SPG Archives - Enterprising Investor

October 15, 2021October 15, 2021

Q3 2021 Portfolio Update

Performance Overview

For Q3 2021, the portfolio is down 0.65%, and up 17.4% YTD. The Q1 starting balance was $144,722.98, and finished the quarter at $147,690.65. Contributions to the portfolio during the quarter amount to $3,948.

A few new positions were added this quarter in several of the portfolio categories. On the discretionary side, British American Tobacco (BTI) was purchased. The Deep Value category saw the addition of M/I Homes (MHO). Finally, SLV silver ETF was added to the precious metals holdings.

During the quarter I received $231.90 total in dividends, which is broken down in the table below.

Ticker	Quarterly Dividend
FE	48.75
DHT	4.30
ITIC	5.52
EMR	42.93
COF	66.00
SPG	64.40
Total	231.90

Discretionary Summary

Discretionary value is the label I’m giving to the positions that are fairly large (~5% of the portfolio) I believe are undervalued and may have the following characteristics: quality business, competitive advantage, misunderstood by the market, or a good company in a heavily sold off industry. The current discretionary value stocks I own consist of Capital One Financial (COF), Emerson Electric (EMR), Simon Property Group (SPG), FirstEnergy (FE), British American Tobacco (BTI). The table below shows the cost basis, current value, and gains/losses for these positions.

The newest addition to the discretionary portfolio was the purchase of British American Tobacco. Cigarette volumes have been declining at a rate of 5% annually, and that trend is expected to continue. BTI is preparing for a “post-cigarette” world by developing alternative tobacco products that they claim is much more safe than combustables. While ESG funds are not allowed to own British American Tobacco, I don’t mind BTI’s 8% dividend yield.

Capital One recently announced they will enter the Buy-Now-Pay-Later (BNPL) space to compete with companies like Affirm. BNPL seems like a crowded space, so it will be interesting to see if COF can make an impact. With this announcement, it looks like I will be doing some homework on the competition..

First Energy announced their settlement with the DOJ concerning their bribery scandal. The company will pay $115 million to the US Treasury, and another $115 million to Ohio utility customers. These payments will be spread out over three years. With this scandal receding into the background, hopefully FE can revert to their pre-scandal price.

	Avg Price	Cost Basis	Current Value	Current Gain (Loss)
COF	63.25	3,478.75	8,507.95	144.57%
EMR	41.00	3,485.00	8,180.40	134.73%
SPG	74.50	3,427.00	6,002.08	75.14%
FE	28.00	3,500.00	4,651.25	32.89%
BTI	37.45	7,114.91	6,703.20	(5.78%)

Tanker Stocks

Tankers have slightly improved this quarter, but are still a sore point in my portfolio. I wouldn’t be opposed to selling these stocks. However, I don’t have any better ideas, I already have a large cash position, and there is some hope they will work out in the medium term.

	Avg Price	Cost Basis	Current Value	Current Gain (Loss)
DHT	8.17	1,755.90	1,395.35	-20.53%
FRO	10.66	1,738.29	1,467.00	-15.60%
STNG	26.63	1,742.67	1,499.40	-13.96%
TNK	23.86	1,765.88	1,067.08	-39.57%

Deep Value

Deep value is a sub-strategy I’m employing in my portfolio. This is a quantitative strategy that buys a basket of statistically cheap stocks. The metric I use is EV/EBIT, based on the wonderful book The Acquirers Multiple. Historically, this strategy has provided excellent returns, although it has not kept up with the S&P 500 the past few years. Additionally, I am making an effort to apply this strategy to microcap companies. Microcaps are classified as having a market capitalization between $50M-300M. These small companies are more volatile, but have the potential for attractive returns.

My position sizing is smaller than the discretionary side of my portfolio because I want to own a basket of about 20 stocks. Since this is a quantitative strategy, I do not spend much time analyzing these businesses. The main idea is that these companies are trading at very cheap valuations, and the winners will (hopefully) outnumber the losers.

Note: MSGN merged with MSGE during the quarter

	Avg Price	Cost Basis	Current Value	Current Gain (Loss)
BIIB	275.00	2,475.00	3,116.43	25.91%
BTG	5.25	2,499.00	2,003.96	-19.81
HXL	36.80	1,803.20	3,057.60	69.56%
ITIC	164.54	1,974.48	2,095.56	6.13%
MSGE	16.00	2,000.00	1,822.50	-8.88
QDEL	120.00	2,520.00	2,690.52	6.77%
MHO	60.00	2,520.00	2,427.60	(3.67%)

RSKIA, FF, and BBSI were sold this quarter since I’ve held them for a year. RSKIA and BBSI realized attractive gains, while FF produced a loss. Last quarter Future Fuel paid out a special dividend, which I received about $300. With this special dividend, my return with FF was closer to breaking even. The new addition this quarter was the home builder M/I Homes (MHO).

	Cost Basis	Sale Proceeds	Realized Gain (Loss)
RSKIA	1,740.75	2,690.23	54.54%
FF	1,794.00	1,310.99	(26.92%)
BBSI	1,767.50	2,572.48	45.54%

401k and Precious Metals

My 401k is through my current employer and actively receives contributions. The 401k consists of a Blackrock Target Date Fund (which is no longer being funded), and the Oakmark Fund. The Oakmark Fund is a large cap value fund. Since I am actively contributing to my 401k, it will naturally have a growing influence on my portfolio.

I also have a decent allocation to precious metals that are used as a bond substitute, recession and inflation hedge. This quarter, I added 100 units of iShares Silver Trust (SLV) at a cost basis of $20.52 a unit. The table below shows the YTD performance for the precious metals and 401k, which includes the effects of contributions.

	12/31/20	9/30/21	YTD Gain (Loss)	YTD Contributions
Precious Metals	9,964.00	9,682.04	-6.84%	2,054
401k	32,252.43	54,845.18	21.91%	14,200.00

Books I’m Reading

This quarter I read “Kochland: The Secret History of Koch Industries and Corporate Power in America”. Prior to reading the book, I was not too familiar with the Koch brothers besides them controlling the largest private company in the country, them being libertarians, and that they are controversial. This book covers the history of Koch Industries, Charles Koch’s management philosophy, various Koch Industry scandals, and Charles Koch’s lobbying machine. Kochland has a somewhat negative bias against Charles Koch, which I kind of knew before reading, so the negative portrayal did not bother me.

Much of the book consisted of explaining how Koch Industries went into a new line of business, then some crises happened in that new business, then presenting 1st hand accounts from key people navigating said crisis. This process repeated several times. The book did provide a good overview of the history of the company. I wish it provided more financial data, but apparently Koch Industries is extremely secretive so that info is not usually released.

The chapters on Charles Koch’s political network were very interesting. I was not aware of how impactful Koch’s lobbying groups were at amplifying the Tea Party movement, blocking climate legislation, and meddling with Trump’s tax plan. Overall the book was quite the page turner, I just might seek out other books on Koch Industries to get an additional perspective.

For more value investing fundamentals check out:

Q2 2021 Portfolio Update

Stock Analysis: Brown-Foreman

Book Review: Buffettology

Stock Analysis: Union Pacific

July 27, 2021July 27, 2021

Q2 2021 Portfolio Update

Performance Overview

For Q2 2021, the portfolio is up 6.37%, and up 18% YTD. The Q2 starting balance was $132,799.55, and finished the quarter at $144,722.98. Contributions to the portfolio during the quarter amount to $3,386.

