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Portfolio Upate 1Q 2018

April 17, 2018

I thought it was about time to review my positions as I haven’t posted any updates in the last three months. I’ve made a number of changes since the end of the year (and before) which I haven’t written about. So here’s a rundown of my current holdings with comments

Altius Minerals
The company continues to acquire royalties financed by both debt and equity raises. The share price has been disappointingly unresponsive to both the improved macroeconomic environment (commodity pricing) and improvements in the operating business; investors seem to be stuck looking backwards at stock performance and commodity pricing over the past 4 or 5 years. Fairfax Financial, an insurance holding company headed by noted Canadian value investor Prem Watsa, made a significant (from Atius’ point of view) investment in Altius during 2017, providing additional liquidity for acquisitions. The stock has appreciated almost 40% from its lows of last year, and, if commodity pricing continues to improve, I think shares should be in the $20-$30 range next year.

AMC Networks
This early 1Q 2018 purchase has basically tracked with the market over the quarter. I don’t foresee any divergence from the overall market until either 1) the general perception of the macro outlook for program suppliers improves or 2) there is some kind of corporate action (change of control, or other). This position requires patience

BBX Capital
This year-end 2017 Repurchase (see post) was based on the premise that BBX’s market cap was less that the market value of its 90% ownership in Bluegreen Vacations (BXG), each BBX share having the equivalent of 2/3 of a share of BXG. With BXG shares trading at close to $22, this equates to close to $14.50 of BXG value per BBX share, while BBX shares trade at around$9.25. To muddy the issue, BBX has launched a tender offer for 6.6 million shares at $9.25 each that expired April 17. Two things to note: 1) management is tendering 2.2 million shares in this tender offer and 2) the tender offer price was less than 5% above the market price when the tender was announced. Generally a tender offer where management tenders such a large number of shares is seen as a negative (those who tender see the tender offer price as a fair or even generous price), and one might expect the share price to fall once the tender date has passed. On the other hand, a tender offer priced so close to the market might lead one to think that management is trying to buy back shares on the cheap, and in effect ‘cheat’ shareholders out of the significant upside I, at least, ascribe to BBX shares. Needless to say these signals are contradictory. My interpretation, perhaps too sanguine, is that management, specifically Alan Levan or John Abdo, who own together about 35% of the company, desired liquidity for some reason not associated with the company, and that the only way for them to dispose of a large block of shares without depressing the stock price and/or running afoul of the SEC was a tender offer large enough to accommodate their needs but with an offer price that most shareholders would not find attractive and thus not lead to oversubscription (thus assuring they could dispose of their entire tendered share block). We shall see. I am continuing to hold my shares as I think that BBX is currently being undervalued by Mr. Market give the price of BXG shares. I am somewhat biased here as my experience with the Tropicana Entertainment (TPCA) tender resulted in my tendering my entire position and then seeing the share price subsequently increase and ultimately the being bought at a significant premium. Admittedly this is not exactly the same situation.

Cherniere Energy
I continue to hold shares in Cherniere as it has continues to build out its natural gas liquification infrastructure. This is an arbitrage play on the cost of natural gas in the US vs. the rest of the world, NOT on the cost of natural gas itself. I anticipate holding shares until the build-out is complete and the company becomes positive cash flow.

Fortress Global Enterprises
The name change for this company doesn’t seem to have positively impacted the stock price! The dissolving pulp business appears not to have rebounded the way I originally anticipated four or five years ago, and the company continues to operate in the red. The security paper division was sold off last year to improve liquidity as the company will face some refinancing hurdles for its current debt over the next two years. The company is in a highly operationally levered business and has a relatively significant per share book value in relation to its share price; if the price of dissolving pulp turns, the company could produce significant cash flow. One downside is that the current CEO pays himself far too much for a company that has lost money over the past 4 years.

Glassbridge Enterprises
This ‘net-net’ investment turned out not to be so ‘net-net’, i.e. the book value was significantly overstated due to unaccounted for liabilities. With the transition from operating company to an asset management company last year most of those liabilities surfaced and the book value (and cash position) was eaten away.  In fact, there are still additional potential liabilities that could devour what little value is currently left. I sold ½ of the position earlier this year for a ‘tax loss’ (that is a real loss somehow justified as a loss that would reduce taxes due on other realized gains…. My, how we kid ourselves sometimes!). The remaining position is so small that I will continue to hold and see if anything can be saved from the remaining carcass.. unless, of course, I need another ‘tax loss’ at the end of this year!

Novagold
Still in the permitting stage but closing in on the capital investment stage this junior gold miner is held in the portfolio as a gold hedge; I continue to feel the market is overvalued and I anticipate gold will do well if we have a raging bear market. The position is intended to provide liquidity during a major selloff.  When the permitting is completed I anticipate that there will be some kind of corporate action, either an outright sale of the company, a merger or a capital raise, though I think this latter unlikely. I anticipate selling when we begin to approach this stage if not before during a market rout (will we ever have one?).

Regency Affiliates
I continue to hold Regency despite one of its three investments (the cogeneration plant at the Kimberly Clark plant in Arkansas) becoming basically valueless when Kimberly Clark announced that it would build its own co-generation facility rather than renew its contract with the facility in which Regency owns a 50% interest. Most of the value in this company now comes from its interest in real estate currently leased to the Social Security Administration in Maryland. The lease expires in 2019 and if renewed will provide potential for a significant cash flow event; refinancing on the property. The SSA has recently signaled its intention to renew. Once the renewal is in place, and if the refinancing is successful, it remains to be seen what current management, who have not shown themselves to be the most brilliant capital allocators in the past, will do with the proceeds. I anticipate selling once the refinancing is announced.

