Betting against Biglari

I think most of my readers will be familiar with Biglari Holdings, the company run by Sardar Biglari. He likes to present himself as a young Warren Buffett and to complete the picture he has even gone as far as copying the general design of berkshirehathaway.com. But while he talks to talk, he doesn’t walk the walk. The company is quickly becoming an interesting case study in creative ways to screw shareholders. The license agreement that would entitle him to receive royalties for the use of his name if a change of control occurs is especially ridiculous.

As a result Biglari Holdings is trading at a depressed valuation and, despite Sardar’s tight control, it has attracted the attention of the activist investors at Groveland Capital. They announced a small stake in the company in November together with the intention to acquire a board seat. Biglari Holdings is a target that is bigger than usual for them since they are mostly active in the micro cap space. They did for example briefly own Solitron.

Pretty ironic to see an activist investor taking aim at the firm of a fellow activist investor, but what we have so far is just an interesting story (that’s mainly why I follow Biglari, it’s fascinating). But this all changed when Biglari decided to respond. He was apparently “op z’n pik getrapt” and decided to retaliate against Groveland by taking a large stake in a couple of of small companies that they own: Air T and Insignia Systems. I have no idea what his thought process exactly was behind this move, but Biglari’s buying has fueled both stocks to new highs.

Based on the poison pill that Air T quickly adapted I think Groveland is worried that Biglari will try to gain control over the company without paying all shareholders an appropriate premium. That makes sense because he obviously doesn’t want this to be beneficial to Groveland, but it has been pretty great so far for shareholders that have flexibility in selling shares.

Since 21 November, the date Groveland made their intentions known, Air T has advanced from $16.50/share to a high of $27.20/share: a gain of almost 65% while Insignia Systems gained almost 50% when it went from $3.00/share to a high of $4.45/share. Both stocks have dropped from the recent highs because it seems that Biglari has stopped buying:

Price development AIRT and ISIG

This massive increase in share price is unrelated to the fundamental development at both companies. Biglari has been very aggressive in acquiring a position. He now owns 338,500 shares (representing a 15% stake) of Air T and he probably bought the majority of this stake in just a couple of days based on the trading volume. That’s in my opinion pretty restarted since that would normally be a complete month of volume. His buying spree in Insignia Systems has been equally ridiculous. He now owns 2.3 million shares (close to a 20% stake) while the daily trading volume in the month before December was usually around 20,000 shares. When someone is buying so fast a big price impact shouldn’t be a surprise.

Because of this I thought that shorting some Air T was a good idea. I didn’t go for Insignia Systems because it had a more expensive borrow, and Air T was at that moment still trading near its highs. That proved to be excellent timing since the stock dropped almost 15% in a few minutes after I tweeted this:

I’m guessing that both stocks will soon go back to the original price level, although Biglari remains an unpredictable factor. So far he already overpaid a couple of million dollars just to make a point, and it is of course easy to waste some more money if it isn’t your money. One thing is certain: entertainment value is almost guaranteed!

Disclosure

Short AIRT, no position in ISIG or BH

PD-Rx Pharmaceuticals reports great FY2014 results

When I initially bought PD-Rx Pharmaceuticals a bit more than a year ago I was mainly attracted to the company because it was cheap on almost all metrics while it has a solid history of growth and profitability. The great thing about a blog is that you often have visitors that know more about the company than you do, and in the case of PD-Rx someone mentioned that a big competitor had left the business. Because of that development I expected that fiscal year 2014 would be a good one, and the company didn’t disappoint today.

Revenue was up 12% and, thanks to higher margins and operating leverage, earnings increased with a whopping 63% from $0.70/share to $1.14/share. The market didn’t ignore this, but with the stock up 52% it is – based on trailing earnings – just as cheap today as it was yesterday. The company is now trading 6.7x PE-ratio which is pretty cheap in itself even if you don’t expect any growth going forward. At the same time this ratio doesn’t give the company credit for the large, and rapidly growing, cash balance. The PE-ratio ex-cash is just 3.5x and the EV/EBIT ratio is now 2.2x. Amazing to have a stock in your portfolio that is up >150% but is still at this valuation.

PD-Rx historical financials 2014 update

Disclosure

Author is long PDRX

Thanks Leon Cooperman

I have exited my positions in ATLS and TRGP after Leon Cooperman appeared on CNBC to tell the world how much he liked Atlas Energy. I haven’t even watched the video above myself to be honest because I don’t give a fuck what Leon Cooperman thinks, but when the stocks pops as a result I’m happy to sell. When you compare the implied stub price of one week ago (left) with the picture today (right) you see that the market is suddenly valuing the stub a lot higher:

Change in new Atlas Energy Group stub price

I think the current implied stub price is probably not very far removed from intrinsic value. Unfortunately my gains on this trade are limited because the merger spread between APL and NGLS increased. Making money on a merger arb while the spread increases is not bad though.

Disclosure

No positions anymore

Clarke Inc launching tender offer

When I entered my position in Clarke in the beginning of December I wrote the following:

Given the large cash balance after the sale of Supremex there might even be more in the cards than just the current repurchase program.

This proved to be a prescient comment since the company announced a sizable tender offer yesterday for 2.5 million shares at a price of $9.5. The 2.5 million shares represent 12.8% of the outstanding shares, and given the ~30% discount to NAV this transaction could provide a nice boost to intrinsic value. If they are able to repurchase 2.5 million shares NAV per share (adjusted for unrecognized pension assets) would increase with 4.35%. That’s an easy way to make money. Whether or not they will be able to repurchase the full 2.5 million shares remains to be seen since they are offering a small premium compared to the last trading price.

Disclosure

Author is long Clarke Inc

Reduced my position in Conduril

I have been reducing my position in Conduril this month because I think the risk/reward is at the moment not as attractive as it was earlier this year. This despite the fact that the share price declined with more than 25% from a high of €88/share to the current €65/share. The main reason is the sharply declining oil price, and the possible effect that it will have on Angola. Conduril is generating roughly 50% of its revenues from Angola while the country relies on oil for approximately 80% of its tax revenues. With oil below $60/barrel they have a problem:

fitch-report-on-oil-vulnerabilitiesI’m not someone who focuses on macro factors with my investments, but there is a difference between making predictions and recognizing reality as it is. And when a lot of future tax revenue is gone it isn’t exactly a stretch to assume that there will be a lot less money available in the coming years for stuff like public infrastructure: the kind of work Conduril does. It also increases Conduril’s credit risk on its outstanding receivables.

I don’t know if this realization is driving the decline behind Mota-Engil Africa’s share price. I called this company a good comparable to Conduril just two weeks ago because it’s active in the same sector and it is also getting roughly 50% of its revenues from Angola (it does however have a more leveraged balance sheet). When you see that Mota-Engil Africa is down more than 50% since its listing in Amsterdam three weeks ago the recent decline in Conduril’s share price suddenly doesn’t look that bad:

CDU vs MEAFR share price

Despite the sales Conduril is still my biggest position, just not as big as earlier this year.

Disclosure

Author is long Conduril, no position in Mota-Engil Africa