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Tal Davidson
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Tal Davidson, MBA I'm a research-driven individual investor. I’ve started investing in 2003 as a hobby, and since it has grown to be my passion. I have been studying the works of Ben Graham, Buffett, Howard Marks, Martin Whitman and many more thought leaders. I believe that the human mind is... More
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The Inspiration Fund
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  • 2014 Letter - The Inspiration Fund

    The Inspiration Fund (NYSE:TIF) is the personal investment portfolio of Tal Davidson. TIF's goal is to create wealth through investing in companies with improving businesses, led by inspirational managers. TIF draws inspiration and applies learnings from inspirational value investors. TIF is constructed from a select few out-of-favor companies, having high prospects for improvement and growth, based on independent in-depth research. TIF does not compromise on a margin of safety, investing only when the price is significantly lower than the estimate of intrinsic value. TIF is slow to invest, and even slower to divest. TIF is a concentrated, long-only, low turnover portfolio, consisting of 15-30 holdings.

    (click to enlarge)

    Discussion on Performance

    The Inspiration Fund gained 8.24% in 2014 (since its public introduction on February 13th), vs. gains of 12.83% of the S&P500 and 5.74% of the Russell 2000. A duration of less than a year since becoming public is too short a time to depict any meaningful insight on the ability to generate alpha. Nevertheless, even in this short duration, clustering TIF's holdings into three main categories reveals a pattern, which may shed light into the reasons for its temporary mediocre performance.

    The Inspiration Fund is a bottom-up portfolio consisting of investments in the equity of companies, which are categorized as follows:

    1. Value Builders -companies which are in the process of building or enhancing their value, but their stock price does not reflect it, yet. Value is being created through the improvement or expansion of the underlying business. The holdings in this category are mostly small caps, led by inspirational managers which have a personal stake in the success of their company. I seek companies whose managers/owners are honest and candid. I want to engage with those who are active in creating value, either by turning around operations, developing new products or markets, re-capitalizing, cutting costs, making divestitures, M&A, and allocating capital prudently.
    2. Generals - Prominent mid and large cap companies, which I have found to be undervalued. Often these companies will have a long-term history of profitability and/growth, yet have fallen temporarily out-of-favor. Holdings in this category are generally less volatile than Value Builders, and provide the portfolio with stability and peace of mind.
    3. Cyclicals - companies which performance is dependent on commodity prices. Those include Gas and Oil E&P companies, gold miners and steel producers. I seek investments at or near a cyclical low. Holdings in this category must meet the criteria of either the Value Builders or the Generals categories, and in addition have the potential (but not the guarantee) of appreciating when commodity prices bounce back.

    In December 31th 2014, Value Builders accounted for 58% of the capital invested, and included Summer Infant ($SUMR), Rosetta Stone ($RST), NV5 ($NVEE), The Arctic Cat ($ACAT), Skullcandy ($SKUL), Tredegar ($TG) and others.

    Generals accounted for 18% of capital, and included Apple ($AAPL), Pier 1 Imports ($PIR), Bed Bath and Beyond ($BBBY), Best Buy ($BBY), Veolia ($VEOEY) and others.

    Cyclicals accounted for 22% of the portfolio, and consisted of the private equity holding company, Sprott Resource Corp ($SCPZF), Steel producer Posco ($PKX), Gas E&P Ultra Petroleum ($UPL), Gold miner Primero ($PPP). The cash level at the end of year was 2%.

    Although I've been learning and developing my investing skills for more than ten years, 2014 was the first year in which I diligently tracked my portfolio and made it public. Through the scrutiny of public disclosure, I hope to become more methodical, and eventually, a better investor.

    So what have this first year in the public light (if one can call my two readers so) taught me? Well, for starters, it had taught me that my portfolio is volatile, significantly more volatile than the benchmarks. Up to 16%, down to 2% and back up to 8%. Secondly, it proved again how difficult it is to beat the market over a short term. While being ahead of the Russell2000, it still lags the S&P500. Lastly, and most importantly, it re-assures me in the merits of my approach. On this latter aspect I would like to elaborate.

