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| Subject: Investing Using Sentiment Analysis With Amit Ghate Sun Jun 04, 2017 11:57 pm | |
| SummaryHow to identify contrarian opportunities, how shorting has changed over the years, and a better way to express a short trade are topics discussed, and Amit Ghate shares short ideas on several battleground stocks. We highlight several notable Sohn Investment Idea contest entries and a noteworthy PRO idea on a compelling arbitrage opportunity. Our idea screen of the week takes a look at opportunities in the chemicals industry.
Welcome to the latest issue of the PRO Weekly Digest. Every Saturday for Seeking Alpha PRO subscribers and Sunday for all other Seeking Alpha users, we publish highlights from our PRO coverage as well as feature interviews and other notable goings-on with SA PRO. Comment below or email us at pro-editors at seekingalpha.com to let us know what you think. Find past editions here.
Feature interview Amit Ghate (a long-time Seeking Alpha contributor) is a private, full-time trader who uses a contrarian style. Notable calls include a bearish thesis on Osiris Therapeutics (NASDAQ:OSIR), a bearish thesis on Plug Power (NASDAQ:PLUG) and a bearish thesis on CorMedix (NYSEMKT:CRMD). We emailed with Amit about his transition to full-time trading, risk management and the benefits of living on the West Coast. Seeking Alpha: You made the transition from a full-time consulting job to trading. Can you discuss the motivation for this move, how your investing style has changed as a result (if at all) and any advice for readers considering making a similar move? Amit Ghate: My style and the transition necessitated one another, i.e., once I realized that I wanted to trade actively rather than only investing for the longer term, it required that I follow the market throughout the day. As I discuss below, my style requires watching participants on chat boards, Twitter, etc., in order to get a sense of the "emotions" of the market. As to advising others on a similar transition, I think the decisions depend on one's trading style, but one thing that made it much easier for me was living on the West Coast. You can get a lot of reading and trading done from 5 AM PST to 9 AM PST, then head to a "real" job, and then read up on what happened during and after the market close upon returning home from the day job. Doing this for a while will give you a real sense of whether or not the trading life is for you. (I know several people who were successful traders but gave up trading either because they missed the camaraderie and shared purpose of working for a larger company or because the uncertainty and stress weren't worth the potential financial rewards of trading.) And indeed, I've returned to my roots in that I periodically take on consulting projects because not only is there something very alluring about working with facts and numbers in the engineering world, but also because it helps balance out the emotional swings that are inherent in trading. SA: How do you identify contrarian opportunities? How do you deal with the issue of catching a falling knife (or standing in front of a freight train for a short)? AG: I personally identify contrarian opportunities by watching trading volumes and trader rooms / message boards / Twitter feeds. When there seems to be an inordinate amount of excitement about a stock, especially if it goes on for a few days or even weeks, then that's a situation that's worthy of more due diligence. One newer tool to help look for these types of situations is the social media heat map. It's one thing for Apple (NASDAQ:AAPL) or Nintendo (OTCPK:NTDOY) to get a lot of mentions, it's another when a sub $200M market cap company is getting the same attention. As to the second question, the biggest overall lesson - and one that, unfortunately, I seem to have re-learn periodically - is money management. That's the ultimate survival skill for traders. For shorting, in particular, you have to have in mind that any stock can move against you substantially, and thus you must be positioned for that possibility, even to the extent of being able to add shares after some price increase (and after some elapsed time). But I don't know of any algorithm for it. Rather, you can expect that if a trade goes your way from the outset, you'll feel that your position was much too small; conversely, if the trade goes against you, it will always seem like you had too large an initial position, regardless of any position sizing rules you used. I think it's just the nature of trading. SA: Shorting takes a different skill set than the one required for a long-only investor. Can you discuss what skills and mentality you need? What lessons have you learned the easy or hard way? AG: My answer to this question would have been very different a decade or two ago. Previously, shorting required a contrarian bent and some analytical skills, but otherwise, the mechanics of it were favorable because there was no issue regarding getting a borrow for a short, and once upon a time, you actually received interest on the credit balance you created with the short sale. Nowadays, the biggest issue is structural; you have to pay changing and unpredictable borrow rates on stocks, and you may have your shares called in at any time (which, incidentally, is why I favor trading option-eligible stocks). Couple that with a historic bull market, and this certainly has been a tough time for short-sellers. SA: Part of the thesis for your great call on Osiris Therapeutics (OSIR) involved a massive short squeeze. What factors do you look for in a short-squeeze trade? How do you manage risk? AG: Obviously, the first requirement is that there be a large short interest in the stock. Short interest numbers are readily available, but they are only updated biweekly or so, so you have to couple the data with a more real-time appraisal of the likely short interest, which again can come from watching message boards, comments to articles, etc. Then, if you see a large volume price spike well after any news release, there's a good chance it comes from shorts capitulating (due to money management rules and/or margin calls). That was the case for OSIR. Risk management is combination of money management and a conviction that the price spike is not fundamentally warranted. The latter takes due diligence, which is why I presented several valuation scenarios in my OSIR article. SA: Plug Power continues to be a battleground stock. Do you have any updated thoughts on it (or the fuel cell/electric vehicle space in general) since your short call? AG: I still follow PLUG to some extent, but currently think it's trading in a reasonable price range, so I don't have any position in it and am not likely to have