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Steel Partners Preferred (SPLP.PRT)

In my last post I alluded to a new position that I was building in a preferred issue. At the time I was writing that post I hadn’t yet accumulated a full position so I left the issue unnamed. An anonymous reader, as if reading my mind, suggested I look at the Steel Partners preferred units.

So now I’ll confirm I purchased these preferred units, but the T class not the A class. The original class A preferred units were issued last February for the buyout of Steel Excel shareholders. Then last month additional preferred units were issued to fund the buyout of the balance of the outstanding Handy & Harman shares not owned by Steel Partners. However, these latter units were designated class T units, but ONLY to distinguish them from the original class A units issued in February for ease in calculating the December 2017 dividend payment. After the December dividend payment the T class units will revert to A class units.

So why are either class of preferred units interesting? For one thing the balance sheet of SPLP is solid and cash flows from operations appear to cover LT debt several times (although this is not particularly clear as Steel Partners has interests in a number of businesses in different industries including manufacturing and banking – DO YOUR OWN DUE DILIGENCE). The preferred units, like preferred stock, have a call on cash flows superior to the common units, AND THE MANAGEMENT TEAM IN CHARGE OF SPLP CURRENTLY OWNS 50% OF THE OUTSTANDING COMMON UNITS OF STEEL PARTNERS. This means Lichtenstein’s management group would have to lose ALL their equity in the venture in order for the preferred units to become worthless. Thus, it seems to me that management incentives are at least to some degree aligned with those of preferred unit investors.

My interest in the T class units was tweaked when I noticed that they were selling at about a 5% discount to the A class units. That didn’t seem to make sense. The only difference in the cash flow streams between the two preferred classes is 10.4 cents at the December dividend payment, 37.5 cents payable to each class A preferred unit vs. 27.1 cents for each class T unit, but the T units were selling for $1 less. To explain this I can only suggest that there was additional selling pressure on the T class due to the fact that certain holders of the preferred units who had received them in the Handy & Harman exchange offer either 1) HAD to sell as they were constrained to holding only certain types of instruments or  2) considered the limited upside of the preferred units inconsistent with their investing goals. In either case I LOVE IT WHEN THERE ARE ‘FORCED’ SELLERS. Furthermore, just to make these units more attractive, they have a defined life; The issue must be fully retired at par, $25, in 2026, with 20% of the issued to be retired in 2020.

This is a period where I have been looking for investments that fit into one of two categories: either they are 10/1 (possibility of 10x up vs. 1x down) or relatively shielded from the current nosebleed equity markets with a reasonable return. These preferred units, of course, fall into the latter camp.  OK, so once I identified the preferred units as attractive why didn’t I ‘back up the truck’ and buy as much as I could, or at least buy a full position? Well, here we get into an ‘implementation’ issue. MY implementation issue. Scene: two weeks ago…price of both the A units and T units were trending down each and every day. I calculated that at $20 and change the units were yielding an IRR of 10%+. So I purchased a first tranche of class T units at about $20.12, thinking I would add a second and possibly a third tranche below $20 a unit as the price continued to trend down. BUT, and here’s the problem, rather than continuing their downward trend, the price suddenly reversed direction and began increasing! At first I thought, maybe this was just a blip upwards before the downward trend resumes. After a couple of days of gains, when I finally realized that this was not the case, I finally began putting in limit orders to get another tranche at a $.30 higher, then $.40 higher, then $.50 higher, etc. Yes, each time missing the purchase because I was nickel and diming my limit price. SO JUST HOW STUPID CAN I BE?? It’s a curse for me to make my first purchase at the low because I then anchor to that price and have a hard time pulling the trigger subsequently when the price goes up.

Anyway, that’s the saga of why I’m holding a half position in these preferred units.


As always, the above is not investment advice; always do your own due diligence!



Out with the Old and in with the New

When considering a new investment I generally expect to hold it for a minimum of 2 or 3 years; if you have a dissonant view about a certain security (and that is the secret to making a decent return in the stock market) you can’t expect Mr. Market to suddenly change his mind just because YOU purchase the security. It takes time. After all, how long does it take YOU to change your mind about an investment? and remember, Mr. Market is quite a stubborn fellow. Prone to excess, but quite a stubborn fellow. A company generally needs to demonstrate that it is on a track to exceed Mr. Market’s expectations for a number of quarters if not years before Mr. Market can swallow his pride and re-price its equity. I think we can acknowledge that changing ones mind about an investment is perhaps one of the MOST difficult thing for an individual to do, and Mr. Market, after all, is just an amalgam of individuals.

