What are you buying today?

[alwaysdrawing]

I'm buying puts on BURL.  Retailer with 100% of stores closed indefinitely, with no sales on website, because they closed it last year (!), and trading for over 20x trailing profits.

 

If they are closed for months, they will have stale inventory, a cash crunch, and are definitely not going to earn anything like last year's profits, and will almost certainly make significant losses. The valuation, which has only receded to levels seen last year in 2019, is still pricing in both profitability and growth, neither of which is likely.

 

I highly doubt they will be able to survive if coronavirus keeps them shut down for long, and even if they re-open, it seems unlikely they will be returning to the same level of sales, to say nothing of profitability.

 

My guess is shares trade down 75%+ over the next year, if they survive at all.

 

Neat idea and hardly(to my knowledge) a crowded institutional idea either. How do look at structuring this in a cost effective manner? I gave it a quick glance and put it on the "take a look at" reminder list for later. But briefly, couldn't you construct a cheaper expression with an outright short and some calls to hedge? Or is this a "big expected downside so go really far out of the money" situation?

 

I just buy long out of the money puts.

 

Very interesting - what dates you buying on the puts?

 

Mostly I buy longer dated stuff--Jan 2021.  I have some shorter dates on this name too, but mostly I'm in Jan 2021 $100s/$120s

 

The spreads on those puts is something to behold. Bid and ask are 2x apart (order of magnitude).

 

Try to get a fill in between--if you have a good broker like Fidelity or IBKR they help too.

 

Or just pay the ask--most of these options are hung based on market makers running delta hedge books, not by a bookie setting the line. 

 

I honestly think these options, among others right now, is stealing--buying insurance on a house that's already engulfed in flames.

[TwoCitiesCapital]

I'm buying puts on BURL.  Retailer with 100% of stores closed indefinitely, with no sales on website, because they closed it last year (!), and trading for over 20x trailing profits.

 

If they are closed for months, they will have stale inventory, a cash crunch, and are definitely not going to earn anything like last year's profits, and will almost certainly make significant losses. The valuation, which has only receded to levels seen last year in 2019, is still pricing in both profitability and growth, neither of which is likely.

 

I highly doubt they will be able to survive if coronavirus keeps them shut down for long, and even if they re-open, it seems unlikely they will be returning to the same level of sales, to say nothing of profitability.

 

My guess is shares trade down 75%+ over the next year, if they survive at all.

 

Neat idea and hardly(to my knowledge) a crowded institutional idea either. How do look at structuring this in a cost effective manner? I gave it a quick glance and put it on the "take a look at" reminder list for later. But briefly, couldn't you construct a cheaper expression with an outright short and some calls to hedge? Or is this a "big expected downside so go really far out of the money" situation?

 

I just buy long out of the money puts.

 

Very interesting - what dates you buying on the puts?

 

Mostly I buy longer dated stuff--Jan 2021.  I have some shorter dates on this name too, but mostly I'm in Jan 2021 $100s/$120s

 

The spreads on those puts is something to behold. Bid and ask are 2x apart (order of magnitude).

 

Try to get a fill in between--if you have a good broker like Fidelity or IBKR they help too.

 

Or just pay the ask--most of these options are hung based on market makers running delta hedge books, not by a bookie setting the line. 

 

I honestly think these options, among others right now, is stealing--buying insurance on a house that's already engulfed in flames.

 

 

I've been having some success just by being patient with limit orders. Have been selling small pieces of my positions above the ask and repurchasing them a few hours later for the bid.

 

There's been a handful of times where the re-buys haven't filled and I've needed to wait a day or two, but that's the risk you take to collect the spread.

[LC]

I honestly think these options, among others right now, is stealing--buying insurance on a house that's already engulfed in flames.

 

Is this your first time buying puts on dead companies? I've done so in the past, hilariously usually breaking even. I've had companies technically in BK with 100s of millions in equity value, buying 6 month puts and having them breakeven. It can be infuriating.

[Gregmal]

I actually agree 100% with alwaysdrawing. I’ll admit I was skeptical as his posts originally seemed sensational, but his detail given on the strategy is money. Has saved me big time on the draw down with certain names. It’s a value investors market. Hold longs that will weather the storm and buy insurance on the stuff that can’t hold fort for a few months at minimal outlays with large payoffs

[Gregmal]

I honestly think these options, among others right now, is stealing--buying insurance on a house that's already engulfed in flames.

