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Upping the ante on GameStop (GME)

Since I started writing this piece, a number of articles have come out about the company and the stock price, and shares have risen more than 10%.  I still think that there is a good bit of upside in the price, as well as a possible short squeeze which could spike the share price significantly. I had planned on gradually increasing my position in GME but with the recent gains I’ll just be watching unless the share price falls under $3.50 again.

In my last blog I noted that I had taken a very small position in GameStop (GME) and would tender my shares into the Dutch Auction that was announced just subsequent to the 2nd quarter earnings/dividend cut announcement. Well, I did tender my shares but I tendered at the high end of the range, $6.00, rather than the low end, $5.20. My thinking was that since the stock price was in the $7+ range before the dividend elimination was announced  and not that many shares had traded at the low after the dividend elimination announcement but before the tender offer announcement, there would not be enough shares tendered at the low end of the range and the dutch auction price would be established toward the upper end of the range. Boy was I wrong! More than twice the number of shares were tendered at the bottom of the range ($5.20) than were provided for in the auction purchase (12 million). By my calculation a lot of risk arbitrageurs lost a lot of money on this one! (Glad to think I was not the only one who got it wrong!) With at least another 12-13 million shares returned at the end of the dutch auction it is no wonder that the share price collapsed again all the way down to almost $3.00 a share.

So now, is this stock a stinky dead duck or an ugly duckling just about to metamorphize into a beautiful swan? Most commentators agree that the business has no future, that all games will be downloaded from the internet in the future, and that a retail presence in this industry is redundant; the company will eventually wind down and the stock will go to zero. Thus, the most popular thesis is ‘sell the stinker’. But that’s just why I like it! A generally-hated stock that has a decent balance sheet and is still generating significant cash flow is something that I’m attracted to. If somehow capital management is improved and, even better,  the decline in the business is slowed, this could be a real winner.

Recent attention to the stock comes from the fact that Scion Asset Management (Dr. Michael Burry of The Great Short fame) sent a letter to the GME board on August 16 in which he states that he owns 3 million or approximately 3% of outstanding GME shares and urges management to accelerate the repurchase of shares under their existing $300 million share repurchase program. He notes that at then current market prices (mid $3 per share) GME could purchase up to 80% of outstanding shares while only using half of their currently held cash balance. Will the Board or management listen? I have my doubts! You had a new retail guy come in from outside as CEO in May; usually retail guys want to invest spend their way out of a difficult situation by growing not slowly liquidate. Here, I think it depends on how savvy their CFO is and how desperate their Board is to keep the share price up and/or keep shares out of hostile hands. The real question is how the market will react to the letter and whether other activist funds jump on the band wagon and put additional pressure on the Board.

From an upside/downside perspective I think this is an interesting situation. The probability of management doing something further to boost the share price I think is less than 50% UNLESS additional pressure is put on them (a 3% holding is not enough to go activist). But the market may not see it this way. With some 56% of the float short (that’s right, close to 60%) the share price is inherently unstable.  Any significant move of the share price to the upside caused by repurchases, other actions or even just a change in perception that these things might happen (read ‘a mood swing’ caused by the publication of the Burry letter to the Board) could be exaggerated. Could we be in for a classic short squeeze?

Interestingly, yesterday, August 22, over 29 million shares traded and the price was up 9%. That’s over 30% of shares outstanding! Of course the same shares may have been traded several times during the day so that the 30% is likely overstated. In any case it is a significant number. Are the shorts covering? Is the company buying back shares?  are ‘traders’ simply trying to make a buck on a volatile stock? or is the company ‘in play’? stay tuned! It should be fun to watch.

