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Why I love the end of the year (SMHI and AMCX)

January 7, 2018

You’ll notice that I avoid all mention of my portfolio performance at year-end. Yes, that’s on purpose. My blog is not here to help you invest … its to help ME invest. And I don’t think I need to crow about my results, good or bad (like this year) as they may be. I’m trying to improve my method. I think the results will follow.

So let’s get on with it. Why do I like year-end? Because a lot of people do dumb things with their portfolios. Now don’t think I’m referring to individual investors, though they do dumb things too; I’m really referring to those lemmings who get paid big bucks to lose manage other people’s money. Yep, that’s right, the professionals. They love to window dress. Gotta sell their losers and buy more of the stocks that have gone up so they can ‘look good’, performance be damned!

How do we, smart investors take advantage of this? Well, I’ve found that a good place to go prospecting for new investment ideas during December is in the 52 week low list. When a stock has really underperformed for the year what happens at year-end? It becomes a candidate for tax loss selling, or even ‘just-get-me-out-of-that-position-whatever-it-costs’. There is just something oh so human about getting rid of your losers; it seems that once they’re gone from your portfolio a weight is lifted, you can finally forget the damage they did and the grief they inflicted. I have to admit that I too am inclined toward participating in this annual ritual, but I try to remind myself that I would really be doing something STUPID; I would be selling at exactly the same time that a lot of other people would be selling. So I put off my portfolio clean out until March or April (Spring cleaning anyone?) when I hope others will be thinking about something else. Instead, December is the time to take advantage of this annual rite and buy up the year’s losers other investors are dumping. We all know that other investors push Mr. Market to extremes. Prices get bid up too high for ‘good’ companies and bid down too low for ‘bad’ companies. Of course WE don’t partake in that do we? So let’s try to take advantage of Mr. Market’s little mania, and what better time than in December?

Two new positions

Last year’s spinoff: Seacor Marine Holdings (SMHI)

You all know I like spin-offs. Joel Greenblatt and all! So here’s a spinoff that looks so unappetizing that I just can’t resist. First of all its in an industry that is nothing if not ‘out-of-favor’, offshore drilling support. Second the company has been losing money hand over fist for the past couple of years. Third, it’s too small to be on the radar of most professional investors ($230 million market cap). OK, there are a couple of positive factors too, 1)  the company is selling at about half of book value (with much of the equipment having already being written downs in the past couple of years) and 2) a number of the top brass from the parent company moved over to the smaller spinoff, showing some confidence in this ‘loser’. The company I’m referring to is Seacor Marine Holdings Inc. (SMHI). It was spun out of  Seacor Holdings (CKH) in June of this past year. In a strange twist Seacor Holdings started in the business SMHI is in, support ships for offshore drilling, then branched out into other marine activities and is now selling off its original business unit at what appears to me a market bottom. When I have to hold my nose to purchase a security, when my stomach churns with nausea at the sight of a company’s financials, then I know that nothing too bad can come out of the investment because most other investors will have had the same reaction …. and will have passed on the opportunity. The spinoff was effected on a 1.007 for 1 basis (don’t ask me why the funny number … just another point in its favor as owners of CKH were left with some odd number of SMHI shares) last June and began trading at $18 and change a share. Since then the shares have lost about 1/3 of their value and I was able to pick up my small position at the beginning of 2018 for around $12/share. Meanwhile the parent company, CKH, has gained about 1/3 since the spinoff. Taken together, however, the market values of the two separate companies have so far NOT exceeded the value of the pre-spin company (and that in a market where the average gains have been more than 10% during this period). When and IF the offshore drilling service sector turns SMHI should do wonderfully; this is a bet on the market turning before their cash runs out! Recent price action of petroleum bodes well for a change in the market.

 

The laggard spinoff: ; AMC Networks (AMCX)

Did I mention above that I’m enamored with spin-offs after my experience with NACCO Industries? Yes, I think I’ve written about this a couple of times. So here I go again, I’m looking at a spinoff that took place some 6+ years ago. AMC Networks (AMCX) was spun out of Cablevision Systems in June 2011 and started trading at around $35 a share. The spin-off included the entertainment programming assets (read cable channels) developed by Cablevision Systems over the prior several decades but not the NYC sports properties (MSG and MSGN) that were subsequently spun out of Cablevision as separate companies. Since the spin-off, the share price of AMCX has had its ups and downs, trading up to a high of around $85/share in June 2015 then subsequently trending down to their current level of around $52/share. Among the publicly traded programming assets AMCX trade for one of the lowest EV/EBIT (interesting article in Barrons) and the shares currently show up on Greenblatt’s Magic Formula list. So why do I like the shares now? No particular reason except they are trading around the lows of the past couple of the years, and, oh yes, management is getting long in the tooth; Josh Sapan who has been president and CEO since the spin (and well before that too) is getting on towards retirement age (getting a little tired of it yet, Josh?) and, more to the point, Charles Dolan, Executive Chairman, is now in his early nineties. Mr. Dolan (Sr., not to be confused with the son Jim), after holding out on selling Cablevision Systems for years finally pulled the trigger and sold the family jewels to Altice in 2016. Since then, Jim has busied himself with the running of MSG/MSGN, while the rest of the family sits on the board at AMCX. As there is no obvious family member to succeed Mr. Dolan Sr. at AMCX (not to speak of Josh Sapan), might we be getting towards an inflection point? In any case, I think with Disney potentially starting an on-line platform to compete with Netflix it may be time for programming assets, which have been in the value doldrums for the past 5 years (except Netflix!), to be revalued upwards in a more competitive environment.

Disclaimer: As always do your own due diligence, the above is neither a recommendation to buy or sell any securities…. I’m just in this for fun; behave accordingly!

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