Portfolio Update Heading into 3Q

A few months ago I found a position outside of equity research at a smaller, scrappier tech firm/exchange based in my home town. The downside(?) is no more NYC. I’m happy to have had the opportunity to do things like eat dinner with the CEOs and CFOs of Fortune 100 companies, but I found a lot of the work to be mundane (making PowerPoints and writing big reports). The upside is I can post about what I’m buying and selling again. Since my last investment post I added a LOT of new names. One of my big takeaways from my former boss was to create the following Excel sheet and to update it between quarters:

10142016

This super-simple chart lists my currently holdings and prospects. It also does something that I found extremely helpful as I think about where to allocate cash.

  1. Quantify your confidence
  2. Measure your accuracy
  3. Adjust to suite

Onto what I’ve been up to. My experience at a bulge bracket covering telecom and cable companies has heavily influenced my strategy and investments. I prefer to invest where I have some degree of industry knowledge, which used to be only tech names, but now includes telecom and cable as well.

My strategy is to buy and hold some long names for 3-10 years (depending on my outlook), while also flipping excess cash in and out of stocks in less than 1 year holding periods for special situations. Since my last post I bought and sold three names: AMZN, ESRX and DRII.

1021-portfolio-allocation

AMZN worked out well. Investors started dropping Amazon at the start of 2016, and I was lucky to buy at $550. I still feel the valuation is pricing in a monopoly (which is far from guaranteed), so I flipped the stock at $670 after earnings. I don’t regret selling at this point even though the stock has continued to rally. While I fully appreciate the cloud thesis, I can’t help but wonder when politics becomes a problem. DRII was a wild ride, and I chickened out right before a much-anticipated acquisition of DRII was announced, and only broke even…annoying. ESRX went better. I bought during the big downturn in Feb/March around $68 and sold in June after the stock had rallied a bit to $74 later in the spring.

I also exited some legacy positions that I had been holding onto without truly understanding. SAN, BP, and Care Service Co all met their makers. While I am OK investing in special situations, I am no expert on consumer banking, integrated oil & gas, or elderly care, so I’ll leave it to them. All of these investments were down 15-50%, and just weren’t worth the aggravation of holding.

Of the names I have added GOOGL, MSFT, PYPL, INTC, and SWHC are up 9.7%, 11.6%, 23.6%, 16.7% and 17.0% respectively. Out of the rest: FB, DVMT, LVLT, RSYS, CHTR, CSAL, LILA, and UNH are all flat since purchasing over the past 2 months. FTR is down 7% (unsurprising because it’s FTR and swings wildly), and if earnings disappoint I plan to get out of the way. My new job won’t allow me to short, but the perfect way to play this stock would be to short CTL in conjunction with a long FTR position.

Some explanation for my recent picks:

DVMT – A short-term play on Dell value arbitrage. See here.

LILA – Primarily Chilean cable assets owned by John Malone. See looong slideshow here.

CSAL – A fiber asset REIT spinout which has performed massively over the past year. The dividend should end up around 4-6% to match other REITS, instead of the ~8% it’s trading at now. Stock could go to $35-40.

CHTR – The new combined TWC-CHTR entity should start kicking off a lot of cash flow by next year. No dividend, so lower interest rate risk compared to VZ or T.

SWHC – Easy political trade. Trump wants to shoot someone/anyone. HRC wants to tighten gun control and is also a war hawk. Both should be good for the stock, which incidentally has a pretty darn good CEO.

LNG – LNG exports set to rise over the long-term. New CEO is solid. Bought it at $39, around the price the new CEO has paid.

FTR – Dividend at 10% is crazy cheap vs peers CTL and WIN around 7-8%. Despite crappier management, a small position is warranted.

MSFT – Set to benefit from massive investments in cloud by Fortune 500 CIOs. AWS/MSFT/Google should all benefit from this trend.

GOOGL – I’m a bit worried about a lack of direction, but the fundamental business is a cash machine.

LVLT – Fiber infrastructure play, probably ends up getting bought by AMT or maybe SBAC at some point. Too cheap at current levels to ignore.

RSYS – Sells NFV networking solutions to the major telecom giants. Recent contract wins should drive the stock higher. See analysis here.

UNH – Out of my wheelhouse, but the stock seemed cheap, healthcare costs clearly aren’t going down for consumers, and UNH is performing well post-earnings.

INTC – I think the bull case on INTC is overrated, but I also bought it cheap at $30. For now, I think it is a hold, but it is also possible that recent management guidance is just sandbagging.

So far I’ve been wrong on INTC and UNH, but hey that’s why I’m implementing this new process. I believe that Mark Zuckerberg is a pretty talented guy, and he has a solid monopoly on personal interaction. Ironically I have been on Facebook since 2004, but avoided the stock until recently. VR may never take off, but I’m not worried about it, it’s a very small part of the business. GOOGL should be solid, and CSAL I think has a lot more upside if the dividend eventually gets to the level of peers.

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HRC will win, but thanks to identity politics the next 4 years will be largely status quo gridlock.

In early September of 2008, I predicted that Barack Obama would defeat John McCain. I have to apologize for being lazy this time around and not posting this when the election was decided in January, when the Republican Party pivoted from a white bread conservative party to all out nativism. Not every pivot is good people!

Why will Hillary win? Aside from Donald Trump being… I can’t even think of a worse enough insult here…. Donald Trump? In a single word, data. The same DNC political stats machines that won it for Obama are winning it #withher. This is all well and good, and it highlights just how behind the times the Republican base is, because they clearly seem to want some sort of martini drinking, Sinatra crooning, 1950s throwback.

It wasn’t a clean campaign on either side, divided crudely along race and class lines. A struggling Hillary had to fallback on getting out the female vote, on the basis of both voters and Hillary having the same lady-parts. That’s a troubling continuation of the racially influenced Obama campaign, which boosted turnout among African American voters due to his race. Did everyone vote strictly on racial lines? No of course not. Did some people? Yes. At the very least, identifying physically with their candidate (or not) was a factor, and it’s why I think we’re going to continue to see political gridlock. When I ask a Hillary supporter why she’s going to vote for her, and the answer is “Because she’s a woman”, I can’t help but feel a bit appalled.

As a white man, people would be aghast if I told them I were voting for candidate X because he is also a white man. They would be enraged, they would push back. But that is EXACTLY what some liberals are saying should be done with Hillary Clinton this cycle. Don’t get me wrong, there’s certainly value in having diverse viewpoints, but perhaps we should look a little deeper than skin color or gender to build a policy platform? Simply pushing the agenda of people who share the same genetics as you seems…. bigoted? People can change their political affiliations. Ideas can evolve. Genetics are largely what you get stuck with, and rallying your base along those lines only evokes a sense that the other side can never belong.

White nativism won’t be going away, because poor whites will feel under siege after this election cycle. They have lost out economically over the past decade to globalization, and what is immigration if not a billboard style reminder of globalization? The rural and suburban areas in which poor whites live have been largely left behind by the elites on both sides. They have witnessed a whole bevy of race and gender-based policies rolled out to encourage equality for women and minorities in the workplace and in school, which tend to favor races rather than poverty. Identity politics doesn’t thrill them and why should it when they are the only class+race of people that can be openly ridiculed, called deplorable for their beliefs however misguided, and then ignored for 4 years?

So the Republican Party will likely remain obstructionist. One representative has already proposed re-re-re-visiting the email scandal after January 1st. Seriously?

The two parties are morphing in weird and wildly unpredictable ways, if only there was a forum for new ideas that wasn’t restricted by the two incumbents.