Renewal Wealth Monthly Newsletter - February 2021
David vs Goliath (Reddit, Gamestop, & Meme Trading vs Wall Street Hedge Funds)
“This GameStop (NYSE:GME) squeeze is deeper than a squeeze.. It is a revolution that started with people not trusting central authority; it is a call for transparency and fairness. It makes my more bullish crypto but more importantly more focused and committed to systems change.” Mike Novogratz, Galaxy Digital
Part 1: January Portfolio/Market Recap (Tesla, Bitcoin and More)
Renewal Wealth Active Growth Portfolio
6 Month Return: 111% (S&P 500 13.67%)
January Return: 13% (S&P 500 -1.11%)
Year To Date Return: 19.27% (S&P 500 3.44%)
As the 2nd Month of 2021 commences, the Nation and families worldwide continue to struggle with the Covid19 epidemic. Great progress is being made as the world enters into greener pastures in 2021, with over 104 million vaccination doses administered globally, and close to 34 million given in the US as of this week (Bloomberg.com), as well as significant decline in hospitalizations and ICU visits from the disease since a December spike.
Amidst this backdrop, as well as the Jan. 20 inauguration of President Joe Biden, lingering political and social tensions, and Occupy Wall Street 2.0 via the Reddit/Twitter/Gamestop anarchy this week, the expected health of the US economy, as measured by the US stock markets, continues to display strength, fortitude, and resilience, continuing 2020’s strong year. The S&P 500 is up almost 3% year to date, the NASDAQ (tech stock index) is up 8.5% and many international indexes are also showing tremendous signs of life, with the Latin American emerging market index leading, up near 30% year to date (as 2/4/21 morningstar)
In the Renewable Energy world, Tesla’s continues to surge, amongst record Q4 profits, up over 20% year to date. Despite a good percentage of the revenue and profits still coming from federally subsidized EV credits, sales and new deliveries continue to grow, manufacturing expansion continues in the new Texas and China factories, and the company continues to benefit from global expectations and investment in the future of the electric vehicle market
Bitcoin, continues to trade near its peak, currently around $38,000, after touching hitting over $40,000 on Jan. 8th for first time ever. It continues to garner interest and investment flows alike from both retail and institutional investors, a trend we expect to continue (see below interview from ARK Invest CEO Cathie Wood on more insight on EV Markets, Tesla and Bitcoin).
A couple other noteworthy facts:
Since President Biden was sworn in on the 20th of January, including the three this week reversing Trump era immigration legislation, he has now signed 45 executive orders, in all areas, from healthcare, to immigration to energy policy, such pulling the permit on the oft debated Keystone XL pipeline, and signing off of repeals of Trump era tariffs and trade restrictions
In the DOL jobs report for January, the unemployment rate declined again, from 6.67% to 6.3%, showing a continued recovery, despite reluctance for Americans (and globally) for dining, travelling and entertainment
Interest rates remain at record lows in most developed nations in efforts to advocate spending and economic activity. The US 10 year treasury bond is currently at 1%/year
Part 2: Renewable Energy Company of the Month: Daqo New Energy (DQ)
Company Name: Daqo New Energy Corp. (Ticker: DQ)
Where is the Company Based: China
What Does the Company Do: Daqo New Energy Corp is a leading manufacturer of high-purity polysilicon for the global solar PV industry. Founded in 2007, the Company is one of the world's lowest cost producers of high-purity polysilicon.
Market Cap (company value): $8.3bln
Annual Sales (2019): $350m (2020 data will be released end of Feb/March)
Ann. Profits (2019): $29.5m (2020 data to be released end of Feb/Mar) - see note above
Current Stock Price: $120 (February 3, 2021, 3pm)
Stock Price 1 month ago: $63.71 (88% gain)
Stock Price 1 Year ago: $11.55 (939% gain)
Pros: Amid the current development in Renewable energy globally, President Biden has suspended restrictions on Chinese companies selling products for use in America’s bulk power system, announced that the U.S. would rejoin the Paris Climate Accord and said that America would seek to eliminate carbon emissions from its power sector within 15 years. This all seemingly bodes well for US/Chinese relations, trade, continued growth in the sector globally, and for sales for DQ
Daqo has recently landed several large contracts for production of polysilicon with JASolar through 2023 and another unnamed Global solar PV company for this year.
Cons: The stock price has soared almost 1000% already this year. Typically when a stock rises that fast, it is said to be “overvalued”. However, valuations are also funny things in the realm of growth investing, as many companies in their rapid growth and global expansion (such as Apple, Amazon, Google, and Tesla) had gone through similar periods, and continue to remain at similar valuations, as their growth continues.
