Selling Down Turning Point Brands

After a decent run up I sold a half position in TPB as it overshot my previously defined price target.

Due to the lack of better investment opportunities I am willing to hold on to half a position despite what I believe is now a fully valued price for the OTP company.

In my writeup of the company I claim TPB to be a compounder in the making, which I still consider true. However, the company as of late has been actively pursuing M&A opportunities in Vaping Products which I consider much riskier than further building their smokeless tobacco offerings. The vaping industry is relatively new, faces deep pocketed competition from incumbents such as Imperial Brands, Philip Morris but also upstarts such as Juul, while facing an uncertain regulatory future.

I am thus discounting growth in the vaping segment with a higher rate than growth in the smokeless segment and believe an EV/EBITDA in excess of 10x is a decent valuation to start exiting a successful investment.

Why Bitcoin´s Own Success Will Kill It

Not a day passes without the mentioning of Bitcoin or BTC. At work, in the subway, at grandmas 80s birthday or the local insurance guy; just about everybody talks BTC these days. Discussions, however, almost always circle around the fact how BTC has risen over 1000% within a year and all the money one has/could have made by buying BTC. Rarely I observe critical questioning and thinking of where the real value of this freshman financial asset lies. Should these discussions ever come up the bull case centres around these two arguments; “BTC is the better gold” and “BTC is a currency everyone is going to use”. Let me briefly talk about that.

Will BTC be a world currency?
Picture the financial system relying on BTC. It would look something like this: While limiting the amount of coins issued to 21mm is one of BTCs biggest selling arguments it is at the same time its achilles heel

TBT 2017

The year has ended on a high note for my portfolio. Turning Point Brands´ value increased almost 20% over the days between Christmas and New Years. It seems like the market has suddenly woken up to recognise what the Trump administration´s tax cuts will do to a business that generates almost all of its profits in the U.S. Further, dialysis services provider Davita announced the sale of its Healthcare Partners division for USD 4.9 bn. which has been a drag since its acquisition in 2012. This was rewarded by the market with a 30% run. An allocation of these proceeds to share buybacks and debt retirement should push the value of Davita´s equity further up towards USD 90 per share.

Incorporating this stretch towards the finish line of the old year Investing0711 returned 13.57% for the full year.

Baidu: Price Target Reached, Cashing Out

Today I sold my stake in Chinese search giant Baidu. The reason behind it is straight and easy: Valuation exceeded my Price Target of around USD 255 per share. In my opinion a margin of safety is not given at this price.  Further share price appreciation hence will be based on shaky growth assumptions, that I am not willing to pay up for. (especially in a market where European Junk-bonds yield lower than 10-year treasuries, a levered tec-fund can raise capital at 7% and the only justification to hold on to stocks is the fear of missing out on yet another rallye)

The Investment in Baidu yielded a 43% CAGR with only very little risk of permanent impairment of capital.

A Different Kind of Checklist

Trying to mechanically reduce the process of discovering undervalued equities to a few value ratios such as P/B, P/E or EV/EBITDA can hardly translate into sustained outperformance of the broader market. If this was was the case machines would have replaced every single money manager long ago. At the same time prices for stocks screening favourably would be bid up and the opportunity would cease to exist. Unfortunately this means that a straight-forward checklist, purely based on a bunch of financial ratios, does not help at all.

To define the checklist that can be of help to outperform the broader markets it is necessary to first outline the playing field  and from there answer the question of what has to be done to outperform the market.

I believe the playing-field looks like this:

Tremendous Potential at MEI Pharma!

MEI Pharma is an idea brought to my attention by a fellow value investor. Thanks a lot!

I believe that the essence of value investing lies in the uncovering of highly positively skewed bets. Such bets feature the favourable combination of very little risk for permanent impairment of capital and high reward. Value investors focus primarily on the mitigation of downside risks when evaluating whether or not a security is investible. Doing that they seek comfort in robust cash-flows or tangible asset bases that serve as solid lower bound to share prices. Only when it can be assured with reasonable certainty that the downside is minimal an investment awakens interest.

Pre revenue cancer therapy developer MEI Pharma exactly ticks this box. Immediate downside is very limited given the equity is trading at net cash, while the upside is a nice 7.5x.

2016: A Year of Outperformance and Some Avoidable Mistakes

Another year has gone by and I can announce that for the first time in this blog´s short two-year history I have squarely beaten the S&P500 by 4.9%. The value of funds invested is up 18%  from the beginning of the year and the S&P500 closed 13.1% higher (in EUR). I am especially happy about the results since they were achieved by employing a very rational approach that I am confident to be able to replicate in the years ahead.

For each company that I bought shares in I could determine with high certainty its intrinsic value and document most of the analysis here on this blog. As a consequence I achieved healthy returns with Clydesdale Bank, Baidu, IBM, RCI Hospitality and Davita. Many of these fine companies are still far away from my target prices and will hopefully serve as foundation for next year´s outperformance.

Turning Point Brands – A Compounder With 80% Upside

Turning Point Brands (TPB) is a textbook low risk, high return investment with immediate catalysts. Based on conservative assumptions I estimate that Turning Point Brand´s equity provides at least 80% upside to today´s valuation. The company is in the business of selling other tobacco products, which among others includes moist snuff, chewing tobacco, cigars, cigarette paper and liquid vaporisers. A 2016 IPO has provided relieve to TPB´s sky-high pre IPO debt load. Further refinancing and deleveraging of the balance sheet, which is supercharged by utilisation of loss carry-forwards, will reveal true earnings power of the business in 2018. Fetching a conservative multiple on 2018e earnings of 15x, implying an earnings yield of 7%, I arrive at a fair value of USD 23 per share.

Worst Timing Ever – And How to Avoid Major Fuck-Ups in Future

Selling some few hours prior to a neat 20% rally sucks (See the RCI Hospitality chart below). I guess we´ve all been there and we cannot undo our decisions. What we can do is trying to avoid similar unnecessary letdowns in the future.

To do this I will try to put down some principles that might keep me from hastily hitting the sell button

Selling RICK at a 36% Profit on R/E Concerns

There was recently a major change in my portfolio that was left unexplained until today. I quietly sold off my entire RCI-Hospitality-Holdings (RICK) holdings after having beat the drum for the company for quite some time. Therefore, I feel that I owe an explanation of why I have done so.

As you might have noticed I was quite fond of RICK´s insanely cheap valuation. The position was bought at levels of USD 8 and USD 10 per share respectively. In my Seeking-Alpha analysis of RICK I determined the company to be worth anywhere between USD 12.50 on the low- and USD 16 per share on the high side.