*This is a copy of my letter to investors summarizing the month of January.
December monthly report can be found here.
2012 Return: +58.61%
Portfolio January Performance: +6.61% S&P 500 January Performance: +5.04%
Portfolio YTD Performance: +6.61% S&P 500 YTD Performance: +5.04%
Total Return Since Inception (1/1/12): +70.09%
Portfolio Highlights For January
- UPIP gained 68% during the month of January on an announced deal with Ericcson (ERIC) to essentially enforce their portfolio of over 2,000 patents and share in the profits of the patent enforcement. Essentially, UPIP has been given a portfolio of patents to capitalize on that is in addition to their already extensive portfolio of patents that belonged to the company when it was known as OpenWave. There is certainly a value that can be assigned to this portfolio, as certain patents are assured to bring in licensing revenue over the long-term for UPIP. The market, however, has not been reflecting the difficulty in valuing the portfolio, instead taking the route of being completely dismissive of the company all together. This dismissive attitude was fully reflected in the stock when it was trading at $1.20 to start 2013, valuing the patent portfolio at only $60 million despite assertions from those who had worked on the portfolio in the past that its worth was in the hundreds of millions of dollars.
Ericcson entering the picture is as a big deal as the appreciation in the stock price for the month of January suggests. It certainly caps the downside, making the $120 million market cap that the company started the year at seem ludicrous given the exponentially increased potential for both licensing revenue and potential settlements as a result of enforcing the patents. I am hard pressed to see the company trading anywhere below $1.50 per share (valuing both UPIP and ERIC patent portfolios at only $90 million), clearly defining risk at roughly .50 cents per share from here.
Despite my bullish feelings with respect to UPIP, no additions were made during the month as I am content leaving total long exposure right where it is currently. I will get to that later.
- SPNS gained some well deserved recognition during the month in the form substantial buying in the name. The company share price increased 25% during the month of January on substantially greater volume than average. During January the company announced that they expected $135 million in revenue for 2013, representing a 20% increase versus 2012. They have also announced a new product for the financial services industry named DECISION, which, based on initial indications has received significant interest, creating potential to ramp revenues at a greater pace than expected throughout 2013. Additionally, the company announced a cash dividend to be paid in February of .15 cents per share.
Despite the 25% increase, SPNS remains greatly undervalued versus its peers. Larger competitors in the space (SAP, ORCL, CA) are trading at an average of roughly 4 times sales, which would put SPNS share price well above $10 per share based on the $135 million estimate for revenue in 2013. The spark in gaining further recognition, in the form of increased institutional buying of the stock, should come as a result of dual increasing revenue streams with the successful rollout of DECISION.
No additions were made to SPNS in January. During the month of December the position in the portfolios was increased substantially in anticipation of this run. SPNS is currently a max position in the portfolios.
- MITL is a new position that was taken during the month of January at an average price of 3.60. The position is small to start due to the fact that the company is a bit more leveraged than I typically prefer. However, the value of the company is certainly attractive given the restructuring efforts taken by their new CEO. The basic Cliff Notes version of the full research report is as follows:
- MITL was taken public in an unsuccessful IPO in 2010 at $14 per share
- A year and a half later MITL was trading at $2
- Old CEO fired
- Current CEO Richard McBee takes the helm
- Debt reduced, excess facilities closed, jobs eliminated
- Company restructured into 3 key units with a focus on software initiatives instead of hardware (higher margins, recurring revenue streams, predictability in income)
- Following restructuring and market pummeling MITL is selling at 4 times EV/EBITDA and 3 times free cash
- Margins are increasing as are revenues on a year over year basis versus just a couple years ago where the company was steadily losing market share
- Company is a prime target for acquisition given their reputation for an innovative company within the VOIP space that is dominated by large, cash rich players a la CSCO
- FIGI There will be no research report or details provided here other than the symbol for transparency sake. It is simply too small a company and highly-illiquid. I outlined this buy very briefly on January 14th. Small position.
- The portfolios did increase exposure from 75% long to start January to 85% long to end January. Given the current position of the markets, I cannot see exposure increasing beyond current levels. I will go into details of my market view in the “Looking Ahead” section below.
