Mid Year 2019 Portfolio Review

The calendar can sometimes play tricks on the way returns look, now in hindsight 12/31/18 was a tough determination date skewing my 2018 results to the downside and now is skewing my 2019 results to the upside.  Through the end of the second quarter my blog portfolio is up 58.3% versus 17.9% for the S&P 500, the big first half has pulled up my lifetime-to-date IRR to 22.5%.  Outsized winners this period included KAR and SMTA due to sizable call option positions and then to a slightly lesser extent big wins in CZR, HHC and MMAC.

Often when I post an idea it's sort of an initial indication of interest, usually starting with a 3-5% position for me, and then in the comments section I get more bullish or bearish on an idea.  KAR Auction Services (KAR) was one of these, I liked the idea and the spinoff of IAA in January, posted on it, received some feedback so when the company conducted an odd conference call in February and the stock subsequently sold off, I was ready to act.  Ended up buying a large (for me at least) position in call options that paid off handsomely, although I sold too soon (last week) given the price movements today on the first day of regular way trading.  IAA looks fully priced to me.  KAR looks potentially cheap depending on how you value TradeRev and RemainCo's closest public peer, BCA Marketplace in the UK, was sold this week to private equity for 12x EBITDA.

Other Closed Positions:

• Caesars Entertainment (CZR):  Eldorado Resorts (ERI) and Caesars inked their cash and stock deal earlier this week with a headline price of $12.75 per share, with much of the cash coming from VICI Properties (VICI) via the sale leaseback of three casinos.  The deal price isn't too far off of what I paid in 2017 for my initial position in CZR through CACQ, but it is a big move from the 4Q lows when the world was potentially falling apart, what a difference 6 months can make in the markets.  Now seems like a good time to back away from the gaming sector, I'm interested to see how the industry does through the next recession, especially with the PropCo/OpCo model that's all but rolled out across the entire group.  I suspect we'll see some opportunities and dislocations there in the future, but for now I'm going to wait on the sidelines. 
• Spirit Realty Capital (SRC): When the news broke that SMTA had sold the assets in their master trust to HPT, I took the opportunity to exit SRC and roll some of that into SMTA.  SRC will be a vanilla net-lease REIT by the end of the year and it'll probably trade up a bit higher from here as the multiple plays catch-up, but an acquisition by one of the larger net-lease names is likely off the table.  There are enough net-lease properties in private hands that there's no reason for someone like Realty Income (O) to buy SRC, they could issue their expensive shares in a secondary and buy cheap assets directly without the headache and expense of a merger.
• Mitek Systems (MITK): Mitek Systems ended up dropping their strategic process, they have new management that presumably wants to create value independently (and not lose their jobs), the company has a strong niche, but investing in a small software growth stock wasn't my initial thesis so I sold it for a small gain.
• Hamilton Beach Brands (HBB):  I was still holding onto a stub position in HBB as a result of its 2017 spinoff from NACCO Industries (NC), ended up selling it as I just didn't have conviction enough in the company meeting its long term revenue goals in the face of increasing pressure from Amazon.  Amazon's advertising model to get into the top of the search results is going to pressure margins going forward.
• OncoMed Pharma (OMED):  Mereo Biopharma has been a disaster since the reverse merger with OncoMed, it's notably tied up in the Woodford Patient Capital Trust mess and likely has an overhang as a result.  Celgene also decided not to exercise their option on a drug that was 2 of the 3 CVRs in this transaction, chalk this one up as a loss.
• Voltari Corp (VLTC):  This tiny NOL shell ended up being a home run for those small enough to get into it, the final price was $0.86/share versus the initial $0.58/share offer Icahn made to start things off.

Portfolio as of 6/30/2019:

CVRs: GNVC, INNL, MRLB, OMED

Disclosure: Table above is my blog/hobby portfolio, I don't manage outside money, it's a taxable account and a only portion of my overall assets.  The use of margin debt, options, concentration doesn't fully represent my risk tolerance.