ATG Portfolio 6 Month Check-up

I suppose it’s my turn to provide a quick take on the current make-up of ATG’s portfolio and thoughts on specific equities.  While I have a few regrets (such as not buying Royal Caribbean at moMANon’s behest in hopes of buying a little cheaper and not picking up a larger entry position of Whitewave Foods), overall I’m happy with the current makeup of our portfolio and the various trades over its first 6 months.

ATG Snapshot 10-30-14

 

  1. OZM- At 16% of invested capital, Och-Ziff is our largest holding in the portfolio, more as a result of picking up more shares on weakness than overt confidence. I am extremely interested to see how their third quarter earnings pan out on November 4- the beauty of this stock is that they distribute most of their earnings as a dividend and it’s priced so cheap that their funds only need to gain a few ticks above 0% to generate adequate profits.  The downside is that that they primarily play in international alternative investments, an area where getting a few ticks above 0% is no easy task in today’s environment.  I’m a HOLD on this one.

 

  1. ESV- Admittedly, I keep getting this stock wrong. It has been the worst performer of the ATG portfolio, with an unrealized loss of 13.5% to date.  Plummeting oil prices coupled with concerns about over supply in the offshore rig industry have outweighed positive earnings results, a stable balance sheet, attractive dividend yields, and continued backlog of revenue for the company.  Perhaps this is my version of the Ackman-Herbalife complex, but I’m convinced that ESV is destined to turn around- today’s earnings announcement of a solid beat and 3.2% gain is a good start.  It’s hard to find a best-in-class company that generates ample profit, cash flow, and trades at a price below net book value of assets, even after excluding intangibles.   I’m a believer in Ensco, but keeping a HOLD rating relative to the ATG portfolio given our large position.

 

  1. GOOGL- I like monopolies, low leverage, strong revenue growth, and cutting edge technology investments at a price equal to the average S&P P/E ratio. STRONG BUY.  We’ll be adding more soon.

 

  1. VNM- Vietnam index, this is a tough one. I like this play a lot in the long run, but I’m annoyed by  the nature of emerging market ETF’s like this where  local players can anticipate the ETF buys for particular stocks in advance and move the market (increasing the ETF basis);  I’m also cautious about emerging markets in general over the next couple of years.  I think we’ll see a lot of volatility here and will need to buy on dips/ maybe sell on big upswings over the next year or so, hence the HOLD/ WATCHING WITH CAUTION rating.

 

  1. HTZ- Hertz is a fascinating story, not too dissimilar to WTW: incredible overall market demand drivers for the industry but company-specific misteps and under-performance.  If you missed my prior post on Hertz, check it out for more detail on why I’m intrigued, including how Carl Icahn bailed my ass out of the initial trade.  We’re back in now that the stock has plummeted from $31/ share to around $20 share and has removed their CEO.  While there may be some short-term turbulence as they eventually re-state their earnings and name a new permanent CEO, I’m extremely bullish on this stock over the next 12 months.  STRONG BUY.

 

  1. DE, PHM, DNOW, CLNY- I’m going to pull a Bill Simmons and group all these stocks together because (i) I’m lazy and (ii) they all share the similar characteristic of being what I consider relatively safer, industry leading stocks at attractive P/E ratios that I don’t lose any sleep over. We’ll buy on dips but they also aren’t likely to sky-rocket any time soon.  The overall theme is increased importance on agricultural equipment/ farming efficiency, eventual millennial movement towards starting families and moving into new homes, continued energy/ oil industry growth in the US via a Warren Buffet supported spin-off, and attractive risk-adjusted real estate returns via a super smart shop that plays in both debt and equity (including rental residential).

 

  1. WTW- In the last 3 months, Weight Watchers notched a staggering 53% gain from $19.25/ share to $29.42/ share before dropping 13% today despite a healthy earnings and revenue beat (but a 12% reported loss in overall membership). We’ve done well on this stock, and any reader of this blog knows that I’ve been cheer-leading it for over a year (admittedly more in bad times than good).

