After a absurdly strong 2013, the market had another great year. The S&P500 index gained 11.39%. Our portfolio returned 46.61%. Since 2009, the market has returned 16.74% compared to our 25.30% annually compounded rate.
The outperformance was largely due to our focus on positions that were initially not discovered by the industry but slowly started getting more eyeballs. In general, we have started to look at companies where we have an edge. Given my small capital base, it has made it clear that I have a huge advantage where the market is not looking. This is in smaller cap companies and companies that are going through transformations.
Although 2014 was a good year, I think we should be able to beat the market given our current portfolio and be able to beat the market at a wide margin. I wouldn’t be surprised if 2015 results in similar returns as 2014. Although we are having a hard time finding new ideas, so once our current holdings work out it will be tougher to deploy the cash elsewhere.
One of the changes I made going into 2013 was fixing two of my big mistakes: being too lazy w/ my position and not focusing on “why”.
In the past I had fallen in love w/ my holdings. My biggest mistake was Goldgroup Mining. Even though I had friends bring up the negatives for the company, I was blind to my position. I kept a closed eye to any analysis of the company that was negative. I was too lazy to act even though it was clear the company had large debt issues and need to constant capital. Another mistake was Dolan Company. Where the negatives of the company’s revenue stream was discussed regularly in the conference calls. Although I heard these issues, I was blinded by the love of my holding.
The second mistake was never asking “why” I’m finding this company for a bargain. Why is the company so cheap, if my thesis is correct. This is also where I’ve realized my edge lies. For example, when I bought BAC Warrants it was clear why it was cheap. The market hated the legal issues and was too scared by the potential large payoffs. So the edge lied in looking past these issues and seeing the legal settlements had always been done for pennies on the dollars. Also the brand had huge cash generating potential once these one-time issues were resolved and the interest rates increased. Similarly, in 2013 I bought XPEL. This was a micro cap where not many were looking at. The company’s shares were extremely illiquid, many days going through no trades. Although the company was generating good cash flow, had a dominant position w/ its software, the brand was growing, and the industry was growing rapidly. There were huge tail winds for this company’s product. In both these situations, asking “why” gave me a valid reason where I could benefit on buying the shares and waiting for the market to come around.
Going forward, I’ve decided to focus on two type of investments: ignored companies and companies going through transformations. XPEL is a great example of “ignored companies.” ID Systems is a company going through a transformation w/ the co-founder coming in fix operations. For the most part, I’m finding more of these ignored companies. Although when we do find companies going through transformations we are buying a huge position.
A quick analysis of some of my current holdings:
XPEL: This is once an ignored company that is finally getting eyeballs. Once this company gets uplisted so funds can buy, the stock will have an unique situation. The insiders own over 40% of the shares and you have early investors owning around 10-20%. So the float is very small for funds to build a position.
The company’s revenues are growing rapidly and there is still huge growth. The international market is starting to get to a good size and I believe the international revenues will eclipse the US revenues. The company’s owned stores make huge cash and as the company builds more of these we will see large cash increases. The company’s growing cash balance will make the balance sheet a weapon, as M&A will pick up. I expect the company to spend lot more on international M&A than US M&A.
ID Systems: This is a company that has been going through a transformation w/ the co-founded stepping in to be CEO. The company is expected to finally be EPS positive in 2015. Also they have a very good operating leverage where additional revenue growth will have big impact on cash and earnings. I think 2015 will be very good for the company, as revenue will increase and company will be profitable. Also, this company is going to be a cash machine with little need for capital.
Sevcon: This is a company that is ignored by many. There is little trading volume, w/ Gabelli owning over 50% of diluted shares. Also the company has huge operating leverage, so cash generation won’t show until you see revenue hitting the income statement. Although, if you look at the prior year financials you can see the company has spent quite a bit on R&D. The fruits of the R&D are close to hitting the financials. We recently saw some fruits of it with the first sales deal for the China JV and a large $50 million contract w/ a Tier One Chinese auto manufacturer. Also, the majority ownership by shareholder friendly fund will ensure that the poor management team doesn’t waste time or shareholder capital.
I haven’t found many new ideas to add to the portfolio. I have made some changes in late 2014, most of them haven’t been large positions.
I sold out of 1347 Property Insurance and Kingsway Financials. I sold out of 1347 right after the news came out that they pulled out their application for the Florida market. The company’s decision not to pursue the opportunity in Florida was a big change in how I had envisioned the investment thesis working out. As for Kingsway Financials, I found other opportunities where I think the odds are better for me.
I bought a position in Sevcon. This is an obscure company that is not followed by many. Although there has been a major change with Gabelli Funds owning a majority of the shares and Ryan Morris as the Gabelli elected activist on the Board. The company is going through a transformation with Gabelli leading the investment into R&D. The company has a JV with a large Chinese manufacturer that should boost revenue. Signs so far show that the company’s transformation is going well and we are starting to see new sales coming our way.
I have also bought 3 other positions that I will leave undisclosed for now.