Why would you buy that (GME)? and other updates (GLIBA)

Last year around this time I made a couple of interesting purchases; I bought shares of GCI Liberty (GLIBA) and Charter Communications (CHTR) on the same day. It was the day after Charter announced that it had lost video subscribers in the 1st quarter and, in consequence, the shares plunged to around the $250 level. I had also previously purchased shares in LVNTA prior to the spinoff from Liberty in March of 2018, but I want to focus on the GLIBA shares and CHTR shares purchased on the same day, April 27th. Since then, the Charter shares have risen in price by more than 50% while the GLIBA shares have risen only 35%. These results serve to remind me that certain investing strategies, even with the most logical of analyses, can go awry. I purchased GLIBA shares as a surrogate for CHTR shares because from my analysis they were trading at significant discount to their sum-of-the-parts value, with the overwhelming majority of that value coming from ownership of CHTR shares (say around 70%). In theory (my theory at least) GLIBA shares should have increased in value at least as much as the CHTR shares and perhaps more, if I was lucky, if the sum-of-the-parts discount narrowed. But exactly the opposite happened. The leverage I had hoped for worked in reverse. The General Communications part (Alaska telecom) of the business ran into a rough period and was clearly de-valued by the market which partially offset the increase in value of GLIBA’s Charter holdings. The lesson to remember for me is that sum-of-the-parts discounts can widen as well as narrow. Will the discount eventually be closed on GCI’s Charter holdings? Most probably; Charter may well gobble up GCI Liberty if it generates a lot of excess cash, especially if the GLIBA discount widens, but it’s unlikely, given that they are both Malone related entities, that Charter will pay a premium for the GLIBA’s Charter shares. And who knows when that might happen?

With Charter shares up so much this year I decided to rebalance my portfolio somewhat. So instead of trimming Charter shares I trimmed the less well performing GLIBA shares.

OK, of all stocks to buy for a value investor type of guy why would I buy GameStop (GME)? Look at the charts, the stock has been in freefall for 6 years. Revenues and profits have been in constant decline and management hasn’t been able to make any headway in turning around the business for all those years. Management even failed in their attempt to find a buyer who would pay a decent price for a runoff business. There were simply no takers, even in our current low low interest rate environment. Shouldn’t that mean the business, and thus the stock, is really dead? Nobody needs a physical store to sell hardware and software gaming stuff anymore. Gamers just buy whatever they want on-line! Got a computer, download the game you want, maybe even preview it on-line before downloading it!

So you might think it would be time to just close up shop and liquidate the business, or sell off any pieces (the collectibles business, for instance) that might have some value to another retailer. Nope, the board has decided to stick it out and has brought in a new CEO from the Retail sector. The business (and stock) looks like dead meat.

But me, I’m a sucker. I like to take the part of the underdog, the David rather than the Goliath. Ok, so I realize a number of times I have been wrong (viz. Rite Aid, Glassbridge Enterprises, et al.) with this strategy, more time wrong that right recently. But I just can’t help myself. This time my position is small, really, very small. I want to see if the new CEO can do anything, come up with a strategy that can eek some value (for shareholders!) out of a company that will most likely still earn a chunk of change this year, and maybe even next. Furthermore, if the CEO is in any way street wise he has “kitchen-sinked” the first quarter and so we should see some improvements in the near future quarters. I like to buy on bad news, and, boy, could there be any more bad news for investors than last quarter’s results? (that was rhetorical! of course there could, be worse news, are you fooling yourself? the business could declare chapter 11, and may well!) Revenues were down again last quarter and the dividend was cut. Yup, the only thing that was keeping the stock price afloat was the dividend, and they eliminated it. The stock dropped close to 40% the day after the announcement….

update…

as I was writing this, GME announced that it would roll out a modified dutch tender auction for 12 million shares at a price not less than $5.10 and not greater than $6.00. That would represent just under 12% of the outstanding 102 million shares and if the maximum number of shares are tendered would cost the company at most $72 million. The share tender, of course, doesn’t address the company’s strategic problems, but from an investor’s point of view gives the share price a floor and a ceiling for the next month (until the tender offer ends). As my current position is too small to impact my portfolio returns meaningfully and I most likely won’t be able to pick up more shares in the next month for under $5.00, I will be tendering my shares at the maximum of the range, if not selling previously; a 20% gain in a week is an acceptable return, and 25% in a month OK too. Perhaps there will be a chance to pick up shares under $5 again once the tender is complete.

