PME: Fishing for Value.

Benjamin Graham referred to his style of investment as "Cigar Butt" investing. He would look for companies that had been largely been discarded but still had a few puffs left.  Graham reasoned that such companies would trade at a discounts to asserts and would thus provide an opportunity to realize a substantial profit with minimum down side risk.  

During the course of researching YOD and its new billionaire investor, I believe that I may have found a company fitting Graham's criteria.  One of the companies, Xuechue He, (who purportedly is the 38th richest man in China was involved was Pingtan Marine, a company largely ignored (look at that volume 46,980!):

ORIGINS

PME was has its origins in a "blank check" or "SPAC" company called "China Growth Equity Investment Ltd." (CGEI).  CGEI acquired a number of fishing industry companies: Merchant Supreme, China Dredging, Fujian Xinggang Port Service Co., Ltd, Fujian Provincial Pingtan County Ocean Fishing Group Co., Ltd, and rolled them out as new company called Pingtan Marine Enterprises.  After this roll up,  PME has companies that  which  presently looking like this:

PME's Operations

"We are a marine enterprises group primarily engaging in ocean fishing through our wholly-owned PRC operating subsidiary or VIE, Fujian Provincial Pingtan County Ocean Fishing Group Co., Ltd., or Pingtan Fishing. We harvest a variety of fish species with our owned and licensed vessels operating within the Indian Exclusive Economic Zone and the Arafura Sea of Indonesia. We provide high quality seafood to a diverse group of customers including distributors, restaurant owners and exporters in the PRC."

(From annual report)

In other words, there is nothing ground breaking or high tech.  They currently own 126 ships boats and fish off of India and the Arafura Sea.  The boats are valued about $1Million a piece.  They were independently appraised, and the appraisals for each ship are available on the company's website.  PME recently announced that it had ordered 25 new boats, which will replace some of the older ships in the fleet when constructed.

Why I'm Intersted

The Chinese fishing industry is growing, but I don't particularly care.  What interests me is that PME is trading below its tangible book value-of $3.45. In itself, that would not get me excited as numerous companies in declining industries trade below assets. For example, coal companies such as Arch Coal trade significantly below book. (ACI trades at 3.50 and has a book value of 10)  PME, however, also has a p/e ratio of 2.7.   In other words, we have earnings that are growing and it trades below book.  This is one that just might fit Graham's criteria.  Indeed, PME trades well below its "Graham Number" of $8.89

The first quarter highlights:

• Revenue from continuing operations ("fishing business") increased 233.4% to $65.6 million from $19.7 million, primarily due to increases in sales volume and unit selling price.

• Gross profit increased 347.1% to $24.0 million from $5.4 million, and gross margin was 36.7% compared to 27.3%, due to an increase in unit selling price, change in product mix and tighter control on cost of revenue.

• Net income from the fishing business increased 393.1% to $21.7 million, or $0.27 per diluted share, from $4.4 million, or $0.06 per diluted share. 

So we have growth last year. PME has provided revenue guidance of for 2014 of $80 and $85 million.  Compared to other fishing industry companies PME is incredibly cheap: 

It's always a fun game to play the "if it trades at the average what would the price be " game.  Based on EPS guidance.  PME would be $17 if it were to approach industry means.

RISKS

So we have a $17 stock trading below book value at $3.20, slam dunk right?   Not so fast. As with any Chinese stock there first question is whether you can trust the numbers.  The Company hired a public accounting firm that is supposed to verify compliance with GAAP standards, etc..  So if the auditor does its job, this still sits pretty. That being said, I  would be still very skeptical if I saw widespread warrant exercising and dilution.  Fortunately, I do not see dilution. The number of shares outstanding has remained at 79,055,053 since 2012. 

Two other things raise at least some yellow flags.  The the company's "in the press" section contains Seeking Alpha articles and by "the street" recommending its stock.  I'm not big on companies that promote their own stock rather than their companies.  But this is not necessarily a big deal, the company sells fish at market prices so there's no need to brand or advertise, etc..  Still just keep the self promotion on the watch list.

In addition,  there are numerous closely related party transactions.  Some of these are because of the roll up where individuals involved in the subsidiaries.  This should cause some questions to be asked but it is not a reason to totally stay away. 

Ironically, one the things that has eased my concerns is that PME is taking on new debt to finance the new ships.  Small cap companies with debt will outperform those with no debt.  To some degree, the additional debt provides some assurances over the finances of PME as what lender would provide such loans without confidence of being paid back.

CONCLUSION

This is a fishing company. The industry is not complicated and should not be that subject to trends.   We know the company hard assets from the boats they owned and were independently appraised.  Because PME trades below book and earnings have increased, I feel that it is worth the risk of taking a position and I've done so.