A few new positions were added this quarter in the deep value category. These include Biogen, MSG Networks, Investors Title Co, Quidel, and B2Gold. Additionally, Richardson Electronics was sold for a gain.

During the quarter I received $587.72 total in dividends, which is broken down in the table below. It should be noted that FutureFuel paid a special dividend in addition to their normal dividend, which amounted to $345.

Ticker	Quarterly Dividend
FF	353.28
STNG	6.80
FE	48.75
DHT	8.60
BTG	19.04
ITIC	5.52
BBSI	21.00
EMR	42.93
COF	22.00
SPG	59.80
Total	587.72

Discretionary Summary

Discretionary value is the label I’m giving to the positions that are fairly large (~5% of the portfolio) I believe are undervalued and may have the following characteristics: quality business, competitive advantage, misunderstood by the market, or a good company in a heavily sold off industry. The current discretionary value stocks I own consist of Capital One Financial (COF), Emerson Electric (EMR), Simon Property Group (SPG), and FirstEnergy (FE). The table below shows the cost basis, current value, and gains/losses for these positions.

Recently, FirstEnergy announced a deferred prosecution agreement with the DOJ. This will probably result in a fine, and hopefully the scandal will be put to rest. The Fed released the results of their latest bank stress test. Capital One was one of the strongest performers in the stress test, meaning. COF has plenty of excess capital to weather a storm. Or since it appears things are returning to normal, hopefully Capital One can return some of this cash to shareholders.

	Avg Price	Cost Basis	Current Value	Current Gain (Loss)
COF	63.25	3,478.75	8,507.95	144.57%
EMR	41.00	3,485.00	8,180.40	134.73%
SPG	74.50	3,427.00	6,002.08	75.14%
FE	28.00	3,500.00	4,651.25	32.89%

Tanker Stocks

	Avg Price	Cost Basis	Current Value	Current Gain (Loss)
DHT	8.17	1,755.90	1,395.35	-20.53%
FRO	10.66	1,738.29	1,467.00	-15.60%
STNG	26.63	1,742.67	1,499.40	-13.96%
TNK	23.86	1,765.88	1,067.08	-39.57%

Deep Value

	Avg Price	Cost Basis	Current Value	Current Gain (Loss)
BIIB	275.00	2,475.00	3,116.43	25.91%
BTG	5.25	2,499.00	2,003.96	-19.81
FF	13.00	1,794.00	1,324.80	-26.15%
HXL	36.80	1,803.20	3,057.60	69.56%
ITIC	164.54	1,974.48	2,095.56	6.13%
MSGN	16.00	2,000.00	1,822.50	-8.88
QDEL	120.00	2,520.00	2,690.52	6.77%
RSKIA	8.25	1,740.75	2,743.00	57.57%

Since I sold some deep value stocks last quarter, I used the proceeds to buy a few new companies this quarter. The new additions are Biogen (BIIB), B2Gold (BTG), Investors Title Co (ITIC), MSG Networks (MSGN), and Quidel (QDEL). Some of the remaining deep value picks, such as FF and RKIA, are coming to their one year anniversary so they will probably be sold next quarter. Finally, Richardson Electronics was sold this quarter for a nice gain.

	Cost Basis	Sale Proceeds	Realized Gain (Loss)
RELL	1,802.25	2,997.32	66.31%

401k and Precious Metals

I also have a decent allocation to precious metals that are used as a bond substitute, recession and inflation hedge. The table below shows the YTD performance for the precious metals and 401k, which includes the effects of contributions.

	12/31/20	6/30/21	YTD Gain (Loss)	YTD Contributions
Precious Metals	9,964.00	9,682.04	-2.83%
401k	32,252.43	49,930.84	19.68%	10,252.00

Books I’m Reading

One of my recent reads was “The Go-Go Years: The Drama and Crashing Finale of Wall Street’s Bullish 60’s”. I was looking for a market history book that covered the 1960’s market boom, then the stagflation bear market of the 70’s. A part of me feels like history is repeating, so I was interested in learning more about this time period and I’ve heard this book mentioned before. Unfortunately, Go-Go Years does not cover the high inflation of the 1970’s. It is mostly focused on the 60’s and ends with the recession in 1970. Despite this, the book was still quite interesting because I was not aware of all the stock market drama going on in the 1960’s.

The book starts off early in the decade, painting the picture of a market moved by individuals instead of institutions. Then the growth mutual funds pioneered by George Tsai, and copied by many, took advantage of the technology companies of the day. Conglomerates became a new phenomenon with Textron, Litton Industries, Gulf+Western and the like. Financial engineering and shoddy accounting was spreading throughout corporate America. Go-Go Years culminated with the 1970 recession that crushed the overleveraged stock brokerage industry. This era does not get mentioned as much as 1929 or 2008, but if you enjoy market history, Go-Go Years is a good read.

The second book I read this quarter was the personal finance classic “The Millionaire Next Door: The Surprising Secrets of America’s Wealthy”. I thought I knew the gist of the book, “live below your means and invest”, but Millionaire Next Door presented some interesting information that made it an enjoyable read. Many of the millionaires profiled in the book come from humble, or even poor beginnings, yet they build a small company, save, and invest. The example millionaires were frugal, but to my surprise, they didn’t drive 15 year old Honda Civics. The authors’ surveys found that many of the self made millionaires bought newer cars, they just bought Cadillac’s and Ford Explorers instead of high end BMW’s. A big theme of the book was that you can have a high income, but if you spend it all on status items you can look rich but actually have little net worth. Now whenever I think about making a big purchase, I’ll ask myself “What would a millionaire next door do?”.

For more value investing fundamentals check out:

2020 Portfolio Update

Stock Analysis: Brown-Foreman

Book Review: Buffettology

Stock Analysis: Union Pacific

May 6, 2021May 6, 2021

Q1 2021 Portfolio Update

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Performance Overview

For Q1 2021, the portfolio is up 11.09%. The Q1 starting balance was $113,027.88, and finished the quarter at $132,799.55. Contributions to the portfolio during the quarter amount to $6,866.

No stocks were bought this quarter, however a few positions were sold. Paul Mueller Co, Friedman Industries, and Surge Components were all sold for a gain.

During the quarter I received $230.67 total in dividends, which is broken down in the table below.

Ticker	Quarterly Dividend
FF	8.28
STNG	6.80
FE	48.75
DHT	10.75
RELL	24.30
FRD	7.06
EMR	42.93
COF	22.00
SPG	59.80
Total	230.67

My Thoughts

I don’t have much thoughts this quarter, except to say that the r/wallstreetbets and GameStop ordeal is dumb.

Discretionary Summary

Discretionary value is the label I’m giving to the positions that are fairly large (~5% of the portfolio) I believe are undervalued and may have the following characteristics: quality business, competitive advantage, misunderstood by the market, or a good company in a heavily sold off industry. The current discretionary value stocks I own consist of Capital One Financial (COF), Emerson Electric (EMR), Simon Property Group (SPG), and FirstEnergy (FE). The table below shows the cost basis, current value, and gains/losses for these positions.

The only bit of news with these stocks is that Emerson’s long time CEO David Farr retired, replaced by Lal Karsanbhai. A long tenured, quality CEO is a consideration when looking for quality companies. I will have to keep an eye on the new management to see how their capital allocation stacks up.

