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Zach Mansell
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I'm a recent graduate of The University of Southern Mississippi. I have my BSBA in Economics with a minor in mathematics. I am currently a candidate to sit for the 2nd level of the CFA exams to be taken in June 2012. I moved to New York in July 2011 to seek work in finance and have been... More
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  • My Portfolio Mid-Year 2011
     As we close the 2nd quarter of 2011, I have made many changes to my portfolio in preparation for what I believe to be on the horizon over the next year or two. 

    Currently I have 30% of my portfolio in cash. I have sold most of my equity positions from the end of year 2010.

    TTT,KHDHF.PK, CIM, and SB are all gone. I also closed out my put position in CIM so I wouldn't have to cover it in cash. Let me be clear: I still like all of these companies and will be looking for opportunities to re-enter these positions; however, I feel that the next year will be very challenging for equity markets and if I can reopen the positions with a price that is 20-30% lower than today, then I will have done well for myself. 

    16% of my portfolio is invested in Fairfax Financial. This is, in addition to my cash, is my bear market hedge. Fairfax should appreciate in price if there is deflation over the next ten years. It should also hold relatively stable in the midst of an equity downturn given their hedged position on their stock portfolio. 

    17% of my portfolio is in Google. Google has tons of cash, a strong brand, and is still growing double digits rate at a P/E 19. All of these factors should limit P/E compression amdist a downturn AND Google should have the ability to take advantage of another downturn with its huge cash hoard. 

    8% of my portfolio is invested in KEYP; however, this likely includes a large unrealized loss making my exposure to the position less. KEYP has not resumed trading and I have not idea at what price I could exit the position. This is basically an after thought for me as there appears to be nothing I can do to limit my exposure to this RTO. 

    29% of my portfolio is in VALV. I have been doing more and more research over the past few weeks. I have talked with distributors and institutional investors and am in the process of speaking with customers and competitors. 
    I have more than quadrupled my position during this process as my results convince me this is a great deal. Once I have a comprehensive picture of the company from all of my sources, I will publish a piece on SA pointing out everything I have found. 
    Tags: valv, goog, frfhf, keyp
    Jun 29 10:53 AM | Link | Comment!
  • A Look Inside Keyuan Petrochemical: An Interview with the CFO
    Ms. Aichun "Angela" Li was kind enough to respond to my requests for further information on the company so I could write an article about them. The following is the transcript of much of the ensuing conversation.

    Before we being, I believe an introduction is necessary:

    Ms. Li has been the CFO of Keyuan since early in May 2010. Ms. Li has a decade of experience in Corporate Finance and was most recently a consultant with Bank of America (ticker: BAC) where she managed financial reporting, forecasting, and planning for several multi-million P&L accounts. Prior to that, Ms. Li was working with Nucor Corporation (ticker: NUE) as their senior accountant. Ms. Li consulted with 36 divisions of Nucor on internal finances and taxes. Before joining Nucor, Ms. Li was a tax consultant with Deloitte & Touche LLP. Lastly, Ms. Li has served as a member of the board of directors for Huifeng Bio-Pharmaceutical Technology Inc. in China. Ms. Li's educational credentials speak for themselves: an MBA from the Fuqua School of Business at Duke University and a Master of Science in Accounting from Wake Forest University. Ms. Li is also a Certified Public Accountant.

    I would like to take a moment to thank Ms. Li for taking the time out of her schedule to answer my questions.

    Zach: I am curious as to why Keyuan has chosen to use the reverse merger process to access U.S. shareholders. This is especially interesting given all of the negative sentiment and press that reverse mergers are getting because a handful have turned out to be frauds. Why did the management choose the reverse merger process as opposed to a traditional IPO?

    Ms. Li: Keyuan started production and sales in Q4 2009. We project to report $550 million in sales for the 2010 year that just ended, the first full year of operation. So this is a young company positioned for a quick ramp-up to capture the business opportunity in its exciting niche market. A reverse merger provided the company with immediate access to capital needed, while an IPO would have taken over a year to complete. The Company achieved a NASDAQ uplisting in 3.5 months from the final closing of the first financing (the quickest RTO in history to do so) and was recently upgraded to NASDAQ Global Market. Management is committed to become one of the best public companies that is serious about creating shareholder value.

