Tracking Allan Mecham's Arlington Value Capital Portfolio - Q4 2019 Update

Summary

• Arlington Value Capital’s 13F portfolio value decreased from $1.53B to $1.47B. The number of positions remained steady at 15.
• Allan Mecham increased Alliance Data Systems while decreasing Berkshire Hathaway and AutoNation.
• The top three positions are Berkshire Hathaway, Cimpress NV, and Spectrum Brands, and they add up to ~60% of the portfolio.

This article is part of a series that provides an ongoing analysis of the changes made to Allan Mecham's 13F stock portfolio on a quarterly basis. It is based on Mecham's regulatory 13F Form filed on 02/14/2020. Please visit our Tracking Allan Mecham's Arlington Value Capital Portfolio article for an idea on his investment philosophy and our last update for the fund's moves during Q3 2019.

This quarter, Mecham's 13F portfolio value decreased ~4% from $1.53B to $1.47B. The number of holdings remained steady at 15. The top three holdings are at ~60% while the top five are at ~80% of the 13F assets: Berkshire Hathaway (BRK.A) (BRK.B), Cimpress NV (CMPR), Spectrum Brands (SPB), Alliance Data Systems (ADS), and AutoNation (AN). To know more about value investing, check out Value Investing: A Value Investor's Journey Through The Unknown.

New Stakes

Covetrus Inc. (CVET): CVET is a small 1.15% of the portfolio stake established this quarter at prices between $8.75 and $15.

Note: Covetrus was spun off from Henry Schein (HSIC) in a spin-merger with Vets First Choice in February last year. Shares started trading at $36.50 and now go for $11.32.

Stake Disposals

Charter Communications (CHTR): The original 2.46% CHTR stake was purchased in Q3 2018 at prices between $275 and $333. Q4 2018 and Q1 2019 saw the position almost sold out at around the same price range. The remainder stake was disposed this quarter. The stock is now at ~$523.

Stake Increases

Alliance Data Systems: ADS is a large (top five) ~10% of the portfolio position. It was first purchased in Q3 2017 at prices between $210 and $265 with the bulk established in Q1 2018 at prices between $213 and $276. Q1 2019 saw an about turn: ~23% selling at prices between $150 and $182. That was followed with a similar increase next quarter at prices between $134 and $181. The zig-zag trading pattern continued last quarter: similar reduction at prices between $122 and $159. The stock currently trades at $80.69. There was a ~15% stake increase this quarter at prices between $100 and $128.

Jefferies Financial Group (JEF) previously Leucadia: JEF was a very small ~1% position in 2013. In H2 2014, that original position was increased by a whopping 15x at prices between $22 and $24.50. Q4 2015 also saw a ~60% increase at prices between $16 and $21. Since then, the position has wavered. The stock currently trades at $20.67 and the stake is at 5.80% of the portfolio. Last two quarters saw minor trimming while this quarter there was a marginal increase.

Stake Decreases

Berkshire Hathaway: BRK.B is a long-term holding that has been in the portfolio for many years. It is currently the largest position at almost one-third of the entire portfolio. The vast majority of the original stake was purchased during the five quarters through Q1 2016 at prices between $124 and $152. Recent activity follows: There was a ~55% stake increase in Q1 2019 at prices between $192 and $209. Next quarter had seen a ~8% stake increase and that was followed with a ~16% increase last quarter at prices between $196 and $215. The stock is currently at ~$218. There was a ~15% trimming this quarter.

Note: Mecham has had a previous very successful round-trip with Berkshire Hathaway.

Cimpress NV: CMPR is Arlington Value Capital's second-largest individual stock position at ~17% 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 original stake was purchased in Q1 and Q2 2013 at prices between $32 and $49. The next significant buying was in Q3 2015 when there was a ~90% increase at prices between $64.50 and $84.50. The position has since wavered. Recent activity follows: There was a one-third increase in Q1 2019 at prices between $74 and $120. The stock currently trades at $119. Last two quarters saw minor trimming.

Note: Arlington Value Capital has a ~8% ownership stake in the business.

Spectrum Brands: SPB is a large (top three) ~12% of the portfolio stake established in Q4 2018 at prices between $41.50 and $75. There was a ~13% trimming this quarter at prices between $46.50 and $64. The stock currently trades at $60.58

Note: Arlington Value Capital has a ~6% ownership stake in Spectrum Brands.

AutoNation Inc.: The large ~10% AutoNation stake was first purchased in Q4 2016 at prices between $40 and $50 and increased by ~60% in the following quarter at prices between $42 and $53. The position has wavered. Recent activity follows: Q4 2018 saw a ~70% stake increase at prices between $33 and $43 while in the last two quarters there was a ~20% selling at prices between $41 and $53. The stock is now at $43.96.

