I’d like to thank Jay Powell and his marvelous printing press. The equity side of my investment fund, which I manage, is 100% mining stocks – mostly juniors – and as of today it’s up 100% QTD. Thank you Jay. Almost every stock we hold is from the ideas I present in my Mining Stock Journal.
But I’m here to discuss the “idiot stocks.” I’ve decided to label stocks like SHOP, W, TSLA, BYND, CVNA, etc as “idiot stocks.” Yes, ignorant speculators have managed to get lucky trading these stocks during a period of time when the Fed has printed the greatest amount of money in its history. But only an idiot would consider them to be long term, fundamentals-based investments. Not one of those stocks has ever produced a valid GAAP profit and never will. They are largely cash-burning furnaces that have benefited from a stock market that, for now, will tolerate any negative event short of nuclear war.
The latest idiot stock with which I’ve started toying is Fastly (FSLY, $86). FSLY is an “edge” cloud-based technology services business focused on real-time content delivery network services. FSLY’s market is $8.14 billion which is 38.6x trailing revenues. For 2019 the Company generated $200 million in revenues. It looks like, based on its growth rate and Q1 revenues of $63 million, that it will generate maybe $270-280 million in revenues in 2020. The point of this is that it’s a small company with significant inherent business risks, not the least of which is obsolescence and competition.
Like most of the idiot stocks, FSLY operates at a loss every quarter and its operations burn cash every quarter, even adding back the non-cash expense of stock-based compensation. Of course, stock-based comp imposes silent shareholder dilution. And insiders are ensuring this dilution happens quickly, as almost everyday insiders exercise zero-cost stock options and then turnaround and dump the shares in the market. At the end of Q1/19, there were 25 million shares outstanding. Now the share-count is 95 million.
The stock chart, RSI and MACD pretty much speak for themselves. This is one of the more overvalued stocks I’ve analyzed, ergo an idiot stock. I’ve been playing around with near-money puts for the last 7 trading days. Despite the chart appearance, I’ve managed to eek out a modest profit.
The implied vol is very high, especially for the call options. This means shorting OTM calls is a better proposition than buying puts. The July 17th $120 calls were $2.20 bid on Friday. Shorting these would be the equivalent of picking up nickels in front of a steam-roller. If you feel like stepping up the risk for higher profits, the August $120 calls can be shorted around $7, plus or minus 20 cents. The short interest is not very high (6%) so you won’t have to worry about a short-squeeze. If you short the calls, use a 20% stop-loss.
Because the implied vol is so high (on average it’s 100%), the puts are expensive – even deep OTM puts. This is why I’m sticking with weekly near-money puts for now. But this stock was trading at $45 on June 11th. On this basis it might be worth taking a shot with August $60’s. Another interesting idea is the January 2021 $20’s. The last trade in this put was this past Wednesday at $2.81. If you short the stock, use a 20% stop-loss. You want to give yourself room to weather the high volatility and avoid getting stopped out on a brief 10% intra-day spike.
The commentary above is from my Short Seller’s Journal. FSLY dropped as much as $10 on Monday. I scored a double on the puts I bought on Friday. Several of my subscribers bought puts in early trading Monday and booked profits that made it worthwhile getting out of bed today. You can learn more about this newsletter here: Short Seller’s Journal information.