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Charter (CHTR)/GCI Liberty (GLIBA)

Well, Charter Communications (CHTR) stock tanked 15% on Friday (4/27/18), and you know me, I’m a sucker for something on sale! Yup, I picked up a position in Charter at around the $252/share level and purchased a bit more GCI Liberty (GLIBA) at around $45 a share. I had originally purchased some Liberty Ventures back in January for around $57 a share (before it was spun out of Liberty Interactive and merged with GCI Communications in March), so adding at $45 was a no-brainer for me.

The question is, did I buy shares in a good company at an discounted price? or did I buy a shares in a declining company trading at their 52 week low only to watch it subsequently go down another 50%? I really don’t know …. yet! I like the company’s management (Tom Rutledge) and the controlling shareholder (John Malone). Both have provided investors in their companies with superior returns in the past. The company’s relevance in the video/data delivery business doesn’t seem in question to me AT THIS TIME. (Note: I’m not very good at predicting the future) The downdraft on Friday, it appears to me, was caused by a slight, unexpected increase in the loss of video subscribers (122k in 2018 vs 100k during the same period last year) perhaps combined with an increase in capital expenditures for the quarter that was not anticipated (by Wall Street). All the other metrics looked positive for the quarter, including growth to bottom line income. My experience in this business is that quarterly results for these types of distribution companies can be rocky, and quarterly performance is not necessarily indicative of long-term performance. I’m willing to give these highly qualified jockeys a chance to prove themselves (once again) because I can buy shares in this company at 85% of what I could buy in at just a day earlier and 65% of what shares  could be purchased for at the high over the last 52 weeks.

So lets see… Netflix at 250x earnings or Charter at 8x earnings. Hey I’m a value guy! I want good return on capital for my money now, not the promise of huge (?) cash flows 5, or perhaps 10, years down the line. Not every one agrees with this way of thinking. Momentum investors have been very successful over the past 5 years and FANG stocks… well, results speak for themselves. But I want to sleep at night.

So the question is why buy Charter stock directly and not GCI Liberty or Liberty Broadband? I will admit, my first instinct was to add to my GCI Liberty position (which I did…. a little) when I saw the price decline. But on further reflection I noted that both Charter and Liberty Broadband (a surrogate for owning Charter given that it has no operations but simply owns Charter shares) declined in the order of 15% by mid-day Friday while GCI Liberty declined by only 10.5 %. Of course GCI Liberty owns both the GCI business and Charter shares (both directly and through Liberty Broadband share ownership), the former making up about 20% of the total market cap of the combined company. [OK, I’m using the ownership % of former Liberty Ventures and GCI Communications as a surrogate for the relative ‘value’ of the two components of GCI Liberty … its called shorthand!] So we might expect GLIBA shares to have declined only by 80% of what we saw Charter shares decline. In fact GLIBA shares did decline almost 11% vs the 12% I would have expected (80% of 15%). But my thinking when purchasing a full position in Charter was that Mr. Market was offering me the bigger discount through a direct ownership of Charter shares. THAT’S where I wanted to put my money! The bigger bang for my buck.

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Portfolio Upate 1Q 2018

I thought it was about time to review my positions as I haven’t posted any updates in the last three months. I’ve made a number of changes since the end of the year (and before) which I haven’t written about. So here’s a rundown of my current holdings with comments

Altius Minerals
The company continues to acquire royalties financed by both debt and equity raises. The share price has been disappointingly unresponsive to both the improved macroeconomic environment (commodity pricing) and improvements in the operating business; investors seem to be stuck looking backwards at stock performance and commodity pricing over the past 4 or 5 years. Fairfax Financial, an insurance holding company headed by noted Canadian value investor Prem Watsa, made a significant (from Atius’ point of view) investment in Altius during 2017, providing additional liquidity for acquisitions. The stock has appreciated almost 40% from its lows of last year, and, if commodity pricing continues to improve, I think shares should be in the $20-$30 range next year.

