Active Equity/Commodity Portfolio: Annual Report

Happy New Year! I have no resolutions since every day is like a new year for me.

In 2017, I focused more on active equity/commodity portfolio than the other portfolios as I finally was able to trade free of commissions, found more opportunities there and had money saved up from off-book jobs.

WHAT A BORING YEAR…for the stock market. Sometimes, boring is good. S&P 500 was up 21.64%.

Figure 1: S&P 500 Annual Return (Includes Dividends).
Source: Aswath Damodaran, NYU Stern

The geometric average return since the financial crisis is 8.42% (2008-2017). Geometric average better reflects the returns over time since there’s always volatility in the market and volatility lower investment returns.

Since inception (November 2016), active equity/commodity portfolio is up 15.74%. For 2017, the portfolio returned 11.86%, way way below the market. No wonder active managers are not anyone’s favorites at this time.

Figure 2: Active Equity/Commodity Portfolio (Robinhood) P/L since inception (Nov. 2016).
The white line represents the start of the year.

I will address the significant drawdown you see in figure 2 at the bottom of this post.

The biggest gain of the year, both in a percentage and nominal terms, came from the first trade in 2017. The trade was long NUGT (3x leveraged gold ETF). I believed gold was unfairly beaten down and would recover around the new year as portfolios would be rebalanced and uncertainty with Trump’s economic plans at the time would force investors to hedge their portfolio. And that’s what happened in January 2016. I closed the position at 28% gain.

While trading 3x leveraged ETFs, Be cautious as they always go down even though the underlying security goes up. The structure of leveraged and inverse ETFs are different than most retail investors think. They are not a good idea to be held for a longer time and as a significant portion of a portfolio.

The biggest loss of the year, both in a percentage and nominal terms, came from the 5th trade in 2017. The trade was long TVIX (2x leveraged volatility ETN, not ETF). I believed volatility would pick up from February to March (and it did a little bit). However, after TVIX underwent 1:10 reverse split in mid-March, I did not want to risk having the ETN go to single digits once again. So I closed the position at 17% loss.

To briefly sum up, the biggest gain was 28% and the biggest loss was 17%. In positive nominal terms, the profit was three times larger than the loss (positive number).

At the time, both NUGT and TVIX were a significant portion of the portfolio (Robinhood). Over time, I deposited more money into the account as I saved up from off-book jobs and summer internship. The account is now 6 times larger than it was at the beginning of 2017. Larger account allowed me to have more flexibility and lower my exposure to a single trade.

Top 3 Trades and Bottom 3 Trades
Current Positions:

I can only go long securities on Robinhood. Current positions are VRX (The biggest gainer at the moment, 112%. 14% of the portfolio), ORCL, XIV, ILMN, OMER, PSQ, SH, COL, TEVA, MTSI, and AXON (The biggest loser at the moment, -77%. 0.5% of the portfolio).

When talking about % gains on trades, traders should also look at those trades as a % of the portfolio. If I’m going to speculate on a one-time event, such as FDA ruling on a drug, I’m going to have a small exposure to that company (such as AXON). If I am profoundly convinced on the fundamentals of the company and/or technicals of the stock, I will have a higher exposure to that company (such as VRX).

It’s important to point once again these gains/losses are unrealized. The returns are subject to change…until the position closes.

Both PSQ and SH are inverse ETFs of the market. I have bought them as a small hedge for my portfolio as I’m long individual U.S. stocks.

Why am I long the stocks mentioned above? I will not go in-depth here.

  • $VRX: Extension of debt. Time flexibility to restructure the company.
  • $ORCL: Unfair share-price beat down after positive earnings report and market, in general, is trending higher.
  • $XIV: Because why not?
  • $ILMN: Someone is loading up big amounts of calls. Speculation it will be acquired at a huge premium.
  • $OMER: Friend’s advice (first time I took friend’s advice with actual money at risk).
  • $PSQ and $SH: Small hedge, as I mentioned above.
  • $COL: Speculated it might be acquired at 15-25% premium. United Tech (UTX) later acquires them at 18% premium.
  • $TEVA: TEVA calls were active after Allergan (AGN) was halted. Speculated upcoming positive news for TEVA. The week after, new CEO news. Sticking to TEVA as the new CEO has a great reputation and I’m confident his tenure will reward the shareholders.
  • $MTSI: Calls active and social media sentiment.
  • $AXON: Speculation on Alzheimer drug data. Chances were low, but I believed even a small positive side of the drug would help the stock price. I was wrong. Was initially 2% of the portfolio. Now 0.5%. Still open as I have nothing to lose.
Get Out?
Over 12% loss of value in less than 2 months (Fall 2017).
The face is from the movie “Get Out

