Old West Investment Management, LLC
Letters to Investors
July 13, 2016 April 14, 2016 January 15, 2016 October 15, 2015 July 13, 2015 April 9, 2015 January 7, 2015 January 13, 2014 January 11, 2013 January 13, 2012 January 13, 2011 December 22, 2009 October 1, 2008
Old West Investment Management, LLC
July 13, 2016
Dear Investor,
The first half of 2016 was marked by tremendous volatility, with a very steep selloff in January, followed by a gradual recovery in the market. But the explosive final week of June was truly the icing on the cake, when the market violently reacted to the downside following the epic U.K. “Brexit” vote, only to once again fully regain those losses. What a year it has been!
As you can see in your enclosed statement, we had a very strong first half of the year. With the S&P 500 up 3.84%, our portfolios far exceeded that, by very wide margins. Although we aren’t excited about the future prospects for the overall market, we are extremely bullish on the companies we are invested in.
It’s never easy looking into the “crystal ball” to try and predict the future. If anyone tells you they know what will happen in the future, or they know what the market is going to do, I suggest you run the other way. What makes today more uncertain than past years in trying to predict future economic activity is the interest rate environment. Not often can you say NEVER BEFORE, but never have interest rates been this low. NEVER in history. Isn’t that amazing!! As you have heard and read, many countries are offering negative interest rates on their bonds. Yes, you have to pay them to hold your money. Currently, there is $12.7 trillion of sovereign debt, 36% of total world sovereign debt with negative interest rates. There is another $14.5 trillion with interest rates of less than 1%. One has to ask the question, is this really happening? There is no sign of this changing anytime soon, but I am old enough and just wise enough to know that at some point it will change, and with a vengeance.
So what does this mean? How does one invest in this environment? First, I am so glad we began building positions in gold miners the past few years. They have been big winners for us, and they are just getting started. Second, all of this cheap money sloshing around the world will cause mispricing of all types of investments, from stocks, to bonds, to real estate and more. I think this calls for extreme caution going forward. We will be very careful not to overpay for stocks, and insist that each and every one of our investments have a margin of safety to protect your capital.
The twenty-first century has been marked by a series of investment bubbles, all of which I believe have been facilitated by the Federal Reserve. First was the tech stock bubble of 2000, which was fueled by cheap money thanks to Alan “The Maestro” Greenspan. Next was the housing bubble of
601 S. Figueroa Street, Suite 1975 Los Angeles, California 90017 213.943.1740 www.oldwestim.com
2008, fueled by cheap money thanks to Ben “Helicopter” Bernanke. More recently we experienced an energy bubble, where easy access to cheap money caused excess exploration and production of oil and gas, this time aided by the Janet Yellen Fed. I believe the next bubble will be the bond bubble, where trillions will be lost worldwide by investors believing that interest rates will never go the other way. There was similar sentiment with housing and tech stocks before they collapsed. When will this bond bubble occur? That is impossible to answer, but I have seen enough in my career to know that everything cycles, and interest rates will rise. Watch out when they do.
How do we protect your money from this oncoming train wreck? First, by not investing in long dated bonds. Second, by not over paying for stocks, and not following the crowd into utilities and consumer staple stocks paying a nice dividend. Investors are currently chasing yield driving up these stock prices to nose bleed levels.
Looking at our portfolios, our investments in gold miners, the beaten up energy sector, and stocks like Fairfax Financial that run counter to the market, give me confidence that when this long dated bull market come to an end, our clients will be in a much better position than the masses that have piled into index funds.
In each of our quarterly letters we highlight certain companies we are invested in. In this letter, we highlight just one with tremendous potential.
CHENIERE ENERGY, INC.
Cheniere, whose stock symbol is aptly L.N.G., (Liquified Natural Gas) is one of our newest investments, and one that I am hugely optimistic over. LNG is in the business of sourcing natural gas here in the U.S. and shipping it all over the world. LNG first came to our attention several years ago when we noticed legendary investor Seth Klarman of the Baupost Group accumulating shares. Another legendary investor, Carl Icahn, is the largest shareholder and two of his lieutenants have board seats. Today, Baupost owns 30 million shares (12.7% of the company) and Icahn owns 32 million shares (14% of the company). Both of them have an average cost in excess of $55 per share, far above today’s price of $39.
I generally don’t think much of CEOs who appear on CNBC’s Jim Cramer show. I would hope they are too busy running their company to participate in such a circus. I watched interviews with LNG CEO Charif Souki, and I was totally turned off. He appeared to be a jet setting, fast talker who spent a fair part of the year in Aspen. I decided not to touch the stock with him as CEO. When I heard he was fired, I was excited and anxious to see who they would hire. Jack Fusco, CEO of electric power plant operator Calpine, left a very good job to take over as LNG CEO. Fusco has spent his entire career in the utility/ power plant/ natural gas business and seemed perfect for the role. I’m guessing Carl Icahn, with two board seats, had enough of the fast talking Souki and forced him out of the company. Nobody plays hardball better than Icahn. I was also thrilled to learn that Fusco agreed to buy $10 million of LNG stock, and he was given another $10 million of restricted stock as part of his package.
601 S. Figueroa Street, Suite 1975 Los Angeles, California 90017 213.943.1740 www.oldwestim.com
During the time that LNG was on our watch list, the stock fell from $84 to $23 per share. Our average cost is $34 per share, and today it’s trading at $39.
To ship natural gas overseas by vessel, it needs to be converted to liquefied natural gas (LNG). The natural gas is delivered to the terminal where it’s chilled to -240°F, a temperature that transforms vapor to a liquid, compressing its volume 600 times. Once it arrives at a foreign destination, it is deliquified for use.
Thanks to technology in oil and gas production, the United States has become the leading natural gas producer in the world. Natural gas usage continues to grow dramatically. Much of the world is dealing with air pollution, and some of the biggest contributors are coal fired power plants. Wind and solar plants are still in their infancy, and are very expensive, and nuclear powered plants are problematic to say the least. Natural gas fired plants aren’t pollution free, but are much, much cleaner than coal plants. Natural gas is also used heavily in manufacturing plants, production of chemicals, and on highway and off highway trucks.
LNG has two locations where they operate what they call “trains”. Each train is a terminal where the gas is liquefied and transferred on to a vessel. LNG will have six trains at Sabine Pass, Lousiana, and three trains at Corpus Christi, Texas, both locations situated on the Gulf of Mexico. All trains at both locations should be completed by 2019. After years and years of planning and construction, Train One at Sabine is completed and they shipped the first vessel two months ago. Construction giant Bechtel Corp. is building the projects, and total project cost is estimated to be $30 billion.
There are competing LNG projects being developed around the world, including Chevron’s huge Gorgon project in Australia. The fact that Cheniere began the process several years ago gives them an advantage as they have supply contracts with users all over the world. LNG has supply contracts with British Gas, Gas Natural Fenosa of Spain, Korea Gas, Gail Limited (India), Total of France, Centrica (U.K.), PT Pertamina (Indonesia) and more. With these supply contracts, LNG is paid a fixed fee to liquefy and load the LNG on to the vessel. They are not taking market risk with the price of natural gas. There is talk of oversupply of L.N.G. in the future, but Cheniere is in a great position having all these customers signed to long term supply contracts.
The LNG investment is not without risk. A major concern of ours is the amount of debt the company has. As I stated earlier, the total project cost is estimated to be $30 billion, and LNG has $16 billion of long term debt, and this number could increase. However, the company estimates they will have in excess of $1.0 billion of free cash flow within five years. The company is confident they’ll have no problem servicing and repaying their debt.
601 S. Figueroa Street, Suite 1975 Los Angeles, California 90017 213.943.1740 www.oldwestim.com
Baupost’s Seth Klarman added 3.7 million shares to his position the p ast few months. I can’t imagine Jack Fusco would have left Calpine for LNG if he didn’t realize the future is very bright. The bottom line is, we in the U.S. have enormous reserves of natural gas, and the world is using more of it every day. We at Old W est believe Cheniere Energy is in a great position to profit from this opportunity for years to come.
As of the date of this letter, the market is at an all time high. We are by no means bullish about the market but owning companies like Cheniere Energy gives us confidence your hard earned money will continue to grow in the future. Thank you for your continued loyalty and support.
Sincerely,
Joseph M. Boskovich, Sr. Chairman and Chief Investment Officer
601 S. Figueroa Street, Suite 1975 Los Angeles, California 90017 213.943.1740 www.oldwestim.com
Old West Investment Management, LLC
April 14, 2016
Dear Investor,
The first quarter of 2016 was one of the most volatile first quarters in stock market history. The S&P 500 got off to a terrible start in January, down as much as 9%. The market benchmark clawed its way back the rest of the quarter, ending up approximately 1.35% as of March 31. As you can see in your enclosed statement, we had an outstanding quarter, outperforming the S&P by a fairly wide margin (with the exception of Old West Investment Partners which was nearly even with the S&P).
There appears to be a trend reversal in the market, with value stocks gaining while the high flying growth stocks are struggling to maintain their lofty levels. While I am not bullish on the prospects for the market, I feel very strongly we own a collection of companies selling at bargain prices poised to do well regardless of the market.
Global growth prospects do not look good, as debt has reached levels that will make robust growth hard to achieve. The central banks of the world remain extremely accommodative with little impact. The U.S. economy is one of the few bright spots in the world, and as you know we are very biased towards U.S. companies. The jury is out as to whether the bull market that began in 2009 has ended, or has longer to run. We remain focused on the companies we own versus worrying about factors out of our control.
The number one cause for our poor performance in 2015 was our energy holdings, and it appears the energy markets have reached a bottom and are slowly starting to rebound. We have maintained our energy positions that hurt us last year, and I believe they will be among our best performers the next few years. We recently added to our Chevron position, a best of breed energy producer sporting a 4.5 % dividend yield.
In my quarterly letters I like to highlight some of our holdings, to give you insight into the thinking behind the companies we own. This quarter I’ll discuss two of our gold mining companies as well as Live Nation.
LIVE NATION (LYV)
Old West Co-Portfolio Manager Spencer McCroskey writes the following:
Live Nation Entertainment (Live Nation) is the product of the 2010 merger between Live Nation, the world’s largest concert promoter, and Ticketmaster, the world’s largest ticket distribution
601 S. Figueroa Street, Suite 1975 Los Angeles, California 90017 213.943.1740 www.oldwestim.com
company. It is the largest live event business in the world and is vertically integrated with operations throughout the concert industry supply chain consisting of the Artist, Manager, Promoter, Venue, Ticket Distributor, and the Consumer. The live event serves as the hub while the spokes (Manager, Venue, and Ticket Distributor) drive the cash flow of a very efficient hub and spokes business model. Live Nation also owns or operates 167 venues including House of Blues, the Hollywood Palladium, and 3Arena in Ireland.
The music industry has been in turmoil since Apple introduced the iPod. The iPod music era commoditized music, in a sense, making it available to the masses. As a result, the music companies, and ultimately the artists, earn less income from album sales. As a result, touring has become the primary income source for many artists worldwide. Evidence of this trend can be seen through the 10% annualized growth in worldwide concert spending from $4 billion in 1998 to over $17 billion in 2015. Nielsen estimates that 51% of the US population attended concerts in 2015, up from 44% in 2014. Last year, Live Nation was responsible for connecting 63 million fans to over 25,500 events showcasing over 3,300 artists.
Live Nation’s concerts segment generates the majority of the consolidated revenues (70%) while only generating around 10% of the operating income. This is the hub around which some of the other businesses, the spokes, drive the real cash flow to the business. Two of the most significant businesses within Live Nation are Ticketing and Sponsorships which generate about 25% of revenues when combined and account for nearly 100% of the operating income before allocation of overhead. Live Nation returns roughly 15% on invested capital indicating it is a very good business, driven by two key competitive advantages: scale and scarcity. Sponsorship revenue has increased over 11% annually since 2011 and this number is expected to grow even faster in the future as large sponsors continue to see live concerts as a viable source for ad- spending and allocate away from more traditional media outlets.
Dr. John Malone owns roughly 35% of the company through Liberty Media. Liberty Media recently increased their stake by about 30% in December of 2015 around $25 per share. Currently, Live Nation shares may be purchased at a 12% discount to that of the recent acquisition by Liberty. We have been proud owners of Live Nation for over 3 years generating returns of over 90%, or 15% annualized, since our initial acquisition.