	Avg Price	Cost Basis	Current Value	Current Gain (Loss)
COF	63.25	3,478.75	6,997.65	101.15%
EMR	41.00	3,485.00	7,668.70	120.05%
SPG	74.50	3,427.00	5,233.42	52.71%
FE	28.00	3,500.00	4,336.25	23.89%

Tanker Stocks

	Avg Price	Cost Basis	Current Value	Current Gain (Loss)
DHT	8.17	1,755.90	1,274.95	-27.39%
FRO	10.66	1,738.29	1,165.45	-32.95%
STNG	26.63	1,742.67	1,255.28	-38.82%
TNK	23.86	1,765.88	1,028.6	-41.75%

Deep Value

Deep value is a sub-strategy I’m employing in my portfolio. This a quantitative strategy that buys a basket of statistically cheap stocks. The metric I use is EV/EBIT, based on the wonderful book The Acquirers Multiple. Historically, this strategy has provided excellent returns, although it has not kept up with the S&P 500 the past few years. Additionally, I am making an effort to apply this strategy to microcap companies. Microcaps are classified as having a market capitalization between $50M-300M. These small companies are more volatile, but have the potential for attractive returns.

	Avg Price	Cost Basis	Current Value	Current Gain (Loss)
BBSI	50.50	1,767.50	2,410.10	36.34%
FF	13.00	1,794.00	2,005.14	11.77%
HXL	36.80	1,803.20	2,744.00	52.17%
RELL	4.45	1,802.25	2,579.85	43.14%
RSKIA	8.25	1,740.75	2,795.77	60.61%

This quarter I sold off three of these deep value positions. Paul Mueller Co was sold for a 102.5% gain, Friedman Industries for a 65.67% gain, and Surge Components for a 120.77% gain. With this quantitative strategy, I would typically hold the stocks for one year, then rebalance into a fresh set of undervalued stocks. I sold MUEL and SPRS early because they have run up massively lately. It would be expected that some of these microcaps will shoot up in price randomly. But over the past few months, it seems like all of these small deep value companies are rapidly rising. Maybe I’ll regret selling too early, but it seems hard to regret taking a 120% gain. As for FRD, it was a net-net when I bought it. The price reverted back to its net current asset value, so I made my exit.

	Cost Basis	Sale Proceeds	Realized Gain (Loss)
MUEL	1,768.00	3,580.18	102.5%
FRD	1,800.10	2,982.13	65.67%
SPRS	1,819.30	4,016.47	120.77%

401k and Precious Metals

	12/31/20	3/31/21	YTD Gain (Loss)	YTD Contributions
Precious Metals	9,964.00	9,281.20	-6.85%
401k	32,252.43	43,020.27	10.93%	6,866.00

Books I’m Reading

The Outsiders: Eight Unconventional CEOs and Their Radically Rational Blueprint for Success was a book that I kept hearing people talk about, so I finally read it. The CEOs covered in this book include Warren Buffett, John Malone, Catherine Graham, Tom Murphy, Henry Singleton, Bill Anders, Bill Stiritz, and Dick Smith. Obviously I’m familiar with Buffett, and knew a little about some of these CEOs. However, it was nice to read about these capital allocators at General Dynamics, Ralston Purina, General Film, that I never heard of. The book emphasizes how these CEOs outperformed Jack Welch of GE, the poster boy of a successful CEO. Each of these CEOs focused on going against the herd, and expertly allocating capital instead of doing dumb acquisitions, or focusing on quarterly results. This book was a quick read, and very much enjoyable.

The second book I read this quarter was Skyscraper Dreams: The Great Real Estate Dynasties of New York. Dynasties is a good word to describe these New York real estate players since many of these are multi-generational family businesses, which I found fascinating. The book starts with Manhattan back when it was mostly fields, and progresses towards the early 1900’s where skyscrapers appear onto the scene. As the 20th century unfolds, you learn about the skyscraper boom leading up to the Depression, the post-war boom, the changing of the guard in the 1960’s, and New York’s financial woes in the 1970’s. I wasn’t too familiar with NYC history, let alone the stories of the people who built it. If you’re interested in a financial history book that’s a bit different than stock investing or business, I recommend this one.

For more value investing fundamentals check out:

2020 Portfolio Update

Stock Analysis: Brown-Foreman

Book Review: Buffettology

The Many Flavors of Value Investing

January 9, 2021January 9, 2021

2020 Portfolio Update

Performance Overview

For Q4 2020, the portfolio is up 13.21% and finished the year up 23.47%. The Q4 starting balance was $96,383.61, and finished the quarter at $113,027.88. Contributions to the portfolio during the quarter amount to $3,656.

No stocks were bought or sold during this quarter. During October and November I owned some SPY puts as tail hedges, but I let that position run off in December.

The current allocation of the portfolio is shown in the chart below. Currently, the portfolio consists of discretionary value stocks, oil tankers, deep value, 401k stocks, precious metals, and cash. It can be seen that 66.7% of the portfolio is in stocks, while 33.3% is in cash and safe haven assets. I would prefer to deploy more of the cash to undervalued stocks, but I am remaining cautious despite the market ripping higher towards the end of the year.

During the quarter I received $427.04 total in dividends, which is broken down in the table below.

Ticker	Quarterly Dividend
FF	8.28
BBSI	10.50
FRO	81.50
STNG	6.80
FE	48.75
DHT	43.00
RELL	24.30
FRD	7.06
RSKIA	88.62
EMR	42.93
COF	5.50
SPG	59.80
Total	427.04

My Thoughts

2020 in Review

Going into 2020, my portfolio was a mess. Once upon a time, I was going for a multi-asset strategy. My portfolio consisted of value stocks, emerging markets, commodities, precious metals, money market, and tail hedge puts. In mid-2019 I sold my value stocks to buy a house, which created a gaping hole in my portfolio that remained early in 2020. As the market started to react to COVID, I quickly tried to get my portfolio in order. The primary focus was to reorient my portfolio to mostly focus on value stocks, and taking advantage of the market selloff to buy some quality companies at a discount.

One of the key factors that shaped this year’s performance was holding about $500 in SPY put options. The idea is that they would provide a buffer so that the portfolio could break even even if the market dropped by 20%. In late February these options were doing their job, so I sold them at a value of about $9,000. In hindsight I should have held onto them into March, but I can’t complain. The rest of the portfolio was primarily cash, plus stocks from my current 401k, and some precious metals.

The proceeds of this hedging was used to buy the first batch of quality companies. In March, I bought Capital One, Emerson Electric, and Simon Property Group. To my surprise, the market panic didn’t last long, so the deals quickly dried up.

During April and May I jumped onto the oil tanker trade. While the thesis played out, these companies made a ton of money, the stock returns have been abysmal. I probably bought these stocks at the peak, but that’s the way it goes.

The summer months saw me dip my toe into buying deep value stocks. These are stocks that traded at less than 5 times enterprise value over EBIT. Most of the companies I bought were microcaps, which have a market capitalization of less than $300 million. I didn’t know it at the time, but my timing in buying these stocks was great. The deep value universe got slaughtered during the March selloff, down around 50%. During the summer these stocks turned the corner and rallied all year so that they ended the year down only 7%.

In August I bought some First Energy hoping their bribery scandal is overblown. Finally during the fall I started up the tail hedging strategy again in case of worsening COVID, no stimulus getting passed, and election drama. All of those things happened, but the market ripped higher on vaccine news, causing me a small loss on my SPY puts.

