And the Bubble Goes “POP”!

So I was correct last week in assessing that we were in the twilight period for 3D systems corporation (DDD). I was wrong for not selling then.

I did not realize how quickly the bubble would deflate after it popped. And I have paid for that mistake.

Most of the profits on the trade have been lost in today’s crash. I believe stage 6 (of the stages I outlined here) is now over. I will have to reverse the position to a short as soon as possible, but short-sales have been restricted for the stock until Wednesday morning’s session. At that point, stage 7 will begin. So for the mean time, I will make a hasty exit.

Corning (GLW) Warning

I did not realize the extent of the correlation of Corning’s earnings to the Japanese Yen. For every percentage point the yen decreases in dollar terms, Corning’s earnings for Q4 2012 (will decrease by $6mm, as the CFO stated in the last conference call. This article nicely sums up the situation.

The yen-dollar exchange rate decreased 10% through the fourth quarter, and it has become apparent to the Forex markets that Shinzo Abe will actively push for further devaluation. This means a $60mm maximum impact to Corning’s earnings.

This is a risk I am not willing to take. I want to see how the market reacts to the results, which will be announced on Tuesday. I am willing to sacrifice the profits that might be had if the stock pops on excellent results as a payment for more information on the stock. Selling a significant portion of the position on Monday.

Rapid Repositioning

So I have not followed through on the moves suggested in my previous post; I have done things very differently.

The trading in Activision (ATVI) does not make any sense to me. In the wake of the Newtown shootings, Vice President Joe Biden has been spearheading an effort to reduce gun violence, and a discussion on gun violence in video games is in the agenda. Several media outlets specifically mentioned Call of Duty (Activision’s best selling game) when discussing the story.

This, to me, reads like negative news, which would affect perception negatively, and cause the stock to fall. However, last Friday, when the story was breaking, the stock popped instead.

I cannot find sufficient reason for why the perception would get so positive, save for perhaps the recognition of Call of Duty’s success by its infamy. I have not been enthused with the stock’s performance, and there is no blockbuster video game on the horizon. The two biggest drivers of revenue planned for this year are a Starcraft expansion and continued growth in Skylanders. A quick chart of Google trends confirms the idea that Skylanders was a huge seller this previous holiday season. The Starcraft expansion could be a hit or a miss. It is a huge question mark as to whether the Skylanders earnings boost is enough to counter the lack of other major titles during the holidays and the negative perceptions of gun violence. To avoid the uncertainty, and perhaps out of my own negative bias, I have sold the stock. It will remain to be seen whether this was the right decision or not.

There are many less risky plays. The oil price has resumed the upward climb as global demand revives from its dip. The place to be is, and has been, in international and deepwater projects. I still have no exposure to the emergence of African oil, and the ensuing consumer-products boom, which is unfortunate. I was expecting perception of African investments to grow positive throughout December and January, so I was originally planning on speculating in AFK (a broad Africa index), but the index has not performed well enough to suggest that perception is turning around. I will continue to monitor AFK, and look for more targeted ways of playing the African growth story.

C&J Energy (CJES) is now becoming dangerous. Though it remains VERY undervalued, the perception has gotten stronger against fracking. CJES has returned to the resistance point at $22-23, but I do not think it will break through. The anti-fracking movie “Promised Land” has come out, and though it has not been very successful, it should turn the perception even more negative, and depress the stock price. In addition, natural gas prices have not risen as fast or as far as I would have hoped to use up the spare fracturing fleet supply. The U.S. onshore activity (represented by the rig count) dropped throughout the 4th quarter, so I expect that competition was more fierce than the rest of 2012 for CJES’s fracturing services. So I have sold out a portion of the position.

I am unsure how much should be sold out, because 2013 will likely be a much better year for CJES. The natural gas price will probably continue to slowly rise, and oil and gas companies may begin to spend again on natural gas drilling. In addition, the price of oil is already much higher than it was during the 4th quarter, so demand for U.S. onshore oil will increase.

But the combination of a worsening perception for fracking and weak 4th quarter earnings will drive the stock down, so I must sell some of the position.

I have traded out the CJES shares for an investment in Core Labs (CLB). I respect the management of this company more than any other oil service company for their knowledge of and foresight in their industry. The company shifted to international and deepwater projects several quarters ago, so they are relatively immune to the poor 4th quarter earnings that I expect for most U.S. onshore oil service companies. While the profit margins at CJES have worsened, the profit margins at CLB have widened. CLB has a wide moat around its core analysis business, while CJES has a relatively small moat. CLB trades at $113, $2 less than what I sold it for a year ago, though the earnings have increased by 22.6%. It is one of the few companies I would buy at a P/E to growth ratio above 1 (it currently stands at 1.13), because of its excellent management, high profitability, and relative monopoly in the core analysis business.

