Tracking Allan Mecham's Arlington Value Capital Portfolio - Q3 2016 Update

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Includes: APO, AWI, BAC, BRK.A, BRK.B, CHEF, CMPR, CPRT, DNOW, DSWL, HEI, IBKR, LB, LBTYK, LTRPA, LTRPB, LUK-OLD, MCO, MSM, OUTR, QRTEA, QRTEB, RAVN, TRIP, VIAB, VMI, WFC
by: John Vincent
Summary

Arlington Value Capital’s 13F portfolio decreased from $902M to $862M. The number of positions decreased from 19 to 17.

Allan Mecham increased Bank of America & Wells Fargo while reducing NOW Inc.

The top three positions are Berkshire Hathaway, Cimpress N.V., and Leucadia National and they add up to almost ~57% of the portfolio.

This article is part of 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 11/14/2016. Please read our Tracking Allan Mecham's Arlington Value Capital Portfolio article for an idea of his investment philosophy and our last update for the fund's moves during Q2 2016.

This quarter, Mecham's US long portfolio decreased ~4% from $902M to $862M. The number of holdings decreased from 19 to 17. The top three holdings are at ~57% while the top five are at ~75% of the US long assets: Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B), Cimpress N.V. (NASDAQ:CMPR), Leucadia National (NYSE:LUK-OLD), NOW Inc. (NYSE:DNOW), and Interactive Brokers (IEX:IBKR).

To know more about value investing, check out Value Investing: A Value Investor's Journey Through The Unknown.

Stake Disposals:

The Chef's Warehouse (NASDAQ:CHEF): CHEF was a small 0.91% of the portfolio stake purchased in Q2 2014 and doubled the following quarter at prices between $16 and $21. The seven quarters thru Q2 2016 had seen a combined reduction of ~72% reduction at prices between $11 and $23. The disposal this quarter was at prices between $10.50 and $16 and the stock currently trades at $12.85.

L Brands Inc. (NYSE:LB): LB was a ~4% of the portfolio stake purchased last quarter at prices between $60.50 and $88 and sold this quarter at prices between $67 and $78. The stock is now at $68.71.

Outerwall Inc. (NASDAQ:OUTR): OUTR was a ~5% of the US long portfolio stake. It was established in Q2 2014 and increased by ~120% the following quarter at prices between $53.50 and $72. There was another ~20% increase in Q4 2015 at prices between $37 and $66. The pattern reversed in Q1 2016: ~42% reduction at prices between $26 and $39. Last quarter saw a ~30% increase at prices between $36 and $45. The position was eliminated as Outerwall was taken out in a private equity transaction led by Apollo Global (NYSE:APO) at $52 per share in a deal that closed in September.

TripAdvisor Inc. (NASDAQ:TRIP): The TRIP stake established in Q3 2015 was doubled to a fairly significant ~3.50% portfolio position in Q4 2015. The buying happened at prices between $63 and $93. Q1 2016 saw a ~40% selling at prices between $54 and $85 and the disposal this quarter was at prices between $60 and $71. The stock is now below those ranges at $50.02.

Liberty TripAdvisor (NASDAQ:LTRPA) (NASDAQ:LTRPB): This was a minutely small 0.05% portfolio stake that was eliminated this quarter.

Note: Liberty TripAdvisor is a spinoff of Liberty Interactive's (QVCA) (QVCB) TripAdvisor stake. It started trading in August 2014.

New Stakes:

Armstrong World Industries (NYSE:AWI), Liberty Global (NASDAQ:LBTYK) (NASDAQ:LBTYA), and Viacom (NASDAQ:VIAB): These are very small (less than ~1% of the portfolio each) stakes established this quarter. AWI is a 0.78% position purchased at prices between $37.71 and $45.51 and the stock is now at $40.60. LBTYK is a minutely small 0.12% portfolio stake established at prices between $27 and $33 and it currently goes for $30.41. VIAB is a ~1% position purchased at prices between $35 and $46 and it currently trades at $38.61.

Stake Decreases:

Cimpress N.V.: CMPR is Arlington Value Capital's second-largest individual stock position at ~21% 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 & Q2 2013 at prices between $32 and $49. Q4 2014 saw a ~20% reduction at prices between $54 and $76. Q3 2015 saw a huge ~87% increase at prices between $64.50 and $84.50. The stock currently trades at $83.29. There was a ~17% selling last quarter at prices between $88 and $100. This quarter saw a marginal further reduction. Mecham is starting to harvest gains.

Leucadia National: 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 $22 and $24.50. Q4 2015 saw a ~58% increase at prices between $16 and $21 and that was followed with a ~37% increase the following quarter at prices between $14.50 and $17.50. The stock currently trades at $20.87. This quarter saw a ~8% trimming.

Moody's Corporation (NYSE:MCO): MCO is a ~2% portfolio position established in Q1 2016 at prices between $78 and $100. This quarter saw a ~44% reduction at prices between $93 and $110. The stock currently trades at $99.29.

MSC Industrial Direct (NYSE:MSM): MSM is a large ~8% of the portfolio stake established in Q1 2015 and almost doubled the following quarter at prices between $69 and $81. Q3 2015 saw another ~35% increase at prices between $61 and $72. The pattern reversed in Q1 2016: ~20% reduction at prices between $56 and $76. The stock currently trades at $83.11. Last quarter saw a very minor increase while this quarter saw a marginal reduction.

NOW Inc.: DNOW is a large (top five) 8.79% 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. Q3 2015 saw a ~52% increase at prices between $15 and $20 and that was followed with another ~10% increase in Q4 2015. Q1 2016 saw an about turn: ~22% reduction at prices between $12.50 and $20. This quarter saw another ~23% selling at prices between $17.87 and $21.55. The stock currently trades at $19.68.

Stake Increases:

Berkshire Hathaway: BRK.B is a long-term holding that has been in the portfolio for many years. The current position is the largest at ~23% of the portfolio. The vast majority of the current stake was purchased during the five quarters thru Q1 2016 at prices between $124 and $152. The stock is currently at $157. Last quarter saw a ~5% trimming while this quarter saw a ~4% increase.

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.

Bank of America (NYSE:BAC): BAC is a 6.27% of the portfolio position established last quarter at prices between $12 and $15 and increased by ~28% this quarter at prices between $12.74 and $16.19. The stock currently trades well above that range at $20.16.

Interactive Brokers: IBKR is a top-five 8.68% stake purchased in Q4 2014 at prices between $24 and $29. The following quarter saw a roughly one-third increase at prices between $28 and $34. Last quarter also saw a ~10% increase at prices between $33.50 and $40. The stock currently trades at $38.11. There was a marginal further increase this quarter.

Wells Fargo (NYSE:WFC): WFC is a 6.24% of the portfolio position established last quarter at prices between $45 and $51 and increased by ~63% this quarter at prices between $44.28 and $50.80. The stock is now just above those ranges at $52.59.

Copart Inc. (NASDAQ:CPRT), HEICO Corp. (NYSE:HEI), Raven Industries (NASDAQ:RAVN), and Valmont Industries (NYSE:VMI): These four positions had minor increases this quarter. The position sizes are still too small (less than ~0.5% of the portfolio each) to indicate a clear bias.

Kept Steady:

Deswell Industries (NASDAQ:DSWL): DSWL is a minutely small 0.02% stake left untouched this quarter.

The spreadsheet below highlights changes to Mecham's US stock holdings in Q3 2016:

Disclosure: I am/we are long BAC. 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.

Editor's Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.