Portfolio Update 7.31.21

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July 31, 2021

The VDL Portfolio as of 7.31.21…

VDL Portfolio

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There are plenty of new readers so I’ll kick this off with a reminder on how I group my investments — sort of a necessary read for any of the categories to make sense.

Q2 earnings have been rolling in for several positions and results have been good with most S&P companies reporting a surprise beat on revenue and earnings.

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For starters, my cash levels are down (less than 2%) as I’ve put some money to work over the past month, including topping up a few positions and adding a new one on 7/19 (the only notable heavy down day this month).

First were some of the exits:

  • TheMaven ($MVEN) — Against my better judgement, I’m selling this B Riley holding prematurely. It was a quick turn from January to July. They own some financial publications including TheStreet. Financials are not yet current (last reported through 9/30/20). B Riley and 180 Degree Capital ($TURN) are major shareholders and have board seats. Ultimately, it felt like the balance sheet was a bit of a mess, the financial statement progress was slow, and better opportunities have been surfacing.
  • Here’s an excerpt from 180 Degree Capital’s Q1 letter —

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  • Northrop Gumman ($NOC) — Maybe not a surprise as I sold Lockheed last month. Both of these defense players were small positions that had ~20% advances for me in 1H21. At ~$360/share, NOC still trades at less than 15x 2021 earnings guidance with decent growth prospects. They’ve also plowed roughly $4bn in divestiture proceeds into paying down debt and repurchasing stock this year. NOC is a nearly $60bn company — for those seeking a relatively stable and reasonably priced large cap stock, this is a good place to start…
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New positions have been adding up too…

  • Cleveland-Cliffs Inc ($CLF) — Steelmaker with an aggressive CEO. Wrote this up on a recent quick value post. Bought a toe-dip sized position at ~1.5% of the portfolio. It’s a levered company with the slew of acquisitions done over the past year but they are earning supernormal profits right now thanks to steel prices. The plan is to repay debt and get to zero net leverage within a 1-3 year timeframe. Even if steel prices return to normal it looks incredibly cheap… especially when compared to the well-run mini-mills Nucor and Steel Dynamics. Cliffs has an amazing competitive advantage in owning a reliable and cost advantaged feedstock for the steelmaking process.
  • Retail Value Inc ($RVI) — A few years ago there was a trend to shed Puerto Rico real estate assets from some of the smaller REITs, one of those was Retail Value Inc. It was intended to be a slow-moving liquidation… sell the assets, distribute the proceeds to shareholders, and wind the business down in an orderly manner. Just recently, RVI announced the pending sale of all PR properties which leaves the company with a big pile of cash, zero net debt, and 8 US strip center properties that are still generating earnings. It may not be a huge upside opportunity but if this PR sale goes through (a key risk), then RVI looks like a low-downside proposition with reasonable upside.
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  • Discovery Inc ($DISCK) — There was drama around the Archegos hedge fund collapse this year. It led to a massive run-up from $20 to $70 in Discovery and shares have since then settled in around $27. In May, AT&T and Discovery announced they would combine their media businesses (Time Warner and Discovery). I also own some AT&T ($T)… those shareholders will receive some stock in both the wireless business and the newly created media business. At $27, this stock trades at about 8x FCF with the pending merger looking like a big boost to future prospects.
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A revised look at the investment allocation by bucket:

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Core investments make up nearly half the portfolio and cash is down near 1% in total.

I’ll reserve a bit of space to talk about the core holdings specifically. These are the stocks that carry the major freight for me, I intend to hold onto them for a long period of time and let these management teams “go to work” with the cash flow from their businesses.

  1. Meredith Corp ($MDP) — As a quick reminder, Meredith has 2 business — TV stations and digital/print media — the TV stations are being sold to Gray Television for $2.83bn. Shareholders will get a special dividend of $16.99/share at closing and shares in the remaining digital/print media business (RemainCo). Based on current share price, RemainCo is valued pretty cheaply (< 6x EBITDA) with low leverage (2x net debt/EBITDA)… The digital side is growing rapidly and has just overtaken print in size; print is declining rapidly (mostly magazines).
  2. Viatris ($VTRS) — I may be overly attached to this one and the generic drug manufacturers in general. I’ll send an update once all 3 holdings have reported Q2 earnings ($OGN $TEVA $VTRS). Investor expectations in this business (and industry in general) are nonexistent with the stock trading at < 4x earnings / FCF. Leverage is in good shape following the merger with Pfizer off-patent portfolio. Earnings growth looks great over the next few years; all we need is management to execute the plan. Upside looks great with flat/modest multiple expansion; and if investor expectations flip to positive then the upside could be even greater.
  3. bebe ($BEBE) — This company is majority-owned and controlled by another holding of mine B Riley. They own a portfolio of brands, such as bebe and Brookstone, and collect licensing income from them. More recently, they acquired a franchise portfolio of 47 Buddy’s Home Furnishing rent-to-own locations (an industry that’s doing quite well right now). My estimates are north of $1/share in earnings with good growth prospects. At $5.35/share, the stock is a bargain.
  4. B Riley ($RILY) — Q2 results were great. I’ll soon be updating my estimates and sending out an update. Despite a massive run-up in share price over the past 2+ years, I completely trust management to continue building per-share value. As an aside, RILY holds stakes (and in some cases controlling stakes) in other public companies that I follow/invest in.
  5. Deluxe ($DLX) — Deluxe has quite a bit going on. It’s a case of good business / bad business — the bad business (manufacturing checks for banks) produces a ton of cash but is in decline. Over the years, they’ve built a solid services and software business serving small businesses through acquisitions. New management came in recently and has stopped the acquisitive growth in favor of traditional sales efforts. The stock is cheap at less than 10x earnings but they’ve recently made a large acquisition in the digital payments space which is taking leverage >4x EBITDA. Sales growth and execution are becoming increasingly important (though they are doing what they said they’d do!).
  6. Berry Global ($BERY) — Plastics manufacturer executing a levered acquisition strategy over the past 10 years. It’s a < $9bn market cap that should produce ~$1bn in FCF this year. Management is finally committing to keeping leverage down and utilizing cash for buybacks and other shareholder-friendly moves. Including 2021 guidance, they’ll generate >$4bn in cumulative FCF with virtually zero having been spent on share buybacks.
  7. Bristow Group ($VTOL) —Helicopter operator ERA Group merged with bankrupt Bristow Group to form the new and improved Bristow… Oil and gas markets (primary revenue source) have been tough on the business since 2015-2016 but management is top-notch in navigating these markets. They have plenty of turnaround opportunity left with the post-bankrupt Bristow and great cash flow.
  8. Rubicon Technology ($RBCN) — A bit of an unusual one, Rubicon is a cash shell. The stock trades below cash on the balance sheet. They have a very small operating business operating near breakeven lately. This was formerly in my “option” bucket but management and the board have been great stewards of cash/assets here which gave me confidence in the situation. I view it as a low-downside situation with plenty of upside optionality should they find an attractive business to acquire (or simply wind it all down and distribute cash to shareholders).

Most of these holdings of mine have underperformed since 1/1/2020 (pre-COVID timeframe) — not all were originally purchased on that date but my point is that they all still have yet to see their original thesis play out…

Core holding returns vs. S&P 500 since 1/1/20

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One-year returns are quite a bit better but some are still “in progress” — particularly Viatris!

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