Special Situation Investments

SSI tracking portfolio rebounded nicely with +11.5% gain in July. We are now slightly above break-even for the year. A detailed performance breakdown is provided below.

During the month we published 2 new Portfolio Ideas, highlighted numerous Quick Idea Pitches in our new weekly reports, and did an active case clean-up closing 7 Portfolio Ideas.

Below you will find a more detailed breakdown of tracking portfolio returns by individual names as well as elaborations on names exited during the month.

TRACKING PORTFOLIO +11.5% IN JULY AND +562% SINCE INCEPTION.

Disclaimer: These are not actual trading results. Tracking Portfolio is only an information tool to indicate the aggregate performance of special situation investments published on this website. Quick Ideas are not part of the tracking portfolio. See full disclaimer here.

The chart below depicts returns of SSI Tracking Portfolio since the start of 2017 – these are not actual trading results but rather an aggregate performance of investment ideas published on SSI.

PERFORMANCE SPLIT JULY 2022

The graph below details the individual MoM performance of all ideas that were active during the month of July 2022. This chart excludes Quick Ideas.

PORTFOLIO IDEAS CLOSED IN JUL’22

US Global Investors (GROW) +66% In 2 Years
US Global Investors is a mutual fund/ETF manager. Its airline ETF JETS was a major beneficiary from the COVID-19-induced market volatility that attracted a lot of investors/speculators betting on the recovery of the airline sector. As a result, JETS AUM exploded from $100m to $1.7b. Upcoming GROW revenues and profitability were high visible, however, the market still appeared to be undervaluing the company, with its asset management business trading at low single-digit forward PE multiple. Our estimates for JETS AUM growth were significantly exceeded reaching $5bn+ at the peak. GROW share price skyrocketed, however, the company just became even cheaper as profitability gains exceeded the increase in the share price. The company is flush with cash and continues to generate more every quarter. However, eventually, it became clear that the market will not re-rate GROW mainly because of its entrenched board and CEO, who has full voting control and seems to consider the company as his own piggy bank. GROW continues to hoard cash instead of launching buybacks on the incredibly cheap stock. With no clear catalyst in sight, we decided to step out of this position with +66% gain in 2 years.

PBF Logistics (PBFX) +16% In 1 Month
PBF Logistics received a buyout intention from its GP PBF Energy (48% ownership). The exact price was not mentioned, but negotiations with the special committee had started and it was mentioned that a non-binding offer might be presented at any time. The risk of losing money seemed limited – downside to pre-announcement prices was at 10% and the buyer was unlikely to walk away given a strong strategic rationale behind the buyout. The timing of the offer was also opportunistic given that PBFX dividend yield was artificially depressed, no longer reflective of its earnings power, and was about to get raised shortly. On normalized earnings level PBFX was trading at a very high 13% yield. Plenty of other recent MLP buyout precedents also suggested that the offer is unlikely to go through at the pre-announcement levels. $18-$19/share seemed a reasonable price target offering 16%-20% upside. This estimate appread to be accurate – a month after our write-up the offer was announced at c. $18/share in cash and stock. The special committee agreed unanimously and the spread was eliminated. Given very limited chances of increased price, the idea was closed with +16% gain in 1 month.

Shell Midstream Partners (SHLX) +15% In 1 Month
Another buyout of a midstream MLP by its general partner that played out successfully. In Feb’22, Shell Midstream Partners received an acquisition proposal at $12.89/share from GP Shell Pipeline. The stock traded slightly above the offer since the announcement, reflecting expectations that the special committee will negotiate a higher take-private price. The bid appeared opportunistic and came at zero premium to share price at the time. Dividends were depressed and at estimated normalized levels, the offer value the company at 14% dividend yield – substantially higher vs where peers were trading. Multiple shareholders voiced their opposition. Numerous other precedents of other MLP buyouts also suggested that a higher price would be renegotiated. Eventually, Shell Pipeline bumped the offer and a definitive agreement was signed at $15.85 – even higher than we expected. The spread closed immediately resulting in 15% gain in 1 month.

