Following Up on Enzon (ENZN)

Enzon published their annual 10-K filing after the close on Friday. Royalty revenue has been drying up much faster than management anticipated in their 2015 filing. They expected $9m in revenue for 2016, and received closer to $8m. They had forecast $29m in revenue at the start of 2016 (or $20m from 2017 thru 2021), and as of 2017 they now expect to receive $10m, implying that they reduced their 2017-2021 forecast by half from $20m to $10m in revenue. Additionally, Merck notified ENZN that they had overpaid and will be reducing future payments to account.

The Nektar court case is still moving along, so there is still upside revenue potential there. Additionally, Shire is in Phase III with its calaspargase pegol development (referred to as SC Oncaspar by Enzon). So the upside potential still exists for one-time milestone payments of roughly $15 million triggered by European and U.S. FDA approvals.

My guess is the stock will trade down closer to $.20-0.25 in the near-term. I closed out of my position at -20%. Thankfully was never very big to begin with and the accelerating decline in royalties seems much faster than anticipated. The company still likely has $15-25 million in royalties, but expenses remain high, and as less than a 1% position, it’s not worth the hassle.

From a learning standpoint it was helpful to learn more about liquidating trusts and the associated taxation of distributions.

 

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Norsat International Acquisition Likely But For How Much?

Last Monday I purchased shares in Norsat International, and so far I’m up 22%. The story is evolving faster than I had anticipated…

NSAT is a small Canadian manufacturer of satellite components, and yet another stock which was trading at very cheap multiples (6x EV/EBITDA,  1.3x Price/Sales, 1.2x Price Book, very little debt)  due to negative investor sentiment towards the satellite industry in general. Norsat specializes in custom, rugged, portable satellite equipment. I have some (small) experience using satellite equipment myself from the military. Compared to cell phones or landlines, satellite is far from perfect in implementation, but also far better than nothing at all.

Viasat’s aggressive new Ka band satellite launches have been turning up the heat on an already precarious industry. Bankruptcies and mergers still loom for satellite providers due to a lot of satellite oversupply coming onto the market. More competition between Ka and Ku band providers should result in lower costs of renting satellite bandwidth, which is a good thing for satellite customers, and ultimately, the manufacturers making the equipment to connect to the satellites. Consequently, NSAT is showing solid EBITDA and margin growth as they roll out Ka band equipment alongside their existing Ku gear.

Norsat had suffered from poor management and lack of profitability about a decade ago before bringing on CEO Aimee Chan, who has cut costs and swung the company back to the black. About 6 months ago the firm published a press release stating that it had received multiple buyout offers, including one from Privet Fund LP for $8.00. I was surprised to see a company which had such good upside optionality only trading at $8. Privet had taken a 17.6% stake in the common shares, which perhaps convinced investors that this was a done deal, but it is often the case that companies receiving buyout offers trade through the initial offer price. The valuation multiples I mentioned above along with the emphasis on the phrase “multiple offers” piqued my interest further. I made this a mid-sized position at $8.

The stock shot up on Friday after Privet Fund raised its initial offer from $8/share to $10.25/share. Given the aggressive interest from Privet I am a bit puzzled about why the stock is only trading at $9.80 as of the end of close Friday. At 8x EV/EBITDA NSAT is no longer what I would define as cheap, but it isn’t rich either. I plan to keep holding for now.

Oh also, please note the following news about Duke basketball.

Rock Chalk!

After Running Up 69%in 4 Months, Selling WLDN

We must all suffer one of two things: the pain of discipline or the pain of regret or disappointment. – Jim Rohn

Be fearful when others are greedy. Be greedy when others are fearful. – Warren Buffett

My best performer for the past 4 months, Willdan (Ticker: WLDN) might also end up being my biggest regret for two reasons:

  1. My initial position was in too small a size, about 0.05% of my portfolio.
  2. Momentum could carry it further.

I bought in November soon after the election when it became clear that infrastructure was going to be an actual priority. WLDN had been growing a lot and wasn’t expensive for the growth at the time. So I took a small position around $19/share and sold after last week’s earnings report at $33. The earnings results themselves were fine and the company sounded solid, but the multiples have blown up on this name.

My initial decision to research WLDN came from this write up. I didn’t know much about the company going in, but similar to my other small bets (VG, RSYS, TSL, and RDCM), my intention was to start small and add to the winners. This one got away from me, and at a TTM EBITDA of 20x, a Forward P/E of 25x and no defensible moat that I can see, I can’t justify holding on. I have to obey the iron law of valuation, even/especially when it’s tempting to say “but this time is different”. So I’ll choose the pain of discipline – look for other stocks with more attractive intrinsic valuations, and size my initial position appropriately.