AMC Networks
This early 1Q 2018 purchase has basically tracked with the market over the quarter. I don’t foresee any divergence from the overall market until either 1) the general perception of the macro outlook for program suppliers improves or 2) there is some kind of corporate action (change of control, or other). This position requires patience

BBX Capital
This year-end 2017 Repurchase (see post) was based on the premise that BBX’s market cap was less that the market value of its 90% ownership in Bluegreen Vacations (BXG), each BBX share having the equivalent of 2/3 of a share of BXG. With BXG shares trading at close to $22, this equates to close to $14.50 of BXG value per BBX share, while BBX shares trade at around$9.25. To muddy the issue, BBX has launched a tender offer for 6.6 million shares at $9.25 each that expired April 17. Two things to note: 1) management is tendering 2.2 million shares in this tender offer and 2) the tender offer price was less than 5% above the market price when the tender was announced. Generally a tender offer where management tenders such a large number of shares is seen as a negative (those who tender see the tender offer price as a fair or even generous price), and one might expect the share price to fall once the tender date has passed. On the other hand, a tender offer priced so close to the market might lead one to think that management is trying to buy back shares on the cheap, and in effect ‘cheat’ shareholders out of the significant upside I, at least, ascribe to BBX shares. Needless to say these signals are contradictory. My interpretation, perhaps too sanguine, is that management, specifically Alan Levan or John Abdo, who own together about 35% of the company, desired liquidity for some reason not associated with the company, and that the only way for them to dispose of a large block of shares without depressing the stock price and/or running afoul of the SEC was a tender offer large enough to accommodate their needs but with an offer price that most shareholders would not find attractive and thus not lead to oversubscription (thus assuring they could dispose of their entire tendered share block). We shall see. I am continuing to hold my shares as I think that BBX is currently being undervalued by Mr. Market give the price of BXG shares. I am somewhat biased here as my experience with the Tropicana Entertainment (TPCA) tender resulted in my tendering my entire position and then seeing the share price subsequently increase and ultimately the being bought at a significant premium. Admittedly this is not exactly the same situation.

Cherniere Energy
I continue to hold shares in Cherniere as it has continues to build out its natural gas liquification infrastructure. This is an arbitrage play on the cost of natural gas in the US vs. the rest of the world, NOT on the cost of natural gas itself. I anticipate holding shares until the build-out is complete and the company becomes positive cash flow.

Fortress Global Enterprises
The name change for this company doesn’t seem to have positively impacted the stock price! The dissolving pulp business appears not to have rebounded the way I originally anticipated four or five years ago, and the company continues to operate in the red. The security paper division was sold off last year to improve liquidity as the company will face some refinancing hurdles for its current debt over the next two years. The company is in a highly operationally levered business and has a relatively significant per share book value in relation to its share price; if the price of dissolving pulp turns, the company could produce significant cash flow. One downside is that the current CEO pays himself far too much for a company that has lost money over the past 4 years.

Glassbridge Enterprises
This ‘net-net’ investment turned out not to be so ‘net-net’, i.e. the book value was significantly overstated due to unaccounted for liabilities. With the transition from operating company to an asset management company last year most of those liabilities surfaced and the book value (and cash position) was eaten away.  In fact, there are still additional potential liabilities that could devour what little value is currently left. I sold ½ of the position earlier this year for a ‘tax loss’ (that is a real loss somehow justified as a loss that would reduce taxes due on other realized gains…. My, how we kid ourselves sometimes!). The remaining position is so small that I will continue to hold and see if anything can be saved from the remaining carcass.. unless, of course, I need another ‘tax loss’ at the end of this year!

Novagold
Still in the permitting stage but closing in on the capital investment stage this junior gold miner is held in the portfolio as a gold hedge; I continue to feel the market is overvalued and I anticipate gold will do well if we have a raging bear market. The position is intended to provide liquidity during a major selloff.  When the permitting is completed I anticipate that there will be some kind of corporate action, either an outright sale of the company, a merger or a capital raise, though I think this latter unlikely. I anticipate selling when we begin to approach this stage if not before during a market rout (will we ever have one?).

Regency Affiliates
I continue to hold Regency despite one of its three investments (the cogeneration plant at the Kimberly Clark plant in Arkansas) becoming basically valueless when Kimberly Clark announced that it would build its own co-generation facility rather than renew its contract with the facility in which Regency owns a 50% interest. Most of the value in this company now comes from its interest in real estate currently leased to the Social Security Administration in Maryland. The lease expires in 2019 and if renewed will provide potential for a significant cash flow event; refinancing on the property. The SSA has recently signaled its intention to renew. Once the renewal is in place, and if the refinancing is successful, it remains to be seen what current management, who have not shown themselves to be the most brilliant capital allocators in the past, will do with the proceeds. I anticipate selling once the refinancing is announced.

