Author Archives: Alpha Vulture

2018 end-of-year portfolio review

With another year behind us it’s once again time for the obligatory annual performance review. For the first time since I started blogging the MSCI All Country World Index ended up in the red, thanks to an action-packed 4th quarter, while my portfolio produced its worst result since 2011 as well. And while 2019 is still very young, so far it looks like that more excitement is on it’s way. Of course, exciting is most likely going to mean that I’m going to lose a bunch of money, but hopefully it will also offer opportunities to scoop up some bargains. So far I haven’t done a whole lot of buying. Sure, lots of stocks have gotten cheaper, but most of them were pretty expensive to begin with. But with so many stocks going down around the world I’m sure there are some new fresh bargains out there, waiting to be discovered by me :).

Year Return* Benchmark** Difference Old Return Delta***
2012 18.44% 14.34% 4.10% 18.53% -0.09%
2013 53.38% 17.49% 35.89% 53.04% 0.33%
2014 30.11% 18.61% 11.50% 27.72% 2.38%
2015 24.23% 8.76% 15.47% 20.23% 4.00%
2016 64.97% 11.09% 53.88% 43.58% 21.39%
2017 29.04% 8.89% 20.15% 30.12% -1.08%
2018 13.07% -4.85% 17.92% 13.21% -0.14%
Cumulative 606.75% 99.46% 507.29% 489.15% 117.60%
CAGR 32.23% 10.37% 21.86% 28.83% 3.39%

* Return in euro’s after transaction costs, net dividend withholding taxes and other expenses
** Benchmark is the MSCI ACWI (All Country World Index) net total return index in euro’s
*** Delta between previous reported return (Old Return) and new performance numbers (Return)

With a double digit positive return there is little I can complain about for the year, although that’s probably not going to stop me from doing exactly that in the next few paragraphs ;). But before diving a bit deeper in my portfolio I think I should explain what’s going on in the table above. When I started tracking my performance I tried to keep things simple by only tracking my main account(s), and ignoring stuff like the tax credits that I generate when dividend taxes are being withheld from my account.

Some time ago I decided that I should track things properly, and keep track of my results across all investment accounts and account for tax credits as well. At the same time I kept using my original methodology for the blog, but keeping two sets of numbers just for that is unnecessary complex. So that’s why I have provided in this table above a full reconciliation of the new numbers with my previous reported numbers, and going forward I will only report using the new and improved methodology. Adding the performance numbers of some small accounts doesn’t impact the yearly results in a huge way, except for 2016. That was an awesome year, mainly thanks to one special situation, that unfortunately enough will never repeat itself again.

Anyway, enough about the boring accounting stuff. Time to look at some numbers. As you can see HemaCare was the driving force behind the performance of the portfolio. Even though the stock gave back a decent amount of its gains in the last quarter, it still ended the year up 221%. Other stocks that did well were Viemed Healthcare and PD-Rx, while there were a lot of things that absolutely didn’t go in the right direction. This is without a doubt the performance attribution graph with the most red in it since I started making these.

The special situations bucket was, as usual, a good contributor to my performance, but to be honest, this year was a bit disappointing. A lot of situation that I entered in previous years payed out. Examples of these include two BINDQ liquidation payments (+115bps), Tejoori (+84bps), the Dyax CVR (+78bps) and the Casa Ley CVR (+57bps). With so such a big tailwind this years results certainly could have been a lot better. Unfortunately, I participated in some deals during the year that didn’t work out, with Rosetta Genomics being the biggest failure with a 202bps loss. At the same time, the missing distribution on the Sorrento Tech shares that I bought at the end of 2017 caused a 188bps loss. I’m somewhat hopeful that this loss will be reversed this year since the company says it’s working with DTC to correct the issue, but for now I have valued the position at zero, just like my broker is doing.

One thing that my regular readers probably noticed is that I didn’t blog as much during 2018 as in previous years. My New Years resolution is to bump up that frequency a bit again, and I hope 2019 will have some profitable situations in store for us. Happy new year!

Disclosure

Author is long most of the stuff in the performance attribution graph

Did I get screwed in the Sorrento Tech liquidation?