So how is it that I have exited my last investment, NACCO Industries (NC), after less than 2 months? Well, incredible as it may seem, Mr. Market has changed his mind about NC and revalued it (and it’s spin-off progeny, Hamilton Beach (HBB)) by close to 70% in less than 2 months! Is it possible that by spinning off the Hamilton Beach, NC management has increased the intrinsic value of the now-separate companies by 70%? I hardly think so. Perhaps NC was trading at only 60% of its intrinsic value in the first place and the spinoff lifted the shroud from Mr. Market’s eyes? Well, maybe. I’m just not sure that pre-spin NC was trading at 50% or 40% of its ‘intrinsic value’ and so I have exited my position with a quite reasonable 68% gain.

My primary reason for selling is that my initial thesis has proved out; the spinoff repriced the equity to take into account the two different businesses. And secondly, the shares have already risen beyond my target exit price and I no longer see  the same upside as I did at the time of my initial investment. The future for the two companies does look a bit fuzzy right now; we haven’t seen stand-alone company performance yet for either one. Furthermore, on a short-term horizon, 3rd quarter earnings will be released for both companies this week. Will they disappoint? I don’t know. Perhaps not and both securities will rocket to another 70% increase. But then again, there could be a disappointing earnings announcement with a resultant fall in one or both share prices. With this uncertainty and the market in such a heady state overall I think it is prudent to take a bit of money off the table.

As you will remember NC had (and still has) a two class share structure; class A shares are publicly traded on the NYSE while class B shares are held by the controlling family and have 10x the voting rights of class A shares. When Hamilton Beach  (HBB) was spun out of NC on Sept 30 each NACCO shareholder, whether class A or B, received one class A share and one class B share of Hamilton Beach for each NC share owned as of the record date. I would have thought that shareholders of NC class A shares would receive only class A shares in HBB and class B shareholders class B shares, but this was not the case. All NC shareholders, whether class A or B shareholders, received the same securities in the spin-off. The issue here is that HBB class B shares are not registered on any exchange and therefore not salable. In order to sell your HBB class B shares you must first exchange them for class A shares. As I have now discovered from my broker the class B shares are not in book form so there must be a physical exchange!! In short, this appears to mean it will take up to 6 weeks for HBB class A shares to appear in my account after my exchange request. Oh, and, of course, there is a $30 fee to do this! So to dispose of all my shares, besides selling the NC and HBB shares in my account, I have also had to short a number of HBB shares equal to the class A shares that I will receive after the exchange is completed and the class A shares delivered. Hopefully the mechanics will work out without too much difficulty (or cost).

As to a new position, yes, I have begun accumulating shares in a preferred issue that I will post about when I have a full position… it’s a rather illiquid security and I don’t want competition from my two readers out there!

As always, the above is my view on the aforementioned securities; please do your own due diligence as I am more likely to be wrong than right!

An appeal to Saint Jude (GLAE)

It seems I have a special attachment to Saint Jude, the patron saint of lost causes; I am a shareholder of Glassbridge Enterprises (GLAE). This is a company that, on the surface, appears to have little value or chance of survival. Of course, the worst part is that I paid up to become a shareholder.

The first thing to remember about Glassbridge is that in its former life as the company known as Imation it was a net-net for many years…… until suddenly it wasn’t! No, not because the share price rose, but because somehow assets disappeared into thin air, or rather more likely they weren’t there in the first place. In fact, when I bought into GLAE last winter I thought it WAS a net-net as shares appeared to be selling well below book value. Yet, when the transmigration from Imation to Glassbridge happened, pffft!, book value disappeared, and as of June 30th this year book value was $-5.68 a share! This negative book value did factor in a substantial amount of liabilities from discontinued operations ($44 million). Most of this, according to the 2016 10K, was accounts payable that management was disputing. So, since then, what’s happened to these disputed items? Well, last week the uncertainty around some of these liabilities was resolved. A lawsuit brought by CMC against several former Imation entities was settled; $10.025 million of restricted cash assets from discontinued operations will be released to CMC and an additional $1.5 million in cash and $1.5 million in notes will be paid out over the next year. Offsetting this, $21 million of current liabilities from discontinued operations will move off the balance sheet. From what I can see this should improve book value by approximately $8 million ($1.60 per share). Of course non-restricted cash, it seems, will suffer! Note that this still leaves $23 million of liabilities from discontinued operations on the balance sheet, of which $11 million appear to be accruals for “legal fees” (2016 10K) against which there don’t appear to be any segregated current assets. Hmmm… I would love to see a little more color on this in the next 10Q, but I imagine that we will have to wait for the 2017 10K to get more information unless something is resolved in the meantime.

