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Friday File: Fairfaxes, Blackbirds, Nodaks and more

Buying and selling in the Real Money Portfolio -- adding exposure to India and the Montney, Selling some Insurers, and updates on small speculations

By Travis Johnson, Stock Gumshoe, October 15, 2017

When the market is doing well, holding hedges like cash and gold is going to hurt your portfolio performance when you measure against the S&P 500 or other common benchmarks. That’s the case for me right now, and has been for the recent past — though it hasn’t been enough to bring me below the S&P 500, at least. My portfolio performance as of earlier this week (including all of my diversified funds, not just my individual equities) shows a return of 16.8% year to date and 12.3% for 2016, compared to 15.4% and 12% for the S&P 500 total return for those time periods (including dividends, in both cases).

So that’s clearly not fantastic outperformance, but it makes me reasonably pleased — I think of my gold and mining exposure, which is roughly 14-15% of my individual equity portfolio right now — as a hedge against crisis and against perpetual currency depreciation (though good companies are a better inflation hedge than gold, over time, since they can raise prices), and I think of cash, which is currently 6-7% of my portfolio, as an “optionality” hedge that gives me the opportunity jump on things that look interesting the next time the market freaks out or we have a real bear market decline. If I can keep doing as well as the overall market while still keeping meaningful exposure to gold mining and to cash, with some investments that offer significant speculative upside over time, I’m pretty happy.

(That’s all as tracked by Personal Capital, by the way, which is that rarest of beasts: a Stock Gumshoe advertiser that I personally recommend, despite the fact that I try pretty hard to avoid giving the impression that our advertisers are endorsed by us in any way. Not to put too fine a point on it, but I use the service every day and if you decide to try their service, then they pay Stock Gumshoe. Simple, and quite clearly I’m biased when it comes to this service.)

So… what do I have to write to you about today, with hopes that it will help my portfolio continue to beat the market and be interesting? I have a few more options positions that I’ve added to the portfolio recently (more on that in a moment, I don’t usually write much about them because I can’t recommend options trades to a large group of people — but I did get a question about that this week), but now I want to focus on India and take a look at the Fairfax India Fund, which has come up a few times during my discussions of Papa Fairfax Financial Holdings, and which, to cut to the chase a bit, I’ve just added to my personal portfolio.

I’ve been thinking about India quite a bit in recent months, the large country that is perennially the “should be amazing” part of the emerging market world, along with Brazil. The case for India is always pretty much the same: So many people. So many young people. So many educated young people. Such an entrepreuneurial culture. Such a huge runway for growth they can have if they clear up the corruption and stagnation of their bureaucracy and channel the energies of the that young population into an economy that works for everyone.

Is it going to happen now, under the sometimes worrisome regime of Modi? It kind of looks that way to me… or, at least, they’re making more progress on many fronts than we’ve seen in a long time, but we are also at a bit of an inflection point when it comes to Modi’s attempted reforms — India has both attempted to slow the black market by recalling all their high value bank notes (often referred to as the “shock demonetisation”), and attempted major (and rapid) tax reform by replacing a lot of confusing tax systems with a goods and service tax that also turned out to be plenty confusing, with quite a few hiccups in the implementation.

That has led the government to be in a bit of a panic, frankly, as tax receipts are way down from what was expected, and economic growth has slowed partly because of demonetisation confusion that hit smaller businesses, and has worried some folks that if the revenues come in light the government will cut spending on needed infrastructure at a time when that economy really needs an infrastructure boost both for stimulus reasons and because the core infrastructure is simply inadequate for a nation of a billion people.

There is plenty of criticism of the Modi government — even when it comes to his handling of the economy, which was supposed to be his strength, so we shouldn’t assume that all is rosy… the stories about growth being “stunted” because of government mismanagement are easy to find, as are worries about possible spending cuts and failures of the new tax system, but Prime Minister Modi maintains a high level of popularity, if not as high as it was a year ago, and I expect reforms will continue to be pushed — along, probably, with more government spending on stimulative infrastructure.

