How Margin Trading Works: Its Benefits, Risks, and Tips
How Margin Trading Works: Its Benefits, Risks, and Tips
Crypto Exchange with Margin Trading: How Does it Work
Margin Trading Products & Strategies - Fidelity
Margin Trading - Overview, Risks and Succesful Practices
What is Margin Trading on CROSS exchange? – Help Center
@barronsonline: PPP processing fees, an unexpected boost from trade, and hospitals’ operating margins were among the coronavirus-induced weirdness that showed up in the first look at economic growth during the second quarter. https://t.co/tuYR0l3ddS
Chris Gilbert, CEO of Fox Marble Holdings alongside his business partner Etrur Albani, established the publicly traded marble quarrying company with the specific purpose of operating in Kosovo. Kosovo has a long history of marble processing and offers huge potential with 70%+ projected margins.
What exchange allows to margin trade Bitcoin - as soon as possible - without a lengthy customer verification process?
I want to trade Bitcoin with margin as fast as possible while the price is still in this "calm before the storm" situation. On which exchange can I become a trader as quickly as possible without having to wait (for days/weeks)? 796 exchange? OKCoin ? Huobi (BitVC)? BTC China? Bitfinex? Bitmex? BTCsx? Where I can I start to trade (with BTC I have) as fast as possible when I sign-up today? I don't ask about the risk or quality of the exchange. I only care about the speed of the sign-up process until I'm allowed to trade. I want to margin trade before the breakout. I already spend months trading without margin, so I know the basics and risks of trading.
Trying my hand at mining and finding the whole process to be more trouble than its worth. Mediocre minerals and pirates make any profit margins slim at best. Who's making their living on this trade and what advice do you have for people like me?
Hi guys, I have been using reddit for years in my personal life (not trading!) and wanted to give something back in an area where i am an expert. I worked at an investment bank for seven years and joined them as a graduate FX trader so have lots of professional experience, by which i mean I was trained and paid by a big institution to trade on their behalf. This is very different to being a full-time home trader, although that is not to discredit those guys, who can accumulate a good amount of experience/wisdom through self learning. When I get time I'm going to write a mid-length posts on each topic for you guys along the lines of how i was trained. I guess there would be 15-20 topics in total so about 50-60 posts. Feel free to comment or ask questions. The first topic is Risk Management and we'll cover it in three parts Part I
Why it matters
Using stops sensibly
Picking a clear level
Why it matters
The first rule of making money through trading is to ensure you do not lose money. Look at any serious hedge fund’s website and they’ll talk about their first priority being “preservation of investor capital.” You have to keep it before you grow it. Strangely, if you look at retail trading websites, for every one article on risk management there are probably fifty on trade selection. This is completely the wrong way around. The great news is that this stuff is pretty simple and process-driven. Anyone can learn and follow best practices. Seriously, avoiding mistakes is one of the most important things: there's not some holy grail system for finding winning trades, rather a routine and fairly boring set of processes that ensure that you are profitable, despite having plenty of losing trades alongside the winners.
Capital and position sizing
The first thing you have to know is how much capital you are working with. Let’s say you have $100,000 deposited. This is your maximum trading capital. Your trading capital is not the leveraged amount. It is the amount of money you have deposited and can withdraw or lose. Position sizing is what ensures that a losing streak does not take you out of the market. A rule of thumb is that one should risk no more than 2% of one’s account balance on an individual trade and no more than 8% of one’s account balance on a specific theme. We’ll look at why that’s a rule of thumb later. For now let’s just accept those numbers and look at examples. So we have $100,000 in our account. And we wish to buy EURUSD. We should therefore not be risking more than 2% which $2,000. We look at a technical chart and decide to leave a stop below the monthly low, which is 55 pips below market. We’ll come back to this in a bit. So what should our position size be? We go to the calculator page, select Position Size and enter our details. There are many such calculators online - just google "Pip calculator". https://preview.redd.it/y38zb666e5h51.jpg?width=1200&format=pjpg&auto=webp&s=26e4fe569dc5c1f43ce4c746230c49b138691d14 So the appropriate size is a buy position of 363,636 EURUSD. If it reaches our stop level we know we’ll lose precisely $2,000 or 2% of our capital. You should be using this calculator (or something similar) on every single trade so that you know your risk. Now imagine that we have similar bets on EURJPY and EURGBP, which have also broken above moving averages. Clearly this EUR-momentum is a theme. If it works all three bets are likely to pay off. But if it goes wrong we are likely to lose on all three at once. We are going to look at this concept of correlation in more detail later. The total amount of risk in our portfolio - if all of the trades on this EUR-momentum theme were to hit their stops - should not exceed $8,000 or 8% of total capital. This allows us to go big on themes we like without going bust when the theme does not work. As we’ll see later, many traders only win on 40-60% of trades. So you have to accept losing trades will be common and ensure you size trades so they cannot ruin you. Similarly, like poker players, we should risk more on trades we feel confident about and less on trades that seem less compelling. However, this should always be subject to overall position sizing constraints. For example before you put on each trade you might rate the strength of your conviction in the trade and allocate a position size accordingly: https://preview.redd.it/q2ea6rgae5h51.png?width=1200&format=png&auto=webp&s=4332cb8d0bbbc3d8db972c1f28e8189105393e5b To keep yourself disciplined you should try to ensure that no more than one in twenty trades are graded exceptional and allocated 5% of account balance risk. It really should be a rare moment when all the stars align for you. Notice that the nice thing about dealing in percentages is that it scales. Say you start out with $100,000 but end the year up 50% at $150,000. Now a 1% bet will risk $1,500 rather than $1,000. That makes sense as your capital has grown. It is extremely common for retail accounts to blow-up by making only 4-5 losing trades because they are leveraged at 50:1 and have taken on far too large a position, relative to their account balance. Consider that GBPUSD tends to move 1% each day. If you have an account balance of $10k then it would be crazy to take a position of $500k (50:1 leveraged). A 1% move on $500k is $5k. Two perfectly regular down days in a row — or a single day’s move of 2% — and you will receive a margin call from the broker, have the account closed out, and have lost all your money. Do not let this happen to you. Use position sizing discipline to protect yourself.
If you’re wondering - why “about 2%” per trade? - that’s a fair question. Why not 0.5% or 10% or any other number? The Kelly Criterion is a formula that was adapted for use in casinos. If you know the odds of winning and the expected pay-off, it tells you how much you should bet in each round. This is harder than it sounds. Let’s say you could bet on a weighted coin flip, where it lands on heads 60% of the time and tails 40% of the time. The payout is $2 per $1 bet. Well, absolutely you should bet. The odds are in your favour. But if you have, say, $100 it is less obvious how much you should bet to avoid ruin. Say you bet $50, the odds that it could land on tails twice in a row are 16%. You could easily be out after the first two flips. Equally, betting $1 is not going to maximise your advantage. The odds are 60/40 in your favour so only betting $1 is likely too conservative. The Kelly Criterion is a formula that produces the long-run optimal bet size, given the odds. Applying the formula to forex trading looks like this: Position size % = Winning trade % - ( (1- Winning trade %) / Risk-reward ratio If you have recorded hundreds of trades in your journal - see next chapter - you can calculate what this outputs for you specifically. If you don't have hundreds of trades then let’s assume some realistic defaults of Winning trade % being 30% and Risk-reward ratio being 3. The 3 implies your TP is 3x the distance of your stop from entry e.g. 300 pips take profit and 100 pips stop loss. So that’s 0.3 - (1 - 0.3) / 3 = 6.6%. Hold on a second. 6.6% of your account probably feels like a LOT to risk per trade.This is the main observation people have on Kelly: whilst it may optimise the long-run results it doesn’t take into account the pain of drawdowns. It is better thought of as the rational maximum limit. You needn’t go right up to the limit! With a 30% winning trade ratio, the odds of you losing on four trades in a row is nearly one in four. That would result in a drawdown of nearly a quarter of your starting account balance. Could you really stomach that and put on the fifth trade, cool as ice? Most of us could not. Accordingly people tend to reduce the bet size. For example, let’s say you know you would feel emotionally affected by losing 25% of your account. Well, the simplest way is to divide the Kelly output by four. You have effectively hidden 75% of your account balance from Kelly and it is now optimised to avoid a total wipeout of just the 25% it can see. This gives 6.6% / 4 = 1.65%. Of course different trading approaches and different risk appetites will provide different optimal bet sizes but as a rule of thumb something between 1-2% is appropriate for the style and risk appetite of most retail traders. Incidentally be very wary of systems or traders who claim high winning trade % like 80%. Invariably these don’t pass a basic sense-check:
How many live trades have you done? Often they’ll have done only a handful of real trades and the rest are simulated backtests, which are overfitted. The model will soon die.
What is your risk-reward ratio on each trade? If you have a take profit $3 away and a stop loss $100 away, of course most trades will be winners. You will not be making money, however! In general most traders should trade smaller position sizes and less frequently than they do. If you are going to bias one way or the other, far better to start off too small.
How to use stop losses sensibly
Stop losses have a bad reputation amongst the retail community but are absolutely essential to risk management. No serious discretionary trader can operate without them. A stop loss is a resting order, left with the broker, to automatically close your position if it reaches a certain price. For a recap on the various order types visit this chapter. The valid concern with stop losses is that disreputable brokers look for a concentration of stops and then, when the market is close, whipsaw the price through the stop levels so that the clients ‘stop out’ and sell to the broker at a low rate before the market naturally comes back higher. This is referred to as ‘stop hunting’. This would be extremely immoral behaviour and the way to guard against it is to use a highly reputable top-tier broker in a well regulated region such as the UK. Why are stop losses so important? Well, there is no other way to manage risk with certainty. You should always have a pre-determined stop loss before you put on a trade. Not having one is a recipe for disaster: you will find yourself emotionally attached to the trade as it goes against you and it will be extremely hard to cut the loss. This is a well known behavioural bias that we’ll explore in a later chapter. Learning to take a loss and move on rationally is a key lesson for new traders. A common mistake is to think of the market as a personal nemesis. The market, of course, is totally impersonal; it doesn’t care whether you make money or not. Bruce Kovner, founder of the hedge fund Caxton Associates There is an old saying amongst bank traders which is “losers average losers”. It is tempting, having bought EURUSD and seeing it go lower, to buy more. Your average price will improve if you keep buying as it goes lower. If it was cheap before it must be a bargain now, right? Wrong. Where does that end? Always have a pre-determined cut-off point which limits your risk. A level where you know the reason for the trade was proved ‘wrong’ ... and stick to it strictly. If you trade using discretion, use stops.
Picking a clear level
Where you leave your stop loss is key. Typically traders will leave them at big technical levels such as recent highs or lows. For example if EURUSD is trading at 1.1250 and the recent month’s low is 1.1205 then leaving it just below at 1.1200 seems sensible. If you were going long, just below the double bottom support zone seems like a sensible area to leave a stop You want to give it a bit of breathing room as we know support zones often get challenged before the price rallies. This is because lots of traders identify the same zones. You won’t be the only one selling around 1.1200. The “weak hands” who leave their sell stop order at exactly the level are likely to get taken out as the market tests the support. Those who leave it ten or fifteen pips below the level have more breathing room and will survive a quick test of the level before a resumed run-up. Your timeframe and trading style clearly play a part. Here’s a candlestick chart (one candle is one day) for GBPUSD. https://preview.redd.it/moyngdy4f5h51.png?width=1200&format=png&auto=webp&s=91af88da00dd3a09e202880d8029b0ddf04fb802 If you are putting on a trend-following trade you expect to hold for weeks then you need to have a stop loss that can withstand the daily noise. Look at the downtrend on the chart. There were plenty of days in which the price rallied 60 pips or more during the wider downtrend. So having a really tight stop of, say, 25 pips that gets chopped up in noisy short-term moves is not going to work for this kind of trade. You need to use a wider stop and take a smaller position size, determined by the stop level. There are several tools you can use to help you estimate what is a safe distance and we’ll look at those in the next section. There are of course exceptions. For example, if you are doing range-break style trading you might have a really tight stop, set just below the previous range high. https://preview.redd.it/ygy0tko7f5h51.png?width=1200&format=png&auto=webp&s=34af49da61c911befdc0db26af66f6c313556c81 Clearly then where you set stops will depend on your trading style as well as your holding horizons and the volatility of each instrument. Here are some guidelines that can help:
Use technical analysis to pick important levels (support, resistance, previous high/lows, moving averages etc.) as these provide clear exit and entry points on a trade.
Ensure that the stop gives your trade enough room to breathe and reflects your timeframe and typical volatility of each pair. See next section.
Always pick your stop level first. Then use a calculator to determine the appropriate lot size for the position, based on the % of your account balance you wish to risk on the trade.
So far we have talked about price-based stops. There is another sort which is more of a fundamental stop, used alongside - not instead of - price stops. If either breaks you’re out. For example if you stop understanding why a product is going up or down and your fundamental thesis has been confirmed wrong, get out. For example, if you are long because you think the central bank is turning hawkish and AUDUSD is going to play catch up with rates … then you hear dovish noises from the central bank and the bond yields retrace lower and back in line with the currency - close your AUDUSD position. You already know your thesis was wrong. No need to give away more money to the market.
Coming up in part II
EDIT: part II here Letting stops breathe When to change a stop Entering and exiting winning positions Risk:reward ratios Risk-adjusted returns
Coming up in part III
Squeezes and other risks Market positioning Bet correlation Crap trades, timeouts and monthly limits *** Disclaimer:This content is not investment advice and you should not place any reliance on it. The views expressed are the author's own and should not be attributed to any other person, including their employer.
You might want to say: "Retard, there have been at least a dozen posts about RKT already." Well, there is some itsy bitsy tiny bit of new information...
