Portfolio Update: ANGI Short Back On, Closing out Long HSBC Position

I have decided to close out my long HSBC position after the firm posted terrible earnings this morning. It is becoming clear that the firm’s new compensation structure is not effective. Additionally, I feel that my positions in Banco Santander and J.P. Morgan represent better long-term holdings. I am not unhappy with a relatively flat return over the holding period (3% since an initial position in 2011), but there are certainly lessons to be learned.

Initial Thesis

The initial mid-2011 HSBC thesis revolved around the bank possessing stronger margins and higher ROE than Banco Santander, while at the same time being undervalued to peers. Price/Tangible Book Value was particularly attractive at 1.04. The dividend also paid over 4% at the time. London had a strong reputation as a center for international finance, and HSBC was well-respected within the space. I liked several European banks at the time, and thought investing in both HSBC and Banco Santander would spread the risk of increased regulation between countries. I also liked HSBC for its Asia focus in particular.

What Went Wrong

Regulations imposed on British banks have altered the landscape a bit. To workaround the current compensation rules, HSBC has misaligned employee compensation using stock options. Asian earnings have not grown enough to offset other geographic trends. No catalyst exists on the horizon the drive the stock higher.

The Takeaway 

I failed to evenly split my investment between Banco Santander and HSBC. Had I done so, the gain from SAN would have outweighed the lag from HSBC. As it stands, I put about 2X the investment into HSBC, because I felt that it was a less volatile play. I was right that it was less volatile, but it also under-performed the sector, and the compensation changes have hurt rather than helped. Thankfully, Banco Santander looks to be performing well. As punishment for a bad trading idea, I will be placing the money from the HSBC sale into a passive ETF for the long-term.

ANGI Short Back On as of April 30th

Short interest in ANGI has decreased, while ANGI’s results have been as terrible as always. The song remains the same:

  • Bad Business Model
  • Accruals-driven Earnings/CFO
  • Insiders Selling Out
  • “Independent” Board Members Leasing Buildings to ANGI
  • Massive Deferred Revenue
  • Growing Accounts Receivables w/Inadequate ADA
  • Large Amount of Prepaid Expenses
  • Significant Short Interest
  • Several customer-related lawsuits
  • Marketing Spend per Customer Acquisition > Lifetime Revenue Per Customer
  • Negative Book Value

I am confident this business will fail, it is only a matter of time and will be shorting for as long as I can do so without having to borrow at high rates.

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Author: secondhandstocks

The genesis for this blog stems from a Marine buddy and I came back from Afghanistan with more money than knowledge, and heedlessly tossed our hats into the stock market ring. A few months later, I remember discovering the classic book The Intelligent Investor by Graham and Dodd, and ravenously devouring my first introduction to value investing. That framework - with some generous additions by Seth Klarman, and Joel Greenblatt among others - guides my investment philosophy. I spent five years working in the intelligence field, both in the Marine Corps and then for a government agency after that. I speak Arabic and Pashto, have programming and analysis experience, and enjoy investing in technology companies as a hobby. I also spent a year on Wall Street working on a #1 Ranked Institutional Investor team, before deciding that that the Sell-Side was not for me.

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