Portfolio Update 8.31.21

Period
August 31, 2021

Another month gone by and time for a portfolio update!

Here’s the portfolio as of 8.31.21:

VDL Portfolio

image

The portfolio is still mostly in Core positions (45% of total across 8 positions). With another large chunk in Generals (42%). A consistent sub-10% weighting in Options and 4% in cash.

image

An “average” position in a General is right around a 2% weight, an Option position under 1%, and a Core at 5-6% — just the distribution I’m looking for. My investing style is such that “Core” holdings are fewer and further apart than most investors believe.

I’m lucky to find 1-2 new Core holdings in a year. None have been added to this bucket so far in 2021. I’ve held most of my Core positions since 2018 with a few additions in 2019 and 2020. Some of the previous holdings are gone thanks to buyouts.

Activity during the month:

  • Qurate Retail ($QRTEA) — A John Malone / Liberty entity written up this month. It’s another cheap stock at less than 6x EBITDA and FCF. It’s a slower grower long-term. Two interesting changes of late — first, they’ve switched from plowing all FCF into buybacks in favor of a combination of large special dividends + buybacks (a capital allocation policy I’m fond of); second, Chairman Greg Maffei is in the process of buying out John Malone’s shares for $400m+ which would be a sizable bet on this company even for him.
  • No exited positions during August

Let me start by saying I love every stock / business in my portfolio right now. There is a wide mix of business type and capital allocation policy… All told, each position looks like 50% upside or more from current share prices.

Last month I dedicated some space to talk about each of the Core holdings. This month, I’ll talk through some investments I have in a few concentrated industries:

1) Pharma — 15.4% of portfolio value

$VTRS $OGN $TEVA

wrote about the “generics” stocks recently but that’s a bad headline for these businesses… They each generate 60% or less of revenue from generic sales. Each company is rapidly paying down debt, staring at earnings growth for the first time in years, and quite literally trade at the lowest valuations in the S&P 500.

They are a combined $38bn in market value with $56bn in debt, $7bn in annual FCF, and $13.8bn in EBITDA — 6.8x EBITDA / 4x leverage / 5.4x FCF. My view is that these positions each have >100% payoffs over the next 2-3 years (if not sooner).

Consensus believes they are levered businesses with secular challenges on pricing / competition. I believe revenue and cash flows are stable and growing (more so than the market anticipates). On top of that, a growth wave is coming this decade with a large group of blockbuster drugs coming off patent…

image

2) Energy — 10%

$VTOL $CVEO $MPC $VAL

Crude oil prices have erased the 2020/pandemic impact and are higher than 2019 prices… Despite that, shares of energy stocks are still way off 2018-2019 levels…

WTI spot (monthly) vs. $XLE energy sector ETF

image

Bristow (formerly Era Group) operates a helicopter fleet for transport to offshore rigs and Civeo operates lodges/accommodations services to remote oil/mining sites. Both are big cash generators on the cusp of wrapping a years-long effort to clean up their balance sheets. Now that they both have leverage in the 2-2.5x EBITDA range, they are turning to buybacks. A first time shift in capital allocation policy can be pretty exciting.

Marathon is more of an event-driven idea. They sold the Speedway gas station chain for $21bn and are now sitting on a huge pile of cash they plan to return to shareholders… $1bn shares already repurchased and another $9bn capital returns planned over 12-16 months.

image

At the same time, the core oil refining business is starting to rebound as cars hit the road again post-pandemic…

MPC segment financials

image

3) Media — 9.2%

$MDP $DISCK $T $LSYN

I took the net position size of Meredith for this one and backed out the upcoming special dividend.

Meredith is the big position here. And with the pending sale of TV stations, I’m optimistic the remaining print/digital media business will quickly turn into a cheap and growing business. Net of the $17/sh dividend, this is a $25 stock trading at < 6x EBITDA and 2x leverage. My guess is they’ll use cash flow for a combination of buybacks and smaller M&A to add to the growing digital business. This stub company could offer 15-20% returns annually.

AT&T and Discovery are a play on the same corporate event. The spin/merger of Warner Media and Discovery with AT&T’s wireless business becoming a separate public company. I think there’s a double play to be had here with the wireless business likely trading closer to Verizon and the Warner/Discovery media business becoming one of the higher-rated content businesses (with a robust collection of content assets).

4) Power Gen — 5.8%

$VST $NRG

I picked up both of these positions in ~June of this year following the heavy losses from Winter Storm Uri in Texas.

image

Vistra and NRG are very similar businesses — both are heavily exposed to Texas power generation (ERCOT) and the PJM markets. The Vistra ship took on more water from the storm and has yet to fully recover. Both companies are adamant this was a one-off event and fundamentals should recover in 2022 and beyond. There could absolutely be some residual effect from regulatory or extra capex to harden against future weather but those risks seem manageable.

NRG was a later add as it looks like a cleaner bet. They were less burned by Uri ($975m gross impact vs. $2bn at Vistra), they’re divesting the highly competitive PJM power generation assets, and have a cleaner balance sheet. Overall, NRG is shooting for $12.50 in FCF per share by 2025:

NRG investor day goals

image

5) Business Formation / Services — 5.6%

$DLX $HRB

There seems to be a shift toward smaller and nimbler entrepreneurial efforts with the rise of work from home, “side hustles,” and passive income. Just look at the spike in new business applications in 2020-2021… Even the “high-propensity” applications (those planning to have payroll) have jumped significantly…

Business formation stats August 2021

image

Deluxe provides a slew of services to small businesses from formation services, logo design, web hosting, outsourced payroll, and marketing. They have a large business making physical checks which is declining ~5% per year but generates excellent cash they are deploying back into the growing small business services.

H&R Block is a well-known tax preparer with a large retail footprint. Calendar 2020 and 2021 were weird years with a shift in the tax deadlines. But the pandemic has and should continue to provide a boost to tax prep and planning given the stimulus/unemployment complications. Overall, 2020 had a jump in individual returns filed but an overall decline in returns filed (business closures most likely).

Tax returns filed by type 2019-2020

image

H&R is trying to break into the small business tax and accounting arena to compete with Intuit/QuickBooks. They acquired Wave, a free software similar to QuickBooks with payroll and payment services. Now they want to work with small businesses for tax returns, bookkeeping, and other advisory work. A great way to utilize the massive retail footprint throughout the country.