 

After reading the earnings transcript, the clear strategy set by new CEO Jim Chambers,  and witnessing the measureable improvement of Weight Watcher’s technology presence (app integration with fitbit, iphone6, jawbone, etc.) I remain a steadfast  believer in the stock.

 

The only caveat is that I actually did a little “gonzo investment research” and joined a new weight watchers group through my company to see what the program was like from the inside.  I lasted one meeting- out of the total 18 people in attendance, there were literally 17 women staring down the 1 man with total disdain.  I knew that Weight Watchers was overwhelmingly women, but I never fully appreciated the company’s challenge in attracting men to their onsite meetings until being there in person and feeling the awkwardness.  I was very impressed by the initial Simple Start program and could immediately see the benefit of their group weight loss approach, but I think the programs need to be separated by gender if they ever hope to gain critical mass from the dudes.  They also need a dude sponsor that men can actually relate to: Jonah Hill or Seth Rogan need to get fat again!!

 

-Maverick

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Another Take on ESV and OZM

Below is moMANon’s response to my last post on ESV and OZM.  Since I wrote my last post praising ESV and questioning OZM, ESV has dropped another 4% and OZM has gained 4%, so I have to give some credit where credit is due (at least for now).  🙂

“The call out is well deserved.  But such a thing demands a response:
  • ESV and oil rigs.  These are very cyclical businesses.  Drilling rates go up, the industry builds more rigs, drilling rates go down, repeat as needed.  The timing of the cycles changes, the upswing can last longer than expected and the downturn can be worse than you planned.  While you earn a nice dividend you need to insure a lot of volatility.  While I too have little idea what will happen to oil prices they need it to rebound so drilling activity picks up and rig rates stop falling.  I too hope we’ve seen the bottom, and will support a Maverick purchase (but still no full position).   There’s still plenty of downside available.
  • OZM.  I’ve been trading around OZM for a while admittedly have position bias.  The downside is all true: performance sucks, management is bribing people, and hedge funds are under fire in the news.  But I don’t think OZM and BX are the same play.  Blackstone is a bull market winner; more deals, more inflows and more asset appreciation.  OZM on the other hand will do well in a flat and choppy economy with lower risk and steady performance.  Don’t get me wrong- I like Blackstone.  It is the benchmark in financial services, and buying a best of breed always seems to work out well.  OZM is a cheap way to play hedge funds, which have had a tough run, but the fees have held up, and the market can always shift to a more hedge fund friendly trajectory.  I like them both.  As long as assets under management keep growing, OZM is a better business going forward then it was yesterday.  For now they keep adding dollars even with the headwinds.  Some performance boost would go a long way but I have not lost faith.  Buy OZM.”
-moMANon

Dealing with Losers

Stocks are Down

 

Overall I’m pretty pleased with the ATG portfolio’s performance since inception 5 months ago.  We’ve stuck to our guns of investing in 8-10 stocks with a patient deployment schedule (we’re still over 50% in cash), taking some gains in response to quick abnormal up-ticks as well as adding to positions on down movements.  For the most part we’ve been able to stay ahead of the major index returns without taking too much risk, carrying responsible diversification without watering down our best ideas, and I believe we’ve done a good job of sticking with the principals of the ATG investment philosophy which I provided in the very first ATG blog post:

  1. Look for companies that are the best or near the best at what they do and have “moat-like” characteristics.

 

  1. Ask yourself if this is a company that you would be willing to invest in for 15 years based on their product, industry, and reputation.

 

  1. Pay close attention to a company’s balance sheet and capital investments.  A High amount of leverage is not necessarily a bad thing, but make sure you believe the company is properly capitalized to execute their business plan and that they adequately invest in growth and development.

 

  1. Once you have identified companies that fit criteria 1-3, filter out the companies that appear to be undervalued relative to their peers and the general market based on factors such as P/E ratio, return on equity, and price to book.

 

  1. Pay more attention to how companies perform and the hard numbers than what their executives say or the guidance they provide.  As an example, I love buying companies that dip on disappointing guidance and profit beats for the current quarter.

