Chat Transcript for Mar 21, 2012: The Bubble, OMGPop, ZNGA, STX, FIO and much more

Here’s the transcript of today’s chat. See you next week at 2pm EST at for more Q&A where you can ask me anything.

Q. Hey Cody, if you were starting a portfolio today what would you have in it and what % cash. Thanks and appreciate all your hard work.
A. Tough question, given how I continue to think we’re likely heading into a big tech stock market bubble, but that I think the near-term is more likely to see panic than another blow-off top. So I’d try to have my cake and eat it too — start off by putting 1/3 as much money as you want to eventually invest into the top 5 or 6 stocks from my weekly ratings and then put some more in a few weeks in whatever stocks are rated highest at that point and so on. Use scales and don’t rush in. Always have plenty of cash and/or income to be able to sleep at night no matter what happens to the markets.

Q. Cody…Does GMCR see $60 in time for April calls? …Great product!
A. You know that I think GMCR is headed much lower eventually partly because I don’t question David Einhorn when he targets a company for his short funds. So I would almost always look to be on the short side rather than the long side of that one, other than that one time I pointed out that EVERYBODY was short GMCR and it was time to take a contrarian long-side trade. That was probably the one and only time I’d look to get long GMCR and I would much rather be short GMCR than long it any day of the week.

Q. Hey C.W, Would now be a good time to buy VIX?
A. Oh, that VIX sure looks “cheap” doesn’t it? My VIX calls, which I’d put on as a hedge anyway, expired worthless last week and that’s okay — as my old mentor used to say, “May you lose money on all your hedges.” Anyway, I do like the long-VIX idea as a hedge here, but that’s not something I’ve backed on the sheets just yet. Will let you guys know if and when I do so.

Q. Any new thoughts on LPS? Especially to those of us holding puts that will be expiring in a couple/few months? Thanks and great work.
A. My first thought about LPS lately, and despite the fact that it’s still down huge from where we initiated our short, is simply “That no good, dirty, rotten, backstabbing…” I’d warned you guys that it sure looked like the regulatory atmosphere had shifted back to being favorable for this company and its like a few months ago, but if I’d known it’d get as positive as it eventually got, I’d have covered that LPS short entirely and even tried to go long perhaps for a trade. I didn’t and mea culpa for that. No idea when or what will turn the tide back against this company but I’m still quite confident that they are going down some day. Matter of timing, as much as anything.

Q. Hi Cody, can you help analyze Zynga’s short term outlook for me to understand? How would the stock price likely react if they announce at 4pm that they acquired omgpop? Up or down and why? Thanks!
A. How ZNGA reacts to any acquisition news partly depends on what price they pay for the acquisition and how its structured. If ZNGA shareholders feel the company way overpaid the stock will get crushed. If investors feel they bought OMGPOP on the cheap, ZNGA will, er, “pop”. And finally, if EVERYBODY already knows the acquisition is coming then it’s likely priced in already anyway.

Q. Cody…Back to ZNGA, looks like maybe $200M for the acquisition: …Any insight on the price tag and reaction to that or are we now too far into the weeds? I would love to make a quick play on this…Announcement at 3pm maybe.
A. Okay, let’s talk about this ZNGA for OMGPOP acquisition and how to trade it more as I think there’s some insights for everybody on this. First, look if you can pull up the headline from the WSJ then so can everybody else and if everybody is pulling up that headline and trying to game the market’s reaction to it, then the headline and the market’s reaction to it are, by definition, already priced in. RIGHT NOW, already, even though the news is still just a rumor. But if the news is very different than that headline, then there could be a secondary reaction when the news actually hits. Can you game whether the news will be different than the rumor and whether that difference is a good thing or a bad thing and further, whether the market and all those guys who just made their moves on this rumor will agree with your assessment of that news? And further, let’s keept it real — when I talk about tech stocks heading into a new bubble, I’m picturing little start up gaming companies like ZNGA coming public and being valued at billions of dollars and then stupidly throwing hundreds of millions of dollars at other stupid start up gaming companies like OMGPop (full disclosure, I play games from both companies and enjoy them, but that has nothing to do with investing in them). Can you game a tech stock market bubble and how it will move ZNGA for the near-term and mid-term? No, probably not, so I don’t try. I think ZNGA is probably going to be a great short opportunity at some point, but that’s got nothing to do with today and that doesn’t mean that I’ll ever actually risk my own hard-earned capital on a ZNGA long or short at all.

