My portfolio is up 15.75% for the first six months of 2017, pulling up my since inception IRR to 23.74%, and comfortably ahead of the S&P 500's 9.34% gain so far this year. Significant winners have been Tropicana Entertainment, MMA Capital, Pinnacle Entertainment and Resource Capital, the only significant loser has been New York REIT.
Closed Positions:
- ILG Inc (ILG): In hindsight, this was one of my favorite special situations of the past several years. ILG (f/k/a Interval Leisure Group) had entered into a reverse morris trust transaction with Starwood prior to the announcement of Starwood's merger with Marriott, thus those that wanted to play the merger arb on the Starwood/Marriott transaction had to short out both Marriott and ILG against Starwood creating an uneconomic selling pressure on ILG's shares. Since the deal has closed, ILG has run up well over 100%, I unfortunately sold a little too soon in the low $20s as ILG is now being bid up under speculation of a merger with Marriott Vacations Worldwide (VAC). I'll be looking closely for ideas like this in the future, something similar was the Dell buyout of EMC/VMWare which created a coiled spring in VMWare stock that's caused the DVMT tracker to do very well too.
- Actelion (ALIOY): The Actelion/J&J deal closed and the development stage biotech company that was created out of the merger, Idorsia, has done very well too. I bought the unsponsored ADR, there was a short week or two there when the shares dropped and people started speculating on why and if withholding taxes were going to be an issue, I got scared out of my position, ended up making a small amount of money but left some on the table.
- CSRA (CSRA): CSRA is the government services spinoff of CSC, with CSC I had the right idea at the time of the spinoff, CSC was setup to be sold and it was earlier this year when it merged with a division of HP Enterprises in a reverse morris trust to create DXC Technology (DXC). I haven't spent much time on DXC, but CSC turned out to be the better side of the CSC/CSRA split. I ended up selling CSRA earlier this spring in a slight fit as I didn't realize pension income was being included in their "adjusted" EBITDA figure they were presenting. It caused the shares to look artificially cheap compared to peers and I just missed it, lesson learned.
- WMIH Corp (WMIH): The white whale of NOL shells, with over $6B in NOLs and apparently no dance partner in sight, it appears like the company's sponsor KKR is unable to find a deal that makes sense, they can walk in January, and will likely use that as leverage to strike an even more advantageous deal with WMIH. If a deal does happen in the meantime, there still could be money to be made after but I don't see a reason to wait around any longer.
- Miramar Labs (MRLB): Miramar Labs is another CVR opportunity, and even smaller than the others mentioned on the blog, but they make a medical device that's used to reduce underarm sweat and hair. It's more of a elective beauty and/or lifestyle product that is sold to plastic surgeons, spas, etc, and its treatments are paid in cash and not processed through insurance companies. Sientra (SIEN) is buying Miramar for $0.3149 per share upfront and $0.7058 per share in contingent payments for a total just over $1.02 per share. The contingent payments are a little unique, where the milestone is a cumulative net sales number with no deadline. Unlike the other CVRs that rely on an FDA approval, here Miramar already has an approved and commercialized product, so unless the sales flop going forward, the payout should occur, its just a matter of when. The big payout is for $80MM in sales, Mirmar did $20MM in sales last year, but they're seeing some growth, I'm modeling out a 3-3.5 year timeframe to hit the milestone payment which at current prices of around $0.55 per share generates a pretty nice IRR. Thanks to @yolocapital on Twitter for pointing it out to me.
- Sound Banking Company (SNBN): Sound Bank is a tiny North Carolina based community bank that is being acquired by another small bank but with high growth ambitions, West Town Bancorp (WTWB). There are many small bank mergers happening, if I was less capital constrained, or had a lower risk mandate I'd probably be diving head first into more of these as the spreads are fairly wide for what should be low risk deals. West Town Bancorp is offering $12.75 in cash or 0.6 shares of WTWB for each share of SNBN. With SNBN currently trading at $13.40, you could create shares of WTWB for $22.33 when they currently trade for $24.45. There is a cap on the cash/stock consideration, so proration is likely with the stock trading over the $12.75 cash payout, but it still seems/seemed like a good bet, the merger is expected to close in the third quarter.
- Interoil Corp (IOC) Contingent Resource Payment: I got bored and ended up trying this CRP/CVR the day or two before the merger with Exxon Mobil was completed, no view on how much natural gas is actually in PNG, so its a pure speculation that should be decided in the next quarter.