Trade RISKS PME is thinly traded, so position size should be 1/2 to 1/3 of normal position size.  Also, given the liquidity issues, do not use a hard stop.  My mental stop would be 3.00 for less than 1R risk.

LEJU closed

I closed the remainder of my Leju position out today when it broke 12.  Today presented a big red bar. Under the right circumstances, I could  have tried to ride out the move since I had already reduced my position by 1/2 and hope for a reversal. I elected not to do so because  SFUN (which I sold yesterday), a competitor of LEJU absolutely got hammered today--over 7%. If other stocks in an industry get hammer it is best not to see if your stock is the sole survivor.   Leju held up for most of the day, but 12 ultimately caved as well. 12 was my mental stop.  After I sold LEJU quickly dropped to as low as 11.51. 

 Summary: in at 10.65 (5/13).  Out 1/2 at $11.91 (5/28) Out  1/2 $11.90 (5/30) for an 11.83% gain.

 No regrets about this trade. My analysis when I entered is here.   Although earnings were great it is a thinly traded stock that I don't want to wait for it to make its move.  This stock is more than capable of very quick sell-offs as it is of big gains.  Note the severe sell off earlier this month.  If it is not actively being pushed up it could fade just as fast. So did I gamble a bit on earnings? Absolutely, but I was rewarded with that big green bar and a nice profit on the trade.  

GFS closed

I closed GFA today.
GFA is a Brazilian housing company. My reason for entering the trade was that Brazil stocks had looked strong and this was close to a breakout.  So first the EWZ, which tells the story-- a nice breakout and then failure.

GFA suffered the same fate. On the weekly chart it looked like it was making some progress but then failed to break 3.50 and sold off below 3.00. That was my stop and I honored it.

On the daily we see a failed breakout that is accelerating.

So what's the damage.  Purchase at 3.42.  Sold 1/2 @ 3.09 and the remainder today at 2.99. Total loss of 1.14 R.  No losses are fun but I keep this one small.  In that regard, I cannot complain.

In summary,  my Brazil trade failed as the Brazilian  markets sold off and most of the ADR's similarly had failed breakouts.  I might look at getting short some of these names.

SFUN Closed out, BHI opened

So got the big red bar today in SFUN and decided not to wait to find out what it means out at 12.58 near LOD, love those.  But hit the entry very well on the move at 11.23 (1.35 or  12% for a week hold).

Reasons for Selling: Relatively large move down. The stock overall is still in a downtrend so the chances of it reversing and continuing that trend are better than average.  

Time will tell if selling was the right decision here.  This could be the beginning of a extended uptrend or it could resume what it had been doing.  But as I refine my profit taking criteria I do know that I would rather close out for nice profit than a loss.

BHI: New buy

I've liked the look of a lot of oil related companies and BHI is one such company.  It has had over a month of consolidation in a very tight range.  Today, saw a bit of a bigger move and some additional volume.  This type of action often precedes a bigger move to the upside. I'm not a fan of chasing stocks or buying breakouts as I would rather be in before the action heats up.


  Stop at 68 or just over 1R.

Current position summary.

Longs:

SFUN  Looking very nice.  Bought at 11.23 average.

Leju: Bought at 10.65.  The recent Ipo trading history is short but it has come back with a vengeance after an IPO flop? It great earnings and pickup 3 more analysts all with buy ratings.  Ideally, I would like to see consolidation and the 12 hold.  

HCLP this one has been on fire average price 38.88 (not including the dividends)  Probably a bit overheated and a pull back might be needed. I would love to just let this one ride for the year and take a long term capital gain. 

RFMD: Another melt up type stock.  In at 7.48.  Unfortunately,  I reduced my position size by 20% on that big red bar (for a small profit) in April.  Since May this has been off to the races.

NOK Average $4.43 This was my star of last year.  After a lot of consolidation between 8 and 7 NOK looks poised for another run if it can get past 8.  It's picked up some price targets and announced a share buyback  and a .51 dividend.  (we'll call that a reward for my patience after they cut the dividend shortly after I bought)  Obviously, this has paid off well for me and I want to see what it can do now that it is free of the handset division.

MCD: Avg. $100.28  continues to put in a nice little trend.  Slow and steady.  The 20 MA has acted as support.  If the market stays strong I would expect the next leg up to 104-05. I have no big expectations here, but it's a nice place to park some cash 3%+ dividend.