 

Is this your first time buying puts on dead companies? I've done so in the past, hilariously usually breaking even. I've had companies technically in BK with 100s of millions in equity value, buying 6 month puts and having them breakeven. It can be infuriating.

 

It depends. On things too obvious straight short with some way out the money calls is how I do it. BURL is(regardless of eventual outcome) a beautiful trade because it’s off the radar. 

[kab60]

More AMA Group... Price chart makes one puke, but I think it's a potential 5-10 bagger, and unless I've completely missed something, I think I've rarely seen a selloff as crazy as this one. Might wanna write it up.

 

I am a little bit concerned about the debt covenants. My stomach is weaker than yours, I puked this out when it was  0.57AUD, now at 0.175AUD.

 

It trades like an option now.

Well, you did well selling. I averaged down a couple of times - and doubled it today. Ugh. Someone mailed me to get my view, quick view here (all very back of the envelope):

 

From the recent CC (from the CEO): We have a net leverage ratio where we can't exceed 3.25 in the first year. That doesn't get tested until the end of this year. And everything is on the basis of around run rate and those sorts of things. So we're comfortable with that at the moment. And based on those, so no concerns on that.

 

 

So I think end of last Q they had around 300m drawn on their 375m debt facilities and 50m cash so 250m net debr vs guidance of some 75m ebitda. So obviously close and obviously things have evolved for the worse with corona-virus (if you go to AMAs website they sent out a note to customers, clients etc.), but they're still in business - this isn't retail. And there might be pent up demand from hails storms that hit Australia.

 

But I think what's important here is the comment on run rate which I assume means that they'll be able to include, among other things, 17m in expected synergies (they have alluded that it will be higher, so perhaps they can bump it up). Either way I think there's a real risk that they breach those covenants - but I also expect lenders to be willing to waive those given the special circumstances. Very few banks will want to write off a loan six months in - and optically it would look extremely bad.

 

As for valuation, with a marketcap of 125m and 250 net debt the price of AMA is below the price of the Smart Capital acquisition (where rumour was others were willing to pay around 320m I seem to recall) PLUS the old Ama Group. Blackstone was close to buying the whole thing for some 10xebitda while right now - if things go as planned - they might do plus 100m ebitda in their fiscal 21 so around 3,5xev/ebitda.

 

I know it sounds almost stupid, but that would potentially imply equity upside of some 600 pct. from here. There is real risk of permanent capital impairment, but I think the risk is severly overstated and would expect them to get a waiver if they trip covenants. Last resort perhaps call Blackstone again? And I don't think things are all that dire. This is smash repair shops that should be extremely resilent since insurance pays, AND they had good answers on the call as to what needs to be improved (and it seems pretty easy to fix). CEO owns a ton of stock, three insider buys since beginning of march - post results.

That was a quick plus 200 pct... Company update out today, basically as expected. That was the best setup in a looong time. Increased pricing and covenant testing postphoned. Still think it is worth twice as much. Suddenly a very large position.

[alwaysdrawing]

I honestly think these options, among others right now, is stealing--buying insurance on a house that's already engulfed in flames.

 

Is this your first time buying puts on dead companies? I've done so in the past, hilariously usually breaking even. I've had companies technically in BK with 100s of millions in equity value, buying 6 month puts and having them breakeven. It can be infuriating.

 

Not by a long shot. I made money in the early stages of MDXG’s collapse, and ended up losing a bit more than my early gains when the company did not go bankrupt by Jan 2020, despite not filing financials.  I have also lost money on options on Tesla over the past few years (though have won at various points along the way too). 

 

Options are generally a small part of my portfolio, but in the past two months I’ve been very successful buying puts on companies with a clear downside to COVID impacts, companies with weak balance sheets/high leverage, and buying calls on volatility.  At this point I have significant put positions that are longer duration, and which I still think will perform asymmetrically.

 

I have a background in poker, sports betting, and various other games, and options are a natural extension of other gambling/strategy type games. Finding asymmetry is difficult, and sometimes the thesis doesn’t pan out, but when you buy OOTM options, it’s OK if they often go to 0 if sometimes you make 5x or 10x or, like with some of the recent volatility calls, 20-40x.  I only buy long puts and calls in an anti-fragile way where all I can lose is the option cost.

 

That being said, how often can you easily buy options on a company with literal 0 current revenue, no insight into when they will reopen, and priced based on stale numbers?  It defies basic logic, and must be because market makers are using Black Scholes (and likely think they are scalping me), when they really risk significant gaps down that are foreseeable.

 

I have never seen anything like this market, and opportunities abound in asymmetric bets still.