GOLD
Much of what I see going on in the world today favors the ownership of gold in one’s portfolio. Consider the following factors:
601 S. Figueroa Street, Suite 1975 Los Angeles, California 90017 213.943.1740 www.oldwestim.com
• Interest rates at a 500 year low. Gold, which has no yield, now has as good of a yield as holding cash!!! • Every central bank in the world is implementing monetary easing, which results in the steady debasement of fiat currency • The U.K. possibly leaving the European Union, which might signal the end of the E.U. • The constant threat of terrorism • An explosion of debt in China, with thousands of bad loans being rolled over into new loans. China’s banking system is now $35 trillion, which is larger than that of the U.S., with a much smaller economy.
Ray Dalio, Chief Investment Officer of Bridgewater Associates, the world’s biggest hedge fund, recently said every portfolio should have at least ten percent in gold. Gold has traditionally been seen as a commodity, but I believe it will increasingly be viewed as a currency (it is the world’s oldest currency). I see our gold holdings as defensive and opportunistic. We have no competitive edge holding actual gold, so we own companies that produce gold, run by owner/ managers who are heavily invested in their companies with track records of success. Our two biggest gold mining positions are companies with the same name (by coincidence) in two different languages, New Gold and Novagold.
NEW GOLD, INC (NGD)
New Gold is a Vancouver based mining company with properties in Mexico, Canada, the U.S., Australia and Chile. If the price of gold goes as high as I might speculate, I take comfort in the fact that NGD’s mines are in countries that are politically stable. Companies whose mines are located in volatile countries (South Africa, Argentina, the Congo) could be subject to nationalization of mines if the price goes high enough and the country is desperate for money.
Randy Oliphant is the long time CEO of NGD, and he has done a wonderful job of positioning NGD as one of the low cost producers in the industry with an all in cost of just over $800 per ounce. With today’s price of $1,250 per ounce, the company is operating well in the black. Oliphant owns $20 million of stock in the company, so our interests are truly aligned. The company has $600 million of liquidity with $335 million in cash. Although NGD has not been profitable the past two years due to the low gold price, they could become extremely profitable in the future as the gold price recovers and new production comes on board. Pierre Lassonde, known as the godfather of mining, has been a long time director, and he owns 6 million shares of stock. Better known companies like Newmont and Barrick are mostly mentioned in the media, but I much prefer New Gold as a long term investment.
601 S. Figueroa Street, Suite 1975 Los Angeles, California 90017 213.943.1740 www.oldwestim.com
NOVAGOLD (NG)
Novagold has no income and doesn’t even generate revenue, but they are sitting on one of the largest known reserves of gold in the world. The Donlin project is located in the good old U.S. of A, in Alaska. The proven r eserves of Donlin are 40 million ounces of gold, plus huge amounts of copper and silver. Dr. Thomas Kaplan is Chai rman of the Board, and ow ns 80 million shares of NG, or 2 5% of the company . Dr. Kap lan has a long history of successfully investing in precious metals and energy. The second and third largest investor s in NG are legendary investors John Paulson and Baupost Group’s Seth Klarman.
The Donlin project is a 50/50 joint venture with Barrick Gold Corp., and production is still a few years off. I love the fact that they haven’t been bur ning fuel, tearing up equipment and depleting resources the past few years at low prices. Hopefully once production begins the gold price will be much higher.
NG has $117 million of cash and short term investments, and they are burning $20 million per year a s they continue through the permit process. They have plenty of liquidity to bring this project to be construct ion ready, at which time I predict they will sell their interest to a major miner and possibly Barrick.
Thank you for your continued support and loyalty to Old West. I am extremely grateful that you stuck with us during our peri od of under performance, and our team will continue to work diligently to preserve and grow your hard earned assets.
Sincerely,
Joseph M. Boskovich Chairman and Chief Investment Officer
601 S. Figueroa Street, Suite 1975 Los Angeles, California 90017 213.943.1740 www.oldwestim.com
Old West Investment Management, LLC
January 15, 2016
Dear Investor,
The year 2015 was one of the most difficult years I have experienced in my forty years of investing. Somewhat like the years 1999-2000, when if you didn’t own tech stocks you felt like the village idiot, this past year had a similar dynamic. However, this time the entire S&P 500 was propped up by only a handful of stocks. They were, Amazon up 118%, Alphabet (Google) up 44%, Netflix up 134% and Facebook up 34%. These stocks did the heavy lifting to prop up the market average to near even for the year. At the end of the year, 70% of the S&P 500 stocks were trading below their 200 day moving average. Looked at another way, the 15 highest contributing stocks in the S&P 500 produced nearly 300% of the return. To my knowledge, never before has the index return been driven by so few names. By watching CNBC and reading the Wall Street Journal, the investing public was under the illusion that last year was pretty good. Far from it, as some of the best investors in the business had a very difficult year. Bill Ackman of Pershing Square and David Einhorn of Greenlight Capital, two outstanding investors were both down over 20%.
As value investors, we could not rationalize the extreme valuation the market had placed on last year’s high flyers. Facebook has a market cap of $300 billion and a PE ratio of 106 times earnings. Amazon has a market cap of $315 billion and is trading at 970 times earnings. Netflix has a market cap of $49 billion and is trading at 300 times earnings. Alphabet (Google) has a market cap of $528 billion and is trading at 33 times earnings. If you look at the history of investing in technology, very few companies can maintain their growth and technological edge over the long run. The tech graveyard is full of once high flying companies, like Polaroid, Burroughs, Xerox, Kodak, AOL, Palm, Wang, JDS Uniphase, Sun Microsystems and more. The fact we didn’t own the high flyers, and we were guilty of owning companies involved in energy, materials and industrials caused us to have a subpar year with poor results.
The big story in 2015 was the slowdown in China, which triggered a slide in commodity prices from iron ore to copper to oil. We were not surprised by the Chinese slowdown, but we were surprised by the market reaction to some outstanding companies who have limited exposure to China. Emerson Electric, Colfax, Allison and Twenty First Century Fox were all down sharply for reasons unknown to us. Even bellwether Berkshire Hathaway was down 12%, and we have recently been adding Berkshire to our portfolios. Our investments in energy related companies had an extremely difficult time in 2015. Chesapeake Energy, EOG Resources, Freeport McMoran and Exco Resources were all down sharply. Having said that, I believe the worst is behind us in energy, and 2016 will bring gradual higher prices and improved performance. Production cutbacks are increasing, and for the first time the U.S. is now an exporter of both oil and natural gas, which will have a dramatic impact for U.S. producers. At the end of 2015, there were 698 drilling rigs in the U.S., down a staggering 70% in just one year. Worldwide demand
601 S. Figueroa Street, Suite 1975 Los Angeles, California 90017 213.943.1740 www.oldwestim.com
for oil has never been greater at 95 million barrels per day, and I believe supply and demand will become more aligned in the coming year.
We did have some star performers in 2015, namely Microsoft, GE, AIG, Liberty Media, Novagold, Post Holdings, Hologic and Onex. All of these companies are still in the portfolios and still have good upside potential.
The coming year should be interesting to say the least, with the presidential election looming in the fall. The stock market has risen for nearly seven years without a significant correction, which ranks as one of the longest bull runs in history. The market is off to a rough start in 2016, but I believe this plays into our favor. The companies we are invested in have tremendous value, and it’s only a matter of time until the aforementioned high flyers will come crashing down to earth, and the market will reward stocks selling at or below fair market value. China has been all over the news this week and rightfully so. Since the Great Recession, there has been an explosion of debt in China. Their banking system has grown to over $35 trillion, much larger than ours, with an economy much smaller than ours. Thankfully, we have never invested in a Chinese company and have no plans to do so.
Looking at economies around the world, we look like the only nice house in a rough neighborhood. China, Japan, Europe, South America, Canada and Australia are all struggling to grow, and all of these regions could be in or near recession. The question is can the U.S. raise up the rest of the world, or will the rest of the world drag down the U.S. My concern is there is way too much debt all over the world. Countries, states, counties and cities have all over borrowed, and excessive debt is a retardant to growth. I believe the Fed will be very hard pressed to raise interest rates much more, as any further strengthening of the dollar will be very problematic for corporate profits. Don’t be surprised if we see QE4 from the Fed before the end of 2016.
In past letters we normally highlight some of our bigger investments, giving you a description of the company and detail the reasons we own it. In this letter I will give a brief update on each of our biggest holdings with our outlook for them in the coming year.
IBM
As they have done every decade or so throughout their long history, management continues to transform this business. They continue to shed low margin business in favor of higher margin enterprises. The stock is trading at a ridiculously low price of $133 per share (8.5 times earnings), down from $215 per share. Berkshire Hathaway is the largest holder, and they continue to add to their position. We see very limited downside with huge upside potential. Watson is becoming an integral part of our healthcare system.
Fairfax Financial Holdings
This Toronto based insurance holding company was founded by legendary investor Prem Watsa, who has compounded book value by 21% per year for thirty years. We see a trend developing! Fairfax may not be a household name, but their insurance holdings are well known in the industry, including Odyssey 601 S. Figueroa Street, Suite 1975 Los Angeles, California 90017 213.943.1740 www.oldwestim.com
Reinsurance, Crum and Forster, and Zenith National. Like Berkshire Hathaway, Fairfax invests the float of their insurance premiums, with tremendous long term results. Watsa, who was born in India, has recently returned to his roots with an investment fund in this fastest growing country in the world.
Leucadia National
As an investment company that owns a collection of businesses in various industries, Wall Street has always deemed book value per share as the best proxy for fair market value. The same can be said for Berkshire Hathaway. Going back 30 years, Leucadia has traded for as much as 250 % of book value, and as low as 61% of book. Today’s market price of $16 per share has Leucadia trading at 56% of book value. Amazing. Great company, great management, great collection of assets (Jefferies, National Beef, Berkadia, Garcadia, Idaho Timber, Harbinger, etc) and it is insanely cheap. Big upside potential.
Sears Holdings
As most of you know, our thesis on Sears has always been the sum of the parts asset value, not Sears the retailer. This past year, management (Eddie Lampert) spun off 266 of their 1,727 properties into a REIT called Seritage Growth Properties. In return, Sears Holdings received $3 billion in cash. Then you might ask, did they take all the best properties into the REIT, and leave all the dogs in Sears Holdings? The answer is no. We have done a property by property analysis, and Sears still controls 1,461 properties that share very similar characteristics to those that were spun off. Besides the real estate, other valuable assets include three iconic brands (Kenmore, Craftsman, Die Hard), 800 auto centers, a re-insurance company and the largest home repair and installation operation in America. The current stock price is $18 and we believe fair value to be somewhere between $60 - $80 per share. This past year, the two largest shareholders, Eddie Lampert and Bruce Berkowitz, continued to accumulate more shares. Together they now own 77% of the shares outstanding.
Chesapeake Energy
It’s been painful owning this company in 2015. However, it just might be one of our best performers in 2016. The company has $1.7 billion cash in the bank, and an untapped line of credit of $4.0 billion that is good until 2019. In case you haven’t noticed, natural gas prices have rebounded from $1.85 to $2.40/ Mcf the past few weeks, and 71% of Chesapeake’s production is natural gas. This stock is grossly oversold and has huge upside potential.
Experiencing the melt down in energy and materials markets last year has been difficult, but we haven’t had permanent loss of capital, only temporary. Two of the greatest investors in the country, Carl Icahn and Mason Hawkins are the two largest holders of CHK, and they have not sold one share. In fact, the astute and shrewd Icahn has added to his position several times this past year.
Berkshire Hathaway
Berkshire Hathaway is our most recent investment and we are very excited about holding this great company at a time we feel the market is mispricing the future potential of the business. The company has 601 S. Figueroa Street, Suite 1975 Los Angeles, California 90017 213.943.1740 www.oldwestim.com
over $200 billion in investments generating over $10 billion in annual earnings, assuming just 5% annualized appreciation. Additionally, they privately own and operate around 100 businesses that employ well over 300,000 people. Collectively, these businesses generate over $20 billion in net earnings on an annual basis, a number that is slated to grow substantially as a result of recent capital spending. At roughly $130 per share for the B shares, BRK is available to purchase at 1.3x reported book value, only slightly above the levels Warren Buffet has declared he would openly repurchase the stock. We believe this is a very attractive entry point for a very strong collection of businesses and world-class capital allocators.
Now, Inc.
