Slope of Hope Blog Posts

Slope initially began as a blog, so this is where most of the website’s content resides. Here we have tens of thousands of posts dating back over a decade. These are listed in reverse chronological order. Click on any category icon below to see posts tagged with that particular subject, or click on a word in the category cloud on the right side of the screen for more specific choices.

Sirius Questions about Hedging and Risk (by Pinsen)

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Hey Fellow Slopers,

This post might be a little basic for some of you, but since Slope has a broad range of readers, I figured this might be educational to some of them.

Yesterday, a financial professional Portfolio Armor subscriber contacted me with a question: he said he’d been unable to find optimal put option contracts to hedge his client’s position in Sirius XM Radio Inc. (SIRI). I sent the note below in response, and since it covers some basics about hedging and risk, I thought it might make an educational blog post. First, though, a quick explanation of what Portfolio Armor does:

How Portfolio Armor Works:

You enter your stock and ETF holdings, and the maximum downside risk you are willing to accept for each holding. Then, using its proprietary algorithm (which was developed by a finance Ph.D. candidate), Portfolio Armor shows you the optimal put options to buy to obtain the level of protection you want at the lowest cost.

How does Portfolio Armor differ from other options tools?

Portfolio Armor is unique in that it shows the optimal put options to buy for you to obtain the precise level of protection that you want at the lowest cost.

What about just scanning Yahoo! Finance or Morningstar to manually find puts to buy?

A very good, experienced, and savvy investor might be able to find the right number of contracts and the right strike price to protect against a certain loss level, but when taking price into account he at risk of paying too much for too little coverage.

My note to the financial professional looking to hedge his client’s SIRI position:

Please see the two attached screen prints. The screen print titled “SIRI Portfolio Armor” shows that 23% is the smallest threshold for which Portfolio Armor was able to find optimal protective put option contracts for SIRI (“threshold” refers to the maximum decline you are willing to risk in your stock or ETF).

What that means is this: if you wanted to protect against a smaller loss in SIRI today (say, a greater-than-20% loss), the cost of protection would be greater than the loss you were looking to protect against (20% of your portfolio value).

That would be like spending $1000 on collision insurance for a car with a Blue Book value of less than $1000: it wouldn’t make sense. Which is why Portfolio Armor doesn’t show any contracts when the cost of protection is greater than the threshold entered.

There are a number of factors that determine how much it costs to hedge a position with protective puts. One of them is the perceived risk of the security. The other screen print, “SIRI Altman Score” shows that SIRI currently has an Altman Z”-Score of about -4.25.

Scores below 1.1 indicate risk of bankruptcy within two years, according to the Altman Z”-Score bankruptcy model (more detail on that here). That risk may help explain why SIRI is so expensive to hedge.

Another factor that affects the cost of hedging is general volatility. Volatility spiked today (due in part, most likely, to fears related to Japan)1. In general, it’s cheaper to hedge when markets are up and volatility is low (“buying umbrellas when it’s sunny out“).

It’s also generally cheaper to buy protection on a diversified ETF (e.g., SPY, which tracks the S&P 500 Index) than to buy protection on an individual stock. An index-tracking ETF such as SPY is subject to market risk, but it’s diversification pretty much eliminates idiosyncratic risk; an individual stock, on the other hand, is subject to both market risk and idiosyncratic risk.

1I wrote this note Wednesday night, after the VIX had spiked about 20% on the day. It fell about 10% today.

A Nano Cap Bargain (by DPinsen)

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Despite my general bearishness these days, I just added a long position. Below is the scoop on it, but first a quick heads up about something else: we're giving away an iPad 2 at the end of this month on Short Screen. If you're interested in entering the contest, you can find the info on it here.

