Monthly Archives: November 2013

Exited Alternative Asset Opportunities

After buying Alternative Asset Opportunities (TLI) almost exactly one year ago I exited my position today at a very small loss (-2.4%). Fundamentally nothing really changed between today and one year ago. What changed was my understanding of the traded life interests. If you start with my oldest post on TLI and read the follow-up posts chronologically you see how with every update I realize that my model of the expected future cash flows needs to be refined, and obviously always in the ‘wrong’ direction. After my latest post on the fund I realized – with the help of a reader, thanks! – that the model was still too optimistic. With my perceived margin of safety evaporating the logical thing to do was selling my position.

I always write that readers should do their own research, and if TLI doesn’t prove the point I don’t know what will. I have compiled a quick list of all the things I missed initially:

  • Update, Nov ’12: the average age of the portfolio doesn’t increase with one year/year.
  • Update, Nov ’12: the ratio of females and males doesn’t remain constant
  • Update, Oct ’13: added assumption that premiums increase 5%/year
  • Update, Oct ’13: realization that some policies lapse when holder reaches age of 100
  • Update, today: 5% premium increase per year too optimistic, probably 9~10%/year
  • Update, today: reducing average age with one year doesn’t increase LE’s with one year

So keep this in mind the next time you read a post on my blog! Especially the last point in the list matters for the valuation. While quite obvious in hind sight I didn’t realize how big the difference was. If you assume that insured group is as healthy as a ‘normal’ 3 year younger group you only add 1 year to their LE. Given that the new LE provider is expecting that the insured group could have a LE that is two years above the previous estimates it’s now easy to see a scenario where you actually start losing money (and given the historical profile of policy maturities it certainly looks like they could be right). TLI simply doesn’t appear to be the opportunity I once thought it was.


No position in TLI.L anymore

China Energy story reaches a happy ending

I wrote in September that China Energy finally completed a reverse split to go private, and I expected that to be my last post about the company. But with every passing day since – without cash in my account – I started to wonder if I would actually get paid. With the shares suspended for trading you can’t do anything else than wait, and that finally paid off today.

Since starting this blog I haven’t had a single investment blow-up in my face, but this is not a sustainable track-record. It’s inevitable that some day I’ll buy something that will be a (near) zero, and that’s something that I try to keep in mind when I size my positions. Buying losers is part of the game: you just have to make sure that you aren’t betting the proverbial house. While it would of course have been unfortunate if China Energy would have been a zero it wouldn’t have blow a hole in my portfolio. It would just have shaved a couple percentage points off my return year to date.


This time really no position in CHGY anymore

PD-Rx Pharmaceuticals: obvious cheap

PD-Rx Pharmaceuticals is a distributor of medication to primary care physicians. The medications are delivered prepacked from the companies warehouse so patients don’t have to see a pharmacist. But to be honest, a description of what the company is exactly doing isn’t that important for the investment case. If you look at the historical results, and the current market capitalization it becomes immediately clear that the stock is cheap. So without further ado, lets take a look at some key statistics:

Last price (Nov 4, 2013): 3.00 USD
Shares outstanding: 1,769,619
Market cap: 5.38M USD
P/B (mrq): 0.75x
P/E (ttm): 7.5x
EV/EBIT (ttm): 1.22x


An EV/EBIT ratio of just 1.22x is extremely low, and that is the combined result of a nice amount of net income with a large cash position. The company has ~75% of it’s market cap in cash and when the P/E ratio is 7.5x you get an even lower number when you switch to a metric that does account for the cash on the balance sheet. The ex-cash PE-ratio is just 2.0x: this is what I call obvious cheap! Looking at the historical financials also doesn’t uncover anything that warrants a price this low:

PD-Rx historical financials

Unfortunately the company has only the financials of the past five years available on it’s website, and that’s all you have to work with as an investor. They don’t release quarterly results and they don’t file anything with the SEC. The annual reports themselves are a quick read: there is a shareholder letter of one page, a couple of ‘nice’ graphs and financial statements (without the usual footnotes).

What we see is a business that is pretty profitable. Average return on equity was 15% the past five years while the average return on invested capital was a very respectable 23%. The company is also debt free since 2012, it remained profitable during the recent recession and the share count has remained stable the past five years. It’s hard to find anything to really hate in these numbers. Gross margins and net income are down compared to 2011, but it’s not outside the historical range.

