Upslope Capital recently published its Q4 investor letter in which the investment firm discussed important changes to its portfolio positions during the quarter. Among the key changes is initiating a short position in Crown Holdings, Inc. (NYSE:CCK), a $7.4-billion consumer packaging company based in Philadelphia, Pennsylvania. Let’s take a look at Upslope Capital’s commentary on Crown Holdings.
George Livadas, the founder and portfolio manager of Upslope Capital, wasn’t happy with Crown Holdings’s bet to acquire Signode Industrial Group for $3.91 billion in cash. He writes in the letter:
Since inception of Upslope’s strategy (at a prior firm), Crown has been one of our largest long positions. However, a large acquisition in an unrelated business, announced just six days before Christmas ticked the ‘very questionable capital allocation’ box for me. Crown’s $4 bn acquisition of Signode – an industrial/transit packaging company – undercut a number of the reasons I (and I suspect other shareholders) liked the stock: predictable, a cyclical cash flows, de-leveraging, ramping share buybacks, and the prospect of a dividend. The deal, which added a materially cyclical business and a significant amount of debt, negated each of these attributes.
Why did Upslope Capital decide to open a short position in Crown Holdings, Inc. (NYSE:CCK)? Livadas says:
Most of the time, when I decide to exit a long position, flipping and initiating a short position is not actively considered. However, in my view, there are few more obvious ‘green-lights’ to short a stock than a questionable, seemingly empire-building acquisition. While it’s possible Signode will ultimately be a win for Crown, I believe the odds favor value destruction due to the flimsy strategic rationale. As one analyst asked during Crown’s call announcing the deal: “how does Crown become a better company…[with] Signode in the portfolio?” Management did not have a good answer.
Pixabay/Public Domain
Crown Holdings, Inc. (NYSE:CCK) is a supplier of packaging products to consumer marketing companies around the world. It makes metal beverage and food cans, metal aerosol containers, metal closures and specialty packing. The company claims to manufacture one out of every five beverage cans used in the world, and one out of every three food cans used in North America and Europe. Shares of the consumer packaging company are down nearly 5% since the beginning of the year. Whereas, the stock has moved up just 0.81% during the last 12 months. The stock value jumped 7% during the last year.
For the full-year 2017, Crown Holdings reported net sales of $8.7 billion, up compared to $8.3 billion in 2016. Net income attributable to the company was $323 million, down compared to $496 million in 2016. Earnings per share were $2.38 last year, compared to $3.56 in 2016, while adjusted earnings per share were $4.03 in 2017, versus $3.93 in 2016.
In this piece, we will take a look at ten recent IPOs in micro cap stocks.
There are a variety of benefits and drawbacks to listing a firm’s equity for trading on the stock market. The single biggest benefit of the process called an IPO, is that it allows management to raise large amounts of funds and investors to potentially profit by seeing their existing stakes multiply in value. At the same time, the IPO process also brings in a variety of constraints. Publicly listed companies are subject to corporate financial reporting requirements of the jurisdictions in which their shares trade. At the same time, share prices can be a volatile affair, and while investors stand to gain significantly if their companies are well received by the market, they also risk equally massive losses should the opposite occur.
Warren Buffett never mentions this but he is one of the first hedge fund managers who unlocked the secrets of successful stock market investing. He launched his hedge fund in 1956 with $105,100 in seed capital. Back then they weren’t called hedge funds, they were called “partnerships”. Warren Buffett took 25% of all returns in excess of 6 percent.
For example S&P 500 Index returned 43.4% in 1958. If Warren Buffett’s hedge fund didn’t generate any outperformance (i.e. secretly invested like a closet index fund), Warren Buffett would have pocketed a quarter of the 37.4% excess return. That would have been 9.35% in hedge fund “fees”.
Actually Warren Buffett failed to beat the S&P 500 Index in 1958, returned only 40.9% and pocketed 8.7 percentage of it as “fees”. His investors didn’t mind that he underperformed the market in 1958 because he beat the market by a large margin in 1957. That year Buffett’s hedge fund returned 10.4% and Buffett took only 1.1 percentage points of that as “fees”. S&P 500 Index lost 10.8% in 1957, so Buffett’s investors actually thrilled to beat the market by 20.1 percentage points in 1957.
Between 1957 and 1966 Warren Buffett’s hedge fund returned 23.5% annually after deducting Warren Buffett’s 5.5 percentage point annual fees. S&P 500 Index generated an average annual compounded return of only 9.2% during the same 10-year period. An investor who invested $10,000 in Warren Buffett’s hedge fund at the beginning of 1957 saw his capital turn into $103,000 before fees and $64,100 after fees (this means Warren Buffett made more than $36,000 in fees from this investor).
As you can guess, Warren Buffett’s #1 wealth building strategy is to generate high returns in the 20% to 30% range.
We see several investors trying to strike it rich in options market by risking their entire savings. You can get rich by returning 20% per year and compounding that for several years. Warren Buffett has been investing and compounding for at least 65 years.
So, how did Warren Buffett manage to generate high returns and beat the market?
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