Binary Outcomes, Shadow Contract Swaps, Space CEOs, Cheap VR Play And More

Here’s the transcript from this week’s Trading With Cody Live Q&A Chat.

Q. I am having some difficulty translating your cautionary email, sent out earlier, into an actionable plan that works for me. You write, “I am increasingly getting butterflies in my stomach that we could be facing unseen risks to the economy and stock market. I am beginning to think that something that has been previously brushed off by the market could trigger a market selloff in the near future.” You go on to write that it might be a good time to take risk off the table and trim some of the big winners, and maybe even sell some of the ones that are underperforming. In the past when you have written something this cautionary, there has been a correction of some sort before too long. Do I try and trim some stocks, and if so which ones? Not everyone has a position in all of your big winners so there may be nothing to trim. Some of the big winners may still have some legs, especially as earnings reports will begin soon. It seems to me that it might be a better strategy to trim by hedging the overall market as you have done at times in the past rather than pick and choose which stocks to sell. My questions are: Why do you sometimes recommend market or index hedges and at other times just suggest trimming big winners?. And, what is the reason for your recommendation this week of trimming winners and underperformers and not hedging the overall market?

A. No easy answers and I spend all my days trying to analyze and communicate that analysis to you all. I tend to short/buy puts when I think the market is ready to tank short-term. Right now, as I explained in that email, the outlook is binary — I think the odds of a imminent crash aren’t high enough to risk adding puts and short hedges to my personal account (the hedge fund, by nature, always has more hedges). I don’t have any magic bullet and that’s why I sometimes suggest trimming stocks and getting more defensive when times are amazing. Remember at the bottom last March when all I did was send out Trade Alerts telling you all that I was loading up on our stocks while they were crashing? Well, now all I can do is tell you that I’m now trimming stocks while they are through the roof.

Q. Based on your email yesterday about the future looking cloudy and to make sure we’ve done some trimming on the big wins, do you have a recommendation on what percentage of our holdings should be in cash?

A. Not really. Everybody is different with different goals, risk tolerance, family demands and so on. I’d suggest making sure you have enough cash in your portfolio that if the market drops 20% this year that you won’t be losing sleep.

Q. The magnitude of the amount of shorting of treasury bonds by hedge funds has become worrisome. What effect will this have on our stock portfolios when and if their play becomes a reality. High inflation, stock prices plunging. Is this why you can’t fully sleep at night?

A. If there’s a huge magnitude of hedge funds shorting Treasuries, that would make me think that eventually all those hedge funds will blow themselves up before they ever end up making money on that trade. Hedge fund group think is a problem and hedge funds as an industry have long underperformed other asset classes. I don’t think there’s a problem with too many hedge funds shorting Treasuries though. I do think there is a potential problem of too many hedge funds loading up in shadow contract swaps that allow them to own 10-30% of giant stocks without disclosing it to the SEC or anybody. That won’t end well either if that’s the case. Whenever you see a ton of hedge funds doing the same thing, it almost always ends badly for the hedge funds.

Q. Cody, what odds would you give for China to invade Taiwan within the next 3 years and how would the market react to it. https://www.bloomberg.com/opinion/articles/2021-04-07/china-taiwan-conflict-could-come-sooner-rather-than-later?srnd=premium&sref=uFg28fJr

A. I’d give the odds at just about 0% that China would invade Taiwan, IN THE NEXT THREE MONTHS, at least. Over the next five years, the odds are probably 10-20% that China somehow tries to take over Taiwan.

Q. Regarding the 5 space stocks that Cody wrote about, what are people buying? Vacq and HOL, I have purchased a medium size position. I also started to buy GNPK AND I have 2 times more VACQ than HOL. I will likely buy a smaller position in GNPK. AND my VACQ is about the same as you 2x.

A. I’m still very much buying VACQ on any pullback in the stock. I’ve cooled a bit on HOL and it’s about half the size of my VACQ at this point and I’m not looking to buy more HOL. VACQ, Rocket Lab, is the only company not-called SpaceX that is actively, successfully sending rockets and satellites to space. HOL still has to get there.

Q. Hey Cody, I was having a look at the webcast you sent us featuring the CEOs from our space-revolution stocks. You mentioned that you didn’t like some of their performances, could you elaborate on that and tell us which ones or why?

A. First let me tell you the two CEOs that I thought shined on that panel — the Black Sky (current stock symbol is SFTW) CEO and the Rocketlab CEO (current symbol is VACQ). The two that I thought did poorly were the Astra (current symbol is HOL) and AST Mobile CEOs (symbol is ASTS). I’m actually long some ASTS puts and am trying to trim some of those today to lock in some profits. I’m still holding my HOL but am doing a lot of homework on the executives over there to get a better feel for the company’s prospects.

