WASHINGTON, February 25, 2014 – Strange doings on Wall Street today. This morning’s trading action is a little difficult to parse. Averages are up a few points, then down a few points, then sideways a few points. The market is likely stepping back to take a look at the latest burst of irrational exuberance, even as the latest “arctic vortex” whisks its way from the nearly totally frozen Great Lakes through the hapless East Coast which can’t get a break from the cold.
Meanwhile, brokers are collecting plenty of commissions, while portfolios, at least today, are stuck in neutral save for some back and forth fussing by gold bugs who have to deal with precious metals options expirations today—something we’ll get back to in a minute.
This aimless action, perhaps inspired a bit by the more or less end of earnings season reporting as well as the absence of lots of big data, is difficult to describe. But a short entry yesterday in Jesse’s Café Américain—a gold and silver and social-justice-centric website we often consult—seemed to catch the spirit of the moment by referencing a witty passage from Lewis Carroll’s “Alice’s Adventures in Wonderland” describing Alice’s encounter with the Mad Hatter’s tea party:
“The table was a large one, but the three were all crowded together at one corner of it: ‘No room! No room!’ they cried out when they saw Alice coming.
“‘There’s plenty of room!’ said Alice indignantly, and she sat down in a large arm-chair at one end of the table.”
“‘Have some wine,’ the March Hare said in an encouraging tone.
“Alice looked all round the table, but there was nothing on it but tea. ‘I don’t see any wine,’ she remarked.
“‘There isn’t any,’ said the March Hare.
“‘Then it wasn’t very civil of you to offer it,’ said Alice angrily.”
And no, this isn’t a political reference by either Jesse or the Maven. Lewis Carroll came after the Boston Tea Party and was dead and buried long before our current Tea Party suddenly burst into existence, inspired by CNBC commentator Rick Santelli’s now-immortal rant.
Jesse is referencing instead the sloppy action of the precious metals going into the aforementioned options expiration period for futures contracts. The nonsensical passage above captures the essential feel of today’s trading action.
We freely admit that, like Alice we’re confused and pretty irritated at the irrational nonsense that’s masquerading as something entirely normal on the surface. It’s hard to make investment decisions in an environment like this one. But we’ll give it a shot.
Today’s trading tips
We’re doing little if anything today in our portfolios. Since the market has tended to be interested in red ink this morning, we’ve used that moment to retire our bearish hedge position in bearish ETF HDGE, having lost a bit on it in the end, but leaving with no regrets. The hedge protected our overall position in the market when things looked really bad a couple of weeks ago.
On the other hand, last night and again this morning, we added to our positions in modest-sized telco Frontier Communications (FTR) after it reported essentially inline earnings with a positive forward spin. It’s an inexpensive stock in dollar terms, so you can pick up a fair bit of it for notta lotta money as they still say in New York.
Why would you want to join the Maven in this position? The rationale is simple. While the stock is a bit speculative, Frontier has managed to digest a huge acquisition of Verizon (VZ) local service customers it acquired—something of a wasting asset these days—without going belly up like fellow small telco FairPoint Communications (FRP) did a few years back.
FRP eventually filed for bankruptcy after Verizon conned them into vastly overpaying for a similar batch of rural and small urban customers the telecom giant no longer wanted to bother with. FairPoint has since re-emerged much healthier and minus a boatload of crushing debt. But the damage will be hard to recover from in the long term, and most investors are still suspicious of the new stock.
Frontier on the other hand seems to have learned from FRP’s mistake and likely cut a better bargain with VZ. In any event, by all accounts, they’ve massively improved Verizon’s lousy service record, particularly in their newly acquired West Virginia territory (where the Maven is actually a part-time customer). They’ve maintained a pretty good cash flow while limiting the inevitable copper-line customer loss ratio; and, best of all, they’ve been able to maintain a swell dividend of nearly 9% after cutting it from an unsustainable 12% a bit over a year ago.
The fact that Frontier has even survived after a deal with Verizon’s buccaneers is nothing short of miraculous and indicative of the smaller company’s excellent management. The fact that they’ve also just announced a new acquisition of unwanted AT&T (T) lines in their corporate home of Connecticut offers further evidence of Frontier’s desire for continued growth.
The stock is up 10 percent today which is no surprise. It’s been massively shorted by the smug establishment cognoscenti, all of whom seem convinced that Frontier’s unsophisticated rubes will inevitably suffer the same fate as FairPoint.
We suspect that quite a few of these shorts are now starting to bail, and there’s nothing more fun for an optimist like the Maven than to climb into an unloved but undervalued stock and ride it into a big short-squeeze to Profit City.
Frontier’s shares have traded between $4.70 and $5.15 as of roughly noon today, and the price is settling in just above the $5 mark as we write this. So if you have any interest in this speculative value play, we’d advise you not to chase it. Instead, wait a little and buy on pullbacks, which will invariably happen once the more delicate, overly leveraged shorts are squeezed out.
Analysts seem to think FRT could reach or surpass $5.50 per share by year’s end, but in this market, who knows? In the meantime, the dividend seems to have good coverage. So conservative investors looking for some slightly volatile spice in their portfolios might want to take a look at this little telco that could.
Disclaimer: The author of this column maintains several active trading and investment portfolios and owns residential and investment real estate. He currently owns shares of FTR and may acquire more.
Positions mentioned above describe this author’s own investment decisions and should not be construed as either buy or sell recommendations. The current market is highly treacherous and all investors travel at their own risk. Caution should be exercised at all times.
Illustrations, charts, commentary, and analysis are only the author’s view of current or historical market activity and don’t constitute a recommendation to buy or sell any security or contract. Views, indications, and analysis aren’t necessarily predictive of any future market or government action. Rather they indicate the author’s opinion as to a range of possibilities that may occur going forward.
References to other reporters, analysts, pundits, or commentators are illustrative only and do not necessarily represent an endorsement of such individuals’ points of view. If specific investment vehicles are mentioned in any article under this column heading, the author will always fully disclose any active or contemplated investments in said vehicles.Click here for reuse options!
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