Hold on to your butts 🚀
Yes, you might have seen the stock price climb to ~$26 after IPO and fall back to $19 and not listened to this brilliant retard telling you not to sell the GODDAM stock. Maybe because you have read the "sEeKinG alPhA aNaLysT" giving it a "meh" rating. Well, in an effort to give you another chance on those sweet tendies, Rocket announced pre-earnings numbers, before the actual earnings date of September 2. This is what it looks like:
Quarterly earnings are up by 125% from the previous year with quarterly revenue of $5.31 billion. On an adjusted basis revenue is up by 300% over last year. The full report is here.
Adjusted net income is $2.8 billion, which is an increase of $2.2 billion compared to the first quarter of 2020 and $2.6 billion compared to the second quarter of 2019. For the accountants among you, the full set of numbers are here.
To put numbers into perspective this is a company with $2.4 billion float according to Google.
The stock was up 11.22% today and trading at around $23.8 at market close.
What does this all mean?
This is the parent company of Quicken Loans, it is essentially a FinTec company for mortgage refinancing, etc. Some argue that it is actually a tech company. They handle pretty much everything electronically via their website and app. This is important because of COVID-19. According to online reviews, they have one of the best-streamlined and user-friendly interfaces. You can do pretty much everything regarding financing your home without having to sit in a crowded office in your facemask.
Because of how user-friendly their apps are, they have sweet sweet margins: "Who is going to do DD on home mortgages when you can do everything on an app. Am I right?"
Interest rates are extremely low due to Fed intervention and it is to remain low for a very long while. Remember the famous quote from our lord and savior JPow: "We're not thinking about raising rates, we're not even thinking about thinking about raising rates." For this reason, everyone and their mum are doing refinancing, buying homes, etc.
With a float of $2.4 billion, the company can have VERY significant price changes in a short time.
RKT is the ultimate meme ticker. "RKT to the moon 🚀" and "REKT 🔥" memes will keep us entertained for years to come while providing free advertisement for the company.
Q: But what if the interest rates go back up tomorrow? A: It won't, as that would collapse the S&P 500 overnight. They have to keep interest rates low so that the money stays in the stock market. Q: This sounds like the next subprime mortgage crisis. What if people start defaulting on their mortgages? A: They are not the ones lending the money, so they don't care. They package the mortgages and hand it to someone else. They keep mortgages for only 3 weeks on average during the process, then they are off the hook. Q: Aren't there other mortgage companies with online services? A: Yes, but nothing this streamlined and easy to use. And they have very good brand recognition with the Rocket brand and Quicken Loans. Again, it is like TurboTax: yes there is other tax software out there, but who cares? Q: But the stock price does not reflect the fundamentals. Didn't it crash last week and then stall? A: Yes there was some price discovery after IPO and you would have been right up until Monday of this week. But since the pre-earnings announcement, the stock price is picking up some serious steam. Once the mainstream media catches on and price exceeds the ATH (probably tomorrow), this will go to the moon. If this does not look like a RKT platform I do not know what does: https://preview.redd.it/lyevy8wx6bi51.png?width=1260&format=png&auto=webp&s=10da2d7c8be7d4a83c0b798c16aafaa94bacfc20
The TSLA 2K Play - A Trade Retrospective on Taking a $.21 Credit to Make $8.34 More
There are different ways to play TSLA to $2000 this past week. Here’s my thought process on how I approached trading the move up, without paying a debit (but uses margin).
On Monday, August 17, besides TOS being absolutely atrocious, TSLA was lurching higher, and at around 11am PST or so, when it broke out to new highs, my thought was that there’s probably going to be a short squeeze again that takes us to $2000, the target that basically everyone was looking at. So, I looked to put on a play that captured something to that $2000 price level by Friday, Aug 21 expiration. I began by looking at the 1980/2000 long call vertical. At the time, that spread cost $2.28 debit. So if I were to just put on that vertical, I would be paying $2.28 to make potentially $17.72. But I don’t really like paying large debits (large is anything above $.25 per spread), especially for these types of short-term directional bets. So I looked for other ways to reduce the debit. Alongside the purchase of the long call vertical, I also sold the 1650/1625 put vertical, for $2.05 credit. The reason for placing the short strike of the put vertical at 1650 is that it was under Monday’s low, and the reason for the long strike at 1625 was that it made the put vertical wide enough to collect a decent credit. Now, the total debit on the trade became $2.28 (debit of 1980/2000 call vertical) - $2.05 (credit from 1650/1625 put vertical), or $.23. $.23 was pretty cheap, and honestly I could’ve stopped there. But as I was thinking about the trade, I realized I didn’t really like how the short put verticals actually added more downside risk to the trade. So I was thinking that as early as I could, I would buy back that short put vertical once it drained in value, as TSLA continued running up with the momentum it had. And given the huge upside momentum that day, I thought that TSLA would probably gap and continue higher the following day, or at the very least just move sideways, which would drain the value of the short put vertical and allow me to buy it back for a low debit. However, if I bought back the put vertical before it fully drained to 0, then my overall debit on the trade wouldn’t just cost $.23 anymore - it would cost more. So in the spirit of keeping the debit as low as possible, I needed to actually collect more credit from somewhere else, if I really didn’t want to pay for this trade. So, I decided that I was going to sell a call vertical above the 1980/2000 long call vertical. And a safe enough distance above the long call vertical, would be up at 2200, which gives me 200 points of runway above 2000. So I sold to open the 2200/2250 call vertical, for $1.27 credit. I felt safe about selling the 2200/2250 call vertical, because for it to really be at risk, TSLA would first need to move above 2000, the psychological level, and by the time it starts to get near 2200, the 1980/2000 call vertical will be 20 points deep ITM, so I have 20 points of coverage. Of course there’s still 30 points of risk (given that the 2200/2250 short call vertical is 50 points wide), but time is on my side. Assuming that TSLA even gets near 2200 on the last day, given how little time left there is, that short call vertical would probably be trading for maybe $10 or so, and the 1980/2000 long call vertical in front of that short call vertical, would be deep ITM and worth $20, so I can just close the entire spread at a profit anyway. So after selling that 2200/2250 call vertical, the trade went from $.23 debit to $1.04 credit (because $.23 - $1.27 = -$1.04, or $1.04 credit). Now I’m getting paid to play the breakout to TSLA 2K.
On Tuesday, TSLA gapped up higher, and right off the bat, the short put verticals basically drained from $2.05 to $.83. I closed that out to remove any downside risk, so that if TSLA decides to reverse and tank, or hang out sideways and never make it to 2000, no harm no foul, I have the upside play on for a credit. Recall that $.23 (the debit of the initial entry) - $1.27 (the credit collected from the sale of the 2200/2250 call vertical) + $.83 (the debit of buying back the short put vertical) is -$0.21, which is a $.21 credit, after adjustments. And now, I just have to manage TSLA to the upside. The result of this adjustment left me with a 4 legged spread where I’m long the 1980/2000 call vertical and short the 2200/2250 call vertical (this 4-legged spread is also called a condor, specifically a Call condor). Throughout Tuesday and all of Wednesday, TSLA just moved sideways, and I was fine with that. Others who purchased naked long calls far OOM were worried about the premium drain, but I was fine knowing that I got paid to play the move to 2K, whether it happened or not. It completely did not matter if TSLA moved sideways or tanked, because it wouldn’t negatively impact the equity curve. Another reason why I actually liked TSLA hanging sideways is that it gives TSLA less of a chance to surge higher and run over that 2200/2250 short call vertical with the time left before expiry.
Thursday was where the magic happened (for pretty much everyone). As we know at around 7:45 am PST, TSLA rallied from around $1900 to almost $2000, and the Call condor really started to expand in value. When TSLA was at $1990, the call condor spread expanded to $8.34. Recall that the cost on this trade (after the closing the short put vertical) put my cost at a $.21 credit. Now, I can sell this condor out and pocket another $8.34. That’s pretty sweet. Getting paid $.21 to make another $8.34. (At this moment, I noted what the legs were trading for. The long vertical of the condor was trading for $9.27, and the short vertical was actually trading for $.93. Recall that when I entered the short vertical on Monday, I actually collected a $1.27 credit on it. Now, even after the 150 point move up in TSLA, even after volatility expansion, that short vertical was still worth $.34 LESS - that’s the power of theta decay). So at that point, I pretty much just closed out the entire position. I was pretty happy with essentially getting paid $.21 to make another $8.34 (in hindsight, I could’ve milked another $11.66 per spread, but that’s besides the point).
What if TSLA decided to tank upon entry, jeopardizing the short put vertical? Upside conviction was strong, but I would have to buy it back and find a way to reduce the new debit on the overall trade.
What if TSLA decided to make a run up to $2000+ very early on in the week (ie. on Tuesday it runs up to $2100)? Then the 2200/2250 short call vertical would’ve expanded too much and offset the gains of the deep ITM 1980/2000 long call vertical. I would have to cough up the debit and buy additional call verticals to cover the upside. Perhaps a 20 or 30 point wide call vertical around the 2100 strike to cover the remaining upside risk, which would cost around $10-$15 debit. Then work to reduce that debit over the week.
But what if TSLA decided to tank below 2100 after adjustment above? Or lower to below 1980? Or even further down? Sell more 2200/2250 call verticals. Then sell out the long call vertical for whatever remaining debit. Then sell out the 1980/2000 call vertical for whatever value it has left.
So many adjustments. KISS. You will just get whipsawed and use up a ton of margin. It's just what I have to do. I have to be mechanical about the greeks and not play the hope card. This trading style is not for everyone and is not the holy grail.
The Rise and Fall of AMD (then Rise): What Happened?
With AMD shares hitting a new all-time high today on the back of an earnings beat and raised guidance (as well as Intel's 7nm delay), I thought it would be an opportune time to look back on how amazing of a turnaround story this has really been given that only 7 years ago the company's future was very much in doubt. In 2013, ArsTechnica ran a profile on how AMD took on Intel in the late 90s, experienced rousing success with its Athlon and Opteron chips, before over-spending and mis-executing its way into a free fall. Back then, AMD found itself completely out-maneuvered by Intel in the desktop, laptop, and sever markets and had largely been shut out of both smartphone and tablet production. This fascinating story features some matchmaking by Bill Gates, a failed attempt by AMD to acquire Nvidia when it traded under $15 a share, and a botched integration with graphics maker ATI Technologies. Warning: the two-part article, while super interesting, is absolutely on the lengthy side. For those of you who like the quick-hitters, I've summarized the highlights below. https://arstechnica.com/information-technology/2013/04/the-rise-and-fall-of-amd-how-an-underdog-stuck-it-to-intel/
During the 1980s, AMD was a second-source supplier for companies using Intel processors. Companies like IBM didn't want to rely solely on Intel for one of the primary components in their computers, so they licensed AMD to produce versions of Intel processors. However in 1985, Intel stopped giving AMD its designs which forced them to reverse-engineer versions of Intel parts. By 1990, Merrill Lynch had declared AMD "dead", as the smaller company couldn't keep up with Intel product releases. This would not be the last time, as its aggressive pricing throughout the first half of the 90s had left AMD in a poor financial position.
In 1994, a tiny Silicon Valley outfit named NexGen began shipping a chip that was comparable to Intel's flagship Pentium. Microsoft CEO Bill Gates had taken an interest in NexGen, in particular, its brilliant CEO, Atiq Raza. Gates suggested that Raza speak to AMD since the company owned a chip fab but needed a better product to build in it. Raza met with then-CEO Jerry Sanders, who threatened to run NexGen out of business. Upon hearing about the exchange, Gates picked up the phone, called Sanders, and convinced AMD to purchase NexGen for $615mn in 1995. Soon after, Raza, dubbed by Sanders as the "Michael Jordan of microprocessor design", helped AMD develop the K6 - a major turning point for the company.
The K6 rivaled Intel on speed and price, and its revisions led to one of AMD's most successful architectures: K7, marketed as the Athlon. Athlon received "CPU of the Year" in 1999 from ArsTechnica and helped AMD grow sales from $2.5bn in 1998 to $4.6bn by 2000. With the company having just pulled in nearly $1bn in profits, Sanders rented out San Jose's entire HP Pavilion (now the SAP Center) for a party in which he paid for Tim McGraw and Faith Hill to perform and proclaimed AMD's share price would soon hit $100.
Around this time the company started spending too much and spreading itself too thin. AMD was making most of its profit from memory, but was also dabbling in logic, microprocessors, and communication products. Sanders had also decided to build a massive fab in Germany with borrowed money. Despite this, AMD continued to find technical success. AMD utilized the Athlon to develop a similar architecture that was more useful for severs. The new product, Opteron, led to AMD capturing an estimated 25% of the server market by 2006 all the while Intel struggled to produce a chip that could compete with the performance advantages of Opteron.
While on the surface AMD seemed to be firing on all cylinders with its popular Athlon and Opteron chips, the company was a financial mess behind-the-scenes. The company announced net losses of $61mn in 2001, $1.3bn in 2002, and $274mn in 2003. The main culprit? Investments in fabs that grossly overshot initial cost estimates. Between its two locations in Germany, AMD invested roughly $4.6bn.
AMD's competitive edge with Opteron coincided with some low points for Intel that forced the company to re-imagine its architecture altogether. The result was the release of the Intel Core microarchitecture in 2006. Core enabled Intel to take back the performance crown in the PC market, and it proved more power-efficient than AMD's laptop chips right when laptops began to outsell desktops for the first time. Intel compounded the pain by strategically releasing frequent upgrades and forcing AMD to play catch-up yet again.
Though AMD's CPUs consistently improved, over time they became shut out of the high-end market once more and were relegated to compete mainly on price, mirroring the company's early struggles. As Intel churned out its best product in years, AMD began trying to swallow another company whole. In 2006, AMD saw an opportunity for the future by integrating a memory controller into the CPU. However, the company needed the graphics and chipset experience to make it happen.