India does not have the clean appeal of China for an investor, because it’s perceived as a highly fragmented and bureaucratic democracy that’s hampered by tradition and laden with layers of baksheesh — China, as an authoritarian state dominated by state-owned industries with a strong “what’s good for the country, not what’s good for the individual” mindset (except the individuals who are high up in the party or in state-run industries, of course), can act much more quickly and make its corruption and bribery much more efficient. It also doesn’t have those high-profile headline-generating tech companies like China’s Alibaba (BABA) and Tencent (TCEHY).

But India does have what China lacks: A young population. China’s population controls have made the country more sustainable than it was 50 years ago in terms of resource utilization and space, but they will also tend to put a lid on its growth — much like in the US, where the slowing birthrate means that we require a lot of ongoing immigration to kept our working age population growing enough to support economic growth (and, in fact, to support government promises like Social Security). China is not in nearly as rough shape as the even-more-homogenous and anti-immigrant Japan on the demographic front, but it could get pretty bad pretty quickly if there’s anything to upset the population in China. Without a history of a retirement social safety net, China’s aging workers spend less and save more, which is great for capital formation but not so great for trying to build a consumer-led economy. China’s middle class is probably on the verge of getting squeezed a bit in the decades to come as it supports a larger and larger elderly population.

That’s not true of India — to give some perspective, the median age in India is about 27, Brazil’s about 32, China and the US are together at 36 or 37, most of Europe is in the low-to-mid 40s, and Germany and Japan, those two major engines of the developed world, are the two oldest major nations in the world with median ages of 46.8 and 46.9, respectively. The only older country in the world is mostly-irrelevant Monaco, with a median age of 52.4… appropriate for what is, in many ways, an income-tax-free retirement community for the wealthy. (Looking for countries with even younger populations? Once you get below 25 or so, they’re almost all in Africa — and I’m sure I’ll dig into Fairfax Africa at some point in the future as well, though it’s not currently as appealing to me as Fairfax India).

So India is in that “younger” group of emerging nations with good economic growth prospects, sometimes laden with a bit of political or other risk — a little younger than Mexico, a little older than the Philippines. That provides extraordinary potential power to their economy, perhaps even boosted a little bit as the US and Europe cut down on immigration and make it more appealing for Indians to stay at home to start their businesses. The challenge is in harnessing that youthful population’s potential by improving the infrastructure, making the bureaucracy easier to navigate, replacing bribes with sensible and effective taxes, and removing roadblocks to entrepreneurship.

Several huge family-run conglomerates have dominated many parts of the Indian economy over the last 50 years, not unlike South Korea, but other than those few companies that have become global leaders or have grown to be multinationals with significant foreign stock market listings (like Infosys or Tata in India, or Posco in Korea), there isn’t an easy way for foreign investors to invest in many of the individual companies in the Indian the market without moving to the country, dealing with the bureaucracy, and investing in the local stock market or making private deals.

Which leads me to an investment that does just those things for us, and is also affiliated with one of my favorite investors: Fairfax India (FIH.U in Canada, FFXDF OTC in the US)

Fairfax India is one of two publicly-traded investment vehicles that have been created by Prem Watsa’s Fairfax Financial recently (the other is Fairfax Africa). It effectively looks like a hedge fund or a private equity fund, with a fairly steep management fee and profit share for the managers, and it intends to buy, hold and manage a concentrated portfolio of investments in Indian companies, both public and private.

The appeal is that it’s a pretty unique portfolio of assets that would be hard for an outsider to buy, including part of Bangalore airport (BIAL), and it’s that airport ownership that actually ticked me over the edge to buying shares, since they recently moved to 48% ownership and the valuation of the airport overall is roughly the same as it has been. The airport is young and growing, with plans to triple passenger capacity and add a second runway, and that will help with the profitability (BIAL is regulated, so the goal is to get a 16% return from a predetermined portion of the business (all the direct air business, like fueling and fees, and a portion of the concessions), and then the rest of the concessions income beyond that revenue share portion goes to BIAL… as does whatever they can earn by selling 460 acres of land surrounding the airport for development.