Semapa (SEM.LS) +18% in 1 Year
A Lisbon-listed industrial holdco Semapa was a take-private target by its largest shareholder (83% voting rights). At the time of the write-up, the stock was trading slightly above the takeover offer of €11.66, reflecting expectations of a higher subsequent bid as it was clear the current one will not receive sufficient support. The offer rejected by the two largest minority holders and the buyer failed to reach the needed 90% ownership threshold required for delisting. Semapa was (and still is) very cheap – excluding the stake in the publicly listed Navigator, its two other high cash flow generating businesses were valued at a negative €222m EV. With a year since the previous offer, Semapa became even cheaper reaching €600m negative EV for its two non-public businesses. There was no further atempt to take the company private by the controlling shareholder. With no catalysts in sight, it became clear that such a discount could remain permanent. The idea was closed with 18% gain in one year.

Altisource Asset Management (AAMC) 0% in 1 Year
AAMC is an asset management company that has been seeking to eliminate its preferred share overhang. The company was basically a cash shell. AAMC preferreds are toothless security, with no dividends/redemption rights and an absurdly high conversion price of $1,250. The company reached an agreement with one of the major holders to convert preferreds to common shares for 12 cents on the dollar, suggesting that AAMC could settle with other parties on similar favorable terms. The conversion on same terms would’ve increased the company’s BV from negative $34 per share to $28-$30/share. Meanwhile, the common stock traded at $17. AAMC eventually settled with all remaining preferred shareholders except the largest one – Luxor. The process got prolonged due to litigations with Luxor. Unexpectedly AAMC decided to venture into lending/crypto businesses which we did not feel comfortable about. As the downside protection from existing cash balances kind of disappeared, we have used recent spike in the share prices to close the case.

PharmChem (PCHM) -25% In 2.5 Months
Last year, two activists with a combined 25% stake overhauled the PCHM board and started a turnaround. Multiple positive changes had been implemented and insiders were actively cashing out minority shareholders while growing their own stake in PCHM. After the Q1’22 earnings’ share price slump, PCHM announced another opportunistic large tender (at $3.25-$3.75 range) for 40% of the free float. Management once again was not participating. So basically, PCHM seemed like a cheap (10x PE) company with a steadily growing, highly profitable business + new shareholder-friendly management, which owned a 40% stake, wanted to own more and clearly thought shares were cheap. The turnaround seemed to be going in the right direction and none of the positive changes seemed to be reflected in the price yet. However, the offer was abruptly canceled as the company was not able to raise debt financing for it. Then after a month, management suddenly changed its tone saying further buybacks are no longer in the cards and that the company’s largest client (10% of revenues) will suspend purchases for at least one quarter. Given no further catalysts and uncertain timeline/success with the ongoing turnaround, we decided to remove PCHM from the active ideas with 25% loss in 2.5 months.

Kohl’s (KSS) -52% In 6 Months
US department store retailer Kohl’s once again became the target of activist shareholders, who pushed the company to start a sale process or explore sale-leaseback transactions for its RE assets. At the time, KSS had $8.8bn of at-cost value in real estate assets compared to $10.6bn in EV, making it an attractive buyout target. Numerous media reports started signaling that KSS received multiple interests from various PE firms. One activist said some parties were ready to pay at least $75/share (25% upside at the time). Bidding war seemed likely. Unfortunately, management rejected all offers after which the activists initiated a proxy war. Eventually, the management yielded and officially started considering the sale process and talking to interested parties. All of this happened within the span of a few months. However, as the market environment turned for the worse all of the buyers walked away and KSS stock price collapsed inline with other retailers. The potential bidding war idea was closed with 52% loss in 6 months. KSS remains cheap at 3.5x NTM adj. EBITDA, with owned real estate value exceeding its current EV. Management also promises to launch a large 14% buyback later on this year.

