Q1 Performance

In Q1, I was up 7.25% compared to the S&P 500 that was up 5.42%.

This year is off to a great start. At a straight performance comparison the Q1 results might not look that spectacular. Although, looking at the individual holdings the performance was spectacular. For the quarter, I averaged around 16% of the assets in cash and was still able to beat the market. 8 of the holdings substantially outperformed the market (HNR was up 25%, ATS Corp up 64%, HEK up 30%, HHC up 30%). The two biggest holdings at the start of the quarter (GGP and Yukon-Nevada Gold) underperformed the market and had the biggest negative impact on the quarter’s performance. GGP was flat and YNG was down 22%. I believe on the long-run both of these companies will do well.

During the quarter, I was increasing my position in HEK, HNR and KVHI as the shares pulled back at the start of the quarter. I sold out of WCG and RSYS, to allocate the funds to other holdings and reduced my holding in GGP. I also built new positions in Dolan Company, Hallmark Financial, and Community Banker’s Trust. This quarter was quite busy for me, with the crisis in Middle East and tragedy in Japan created opportunities to buy companies that got cheaper even though they were not directly related to these events.

At the end of the quarter, I had cash accounting for 15% of the assets. There are a few companies that I’m currently looking into that could eat up some of the cash. Although I will keep a high cash balance, so it is more likely that I will cut my holding in other companies to build up new positions. Just after the quarter ended, I sold out of Avino Silver and bought more Hallmark Financial.

Thoughts on my holdings:

Avino Silver: In the 4 months that I held the shares, the company was up 56%. I sold out after the quarter ended. There is plenty of upside still remaining, although I already have a decent exposure to commodities via YNG and Reed Resources.

Reed Resources: The company is making progress around realizing value from its 3 main assets. The company announced changes to its profit sharing deal with Mineral Resources. Mineral Resources converted its 40% interest in the profits from the Mt. Marion assets into a 30% equity of a new entity, which will own 100% interest in the Mt. Marion assets. This is the first step in creating a structure which will allow Reed to spin-off/sell/partner on the Mt. Marion assets.

Also a recent research report puts a valuation of $1/share ($10 for each ADR share) for the company. I believe this to be a very conservative valuation and the upside could be much higher.

Below are my thoughts on some of my current holdings:

ATS Corp: ATS Corp is basically a waiting game. We know the company has announced that it is pursuing strategic alternatives. We are just waiting for the details. In the meanwhile, the company keeps racking up big contract wins. The backlog is now at 1.3x the annual revenue run rate. Although I like this company and the near term catalyst, I might sell these shares incase other holdings get cheaper.

KVH Industries: The company is setup for a monster 2011. In Q1, the company announced sales of its TracPhone v7 unit to a company w/ over 125 vessels. In late 2010, the company announced a major TracPhone v7 deal w/ the US Marine Corps. The company’s 2010 deal basically covers all the company’s costs for the airtime business. With the 2011 deal, the company’s incremental sales of TracPhone airtime would lead to mouth watering margins. The TracPhone airtime business has great operating leverage with additional revenue not requiring huge expenses. The installation of these TracPhone sales takes 6-9 months, so we won’t see the cash flow implications of these new deals until late 2011. I’m excited about KVH’s future prospects. I was buying shares early in Q1 as there was a pull-back in the shares.

Harvest Natural Resources: Q1 was spectacular for HNR. In all aspects the company performed exceptionally good. The company reported huge increases in its Venezuela reserves, positive results from its Indonesia drilling, and a letter of intent signed with Transocean for drilling in Gabon. The company jumped over 10% in early March when it reported an operational update (discussing the reserves). The company announced the sale of its Utah assets for net cash of $205M. The company will use the cash to payoff the $60M debt and likely use the remaining cash to expedite the development of the Indonesia assets. Even with the jump in share prices, the company is still selling at a huge discount to the true value of the company. The next 3-5 months will be very interesting, I expect the company to either sell some of its assets or the entire company. I was buying shares early in the quarter as the shares were dropping for no apparent reason.

