A quick look at the trades that were made last month:
Bought Oracle ( ORCL ) at $31.47
The latest company earnings were pretty disappointing to the short term investors and the market took the stock down just over 10%. When you look past a “poor” 3 months, the company is still generating ridiculous cash flows and economic profit. It has very little debt and it is still the dominant database/enterprise tech company on the planet. Back-end databases and systems are not exciting as iPhones or iPads but they are still the nuts and bolts of our information society. Even before the drop, the stock was still selling at a discount and so the opportunity to buy it on sale was hard to pass up.
Added to S&P500 Short Position
Given the large amount of enthusiasm for stocks and huge run-up in prices in March including the 10 straight days of positive days combined with investor sentiment that has been apathetic towards risk along with Federal Reserve that shows no signs of stopping the printing presses, the spider-sense usually tells us these times of extreme exuberance are ripe for taking the other side of the trade. So as we continue to buy well-run companies we think are still trading at a discount, weâ€™ve also got one eye ready to cash in when the central bank game of musical chairs stops. Even if the market does correct, we would be happy to add to our positions of the companies we own on the cheap because we like the businesses and their capability to generate long-term excess returns on capital. In these types of purchases, we are looking for 10 percent upside return, so it is a position we may not stay with very long.
Sold to US$ Short Position (via HDD)
The way this should normally play out is when a central bank prints more money, it should create inflationary pressures which would devalue a local currency. A cheaper currency makes a country’s exports cheaper which should increase the profits for local companies and stimulate the economy. So far the Fed Reserve and their quantitative easing initiative(s) has made a slight dent in economic growth, mainly because companies have preferred to hoard cash instead of investing it. In addition, recent external factors in Europe (i.e. Cyprus) have made the U.S. a safe haven for investors, which has strengthened the US$. The only thing that has improved has been stock prices. We decided to open a short position on the US$ only to hedge off some currency exposure in our US$ based assets which have made up a greater proportion of our portfolios, so it was more about managing risk in the assets we owned and less about profiting from a weak Greenback. At this point there seemed to be very little indication the dollar is going to follow conventional wisdom so we decided to take off the hedges.
Bought FedEx at $96.94
FedEx is a nice proxy for the health of the global economy and classic cyclical stock. When the economy is good, they should be shipping more packages. When it is bad then their volumes will fall. FedEx’s company is seeing that customers appear to be shipping less overnight packages (which are higher margin) and instead are willing to stretch out their delivery times and use cheaper delivery plans (lower margins). They are willing to sacrifice immediacy right now. Consequently, their customers are also making more use of ground shipping which has been solid. There are also many indications that the economy is seizing up again, especially in Europe and China which might take the stock down even further. It is at these times, where stocks like FedEx become good value plays. Eventually the economy will turn around and FedEx will lead the way. The company despite this is still generating decent returns on invested capital, has a very strong balance sheet with very low debt, and is out of favour by the market. There appears to be some upside on the stock. We bought a small position and will add if the price falls further and if economic data continues to point to weakness.