    Zach: Now that the company is a U.S. publicly traded company, does the management feel that there is a stigma attached to the company because it is a reverse merger?

    Ms. Li: Yes, we do feel it.

    Zach: What actions can the management do to build confidence in potential US shareholders beyond obtaining KPMG as an auditor and paying a cash dividend? Are there any plans in place to implement these initiatives?

    Ms. Li: The most important thing management can and is doing to build shareholder confidence is to stay focused on servicing our customers and executing our growth plan to deliver what we promised to our shareholders. We are focused on being completely transparent through our communication efforts with shareholders to help them better understand our business and corporate practices.
    Properly setting and managing expectations builds confidence. In our short time as a public company, we have clearly articulated our growth strategy and successfully executed each of these initiatives on time and on budget. We are hosting many on-site investor visits that provide interested investors the opportunity to see for themselves and to have open, direct dialogues with management. Lastly, subsequent to our reverse merger we raised $20 million with PRAX Capital, a private equity firm focused on the greater China market. PRAX completed very thorough due diligence over a six month period and we believe this provides additional confirmation to US investors about the quality of Keyuan's management and business model. Please visit www. for more information.

    Zach: The reported results of many US listed, Chinese reverse-mergers have been compared to their SAIC filings with large discrepancies found. Is there a legitimate reason for large discrepancies between figures in the SAIC filings and those filed with the SEC?

    Ms. Li: In many cases I would not expect to see large discrepancies between those two sets of figures. However, there are cases where reconciliation can be made based on based on legitimate reasons to bridge bigger discrepancies.

    Zach: What are the drawback to US investors who use a company's SAIC filings as a proxy of business condition?

    Ms. Li: One of the drawbacks using simply SAIC filings as a proxy of business condition is that some US investors do not have certain necessary background information on SAIC filings to help them bridge the gap if they are any. Getting the full picture is important in making sound judgments. The most recent SAIC filing we had was the 2009 report showing about $14 million cumulative loss from 2007 to 2009. The China subsidiary was registered in 2007, started construction in early 2008 and started production and sales in Q4 2009. Our US filing for 2009 recorded one year's loss of about $9M including income tax benefit.

    Zach: Does the management foresee any potential events in the near future that may reduce its ability to refinance its revolving debt?

    Ms. Li: The company has maintained good relationships with several local and national banks, including China Construction Bank, Agricultural Bank of China, and Bank of China. We have successfully extended almost all revolving debts as we needed in the past year. With an adequate coverage ratio of EBITDA to interest and debt service, we do not see any adverse events at this point that will reduce our ability to refinance revolving debt as we continue to strengthen our relationship with the lending community.

    Zach: In the SEC filings, there was mention of a Circular 698 and its potential effect on Keyuan. I did not entirely understand the implications of this. Would you mind going into a little detail about what it is and how it may affect the business?

    Ms. Li: Since Circular 698 has a short history, there is uncertainty as to its application and its enforcement scope is still subject to interpretation by PRC tax authorities. However, our understanding is that the purpose of Circular 698 is to prevent PRC shareholders from using off-shore companies to avoid PRC tax. In the event that the tax authorities determine that a reasonable commercial purpose for the offshore holding companies, other than the avoidance of PRC income tax liability is lacking, the PRC tax authorities will have the power to re-assess the nature of any equity transfers under the doctrine of substance over form. According to Circular 698, in case the operating company is a PRC company while the offshore holding companies are only shell/holding companies which are located in a country or jurisdiction where the effective tax burden is less than 12.5% or where the offshore income of its residents is not taxable, any transfer of the equity shares in the offshore holding company (excluding shares in PRC-resident enterprises both bought and sold in the public securities markets) would also be subject to PRC taxation. For example, the exercise of "slow-walk" options agreements may be subject to Circular 698 and likely to come under greater scrutiny by PRC tax officials and regulators. However, since buying or selling shares in the public market is a normal commercial transaction and itself can serve as evidence that such a transfer has reasonable business purpose (not for the purpose of avoidance of PRC tax), buying and selling shares in public market is not subject to Circular 698. Therefore, we don't see Circular 698 as a practical concern to our public shareholders.