We wrote about this company in more detail in our most recent letter dated October 15, 2015, but thought it was worth re-emphasizing some key points. DNOW is a distributor of drilling and maintenance equipment with 80% of their business tied to the energy space. Management remains committed to what they can control and have identified this time as a unique opportunity for strategic acquisitions that will help the company emerge as a stronger global distribution business as the energy and industrial markets recover. Conservatively, we believe the company can generate $200 million in owners’ earnings, which represents a current earnings yield of around 14% at the current market prices of $13.00. The company has over $15 per share (not a typo) in net asset value (total assets – total liabilities) whiich provides us a very comfortable margin of safety in this investment.
****
I hope you get the idea that we own some very exciting opportunities that have not been recognized by the markets. I would much rather be in this position than if we owned Amazon selling at 900 times next year’s earnings. My experience has been, very difficult periods in the market are followed by great opportunities and very good performance. As difficult as the market has been for us at Old West, and for you our loyal investors, I am confident our investment process will produce superior results in 2016 and into the future. Thank you for all of your past and present support. We at Old West wish you and your families a happy, healthy and prosperous new year.
Sincerely,
Joseph Boskovich, Sr. Chairman and Chief Investment Officer
601 S. Figueroa Street, Suite 1975 Los Angeles, California 90017 213.943.1740 www.oldwestim.com
Old West Investment Management, LLC
October 15, 2015
Dear Investor,
At the midpoint of 2015, the S&P 500 was even for the year. There was a lack of volatility never seen before with the market neither up nor down by more than 4%. Well, that sure changed in the third quarter. I suppose you could call the first half of the year the calm before the storm. The S&P 500 was down by 6.44% in the third quarter, and as you can see in your enclosed statement, we underperformed the market for the quarter. Once again, our energy, materials and industrial companies hurt our performance. However, I believe we hit a bottom in our portfolios in September, as we have bounced sharply off the bottom the first ten days of October. The month of August was the most volatile of the quarter, with the S&P down 6% in one month. August was one of our better months in our six and one half year history, relative to the market. We have been prepared for a market downturn and feel we will have great outperformance in the fourth quarter and beyond.
Some of the companies that have been the biggest detractors to our performance over the past fifteen months have recently begun to rebound sharply. Freeport-McMoran is up 60% from its bottom, Chesapeake Energy is up 44% from its low, and New Gold is up 42%. We believe the companies that have hurt our performance will be instrumental in our having outperformance over the next several years.
With the recent dramatic drop in energy prices, many companies in the energy-related businesses are selling at big discounts to their intrinsic values. Old West Co-Founder Spencer McCroskey identified NOW, Inc. as one such opportunity. Spencer writes the following:
Distribution Now, or NOW Inc. (DNOW) is a worldwide distributor of drilling and maintenance equipment primarily to the energy and industrial markets, with the energy market responsible for over 80% of DNOW revenues. DNOW was spun out of National Oilwell Varco (NOV), a much larger provider of drilling and production equipment to the upstream oil and gas industry, in May of 2014. The CEO of NOV at the time, Merrill Miller, resigned as CEO of NOV and took on the chairman role of DNOW. Robert Workman, an executive with NOV since 1991 was assigned as President and CEO of DNOW. Combined, both Miller and Workman own about 1.3 million shares outright, in addition to another 1.8 million options with average exercise prices over $30 (current stock price is near $18) as well as 1.2 million restricted stock units that will vest over the next 5 years. In our view this ensures long term management and shareholder alignment.
601 S. Figueroa Street, Suite 1975 Los Angeles, California 90017 213.943.1740 www.oldwestim.com
DNOW services the oil and gas industry, so we don’t have to make a determination of what the future price of oil or gas will be, just that it will continued to get pumped out of the ground. We believe the current company is able to generate about $200 million in owners’ earnings on >$4B in revenue. This number has grown consistently over the past several years as the company has spent more than $1.1 billion on acquisitions. Year to date DNOW has spent another $220 million on acquisitions, all funded through working capital. Current debt levels are minimal, as of the last reporting period long term debt was only about $80 million. The company’s current assets total $1.7 billion (mostly inventory and AR), total assets equal $2.4 billion, offset by liabilities of $550 million. In short, we believe that there is substantial protection in the tangible assets on company’s balance sheet.
Our analysis found that the working capital currently tied up in the business is much more substantial than necessary, a likely source of future value. As a percentage of revenue, DNOW has consistently maintained 35% of their annual revenue in working capital. Industry competitors and other parts suppliers not specifically in the energy industry maintain working capital balances closer to 25% of annual revenue. Management has also acknowledged this excess working capital and has committed to reducing this over the next few years. This will translate into higher returns on invested capital as the company unlocks unnecessary inventory and deploys it through acquisition or operating efficiencies. In total, we estimate excess working capital to total about $300 million, or about $3 per share.
The combination of the fortified balance sheet and cash generative business in spite of the depressed oil and gas prices is what originally attracted us to the business. Upon further analysis, we not only discovered excess working capital as a store of value, but we also found that the company has been aggressively cutting operating costs as they close their branch model and shift to a distribution center model. This should lead to significant margin expansion in the coming years. While the majority of companies in energy space are fighting to stay alive, DNOW is actively seeking bargain priced acquisitions, exactly the kind of behavior we applaud. DNOW also has ample liquidity through their bank lines of credit that will allow them to maintain their acquisition strategy in the event that oil prices remain depressed longer-term. We expect these acquisitions will be a meaningful source of earnings growth over the next several years.
We believe that the company is conservatively worth around $20, a return of about $30% on our capital invested to date. The S&P 500 currently trades at 17x next years’ earnings. At a normalized owner earnings’ number of $200, this would value the company over $30 per share, a 66% premium to the current market price ($18). While we don’t need the market to “realize” our return for us through so-called multiple expansion, it’s an example that paying the right price for a great company may yield results in a number of different ways. On average, we’ve paid about $15.30 per share for DNOW, which is only 7x normalized earnings. At these prices, we are comfortable with our margin of safety.
601 S. Figueroa Street, Suite 1975 Los Angeles, California 90017 213.943.1740 www.oldwestim.com
The Case for Gold Miners
You may have noticed we have several gold mining companies across our portfolios. I’d like to explain our thinking in this out of favor sector. As we have pointed out many times, we are not macro investors, but rather bottom up researchers sifting through data looking for great owner/ operator run companies. One question we ask is, does the company have a product line where there will be future growing demand. Gold has been coveted by man for thousands of years. The price fluctuates, and there is risk the price could fall to the point where the mining companies lose money. Gold peaked at $1,900 per ounce in 2008, and has fallen as low as $1,035 recently. I believe there are several dynamics that will push the price much higher in the near future.
The world’s economies are currently in unchartered waters. Never before have central banks all over the world had such easy money policies as today. The U.S. Federal Reserve, the European Central Bank, the Bank of England, the Bank of Japan, the Bank of China, the Swiss National Bank, the Bank of Australia and more are all printing money at a feverish pace, suppressing interest rates, and intentionally debasing their currencies. There is no limit to how much currency these central banks can print. I believe gold is a form of currency, yet it is the only currency in the world that is limited in supply.
A popular argument against gold as an investment is that it doesn’t have a yield. There is no interest paid on gold deposits. However, for one of the first times in history, you aren’t paid any interest to speak of if you hold cash. The difference between cash and gold is the Federal Reserve continues to print dollars at an unprecedented pace. The U.S. has an $18 trillion national debt, with another $100 trillion plus of unfunded liabilities for Social Security and Medicare. Keep in mind we are not investing in gold bars or the GLD ETF. We are investing in companies that produce a product with ready and growing demand.
In America, we have several sayings where gold is mentioned as a benchmark, like good as gold, the gold standard, the golden rule, a pot of gold at the end of the rainbow, and the golden years. You get the idea. In as much as we value gold, people in other parts of the world LOVE gold. The people of China, India, Indonesia, Malaysia, the Philippines and other emerging countries covet gold more than we can imagine. As these countries become increasingly prosperous, the demand for gold will only increase.
There are 2,500 metric tons of gold produced in the world annually. It is widely believed that the world is producing as much gold per year now as it ever will. The easy supply has been found and mined, and it is becoming more difficult to find and more costly to mine every year. India is the biggest consumer buying 750 tons per year, followed by China at 430 tons. The U.S. consumes 130 tons per year. However, the U.S. has the largest national gold reserve at 8,000 metric tons, followed by Germany at 3,500 metric tons. Both Russia and China are aggressively adding to their national reserves the past few years.
601 S. Figueroa Street, Suite 1975 Los Angeles, California 90017 213.943.1740 www.oldwestim.com
How did we choose the mining companies in our portfolios? First, following our investment process, we own companies run by owner/managers. Management teams that are heavily invested in their company, combined with modest compensation packages that are respectful to us shareholders. Second, when a company’s revenue is dictated by the price of a commodity, a strong balance sheet is imperative. The price of gold can be at or below breakeven for long stretches, and too much debt can be crippling. Third, reserves must be in business friendly and stable countries. Many mining companies have reserves in countries like the South Africa and the Congo, and if the price of gold was high enough, nationalization would be a real possibility. Our miners have reserves in Canada, Chile, Mexico and the good old U.S.A.
I realize gold miners are a contrarian call, but I do believe there is a place for them in the portfolio. Most of these stocks have fallen as much as 80% from their highs, so we feel we have a good margin of safety in our positions, as we have made our recent purchases near the bottom.
I do not know if we are in a correction phase of a long term bull market, or if we have entered a bear market. What I do know is we own a collection of high quality companies run by great management teams, whose interests are aligned with ours. We are excited to see our investment ideas develop, and we are confident our performance will be strong the balance of this year and into the future.
Sincerely,
Joseph Boskovich, Sr. Chairman and Chief Investment Officer
601 S. Figueroa Street, Suite 1975 Los Angeles, California 90017 213.943.1740 www.oldwestim.com
Old West Investment Management, LLC
July 13, 2015
Dear Investor,
One year ago today we at Old West were feeling pretty good about things. In the six years we had been in business we had developed top tier track records across our portfolios. However, we hit a rough patch in mid 2014, and we have had subpar performance for the past twelve months. There are several reasons for this, including a crash in the price of oil and natural gas, a steep correction in the price of precious metals and materials, and some mistakes on my part.
The past twelve months have hurt our cumulative return and have been difficult for me and our team, but there is a silver lining. Our biggest holdings across our portfolios currently have tremendous value, and I’m very excited about the next twelve months and beyond. We have built positions in companies that in some cases are at multi year lows, selling at significant discounts to their intrinsic value. These are great companies run by great owner/managers.
Many investors have piled into momentum stocks selling at ridiculous valuations, and that is a big reason why the overall market averages are so high. Let me give you one example, Salesforce.com, Inc. (Symbol CRM). CRM is projected to have $5.6 billion in revenue this year, and is projected to lose $200 million. The market has decided CRM is worth $46 billion today. They are projected to make $1.00 per share two years from now, but that would have the company selling at 70 times earnings in two years. Whenever you start hearing the talking heads on TV value companies at a multiple of revenue with disregard for profit, watch out ! Recent valuations are reminiscent of the tech stock bubble of 2000. It is not in our DNA to invest your money in companies with such rich valuations. We are value investors through and through, and that is what will protect you when this six year bull market comes to an end.
Some of the greatest names in investing have suffered setbacks much worse than what we have experienced the last twelve months. It is imperative that we stick to our investment process and we will be greatly rewarded. To review our process for making an investment, we look to invest in companies where there is an owner/manager that owns a significant stake of that company and is 100% aligned with shareholders. This principle alone greatly narrows our investable universe. Once such a company has been identified, we are primarily interested in the value of the underlying business and its relationship to current market price. We cannot predict when a stock’s value discrepancy will be narrowed, but we feel secure in knowing that we own a business with excellent management at attractive prices. If our views of the underlying business change, then our investment position will change, but we will not lose conviction in an investment simply because of short term market fluctuations. By sticking to these principles, we feel very confident that we will continue to achieve our main goal, which is to provide attractive appreciation of capital over a long- term period to our investors without taking significant risk.
601 S. Figueroa Street, Suite 1975 Los Angeles, California 90017 213.943.1740 www.oldwestim.com
With every quarterly letter, I’d like to give you the investment thesis behind a few select holdings, as well as updates on holdings that might be problematic or misunderstood by the market.
Our co-portfolio manager and co-founder Spencer McCroskey has done substantial work on the two holdings he will write to you about. First, the thesis behind IBM, followed by an update on Sears Holdings.
