January 5, 2018
Last quarter I wrote the following: “On a brighter note, Tower Jazz continues to meet and exceed all goals.” In November, I spent the better part of the day with TSEM’s management team in NYC for their second annual investor day conference. I had the opportunity to talk one-on-one with CEO, Russell Ellwanger, and other key members of the TSEM team. If there was a CEO Hall of Fame, Russell would be at the top of the list. Tower is the only company in which I’ve ever invested that has not only met its goals, but exceeded them as well (since first purchased in early 2014)!
Below, is a very condensed version of the November, 127 page presentation:
Tower Jazz (TSEM) TARGET MODEL 2017 2015
Revenue $3.5 billion $1.42 billion $960 million
EBITDA $1.05 billion $435 million $248 million
NET PROFIT $520 million $221 million $51 million
FREE CASH FLOW $476 million $177 million $30 million
(EBITDA = earnings before interest, depreciation, amortization)
The key statistics indicate that since 2015, earnings and free cash flow have risen 4X to 6X through 2017. Then, they are expected to double/triple over the next several years (TARGET MODEL).
We have not sold Tower because it has been and remains a hidden gem. They are stellar performers and are very well diversified throughout many industries – wireless, wireline, autos – connected vehicles – electric, hybrids, and driverless, cameras, security, traffic control, medical, industrial, bar coding, cell phones, machine vision, cinematography, virtual reality …… Tower touches most every aspect of our lives, every day! In contrast to Qorvo (we sold all shares in early 2017) which concentrates in cell phones (high exposure to Apple & Samsung), Tower is anything but a one-trick-pony. It’s a proxy for where the world economy has been and will be heading in the future.
So, WHAT’S THE PROBLEM? Currently, it is everyone’s largest holding! We originally paid between $9-$10 per share, in 2014 and as of 12/29/17, it closed at $34.08, (up roughly 265%.) We ARE NOT sellers because of the chart (above). However, when we decide to raise cash in your account, we will lighten our holding in TSEM. When you review your portfolio, PLEASE contact me if you’re at all concerned with the percentage that TSEM represents in your account.
FYI, just before printing this letter, Kiplinger picked it’s top 5 small stocks for 2018, of which TSEM was one. This is what they just said – Tower Semiconductor Limited is another cyclical company that is hitting its sweet spot. Headquartered in Israel and with factories in Israel, the U.S. and Japan, Tower fabricates semiconductors. Most semiconductor firms design, engineer and distribute chips. But few actually manufacture the chips, which is where Tower comes in. With semiconductors in everything from washing machines to doorbells, demand is soaring. Building semiconductor fabrication facilities is costly. But Tower has the facilities it needs. Running a factory at 80% or 90% of capacity instead of 60% doesn’t cost much more, so revenues flow to the bottom line. Tower trades at 14 times 2018 estimated earnings.
Buffet said “I’d rather have all the farmland in the US than all the gold in the world” In 2017, we made a somewhat dramatic shift in our investment strategy. We purchased Vanguard fixed income and Gladstone Land (LAND), a real estate investment trust (known as a REIT). Although not every account owns these investments (due to account size, cash on hand, and risk), we lowered our correlation to the market with these investments and cash (money market). Having made this shift, you can expect your account to neither keep pace when markets are up, nor decline as much when markets are down. In other words, we have become more risk averse. We are still taking our shots on goal (and will continue to do so) but are putting less of our net worth into common equity.
Attributes of LAND:
$ Hedge against inflation $ Excellent management team and properties $ Not correlated to the stock market $ Small profitable farms with their own water sources $ Grows mostly fruits and vegetables – non-GMO $ Pays approximately a 4% annual dividend.
Recently, two of our companies, Planet Payment and Silver Spring Networks were purchased for cash for tidy profits. Although GCM has pivoted, I firmly believe that our diversified holdings should continue to yield one or two surprises every year or so, hopefully for the foreseeable future.
Regarding recent inquiries from several of you about my retirement plans. Simply put: Every morning I look through the list of the richest people. If I’m not there, I get up and go to work. I still love what I do, particularly assisting you and the wealth of knowledge I gather each and every day. I’ve also concluded that I still have a lot to learn because, I’m not young enough to know everything!
To a prosperous New Year, and with continued gratitude for your trust and confidence in GCM.
2017 is a wrap.
With all my best,
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 performance is no guarantee of future results.