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2011 Portfolio Review (part 2)

January 16, 2012

This is the continuance of my previous post reviewing 2011 performance of stocks in my model portfolio.

ENZN: (share price declined 45%) The few events at Enzon last year don’t seem to account for the share price decline. Yes, there was the discontinuance of trials associated with Peg-SN38 in May, the subsequent departure of the CEO and his replacement with the CFO and the reduction in staff last Fall. And of course, there is the continuing cash bleed. Maybe its just that nothing was announced to keep the share price up, and Mr. Market is getting a bit bored with no story here. The largest 5 institutional owners continue to own over 50% of the equity. The most recent change was Iridian increasing its ownership to over 10% in October. I added 25% to my position in October at $7.50 but only because it was either that or sell out and I just feel that the Klarmans and the Icahns of the world know something more than I do on this one.

BAC.WS.A: Not much to say here; the warrants were down 72% for the year. However, they have a number of years before they expire and I’m confident they will recover and then some. In 2011 I tripled my position but started buying far too early (July-October) as usual. So far this year the price has rebounded nicely, up 50%. Hopefully that will continue.

GRVY: (share price declined 15%) This is one of the few net nets Mr Market is currently offering that has positive operating income and cash flow. I think Mr. Market continues to significantly undervalue these shares simply because he is tired, tired of waiting for the rollout of Ragnarok II, the sequel to Ragnarok, a massive multiplayer online video game that still generates income for the company. Ragnarok II was supposed to be ready years ago and is still being tested (or maybe, just maybe it’s being rolled out as I write this! that’s the scuttlebutt on the web). Maybe Mr. Market has capitulated as he knows that with a majority (Japanese) shareholder, GungHo, there is simply no way to force management to realize the company’s intrinsic value, nothing an activist investor can do. So he’s had it! and he’s pricing the stock at around a 20-25% discount to cash held at the corporate level (there’s more at the subsidiary level, but I guess he figures that it will be used to develop other games). He doesn’t seem to remember that the company has been net income and cash flow positive for most of the past 3 years and that management hasn’t frittered the cash away on overblown salaries and bonuses or useless acquisitions. No he’s just given up. Shares began the year at $1.71, dropped to a low of $1.16 in November and rebounded somewhat to end the year at $1.45. I significantly increased my position around the $1.20 level, and if it drops down to those levels again on no new news I wouldn’t hesitate to purchase more.

XLS: (spun off from ITT, shares started trading at $11.50 in October and dropped 21% to end the year at $9.05). Exelis, which I wrote about late last year (see here),  has seen its shares follow the classic spinoff pattern, trading down during the WI period then down some more during the first 6 weeks of trading before turning up slightly at year-end. I added to my spinoff shares around the $9.00 level because the company looked undervalued compared to other defense contractors (an industry already out of favor due to anticipated future defense spending cuts). I note with pleasure that its PR department has been active issuing a number of press releases over the past couple of months, important for a newly public company in attracting institutional interest. The share price is now showing a bit of post-spin rebound.

HHC: (the share price was down 19% for the year after being up over 40% at one point) You will remember that HHC was spun out of GGP in late 2010. Shares traded up for the first quarter of 2011, but when earnings came in, apparently everybody was expecting something better, and the shares gave up all the gains they had made in 2011 and more. The post-May slide has put the shares back at levels at which I originally purchased. For me this is a long-term holding with a potentially large upside, but one that will require multiple years to realize value. In retrospect, should I have sold for a short-term gain of 60% in April? Of course! But hindsight is useless except to learn from. Besides, I hate short-term gains! (have I said that before?)

EBIX: (share price down 7% on the year) Ebix shares were beaten down last year on a lot of negative publicity. It appears the shorts were putting forth the case that the company’s business model of rolling up other software vendors was masking slowing revenues and income. There was even talk of fraud and accounting chicanery. The company responded vigorously issuing press releases, insituting share buyback then increasing the buyback and finally instituting a dividend. Despite the Board’s and the founder’s (who is the largest shareholder) best efforts and continued revenue and net income growth, the shares tanked. At one point they were down 45% for the year. However, the tide seems to have turned now. Negative publicity seems to be waning. The shares have recovered nicely since October. I purchased a small position (a bit too early, it seems) at around $16 on the theory that the shorts had it wrong and the price would rebound. I found the company’s explanations for the issues in question logical and convincing and their actions shareholder friendly. Shares still trade at a below market multiple, but once the multiple expands above 16 or 17x (let’s say above $30 in price) I’ll no longer have a valid motive to hold this growth company’s shares.

