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Housekeeping: RAD, NC and NYRT

September 18, 2017

Rite Aid (RAD)

When I first wrote about Rite Aid, Walgreens was still waiting for Justice Department approval to acquire the company at $6.50 a share (down from $8), an acquisition I gave a 50/50 chance of succeeding. Clearly I was overly optimistic, and when the deal was changed at the 11th hour (the acquisition was nixed in favor of a purchase of about half of Rite Aid stores by Walgreens) RAD shares tanked, losing close to a third of their value. I added 50% to my position at that point. Then, more recently as the share price continued to decline, I ‘doubled down’ at around $2.27 a share. This ‘doubling down’ has always been an issue for me; what ‘doubling down’ SHOULD mean is to double the INVESTED dollars not SHARE COUNT, yet I rarely end up doing that. What often happens, as it has this time, is that the share price drops, I buy another tranche of the SAME NUMBER of shares as I currently own with the intention of buying a further tranche when the share price falls more. Then, lo and behold, the share price never does fall further and instead begins to rise. Because I’m anchored to my most-recent purchase price I never end up purchasing the third tranche. It is totally illogical but I can’t seem to pull the trigger once the share price begins to rebound. Yet that’s EXACTLY the moment to buy… when the price is RISING not FALLING! The problem is that it’s not always easy to know when the price is really rebounding. In retrospect its easy to see this; a chart makes it obvious.  But in practice, well, you know what Yogi Bera said…

I find that one of the most difficult (read psychologically painful) moments is when one purchases  a final tranche of shares believing the share price is rebounding, only to have the price fall further. The way around this ‘purchase dilemma’ is to ignore short-term movements in the stock price and base purchases on your estimate of the company’s intrinsic value. Thus if you purchase with a discount to your intrinsic value (say a margin of safety of 30, 40 or 50%) it doesn’t matter if the share price goes down; in fact this is only an opportunity to purchase MORE of the company at an even GREATER discount. Of course this means that you have to do your homework and figure out your estimate of the company’s intrinsic value…

So where does that leave us with Rite Aid? Last post I outlined a bit of a heuristic valuation. I think you need a more complete in-depth valuation to feel comfortable in making an investment at current levels but I’m not going to provide that as I think each investor needs to make the effort on his or her own. I’m not expecting the share price to do much until the current deal with Walgreens is consummated (or not), so I think there is ample opportunity to pick up shares at levels slightly below where the shares are currently trading.

 

NACCO Industries (NC)

First, a hat tip to the Clark Street Value blog for bringing the Tropicana Entertainment opportunity to my attention; that was a cool 40% gain in less than 6 months! Thank you!

So now he’s mentioned the NACCO Industries (NC) spinoff. I love spinoffs (Thank you Joel Greenblatt), especially where there are two or more totally unrelated businesses within a holding company structure. ‘Conglomerates’ almost never get valued properly as investors have an easier time understanding ‘pure plays’ with the result that conglomerates seem to be assigned a ‘conglomerate discount’. NC is a perfect Greenblatt example; a coal mining business and Hamilton Beach, a small appliance maker. What do the two have in common? Not much, and apparently management has finally come to the same conclusion. This is a family controlled business (as will be the two surviving public companies) and so therefore everything is not strictly Wall Street rational. Family control can have significant advantages (long-term outlook and careful guarding of capital when shareholder and family interests are aligned) as well as disadvantages (like what are a coal company and small appliance maker doing together under the same corporate umbrella?).

I’ve taken an initial position and have yet to do a ‘deep dive’ into the financials. I’m hoping the market doesn’t pump up the value of the shares too much before I can get myself to look more closely at the two stand alone companies (already up 7+% since I purchased, ouch!)

 

New York REIT (NYRT)

Wow, what a ride! NYRT announced a transaction for their NYC Worldwide Plaza property last Thursday and the shares lost almost 10% in pre-market trading! What gives? Yes, this was a troubled REIT from the beginning; bad management (from a shareholder’s perspective, of course) slowly ground the value of this investment down considerably from its 2010 initial offering price of $10 per share. But with the decision to liquidate and a new management team heading the liquidation process since March of this year all the problems were supposed to be behind it. Why did the stock drop like it did? I’m not exactly sure but my guess is that the uncertainty that the Worldwide Plaza deal generated (a refinancing and sale of a portion of the equity rather than the sale of the entire equity position in the property) was the primary motive for the share price drop. On the conference call following the announcement, management DID affirm that the transaction will not negatively impact the liquidation NAV estimate that management will publish at the end of the 3rd quarter. As of the second quarter that NAV estimate was $9.21 per share. But management also made clear that the Worldwide Plaza deal will probably mean that at least the remaining interest in this property will probably not be sold within the two-year liquidation period, resulting in a continuing liquidation trust. As some institutional owners are not allowed to own non-tradeable securities this revelation could also have had a negative impact on the share price.

All that being said (and even before I heard the conference call) I added significantly to my position in NYRT at the opening yesterday. It seemed to me that a 10% haircut was far too much (actually it was more like a 15% haircut as the price had already begun to decline on Wednesday) and the market was overreacting. After listening to the conference call I am even more sure that the market over-reacted and now, of course, wish I had ‘backed up the truck’… but so it goes.

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One Comment
  1. Just came across your blog and enjoying it! I’m right there with you about being hesitant to buy when prices are rising. So much that I’ve essentially structured my life away from checking stock prices regularly!

    Looking forward to reading more of your posts 🙂

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