Portfolio Update 12.31.21

December 31, 2021

Portfolio update as of 12.31.21


There were a few minor reclassifications among the buckets this month. Franchise Group ($FRG) and Turning Point Brands ($TPB) moved into the Core bucket and Deluxe ($DLX) moved into the Generals.

DLX is (and has been) on a short leash lately. Quick reminder — new management came in from First Data with a plan to return to organic growth in lieu of an acquisition strategy. This resulted in both opex and capex investments into the business and cash flow has declined. The pandemic hit which slowed progress on sales wins. All the while, they acquired an attractive business at a high multiple with a lot of debt. This is leaving me skeptical that the plan is going to work out… I’m watching over the next 2-3 quarters to make sure things are moving in the right direction. If not, it will have destroyed a lot of value from what this business was under prior management.

Onto TPB — I view this as my singular exposure to the cannabis market with their ownership of the ZigZag rolling papers brand. This business has a long history of stability, margins, and cash flow (even prior to its life as a public company). Management has taken a slow and steady approach to turning that cash flow into more cash flow through a “collection of brands” strategy. There’s a long runway here for both organic growth (shift from tobacco to cannabis) and inorganic growth. And it comes with one of my favorite setups — cash flow has grown over the past 5 years while price/cash flow multiple has contracted.

Lastly is FRG — My initial hesitation to throw this one into the Core category was driven by the type of businesses they own — rent-to-own, low-income retail, mattresses, furniture, etc. These are generally low-multiple businesses. But CEO Brian Kahn reminds me too much of Bryant Riley (they even have close ties). The stock has had quite a run over the past 2 years but still trades at ~10x earnings with reasonable leverage. There’s an excellent chance that Kahn and team will continue to build value through acquisition in the coming years.


Portfolio activity…

  • Knot Offshore Partners ($KNOP) — New Position
  • recently wrote about this position. It’s cheap on earnings with a remarkably stable business and an excellent management team. Despite its stability, there’s confusion around the business (energy-related) and structure (LP, but not) which has offered up some buying opportunities over the years. Perhaps arbitrary but management has drawn a line in the sand with $20/share being the point they’d consider issuing equity to grow the business. At a recent $13/share, it was a sufficient discount to that bogey. Though it’s a good business, it’s better suited as a General. The drop-down structure and leverage make it vulnerable in a sell-off and tied to equity capital markets for growth (no/little retained earnings). The dividend at $2.08/share pays out close to 16%… if a year goes buy and shares tread water, I’ll likely take the dividend return and bolt.

  • ODP Corp ($ODP) — New Position
  • Another recent write-up. A big portion of my watchlist has turned into spin-offs or major divestitures. Despite the crummy underlying business of Office Depot, this is a very interesting setup. It’s likely they’ll spin or sell the Retail segment for somewhere in the $700m to $1bn range and have a pile of cash and a profitable B2B business remaining. Management is turning aggressive with increasingly large share buybacks amounting to ~30% of the market cap.

  • GreenFirst Forest Products ($ICLTF) — New Position
  • Admittedly, this is a speculative position with little research having been done so far. I picked up a few shares after reading about a continued uptick in lumber prices. Shares of ICLTF haven’t budged after a massive run-up following the acquisition of some Rayonier lumber assets.

  • Yellow Media ($Y.TO) — Exited
  • It was a quick 18% return since March 2021. When I first bought shares, I acknowledged it was a cheap stock with a declining business (10-15% per year) shifting to a big net cash position and kicking off a capital return program. Shortly after repaying all debt, they started a small buyback program but nothing aggressive. The next quarter came and they had repurchased a paltry amount of stock so it was pretty clear heavy buybacks / capital returns weren’t going to be a big part of the plan.

  • Saga Communications ($SGA) — Exited
  • Another one with a quick 12% return since April 2021. Saga is still quite cheap, has a great balance sheet, and is not in secular decline! It still trades at close to 4x EV/OCF. And cash flow remains at only ~75% of pre-pandemic levels. Since this is an insider-controlled company and low float, they’ve tended to favor dividends over buybacks historically. The dividend was cut in half during the pandemic but just recently they declared a special dividend; so things may be getting closer to “business as usual” for this little radio station operator.

Portfolio commentary…

My portfolio has a few “themes” to it. Probably a few “reopening” positions as well that I’m overlooking… The following buckets make up ~55% of the portfolio.


The merchant power plants (VST and NRG) trade at lower valuations of operating cash flow than even the coal miners do! There’s a general fear that power plants using fossil fuels are a goner and that might eventually be the case. The earnings streams are sturdier than the market anticipates and winter storm Uri offered up a good entry point for both of these stocks. The reason to continue owning them after a period of hard-hit Uri earnings is the aggressiveness of each management team in recognizing the valuation gap.

A competitor is soon coming to market in Exelon’s merchant generation business spin-off, Constellation Energy. It has almost zero fossil fuel exposure (mostly nuclear generation) and plans to have a cleaner balance sheet. If the valuation gets lumped in with the rest of the group, it may be a very interesting stock.

$NRG was recently listed on B of A’s Value 10 and Growth 10 screener:


It continues to be a painful ride with the generics / off-patent pharma stocks. I’ve been following the pharma sector closely and there are plenty of great opportunities out there, big and small. Novartis announced a strategic review for their generics business, Sandoz, which is a ~$9bn revenue company. There was a tidbit from that call that highlights one of my main attractions to the Gx space — a supercycle of blockbuster drugs coming off patent in the next decade:


My energy bucket is part laziness. I like my core positions despite having any view on commodity prices. They all generate good cash flow and I trust management in using that cash wisely. This was a case of independently finding companies that met my criteria for cash flow generation, balance sheet, management, capital allocation, valuation and simply happened to fall in the energy sector… As a bonus, it turns out the macro theme is an additive to my holdings. Energy stocks were some of the strongest performers over the past year but still lag oil prices over the last 3 year period… Supplies and capex are being restricted industrywide in favor of capital returns which would be a net positive for commodity prices. My holdings performed extremely well during the low points of the latest cycle and have little optimism built in for a higher-priced environment.


On the automotive side… I’ve been tracking a few cheap stocks that have been hit particularly hard by automaker plant shutdowns and chip shortages… several of these businesses are poised to bounce back in 2022 and should see a nice re-rate. My 2 holdings in this industry are unique, one recently emerged from bankruptcy and is working through some non-fundamental issues (GTX) and the other recently underwent a massive deleveraging event (from 6x+ debt/EBITDA to ~2x) and has a very strong non-automotive business unit that is performing well (NNBR)

My financials are really more like insurance holdings and then B Riley. The insurance market is fascinating with plenty of stocks looking beaten up in 2020-2021. Nearly every insurance company on the planet is talking about hardening rates and the need for adequate returns on capital. With prices rising, underwriting earnings are on the rise too. The downfall is that with rates so low, insurers will have to work harder to generate investment income from their balance sheets; and that may mean increased leverage (assets to equity).