Resolute Forest Products
Another asset heavy, commodity price dependent business, Resolute is still finding its operational footing 4 years after emerging from bankruptcy. The pricing for its major products, wood and wood products, has continued to be depressed and potentially now subject to Trump tariffs. Operations in the 3rdquarter of 2017 gave investors hope that strengthening prices and better management were beginning to produce significant cash flow. Unfortunately the 4thquarter results belied these as management provided an interesting excuse for disappointing results; transportation issues caused by insufficient driver availability! If 1stquarter 2018 results show improvement the share price should find significant buoyancy.

Rite Aid Corporation
What can I say? I underestimated management’s ability to screw things up. I thought that a company worth $6-9 billion to a competitor in a buyout would retain at least ½ that value as a stand-alone entity, perhaps even be sold to a different competitor for a premium. But no, somehow management has found a way to devalue the public market value of the company by 50% after the asset sale to Walgeens.  Oh, and of course, at the same time, they did provide nicely for themselves (continued employment) in the new Albertson’s deal. I do have to say that at this point I’m not sure that the Albertson’s deal will be consummated. In fact, I don’t really know HOW it could be consummated since the owners of Albertson’s recently announced that they DON’T plan on IPOing the company. But without public shares what will the current Rite Aid shareholders be paid with, as this was an all stock deal?  Perhaps, due to Mr. Market’s recent valuation of Rite Aid shares (well off the imputed value of the Albertsons purchase price of $2.63 per share) the Albertson’s private equity owners got cold feet and called off the IPO; after all, their goal was to provide themselves with liquidity so they could finally exit their position in Albertsons. This was never a good deal for Rite Aid shareholders as the price was low and there was going to be a constant overhang of private equity shares depressing the share price. I am hoping Rite Aid shareholders will reject the deal at the upcoming annual meeting. If that happens, perhaps some other suitor will show. I think that, overall, investors are currently too negative on the underlying retail business; there is far too much fear that Amazon will enter the fray and suck away all potential profits.

SEACOR Marine Holdings
This has been a real surprise. I purchased shares in SEACOR in early 2018 because it was trading at less than ½ book value. I theorized that after the June 2017 spinoff and before the end of the year a number of institutional investors may have dumped the shares they received in the spinoff for any of the classic spinoff reasons: the market cap of SMHI was too small for their investment guidelines, the company was too concentrated in one business, the offshore support ship business was currently doing very poorly due to the low price of oil, etc. Not much has changed except that oil prices have firmed up somewhat so I really can’t account for the quick run-up in the share price except that perhaps the selling stopped after year-end with the price now simply reverting to its immediate post spin level. Overall this is a well-managed company in a far too cyclical business. I readily admit I have no expertise in this industry and only purchased because it was a spinoff trading well below book; I will likely exit the position if and when the share price appreciates to between 90 and 100% of book value.

I also continue to hold stub positions in two REIT liquidations (New York REIT and Winthrop RE Trust), the first of which is now scheduled to become a non-tradeable trust sometime before February 2019 after a final payout sometime in the Fall, while the second is already almost two years into its Trust lifetime and hopefully will be wound up sometime this year.

I have added some new, small starter positions that I hope to write about in the near future (don’t hold your breath!). These include: GCI Liberty, Navios Maritime Partners and Entercom Communications

 

Sold Positions

Awilco Drilling
This position was sold early in the quarter when the company announced its intent to purchase an additional deep-water rig. The investment thesis changed; I purchased under the theory that this was a play on improvements in the North Sea offshore drilling environment (improved crude prices) which would lead to the better day rate pricing and longer term drilling contracts for both platforms (one currently finishing up a short-term contract and one cold stacked), and that cash flows from these would be paid out as dividends, per the company’s prior stated policy. Instead it was announced that the company will buy a new deep-water rig; this means that any improved cash flows from the existing platforms most likely will be used to fund the new build rather than being paid out to shareholders. I sold on this news, but somewhat too early as the share price continued to rise after I sold.

Netflix (short)
I have been sadly lacking in updates here as I did close my short position in Netflix at the end of October at around $200. Subsequently the shares rose to over $300, backed off slightly in March and are now charging ahead again. I still feel the shares are significantly overvalued and am looking at long-term leap puts, but not sure I will pull the trigger as the only two shorts in my investment lifetime have turned out badly. Note to self: heed Buffett’s advice about shorting….. DON’T.

Steel Partners Preferred T
I exited this position with a small profit midway through the quarter; I had anticipated that the preferred shares would ‘revalue upwards’ when the exchange of the preferred T shares for preferred A shares was finalized in December. Apparently there was more overhang of preferred shareholders than I had accounted for and the preferred A shares did not revalue in the timeframe I had anticipated so I exited.

