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  • Writer's pictureGreystone Capital

Brief Portfolio Update Q1 2019

During the first quarter of 2019, my portfolio returned a positive 42%. Mean reversion is a hell of a thing. While quarter to quarter results are to be taken lightly given my long-term investment horizon, this was a happy result, and a welcome outcome following the back half of 2018.

These results compared favorably to the S&P 500, and Russell 2000, up 9.4% and 13.5% YTD. I benefited during the quarter from the overall rise in prices market wide, so this Q1 performance should in no way be viewed as ‘normal’, nor expected to continue into the future.

With that said, I feel as though my portfolio remains favorably positioned to continue to post positive returns over the long term, but over the next few quarters, the price action of many of the businesses I own will be unpredictable.

I benefited the most due to positive contributions from holdings in The Joint Corp., SharpSpring Technologies and Skyline Champion Corp., with flat to negative contributions coming from positions in CRH Medical, Rimini Street and Ecology and Environment. I wanted to write a brief post outlining some of what I own in short detail. I will most likely make this a more regular (quarterly) occurrence, and get around to organizing everything in Excel at some point. I posted this thread on the MicroCap Club as well.

I made more changes to the portfolio in 2018/early 2019 than originally anticipated including selling out of some software businesses (I’m not liking what I’m seeing in terms of SaaS valuations across the board) and currently holding more cash than usual. While this can normally be interpreted as a ‘market call’, I don’t view it as such. I’m ready to put the cash to use when another good opportunity comes along. I am hesitant to continue adding to some of my current holdings, even though I feel good about the long-term prospects of each business. Many are in ‘wait and see’ mode where I will probably miss out on lower prices if I decide to buy more, but will feel better about execution risk being lessened.

Top Five Positions

CRH Medical Corp. (CRHM) – one of my largest positions. A new CEO and IR head have me excited for continued operational progress. I haven’t been given a concrete answer on the reason for the CEO departure (I’ve been playing phone tag with the CFO), but its likely that the former CEO underachieved in terms of operational progress, in the eyes of some (not me). The company has struggled as of late to turn growing revenues into profits and increased FCF, and my guess is that these ‘small fish’ acquisitions may not be getting it done anymore. One more large or ‘GAA’ size acquisition would really help move the needle here. Otherwise, it may be time to start returning some capital.

The Joint Corp. (JYNT) – I’ve owned the Joint for some time, and recently sold 2/3rds or so of my position despite what I believe to be a long runway for growth. I still own a chunk. The shares have run up to a valuation that makes me nervous, as they, like SharpSpring (below), are priced to perfection. I hope to get a chance to purchase more at lower prices, but I’m not sure I’d be a buyer at these levels. I will most likely end up regretting it, but recent experience with a few ’round trips’ forced me to reconsider this holding from a capital allocation/portfolio management standpoint. I still love the business and the management team.

Burford Capital (BRFRF) – I spent the past few months studying this non-microcap business, and is the first midcap in which I’ve invested in some time. I wrote another short post about the company, but in essence, Burford is an incredibly high quality business with a phenomenal management team that appears to be ‘hiding in plain sight’. The shares trade at a market like multiple of earnings, despite having superior ROICs, an incredibly long runway for growth, one of the best and most shareholder friendly management teams I’ve encountered, and an incredibly strong entrenched competitive position. So why is the opportunity available? The business appears to be difficult to understand (not really if you dig in), trades on the AIM, has somewhat of a bad reputation (a misconception) and is very difficult to model due to the lumpiness of earnings, invested capital and cash collection. But for investors who don’t care about any of the above, this appears to be a great opportunity to step back and let the management team do their thing.

Rimini Street (RMNI/RMNIW) – I continue to think that this is a high quality business being masked by a complicated capital structure, legal issues (that seem to be working themselves out) and a low float with huge insider and private equity ownership. The operational and balance sheet progress that has been made in the past year sets the business up to have a monster 2019, and I can see the company generating somewhere in the neighborhood of $80-100mm in EBIT within the next few years. Right now, RMNI is being offered at less than 1.5x revenues, and around 11x pre-legal cost EBIT despite high teens revenue/customer growth and improved margins. Warrants offer additional upside.

Ecology and Environment (EEI) – I recently bought more following a mystery 9% drop in the share price Thursday, and am excited about 2019, where the company will finally file their long overdue 2018 10k (where I believe a larger cash balance will be disclosed as well as solid FCF generation), and has most likely put themselves in position to be acquired by a strategic competitor or private equity group. Other developments include the firing of the CEO, and a large workforce reduction that will result in significant cost savings. EEI is now a $45mm mkt cap company with $18-20mm cash, generating $5-6mm in FCF (before expected cost savings). I’m comfortable holding for awhile given the balance sheet, board, and 4% yield.

Other Investments

Valeura Energy (PNWRF) – I own a small position in this Turkish E&P company that is sitting on valuable oil and gas real estate, and focused on extracting natural gas in the Thrace Basin in Turkey. Valeura is currently profitable, has no debt, and funds itself thru operational cash flow.  What makes the story even more intriguing, is that the company is in good financial shape, despite natural gas prices near decade lows in North America. The management team has spent the past few years attempting to prove that they can achieve commercial flow from the land on which they sit, and the next few months/year will be spent furthering these efforts. Downside risk is probably in excess of 50%, hence the small position size.

By the way, similar to Buffett with airlines, I need a helpline when I’m presented with cheap, compelling oil and gas names.

Select Sands (SLSDF) – I still own a chunk of shares. I’m not totally optimistic about a turnaround, and don’t know what the business is ultimately worth, but I’m confident that number is above $6mm USD. My research and conversations with industry people point to an improvement in economics within the industry – and a possible return to Northern White by many E&Ps – but again, I’m not optimistic. To management’s credit – they’ve done a decent job navigating this mess by preserving cash and halting expansion plans, but I still can’t give too much credit for missing the quick deterioration of industry economics six months ago.

Sold:

SharpSpring Technologies (SHSP) – it pained me to sell this high quality business that still has a very long runway for growth. This was one of my largest positions, and has been a fun ride over the past year+. The recent additional 35% run forced me to reconsider the valuation, which is now approaching 10x revenues. While the multiple is probably warranted,and nowhere near some of the egregious SaaS multiples we are seeing out there, the shares reached my target price (ahead of time) and seem to be priced for perfection. Unless I get another chance to dive back in, I will probably regret this one.

VieMed Healthcare (VIEMF) – I didn’t end up owning this for very long and sold at a small profit. I didn’t make it a full size position, and ultimately through further research could not get comfortable with the actual benefits of the respiratory therapy (is it necessary?) as well as the regulatory risk. The market has no problem punishing the shares on the slightest whiff of rate cuts. If we see another large drop, I may revisit, but I’m out for now. Of note, I am a huge fan of the business, management team, and think the runway for growth is long, with minimal capital needed to generate

Nobility Homes (NOBH) and Skyline Champion (SKY) – I made the decision to sell out of both manufactured home businesses I owned. Neither became a large position for me (SKY was getting to mid-size), and ultimately the choice came down to a new opportunity that came up and not having a good handle on the state of the manufactured housing industry. The thesis comes down to increases in MH shipments, which I don’t think I’m able to forecast. I still like SKY, and maybe with another secondary/large holder sale I will be able to pick it back up below $15.00 again.

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