February 2011 Update
I’ve been a bit lax in posting, primarily because I don’t really have much to say about a market that is grinding ever upward without much positive news to drive it, as well as the fact that I’m having a bit of difficulty finding any bargains in the stock market these days. I will admit that I have added several small positions over the past couple of months which I haven’t outlined in my blog (for shame!), and to rectify I have gone into some specifics below. However, I am primarily in a holding pattern, waiting for a couple of the larger positions in my portfolio (BBEP and ASCMA) to reach their target sell prices. Given the almost 100% advance in the US markets over the past 2 years and the lack of any significant pullback, combined with the current low VIX reading, I’m a bit wary of committing more funds, rather, I would like to reduce my exposure. If I had it in me to be a trader (which I don’t) and taxes were not a factor, I would probably be about 50% in cash, rather than my uncourageous 15%.
Back in December 2010 I added a small position in Level 3 Communications (LVLT). It’s a company that I owned shares in once before; at that time it became a successful short term ‘trade’ for me. Now, mind you, I don’t go purchasing shares in a company with the idea of trading in and out of it for a quick 10% or 20% gain. But, as in the case with my previous purchase of LVLT, if Mr, Market revalues shares I buy up by 50% or 100% in the span of 6 months or less, I do think that I need to re-evaluate my reasons for continuing to hold and most likely sell unless new information warrants a much higher target. I was reawakened to LVLT by a string of posts on the Corner of Berkshire and Fairfax discussion board. In the past I have read the Marty Whitman investment thesis on LVLT and noted that Prem Watsa is a longtime bond and shareholder. In December with the price again below $1 a share my interest was piqued.
A bit of price history on LVLT shares: with the bursting of the tech bubble in 2000/2001 shares of LVLT wilted from over $110 down to around $4 and then bounced around between $2 and $7 for the next 7 years. With the 2008 credit crunch shares once again dived, this time to under $1 a share. In the subsequent stock market recovery shares moved up to the $1.60-$1.70 range, but in the latter part of 2009 the share price was trending down again until it was below a dollar by December. LVLT was still losing money and the regulatory environment didn’t look like it was ever going to allow the company to earn a decent return on its 10 year earlier investment in fiber. The telecom titans (both telephone and cable) who were controlling the ‘last mile’ continued to lobby strong and hard that they should be paid for throughput. The Comcast/NBC deal conditions would be a marker in the sand. Well, at least that is my interpretation of what the other market participants (i.e. Mr. Market) were thinking. Me, I have no way of knowing what is really going to happen regarding the internet transport pipeline, but it seems to me that there must be some value in the pipeline and LVLT certainly has the best pipeline. Besides, LVLT is a relatively small player when compared to the AT&Ts and Comcasts of the world. Why would any regulatory body not protect the little guy here? At least make sure such an important, even if small, player doesn’t get crushed. As for valuation of LVTL, I don’t really know enough to make an educated guess. I doubt anyone else knows either; if they did, they would have sold any shares of LVLT they had in 1999 and would be sitting on the sidelines waiting for the shares to bottom (or have they already?). So what we have here is a business that might be worth a lot of money if regulatory and business things work out in its favor, but, if not, risks going into bankruptcy due to a heavy debt load. The upside could easily be $5 to $10 per share with the downside $0. So any probability of positive vs. negative outcome greater than 20%, or maybe even 10%, looks to be a winner. As I said, I have no way of knowing what the outcome will be but it looks like odds I can live with. That said, LVLT is no more than 1% of my portfolio.
The second small position that I opened more recently is an investment in Gyrodyne Corporation of America (GYRO). The specific story on GYRO was laid out rather well in a July, 2010 post on Street Capitalist so I won’t rehash it all here. The long and short of it is that GYRO’s main asset, a large parcel of land on LI, was appropriated by NY State under eminent domain in 2005 and the recompense provided at the time was not deemed fair by GYRO management so they went to court. Four years later (July 2010) the court decided that yes, indeed, the amount paid by the state was inadequate and GYRO was due an additional $98 million plus interest (at 9%). However, the state, never one to pay up when they could delay and pay interest at 9%, has appealed. The state’s brief is due to the court by March of this year. What will be in it, the Lord only knows since no additional evidence can be introduced at this point. I assume it will take another six months or more for the courts to ponder the matter and have whatever hearings they need to have (as you can tell I have absolutely no insight into the legal proceedings). But I think the award will stand. In fact, I’m handicaping the outcome at a 95% probability that the prior verdict stands and only a 5% chance that the verdict is overturned or the award reduced (but what do I know?). So what is the value of the company? Street Capitalist puts it at $119 a share. I don’t see any reason to quibble; the majority of the value is in the award from the state (about $109 a share) with the balance being the real estate assets (medical buildings on LI and elsewhere) purchased with the state’s 2006 payment offset by some long term debt. This being the case, I don’t see how, once the award is confirmed, the value of the business is worth less than book value less a 10% discount. In fact, GYRO should coming into investable funds (non-taxable if reinvested in real estate) just in time to acquire assets when the market is recovering. From my perspective, GYRO fulfills a couple of important investment criteria: 1) it is a microcap with only1.3 million shares outstanding so not too many large funds should be interested, 2) even so, it has several activist investors which is important to me as they will assure that asset allocation is favorable to little shareholders like me and 3) it is an event driven investment at a time when the market is rather frothy. Again this is a rather small portion of my overall portfolio.
Successful investing to all! But don’t forget that the above is not investment advice; you must do your own due diligence and decide what investments are right for you.