Heckmann Corp: The company reported a good Q4 and raised projections for 2011. 2011 looks likely to be a huge year for the company, it will prove the company’s business model and setup the company for huge growth in the coming year. The company increased its FY’11 guidance drastically, increased revenue by 50% (from 100M to 150M) and EBIDTA by 100% (from 20M to 40M) (Yes, this business has good operating leverage). The company announced that in early 2011 the company acquired 1 company and is working on closing 4 more deals. These 5 deals are included in the projections for FY’11. The company is looking at more acquisitions and these future acquisitions are not included in the projections. My bet is the company will easily bet its projections. The company also bought back 1.5M shares. Overall, I think we are looking at a very strong 2011. I think we could see the company do 100M+ in EBIDTA in 2-3 yrs. Management has hinted that revenues could more than double each year in the near term (I think at least 4-5 yrs). Given the operating leverage, the upside is huge. One of the catalyst for Heckmann’s services is the pending Natural Gas Act, that is currently pending approval from Congress. I believe we should shortly see approval of this bill which should make way for diesel trucks to convert to LNG. This will create a huge demand for HEK services.

Yukon-Nevada Gold: Gold prices are at all time highs. The company has an cost of production of $600/oz compared to gold prices of $1,300. The company should be able to produce 140oz per year. Although the company reports extremely poor production numbers. Why? Its the weather. Sounds like the ‘dog eat my homework’ excuse. As bad as it sounds, YNG has been severely impacted by bad weather and poor preparation to handle the conditions. YNG recently announced expedited conversation of warrants at 18% discount to conversion price. I think management made a smart move by taking a hit on the cash proceeds, allowing the company to be prepared for the next winter. In turnarounds you are bound to have road blocks. I think the company is still on track for some amazing growth in production for the next 5 yrs. The shares took a hit in Q1 but I think this is only temporary. The company expects to produce around 400oz of gold in couple of years. Management has said they expect to hit 1M oz of production by 2015, so the upside on this is huge.

General Growth Properties: GGP had its first conference call post-bankruptcy. The company provided no specific guidance. Although listening to the management’s plan it is clear that GGP has a strong future ahead. In the next 12 months we should see the company recapitalize large chunks of its debt (already they have the longest maturity of all REITs), shed non-core assets, invest in core assets, and negotiate better lease rates. In the long run, the company has mentioned plans to expand outside US (I think it is Asia, Canada, and Brazil) and I could see them acquiring strong assets in US. Although the shares have run up substantially since my initial purchase, I still see no reason to sell. The only reason I would consider selling is if I need cash for new purchases, as I did late in the quarter. I sold 30% of my holding. GGP still is my largest holding.

Hallmark Financial: The Q4 numbers were bad. The bad winter that hit most of US had a big impact on Hallmark. I work for a P&C Insurance company, so I was aware of the impact the bad weather had on my company and most insurance companies. Although I believe the shares sell for a decent discount to book value and there is plenty of growth opportunity w/ a very good management team at the helm.

Community Bankers’ Trust: This is a new buy. The company is a small bank that is selling for a big discount to book value and is a turnaround play. I have been watching this company for many months now. The biggest problem for the company was the management was not executing and seemed very reluctant to take steps to turn the company around. In the last few months the BoD has replaced the CEO, added new members to the Board, sold off some assets, and started to increase fees for services. The shares of the company dropped from $3 to $.77, management was buying shares at each dip. There have been no insider sales. And finally the company’s performance is starting to turnaround.

Palladon Ventures: The company signed up two major customers to purchase its iron ore. The customer invested cash in the company, allowing the company to build out its concentrator plant. Once the plant is built, in 2012, the company should be processing 2M tons per year. In the meanwhile the company is going to sell its run of mill product to generate decent cash.

I ended the quarter w/ cash making up 15% of funds. I like to have a cash balance much higher, so I will likely be building up cash in the next couple of quarters as some of my ideas work out.

