How I’m Making Money In The Selloff

First of all, I want to thank everyone for your kind messages and emails. I always appreciate the kudos and feedback.

As a reminder to those who have emailed questions and stock ideas to me – please understand that it’s exceedingly difficult to keep up with the multitude (about 200 per day) emails that hit my desk. I do open them all (at least briefly) and will read well-researched ideas, but time doesn’t permit me to respond to the vast majority.

In other words, please take no offense if I don’t respond. Thanks again and thank you for understanding.

 

Quick Recap Of My LIVE YouTube Session

Yesterday, I hosted a LIVE info and Q&A session on YouTube. About 100 people tuned in live and a couple hundred more have checked out the replay. I won’t always recap the content (perhaps one of you can volunteer to do that!), but considering the big market decline, here are my quick notes:

1. Rising rates and trade wars aren’t good for the economy (at least not in the short-term). It creates disruptions, stifles investment, and transfers money (in the form of tariffs) from companies to the federal governments.

That being said, the economy is still strong, so I expect the market decline to occur in a more orderly fashion. In other words, if the market is heading for a more meaningful correction, I expect it to bounce at some point along the way. I think there will be better opportunities to sell ahead.

As a result, I started to increase my long exposure at the end of the day today.

2. Nobody knows where the market is going tomorrow… but I like my stocks. So, why should I get rid of them? Trimming positions and getting rid of speculative names is a good idea in this market, but if SMSI executes, they could do $0.50 of EPS in 2019 (model here). That’s a P/E of less than 4 as compared to its enterprise value of $1.90. Even in a bear market, stocks don’t get to half of those levels.

Clearly, when fearful of a market decline, it makes more sense to sell what you don’t feel great about, but I focus most of my attention on shorting the source of my fears!

In this case, I’ve been short things like FXI (China) and long things like RWM (which shorts the Russell 2000). I’ve also been short assorted stocks that I believe will have troubles ahead (like Kroger $KR, which is facing major competition from Amazon $AMZN).

3. I expressed my view that demand for Turtle Beach’s $HEAR products still looked good to me (per NPD data). That was quickly proven correct. HEAR pre-announced a very strong quarter. The stock responded by ripping despite the market being down heavily today.

This was a perfect example of why its good to own companies with business momentum, even in a market decline. My RWM made money and my HEAR bet made money, so I’ve been having a great week, despite the market decline!

4. This is not an environment for speculative picks. If the business isn’t already humming, the stock is liable to get hit harder if the market continues to fall. I have decades of experience with this, dating back to the Y2K and Internet bubbles.

A few years ago, I said that 48 of 50 pott stocks were shorts. On average, they dropped 95%. At the beginning of the year, I effectively called the top on Bitcoin and crypto stocks like $RIOT. Since then, Bitcoin has gone from $16,000 to $6,000 (and RIOT has gone from 25 to 2). Ditto for MoviePass $HMNY.

At present, I feel the same way about the new run in pott stocks. Most of the pott stocks are speculative… and most of the others are overvalued. There’s money to be made here, but it won’t be easy. Can the bubble continue to inflate? OF COURSE… but I wouldn’t want to be there when it pops. I’ve been making my money on the short side (by shorting call options on stocks like $TLRY and $NBEV). In the meantime, I protected those negative bets by making a short-term bullish bet on XXII, which also paid off. Win win!

5. Speaking of companies with momentum, I provided a major update on SMSI by recapping their latest investor presentation, which sounded very bullish to me. Here are my notes from the presentation:

 

Notes On Smith Micro’s (SMSI) Latest Investor Presentation

EMPLOYEES — SMSI currently has 160 employees. Most of them are in European development centers. Two takeaways: 1) SMSI’s expense base has been consolidated around product-development and 2) having moved development efforts overseas, SMSI is now benefiting from lower wages and a strong dollar.