Since the above is primarily accounting shenanigans it doesn’t really help us to know whether there is ANY value left in the Imation carcass or whether some value is currently being created by GLAE operations (asset management). So I’m still waiting to see if I’ve dumped money into a black hole or whether phoenix-like, Glassbridge will rise out of Imation’s ashes. Mr. Market obviously doesn’t think much has been resolved as shares have bumped down over the interim.

Stay tuned and say a prayer to Saint Jude for me.

Housekeeping: RAD, NC and NYRT

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.

Portfolio update: BBX, TPCA, RAD and GLAE

Yes, I’ve been somewhat lax in updating my blog portfolio. The summer doldrums are here; with heat above 100 degrees my brain functions at half speed at best.

Last month I sold out my position in BBX Capital. I hadn’t really been following the vicissitudes of the company closely, but with the dismissal of the SEC charges against the former chairman and his return to the company once again as Chairman of the Board coupled with the declining share price over the previous 6 months I thought it time to take the money and run. I hung in there a bit to see if the NYSE listing would provide any renewed updraft in the share price, but it didn’t. I don’t like investing in companies where executives are even accused of wrongdoing (given the reticence of the SEC to go after ANY corporate executives I immediately assume that where there’s smoke there’s FIRE!). When I first invested in BBXT it was trading at less than half book value and the former Chairman (Levan) was ‘on sabbatical’. The shares are now trading over book value and he’s back in place… no need to say more. More than a 100% return, though I left money on the table by not being more attentive and selling out earlier.

The Tropicana Entertainment dutch tender terminated on 8/19. I tendered all my shares at the maximum, $45/share. Less than half the outstanding shares were tendered, meaning that the final price was the top end of the tender range and that a good number of investors thought the offer was too low. Knowing Icahn, it probably was! But for me a 45% return in less than 6 months was something I could live with, and to my mind there was more than some uncertainty as to the exit strategy and timing for those that continue to hold.

I have increased my positions in Rite Aid and Glassbridge. Selling in the wake of the 11th hour Rite Aid/Walgreen Boots deal change has sent the shares in Rite Aid down over 50%. I think this is a huge over-reaction. The company that Walgreens was willing to pay over $8/share for 24 months ago is now selling for 30% of that. Rite Aid is now a ‘disappointment’ stock and, to my mind, will bump along at current levels until a) the new slimmed down operations produces improved operating results or b) another company comes along and bids on the remaining Rite Aid (Amazon?). I plan to increase my position further if the shares continue to weaken.

Glassbridge delisted from the NYSE at the beginning of August.  There was a considerable spike in volume just before and after the delisting. I assume this was probably because some institutional holders didn’t want to or couldn’t hold the OTC shares, and that these ‘forced sellers’ have temporarily depressed the share price. In consequence I doubled my holdings at about $1.90/share. Insiders bought in June/July at more than $3.00/share, which would seem to corroborate my theory. The shares are still highly speculative and I’ll be closely watching the 2nd Quarter results which will be announced shortly.

Underperformance is UGLY

Over the past seven months I have added seven new positions, 6 long and 1 (ouch) short. Now, you know, I’m not one for looking at short-term performance but sometimes you have to look in the mirror and acknowledge just how ugly you are even in the short run… and that’s certainly the case here! Of the seven positions, two have positive returns, one is about even, and the remaining 4 are down between 8% and 40%. That’s not pretty when compared to the S&P 500; up some 11% since December 1, 2016. Undoubtedly throwing darts at a list of stock names would have resulted in better stock selection. So lets take a look what went wrong. As usual, I’ll ignore the investments with positive returns and focus on those that are down. There is no better way to improve your investing skills than dissecting your mistakes (if indeed they are mistakes!). So here goes.

