Plug Power: Some Historical Perspective and Recent Anomalous Trading Activity

“Life is beautiful…but luck must be on your side.” – Tivadar Schwartz

I study rare events. Some believe it is my stock in trade. Enter Plug Power (“PLUG”). Someone pitched me PLUG as a short several weeks ago, when it was trading between $3.00-$4.00 per share. For various reasons, I was displeased with the short case and passed on it. I did not transact in PLUG or related securities until the last couple trading days.

Luck was on my side. The stock went straight up over the last few weeks, hitting a high of $11.72 per share yesterday morning…before crashing down mid-day, and closing at ~$6.00/share. PLUG fell nearly 50% from peak to trough, yesterday.

On Monday, I claimed, “If you look at $PLUG historical daily traded value since 1999, you’ll see why I suspect recent criminal/illegal behavior.” I may be wrong, I may be right. I would like to elaborate on my opinion (which I stand by), and explain the underlying reasoning behind it.

Unusual and Historically Anomalous Volume

Note the following:

  • PLUG’s 3 largest volume days in its HISTORY (since 1999!) occurred in the last 3 trading days;
  • The value traded exceeded its market value in these 3 days.
  • The price of PLUG rose 25%, 30%, and 9% (intra-day yesterday) on these days, even as volume rose to historical levels. The 25 % and 30% rise ranked in the top <1% daily price increases in PLUG’s entire history.
  • Suspiciously, PLUG share price rise these last 3 days occurred without any headlines, developments, etc. Any positive news (e.g. Walmart blah blah blah) occurred many days ago. So no news, yet historical volume, and historical price increases?
  • Nearly half of the largest volume/value traded days of the top 1% largest volume/daily traded occurred in 2014. (that is, if you rank PLUG’s daily trading by largest volume days, 42% of the 1%

PLUG Historical volume

If the above set of facts do not disturb you, consider the following: if you and I were playing poker, and I went all-in (bet my entire stack of chips) 3 consecutive times, and each time I won because my hand was a royal flush… which explanation is more plausible:

(a) The probability of such an event is blah blah blah

or

(b) He is cheating

Note how I never have opined on the company’s business, accounting, etc. I simply am pointing out mathematically questionable volume and trading activity. The above behavior can only be explained by the behavior of stock promoters, unscrupulous shareholders, and maybe unscrupulous quant/high frequency entities.

I may update this post later with more. Note that this post is not opining on the near or long-term trajectory of the shares discussed.

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A Short Seller’s Perspective on Biotech

I avoid shorting biotech stocks. I prefer buying biotech stocks, and have been long several biotech names. Here is the internal debate currently taking place inside me:

(1) Avoid Biotechs –  I have no edge, and can’t possibly develop an edge on single-name biotechs. I am the patsy on the table, in the biotech stock casino. Focus on businesses I can understand, that are in the domain of ‘know-able’.  Even hedge fund operators with relevant M.D. / P.H.D. credentials, relevant industry experience, and scientific knowledge are often humbled by Mr. Market. Also, the last leg of bubbles tend to be the most dangerous one.

(2) Short Biotech, Take No Prisoners – The more macro, “top-down” analyst within me is telling me to short biotechs, either via indices, basket-cases, or maybe even single names. What leads me to this belief? Fund flows, price action (in aggregate as well as some truly historically exceptional price movements, e.g. ICPT ITMN without loss of generality), the (lack of) quality of many recent IPOs (?), etc. A friend of mind tells me the bull case for biotech is that human genomics is a game-changer, and that this boom has more legs. Perhaps. Recall, however, that the internet, too, was a game changer … that didn’t change the fact that it was a great short.

I will likely avoid biotech names (as shorts) at this time, but may change my mind if I feel like it.

UNG (United States Natural Gas Fund, LP) as a Short

I explored the case for going long “natty gas” on January 20th, 2012. I now believe there are good reasons to sell/short the UNG vehicle for the following reasons (note that shorting anything is always and everywhere a dangerous activity):

  • UNG is, by design, not a “buy and hold” vehicle.
  • There appears to be forced and uneconomic buying among some commodity participants (e.g., I haven’t the word ‘Amaranth’ in a while). That suggests a perfect storm of opportunity, given patience (and cash).
  • This is one where, in my view, you do not ‘stop loss’ if it goes higher… you add more.
  • Volatility is one of the few quantities in markets that is inherently mean-reverting (though there is a ‘clustering’ effect as well).

