What are you buying today?

[sleepydragon]

Added more MO

[Gregmal]

Bought a few WFC $45 calls. Looking for a run into earnings.

[sleepydragon]

Bought a few WFC $45 calls. Looking for a run into earnings.

 

Hopefully the new CEO won’t do write downs, like many new CEOs like to do.

 

[Spekulatius]

Bought a few WFC $45 calls. Looking for a run into earnings.

 

Hopefully the new CEO won’t do write downs, like many new CEOs like to do.

 

Yeah, or set the future bar low, so he can easily jump over it. FWIW, I don’t  like banks right now - potential for lower NIM and higher loan losses.

[pocoapoco]

Bought a few WFC $45 calls. Looking for a run into earnings.

 

Hopefully the new CEO won’t do write downs, like many new CEOs like to do.

 

Yeah, or set the future bar low, so he can easily jump over it. FWIW, I don’t  like banks right now - potential for lower NIM and higher loan losses.

 

Greg, why the 45s? Just leverage ?

[Dynamic]

Or as someone pointed out the other day, you can use call buying to limit downside risk if you buy what you can afford to exercise at the strike price instead of buying the stock.

 

Scenario A

For example if WFC were at $53 and you had $5410 cash and could buy one $45 strike call for $9 before earnings, you'd lay out $900 + $10 commission up front and have $4500 left to exercise the call to receive 100 shares WFC.

 

Your breakeven price is $54.10 instead of $53.10 unless you earn a little interest on the $4500 cash until expiry so you lose out by $100.

 

But if WFC falls below $45 at expiry, you don't exercise and limit your loss to the $910 you laid out up front, keeping the $4500 in cash you had retained to cover the exercise.

 

Scenario B

The extreme alternative approach is to spend all $5410 on 6 contracts at $900 each and get 5-6x leverage and increase your potential loss to 100% after a 17% drop in WFC price to $45 while increasing any gains. If you want to cash out at any time up to expiry you may choose to sell the calls to someone else or to exercise them and sell the stock, reducing commission and spread costs slightly.

 

Or you go somewhere between these extremes by buying between 2 and 5 contracts to get some leverage and some downside protection.

 

My guess is that it's most likely being used as uncallable leverage over a certain time frame to amplify the upside. But on occasions where the probability distribution of outcomes includes a substantial downside swing it can provide built in protection at a known cost. Sometimes this may have features superior to alternatives like stop losses which are path dependent and might not actually exit the position at the price you set of the fall is fast enough.

[Gregmal]

Bought a few WFC $45 calls. Looking for a run into earnings.

 

Hopefully the new CEO won’t do write downs, like many new CEOs like to do.

 

Yeah, or set the future bar low, so he can easily jump over it. FWIW, I don’t  like banks right now - potential for lower NIM and higher loan losses.

 

Greg, why the 45s? Just leverage ?

 

A few reasons, women similar to what Dynamic stated.

 

First, it is leverage, yes.

 

Second is that $45 is where you had all that support during the worst of times right after the account opening scandal. If it held there, then, it would take one hell of a meltdown to take it below there on a short term basis. It hasn't done anything the past month or so; my hope is that something will give. The big banks are still modestly inexpensive and reasonably high quality. So there could be some catching up to do, especially with Wells.

 

I dont entirely anticipate holding it through earnings. We've got a nice runway until then. One of the easiest and most repeatable trades ever was buying Apple a few weeks before earnings and then flipping it the day of, between 2012-2014 it worked like clockwork. You could always still hold, especially if you get yourself a big enough cushion.

 

So basically, with the $45s, I have enough leverage where a move of a few bucks up can work, but enough of a cushion where if it doesnt do anything or goes down a bit, I can always just exercise the call and hold the position. In which case I own WFC- theres worse things in the world. AND if there is such a scenario where the $45 mark comes into question, then it'll obviously be something extraordinary, in which case having the position on will likely prompt me to dig into the potential opportunity much more thoroughly than if I just had it on the potential watch list with a gazillion other companies, while at the same time still limiting my losses.