The solution was to purchase Canadian graphics company ATI Technologies for $5.4bn - or roughly half of AMD's market cap. This came after AMD had approached Nvidia as its first-choice takeover target. At that time, Nvidia was trading under $15 a share. But Jen-Hsun Huang, Nvidia's outspoken CEO, insisted on running the combined company — a non-starter for AMD leadership. While ATI's technology was considered superior to Intel's, the integration process proved disastrous from the start. Employees from the two companies divided into green (AMD and CPU) and red (ATI and GPU) sides, prioritizing needs of their individual products, and causing major delays time and time again.
With problems executing and stagnant sales, AMD ended 2007 with more than $5bn in debt and lost $3.3bn on the year after having taken a write-down charge for its acquisition of ATI. The company was having serious difficulty affording the costs of its fab facilities, when the entire industry endured a sharp downturn in 2008 that caused the stock to plummet from $20 to $4 a share.
AMD had no choice but to spin off its foundries in 2009 (AMD spun off GlobalFoundries in 2009), weakening its competitive positioning relative to Intel. Despite efforts to engineer higher quality products, its share of the PC and sever businesses kept declining and AMD was unable to achieve meaningful share in the ultrabook and tablet segments. The low-end CPU market sent margins tumbling and increased exposure to secular declines in PC sales.
By 2013, only one singular analyst on Wall Street was bullish on the stock — which had now fallen from $8 at the start of 2012 to just around $2. Yet after a major delay with the highly anticipated "Fusion" 32nm chip, the analyst noted that there were now liquidity concerns due to the declining PC market. Even former CFO Fran Barton thought AMD had next to no future in its battle with Intel: "...the game's been played."
Flash-forward to today and AMD just delivered its highest CPU revenue in over 12 years, has taken CPU market share for 11 straight quarters, and currently enjoys double-digit server processor market share. Whether you're an investor or not, bullish or bearish, that is one hell of a comeback. Hats off to Lisa Su and the entire AMD team.
PRPL earnings is tomorrow, 8/13, after hours. Any other date is wrong. Robinhood is wrong (why are you using Robinhood still!?!). I'm going to take you through my earnings projections and reasoning as well the things to look for in the earnings release and the call that could make this moon even further.
I make the assumption that Purple is still selling every mattress it can make (since that is what they said for April and May) and that this continued into June because the website was still delayed 7-14 days across all mattresses at the end of June. May Revenue and April DTC: The numbers in purple were provided by Purple here and here. April Wholesale: My estimate of $2.7M for Wholesale sales in April comes from this statement from the Q1 earnings release: " While wholesale sales were down 42.7% in April year-over-year, weekly wholesale orders have started to increase on a sequential basis. " I divided Q2 2019's wholesale sales evenly between months and then went down 42.7%. June DTC: This is my estimate based upon the fact that another Mattress Max machine went online June 1, thus increasing capacity, and the low end model was discontinued (raising revenue per unit). June Wholesale:Joe Megibow stated at Commerce Next on 7/30 that wholesale had returned to almost flat growth. I'm going to assume he meant for the quarter, so I plugged the number here to finish out the quarter at $39.0M, just under $39.3M from a year ago. Revenue Expectations from Analysts (via Yahoo) https://preview.redd.it/notxd6hhbng51.png?width=384&format=png&auto=webp&s=aa0453414f467aa6c5bf72ce8a8046c0ae6e62a5 My estimate of $244M comes in way over the high, let alone the consensus. PRPL has effectively already disclosed ~$145M for April/May, so these expectations are way off. I'm more right than they are.
I used my estimates for Q3/Q4 2019 to guide margins in April/May as there were some one time events that occurred in Q1 depressing margins. June has higher margin because of the shift away from the low end model (which is priced substantially lower than the high end model). Higher priced models were given manufacturing priority.
Marketing and Sales Joe mentioned in the Commerce Next video that they were able to scale sales at a constant CAC (Customer Acquisition Cost). There's three ways of interpreting this:
Overall customer acquisition cost was constant with previous quarters (assume $36M total, not $93.2M), which means you need to add another $57M to bottom line profit and $1.08 to EPS, or
Customer Acquisition Costs on a unit basis were constant, which means I'm still overstating total marketing expense and understating EPS massively, or
Customer Acquisition Costs on a revenue basis were constant, which is the most conservative approach and the one I took for my estimate.
I straightlined the 2.2 ratio of DTC sales to Marketing costs from Q1. I am undoubtably too high in my expense estimate here as PRPL saw marketing efficiencies and favorable revenue shifts during the quarter. So, $93.2M General and Administrative A Purple HR rep posted on LinkedIn about hiring 330 people in the quarter. I'm going to assume that was relative to the pre-COVID furloughs, so I had June at that proportional amount to previous employees and adjusted April and May for furloughs and returns from furlough. Research and Development I added just a little here and straight lined it.
Interest Expense Straightlined from previous quarters, although they may have tapped ABL lines and so forth, so this could be under. One Time and Other Unpredictable by nature. Warrant Liability Accrual I'm making some assumptions here.
We know that the secondary offering event during Q2 from the Pearce brothers triggered the clause for the loan warrants (NOT the PRPLW warrants) to lower the strike price to $0.
I can't think of a logical reason why the warrant holders wouldn't exercise at this point.
Therefore there is no longer a warrant liability where the company may need to repurchase warrants back.
The liability accrual of $7.989M needs to be reversed out for a gain.
What to Watch For During Earnings (aka Reasons Why This Moons More)
Analysts, Institutionals, and everyone else who uses math for investing is going to be listening for the following:
Warrant Liability Accrual
Capacity Expansion Rate
CACs (Customer Acquisition Costs)
New Product Categories
Cashless Exercise of PRPLW warrants
Margin Growth This factor is HUGE. If PRPL guides to higher margins due to better sales mix and continued DTC shift, then every analyst and investor is going to tweak their models up in a big way. Thus far, management has been relatively cautious about this fortuitous shift to DTC continuing. If web traffic is any indicator, it will, but we need management to tell us that. Warrant Liability Accrual I could be dead wrong on my assumptions above on this one. If it stays, there will be questions about it due to the drop in exercise price. It does impact GAAP earnings (although it shouldn't--stupid accountants). Capacity Expansion Rate This is a BIG one as well. As PRPL has been famously capacity constrained: their rate of manufacturing capacity expansion is their growth rate over the next year. PRPL discontinued expansion at the beginning of COVID and then re-accelerated it to a faster pace than pre-COVID by hurrying the machines in-process out to the floor. They also signed their manufacturing space deal which has nearly doubled manufacturing space a quarter early. The REAL question is when the machines will start rolling out. Previous guidance was end of the year at best. If we get anything sooner than that, we are going to ratchet up. CACs (Customer Acquisition Costs) Since DTC is the new game in town, we are all going to want to understand exactly where marketing expenses were this quarter and, more importantly, where management thinks they are going. The magic words to listen for are "marketing efficiencies". Those words means the stock goes up. This is the next biggest line item on the P&L besides revenue and cost of goods sold. New Product Categories We heard the VP of Brand from Purple give us some touchy-feely vision of where the company is headed and that mattresses was just the revenue generating base to empower this. I'm hoping we hear more about this. This is what differentiated Amazon from Barnes and Noble: Amazon's vision was more than just books. Purple sees itself as more than just mattresses. Hopefully we get some announced action behind that vision. This multiplies the stock. Cashless Exercise of PRPLW Warrants I doubt this will be answered, even if the question is asked. I bet they wait until the 20 out of 30 days is up and they deliver notice. We could be pleasantly surprised. If management informs us that they will opt for cashless exercise of the warrants, this is anti-dilutive to EPS. It will reduce the number of outstanding shares and automatically cause an adjustment up in the stock price (remember kids, some people use math when investing). I'm hopeful, but not expecting it. The amount of the adjustment depends on the current price of the stock. Also, I fully expect PRPL management to use their cashless exercise option at the end of the 20 out of 30 days as they are already spitting cash.
I've made some updates to the model, and produced two different models:
Warrant Liability Accrual Goes to Zero
Warrant Liability Accrual Goes to $47M
I made the following adjustments generally:
I reduced marketing expenses signifanctly based upon comments made by Joe Megibox on 6/29 in this CNBC video to 30% of sales (thanks u/deepredsky).
I reduced June wholesale revenue to 12.6M to be conservative based upon another possible interpretation of Joe's comments in this video here. It is a hard pill to swallow that June wholesale sales would be less than May's. The only reasoning I can think of is if May caused a large restock and then June tapered back off. The previous number of $19.0M was still a retrenchment from the 40-50% YoY growth rate. I'm going to keep the more conservative number (thanks again u/deepredsky).
I modified the number of outstanding shares used for EPS calculations from 53M (last quarters number used on the 10-Q) to almost 73M based upon the fact that all of the warrants and employee stock options are now in the money. Math below. (thanks DS_CPA1 on Stocktwits for pointing this out)
Now that we have established that coliseum still has not exercised the options as of july 7, and that purple needs to record as a liability the fair value of the options as of june 31, we now need to determine what that fair value is. You state that since you believe that there is no logical reason that coliseum won't redeem their warrants "there is no longer a warrant liability where the company may need to repurchase warrants back." While I'm not 100% certain your logic here, I can say for certain that whether or not a person will redeem their warrants does not dictate how prpl accounts for them.
The warrant liability accrual DOES NOT exist because the warrants simply exist. The accrual exists because the warrants give the warrant holder the right to force the company to buy back the warrants for cash in the event of a fundamental transaction for Black Scholes value ($18 at the end of June--June 31st that is...). And accruals are adjusted for the probability of a particular event happening, which I STILL argue is close to zero. A fundamental transaction did occur. The Pearce brothers sold more than 10M shares of stock which is why the exercise price dropped to zero. (Note for DS_CPA1 on Stocktwits: there is some conflicting filings as to what the exercise price can drop to. The originally filed warrant draft says that the warrant exercise price cannot drop to zero, but asubsequently filed S-3, the exercise price is noted as being able to go to zero. I'm going with the S-3.) Now, here is where it gets fun. We know from from the Schedule 13D filed with a July 1, 2020 event date from Coliseum that Coliseum DID NOT force the company to buy back the warrants in the fundamental transaction triggered by the Pearce Brothers (although they undoubtably accepted the $0 exercise price). THIS fundamental transaction was KNOWN to PRPL at the end Q4 and Q1 as secondary filings were made the day after earnings both times. This drastically increased the probability of an event happening. Where is the next fundamental transaction that could cause the redemption for cash? It isn't there. What does exist is a callback option if the stock trades above $24 for 20 out of 30 days, which we are already 8 out of 10 days into. Based upon the low probability of a fundamental transaction triggering a redemption, the accrual will stay very low. Even the CFO disagrees with me and we get a full-blown accrual, I expect a full reversal of the accrual next quarter if the 20 out of 30 day call back is exercised by the company. I still don't understand why Coliseum would not have exercised these. Regardless, the Warrant Liability Accrual is very fake and will go away eventually.
ONE MORE THING...
Seriously, stop PMing me with stupid, simple questions like "What are your thoughts on earnings?", "What are your thoughts on holding through earnings?", and "What are your thoughts on PRPL?". It's here. Above. Read it. I'm not typing it again in PM. I've gotten no less than 30 of these. If you're too lazy to read, I'm too lazy to respond to you individually.
Didn’t see one posted yet so let this be the megathread that cliff can sticky or whatever. I’ll update this as info comes in and maybe live blog the call if I make it to my computer in time Webcast info can be found at: https://ir.tesla.com/events/event-details/tesla-inc-q2-2020-financial-results-and-qa-webcast The call starts at 2:30pm PDT Q2 report: https://ir.tesla.com/static-files/f41f4254-f1cc-4929-a0b6-6623b00475a6 Call live blog (times in PDT): 2:30: "Call starting shortly" 2:32: Tesla director of investor relations 2:33: Elon opening remarks. Good job to the Tesla team. 4th consecutive profitable quarter. Auto industry is down, but Tesla is up. Next gigafactory is just north of Austin, Texas (15 min from downtown Austin) on the Colorado river. "Boardwalk" and "ecological paradise." Cyber truck, Semi, and 3&y for eastern half of North America. Fremont will do S&X for worldwide and 3&Y for western half of NA. Shout out to Tulsa. Tesla solar is the cheapest in the US. 30% cheaper than US average. $1.49/w. New Tesla Model S has a range over 400 miles. 2:39: FSD crap 2:40: Thank you Tesla team again for a full year of profitability. 3 new factories within the next year. "So much to be excited about"! "Never been more excited for the future of Tesla" 2:42: CFO Saved costs by laying employees off Continue reducing costs $48M FSD recognized Megapack is profitable Questions from institutional investors: Q: *missed the first question, sorry* Q: Vision for the future A: FSD on all vehicles. Biggest value increase of any company. Q: AP. Upcoming self driving milestones A: Major milestone is transition from "2.5D" (pictures) to "4D" (video) environment. Later this year. Big improvement to process video instead of pictures for FSD... Better than humans. "Orders of magnitude reliability" better. Elon thinks computers are smart. Q: Alien Dreadnought A: Putting more work into manufacturing engineering to make the machine that makes the machine. GF1 is alien dreadnought version 0.5. Working towards 1.0. GF Shanghai makes better cars than Fremont. Berlin Model Y will look the same but have more advanced architecture. Integrating design and manufacturing. Vertical integration is important. Increasing CapEx efficiency. "Tesla loves manufacturing!" Q: How many can Tesla produce in Texas A: "Right now, 0. Long term, a lot." Retail: Q: Tesla Energy A: Long term Tesla Energy will be same size as Tesla Automotive. Solar, wind, and batteries. Grid scale storage will expand. Auto-bidder is autopilot for battery storage; Like high frequency trading. Makes sure the battery is working correctly and grid satisfied. Main thing about Tesla is cell production at an affordable price (Tesla doesn't manufacture cells though? - me). "Talk more about this at battery day." Q: Tesla Semi production plans A: Production will start next year. First few units will be used by Tesla. Mainly between Fremont and Reno/Sparks. Some early units will go to some early adopters. Semi will be awesome. Semi will use nickel based cells. Passenger vehicles will use iron based cells; range of maybe 300 miles in the Chinese market. Use very little cobalt in cells already. Q: Why is Tesla removing the standard range vehicles A: "Mining companies, please mine more nickel at high volume." Tesla will sign a long term contract. New normal for range will be ~300 miles. Q: What is the hold up of Tesla insurance outside of California A: "Joking before call about quarterly insurance question." "Version 0.9" in California. Use the data captured in the car to assess probability of crash and use that for premium. Take the California product and use it in other states or make other states better; going with the latter. Handful of states by the end of the year. Regulatory approval will be needed. Version 2, Version 3, etc. as they go forward. Car will let you know to "drive better if you want a lower premium." Elon: "#1 thing to take from this call is that Tesla is hiring ... especially insurance." Tesla insurance will be provided for Tesla Network car sharing; not required. Investors on the line: Q: Gross margin of vehicles different between factories. A: GM increased in China. Model Y was profitable in first quarter of production. Model Y is more expensive than Model 3 to produce, but will become closer to the same. Locally sourcing components is "literally rising 5%-10% price improvement per month." Suppliers are eager to support Berlin GF. Q: Is Tesla aiming for industry leading gross margin. EV credits A: "We don't run the business to rely on regulatory credits." Revenue from FSD. OpEx continues to come down. I have to go, so this is it for the call live blogging
First off I’m sorry for the noob question. Just recently came from Robinhood and whenever I would transfer money from my bank I’d have up to $1,000 of it ready to invest instantly. Is there a similar system with TOS? I just put in $1,400 and I would like to use most of that to make a trade on Monday. Would that be possible or will I have to wait longer?
