Motiwala Capital LLC - Fourth Quarter 2014 Letter
- Microcaps H and L were purchased at low valuations. Both exhibited strong earnings growth and were rewarded with higher valuations resulting in superb gains.
- Apple had a fantastic year, releasing exciting new products and continuing to return capital to shareholders via share buybacks and dividends.
- Visteon continued to divest non-core businesses and investors were happy
- Learning from Mistakes:
- Avoid High leverage, capex and high dividend payout combination in cyclical business. This is deadly combo for cyclical business. : Thye faced loss in Energy service companies having above deadly combo.The positions in North Atlantic Drilling (NADL) and Prosafe (PRSEY) hurt the portfolio returns by 6%. These were the biggest mistakes since 2011. Both companies are in the energy service industry, cyclical in nature and dependent on capital spending by large oil producers, which in turn depends on crude oil pricing. NADL and PRSEY had significant capital expenditures and high levels of debt. To add fuel to the fire, they had a high (75-100%) dividend payout policy. The combination of these three factors in a cyclical business is too risky. I will guard against this in the future.
- When the situation changes, SELL: They bought shares of Russian media company CTCM Media (CTCM) in March 2014 with argument “CTCM has a solid balance sheet and produces attractive free cash flows. CTCM was purchased for 10%+ FCF yield. When Russia moves out of the front-page news, I hope the stock would be higher.” After purchase, the stock appreciated by 25% despite Russia continuing to be in the headlines. The stock was still cheap and I continued to hold. However, in late September Russia passed a law restricting ownership of Russian media companies to 20% from the prior 50%. This was unexpected and the stock price took a 20% hit. Later the stock was also hurt by the rapid depreciation of the Rubble, which was caused by the rapid decline in crude oil prices. CTCM indirectly became linked to energy prices. My mistake here was not selling immediately after the media law change, which would have reduced our losses.
- Portfolio Composition: 'Generals' (generally undervalued equity investments that fit the value framework), Special Situations (generally undervalued equity investments that fit the value framework), and Cash.
- energy service industry: cyclical in nature, dependent on capital spending by large oil producers (i.e. indirectly, on crude oil pricing).
- Their failure in Russian media company suggests Media company can be indirectly linked to energy prices. This is why second order, third order thinking is important.
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