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Updates: SVVC and RSH

October 22, 2014

The good news first:

A couple of things have happened at Firsthand Technology Value Fund since my initial post: the fund announced 1) a $10 million share buyback (to be completed by year-end), 2) the sale of their position in Facebook and the return $2.99821 per share in related gains (Nov. 6). Both of these were part of the standstill agreement with Bulldog last April. To complete the other terms of the agreement they must 1) sell their position in Twitter by the end of October and the distribute the related gains to shareholders by year-end, and 2) conclude a tender offer for 10% of shares at 95% of NAV by the end of January 2015. Net asset value (NAV) at the end of September was reported at $29.70 per share of which $7.44 was in cash. The increase in cash from the end of August is consistent with the sale of Facebook shares, though we can deduce that they used some of the Facebook proceeds to invest in AliphCom, a maker of ‘wearable’ technology.
What is interesting to note is that the fund sold all of its Facebook shares in September. They didn’t gradually sell their second largest position over a couple of months, something I might have deemed the prudent thing to do. No, they sold it all at the last possible moment! This seems to portend that they will do the same thing with their Twitter stake, i.e. wait until the end of October then dump it all in the market. Sounds like a strange strategy to me but perhaps consistent with their poor performance over the past 10 years. We holders of the fund were lucky with Facebook, the market didn’t tank in September. Will we be so lucky with Twitter? So far TWTR has held up valiantly in the latest sell-off. But, as for the future, who knows? I’m looking for another distribution from the TWTR sale of about $2.50-3.00 sometime around mid-December.

The discount to NAV appears to have shrunk from the mid 20s to around 15-16% currently. Perhaps this is the effect of the news about the distributions, the buyback and the tender. However, if the two distributions are factored in, we are still around a 25% discount on the new, lower NAV. So I still think we have a ways to go, but should handily get to my target of a 15 to 20% return on this investment by the end of January if not sooner.

Now the bad news:

Having reviewed the RadioShack situation recently I have concluded there isn’t much upside left in the stock. While there is potential for the company, it appears to me that the hedge funds have usurped most of the potential gains. Thus I will be selling off my position shortly when I see a nice little price spike. In retrospect I should have cut my losses much sooner, however I kept thinking that I might find an opportunity to double down at lower prices. But the performance of the operations and management has been just miserable and there was never a time when the risk/reward looked right. There’s a good lesson here, perhaps applicable to the Fortress Paper investment which I will be revisiting before year-end if for nothing else than an nice big tax loss.

  1. Greg Porter permalink

    I see two interesting things about the upcoming distribution.

    First, unless you opt-out, you get the distribution in more shares of SVVC rather than cash. The shares are valued at the market on the valuation date. They don’t say when the valuation date will be, but the payment date would make the most sense. Assuming the shares still trade at a big discount to NAV, it might make sense to take the distribution in shares.

    Second, although they could issue new shares, they say that they expect to buy shares in the market to get the shares for the distribution. So, they will be buying a little over 10% of the outstanding in the market to get the shares. Presumably they will be doing the same thing again in a month or so with the gains from the TWTR sale. They will have to buy more than 20+% of the outstanding to get the shares for the distributions, in addition to the seperate share repurchase and tender. That would be a lot of buying pressure.

  2. Thanks for the comment Greg. I’m glad you brought this issue up; I’ve been contemplating whether to take the distribution in cash or more shares. In most cases I would take the shares as they will be credited at market vs. NAV. But in this case I’ve decided to opt out and take cash as I’m thinking of this investment as short-term. I also don’t trust fund management to ‘do the right thing’ by shareholders given their track record. On your second point it’s not clear to me that they won’t use the announced $10 million buyback to fund the DRIP reinvestment program; I can see them claiming that they bought back $10 million worth of shares and then simply used these shares for the DRIP. It’s kind of a shady way of complying with the standstill agreement in fact if not in spirit. Don’t forget they still have to undertake a self-tender to be completed by Jan 31 2015, so I’m thinking they don’t want to bring too much buying pressure to bear on the shares.

    Again this is an investment I’m not particularly excited about for the long term; it’s enough to review the performance of this fund for the past 15 years to understand why. As you will remember from my initial post I’ll be more than satisfied with a 15-20% return on this ‘parked’ money and won’t hesitate to liquidate the investment if the share price hits my target.

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