Off the bat I’m going to acknowledge that it feels quite silly to be writing about my portfolio at a time like this. I, perhaps like you, live in a city that has been impacted by the protests surrounding George Floyd’s death and the larger BLM movement. For some communities and people, the gravity of these events is evident. So, it seems trite to spend energy thinking and writing about my insignificant portfolio holdings against that backdrop. Nonetheless, I hope it helps both you and me get our minds off of these weighty issues for a moment.
This will be the third month in a row that I have written a portfolio update, which was not really part of my plan for this blog. I never intended to talk about each month’s performance or changes in holdings this much as it doesn’t really mesh with my long-term perspective. Ultimately, the monthly and quarterly performance are noise and should carry little weight, but I think these posts are more entertaining because of the portfolio changes. The turbulent times we are currently navigating are creating more changes in the portfolio than I would otherwise be apt to implement. So, I guess my point is: I don’t intend to write an update each month moving forward, only when I feel there have been a number of interesting developments.
Holdings and performance have been updated through May on the Portfolio page.
YTD the portfolio has done very well relative to the Russell 2000 and Russell Microcap benchmarks (-6.4% vs -15.9% & -16.6%). Although, I would like to point out (as I did last month) that this was largely because of my sizable cash allocation through most of March and April. If I had been fully invested at the time I suspect my performance would be as bad or worse than the benchmarks.
Constellation (CNSWF +17.7%), MSG Networks (MSGN +12%), and Gravity (GRVY +33%) carried the portfolio. Constellation had their AGM and announced decent quarterly results at the beginning of the month, but more importantly announced that their TSS operating group will be merging with Topicus.com which is a Netherlands-based VMS firm. Of more significance was their declaration of their intent to IPO the new entity in the future. This is an interesting development and, I believe, spurred the stock to new ATHs. As for MSGN, I think that their shares have been rising as it becomes clearer that the NBA will be returning to action to finish their season in some fashion, thus improving the short term prospects for the company. Gravity rallied into a solid earnings release at the end of the month and popped about 15% on the release date alone (5/29/20).
There was a flurry of activity on 5/29 and 6/1, so on the Portfolio page I have updated the holdings through the 6/1 market close (in order to capture the new holdings) rather than the month end holdings as I normally do. Here were the changes for the month:
- Bought Dream Unlimited (DRUNF): Dream is a Toronto-based real estate investment and development firm. In addition to managing several Dream-branded REITs, they also have both residential and commercial assets in various stages of development across western Canada, Ottawa, and Toronto. Dream suffered a 45% or so drawdown this year along with every other real estate-related business. Dream’s track record is compelling, leverage is reasonable, the P/B is attractive (.5x), insiders have skin in the game, and ultimately I’m betting the market has overreacted to COVID’s impact on real estate. I put this in at a 7% position and have mentally categorized it as deep value. Hopefully I will have a more complete write up on this soon.
- Bought Fitbit (FIT): This is another arbitrage play to go along with my Wright (WMGI) position. Google agreed to a $2B ($7.35/share) all cash acquisition of the floundering wearables company in November of last year. Like all other merger arb positions, the spread blew way out as COVID rocked markets and arbs unwound positions but has bounced back and normalized somewhat. There are still a number of questions around the viability of the deal from a regulatory perspective, but I felt that the 16% spread was enough to warrant a small (3%) position in my special situations bucket. I never wrote up the Wright position either, so maybe I will do a combined post on the two. I really like these arbitrage plays in this environment, I would love to add more.
- Trimmed Gravity (GRVY): The South Korean mobile/desktop game publisher has been on a tear lately. Through 5/31 they are up 35% YTD. I don’t usually trim positions – I tend to be either all in or all out. But GRVY had become about a 16% position by the time I trimmed it (selling into the rally on 5/29 when the earnings report came out). While I like Gravity alot, my thesis was mostly based on the fact that they were very cheap and control underappreciated assets (the Ragnarok franchise), not that the business was particularly high-quality. Quite the contrary, I think games publishing (especially mobile and MMO style games) is a very difficult business. So, I was getting a little uncomfortable with the size and decided to take some chips off the table and cut the position back to about half the weight. Even at these levels shares look underpriced and I still see plenty of upside, but I wanted to take some of the risk off.
- Exited NIC (EGOV): This one really hurt. EGOV was the first position I put into this portfolio and was my baby from the beginning. I absolutely love the business model: they build web portals for state and local governments so that citizens can renew drivers’ licenses, auto tags, hunting/fishing licenses, etc. completely online. It’s a sleepy little business that yields steady growth and proved very resilient through this year’s drawdown in equities. I like the low-key nature of management and the business itself (tech company located in Kansas). However, the valuations have gotten pretty stretched in my opinion – a 33x TTM P/E is a little rich for me despite my love for the company. I still think there’s modest, but dependable fundamentals growth from here but I don’t know that the valuation can hold. Although I think it will take a calamity to get back to the valuation levels I originally got in at, I will definitely be keeping an eye on this one for another entry point down the road.
Well there you have it. Those are the big developments. Looking forward, I’m not seeing a ton of interesting opportunities right now. I’ve been trying to get out of my comfort zone a little – I did a ton of work on a tiny mortgage REIT that I really liked. Unfortunately the price ran on me before I could get in, so it might have been for naught. I would love to find more special situations; things that might be less exposed to market gyrations. I still don’t know that I believe in this rally – I’m not sure that we’ve completely digested COVID and the markets haven’t batted an eye at widespread civil unrest. I try not too put too much weight on macro events like that, but it feels good to have about 18% of the portfolio in cash right now. Anyway, thanks for reading and best of luck to you out there.
Sawbuckd
Sawbuckd 