Portfolio Lowlights For January
- WMIH gave back roughly 5% during the month of January after gaining 75% in December. This should probably be listed as a highlight given how little the stock gave back despite the large gains it witnessed in December. There was nothing new out of the company during January. The selling pressure that WMIH witnessed during the month can be classified as small, retail investor types versus the buying in December that certainly wasn’t anything of the retail variety. It was very low pressure, thin selling for almost the entirety of the month. The stock is essentially forming a wide range around its recent highs on steadily decreasing volume. Fairly standard behavior for a stock that is attempting to digest recent large gains.
There was no activity in WMIH shares for portfolios during the month of January.
- PTGI was sold for a less than one point loss during the first week of January. I continue to like the company from a fundamental standpoint. However, at that time, I wanted to raise a little bit of cash for the portfolios until the market situation lost some of its fuzz.
- PXLW was liquidated during the first half of the month for a .50 cent loss from inception in August. The stock has been an underperformer since initiating the position. With their earnings announcement this past week, sending the stock down 9% to 2.40, it now makes two quarters in a row where the company has disappointed investors. I don’t feel that there is much risk in the stock at these levels. Nor do I feel that there is much potential reward. There are better opportunities for the resources of the portfolios at this point.
- PRXI lost roughly 10% for the month of January. The company released earnings during the month. The primary reason for the selloff in the shares following earnings, from my view, is that the company didn’t mention the sale of the Titanic assets at all during the call. A good deal of investors may be getting impatient waiting for the payoff to come from that deal. This company has never been an earnings story as it is in a low growth business (exhibitions).
PRXI is a small position in the portfolios and will likely remain that way for the foreseeable future due to the difficulty in gauging how long it will take for the value of their Titanic assets to be realized.
Looking Ahead To February
For the first time in quite awhile, we are beginning to see signs of some possible one-sided bullish froth developing in the marketplace. While I don’t believe in simply taking a potpourri of contrary indicators pointing to an excess in bullishness and using this data as the basis for allocation of the portfolios to cash or to be hedged, it is something that does cause a rise in my antennae.
It goes back to a very simple philosophy I have developed with respect to the financial markets after participating in multiple periods of both bullish hysteria and bearish subjugation. That is: The financial markets hate you. Type “the financial markets hate you” into google and a majority of the first page will come up with clips from an article I wrote back in 2011 for The Street (Yahoo) regarding this philosophy. It deserves some thought and discussion.
What does it mean that the financial markets hate you? They are after all oblivious to your existence. Markets have no feelings or emotions that can result in actual hate developing. Absolutely true. However, what can be said is that financial markets are inherently counter-intuitive in nature. The basis of speculation is built on deception.
The deceptive act of waving a map pointing to a land filled with promises of financial security and wealth. The deceptive act of having periods where these promises seem to be getting fulfilled on an increasing basis only to find out that the increase was completely hollow and even fraudulent in nature. The deceptive act of transmitting voluminous amounts of information that do nothing to enhance the investment decision making process, only to confuse it and disfigure it from within.
Few of these deceptive acts are intentional in nature. There is no backroom at Goldman Sachs where a group of crooked men with sharp canes and raspy voices sip scotch while plotting the demise of the individual investor. It makes for vivid thought, but little else. There is, however, an inherent device within the markets that causes a majority of investors to lose money over the long run. That device is counter-intuition and the only act that can combat a counter-intuitive entity is to UNlearn what you think you know as an investor or trader.
The fact of the matter is that at any given moment in the financial markets all of its participants are doing the wrong thing in perfect coordination. Let’s think back to the points in time that have been tremendous opportunities for profit or loss during the past 20 years:
1995 – The internet was just getting its legs under it. Netscape went public in 1995, with a good deal of head scratching and general ignorance as to its significance at the time. Silicon Valley was better known for a place where geeks could go get Thai Food, followed by massages of whatever variety one wished. No thought of significant appreciation in technology. Status quo. The individual investor wasn’t heavily involved, neither was the institutional machine. Not many saw what was coming.
