SCC Portfolio Update (YTD Thru 12-31-2022)
Seven Corners Capital's equity portfolio positioning as of December 31, 2022 was as follows, with the top-6 positions constituting 82% of the aggregate portfolio:
The Seven Corners Capital (or SCC) portfolio finished Q4 2022 up 7.1% overall on a YTD basis. This represented outperformance approximately 2,500 bps versus the S&P 500 (down 18.1% YTD) including dividends received. The prime method employed for achieving returns in the SCC portfolio (after, of course, intelligent stock-picking) is by "letting our winners run". In other words, one wants to avoid the key mistake that investors often make of cutting the flowers in the portfolio & watering the weeds. As an example of the relative stasis in our portfolio, 5 of SCC's top-6 holdings at the end of 2021 remained in our top-6 at the end of last year (only TTSH dropped out, replaced by 2022's principal newly-established holding, Genworth Financial, ticker GNW).
The following is an update regarding earnings and other news for SCC's top 4 equity positions (PSHZF, SD, MACK & GNW):
PSHZF, led by billionaire hedge fund manager Bill Ackman, finished 4Q 2022 down 16% on the year, approximately in-line with the overall market. PSH's NAV, on the other hand, was down just 10% for the year. This performance is impressive considering Ackman & Team are following up three years of outsized NAV gains of +27%, +70% and +58% in 2019, 2020 & 2021, respectively (compare this to Cathy Wood's ARKK, which was down 67% overall last year). On a "pandemic era" stacked basis, PSHZF's NAV has increased 142%, a CAGR of 34%.
PSHZF continues to trade at a substantial discount to NAV of ~28%. Frankly, this fact has become a bit tiring to both Ackman and yours truly. Ackman indicated in his mid-year investor letter that the discount will probably not close unless & until PSH obtains a US-based listing, which could occur if PSH acquires or merges with a domestic operating company (currently PSH is blocked from an American listing due to PFIC rules): "As PSH grows in market capitalization and its ownership stakes in its portfolio companies increases, one can envision a world in which over time PSH becomes a controlling owner of one of more businesses that comprise the substantial majority of our assets and income. We expect to continually evaluate PSH and its operations, and consider whether in the future it may be able to operate not as an investment company in the U.S., but rather as an operating company that could be listed in the U.S."
Pershing Square Capital Management's 13-F holdings as of 12/31/2022 should be released on or about February 15th, so investors will be able to see then what changes to the PSHZF portfolio made in Q4. In addition, PSH continues to repurchase shares under its existing $200MM repo program (see PRs here).
In addition, Ackman revised PSH's dividend policy in March 2022 to (1) increase it by 25% to $0.125/share per quarter (or $0.50/share annually) and (2) adjust the distribution in each succeeding year (i.e., 2023 and onwards) such that the quarterly dividend will equal 0.25% of the average PSH NAV for all trading days in December of the prior year (subject a floor of the current $0.125/quarter). In effect, this means that if PSH's NAV in December 2023 rebounds to an average of, say, $55/share (up ~22% from the Q3 2022 quarter end NAV of ~$45 [SCC estimate; actual numbers to come on out Wednesday evening, October 5th]), then the aggregate PSHZF dividend for 2024 should equal $0.55/share, or $0.1375/share per quarter for that year.
An interesting recent podcast (from last September 12th) discussing the PSHZF long thesis in depth can be found here.
One caveat on PSHZF. Due (apparently) to the 2021 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.
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 87 in a few weeks) 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), thereby maximizing free cash flow conversion. As of 9/30/2022, SD actually had a net cash position of $240 million and currently sports an enterprise value of approximately $440MM (counting long-term asset-retirement obligations as debt), versus adjusted operating cash flow in Q2 2022 of $55MM, meaning the company is trading at an EV of just 8 quarters' cash flow [see Q3 Earnings PR here]. SD has also done a great job recompleting and reactivating dormant wells. SD's annual PDP decline is expected (by the company) to average approximately 8% over the next 10 years. Since June 2022, yours truly has been strongly urging SD management (both in public & behind the scenes) to institute an active hedging program to secure the stability of future O&G cash flows, and indeed SD began hedging its nat gas production as of the end of 2022:
"The Company maintained its commitment to protecting shareholder capital invested in its development program by entering into commodity derivative contracts for natural gas. The commodity derivative contracts have an average strike price of $8.39 per MMBtu with a positive mark-to-market asset value of $4.0 million as of September 30, 2022" (Q3 Earnings PR, page 1).
MACK is a classic uncorrelated "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, MACK has a cash runway which the company claims should last until 2027.
In November, Ipsen announced that the Onivyde Phase 3 drug trial for first-line treatment of pancreatic cancer was successful (if the FDA approves Onivyde for this indication, MACK will receive $225 million from Ipsen via a CVR payment, or nearly $17/share on 13.4 million shares outstanding; note that MACK retains significant NOLs that should largely obviate taxes on such a payment):
Merrimack Provides Ipsen Report That Onivyde® Regimen Demonstrated Statistically Significant Improvement in Overall Survival in Previously Untreated Metastatic Pancreatic Ductal Adenocarcinoma
November 9, 2022 CAMBRIDGE, Mass.--(BUSINESS WIRE)--Merrimack Pharmaceuticals, Inc. (Nasdaq: MACK) [(“Merrimack” or the “Company”)] announced that Ipsen, SA (“Ipsen”) issued a press release today reporting its primary analysis of the results of its Phase III NAPOLI 3 trial of Onivyde® (irinotecan liposome injection) plus 5 fluorouracil/leucovorin and oxaliplatin (NALIRIFOX regimen) as a treatment of first line metastatic pancreatic ductal adenocarcinoma (mPDAC). The Ipsen press release indicates that the trial “met its primary endpoint demonstrating clinically meaningful and statistically significant improvement in overall survival compared to nab-paclitaxel plus gemcitabine in 770 previously untreated patients with metastatic pancreatic ductal adenocarcinoma (mPDAC) and key secondary efficacy outcome of progression-free survival (PFS) also showed significant improvement over the comparator arm. The safety profile of Onivyde in the NAPOLI 3 trial was consistent with those observed in the previous phase I/II mPDAC study.” Ipsen indicated in its update that it intends to file a supplemental New Drug Application with the U.S. Food and Drug Administration for Onivyde in combination with oxaliplatin plus 5- fluorouracil/leucovorin for the treatment of patients with previously untreated mPDAC following the Fast Track Designation granted in 2020. [source]
Insiders have been purchasing MACK heavily via the open market late in 2022 and during the first few weeks of 2023 (see here). Insider buying can often be a good indicator of the future return on a stock, as insiders tend to shy away from putting their own capital to work (as opposed to being gifted options and RSUs) unless they are highly confident in their stock's future price performance.
SCC's original long thesis for MACK can be found here.
GNW, a new SCC holding in 2022, outperformed the overall market by a significant margin during the last part of the year and has appreciated substantially over SCC's initial cost basis of $3.75/share in a short period of time.
GNW trades at a discount to the sum of its parts, principally its 81.6% ownership stake in Enact Holdings (ticker ACT) , which is now valued at $3.3 billion (or 22% greater than GNW's $2.7 billion aggregate market cap). The SCC long thesis on GNW involves the eventual separation of GNW's ACT stake from GNW's generally unprofitable long-term care & life and annuity operations. The company also previously indicated that it will initiate a dividend in the near term and has been actively repurchasing its stock in recent quarters.
SCC's discussion of the corporate governance issues plaguing GNW can be found here.
DISCLOSURE: Long all of the above.