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maziume
Articles (24)  | Author's Website |

MaziValue's February Performance

The portfolio's performance and earning catalysts for securities

Portfolio performance

Note: Mazi Ume Capital LLP does not exist right now, but if I do run a hedge fund in the future, that's what it will be called. Mazi Ume Capital LLP is just my personal portfolio for now.

February Performance Excel wksh

Below is a chart from Interactive Brokers' Portfolio Analyst comparing my performance (Consolidated) to the Russell 2000, Standard & Poor's 500 and the Vanguard Total World Stock Index (VT) since inception of the portfolio on Dec. 10, 2015. The performance of the indexes includes dividends.

My portfolio's return (Consolidated) is after interest and fees. Interactive Brokers charges interest when you buy a security in a different currency, and fees are trading fees. My portfolio is most comparable to the Russell 2000 since every stock on the long side (90% of total portfolio) has a <$500 million market cap. Vanguard Total World Stock Index is comparable since I hold some international stocks.

Performance Since Inception

Performance was positive for January. The portfolio rose 4.06% and once again fared better than the indexes. The Dow was the only index that posted a positive return for the month. Virtually all the gains so far since inception have come from the long side of the portfolio. New additions to the portfolio on the long side in February were Gamehost Inc. (TSX:GH)(GHIFF) and Pacific Health Care Orgnization (PFHO). I sold off DX Group after earnings on Feb. 29. The only addition on the short side in February was TripAdvisor (TRIP).

I added some more January '17 CarMax (KMX) put options at 69 cents (March 1); the average cost of those puts is now 84 cents. I also added some January '17 $40 Lululemon (LULU) put options (March 2) at $1.93. Lulu puts make up 1% of the portfolio; CarMax puts make up 1% as well. I will be posting my short thesis for Lululemon later. Also added some more TripAdvisor January '18 puts at $3.90. The average cost of the TripAdvisor put options is $3.92, and it makes up 1% of the portfolio as well.

I will be adding more money to the portfolio so this will change the average cost of each position but not the weighting, since all will get an even increase. Just FYI in case you see the average purchase price on the Performance & Holdings page go up. Performance is time-weighted, so it should not change, and luckily for me, Interactive Brokers does all the hard work.

Individual performance

Long

Long February

Short

Short February

*Individual performance for the shorts are as of my purchase dates and not as of February. I will track them on a month-to-month basis like the longs next month.

Remember, the shorts make up just 10% of the portfolio. They are executed with put options and will be volatile. They'll protect the portfolio in a down market, however. I short because I believe a stock is going to fall and not just to hedge. So the put portfolio should still do well in a rising market.

The best performer for the month of February was Game Digital PLC (GMD.L). Remember, I held 40% cash through February so the large gains on the securities did not fully translate to full performance. Also, the put options make up a small percentage of the portfolio. Anyone interested in the security weighting can see them on the Performance & Holdings page. There was also the magicJack (CALL) mistake that cost the portfolio 0.5% of performance for the month of February. I sold off DX Group, my largest holding, in February and also purchased the aforementioned TripAdvisor and Lululemon puts. I now hold 50% cash going into March.

Updates on positions

Longs

Christopher & Banks Corporation (CBK)

Christopher & Banks reports earnings later this month. The strong dollar is going to be a headwind in the fourth quarter earnings report in March. It is not likely to be stellar. Nonetheless, the stock is still extremely cheap. We need to keep an eye on the inventory levels. Management did a good job of deleveraging last quarter so that should help aid performance. If we see more deleveraging this quarter, then the next quarter should be stellar.

Tilly's Inc. (NYSE:TLYS)

Earnings report is coming in March. Tilly's store count is still a valid concern, and that is the number to watch in the March Earnings report. If the new CEO does not follow through on his word to at least pause the store count growth, I'm selling. Store count growth is extremely important because asset turns have been falling, and if they keep falling losses will follow. Also, they carry a large cash balance. The fourth quarter is also usually the largest quarter. I'm hoping they announce some sort of repurchase program or dividend payout.

DX Group (DX.L)

I sold off DX Group on Feb. 29. It was a disaster, but I got out with my shirt still on and a 7% total gain. Read my feedback on it here.