That land may be a prime driver in the long run, since Bangalore, often referred to as the “Silicon Valley of India,” is expanding in the airport’s direction and the airport area isn’t all that developed yet, but for the near term I expect strong profitability and inflation protection from the airport operations, both fees and services for the airlines as capacity grows, and the more extraneous stuff like airport shops and restaurants as the airport expands.

The public ownership of BIAL is only 26%, so Fairfax could perhaps end up buying a controlling stake if Siemens opts to sell their remaining share (26%), but so far Fairfax has bought out the other partners this year to get its 48% stake. Fairfax’s internal valuation of BIAL gives it a price/book valuation in the 3.5X neighborhood, roughly what they paid for their shares, which is reasonable compared to other airports… though I think Bangalore may have above-average growth prospects if India’s economic modernization continues in the decades to come.

BIAL is the largest investment Fairfax India has made so far, here’s the total portfolio of investments made at this point:

BIAL: 48% for $585 million
National Collateral Management Services Limited (agricultural logistics and storage): 88% ownership for $149 million
IIFL Holdings (financial services): $277 million for 27%
Fairchem Specialty (chemicals from vegetable oils): $19 million for 45%
Privi Organics Limited (aroma chemicals, recently merged with Fairchem): $55 million for 51%
Sanmar Chemicals (PVC and specialty chemicals): 30% + debt for $301 million
National Stock Exchange of India (stock exchange, Fairfax was in process of buying a larger stake but that was derailed by the plan for IPO): $27 million for 1%
Saurashtra Freight Private Limited (container freight services): $30 million for 51%

So that’s a total of $1.44 billion invested over the past two years, mostly in private companies — IIFL and Fairchem are publicly traded and have risen dramatically in value since Fairfax invested in them, and BIAL is worth about what Fairfax paid for it (the others are all generally up a bit in value, so the total portfolio is worth about $2.15 billion now).

Here’s how Prem Watsa and CEO Chandran Ratnaswami described them in the 2016 letter to shareholders, their last full commentary:

“While the book value per share of Fairfax India was $10.25 per share, we believe that the underlying intrinsic value is much higher. For example, in spite of an average 15.4% return on equity and a 26% annual growth in book value per share over the past ten years, IIFL, even at its current stock prices of around 364 rupees per share, is selling at a price/earnings ratio of only 14.0 times expected earnings. And the founder, Nirmal Jain is an outstanding entrepreneur. All of the companies listed above have similar characteristics. The potential for all of them is very significant.”

That book value has risen now — it was technically over $14 at the end of the last quarter, but that was partly offset by the last purchase of 10% of BIAL after the end of the quarter, which came at a higher valuation, and their latest term loan. Adjusted for that, the book value as of August would have been $13.66.

When it comes to valuation of Fairfax India shares, the earnings don’t mean very much — essentially all of the earnings are going to be the unrealized gains on investments from quarter to quarter, any actual cash earnings are going to pale compared to the changes in the value of their investments, and that’s going to be very lumpy (huge gains some quarters, large write downs that create paper losses in others if they have a bad investment or two, as is probably inevitable. What will matter is the book value per share and the growth in that book value over longer periods of time as the value of their investments (hopefully) rises. Fairfax recognizes that, so they will also note that book value per share is their key metric.

But there is some hope that the financial impact of that latest top-up BIAL transaction, which hit the book value by a bit and will likely cause a reported loss in the next quarter unless there are other gains to offset it, could also cause a dip in the share price when Fairfax reports next. That’s reason to perhaps be cautious, Fairfax currently trades at about 1.3X book value, which is reasonable for an initial purchase at this $18 level — but not such a bargain that I’d be confident about making a huge investment. Since the last quarterly report from Fairfax India, the overall Indian market (as represented by the INDA ETF) is up a bit, but the two publicly traded companies in Fairfax India’s portfolio are either flat or down a bit, so there won’t likely be a big surprise jolt to the book value from those holdings.

