PORTFOLIO UPDATE: BLACK CATS
During the trading day Friday, I tweeted the following: After listening to CIDM's conference call and reviewing their earnings report, I can't say I was disappointed with anything that company had to say. The quarter can best be described as positively transitional, with the sum of all their parts being moved into place in order to create the company that CIDM will turn out to be 24-36 months down the road. In the meantime, however, my focus is on performance. CIDM did constitute roughly 30% of overall portfolio exposure before I sold half of the position. With the reaction to the earnings report, I couldn't perceive a clear outcome for the stock over the next few months. Given that reality, the prudent decision became the best decision. Trimming exposure down to a roughly 15% position overall will allow me to judge the circumstances evenly as they evolve over the intermediate term. I could add back in. I could reduce the position further. I'll simply take it as it comes. I have no love for any of my positions. The only thing I am in love with is the consistency of my performance. Anything that has the potential to interrupt that love affair gets kicked out of the house. And that is how I differ from the typical special situations, value, restructuring guy. I'm not willing to put up with the inordinately large drawdowns over any timescale. I've weighed the expected value (EV) of this decision as it pertains to long-term performance very carefully. The plain and simple of it is as follows: A drawdown in excess of 30% has a far more detrimental influence on a) long-term performance b) confidence of client base than any positive outcome of sitting through disturbances that your typical special situations, value manager would be open to doing. To borrow loosely from Paul Tudor Jones, given that I run a smaller asset base I have the luxury of being that fast boat on a choppy sea as opposed to being the large tanker that is immobile and clumsy in nature. I'm going to take advantage of that until I absolutely can no longer do so. Additionally, I don't think there is another special situations investor out there who has as good an understanding of the tape/price action/technical analysis as I do. With that said, I'm going to play into that strength with both entry points and exits. I have no need to sit still, allowing the market to have its way with me while proclaiming that "price and volume mean nothing over the long-term." Being proactive in studying price and volume as a complimentary function...
PORTFOLIO UPDATE: THERE IS NO FENCE LIKE DE-FENCE
During the trading day Friday, I tweeted the following: Defense in the markets is a an exercise in sacrifice. I've had positions that I have loved in the past that I've had to shed in the name of asset allocation. In order to create the proper equity curve while maintaining one's own sanity, these types of sacrificial exercises need to be tended to from time to time. Otherwise, your portfolio simply ends up becoming a derivative of market volatility that will eventually be susceptible to a terrific swoon that you will be powerless over because you have no cash to allocate at prices you never thought you would get. Any asset allocation worth its salt should take into account the risk equation the market is offering at any given moment. In fact, this consideration should take precedence over any fundamental research or favorable micro scenarios that your mind can dream of. With respect to KCG, it was a sacrifice that I didn't enjoy making, but nevertheless had to. It came down to two strikes against KCG that made me liquidate the name first when looking to raise cash: 1. Market cap was higher than anything contained in the portfolio 2. Liquidity was greater than anything else contained in the portfolio The first consideration is one of correlation. The second consideration is one of convenience. Together, they made the decision quite easy. As it stands now, the portfolios are roughly 80% long spread out between WMIH, CIDM and BFCF. 20% of the portfolios are sitting in cash. It should also be noted that this was the worst week for the market in 19 months. Despite that fact, the concentrated portfolio you see above finished the week up. That is exactly what I like to see and hope to see more of that in the week...