[wescobrk]

My SPY puts the past couple of days looks idiotic.

 

2800 on the S&P doesn't make sense to me with the change in consumer spending going forward. The medical experts say 12-18 months at the very earliest. It seems the market is just looking at this as a 60 day pause.

 

It over shoots on the way down and way up though.

[kab60]

Townsquare Media, Knot Offshore Partners - funded by a bit of Spirit Airlines, Alliance Data Systems

[LC]

I was specifically referring to options on "dead men walking" so to speak (companies which have declared covenant breaches, things like that). Regardless I'll throw out some counterpoints:

 

-They've got 400M of cash, not a lot of debt - can probably get thru 2020 lease and interest obligations

-They may be eligible for lease forgiveness or modification due to COVID as other tenants are doing.

-These are not anchor stores or locations. Property owner's may have difficulty kicking out BURL and finding a replacement tenant. May be easier to extend terms.

-I agree the demographic may be hit harder by the pandemic and therefore slower to return to stores

-On the other hand, this company has a long history and has shown to be quite resilient. I don't think it's a BK risk.

 

Additionally, have you looked at Ross? I would think the similar thesis applies there although they appear slightly less levered.

[dpetrescu]

Does anyone know much about TYL and TDG? I bought some shares recently but Just a starting position, didn’t have enough time to fully understand the companies. But they both seem to have a competitive advantage with pretty impressive pricing power.

 

TYL just seems to have unusual pricing power, don’t fully understand them. I heard about TYL while listening to a Munger DJC Q&A. He mentioned TYL is the main company digitizing  government agencies. The main but larger competitor of DJC and their software plan. Sure, would have been better 10 years ago but federal agencies are slow to change and most have a way to go. I can say this from experience, I’ve been waiting g for my city to digitize permit intake and review for 12 years now. It’s a good competitive advantage and the tide is in their favor for a while.

[bskptkl]

Does anyone know much about TYL and TDG? I bought some shares recently but Just a starting position, didn’t have enough time to fully understand the companies. But they both seem to have a competitive advantage with pretty impressive pricing power.

 

TYL just seems to have unusual pricing power, don’t fully understand them. I heard about TYL while listening to a Munger DJC Q&A. He mentioned TYL is the main company digitizing  government agencies. The main but larger competitor of DJC and their software plan. Sure, would have been better 10 years ago but federal agencies are slow to change and most have a way to go. I can say this from experience, I’ve been waiting g for my city to digitize permit intake and review for 12 years now. It’s a good competitive advantage and the tide is in their favor for a while.

 

TYL at 85 PE and 11x sales! - never heard of the company, but you must think they have some kinda secret sauce.

[lnofeisone]

Does anyone know much about TYL and TDG? I bought some shares recently but Just a starting position, didn’t have enough time to fully understand the companies. But they both seem to have a competitive advantage with pretty impressive pricing power.

 

TYL just seems to have unusual pricing power, don’t fully understand them. I heard about TYL while listening to a Munger DJC Q&A. He mentioned TYL is the main company digitizing  government agencies. The main but larger competitor of DJC and their software plan. Sure, would have been better 10 years ago but federal agencies are slow to change and most have a way to go. I can say this from experience, I’ve been waiting g for my city to digitize permit intake and review for 12 years now. It’s a good competitive advantage and the tide is in their favor for a while.

 

Curious what makes TYL different from Accenture Federal or Booz Allen? I think there is plenty of $ to be made in updating current processes and taking care of the legacy paper, etc., just not sure the best way to play it.

[dpetrescu]

Infeisone - not familiar with those companies but it seems like they’ve been growing quite a lot also. My impression of the two you mentioned that the more technology consulting and cloud services? But I might be wrong? Have to look into them. Tyler is interesting because it seems a pretty good pure play on software platforms for city, local and federal departments - software operating platforms (pay parking tickets online, send permit drawings and applications online, receive plan check letters online, etc). Instead of every department (court, permits, licenses, receive RFPs) having their own website, it’s one single platform.

 

Someone on here started a post - what people will do more of longer term after this pandemic is over. He mentions a lot of people will get haircuts on day 1 and then back to normal. Once this pandemic is over I think every city in the US will be accelerating their digitization plans. It allow the cities to make revenues (collect court tickets online) and keep employees during pandemics (review building permits while working from home) without having to lay people off. And it’s just inevitable.

