An Israeli Jewel, Ill-Timed Short Positions and a Play on Gold

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Moreno LogoThe web is littered with lists, boasts from every corner, each claiming to be the penultimate collection of tips, tricks, lessons, and laws. Smart investment is driven by experience and data, and you often have to navigate through the digital debris to find good advice. But mistakes are just as instructive. Smart people are never entirely immune to bad judgment. So we are offering a new monthly series—My Best, My Worst, My Next—which offers three personal anecdotes from world-class investors. We hope to guide you towards success, warn you away from failure, and provide an advanced peek at the future.

Michigan Interactive Investments, the University of Michigan's student-run investment club, attracts 60 of its best undergraduate minds each year. With membership changing every year as seniors graduate, returns have varied from 19.9% for the academic year 2008-09, when the S&P 500 fell by 3.7%, to a loss of 2.4% for the academic year 2010-11, when the S&P 500 rose by 14.6%. MMI's current vice president of investments, Brandon Lebowitz, has a unique vantage point from which to observe, analyze and learn.

 

OUR BEST: The Joy of Finding a Growth Play

Though Allot Communications (ALLT), an Israel-based provider of IP service optimization and revenue generation solutions, was recently under fire when Bloomberg reported that some of Allot's equipment for monitoring Internet traffic was sold to Iran via a distributor in Denmark. The Jewish state bans trade with Iran.

But the stock was a winner for MMI. It returned 100.9% for the academic year 2010-11, when MMI bought it for $4.50 and sold at around $10, safely beating its six- to 12-month target price of $8, set by Lebowitz and his three colleagues. It  recently traded at $16.

Lebowitz et al. pitched the company to MMI as a growth play, on the strength of its suite of products, which essentially allows Internet network operators to keep their mobile growth economical. Allot's products monitor "who, what, when, where and how" subscribers are using their networks, crucial data considering that operators are moving away from "all you can eat" data plans, and also a must-know for content partnership deals or application-tiered services.

Allot continues to operate in a growth market. According to Cisco's Visual Networking Index, global mobile data traffic will increase 26-fold between 2010 and 2015, growing at a compound annual growth rate of 92%.

Though a successful pick, Allot represents Lebowitz's past investing philosophy and his current belief that a growth play such as Allot Communications is a rare find. "I evolved into a more value-oriented approach. That's how I matured as an investor."

 

OUR WORST: Short Positions, Timing and Diffusion of Responsibility

Among the worst investment decisions Lebowitz mentions are two short positions: Netflix and the S&P 500.  

Lebowitz and his colleague David Bleznak pitched shorting Netflix (NFLX) in TK 2010, when the company was trading at $163. Their short pitch was based more on valuation than on fundamentals. The stock had risen by 269% over the previous year. Lebowitz and Bleznak put the target price at $115. The market was slow to recognize that the technological changes from DVD rentals to streaming would hurt Netflix's competitive advantage, and the stock continued to surge up to $300 in the summer of 2011, before a misguided change in pricing caused widespread subscriber defections, and the share price nose-dived. The stock is now trading at $69.

MMI didn't benefit from the run down. The fund had a stop-loss order at $200, and lost 19.5% on the investment in academic year 2010-11.

Another ill-fated move was hedging the MMI portfolio by shorting the S&P 500 in 2010, as the market was rallying on quantitative easing, and then removing the short in the summer of 2011, just when the market skidded 15% on the inability of Congress to agree on raising the debt ceiling. 

The underlying reasons for the poor performance of the short positions:  bad timing in the case of Netflix, and misreading the macroeconomic fundamentals in the case of the S&P 500. But Lebowitz points to lessons he learned from both trades, each related to the team structure of club management.

For example, while the Netflix pitch came from Lebowitz, the rigid stop-loss at $200 was the rule of the then club manager. Cutting losses at $200 instead of riding through the run-up to $300 is understandable, but the final outcome taught Lebowitz to be flexible about imposing stop-losses with fundamentals-based, long-term bets.

With the S&P hedge, he feels that after the club voted for it, they didn't evaluate  the position closely enough on an ongoing basis. "There is a diffusion of responsibility after the vote," he says. "Maybe one idea is to appoint another group to constantly monitor the position."

 

OUR NEXT: Gold at No Operating Cost

MMI's pitch for Royal Gold Inc. (RGLD), a Denver-based owner of royalty interests in precious metals, when the company was trading at $64.66, was based on global macro analysis of demand for gold, and the economics of Royal Gold. The stock is currently at $67, and still in MII's portfolio.

The MMI members who pitched it, Ricky Gelband, Jason Schwartz and Joe Kryza, pointed to such factors favoring continued global demand for gold as ongoing destruction of fiat currencies and the resulting demand from central banks—including a Wikileaks report, according to which China has been secretly stockpiling gold—and individual investors. The latter include, for example, Indians. Golden ornaments account for up to 15% of the cost of an Indian wedding, according to Edelweiss Financial Services. Considering a projected 150 million weddings in India over the next decade, that source of demand will not be drying up anytime soon.

MII members chose Royal Gold as their gold vehicle because the company tracks gold better than mining companies, and as a royalty holder it has no operating cost risks. Its royalty revenues come from gold (64%), as well as nickel, copper and silver, mostly from Canada and Chile. MII is in good company. Forbes magazine has named Royal Gold to its 2011 list of Best Small Companies.   



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas , Stocks , US Markets

Referenced Stocks: ALLT , NFLX , RGLD

Kasia Moreno


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