 

  1. Once you have picked your investments, track them closely and don’t be afraid to either take gains or cut losses based on the movements of the market.  I don’t necessarily advocate short-term trading, but taking advantage of quick, abnormal movements in specific equities is an advantage the individual investor has over institutional investors and mutual funds.  I truly believe a disciplined active management approach to specific equities can help an investor mitigate the impacts of larger adverse macro movements and help take chips off the table in a bubble environment.

 

Having said all of this, the portfolio has taken a major hit the past month, primarily due to two stocks:  Enseco (ESV) and Och-Ziff (OZM).  Below is a chart showing the performance on these two stocks over the last few months:

ESV, OZM

 

It has been a rocky ride- at one point ATG was actually up over 10% in both stocks before they started their painful descent.

Naturally the question comes down what we should do about it.  There are three choices:

  • sell and move on,
  • double down and buy more, or
  • do nothing and see if comes back. Let’s break it down individually:

Ensco, PLC (ESV).  This is company that owns and operates offshore drilling rigs around the world.  They are generally recognized as one of 2nd or 3rd the largest rig providers and pride themselves as having the newest fleet of rigs amongst their competitors.  Along with all the offshore rig companies, ESV’s stock has been under pressure lately due to concerns about over-supply of rigs through 2016 which could impact their utilization combined with a dramatic drop in oil prices over the past month.  What attracted me to ESV in the first place was their market-leading position combined with a great dividend (6%) and cheap P/E ratio around 9% due to negative buzz on the rigs in general as highlighted below.

I’m not smart enough to know where oil prices are going.  They may continue to lag due to international events and the fracking boom, but history suggests a bounce back up.  As for the company, I don’t see any negative developments- their utilization rates remain high, an impairment of older fleets on their balance sheet is behind them, and I don’t see any financial burden that would leave me to believe that would force them to cut their 6.9% dividend.  At a forward P/E of 7.59, there is plenty of room for slack as supply risk on the rig-side plays out over the next few years.  In fact I see this dynamic playing into ESV’s favor over the long run as competitors are currently discouraged from building new rigs and putting long-lead capital dollars to work.   To put a long story short, we’re doubling down on ESV.

Och-Ziff (OZM).  Och-Ziff is one of the largest alternative asset management firms in the world.  In simple terms, they invest billions of dollars in various vehicles on behalf of large institutional investors and charge both asset management fees and performance fees.  Their recent drop has been due to:

  • Negative publicity surrounding a lawsuit involving bribery and fraud (see moMANon’s prior post detailing the issue);
  • Calpers’ recent announcement (Calpers is the largest pension fund in the country) that they are exiting the hedge fund arena due to excessive fees and monitoring costs and
  • Lackluster fund performance. Through August, their three funds have reported paltry YTD returns of 2.57%, -1.47%, and -4.25%.

Despite all the bad news above, OZM is still making money and attracting fund inflows ($400 million in the last month alone).  Last quarter’s earnings surprised to the upside, there’s excess cash flow to cover their 6.6% dividend, and if they can improve fund performance over the  remainder of the year there could be additional performance fee distributions at the end of the year.  In fact, the consensus forward P/E ratio for OZM is an astounding 6.75, which is less than half of what the overall S&P is valued at currently.

When faced with disappointing stock picks and what action to take, I try to step back and apply the investment principals at the top of this post before making a decision.

In this circumstance it has led me to hold my faith in ESV (passed all 5 criteria) and question whether OZM belongs in the portfolio.  Given OZM’s weak fund performance and negative publicity, I question whether they can sustain their position as a market leading money manager with moat-like characteristics.  There is a decent chance their performance and reputational issues are a temporary blip and this is the perfect time to buy into their stock, but I’m strongly considering pulling the rip-chord and switching them out for a group like Blackstone (BX).

moMANon- speak now or forever hold your peace!

-Maverick

 

 

Let’s Go Shopping!

shopping

In the past 10 days the S&P 500 has dropped over 3% over Russia/ Ukraine tension, Argentinian bond defaults, fighting in the Gaza strip, improving GDP numbers that could trigger an unwinding of quantitative easing, and who knows what else.  Anyone who claims to fully understand the complexities and future implications of each of these events should be thrown in a padded room (or given a spot on CNBC Squawk Box).   

