Note: this is NOT financial advice. Trading is risky and you can lose all of your money. THIS is HOW I scored a 36.4% win in 4 weeks on a stock that was distressed. This was a HIGH RISK/HIGH REWARD play, but the lessons here were about how I managed risks and exited on a target when things went south. This was not the 20x upside I’d hoped it would be for years – but you will find out at the end that it still has that potential down the road. After chapter 11 and restructuring, there may be an attractive price point which may get my attention for re-entry.
Note #2: I am not one of the high rollers you might follow on Twitter. This is about executing some side deals once or twice a month to get some extra income for us common people. This is a lesson I learned on managing risk I wanted to pass on.
I am a BIG gold and silver and miners guy – but in a period of time where I saw some chop and sideways movement, I pounced on an opportunity outside of the sector. Unfortunately, it did not moonshot as I had hoped, but I wanted to do a post mortem on my thinking and what happened. Hoping you can learn some lessons with risk management and making lemonade out of lemons.
First – the setup. WPG is Washington Prime Group. It is a mall REIT, something I felt a year ago would go the way of the VCR. I learned there are a lot of different KINDS of REITs, and this is one that I felt would tank due to a lot of the anchor stores going out of business and people now ordering online. Turns out I wasn’t wrong. The company has lost money the last year due to COVID and had $3.5b in debt. However, the balance sheet showed $500m in equity along with 24m shares fully diluted, or roughly $22 per share if taken apart. It was selling for $1.69. My buddy did a deep dive and said it was a high risk, high reward play in which the company can go bankrupt – but also there was a chance they escape bankruptcy due to the great Q1 results, leases getting signed, and everything opening back up. The missed a loan payment a few months ago which then triggered discussions about debt restructuring.
The play – try to avoid bankruptcy and stock moonshots, with yearly dividends up to $9. Get in early. If they avoid bankruptcy, on paper, it’s a $90 stock that used to pay out $9 per year in dividends. My buddy went for a similar play last year with PEI and got PAAAAAAAAAAAAAAAAAAAAAAAAID with the dividend play before selling the shares at a nice profit. Idea here was to accumulate shares at $2-4 and hold until $90 and get $9 per year dividends 1-3 years down the road. Or, if things go south – ensure profit taking on the way up occurred- IF it occurred.
How it turned out – ugly. Chapter 11, and on paper, it’s looking like the new equity set side for common stock is $20m for 24m shares. Ballpark it SEEMS they are setting aside $1 per share for common shares. The news was given on a Sunday, and with the share price in the $4 range after a sharp Friday sell off (where it was over $6 at one point), expectations were there that there was going to be a large amount of selling Monday morning. I noticed there was a MASSIVE short position on it, and I felt that once price bottoms, shorts may buy back and take the price up a bit. This is where they make THEIR profits.
What I did to turn a 36.4% profit in 4 weeks?
- Manage risk and dip my feet in to get a position. At $1.80 or so share price, I wanted to accumulate in stages. My buddy went in with 40,000 shares at about $2.20 per share. I am mostly invested in gold and silver miners and felt I’d take a “full” position” on this as a speculation using options first to capture any strong movements up. I bought 30 call options at $1.50 strike price for September at a cost of $1.09 per share option. The overall catalysts here would be “bad news” and go to bankruptcy, or “good news” and they avoid bankruptcy. I noticed the short position was 31%. I also did a deep dive and saw the $500m in equity for 24m shares. I know literally nothing about bankruptcy rules, but on paper, the company had a lot of assets that could be liquidated. So I started with 3000 shares controlled (30 options) for $3,270.
- Wait and be patient. If this was going to be a $90 share, it needed good news. There were delays after delays, and the speculation on the boards were that these delays were good in that they may be finding ways out of bankruptcy due to strong cash flows as malls were reopening and people were coming back. With each delay, more people bought, and this also created mini short squeezes.
- Execute taking profits on the way up. With high risk plays (like I so with gold/silver explorers) I HAVE to lock in profits on the way up by usually selling half of my position at a double. At one point, my options were worth like $4.20 each, or about 4x. One day it just ran hot on what looked to be a short squeeze of sort and while I did not immediately sell at 2x, I watched and was ready to have a limit sell at 2x on a retreat of the stock. It ran. I sold 7 of the 30 options for about what I had paid for all 30. Meaning, I sold 1/4th of my options for 4x profits. This gave me 23 FREE options. This is important to remember when doing high risk plays, that I locked in profits when I could.
- Build more on dips. When price went down to about $4.50 (I had sold options near $6 share price), I bought 2000 shares over a few days and bought 7 more options at like $3.60. I now had a position 2000 shares at a cost to me of $4.12 each for $9,460 and 30 options at a cost to me of $2,520 (remember, 23 of them were free, so the 7 I bought were at $3.60). My total cost now was $11,980 to control 5,000 shares. On a daily basis, my unrealized gains for this were insane. Eye popping!