 

 

LST Year in Review – and Considerations for 2014

Although Wall Street may be the last place to go, for those seeking introspection, I find year-end to be an excellent time for investors/traders to process and reflect on all the good, bad, and ugly investment/trade decisions that were made in 2013. it’s an excellent time for introspection on Wall Street. Everyone is subject to bad/good luck; happens to the best of us. The real question is: when I fail, can I pick myself up? Can I determine how much was my fault, vs. what was beyond my control? What could I/you have done differently, and what can I/you differently going forward?

Or, if and when I am doing exceedingly well, how much of my success is simply a result of luck? Skill? Future success (independent of bad/good luck) seems somewhat dependent on figuring these things out, as it pertains to applying to future actions/decisions. That is, until one encounters a black swan that renders one a fool of randomness…

I find it time-consuming and painful, but ultimately valuable to examine all investment/trade decisions… it helps me figure out the underlying ’cause and effect’ relationships behind wins/losses (answering the “why” questions). Or not (“I don’t know” is a perfectly acceptable answer/belief, in my view). By the way, luck is fine… self-honesty is what matters, in my opinion. As long as one is aware of return attribution… staying power/replicability may be within reach.

PERFORMANCE ASSESSMENT SUMMARY

  • Public and Private Statements – Mixed bag. Made some very bad public calls, and made some good calls (statements made via verifiable fashion, e.g. tweets, posts, e-mails, in-person statements, etc). See below, “THE UGLY, THE BAD, AND THE GOOD” for more.
  • Actual Returns – Great job, but can do better going forward, especially on the long side. My overall batting average remains poor, but as some guy named Stanley Druckenmiller said: “I’ve learned many things from him (Soros), but perhaps the most significant is that it’s not whether you’re right or wrong that’s important, but how much money you make when you’re right and how much you lose when you’re wrong.” A friend earlier this year told me, “try harder.” He’s right, need to try harder. Also need to consider scale-ability and replicability. Shorting the Yen is very scaleable. Other, lower hanging fruit? Not so much. I had an interesting discussion with a quant about scale-ability. Despite the fact we do very different things, we understood each other…I gather his fund seriously ‘models’ scale-ability for each implemented as well as prospective strategies.

THE UGLY, THE BAD, AND THE GOOD

THE UGLY

THE BAD

  • Short CAT – This idea generated positive alpha, but in absolute terms, this has been a bad (but not ugly) short.
  • Short OSTK – I tweeted, “$OSTK has this huge “SHORT ME” sign all over it… but I’ve thought so all year, and haven’t pulled trigger yet.” – the stock has been flat/down slightly since. Yes, alpha. But abysmal.
  • Long JCP – I wrote, “If you have some “moolah to torch”, methinks you start building a long $JCP position next hour, if not early next week. No Ch.11 over wknd.” – The stock drifted further, before going slightly positive from the point I stated. T
  • Short China – China definitely underperformed relative to the US, but my timing was perfectly bad, as it was in July.
  • Long $ – I wrote https://thelongshorttrader.com/2013/07/08/make-way-for-the-coming-of-king-dollar/ – Another terrible call (though I stand by it, going forward).

THE GOOD

LESSONS LEARNED FROM PAST MISTAKES (a.k.a. “trader’s tuition”):