 

Note that none of the above constitutes recommendations for or against shares of any of the above-mentioned companies. You should always do your own due diligence when investing.

Why I love the end of the year (SMHI and AMCX)

You’ll notice that I avoid all mention of my portfolio performance at year-end. Yes, that’s on purpose. My blog is not here to help you invest … its to help ME invest. And I don’t think I need to crow about my results, good or bad (like this year) as they may be. I’m trying to improve my method. I think the results will follow.

So let’s get on with it. Why do I like year-end? Because a lot of people do dumb things with their portfolios. Now don’t think I’m referring to individual investors, though they do dumb things too; I’m really referring to those lemmings who get paid big bucks to lose manage other people’s money. Yep, that’s right, the professionals. They love to window dress. Gotta sell their losers and buy more of the stocks that have gone up so they can ‘look good’, performance be damned!

How do we, smart investors take advantage of this? Well, I’ve found that a good place to go prospecting for new investment ideas during December is in the 52 week low list. When a stock has really underperformed for the year what happens at year-end? It becomes a candidate for tax loss selling, or even ‘just-get-me-out-of-that-position-whatever-it-costs’. There is just something oh so human about getting rid of your losers; it seems that once they’re gone from your portfolio a weight is lifted, you can finally forget the damage they did and the grief they inflicted. I have to admit that I too am inclined toward participating in this annual ritual, but I try to remind myself that I would really be doing something STUPID; I would be selling at exactly the same time that a lot of other people would be selling. So I put off my portfolio clean out until March or April (Spring cleaning anyone?) when I hope others will be thinking about something else. Instead, December is the time to take advantage of this annual rite and buy up the year’s losers other investors are dumping. We all know that other investors push Mr. Market to extremes. Prices get bid up too high for ‘good’ companies and bid down too low for ‘bad’ companies. Of course WE don’t partake in that do we? So let’s try to take advantage of Mr. Market’s little mania, and what better time than in December?

Two new positions

Last year’s spinoff: Seacor Marine Holdings (SMHI)

You all know I like spin-offs. Joel Greenblatt and all! So here’s a spinoff that looks so unappetizing that I just can’t resist. First of all its in an industry that is nothing if not ‘out-of-favor’, offshore drilling support. Second the company has been losing money hand over fist for the past couple of years. Third, it’s too small to be on the radar of most professional investors ($230 million market cap). OK, there are a couple of positive factors too, 1)  the company is selling at about half of book value (with much of the equipment having already being written downs in the past couple of years) and 2) a number of the top brass from the parent company moved over to the smaller spinoff, showing some confidence in this ‘loser’. The company I’m referring to is Seacor Marine Holdings Inc. (SMHI). It was spun out of  Seacor Holdings (CKH) in June of this past year. In a strange twist Seacor Holdings started in the business SMHI is in, support ships for offshore drilling, then branched out into other marine activities and is now selling off its original business unit at what appears to me a market bottom. When I have to hold my nose to purchase a security, when my stomach churns with nausea at the sight of a company’s financials, then I know that nothing too bad can come out of the investment because most other investors will have had the same reaction …. and will have passed on the opportunity. The spinoff was effected on a 1.007 for 1 basis (don’t ask me why the funny number … just another point in its favor as owners of CKH were left with some odd number of SMHI shares) last June and began trading at $18 and change a share. Since then the shares have lost about 1/3 of their value and I was able to pick up my small position at the beginning of 2018 for around $12/share. Meanwhile the parent company, CKH, has gained about 1/3 since the spinoff. Taken together, however, the market values of the two separate companies have so far NOT exceeded the value of the pre-spin company (and that in a market where the average gains have been more than 10% during this period). When and IF the offshore drilling service sector turns SMHI should do wonderfully; this is a bet on the market turning before their cash runs out! Recent price action of petroleum bodes well for a change in the market.

