Renaissancemen.org

I was recently asked by a friend for a project to analyze snapchat and Fortuna for how I might play these in the short term. Meaning, this is NOT financial advice. I am NOT a professional trader as I have a job in another industry – but like many of you, am an investor in these markets and want to seek out thoughts and opinions from people. FinTwit can be a mean and nasty place, and if you make certain calls and are wrong, the trolls have a strong game. I’d much rather use the lense of probability by looking at fundamentals to see where things are LIKELY to go. Meaning, I have no crystal ball.

I’m going to look at a lot of different things that drive these, and not just charts. I love charts, but you can see they are only a fraction of what I use. I use financial statements too – but you all know how Tesla at 300+ P/E ratio makes no sense. We can look also at underlying market fundamentals for their industries as well as drivers in the headlines which can affect the prices.

Part of what I want to do is bridge that gap between those in the know, and those who are at the very amateur level. So, please use this as a form of education, and not investment advice. There are CPAs who would love to spend a day doing cash flow analysis with you to make your eyes bleed. That’s not me. I’m trying to take the most important factors I can here to let you know what I am looking at.

Snapchat

$SNAP – at a glance

Sector – tech

P/E ratio- 2818x (first quarter being positive)

Price to cash flow – 1131x

Mkt cap – $62b

52wk range – $24 – $83

The tech company competes in the space with Facebook, Twitter, TikTok, etc. In the chart above, I noticed some gaps I wanted to understand, and try to compare its performance to an underlying market/index.

• The red circle is a major gap down on 10/22/2021 due to a privacy issue that Apple fixed that had hindered the ad revenue of the stock. By Apple blocking this feature, it hindered ad revenue by keeping metrics private.
• The green circle gap up contains a gap DOWN from 2 days ago, followed by a gap up yesterday. Facebook stock tanked 20% and took down the sector.
• In the gap down, Snapchat agreed with Facebook that TikTok is the future – which then flies in the face of the gap up.
• Snap also just announced it made a profit for the first time. While official numbers on Yahoo aren’t out, you can see $22m in profit against a $62b market cap give this a 2,818 P/E ratio
• If you to a price to cash flow ratio, you see an 1131x.
• Can see resistance at $39, $42.50, $43.50, $49.
• Support just hit at $35 with 20dma.
• In April, the privacy issue was announced with iPhone updates and you can see it generally underperforming the Nasdaq since then.
• Around the time of the gap down, the Nasdaq launched higher
• General tech sector weakness now here and this may mute higher prices with SNAP.

IF SNAP trades along with the FAANG and Nasdaq, you can see how this went 4x in 5 years, before recent correction started. You can see how the FAANG+MSFT make up about half of the market cap. And, that market cap is now somewhere around $30T.

Short term drivers – while SNAP made a profit for the first time (it seems), the entire sector looks primed for a blood bath of sorts. It’s possible the “correction” is over and we go higher, but with rates rising soon and the Fed continuing to be hawkish, you can see a storm brewing where a risk off scenario plays out inside of 2 months.

You could see where there is a momentum play here for the stock and it gain traction in a falling sector, but you have to wonder how many different funds is this thing in that are tied to the general sector? So, if people are selling QQQ to go risk off, SNAP earnings may not mean a lot. No idea how many ETFs or funds are at play that have them in their holdings as well.

X-factor – I took a look at volume, and it was insane on buy. Ten times avg volume. Smells of a short squeeze. Are there more buyers? Are there die hard SNAP people out there?

The volume there AFTER large volumes of selling the day before could have been a short squeeze. I don’t short things, as you can have “infinite” losses. But if all of the shorts have been covered, this rocket ship might peter out. You can see that quarter by quarter they have been decreasing their losses to finally making a gain, but this sector right now I’d stay the hell away from. Maybe you get a few days/weeks positive with a momentum play, but to me I think there may be some profit taking near term to support at $35.

I would watch this for a week and do nothing and let the dust settle. If you had a gun to my head to play this Monday, I’d play some 60 day puts with expectations to be down 25% before getting a nice pay day on sector sell off. Because of the high levels of volatility, tight stop losses can get destroyed on any momentum play. My risk tolerance is much higher than yours.

On etrade – analysts are all over the place – but 2 of the 3 buys are older data.

So IF I were to buy puts here, I’m looking at perhaps a $35 strike price at $2.50 to play a short term down move this week which may come back to $35. Resistance might hold there and it’s possible March 18th this thing closes right around $35. However, I’m expecting rate hikes to hit and punish tech harder than other sectors. Perhaps rate hikes are priced in now, but I think the 4x in the Nasdaq in 5 years in a super bullish market is going to get spanked harder than others. Barely profitable and not profitable stocks may be the first to get culled with the herd.

