Closing out the year

Once all the data comes in we will provide full analytics of the 2CHYP portfolio heading into 2018.  The analytics will focus on the portfolio level, so today, I want to highlight some specific stocks we think are well positioned to start the year.

In my opinion, the 3 positions with the biggest upside potential are UNIT, WPG, and SOHO.

Recall that Uniti was a nearly $30 stock prior to the Aurelius mess and given that it now looks likely to conclude with no fundamental harm to Uniti, I think it could return to around $30 by the end of 2018.  With a substantial number of UNIT shorts underwater, a squeeze could theoretically accelerate the movement.

Retail had a strong holiday season with preliminary data indicating strong growth in year over year sales.  Perhaps more importantly, the new tax bill is expected to benefit retail more than just about any other sector in terms of the delta to the effective tax rate.  These 2 factors could combine to reassure the market that WPG’s yield is safe and a yield that is perceived as safe does not stay at 14%.

We estimate that SOHO has an NAV around $11 to $12 making it among the most discounted REITs at a price of just $6.54.  This discount has been around for quite some time, but now there are catalysts to help the stock close the gap.  Specifically, we expect good things out of 1Q18 as both its Houston and Florida hotels benefit from the continued hurricane recovery effort.  The tailwinds on these markets which respectively were the oil recession and Zika have now rescinded, paving the way for strong same store RevPAR (revenue per available room) growth.  Already in 3Q17 SOHO was capturing market share but given the weakness in national RevPAR it was not enough to move the needle.  We expect the relative performance to remain strong, but now that it is combined with stronger national and market specific hotel RevPAR the impact will reach the bottom line.

The massive upside potential of these stocks does not come without risk as UNIT is susceptible to a decline in profitability of ILECs and CLECs such as Windstream which would devalue its existing assets.  WPG’s risks as a B Mall owner are obvious, and SOHO has extremely high leverage.  In each case, our analysis suggests the companies will be able to navigate the risks and capitalize on the opportunity, but these aspects need to be constantly monitored.

I would like to point out, however, that these risks are quite diversified.  Hotel economies have little correlation with telephone carriers, and both are unrelated to the battle between Amazon and traditional retail.  This is only a sampling of the diversification which we will discuss in depth in next week’s analytics.

Commentary may contain forward looking statements which are by definition uncertain.  We retain no obligation to update or correct forward looking statements should the available information change.  Actual results may differ materially from our forecasts or estimations.

2CHYP Portfolio Snap Shot

12/28/17 2CHYP Performance since inception

2CHYP Weekly Trade Confirmation Report:  No trades this week