2015 was a good but frustrating year, most of my gains were front loaded in the first quarter and since then I've been treading water. Owning several big positions in real estate companies wasn't the best positioning in a year when the Federal Reserve has finally began to tighten rates. Value added spinoffs and NOL rich companies drove my returns this year. No cash was deposited or withdrawn from the account and to reiterate the overall portfolio goal is to generate a 20% IRR over the long term.
Miscellaneous Position Comments:
- Graham Holdings: This was my biggest loser for the year and I ended up selling mainly for tax reasons around $550. I made a similar mistake as with News Corp the year before, Graham is a cheap pile of assets within a family run holding company structure, nepotism, etc - basically a value trap sum of the parts story. Eventually the value might be unlocked but you have to wait for the next spin/asset sale and enter it at a more substantial discount than I did around $700. Now might be that time for those new to the name, I could see it being a beneficiary of the January effect, you're basically getting paid to take the for-profit education/Kaplan segment at today's prices.
- Rentech: My other loser pick that I acquired this year, with Rentech I just went outside of my swim lane, didn't fully understand the business or the challenges it faced. Plus, I was skeptical of the MLP structure to begin with but hoped the market would hold up long enough for Rentech to dispose of their yieldco MLP and convert the stub to an MLP, it obviously didn't. Thankfully, I sized this one small from the beginning and exited before things got really bad for the company.
- Computer Sciences/CSRA: The original plan on this spinoff was to sell CSRA and hold CSC in hopes that it would be sold to a competitor or private equity. But as the spinoff happened, CSRA (the government services business) fell seemingly everyday until it hit around $26 and has since bounced back somewhat. Another curious thing that I haven't fully gotten answered, none of the tax basis went over to my CSRA position, so I called an audible and sold the CSC piece (free/unearned tax loss as it stands now) and will hold onto CSRA as it's the better business and despite the rebound still substantially undervalued compared to its peer group. The peer group has traded up a bit since the November spin, now averaging around 10x EBITDA, which would value CSRA at $38-39/share and that could move higher as they realize the merger synergies with SRA and use free cash flow to delever their balance sheet. There's been several similar situations that have worked out well in the government services space; CSRA is one of my favorite ideas for 2016.
- Par Pacific Holdings: I'm working on a more comprehensive PARR update, but if one isn't an energy expert (me) and still wants to find a way to participate in the industry's distress, PARR is a perfect way to do that. I've been trying to figure out who the eventual winners will be in both energy and mining, every few days it seems like another company is announcing asset sales, a good question to ask is who will be on the other side of these forced sales? One such buyer is PARR, they've raised capital, have a strong sponsor/deal maker in Sam Zell's investment arm, and a cost of capital advantage due to their large NOL.
- I hate being in battleground names, which American Capital (ACAS) has become, it's just usually not worth the effort as there are shorter hurdles to jump. So I hope that someone (Ares? Fortress?) takes out ACAS one way or another and bails me out. My official stance is I like Elliott's involvement and how quickly ACAS announced another strategic review, think it gets to ~$19, but it's a dicey time for high yield and risky leverage loan assets. I'm preparing for this to be another mistake.
- MMA Capital Management completed their GE tax credit portfolio acquisition and posted an investor presentation to go along with it (more detailed than I've seen from them in the past).
- I participated in a couple of the big exchange offers this year (GE/SYF and DOW/OLN, missed DHR/NTCT), going to do more of that (and other small opportunities, CVRs, etc) next year as it might be another tough one for the broad market indexes, makes sense to take some small wins here and there.
- I've been on the lookout for further dislocations in the credit markets, especially in vehicles that gave retail investors a way to invest in illiquid hairy high-yielding assets. One that I've mentioned in the past that's starting to get interesting to me is Oxford Lane Capital Corp (OXLC) which is a BDC-like company that almost exclusively owns CLO equity. CLOs unlike BDCs don't mark-to-market their assets and thus are less at risk for being forced sellers when markets decline, if credit worries stay contained to the energy sector, CLOs should continue to perform well despite their current drop in price. No position yet, things probably get worse in these leverage loan vehicles, everything takes longer than you'd expect to play out.
- Another idea I've been researching is Baxalta (BLXT), its a pharmaceutical company that's focused on rare diseases like Hemophilia, they've had a couple key drug approvals recently and look cheap on a forward P/E basis. Additionally, Shire (SHPG) has been stalking the company since it's spinoff from Baxter this past summer, one of the reasons for the deal is Baxalta is a U.S. taxpayer and since Shire has already inverted they could remove some of Baxalta's tax burden.
Thank you to everyone for reading and happy new year.
Disclosure: Table above is my blog/hobby portfolio, its a taxable account, and a relatively small slice of my overall asset allocation which follows a more diversified low-cost index approach. The use of margin debt/options/concentration doesn't represent my true risk tolerance.