Current Holdings:
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.
mrlb: the device has been around since at least 2013, if this was a winner, shouldn't it have been on a more stable footing and generating higher annual sales by now?
ReplyDeletehttps://www.youtube.com/watch?v=BbjrPt0SNHU
Also, you've got a company losing copious amounts of money acquiring another company who's losing copious amounts of money. What makes him so sure there's going to be any money to get back after 3-4 years?
DeleteBoth fair criticisms, but you'll get more than half your money back immediately. I think its a fair bet the earn out will be reached eventually, hopefully Sientra is still around to your point, but with the discount being offered to the total consideration price, I think the hurdle is pretty low to add it as a small position.
DeleteI just noticed that it was a roughly 2k position so you're only risking around 1k. lol. Smart position sizing.
DeleteWell done though I am surprised that you have so many positions now :); Just thinking about what J Greenblatt always says: You dont need anymore than 7 positions in a well diversified 'stock picker's' portfolio. But to each his own.
ReplyDeleteBTW, if you have not looked at CARS closely, I suggest that you do. High growth area and high FCF yield (seldom does one find this combo). The rub is that near term growth is being impacted by legacy issues. Would love to hear your thoughts if it interests you.
I have a hard time selling if I like the management/strategy, plus I'm tax sensitive, the combination ends up making me collect positions. I haven't looked closely at CARS, heard their investor day was a near disaster, but it is a little funny that you poke at me for having too many positions and then suggest another one. Ha, thanks for the comment as always, will look at CARS closer.
Deletetouché
DeleteWell done - great performance this quarter!
ReplyDeleteCan you please explain how you make your sell decisions? I have a hard time deciding when to sell. For example, if I get gains more than 100%, I start looking to sell. But I probably end up leaving money on the table by selling too soon. So I'd like to understand how you decide on sell decision.
I'm probably the wrong person to ask, I usually suck my thumb when it comes to selling. Most of the time I buy for a short term reason and then end up holding because I don't want to pay short term taxes (not a great reason) or I end up liking the management/strategy and see the potential for bigger long term gains. Or the best reason, finding a new idea you like better than a current idea, but I don't have a process that I follow like selling down after a 100% gain. Would love to be in that situation more often. Thanks for reading.
DeleteMDC - Isnt the simplest solution for you to transfer your account/use a new acct that is tax deferred like a 401K? I use mine and never have to worry about tax implications when making buy/sell decisions.
DeleteI'm a bit strange in that I've worked for the same company (through a few mergers) since I graduated college (~13 years now), so all of my tax deferred money is still within the company plan. I have a small Roth IRA, but haven't been eligible in a while to contribute more to it, and too lazy to do a backdoor Roth. Taxable accounts provide some flexibility too, fairly easy to add/subtract funds as life changes.
DeleteAre you going to tender into the TPCA situation? Do you think Icahn does a revised (higher) tender?
ReplyDeleteI haven't done anything yet, but I'll likely tender, with how much Icahn wants I'm guessing it'll go off at the top end of the range. This was the original thesis, probably best to move on instead of waiting for the two year cooling off period and him to squeeze you out.
Deleteat what level are you going to tender ? $45 ? or $43 where its at now?
ReplyDeleteI think the play is to tender at $45, seems unlikely that IEP will be able to buy all they're hoping for.
DeleteMerging two losing Companies could be like combinig two lame runners to sprint together (tied), and hoping that the result will be a Usain Bolt...
ReplyDeleteLILA starting to work on John Malone buying. Great pick. How are you feeling about DVMT/VMW at these levels? Obviously there is still a sizable spread, but are you worried about how VMW is going to perform in the next couple of quarters?
ReplyDeleteLiLAC has been one I've just tried to forget about, don't think it would qualify as a "great pick" but still believe it will work out long term. DVMT for me is really about the discount, still around 30% (which is close to what it was around the time of the transaction), I don't have an intelligent opinion on VMW's business - part of the reason I've kept it a small position. But eventually Dell will come back for the rest of EMC/VMW, still probably a few years away.
DeleteAny new thoughts on RSO, STAR and VST? I'm invested in those too.
ReplyDeleteI think RSO is executing well on simplifying their balance sheet and STAR seems to be working on unlocking its value.
