In the third quarter, Olesen Value Fund generated a return of 1.7%. The following table shows our historical returns after fees alongside those of global equity markets since the fund’s inception.
Olesen Value Fund: Portfolio Updates
Started Buying Small, Diversified Asian Firm at 7x Earnings
During July, we started accumulating shares in a small Asian industrial firm. The company has good market positions in a few different niches, a diversified portfolio of businesses, has always been profitable, a high dividend yield, a large cash balance, and little debt. The stock trades at only approx. 7 times our estimate of normalized earnings. Consistent with our usual policy, we won’t disclose the name of the company until we are finished accumulating the position.
Bought a Good Business at 9.5x Adj. Trailing Earnings; Divestiture May Propel Stock Price
Near the end of the third quarter, we finished accumulating a position in a small European company which we had started buying in the second quarter. This company has an excellent position in the industry it operates in, it is consistently generating high margins and returns on capital, and it has almost zero net debt (total debt minus cash balances). Based on the average price we paid for the shares, we paid approx. 9.5x adjusted trailing earnings, which I think is too low for this above-average business. The true earnings have been obscured by non-cash write-downs and poor performance in a non-core business segment. I think this segment will be divested or curtailed, which should cause the market to better appreciate the value of the business and lead to a higher stock price. In addition, a dividend will likely be initiated soon, which could also help the stock price.
Dirt Cheap, but Decent Company Trading at EV-to-EBITDA of Approx. 1.0x
During the quarter, we also decided to go ahead with an investment in a small, very cash-rich technology company trading at an enterprise value-to-EBITDA multiple of approx. 1.0x. The company is the leading operator globally in its primary business, but we think technological developments as well as the expiration of certain contracts will likely reduce free cash flow to a smaller, but still positive, amount over the next few years. The company is listed in Asia but operates globally and has a North American controlling shareholder. Due to regulations in the country in which the company is listed, we need to obtain certain approvals before we will be allowed to trade the stock, which we hope to finalize soon.
Started Buying Small European Company With Top-Notch Assets Trading at 50% of Liquidation Value
Towards the end of the third quarter, we started accumulating a new investment. The market cap of this small European-based company is only approx. 50% of the company’s liquidation value, and the assets are top-notch. However, there are also some risks, especially future equity dilution that is driven by the CEO’s incentives, which are not fully aligned with shareholders but instead favor growing the company. Still, considering the extremely low price we are paying for these first-rate assets, I think the risks are worth taking in this case.
Olesen Value Fund: Declining Cash Balance; Conclusion
Please excuse the unusually short letter this quarter, which in some ways was more “quiet” than normal. However, we did identify three new investments this quarter, but, as you probably know, in these letters, we normally don’t reveal the identity of or discuss in too much detail a new investment until after we have sold it, especially if we are still in the process of accumulating it in the market. We are working hard to find attractive investment opportunities, and we are actually having fairly good success in this regard, especially in light of the generally pricey equity and fixed income markets these days. Most of the opportunities we have found or are currently considering are small publicly traded companies located in Europe or Asia. However, as discussed in more depth in the Q2 letter in the section titled “Our Currently Large Cash Balance” (which you can find at www.OlesenValueFund.com), the deployment of our cash is being delayed by the low liquidity of some of the investments we are accumulating. For illiquid investments, we will most probably get a better price if we spread our purchases over a period of time (such as a few weeks or months), except for the (less common) cases where we think the stock price is likely to rise significantly in the short term. At this point, most of our cash balance is more or less “ear-marked” for investments we are currently accumulating (or planning to accumulate as soon as necessary trading approvals are obtained). Our cash balance has been declining during the third quarter as we have been accumulating shares in our new investment ideas as well as a couple of older ones, and it will most likely decline further in the fourth quarter.
As always, don’t hesitate to call or email me with any questions, comments or concerns. Also feel free to visit the web site www.OlesenValueFund.com, which has additional information about Olesen Value Fund, including previous quarterly letters. Let me know if you need the password to the web site, which is required by SEC regulations.
Christian Olesen, CFA
Olesen Capital Management LLC, general partner of Olesen Value Fund L.P.
Olesen Value Fund L.P. – Sep 2014 Update / Factsheet
The fund earned 0.4% net in Sep. vs. -1.7% for the MSCI All-Country World Index and -1.4% for the S&P 500.
Our outperformance was mostly due to two small European companies in our portfolio and our investments in financial services.
During September, we started accumulating a new investment. The market cap of this small European-based company is only approx 50% of the company’s liquidation value, and the assets are top-notch. However, there are also some risks, especially future equity dilution that is driven by the CEO’s incentives, which are not fully aligned with shareholders but instead favor growing the company. Still, considering the extremely low price we are paying for these first-rate assets, I think the risks are worth taking in this case.
During September, we finished buying shares in the small European firm I discussed last month. We also continued accumulating positions in two other small companies, one Asian and the other European. We hit an unexpected snag in obtaining the necessary approvals to trade the Asian-listed shares of the very cash-rich technology company trading around 1.0x enterprise value-to-EBITDA which I described in last month’s update. We are working to solve the problem, which is due to regulation in the country where the stock is listed, and hope to start buying the stock soon.