AO Johansen (8.6% portfolio position)
The owner operated company has transformed to a fully automated omni channel distributor for the Danish construction market. Management acquired several B2B and B2C trading platforms which have been successfully integrated. The transformation to an omni channel distributor has led to temporary cost increases that are expected to come down from 2019. I highly respect management for their capital allocation skills. Apart from repositioning the business, the company repurchased over 51% of outstanding capital from two competitor’s at prices substantially below intrinsic value. Consequently, net debt outstanding increased to 3.8 times EBITDA. While this seems high for a company operating in a cyclical industry, it is noteworthy that AO has substantial real estate holdings in Denmark. In addition, operating performance has been very stable over the last decades. The industry structure is oligopolistic with no successful entrant for decades. In addition, more than half of revenue is generated from replacement parts for existing properties. There have been rumors that Ahlsell might be interested in acquiring AO. The owner family already tried to sell in 2007 (the disposition was not allowed by the Danish authorities).
Houston Wire & Cable (6.7%)
HWCC is a distributor to the industrial, infrastructure and utility sector with a focus on the Houston area and oil & gas industry. As a master distributor of specialty cable, the variability of stock keeping unit is very high meaning that each cable differs either in length or product type. The company has a large customer base which enables them to sell leftovers (of cut cables) and keep inventory in check.
After a prolonged downturn, the company profits from a strong onshore oil market and increasing industrial demand. A potential recovery of the US offshore oil rig count could lead to a mid term earnings potential of one USD per share. The new CFO seems to like his new employee and accumulated roughly 120.000 shares over the last months (equals three times his base salary).
Pershing Square Holdings (5.5%)
Pershing Square offers an economic way to participate in the benefits of a hedge fund. Fees are relatively low given that I will not pay carried interest to management until the high water mark will be reached. Despite Pershing’s recent underperformance, it seems that many investors are still following Pershing’s investment picks (just have a look at Lowe’s /LOW uptick in share price when Pershing filed their holding with the SEC).
Italian REIFs (5.1%)
In 2015, I started to invest in a basket of listed Italian real estate funds. All of them are in the liquidation phase. I increased and downsized my positioning several times. Recently, I reduced my allocation due to a slower than anticipated disposition progress, an unforeseen tax revision at one of the funds and the deteriorating political climate in Italy. So far this investment theme has delivered a 20.0% total return and a 20.3% IRR.
Fairfax Financial (5.0%)
The company is known for its great track record of compounding capital over its 33 year history. Fairfax owns a number of independently operating insurers with a run rate of USD 16 bn in gross premiums. With Brit and Allied World two significant acquisitions were recently made.
Prem Watsa and his team of investment professionals are using the float from the insurance business to lever up the investment portfolio. As of June 2018, 52% of the USD 40 bn investment portfolio were allocated to cash and short term securities. Consequently, a rising interest rate environment should benefit the company and increase interest income.
Nevertheless, investment returns over a five year period were weak as management held on to equities hedges for far too long. They ultimately covered the losses after the election of Donald Trump. However, largely unnoticed came their decision to also liquidate most of their US treasuries holdings. In hindsight, this was an excellent decision.
They target a 15% return on equity over the long term, which sounds less ambitious by considering the large float Fairfax has at its disposal. Currently, this translates into USD 2 bn of annual profit which according to Prem Watsa should be returned to shareholders at current share prices.
Geospace Technologies (4.2%)
An investment in GEOS is a bet on an increase in seismic exploration activity in the oil and gas sector. There are first indications that order inflow is increasing. Despite the recent increase in the oil price this investment requires patience as excess inventory at customers’ hand needs to come down first.
Management has managed the downturn decisively. They cut costs thoughtfully, kept their solid balance sheet and even achieved positive cash flow in 2017. At the same time, they continued to invest in the future by keeping R&D expenses steady.
Doubts about GEOS technological leadership in permanent reservoir monitoring systems increase uncertainty on how the company will perform in a recovery. Based on my assessment, orders in the permanent reservoir segment are not needed to justify the investment case at current valuation. It rather provides optionality for further upside potential. Moreover, the company’s non-seismic operations have performed very strongly providing diversification to the company’s income stream.
Kanam Grundinvest (4.2%)
This is one of the last remaining German open-ended real estate funds currently in liquidation. The liquidation process is taking longer than originally anticipated as management is trying at all costs to keep their fee generating assets as long as possible. Still the purchase price was low enough to generate an adequate return.
Spectrum Brands Holdings (4.1%)
This is an example where a watchlist of potential portfolio candidates can pay off. On April 26, 2018 the stock price declined by 30%. That day, the market received a disappointing quarterly earnings report and news came out that the CEO had to leave. In addition, a negative sentiment towards consumer goods companies in general let market participants panicking. I took the opportunity to build a position in the company.
