, with my eyes glued to my screen, GME (and BB, the other put position) became even more un-tethered to reality. But what was even more shocking, is that in the markets rush to buy puts, they had bid up the implied volatilities into the thousands of percent. This rise in vol masked the significant directional loss, and I actually sold my puts for a 50% profit, despite the stock 5x-ing before I executed.
My thought process was rather simple: I had looked at the stock, and realized that this company likely wouldn’t go to zero. Even if you look at other short squeezes, their price often remains elevated to other norms. So while I had factored this in to my original trade by buying strikes closer to the money, now it would take a significant impairment below my fair value estimates in order to be able to make any money directionally. Also, as time is IRRs worst enemy, I decided it prudent to sell into the piping hot market.
Overall my portfolio ended down 8.8%, compared to the SP’s loss of 1.1%. To date, my portfolio has had a beta of .86, an annualized alpha of 85%, and a correlation to the SP500 of .25.
MBI
MBIA ($MBI) is currently the largest position in my (currently rather concentrated) book. MBI is the other famous monoline insurer (other than Ambac of course) who has faced similar problems to Ambac over the past 10 years, but currently has a very different catalyst playing out.
MBIA just won a $604M judgment against Credit Suisse, dating back to the ’08 crisis. This makes them markedly different to Ambac, as this marks the last open R&W RMBS claim to resolve. CS has said they won’t appeal (though they still may). The carrying value for the judgement settlement was ~$530M, but the market hasn’t responded kindly to MBIA post judgment, with the stock price falling over the past few days.
MBIA is also entangled in a number of lawsuits around Puerto Rico and their bond exposure there. So while this CS settlement is nice, the real play comes as the PR litigation winds down. As these issues are resolved, I believe that there are three things that can happen that could offer significant upside.
- Once the company is on solid footing, management has indicated they could ask their NY regulator for permission to issue a special dividend.
- Assured Guarantee Corp (AGO) has shown interest in the MBIA book in the past, and they make sense as a strategic acquirer. While there is no guarantee (haha pun) that this is happen, the upside could be enormous
AMBAC
Ambac ($AMBC) is the second largest position in my portfolio. While I believe the upside is more significant for Ambac than MBIA, I have also noticed that the market pays far less attention to their developments. Because of this, I believe there will be ample time to build the position back up in the coming months as the court dates are rescheduled. My math (and thinking) on AMBC hasn’t changed much since my last round of research. The overview of what I have found is here.
FE
First energy is a new position, which I have only added in the past couple of days. They are a utility provider serving Ohio, Penn, West Virginia, Virginia, New Jersey, and New York. About a year ago, one of their (former) subsidiaries was wrapped up in a bribery scandal with a number of Ohio state congressmen. All the congressmen have been indicted, but the company is yet to see legal action brought against them.
The bribes were in an effort to pass the Ohio bill HB6, a bill that gave traditional energy producers subsidies and rate increases. Likely outcomes of the legal proceedings would be some monetary fine (precedent is fines around the ~$50M mark), and a repeal of HB6.
But if you look at analyst estimates of ’21 earnings, the discount at which FE trades to it’s peers is so large that even with a continued 20% discount in the future (due to reputational damage) and a .40 cent EPS impact, there remains 20 – 30% upside in the stock.
Puts
I have written about both PEN and GSX before, but I believe them to be long term, high conviction trades. However, to profit from these trades I need to be able to withstand the ongoing volatility (which many institutional money managers can’t do). In Jan, both GSX and Pen saw significant rallies in their share price, causing a ~10% draw down to my portfolio.
In the long-term however, I believe their share price’s will correct. For GSX, I believe this means it will go to zero, as there is significant (and ever-mounting) evidence that the company is a complete fraud.
Pen on the other hand is slightly less clear cut. The stock initially dropped as the FDA issued a recall for it’s faulty catheter. However, after announcing blockbuster sales in other segments, the stock has since rallied significantly. As this news came out, I was open to believing that potentially my thesis was just wrong, and I should get out of the way, but around the same time other news was released.
For starters, many research articles in academic journals that support their products were found to be written by a pseudonym of a chief executive, without declaring any conflicts of interest. The testing lab for quality control was found to be run by a related party, and management keeps selling shares.
These red flags point to deeper, systematic issues that may play it self out in the coming months.
While I’ve rebalanced my GSX position back to ~7% of my portfolio, I have let the PEN position shrink in size some as it moves against me. While I believe strongly that there is a catalyst that will play out over time, the rising stock price and positive earnings announcement do give me pause that the theory might not play out, and so I’ve allowed the markets to naturally reduce my position for me.