DDDD - Retail Investors, Bankruptcies, Dark Pools and Beauty Contests
For this week's edition of DDDD (Data-Driven DD), we're going to look in-depth at some of the interesting things that have been doing on in the market over the past few weeks; I've had a lot more free time this week to write something new up, so you'll want to sit down and grab a cup of coffee for this because it will be a long one. We'll be looking into bankruptcies, how they work, and what some companies currently going through bankruptcies are doing. We'll also be looking at some data on retail and institutional investors, and take a closer look at how retail investors in particular are affecting the markets. Finally, we'll look at some data and magic markers to figure out what the market sentiment, the thing that's currently driving the market, looks like to help figure out if you should be buying calls or puts, as well as my personal strategy. Disclaimer - This is not financial advice, and a lot of the content below is my personal opinion. In fact, the numbers, facts, or explanations presented below could be wrong and be made up. Don't buy random options because some person on the internet says so; look at what happened to all the SPY 220p 4/17 bag holders. Do your own research and come to your own conclusions on what you should do with your own money, and how levered you want to be based on your personal risk tolerance.
How Bankruptcies Work
First, what is a bankruptcy? In a broad sense, a bankruptcy is a legal process an individual or corporation (debtor) who owes money to some other entity (creditor) can use to seek relief from the debt owed to their creditors if they’re unable to pay back this debt. In the United States, they are defined by Title 11 of the United States Code, with 9 different Chapters that govern different processes of bankruptcies depending on the circumstances, and the entity declaring bankruptcy. For most publicly traded companies, they have two options - Chapter 11 (Reorganization), and Chapter 7 (Liquidation). Let’s start with Chapter 11 since it’s the most common form of bankruptcy for them. A Chapter 11 case begins with a petition to the local Bankruptcy court, usually voluntarily by the debtor, although sometimes it can also be initiated by the creditors involuntarily. Once the process has been initiated, the corporation may continue their regular operations, overseen by a trustee, but with certain restrictions on what can be done with their assets during the process without court approval. Once a company has declared bankruptcy, an automatic stay is invoked to all creditors to stop any attempts for them to collect on their debt. The trustee would then appoint a Creditor’s Committee, consisting of the largest unsecured creditors to the company, which would represent the interests creditors in the bankruptcy case. The debtor will then have a 120 day exclusive right after the petition date to file a Plan of Reorganization, which details how the corporation’s assets will be reorganized after the bankruptcy which they think the creditors may agree to; this is usually some sort of restructuring of the capital structure such that the creditors will forgive the corporation’s debt in exchange for some or all of the re-organized entity’s equity, wiping out the existing stockholders. In general, there’s a capital structure pecking order on who gets first dibs on a company’s assets - secured creditors, unsecured senior bond holders, unsecured general bond holders, priority / preferred equity holders, and then finally common equity holders - these are the classes of claims on the company’s assets. After the exclusive period expires, the Creditor’s Committee or an individual creditor can themselves propose their own, possibly competing, Restructuring Plan, to the court. A Restructuring Plan will also be accompanied by a Disclosure Statement, which will contain all the financial information about the bankrupt company’s state of affairs needed for creditors and equity holders to make an informed decision about how to proceed. The court will then hold a hearing to approve the Restructuring Plan and Disclosure Statement before the plan can be voted on by creditors and equity holders. In some cases, these are prepared and negotiated with creditors before bankruptcy is even declared to speed things up and have more favorable terms - a prepackaged bankruptcy. Once the Restructuring Plan and Disclosure Statement receives court approval, the plan is voted on by the classes of impaired (i.e. debt will not be paid back) creditors to be confirmed. The legal requirement for a bankruptcy court to confirm a Restructuring Plan is to have at least one entire class of impaired creditors vote to accept the plan. A class of creditors is deemed to have accepted a Restructuring Plan when creditors that hold at least 2/3 of the dollar amount and at least half of the number of creditors vote to accept the plan. After another hearing, and listening to any potential objections to the proposed Restructuring Plan, such as other impaired classes that don't like the plan, the court may then confirm the plan, putting it to effect. This is one potential ending to a Chapter 11 case. A case can also end with a conversion to a Chapter 7 (Liquidation) case, if one of the parties involved file a motion to do so for a cause that is deemed by the courts to be in the best interest of the creditors. In Chapter 7, the company ceases operating and a trustee is appointed to begin liquidating (i.e. selling) the company’s assets. The proceeds from the liquidation process are then paid out to creditors, with the most senior levels of the capital structure being paid out first, and the equity holders are usually left with nothing. Finally, a party can file a motion to dismiss the case for some cause deemed to be in the best interest of the creditors.
The Tale of Two Bankruptcies - WLL and HTZ
Hertz (HTZ) has come into news recently, with the stock surging up to $6, or 1500% off its lows, for no apparent fundamental reason, despite the fact that they’re currently in bankruptcy and their stock is likely worthless. We’ll get around to what might have caused this later, for now, we’ll go over what’s going on with Hertz in its bankruptcy proceedings. To get a clearer picture, let’s start with a stock that I’ve been following since April - Whiting Petroleum (WLL). WLL is a stock I’ve covered pretty extensively, especially with it’s complete price dislocation between the implied value of the restructured company by their old, currently trading, stock being over 10x the implied value of the bonds, which are entitled to 97% of the new equity. Usually, capital structure arbitrage, a strategy to profit off this spread by going long on bonds and shorting the equity, prevents this, but retail investors have started pumping the stock a few days after WLL’s bankruptcy to “buy the dip” and make a quick buck. Institutions, seeing this irrational behavior, are probably avoiding touching at risk of being blown out by some unpredictable and irrational retail investor pump for no apparent reason. We’re now seeing this exact thing play out a few months later, but at a much larger scale with Hertz. So, how is WLL's bankruptcy process going? For anyone curious, you can follow the court case in Stretto. Luckily for Whiting, they’ve entered into a prepackaged bankruptcy process and filed their case with a Restructuring Plan already in mind to be able to have existing equity holders receive a mere 3% of new equity to be distributed among them, with creditors receiving 97% of new equity. For the past few months, they’ve quickly gone through all the hearings and motions and now have a hearing to receive approval of the Disclosure Statement scheduled for June 22nd. This hearing has been pushed back a few times, so this may not be the actual date. Another pretty significant document was just filed by the Committee of Creditors on Friday - an objection to the Disclosure Statement’s approval. Among other arguments about omissions and errors the creditor’s found in the Disclosure Statement, the most significant thing here is that Litigation and Rejection Damage claims holders were treated in the same class as a bond holders, and hence would be receiving part of their class’ share of the 97% of new equity. The creditors claim that this was misleading as the Restructuring Plan originally led them to believe that the 97% would be distributed exclusively to bond holders, and the claims for Litigation and Rejection Damage would be paid in full and hence be unimpaired. This objection argues that the debtors did this gerrymandering to prevent the Litigation and Rejection Damage claims be represented as their own class and able to reject the Restructuring Plan, requiring either payment in full of the claims or existing equity holders not receiving 3% of new equity, and be completely wiped out to respect the capital structure. I’d recommend people read this document if they have time because whoever wrote this sounds legitimately salty on behalf of the bond holders; here’s some interesting excerpts: Moreover, despite the holders of Litigation and Rejection Damage Claims being impaired, existing equity holders will still receive 3% of the reorganized company’s new equity, without having to contribute any new value. The only way for the Debtors to achieve this remarkable outcome was to engage in blatant classification gerrymandering. If the Debtors had classified the Litigation and Rejection Damage Claims separately from the Noteholder claims and the go-forward Trade Claims – as they should have – then presumably that class would reject a plan that provides Litigation and Rejection Damage Claims with a pro rata share of minority equity. The Debtors have placed the Rejection Damage and Litigation Claims in the same class as Noteholder Claims to achieve a particular result, namely the disenfranchisement of the Rejection Damage and Litigation Claimants who, if separately classified, may likely vote to reject the Plan. In that event, the Debtor would be required to comply with the cramdown requirements, including compliance with the absolute priority rule, which in turn would require payment of those claims in full, or else old equity would not be entitled to receive 3% of the new equity. Without their inclusion in a consenting impaired class, the Debtors cannot give 3% of the reorganized equity to existing equity holders without such holders having to contribute any new value or without paying the holders of Litigation and Rejection Damage Claims in full. The Committee submits that the Plan was not proposed in good faith. As discussed herein, the Debtors have proposed an unconfirmable Plan – flawed in various important respects. Under the circumstances discussed above, in the Committee’s view, the Debtors will not be able to demonstrate that they acted with “honesty and good intentions” and that the Plan’s results will not be consistent with the Bankruptcy Code’s goal of ratable distribution to creditors. They’re even trying to have the court stop the debtor from paying the lawyers who wrote the restructuring agreement. However, as discussed herein, the value and benefit of the Consenting Creditors’ agreements with the Debtors –set forth in the RSA– to the Estates is illusory, and authorizing the payment of the Consenting Creditor Professionals would be tantamount to approving the RSA, something this Court has stated that it refuses to do.20 The RSA -- which has not been approved by the Court, and indeed no such approval has been sought -- is the predicate for a defective Plan that was not proposed in good faith, and that gives existing equity holders an equity stake in the reorganized enterprise even though Litigation and Rejection Damage Creditors will (presumably) not be made whole under the Plan and the existing interest holders will not be contributing requisite new value. As a disclaimer, I have absolutely zero knowledge nor experience in law, let alone bankruptcy law. However, from reading this document, if what the objection indicates to be true, could mean that we end up having the court force the Restructuring agreement to completely wipe out the current equity holders. Even worse, entering a prepackaged bankruptcy in bad faith, which the objection argues, might be grounds to convert the bankruptcy to Chapter 7; again, I’m no lawyer so I’m not sure if this is true, but this is my best understanding from my research. So what’s going on with Hertz? Most analysts expect that based on Hertz’s current balance sheet, existing equity holders will most likely be completely wiped out in the restructuring. You can keep track of Hertz’s bankruptcy process here, but it looks like this is going to take a few months, with the first meeting of creditors scheduled for July 1. An interesting 8-K got filed today for HTZ, and it looks like they’re trying to throw a hail Mary for their case by taking advantage of dumb retail investors pumping up their stock. They’ve just been approved by the bankruptcy court to issue and sell up to $1B (double their current market cap) of new shares in the stock market. If they somehow pull this off, they might have enough money raised to dismiss the bankruptcy case and remain in business, or at very least pay off their creditors even more at the expense of Robinhood users.