  • Value Traps (long housing 2005/2006) – In 2005 and 2006, I went long some housing related names because they looked cheap on book value, etc. basis. I was the patsy on the table. I lost nearly 100% of my invested capital in these names. Lessons learned: cheap can get cheaper (and go to zero), book value can erode, earnings can go negative (despite past results), macro matters, true fundamental/securities analysis is NOT merely looking at numbers/ratios. Cyclicality matters, and structural discounts to valuations on cyclical names are often well warranted. Risk management and diversification are NOT a linear function of # of securities one owns.
  • Risk Management and Humility Critical with Short Selling – In 2011, I was overly concentrated in a short that I believed was going to zero. As the stock went lower and lower, I grew my position substantially (“It takes courage to be a pig” so I thought). I initiated the short at 100, added some at 67, added more at 50, and a lot more at 29. I felt like a genius. It went down to 18…and hit a temporary low at 18. I considered taking profits around 20… but did not. As fate would have it,  I was incidentally on a flight most of that day. I had about a 20-30 minute window of time to decide whether to cover or not. Woe be the day I did not cover, because the stock went up 4x-5x before eventually going to zero. I realized a loss on this trade. It almost single-handedly destroyed my 2011 performance. Fortunately, I learned my lesson quickly (after taking my loss), and actually ended up handsomely in 2011. As Kyle Bass said (regarding a similar experience he endured), “and it was the most important lesson in short selling that anyone could ever learn. It taught me the humility and the respect that you must have when you’re on the short side of anything. It wound up being one of the best things that ever happened to me.”

CONSIDERATIONS FOR 2014

  • Consider sectors and strategies that were out of favor in 2013 – When I say consider, I am not advocating that you blindly invest in everything that didn’t work in 2013… but to understand what did not work in 2013, why it did not work… and why it may (or may not) work in 2014. Try to understand causation. There’s one particular strategy that I’m very “bullish” on… and I think I’m “bullish” for all the right reasons. Hint: unreliable, but often cited hedge fund performance survey claims that performance for this strategy was -20-35% in 2013.
  • Gold and Miners – I say we will see gold go lower in 2014. 10+ years of up, up, and up does not correct this easily. Need to see some miners go the way of chapter 11, and/or massive dilutive capital raising. “Gold tumbled 28 percent this year, set for the worst annual plunge since 1981.” Note that gold declined further in 1982.
  • Endogenous vs Exogeneous – So I think it’s fair to say that the 2006-2008 financial crisis was largely an endogeneous one, whereas 2001 was more exogeneous in nature. I wonder if the proximate cause for the next correction will be of the exogeneous variety.
  • Go Long Active (vs. Passive) Management – The popularity and proliferation of passive management (as evidence by ETFs and similar), coupled with the rise in US equity indices in 2013, provide a rare opportunity for active managers to generate significant alpha in  2014 vs. their passive counterparts. 2014 will favor true alpha seekers.
  • Credit/Rates – I say go long Saba Capital, or some of the strategies/concepts they employ that have not fared so well this year.
  • Bitcoin Implications – I took bitcoin very seriously, before many others did (thanks to a geeky friend of mine who is very much a forward-thinking individual).  I’m thinking through the investment implications, i.e. the 2nd/3rd/4th order implications. Suffice it to say: I believe bitcoin and/or related concepts may end up slaying certain rent-collecting goliaths of the real economy… these behemoths, in my view, have de facto monopolistic power within their respective domains. Their demise/contraction are long overdue. For the sake of society (and capitalism), I would love to see innovators slay them within the next 5-10 years. Innovate or perish. Creative destruction, par excellence. It is the American way.
  • Russia? Turkey?
  • War risk creeping – Investment implications unclear (not the US per se), but for example, Japan is getting aggressive. It seems symptomatic of desperate governments. Certainly rhyming with past history. I personally hope all their unnecessary aggression dissipates…but you never know. It is my understanding that  (?) market prices poorly predict war.

“Trading, like poker is a zero sum game. We have 1,500 employees, spent hundreds of millions on research during 37 years. You are going to have to beat me.” – Ray Dalio, Bridgewater Associates.

And David slew Goliath.

The ACTG Short Thesis

See the email below, which I sent to a well-regarded short seller back in Q4 2010 (fortunately I was not short at the time, but did gainfully short ACTG later on):

———- Forwarded message ———-
From: YYYY
Date: Fri, Nov 12, 2010 at 4:28 PM
Subject: Thanks
To: XXXX

Hi XXXX,

Have you had a chance to take a look at Acacia (ticker “ACTG”)? I believe ACTG may provide a good short-selling opportunity within the next few years, or at least I believe thorough research/analysis would provide a compelling story/thesis to gainfully shorting the name. My take is: “Acacia’s stock price warrants no premium to earnings (or any cash flow metric) because its earnings are low quality (inherently volatile and concentrated), and the market will in time recognize that.” As I may have mentioned, I have had conversations with a private competitor of theirs and have good relationships with them. They state that Acacia historically has only proven to be good capital raisers (via IPO, secondaries, etc.) but poor operators (I investigated the cash flow generative ability, or lack thereof, for their entire history; it’s true). To be continued…(I’m working on it right now)

