Q2 Update Stock Picking Contest

by JT McGee

With volatility in the markets comes some underperforming assets in the second quarter of the annual stock picking contest at Financial Uproar.

The performance of my four stock portfolio is still well ahead of the overall market averages, however.

Selected updates

  • Conrad Industries – Up 54.7% this year, it is by-far the leader of the portfolio. Conrad Industries builds and repairs vessels, primarily barges, which move everything from coal, to corn, to oil down America’s waterways. The company is exceptionally well-managed (the controlling family owns a majority of shares outstanding) yet trades at substantial discounts to the market based on EV/EBITDA multiples. Given that this is basically family owned, I see no reason for the firm to be discounted so heavily, since the family has incentive to make good capital allocation decisions. That flies in the face of conventional wisdom (a majority shareholder holds all the voting power) but the company’s history shows the family has every intention to work for the interests of minority shareholders. A large-scale share repurchase authorization was approved in the first quarter of 2013, and given that no capital has been deployed, I suspect managers are waiting to receive funds from a BP Disaster claim or a plunge in the share price to make aggressive purchases of stock on the open market. This is a buy and hold position for me, due to the company’s impressive ROICs and the fact I think this could be a buyout candidate, perhaps one led by management.
  • S&P 500 index – Up 13.5% dividends included, this is beating my other two picks for the time being, unfortunately.
  • Solitron Devices – Up 11.58%, this is a cash box that just had its first annual meeting in decades, I believe there’s room for a massive special dividend later this year. The 13-D shareholders will likely push harder for it to return its cash hoard to shareholders. I’m waiting for activism to play out, since the company’s market cap is essentially equal to cash on hand, which values the profitable business on top at $0. This is one of the dangers of net-net, pawn star investing. The cash is there; the variable is when it is paid to shareholders.
  • American Capital Ltd – Up a modest 5.24% after a quick start to 2013. This business development company is an outcast of its peers. It does not pay dividends, instead choosing to deploy cash to reduce leverage and repurchase shares, currently at a pace of about 13% of the share count each year. If it were to continue to repurchase shares at the same rate, each share would have claim to 14.9% more of the company each subsequent year (1/.87). So what’s sending ACAS lower? A culmination of things. First, its management fees from AGNC and MTGE are certain to decline as book values drop for both levered mREITs. Secondly, BDCs as a whole are getting creamed because of their exposure to mezzanine debt (junk financing, basically) as investors worry about the quantity of loanable funds should Bernanke pull out of the debt markets. (BDCs followed the rally in junk bonds, and the subsequent fall. The JNK and HYG ETFs are a good proxy for junk bond values.) American Capital is primarily an equity BDC, however, at nearly a 70/30 split of equity/debt investments, so its portfolio is vastly different than other debt heavy BDCs. I’ll continue to hold, since ACAS trades at a discount to its reported net asset value, and because the repurchases are immensely valuable for existing shareholders. One brightspot: American Capital is the best performing company of the major BDCs this year.

Commentary

This year is no different than years previous. One star stock leads the pack to boost total performance. That stock tends to be a small cap net-net or low EV/EBITDA name for the three years that I have participated in stock picking competitions on the blog.

YTD Returns: 21.85% vs. 12% for the S&P 500. If results hold, this would be the third straight market-beating year. Fingers crossed.

The goal of my portfolio is to beat the S&P 500 on a total returns basis. I don’t take into consideration relative volatility (beta), since I think it’s mostly unimportant insofar as determining the value of a business to a private owner. If you care about beta, you care about what other people think, and following that logic you should just invest in an index fund.

Disclosure: I and members of my family own CNRD, SODI, and ACAS. No position in SPY. I’m not a financial advisor, nor would any financial advisor approve of a concentrated portfolio like this. Do your own due diligence before investing in ANYTHING.

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