The Rise of Retail Investors - An Update
A few weeks ago, I talked about data that suggested a sudden surge in retail investor money flooding the market, based on Google Trends and broker data. Although this wasn’t a big topic back when I wrote about it, it’s now one of the most popular topics in mainstream finance news, like CNBC, since it’s now the only rational explanation for the stock market to have pumped this far, and for bankrupt stocks like HTZ and WLL to have surges far above their pre-bankruptcy prices. Let’s look at some interesting Google Trends that I found that illustrates what retail investors are doing. Google Trends - Margin Calls Google Trends - Robinhood Google Trends - What stock should I buy Google Trends - How to day trade Google Trends - Pattern Day Trader Google Trends - Penny Stock The conclusion that can be drawn from this data is that in the past two weeks, we are seeing a second wave of new retail investor interest, similar to the first influx we saw in March. In particular, these new retail investors seem to be particularly interested in day trading penny stocks, including bankrupt stocks. In fact, data from Citadel shows that penny stocks have surged on average 80% in the previous week. Why Retail Investors Matter A common question that’s usually brought up when retail investors are brought up is how much they really matter. The portfolio size of retail investors are extremely small compared to institutional investors. Anecdotally and historically, retail investors don’t move the market, outside of some select stocks like TSLA and cannabis stocks in the past few years. However when they do, shit gets crazy; the last time retail investors drove the stock market was in the dot com bubble. There’s a few papers that look into this with similar conclusions, I’ll go briefly into this one, which looks at almost 20 years of data to look for correlations between retail investor behavior and stock market movements. The conclusion was that behaviors of individual retail investors tend to be correlated and are not random and independent of each other. The aggregate effect of retail investors can then drive prices of equities far away from fundamentals (bubbles), which risk-averse smart money will then stay away from rather than try taking advantage of the mispricing (i.e. never short a bubble). The movement in the prices are typically short-term, and usually see some sort of reversal back to fundamentals in the long-term, for small (i.e. < $5000) trades. Apparently, the opposite is true for large trades; here’s an excerpt from the paper to explain. Stocks recently sold by small traders perform poorly (−64 bps per month, t = −5.16), while stocks recently bought by small traders perform well (73 bps per month, t = 5.22). Note this return predictability represents a short-run continuation rather than reversal of returns; stocks with a high weekly proportion of buys perform well both in the week of strong buying and the subsequent week. This runs counter to the well-documented presence of short-term reversals in weekly returns.14,15 Portfolios based on the proportion of buys using large trades yield precisely the opposite result. Stocks bought by large traders perform poorly in the subsequent week (−36 bps per month, t = −3.96), while those sold perform well (42 bps per month, t = 3.57). We find a positive relationship between the weekly proportion of buyers initiated small trades in a stock and contemporaneous returns. Kaniel, Saar, and Titman (forthcoming) find retail investors to be contrarians over one-week horizons, tending to sell more than buy stocks with strong performance. Like us, they find that stocks bought by individual investors one week outperform the subsequent week. They suggest that individual investors profit in the short run by supplying liquidity to institutional investors whose aggressive trades drive prices away from fundamental value and benefiting when prices bounce back. Barber et al. (2005) document that individual investors can earn short term profits by supplying liquidity. This story is consistent with the one-week reversals we see in stocks bought and sold with large trades. Aggressive large purchases may drive prices temporarily too high while aggressive large sells drive them too low both leading to reversals the subsequent week. Thus, using a one-week time horizon, following the trend can make you tendies for a few days, as long as you don’t play the game for too long, and end up being the bag holder when the music stops.
The Keynesian Beauty Contest
The economic basis for what’s going on in the stock market recently - retail investors driving up stocks, especially bankrupt stocks, past fundamental levels can be explained by the Keynesian Beauty Contest, a concept developed by Keynes himself to help rationalize price movements in the stock market, especially during the 1920s stock market bubble. A quote by him on the topic of this concept, that “the market can remain irrational longer than you can remain solvent”, is possibly the most famous finance quote of all time. The idea is to imagine a fictional newspaper beauty contest that asks the reader to pick the six most attractive faces of 100 photos, and you win if you pick the most popular face. The naive strategy would be to pick the faces that you think are the most attractive. A smarter strategy is to figure out what the most common public perception of attractiveness would be, and to select based on that. Or better yet, figure out what most people believe is the most common public perception of what’s attractive. You end up having the winners not actually be the faces people think are the prettiest, but the average opinion of what people think the average opinion would be on the prettiest faces. Now, replace pretty faces with fundamental values, and you have the stock market. What we have today is the extreme of this. We’re seeing a sudden influx of dumb retail money into the market, who don’t know or care about fundamentals, like trading penny stocks, and are buying beaten down stocks (i.e. “buy the dip”). The stocks that best fit all three of these are in fact companies that have just gone bankrupt, like HTZ and WLL. This slowly becomes a self-fulfilling prophecy, as people start seeing bankrupt stocks go up 100% in one day, they stop caring about what stocks have the best fundamentals and instead buy the stocks that people think will shoot up, which are apparently bankrupt stocks. Now, it gets to the point where even if a trader knows a stock is bankrupt, and understands what bankruptcy means, they’ll buy the stock regardless expecting it to skyrocket and hope that they’ll be able to sell the stock at a 100% profit in a few days to an even greater fool. The phenomenon is well known in finance, and it even has a name - The Greater Fool Theory. I wouldn’t be surprised if the next stock to go bankrupt now has their stock price go up 100% the next day because of this.
What is the smart money doing - DIX & GEX
Alright that’s enough talk about dumb money. What’s all the smart money (institutions) been doing all this time? For that, you’ll want to look at what’s been going on with dark pools. These are private exchanges for institutions to make trades. Why? Because if you’re about to buy a $1B block of SPY, you’re going to cause a sudden spike in prices on a normal, public exchange, and probably end up paying a much higher cost basis because of it. These off-exchange trades account for about one third of all stock volume. You can then use data of market maker activity in these dark pools to figure out what institutions have been doing, the most notable indicators being DIX by SqueezeMetrics. Another metric they offer is GEX, or gamma exposure. The idea behind this is that market markets who sell option contracts, typically don’t want to (or can’t legally) take an actual position in the market; they can only provide liquidity. Hence, they have to hedge their exposure from the contracts they wrote by going long or short on the stocks they wrote contracts to. This is called delta-hedging, with delta representing exposure to the movement of a stock. With options, there’s gamma, which represents the change in delta as the stock price moves. So as stock prices move, the market maker needs to re-hedge their positions by buying or selling more shares to remain delta-neutral. GEX is a way to show the total exposure these market makers have to gamma from contracts to predict stock price movements based on what market makers must do to re-hedge their positions. Now, let’s look at what these indicators have been doing the past week or so. DIX & GEX In the graph above, an increasing DIX means that institutions are buying stocks in the S&P500, and an increasing GEX means that market makers have increasing gamma exposure. The DIX whitepaper, it has shown that a high DIX is often correlated with increased near-term returns, and in the GEX whitepaper, it shows that a decreased GEX is correlated with increased volatility due to re-hedging. It looks like from last week’s crash, we had institutions buy the dip and add to their current positions. There was also a sudden drop in GEX, but it looks like it’s quickly recovered, and we’ll see volatility decreased next week. Overall, we’re getting bullish signals from institutional activity.
Bubbles and Market Sentiment
I’ve long held that the stock market and the economy has been in a decade-long bubble caused by liquidity pumping from the Fed. Recently, the bubble has been accelerated and it’s becoming clearer to people that we are in a bubble. Nevertheless, you shouldn’t short the bubble, but play along with it until it bursts. Bubbles are driven by pure sentiment, and this can be a great contrarian indicator to what stage of the bubble we are in. You want to be a bear when the market is overly greedy and a bull when the market is overly bearish. One of the best tools to measure this is the equity put / call ratio. Put / Call Ratio The put/call ratio dropped below 0.4 last week, something that’s almost never happened and has almost always been immediately followed up by a correction - which it did this time as well. A low put / call ratio is usually indicative of an overly-greedy market, and a contrarian indicator that a drop is imminent. However, right after the crash, the put/call ratio absolutely skyrocketed, closing right above 0.71 on Friday, above the mean put / call ratio for the entire rally since March’s lows. In other words, a ton of money has just been poured into SPY puts expecting to profit off of a downtrend. In fact, it’s possible that the Wednesday correction itself has been exasperated by delta hedging from SPY put writers. However, this sudden spike above the mean for put/call ratio is a contrarian indicator that we will now see a continued rally.
1D RSI on SPY was definitely overbought last week, and I should have taken this as a sign to GTFO from all my long positions. The correction has since brought it back down, and now SPY has even more room to go further up before it becomes overbought again
1D MACD crossed over on Wednesday to bearish - a very strong bearish indicator, however 1W MACD is still bullish
For the bulls, there’s very little price levels above 300, with a small possible resistance at 313, which is the 79% fib retracement. SPY has never actually hit this price level, and has gapped up and down past this price. Below 300, there’s plenty of levels of support, especially between 274 and 293, which is the range where SPY consolidated and traded at for April and May. This means that a movement up will be met with very little resistance, while a movement down will be met with plenty of support
The candles above 313 form an island top pattern, a pretty rare and strong bearish indicator.
The first line of defense of the bulls is 300, which has historically been a key support / resistance level, and is also the 200D SMA. So far, this price level has held up as a solid support last week and is where all downwards price action in SPY stopped. Overall, there’s very mixed signals coming from technical indicators, although there’s more bearish signals than bullish. My Strategy for Next Week While technicals are pretty bearish, retail and institutional activity and market sentiment is indicating that the market still continue to rally. My strategy for next week will depend on whether or not the market opens above or below 300. I’m currently mostly holding long volatility positions, that I’ve started existing on Friday. The Bullish case If 300 proves to be a strong support level, I’ll start entering bullish positions, following my previous strategy of going long on weak sectors such as airlines, cruises, retail, and financials, once they break above the 24% retracement and exit at the 50% retracement. This is because there’s very little price levels and resistance above 300, so any movements above this level will be very parabolic up to ATHs, as we saw in the beginning of 2020 and again the past two weeks. If SPY moves parabolic, the biggest winners will likely be the weakest stocks since they have the most room to go up, with most of the strongest stocks already near or above their ATHs. During this time, I’ll be rolling over half of my profits to VIX calls of various expiry dates as a hedge, and in anticipation of any sort of rug pull for when this bubble does eventually pop. The Bearish case For me to start taking bearish positions, I’ll need to see SPY open below 300, re-test 300 and fail to break above it, proving it to be a resistance level. If this happens, I’ll start entering short positions against SPY to play the price levels. There’s a lot of price levels between 300 and 274, and we’d likely see a lot of consolidation instead of a big crash in this region, similar to the way up through this area. Key levels will be 300, 293, 285, 278, and finally 274, which is the levels I’d be entering and exiting my short positions in. I’ve also been playing with WLL for the past few months, but that has been a losing trade - I forgot that a market can remain irrational longer than I can remain solvent. I’ll probably keep a small position on WLL puts in anticipation of the court hearing for the disclosure statement, but I’ve sold most of my existing positions.
