The portfolio returned 2.76% in the first-quarter of 2016 and underperformed the comparable indices.
The best performer was EasyJet, which returned 12.27% after dividends. The timing of my EasyJet addition to the portfolio in February was incredibly lucky. The worst performer was Syntel, which plummeted after disappointing Q1 guidance. I sold off Target after the disappointing earnings report and its new ‘strategy’. At the right price, I’ll be happy to own Target once again. Cash position in the portfolio fluctuated throughout the quarter but closed out at 45%.
Individual Security Updates
I added EasyJet this quarter; the thesis is available here for anyone interested. The Pound Sterling sits at $1.29 today. I am no forex expert, so I don’t know where the Sterling is headed. What I do know, however, is that if the pound remains stable (~$1.23), EZJ can recuperate some of the Brexit-fueled-Sterling-depreciation lost income when the $1.23 level laps in the October quarter. If the Sterling runs higher, the company would recuperate the lost income and then some because it receives the money ahead of time and would hence end up with lower expenses. In summary, falling pound ($1.13), profits remain stable relative to last year; medium pound ($1.23), lost income from the past year is recuperated; stronger pound ($1.3+), profits rise significantly because of the income/expense characteristic of the consumer airline which I outlined in the EZJ thesis.
The traffic stats so far this year are quite compelling — load factors and Passenger numbers are all higher y/y. The stats would mean nothing, though, if the company used overly promotional tactics (i.e. unreasonably lower ticket prices) to attain them. The company’s first-half report is due in the second week of May.
Mind CTI reported earnings and I penned an update for that ER as well, and its first quarter report is due in the first or second week of May.
Rocky Mountain Chocolate Factory
I added Rocky Mountain Chocolate Factory to the portfolio this quarter, and the thesis is available here for anyone interested. The Trump administration laid out its tax plan this week with a proposed 15% corporate tax rate. RMCF’s tax rate is among the highest in the country so it stands to benefit significantly from tax-reform.
I sold off target after its ER. Management’s new strategy didn’t make much sense to me, so I decided to cut my losses and part ways with the stock. I’m willing to take a new position at a lower price, though. The update is available here for anyone interested.
Syntel reported Q4 earnings report was quite disappointing. Mgmt guided to lower earnings because of the uncertainty its clients in the Healthcare and Financial industry are facing. It was disappointing, but one would be hard-pressed to find a business with defensive characteristics in this market that trades at a reasonable valuation. It recently reported earnings for the second quarter — I will publish a post regarding Q2 this weekend.
I sold off Walmart for modest gains. Blue-chips such as Walmart tend to be efficiently valued; mild deviations from fair value self-corrects rapidly. I’m willing to take another position if the stock treads the low 60s again.
I’m still working on a post for Gattaca PLC, which I added last month. Syntel and Mind CTI have also reported earnings. I should have all those up by this weekend if time permits.
The portfolio returned 3.34% and 24.76% in the fourth quarter and calendar year 2016, respectively and underperformed the comparable indices. The screenshot below comes from Interactive Broker’s portfolio analyst and represents the portfolio’s performance since its inception on December 10th, 2015. Both the Russel and the DOW had tremendous runs in the fourth quarter post the election of President Trump.
Individual Security Performance
The best performer was Avnet, which returned 22% during my holding period in the fourth quarter. I sold Avnet after an early morning pop. I Still like what it’s about and will be happy to jump back in if it treads the low 40s. The TS segment sale should unlock a lot of cash that will hopefully be returned to shareholders. I sold off Gamehost, Flanigan’s Enterprises, and Advent Wireless as well in the fourth quarter. The portfolio currently comprises of Syntel (SYNT) and Mind CTI (MNDO) at 16.6% and 16%, respectively.
Volatility and ‘Risk’
I generally abstain from discussing volatility, but I figured I’d post about it for once, and once only since I’m closing out my first year. I do not believe volatility and risk are in any way correlated, the portfolio performed OK during the volatile periods, especially during the beginning of 2016 which happened primarily because of the portfolio’s cash balance.
My risk management arsenal is and will always be to pay less for a security — the less I pay, the less ‘risk’ I am exposed to. My portfolio is also more concentrated than the average investor, and so I expect higher volatility than the general markets for my portfolio.
2017 Mazi Value Goals
I fell short of my reading goals in 2016 because I didn’t have much time. From my experience thus far, knowledge, like stocks, compound over the long run. Education is paramount. In an age where world-class professors post their Finance MBA courses online at no cost, where pdfs are easily accessible, where new, reviewed books are easy to find, there is no excuse. Burry and Buffett did not get to read reviews of a book on amazon before purchasing in the early 40s/90s nor did they have access to online classes at no cost, they had no way to filter and simply read as much as they could, which makes their accomplishments evermore impressive. The goal is to knock out at least one book every month. February’s book is Billion Dollar Lessons by Paul Carroll.
The Antithesis of Value
One other thing I want to accomplish is to start analyzing companies traditional value investors tend to ignore. Companies such as Amazon, Facebook etc., you know, the traditional companies that are generally written off as expensive or ‘bubblicious’ because of their expensive multiples. I want to get out of my comfort zone and actually learn about these companies though I probably won’t buy them.
I am not a fan of making quarter to quarter or year to year EPS predictions because mine is rarely ever accurate. But because the sell-side 2017 guidance looks a bit suspect to me, I believe it would be appropriate to make my own forecast in this case since I recently recommended the stock (you should take everything I say with a grain of salt, of course.) Analysts are expecting, on average, $2.32/share or approximately $189 million, and I think it’s a bit too optimistic. I would agree with the expectations on a normalized basis but it would require that revenues stabilize next quarter, given the degree of operating leverage the company carries. The concentrated nature of its clients makes it difficult to figure out exactly when this will happen — it could be next quarter or could be later on in the year. Also, given how commoditized the industry is, it is reasonable to expect that revenue growth will trace that of its competitors over the long run, which in this case is still thankfully >0%. I think there is short term price risk so I have trimmed my position to 16.6% which is still quite sizable by industry standards. The goal is to average down at a lower price if the company misses the 2017 sell-side guidance and my expectations remain intact.
