On November 1st, 2019, the DYME3Y Investment Club will officially launch. The full name of the Investment Club is “Double Your Money Every 3 Years” – and this is the mandate of the club. Investors will contribute their hard-earned money and the minimum goal will be to double your money. And this is whether markets are up, down, or go sideways: This is about achieving pure alpha.
To achieve this return, annual returns must be slightly north of 25%. And to achieve 25%, it will be necessary to have concentrated portfolios that employ leverage which means that these projected above-average returns will require above-average risk. We want anyone who goes into this to have their eyes wide open about the potential downside.
Moreover, there will be zero liquidity until the end of the three-years. Assuming that everything works out and the returns are achieved, there will be a new Investment Club that will launch November 1st, 2022. It should not be considered a tax-efficient investment vehicle: There will no cash distributions until October 31st, 2022 while if everything works out, there should be significant realized capital gains each year.
We anticipate that the Investment Club will have at any one time a maximum of 10 positions and perhaps as few as 5. The Investment Club will take both long and short positions and employ (at times) sophisticated option strategies.
DYME3Y’s decisions will ultimately by based on discounted cash flow. That being said, however, we will be also consider technical factors (for proper entry points) and look at any one company’s past historical ratios such as price/book and price/sales.
The investment process will go as follows: There are a number of financial services professionals who have indicated interest to serve as analysts. They will submit reports in a standardized format to the seven person Investment Committee (more on that in a moment) and the Investment Committee will discuss the merits of the particular idea. Then the matter will go to a vote with respect to initiating a position, and if a minimum of 5/7 Committee members agree, then the position will be initiated. I will head the Committee and have the unilateral ability to over-ride that decision. Quite simply: I will be able to block any action; however I will NOT be able to force action unless 4/6 other Committee Members are on-board.
Once there is agreement to initiate a position, I will be given the authority to formulate the most appropriate strategy to maximum returns while minimizing risk. Let me use a specific example: We have agreed that ABC is over-valued at $100 per share and our target price over the next 12 months is $60. We could short-sell. Or we could buy an in-the-money put or out-of-the-money put, or sell an in-the-money call. Or perhaps execute a calendar spread. Various options will be discussed by the Investment Committee, but logistically it will be impossible to meet and consult prior to every single decision.
Once a trade is executed, all investors will receive notification by e-mail. The rationale for the position (long or short) will be explained and the strategy will be discussed briefly. At the end of each month, a summary of the current state of the portfolio will be sent out by e-mail to all investors and it will also be posted to my website: www.michaelhlinka.com.
November 1, 2019 – Starting Balance: $500,000.00
December 31, 2019 – Ending Balance: $494,057 , -1.19% since inception
Opening Balance: $500,000.00 USD
Current Balance: $491,557.41 USD
Performance since inception: –1.69%
There were four positions initiated in November, the first month for the DYME3Y Investment Club:
- Long position in Alcoa (AA)
- Long position in Carnival Cruise Lines (CCL)
- Short position in Advanced Micro Devices (AMD)
- Short position in Netflix (NFLX)
On November 1st, when CCL was approximately $43.50 per share, we sold 10 CCL Jan 50 puts that will expire in January 2022, receiving premium of approximately $12.50 per share. This position will require us to pay $50 per share for CCL any time over the next 26 months. It is our belief that CCL is undervalued and before 2020 is out, it will hit $60 per share. If and when it does, it is likely we will close off this position, allowing us to redeploy the margin tied up more productively.
With a complementary trade on the same day, we bought 15 CCL Jan 30 calls that will also expire in January 2022, paying approximately $14.00 per share. This is a leveraged way to express the view that CCL will indeed hit $60 within the next two years. Had we purchased CCL at $43.50 and had it went up to $60, we would have made a profit of $16.50 per share, a return of $16.50/$43.50 or 38%. With the strategy we employed, if CCL hits $60, then the percentage return will be in the neighbourhood of 114%. Depending on the charts at the time, we plan to close the position at or around $60 per share.
On November 4th, when NFLX was approximately $285, we sold 2 NFLX Jan. 200 calls that will expire in January 2021, receiving premium of approximately $103 per share. This position was entered in the belief that fair value for NFLX is approximately $200 and it will be realized before expiration. This trade has not gone our way: NFLX is currently $315, up about 10% from our entry point. Our opinion on NFLX has not changed: We believe that the market is under-estimating the importance of the competitors that will damped NFLX’s rate of growth, and its ability to raise prices. We are monitoring this position carefully.
On November 8th, when AA was approximately $22 per share, we sold 33 AA Jan 18 puts that will expire in January 2021, receiving approximately $2.00 in premium on a per share basis. This will require us to purchase AA at $18 anytime up to next January. It is our belief that AA is under-valued at $18 which means that we will be happy to purchase it should it hit that price. Our hope and belief, however, is that it will never decline to $18, and we will keep the premium.
On November 21st, when AMD was approximately $38.75 per share, we sold 20 AMD May 20 calls that will expire approximately 6 months from now, receiving $19.25 in premium. Essentially, we short-sold AMD at $39.25, in the belief that it is greatly over-valued and fair value is in the $20 range.