GFA: the dog of the group avg. 3.42 The breakout failed (or is failing?)   I was hopeful that the Brazil Rally would move this up and it had looked ready to breakout.  And then it went the opposite direction.  I cut my position size by 1/2 today and will dump the rest on close below 3.  Just under a 1R loss right now.   EWZ and many of the leading Brazillian stocks recently sold off.  Hopefully they can catch a bounce.  If not there's R. I. and C. of the Brics

SHORTS:
YOD This is what I love to see on a day after I take a short position.  -12.69% the next day. If only every trade worked on this well.   I anticipate as volume dries up this will drift lower.  There are likely people that bought the billionaire news at 3.20 or higher who are now trapped and when they capitulate YOD should see new lows.

YOD: Still nothing to see here.

On Thursday, it was reported that Xeuchu He, a Chinese billionaire Picked up 2.2 million shares or so.  It was also reported that Shane Mcmahon picked up 24,600 shares.  I had no position when this happened but the market certainly liked the news and YOD closed up over 50% on huge volume.  

The question I must ask is whether, does these events change my analysis and conclusion that YOD is fundamentally flawed.  I conclude that they do not and have re-entered my first tranche of my short.

• The Shane McMahon Buy

As I discussed in the context of my review of YOD's earnings this stock is being heavily diluted and sold by insiders.  1.3 Million shares were added so far this year.  

Now Shane McMahon files an form F  announcing that Shane McMahon also bought 24,600.  shares on behalf of a trust Shane B. McMahon Trust u/a/ Vincent K. McMahon Irrev. Trust dtd. 12/23/2008, 24.  How is buy consistent with my conclusion that insiders are dumping?

 In filling out this form, McMahon had to list the number of securities owned following the transaction.  He lists 2,300,000

Now let's compare that to what McMahon declared in the February 6, 2014 Form S3:

C Media Limited (3)	9,142,855	8,209,522	933,333	*
Shane McMahon(4)	5,782,985	2,829,098	2,953,887	18.0%

The third column lists his shares following C-Media. 2.9 Million. In other words, he's cut his stake by 600K in just a few months. Heck, if you consider the shares he sold to C-Media (and I understand why he did as this company was out of cash and had received a delisting notice last August) He's cut his position by 40% in less than 6 months. 

 Second, I expect more selling from McMahon. I've noted that Shane McMahon has to exercise
 his warrants or he loses the right to do so and would make 4% interest. I base this conclusion on repeated statements in various filings, most recently the 10Q:

"Effective on January 31, 2014, the Company and Mr. McMahon entered into Amendment No. 4 to the Note pursuant to which the Note will be, at Mr. McMahon’s option, payable on demand or convertible on demand into shares of Series E Preferred Stock of the Company (the “Series E Preferred Stock”) at a conversion price of $1.75, until December 31, 2014. " 

• Xeuchu He-- The Chinese Billionaire.

The news that most people have been excited about is 2,285,715 share purchase by He. He purchased these shares from C-Media, which had recently purchased the shares from various insiders including McMahon.  The terms of the deal were not released.

So is this a game changer? Or is YOD still the same company losing 89 Million since it engineered a reverse merger with a public shell company, Alpha Nutra (PINKSHEETS: APNA) and became China Broadband in January 2007 (China Broadband changed its name to YOU on Demand in 2011.  (Don't you love "Chinese companies with American names) . YOD made  $138k in revenues last quarter.

I am assuming that He purchased the shares at a discount. I base this assumption on the fact that most PIPE deals are discounted (sometimes significant) and also on the short period that C-Media has held their shares.Some have suggested that C-Media sold their shares after buying from the insiders to lock in He's experience and connections.  I admit that initially thought this scenario was plausible but after more research I do not believe that this was the reason C-Media sold to He for several reasons.

First, Xeuchu He's fortune was made in mining. At Honbridge Holdings. Nothing in their organization chart would suggest a background, connections, or necessary experience in technology or video on demand, or even in China for that matter. He deals primarily with South American companies.

To that end, I began researching the link between Xeuchu He and Xeusong Song (the head of C-Media).  The two had been associated on numerous "blank check" companies also known as Special Purpose Acquisition Companies ("SPACS"). This is a process where He and Song, among other ("Jin Shi" a YOD board member) would create shell companies or engage in various reverse mergers.

SPACS were big in the 1980s but were abused by insiders looking to make a fast buck through the promotion of the stock. The SEC then began placing more restrictions including the amount of money that must be raised and price of offering, etc.. , Surprise the SPAC is back in China. In any event, Song seems to have the experience and connections for all of these deals and does not need to buy He's experience. For all we know the shares could be a thank you gift from Song to He for investing in the other SPACS.

Point being, I don't expect He to play a major role as an investor. He's not on the board, not part of management, doesn't have the authority to bind the company and does not have the background in the industry. And let's face 2.3 million shares of a $3 stock is not a whole lot of money to a billionaire to get actively involved.  By contrast he has his fortune tied up in Honbridge and his investors would probably not be pleased if he was avoiding his day job to work on a penny stock project.