A bill was recently introduced in the House of Reps. with the intention of increasing the H1B visa minimum salary to $130,000, or to the 85th percentile of the median annual wage for Computer and Mathematical Occupations per the DOL in order to encourage hiring Americans over other nationalities. The bill also diverts 20% of all new H1B visas issued to small businesses with 50 or fewer employees. 14% of Syntel’s billable consultants worldwideuse visa work permits. Even if we assumed that 100% of permits were H1B’s in the U.S., it’s still not that big of a deal. Syntel will likely take a small hit on its margins but nothing particularly substantial.. say maybe 100-200 bps, tops.
Australian Local Media
Local news companies in Australia look fairly attractive. I’ve been watching some of them for a few months but I have been reluctant to buy because I cannot figure out an appropriate topline decay rate. Lack of access to the appropriate data, and my urge to buy at the worst case scenario kept me from pulling the trigger. For Prime Media Group (ASX: PRT), which currently exhibits a double-digit dividend yield, my entry target was $0.18, a price that assumes that earnings would decline at a CAGR of 17%, perpetually. The stock traded as low as 3.5x last year’s earnings and bottomed intraday at $0.24 and it now sits around $0.30. If it treads down to the $0.19/$0.2 level then I think it’s worth a look.
Advertisers are flocking head over heels to capture the millennial media crowd which is clearly moving online. Given that Australia is the world’s largest exporter of iron ore, the Chinese construction slowdown and iron ore crash translated to lower advertising expenditures around the area. Though the commodity performed sensationally in 2016, it still trades ~56% below its peak 2010/2011 peak. So while I agree that the local traditional media biz will decline terminally from here on out, the market’s assumption looks a bit too pessimistic. The management team seems adept at capital allocation and realizes that the industry will not grow and so they are paying out earnings rather than scouting out high-flying tech media stocks to drive ‘growth.’ Again, any asset – moat or no moat – is investable at the right price, IMO.
Contemporary Australian Media Laws and Industry Consolidation
A bill was recently introduced and is currently in the pipeline for the 45th Australian Parliament. It has been passed by the House and is now in the Senate. The purpose of the law is to alleviate the media control and ownership restrictions that were put in place in 1992 under the Broadcasting Services Act to prevent monopoly control of the media. The restrictions to be alleviated are as follows:
75% Audience Reach prohibits commercial television broadcasting licensees from controlling licenses whose combined license area populations exceed 75% of the population of Australia. This resulted in regional and metropolitan networks.
The 2 out of 3 Rule prohibits control over more than two out of three regulated media platforms in any one commercial radio license area. So a company can own a newspaper and a radio license but is prohibited from TV broadcasting in the same license area.
Online news organizations do not face the same restrictions and so these laws disproportionately affect local, traditional news organizations. Companies do not set up shop in a terminal industry and so the passage of this law will lead to industry consolidation because replacement costs likely exceed the current valuations. If valuations of these companies remain depressed and the law is passed, they will become LBO/industry consolidation targets and PRT will likely get scooped up by one of its competitors.
The U.K. & Brexit
Recruiting companies as a whole in Britain look attractive, my favorite one so far is Gattaca PLC (LSE: GATC). The company recently made an acquisition and the non-cash amortization should provide an extra $2 million free cash flow that won’t show up on the income statement; FCF > net income. That is significant for a company with a market cap <£100 million. I was hoping to buy, as I had mentioned in the Q3 performance report, in march in accordance with the formal article 50 trigger but the stock has rallied a bit this year. The £2.30 level was my entry target but it bottomed around the mid £2.5s and rallied. If it pulls back to the £2.3 level, I think it’s worth a look.
U.K. Economic History
Ben Graham was once asked if wall street professionals are more accurate in shorter or longer term forecasts and his response was:
“Our studies indicate if you have your choice between tossing a coin and taking the consensus of expert opinion, the result is just about the same in each case.”
I recently came across one of the most amusing anecdotes about economics and forecasting called Fiedler’s Forecasting Rules (which I posted here)in Paul Dickson’s The Official Rules. It’s quite interesting and I’d recommend it to anyone. Given that the Pound Sterling was one of the hottest FX trades last year, I figured that I’d close the year off with some commentary on Britain:
The 1981 Budget Debacle
The U.K. entered a recession shortly after Margaret Thatcher was elected in 1979. Per the 1979 Conservative General Election Manifesto, Margaret Thatcher’s economic priority was twofold: tame the double digit inflation and grow the economy. In 1981, Thatcher proposed a budget that came to be one of the most controversial in U.K. history: she chose to raise taxes to the tune of £4 Billion, or approximately 2% of the GDP at the time. This was a period where Britain was in a recession, and fiscal tightening in a recessionary environment defied the logic of the economic theorists. 364 Prominent economists from the academic community penned a letter to her:
“We, who are all present or retired members of the economics staffs of British universities, are convinced that:
(a) present politics will deepen the depression, erode the industrial base of our economy and threaten its social and political stability;
(b) there is no basis in economic theory or supporting evidence for the Government’s belief that by deflating demand they will bring inflation permanently under control and thereby induce an automatic recovery in output and employment;
(c) there are alternative policies; and
(d) the time has come to reject monetarist policies and consider urgently which alternative offers the best hope of sustained recovery.”
The letter prompted the “Were all 364 Economists Wrong” volume from the Institute of Economic Affairs. The U.K. economy got out of the recession a few months after that letter was published and grew at a pace of 2.7% in the ensuing decade – a far cry from the consensus economists’ predicted depression. Inflation peaked in 1980 at 18% and fell to 5% at the end of 1982.
