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1Q 2011 Update

April 4, 2011

I don’t track portfolio performance on this blog for a number of reasons. First, the purpose of the blog is to highlight what I think are great investment ideas as well as explore the zen of investing, second the stocks mentioned here make up only a portion of my portfolio and I’m just not interested in running multiple books.

That said (and repeated for the nth time… sorry), let’s take a look at what happened to the holdings highlighted in this blog this past quarter.

A. Portfolio changes I made:

1) Sold out position in

  • KSP for a 46% gain
  • AVTR for a 14% gain

2) Reduced holdings in ASCMA by 50% (70% gain)

3) Added positions in

  • GYRO
  • PDLI

4) Added shares in

  • KHDHF: increased holding 50% (the January rights offering)
  • PRXI: increased position by 30% when share price dipped to $1.55

Comments: My first reaction is TOO MUCH trading! I look to keep my turnover under 25% per year, preferably under 20%. The second is that I kind of blew the KSP trade as I exited the position about 2 weeks before the buyout/exchange offer; I lost the last 35% of the gain. My takeaway can be summed up in one word, Patience! I think one of the most valuable traits a value investor can have is a double dollop of patience. Almost every time I reflect on what I have done vs. what I should have done (in the investing sphere, that is) I conclude that I did not demonstrate enough patience.  In most cases, I acted precipitously when I shouldn’t have and, conversely, I wasn’t daring enough in adding to positions when they were down. So, action when I shouldn’t have and inaction when I should have. Hmmm. I’m not sure exactly how to counter this and improve my investment style except to revert back to a more disciplined model; buy only with a real margin of safety and sell when shares reach 90% of intrinsic value NO MATTER WHAT. This, of course, is the great attraction of an investment ‘system’. You obviate the human emotion that makes us first and foremost bad investors, the ‘sell when you’re down’  knee-jerk reaction.

B. Selected Company News and share performance:

a) Ascent Media: the sale of all ‘historic’ business operations was completed in February and ASCMA’s operations now consist of only its recently acquired Monitronics International group, plus some cash for perhaps another small acquisition or internal growth. The Monitronics business should, at the very least, fund its own growth, and at the best provide significant cash flow if overall customer acquisition costs are reduced by slowing growth. I’ll be interested to see what management does. But in any case I have sold out 50% of my position because the shares reached my intrinsic value calculation based on the balance sheet and I don’t really have enough information about the new ASCMA’s operations to revise that upwards or downwards. I have put a sell target of $55 on the remaining 50% interest but without any real in-depth analysis. I’ll be happy to cash out early if the share price continues to appreciate as it has over the past quarter, rising 26% to almost $49 a share.

b) Breitburn Energy Partners: Operating performance has been lackluster. I try to remind myself why I invested in this LP in the first place: it had liquidity problems in 2008 and eliminated its dividend. So the play was based on a low market to book ratio and the idea that the liquidity problem was not as bad as the market perceived. Indeed, the liquidity issue was resolved without massive dilution and the dividend reinstated, albeit at a lower payout level than before. So why am I less than pleased? BV which was around $24 and change a year ago has now fallen to $22 and change. My original thesis was to sell out around book. It’s still my thesis, but book value has now edged downward so I have to reduce my expectations for the exit price. I’m now looking to liquidate in the $22 to $24 range over the next quarter. Perhaps if we get a bump up in the 1st quarter payout the unit price will float up to the higher end.

c) Enzon Pharmaceutical: No real operational news here. The stock continued to tread water between $10 and $11.50 a share. The top 10 institutional owners accounted for over 60% of company ownership with Icahn’s fund increasing its ownership in 4Q 2010 and Baupost retaining most of its 16% stake. The company, in my opinion, is in semi liquidation mode and the high concentration of institutional ownership guarantees management doesn’t try to hijack the cash for some crazy acquisition. Share price appreciation is dependent on some corporate event like a share buyback or extraordinary dividend and will probably lag in an up market and outperform in a down market. It’s a hold for me until the triggering event happens. Let’s hope soon!

d) Gravity Ltd.: We should be getting near an inflection point in the Gravity story… but that’s been the case for several year’s now. I still think Mr. Market continues to misprice this security. It’s trading at 85% of cash on the balance sheet and has positive cash flow. The potential upside is significant if only because the company has disappointed for a number of year’s now. I can see the shares possibly trading above $5 if its latest game has any sort of operational, not to speak of financial, success whatsoever. I like this position because, like ENZN, the final outcome is less dependent on Mr. Market and more dependent on some catalyst… especially in this market that I consider somewhat fully valued.

e) Contango Oil and Gas: I bought MCF after the market reaction to the news of its devaluation of oil and gas reserves last June. The investment thesis was that the news artificially depressed the share price and that the long-term story was still intact: Low-cost gas producer, significant management ownership insuring alignment with outside investor interests, a small market capitalization and no debt. The thesis has pretty much played out. Management didn’t pay themselves a huge bonus for non-performance (unlike many other large companies last year… unfortunately). Unfortunately gas prices haven’t recovered as they might. Nevertheless MCF’s shares have  outperformed the market since I made my purchase. The March announcement of a successful well in the Gulf has buoyed the stock lately. If the share price reaches the upper $70 over the next six months I will be a seller, especially if I can hang on until LTCG treatment kicks in for me in August.

f) Myrexis Pharmaceuticals has been a disappointment. It appears that I made somewhat of a mistake on this one. I should have sold out when the shares hit $6 some 18 months ago. The shares have traded under my cost basis for the entire quarter. The company just announced a restructuring that includes laying off a good percentage of the research staff in order to conserve cash. We are over 20 months into this spinoff and almost no products or revenue opportunities to speak of have been announced. I think my error in judgement was in not appreciating that the company is being run by scientists, not investors or capital allocators. I should have seen (and appreciated the fact for what it was) that management owns only a very insignificant share of the company. What made me think that they would look after outside investor interests? Well, actually, maybe I thought that it would be some outside actor that would catalyze value in this company, like a potential acquirer. My plan is to hold until after the 2 year anniversary of the spinoff in July. Then if there is no change in status I will be looking to liquidate the position before the company actually does run out of cash or management is tempted into some value destroying transaction in order to save their salaries.

That’s the extent of my comments for this post. As you know I am opportunistically looking to raise cash over the next quarter as I don’t think this upward market trend will last forever. But I am ever mindful of my above takeaway. Patience! What could have a worse emotional impact than selling a position for a loss days or weeks before a catalyzing event squeezes intrinsic value from a (formerly owned) company!

One Comment
  1. Teresa permalink

    Patience is certainly something we all need to work on when investing. My father is a long time investor, leaning towards the growth side. The first thing he told me about investing was to have patience, good things don’t happen overnight. He also said if investing keeps you awake at night, it’s not for you. His third piece of advice was – if you can’t afford to lose it, don’t invest it. Thanks for sharing your research.

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