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One year on….

April 16, 2019

It’s been almost a year since I last posted. Much has happened but little has changed; the US stock market is almost exactly where it was last year at this point, slightly overvalued, in my humble opinion, but relatively strong given the healthy US economy and continued low interest rate environment. Except for a brief period in November and December of last year the US equity market continues to be quite uninteresting from a value investor’s perspective. In fact, I note that it’s not only me; my favorite blogs have been mostly quiet for the past year.

Despite this, my portfolio has evolved over this past year, though my blog has not kept up with the changes; sorry, I’ve been uninspired. I did unwind some notable mistakes … New York REIT (NYRT), Regency Affiliates (RAFI), Navios Maritime Holdings (NMM), Altius Minerals (ATUSF), while others survive for some unknown reason in my portfolio… Rite Aid (RAD), Fortress Global Enterprises (FTPLF) and Glassbridge Enterprises (GLAE). And finally, a number of new positions have been added … Fiat Chrysler (FCAU), Adient (ADNT), Corepoint Lodging (CPLG), Madison Square Garden (MSG). I’ll try to go through some of the thinking behind these changes below.

Mistakes Made

Most of the ‘notable mistakes’ unwound over the past year have been mistakes of omission, i.e. not selling soon enough after the investment case changed.

Regency Affiliates (RAFI) announced in April 2017 that Kimberly Clark had NOT renewed the contract for the co-located cogeneration plant in Mobile Alabama in which Regency had a 50% interest. The effect of this was to effectively zero-out the value of Regency’s investment in this asset as the plant effectively had no value outside that business arrangement. Given that my investment case for the company assumed that the plant would continue under contract and the asset would maintain its value, I should have sold my position in RAFI immediately after the announcement was made despite the decline in share price; it should have been clear to me that the inability to secure an ongoing relationship with Kimberly Clark was indicative of management’s inability to generate shareholder value and that, as such, the investment case was broken.

The position established in Navios Maritime Holdings (NMM) toward the end of 2017 was sold in January of this year when it finally became clear to me that management simply wasn’t acting for the benefit of shareholders. As usual I was a bit slow coming to that conclusion. When I initially purchased the shares it was as a surrogate for the entire shipping industry which I thought was perhaps at or near a cyclical low. I selected NMM as it was one of the companies with the lowest price to book ratios at the time. (That, in itself, should have provided a key clue!) In retrospect I can say that I didn’t do anywhere near enough due diligence on the company and its management. It would clearly (in retrospect!!) have been a better strategy to purchase a basket of shipping companies or a sector ETF given my focus on the industry rather than the individual company. Laziness here!  So, a hand slap for impatience and hubris.

My position in New York REIT (NYRT) was sold for tax purposes before the company’s assets were put in a liquidating trust. (Company assets went into a liquidating trust on November 7th 2018 at which time given units in the trust which could not be traded on any exchange, i.e. became illiquid for the duration of the trust). I know I was not alone in being fooled by this value trap; a number of value investment blogs had touted the shares over the prior several years. The key points that fooled most investors were 1) management of the assets to be liquidated was shifted from the prior management team (which had put the company into the state that led to liquidation) to another management group that had previously performed well in a similar liquidation (Winthrop Realty) and 2) this new group was estimating a reasonably high net asset value for NYRT’s assets. Well, the property market in New York weakened and the initial estimates of liquidation value proved over-optimistic. Should I have known the trade was too crowded to be a true value trade? Don’t really know. But I do know I should have sold when the first estimates of a decrease in net asset value began to slip out earlier in the year. What is the saying? Cut your losers and let your winners run…

Then, in the ‘notable mistakes category’ there are also a couple of my current holdings that I continue to cling to, neglecting the fact that the investment case has changed, and radically; Rite Aid, Fortress Global Enterprises, and Glassbridge Enterprises. I really have to ask myself what I was thinking by holding on to these positions for the length of time I did.. and what am I thinking now, since I still hold these shares.. (oh, OK, Hope springs eternal, as the saying goes)

Who would have thought that a company with as much physical presence as Rite Aid would see its share price decline over 90% in 4 years? and I guess more importantly, why do I have such a hard time accepting that this can and does happen to companies quite often? as a corollary, the question is how does management that creates such a mess survive so long?

The latter question was recently answered, though somewhat questionably; the Board of Directors at Rite Aid decided to fire the three top executives that oversaw the prior 4 years of value destruction and the share price debacle. But why on earth did they keep the CEO on ‘until a suitable replacement was found’? Get him the hell out of there; he’s a lame duck at best, a hindrance to any possible turnaround at worst!

OK, OK so lets not get into what Management has done wrong; that’s for the next group of managers to figure out. Let’s  instead ask ourselves what WE did wrong as investors. So I have to question why didn’t I understand that if the acquisition by Walgreen acquisition didn’t go though there must have been something tainted about the acquirer, the acquiree or the industry in general. Yes, there was the Department of Justice thing and all that delayed the acquisition process interminably, but when things are healthy, a deal either gets done or its undone because the circumstances around the target are MORE optimistic than originally thought unless some financial shenanigans come to the surface. We could, of course ascribe the whole problem to the worsening situation in the overall industry; just look at the other two pharmacy chains, Walgreens and CVS, now and what their share price has done over the past year …. miserably to say the least. But that would be too easy, as well as useless. These industry ups and downs and transitions are going to keep happening. So why did I stick with my optimistic view of the company, or at least my optimistic view of the intrinsic value of the company even when the initial deal failed? Perhaps because I’m too familiar with Rite Aid; I’ve shopped there. Perhaps because I can’t imagine the number of drug stores diminishing. Perhaps because I just can’t imagine being out of milk/orange juice/cookies/toothpaste on a Sunday and not being able to just stop into the local drug store and pick up what I need. So really maybe it is because I am projecting my own wishes on the industry outlook, not the reality of today’s changing economy. I should have interpreted the Walgreens offer for Rite Aid as a wake-up call; perhaps Walgreens management concluded that ‘bulking up’ was the only way to survive and maintain the current levels of profitability in an industry in transition. A distress call, even. The sign of a sick retail sector, not a healthy one. A precursor to lower margins and profitability.