SAFEPATH / SAFE & FOUND — The new IoT edition of SafePath (which is also known as “Safe & Found” at Sprint) will monitor items in and out of the home — this will include many home monitoring devices, along with vehicle trackers, pet trackers, and elderly trackers. Customers want this from their carriers. As a result, SMSI believes that the IoT edition will result in new carrier wins.

Roughly 50% of Sprint’s Safe & Found customers are new buyers, as opposed to converted Location Labs customers. All indications are that Sprint and SMSI are targeting 2-3M subscribers over time. That’s in the Sprint customer base alone, making this a much bigger opportunity than the Location Labs customer base (which I estimate at 300,000).

Sprint and SMSI won’t discuss this publicly, but triangulation of data points from multiple reliable sources indicate that a SMSI receives about $10 per quarter per subscriber. From there, the math is easy to do. I believe they averaged more than 100,000 customers during the quarter and ended the quarter with 120,000 and 140,000. This is a nice growing base of high-margin subscription revenue.

Now that Sprint is successfully running on auto-pilot, SMSI finally has the bandwidth, ability, and market credibility to focus on attracting new carrier customers. SMSI favors those with an installed base of customers using inferior products.

Smith Micro’s CFO, Tim Huffmyer (who is traditionally conservative) specifically said that its SafePath IoT opportunities are not reflected in SMSI market cap.

COMMSUITE — CommSuite is pre-loaded on all Android devices at Sprint. They have an iOS version which has not been rolled out yet. CommSuite currently sits on 19M devices and manages over one billion messages per quarter. SMSI is investing in maintaining and expanding this product’s relevance.

SMSI is optimistic that another U.S. carrier will “seek out” CommSuite in the near future, due in part to enhancements made over the past year. Expect 3% sequential growth per quarter for the rest of the year (very healthy for a long-established product).

In the meantime, multiple years are left on the Sprint contract. So, The odds of losing Sprint are virtually nil, while the odds of winning a new carrier is substantial.

T-MOBILE — SMSI has publicly noted that T-Mobile has a few SafePath-complementary offerings AND an inferior voice platform to CommSuite (which also happens to be an internal cost center). Connecting the dots, it seems quite clear that they are in advanced discussions with T-Mobile, among others.

GRAPHICS — New launches are coming to the Graphics biz, which should start to contribute to a resurgence in this business, which has recently been a drag on overall revenues.

QUICKLINK IOT — The QuickLink IoT business is for sale. Don’t be surprised if they divest this business by selling multiple unlimited perpetual licenses and the selling the rights to the rest of the business to an independent third party.

NETWISE — NetWise is a policy-based Wifi-offload product which has data analytics for spectrum and non-spectrum, which provides great insight into customer activity as they jump from network to network.

QuickLink & NetWise had one-time license sales in Q2 (about $200-250K). These aren’t expected to repeat in Q3, but data points and math suggest that SMSI should easily replace that revenue with growth in SafePath and CommSuite. As a result, I personally believe that they will blow away the Street estimates of 6.1 million in revenue for the quarter.

EXPENSES — Costs dropping by another $250K/Q. Seeking more opportunities to reduce expenses.

CONCLUSIONS — Tim Huffmyer said Sprint it will become a bigger % of SMSI revenue as SafePath ramps up… but then he said that it will “decrease when (he didn’t say “if”) they launch on another SafePath customer”. this provides further evidence that the company is close to signing a new major carrier.

Mathematically, it HAS TO be something that will grow faster than Sprint is, but Mr. Huffmyer’s rhetoric also makes it clear that They are seeking customers with an existing install base, which means that he’s talking about AT&T, Verizon, and/or T-Mobile (any of which could justify the addition of multiples to SMSI’s valuation).

Connecting the dots of Tim Huffmyer’s rhetoric, it seems pretty clear that they are hoping, if not expecting, to win T-Mobile. If they do, barring a massive gap up on the announcement, I will be buying shares on that news.

