“But my lord, when we addressed this issue a few years ago, didn't you argue the other side?" He said, "That's true, but when I get more evidence I sometimes change my mind. What do you do?”
”• John Maynard Keynes
Part of being a successful investor is doing a periodic evaluation of one's own performance. It is particularly important that an investor pays attention to his/her outright failures and under-performing positions as well as the winners.
Sometimes the premise of an investment changes, sometimes the premise for the investment is proven to be faulty; while other times the premise still exists but the anticipated result simply has not materialized. Of course an investment premise must ultimately be tied to value or no margin of safety exists. If no value exists, the investing premise is little more than an educated speculation.
Successful evaluation should never focus merely upon the price movement of an equity. It is important to note than not all winners are good investments and not all losers are bad ones. Just as all birdies in golf are not the result of a well-executed swing. Sometimes a fortuitous bounce leads to a positive result which had nothing to do with proper aim or execution. A bladed shot sometimes hits the pin and drops straight down or a duffer occasionally records a hole-in-one with a poorly struck ball.
The focal point of the assessment should involve determining whether value still exists and/or the premise for the original investment remains valid. Further, in many cases the realization of value takes much longer than the investor has anticipated.
Most investors have experienced periods of impatience where they have sold a long-held position only to watch its price ascend shortly after they have jettisoned the stock. If the stock was sold on the assumption it was "dead money" rather than based upon a change in its previously ascertained merits, then the investor has committed a grievous sin. Emotion has caused the investors to enter the land of speculation.
On the other hand, if the premise for the original investment or the perceived underlying value of the equity has changed materially, the investor has committed no sin at all. Rather, he has become the victim of bad luck or an unforeseen event which triggered the upward price movement. In such cases the investor is likely to feel foolish about selling the equity; however, his decision to sell was prudent.
Many investors spend entirely too much time monitoring stocks which they have recently removed from their portfolios. It is as if they have been suddenly been fitted with a pair of rear view mirrors that are attached to their temples. Although such behavior is commonplace, it can become a dangerous pursuit if the investor begins to second guess the rational evaluation process which led to his equity sale. Those who choose to evaluate their success by short term market fluctuations are ultimately destined to long term under-performance.
With the aforementioned thoughts in mind, now it is time for me to evaluate my 2011 performance.
2011 Stock Write-ups on GuruFocus
Last year I wrote detailed reports on four tiny companies which represented my largest holdings. I submitted three of the stocks (BERK,CNTY,TATT) for review in the Gurufocus Value Investing Contest. The other stock (TCHC, Financial), was chosen as a likely turnaround candidate.
Here are the links to my 2011 Gurufocus articles on the four companies:
1. Berkshire Bankcorp: Undervalued and Overcapitalized
2. Century Casinos - An Asset Play with an Earnings Catalyst
3. TATT: An Asset Based Value with a Dual Catalyst
4. TCHC; APC Turnaround Candidate-
All four stocks traded at large discounts to their tangible book values and possessed strong balance sheets. All four stocks were net cash positive (Cash > LT Debt). Further, I believed that all four candidates would turn profitable or increase their net operating earnings in the following 12 months. I felt several of the stocks had other potential catalysts.
Berkshire Bancorp (BERK, Financial)
My thesis for BERK was quite simple, specifically the tiny regional bank was extremely over-reserved, reasonably priced and profitable. Additionally, It appeared to have a high quality loan book with a low percentage of non-performing loans suggesting that the bank was over-reserved.
The main catalyst involved the fact that the majority owner (Moses Marx) was forced to convert his interest paying convertible stock into common stock last fall. Thus he would no longer receive any income suggesting that he would likely wish to monetize his large position through a dividend reinstatement or an outright sale of the bank.
Although, Marx has not yet monetized any of the banks assets, he has increased his position to about 70% of the outstanding shares since the preferred shares converted on 10-31-2011. His latest purchase came on April 26th when he bought over 25 thousand shares at 6.70. It should be noted that Marx purchased slightly fewer than 6 million shares of the bank last fall at a price of 8.12 per share following the conversion of the preferred shares.
It appears that Mr. Marx bought out all the other preferred investors which the exception of the George Karfunkel Trust which owns just under 10% of the outstanding shares.