The value of Fairfax India will fluctuate pretty dramatically with the currency, and most of its businesses are very cyclical so they are clearly bets on growth in the Indian economy. Fairfax Financial also has other large investments in India, through Thomas Cook India and ICICI Lombard and others, and they intend to move that “others” exposure into Fairfax India where practical (ie, Fairfax Financial selling its stake to Fairfax India on reasonable terms).

What that look at Fairfax India also makes me want to do, frankly, is buy more shares of Fairfax Financial itself. The book value for Papa Fairfax as of the end of June was $378, though adjusted for the unrealized gains in its subsidiaries it would be $457 per share — and that’s all US$. So at $518, the parent Fairfax (FFH.TO FRFHF) trades at 1.13X adjusted (my adjustment) book value.

The float for Fairfax Financial has grown considerably over the years as well, they report that at their annual meeting and it was $722 per share as of 2016, helping to fuel a large portion of Fairfax’s total portfolio of $1,231 per share… and both of those numbers improve with the Allied World acquisition, since it boosts the investment portfolio and most operating metrics by about 30% while increasing the share count by only about 20%.

Fairfax Financial is far more diversified than Fairfax India, but is certainly risky. I increasingly like it as a “buy a bit whenever you can” investment when valuations are attractive, akin to Markel (MKL) or Berkshire Hathaway (BRK-B), but it remains much, much cheaper than those other insurance conglomerates by most of the metrics that matter to me (like book value per share), which is why I’ve been buying more Fairfax than the others of late.

There’s a reason for the cheapness, of course, and the most prominent reason is Fairfax’s “big bet” mentality under Prem Watsa — that led to their “lost years” when they spent 2010-2016 betting heavily on deflation and financial crisis and hedging everything, and investors are very cognizant of that risk.

The good thing is that their awful investment returns for that period meant they had to really focus on profitable underwriting, which they did… but despite the losses from hedging, Fairfax never lost its interest in concentrated and distressed investing or in value investing for the long term in different economies around the world, particularly in India where Prem Watsa is both well-connected and a bit of a folk hero.

Fairfax has pulled back from its hedging and short bias, but it still has a huge amount of its investment portfolio in cash or very short-term instruments, which gives Watsa, like Warren Buffett at Berkshire, a lot of “dry powder” for his next move. Whether that’s one big thing, or just more bolt-on acquisitions and more capital allocated to India and Africa and other investment theses, I don’t know… but 19% compounded returns over a few decades make me quite willing to stay invested in Fairfax, to add a bit more, and, as they build out their appealing portfolio of otherwise inaccessible investments in India, to also put a bit of capital to work specifically in Fairfax India.

Fairfax India is new, but it is effectively managed by active managers on the ground in India who have been managing money for Fairfax for years, and who performed dramatically better than their index since 2000 (20.5%/year since 2000 versus 8.9% for the BSE SENSEX 30), so even though the performance is lumpy (huge gains in 2014, for example, increased the annual outperformance for 2000-2015 dramatically), I like the established and successful management.

I don’t love the fees, which is one reason to stick with the parent over the India fund… you effectively pay 1.5% a year plus 20% of profits over a 5% annual hurdle, but they aren’t egregious considering the access to non-public investments like the Bangalore airport. India is more accessible than it was a decade ago, to be sure, with decent ETFs now available like INDA and EPI for access to the major IT companies, banks, and conglomerates (like Reliance), and a few of those (HDFC, INFY, TCS) are also traded in New York, but for the most part it is effectively impossible for retail investors to trade directly in India, one of the few countries that is both on a growth-friendly political and regulatory track (though unproven, of course, and risky) and has overwhelmingly positive demographics compared to most of the large economies in the world.

It’s not a huge buy, I’ve essentially committed another 1% of my portfolio to Fairfax, split roughly equally between Fairfax Financial and Fairfax India. And to pay for it without cutting too much into my cash position, I sold off some of my smaller insurance positions to add a bit more to the Prem Watsa bucket.