Q. Thoughts on APOL pre earnings? Since it already warned, is there much downside left?
A. There certainly can be more downside for APOL if the news and the report and the guidance are worse than APOL’s management has already tried to get the Street expecting. If business trends have further deteriorated for the company (lots of headlines this week that law School admissions were down big this year again, as they were last year for example) I would expect more downside. Matter of timing on this one too, in my humble opinion, but it’s headed lower over time.

Q. As apple grows to the sky not a single down day in nearly 3 months where do U start to trim even more as its 609 today?
A. No easy answers. I haven’t trimmed much of my position and it remains my largest position, but I grow increasingly nervous as the stock continues this near-term straight-up ascent. At least we have the option to worry about how much AAPL to sell since we were brave enough to buy it back when people were selling to us at $400 a share because they were scared about Greece and the EU-crisis. Aren’t you glad you ignored the noise?!

Q. 2 stock questions: any thoughts on Complete Genomics (GNOM) and would it be crazy to initiate a position on FIO at this level? Thank you!
A. I would be terrified of owning shares in a penny stock that’s down 80% from its recent highs that is in the business of: “Complete Genomics, Inc., a life sciences company, develops and commercializes a DNA sequencing platform for human genome sequencing and analysis. Its Complete Genomics Analysis platform combines its proprietary human genome sequencing technology with informatics and data management software to provide customers with data that is ready to be used for genome-based research. The company’s human genome sequencing services have applications in cancer research, Mendelian disease research, rare variant disease research, and clinical trial optimization. Its customers include academic and government research centers, and biopharmaceutical companies.” But I have no edge on GNOM and wouldn’t pretend to.
As for FIO, nothing’s changed since I’ve written about it from the start — will be wildly volatile, but will have lots of upside if they deliver on the promise of their technology.

Q. Cody. Interest rates are stirring. I’m long the yield curve. Your prognostication? And, can your buddy Ben really force fed funds at zero for two more years as he said?
A. I think rates have to go higher eventually — there is a natural cost to capital that our socialist Republican/Democrat Regime has tried to pretend they can eliminate, but they can’t change nature. Timing is everything…I think there will be plenty of time to catch some huge profits when rates finally do start to rise again…and I’d rather be late than early to a big-macro-longer-term move like that.

Q. Cody, any thoughts on INVN and TNGO?
A. I like INVN but don’t know it well enough to have bought it. Will do some more homework on that one.

Q. Cody, Thanks for the guidance during 2012. My portfolio is up %20 for the year despite keeping 30/40% in cash. The Apple and STX Calls worked out great and I cashed these in when I reached with 300 – 500% returns! What are your thoughts on RAX – good play on the Cloud environment?
A. Hey, congrats on that kind of performance while maintaining that kind of cash balance. You’ve been a long-time reader along with some of the other guys I’ve cited lately, yes? As for RAX, it’s a great company, but it’s VERY expensive at this point. I’m leery chasing it with a $7BB market cap and at 40x next year EPS.

Q. I posted a question on the regular site, do i have to post it here?
A. I try to answer all your questions wherever you post them, but if you asked something and I missed it, please submit here again next week.

Q. Cody, SNDK is your highest rating now. Can you recommend some calls? Or should we wait closer to ER date?
A. I was dead wrong about SNDK into its earnings report last time but I’ve since made big money back on it, and I am just riding my recently added-to position in this name.

Q. Hi Cody, Thanks for all of your advice! I sold STX back a month ago when it hit 26 for the first time and it now seems to be in a trading range of 26-28. Do you think this is a good time to get back in with options and if so, how far out and in the money or out of the money? Also, a follow on to FIO. Is there a good range for options that you see? Thanks for everything, and btw, my email updates are working perfectly now…thanks for getting that worked out!
A. I think STX has more upside and I’m probably a buyer on weakness from here. You’ll see if and when I pull the next STX trigger.

Q. Can you remind us how to upload a photo, and why does Bill get to be in red?
A. TO UPLOAD YOUR PHOTO, SIMPLY GO TO HTTP://WWW.GRAVATAR.COM and follow the instructions. Next time you come to your pic will be here. Bill and I are in red because we are administrators of the site.

Okay guys, these chats really do make my brain hurt by the time we finish them. Thanks for all the great interaction and I’ll see you guys next week.