Tuesday, June 30, 2020

Mid Year 2020 Portfolio Review

What an all around emotionally exhausting six months.  From an investing perspective, at one point my blog portfolio was down well over 50% for the year, erasing all gains from 2019 before rebounding with the market through most of the second quarter.  I try to be transparent because it's somewhat fun and keeps me accountable, I'm down -24.01% compared to the S&P being down -4.04% for the first half of the year.  My IRR since inception is 18.5%, a bit below my long-term stretch goal of compounding at 20%.  Big dollar value losers have been mostly long held positions in Liberty Latin America (LILA), Par Pacific (PARR), MMA Capital (MMAC), and Howard Hughes (HHC).
I continue to be optimistic about markets and that long term humanity will beat the virus (honestly not sure how you can operate, especially with kids, any other way while remaining sane) and that life will return to a somewhat changed, but recognizable normal. As you get older, time seems to pass quicker, look back on the events that happened only 3 years ago (i.e., for sports fans the Patriots comeback against the Falcons in Super Bowl 51 happened 3.5 years ago) and they feel like they happened recently, coronavirus is here with us now and the world "normalizing" in 2022 seems far away, but it really isn't if you take a step back.

In my day job, I help support a business that is a large service provider to leveraged credit asset managers -- March and April were pretty historic in terms of the quick downfall and then subsequent recovery in anything with significant credit risk. A couple brief observations: 1) during the financial crisis of 2008-2009, the root cause of the problem was in the financial system, in data points I'm seeing, I don't believe that to be the case today and once the medical side of the equation works itself out, we should see a more robust and accelerated recovery.  There are a lot of long form reporting pieces about risks to the banking system, but I just don't see it, could be wrong, but it feels like click bait and creating parallels to the GFC that just aren't there; 2) There's plenty of new activity/fund formation in credit markets, in 2008 (well really in the summer of 2007) all securitization activity ground to a complete halt and was essentially zero until late 2010.  Today, there is less activity but still plenty going on in credit markets.  Capital is available to borrowers in a position to survive, defaults will pick up from here but most of the bankruptcies to date are either in credits that were already in distress or the riskiest of hospitality, like Cirque du Soleil. Same as everyone else I'm fascinated with the speculative trading activity around bankrupt or near-bankrupt equities, but the process still seems to be working to me, although with strange speculative bouts, but companies that generally shouldn't being saved, aren't being saved.  Either way, I get it, it's fun to be snarky.  But if credit is flowing to the high yield and leverage loan markets (yes, I know, Fed intervention), my sense is we make it to the other side of this mess.

  • I blew out of most of my merger arb and other similar ideas early on during the downturn, contributing in my small tiny way to spreads widening across many deals; a particularly painful one was Asta Funding (ASFI), I sold at $9.76 when they had a go-private offer for $10.75, that offer has since been increased twice and now stands at $13.10.
  • Everyone is dealing with disruptions, I'm stuck working from home in my basement on a folding table, my research process is a mess and it's also hard to research stocks with so much volatility, once I feel like I know the basics, the situation might have changed.  I try not to let the blog influence my investment activity (i.e., buy things because they'd make for an interesting post) but its still in the background a bit, so while I want to post more, apologies if I'm a little more sporadic through this crisis.
  • I sold options for the first time in a long time recently, none currently outstanding, but with a few positions in my mind (could be totally wrong) the value of the underlying assets/business is much else volatile than the stock price, good examples would be GLPI which is essentially mezz debt of PENN (PENN can raise capital whenever it wants as long as Dave Portnoy is pumping the stock to his loyal followers) or something with scarce trophy assets like MSGS.
  • Speaking of GLPI, I initially didn't own a position when I wrote it up in April, but it is now one of my higher conviction ideas.  Unlike the other gaming REITs which have a significant portion of their assets in Las Vegas, GLPI is focused on the regional casinos, has adequate diversification among geographies as Covid heats up in less expected locations, PENN has already raised equity on top of transferring ownership of the Tropicana to GLPI.  The NFL seems pretty committed to having a full season one way or another this year and the Barstool sports betting app is still set to launch in August ("DDTG" is likely one giant marketing campaign for their app launch), I have a hard time seeing how PENN doesn't restart making full cash rent payments in September.
  • I get asked about Howard Hughes a lot as I've been a long time bull, I did add considerably after the equity raise -- at first I was a little disappointed, the story has always been that the company is able to self finance itself, all development projects are fully funded with committed financing, etc., Ackman likely took advantage of his hedge windfall and quickly deployed it in HHC the only way he reasonably could, through a secondary.  While the business remains challenged given their markets are particularly hard hit by Covid, I also think they continue to have long term appeal and the crisis might be a catalyst for restarting the home-building sector.  For the next year or two, HHC is likely more of a land play than a commercial real estate developer, but with the Ackman equity raise, the worst case scenarios are likely off the table for now.
  • Most of my other positions are fairly well covered in previous posts, feel free to ask any questions in the comments and I'll try to answer them as best I can.  However, generally in a sit on my hands mode for the moment.
Current Portfolio:

