What I’m Still Holding and Why

In light of recent market moves, I went through my portfolio and gave myself a quick reminder of why I still hold some of these stocks. 

I took a hit in early August, during 2Q18 earnings. Since nothing I did was working, I had to cut exposure. The upshot of that incompetence is that I reduced my portfolio even before the latest market downturn. Then I cut more in early October. 

Now that I'm sitting on more cash & bonds than I have stocks, I'm almost cheering when the market goes down. 

I still have the below stocks though and I don't plan to sell them. If a year from now I might be proven as a bag holder, at least I can look back and understand why. Here they are.

FNF @ $32.5 

I wrote about FNF here and here. This is my biggest position at about 3.5%. The stock got crushed the past month due to market wide concerns about housing. I thought FNF actually held up relatively well despite the housing carnage (compared to say, homebuilders)

My views on housing remain the same – short and intermediate term cautious and long term bullish. In the intermediate term (within 3 years), we have an demand issue driven by lack of affordability, and housing prices have to come down.

However, the long term view is decidedly bullish, due to demographic tale winds I have outlined here. And I do think at <$33 a share (low teens PE), this is cheap enough for me to hold long term. 

Recent events:

• FNF just reported 3Q18 results. Open orders were down -9% yoy, and showed worsening trends each month throughout the quarter. Most of the damage is on the refi side though, which does not contribute that much to margins, so overall pretax profit actually went up. 
• The Stewart acquisition is scheduled to close 1H19. The housing market will probably still be in a slump at that time. This may not be a bad thing, as FNF will have plenty of opportunity to cut cost and bring STC’s margin up to FNF’s level. 
• Within a year, they will be able to offset the shares issued in the transaction through share repurchases. 
• FNF generated $320mm of cash flow from operations in 3Q18 alone, annualizing to over $1bn of cash flows from ops. That compares very well with market cap a little over $9bn. Mind you this is a business that does not require a ton of capex. Oh, and they pay nice dividend.

Bonanza Creek Energy (BCEI) @ 29

When I wrote about BCEI last time, I was aware of an initiative to effectively ban fracking in Colorado, but did not think that will gain traction. Unfortunately it did and now it's on the November ballot.

Here's the situation. There are 2 related items on the ballot - Proposition 112 (which effectively bans fracking) and Amendment 74 (which calls for just compensation if government actions hurt property value). 

What kind of probabilities and scenarios are we looking at? The latest poll numbers I read suggest both will pass. Both measures have found great support (Proposition 112 leader 52%, while Amendment 74 leading with 63% support). The 2 have different threshold though. Proposition 112 only needs 50%, while Amendment 74 needs 55% of votes to pass.

Given the above information, I would put the probability of passing each at 80%. So:

• 64% chance that both measures pass (and effectively put BCEI in liquidation), 
• 20% chance they don't pass Prop 112 and BCEI shares pop, and 
• 16% chance that Prop 112 passes, but Amendment 74 fails. This would mean banning fracking without compensation, and BCEI shares collapse.

The base case then, is a sort of liquidation scenario for BCEI - no more new projects, but grandfather existing wells, and compensate them for property value damages. 

In that situation what is BCEI worth? Well if they get compensated on property value damages, then it's just worth the PV10 value right? That number is about $37/share. It's going to be more because the PV10 was done with $56 WTI, and now that WTI is around $67.

So I'm not selling this at below $30/share. I also think that between the upside scenario (no fracking ban) and downside scenario (ban without compensation), there's a higher chance for the former. 

I did switched some of my stocks to call options to manage the risk.

ASML @$158
ASML is the undisputed leader in EUV technology. If you’re too lazy to google, EUV is the most cutting edge semiconductor production process, needed as chips get smaller and smaller.

Here again, like FNF, I am medium term cautious but long term bullish.

Stock has been hit by general semiconductor sector meltdowns, as well as company specific factors. 

In the latest transcript, you can tell analysts are worried about the number of EUV units they might ship in 2020. Management guided to 40 units but they are saying that’s their estimate of capacity, which is not quite the same as customer demand. They also pointed out that “customers are not planning systems, they're planning wafers” – meaning as ASML’s machines get more productive, customers don’t have to buy as many machines. 

So I think 2020 estimates could be in danger.

But is the ASML bull case really about 2020 targets? I do not think so. I think it’s about ASML not only having a sole supplier position in EUV, but also showing success in the next generation product, high N.A. EUV.

Put another way, ASML will likely have a monopoly position through 2025 or even 2030, in the most cutting edge of semiconductor technology, and in the context of U.S. and China having a technology arms race.

Now that is a very enviable position. The company has net cash position so the question is not survival, but magnitude of success. 

The Others

• Digital Realty (DLR) and STORE Capital (STOR). I still have 2 REIT stocks. DLR owns data centers and STOR does triple net retail leases – I wrote about them here and here.

• Alibaba (BABA) @ $145 and Tencent (700.HK) @ HKD 270. Ugh.. as owners of these 2 stocks that practically goes down everyday, it's been absolutely brutal. And now they’re actually cheap relative to growth potential, with lots of unmonetized assets. BABA’s for example, hasn’t even started monetizing its cloud infrastructure business, its entertainment business…etc. 

• Google (GOOGL) @1150. I thought about cutting out on this one to protect my profit, but it’s now a 1% position that I’m just going to hold. Advertising is undoubtedly cyclical, and AMZN is encroaching on Google and Facebook’s duopoly there. Yet I take comfort that the technological expertise that Google owns will allow it to thrive beyond the current cycle.

• Quotient (QTNT). This is been a wild and frustrating ride, but I'm still in it. 

• Arena Pharma (ARNA). Biopharma companies have just about the least macroeconomic exposure of all sectors, and I like this one.

• CVS and UnitedHealth (UNH). I’ve held these for years. UNH is best of breed, and I believe the CVS/Aetna combination could challenge UNH for that status. 

• Bojangles (BOJA).  A legendary friend chicken brand, a conservative management that keeps leverage under control, and decent valuation. I like it. 

• P&G (PG) – I’ve had this for a while. 

I also have a bunch of tiny positions that are about 0.5% each. Collectively they add up to about 10% of my portfolio. It’s a bit of throw everything at the wall and see what sticks – I’ve got momo stocks like Amazon to some illiquid microcaps. There are a lot of unrealized losses here due to my habit of not exiting losing positions cleanly but retain a foothold for monitoring purposes. I’m not sure that’s a bad habit.