The company is in the process of selling its battery and appliances businesses to pay down most of its debt. A merger with the holding parent company led to a simplification of the structure and an increase in free float. The remaining portfolio of brands produces ample free cash flow.
Gilead Sciences (4.0%)
The company faces competitive pressure from new HIV and HCV medication. Gilead has a history of very successful acquisitions. Last year’s purchase of Kite Pharma looks like another thoughtful addition to Gilead’s vast potential of new medications. Their focus on product development in NASH, inflammation and oncology should provide a break through in at least on of the three fields over the next years. Gilead is spending each year roughly one percent of global total industry research costs.
City of London Investment Group (3.8%)
A niche player in the asset management business investing client’s money in closed end funds with a focus on emerging markets. Assets under management have grown slowly over the last years. Management fees are slowly coming down. The company is very well managed and fully aligned with shareholders.
DFS Furniture (3.7%)
DFS is the leading UK retailer and manufacturer of upholstered furniture. I like the company’s flexible cost structure, vertical integration, high sales density and their ability to consolidate the market during downturns. DFS has been buying struggling competitors and is investing in its digital sales channel.
Pason Systems (3.2%)
Pason’s equipment is installed in over 1,000 onshore drilling rigs or 65% of all rigs in the Western hemisphere. For the customer, Pason’s products and services make up a small part of total cost, but play an important role in terms of safety and data analysis. The company is currently launching a new set of software products that could enhance the revenue potential per rig. Combined with a recovering market and market share growth in the Middle East, Pason is well positioned to reach 2014 profit levels again.
This is a special situation investment. Majority owner Volkswagen might sell or merge the company with some of MAN’s legacy operations.
Minds + Machines (2.7%)
This has been a frustrating investment so far. Shares are tightly held by London based investment funds. Shares are traded on the London Alternative Investment Market. Daily volume is below GBP 100 k. As a registry the company sells new TLDs via registrars to website operators/investors. The company had some successes most predominantly with their .vip TLD in China. Nevertheless, legacy issues brought up by the former management are holding back profitability. Also, a recent strategic review resulted in the acquisition of another registry. In contrast market participants expected MMX to be acquired.
Par Pacific Holdings (2.5%)
PARR owns the only refinery on Hawaii. The owner of the other refinery recently decided to sell part of the operations to PARR and close down the remaining production capacity. With demand for on-island sales in Hawaii constantly growing and investments to increase the share of higher quality output (i.e. jet fuel) ongoing, the asset is well positioned. PARR’s other operations include a highly profitable refinery in Wyoming, a network of gasoline stations, mid stream logistics assets and a 39% share in natural gas upstream company.
Lancashire Holdings (2.0%)
Lancashire has reduced underwriting activity and returned excess capital to shareholders over the last years due to fierce competition. The specialty insurer’s business and short duration investment portfolio should benefit from a rising interest rate environment. Interestingly, Crispin Odey’s fund holds a large short position in this name.
JZ Capital (2.1%)
Since the investment holding has cancelled the dividend nobody seems to be interested. JZCP owns a diversified portfolio of companies and real estate in Brooklyn and Miami. However, the majority owners do not seem to take notice of the languishing share price and no catalyst is on the horizon to close the 40%+ discount to NAV.
Sarine Technologies (2.0%)
The company has been facing a number of headwinds. Recent results suggest that the business is stabilizing. The launch of a new product segment has the potential to de-risk revenue generation over the next years. Still, the share price is falling.
Dundee Corporation (1.7%)
The most instructive investment I made over the last years. Dundee looked always cheap. Therefore, I added three times to my position. I ignored the continuing adverse news flow. The very definition of a value trap. Finally, the new management in charge seems to have a plan. The underlying assets have vast potential to surprise on the upside.
System1 Group (1.4%)
Another educative investment. I missed to sell the remaining position, when the share price was at GBP 10. Now back at GBP 2 this is a bet that management will handle the transformation of the business in an industry disrupted by digitization. System1 used to be a disruptor itself and it will be telling to watch whether they can adapt to the new environment.
My first investment in Australia. LogiCamms is a tiny mining & oil servicer. The company is still struggling to regain profitability, although the demand for their services has recovered. In hindsight, the mistake was to look for small players to generate outsized profits. Many larger competitors had a stellar performance or were taken over since I initiated this investment at the beginning of 2016.
The content contained on this site represents only the opinions of its author(s). I may hold a position in securities mentioned on this site. In no way should anything on this website be considered investment advice and should never be relied on in making an investment decision. As always please do your own research!