Portfolio Update: Whole Foods, Under Armour, Tesla

It’s been a while since I did a portfolio update, and there has been enough interesting news this week to do one now.

Hack Wall St. Portfolio – Buy Whole Foods and Sell half of Third Point Re

The portfolio looks like it is generally doing well.  Seven positions have 15%+ returns and one has more than doubled.  Unfortunately, old losses and a being down over 20% in Third Point Re put the portfolio at an 11% gap between its return and the S&P.

So, this week we’re going to cut the Third Point position in half to raise cash for Whole Foods.  Somehow, even down 23.5%, Third Point is still 15% of the portfolio.  We will use the 7.5% of it and some of the cash to make a new 10% position.

I wrote about Under Armour in the newsletter last week (reprinted below) and the problem with owning great companies that are always seemingly overvalued.

Whole Foods has historically been one of these companies.  Its margins and returns are far higher than any other grocery because it can charge more for its organic and otherwise “healthy” food.  Pair that with its intense growth in developing new stores and buying out competitors and its stock price rose from a split-adjusted $5.60 at the turn of the millennia to over $63 in 2013.

That was the high.  Since then, normal grocery stores and the WalMart/Targets of the worlds have added substantial organic choices to their stores and Whole Foods’ growth has stumbled and then finally, over the past year, has gone negative as far as same stores go.

This past week, Jana Partners, an activist fund, announced that it had built an 8% position in the company to attemot to aid a turnaround and eventually enocurage a potential sale of the business.

After a boost from the annoucnement, Whole Foods trades for about 7.5x EBITDA; it would not be surprising for a buyer to pay 10-12x EBITDA or more.  A prominant fund manager I respect values the company at at least $40 right now.  A turnaround that make the company more profitable and potentially higher valued could bring even more gains.

Market Timing Portfolio – All Good; Asset Allocation Portfolio – Meh

The market timing portoflio continues to ax murder the makret – with a 11.5% relative to 6.4% from the market.  Short bonds is the only down position.

The asset allocaiton portoflio is still slumping, up just 1.1%.  Down positons in real estate and commodities have killed performance.

Stocks for 2017 – Endless Tesla Madness

It seems I am destined to structure portfolios with mostly good performers and a few stinkers that kill everything good in the world.  In the Stocks for 2017 portoflio a 43% gain in Tesla (which we are short, so that’s bad) and a 27% loss in Fitbit are dragging down the returns.

A Business Insider post this week higghlighted the insanity of Tesla’s current valuation.  Its valuaiton has now eclipsed both Ford and GM – despite the fact that it has delivered 76k vehicles in 2016 for revenue of $7B and an $800MM loss, while GM has delivered 10mm vehicles for revenue north of $150B and almost $10B in net income and Ford has hit 6.5mm vehicles, $151mm revenue and $5mm net income.

The article says the stock is not valued on these current numbers but the (fantastical) possibilities of what the company could do.

Tesla has a reckoning coming at some point, we may, unfortuantely, get stopped out before it happens.

Personal Portfolio – Under Armour Shenanigans

For the most part, I am rarely able to invest in the companies I admire the most.
Companies like Amazon, Facebook and Netflix are always trading at incredibly high valuations.
They have great business models, the generate crazy amounts of cash flow and the stock price typically never stops going up.
So, in January when I noticed Under Armour was trading for around $27/share – down from over $40 in 2016 – I decided to sell some puts.
Under Armour is one of these great companies.  At some point over the last few years, it has sponsored the best athlete in almost every major sport.  Revenue is over eight times what it was ten years ago.  Return on equity is consistently over 15%.
The puts I sold gave the buyer the right to sell 100 shares of Under Armour to me for $27.50 per share by February 21.  For that put option, I received $171.
This trade was right in my wheelhouse.  Under Armour is a great company with great management that I would want to own at $27.50 per share.  I was receiving close to $200 just to hold an option for six weeks.
Here’s where the trouble began.
At the end of January, Under Armour reported its financials.  Sales growth was “only” 18% because this is lower than Wall St. expected, Under Armour dropped from $25 to $19 in a day.
By the time the option came due, I was paying $2,750 for stock that was worth $1,969. Today, the position is worth about $1,800.
That’s a pretty big hit.  If you add the $170 to the position and $50 I received for selling covered calls at a $27.50 strike (where I would break even) it looks a little better.
Where it looks much better is the actual investment.  I will continue holding Under Armour indefinitely.  Like I said above, I don’t often get the opportunity to invest in great companies.
This one-day drop is the risk you take when selling options for premium.  For the most part, if you’re conservative, you can persist making good money (like I said a few weeks ago I manage an account that makes about $500 a month selling covered calls) by selling options.  Every once in a while, something crazy will happen.
The key is to expect the unexpected and have the intestinal fortitude to take the hits when they come.

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