For those doing the math, I did add some cash to the portfolio in March, I'm doing a money-weighted return for my performance metric which should be reasonable as I've never withdrawn from the account, only added, IRR and CAGR should be pretty close.  Another caveat, average cost is today's average cost, I had some losses earlier in the year, typically if you sell a portion of a position you want to sell the higher cost basis shares but thus far I've been selling the lower to soak up taxable losses.

As always, on the lookout for new ideas, feel free to reach out and try to enjoy your holiday weekend as best you can and stay safe.

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


  1. Tough H1 .. Sucks but you'll get over it, the process is solid.

    "Everyone is dealing with disruptions, I'm stuck working from home in my basement on a folding table, my research process is a mess"

    Yes .. Especially with kids it's difficult. We are looking into renting some private office space nearby or at least reorganizing the house.

    To get back to stocks: one thing stands out to me about your portfolio: you still like a 6% ATXI position at current prices? I had a position here too, but sold out at some point. AFAIK nothing significant happened since the stock traded around $5.50 yet shares are up 100%.

    It's one of my (many) weaknesses that I tend to take profits too soon, so maybe I was wrong to sell. But at this point it seems that the 'narcotics' risk that the market was super worried about in 2019 is basically not priced in anymore? Did I miss anything? I haven't been following this story super closely anymore.

    1. Thanks for the encouragement - yeah I keep thinking I should upgrade my workspace as this situation becomes more permanent.

      On ATXI - Yeah I agree with you, don't think you're missing anything. I probably own too much considering that the downside is potentially near $0/share, one of those positions where I've been a bit lazy with.

  2. What are your thoughts on MMA Capital at this point? I've been looking to initiate a new position but I'm not 100% sold on the idea of solar at this point in the cycle. Seems to be holding well at the $22 level. Thoughts?

    1. Few thoughts:

      * Still a bit curious why Michael Falcone resigned, could be any reason, but just seemed a bit strange so quickly after the recent quarterly conference call. The interim CEO, Gary, has been there forever, right hand man of Falcone, almost owns as much stock as Falcone, I don't see any serious risk in the transition, just spooked the market and was odd.

      * Solar should be holding up pretty well, banks are doing reasonably fine right now, credit markets open and able to provide the permanent exit financing for their solar projects.

      * I think they need a name change (again), maybe a new capital allocation policy that favors dividends. This really should be an ESG/yield co darling, when the recovery takes hold, if this thing is paying out a nice dividend, gets picked up by ESG investors/indexes, I don't see why it shouldn't trade back up near adjusted book value. Forget the NOL, just pay a dividend, attract yieldco/BDC type investors and grow through secondaries.

    2. Good to hear your thoughts, I agree swapping to a Yield Co strategy would give it a quick re-rating. My thoughts are that we won't see a change in strategy before one of two things, either insiders want out or the NOL runs down. Definitely long term runway ahead.

      Also want to say thanks for mentioning Nexpoint Residential in your March post. It follows a similar strategy that I'm use to in the SFR space, was able to pickup a decent size position at the bottom. Keep up the great work!

    3. The one counter to that, it is in Hunt's best interest (this is an externally managed vehicle after all) to get the quick re-rating so that they can raise capital, grow the entity and increase their management fees. It's a bit confusing why they haven't done that yet, pure speculation, but maybe a go-forward strategy dispute was part of the reason Falcone left?

    4. I think it's just too small to move the needle for Hunt. At over $20B in AUM even doubling MMA wouldn't push the needle. I have no ideas on why Falcone would leave like that. Especially after the board gave him an exemption in March to purchase more shares past the rights plan, unless this was a common exemption that I wasn't aware of.