    Zach: Has it been determined if dividends to Keyuan from its operating subsidiaries in China will be subject to the 10% tax under new EIT laws?

    Ms. Li: We are in the process of finalizing all accounting and tax considerations related to the dividend payment.

    Zach: In the most recent 10Q, estimations of completed construction of certain facilities were given. Estimated revenues and profits were given for the SBS building. Are there any forecasts as to the impact on revenues and net income from the completion of the asphalt facility or the pre-treatment facility?

    Ms. Li: Projected annual revenue and net income from the asphalt facility will be approximately $300 million and $30 million respectively, with full year benefit starting 2013.

    Zach: When are the company's 2010 year end results expected to be out?

    Ms. Li: The filing deadline for Keyuan's 2010 10k is March 30. We expect results to be out around mid-March and will announce the specific data about 1 week in advance.

    Zach: Is there anything that you would like to include in the article or anything that you would like potential US shareholders to know?

    Ms. Li: It is important that investors understand that Keyuan differentiates itself from the competition through its technology advantage and innovation. We are different because of our ability to utilize heavy oil in the production process. Given that our input costs are less than our competitors, we operate with a better margin profile which translates into higher cash flows. We continue to improve our production processes and develop new products to ensure we stand strong in the competition.
    Keyuan has strong regional demand for its products with close proximity to local buyers. This, too, adds to sales potential, as well as minimizing transportation pricing impact.

    In addition, Mr. Tao, our Chairman and CEO served as President of two companies in Ningbo, Hebang Chemical and Daxie Liwan Petrochemicals, which were both purchased for more than $1 billion from CNOOC. He has deep industry experience and has been able to build companies from the ground up to monetization. He is also one of the principle shareholders of Keyuan and so his goals of maximizing value are completely aligned with the US investors.

    Currently, Reuters, Bloomberg, Yahoo, and others still reflect a market cap of only $19 million. That's because these companies only recognize the common share count from the latest 10Q or 10K filing and as a policy don't recognize preferred shares. That last 10Q filing recognizes the share structure as of 09/30/2010. When you account for all preferred shares that were converted to common shares in November 2010, the correct market cap is over $325 million. These publications will reflect the higher figure when the 10K is filed in March 2011.

    Jan 31 6:51 PM | Link | Comment!
  • My Portfolio in 2010

    The Year 2010 in Review

    I ended the year 2009 and started the year 2010 by making significant changes to my portfolio. I sold off all of my holdings in US Steel (ticker: X) at gains of about 35%. I sold 15% of my holdings in Bank of America (ticker: BAC) for a 53% gain. I sold 15% of my shares in EXM at a modest gain. I sold all of my holdings in General Electric for a 20% loss.  I also added some new positions. I initiated positions in Shengkai Innovations (ticker: VALV) and Delphi Financial Group (ticker: DFG) during the first week of January. After that first week in January my portfolio was as follows:

    Google (ticker: GOOG)
    Bank of America (ticker: BAC)
    Shengkai Innovations (ticker: VALV)
    Delphi Financial Group (ticker: DFG)
    Excel Maritime (ticker: EXM)
    KHD Humboldt Wedag (ticker: KHD)

    At the time I was heavily weighted in financials with Bank of America accounting for over 30% of my portfolio and Delphi Financial accounting for another 15% or so.  In April, after the prices of just about everything had run up I sold all of my holdings in Delphi Financial Group for a 21% gain. I felt that the price had run up too far too fast even though it was still under my target value for the company. I also saw opportunitities elsewhere. At the time Goldman Sachs's stock had cratered because of the news of the SEC investigation and I still liked the way financials looked so I purchased it with the proceeds.

