SCC Portfolio Update (YTD Thru 9-30-2023)
Seven Corners Capital's equity portfolio finished Q3 2023 up ~4% YTD, versus up ~12% for the S&P 500, representing an underperformance of ~8% during the first half of the year. Since the beginning of 2020 (i.e., on a "Pandemic stacked basis"), the SCC Portfolio has appreciated ~81% versus up ~39% for the S&P 500, in each case including all dividends received, representing outperformance of 4,200 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, GNW, SD & MACK):
PSHZF, led by billionaire hedge fund manager Bill Ackman, finished the first 9 months of 2023 up 7%, despite NAV increasing 11% (thus, PSH's discount to NAV increased to a massive 37%):
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 to intermediate term, the closing of the enormous NAV discount. Simply closing the discount would result in a 58% appreciation in the stock, assuming NAV were constant. Ackman hinted last year that PSH could become a Berkshire Hathaway type vehicle via a US listing: "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]
Interestingly on this front, major PSH holding Howard Hughes Corporation (HHC) recently underwent a corporate reorganization in Q3 2023 that potentially could set the entity up to be a Berkshire Hathaway-type vehicle for PSH (i.e., a domestic holdco under which Ackman could group all of PSH's investments, including HHC's current operations, in a publicly-traded entity) [link here]. Berkshire trades well above book value [link here] and, assuming PSH were to go public via HHC, PSHZF holders should eventually see a similar valuation for their stock.
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, longs should review the 1st Half 2023 PSH semi-annual report (link here).
GNW, a new SCC holding in 2022, outperformed the overall market by a significant margin during the 2nd half of 2022 and increased about 9% during the first 9 months of 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 currently valued at $3.5 billion (or 30% 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. 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.
SCC's discussion of the corporate governance issues plaguing GNW in recent years can be found here.
GNW's Q3 2023 results should be released in early November.
Sandridge is SCC's largest energy holding and was up 4% in the first 9 months of 2023. 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 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.
In Q2 2023, SD announced a special dividend of $2/share and the institution of a regular $0.10/quarter dividend, representing a laudable return of the company's excess capital to its true owners, the shareholders [link to PR here]:
MACK, which was up 7% in the first 9 months of 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 mid-June, Ipsen announced that submitted an NDA for Onivyde and that it has received a PDUFA date of February 13, 2024 from the FDA [link here]:
Insiders purchased MACK heavily via the open market late in 2022 and during Q1 and Q3 2023 (including as recently as early August) (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.
DISCLOSURE: Long all of the above.