longer-term swing trade

Good to hear from you again.

My partner has conversed a good bit with you over on Yahoo last year (or the year before?)... I think over some biotechs. We both have a great deal of respect for your knowledge and insights.

I will check out the sites you mentioned.

Best to you.
 
ktm,

I've been evaluating your MIR example and have a couple of questions. I looked (in a cursory fashion) at MIR's financials and noticed that they have a lot of warning signs: high D/E ratio, low current ratio, low ROA, etc. And you bought them when this stock when the price was collapsing. Is this part of your strategy - to buy stocks that you believe dominate their market and have no forensic difficulties but may have weak financials in some way so that you know the price will collapse significantly?
 
I'm asking cuzz this will take some mind-bending on my part: I usually only buy stocks displaying some growth and solid financials. I guess I'm looking for a new way to look at things.
 
MIR is certainly not your typical Graham/Buffett play. It's really not a Graham/Buffett play at all. I used it more as an example of how derivatives can juice a position...but I did buy on fundamentals.

In MIRs case, I had to dig much deeper to understand the business. At the time I bought, ENE fear was at it's peak so part of the downdraft was the fear of all utilities with trading operations. MIR's revenue from trading is only about 5% of income. MIR has two core problems; they attempted to expand too quickly (thus overleveraging) and they began to recognize revenue in a different manner. I disagree with the new recognition policy as it has skewed the ratios and makes comparisons more difficult. DYN and CPN have also adopted this policy (as did ENE - who started the whole thing) while D and DUK have not. While this isn't the only difference between these companies, the market has viewed the policy very negatively as evidenced by the differences in pricing of the respective stocks. The D/E is worse than it appears because goodwill should be thrown out entirely IMO.

Once MIR's debt was downgraded to junk, it was clear they would be severely impacted and would have to take action. MIRs core holdings (plus acquisitions) are that of a traditional utility with many tangible operations and revenue generating assets. While TTM certainly looks bad, going forward the following things will have to happen:

MIR will need to keep a significantly higher level of cash on hand, 1.6B by year end according to co guidance, and likely much more going forward

Capex will drop significantly as expansion is tabled. This will cause free cash flow to soar.

Normalization of their earnings power shows a great deal of potential value if they manage this period properly. MIR has minimal exposure to California.

I agree with your assessment that maybe I thought it was going to tank short-term and then recover over the long haul. The argument would then be to short it and buy it when it gets lower. I don't agree that it was certain that this would happen, but by playing it in the manner I did, I feel I set myself up for the best possible scenario. I'm essentially betting against MIR going out of business and my growing stake should give me a basis in the $6 range if all works out. In a few years at a 15x multiple, that should net me a few million before taxes.
 
A few core holdings with more Graham/Buffett qualities and predictable financial outlooks may be PFG, TSN and AHO. I have holdings in each of these and like their long term prospects. I have a small holding in PFG and have bought AHO from 26 all the way down.
 
Free cash flow, Graham/Dodd, goodwill at the expense of TA – you realize all this is blasphemy! Just kidding – I’ve got a few questions about your options strategies if you don’t mind. (As you’ll see, I’m a newbie with puts and calls.)

1. It sounds like you got into MIR when the price had fallen to15. So I assume you felt that it was going to continue dropping. If so, then why did you sell puts for several months? I thought one sold puts when the expectation is for increasing price.
2. Why did you start selling calls in April? Did you think the stock was going to break out there or did you expect it to fall and stay in a trading range as it actually did? If you’re selling calls, don’t you expect the price to decrease?

Thx again.
 
With most option sellers, the writer would prefer to have the option expire worthless as they are simply trying to profit from a move in the opposite direction.

In my case, I am not concerned with the stock's direction. At the point I am writing the option, my goal is to capture a significant amount of time premium and I wouldn't mind owning the stock at the (basis) price of my write. This works the same on the upside. The calls were written with the stock just below 15 at the 15 strike for about 80 cents. Since it reversed I kept the 80 cents, however I would have been perfectly happy with a continued upward trend and having my stock called away at (essentially) $15.80.

Option writing is a proxy for buying the stock in my case. Naked puts are "synthetic covered calls" and I will only write them if getting assigned will further lower my cost basis. With calls, I must be happy with my absolute return should I be called away.

Hope that helps.
 
I really appreciate the advice. I've only been at this 9 months (part time for sure) and was starved for long term swing trading approaches. IMO, most of what is out there will get you killed in tough markets like these, so it's great to talk to someone who's actually doing it.
Anyway, just to clarify, during this process you never owned any MIR? You were strictly working with options?
Also, I'll ask the typical newbie question: I've got a basic book on options, but it doesn't it go into the kind of detail that one needs to trade. I know that you've developed your own methodology, but do you have a book that you'd recommend that touches upon the kind of derivative strategies that you're talking about here?
 
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