In honor of the new year, here are the top five investments in my equity portfolio as of the beginning of 2020, along with my investment thesis on each one.
Scully Royalty (SRL, Financial) is a complicated company that requires many hours of reading to get to the whole picture. Fortunately, in my opinion, getting the entire picture is not necessary for this investing idea. A good investing idea is something you need to be able to write on a napkin. This stock is my best idea and therefore my biggest position, so here’s my napkin summary:
Scully Royalty has an enterprise value of $103 million. It owns a 7% royalty on the Scully iron ore mine in Canada. That mine re-opened in the summer and is being ramped up by the private non-reporting Tacora Resources. When fully ramped, this ultimately results in $30 million in after tax earnings being added to Scully Royalty's bottom line. In effect, it trades at something like three times forward earnings, but this is not clear to the market as the latest financials only included the first six months of 2019, where the mine had not re-opened yet. I’ve written a more comprehensive review as part of the GuruFocus Value Idea Contest here.
Tradeable contingent value right GCVRZ
There is a tradeable contingent value right under the ticker (GCVRZ, Financial). This security was issued by Sanofi Aventis (SNY) during an M&A event a few years back. The milestone payments were missed. However, a lawsuit developed with contingent value right holders suing Sanofi, alleging that it purposely tried to avoid hitting the milestone.
The parties recently settled the case. Sanofi shall pay to the Trustee, for distribution as discussed below, a total of $315 million (the “Settlement Payment” or “Litigation Proceeds”):
The lawyers and trustees take a cut, but by my estimate, this still results in a payout of $0.89 per CVR.
The trustee is guiding in the press release to $0.88 per CVR. In my experience, this sort of guidances tends to be conservative.
A date for the settlement is not provided, but if I go by the more conservative $0.88, the gross spread is 3.22%. If I assume in four weeks it is done, this looks like an annualized return of more than 50%. I'm assigning this 100% probability of closing because it is a settlement and Sanofi has $11 billion in EBITDA and $7 Billion in cash.
The risk here is that the payment will take a long time. I'm not an expert on this topic, but so far my research indicates it should take at an absolute minimum of three weeks. The case is settled. In my book, it looks like a straightforward affair from here, as all parties are incentivized to move on and get this off their books.
Antero Midstream (AM, Financial) is a pipeline company. It mainly transports gas and shares destinies with Antero Resources (AR, Financial). After coming to an agreement with Antero that helped both companies to unlock value and run their business in a more sustainable fashion, this started ripping higher.
I’ve been along for that ride and think it is going much farther. I’ve added a lot of shares at a 24% yield. Now it is trading at a 15% yield and 7.5 times cash flow. Analyst estimates pencil in $0.95 of earnings for next year, but I think this is a low estimate. The same goes for estimates two years out, which are for $1.15. The company just bought back some stock around $5 per share and may be able to buy more cheap stock from Antero Resources. At the end of January, this should be paying out what is roughly the equivalent of a 4% dividend.
Clarksons PLC (CKNHF, Financial) is a shipping broker from the UK. The company has been arranging contracts between buyers and sellers of shipping contracts since 1852. The company is profitable but trading at a price-earnings ratio of around 30. It has increased its dividend every year for the past 16 years.
With a market capitalization of $941 million, it is still a small-cap company. Thus, there are hardly any analysts who keep an eye on it. Shipping is also a particularly unpopular market.
The company takes a percentage of the value of the transactions it brokerages as a fee. If transport prices go up, its fees increase commensurately.
The markets for maritime transport have been poor for years, but as prices rise, Clarkson's profitability increases exponentially. Its cost base hardly increases, but income does as this is based on a percentage of turnover.
In a dream scenario, sales increase six times and the costs remain virtually the same. Due to the inherent operating leverage effect, profit increases by an even greater factor. Scenarios in which the profit increases by a thousand or two thousand percent are conceivable.
HC2 Holdings (HCHC, Financial) is a diversified holding company lead by Phil Falcone. Falcone is an ex-hedge funder, and I believe this is his attempt at a permanent capital vehicle. HC2 is invested in construction, marine services, energy, telecommunications, life sciences, broadcasting and insurance. It appears heavily indebted, but most of that debt is actually non-recourse to the holding. In addition, there’s been activity to sell a stake in a subsidiary that would go a long way to remove uncertainties regarding the balance sheet. I believe the net assets owned through subsidiaries will ultimately be considered worth multiples two or three times HC2’s current market cap of ~$100 million.
I don't know what will happen in 2020. I own some gold miners, silver miners and royalty/streaming companies to help deal with things that portfolios are generally ill-prepared for. I try to pick up positive returns through lots of special situations that are not as correlated to the market. If the market keeps ripping higher, I'm probably going to lag, but in most other scenarios my portfolio should do quite well.
Disclosure: author is long HCHC, AM, AR, GCVRZ, SRL
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