Dear Partner:
Arquitos Capital Partners returned -14.7% net of fees and expenses in the third quarter of 2015, bringing the year-to-date return to -12.5%. Our annualized return since the April 10, 2012 launch is 24.8%.
At the end of the second quarter we had a respectable 2.5% return for the year. Our performance during the third quarter eliminated those gains and has produced a measurable decline. Despite the disappointing results of the share prices of many of our holdings in the quarter, I’m satisfied with their operational results. This has been a buying opportunity.
ALJ Regional Holdings (ALJJ, Financial) acquired a new subsidiary during the quarter, doubling the size of the company. The stock price only recently has begun to reflect this very positive development. However, shares are cheaper now than earlier in the year relative to the value of the company. Shares currently trade for less than seven times earnings and less than four times EBITDA. They are worth considerably more. Once investors see the results of the new acquisition reflected in ALJ Regional Holdings’ financial statements, the stock will begin to more accurately reflect that value. ALJ Regional Holdings is a company we’ve owned for three years, and shares are more than 500% higher than when we first bought them. The last three years have been very, very good, but the best is yet to come.
Arquitos Capital Management: Real Industry stock drop
I wrote about Real Industry (RELY, Financial) in the last letter, and the stock promptly dropped 22% during the quarter. Aluminum prices have plummeted this year, which have hit the price of its stock. However, the weakness in the price of aluminum has benefited Real Industry as much as it has hurt. A large portion of the company’s revenue comes from its tolling operations, where it earns a spread on the price. Increased volume resulting from lower prices benefits this part of the business. There is a structural factor as well, as the automobile and other industries move toward using lighter aluminum in place of heavier steel. The company explains this well in its most recent investor presentation, which you can find on its website. The company also made an unsuccessful bid for a new acquisition during the quarter. It’s likely it will find another deal in the future, which will help them monetize their large net operating loss tax assets.
Sitestar (SYTE, Financial) shares dropped 46% in the quarter despite marked progress at the company. SYTE is a good example of how the share price of a very small company can become severely disjointed from its value. SYTE’s primary assets are its real estate holdings, where the value does not change over a short time period. I joined the board earlier this year along with a few other shareholders, and we are working with management to enhance shareholder value at the company.
Our poor performance in the quarter can also be attributed to the following:
- Bank of America (BAC) warrants dropped 21%, though shares of the common stock are now approaching highs last seen in June.
- SWK Holdings (SWKH, Financial) shares dropped 11% during the quarter after the company bungled a reverse split. While this mistake was disappointing, the thesis for the company holds.
- Intrawest (SNOW, Financial) shares were down 26% on no news.
- Special Diversified (SDOI, Financial) shares dropped 12%. The company now trades for 10% less than its net cash.
WMI Holdings (WMIH, Financial) is a company that did not drop in value during the quarter. WMI Holdings is the former Washington Mutual, now postbankruptcy. Today it is essentially a shell company with a very large net operating loss tax asset. KKR made a significant investment in WMI Holdings last year, took over the board, and has been working to make an acquisition. A few weeks ago WMI Holdings announced that it had identified a potential acquisition, which is the news investors have been patiently waiting for over the past several years. However, WMI Holdings was not able to reach an agreement, and the acquisition opportunity WMI Holdings referred to finalized a deal with another company. While losing out on the deal is disappointing, it reinforces the idea that WMIH is looking for a large acquisition. I expect it to identify another opportunity in the future in the same industry of the failed bid. Price fluctuations will happen in the short term. This is something we can’t control, but there is tremendous value in our current portfolio and the market will eventually put an appropriate price on these companies.
Thank you again for being an investor in the partnership. Please don’t hesitate to contact me if you have any questions. I look forward to continuing to compound funds on your behalf.