    Measuring the contribution of each holding category separately reveals an interesting insight. As can be seen in the table below, Value Builders have generated $10,160, Generals follows with a contribution of $8,180, and Cyclicals ruined the party with a negative ($10,084). Ouch.

    The main lesson I am learning from these results is a positive one. Through a meticulous search and in-depth analysis, I was able to commit capital to a group of growing and improving companies, meeting my strict standards. The table below lists the returns of Value Builders over 2014.

    Ticker

    Company

    % Holdings

    12/31/2014

    Gain

    NVEE

    NV5 Holdings Inc

    8.32%

    $3,944

    SUMR

    Summer Infant, Inc.

    9.65%

    $3,445

    SKUL

    Skullcandy Inc

    6.00%

    $1,974

    LUNA

    Luna Innovations Incorporated

     

    $1,368

    VITC

    Vitacost.com Inc

     

    $1,336

    TG

    Tredegar Corporation

    4.11%

    $1,310

    RST

    Rosetta Stone Inc

    9.17%

    $801

    PRISB

    Promotora Del Informacionas

     

    $340

    MIXT

    MiX Telematics Ltd - ADR

    7.27%

    $263

    ACAT

    Arctic Cat Inc

    7.92%

    $170

    GAIA

    Gaiam, Inc.

     

    $131

    PRISY

    Promotora de Informaciones S.A.

     

    $95

    CRNT

    Ceragon Networks Ltd

    2.02%

    $88

    NES

    Nuverra Environmental Solutions Inc

     

    $7

    INTX

    Intersections Inc.

    5.51%

    ‎-$101

    TEU

    Box Ships Inc

     

    ‎-$689

    ARO

    Aeropostale Inc

     

    ‎-$1,157

    TRMR

    Tremor Video Inc

    2.29%

    ‎-$1,409

    LOV

    Spark Networks Inc

    4.25%

    ‎-$1,755

    Total

     

    52%

    $10,160

    A discussion on select holdings follows further in this letter. A fuller analysis for some of the holdings is published in SeekingAlpha.com (requires PRO subscription).

    Generals did not disappoint either. I consummated this year quite a few Generals, to free up capital to the Value Builders, which presented better risk/reward ratio, and possess a better fit to my personal investment style.

    Ticker

    Company

    Value

    % Holdings

    12/31/2014

    Gain

    Type

    PIR

    Pier 1 Imports Inc

    $8,132

    6.44%

    $198

    General

    BBBY

    Bed Bath & Beyond Inc.

    $6,906

    5.47%

    $1,131

    General

    BBY

    Best Buy Co Inc

    $5,625

    4.45%

    $2,757

    General

    VEOEY

    Veolia Environment VE SA (ADR)

    $4,661

    3.69%

    $794

    General

    AAPL

    Apple Inc.

      

    $2,221

    General

    EMC

    EMC Corporation

      

    $464

    General

    LH

    Laboratory Corp. of America Holdings

      

    $573

    General

    TEF

    Telefonica S.A. (ADR)

      

    $43

    General

    Total

      

    20%

    $8,180

    General

    But, as mentioned above, the party poopers were the Cyclicals. I hold some good companies in this category, believing that I had bought them on the cheap. But wrong I was, as cheaper they got. Who would have thought that Gold, Gas, Coal and Steel, which experienced multi-year low at the beginning of the year, would trade even lower at the end of the year? Who would have thought that Oil will drop to below $50 a barrel? Certainly not I. I am fully aware of the manic-depressive nature of commodity prices, and make no attempt to predict future prices. I was banging my head during the course of the year, pondering whether there's a place for commodity-based companies in a value portfolio like mine's, in the first place. True, gurus such as Mohnish Pabrai, Guy Spier, Martin Whitman and even Warren Buffett do not avoid miners and E&P, but still. I am still considering that, and will allow myself the time to reach a conclusion. As I've indicated in the heading, I believe in being "Slow to invest, even slower to divest".