It felt like there was a lot of action in 2020, however I also tried to be measured in my capital allocation. Most of the year I carried a large cash balance, waiting for another chance to buy some undervalued stocks. In hindsight I should have gone all in, but I’d rather act conservatively and survive as an investor.

Luck vs Skill

While I am proud of my performance this year, I am trying to reflect on my decision making. Many of my decisions, and outcomes, were the result of some part skill. However, I am aware I had some lucky tailwinds as well. Since I can be jealous sometimes, I also look at other investors and wonder how much of their results were based on luck or skill.

The way I see it, there is a spectrum of complete luck (roulette wheel) to skill (chess), and most things fall in the middle. Everything in investing probably has some degree of luck involved. But there is a difference between making sound, well thought out decisions, and speculating without even being able to provide a thesis besides “stocks only go up” or “it’s different this time”. It is probably impossible to quantify luck vs skill in investing, but I’m going to ramble on a bit anyways.

I’m not sure if it was luck or skill that I was hedged in February. The outcome of this hedging dramatically impacted this year’s performance.

I chalked it up more towards skill that I was buying in March when everyone was panic selling. On the flip side, if Great Depression 2.0 happened, I’d probably be complaining that I pulled the trigger too early.

Perhaps I got on board with the oil tanker trade too late, my timing being bad luck, or maybe it was a lack of skill.

The deep value universe was turning the corner right when I was buying in the summer. I’ll take this lucky timing since Paul Mueller Co, Barrett Business Solutions, Friedman Industries, and Spark Components have really helped me out.

During the summer, Emerson was up 50%. It was tempting to sell it and get those quick gains. However I am trying to be more disciplined and hold my stocks longer, which worked out because now Emerson is up nearly 100%.

I think you can see there are arguments for luck and skill in many of my decisions. As I look around, I wonder about other investors (or speculators). Is betting on government stimulus, accommodative Federal Reserve, record vaccine development luck or skill? Is it luck or skill to buy cruise ships, airlines, Zoom, NIO and the like? Good for the people who made massive gains this year, but it would probably be wise to reflect on your decision making.

One issue with the stock market is that many people focus on the short term. This short termism makes it easy to think the market is just a casino. Instead, I view owning stocks as owning a slice of a business. Holding a stock for the long term reduces the role of luck since the returns are more driven by business economics. I believe having a long time horizon, and taking advantage of behavioral psychology, allows an investor to make their own luck.

Rationality and Wealth

It seemed like a lot of people lost their minds in 2020. I wish more people would think like Charlie Munger when he says “I never allow myself to have an opinion on anything that I don’t know the other side’s argument better than they do”. Too many people fill their minds with toxic information, surround themselves with toxic people, and allow their cognitive biases to be exploited. An idea that I am developing is that you can’t build wealth (whether that is financial, or in mind/body/spirit) without rational thought. By rational, I mean thought based on first principles, facts, logic, reason, and removing your biases from the equation. You can get rich being irrational, but I think you will have a hard time building long term wealth without being rational.

Discretionary Summary

Discretionary value is the label I’m giving to the positions that are fairly large (~5% of the portfolio) I believe are undervalued and may have the following characteristics: quality business, competitive advantage, misunderstood by the market, or a good company in a heavily sold off industry. The current discretionary value stocks I own consist of Capital One Financial (COF), Emerson Electric (EMR), Simon Property Group (SPG), and FirstEnergy (FE). The table below shows the cost basis, current value, and gains/losses for these positions.

	Avg Price	Cost Basis	Current Value	Current Gain (Loss)
COF	63.25	3,478.75	5,436.75	56.28%
EMR	41.00	3,485.00	6,831.45	96.02%
SPG	74.50	3,427.00	3,922.88	14.47%
FE	28.00	3,500.00	3,826.25	9.32%

There has not been a lot of news to report with these stocks. Simon Property Group announced the acquisition of Taubman Centers (TCO), which should close early in 2021. This deal was supposed to happen early in 2020, but it was called off due to COVID19. At least now SPG will pay $43 a share for Taubman instead of the original $52.50.

FirstEnergy drama has deepened this quarter with the firing of their CEO and a couple other executives for misconduct. The company hasn’t disclosed yet what this misconduct was. While FE is looking a little more guilty at the moment than when I made my purchase, the stock has not sold off. I will continue to monitor this company, hopefully the bad news is overblown and the stock will revert back to its pre-scandal levels once the investigation progresses.

Tanker Stocks

Tankers have continued to be disappointing, despite their great profitability this year. Oil tanker spot rates went from a massive peak to a massive trough. Luckily most these companies have used their abnormal profits to shore up their balance sheet. Now that the tankers have to pay less interest on their debt, the break even spot rate is much lower. Recently steel prices have had a large increase, which hopefully means people will be scraping their old tankers soon. One dollar increase in steel prices increases the scrap value of a VLCC by $40k. Plus, less supply of tankers equals higher spot rates to ship the oil.

	Avg Price	Cost Basis	Current Value	Current Gain (Loss)
DHT	8.17	1,755.90	1,124.45	-35.07%
FRO	10.66	1,738.29	1,013.86	-41.67%
STNG	26.63	1,742.67	760.92	-56.34%
TNK	23.86	1,765.88	814.74	-53.86%

Deep Value

	Avg Price	Cost Basis	Current Value	Current Gain (Loss)
BBSI	50.50	1,767.50	2,387.35	35.07%
FF	13.00	1,794.00	1,752.60	-2.31%
FRD	5.10	1,800.10	2,421.58	34.52%
HXL	36.80	1,803.20	2,376.01	31.77%
MUEL	26.00	1,768.00	2,257.60	27.69%
RELL	4.45	1,802.25	1,907.55	5.84%
RSKIA	8.25	1,740.75	2,126.88	22.18%
SPRS	1.31	1,819.30	3,074.70	69.00%

401k and Precious Metals

	12/31/19	12/31/20	YTD Gain (Loss)	YTD Contributions
Precious Metals	$7,861.00	$9,964.00	30.52%
401k	$12,871.20	$32,252.43	14.59%	$14,108.00

Tail Hedging

During October and November I implemented the hedging strategy that I had on early in the year. My initial position in October was buying $495 worth of SPY puts. In November, I sold the first batch of puts for $50, and bought another batch for $487. This second batch was sold in December for $175, and I haven’t bought any more since then. The net loss for this hedging was $757, or about 0.67% of the portfolio.

Books I’m Reading

The main book I read this quarter was The Philosophy Book: Big Ideas Simply Explained. Prior to this book, the only other philosophy work I have read was the classic Stoicism work “Meditations” by Marcus Aurelius. Whenever I would venture to Wikipedia to read about a philosophy concept, I would get bogged down by all the jargon. This book finally built the foundation for me to understand the high points of philosophy. In fact, I wish I would have read something like this a long time ago because I found the material extremely interesting. Not only does reading about philosophy feed my natural curiosity, but it applies to investing as well (maybe not the weird metaphysical concepts). Understanding why people do the things they do is very important to navigating the investment world. Maybe soon I’ll dig into a specific philosophical work like “On Liberty” by John Stuart Mills…

Cable Cowboy: John Malone and the Rise of the Modern Cable Business is a book I received for Christmas and read within a few days. This book is about John Malone, and his career building TCI and Liberty Media. I was not familiar with Malone, but I knew he was renowned as a great capital allocator so I was looking forward to learning more about him. Malone took over as CEO of TCI in the early 70’s, and transformed the nearly bankrupt company to a cable giant. Once he sold off TCI, Malone has focused on Liberty Media, which he still controls today. Malone’s capital allocation is different from Buffett’s, he utilized debt and focused on cash flows over GAAP earnings. Reading this book makes me want to dig more into cable and media companies in the future.

