Part of our approach throughout 2016 has been to utilize our expertise and skill in investing more in our Tactical Model, rather than just going and buying a stock index(es). It is true, we are slightly underweight stocks/equities outside of Canada but if we can manage, as we have since inception, to outperform our global benchmark without assuming so much market risk, then that is a good thing. As we say at High Rock, "stronger risk-adjusted returns".
And today we harvested (an old partner of mine at Merrill Lynch used to love referring to taking profits on investments as "harvesting" as in harvesting gains) some gains or sold a position we had on for only one month.
Given I was on BNN about 6 weeks ago and Catherine asked me what our Tactical Model was all about (she said they have become a popluar term), I should probably first define what our Tactical Model is and how it operates.
First thing is security selection. This Model currently includes some select stocks/equities, a preferred share (not a typical one your Advisor would buy), a convertible bond and several high yield bonds (also rather specific). Pretty much across the entire capital structure of a corporation...IE...from the most volatile at the bottom (stocks) to the most senior/less volatile at the top (high yield bonds) and everything inbetween.
Second thing is trading. As I have written in the past, one of the biggest benefits to our clients (and oursleves, given we are managing our own money too) is that we manage money on a discretionary basis thru our license with the Ontario Securities Commission as a Portfolio Manager. What this means is that every trade we do (stocks, bonds) are all done on a bulk trade...we buy or sell one block of stock or bonds with a dealer on the "street" at one price. So every client buys/sells that stock/bond at the exact same time and the exact same price. Then at the end of the day, we allocate to each account on a pro-rata basis. We can move pretty quickly.
Ok so a late season harvest came through today. On Nov 11th I bought this US stock, CVR Energy (CVI). CVR is a Texas-based holding company with interests in a Refiner and a Fertilizer manufacturer. I bought this stock at $15.80. I sold it today at $23.45 (Dec 9th). That represents a +48% return over almost a one month period. With a return like that, you don't need to own a ton. A 1% weight added almost .5% to an overall portfolio (in this market, I will take that).
Your first question should be "why did you buy it"? Here goes:
One of my office mates came across the idea and we researched it for a day or two after the election (wish it was a few days before that because it had already started moving higher by Nov 11th). US Refiners have been hammered on a cost basis with Obama's EPA policies. Refiners need to either blend fuel with ethanol or buy Renewable Identification Numbers (RINs). These RINs have gone thru the roof the past two years, so much so, that the industry is calling it "RINsanity". By way of numbers, CVR currently has about $300mm in Ebitda (Earnings before Taxes, Depreciation and Amortization) but spends about $200mm in RINs per year. So removing the RINs would add a huge lift to the cash flow of CVR. Now the fact that legendary investor, and Trump supporter, Carl Icahn, owns 82% of CVR certainly didn't hurt our view at all.
And look who got elected as POTUS...one Donald Trump. Like him or hate him, he is all about removing regulations, like RINs, to free up businesses to grow. CVR was trading at a low $12.03 on Nov 3rd. It obviously popped up on the 9th to $15.87 and hovered there for a few days. I bought it in there on the 11th at $15.80. It started to move higher but at a fairly moderate pace. Then this week it went ballistic when Trump announced Oklahoma AG and Obama Clean Power Plan critic, Scott Pruitt, as Head of the Environmental Protection Agency (EPA). This guy's nomination alone moved the stock up to almost $25.00 on Dec 9th (darn close to where I had a sell order at $25.75...too bad it didn't make it).
Now my valuation thought process on this was the following. CVR pays about $200mm per year in RINs. If the entire RIN program was cancelled (not 100% sure 100% of it would be but let's assume for a minute it was), then all $200mm would accrue to Ebitda. And Ebitda trades on a multiple basis and, for CVR, that multiple is about 7x so $200mm in RIN savings X a 7 multiple = $1.4bln in additional stock value. Given CVR was trading with a stock value in early Nov at about $1bln, I figured it would move close to this $25 level which would represent about $2bln in stock value or close to the full $1.4bln in RIN savings. (Sorry if it is confusing but there was some method to the madness).
Today, it got very close to my sell order but didn't quite get there. I ended up calling a dealer and selling at $23.44. Almost at my target but not quite as it just wasn't responding well today...could be that after one month, all kids of stories started popping up about what a great trade this is.
If there is one thing I have learned from a career of trading and investing it is that if it hits the front pages of the newspapers...it is time to sell (as the old saying goes, "buy the rumour, sell the fact"). Part of being Tactical is to be ahead of the market. It's not easy and we can't always do it but we keep on searchng for good ideas with what we feel represent strong risk-adjusted returns for us.
Past performance is no guarantee of future performance.