The $2.50 here last for the $35 strike means that on March 18th, if this finishes below $32.50, I make money on it – and if the closing is $30, that means I made $2.50 on each or doubled my money. Now, options guys like Chris Marcus may be able to talk you through iron bird condor falcon trap strategies (kidding here), but for the common and casual investor the question is – how do I play this in a way I can understand?

So one of these puts would cost $2.50 x 100 (one hundred shares in a contract) = $250. For a trade, I might buy 10 of these for $2,500. I’d probably cut my losses here at 25% or $1.85ish as there may be more buys to pile in on the momentum before it fades. It’s possible you get some hard selling and we get to $35 by Tuesday. I’m probably looking at a 75% upside and 25% downside – which I usually wouldn’t trade at a 3:1 – too much downside risk. Also, you could say now that they are making a profit, they should continue upward. But at a 2,818 P/E ratio, I’d hardly consider that moving the dial for bullish profits, especially in a fading economy. I picked March 18th – as I felt if you have a 10-20% loss, when rates move up, you might be able to make it back and profit then. That’s how I hedged some of this downside risk – by buying time. I don’t like the time decay at 5-6 weeks out so ideally I’d try and get rid of these by mid week with a sharp move down.

You could make the bet that the Nasdaq is due for a bounce and bounced off of the 400 dma. I am bearish on the tech sector for the underlying macros, and with this, I’d lean towards buying puts on SNAP. Personally, I’d wait a week for the dust to settle here first if you do not like volatility, but immediately you may have some selling from that massive rally to get you 20-30% profit in one day Monday. Professional traders who bought hard at that $24 may be looking to get out in a 30% win in a day and move on. A 58% move in a day BEGS to be sold into. It may hit $35 and bounce up from there. If the stock hits $36, I’m out as I could have just made serious scratch and not try and call the bottom at $35.

Fortuna Silver Mines

I’ve written extensively about them and I can point you to a bunch of blog posts about them. They’ve had some short-term struggles, but these guys I’m super bullish on long term. My entire portfolio is about to be built on them and EXK for 5 year holds. However, let’s walk through the same analysis from above to unpack this stock to see how we might play some shorter term trades.

$FSM- at a glance

Sector – mining/precious metals

P/E ratio- 11.45x

Price to cash flow – 6.44

Mkt cap – $945m

52wk range – $2.91 to $8.52

Unlike SNAP who was a not profitable company turning profits for the first time, FSM has seen declining earnings the previous 4 years.

I believe that trend is changing, as they just had record AuEq production for the year. Fortuna SILVER mines has moved to a 27% silver production – mostly producing gold. That mirrors a move of PAAS and AG has steadily moved down their silver ratio as it has been hard to be a primarily silver producer these days.

So – with this, FSM tracks closely to gold, and is part of GDX and GDXJ.

Let’s look at FSM price compared to the movements of GDXJ.

You can see a correlation, with at times GDXJ outperforming FSM, then short periods where FSM outperforms GDXJ.

So with this, let me compare the ratio of GDXJ to FSM. You can see it is at a high, where going way back FSM may not been a part of GDXJ. However, you can see an oscillation to where it is now undervalued RELATIVE to GDXJ.

We then know GDXJ has a relationship with gold. What you can see with that spike in the middle was March 2020, when miners sold off harder than gold, and then snapped back with a vengeance to August 2020 or so. The miners continued to outperform gold until early 2021. Since then, gold has significantly outperformed the miners. IF there is a March 2020 event to happen, sure, the miners will sell off harder than gold, but it’s ALREADY at a low. Can it go lower? Yes.

So we have some layers here….

• If gold price goes up, GDXJ should go up. It has been lagging gold, and due to outperform gold.

• If GDXJ goes up, FSM also will go up, but it has been undervalued relative to GDXJ, so this has torque to move higher than its peers in GDXJ.

There have been news items the past 6 months that have dinged the value of FSM.

• Peru elections happened and put in a far leftist. Rhetoric spooked any mining stock in Peru. A few months later, the rhetoric subsided and Peru stocks started to rebound.
• Just as a recovery was happening with FSM, they got news a mine in Mexico (San Jose) was losing its environmental permit. The stock tanked, and a week later the sector came under significant pressure. No operations ceased, and mining continued.
• 5 weeks later the president of Mexico intervened and Fortuna was granted a 12 year extension to the mine, although it was near end of life for 2-3 years out.
• Last week, a worker was killed and a coup d’etat happened in Burkina Faso where one of their gold mines are.
• This week, SEMARNAT stated they gave FSM a 2 year extension to San Jose and not a 12 year extension has had been reported. As some miners had a small gain yesterday, FSM lost 1%. Truthfully, it never recovered the $1.52 it lost when the permit was revoked, so there wasn’t much downside there. The company is seeking clarification, as all of their documents stated 12 year extensions, which were approved – SEMARNAT claiming a “typo” on their end. More drama has hung over this mine.