 

The laggard spinoff: ; AMC Networks (AMCX)

Did I mention above that I’m enamored with spin-offs after my experience with NACCO Industries? Yes, I think I’ve written about this a couple of times. So here I go again, I’m looking at a spinoff that took place some 6+ years ago. AMC Networks (AMCX) was spun out of Cablevision Systems in June 2011 and started trading at around $35 a share. The spin-off included the entertainment programming assets (read cable channels) developed by Cablevision Systems over the prior several decades but not the NYC sports properties (MSG and MSGN) that were subsequently spun out of Cablevision as separate companies. Since the spin-off, the share price of AMCX has had its ups and downs, trading up to a high of around $85/share in June 2015 then subsequently trending down to their current level of around $52/share. Among the publicly traded programming assets AMCX trade for one of the lowest EV/EBIT (interesting article in Barrons) and the shares currently show up on Greenblatt’s Magic Formula list. So why do I like the shares now? No particular reason except they are trading around the lows of the past couple of the years, and, oh yes, management is getting long in the tooth; Josh Sapan who has been president and CEO since the spin (and well before that too) is getting on towards retirement age (getting a little tired of it yet, Josh?) and, more to the point, Charles Dolan, Executive Chairman, is now in his early nineties. Mr. Dolan (Sr., not to be confused with the son Jim), after holding out on selling Cablevision Systems for years finally pulled the trigger and sold the family jewels to Altice in 2016. Since then, Jim has busied himself with the running of MSG/MSGN, while the rest of the family sits on the board at AMCX. As there is no obvious family member to succeed Mr. Dolan Sr. at AMCX (not to speak of Josh Sapan), might we be getting towards an inflection point? In any case, I think with Disney potentially starting an on-line platform to compete with Netflix it may be time for programming assets, which have been in the value doldrums for the past 5 years (except Netflix!), to be revalued upwards in a more competitive environment.

Disclaimer: As always do your own due diligence, the above is neither a recommendation to buy or sell any securities…. I’m just in this for fun; behave accordingly!

Married, Divorced and Married again! (BBX)

You know those couples who get married, divorced and then married again? Unless you have actually been through this yourself you probably find the whole thing kind of strange. Why did they get divorced in the first place if they were only going to tie the knot again? The answer is not always logical; these things just happen.

OK so I’m having that kind of relationship with BBX Capital (BBX). I owned BBX until last summer; I sold when the courts upheld Mr. Alan Levan’s appeal against an earlier guilty verdict in an SEC lawsuit. Mr. Levan was back in as Chairman at BBX and I thought it time to get out. OH WHAT POOR TIMING ON MY PART. Shortly thereafter, BBX announced that BBX and BlueGreen Vacations (BXG) would sell 10% of BlueGreen’s equity to the public (5% to be sold by BBX and 5% by BlueGreen itself). What was interesting was that post-IPO BBX was still going to own 90% of BXG and that per the preliminary prospectus BXG shares were going to be priced in the $16-$18 range. This meant that the implied market cap of BXG was going to be substantially larger than that of BBX (which had some other holdings in addition to its 90% interest in BXG). I assumed that the purpose of the IPO was to highlight the value of BXG, demonstrate how undervalued BBX was and thus goad Mr. Market into bidding up BBX shares. When I finally realized what was happening BBX shares had climbed from my exit price of $6.40/share to around $8.50/share and I thought “Gee, the easy money’s been made and besides I don’t really know anything about the time share market except that it seems to me a real scam!”. Of course hundreds of thousands of people own time shares so it can ‘t be a TOTAL scam. Somebody must think buying a timeshare vacation house is a good investment. In any case, I thought that since the IPO hadn’t happened yet, perhaps BXG wasn’t really going to end up priced in the $16-$18 range, so maybe the opportunity wasn’t as attractive as it seemed.

Fast forward to the end of December. The BXG IPO had already successfully taken place at the beginning of November. The price of the IPO was, as I expected, lower than the price in the preliminary prospectus, $14 a share rather than $16-$18 (still, not bad!). But more importantly, shares in BXG had climbed from their initial IPO pricing to around $18.00/share. However, Mr. Market, being that unpredictable fellow that he is, had bid DOWN shares in BBX, which were then trading in the $8.00 range. I can only imagine what BBX management (read Alan Levy) was thinking at this outcome; I too was simply stumped by Mr. Market’s reaction to the IPO. OK so BBX management HAD done some rather flakey things in the past and maybe they’d do something flakey again in the future. They had, after all, just invested $60 million in a chain of sweet shops called IT’SUGAR this past summer. (What, were they trying to imitate Buffett’s investment in See’s Candies?? Well, I could actually think of stupider things to do …..) Furthermore their investment in Renin, a manufacturer of interior doors and hardware, didn’t seem to be generating much cash. And then there were the various investments in real estate. Were they actually worth anything? I found them more than somewhat difficult to value (accounted for with the equity method as they are). Top that off with about $165 million in cash (some pre-existing, some from the IPO) and $145 million in debt at the corporate level ($80 million in borrowings from BXG plus $65 million in subordinated debentures). So, yeah, maybe Mr. Market didn’t have any great expectations for BBX management’s investing prowess. But all that aside, unless you believed that net, net these assets had a significant negative value, the valuation of BBX simply didn’t make sense. Each share of BBX owned the equivalent of .656 shares of BXG (103 million A & B class BBX shares outstanding with BBX owning 67.3 million shares of BXG). BXG shares were trading over $18.00 at year-end 2017. Thus each share of BBX owned about $12 of BXG share value but was trading at around $8! I can understand a holding company discount, especially when management of the holding company has done some odd things in the past. Maybe it would be understandable if management at the holding company was different from management in the owned investments, but here that’s not the case. So my simple investment thesis is that the share prices will converge; either the BBX share price will begin to increase (maybe even retaining a small discount) toward the underlying value of its BXG shares, or BXG shares will begin to drift downward, bringing the value of the BXG investment down towards the price of BBX.

