Last Friday, news surfaced that forced liquidation of at least one large leveraged Asian hedge fund, forced block sales in several media companies and Chinese ADRs including:
Typically, there is always some collateral damage following these types of intense moves that are lower on heavy volume with some of the names above down more than 50% from their highs just a week ago. At the extreme end, in 1998, the failure of the highly levered hedge fund, Long-Term Capital Management almost caused a collapse in the financial system before an organized rescue by the Federal Reserve.
As a result of the large moves lower caused by this forced liquidation, we started nibbling on a few of the names above on Friday (3/26) with the knowledge that there was the possibility of contagion during this upcoming week. More forced liquidations might give us even better prices to fill out our positions.
For risk management, we also shorted the S&P to hedge these positions given the 1.7% upward move on Friday, despite the large moves downwards in these individual names and related securities during the week.
Viacom ($VIAC) is a name that we mentioned on 9/25/20. The stock was at $30. We thought the stock could rerate higher based on their ramping streaming business.
“VIACOMCBS, AN UNDER THE RADAR, DEFENSIVE PLAY ON VIDEO STREAMING”
However, as the stock ramped for a variety of reasons over the past six months, we sold the stock and tried to put that money into names in under-appreciated sectors such as energy and financial.
Viacom intelligently fortified their balance sheet by raising $3B in capital when the stock reached an all-time record high on 3/24/21. Viacom’s stock has now declined from $100 on 3/24/21 in just 4 trading days to $48 on Friday. As a result, we started nibbling on this name along with a couple of others.
In terms of fundamentals, Viacom should see their advertising revenues continue to recover if GDP growth improves to ~7% in 2021. In addition, their streaming business should continue to thrive as more households adopt multiple streaming services beyond Netflix. In terms of risk, the pandemic accelerated cord-cutting, but with the stock now trading at a price to earnings ratio of 11x 2021 EPS compared to the S&P at 23x, the risk to reward to owning the name should be favorable again.
Our goal for this next week would be to add to this position (and others) if weakening persists while hedging these positions with additional shorts.