QUICK IDEAS CLOSED IN JUL’22

Genesis Metals (GIS.V) +18% In 1 Month
Merger between two Canadian gold miners. Spread seemed to exist because of expensive hedging, however, with a short timeline borrow costs were expected to be minimal. The transaction was synergistic given geographical proximity of the mining properties. Shareholder approval seemed likely given the low cost-basis of the largest shareholder and recognition from larger industry peers that the buyer has apparently received. The idea was reopened in June as the spread widened from 4% to 18% on no news. Eventually, after receiving shareholder approval, the merger closed successfully, leading to 18% arbitrage gains in 1 month.

Codorus Valley Bancorp (CVLY) +3% In 5 Months
Activist hedge fund Driver Management (6.5% stake) was pushing for a company sale. CVLY was trading at a low price-to-tangible book value (TBV) multiple of 1.08x. The activist (who has had a decent track record in pursuing banking activist campaigns) argued the company had been mismanaged and would be worth 1.5x TBV in a sale scenario. Similar banking acquisitions fetched multiples north of 1.3x. The latter ratio implied an 18% upside. Besides low valuation, the downside was protected by the company’s recently announced share buyback program. Another positive development was activist’s success in replacing the entrenched ex-Chair and CEO. Eventually, Driver Management reached an agreement with the company to appoint board members. However, due to the increasing interest rate CVLY recently reported lower TBV which pushed P/TBV multiple upward to 1.2x. With limited potential upside and unlikely company sale, we decided to close the idea with a 3% gain in 5 months.

Volkswagen (VWAPY) +3% In 1 Year
Arbitrage of Volkswagen’s ordinary (VWAGY) and preferred shares (VWAPY). Both share classes seemed to be identical from an economic value perspective as ordinary share voting rights were/are basically useless. Historically, preferreds used to trade at a small premium over ordinary shares. However, the trading pattern reversed during pandemic and ordinary share premium over preferreds spiked, reaching 49% at one point. Part of this was explained by Porsche spin-off rumors and investor reluctance to short VW shares after the infamous short squeeze in 2008. The discount, however, has persisted since the write-up. With no catalysts, we closed the idea with a 3% gain in 15 months.

Turquoise Hill Resources (TRQ) -14% In 4 Months
Copper/gold miner Turquoise Hill Resources received a buyout offer from majority shareholder Rio Tinto (51% stake in TRQ) at C$34 per share. TRQ operates a mine in Mongolia which has been undergoing an underground expansion project. The proposal received fierce minority shareholder backlash, many of them calling Rio’s bid low-ball and opportunistic. The mine was/is expected to become the 4th largest copper mine in the world once the expansion is completed and would generate $8bn in FCF attributable to minority shareholders in 2025-2030 alone compared to $2.6bn Rio was trying to cash out them for. At the time of our post, TRQ traded at a 10% premium to the proposal – clearly, a higher offer was expected by the market. Rio’s low-ball initial proposal seemed to protect the downside well. Since June, however, no further news on the offer came out while the copper prices have nosedived by 30%. As the chances of an improved offer have diminished with the drop in copper, we have closed the idea with a 14% loss in 4 months.

Playtech (PTEC.L) -45% In 8 Months
Gaming software and content developer Playtech received a takeover proposal from an Australian peer Aristocrat at £6.80/share. Subsequently, reports appeared that two other bidders approached the company, with media rumoring more interested parties behind the scenes. The stock traded above the initial buyout offer, reflecting expectations that a bidding war could break out. Meanwhile, Aristocrat’s proposal, which was highly synergistic, seemed to protect the downside. Several major shareholders had signed an irrevocable undertaking for Aristocrat’s offer which could only withdrawn in case of 10%+ higher bid. Eventually, Aristocrat’s bid was rejected by a new group of Asian investors who acquired a stake in the company, however, despite prolonged buyout rumors, other suitors failed to make an offer. As company sale appeared to be off-the-table, we closed the idea with a 45% loss.

Archive Of Monthly Performance Reports