THOUGHTS ON STRATEGY AND COMMENTS ON A COUPLE HOLDINGS

It goes without saying that investors are excessive in their lust for action in the financial markets. The simple act of sitting is one of the most powerful gifts an investor can have. Yet what we have are a large group of information obsessed investors who can't decide which investment will best suit their needs because of the inability to differentiate between the signal and the noise. It is a modern day plague that is one of the bigger liabilities to an investors equity. 

I monitor my results extremely closely. Not just such obvious measures such as performance relative to a benchmark. But also the number of ideas I am generating. The number of ideas I filter out due to the opportunity not meeting my requirements. The number of trades I make per month and per year. 

In going over 2013 results, the number of trades I have made has dropped by some 50%. The number of new ideas I have generated in 2013 versus 2012 is down 40%. My filter has become more stringent in its requirement for investment, not allowing a number of opportunities in the portfolio that would have made the cut in 2012. Yet, the results in 2013 are substantially better than 2012 which saw a gain of 59%. Quality beats quantity. 

The general theme here is one of selective, measured inactivity. It is essentially trend following as applied on the micro level of choosing quality misunderstood, murky opportunities in my method in particular. The point is that you, as an investor, allow the market to do the heavy lifting for you, as it is only too willing to do during a secular bull. You come to the realization that you can only get in the way of superior investment results during such conditions. 

I'm laying low. Have no need to look beyond the concentrated portfolio of names that make up our current holdings

Brief comments about two of the names in the portfolios. I'll have more in the monthly performance review in the New Year:

WMIH - I have received a number of questions regarding future valuation here. I believe it is extremely difficult to put together a valuation model because we have no idea what form their future business will take. I do however believe that the most common methodology of simply valuing the NOLs minus X% discount is misguided. What we know about WMIH with the KKR deal is that it has now gone from a point of imagination of what can be done with the shell to consummation. The only question that needs to be answered is what form (insurance, bank, real estate) will that consummation take. With the consummation being a high probability event in 2014, the idea of simply valuing NOLs minus X% discount no longer applies. Investors need to look at what value any future business attached to those NOLs will have, as opposed to measuring the NOLs alone. The NOLs are not there to simply be acquired at this point, which is what valuing the company using the NOL-X% discount assumes. The question that needs to be asked is over what time period will the NOLs be used by the merged company and what multiple will the market assign to a company that is generating tax advantaged income over X amount of years. Answering these questions will give you an idea of where WMIH will end up. 

BFCF - DRII is the closest comparison we have to the free cash flow generating (formerly BXG:NYSE) monster contained within BFCF. DRII is growing revs at a 30% clip this year, trading at a 1.5 bil mkt cap on est. $800 mil revs for 2013. Last numbers we have on BXG were nearly $400 mil in revs 2012. Assuming similar growth that bumps up to $500 mil for 2013. Combined post-merger mkt cap for BBX/BFCF is 400-450 mil. That puts the value of BFCF at less than 1 times sales (BXG alone) post-merger. Value proposition? Yes. Actually it is an extreme value proposition when you look at the value of BFCF based on the BXG unit as a multiple to free cash flow. But, there are other opportunities out there that deliver attractive free cash multiples within growing companies.

I'm not a value guy. I'm a hidden/misunderstood asset guy. And BFCF is the equivalent of a Wall Street grab bag of goodies. The only issue is you have to stick your hand into the bag blindfolded because we don't know exactly what is contained in the bag. But that is perfectly fine. Why? We have the BXG unit within BFCF that is the birthday cake. Whatever we get from the grab bag are just extra goodies to make this party legendary. 

The distressed RE assets that were gained through foreclosure through the FAR unit of BFCF are impossible to value correctly. This is due to two reasons:

1. We don't know how extensive they the RE assets are apart from the fact that the CEO has referred to the assets as a "gold mine."

2. We don't know the extent of development that will take place on these properties, making them all the more valuable under the guidance of real estate veteran Alan Levan. But Mr. Levan has said: 

"This is land that is ripe for development now and for which we are lining up partners to develop that land with us today"

"In a non-banking environment you can work the real estate to its highest and best value," when referring to the reasoning behind stripping away their bank charter. 

That's all for today. Have an unperturbed weekend. 

 

Author: admin

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