3Q Results

My stock picks got Trumped.

The VT, my Mr. Market proxy for comparison is now up 1.5% vs my weighted picks of 0.7% and unweighted of 2.4%. Over the same time frame, the VTI, my U.S. markets proxy, is up 4.7%. Thankfully, my actual portfolio did not do as badly, and I spent the last couple of weeks shopping for new names. Lessons learned include not putting your small cap speculative positions at the top of your weighting.

3q-results

The 3 Worst Picks – LILA, CSAL, RSYS

LILA declined ~20% on earnings. I got out of the way on the first day, but ouch. As is typical for a John Malone vehicle, management subsequently announced a massive $300m stock repurchase plan on the grounds that the stock was “presently undervalued”. This is a typical Malone play – no dividends, no distributions, just well-timed buybacks. I still like LILA for all the reasons cited in this slide deck and this Seeking Alpha post. However, I am a bit worried about currency risk. A lot of LILA assets are denominated in the Chilean peso, so I bought back in with a more manageable position size.

CSAL declined on earnings and has since rebounded. My sense is that a lot of hot money had been sitting in CSAL, waiting for the REIT funds to step in. The dividend at 9.5% basically covers the downside and I didn’t hear anything on the earnings call to shake that belief. Management did announce a deal for towers in Mexico, Colombia, and Nicaragua. I’m bullish on two of those three countries, but I think investors got spooked post-Trump. The towers themselves are under-tenanted, and while I’m not thrilled about the multiple paid, the 10-day currency stretch helps to remove some of the valuation issues. Ultimately, I think anything that helps CSAL get away from relying solely on WIN is a good thing, and the triple-net REIT structure is highly attractive to me.

I think hedge fund investors in particular might be dominated by fears of a Trumpian calamity and the eventuality of a rate rise in December, so they’d rather close what they consider a speculative short-term position out during a year that has not been kind to them. I’m not sweating it, and I recently increased my position here.

RSYS was meh. They basically reported an in-line quarter with higher revenue potential pushed out a bit into 2017. This is a small bet on a big return and I’m sized accordingly there so quarterly timing is less of a concern. It is my sense that Cisco and the other network equipment providers have been milking network operators for years, and I found this summary of Google’s SDN insightful about the opportunity that RSYS and RDCM have ahead of them.

The 3 Best Picks – LVLT, TMUS, COMM

LVLT got an acquisition offer from CenturyLink for a ~$61/share, a sizeable premium to the $46.92 close on the prior day. CTL management hasn’t a clue, so they are trying to buy one. Unfortunately, CTL management will be around after the merger. Did I mention they have an underfunded pension and a declining top-line? I closed out my position. This one isn’t worth sticking around for.

TMUS announced strong subscriber numbers. I was hoping for a downturn, but I went ahead and opened a position because Trump. Ain’t no way no how someone doesn’t make an offer for TMUS within the next year. I could see cable companies or Sprint making a run eventually. It’s incredibly valuable to all 4 telecom companies to merge. On the cable side, they’re looking at quadplay in Europe, seeing big Euro companies like Altice stepping into the U.S. market, and realizing they ought to leverage their existing wireless options through VZ.

COMM got away from me before I could buy, and I’m just not excited about it at these levels.

FTR is a short 

FTR did about what I expected it to. The CFO was recently replaced but I don’t think he can right this ship. They’re carrying a lot of debt, and really struggling to make this VZ acquisition work. I sold on the earnings print and would short the stock if it gets above $5 again, maybe buy speculatively under $3, but don’t count on seeing your money again before the dividend gets cut. I suppose a reduction in capital gains tax could make them more attractive? There could be some policy help coming, but I’m skeptical of management’s ability to keep the company solvent when subscriber numbers keep heading the wrong way.

I sold SOUHY

It was a small spin-off comodity company which I don’t know much about and was denominated in AUSD. Not worth the time commitment to me.

FB is undervalued relative to the growth

A lot of soul-searching needs to go on in our society with Facebook. At the same time I think FB is undervalued, and I recognize that it is a monopoly. I got out of the way after earnings, and recently bought a small position again. I think FB has serious advertising issues. A lot of marketers can’t prove any sort of ROI from it, unless they work at a big ugly consumer products company. Fundamentally, I think even Mark recognizes this and is working to correct, which is why Facebook is now focusing on improving ad quality and targeting rather than simply expanding the number of ads to users. This is a good thing for investors in the long-run and I think the stock is oversold for the growth profile, even if revenue comes in a touch slower. The big ugly consumer product companies like P&G will still have to invest in Facebook, because nobody ever got fired using social media advertising and nothing sexier has come along yet.

The Trumpconomy Outlook

It’s not all sunshine and roses here. I had positioned myself for a Clinton win. Now a lot of that comes into question and requires re-thinking. From a psychology perspective, I think Trump may have just pushed out the stock rally into mid-2017-2019. Somewhere in the next couple of years things will go south, but simply by surprising everyone (along with some decent economic data) I think DT has changed the prevailing market sentiment. Investors will be rolling into infrastructure plays, and a thousand other beaten down industrial assets which were presumed to be losers under Clinton. Bond investors will likely roll into stocks as well for the foreseeable future, and I don’t expect a cannibalizing effect to materialize. A lot of cash has been sitting on the sidelines. If rates and inflation go up, I think the stock market can keep rallying for 1-3 more years as investors who were in cash worry about inflation. Private wealth types are advising clients not to sell for tax gains this year, because they expect the Trumpublicans will lower the capital gains tax. Tech and anything else with global customers may become more unloved.