    During the course of the year I began kicking myself for ever having initiated a position in Excel Maritime. EXM was one of my top picks back in 2008 when it had a book value of near $30 a share but was only selling for $7.75 or so. This, of course, was before the huge amounts of dilution that followed and the renegotiation of several debt covenants and etc. I wish I would have followed the sage advice that “it’s better to buy a good company at a fair price than a fair company at a good price.” In this case I was fairly certain that I had not even picked a fair company. I ended up selling all of my holdings in EXM in June for a sizeable loss (even after a year of selling covered calls on it to make some of the returns back). I was still bullish on the prospect for the dry-shipping sector and decided to find the best company in the sector, not weighted down by loads of debt, to place my bet on. I initiated a position in Safe Bulkers, Inc (ticker: SB).

    Around this time I also began looking into real-estate. What better place to look for yields than the sector everyone hates, right? I initiated a position in Chimera Investment Corp. (ticker: CIM) to gain exposure and to receive some fat yields.

    Lastly, my newest position is back to financials. I purchased shares in Fairfax Financial Holdings (ticker: FRFHF.PK). This gave me my exposure to fixed income investments without actually having to purchase any bonds and gave me access to a great money manager at a price just a hair above the company’s book value.

    At year end my portfolio is as follows:

    Bank of America May 2011 Call Options, 7.00 strike price (11% of portfolio)

    I sold all of my holdings in Bank of America after it fell from $19 to $12. This resulted in about a gain of 12%. I was still confident that the bank would do well, and that it had the potential to go back to $19 and beyond, but, I also realized that it was going to take more time than I had initially thought. I purchased call options that were deep in the money with a delta of 1. This essentially protects me from a total loss on the options because it is unlikely they will expire worthless and by purchasing an option with a delta of 1 I get all of the same upside as the stock but with less potential downside in the event of a downturn. With options I can also control the same numer of shares for a fraction of the price. As of the close on Dec. 31, I am up 28% on this position since November 2010.

    Chimera Investment Corp (ticker: CIM) (11% of portfolio)

    I purchased Chimera at $3.89 back at the end of July. I wanted exposure to the REIT industry while being overcompensated for the risk I was taking. Chimera initially caught my eye with its high-yield. I actually had a negative opinion of it at first because of the fact that it was one of the highest yielding stocks in its sector. (I had previously been burned by “high-yielding” stocks that cut their dividends soon after I purchased them: namely BAC and EXM).  I did look into it and have been impressed with everything I’ve learned since. Most of their mortgages are owned by people with relatively good credit and who had equity in their homes at the time of purchase (though it’s hard to know of how much, if any, equity still exists). Chimera’s management team is a wholly owned subsidiary of Annaly (ticker: NLY), all of Chimera's employees work for Annaly, and Annaly owns 5% of Chimera. I have been told you cannot go wrong with Annaly’s management team and upon research I noted Annaly has done well for its investors in the past. 50% of their portfolio is in ARM which will adjust in the next few years making Chimera one of the most flexible REITs in the face of rising interest rates. Lastly, insiders had been buying a lot of shares throughout 2008 and 2009 which I always take as a good sign. I initiated a position, have added to it, and am up 11% on the entire position since since July.

    Fairfax Financial (ticker: FRFHF.PK) (13.5% of portfolio)

    There was a time that people were worried about deflation. Some may still be and rightly so. If interest treasury rates follow the formula "nominal = real + expected inflation" then you just plug in number and solve. Nominal one-year treasury rates are 0.26%. A conservative risk-free real rate of return is assumed to be 1% a year. If this assumption is correct and these figures continue, we have to have deflation of 0.74% a year for it to equalize. 
    I wanted a position that would do well in the event of deflation but I also wanted the flexibility of doing well in case I was wrong. Insurance companies appealed to me, not only because of their incredible business model, but because they typically have large fixed income holdings and fixed income investments typically do well in deflationary periods. Fairfax has an incredible track-record and Prem Watsa is supposed to be one of the better investors of our time. With his track record in returns on bonds and equities and the company’s track record of compounding book value at 12-15% per year I figured I couldn’t go wrong. On top of all of this, the company’s entire equity position was hedged. This prevents any gains from equity positions in the short term but it also prevents against their loss which was something attractive given how concentrated my portfolio was with 99% invested in equities and the threat of deflation. This was my hedging bet as well as a long-term hold. I am currently up 0.76% on this position since its initial purchase at the end of September (I have added to it since).

