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In a portfolio report Wednesday, deep value investor Francis Chou (Trades, Portfolio), founder of Chou Associates, revealed changes to some of his most closely watched positions, including losing positions in Sears Canada and Exco Resources due to bankruptcy, and reducing a stake in Valeant Pharmaceuticals (VRX, Financial).
Known for housing notoriously troubled names, Chou’s RRSP Fund saw several of its holdings fold in the fourth quarter. Sears Canada (TSX:SCC, Financial), the worst performer, delivered Chou a 100% loss when it dwindled from $10 at time of purchase in the second quarter of 2013 to nothing as the company went out of business in January. A former stalwart in retail, Sears had opened its doors in Canada in 1953.
Chou’s RRSP Fund sold 292,830 shares of the company, which represented 0.33% of the equity portfolio as of June 30, 2017.
Chou took an estimated 88% hit on his stake in EXCO Resources (XCOOQ, Financial), whose stock price tumbled from around 8 Canadian dollars at time of purchase in second quarter 2017 to around 1 Canadian dollar in the fourth quarter. He unloaded 48,763 shares of the company, formerly 0.3% of the portfolio.
The Dallas-based oil and gas company filed for Chapter 11 bankruptcy on January 2018 to restructure its balance sheet. According to filings, Exco had $1.67 billion in debt with $39.6 million in cash at the end of 2017. Lien term loans of Exco Resources totaling $7.7 million represent the Chou RRSP Fund (Trades, Portfolio)’s largest holding at 10% of assets.
Chou sold his position in Overstock.com Inc. (OSTK, Financial) as its price climbed 104% over the past year. Before closing the sale, Overstock was Chou’s sixth largest position, at 5.75% of the equity portfolio.
He also reduced 68.3% of his position in the embattled Valeant Pharmaceuticals, but that does not mean he disliked the stock, he said in a quarterly letter. Having sold some of the position for tax purposes, he repurchased some shares in the first quarter when the price dropped further. Chou wrote:
“However, in the beginning of the fourth quarter, due to the amount of U.S. bank warrants and stocks that we sold, we had realized capital gains of close to $18.14 per unit. If we were to pass down the capital gains to our unitholders, it would leave a large tax burden to them during the income tax season. This tax burden would be easier to bear for our unitholders if we had outstanding returns for the last few years. However, the reality is that we did not have the best of years. In order to mitigate the problem or eliminate it, we sold all the pharmaceutical stocks in which we had unrealized losses, hoping to buy them back a month later (31 days) at close to the same price we sold them. Sometimes, there are other stocks in the same industry that are equally cheap and we would buy them as a hedge in case the stocks we sold ran up in price. That is why we added DaVita Inc. to our portfolio at about $54 per share. Unfortunately, since timing was not our greatest strength, the pharmaceutical stocks took off in December and we did not get the full benefit of their rise. Luckily, we had DaVita Inc. in our portfolio, which increased 33% to $72.25 at year-end 2017, softening some of the blow from the rise in the other pharmaceutical stocks.”
The Chou RRSP Fund (Trades, Portfolio), based in Canada, returned 13.62% for the year ended March 29 and has returned 9.06% annualized since inception in 1986.
