Stock at Whole Foods Market (WFM) have drifted towards the $30 mark. WFM has a soft spot in my heart. When I was living in the USA, I bought all my meat from WFM and it tasted so good! Moreover, all my classmates thought I was a spendthrift which made me want to go there more. It was like the Apple luxury good effect. However, I went there because I personally do not want antibiotics and hormones in my meat, and also because the extra checks in organic food means there is better food safety.
This past year, WFM has started coming down in price. Organic food has become more mainstream and the traditional grocers such as Walmart or Target are offering it. Even in Singapore, the “layman” grocer NTUC offers organic vegetables. This has caused analysts to fear that WFM’s margins will deteriorate.
Peridot Capital has argued their thesis in several posts which I have linked to before. One part of their argument that I find unique is that same store sales have fallen because WFM has opened so many new stores that they are cannibalizing each other. That makes intuitive sense but same store sales at their new stores are increasing rapidly that I believe WFM is expanding the pie as well.
Peridot Capital WFM Thesis
Peridot Capital WFM 2015 Update
The Mosaic Co is a company that I have been following for a long time now.MOS is a fertilizer company with phosphate mines in Florida and potash mines in Canada. Fertilizer is an under followed commodity as most investors focus on oil, metals, and grains.
Mosaic is the world’s largest producer of phosphate. It is vertically integrated with it’s mines in Florida accounting for 10% of global production of phosphate rock.Another large producer of phosphate is the government of Morocco. The market price is set by non-integrated producers which benefits Mosaic as it’s integrated business means a lower cost of production than them.
Mosaic is also the 3rd largest producer of potash, trailing PotashCorp and Uralkali. The potash industry is run as an oligopoly which has set prices much higher than marginal costs of production. Uralkali has started to slowly break away from this cartel by offering lower prices. The lower prices mean that there are larger barriers of entry to new players due to the incredibly high capital costs for greenfield projects.
Most important to me is the argument that Jeremy Grantham makes on fertilizers. Phosphorus (phosphate) and potassium (potash) both cannot be made, cannot be substituted, are necessary to grow all life forms, and are mined and depleted. To further aggravate the situation, Former Soviet states and Canada have more than 70% of the potash while Morocco has 85% of all high-grade phosphates. Thus, there is a quasi-monopoly on these two fertilizers. Mosaic and PotashCorp are probably the only two easy-to-invest companies.
The general commodity decline over the past 2 years has led to Mosaic to decline along with the rest of the sector. Mosaic is rated 5 stars with a fair value estimate of $48 and a high uncertainty rating. This translates to a consider buy price of $28.88. I have established a position in MOS through a long stock and short put position.
This year 2 of my portfolio companies filed for bankruptcy – American Apparel and Box Ships. Both have lessons for me.
Let’s first talk about American Apparel. The company was in the news for the removal of founder, shareholder and CEO Dov Charney for several sex scandals. The CEO then struck a deal with the private equity firm Standard General, boosting Charney’s stake in the company to 43% but giving Standard General a say over a large block of stock. Standard General also owned a huge chunk of American Apparel debt. I felt that there was a high probability that Standard General would facilitate a takeover or take private deal for American Apparel. Thus, with American Apparel stock trading at bankruptcy, my downside was low but upside large. Knowing that if I was wrong the stock would be worthless, I sized the position really small. While the investment did not work out as I hoped, I believe that my process was still correct.
The second company that filed for bankruptcy was Box Ships (TEU). I bought TEU for exposure to container shipping after I remembered that Motley Fool recommended the stock back in end 2011. I definitely did not see TEU filing for bankruptcy. Ultimately, I made an investment in TEU without really knowing much about TEU itself, though I knew something about the industry. I repeated a mistake I’ve made several times where laziness cost me. I should really eradicate this habit. Thankfully, the position in TEU was also small.
Today I decided to take the plunge and long Sun Edison (SUNE) through selling cash-secured put options. A lot of my bullishness of the stock comes from knowing that David Einhorn owns it as well as a recent write-up by John Hempton of Bronte Capital about it,
SUNE reported earnings after the close last night and they missed EPS expectations by about 21 cents. The stock is down today about 18%. Since I don’t have a position in SUNE yet, I believe now would be a prudent entry point.