    Ticker

    Company

    % Holding

    Gain

    SCPZF

    SPROTT RESOURCE CP

    11.89%

    ‎-$3,711

    PKX

    POSCO (ADR)

    5.24%

    ‎-$517

    UPL

    Ultra Petroleum Corp.

    4.90%

    ‎-$2,778

    PPP

    Primero Mining Corp

    3.10%

    ‎-$2,610

    MT

    ArcelorMittal SA (ADR)

     

    ‎-$429

    ESCR

    Escalera Resources Co

     

    $16

    HNR

    Harvest Natural Resources, Inc.

     

    ‎-$54

    Total

     

    25%

    ‎-$9,617

    Had I not invested in Cyclicals, I would have beaten the S&P500 head over feet. Nevertheless, The Inspiration Fund aims to provide safety of capital and above-average returns in the long term, not maximize headline performance in the short-term. My thinking at the time of writing, is that investing in Cyclicals altogether was not a mistake. Each of my holdings were carefully selected for their individual merits, which go far and beyond the (then perceived) low commodity prices. A few examples are detailed later in this letter.

    The optionality that TIF possesses today, in the beginning of 2015, is enormous. Practically all the Value Builders were bought at levels which have a clear line-of-sight to double, should their thesis work out favorably. A rebound in Oil & Gas price will drive a surge in the E&P holdings.

    What Performance to Expect

    "An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return" (Benjamin Graham, Security Analysis, 1934)

    Well, what return is adequate? It is not accidental that Ben Graham chose adequate, rather than high, or above average returns. An investment operation is expected to compensate its owner for the burdens, duties and risks she is taking while committing capital to own shares. Owning a security, whether an equity stake or a debt instrument, involves a few burdens and duties. An investor exposes herself not only to company specific risks, and permanent impairment of principal if materialized, but also to other risks. Broad market volatility may depreciate the market price of the holding for a prolonged period of time. Even if the market eventually corrects itself, the invested capital is tied to the investment, or else can be liquidated at much lower prices. As for duties - passive outside investors, like I, with marginal stakes in even the smallest of companies, do not incur much fiduciary or legal duties as do insiders and control investors. Nevertheless, we do hold a moral responsibility for the operations of the company we own a stake in. Lastly, investment returns are expected to compensate an investor for the time invested in analysis, as well as the expertise, which was achieved over one's professional lifetime.

    Therefore, in order to determine an adequate return level for TIF, I will consider the burdens and risks incurred. TIF is a concentrated portfolio of interests in 15-30 companies. While some of the companies held are large, prominent, successful and relatively safe, such as Bed Bath & Beyond and Apple, most holdings are of struggling small caps, fighting their way out of their dire situation. Such are my investments in Skullcandy, Summer Infant, The Arctic CAT, Intersections Inc., Rosetta Stone and others. In addition, a significant portion of the portfolio is tied to commodity prices, such as Gas & Oil (Sprott Resource, Ultra Petroleum) and Steel (Posco). Commodity price cycle timing is unexpected, at least by me. Not only is my typical holding significantly more volatile than the market, but the aggregate also seems to be more volatile as well. There is little value of measuring performance over a quarter or even a year's period. The turnarounds I invest in takes years to turn, and sometimes falter for many quarters before they jerk up. My miners and E&P companies will appreciate when the commodities cycles will turn, which may be tomorrow or in a few years.

    Given the above, over a period of three to five years, I will be disappointed with returns similar to those of the broader market, as represented by the most popular benchmark, the S&P500 index. Average annual outperformance of 3%-4%, before taxes (which are individual), would be adequate, or marginally satisfactory. Outperformance of over 5% vs. the S&P500 will make me happy, whereas with 7%-10% outperformance, I would be thrilled. After much thought, I believe that my performance expectations are both achievable and realistic.

