One of the worst things about running a concentrated portfolio of 10-15 microcaps is how little news and movement there is in the stocks. It’s just not as exciting as I imagine trading in and out of large caps would be, where every day you’d have new analyst reports, market movements, etc. to keep read. Of course, because of the lack of “exciting” things, it’s much easier to focus on the true business fundamentals and apply basic value investing concepts to investing in micro-caps. Plus, it might not be as exciting, but it’s a heck of a lot more profitable.
Anyway, that’s why I was so excited when this morning not one but two of my big holdings announced some big news (plus a third, AEY, will announce full year results tomorrow). First, Asta (ASFI) reported full year results, and then Newcastle (NCT) announced they will be investing 443.7m in excess mortgage servicing rights (MSRs for the rest of the article).
Let’s start with Asta. I think the results were pretty darn impressive. The company ended the year with cash and equivalents of $106.9m and announced that as of today they have $108.8m in cash. This is a company with no recourse debt and (excluding the non-recourse debt) under $3.5m in liabilities. With their market cap currently at ~$113m, they are basically assigning zero value to the rest of their assets…. assets that generated over $80m in cash flow in the past year.
The Great Seneca portfolio (which is attached to their recourse debt) performed reasonably well too. I’ve always assigned no value to it in my analysis, so the fact that it is paying down its debt at a decent clip is encouraging. It’s currently on the books for $78.3m versus $71.6m in debt, meaning that even if the portfolio is completely worthless the biggest hit shareholders could take would be ~$7m write-down as Asta turns the “keys” over to the bank. With a current book value of $173m, that write-down would literally be a drop in the hat.
Honestly, the only real disappointment in the quarter was the company was not at all aggressive with share repurchases. They haven’t released the 10-K yet (it should be coming soon), but working off the balance sheet it looks like they repurchased only 9-10k shares. Given 14-15m shares outstanding, that’s a drop in the bucket. Don’t understand why they wouldn’t step it up.
Newcastle (NCT) announced that they were investing $43.7m in MSRs (see press release and investment summary at their investor’s website). You may remember that investing in MSRs was the reason they raised ~$120m in November. I think this investment is a big win for both the preferreds and the common.
Let’s start with the common. While I continue to think the dilution was a huge mistake and this won’t make up for it, the investment at least looks interesting. They’re forecasting a pretty high IRR and the group their investing with will own the other 35%, so interests should be properly aligned. Again, it won’t make up for the dilution, and all forecasts need to be taken with a pound of salt, but at least they did an investment that looks timely and has some upside.
For the preferreds, I think the investment was an absolute home run. Two reasons- these aren’t really the type of investments where you’re likely to take a complete zero- and it would take several complete zeros for the preferreds not to be completely covered. As a matter of fact, from my limited understanding, it’s pretty tough to actually lose a serious amount of money in these things. Most likely case is you invest at a very, very sub-par IRR, but actual capital loss is difficult. While sub-par IRR would be terrible for the common, the preferreds just need the company to not burn through cash to get paid off. Second reason- the company only employed ~40% of the cash they just raised to make this investment. All that remaining cash is just sitting on the balance sheet, protecting the preferreds downside.
Disclosure- Long ASFI, AEY, and NCT preferreds.
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