VST - I hope they don't go through the rumored merger with Dynegy. Not much pop in the stock price after listing in NYSE though.
RSO - I don't know if you caught this, but they sold LEAF to People's United Bank for almost double book value. I think it'll be about another $1 to NAV. This remains one of my favorite ideas, pretty clear path to it trading near NAV in the next 12 months. I'm hoping FSC/FSFR might end up similar, not sure if you follow those, but could see Oaktree coming in, writing down assets, and slashing the dividends, something to keep an eye out for.
ReplyDeleteSTAR - SAFE seems to have launched pretty successfully, how big could it get? One day it could be pretty significant to STAR, but I don't think helps STAR become simpler. Still trading at a significant discount to its breakup value.
VST - I'm less excited about Vistra than I was originally. Same thoughts as you around Dynegy and the lack of an uplisting pop, add in its a very competitive business with long term challenges (renewables), its less attractive than I originally thought but still might give it some time to play out more.
RSO - I completely missed the LEAF sale 8-K. Thanks for pointing that out. This should take NAV close to $15.2. I just added some more to my position. Good execution by RSO in terms of simplifying their balance sheet.
DeleteThe FSC/FSFR transaction with Oaktree is interesting. If they slash dividend, it will start to look like RSO.
An example you might to look at is DS. They were NCT previously and I know Fortress has a mixed bag of results. But they canceled REIT status and dividend, and are now only a golf operator, thus providing two reasons - dividend cancellation and golf - for selloff. I like to think of this as a private equity investment (3 year timeframe) with option value on new Topgolf competitor they are creating. Here's my short writeup - http://walnutavevalue.blogspot.com/2017/06/drive-shack.html
STAR - yes, they don't seem to be in any hurry to simplify their balance sheet. I think Sugarman likes being a developer based on their glitzy investor presentations.
I like DS from afar, haven't full dug into it because of the Fortress management fee and their overly promotional investor presentations, they are simply the best at selling their story. But you don't often see REITs converting to a C-Corp, and then Edens buying in the open market is certainly a good sign, as the makings of an interesting idea, but the external management on a regular operating business that has its own cost structure is a bit much for me. Nice write-up.
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DeleteYes, the external management fees are excessive at ~$10M per year since the EBITDA is only $30M currently. And I agree their investor presentations are overly promotional.
DeleteI still think there's sufficient margin of safety here. But only time will tell if all equity owners come out as winners or Fortress milks all the value out via management fees.
Thanks for sharing and I wish you continued success. As it relates to merger arbitrage, the opportunity spreads beyond small banks. Normally quants keep the spread narrow, unless the data was changing. And based on my research, its not. For the trailing 2 years ending 6/30/17, the percent of deals breaking hasn't increased, nor is it accelerating. It's at 7.1%, but they're being priced w/ a 13.2% break, allowing for 5.1% annualized returns w/ 6.85% volatility.
ReplyDeleteThanks, interesting thoughts, more precise than my analysis.
DeleteOaktree/ Howard Marks bought Vistra ($844M on 13-F) in Q217.
DeleteWhat do you like most out of your portfolio right now? What do you think has the most room to run at this point and why?
ReplyDeleteTough one, but if I had to get up in front of a room of people and pitch an idea, it would probably be RSO. Might not have the most room to run, but I think it's path to the $15 book value is pretty clear and should happen in the next 6-9 months. All the hairy assets have been sold, now they'll monetize non-core assets to match when they fund core assets, C-III is a big operator in the industry, they need to grow this for it to make sense to them.
DeleteInteresting thanks. You aren't worried about tax reform impacting the business?
DeleteAs in tax reform making a REIT structure less attractive? No, I think this will be valued off of NAV and dividend yield no matter the tax environment.
DeleteI see. Always helpful thank you for the insight.
DeleteHi, could you comment on how do you decide on the size of your margin loan? Thank you.
ReplyDeleteIt's fairly arbitrary, I don't target an amount, it just depends on the opportunities I see available or not wanting to sell other positions for tax reasons. This account is intentionally aggressive, it's not a large part of my net worth and I'm fairly under-leveraged elsewhere. There's no particular metric or target I use and acknowledge my results are partially the result of the leverage, if I was managing others money I wouldn't be leveraged, much easier when its just me and not a make or break amount of money. Thanks for the comment.
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