SIN Picks

JOE Put Symbol Updated

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July 25, 2007 | SIN Picks | Author Asif

The symbol for the $50 Jan 2008 leap puts on home builder St Joe (JOE) has changed from LRXMJ.X to JOEMJ.X and I have updated the model portfolio to reflect this change. This came to my attention when I was looking at the recent price action of St Joe, which has shed almost 25% of its value over the last three months along with the rest of its home builder brethren like Toll Brothers (TOL) and Lennar (LEN). With this recent drop, I was perplexed about why the put options were still showing a loss and that is when I discovered that the symbol had changed. These options are now posting a gain of 37.14% instead of a loss of 18.57%. To learn more about why I chose put options on St Joe, check out my May 2006 blog entry titled Housing Sector in Pain.

After a brief respite, it looks like the subprime mortgage mess is headline news again and Countrywide Financial (CFC) has become the poster child for the sector. Countrywide reported results yesterday with profits declining 33% and the stock dropped 11.4% in sympathy. Rolling our put options into new puts like I suggested in the portfolio update on July 10th would have netted us a very good profit but I hesitated a little too long and can add this trade to my ever growing list of missed opportunities.

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Nautilus Slims Down

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July 17, 2007 | SIN Picks | Author Asif

Nautilus (NLS), the maker of the well-known Bowflex line of fitness products, reported terrible second quarter results last evening with both revenue and earnings coming in below expectation. Barring a one time gain due to a litigation settlement, the company actually lost $9.5 million or 30 cents a share. The bad news did not end there as the company now expects to earn only between 20 to 30 cents in the second half of 2007, less than half what it earned in the second half of 2006 and well below analyst estimates of 74 cents over the same time period.

With housing showing no signs of improvement and the other divisions of Nautilus not picking up the slack from low fitness equipment sales, the outlook for 2008 may not be encouraging either. Four analysts who had ratings of buy to outperform on the stock have now downgraded the stock and while unfortunate, I believe it is best to sell this stock both in the SINLetter model portfolio and my personal portfolio. As long time readers are aware, Nautilus almost made the cut numerous times but I finally pulled the trigger and bought the stock last month after it had dropped a lot. Unfortunately I pulled the trigger a little too soon and now have a loss of roughly 20% to show for it.

As a long-term investor, I ought to stick it out with Nautilus but with the lowered outlook, the stock is expensive even at these levels. The company made 8 cents a share last quarter and 4 cents this quarter. Based on the second half outlook, a price of $10/share and not taking stock buybacks into account, the P/E for 2007 would work out to between 24 and 32. Despite the high dividend yield, I think it is best to sell Nautilus at this point as I believe the stock is either heading lower or is likely to stay flat for the foreseeable future.

I will use the closing price today as the selling price for Nautilus in the SINLetter portfolio.

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Portfolio Updates July 10, 2007

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July 7, 2007 | SIN Picks | Author Asif

With the July 20 expiration date approaching soon for our $40 put options on mortgage lender Countrywide Financial (CFC), I am going to sell them based on the price as of market close today. The options are up a little over 60% as I write this post and while I missed the 188% gains I would have achieved by selling them in April, I am satisfied with a 60% gain in six months. You can read more about why I chose put options on Countrywide in my December 2006 blog entry titled The Effect of Housing Weakness on Mortgage Lenders.

They say that when housing inventory hits about 9 months, the sh*t hits the fan (pardon my French but it was hard to put this any other way). As of May 2007, housing inventory is at 8.9 months and is the biggest inventory overhang since 1992 according to this MarketWatch.com story. Even in the highly desirable part of the San Francisco bay area that I live in, I have noticed condo prices drop more than 5% in a couple of months. Home improvement companies like Home Depot (HD) and home builders like D.R. Horton (DHI) are cutting forecasts and some of them are now posting a loss, trapping the value investors who were attracted to the home builders thanks to their low single digit P/E ratios.

In this environment it may be prudent to continue hedging a long portfolio through selective put options. I may roll some of the proceeds from this sale into put options on Countrywide Financial with a longer expiry date. Another alternative would be put options on Wachovia Bank (WB), which has a lot of exposure to adjustable rate mortgages (ARMs) thanks to its acquisition of mortgage lender Golden West Financial for $25.5 billion near the height of the mortgage bubble. Golden West Financial was a pioneer in ARMs. Put options on a diversified bank like Wachovia may not necessarily be advisable and I want to explore its revenue streams some more before I make a decision.

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WisdomTree Investments AUM Crosses $4 Billion

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June 16, 2007 | SIN Picks | Author Asif

Along with the release (pdf) of its new International Real Estate Fund (DRW) earlier this month, WisdomTree Investments (WSDT.PK) announced that assets under management (AUM) were approximately $4 billion. As you can see from the table below, over the last six months the rate of AUM growth has been about $500 million per month for this company that launched its first set of ETFs exactly one year ago on June 16, 2006.