one unless the stock moves substantially in one direction or the other. I think TSLA is extremely overvalued and have a short position in it, but I have no conviction on how long it will take for the market to revalue the company based on fundamentals rather than emotion. SA: You identified several key catalysts in your short of CorMedix (CRMD). Would any of these work in reverse to find long ideas in the healthcare space? If so, what would you look for? AG: I don't think the reverse of any of those items would necessarily result in a good long pick, but any good long pick should avoid massive potential dilution and the imminent need for financing, as both of those not only threaten the price in the near term but also greatly reduce the rewards, even if the technology or drug prove successful. SA: What are some of your highest-conviction ideas right now? AG: Over the longer term, I think Energous Corp. (NASDAQ:WATT) and Anavex Life Sciences (NASDAQ:AVXL) trade substantially lower from here, but both are expensive shorts to carry, so use of options strategies may be the best way to participate. Shorter term, I like Aerie Pharmaceuticals (NASDAQ:AERI) for a pullback after its recent Mercury 2 news release, and Gold Resource Corp. (NYSEMKT:GORO) for a bounceback to higher levels once the GDXJ index change is complete. *** Thanks to Amit for the interview. If you'd like to check out or follow his work, you can find the profile here. PRO idea playing out Integra Gold (OTCQX:ICGQF) is up >300% (in CAD) since Itinerant highlighted the overlooked transformation (at very little cost) from exploration to producer in October 2014. Itinerant noted a takeover as a potential catalyst, given the flagship Lamaque project's high grade, low capex and location in a safe jurisdiction. Eldorado Gold (NYSE:EGO) clearly thought so; in an update comment, Itinerant noted its acquisition of Integra Gold last month. Call from the archive - VEDL Vedanta (NYSE:VEDL) is down ~10% since Street Smart Investor said the merger with Cairn India (OTC:CWNQY) would result in a re-rating in March 2017. In earnings released last month, VEDL reported increasing production, which drove a 41% increase in revenue, a 2x increase in EBITDA and a 3.4x increase in profit after tax. In an update comment, Street Smart Investor said they expect renewed momentum after some consolidation now that the merger is complete. With ~50% upside to the original target price, this idea may be worth another look. Noteworthy PRO articles We wanted to highlight one of our PRO editors' favorite PRO ideas this week. SA Editor John Leonard, CFA: CVC Research highlights another arbitrage opportunity in SINA/WB (which follows up on their previous great call), as the value of Sina's (NASDAQ:SINA) stake in Weibo (NASDAQ:WB), plus cash/investments is worth ~$151/share, or ~45% upside, while SINA just announced another distribution of WB shares to shareholders. Notable Sohn Investment Idea contest entries 2U, Inc (NASDAQ:TWOU) by Christopher Campbell: published on May 31, 2017. After tripling since its 2014 IPO, TWOU trades at 11x revenue, as it has positioned itself as an industry-leading SaaS growth story. However, investors are significantly overestimating the quality of 2U's business model and overlooking the increasingly competitive nature of its industry; there are several catalysts that should highlight its tenuous competitive position and overly optimistic estimates. Energizer (NYSE:ENR) by Stephen Saroki: published on May 29, 2017. With the alkaline battery market in secular decline, Energizer operates in a highly competitive market where retailers have all of the leverage, while due to the lack of product differentiation (and the rise of Amazon (NASDAQ:AMZN)), Energizer will likely both lose share and have declining margins. The extraordinarily high valuation and high probability that recent positive results will reverse starting in the next quarter makes this a compelling short. eBay (NASDAQ:EBAY) by Dylan Adelman: published on May 29, 2017. This is the Sohn Idea contest winner. EBAY has a stable-growth core business, suffers from temporary unpopularity, is a cash cow buying back shares, has a well-aligned management and smart capital allocation, and is trading at a good price; there are two additional aspects of the eBay long thesis that are massive and entirely missed by the market. Idea screen of the week Each week we use the PRO Idea Filter to find potential ideas based on a recent news event. This week, PRO Editor John Leonard, CFA, looks at the chemicals industry, which is receiving renewed interest following news of a Berkshire subsidiary buying a stake in Lanxess (OTCPK:LNXSF). Earlier this week, Berkshire Hathaway (BRK.A, BRK.B) subsidiary General Reinsurance disclosed a 3% stake in chemical company Lanxess. As Berkshire/Buffett purchases typically spark investor interest in an entire industry (e.g., airlines), I ran a screen of PRO long ideas in the Chemicals - Major Diversified and Specialty Chemicals sectors. Two ideas turned up in this screen that might be of interest (prices as of June 1 close). OCI Partners (NYSE:OCIP) by Angry Uptick: published on May 1, 2017, up ~20% since publication. The thesis here is already playing out, as highlighted in a recent version of the PRO Weekly Digest. However, there is still an additional ~40% upside to the midpoint of the author's target price, which appears in reach given the rebound in methanol prices and reinstated distribution; downside appears limited given the "M&A put" from the majority shareholder which could always make another bid and involvement of Sam Zell's family office. Chemtrade Logistics (OTC:CGIFF) by Safety In Value: published on January 17, 2017, ~unchanged since publication. The accretive acquisition of Canexus adds a lowest-cost producer and diversifies geographic end markets (many of which are necessities); placing a ~10x multiple on pro forma EBITDA results in ~20% upside (in CAD), while investors are paid to wait with a mid-single digit yield. About the PRO Weekly Digest PRO members automatically receive the Weekly Digest and other PRO content in their inbox. If you are not a PRO member and would like to be notified of this, click "Follow" at the top of this article to follow the SA PRO Editors account, or click to subscribe to the free newsletter below to receive these in your inbox. You can view all past PRO Weekly Digests here. And if you're interested in SA PRO, check out the details here to sign up or learn more. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Additional disclosure: Check with individual articles or authors mentioned for their positions. Amit Ghate is long GORO and short AERI, AVXL, WATT, TSLA.
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