As you saw in figure 2 (and figure 3 below), there was a large drawdown in the portfolio. Over 12% of the portfolio lost value in less 2 months. Why was that? It was largely due to VRX and TEVA tumbling. Both were little longer-term strategy and high conviction both companies would turn itself around. After 2 months, both stocks rebounded and hit 52-week highs afterward. Other stocks in the port during the 2 months were performing fine.

If it is one thing I learned as a trader, it is that high conviction leads to an ego which then leads to losses most of the time. So did I have an ego in this case? I don’t believe so. I was sticking to the initial trade strategy on VRX and TEVA, and there was no material news. It was the market noise. If the company fundamentals changed, then I might have changed my strategy on the trade (either close, cut down, or buy more shares).

 

Upcoming ‘Portfolio Performance’ articles will be on other portfolios.

Equity/Commodity Portfolio Performance: Inception & 2016

In the previous article, I laid out my performance for Forex portfolio since inception and for the year 2016. This one will briefly lay out the equity/commodity portfolio performance. Briefly, because I don’t have much statistics on it than for FX……for now.

Before going further, I should note: “Average price” includes Dividend Reinvestment Plan (DRIP) – the dividends I received were used to buy additional shares in the company.


Since inception (summer of 2014), I’m down 31%. I’m currently holding 9 companies, including the ones I wrote article(s) about; GoPro (NASDAQ:GPRO), General Electric (NYSE:GE), and Cisco (NASDAQ:CSCO). I don’t have Eli Lilly (NYSE:LLY) since my broker doesn’t allow me to short.

All shares of 9 different companies belong to 1 class: domestic equity. 59.4% is in large cap. 18.89% in mid cap. 3.66% in small cap. And 18.05% in “other domestic equity.” Will change the allocation this year; international equity, fixed income, etc.

On February 16, 2015, I wrote about Microsoft (NASDAQ:MSFT) when the share-price was $43.95. Today, it’s trading at $62.14. I missed the opportunity to go long on it.

On April 12, 2015, I wrote about GE and believed GE was a strong by (it still is). Since then, GE is up 12.30%, from $28.06 to $31.51 (dividends not calculated). Dividends are automatically invested in new shares. Average price I paid for the shares is $25.99. I’m currently up 21.24%.

In the summer of 2015, I wrote about CSCO (part 1, part 2 AND 4Q FY’15 earnings report). Since the first article, CSCO is up 7.97%, from $27.99 to $30.22 (dividends not calculated). Average price I paid for the shares is $24.85. I’m currently up 21.61%.

On November 21, 2015, I wrote my first article on LLY and believed it was overvalued (it still is). Since then, LLY is down 13.98%, from $85.50 to $73.55. Second article on LLY was posted very recently.

On December 26, 2015, I wrote about GPRO and believed it was a buy. Since then, GPRO (and I) are down whopping 52.62%, from $18.34 to $8.69.

For the last year, my equity portfolio is down 12.61%. Because of $9.99 trade fee and low capital, I have refused to buy some stocks I wanted at times.

I recently opened Robinhood, broker with $0 commission. I’m planning to use it to actively trade equities and commodities.

As to commodities, I’m up 8.25% since inception (fall of 2016). I’m currently holding 50 shares of Direxion Daily Gold Miners Bull 3X Shares (NUGT), which is up 24.03%.

I might change my broker to Interactive Brokers (IB) from TD Ameritrade, as IB offers more tools for portfolio analysis.

If you didn’t like this performance/article, read the “Forex Portfolio Performance: Inception & 2016.” Maybe you’ll like that performance/article enough to like me again.

If you do, follow me on Twitter (@Khojinur30). I tweet out my trades live. If you don’t, peace.

