Portfolio Update 11.30.21

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November 30, 2021

Portfolio update as of 11.30.21

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For new subscribers…

Generally speaking, I bucket my holdings into 3 groups — Core, General, and Option. The percentage mix and bucket attributes are outlined below. You can read more about my bucket approach here.

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Portfolio activity…

  • Deutsche Bank ($DB) — New Position
  • Shares of DB have been weak long since the financial crisis ended. But the turnaround seems to be mid-innings (despite the share price reaction) and the stock remains incredibly cheap. Recently wrote this one up in a Quick Value post.

    This doesn’t need to be a complicated bet. The balance sheet is in good shape such that a capital raise isn’t necessary (thanks to robust investment banking environment!) and the 2022 guidance calls for 8% ROTE with the stock at <0.4x tangible book. Throw in capital returns starting again and that looks like a recipe for outperformance.

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  • Takeda Pharma ($TAK) — New Position
  • Another recent Quick Value post! I probably need a restraining order on pharma stocks but I couldn’t resist with this one.

    Takeda levered up to buy Shire Group (which had previously levered up to buy Baxalta, a spinoff from Baxter). Since then, Takeda has sold some assets and repaid debt. Today, they have low product dependency in future patent cliffs, an improved balance sheet, a nice dividend (6%+ yield), and a low valuation at ~8x earnings.

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  • Kyndryl Holdings ($KD) — New Position
  • Spin-off from IBM and a competitor to another holding of mine, DXC Technology. It’s not a great business, facing challenges from low cost outsourcing and software automation. Big companies just aren’t paying for traditional BPO services anymore.

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    Only a few weeks into the spin and performance has been a disaster already! Insiders have started to buy a few shares after prices have already tumbled more than 50% out of the spin. The pro-forma figures coming out of IBM are incredibly messy… On the surface it appears that KD trades at a low single digit multiple of EBITDA and FCF but those may be misleading from non-GAAP reconciliations. Management seems confident the add-backs are legitimate. A few quarters of in-line performance should help with a re-rate. This is a general and very clearly a short-term position for me.

Portfolio commentary…

Overall, cash balances in the portfolio are down as I’ve reinvested in a handful of Generals during the latest market selloff(s). The top of the list has changed very little and it’s been quite some time since there’s been an addition or deletion from the Core bucket.

My pharma positions are taking on water and fast…

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I felt all 3 of these companies had great Q3 results which increased my fair value estimates for each. The perception is that these are still very crummy businesses. My expectation is that 2022 will highlight shifting capital allocation priorities (more buybacks and dividends) along with good earnings growth.

As far as some other stocks are concerned…

  • BEBE made several recent announcements — increasing their dividend (~7% yield), refinancing high-yield debt, and another small acquisition of Buddy’s stores.
  • BERY had an activist get involved to suggest a sale of the company or a massive shift in capital allocation toward buying back stock.
  • RILY upped the regular dividend to $4/share per year for a 5%+ base dividend yield. They also pay frequent special dividends. Insiders (including the CEO) continue buying stock at prices north of $70/share.
  • RBCN has made no progress on using its large cash pile to make an acquisition but it still trades below net cash and tangible book value (and as such I view it as a defensive position)
  • VST and NRG are starting to shift capital allocation to buybacks — the former in very dramatic fashion
  • TPB now trades at ~12x earnings for a business growing 5-10% annually — it also represents my only exposure to the cannabis market…
  • T and DISCK have both performed terribly over the last 6 months — spin/merge between Warner and Discovery is on track for mid-2022 and the remainco wireless business looks attractive relative to VZ
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  • FRFHF is finally starting to notice its undervaluation with a $1bn tender offer to buyback shares — about 8% of the current $12bn market cap — and the stock is still trading well below book value in a strong insurance market
  • CVEO, VTOL, and MPC represent my energy exposure and each of them generate excellent cash flow, have good balance sheets, and are starting to return significant amounts of cash to shareholders
  • On the special situations front there are several holdings undergoing active change from post-bankruptcy reorg (GTX), activist pressure (TREC), spin-off (KD, OGN), major business unit sales (SPB, MPC)
  • On the turnaround front there are plenty of holdings at various stages of the process ranging from nearly complete (BW, DB, CLF, NNBR) to early innings (HALL, DXC).

On the whole, this portfolio trades for less than 9-10x free cash flow with the median holding having leverage of ~2.5x debt/EBITDA. There are certainly some levered positions in here but I rarely invest in a company without a plan for dramatic deleveraging.

It’s a statistically cheap portfolio with a bent toward special situations, deleveraging, and a few industry themes. Occasionally I’ll see an idea from another investor that intrigues me but for the most part I view this as a very different lineup from other investors / funds…