POSITIVE EARNINGS ON DECK — Q3 earnings will be announced soon. In general, I don’t make earnings calls unless I’m confident about the likely outcome. In this case, I’m VERY confident that SMSI will easily beat the Street estimate, which calls for $6.1 million in revenue. I expect something closer to $6.7 million and perhaps as much as $7.0 million (which would obviously be outstanding).

I think it will be a good sign if SMSI announces its call date soon. On average, the call has been scheduled for the final days of October. If it’s anywhere in that ballpark, it will only add to my confidence in the outcome.

 

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Disclosures / Disclaimers: I am long SMSI, HEAR, RWM, and short FXI. I’m also short HEAR put options and NBEV call options. However, this content is not a solicitation to buy, sell, or otherwise transact any stock or its derivatives. Nor should it be construed as an endorsement of any particular investment or opinion of the stock’s current or future price. To be clear, I do not encourage or recommend for anyone to follow my lead on this or any other stocks, since I may enter, exit, or reverse a position at any time without notice, regardless of the facts or perceived implications of this article.

I am not a financial advisor. Nor am I providing any recommendations, price targets, or opinions about valuation regarding the companies discussed herein. Any disclosures regarding my holdings are true as of the time this article is written, but subject change without notice. I frequently trade my positions, often on an intraday basis. Thus, it is possible that I might be buying and/or selling the securities mentioned herein and/or its derivative at any time, regardless of (and possibly contrary to) the content of this article.

I undertake no responsibility to update my disclosures and they may therefore be inaccurate thereafter.  Likewise, any opinions are as of the date of publication, and are subject to change without notice and may not be updated. I believe that the sources of information I use are accurate but there can be no assurance that they are. All investments carry the risk of loss and the securities mentioned herein may entail a high level of risk. Investors considering an investment should perform their own research and consult with a qualified investment professional.

I wrote this article myself, and it expresses my own opinions. I am receiving no compensation for it, nor do I have a business relationship with any company whose stock is mentioned in this article. The information in this article is for informational purposes only and should not be regarded as investment advice or as a recommendation regarding any particular security or course of action.

The primary purpose of this blog/forum is to attract new contacts with professional industry expertise to share research and receive feedback (confirmation / refutation) regarding my investment theses.

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15 thoughts on “How I’m Making Money In The Selloff

  1. Not saying I don’t like your videos, they have been awesome and very informative with lots good lessons, but I miss reading article like this! Thank you for everything you do Mark.

    Like

    1. I understand, but writing articles with the same amount of content was requiring about five hours of work.

      For something I do for free, the extra 3.5 hours was proving to be too much relative to my other obligations, pursuits, and interests.

      I give what I can, but appreciate / respect your feedback. Cheers 😎

      Like

  2. Given the topic of this article, I am curious if you have an opinion on HYG (junk bond ETF) long term puts as a reasonable hedge. I already use SH but have recently bought a substantial position in January 2020 HYG $84 puts. With the rising rate environment and potential earnings slow downs, the thinking here is that the companies with outstanding junk bonds will 1. have to pony up much bigger yield to raise money. 2. Defaults will increase as companies with junk are likely closer to the margin on debt service capabilities…and 3. The yields on safer investment grade bonds and potentially treasuries are more attractive in a rising rate environment with much less risk. Add to this that corporate debt has more than doubled to $4.9T in the last 10 years of low interest rates.

    Like

    1. I like HYG as a hedge, but the decline feels overdone right now. Plus, I don’t like buying options (I prefer to write them).

      p.s. Folks, please hold your questions until the next Q&A. Busily working on research for the next one. Thanks!

      Liked by 1 person

  3. I think TPCS is a good defensive play if the market corrects. This is from Quick on Yahoo Finance:

    “Found this on the website of one of the two major ship builders-this is consistent with General Dynamics
    stating they expect Block V award in this quarter. From Navy–PLANNED AWARD OCTOBER 2018!!!!
    Block V contract is expected to be $30 billion–this should be great news for TPCS as they get their share.