IBM
One of the more recent companies we’ve invested in is IBM, the information technology company with a $160 billion market capitalization. Berkshire Hathaway is IBM’s largest shareholder, and has been for several years. But it wasn’t until Prem Watsa at Fairfax Financial initiated his position at reasonably higher prices than were currently available in the market that we thought it warranted a closer look.
One of the first things that was clear was just how universally out of favor IBM had become. At the start of Q4, 2014, the company was well on its way to becoming the Dow Industrial Average’s worst performer for the second year in a row. In October 2014, the company revoked their 2015 EPS guidance which had been set by the company’s predecessor CEO. This set off a wave of articles and commentaries about why the company was going to struggle to turn itself around. The list of reasons included shrinking revenues and free cash flow, lack of spending on R&D, and the substantial increase in debt to finance share buybacks and dividends. The last point drew comments from Stanley Druckenmiller, the former head of Duquesne Capital, who cited IBM as the “poster child” of a so-called “balance sheet recovery” which he defined as the artificial increase in EPS through the use of debt-funded share buybacks.
So what does this all mean, and what do we see at Old West? IBM has been through a number of transformations through the years, and we believe they are in the midst of another formative transformation. IBM has a fresh management team headed by CEO Virginia “Ginni” Rometty who began her tenure in 2012. Her plan for transformation in the coming years includes a focus on uses for “big data”, remaking enterprise IT infrastructure in the cloud, and reinforcing the social, mobile and security aspects of customer-engagement. What does this look like in practice? One example would be through the work IBM is doing with Burlington Northern Railroad (“BNSF”). IBM provides analytics technology to BNSF to help them reduce derailments. They installed 2,000 sensors spread across 32,500 miles of track, and 230,000 train cars in order to monitor changes in speed, temperature, vibration and alignment, all factors that could cause a derailment. IBM is able to analyze over 100,000 data points every day in order to assist BNSF with preventing problems before they become one.
IBM has consistently proved that they are able to generate substantial cash flows based on their core of high quality businesses: consulting (“Global Services”) and software. The majority of the revenue generated between these two business units is recurring in nature and provides a substantial backlog of stability headed into each year. In total, $50 billion in revenue generated between these two
601 S. Figueroa Street, Suite 1975 Los Angeles, California 90017 213.943.1740 www.oldwestim.com
business units, or more than 50% of the firm’s total revenue is recurring in nature. Additionally, the Global Services business generates 35% gross margins while the software business generates nearly 90% gross margins.
Over the last 5 years, IBM has generated on average, about $16 billion in net income on about $100 billion of revenues per year. For 2014, the company generated $15 billion in net income (before discontinued operations) on $92 billion in revenues. This is a 17% net income margin, an improvement over the previous five year period. This net margin improvement is a reflection of the company’s strategy to shed “empty calories”, as Ginni Rometty stated. The most recent example of this is their disposal of their semiconductor business which generated $7 billion of revenue but $500 million in operating losses. The company remains laser-focused on growing their profitable businesses and divesting their unprofitable ones.
Over the same five year period, IBM invested over $30 billion dollars in R&D, or roughly 6% of revenues annually. This R&D has led to more patents awarded to IBM than any other company for 22 straight years. In 2014, the company generated 7,534 patents the most patents ever issued to one company in a single year.
We believe IBM can earn about $15 billion annually (after R&D, interest expenses, and capital expenditures). This amounts to $15.25 per share, or about 9% at current market prices. The company has also demonstrated that they are committed to returning this cash to shareholders through the form of stock buybacks and dividends. In other words, as shareholders of IBM, we can reasonably expect about 9% in annual returns for the next several years with an upside of the patents generating value in excess of the earnings already accounted for with a sizable downside protection in the overall quality of the business.
Sears Holdings
You may have recently read about a sale leaseback transaction involving Sears and some of their owned properties. In short, Sears sold 266 properties (15% of their total property count, 20% of their square footage, and 1/3 of their owned properties) for $3 billion into a newly formed entity called Seritage Growth Properties (“Seritage”), which is a separate publically traded company traded under ticker “SRG”. Sears was able to sell some of their properties into three separate joint ventures with Simon Property Group, Macerich, and General Growth Properties, which raised $400 million. The additional $2.6 billion was raised through existing shareholders in the form of a rights offer. This means that all shareholders as of June 9th, 2015 received a right offering the chance to own the newly-formed SRG, which consisted of 266 properties previously owned by, and primarily occupied by Sears or Kmart, provided they paid the price determined by the rights offer.
Seritage raised a total of $1.1 billion in debt, using the mortgaged properties as collateral which meant that the rights offer raised about $1.6 billion from current shareholders, or $14.80 per current Sears share. What we knew about Seritage was that it was 94% occupied by Sears/Kmart, had about 39 million square feet of gross leasable area, and had the promise of higher-paying tenants replacing Sears in the near future. We estimated the total fair value for Seritage to be about $2.8 billion, which
601 S. Figueroa Street, Suite 1975 Los Angeles, California 90017 213.943.1740 www.oldwestim.com
was roughly equal to the value of the Sears properties that were transferred. Immediately after the rights began trading on the open market, we took advantage of the opportunity to sell our stake in Seritage at a value of $3.4 billion, a 20% increase over our estimated fair value. We hope to have the opportunity in the near future to own Seritage again, but it will have to be at a price that better compensates us for the risks embedded in a highly concentrated and levered REIT that will be in a state of significant change for the foreseeable future.
We felt that Sears was the main beneficiary of the deal and was the stronger of the two companies after the close of the transaction. In exchange for 266 properties, Sears received the full $3 billion, a fair value, in cash. This monetized an asset not earning anything and provides the company, and Eddie Lampert, options for capital allocation, a talent for which he is much better suited than as a retailer. Additionally, Sears doesn’t have to come up with future cash for tenant improvements associated with the 266 properties where they will be reducing their footprint over the coming years. These costs are now the responsibility of Seritage and the joint ventures. Finally, the sale of Seritage effectively meant we were reducing our stake in Sears by about 20%, a timely reduction based on the recent movement in the market price for SHLD shares.
Much has been and continues to be debated on this controversial company, however, we will continue to seek opportunities where we can buy dollars for fifty cents. Even after this transaction, we feel confident that a conservative assessment of fair value for Sears is over $50 per share while the current price is closer to $23. Since we’ve owned Sears, they have transferred around $13 per share in value in the form of spins, dividends, and rights offers.
Old West co-founder Joe Boskovich Jr. has summarized the thesis behind Fairfax Financial and will also provide you an update on Chesapeake Energy.
Fairfax Financial
Fairfax Financial is an insurance holding company based in Toronto, Ontario, and is led by a tremendously talented Chairman and CEO named Prem Watsa. Prem Watsa is often referred to as the Warren Buffet of Canada, and like Buffet, Watsa has made his shareholders a fortune by taking the premiums that Fairfax receives from its various insurance agencies worldwide, and invests those premiums in stocks, bonds, and other assets. Since 1985, Prem Watsa has compounded book value per share at 21.15% annually, and the common stock price has compounded at 19.8% annually.
Since starting Fairfax, Prem Watsa has amazingly navigated his company through and profited off of some of the most volatile investing landscapes. He sold half of his stocks and bought S&P put options ahead of the stock market crash of 1987, he bet big on Japanese puts- or rights to sell stocks at guaranteed prices – ahead of the Tokyo stock market collapse in 1990, and he made a fortune for his clients during the 2008 subprime mortgage crisis and the United States housing bubble. Today, Fairfax Financial is uniquely positioned to profit during the next bear market. Watsa sees global stock markets as overvalued, and he has instituted major hedges against a market drop. At the end of 2014, 89.6% of the Fairfax’s equity and equity-related holdings were subject to defensive equity hedges and deflation protection. In short, if the market drops, Fairfax gains!!
601 S. Figueroa Street, Suite 1975 Los Angeles, California 90017 213.943.1740 www.oldwestim.com
Despite Prem Watsa’s bearish views on the global stock market, Fairfax continues to identify many exciting investment opportunities for its long book, and our stake in Fairfax gives us exposure to those long term investments. For example, in 2011, Fairfax purchased a 9% stake in the Bank of Ireland, and earlier this year cashed in those shares for almost four times what they were worth at the time of purchase. In November 2014, Prem Watsa formed Fairfax India, a new $1 Billion investment holding company that is 30% owned by Fairfax Financial. This entity is aimed at acquiring control or significant influence positions in Indian companies based on Prem Watsa’s confidence in the “business-friendly government” of Indian Prime Minister Narendra Modi, who was elected this past May. Bank of Ireland, Fairfax India and IBM are examples of long term investments that Fairfax has been purchasing despite an overall negative macroeconomic view.
Chesapeake Energy
For several years before the global financial crisis, investors rewarded Chesapeake Energy as co- founder, Chairman and CEO Aubrey McClendon borrowed heavily to snap up oil and gas prospects and drill more wells than its rivals. That changed in 2012 as the company’s debt reached over $16 billion and shareholders began to worry about the CEO’s appetite for risk and enthusiasm for spending. Between 2008 and 2013, Chesapeake’s capital spending exceeded cash flow by an astounding $47.4 billion. That is all in the past.
In 2012, Chesapeake shareholders fired Aubrey McClendon from the company that he founded and brought in an independent Chairman, Archie Dunham. Archie Dunham is one of the brightest and best in his field. He ran Conoco as CEO, and after the merger of Conoco and Phillips Petroleum, he ran Conoco Phillips as Chairman. Over the last 1 ½ years, he has purchased more than $40 million of stock on the open market, and most recently bought $14 million at $13 per share. Archie Dunham and CEO, Doug Lawler, have set forth a plan to put Chesapeake in a better financial position and spend in line with cash flow. In October 2014, Chesapeake sold gas assets to Southwestern Energy for $5.38 Billion. The sale shed Chesapeake of non-core assets in the Marcellus and Utica Shale formations that accounted for roughly 8% of the company’s total production. In return, CHK received half the company’s market value. This action was not only unrewarded in the market, but seemingly punished. More recently, on July 1st, Chesapeake announced that it was selling additional non-core oil and gas assets in Western Oklahoma to privately held FourPoint Energy for $840 million. Both of these transactions have greatly improved Chesapeake’s financial health, while divesting non-core assets that represented small fractions of the company’s total production. Today, the company has no short term debt and assets easily cover liabilities by almost 2x’s. Chesapeake has become a very efficient and disciplined company under the new management team, and we believe that we will profit handsomely in this investment!
A final note on Chesapeake. Our initial purchase was at $21 per share. The stock climbed to $32 before the bottom fell out of the oil market. It recently fell to $10 per share. Besides board chair Dunham’s purchase at $13, famed investor Carl Icahn added to his 73 million shares at $14 per share. We have increased our position twice as the shares have dramatically fallen. Am I upset that the share price has fallen so low? Yes and no. We now own many more shares, and we will all be handsomely rewarded as it recovers.
601 S. Figueroa Street, Suite 1975 Los Angeles, California 90017 213.943.1740 www.oldwestim.com
Hopefully you get the idea that our team is excited and bullish about the holdings in our portfolios. Regardless of all the noise and problems in the world (Greece, China and more), we look forward to the second half of 2015 and beyond.
Sincerely,
Joseph M. Boskovich Sr. Chairman and Chief Investment Officer
601 S. Figueroa Street, Suite 1975 Los Angeles, California 90017 213.943.1740 www.oldwestim.com
Old West Investment Management, LLC
April 09, 2015
Dear Investor,
In the past I have written an annual letter to our investors where I discuss the previous year’s performance and give our outlook for the coming year. In the future I will write a quarterly letter which will accompany your statement. Beginning with this first quarter letter, I will highlight one or more of our holdings, especially where a company might be misunderstood and misvalued by the market.
This past quarter saw tremendous volatility in the market, with the DOW up or down by more than 300 points several days. At the end of the quarter the market was nearly flat, and our portfolios were slightly above or below the flat line (see enclosed statement). Energy prices appear to have stabilized after bottoming last month. The market has been trading in a narrow range this month, and could easily break out one way or another. We can’t control the market, but we are very confident that the companies we are invested in have good value and will perform well in the long run.
I would like to highlight two of our biggest holdings in this letter, Leucadia National Corporation and Chesapeake Energy Corporation. These were two of our worst performing companies in 2014, and Chesapeake was down another 27% in the first quarter of 2015 (Leucadia was flat).