For more value investing content check out:

How Berkshire Acquired National Indemnity

Book Review: Buffettology

Intro to DCF Analysis Part 1

October 12, 2020January 8, 2021

Q3 2020 Portfolio Update

This post contains affiliate links. If you use these links to buy something I may earn a commission. Thanks for your support.

Performance Overview

For Q3 2020, the portfolio is up 4.49% and is up 9% year to date. The Q3 starting balance was $89,241.80, and finished the quarter at $96,383.61. Contributions to the portfolio during the quarter amount to $3,135.

No stocks were sold during this quarter, but nine new positions were added. The nine companies I have bought are Barrett Business Services (BBSI), Hexcel (HXL), Friedman Industries (FRD), George Risk Industries (RSKIA), Paul Mueller Co. (MUEL), Richardson Electronics (RELL), Surge Components (SPRS), FutureFuel (FF), and FirstEnergy (FE).

FirstEnergy is a sizable position, while the rest of the purchases were smaller allocations. FRD and RELL were net-nets (trading below net current asset value) at purchase. The rest of the smaller positions make up my foray into deep value investing, meaning they trade at very low EV/EBIT ratios. Many of these stocks are microcaps, meaning their market capitalization is below $300 million.

The current allocation of the portfolio is shown in the chart below. Currently, the portfolio consists of discretionary value stocks, oil tankers, deep value, 401k stocks, precious metals, and cash. It can be seen that 69.8% of the portfolio is in stocks, while 30.2% is in cash and safe haven assets. I would prefer to deploy more of the cash to undervalued stocks, but I am remaining cautious despite the market surging during the third quarter.

During the quarter I received $318.08 total in dividends, which is broken down in the table below.

Ticker	Quarterly Dividend
FF	8.28
BBSI	10.50
FRO	81.50
STNG	6.80
DHT	103.20
EMR	42.50
COF	5.50
SPG	59.80
Total	318.08

My Thoughts

This quarter has been pretty drama free for my portfolio. The pandemic and economic difficulties have appeared to mellow out…but I wouldn’t be surprised if there is more trouble on the horizon. Despite my cautiousness, I did some buying this quarter. My goal of building out about 20 deep value positions started this quarter, with my purchase of eight companies. For the foreseeable future, I want to move towards an allocation of 70% stocks, 30% safe haven assets. I believe this will allow me to put some cash to work, while also having some ammo if the market corrects again.

As for the market, it still appears irrational. Everyone and their plumber is making easy money in the market right now. Everything seems easy when the market keeps going up, but let’s not forget everyone freaking out in March. I strongly believe there is a difference between ~~gambling~~ speculation and investing (ok oil tankers are a speculation, but at least there’s a reasonable thesis behind it). I’m here trying to build wealth, not make quick gains.

Also, the election is coming up, which I’m sure will be completely drama free…but if you think your portfolio is going to tank because the other guy won, well, you’re doing it wrong. As Buffett has said, don’t bet against America. Our businesses and country have been the place to be for 200 years. And if you’re that worried about a Great Depression 2.0, then you can always invest in a resiliant multi-asset portfolio.

Discretionary Summary

Discretionary value is the label I’m giving to the positions that are fairly large (~5% of the portfolio) I believe are undervalued and may have the following characteristics: quality business, competitive advantage, misunderstood by the market, or a good company in a heavily sold off industry. The current discretionary value stocks I own consist of Capital One Financial (COF), Emerson Electric (EMR), Simon Property Group (SPG), and FirstEnergy (FE). The table below shows the cost basis, current value, and gains/losses for these positions.

	Avg Price	Cost Basis	Current Value	Current Gain (Loss)
COF	63.25	3,478.75	3,952.3	13.61%
EMR	41.00	3,485.00	5373.45	59.93%
SPG	74.50	3,427.00	2975.28	-13.18%
FE	28.00	3,500.00	3,588.75	2.54%

FirstEnergy

FirstEnergy (FE) is an Ohio based electric utility company. FE services Ohio, Pennsylvania, West Virginia, Virginia, Maryland, New York and New Jersey. The reason FE is cheap is because it has been caught up in a bribery case involving Ohio Bill HB 6. FirstEnergy contributed to a political action committee to support this bill. This piece of legislation deals with the bankruptcy of FirstEnergy’s previously owned nuclear power plants.

These nuclear plants were spun off from FE a few years ago, into a new company called First Energy Solutions (now named Energy Harbor). FirstEnergy’s management separated from spin off three years before the HB 6 bill was proposed, and FirstEnergy Solutions went bankrupt a year before HB 6. FE management claims they did nothing wrong. Based on the info so far, it appears FE washed their hands of the nuclear plants years before the bill, and the legislation does not benefit FE that much.

Part of my strategy is to find stocks that are heavily sold off from negative news. These situations can create opportunities because oftentimes the market becomes overly pessimistic on the stock. I believe FE has a good chance of coming away clean from these allegations, but I will monitor the situation in the coming quarters.

This holding could either be a “value flip” or a longer term, bond substitute that will protect against inflation. Once this negative news gets settled, it is possible FirstEnergy will revert back to its pre-selloff price. I purchased FE at $28 at share, and it was trading around $45 a share before the negative headlines. While I wait for this reversion, I will get a safe 5.5% dividend yield and hopefully enjoy the low volatility typically associated with utilities.

Tanker Stocks

Tankers have continued to be disappointing, despite their great profitability this year. I probably bought these stocks at the top, which is frustrating, but I’ll continue to push through the pain. Frontline and DHT have been rewarding shareholders with juicy dividends, so that somewhat alleviates the sting. The Twitter account @calvinfroedge has been a great resource for oil tanker investors, and he nicely sums up tankers so far this year:

Tankers, let's review:

– Made years worth of earnings in 9 months
– Lowered net debt by as much as 50%
– Bought back up to 10% of shares
– Shares trade in some cases at / near all time lows
– Fuel demand is normalizing after covid shock
– Best fleet growth picture in 20 years
— 🏴‍☠️ (@calvinfroedge) October 7, 2020

	Avg Price	Cost Basis	Current Value	Current Gain (Loss)
DHT	8.17	1,755.90	1,109.40	-36.82%
FRO	10.66	1,738.29	1,059.50	-39.05%
STNG	26.63	1,742.67	752.76	-56.8%
TNK	23.86	1,765.88	802.16	-54.57%

Deep Value

	Avg Price	Cost Basis	Current Value	Current Gain (Loss)
BBSI	50.50	1,767.50	1835.40	3.84%
FF	13.00	1794.00	1569.06	-12.54%
FRD	5.10	1800.10	1643.95	13.74%
HXL	36.80	1803.20	1643.95	-8.83%
MUEL	26.00	1768.00	1836.00	3.85%
RELL	4.45	1802.25	1688.85	-6.29%
RSKIA	8.25	1740.75	2557.70	29.70%
SPRS	1.31	1819.30	1869.75	2.77%

401k and Precious Metals

	12/31/19	9/30/20	YTD Gain (Loss)	YTD Contribution
Precious Metals	$7,861.00	$9,964.00	26.75%
401k	$10,962.24	$23,687.33	11.36%	$10,863.00

Interesting Articles

If you think this post is boring, then check these articles I read this quarter.

