What's in my Deep Value Portfolio? #1

A quick update on my current picks, as of 09/07/2024.

Jul 09, 2024

It has been a while since I posted any portfolio updates on Twitter. Considering that quite a lot has changed, I thought it would be nice to share what I currently own and name all the recent sells and buys.

In the past, the majority of the positions in our portfolio would usually be concentrated in around 7-10 highly undervalued, but often also quite soggy net-nets. However, as the time went by, my worries about the general market situation started increasing. Although I never try to predict or time the market, nor any macroeconomic trends, many of you would probably agree with me that the stability of what we currently experience, namely the frequent speculative market operations of today, feels rather questionable. That is to say, of course, we will never know when the bad times come before we experience them ourselves, but in my view it is better to be safe than sorry. We might or might not see a correction soon, but no matter what happens, I consider it wise to now demand more “bang for my buck”.

Due to their nature, the percentage allocation in those soggy net-nets of yesterday, thus, decreased. I decided to put more money in companies which I consider to be of a lot higher quality than what the simple emphasis on mostly quantitative analysis can promise, while still maintaining a satisfactory level of “cheapness” throughout the portfolio. I also thought it would be prudent to keep a larger-than-usual part of my own, and my family members’ money in special situations, which at least partially isolate our capital from any potential unpleasant market fluctuations (more on that later).

Current portfolio picks

CZBS (15%), an overcapitalized ECIP bank with high integrity management, trading at approx. 5-6 P/E and roughly 2/3’s of its adjusted TBV, with a lot of tailwinds. Citizens’ deposit cost is a lot lower than in case of other banks, and it has an excellent quality of underwriting, as well as fairly okay efficiency ratio. The company is constantly buying back shares on an open market, which will be further increasing its value over time. The longer the price stays stagnant, the more value will be created for the shareholders. There are whispers of a potential tender offer coming, and the management is actively looking for M&A opportunities as well, which seems 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, which should, furthermore, provide it with new opportunities to deploy that low-yield cash into higher-yield mortgages seems like the way to go. The management lends money in a conservative way and is very shareholder friendly, which also decreases the risk.
Citizens is my single biggest allocation at the moment. 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.
NAII (11%), a cheap supplement manufacturer with temporary problems, most of which are already behind us. 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 2 of the largest 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 promised their lender (Wells Fargo) that it will return to profitability in Fiscal Q1 2025, which in this case began just last month. In my view, the market’s assumed losses due to this situation happening were significantly overestimated, and I expect the share price to start reverting to higher levels after the next quarterly results are released, hopefully providing the shareholders with some net income, instead of net losses this time.
Currently, it is trading for ~$5.5, and my calculations suggest its liquidation value should be at around $9-9.5, additionally with expected positive earnings on top of that.
Although not the cheapest one here, as judged by any quantitative metrics, NAII has become a fairly large position for us due to its quite short waiting time and high conviction. Chase Ricker described this case very well here.
ANX.L (10%), a credit hire and legal services company from the UK, trading at a funny 4-5 P/E, about half 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 was a big overhang on the stock for the past few years. I consider Anexo to be worth at least 100% more than what the current price suggests, and its underlying business should not be hurt in any drastic way in case a market correction happens.
UBAB (8%), a case similar to CZBS - another overcapitalized ECIP bank trading at 5-6 P/E, with many growth opportunities. During its Q1 earnings call, the management mentioned ongoing discussions about a potential buyback/tender offer after which the stock went up ~20%. UBAB’s RoE is slightly higher than in case of CZBS, but with pretty similar efficiency ratio for both of these banks. The investment thesis here is pretty much the same.
CURN/CXI.TO (7%), 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 all around the world. I consider the potential downside risk in the 3-year perspective to be low.
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. 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.
Undisclosed Polish net-net (formerly, one of the most recognizable electronics and hardware retailers in the country, 5% allocation), trading at 20% of book, 36% 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, 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 also likely here, as we have seen such efforts in the past, but those were unsuccessful. A detailed writeup is available here (although for subscribers only).
Another undisclosed Polish net-net (steel industry, 5% allocation), 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), paying ~3% dividend yield. Although the industry in Europe is slightly depressed, the company is trading for a P/E of ~11, and has pretty much no debt on top of that.
I will soon post a detailed analysis of the company on my Substack, but the main points I summed up in my latest writeup.
LQDA (4%), special sit – a bet on the FDA drug approval. Although not my usual pick, I consider the risk-reward here to be very enticing.
CVN.AX (3%), special sit backed by a group of activists that pursue the sale of the company. At the cost of 20c today we get a SoTP value of 33c, with downside well protected by cash and carry that covers most of the market cap today.
MESA (1.5%), a near-bankruptcy airline play with fairly high probability of survival. Up ~60% since buying.
VIN.WA (only 1% allocation now, will buy more soon), a debt collection agency, consistently profitable for many years now, with very little debt, trading at ~44% of NCAV and ~69% Adj. TBV. Last year the management announced a buyback of almost 13% of all shares that will additionally be financed with cash from a freshly issued bond. Again, a management buyout is possible, as the board members are purchasing shares on the market and are very aware of the undervaluation. On top of that investors get a 4.5% dividend yield. I plan on writing a more detailed writeup on this one in the future as well.
Undisclosed odd-lot tender, with low-risk 9% return in 2-3 weeks.
(12/07/2024 update: That company was $SILA. I just sold shares for $22.65 instead of tendering, as the price today rose slightly above the lower-end of the offer. ~$2.1/per share gain, 99 shares each = ~$208 per account, in just 2 weeks)
The Japanese net-net basket (around 20% allocation, depending on the account):

For reasons which I will not disclose, I deemed it necessary to liquidate the Japanese basket sometime next month. I still believe this to be a wonderful investment opportunity and that the thesis still holds well, but due to personal reasons this has to be done.

The amount of excess cash we should soon have, as a result of this happening, I plan to put in more special sits, together with the spare cash we not yet invested as of today. I estimate that around 30% of AUM will soon be put to work in special situations and other cases at least partially isolated from the general market behavior, but the exact ratio will ultimately depend on the degree to which I succeed in finding opportunities that are of interest to us.

As of today, our YTD return is slightly over 11%, with 16.7% return for the S&P500.
Since inception in 2020, we managed to reach around 25-30% CAGR, with no down years. I remain heavily focused on investing in stocks with a wide margin of safety, which also pass the conservative requirements derived from my mental models, and due to the increasing market uncertainty, such requirements tighten with each passing month.

I wish you good luck and happy hunting!

Stonks Value

Note: all of the % information regarding my portfolio picks are rough approximations, as the actual numbers vary from one account to another. Everything I say here or in any other publications should be treated only as my own opinion. This is not investment advice.