[sleepydragon]

In my opinion, if you are right on the stock, no point of buying a bit of options and planing on all these different scenarios. Just buy the stock in a big way if you are confident or don’t bet anything especially not options.

Or just buy a big load of calls to get huge leverage.

 

I had a coworker who earned the down payment for his house buying calls on Apple.

But another coworker (who is very good at stock) lost about 5 years of pay when he all-in a high conviction calls (the stock went up many times after his calls expired worthless)

 

 

[Gregmal]

Not to sound like RuleNumberOne, but theres not too much to be high conviction on here, right now, when the market is going up .5% every day. I expect WFC to rally a few bucks into the January earnings. I retain the option to maintain a position thereafter via the calls, but have some flexibility in between without a big capital outlay. Theres worse things to own than a small bit of WFC

[DooDiligence]

In my opinion, if you are right on the stock, no point of buying a bit of options and planing on all these different scenarios. Just buy the stock in a big way if you are confident or don’t bet anything especially not options.

Or just buy a big load of calls to get huge leverage.

 

I had a coworker who earned the down payment for his house buying calls on Apple.

But another coworker (who is very good at stock) lost about 5 years of pay when he all-in a high conviction calls (the stock went up many times after his calls expired worthless)

 

I am in total agreement.

 

I bought MO $52.50 Jan 2020 Calls in late July of 2018 (equity was at $58) for a premium of $8.

They went up slightly after purchase & then plummeted along with the equity.

If I would've just bought the equity, I would've been able to hold on for what will probably hopefully be a gain over the next few years.

 

I also bought MO $50 Jan 2021 Calls in late Nov of 2018 (equity was at $53 BTFD) for a premium of $7.50.

I have watched a similar but less drastic drop in these options & a slight recovery since.

If I'm lucky the 2021 Calls will get me close to breakeven on the option debacle.

 

I was trying to replicate my luck years before with Edwards Lifesciences Calls, where the options nearly paid for my equity.

 

This was an expensive, but not debilitating, lesson & I believe that from now on I'll leave the long Call trading to the experts.

[Gregmal]

In my opinion, if you are right on the stock, no point of buying a bit of options and planing on all these different scenarios. Just buy the stock in a big way if you are confident or don’t bet anything especially not options.

Or just buy a big load of calls to get huge leverage.

 

I had a coworker who earned the down payment for his house buying calls on Apple.

But another coworker (who is very good at stock) lost about 5 years of pay when he all-in a high conviction calls (the stock went up many times after his calls expired worthless)

 

I am in total agreement.

 

I bought MO $52.50 Jan 2020 Calls in late July of 2018 (equity was at $58) for a premium of $8.

They went up slightly after purchase & then plummeted along with the equity.

If I would've just bought the equity, I would've been able to hold on for what will probably hopefully be a gain over the next few years.

 

I also bought MO $50 Jan 2021 Calls in late Nov of 2018 (equity was at $53 BTFD) for a premium of $7.50.

I have watched a similar but less drastic drop in these options & a slight recovery since.

If I'm lucky the 2021 Calls will get me close to breakeven on the option debacle.

 

I was trying to replicate my luck years before with Edwards Lifesciences Calls, where the options nearly paid for my equity.

 

This was an expensive, but not debilitating, lesson & I believe that from now on I'll leave the long Call trading to the experts.

 

Not every situation is right. Especially with a big dividend player like MO, with that type of premium and only a 6% floor(53 spx - 50 strike) puts you at a disadvantage. Ideally you want as little premium as possible. The $45 WFC calls are about $9 vs a $53.7 spx. If it goes up your pretty much getting 1 for 1 returns vs having to calculate for premiums and whatnot. If it goes down, then you still, and also beneficially, have some protection, IE if it went to $45 your $9 call would be greater than 0 assuming its a short term move and a longer dater option.