I sold the balance of my NI Holdings (NODK) shares — the company is doing fine, but it’s no longer dramatically undervalued like it was when it went public as a mutual conversion earlier this year, and I don’t see any sign of them doing anything interesting with that big extra bolus of cash they got from the conversion… no M&A or even M&A rumors that I’ve seen, and no big ramp-up in agents or marketing to this point that has shown itself to me, which means it’s just a staid insurance company with a better cash position, and the only thing they’ve really done is buy back their maximum allowed shares and set up a new employee incentive program.

It seems to be a fine company, albeit one that’s likely to have a bad quarter thanks to crop insurance losses in the drought in the Dakotas. That’s worth more than the $10 they came public at, and worth more than the $14 I paid once it started trading publicly, but I hesitate to accept believe that it’s really worth the more substantial premium to book value at which it’s now trading. It could be that I end up being wrong, it’s possible that Nodak will end up being a great company and will build a colossus that begins to compound book value, but I don’t see that likelihood now and I don’t see that ambition in their leadership. If it’s not steeply undervalued, then I can find great insurance companies that I think have a better chance of substantially compounding shareholder value elsewhere, so I’ve sold the remainder of my NI Holdings shares.

Likewise with AIG (AIG), which has certainly been through its ups and downs — I’ve now sold the remainder of my AIG warrants because I see more opportunity in Fairfax Financial… so if we want to test that acumen of mine in the future, we can just put up a chart of AIG vs. Fairfax from 2017-2022 and we’ll see which one wins. I bet on Fairfax today, even though it’s substantially more richly valued than AIG, and I do that with the removal of my levered position in AIG Warrants at a modest gain to make Fairfax Financial now the largest investment I’ve made in any company over the past year.

(Incidentally, I just added data to clarify that to the Real Money Portfolio — I now have both a column for the percentage of my portfolio each investment represents today, and a column for the percentage of total cost basis that each investment represents… which helps to illuminate the difference between stocks that are large portfolio positions because I committed more capital to them and those that are large portfolio positions mostly because they’ve appreciated in price.)


Several readers have asked me about Shopify (SHOP) following Citron’s bear attack. I noted last week that I wasn’t worried about the “SHOP is overvalued” argument, because it’s obviously true that SHOP is overvalued — but that I was waiting to see if SHOP had a response to the more important allegations of FTC violations and such.

SHOP’s response has been very muted so far, they quietly posted a note on their Investor Relations page that they ‘stand by their model’ but did not specifically respond to Citron, which I think has probably been making investors pretty nervous. They should be releasing their quarterly earnings report in about three weeks, so it seems unlikely that we’ll get any more detailed word from the company before that… and there has been a substantial wave of selling this week as the stock crashed through the 20% and 25% stop loss triggers that are commonly used by retail investors. I expect we’ll probably stay in this same price range until earnings come out, unless Citron follows up with something that looks a lot more like a smoking gun. I’d side with Shopify over Citron at this point, given what I’ve heard, but I haven’t put that sentiment into action by adding to my position. I’m just holding and watching, and letting my stop loss trigger point of $73 be the decision maker for me in the absence of fundamental news.


Other news?

Northern Dynasty Minerals (NAK, NDM.TO), on which I still hold a sliver of my old warrant position, has been moving up a bit of late — that’s not really on any firm news about what’s important to Northern Dynasty, that being news of actual permitting progress or a partnership deal, but the incremental news has been relatively positive, with some hires that reinforce the notion that the permitting is really moving forward, and they presented a somewhat more formalized version of their often talked about “scaled down” mine plan that would be less environmentally frightening, or less risky for the salmon fishery that has been the major concern.

There’s also the formality of the EPA backing away from its blocking action for the Pebble Project, which has taken a little longer than the press release earlier in the year. Both of those make it incrementally more likely that the mine will be built at some point, though neither is at all decisive — and I have no particular intention of holding the shares by the time we actually know whether the mine will be built or how much it will cost… we’re a long ways from that point. I’m holding the remainder of the warrants in hopes that the price will have a blow-off high when they make meaningful permitting progress or, preferably, get a major buy-in from a big miner that wants to contribute a lot of capital to what will be a hugely expensive mine development project. We’ll see.