First let’s talk about Chesapeake (CHK), a company I have discussed in past letters. We first started investing in CHK in May, 2013 at a price of $21 per share. We have followed the company for years, but what finally sparked our interest was when the CHK board brought in oil industry veteran Archie Dunham as Board Chair. Archie is a Marine Corp veteran who spent his career at Conoco Phillips working alongside industry icon Jim Mulva. Dunham quickly ousted founder Aubrey McClendon, who was accused of self dealing at the expense of the company. Dunham chaired the search committee to find a new CEO, and they hired a rising star from Anadarko Petroleum, Doug Lawler. The same day CHK announced the hiring of Lawler, Dunham made an extraordinary open market purchase of $10 million of CHK stock at $21 per share. We made our initial purchase shortly afterwards.
CHK stock rose to $30 per share in 2014, but then the price of oil was cut by more than half, from $100 per barrel to the low 40’s. When we first invested in the company, we did so with the intention of making it a long term core holding. The two biggest shareholders in the company are legendary investors Mason Hawkins of Southeastern Asset Management, and activist investor Carl Icahn.
601 S. Figueroa Street, Suite 1975 Los Angeles, California 90017 213.943.1740 www.oldwestim.com
CHK stock recently hit a low of $13.38 per share. Soon afterwards Icahn purchased an additional six million shares, and board chair Dunham purchased an additional $14 million of stock at $14 per share. The share price falling to this ridiculously low level gave us the opportunity to increase our stake, which we capitalized on.
CHK has over 14 million acres of tremendous reserves of both oil and natural gas, with a strong balance sheet which will see them through these difficult times of low prices. Warren Buffett said, “If you aren’t willing to own a stock for ten years, don’t even think about owning it for ten minutes.” I predict we will make a lot of money owning Chesapeake Energy.
Leucadia National, which has been described as a mini Berkshire is our biggest investment across all the portfolios, and is a company that I have also discussed in past letters. Although we are frustrated by Leucadia’s performance over the past year (down 21% in 2014), we are very optimistic about its long-term prospects. Joe Steinberg founded Leucadia 30 years ago, and he remains chairman of the board with an ownership stake worth $530 million. Two years ago, Leucadia and Jefferies & Co. combined to form a unique and powerful merchant and investment banking platform. Armed with permanent capital, Leucadia has the unique ability to invest for the long term and focus on creating value for its shareholders through opportunistic capital allocation. Since March 1, 2013, Leucadia has invested an aggregate of almost $2.2 billion towards new investments.
In his most recent annual letter to shareholders, Leucadia CEO Rich Handler talks about Leucadia increasingly becoming one of the first groups that is turned to when unexpected value propositions arise and a rapid and creative solution is necessary. Two such examples are Leucadia’s recent investments in Harbinger Group, and their bailout of FXCM;
Harbinger Group (HRG): HRG is a diversified holding company that owns substantial interests in two very attractive public companies (59% of Spectrum Brands (NYSE: SPB) and 80% of Fidelity & Guarantee Life (NYSE:FGL). At the time of Leucadia’s initial purchase in September 2013, the sum‐of‐the‐parts valuation of HRG was roughly $13.50 per share, while the stock was trading at around $10.00. Leucadia increased its stake considerably in 2014, and also named its Chairman, Joe Steinberg, as the new Chairman of HRG. In this transaction, Leucadia masterfully took advantage of its permanent capital and acquired a 23% stake in a holding company at a 10% discount to market, on average. In doing so, they have acquired a 13% look-through stake in Spectrum Brands and get the remaining Harbinger businesses for free. To date, Leucadia has a mark‐to‐market gain of $119 million on their investment.
Forex Capital (FXCM): FXCM is an online foreign exchange market broker based in the United States. On the morning of January 15, 2015, the Swiss National Bank announced that it would drop its three year old peg of 1.20 Swiss francs per euro, and would let it float against the Euro. On the news, the Swiss Franc appreciated by 41%, and FXCM shares plunged more than 80 percent in after hours trade because of the severe risk that FXCM would become insolvent due to its inability to
601 S. Figueroa Street, Suite 1975 Los Angeles, California 90017 213.943.1740 www.oldwestim.com
meet regulatory capital requirements. Within hours, Leucadia management was at FXCM headquarters negotiating a $300 million bailout deal. Leucadia now holds $300 million in principal amount of a two‐year secured term loan with an initial interest rate of 10% per annum, increasing by 1.5% per annum each quarter for so long as the loan is outstanding. Additionally, Leucadia will receive the majority of proceeds in connection with any sale of assets, any dividend or distribution or the sale or indirect sale of FXCM’s business. In just 2 ½ months, Leucadia has already received $66 million from FXCM.
These are just two examples of companies we are invested in that are trading at substantial discounts to their intrinsic values. Six years into a bull market, our team has been able to identify numerous companies with tremendous value, which is why I am so optimistic about how we will perform the balance of this year and beyond.
Sincerely,
Joseph M. Boskovich Sr. Chairman and Chief Investment Officer
601 S. Figueroa Street, Suite 1975 Los Angeles, California 90017 213.943.1740 www.oldwestim.com
Old West Investment Management, LLC
January 7, 2015
Dear Investor,
The year 2014 goes down as one of the more peculiar years I have experienced in my many years of investing. The S&P 500 Index finished the year up 13.7%, and 85% of all money managers failed to beat this widely used benchmark. As a contrarian, I hate being lumped together with such a compelling majority, but unfortunately we were one of the 85%. I can’t explain why all the others underperformed last year, but I do have a clear understanding of how we at Old West accomplished our numbers. I’ll point out that the only other year we underperformed the market was 2011, and 2012 was one of our best years. I expect a similar fate in 2015.
The big story of the year was the dramatic fall in the price of oil. We have significant exposure to the energy sector, and we believe the companies we own are best of breed and have very bright futures. Our energy holdings were a big contributor to our underperformance. We continue to own these companies, and we continue to be very excited about America’s march towards energy independence.
Speculation drove the stock price of many technology companies to all time highs, as companies were being valued on a multiple of revenue versus a multiple of earnings. We continue to favor companies with real earnings and real cash flow, and I believe we were penalized for being conservative in 2014.
Our All Cap portfolio of our top 25 ideas was up 5.72% in 2014 net of fees. Our Focused portfolio of our Top ten ideas was down 5.12% in 2014. Top performers were Fairfax Financial (+31%), Live Nation (+32%), Microsoft (+24%) and AutoNation (+22%). Top Detractors to performance were Freeport-McMoRan (-38%), EXCO Resources (-59%), Chesapeake Energy (-28%) and NMI Holdings (-22%).
Our Large Cap portfolio was up 1.78% for the year. Of the thirty five names in the portfolio, four are energy companies. EOG Resources, Chesapeake, Freeport and Murphy Oil are all outstanding companies with huge upside potential. Some other companies in the portfolio selling at big discounts to intrinsic value would be AIG, Leucadia, Bank of America, New Gold, Jacobs Engineering and IBM.
601 S. Figueroa Street, Suite 1975 Los Angeles, California 90017 213.943.1740 www.oldwestim.com
Our Small/Mid Cap portfolio was down 1.24% in 2014, versus our benchmark the Russell 2500, which was up 7.07%. As in our other portfolios our exposure to energy and materials was a big detractor to our performance. Looking ahead to 2015, this portfolio is poised to perform extremely well. Companies like Air Lease, Hornbeck Offshore, Leucadia, Magnum Hunter Resources, Novagold, NMIH, and Remy International, all of which performed poorly in 2014, are selling at significant discounts to their intrinsic values.
Across our different portfolios, we have our clients money concentrated in our best ideas. Fifty percent of our investment dollars are invested in our top ten ideas. Our single biggest investment is Leucadia National Corporation, which was down 21% in 2014. I’m not happy that the stock price has not performed well, but not at all disillusioned by the prospects for the company. Leucadia’s book value is $28 share, and is currently selling for $22 per share. Berkshire Hathaway is selling for 150% of book value, and Leucadia (called by many the “baby Berkshire”) is selling for 80% of book value. We have a very high confidence level in Leucadia management, who collectively own $1.25 billion of their own stock.
We continue to hold our investments in Sears Holdings. When you add the spinoff companies (Land’s End and Sears Hometown) to the original Sears Holdings investment, we have actually made money, although less than our overall returns. Management has closed 235 of their worst performing stores this year alone, and they continue their transformation into a real estate company. We believe today’s share price of $33 is very conservatively a 50% discount to liquidation value.
Regarding my outlook for 2015, I believe the economies of the world will continue to struggle with low growth. Debt is a retardant to growth, and worldwide debt has grown from $80 trillion to $210 trillion in the past nine years. World debt has grown 12% per year while world GDP has grown 4% per year. In 2008 world total debt ex-financials was 175% of world GDP, and today it stands at 215%. A major factor in our current lower than expected inflation rate is a poisonous combination of rising debt and slow growth. The growth slowdown makes deleveraging harder which at the same time, high indebtedness exacerbates economic slowdown. I believe this largely explains the current slowdown in most of the world, and especially in Europe and Japan.
China’s massive over building and slowdown in exports will continue to burden them. China is the world’s second largest economy and the world’s largest banking system, with $26 trillion in assets, or more than 1/3 of global GDP. Forty percent of Chinese bank loans are tied to real estate. Many of these loans are in arrears and rather than take write downs of bad debt, they roll forward the amount in arrears into a new loan. Can you imagine our banking system operating like that? Central economic planning has never been successful, and China will not be an exception to this fact. It’s very difficult to get a clear picture of the true status of the Chinese economy because their government puts out statistics that are not reliable and very likely false. We have never invested in a Chinese company and we have no plans to do so.
601 S. Figueroa Street, Suite 1975 Los Angeles, California 90017 213.943.1740 www.oldwestim.com
The United States economy appears to be the lone shining star in the world. The EU, China, Japan, Australia, Canada, Brazil and Russian economies are all struggling to keep their heads above water. The U.S. has three to four percent GDP growth, falling unemployment, low inflation, and a tremendous shot in the arm with dramatically lower gasoline prices. We do have much higher expenses for health care and education, but the gas prices are making consumers feel more like spending, and that is bullish for the stock market. Like other countries around the globe, we have serious debt issues that have not been resolved. We have over $17 trillion of sovereign debt not including future entitlement obligations. Baby boomers are leaving the work force at an increasing rate, and some very difficult decisions need to be made regarding medicare and social security. We are very fortunate that today’s ultra low interest rates are masking the issue of how to service this debt, but there is a brewing crisis down the road.
I guarantee you interest rates are going to rise but I have no idea when. Worldwide interest rates are at a 500 year low, with no sign of rising thanks to deflationary pressures. This too is bullish for the stock market.
Having discussed all these macroeconomic issues, I need to point out that we spend the great majority of our time studying individual companies. Of course macroeconomic issues affect the stock market, but we are looking for great companies run by great owner/managers with track records of success. Great companies survive most any macroeconomic environment. U.S. companies continue to have prodigious cash flow and stock buyback and dividend increases continue. I find it interesting that stocks are under-owned by many investors. U.S. pension funds, with $14 trillion in assets, are only 37% invested in stocks. This is not a sign of a stock market bubble.
I feel the stock market today is neither expensive nor cheap, but most likely fairly priced. We are coming up on the six year anniversary of the past recession market bottom, and the next few years will be much tougher to make gains than the past six years. Active managers (meaning people who pick stocks for a living) have had a difficult time beating the stock market indexes the past few years. This is most typical in a good market when all boats are rising. Many investors, including large institutional investors, have turned to index funds and ETF’s for the lower fees, and lately just as good or better performance. I believe that is about to change, and we are entering a period where it will be a stock pickers market. We will stick to our investment process, and I am very confident that our current holdings are going to have tremendous out performance over the next few years. Most of the companies we own are trading at significant discounts to their intrinsic values, and we are very excited to see these ideas develop.
601 S. Figueroa Street, Suite 1975 Los Angeles, California 90017 213.943.1740 www.oldwestim.com
We are now in our seventh year of business, and we have a dedicated and hard working team trying our best to maximize your returns with a watchful eye on risk. Thank you for your loyal support, and I wish you a happy, healthy and prosperous 2015.
