Tim Eriksen‘s Cedar Creek Partners has produced an average annualised return since inception for investors of 14.1% compared to a gain of 7% for the S&P 500 over the same period. Inception was January 15, 2006, so unlike many other smaller hedge funds, Cedar Creek was around to experience the financial crisis.
For the first half of 2016, the fund produced a return of -3.5% compared to 3.8% for the S&P 500. At the end of June, the fund had 17 positions, with 56.5% of assets invested in the fund’s top five longs and 89.5% of assets invested. For the second quarter, the fund gained 5%.
Cedar Creek is a value fund at its core and the fund seems to prefer “investments trading at a discount to cash or securities but with little upside potential due to the lack of a strong money making business.”
One such investment was Associated Capital a spinoff of Gamco, which was sold during the second quarter as Cedar’s managers were concerned about their large exposure to investments of this type. With little or no earnings power, there was no indication as to how long it would take before Associated Capital’s discount would begin to narrow, and as a result, Cedar’s managing partner Tim Eriksen believe the cash could be better used elsewhere.
“While value investing is all about paying less than a dollar for a dollar’s worth of assets, it is also important that over time the value of the assets is growing, so the investor can capture not only the elimination of the discount in valuation but also the gains of the business over the holding period. In Associated Capital’s case we decided that due to the relatively low earnings power of the business and the unknown timeframe for a narrowing of the discount, that we would be better off allocating capital elsewhere.”
Associated Capital is out, but another stock with similar traits was added to Cedar’s portfolio in the last quarter.
Virtus Investment Partners is an investment manager that is suffering from declining assets under management. However, according to the fund’s research Virtus has nearly $50 per share in cash on its balance sheet and trailing earnings over three dollars per share, including some one-time costs. Stripping out cash, Cedar estimates it paid around five times earnings for the business at the date of acquisition an extremely attractive multiple for a cash rich business.
Cedar Creek: Turning activist
Another investment Tim Erikson writes about in Cedar’s second quarter letter is Solitron Devices.
The fund originally purchased Solitron in 2014. At the time the company had $7.2 million in cash, a market value of $9 million and earnings of approximately $80,000 per year. The problem was management had a severe disregard for shareholder rights. No annual meetings were held between 1993 and 2012 and when annual meetings were eventually held in 2013 and 2014, shareholders voted against every director, but the board would just appoint someone new.
Cedar turned activist in 2015 and announced its intention to run two rival directors for board seats. Shareholders voted overwhelmingly in favour of Cedar’s nominees, but the existing board decided to fight the fund and its shareholders. Legal fees have pushed the company into losses in three of the last four quarters but finally, a few weeks ago Cedar finally got its way, as Tim Erikson writes:
“After an immense amount of effort by the Board, we are pleased to report that last Friday after market Solitron issued a press release announcing significant changes. The CEO is retiring, the company entered into a separation agreement which includes the company repurchasing his stock and options, a new COO has been hired, I have been named CEO, and David Pointer, the other nominee in my proxy fight, has been named Chairman.”
“My duties will be to improve shareholder relations, corporate governance, capital allocation, and financial reporting. As one shareholder told me over the weekend, “You already are handling shareholder relations” which is really true as shareholders have had way more contact with me than management over the past year.”
Tim Erikson and Cedar are certainly worth keeping an eye on as this situation plays out.