Monopolies are Distorting the Market

Buying Stocks Trading Above 10x Sales A Good Idea?

Books I’m Reading

A few weeks ago I went to the local used book store for the first time since the pandemic and found a copy of the classic Buffettology. This book contains a lot of info that Buffett die hards will have seen elsewhere. However, I think it is a great book for a newer investor to gain the right mindset about investing. One of the main points is thinking about a stock like owning a piece of a business, which is something I totally agree with. The book presents an interesting business valuation method. A gripe I have is that I think this method suffers from some hindsight bias, so I’m not sure how practical it is to use.

Another book I read this quarter was Capital Allocation: The Financials of a New England Textile Mill 1955 – 1985. This book is the history of Berkshire Hathaway in the decade prior to Buffett taking control, and his capital allocation decisions up until the mid 80’s. Capital Allocation tells the story of how a struggling textile mill became one of the strongest companies in this country. My favorite part of this book is the deep dive into the financials of Berkshire and its early investments that I have not seen elsewhere. I loved nerding out over all of the financial statement snippets. Capital Allocation has a new place in my top 5 investing books.

For more value investing fundamentals check out:

Q2 2020 Portfolio Update

Intro to DCF Analysis Part 1

Intro to DCF Analysis Part 2

The Many Flavors of Value Investing

July 3, 2020July 3, 2020

Q2 2020 Portfolio Update

Performance Overview

For Q2 2020, the portfolio is up 6.65% and is up 4% year to date. The Q2 starting balance was $80,525.94, and finished the quarter at $89,241.80. Contributions to the portfolio during the quarter amount to $4,551.

No stocks were sold during this quarter, but four new positions were added. The four companies I have bought are Teekay Tankers (TNK), Frontline Ltd. (FRO), DHT Holdings (DHT), and Scorpio Tankers (STNG). These positions are oil tanker companies, and all were bought at the end of April and early May.

The current allocation of the portfolio is shown in the chart below. Currently, the portfolio consists of discretionary value stocks, oil tankers, 401k stocks, precious metals, and cash. It can be seen that 39.1% of the portfolio is in stocks, while 60.9% is in cash and safe haven assets. I would prefer to deploy more of the cash to undervalued stocks, but I am remaining cautious despite the market surging during the second quarter.

During the quarter I received $260.65 total in dividends, which is broken down in the table below.

Ticker	Quarterly Dividend
FRO	114.1
STNG	6.8
DHT	75.25
EMR	42.5
COF	22
Total	260.65

My Thoughts

Under normal circumstances, it should be a boring quarter where I don’t feel the need to ~~rant~~ comment on current events. However these last few months have been insane. Here are some of the notable crazy things, things that confuse me, things that worry me that have happened this quarter:

Unemployment around 20% and much higher for the service sector
The S&P 500 nearly breaking even for the year despite the quickest 30% selloff ever and then follows it with the best quarter since 1938
The Federal Reserve upping their game by buying bond ETFs
Consumer spending somehow rebounded quickly
Compelling arguments on either side saying that COVID is as bad as predicted, or not that bad at all
Whether you wear a mask is a strong indicator of your political affiliation
Rookie traders who stereotypically use the brokerage Robinhood gambling on airlines, cruise ship, vaccine biotech, work from home tech stocks among others
Barstool Sports founder Dave Portnoy becoming a stock market influencer…stocks only go up suckers
Hertz, Chesapeake Energy, probably others, massively rallying after announcing bankruptcy
Although they called it off, Hertz almost issued stock to gamblers after they declared bankruptcy…that means selling stock to suckers that will go to zero when the bond holders wipe them out
Protests…which I’m all for if done peacefully, but we are still in a pandemic which is scary
Riots (not cool) and autonomous zones
Nikola, a Tesla clone that makes trucks is now worth $20 Billion, an 8x increase in stock price, despite not having actually built a single truck
Negative $40 a barrel of oil…ie paying people to take the oil because it costs too much to store it

It’s like we’re living in the tech stock mania of the late 90’s, social unrest of 1968, and the economy of 1932 all at the same time. I’m just trying to think rationally, be empathetic of others, filter out the noise, do my best to keep my family healthy, and do my best to efficiently allocate my capital.

Or ya know, stocks only go up…

I’m sure Warren Buffett is a great guy but when it comes to stocks he’s washed up. I’m the captain now. #DDTG pic.twitter.com/WqMR89c7kt
— Dave Portnoy (@stoolpresidente) June 9, 2020

Discretionary Summary

Discretionary value is the label I’m giving to the positions that are fairly large (~5% of the portfolio) I believe are undervalued and may have the following characteristics: quality business, competitive advantage, misunderstood by the market, or a good company in a heavily sold off industry. The current discretionary value stocks I own consist of Capital One Financial (COF), Emerson Electric (EMR), and Simon Property Group (SPG). All three were bought during the March sell off. The table below shows the cost basis, current value, and gains/losses for these positions.

	Avg Price	Cost Basis	Current Value	Current Gain (Loss)
COF	63.25	3,478.75	3,442.45	-1.04%
EMR	41	3,485.00	5,272.55	51.29%
SPG	74.5	3,427.00	3,145.48	-8.21%

After the March lows, EMR quickly rebounded, which makes sense because it is probably the best quality company I own. Since March, COF and SPG were struggling, both down around 20-30% from purchase. Recently, the market has raised all ships, where all three of these companies were in the green for me…however the market has taken back some of those gains.

Notable News

There is not too much news to report for this set of stocks. Simon began reopening their malls in May, so hopefully Q2 results show some optimism. SPG also canceled their merger with Taubman Centers (TCO), which is another large mall REIT. These properties would be a nice addition to Simon since the ownership of quality malls is pretty concentrated to a few large players. However, given that 2020 is going to be very rough on SPG, it seems prudent to reserve capital.

EMR and Portfolio Management

At one point this quarter, Emerson was up 70% from my cost basis. While it was exciting to see the stock run up so much within three months of purchase, it creates quite the dilemma. A lot of people spend the majority of their time finding and researching stocks in order to make a buy decision. However that is only half the work. Now that you own the stock you have to decide when to sell, which could be:

The Stock runs up some random amount that makes you feel good, so you sell to take some money off the table
The stock reverts back to your estimate of the stocks true value, so you sell to find another undervalued stock
Lastly, you hold onto the stock indefinitely, allowing the businesses earnings to compound which will steadily increase the share price

Plus I’m not even getting into the thoughts that enter your head when a stock is down…The naive investor probably does the first scenario, buying a stock and selling it some arbitrary gain. There’s technically nothing wrong with the second scenario, but you’ll have to pay capital gains tax and it only makes sense if you have another good opportunity to roll your gains into, which is never guaranteed. The last scenario reflects investing in its truest form, and makes your life a little easier by reducing your tax burden, reducing the chance you’ll roll your gains into something dumb, and generally more hassel free. If you think about it in terms of internal rate of return (IRR), on paper the last option most likely will have lower (but still attractive returns). It’s possible to have higher returns value trading, but there is execution risk involved.