Share Price
Company Purchase Current Change $2.09 $2.33 11%
Regency Affiliates $8.95 $6.95 -22%
Tropicana Entertainment $31.63 $42.60 35%
Glassbridge Enterprises $6.59 $3.96 -40%
Rite Aid Corp $4.70 $2.95 -37%
Awilco Drilling $3.76 $3.52 -6%
Netflix $138.00 $149.41 -8%

Regency Affiliates
Shares are down about 20% since I purchased. The story here is simple. One of the company’s three assets became irremediably impaired just after I invested; the company has a 50% interest in a cogeneration plant at a Kimberly-Clark facility in Alabama with a 15 year contract due to expire in 2019. The renewal was being renegotiated when I invested. With no forewarning (or at least none that I was aware of) it was announced in April that Kimberly Clark had decided to build their own cogeneration facility and thus not renew the contract! This rather surprised me as I don’t understand how it could be cheaper to build a new facility than renegotiate a better rate with the existing facility (but then again my engineering expertise is rather limited, I will admit). Furthermore Regency management gave no indication that the negotiations were going against them, or that, in fact, the decision would be made so soon. Once the existing contract expires in April of 2019 Regency will own an interest in a cogeneration plant that, from what I can understand, will have practically zero residual value. And this after management did a dog and pony show last Fall about how the company was so undervalued! So, either management was blindsided by the non-renewal or they were not quite honest with the investment community in their presentation. I’ll opt for the first, giving management the benefit of the doubt. But that still leaves me questioning the soundness of Regency management’s judgment. Did they underestimate the possibility that the contract would not be renewed and thus not dedicate enough effort to the renewal process or was it simply out of their control? We’ll likely never know.
So where does that leave us in terms of our investment? The Oct. 2016 management presentation put a ‘sum-of-the-parts’ valuation on the company of $14.63-$21.64 per share. Their value for the interest in the cogeneration plant was $10-$28 million, or $2.09-$5.86 per share. So a revised per share value might now be in the range of $12.54-$15.78 assuming no residual value for the cogeneration plant. It is interesting to note how much of the total upside the interest in the co-generation plant was in their Fall presentation! In any case, today’s price of $6.95/share is still a substantial discount to the company’s estimated ‘conservative value’; about a 45% discount to the conservative valuation. There remains another risk however; the company’s primary asset, a 50% interest in the buildings housing certain primary Social Security Administration offices, is under a lease that expires in 2018. Should the SSA not renew the lease this asset might have to be revalued downward. Notwithstanding this, I will continue to hold and see what happens during the lease negotiations. If the lease is renewed I expect that the underlying mortgage will be refinanced and the company should receive a large cash payment; how management handles this cash will determine whether I continue to hold thereafter or not.

Was it a mistake to buy when I did? or could I have made a better decision? The only thing I really fault myself for is being too optimistic about management. They did have some trouble with self-dealing about 10 years ago which I kind of ignored. Not sure, though, that my decision making was faulty as much as the timing inauspicious.

Glassbridge Enterprises
OK, I got this one ALL wrong. The transition from Imation as an operating company to Glassbridge as an asset manager sent the company’s financial statements into total turmoil. When I invested, the company was in the middle of the transition; financials were at best hard to interpret. It appeared to me that at my entry point of $6.59 per share I was getting more than the share price in cash on the balance sheet. However, when year-end 2016 financials were filed a couple of months later some of that cash and a good bit of book value had disappeared into the vortex; cash dropped from $50 million to $32 million, but more worrisome, book value dropped from ($.78) per share to ($5.29) per share. Just another case where I feel that management was somehow conspiring against us investors; new management also awarded itself 1.5 million shares against the right to invest funds in the now-parent company’s asset management business. And before you downplay this, remember that the company, after its January 10:1 reverse stock split, had only 5 million shares outstanding (including 5/6 of the grant). That 1.5 million shares represents more than 1/4 of the company!
It’s interesting to note how volatile the share price has been recently, trading down to almost $3.00 on basically no news, then popping back up to the $4-$5 range. I interpret this as investors having a rather disparate view of how the company should be valued. In fact, I’m a bit unclear myself as to how to value the business. With the share price down 40% from my entry point is it time to double down?
To a large extent I think the value of the Glassbridge’s asset management business is dependent on what The Clinton Group wants it to be worth. I’m assuming they want to do something with this ‘vehicle’. So if the shares dip into the $3.00 range again I’ll probably be doubling down.

In this case, I can clearly see that the investment process was faulty; I invested with incomplete information, knowing full well that it was incomplete. The hubris was in thinking that I could decipher what balance sheet information there was better than other investors WITH THE SAME INFORMATION! Note to self.. YOU’VE GOT TO BE KIDDING!