Sincerely,
Joseph M. Boskovich Sr. Chairman and Chief Investment Officer
601 S. Figueroa Street, Suite 1975 Los Angeles, California 90017 213.943.1740 www.oldwestim.com
Old West Investment Management, LLC
January 13, 2014
Dear Investor:
As I sit down to start writing this annual letter to investors these first days of 2014, I think back to what my expectations were for the stock market one year ago. I would not have predicted that the S&P 500 would be up 32.39% in 2013. Especially since this market benchmark was up 128.71% from the market bottom in 2009 though the end of 2012. I’m pleased to tell you that all of our portfolios continue to have outstanding performance, and we have fully participated in this robust market rally.
Our Large Cap Portfolio was up 31.24% in 2013, and we accomplished this return without investing in any of the highfliers like Google, Amazon, or Facebook. Our Small/Mid Cap Portfolio was up 25.12% and that was in spite of getting defensive in the second half of the year and at times having as much as 10% cash in the portfolio. Our All Cap Portfolio was up 26.46%, as we continue to build a tremendous five year track record. Our Focused Portfolio of our top ten ideas (which currently contains 12 stocks) was up 32.02% this past year. The very good news for our clients is most of our investments have yet to work. I see significant upside in these outstanding companies.
In addition to our long only separate account strategies, our alternative investment strategies for accredited investors continue to provide our clients with solid long term performance.
Although this five year bull market is due for a correction as we enter 2014, we are true bottom up investors. We are focused on the individual companies we are invested in, or companies we are contemplating investing in, and we don’t pretend to know what the market is going to do.
I would like to give you an update on four of our largest holdings, including their prospect for 2014.
FAIRFAX FINANCIAL
Fairfax CEO Prem Watsa is known as “The Warren Buffet of Canada”. This Toronto based insurance conglomerate has a wonderful long term track record. The book value of this stock has compounded at 23% year for 27 years (I see a trend developing!!) Like Buffet, Watsa has made his fortune investing the float of insurance premiums, and he is truly one of the world’s great investors. Watsa has been rather bearish the past few years, and continues to believe that deflation is the
601 S. Figueroa Street, Suite 1975 Los Angeles, California 90017 213.943.1740 www.oldwestim.com
greatest threat to the world’s economies. On days that the stock market is sharply down, Fairfax stock is often up, so it works as a nice hedge. We own Fairfax in all of our portfolios.
LEUCADIA NATIONAL CORPORATION
Joe Steinberg and Ian Cumming met in college 43 years ago. They started Leucadia in 1978 and since then they have compounded shareholders return at 18.2% per year. Leucadia can be described as a mini – Berkshire Hathaway. Leucadia owns a variety of businesses, including investment bank Jefferies, National Beef, Berkadia, Garcadia and Idaho Timber. Leucadia is currently sitting on $2.2 billion in cash and liquid investments plus a $3.6 billion Federal income tax loss carry forward.
Leucadia was formerly the largest shareholder of Jefferies, and this past year they bought the entire company. Steinberg and Cumming are in the 70’s, and they didn’t have a clear succession plan. Former Jefferies executives Rich Handler and Brian Friedman are now the top executives at Leucadia, with Joe Steinberg staying on as Chairman. I believe Handler and Friedman, who are in their 50’s, will smartly and aggressively seek investment opportunities worldwide for Leucadia, and it could be the Berkshire Hathaway of the next ten to twenty years. We own Leucadia in all our portfolios.
CHESAPEAKE ENERGY CORPORATION
Chesapeake is an interesting story. The company was built by renowned oil man Aubrey McClendon, who aggressively grew the company for many years. Towards the end of his stint as CEO he was accused of self dealing and was forced out by a newly independent Board of Directors. Archie Dunham, the former CEO of oil giant Conoco Phillips, was brought in to be board chair once McClendon’s self dealings came to light.
Dunham became chairman of the search committee charged with finding Chesapeake’s new CEO. After a diligent search effort they chose Doug Lawler, a rising star at Anadarko Petroleum. The same day Dunham announced the hiring of Lawler, he made an open market purchase of $9,000,000 of Chesapeake stock. Open market purchases by insiders of this magnitude are not common, and my eyes light up when I see a transaction this impressive.
Archie Dunham is a Marine Corp. veteran who spent his career working side by side with legendary oilman Jim Mulva at Conoco. With Archie now serving as Chairman of Chesapeake and Lawler getting his chance as CEO, I believe the result will be powerful. Former CEO McClendon amassed huge tracts of oil leases during his tenure, and the company had excess land reserves. Lawler immediately began selling these excess reserves and generated $5 billion in proceeds this past year, and reduced company debt by $3 billion.
Traditionally Chesapeake was mostly a natural gas producer. With the natural gas market depressed due to abundant supplies, the company has been aggressively moving towards oil, and is currently
601 S. Figueroa Street, Suite 1975 Los Angeles, California 90017 213.943.1740 www.oldwestim.com
producing much more oil than gas. Also, McClendon built a bloated organization with excess layers of employees at every level. Lawler has laid off hundreds of employees not critical to the organization, not to mention many other unnecessary expenses. We think Chesapeake has a very bright future.
SEARS HOLDINGS CORPORATION
The team at Old West continues to monitor the situation at Sears very closely. Our thesis has always been that Sears will not survive as a big box retailer. We believe the sum of the parts asset value far exceeds today’s stock price. CEO Eddie Lampert, who owns nearly 50% of the shares, continues to close the worst performing stores, but overall same store sales are falling faster than he expected, resulting in significant negative cash flow.
Besides Lampert owing 50% of the shares, Bruce Berkowitz of the Fairholme Fund, one of the great investors in the world owns 20% of the shares. Noted investor Murray Stahl of Horizon owns 3 million shares, and Thomas Tisch of the Tisch family (Loews Corporation) owns 4 million shares and has a board seat. I am very concerned about this investment and I am following the situation very closely. I believe the sum of the parts valuation is easily in excess of $100 per share (today’s price is $36), but unless Lampert can stop the excessive bleeding, the asset value may not be fully realized.
* * *
There are several indicators currently signaling the stock market is due for a pullback. Bullish sentiment of investors recently outnumbered bearish sentiment four to one. Retail investors have been pouring money into mutual funds, with $450 billion going in the past year, which is more than the previous four years combined. Why does this optimism among investors worry me? I am a contrarian investor by nature, and I have learned that the greatest opportunities arise when things are bleakest. The more the investing public likes the market the more worried I become. However, the market is basically flat for the past fourteen years, so it very well could keep going. But nervous I am!
In the year 2000, the market multiple was 35 times earnings, almost double today’s market multiple. The S&P 500 is not that much higher today than the peak in 2000, yet corporate earnings are three times higher today. But this five year bull market run is showing signs of slowing, and most likely due for a fairly sharp correction. I take great comfort in knowing that the companies we are invested in are reasonably priced, with owner/operators who are invested right alongside us. The year 2000 market fall was preceded by massive insider selling at nearly all the technology companies. Our promise to you is we will vigilantly watch insider activity to be sure there is no significant selling at our companies.
601 S. Figueroa Street, Suite 1975 Los Angeles, California 90017 213.943.1740 www.oldwestim.com
We have recently moved offices within the same building, and we hope you’ll stop by to see us and our new space the next time you’re in Downtown Los Angeles. Thank you for your continued support, and we at Old West wish you and your family a happy and healthy 2014.
Sincerely,
Joseph M. Boskovich Sr. Chairman and Chief Investment Officer
601 S. Figueroa Street, Suite 1975 Los Angeles, California 90017 213.943.1740 www.oldwestim.com
Old West Investment Management, LLC
January 11, 2013
Dear Investor:
This past November marked the beginning of Old West Investment Management’s fifth year in business. I am extremely pleased with all facets of the company that we have built.
Our Large Cap portfolio was up 24.5% net in 2012, ahead of the total return of the S&P 500, which was up 16.0%. Top performers in the portfolio were Bank of America, Jefferies, USG, Sears, The Gap and Liberty Media. Our Small/Mid Cap portfolio was up 24.6% net in 2012, compared to our benchmark the Russell 2500 which was up 17.9%. Top performers in the portfolio were USG, Sears, Smart Balance, Texas Industries and Lennar. Our Focused portfolio, which is comprised of our ten best ideas, was up 31.4% net in 2012. Top performing names were Sears, USG, Jefferies and Liberty Media. Since inception, we have compounded at 13.3% net in our Large Cap portfolio, 16.9% net in our Small/Mid Cap portfolio, and 14.9% net in our Focused portfolio, all of which are above their respective benchmarks. We have done this by investing in owner-manager run companies at prices offering demonstrable margins of safety.
In addition to our long only separate account strategies, our alternative investment strategies for accredited investors continue to provide our clients with solid long term performance.
While all of our investment strategies did well this past year, we needed a strong year since we had a disappointing 2011. The two companies that were primarily responsible for a weak 2011, Jefferies and Sears, were two of our best performing investments in 2012. One measure of an investor is whether he “cuts bait” when an investment goes against him. When you’ve done your research and are confident in your investment process, a dramatic price decline is often a great opportunity to increase your investment and be paid handsomely for work that has already been done. This is exactly what happened to us in 2012. It is interesting to consider that if the companies that we have owned were to have simply appreciated to their current prices from our original purchases, our returns would be lower than they are.
As we enter 2013, we have some outstanding new companies in the portfolios, like Colfax and AutoNation, as well as some long term holdings that still represent tremendous values at their current prices. Speaking of long term holdings, it’s also interesting to note that an owner of one share of Sears Holdings was distributed securities worth roughly $10 over the course of the last year. Despite our strong performance last year, all of the companies that we currently own still trade at significant discounts to their growing intrinsic values.
601 S. Figueroa Street, Suite 1975 Los Angeles, California 90017 213.943.1740 www.oldwestim.com
As our investment team continues to mature, our investment process continues to evolve and improve. We continue to seek out companies that are feared, ignored, or misunderstood by the market. As always, we remain committed to investing in companies run by management teams with large stock ownership, smart pay, and track records of compounding shareholder value.
Across the globe, countries are grappling with excessive sovereign and personal debt loads coupled with anemic economic growth. The U.S., U.K., E.U., China, Switzerland, and Japan are all attempting to jumpstart their economies with collective money printing and government intervention in debt and currency markets. Never before has so much of the world attempted to solve the same problems with the same tools.
The current state of the U.S. economy has been described as the best house in a rundown neighborhood. Ben Bernanke continues his experiment with uncharted monetary stimulus, and the world’s major central bankers are following along. As extreme as the Fed’s measures seem, they are actually moderate when compared to other central banks. Countries all over the globe are printing money to buy bonds, stocks and gold, with the assets being held on the ballooning balance sheets of their central banks. For example, assets held on the books of the U.S. Fed approximate 20% of our GDP. The E.C.B. has assets equal to 30% of the European Union’s GDP. The Swiss National Bank, historically considered a beacon of financial prudence, holds assets equal to 100% of Swiss GDP. I’m not smart enough to know how this plays out, but I’m old enough to be worried.
And then there is Japan, which seems like the canary in the coal mine of sovereign debt. Shinzo Abe was just re-elected Prime Minister, their seventh in the last seven years. The Bank of Japan has held interest rates at near zero for over a decade, and they are in the middle of “unlimited” quantitative easing. Japan is the world’s third largest economy, and the world’s second wealthiest nation. With sovereign debt in excess of 200% of GDP (compared to 90% for the U.S.) and a rapidly aging population, it is hard to see how the Japanese Government will be able to honor their commitments to their citizens or their creditors. In other words, a de facto Japanese default seems inevitable at some point.
The end result of this money printing experiment will be inflation, and it’s just a matter of timing and magnitude. We believe the best place to invest during inflationary times is the stock market, especially in companies that have the ability to pass on price increases. And yet investors continue to pour money into the bond market seeking safety. I can’t imagine buying a US Government bond maturing in fifteen years yielding 2 1/2 %. In this environment, owning Government bonds seems to be the equivalent of “picking up dimes in front of a steamroller” as Leon Cooperman has said.
We have a new addition to our investment team in 2013, Brent Humphreys. Brent worked at Knott Partners in New York for the past 5 years, and we are extremely excited about the skill set that Brent brings to our team. We first met Brent several years ago; we immediately recognized his passion and talent, and we’ve been waiting for the right opportunity to bring him on. Welcome Brent!
601 S. Figueroa Street, Suite 1975 Los Angeles, California 90017 213.943.1740 www.oldwestim.com
As we enter this New Year, we are excited and confident about the companies that we own on your and our behalf. I am also very pleased with our team’s abilities and drive. Trading, compliance, operations, marketing and research are all critical areas in a money management business, and we strive to excel in all of them.