Eli Lilly (LLY) Is Overvalued – Too Costly To Buy (UPDATED)

UPDATE: This article is also posted on Seeking Alpha. For the first time, my article was accepted to be on Seeking Alpha. The link to the article on Seeking Alpha can be found here, or http://seekingalpha.com/article/3707566-eli-lilly-is-overvalued-too-costly-to-buy.

 

Eli Lilly (LLY) - Past 5-Years
Eli Lilly (LLY) – Past 5-Years

On October 22, Eli Lilly (LLY) reported an increase in the third-quarter profit, as sales in its animal health segment and new drug launches offset the effect of unfavorable foreign exchange rates and patent expirations. Indianapolis-based drug maker posted a net income increase of 60% to $799.7 million, or to $0.75 per share, as its revenue increased 33% in animal health segment. In January 2015, Eli Lilly acquired Norvartis’s animal health unit for $5.29 billion in an all-cash transaction. The increase in the animal-health revenue helped offset sharp revenue decreases in osteoporosis treatment Evista and antidepressant Cymbalta, whose revenue fell 35% and 34% year-over-year, respectively. Eli Lilly lost U.S. patent protection for both drugs last year, causing patent cliffs. Lower price for the Evista reduced sales by about 2%.

Total revenue increased 2% to $4.96 billion even as currency headwinds, including strong U.S. dollar, shaved 8% off of the top line in revenue. Recently launched diabetes drug Trulicity and bladder-cancer treatment Cyramza helped increase profits, bringing a total of $270.6 billion in the third-quarter. Eli Lilly lifted its guidance for full-year 2015. They expect earnings per share in the range of $2.40 and $2.45, from prior guidance of $2.20 to $2.30.

Despite the stronger third-quarter financial results, I believe Eli Lilly is overvalued.  Eli Lilly discovers, develops, manufactures, and sells pharmaceutical products for humans and animals worldwide. The drug maker recently stopped development of the cholesterol treatment evacetrapib because the drug wasn’t effective. Eli Lilly deployed a substantial amount of capital to fund Evacetrapib, which was in Phase 3 research, until they decided to pull the plug on it. The suspension to the development of Evacetrapib is expected to result in a fourth-quarter charge to research and development expense of up to $90 million pre-tax, or about $0.05 per share after-tax. Eli Lilly’s third-quarter operating expense declined 7% year-over-year, mainly due to spending on experimental drugs that failed in late-stage testing trials.

Eli Lilly’s market capitalization skyrocketed over the past five years by 122.76% to $90 billion, but their revenue, gross profit, net-income, operating income, as well as EBITDA, declined significantly. Over the past five years, its revenue decreased 14.61% from $23.08 billion to $19.70 billion (LTM), largely due to patent expirations. Gross profit and net-income declined 26.06% and 53.48%, respectively. Its operating income fell 59.18% over the past five years.

Eli Lilly - Revenue/Gross Profit
Eli Lilly – Revenue/Gross Profit

 

Eli Lilly - Key Financials
Eli Lilly – Key Financials

Its operating margin fell a halfway over the past five years from 28.30% to 13.53% (LTM). EBITDA margin, on the other hand, fell all the way to 18.73% (LTM) from 34.05%.

Key Margins
Eli Lilly – Key Margins

Meanwhile, shares of Eli Lilly gained 144.49% over the past five years. Its price-to-sales ratio too high compared to its history and to S&P 500. Its Price/Sales ratio currently stands at 4.6, vs. at 1.7 in 2010, while S&P 500 currently stays at 1.8 and industry average at 3.9. In addition to the falling revenue, gross profit, net-income, and EBITDA, its free cash flow fell significantly over the past five years by 72.24%, or fell 22.61% on a compounded annual basis.

Not only did their cash flow fall, but their net-debt increased significantly. Its net-debt increased by a whopping 1789.87% over the past five years from $199.5 million to $3.85 billion. They now have almost twice as much of total debt than they do in cash and equivalents. I believe Eli Lilly is at a risk for poor future ratings by rating agencies, which will increase their borrowing costs.

Eli Lilly – Total Cash/Total Cash/Net-Debt
Eli Lilly – Total Cash/Total Cash/Net-Debt

Strong U.S. dollar is an issue for Eli Lilly. Over the past five years, the dollar index increased 26.75%. Last quarter, its 49.2% of revenue came from foreign countries. Its revenue in the U.S. increased 14% to $2.54 billion, while revenue outside the U.S. decreased 9% to $2.42.