 

 

Out of Adient (ADNT)

I don’t usually trade stocks; my holding periods tend to be counted in years rather than months. But every once in a while I’ll somehow get saddled on a bucking bronco… in this case Adient. The shares lost something like 80% of their value in 2018. I was lured in to buy a position in late 2018/early 2019 at around $17 a share only to see the share price rise to almost $26 by late February then crash back to my purchase price by early March. You never know how LOW a stock can go so I liquidated my position with no loss and no gain, still convinced in the long run there is value in this company. When the share price fell below $14 in late March I was tempted back and reestablished a position. Once again shares went on a tear and peaked around $25 in late April. With a 70%+ capital gain, the company about to report 1st quarter earning (I was pretty sure Adient earnings would be lackluster as fixing a large global organization takes more time than anyone imagines) and  what I consider a precarious economic situation for the automobile sector, and parts manufacturers in particular, I felt it was time to sell and this time lock in a profit.

As of mid-May the shares are back under $18. Is it time to reestablish a position? I still think the company is undervalued at current levels, but we need to see some signs of improvement in revenues and above all the bottom line before Mr. Market’s opinion will change. Of course, if we wait for those improvements Mr. Market will price in the improved outlook and the shares will bounce well over the April highs. But before I reestablish a position I want to see how low the share price will go. The March lows were lower than the December lows. Will we have new lows that are below the March lows? If so, the trend is still down. On the other hand, if we make new lows around the $14 or $15 level then perhaps we might see the share price gradually improve with the health of the business… I like gradually, not bucking bronco ups and down.

In the meantime we get to see how the overall economic situation plays out. A recession will dampen demand for automobiles which, in turn,  will trickle down to seat manufacturers. Given the distinct possibility of a trade war leading the US into recession, perhaps a ‘wait and see’ attitude is best unless ADNT shares lure us back with a super discounted price.

One year on….

It’s been almost a year since I last posted. Much has happened but little has changed; the US stock market is almost exactly where it was last year at this point, slightly overvalued, in my humble opinion, but relatively strong given the healthy US economy and continued low interest rate environment. Except for a brief period in November and December of last year the US equity market continues to be quite uninteresting from a value investor’s perspective. In fact, I note that it’s not only me; my favorite blogs have been mostly quiet for the past year.

Despite this, my portfolio has evolved over this past year, though my blog has not kept up with the changes; sorry, I’ve been uninspired. I did unwind some notable mistakes … New York REIT (NYRT), Regency Affiliates (RAFI), Navios Maritime Holdings (NMM), Altius Minerals (ATUSF), while others survive for some unknown reason in my portfolio… Rite Aid (RAD), Fortress Global Enterprises (FTPLF) and Glassbridge Enterprises (GLAE). And finally, a number of new positions have been added … Fiat Chrysler (FCAU), Adient (ADNT), Corepoint Lodging (CPLG), Madison Square Garden (MSG). I’ll try to go through some of the thinking behind these changes below.

Mistakes Made

Most of the ‘notable mistakes’ unwound over the past year have been mistakes of omission, i.e. not selling soon enough after the investment case changed.

Regency Affiliates (RAFI) announced in April 2017 that Kimberly Clark had NOT renewed the contract for the co-located cogeneration plant in Mobile Alabama in which Regency had a 50% interest. The effect of this was to effectively zero-out the value of Regency’s investment in this asset as the plant effectively had no value outside that business arrangement. Given that my investment case for the company assumed that the plant would continue under contract and the asset would maintain its value, I should have sold my position in RAFI immediately after the announcement was made despite the decline in share price; it should have been clear to me that the inability to secure an ongoing relationship with Kimberly Clark was indicative of management’s inability to generate shareholder value and that, as such, the investment case was broken.

The position established in Navios Maritime Holdings (NMM) toward the end of 2017 was sold in January of this year when it finally became clear to me that management simply wasn’t acting for the benefit of shareholders. As usual I was a bit slow coming to that conclusion. When I initially purchased the shares it was as a surrogate for the entire shipping industry which I thought was perhaps at or near a cyclical low. I selected NMM as it was one of the companies with the lowest price to book ratios at the time. (That, in itself, should have provided a key clue!) In retrospect I can say that I didn’t do anywhere near enough due diligence on the company and its management. It would clearly (in retrospect!!) have been a better strategy to purchase a basket of shipping companies or a sector ETF given my focus on the industry rather than the individual company. Laziness here!  So, a hand slap for impatience and hubris.