To summarize where the various positions stand as of the end of November:
- CCL trades are down approximately $500
- NFLX trade is down approximately $5,400
- AA trade is down approximately $1,475
- AMD trade is down approximately $1,050
This is hardly the start we were hoping for, but it’s still early, we continue to believe in each of these decisions, and we are actively looking for other opportunities, given how much margin is still available in the account.
Opening Balance (November 1, 2019): $500,000
Ending Balance (December 31, 2019): $494,057
Performance Since Inception: -1.19%
There were four positions initiated in November and all four remain open as of December 31st, 2019:
- Long position in Alcoa (up $905)
- Long position in Carnival Cruise Lines (up $14,298)
- Short position in Advanced Micro Devices (down $14,535)
- Short position in Netflix (down $6,856)
There was a single new position initiated in November:
- Long position in Signet Jewelers, SIG
On December 12th, when SIG was approximately $21, we sold 30 $16 puts, expiring April 2020, receiving a premium of approximately $1.10 per share. This strategy means that if SIG ever trades below $16 per share, we would be forced to pay $16 for it. The risk with this strategy is that SIG sells off dramatically (it has been as low as $10.40 this year), yet we’re on the hook paying $16. However, it is our belief that Signet Jewelers is fairly valued at $21 and greatly under-valued at $16 per share. We believe that SIG will remain comfortably above $16 for the next four months and we will keep 100% of the premiums we received, which were (after commissions) $3,252.
The SIG position is unchanged over the past three weeks.
At this point in time, we believe that the market is fully valued, which makes it difficult to initiate new positions… that being said, we are carefully scouring the market for new opportunities.
Here’s to a Happy, Healthy, and Wealth-Generating 2020!
Opening Balance (November 1, 2019): $500,000
Ending Balance (January 31, 2020): $463,405
Performance Since Inception: -7.32%
There were two positions closed in January and two positions initiated:
- Short position in Netflix closed
- Short position in AMD closed
- Long position in Ventas (VTR)
- Long position Foot Locker (FL)
On January 8th when AMD was approximately $50 per share, we bought back the 20 $30 calls at $30 per contact. We continue to believe that the market is wrong about the growth prospects of AMD; however the momentum is against us and we thought it prudent to cut our losses on this position.
On January 8th when NFLX was approximately $330 per share, we bought back the 2 $200 calls at $147 per contract. We still cannot justify the price of NFLX based on discounted cash flow analysis. That being said, the market doesn’t see it that way. This is a position we will continue to monitor: If and when sentiment turns, it could be with blinding speed.
On January 14th when Ventas (VTR) was $57 per share, we sold 20 August 50 puts, receiving $1.25 per share in premium. This means that if Ventas should fall below $50, we will be obligated to buy at that price. Ventas is a real estate investment trust that specializes in health care/senior’s living, two sectors that we believe will grow in the years to come. We truly hope that we will be assigned. But we think it more likely that this will not be the case, and we’ll only be keeping the premium.
On January 22nd when Foot Locker (FL) was $38 per share, we sold 15 August 30 puts, receiving $1.30 per share in premium. This is another case of where we think that assignment is unlikely: We would love the opportunity to buy Foot Locker at that price.
As of the end of January, here is the summary of our positions:
- Long position in AA (down $6,090)
- Long position in CCL (up $3,418)
- Long position in FL (down $560)
- Long position in SIG (up $2,292)
- Long position in VTR (up $365)
We continue to be cautious about a market that seems very frothy. That being said, when value presents itself, we will act quickly and decisively.
Opening Balance (November 1, 2019): $500,000
Ending Balance (February 29, 2020): $437,449
Performance Since Inception: -12.51%
There was one position closed in February and four positions initiated:
- Long position in Carnival Cruise Lines closed
- Long position in Kraft Heinz (KHC) initiated
- Long position is US Steel (X) initiated
- Short position in Rosetta Stone (RST) initiated
- Long position in GAP Stores (GPS) initiated
On February 5th, we purchased 5,000 shares of US Steel at $9.29. We believe that this is a deep value play and that as steel prices firm and given the expected fiscal stimulus in advance of the 2020 US election, we continue to believe that this is undervalued.
On February 6th, when Kraft Heinz was approximately $29 per share, we bought 20 calls that will expire in January of 2022, and simultaneously sold calls with a higher strike price for a couple of months out. Since entering the order, KHC has sold off – it now stands around $25 per share – but much of this is attributable (we believe) to the recent Corona Virus scare. We continue to believe in this position.
On February 11th, when CCL was approximately $43 per share, we closed two positions. This was in the early stages of Corona Virus, and we are very happy that we closed this position because the stock has sold off markedly since then.
On February 20th, when RST was $21 per share, we sold 20 17.5 calls that will expire in June. As long as RST closes at $17.50 or below (and it is currently $17.32) and we believe that if should the markets recover, this company will be left behind.
On February 27th, when GPS was $14 per share, we sold 35 13 puts that will expire in June, receiving $1.08 in premium on a per share basis. We do not believe that GPS will decline to $13, but if it does, we are happy to own it, given its dividend yield and sales per share.
This commentary is being written in the midst of the coronavirus pandemic. There is a tremendous amount of uncertainty in the markets and we will be proceeding very, very cautiously in the foreseeable future.