Date Assets Under Management
June 16, 2006 20 ETFs begin trading
October 13, 2006 $700 million
November 10, 2006 $1 billion
December 22, 2006 $1.5 billion
Late January, 2007 $1.9 billion
February 2007 $2.4 billion
March 2007 $3.1 billion
April 2007 $3.5 billion
May 2007 $4 billion

I was recently interviewed by Dow Jones (DJ) special reporter Mara Lemos Stein for an article she was writing about WisdomTree in the Hedge Fund Trades newsletter. Her well written article titled “Wisdom or Hubris? Listing Promises Insight”, appeared in the June 11, 2007 edition of Hedge Fund Trades and covered almost all the major events surrounding WisdomTree. While I cannot reproduce the entire article here, some key points from the article that I did not cover in my newsletters or blog entries about WisdomTree are given below,

  • In the first quarter of 2007, WisdomTree took in $1.5 billion of assets for a 12.5% market share of the ETF industry according to a April 2007 Morgan Stanley report.
  • Ed Borgato, principal of a hedge fund called Capital Standard LLC that has $50 million under management, finds WisdomTree interesting as “a way to play ETFs’ growth and to invest alongside Steinhardt”. Michael Steinhardt is the Chairman of  WisdomTree and a legendary hedge fund manager who left the business in 1995 to focus on philanthrophy.
  • There have been a series of insider sales at WisdomTree in recent months. Steinhardt sold 1 million shares in March and registered to sell 150,000 shares in late April. COO Bruce Levine, registered to sell 750,000 shares in mid-May.
  • According to a February 2007 article in MarketWatch.com, Steinhardt controls 34.2% of the company. AIG owns 10% after the $3/share sale to AIG that I was not happy about and mentioned in the portfolio performance section of the January 2007 edition of SINLetter. Atlantic-Pacific has a 4% stake and Wharton professor, WisdomTree advisor and author of the book Stocks For The Long Run, Dr. Jeremy Siegel owns 2%.
  • There were 160,000 shares of WisdomTree sold short in May.
  • WisdomTree had a net loss of $19.3 million in full year 2006 and a loss of $6.6 million in the first quarter of 2007.
  • The company plans to list on the Nasdaq towards the end of this year and this might open the investment opportunity to a greater number of investors.
  • Hedge funds are eyeing this company with a market cap of $560 beecause of the possibility of a buyout like the Amvescap buyout of PowerShares for upto $730 million if certain targets are met.
  • As dividends set by companies change, WisdomTree products may require more active involvement by index designers and this might explain the slightly higher expense ratios of WisdomTree ETFs when compared to competitors.

As the article mentioned, I am one of those investors who is expecting strong future cash flows and am willing to ride out the volatility that comes inherent in this stock.

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Portfolio Updates June 14, 2007

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June 14, 2007 | SIN Picks | Author Asif

It appears that our Salesforce.com (CRM) Jun 2007 $40 Put Options were badly timed and have lost most of their value over the last month. As mentioned in the June investment newsletter,

“earnings were actually hurt by the millions of dollars in stocks options they had to expense and the stock dropped more than 5% the following day. However the options did not move much and I made the fatal mistake of holding on to them. The stock then took off on news about a partnership between Google (GOOG) and Salesforce.com, which now appears to be nothing more than hype. It looks like founder and CEO Marc Benioff’s marketing genius also rubs off on the stock of Salesforce.com. At its current price of $47.25, the stock is way too high for our $40 put options to be worth anything and I am glad I only allocated 0.5% of the portfolio to this position”

If you get a chance, check out this very interesting blog post titled Siebel 2.0: The end of Salesforce.com that appears to reflect some of my thoughts about the risks Salesforce.com faces going forward. At any rate, our put options are likely to expire worthless tomorrow and I am going to sell them at the closing price today to register a loss in the portfolio. I also hold these options in my personal portfolio and will suffer the same steep loss.

The symbol for the January 2008 put leaps on the trucking company YRC Worldwide (YRCW) changed from YBQMG.X to YUXMG.X and I have updated the model portfolio to reflect this change. While our put leaps on YRC Worldwide and homebuilder St Joe (JOE) are still in negative territory, I am going to continue holding them to hedge our long portfolio.

The put options on mortgage lender Countrywide Financial (CFC) are once again registering a gain of over 14% after spending some time in negative territory over the last few weeks. Less than three months ago these options were up a whopping 188% and I regret not taking profits like I did when I sold our put options on bankrupt subprime mortgage lender New Century Financial for a gain of  850%. The CEO of Countrywide Financial sold $156.3 million worth of stock over the last year and with the probability of an interest rate cut that could help the housing market appearing bleak, I expect the recent weakness in Countrywide to continue.

Children’s apparel maker Gymboree (GYMB) did take the breather I was expecting and the stock appears to be attractive at these levels. I am purchasing 200 shares of Gymboree for the model portfolio after the close of market today. Fitness equipment and apparel maker Nautilus (NLS) is also looking very attractive at these levels and I am starting a position in Nautilus in both the SINLetter portfolio and my personal portfolio. I am purchasing 500 shares of Nautilus for the model portfolio after the close of market today. You can find my thoughts about Nautilus in the following blog entries,

I am also encouraged by the importance management is giving to the apparel division at Nautilus and the decision to open a Pearl iZUMi store in the Woodburn Company Stores location was a great idea. The Woodburn Company Stores outlet is a popular shopping destination and is located between Portland and Salem, which recently became the second largest city by population in Oregon. I have also noticed better product placement of the Nautilus Bowflex line of home gyms in Costco stores recently.

To finance the purchase of both Gymboree and Nautilus, I am going to sell our position in Intel (INTC) for a profit of over 22% since we added it to our portfolio in July 2006. These changes to the portfolio will be reflected after the close of market today and will be based on the closing price.

Portfolio Updates June 14, 2007

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