Portfolio Update 1.31.22

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January 31, 2022

Portfolio update as of 1.31.22

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There were no changes to classifications of any holdings during the past month. The overall mix of holdings hasn’t changed much either with 8 Core positions making up 36% of the portfolio. The portfolio is essentially fully invested at the end of January.

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Portfolio activity…

  • ALJ Regional Holdings ($ALJJ) — New Position
  • sent out a write-up on this stock not long ago and just a few weeks later the company came out with another press release indicating another major asset sale. This could put net cash at $3+ per share vs. the current share price at $2… bit of a head scratcher but my guess is the market wants to know what the remaining business lines look like financially and what they plan to do with all that cash…

  • Charter Communications ($CHTR) — New Position
  • Shortly after my Quick Value post, I decided to purchase a small stake in Charter. It’s small at a ~1% position but may move up…

  • LendingClub ($LC) — New Position
  • Another small “trade” — I purchased shares after they reported “dismal” Q4 results. I use quotes because the report wasn’t all that bad. Shares got down to $15-16 and then settled in around $17-18. At a $1.8bn market cap, it trades at 13x earnings for a growing fintech business.

Portfolio commentary…

Going to spend some time on some “losers” this month — RILY is down 30% since the 12/31 portfolio update and CLF 20%… aside from those, several holdings are down significantly from my original purchase (discussed later).

I’ve discussed RILY on several occasions. What’s interest at a price near $60/share is that management recently set the base dividend bar at $4/share each year which equates to a 6.7% dividend yield today. On the latest earnings call, Bryant Riley outlined why they felt comfortable at the $4/share threshold and indicated the core recurring businesses could cover this even with a significant drop-off in capital markets activity. This is really interesting here since the near 7% dividend yield is what you’d expect from a stressed/distressed business! (a category RILY should not be lumped into.) So either the market is missing something or RILY’s core businesses are set to experience declines.

CLF is down partially on the news around new steel supply coming online. Particularly US Steel’s large newbuild plant. Part of the CLF bet is that they’re earning super-normal profits this year to help pay for the acquisition spree they recently went on.

I covered some of my theme’s on last month’s post but thought this chart on the merchant power plants was really great… From the recently spun-off Constellation Energy, which is already trading at a premium to the group, power plants are trading at absurd FCF levels in the high-teens / 20% neighborhood.

Power plants are comping against high-yield energy stocks. The market is pricing these businesses as pure merchant power sellers with very short duration cash flows. This is why I have ~11% of the portfolio allocated between VST and NRG.

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Several holdings are down considerably from my initial purchase(s) — TPB, DLX, T, NNBR, LSYN, QRTEA, etc. — I’m excluding the Option bucket since several of these have paid large dividends and I’m highlighting only the price returns…

I’m not much of a macro-driven investor but it’s hard to ignore the inflation/Fed data coming out. There’s an argument to be made that some of the inflation spike is COVID-driven but it’s hard to ignore harder to reverse changes like price hikes on goods & services and wage growth. So if we see tightening and rates rising heading into 2H22, that could be painful for buying 1) levered businesses; or 2) stocks that are cheap for cheapness’ sake. All of this to say — when it comes to the General bucket, my goal is to stick with mostly special situations where some idiosyncratic element is taking place…

  • TPB — This is a Core holding and I’m comfortable with the longer term growth outlook. I’m not completely convinced on the “other brands” approach to capital allocation but the ZigZag rolling papers business is a jewel that should grow nicely for many years with exposure to cannabis.
  • DLX — Deluxe was a Core holding and was relegated as new management started plowing all cash flow into growing the company organically + a major acquisition. The latest results were the first sign of progress in nearly 2 years and the outlook is for 8-10% top-line growth in 2022 despite a sub-10x earnings multiple.
  • T/DISCK — Management decided a spin-off was the route to go so shareholders will get a piece of both the wireless business and the media business. Plenty of pundits out there on this situation but it should work out just fine… The telco business historically has traded right near Verizon until they went the Directv/Time Warner path. Despite your views on the business quality for either Telco/Media, there will likely be a good trading opportunity when the spin takes place.
  • NNBR — Auto suppliers have been feeling some pain the past few years with production challenges, COVID, and chip shortages. NNBR also has a great industrial business not exposed to the auto market. I originally purchased this after the company went through a major balance sheet transformation taking leverage from 6x+ to 2.5x after an asset sale. Shares are now trading under 5x EBITDA and management plans for 10%+ growth over the next 4-5 years.
  • LSYN — This company finally won a legal battle dating back to their original spin-off that cancelled 7.5m of 34m shares outstanding (22%). They generate excellent cash flow and recently made a few acquisitions that should add to growth. The podcast market should have good growth characteristics for many years.
  • QRTEA — My original purchase was incentivized by the recent string of major dividends (in favor of buybacks); something I’m a big fan of. Since then, the company experienced a catastrophic fire at one of their fulfillment centers which is impacting sales/cash flow. On top of that, supply chain and an e-commerce slowdown are hurting the business. Significant leverage adds fuel to the fire… I made need to reassess this position…

Comments welcome on any of these positions. My hope is to adequately reassess positions that are down substantially and either add to them or move on. Of the names listed above, I feel comfortable with all but 1-2 of them… The old adage that losers average losers is always top of mind!