Monthly Archives: May 2014

Diana Shipping (DSX)

Shipping is an industry that has been distressed since the Great Recession. Before the recession, shipping was literally booming and loads of shipping companies went public. Shortly after that, the macroeconomy went haywire and shipping never really recovered. The boom before the recession has caused too many orders for new ships. These new ships started coming online exactly at the wrong time, causing a huge overcapacity and a plunge in charter rates.

The industry is slowly working through this overcapacity. Older and less efficient ships are being scrapped while new ship orders are being delayed or even cancelled. As the global economy recovers, demand is recovering. The Dry Bulk Index has at times seen sudden spikes.

To me, its a matter of time that the shipping industry improves. In fact, during the short stock market slump in mid-2012, I went long some DSX stock at ~$5. The stock doubled and I thought it’d be a good time to sell, in anticipation of a pullback which never occurred. The stock went up even more but has since corrected a little.

I doubt I’ll get to see DSX at $5 so I’ll have to accept that I’ll have to rebuild exposure to the dry bulk shipping industry at a slightly higher level. I would be comfortable going long the stock again at $10, which was the price I had earlier liquidated at, but the stock hasn’t reached that level yet. Instead, I’ve decided to sell puts on DSX, taking advantage of the fairly high implied volatility. In the worse case scenario where I am put the stock, I establish a long position in the stock at a lower price. Otherwise, I get to collect a decent premium if my puts expire worthless. This is especially optimal since I have no idea when the dry bulk industry will start moving again so I collect yield to optimize my returns.

I sold 5 DSX Jan16’15 12 Puts @ 1.7. The stock is no longer covered by Morningstar. Below are the details of the transaction.

Economic Moat – None

Stock – $11.17

Strike – $12

IV – ~36.74%

Premium received – $1.7

Effective Buy Price – $10.30

Return of cash-secured put that expires worthless – 16.50%

If the stock falls further, I would probably sell even more puts or even long the stock.

 

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EZCorp, Inc. (EZPW) Scale-up Selling

On May 21, EZPW rose 19.02% to close at $12.45, from a previous day’s close of $10.46. There wasn’t any apparent news. Given that I had averaged down my EZPW long stock position on 28 Jan at $9.84 and $9.96, and again on 25 March at $11, I took this opportunity to reduce my position. When the market opened, an existing GTC limit sell order that I had placed was filled at $12 for 300 units of stock. I immediately placed  additional sell orders at $12.5, $12.75, $13, and $13.5, each for 300 stock units. This would mean that I would exit my long stock position through scale up selling, and keep my short put positions, in case EZPW would run further.

 

On the same day, my sell EZPW @ $12.50 for 300 stock units was filled. The next day, the $12.75 for 300 stock units was also filled.

As a result of these trades, I was still long 600 units of stock at an average price of ~$11.63, and short 8 puts with September expiry, which would give me an effective buy price of $11.235 for 800 stock units.

I was comfortable holding onto this position because I was uncertain why EZPW had popped, which could signify a run up, but also lightened my position by 900 stock units which would give me the chance to average again further if EZPW drops lower.

Diana Containerships (DCIX)

When the market opened, my limit purchase order for DCIX at $3.50 was filled. I bought 1700 lots at $3.50. The reason why the stock crashed as can be seen in the chart below, from the previous close of ~$3.65, was because the company announced during it’s earnings call that it was cutting its dividend to 5 cents from 15 cents previously. Given this dividend cut, I am only yielding 5.71% at my purchase price, compared to 17.14% if they hadn’t cut the dividend. As can be seen from the chart below, the stock has since fallen even further to near $2.50 levels, a near 30% fall since my purchase. It is approaching the price where I should average down further.

It is frustrating. Since Diana Containerships was a spinoff from Diana Shipping (DSX), Diana Shipping is a majority shareholder. I thought the DSX wouldn’t allow DCIX from cutting it’s dividend since they would want the financing. I was perhaps not conservative enough, especially given the high yield of DCIX at that point of time, which is often a warning sign.

From a long term perspective, DCIX is probably still a good buy if I am bullish shipping long term. Lets see how it goes.

LULU Averaging

Prior to setting up this journal, I’ve held a fairly sizable position in Lululemon (LULU). When I first started looking at the markets in the 2009 period, LULU was a growth stock. However, the stock tumbled in 2013.

I originally opened a position in LULU 1 Mar 2014. My average price for my 100 long stock was $47.50. I also had quite a few short puts with strikes in the $50-$55 region. Anyway, with the stock coming down to its its previous low of $45, a limit buy order of 100 stocks was triggered. A put-write trade was also triggered. I view this as averaging down, especially after lightening my position slightly by buying back some puts that were about to expire, when LULU bounced between $50-55 region.

To summarize, I bought 100 shares of LULU at $45 and sold 4 puts. Trade details of the put-write is as follows:

M* FVE – $53

Fair Value Uncertainty – Very High

Economic Moat – None

Consider Buy Price – $26.50

Stock – $45

Strike – $47.50

IV – ~45%

Premium received – $6.60

Effective Buy Price – $38.40

Return of cash-secured put that expires worthless – 16.13%

With this discipline to average down, I believe that my position in LULU should turn out OK.

About LULU the company

LULU is a niche athletics apparel manufacturer. Their main product line is in yoga clothing. Their products are very high priced and command a premium over their peers. They also are tailor-made towards yoga whereas most athletic apparel manufacturers concentrate on other sports and activities.

The stock price initially fell because the company sold a line of yoga pants that turned sheer. The company’s management created a PR mess by shrugging it off and even making comments that would appear to be insulting fat people. Even after the initial fall, the company continued to report supply chain problems. This has resulted in the stock price ~40% off its highs.

I asked the opinions of some friends who purchase Lululemon products. They said that they only use LULU products because its a status symbol in the gym. Also, the products are the most functional and also have the best appearance to the wearer. Both guys and girls told me this. Surprisingly, lululemon products seemed to be very popular in Singapore as well, even though there isn’t even a lululemon store here. This gave me confidence that the company’s products would continue to be popular in spite of the supply chain issues. Moreover, the company is starting to expand internationally. The progress of the international expansion caused the stock to bounce to ~$55 in mid-March. As a result, I’m still confident of LULU as an investment.