#$krft

Passport Capital returns an estimated 1.01% for July 2015 - the fully hedged version returns 0.35%

John Burbank's Passport Capital generated a 1.01% return on their publicly disclosed long portfolio for the month ending July 2015, outperforming the S&P500 by 100 basis points (bp). On a hedged basis, the portfolio would have returned 0.35% StockAlpha over the same period. Passport Capital's StockAlpha reflects the return of the net return if each security in their portfolio was hedged with a sector ETF, such that the resulting portfolio was market, beta and sector neutral. StockAlpha in the Materials sector contributed the most to StockAlpha during the month.

Positive Contributors to Passport Capital's Returns

Passport Capital’s position in Cytec Industries Inc. (CYT) contributed the most to the performance of the manager’s long-portfolio during the month. Over the month of July 2015, Passport's 3.8% position in Cytec Industries Inc. (CYT) increased in value by 25.4%, contributing 0.97% (3.8%*25.4%=0.97%)to the long portfolios overall return. Looking at Passport's portfolio through a fully hedged StockAlpha lens, the holding of Cytec Industries Inc. (CYT) also provided the largest contribution to fully hedged returns. Cytec Industries Inc. (CYT) returned 25.4% during the month compared to the Materials sector, which returned -5%. As a result, after taking into account Cytec Industries Inc. (CYT)'s beta relative to its sector, the position contributed 1.1% of StockAlpha to the Passport’s monthly performance.

Negative Contributors to Passport Capital's Returns

Much of the drag on Passport Capital’s long-portfolio during the month can be attributed to the holding of Vipshop Holdings Ltd (VIPS). Over the month of July 2015, the manager's 10.7% position in Vipshop Holdings Ltd (VIPS) returned -9.4%, contributing -1.01% (10.7%*-9.4%=-1.01%)to the long portfolios overall return. Looking at Passport's portfolio on a fully hedged basis, one can isolate the StockAlpha. The holding of Vipshop Holdings Ltd (VIPS) also provided the most negative contribution to fully hedged returns. Vipshop Holdings Ltd (VIPS) returned -9.4% during the month compared to the Cons. Disc. sector, which returned 5%. As a result, the position contributed -1.7% of StockAlpha to the manager’s monthly performance.

Overlap with other hedge funds

When I first started as a trader I only traded equities. Actually I only traded NASDAQ stocks. Actually I only traded NASDAQ stocks intraday. Actually I only scalped NASDAQ stocks. Actually I only scalped NASDAQ stocks from the long side. If I only continued trading like this I would probably be practicing law somewhere..... and poorly at that.

As traders we must evolve, grow, learn to express our trades with different products and time frames. Many intraday traders also trade options to express trade ideas that work better with options- particularly certain swing trades. Recently I used options to express a longer term trade in $LL for example. I blew a pretty easy options trade in $HLF last month. I am sure you have read about the short term 2.4m $KRFT options trade by now.

So what does it take to be a successful options trader?  I thought I would ask Seth Freudberg, a professional options trader, for his insight.  For those looking to learn options, the video below outlines 5 Attributes of a Successful Options Trader. Maybe you can be one of them.

Summary of the Top 5 Attributes of a Successful Options Trader:

Humility

Risk Management

Consistency

A “bread and butter” trade

The X Factor

I have been trying to work out what I missed in my appraisal of Kraft because let’s face it the sort of proportional bump up the company enjoyed after the Heinz/3G bid was kind of big: 

Source: BigCharts.com

That the incumbent Kraft management was underperforming was pretty clear to everyone - the replacement of the CFO announced last month was a nod to this. I looked back on my notes from the Q4 statement six weeks ago and it was not classically pretty:

(1) The stock suffered an operating loss due to ‘market-based impacts to post-employment benefit plans’­ – in essence funding the company’s pension deficit. 

(2) Looking at the divisional split the positive pricing in cheese (easy comp and recovery in volumes) led the way and actually masked the reality of three other divisions having negative pricing.  

(3) ‘we did not grow share in any individual category. We merely held flat at 60% of our US businesses, and lost share in the other 40%’

(all above sourced from the author’s own notes from the Kraft Q414 report)

Of course what is new - and apparently worth US$20+/share are US$1.5bn of synergies, some clever financing and the optionality of pushing Kraft’s products outside North America.  Well I guess the latter strategy worked for Heinz: just look how its smaller but more international sales base is more higher valued.  

 Source: Kraft-Heinz deal presentation 

If I screw my eyes up I can see how you may be able to justify US$20bn of extra EV for Kraft but it is not going to be easy as no turnaround / synergy generation project is.  Mr Market has moved pretty rapidly to a finale valuation on the basis of the individuals and groups associated with the deal. Kraft is no Heinz in my view.  