 

Bsk. - That’s right it is extremely expensive. I think there’s a reason why Charlie Munger is taking the daily journal of commerce in that market as competitor. Imagine what an unprecedented market position that market is:

 

1. City group of departments hires TYL to digitize their operations - this likely takes 5 or more years?

2. TYL now has a contract to service the systems on an ongoing basis

3 thyre going software as a service. See Microsoft, adobe, auto desk

4. Once they digitize a City, seems like they have a better competitive advantage than Microsoft. If a better platform comes out a city would have to undue 5-10 years of commitment and years of progress and all departments would have to agree.  Imagine if we learned that there is a better language than English, would anyone switch?

5. I could be wrong about all this and price could collapse, it is expensive

6. Wish I heard about it 10 years ago :)

[Jurgis]

Once this pandemic is over I think every city in the US will be accelerating their digitization plans.

 

On what budget?

 

Once this pandemic is over I wonder how much money any city/state in the US will have to do anything new and non-essential.

[Castanza]

Once this pandemic is over I think every city in the US will be accelerating their digitization plans.

 

On what budget?

 

Once this pandemic is over I wonder how much money any city/state in the US will have to do anything new and non-essential.

 

[dpetrescu]

True it is an upfront investment but it’s inevitable and it is the simplest way to cut budgets long term and remove all the current inefficiencies and slow timelines. I  think Ron would approve ... at least in spirit. Well maybe not but Ron’s daughter would definitely approve.

 

Once this pandemic is over I think every city in the US will be accelerating their digitization plans.

 

On what budget?

 

Once this pandemic is over I wonder how much money any city/state in the US will have to do anything new and non-essential.

 

[orthopa]

I have been looking at selling some puts as a way to get access to some cash. Puts on BA exp Jan 2021 in the 60-70 range trading at ~$7.00. Selling some of those seem interesting. Gov not going to let BA go bankrupt and CEO doesn't believe a bailout is necessary. A lot would have to and can go wrong but owning BA in the 50s may not be the worst thing in the world. Worst case you buy them back for pennies on the dollar.

 

Thoughts or examples otherwise of companies that likely to make it through but options pricing in a lot of volatility?

[LC]

Good question and idea. I am thinking some of the banks? And maybe oil majors? Maybe even Berkshire given their banks exposure. I need to check the option prices but the general thesis is look for good businesses with one time COVID impacts.

[TwoCitiesCapital]

Been rolling a number of my long positions into two year, deep in-the-money LEAPS which has freed up 40-50% of the cash in the positions.

 

 

Will be missing out on some sizable dividends, but have same notional exposure for capital gains and will hopefully make more than the dividends missed by putting the incremental capital to work as new names go down further.

 

Rolling those LEAP positions back into cash shares. Rolled for no net change in cash, but my notional exposure will drop by 30-40% on this reduction. Grateful for the ride up and the ability to sell the calls at larger premiums to spot than what I purchased, but skeptical that this rally continues and don't want the leveraged exposure on the way back down.

[jeffsreng]

No position:

 

Buyer 100,000 $SLV Jan2021 $30/$35 bull call spreads for 14 cents potential 3500% return if it hits  ---Silver

 

https://www.macrotrends.net/1470/historical-silver-prices-100-year-chart

[orthopa]

No position:

 

Buyer 100,000 $SLV Jan2021 $30/$35 bull call spreads for 14 cents potential 3500% return if it hits  ---Silver

 

https://www.macrotrends.net/1470/historical-silver-prices-100-year-chart

 

Tons of more options traded as above today.

[orthopa]

No position:

 

Buyer 100,000 $SLV Jan2021 $30/$35 bull call spreads for 14 cents potential 3500% return if it hits  ---Silver

 

https://www.macrotrends.net/1470/historical-silver-prices-100-year-chart

 

This seems to be a play on endless QE obviously. Silver traded way up in 2010-2011 after QE2. Tempting for gamble.

[alwaysdrawing]

Buying a basket of tankers (Crude & products):

ADS NO

DHT

DSSI

EURN

INSW

NNA

STNG

TNP

 

Supercontango looks like a sure thing, now that everyone is waking up and realizing that the OPEC cuts were a farce and much less than the drop in global oil demand.  Oil down, VLCC rates up, and I expect both to continue along those paths.

 

 

[matts]

Buying a basket of tankers (Crude & products):

ADS NO

DHT

DSSI

EURN

INSW

NNA

STNG

TNP

 

Supercontango looks like a sure thing, now that everyone is waking up and realizing that the OPEC cuts were a farce and much less than the drop in global oil demand.  Oil down, VLCC rates up, and I expect both to continue along those paths.

 

why not TNK?