Long story short, it’s tempting to sell Emerson, but for now I don’t have a better company to reinvest in. I consider EMR fairly priced right now, my thought process might change if it becomes significantly overvalued. At this valuation, Emerson should have slightly above-inflation business growth, and throws off an attractive amount of free cash flow (I like cash flow over earnings but that’s a different tangent) from here.

Tanker Stocks

During the last quarter I jumped on the oil tanker trade (see my analysis) and entered positions in DHT, FRO, STNG, TNK. The table shows my cost basis, the current value, and the current percentage losses. I will probably do a write up revisiting the tanker thesis so I’ll keep this short. Oil tankers were very profitable during the first quarter. Oil tankers probably earned as much or more during the second quarter which will reflect the crazy high spot rates seen in April. In other words, the thesis played out just as the smart people predicted. The oil tankers have made record profits in the last 9 months, some even paying juicy dividends…yet I’m down 50%.

For now at least, the craziness in the oil market has subsided which has shortened the duration of the tanker thesis. However there are some other factors that are positive for tankers in the medium term. I was hoping this trade would have panned out by now, but I still think the value of these companies will eventually be realized.

DHT	8.17	1,755.90	1,102.95	-37.19%
FRO	10.66	1,738.29	1,137.74	-34.55%
STNG	26.63	1,742.67	871.08	-50.01%
TNK	23.86	1,765.88	948.68	-46.28%

401k and Precious Metals

My 401k is through my current employer and actively receives contributions. The 401k consists of a Blackrock Target Date Fund (which is no longer being funded), and the Oakmark Fund. The last asset class is the decent allocation to precious metals, which are used as a bond substitute, recession and inflation hedge. The table below shows the YTD performance for the precious metals and 401k, which includes the effects of contributions.

	12/31/19	6/30/20	YTD Gain (Loss)	YTD Contributions
Precious Metals	7,861.00	8,712.56	10.83%
401k	10,962.24	17,301.35	-9.37%	7,728.00

Value Papers

If you think this post is boring, or want to nerd out on value investing research papers, then check these papers I read this quarter.

Is Value a Value Trap?

Is Systematic Value Investing Dead?

A Quick Survey of “Broken” Asset Classes

Books I’m Reading

Usually I try to focus on one book at a time, but the past few months I’ve been multitasking. Eventually I may do full reviews of these books, but for now a little summary. I just finished The New Jim Crow: Mass Incarceration in the Age of Colorblindness. Given the current events, I thought I should go out of my comfort zone and read about race and the criminal justice system. It was a very powerful book that made me question some of my beliefs on why society is the way it is.

Next, I’ve been slowly making my way through Titan: The Life of John D Rockefeller, Sr. This book is huge, so it’ll take me awhile to plow through it. So far I’m at the stage of his career where things are really starting to pick up. It was fascinating to learn about the very strange childhood Rockefeller endured.

Finally, I’m almost done with The Rise and Fall of the Conglomerate Kings. This is a business history book of the founders and the companies that led the high flying conglomerate movement in the 1960’s. This includes Textron, Litton Industries, Gulf + Western, ITT, and LTV. These guys were pioneers at buying other companies and using financial engineering to drive up their stock prices. This book highlights these companies’ capital mis-allocation, which contrasts to everyone’s favorite conglomerate, Berkshire Hathaway.

Conclusion

This wraps up my Q2 2020 portfolio update. Hopefully Q3 is less eventful and my stocks go up…or better yet some new buying opportunities emerge.

A write up of my Q1 2020 results can be found here

Check out my summary of Berkshires Q1 portfolio changes

May 16, 2020June 6, 2020

SPG Q1 2020 Earnings Update

Back in March, I purchased 46 shares of Simon Property Group. While I am optimistic about Simon, I feel like it needs close monitoring since it is a highly indebted company. I did a write up analyzing their debt and liquidity needs for the year, which provided some reassurance. Now that Q1 is over, I want to follow up on their debt situation, and see how the mall closures have impacted their operating income. Below are some of the highlights from the SPG Q1 2020 earnings call.

Q1 Income Statement

Now to dig into my favorite part, the financial statements! The table below shows the key income statement lines, comparing Q1 of this to last year. Revenue is down compared to 2019, however it is interesting that lease income is not contributing too much to the lower sales. The 10-K lists the various reasons that “other income” is lower in Q1 2020 compared to 2019, but I’m not going through that here.

Operating expenses were slightly lower, it would be interesting to see what Q2 expenses look like since it will capture more of SPG’s scaling back of operations. Interest expense is lower, due to lowering of variable rate debt rates and refinancing of other debts.

Finally we can see that the net income dropped, and that the business earned $0.35 less than this time last year. All in all, the Q1 income statement looks good given the circumstances, but Q2 results will sure to be uglier.

	Q1 2020	Q1 2019
Total Revenue	1,353,360	1,452,834
Lease Income	1,262,232	1,289,058
Operating Expense	698,491	707,813
Interest Expense	187,627	198,733
Net Income	437,605	548,475
EPS	1.43	1.78

Current Balance Sheet

The balance sheet of SPG is something I want to keep close tabs on. While I’m not too worried about Simon’s debt load, the possibility of large operating losses requiring them to access credit is a bigger concern. First, the cash flow statement shows that Simon gained $6.45B in proceeds from debt, while repaying $3B of debts. This must be refinancing a credit facility, or paying off a bond that came due. Elsewhere in the 10-K, Simon reports they drew $3.75B from their credit facility for operating liquidity. Given the proceeds of this credit line, SPG’s cash balance at the end of the quarter was $3.724B compared to $670M at the end of 2019. Next, the total debt increased from $24B to $27.5B this quarter. To satisfy the finance nerd in me, the breakdown of SPG’s debt is as follows:

$3.0 billion outstanding under the $4.0 billion unsecured revolving credit facility
$875.0 million outstanding under the $3.5 billion unsecured supplemental credit facility
$1.0 billion outstanding under the $2.0 billion global unsecured commercial paper note program
Unsecured debt consisted of $15.8 billion of senior unsecured notes (bonds)
Total mortgage indebtedness was $6.9 billion

Based on these figures, it appears Simon has plenty lines of credit to tap into if need be. Finally, the 10-K also reported that SPG is in compliance to all of their debt covenants.

COVID Response

As the COVID crisis unfolded, Simon claims to be one of the first companies to voluntarily close all of their properties. Recently SPG has been opening properties back up with added precautions. Currently, 77 of Simon’s U.S. malls have reopened. Within the latest 10-K, Simon outlined their business response to weather COVID19:

Significantly reduced all non-essential corporate spending
Significantly reduced property operating expenses, including discretionary marketing spend
Implemented a temporary furlough of certain corporate and field employees due to the closure of SPG’s properties
Suspended more than $1.0 billion of redevelopment and new development projects
David Simon, the CEO and President elected to reduce his base salary to zero and deferred his approved 2019 bonus until the market conditions improve
Implemented a temporary decrease to the base salary of certain of its salaried employees ranging from 10% to 30%
The Board of Directors agreed to temporarily suspend payment to the independent directors of their board service cash retainer fees

In my view, these measures seem rational, and it is good to see the CEO and board eliminate their compensation. That is to say, I will be curious to see how these spending cuts affect the operating results next quarter.

Dividend Payout

One topic of interest is what SPG will do with their dividend. Simon paid a quarterly dividend of $2.10 in Q1. Interestingly, SPG has declared they will pay a Q2 dividend, however they did not say how much it would be. As a capital allocator, I would hope they would only pay a dividend if they had the operating cash flows to support it. I do not mind if they need to temporarily reduce or suspend their dividend payments, however many people are very demanding of their dividends.

