JDPI’s letter to limited partners for the third quarter 2014.
For the third quarter, J. Deal Partnership I, LP (JDPI) was up 9.85% net versus 1.13% for the S&P 500. Year-to-date the fund is up 27.62% net versus 8.34% for the S&P 500. Since inception in October 2011, we have earned 88.77% after all fees and expenses, or 23.60% annualized.
JDPI: Third quarter review
The third quarter outperformance was driven by our two largest long positions – ALJ Regional Holdings, Inc. (OTCMKTS:ALJJ) (micro-cap) and Bank of America Corp (NYSE:BAC) (large-cap). Our largest decliners lacked an obvious short-term catalyst for outsized earnings, or a major corporate event, and were therefore impacted by the selloff that started in September. We recently took advantage of this buying opportunity.
Today the forward after tax earnings + dividend yield of the S&P is nearly 8%, and 9% for the Dow, versus 2.29% for the UST 10-year. The same weighted average yield of our top four positions is 15%, or around half the value of the S&P. Even in a prolonged global slowdown, we think that US corporate earnings-and our holdings in particular—have a high probability of widely outperforming GDP, residential real estate rental rates, and all categories of bonds.
JDPI: Portfolio Update
In July we sold our position in Hartford Financial (NYSE:HIG and HIG-W/S) for a blended 97% return (40.4% IRR) and realized long-term capital gains. We began purchasing the stock and crisis-era warrants in October 2012 after the hedge fund Paulson & Co. began pressuring the company to divest their life insurance and annuity-related segments, which had been masking the earning power of the core property and causality business.
JDPI: Exit of Vicon Industries Inc.
In July we finished closing out our position in Vicon Industries, Inc. (NYSEMKT:VII) for a single-digit loss. We started purchasing the stock of this distressed manufacturer of video surveillance equipment in April 2013 for 60% of liquidation value (cash + receivables + owned real estate – total liabilities) and aggressively worked to induce a sale. We introduced several energetic strategic buyers to the board, all of which walked away after various degrees of due diligence.
Vicon ended up being in worse shape than we had originally thought primarily due to ongoing software bugs and declining market share due to a lack of innovation. Despite the cheap price, large strategic buyers could not get comfortable with our proposed plan to absorb Vicon as an entry-level product line, strip SG&A expenses, sell the buildings and merge manufacturing.
In April the company announced a plan to merge with an equally distressed yet smaller peer, dilute the stock by 50% to pay for it, and issue a special dividend to distribute a portion of the excess cash. We sold because we did not see the benefit to merging two small companies with equally distressed competitive advantages; two pigeons do not make an eagle.
JDPI: Performance drivers
Biggest contributors to our Q3 performance measured in total dollar contribution:
JDPI: New position – Perry Ellis International
History and Overview Perry Ellis International, Inc. (NASDAQ:PERY) manages a portfolio of 33 men and women’s niche clothing brands that it either acquired, created or licensed since being founded by its CEO/Chairman in 1967. Owned brands include Perry Ellis, Original Penguin, Gotcha, Laundry, Rafaella, Cubavera, Ben Hogan, FARAH, C&C California, SAVANE, Jantzen, Redsand, Axist, Jag, ProPlayer, and others. Licensed brands include Nike, Callaway Golf, PGA Tour, Champions Tour, Grand Slam, and Jack Nicklaus.
PERY has ~$900 million in revenue divided between Wholesale Men’s (74%), Wholesale Women’s (14%) Retail/Direct (8.7%), and Licensing (3.2%). Wholesale Women’s and Retail segments will produce negative $15 million in EBITDA this year, while Wholesale Men’s and Licensing will earn over $47 million in EBITDA without margin expansion.