When this crisis happened, silver $25.23 and gold was $1865. One can make an argument that if these prices are reached again, FSM should be back to $5.52. So I’d like to take a look at gold and silver prices.

Last Friday, I made a comment that I felt the DXY was headed downward due to RSI and overbought conditions.

We did have a bit of bounce in gold – but not a ton, as the 10yr put in some headwinds. Gold closed over its 200dma which I really liked.

As you could see – the DXY moved to the bottom of the channel. It may have a bounce this week.

Bigger picture with gold, I’m watching a 200/400 death cross and potentially soon to be golden cross. To me, this shows the strong move up with the 200 skying high above the 400, then the consolidation is OVER at the 200/400 death cross.

Once the consolidation is over, the question then is – Is this price shelf justified? IF the 200/400 cross again in the next few weeks, that is SUPER BULLISH to me as it indicates that the price shelf is confirmed. Right now the 400dma is at…$1829. The .23 fib retracement? At $1830.

Now, we have rates starting up in a month or so to be increased possibly .25. In a 7%+ inflation environment and stalling economy. Right. Anyhow, I do NOT think the Fed Funds rate is bullish for gold, as some have said. RATHER – as these rates rise, you get sell offs and rotation into risk off, which pushes the 10yr down. So rather than track the gold to DXY the next month, I’m watching the gold to 10yr.

The chart above shows the last time we raised rates. Look at the bottom in green and you can see the 10yr falling was what launched gold.

10yr now at 1.9 or so. Could it get to 2? We could see a lower touch to the triangle on gold this week if the 10yr goes up more. Eyeballing this, you are talking a low this week of maybe $1780. IF the 10yr keeps going up.

However, miners are really beaten down versus gold, and they could be anticipating a market sell off. Well, perhaps Nasdaq corrects more than others? Below, take a look at the Nasdaq to GDXJ on the monthly chart

This shows this is near all time highs. So if the Nasdaq does sell off, the bet is that GDXJ will sell off far less, or even gain – thus reducing this ratio.

If you compare the Nasdaq to gold since gold entered its bull market, you can see there are times where it is positively and negatively correlated. Look in March 2020 when stocks were hammered, gold dipped, but not as much. What this CLEARLY shows is money chasing stocks from August 2020 on where money has left gold. Recently, you can see a correction with the Nasdaq – but where has that money gone? Michael Oliver discusses a long, drawn out arm wrestling match.

OK – so I made the case that FSM is tied to GDXJ and GDXJ is tied to gold – and all of these things are due to outperform.

Short term IF gold can get over $1830 and create a golden cross, gold, GDXJ, and all stocks will launch into orbit. Most may get in around $1880, but once this golden cross confirms that price shelf – look what happened in 2009. The second that 200/400 golden cross happened, all hell broke loose to the upside.

Now, on the flip side here we have the potential to break down from the triangle. If $1780 or so falls, we have super strong resistance at $1675. The GOOD news here is that GDXJ and these stocks are priced for gold at $1500 already. If you look at FSM, it has the same price it has had when gold was $1250-$1400.

FSM developments that are overlooked:

1. The San Jose mine had a few years left of life and is a silver mine. With the Roxgold acquisition, FSM is super strong with gold. By next summer, they will have a new mine in the Ivory coast operating to take them to a 500k AuEq producer.
2. Peers are trading at 24x Pe and 2-3x mkt cap. IF FSM was valued at peers, you are looking at a $7-$10 stock price, TODAY.
3. The environmental permit was re-instated and no revenue was lost.
4. Record gold equivalent production for the year
5. Exploration project in Africa had 20g x 18m recently. Great exploration potential.

How I am playing FSM – I was playing them with a mix of short term and longer term options. I was burned on the short term ones because as the market recovered, the $1.52 lost in the smash was never recovered, and sitting there ready to be grabbed.

Short term options…

If I’m looking at Feb 18th, I know around that time of the month they start smashing metals. Well, it’s also the date of monthly shares options expiration this month.

While I’m seeing $.04 for the $4.00, I don’t see FSM overcoming the $4 price inside of 2 weeks. Furthermore, the overhang that the recent news article puts on the stock, it might have limited upside. What I’m waiting for is an “ok” before this stock launches. There was only 2-3 years or so of mine life left on San Jose. My guess is they wanted to extend the mine out a bit and keep it going for another 10 years as CapEx to start new mines is expensive.

