This value fund exited PG&E during the third quarter

DG Capital’s DG Value Funds declined 2.7% in the third quarter as smaller capitalization and distressed assets struggled. Year to date, the three DG Value Funds are up 6.49%, 5.42% and 5.76%.

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New position in BioDelivery Sciences International

In his third-quarter letter to investors, which was reviewed by ValueWalk, Dov Gertzulin said he added BioDelivery Sciences International stock to the fund’s portfolio during the third quarter. The stock was a positive contributor to the fund’s performance during the third quarter, and he expects it to continue to produce strong results in the rest of this year.

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Q3 2019 hedge fund letters, conferences and more

The specialty pharmaceutical company focuses on treatment of chronic pain, and its main prescription drug is Belbuca, a buprenorphine film pain medication that sticks to the inside of the cheek. It dissolves within 30 minutes and is unique because it only partially activates the opioid receptors, which means the impact doesn't go beyond a certain level. It's designed to reduce the risk of overdose and carries a reduced likelihood of abuse. Gertzulin said there is no competing buprenorphine product available, so he expects the company to continue its almost 100% annual growth rate as it gains market share.

He believes BioDelivery is worth $7.50 per share, which would be a 90% upside from where they purchased it.

Exits of PG&E and Universal Electronics

DG Value had an equity position in embattled utility PG&E, but the position was exited during the third quarter. The position had a negative impact on the fund's performance during the quarter.

The bankruptcy court granted a motion allowing a state trial on the company's role in the Tubbs Fire, which was the biggest fire in 2017. Even though the CAL FIRE and California Public Utilities Commission both determined previously that PG&E's equipment did not cause the Tubbs Fire, the judge decided to move forward with a jury trial, which sent PG&E's stock tumbling.

Gertzulin's thesis for PG&E was that the company was not at fault for the fire, but that thesis is no longer intact, so the fund exited its equity position. The fund does continue to hold a small position in the company's debt securities.

The fund also exited its equity position in Universal Electronics, which was one of its top contributors to performance during the quarter. DG sold the stock as it approached their fair value estimate.

Other positions

Gertzulin also highlighted Merrill Corporation, Invacare Corporation, Contura Energy, FAGE International and Harrah's Northern California.

The fund owns both stock and a senior secured loan from Merrill. The company executed a debt financing to fund a large shareholder dividend and continues to report strong earnings numbers. DG Value funds also participated in the new debt financing to replace their position in the existing term loan. DG also added to its equity position in Merrill during the quarter and remains "optimistic about the growth potential of its platform."

DG Value owns some of Invacare's convertible debt. Gertzulin said the medical equipment manufacturer's debt should continue offering a 13% return over the next 12 months "with a high margin of safety." He also said the company could refinance, which could mean that they will see that return faster. At the end of the third quarter, the 5% convertible notes were selling at more than 94 cents on the dollar, an increase from the fund's 80 cents on the dollar purchase price.

The fund holds a senior secured loan and stock in Contura Energy. The equity was a major detractor to its performance during the third quarter, although the debt position was neutral. Gertzulin said lower metallurgical coal prices, uncertainty around the CEO search and potential liabilities from previously divested mines weighed on the company's stock during the quarter.

However, he likes the choice of David Stetson as the new chairman and CEO. The company also announced a solution for its potential liabilities from previously divested mines, which includes a $90 million payment to FM Coal, which is taking over operation and liabilities associated with the mines. Gertzulin expects the senior secured loan to earn them a double-digit return and sees the equity more than doubling from its current price.

DG Value continues to hold unsecured debt from Greek yogurt producer FAGE International. The fund took a position in the company's debt earlier this year at 79 cents on the dollar. In August, the company posted improved earnings results, and its bonds climbed to about 90 cents on the dollar.

The fund also continues to hold a senior secured debt position in casino operator Harrah's Northern California. The company held its grand opening in April and has so far posted solid results. Gertzulin expects the company's cash generation to deleverage its balance sheet by quite a bit. Harrah's bonds have climbed from 95% to 106% of face value with a 14.4% yield to maturity, and he sees room for more principal upside.

This article first appeared on ValueWalk Premium



About the Author

Michelle Jones
Michelle Jones was a television news producer for eight years. She produced the morning news programs for the NBC affiliates in Evansville, Indiana and Huntsville, Alabama and spent a short time at the CBS affiliate in Huntsville. She has experience as a writer and public relations expert for a wide variety of businesses. Michelle has been with ValueWalk since 2012 and is now our editor-in-chief. Email her at Mjones@valuewalk.com.