As always, I'll be posting live thoughts related to my personal strategy here for people asking. 6/15 2AM - /ES looking like SPY is going to gap down tomorrow. Unless there's some overnight pump, we'll probably see a trading range of 293-300. 6/15 10AM - Exited any remaining long positions I've had and entered short positions on SPY @ 299.50, stop loss at 301. Bearish case looking like it's going to play out 6/15 10:15AM - Stopped out of 50% of my short positions @ 301. Will stop out of the rest @ 302. Hoping this wasn't a stop loss raid. Also closed out more VIX longer-dated (Sept / Oct) calls. 6/15 Noon - No longer holding any short positions. Gap down today might be a fake out, and 300 is starting to look like solid support again, and 1H MACD is crossing over, with 15M remaining bullish. Starting to slowly add to long positions throughout the day, starting with CCL, since technicals look nice on it. Also profit-took most of my VIX calls that I bought two weeks ago 6/15 2:30PM - Bounced up pretty hard from the 300 support - bull case looks pretty good, especially if today's 1D candle completely engulphs the Friday candle. Also sold another half of my remaining long-dated VIX calls - still holding on to a substantial amount (~10% of portfolio). Will start looking to re-buy them when VIX falls back below 30. Going long on DAL as well 6/15 11:30PM - /ES looking good hovering right above 310 right now. Not many price levels above 300 so it's hard to predict trading ranges since there's no price levels and SPY will just go parabolic above this level. Massive gap between 313 and 317. If /ES is able to get above 313, which is where the momentum is going to right now, we might see a massive gap up and open at 317 again. If it opens below 313, we might see the stock price fade like last week. 6/15 Noon - SPY filled some of the gap, but then broke below 313. 15M MACD is now bearish. We might see gains from today slowly fade, but hard to predict this since we don't have strong price levels. Will buy more longs near EOD if this happens. Still believe we'll be overall bullish this week. GE is looking good. 6/16 2PM - Getting worried about 313 acting as a solid resistance; we'll either probably gap up past it to 317 tomorrow, or we might go all the way back down to 300. Considering taking profit for some of my calls right now, since you'll usually want to sell into resistance. I might alternatively buy some 0DTE SPY puts as a hedge against my long positions. Will decide by 3:30 depending on what momentum looks like 6/16 3PM - Got some 1DTE SPY puts as a hedge against my long positions. We're either headed to 317 tomorrow or go down as low as 300. Going to not take the risk because I'm unsure which one it'll be. Also profit-took 25% of my long positions. Definitely seeing the 313 + gains fade scenario I mentioned yesterday 6/17 1:30AM - /ES still flat struggling to break through 213. If we don't break through by tomorrow I might sell all my longs. Norwegian announced some bad news AH about cancelling Sept cruises. If we move below $18.20 I'll probably sell all my remaining positions; luckily I took profit on CCL today so if options do go to shit, it'll be a relatively small loss or even small gain. 6/17 9:45AM - SPY not being able to break through 313/314 (79% retracement) is scaring me. Sold all my longs, and now sitting on cash. Not confident enough that we're actually going back down to 300, but no longer confident enough on the bullish story if we can't break 313 to hold positions 6/17 1PM - Holding cash and long-term VIX calls now. Some interesting things I've noticed
1H MACD will be testing a crossover by EOD
Equity put/call ratio has plummeted. It's back down to 0.45, which is more than 1 S.D. below the mean. We reached all the way down to 0.4 last time. Will be keeping a close eye on this and start buying for VIX again + SPY puts we this continues falling tomorrow
6/17 3PM - Bought back some of my longer-dated VIX calls. Currently slightly bearish, but still uncertain, so most of my portfolio is cash right now. 6/17 3:50PM - SPY 15M MACD is now very bearish, and 1H is about to crossover. I'd give it a 50% chance we'll see it dump tomorrow, possibly towards 300 again. Entered into a very small position on NTM SPY puts, expiring Friday 6/18 10AM - 1H MACD is about to crossover. Unless we see a pump in the next hour or so, medium-term momentum will be bearish and we might see a dump later today or tomorrow. 6/18 12PM - Every MACD from 5M to 1D is now bearish, making me believe we'd even more likely see a drop today or tomorrow to 300. Bought short-dates June VIX calls. Stop loss for this and SPY puts @ 314 and 315 6/18 2PM - Something worth noting: opex is tomorrow and max pain is 310, which is the level we're gravitating towards right now. Also quad witching, so should expect some big market movements tomorrow as well. Might consider rolling my SPY puts forward 1 week since theoretically, this should cause us to gravitate towards 310 until 3PM on Friday. 6/18 3PM - Rolled my SPY puts forward 1W in case theory about max pain + quad witching end up having it's theoretical effect. Also GEX is really high coming towards options expiry tomorrow, meaning any significant price movements will be damped by MM hedging. Might not see significant price movements until quad witching hour tomorrow 3PM 6/18 10PM - DIX is very high right now, at 51%, which is very bullish. put/call ratio is still very low though. Very mixed signals. Will be holding positions until Monday or SPY 317 before reconsidering them. 6/18 2PM - No position changes. Coming into witching hour we're seeing increased volatility towards the downside. Looking good so far
What if I told you OPERATION 10 BAGS is actually OPERATION 20 BAGS - Courtesy of Albertsons (ACI)
Edit 1: I wouldn't rush to get in immediately with how poor SPY/QQQ look at open. Waiting until later in the day when they've maybe bottomed out is likely a better move Edit 2: Broader market looks to have stabilized. Congrats if you bought the dip. But now is time to get balls deep - I'm in the process of tripling my position u/trumpdiego 's post from a few days ago on ACI inspired me to do some research of my own, and it seems operation 10 bags may actually be a 20 bagger Post for reference:https://new.reddit.com/wallstreetbets/comments/huq9eq/operation\10_bags_brought_to_you_by_albertsons/) TL;DR: ACI is a leader in multiple sub-sectors that the market has been pumping lately. Their stock hasn’t increased as much as competitors in the last month, and it is cheaper than all of them on a P/E basis. Grocery prices have been rising faster than ever before. ACI is driving customers to their stores at a rate higher than anyone else in the industry. Online grocery sales were likely close to a record $19B in Q2. ACI’s online grocery sales were up +243% in April, and close to +220% this last quarter. Both of those last two facts suggest over $36B in quarterly revenue, compared to a street consensus of ~$23B. TL;DR for the TL;DR: Albertons Companies (ACI) 8/21 $20C’s are going to the moon when they report earnings before market open on Monday 7/27, but potentially sooner if any other online grocers report what you’re about to read below. And I'll show you exactly why referencing the data that the big bois use to evaluate investments. Primer for the type of autist who likes to know what he’s YOLOing options on: ACI is a food and drug retailer that offers grocery products, general merchandise, health and beauty care products, pharmacy, and fuel in the United States, with local presence and national scale. They also own Safeway, Tom Thumb , Acme, Shaw’s, Star Market, United Supermarkets, Vons, Jewel-Osco, Randalls, Market Street, Pavilions, Carrs, and Haggen as well as meal kit company Plated based in New York City. Additionally, ACI is the #1 or #2 grocer by market share in 68% of the 121 MSAs (Metropolitan Statistical Area) they operate in. And here’s the good part: ACI is a leader in the online grocery shopping/delivery marketplace. They offer home delivery services in ~65% of their 2,200 stores, and have partnerships with Instacart, Uber Eats, and Grubhub to facilitate 1-2 hour delivery in 90% of their locations. Guess whose stock is up 75% this quarter? Grubhub. Think the market likes food delivery? Besides online grocery shopping, what else is surging due to COVID-19? Meal kits. And guess what, ACI is one of the only grocers with a meal kit offering. Demand is surging so much that Blue Apron (APRN) decided to go public on June 24th, and is already up 22.47% since then. Think the market likes meal kits? Now back to your regularly scheduled programming: Before I get into the industry and ACI specific numbers that make me TSLA levels of bullish on ACI – let me tell you what the market thinks. Q: “Why do I care what the market thinks? I’m smarter than it!” – Probably most of you. A: “Because it doesn’t matter how right you are if the market doesn’t agree, especially when YOLOing short term options. Market Trends: Over the last 30 days, ACI shares are up a meager 3.43%, currently trading at a 7.3x P/E multiple of consensus 2020 earnings. Check out what the most comparable companies to ACI have done over the last 30 days, and associated 2020 expected earnings P/E they are trading at: Grocery Outlet (GO): +11.30% (39.7x) Kroger (KR): +9.16% (11.9x) Sprouts Farmers Market (SFM): +15.71% (15.1x) So what does that tell you? The market loves grocery stores right now in corona times (no shit), and ACI is relatively the cheapest stock out of all of them. The performance of Grubhub (+75% in Q2), Blue Apron (+22.47% since 6/24/20 IPO), and literally every single online retailer tell you the market’s opinion on online shopping, food delivery, and meal kits as well. If ACI were to trade at KR’s 11.9x P/E, that would make the stock worth $26.15, +63% from close today. Wonder what that means for option tendies… Oh what’s that? You’re asking why ACI could start trading on par with KR at a 11.9x P/E? Great question! Let me get into why this sexy boi will print: Starting from a macro perspective, CPI: Food at Home (NSA) is the consumer price metric that tracks inflation in food prices as grocery stores and related establishments. After deflating -.16% in 2018 and inflating just .03% in 2019, CPI: Food at Home (NSA) is +4.74% thus far in 2020. Why is this? Food prices are historically correlated with Disposable Personal Income, which also increased at its highest rate ever through Q2’2020. So as long as big daddy Powell has the money printer going brrrrrr, Albertsons will be making more and more money on each sale. Now, this food price inflation does benefit every grocer. However, let’s take a look at the ID Sales (which is the grocer equivalent of same-store-sales) trends recently for ACI and its main competitors that I was able to find data on:
So through at least April, ACI has been in a class of their own when it comes to generating repeated traffic at their locations. Courtesy of the fine people at Morgan Stanley, we also know ID Sales were +16% in June (so you can deduce they were in the +17% to +20% range in May), and still up “double-digit percentage” thus far in July. So far we’re established that ACI is selling their products for the most they ever have, and generating more traffic at identical stores than all their competitors. This data is affirmed by JP Morgan’s foot traffic index which shows ACI taking customer from Kroger. But wait – here’s the sexy part: Time to forecast ACI’s online sales this quarter using published industry data: According to new research released 7/6/20 by Brick Meets Click and Mercatus, U.S. online grocery sales hit a record $7.2 billion in June, up 9% over May. Let’s do some quick maths and deduce that online grocery sales were $6.61B in May. Now let’s be super conservative and say May was a 20% increase over April (realistically I would guess closer to +5-10%), and that gives us $5.51B in online grocery sales in April. This means we likely had ~$19B in online grocery sales in Q2. As ACI represented 1.60% of the online grocery marketplace in 2019, that would imply $304M in online revenue this past quarter. This is very conservative though, as even after assuming a 20% drop in April relative to May, we also assumed their market share stayed at 1.60%. Remember those nice people at JPM who’s foot traffic tracker told us that ACI was stealing customers from KR? Well they also estimate ACI’s 1.60% market share in online groceries to reach 2.50%-2.80% in 2025, with a CAGR (cumulative average growth rate) of ~9% in market share per year. That means their 1.60% market share is likely 1.744% now. Take 1.744% of $19B, and:
!!!!That means $331.36M of online sales!!!!
Remember this number Now that we have an estimate for ACI’s online sales based on the broader industry trends, lets come up with an estimate using only company data: On their last earnings call, management noted that online sales had grown 83% in 2018, 39% in 2019, +278% in the first 12-weeks of 2020, and +243% in April (Remember this number too!). Can you hear your Robinhood account balance going brrrrr? If not, the oven is about to get turned up faster Jerome can print a milli: Math time! · ACI did ~$265.4M in online sales in 2018. Source: https://www.digitalcommerce360.com/2019/11/04/albertsons-embraces-omnichannel-retail/#:~:text=Albertsons%20does%20not%20break%20out,%2461%20billion%20in%20total%20revenue. · That means they did ~370M in online sales in 2019. · ACI had $62.455B in 2019 revenue. · Which means 0.59% of their sales were online. · Working backwards off their Q2’19 revenue of $18.738B, we arrive at $111M in online revenue. · Let’s be conservative and assume some sequential decline from their April online sales growth (the second number you should have remembered) and put Q2 online sales at +220%.
!!!!That means $355M in online sales!!!!
Remember that first number I told you to keep in mind? $331.36M. Considering entirely different data sets were used to find each number, it may not be so crazy to think it could be a pretty accurate forecast of the online sales when they report earnings. But since you’re so smart I know you’re on the edge of your seat wondering what that would mean for their total revenue Let’s take the average of both forecasts, and use $343.18M as our forecast for online revenue. Given online sales were 0.59% of 2019 revenue, it would imply $58.166B in revenue this quarter, compared to the $22.78B street consensus estimate. Admittedly, online sales staying at .59% is unrealistic due to how many consumers would shop online instead of in the store. Here’s some more math to deduce the new percentage: · In 2018, 0.44% of their sales were online · When online sales rose 39% in 2019, the proportion went up to 0.59% · So a 39% increase in online sales led to a 0.15% greater contribution of online sales to total revenue · Therefore a 220% increase would mean a 0.345% increase in proportion of online sales, putting them at .935% of total sales
!!!!!That gives us $36.704B in revenue for this past quarter vs a consensus of just under $22.78B. A beat by over 60%!!!!!
If you’re one of the rare autists to realize that revenue is only one half of the earnings equation, and your costs are the equally as important second half: Let’s go back to our friends at JPM, in a recent research note, after mentioning the foot traffic ACI was taking from KR, they also noted that ACI has superior gross margins to KR, as their stores are strategically located further from aggressively low priced competitors such as Aldi and WalMart. Additionally, they praised ACI’s recent cost savings initiatives that have been underway for some time now, and believe they would lead to some of the best margins in the industry. So you’re telling me ACI is going to make way more money than anyone expects this quarter, while also having lower costs? That must mean call options are crazy expensive, right?? Wrong. The aforementioned option is trading at just $0.50. That means after earnings when the stock rips to $30, they could be worth $11, does a 2,100% return sound good to you too? And for you especially literate autists, the IV is only 91.61%.
ACI 8/21 $20C
Let’s ride this fucker to the moon
Happy to respond to any questions/comments on sources for some of the data I presented or anything else your autistic brain comes up with regarding ACI
Assigned early on your short put spread? Send a thank you note...
"I was assigned early, what do I do?" is a common question - first, don't panic. Second, read the below. Third, don't panic. Fourth, ask questions. When selling options, there is always a chance that the option owner can exercise early, leaving the option seller with stock that they weren't anticipating - either 100 long shares if they sold a put, or 100 short shares if they sold a call. This can cause confusion, particularly if one doesn't have the buying power to pay for the shares. In one tragic instance earlier this year, Alexander Kerns took his own life due to the buying power shown on his (misleading) screen after selling spreads. Let's cover what happens if the short leg of a put spread is assigned before expiration and show that it is actually Good news for the option seller. Traditional put spread:
Sell 1 18 Sept AAPL 485 put for 17.35
Buy 1 18 Sept AAPL 480 put for 15.30
Total credit of 2.05
If held to expiration, what can happen?
AAPL finishes > 485, we keep 2.05 for a $205 win.
AAPL finishes <480, we lose 2.95 ($5 is the width of the strikes, minus the $2.05 collected) for a $295 loss
AAPL finishes between 480 and 485 and we are assigned 100 shares of stock at $485.
In scenario 3, we'll have $48,500 debited from our account and have 100 shares of AAPL. We'll still have the 2.05 credit from selling the spread, so our Effective entry price is $482.95 (485-2.05). If AAPL expires >= $482.95, we'll be profitable on our stock position, below $482.95 and we'll be unprofitable on our 100 shares. We will now have an increased potential for loss on Monday, as our long put has expired worthless. Unless one wants to take the 100 shares, it is recommended to close the position before the market closes on expiration to avoid dealing with the stock. Early Assignment While it is somewhat rare, there are times when an option holder may choose to exercise their option early. If a stock is hard to borrow (usually calls), if the remaining extrinsic value is incredibly low, for a dividend (calls) or simply because the put or call holder is inexperienced, we may find that we're holding shares that we weren't expecting prior to expiration. Don't panic Continuing with our example, let's say that AAPL is trading at 460 on September 11th and we find that our short put has been assigned, changing our position to:
Long 480 put
Long 100 shares of AAPL at an entry price of $485
If held to expiration, what can happen?
AAPL finishes at 485, our 480 put expires worthless, we sell the stock at close for break even, and keep the 2.05 credit for the initial spread - a $205 win.
AAPL finishes <480, our 480 put expires in the money and we sell our shares at 480. We lose 2.95 - We bought the stock at $485, sold for $480, but received $2.05 in an initial credit. Total loss is $295.
AAPL finishes between 480 and 485. We sell the stock at close, our 480 put expires worthless and we make money if the stock ends above $482.95, lose if it ends below $482.95.
Note that these three scenarios are Very similar to the initial put spread, with one important difference. This time, the first scenario only discusses if AAPL ends at $485. Look what happens if AAPL ends Higher than $485, for example:
AAPL finishes at $490. Our 480 put expires worthless, we sell the stock at close and take in an extra profit of $5/share, for a total win of $705 ($500 on the stock + $205 on the put spread).
Early assignment of puts in short put spreads Helps the option seller Between when we are assigned on the short put and expiration, we have a "free shot" at upside in the underlying name. Our risk hasn't changed. This is too good to be true There are some downsides, namely, you need the capital for the 100 shares. In this case, we've gone from a small margin requirement of less than $500 to needing $48,500 for the shares (for a cash account). If you don't have the cash, you can simply close the position. If you receive a margin call, you will normally have two to five days to fulfill it, giving you a bit of time to see if you get 'lucky' and there is a big recovery on the underlying. You should still proactively close the position, though, as your broker may decide to close other positions to fulfill the margin call. How about calls? The process is the same for a short call spread, but there are a couple of significant differences:
You will pay interest on the short shares. This can be quite expensive if the underlying is volatile and/or hard to borrow.