Blackbird Energy (BBI.V, BKBEF) shares have been recently moving up for some reason, without any official news — that’s partly because they’re still drilling and completing and have simply had an absence of bad news. Bad news came earlier this year when their technology failed, with the Stage Completions equipment flopping on one of their holes, and with the shutdown of their partner’s gas processing plant for a while. So the fact that they’ve since completed a well and done more drilling and completing without a press release probably indicates that nothing else has failed… right? Absence of bad news is good news.

That’s a little shaky, but there are other good things happening as well — Encana has continued to invest in the Montney with a big new condensate processing plant that started up just last week, so that’s encouraging because Blackbird’s lands are next to a lot of Encana’s core areas, and Kelt had some good drilling results in land just north of Blackbird that seems to have also cheered investors.

As long as oil prices remain relatively robust, keeping demand for condensates from the oil sands producers high, I think Blackbird has a decent future based just on their existing proved and probable reserves — decent enough to hold on to the warrants while I wait to see what happens. The company has a reasonably justifiable valuation — at a market cap of about $200 million it’s essentially valued at the Net Present Value of the proven reserves, with a 10% discount rate, but the proven reserves are on just a small portion of their land holdings and they have close to twice that amount in the “proven and probable” reserves, and more still in the contingent resources that may be able to be proven up with a bit more drilling, along with less obvious potential in areas that have not yet really been drilled at all but should be, as they say,”highly prospective” in the Montney. You can see the latest presentation from Blackbird here.

This is still a “prospective” stock, of course — revenue is very low thanks to the small number of completed wells that are actually selling gas and condensate, and it’s not generating any cash flow, but I think there’s a good chance that we’ll see a meaningful amount of news out of Blackbird in the next six months when it comes to increasing their gas processing capacity, tying more production in to pipeline systems, and defining more reserves.

And I still like the leverage that the Blackbird 2021 warrants (BBI.WT, BKBFF, 30 cent strike price) provide, so I’ve increased my warrant holdings by about 30%, bringing the average cost per warrant down a bit — this now has a cost basis that approaches 1% of my capital at risk, so that’s pretty aggressive for a warrant holding on a junior gas stock, and that money is very much at risk of going to zero.

I think the likelihood of good news is pretty strong given the activity in Blackbird’s neighborhood in the Montney, and the price is much more subdued than it was last Spring, thanks to the Summer of bad news… but that is far from a guarantee, particularly if gas prices remain low. Given the promotional mien of CEO Garth Braun, I would be surprised if he doesn’t make the rounds of the investment newsletters and conferences to trumpet any accomplishments when (if) the news cycle turns, driving the price up further (though, of course, the news could also end up being bad — worse decline rates on the wells, no gas processing agreements, weak drilling results, etc.) If you want the hyper-optimistic take on Blackbird, you need go no further than Marin Katusa, who has been trumpeting the stock for a year or so now and wrote it up aggressively again in August here.

Risky, but appealing warrants at a relatively small premium to the common — at 16 or 17 cents, you need Blackbird shares to be above 47 cents for the warrants to break even by the Spring of 2021, and they’re at about 40 cents today (this is all in Canadian dollars). That means if the stock falls, stays flat, or rises 25% or so in the next 3-1/2 years you’re better off in the common equity than in the warrants, but if the stock goes up substantially the warrant leverage kicks in nicely — if the stock is at 60 cents at expiration, then that would be a 50% move in the common equity but a 90% move in the warrants (from 16 cents to 30 cents), and if the stock is at, say, a dollar, that would mean a 150% gain in the stock but would be a 400%+ return for the warrants. You pay for that leverage with the acceptance that if their wells fail to impress, or their reserves don’t expand, or gas prices fall and the stock is at 25 cents in a few years (or whatever other bad scenario you can envision emerges, and there are plenty), you could easily face a 100% loss in the warrants while the stockholders see only a 30% decline.


