Betting Against CSX?

CSX Corp. (NASDAQ: CSX) is a relatively easy business to understand. Ever play Monopoly and buy up all the railroads? CSX is in the business of transporting goods via train on its vast network of track in the eastern United States. Around 21,000 route miles of track in 23 states, and extending into parts of Canada. Not too difficult to understand what’s going on here, but why am I looking at CSX?

A few of my latest posts have been about looking for something to short (via put options). The problem is, while the market jumped to all-time highs (or near all-time highs depending on what index you favor) after Trump’s victory, the things I’ve considered betting against haven’t done that well. Which would be fine if I HAD bet against them, but I haven’t yet. I was, and still am, waiting for higher stock prices to buy my puts against. So I got to thinking, what WAS making new 52-week highs lately. To my surprise, CSX was on the list. I’ve never seriously looked at the railroads before, but I’m always reading about what’s going on in the market. For the longest time I’d heard about how the rails were hurting because of the decline in coal shipments. Coal is some pretty nasty stuff, and apparently we aren’t going to be using as much of it going forward. So why is CSX on the new high list?

On November 9th, CSX presented at Baird’s 2016 Industrial Conference, laying out its long-term strategy and updating its fourth quarter 2016 guidance. Now, keep in mind that as I write this, the stock is at a 52-week high of about $34.60, and the highest it’s EVER been was $37.99 in late 2014. Here’s one piece of what was said during the presentation. (It’s available via webcast online, and is highly recommended)

In the fourth quarter, they expect an 8 cent EPS impact from costs associated with refinancing near term debt. The company expects earnings to reflect prior guidance of flat to slightly down, if you EXCLUDE the 8 cent hit. So here’s how I see this. It’s going to cost them 8 cents a share to refinance their debt, which will obviously mean that their EPS isn’t going to be as good. But if that hadn’t happened, their earnings would be consistent with prior guidance. (Similar or perhaps down a little from last year) Does that sound like a company that should be on the 52-week high list? ‘Oh yeah, it’s gonna cost us to repackage this near-term debt, but if we didn’t have to do that, we’d make the same or a little less than this time last year.’ Hummmm…

They also talked about transitioning away from coal, toward more service-sensitive and international markets. There was talk of the CSX of Tomorrow, but not a lot of detail on it. They did estimate that over the past 5 years they’ve lost $2 billion in revenue due to the decline in coal, and they weren’t too hopeful about a near term recovery.

They did, however, talk about cost cutting and efficiencies. Train length has grown 20% since 2014. They talked about reduced labor, fuel efficiency, technology, predicitive analytics, etc… Over the past few years revenue has stalled, as well as earnings, but cost cutting and efficiency improvements are going to lead the way? Does that sound like a company that should be on the 52-week high list? Ok, so I’m a little skeptical.

I listened to their Q3 earnings call, held in October, and wow. Revenue declines (8% vs prior year!), earnings declines, volume declines, coal declines… Just like the Baird Industrial Conference, there was a lot of talk about efficiency. Here are a few snippets from the call. I would encourage anyone interested to listen to the call to get the full picture of what’s going on.

“…we continue to see a soft but stabilizing industrial economy with volume down year-over-year…”

“…Chemicals will be down with continued weakness in drilling related products, especially crude oil due to low crude oil prices and unfavorable spreads…”

“…Domestic coal will again be down, however, in the fourth quarter we will cycle the start of the pronounced market weakness, which took hold in the fourth quarter last year…”

There were a few points where they talked about upcoming easier comps for specific business metrics, which I took to mean that in the past things looked so bad that their current mediocre forecasts look almost good.

Ok, I’m obviously focusing on the negative here. They talked about positive things as well. But most of the ‘good’ were cost and operational efficiency improvements, things that any company should be focused on all the time. It seems to me that the market has priced in a strong near term recovery in CSX, a recovery that I just don’t see evidence of. I believe if the company falters, or if the overall market does, this stock will be hit hard. Very hard.

What are the risks? Well, it sounds like CSX is working hard on these efficiency improvements. What if the economy takes off? What if they get a lot of business? They could earn a ton of money if they generate more revenue. It could happen. I have an order in betting it doesn’t.

As always, feel free to look at my portfolio and see how I’m doing. Usually I own or plan to own stock in many of the companies I write about. Specific numbers I reference may not be completely accurate; different online financial sources often have somewhat conflicting information. Verify information via multiple sources you trust. Please READ MY DISCLAIMER. Make your own decisions, do your own research, and never rely on any single source for information. I am not a financial professional; do not rely on me as such.