    TIF's mediocre performance since inception in February 13th this year, a period of less than one year, is not indicative, and practically irrelevant to its long term performance expectations. Moreover, as the price for my stakes decline, the market risk declines as well. For example, it is much safer to hold Sprott Resource at a 40% discount to NAV than it was at 20% discount to NAV. After I had re-evaluated my portfolio holdings lately, I still believe that most of TIF's holdings possess the potential to double within 2-3 years. I am confident that TIF will sooner or later shine, generously compensating myself and TIF's followers for years to come.

    Discussion on Specific Holdings and Past Holdings

    Apple - Exited Position (32.3% gain)

    Apple was initially purchased back in January 2013 at about $500 a share, pre-split. I added to my position at $450 and $400 a share. Back then, Apple was claimed to have lost its "touch", after the passing of Steve Jobs. It was perceived as a company that could no longer innovate in a large scale. Albeit its massive market cap north of $380B, it was trading at a low double digit earnings multiples, while possessing a huge cash pile. Its products were and still are sticky and premium. Carl Icahn called it then a "no-brainer" and he was right. My thesis was to hold Apple stock at least until it demonstrates its ability to innovate, which I was certain it would. Fast forward to September 2014. My position in Apple appreciated 32.3% to about a $100 a share, post-split. Apple recently announced the iPhone 6, the iWatch, and Apple Pay. While Apple is still great, and not over-priced trading at a P/E of 17, I needed to free capital for opportunities with larger gain potential.

    Vitacost - Exited Position (27% gain)

    I was extremely lucky for holding Vitacost for less than two months, until they received a bid to be purchased by Kroger. I learnt much about this company through an insightful research article in SeekingAlpha.com, written by a talented investor and a friend, Mike Arnold. Following my own research, I was intrigued by the operational excellence of the company and its compelling valuation. Mike believed right from the start that Vitacost was an excellent buyout candidate. Although I did not know what was in the cards for Vitacost, I figured that its shares were poised to rise whether it is acquired, or whether it grows organically. Good things happen to good companies, given that they are bought cheaply enough. Luckily, Mike's thesis played out nicely, and I pocketed a 27% gain.

    The Arctic Cat - Opened a Position

    I have discovered The Arctic Cat, a manufacturer of snowmobiles and all-terrain vehicles, through one of the idea generation methods which I like best - browsing through small-caps one by one on the StockRover.com's platform. One can find my investment thesis in my SeekingAlpha profile. The main points are re-iterated here.

    Arctic Cat is a veteran manufacturer and marketer of snowmobiles (No. 3 market share), all-terrain vehicles, known as ATVs and Side-By-Side (no. 5 market share). The new Wildcat ATVs receives favorable reviews and awards, and are positioned well to be a growth driver. In addition, during 2013, the company entered into a deal with Yamaha to purchase performance engines, and also manufacture snowmobiles under the Yamaha brand. This new deal has the potential for growth, and may be a pre-cursor for increased collaboration, even M&A. FY'14 and FY'15 results suffer from excess capacity in ACAT's dealer network, yet once the channel is cleared, a moderate growth of 5%-6% per annum should continue. The CEO was recently ousted, with no specified reason, adding to the uncertainty. I personally believe that this ousting is related to ill-faced channel stuffing. With $6 a share in cash, and zero long-term debt, the company can weather tough periods and recessions. I believe that the company has the capacity to take on some long-term debt, which will support profitability. At $36, or $470M market cap, the company trades at 13 trailing P/E multiple to its depressed earning, affected by short-term unfavorable forex trends, and excess inventory at its dealer network. During the last 4 years, the company has traded as low as 12x and as high as 30x. Obviously, the market see Arctic Cat as a non-growing mediocre company. ACAT does not have the breadth, diversity and no. 1 market positions as Polaris ($PII) and BRP ($DOO.TO), so it should deserve a lower multiple. Nevertheless, it seems as the difference in valuations is way off. There are multiple potential positive catalysts which supports a higher share price:

