Half-year portfolio review, 2018 edition

With June behind us it’s once again time to see how my portfolio has been performing so far this year. It’s getting repetitive, but there is little I can complain about given the double digit return and the solid outperformance compared to the MSCI ACWI. With global equity markets going up year after year, I started investing at a very favorable moment, and I absolutely don’t expect that I’ll be able to keep generating performance numbers like this in the future. At some point some negative return numbers are probably going to be mixed in the list, and that would evaporate a (potentially large) part of the current compound annual growth rate.

Year Return* Benchmark** Difference
2012 18.53% 14.34% 4.19%
2013 53.04% 17.49% 35.55%
2014 27.72% 18.61% 9.11%
2015 20.23% 8.76% 11.47%
2016 43.58% 11.09% 32.49%
2017 30.12% 8.89% 21.23%
2018-H1 12.06% 2.40% 9.66%
Cumulative 483.20% 114.66% 368.54%
CAGR 31.16% 12.47% 18.69%

* 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

As you can see in the performance attribution graph below, a large part of the return can be explained by just a couple of positions. Especially HemaCare has been a driving force behind my portfolio thanks to a 155% gain in share price. Conduril and Viemed Healthcare also contributed nicely, but the rest of the positions were a mixed bag with small losers and winners.

The contribution to the portfolio of the special situations with 259bps doesn’t look bad, but is actually a bit disappointing. In the first half of the year I had a couple of nice situations play out such as the Casa Ley CVRs (contributing 59bps), a BINDQ liquidation payment (contributing 67bps) and the Tejoori liquidation (contributing 86bps). Unfortunately lots of the gains inside the special situations bucket were offset by a couple of deals that went sideways. The biggest one was the Rosetta Genomics merger that failed spectacularly, causing a 207bps loss. Another (undisclosed) merger subtracted 87bps from the performance while some other deals also generated small losses. Hopefully things will turn around a bit in the second half of the year.

The composition of my portfolio doesn’t contain any big surprises. It’s a fairly standard (for me) split between long-term value stocks and special situations. The observant followers of this blog will notice that there are in the overview above a couple of positions I haven’t blogged about previously. One of them is Scheid Vineyards, a name you might have heard before. I used to own a single share just to keep track of the company, but after reading the latest letter to shareholders my interest was piqued again.

This year the company managed to rezone about 130 acres of farmland bordering the city of Greenfield into commercial and residential land. They are planning to sell this the coming years, and will probably realize a handsome profit on it. They also got their vineyards and winery appraised earlier this year for $190.5 million while the company has a market cap of just $80.4 million. There is a lot of debt that needs to be taken into account as well, but there are also other assets such as the 130 acres mentioned earlier, and a large wine inventory. All-in-all I believe that the intrinsic value of the company is more than twice the current price, which makes it a pretty sweet deal in my book.

Disclosure

Author is long everything in the portfolio overview

12 thoughts on “Half-year portfolio review, 2018 edition

  1. Martin

    Congrats, your results were good.
    Scheid Vineyards may run an accounting profit, but they are not turning an economic profit, factoring in the opportunity cost of all their assets. This comes down to capital allocation. What do you think is their return on assets, if you use fair value of assets? Do you think they will dividend out the sale proceeds or are their incremental returns on capital higher than their average e.g. by selling online? Good luck.

    Reply
    1. Alpha Vulture Post author

      Thanks!

      Last year they certainly only made an accounting profit since operating profit was negative, and only a big reduction of their deferred tax liabilities turned the bottom line positive. That said, I don’t think you should ever expect this to be a business to generate huge returns on capital. Vineyards are an asset with a pretty low cap rate, so anything build on top of that probably shouldn’t generate high returns either. The flipside of that story is that you own real assets that probably maintain or grow in value through time pretty well. If you buy a 30-year government bond yielding 3% at a 50% discount you still only have a 6% yield. Would still be a pretty sweet deal as well.

      But what I do like about their business is the fact that they are transitioning from lower margin revenues, to higher margin revenues. The growth of their cased wine segment in the past few years is really impressive, and if they can continue growing their branded wine sales I suspect that earnings and cash flows might follow as well. What they will do with the cash from the Greenfield land I don’t know. Maybe a dividend, maybe reinvest it in the business. I’m fine with both really.

      Reply
      1. Martin

        66M (If you value current assets at book ) + 191M vineyards + 4M other = 261
        Income from Continuing Operations ~ 3M
        Yield = 3/261 = 1.1% <—- Is this the caprate for vineyards?

        Btw Radisys (RSYS) may be something for special situations: trading in the $1,4x range vs $1,72 all-cash buyout offer from Reliance with cash on hand. Shareholder and regulatory approvals required.

        Reply
        1. Alpha Vulture Post author

          I know that for some of the land that Scheid Vineyards leases they pay more than $2000/acre in rent for what probably is a cap rate around 4%. You would hope that the company is able to generate at least that kind of return in the long run as well on it’s own land/assets, and actually significantly more since growing grapes and making vine isn’t a charity business (maybe it is a little bit, just because it’s a nice hobby for rich people…).

          And thanks for the mention of Radisys. I looked at it today, and I certainly agree it looks attractive. Spread is big, and it’s a small company so you would expect that CFIUS issues would be manageable. At the same time this is the kind of risk I’m pretty clueless with in handicapping, so I’m not onboard yet…

          Reply
          1. Cogitator

            Wouldn’t be an apples-to-apples comparison with a lessor’s economics anyway since the land owner’s $2000/acre probably flows pretty much to cash, whereas Scheid has unpleasant costs in-between.

            Haven’t looked at this in depth, but if they’re doing $3M in average earnings (albeit the old low-margin business) on $4,200 acres of vineyards, they could technically make more by just renting all of that out at the $2000/acre.

            Of course, assuming a 4% cap rate is also roughly right, the appraiser must be factoring in material increases in going-concern earning power to get to $190M valuation.

            The 130-acre plot of land marked for residential/commercial is very interesting, though, given that developers pay upwards of $50,000 per acre-feet for water rights in new muni developments out West…

          2. Alpha Vulture Post author

            Yeah, the land lessors business is sort of the best one because you get paid without doing much. So you better hope that in the long run the entity that does all the work can at least recoup the cost of the land and make some additional profits. If you think they can’t, then of course it makes sense for this to perpetually trade at a discount to land value.

            An yes, the 130 acres certainly should be a nice windfall. On zillow.com they have a couple of land plots for sale in Greenfield.

            • Here is for example land at $325,000 per acre (and unlike Scheids land it’s still zoned for argicultural use).
            • This land is zoned for residential use and worth $390,000 per acre.
            • And here are 10 acres (that are still zoned for argicultural use, but has one house included) for $250,000 per acre

            So if Scheids land is worth something in this kind of range you are quickly talking about $20 million, $30 million or even more. Not bad for a $80 million market cap company 🙂

  2. Antus

    I am an observant follower of this blog. Your results are great.
    And here is my yearly request: why not disclose your portfolio fully?
    Approx. 50% of your portfolio is not disclosed and it is a pity…

    Reply
  3. Dave

    RE: Beximco
    I tried buying it (I’m located in the US), but can’t. Reg S restriction. Maybe that is partially the reason for the discount.

    Reply
  4. Henry

    Strong half year result, congrats
    Any insight regarding what is driving Beximco’s price movement?
    It is down in Bangladesh and hit a 52-week low, GDR-Dhaka discount is now at 66%

    Reply

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