2020 Year End Update Extravaganza

Happy New Year to all – I hope that your 2021 is off to a great start and treating you better than 2020. As I mentioned on Twitter towards the end of the year, the last month or two of 2020 were very quiet for the blog and portfolio. I was swamped with work at my day job and trying to enjoy what little free time I had during the holidays. Now that I’ve had a bit of a breather, I am refreshed and ready to get 2021 kicked off.

I am a little late getting this update out so, much like your gluttonous eating habits over the holiday season, I suspect you have already gorged yourself on a buffet of vague market platitudes and are leery of another heaping helping of hindsight bias as has been offered on Fintwit. So I will skip the rambling commentary and get right to the specifics. I’ll talk a little about performance and then give a brief update on each position in the portfolio. I also want to discuss some of my bigger blunders this year, so we will cover that towards the end.

If you haven’t already, be sure to check out the portfolio page, which has been updated through 12/31. I closed the year out at +51% for 2020, which is pretty hard to believe given the course of events that unfolded. Despite the eye popping numbers coming out of some corners of Fintwit (looking at you, SAAS guys), I am extremely pleased with this outcome. The year started a little wobbly with Q1 escalating into a full blown crash by the end of March. The few percentage points of outperformance during this period were mostly because I wasn’t fully invested – had I been fully deployed I don’t expect I would have faired any better than the R2000 or RMicrocap. A ton of the performance this year was driven by two stocks, which I have covered on the blog before: Gravity (GRVY) and Collector’s Universe (CLCT). Performance over the summer was especially strong as both of these position really started to take off and continued to hold strong through the end of the year.

Next, I thought I would give a very brief update on each position in the portfolio. If there is a corresponding write-up I will be sure to link to it below. I generally write names up as I put them into the portfolio, but there are several that do not currently have full  write ups – one of my projects for 2021 is to remedy this. I am also going to sort names by which of the 3 portfolio “buckets” they fall into. If you want more info on how I think about the different sections of the portfolio and my general investment philosophy, check out this post.

Special Situations (target % = 10-20%, current % = 6%):

Rubicon Technology (RBCN): So far, so good with RBCN. There’s not much to update here outside of what I have already written on the blog.

Cellular Biomedicine Group (CBMG): CBMG is small merger arb position that I haven’t gotten around to writing up in the blog. This is a management buyout situation with some outside private equity fund involvement. Management has been trying to pull together a deal for over a year now and seems to be pretty close as they have a special shareholder meeting lined up for February 8th to vote on the current $19.75/share offer. If all goes according to plan, CBMG will return about 15% from my entry price in mid-November.

PDL BioPharma (PDLI): H/T to @AlphaVulture on this liquidation situation. I would have never found this or invested had it not been for their great write up on the situation. [Full disclosure: at this point the stock doesn’t trade anymore as the company is liquidating, but I still recommend reading AV’s write up for the though process and analysis.]

Mean Reversion/Deep Value (target % = 40-60%, current % = 57%):

MSG Networks (MSGN): MSGN has been an interesting ride. My largest tranche of capital was invested in December 2019 with two smaller additions in January and February of 2020. Although I am now approaching break even on the total position, I could have had the shares at a much cheaper price shortly after I stopped buying, when COVID hit. This was one that I really wanted to add to during the COVID drawdown but I had already hit my personal limit for averaging down. In my short time as a shareholder, MSGN has continued to do dumb Dolan stuff like add James’ son (also a musician) Aidan to the BoD. Despite this, I still think this is an incredibly attractive situation. The company trades at a mid-single digit trailing P/E, they continue to pay down debt and buy back stock, and here in the early days of 2021 there have already been serious rumblings of legalizing sports gambling in NY which could be a meaningful tailwind for the business.

Ituran Location & Control (ITRN): ITRN is probably the name I feel the least confident about. COVID has been difficult on the business as people across the globe have been travelling less and therefore providing less demand for the company’s telematics products/services. Their international operating results, particularly in Brazil and their recently acquired Mexico venture, have been disappointing. I think there’s a lot to be optimistic about here: they are adding new product lines (like telematics integrated with auto insurer’s offerings), they are exploring exciting new markets (JV in India), and there is potential for substantial re-rating of the business as the Latin American economies normalize and their Mexican JV integration begins to bear fruit. If I had to choose a name that was closest to being sold in the portfolio, ITRN would probably be it.
 

