Tim McElvaine latest letter to investors
- Peter Cundill Profile- Part one: Introduction
- Peter Cundill's Top Book Recommendations For Investors
- Peter Cundill: Discount To Liquidation Value
To my Partners:
As I was finalizing this report, we received good news. Polaris Materials, a relatively recent investment of the Trust, has received a takeover offer at a large premium to the stock price. This transaction impacts the Trust in two ways:
• Our performance to the end of August will be somewhere around +11% or so YTD; and
• Our cash levels are now over 35% of net assets giving us both downside protection and the ability to take advantage of future investment opportunities.
The report which follows discusses our portfolio as of June 30, 2017. Due to the Polaris transaction, the percentages will have changed somewhat but the figures are consistent with the Trust’s June 30th financial statements (which are included for Partners).
We are well positioned in what is an uncertain economic and political environment. I am confident in our stocks and optimistic about our returns. I will talk a bit about the portfolio below and why I am excited but first want to cover off a couple of other items.
Outline of our reporting
As discussed in the Annual Report, I don't think about the portfolio in terms of geography but more by the nature of the investments. The “bible” of value investing is the book “The Intelligent Investor” written in the 1930s by Benjamin Graham. Taking a little bit of liberty with Ben Graham’s ideas, I have broken our investing into 3 categories. I define the categories as follows:
1. Large unpopular companies – Generally speaking, for a larger company to come across our path, it must be unpopular. “Unpopular” may mean it is located in an industry, country or region which investors dislike or is suffering from a negative event or news. Our recent successful investment in PrairieSky is an example of an industry (oil & gas) which fell from favour (in early 2016) leading to an opportunity for us to invest in one of the industry’s leading companies. Over our history, we have had good returns in the large unpopular companies category but patience was definitely required.
2. Bargain secondary issues – While a larger company may be a bargain, it is usually due to unpopularity. A secondary company may become cheap for a number of reasons including unpopularity but also because of neglect, a constraint, or dislocation such as a spinoff. For simplicity, I have defined a secondary issue as a company with a market value below $1bn, although some of our investments have been much smaller companies.
3. Special situations and workouts - I include in this area everything from liquidations to distressed debt. This category will be unlikely to contain equity investments unless they have a limited life. (eg. Liquidations, risk arbitrage etc…)
Review of the first half of 2017
Large unpopular companies:
This category’s performance was roughly flat during the first six months of 2017 as gains in Blackberry and Leucadia National were largely offset by weakness in VOYA Financial and Seacor Holdings. Seacor’s weakness was somewhat structural as in June Seacor distributed to us Seacor Marine shares. I will discuss this a little more below.
Bargain secondary companies:
The largest contributors to this category’s six month performance were Village Farms and Wow! Unlimited Media (exclamation mark is part of their name) while Glacier Media was a detractor.
Where We Are Now
My review of the portfolio will discuss the Trust as of June 30, 2017. Unaudited financial statements for the first 6 months of 2017 have been included (for Partners) with this report.
Two items of the Trust’s portfolio give me reason for optimism:
• Our stocks are inexpensive with several of our investments having near term catalysts in place to realize this value; and
• The balance sheets of our investee companies are generally in good shape.