Note that I know nothing about the time-share market. (Have I said that before?) And therefore I have no idea whether BXG is trading at an appropriate market valuation. My investment thesis is based solely on the seeming discrepancy in valuation between the two shares. I have no idea how long this  divergence will last, months, years even, but I think that eventually Mr. Market will come to his senses and be ‘rational’ about valuing these two securities.

Further note: again a hat tip to Clark Street Value who had a nice write-up on BBX Capital a couple of months ago.

 

Disclaimer: You should be aware by now not to rely on this or any other of my posts for investment advice; this blog is simply an externalization of some of my random thoughts about investing.

 

Sometimes it pays to acknowledge you’re not as smart as you think, and other year-end tales

I’m writing this from a place way up in the mountains where there is no internet connection. I find it healthy to disconnect sometimes, because it forces me to think and reflect, rather than ‘follow the market’.

So I’ve been reflecting on my successful trade in NACCO Industries (NC). Not that I want you to think I’m bragging, a close to 70% return in only a six weeks is nothing to sneeze at after all, but, really, I’m not. I just want to learn from this experience so I can replicate it… over and over. In large part, I have to say, the return was mostly pure chance. These things happen once in a while if you’re in the right place at the right time… Still, is there anything I can learn from it to better my next investment?

What were the factors leading to such a phenomenal (for me at least) return? Well, the first was that I ‘showed up’, I actually purchased shares in the spinoff before the event. I have the Clarke Street Value blog to thank for that. Second, I was quick to recognize that this spinoff had all the makings of a classic Joel Greenblatt (meaning, attractive) spinoff; the parent’s two businesses were in completely unrelated fields (Coal and small home kitchen equipment), it was somewhat complicated (family controlled, dual class share structure) and it was a small enough transaction to be under the radar of most institutional and hedge funds. So the first reminder to self is to identify all upcoming spinoffs. They generally lead to some good returns (again, thanks Joel Greenblatt). To do that you’ll need to read, read, read: the Wall Street Journal, Barrons, Bloomberg, whatever you can get your hands on, oh and of course Clarke Street Value blog.

So what were the other factors leading to success? 1) timing of the purchase (pure chance), 2) timing of the sale (again, you got it, PURE CHANCE) and finally acknowledging that I didn’t really know which of the eventual spinoff entities was going to outperform … so I held both. Maybe I was just too lazy to do the research. Maybe I figured I really didn’t know enough about either industry to make an educated guess about where each spinoff entity would trade. But let’s just say I was smart enough to acknowledge that I just didn’t know; the important thing was that post-spin investors were going to have the chance to value each business independently, coal investors were going to be evaluating NACCO, small kitchen appliance investors were going to be evaluating Hamilton Beach, independently of each other. Most likely investors would value the sum of the two independent businesses at more than the original combined entity. Furthermore, perhaps the spinoff was in preparation for the family to divest one of the two businesses, which would be an added kicker.

