SCC Portfolio Update (Year End 2021)
Seven Corners Capital's equity portfolio positioning as of December 31, 2021 was as follows, with the top-6 positions constituting 58.5% of the aggregate portfolio:
The Seven Corners Capital (or SCC) portfolio finished 2021 up 10.8% overall, despite being weighed down by a cash position fluctuating around 15%. This represented underperformance approximately 1,720 bps versus the S&P 500 and 340 bps versus the Russell 2000, in each case including dividends received. (Note that there is fairly minimal overlap with the Nasdaq.) On a two-year stacked basis (i.e., from 1/1/20 to 12/31/21), the SCC portfolio was up 58% overall (26% CAGR), despite being weighed down by a significant cash position throughout. This represented outperformance of approximately 1,944 bps versus the S&P 500 and 3,590 bps versus the Russell 2000, in each case including dividends received. As a reminder, SCC's overriding investment goal is the pursuit of multi-baggers, mainly in the microcap and small-cap space. During 2021, SD & TTSH drove the positive results, while MACK & TPB dragged us down (see discussion of each below).
The following is an update regarding earnings and other news for SCC's top-5 equity positions (PSHZF, TPB, SD, TTSH & MACK) as of December 31, 2021:
Up 17.5% on the year in 2021, celebrity billionaire hedge fund manager Bill Ackman guided PSHZF to its third consecutive year of large gains in net asset value (or NAV) in 2021, with NAV finishing up 27% (this following two mind-bogglingly good years of +70% and +58(!!!)). On a three-year stacked basis, PSHZF's NAV has increased an insane 241% (versus just plus 82% for the S&P 500, including dividends).
Now you might think that with PSHZF's NAV under Ackman's steady investment hand beating the S&P 500 by ~16,000 bps [sic] over the 2019-2021 period, PSHZF would trade either close to or perhaps even above NAV. But you would be wrong. PSHZF ended 2021 trading at a 28% discount to NAV, which is interesting given that many other stocks (including so-called meme stocks) continue to trade at absurd premia to any sane valuation metric. Would you like to own, say, TSLA at ~1,000X book value and 148X estimated 2021 EPS...or PSHZF's high-quality portfolio (which includes a substantial hedge against short-term interest rate increases) at 72% of NAV? I'll take the latter, thank you. "Price is what you pay, value is what you get."
Pershing Square Capital Management's 13-F holdings as of 12/31/2021 should be released on or about February 14th, so investors will be able to see then what changes to the PSHZF portfolio made in Q4 of 2021. In addition, PSH's Q4 investor update call is scheduled for 9am EST on February 11th.
One caveat on PSHZF. Due (apparently) to the recently-passed SEC Rule that largely shut down trading in so-called "dark stocks" as of September 1st last year (see here for discussion), some brokers no longer allow US customers to buy shares of PSHZF (you can only close out existing positions). For example, TD Ameritrade claims its clients can't buy PSHZF because it is a "foreign ETF" (which is a strange characterization of the company, which is actually a Guersey-based closed-end fund). So adding to (or initiating) a position in PSZHF could be problematic, at least for awhile.
TPB, a leading U.S. provider of Other Tobacco Products and adult consumer alternatives, announced some big news in mid-December:
Turning Point Brands Names Former Liberty Media Executive Yavor Efremov as CEO
Current Chief Executive Officer, Larry Wexler, To Retire in January 2022, After Leading The Company for Nearly Two Decades; Will Continue To Serve on Board of Directors
Planned Succession Brings A Seasoned Executive With Extensive Operating and M&A Experience To The Company as It Embraces Its Next Growth Phase
Company Expects 2021 Revenue and EBITDA To Be Towards The Higher End of Previously Communicated Guidance
LOUISVILLE, Ky. – December 16, 2021 – Turning Point Brands, Inc. (“TPB” or “the Company”) (NYSE: TPB), a manufacturer, marketer and distributor of branded consumer products, including alternative smoking accessories and consumables with active ingredients, announced today the appointment of Yavor Efremov as President and Chief Executive Officer, effective January 11, 2022. Mr. Efremov succeeds the Company’s current CEO, Larry Wexler, who will retire in January following 18 highly successful years at TPB. Mr. Wexler will remain on the Board of Directors and serve as a consultant to the Company following his retirement.
Prior to joining Turning Point Brands, Mr. Efremov served as the CEO of Motorsport Network, where he was responsible for upgrading the IT infrastructure, processes, and company strategy to support the integration of more than 30 businesses around the world. He also served as a senior executive at Liberty Media Corp., where he was instrumental in sourcing, financing, and growing Liberty’s investments in multibillion-dollar businesses, including Charter Communications and Formula 1. Prior to that, Mr. Efremov worked as an investment banker at Goldman Sachs & Co. and as a corporate lawyer at the law firm of Cleary, Gottlieb, Steen & Hamilton. Mr. Efremov holds a J.D. from Yale Law School and a Ph.D. in economics from Yale University. He also has a B.S. in mathematics and a B.A. in economics from Furman University.