- Evaluate risk – again. At this point, my risk of loss of capital was all of the options I paid for going to zero, which was $2,520 and 50% haircut on my 2000 shares at $4.73 each as I would consider selling at 50% loss. My stop losses are usually much tighter, but the volatility here was nuts and I didn’t want to get stopped out on a blip. So with this high risk play, I was looking potentially at 70% loss of the $12,000 – however, 23 of those options I got EARLY and even with really bad news, $1.50 strike price for these shares could have salvaged something. So let’s say my haircut downside was 50%. I took profits to mitigate a LOT of this risk. My upside take on this was potentially looking like a 16x with massive dividends yearly. Now, it was just a waiting game. Short position was still high, which factored into what happened next. With banking $3000 or so with the options and having a cost of $12,000, my total exposure of loss was $9000, so I was willing to lose $4500 in share price before bailing.
- Bad news – sell? On Sunday, the bad news came, and I felt there were going to be a lot of sellers just trying to catch a bid on something, anything. So far, my cost basis on controlling 5,000 shares was $2.39. That was my break even point, essentially – if I were to liquidate all. Obviously if I wanted to exercise the 3000 shares it would cost me another $4500. My point here was to potentially hold long term and wait out some bad news. I wanted to see if when price crashed if there would be people buying the dip OR perhaps lots of short sellers buying on these fire sales to replace what they shorted. If they were shorting hard at $4, $5, $6 then they were strong buyers at $2 and $3. This was a risk here, which I GAMBLED on. It paid off.
- SELL and Post mortem. Stock price crashed to $1.87 almost immediately Monday morning, lots of circuit breakers down, but buyers came back in. Price came up to over $4 and at $4.12 – touching $4.24. I liquidated everything on the way up at $4.12 as in my head I was seeing a ballpark 33% profit and jumped. My buddies sold earlier in the morning at $2.20 and I was thinking I might hold for a year. On the 2000 shares which I bought at $4.73, I ended up losing $1,220. However, on the options, I sold all of them for $2.70 each for a total sale of $8,100. My sale of the shares were $8,240. Total revenue on sales was $16,340. Total profit was $4,360 on $11,980 in – which is a 36.4% profit.
- Follow up and pounce later? Later in the day, the price went down to $3.04. I see this fading over the next few weeks to perhaps $1-$1.25. This is where they discussed the equity would be, and I feel there will be those who hold long term, but a lot of people who are bag holders who are selling to shorts, who are then turning around and selling having a massive profit. I love the idea of dividend stocks, and on the other side of this sell off, I’d like to see how this goes and perhaps buy my 5,000 shares back at $1 (plus another 5,000), costing me $5600 out of pocket (after the $4,360 profit). This would give me a $.56 per share cost on a stock 2-3 years from now might pay $1-$5 per year, per share, dividend. IF this does pay $1 per share, per year, in 6 months into the dividend I get my “seed” money back, doing nothing but taking $10,000-$50,000 per year for decades on a “free ride”. Considering this COULD be 20 years of $50,000 in dividends, there’s a million bucks!!
So – how can you potentially turn $2,000 into a million? I think there’s a lot of people out there that know what they are doing. I have been making trades here and there for about 15 months and making a few thousand a month on good months for side money. I got a little lucky with this, and I’m not ignorant of this fact. However, the point here was it was about managing risk, executing a plan, taking profits, and capitalizing on momentum where I could on a high risk play. A play was identified and I was able to take profits on the way up to minimize downside risk. Bad news happened, and I was able to sell off for a nice gain.
Right now, I have bought a book on dividend stocks and plan to read that. I’ve watched some videos online of REIT plays, but I’m also not confident my money wouldn’t go to zero – some of these were tanker stocks which soared after the -$37 oil, but unclear the market today for this. I’m going to do a deep dive on some others and see what else is out there. I took this profit and rolled it into a play presented by the silver chartist on a mid-sized gold producer with a very attractive entry point. A breakout on gold could take this to a 30% score quickly. My HOPE is by the time this gets the 30% target that WPG is down to $1-$1.50 and I can buy back in using profits of this and the profits of the first WPG score to get 10,000 shares for about $2,000 out of pocket. That’s $.20 a share!
Trading isn’t always about “where lambo??”. If you can get 25-40% on short term deals, take it. It adds up over time, and I tend to use profits to fund my next plays.
And 90-95% of my portfolio is longer hold, with perhaps 5-10% at times used for trading. BE CAREFUL!
With my expectations of a 10-20% downside stock move coming at some point, it’s important to keep your eyes out for some deals that could come your way. Things I’m looking at AFTER gold and silver make a nice move?
- oil stocks
- REITs (medical and data centers?) for dividends
- copper (too hot right now, I think this will cool off before rising through 2030)
- battery metals (2022)
- uranium – I was in on some uranium, but it didn’t move. I moved it to gold/silver, which declined and uranium stocks shot up. Whiffed. I feel a strong pullback is coming before a launch up. Cameco buying stockpiles and using that to fulfill contracts is exciting! I still feel this is a 2022 play for me, but may want to start some small positions in the big ones soon. I’m in with CCJ on my son’s portfolio and that more than doubled.
Idea potentially is to get some strong wins with gold and silver and when RSIs are super hot, trim positions by 10% and put into some of the above. Roll 50% of trade wins into these. Build gradual positions all through 2022.
June 15, 2021 at 1:11 pm
Nice one Nate!👍
If silver gets to $50, do you think you would sell and take profits? However, if silver goes up quickly and looks as though it might go beyond $50, what would be your strategy then?