Motiwala Capital Q4 2012 Letter To Investors

by: Adib Motiwala

Dear Investors,

The year 2012 ended on a strong note with the US equity market as reflected by S&P 500 up 16%. Motiwala Capital also had a good year with accounts in place for a full year outperforming the index.

2012 Performance

Overall performance in 2012 was good with two winners for every down position. Our biggest winners by total return were Sauer-Danfoss (50%), CSG Systems (40%), Conrad Industries (36%), Western Digital (35%), UFP Technologies (20%) and Mind CTI (17%). We had a 95% success rate on special situations in 2012 with 39 of 41 investments profitable and positively contributing to portfolio returns. The positions that detracted from performance were: Big Lots (-25%), Aeropostale (-15%), and Vodafone (-10%).

Motiwala Capital can manage individual, joint, trust and IRA including 401(NYSE:K) to IRA rollovers. For more information on the firm, please check out our website ( which contains past letters, presentations, and interviews with Manual of Ideas. Here is the link to the most recent interview.

Portfolio Composition

Our portfolios are divided into two sections. The 'Generals' are equity investments that fit the value framework. We have 16 such positions that make up about 60% of the portfolio. The rest of the portfolio is currently in special situations (short term investments with a specific event that unlocks value) or cash which can vary at any time. The top 5 positions add up to 30% of the portfolio.

Portfolio Characteristics

Weighted average P/E = 10 (P/E is based on 12-month trailing earnings)

'Generals'/Invested portfolio dividend yield = 3% (1.8% on the entire portfolio)

Weighted average Market Cap = $31.5 billion

Price to Value

For every stock we purchase, we estimate a range of fair values. We compute a ratio of current market price (price) to estimated value (value). We monitor our current and watch list investments and the entire portfolio using this price to value. Price to value on the invested portfolio was 0.8

Current Portfolio (Some clients will not have all positions and in the same weights)

Company name (Ticker)

% of portfolio

Western Digital (NYSE:WDC)


Vodafone (NASDAQ:VOD)


Kohls (NYSE:KSS)


Conrad Industries(OTCPK:CNRD)


Lear Corp.(NYSE:LEA)


Big Lots (NYSE:BIG)


Aeropostale (NYSE:ARO)




Microsoft (NASDAQ:MSFT)




Becton Dickinson (NYSE:BDX)


Halfords (OTCPK:HLFDY)


Dolby (NYSE:DLB)


National Oilwell Varco (NYSE:NOV)


Gamestop (NYSE:GME)




We have invested across the market cap spectrum and are market cap agnostic.

We do not go out seeking specific investments by sector. We make our investments one stock at a time. However, as part of risk management, we want to make sure that our investments are across multiple sectors.

Portfolio Activity

Special Situations: Share and Closed End Fund (CEF) tenders

We participated in one CEF tender and five share tenders which were profitable.

Special Situations: Merger Arbitrage

We bought shares of Dollar Thrifty (NYSE:DTG) as the spread on the pending acquisition by Hertz (NYSE:HTZ) ballooned to 16% two weeks before the expiry of the tender. Within a week, the spread fell to 2% and we exited the position. The position in Shaw Group (NYSE:SHAW) was initiated in Q3 2012 when the spread ballooned to 20%. As the spread fell to 3%, we closed the position.

Special dividends: Last year two portfolio companies declared special dividends. Once again this year two companies, Conrad (OTCPK:CNRD) and Dolby, declared special dividends of $2/share and $4/share respectively. These amounted to about 11% yield on the stock prices for the two companies. We prefer to buy cash rich companies which produce steady cash flows and are at attractive valuations. Such companies are in a position to take shareholder friendly actions such as dividends, buyback of shares, reducing debt, investing in the business or ride out tough times.

Generals: Portfolio exits:

Sauer-Danfoss (NYSE:SHS) was our most recent position initiated only in the last quarter. SHS was majority owned by Danfoss A/S. Danfoss A/S bid for the 25% shares that it did not own at $49 a share. We sold around $51 for a 50% gain for few months of ownership. We were quite happy with the outcome in a relatively short ownership period.

Iconix Brand Group (NASDAQ:ICON) was purchased in Q1 2012. We liked the asset light business model that earns royalty income by licensing its brands to its partners. While we liked the valuation, it had a bit more debt than what we usually prefer in our investments. In the previous quarters, ICON had been buying back shares and we were happy with that approach. Results since purchase had been flattish as some of their brands were facing tougher times. In Q4, ICON announced that they were buying the Umbro brand from Nike for about $225 million. While the market seems to like the latest deal, I was concerned with the increased leverage and that management was intent on growing the topline rather than retire cheap shares. We sold the entire position for a 10% gain.

