Three Times Lucky

I shorted 3 stocks in a matter of 2 weeks. I ended up with profits for all 3 trades. But I gotta admit, I was lucky that my short trades were successful as there were other factors that had a hand in the tanking of share price.

My lack of in-depth research due to FOMO also allowed fear to play games with my head and I had to exercise huge restraint to keep my cool and let the stock price do its work.

PG&E Corporation (NYSE:PGE)

Pacific Gas and Electricity Corporation is a utility company engaged in the business of electricity and natural gas distribution, electricity generation, procurement and transmission and natural gas transportation and storage. They operate in the northen two-thirds of California, encompassing over 5.2mil household.

I shorted this stock is mainly due to the news below.

https://edition.cnn.com/2019/10/08/us/pge-power-shutdown-california/index.html

I reckoned that the power shutdown will affect their revenue and their financial report for the following quarter will be bad. Simple as that.

What I did not know is that the fire season in California is only one half of the problem this company is facing. PG&E is also embroiled in a bankruptcy trial which will focus on whether the company is responsible for starting the Tubbs fire, one of the most destructive fire in California.

Stock price did not move much after news of the proposed power shutdown was released. I became worried that I had made a mistake in my short thesis. Instead, this happened and caused the stock price to plunge 30%.

I was lucky as I had no idea this was coming. Had the ruling gone the other way. I would not even know what hit me.

United States Steel Corporation (NYSE:X)

There was a flurry of news for US Steel last month.

  • US Steel announced acquisition of 49.9% of Big River Steel
  • CFO resignation and cost cuts
  • Changed Q3 guidance into a more positive note
  • Revised earnings estimates lower
  • Trade deal hopes

Overall, I felt that it does not look good for US Steel at the moment.

Firstly, the acquisition for Big River Steel would increase their long term debt from US$1.6B to US$2.3B. If they intend to be the sole owner of Big River Steel, US Steel would have to significantly raise their debt levels even more.

Secondly, it is never good news when a CFO resigns. (see article here) There could be a variety of reasons why a CFO leaves the company and most of them are bad news.

On the same week, there was the Q3 revised guidance and “love fest” between US and China. On the following Monday, the stock rose and I decided to short it. The main reasons are due to the first 2 mentioned above and also the fact that I do not believe the trade “deal” would amount to anything substantial. (see my thoughts on the trade deal phase 1 here)

Shorting a stock which you have barely enough knowledge is real scary. I began to do furious research on US Steel and commodities like steel and iron ore. Some of the risks for US Steel is better than expected earnings, renewed trade deal hopes and its large discount to book value. To be honest, I do not even have a target price for this trade, which is a huge error on my part.

Luckily for me, US Steel announced on 16 Oct 2019 that they plan to have a private offering of US$300m convertible notes due 2026 to institutional investors, with an option to purchase up to additional US$50m notes. They also announced the continued idling of the East Chicago Plant Tin mill in Indiana and warned of job losses due to the closure (I don’t even know they have this problem).

Investors deemed the news negative and there were huge speculation of the price of the convertible notes. The share price fell about 10% since the trade deal announcement. I decided that enough was enough and closed my trade.

Netflix (NASDAQ:NFLX)

This is one of the most opportunistic trades that I had done.

On 16 Oct, Netflix released their Q3 results with a 40% beat in EPS due to foreign exchange gains, without it EPS would be in line. Revenue in line with estimates. However, new subscriptions were lower than expected. Not only that, Netflix’s CEO Reed Hasting admitted that upcoming competition from Disney and Apple will hurt subscriber growth.

Imagine my surprise when its share price went up 10% after the results release.

So long story short, I placed a shorted the stock and true enough, the euphoria died down and the price went back to pre-earnings levels.

Thoughts

The purpose of this post is not to brag about my winning trades.

Investors can enjoy short-term dynamic trading individual stocks, anchoring long-term winning portfolios allocating assets permanently. Usually, I prefer to invest for the long term by setting reliable portfolios but I am of the view that we should be flexible enough to be active in the shorter term to take advantage of market mis-pricings and volatility.

As shorter term trading carries more risk, I only allocated 10% of my portfolio into trading accounts. Due to the short timeframe I have before I execute the trade, I am taking the risk of missing out important information about the company or related industry. This created unnecessary fear and made me doubt my initial thesis. Another mistake I made is not setting an exit strategy. It could prove costly if my trades went against me.

Even if you run across a busy highway unscathed, you are still an idiot. I did that 3 times so I’m 3 times the idiot. In conclusion, make your battle plan ahead of time so you’ll already know you’ve won the war.

Cheers

Cover photo: 2013 New York Times Best Seller adolescent novel by author Sheila Turnage

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