Regardless of He's involvement, (even if he took the CEO) is that I don't think YOD can compete against multi-billion dollar companies on the same content. 

• YOD still offers nothing that Chinese Internet Giants do not already provide.

YOD is going in to mobile now that its VOD cable has bombed. It is currently "pre-loaded" on one phone.  But guess what?  The mobile movie  market is already crowded with Billion Dollar Competitors:

Yoku yoku mobile app
LeTv http://mobile.letv.com
Tenecent's QQ http://film.qq.com

YOKU just missed earnings and got hit bad after guiding lower.  The reason more competition and increasing costs of content.  I thought the analyst's comments were very telling as they echo my sentiments on YOD:

“They are in a dilemma,” Echo He, an analyst at Maxim Group LLC who has a sell rating on Youku, said in a phone interview. “If they spend money on content, they cannot make profit. If they don’t spend, there won’t be viewers and ads. They are in a tough spot.”

Similar comments followed Tenecent's earning discussion on video.  So the big boys are all seeing compressed margins, the need to spend more on licensing and advertising to attract viewers. I don't see any possibility that YOD would be successful in such an arms race when it does not have the content, the infrastructure, or the money to advertise.  And the 138k in revenue demonstrate that it has not been successful.

In conclusion, the YOD is still the same company with contracting revenue growth.   It's my opinion that day traders took the news and ran with it. Momentum always dries up without earnings. And as YOKU demonstrates revenue growth will become increasingly difficult in this sector.

RISKING 1.5 R% on this one. 

New position: SFUN

Leju hit a home run on earnings.  So that risk when I opened that trade turned out well. I think LEJU goes much, much higher and I'm holding rather than adding.  LEJU's problem is its lack of volume so I didn't want to put on more size.  So I did the next best thing--buy the competitor, SFUN.

SFUN has much more liquidity and good earnings and revenue growth as well.  On a chart perspective the MACD is showing bullish divergence which often precedes a reversal.  Stop will be at 10.03 lows for the downtrend.  Hopefully, Leju puts a bit of a spark.  Over 12 will confirm for me. 

CLOSED: ACI Just a lump of coal

So here's one that didn't work out. ACI really looked like it had bottoming potential. This is a 2 year chart to show this range that I was hoping would be a bottom.

  I was very optimistic when it broker over 5 It hit about 5.40 (I sold the May 5.50 calls for .24, which was the one smart thing I did on this trade. Unfortunately, I added @4.25 hoping for a bounce... didn't happen and I stuck fast to my stop and closed it at 3.97.

Analysis

So yea, I lost over $1.03 a share on this (minus dividends and premiums from the 5.50s)  Good riddance.  Would I be surprised if it bounced here?  Not really, but I'd rather honor my stop.

This trade was entered on the theory that coal couldn't get worse.  It did.  Less size might have let me stay in longer. But I think, It's best to realize that not every trade will be a winner and to take the loss.

Closed: EMES, JWN Catching falling knives without getting cut.

I opened two falling knives on Friday one to the upside (JWN shorted) and one to the downside EMES (bought)

Both worked fantastic.  EMES closed after one day + $6.55 points  and JWN covered for a $1.83 gain.Both probably will go more in their respective directions-- but  the trick to catching knives is let them go before they get another chance to cut.

YOD: A company doomed to fail

 YOU ON DEMAND, ticker "YOD" has been pumped as the "Netflix of China."  But it's quarterly report demonstrate that YOD is not even the Netflix of China Town ... in Des Moines. 

I have repeatedly shorted this stock and did so again after earnings. I will continue to add to my position as the Quarterly Earnings report demonstrates that this company is doomed to fail.

Here is how I read the quarterly report of YOD and other pumped companies:

• DETERMINE IF STOCK IS BEING DILUTED
  If a company is in a start up stage, you want to ensure that the insiders are committed to the long haul and not in it for a quick buck--the hall mark of a pump and dump.  So when I see a questionable company, I like to determine if and how much a stock is being diluted.  This will often take the form of convertible warrants and can be determined as follows:

Annual and quarterly reports will always list the number of shares outstanding as of the last date before issuance of an earnings report. The earnings data may in excess of a month a way.  This information lets you look into the future a bit.  

YOD is being diluted:

First page of quarterly report:

"Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 16,553,022 shares as of May 15, 2014."

Now let's compare that number since quarter end.  March 31, 2014.  We can do so by looking at the the Shares outstanding on the quarter.  An earnings report will compare quarters so we see that from March of last year that over 1.3  Million shares were added over the year:

Basic		15,931,394			14,602,196
Diluted		15,931,394			14,602,196

From the annual report, comparing 13 to 12:

Weighted average shares outstanding
Basic		15,226,216			11,099,746
Diluted		15,226,216			11,099,746

SINCE DECEMBER 31, 2013 the Shares outstanding have increased by 1,306,806.  This Stock is being diluted faster than a Dewars with two ice cubes. 