Black Wednesday and the Exchange Rate Mechanism
The European Exchange Rate Mechanism (ERM) was established 1979 to facilitate exchange rate stability amongst its members in order to improve trade relations between them. It was a precursor to the Euro. Per the Federal Reserve Bank of St. Louis, Britain declined to partake in the ERM in 1979 because she believed that the risk of an inflexible currency outweighed the benefits. This was also a period when Britain was in a recession at the time and needed more control over the value of the pound to remain competitive, as I discussed above. Britain eventually joined the ERM in 1990 and subsequently pegged the pound to the Deutsche Mark at 2.95 DM to 1 Pound Sterling. The idea was that the British government would intervene if the exchange rate fell below 2.773.
In 1992, Britain found herself in a recession while stuck in the ERM and pegged to a strong Deutsche Mark. The Brits needed a weaker currency while Germany was doing fine. Currency Speculator, George Soros, amongst others recognized the vulnerability in the Pound Sterling and realized that Britain would be forced to exit the ERM and thus, he sold the Pound Sterling short. Other speculators eventually realized this and begun selling the pound as well. The Bank of England went on a buying spree with foreign reserves attempting to hold up the value of the Pound to keep the U.K. in the ERM but eventually succumbed to the speculators. Britain was forced to exit the ERM. Economists at the time, however, were worried about the risks of leaving the ERM and all the benefits that Britain would leave behind. They assumed that the exit would push the UK into a deeper recession. This is even more evident by the actions of the Bank of England which attempted to fight off currency speculators to avoid the devaluation required for the exit. The exit from the ERM andthe subsequent Pound Sterling devaluation was credited for Britain’s economic revival – The U.K’s economy grew at an annualized rate of about 3% from the ERM exit until the recent great recession. Why would the Bank of England fight to keep the currency strong in the ERM if they knew that the devaluation and, an ERM-exit, would swiftly pull them out of the recession and generate an envious real GDP growth rate of 3%? They didn’t.
Once again, the same consensus economists and bureaucratic institutions are predicting recessions/depressions as a result of Brexit. I have a hard time rationalizing why corporations would choose to redomicile their operations into an anti-business environment with higher taxes, more regulations, and a stronger currency over Britain where they would get the opposite. Philip Hammond, Chancellor of the Exchequer – the equivalent of the U.S. Treasury Secretary – recently stated that if Britain was not able to strike a deal with the EU that it would turn into a corporate tax haven which the EU vehemently opposes re: Apple/Ireland tax issue.
Ironically, the euro zone faces the same issue Britain faced in 1992 – Germany is propping up and benefiting from the currency while the other countries that require weaker currencies are struggling with deflation and prolonged recessions. Although these countries are well aware (I hope they are) that they need devaluations to revive their economies, they are being fear mongered by virtually every bureaucratic institution into believing that a depression awaits them if they exit the euro zone. And because the devil you do know supersedes the devil you don’t, these countries choose to remain in the euro zone.
I should stress that I am not implying that the economists will be wrong once again and I certainly do not have the answer.. The point is that there is no historical precedent that indicates economists or the bureaucratic institutions are any better at predicting economic trends than a coin flip. One only has to look at the IMF’s and the ECB’s eurozone growth forecasts since 2008. So while they all attempt to make economic predictions, it is important to note that there is always a positive bias embedded within actions accepted by the status quo and a negative bias when actions deviate from the expectations of the status quo. I say this with great respect for the field of economics and its participants.
If Margaret Thatcher had succumbed to the pressure from the consensus economists, what might have happened to the British economy in the 1981 period? If the British government had its way with the ERM, how would the British economy have fared? Would Britain have joined the now awful eurozone? I guess we’ll never know. What I do know is that I am bullish on the U.K. economy – the actions the British government has taken and continues to take should offset the negatives arising from Brexit.
In theory, theory and practice are the same. In practice, they are not. – Unknown
Disclaimer: Nothing mentioned in this article is investment advice or a recommendation to sell, buy, or hold any securities. Contact your investment advisor before making any investment decisions.
The Long portfolio rose 0.22% for the month of September, while the consolidated portfolio increased by 0.4 %. The portfolios closed at +6.39% and +4.8% respectively for the quarter.
Gamehost was the best performer for the month of September, rising nearly 5% post-dividend. I sold off Gamehost earlier this month in anticipation for the new ideas in late December/early January. Also sold Flanigan’s Enterprises before Hurricane Matthew. I’m in the process of getting rid of Advent Wireless as well. So Avnet, Mind CTI and whatever new positions should be the only two long positions at the end December. I may end up selling those two as well if I come across better ideas.
Election Bonanza & President Trump
Disclosure: I supported Senator Bernard Sanders during the Primaries for non-economic reasons. I, however, did not vote for either major party candidate, so my goal here is to be as non-partisan as possible while presenting both my opinion and facts.
President-elect Donald Trump’s message was geared towards those that had lost manufacturing jobs. He forgot to mention, however, that more jobs are being lost to automation than they are towards China. If corporations could produce goods at lower costs via robots, they’d lay off the Chinese workers and employ the robots. The inescapable truth is that technology will always prevail and you cannot fix the economy by raising the minimum wage as Hillary and Bernie supported or by placing tariffs on China, Japan, and other countries we have trade deficits with as Trump suggested. Yes, we do need to restructure our trade deals with these countries, but people need to learn new skills and it is that simple. Tariffs, lower Corporate and Income Taxes as well as restructured trade deals will only create a temporary, albeit well needed economic high, but will not fix the long-term issues.
I was in Boston last weekend, and the airport prohibits Uber/Lyft, and so the Taxis have succeeded in lobbying, monopolizing, and thus, slowing down the digital transportation economy. The horse breeders likely protested Henry Ford and Carl Benz, but inevitably moved on when the customers chose to drive cars over riding horses. Despite what consumers say, they will always elect for the cheaper and more convenient alternative technology; they will always choose to pay $4 for a big mac meal over $7. One cannot stop technological advancement, and market forces will inevitably prevail. The Taxi drivers will eventually get replaced by Uber drivers, and the Uber drivers will undoubtedly protest and lobby against autonomous cars as well. So what we need is a wave of STEM incentives that work. One would benefit from actually learning to maintain or build the robots that are taking the jobs because that will always be in demand. There is also the issue of consumer debt, but that is a topic for another day. A bi-partisan approach is required to fix these problems.