Regarding that, while we like DQ and their continued growth prospects, and full disclosure, have recently invested in and still hold in some clients accounts (as 2/4/21), we advise caution with anyone looking to invest in it, as we are closely monitoring its current share price vs. valuation and will gradually determine over the coming weeks and months if we believe it will be good to invest in going forward
Key/Important Upcoming Dates/Things to Watch
President Biden’s continued policy changes, specifically if he repeals the Trump tariffs banning solar imports from China
Q4 2020 Earnings Report - sometime between 2/26-3/10/21
Expected IPO of their subsidiary subsidiary Xinjiang Daqo New Energy on the Shanghai Stock market
Part 3: David vs Goliath (Reddit, Gamestop, & Meme Trading vs Wall Street Hedge Funds)
If you haven’t heard about this story the last two weeks, or had someone tell you they invested in Gamestop or AMC, then your living under a rock or you have more willpower to stay off Facebook than I have. Not that I believe its an extremely important story in the context of long term economic or sociopolitical happenings, but its one that caused a significant disruption and downturn in the overall stock markets on and around January 27-29th, and worthy of some attention, clarification and discussion
To try to sum up the saga best I can in 9 bullet points:
January 19th - Hedge Fund, Melvin Capital announces a significant short position in Gamestop (GME) stock (short meaning they were investing against the stock - i.e. investing client dollars that the stock will continue to go down/depreciate in value)
Jan 19/20th - retail traders via Reddit (a public internet forum for discussion of different topics and groups known as subreddits), in the subreddit “r/WallStreetBets”, point out the short position, and one user particularly posted their opposition to the trade sharing a $50,000 long position on the stock (hoping it goes up in price).
Many other traders joined, creating a large scale online protest vs. Wall Street hedge funds, this particular short position, and much investment in GME and a couple of other stocks (notably ACM), leading to a jump from $40/share to $120 by Jan 25th
The Short Squeeze - The rapid price rise caused hundreds of millions of losses for the hedge funds, forcing them to “close” their positions (take their losses), since they were trading on “borrowed funds” (known as margin trading). This is known as a Short Squeeze. It caused the price to go up even more rapidly
Some Wall Street traders and hedge fund partners appeared on TV, clearly not happy with the happenings and their massive losses, This caused even more fervor online, and even more trading worldwide, causing the price to continue to rise
RobinHood Stops Trading: As the price of GME peaked around $390 on Thursday 1/28 (close to 1000% rise in a week), several of the exchanges and platforms the trading was occurring on were forced to stop trading all together, and removed the stock from its platform as they dealt with regulatory requirement issues, amongst other potential conflicts of interest
With the trading halted and the stock being removed, the stock price came tumbling down, allowing the hedge funds to cut their losses at significantly better prices than otherwise would’ve occurred, thus making it seem like the brokerage platforms, such as Robinhood (whose motto is to democratize finance for all), may have been throwing a inflatable rubber ducky to the sinking hedge funds
Lawsuits; Many people were very angry with the brokerage websites for halting trading and removing the stock, leading to some lawsuits being files and much social media uproar
By this week, the trading fervor declined rapidly and GME stock has tumbled back down, at this current time sits around $58/share (Thursday 2/4) and very likely will continue to back towards the $40 level before the melodrama, as many of the hedge funds, will hold their short positions, and much of the fervor to buy and stick it to the proverbial man has died down
1.) Day trading (what most of the social media retail traders here were doing) is not investing. Its not much or at all in most cases different from gambling. It’s not what we at Renewal Wealth do, nor believe in. Sadly, right as the fervor to buy these stocks peaked on social media, and tens if not hundreds of thousands of new retail traders began buying, that’s exactly when the price dropped sharply, causing a lot of losses for a lot of people. Its not the first time its happened and wont be the last
2.) Was RobinHood and the other brokerage websites right in shutting down trading and delisting the stock? Their rationale and reasoning for doing so was their legal requirements and obligations they have from the SEC, known as capital or maintenance requirements (this is complicated and not an area I have expertise in, but it is a legitimate legal requirement all brokerages have). As seemingly millions more shares were being bought in that two day period, as client account values skyrocketed, (likely a lot of this being on margin i.e. borrowed funds) this would’ve greatly affected their books, leaving them under capital requirements, thus prompting their decision to halt buying, and eventually remove the stock from further purchase as they dealt with their capital requirement issues
3) The gray area: It became made known in the days following the closing of the brokerage and stopping of trading, that a company called Citadel LLC, a Wall Street firm, who is more or less the parent company of different hedge funds and investment companies, “bailed out” one of the Hedge Funds they have a stake in (similar to some of what Elon Musk has done over the years between his companies), and that was involved in the short trade (Melvin Capital), via multiple billions of dollars. Simultaneously, it was made evident, that this same company accounted for roughly 1/3 of all of RobinHood’s revenue last year.
4) The grayer area: RobinHood, as a private brokerage firm, can partake in their own trading activities without needing to publicly disclose to anyone what they’re buying or selling. Speculation surfaced (and rightfully so, given that they can see what their largest/most successful clients/hedge funds are doing) that they may have been short in the GME stock themselves. This would’ve been potentially a huge conflict of interest, and while not illegal, we’ll just leave at “gray”. Unfortunately, we’ll likely never know the full truth in either case, as the things don’t have to be publicly disclosed, and the lawsuits end up going further (it doesnt seem so at this point, as it doesn’t seem like any criminal activities occured, from my own, admittedly non-expert opinion).
5) The Lesson to Learn: Tom Yeung, CFA, wrote a story for investorsplace.com (see below) last week on it all and summed up better than I could the lesson here, where Renewal Wealth as a firm stand on the whole thing:
“The stock market, after all, is mostly a fixed-sum game. But for long-term investors, the same truth still holds: The road to consistent wealth has always been in buying a group of high-quality investments bought at a reasonable price. Practice that discipline with your core portfolio, and you’ll make plenty of merriment with joining me in reading about the trials and tribulations of others on r/WallStreetBets.”
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