[Dynamic]

One has to be extraordinarily cautious in overusing options for leverage because you need the timing to be adequate and a lot of value stocks can get even cheaper over even 2 year LEAPS durations. You must avoid a blow up at all costs to remain in the game. They have advantages too, in that if you're long an option it cannot go below zero so long as you don't exercise when it's out of the money and the effective loan, while relatively expensive, is not callable. But the allure of an early success can easily suck you into taking too much risk when you don't have enough conviction over both price and timing. Temperament and thinking through the worst case scenario are vitally important.

 

On the flip side I do really like writing short durations puts as a way of entering long term positions at the right price so long as I'm adequately cash covered (as boilermaker does) and the effective entry price and return to expiry are sufficiently high. Or if I want to exit a stock position because of fairly full valuation, selling covered calls can either give me extra yield while I wait for my price or enhance my sell price if I'm called. They can be useful tools if used with extreme caution.

[DooDiligence]

One has to be extraordinarily cautious in overusing options for leverage because you need the timing to be adequate and a lot of value stocks can get even cheaper over even 2 year LEAPS durations. You must avoid a blow up at all costs to remain in the game. They have advantages too, in that if you're long an option it cannot go below zero so long as you don't exercise when it's out of the money and the effective loan, while relatively expensive, is not callable. But the allure of an early success can easily suck you into taking too much risk when you don't have enough conviction over both price and timing. Temperament and thinking through the worst case scenario are vitally important.

 

On the flip side I do really like writing short durations puts as a way of entering long term positions at the right price so long as I'm adequately cash covered (as boilermaker does) and the effective entry price and return to expiry are sufficiently high. Or if I want to exit a stock position because of fairly full valuation, selling covered calls can either give me extra yield while I wait for my price or enhance my sell price if I'm called. They can be useful tools if used with extreme caution.

 

I have used this short put strategy a few times & it worked out well.

I'll probably do it again in order to back into a position where I already own 1/2 to 2/3 of the equity that I want.

 

I've also sold covered calls with success.

 

---

 

Thanks as well to Gregmal for your input.

 

---

 

I'm not much of a short term trader.

My crystal ball is murky, at best, even after reading this,

 

https://www.amazon.com/Long-term-front-running-template-market-speculation/dp/1973323400

 

I'm generally comfortable riding an issue up & down except in the case of MO where I felt they were taking the business in a bad direction.

 

I've read a lot of analysis by people I respect which leads me to believe that MO will turn out OK but I think I'll pass on vice in the future.

edit: It's just too gut wrenching.

[SafetyinNumbers]

I added a touch more ATTO.

 

I think ATTO trades too low based on the fundamentals and it would trade much higher if not for its largest shareholder (Bain) selling a PIK note to fixed income investors including sovereign wealth funds. The note is due in May 2020 but we should find out shortly what comes out of negotiations between Bain and the note holders.

[CorpRaider]

Bought a few WFC $45 calls. Looking for a run into earnings.

 

Hopefully the new CEO won’t do write downs, like many new CEOs like to do.

 

Yeah, he seems likely to clear the deck and there is probably plenty to mention, but after considering it, trying to dance around that seems like being too cute to me.  I bought a little bit more today.  Got scared it was going to run away from me/FOMO. 

 

The god of skinny compounder-bro punks has like 40% of the portfolio that he runs without size constraints in WFC.

 

I've had some success with LEAPS + corporate transactions/special sits.  Not sure if I was lucky or good...was back when Black-Scholes was (I think) more taken as gospel. 

[SafetyinNumbers]

I added a touch more ATTO.

 

I think ATTO trades too low based on the fundamentals and it would trade much higher if not for its largest shareholder (Bain) selling a PIK note to fixed income investors including sovereign wealth funds. The note is due in May 2020 but we should find out shortly what comes out of negotiations between Bain and the note holders.

 

Curious what your PT is on this.

 

I think it's more than a 100% upside and potentially a lot more if the new management team is successful in fixing margins.

 

The crazy upside number if they can fix the business and get some revenue growth over 5 years is much bigger.

