More On How To Profit In The Selloff (Includes SMSI, HEAR, Pott Stocks, etc…)

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.

 

It’s The End Of The World… But I Feel Fine 🙂

Last week, I hosted a LIVE info and Q&A session on YouTube. About 100 people tuned in live and FOUR HUNDRED others have now checked out the replay.

To be sure, it was a money maker for anyone who followed my moves 🙂

I rarely write recaps, but this time I did. So, in this article, I’ll provide an update to the moves I made… along with some new moves and thoughts. I also plan to go LIVE on Friday to answer your questions.

I’ll also discuss SMSI’s option expiration (which is happening Friday afternoon) and upcoming earnings report (which will be on Wednesday), both of which should move the stock aggressively, especially since it is thinly traded. I preview that discussion in my final segment below.

 

OK, let get to work !  Last Time I Said…

Rising rates and trade wars aren’t good for the economy (at least not in the short-term)… [however] 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.

Now I Say…

As luck would have it, the market bottomed shortly after I hit the “Publish” button. The market bounced by more than 3% in just three trading sessions:

SPY

With Trump sounding off against the Fed and year-end coming, I think the bounce can at least continue until we hit the 200 DMA, which is another 3% up from here.

 

Last Time I Said…

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).

Now I Say…

The same. I’ve gotten rid of most of my speculative exposure. So now, stocks like SMSI, GAIA, and HEAR represent an even bigger % of my total long exposure. That has worked fantastically! GAIA is up with the market and SMSI has been outperforming throughout the downturn. They also announced their call date this week (more on that below).

 

Last Time I Said…

[HEAR] 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!

Now I say…

HEAR pre-announced that Q3 was much better than expected. This news has sent the stock ripping through its 50 DMA. In addition, investing legend Jeffrey Vinik has bought in, likely for some of the same reasons as me — the headphone trend is not proving to be a fad yet. Further, the latest data on Fortnite shows that it continues to go strong. Headphone sales this year has only been about 5 million units to date… but there are 125 million Fortnite players. That doesn’t guarantee victory, but that simple math tells me that the odds remain in my favor.

I’ve actually increased my long exposure to HEAR by selling more puts and even buying some shares. It’s up as I write this, even though the market is pulling back a bit today. That’s a strong move.

 

Last Time I Said…

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!

Now I Say…

The same. The more research I do, the more I believe that legalization is going to spark massive declines in the price of marijuana. They are already seeing it in Oregon, where prices have fallen 75%!!! This is great news if you like pott, but not for most pott stocks!

Again, it’s a bubble, so there’s still speculative money to be made in some of these stocks, but be careful! Most of my money will be made by shorting them at opportune times (as was the case during the Internet and Real Estate bubbles).

If I have to guess, the next move is up, but again… be careful!

 

Last Time I Said…

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:

If you wish, you can watch the SMSI segment of my LIVE broadcast by Clicking Here.

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.

 

Now I Say…

They’ve announced their call date… and it’s next Wednesday. Anyone looking to get in, might have to pay up on Wednesday, because SMSI is thinly traded. In addition, most people don’t know this, but a ton of options are expiring on Friday.

Notice how the vast majority have a $2.50 strike price and then continue reading…

SMSI Options

If you add it up, it’s about 6,300 contracts. That represents a massive 630,000 shares of the stock! So, if you wonder why the stock has been mysteriously held at $2.50, look no further.

SMSI’s short interest was falling until two months ago (coincidentally, around the same time these options gained popularity). Since then, it hasn’t risen, but it hasn’t continued falling either.

The most interesting thing is that $2.50 options are NOT being offered for November. The next ones up are $3.00… so, what’s going to happen on Monday considering that:

  1. 630,000 shares worth of options will expire Friday?
  2. The short interest is sitting at 2.7 million shares?
  3. The chart is at the end of a pennant formation?
  4. …and I’m 99.9% sure SMSI will crush its estimates on Wednesday?

You tell me. I haven’t seen a set-up like this before.

I just know it’s going to be interesting!

SMSI

Cheers.

More Research:

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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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22 thoughts on “More On How To Profit In The Selloff (Includes SMSI, HEAR, Pott Stocks, etc…)

  1. 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 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.