My position in New York REIT (NYRT) was sold for tax purposes before the company’s assets were put in a liquidating trust. (Company assets went into a liquidating trust on November 7th 2018 at which time given units in the trust which could not be traded on any exchange, i.e. became illiquid for the duration of the trust). I know I was not alone in being fooled by this value trap; a number of value investment blogs had touted the shares over the prior several years. The key points that fooled most investors were 1) management of the assets to be liquidated was shifted from the prior management team (which had put the company into the state that led to liquidation) to another management group that had previously performed well in a similar liquidation (Winthrop Realty) and 2) this new group was estimating a reasonably high net asset value for NYRT’s assets. Well, the property market in New York weakened and the initial estimates of liquidation value proved over-optimistic. Should I have known the trade was too crowded to be a true value trade? Don’t really know. But I do know I should have sold when the first estimates of a decrease in net asset value began to slip out earlier in the year. What is the saying? Cut your losers and let your winners run…

Then, in the ‘notable mistakes category’ there are also a couple of my current holdings that I continue to cling to, neglecting the fact that the investment case has changed, and radically; Rite Aid, Fortress Global Enterprises, and Glassbridge Enterprises. I really have to ask myself what I was thinking by holding on to these positions for the length of time I did.. and what am I thinking now, since I still hold these shares.. (oh, OK, Hope springs eternal, as the saying goes)

Who would have thought that a company with as much physical presence as Rite Aid would see its share price decline over 90% in 4 years? and I guess more importantly, why do I have such a hard time accepting that this can and does happen to companies quite often? as a corollary, the question is how does management that creates such a mess survive so long?

The latter question was recently answered, though somewhat questionably; the Board of Directors at Rite Aid decided to fire the three top executives that oversaw the prior 4 years of value destruction and the share price debacle. But why on earth did they keep the CEO on ‘until a suitable replacement was found’? Get him the hell out of there; he’s a lame duck at best, a hindrance to any possible turnaround at worst!

OK, OK so lets not get into what Management has done wrong; that’s for the next group of managers to figure out. Let’s  instead ask ourselves what WE did wrong as investors. So I have to question why didn’t I understand that if the acquisition by Walgreen acquisition didn’t go though there must have been something tainted about the acquirer, the acquiree or the industry in general. Yes, there was the Department of Justice thing and all that delayed the acquisition process interminably, but when things are healthy, a deal either gets done or its undone because the circumstances around the target are MORE optimistic than originally thought unless some financial shenanigans come to the surface. We could, of course ascribe the whole problem to the worsening situation in the overall industry; just look at the other two pharmacy chains, Walgreens and CVS, now and what their share price has done over the past year …. miserably to say the least. But that would be too easy, as well as useless. These industry ups and downs and transitions are going to keep happening. So why did I stick with my optimistic view of the company, or at least my optimistic view of the intrinsic value of the company even when the initial deal failed? Perhaps because I’m too familiar with Rite Aid; I’ve shopped there. Perhaps because I can’t imagine the number of drug stores diminishing. Perhaps because I just can’t imagine being out of milk/orange juice/cookies/toothpaste on a Sunday and not being able to just stop into the local drug store and pick up what I need. So really maybe it is because I am projecting my own wishes on the industry outlook, not the reality of today’s changing economy. I should have interpreted the Walgreens offer for Rite Aid as a wake-up call; perhaps Walgreens management concluded that ‘bulking up’ was the only way to survive and maintain the current levels of profitability in an industry in transition. A distress call, even. The sign of a sick retail sector, not a healthy one. A precursor to lower margins and profitability.

So why do I still hold the stock? For one thing I’m thinking that a retailer with $20 billion in sales should be worth more than $500 million in market cap, or $4 billion in EV. If Amazon is using some Rite Aid locations as a logistics point for pick up, mightn’t that be a harbinger of a different kind of value for their retail locations? And, after all, it’s now such a small position in my portfolio that inertia combined with potential upside is keeping it there. Look for future updates.

For the other two dregs in my current portfolio I’ll have to give explanations in a later post as I want to get to my new positions in this blog.

