Reshuffling the Deck

Generally speaking, some of my best stock picks have happened when the company is under duress.  Assuming the company is able to survive/turnaround, you've made several times your investment simply because so much of the perceived risk has disappeared.  For example, I bought Fairfax back when it was at $100 and sold several years later just shy of $300 (pre-blog).  I bought USG at the height of the financial crisis, and here's how it turned out: http://mevsemt.blogspot.com/2010/04/transaction-alert-sold-usg.html.

In fact, if you look at some of the best investments made by the great investors, you'll see they've done the same thing (Buffett - Geico & American Express, Berkowitz - Wells Fargo).  Of course there's a risk to this approach - maybe the market is right, and there's always a chance the company could indeed fail!  In fact, I bought AIG just as the financial crisis was hitting the fan, and lost over 50% before selling.

With this in mind, on Friday I decided to add to two of my "stressed" positions, and sell one of my holdings where I may have overestimated the upside.  Specifically, I bought an additional 500 shares of JEF at $9.92 and 1000 AIG warrants at $5.37.  The stock I sold was MIL (formally Terra Nova) at $6.80 (2268 shares).

Questions?  Comments?  Email mevsemt@gmail.com

Light Commentary and Some Links

I'm going to try something a little different today.  Recently there's been a handful of interesting articles/analyses/press releases on companies I own, so I thought I'd provide the links and do some light commentary around them.

First there's Terra Nova (TTT).  As discussed in previous posts, the company is basically an investment vehicle for Michael Smith.  But since no acquisitions have been made, owning TTT requires a bit of blind faith in Smith.  In this vein, here's one of the best analyses I've found on his historical track record: http://seekingalpha.com/article/290755-15-for-15-years-michael-j-smith-s-outstanding-track-record?source=yahoo.

Then there's Sears.  They're spinning off Orchard Supply, started selling Craftsmen tools at Costco, and hired a new CFO.  Taken individually these may not sound like much, but taken together this may signify the beginning of a transformation from a retail operation to a brand/real estate/asset holding company.  Here's a good blurb on the Craftsmen part: http://seekingalpha.com/article/292376-sears-holdings-externalizing-brands-could-be-major-catalyst-for-stock?source=yahoo.  Here's the Wikipedia page on the new CFO: http://en.wikipedia.org/wiki/Robert_Schriesheim.  Clearly, Schriesheim is a turnaround/restructure guy - my guess is Sears wouldn't have hired him unless this is their intent AND he wouldn't have accepted the job unless he judged there was a reasonable likelihood of succeeding.  And lastly, if you're sick of my bullish sentiments, here's a good commentary with a bit more of an even keel: http://seekingalpha.com/article/292409-whether-we-should-throw-in-the-towel-on-eddie-lampert-and-sears-holdings?source=yahoo.

And what about JOE?  Well, regular readers know I'm a huge fan of Bruce Berkowitz.  In fact, his involvement with St. Joe is one of the main reasons I bought the stock (http://mevsemt.blogspot.com/2011/05/new-coattails-to-ride.html).  Additionally, Berkowitz has been an investor in LUK (my largest holding) for 10+ years.  So what's the connection?  Well, LUK has done commercial/residential real estate development on the Florida panhandle, and JOE's recent appointments/hires of Brady, Bienvenue, and Keil all come from LUK.  Frankly, it wouldn't surprise me to see LUK and JOE partner up sometime in the near future.  Lastly, JOE has recently agreed to let Berkowitz acquire up to 50% of their shares (he currently owns 30%), so my guess is he's confident in their prospects.

Well, I hope you enjoyed the commentary and links!  And I always like hearing from my readers, so feel free to email me with any comments or questions (mevsemt@gmail.com).

Sold KHDHF

A few days ago 226 shares of KHDHF were deposited in my account (KHDHF was spun off from TTT), and today I sold them at $10.20 for net proceeds of about $2,300.

As I mentioned in my year end post TTT has been trading ex div since December, so my 2010 ending balance was artificially low (but with the KHDHF shares finally showing up in my account I'm whole again).

Adding to TTT... again.

See my previous post...

This time I added 360 shares at a price of $7.85, bringing my total share count to 2268. 

Adding to TTT...

On a whim today I purchased an additional 270 shares of TTT at $7.82.  The more I think about TTT, the more I think it's like LUK - basically a company run by a shred/talented capital allocator who is focused on creating shareholder wealth by compounding book value.  With these types of companies I'd prefer for the position size to be more than 10% of my portfolio, and with TTT spinning off one share of KHDHF for every 9 shares I wanted my position to be comfortably above the 10% threshold post spinoff. 

On a side note this puts my cash position at only $23K, which feels low and makes me a little nervous given the markets recent run-up. 

