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Four new positions.. or trying to get there…

Over the past month I’ve added three new names to my portfolio and an old one, none of which have I mentioned here yet primarily because I hadn’t bought a full position. I don’t really think my blog has enough readers to move the price of any stock, but a couple are pretty small so just in case I’ve waited until now.

Anyway, at this point I’ve either already purchased a full position or resigned myself to an orphan position in these stocks. What do I mean by ‘orphan’? I think I mentioned before that I always find myself in a quandry when buying a new position. I like to buy into a position gradually, most times in thirds. The problem arises because I hate to purchase the second third at a price higher than my first third. Likewise my final third with respect to the prior two. On reflection this appears rather stupid as I end up only purchasing a full position in stocks that are on a downward trajectory! Stocks that are moving up only allow me to get an initial position. Thus the orphan positions. I realize I need to change this approach, but in the meantime….it is what it is.

I felt guilty about holding positions without blogging about them. No, not guilty because I haven’t let you in on my investing secrets (you’d probably be better off without my naming them, by the way) but rather because I haven’t put pencil to paper and laid out my investment theses for these stocks for myself. So I’m listing the four previously undisclosed positions with their investment theses in abbreviated form. Three of them are recent spinoffs and the fourth, smaller position is a special situation. The three spinoffs are Covisint (COVS), a microcap cloud storage company that was recently spun out of Compuware Corporation, Rayonier Advanced Materials (RYAM), spun out of Rayonier in the middle of 2014, and a stock I held earlier this year, Civeo Corp. (CVEO), spun out of Oil States International last June. All three spinoffs, I believe, have come under selling pressure related to the spinoff (there are also other reasons for the sell-off in these shares) which has been amplified as year-end portfolio rebalancing takes place. The fourth stock Aviat Networks (AVNW), is a microcap special situation where Steel Partners (SPLP et al) has taken an activist position. I’m not going to dive into the fundamentals of these companies in this post. Rather I’m going to outline the reasons that these are Greenblatt-like situations.

Covisint (COVS) has a number of factors that make it an attractive spin-off investment. Until November, 20% of COVS equity was publicly traded, with the remaining 80% held by Compuware (Compuware IPOed 20% of COVS in Sept. 2013). In November Compuware spun off this 80% to holders of Compuware common stock via a distribution that gave Compuware shareholders 0.14025466 shares of COVS for each share of Compuware stock held. Compuware shares were trading at $9.70 just before the distribution (ex date of October 16) and COVS shares were trading at $2.68 (down from mid $4 range a month before the distribution). This meant that COVS represented less than 4% of the value of each Compuware share at distribution. In fact, it appears that Compuware owners considered that the Covisint business had a negative value, as on the ex distribution date Compuware shares actually increased in value rather than decreasing the amount of the COVS spun out equity. Why? Possibly because Compuware pays out a dividend of close to 5% and shareholders might be more interested in free cash flow being distributed to shareholders rather than invested in Covisint’s cash negative cloud computing business. So my thesis was simple: Most Compuware shareholders would not be interested in owning the Covisint shares distributed to them and would be dump them before year-end. The shares would be artificially depressed because of this, providing an interesting investment opportunity. There are also fundamental issues that favor COVS, primarily the recent change in executive management and the freedom its new public status will provide the company. Hopefully I can address these in a future post. I was only able to purchase my first third plus 1/2 of my second at around the $2.30 level before the stock went up about 20%. So I’ve got a semi orphan position here, but still enough to make it worthwhile.

Rayonier Advanced Materials (RYAM) was spun off from Rayonier at the end of June, 2014. At spinoff the stock was trading around $40. Since then, operational results have been, to say the least, miserable. Shares have dropped 45% to the $22-$25 range. Part of the drop is clearly because of the operating results, however part, I believe, is because the owners of Rayonier, a forest and pulp products company, are not the natural owners of RYAM; like the situation with Compuware/Covisint, Rayonier pays a significant dividend while RYAM will not be paying any dividend. Thus, a temporary depression in the price of RYAM until ownership arrives at a new equilibrium. I’m 2/3 of the way into a full position and will try to pick up my final third if the shares fall to the $21 range.

