Portfolio Update March 2024

In February, I took a step back and reconsidered my investment strategy, and as a result I reallocated much of my portfolio. 

I updated my philosophy to include 4 new criteria:

1. Only invest in the universe where you have an advantage with a small amount of capital. Where there is less competition, there are more mispricing opportunities. This means that I only invest in stocks with a market cap below 500M.
2. Set a high hurdle rate. I am currently using one of 50%. 
3. Some of the best bargains are not found in screeners. They may be OTC, foreign, or have a unique capital structure.
4. Invest alongside management that is aligned – both financially and philosophically. 

With that in mind I made some changes to my portfolio:

Over such a short period of time, I don’t think that my returns here matter, but I still wanted to document this for my own benefit. I feel that I have downside protection on these, but I am still lucky that the prices hadn’t dropped more before I realized my mistake with these.

I exited LLYVK. I bought it on 12/15/24 at 70.52. Sold at 80.34 on 2/25/25. +13.90% return

Why did I exit? This broke my new rules. First, it is a large cap stock, and I found a similar tracking type stock that was smaller. Second, I believe that LLYVK has an upside of 35%, which is below my hurdle rate of 50%. Opportunity costs dictate that I reallocate. Finally, the risk in investing in LLYVK is a multiple contraction for the underlying investment in LYV (which is overpriced with low growth).

I exited CROX I have bought CROX over a period of 2 years, cost basis per share is $100.36 sold at  at $107.80  + 7.4% return.

Why did I exit? This broke my new rules. First, Crox has a 6B market cap. Second, I believe CROX has an upside of 41%, this is below my hurdle rate of 50%. 

I exited SKYH. I bought on 12-5-24 at $11.32 and exited at  $10.85 -4.15% return. 

Why did I exit? I originally bought SKYH at  what I estimated to be above its intrinsic value, but rationalized it with expected future pricing power due to supply constraints. It’s unit economics are also currently not excellent. I estimate an IRR of 7% for its first 14 projects. I also see no reason to see why I am on the right side of this trade. The margin expansion thesis will take some time to play out, and the market will price accordingly. I think the main sin here is not buying with a large enough margin of safety / a high enough hurdle rate. 

I trimmed my stake in BOC

Bought on 1-7-25 at $13.69 and sold at $14.50 +5.92%

Why Trim? I like everything about BOC. Good unit economics, poor market sentiment (likely temporary), aligned management. My only issue with this is that my expected return for BOC is 41%, below my hurdle rate. I also don’t see a catalyst anytime soon. However, the intrinsic value is there, so I have just reduced my position. 

My Updated Portfolio (in order of position size)

FutureFuel (FF)

FutureFuel (FF) is a microcap specialty chemical and biodiesel producer headquartered in Arkansas. It is currently trading below liquidation value due to regulatory uncertainty in the biodiesel market, temporary production issues, and recently restated financials. Despite these headwinds, FF is a net-net with no debt, high insider ownership, and a history of a high dividend yield. It is currently selling at 3.8 EV/EBIT. In the past 8 years it has returned 133% of its earnings as dividends to shareholders. Today’s price offers investors an asymmetric risk/reward profile with tangible downside protection.

Bought 14.15

Read more: https://docs.google.com/document/d/153xdHyB41gy8N19euDkNtsjlJHpQvDFMB2BQy8xABBM/edit?usp=sharing

LNF

LNF is a stable and profitable business actively working to return value to shareholders by spinning off its real estate into a REIT.

• 96% upside
• REIT value will be 85-100% of the current market cap. 
• Adjusting for real estate, LNF is essentially trading at 1 EBIT to EV

Read more: Leon’s Furniture (LNF) – A business currently trading at a 50% discount with an upcoming catalyst to close the gap

Bought $17

FILA

This is very similar to LLYVK. FILA trades at 10.25, its ownership stake in DOMS is 9/share. That means you are buying the core of FILA for 54.1M market cap, net debt of 303M, and a normalized EBITDA of ~100M. A 3.5 EV/EBITDA ratio. Peers trade at 12x. The risk may be in a DOMS mutiple contraction, as DOMS is priced at 35x fwd EBITDA. However DOMS is growing at a good pace, 35% revenue growth YOY. Contrast this with LLYVK for which LYV saw 11% growth over that same period (and lower margins). 

In summary:

• 100% upside for FILA
• There are multiple reasons for mispricing (A slightly complex capital structure, the DOMS investment is slightly obscured, a recent deconsolidation, and being listed on a more obscure exchange.)
• Management is highly aligned with the CEO owning 24% of stock. Management has also set an (increased) 20-40% payout ratio target. 

Read more: https://drive.google.com/file/d/1O1PrUSoM9XVPyeo_kUdepStFaoGEuWye/view

Bought $11.15

CCBI

In summary,

• 100% upside
• Korean American bank, trading at 0.5x TBV. 
• Negative sentiment due to 50% commercial RE exposure.
• CBBI has 30% insider ownership.

read more: https://substack.com/home/post/p-122790368?utm_campaign=post&utm_medium=web

Bought $11.55

QEPC

Looking at comparable the private market value of QEP is 13 EV/EBITDA while it trades at only 4.5 EV/EBITDA. 

• A good business at a cheap valuation.
• Implied upside of 63%
• Very aligned management: Majority owned by insiders. With recent commitments to increasing shareholder value. 
• Evidenced by recent divestments and operating margin improvement. 

read more: https://drive.google.com/file/d/1O1PrUSoM9XVPyeo_kUdepStFaoGEuWye/view

Bought $46.85

BOC

I’ve covered this previously. 

40% upside. 
Cost Basis $14.40

HRBK

This bank one of the few ECIP recipients that is still undervalued. ECIP is a strange program by the US Treasury. The “loan” is valued as preferred stock on the balance sheet, however management can buy out the “loan” for 7-28% of the face value. This means that the 81M listed on the balance sheet as a liability is actually a 16M liability (in the cost to redeem the preferred shares).

Combine that with $48MM of cash on the balance sheet (which is 3x the market cap), and we get to an adjusted book value of 84M. An EV/buyout price of 37M ($30/share). The terms of ECIP are such that where HRBK to be purchased, the buyer would receive the same buyback terms as HRBK. In essence when it comes to a take over, the business is selling for essentially free (plus an additional 30% in cash to the buyer). 

In summary,

• We have a conservative upside of 71%, with a 33%+ margin of safety
• Management is a mixed bag. The bank has a poor ROE, is not invested alongside and not aligned with shareholders. Yet it has declared a dividend for the first time. It also has not managed to squander the ECIP funds like other recipients. Also there has been no real asset growth since 2008. A sign of conservative underwriting. 
• We have downside protection on a worst of the worst case basis, ~7.5% of assets would be at risk in another GFC type event. 

Read more: https://dirtcheapstocks.substack.com/p/a-well-capitalized-bank-trading-at 

Bought $17.75

RRR.UN

• 112% upside
• market cap of $35m, $11.5m+ of cash, versus $5m+ cash flows
• Previously appraised at $0.33
• CEO and the R&R management team own over 90% of the R&R shares, and are A+ capital allocators.

Read more here: https://drive.google.com/file/d/1AzlkTuu8wXXIQ020u2prwK_YDpSFKf-p/view
Bought $0.1552