A LOOK INTO A RECENT FILING FROM BFCF
Here is something to take solace in as an investor who enjoys hidden asset, murky, under the rug type investments that the rest of Wall Street can't find, see or have the patience to understand properly: BFCF released an 8-K with the financials for BFCF subsidiary BlueGreen Corporation (formerly BXG:NYSE). The presentation simply reinforces everything I have discussed regarding the company since taking a position and publishing research in October: - Generated free cash flow of $71 million during 9 months ended September 2013. - Full year free cash generation of near $100 million - $46 million in EBITDA through first 9 months of 2013 - Full year estimate EBITDA close to $60 million - $337 million in sales during 9 months ended September 2013 - Full year sales estimates near $450 million - 20% growth in top line vs. 2012 - 11% growth in bottom line vs. 2012 - Timeshare industry as a whole experienced highest one year sales growth since 2006 Important to note that BXG is just one sub of BFCF/BBX. We know of three other subs that were acquired just over the past few months: Renin Corp, Hoffman's Chocolates, William & Bennett. Don't have much insight into the financials of these companies. However, we know the modus operandi of the company is to purchase niche businesses with a proven history of cash flow generation. On a post-merger basis, assuming the merger is consummated between BBX/BFCF, we are talking about a company that is trading at less than 4 times free cash flow AND has real estate assets throughout Florida that are impossible to value correctly due to a) vastness of portfolio b) various stages of development c) murky path to discovery of assets gained through foreclosure. ...
PORTFOLIO UPDATE: THE BOTTOM LINE & SOME YEAR END PERFORMANCE STATS
During the trading day Friday, I tweeted the following: EVOL is likely a stock that I will continue being wrong on. Well, perhaps I'm being too hard on myself. I originally discovered the opportunity when it was in the $6 range, publishing a research report based on what I gained from studying the opportunity. I never got the position sizing correct and my timing on the addition a couple months back wasn't necessarily inspired work. What I mean by continue being wrong with respect to the stock is that I wouldn't at all be surprised to see the stock move up from here. Perhaps substantially so. Here is the bottom line for me and it may just seem silly to you: If I'm not 100% comfortable in a position then I will move capital into positions that I am 100% comfortable with. Positions that I can wrap my head around completely, without any doubt whatsoever as to the clarity of my analysis. There is no reason to waste energy on positions that an investor doesn't understand. Diversification is the poorest excuse possible to wrap oneself into the mummified state that is a vast portfolio of ill suited opportunities that an investor fails to understand completely and totally. With that said, the current portfolios are spread across four positions at 90% invested of total capital. Those positions are: WMIH, CIDM, BFCF and KCG. All of these are companies that I get, both on a technical and fundamental basis. In going over my results for 2013 I had a total of 5 losing trades for the year, not counting trades in ETFs. That is against 9 winning trades for the year. These results are for both realized and unrealized gains. The average loss was 9.45%. The average winner has been 63.74%. Again, this is for both realized and unrealized gains, meaning stocks like WMIH, which I have been holding for 18 months now are included in the total. The largest realized/unrealized loss for the year was a near 18% loss in PXLW taken in January. This was a position I initiated in 2012. The largest realized/unrealized gain for the year is in shares of WMIH which are up 223% this year and 440% since initiating the position in July 2012. I'll have some more numbers in my year end performance summary next weekend. It has been a kind market. Don't confuse that kindness for any level of genius or you will find yourself on the opposite end of a poisoned spear to the...
PORTFOLIO UPDATE: YOU CAN’T BEAT THAT WITH A BAT
With WMIH up 100% just last week after KKR made an announcement of a financing deal that will allow the company grow substantially from here, it would seem that the cat is out of the bag. I have certain ideas of how this partnership with KKR will work out. KKR has many companies under its umbrella that 1) could certainly use the tax efficient structure WMIH can provide 2) can use WMIH as a reverse IPO to gain a lubricated route to listing on a major exchange 3) can use WMIH's existing reinsurance business (WMMRC) to gain entry into this lucrative segment of insurance. In any case, the potential here remains what I thought it was when WMIH was simply a shell with an all-star board of directors and Blackstone as an adviser. In the last paragraph of the research report from July 25, 2012 with WMIH at .50 cents I said: In the meantime, my time horizon for this investment is not several months, but years. I think this type of mentality towards WMIH as an investment is what will yield the greatest results without the burden of unrealistic expectations for magic to happen at the snap of two fingers. Given the upside potential (1000% +) I am willing to give it the time it needs to answer all the questions that investors have in a favorable and profitable manner. The investment of KKR provided a lot of answers to questions of risks going forward. The downside risk barring unforeseen catastrophe has been mitigated substantially. I said on Twitter a couple hours after news was announced on Monday that the upside potential was impossible to assess, however, with KKR involved the downside risk had been capped. In any case, I have very specific ideas of where this will end and believe the companies that will consummate the first stage of WMIH as a "real" financial company have already been chosen. I have gone into some details with my investors and will likely put out an addendum to the first research report at some point in the near future. As of the close Friday, portfolios are at roughly 90% invested of capital. Current holdings: WMIH, BFCF, CIDM, EVOL, KCG. Concentrated, high conviction, well understood investments that, for the most part, continue to exhibit highly favorable risk/reward profiles. My capacity for deep understanding of a company is limited to 6 companies ideally, with a maximum capacity of 8. Those who decide to fill their portfolio with dozens of names are either a) much smarter than I am or b) don't have a deep, "under the hood" type understanding of the companies they have allocated...
