Author Archives: Alpha Vulture

Half-year portfolio review, 2019 edition

With the first half of the year behind us it’s once again time for the obligatory performance review. Absolute performance was quite satisfactory with a solid double digit return, but simultaneously I’m underperforming the MSCI ACWI for the first time since starting this blog. With my focus on special situations it’s a result that you would expect since these often offer a more or less fixed return, making it tough to keep-up with a rapidly rising stock market. Since I’m not too far behind I’m hopeful that I’ll be able to catch up in the second half of the year. There are a couple of special situations that are on the verge of being completed that could meaningfully boost my performance. But even if I don’t catch up, I can’t really complain!

Year Return* Benchmark** Difference
2012 18.44% 14.34% 4.10%
2013 53.38% 17.49% 35.89%
2014 30.11% 18.61% 11.50%
2015 24.23% 8.76% 15.47%
2016 64.97% 11.09% 53.88%
2017 29.04% 8.89% 20.15%
2018 13.07% -4.85% 17.92%
2019-H1 14.51% 16.67% -2.16%
Cumulative 709.22% 132.71% 576.51%
CAGR 32.15% 11.92% 20.23%

* 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

As you can see below, the majority of the performance is driven by the special situations while both HemaCare and Viemed Healthcare were also significant contributors. The graph looks a bit like the one of 2018, and as a matter of fact, the top four is the same as at the end of 2018 (but the order is slightly different). The performance of the special situations bucket got a large boost when the situation around the Sorrento Tech liquidation payment got resolved earlier this year (+158bps). To some extent this is a bit of an artificial gain because the position was marked at zero by my broker last year, and most of it is just a reversal. But thanks to this, the special situations bucket is managing to keep up with the overall stock market reasonably well.

The performance of my long-term value stocks was a bit more mixed. There were unfortunately quite a number of losing positions which is not a great result in a period when everything seems to be going up. Luckily, not every holding was a laggard. Both Argo Group and Goodheart-Willcox launched big tender offers to buy back shares at a significant premium. I sold my entire stake in Argo Group for a decent profit, while I decided to hold on to all my Goodheart-Willcox shares. Based on the information provided in the tender offer document itself (and my own valuation) the company seems to be worth more, and so far the market seems to be agreeing with that assessment since the stock hasn’t traded down below the price of the tender offer. But liquidity is, especially now, after the tender offer, almost non-existent.

The tender offer was for $150/share while the shares were valued at $168/share in an external appraisal, and that number included both a 11.1% discount for a lack of control and a 15% discount for a lack of marketability.  Without these discounts the value per share would rise to $237. With Argo Group I was happy to sort of meet management in the middle and split the discount, but because I have a lot less concerns about the corporate governance of Goodheart-Willcox I’m more inclined to hold it if there is still a significant discount to “fair” value. Additionally, the management projections for revenue and earnings that were included in the tender offer documents looked pretty optimistic as well. I usually put very little value in these kind of projections, but it’s another data point that suggest that the stock is still undervalued at the current price. I guess we’ll see how it will play out.

Disclosure

Author is long or has been long all the stocks mentioned in this post

Nevada Gold & Casinos merger completed

Last year, in October, I wrote about the Nevada Gold & Casinos merger. Back then I thought that it was a simple merger that would probably close before the end of the year, but that proved to be way too optimistic. The merger needed approval of the Washington State Gambling commission, and they took their sweet time. My guess is that this was mostly a bureaucratic delay instead of real regulatory risk, but of course, it didn’t have a positive impact on the annualized return of the position. Luckily the merger agreement contained a provision to adjust the price upwards in case of delays, and instead of a merger payment of $2.50/share the final price was $2.559333/share. I bought my shares for approximately $2.40, so the end result is a 6.6% absolute return which translates to 9.2% annualized. Not great, but not bad either for a deal that got severely delayed.

