Saturday, November 1, 2014

Lottery Ticket Basket Strategy Update as of 10/31/14/Sold 70 AWCMY +52% Gain/Bought as Lottos: 35 CORR at $ 7, 35 IRET at $7.91, 30 RF at $9.33

The last update for this basket strategy was in September. Update for Lottery Ticket Basket Strategy 

1. Update of Lottery Ticket Basket Strategy

The Lottery Ticket Basket Strategy uses a deep contrarian value strategy, appropriately characterized as catching a "falling knife". A common criteria for the stocks contained in this basket is a smashed stock price at the time of purchase and an ugly looking chart, though I may occasionally buy one who does not fit those common criteria. Any technical analyst would most likely have a sell rating on the stock.

See 2004 Study by the Brandes Institute: "Falling Knives Around the World" 

Selections are made primarily on statistical criteria including price to book, price to sales, forward P/E, cash per share and/or free cash flow. I spend anywhere from thirty minutes to an hour researching a potential purchase prior to purchase.

For many selections, I may be pessimistic about the firm's future, but not as pessimistic as the market. I will also occasionally see a ray of light at the end of a dark tunnel. Since I expect failures, which are inevitable and unavoidable in this kind of approach, I limit my exposure to $300 per stock plus any prior trading profits. 

After experiencing some success with this strategy, I now have a requirement that my total investment in all LT holdings can not exceed my total realized gains for this basket strategy. My total exposure is substantially below my net realized gain number, so I currently have a lot of available capacity to expand this basket under this particular risk control rule.

The name of the strategy aptly describes the risk. It is somewhat analogous in many cases to playing a hand of blackjack for the purchase amount knowing that the card count favors the house. It is a form of entertainment and an alternative to a casino visit.

Based on the results to date, this strategy is far more likely to produce positive results even with the LB's skill at the tables. The primary purpose of the LT strategy is to entertain Right Brain, let it swing for the fences with up to $300, and to keep the Nit Wit from interfering with Left Brain's management of Headknocker's portfolio.

Snapshots of realized gains can be found at the end of the Gateway Post on this topic: Stocks, Bonds & Politics: Lottery Ticket Strategy: New Gateway Post

Net Realized Gains:  $13,927.42

Click to Enlarge:

Lottery Ticket Basket as of 10/31/14
Generally, my Lotto selections in the energy and gold mining sectors have been mostly unproductive and less than optimal which is of course an understatement.

I have several selections that appear to be making runs toward zero, a known hazard when the selections are falling knives.

I am after all dumpster diving when selecting Lottery Ticket purchases, and consequently expect to come up with nothing but garbage more than just a few times.  

Some of the selections have improved their circumstances sufficiently that I would no longer categorize a buy as a Lotto. SUSQ and NPBC have already been promoted to the Regional Bank Basket Strategy. ING, FCF and FCE/A no longer fit into the Lotto risk category, but I have no interest in acquiring more shares, so they wallow in this lowly risk category. 

Unrealized Gains over 25%:

RFMD moved into first place after reporting earnings: RFMD Achieves 15% Sequential Growth In Quarterly Revenue

RFMD +143.68%
AMOT +138.75%
FCE/A +76.36%
ING +58.16%
FCF +52.65%
Iridium Communications is a new entrant in this list: 

IRDM +35.35%
Qlogic, a recent buy, moved into the top unrealized gainers after a better than expected earnings report: QLogic Exceeds Revenue and EPS Guidance for Q2 FY2015 

QLGC +28.65%
NPBC +27.12%
Merge Healthcare rose last Friday after reporting better than expected earnings: MRGE: 2.75 +0.13 (+4.96%) 

ING passed the European stress test and will pay back the Dutch government the remaining state aid received by it during the financial crisis. Press release

I harvested a profit in a former member of this list, 

2014 Sold 70 AWCMY +$129.34 Profit on $248.75 total cost


1. Bought 35 CORR at $7 (see Disclaimer): This purchase is discussed in a SA Instablog: Lottery Ticket Basket Strategy-Bought 40 CORR At $7 - South Gent | Seeking Alpha

2. Bought 35 IRET at $7.91  (see Disclaimer): This purchase is discussed in a SA Instablog: Lottery Ticket Basket Strategy: Sold 70 AWCMY AT $5.515 And Bought 35 IRET At $7.91 - South Gent | Seeking Alpha

Even my Lottos are moving toward income generating securities. Both CORR and IRET may become eligible for promotion to the REIT Basket based on future operating results. 

3. Bought Back as an LT RF at $9.33 (see Disclaimer): 

Snapshot of Trade: 

Prior Lotto Profit:

2010 RF 50 Shares +$143.32

2011 One Bond +$64.28
2011 50 Shares of a TP +$58.47

Regions Financial Corp.  (RF) is one of those large regional banks that cratered in price during the Near Depression. Over the years, I have never acquired even an inconsequential level of confidence in its lending practices. The history of this Southern regional bank bank will probably always confine its place to my lottery ticket category, though I will invest slightly more money in RF bonds.  

The destruction of shareholder value is shown by a long term chart: RF Interactive Stock Chart The price topped out in 2006 near $38 before cascading down to a closing low of $2.5 on 2/4/09. Ouch!. RF Historical Prices Even at the current price, the shares have returned only to a price prevailing in 1991, when the banks blew themselves up en masse in what is generally called the savings and loan crisis which was not limited to S & L's.

As one would expect when looking at that chart, the quarterly dividend was slashed in stages from $.38 in 2008 to $.01 in 2009. Regions Financial Corporation - Dividend History The penny per quarter rate stayed in effect for 16 quarters before the bank raised it to 3 cents per share. The current rate is five cents. I will probably not live long enough to see the quarterly rate restored to $.38 per share.

The destruction of shareholder value can be seen in the losses that this bank suffered in 2008 et seq. Those losses can easily be found in historical 10-K filings at the SEC.

I pulled up the 2012 Annual Report and scrolled until I saw this disastrous and pathetic data series:

Page 50, 10-K

Last Earnings Report: I viewed this report as providing a ray of sunshine for this bank. RF SEC Filed Press Release RF reported net income available to common shareholders of $305 million or $.22 per share, up from $.2 in the year ago quarter.

Key Ratios:

The consensus E.P.S. estimate for 2015 is $.86. RF Analyst Estimates

The bank discusses risks incident to its operations starting at page 18 of its 2013 Annual Report filed with the SEC: RF-2013.12.31-10K

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