Saturday, May 30, 2009

Nice run-up and next steps

This is time to look at the ideas that I had proposed and how they are doing. Both my ideas so far have done exceptionally well:
  • ACTS which I had proposed as a buy on Feb 7 (1.49$) has run upto2.025$ (on May 29), an absolute return of 36% over that period. If you annualize the return it is an even more impressive return of 118%.
  • SLT which I had proposed as a buy on Feb 11 (5.45$) has run upto 13.17$ (on May 29), an absolute return of 142% over that period. If you annualize the return it is an even more impressive 483%.
  • The returns from the broader market has been underwhelming to say the least against the above ideas. It is best to compare these returns against how the broader market (S&P 500 represented through SPY) has done in that period (Feb 7 to May 29). The absolute return is 6% over that period and 21% annualized.
Given the above we have handily beaten the market in this period. The results have been all the more satisfying because we have gone through a pretty topsy turvy market in the last few months.

Where do we go from here?

I will let out a little secret when I first came up with the above ideas. My expectations were the following:
  • ACTS will double in the next 2 years.
  • SLT will go 5 times in 5 years.
The above was a simple way for me to judge when to sell the stock if they start moving (and moved they have in the last few months). Selling a stock is always one of the more difficult thing to do once you have had a nice run up. It is easy to fall in love with the stock. Given the stock have had strong moves here is my current thinking:
  • Buy ACTS. ACTS is still highly under priced and such gross under pricing opportunities are disappearing with the current run-up in the market. When I wrote in Feb there were quite a few and I don't find that many now. So though the stock has gone up the underlying logic of buying the stock still remains - nice cash cushion, ability to adapt operating cost given the revenue situation. There may be some upside with the new products but I wouldn't consider that to be a big reason until the product proves it out in the market.
  • Sell SLT covered calls with strike around 17.50 with short expiration till Sept. The stock has had a great run and I still see a decent upside from here so I wouldn't be selling any long term call options. However, the great run-up allows us to benefit from some premium income in the interim.
  • Buy S&P put option once S&P (SPY) goes above 1000. While the economy is recovering the market has gone up too far too fast and I am not convinced that those gains will remain. Besides, it will provide a good hedge against some of the strong run-up we have seen in the stock.
I look forward to hearing your thoughts and feedback.