• Assess Cash position and burn rate:  Obviously, you want to make sure the company has enough funds on hand to pay its bills and pursue its business strategy:

ASSETS
Current assets:
Cash and cash equivalents	$	17,954,910		$	3,822,889

Wow, a huge increase in cash! YOD company must be raking in the profits right?  Not exactly.

Digging deeper we learn than it raised 25 Million dollars over the last year by issuing warrants.  They also sold off their broadband subsidiary. Of that, it now has about 18 Mill left.  Next, we determine whether the company is cash flow positive through ordinary operations:

Revenue	$	137,681		$	938
Cost of revenue		875,938			848,585
Gross loss		(738,257	)		(847,647	)
Operating expense:
Selling, general and administrative expenses		1,640,640			1,983,736
Professional fees		185,484			251,434
Depreciation and amortization		149,960			292,833
Total operating expense		1,976,084			2,528,003
Loss from operations		(2,714,341	)		(3,375,650	)

*The 2013 earnings are a pro forma to account for a discontinued broadband business. (I'm somewhat skeptical of pro formas as companies can manipulate shares of the discontinued operations to show growth in the current business)   According to the YOD's annual report it list the discontinued operation as being profitable.  A question I have not answered yet is why they would get rid of their business that was at least marginally working?  But since that business is gone, I'll focus on the left over carcass. 

Currently, They currently lose money on every sale. They spend $8.75 for every $1.37 received    On top of that they have the other operating expenses which accounts for an additional loss of 1.9 M on the quarter.   At the current rate they'll lose 10.7 Million for the year. Leaving them with just $7.2 for next year.  YOD does not have sufficient cash to get through the next year.  

• Is the Company's Business Plan working?

All companies hope that at some point they can generate sufficient revenues to cover the cost of revenue and the cost of operations and at some point even make a profit.  Given the struggles YOD has had I see little value in discussing profitability as it is not really relevant that the company has lost nearly $89 million since it began.  It's all about revenue growth.  It is imperative that the companies grow and given that there is less than 2 years of cash remaining, it is imperative that YOD grows very quickly.  Unfortunately, for YOD that is not what is happening.  Q4 2013, revenues were 163,000  and first quarter earnings were down to $137,681. YOD is clearly not growing as it had planned.

• Will a new mobile business Strategy the Savior?

YOD apparently is of the belief that mobile will be the future.  It currently is on 1 cell phone, the Huawaei Mate and can provide up to 2 movies a week to subscribers. I seriously doubt that this strategy will work--are people really going to rent movies to watch on a 4 to 6"  screen?  I'm very skeptical. And  the revenue decrease demonstrates that this strategy is not working yet.  

Setting aside my skepticism and lack of tangible revenues, let's assume for the sake of argument that such a business plan is viable.  However, to implement this strategy it is imperative to advertise this new service, develop back end support, obtain the available servers and equipment necessary to run such a business.  In other words, to obtain mobile revenues YOD  requires a substantial additional investment.  Pursuit of mobile revenues will necessarily increase the company's losses.   And it does not have any margin for error, with the less than 2 years of cash it has remaining, which will mean to  company will need to raise cash causing more dilution.

In its own words:

 "we have access to additional funding through various methods including utilization of our $50 million shelf registration of which $47.3 million is remaining as well as other means of financing such as debt or private investment."

Just so no one is surprised when the next wave of dilution comes. And then the "going concern" notice. "These conditions raise substantial doubt about the Company’s ability to continue as a going concern."

• Paying for promotion?  Legitimate companies do not need to pay for consultants to pump their stock.  YOD is already in bed with See Thru Equity.   For 10K they get analyst following. 

The other "Analyst" --Chardan Capital-- has a $10 price target and recently opined that this could be a take over target.  I have not identified anything that YOD has that any potential suitor would not be able to acquire on their own for far less than $40 million.  

But Chardan and its executives own over 2 Million warrants.  (incidentally Chardan's founder is the brother of YOD's CFO March Urbach)  And the 10 price target is supposed to be objective, yea right. In addition,  In the quarterly report,  YOD discloses, "The Company is committed to paying service fees to certain consultants of $25,000 through the second quarter of 2014." 

Companies that pay for play, nearly always crash after the promoters have cashed out.  Given what we know about the ongoing dilution--nearly 9% year to date.  YOD is actively being sold and will be continue to be under tremendous selling pressure. 