    1. Appointment of a CEO (removal of the uncertainty).
    2. The company actually do what it says (do not miss guidance).
    3. Activism or Ownership by a high profile investor.
    4. Extending the agreement with Yamaha, or M&A.
    5. Expanding internationally, or to adjacent markets.
    6. Re-capitalization by taking on some long-term debt.
    7. Increasing the number of dealerships

    Materialization of one or more catalysts has the potential to send the stock 50%-100% higher. On the downside, recession is the most significant risk, due to the discretionary nature of the business. Forex could continue to be un-favorable; the company may lose money on hedging; snow conditions may be lousy; and many other bad things can happen. Nevertheless, it is a bit hard to conceive the company worth much less than 12x a $30M annualized net income, totaling $360M, which would be 25% less than the purchase price.

    Rosetta Stone - Opened a position

    Rosetta Stone is a developer of language-learning products. It seems widely misunderstood by the market, as it is undergoing a major shift in its business model towards SaaS and business-to-business focus. The market is probably giving overly focus to the threat of substitutes, in the form of new startups offering freemium learning programs, and to the seemingly low barriers of entry. Nevertheless, RST possess some brand equity and valuable IP that will position it to prosper. RST recently completed several acquisitions at reasonable prices, acquiring important assets to enable it to compete effectively. It is switching its focus to B2B, streamlining International - Korea and Japan, Right-Sizing - eliminating jobs and reducing advertising (making it more efficient). The new CEO, appointed February 2013, is prudently taking the right actions to set the company on the right path. The company is owned by respected activists D3 Funds and Osmium Partners. David Nierenberg, of D3 Fund, complains publicly about "initiative overload" and calls for "increased focus" and strengthening of the board. The activism at this stage is friendly. RST trades at EV/Sales of about 0.5, compared to the typical SaaS Company trading at a multiple of 2-3.

    Intersections - Opened a position

    Intersections is a cigar butt. It is a mediocre business, yet its price is so low, that it acts like an option, presenting a potential for multi-bagger returns, yet with very little downside risk. Intersection is operating in two segments. The largest one, responsible for 99% of revenues is subscription-based consumer identity protection service, marketed under the "Identity Guard" brand name. Another important segment is Voyce (mydogsvoyce.com), a startup which created a wearable computing collar for dogs, and a matching SaaS service monitoring wellness indicators. The product is due to launch in Q1 2015. Intersections is losing a significant part of its Identity Protection revenues due to a regulatory raid, restricting the marketing of its products by financial institutions such as banks and credit card companies. At $4 a share, the company's shares are so cheap, that the remaining consumer Identity Protection business alone is worth more, even a lot more, than the current market price. Add to that the value of Voyce, and any outcome short of a perfect storm can turn Intersection's stock into a multi-bagger. My complete analysis is published under my SeekingAlpha profile.

    Sprott Resource

    Sprott Resource is my largest position (11%-15%), nearly three times larger than my normal position size (5%). This holding gave me much pain, as I have been adding to it all through its downfall, from a high of $5.5 in 2011, until the recent low of $1.5. Sprott Resource Corp. is responsible for shedding more than 4% of the market value of TIF during September alone, having depreciated more than 20% during this month. It is yet too early to conclude whether buying Sprott Resource was a mistake. Sprott is a holding company of mostly private companies operating in various commodity sectors - Oil and Gas, Agriculture, Coal and Uranium. Sprott Resource Corp. has longer-term track record of buying good private companies operating in commodities around their cyclical low, improving the companies and then taking them public, netting a profit. Sprott Resource has the backing of Sprott, the larger commodities asset manager in Canada, and its management seems prudent. Since I am no expert in mining, E&P and commodities in general, Sprott Resource is for me a jockey play in the expertise of its management. Luckily, shares were bought at a significant discount to NAV, often more than 20%. Nevertheless, all of these did not result in favorable returns, so far. The downtrend in Oil Prices, down to less than $50 a barrel in December, combined with continued downtrends in met coal, did not leave Sprott Resource stock price any real chance to appreciate. Albeit the pain of paper losses, I still hold my position, remembering that eventually the pendulum will turn, as it always does, as the venerable investor Howard Marks continuously reminds us.

