Q4 2015
Greetings.
In 2015, the S&P 500 and Dow indices were down 1-2%. In actuality, if Google, Amazon, Microsoft, and Facebook are excluded, the market (average investment) was down greater than 4%. Goldberg Capital fared better. Collectively, we were UP 4% even after a terrible December. Exceeding the average investment by 8% in 2015 was not as gratifying as it could have been because most of the progress evaporated during the last month.
Many stocks sold off at year-end with what appeared to be a lack of financial rationale. One of our major holdings – Global Ship Lease (GSL) serves as a prime example. Here’s the short story: GSL was over $6/share in August and closed the year at $2.60/share. This, despite record earnings and cash flow, lowered debt, a 12+% yearly dividend, solid bookings (orders cannot be canceled through 2017) and a major agreement with one of the world’s largest shipping companies (which happens to be a significant investor in GSL as well).
So, what went wrong? Simplistically, a well-respected investment firm lost one of its major clients. They owned approximately 5 million shares of GSL (10% of the outstanding shares) for this client. When the shares/client left the investment firm, they ended up in bad hands or “going rogue” (as I like to say). The recipient of these shares (supposedly a pension fund) apparently had little interest in owning the 5 million GSL shares. These insecure shares were dribbled into the market during the fourth quarter. GCM was part of a group (that included Global Ship Lease) trying to purchase all of the rogue shares from the new firm during December. For whatever reason, they did not agree to sell them to us. If they had, the stock would have been in good hands, the pressure removed, and the share price likely would have rebounded. This kind of event is impossible for the average investor to be aware of. It is my belief that the depressed stock price has NOTHING to do with the financial health and well-being of GSL. As a prognosticator, I predict that GSL will be one of our best investments going forward. We’re betting on it!
Energy was THE story in 2015. The price of energy significantly impacted both its own sector and the rest of the market. What threw forecasters and policymakers for the biggest loop with their economic forecasts for 2015 was OIL. Crude oil prices stayed unexpectedly low this year, and those low prices didn’t prove as beneficial as many had hoped. A year ago, the price of oil had collapsed, but many expected it to gradually rebound. Lower gas prices usually provided a boost to consumers, and higher gas prices certainly hurt consumers, but the boom that many had hoped for failed to materialize.
We should remain dispassionate during 2016, despite the inevitable political fearmongering and consternation during the upcoming year. With that in mind, the year-ahead shows significant gaps between political perception and reality. Could the economy be better? Of course it could. That’s not the point. The point is simply that investors must always separate political propaganda from the true underlying fundamentals. The upcoming election could present significant investment opportunities if the campaigns (both Republican and Democratic) ignore the already improving trends of U.S. fundamentals.
There will likely be many opportunities in 2016. We will continue to invest dispassionately and objectively and believe that approach could be vital to portfolio performance during 2016. Both political parties’ naysayers will likely be loud, but the U.S. economy appears rather healthy. Today, most investors seem unaware that the budget deficit has decreased from 10% of GDP to only about 2.5%, which is actually smaller than the long-term average. In other words, the deficit as a percentage of GDP is now better than normal. The smaller deficit is simply attributable to the combination of cyclical improvement in the overall economy with cyclical reductions in spending.
Investors will need to realize and act on the gaps between political rhetoric and reality.
Upton Sinclair famously said, “It is difficult to get a man to understand something, when his salary depends on his not understanding it.” When you are incentivized to believe something, you will believe it. As an independent advisor, I make my own decisions that I believe will benefit clients. This means that I invest when I believe the profit incentive is there and sit on cash when I believe that it is not! Decisions are not dependent on my lack of understanding.
In 2015, we had a couple of multi-baggers – Dot Hill and Qorvo. This wouldn’t have been possible if the markets were always right or sane. We paid an average of $1.00/share for Dot Hill over the years, and they were bought out in October for $9.75. We paid an average of $20/share for Qorvo over in 2013, and we sold a sizeable position in May for $79. We bought Qorvo back in the $40s and expect this to be a sizeable winner – again! Here’s what the average investor does not know about Qorvo: Their dollar content per smartphone (Apple, Samsung) will double over the next couple of years. When Apple/Samsung report lower sales, it’s not a big deal to Qorvo. However, the stock does react negatively. Additionally, if Apple loses market share to the Chinese smartphone manufacturers, Qorvo content is in many of the major Chinese manufactures at better profit margins! The market does not grasp this.
The multi-baggers took patience and, luckily, we have plenty of it. I expect several of our companies – GSL included – to prove the markets wrong once again.
Don’t worry about the Chinese stock market! To your good health and well-being in 2016.
Len
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.