The Pound Sterling, The Euro, and Speculation
With the proceedings of Brexit underway, shorting the Pound Sterling has been, perhaps, the most effortless trade of the year. I’ll be expanding the portfolio into Britain again (more on new screening process). Some of these stocks have fallen despite the fact that the currency is trading at multi-decade lows. So we have a scenario where the currency and some potential stocks both look cheap. I believe maximum pessimism and perhaps, the best time to buy into Britain will come when the process of invoking ‘Article 50’ becomes a reality. I.e., when people are entirely convinced that Brexit means Brexit. I do believe, as I have mentioned in the past, that Brexit was a positive development for the U.K. – a weaker pound and less burdensome regulations should propel exports. The Euro, as a currency, is as suspect as it gets and is frankly unsustainable. The farther other countries can get away from it, the better off they will be.
While most people are betting on a lower pound against the Euro, a better bet would be to do the opposite. The Anti-Establishment trend is in full swing and with elections in Germany, France, Netherlands, and with Anti-Establishment parties gaining increased support in these countries, what happens to the Euro if one of them are successful? Some are proposing referendums. This is significant because not only are these countries members or of the EU; they also use the Euro! So [insert prefix here]-exit will also be as unprecedented as Brexit was. Netherlands is one of the net contributors to the Euro Zone.. so trouble ahead for the euro, but I’m not betting the ranch on it.
A Concentrated Approach
The portfolio, on average, has held 50% of its asset in cash since inception. This is not something I did intentionally as I don’t believe in market timing. I do, however, like to take advantage of inefficiencies like tax-loss selling, window dressing, etc.
When I started this website, my intention was to hold somewhere between 12-18 securities as Mike Burry did initially. I promptly came across the harsh reality of value and time and found myself taking 12% positions. Finding 12-18 undervalued securities is difficult in its own right and also, working a full-time job while being a ‘part-time’ investor is tough and time-consuming. I don’t have enough time to keep track of 12 securities; I can barely keep up with the 7 (long and short) or so from last quarter! So the goal going forward is to hold somewhere between 3 to 6 securities.
I want to run a full portfolio in 2017, so if that means running my favorite idea at 40% or 50% of the portfolio, and two more at 30% or 25%, then so be it. I’m compelled by the early Munger days when he ran his fund with ‘very few securities’ or ‘no more than three’ positions. If I find three companies trading at 7x normalized earnings (14.2% earnings yield), why buy a fourth position at 12x (8.3% earnings yield)? I’m weary of currency risks and want to have a portfolio allocation ideally in the USA, so I’ll limit the international positions to 50% unless I find something irresistible abroad. I’m well aware that my currency prediction abilities are lacking and so I either need to figure out a way to hedge or minimize international exposure. I’m also considering eliminating my short portfolio because of time constraints. So if I do not come up with any more short ideas, then I’ll most likely just let the puts expire.
The assets everyone perceives to be ‘safe’ and of ‘good quality’ are usually priced as such, which then makes them inherently risky. Take the U.S. Treasuries, for example, the 30-year Fixed income bull market in bonds have sedated the amnesic market participants into believing treasuries can do no wrong. So we have the most experienced fund managers holding on to the most expensive bond market in history because they fear a market crash. So the logic is to sell the stock market short and go long the most expensive bond market in history with zero inflation protection. Fixed income investors are exposed to currency and interest rate risks which are both unpredictable. Fixed-Income Investors have gotten a sneak peak of what ‘risk’ looks like with the post-election rising yields and the Long-term Treasury, European, and Japanese Government Bond holders are feeling the heat. It is important to understand that there is no such thing as ‘risk-free’ debt. Remember, the government or the bond issuer needn’t default for losses to occur, yields just have to rise.
Investors that sought safety in Treasury Bonds in the 60s and 70s (last fixed income bear market) soon found themselves sitting on significant inflation-adjusted losses. You get your principal back 20 years later, but it is worth 25% of what it was when you lent it while the price of goods around you have quadrupled. Today creates the same environment with governments worldwide expanding their balance sheets at an unprecedented pace with growth lagging behind coupled with the lowest yields we’ve seen in the past few centuries. Don’t get me wrong; I’m not cheerleading for equities (stocks) here, because they too, are expensive. Equities, however, do offer inflation protection. So I am 100% equities at least until bonds become attractive once again.
New Screening Process & An Open Mazi Value Watchlist
I have created new screens based on GuruFocus sectors – you can view them here. The list is currently locked and the new ones are designated by ‘New’; I will open them up when I am done screening. The screen is broad, and the only requirements are that the companies in question have a market cap > $20 million, exhibit consistent cash flows, and be located in either Canada, Australia, U.K., or the USA. I’m going to run through them once again once I’m done with the screening process to place a ‘quantitative value’ on them. The quantitative value will be circa 10x normalized earnings, and my future qualitative analysis will determine what I’ll eventually pay for it. The point of this is to get to know these names over time, better track them, and jump in and out of them very quickly when the opportunity presents itself. Another plus to this new process is that I won’t have to screen for probably another few years – it’s probably the most mind-numbing process, but it is an investment in my time. So far, I’ve gone through over 4000 stocks and still have about 3000 to go. I’ve avoided certain sectors like ‘metals,’ Oil and Gas, etc. that I’m not comfortable with and you should expect about 2000 securities on the final watch list. I’ll compile them into one spreadsheet and make them available on the website in when it is complete.
The Fed and The Intelligent Speculator
Speculating on what the FOMC will do each successive meeting has always is always the forefront of the Financial Media. It is a crowded speculative trade, and I do not intend to adjust my portfolio based on the winner of the presidential race or what the Fed chooses to do. Although people love analyzing this stuff, no one truly knows how, if, or when the fed’s balance sheet will be unwound. Government response to every recession/crisis is always inflationary, so a fully invested value portfolio should be fit for all seasons over the long run and note the emphasis on ‘over the long run.’ My goal is to remain an investor and not a trader – differentiating between the two is imperative. I have my opinion on all sorts of economic events, I use it to adjust what select potential candidates for the portfolio, but at the end of the day, the portfolio will rely solely on Graham’s Margin of Safety, it is the only strategy that has been proven to work.
