SCC Portfolio Update (YTD Thru 3-31-2023)
Seven Corners Capital's equity portfolio finished Q1 2023 down ~2.5% YTD, versus up 7.4% for the S&P 500, representing an underperformance of ~9.9% during the quarter. Since the beginning of 2020 (i.e., on a "Pandemic stacked basis"), the SCC Portfolio has appreciated ~75% versus up ~31% for the S&P 500, in each case including all dividends received, representing outperformance of 3,400 basis points versus the index.
“Lethargy, bordering on sloth, remains the cornerstone of our investing style.” --Warren Buffett
The SCC portfolio is currently positioned as follows:
The following is an update regarding earnings and other news for SCC's top 4 equity positions (PSHZF, MACK, SD & GNW):
Pershing Square Holdings (PSHZF), 29% position
PSHZF, led by billionaire hedge fund manager Bill Ackman, finished 1Q 2023 up slightly (+1.8%). PSH's NAV for Q1 2023 should also be up slightly (final numbers are expected to be revealed shorty).
The long thesis continues to be two-fold: (1) A bet that Bill Ackman will outperform the overall market with his stock picking and uncanny ability to make huge sums via hedging, and (2) More importantly over the near term, the closing of the enormous NAV discount. At last check, the discount was 32%. Thus, simply closing the discount would result in a 50% appreciation in the stock, assuming NAV were constant. Ackman hinted last year that PSH could become a Berkshire Hathaway type vehicle via a listing in the US as an opco: "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."[source]
Linked are the most recent NAV performance statistics and monthly performance reports for PSHZF
Pershing Square Capital Management's 13-F holdings can be found here. In addition, PSH continues to repurchase shares under its repo program (see PRs here).
Lastly, the 2022 PSH annual report recently became available (link here).
Merrimack Pharmaceuticals (MACK), 13% position
MACK, which was up 7% in Q1 2023, 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 2022, 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). [source]
In MACK's Q1 2023 earnings release, the company advised as follows: "In February 2023 Ipsen provided guidance to investors that it intends to file a supplemental New Drug Application with the U.S. Food and Drug Administration during the first half of 2023 following the Fast Track Designation granted in 2020 for the use of Onivyde in combination with oxaliplatin plus 5-fluorouracil/leucovorin for the treatment of patients with previously untreated mPDAC."
Insiders have been purchasing MACK heavily via the open market late in 2022 and during the Q1 2023 (including as recently as March 21st) (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.
Sandridge Energy (SD), 13% position
Sandridge is SCC's largest energy holding and was also the 2nd largest drag on the SCC portfolio in Q1 2023 (behind another energy play, GULTU). The long thesis here remains that the secular decline in O&G drilling, combined with the revival of inflation generally, will support carbon-based energy prices going forward (in other words, if you own O&G assets, then ESG is your friend). With legendary investor Carl Icahn (still going strong, despite turning 87 recently) 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. 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.
Genworth Financial (GNW), 10% position
GNW, a new SCC holding in 2022, outperformed the overall market by a significant margin during the 2nd half of 2022 and decreased about 6% during Q1 2023. The stock price has increased appreciably 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 $3.0 billion (or 20% greater than GNW's $2.5 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. Longer term could see GNW's Life & Annuity business value unlocked via a de-stacking transaction (currently L&A is trapped below the long-term care business in the org chart and the applicable insurance regulators must bless any de-stacking). The company has been actively repurchasing its stock in recent quarters, including during Q1 of 2023.
SCC's discussion of the corporate governance issues plaguing GNW can be found here. In addition, SCC's CIO nominated himself as a director candidate at GNW's 2023 annual meeting for the 2nd year in a row, in an attempt to put pressure on the incumbent board of directors to be more responsive to shareholders.
DISCLOSURE: Long all of the above.