Civeo was spun off from Oil States International (OIS) in June 2014. I had purchased OIS back in May 2014 as a short-term play on the spinoff. The Civeo shares I received from spinoff were sold in July at approx.  $28/share for a 35% gain. Not bad for a couple of months! Since then, the shares of Civeo have declined substantially; 3rd quarter operating results were disappointing resulting in a share price drop of close to 50%, then recent oil price declines impacted the price of all oil service companies, with CVEO shares dropping into the $7-$9 range. I think the price drop has been overdone, perhaps exacerbated by year-end selling related to the spinoff. I’ve picked up a small position at $8/share (my timing is, as always, is not perfect) and perhaps will add to this position if the shares fall further, back to $7 or under. Did I forget to mention there is an activist here, Einhorn, whose average cost is far above the present share price?

Lastly there is Aviat Networks (AVNW) a small networking and microwave equipment company that is currently undergoing some difficult times. I’m coat-tailing on this one. Steel Partners has taken an 13% position in the shares over the past couple of months. Their modus operandi is to take a significant position, perhaps eventually a control position, and help management build back up the company. I missed my chance with ModusLink, another small company that Steel Partners took a position in, which subsequently ran up 50% or more. This is a small position for me as I haven’t done a deep enough dive into the financials. Furthermore the company is losing money, though it is trading at less than book value and about half of my purchase price ($1.34/share) is in cash. It also has an impressive list of value investors as owners (Royce, Schneider, etc.).

As always, this is not a recommendation to buy any of the securities mentioned; the post is destined for your entertainment only!

Ambassadors Group (EPAX)

As I noted in my last post about restructuring my portfolio, I’ve been adding shares of small ‘special situation’ companies. The next one up here is Ambassadors Group (EPAX)

The company describes itself as ” a leading provider of educational travel experiences and online education research materials primarily engaged in organizing and promoting worldwide educational travel programs for students through a direct to consumer revenue model”, but I view it as a soon-to-be positive operating income net-net. Revenue has been declining for the past 5 years, dropping from $69 million in 2009 to $51 million in 2013. In 2014 the annual running rate based on the first 3 quarters is about $39 million. With revenue dropping, earnings dropped too, from $1.05 per share in 2010 to a loss of $.42 per share in 2013. So why would I be interested in such a company? For one thing the company had a book value of $2.78 per share as of Sept. 30, 2014, and all of that is in CASH (or equivalents, obviously). Oh, did I forget to mention NO DEBT! Furthermore, the company seems to have turned the corner operationally, earning $.11/share last quarter. In addition they have recently sold off the smaller of their two operating segments, BookRags, and monetized their headquarters building. This is all a result of a change in strategic direction the company went through in 2013 brought about by activists Bandera Partners and Lane Five Capital Management, owners of respectively 18% and 7% of the outstanding shares. Since 2012/2013 both of these firms  have had representation on the board. A management change was effected during the first quarter of 2013 (or, more accurately, I should note that ‘old’ management was allowed to resign) and a restructuring plan was devised to rationalize and shrink the company back to profitability. I think we are seeing the fruits of these efforts with the latest quarter’s results.

What’s not to like? Well, we obviously need to see a leveling off of the drop in revenue as well as continued positive net income. In other words, the plan still needs to be proved out. In the meantime we can purchase the shares at $2.15, or less than 80% of net cash. If the company could just continue to earn 11 cents per quarter (so $.44 annually) as it did last quarter what might it be worth? Let’s look at it on a per share basis; first, the cash they don’t need for operations (most of it, so I’ll estimate that conservatively at 80% of the cash equivalents on the balance sheet), about $2.22, plus the operating business at 6 times net income (have to be conservative as they aren’t paying any taxes currently), so $2.64, for a total of $4.86, some 126% above the current share price. Now that’s a really back-of-the envelope calculation which doesn’t take into account the company’s true earnings potential or taxes or any of the other subtleties we really need to factor into a thorough valuation.

