Interview with Covestor Model Manager Mark Holder (AER, RVBD, FCX, LIWA, MEE, PUDA, ANR, TEX, LULU, MMYT, TSLA, RVBD)

As of September 27th, 2010, manager Mark Holder’s Opportunistic Arbitrage model has enjoyed a 22.56 percent return since its inception in February 2010. Holder uses a variety of strategies to achieve this return, including investing in IPOs and beaten down sectors. We talked to him this week to get some insight on some of the moves he’s made during recent months and his thoughts about the many IPO filings this year.

Covestor Live: In July, your model substantially outperformed the S&P500. To what do you attribute that success?

Mark Holder: After a weak May and June, the portfolio had taken on extra leverage in order to benefit from an expected market rebound due to being oversold and very undervalued. It also helped that the 2 largest holdings, AerCap Holdings (AER) and Riverbed Technology (RVBD) both had exceptional months. The model was also heavily invested in material stocks to take advantage of an expected rebound in China after a very weak first half of the year. Copper stocks Freeport McMoRan (FCX), Lihua International (LIWA) and Coals stocks  Alpha Natural Resources (ANR), Massey Energy (MEE), and Puda Coal (PUDA), along with companies like Terex (TEX) were loaded up to benefit from a rising Chinese market.

CL: What factored in to your decision to short lululemon athletica inc (NASDAQ: LULU) this month?

MH: Lululemon athletic is a leading specialty retailer trading at a rich valuation. Since the model was highly leveraged even after a huge gain in September, the decision in shorting LULU was to hedge some of those gains with a stock that had a huge gain and was overbought (CL NOTE: LULU’s closing price was $33.71 on September 1st and $44.48 on September 20th.). Shorting LULU versus selling some big gainers in the model allows me to keep the top stocks for the long term and to limit capital gains taxes. LULU is just a short term holding that will likely be covered as the market sells off from an overbought situation.

CL: There are a lot of new companies filing for IPOs this year. Are there any that you’ve been following? If so, why?

MH: Mostly follow IPOs the weeks and months after going public. Two that are interesting were MakeMyTrip (MMYT) and Tesla Motors (TSLA). With the IPO market weak this year, the expectation was that MMYT would IPO under the radar and provide and great opportunity to invest in the Indian online travel market. US investors lack access to Indian stocks making this IPO very appealing. Even though the stock priced at a reasonable valuation, it unfortunately soared as it opened trading, making the stock too rich for this model. TSLA on the other hand is a stock that appears dead on arrival. It’s riding the electric car boom but appears destined for the renewable energy graveyard. TSLA still hasn’t made a profit and faces stiff competition down the road from a revived auto manufacturing market. Not to mention that electric cars rely on a coal fired electricity system making them a lot less green then most people realize. Also, the company has a part time CEO. This stock reminds me of the unprofitable dot com stocks in the late 1990s—lots of hype but not much in the way of substance placing in on the radar for shorting down the road. This model will likely stay clear of this stock until after the GM IPO when the hype in the sector is likely to dissipate.

CL: What do you specifically look for in an IPO filing?

MH: IPOs are like any other transaction in the market, you look for opportunities where the market is mispricing an asset. Limited information is available so anybody willing to do extra research can usually find some winner ignored by the markets. During some periods, IPOs are hot and they tend to underperform after going public so you want to stay clear or short. In general though, I’m looking for transformational companies misunderstood by the markets hence providing a great entry point.

CL: You recently reduced your Riverbed Technology Inc (NASDAQ:RVBD) holdings. What prompted this sell?

MH: Riverbed Technology had made a huge run from $30 to $46 in the last month or so (CL NOTE: RVBD had a low of $31.35 on August 12th and a high of $46.55 on September 20th) and had become extended like a lot of other technology stocks due to rampant merger speculation. Also, the stock had become roughly 15% of the portfolio so it was prudent to trim the holdings back to 10% for diversification purposes. RVBD remains a favorite of the portfolio as WAN optimization is still in the early stages of deployment. The remaining shares will likely be held for a long time, but we’ll also be opportunistic to trim or add to the position depending on the stock action.