I tell you one company that does impress me in this broad space and that’s Kraft’s old corporate bedfellows Mondelez. Global growth, market leading brands, exposure to snacking and related trends...

Source: Mondelez Q4 14 report

...a free cash flow focus and a surprisingly stagnant share price buffeted by the translation impact of a strong dollar.  

 Source: Mondelez Q4 14 report 

Well done if you held some Kraft but if you are looking for somewhere to reinvest those newly created profits then take a look at an historic part of the Kraft empire: Mondelez.  Funny name, potentially interesting investing opportunity here.  

The $55 billion acquisition comes at a multiple of 23 times the target's Ebitda. Aggressive cost-cutting might lower that figure, but Campbell and ConAgra would be easier to digest.

Today Heinz is acquiring Kraft. 

Matt Levine calculated the combined company will have an enterprise value of about $111 billion and an equity value of about $83 billion.

Levine writes:

It's a great team, no? Buffett can look cuddly, 3G can be ruthless. Buffett offers Kraft shareholders a long-term investor with a nice halo, while 3G offers them operational expertise and a track record of successful cost-cutting. It's worked out great for them so far.

Read his full analysis at BloombergView.com.

Justin Fox says the party’s over for Kraft.

I will wager, though, that this particular ownership change, with Kraft Foods merging with H.J. Heinz in a deal arranged by Jorge Paulo Lemann’s 3G Capital and Warren Buffett’s Berkshire Hathaway, will be more dramatic and traumatic (for Kraft Foods employees, not necessarily customers or shareholders) than all the rest combined.

What’s your brand? Seriously. What do people think of when they think of you? Do you understand what your value add is and are you confident enough to stick with it, even if it falls out of fashion?

If 3 makes a trend then Branding is the word of the day. Unfashionable, unhealthy, profitable as hell, defiantly old school branding.

Look at Kraft: up 36% on news that it’s getting swallowed by Buffett and his Brazilian amigos at 3G. Actually it’s being folded into Heinz which makes sense. Between them 3G and Berkshire control Heinz, Kraft, Velveeta (a hedge on real cheese), Dairy Queen and Burger King.

Even people without peanut allergies would be dead within 6 months if they ate nothing but what Jorge Paulo Lamann and Warren are serving. Doesn’t matter. Shareholders are getting more than $12b in one day gains tossed their way. They can use the money for a health club membership. Or a slice of cheese slathered in Miracle Whip. Makes no difference to Berkshire. Warren is judgmental about a lot of things but diet isn’t on the list. Sonic Boom

Then there’s Cliff Hudson, CEO at Sonic Drive-In. The company crushed earnings again last night and upped estimates just for good measure. Same store sales rose 11.5%.

Sonic is killing it bc they know what they are. When McDonald’s was talking about putting Kale on the menu earlier this month Sonic was expanding its line-up of Nerds to be added into Slushies.  Why? Because they were popular and no one ever confused Sonic with a health spa; especially not Sonic.

I Tweeted about it on March 2nd (see above). Since then SONC shares are up more than 10%. McDonald’s is still mulling Kale and whining about America’s obsession with health food hurting sales.

Bullshit. There’s nothing wrong with McDonald’s that some self-esteem couldn’t fix. There are economies of scale at work and other issues but the main reason SONC is boot-stomping MCD is because Sonic is run by a guy who understands his customer, his job and most of all his company's brand.

“There’s one thing we serve” Hudson told me when I interviewed him for Yahoo last December. “That’s what the customer orders.”

I added to my position in the stock the next week.

1 in every 7 hotdogs eaten out of the house (ie Not sold by Kraft) is sold at Sonic. The company makes 40% of its profits from milkshakes, soda and those candy Slush drinks. There’s grilled chicken on the menu. You don’t have to take the road must gluttonous. But Sonic isn’t there to judge you. Which is probably why they’re doing so well.

The Dartmouth Brand

Finally there’s my Alma-mater, in the news again for fraternal hi-jinx. Turns out a pledge at AD fraternity chose to have the house seal branded on his butt. The fraternity, of which Dartmouth President Phil Hanlon was a member has been suspended.

(Kevin Bacon (”Thank you sir may I have another”) plays a sizzling game of pong in the AD basement)

Really, Dartmouth President Phil Hanlon? You graduated in 1977. The next year a movie called Animal House came out. You probably heard of it, especially since writer Chris Miller was a Dartmouth AD a few years ahead of you. I may or may not have shared a cough-y moment with Miller in that same house 12 years later (I admit to nothing and memories are a complicated thing…).