The new CEO's background is interesting, despite not having ant tobacco or OTP experience: a Yale-trained lawyer, I-banker & economist, with experience working for billionaire John Malone. Welcome CEO Efremov!
TPB has been a decent long over the past few years, rising about 45% (including dividends) since originally purchased in 2018, about a 10% CAGR, which should probably be higher given TPB's "up & to the right" 5-year trailing financial trends in revenues, EPS & EBITDA/AEBITDA (see charts below).
TPB currently trades at an EV/EBITDA multiple of 8.8X and a FCF/EV yield of 5.9% (each for FY2021 (SCC estimates)), so it's not pricey versus the rest of the market, especially considering its enviable growth and profitability metrics and prospects.
Sandridge is SCC's largest energy holding, based on the thesis that the secular decline in O&G drilling, combined with the revival of inflation generally, will support carbon-based energy prices going forward. With legendary investor Carl Icahn (still going strong, despite turning 86 next month) as its largest shareholder (he owns 13%) and Icahn's former lieutenant Jonathan Frates as its board chairman, Sandridge did an admirable job steering the company away from the abyss of bankruptcy in April 2020 (when, recall, the price of oil dropped to NEGATIVE $40/bbl). The company has cut unnecessary expenses to the bone ("high-grading" SD's well inventory in fact, not just as a management talking point), maximizing free cash flow conversion. As of 9/30/2021, SD actually had a net cash position of $99 million and currently sports an enterprise value of approximately $300MM (counting long-term asset-retirement obligations as debt), meaning SD trades at just (A) 3.3X 2021 EBITDA and (B) 4X 2021 FCF (SCC estimates). The company has also done a great job recompleting and reactivating dormant wells, with Q3 2021 aggregate production declining just 16% yoy (and a minimal 1.6% versus Q2 2021) with fairly limited capex spend (see Q3 E PR here). Recent financial metrics for SD:
This position was established in Q1 of 2020, mainly being a bet on investor and ValueAct Capital co-founder Peter Kamin, who currently owns 6.85 million Tile Shop shares (13.2% of TTSH's equity) and as board chairman is effectively now in control of the company. Put succinctly, Kamin is a home run hitter. For example, since his initial investment over nine years ago as a large (>5%) holder of Rand Worldwide (RWWI) at an average cost of sub-$1/share (at last check, he controlled almost 60% of the company's shares), the stock as gone up over 10X. (See his full list of disclosed trades in public companies here.)
TTSH announced its Q3 earnings on November 4th (see full earnings PR here). Impressively, through the first 9 months of 2021, revenues were up 15% (with SSS +13%), net income was up 178% and AEBITDA was up 39% (in each case yoy). It seems that the "Kamin operational magic" is still working at TTSH. The company also rewarded shareholders with a $0.65/share special dividend (paid in Q4 2021).
Last year the company instituted various corporate governance reforms as follows (see full settlement details here):
(1) Directors Jacullo, Kamin and Rucker agreed to extend their previously-disclosed standstill commitments (see Company’s Form 8-K dated January 10, 2020) until at least June 1, 2023;
(2) The Company will continue to provide OTC disclosure at or above the level characterized as “Pink Sheet: Current Tier” for until the earlier of three years after the effective date of the Settlement Agreement or until such time as the individual defendants no longer serve on the Board of Directors of the Company (the “Board”);
(3) All shares purchased by Messrs. Kamin and Jacullo or entities affiliated with them between October 23 and November 8, 2019 shall be voted in the same proportion as the vote of shares held by Outside Stockholders (as defined by the Settlement Agreement) for three years from the date of purchase or until sold;
(4) The Company’s Insider Trading Policy shall be modified to extend the period before insiders can begin trading after a public announcement of material information; and
(5) The Company’s Certificate of Incorporation and Bylaws were amended to expand the approval rights of public shareholders who are not directors and officers and to establish an Independent Transaction Committee of the Board of Directors comprised of Mark Bonney and Linda Solheid.
MACK is a classic "discount to the sum-of-the-parts" play. It can be good to have one or more of these plays interspersed with one's general long holdings, since (theoretically, at least) investors should view them without regard to rises or falls in the overall market. With no debt and a cash runway which the company claims should last until 2027, and with underlying business operations having basically ceased, MACK retains approximately $500MM of face value worth of contingent value rights (or CVRs) on its balance sheet, representing a maximum potential value to MACK holders of up to $37/share, compared to a recent stock price of $4.00. If the company fails to monetize the CVRs in the near term by selling them to a third party buyer, shareholders will likely have to wait 1 to 2 more years for the underlying drug trials to read out in order to determine whether and how much the CVRs will pay out. FWIW, insiders have buying quite heavily in recent months (see full list of insider transactions here).
DISCLOSURE: Long all of the above.