I noted in my Real Money column last week that the Fed's massive cash infusion in the financial system had created an atmosphere of Thunderdome in the markets, where the incredibly misguided January statement from Bridgewater's (BWB) Ray Dalio that "cash is trash" would be replaced by "trash is cash." That has been happening this week, as stocks of cash-burning companies like Tesla (TSLA) and Zoom (ZM) have jumped while notorious cash-eater Netflix (NFLX) has hit an all-time high in Thursday's trading, as has Amazon (AMZN) , which has a spotty record of free cash flow generation.
How to trade this? Fire up the Robinhood app and just tag along for the ride until the market inevitably realizes, as it did in mid-February, that valuations of cash-burning companies are not sustainable -- especially against the backdrop of the Covid-19 lockdowns, which have produced an economic contraction with a suddenness and magnitude as seen again in Thursday's report of 5.245 million initial jobless claims in the U.S. This has not been not seen since 1929.
Well, if you have been reading my Real Money columns for the past six years, you probably know that that is not how I roll. I have been buying puts in very, very small denominations to be ready for a turnaround, but keeping that position to less than 3% of my total portfolio value. I have also been buying calls on bond exchange-traded funds, and today harvested a nice profit on my iShares Barclays 20-plus Year Treasury Bond (TLT) weekly calls.
With the 10-year Treasury note yielding 0.60%, the bond market is telling us that the economy is nowhere near as rosy as the stock charts of Amazon (AMZN) and NFLX would indicate. Bond investors realize that economic value destruction -- lost jobs and lost income -- will always outweigh market share gains (Netflix vs. movie theaters) that occur in the short run.
But, as I noted in my Real Money column last week, it is very difficult to fight the Fed, and that limits my short endeavors. Portfolio managers make their bones on the long side, fortunately, and I have been buying securities in companies that are not only generating cash but returning that cash in the form of dividends and share repurchases. None of those companies I mentioned -- NFLX, AMZN, TSLA, ZM -- has ever paid a dividend, and only AMZN has an long-dated, active share repurchase authorization -- NFLX announced a token $100 million authorization on March 6, but that's so small I ignore it. But AMZN hasn't bought back a share of stock in eight years.
So, you can put your capital out there and hope that other investors are willing to pay more for it later, or you can buy streams of cash flow and reinvest them yourself. I think you can guess what I would do.
Right now, the portfolio of my firm, Excelsior Capital Partners, is full to the brim (I am using as much leverage as my prime brokers will give me) with oil tanker companies (Nordic American Tankers (NAT) , Navios Maritime Acquisition Corporation (NNA) , and the preferred of Tsakos Energy (TNP) ) mortgage real estate investment trusts (preferreds of Armour Residential (ARR) ) and some energy infrastructure master limited partnerships (Antero Midstream (AM) , and Nustar Logi (NSS) .) On a leveraged basis, that portfolio yields nearly 20%. If that means that I don't deal with the machinations of fund managers who have long since ceased valuing companies in search of inscrutable, impossible-to-measure concepts like "disruption" and "sustainability," then so be it.
I can't go into all the details here owing to space concerns, but I model all the companies in which I invest and value their cash flows on a discounted basis. My motto is "cash flow never lies" and I base all my investing decisions on that ethos.
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