It has been a long time since I’ve updated the blog. I’ve been busy making changes to my portfolio. One of the lessons learned from prior years is that laziness is not good for value investors with small capital. So I’ve been more active in monitoring my holdings and making changes.
Cheasepeake Energy: I sold out of CHK in Aug ’14. The main reason was the ability to find and buy other companies where the upside was huge.
Bank of America Warrants: I cut back my position on BAC warrants. Again, the upside I see in other positions was much more than what I see at BAC. Although this is still over 10% position for me, so I still believe there is plenty of upside left.
Derma Science: I sold out of the position that I bought in Q1. I still like this company and the Q2 numbers showed that there is lot of growth for this company. Although I think this will take a long time to play out, so I decided to move the capital elsewhere.
ID Systems: I bought a large stake in IDSY. After the new CEO taking over and seeing the Q1 results I bought a huge stake in the company. I then doubled the position after the Q2 numbers came out. The new CEO is fixing the mistakes from the prior CEO and investing capital into new products. Also the CEO is building the relationship and increasing “wallet size” with existing customers. I think there is huge upside to be had at current prices.
Accretive Health: We have been buying more shares in this position. I think we are only months away from restated financials. The company has been able to get a great CEO and a good CFO to join the company. The company has a huge cash position and revenues will grow once the restatement is behind them. Plus there is a huge tailwind for their services.
So far 2014 has been unexpectedly good. We knew our holdings were cheap but I didn’t except the move up to happen so quickly. We are up almost 40% for the current year, with plenty of upside still to come from some of my holdings. Although the downside of these returns is that I’m having a hard time putting cash to work. I’m not finding many new opportunities. But for now, I expect to have much more upside for 2014.
I’ve been doing quite a bit of trading in the last month or so. Although the trading has been around repositioning how the portfolio is setup, not about finding new buys. Currently my portfolio has been largely setup towards these long term plays, where the catalyst might take years to work out. My two biggest positions are BAC Warrants and XPEL. Both of these are long term plays that will take years to work out. Although I’ve been finding situations that can have good returns in short-term, 1 year or less. Over the past few months I’ve been wanting to switch the portfolio position to become a 50-50 split between long term plays and short-term situations. This is similar to how Buffett ran his partnership.
So in the last month, I’ve been moving capital out from longer term plays to buy these short-term plays. Currently the portfolio is at a 70-30 split, leaning towards the longer term plays. Getting to the 50-50 split will take time, as I will wait for these positions to work out, before I move capital around. Although I did trim my position in BAC and XPEL to put more capital to work at shorter term situations.
Recently, I’ve bought a new position in Derma Science (DSCI). I’ve been watching this company for a while but couldn’t buy because the share prices were high. Although after Q1 numbers came out, the stock dropped from $14 to $8ish. I built up a small position and I’m looking to buy more. The shares have started to move up, now over $10. So I will be patient until it gets into low-$9s. The company has a CEO who has been turning around the operations. There is a growing business which is getting masked by another mature business. Also, the company has a drug going through Phase III testing. If the drug works out then the upside is huge. But even w/ a failure on the drug the company is worth lot more than current market price.
I’ve also started buying 1347 Insurance (PIH). This is a spin off from KFS. The company is focused on writing home insurance policy in specific states where the CEO and management has strong experience. The company is currently doing a run-rate of $16M premiums annually. Although, the company will be at $40M+ run-rate by year end and should be doing $100M-500M in 4-5 yrs. If the company can write profitable business, this is going to be worth a lot more than the current $30M market cap. The company is doing a capital raise to get cash to expand in Florida. The capital raise is expected to be priced on Monday and I expect it to be priced less than current market price of the shares. So I expect the shares to drop and it will provide an opportunity to build up a full position.
Since a few people asked for an update, here is a quick overview of what I’ve been doing this year.
I’ve decided to stay quite on the blog and in my trading. If you look at my past blog entries, you will see that I used to post quarterly results. I later realized that these short-term results are noise that only distract from what an investor should be focused on, which is long term results and finding cheap equities. So I’ve decided to stay quiet during the year and only post annual results.
One of the lessons I’ve learned over the past 4+ yrs of investing is that individuals with small capital are better suited for special situations. This means that you will have a higher turnover than a typical buy-and-hold porfolio. Although you will get much better returns. This is something that I’ve tried to learn and have been doing lot more of in 2014.
Here is what I’ve been busy doing in 2014:
- Goldgroup Mining: I sold out of these shares in early 2014. The shares have been a 6x since late 2013. I didn’t buy at the all-time lows but I doubled my investment in 2 months. I found other interesting opportunities, so I sold out of this one.
- Aurcana: I sold out of these shares with a small profit. This was a speculative buy for me. Luckly we were able to get out of this with a small profit.
- MBIA Call Options: We sold out of this after the rating update. The options were a double for us in less than 6 months. Right now the stock is cheap but we don’t know when they will get all the rating upgrades. Plus there are some other opportunities we are liking more.
