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Four new positions.. or trying to get there…

December 22, 2014

Over the past month I’ve added three new names to my portfolio and an old one, none of which have I mentioned here yet primarily because I hadn’t bought a full position. I don’t really think my blog has enough readers to move the price of any stock, but a couple are pretty small so just in case I’ve waited until now.

Anyway, at this point I’ve either already purchased a full position or resigned myself to an orphan position in these stocks. What do I mean by ‘orphan’? I think I mentioned before that I always find myself in a quandry when buying a new position. I like to buy into a position gradually, most times in thirds. The problem arises because I hate to purchase the second third at a price higher than my first third. Likewise my final third with respect to the prior two. On reflection this appears rather stupid as I end up only purchasing a full position in stocks that are on a downward trajectory! Stocks that are moving up only allow me to get an initial position. Thus the orphan positions. I realize I need to change this approach, but in the meantime….it is what it is.

I felt guilty about holding positions without blogging about them. No, not guilty because I haven’t let you in on my investing secrets (you’d probably be better off without my naming them, by the way) but rather because I haven’t put pencil to paper and laid out my investment theses for these stocks for myself. So I’m listing the four previously undisclosed positions with their investment theses in abbreviated form. Three of them are recent spinoffs and the fourth, smaller position is a special situation. The three spinoffs are Covisint (COVS), a microcap cloud storage company that was recently spun out of Compuware Corporation, Rayonier Advanced Materials (RYAM), spun out of Rayonier in the middle of 2014, and a stock I held earlier this year, Civeo Corp. (CVEO), spun out of Oil States International last June. All three spinoffs, I believe, have come under selling pressure related to the spinoff (there are also other reasons for the sell-off in these shares) which has been amplified as year-end portfolio rebalancing takes place. The fourth stock Aviat Networks (AVNW), is a microcap special situation where Steel Partners (SPLP et al) has taken an activist position. I’m not going to dive into the fundamentals of these companies in this post. Rather I’m going to outline the reasons that these are Greenblatt-like situations.

Covisint (COVS) has a number of factors that make it an attractive spin-off investment. Until November, 20% of COVS equity was publicly traded, with the remaining 80% held by Compuware (Compuware IPOed 20% of COVS in Sept. 2013). In November Compuware spun off this 80% to holders of Compuware common stock via a distribution that gave Compuware shareholders 0.14025466 shares of COVS for each share of Compuware stock held. Compuware shares were trading at $9.70 just before the distribution (ex date of October 16) and COVS shares were trading at $2.68 (down from mid $4 range a month before the distribution). This meant that COVS represented less than 4% of the value of each Compuware share at distribution. In fact, it appears that Compuware owners considered that the Covisint business had a negative value, as on the ex distribution date Compuware shares actually increased in value rather than decreasing the amount of the COVS spun out equity. Why? Possibly because Compuware pays out a dividend of close to 5% and shareholders might be more interested in free cash flow being distributed to shareholders rather than invested in Covisint’s cash negative cloud computing business. So my thesis was simple: Most Compuware shareholders would not be interested in owning the Covisint shares distributed to them and would be dump them before year-end. The shares would be artificially depressed because of this, providing an interesting investment opportunity. There are also fundamental issues that favor COVS, primarily the recent change in executive management and the freedom its new public status will provide the company. Hopefully I can address these in a future post. I was only able to purchase my first third plus 1/2 of my second at around the $2.30 level before the stock went up about 20%. So I’ve got a semi orphan position here, but still enough to make it worthwhile.

Rayonier Advanced Materials (RYAM) was spun off from Rayonier at the end of June, 2014. At spinoff the stock was trading around $40. Since then, operational results have been, to say the least, miserable. Shares have dropped 45% to the $22-$25 range. Part of the drop is clearly because of the operating results, however part, I believe, is because the owners of Rayonier, a forest and pulp products company, are not the natural owners of RYAM; like the situation with Compuware/Covisint, Rayonier pays a significant dividend while RYAM will not be paying any dividend. Thus, a temporary depression in the price of RYAM until ownership arrives at a new equilibrium. I’m 2/3 of the way into a full position and will try to pick up my final third if the shares fall to the $21 range.

Civeo was spun off from Oil States International (OIS) in June 2014. I had purchased OIS back in May 2014 as a short-term play on the spinoff. The Civeo shares I received from spinoff were sold in July at approx.  $28/share for a 35% gain. Not bad for a couple of months! Since then, the shares of Civeo have declined substantially; 3rd quarter operating results were disappointing resulting in a share price drop of close to 50%, then recent oil price declines impacted the price of all oil service companies, with CVEO shares dropping into the $7-$9 range. I think the price drop has been overdone, perhaps exacerbated by year-end selling related to the spinoff. I’ve picked up a small position at $8/share (my timing is, as always, is not perfect) and perhaps will add to this position if the shares fall further, back to $7 or under. Did I forget to mention there is an activist here, Einhorn, whose average cost is far above the present share price?

Lastly there is Aviat Networks (AVNW) a small networking and microwave equipment company that is currently undergoing some difficult times. I’m coat-tailing on this one. Steel Partners has taken an 13% position in the shares over the past couple of months. Their modus operandi is to take a significant position, perhaps eventually a control position, and help management build back up the company. I missed my chance with ModusLink, another small company that Steel Partners took a position in, which subsequently ran up 50% or more. This is a small position for me as I haven’t done a deep enough dive into the financials. Furthermore the company is losing money, though it is trading at less than book value and about half of my purchase price ($1.34/share) is in cash. It also has an impressive list of value investors as owners (Royce, Schneider, etc.).

As always, this is not a recommendation to buy any of the securities mentioned; the post is destined for your entertainment only!

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3 Comments
  1. Could you comment on the debt and negative book value of RYAM? The price of cellulose specialty products have been increasing steadily. What would happen if the price was to decline and ultimately resulting in issues in paying debt by the Company?

  2. Love your blog. Thanks for sharing. A couple of points on the stocks that you mentioned.

    I am long RYAM. I don’t think that the sell off is as a result of a transition in ownership. It actually did quite well initially after the spin. There’s two main issues with RYAM. The first is the accounting scandal that rocked its former parent and the fact that the management team whose watch it happened under is now at RYAM. the second is the overcapacity in the specialty cellulose industry. The thesis is that global growth would eventually absorb this excess capacity, but with the economies of many other countries in the tank this may not happen.

    I am also long CVEO. As you can tell, we both share a special situation tilt to our investing. Einhorn got crushed in CVEO, initially as a result of its poor operating results, then its decision not to covert into a REIT and lastly because of a massive drop in commodity prices which should slow drilling and mining and ultimately the demand for CVEO’s man camps.

    I have no opinion on AVNW other than back in 2010 an extremely successful activist investor, Ramius…now Starboard Value, tried to turn the company around. Its stock sits at bout half that level today, so it remains to be seen whether an activist can right the ship there. At least the stock is much cheaper today than it was back then.

    In case you’re interested, I blog about special situations over at The Mötley Fool…

    http://caps.fool.com/Blogs/ViewBlog.aspx?t=01001019292467236494

    That’s my $0.02 FWIW. Happy Holidays!

    Jason

  3. Whar are your performances for 2015 ?

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