I’ve been publicly shorting and cautioning people against ACTG since 2011 (and much more vocally in private. To this day, it’s not clear to me how one gets comfortable holding a long position in this name. I recall one shareholder who seemed to gloat about having inside information (it’s unclear if the information was Material Non-public Information). That increased my conviction that this was a long term sell (though entry and exit prices have mattered very much, as it has been a volatile name), as the holders are probably of the fast money variety, and weak hands.

Just to elaborate on the above thesis: ACTG seems like nothing more than a intellectual property hedge fund, but with the illiquidity of a long duration private equity/venture capital firm. ACTG’s earnings are inherently more volatile than a hedge fund’s, and its holdings are more illiquid than a private equity firm’s holdings. ACTG represents the worst of both worlds. If you’re a hedge fund owner, how much are you willing to pay up for a hedge fund? How much are you wiling to pay for a “stream” of cash flows that is lumpier than your own, and harder to liquidate?

CATastrophe: Why Caterpillar, Inc. is a Strong Sell

A few friends and I have been bearish Caterpillar, Inc. since at least Q1 of this year. The full report in the embedded document below includes information and opinions provided by said friends of LST. We believe:

  • Questionable revenue recognition practices between CAT & its foreign subsidiaries seem ripe for malfeasance.
  • 54% of CAT’s assets belong to Caterpillar Finance, yet management rarely mentions its existence. Shareholders seem unaware of its existence (just as many of GE’s shareholders were unaware of GE Capital before 2008)
  • CAT’s customers are slashing spending & are in cash conservation mode. Some are at risk of filing chapter 11. 70% of sales originate from outside the United States.  Take FCX for example which just announced it is reducing, deferring capital expenditures, and seeks asset sales.
  • CAT does not generate enough free cash flow to cover its dividend.
  • CAT completed $9 billion in failed (including one fraudulent), value-destroying acquisitions since 2010.
  • Channel checks from 4 sources show backlog worse than the lower end of expectations.
  • Compensation targets mis-aligned and far beneath management’s guidance and stated goals.
  • CAT shares are worth no more than $28.00/share (67.4% downside) & face further downside risk depending on how China & the commodity bust play out.

Do You Know What You Don’t Know About China?

Over two weeks ago, I wrote a post suggesting going long US Municipal Bonds and China , as a “knife catching” trade . Those trades haven’t fared too poorly since. I recently listened to a fund manager who is (arguably) the most bearish manager out there (on China). I won’t pretend that I’m suddenly a China expert, just because I sat through a very detailed, and well-researched presentation on China. In fact, you should assume I’m the patsy, or closer to being the patsy in the room rather than the proverbial  “smartest guy in the room”. That said, all prospective investors in China should ask themselves the following questions:

  • Do you know what’s going on in China?
  • Specifically, do you know how China’s banking system works?
  • Do you know how large China’s banking system is? In absolute terms? In relative terms?
  • Do you know what a ‘deposit’ in China is? Do you know how comparable said deposits are compared to a US bank’s deposits?
  • Do you know why short term rates skyrocketed recently?
  • As far as vacant properties go, if Ordos is NOT the exception, and actually indicative of what’s going in more populated centers within China… what would you do?

I currently believe longer duration players (specifically over next 2 years’ time) should stay away from going long China until there has been some cleansing in its banking system and/or some drastic Renminbi actions. This doesn’t mean there is no room for violent counter-trends to the upside (which should be taken as a gift to SELL; we are in one right now, so I think). But being too cute can backfire.

Thesis: China’s banks will have to take some pain, or its currency must take a hit, before going “all in” long China as a “buy and hold” makes sense. That is the set of events I’m watching. I don’t think there there is any other way around China’s banking situation. Steer clear of China and related long plays (for longer duration purposes; speculators, do as you wish!) until either happens.

For the more speculatively inclined: shorting is always and everywhere a precarious undertaking. That said, there is more than one way to skin this China cat… in equities, FX, and commodities land(s).

DO YOUR OWN WORK