Game Digital PLC

As I mentioned in last month's report, Game Digital reported earnings. The report was good, but markets were in turmoil, and the stock declined. It was the best performer for February, however.

Reitmans Canada Ltd (RET.A) (RTMAF)

Reitmans paid a 1% dividend early in January. Management also announced a new cost-cutting strategy going forward. Oil looked a bit stabilized in February, and the Canadian dollar has gained on the U.S. dollar. If this continues, then this will be a tailwind for the company provided that it still hedges only 60% of its inventories, which is purchased in U.S. dollars.

A stronger Canadian dollar appreciating against the U.S. dollar will make Reitmans a cash cow like we saw in the later part of last decade. So that's what we need to look for in earnings. The hedging program will be the difference between this company being worth Canadian dollars $8 per share or $16 to $20.

Has oil bottomed? I hope so. Deleveraging will have to come from the highest cost producers. This doesn't have to be all shale producers, as leverage plays add to the cost of production in a down market. Reitmans was the second-largest holding in February just behind DX Group and is now my largest holding (I sold off DX) at 13% of my portfolio going into march. If we have any pullbacks on Crude, I'm going to pick up more shares. You can read more about Reitmans here.

Gamehost Inc.

Gamehost's performance will be dependent on Alberta's economy, which should recover with Crude oil. There's no real catalyst here, but a 10% dividend is nice to have while we wait.

Pacific Health Care Orginization

PFHO trades below its liquidation value and is still net income positive. The company paid a special dividend last year, so let's hope for another one. Part of the reason why it trades at such a discount is because of the uncertainty surrounding the company's clients. Under all conservative assumptions the company is easily worth at least 50% more. You can read more about that here.

Shorts

Adobe Systems (NASDAQ:ADBE)

We need to watch the gross and operating margins. The premise of my Adobe short is based on the company's acquisitions. The switch from licensing to subscription model should have pushed up gross margins – it didn't. Gross margins have been falling instead. The net income increase in the third and fourth quarters was virtually cost cutting.

Although there may still be a little room for cost cutting based on historical standards, they can't do that forever. If these gross margins do not improve substantially in the first and second quarters, then Adobe will remain a short. The puts go out to January 2018 so even if they are able to cut costs in fiscal year 2016, they won't be able to do so in '17. Anyone interested in reading my full thesis can do so here.

TripAdvisor

This one is a disaster waiting to happen. The company's fourth quarter earnings report validated my short thesis; costs are still growing faster than expenses, but Wall Street is fast asleep at the wheel. You can read my update on the earnings here.

CarMax

Recovery rates, inventory levels and delinquency rates are the numbers to watch for CarMax's earnings. Given the volatility we have seen because of Crude oil, lenders are going to start cleaning up their loan books; it will start with the auto loan subprime borrowers.

CarMax's business is fully dependent on outside capital. If lenders are recovering less for each defaulting borrower, and if the number of defaults are rising, lenders are going to start exiting the auto loan market. Also, CarMax's ballooning inventory levels don't help its case. A record number of cars were sold last year, and 2014 was also the third highest in 15 years. All these cars are going to come into the market, and this will deflate the values of CarMax's inventories even further.

Outlook

As I mentioned earlier, I am only 50% invested right now, so I expect to underperform the markets in March since my priority will be adding more shorts. Hopefully, we come back with a vengeance in April. I'm going to be posting the Lululemon short thesis; I also found a fairly attractive long candidate that I should have up by the weekend. The goal for March is to add three longs and three shorts if possible. I want to get the shorts in before the next volatility rout since I execute them with put options.

Beating the indexes by a wide margin is great, but I ask that you do not compound the previous 2½ months' performance out to the future. As you know, past performance is not indicative of future results, but my priority is to deliver decent returns over the long run.

For anyone who's new, if you're interested in duplicating my performance, go to the home page of my website, mazivalue.com, and put your email in the subscription box. You'll receive an email whenever I add or trim a security in the portfolio. I have the weighting of each holding on my home page, and you'll get updates like these every month. My recommendation is that if you do chose to do what I'm doing, then you should incorporate the entire portfolio, including the put/short portfolio. I run it this way for a reason. You're also welcome to shoot an email with any questions. It's all free.

About the author:

maziume
I run an investing blog at mazivalue.com. Follow me on twitter @maziume

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