I’ve decided to sell put options instead of buying the stock because of the incredible implied volatility on the 156 day options. The IV is between 100-115%! Also, because of the sharp decline in the stock, the 50% delta option is not the same as the option with the strike closest to the current price of the underlying. Thus, I’ve split my risk by selling both the 50% delta option with a strike price of $7, and the 50% price option at $5. If both expire ITM and I’m put the stock, I my effective buy price would be in the low $4, a heft 20% or so discount to the current trading price. I believe this is a perfect example of how using options could yield a better outcome than trading the stock.
I also sold put options in another solar company: SolarCity(SCTY). I consider this a lower risk investment compared to SUNE as SCTY has a vertically integrated business model, allowing the company to control its cost structure as well as benefit from economies of scale. It also has the largest residential market share and a sizable commercial market share. SCTY. SCTY has the potential of earning a moat through achieving a cost advantage over its competitors due to its size and scale. Since SCTY had a lower IV and has also fallen by a lesser degree compared to SUNE, I sized the position to be smaller than the SUNE position.
Some thoughts on Solar: I made money in 2H2011 by being short solar. That was perfect timing as the solar industry literally imploded, Solyndra filed for bankruptcy, and many Chinese solar firms have since been bankrupted. What bothers me is that I missed the lows of First Solar in May 2012, which was also literally the bottom of the down cycle in solar stocks. This allows me to hopefully not repeat my same mistake.
I totally get the thesis that solar is a very long way from becoming a mainstream electricity source. This is due to our very primitive standard of battery technology, which is still at Generation 1.0 whereas we are in Generation 5.0 for jetfighters. This means that we are unable to cost effectively store the electricity generated through solar. However, I am also very aware that solar is becoming cost-effective with traditional power generation even without subsidies in many areas of the world, not just California. This is where I think the opportunity lies, not that Solar becomes a main power source for cities, but that it becomes an important contributor to the power grid and also where it becomes a standard investment in homes, just as say a garage or WIFI is.
On further analysis of the market action over the past month, I’ve realized another error that I’ve made is that I’m not very comfortable holding losing leveraged positions. One of the reasons for this is because my position sizes have become too large relative to my portfolio. Secondly, it’s because my boss at my day job is a panicy person which doesn’t allow for this. As a result, this has affected my thinking. If I had held my short positions, while I probably would still be losing, I wouldn’t be losing as much.
The past quarter has been a roller coaster ride for me, especially the past 3 weeks. During the CNY period, as well as during the past 3 weeks, I made and lost a fortune.
During CNY, I went to Dubai for holiday. During that time, I made and then lost about 7.8% of my portfolio. From March 13 to 20, I made 11.5%, but lost 10.3% on the night of 20th March. On 23 March to 25 March, I made back another 6.5%, but lost 9.5% from 26 to 29 March. In fact, I am now down year to date, which is remarkable given that at one point I was up 13% for the year, handily outperforming the S&P500.
In both the CNY and the recent 3 weeks of volatility, I made a few similar mistakes. The first was to have a big open position during a time when I could not monitor the position. The first, because I was on a plane to Dubai and also on holiday which meant my schedule was disrupted and was less able to look at the portfolio, while on 20 March I was at a concert.
The second mistake I made was that I forgot that life is a marathon and not a sprint. As a result, I had huge futures positions in crude oil, wanting quick gains. I forgot that I had initially started trading in futures through very small positions, only have one or two open contracts at a time. Instead, I started trading up to 10 contracts, not including options. This was perhaps foolhardy.
On the bright side, I did learn that I am surrounded by a few encouraging friends. Other traders such as Charles, Ma, and WR were all encouraging me even as I questioned my trading ability. It was most heartening to know that I have surrounded myself with such sincere friends.
The University of Illinois has published an interesting report on the Midwest Cost of Production on farmland. It seems like Midwest farmers are now losing money on corn and soybeans. It’s not surprising then that Midwest farm values have declined for the first time in over 10 years.