TRGL versus IMO

The chart below shows the performance of TRGL and IMO from when I entered the trade on 3/31/2011 until when I exited on 4/21/2011. I started out with 24% trailing stops on both sides of this trade, but as I noted on Short Screen at the time, I tightened those trailing stops on both sides (to 8%) on 4/19. So I got stopped out of TRGL early on 4/21 — at $7.58, instead of $8.85, which is where it closed that day. Once I got stopped out of TRGL, I sold my long position in IMO. Overall, it wasn’t a bad trade: I made 3% on the long side and 30% on the short side, for a combined return of 16.5% on the combined trade.

Why TRGL popped on 4/21

The company, an oil & gas E&P with its operations in the Paris Basin, had been under a cloud as the French government considered banning shale exploration for environmental reasons. On 4/21, the company commented on an interim report about shale exploration by a French government agency, but there was nothing conclusive about that report; the pop on 4/21 looks like it was a simply a short squeeze.

Performance of TRGL from 4/21 until this week

The chart below shows how TRGL shares have done since I got stopped out on 4/21.

Why this was a missed opportunity

Because the bearish case against TRGL hadn’t materially changed on 4/21, so I should have taken advantage of the bounce and bought in-the-money puts on it then. I didn’t think of that at the time.

Buying puts on a stock after getting stopped out of a short position

The odd thing is that I did do that when I got stopped out of the short side of another market neutral trade (Short JOE, Long GTY) for a loss earlier this year. Since I thought the bearish case against JOE remained intact, I bought long-dated, in-the-money puts on it (which I’m still holding). It’s something I’ll consider going forward when I get stopped out for gains as well.

A reminder about hedging versus betting

Those puts on JOE were a speculative bet against  the stock; because of that, I bought in the money puts on it, consistent with Tim’s guidelines about buying options in Chart Your Way to Profits. That makes sense for directional bets (when you are willing to pay more to reduce the odds against your bet) but would be sub-optimal in most cases for hedging (when you want to get a certain level of protection at the lowest possible cost).

If I were hedging, I would enter the symbol of the stock or ETF I was looking to hedge in the “symbol” field of Portfolio Armor (available as a web app and as an Apple iOS app), enter the number of shares in the “shares owned” field, and then enter the maximum decline I was willing to risk in the “threshold” field. Then Portfolio Armor would use its algorithm to scan for the optimal puts to give me that level of protection at the lowest cost.

On rare occasions (I’ve seen it happen once, so far) the optimal puts Portfolio Armor presents might be in-the-money; in most cases however they will be out-of-the-money.

My most recent market neutral trade

I entered another market neutral trade last Friday, long ALB, short ADES. More details on that at the link.

Related posts:

1. A few updates for 4.22.2011 – Thursday was a good day for new Portfolio...
2. Another two speculative options bets In previous posts elsewhere, I’ve mentioned a few guidelines I’ve...
3. Market Neutral Trade for 5.03.2011 On Tuesday morning, I shorted USG at $15.09 and bought...

Related posts brought to you by Yet Another Related Posts Plugin.

Related posts:

1. Market Neutral Trade for 5.03.2011 On Tuesday morning, I shorted USG at $15.09 and bought...
2. Market Neutral Trade for 3.31.2011 Update: I bought IMO at $51.40 today and shorted TRGL...
3. Market Neutral Trade for 2.10.2011 2/10/2011 Update: I shorted MBLX at $9.12 today, and bought...

Related posts brought to you by Yet Another Related Posts Plugin.

Reasons I shorted CCSC as part of this trade

• + Its chart looked weak, with the stock trending down since its IPO last fall
• + Its valuation looked pricey relative to its earnings, even after adjusting for growth estimates.
• + Anticipated selling pressure when the 6 month IPO lockup period expired for insiders.

Getting Stopped out for a Loss

I used double digit trailing stops on this trade, and got stopped out of CCSC at $25.38, for a loss of 11.3% on the short side on Jan 4, so I sold out of YUM as well, at $48.21, for a loss of 4.8% on the long side. Total loss of 8% on this market neutral trade. Below is a chart of both stocks from when I entered the trade, on December 2nd, 2010, until when I exited, on January 4th, 2011.