Rite Aid
What can I say here except that my belief was that management of Walgreens would tough it out and consummate the take-over? Well, they didn’t. At the 12th hour they struck a new, completely different deal; they agreed to purchase a little less than half of the Rite Aid locations for $5.8 billion, adjusted for working capital, and also give Rite Aid a $385 million breakup fee. From what I can garner, there are a number of varying opinions about what this means for Rite Aid shareholders. Will the stump company be able to make a go of it in their downsized form? or is there some other end game? It seems hard to understand the Rite Aid strategy in this new deal; most chains are trying to GROW and benefit from ECONOMIES OF SCALE. So what’s the scoop? I sure as heck don’t know. The new Rite Aid will be much less levered (the net $5.2 billion in cash they receive will go toward paying down LT debt of $7.2 billion). But savings of $300 million in interest payments doesn’t seem enough to ‘right the ship’, especially because they will be LOSING the effects of economies of scale on SG&A costs. We also have no idea WHICH locations they are selling to Walgreens; Are they selling the MOST profitable or the LEAST? So lets just take a step back and look at the big picture. Walgreens was willing to pay $6.9 billion for all of the Rite Aid equity ($6.50 a share), including the 4600 store locations and assumption of all liabilities (LT debt of $7.3 billion). Yes, they were going to have to sell off 1,000 or more locations to Freds but the compensation was still going to accrue to Walgreens. So, from a per store perspective, the buy-out deal valued each location at about $3 million ($14.2 billion/4,600 locations). Under the current store-purchase deal Rite Aid will be left with 2,400 locations. If we valued these locations based on the Walgreens revised buyout offer price of $6.50 a share they would be worth $7.4 billion. The shareholder equity would then be worth $5.2 billion (the $7.4 billion EV less the debt of $2.2 billion). With about 1.1 billion shares outstanding that would come to about $4.75/share. This is clearly worse for Rite Aid shareholders than the Walgreens original offer. But that simple calculation points out the several factors that WE DONT KNOW and which are ESSENTIAL for a more precise valuation; which store locations were sold off (the best or the worst?), whether SG&A can be shrunk commensurate with the shrinking of the store locations and what other efficiencies, in the form of sourcing benefits, the current store-purchase deal holds for Rite Aid.

I don’t think my (or anyone else’s) valuation of the post-deal Rite Aid can be very accurate with the information we currently have. I kind of laugh when Evercore comes out with a target price of $2.50 per Rite Aid share, but perhaps they know a lot more than I do. Instead, I want to focus on another aspect of the deal; Rite Aid management was in the mental mode of being ‘bought out’ over the past 18 months. I’m sure operations suffered because of the uncertainties surrounding the acquisition. I’ve worked for a company that was the target of an acquisition and I can assure you it’s not a pleasant experience; everyone is looking for their next job. So, transitioning from that mindset to one based on reorganizing a downsized corporate structure? good luck! My inclination here is to believe that some other deal is in the works or will be in the works shortly. It is difficult to move from one mindset to another so swiftly especially after such a long ‘gestation’ period. So my totally UNINFORMED prediction is that the stub company gets sold within the next 18 months as well. It may be that management will need the Walgreens purchase to be approved before another ‘deal’ can be announced, but I think those investors who wait it out will see a tender in the $5-7/share range sometime in the next two years. Of course, I could be totally off base; Rite Aid management might have an acquisition (like Freds?) in their sights instead. Or they could just be happy to maintain their high paying management jobs and run the company into the ground (never underestimate self-interest!); it’s not easy to ascribe intelligent asset allocation to management. In any case, I am hoping to double down on my position at around $2.50/share. I was surprised at the price resilience yesterday as it was the last day of the quarter and I thought there might be some ‘forced’ selling for those funds that didn’t want to show a position in Rite Aid at the end of the quarter.

On the investment process: the jury is still out. Need to see how this plays out over the next year or two.

Awilco Drilling
Shares of Awilco, after accounting for the $.20 dividend paid in June, are currently priced right about where I purchased them. I expect the share price to remain in a rather narrow range until we get closer to contract-end next April or oil prices make a significant move up (or down!). I think there is kind of binary outcome for these shares based on what happens to the price of oil.

Ditto as above: the thesis still has to play out.

