Happy New Year! This year marks my 20th year (full-time) as Goldberg Capital and can easily say that it’s the best business decision I’ve ever made. I believe that I’ve learned a few tricks since incept, although compliance issues (thanks Madoff!) are making the profession extremely challenging, which no tricks can cure. Additionally, dealing with fast-speed/electronic trading, ETFs, etc., has changed the landscape, often resulting in a mismatch between the price of a stock and the company’s valuation. That’s good news for stock pickers because stock/fundamental analysis has changed little over the years.
In my 20 years, I have never seen a year of investing like this one. I only had a couple of aggressive accounts in negative territory this year (apologies) but most accounts fared quite well. When I talk to my network of advisors/friends around the country, many tell me they’ve had one of the worst years in their history (down 10+%). Why? The smaller companies got pummeled and only a handful of stocks in the major indexes did well. During the past two decades, I have not often heard such despair from people that I know well. It’s very difficult when the averages are in positive territory, but your business is down. Barron’s Magazine labeled 2014 as – money management blues. Trust me, I feel their pain.
Our approach is fundamentally focused — we don’t fit in any box very easily. That’s kept us out of the large institutional consultant world, and we’re fine with that. As you well know, GCM often invests where few managers dare to go. The goal of course is, with patience, this philosophy will provide the alpha.
Anytime GCM buys or sells something, we realize that there’s someone on the other side of that transaction with the opposite opinion. And so, we always like to ask “What are they thinking and why? And why is it different than what we’re thinking?” To a large extent, every investment made is a bet against someone taking the opposing position. Since I want to be right, it’s essential to understand why they would sell it to us at that price and what they’re thinking.
If GCM wants to own a company because it’s attractively valued, I ask why someone would sell. What don’t they like about the company? Why would they sell it under $5/per share if I think it’s worth $15?
Well, I’ll never know exactly, but I take the opposite viewpoint and go through all the possible scenarios that someone might believe the thing is worth. Why is it only worth $5? Are sales going to not come in as expected? Are earnings not going to be as expected? Is there a management problem? Are margins slipping?
A perfect example in 2014 was RF Micro Device (RFMD), which is now Qorvo (QRVO), after merging with Triquint on 1/1/2015. You will notice (on your January Schwab statement) that you now own one-quarter of the shares with QRVO as you did with RFMD, with the stock price approximately 4X greater. After selling 2/3 of our Unipixel shares, we made RFMD our largest position, purchasing the majority of our shares under $5 during the summer of 2013. The stock closed at $16.59 at the end of this year.
I generally do not lose much sleep over my investment decisions, but when I make a several million dollar bet, honestly, I am anxious. It’s easy to look back after a success but when it’s decision-making time, there is no such comfort (Why are they selling me RFMD under $5/share? What am I missing?). Looking forward, I believe many of our companies, particularly Tower Semi-Conductor (TSEM), has break-out success. I purchased our initial shares of TSEM this past spring around $9/share but, of course, the future is yet to unfold.
Another company that GCM is slowly accumulating is Chicago Bridge & Iron (NYSE: CBI). This is a large engineering and construction firm that builds infrastructures — mostly for energy projects. Several months back, sellers of the company’s stock were out saying that CBI had some questionable accounting. I take the view that the accounting isn’t questionable, that the company is well run, that their earnings will come through, and that the stock is at a bargain price if you can buy it under $50 (down from $89 on 4/14/14). So, we’re buyers.
The guy who’s selling CBI at $89 thinks that the accounting is not going to be good and it’s on its way to $60. Then oil crashes and CBI falls further to the low $40s. The guy that’s buying it at $40 thinks, “No, no, no, it’s a well-run company and, oil stocks will rebound, and the accounting, earnings, and sales will all be fine (in due time) and we’ll ride it back to $60, or higher”. To boot, a guy by the name of Warren Buffet has a 10% stake at higher costs than today’s price. I believe that if you buy good companies, getting too tied up on the valuation today, can cloud your judgment.
Sometimes, I attempt to catch the falling knife too soon. Transocean (RIG) is a good example. It dropped by 35% before we began buying it in 2014, yet it imploded after the oil/gas industry fell apart this fall. If I were to start a new client, I would be a buyer. Therefore, we are in a staying mode!
All things considered, 2014 was a decent year. In 2015, we will lighten our load somewhat with Qorvo, beef up other positions and look for more, well-managed, undervalued opportunities. We are holding some of our laggards for no longer than the next twelve months (DSNY, EMDY, ITMSF, NNLX, & WMTM). We’re retaining these as a zero cost option (not much to lose) because they still have the original potential first believed, but our patience is running…. very thin. They may look ugly on this statement, but they still could be tomorrow’s winners (fingers crossed).
All my best for a healthy and rewarding 2015,
Goldberg Capital Management is an investment adviser registered with the State of CT Department of Banking. This Newsletter and its contents are for informational and educational purposes only. You alone will need to evaluate the merits and risks associated with the use of the information provided herein. Although this Newsletter may provide information relating to approaches to investing or types of securities and other investments you might wish to buy or sell, no information provided in this Newsletter is intended or should be construed as an investment recommendation or endorsement from Goldberg Capital Management. Please remember that past pe