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June Issue Of Hidden Value Stocks

June Issue Of Hidden Value Stocks

Free, One time buyer, Premium members by Rupert Hargreaves

NOTE: Existing members can skip to the bottom to find the full 20-page issue.

We asked a ton of ValueWalk readers what their #1 goal was for improving their value investing.

Can you guess what they said?

No, it wasn’t more coverage of Apple or Tesla, those are already well covered by the likes of CNBC, sell side firms and blogs.

Nor was it more coverage of risky leveraged trades, ETNs.

They wanted good small-cap investment ideas that are vetted and have liquidity, but not well covered by Wall Street, Bloomberg, CNBC, sell-side analysts, blogs or even closed sites like SumZero or Value Investing Club.

This answer makes sense: we all want to collect more winners in our portfolio.

But after following investments of ultra-famous investors (Buffett, Dalio, Icahn), reading diligently through 10-Qs at night, and even combing through article after article on obscure forums and blogs, it can be hard to find qualified “special situation” ideas that aren’t already widely known.

So, to meet this key need of our readers, ValueWalk launched the Hidden Value Stock newsletter.

The Hidden Value Stock newsletter is a 20+ page deep dive report that gives you detailed analysis behind specific small and mid cap stocks that two under-the-radar value investing hedge funds like, as well as interviews with the fund managers about their investing process.

The latest issue of Hidden Value Stocks is out this week and if you want to sign up to receive an issue.

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June 2017 teaser

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Arquitos Capital Partners – July 2017 Performance

Premium members by Rupert Hargreaves

Steven L. Kiel:

Arquitos Capital Partners returned 1.6% net of fees in July, bringing the year to date return to 26.0%. Since its April 10, 2012 launch, the fund has provided an annual net return of 30.4%.

Separate from performance results, I want to highlight a project in which you will likely have interest. My friend Tom Jacobs spearheaded a campaign to republish the works of Maurece Schiller. After a Kickstarter campaign and other financial contributions to get the project off the ground, Tom is on the verge of publishing the first of five Schiller books on special situation investing. I had not previously been aware of Schiller’s contribution to investment analysis and learned that his books, originally published more than 50 years ago, were the foundation for the style of investing that Arquitos has successfully employed.

Tom’s idea was to add modern case studies from a variety of investors in the reprints of the books. I am happily supporting Tom and am also contributing a case study for one of the books. You can find my case study on ALJ Regional Holdings below:

 

 

Stanphyl Capital Management July Letter To Investors

Premium members by Rupert Hargreaves

Friends and Fellow Investors:

For July 2017 the fund was down approximately 0.9% net of all fees and expenses. By way of comparison, the S&P 500 was up approximately 2.1% while the Russell 2000 was up approximately 0.7%. Year to date the fund is down approximately 16.7% net while the S&P 500 is up approximately 11.6% and the Russell 2000 is up approximately 5.8%. Since inception on June 1, 2011 the fund is up approximately 90.1% net while the S&P 500 is up approximately 109.4% and the Russell 2000 is up approximately 83.2%. Since inception the fund has compounded at approximately 11.0% net annually vs 12.7% for the S&P 500 and 10.3% for the Russell 2000. (The S&P and Russell performances are based on their “Total Returns” indices which include reinvested dividends.) As always, investors will receive the fund’s exact performance figures from its outside administrator within a week or two; meanwhile I continue to waive the annual management fee until we regain our high-water mark.This has been an awful year for us, and yet the fund has been down roughly this much before and

This has been an awful year for us, and yet the fund has been down roughly this much before and subsequently went on to recover that downdraft and set a new all-time high NAV, and I have every intention that it will do so again. This year’s terrible performance has been almost entirely due to our short position in Tesla, whereby despite having an overwhelming number of facts on our side (detailed, as usual, below) the stock is up 51% this year. Meanwhile, as a value investor it’s currently tough to find any companies cheap enough to buy; Howard Marks from Oaktree Management did a great job this month summarizing how incredibly overvalued this market is– here’s the link and here are the highlights:

See the rest of the letter below:

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Second Quarter 2017 Letter to Alluvial Fund Partners