OH BOY WAS I EARLY ON THIS! shares are now only 8% higher than when I sold short but in the meantime they have been as high as $165 (-20% on my position). My original investment thesis was that the shares were priced for perfection at $138, but, as someone once said, the market can stay irrational far longer than I can stay solvent. I almost bailed on this position several times but because it is small relative to the overall portfolio I ended up hanging in there. I still think Netflix shares should be priced in the $50-$75 range. Will they ever get there? I don’t know. But what I believe the general investing populace is forgetting is that this disrupter can get disrupted too! Who is to say that Amazon or Google won’t invest billions to create original programming? Then it would just be an ‘arms race’; who can spend the most and develop the biggest guns (the best programming). There really is no enduring moat in this race; just look at the broadcast networks! And they had a 30 year head start! New technology is the disrupter and Netflix just happens to be at the crest of the wave at this moment.
As I noted in my last post, I’m still about 50% in cash and look to stay that way until I can find a $.20 dollar. Given my slothful state I really don’t think that’s going to happen until the market corrects ever so slightly. In the meantime I’m trying to build up a wish list of great companies that I might be tempted by at 50%. 40% or, better yet, 25% of their current price.

The investment process: remember 2 things.. 1) do not short shares; trading is not your strength and 2) don’t forget… DO NOT SHORT NO MATTER WHAT! GOT THAT? This position may still play out positively, but it will just be pure dumb LUCK (something we hope for in investing but know not to count on).

Updates on TPCA and GYRO

A quick update on a couple of positions that are in the news.

Carl Icahn’s IEP and Tropicana Entertainment (TPCA) are offering to purchase up to 5.58 million shares of TPCA shares in a Dutch auction for a minimum of $38 and maximum of $45 per share with the tender running through August 2nd. The auction is contingent on at least 2 million shares being tendered. If the full 5.58 million shares are tendered IEP will control over 90% of the outstanding shares as it already owns 72.5%. My only thought about this tender is that the price range is rather odd since the stock is already trading at $42/share; why anyone would tender below the current market price is not clear to me. In any case, I will be tendering my shares at $45 since my original investment thesis was that Icahn would do something to bring the share price closer to HIS estimate of intrinsic value ($48/share per IEP’s balance sheet valuations), and here we are. A 45% gain in less than 6 months is nothing to be sneezed at. On the other hand, I also don’t mind if he doesn’t buy up my shares at $45 as I’m quite convinced he would come back at a later date with a potentially sweetened offer.

Gyro dyne Corp. (GYRO) has announced a distribution of $1.00 per share as part of  their long-term liquidation process. My thought here is that after the shellacking common shareholders (me, primarily!) took in the exchange a year and a half ago I’m a little peeved that the liquidation isn’t being moved along with a bit more urgency. I look at the slowness of the process and note that, as usual, management is reticent to liquidate in a timely manner since their compensation terminates with the full wind-down of the company.

On a similar note I’m also becoming less and less enthused with Winthrop management’s handling of their liquidation; its been almost a year now since the company’s remaining assets were put in a liquidating trust and we shareholders have seen little in the way of property sales and liquidating distributions. I was very positive about management when they first decided to put the REIT into liquidation almost 3 years ago but now I’m beginning to wonder if they are not just dragging out the liquidation process for their own benefit. Because of what’s happening with the Winthrop Liquidating Trust I’m beginning to get worried about my position in New York REIT (NYRT) as Winthrop’s management has taken over management of that liquidation as well. As part of Winthrop management’s pitch to replace the then-current management at NYRT they estimated the liquidating value of NYRT at over $11.00 per share. But the latest financials for the company, the first to be presented under liquidation accounting, show a liquidation value of just $9.25 per share. So where did that $1.75+ per share of value go? Difference between conservative liquidation value and real potential liquidating dividends? or perhaps difference between marketing (when you’re pitching something that will bring in $) and operations (when you actually have to perform!)….hmmmm. We’ll see. Maybe I’m just being a bit too anxious.

Just a note on my cash position. From the above you can see that I have invested in a number of situations that are self liquidating. My current portfolio remains about 50% equity, 50% cash, and with time (and no action on my part) I’m looking for the cash portion to increase. (Note that I wouldn’t mind if the equity portion increased too.. in both absolute and relative terms!) Yes, I’m nominally in the camp of ‘overvalued stock market’ but I have no idea when or even if this might be corrected. Unlike most market analysts, I’m willing to freely admit I have absolutely no predictive powers. My cash position is more reflective of the fact that I can’t find anything dirt cheap to buy (and that what I do buy doesn’t turn out to be as dirt cheap as I thought … but that’s the subject of my next post). I have to fight daily from keeping that cash from burning a hole in my pocket, especially since I’ve been wrong on the market direction for a couple of years. But better safe than sorry; I’m too old to go back to waiting on tables or being a Wal-mart greeter (ouch!) Selling apples on the corner (1930) no longer seems to be an option!