Finding Ideas

With the run up in the market in the last 6 months, I’m not finding many investment opportunities. I’m finding plenty of turnaround situations but most turnarounds are unlikely to be successful so I have been staying away from them. The investment opportunities that I have found (Dolan Company and Hallmark) will likely become more concentrated positions.

As I review my portfolio, I realize that in the last few months I’ve gotten away from my emphasis on a concentrated portfolio. A portfolio with 12-15 investments would be considered concentrated by most folks. Although when I’m managing my personal funds and there is no outside pressure on the liquidity requirements, I would like to see a much higher concentration. When you look at what Buffett did in his early days, he would be holding 4-5 investments.

As I look at my current holdings, if I had concentrated my investment in the top 7-8 ideas the returns would have been much better. Also, I would have been more focused on the companies and be able to research them in further detail. I will likely start getting out my least favorite holdings and concentrating further in my top holdings.

8 responses to “Q1 Performance”

  1. I like the the Community Bankers Trust (BTC) buy but the moves have been wild. In the Q3 press release, management said they would probably return to profitability in Q4, but the stock still declined to $0.77 in December (probably on tax loss selling.) After putting up a profitable Q4, I hope they continue to make progress in Q1. Another profitable small bank to look at is Ameriserv (ASRV). They have the benefit of a booming economy in western Pennsylvania due to the Marcellus.

    • Derek,
      Yes this is a very wild swinging stock. The key thing is the company is finally making the right decisions to move the company forward. In 2010, the management didn’t do anything and just watched the shares and company’s operations deteriorate. I like the new CEO and the moves the company has made in the last few months. If they keep improving their operations, I think the shares have plenty of upside. As for volatility, it could be a friend of patient investors.

      Do you still hold shares in BTC?


  2. great blog. are you concerned that yukon nevada gold has 240 million warrants outstanding even after the 10 million exercise at .11 on april 6th?

    • The company has 690M shares outstanding, 258M warrants, and 53M in options (from latest presentation). If you assume that all the warrants and options are exercised, you are looking at a total of 1B shares outstanding. The company is producing around 150K/oz of gold a year w/ expected production of 400K/oz in 2-3 yrs. The current margins are $800/oz ($1400 price – $600 cost). At that margin, you are looking at cash flow of around 120M. Put a 5-7x multiple and you are looking at a value of 600-850M. So w/ 1B shares you are looking at a market cap of around $.60-$.85/share, which is around where we are trading today. If the company hits its 400K/oz production target in 3 yrs, you could see the value jump to 1.6B – 2.2B, around $1.6 – $2.2/share. Even assuming all warrants get exercised, you could see the share price double/triple if the company hits is target production.

      My big concern is that all warrants don’t get exercised then you have a company looking for capital and I would hope management doesn’t have to dilute shareholders. Also with the current increase in costs and decrease in production, I hope it is only a short term issue and not an indication of long term trend. Plus we have a delayed presentation due to some announcement. I hope it is related to an acquisition, some partnership to increase production, or finalizing a 40M bond.

  3. i’m looking forward to the reason for the conference call delay too. their recent results stand a bit in contrast to the confident perspective of baldock in the videos and the tone of their earlier presentations. not sure who all the warrantholders are – but out of the pool of insiders, it seems to me that we’re probably somewhare in the range of only 11M warrants exercised through april 10th. i believe there’s sometimes a one week delay to view insider filings in canada.

    • Yes I still hold HNR. My expectation is the company is going to wait until the Oman and Indonesia results are known before we see substantial steps from management. Indonesia results were disappointing but it is smart to drill further. Also, I would like the company to go back and drill LG1 to its full depth. Oman is drilling ahead of plan. I hope we should know the results about both these locations in December. Gabon, it seems like management is preparing to either sell asset or just taking it slow until the results from exploration drilling is known. VZ dividend check getting delayed is disappointing but they have always received the money. Overall, my view on the company prospects hasn’t changed.

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