Thank you for your continued loyalty and support, and I wish you and your family a healthy, happy and prosperous 2013.
Sincerely,
Joseph M. Boskovich, Sr.
Chairman and Chief Investment Officer
601 S. Figueroa Street, Suite 1975 Los Angeles, California 90017 213.943.1740 www.oldwestim.com
Old West Investment Management, LLC
January 13, 2012
Dear Investor:
This past November marked the third anniversary of the founding of Old West Investment Management. We are proud of the company and investment track records that we have built, and we recognize that we would have neither without your trust and partnership. We began our business in the heart of the financial crisis of 2008, and 2011 was once again full of financial market anxiety and volatility. Whatever 2012 brings, we remain guided by our simple investment philosophy and focused on the companies that we own.
Following strong performance in our first two years of business, 2011 proved to be challenging. In calendar 2011, our Large Cap portfolio was down 9.5% compared to our benchmark, the Russell 1000, which was up 1.5%. Our Small/Mid Cap portfolio was down 9.59 % compared to our benchmark, the Russell 2500, which was down 2.51%. Our Focused and Balanced portfolios were down 13.75% and 3.18% respectively. The general market benchmark, the S&P 500 was up 2.11% in 2011. In addition to our long only strategies, our alternative investment strategies for accredited investors continue to provide our clients with solid long-term performance. In summary, despite disappointing investment performance this year, our various investment strategies have produced strong risk-adjusted absolute returns since inception. While we are not at all pleased with our performance last year, I firmly believe we will outperform the market in the future, just as we have historically. In fact, I consider short-term underperformance to be an unpalatable if inescapable prerequisite for long-term outperformance.
Although we have several different investment products, it’s important to remember that they all stem from a single investment process. We spend all day studying companies and the people who run them. Our best investments can be found across our various products, as we leverage our intensive research process to produce ideas that are unique and opportunistic.
As I look at our holdings, I am truly impressed by the quality of the companies that we own and encouraged by how cheap they are. Our investment performance this year was negatively impacted by two of our largest investments, Sears Holdings and Jefferies Group, which each fell by more than 50%. While it is never fun to watch large investments fall in market price, it can often be a blessing in disguise as it allows us to increase our investment at even more favorable prices, which we have done with both Sears and Jefferies. Regarding our investment in Sears, our original thesis remains intact, and we are confident that the company is worth multiples of its current price. We have completed an incredibly in-depth presentation on the company (much like our work on USG) and
601 S. Figueroa Street, Suite 1975 Los Angeles, California 90017 213.943.1740 www.oldwestim.com
would be happy to share it confidentially with any investor that has an interest. Jefferies is a very well run company that is currently under-earning because of its thoughtful investment in new hires and capabilities. In the week after MF Global went bankrupt, Jefferies was attacked by a publicity- hungry analyst that forgot to do his homework before he opened his mouth on national television. More than 50% of Jefferies is owned by employees and Leucadia National, and the company’s track record of staying out of trouble speaks for itself. Rich Handler, the CEO, has spent the past decade transforming the company into a global investment bank/broker dealer, and it’s only a matter of time until shareholders are rewarded richly. To use a historical analogy that Bruce Berkowitz at Fairholme has thrown around: if you were a Berkshire Hathaway shareholder in 1974, you watched the stock price fall from $76 to $40 per share. The $115,000 per share price today (fair value is likely between $130,000-150,000) poignantly illustrates the absurdity of focusing on short term market movements as opposed to long-term value creation.
The 2011 headlines were dominated by the European Union and the idea of sovereign risk. It appears they will continue to be the center of world attention in early 2012. Regarding the EU, it is worth remembering that no country has benefitted from the introduction of the Euro more than Germany. Twenty years ago before the Euro’s introduction, Germany was not even a top 20 exporter to the world, and now it is the second largest. Although oversimplified, the price of 6% German unemployment is 20% Spanish, Greek, Italian, Irish, and Portuguese unemployment. So far, the Germans have been playing hardball around fiscal responsibility, forcing the more profligate Euro members to get their financial houses in order. Ultimately though, Germany has the most to lose from an unraveling of the Euro.
Despite what the Germans say publicly, this will likely be accomplished with money printing in some form or another in order to inflate nominal GDP growth (European money supply has expanded 60% y/y over the last 6 months). This is a fascinating time in history, where so many countries are faced with the vicious cycles of sluggish growth, excessive debt, and deflationary pressure. The U.S., the European Union, Japan, the UK, the Chinese (through the USD peg), and even the Swiss are all running the printing presses overtime.
There is little doubt that Fed Chairman Ben Bernanke has been busy behind the scenes helping the Europeans come up with “solutions” to their debt crisis. It is becoming increasingly obvious that the Greeks don’t have the resolve or ability to cut their way out of debt, unlike Ireland which has made impressive progress, though their debt will likely need to be restructured as well. Greek default and Irish restructuring seem inevitable, and post default I believe the Germans will engineer an ECB money printing solution to the EU predicament.
601 S. Figueroa Street, Suite 1975 Los Angeles, California 90017 213.943.1740 www.oldwestim.com
If and when the Europeans stop dominating the headlines, Japan is ready to take their place. With the worst sovereign balance sheet in the world, Japan is also cursed with a rapidly shrinking workforce and aging population (a fate that will hit Europe next, the Chinese, and the US over the next 50 years). The Japanese are renowned savers, but with more retirees and fewer workers to support them, their 230% debt to GDP ratio looks insurmountable. The answer: print more Yen.
With coordinated global money printing, it seems as if we are near the end of a thirty year interest rate cycle. From 1981 to 2011, rates have steadily fallen, which has driven a generational bull market for bonds. How will we protect our capital in a reversal of rates and inflation? Owning good companies has been great way to protect against the decaying effect of inflation, especially companies that have the ability to pass on price increases. Companies that control hard assets, like real estate, commodities, and infrastructure are also good inflation hedges. Regarding fixed income, I can’t imagine investing clients’ money in long dated bonds in this environment. Finally, we continue to purchase cheap insurance policies against higher interest rates in the portfolios where we are able to do so.
The S&P 500 closed at 1257 on December 30, 2011. In February 1999, the S&P 500 was likewise at 1250. Although discouraging for the investor of the last 10 years, it generally bodes well for the investor of the next 10 years. The bond market has produced outstanding returns during the same time period. I believe a reversal of these two markets is not too far off.
One area we are focused on is a recovery in housing construction. Going back sixty years, the U.S. has averaged 1.4 million housing starts per year. For the last three years we have averaged 500,000 starts per year. We are all too aware of the foreclosure overhang on the market, but inventory is being absorbed. When discussing how bad the housing markets are, we tend to discuss the extreme case areas of Las Vegas, Phoenix and Riverside County. However, Texas, the Northeast, Northwest, and many parts of the Midwest have come a long ways in depleting their inventories. We believe that at some point in the next eighteen months we’re going to wake up to abnormally small inventories and housing construction will have to accelerate. If we wait for conditions to improve, we’ll miss the first forty percent move in these stocks, so as usual, we are early. Our investments are in companies supplying the builders like USG rather than the builders themselves, with the exception of Lennar.
We have been heavily invested in financials, which worked against us in 2011, but we believe that will change in the years ahead. Companies like Jefferies, Citicorp, MBIA, Bank of America and U.S. Bank have excellent prospects for the coming year. It is a struggling and hated sector, but we accordingly see great opportunity and bargain prices.
601 S. Figueroa Street, Suite 1975 Los Angeles, California 90017 213.943.1740 www.oldwestim.com
Our portfolios are full of great companies whose shares are selling well below their intrinsic values. As such, we at Old West are very optimistic that 2012 will be a breakout year for our company and the performance of our investments. We appreciate your loyalty and support, and we wish you and your families a happy, healthy and prosperous 2012.
Sincerely,
Joseph M. Boskovich, Sr.
Chairman and Chief Investment Officer
601 S. Figueroa Street, Suite 1975 Los Angeles, California 90017 213.943.1740 www.oldwestim.com
Old West Investment Management, LLC
January 13, 2011
Dear Investor,
It has now been over two years since we founded Old West Investment Management, LLC and began investing our clients’ and our own capital on November 1, 2008 in the heart of the financial crisis. Despite the overwhelming dislocation and panic at the time, we aggressively sought out opportunity where risk and return had been fundamentally disconnected. Two years later, I couldn’t be more pleased with our investment performance across all of our strategies.
In calendar 2010, our Large Cap portfolio was up 19.40% compared to our benchmark, the Russell 1000, up 16.10%. Our Small/Mid Cap Portfolio was up 39.63% compared to our benchmark, the Russell 2500, up 26.70%. The general market benchmark, the S&P 500, was up 15.05% for the year. Since inception, both of these portfolios have achieved strong risk-adjusted returns that are well ahead of their benchmarks.
Our Balanced portfolio was up 20.75% in 2010. When you consider that this portfolio had more than a 20% cash position all year, I consider this risk-adjusted performance very impressive. Our Focused portfolio was up 32.03% since its inception February 1st of 2010. The Focused portfolio is comprised of our ten best ideas, usually equally weighted at 10% each. This is our newest portfolio, and for people who want concentration and don’t mind volatility – it’s great.
In addition to our long only strategies, our alternative investment strategies for accredited investors and/or qualified purchasers continue to provide our investors tremendous returns with significant downside protection.
Given our several investment strategies, it is important to remember that all stem from the same simple investment process. We spend all day studying companies and the people who run them. Because of the in-depth research that we perform, we also concentrate our capital in our most compelling ideas across all strategies. For example, our top 10 ideas represent 39% of our firm wide capital, and our top 20 ideas represent 50%.
I am very thankful for the team we have at Old West. Portfolio Manager and Co-Founder Steve Blass and I are responsible for managing these portfolios, but our entire team contributes to the investment process. Our unique approach and lots of hard work has led to this outstanding performance.
In my letter to investors a year ago, I wrote about the inflation versus deflation debate. I expressed our concern regarding both potential threats, with deflation being the more immediate concern and inflation the longer term one. One year later, I wish the picture was clearer, but it isn’t.
The Federal Reserve was created by Congress to regulate the money supply and attempt to control interest rates in order to minimize inflation and maximize employment. Current Fed Chair Ben Bernanke has embarked on an aggressive plan, more commonly known as “Quantitative Easing” (Q.E.), to prevent our economy from falling into the quicksand of deflation. In a sense, he is attempting a debt for equity swap on a sovereign scale.
Bernanke is highly intelligent and is one of the nation’s greatest experts on the Great Depression. Seeing what deflation has done to the Japanese economy for the past twenty years shows how difficult a problem it is that we
601 S. Figueroa Street, Suite 1975 Los Angeles, California 90017 213.943.1740 www.oldwestim.com confront. This risk is only magnified by our country’s over-indebtedness. Despite his intelligence and good intentions, Bernanke is steering us into unchartered waters with Q.E. By printing money out of thin air to purchase debt issued by the U.S. Treasury, he is throwing the dice that we will have a positive result (or perhaps a less negative one than the alternative). Nobody knows what the outcome will be, and if you hear someone certain that they know – they are probably wrong and certainly overconfident. We are in unchartered waters, but it remains our job to protect and grow your assets.
We have seen commodity prices skyrocket this past year. It is not due to robust economic activity in the U.S. It is partially due to worldwide economic recovery and the decline in purchasing power of the dollar, but it is equally hard to escape the conclusion that some of the increase is due to speculation. The U.S. dollar has been the world’s reserve currency for the past fifty years, but that status will be challenged if Bernanke overshoots with Q.E.
Ben Bernanke is far from perfect. It bothers me that he long endorsed Alan Greenspan’s easy money policies and also shrugged off the brewing collapse of the housing market in 2005. However, I do believe that he is boldly doing what he thinks it takes to keep the U.S. out of deflationary quicksand. In case you are wondering if Q.E. has been tried before, it has. The Bank of Japan’s balance sheet contains three times the amount of sovereign debt as the Fed as a percentage of GDP. Their national debt has risen to six times their GDP, a number I can’t imagine they could pay back, especially with the aging Japanese workforce. Default is a strong possibility. If you think we have political dysfunction, just imagine having six prime ministers and eight finance ministers since 2006. It appears they are searching for answers and can’t find any.
It is essential that politicians make tough decisions to cut back government spending soon. Of course, that results in further deflationary pressure. Likewise, families and governments all over the world continue to deleverage, adding to such pressures. Bernanke is well aware of these facts, thus the birth and re-birth of Q.E.