Nothing much has changed in regard to the investing thesis for BERK with the exception that the discount in the stock has largely disappeared following about a 40% appreciation in share price. To date I have not sold any shares in the stock; however I will likely begin to sell some of the shares in my non-taxable accounts in the near future. Further I will consider selling shares in my taxable accounts as the gains become long term (held over one year).
21st Century Holding Company (TCHC)
Without question, my best investing idea for 2011 turned out to be the turnaround candidate, TCHC. As predicted the company returned to profitability in the quarter following my article and now has recorded three consecutive profitable quarters. In the trailing 9 months the stock has earned 42 cents and still trades at less than 53% of its tangible book value at it current price of 4.00 per share.
More importantly, the company has started writing sound business and its operating earnings (total earnings less income earnings) have turned positive for the last two quarters. In the latest quarter the overall loss ratio for the company dropped to 44.69%.
To be fair, the stock still contains a high amount of risk in the form of its heavy concentration of underwriting in Florida hurricane zones. Additionally, a substantial amount of the companies net earnings for the prior nine months were a result of net investment gains. Still, considering the current discount to book value the stock holds, its rapidly improving loss ratios, and increased pricing for the Florida P&C market, TCHC remains highly favorable in terms of risk vs. reward at it current price.
I have no intention to sell any of my position in the intermediate future, unless conditions change.
Century Casinos (CNTY, Financial)
CNTY has recorded net earnings of 17 cents in the trailing 12 month period and continues to trade at about a 57% discount to it ten year average price to book ratio of around 1.3X. The stock remains significantly discounted while earning a modest earnings flow and a net cash position.
In late May, the company secured a loan from the Bank of Montreal at highly favorable interest rate. It appears that the management of CNTY is poised to make an acquisition with the remaining 23 million left on the note after paying down the outstanding 4 million owed on their best property in Edmonton.
Although the debt slightly increases the investment risk in CNTY, their management has a long history of making valuable acquisitions at bargain prices which have resulted in substantial gains in long-term shareholder equity over time. The company has raised book value per share at an annual rate of 10.8% in the last ten years.
I continue to hold CNTY with a perceived value of slightly more than it book value of around 5 dollars a share.
TATT Technologies (TATT, Financial)
TATT has been a dog. Since I entered the stock in the Gurufocus value contest approximately 13 month ago, its price per share has descended about 25%. My apologies go out to anyone who bought into my thesis and invested their hard-earned money in the company. It still sells at a sizable discount to net current assets and a large discount to its book value.
All that said, the company did finally issue a dividend of 28 cents about a month ago (less 20% withholding by the Israeli government) and agree to a share buy-back of a maximum of 500 thousand shares. Additionally, in the last six months the TATT has shown a meager profit following a poor summer quarter which featured impairments of intangible assets and inventory write-downs.
The various business sections of TATT have improved slightly with the notable exception of Bental, (the electronic motion division) which has shown precipitous declines. Overall, the business continues to languish but the price of the company remains highly favorable considering the strength of the balance sheet, its substantial cash reserves and the discount to net current assets.
Post dividend, the company still has in the neighborhood of 6.8 dollars per share in net current assets while trading at 4.25 per share. Further, its business model is still relevant although the aircraft OEM and replacement part and service sector continues to remain depressed. At some point in the future, new aircraft production will accelerate and the repair cycle will improve. It remains to be seen if TATT will eventually ascend to it fair value in terms of its balance sheet.
I may hold on to all of my shares of TATT for 2012 unless I decide to utilize some of them as capital losses to offset some of my capital gains in the calendar year. That would be a viable strategy if I found a suitable replacement for the shares with better prospects than TATT.
On the positive side, the management of the company has shown some regard for shareholders by issuing an excellent dividend and agreed to buy-back a modest amount of stock.
Concluding Remarks
All worthwhile portfolio evaluation must be followed by appropriate actions. It does little good to analyze one's holdings and then to merely sit back and remain inactive, hoping for the best. Human nature lends itself to inactivity until stress is felt; at that point the investor tends to overreact.
In the case of the aforementioned equities, I intend to sell some BERK, hold my entire position of TCHC, hold my entire position of CNTY, and consider selling some of my position in TATT to offset capital gains. I will only sell some TATT if I find a suitable replacement since I already have approximately 16% in cash in my current portfolio. Of course my cash position will increase as I sell BERK unless I redeploy the capital in other stocks.