I’ve been following the company for a couple of years now but it never quite got cheap enough for me to buy… that is, until now (my opinion only…. do your own analysis!) so I’ve added shares to my portfolio as I think that end-of-year tax loss selling has severely mispriced these shares.

Year-end 2014: Rearranging my portfolio

This year, 2014, my portfolio has lagged the market substantially. It’s due to a number of factors but principally 1) my concentration in two large positions (AIG and BAC warrants) that lagged the market, 2) a large cash position and 3) the significant decline in Fortress Paper.  What can I say? It’s been a very disappointing year. So I’ve decided to change tactics for 2015, diversify a bit and focus more on special situations in smaller cap stocks. We’re now getting to the end-of-the-year and so its time to take advantage of  year-end tax selling … not my selling! other people selling their ‘losers’ (my future winners).

Reducing AIG position
To accomplish this rearranging I started by downsizing my largest position, AIG. I still believe AIG is considerably undervalued. It may double again in the next 5 years as it has doubled for me in the past 3… but, then again, it may not. Despite the steady operating improvement over the past couple of years investors have not rewarded the company with even a market multiple. Perhaps its the company history, perhaps it’s because a number of institutional investors were burned by the stock in 2008/9, perhaps its the ongoing Star trial and potential liabilities it could spell for AIG. For whatever reason, investors have stayed away from the stock this year and the share price has pretty much languished. Of course, that sets it up for a good 2015 were investors to have a change of heart, but I want to look for something a little bit less mainstream, so I’ve sold off 1/4 of my position so that I can diversity my portfolio and delve a bit more into special situations (well, at least smaller cap companies with some kind of catalyst for value enhancement)

Another liquidation situation
My first purchase under my new strategy was a repurchase. As I indicated in my response to Dan’s comment on my post on Winthrop Realty Trust I’ve put some money back into Gyrodyne Corporation of America (GYRO). I posted about GYRO back in 2011 (see here, here and here) and made a tidy 57% profit on the stock in 10 months. This time GYRO is in the final throes of liquidation… or is it? Last year in an effort to minimize the tax impact to shareholders GYRO management devised an extremely complicated mechanism, in effect splitting the company into two, one part that holds ownership in the properties and one that manages the properties. Only one of these, GYRO, the management company, continues to be a publicly traded company. They made it even more complicated by introducing another type of security, a Global Note, which they used to pay out last years ‘earnings’ (remember GYRO is a REIT and REITs have to pay out 95% of their income to retain their REIT status). Management seems to have shot themselves in the foot with all these gyrations (yes, pun intended);  the plan was to remerge the two ‘companies’ into an LLC before proceeding to liquidation by YE 2016. The problem is that the merger requires a 2/3 majority vote of the public company shareholders and management can’t seem to get the needed shareholder votes for whatever reason. The special meeting to approve the merger has been postponed twice so far. Shares of GYRO have been trending steadily downward since the end of December 2013 when a large cash payment ($45.86) was made and the management and operating assets were split. Right after the distributions the public company shares were trading in the $7-$8 range but have since traded down to a recent $4.10-4.40 range. My guess is that this is the result of 1) a reassessment of value based on a closer look at the remaining assets, and 2) uncertainty surrounding the timing of the liquidation that the postponement of the special meetings has introduced.

What’s great about liquidations is that management has to provide their estimate of what the liquidation distributions will be in the filings. Generally these estimates are VERY conservative as management has no interest in provoking a shareholder lawsuit. (Strangely, shareholders never sue when the liquidation distributions are GREATER than management estimates, but often do when they are LESS…) So what do the liquidation estimates tell us about the value of GYRO? Well, in the merger of GYRO, GSD (the owner of the properties) and the ownership interest of the global notes into the new entity to be known as Gyrodyne LLC, GYRO owners should get 15.2% of the ownership. The latest book value of GYRO shares at Sept 30 2014 was $5.52. However, we have to subtract from that the dividend of $.46 payable to shareholders of record at the end of September, so that leaves us with a post dividend BV of about $5.06/share. This should reflect management’s take on liquidation value, but may be overstated (or subsequently diluted) by the notes in lieu of interest that will be paid on the Global Notes distributed in December ’13. That isn’t a lot of upside from today’s price of around $4.20 but, as I said, management tends to be conservative. In any case, I think the downside is protected. The big IF is when the liquidation can be completed and when the distributions can be made.

