Unfortunately I was not able to execute the trade as a net trade due to employer restrictions on shorting, and therefore only realized the long DF upside of around 8%.
Although I think there is plenty of upside left in this story and that DF stand alone profitability will be much higher in the future than where it stands right now; I may reduce my position in the trade to lower my portfolio concentration and pick up some other interesting opportunities arising.
KLIC my other significant holding in 2013 has not fared as well and is down 7% from my initial purchase. The strong cash position, free cash flow generation ability of the business, and low level of competition in a niche market make me feel pretty safe about this holding.
I have not had the time to post write-ups about other ideas recently, but I have been reading blogs and posts on sumzero, gurufocus, and the likes. Few ideas that tickled my fancy are:
1) Pinetree Capital ($0.40) - a publicly traded asset manager investing in junior (extremely junior) commodity developers. This is really the perfect opportunity for an activist investor to buy a dollar for 40 cents.
The goods: Cheap!
- Fund NAV as of March 31, 2013 was $1.20, stock is trading at $0.40 (57m mkt cap). $0.17 of NAV is deferred tax asset, rest is investments. Even excluding the deferred tax asset, it's trading at 0.39x NAV.
- 91% of investments as of Dec 31, 2012 were in public companies - easy to liquidate
- Extremely diversified, 400 odd positions; they don't take a majority stake in companies, so low liquidity concern. (175m fund, 25m is largest position)
- Permanent capital, no risk of redemptions
The Bad: Management
- A horrible way to invest. Diversifying between junior miners could be the worst possible way to deploy capital. Accordingly NAV has been shrinking at an alarming rate - Jan 11 - 4.68, Dec 11 - $2.61, Dec 12 - $1.55, and $1.20 as of March 31, 2013.
- CEO bonus was $34mil in 2010; 10% of growth in BV of firm during year.
- They continue to invest elsewhere - I don't understand how other investments can be more attractive from the management's point of view than repurchasing shares.
2) Bed Bath & Beyond ($65) - retailer of home, kitchen, and bath products. Possibly one of the best ways to play the US housing recovery.
- Growth and Margins - 2003 to 2007 growth averaged over 15%, revenue growth remained positive throughout the housing crash, currently just under 10%.
- Gross margins over 40%
- Reasonable valuation of 11.6x 2013 earnings. Even better, 12.6x 2013 FCF.
- 0 debt
- Increasing competition from online retailers?
3) Skullcandy ($5.20) - producer of headphones facing stiff competition and slowing revenue growth of +21%. The company is refocusing business on mid-high range headphones in 2013 and exiting the lower price points.
- Market cap of $147mil and $100mil in working capital.
- 2012 EPS of $0.92
- Little value-add industry, however a strong brand can help differentiate product.
- Competition forcing company to refocus strategy.
- 2013 sales are expected to be lower due to the aforementioned change in strategy
- Trading at <6x ex cash PE.
- Target market is kids from ages 3-9. This is not the target audience of smartphones, and you cannot replace toys with smartphones and tablets.
- Sales are growing still; Leapfrog makes good toys - 3 of the top 4 toys of 2012 according to NPD Group's Retail Tracking Service report.
- Leapfrog has created a cheaper ($100) hardware to compete against the tablet insurgence. Also more durable.
- I may be underestimating the impact of tablets and smartphones on the toy industry.
- Competition is the #1 destroyer of investment returns and should not be underestimated.
5) ORIG ($15.32) - a leveraged deep underwater drill ship owner/operator. Currently has 3 ships under construction paid for using debt, which are due in the second half of 2013, and hence the current debt position seems unreasonably high.
- Post delivery of vessels, ORIG is trading at a 4.6x EV/EBITDA multiple with one of the youngest fleets of its competitors. New vessels are already contracted along with the remaining fleet; 90% of the vessels are contracted into 2014 as well. ORIG is also trading at a discount to book and significantly below asset replacement value.
- The company has a leveraged balance sheet, $2.3b net debt.
- Shipping is one of the businesses with very little value-add, differentiation, and barrier to entry. It is extremely vulnerable to cycles, and current attractive rates on deep water vessels probably mean oversupply is due in the future.