Author: Mark Holder, Stone Fox Capital
Covestor model: Opportunistic Arbitrage, Opportunistic Arbitrage Long Only and Net Payout Yields
Disclosure: Long CCIH, LIWA, LIZ, GFA, FWLT, RIGL, RVBD, FCX, IBN
The Opportunistic Arbitrage model had another rough month, down 10.45% while the S&P 500 dropped 1.83% and the S&P 400 Midcap Index fell 2.16%. The model was again hit by fraud concerns among Chinese companies and emerging markets stocks fell due to concerns over inflation, pulling down growth.
Over the 29 months of this model since inception, it has had numerous large swings. Unfortunately, some cases were to the downside. In those cases the stock holdings became more attractive in the process. Even with China fraud scares, the three relevant stocks owned in this model appear to me to be worth more than our original purchase prices.
The size of declines in some of the stocks in this model caught us off guard. It didn’t surprise us that June was weak, but the level of weakness in several sectors such as industrials and emerging markets such as China did catch us off guard.
Bottom Performers
The bottom performers were again lead by the China stocks in the model. ChinaCache International (NASDAQ: CCIH) and Lihua International (NASDAQ: LIWA) were both down sharply. The extreme weakness in CCIH caught us completely off guard. The company is the leading content delivery network (CDN) provider in China – think the Akamai (NASDAQ: AKAM) of China. The stock has dropped from a post IPO high of $35 during November 2010 to $6.40 during June. Somehow this IPO got caught up in the reverse merger scare and now I believe provides one of the best growth opportunities around, given its growth and valuation.
LIWA, on the other hand, offers a solid play on the demand for recycling copper and producing copper products in China. While no legitimate fraud accusation has ever been brought against LIWA, the stock has suffered alongside all the other China plays. LIWA hit a low in June. The sector appears to have hit a tipping point during that month as the fear matched that of the financial crisis in the US during March 2009.
The risk remains that something under the surface exists that could take down these two stocks, but every day that passes increases the odds that both companies are legitimate businesses.
Other weak stocks this month were Liz Claiborne (NYSE: LIZ), Gafisa (NYSE: GFA), and Foster Wheeler (NASDAQ: FWLT). Both GFA and FWLT suffered from a fear that China and emerging markets would slow down, resulting in less demand for their goods. LIZ on the other hand is a turnaround play on women’s apparel that would suffer if the US entered another recession.
Top Performers
Rigel Pharma (NASDAQ: RIGL) was the only significant gainer, but its strong gain was not nearly enough to offset the major losses. No real news on the stock, but it recently hit 52 week highs, possibly on speculation that its new arthritis drug will have successful Phase III results. Riverbed Tech (NASDAQ: RVBD), Freeport-McMoRan Copper (NYSE: FCX), and ICICI Bank (NYSE: IBN) all had decent gains as well.
Conclusion
The model remains fully invested as we see significant growth opportunities once the emerging market inflation fear peaks and the European debt crisis passes. Both could possibly happen during July, or take several more months.
Sources:
Price data from Yahoo Finance, http://finance.yahoo.com