What actually happened was nothing that I could have predicted. The first day of post spinoff trading, 9/29, NC traded below $20 per share and HBB traded in the low $30s. Investors were dumping the coal mining shares in favor of the kitchen aid business. This is just what I thought would happen. I myself, favored HBB over NC (but with of course no research to back this up). Luckily I did nothing. By the end of Monday, the next trading day, however, NC was trading in the low $30s (and I was berating myself for not having bought NC below $20 for a quick 50% gain!). Still, I let sloth prevail and did nothing. Over the ensuing month both shares traded up to the low $40s. When the shares of NC finally overtook HBB in dollar terms and I had a 70% gain in 6 weeks I said, enough is enough and sold. How could two businesses be worth 70% more separate than together? Now, I could understand a gain like this after a couple of years of decent performance on the part of one or both companies. But really, after 6 weeks and no further information? It was just too much for my rational mind; I was out. It wasn’t a clean ‘out’ however; NC had distributed 1 share of HBB A stock and 1 share of HBB B stock for each share of NC owned at the spinoff date. The catch was that the B shares were not registered to be traded on any exchange and they had to be exchanged on a 1 for 1 basis for A shares. To further complicate the issue the B shares were not in book form so it was going to take 6 weeks to make the exchange (needless to say I’m still waiting). So to close out the trade I shorted an equal number of A shares to what I would receive in the exchange. And lucky I did! Since then HBB shares have declined over 30%. Had I not exited when I did I would now be up only some 40%. Not bad, but not the stellar 70% return I managed. So a further lesson; Don’t be too greedy!

OK a few housekeeping items. I sold off my position in Support.com (SPRT) last month, primarily because it was too small but at the same time I didn’t have enough confidence in the investment rationale to increase the position to my standard size. I also sold of my position in Gyrodyne (GYRO) for a tax loss I needed to balance out other LT gains. I haven’t soured completely on GYRO and may buy the position back in the new year.

Bubble? Bubble? What Bubble?

So much has been written about whether we are in an equity market bubble that, not to be outdone, I thought I’d offer my two cents. As an added feature I’ll also offer up my thinking about Bitcoin and crypto currencies! I can’t be any more wrong about these things than all the other commentators, can I? It appears from reading all the garbage commentary that nobody really knows what is happening anyway.

So let’s start with the equity bubble…..

Of course we’re in an equity bubble! Just look at the most favored stocks on the US equity exchanges, the FANG stocks. They mostly trade at impossible multiples of current earnings. Doesn’t anyone remember the Nifty Fifty? (and what happened when they were no longer Nifty?) No one in their right mind believes corporate earnings can be predicted with any semblance of accuracy; Earnings 2 or 3 quarters out can hardly be guessed at, never mind 5 or 10 years. So why should any company be valued at over 100x earnings (unless of course it is sitting on assets worth its market capitalization)? Current multiples anticipate earnings 5, 10 or more years out! Many pundits find all sorts of ‘logical’ explanations for the market trading at current lofty multiples; the low interest rate environment, new technologies, a quantum shift in the digital economy, etc. etc. All I can say is “Give me a break!”. How many times have we heard “Its different this time”, that is, until it isn’t. Sorry, I’m a non-believer! I think the market moves in waves, from dearth to excess and back to dearth. We just happen to be near the crest of the wave right now.

And bitcoin? Well, does Tulipmania ring any bells? I’m wondering just when ‘investors’ in cryptocurrencies wake up and find that poof!, their investment went up in ether last night. Now, I’m certainly not predicting this will happen tomorrow or next month or next year; bitcoin could go to $100,000 in the next two years (or two weeks!) for all I know before the proverbial ‘stuff’ hits the fan… but hit it, it will! The value of bitcoin is simply based on demand and supply. Supply is limited and recently demand has been high. Very high. It could get higher. But, because there is not much that can be done with bitcoin that cannot be done with any other currency (like pay for the necessities or even the luxuries in life) I don’t really see what kind of edge it has. Well, it has an edge; its anonymous. But how long will national governments let ‘investors’ invest speculate in UNREGULATED assets (and I use that term loosely) that CAN’T BE EASILY TAXED??? My guess is not too too long…..

The real question an investor has to ask him/herself is WHAT TO DO knowing that we ARE in a bubble. I’ve been asking myself that question for the past 2 or 3 years, that is, since I began thinking that we had entered bubble territory. To my mind the question has become more urgent in the past year, since the presidential election, with the 20+% rise in the US equity market. For the general investing public I think the best thing to do is nothing. Remain fully invested with the understanding that your portfolio WILL INEVITABLY DECLINE at some point by 50 or 75%. If you get used to doing nothing on the way up, then perhaps it will be easier to do nothing on the way down! It’s important to remember that timing the market is a fool’s game… so don’t even consider trying! But for an investor who can spend a bit more time and energy looking into various market opportunities, is there anything he or she can do to position his/her portfolio for the inevitable bear market, short of holding only cash? And even holding only cash ‘equivalents’ is not without risk as we saw in 2007/2008. It doesn’t help that cash provides close to zero return in this environment. My answer to this is simply to look for what appear to me mis-pricings and ignore the overall market. I’m also trying to be careful to move up the corporate priority ladder in terms of securities, for example the preferred units in Steel Partners LP (SPLP-PRA). And of course, I have a number of investments that are in liquidation so the cash SHOULD be coming back sooner rather than later (NYRT, FUR).

