Tracking Allan Mecham's Arlington Value Capital Portfolio - Q3 2015 Update

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Includes: BAC, BRK.A, BRK.B, CHEF, CMPR, CPRT, DNOW, DSWL, FWONA, FWONK, HEI, IBKR, LTRPA, LTRPB, LUK-OLD, MSM, OUTR, QRTEA, QRTEB, SNE, TRIP
by: John Vincent
Summary

Arlington Value Capital's 13F portfolio increased from ~$716M to ~$745M. The number of positions increased from 13 to 15.

Allan Mecham increased Cimpress NV, Berkshire Hathaway, MSC Industrial Direct, and Now Inc., while dropping Bank of America.

The top three positions are Cimpress NV, Berkshire Hathaway, and Now Inc., and they add up to almost ~50% of the portfolio.

This article is first in a series that provides an ongoing analysis of the changes made to Allan Mecham's US stock portfolio on a quarterly basis. It is based on Mecham's regulatory 13F Form filed on 11/16/2015.

Allan Mecham founded Arlington Value Capital in 1999. Its annualized returns are impressive at ~19%. What is more impressive is that the performance accelerated as the assets grew: per their 2014 annual letter to investors, they had an outstanding run of 37.9% annualized returns over 6.5 years, compared to 9.9% annualized for the S&P 500. Mecham's investment style is in the classic value investment mold, and is very conducive to cloning: concentrated positions and long holding periods.

The fund's Assets Under Management (AUM) is at around $750M, and almost all of it is invested in US equities. Recent 13F reports have shown around 12 positions. Typical position sizing is ~10% of the portfolio. The AUM has accelerated in recent quarters, having almost doubled from Q1 2014.

This quarter, Mecham's US long portfolio increased 4.09% from ~$716M to ~$745M. The number of holdings increased from 13 to 15: a large position in Bank of America was eliminated during the quarter, and three small new positions were added. The top three holdings are at almost 50.17%, while the top five holdings are at 70.23% of the US long assets: Cimpress NV, Berkshire Hathaway, Now Inc., Interactive Brokers, and MSC Industrial Direct.

Stake Disposals:

Bank of America (NYSE:BAC): BAC was the second-largest position at 13.87% of the US long portfolio as of last quarter. It was in the portfolio since the fund's first 13F filing in Q4 2012. The last significant buying happened in Q3 and Q4 2014 at prices between $15 and $18 - around 2.6M shares were purchased during those two quarters. Last quarter had seen a ~10% trimming. The elimination this quarter happened at prices between $15.26 and $18.45. The stock is currently at $17.44.

New Stakes:

Liberty Media (LMCA, LMCK), Liberty Tripadvisor (LTRPA, LTRPB]]), and Tripadvisor Inc. (NASDAQ:TRIP): These are very small (less than ~1% of the portfolio each) stakes established this quarter. The position sizes are too small to indicate a clear bias.

Note: Liberty Tripadvisor is a spin-off of Liberty Interactive's (QVCA, QVCB) Tripadvisor stake. It started trading in August 2014.

Stake Decreases:

The Chef's Warehouse (NASDAQ:CHEF): CHEF is a small 2.16% of the portfolio stake purchased in Q2 2014, and doubled the following quarter at prices between $16.32 and $20.74. The stock currently trades at $19.47. The last four quarters have seen a combined one-third reduction at prices between $15.75 and $23.39.

Stake Increases:

Berkshire Hathaway (BRK.A, BRK.B): BRK.B is a long-term holding that has been in the fund's portfolio for many years. The current position is the second largest at 16.44% of the portfolio. Last quarter saw a ~140% increase at prices between $136 and $145, and that was followed by another ~120% increase this quarter at prices between $128 and $145. The stock is currently at $135.

Note: Mecham disclosed that Arlington had a very successful previous round-trip with Berkshire Hathaway: ~170% realized gains during 41 months of ownership that ended in 2014. Berkshire Hathaway stock returned around half that during the period, and Mecham's performance was boosted as the position was leveraged.

Cimpress NV (NASDAQ:CMPR): CMPR is Arlington Value Capital's largest individual stock position at 22.78% of the portfolio. It is a long-term stake that has been in the portfolio since the firm's first 13F filing in Q4 2012. The bulk of the current stake was purchased in Q1 and Q2 2013 at prices between $32 and $49. The stock currently trades at $91.19. Q4 2014 saw a ~20% reduction at prices between $54 and $76. The last two quarters had seen minor buying. This quarter saw a huge ~87% increase at prices between $64.53 and $84.51.

Interactive Brokers (NASDAQ:IBKR): IBKR is a top-five 10.17% stake purchased in Q4 2014 at prices between $23.79 and $29.37. The following quarter also saw a roughly one-third increase at prices between $28 and $34. The last two quarters have also seen minor increases. The stock currently trades at $43.58.

Leucadia National (NYSE:LUK-OLD): LUK was a very small ~1% position in 2013. During the last two quarters of 2014, the original position was increased by a whopping 15x at prices between $21.80 and $24.41. The stock currently trades below that range at $17.95, and the position is now at 8.07% of the portfolio. The last three quarters have also seen additional buying. For investors attempting to follow Mecham, LUK is a good option to consider for further research.

MSC Industrial Direct (NYSE:MSM): MSM is a top-five 9.89% of the portfolio stake established in Q1 2015, and almost doubled the following quarter at prices between $69 and $81. This quarter saw another ~35% increase at prices between $61 and $72. The stock currently trades very near the low end of his purchase price ranges at $61.23. For investors attempting to follow Mecham, MSM is a good option to consider for further research.

Now Inc. (NYSE:DNOW): DNOW is a large (top-three) 10.96% of the US long portfolio position established in Q3 2014. The bulk of the buying happened the following two quarters at prices between $20.50 and $30. The stock currently trades at $18.31. Last quarter had seen a ~10% trimming. This quarter saw a ~52% increase at prices between $14.80 and $19.91.

Outerwall Inc. (NASDAQ:OUTR): OUTR is a large position at 9.17% of the US long portfolio. It was established in Q2 2014 and increased by ~120% the following quarter at prices between $53.66 and $72.22. The stock currently trades at $64.64. The last three quarters have also seen minor buying.

Sony Corporation (NYSE:SNE): The 8.5% of the portfolio SNE stake was purchased in Q2 2014 at prices between $16.10 and $19.03. The following quarter saw a ~40% increase at prices between $16.66 and $19.82. Last quarter, the pattern reversed: ~30% sold at prices between $28.39 and $32.74. There was a marginal increase this quarter. The stock currently trades at $26.51.

Copart Inc. (NASDAQ:CPRT) and Heico Corp. (NYSE:HEI): These two very small stakes (less than ~0.5% of the portfolio each) were increased marginally this quarter.

Kept Steady:

Deswell Industries (NASDAQ:DSWL): DSWL is a minutely small 0.02% of the US long portfolio stake, kept steady this quarter.

The spreadsheet below highlights changes to Mecham's US stock holdings in Q3 2015:

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.

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