Wrote three articles: about FRMO, JCTCF and HWDY/NFBK

I have been busy the past few days writing a total of three articles for Seeking Alpha. Two are about well known names in value circles: FRMO Corp. (FRMO) and Jewett-Cameron Trading Company (JCTCF). FRMO is an interesting business with a stake in Horizon Kinetics, but I think it is way too expensive. Jewett-Cameron’s business is less exciting, but they are interesting because they are super aggressive with repurchasing shares. Unfortunately, I think the stock is roughly fairly valued. It’s not a bad deal, but I’m not expecting great returns either.

The article that I think is the most interesting is the one about the merger of Hopewell Valley (HWDY) with Northfield Bancorp (NFBK). I think it’s a very low-risk deal that should be completed soon that offers an attractive spread. These are the kind of small opportunities that can make a difference at the end of the year.

I usually don’t mention it on my blog when I write something for Seeking Alpha, so if you don’t want to miss anything I suggest you follow me on their site. Alternatively, you can also follow me on Twitter, because I do usually tweet a link.

Disclosure

Author is long HWDY, short NFBK

Back in Clarke Inc

Today I rebought a position in Clarke Inc. I exited last year when the discount (adjusted for the unrecognized pension asset) was just 14% but since that is now back to 26% I’m also back in the stock. Perhaps the market has some uncertainties about the energy securities portfolio that Clarke owns, but I don’t think that is a good reason for such a big change in the discount since that part of the portfolio is worth just ~10% of the company. What’s also interesting is that Clarke is back repurchasing shares, but they are doing it a bit stealthy. The pension fund acquired 595,900 shares in 2015 which is 3.8% of all outstanding shares. Especially in November and December the fund appeared to have been active in buying stock according to Sedi.ca.

Clarke Inc. NAV 1/6/2016

Disclosure

Author is long Clarke Inc.

The world’s vultures are vanishing

The Economist has a sad piece about the world’s vulture population. In Africa, there are 11 species of the bird and 6 of those are at risk of extinction and 4 are critically endangered. In the rest of the world, the situation is apparently not a lot better. A big reason for this is the use of diclofenac, a drug given to livestock that is deadly to vultures when they eat the carcass of an animal that has been treated with it. The article doesn’t specify if Alpha Vultures are also at risk.

Vulture

2015 performance review

With New Year’s Eve behind us, it is once again time to look back at how I performed this year. While this wasn’t my best year ever performance wise, I think the achieved result is still way above what I can reasonably expect in the long run. What was interesting this year is that 2015 was the first year with some real market volatility. I always said that I expect that my portfolio would do relatively well when the regular indexes are having trouble. And while that makes sense when you usually run with a net exposure of less than 100% while owning cash-rich stocks (among other things) only the market can test whether or not your prediction is correct. So I’m especially pleased that my portfolio dropped just ~5% in the summer while the MSCI World Index went from roughly +20% to almost -10%. I don’t have exact numbers though since I don’t track this daily.

YearReturn*Benchmark**Difference
201218.53%14.34%4.19%
201353.04%17.49%35.55%
201427.72%18.61%9.11%
201520.23%8.76%11.47%
Cumulative178.55%73.30%105.25%
CAGR29.19%14.74%14.45%

* Return in euro’s after transaction costs, dividend withholding taxes and other expenses
** Benchmark is the MSCI ACWI (All Country World Index) net total return index in euro’s

One accounting issue that I should disclose is how I accounted for the value of the Casa Ley and Synergetics USA CVR’s. I simply valued these at zero even though I spend money to acquire them and I think they are worth more. But my broker values them at zero, and I decided that I don’t want to go through the continued trouble to manually correct my performance calculations. Especially since it can take years before they fully pay out, and I might start owning even more of them. If I would be running a fund I think you should be highly skeptical if I made that decision, since I’m now underreporting my performance which could come in handy on a rainy day. So my real performance this year was probably a few percentage points higher (I sized the Safeway merger that generated the Casa Ley CVRs huge!).

Performance attribution 2015

Even while I underreported my performance from “special situations” slightly it is still by far the biggest contributor to my portfolio performance. When I post a (merger) arbitrage idea on my blog I often get comments from people that think it’s not worth the trouble, that it is picking up pennies in front of a steamroller et cetera. If you don’t think it yourself already, you probably recognize the sentiment. But once you start to add up all the little bits of money you make it starts to make a difference. Even though some merger ideas failed this year (for example, the ROIQ warrants: -100%!) it’s making the difference between an excellent year and just an average year. More than 50 different stocks contributed to the special situations total. Without the contribution of those, my performance would be almost equal to the MSCI World Index.

I do think that that is mostly a coincidence. My stocks aren’t very correlated to the index, but my regular stock picks didn’t perform very well because I had a lot of (indirect) exposure to sectors that performed poorly. Oil, and resources in general, had a terrible year while emerging markets also didn’t do well. If you are a bit flexible with your definitions I think my exposure to those two sectors was roughly 50% at the start of the year, and it is still sizable right now at more than 30%. I’m considering Beximco, Retail Holdings, Conduril, Ming Fai, Argo, Pardee, Deswell, Boom and Awilco to be resource and/or emerging market stocks:

Portfolio overview end 2015

This level of concentration has some risks, but I think those are manageable because to a large extent those positions are very uncorrelated. What happens in Bangladesh (Beximco) has almost zero influence on what is going to happen in Angola (Conduril). And besides that, I think those stocks are simply too cheap not to own. But hopefully, I’ll be able to find some interesting bargains in 2016 again. I have been very busy with special situations and my current positions in 2015, but besides buying a basket of Italian REIFs I didn’t buy any other new long-term positions. With an IRR of 18.31% that is an idea that is working out so far, even though (or especially because) I had the feeling that most of my readers weren’t very interested in it.

Disclosure

Long everything that I appear to own based on this article

PD-Rx Pharmaceuticals reports terrible FY2015 results

Last year I wrote a blog post titled “PD-Rx Pharmaceuticals reports great FY2014 results“, but unfortunately, I can’t repeat that exercise this year. While it was likely that this year would be worse than the 2014 record year, 2015 was also worse than expected. Revenue dropped 33% from $29.1 million to $19.4 million while earnings dropped 72% from $2.0 million to $0.5 million. The company doesn’t go into a lot of details what’s the cause, except that they lost “significant sales in a single sector due to a loss of market demand for a single drug”. 

I think that this is a risk that you just have to accept when you invest in smaller companies. They are often less diversified with regards the products they offer and the number of customers they have. The biggest product of PD-Rx now represents 16% of sales, so they should now be a bit less risky (it was 49% in 2014!). Another factor that reduces the risk investors in PD-Rx face is the large cash balance that the company owns. PD-Rx currently has a $9.8 million market cap while they also have a net cash balance of $6.2 million. Because of the large cash balance, I think the stock is still pretty cheap at the moment (and on the edge of becoming a net/net once again), although it remains unclear what plans the company has with it. It has slowly been building up for years now.

I have compiled an updated table of PD-Rx’s financials below. As visible historical results have been volatile – but consistently positive – in the past. Since the company only releases results once a year we have to be patient to see if they can recover next year.

PD-Rx historical financials 2015 edition

Disclosure

Author is long PDRX