Last year I bought some shares of Sorrento Tech, formerly known as Roka Bioscience (NASDAQ:ROKA), on its last trading day, December 28, 2017. Today the first liquidation distribution finally showed up on my brokerage statement, but to my unpleasant surprise only shares that I bought earlier got the distribution. After checking with my broker they told me, and I will quote their response below, this was as it should be because the company set an ex-dividend date of December 28, 2017.

Per DTC comments:
The First Interim Liquidating Distribution in the aggregate amount of $3,199,137.92, payable to the holders of the Record Date being December 28, 2017 on November 9, 2018 (the “Payable Date “) be,and hereby is, declared payable on November 9, 2018; and it is further.

Given that I bought the shares on December 28, 2017 and it takes two days to settle trades I didn’t get anything. So the question? Is this possible? Did someone screw-up? The company had not set any ex-dividend date in the proxy statement related to the liquidation, although it did state that it would close its stock transfer books at the close of business on such date.

To me it seems that someone made a mistake, and I don’t think it’s me. If the stock isn’t trading ex-dividend when I’m buying it, I should in theory get the rights to any potential future payment. But the question is, who screwed up? The liquidating company? DTCC? My broker? And what can I do about it? Any readers with a good idea?

Disclosure

Author seems to be long a bunch of ROKA shares that might be worthless.

Nevada Gold & Casinos merger arbitrage

Last month Nevada Gold & Casinos (AMEX:UWN) announced that it had struck a deal to be acquired at $2.50/share, subject to certain minor adjustments. The company operates 9 mini-casino’s in Washington, approximately 604 slot machines in 15 locations in Deadwood, South Dakota and one casino in Henderson, Nevada. This last location is under contract to be sold, and is the cause of the possible adjustments in the $2.50/share merger consideration. Based on working capital of the Nevada business at the time of the sale there is a possible adjustment to the merger consideration. Because this adjustment is expected to be minor to begin with, and can both be positive and negative, I think we can safely ignore it since I think it should have a more or less neutral expected value.

With the stock currently trading at $2.39 there is a potential upside of 4.6% which would translate to a 19.8% internal rate of return if the deal closes, as scheduled, before the end of the year. And with the stock trading at $2.15 before Nevada Gold & Casinos announced that they were in discussions to be acquired the likely downside in case the deal breaks is probably limited. Add that there is no financing condition, and stockholder approval and regulatory approval shouldn’t be an issue either, I think it’s an attractive deal. As a small sweetener, the merger consideration will be increased by $0.01/month if the merger is completed after February 1, 2019. I don’t think that will happen, but if things get delayed for some reason it’s nice to get paid while waiting for the deal to be consummated.

Disclosure

Long Nevada Gold & Casinos

Synergetics CVR expires worthless

Earlier this year I wrote happily how the Casa Ley CVR that was issued in 2015 in connection with the Safeway merger was going to pay out. Another CVR that I acquired in the same year, when Synergetics USA was bought by Valeant Pharmaceuticals (now know as Bausch Health Companies), didn’t have a happy ending. The CVR had some milestones related to product sales from the effective date of the merger till 30 June, 2018, and apparently those weren’t met. I didn’t see a SEC filing or press release about it, but only noticed the disappearance of the CVRs in my brokerage account. Of course, a bit of a disappointing outcome, but not really surprising considering how Valeant imploded almost directly after finishing the acquisition.

Disclosure

No positions anymore

XPEL: anything but your classic value stock

Some stocks are well known in value investing circles, even though they are anything but a classic value stock. XPEL, Inc. (CVE:DAP.U), a company specializing in paint protection films for cars, has been written up twice on VIC, once in 2013 and again in 2015. There is a long thread about it on CoBF, people write about it on Twitter and there are plenty of articles on SA as well. With a market cap of ~$185 million XPEL is a tiny company, but it is remarkable well-known in certain circles. But with the stock trading at a 37x P/E and 10x P/B-ratio while it’s up almost 400% this year it sounds like an unlikely candidate for me to investigate.