LVLT: (share price up 16% for the year) Another stock with a roller coaster year. Shares reached the equivalent of almost $40 in June before falling back to below $20 in December. The story this year for LVLT was the combination with Global Crossing which was finalized in December. Along with the fusion came a long anticipated 1:15 reverse share split. This is not a traditional value stock as it has a negative book value and hasn’t really produced any income in the last 5 years. The only value story here is whether we believe we are buying assets on the cheap that at some time in the not-too-distant future will be able to generate any kind of normal returns. The jury is still out on this. My capital gain rule (only Long Term please) once again kept me in this position far longer than I should have. If this year we get anywhere near the 200% return I had on paper in the middle of last year, I’ll be liquidating in a flash.

GKK: (share price up 8% on the year, but down 7% for me since my mid-December purchase) An idea I picked up from Whopper Investments and Variant Perceptions that I wrote about recently, here. This is a complex situation with which I only began to feel comfortable after the company published the pro forma statements reflecting the transfer of the Real Estate Division’s assets. I still think there is enough uncertainty to keep investors on tenter hooks and the share price rising or falling on the latest whiff of news. In retrospect I purchased a bit too high and I’ll be looking to complete my position only if and when Mr. Market offers me a price with a bit more margin of safety, around $2.25 or less.

XYL: (spun off from ITT, shares started trading around $24.25 in October and rose 6% to end the year at $25.69) This is the largest and, for me, the least interesting of the 3 former ITT companies. My reasoning is that this was touted as the most interesting of the former ITT companies because of the company’s focus on products related to water resources, which everyone knows is a future growth area, i.e. a ‘story stock’ if there ever was one. True, the company has solid earnings growth, but behind every story stock there lurks disappointment. I anticipate selling this position within 6 months to concentrate on the other ITT businesses.

MYRX: (share price down 36%) With little positive news on the drug development front and a continuing cash bleed, albeit at a reduced rate, Mr. Market continues to mark down the shares. Why am I still holding this position? Cash on the balance sheet ($3.83/share  at 3Q end) still exceeds the market value of the company ($2.68 at YE 11) by almost 50%. And there have been some corporate changes such as the appointment of a new CEO and a reduction in headcount of over 50% in 2011. Will we see any value emerge in 2012? I just don’t know. If we get any kind of good news and a price spike I may consider exiting this position as my original investment thesis hasn’t panned out.

ABH: (share price decline of 38% in 2011, though my position is down only 13%) After emerging from bankruptcy in late 2010, Abitibi Bowater (now named Resolute Forest Products,) with lower debt and new shareholders, faced a difficult economy in 2011. Weak earnings results dragged down the share price throughout the year. The company has a rather concentrated group of owners, including Fairfax Financial and Steelhead Partners, with the top 4 holding over 45% of the shares. The situation has become more complicated as ABH has made a bid for Fibrek which has now turned hostile. It looks to me like the addition of Fibrek’s assets would be accretive for ABH, but there may be a problem as the initial bid is considered low by a number of Fibrek shareholders. In any case, if there is a rebound to the economy ABH could do nicely with or without the Fibrek assets.

ITT: (the remaining assets of ITT after the spinoff of XYL and XLS; shares started trading around $17 after the spinoff and rose 14% to end the year at $19.33) Since this was the catchall entity after the two other divisions of ITT were spun off, it’s not exactly clear what the previous performance of these assets has been as there are no pro forma financials provided like there were for XLS and XYL (and I was too lazy to create them). Interestingly, the former CEO of all of ITT stayed on to manage the new slimmed down company. I take this as a clear indication that there is value in the new ITT, but, for me, I’ve lumped it into the ‘too difficult’ category unless and until there are more complete financials (YE 2011 10K), by which time it may be too late. In the meantime, I will continue hold my shares until a better opportunity presents itself.

One Comment
  1. ITT looks like it may be an interesting spinoff situation? After all… when the CEO jumps ship to the smaller company it may be because it is undervalued and he hopes to load up on options. (If he jumped to a much larger company then his compensation would be commensurately higher. So I am interested in his motivations.)

    Also, have you looked into whether the asbestos claims at ITT may be lower than expected?

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