Looking Forward

During the SPG conference call, David Simon did say that he expects positive cash flow this year. This is reassuring, since most people are assuming they are going to run a deficit with retailers not paying rent. But of course, we don’t really know how things will pan out. Simon did mention that some retailers have negotiated delays in rent payments. The company did not specify how many retailers they have negotiated with, or how many retailers have failed to pay rent. Therefore number of rent collected in a key figure. It appears Simon does not want to speak too specifically about this so retailers don’t use it as an excuse to not pay rent because X% of retailers haven’t paid. SPG communicated its firm position that retailers signed a contract to pay rent and must uphold that.

Since SPG closed its properties only a week or so before the end of the quarter, Q2 should be more revealing of how this crisis has impacted the company. The occupancy at the end of Q1 was down 1.1%, amounting to a total occupancy of 94%. This occupancy level seems very strong, but it is definitely something to monitor in the coming quarters. If this crisis persists, it could take a while for retailer bankruptcies to shake out.

Conclusion

All in all, I think this quarter’s results were pretty positive given the situation, and given how beat up this stock is. In the coming quarters, it will be important to keep track of the occupancy, lease revenue, operating income, and how they are deploying their credit facilities. While it is very possible SPG suffers through more pain, I am still optimistic on its fundamentals looking a few years out.

April 16, 2020June 6, 2020

Why Simon Property Group (Probably) Won’t Go Bankrupt

The March selloff provided some opportunities to buy undervalued stocks. One of the stocks I scooped up was Simon Property Group, which on the surface appears to be a risky business. However, the assumption I’m making is that the majority of tenants will continue to pay their rent through this COVID19 crisis. Since this is a big assumption, I decided to dig into Simon’s financials, model what would happen if a chunk of their tenants fail to pay rent, and try to prove why SPG won’t go bankrupt.

Estimating SPGs Finances During COVID19

Now let’s do some back of the envelope calculations to model what SPGs finances may be this year. Simon Property Group’s simplified income statement and balance sheet are shown below. In this exercise, we assume a scenario where a large portion of tenants don’t pay rent, however we have to balance being conservative with being realistic. First, let’s say that there is a 30% reduction in revenue from tenants not paying or going bankrupt. Factoring in the 30% haircut from last year’s revenue, this would mean an estimated 2020 revenue of $4B.

SPG 2019 Simplified Income Statement	(Dollars in Thousands)
Total Revenue	5,755,189
Expenses
Property Operating	453,145
Depreciation and Amortization	1,340,503
Real Estate Taxes	468,004
Repairs and Maintenance	100,495
Advertising and Promotion	150,344
Home and Regional Office Costs	190,109
General and Administrative	34,860
Other	109,898
Total Operating Expenses	2,847,358
Interest Expense	(789,353)

SPG 2019 Simplified Balance Sheet	(Dollars in Thousands)
Assets
Investment Properties Less Depreciation	23,898,719
Cash and Cash Equivalents	669,373
Liabilities
Mortgages and Unsecured Indebtedness	24,163,230

Breaking Down Expenses

Even though the revenues may be down because of the COVID19 crisis, expenses may be fairly fixed. The next line on the income statement shows SPG had operating expenses amounting to $2.9B in 2019. Operating expenses consist of property operating cost, real estate taxes, repairs, advertising, office costs, employee costs, and depreciation. Some of these expenses could be cut, but that would probably equate to a couple hundred million which won’t move the needle too much. Above all, the largest cost is depreciation, which is a non-cash expense. Depreciation spreads the cost of certain purchases over a period of several years, instead of charging the full cost upfront. Since we are primarily worried about cash flow coming in and out, we can add back depreciation, resulting in an adjusted operating expense of $1.5B.

Operating and Net Income

Now that we estimated expenses, we can find the operating income by subtracting the adjusted operating expenses ($1.5B) from the estimated revenue ($4B). This leads to an estimated operating income of $2.5B. Following the operating income are a series of line items that arrive at the net income. Examples of these items are income tax, income from unconsolidated entities, and unrealized losses on assets. For simplicity sake, let’s ignore these since they won’t change the outcome much. The last line item we care about is the interest expense, which amounts to about $800M this year.

Current Liabilities

A common metric used to judge a businesses credit worthiness is the interest coverage ratio. This is calculated by dividing the operating income by the interest expense. For instance, an interest coverage ratio below 1.5 indicates the company may have difficulties paying their interest if there is a bump in the road. Calculating the interest coverage ratio for SPG, with the estimated operating 2020 expense, yields 3.16. In short, Simon should be able to make its interest payments this year.

With the income and expenses tallied up, it is time to look at the liquid assets and liabilities on the balance sheet. So far we estimated the amount of cash coming into SPG this year, but we have to factor the cash already on hand. During the period ending in 2019, Simon has $670M in cash. There are some accounts receivables and payables, but let’s pretend they cancel each other out for simplicity.

Long Term Debt

The most important piece of info needed to judge SPGs financial strength is the amount of debt they owe. Currently, SPG has $24B in debt, with $6B of it in mortgages, and $18B in unsecured debt such as bonds, commercial. paper and credit facilities. As previously mentioned, interest on the debt is about $800M this year. Some of the bonds and the commercial paper come due this year, which means the principle needs to be repaid. Finally, the amount of debt coming due this year is $2.9B.

The big question is whether or not Simon can pay off the debt coming due this year, and make its interest payments with reduced revenue. The good news is that in March, SPG received an increase in their credit facility. They now have about $9B in credit they can tap into to pay their liabilities. Obviously it isn’t ideal to use debt to pay debt, but these are circumstances beyond their control.

Calculating SPG’s Deficit

Putting it all together, we can estimate how much of a cash surplus or shortfall SPG will have this year after paying its debts. The equation below shows that by adding the estimated operating income and the current cash balance, then subtract interest and debt coming due, Simon will approximately have a $500M deficit.

Estimated Operating Income + Cash – Interest – Debt Due = -500M

While it is not ideal that SPG will more than likely suffer a loss this year, they can easily cover this deficit with their credit facilities. Therefore, based on these rough calculations, I believe Simon Property Group will be able to weather this rough 2020.

Other things to consider are Simon’s debt covenants may be a limiting factor on how they can navigate this crisis. However, I couldn’t find much detail on their covenants. One can assume that if they had a large increase in their credit facility, then they must not be close to violating the covenants.

Simon’s Dividend

Another note is that this analysis did not take into account Simon’s dividend. REITS must payout a large portion of their profits, however I doubt Simon will be profitable in 2020. Although some investors would probably prefer SPG to maintain the dividend as much as possible, I believe the smart thing to do would be to cut the dividend if this year is indeed economically bad. In other words,I would be a bit disappointed if SPG tapped into their debt to maintain the dividend.

Conclusion

In summary, it appears that SPGs $9B credit facility can provide a life jacket during this pandemic. These calculations are based on a 30% reduction in rental income, which seems harsh but not out of the realm of possibility. If every retail company goes bankrupt or doesn’t pay rent, then I guess it’s force majeure and we must be in a depression. Therefore, in my view, there is a good amount of evidence to show why SPG won’t go bankrupt.

Let me know if I’m missing something crucial! I by no means claim to be a competent analyst.