Outlook and Ideas

After re-evaluating from a defensive position, I have a few solid gains.

Recent Investments

The majority of my recent gains have come from a large upward move in Penn West Virginia (PVA). This was the undervalued natural gas play I bought earlier in the year. My theory was that natural gas prices were rising, yet natural gas companies had failed to respond in kind, so I expected this to be corrected by the year’s end. As it turns out, the thesis was actually false – natural gas did not remain in an uptrend for long. However, two things added up to make this play successful: 1) I purchased a company trading at a price/book of 0.4, which gave me sufficient margin for error, and 2) the company had recently used its financial position to purchase oily shale acreage in the Eagle Ford.

The oil acreage allowed the company to accumulate significant income, so it is growing its book steadily. Even now, it trades at less than 0.6 price/book, so for the time being, I am leaving the full amount invested. I will likely hold until it reaches a price/book of 0.8.

In addition, I have made a few successful short term bets. I took some modest profits shorting XONE on the way down, but I did not get out in time, and the majority of the profit from the trade was lost. In addition, I took small profits from catching the bottom of the S&P 500 ETF last week. I also entered a trade on the Euro. I had intended to hold this for some time, as I believed the continuation of United States’ QE at the same time that periphery Euro countries pay down their loans would lead to an upward surge in the Euro. However, I do not believe I adequately understand the situation to profit from this, so I took today’s pop as an opportunity to get out with some profits.

New Investments

My largest new position is in Take Two Interactive (TTWO). Though the stock has already had a big run, I believe that the success of Grand Theft Auto V has not been fully accounted for. This is the best selling game of all time, and the stock has not reacted since the game broke all expectations in late September. Further, I have noticed that companies which turn from unprofitable years to profitable ones generally have a large pop on the announcement. I am hoping to take advantage of such a move when Take Two announces its earnings for both this quarter and the subsequent one. In addition, the company has poured significant cash expenditures into both developing the game and marketing it. Now that the game is out, the cash flow situation should change dramatically, with massive cash inflows against much lower expenditures. I have established a position in call options for next March, and I am slowly accumulating a stock position as well.

New Ideas

I keep questioning when the bubble in speculative stocks will collapse. Salesforce (CRM), Workday (WDAY), Tesla (TSLA, of course), 3D Systems (DDD), Stratasys (SSYS), and the like continue higher. The trend has gone too far, and I am at an impasse about what to do. To short would likely be suicide – the market still has legs, and these will run up more than the market. How long until general economic weakness forces a re-evaluation of all of these names? I could attempt to play alongside the market – but I fear I have missed my entry point (last week, when the market bottomed). Thus, I have no clear strategy here.

I am still investigating stocks in other countries. The trend of capital seems to be flowing into the United Kingdom.

The stock that has been on fire in the London Stock Exchange is Ocado (OCDO). It seems to be in the midst of a reflexive boom, but the process may be too far along to begin a speculation. The company does have a truly revolutionary product – they have actually been able to build a working business model on home delivered groceries. As a result, the fundamentals have been improving at the same time that the stock price and perception have been improving. I expect this trend to accelerate. The company is using financing for its growth, turning mostly to the debt markets rather than equity. As a result, it may be an ideal candidate for making a speculation.

As the company is already in a strong uptrend, I am wary of entering, because I may be caught in a correction to the downside. Usually, trends like this are tested by a wave of negative perception. Because the company is rapidly improving fundamentals and the idea does seem to be catching on with the public, I believe it will survive such a test. After surviving a test, the trend should emerge stronger than ever. So I will wait for such a point before considering entering a position.

I am also looking for extremely undervalued cases in European countries, but the search is yielding no strong candidates so far.

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