These dynamics will take time to fully play out. It takes a while to move big positions around if you are a mutual fund. Like most things Trump touches, I expect a lot of sizzle and no steak. So I plan to keep focused on tech and telecom with a smattering of industrials in the mix, and to be wary of any big market rallies from here.

In the telecom space, I expect Trump’s FCC to be far less aggressive about protecting things like Net Neutrality and yes, mega mergers. I bought TMUS, ELNK, and TWX. I also think the odds have gone up that AMT and CCI get aggressively acquisitive. They will be forced to offset resurgent telecom power once TMUS or Sprint is off the board. The only way to keep leverage over the telecoms will be to consolidate the supply of tower and fiber assets that feed VZ and T. 5G at this point looks like an incremental improvement, not a game changer for telecoms. This makes telecom REITS or companies with significant reitable assets like CSAL, CCOI, SBAC, and ZAYO more attractive.

In tech, the same tailwinds that existed before this election cycle are in place afterwards. A lot of people still don’t have smart phones or internet access. A lot of legacy technology is getting disrupted. The forces at work are so crazy-powerful that companies like Google and Facebook can spend money on all kinds of ridiculous moonshots, and still mint a lot of money on their core businesses. Companies with strong drivers and revenue/FCF growth >20% y/y will likely grow through any bear market too in my view. So I’m fine spreading my bets where the opportunities exist in work-outs, high dividend yielders, small cap value, and small-large cap growth. Lately I have been finding interesting work-outs. Hedge funds have not been able to compress deal spreads the way they used to because of costly failures like Valeant and regulatory fears.

My biggest single-name position is now TWX

TWX – I bought TWX the day the rumor came out that AT&T was looking to buy. Under Clinton this thing was a shoo-in. AT&T has a lot of lobbyists paying Republicans a lot of money. TWX has a lot of media strength to support presidential candidates and donated a lot of money to HRC. Nothing has changed. This deal is going to happen. First off you’ve got precedent with Comcast buying NBC. Secondly, Trump said a lot of inane campaign bull crap which he is now backing away from. Are politicians actors or are actors politicians now? I’m confused. He hasn’t said anything negative about T-TWX since the campaign, despite his supposed thin skin.

TWX’s valuation is at the high end at these levels, but I don’t mind getting into AT&T at a discount, though I may sell after the deal closes. The FCC will take a pound of flesh from AT&T, but I think there is an 80% chance that the deal goes through and my cost basis was $89.78. This is now my biggest position aside from VT. I swung for the fences.

allocation
401K Play Money – Separate from Auto-Investing Accounts

ELNK – I like Windstream and I think this deal goes through as well. I mostly play WIN through CSAL because of the favorable capital structure, but I took a small position here for kicks and am now regretting it because I have to wait for the stupid thing to wind up in mid-2017. Something like a 15-20% upside here if WIN does OK in the interim. I made a little merger-arb spread calculation here.

elnk-win-calc

I think the FCC will have a lot on its plate between the spectrum auction, AT&T-Time Warner, and probably T-Mobile. So I expect this thing won’t close until June.

RAD – An all-cash deal set to close the final month in a lame duck presidency? Yeah sure I’ll take a flyer on this one. It’s a small position, but the annualized return is 86% at this point. Worst case, this admin rejects it and they come right back in February to seek approval again. A lot of the deal-awaiting healthcare stocks are now rallying and I am thinking hard about HUM.

RDCM and RSYS – I bought into RDCM (finally) after earnings. NFV and SDN network plays look interesting right now. AT&T and VZ are clients, and neither firm looks expensive on a P/S basis. RSYS management sounds more enthused than RDCM, but I think part of the earnings call misunderstanding is because they were into the late afternoon hours in Israel and speaking a language that is not native to them. These are small positions with potentially big upsides.

VG – Vonage has strong cash flows and a good-looking strategy to leverage cloud-based telephony. The Nexmo acquisition looks like pretty good timing in hindsight. Another small position with big potential upside. VG quietly hired away someone from Google to be their CTO and I like what he has in the works. I would like to buy TWLO but its crazy expensive right now and there is a big lock-up overhang.

WLDN – an infrastructure play that has performed well since I bought it. A lot of insider ownership and the potential for big government investments intrigued me post-Trump win. See more details and good analysis here.

TMUS – I expect multiple bidders for TMUS within the next year. Deutsche Telekom is playing coy, but if the offer is sweet enough they will sell. There is a huge monopoly incentive for one of the other three carriers to buy TMUS, even if the valuation is in nosebleed range. Cable companies also want to get into the space. Between VZ and AT&T, AT&T has the clearly superior strategy. Ultimately I think TMUS’ pure focus on execution is smarter, but I’ll take the cash from T-TWX since it looks easy at this point, and figure out if I want to hold the AT&T stock then (probably not).

My asset allocation is still leaning outside the market

I expect the market to keep grinding higher until February barring some sort of crisis. I’m interested to see what the Republicans believe will spur the economy at a time of massive economic concentration and monopolistic power not just here in the U.S. but globally. See Samsung and South Korea.

Small business need to be the driver here for this to be a healthy sustained economic rally. If Congress simply rewards its donors we’re in trouble in 1-3 years. I think investors are getting desperate and betting on Trump, which is unfounded from what we know about him.

I’m looking at buying small multi-family real estate outside of the stock market, and am mostly limiting myself to defensive telecom stocks, small speculative positions, and 6-24 month workouts. Every paycheck I max out my 401k contributions. Everything else goes to paying down debt and building up the cash war chest for the next downturn.

It’s worth reiterating that I have removed about 25% of my portfolio into cash since 2015, which is not displayed in the pie chart above. So my cash position is understated in the chart. Let’s all hope January doesn’t go down like this.

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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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