Consolidated-Tomoka (CTO, $53.25) is a diversified real estate company based in Daytona Beach, FL where most of its operations are. CTO owns quite a few different assets which I’ll get into below, but their two main assets are 10,500 acres of raw land in Daytona Beach and 43 income-producing properties (mostly single-tenant retail buildings and multi-tenant office buildings). Management’s stated goal is to sell off the 10,500 acres of land and use the proceeds to purchase more income-producing properties. It is extremely difficult as an outside investor (especially one who hasn’t been to Daytona in years) to accurately estimate what their land is worth, but even the most conservative assumptions put the value of the company above what the market is valuing it at today.
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Author: Travis Wiedower
Embrace Volatility!
As I’m sure most you are aware, that’s what the market has done the past week. Just today the market opened down 1,000 points only to regain almost all of those losses by mid-day and then crash back down in the afternoon. I knew the panic was real when multiple people (who have very little interest in the stock market) reached out to me asking what’s going on. I think one of my friends thought I was out of a job by 10:00 am 🙂
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VirTra Systems: When Compensation Matters
After my recent blog post on why management’s compensation matters, I’ve been wanting to give a more concrete example. VirTra Systems (VTSI, $0.11) is a company that I was initially very interested in—great product, sales are ramping up and tailwinds to continue that growth. Unfortunately, when I delved into management’s compensation it was an absolute deal breaker.
Business overview
Let’s take a step back and look at what they do. VirTra makes combat simulators for police officer and military training. They offer simple single-screen virtual shooting ranges all the way up to a 300 degree, five screen combat simulator that fully immerses the officer in a real life scenario. These scenarios are filmed with real actors (some competitors use CGI) and then played back on the video screens for the officers. Whoever is training the officer watches and alters the scenario based on the officer’s actions. So if the officer adequately talks down the offender the scenario will go one direction. If the officer pulls out his gun the offender will react much differently. Officers also get an electronic shock when fired upon to increase realism. Below is a picture that shows their largest simulator.
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Is patent reform inevitable?
The first federal law related to patents was the Patent Act of 1790 and was titled “An Act to promote the Progress of Useful Arts.” In a nutshell, that’s exactly what patent law is trying to do—promote innovation. And I don’t think anyone is going to argue against innovation as a valid cause (well, maybe socialists). Interesting historical tidbit: to be granted a patent under this initial law, an individual was required to get approval from two of the following three people: the Attorney General, the Secretary of State and the Secretary of War. With over 600,000 patent applications filed in the United States just last year, I imagine John Kerry is happy this is no longer the process.
Since these first laws, the popularity of patents has ebbed and flowed throughout our country’s history. During good times people see patents as a way to promote innovation which leads to new businesses (and thus jobs) and thriving economies. During recessions patents are viewed as monopolistic devices that large companies use to crush small competitors via expensive lawsuits.
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Compensation Matters
“Perhaps the most important rule in management is ‘Get the incentives right.’”
— Charlie Munger
If you don’t know, Charlie Munger is Warren Buffett’s long-time partner and Vice-Chairman of Berkshire Hathaway. And if you haven’t read his book, Poor Charlie’s Almanack, I cannot recommend it enough. It’s more about psychology and general life advice than it is investing, but it nonetheless had a major positive effect on my investing career. Mr. Munger ends his book with a discussion of 25 psychological tendencies he feels are the most common sources of human misjudgment. The first one on his list, because he feels it’s the most underestimated, is what he calls “reward and punishment superresponse tendency.” In more normal speak, “incentives are extremely powerful.”
On a regular basis I am shocked at how many investors will write about a company and not mention management pay. It is one of the first things I look at and is, in my opinion, one of the most important (and overlooked) parts of an investment thesis. It is human nature to be selfish and act in one’s own interest and many CEOs are incentivized not to act in the best interest of shareholders.
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Navigator Holdings (NVGS)
Navigator Holdings (NVGS, $19.13) is in the liquefied petroleum gas (LPG) shipping industry. The liquids they ship are by-products of oil and gas production and refining. Their stock appears fairly valued based on the current industry dynamics, but the LPG shipping industry is expanding rapidly over the next few years. I believe the market is underestimating how much cash Navigator will generate in 2017 forward which creates a significant opportunity for investors willing to hold NVGS that long.