 

Revenue is around US$1.7bn now and if they can get to US$2bn in 5 years with EBITDA margins of 15% (the goal for 2022 at the recent investor day last month), then EBITDA is around US$300m vs US$170m now.

 

Peers generally trade north of 8x EBITDA, so that leaves an EV of US$2.4bn.

 

The current DSO are at 90 days which is elevated for one off item in particular but management thinks they can get it to 45 days over time. Some peers are that low on DSO but even getting down to 70 days will free up over US$80m in cash. I can easily see with annual free cash flow plus improving working capital that debt will be closer to US$400m from ~US$565m now in 5 years. Also management is keen on buying back stock and there should be enough cash to do that too. If I model them buying 11.1m shares at $10 vs the current price of ~$3, there are 60m shares left outstanding. So an equity value of US$2bn and 60m shares outstanding is over a 10 bagger from here.

 

I usually don't throw numbers like that out there because it sounds ridiculous but that's why I think the risk/reward is good at these prices.

 

I think most investors are waiting for the resolution of the PIK and I think because of the upside that I'm sure Bain can see, they probably want to hold onto the equity. The big risk is that they turn over their shares to the bond holders who then proceed to sell into the market. I just can't see why Bain or the note holders would do that when they could run a strategic process and get a higher price or just wait to see how successful management is with the turnaround. That being said, I am constantly surprised by market participants.

 

 

[Gregmal]

I would add this useless but fun supplementary note on the WFC trade, relating to a scenario mentioned in terms of theoreticals... something Ive done once or twice with similar situations... should the stock somehow blow up($45 as I mentioned is a very powerful support level) you can always run it back so to speak and then go short the long dated $55 puts as well. I like scenarios where worst case is you own a quality company. A lot of my MSG exposure over the years has been rolling very deep in the money calls and shorting deep in the money puts.

[zurgenfeldt]

bought into LUV. Currently a 10-cap.

[Broeb22]

I added a touch more ATTO.

 

I think ATTO trades too low based on the fundamentals and it would trade much higher if not for its largest shareholder (Bain) selling a PIK note to fixed income investors including sovereign wealth funds. The note is due in May 2020 but we should find out shortly what comes out of negotiations between Bain and the note holders.

 

Curious what your PT is on this.

 

I think it's more than a 100% upside and potentially a lot more if the new management team is successful in fixing margins.

 

The crazy upside number if they can fix the business and get some revenue growth over 5 years is much bigger.

 

Revenue is around US$1.7bn now and if they can get to US$2bn in 5 years with EBITDA margins of 15% (the goal for 2022 at the recent investor day last month), then EBITDA is around US$300m vs US$170m now.

 

Peers generally trade north of 8x EBITDA, so that leaves an EV of US$2.4bn.

 

The current DSO are at 90 days which is elevated for one off item in particular but management thinks they can get it to 45 days over time. Some peers are that low on DSO but even getting down to 70 days will free up over US$80m in cash. I can easily see with annual free cash flow plus improving working capital that debt will be closer to US$400m from ~US$565m now in 5 years. Also management is keen on buying back stock and there should be enough cash to do that too. If I model them buying 11.1m shares at $10 vs the current price of ~$3, there are 60m shares left outstanding. So an equity value of US$2bn and 60m shares outstanding is over a 10 bagger from here.

 

I usually don't throw numbers like that out there because it sounds ridiculous but that's why I think the risk/reward is good at these prices.

 

I think most investors are waiting for the resolution of the PIK and I think because of the upside that I'm sure Bain can see, they probably want to hold onto the equity. The big risk is that they turn over their shares to the bond holders who then proceed to sell into the market. I just can't see why Bain or the note holders would do that when they could run a strategic process and get a higher price or just wait to see how successful management is with the turnaround. That being said, I am constantly surprised by market participants.

 

Is some maneuvering around in the capital structure really the big risk? What probability is a bankruptcy in the next few years? What effect would a large customer loss have? What kind of currency swing would cause real cash flow problems?

 

Joel Greenblatt always said he bet the most on positions where he felt he could not lose much even in a bad outcome. You might be more savvy with restructuring-type situations, but this is not very asymmetrical from what I see.