2000 – The internet became known as the greatest invention of the past 100 years. Wall Street responded appropriately by feeding the appetite of this mindset. Trading was the new breathing. Silicon Valley was the destination of Ivy League grads. The markets became an ATM and all you had to do was open up an Etrade account. Everyone was involved, from the institutions down to the smallest investors. Those who sold short the market, in anticipation of the market spewing hate on this carnival of cash proliferation were decapitated without much regard for even cleaning up the mess. It was blind euphoria and the market would have its revenge.
2003 – The internet boom gave way to an internet collapse which gave way to a liquidity boom initiated by Greenspan. An entire generation of market participants lost entire fortunes, homes, cars and savings for a college education that unknown to the parents at that time no longer guaranteed their children a job in 10 years anyways. Sentiment on stocks soured to record lows. Allegations of fraud and an all out witch hunt ensued to punish those who were only serving the market’s greater purpose during such periods: To spew the venom of perceived safety of the markets and potential for unlimited gains into every bank, savings and store of funds available to the average individual so that they will trust their funds in the hands of Wall Street. Individuals swore off investing, instead turning to real estate as a way to secure their future. A secondary boom in stocks was about to begin, this time led by energy and commodities, with technology trailing closely behind. The individual investor was involved, but nowhere near the extent they were only years earlier. The hate of the market was too great for many to overcome.
2008 – The hate that the financial markets had for anything with a heartbeat was about to reach new heights, as it wasn’t happy simply taking a store of wealth in stocks. This time there was a party occurring in real estate. The markets noticed smiles, cups clicking together in praise during fancy dinners and adventurous new sexual positions being attempted in bedrooms around world. It was too much for the markets to bear given their hateful disposition for those who attempt to pick fruit from its tree. They reacted by destroying the store of wealth that much of the world thought was untouchable. And with those losses came the implosion of nearly the entire global banking system. Old money Wall Street institutions Bear Stearns and Lehman Brothers were not spared from this round of historic hate for anything having to with capitalism. The inherent vitriol in the markets stood at the corner of Wall and Broad in a shiny cape and pointy mask, laughing as it took back generations of wealth in a historic display of its propensity to hate. Both individual and institutional investors were gone…for good.
2009 – A great bull market was about to begin, just as the world was seemingly coming to an end. The hate the markets so love to spew was about to take the form of opportunity cost. Hiding money under the mattress, as so many did after the generational carnage that was experienced, had unforetold opportunity costs that are only beginning to be realized today by investors who seem to suddenly be rushing back into the arms of the beast. The markets hate can be shown in both lost opportunity and outright dissolution of capital.
Present Day – Individual and institutional investors have short memories. There seems to be a certain sense of comfort with the market at this present moment that hasn’t been seen in sometime. HOWEVER, allow me to state the following: The level of bullishness at these levels should not be confused with any of the great bull market tops of the past. It is vastly different.
How so? The machine gun malice that was inflicted upon the investor class, both individual and institutional, from 2000 on, with 2008 being the proverbial icing on the cake, will resonate for years to come. What that means for the markets is pullbacks that normally would take a great amount of effort to have investors throw in the towel, by either getting short or going to cash, will take much less effort than usual. A simple 4-5 percent pullback from bull market highs will do the trick.
The pain of loss still resonates deeply in the investor psyche. Barring any severe economic downturn, which given the liquidity efforts of the global central bank cabal seems like a slim possibility, the selling will simply happen too quickly in an effort by investors to avoid the evil nature of the markets.
The greatest cost to investors, therefore, will continue to be opportunity cost, as has been the case since 2009.
The hate that the markets so intently and vividly enjoy inflicting not only comes from outright loss of capital, it also comes from opportunity cost. That opportunity cost eventually gives way to submission by those who can no longer stand watching those around them create wealth while their fears hold them back from keeping up. In a tsunami of acceptance, both individuals and institutions come to the markets at once, abandoning fears of a pullback entirely.
We are far from this stage of the bull market currently. It will be a necessary component before any sustainable top is observed.
With that said, while I am cautious given the near-term return of the investor class, their return does not constitute a bearish opinion that goes beyond a few months at most. A relatively small move to the downside will accomplish the desired result of investors believing that the markets are out for blood…once more.