Hindsight is 20/20

Had I used wider stops, I might have stayed in the trade long enough to profit from it. Below is a chart of both stocks from when I entered the trade, on December 2nd, 2010, until Monday, May 9th, 2011. Note the selloff at the beginning of March: the company released earnings on March 2nd, missing analysts’ estimates.

This wouldn’t have applied in the case of CCSC, since it doesn’t have options traded on it, but a suggestion that has come up recently from a couple of Portfolio Armor users is extending its algorithm to find optimal calls for hedging short positions.

Recall that with Portfolio Armor (available as a web app, and an iOS app) you just enter the symbol of the stock or ETF you’re looking to hedge, the number of shares you own, and the maximum decline you’re willing to risk, (your threshold). Then the app uses an algorithm developed by a finance Ph.D. candidate to sort through and analyze all of the available puts for your position, scanning for the optimal ones to get you the level of protection you want at the lowest cost.

Adding the ability to hedge short positions with optimal calls is something I’m considering adding, if enough users request it. If we do add that functionality, we’ll probably raise the price, to offset the development cost, but those who subscribed to the web app beforehand would be grandfathered in at the current cost. I don’t know if we’d add the functionality to the iOS app too, but there again, if we do, current users would get the upgrade without paying more.

Related posts:

1. Market Neutral Trade for 5.03.2011 On Tuesday morning, I shorted USG at $15.09 and bought...

Related posts brought to you by Yet Another Related Posts Plugin.

USG Corporation (NYSE: USG) manufactures Sheetrock and other times of wallboard. I shorted this one last year, and got stopped out for a single-digit loss. I plan on using a double-digit trailing stop this time, on both the long and short side of this trade. I’ll probably use slightly tighter stops initially this time than I did initially on the last market neutral trade (long IMO, short TRGL) though. Charts below courtesy of Finviz.com.

Short Screen shows an Altman Z-Score of 0.59 for USG. Scores below 1.81 are considered an indication of financial distress, according to the model.

USG is currently rated as having Average Accounting & Governance Risk (AGR®), receiving an AGR Score of 70 percentile among the approximately 8,000 companies in North America rated by Audit Integrity, indicating higher accounting and governance risk than 30% of the other companies.

USG had negative earnings over the trailing twelve months and has an PEG ratio of -0.19 (based on analysts’ estimates of its earnings over the next five years).

Interface, Inc. (NASDAQ: IFSIA) manufactures modular and broadloom carpets, and other floor covering products.

IFSIA has an Altman Z-Score of 3.37. Scores above 3 are considered indications of financial strength.

IFSIA is currently rated as having Conservative Accounting & Governance Risk (AGR®), receiving an AGR Score of 98 percentile among the approximately 8,000 companies in North America rated by Audit Integrity, indicating higher accounting and governance risk than 2% of the other companies.

IFSIA looks pricey based on trailing earnings, but it has f PEG ratio of 1.44 (based on analysts’ estimates of its earnings over the next five years), which looks a little more reasonable.

Related posts:

1. Market Neutral Trade for 3.31.2011 Update: I bought IMO at $51.40 today and shorted TRGL...
2. Market Neutral Trade for 2.10.2011 2/10/2011 Update: I shorted MBLX at $9.12 today, and bought...

Related posts brought to you by Yet Another Related Posts Plugin.

– I exited the Short TRGL / Long IMO Market Neutral Trade Thursday for a 16.5% gain (30% on the short side, 3% on the long side). TRGL spiked up 22% on Thursday, but I covered early, since I had tightened my trailing stops from 25% to 8% on Tuesday.

– Alloy Steel International released its fiscal Q1 numbers early Thursday: a sequential drop to “OK” from Q4’s record numbers. The thesis still seems to be intact, so I’m holding here. Looks like Q2 will probably be unimpressive as well, though, so patience may be required with this one.

Related posts:

1. Market Neutral Trade for 3.31.2011 Update: I bought IMO at $51.40 today and shorted TRGL...

Related posts brought to you by Yet Another Related Posts Plugin.