Wireless Xcessories Group, Inc. (Pink Sheets: WIRX.PK) is a Pennsylvania-based nano cap that designs, manufactures, and distributes accessories for cellular phones, including those manufactured by Apple, Nokia, Samsung, Research In Motion, and other companies. One example of the thousands of accessories WIRX sells is this protective iPhone cover:

Pink Skulls Pattern Protective Cover for an iPhone 4

According to company’s most recent financial summary, its cell phone accessory business didn’t do too well in the first three quarters of 2010: it had a loss from operations of $89,000 or $0.02 per share in the first 9 months of 2010, which the management attributed in part to problems with the implementation of new business software (nevertheless, it had net income of $167,000 or $0.04 per share over the same period due to gains from the company’s investment in marketable securities).

WIRX's chart does't look great either:

WIRX may not be a great business, but it appears to be selling at a great price: according its most recent financial summary, the company had no debt and net working capital of $7.3 million as of 9/30/2010; as of Thursday’s close, it had a market cap of $3.8 million.

On March 15th of last year, the company declared an annual dividend of $0.10 per share. We should know soon whether the company declares another annual dividend, and, if so, how much it will be.

A few cautions about this stock: it’s illiquid and thinly traded (I had trouble buying more than a few thousand shares a day without going over the ask), and the company’s financial statements haven’t been audited since it voluntarily deregistered its common stock in the spring of 2008. Based on its final 10-K, filed on March 28th, 2008, Audit Integrity had rated the company as having a conservative Accounting & Governance Risk (AGR®) score of 85 out of a possible 100, ranking it in the top 96th percentile among the approximately 8,000 companies rated by Audit Integrity at the time.

Market Neutral Trade for 2.10.2011: Long EMN, Short MBLX

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For today's market neutral trade, I shorted MBLX at $9.12 and bought an equal dollar amount of EMN at $91.37. As I’ve done with the last few market neutral trades, I shared the trade idea with subscribers of the Market Neutral Notification List the night before I placed the trade.

One quick note about my plan here: in a previous post, I mentioned I planned to build up to a portfolio with 26 pairs. I've decided that would be a little unwieldy. Instead, I plan to build up to 13 pairs over the next six months or so, using wide trailing stops, and then start closing out open positions and replacing them with new ones. On to today's trade.

Metabolix, Inc. (Nasdaq: MBLX), a bio-plastics company, caught my eye recently when I saw its chart.

The gap down in that chart in November occured when the company filed a disappointing 3rd quarter 10-Q, in which it reported a loss of 37 cents per share, versus a gain of 41 cents per share in the previous year's 3rd quarter.

Short Screen shows an Altman Z-Score of -0.95 for MBLX. Recall that Z-Scores below 1.81 indicate risk of bankruptcy within two years. Although MBLX has a high current ratio and no long-term debt its negative trailing four quarters EBIT (Earnings Before Interest And Taxes) and its negative retained earnings contribute to its negative Z-score.

Out of curiosity, I also pulled up a stock report on MBLX from MarketGrader Research. MarketGrader's quantitative tool gives a sentiment rating for stocks, that takes into account technical factors as well as earnings guidance and short interest, and a fundamental rating that takes into account cash flow, profitability, and other factors. On a scale of 0-to-10, with 0 being the worst, MarketGrader gives MBLX a sentiment rating of 1.4. On a scale from 0-to-100, with 0 being the worst, MarketGrader gives MBLX an overall grade of 15.3 and a "sell" rating.

For Eastman Chemical Co. (NYSE: EMN), Short Screen shows an Altman Z-Score of 3.2 (scores of 3 and above indicate an absence of financial distress).

MarketGrader Research's tool gives EMN a sentiment rating of 8.6 on its 0-to-10 scale, an overall grade of 66 on its 0-to-100 scale, taking into account the stock's fundamentals, and a "buy" rating .

Gaming Industry: Long GPIC, Short ASCA (by Dave Pinsen)

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Hey fellow Slopers,

Happy New Year.

