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Investment Review (2)

March 23, 2012

In my last post I revealed what my portfolio might look like if it included only my ’10 best ideas’. In this post I’ll make a few comments about each of my ’10 best’. You’ll note that generally these are more recent acquisitions, many still in the accumulation phase. Many of my older positions were earmarked for liquidation in the last post, and some I’m already in the process of scaling out of. Below I’ve listed my ’10 best’ in the same order as last time, i.e. by their current weighting in my portfolio.

  1. AIG: Really nothing to say here that I haven’t said before. AIG is selling at less than 50% of book value. Mr. Market, at least in my humble opinion, is discounting the shares because of 1) the 1 billion share ‘overhang’ owned by the Treasury and 2) the company’s ‘untouchable’ status resulting from the Gov’t bailout during the 2008/09 financial crisis. I’m happy to watch the fundamentals improve and the share price remain artificially constrained; when the lid is take off, the shares should fly. I wouldn’t mind adding to my already substantial position if the share price retreats to the mid $20 range.
  2. MFC Industrial (MIL): This is a misunderstood black box. Great management, transparency zilch! It’s my second largest position because I am expecting the company to make good on its announcement to return a significant amount of capital to shareholders, something like 20%, as per last Fall’s announcement. The position has been a bit of a drag on my portfolio this year, but short-term performance, or lack thereof, is not my first priority, and I think there is definite value here. The dividend has been increased slightly this year and I anticipate a catalyst to unlock value before the end of the year. In the meantime, the company has a considerable cash balance that protects on the downside.
  3. Bank of America A warrants (BAC.WS.A): Woe is me! why didn’t I follow through on my plan to increase my position by 1/3  in BAC warrants at the end of last year. Well, now I’m paying the price! The warrants are up 150% since the beginning of the year and even though I didn’t take the plunge back then I’m back above water on this investment. Once again the power of averaging down is manifest. My first purchases were at $6.60 in Oct. 2010. My last at $2.46 last December. I’d love to have another chance to average down, but I’m not sure Mr. Market will offer me that opportunity again. I anticipate holding these for another 3 to 5 years.
  4. Howard Hughes Corporation (HHC): I keep asking myself what’s my edge here, but don’t seem to come up with a convincing answer. Nevertheless, I think there is a lot of ‘hidden’ value in these shares. NY’s South Street Seaport, for instance, carried on the books at next to nothing. I’m just not sure how the value is going to be realized. I hold HHC primarily because it’s a spinoff, a little hard to value and it’s a real estate company that pays no dividend (it’s not a REIT); all factors that rate a ‘+’ on my checklist. The share price has done a round trip since I first bought, rising to over $70 a year ago before falling back last Fall into the high $30s (where I should have bought more). It’s now up almost 50% from my purchase price, and thus not as much of a bargain, but I think there is still plenty of upside.
  5. Level 3 (LVLT): Ahh.. the quintessential story stock! What’s it doing in my portfolio? Well, it does have valuable assets. In fact, their fiber in the ground has been called irreplaceable. The issue is when will they be able to make a decent return. A decent return on market value would be OK, a decent return on cost would be awesome! I bought at year-end 2010 when the share price dipped down near where it was during the financial meltdown. The odds are what I liked; a potential 4x up to 1x down. In other words, it didn’t seem impossible (and still doesn’t) that if the company could just get a decent return on assets the result might be a stock price 4x what I initially paid. The share price more than doubled after I purchased, but, you know, I have an aversion for short-term gains so I watched as the price then declined 40% back almost to my purchase price. The recent rally has driven shares back up 50%, but volatility could take them anywhere before the operating story plays out. If Mr. Market gets exuberant again, I may just have to take him up on his offer.
  6. Exelis (XLS): This is another spinoff story. Shares of a company in an out-of-favor industry (defense) are spun off and promptly decline 25%, allowing me to pick up a position where the trailing P/E is under 5 and the dividend yield over 4%. This is my kind of investing! Now if management is successful in holding back the expected earnings decline just a bit, I think Mr. Market will realize his mistake in discounting the shares so much and reward us shareholders with a  50% return from here over the next year or two. I don’t anticipate holding XLS longer than that as this is a classic Greenblatt spinoff investment.
