GDS Investments

About the Author GDS Investments

Glenn started GDS Investments in 2012. From 2001 to 2012, he worked for Alsin Capital Management, Inc. as an equity research analyst (2001-2003), co-portfolio manager (2003-2008), and most recently as portfolio manager (2008-2012). Before joining ACM, Glenn worked for Enron Corp. as a derivatives structuring manager, and for Commerce Bancorp (now TD Bank) as a commercial real estate credit analyst. Since inception (December 2008), client portfolios are up more than 24% annually (through 6.30.2013). He serves as an advisory board member of Value Conferences, an online-only conference featuring some of the most prestigious value investors across the globe. Glenn has a BA in Management (Accounting concentration) from Gettysburg College and an MBA (Finance concentration) from Southern Methodist University. He graduated in the top 10% of his MBA class and participated in study abroad programs both as an undergraduate (Seville, Spain) and graduate student (Melbourne, Australia). His hobbies include running, cycling, golfing and youth coaching.

Top 5 For 2015, Part 3

In my first two Top 5 columns, I recommended Fairway Group (NASDAQ:FWM), Chesapeake Energy (NYSE:CHK) and Chicago Bridge & Iron (NYSE:CBI). To get things started for my final Top 5 column, I pose this question: “Has the Internet been a net benefit or a net cost to the average investor?” Before I begin, I’d like to first tell a brief story about an investor conference I recently participated in. As is customary, before diving into the heart of the presentation, I provided some background about my firm, its investment philosophy, performance results, etc. In the middle of talking about special situations investing, finding top quartile stocks (in terms of quality) with bottom quartile valuations (Magic Formula Investing) and other core tenets of my investing philosophy, a parallel picture began to emerge. A picture of two long, winding roads that intersect…one named “preparation” and the other “patience.” To be a great investor, one needs to be at the intersection of preparation and patience. Being exceptional at one and not the other is a recipe for underperformance.

I know, I know, I know…how does this tie into my original question about the Internet? Well let’s address this question through the impact it has had on the two variables that drive investment success. I would argue that its impact on investment “preparation” is negligible at best. Certainly, it is much easier to access raw data for a particular company today than it was 10 to 15 years ago. Every public company has a website with convenient access to SEC filings, press releases, conference calls and investor presentations. Clearly, this is an example of a positive byproduct of the web; but it is rare for humans to cherry-pick the good without consuming the bad. Very few investors stop their research at company websites. Most carry on to a murkier world of internet journalism that includes recycled research [sourced from the same person(s)] and, lazy and/or incomplete analysis (quantity over quality mentality). In addition, there is an overemphasis on today’s events while simultaneously providing investment advice on companies that are discounting future ones. Investors should tread carefully when incorporating information into investment decisions that stray from the original source.

However, between the two, patience is where the Internet has done the greatest harm to the average investor. Just to be clear, I define patience as what happens after a stock is purchased (the “ownership” phase). Cheap commissions, a constant flurry of quotes, the news and other distractions have turned stock “owners” into “renters.” The Internet, and all of the noise that accompanies it, is directly responsible for the increase in investor turnover over the last 15 years. One “law” of behavioral finance is that more information and greater attention to your investments actually leads to higher turnover – the enemy of long-term performance. Furthermore, “renting” stocks invalidates everything that went into the preparation stage. It has been my experience that the investment mind is much more rational during the preparation stage than the patience (ownership) stage simply because investment losses become real during the latter stage. For the average investor, losses lead to stress which leads to shorter investment horizons and an increase in emotionally-guided decision making.

Many stock “renters” would be wise to embrace the lyrics of Jerry Garcia who sang:

“Check my pulse, it don’t change. Stay seventy-two come shine or rain.”

With that, I present to you my last two picks for 2015.

Rayonier Advanced Materials (NYSE:RYAM) is the leading producer of high-purity, cellulose specialties natural polymers for the chemical industry. RYAM spun out of Rayonier (NYSE:RYN) in June 2014 and is the undisputed market leader with 38 percent share and more than three times the volume as the next three largest suppliers combined. This is important to note for the following reasons:

Firstly, dominant market share creates economies of scale which produces high return on invested capital (for example, in the last 10 years, Rayonier has averaged 30 percent EBITDA and 20 percent return on invested capital).

Secondly, excess capacity in industries with a handful of larger players can be absorbed more quickly and with better price integrity than in industries with fragmented supply. Since Rayonier’s two largest competitors represent approximately two-thirds of total industry supply, the industry can quickly adjust capacity in difficult pricing environments. Industry capacity went up 15 percent in 2013, the majority of which came from Rayonier’s decision several years ago to convert 240k tons of commodity-grade to specialty-grade capacity. Although this $385M project has put pressure on industry margins today, it should enhance profitability in the long-term.

The spin-off and near-term pricing pressure has created an opportunity for investors to own a dominant number one in a consolidated industry with substantial barriers to entry, at less than half of fair value. As excess capacity rationalizes and margins improve, Rayonier should trade at much higher prices.

My last pick is General Motors (NYSE:GM) or GM B Warrants. General Motors continues to work through recall issues over faulty ignitions that began last year. I still believe that General Motors will eventually get through this unfortunate period and come out the other side as a much stronger company – but it will take time.

Last October, General Motors rolled out its long-term strategic plan, which included the following initiatives:

o Grow Cadillac: General Motors will separate this business unit and have it headquartered in NYC. It will introduce four new vehicles in 2015 and nine new models over the next five years in China.

o Grow in China: To support expected sales of 5 million vehicles annually, General Motors and related joint ventures will open five additional manufacturing plants over next four years. China is forecasted to become the largest luxury car market by the end of this decade.

o Grow GM Financial: General Motors expects to grow this segment to support growth in its core auto segments and is expected to enter China in early 2015.

o Deliver Greater Operating Efficiencies: Through improved relationships with suppliers and fewer vehicle architectures, General Motors is well-positioned to lower material costs and enhance profitability over the next half decade or more.

In addition, General Motors reaffirmed previously announced profitability targets, which include a 10 percent EBIT target for North America in 2016, a 9 to 10 percent net income target for its joint ventures in China, and a return to profitability in Europe. At a recent price of $34/share, General Motors remains one of the more compelling large-cap investments.

GM’s B warrants gives investors wider return possibilities (both on the upside and downside) than the underlying common stock. It has the same general mechanics as most of the other warrants created from investments made under TARP. Note, I recommended Bank of America (NYSE:BAC) “A” warrants in April of 2012 at $2 (now trading at $6). I believe GM’s warrants have similar upside. They expire on July 10, 2019, and carry a strike price of $18.33. At a recent quote of $17, the warrants carry very little premium to their “in the money” value, despite another four and a half years till expiration.

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