PORTFOLIO UPDATE: DASH
During the trading day Monday, I tweeted the following: My love for the regional bank names is well documented. I have been harping about their upside paired with relatively minimal risk for the entirety of 2013. While I believe that both SBCF and HMPR continue to possess minimal downside, I have found greater upside opportunities that demand capital. Sitting and waiting for the sludge through the dilution that SBCF faces is not an option in a 4th quarter where fireworks are occurring all around me. I have companies like KCG that are up 20% in two weeks since making the initial purchase. SBCF was essentially breakeven as a holding over the months it was held. While I appreciate patience and diligence in an investment, I also appreciate the fact that the S&P has turned into Usain Bolt with my job being to run faster than the fastest man of Earth. SBCF isn't allowing that to happen, despite how I feel about the long-term performance of regional bank shares. We are nearing the end of the month, meaning that the performance summary detailing each holding will be posted shortly. In the meantime, the portfolios are now basically 100% invested in the following: WMIH, CIDM, EVOL, KCG and BFCF. A concentrated portfolio of best...
PORTFOLIO UPDATE: THE JUMP OFF
During the trading day Wednesday, I tweeted the following: I'll have the research report for KCG up before the end of the month. As I mentioned on Twitter, this is a bit out of my normal market cap range. In fact, KCG represents only the fourth name I have profiled that has a market cap over $500 million. The 16 other reports I have written have all been sub-$500 million market cap companies. The average gain of the three $500 million+ market cap companies (PRGS, YELP, BWC) I have profiled over the past 2 years is 77% to date. With KCG I expect the pace of gains to continue. If I could sum up the investment thesis in one sentence it would be that the global financial markets are facing a liquidity driven surge that will naturally benefit one of the leading liquidity providers in the world. It really is as simple as that. Of course, I could have gone the route of a company like ICE (now owns NYX) or CME. Too mature, however. These are both companies with market caps in excess of $10 billion. KCG has a market cap only slightly above $1 billion due to the fact it came to an inch of its corporate life due to a software upgrade error that started spitting out erroneous orders last year. It has since been restructured, recapitalized, merged and all the better for it. I'll bottom line it one more time with this: Any global liquidity provider with a dominant position in the marketplace that is selling at less than 1/10th the value of its competition is a low-risk, high reward proposition. An asymmetric bet that will be carried by the markets as trading volumes increase and the surge in equities we are seeing continues. I expect tremendous upside here over the next several years. To give an idea of what I am expecting with KCG just remember that I don't consider positions that have upside of less than 300% over the long-term. With that said, the portfolios are pretty much fully invested at 100% of capital. I'll have an update on each position as I usually do at the beginning of the month in my monthly report. If you would like to be added to the mailing list for the report, email me at mail@t11capital.com and I will be happy to add you. ...