• The Competition is intense and the competitors are Goliath's

As I have pointed out on stocktwits, this notion that YOD has exclusivity or is a leader is a complete myth. Finally, YOD has acknowledged as much at the Conference Call:

The market for video entertainment is subject to continuous change and aggressive competition. Our primary competitors include companies that operate online video voice type in China, such as iQiyi, Youku, Tencent and Sohu. They all carry a very large amount of the video content, including Hollywood and domestic movies and they compete on the variety and freshness of the content, in order to drive Internet traffic to their websites. 

YOD is competing against companies that are worth many billions of dollars with the same content.  Who has the infrastructure and ability to spend money on advertising?  YOD will lose that battle. 

Conclusions

•  The Q1 report suggests that YOD is doomed
•  Revenues are decreasing, 
• YOD losses money on each sale
• YOD does not have sufficient cash to get through the next year. 
• More dilution is likely
• Insiders will continue to exercise warrants keeping YOD under pressure
• It will need substantial additional funds to pursue its mobile strategy.  
• Competition is intense and YOD offers nothing to consumers that Chinese Internet giants do not already have.

Nonetheless, some people spent 15 minutes reading an article on seeking alpha, by an anonymous author who created his profile the day he published his first article which calling YOD the Netflix of China. Based on that pump, they continue to think will become a double and triple digit company. I plan to go point by point through that nonsense, but my conclusion is don't buy the hype. 

Trades Opened: EMES, JWN

Long EMES:

This one had been on fire as of late.  In my opinion it got very overextended.  It crushed earnings and  rallied up to 95, it was only a matter of time before a pull bak would happened and finally the market caught up to it   In my opinion 95 to 75 in less than a week is too much for this stock.  There was no negative news, the rest of the industry has been strong.

This trade goes against most of my rules, about trying to catch a falling knife.  This is much different than a bottom fishing type scenario where you want to see a rounding bottom and some progress on the fundamental side of the business.  To that end, I entered small @ $75.38.   I'm using 70 as stop.  Targeting 85 on the rebound.  Whatever direction it goes, it is likely to happen fast.  I don't expect this trade to last more than a few days. 

JWN:  Beat earnings and guided basically in line with estimates.   A good earnings report by any standard but worth a 15% move?  I don't think so.  I suspect that it is momentum investors chasing a chart, and the move will be faded.   The money flow was actually negative.

A weekly chart demonstrates how extreme this move was.  There was a nice steady progression and no gaps on this chart.  Anyway because this is momentum, I took 1/2 a position, which will allow me to stay in this trade if it stays hot over the next day or two.  In at 69.34, we'll stop it at 73.50.   If it starts to stall, I'll add to this position.  Target 65 to play it safe. But the gap probably fills.

CLOSED: GNRC

Closed GNRC for a 5+ point move on the short side.  Average $ 57.29

Reasons for entering the trade:
The company makes generators and had what I felt would be inflated earnings due to adverse weather.  As the weather normalized, I expected earnings would normalize.   Sure enough 1st quarter they missed on revenue.

Trade Assessment:
This was not an easy one.  I used a stage entry,  but probably entered too early 56is. on the first of the position.   I allowed 2 R risk and when it dropped back under 60 I added @ 59 range.  My risk limit was nearly hit in March but fortunately it sold off.

Exit:  Why did I close the trade?  Knowing when to get out on a profitable trade is the thing I find most difficult.  For a trade like my BAC trade, I had a long trend that could use a trend line as a stop. That's not present on a trade like this yet.  So after the first drop, I forced my self to stay in as it rallied back up to 55.  What I did not like, was seeing it reverse yesterday after hitting the 200MA.  It was acting much stronger than the broader market, so do I take the profits or the chance that the momentum fades and moving average support fails to hold?  

Ultimately, I elected to take the profits.  I considered phasing out partially but I elected to put the money into other  opportunities.  If it continues to rally,  54 range, it might be worth trying to reinitiated a 1/3 position.

New Buy: Leju

Leju was a recent IPO that had a tough time shortly after beginning trading.  I believe there was a "wash out" this past week and bought today at  $10.65 as it has regained strength.  The catalyst today was an analyst outperform rating.  I believe a break above 11 will trigger the next run up and we are within striking distance. I want to be in before the break as I find it best for risk management.  Stop is at $9.45 which is the lowest close for this stock.

Fundamentals:  

positives:

Exclusive deal with Zillow.
Exclusive right to sell to Bidu
Exclusive advertising agent for SINA
15% ownership  (180 million stake) by Chinese internet giant Tenecent.
over 60 million users.
335 Million in revenues (2013) 96% growth from 2012.
Tiny 14 Million float.
Profitable -- 10 Million (2013) up from a loss of 63 Million in 2012.
Leju just picked up its first analyst, who initiated coverage at "outperform" and a price target of 15.