    Liked by 1 person

      1. Confirms what I picked up. The arbs didn’t buy enough SMSI to cover the $2.50 options and may be on the hook for 189,000 shares according to a options pro we spoke with.

        The timing around earnings and the pennant break out couldn’t be worse for them. It’s effectively a short squeeze. We’ll see if traders keep pressing it thru Friday, forcing them to buy in order to deliver those shares.

        Liked by 1 person

    1. The $2.5 OI is mostly retail. Between myself and many colleagues I know, we loaded up on these calls at $0.30 to $0.35. I also know Mark sold this same strike.

      It’s interesting to see the stock move a few days before opex. I had written it off and was expecting a pin at $2.5 by end of week so I sold some of those calls at $0.10 yesterday. Still have a bunch more I’m holding now.

      What is more interesting is the $5 Jan calls. That entire OI of nearly 5,000 is almost certainly an institution or a very wealthy investor as all of those trades were in 100 to 1,000 contract blocks. I’m piggy backing off that trade with $4 calls.

      I should say usually buying OTM calls is a fools errand so it’s a tiny part of my full exposure. I do have a nice amount of $1 calls though. Pretty safe relatively speaking and gives you leverage at nearly par value.

      Like

      1. Thank you for the thorough explanation Ben, not really well versed with options, but this made me understand it a bit better. Looks like we are an exciting ride soon

        Like

      2. Great post. My only disagreement is that there has to be someone on the other side of all those retail Oct 2.5 call purchases!

        While it’s true that I wrote some, as discussed in my videos, mine was a position where I bought more SMSI stock + wrote the calls + wrote the puts. That collects a lot of easy premium, as long as the stock doesn’t tank (and the data made me confident that wouldn’t happen).

        Somewhere there are folks sitting on the other side of your call options 🤔

        Like

        1. I also sold the 2.5 puts! expiring worthless this week hopefully 🙂 – break even at $2.1 or something insane like that.

          So re: your thesis above Mark are you saying the sellers of the 2.5 calls sold this NAKED?? and they have to now buy the stock in order to deliver it on friday??? That’s odd… if I ever sell calls, it’s always covered already.

          Like

          1. Not all, but YES. When you buy an option, who do you think you’re buying it from?

            Most people BUY calls and puts. That requires a seller (writer), which is often a market maker who uses the option’s Delta value to calculate how many shares to buy or short to offset the risk of selling those options to the buyer.

            As expiration approaches, those positions often need to be adjusted depending on how the options are playing out. In this case, we see what’s happening…

            Liked by 1 person

          2. okay let me understand. You are saying an MM likely sold those $2.5 cals naked and are suggesting today they are buying because the stock was over 2.5 and they’ll need to deliver? But the stock was $2.55 at low of day… wouldn’t have it been just as simple for them to sell the stock down and keep it at 2.5? That is what opex pinning is all about right? So why would it be different this time? I think I know the answer but appreciate it if you can walk me through this a bit more.

            Liked by 1 person

          3. I get the feeling that they’ve been TRYING to keep the stock pinned down, but with earnings coming and looking like a solid beat, the stock broke out of its wedge and is now sparking a little short squeeze on those guys.

            You can only hold a stock down if there aren’t enough buyers to counteract it! Otherwise, you just dig yourself into a deeper ditch 😂😂😂

            Liked by 1 person

          4. Should be noted that the IWC has also been helping to hold SMSI down (along with HEAR and GAIA).

            However, all three have been acting strong, so real buyers have been outstripping the pressure from ETF selling. That’s called VALUATION 😎

            More on this during tomorrow’s LIVE…

            Liked by 1 person

  2. TPCS Submarine News

    Today in a Cabinet meeting Trump said:

    “We know what the budget, the new budget is for the Defense Department, it will probably be $700 billion,” the president said. “I brought it up to $700 (billion) and then $716 (billion) was to build new ships. We’re building new incredible submarines, the finest in the world, the most powerful in the world, anywhere, ever. We are doing things that we have never done on this scale, so that included a lot of rebuilding of our military. So despite that, I’m going to keep that” at a $700 billion defense budget.“

    Liked by 2 people

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