Stories were told, Dartmouth President Phil Hanlon. Stories much worse than a 19 year old making bad decisions with a part of his body no one is expected to see anyway. Surely your wontons haven’t shrunk so much and your memory faded so badly that you think a brand or tattoo is the worst thing that’s happened in the AD basement recently.

Of all the problems fraternities have, and there are so very many, a kid burning himself then being too dumb to keep the wound clean is pretty low on the list.

In fact, this is about the least horrifying press our little beloved College on the Hill has had in months. With a little spin you could argue the idiot pledge in question was simply engaged in a bit of unhealthy branding. He just got too literal.

The market recently has been bouncing around in a wide range. Well the indexes have at least. But under the covers there have been many stocks breaking out. In this type of market you need to look at two possible entry points at times. Yes, there are those that will not buy strength in this kind of market. Only stocks that show strength holding at support and reversing. 

 That is fine, but they run the risk of missing a big move. Costco ($COST) was one of those stock on my list this week. My notes from Saturday say it is a buy on clearing 146. It did that Tuesday and did not give much back Wednesday. It sits up 6.3% from the buy trigger as I write this. A big missed opportunity if you were waiting for it to pullback and hold at support at 137.

Another I found and marked as a pullback buy candidate is heading down the same path. Kraft ($KRFT), I had marked as a buy on a pullback to 64. It was trending lower in a bull flag but had the RSI holding up well. Monday came and it did move lower. Under the 20 day SMA for the first time in two weeks. But it never touched 64, so no trigger. The thing is though it gives off another buy signal if it were to break above 67.40.

This is hard for some to understand. Why would I be willing to buy it at 64 and at 67.40 but not in between? It comes down to reward versus risk. As it shows strength at 64 and reverses there is a natural stop to buy against. As it moves away from that level the downside risk that it returns there grows bigger to where it is commensurate with the upside reward to the next resistance level at 67.40. But when it gets over that 67.40 level there is a new stop to trade against as it clears resistance. Each one risks a different amount of price so the sizing should be different.

This is not the only way to trade this. Some would be comfortable when it reversed Monday buying Tuesday on an upward price move, using Monday's low as a stop. That is fine too. There are infinite methods of trading. Find one that suits your risk tolerance and stick with it.

Despite beating the Street on both the top and bottom-line, Facebook stock still fell 9% in the after hours, and is down nearly 6% today. This is just further proof that the markets were looking for more from the company, with the Estimize consensus suggesting EPS should have been $0.02 higher at $0.45. Adding fuel to the fire were comments on the subsequent earnings conference call. Chief Financial Officer, David Wehner, cautioned that spending would be ramping up by 50 - 70% in 2015 on a non-GAAP basis, causing investors to fear Facebook might become the next Amazon, a company which has a seen a deep decline due to large, failed investments. Facebook also warned Q4 revenues would show a year-over-year increase of 40 - 47%, a slower pace than they have historically grown, and much lower than the 59% increase we saw in the Q3 results. However, the company made the same claims regarding weaker revenues in Q3, but were able to beat top-line expectations, and post YoY growth that was roughly in-line with Q2 results.

After the bell we get results from 15 more S&P 500 companies, including Kraft Foods, Visa and insurers Metlife and Allstate.

How Are We Doing?

Expectations for S&P 500 earnings growth for the third quarter stand at 10.8%. Revenues are anticipated to come in with 4.4% growth. All 10 sectors are anticipated to post positive YoY growth on both the earnings and revenue front.

Leaders

Earnings:

Health Care (13.3%). Notable industry: Biotechnology (45.1%)

Consumer Discretionary (13.1%). Notable industry: Internet Retail (20.4%)

Materials (13.0%). Notable industry: Metals & Mining (15.1%).

Revenues:

Health Care (10.7%). Notable industry: Biotech (38.9%).

Information Technology (7.3%). Notable industry: Software (15.7%)

  Laggards

Earnings:

Utilities (4.2%). Notable industry: Electric Utilities (3.0%).

Telecommunication Services (0.9%): All five companies are within Diversified Telecom Services. Only Verizon posted y­o­y growth.

Revenues:

Energy (0.1%). Notable industry: Oil, Gas and Consumable Fuels (­-0.7%).

Materials (2.7%). Notable industry: Paper & Forest Products (­-13.6%).

Beat/Miss/Match

Earnings: 280 companies have reported thus far, 54% have beaten the Estimize consensus, 35% have missed and 11% have met. This is compared to Wall Street estimates, of which 72% of companies have beat on the bottom­-line, 21% have missed and 8% have met.

Revenue: 51% have beaten the Estimize consensus, 49% have missed, and 0% have met. For revenues, 59% of companies have beat the Wall Street estimate, while 41% have missed.