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Review of Open Short Positions

I have short positions open in CNQ, CAR, HTZ, and GM.

music selection:  “Save Tonight” — Eagle-Eye Cherry

weigh-in: 211.2 (0.2)

I have four short positions open to hopefully profit off troubled stocks while providing a small amount of hedging.  Those positions are mixed bag and I’m going to review them all here.

Canadian Natural Resources (CNQ) is a tar sands producer in Canada.  They are struggling to bring new production online on schedule and under budget.  This is a high cost producer of low quality crude and I think it can’t long compete with Eagle Ford and Permian shale oil.  Unfortunately, the stock has rallied recently (after being a  strong winner for me) and is an underwater play.  This is a synthetic short (naked call/long put) at the 30 strike and 19JAN2018 expiry.  My unrealized P&L is a 238 dollar loss.

Avis Rent A Car (CAR) is a small winner for me.  I am betting against this one (and Hertz, half positions each) because I think there is a bubble in subprime auto lending.  This ultimately means depressed prices for used cars which will be very damaging to the rental car business economics.  I’m up 27 dollars here.

Hertz (HTZ) is doing much better for me and is my best short.  It faces the same headwinds as CAR but it seeing more heat in the market.  I am up 40% or so.  That’s an unrealized profit of 1,008.

Finally, I am short General Motors (GM).  I was doing pretty well here but the company wisely unloaded its struggling European business to a competitor.  This will improve margins and provides much needed cash.  I still think sales will take a hit when the sub prime auto lending bubble pops.  It is also evident this company is being run by and for the autoworkers union.  If I can stay in the position long enough, it should be a big winner.  So far, I am down 820 including payments made in lieu of dividends.

Altogether, I’m down 23 dollars on these four combined short positions.  I feel like I am getting hedging at a fair price considering the market has been mostly up since the election.   I will continue to look for more attractive short opportunities.

Devour your prey raptors!

{ 10 comments… add one }
  • Steve March 13, 2017, 6:54 pm

    I’m curious about your short on GM, as I am currently long GM. While I agree with the thesis that GM is heavily burdened by the UAW and that car sales may have peaked, I can’t quite buy that GM stock is about to fall. With a P/E of 6, the market is already pricing in a serious drop in sales for GM.

    In the very long run, the company may be driven to bankruptcy by the UAW, but that took 30-40 years the last time and probably won’t happen anytime soon. The auto-loan bubble is perhaps more immediate, but even there, GM’s exposure is much smaller than Hertz or Avis who would be devastated by a used market crash, since they sell used cars. Even GM’s financing arm isn’t exposed to these sub-prime loans in enough of a way to make a large dent in earnings.

    I like your thinking with the rental car companies and may even try out a similar strategy myself, but I think you’re going to get burned on GM, perhaps even more than you already have.

    By the way, thanks for writing this blog. It’s an interesting read.

    • The Lizard King March 13, 2017, 10:39 pm

      Steve,

      Thanks for the counter point of view. When the subprime bubble pops, a large portion of GM’s revenue is going to dry up. Can they withstand that? Time will tell. You see value. I see a value trap. Good luck to both of us!

  • Chris B March 13, 2017, 8:54 pm

    Hertz and Avis are down because they are steadily getting wiped out by Uber. So being short is the right move for the wrong reason.

    • The Lizard King March 13, 2017, 10:43 pm

      Ride sharing services are another key part of the equation. I see business travel as being a key revenue driver though. I don’t know of anyone who travels for work who was told to “get an Uber” instead of a rental or taxi though. I think companies may still be concerned about litigation liability with using an unlicensed service. If that changes, the rental car companies are really in big trouble. Either way its a crappy low margin business with high capital requirements. I expect to be vindicated here.

  • My Dividend Pipeline March 13, 2017, 9:08 pm

    Raptor,

    Thanks for the update. I like the rental car shorts, but GM….eh I don’t know. I’m sure you have a stop loss on that one. PE @ 6 couple with a 4%+ divvy and an microscopic 25% payout ratio. Any good news combined with a dividend increase sends it to $40 in a hurry!

    Best of luck!

    MDP

    • The Lizard King March 13, 2017, 10:41 pm

      Yes, 25% stop loss. Currently at 16.43% loss including payments made in lieu of dividend. If I get burned, it won’t be badly.

  • Mr. Tako @ Mr. Tako Escapes March 14, 2017, 2:25 am

    Tough to be short in an up market, eh?

    CNQ is probably a reasonable bet given the flood of new shale oil transported at lower cost due in new pipelines.

    • The Lizard King March 14, 2017, 2:32 am

      Yes. But the short positions are ultimately hedges. For now, I’m getting hedging at a very reasonable price!

  • Dividend Growth Investor March 14, 2017, 6:44 pm

    I am very risk averse for whatever reason, which is why I have only done short sales for hedging purposes. When I was a teenager, I thought I would be an active trader when I grew up. I did some paper trading (which was a waste of time) but I learned how bad it would have been to be short a stock that triples in a short amount of time ;-(

    In terms of GM, it may be a decent idea to buy the $45 put that expires in Jan 2018 for $9.75 ( ask). At $36.87 for spot, you are essentially losing on the dividend payment and it seems like the premium you have paid is low. The risk is limited to the $9.75 which admittedly is equivalent to a roughly 26% stop loss. The $42 put that sells at $7 is not that bad either.

    • The Lizard King March 14, 2017, 8:05 pm

      I very strongly considered a synthetic short for GM. If the borrow rate had been higher, I would have. There are lots of ways to be short and none of them are bad…except when the market is moving against you. I plan to stick my guns a little longer.

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