March 2020 Portfolio Update

March Madness

So I’ve had probably my best month as an investor so far. My portfolio is up ~20% MTD and ~15% YTD. I generally judge my performance against the ACWI EUR Index which was down -15% MTD and -21% YTD. My Interactive Brokers account (which is not all of my portfolio) has compounded at 19% vs -3% for the ACWI EUR since I opened it on 11 January 2018. This chart paints a fairly pretty picture:

Greatest Hits

Obviously luck played a major role here, however margin of safety remains the key concept in my investing strategy. Below is loose summary of some of my greatest hits this month.

Cash

I was over 50% cash going into March with a mix of euros and US dollars. This obviously provided me with lots of downside protection, optionality, and piece of mind. Despite what Ray Dalio thinks of cash, the cliché “he who has cash in a recession is king” is kind of true. I am still ~30% cash.

A-Mark Precious Metals (AMRK):

I’ve gradually been buying AMRK all month for an average price of $8.58. AMRK is a fairly unique company on the public markets which primarily does wholesale precious metals trading and secured lending, among other activities. Essentially AMRK’s wholesale business earns excess profits during times of increased demand for physical gold/silver and extended periods of volatility in precious metals markets (up or down, but upwards vol is generally better for AMRK).

Gold and silver markets have gone bonkers over the past month. The GVZ and the VXSLV both spiked over 400%. Massive spreads between physical and futures prices have emerged. Short sellers were scrambling to find 100oz gold bars to settle their COMEX futures. ARMK should be making a fortune in this market and could be trading at very low single digit earnings. There are risks here: they use a lot of derivatives and could get caught out if their futures hedges blow up (however the wholesale trading desk has been consistently profitable for 2 decades), management has been self-serving in the past, and there is a risk of shutdown for gold retailers. +43%

Emergent Capital (EMGC)

I read an excellent write up on Value Investors Club a number of months ago about a life settlement company in run-off with a 27.5% interest in around 576 life policies (now about 552) with an average age of 85. To cut a long story short, EMGC was already cheap with an excellent risk-reward profile, yet when the pandemic took off the share price actually dropped when the value of its policies had to be increasing (facts are facts here). I took a very small position here as there is debt, a complex waterfall mechanism, and issues around premium step-up in their universal life policies. However I believe there’s still lots of value remaining in EMGC. +95%

SPY 13APR20 260.0 Puts

This was a stroke of luck with timing. As a pandemic hedge, I bought a 3% position in out-of-the-money SPY puts at around 4pm (Dublin time) on 11 March. Within a matter of hours the market plunged 10% after a disastrous Trump speech and my options were well in the money. I sold the next day. +105%

Drägerwerk Series D Participation Certificates (DRW1)

This was another stroke of luck with timing. Drägerwerk is a classic Hidden Champion from Germany in the medical and safety equipment space. It’s a family company with a very convoluted capital structure and effectively 5 share classes. Notably it is a world leader in ventilators and should increase its EBIT by at least 50% this year (and possibly by much more). Drägerwerk Prefs (DRW3) have almost doubled, yet its quasi-equity “participation certificates” didn’t rally at all.

The spread between DRW1 and DRW3 narrowed to an 8 year low. You could create one of the biggest beneficiaries of the coronavirus pandemic for a ludicrously cheap price. I started buying DRW1 last Monday and Tuesday last week at an average of €239. On Wednesday, Drägerwerk had announced they were redeeming the certs for €547 in January 2023. This is opportunistic from Dräger management as they are taking an aggressive interpretation of the Series D constitution by redeeming at 10x the average DRW3 price from Dec 2019-Feb 2020 (€54.7), which is a huge discount to the current price (€94.2). Still this has been a clear home-run. +94%

Pershing Square Holdings (PSH)

I have made a decent profit on Bill Ackman’s closed end fund over the past few years, but sold my position in late December 2019 because PSH’s high-watermark had been breached and Ackman’s levered portfolio of large cap US stocks didn’t seem particularly appealing. Cut to 3 March, PSH made an interesting announcement that it had purchased “large notional hedges which have asymmetric payoff characteristics“. These turned out to be credit default swap on various credit indices (CDX IG, CDX HY, and ITRX EUR).

As the market crashed, PSH was posting modest NAV gains in its weekly NAV report on 9 March and flat NAV on 17 March. On 18 March, Ackman gave his now infamous “hell is coming” appearance on CNBC. I don’t want to weigh in on that emotional tv appearance except to say that PSH went down to a 40%+ NAV discount the next day. I bought some stock at $14.60 on 19 March because the discount had gotten to such a ridiculous level. Ackman has just unwound one of the greatest hedges of all time (almost 100x in 3 weeks) and put the proceeds back into his large cap portfolio. They are paying dividends and buying back a decent amount of shares. I’m not thrilled about Ackman putting another $488m into Howard Hughes or some of PSH’s corporate governance, but I think the discount continues to narrow substantially from here. +19%

Miscellaneous

My holdings in Austrian herbal liquer company Gurktaler AG (GAGS, GAGV) have been pretty much flat this year. Gurktaler is so illiquid that it’s a de facto private investment. I don’t plan on selling it any time soon. Over the month, I finally initiated a position in Czech beverage company Kofola CS (KOFOL) which I wrote up on this website last month.

I trimmed back some of my position in D’Ieteren (DIE) earlier in the month. DIE’s share price is down about 30% YTD, but I think their €1.5b cash war chest and their buyback program will create lots of value for shareholders. Texan bank Cullen Frost Bankers (CFR) has been crushed this year (-45%) but I continue to this is another long term investment for me. While it directly and indirectly exposed to the Texas energy industry, Frost is a very conservative lender with a great corporate culture. It’s not often you can buy a bank of this quality for less than book.

Finally I sold all my remaining basket of net-nets early in March at well below their NCAVs. These were Agroton (AGT), Tiemco (7501), Toa Valve Engineering (6466), and TLV Holdings (42L). I think the net-net strategy will come back in style very soon.

Please email me at streetsofvalue@gmail.com if you want to talk shop.

Disclosure: I am long AMRK, DRW1, EMGC, PSH, GAGV, GAGS, DIE, CFR, and KOFOL.