Q. VACQ that has actual revenues (based on recent launches and commitments for more) has a market cap of $444mm, while SPCE with limited revenues has a market cap of $6.9bn. Why such a huge gap? Is this a good way to compare and to think about this?

A. VACQ’s market cap is not $444 million. It’s more like $6 billion, as I’ve explained whenever I’ve written about it: “Remember, we are investing for the next 10,000 days so I see VACQ as an opportunity for us to get a venture capital type investment at an reasonable valuation of under $6B, or about 30x next year’s sales estimates. And as always, I look to get in ahead of the rest of the world, starting our investments in this new Revolutionary sector before it becomes a multi-trillion dollar market.” You’re looking at the SPAC’s valuation before it merges with RocketLab and not realizing that it will change dramatically when the merger happens and the stock comes public.

Q. Cody, does VACQ replace SPCE as your top non SPACEX play?

A. Hmm, VACQ is certainly my favorite non-SpaceX way to invest in The Space Revolution, but I don’t actually remember ever saying that Virgin Galactic as my favorite non-SpaceX investment in Space. SPCE is fine and I still own it as I have since it was at $8 when I sent out the Trade Alert about it to all of you subscribers two years ago before it rallied all the way to $60 and I sent out a Trade Alert telling you all that I was trimming some.

Q. FB has moved up nicely since you posted that you made it your largest position (in the hedge fund?) at around $250. Do you still rate it a 9 at this level (around $311)? What might be the catalysts to get FB moving up further from this level?

A. FB at $311 is probably closer to a 8 out of 10 than a 9. I don’t know what catalysts will move FB, but the Oculus VR Revolution is happening in front of our faces and the stock is still cheap based on its social media businesses, so does it need a specific “catalyst”?

Q. Doing the chat with Oculus Browser masters on the left side chat in the middle. and Gmail on the right. Not bad Cody.

A. Are you using the Immersed app to do all that? And also, you’re welcome.

Q. I have downloaded Immersed but not started using it, just using the Oculus Browser that is built in with multiple tabs open, all while sitting in the comfort of the “International Space Station”. Ha

A. Amazing.

Q. Have you looked at velo3d?

A. A little bit, and we are looking at it more right now. Let you know if we like what we find.

Q. Are there any smaller companies in the VR revolution? Microsoft certainly hit it big with the Army contract. However it is not a small company.

A. I’m working on every VR stock we can find. Stay tuned.

Q. Cody, is it time to increase our BTC position? As time goes by and I read your posts, I have less and less confidence in the Stock market. WWCD ( what would Cody do?)

A. Haha about the WWCD but let’s not get carried away, eh? I own plenty of Bitcoin personally as I bought some and took some as payment for Trading With Cody back when bitcoin was at $100 in 2013. I also own some bitcoin futures in the hedge fund that I’ve steadily bought since we launched the hedge fund two and a quarter years ago when bitcoin was below $10,000. I’m not terribly bullish near-term about bitcoin but I’ve owned it as a forever-asset since I bought it because as I’ve always explained, bitcoin is the currency that is most likely to replace the US Dollar as the world’s reserve currency in the future.

Q. What do you think about the Coinbase IPO?

A. The Coinbase IPO is the most overhyped IPO since FB came public and subsequently crashed 50%. I’d LOVE to buy some Coinbase, but I do expect there will be a much better price to buy into Coinbase at some point in the next year. Not at its IPO.

Q. Good morning Cody. Based on your analysis yesterday, is it time to buy some QQQ puts? Any other hedges you’re using or recommend?

A. I can think of worse ideas than hedging our many Revolutionary stock winners with some QQQ puts, but I wouldn’t expect that QQQ puts are going to actually help make us money. Maybe just use it as a hedge for the potential downside in the markets. I’m actively shorting crappy EV-related stocks, and crappy old school Space-related stocks to help hedge the hedge fund portfolio too. In my personal account, I just trimmed some longs and raised a little more cash and am not actively shorting things in there.

Q. Appreciate knowing if anyone has seen research analyzing the bear case. I think Cody has called this right in that there’s a lot of Covid vaccine optionality on several continents, while absent that its just a good partner in China, India, Taiwan and Europe, seems a big risky bet for the bears; ~20% of shares are shorted.