Share price: $6.54
Shares outstanding: 27,612,597
Market cap: $180.6 million
Enterprise value: $180.9 million
P/E (ttm): 37.1
EV/EBITDA (ttm): 20.8
P/B (mrq): 10.0

Financials

Based on these simple metrics above XPEL is anything but cheap, but what this doesn’t show is the extremely impressive growth the company has been experiencing. The company had revenues of $6.0 million in 2011 while revenues for the last three months alone were a whopping $28.9 million. That’s a compounded annual growth rate of more than 50% for six and a half years straight! Even more impressive is that all this growth was accomplished with almost no increase in share count, minimal debt levels, and while fighting a lawsuit against 3M (settled last year). An overview of the historical income statement is shown below:

While these numbers are pretty impressive, the last two quarters have been even better: revenue grew in the first half of 2018 with more than 80% compared to the first half of 2017, while realizing a 3 percentage points higher gross margin. And too be honest, that was about time. Because despite the impressive growth the past years, the operating profit of the company was a bit disappointing. In 2013 the company earned about $2 million on $18 million in revenue, and 4 years later it was still earning $2 million on $68 million in revenue. Growing revenue is great, but in the end it’s about earning money. But once you have a lot of revenue, increasing your margins a little bit does wonders for your profitability.

Valuation

Valuing a growth company is never easy, but in my experience they are usually so expensive that no matter what kind of model I produce, I have a very hard time justifying the current share price. So I (almost) never end up buying anything that can be classified as a growth stock. But with XPEL it’s remarkable easy. We don’t have to make a fancy model that projects (high) growth rates a decade forward. Really all that is needed is to assume that the company can grow revenues by 35% for two years in a row while maintaining its current gross margin. Considering the historic growth I think that’s a pretty low hurdle to jump over. I have no idea how far growth can continue, but if you can grow for 6.5 half years at more than 50%, while growing at 80% in the last half year, I’m sure there must be quite a bit of runway left.

Asumme at the same time that there is a bit of operating leverage in the “Selling, general and administrative costs” and that these will grow a bit slower than revenues at 25% and the following picture is painted:

With the stock currently trading at $6.54 that means that you can buy this rapidly growing company at just 10.8 times its earnings in two years time.

Insiders

What I like about XPEL is that insiders own a decent chunk of the company. The CEO owns 5% of the outstanding shares while various members of the board of directors own another 35%. Surprisingly enough, the company doesn’t pay its executive officers with options. The number of outstanding shares increased with 7% since 2012, from 25.8 million to 27.6 million, but not from options or other share based compensation. The reason for the increased share count was a private placement in 2017 at $1.43/share (then the current share price). Most of the shares in the private placement were issued to certain directors and officers of the company, and in hindsight these were for sure issued at an opportunistic time, just before the settlement with 3M. It leaves a bit of a bad taste in my mouth because there didn’t seems to be a pressing need to raise cash at the time. At the same time, I wouldn’t be complaining if the company would have paid twice the amount in share based compensation throughout the years…

Conclusion

Some people think that as a value investor you have to buy stuff like net-nets and stocks trading at a single digit P/E-ratio. While I often like companies like that, the only thing that matters is whether or not something is cheap. Sometimes a stock trading at a single digit P/E-ratio is expensive if for example bankruptcy is around the corner, and sometimes a stock trading at an almost 40x P/E ratio is cheap if revenues are expected to grow explosively. I think XPEL is one of those stocks. How fast it is growing is really amazing, yet the stock is surprisingly affordable.

Of course, it’s not without risks. There are all the “normal” risks like growth slowing because of higher market penetration or a downturn in the economic cycle and people stop buying cars. But I think the biggest risk is basically that this is more or less a one product company. They are growing fast because they have a great product (their ultimate paint protection film was introduced in 2011). I don’t have a car, so I don’t really know how useful it is, but the numbers speak for themselves. But what happens if some company, lets say 3M, creates a superior product? Can they still thrive, or would business slowly deteriorate until nothing is left? That’s the big question. If you pay a high price you not only need XPEL to grow the coming years, it also needs to be a good business 10 years and probably 20 years from now. A lot can happen in such a timeframe.

That said, I couldn’t resist picking up some shares. I don’t think XPEL is a sure thing (it never is), but at the same time it’s just too cheap to ignore considering the absolute fantastic growth.

Disclosure

Long XPEL