Thank you,
Michael, the Stock Picking Bartender,

Reno, Nevada

All Options are on the Table

All options are on the table! WOOOT!!!! But what do I mean by that? As those of you who’ve been following my adventures in the stock market know, I’m currently very cautious when it comes to the market overall. To be clear, I actually think it will make new highs from here, so I’m not calling ‘the top’ or anything. I don’t claim to be that good.

Within the last several weeks I’ve sold most of my stock (for some very good profit), and I’m about 75% in cash. But here’s the thing, there are companies out there that I like, that are close to levels where I’d like to start a position. But what if it turns out that I’m right, and the market has a large correction sometime in the next 12 months? Well then, I’ll just buy MORE as they go down. It’s been working for me so far. But what about an additional strategy?

Via put options on stocks that I believe are overvalued, I can profit from their decline. (Here’s an Investopedia article about the basics of options.)  I can buy significantly out of the money put options that are good for ‘long’ periods, even over 12 months. If I’m right, I can make a significant amount of money by only investing a small amount upfront.

If the market tanks, these options could potentially act as a hedge against going long in the stocks I’m considering buying. If the market moves sideways, it’ll just be good old-fashion stockpicking: what am I ‘long’ versus what am I ‘short’? If the market keeps going up… well, I don’t plan on spending a ton on options, but I’ll likely lose most, if not all, of the option investments.

The GOOD: Options are relatively cheap versus the number of shares they can ‘control’. Some big money is possible using only a small investment. Shorting stocks directly is dangerous and I don’t ever plan to try it, while options only risk the amount of money invested.

The BAD: You have to be right with your timing to make money in options, even long term ones. Options lose money over time, all else being equal. Why invest in something like that? Am I THAT good?

The UGLY: What if I’m just getting cocky because of my market trouncing performance so far? What if I’m getting too fancy, too big for my britches? Options, hedges… etc. I’m just an amateur, what am I doing playing with options? I could lose my shirt. Shouldn’t I simply stick with what I’ve been good at so far? I could blow 10% of my portfolio on options that expire worthless, and still be beating the heck out of the market… but should I take the risk?

I’ll admit that when I use terms like ‘hedging’, I start to think I’ve read too many investment books. (It’s a favorite pastime of mine) So I’m aware of the vast potential for hubris here. I plan on fighting these propensities by remaining small in the options game, and not be in a hurry. I don’t think the market is going to crash tomorrow, so I can take my time. I am fully aware that options are high risk, and most people who buy out of the money options tend to regret it. I could very well end up being one of those people, but I’m planning on giving it a try with a small amount of money.

What companies do I feel have the potential to become overvalued if the market pulls them significantly higher? I’m thinking about some of the companies I’ve made money on in the past.

Energy Transfer Equity (NYSE: ETE) was good to me on the long side, with a 222% gain over 7 months. I sold it last month, and am happy I did. If it shot up to the mid $20’s I might buy some puts. It’s had a GREAT run, but the dividend is far from assured.

Ambarella Inc. (NASDAQ: AMBA) was a good investment as well, up 70% over about the same time period as ETE. I still like the company long term, but if it shot way up from here I’d consider some puts. But then, if it tanked from here I’d be a buyer.

I haven’t talked about Mattel Inc. (NASDAQ: MAT) in awhile. It was good for a 43% gain when I sold it in February after holding it about 6 months. It hasn’t done much since, but the valuation seems high, in my opinion. The dividend is far from assured, and any stumble in the turnaround story could send the stock down. A rally on little news might be a good opportunity to take the other side.

Simply because I’ve sold these companies doesn’t mean that I’ve stopped following them. At some point I hope to buy them again at lower levels, but now I’m considering expanding the tools at my disposal. At this point these are just some ideas I’m kicking around, not hard plans, but you can see my thinking. As I stated above, I believe the market is headed higher in the very near term, despite the negativity of the past several trading days. If I’m right, that might be the perfect time to try my hand at puts.

As always, feel free to look at my portfolio and see how I’m doing. Usually I own or plan to own stock in many of the companies I write about. Specific numbers I reference may not be completely accurate; different online financial sources often have somewhat conflicting information. Verify information via multiple sources you trust. Please READ MY DISCLAIMER. Make your own decisions, do your own research, and never rely on any single source for information. I am not a financial professional; do not rely on me as such.

Thank you,
Michael, the Stock Picking Bartender,

Reno, Nevada