There are a five other situations I have started positions in, but they are not yet full positions so I’ll hold off discussing them until I complete my purchases. This touches on one of the most difficult aspects of investing for me: buying, as in how to get into a full position, how many tranches to divide the purchase into and at what price. First I make an overall decision on how big a position I want to take, then I try to buy in, say, thirds or fourths. Sounds simple, right? The problem I have is that once I buy an initial stake I never want to pay more for incremental purchases. I know this is stupid and gets me into only those stocks that are declining! The ones that are trending up leave me with a partial position and a bad taste in my mouth. It’s just a psychological hang-up that I’m trying to get over. Perhaps the subject of a future post!

I’m parking some more money .. in a liquidation situation this time.

It’s hard not to fall into the trap of increasing market exposure as the market vaults to new highs and your portfolio continues to lag; You sit there with cash and, day after day, share prices keep rising. But this is exactly the wrong time to increase exposure! To give myself a little solace in my current plight I play out the most likely what-if scenario were I to give in and invest my free cash: It goes like this…so I finally capitulate and load up on all those shares I’ve been coveting….. only, the day after I invest the market stumbles and continues dropping steadily for the the next two months, dropping 10, 15, 20%, and I’m sitting there with all those coveted stocks now in my portfolio at 20, 30, 40% losses. Yes, my losses are always greater than that of the overall market; it’s Murphy’s law! So I smugly look back to the present and feel good about not jumping on the bandwagon at this point in the latest bull run. But what to do with all that idle cash then? If you’re like me it begins to burn a hole in your pocket at some point. I could just let it sit there and EARN NO INTEREST. But with a little industry maybe I can put together a low risk investment or two. I did something of the sort when I ‘parked’ some money in the Firsthand Technology Value Fund. Next I put some loose change into a closed end fund with a catalyst, Diversified Real Asset Income Fund (DRA). Those investments are still in the process of maturing and I won’t know whether I’ve reached my investment goals there for a couple of months. OK. But there’s still more change jangling around in the pocket, tempting me to ‘put it to work’ (an expression I’ve never quite understood) So what’s next?  I’ve decided to fall back on that decidedly unsexy sector of investing, liquidations. Why unsexy? Primarily because the upside in any liquidation situation is clearly limited. But then again, so is the downside, and that’s what I’m interested in here. The idea is to limit the downside so that in a market retreat I’ll have the cash ready to buy up all sorts of treasures.