  7. EBIX is a truly Ken Fisher kind of stock. Again, this is not a typical value investment. It’s no cigar butt or net-net. But it is a ‘growth at a reasonable price’ story. OK, so my initial investment was made because the shorts pounded the heck out of the shares; stories of fabricated financials, a roll-up strategy masking declining growth, etc. It all started about a year ago. The stories came out implying some financial and operational shenanigans. The shares came under pressure. The pressure built. The share price dropped to below $13, or less than 10x earnings. But from everything I could read, the CEO was a stand-up kind of guy, if a little unconventional (and I LIKE unconventional), and he owned 30% of the company. When the shares came under pressure, the company responded. The Board declared a large share buyback (with cash on the balance sheet.. not incremental borrowing). Then they declared a dividend. I liked everything I saw and placed my bet. The investment thesis was that the shorts were wrong, this would prove out in the medium term and the share price would rebound strongly. Well, it has half played out. The share price is up 50% since my purchase, but has not fully recovered yet. I think the story is good and can see holding for several more years if operating results continue on track and Mr. Market doesn’t get too exuberant.
  8. NovaGold (NG): I haven’t yet done a full write-up on NG. The short story is 1) I was looking for a gold hedge, 2) there is a spinoff involved and 3) my favorite value investor, Klarman, purchased a position last Fall at prices not far below today’s. The kicker is that there are other savvy investors involved and the price of NG has been tanking recently with the downward drift in the price of gold. What’s not to like? I’m hoping to build a full position in the low $6 per share area.
  9. Resolute Forest Products (ABH): Another company that I haven’t explored here in-depth. I’ll simplify my thesis here as I did for NG. The company came out of bankruptcy  just over 15 months ago after restructuring its debt. Fairfax is a big shareholder, having held the debt previously. Shares are selling for less than 45% of book value, and the industry is highly cyclical. It’s kind of messy right now as the company has made a hostile offer for another paper and pulp manufacturer, Fibrek, and there is a legal war as Fibrek has cosyed up to Mercer for better terms. Resolute has so far refused to increase their bid (a plus in my book) so the effects shouldn’t be too negative. Again this is another case of large potential upside and limited downside.
  10. Gramercy Capital (GKK): Prior posts on Gramercy both here and on other blogs have laid out the investment case. The 2011 annual report has just been released and the shares have subsequently fallen 10%. I interpret this to be caused by two factors: 1) it was not announced that the arrears on the preferreds would be paid (opening the way for a common dividend) and 2) one of GKK’s two CDOs that passed the last quarterly exam, did so by a very slim margin, casting doubt as to whether it will continue to contribute cash in the 2nd quarter and beyond. I think the share price retreat was unwarranted but I wouldn’t mind taking advantage if the share price falls below $2.50 to build a full position. From that level I thinkg the shares have a potential return of well over 100%, though it may take a number of years to play out.

So far this year my portfolio is up some 25%, handily beating the benchmark S&P 500 index. My strategy from here on in is … patience. I’m hoping to exit some of my positions if they reach their target exit price in the next few months, build up some of my ’10 best idea’ positions and raise a bit of cash before the presidential elections. Of course if a new investment idea pops up in the near future I’ll be expounding on it here. Well, I’ll admit I do have an idea but it hasn’t hit my first buy in level yet… stay tuned!

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2 Comments
  1. Justin permalink

    I just discovered your blog and appreciate your analysis. Coincidentally, I am in the middle of Joel Greenblatt’s book so it really resonates. Given many value plays are off the beaten path, what do you find are the best resources to discover potential investments which fit your criteria (other than, say, stock screens on certain variables)? Thanks

  2. No really great method except to read alot. You can always find a list of spinoff stocks, but corporate reorganizations are harder to track. You should probably keep up on the value investors club’s postings; they can be a good place to start as well as the other blogs I link to here.

    Good luck on your investing!

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