Gravity (GRVY): 2020 was an incredible year for the Korean game developer/publisher and I think 2021 could be another big year. GRVY has a lot of momentum going into the year as they continue to launch new games (with notable success) and explore new partnerships across their various geographical markets. At this point it’s hard for me to envision adding more to my current position, but I also don’t think GRVY is at insane valuations relative to peers.

Namsys (NMYSF/CTZ): Namsys is one of the names I have not formally written up in the portfolio, but probably one of my favorites. They are a small Canadian software company that builds cash management products for “cash in transit” (CIT) service providers (basically armored truck companies, most notably Brinks $BCO) as well as multi-location retailers and banks. From a price action perspective, 2020 was pretty choppy for Namsys but I continue to be intrigued by this situation because of the consistency of growth and the niche nature of the business. NMYSF is intriguing but has a few notable wrinkles. The aforementioned Brinks is a key relationship that presents customer concentration that could be viewed as a potential threat or huge avenue for growth. The company also has a long term employee bonus plan that dictates that when 50% of assets or shares of the company are sold/transferred OR an outside party crosses 20% ownership, the company owes the employees and officers 15% of the transactions consideration. I always found the bonus thing to be quite odd, but I suppose it was a way to entice high-demand technical talent to work for a tiny (<25 employees IIRC) Canadian SAAS company. Anyway, there’s a major shareholder that is getting close to tripping the bonus and there’s a bit of a time crunch based on the when certain parts of the bonus pool are to be paid. So 2020 was pretty interesting based on these shareholder developments but I expect 2021 will likely be even more interesting as things catalyze one way or another.

Collector’s Universe (CLCT): CLCT was a situation in which my timing could not have been better. I added the name to the portfolio in April after having my eye on it for quite awhile. I was able to buy just ahead of Alta Fox’s activist campaign going public, which brought tons of attention to what I thought was a mis-managed company with lots of potential given a number of emerging tailwinds in the current market environment. Although the shares look a bit expensive o a trailing basis, I think Alta Fox (and others) have laid out compelling cases for value creation in the near to intermediate term. Late in the year, former Alta Fox board candidate and avid card collector Nat Turner joined forces with Steven Cohen and other PE backers to bamboozle the CLCT board into giving away the company at an underwhelming $75.25/share price point. But several large shareholders have now indicated that they plan not to tender, so early 2021 will likely hold some interesting developments for CLCT as well.

Long Term Value (target % = 40-60%, current % = 31%):

Constellation Software (CNSWF/CSU): Constellation is another name I have never really discussed on the blog. That is largely because I have nothing to add to the public discourse and do not believe I hold much of a differentiated view. I also feel quite guilty that it does not really fit my microcap/smallcap criteria for the portfolio, but I simply cannot help myself when it comes to this company. I love the management team, culture, execution, opportunity set, etc. that Constellation presents. There are many that are trying to execute the exact same strategy but even when I develop a wandering eye, I am never as smitten with any other VMS rollup as I am with good old CSU. Constellation is a portfolio holding that I rarely think about at all and will probably hold for a very long time. I am currently awaiting my Topicus shares with baited breath…

IAC (IAC): IAC was another addition during 2020. I’ve long admired the company and kept fairly close tabs on it but the MTCH spin earlier this year presented too tempting an opportunity to pass up. IAC is another holding that I feel quite guilty about because of their market cap, which is well out of the small/micro cap range. But ultimately I think of this portfolio and my whole “value” orientation to be more about finding misunderstood opportunities – it just so happens that those occur more frequently in small/microcaps so that is where I focus my efforts. But mid/large caps can have the same problem – especially in the much maligned SOTP situation. Where IAC gets the SOTP problem right is by trying their hardest to force those value gaps closed with spinoffs. That and the impressive track record of Diller and Levin were just to much for me to continue to pass up when I added the position in the late Summer. I could certainly see myself adding more to this position over time, perhaps even in 2021 depending on how the Vimeo spin goes.

Dream Unlimited (DRUNF/DRM): Dream was a new addition this year that I have written about on the blog. Not a lot to update here as the management team continues to execute and the market continues to ignore.