    Presentation from Capt. Stevens of the Naval Sea Systems Command

    Block V (FY19-23 ships) – Planned award Oct 2018
    Up to 10 ships – Multi-Year Procurement (MYP) contract with Economic Order Quantity (EOQ)
    Includes VIRGINIA Payload Module (VPM) and Acoustic Superiority (AS)

    GLTA”

    I believe there will be north of 200 Billion Dollars of submarine orders in the next 15-20 years. TPCS’s share could be 600-900 Million Dollars. I think Mark’s target of $3.00 is conservative.

    Like

  4. Hey Mark,

    Just a question for you. You said that analysts are expecting 6.1 million in revenue. I’m assuming they know that last quarter we hit 6.9 mill and the licensing fees add up to 200k-300k. Any idea why they’re taking 800k off…?

    Like

    1. No idea. I’m not a customer of the firm… but I’m glad they did!

      Most analysts don’t do the kind of work we have. My checks and math indicate that they will easily beat that Street estimate, hopefully bringing some nice new attention to the stock when outlets like SeekingAlpha report it.

      Like

      1. I’m new to the game but I guess you must be right because I feel as though anyone could have calculating them beating those numbers lol!

        But if that’s the case then they definitely don’t understand the operating leverage they have — which will become a lot clearer in this ER.

        Like

  5. Just FYI, Scott Searle, the Roth analyst, has been following this stock for a while. He recommended it back in 2010 while working at Merriman Curhan Ford.

    Like

  6. SMSI: Upcoming & Recent Events
    Thursday, November 29, 2018 | Palmer House Hilton, Chicago, IL
    Benchmark Discovery One-on-One Conference
    Tuesday, October 24, 2018 – 1:30PM PT / 4:30PM ET
    Listen to the Smith Micro Software Third Quarter 2018 Financial Results

    Like

  7. TPCS

    Catalysts Before Earnings Call on 11/12/18-THE SUBMARINES ARE COMING…DON’T MISS THE BOAT!

    August 2, 2018-Huntington Ingals CEO Mike Petters said, “This is the most exciting time that I’ve seen in ship building in 30 years.”

    Block V Virginia Class Submarine order for 10 subs expected this quarter for 30 Billion Dollars

    Advanced Payload Module Work added for Virginia Class Block V subs 2-10

    Columbia Class Submarine prototype work begun…This could be a 128 Billion Dollar Program according to https://breakingdefense.com/2018/07/inside-americas-aging-nuclear-missile-submarines/

    Expect another 18 Virginia Class Submarines for Block Vl and Block Vll valued around 60 Billion Dollars

    Total Submarine program over next 15 20 years could be north of 200 Billion Dollars

    TPCS makes a number of parts for submarines including hatches, sonar housings and fairings and vertical launch missile tubes. Other new parts are likely being added as General Dynamics Electric Boat reduced their approved vendor list from 15,000 to about 5,000.

    TPCS’s share of the submarine business could be 600-900 Million Dollars over the life of the Virginia Class and Columbia Class Program. Do the math. It works out to about 37-56 Million Dollars per year for TPCS over the 15-20 year period. This could be an excellent annuity stream of earnings and cash flow.

    One risk to the annuity is an early buy-out of the company as the story develops. On the November 13, 2017 conference call, Alex Shen CEO said, “First, I will share something from Rich McGowan, our Chairman of our Board, who stated, the board is very aware of the significant drag on earnings caused by the costs of being a public company at our revenue level. We have been and continue to actively investigate and pursue all ways to improve this.”

    Presentation from Capt. Stevens of the Naval Sea Systems Command
    Block V (FY19-23 ships) – Planned award Oct 2018
    Up to 10 ships – Multi-Year Procurement (MYP) contract with Economic Order Quantity (EOQ)
    Includes VIRGINIA Payload Module (VPM) and Acoustic Superiority (AS)

    Remember…THE SUBMARINES ARE COMING…DON’T MISS THE BOAT!
    Less

    breakingdefense.com.

    Like

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