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Follow-up on RadioShack and a new position (ZINC)

October 28, 2014

Ok, so I’m impatient. Once I’ve decided I shouldn’t have a position in my portfolio I’m in no mood to wait around for the best price. RadioShack (RSH) is now gone from the portfolio; it ‘spiked’ up to $1.03/share and I dumped it. What was so magic about the price? Nothing. I just decided that I’d had it, that the hedge funds, Standard General and Litespeed Management, that provided the needed financing to continue operations had basically taken all the upside optionality out of the common shares. In retrospect I have to say that I should have liquidated much sooner. My original investment thesis was based on the loads of cash (or at least enough to make it through a turnaround) that would let new management reshape the bad operating performance. Little did I foresee that not one turnaround would be needed, but two. My lesson from this investment? A reminder to myself: cut losses early (and let winners run!) if the original investment thesis doesn’t pan out. This is perhaps one of the hardest things for a value investor to do as you have to first see that the investment thesis isn’t playing out early on, then acknowledge that you’ve been wrong with a timely sale.

Next, the new investment. I’m a bit late reporting this but then, these day’s I’m not posting nearly enough to keep up with my heavy trading (yes, tongue-in-cheek). And besides, the share price of the new investment, after running up in the last week or so, has now subsided to almost that level at which I invested. The thesis around Horsehead Holdings (ZINC) is not new to the value investing community. Monish Pabrai began accumulating shares almost 2 years ago when they were in the $9/share range and its now the largest position in his portfolio. Since his initial investment the share price increased to over $20 this past Summer before swooning recently to the mid-teens. If you look around the web you can find a lot about the investment thesis so I won’t belabor it here. Basically, the company reclaims zinc from iron ore tailings. Not sure if tailings is the right word, but its the residue from the steel industry. It gets paid to dispose of this residue and then extracts the zinc and other metals, primarily silver, which it then sells on the open market. The company built a new ‘game-changing’ plant over the past several years which purportedly will reduce its costs substantially. Last Spring it moved operations to the new facility and closed its old plant. Well, production at the new plant hasn’t ramped up as fast as expected and thus the setback for the company shares. To me this is a typical Phil Fischer situation. The market expected the new plant to come on-line and ramp up production seamlessly. That hasn’t happened, and now Mr. Market is disappointed and is punishing the stock. I’m inclined to believe that the setback is temporary and that this operational snafu has provided a nice entry point for the patient, long-term investor. It looks like there is somewhat of a competitive moat around this company as it has long-term contracts for the iron ore residue and is the only company to have invested in this next-generation plant. I wasn’t exactly fleet of foot when I purchased my starter position for around $14.50/share, as shares had dropped into the $13’s on the announcement of the operational setback. Then, of course, with the recent rally the share price spiked up to $16 and change, before falling back to around $15/share yesterday. If the share price continues to trend down I will be buying a full position.

As always, don’t mistake the above comments as investment advice. You should always do your own investment analysis!

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3 Comments
  1. It seems unlikely that ZINC would be able to generate high returns ex-ante in a commodity industry, especially when the commodity price isn’t at the top of its cycle. If management made grand claims about the profitability of the new plant, then that may be a red flag. I haven’t researched the stock or their technology though.

  2. That was my first reaction as well. The interesting thing here is that ZINC is a recycling company competing against a mining industry. Whether their technology can deliver as promised and whether it is proprietary enough to create a competitive advantage is the $64,000 question. Thanks for the comment Glenn.

  3. Brian Roach permalink

    Grant’s Interest Rate Observer covered the ZINC transformation story pretty well over the past 2 years. Recently they downgraded their recommendation of ZINC on the basis of the transformation being complete and the stock price performing well over the time period. As the utilization of the new plant ramps up, I think ZINC becomes an attractive target for a larger metals company.

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