Eli Lilly - 2014 Geography Revenue
Eli Lilly – 2014 Geography Revenue

Eli Lilly’s dividend yield of 2.55% or 0.50 cents per share quarterly can be attractive, but it is undesirable. From 1995 through 2009 (expectation of 2003-2004), Eli Lilly raised its dividend. Payouts of $0.26 quarterly in 2000 almost doubled to $0.49 in 2009. Then, the company kept its dividend payment unchanged in 2010, the same year when its net-income, EBITDA and earnings per share (EPS) reached an all-time high. About four years later (December 2014), Eli Lilly increased the dividend to $0.50 quarterly. I still don’t see a reason to buy shares of Eli Lilly. The frozen divided before the recent increase was a signal that the management did not see earnings growing. With expected patent expiration of Cymbalta, their top selling drug in 2010, it is no wonder Eli Lilly’s key financials declined and dividends stayed the same. Cymbalta sales were $5.1 billion in 2013, the year its patent expired. In 2014, its sales shrank all the way down to $1.6 billion. Loss of exclusivity for Evista in March 2014 immensely reduced Eli Lilly’s revenue rapidly. Sales decreased to $420 million in 2014, followed by $1.1 billion in 2013. Pharmaceuticals industry continues to lose exclusivities, including Eli Lilly.

In December 2015, Eli Lilly will lose a patent exclusivity for antipsychotic drug Zyprexa in Japan and for lung cancer drug Alimta in European countries and Japan. Both of the drugs combined accounted for revenue of $866.4 million in the third-quarter, or 17.5% of the total revenue. They will also lose a patent protection for the erectile dysfunction drug Cialis in 2017, which accounted for $2.29 billion of sales in 2014, or 11.68% of the total revenue.

Besides the pressure from patent expirations, there is also regulatory pressures on drug pricing. According to second-quarter 10Q filing, Eli Lilly believes “State and federal health care proposals, including price controls, continue to be debated, and if implemented could negatively affect future consolidated results of operations.” During the third-quarter earnings call, CEO of Eli Lilly, John C. Lechleiter, said that price increases reflects many of medicines going generic and “deep discounts” government mandates for large purchasers.

As of October 16, Eli Lilly had two drugs under regulatory review, nine drugs in Phase 3 testing, and 18 drugs in Phase 2 testing. Since the end of July, the drug maker terminated the development of few drugs, including evacetrapib in Phase 3, two drugs in Phase 2, and five in Phase 1. Out of total eight drug termination, only five drugs moved to the next stage of testing. I view the recent termination of evacetrapib as a major setback.

Eli Lilly Pipeline
Eli Lilly Pipeline – Third Quarter Earnings Presentation – Page 16

Compared to its peers, LLY’s Price-to-Earnings ratio is too high. Its P/E ratio (on GAAP basis) stands at 38.22 while industry average stands at 17.7. Four of its main peers, Pfizer (PFE), Johnson & Johnson (JNJ), Merck (MRK), and Sanofi (SNY) P/E ratio stands at 24.08, 19.63, 14.41, and 22.38, respectively.

Negative trends, tighter regulations, increasing competition and slowing growth makes Eli Lilly’s current valuation unjustified. I believe it will reach an average P/E ratio of its four main competitors, at 20.12, in the next three years. I expect EPS (GAAP) to contract. With current EPS of $2.21 (LTM, GAAP) and P/E ratio of 20.12, share price would be worth $44.46, down 47.37% from current share-price of $84.47. As EPS contracts, the share price of Eli Lilly will be much further down from $44.46 in the next three years.


Disclosure: I’m not currently short on the stock, LLY, at this time (October 21, 2015).

Note: All information I used here such as revenue, margins, EBITDA, etc are found from Eli Lilly and Company’s official investor relations site, Bloomberg terminal and morningstar. The pictures you see here are my own, except “Eli Lilly Pipeline – Third Quarter Earnings Presentation – Page 16”

Disclaimer: The posts are not a recommendation to buy or sell any stocks, currencies, etc mentioned. They are solely my personal opinions. Every investor/trader must do his/her own due diligence before making any investment/trading decision.