Some more thoughts on TTT/MCFAF

In my previous post on TTT/MCFAF (click on "zCurrent Holding: TTT" under Labels) I mentioned how the recently announced merger made TTT an attractive investment, so I thought I'd elaborate a little here... 

MCFAF can be thought of as the original Michael Smith investment vehicle, and through countless mergers/acquisitions/divestitures/spinoffs it's been used to generate serious wealth over the last two decades.   Before the merger I thought TTT was cheap, but I never bought it b/c I was worried about any conflicts of interest.  Afterall, with Smith controlling both companies and with both companies dependant on acquisitions to create value, I was worried he would cherry-pick the best opportunities for MFCAF.  Additionally, TTT was basically a mining royalty company that paid MFCAF a fee for administration - perhaps this fee was slightly beneficial to the shareholders of MFCAF at the expense of TTT?   Lastly, from what I've been able to gather (from 3rd party sources, so I can't verify the accuracy), Michael Smith has a large ownership stake in MFCAF and a small stake in TTT, so financially he's much more aligned with MFCAF (and when I evaluate stocks, insider alignment is one of my primary considerations). 

So, my next thought was why the merger and why now?  Afterall, over the last 5-10 years Smith has gone through considerable lengths to put build the company that was basically the sum of TTT, MFCAF, and KHDHF*.  He then spun out MFCAF and a few years later he split up TTT and KHDHF, and now he's merging TTT and MFCAF!  Wouldn't it've been easier to just spin out KHDHF in the first place?  Ultimately there's no way for me to know why Smith has made these transactions so complex, BUT that doesn't matter b/c with the TTT/MFCAF merger I'm comfortable that now I'm directly aligned with him. 

So, all that being said, I do have a conspiracy theory about what might be up Smith's sleeve.  Recently, TTT issued stock to raise cash for the express purpose of pursuing an acquisition.  My blue-sky hope is Smith found an acquisition that's so attractive he, along with his MFCAF shareholders, wants a piece of the wealth it'll generate - and what better way to do this than by merging MFCAF into TTT before the acquisition becomes public?  Also, this is consistant with a nuance of the TTT/MFCAF merger that has a lot of people scratching their heads - Smith is financially aligned with MFCAF, but on the surface the TTT/MFCAF merger appears to benefit TTT shareholders at the expense of MFCAF.  Afterall, on a conference call Smith was very confident he has the necessary MFCAF shareholder support for the TTT merger - perhaps the pending acquisition was how he got it?  Of course this is just IDLE SPECULATION on my part, we'll see what happens...

*KHDHF is a cement/industrial company that trades on the Frankfurt exchange and here in the US on the pink sheets.  This company is being spun out of TTT in 4 phases, three of which are already complete.  After TTT and MFCAF merge, I'll get 1 share of KHDHF for every 9 shares of TTT/MFCAF I own (which is why I purchased such an odd number of shares - it's divisible by 9). 

Transaction Alert: Bought TTT

Over the weekend I posted about "uU" investing and mentioned I'd been watching TTT and MFCAF (see my previous post).  Ironically, less than 48 hours later these companies announced they'd merge, which IMHO makes them a very compelling investment.  So today I purchased 1638 shares of TTT at a price of $7.30, for a total outlay of $11,957. 

TTT/MFCAF is almost a pure "jockey" bet (at a reasonable price) - if everything works out perfectly (which there's a 99.9% chance it won't) this would be akin to buying Berkshire Hathaway in the 1960's or Leucadia in 1980's.  However, we don't need things to work out "perfectly" to make some real money here, we just need things to work out "OK". 

Both these companies are run by Michael Smith, who for the last 2+ decades has put together a case study on how to generate wealth - here's a fantastic article from SumZero on how he's done it: http://www.sumzero.com/postings/2985/guest_view.   Also, one of the Seeking Alpha contributors has put together a number of very good articles on the evolution of TTT/MFCAF, here's a link to his page: http://seekingalpha.com/author/george-fisher/articles.  Lastly, this guy has also done some excellent write-ups and owns the stock himself: http://longtermvalue.wordpress.com/.

In my previous "uU" post I said the following: 

I love it when I hear value folks talk about whipping out Excel, plugging in financial statements, explicitly projecting bull/bear cases for 7 years, trying to figure out the right cost of equity (BTW it's 12%, it's always 12%), and then passing b/c there's too much uncertainty.  Rather I'd argue, for some portion of their portfolio, investors should seek out uncertainty, try to quantify the downside (or like B. Berkowitz says, "Kill the company"), make sure you're not overpaying, and let the upside take care of itself.

In this case I'm doing just that (hopefully I won't end up with egg on my face...).