A. The bear case on Dynavax is that it might not end up in any meaningful Covid vaccines and that it’s fair value without the Covid vaccine upside is probably about $5 or less (or less than half its current price).

Q. As the cases are spiking again, is it time to increase the stake on WFH stocks like Docu, Zm, Amzn etc?

A. Not necessarily. We’re up 200% in DOCU and ZM since we bought them last March and we’re up 600% in AMZN since we bought it five years ago. I still like all three business models and DOCU/AMZN are probably going to be fine even if/when the pandemic is finally over. I’m sitting tight with each of them for now.

Q. Hey Cody, any thoughts on a QCOM “Feet to the Fire” earnings report?

A. Not really. The company will likely beat and talk about how if they can only get enough chips to meet demand that this year could be huge for 5G.

Q. Are you still invested in SONY?

A. Yes, we first bought it in the teens a few years ago and I bought more back a few months ago in the $50s.

Q. Cody, with respect to all these space SPACs stocks with high reward/risk ratio we are entering: what is the real risk? If we buy e.g. at 11$, all it can go down to is 10$, or can it potentially go down to 0$? What happens if the merger is not accomplished? Will they look for a new merger? Why are they all are valued 10$ when they’re issued? Thx!

A. If the merger doesn’t happen in a SPAC or even if you change your mind about wanting to own the merged companies after they merge to go public, you can theoretically sell your SPAC stock back to the SPAC at $10. The day the SPAC merger happens and the stock starts trading for real, there is no limit to the downside and like every stock you own in your portfolio right now, it can go to $0. SPACs choose what price they value their shares at and they all choose $10 as a standard, but there’s no magical reason to price your SPAC at $10 other than standardization.

Q. Hope week is going good for you. Do you have any recommendations for upcoming possible SPAC merger for GRAB? https://www.barrons.com/articles/asian-ride-sharing-company-grab-reportedly-plans-to-list-in-u-s-via-a-spac-merger-51617819772. It will be good to know your perspective on this. Secondly, any recommendations for Republic? Last time you said you may be coming out with an email for this. Thank you.

A. I’m not keen on investing in ridesharing companies in countries that I can’t visit. On the other hand, yes, I’ll have much more on Republic.co and ideas there in coming days.

Q. About 2 years ago you briefly held a position in COMM. A few months ago you were asked to take another look at COMM. Did you ever do that? What is your opinion now?

A. The reason I bailed on the stock was because it didn’t look like revenues were going to climb despite the growth of their 5G business. Fast-forward and revenues haven’t grown and aren’t supposed to next year either. No thanks.

Q. What’s your take on memory stocks, Mu and LRCX (sells tools to memory companies like MU and SKHynix)? Have the semi stocks played out?

A. Memory companies, though a oligopoly these days, are still too commoditized for me to like them. That said, the drastic shortage of chips throughout every sector, from smartphones to cars to computers, would indicate that the semi cycle is not topped out yet.

Q. What do you think about FSLY? They have almost the best performance in CDM and are now just trying to optimize their interface and user experience.

A. I’ve shorted FSLY off and on in the hedge fund for the last few months though I don’t have any position in it presently. The company isn’t profitable and isn’t going to be profitable any time soon and I would rather own AMZN or MSFT as my way to bet on The Cloud Revolution.

Q. Cody, have you looked at NNOX? It’s a revolutionary technology for MRI and XRAY. The FDA just approved them. Any thoughts?

A. Here’s what I wrote about it when someone asked me about it back in December: “Anyway, advancing X-ray to chips is a good idea at a glance, I suppose: ‘engages in developing and producing X-ray source technology for the medical imaging industry in the United States. It develops novel digital X-ray source, a microelectromechanical system-based semiconductor cathode that achieves electron emission by a non-thermionic low-voltage trigger to nano-scale molybdenum cones.’ Then again, the company’s not hardly got any revenues yet and will hardly have a few million in revenues next year and the stock is worth….wait for it….$2.6 billion?! No thanks for me at this valuation.” The valuation is down to $1.9 billion as the stock has dropped 30% since I wrote that scathing analysis in December and I still think it sounds way overvalued.

Q. Would you give your opinion on NVEI a Canadian company? Thanks.

A. Looks like an interesting financial tech play, but I don’t like to invest in Canadian stocks very often. Trading at 60x next year’s earnings estimates while the topline growth is supposed to slow from 58% this year to 18% next year makes me worried at a glance. I’ll take a deeper look and if I like what I find, I’ll let you guys know.

Okay folks, that’s a wrap! Thank you all and have a great weekend.