Resolute Forest Products
Another asset heavy, commodity price dependent business, Resolute is still finding its operational footing 4 years after emerging from bankruptcy. The pricing for its major products, wood and wood products, has continued to be depressed and potentially now subject to Trump tariffs. Operations in the 3rdquarter of 2017 gave investors hope that strengthening prices and better management were beginning to produce significant cash flow. Unfortunately the 4thquarter results belied these as management provided an interesting excuse for disappointing results; transportation issues caused by insufficient driver availability! If 1stquarter 2018 results show improvement the share price should find significant buoyancy.

Rite Aid Corporation
What can I say? I underestimated management’s ability to screw things up. I thought that a company worth $6-9 billion to a competitor in a buyout would retain at least ½ that value as a stand-alone entity, perhaps even be sold to a different competitor for a premium. But no, somehow management has found a way to devalue the public market value of the company by 50% after the asset sale to Walgeens.  Oh, and of course, at the same time, they did provide nicely for themselves (continued employment) in the new Albertson’s deal. I do have to say that at this point I’m not sure that the Albertson’s deal will be consummated. In fact, I don’t really know HOW it could be consummated since the owners of Albertson’s recently announced that they DON’T plan on IPOing the company. But without public shares what will the current Rite Aid shareholders be paid with, as this was an all stock deal?  Perhaps, due to Mr. Market’s recent valuation of Rite Aid shares (well off the imputed value of the Albertsons purchase price of $2.63 per share) the Albertson’s private equity owners got cold feet and called off the IPO; after all, their goal was to provide themselves with liquidity so they could finally exit their position in Albertsons. This was never a good deal for Rite Aid shareholders as the price was low and there was going to be a constant overhang of private equity shares depressing the share price. I am hoping Rite Aid shareholders will reject the deal at the upcoming annual meeting. If that happens, perhaps some other suitor will show. I think that, overall, investors are currently too negative on the underlying retail business; there is far too much fear that Amazon will enter the fray and suck away all potential profits.

SEACOR Marine Holdings
This has been a real surprise. I purchased shares in SEACOR in early 2018 because it was trading at less than ½ book value. I theorized that after the June 2017 spinoff and before the end of the year a number of institutional investors may have dumped the shares they received in the spinoff for any of the classic spinoff reasons: the market cap of SMHI was too small for their investment guidelines, the company was too concentrated in one business, the offshore support ship business was currently doing very poorly due to the low price of oil, etc. Not much has changed except that oil prices have firmed up somewhat so I really can’t account for the quick run-up in the share price except that perhaps the selling stopped after year-end with the price now simply reverting to its immediate post spin level. Overall this is a well-managed company in a far too cyclical business. I readily admit I have no expertise in this industry and only purchased because it was a spinoff trading well below book; I will likely exit the position if and when the share price appreciates to between 90 and 100% of book value.

I also continue to hold stub positions in two REIT liquidations (New York REIT and Winthrop RE Trust), the first of which is now scheduled to become a non-tradeable trust sometime before February 2019 after a final payout sometime in the Fall, while the second is already almost two years into its Trust lifetime and hopefully will be wound up sometime this year.

I have added some new, small starter positions that I hope to write about in the near future (don’t hold your breath!). These include: GCI Liberty, Navios Maritime Partners and Entercom Communications

 

Sold Positions

Awilco Drilling
This position was sold early in the quarter when the company announced its intent to purchase an additional deep-water rig. The investment thesis changed; I purchased under the theory that this was a play on improvements in the North Sea offshore drilling environment (improved crude prices) which would lead to the better day rate pricing and longer term drilling contracts for both platforms (one currently finishing up a short-term contract and one cold stacked), and that cash flows from these would be paid out as dividends, per the company’s prior stated policy. Instead it was announced that the company will buy a new deep-water rig; this means that any improved cash flows from the existing platforms most likely will be used to fund the new build rather than being paid out to shareholders. I sold on this news, but somewhat too early as the share price continued to rise after I sold.

Netflix (short)
I have been sadly lacking in updates here as I did close my short position in Netflix at the end of October at around $200. Subsequently the shares rose to over $300, backed off slightly in March and are now charging ahead again. I still feel the shares are significantly overvalued and am looking at long-term leap puts, but not sure I will pull the trigger as the only two shorts in my investment lifetime have turned out badly. Note to self: heed Buffett’s advice about shorting….. DON’T.

Steel Partners Preferred T
I exited this position with a small profit midway through the quarter; I had anticipated that the preferred shares would ‘revalue upwards’ when the exchange of the preferred T shares for preferred A shares was finalized in December. Apparently there was more overhang of preferred shareholders than I had accounted for and the preferred A shares did not revalue in the timeframe I had anticipated so I exited.

 

Note that none of the above constitutes recommendations for or against shares of any of the above-mentioned companies. You should always do your own due diligence when investing.

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3 Comments
  1. It’s funny how AMCX and Netflix are both network companies, but showing huge differences in Return on Capital, where AMCX shows above 40% ROC whereas Netflix shows 5% ROC.

  2. Really like your ideas and noticed that you wrote about GLAE. I also posted a concise write-up on GLAE here if you are interested: https://jackpotintheweeds.wordpress.com/category/glassbridge-enterprises-glae/

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