This is the bad news- aside from diversifying across asset classes or dollar cost averaging, there is very little an investor can do to anticipate and guard against these unforeseen events.

Now for the good news- Despite all of these events and the recent drop, the S&P 500 is still up 5.5% on the year and plenty of stocks continue their upward march as the economy improves and earnings improve.  This little 3% “hiccup” from macro and geo-political uncertainty may provide some discount shopping opportunities.

Here’s my take on discount shopping in times like this:

  1. This is a “sale” opportunity and not a “clearance” rack. Make sure you buy quality companies that you believe in over the long haul just in case that sale turns into a clearance after you buy and a patient holding period is necessary.
  1. Start with looking at the stocks you already own and know well: buy more of the stocks you still really like that have taken a hit, but make sure you re-visit their financial position and prospects for growth.
  1. Look for companies that are actually on sale at the moment and have dropped materially from their highs (or have below-market P/E ratios). For example, I’ve been waiting for an opportunistic time to open a position in Disney (DIS) because I love the company, have a 3 yr old daughter obsessed with Tinkerbell, and I believe they have incredible staying power, but their stock price has not been affected at all by the geo-political and macro noise over the past month.  I’ll have to wait on Disney until the next sale or clearance opportunity. 

Based on the criteria above,  ATG has taken an entry position in John Deere (DE), added to its position in Ensco (ESV), and will likely be adding to its position in Google (GOOGL) and Whitewave Foods (WWAV).  We are also looking harder at airline and transportation stocks for sale opportunities.

It’s no coincidence that all the companies listed above are long-standing companies with huge competitive advantages in what I believe to be high growth industries.  Can you imagine a (near) future with increased capital spending on agriculture, energy consumption, continued dependence on online marketing/ e-commerce, more demand for non-dairy organic substitutes and increased travel for commerce and pleasure? 

If so, I’ll see you at the discount rack.  

ATG Investment Fund: The Initial 7…

throwing dart

 

The ATG Investment team has finally gotten off its ass and opened its joint  investment fund.  On a monthly basis we will update the positions and share true performance of the fund in the “Current Portfolio” tab of this blog.  On April 17 we established initial positions in 7 different securities and allocated a total of 25% of the available capital to these stocks.  Over the next several months we intend to slowly build up the investment fund to approx. 80% invested in the market with 20% in cash as a buffer.  The investment allocations of each security are reflective of our perception of current price- for example, WWAV has a smaller allocation than ESV currently due to the recent run up in its price before we established an initial position.  If pricing dynamics change 30-60 days from now, we will adjust the allocation to try and take advantage of pricing and build a more favorable basis in any given security.   We plan to limit the total number of different investments at any given time to around 10.  Our logic is that its enough to provide meaningful diversification but not too many to lose focus or dilute the ATG team’s best overall ideas.

Without further adieu, below is the initial ATG portfolio:

 

ATG Portfolio- 4-20-14

 

OZM (Och-Ziff), ESV (Ensco), CLNY (Colony Financial), WWAV (White Wave Foods), and PFF (iShares Preferred Shares ETF) have all been discussed in prior ATG posts.  GOOGL (Google Class A) was a bit of an impulse, last minute add to the portfolio in light of their recent modest price drop.  Any portfolio should have some high quality tech exposure, and GOOGL is probably the most reasonably priced of the high growth names at 17x 2015 forward earnings.

VNM (Market Vectors Vietnam) is an ETF that tracks the Vietnamese stock market.   Both Maverick and moMANon have had the opportunity to visit the country before and are in agreement that this is our favorite emerging markets bet right now (and favorite southeast Asian cuisine option).  I’m sure an ATG post is forthcoming laying out our argument for the opportunity.

