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%
| Cash | Investments | Total | Margin |
| $557,327.41 | -$65,750 | $491,557.41 | $403,192.41 |
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.
Michael Hlinka
Opening Balance (November 1, 2019): $500,000
Ending Balance (December 31, 2019): $494,057
Performance Since Inception: -1.19%
| Cash | Investments | Total | Margin |
| $560,576 | -$66,518 | $494,057 | $376,397 |
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!
Michael Hlinka
Opening Balance (November 1, 2019): $500,000
Ending Balance (January 31, 2020): $463,405
Performance Since Inception: -7.32%
| Cash | Investments | Total | Margin |
| $475,995 | –$12,550 | $463,405 | $381,006 |
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.
Michael Hlinka
Opening Balance (November 1, 2019): $500,000
Ending Balance (February 29, 2020): $437,449
Performance Since Inception: -12.51%
| Cash | Investments | Total | Margin |
| $431,579 | $5,910 | $437,449 | $323,517 |
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.
Michael
Opening Balance (November 1, 2019): $500,000
Ending Balance (March 31, 2020): $274,326
Performance Since Inception: -45.13%
| Cash | Investments | Total | Margin |
| $404,816 | -$130,490 | $274,326 | $210,088 |
There was one trade in the month of March: We bought back the Signet Puts and now have the following open positions in the account:
- Long position in Alcoa (AA)
- Long position in Foot Locker (FL)
- Long position in The Gap (GPS)
- Long position in Kraft Heinz (KHC)
- Short position in Rosetta Stone (RST)
- Long position in US Steel (X)
- Long position in Ventas (VTR)
I would like to take this opportunity to explain our rationale in holding each of these positions: It is the unanimous opinion of yours truly and the rest of the Investment Committee that while there is significant downside possible, on a risk-reward basis we would be making a mistake to close any of these positions right now.
In the wake of coronavirus, there is going to be massive stimulus spending. What we just saw in the United States – the $2 trillion package – should not be understood as a stimulus package: This was a “rescue” package. There will be calls on both sides of the aisle in the US to “get America back to work” and we believe that this bodes well for companies like Alcoa and US Steel. We are actively looking for other companies who could similarly benefit from what we think is coming down the pike in the near future.
We believe that the high-end luxury segment will take a long time to recover, but the basic, middle-class providers of needed products like running shoes and denim should outperform, hence our continued exposure to Foot Locker and The Gap. There is the chance of bankruptcy… no question about that… but if you’re a large property owner like the Simon Group, do you really want to see either Gap or Foot Locker go out of business? We believe that both of these entities will escape bankruptcy, and if they do, then they should return relatively soon to the profitability that they enjoyed pre-COVID 19.
Kraft Heinz is, to us, a turn-around story and we believe that of all the companies in this space, there is the greatest upside potential for it.
We also believe that post-coronavirus, risk premiums will return to the market in a significant way, and a company like Rosetta Stone, that has lost money year after year after year, will not see new capital flowing into it.
Ventas is a bit of a trickier proposition. This is the world’s largest provider of Senior Care facilities, and it and other companies in this space have been brutally punished because of the fact that the mortality rate associated with the virus is so high for the elderly and particularly elderly people with pre-existing health conditions. However, when we step back and look at the bigger picture, the cohort of the elderly continues to grow in the developed world. Coming out of COVID-19, it’s difficult to see a great deal of investment capital flowing into this industry. Ventas just paid out its regular quarterly dividend and while we’re not sure that this dividend is safe, we see this as a highly liquid company whose share price right now doesn’t even cover the value of its real estate holdings. We believe that it would be a mistake to close our position on Ventas right now as well.
Finally, I personally feel terrible about the performance of this Investment Club. What has occurred… that is an almost entire shut-down of the developed economies of the world… was simply beyond my imagination – and beyond the imagination of other Investment Committee members as well. However that being said: Our discipline going into this was based on finding those companies with solid balance sheets and then relying on discounted cash flow analysis to determine where we would employ our capital. This continues to be our discipline.
I hope that everyone is staying safe and doing their best to enjoy these days, as trying as they are in so many respects.
Michael
Opening Balance (November 1, 2019): $500,000
Ending Balance (April 30, 2020): $324,073
Performance Since Inception: -35.19%
| Cash | Investments | Total | Margin |
| $324,073 |
There were no trades executed in the month of April. We were pleased to see that the account recovered somewhat from the end of March; however we are not confident that a broad market rally will continue.
It is the collective belief of the Investment Committee that we are (if I may use a baseball metaphor) in the first inning of this game. We believe that it will be a very long time before the economy recovers to where it was this past January – and if you recall, at that time we were concerned about valuations.
We have already seen unprecedented fiscal and monetary stimulus. It seems to us that there is little more that the Bank of Canada and Federal Reserve can do. Short-term interest rates will be at zero percent for a very, very long time. That means there will be massive fiscal stimulus, the only possible political response to keep the economy afloat. In the wake of this, there will be inflation, which is, essentially, a drag on everyone’s real standard of living.
The basics of life are going to get more expensive. The collapse of oil prices has a strong anti-inflationary impact in the short run. However, at some point oil prices will firm, and then likely rally higher. (Even given the demand destruction that we will be witnessing.) We expect that necessities will become more expensive, and consumers to become much more cost-conscious. It will be difficult for producers to pass along price increases, which will depress corporate profitability. It will take a very long time – years if not a decade – for the consumer to come back… for a variety of reasons.
First, there is the employment picture. We do not see a V-shaped recovery in the labour markets… does anyone really believe that the airline industry is going to bounce back any time soon? Yes, over time resources will move to where opportunities lie, but it will be a long, drawn out process. Many businesses and individuals will have to declare personal bankruptcy along the way, destroying their ability to access credit in the future. We would not be surprised to see a great deal of regulation and legislation coming out of this: Is it beyond the realm of possibility that, for example, credit card companies will see limits on the interest they can charge? Bottom line: We don’t see the consumer “bouncing back” any time soon.
So what are the investment implications? We are nervous about retail; however the companies we own: The Gap and Foot Locker, are not high end. People still need clothes and shoes and as weaker competitors fall by the wayside, more business will go to the survivors. US Steel and Alcoa will benefit from the infrastructure spending we see coming in advance of the 2020 Presidential Election. Senior citizens will still need a place to live, and Ventas with its solid balance sheet and diversified real estate portfolio, should be able to weather this storm. Kraft Heinz has seen its business benefit from more people staying at home and eating in.
When we formed this Investment Club, I and the Investment Committee – all CFA Charter holders – agreed that we would make our investment decisions based on fundamental analysis and discounted cash flow. Given the uncertainties faced right now, we will continue to monitor the economy and deploy our remaining capital (and we have a lot) when we feel that the time is right.
Opening Balance (November 1, 2019): $500,000
Ending Balance (May 31, 2020): $340,228
Performance Since Inception: -31.95%
| Cash | Investments | Total | Margin |
| $340,228 |
There were no trades executed during the month of May in this account.
We continue to be extremely nervous about the general level of the market. As I write, on top of the risks the health and economic risk, the United States is in the midst of a political crisis in the wake of the death of George Floyd.
It is the consensus opinion of the group prior to last week that it would be a very gradual recovery, and the protests and destruction in the wake of them surely won’t help.
I have been involved in capital markets since the early 1990’s and it has never been this challenging. That being said, however, there are some eternal truths in valuing equities: At the end of the day, owning a common share means owning a proportionate share of the profits of an individual company, irrespective of the general economic environment.
-Michael Hlinka
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