BACK IN REAL INDUSTRY (RELY)
There is some history here with this company, so let's do a brief review. I originally released the research report on RELY (back then it was SGGH) in October 0f 2014. The company had just made its acquisition of the aluminum recycling subsidiary of Aleris Corporation. Just a short while later, in December 2014, I exited the position due to a number of reasons, including wanting to raise cash to allocate into Impac Mortgage. On Monday, I reinitiated our position in RELY at what is roughly the same price I exited in December 2014. There have been some material improvements taking place at the company that are worthy of mention. Also, the fact that RELY escaped what was a brutal year for commodities (aluminum included) unscathed, marks an important test for management that they passed surprisingly well. For me, this is an example of the market telling a story through price that fundamentals have yet to properly capture. For all intents and purposes, given a depressed commodity market in 2015 and the newly minted, leveraged state of the company, RELY should have suffered much more than it did. The fact that it did not is a clear tell. Here are some of the material improvements/catalysts coming into play for RELY: RELY generated $81 million in EBITDA in 2015. One of the best performances for the company during a terrible year for commodities. Issued a "CEO Challenge" in 2015 to reduce costs by 1% ($13.4 million). Managed to cut costs by $15 million. The target for cutting costs in 2016 has been raised to $17 million. Consumption of aluminum is slated to grow by 6% globally in 2016. Additionally, the automobile aluminum supercycle is in its infant stages, with RELY positioned to be a significant supplier in the automobile space. Only 30% of the companies revenues are unhedged. The remaining revenues come from either tolling or are hedged. Free cash flow machine that has allowed for a $50 million reduction in debt in 2015. The company possesses some $900 million in NOLs that haven't been tapped into as of this date. It has been stated that Aleris is not the platform to utilize the NOLs due to significant depreciation expenses. The company is looking for bolt on acquisition candidates, passing on a myriad of deals in 2015 because they did not meet the company's requirements. Management is committed to making accretive future acquisitions while preserving ownership for current equity holders. In other words, very little future dilution. A strong movement taking place in government towards import tariffs...
JUNE CLIENT LETTER: FAILURE GENERATION; HEADLINE GAMES; THE SPORT OF INVALIDS
What follows is a section from the “Thoughts & Analysis” portion of my monthly letter to investors at T11 Capital. The Failure Generation In no uncertain terms, we have been challenged extensively during the first half of 2016. Challenged as to the level of conviction in future economic prosperity. Challenged as to the level of faith in government to govern properly. Challenged as to the level of confidence in the financial markets. Challenged as to the degree of research into our tidy portfolio of three core holdings that have basically floundered in 2016. These challenges are being exasperated by a seemingly perpetual modern infatuation with failure. Everyone from media outlets to prominent billionaires to overly-sensitive millennials are gripped by a near obsession with failure. Economic failure. Individual failure. Corporate failure. Governmental failure. If there is failure to be had, it peaks the interest of all classes of individuals. Take for example the recent army of billionaires who have come out to proclaim imminent doom in the global economy and financial markets. It used to be that billionaires kept enlightened opinions to themselves as the biggest threat to a billionaire is another billionaire. Therefore, by disseminating enlightened knowledge they are only allowing the meager millionaire class to move into the billionaire status creating a form of self-cannibalization to a certain degree. Not in today's world, however. Billionaires are only too eager to tell us all how peasantry awaits any individual who trusts in the global economy to provide any form of prosperity going forward. Soros, Druckenmiller, Rogers, Icahn, Bass and Grantham to name a few. And those billionaires that aren't delivering news of imminent doom directly delegate the responsibility to messengers who tell us they have sat in a room full of billionaires who profess total allegiance to cash in fear of economic collapse. The failure generation has spoken most recently with the surprise vote for Britain to exit the EU. This time they have not simply expressed failure, but have voted for it, in the form of a long standing union failing to exist in its current form. The EU has failed, during a time when, not surprisingly, failure is not only the path of least resistance, but subconsciously, or perhaps even consciously, has become the path of greatest desire. When billionaires aren't discussing publicly the storyline of impending economic failure or citizens voting for the failure of a union, then individuals pass their time by openly and viciously hoping for the failure of the innovators among us. Nobody encapsulates “innovator” better than Elon Musk. Not surprisingly, he is the most derided individual in corporate America, with a...