This chart is UGLY, but as a contrarian here, this is where I want to load up and dollar cost average in. Could they have speed bumps in the next few weeks? Sure. Are the undervalued to peers? Dear god yes.

IF I’m doing a ST play on FSM, I’m opting for the $3 strike on Feb 18th – I’d probably put in a stink bid for $.20 or put in at $.25 on any weakness. This stock is literally below every moving average and making record gold numbers. It’s beaten up, hated – and a quality stock. I’m buying as much as humanly possible.

The $4 strike is interesting – but I think has a high probability of expiring worthless. Still, it might be worth it to perhaps buy some contracts here.

If you buy a $4 strike for .04, you are looking at $4.00 a contract. $.04 x 100 = $4.00. Buying 100 contracts gets you a price of $400. 100 contracts is exposure to 10,000 shares.

If you buy the $3 strike for $.25, that is $25 a contract or 4 for $100. At $2,000 you can buy 80 contracts – or exposure to 8,000 shares.

If price can recover to $3.50, that gets you a 100% return the $3 strike price contract from $2,000 to $4,000. You can sell 40 of the contracts for you initial $2,000 in and sell 10 more contracts for $500 to pay for your $4 strikes. Let the other 30 contracts of $3 strike ride.

FSM LT

My preference here for FSM is to play this for Jan 2023.

A $2 strike price here is priced at $1.51. You are ITM when price hits $3.51. But, I prefer to try and double my money when possible on calls. Here, I’d look hard at the $1.02 for $3 strike price, meaning you break even at $4.02 and double your money at $5.04.

I’d also add the $5 strike here for $.50 as this is then suggesting a $5.50 price to break even and a $6.00 price doubles your money, but you can get twice as many contracts. Most of what I have that is not shares is in the Jun 2022 and Jan 2023 for $3 and $4 strikes.

I feel gold should get a strong move up in H1 2022. With that, all gold stocks should rise. With that, there will be interest in trying value within these stocks – when then leads most to find FSM.

With a $2000 gold price and GDXJ/GDX humming, AND FSM starting to be priced closer to its peers, it has an interesting chance to be a $10 stock by end of summer.

You can see in this green trading band that FSM traded between $6-$8 for a year, PRIOR to getting any gold from Roxgold OR Lindero.

At $2300-$2500 gold, with the new mine coming online next year in the Ivory Coast, this could be a $20 stock that explodes up and trades like an electric junior miner.

Lots of risk short term with options, but massive upside with longer term options. I’m seriously considering throwing a few hundred dollars in options at the $10, $12, and $15 options when I get my next paycheck.

The $10 options are $.14 each, or $14 a contract, or 7 for $100. That’s access to 700 shares for $100 price. For every $1 over $10.14, you make 7x. So $100 gets you $700 if price is $11.14. If price hits $20, that is 70x. So $100 gets you $7,000. I may put in some bids for $.10 on $10, up to $300. That could be a 100x at $20 FSM. That’s a $30,000 payout on $300. The problem is, most don’t hold the whole time, they sell them off.

The problem here, mostly is – WHEN will all of this launch into orbit? Options can be fun to play, but the house usually wins these things, remember that.

Conclusion

IF we get a sector rotation out of tech and into risk off, gold can indeed see the $2500 price tag inside of 18 months. More likely may be $2200 by end of year. IF that happens, we are likely to see the gold stocks trade like tech stocks, with junior gold producers having higher leverage with the price. You may have some of these juniors doubling or tripling their market caps due to stupid profits – meanwhile, those undervalued could see a massive move up with torque.

$20 may sound like a stupid high price for Fortuna. Let’s consider this. IF they are compared to a 500k AuEq peer NOW, they could be a 3x. That takes them to $10. AT $1800 gold. With $2200 gold, you may see the GDX/GDXJ trading high relative to gold and outperforming gold by a LOT. Meaning, many of these could be at a 35-50x P/E ratio as these start trading like tech stocks and getting bloated. Remember, the price of gold doesn’t have to double for a company value to double.

If a gold company produces gold at $1200 and gold is $1800, then that’s $600 profit. If gold moves to $2200, you then are potentially going from $600 to $1000 profit, or 67% higher earnings. It might not be unreasonable for these to get priced anticipating $2400-$2500 gold, which gives them a double PE ratio than now. IF FSM has a fair value potentially now at $3b, it could see the mkt cap reach $6b. Or, 6x from here.

Short term options can be profitable, but carry substantial risks. Understanding the underlying markets may then have you potentially looking at outside the money options further out to get that same type of movement you may get with cheaper ST options.