This post was initially supposed to be about the Pension Crisis, which I will publish later this week or this weekend. I ended up writing about 100 pages of fluff in a word doc from value Investing to strategy to Burry to Buffett to the Pension Crisis. It is one big draft right now, so I figured I’d just divvy it up and post them over time. This post was excerpts of the doc.. I guess I’ll refer to it as the Master doc from now on.
The Long Portfolio rose 0.76% for the month of August. I delayed this August report for a few weeks with the intent of writing some macro commentary. Although I am already in the process of doing so, it is almost the end of the month. Given that the Fed elected to hold rates still, the commentary should prove to be even more pertinent. Hence why I am comfortable pushing this into October. The October report will be published very early on in the month since the tedious part of it is the macro stuff which I am almost done with. Here’s a screenshot from Interactive Broker’s Portfolio Analyst:
Using the markets (S&P/DOW/RUSSEL) for comparison purposes to the Long Portfolio rather than a hedge fund long index is conservative given that the average Hedge Fund underperforms the market. I also will be using the Credit Suisse Long/Short Equity (CSLS) as the comparison index for the Consolidated (Long + Put Option) Portfolio. I have elected to use this because it is offered in Interactive broker’s Portfolio Analyst and if I ever wanted to pull a chart comparing the Consolidated Portfolio to anything, the report can be generated automatically. For Example:
It is important to note, though, that I pulled the consolidated chart on the second or third trading day of September, so there’s a bit of a bump on there at the very top right corner. The Long Portfolio’s chart was pulled on the First of September.
I have also been working on writing about my journey through the investing world which will entail, in detail, what drove me to where I am today. I will also finally (and I want to apologize since I know some of you have been asking for this for a while now) publish the list of investing book recommendations – I penned the majority of it a while ago but just never published it. The Journey through Investing as well as the Books/Recommendations will have their own page and the ‘About’ page has already been removed to reflect this. I worked on all these through the month and got absolutely nothing done. Performance reports after next month (Q3) will be written quarterly going forward. I will still cover earnings updates as they come in, I just don’t see the point of writing these every month anymore.
I also recently received a very comprehensive value investing survey from a Gurufocus user that interviews other Gurufocus users. The list of questions are so well thought out that I am going to publish them here as well.
I will be adding more cash to the portfolio early next week. I have placed some limit orders to balance out the portfolio the way it currently is, so my cost basis will rise for those stocks that have already risen and the target cash % will be the 40% it currently is. I have posted commentary on earnings for the portfolio’s positions for the most recent earnings quarter so you can find them on the research page.
Great news on Avnet! They have agreed to sell their Technology Solutions segment to Tech Data for $2.6 Billion. Per mgmt, this should close early next year — I will elaborate on the transaction in an individual post this weekend or early next week. Interim CEO, Bill Amelio was selected as a permanent replacement.
What I have done here is separate the Long portfolio from the Consolidated, which is the Long Portfolio + Put option portfolio. The long portfolio consists of long equities and nothing else. In the prior months, I had only reported the ‘Consolidated’ or the combined Long + put option portfolio. Going forward, I’ll be using this format. The long portfolio is more comparable to the indices listed above and should outperform the consolidated portfolio in good times. The consolidated portfolio will outperform the long portfolio in more dire times given its structure. The portfolio has also held an average of about 45% cash since inception. This has not been intentional. While I agree the market is overextended, I don’t want to attempt to time a market crash. I believe a full portfolio while hedging with put options is the best alternative to that.
The above is how the individual securities fared for the month of July. Please understand that the above is not a snapshot of the portfolio today. KMX Jan 17, SODI, PFIN, and PFHO are gone. And AWI and AVT are in. Will cover everything in detail and also post earnings updates for BDL, GH, MNDO, and TRIP later this week.
The portfolio rose 0.6% for the month of June, but fell 0.14% for the second quarter and underperformed all indices with the exception of the Russel 2000. The chart below comes from Interactive Broker’s Portfolio Analyst.
I pulled this chart on July 3rd and so it, unfortunately, includes data from the First of July.
The best performer for the month was Gamehost, and the worst performer was Pier 1 Imports. I sold off PIR on Thursday; you can read the update here. Q2 performance was abysmal; I made a lot of mistakes with regards to the portfolio this quarter. The portfolio currently holds 36% cash after the BDI and PIR sale, and I am hoping to either fill that up quickly or increase concentration in the current holdings. Beyond that, the put portfolio will be my priority. I have updated the current holdings as well as their percentages on the homepage. You can view them there.
The portfolio fell 1.2% for the month of may and under-performed all Indices. I don’t have the chart this time because I didn’t pull the report from interactive brokers in time so it contains part of June’s performance. The chart below comes from interactive brokers’ Portfolio Analyst.
The chart is now too cluttered as there are too many months included and I can’t customize it. Also, if you look at the bottom right corner, I cut off at 6/02. That was where may’s chart ended. I can’t customize that chart to show a specific date range, so If I don’t pull the report before the first trading day of the following month, then it shows the new month. Going forward, I’ll use a column chart from excel rather than the IB chart to illustrate just the ‘current month’, ‘YTD’, and ‘Since Inception’ performance of the portfolio.
The best performer for the month was Black Diamond Group. This performed well not because of Crude oil but because they reported that they were providing housing to Fort McMurray resident that were left homeless as a result of the wildfire. Gamehost fell 14.29% for the opposite same reason – One of their properties is located in Fort McMurray and with the whole city being evacuated because of the fire, there’ll be no activity at the Boomtown Casino. Pier 1 Imports was the worst performer for the month. This fell because the general retail index got hit after weak earnings from larger retailers. The company reports earnings later this month so we’ll see if the fall was warranted.