So that’s it. My advice is to do nothing more than prepare mentally to see your portfolio lose half its value in the next couple of years….. And then DO NOTHING when it does begin the decent! That latter ‘DO NOTHING’ is, of course, a real challenge.

Steel Partners Preferred (SPLP.PRT)

In my last post I alluded to a new position that I was building in a preferred issue. At the time I was writing that post I hadn’t yet accumulated a full position so I left the issue unnamed. An anonymous reader, as if reading my mind, suggested I look at the Steel Partners preferred units.

So now I’ll confirm I purchased these preferred units, but the T class not the A class. The original class A preferred units were issued last February for the buyout of Steel Excel shareholders. Then last month additional preferred units were issued to fund the buyout of the balance of the outstanding Handy & Harman shares not owned by Steel Partners. However, these latter units were designated class T units, but ONLY to distinguish them from the original class A units issued in February for ease in calculating the December 2017 dividend payment. After the December dividend payment the T class units will revert to A class units.

So why are either class of preferred units interesting? For one thing the balance sheet of SPLP is solid and cash flows from operations appear to cover LT debt several times (although this is not particularly clear as Steel Partners has interests in a number of businesses in different industries including manufacturing and banking – DO YOUR OWN DUE DILIGENCE). The preferred units, like preferred stock, have a call on cash flows superior to the common units, AND THE MANAGEMENT TEAM IN CHARGE OF SPLP CURRENTLY OWNS 50% OF THE OUTSTANDING COMMON UNITS OF STEEL PARTNERS. This means Lichtenstein’s management group would have to lose ALL their equity in the venture in order for the preferred units to become worthless. Thus, it seems to me that management incentives are at least to some degree aligned with those of preferred unit investors.

My interest in the T class units was tweaked when I noticed that they were selling at about a 5% discount to the A class units. That didn’t seem to make sense. The only difference in the cash flow streams between the two preferred classes is 10.4 cents at the December dividend payment, 37.5 cents payable to each class A preferred unit vs. 27.1 cents for each class T unit, but the T units were selling for $1 less. To explain this I can only suggest that there was additional selling pressure on the T class due to the fact that certain holders of the preferred units who had received them in the Handy & Harman exchange offer either 1) HAD to sell as they were constrained to holding only certain types of instruments or  2) considered the limited upside of the preferred units inconsistent with their investing goals. In either case I LOVE IT WHEN THERE ARE ‘FORCED’ SELLERS. Furthermore, just to make these units more attractive, they have a defined life; The issue must be fully retired at par, $25, in 2026, with 20% of the issued to be retired in 2020.

This is a period where I have been looking for investments that fit into one of two categories: either they are 10/1 (possibility of 10x up vs. 1x down) or relatively shielded from the current nosebleed equity markets with a reasonable return. These preferred units, of course, fall into the latter camp.  OK, so once I identified the preferred units as attractive why didn’t I ‘back up the truck’ and buy as much as I could, or at least buy a full position? Well, here we get into an ‘implementation’ issue. MY implementation issue. Scene: two weeks ago…price of both the A units and T units were trending down each and every day. I calculated that at $20 and change the units were yielding an IRR of 10%+. So I purchased a first tranche of class T units at about $20.12, thinking I would add a second and possibly a third tranche below $20 a unit as the price continued to trend down. BUT, and here’s the problem, rather than continuing their downward trend, the price suddenly reversed direction and began increasing! At first I thought, maybe this was just a blip upwards before the downward trend resumes. After a couple of days of gains, when I finally realized that this was not the case, I finally began putting in limit orders to get another tranche at a $.30 higher, then $.40 higher, then $.50 higher, etc. Yes, each time missing the purchase because I was nickel and diming my limit price. SO JUST HOW STUPID CAN I BE?? It’s a curse for me to make my first purchase at the low because I then anchor to that price and have a hard time pulling the trigger subsequently when the price goes up.

Anyway, that’s the saga of why I’m holding a half position in these preferred units.

 

As always, the above is not investment advice; always do your own due diligence!