The 2019 Annual Review

An update on how I am doing

Published on:
December 14, 2019
Reading Time: 4 Minutes.
Written on:

About The Author

Noam Ganel, CFA is the founder of Pen&Paper, a value-oriented, contrary-minded journal of the financial markets. Noam worked as a Vice President in Capital Markets at Silvergate (publicly traded on NYSE under SI since Nov-2019.) At SI, which he joined in 2010, Noam was responsible for advisory services to family offices,  private companies, and financial advisors.

The best-performing stocks

Carriage Services (CSV on Nyse), Stericycle (SRCL on Nasdaq), WW International (WW on Nasdaq), and Hyster-Yale (HY on Nyse) are the winner stocks this year.

CSV is up 55%;  SRCL is up 51%; WW is up 33%; and HY is up 41%; Together, they contributed third quarters of this year's return.

The high returns on Carriage and Stericycle are because of the low prices I paid for both companies in the first quarter of this year, and not because of a material change in business fundamentals.

I wrote about Carriage Services in January and about Stericycle in February, during those two months the market  bottomed in 2019.

I can't remember where I got the Carriage idea. But I do remember reading about Stericycle from Laura O'Dell, CFA  of Diamond-Hill.

Download O'Dell's report titled Stericycle: Waste Not, Want Not.

Buying Hyster-Yal was a bet that the geopolitical and trade wars will wane away at some point. And that Mr. Market confused risk with uncertainty.

Buying Hyster-Yal was a bet that the geopolitical and trade wars will wane away at some point. And that Mr. Market confused risk with uncertainty.

When I bought HY in May, the stock traded at what is now the 52-week low, about $45 per share. I published an essay on Hyster-Yale in September. (If you are interested in getting live updates on my stock activities, write to me.)

Oprah Winfrey's Weight Watchers traded $30 a share when I wrote about it. And in less than 48 hours after I bought the stock, because of a gloomy earnings call, WW dropped by a third in price.

But in August, WW bounced back to $30 a share and now trades at $39. Weight Watchers has a recognized brand with sophisticated, deep-pocket investors. But WW is not a compounder stock or a long-term hold - I hope to sell the position soon.

The worst-performing stocks

The three worst-performing stocks, which I define as stocks that experienced a price dropped over a third, were Superior Industries (SUP on Nyse), Gulfport Energy (GPOR on Nasdaq), and Beasley Broadcast Group (BBGI on Nasdaq).

I bought Superior at almost $6 a share in May, and SUP now trades at $3 a share. I first hear about SUP from the legendary investor, Mario Gabelli, of GAM Investments. Even the price halved, I like Superior's business model and believe that SUP offers a dollar of value for 50 cents.

I will write a full-length report on Superior in the upcoming months (Write to me if you would like to know when the article is published.)  

Gulfport is another stock that halved in price. After reading the company's recent public filings, which will leave you in state of gloominess, I decided to buy a few GPOR shares only because I thought Firefly Value Investors, an active investor and hedge fund that specializes in a turnaround situation, may revive operations. Read more about Firefly on the SEC's website.

A contrarian position I took was buying BBGI. At $4 a share, I thought it was a Benjamin-Graham-bargain-stock. The Beasley family owns BBGI for the most part. And the family had done a reasonable job in capital allocation decisions over the past years.

A strategy that focused on tailwinds companies is superior to a strategy that looks at companies facing headwinds.

But I don't see a heroic future for the stock and will likely sell the position in 2020. I have little interest in following the economy of radio stations - especially as the industry continues to experience headwinds.

I should have followed Charlie Munger's who said that "one of the lessons management has learned - and unfortunately, sometimes relearns - is the importance of being in businesses where tailwinds prevail rather than headwinds."   

In short, the three companies, which in total represent 10% of my portfolio, fit in the contrarian, cheap buckets. While I don't expect a particular wondrous future for these positions, the stocks were cheap, and so I bought a few shares. In total, the three companies detracted 35% percent from the annual return.

Two stocks I am most proud of

The first company is GrafTech (EAF on Nyse.), which I bought a month ago. The second company is Mednax (MD on Nyse.), which I purchased in April 2019. I believe that over the next three- to five years, these two companies will have a more meaningful role in the portfolio than all the of all other stocks combined.

Both Mednax and GrafTech had little effect on the portfolio results this year. But they have more value of all portfolio companies.

In April, I published an introductory article on Mednax, and last week I wrote a summary about GrafTech. In my view, Mednax has a CEO that is a great capital allocator, and GrafTech has a unique position in the market place; It is a low-cost producer of needle coke, which I estimate will increase in price - and in demand - over the upcoming years.  

Both Mednax and GrafTech had little effect on the portfolio results this year. But they have more value of all portfolio companies.

A review of the performance

I was more active in the stock market this year than  I would have liked. On Average, I placed small bets (less than 2% of the portfolio size) each month and traded 16 times. GrafTech was an exception. This position now represents about 15% of my portfolio.

To fund the purchases, I exited from 8 companies, for a slight gain[2].

In two cases, I bought and sold the position within a few months [3]. The two companies were Signet Jewelry (SIG on Nyse)  and Flexsteel Industries (FLXS on Nasdaq). The net realized gain from activity was negligible.

I overpaid in both circumstances. And there were too many abrupt changes in the industries. In jewelry industry: the lure of diamonds is waning down. And who knows how will we shop for furniture in the future.

To further summarize the performance in numbers, in 2019, my total return was 8%, which included 5% in capital appreciation and a 4% in dividend and interest received. My portfolio now has 16 names, with the largest position being GrafTech.

Finally, let the digital record show that my goal in 2020 is to own a much more concentrated portfolio: with no more than ten companies by year-end.

[1] My focus here is the 2019 performance. I exclude stocks bought in prior years.
[2] Since I didn't buy these positions in 2019, I excluded them from this article.
[3] A practice I am not fond of.
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