LULU reports earnings later this week. Management has promised that they’ll get inventories inline with sales by Q2. The question is can they pull this off while keeping gross margins steady? If they do in Q2, can it be sustained in Q3? Q1 should tell the tales..
Pier reports on June 29th. The stock has already been hit based on news of other weak earning reports from other retailers, Inventory levels and margins are to be watched. If inventories rise and margins fall once again, this will be the cue to exit the position. If inventories stay steady or rise with sales or just slightly more, I’ll stick with it. But I believe there’s a decent chance for margin expansion as mgmt projected last call.
Gamehost’s earnings will likely be impacted by the Fort Murray fire. I didn’t add to the holdings because it seems investors tend to overreact to what seems obvious. The company has the operations and the buildings insured, so in the event of an earnings overreaction to the downside, I’ll probably make this 15% of the portfolio. It’s currently 10.1%. The Fort McMurray economy will also need some time to recover as well as people have lost personal belongings.
Flanagan reported earnings last month. Revenues rose, but earnings fell as expected. The company fixes the cost of its baby-back rib supplies which is a substantial percentage of its total cost, this is usually done in October. Watching hog futures around that period should give us a hint of what’s in store. Unfortunately, I don’t have any historical futures data, so I can’t do any comparison. But if the futures point to lower prices as of right now, we at least know we’re headed in the right direction. Will trim if the price crosses $24/$25 level before all this.
I’ve been a bit sick and also really busy lately, so I haven’t posted anything in about 3 weeks. So I want to update, there will be no ‘Official’ May Performance Report, but I’ll summarize the updates on each position on here as of today’s date (5/5/2016) – Happy Cinco De Mayo btw – Regular monthly performance reports will commence in June. The portfolio rose 0.49% vs 0.39% for the S&P 500. The portfolio is still about 50% invested, it’s difficult to find bargains in this market – most of the ‘cheap’ cyclical stocks are stuffed with overvalued inventories that still need to be written down, so I don’t want to buy something just because it looks cheap. I’ll update for the other indexes later on the homepage, but I believe it underperformed all other indexes except the S&P.
Flanagan Enterprises (BDL)
I want to start with BDL since I purchased this stock mid last month but didn’t have time to post about it. This is going to be a very brief summary of what I would have written. I purchased this at $21.2, the stock trades at about $18/sh so i’m about 15% underwater now.
In a nutshell, the company owns and operates restaurants and liquor stores in the Florida area. The company still generates mid to high single digit comparable store sale numbers and is growing at 10% and yet it trades at about 11x earnings.
The company partners up with other investors on the restaurants and the way the partnerships work is that the company pays the investors with the cash flows and collects no management fees beyond the money required for regular operations. Once the investors receive their invested money back in full, then the cash flow each restaurant generates is split in half between the company and the investors. So, the company is basically guaranteed to increase the bottom-line in the future. This won’t happen quickly, but if you were to model this out, the company should at least trade somewhere around 15-20x earnings. So I believe there’s at least 50% upside from these prices. S&P’s P/E ratio is about 24x, so the current P/E is less than 1/2 of S&P’s.
While the company carries about $10 million in debt, it also owns about $20 million of land and property in florida, so there is sufficient equity to conservatively eliminate the debt from any valuation calculations.
Please note that BDI and BDL are different. BDI is Black Diamond Group Ltd, BDL is Flanagan’s Enterprises.
Before doing this, I want to send my thoughts and prayers to the people of Fort McMurray. As some of you may have heard by now, there is a massive wildfire in the Canadian city of Fort McMurray. The city has been evacuated – though no casualties have been reported, people have lost their homes and belongings.
The Canadian stocks have basically offset each other over the past few days. Gamehost down 17% because of the Fort McMurray fire (more below) and Black Diamond up 28% today because it has excess capacity for temporary housing in the Oil Sands around that area.
Gamehost was my largest position just a few days ago. One of Gamehost’s Casinos – Boomtown Casino – is located in the city of Fort McMurray. With the wildfire causing a complete evacuation of the city, the effect on earnings becomes obvious. Less activity at the Casino – if it even survives -and thus, less earnings for gamehost. I called the company two days ago to get more information before posting about this, but they were swamped with thousands of investors attempting to ask the same question I was – Is the building insured?
Per the company’s filing on Sedar yesterday:
The Company’s Boomtown Casino in Fort McMurray, Alberta is fully insured including property and business interruption coverage. All Gamehost properties and operations are fully insured by a leading multinational property and casualty insurance company. Management has initiated an insurance claim in anticipation of losses at our Boomtown Casino and is currently in discussions with the insurer regarding due process.
I had a 37% equity in the position wiped down to about 16%. I’m going to add more when I trim Black Diamond. I want this position and Black Diamond Group (See Below) to make up 25% of the portfolio. Any more positions on Canadian stocks will be hedged with futures or put options shorting the CAD to reduce currency exposure.
Black Diamond Group Ltd
BDI reported earnings yesterday and shot up 28% today – I don’t believe it was because investors liked the earnings, but because of the fire in Fort McMurray since BDI provides temporary housing. Total equity in this position is +19% and it’s now my largest position after the Gamehost decline.
The company reported:
47% q/q decline in revenues and Q1 EPS of -0.06.
Total debt q/q down 20%
As I mentioned in the original thesis, the dividend was cut down to pay down debt and the company will still be cashflow positive even though earnings will turn negative. So that’s precisely what we’re seeing. While the company reported a loss of $2.4 million, it actually took in about $10 million of cash for the quarter. This is because of the discrepancy between the CapEx and Depreciation I mentioned in the original thesis.
The company has historically sold its used fleet for above book prices, but since the industry is depressed. Assuming a conservative 20% haircut on book value, the company will still trade below the new book value – this means we’re basically getting the company for free! The positive FCF and debt repayment should continue while we wait for the industry to recover.