    Google (ticker: GOOG) (16% of portfolio)

    My initial purchase of Google was motivated by my feelings towards the company. It is my favorite company and I wanted to be a stockholder….but…I couldn’t afford it at pre-recession levels. I bought at $480 back in 2008. I watched it from there and it bought again at $311 in January of 2009. I just did not get why it was selling for so cheap. It had slowed growth but was continuing to post double-digit growth in earnings, was still growing its market share globally and abroad, and was making acquisitions that were bound to help it in the future (Android and DoubleClick) and it was only selling for a P/E of 15. On top of all of this it had several billion dollars in cash and is a cash flow generating machine. I quadrupled my position at the price of $311. I purchased again at highs of $610 in January 2010 just because I was confident Google was a relatively safe-bet (though 2010 turned out to be a rough year for the company). I’m still confident in this company’s ability to generate free cash flow. They are the largest and most widely used search engine with text ads, after the acquisition of DoubleClick they owned the largest display advertiser with the largest network of display advertising users, and upon the completion of AdMob they owned the largest mobile advertiser. Now they are starting with Google TV and own YouTube which gets more than 2 billion hits a day. What does this mean? This means if you’re an advertiser and you want to display mobile ads, internet ads (text or display), online video ads, or TV ads (in the future), you are likely to go through Google. I’m confident this will only lead to increased cash flows for the company. I am currently up 46.54% on my entire position since its initial purchase in July 2008.

    Goldman Sachs (ticker: GS) (16% of portfolio)

    I purchased Goldman when the SEC started investigating the company. The stock tanked! On top of all of that, I didn’t feel like they had done anything legally wrong. I agreed that more disclosure should have been made but did it really matter that John Paulson helped make those investments to facilitate his bearish bets? Those investors knew what securities made up the product and bought it because they thought they were going up, John Paulson thought they were going down. Goldman Sachs is a market maker, not an investment advisor, and if you want to purchase something they make a market for it. Why should they be punished for selling investors what they wanted? The investors were wrong, John Paulson was right, and Goldman ended up being the scapegoat over someone’s hurt pride. So I purchased fully expecting the investigation to find no wrongdoing. This also gave me a fair price to enter into one of the best in the field. I was disappointed with the $500 million settlement but that is politics. I am up 7.7% since my purchase in April 2010 despite earnings trending lower all year.

    KHD Humboldt Wedag (ticker: KHDHF.PK/TTT) (8.5% of portfolio)

    This has been a very interesting investment. I purchased at $11.85 back in November 2009 for two reasons: the company had $13 a share in cash and had wide exposure to emerging markets which should drive future growth. The  $13 per share in cash was in prepayments for services, so it wasn’t strictly “cash” but it was money that the company had to fund its current operations and it was in no danger unless if there was a double-dip (which I thought was unlikely at this point). KHD changed its name to Terra Nova Royalty Co. (ticker: TTT), a mineral royalty company, and spun off its cement/engineering subsidiary KHD Humboldt Wedag(ticker: KHDHF.PK) as a stock dividend. Soon after, TTT purchased Mass Financial (Michael Smith controlled both companies) and changed its accounting standards allowing it to recognize a substantial gain in book value. Currently, more than half of TTTs market cap is valued in the cash they hold and they are searching for other royalty acquisitions. At a trailing P/E of 9, a lot of cash to produce future returns and a dividend policy in 2011, TTT still looks attractive. KHD trades at a trailing P/E of 5 and has exposure to emerging markets as they continue to do well. I believe both of these companies have legs to run. Combined, I am up 30% since my initial purchase in November 2009.