So why do I still hold the stock? For one thing I’m thinking that a retailer with $20 billion in sales should be worth more than $500 million in market cap, or $4 billion in EV. If Amazon is using some Rite Aid locations as a logistics point for pick up, mightn’t that be a harbinger of a different kind of value for their retail locations? And, after all, it’s now such a small position in my portfolio that inertia combined with potential upside is keeping it there. Look for future updates.

For the other two dregs in my current portfolio I’ll have to give explanations in a later post as I want to get to my new positions in this blog.

New Positions

Late last year and on into early this year I began to deploy a bit of the cash that I had been holding (read “burning a hole in my pocket”) for the past several years. As the market was declined close to 20%  I built a position in Fiat Chrysler, and took new positions in Adient (a bit too early), Madison Square Garden and several other smaller positions that I subsequently sold. Later, at the end of March, after Corepoint Lodging reported unexpectedly low 4Q earnings and the stock dropped something like 20%, I added a position there as well .

The investment thesis for Fiat Chrysler (FCAU) was rather simple. The company was trading at something like 5x earnings. The company had little or no long-term debt. In November they sold their parts division, Magneti Marelli, for $7 billion and reported that they would return much of that capital to shareholders through a special distribution after the sale’s closing. It was further rumored that the Company would be initiating a dividend, a rumor subsequently confirmed in a late February press release. By last summer the share price had backed off from a high of $24/share at the beginning of 2018 to the high teens, as there were many analysts who were forecasting a significant drop in car sales with the advent of the next (soon to be appearing) recession. I purchased a small position in July/August of last year. Then, with the year-end drop in the market and similar drop in FCAU’s share price, I added substantially at the end of December and early January. An imminent return of 15% of capital and the shares trading at a 2 year low convinced me, and Fiat Chrysler is now my second largest position.

I always review the 52 week lows in Barrons; bottom fishing is an interesting, and at times, lucrative pastime, provided, of course, that you don’t invest indiscriminately and do your due diligence thoroughly. I had been seeing Adient (ADNT) in the new lows list for almost 6 months. Now remember, I have a soft spot for spinoffs, especially those that go out of favor after the spin. So I finally looked up what analysts and bloggers were saying about Adient when it was about to be spun out of Johnson Controls in November of 2016. To my amazement I saw predictions of $14/share of earnings for the next year. So a company whose shares were trading in the mid teens at the end of 2018 was supposed to have been able to earn $14/share? sounds like a situation that might be interesting. Of course, the auto industry in 2019 wasn’t what it was projected to be back in 2016, so that had to be factored in. More importantly, was the company going to go under? After a quick look at the balance sheet it didn’t appear that this was the case. So if the auto industry didn’t suddenly tank (always a distinct possibility given the current precariousness of the world economy) here was a company potentially trading at 1x future earnings. Unlike some other automotive parts companies, the threat of obsolescence for Adient products appeared low; car seats are required in electric cars just as they are in combustion engine cars. So I took a position in early January at around $17 a share. The share price tracked up to the low $20s in early March before making a long slow decline back to the low teens. Fortunately I was able to trade out at just about my original cost in early March and then trade back in at around $14 a share at the end of the month.

I must admit I missed the value in Madison Square Garden (MSG) when it was spun out of Cablevision back in 2010. Then again when MSG, in turn, spun off MSG Networks in 2015. So this time around I vowed I wouldn’t miss the spin-off; the company announced last summer that it would spin off the sports teams from the venues. Originally scheduled to be completed in the second quarter of this year the spin-off was recently  pushed out to the second half of the year. I have read various analyses of the value of the franchises (Knicks and Rangers), and Forbes, of course, values the various franchises every year. Yet I think these valuations will prove to be low for the new MSG team entity spin-off; every fan wants to own a piece of his or her home-town team, price be damned! Furthermore, I think the parent venue entity will be more readily valued as the real estate business that it is. We’ll see. After waiting far too long to jump on the bandwagon I’ve taken a half position at around $276 a share.

Lastly, there is the position I’ve taken recently in Corepoint Lodging (CPLG) which was spin out of La Quinta last June. I first read about the spin-off on ‘Clarke Street Value Blog’ (here) and ‘Yet another Value Blog’ last spring (here), but didn’t find the value compelling for my portfolio at the time. It wasn’t until I read in February that CPLG was the top holding in Scion Capital’s (the fund of the famous Dr. Michael Burry!) portfolio and the company’s reduced share price that I became interested enough to explore further. Then, when 4th quarter earnings came out on March 22nd and the share price declined from $14 to $10.50 over the next two days, I added a position. As usual I started buying too soon, and my average cost came in around $11.40.

To conclude, I realize haven’t provided any real analysis of these businesses here in this post. Rather, the purpose was to provide a portfolio update as a precursor to more in-depth posts in the (near?) future on individual holdings.

As always, do your own due diligence; all references to companies listed above should not be construed as investment advice.

  1. Matt permalink

    Great post. I hope you meant $286/share for MSG

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