The fire in Fort McMurray is providing support to the price, so as of 5/5, it makes up about 13% of my portfolio after the +28%. Once the stock surpasses book value, I’ll trim it down to 10% of the portfolio.
United States’ Trail
Pacific Health Care Organization
No new news on PFHO, but it has been fairly volatile. The illiquid nature of the stock leads to large swings in price. I’d buy more, but the bid/ask spread irks me. Price target remains the same at about $14/sh
Pier 1 Imports
Pier reported earnings and guided to higher margins as I anticipated in the original post. One mistake I made however, was ignoring the competitors. Piers inventories were so far in line that I thought their competitors would be irrelevant, but they are not. Virtually every cyclical company is stuffed with overvalued inventories that will have to be sold off. The company did guide to higher margins and is first in line for the industry recovery, so I’m holding on for now.
Trip Advisor (Short)
Reported earnings earlier this week. Revenues declined but investors are still not paying attention to the more important declining metrics – Trip’s Revenue per hotel shopper and Expedia’s Revenue per hotel night.
The company has investors convinced that their ‘successful expansion’ in China will fuel growth will 2017 while 2016 ‘will remain muted’. The same China where iPhone sales just fell (-25%) off a cliff? They have been deceived into pricing a company with declining revenues at 45x earnings. The company will have to fight an uphill battle with growth since the price of the service is in a deflationary spiral.
CarMax’s inventories remain elevated. One mistake I made on this one was buying short-term (1 year, January 2017) puts. I regret that and will get rid of all 2017 put options on the portfolio next time we have another volatility stint.
Recovery rates y/y fell from 54.2% to 51.2%. Inventories fell relative to sales, which is actually good. Past due accounts and LTV ratio trickled up a bit. The U.S. economy continues to slow and I believe we will likely see easy credit slow, which is bad for CarMax.
Lulu reports earnings later this month. I’m going to address the company after that happens. I’m still yet to add my January 18′ put, but if the stock sees $65 again, I’ll add January 18′ put options.
Mind CTI Ltd
Reported earnings this week as well. Revenues fell 19%. This was expected. As I mentioned, the company’s sales has historically risen over the long-term but have wildly fluctuated, which is why it trades at 5x its Enterprise Value. Its 10% yearly dividend is basically a unicorn in today’s market.
Note: Mazi Ume Capital LLP does not exist right now, but if I do run a hedge fund in the future, that’s what it will be called. Mazi Ume Capital LLP is just my personal portfolio for now.
The portfolio rose by 6.82% and underperformed all indexes except the S&P 500. Below is a chart from Interactive Brokers since Inception:
The long portfolio since inception is up 17.89%, and the short portfolio since inception is down 22%. As you guys know, I only short with put options, so that is what is responsible for the large losses on the short side. The short side is also weighted ~10% of the portfolio and is executed with puts. My data so far tells me I should quit the shorting biz, I believe it is important to hedge, and I also believe that I will eventually be proven right on at least some of the shorts, and that will swiftly erase the losses.
The month of March was rough; I went from crushing the markets to underperforming. Tilly’s that I sold off after the decline and Black Diamond Group (BDI), my then largest holding (now third largest since it declined by 17%), that I purchased in March were responsible for the fall. BDI is oil correlated and volatile. CBK aided positively to the performance as it popped 40% before I sold off 80% of it. I also sold off Reitman’s because of the Inventory issues I mentioned.
*CBK is weighted average since I sold 80% of the position
*RET.A and TLYS were sold in March at the listed prices above
I sold off Reitman’s in March after battling with the inventory issues. I thankfully missed out on the earnings decline. I decided that it outweighed the price risk in the near term. I’m going to keep an eye on the stock and perhaps get back in when the dust settles.
PFHO reported earnings last week. I posted an update on that here. I believe Q1 will seal the deal on this one since it will reveal what the recurring revenues are and investors will be now able to value it.
Added this one in March. Inventory levels are to be watched when the 10-Q gets released later this month. Competitor’s inventory levels are still elevated, and that will place some pricing pressures on the company. I still believe margins will increase nonetheless since they are so depressed.
Recovery rates, Inventory levels, and delinquency rates are the numbers to watch for CarMax’s earnings. Given the volatility we have seen because of crude oil, lenders are going to start cleaning up their loan books, it will start with the auto loan subprime borrowers. CarMax’s business is fully dependent on outside capital. If lenders are recovering less $ for each defaulting borrower, and if the number of defaults is rising, lenders are going to start exiting the auto loan market. Also, CarMax’s ballooning inventory levels don’t help its case. A record number of cars were sold last year, and 2014 was also the third highest in 15 years. All these cars are going to come into the market, and this will deflate the values of CarMax’s inventories even further.
Note: Mazi Ume Capital LLP does not exist right now, but if I do run a hedge fund in the future, that’s what it will be called. Mazi Ume Capital LLP is just my personal portfolio for now.
Below, is a chart from Interactive Brokers’ Portfolio Analyst comparing my performance (Consolidated) to the Russel 2000 (RTY), S&P 500 (SPX), and the Vanguard Total World Stock Index (VT) since the inception of the portfolio on December 10th, 2015. I believe the performance of the Indexes include dividends. My portfolio’s return (Consolidated) is after interest and fees. Interactive Brokers charges interest when you buy a security in a different currency, and fees are trading fees. My portfolio is most comparable to the Russel 2000, since every stock on the long side (90% of total portfolio) has a <$500 million market cap. Vanguard Total World Stock Index is also comparable since I also hold some international stocks.
The portfolio’s performance was positive for February. The portfolio rose 4.06% and once again, fared better than the indexes. The Dow was the only index that posted a positive return for the month. Virtually all the gains so far since inception has come from the long side of the portfolio. New additions to the portfolio on the long side in February were Gamehost Inc. and Pacific Health Care Organization. I sold off DX Group after earnings on February 29th. The only addition on the short side in February was TripAdvisor.