And speaking of risky stuff, leverage, and speculations, we had a question from a reader today regarding the Real Money Portfolio that I should answer for everyone:

“Hi Travis,
I seem to have some trouble following your options purchases at times. For example, I missed your purchase on 9/20/17 of INTC, GG and QQQ options. I went back and searched on premium content for those days and did not find those recommendations. Is there somewhere else I should be looking? Is it too late to purchase those options?
Thank you much for your great website and service.
S. C.

Thanks for the question, let me clarify.

I do write about all of my meaningful equity positions when those change in a meaningful way, but I do not write about every options transaction or little speculation. I do include them in the Real Money Portfolio because I’m trying to be as open and transparent as I can, but these are often small and speculative ideas that are not really appropriate for the close attention of a couple thousand of my closest friends all at the same time, and I’m not intending to offer an options trading advisory (as you might notice, I’m not particularly wizard-like in my options trading).

So I don’t call extra attention to them unless there’s a better reason than “I put a fifth of a percent of my portfolio into this options speculation,” or unless they tie into a bigger picture story that I can share — or unless they offer an example that I think readers might be able to follow with different investments.

I don’t mind being more specific and public with those transactions, but it won’t likely do anyone any good and, it would be much more likely to benefit me personally because of the lack of liquidity in those positions — I can pretty much guarantee that our readership is not large enough to impact the shares of even a reasonably small cap stock unless I pound the table on it and yell at the top of my lungs that “everyone must buy shares now,” which is not particularly likely behavior from me… even in that case, if my coverage of a stock does bump the shares up a bit, you can pretty well count on things smoothing out after a couple days and getting back to “normal”, which is why we have our three-day trading restriction here at Stock Gumshoe (authors can own the stocks they write about, but can’t trade in them for three days after an article is published — which should be enough time for “regular” trading to resume).

In the case of options or even tiny speculative positions in microcaps, which I’m tempted into making from time to time, that three days probably wouldn’t do it. So I don’t write about those speculations very often unless there’s a compelling reason to do so, or an interesting story that I think might benefit readers as they consider other positions or strategies, but I do include them on the Real Money Portfolio if they’re large enough to be counted or (more than a tenth of a percent of the portfolio, is the general rule), and, of course, I do disclose any such positions if they are connected to an article.

That said, here’s what’s new to the portfolio in the last week or two that falls into that “small and speculative” category that I don’t always write about:

Every year I do a little dabbling in LEAP options when I see them as being mispriced — this provides me some levered upside exposure to those names in the event that our bull market continues, and the pricing for LEAP options that are more than 1-1/2 or 2 years out is often pretty irrational, to my mind.

The ones that caught my eye on the first release of LEAP trading in September are January 2020 and January 2019 calls on Momo (MOMO), because those shares took a hit but continue to have extraordinary growth expectations (that Chinese tech stock, mostly a video streaming company now, is trading at only 10X 2019 earnings estimates, despite nosebleed growth, mostly because investors are cautious about whether MOMO can get to that next phase of growth, so the options are definitely risk on top of risk… but are cheap if the growth really materializes); January 2020 calls on Intel (INTC) and 2019 calls on QQQ that are speculations on growth in tech in general, since investors like to think “tech is done” but the continuation of a trend is always more likely than anything else; and January 2020 calls on Goldcorp (GG) that are just a cheap levered bet on gold prices.

I’ll probably look through over the next couple months and see if more of the 2020 LEAP options get appealingly priced for adding a little upside leverage to one or another of my more speculative sentiments (LEAPS are released following the September, October and November option expirations) … that’s part of what lets me hold a lot of cash without being too impacted by the “fear of missing out” impulse and without really sacrificing a lot of upside if the bull market keeps rolling.

And with that, I’ll leave you there for our (belated) Friday File — thanks for reading, and keep sending in your questions and your suggestions for teaser ads that we can feed to the Thinkolator. Enjoy what remains of your weekend!

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