It has been a tough, strange few months in the stock market. My relief that the situation in Greece appears to be resolving itself as I thought it would was short-lived. Uncertainty caused by financial reform legislation, confusing economic data and this blasted oil spill which now appears large enough to have its own NFL team have clearly impacted the prices of the companies in the Tarpon Folio lately.
I'm trying something different in this letter - namely, video. I'll tell you in advance it's going to be a bit clunky, but consider this my attempt to look you each in the eye and tell you that while I don't expect you to be happy about the portfolio being down lately, I don't want you to worry about it, either.
I'll save the rest for the video, which you can watchby clicking here.
To update the performance figures I mentioned in that clip - as measured from the beginning of its second year through yesterday, Tarpon is down 9.4%, compared to a decline in the S&P 500 of 12.3%. I realize that doing slightly less poorly than the market is probably of little consolation to anyone - particularly those of you who have invested with us more recently. To all of you I'd offer the following:
Tarpon, if considered an asset itself, is more attractively priced right now than it has been in a year. I have been making a significant number of changes the last few months to capitalize on some remarkable opportunities that have emerged during the recent market decline. As usual, I am buying beaten down shares in some terrific businesses, ones we have long-owned and some new names, too. The market is once again extremely inefficient in certain areas. This is good for us.
For instance, as mentioned in the video, we now own two companies that are trading for less than the value of cash and/or securities on their books. In those cases I am effectively buying dollar bills for us by paying eighty cents. We're getting a discount upfront on the dollar bill, and then, when the market realizes the underlying businesses are in fact worth significantly more than $0, we will profit accordingly, too. There are other big discrepancies between price and value out there, as well, and I intend to keep adding the best I can find to the Tarpon Folio.
I also suspect that, all things being equal, the value gap in our companies will narrow relatively rapidly. We may have already started to see some of that in this week's market rise. Despite recent economic headlines that no doubt seem depressing, they are, in the big picture, consistent with a moderating recovery from one of the worst economic periods in seventy years. The odds still overwhelming point to a full economic recovery, although certainly not as quickly as any of us would like.
Along those lines, I've written a report titled "Why We're Buying in This Market: How The Risks of a Double Dip Recession Are Being Overblown." It was too long to include in this letter, but I very much hope you can find time to read it. It explains much of what I've been doing in the portfolio.
You can download the PDF version of that report by clicking here, or view it on my blog here.
Lastly, in my previous letter I mentioned I'd be reporting to you on my rationale for buying our sole bank stock - Citizens Republic Bancorp (CRBC). That report is also too lengthy to include in this letter, but I will be posting sections on my blog at www.caleinthekeys.com over the coming days. I have put a little more time into that write-up than usual because I suspect many of you are still uneasy about investing in banks these days. Citizens, however, is not one to be overly concerned about. While there is still some mild uncertainty about the bank's near-term results, there is not a lot of risk. Being able to distinguish between the two is important when investing.
For those of you who'd like the summarized version of the investment case for CRBC, here it is:
Citizens Republic is an undervalued and now well-managed bank in the early stages of a turnaround that I believe will see the bank regain profitability in the first quarter of 2011. The bank has strong capital levels, is showing solid improvements in credit quality, and trades at a significant discount to what I believe shares are worth. There is a high degree of uncertainty surrounding the bank's true value, but even under conservative assumptions, that value is significantly higher than where shares currently trade.
For portfolio managers and analysts reading this - here are valuation spreadsheets on CRBC. They, too, are a bit clunky, but drill down as you see fit.
Citizens is a great example of a company that the market is pricing too irrationally lately. CRBC also typifies how I intend to continue to grow our wealth in Tarpon - with hard work, a clear head, and weighing facts more than emotions.
I'll be posting more on my blog in the coming weeks and months to fill in some of these long pauses between investor letters. If you haven't checked it out yet, please do, at CaleintheKeys.com.
Here are those links one more time:
My Video Update
"Why We're Buying" report
CRBC Financial Model
As usual, call or email anytime. And thank you for hanging in there with me.
- Cale Smith