For the third quarter, the portfolio was up 14.91%. The S&P 500 index was up 10.72%. For the nine months in 2010, the portfolio has returned a negative 0.64%, while the S&P 500 has returned 2.34%. Although we outperformed the index in the 3rd quarter, I haven’t been satisfied by the year to date performance. There are two main reasons for trailing the index:
– The type of holdings: Our holdings do not correlate with the index on a short-term period. In any give month, quarter, or year, the holdings could substantially under or over-perform the index. You can look at Yukon-Nevada Gold, it doubled in less than 2 months since we bought it. This is a rare case but my holdings can move very quickly. Harvest Natural Resources announced their hiring of Merrill Lynch, to assist the company in finding potential buyers. The shares had languished in the $8-9 range for months. After the announcement the shares now trade in the high $11. We have held HNR for over 2 years, and finally the value in being unlocked. Overall the portfolio is best compared to the S&P 500 index over a long term period, 2+ years
– Big holdings have underperformed: Two of my top 5 holdings have not performed as well as I expected. The companies have performed well in the 2 years that I have held the shares. Although the share prices have not reflected the improvement in operations. I still firmly believe that the current share prices trade a big discount to the true value of the companies. While my patience is tested, the lack of performance from these top holdings will impact the performance of the portfolio when compared to the index.
– Caraco: My biggest holding has not moved in a year. CPD started 2010 at $6/share. Current it trades in the mid-$5. Although in the short term my results will be impacted, I still believe in the long run this company will outperform the S&P500 index.
Overall I believe the current holdings are exceptionally well positioned to out perform the market in the short-term and long-term. On the short-term basis holdings like General Growth Properties, Yukon-Nevada Gold, ATP Oil and Gas, and Harvest Natural Resources should have a big impact on the portfolio’s returns. On the long-run, companies like Caraco Pharma, Ternium, WellCare, and Heckmann should have a big impact.
Yukon-Nevada Gold: This is a classic example of companies I like to invest in. Companies that have been through an accident (compliance issue), strong management (Sprott, new CEO), and strong balance sheet (large resources, solid cash flow based on historical production). I purchased the shares at an average price of $.30. At the end of Q3, shares were trading around $.67, a gain of 123% in just over 2 months.
Caraco Pharma: I bought some more shares of CPD after the news about the company re-hiring 50-100 employees and the strong Q1 results. The risk related to this company keeps decreasing with each passing month, although the shares at times doesn’t reflect the lowered risk. Although the short-term revenue and cash flow might not be strong, I believe in 2 years this company could be a huge cash creator.
Caraco Pharma: The company keeps marching closer to FDA compliance. The company has been rehiring employees. It is a waiting game now. I will be looking to increase holding if the prices stay depressed.
General Growth Properties: GGP is on track to come out to bankruptcy on Nov 8th. The company has lined up banks to help raise capital by selling equity after the company emerges from Chp 11. This means GGP will sell equity at much higher prices than what was offered to Pershing/BAM/Fairholme. This means more cash or less dilution for shareholders. Also, the Spinco story is very interesting. Any big sell-off in Spinco after Chp 11 will make it a very interesting buy opportunity.
Yukon-Nevada Gold: I have already discussed this above. I expect 2011 to be a very interesting year for YNG. The shares have already doubled since my initial purchase. I think there is still much more upside to come.
Ternium: The biggest news was TX looks like it is in process to build a plant in Brazil w/ a production capacity of 5.6M tonnes. The company is a huge cash generator. I believe TX is the second or third best steel producer in the world. They are positioned in one of the emerging areas of the world and they will benefit from the growth in Latin America for years to come.
Harvest Natural Resources: The company reported it is looking to sell assets or the entire company. They have hired Merrill Lynch to help the company find acquirers. The company received interests from third parties to acquire assets or the entire company. I think any transaction will happen quickly. I have held the shares for over 2 years, the patience is finally paying off.
Heckmann Corp: The company’s shares dropped double-digits in the quarter. I still can’t find any reason for the drop. The company’s future is exceptionally good. The biggest risks that I see are management poorly allocating the cash and execution risk. The management investing cash in the water pipeline business is a good sign. As for execution risks, I think you have some of the best managers in the water business running Heckmann. At current prices, I like this company quite a bit.
WellCare: The company has finally put behind the legal issues related to the fraud. Management can now focus on the operations. The company is also a very appealing acquisition opportunity with the legal cases behind it. I have held these shares for almost 2 years. It is frustrating to see the company work through the legal mess but still no reward from Mr. Market.
KVH Industries: The company announced its biggest contract right before quarter end. The most important part about this contract is the margins on new business. I believe that for new internet service revenues, 60-70% of it will hit bottom line. The company is well positioned to start building cash in 2011. Once the market sees the type of cash this company produces, I don’t think the shares still in the $15 range for too long.
ATP Oil & Gas: The company announced that it has started producing from the MC 941 #3 well. The company is expecting to hit 30-40K MBOE/day of production at the of 2010 and 45-55K MBoe/day at end of 2011. The biggest risk with the MC 941 #3 well is behind us and the liquidity issue has been taken care off. Now the company needs to show the cash flow and the shares could respond accordingly.
Cano Petroleum: This investment hasn’t worked out as planned. The company still has until late October to find a buyer. Although I have been losing faith in the management of the company. At current prices, the company is selling at a huge discount to asset prices.
Palladon Ventures: The company announced that the first shipment of 5K tons of ore has reached the Richmond terminal and was in the process to be loaded on the ships. The company has started shipment of another 5k tons. I think the company will now look to raise capital for major CapEx or sell the company.