Always remember, one's plans should always be subject to change as investment holdings are dynamic rather than static in nature.
”• John Maynard Keynes
Part of being a successful investor is doing a periodic evaluation of one's own performance. It is particularly important that an investor pays attention to his/her outright failures and under-performing positions as well as the winners.
Sometimes the premise of an investment changes, sometimes the premise for the investment is proven to be faulty; while other times the premise still exists but the anticipated result simply has not materialized. Of course an investment premise must ultimately be tied to value or no margin of safety exists. If no value exists, the investing premise is little more than an educated speculation.
Successful evaluation should never focus merely upon the price movement of an equity. It is important to note than not all winners are good investments and not all losers are bad ones. Just as all birdies in golf are not the result of a well-executed swing. Sometimes a fortuitous bounce leads to a positive result which had nothing to do with proper aim or execution. A bladed shot sometimes hits the pin and drops straight down or a duffer occasionally records a hole-in-one with a poorly struck ball.
The focal point of the assessment should involve determining whether value still exists and/or the premise for the original investment remains valid. Further, in many cases the realization of value takes much longer than the investor has anticipated.
Most investors have experienced periods of impatience where they have sold a long-held position only to watch its price ascend shortly after they have jettisoned the stock. If the stock was sold on the assumption it was "dead money" rather than based upon a change in its previously ascertained merits, then the investor has committed a grievous sin. Emotion has caused the investors to enter the land of speculation.
On the other hand, if the premise for the original investment or the perceived underlying value of the equity has changed materially, the investor has committed no sin at all. Rather, he has become the victim of bad luck or an unforeseen event which triggered the upward price movement. In such cases the investor is likely to feel foolish about selling the equity; however, his decision to sell was prudent.
Many investors spend entirely too much time monitoring stocks which they have recently removed from their portfolios. It is as if they have been suddenly been fitted with a pair of rear view mirrors that are attached to their temples. Although such behavior is commonplace, it can become a dangerous pursuit if the investor begins to second guess the rational evaluation process which led to his equity sale. Those who choose to evaluate their success by short term market fluctuations are ultimately destined to long term under-performance.
With the aforementioned thoughts in mind, now it is time for me to evaluate my 2011 performance.
2011 Stock Write-ups on GuruFocus
Last year I wrote detailed reports on four tiny companies which represented my largest holdings. I submitted three of the stocks (BERK,CNTY,TATT) for review in the Gurufocus Value Investing Contest. The other stock (TCHC, Financial), was chosen as a likely turnaround candidate.
Here are the links to my 2011 Gurufocus articles on the four companies:
1. Berkshire Bankcorp: Undervalued and Overcapitalized
2. Century Casinos - An Asset Play with an Earnings Catalyst
3. TATT: An Asset Based Value with a Dual Catalyst
4. TCHC; APC Turnaround Candidate-
All four stocks traded at large discounts to their tangible book values and possessed strong balance sheets. All four stocks were net cash positive (Cash > LT Debt). Further, I believed that all four candidates would turn profitable or increase their net operating earnings in the following 12 months. I felt several of the stocks had other potential catalysts.
Berkshire Bancorp (BERK, Financial)
My thesis for BERK was quite simple, specifically the tiny regional bank was extremely over-reserved, reasonably priced and profitable. Additionally, It appeared to have a high quality loan book with a low percentage of non-performing loans suggesting that the bank was over-reserved.
The main catalyst involved the fact that the majority owner (Moses Marx) was forced to convert his interest paying convertible stock into common stock last fall. Thus he would no longer receive any income suggesting that he would likely wish to monetize his large position through a dividend reinstatement or an outright sale of the bank.
Although, Marx has not yet monetized any of the banks assets, he has increased his position to about 70% of the outstanding shares since the preferred shares converted on 10-31-2011. His latest purchase came on April 26th when he bought over 25 thousand shares at 6.70. It should be noted that Marx purchased slightly fewer than 6 million shares of the bank last fall at a price of 8.12 per share following the conversion of the preferred shares.
It appears that Mr. Marx bought out all the other preferred investors which the exception of the George Karfunkel Trust which owns just under 10% of the outstanding shares.
Nothing much has changed in regard to the investing thesis for BERK with the exception that the discount in the stock has largely disappeared following about a 40% appreciation in share price. To date I have not sold any shares in the stock; however I will likely begin to sell some of the shares in my non-taxable accounts in the near future. Further I will consider selling shares in my taxable accounts as the gains become long term (held over one year).