You will be responsible for dividends. You will have to pay any dividends that occur while you hold the short stock. This is the most common reason you'll be assigned on a short call and you'll need to be aware when selling calls or call spreads anytime there is a dividend prior to expiration.
For both of these reasons, it is generally easier to simply close the position if assigned early. Don't Panic (Yes, I'm reusing this title) When you sell options, you will occasionally be assigned. Once you have a good understanding of how options work, you'll see that there is a Benefit to being assigned early on short puts when they are part of a spread. You will also learn to close calls before they are likely to be assigned or, if assigned, know how to handle it. [Edit: Clarified when options may be assigned early for calls and puts]
Long Thesis - Progyny - 100% upside - High-growth, profitable company is the only differentiated provider in a large, growing, and underserved market. PGNY’s high-touch, seamless offering helps them stand out against large insurance carriers.
Link to my research report on PGNY Summary High-growth, profitable company is the only differentiated provider in a large, growing, and underserved market. PGNY’s high-touch, seamless offering helps them stand out against large insurance carriers. Covid-19 has shown the importance of benefits for employees and will continue to be the key differentiator for those thinking of changing jobs. According to RMANJ (Reproductive Medicine Associates of New Jersey), 68% of people would switch jobs for fertility benefits. For employers, Progyny reduces costs by including the latest cutting-edge technology in one packaged price, thereby lowering the risk of multiples and increasing the likelihood of pregnancy, keeping employees happy with an integrated, data-driven, concierge service partnering with a selective group of fertility doctors. Upside potential is 2x current price in the next 18 months. Overview Progyny Inc. (Nasdaq: PGNY), “PGNY” or the “Company”, based in New York, NY, is the leading independent fertility and family building benefits manager. Progyny serves as a value-add benefits manager sold to employers who want to improve their benefits coverage and retain and attract the best employees. Progyny offers a comprehensive solution and is truly disrupting the fertility industry. There is no standard fertility cycle, but the below is a good approximation of possible workflows: https://preview.redd.it/7aip8pna9zi51.png?width=941&format=png&auto=webp&s=7ef868a67eae10534bac254ab58fb3d4295aef37
Patient is referred to fertility center for evaluation for Assisted Reproductive Technology (“ART”) procedures, including in-vitro fertilization (“IVF “) and intrauterine insemination (“IUI”). Both can be aided by pharmaceuticals that stimulate egg production in the female patient. IVF involves the fertilization of the egg and sperm in the lab, while IUI is direct injection of the sperm sample into the uterus. Often, IUI is done first as it is less expensive. As success rates of IVF have increased, IUI utilization will likely fall.
Sperm washing is the separation of the sperm from the semen sample for embryo creation, and it enhances the freezing capacity of the sperm. Typically, a wash solution is added to the sample and then a centrifuge is used to undergo separation. This is done in both IUI and IVF.
Some OB/GYN platforms are pursuing vertical integration and offering fertility services directly. The OB would need to be credentialed at the lab / procedure center.
Specialty pharmacy arranges delivery of temperature sensitive Rx. Drug regimens include ovarian stimulation to increase the number of eggs or hormone manipulation to better time fertility cycles, among others.
Oocyte retrieval / aspiration is done under deep-sedation anesthesia in a procedure room, typically in the attached IVF lab. Transfer cycle implantation is done using ultrasound guidance without anesthesia. (Anecdotally, we have been told that only REIs can perform an egg retrieval. We have not been able to validate this).
Many clinics house frozen embryos on-site, while some clinics contract with 3rd parties to manage the process. During an IVF cycle, embryos are created from all available eggs. Single-embryo transfer (“SET”) is becoming the norm, which means that multiple embryos are then cryopreserved to use in the future. A fertility preservation cycle ends here with a female storing eggs for long-term usage (e.g. a woman in her young 20s deciding to freeze her eggs for starting a family later).
Common nomenclature refers to an IVF cycle or an IVF cycle with Intracytoplasmic sperm injection (“ICSI”). From a technical perspective, ICSI and IVF are different forms of embryo fertilization within an ART cycle.
ART clinics are frequently offering ancillary services such as embryo / egg adoption or surrogacy services. More frequently, there are independent companies that help with the adoption process and finding surrogates.
ART procedures are broken into two different types of cycles: a banking cycle is the process by which eggs are gathered, embryos are created and then transferred to cryopreservation. A transfer cycle is typically the transfer of a thawed embryo to the female for potential pregnancy. If a pregnancy does not occur, another transfer cycle ensues. Many REIs are moving towards a banking cycle, freezing all embryos, then transfer cycles until embryos are exhausted or a birth occurs. If a birth occurs with the first embryo, patients can keep their embryos for future pregnancy attempts, donate the embryos to a donation center, or request the destruction of the embryos.
The Company started as Auxogen Biosciences, an egg-freezing provider before changing business models to focus on providing a full-range of fertility benefits. In 2016, they launched with their first 5 employer clients and 110,000 members. As of June 30, 2020, the Company provided benefits to 134 employers and ~2.2 million members, year over year growth of 63%. 134 employers is less than 2% of the total addressable market of “approximately 8,000 self-insured employers in the United States (excluding quasi-governmental entities, such as universities and school systems, and labor unions) who have a minimum of 1,000 employees and represent approximately 69 million potential covered lives in total. Our current member base of 2.1 million represents only 3% of our total market opportunity.” The utilization rate for all Progyny members was less than 1% in 2019, offering significant leverageable upside as the topic of fertility becomes less taboo.
Fertility has historically been a process fraught one-sided knowledge, even more so than the typical physician procedure. Despite the increased availability of information on the internet, women who undergo fertility treatments have often described the experience as “byzantine” and “chaotic”. Outdated treatment models without the latest technology (or the latest tech offered as expensive a la carte options) continue to be the norm at traditional insurance providers as well as clinics that do not accept insurance. Progyny’s differentiated approach, including a high-touch concierge level of service for patients and data-driven decision making at the clinical level, has led to an NPS of 72 for fertility benefits and 80 for the integrated, optional pharmacy benefit. Typically, fertility benefits offered by large insurance carriers are add-ons to existing coverage subject to a lifetime maximum while simultaneously requiring physicians to try IUI 3 – 6 times before authorizing IVF. The success rate of IUI, also known as artificial insemination, is typically less than 10%, even when performed with medication. As mentioned in Progyny’s IPO “A patient with mandated fertility step therapy protocol may be required to undergo three to six cycles of IUI, which has an average success rate range of 5% to 15%, takes place over three to six months and can cost up to $4,000 per cycle (or an aggregate of approximately $12,000 to $24,000), according to FertilityIQ. Multiple rounds of mandated IUI is likely to exhaust the patient's lifetime dollar maximum fertility benefits and waste valuable time before more effective IVF treatment can be begun.” Success Rates for IVF IVF success rates vary greatly by age but were 49% on average for women younger than 35. The graph below shows success rates by all clinics by age group for those that did at least 10 cycles in the specific age group. As an example, for those in the ages 35 – 37, out of 456 available clinics, 425 performed at least 10 cycles with a median success rate of 39.7%. https://preview.redd.it/d2l5dtw89zi51.png?width=4990&format=png&auto=webp&s=5ff2ab9948b94419558a27ac861d4e498dce6713 Progyny’s Smart Cycle is the proprietary method the company has chosen as a “currency” for fertility benefits. As opposed to a traditional fee-for-service model with step-up methods, employers may choose to provide between 2 and unlimited Smart Cycles to employees. This enables employees to choose the provider’s best method. Included in the Smart Cycle, and another indicator of the Company’s forward-thinking methodology, are treatment options that deliver better outcomes (PGS, ICSI, multiple embryo freezing with future implantations). https://preview.redd.it/np577a389zi51.png?width=734&format=png&auto=webp&s=c061a2b24c8515890ba204479b4677893dabf755 As detailed in the chart above, a patient could undergo an IVF cycle that freezes all embryos (3/4 of a Smart Cycle), then transfer 5 frozen embryos (1/4 cycle each; each transfer would occur at peak ovulation, which would take at least 5 months) and use only 2 Smart Cycles. Alternatively, if the patient froze all embryos and got pregnant on the first embryo transfer, they would only use one cycle. Before advances in vitrification (freezing), patients could not be sure that an embryo created in the lab and frozen for later use would be viable, so using only one embryo at a time seemed wasteful. Now, as freezing technology has advanced, undergoing one pharmaceutical regime, one oocyte collection procedure, creating as many embryos as possible, and then transferring one embryo back into the uterus while freezing the rest provides the highest ROI. If the first transferred embryo fails to implant or otherwise does not lead to a baby, the patient can simply thaw the next embryo and try implantation again next month. Included in each Smart Cycle is pre-implantation genetic sequencing (“PGS”) on all available embryos and intracytoplasmic sperm injection (“ICSI”). PGS uses next-generation sequencing technology to determine the viability and sex of the embryo while ICSI is a process whereby a sperm is directly inserted into the egg to start fertilization, rather than allowing the sperm to penetrate the egg naturally. ICSI has a slightly higher rate of successful fertilization (as opposed to simply leaving the egg and sperm in the petri dish). Because Progyny’s experience is denominated in cycles of care, not simply dollars, patients and doctors can focus on what procedures offer the best return. 30% of the Company’s existing network of doctors do not accept insurance of any kind, other than Progyny, which speaks to the value that is provided to doctors and employers. For patients not looking to get pregnant, Progyny offers egg freezing as well. Progyny started as an egg-freezing manager, which allows a woman to preserve her fertility and manage her biological clock. As mentioned previously, pregnancy outcomes vary significantly and align closely with the age of the egg. Egg freezing is designed to allow a woman to save her younger eggs until she is ready to start a family. From an employer’s perspective, keeping younger women in the work force for longer is a cost savings. Vitrification technology has improved significantly since “Freeze your eggs, Free Your Career” was the headline on Bloomberg Businesweek in 2014, but we still don’t yet know the pregnancy rates for women who froze their eggs 5 years ago, but early results are promising and on par with IVF rates for women of similar ages now. From a female perspective, the egg freezing process is not an easy one. The patient is still required to inject themselves with stimulation drugs and the egg retrieval process is the same as in the IVF process (under sedation). The same number of days out of work are required. Using the SmartCycle benefit above as an example, the egg freezing process would require ½ of a Smart Cycle. The annual payment required to the clinic is typically included in the benefits package but may require out-of-pocket expenses covered by the employee. Contrary to popular belief, IVF pregnancies do not have a higher rate of multiples (twins, triplets, etc.), rather in order to reduce out of pocket costs, REIs have transferred multiple embryos to the patient, in the hopes of achieving a pregnancy. If you have struggled for years to get pregnant, and the doctor is suggesting that transferring 3 embryos at once is your best chance at success, you are unlikely to complain, nor are you likely to selectively eliminate an implanted embryo because you now have twins. There are several factors that are making it more likely / acceptable to transfer one embryo at a time, enabling Progyny’s success. https://preview.redd.it/48vk9gc69zi51.png?width=953&format=png&auto=webp&s=2c75a2771a1dd9a079074331b317451f076725ca From the Company: “According to a study published in the American Journal of Obstetrics & Gynecology that analyzed the total costs of care over 400,000 deliveries between 2005 and 2010, as adjusted for inflation, the maternity and perinatal healthcare costs attributable to a set of twins are approximately $150,000 on average, more than four times the comparable costs attributable to singleton births of approximately $35,000, and often exceed this average. In the case of triplets, the costs escalate significantly and average $560,000, sometimes extending upwards of $1.0 million.” “Progyny's selective network of high-quality fertility specialists consistently demonstrate a strong adherence to best practices with a substantially higher single embryo transfer rate. As a result, our members experience significantly fewer pregnancies with multiples (e.g., twins or triplets). Multiples are associated with a higher probability of adverse medical conditions for the mother and babies, and as a byproduct, significantly escalate the costs for employers. Our IVF multiples rate is 3.6% compared to the national average of 16.1%. A lower multiples rate is the primary means to achieving lower high-risk maternity and NICU expenses for our clients.” An educated and supported patient leads to better outcomes. Each patient gets a patient care advocate who interacts with a patient, on average, 15x during their usage of fertility benefits - before treatment, during treatment and post-pregnancy. The Company provides phone-based clinical education and support seven days a week and the Company’s proprietary “UnPack It” call allows patients to speak to a licensed pharmacy clinician who describes the medications included in the package (which contains an average of 20 items per cycle), provides instruction on proper medication administration, and ensures that cycles start on time. The Company’s single medication authorization and delivery led to no missed or delayed cycles in 2018. Previous conference calls have made note of the fact that the Company would like to purchase their own specialty pharmacy and own every aspect of that interaction, which should provide a lift to gross margins. This would allow PGNY to manage both the medication and the treatment, leading to decreased cost of fertility drugs. Under larger carrier programs, carriers manage access to treatment, but PBM manages access to medications, which can lead to a delay in cycle commencement. Progyny Rx can only be added to the Progyny fertility benefits solution (not offered without subscription to base fertility benefits) and offers patients a potentially lower cost fertility drug benefit, while streamlining what is often a frustrating part of the consumer experience. The Progyny Rx solution reduces dispensing and delivery times and eliminates the possibility that a cycle does not start on time due to a specialty pharmacy not delivering medication. Progyny bills employers for fertility medication as it is dispensed in accordance with the individual Smart Cycle contract. Progyny Rx was introduced in 2018 and represented only 5% of total revenue in 2018. By June 30, 2020, Progyny Rx represented 28% of total revenue and increased 15% y/y. The growth rate should slow and move more in line with the fertility benefits solution as the existing customer base adds it to their package. Progyny Rx can save employers 5% on spend for typical carrier fertility benefits or 21% of the drug spend. Prior authorization