What's in my Deep Value Portfolio? #2

[11/22/2024] A quick update on my current picks.

As an introduction to this portfolio update, I first planned to write something creative about the rampant speculation in AI and crypto that we can experience nowadays, but I figured that we’re all aware of that already, so why bother.

Wow, you are up 200% on your $MSTR long – pure genius! Here comes the next Warren Buffett ladies and gentlemen.

Anyways, here are some bullet points:

• Europe is slowly falling into the cold embrace of a recession. I see more and more cigar butts come up the worse the situation gets, which isn’t really surprising. The steel industry is in a terrible state and getting even worse - and there I see a great deal of opportunity. I have a lot of European companies on my watchlist, but since I feel the need to take a more conservative approach these days, the portfolio is now roughly 1/3 in cash. The US, by comparison, is a dry wasteland when it comes to cigar butts. International markets seem like the way to go.

• After a surprisingly quick rally, I have reduced my positions in two ECIP banks: United Bancorporation of Alabama (UBAB), which I sold completely, and Citizens Bancshares Corp. (CZBS), which used to be my largest position (15-18%, depending on the account) I have recently trimmed to just 6%, during the recent all-time highs. I still really like this opportunity, but as much as I loved it at $35 (with a then-P/E ratio below 5), it’s quite a different case now at $59 in terms of the expected rate of return, which I estimate to be in mid-teens.
  Nonetheless, there’s still plenty of upside potential, and I’d be glad to buy more, should the price fall in the future. Essentially, the higher the stock price, the less impact buybacks have. Similarly, the lower the interest rates, the worse the reinvestment opportunities, roughly. However, a lucrative M&A deal could probably make me regret this choice.

• This year, I have been underperforming the S&P500, with around 9-10% YTD return, compared to 26% for the index. As much as I’d love to see my stocks grow by 10% every single day (I’m looking at you, MicroStrategy…), sometimes the best thing you can do is go play golf.
  That said, assuming we end 2024 with this return, I calculated that over the first 5 years of my deep value journey, we managed to achieve ~25% CAGR, and that’s pretty good if you ask me (excuse my lack of modesty).

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Current Portfolio Picks

1. ANX.L (10%), a credit hire and legal services company from the UK, trading at mid-single digits P/E, about half of its estimated liquidation value, and with around 1/3 of shares outstanding being held by the insiders. You can read more here, here and here. The management is focused on growing the higher-margin Housing Disrepair segment and reducing debt, which has been a big overhang on the stock for the past few years. It’s a niche type of business with barriers of entry and some able management. I consider Anexo to be worth at least 100% more than what the current price suggests. The nature of the business makes me confident that Anexo would perform well even during a recession. Recently, there have been some discussions on share buybacks as well.
   I feel very comfortable with this investment, both in terms of the potential rate of return and the perceived safety of capital.

2. NAII (10%), a cheap supplement manufacturer with temporary demand problems. In short, NAII has recently built a brand-new production facility for its biggest customers, but due to weakened sales among MLM companies and, in effect, inventory oversupply, those customers have halted orders from the company for a few months and thus, the facility had to be temporarily closed. It was, however, expected that it should once again start running in early 2024, which of course happened as expected.
   The company expects to post net losses for FY2025 (already started), but profitability is expected to return by the second half of the year, just not enough to fully cover the losses from the first half. Currently, it is trading for ~$4.5, and my liquidation value estimate is around $9. Chase Ricker described this case very well here.
   Since my initial purchase, the stock fell more than 30%. I still like it, although NAII was probably a mistake in terms of the initial sizing - I simply got too greedy and sized it too large on misjudged conviction. Still, I expect this investment to turn out satisfactory. Lesson learned.

3. CZBS (6%), an overcapitalized ECIP bank with high integrity management, trading at a P/E of ~7, below its ECIP-adjusted TBV, and with quite a lot of tailwinds. Citizens’ deposit cost is a lot lower than in the case of other similar banks, and it has an excellent quality of underwriting, as well as fairly okay efficiency ratio.
   The company is constantly buying back shares, which is further increasing the value of its shares over time. There were whispers of a potential tender offer, and the management is actively looking for M&A opportunities as well, which seem to be fairly high on their priority list. Providing CZBS is successful in acquiring another ECIP bank, its earnings should see a substantial increase, as it currently holds large amounts of money invested in low-yield treasuries. Using this cash to acquire another cheap bank should, furthermore, provide it with more opportunities to deploy that low-yield cash into higher-yield mortgages. The management lends money in a conservative way and is very shareholder friendly, which also decreases the risk.

   As usual, I highly recommend you read what Alex Bossert has to say on this matter, as I consider his insight to be extremely valuable and definitely worth your time. You can also find one fantastic writeup on Value Investors Club, if you want to get the full picture.

4. Paywalled Polish net-net (formerly, one of the most recognizable electronics and hardware retailers in the country, 6% allocation), trading at just 17% of book, 40% of its NCAV, and with insiders holding over 50% of total shares outstanding.
   In 2020, it was accused by the IRS of incorrectly recognizing VAT-related costs, which reduced their taxable income. It was ordered to pay an enormous sum that threatened the company with illiquidity, and the case went to court shortly after.