Uncategorized by Rupert Hargreaves

Dear Partners,

It is my pleasure to report results for Alluvial Fund, LP’s first six months of existence. While such a period of time is insignificant in the grander scheme, I am nonetheless happy to see the value of our investment grow at a healthy clip out of the gate. For the three months ended June 30, 2017, the value of an investment in Alluvial Fund, LP rose 7.1%, net of full fees. This compares favorably to the S&P 500 Index total return of 3.1% and the Russell 2000 Index total return of 2.5%. Year-to-date, Alluvial Fund, LP has produced a net return of 12.6% compared to 9.3% for the S&P 500 and 5.0% for the Russell 2000. The partnership finished the quarter with $9.3 million in assets.

In launching the partnership, Alluvial has welcomed several new limited partners. I am grateful for the opportunity to manage capital for you, and I will work to the fullest of my abilities to maximize the value of our investment. I am equally grateful to those partners who took a risk on a young, wholly unproven manager back in 2014, when Alluvial was born from a blog I would update in the wee hours in my rowhouse apartment on Pittsburgh’s North Side. It’s been incredibly rewarding to see both our portfolios and the scope of Alluvial’s activities grow.

These quarterly letters are a medium for me to discuss meaningful events at portfolio companies and lay out the investment case for various holdings. From time to time, I may share some general investment related thoughts. However, I tend to leave the pontificating on value investing to others. I enjoy talking about the opportunities I have found much more. With that said, let’s get to it. Alluvial focuses on small companies, illiquid securities, and special situations. Though we maintain this focus, we will purchase larger and more liquid securities when they

With that said, let’s get to it. Alluvial focuses on small companies, illiquid securities, and special situations. Though we maintain this focus, we will purchase larger and more liquid securities when they are especially misprice. We invest globally and are willing to wait years for value to be realized, provided value is accruing at a reasonable rate in the interim. When thinking about Alluvial Fund’s various holdings, I divide them into four informal categories. Many Alluvial holdings do not fit neatly into any of these categories, but the categories do provide me with an analytical framework I use in evaluating possible investments.

See the rest of the letter below:

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Boyles Asset Management – Q2 2017 Letter Excerpt

Premium members by Rupert Hargreaves

“In general, survival is the only road to riches. Let me say that again: Survival is the only road to riches.” –Financial historian, economist, and educator Peter L. Bernstein (2004 interview with Jason Zweig)
As he did in his 2007 book, A Demon of Our Own Design, Richard Bookstaber returns to the story of the cockroach with his 2017 book, The End of Theory.  The cockroach has survived and thrived for about 300 million years, thanks in large part to a simple survival mechanism.  As described by Bookstaber:

…the cockroach simply scurries away when little hairs on its legs vibrate from puffs of air, puffs that might signal an approaching predator, like you.  That is all it does.  It doesn’t hear, it doesn’t see, it doesn’t smell.  It ignores a wide set of information about the environment that you would think an optimal system would take into account.  The cockroach would never win the “best designed bug” award in any particular environment, but it does “good enough” and makes it to the finish line in all of them.