Negatives:
It's a Chinese company
Possible Chinese housing slow down.
180 Million shares outstanding (huge in comparison to float)
presently has low volume
Insider lock-up period expires in October 2014. (could be a positive depending on time frame).

Sfun -- A Competitors provided Disappointing guidance.

While SFUN beat earnings it provided lower guidance.  This is probably the biggest negative. As it may suggest that the entire sector is slowing down.  On one hand, this is a negative for obvious reasons.  On the other hand, it may be a positive as it reduced expectations for Leju, which reports on May 20.

Given the trading volume as of late and volatility this trade makes sense only with a wide stop and small shares.  1 R at most.

Technical Analysis Doesn't Work... But I use it anyway.

Study after study has demonstrated that technical analysis doesn't really work. For example, an October 2009 study by New Zealand's Massey University tested more than 5,000 technical analysis strategies in 49 different countries. The result? Not one strategy generated returns that aren't predicted by chance.   

Sure we can point to one stock that had the perfect text book breakout.  But then if we think back over our trades we will see just as many failed breakouts.  KBH is one that I had.   In KBH we had a nice breakout over $19.50, a continuation the next day up over $20.70  and then total failure past the point of breakout... past the consolidation area.  

As studies show, a "good chart" is just as likely to make for a losing trade as a "bad chart."    I think as a whole, it tends to make traders lazy.  It seems like these days everyone is an expert at technical analysis.  Yet very few know how to read a balance sheet and even fewer constantly make money trading.

In one of the more interesting studies that I've seen, it was demonstrated that the buy strategy  matters far less than the sell strategy.  Using coin flips to enter a trade, you could still make money with well defined exits. This is interesting because there are hundreds of websites recommending stocks to buy and focusing on buy strategies.  Yet it is the sell strategy that  generates the returns.  Notably,  famed commodities trader Peter Brandt estimated that his gains were from just a few trades a year:

• Expect the bottom line over an extended time frame to be represented by only 10% of all trades. The other 90% of trades will be washes.

 His gains can be attributed to risk management as he avoided the large losses.  His record of successes  is  reduced to the maxim "cut your losses short and let your winners run."  

HOW I USE TECHNICAL ANALYSIS

Although I'm of the opinion that Technical Analysis does not work (and I find it comical when people say that a stock has to break a precise penny amount to breakout) I do find it helpful in a following regards:

1. Am I buying value or am I chasing.

I prefer to buy pre-breakout and take my chances that the stock eventually will breakout to the upside.  Given that buying breakouts provides  no more statistically significant profit probability than any other movement, I would rather buy in an area where others have found value, I.e. a consolidation area. This gives me room for error.  I also like to sell a portion of the position off into any breakout, which hedges me against a false breakout and exposes me to less risk.  The downside of such an approach is that I may be in a stock for an extended period while it is in sideways range.  If it does begin an up move, this works to my benefit for tax reasons if I can hold in excess of a year my tax rate is significantly reduced.

2. Am I buying strength or weakness?

All things equal, stocks that have performed are more likely to continue to perform. I'd would rather being in a stock that is going up than down. I would rather buy stocks outperforming the market  on a temporary weakness than attempting to exploit an over-reaction. Reversion strategies such gap filling work well until the one time they don't... and the losses are massive when those strategies don't work.    

On a trending stock, I would prefer to buy a pull back to the middle of the trending range (or short the inverse).  To trade reversals, I want to see an extended bottom, which tells me others are finding value in the range. A sharp stab downwards, is a falling knife and the risk is extreme of both more down side or a quick upside. That becomes just gambling that does not permit adequate risk management.

3. Am I managing my risk?

One of the best pieces of advice that I have seen regarding risk management is that your stop should be placed at the level that disproves your theory. You then position size accordingly.  

If I think a stock is going to breakout to the upside I would place a stop at the level that disproves my hypothesis. In my opinion, its fine if a breakout fails and gets sucked back into consolidation area where people have been supporting the stock.  I should be in already with room to spare, even if this happens I will be in a decent position. It's the break to the downside of the consolidation zone that cause me to exit. 

For example, In my XCO trade I was in in the $5.80s. This had the possibility of presenting a multi-month bottom, which can produce huge returns.  For that reason, I didn't sell after a nice pop to 6.60. Had I looked for a shorter term move, I would have.  I also would have taken more size on the trade but I digress.  After a month of consolidation between $5.75 and $6.25, (an area where traders were finding value) it broke hard to the downside. My theory that a multi-month move to the upside was beginning was disproven and I took my loss.

 I've seen too many people on Stock Twits, or the like, who attempt to justify a losing trade (and their  refusal to take a loss) based on TA. This practices will destroy your account.  Your exit needs to be known before you enter.