The company also included in the 2012 annual report a graph of the amount of annual sales since the inception of the company in 1987, and in the 2011 annual report we can also find a graph of the net income since inception. Both show an encouraging long-term trend, and PD-Rx is obviously also not wasting money on graphic designers:

PD-Rx historical revenue PD-Rx historical net income

PD-Rx has been profitable since 1992. It’s hard to see how you can go wrong if you can buy a company like that for less than NCAV. Especially since it’s a safe bet that the balance sheet of PD-Rx has never been stronger than today and historical earnings would have been higher without interest expense.

The business

The numbers make it clear that the PD-Rx is cheap, and there is also a hint that it’s actually a pretty good business. Return on invested capital is high, and there is also a good track record of growing revenues and income. When you read the latest letters from the CEO to shareholders you realize that the company is not just a distributor, but that software development is an important piece of the puzzle. The software that they offer is cloud based, and once a client is using it they are presumably not switching without a good reason, and sticky customers are a good thing to have. Some relevant quotes from the recent letters (emphasis mine). From the 2010 annual report:

Our “cloud” software offering has now become a great success. Both the dispensing software and the electronic medical record are offered in that manner. We continue to work toward meaningful use criteria for the Acuity Health EMR and SureScripts certification for the e-prescribing software.

The 2011 annual report:

Our technology approach to all aspects of our business continue to keep us in the hunt; both in controlling our operational expenses and in our offerings to customers. We have made significant advances to become paperless both in our operation and as we do business with our customers. Feedback from our customers has been positive as we continue to move into the 21st century. E-pedigrees, E-invoices, and E-Statements are just a few of the ways we are streamlining our business. Our “cloud” dispensing software has been an overwhelming success and even our oldest customers are switching to the “cloud” to improve their software performance.

And the 2012 annual report (EMR stands for Electronic Medical Record):

Our technology approach continues to be refined and we have successfully integrated our “Cloud” dispensing software with the physician’s EMR. This form of integration allows every physician using an EMR to be able to send a prescription electronically for filling at the physician’s office. Dispensing has never been so easy! All the necessary patient demographic
fields are automatically filled in and with a few clicks of the mouse a patient can get their medications directly from their doctors office.

I don’t think you directly should assume that this company has a real moat, but the business quality is probably better than that of the average net-net that I discuss on this site.


This is a part of the thesis that remains a question mark. PD-Rx does not report with the SEC, and it doesn’t disclose how many shares insiders own or how much they get paid. In theory you should be able to get access to the shareholder registry as a shareholder, but this is not something that I have tried. In practice it’s probably not easy as a small foreign shareholder who owns the shares in street name. I do think it’s likely that insiders own a decent piece of the pie since the trading liquidity in PD-Rx is very low, hinting that the free float might be low as well. But if I have a reader who can offer more insight I’d love to hear from you!


PD-Rx doesn’t provide investors with a lot of details, but I don’t think that’s a big problem. Just based on the historical earnings and the current balance sheet we should be able to get a ballpark number. Net income has varied the past 5 years, but the $705K in income in FY2012 is close to the 5 year average of $753K (adjusted for interest expenses). While the company has shown strong growth in the past 25 years I think a more conservative no-growth assumption is reasonable given the lack of growth in recent history. If we value the average earnings at an 8.5 multiple and add the $3.9M in cash I get a valuation around $10.3M. That’s basically twice the current market capitalization, and I think there could be significantly more upside if the no-growth assumption is too conservative (it probably is).


PD-Rx Pharmaceuticals is perhaps not the most exciting stock, but it is cheap, generates high returns on invested capital, and the large cash position should provide downside protection. Since the company provides a limited amount of information to investors there are some questions that remain open, and it’s also not a good sign from a corporate governance perspective. At the same time the stock is without a doubt cheap.

I think that this is the kind of stock that, if you would buy a basket full of similar companies, you most likely would do well in the long run. But without knowing more about the insiders, or seeing a track-record of returning excess capital to shareholders. it’s not the kind of stock I want to bet too heavily on.


Author is long PDRX