What’s wrong with my portfolio? (part I)
I just watched a recent lecture by Mohnish Pabrai at Columbia Business School and came away with the above question… which I will attempt to address below. Take a look at the video if you have 90 minutes to invest and can stand the poor video and horrible audio. It’s definitely worth it (kind of like an early morning 10 mile jog in a cold drizzle), Mohnish is always entertaining and stimulating.
Why did the lecture provoke the question about my portfolio? Well, it was the part of the lecture dedicated to that oft quoted little snippet from Warren Buffet where he says that if he was managing just $1 million he would target, no, he was sure that he could achieve 50% annual returns. That kind of statement makes us all feel a bit insignificant, I bet. If not, you’re either fooling yourself or you’re the next Warren Buffet. And if you’re the next Warren Buffet what are you doing reading this blog anyway? Why don’t you just send me in your stock picks and I’ll fancy them up and share them with ‘our’ readers?
In the context of the Buffett statement above, Mohnish looked at the analyses that won the most recent Moon Koo Lee value investing prize. Of course none of 4 companies that were the subject of the winning analyses would find a place in Buffett’s $1 million portfolio as they couldn’t possibly provide the kind of returns he would be looking for. So I thought maybe I should do the same kind of ‘smell’ test with my portfolio picks. First, though, let me first set a return target that’s a bit more reasonable; I’m no Warren Buffet so give me a break! 50% annually seems kind of a reach. I think I would be quite satisfied with an average annual return of 25%. If I’m able to achieve a higher return so much the better!
So what’s my test? I’ll go through each open position with an eye to whether I think it will be able to make my IRR target of 25%.
Ascent Media (ASCMA): I’ve already sold half my position in ASCMA for a gross gain of 70%, but given the holding period of 2 ½ years this works out to an IRR of about 26%, just within my target. If I’m able to get $55 for the balance of my shares by the end of this year, my IRR should improve by a couple of percentage points. My position in ASCMA gets a passing grade.
Bank of America A warrants (BAC.WS.A): these warrants are basically flat since I purchased them in August, having first gained 30%, then lost the same amount as the company underperformed these last couple of quarters. I need the warrants to trade up to $16 in the next 3 ½ years to make my target IRR. Doable? I definitely think so (this implies BOA shares trading up to the $30 range) and am considering doubling down on this position should the warrants trade down below $6. Of course, it could take longer than 3 ½ years for the share price to recover, but the warrants still have almost 6 years to run, so there’s a bit of leeway there.
Breitburn Energy Partners (BBEP): So far BBEP has returned over 35% annually. My target sell price is only 10% greater than today’s share price. But if we don’t see this move up over the next 6 months it’ll be selling at current levels; the shares are trading at almost 90% of BV.
Enzon Pharmaceutical (ENZN): This stock has gone nowhere for a couple of years. Baupost owns almost 16% of shares outstanding (and have for a while now) and Icahn increased his holdings to over 10% during the last quarter. I’ve been holding the shares for on average about six months but am not expecting much in price movement until there is some kind of corporate catalyst (sale, dutch tender offer or other) over the next year or so. My target is over $20 per share and that should handily provide me with a 25% IRR if all goes well.
Gravity Ltd (GRVY): Shares in GRVY continue to trade below cash on the balance sheet. The company remains profitable but nothing to write home about. But because the company is majority owned by a Japanese firm the only likely path to share appreciation is through improved operating metrics. This in turn is completely dependent on whether their latest version of Rognarok (on-line game) is successful or not. I can see the stock trading at $5 or more per share if it is, or languishing at current levels or slightly lower if not. This presents a good investment proposition with a triple if the investment hypothesis pans out and not too much downside if it doesn’t. This holding obviously passes the test.
Gyrodyne Corporation of America (GYRO): Another special situation play. The NY State appeal of the revised purchase price award should be resolved by August 2011. I’m giving a probability of about 90%+ that the original award is reaffirmed. This should result in a book value of approximately $120 per share once the award is paid. My sell target would be if the shares appreciated to 90% of this for a 40% gain in less than 1 year. If the share price weakens over the next couple of months I will be upping my position.
The Howard Hughes Corporation (HHC): I was late to the party on this one. I actually looked back over some notes I made last September where I jotted down that this would be an ‘interesting’ investment if the share price dropped to the $30-35 range after the IPO. Well, it did, but I was obviously not paying attention. I didn’t wake up until the price had appreciated to the lower $40’s in December. Even then I didn’t take a full position because I was hoping it would drop into the $30 range again (which of course it didn’t). Since then it has been on a tear. It popped to $70 plus last month before settling back after Chairman Einhorn’s comments (and not exactly stellar first quarter results – but this is an asset play). I had set a target to sell if the price broke through $75 a share. Luckily it didn’t – I hate short-term gains. So I continue to hold. I’m thinking $80 or $90 in a year to 18 months which would put it nicely above my target IRR.
KHD Humboldt Wedag International (KHDHF): [To follow the story of this company please read my various posts.] With my average cost below $6 a share and the current price over $10, the stock has nicely met and beat my target IRR. I was luckily able to take advantage of the January rights offering so my militant posture against management has been somewhat muted (yeah, I know, too much self-interest). But I am still very wary of management’s behavior, especially given that they own so little of the company. That said, I do think the company could provide significant upside and my share price target of $15 may prove too low. I’ll just have to keep my eyes and ears open … and hold my nose. In any case, so far the stock has well exceeded my target, and even if I hold another year and nothing happens I’ll have exceeded my target.
That’s all for now. I’ll be completing my review of the balance of my open positions in the next post. So far everything looks OK. Nothing has failed the smell test yet!