I remember having looked at Winthrop Realty Trust (FUR) a number of years ago as a potential value investment. In fact, I even owned a few shares at one point as I dipped in early when I began a deep dive into their financials. It was short lived however, both the owning and the deep dive, as I quickly realized that I didn’t have the kind of real estate expertise to complete the necessary analysis. So a recent blurb in the Spinoff Monitor caught my attention, “Winthrop Realty Trust increases estimate of liquidation distributions from $18.10 to $18.35 per share.” or something like that. I was very surprised to see the company was liquidating, and even more surprised when I read up on it to see the reason behind the liquidation; management concluded that, despite their best efforts, the Market was not attributing enough value to the company and that shareholders would be best served and realize the most value by a liquidation of the assets. Wow! Management concerned about shareholders realizing value? Unheard of! I decided to dig a little deeper. Now the great thing about a liquidation is that management has to provide an estimate of what exactly they think the liquidation distributions will be (not the timing, mind you, just the total amount). So there is no need for me to have any real estate valuation expertise! In fact, who better than the management of a real estate company to provide the best valuation of the real estate they manage! The thing to remember about management’s valuation in a liquidation scenario, however, is that it is almost always CONSERVATIVE. Yes, that’s right there is no incentive for management to overpromise here… and a good many disincentives for them NOT to do so. So let’s go back and look at the proxy the company put out in June 2013 for their August special meeting to approve the liquidation. In the proxy management provides a range of value for liquidation distributions of between $13.79 and $15.79 per common share. Shares were trading in the $11-12 range before the liquidation proposal was made public at the end of April. Thereafter shares traded in the $15 range until mid October when management upped their estimate of liquidation distributions, first to $18.10 then $18.35. Have I missed the boat? Am I getting in too late? Well, of course, it would have been better if I’d invest in FUR in April before the announcement, or even in early October before they increased their estimates. But I’m looking to park money, with little downside so I can’t anticipate a huge upside, can I? I’ve bought a small position at $16.82 per share. This works out to about a 9% return if the distributions end up totaling management’s estimate of $18.35.  That doesn’t sound so great since the liquidation could take til August 2016 or beyond. Two years to get a 9% return, that might mean a return of only 4% per year! But you have to take into consideration the timing of the distributions. Management has already said that the first distribution should be in January or February 2015, and the quicker the distributions the higher the IRR on my investment. Furthermore, I think management may continue to increase their estimate of the distributions. Given their past actions I feel quite confident management will continue to put shareholder interests before everything else;  after all, management as a group is the largest shareholder with over 9% of the outstanding shares.

I haven’t finished accumulating my position as I’m contemplating a bit of year-end selling may depress the price from here over the next month (possibly mutual/pension funds that don’t invest in liquidations??). So, readers, no buying from you please until I’ve bought my fill. Thanks.

Tender results for DRA

The first part of my investment thesis for the Diversified Real Asset Income Fund (DRA) has panned out; they just completed one (out of a potential 3) self tender offers at 99% of NAV. Unfortunately, just like me, there were a number of other fund holders who tendered, and the tender offer was waaaayyy over subscribed. In fact, owners of 2/3 of the total shares outstanding tendered their shares. That means 2/3 of current fund shareholders just wanted to get their money back! I guess nobody was very happy with the historical performance of the fund!

The tender offer was structured to repurchase 10% of outstanding shares (approx. 2.5 million). With over 16 million shares tendered I was only able to sell 15% of my shares. As I said, I am comfortable holding this fund for at least the next 6 months. If over that timeframe the discount to NAV doesn’t average below 10% (today its around 11.8%) the fund will have to conduct a second tender for a further 10% of shares outstanding. In the meantime I’ll be collecting my 7% interest!

Follow-up on RadioShack and a new position (ZINC)

Ok, so I’m impatient. Once I’ve decided I shouldn’t have a position in my portfolio I’m in no mood to wait around for the best price. RadioShack (RSH) is now gone from the portfolio; it ‘spiked’ up to $1.03/share and I dumped it. What was so magic about the price? Nothing. I just decided that I’d had it, that the hedge funds, Standard General and Litespeed Management, that provided the needed financing to continue operations had basically taken all the upside optionality out of the common shares. In retrospect I have to say that I should have liquidated much sooner. My original investment thesis was based on the loads of cash (or at least enough to make it through a turnaround) that would let new management reshape the bad operating performance. Little did I foresee that not one turnaround would be needed, but two. My lesson from this investment? A reminder to myself: cut losses early (and let winners run!) if the original investment thesis doesn’t pan out. This is perhaps one of the hardest things for a value investor to do as you have to first see that the investment thesis isn’t playing out early on, then acknowledge that you’ve been wrong with a timely sale.

