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

 

 

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.

 

 

 

 

 

 

 

 

 

 

The Wizard of Och-Ziff

wizard

I like OZM. It pays out a large portion of the firm’s profit in dividends. Public shareholders own ~1/3 of shares outstanding, the rest is owned by management and employees. Financial interests are fairly well aligned.

 

OZM is a huge hedge fund. At March 1st 2014, OZM had a little over 42 Billion under management.

 

Get ready for some math:

 

They earn a management fee (% of assets under management) and an incentive fee (% of profits). In 2013 they earned ~1.5% management fee on an average asset base of $36 billion. That’s $550 million. This year average assets are 15-20% higher so let’s say $650 million in management fee. Expenses are compensation and SG&A, in 2013 that number was about $700 million. Because I’m a simple guy, I’m going to assume that management fee just about covers all fixed expenses. That means all profit comes form the incentive fee.

 

The incentive fee is split 2/3 to management (they own a lot of shares) and 1/3 to public shareholders. The incentive fee is ~20% of all profits. So for every 1 billion they make, the firm takes $200 million. Since there are less than 500 million shares(including management shares), every $500 million in incentive profit is worth $1 in Earnings (paid as dividends). ALL NUMBERS ARE APPROXIMATE, because that’s how I roll.

 

Ok. Now that we all understand the complex financial model, what do we expect the firm to earn in a normal year? Since inception the firm has returned a little under 10% a year, so we shall discount that and say 8% annual returns. (some years will be more and some will be less-DISCLAIMER) 8% of 43 billion is $3.44 billion and 20% (the incentive fee) is $688 million. That would be earnings per share of ~$1.4 mostly paid out as dividends.

 

I like this stock at $12 bucks because on average it’s going to have a pretty juicy yield. It has market exposure because most asset managers do well when the market goes up. I like that I get payouts every year. DIVIDENDS are my favorite.

 

So what’s the risk?

Well, OZM is currently under investigation for taking money from people you shouldn’t take money from. As a lesson for all, don’t take money from dictators, unless you’re Jennifer Lopez and it’s for a couple songs. Second their fund performance this year is a rocking 0%. 0% is not a good performance. While the stock tends to trade on performance, that’s pretty short sighted for an institution that isn’t going away anytime soon.

 

So I’m buying on dips. I’d own some here at $12 bucks. (Leave room to buy more) Be prepared for negative headlines, I occasionally use those to buy more. Let’s talk about this stock again in a year, and see what’s what.