Friday, December 19, 2014

Lottery Ticket Basket as of 12/19/14/Sold QLGC at $11.92/Bough SKIS at $7.4

The Lottery Ticket Basket Strategy will use a deep contrarian value strategy appropriately characterized as catching a falling knife. A common criteria for stock purchased in this basket is a smashed stock price.

See 2004 Study By the Brandeis Institute: Falling Knives Around the World

Last Update: 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

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: Lottery Ticket Strategy: New Gateway Post

Net Realized Gains:  $14,148.3

Click to Enlarge:
Lottery Ticket Basket as of 12/19/14
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 took a near total loss on Quicksilver Resources as noted below. That is the 4th near total loss harvested this year with the other three being SUTR (-$217.01), RSH (-$219.91) and OIIM (-$268.91). The RSH buy was the most boneheaded of the four. I would note that none of those companies have failed yet. I just wanted the proceeds to exceed the commission cost.

I more than offset the KWK loss with a $386.08 gain in Applied Motion: Harvested AMOT Profit +157% Based on Total Cost-Sold 40 AMOT at $16-Item # 2 Bought 40 AMOT at $5.95-LT (2/6/12 Post).

AMOT was one of my largest unrealized gains noted in my last update. I sold too soon:

Closing Price 12/19/14: AMOT: $20.77 -0.41 (-1.94%)

I have a few other selections that appear to be making runs toward zero, a known hazard when the selections are falling knives. Generally, I will keep the Lotto until it becomes really tight on whether the proceeds will cover the brokerage commission. I have had several come back into good profits after collapsing in price, so I want to give these selections a lot of room to run to the downside before I pull the plug.

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. NPBC have already been promoted to the Regional Bank Basket Strategy but I am keeping the 30 share lot bought as a Lotto in this basket. 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%: 

Merge Healthcare is the only new entrant into this list: Bought: 100 MRGE at $2.48 (11/25/14 Post) 

I doubt that RFMD will be owned when the next update is published.

RFMD +198.93%
Merrill Lynch has RFMD as one of its top semiconductor picks for 2015. Bought as LT: 50 RFMD at $5.18 (12/30/13 Post)

FCE/A 78.3%
FCF +49.04%
ING +45.09%
MRGE +40.26%
IRDM +39.02%
NPBC +28.94%
A number of recent Lotto purchases were bought to generate income and are unlikely to produce significant percentage capital gains.

1. Sold KWK-Near Total Loss:

2014 KWK Sold 50 Shares -$263.87
2.  Sold 30 Qlogic at $11.92 (see Disclaimer): 

Sold Too Soon:
Closing Price 12/19/14: QLGC: $12.83 -0.22 (-1.69%)

Snapshot of Trade:

Snapshot of Profit:

2014 QLGC 30 Shares +$74.24
Bought as LT 30 QLGC at $8.92 (8/24/14 Post)

This is my second successful round trip in QLGC in the Lotto ticket. When I first bought QLGC, I used its price history to illustrate the Madness of Crowds. Sold LT Basket: 30 QLGC at $11.7 (8/26/13 Post)-Bought 30 QLGC at $8.83 (12/31/12 Post)

3. Bought 40 SKIS at $7.4 (see Disclaimer):

Snapshot of Trade: 

Closing Price 12/19/14: SKIS: $7.93 +0.16 (+2.06%)

Peak Resorts Inc. (SKIS) is an owner of ski resorts and recently had its IPO, selling stock to the public at $9 per share. Prospectus Filed 11/21/14 That prospectus contains a discussion of risk factors starting at page 19. The company intends to reduce its debt from $174.8M to about $99 with the proceeds from this offering (pages 36 and 38).

Peak Resorts Announces Closing of Initial Public Offering 

The debt reduction will improve earnings which has been erratic historically:

Lower gasoline costs may improve attendance this winter.

Rather than taking the time to describe its operations, I just took this snapshot from page two of that prospectus:

There is a general description starting at page 3 of each resort which I did read. Some readers may be familiar with one or more of these resorts. I generally refrain, whenever possible, to avoid cold weather and snow. Nashville has had maybe 10 inches of snow altogether over the past ten years.  A snow blizzard is when an inch comes down over a 24 hour period.  

The company intends to pay a quarterly dividend of $.1375 per share. (page 37). At that rate, the dividend yield is about 7.43% at a total cost of $7.4 per share.

The first dividend will cover only a partial 3 month period and will be $.1091 per share. Peak Resorts Declares Initial Cash Dividend

Link to SA Articles on Peak Resorts: SKIS-Peak Resorts-Seeking Alpha The one written by Ian Bezek is thorough, though it will only be made available to non-pro subscribers for a brief time.

Peak Resorts Sees Record Thanksgiving Weekend Visits

After my purchase, Stifel initiated coverage with a buy and a $10 target price.

I do not have a price target. I am buying more Lotto's that pay dividends.  

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