Investment Activity Review-March 2014

After the February blip in the markets as a result of Central Bank tapering leading to hemorrhaging in Emerging Markets, a funny thing happened. The market seemed to have forgotten all that and just continued on its upward trajectory. I decided to use the wave and bank some profits as well as take some pretty aggressive positions.

SOLD Position in McDonalds (Ticker: MCD) for 18.5% gain (ex dividends)
I bought McDonalds in 2012 when the market was getting the worries about the debt ceiling and stocks were taking a hit. As much as everyone yells out loud how much they hate McDonalds, there’s always a line up wherever you go. I think McDonalds, Coke and other fast food names are starting to morph into the Tobacco stocks of the 21st Century. Everyone says they are a plague but they continue to print money and pay a handsome dividend. The stock was getting close to touching my 20% return threshold and I decided that I would bank the profits. If as I believe that stocks will pull back, I wouldn’t have a problem opening in another position.

ADDED to Short Position in S&P 500 via Horizon Betapro ETF (Ticker: HSD)
I’ve commented ad nauseum on our web site about how overpriced stocks are relative to the tepid economic growth that is in effect around the world. Since early in 2013, I’ve been shorting the S&P 500 because of this. It has not been a good trade. During 2013, I reduced my short position by half, even though my loss position was greater than my cut-off loss level of 20%. I still decided to keep a small position because the evidence (record margin debt, growing inflows by retail investors, uber hysterical IPO valuations, and marginal economic growth and financial performance globally) all points to stocks coming back. It hasn’t worked out well. I’ve been having a hard time trying to rationalize this. Should I continue to ride the wave and go long or should I stay with my conviction and not only keep my short position but add to it? At the end of it, I decided that the economic, investment sentiment indicators are pointing to some sort of pull back. I decided to not only to add to my short position, but also to almost double my position. There have been a lot of false starts (Central Bank tapering, Ukraine crisis etc) but nothing of traction. I still believe the next significant stock market event will be downward. With this additional purchase my short position is still under 20% and loss to date is 16% so I am not going all in.

Since writing the above, we have seen the new Fed Reserve Chairman hold court and point blank saying that interest rates could rise within around 6 months. It was a bit of a flip-flop given that only a few weeks ago, she seemed to signal that the program of buying bonds to pump money into the economy while being reduced, might still be in play for awhile or to quote, “considerable time”. So everything is in a bit of flux, except the stock market which continues to set record highs on a daily basis. If Ms. Yellen is playing is straight up, then rates go up and stocks come down.

OPENED Position in NeuLion (Ticker: NLN)
Web 2.0 is very much in play right now with companies like Twitter, Facebook, LinkedIn, and Netflix soaring in value. With respect to Netflix, it has created a great deal of disruption in how we consume traditional media content like TV Shows and movies. Netflix has fostered the phenomena of binge watching, where we can watch an entire season of a program in one shot, at any time and on a variety of hardware. It has changed most media content except one area and that is live sports. Sports content is right now the one element that traditional cable and satellite companies can put their hat on to differentiate themselves. Live sports are also PVR resistant as you are less likely to record it and skip the commercials. As result, it is still hard to watch any of the big professional and college sports without cutting the cord. NeuLion is a company that is making forays into developing technology that can stream live sports.

The company provides delivery, distribution and monetization of live and on-demand content across Internet-connected devices. NeuLion has partnerships with and provides technology and services to over 200 professional and collegiate sports properties and to over 200 television channels from over 40 countries. These include 3 of the big 4 North American sports leagues (NBA, NHL, NFL) as well as specialty sports channels like ESPN. It’s built up a nice portfolio of sporting streams and could be quite appealing to a Google, Facebook, Apple, or Microsoft in the future. It was pretty much under the radar until an article in the Globe and Mail put the stock front and centre. The stock was trading around the $0.50-$0.60 range until the article and then exploded going up 50% in the two subsequent trading days. I managed to get in at $0.75 so right way I was very much in the green. I have never owned a stock that popped so much so fast, so this was new territory for me. I evaluated the position as it was past my 20% threshold and decided to hold on to it as I think there will be some momentum behind the company and it could propel higher. I will admit that emotion was driving some of this decision making. I was thinking wow maybe I can make a real score here. I then had to step back and review some facts before I let the emotion completely blind my thinking. I looked at the numbers and the company had been losing money until 2013 where it generated positive Economic Profit for the first time (Return on Invested Capital was 32% vs a Cost of Capital of around 12-15%). The balance sheet was pretty clean and Goodwill was a small portion of assets. The company appears to be now getting traction and generating meaningful tangible wealth which should feed into the stock price. Make no mistake, this is probably the most speculative position I have in my portfolio and I have to accept straight-up that the stock may nosedive on any weakness. I also looked at the NeuLion position as an opportunity to experiment and see how far my risk tolerance can go.

OPENED Position in General Electric (Ticker: GE)
On the other hand of the investment risk spectrum, we have General Electric. I have always wanted to buy some stock in GE. It is one of the world’s most diverse and profitable industrial companies. The problem with it has been the finance side of the company which almost took GE down during the credit crisis. Because of it, the stock has lagged and been weighed down which is unfortunate because the industrial business has been booming big time. Now GE has signalled that they want to begin a program of divesting the finance arm. It has recently put its consumer lending business on the market and it could at some point sell a portion of the main GE Capital group as well. To me this is a positive game changer moment. With these spinoff’s the focus will return to its core business and could provide some juice to the stock price. It has been trading at a discount to its peers like Siemens and United Technologies. As a long term investment there seems to be a lot of upside. I bought a small position at the $25.20 level and it might go down if my belief the overall market will meaningfully pull back. If it does, I would not hesitate to buy more and average down.