Arlington Value - New Picks From A Concentrated Value Investor

|
Includes: BAC, BRK.A, BRK.B, LTRPA, TRIP
by: Safety In Value

Summary

Arlington Value exited Bank of America prior to large decline.

It added back Berkshire Hathaway stake at a lower price.

The fund's new stake in TripAdvisor - a large opportunity for smaller investors.

Arlington Value is the hedge fund run by Allan Mecham. The fund is concentrated and tends to hold its positions longer term, which makes its SEC filings useful for long-term value investors searching for ideas. While cloning anyone, successful hedge fund manager or not, is not always a good idea, Mecham's picks are certainly worthy of additional research.

Arlington recently filed its positions from the end of 2015 with the SEC. The fund added 3 new securities positions in the second half of 2015. The first two are related to each other, being Liberty TripAdvisor (NASDAQ:LTRPA) and TripAdvisor (NASDAQ:TRIP). The last new position is calls on Outerwall (NASDAQ:OUTR), which is the first time in the few years I've been covering Mecham that I've seen a derivative position. Large increases in the number of shares occurred for Berkshire Hathaway (BRK.A, BRK.B), Cimpress (NASDAQ:CMPR) and Now Inc. (NYSE:DNOW), which are the fund's three current largest positions.

The sales are as interesting as the purchases, with a complete sale of the Bank of America (NYSE:BAC) position, along with material reductions in Sony (NYSE:SNE) and Chef's Warehouse (NASDAQ:CHEF).

The complete portfolio, along with the changes since my last update appears below.

NAME OF ISSUER Symbol Value ($000s) Shares at Year-End 2015 Shares at end of Q2 2015 Shares Purchased in 2H 2015
Bank of America BAC 5,836,328 (5,836,328)
BERKSHIRE HATHAWAY INC. CL A BRK.A 8,505 43 43 -
BERKSHIRE HATHAWAY INC. CL B BRK.B 139,974 1,060,090 393,333 666,757
CHEFS' WAREHOUSE HOLDINGS LL CHEF 11,111 666,154 1,187,968 (521,814)
CIMPRESS N V CMPR 191,839 2,364,305 1,190,042 1,174,263
COPART INC.

CPRT

4,353 114,538 102,150 12,388
DESWELL INDUSTRIES INC. DSWL 144 100,981 100,981 -
HEICO CORP. NEW - CL A HEI.A 1,439 29,261 6,961 22,300
INTERACTIVE BROKERS GRO-CL A IBKR 79,817 1,830,685 1,825,279 5,406
LEUCADIA NATIONAL CORP. LUK 81,506 4,686,991 2,852,643 1,834,348
LIBERTY TRIPADVISOR HDG-A- LTRPA 1,014 33,438 33,438
MSC INDUSTRIAL DIRECT CO-A MSM 67,013 1,190,925 895,884 295,041
NOW INC./DE DNOW 96,290 6,086,623 3,642,064 2,444,559
OUTERWALL INC. OUTR 50,644 1,386,001 1,101,493 284,508
OUTERWALL INC. (Calls) OUTR 2,017 55,200 55,200
SONY CORP. - SPONSORED ADR SNE 32,771 1,331,635 2,146,313 (814,678)
TRIPADVISOR INC. TRIP 27,624 324,040 324,040

Bank of America

The sale of Bank of America looks prescient at the current time, with its shares down 27% since the date of the filing. One major reason BAC has been punished lately is the flattening of the yield curve, ably described by Seeking Alpha article Josh Arnold here. There are a lot of "event-driven" effects in the mega-banks (CCAR, Fed rates, talk of breakups, etc.) which can drive prices materially in the short term. However, after the large decline, BAC trades at a material discount to tangible book value and is closing in on the levels where Arlington was adding, so I wouldn't be surprised to see this position reappear. One thing I've admired about the fund is the intellectual honesty to re-add positions it has previously sold. One great example of this is Berkshire Hathaway.

Berkshire Hathaway

Berkshire Hathaway's price has declined materially since Arlington sold last year, and is, in fact, nearing Buffet's buyback level. Interestingly, the carnage in the midstream and utilities sectors might provide some juicy opportunities for Berkshire Hathaway Energy to do tuck-in acquisitions. This is my favorite Berkshire wholly-owned subsidiary, as it can invest Berkshire's river of cash flow at strong and regulated rates of return. While I don't expect Berkshire to compound capital at the rates it has in the past (simply due to its size), the utilities market is huge and should provide the ability for ~10% growth in book value through reinvestment. If the company is able to buy these businesses at a discount (and recent purchases of Kinder Morgan (NYSE:KMI) stock indicate it's going to try), that has the potential to improve returns further.

For a review of all of Berkshire's major subsidiaries, see this article by Theodore Walker.

TripAdvisor

The only truly new company added to the portfolio in the last 6 months is TripAdvisor. This is the largest hotel review site in the world, and primarily makes money by selling advertising to online travel agents, as its users are in the market for a trip. An excellent overview of the online travel agency business is here, and is a must-read for anyone invested in the space.

TripAdvisor and Liberty TripAdvisor Holdings are essentially both bets on the same company. Each Liberty TripAdvisor share represents 0.42 shares of TripAdvisor for each of its own shares, plus additional voting rights. That would imply a valuation of ~$26 for each LTRPA share, while they actually trade at only $20.16. This is a 30% spread, and while it can be partially explained by the tax liability that would occur if LTRPA were to sell its shares (which have a low-cost basis), I believe that is unlikely to happen, as the John Malone companies have a long history of undertaking tax-efficient corporate machinations. Either way, those who want exposure to TripAdvisor should consider the LTRPA shares, assuming they don't have the liquidity needs of a large hedge fund. Liquidity is often expensive (which is why I think microcaps are often undervalued), and in my opinion, it doesn't make sense to pay for things you don't need. There is also potential for a pairs trade if you believe the discount will close.

In conclusion, the Arlington Value Fund is a large concentrated value fund, and understanding the rationale behind its picks has the potential to have both economic and educational value for the enterprising investor.

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.