[Castanza]

I added a touch more ATTO.

 

I think ATTO trades too low based on the fundamentals and it would trade much higher if not for its largest shareholder (Bain) selling a PIK note to fixed income investors including sovereign wealth funds. The note is due in May 2020 but we should find out shortly what comes out of negotiations between Bain and the note holders.

 

Curious what your PT is on this.

 

 

I think it's more than a 100% upside and potentially a lot more if the new management team is successful in fixing margins.

 

The crazy upside number if they can fix the business and get some revenue growth over 5 years is much bigger.

 

Revenue is around US$1.7bn now and if they can get to US$2bn in 5 years with EBITDA margins of 15% (the goal for 2022 at the recent investor day last month), then EBITDA is around US$300m vs US$170m now.

 

Peers generally trade north of 8x EBITDA, so that leaves an EV of US$2.4bn.

 

The current DSO are at 90 days which is elevated for one off item in particular but management thinks they can get it to 45 days over time. Some peers are that low on DSO but even getting down to 70 days will free up over US$80m in cash. I can easily see with annual free cash flow plus improving working capital that debt will be closer to US$400m from ~US$565m now in 5 years. Also management is keen on buying back stock and there should be enough cash to do that too. If I model them buying 11.1m shares at $10 vs the current price of ~$3, there are 60m shares left outstanding. So an equity value of US$2bn and 60m shares outstanding is over a 10 bagger from here.

 

I usually don't throw numbers like that out there because it sounds ridiculous but that's why I think the risk/reward is good at these prices.

 

I think most investors are waiting for the resolution of the PIK and I think because of the upside that I'm sure Bain can see, they probably want to hold onto the equity. The big risk is that they turn over their shares to the bond holders who then proceed to sell into the market. I just can't see why Bain or the note holders would do that when they could run a strategic process and get a higher price or just wait to see how successful management is with the turnaround. That being said, I am constantly surprised by market participants.

 

Thanks for sharing

[SafetyinNumbers]

I added a touch more ATTO.

 

I think ATTO trades too low based on the fundamentals and it would trade much higher if not for its largest shareholder (Bain) selling a PIK note to fixed income investors including sovereign wealth funds. The note is due in May 2020 but we should find out shortly what comes out of negotiations between Bain and the note holders.

 

Curious what your PT is on this.

 

I think it's more than a 100% upside and potentially a lot more if the new management team is successful in fixing margins.

 

The crazy upside number if they can fix the business and get some revenue growth over 5 years is much bigger.

 

Revenue is around US$1.7bn now and if they can get to US$2bn in 5 years with EBITDA margins of 15% (the goal for 2022 at the recent investor day last month), then EBITDA is around US$300m vs US$170m now.

 

Peers generally trade north of 8x EBITDA, so that leaves an EV of US$2.4bn.

 

The current DSO are at 90 days which is elevated for one off item in particular but management thinks they can get it to 45 days over time. Some peers are that low on DSO but even getting down to 70 days will free up over US$80m in cash. I can easily see with annual free cash flow plus improving working capital that debt will be closer to US$400m from ~US$565m now in 5 years. Also management is keen on buying back stock and there should be enough cash to do that too. If I model them buying 11.1m shares at $10 vs the current price of ~$3, there are 60m shares left outstanding. So an equity value of US$2bn and 60m shares outstanding is over a 10 bagger from here.

 

I usually don't throw numbers like that out there because it sounds ridiculous but that's why I think the risk/reward is good at these prices.

 

I think most investors are waiting for the resolution of the PIK and I think because of the upside that I'm sure Bain can see, they probably want to hold onto the equity. The big risk is that they turn over their shares to the bond holders who then proceed to sell into the market. I just can't see why Bain or the note holders would do that when they could run a strategic process and get a higher price or just wait to see how successful management is with the turnaround. That being said, I am constantly surprised by market participants.