Toreador Resources Corp. (TRGL) is an oil & gas E&P based in France. I shorted TRGL as part of a market neutral trade (paired with a different long position) last July, when it was trading below $6 per share. I got stopped out for a loss a week later, when the stock was just above $7. As you can see from the chart below, TRGL went on quite a run from there, though it has since pulled back from its high earlier this year.

As of its closing price Wednesday, TRGL was trading at 12.29x its trailing twelve month sales.

Short Screen shows an Altman Z”-Score of 1.03 for TRGL (recall that Z”-Scores below 1.1 indicate financial distress, according to the model).

Audit Integrity rates TRGL as having “aggressive” Accounting & Governance Risk (AGR®), placing it in the 15^th percentile (i.e., it has higher accounting & governance risk than 85% of the 8,000 companies Audit Integrity rates).

I plan on using a trailing stop here, in the event TRGL shares again buck the company’s seemingly weak fundamentals and go on another run.

Imperial Oil, Ltd (IMO), an Exxon Mobil subsidiary in Canada, isn’t a pure-play E&P: like its parent company, in addition to its exploration & production (“upstream”) operations, it has downstream and chemical operations as well. Still, as with its parent, the bulk of IMO’s earnings come from its upstream operations: 71% of IMO’s earnings came from upstream operations in 2010.

As of its closing price Wednesday, IMO was trading at 1.8x its trailing twelve month sales.

Short Screen shows an Altman Z-Score of 5.24 for IMO (recall that Z-Scores of 3 and above indicate financial strength). A quick note about why Short Screen shows a Z-Score for IMO, and not a Z”-Score, as it does for TRGL: Short Screen uses Standard Industrial Classification (SIC) codes to class to categorize a company as manufacturing or non-manufacturing. Companies in SIC codes 2000-3990 are considered manufacturing companies. Although only a minority of IMO’s earnings come from its refining business (part of its “downstream” operations), the company’s SIC code is 2911 (Petroleum Refining).

Audit Integrity rates IMO as having “average” Accounting & Governance Risk (AGR®), placing it in the 40^th percentile (i.e., it has higher accounting & governance risk than 60% of the 8,000 companies Audit Integrity rates).

I plan on using a trailing stop on IMO as well.

Related posts:

1. Market Neutral Trade for 2.10.2011 2/10/2011 Update: I shorted MBLX at $9.12 today, and bought...

Related posts brought to you by Yet Another Related Posts Plugin.

Tomorrow I plan to short Ameristar Casinos Inc. (ASCA) and buy an equal dollar amount of Gaming Partners International Corporation (GPIC).

Ameristar Casinos Inc.¹ (ASCA), headquartered in Las Vegas, owns and operates casinos eight casinos spread over several states in the U.S. In August, the company announced that it was looking to be acquired, sparking a rally in the stock, but earlier this month the company announced it was no longer seeking to find a buyer — presumably, because it couldn’t find a willing one at whatever price it was seeking.

Ameristar has an Altman Z”-Score of about 0.26, according to Short Screen (recall that Z”-Scores below 1.1 indicate financial distress). It also has a current ratio of 0.46.

Gaming Partners International Corporation (GPIC), also headquartered in Las Vegas, is a picks & shovels play on the casino industry: it manufactures casino tables, roulette wheels, gambling chips (including ones embedded with RFID microchips), and sells its products worldwide.

GPIC has Altman Z-Score of about 5.9, according to Short Screen. Recall that Z-Scores above 2.99 indicate financial strength. It also has current ratio of 3.91.

In addition to the contrast in financial strength, GPIC has a more attractive valuation than ASCA. Since ASCA has significant net debt, and GPIC has significant net cash, an enterprise value/EBITDA comparison seems appropriate. GPIC has an enterprise value/EBITDA of 2.93 versus 7.83 for ASCA (trailing twelve months, in both cases).

¹Which apparently hasn’t gotten around to building its website yet, and has its domain parked with Network Solutions.

No related posts.

Related posts brought to you by Yet Another Related Posts Plugin.