This brings to mind the saying that in order to finish first, one must first finish.  But the broader point being made is that it is often simple, coarse rules that lead to survival advantages.  While these rules, or heuristics, may not be the optimal traits for an organism to reach its maximum potential for thriving in an environment, given a specific set of conditions, it allows the flexibility needed to stick around to see the finish line should the conditions change.  The observation credited to Charles Darwin about a surviving species being not the strongest nor the most intelligent, but the one most responsive to change is applicable here.  Uncertainty and change are inherent in nature, as they are in business and life in general, and it is often simple heuristics and ideas that, if pursued with discipline and consistency, can allow one to survive whatever the future may have in store.
What are some of the candidates for an investing rule that rivals the survival rule of the cockroach?  It is probably a question that one could ask 10 different investors and get 10 different answers, but for those who follow a fundamental, value philosophy, the concept of margin of safety has to be one of the key contenders for a place at the top of any list.  Even the best investors over long periods of time make plenty of mistakes along the way, and so we as investors must accept that things won’t always turn out the way we expect them to, no matter how much effort we put into trying to understand something.  Building in some margin for error in our process can help us reach the long-term survival necessary for success.
Another candidate for a key rule of survival comes from a more ancient piece of advice: know thyself.  At a recent Talk at Google, investor Mohnish Pabrai told a story about a dinner he attended with Charlie Munger.  At the dinner, Munger talked about the investment firm Capital Group, and an experiment it performed with its investment team. Capital Group assigned teams to manage different portions of its capital under management.  On several occasions, the firm set up a “best ideas fund,” in which it took the highest-conviction stock picks from each of its managers.  But each time it set up one of those funds, that fund underperformed and ultimately failed. After telling this story to his dinner guests, Munger asked the group if they could guess the underlying reason why those funds did not do well.  But dinner was then served, and the riddle was left unsolved.
Years later, Pabrai remembered the story; when he was with Munger on another occasion, he asked about the Capital Group story.  It turned out that the reason the best ideas funds failed is because of the common feature among each manager’s pick: it was the idea that he or she had spent the most time studying.
In a 2007 speech at the USC Gould School of Law, Munger warned against the dangers of drifting into intense ideologies, and made the point that as “you start shouting out the orthodox ideology, what you’re doing is pounding it in, pounding it in, pounding it in.”  And there’s a similar effect when it comes to investment research.  When there’s a decent story for a company to tell about its prospects, the more time one spends with it, the more likely one is to believe in its merits.
The solution to this psychological tendency is not to spend less time on ideas.  We feel that one of the long-term advantages that we can have in the investment world is knowing more about the companies in which we are invested than almost anyone else.  Rather, the mechanism to fight this bias is to try to suspend judgment and opinion about a company’s investment merits until one can thoroughly state the cases both for and against that company’s prospects.  We need to be aware of our own psychology, and how it is affected by the ways in which we spend our time.  And if we ever catch ourselves spending too much time preaching about the ideas we’ve spent the most time on, or not spending enough time trying to understand the case against our best ideas, then—like the puffs of air hitting the hair on a cockroach’s legs—we need to recognize that there may be something amiss.

GrizzlyRock 2017 Second Quarter Investor Letter

Premium members by Rupert Hargreaves

July 21st, 2017

Fellow Partners,

GrizzlyRock Institutional Value Partners, LP and GrizzlyRock Value Partners, LP (together “GrizzlyRock” or the “Fund”) decreased 2.03% net of expenses during the second quarter of 2017 and has returned -7.06% year to date through 6/30/17. Since inception, the Fund has compounded at 9.0% net of expenses per year.(1) The culprit of poor year-to-date performance has been the short portfolio (Fund long portfolio has a positive attribution yearto-date).

Short losses year-to-date have resulted from stock price increases of businesses with reasonable and/or cyclical revenue growth, yet a considerable lack of profitability. These businesses are not simply high quality companies at stretched valuations; rather, these companies have little hope of reaching and/or sustaining profitability given weak competitive positions, lack of technological innovation, capital market dependence, continually high reinvestment rates, and below average management teams. One could synthesize this year’s short portfolio this way: while we asserted “the emperor has no clothes and clothes are unlikely to materialize for quite some time”, for a number of businesses market claims have been “when the emperor dons clothes they will be the most magnificent clothes the world has ever seen!” Substituting the concept of enduring profitability for “clothes” explains Fund performance year-to-date.

In fundamental long/short investing, two imperative concepts are (1) being “early” is the same as being “wrong” and (2) managers must be pragmatic rather than dogmatic. This year we have made the error of being early on many short positions, yet thankfully we have been pragmatic with position sizing.

For a stock to increase markedly in price without showing commensurate profit, the narrative must appear compelling. However, business valuation over time will ultimately be grounded in economic reality. With a 9 year bull market continuing and the “fear index” VIX at all-time lows, market participants continue to pay ever higher prices for the prospect of future cash flows. Speculators are reaching far out on the risk spectrum in story stocks heralded by management teams and investment bankers with a story to tell about the “emperor’s clothes”. The current environment has not been conducive for many of our short positions, and thus our positioning has been both early and wrong.

See the rest of the letter below:

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