    Safe Bulkers, Inc (ticker: SB) (10.7% of portfolio)

    Safe Bulkers is my new play on the dry shipping industry. People have been worried about the over-indebtedness of several players as well as oversupply in the industry hitting in 2010, 2011, and 2012. Safe Bulkers is smaller than a lot of its peers and did not overextend itself as did Excel Maritime (ticker: EXM) and Dryships (ticker: DRYS). I actually sold my holdings in EXM to purchase Safe Bulkers. I liked a lot about SB. It had a 7+% dividend that was easily sustainable given current cash flow rates, had high margins to protect its profits, had a young fleet to keep maintenance costs low, chartered most of its ships on stable time charters, and had plans to expand by over 50% in the next three years using debt AND equity. I felt that this company is conservatively managed and it was far undervalued at the time looking at its future cash flows from current charter arrangements just four to five years out. On top of all of that, I did not think oversupply within the industry would be a HUGE problem like everyone thought it would be. In 2009, more than 50% of ships were canceled that were due to be delivered and I figured that a similar occurrence would happen in 2010. More recently I learned that about 20% of the current fleet will likely be scrapped in the next 5 to 10 years due to age. Rates may stay low and supply may remain high for the short term but in the long–term I only see rates going up. If I can get a company paying a sustainable 7% dividend to be reinvested for three years before rates improve (and along with it the stock price) then I’m fine with waiting. Especially given that the company is now increasing its fleet from 15 to 23 ships. I am up 26.5% since my purchase at $7.26 at the end of June 2010.

    Shengkai Innovations (ticker: VALV) (13% of portfolio)

    I stumbled upon Shengkai Innovations using Joel Greenblatt’s Magic Formula screen back in January 2010. It had just listed on the AMEX, had huge growth rates in the high double digits and was only trading for a P/E of about 10 at the time. I purchased a small amount at $5.64. By mid-February it had hit $9.95 and I had been purchasing all the way up. There was also news of the company nearing completion of a new factory that would triple its output (which started full production this month). Through the year 2010 the growth in revenues and net income was everything that I expected it to be; however, the stock fell from $9.95 to its current price of $5.60 and never regained its high due to a couple significant occurrences. The first one was the suspicion that was aroused towards Chinese reverse mergers being fraudulent companies. Several of them have been so it’s no surprise that the entire market of reverse mergers suffered. On top of that are investors worrying about dilution. Shengkai has 23 million shares outstanding at the moment but has issued enough warrants and options to dilute that number to 42 million and there have been no signals of slowing down. On the contrary, the company voted to up its limit on shares outstanding from 50 million to 100 million. While the growth of this company has been incredible and my research has convinced me of its legitimacy as a company, the constant dilution threatens this as a good investment. My analysis on the company suggests that it is still an attractive buy with 50 million shares outstanding so I am holding onto my position to see what happens though I am not adding even at these currently attractive prices. If dilution does not slow down and earnings cannot keep up with the rate of loss due to dilution I will sell my position. There is one positive to all of the dilution that has been going on though and that is increased liquidity. There were several months in 2010 where less than 2,000 shares traded each day and some days it was less than a few hundred. Since their two most recent stock offerings average three-month volume has been between 15,000 and 20,000 making it far easier to enter and exit positions though still far from liquid. I am down 14% since my initial purchase in January 2010.

    Overall, I’m looking forward to a good 2011. I feel most of these positions have further to run and I am not currently looking at selling any of them (with the possible exception of Shengkai Innovations ). I know there is a lot of concern of the rally continuing but I have a longer time horizon than one year. Companies in the US have deleveraged, trimmed fat, and have the most cash since the 1950s. The companies today are exponentially more attractive than they were just three years ago and I’m looking forward to sustained growth from quality companies over the next several years even if there are “corrections” in 2011 or 2012.

    I really think the two largest dangers to the US economy are high unemployment (which may trend downwards in 2011 if jobless claims are to be believed) and housing. Housing will take the better part of a decade to recover and I see further drops in home prices and increasing defaults through 2012. That is the nature of the beast but if you can pick stocks well, then these past two years and the two going forward may be some of the best opportunities to pick up quality companies that you will experience for some time.
    Dec 31 4:07 PM | Link | Comment!
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