OpenDoor Stock – A Case Study

OpenDoor Stock – A Case Study in Position Selection

There are a lot of ways to go about finding investments and for me being efficient with capital and how that capital is allocated is key. There are so many cusips to invest in and so many things to trade that having a framework with how to operate in the markets is a big deal, at least for The LongVol. OpenDoor stock was a big short/avoid back in May 2022 – now full disclosure, I didn’t short it but this was listed as an idea in the TLV report and on the YouTube as a “no invest/avoid”. 

My goal of this post is to highlight two things: 

1. That Macro-Tailwinds matter when investing (in some sectors)

2. Where you allocate capital too matters just as much as the analysis  

I am going to recap it here then there is a video from May 2022 below. 

1. Macro-tailwinds matter with investing. Government policy changes, Central Bank policy changes etc. all have a trickle down effect on sectors and companies that effectively change the valuations. 

This is important in my framework and I say that being a person who was trained in market-timing over 14 years ago. It doesn’t matter to me what the chart says if the sector or company within it has a macro or fundamental tailwind that says otherwise.

The Fed was on a course to continue (and still are) to slow the economy which would have an affect on OpenDoor’s business model and which I mention in the video below. Now the other side of this argument would be that if that is true then everything in real-estate names would be a short. That was just not true – home builders, for other reasons, were still great longs (check out their charts from the past 12 months). 

So taking this perspective that interest rates are rising and shorting this was one thing that bothered me. There was also the fact that they still lost money constantly but aside from that interest rates continue to rise which is bad for their business, clearly. 

But the fact that we already had a fundamental flaw from rising interest rates was the first sign to avoid this name all together, there’s no need for the fed funds rate chart but here it is for visuals.

The other issues this company had with it was they had massive SBC – stock based compensation. Which, by all accounts, is ridiculous to be doing given the state of the company. Here you are losing massive amounts of money and doing SBC going into a Fed tightening cycle. Big red flag for me, the last thing, in my opinion, in a slowing housing market with rising interest rates you should be doing is SBC. 

This is a testament again to this idea that finding great companies with great management is indeed hard. And regardless of what valuation you want to place on a company without prudent management it simply doesn’t matter.  

Make of that what you will, I discuss it in the video below, but companies that do that never qualify as core positions for me, a trade or speculative position? Sure, but I won’t lie to myself and over allocate the size on this or tell myself there’s value there. 

There are plenty of ways to have expressed long housing real estate other than this name.

The stock traded from $8’s to lows of $0.92 cents into the end of 2022 and despite a nice rally on lows it’s still on lows. 

2. Capital Allocation. If there is one thing I learned young as a PM was to be selective with that went in my book because being paid on what you return matters so being selective was key. OpenDoor had all the signs of a great short (I had no idea $0.92cents) would be the number but it didn’t make sense to short it, at least at $8 – maybe up near +$20 I would have thought about it. 

Why? Stocks like this (Sub $20) become prone to short-squeezes and in the past few days it ramped near +65%.

I saw what you degenerates did to AMC, GME and a few others back in 20/21 and while it was fun to watch some of these hedgies squirm it’s not a game I’m interested in.

Capital allocation matters and filtering out where the cash is best used with risk, time of return and potential returns matter. So the same can be said for technicians who only see charts and base risk around that. 

Even taking the technician view on this without a fundamental framework puts one in a position to make, in my opinion, a fatal mistake in allocating capital to the idea. 

What I try to do in The LongVol Report. is to screen ideas with both perspectives

Screen an idea, look at tailwinds and other factors then apply the market-timing. From there it’s the final step: does this idea deserve my cash? If so, how much, what’s the expected IRR and are there better uses for it at the time. 

These are all the questions I asked then and still ask today within the framework we apply here.

Thanks for reading, enjoy the video from May 2022 of me discussing why OpenDoor was a hard pass and at this point still is sans a small speculative/trade only position. 

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