2018 year end portfolio review

I ended 2018 with -8.5% loss compared to -6.2% loss for S&P500. I play mostly in microcap area which sustained steep losses in Q418. My own portfolio wasn't spared in Q4 either. This is a quick recap of 2018 yearly performance and some learnings. 

 I can't predict macro stuff for 2019, but I feel cautious mainly because of where we are in the cycle (10 year expansion, ultra low interest rates now going up, etc).  But as Howard Marks says - "we don't need to know where we are headed, just where we are in the cycle". So, I'm trying to be cautious and my strategy is to stick with financially strong companies and avoid excessive leverage.

Closed positions:

FRP Holdings (FRPH) -  This was a good winner in 2018 and I previously explained why this was a good investment here. They did resource conversion in the classic manner as described by Marty Whitman. They converted a concrete batch plant to apartment building besides Washington Nationals stadium, and sold off…

Antero Resources ($AR): undervalued Marcellus shale play

Antero resources is a natural gas and liquids exploration and production (E&P) company with acreage in Marcellus and Utica shales. It's shares have under-performed since going public in Oct 2013 ($60/share at time of IPO, $18/share in Sept 2018). Shale E&P's remain an unpopular area of the markets, and some of it is deserved due to capital destruction by many of the firms. In this article, I'll give a brief summary of my initial thesis on Antero, what's the bad side for this investment, and whether Antero is creating or destroying value with their drilling program.

Antero differs from the other stocks I typically write about or invest in, because:
1. It's not a small / micro cap stock, and is covered by several Wall Street firms,
2. It's in the commodity segment. And I have no special forecasting capability on the price of natural gas (But does anyone else, really?)

Yet I still invested in Antero because I believe it's undervalued. I first bought sm…

$GAIA - what the numbers mean

I previously wrote about Marty Whitman's insights on Value Investing. One key insight is to focus on what the numbers mean and not just what the numbers are. I cited several examples to highlight this point, and one of them was $GAIA. I got many questions on why $GAIA makes sense as an investment and I am attempting to answer some of them here.

I bought $GAIA when it had just sold off its yoga apparel business. The story was quite simple  at the time- Jirka Rysavy, an owner / operator with history of creating wealth,  was choosing to focus on streaming business and chose not to participate in tender offer. Most of the value came from cash and building near Boulder, CO. And if the streaming business didn't take off as expected, there was downside protection. $GAIA management also said that they could be profitable at any time with 90 day notice.

So $GAIA at first was the type of investments I am most comfortable with -- where things are so clear that its just simple sum of par…

Marty Whitman on Value Investing

I recently re-read Marty Whitman's book - Value Investing, A Balanced Approach. Whitman's writing is a bit academic sounding and hard to understand, but his insights are amazing. I find that his ideas on creating wealth and resource conversions provide an investment edge because these ideas don't screen well. Whitman says that earnings are not the only form of wealth. A quick way to understand this is Paul Graham's example of creating wealth by fixing a beat-up old car. There are no earnings if this car is not sold, but wealth or economic value has been created. Similarly, Whitman explains how companies can create wealth in tax efficient manners.

Here are some key points from the book:

1. Focus on what the numbers mean, not what the numbers are 

Whitman says that GAAP earning is a starting point and is an accounting tool, and is not meant to capture economic reality. His advice: Start with earnings and make adjustments to account for economic reality. Whitman is NOT adv…

$AINC - middleman company with growth levers

Lately, I’ve been thinking about middlemen businesses. The Private Investment Brief wrote this thought provoking article on middlemen and why they exist. I've made several investments in middlemen companies - $LNG (toll operator for liquified natural gas), $EVI (distributor of laundry equipment with rollup strategy, $YTRA (#2 OTA in India). LNG and EVI thesis have played out well, while YTRA has been plagued by baffling capital raising decisions by management (25% dilution at $5.5/share. My cost basis ~$7.5/share). This post focuses on investment initiated last week -  AINC - middleman / asset manager for AHT and BHR.
I think middle men definitely provide value, and they charge fees for that. But sometimes middlemen can also extract value from the ecosystem, which can be a good or bad thing depending on where you stand. An example: Warren Buffett recently commented that real estate agents (middlemen) provide valuable services especially for first time home buyers. I have the oppo…

House prices: hard to believe currently, but they do go down at times

Real estate prices continues to march unabated since the the crash of 2008 - 2012. Many cities (SF Bay area, Seattle) have already crossed the pre-2007 highs (by a lot). San Francisco median price is 2x that of 2007 highs.Just the equity gains made by residents in SF bay area and Seattle are more than average full time worker salaries. Some of this looks unsustainable. Prices look inflated and there's risk off behavior that assumes that house prices continue going up. Examples such as one shown here indicate that some house prices don't cover even carrying costs (interest + property tax). Is Fear of missing out (FOMO) causing these high prices? 
I don't claim to know how or when prices might get corrected. But now would be a good time to look at prior housing crashes to remember that housing does not always go up. There's no permanent high plateau in finance, and things go in cycles. Some of the risks which caused house price drops in the past may re-appear, or they m…

$FRPH - Value in Action

tl;dr: Bought FRPH at $39/share in July 2016. Currently, the stock is at $58/share, driven mainly by value enhancing steps taken by owner-operators, the Baker family. This article reviews how FRPH put Value in Action.

FRPH recently announced the sale of their industrial warehouse assets (41 properties) to Blackstone for $359M. The management announced that this was good time to sell given lower taxes and low cap rates. I thought this transaction provided a good opportunity to write about FRPH as "Value in Action" investment. The management doesn't promote the stock much - just look at their bare bones Investor relations website, but they have been long term owner-operators and have created significant value.

FRP Holdings ($FRPH) was formed in 1986 from spin off of real estate and transportation businesses from Florida Rock Industries. I first learned about FRPH from a stock pitch by Bill Chen of Rhizome Capital Partners. The original Florida Rock was run by the Baker fam…