HERE IS WHAT SEEMS TO HAVE BEEN MISSED IN THE EVOL CONFERENCE CALL
EVOL is an investment that has been in the portfolios since July. Here is the original research report issued at the time. The company is extremely well managed. The executive team there seems to very deliberate in the actions they are taking, whether acquisitions or other use of the cash they are so good at generating. The DSA technology that is the bread and butter of the company seems to gaining efficiency and acceptance in the marketplace. Despite the run it has seen since July, I don't see much risk in the share price here at all. Let me demonstrate why by highlighting a few points from the conference call. To understand what follows you must first understand the way EVOL's revenue model works. When EVOL signs a new DSA customer it includes a license for a set number of SIM activations. Once the activations are spent, the customer must then renew their license with a new set of activiations that EVOL refers to as FUAs (first use activations). FUAs are a 100% margin product. They are all profit. Here is what seems to have been missed in the conference call: EVOL management: As we look to 2014, we expect to see more FUA renewals. And with the -- and with that, we expect to see the corresponding impact on our top and bottom lines. And while this FUA renewal did help our margins in Q3, during the quarter we did incur fees for our acquisition of Telespree Communications, a transaction I'll talk about in just a minute. Yes, 4 are in FUA. So we've had one in FUA for a long time. Now we just got the second one. And numbers 3 and 4 are coming right along, I mean, momentarily. Cameron M. Wright - Jay A. Fishman, Ltd. Okay. So you just got the second one with 2 close to the pike? Thaddeus Dupper - Chairman of the Board, Chief Executive Officer and President Yes. We -- number 2 came online in Q3 for FUAs. And customer 3, I don't know if it's Q4 or not, but it's close. And customer 4, I think we're forecast for Q1. Isn't it, Dan? Daniel J. Moorhead - Principal Accounting Officer, Principal Financial Officer, Vice President of Finance & Administration and Secretary That might be Q2. But it's coming in, yes, the first half 2014. So we feel good about our DSA funnel. We're making progress in the M2M space, and we think both will contribute, of course, DSA more than M2M, significantly in 2014. Thad, can you just quickly go over the carriers that are in reload mode next year and just an...
PORTFOLIO UPDATE: NEXT TYPE OF MOTION
During the trading day Tuesday, I tweeted the following: After trimming some EVOL due to general market concerns and the resulting desire to raise cash in September, I added back to it at a premium from where I sold the shares. Unfortunately, there are times when you have to pay a premium for planned performance. I believe this is one of those cases. EVOL did not participate in the pullback that marked the end of September, as well as the first half of October. It has simply been consolidating. While it may seem that the stock looks overextended or even in a blowoff stage due to increased volume, it is my view that this is a moment in time where it is actually in a continuation phase as opposed to any top. From both a technical and fundamental perspective, I feel that the gains have much further to go. I have also been adding to a new position that I will be posting a research report on before the end of October. I am making this into a large position from the start due to the upside potential involved in the opportunity. It is literally completely undiscovered, with not a single ounce of coverage or commentary regarding the company. I look forward to presenting it once I put all the pieces together. With the addition to EVOL along with the yet to be announced new opportunity, exposure is now nearing the 100% invested level. Given my opinion of the upside potential for Q4, I think that this level of exposure will remain until close to year end. Of course, I will take the twists and turns as they come, without any preconceived bias. Back to digging for data....
PORTFOLIO UPDATE: ROTATION STATION
During the trading yesterday, I tweeted the following: The decision to reduce exposure here is more opportunistic than it may seem. Although my first concern is controlling risk in the portfolios, the opportunity to own technology into what I think we will be an explosive Q4 rally will become too good to pass up in the weeks ahead. While I am bullish on both HMPR and SBCF for the long-term, I question whether financials will be able to match technology in terms of upside into year end. Both SBCF and HMPR are now small positions (less than 10% of total equity each) in the portfolios. As it stands currently, exposure is at 75% invested with 25% in cash. WMIH, CIDM, EVOL, SBCF and HMPR are the fab 5 holdings for the time being. I expect to add 2-3 more holdings into this mix before October is out, with the prerequisite that the market stabilizes, of course. Been traveling since Saturday and just got back last night. A ton of catching up to do. I'll be posting detailed analysis on where I think the markets are headed during the...