 

Is some maneuvering around in the capital structure really the big risk? What probability is a bankruptcy in the next few years? What effect would a large customer loss have? What kind of currency swing would cause real cash flow problems?

 

Joel Greenblatt always said he bet the most on positions where he felt he could not lose much even in a bad outcome. You might be more savvy with restructuring-type situations, but this is not very asymmetrical from what I see.

 

Telefonica is the big customer and all though there is a revenue guarantee, ATTO has lots of individual contracts with region, business line etc... that they are dealing with. While it might continue to decline marginally over time, I expect the percentage will mostly get smaller because of growth outside of TF.

 

I think the probability of bankruptcy is pretty low. It’s pretty easy to see how accretive ATTO would be to almost any competitor so I think that would be the most likely scenario. The bonds aren’t pointing to financial distress (trading above par) and there is almost no short position despite all of the obvious concerns.

 

Currency swings are a big issue over time given the debt is fixed in USD. They do hedge the debt when it’s issued but that can only do so much. I’m bearish on the USD so I see it as another potential tailwind. From an operational perspective they are somewhat naturally hedged.

 

I could definitely be wrong and the PIK is not the dominant factor here. I’m definitely wrong more than I would like but it’s the most logical thing I can think of. If the stock was at $6 today vs $3 ahead of this PIK announcement, my position would be a lot smaller. After the PIK, I might own more at $6 than I do today, all else being equal.

[Gregmal]

Added a little CTO. Always amusing how the brainiacs at these "institutional" firms can be so stupid. Yea...great time to liquidate your funds position; 3 days before Xmas, during blackout... LOL dopes

[Spekulatius]

Added a little CTO. Always amusing how the brainiacs at these "institutional" firms can be so stupid. Yea...great time to liquidate your funds position; 3 days before Xmas, during blackout... LOL dopes

 

I was looking at this stock for some year end dislocations, but there isn’t much volume. I don’t think their last acquisition indicates that management is selective about where to put their money either. Shopping malls in Jacksonville ?

http://ir.ctlc.com/file/Index?KeyFile=401493134

[Gregmal]

Added a little CTO. Always amusing how the brainiacs at these "institutional" firms can be so stupid. Yea...great time to liquidate your funds position; 3 days before Xmas, during blackout... LOL dopes

 

I was looking at this stock for some year end dislocations, but there isn’t much volume. I don’t think their last acquisition indicates that management is selective about where to put their money either. Shopping malls in Jacksonville ?

http://ir.ctlc.com/file/Index?KeyFile=401493134

 

The main driver right now, as you pointed out, is probably the volume. Any half observant investor sees that, yet Mr. Institution somehow just decided to blow out 250k+ shares in what seems to be a few days...genius. I wanted to double check my cynicism, but a look at the rest of the V3 portfolio was just as baffling and confirmed that these guys just have poor judgment. I am having a hard time reconciling the volumes, so perhaps the company took some of the shares privately, although Im almost positive theyre currently in a blackout, so not sure how that works. But what an idiot. They've been monsters repurchasing shares since Winters left and would have happily taken down those shares if this guy wasn't interested in packing up and going on vacation....I'm all for using 4% debt to buy as many shares $15+ below the low end of NAV.

 

The Jacksonville purchase isn't totally out of nowhere. They already owned several outparcels at St Johns from another deal. Simon owns the other half and its a very upscale retail corridor. I can live with it at a mid-high single digit cap rate and their track record in Florida, which is very good. I'd rather they stick to Florida than try to be heroes buying crap like Party City and Joanne's up in NY and MA...I also think the property serves other purposes; mainly I believe it will be mortgaged in order to retire the convertible note in early March. Getting rid of that poison pill is huge and basically puts the company in play. Either way, at a $280M m/c and a few upcoming catalysts, its one of the few things not nosebleed expensive right now I justify chucking money at a little bit.

[boilermaker75]

Yesterday I wrote some BRKB Dec 27 expiration 225-strike puts; WFC Jan 10 expiration, 53-strike puts; and BK Jan 17 expiration 50-strike puts.