Terravest Industries (TRRVF/TVK): Terravest is another one of the names that I have yet to cover on the blog, but that I hope to remedy in 2021. This Canadian small cap is basically an opportunistic small-scale roll up strategy in the energy services space and is lead by a capital allocation-focused management team with ties to another very interesting Canadian investor, George Armoyan (and his Clarke holdco). The company selectively acquires small niche service providers and manufacturers in the general oil & gas services domain for extremely cheap valuations. Aside from the COVID disruptions and general malaise that hung over the energy sector in 2020, the year was surprisingly quiet for Terravest. Operating results were roughly within expectations (that is to say “good” given the conditions but not particularly exciting for any other year) but I really thought they might get the chance to scoop up some good deals after Q1.

OK now that we’ve run through the portfolio and talked about performance, I want to quickly re-visit some mistakes from the year:

  • Sold Yellow Media (YLWDF) @ $5.00/share on 4/6/20: this ended up being just about the worst possible time to sell Yellow as shares have rebounded to ~$9.50 as I write this. If all I had done was held, it would have turned my 30% loss to a 30% gain. I mentioned it in one of the portfolio updates during the year, but my thinking was that they were going to start bleeding customers uncontrollably (they provide a suite of digital marketing, website maintenance, etc. services to small businesses in Canada), which had been their whole problem to begin with. Even before COVID their customers were dropping them which is why the multiple was so low to begin with. From reading through management’s comments and the financials, I still don’t fully understand why they didn’t struggle more. My thinking was that marketing budgets would be the first thing cut in a pandemic, but it doesn’t seem to have effected them. It’s still puzzling to me, which is the only reason I haven’t re-entered the name (it still looks incredibly cheap and could still be at an inflection point with their turnaround). Still not sure what the lesson is here – I felt like this was a good opportunity (and might still be) but something just isn’t making total sense to me.
  • Sold FitLife (FTLF) @ $11.00/share on 6/1/20: this reasoning was very similar to my logic on Yellow above, namely that the pandemic would be extremely detrimental to the business. But I think this was just a case of not doing enough work to build my conviction sufficiently. I thought FTLF was already in trouble because their primary retail partner GNC had filed for bankruptcy – not only because of potentially unrecoverable receivables but also because I thought it was meaningful part of their distribution. Plus, although FTLF has ample online distribution, I assumed from personal experience with nutritional supplements that brand loyalty would be relatively weak and the demand would not follow to the digital space. Not only did this proved to be wholly inaccurate, but the economics of online/DTC distribution were significantly more favorable for the company. As a result, they turned in one of the strongest quarters in company history in Q3. The shares currently sit at $21, which would have been a 45% gain had a held instead of a 25% loss. This was a small position for me, but I think the takeaway here is to really be sure about the level of my conviction before I put anything on or decide to bail. I think I could have looked a little harder at this and built the resolve not to sell.

Updates on other posts/non-holdings:

  • Aaron’s separation: In September I wrote a quick post about the upcoming lease-to-own retailer Aaron’s split into two distinctly traded entities. The structure/naming convention was a little confusing but ultimately the company split into Aaron’s (AAN), which remained the legacy lease-to-own business, and PROG Holdings (PRG), which is a much sexier consumer financing business, on November 25th. At the time, my conclusion was that I saw the business logic in the separation but didn’t see a clear path to a lot of market value creation – so I elected not to buy any shares. The current market cap of the two companies combined is about $4.5B vs. about $3.5B when I wrote it up on September 8th. That’s about a 30% gain if you bought in early September, but is roughly in line with mid and small cap indices’ performance over the same time period. It’s a relatively short period of time, so I don’t know that there are any big revelations to discuss here, but the situation has roughly tracked with my expectations. There is still plenty of time for PROG’s shares to really take off and make me look like an idiot, but so far so good.
  • StoneX (SNEX): StoneX was another name that I devoted a lot of energy to and wrote about, but could not ultimately get on board. I still think the company is very interesting and has a lot of attractive qualities. Since the write up shares are +10% and about +15-20% from when I was doing my initial research. Even then, I think I was a little late to the party – the price was already up pretty significantly before I heard @puppeh1 discuss it on a few podcasts. Not much else to say here other than I continue to keep an eye on the company.

So there you have it. I know that was probably boring, but thanks for suffering some additional naval gazing here at the beginning of 2021. I am looking forward to another year of research, posts, and interaction with all of you. Please do not hesitate to reach out to me on Twitter or leave a comment here on the blog – I always enjoy talking to readers and fellow Fintwit folks.

Thanks for reading.

Sawbuckd

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