21st Century Holding Company (TCHC)
Without question, my best investing idea for 2011 turned out to be the turnaround candidate, TCHC. As predicted the company returned to profitability in the quarter following my article and now has recorded three consecutive profitable quarters. In the trailing 9 months the stock has earned 42 cents and still trades at less than 53% of its tangible book value at it current price of 4.00 per share.
More importantly, the company has started writing sound business and its operating earnings (total earnings less income earnings) have turned positive for the last two quarters. In the latest quarter the overall loss ratio for the company dropped to 44.69%.
To be fair, the stock still contains a high amount of risk in the form of its heavy concentration of underwriting in Florida hurricane zones. Additionally, a substantial amount of the companies net earnings for the prior nine months were a result of net investment gains. Still, considering the current discount to book value the stock holds, its rapidly improving loss ratios, and increased pricing for the Florida P&C market, TCHC remains highly favorable in terms of risk vs. reward at it current price.
I have no intention to sell any of my position in the intermediate future, unless conditions change.
Century Casinos (CNTY, Financial)
CNTY has recorded net earnings of 17 cents in the trailing 12 month period and continues to trade at about a 57% discount to it ten year average price to book ratio of around 1.3X. The stock remains significantly discounted while earning a modest earnings flow and a net cash position.
In late May, the company secured a loan from the Bank of Montreal at highly favorable interest rate. It appears that the management of CNTY is poised to make an acquisition with the remaining 23 million left on the note after paying down the outstanding 4 million owed on their best property in Edmonton.
Although the debt slightly increases the investment risk in CNTY, their management has a long history of making valuable acquisitions at bargain prices which have resulted in substantial gains in long-term shareholder equity over time. The company has raised book value per share at an annual rate of 10.8% in the last ten years.
I continue to hold CNTY with a perceived value of slightly more than it book value of around 5 dollars a share.
TATT Technologies (TATT, Financial)
TATT has been a dog. Since I entered the stock in the Gurufocus value contest approximately 13 month ago, its price per share has descended about 25%. My apologies go out to anyone who bought into my thesis and invested their hard-earned money in the company. It still sells at a sizable discount to net current assets and a large discount to its book value.
All that said, the company did finally issue a dividend of 28 cents about a month ago (less 20% withholding by the Israeli government) and agree to a share buy-back of a maximum of 500 thousand shares. Additionally, in the last six months the TATT has shown a meager profit following a poor summer quarter which featured impairments of intangible assets and inventory write-downs.
The various business sections of TATT have improved slightly with the notable exception of Bental, (the electronic motion division) which has shown precipitous declines. Overall, the business continues to languish but the price of the company remains highly favorable considering the strength of the balance sheet, its substantial cash reserves and the discount to net current assets.
Post dividend, the company still has in the neighborhood of 6.8 dollars per share in net current assets while trading at 4.25 per share. Further, its business model is still relevant although the aircraft OEM and replacement part and service sector continues to remain depressed. At some point in the future, new aircraft production will accelerate and the repair cycle will improve. It remains to be seen if TATT will eventually ascend to it fair value in terms of its balance sheet.
I may hold on to all of my shares of TATT for 2012 unless I decide to utilize some of them as capital losses to offset some of my capital gains in the calendar year. That would be a viable strategy if I found a suitable replacement for the shares with better prospects than TATT.
On the positive side, the management of the company has shown some regard for shareholders by issuing an excellent dividend and agreed to buy-back a modest amount of stock.
Concluding Remarks
All worthwhile portfolio evaluation must be followed by appropriate actions. It does little good to analyze one's holdings and then to merely sit back and remain inactive, hoping for the best. Human nature lends itself to inactivity until stress is felt; at that point the investor tends to overreact.
In the case of the aforementioned equities, I intend to sell some BERK, hold my entire position of TCHC, hold my entire position of CNTY, and consider selling some of my position in TATT to offset capital gains. I will only sell some TATT if I find a suitable replacement since I already have approximately 16% in cash in my current portfolio. Of course my cash position will increase as I sell BERK unless I redeploy the capital in other stocks.
Always remember, one's plans should always be subject to change as investment holdings are dynamic rather than static in nature.