- Kingsway Financials: This is a company that I’ve been following for over a year. I never got comfortable with this legacy business structure and where the company was going in the future. Although their 2013 Letter to Shareholders was great in allaying these concerns. I think the company has finally turned the corner and has put its bad historical business to rest. There is still some legacy run-off business but their new acquisitions and business ventures are doing to trump the historical business. Also the company’s BV is at $2.6/share and has $17/share in NOLs, compared to the $5/share that I was buying the shares at. I think this is going to be a great compounding machine for years to come.
- Accretive Health: This is a company that was recently written up by Alex Bossert on SumZero. The company is a turnaround situation that is likely going to be bought out. The company doesn’t have updated financials but they are working on it, the auditors are looking through the financials and could be issued anytime now. The company has a great chairman who has a history of turning around companies and selling them. This is setup for a similar situation.
2014 has been an amazing year so far. The over-heated market from last year is struggling to break into positive territory. When I did a review of my 2013 performance, I was shocked at how well the general market did in 2013. It is amazing what a bull run can do to the market and people’s psychology. Although I expected strong market returns for the next few years, I didn’t expect people to go that crazy, that fast.
2014 has been good for us so far. We are up over 13% for the year. What is interesting is that most of this is due to little change in fundamentals for our holdings. Infact, I think the market change will come in the coming months (BAC: when the stress test and capital return results are made public; XPEL: when Q4 numbers come out; CHK: when Q4 #s and the increase in NatGas prices reflect into earnings; MBI: when the imminent rating upgrade happens).
Most recently, I sold out of my holdings in the GSE preferred and commons. I like both of these securities and the current prices are still very cheap. Infact I might get back into these securities if, in a few months, they are still lingering at these prices. I bought other positions that I think are even cheaper.
Aurcana (AUNFF): I bought this stock in Feb. The stock has jumped over 100% in 2014. Although I think this is just the beginning. The company recently made a comment that they are looking at a strategic change. This mining stock has been beaten up due to the entire sector has been oversold and financing concerns. I think the strategic change will be huge value creator for shareholders. The 52-week high for this stock is over $6, and the company was trading at $1 when we bought the shares. So any news on the strategic change can create huge returns.
Goldgroup Mining (GGAZF): Goldgroup is another mining stock that was thrown into the sewer in 2013. The company was quietly executing on its operational change but the market didn’t care. The company recently put into production an asset that should do 700-1,000 oz of gold each month. At a low cost of $400-500, this company is going to be making good cash flow, compared to the market cap. Plus there are potential home-run events if they are able to settle a legal dispute, get permit for another asset, or do another small accretive acquisition. At the prices we were buying, we didn’t need much to go right. Just one thing goes our way and we could have a multi-bagger.
In 2013, we returned 19.46%. This is much less than what S&P500 returned, 31.90%. I’m definitely not happy with the large underperformance. Albeit, it is the long term track record that matters.
What is the lesson learned from 2013? A quote from Allan Mecham, “I think if investors adopted an ethos of not fooling themselves, and focused on reducing unforced errors as opposed to hitting the next home run, returns would improve dramatically.”
In an environment where the market is up 25%, making money is easy. For me to under perform in this market, the reason was our unforced errors. It was the positions where we tried to have huge hits in a short term but ended up realizing a loss. These positions added up to substantially weigh down on the good performance from our best picks. For example, we took a trading position in a company. The rationale was that a specific event was likely to happen and the my take was the market would react pleasantly with the event. The event came and went but the market didn’t budge. I closed this position two months later, taking a big hit. This one position had a negative 1% impact on our 2013 performance. These are unforced errors where I could have avoided them by not trading based on what the market would do.
Lesson learned: In each case I was enamored by the potential gain that I didn’t even focus on what would occur if the market didn’t act as I expected. In most of these cases, greed tends to make the mind act fast. As Richard Thaler would say, the Automatic System becomes too strong that the Reflective System doesn’t get a chance to think. Interestingly, it is in these special situations where I expected huge returns in a short period that I tend to make these mistakes. When looking at investments that you expect to pan out over years, the Reflective System has the ability to think through the decision.
The other thing that I had a negative impact on our performance was poor picks from 1-2 years ago that we closed in 2013. Dolan Media was a stupid mistake that we should have closed long time ago. Instead we waiting until Q1 ’13 to close the position. The stock was down almost 50% in the first quarter. Similarly, Yukon-Nevada was another mistake that we finally closed in 2013.
As I look at my current holdings, I’m very happy with what we own. I can see myself owning these shares for multiple years, as there is huge upside for these positions. I expect the portfolio to out perform the market.
- Berkowitz’s hedge fund returns: Amazing returns for a hedge fund that uses no-hedge
- Pabrai lecture: Great lecture and Q&A with Pabrai. He talks about some of this previous investments and how he looked at the key mistakes he made (Delta Financial) or how he sees the key investment theme (DirectTV)
- Lou Simpson Profile: A dated 1987 profile of Lou Simpson.
XPEL’s 2nd investor presentation is now available. Ryan Pape, CEO, did a great job talking about the company’s product, the industry, and how the company is growing. This is the first time I’ve heard the CEO speak, I thought he is very strategic about his business and keeps his card close to him. He didn’t reveal much about how the company is going to grow but it sounded like he wasn’t much concerned. I think the presentation is a good overview for people that are new to the company.