Generals: New Positions:

Dolby Labs (DLB) develops and licenses sound technologies that create a more enjoyable listening experience and are used in movie soundtracks, DVDs, television, satellite and cable broadcasts, video games, and personal computers that provide surround sound and noise reduction. DLB has been out of favor due to flat revenues over the last couple of years mainly due to the slowdown in the sales of PCs and DVD players. We like DLB as it has leading market share, sports operating margins of 40%, has a strong balance sheet with $1.1 billion in cash and investments in a $3.3 billion market cap and produced free cash flow of $223 million in FY2012 (with $100 million spent on a new building). DLB is increasing penetration in smart phones and will be included in all Windows 8 devices. After we purchased our position, DLB paid out a special dividend of $4/share in December 2012.

Kohl's Corp (KSS) operates 1,134 family-oriented department stores that sell moderately priced apparel, footwear and accessories for women, men and children; soft home products such as sheets and pillows; and housewares. KSS has competitive advantage over their competition as their stores are smaller in size, in non-mall locations, have lower rents and lower SGA per store. Sale per square feet is also higher as a result of more efficiently run stores. KSS produces consistent free cash flows and has been aggressively buying back shares. Share count is down from 300million in 2010 to 230million. KSS started paying a dividend in 2011 and increased it by 28% to yield close to 3% with a 28% payout. KSS valuation at 11x FCF is quite compelling.

National Oilwell Varco (NOV) is the largest provider of equipment for oil and gas drilling. We like NOV as it gives us exposure to the growing field of off-shore oil drilling, with a solid competitive position, strong debt free balance sheet, producing solid cash flow from operations. NOV has grown both organically and via several acquisitions over the years. Despite the share count dilution over the years, sales, earnings and cash flow on a per share basis are up 16%, 30% and 29% respectively.

Generals: Reduced positions:

We reduced our positions in Halfords (OTCPK:HLFDY) and Gamestop (GME) as share prices rebounded strongly from recent lows over the last few months. We also reduced our stake in Becton Dickinson (BDX) on account of disappointing results, with slow growth and potential headwinds from increased taxes. The stock appears more or less fully valued.

Generals: Increased positions:

We increased our positions in Western Digital (WDC), Conrad Industries (OTCPK:CNRD) and Big Lots (BIG). WDC and BIG suffered large drops in share prices. In the case of BIG, results in Q1 and Q2 were disappointing with bleak near term outlook. We had written positively about BIG in our Q1 report and maybe we jinxed it. It has had a rough ride since then and traded below our cost basis. BIG's CEO Fishman recently announced his retirement and it remains to be seen how things pan out. We will remain patient and vigilant. In the case of WDC, the large drop from $45 to low $30s made little sense and we increased our position aggressively. WDC has been a frustrating stock to own. While the business has continued to execute superbly, the stock continues to see-saw endlessly. WDC ended the quarter on a strong note back in the $40s. CNRD continues to execute and we decided to increase our position. It is one of the cheapest stocks we own even after the nice run it had in 2012. CNRD also paid out a $2/share special dividend.

Conclusion: 2012 marked the end of the first full calendar year of investment operations at Motiwala Capital. Special situations contributed meaningfully to our accounts' performance in 2012. We have recently started managing a 'special situations only' portfolio for a few clients from this quarter. If you have any questions or want to know about our performance, please don't hesitate to contact me.

We wish everyone a prosperous and happy new year 2013.


Adib Motiwala

Portfolio Manager

Disclaimer: This commentary candidly discusses a number of individual companies. These opinions are current as of the date of this commentary but are subject to change. All information provided is for information purposes only and should not be considered as investment advice or a recommendation to purchase or sell any specific security. While the information presented herein is believed to be reliable, no representations or warranty is made concerning the accuracy of any data presented. This communication may not be reproduced without prior written permission from us.

Past performance is not indicative of future results. Actual returns may differ for each client from the returns presented. Each client will receive a monthly statement from the custodian. Portfolio level performance numbers have not been reported in this letter. If you wish to receive this information, please contact me directly.

Disclosure: I am long WDC, VOD, KSS, LEA, BIG, ARO, MNDO, MSFT, BDX, DLB, NOV, GME, GRVY, OTCPK:HLFDY, OTCPK:TSCDY, OTCPK:CNRD. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.