Business overview
Navigator operates a fleet of 28 liquefied gas carriers (plus 10 more ships to be delivered through 2017). A liquefied gas carrier is a generic term for a vessel that carries LPGs (such as propane and butane), petrochemical gases (such as ethylene, propylene and butadiene) and ammonia. Collectively I’ll refer to these liquefied gases as natural gas liquids (NGLs). Navigator currently only owns medium-sized (i.e. handysize) vessels, though they are getting into larger ships in the future. Handysize vessels are great because they can handle both medium and long distance routes and are able to access all ports unlike very large gas carriers (VLGCs). Both the liquefied gas carrier industry as a whole and the handysize niche within it are very fragmented. Navigator’s 26% market share in the handysize market is far ahead of their second largest competitor, Ultragas, with 10% of the market.
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Khan Resources (KRI)
Khan Resources (KRI, $0.43) is a small mining company based in Canada with a market cap of $32 million. Two months ago the company was awarded over $100 million in an international arbitration case. At this point you’re probably tempted to stop reading, open your online broker and start buying shares. While that isn’t the worst idea in the world, this investment certainly isn’t for everybody.
To summarize how Khan got to this point, in 1995 they entered into a joint venture (JV) to develop a uranium mine in Mongolia. The JV consisted of Khan as a 58% owner, a Mongolian state owned company owning 21% and a company majority owned by the Russian government with the other 21%. Importantly, Khan owned 100% of the corresponding exploration license and, through the JV, owned 58% of the mining license. In 2010, the governments of Mongolia and Russia decided to develop the mine themselves and expropriated Khan. Along with this, Mongolia cancelled Khan’s mining and exploration licenses.
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Hornbeck First Quarter 2015 Update
Hornbeck Offshore Services (HOS, $22.72) released its first quarter 2015 results this week and, suffice to say, I like everything I see. An important aspect of my original thesis was that Hornbeck is able to scale down quickly and easily during downturns. Looking back on history is always tough, but it seemed management handled the last downturn very well. Now that we’re a couple quarters into this downturn I’m happy to say the business is looking well equipped to survive this one as well.
As of quarter end, Hornbeck has stacked 18 vessels which affects the company in numerous ways. First, their daily operating expenses are decreased. It costs roughly $500 per day to take a vessel out of service vs the $15,000 or so it takes to have one active. Drydocking expenses and maintenance capex are also delayed (not eliminated) while a ship is stacked. The ability to drastically cut expenses almost immediately during a downturn and then gradually ramp those expenses back up as oil recovers is a wonderful thing.
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LGI Homes (LGIH)
LGI Homes (LGIH, $16.69) is a little known homebuilder that is a good example of the baby being thrown out with the bathwater. LGI derives around 60% of its revenue from Texas and anything related to oil has been crushed in the past nine months. Since touching $21 last July, LGI is down 20% despite great results and very positive guidance for 2015. Homebuilding is a fairly crappy industry (commodity, high debt loads and heavily dependent on the economy) but LGI is both one of the fastest growing and cheapest homebuilders out there. LGI is in a great position to soar over the next few years as the housing recovery continues and mortgages are easier to get.
Business overview
LGI was founded in 2003 and IPOed in November of 2013 so they just released their first full year of results being a public company. They specialize in building move-in ready homes for first-time buyers (mainly young renters looking to buy) and their average sales price is $166k which is substantially less than the next closest public homebuilder (AVHI in the $250s). Maintaining a growing inventory of move-in ready homes is, in my eyes, much riskier than many builders that only construct homes after receipt of a signed contract and deposit. In good times (like right now) they are able to immediately sell homes though, so it cuts both ways.
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Hornbeck Book Value Update
Apparently I should have waited one day to post my Hornbeck Offshore Services thesis. Yesterday their 2014 10-K was released in addition to an announcement on the sale of four ships to the US Navy. You can read the details of the sale here. The announcement says they sold three ships with an option for the fourth (and a potential fifth), but the 10-K says they sold four so I assume the option was exercised. This sale gives us some great information on what their full fleet may be worth.
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Travis Wiedower 