    Primero Mining Corp

    Primero was another loser for this year. An explanation is due of why a value investor like I holds a Gold miner in the first place, and why specifically Primero. Primero was initially bought in 2011, as a special situation. It faced a tax ruling in Mexico that if favorable, would result in significant earnings gains for Primero, and stock price appreciation. The ruling was indeed favorable, and Primero shares rocketed more than 100% from my initial purchase price. Once the special situation was cleared, I contemplated on whether to hold Primero as a storer of value (a substitute for cash), or as a potential hedge for my other holdings. While I was weighting different opinions within the value investors' community, I mistakenly chose the path of in-action. Gold prices are still low, roughly equaling break-even prices, which are not sustainable for the long term. An excellent company, with excellent management, such as Primero, would be a storer of value, and an option on rising Gold prices, so I thought. In reality, during Q3, the company released negative data and lowered its guidance, raising the concerns that it was overpaying for acquisitions. This was followed by some personnel changes at the top. As a result, Primero shares were cut in half, from $8.25, to $4.18, at December 31st. At this time, I still hold Primero, as I believe that should I not have owned it, I WOULD buy it today. Looking at the big picture, this is still a well-run company (albeit the recent missteps), owning good mining assets, unloved by the market, operating in a low Gold prices environment. When Gold price eventually appreciate (remember, the pendulum will always turn), and/or when the company will show tangible actions to correct its mistakes, the stock will surge again.

    Tremor Media

    Lastly, I'd like to discuss a clear mistake. Tremor should not have been bought in the first place. While I still hold its shares, I do plan to get rid of them soon. Tremor was bought as a busted IPO, operating in the video ad space. This industry is crowded by many other companies, such as YuMe, Millenial Media, TubeMogul and others. I was allured to Tremor, seeing the rapidly growing revenues, watching insiders pile up company's shares and believing the rosy guidance by management. The reality turned out to be more complex. Barriers to entry are low, and there are too many companies operating in this space. Profitability is a distant dream, while companies slash prices to win market share. In retrospect, I have learned that I have not done enough research to be confident that Tremor Media will emerge as a prominent company. Tremor has fallen by 33% since I bought it. Luckily, it was only a small 3% position. Tremor is a painful reminder to perform well-rounded research, and not letting myself be allured by insider buys and management guidance. In the short term, I lost money on Tremor. In the long term, I believe I earned a lot, as I've learned an important lesson, luckily on a relatively small position.

    How is TIF positioned for the future?

    Triggered by the market declines, I reviewed again the investment thesis of each of my holdings. Learning from venerable investor Mohnish Pabrai, I asked myself two questions: 1) Does this holding has the potential to appreciate at least 100% during the next 2-3 years? 2) What is the potential for loss, if conditions are un-favorable? Mohnish called it "Heads I win; Tails I don't lose much".

    I do believe that most of my holdings possess a fair chance to double during the next 2-3 years. The ones with lower appreciation potential (such as $VE, $BBY, $BBBY) are good storers of value, have low downside, and are a source for capital, once better opportunities present themselves.

    TIF is a volatile portfolio. Much more volatile than the broad market. It will have periods of outperformance (such as Q1 and Q2 2014), and periods of under-performance (such as Q3 and Q4 2014). In the long-term, I do hope and believe that TIF will outperform the market generously, and I would be disappointed if it doesn't.

    Warmest Regards,

    Tal Davidson, Investor.

    Jan 20 1:48 AM | Link | 2 Comments
  • ROIC Is A Superior Company, But Better Opportunities May Be Available

    My first 200 ROIC shares were bought in November 2010 at 9.77$, and I've been adding since, making it eventually a 10% position in my all-around value-oriented portfolio. My average purchase price is about 10.50$ vs. 15$ these days.

    ROIC's story is spectacular - stellar management, led by CEO Stuart Tanz (more on his track record here), coming together with a favorable macro trend - the emergence of the West Coast's retail properties from a multi-year recession.

