Tom Konrad, CFA
The stock market is up, and my bets against it are down, except in energy. It’s time to double down.
Earlier this week, a client asked me if I’d found any buying opportunities while doing research for my “Best Peak Oil Investments” series. The answer is, “no,” although I’ve found a few companies I’m hoping to buy at lower prices, later.
As regular readers know, I’ve been bearish since June 2009, after I cashed in on the quick rally in March, April, and May of that year. My last ten months of sitting on the sidelines as the general market has risen 30% has been far from fun, but it has not made me question my decision to get out. At the time, I judged that the potential gains did not justify the downside risks, and I believe the rise since then has only reduced any potential gains and increased the risks of staying in.
When I published my 10 Green Energy Gambles for 2010 in January, I had just these risks in mind, and suggested that readers use them to hedge any long stock positions, or use them to speculate on a decline.
Readers who took this advice have lost about a third (34%) of their money, which is about what we’ve seen from my benchmark, composed of puts on the broader market and a clean energy ETF (down 38%). If they had used this portfolio of puts as a hedge against the S&P 500 by investing $1 in this portfolio for every ten in the S&P 500, they would have acheived a net 2.5% gain, compared to a 4% unhedged gain on the S&P.
The following table shows how the individual picks have performed so far this year:
| Security | Weight | Underlying | sector | 1/9/10* | 4/27/10* | Gain |
| EWW Jan 2011 $30 Put | 20% | iShares Mexico (EWW) | Misc | $0.825 | $0.40 | -52% |
| CHK Jan 2011 $17.5 Put | 7% | Chesapeake Energy (CHK) | Energy | $0.865 | $0.955 | +10% |
| DAL Jan 2011 $7.5 Put | 7% | Delta Airlines (DAL) | Travel | $0.975 | $0.60 | -39% |
| AMR Jan 2011 $5 Put | 7% | AMR Corp (AMR) | Travel | $0.85 | $0.655 | -23% |
| LUV Jan 2011 $7.5 Put | 7% | Southwest (LUV) | Travel | $0.50 | $0.10 | -80% |
| CNX Jan 2011 $35 Put | 7% | Consol Energy (CNX) | Energy | $2.325 | $3.30 | +42% |
| BTU Jan 2011 $30 Put | 6% | Peabody Energy (BTU) | Energy | $1.45 | $1.13 | -22% |
| HOT Jan 2011 $25 Put | 10% | Starwood Hotels (HOT) | Travel | $1.725 | $0.30 | -83% |
| JBHT Jan 2011 $20 Put | 10% | JB Hunt (JBHT) | Travel | $0.65 | $0.20 | -69% |
| Power Efficiency Corp | 20% | Misc | $0.275 | $0.26 | -7% | |
| Portfolio | 100% | -34% | ||||
| Benchmark | ||||||
| 80% | DIAMONDs (DIA) | $1.49 | 0.84 | -44% | ||
| Powershares Wilderhill Clean Energy (PBW) | 20% | $11.74 | $10.08 | -14% | ||
| Benchmark | 100% | -38% | ||||
| * Prices given are the midpoint between the bid and ask at the close on the given date. | ||||||
I’ve also categorized these picks as “Travel” (including airline, trucking, and hotel stocks), “Energy” (including coal and shale gas stocks), and “Misc” including my bet against Mexico’s peak oil economy and the energy efficiency company Power Efficiency Corp. (PEFF.OB). The following chart shows how the portfolio as a whole and these sectors have performed against the benchmark.
As you can see, the portfolio (blue) as a whole is tracking the benchmark (orange) closely, but the energy companies have fallen (and the puts have risen) despite the market trend, while the travel companies have outperformed the market (and the puts on travel companies have fallen.)
The star performer was the put on Consol Energy (CNX) a firm with interests in both shale gas and Appalachian coal. The main reason for its share price decline has been a large dilutive issue of common stock, priced at $42.50 a share that has depressed the share price. The stock was trading at $56 when I first priced the option.
Outlook
The occaisional stock on the list may fall due to specific news, but if these gambles are going to pay off, it will require either a spike in oil prices that causes a steep decline in the price of the travel stocks, or a significant broad market decline, or both. I think either or both is likely this year, and the recent market rise makes a decline from these levels more likely.
If you’ve been hedging your portfolio with some or all of these puts, you should realize that as stock prices rise, the value of these puts as a hedge against relatively small declines in stock prices falls. Hence, if you want to maintain your hedge, it makes sense to add to it now with some more puts on some of the higher-flying travel and transport stocks, such as Starwood Hotels (HOT), Southwest Airlines (LUV) and JB Hunt (JBHT) at strike prices closer to the current stock price.
DISCLOSURE: Short EWW,DAL,AMR,LUV,CNX,BTU,HOT,JBHT,DIA. Long PEFF.
DISCLAIMER: The information and trades provided here and in the comments are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.
