Snapchat, Subsidies, Small caps, Steel, Solar (and Herbalife)
Here’s the second half of this week’s Trading With Cody Conference Call Q&A.
Q. Are you still holding onto the $IWM puts we bought?
A. I think I am short a little bit of the $IWM ETF out right and I also bought some puts on it. The puts are dated out to August. They are a hedge. We own a few $IWM puts and we are short a little of $IWM. I’m not covering it. The small cap stocks and IWM has actually been strong for the last couple of days, it’s up 3% in the last two days. But it’s actually just barely up from where we initially shorted it, up less than 1%. I am down on the puts obviously because of time slippage and erosion. But again, they are actually a hedge. You guys who have been around have seen a few times over the years where I put on a hedge like that and it doesn’t work out. I’ll just sort of let it stick out there and if we get a 10% crash or there is some Black Swan, I’ve got a little bit of the hedge for the next 70-90 days if it is out to August. That’s fine. I’ll just let them sit there and if they go to zero..ahh, well. I’ve mentioned to you guys before that one of my best hedge fund mentors used to say: “Confucius say, ‘May you always lose money on your hedges.’ Confucius say, ‘Man who stand on toilet, high on pot.'”
My hedge fund buddy didn’t actually say that last one. He would say that if you are losing money on your hedges then theoretically that means your other main positions that are not hedges, the ones you are actually betting on getting alpha from, gains from, outperform the market with, those ones should ultimately be doing better. I’ll stick with the $IWM puts for now.
Q. Instead of options, why not buy $SNAP outright? Why did you buy the calls the other day.
A. It was a unique set up. The call, I thought I mentioned in the write up, that part of the reason was that the call options looked relatively cheap to me. This was a company that just came public and is either going to hit $15 or $25 at some point in the next 30-60 days. It is going to hit $30 or $10 at some point in the next year and half, I would guess. That is really what I would expect for this thing. It is really going to work out or not going to work out, so I would expect options over the next 90 days or 6 months to have a premium in them. I would have to see $SNAP rally 15-20% in the next 90 days for a slightly out of the money call option in a stock like that to break even. Instead, it was like 8%, like 10% that $SNAP was going to have to rally by August, 100 days out or 120 days out, I don’t know off the top of my head how many days that is. But, it is long enough I’ve got at least one earnings report coming out May 10th and another 90 days out from that, which does put us in August, so I’ll have two earnings on the August ones and one more out to October, so I might have 3 earnings reports before those call options expire and they just looked cheap enough that I was able to get some leverage on that $SNAP position without putting very much capital on it.
Likewise, it was unique, because I don’t necessarily believe in $SNAP, the business. I don’t believe in $SNAP’s management yet. Whereas with $FB, you guys remember when it went down to $25, I said you guys, “we got it.” I see the model. Here’s the runway. Here’s how we get to them earning $20 billion in revenue in 3 years or whatever I wrote at the time and explained exactly how it all laid out. I don’t have that vision and that clarity for $SNAP, so I didn’t want to invest in it quite yet. I don’t want to invest in the stock as a Revolution Investment for the portfolio, but I do think because of it coming public and not having grown users the last 90 days before it came public huge. I think we’ve got an opportunity that Wall Street is underestimating how fast it is growing. I think Wall Street really cares how fast user growth is at $SNAP and that is going to be the single most looked at metric when it reports because it is not profitable yet. They are certainly going to look at monetization. They are going to want to see revenue growth. They are going to want to see a lot of things in that report, but if the user growth, and the analysts right now are expecting user growth of 5-6% with 8 or maybe 9 million users added the last 90 days for $SNAP. I think it is going to be 15-20, maybe 25, million. I don’t want to get outlandish. I think the growth will be a lot faster than expected for the last 90 days though. If that happens, I think that the stock will pop to $25. If it is 20 million-25 million, the stock could go to $28-$30.
That being said, I am worried I am picking up pennies in front of a steam roller. If it is not a fundamental great company, what am I doing investing in it at all, even for a trade? It is a risk trade. The reason I used options was just sort of a confluence of factors that came together that made call options in $SNAP look like a good opportunity. Maybe even the put options are even a good play? I do think the numbers are going to be good, so I am betting on the upside. It is probably going to be a binary outcome. They are going to be up big or down big after the next report.
Q. Any thoughts on the $HLF upgrade? Time to short more or time to close our short on $HLF?
A. The upgrade this morning on $HLF sort of blew my mind. And, no, it doesn’t want to make me want to cover. If anything, it does make me want to short more. Here is the headline for the guy’s thesis on it: “Analyst on Herbalife says: Has any company stood up so well to so concentrated an assault?” The analyst based his upgrade on the idea that if $HLF hasn’t collapsed and still has profitability and a strong balance sheet at this moment after they have sustained Ackman’s attack and settling with the FTC and having to change their entire business model, that it must be okay. But, as you guys know, I have been saying “It’s going to take a couple of quarters but I think these guys are in trouble eventually” They are not going to throw the kitchen sink out there the first quarter or two, even if the fundamentals are turning sour. Each earnings report has runway from the past and there are gray areas where you can recognize revenues and earnings and not recognize expenses yet and all that stuff. I am not saying that $HLF is doing anything illegal with their balance sheets or their reports or anything like that. I don’t think that is actually the case. I just don’t think they realize or admit to themselves/investors just how badly their business has been deteriorating and eroding. I could certainly be wrong and as you guys know, I’ll cover that short if I end up deciding I am wrong, But, I don’t think the fundamentals support their business. I don’t think they are going to be around in five years, frankly. We’ll see.
