All that glitters is not gold.
Sometimes glitter takes me for money; sometimes it takes me for opportunity.
What’s up in my portfolio
Those of you who have followed this blog for any length of time know that I’m not too peculiar about where I invest. In 2011, I had virtually all of my portfolio in four micro and small cap companies no larger than $300 million. All but one ended in very favorable acquisitions. In 2012, I went larger cap, seeing opportunities in automakers, offshore rigs, dead animals, and Adams Golf, the only company to appear twice. That mix also proved to be very profitable. I crushed it in tiny names in 2010, raking in 70% total returns. Then 2012 was excellent, reaping the benefits of options on RIG, a buyout of Adams Golf, and a rising Darling International, which I cut earlier in that year at my $18 target.
In 2013, I went with a business development company, a nanocap cashbox, and a shipbuilder. Oh, and the S&P 500, because I lacked any other really good ideas.
So that’s the history. In general, about 90% of my portfolio is invested in my annual top picks each year. I do the Greenblatt thing, for those of you familiar with his “magic formula,” holding most for just over one year in an ideal world.
Some losers and dead money
Ford
Two years ago I said that I was going long Ford in a series that played out for far, far too long. I (foolishly, in retrospect) bought downside protection by going in long-dated calls (LEAPS) and getting eaten alive by decay.
After rolling that position over once, I made out with a profit that only barely exceeded the broad market during the same period while accepting FAR MORE risk because I bought options.
Looking back, I’m not quite sure what got into me. That position was dumped in the past week, and I’m not too happy with it. I dumped it in large part because I didn’t want exposure to large caps given the stock market’s recent rally, but the thesis I originally thought would and should play out has been (finally) adopted by institutional investors, who underowned the stock for much of the recent past. (One automotive analyst complained through the years that no one wanted to talk to him, an indication that institutional investors had no interest in buying autos.)
So, while Ford’s rallying, I have no exposure. Sweet! End result: slightly above-market return for substantially above-market risks.
Apache
I’m nearing a year of holding a small part of my portfolio in Apache, an “acquire and exploit” oil and gas company with assets all around the world. I was sucked in last summer, and the results have been less than impressive.
I’m breaking even on it while the market is up more than 20% in the same time.
I still think it’s a relative value in part because its risky assets overseas (Egypt) are underappreciated by Wall Street, and management has been slow to respond to shareholder concerns. Management outlined a plan that would have the company selling assets to repay debt (capex has exceeded cash flow in a rare event for the company) and repurchase as much as 7.6% of outstanding shares. I like the idea of selling assets to repurchase shares, since the company can essentially sell X barrels of oil and oil equivalents and repurchase X*2 or 3 barrels of oil equivalent thanks to the fact Apache stock is cheaper than the sum of its parts.
I’m still holding on. I like to have some exposure to energy as a general rule (though I don’t always follow through with that), and this is my pick. It also, somewhat, counterbalances the risk to Conrad Industries in that it would benefit from new oil pipelines whereas Conrad would lose some new ship construction business. Apache previously served as a hedge for Darling International, which uses natural gas as a key input.
Learning lessons
Looking back through all my positions, I realize something that is very clear: large caps aren’t my thing. I’ve known that for awhile.
I can get very impatient. I’m especially impatient when things aren’t going my way. For example, all the while Ford’s business was improving, general periods of weakness in the broad market lead to crushed stock prices. No matter how cheap it became, no big investors seemed interested in owning it. Now they want it – and I don’t own it. Woe is me!
Also, options. I just shouldn’t. I accept my hypocrite crown for believing that in the short-term the stock market “behaves like a voting machine, but in the long term it acts like a weighing machine” yet purchasing time-limited options, in effect saying that I don’t care to wait.
I tend not to get so impatient with smaller companies. It is possible to know tiny companies much better than the market. Whether or not I do is up for debate, but of course, when I can buy a company for less than its net working capital, I’m confident I’m doing the right thing. Same thing goes for single digit EV/EBITDA industrial names, or companies trading with earnings and free cash flow yields well above 10%. I (generally) only find such opportunities in very small companies.
My goal is to stay in a fully-invested, concentrated portfolio of companies that, I believe, trade at a substantial discount to the market. The ideal company also has a potential suitor interested in an acquisition. Over time, that has been a winning strategy. I see no reason why that should change.
Luckily, my biggest losers and dead money have been only small parts of my portfolio since I don’t really like large caps, but they occasionally lure me in with the promise of opportunity. That’s the upside.
You can’t win all the time, though I wish I could. What I can do, though, is learn from the investments that slap me across the face every once in awhile. As Buffett says, “If every shot you hit in golf was a hole-in-one, you’d lose interest. You gotta hit a few in the woods.”