Overall we’re trying to build a portfolio that balances attractive yield (PFF, ESV, OZM, CLNY) with higher growth/ beta securities (VNM, WWAV, GOOGL) in hopes of beating the S&P 500 and earning positive returns even if the market ends down for the year.   We are also trying to stay true to the original ATG principal that any security we pick is one that we’d be comfortable holding for several years to ride out any wild, unpredictable  market moves.

 

As always, we welcome any feedback or thoughts as we build up the portfolio and share the performance publicly.  To avoid any misunderstanding from potential readers, I want to make it clear that the ATG Fund represents only a portion of the ATG team’s respective personal investment strategies.  Any responsible personal investment strategy should have diversification among various investment classes (stocks bonds, real estate, etc) and have a meaningful percentage of diversified index/ mutual fund holdings in addition to any individual securities.  For any readers who’d like to talk more about an overall investment strategy, write us a message and we’ll be happy to share our thoughts.

 

 

 

 

 

 

 

 

 

 

Down with ESV?

In the past 3 months I’ve watched my Transocean stock (ticker RIG) swing from up to a 12% positive gain all the way down to a 7% loss as of today’s close (19% downward swing in the last few months).  Today’s drop was partially predicated on UBS downgrades for the major offshore drillers.  They cite a “near-term bear cycle and jack-up over supply concerns” as impetus for the downgrade.  Based on today’s valuations, Transocean and Ensco (ticker ESV) have roughly the same metrics of a 1.0 price to book value, leading P/E ratios around 8, 5%- 5.50% current dividend yield, and healthy cash flows.  Finding long-term stable companies with these metrics are not easy to find in today’s stock market and make for a perfect ATG sweet spot selection.  Props must be given to moMANon, who has been championing the offshore drillers for some time and helped me pocket some gains for the fancy new Mazda I bought at the end of last year.   

Today I added to my position in offshore drillers and bought some Ensco (ESV) to go along with my current RIG position, primarily because they are less leveraged than RIG, offer a higher dividend (5.5% vs. 4.8%), and have the same basic valuation metrics today.  Management continues to invest in future rigs, is projecting continued revenue growth over the next several years, and meaningful dividend increases or share buy backs are on the table.

Ticker ESV   Comments
Company Ensco plc    
Current Price/ Share 52.61    
LTM P/E 9.63    
Forward P/E 7.82   There’s a lot of room for error at these levels!
LTM ROE 10.8%   No show-stopper, but I’m ok with it given the low leverage.
Price/ Book Value 1.02   Very attractive given quality of assets.
LTM EV/ EBITDA 7.6    
LTM Dividend Yield 4.1%   Forward dividend yield of 5.5%!
Est. Rev. Growth (5 yrs) 13.6%    
Debt/ Equity 38.0%   Major selling point when compared to RIG. 
Neat-O-Statistic According to management’s last quarterly call, the company has   over $18 Billion in backlog guaranteed future contract revenue, which is   approx. 150% of today’s market cap!
ATG Takeaway This one checks all the boxes.    There will come a day when alternative energy dramatically changes the   energy landscape of this world, but this company is simply valued too cheap   right now with too much guaranteed future revenue for me to lose any sleep   over this.  If I could find 10 stocks   like this in various industries, I’ll fly to New York and eat the “gold   flake hamburger” by the end of the year 🙂
       
ATG Gut check      
1.  Mkt leader with moat-like Characteristics? Y Yes.  World’s second largest offshore driller   with one of the newest rig fleets and additional rigs under construction.
2.   Strong long-term growth prospects and   relevance? Y Yes.  They operate in 6 continents with several   growth opportunities.  I know fracking/   shale gas is the big buzz word these days, but I’m not 100% sold on fracking-   my relatives in N. Colorado swear that their drinking water has tasted like   crap ever since they started fracking there 😉
3.  Healthy balance sheet?   Y 38% leverage, ample free cash   flow/ working capital, no red flags from my cursory review.   Talk of increased dividends and share buy   backs given the amount of new capital spend already in the works is the sign   of a management team very confident about their current financial position.
4.   Favorable valuation based on P/E, ROE, etc? Y Cheap based on a P/E and price   to book basis, particularly given that analysts are still projecting revenue   growth for the company.