is not required, and the pre-screened network of specialty pharmacies can deliver within 48 hours. Additionally, PGNY has 1-year contracts, as opposed to 3 – 5 years like standard PBMs, but with guaranteed minimums, allowing them to purchase at discounts and pass part of the savings on to employers – another reason the attachment rate is so high. Large, Underpenetrated Addressable Market Total cycle counts are increasing (below, in 000s), including both freezing cycles and intended-pregnancy cycles. Acceleration in cycle volume is likely driven by a declining birth rate as women wait later in life to start a family, resulting in reduced fertility, as well as the number of non-traditional (LGBT and single parents). Conservatively, we believe cycles can double in the next 8 years, a 7% CAGR. https://preview.redd.it/y6y7jb559zi51.png?width=943&format=png&auto=webp&s=6cc5cdde7c6583d8e943d2675ad3b6ae85f818de Progyny believes its addressable market is the $6.7B spent on infertility treatments in 2017, but these numbers could easily understate the available market and potential patients as over 50% of people in the US who are diagnosed as infertile do not seek treatment. Additionally, according to the Company, 35% of its covered universe did not previously have fertility benefits in place previously, meaning there is a growing population of people who are now considering their fertility options. According to Willis Towers, Watson, ~ 55% of employers offered fertility benefits in 2018. A quick review of CDC stats and FertilityIQ shows a significant disparity in outcomes and emotions for those who are seeking treatment. While technology in the embryo lab is improving rapidly and success rates between clinics should be converging, there continue to be significant outliers. Clinics that follow what are now generally accepted procedures (follicle stimulating hormones, a 5-day incubation period and PGS to determine embryo viability) have seen success rates of at least 40%. There continue to be several providers that offer a mini-IVF cycle or natural IVF cycle. Designed to appeal to cost conscious cash payors, the on average $5,000 costs, is simply IVF without prescription drugs or any add-ons such as PGS. However, the success rates are on par with IUI and there is an abundance of patients over 40 using the service, where the success rates are already low. Additionally, success stories at these clinics frequently align with what is perceived as the worst parts of the process: One clinic offering a natural cycle IVF has a rating at FertilityIQ of ~8.0 with 60% of people strongly recommending it. This clinic performed 2,000 cycles in 2018 (the most recently available data from the CDC), making it one of the top 10 most active fertility center in the US. Their success rate for women under 35 was 23%, as opposed to the national average of 50% for all clinics. For women over 43, the average success rate for the most active 40 clinics in this demographic was 5.0% this clinics success rate was 0.4%. The lower success rate is likely due to the lack of pre-cycle drugs and PGS, but the success rate and the average rating is hard to understand. Part of this could be to the customer service provided by the clinic, or the perceived benefit of having to go into the office less often for check-ups when not doing a medication driven cycle. . Reviews from other clinics with high average customer ratings, but low success rates include: - “start of a journey that consisted of multiple IUI’s with numerous medications, but they were not successful.” - After an IVF retrieval, the couple had two viable embryos, both were transferred the next month” - “The couple started with a series of IUI treatments, three in total that were not successful.” - “After a fresh transfer of two embryos, again another unsuccessful cycle”. - “He suggested transferring 2 due to higher implantation rates, but there is increased rate of twins “ Valuation https://preview.redd.it/tqcykjm39zi51.png?width=6358&format=png&auto=webp&s=b63fd53c054ac5cbacaf9ccc734c7e73f0ea3c32 Progyny’s comps have typically been other high-growth companies that went public in the last two years: 1Life Healthcare (ONEM), Accolade (ACCD), Health Catalyst (HCAT), Health Equity (HQY), Livongo (LVGO), Phreesia (PHR), as well as Teladoc (TDOC). Despite revenue growth that outpaces these companies, PGNY’s revenue multiple of 4.4x 2021E revenue is a 40% discount to the peer group median. PNGY’s lower gross margin is likely limiting the multiple. However, Progyny is the one of the few profitable companies in this group and the only one with realistic EBTIDA margins. SG&A leverage is the most likely driver of increased EBITDA and can be achieved by utilizing data to improve clinical outcomes in the future, but primarily by increased productive of the sales reps, including larger employer wins and larger employee utilization. Perhaps the best direct comp is Bright Horizons (BFAM). BFAM offers childcare as a healthcare benefit where employees can use pre-tax dollars to pay for childcare. BFAM offers both onsite childcare centers built to the employer’s specification (owned by the employer and operated by BFAM), as well as shared-site locations that are open to the public and back-up sitter services. Currently, PGNY is trading at 4.4x 2021E Revenue, in-line with BFAM’s 4.3x multiple. I would argue that PGNY should trade significantly higher given the asset-lite business model and higher ROIC. Recent Results Post Covid-19, fertility treatments came back faster than anticipated, combined with disciplined operations, PGNY drove revenue and EBITDA above 2Q2020 consensus estimates. Utilization is still below historical levels, but management’s visibility led to excellent FY21 revenue estimates (consensus is around $555M, a y/y increase of 62%. 2Q2020 revenue increased 15% to $64.6M, and EBITDA increased 18% to $6.5M, primarily driven by SBC as the 15% revenue was not enough to leverage the additional G&A people hired in the last 18 months. The end of the quarter as fertility docs opened their offices back up for remote visits saw better operating margin. Despite the shutdown in fertility clinics during COVID-19, Progyny was able to successfully add several clients. “The significant majority of the clinics in our network chose to adhere to ASRMs guidelines, and our volume of fertility treatments and dispensing of the related medications declined significantly over the latter part of the quarter. . . Through the end of March and into the first half of April, we saw significant reductions in the utilization of the benefit by our members down to as low as 15%, when compared to the early part of Q1 were 15% of what we consider to be normal levels. In April, the New York Department of Health declared that fertility is an essential health service and stated that clinics have the authority to treat their patients and perform procedures during the pandemic. Then on April 24, ASRM updated its guidelines which were reaffirmed on May 11, advising that practices could reopen for all procedures so long as it could be done in a measured way that is safe for patients and staff.” Revenue increased by $33.8 million, 72% in 1Q2020. This increase is primarily due to a $19.0 million, or 47% increase, in revenue from fertility benefits. Additionally, the Company experienced a $14.8 million or 216% increase in revenue from specialty pharmacy. Revenue growth was due to the increase in the number of clients and covered lives. Progyny Rx revenue growth outpaced the fertility benefits revenue since Progyny Rx went live with only a select number of clients on January 1, 2018 and has continued to add both new and existing fertility benefit solution clients since its initial launch. Competition The only true competition is the large insurance companies, but, as mentioned previously, they are not delivering care the same way. WINFertility is the largest manager of fertility insurance benefits on behalf of Anthem, Aetna and Cigna and are not directly involved in the delivery of care. Carrot is a Silicon Valley startup that recently raised $24M in a Series B with several brand name customers (StitchFix, Slack) where they focus on negotiating discounts at fertility clinics for their customers, who then use after-tax dollars from their employers. Risks to Thesis Though there is risk a large carrier may switch to a model similar to Progyny’s, I believe it is unlikely given the established relationships with REIs at the clinic level, the difficulty of managing a more selective network of providers, and the lack of interest shown previously in eliminating the IUI. It is more likely a carrier would acquire Progyny first.
What is yield farming? Most broadly, it means getting some benefit for providing capital, usually in the form of tokens. Currently, there are three major different schemes:
Staked funds aren't utilized in any way and tokens are distributed proportionally to what's staked (may be dai, weth, ycrv, or other tokens). Token price risk: zero. Token accrues, but even if it falls to zero you lose nothing. Smart contract/protocol risk: depends on the staking contract, usually low to zero. Contracts are usually simple modification of the first contract used by yearn (taken from synthetix), making analysis easy by only looking for differences. APR: may start high, but usually collapses fast to relatively low values as funds pour in.
Providing liquidity in trading pools. Tokens are gained in return for providing liquidity for requested tokens on uniswap, balancer, curve, mooniswap. Token price risk: medium to high, depends on pool weights. See these two articles for details on how liquidity providing works: Uniswap - pool weight is always 50%/50% Balancer - arbitrary pool weights, down to 2% for one token. Can be multitoken, not just two. Smart contract security risk: medium to high. In addition to checking the (usually simple) staking contract, requires security analysis of the token contract. If it's possible to mint a very large amount of token, or someone has a hidden enormous stash, the attacker could clean the pool by dumping them at once. I'm aware of one scam called "YYFI" that did this - you can see the attacker successively getting DAI from the balancer pool. Fortunately for the victims, he wasn't very competent and did everything manually, giving time for people to withdraw. A more competent attacker would automate the pool cleaning process in a smart contract. APR: usually very high - upper three digits or four. It's rarely realized APR because it's calculated assuming that token price stays constant. If you think the token being distributed is undervalued definitely the best option to farm.
Depositing and borrowing funds for defi. Currently utilized by compound and cream (a compound clone). Users get rewarded with tokens for lending and borrowing tokens. Token price risk: zero. Security risk: the most complex to analyze option of all, although Compound itself is definitely the safest defi dapp on ethereum.
Warning: gas fees are high. $10k is probably the minimum amount that makes sense for active manual farming, which still only makes sense for a more long-term farms like COMP or CRV, at the cost of not maximizing APR. I have spent over $3k in gas during the last two months by farming very actively. Below $100k, or if you don't want to spend a lot of time on this, it's probably best to deposit your funds into one of yearn vaults that yield farms for users. https://yearn.finance/vaults A partial list of current yield farms (feel free to comment with more farms! I can edit and add them to this list):
COMP farming, the oldest one (I think?). Relatively low returns (58% on DAI), safe, no price risk. Efficient way to farm is to supply and borrow the same asset (can be done via instadapp) up to maximum leverage possible (with some margin for interest payments).
YFV finance, one of the many clones of YFI. The seed pool is safe IF you withdraw before the staking period ends (see the security part). Current APR on stablecoins: 121%
CRV farming, providing liquidity to curve pools. Mostly safe - curve smart contracts tself are safe, but keep in mind if one of tokens in the pool collapses (renBTC is probably the riskiest) other tokens are going to get drained. You can see the current APR on https://dao.curve.fi/mintegauges. As of now, the highest APR is for compound pool - 105.27%. It's varying and there's complicated game with CRV voting that impacts it.
Zombie, meme token. Current APR is abysmal (33.5%) but token may unexpectedly pump, increasing it. There's a smart contract bug that, as long as rewardDistribution and owner aren't set to zero, potentially allows rewardDistribution to lock all staked funds (not steal). Makes zero sense as of today.
Analyzing security. Yield farms come and go. The key to earning high returns is to be agile and to jump fast into new farms, which requires manual analysis of security. Of course it's possible to yolo in without any analysis, but I don't recommend it. I'm going to show an example on two recent farming contracts (of the first type - funds just sit in contracts). Original yearn staking contract. GRAP staking contract. Let's load two codes into a text diff tool, like this site. What interests us on the code level are changes relating to the withdrawal capability, which in the original code are limited to the withdraw() function. We can see that the only substantial change is the addition of the checkStart modifier which prevents both deposits and withdrawals if it's too early. As startime is set directly in source code and can't be modified anywhere, that change is safe - if it doesn't throw on deposit it's not going to throw on withdraw. The next step is switch to the 'read contract' tab on etherscan and look at two variables: owner and rewardDistribution. In Grap's case, they lead to a timelock contract that requires all changes to wait for at least 24.5 hours - which makes any fund lockup extremely unlikely. At worst, we only have to look at the rewardDistribution contract once a day to see if there's any pending change. GRAP farming is now finished with no security incidents. Second example: YFV. This one is still active. Contract link. After comparing them we can see that changes are much more extensive. The withdrawal function also has the checkStart modifier, but that part is fine (ctrl-f to check if starttime can be modified somewhere else - it can't). What's the problem is the checkNextEpoch modifier. There's a lot of things there and three external contract calls (mint calls). If anything in there throws, withdrawal would become impossible. Dangerous. However, that only happens after the staking period ends, so withdrawing before block.timestamp >= periodFinish is relatively safe. Another check is to look at the owner and rewardDistribution variables. Owner is set to zero, but where's rewardDistribution? Unfortunately, contrary to GRAP, it's private. It's possible to read it with the getStorageAt web3 api (although finding the index is more work - it's 3). However, the team has provided a link to the transaction in which they set rewardDistribution to 0 so it's fine. In conclusion, as long as you don't hold the funds after the locking period ended there's no security risk here. The current period ends on Tue Sep 1 14:02:29 2020, UTC.
Margin Trading: In the stock market, margin trading refers to the process whereby individual investors buy more stocks than they can afford to. Margin trading also refers to intraday trading in India and various stock brokers provide this service. Margin trading involves buying and selling of securities in one single session. Over time, However, in reality, margin trading is a sophisticated process that carries significant risk. Due to the heightened risks, it requires a special account referred to as a margin account. This is different from the ordinary cash account that most people are used to. When purchasing stock, one can use either a margin or cash account. How Margin Trading Works. Margin trading is a very common method that is used by many Wall Street traders. Retail traders too use the strategy to maximize their returns. The process works in a very simple way. First, you need to select a broker that offers margin trading accounts. Internationally, many forex and CFD brokers offer this type of Margin trading refers to the practice of using borrowed funds from a broker to trade a financial asset, which forms the collateral for the loan from the broker. Margin trading is a process of trading cryptocurrency with leverage, which allows you to deposit a fixed amount of assets as collateral and borrow multiple times the amount of cryptocurrency from the exchange (while paying a small amount in borrowing fees) to trade with a larger amount of funds than you actually own.
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