New Positions

Late last year and on into early this year I began to deploy a bit of the cash that I had been holding (read “burning a hole in my pocket”) for the past several years. As the market was declined close to 20%  I built a position in Fiat Chrysler, and took new positions in Adient (a bit too early), Madison Square Garden and several other smaller positions that I subsequently sold. Later, at the end of March, after Corepoint Lodging reported unexpectedly low 4Q earnings and the stock dropped something like 20%, I added a position there as well .

The investment thesis for Fiat Chrysler (FCAU) was rather simple. The company was trading at something like 5x earnings. The company had little or no long-term debt. In November they sold their parts division, Magneti Marelli, for $7 billion and reported that they would return much of that capital to shareholders through a special distribution after the sale’s closing. It was further rumored that the Company would be initiating a dividend, a rumor subsequently confirmed in a late February press release. By last summer the share price had backed off from a high of $24/share at the beginning of 2018 to the high teens, as there were many analysts who were forecasting a significant drop in car sales with the advent of the next (soon to be appearing) recession. I purchased a small position in July/August of last year. Then, with the year-end drop in the market and similar drop in FCAU’s share price, I added substantially at the end of December and early January. An imminent return of 15% of capital and the shares trading at a 2 year low convinced me, and Fiat Chrysler is now my second largest position.

I always review the 52 week lows in Barrons; bottom fishing is an interesting, and at times, lucrative pastime, provided, of course, that you don’t invest indiscriminately and do your due diligence thoroughly. I had been seeing Adient (ADNT) in the new lows list for almost 6 months. Now remember, I have a soft spot for spinoffs, especially those that go out of favor after the spin. So I finally looked up what analysts and bloggers were saying about Adient when it was about to be spun out of Johnson Controls in November of 2016. To my amazement I saw predictions of $14/share of earnings for the next year. So a company whose shares were trading in the mid teens at the end of 2018 was supposed to have been able to earn $14/share? sounds like a situation that might be interesting. Of course, the auto industry in 2019 wasn’t what it was projected to be back in 2016, so that had to be factored in. More importantly, was the company going to go under? After a quick look at the balance sheet it didn’t appear that this was the case. So if the auto industry didn’t suddenly tank (always a distinct possibility given the current precariousness of the world economy) here was a company potentially trading at 1x future earnings. Unlike some other automotive parts companies, the threat of obsolescence for Adient products appeared low; car seats are required in electric cars just as they are in combustion engine cars. So I took a position in early January at around $17 a share. The share price tracked up to the low $20s in early March before making a long slow decline back to the low teens. Fortunately I was able to trade out at just about my original cost in early March and then trade back in at around $14 a share at the end of the month.

I must admit I missed the value in Madison Square Garden (MSG) when it was spun out of Cablevision back in 2010. Then again when MSG, in turn, spun off MSG Networks in 2015. So this time around I vowed I wouldn’t miss the spin-off; the company announced last summer that it would spin off the sports teams from the venues. Originally scheduled to be completed in the second quarter of this year the spin-off was recently  pushed out to the second half of the year. I have read various analyses of the value of the franchises (Knicks and Rangers), and Forbes, of course, values the various franchises every year. Yet I think these valuations will prove to be low for the new MSG team entity spin-off; every fan wants to own a piece of his or her home-town team, price be damned! Furthermore, I think the parent venue entity will be more readily valued as the real estate business that it is. We’ll see. After waiting far too long to jump on the bandwagon I’ve taken a half position at around $276 a share.

Lastly, there is the position I’ve taken recently in Corepoint Lodging (CPLG) which was spin out of La Quinta last June. I first read about the spin-off on ‘Clarke Street Value Blog’ (here) and ‘Yet another Value Blog’ last spring (here), but didn’t find the value compelling for my portfolio at the time. It wasn’t until I read in February that CPLG was the top holding in Scion Capital’s (the fund of the famous Dr. Michael Burry!) portfolio and the company’s reduced share price that I became interested enough to explore further. Then, when 4th quarter earnings came out on March 22nd and the share price declined from $14 to $10.50 over the next two days, I added a position. As usual I started buying too soon, and my average cost came in around $11.40.

To conclude, I realize haven’t provided any real analysis of these businesses here in this post. Rather, the purpose was to provide a portfolio update as a precursor to more in-depth posts in the (near?) future on individual holdings.

As always, do your own due diligence; all references to companies listed above should not be construed as investment advice.

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.

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!