Here’s the portfolio as of 9.30.21:
Again, I manage my portfolio in 3 distinct buckets with different characteristics. In total, there were 42 positions (including cash) at the end of September with an average position size of 2.4%.
This breakdown is virtually unchanged from the last month. I trimmed a few positions and swapped 2 out for new names.
Maybe I’m reading into things too much but I’m a bit fearful on both the inflation and supply chain front (who isn’t). Quick background — I run a few e-commerce businesses as a full-time endeavor and supply chain is causing massive problems for our business. Everyone has probably seen the headlines about the cost of a container rising 5-fold over the past 12-18 months… We’re at a point where in some cases, the freight is more expensive than the cost of the product in the container! On top of that, our vendors and suppliers are pushing through enormous price increases. Soon, we’ll have no choice but to follow suit and raise prices to our customers. In the meantime our margins are suffering. I see all of this happening and wonder how most companies will see large earnings growth this fall / next year?
Per FactSet, S&P 500 anticipates 10% YoY earnings growth in FY22 and 20% YoY earnings growth in 4Q21… That seems like a stretch to me…
On the negative side of the equation:
- Inflation and prices are running high
- Supply chain is likely crimping margins
- Labor shortages and wage increases also hurting margins
- Valuations are high
Counter to this, several things present risks to the upside:
- Consumer spending is growing fast
- Money supply is still loose
- Consumer and corporate balance sheets are in good shape
Overall, I feel like my portfolio is fairly well positioned with several businesses insulated from the supply chain issues but others exposed to it + the labor issues. Most of my holdings have “things going on” irrespective of macro activity — like a sale of a major division (MPC, SPB), pending M&A (T, DISCK, MDP), or industry growth.
In aggregate, my holdings are trading at less than 10x earnings and less than 10x free cash flow. Each company should see earnings growth in 2022. Some of the Option positions are balance sheet plays trading at 30% or more discounts to book value.
Activity during the month — there are 2 new positions and 2 exited positions.
- Fairfax Financial ($FRFHF) — Insurance HoldCo led by Prem Watsa. Trades at a sizable discount to book value. I pegged book value around $570/share in my latest post and the stock price has fallen a bit further since then to ~$390 = 0.68x P/B. Historically, shares have traded at a premium to book value. P&C insurance has had a tough stretch the past few years but markets are starting to harden and earnings are on the upswing. In addition, Fairfax is seeing solid growth in their investment portfolio. Book value should be on the rise over the next few quarters and the discount should close.
- Spectrum Brand Holdings ($SPB) — Spectrum announced in early September they’re selling their hardware division for $4.3bn / 14x EBITDA. RemainCo will have a large net cash position of ~$800m and trades at 8-9x EBITDA. Management has signaled they’ll be returning large sums of cash to shareholders (much like the Marathon Petroleum situation). This one may not have enormous upside but the balance sheet is now defensive with major capital returns coming; plus, these are pretty stable businesses remaining.
Exits during the month:
- H&R Block ($HRB) — I know I just recently talked this one up… Last I wrote it up in detail, I highlighted the decline of the retail tax store and HRB’s push into new offerings for small businesses (Wave, banking, advisory, etc.).
- Valaris ($VAL) — Valaris is the post-bankruptcy reorganized merger between Ensco and Rowan (they own and operate offshore oil rigs). Bankruptcy left them with the cleanest balance sheet in the business by a mile (net cash position). Originally purchased this in June of 2021; sold my shares for a quick 21% gain. Finding some cheaper stocks going into Q4 and wanted to rotate into some other names. As for energy holdings, I like my positions in CVEO, VTOL, and MPC best.
When I first started buying in August 2020, I was confident shares would get back to the 2016-2019 range of $25-30/share. High unemployment and a weird tax deadline change had obscured earnings in 2020/2021. Shares have since climbed 60-70% to $25-26 and though they still look cheap at less than 10x earnings, they are still facing the same challenges in retail tax stores. I’ll continue to watch this one.
Shares of $MDP popped 30%+ late in Q3 from $42 to $56…
Rumors are swirling that Meredith ($MDP) is set to be acquired by $IAC for ~$2.5bn (excluding the TV station sale). Depending on where net debt shakes out, that could be ~$58/share. I haven’t sold any shares yet. Was really hoping this would be the center of my portfolio following the sale of the TV division so the news is a bit of a bummer… I’ll have to find a new home for a large portion of my portfolio. I’m going to wait this out and see what the deal announcement looks like (fingers crossed for a merge/spin!). At $56/share, I have the stub digital portion of $MDP trading at ~8x EBITDA with low leverage. If they aren’t acquired by IAC, my guess is they’ll earmark a big chunk of cash flow for acquisitions to grow the digital business a bit faster.
Right or wrong, I’m waiting for an official deal announcement to take action here.