Monro Inc. (MNRO): MNRO is a large ~8% portfolio stake established in Q2 2017 at prices between $41 and $55 and increased by ~55% in the following quarter at prices between $40 and $56. The stock currently trades at $53.94. Last two years have seen only minor adjustments.

Note: Arlington Value Capital has a ~5% ownership stake in Monro Inc.

Interactive Brokers (IBKR): IBKR is a 3.72% 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. There was a ~20% selling in Q4 2018 at prices between $47 and $58. That was followed with another ~12% trimming over the last two quarters at prices between $44.50 and $55. The stock currently trades at $50.59.

Spirit Airlines (SAVE): SAVE is a ~1% portfolio position established in Q3 2017 at prices between $32 and $54. There was a 24% selling next quarter at prices between $33.50 and $45.50. Q4 2018 also saw a ~50% reduction at prices between $44 and $65. The stock currently trades at $26.34. There was a marginal increase in Q1 2019 and minor trimming over the last three quarters.

GCI Liberty (GLIBA): The very small 0.92% GLIBA stake was established in Q3 2018 at prices between $44.90 and $51. The position has seen only minor adjustments since. The stock currently goes for $74.17.

Bank of America (BAC): BAC position was established in Q1 2016 at prices between $12 and $15 and increased by ~28% in Q3 2016 at prices between $12.74 and $16.19. At the time, it was a large ~6% portfolio stake. Q4 2016 saw an about turn: ~55% selling at prices between $15.50 and $23 and that was followed with another ~20% reduction the following quarter at prices between $22 and $25.50. Q4 2017 also saw a ~55% selling at prices between $25.50 and $30. There was another similar reduction in Q3 2018 at prices between $27.75 and $31.80. The stock currently trades at $28.39 and the stake is now very small at 0.60% of the portfolio. Last five quarters have seen only minor adjustments.

Deswell Industries (DSWL): The minutely small DSWL position saw marginal trimming this quarter.

Kept Steady

GrubHub Inc. (GRUB): GRUB is a minutely small 0.01% of the portfolio position established last quarter and kept steady this quarter.

The spreadsheet below highlights changes to Mecham's 13F stock holdings in Q4 2019:

Analyst’s Disclosure: I am/we are long BAC, BRK.B. 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.

Comments

[GaryTeran]

Mecham has indeed retired. He is offering to permit his LP's to cash out, receive in-kind distributions, or be acquired by another hedge fund manager. Based on my back of the envelope calculations, AV could potentially have lost $500 to $600 million of his investor's capital. Possibly as much as -40% in Q1. Sadly, this was avoidable (see my 2015 post where I questioned the AV track record).

[LHRG]

You seem to indicate the losses are permanent? Do you believe the businesses he owned in the fund are worth 40% less?

[value_vulture]

pity. would be nice if another guru manager took a stake now

[GaryTeran]

If investors "cash out", their losses would indeed be permanent. However, it's likely April was profitable so it's also possible a modest recovery occurred for those who held on. His letter to investors suggested a 6-9 month wind down so the ultimate outcome is unknown. What is also unclear is whether Mecham is managing in the interim or not. Would be interested to know, but as usual with AV, there is a shroud of secrecy. I can't even find a web page.

[user 8335351]

Does anyone have his letters from 2017-nowish??

[awgreig]

He just shut the doors after blowing up. Sent out a letter announcing dissolution

[Exile of the Mainstream]

@awgreig Joking right? If not link please.

[ribeyesteaks]

Yeah, it's true. He's closing down the fund. Not sure about blowing up the fund, but the rumor is health issues. Partners are being turned over to Greenberg's fund.

[LHRG]

have some sort of source? I'm not seeing anything.

[Emissary]

Thank you john for your work ,
Just one thing on the summary it says brk was increased while ads was decreased, that's a typo as its the opposite

[John Vincent]

Hi Emissary,

Thank you for pointing this out. I have put in a correction request.

All the best,
John.

[globalmacro]

ADS has been an unmitigated disaster.

[Pickwick's Value Club]

Sadly yes, seems to be punished 2x as the rest of the sector...bottom should be soon though, its trading as if its going out of business within 3 years...

[LHRG]

It is an odd one. I would have to imagine the confluence of no stable management, activist dumping it, sale of epsilon, sale of underperforming receivables, and just general negativity in the sector is making this a once in a lifetime sort of situation. Basically, if it doesn't go bust (which it has a 99% chance of not doing) it will be a triple, at minimum. New CEO will hopefully instill some confidence in the investing public on the next call.

[Pickwick's Value Club]

Don't forget the 50bps rate cut not included in their guidance, let alone the urther 50 bps if they come! With retail clients being a decent (albeit shrinking) part of revenues, in hindsight, i can see this as a great short from $240! But these are 2008 prices now so at least a double by 2021/22