I added some more January 17 CarMax put options yesterday at $0.69 (March 1st), the average cost of those puts are now $0.84. I also added some January 17 $40 Lululemon put options today (March 2nd) at $1.93. Lulu puts makeup 1% of the portfolio; CarMax puts makeup 1% as well. I will be posting my short thesis for Lulu later tonight or tomorrow. Also added some more TripAdvisor January ’18 puts at 3.90, the average cost of the trip put options is $3.92, and it makes up 1% of the portfolio as well.
I will be adding more money to the portfolio, so this will change the average cost of each position, but not the weighting, since they will all get an even increase; just FYI in case you see the average purchase price on the Performance & Holdings page go up. Performance is time-weighted, so it should not change, and luckily for me, Interactive Brokers does all the hard work.
*Individual performance for the shorts are as of my purchase dates and not as of February. I will track them on a month to month basis like the longs next month.
Remember, the shorts make up just 10% of the portfolio. They are executed with put options and will be volatile. They’ll protect the portfolio in a down market, however. I short because I believe a stock is going to fall and not just to hedge. So, the put portfolio should still do well in a rising market.
The best performer for the month of February was Game Digital PLC (GMD.L). I held 40% cash through February, so the large gains on the securities did not fully translate to full performance. Also, the put options make up a small percent of the portfolio. Anyone interested in the security weighting can see them on the Performance & Holdings page. There was also the magicJack mistake that cost the portfolio 0.5% of performance for the month of February. I sold off DX Group, my largest holding, in February, and I purchased the aforementioned TRIP and LULU puts, I now hold 50% cash going into March.
CBK reports earnings in later this month. My belief is that the strong dollar is going to be a headwind in Q4 earnings report in March, so I don’t expect much. Nonetheless, the stock is still extremely cheap IMO. We need to keep an eye on the inventory levels. Management did a good job of deleveraging last quarter, so that should help aid performance. If we see more deleveraging this quarter, then the next quarter should be stellar.
Earnings report coming in March. Tilly’s Store count is still a valid concern, and that is the number to watch in the March Earnings report. If the new CEO does not follow through on his word to at least pause the store count growth, I’m selling. Store count growth is crucial because asset turns have been falling, and if they keep falling losses will follow. Also, they carry a large cash balance, and Q4 is also usually the biggest quarter. I’m hoping they announce some repurchase program or dividend payout.
Reitmans paid a 1% dividend early in January. Management also announced a new cost cutting strategy going forward. Oil looks a bit stabilized in February, and the Canadian dollar has gained on the U.S. Dollar. If this continues, then this will be a tailwind for the company provided that they still hedge only 60% of their inventories, which is purchased in U.S. Dollars. A stronger Canadian dollar appreciating against the U.S. Dollar will make Reitmans a cash cow as we saw in the later part of last decade. So, that’s what we need to look for in earnings. The hedging program will be the difference between this company being worth CAD $8/sh or $16-20.
Has oil bottomed? I don’t think so, but I sure hope so. I believe will have to come from the highest cost producers. This doesn’t have to be all Shale producers, as leverage plays add to the cost of production in a down market. Reitmans was the second largest holding in February just behind DX Group and is now my largest holding (I sold off DX) at 13% of my portfolio going into March. If we have any pullbacks on Crude, I’m going to pick up more shares. You can read more about Reitmans here
PFHO trades below its liquidation value and is still net income positive. The company paid a special dividend last year, so lets hope for another one. Part of the reason why it trades at such a discount is that of the uncertainty surrounding the company’s clients. Under all conservative assumptions, the company is easily worth at least 50% more. You can read more about that here.
We need to watch the gross and operating margins. I want to stress this because the premise of my Adobe short is based on the company’s acquisitions. The switch from licensing to subscription model should have pushed up gross margins – it didn’t, gross margins have been falling instead. The net income increase Q3 and Q4 was virtually cost cutting. Although there may still be a little room for cost cutting based on historical standards, they can’t do that forever. If these gross margins do not improve substantially in Q1 and Q2, then Adobe will remain a short. The puts go out to Jan 2018, so even if they can cut costs in FY 16, they won’t be able to do so in ’17. Anyone interested in reading my full thesis can do so here.
This one is a disaster waiting to happen. The company’s Q4 earnings report validated my short thesis, costs are still growing faster than expenses, but Wall Street is fast asleep at the wheel. You can read my update on the earnings here.
Recovery rates, Inventory levels, and delinquency rates are the numbers to watch for CarMax’s earnings. Given the volatility we have seen because of crude oil, lenders are going to start cleaning up their loan books, it will start with the auto loan subprime borrowers. CarMax’s business is entirely dependent on outside capital. If lenders are recovering less $ for each defaulting borrower, and if the number of defaults is rising, lenders are going to start exiting the auto loan market. Also, CarMax’s ballooning inventory levels don’t help its case. A record number of cars were sold last year, and 2014 was also the third highest in 15 years. All these cars are going to come into the market, and this will deflate the values of CarMax’s inventories even further.
As I mentioned earlier, I am only 50% invested right now, so I expect to underperform the markets in March since my priority will be adding more shorts. Hopefully, we come back with a vengeance in April. I’m going to be posting the Lululemon short thesis tomorrow, I have also found a reasonably attractive long candidate that I should have up by the weekend. The goal for March is to add three longs and three shorts if possible. I want to get the shorts in before the next volatility rout since I execute them with put options.
Beating the indexes by a wide margin is great, but I ask that you do not compound the previous 2.5 month’s performance out to the future. As you guys know, past performance is not indicative of future results, but my priority is to deliver decent returns over the long run.
For anyone that’s new, if you’re interested in duplicating my performance, go to the home page of my website, mazivalue.com, and put your email in the subscription box. You’ll receive an email whenever I add or trim a security in the portfolio. I have the weighting of each holding on my home page, and you’ll get updates like these every month. My recommendation is that if you do choose to do what I’m doing, then you should incorporate the entire portfolio, including the put/short portfolio. I run it this way for a reason. Also, be sure to contact your financial advisor prior to doing so to see if it’s the right strategy for you. You’re also welcome to shoot an email with any questions. It’s all FREE🙂