Next, the new investment. I’m a bit late reporting this but then, these day’s I’m not posting nearly enough to keep up with my heavy trading (yes, tongue-in-cheek). And besides, the share price of the new investment, after running up in the last week or so, has now subsided to almost that level at which I invested. The thesis around Horsehead Holdings (ZINC) is not new to the value investing community. Monish Pabrai began accumulating shares almost 2 years ago when they were in the $9/share range and its now the largest position in his portfolio. Since his initial investment the share price increased to over $20 this past Summer before swooning recently to the mid-teens. If you look around the web you can find a lot about the investment thesis so I won’t belabor it here. Basically, the company reclaims zinc from iron ore tailings. Not sure if tailings is the right word, but its the residue from the steel industry. It gets paid to dispose of this residue and then extracts the zinc and other metals, primarily silver, which it then sells on the open market. The company built a new ‘game-changing’ plant over the past several years which purportedly will reduce its costs substantially. Last Spring it moved operations to the new facility and closed its old plant. Well, production at the new plant hasn’t ramped up as fast as expected and thus the setback for the company shares. To me this is a typical Phil Fischer situation. The market expected the new plant to come on-line and ramp up production seamlessly. That hasn’t happened, and now Mr. Market is disappointed and is punishing the stock. I’m inclined to believe that the setback is temporary and that this operational snafu has provided a nice entry point for the patient, long-term investor. It looks like there is somewhat of a competitive moat around this company as it has long-term contracts for the iron ore residue and is the only company to have invested in this next-generation plant. I wasn’t exactly fleet of foot when I purchased my starter position for around $14.50/share, as shares had dropped into the $13’s on the announcement of the operational setback. Then, of course, with the recent rally the share price spiked up to $16 and change, before falling back to around $15/share yesterday. If the share price continues to trend down I will be buying a full position.

As always, don’t mistake the above comments as investment advice. You should always do your own investment analysis!

Updates: SVVC and RSH

The good news first:

A couple of things have happened at Firsthand Technology Value Fund since my initial post: the fund announced 1) a $10 million share buyback (to be completed by year-end), 2) the sale of their position in Facebook and the return $2.99821 per share in related gains (Nov. 6). Both of these were part of the standstill agreement with Bulldog last April. To complete the other terms of the agreement they must 1) sell their position in Twitter by the end of October and the distribute the related gains to shareholders by year-end, and 2) conclude a tender offer for 10% of shares at 95% of NAV by the end of January 2015. Net asset value (NAV) at the end of September was reported at $29.70 per share of which $7.44 was in cash. The increase in cash from the end of August is consistent with the sale of Facebook shares, though we can deduce that they used some of the Facebook proceeds to invest in AliphCom, a maker of ‘wearable’ technology.
What is interesting to note is that the fund sold all of its Facebook shares in September. They didn’t gradually sell their second largest position over a couple of months, something I might have deemed the prudent thing to do. No, they sold it all at the last possible moment! This seems to portend that they will do the same thing with their Twitter stake, i.e. wait until the end of October then dump it all in the market. Sounds like a strange strategy to me but perhaps consistent with their poor performance over the past 10 years. We holders of the fund were lucky with Facebook, the market didn’t tank in September. Will we be so lucky with Twitter? So far TWTR has held up valiantly in the latest sell-off. But, as for the future, who knows? I’m looking for another distribution from the TWTR sale of about $2.50-3.00 sometime around mid-December.

The discount to NAV appears to have shrunk from the mid 20s to around 15-16% currently. Perhaps this is the effect of the news about the distributions, the buyback and the tender. However, if the two distributions are factored in, we are still around a 25% discount on the new, lower NAV. So I still think we have a ways to go, but should handily get to my target of a 15 to 20% return on this investment by the end of January if not sooner.

Now the bad news:

Having reviewed the RadioShack situation recently I have concluded there isn’t much upside left in the stock. While there is potential for the company, it appears to me that the hedge funds have usurped most of the potential gains. Thus I will be selling off my position shortly when I see a nice little price spike. In retrospect I should have cut my losses much sooner, however I kept thinking that I might find an opportunity to double down at lower prices. But the performance of the operations and management has been just miserable and there was never a time when the risk/reward looked right. There’s a good lesson here, perhaps applicable to the Fortress Paper investment which I will be revisiting before year-end if for nothing else than an nice big tax loss.

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