I have invested in Corning (GLW), which is in the glass business. The TV industry has been experiencing a cyclical trough period as an after-effect of low employment. As employment picks up across the United States, the down-cycle in TV sales should end. In addition, I believe that new buyers of homes will also be likely to buy a new TV for their home. With the housing industry fully on the rebound, a pickup in the TV industry should be close behind.

LCD TV glass has been the most important driver of GLW’s earnings in the past, so the pickup in the industry should cause the fundamentals and perception to become more positive and lead to a stock price increase. As an added bonus, GLW has a near monopoly on smart phone and tablet glass, a segment which has been continually growing. The earnings for these devices is very small compared to TV glass (because of the size of the devices), but this segment should provide an additional earnings boost on top of the TV rebound.

GLW is currently trading at a cheap 9.23 Price/Earnings ratio. I think this is more than reasonable given the prospect of a TV industry rebound. I have invested a fairly large position (~10% of portfolio).

The speculation in 3D systems corporation (DDD) continues. I only wish I had more on the table. I am wary of adding to the position now, because there is really no telling when it will reverse. I will not be shy in shorting the stock when the reversal comes.

Disclosure: I am long CJES, CLB, GLW, DDD. I may sell shares of CJES in the next 72 hours.

Portfolio Overview

The speculation on 3D Systems Incorporated (DDD) has been paying off in spades since I started it. I forgot to post my more recent article on the stock. It goes a little more in depth into the reasoning behind the conclusion that it is in a reflexive bubble.

But recently, I have noticed the trend in perception has worsened. The DDD articles on Seeking Alpha have gotten more  lukewarm recently (1, 2). Since we have already seen that Seeking Alpha articles have an effect on DDD (the Test phase in early October was sparked by these articles: 1, 2), it is not a stretch to imagine that recent articles may sway the general investor opinion in DDD.

I have not picked up any clear technical signals of a reversal, so this may be tricky. I may have to pay back some of the gains to know whether this is merely a pullback in the uptrend or whether the downtrend has started in earnest. Soros says that in a reflexive bubble there is usually a twilight phase, where people are still playing the game, but no one believes in the long thesis anymore. This may be where we are now…

I slashed my GMCR holdings in half at $41/share. I got a near-100% return so far. It still appears undervalued on a P/E-to-growth basis – the P/E is 17.6 and the growth rate is ~42% year-over-year, giving a .42 PEG. This would suggest another double could be possible if it can keep up a 30%+ growth rate. The public perception of Keurig brewers is still pretty good, and I have seen K-cup levels pretty low in the stores I have visited, though that is a very small sample size. I have seen worrying commercials for plastic generic K-cups that fit the Keurig machines recently, but it is too early to tell whether this will accumulate any substantial momentum with customers.

I also sold off my IMAX calls. I think this momentum will last for a while, but my calls were dated for the end of this month so I had to dump them. This may be a great year for 3D movies because of the many sci-fi genre films scheduled. I got a 73% gain on the position, so, not bad for a few months.

These last few trades have left me with a bit more cash to invest. I am looking at a few ideas:

I am considering a purchase in Intercontinental Exchange (ICE). I believe they got a great price on NYSE (a much-better price than their last minute bid last year), and NYSE throws off so much free cash that ICE will be in a great financial position for share buybacks or future purchases. I will admit I have a bias, I know the business model well, and I like the company. Sprecher seems to have a good eye for getting the right purchases at the right time. Once retail investors start to come back on the market, the core NYSE business will pick up, and once the European crisis is behind us, NYSE’s Liffe business will also pick up, so they got a great asset on the cheap.

I am also considering getting more heavy on my C&J Energy Services (CJES) and Halliburton (HAL) positions. I still believe these companies are best of breed in their sector, and it seems that the perception is starting to get more positive for oil among investors. However, a new movie starring Matt Damon about the environmental dangers of shale exploration has been showing in theaters. It remains to be seen whether this will have a significant impact on the public perception for the sector.

I was too eager in selling off the bulk of my BNCC position. The stock doubled again after I sold off the majority of my stake, and it is still only at 55% of the book value.

I am working on compiling some performance results for last year. It was a good year, but it will be worth it to check exactly how good.