Conclusion

Despite this criticism, technical analysis has its place. Stocks that begin big moves have similar looks to them before they start.  For that narrow reason, technical analysis can help weed through the stock universe to find candidates that have "that look to them.  Given enough chances some will hit.  Peter Brandt's approach results from him being in the commodities than are beginning runs,  not taking big loses. Combined with proper risk management procedures you can avoid the risk of big losses.  Thus, keeping you in the game giving you more chances to be in the stocks that run.  It's that simple... cut losses short, and let winners run.

Most Investors are Gamblers

It is important to know your opponents.  Most investors just play hunches:

If they’re not relying on investment knowledge, investors are playing the market the way most people bet at the track or in the casino, by playing hunches. Nearly 80 percent of investors surveyed by Natixis said they simply follow their gut instinct.

When a stock moves in their favor all is fine and well but when it moves against them they seldom have a plan to deal with sell off.  They hold on far too long.  Perhaps it is for this reason, stocks overshoot valuations on both the upside and downside.

Reversals of Fortune: XCO, CORN

I've been having a great run.  But that doesn't mean every trade has gone well.  I was stopped out of XCO today for a small loss, and saw a substantial amounts  of my CORN profits  evaporate.

XCO had so much potential.  I bought 5.85 range and saw a jump to 6.60, which faded back into consolidation area.  As with many failed breakouts, XCO then broke out of the consolidation zone the other way.  The reversal was triggered by a downgrade and a $4.00 price target. My stop at 5.40 was hit and a small loss was taken on the trade less than -.05 R.   I was only on 500 shares and position this trade in hopes that it might make a multi-week / month move.  My premise failed and I gladly took my loss.

Corn.  This has been one that I have tracked for a while now.  In at avg. 33.84.  I've had big hopes for catching a multi-month move.  I'm no longer optimistic as today's crop report predicted a robust harvest.  Another reversal. 35.49 to 34.34.   The position is still profitable and trades above the 50 MA. But another reversal and back to consolidation.  If I do not see immediate improvement on Monday.  I will bang it out.

GNRC: Unraveling of the Sandy Premium

I've been short GNRC (avg. $57.29)  on the premise that the generator company's earnings are temporarily inflated due to the horrible weather of the last year including Hurricane Sandy.  This was an IBD top momentum stock and had not been easy to hold 1st qtr.  Although it didn't push much higher it stayed strong... until first quarter earnings, which missed revenue. GNRC has pretty much acknowledged my theory to be correct and the stock falls.  I believe that there is more down side to go.  That being said, the gap is now closed and the 200MA might provide support. I may consider closing a portion of the position.

YOD: Shorting the aftermath of a Pump and Dump for profit.

April 6 , 2014
$YOD trade diary.  I got short at 5.08 in A.H. after earnings.  They missed but it was bit up for a few minutes anyway.   It last closed at 4.09.  I believe there is more down side.

On Friday there was news of a partnership with Miramax for mobile.  YOD traded as high as 4.99 premarket but sold off quickly opening at 4.50.  It was met by heavy selling that pushed it as low as 3.80.    It then preceded to churn most of the day.  I don't believe that support at the 4 will be able to hold.  Each time it dropped below it came from a great distance which I believe reflects exhausted seller.  Note that the volume was not heavy below 4.   I believe that it was a few stop orders that triggered .10-.20 drops after that level rather than being seen as a target for short selling.  Should there be a push below 4,  $3.80 is unlikely to hold and this could fall very fast. 

 I'm targeting $3.30, which is where it launched before the pump. The MACD showed very bearish divergence on the second push to $7.00.  This should have been the sign that this was finished  to the upside.  But the bearish MACD keeps getting stronger as the stock falls. 

April 7
More selling, 4 broke but it felt more like a slow grind rather than the sharp sell off type move

I covered at 3.68, earlier than my profit target of 3.30 for several reasons.  First, the sell off was not very sharp today and was indicative of ambivalence more than panic.   Although I think it continues to go lower, there are better plays than waiting to squeeze every dollar out of this trade. Second, the overall market has been down pretty sharp.  There was some bounce movement in the momo players towards the end of the day, which could trigger a sharp uptick across the board.

Overall 5.08 - 3.68 in a week.  For a $1.40 gain or 38%. That's a home run. 

April 16, 2014

I reconsidered my belief about the grind, and re-shorted. After trading to the 3.30 range.  YOD popped back up again to 3.70.  I again shorted it finally covering at 2.38

Will it go lower?  Probably, but in the 2.30s I did not feel that it continues to make sense to hold the short position. It will probably be a slow grind to its death. But there are probably better uses of the funds than waiting for a 2.00 move, which may take 2 years.