Trade Update $ZNGA: Closing A Speculative Long Position For Healthy Gain

by Dan October 8, 2013 11:10 am • Commentary

Web 2.0 names are getting annihilated again today, and frankly it is getting ugly with LNKD down 7%, Yelp down 8.5% and FB down 5%.  Nasty business.  I leave half of a long stock position in ZNGA at $3.83 that initiated in June (below) when the stock was $2.80.  I am now going to close the balance of the position.

Action: ZNGA Sold to Close 2nd Half at 3.52 for a .72 gain or about 31% gain on the whole position since June 14th.



Trade Update Sept 25th, 2013:  Taking Profits On A Portion of A Speculative Long  

Back in mid-June I made the argument (below) that despite challenged fundamentals, stocks like ZNGA could be a reasonable speculative long when you consider their large cash balance, investors’ appetite for speculation and the potential at some point these guys are actually able to create a sustainable business model not dependent on FB.

For the most part this position was something that I have not spent a lot of time on, it was what we call a “flyer” in the business, maybe it works, maybe it doesn’t but I’ll put my stop on where I bought it.   At this point, the stock is finally getting caught up with the recent frenzy with Web 2.0 or 3.0 (based on whether or not u r using the metric system) stocks and is now up 40% since mid August, now just 5% away from the 52 week highs.

While I think the price action in some of these new fangled web stocks is a getting a bit silly, who knows how long it can go for.  For those of you fortunate enough to be long, just keeping raising your stops and holding your nose.  But to be clear we know how this is going to end, just a matter of when, in the mean time keep partying like it is 1999!

I am going to take profits on half of my position and let the other half ride, this way I don’t have to keep an eye on the position and deal with a stop.  Set it and forget it from here on out!

Action: ZNGA Sold to Close Half at 3.83 for a 1.03 gain or about 37% gain since June 14th.



MorningWord 6/14/13:  Catching sentiment shifts in unloved stocks can be one of the most satisfying feelings as a trader/investor.  The only problem with doing so is that more often than not you will be early.  Just as stocks tend to overshoot on the upside when things are euphoric, things can be dramatic on the downside as unrealistic fears of losing everything can cause investors to get sloppy.  In the last year or so there have been more than a few once-loved or hype technology stocks that have been left for dead only to see massive resurgence in investor interest. If you are going to rely on sell side research or a pundit on tv to identify the turn you will likely be too late.

Lets look at GRPN for example, the stock was upgraded this morning by Deutsche Bank from a Hold to a Buy and slapped with a $10 twelve month price target.  The street ratings now stand at 4 Buys, 12 Holds and 7 Sells with an avg 12 month price target at $6.40 or 6.5% below last nights close.   The company has a quarter of its market cap in cash and no debt and they actually make money. I am not making a bullish case for the company, but with nearly 9% short interest and a revenue base of over $2 billion expected to grow at 10% a year for the next few years, I think it is safe to say that the stock got a tad oversold last year at $2.60 down from its $20 ipo price in late 2011.

Now this analysis is not exactly helpful with the stock up 150% from the November 2012 lows, but it is interesting to note that the sell-side sentiment shift is largely the result of price action that has been dictated by investors bargain hunting rather than the other way around.  And that’s the point to get “2 or 3 baggers” as they say in the biz you are gonna have to do what very others are willing to do, you are likely to be early and often second guess yourself.  I will also add one very important point, much like we think about long premium options trades, this sort of investing should be limited to a small and speculative portion of your overall portfolio as the last thing you want is your stock holdings to look like the island of misfit toys.

Last week on CNBC”s Fast Money Halftime Report Enis mentioned ZNGA as his final trade, a stock that he is starting to dip his toe in the water with. Much like GRPN at the lows, the stock is hated by Wall Street analysts (3 Buys, 18 Holds and 3 Sells), down dramatically from post ipo highs, and in the mix of management/business model turmoil.  But the most important point I would make is that the company has ~70% ($1.67 Billion) of their market cap in cash and only $100 million in debt. Trading at $2.80, ex cash I think you could safely say this is a fairly cheap long term option.  We are getting long some down here with the idea that we will be early and likely have to sit with a loser for a while till the rest of the investment world gets hip to the potential sentiment shift.

Is ZNGA a sure thing?  Of course not, there are no sure things in this business.  But it’s a situation where the odds are skewed quite favorably for a buyer at these levels.  That’s our goal – looking for situations where the odds are in our favor, and trusting that over time, that leads to an overall positive outcome for the portfolio.  ZNGA’s one such situation, and if it does work out, prices will move far before most analysts change to a bullish stance.

New Trade: ZNGA Getting long at $2.80