On Wednesday evening, I mentioned to those on the market neutral trade notification e-mail list that I planned to short Ameristar Casinos Inc. (ASCA) and buy an equal dollar amount of Gaming Partners International Corporation (GPIC) on Thursday. It turned out that there were no shares of ASCA available to short Thursday, but there are options available for it, so you can establish a synthetic short position in ASCA.

Ameristar Casinos Inc.1 (ASCA), headquartered in Las Vegas, owns and operates casinos eight casinos spread over several states in the U.S. In August, the company announced that it was looking to be acquired, sparking a rally in the stock, but earlier this month the company announced it was no longer seeking to find a buyer — presumably, because it couldn't find a willing one at whatever price it was seeking.

Ameristar has an Altman Z"-Score of about 0.26, according to Short Screen (recall that Z”-Scores below 1.1 indicate financial distress). It also has a current ratio of 0.46.


Gaming Partners International Corporation (GPIC), also headquartered in Las Vegas, is a picks & shovels play on the casino industry: it manufactures casino tables, roulette wheels, gambling chips (including ones embedded with RFID microchips), and sells its products worldwide.

GPIC has Altman Z-Score of about 5.9, according to Short Screen. Recall that Z-Scores above 2.99 indicate financial strength. It also has current ratio of 3.91.

In addition to the contrast in financial strength, GPIC has a more attractive valuation than ASCA. Since ASCA has significant net debt, and GPIC has significant net cash, an enterprise value/EBITDA comparison seems appropriate. GPIC has an enterprise value/EBITDA of 2.93 versus 7.83 for ASCA (trailing twelve months, in both cases).

1Which apparently hasn't gotten around to building its website yet, and has its domain parked with Network Solutions.

Disclosure: No position in either of these stocks currently. My current brokerage doesn't allow synthetic shorting, so I haven't placed this trade yet. I may move the account to a firm that allows synthetic shorting, and place the trade there, but I won't be able to do that for at least a week.

Market Neutral Investing in the Wireless Industry (by Dave Pinsen)

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Hey Fellow Slopers,

For today’s market neutral trade I shorted CLWR at $5.45 and bought an equivalent amount of WRLS at $6.69. As I’ve done with the last few market neutral trades, I shared the trade idea with subscribers of the Market Neutral Notification List the night before I placed the trade.

A quick note on stops before elaborating on this trade: I mentioned in my previous market neutral trade post that due to the number of positions I am building up to (26 pairs, 52 positions), and the relatively small size of each, if I added stops, they would be wide ones.  I have added wide trailing stops since then. On a few occasions so far, there have been double digit intra-day percentage moves in stocks I've purchased or shorted in previous market neutral trades, e.g., IGTE, a long position, dropped about 20% in one day; CCSC, a short position, spiked over 10% last Friday; and JOE, another short position, spiked over 11% intra-day yesterday. Due to the wide stops I am using, I haven't exited any of those positions. Back to today's trade:

CLWR, a 4G wireless carrier which is 54% owned by Sprint, dropped yesterday on news that Sprint has no plans to buy the rest of the company.

CLWR has been burning cash as it grows subscribers, and currently has an Altman Z"-Score of about -0.75, according to Short Screen (recall that scores below 1.1 indicate financial distress). CLWR has been able to raise additional capital via debt financing recently though, albeit at a fairly high price. CLWR insiders have been net sellers of its stock over the last year.

Wireless networking company Telular Corp. (WRLS) has an Altman Z-Score of about 9.75, according to Short Screen. Recall that Z-Scores above 2.99 indicate financial strength (N.B.: Short Screen calculates a Z-Score for WRLS, and a Z"-Score for CLWR, because it goes by the companies' respective SIC codes: The SEC's website shows a manufacturing SIC code for WRLS and a services SIC code for CLWR, even though both companies are in the wireless communications industry).

Insiders have been net buyers of WRLS over the last year.

WRLS was also mentioned as a GARP (growth at a reasonable price) "strong buy" by Sabrient Systems CEO David Brown in his Seeking Alpha article last week.