Portfolio Change Update
March 28, 2018
Purchased SandRidge Energy (SD):
- Produce oil & gas, primarily in Oklahoma
- Evaluating Midstates Petroleum when Midstates made an all stock offer for SandRidge Energy
- SandRidge terminated CEO after Midstates offer
- Notorious activist investor, Carl Icahn, owns meaningful SandRidge position and vocally unhappy with SandRidge
- SandRidge and Midstates both trading at less than 4x cash flow
- After evaluation concluded SandRidge will likely be sold and Midstates is most synergistic buyer
- Therefore, purchased SandRidge to effectively buy Midstates at what will likely be a discount, if Midstates is the ultimate acquirer
- If Midstates isn’t ultimate buyer, likely benefit from another firm paying much higher price
Added to Apogee Enterprises (APOG):
- Leading commercial glass coater and framing systems manufacturer
- Investors impatient with financial challenges at recent acquisitions
- Betting management will be able to turn strategic acquisitions to financial accretion and growth
- Expect service backlog will lead to installation business rebounding
- Margins forecasted to expand over time
- Expansion into mid-height buildings should significantly increase available market
- Geographic expansion could provide a multi-year runway for growth
- Trading at less than 13x coming year’s expected earnings
- Completed second round buy to reach normal weighting
Added to Atlas Financial (AFH):
- Specialty commercial vehicle insurer
- Announced large reserve increase required
- Stock price plummeted
- Strong belief in management team
- Trading at less than 6x management’s guidance for 2018 earnings
- Raised weighting to one of top 10 positions in portfolio post drop
Added to Steelcase, Inc. (SCS):
- Leading office furniture designer and manufacturer
- Share price rose after initial purchase
- Then drifted with market gyrations
- Used lower price to finish purchasing a full weighting
Added to Super Micro Computer (SMCI):
- Developer of computer server technology and applications
- Revenues exceeding expectations
- Yet, earnings under pressure due to increasing memory prices
- Consequently, stock price under pressure and trading near 11x this year’s earning’s estimates
- Believe margin squeeze is temporary
- Plus, industry at beginning of upgrade cycle
- Increased holding to above average weighting
Added to ZAGG, Inc. (ZAGG):
- Design and market mobile device accessories
- Trimmed company last year after stock price ran up
- Stock price fell this year
- Used weakness to rebuild position
- Stock price fell further and now trading less than 10x this year’s earning’s estimates
Sold Liberty Tax (TAX):
- Nationwide franchisor and operator of tax preparation offices
- Not comfortable with founder reshuffling board of directors
- Several long-standing board members quite board in protest
- As a result, accounting audit firm resigned
- New board of directors fired CEO who was brought in to succeed founder
- Although shares appear inexpensive, no confidence in direction of leadership
- Therefore, shares sold
Sold Navigant Consulting (NCI):
- Leading consulting firm
- Share price rallied since added to holding last fall
- Fourth quarter earning did not rebound as anticipated
- Relaxed Federal regulatory environment reducing demand for Navigant’s services
- Yet, share price held up – likely due to an activist investor saber rattling
- Sold company with belief business fundamentals do not support share price
- Like management and happy to own company in future with lower price and improved fundamentals
Sold Vonage (VG):
- Provider of voice over IP services, also known as VOIP, to business and residential clients
- Management masterfully executing plan to improve business mix and growth rate
- Stock price rallied strongly following benefits from strategic, revolutionary acquisition
- Valuation reflecting lots of good news and future growth
- Therefore, shares sold to use cash for less expensive alternatives
Trimmed Regional Management (RM):
- Installment loan lender to underbanked consumers
- Management doing good job building foundation for future growth
- Investors recognizing quality execution
- Significant beneficiary of corporate tax rate reduction
- Share price up more than 50% over last 12 months
- Grew to one of largest weightings in portfolio
- Used large weighting to generate needed cash for purchases above
- Still, one of top five weightings in portfolio