Disclosure

Still long UWN since the merger payment hasn’t hit my account

Exited the Aratana Therapeutics deal

Just one week ago I wrote that I initiated a position in Aratana Therapeutics (NASDAQ:PETX). At the time stock was trading was trading at roughly a 1.2% discount to the price Elanco Animal Health (NYSE:ELAN) was willing to pay, and a CVR with a max payout of $0.25/share was thrown in the mix for free. With Elanco now trading at $30.77/share and Aratana at $4.63/share the spread is a negative 1.6% and the CVR is implicitly valued at $0.07/share. My rough, and perhaps optimistic guess, of its value was around $0.10/share so there is little reason to keep my Aratana position. Unfortunately I decided to not hedge with short position of Elanco, so while the spread went in the right direction, I didn’t make any money. But that’s not a bad result for a week like this!

Disclosure

No position in Aratana Therapeutics anymore

Get a free CVR in the Aratana Therapeutics acquisition

Last Friday Aratana Therapeutics (NASDAQ:PETX) announced that it would be acquired by Elanco Animal Health (NYSE:ELAN). Elanco will pay 0.1481 shares of common stock – worth $4.85 at current market prices – while Aratana is trading at $4.79 for a spread of just 1.2%. While it’s a low-risk deal that should close soon, that’s not enough to get excited about. It gets interesting because Elanco will also issue a contingent value rights that will payout $0.25/share if certain sales milestones are reached before the end of 2021:

Each CVR will entitle its Holder to receive $0.25 in cash if Aratana, Elanco or their respective affiliates achieve cumulative net sales of an animal health product that contains capromorelin as an active pharmaceutical ingredient equal to or exceeding (a) $25,000,000 during the period beginning on July 1, 2019 and ending on December 31, 2020, or (b) $50,000,000 during the period beginning on July 1, 2019 and ending on December 31, 2021.  Elanco has agreed to use “Diligent Efforts” (as defined in the CVR Agreement) to achieve the foregoing milestone.

How likely it is that they manage to hit either the $25 million milestone before 2020 or the $50 million milestone before 2021? I don’t really know. It doesn’t sound like a crazy high hurdle to me, but then again, who knows what the market is for a drug that apparently is used to stimulate the appetite in dogs… If we assume that the CVR is worth something like $0.10/share today, the spread increases from 1.2% to 3.3%. Not spectacular, but for a deal that should close in roughly two or three months time that isn’t too bad. Couldn’t resist buying some shares.

Disclosure

Author is long Aratana

Argo Group announces result of tender offer

Argo Group announced today the results of the tender offer I talked about previously. As I sort of expected slash hoped, the tender offer was undersubscribed, and as a result the company is accepting all 8.1 million tendered shares at the 26p/share maximum. A great result since the stock was trading around 15/16p before the tender offer was announced. Even though the company bought the stock at a pretty decent premium, the tender offer was accretive to NCAV/share. The big question is whether or not I should try to re-initiate a position in the stock, or that I should be happy to have been able to exit without having to face the ridiculous bid/ask spread on the London AIM market. It’s still trading at a pretty sizable discount to NCAV, but at the same time insiders are also increasing their control of the company. Their stake jumped from 52.7% to 63.7%, and if they would exercise their options for 4.3 million shares they get to 74.8%. Having 75% of the votes is for example enough to delist a stock from the AIM market, so corporate governance, never Argo Group strongest point, might become even more a risk.

Because of the long holding period my annualized return on my Argo Group position, ignoring some opportunistic buys and sells I made throughout the years, is sort of disappointing. It’s certainly not terrible, but a 10.8% internal rate of return is also not great:

Date Description Cash flow
1/3/2012 Bought first shares -14.69p
6/20/2012 Dividend payment 1.3p
4/26/2013 Dividend payment 1.3p
4/8/2019 Expected result tender offer 26.0p
IRR: 10.83%

Disclosure

No position anymore as soon as Argo Group pays for my shares