Our position in Blucora (NASDAQ:BCOR) takes the form of convertible bonds that mature in April 2019. The bonds pay us 4.25% interest, but include a convertibility function that allows us the option to convert into common shares at a premium to today’s price. This particular investment is one that we would categorize as low risk / low reward, but there is a possibility that the reward could turn out to be much better than that. Blucora’s primary asset is TaxAct, which is an online tax return business that competes with Quicken’s TurboTax and similar services. The company also owns a legacy search engine business as well as an integrated e”commerce business that primarily offers consumer electronics at value prices. What we find intriguing about the bond is that we believe the company is a very high quality credit given that it has sufficient cash on the balance sheet to pay off the bonds and its business is highly cash generative. We therefore believe that credit risk is low, and we are quite confident that our capital will be repaid at maturity. The potential upside comes from the possibility that the business turns out to be better than the market currently perceives between now and 2019. We calculate that if Blucora simply generates cash at a rate consistent with 2014’s performance for the next several years and allowed that cash to pile up on the balance sheet between now and 2019, the incremental value could easily push the stock price to a figure well above the conversion price, thereby offering us potential equity”like returns with bond”like risk. The Fund had approximately 4.9% of NAV invested in the Blucora bonds as of April 30, 2015.
From Zeke Ashton (Trades, Portfolio)'s 2015 semi-annual letter.