Q. Any thoughts on United States Steel Corporation ($X)? Specifically put options.
A. If anything, I think US Steal $X is headed back to $15 at some point. It was probably a no-brainer short. I mean obviously, hindsight is 20-20, but when it hit $40 a few weeks ago, mid-February, on euphoria about Trump and all of his “cronies” (I used to use that word with Obama’s administrative bureaucratic dudes too using the revolving door in and out of government and regulatory positions back to giant corporations who pay him millions). You know, you have all of these guys that are actively invested in $X or steel companies that are on his advisory board, like Carl Icahn or Wilber Ross, billionaire guys who end up owning a bunch of different sectors…the point being, $X has gone up a bunch on hopes that Trump is going to be a savior for the US steel industry and crack down on China specifically dumping all kinds of steel across the globe. China certainly subsidizes their steel companies and you saw today that Trump is also proposing to put a big tariff on certain lumber out of Canada because the provinces in Canada subsidize the lumber companies allowing them to cut the timber for below market costs.
I always step back and think when we talk about subsidizing industries that we are giving right now several trillion dollars to the giant banks in the United States that are out there competing with Chinese banks, competing against European banks, competing against Canadian banks. The subsidies in our banking industry are so big that I wonder why doesn’t Canada fight back there. Like, “Look we are not going to let you bank in our country anymore.” If you are going to worry about trying to compete against the industries we are subsidizing, we are not going to let you come in here and let you compete against the industries we are not subsidizing. The very fact that we are discussing tariffs as the end-all-be-all as the catalysts for the $X stock sort of underscores why I say don’t even mess with it. Even if you can game what these outcomes and these cronies and the Republican and the Democrat and what Canada and China and all these guys who are not running pure businesses by any stretch of the imagination in any kind of way that I can fundamentally analyze. If your entire business model depends on global trade agreements and whether are not you are protected enough to make money in those world trade agreements…that sounds like something I don’t want to mess with. I run for the hills just on that alone. I don’t know that I would buy puts on $X either. I don’t know if I could game it. Maybe they do get a bunch of protections. Maybe the Canadian lumber tariff is just the start of all kind of tariffs that the United States Republican/Democrat crony dudes for Trump are going to put through and maybe $X goes to $50 because of it. I am not playing that game.
Q. I hope you and the family are well. I want to ask you to address our solar holdings. I bought $SEDG (about a half my normal position in stocks) and SEDG (about 20% of a full position) along with you. $SEDG is down significantly and neither has shown much sign of life. Curious where you stand on these two at this point. Thanks!
A. Thanks for comment on the family. They are well. $SEDG has actually been pretty good lately. The stock has been acting pretty good. Look, I still own $SEDG. It is up from where we bought it. I think it could hit $25 or $30. Robert Marcin talked about it yesterday and he also mentioned it could hit $25-$30. It’s a cheap stock. I believe in solar and I think it is a nice place to grow because of its technology edge. $FSLR is the bigger play, maybe “safer” play. It has a great balance sheet. Great contacts. Yes, our solar stocks have not done as good as some of our other stocks and the market in general, in $FSLR’s case. I will tell you a story, as I was getting an Uber ride to the airport on my trip back from LA, a very nice immigrant from India, probably a 30 year-old guy, was driving me. We were talking about stocks and somehow got on the topic of solar. He was explaining how he used to make a $1000 to $2000 a day, every day, day trading. I said “what stocks were you day trading?” He said, “Just one. Just one. And, it was great until it didn’t work anymore. I used to do $25,000/day and I could make $2000 every day. But, the day I moved it up to $100,000 I was risking and borrowing a bunch of money on credit cards, the stock collapsed.” I said, “What was the stock?” $SUNE. You guys have seen me write about it for years saying to stay away from it because of the balance sheet. If you want to invest in solar, go to $FSLR and sell $SUNE. I just felt terrible for that guy. As it turned out, he said he has paid back $70,000 out of the $100,000 he borrowed and he is trying to get the last $30,000 back by driving an Uber part time and working another job full time. And, he asked me if I thought $SUNE would ever come back. I said, “It filed for bankruptcy, didn’t it?”. He said “yes.”. I wanted to tell him the fact that you are asking some random dude in the back of your Uber car for stock advice tells you why you shouldn’t be trading stocks. But, I didn’t say that. I just said “No, probably not because the debt holders will end up holding all of the equity.” Sad story. Stick with $FSLR if you just want one solar stock. $SEDG is a riskier play, but probably has a little more upside over the next two to three years if it works.
Thanks guys. I am heading to Boston tonight and be back Sunday.
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