   In late 2022, the company won one of the court cases, which was not unexpected by the management.
   Unfortunately, the sole existence of that claim pushed the company into involuntary restructuring, causing the price to plummet. Since making a deal with its creditors, the company is on a clear path to paying off any related liabilities, but the stock price is still stagnant.
   A management buyout is possible, as we have seen such efforts in the past, although unsuccessful. However, it’s unlikely something like that would happen before the creditors are satisfied.
   The main risk is that the company could lose part or all of the ongoing court cases, which might cost them up to 60 million PLN. Nonetheless, the current price offers a substantial cushion, even in the worst-case scenario where they lose every case. However, it will likely take some time before the situation becomes clearer. From what I understand, it’s quite possible they will win additional cases, which could result in a rapid price appreciation for investors. Even if they lose all of them, the company would still be trading at just 30% of tangible book value, although securing enough cash in a short amount of time could present a challenge if it happened all at once (but that’s a big ‘if’). A more detailed writeup is available here (although for subscribers only).

5. Paywalled European net-net from the steel industry (6%), now trading at 30% of book value and a slight premium to NCAV (was a net-net when I first bought it about two weeks ago).
   The management has already announced cost-cutting measures and the spin-off of one of the company’s divisions, which might serve as a minor catalyst to some extent. I am confident that the return on this investment will be satisfactory, even if it takes a few years for the situation to improve.

6. CURN/CXI.TO (5%), a quickly growing foreign currency exchange and payments services company operating in the US and in Canada, with many tailwinds and growth opportunities, some very competent and able management (especially the CEO, who also owns around 20% of shares in the company), repurchasing shares and trading at $127m market cap, while having $107m in net cash (around
   $80-90m of which is working capital).
   CXI is one of only three licensed suppliers of freshly printed dollar banknotes to banks worldwide. The key question is whether the excess cash will be deployed into M&A, as suggested by management - this will depend on whether they can identify sufficiently attractive opportunities. I see the potential downside risk over a three-year horizon as low.
   Essentially, the company’s substantial cash reserves can be used for investments that could significantly enhance profitability, while also providing a tangible margin of safety. The CEO is patiently waiting for the fat pitch.

7. ORCH.L (5%) A special sit, bought for ~17-18p a few months ago when it was trading at ~20% BV and a low single digits P/E, consistently profitable and paying an 18% dividend (suspended for now). Most of it we have sold for a ~70% gain after just one month. We still hold some shares, as I believe a tender offer at a premium to the market price, or even a management buyout is likely to be announced sometime this year. Those things not materializing for any reason would not harm us very much, as the company is still exceptionally cheap even at the current price of 30p. You can read my full writeup on Orchard for free here.

8. Paywalled Polish net-net from the steel industry (4%), trading at 26.5% of book value, around 50% of its conservatively calculated liquidation value, and slightly below 2/3’s of its NCAV. Consistently profitable for over 15 years (except for 2014-2016), and with ~3% dividend yield.
   Although the steel industry in Europe is in a pretty terrible state right now, the company is trading at a P/E of ~10, and has pretty much no debt on top of that. The company is constantly securing new contracts for gas pipeline construction in Poland, something that protects them from the current macroeconomic challenges and keeps them profitable. Preliminary report for the upcoming quarter suggests that these contracts should continue to support profitability for quite a long time.

9. LQDA (4%), a special sit – a bet on the FDA drug approval. Although not my usual pick, I consider the risk-reward here to be very enticing. You can find a lot of good information on Liquidia on Twitter.

10. MPW (4%), a hospital REIT dealing with some bankrupt tenant issues. My unemployed friend wrote a fantastic piece on this one, as well as a few updates later on. I highly recommend his Substack as well!

11. SEG (2%), I’m sure most of you have already heard about this on Twitter. A classic Greenblatt example of a spin-off with rights offering, straight from the third chapter of You Can Be a Stock Market Genius.
    In short, it’s a company trading far below the value of its assets with a significant turnaround possibility, additionally backed by Bill Ackman. There’s a nice writeup on it on Value Investors Club.

12. Another paywalled Polish net-net from the steel industry (2%), trading at 26% of book value, 58% of NCAV and 43% of my liquidation value estimate. Profitable for years, with debt substantially decreased during the highly profitable post-COVID period, and high insider ownership (~80%).

13. PAH3 (2%), I mean, who wouldn’t want to own Porsche for free? (from what I see, probably not a lot of people).
    As the author of this article said it: ‘It’s a value trap within a value trap. A deep value investment, only suitable for true connoisseurs of losing money the intelligent way, how Ben Graham intended it’. Probably a mistake, but we’ll see.

14. TNZ (2%), an O&G company that’s just made an unbelievably lucrative deal at something like 2x FCF which increased their boepd production from 3,000 to 14,000, without diluting the shareholders + it’s quite possible that a similar deal is on the way.

15. VIN.WA (2%), a Polish debt collection agency, consistently profitable for many years now, with very little debt, trading at ~44% of NCAV, ~2/3 Adj. TBV and mid-single digits P/E ratio.
    Last year the management announced a buyback of almost 13% of all shares that will probably be financed with cash from a freshly issued bond. Did I mention that Vindexus has ~102M of cash (not net cash, however) on a 107M market cap ? Why would they issue a bond that almost doubled their cash pile? Maybe a buyout is in the plans, as the board members seem very much aware of the undervaluation, or a large investment? On top of that investors get a 4.5% dividend yield.
    While the realizable value of its collected debt on the balance sheet is difficult to correctly estimate, earnings don’t lie. It’s a cash cow, but pretty much no liquidity at all, so it’s quite difficult to buy any shares.

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I hope you’ve had good time reading this update. If you have any thoughts or suggestions you’d like to share with me, be sure to leave a comment!

And as always, good luck and happy hunting!

Stonks Value