    I've been wondering lately, roughly three years after I've started accumulating shares of ROIC, How well have my ROIC investment fare compared with other shopping center REITs? or in other words, was picking ROIC any better than a investing in a random basket of shopping center REITs?

    Instead of digging up data, I used the readily available NAREIT's REITWatch monthly reports, available from REIT.com. Since ROIC started reporting as a REIT only in 2011, I've selected the two year period from November '11 to November '13. With that data, I've made a simple back-of-the-envelope table, trying to figure out which factors correlate with shopping center REITs' stock appreciation. This is somewhat an anecdotal, non comprehensive analysis, and almost a sure way to mistake correlation for causality. The fact is, that even if two factors correlate, it does't mean that one is causing the other. Nevertheless, it provides some insights. Here's the data:

    "Relative Performance (%)" refers to the price appreciation (or depreciation), excluding dividend yields (%), relative to average the peer group, which is 28.4%. Dividend yields were excluded for simplicity (as yields range in a comparatively narrow range of 3%-5%). The start date is November 30th 2011, and the end date is November 30th 2013. The more greenish the figure, the better. Larger changes in annual FFO are greener, and so are larger decrease in debt levels.

    My first finding was that shopping center REITs' performance had varied significantly. The highest performing REITs returned 12%, 14%, 26% and even 40% above the average of 28.41%. Lowest performing REITs destroyed 12%,13%, 17% and even 54% of November '11's share prices. And how well did ROIC fair? Well, slightly about average, with almost a 30% price appreciation.

    The interesting question to answer is thus, should I stick with REIT or switch to other trusts with better prospects (given that I'm determined to have a shopping center REIT in my portfolio, which is not necessarily the case)?

    To attempt answering, I then aimed to find which factors correlate with price performance. I ran a series of correlation studies using the data-analysis add-in of Microsoft's Excel software. It may not be a surprise to my readers that the P/FFO ratio at the start date, and the change in FFO since, had the highest correlation with returns. Considering these two factors only, I received the following results:

    Price Change (%) = 0.48 + 0.004 x [change in FFO(%)] - 0.034 x [P/FFO Nov'11]

    Statistical significance is satisfactory to this kind of analysis, with R-squared = 0.6.

    If past behavior is indicative of the future (which is highly arguable), what are the prospects for ROIC? Let's look at valuation multiples today (as of November 30th '13):

    ROIC's multiple of 17.8 is about average. Its FFO growth of 18.6% in two years is above the average of 13.6% but not in the high range of its peer group. It is reasonable to believe that as ROIC is growing and maturing, it's FFO growth will not accelerate. Based on these anecdotal factors alone, ROIC's future performance may be average or a little above that. In contrast, a few lower valuation options exist, such as Inland Real Estate Corporation (NYSE:IRC) at P/FFO of 11.5, Kite Realty Group Trust (NYSE:KRG) at 13.6, Ramco Gershenson Properties Trust (NYSE:RPT) at 13.9 and Excel Trust, Inc. (NYSE:EXL) at 13.7. The former three grew FFO nicely over the last two years. If such growth persists, or even deteriorates a bit, they may be the top performers in the next two years.

    For an investment to be considered an investment, and not merely a speculation, so our master postulated in his 1934 classic, it must be based on thorough analysis. I see the exercise described above as a starting point for a more thorough analysis of the individual companies. Note that this exercise is simplistic, and does not factor in key aspects, such as: debt position and creditworthiness; leases portfolios and their expiration dates; opportunities to develop the asset base; warrants and their dilutive potential (ROIC still have many of those); and many other.

    My TODO list grows as I'm adding the following tasks:

    • Research IRC, KRG and RPT individually

    • compare to ROIC and consider a switch.

    Disclosure: I am long ROIC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

    Additional disclosure: I'm considering selling part or all my position.

    Tags: EXL, IRC, KRG, RPT, ROIC, reits
    Dec 31 7:24 AM | Link | Comment!
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