In the short-term I think WLDN may go higher still, and if I had a larger position to begin with I could have trimmed rather than exiting. Lately I’ve been working harder to start every position with no less than a 3% position, which should help me to avoid having to bail from another runner like Willdan earlier than I would like.

 

Trina Solar (TSL) Deal Closing – Up 18% in 3 Months

Bank of New York Mellon which handles the ADR shares of Trina Solar appears to be finalizing the all-cash TSL self-buyout of the U.S. based shares. I am up 18% in the 3 months I have owned it compared to a 5% gain for the S&P 500.

This investment worked in part because the valuation was so cheap that I was never sweating getting stuck with the TSL shares if the deal fell-through. The price was well-supported by a valuation floor, which poses a sharp contrast to my Rite Aide debacle. Trina Solar ADR shares were trading at single digit valuation multiples as recently as a month ago. I felt confident that Chinese regulators were not going to block the Chinese founder of his company from buying back his own US-based ADR shares. So when the stock was selling off due to vague macro fears of a Chinese capital outflow clampdown,  I bought. Disgusted and exhausted U.S.-based investors had discounted the likelihood of the deal closing.

It is interesting to see Berkshire Hathaway now doing the same style investment in Monsanto, a stock founded on low valuation but which includes 12.1% of upside M&A optionality if the deal closes. To me this lends credence to my initial thoughts about M&A investment back in the fall. Many of the regular risk-arb M&A firms chose to sit on the sidelines rather than take on some of the riskier M&A deals available without considering the cheap-to-fair valuations of the pursued companies.

My portfolio is getting more manageable at 25 stocks. For anyone interested in M&A arbitrage spread ideas, two great resources here:

http://www.insidearbitrage.com/merger-arbitrage/

http://www.mergerinvesting.com/pendingmergers

 

 

1Q17 Portfolio Update – Sizing Up While Slimming Down

Doubt is not a pleasant condition, but certainty is absurd. – Voltaire

It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so. – Mark Twain

I generally don’t like to measure performance by quarter as it leads to short-termism, but this quarter has been a good one. Facebook, WLDN, Dell, Charter, and CSAL/UNIT have all had strong 3 month rallies of >15%, but I’ve still had too much cash sitting on the sidelines, between 5-15%. So, I’ve decided to ignore the macro for the most part, and focus on deeply undervalued names. This portfolio is meant to compose of my most compelling investments. It’s not supposed to have a macro view and I can always pull more cash from savings into the account if a real market crisis/opportunity emerges. This doesn’t mean I won’t hold cash, but from here on out, I plan to keep it within the 3-5% range. While valuations *could* be high right now, I find little certainty in macro opinions.

end-of-1q17-portfolio-compsition

Slowly rotating from passive to active has been a challenge. Owning part of a going concern entails hours of research, but I’m getting more comfortable with the names I own. As I started researching new stocks initially, I spread my bets with several small positions in names like LVLT, TSL, RAD, RDCM, GSAT, Dish, ESOA, T-Mobile, Dell, and RSYS. Some panned out (LVLT, ESOA, DVMT) and some have not (RAD, GSAT, VG). Thankfully, by keeping my riskiest allocations small, and selling after being down 10-20%, I’ve generally been able to limit losses, while sizing up the names I am more comfortable with like AOBC, HUM, CSAL/UNIT, DISH, and TMUS. My one big mistake recently was Rite Aid, a reminder that valuation is everything.

This activity has entailed a lot more trading than I can sustain over the long-term, and I’ve been focused on buying fewer small positions and getting more buy and hold value names into the portfolio.

As such, I recently added SBFG and CKFC, two community banks with low loan-to-asset ratios and price to tangible book values which should help them benefit in the event that interest rates rise. My hope is that I won’t really have to touch them for the next year.

I also added a shipping spin-off, INSW which appears to be at least 20% undervalued on a NAV basis (thesis here), and the ADR tracker for Actelion in the hopes of receiving shares in a biotech R&D spin-off for free (good summary here). Shipping in general I find to be a pretty “meh” industry. Biotech and pharma I do not fully understand, but I am seeing a lot of names pop up in my screens, and it seems like there are a lot of babies being thrown out with the bath water.

My goal is to run a portfolio of no more than 20-25 names at a time, which should enable me to stay focused and to avoid tracking the market.