I had said 2010 would be a strong year for the holdings. Q1 was a great start for the year. In Q1, the holdings were up 24.5%. Comparatively S&P500 was up 4.87%, NASDAQ was up 5.6%, and DOW was up 4.11%.
The interesting thing about the Q1 results is most of our holdings still selling at a big discount. Even with the run-up the intrinsic value is much more than the current market price. I run a concentrated fund with 6 holdings making up 85% of the fund value. Running a concentrated fund will give results that can substantially deviate from the major indexes. In the short run, I can substantially underperform compared to the indexes. Although in the long run, I believe the concentrated approach will beat the indexes by a large margin.
The holdings that had a major impact on the Q1 performance were: Ternium (up 15%), Harvest Natural Resources (up 42%), General Growth Properties (up 39%), RHIE (down 43%), and Palladon Ventures (down 12%).
There were 2 new additions to the holdings in Q1:
– ATP Gas & Oil: The company’s Telemark project is a game changer for the company. The market is acting as if the Telemark project is not going to happen, even though the company has started production. 2010 will be a big year for the company.
– Heckmann Corp: I believe the company’s water pipeline business is going to be a huge cash flow generator. It will take 3-5 years but I think this company is going to be worth substantially more than current prices.
There were also 2 positions that I sold out of:
– Palladon Ventures: I entered the holding as a speculative buy. I expected the new management team to delivery on fixing the debt issues and entering into an agreement to sell its iron ore. The company could not resolve the debt issues and now 75% of the company is owned by the debt holder. In the end, this was a high risk/reward situation that didn’t work out as I expected.
– RHI Entertainment: This was a disappointment. I like the management team but in the end the business cycle killed it. As Buffett said “when management team with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that stays intact.” In this case, RHI’s business was impacted, much more than I expected, by the 2008-2009 crisis. In a bad business cycle with a huge amount of debt, only a few businesses can survive.
Looking Ahead
I expect 2010 to be a very strong year for the holdings. I think the holdings are still selling at a huge discount to intrinsic value. Many of the holdings, ATPG, HNR, TX, KVHI, and PRXI, have shown that their business is growing. In some cases, ATPG and HNR, there are major game changer events that have occurred in the last few weeks. For the others, their business fundamentals keep improving and I believe once strong results that showing Mr. Market will realize the true value.
Even in today’s market, I still see some very interesting buying opportunities. I can still find companies selling at discount to cash on hand. Also there are companies where the business has run into some problems which management should be able to fix, the shares currently are trading with expectation of the worst outcome. I think the market still has many opportunities where investors can lock in gains over the next 3-5 where the returns will beat the historical average return on equities.