Given the building inflationary pressure caused by levitating commodity prices, as well as rising import prices caused by a weakening dollar, the environment has favored investments in hard assets. We continue to monitor events in China, and it is becoming increasingly evident that there is a massive real estate bubble building as a result of their fixed exchange rate policy (and the overly loose monetary policy they import as a result) and state-mandated lending. Bad bank loans continue to be swept under the rug, and a sharp correction in Chinese real estate could dramatically reduce the prices of metals. I can’t totally understand skyrocketing foodstuff prices, but I do know that what goes up often come down (and fast). Twenty plus years in agriculture taught me that lesson more than once.
In my opinion, the stock market has similarly overshot longer term economic fundamentals. Our plan is to take some profits early in the New Year and raise some cash. We will also continue to invest in global companies with pricing power as a hedge against future inflation.
We mainly invest in U.S. companies and these companies are in great financial shape. Balance sheets are strong, and profits robust. There is a fair amount of pent-up demand in several industries, and barring any disasters, 2011 should be a good year for many U.S. companies. I believe the employment situation will continue to slowly improve, reinforcing improving consumer confidence. That being said, many stock prices already incorporate this view.
I have written about macro economic factors in this letter, but it’s important to remind you that the bulk of our research is company-specific. We continue to look for investment opportunities in companies with strong
601 S. Figueroa Street, Suite 1975 Los Angeles, California 90017 213.943.1740 www.oldwestim.com management teams that are heavily invested in their own companies. On that note, it makes me nervous that the ratio of insider selling to buying in all companies is extraordinarily high. Needless to say, there is no significant insider selling in any of our holdings and in many cases there is buying.
So we’ll see where 2011 takes us. One fascinating point in the New Year will be when President Obama moves to bail out California, New York and Illinois (all controlled by his fellow Democrats) and the new Congress tells him NO. Another flashpoint will be when the Administration needs to raise our government debt ceiling.
Lots of moving pieces to this puzzle, but I am cautiously optimistic about the company-specific opportunities that our team has uncovered. Thank you for your continued support and belief in our company. I wish you and your family a wonderful 2011.
Sincerely,
Joseph M. Boskovich, Sr.
Chairman and Chief Investment Officer
601 S. Figueroa Street, Suite 1975 Los Angeles, California 90017 213.943.1740 www.oldwestim.com
Old West Investment Management, LLC
December 22nd, 2009
Dear Investor,
As we approach the end of 2009 and the completion of our first calendar year in business, I would like to give you an update on the performance of our four portfolios, an overview of our firm’s progress, and some thoughts on our economic outlook for 2010.
We have been fortunate to have outstanding risk-adjusted performance in all four of our portfolios in 2009. Our Large Cap Growth portfolio is up 34.3% year to date through November 30th. Caterpillar, Costco, Newmont Mining and U.S. Bancorp have been some of our best performing investments.
Our Small/Mid Cap Growth Portfolio is up 26.9% through November 30th. D.S.W., Hanesbrands, Incyte and Interactive Intelligence have been some of our best performing investments.
We are also pleased with the performance for both of our limited partnerships in 2009. Old West manages two alternative investment strategies exclusively for qualified and accredited investors.
Although we are absolute return oriented investors, we understand that it may be useful to compare our net returns against respective indices over time. Year to date through November 30th, the total return of the S&P 500 is 24.0%, the Russell 2500 is 25.4%, the 5 year Treasury bond is 1.3%, and the Barclay’s US Aggregate Bond Index is 3.4%.
I couldn’t be happier with the team we have assembled at Old West. We have a cohesive group, truly operating as a team, and we’re having fun building our business. We have nearly $75 million under management, and we continue to grow new relationships. For those of you who that haven’t visited us in our new offices in the heart of Downtown Los Angeles, we hope that you will come see us soon. We even validate parking!
Now the tough part: taking a look into 2010. We all hear in the media that the recession is over and better times are ahead. I believe that. HOWEVER, there are many threats that make an economic recovery problematic. We do not see a consumer led recovery. Just as the Great Depression had a lasting imprint on our parents and grandparents who lived through it, the Great Recession won’t be forgotten soon. The baby boomer generation is in no shape to retire, and unlike our parents, we can’t be certain that Social Security and Medicare will be solvent until we leave this world. Americans’ spending habits will never be the same, and a propensity to save will reappear. With consumption still composing nearly 70% of our economy, this necessary increase in savings may present a secular headwind to growth.
We have all heard about the “miracle” occurring in China, where continued explosive growth is leading the Chinese into prosperity. We are becoming increasingly concerned that the Chinese central government is fueling over-investment in plants, equipment and infrastructure, with limited end demand. There is a pileup of cars, homes, materials, and supplies that far exceed demand, and they can no longer count on us to buy all of their “stuff.” The end result could be a correction in the price of materials, a Chinese banking crisis, and a potential deflating of “animal spirits”.
This may not be as bad as it sounds. For America to thrive in the future, we need to re-establish our manufacturing base. We need to start making things again, and I believe we will. That’s why we are invested in great American companies like Caterpillar, Emerson, Coca Cola, Johnson & Johnson, Medtronic, Northrop Grumman, Pfizer, and Spirit Aerosystems. Our country’s labor costs are now competitive with Europe and Japan, and I believe we will be a strong competitor in world trade in the next decade. I believe the Chinese will
601 S. Figueroa Street, Suite 1975 Los Angeles, California 90017 213.943.1740 www.oldwestim.com eventually consume much of what they produce, and I believe we will gradually export as much as we import. But these movements don’t occur overnight, and the adjustment period may be painful.
I think deflation is a bigger near term threat than inflation. The world is awash in materials and finished goods currently. I have been skeptical of Ben Bernanke’s monetary policies as I vividly recall his endorsement of Alan Greenspan’s easy money policies earlier this decade. However, I do believe the Fed has been running the printing presses overtime for a reason, and it is because they have been rightly concerned about private sector de-leveraging and lackluster end demand worldwide. Each day it is becoming more clear - with overly abundant supplies of oil, gasoline, natural gas, electricity, cars, labor, steel, aluminum, advertising space, homes, offices, textiles, and shipping vessels - that we currently have too much of most everything.
Eventually this situation will correct, and inflation will again emerge as a major concern. But will this occur in twelve months or five years? Every economic policy maker in the world would like the answer to that question. My guess is that it’s later rather than sooner.
Having said all of this, we spend the vast majority of our time researching companies. We have a three to five year time horizon on our investments, and we are the first to admit that we don’t know what tomorrow may bring. We instead focus on following our well-defined investment process, investing in good businesses run by owner/managers who pay themselves conservatively.
Thank you for your continued support, and we at Old West wish you and your family a happy holiday season.
Sincerely,
Joseph M. Boskovich, Sr.
Chairman and Chief Investment Officer
601 S. Figueroa Street, Suite 2250 Los Angeles, California 90017 213.943.1740 www.oldwestim.com Old West Investment Management, LLC
October 1, 2008
Welcome to Old West Investment Management, LLC! Our team is motivated and excited to deliver to our clients top performing investment products. When I tell people that we recently started an investment management company, a common reaction is one of concern due to the recent turmoil in the financial markets. However, occasionally I will encounter someone who will exclaim “Your timing couldn’t be better”.
The latter reaction would be a person with good investing instincts. The fall of 2008 will go down in history as one of the most difficult and challenging investment environments in history. As our team begins buying stocks, there are bargains galore! It is common today to find companies with outstanding management teams, high barriers of entry from competitors and strong balance sheets, that are selling for four, five and six times earnings.
Our investment process and our talented team will work hard to find the best investment opportunities, and of equal importance, to avoid poor choices which I refer to as “land mines.” At Old West we have four main investment vehicles: large cap growth, small /mid cap growth, an income fund and a long/short equity absolute return partnership. I believe all four of these strategies will be “best of breed”.
My promise to you is that our team will do everything possible to maximize our client’s investment returns, provide great customer service, and be very responsive to your needs. We look forward to working with you!
Sincerely,
Joseph M. Boskovich, Sr.
Chairman and Chief Investment Officer
601 S. Figueroa Street, Suite 1975 Los Angeles, California 90017 213.943.1740 www.oldwestim.com Disclosures
This commentary expresses the views of the author as of the date indicated and such views are subject to change without notice. The information contained is not a complete analysis of every aspect of any market, country, industry, security or portfolio. All market condition references are as of the date indicated unless otherwise indicated. Old West has no duty or obligation to update the information contained herein. Further, Old West makes no representation, and it should not be assumed, that past investment performance is an indication of future results. Moreover, wherever there is the potential for profit there is also the possibility of significant loss.
This commentary is being made available for educational purposes only and should not be used for any other purpose. In addition, the information contained herein does not constitute and should not be construed as an offering of advisory services or an offer to sell or solicitation to buy any securities or related financial instruments in any jurisdiction. References to particular securities are only for the limited purpose of illustrating general market or economic conditions and/or to express the firm’s investment philosophy and process, and are not recommendations to buy or sell a security, or an indication of the author’s holdings. Such securities may or may not be in one or more managed accounts from time to time. Certain information contained herein concerning economic trends and performance is based on or derived from Old West and/or information provided by independent third-party sources where referenced.
Old West Investment Management, LLC (“Old West”) believes that the sources from which such information has been obtained are reliable; however, it cannot guarantee the accuracy of such information and has not independently verified the accuracy or completeness of such information or the assumptions on which such information is based.
This commentary, including the information contained herein, may not be copied, reproduced, republished, or posted in whole or in part, in any form without the prior written consent of Old West.
Old West Investment Management, LLC is an independent investment management firm established in 2008. Old West Investment Management, LLC manages a variety of equity, fixed income, and alternative assets for individual and institutional clients. Additional information is available upon request and on our website at www.oldwestim.com.
Additional Performance Disclosures:
Old West Investment Management, LLC. claims compliance with the Global Investment Performance Standards (GIPS®). The firm maintains a complete list and description of composites, which is available upon request.
Net of Fees Performance as of December 31, 2014.
1-Year 3-Year Annualized Annualized Inception Old West Large Cap 1.78% 18.13% 13.88% Russell 1000 Total Return 13.24% 20.62% 15.98% Old West Small/Mid Cap -1.30% 15.07% 14.84% Russell 2500 Total Return 7.07% 19.97% 17.43% Old West Focused -5.12% 17.46% 13.30% S&P 500 Total Return 13.69% 20.41% 17.16% Old West All Cap 5.72% 19.91% 16.73% Opportunity S&P 500 Total Return 13.69% 20.41% 17.16%
The Old West Large Cap Portfolio/Composite (the "LC Composite") comprises all portfolios with an asset allocation of large capitalization equities. The LC Composite was previously known as the Old West Large Cap Growth Composite prior to 09/30/2010. The LC Composite was created 11/1/2008 and is benchmarked to the Russell 1000® and S&P 500® benchmarks. The Large Cap portfolio primarily invests in large-capitalization US equity securities and is subject to market risk.
601 S. Figueroa Street, Suite 1975 Los Angeles, California 90017 213.943.1740 www.oldwestim.com
The Old West Small/Mid Cap Portfolio/Composite (the "SC Composite") comprises all portfolios with an asset allocation of small and mid capitalization equities. The SC Composite was previously known as the Old West Small/Mid Cap Growth Composite prior to 09/30/2010. The SC Composite was created 11/1/2008 and is benchmarked to the Russell 2500® and S&P 500® benchmarks. The Small/Mid Cap Portfolio primarily invests in small and mid-capitalization US equity securities and is subject to market risk.
The Old West Focused Portfolio/Composite (the "FOC Composite") comprises all portfolios with an asset allocation of all capitalization concentrated equities. The FOC Composite was created 2/1/2010 and is benchmarked to the S&P 500® benchmark. The Focused portfolio primarily invests in all-capitalization US equity securities and is subject to market risk.
The Old West All Cap Opportunity Portfolio/Composite (the "ALL Composite") comprises all portfolios with an asset allocation of equities and income producing securities. The ALL Composite was created 12/1/2008 and is benchmarked to the S&P 500® benchmark. Prior to May 31, 2013 the Composite was called the Old West Balanced Composite. The All Cap Opportunity portfolio primarily invests in all-capitalization US equity securities and is subject to market risk.
The Russell 1000® Index is an unmanaged market capitalization weighted index of the 1000 largest US companies. The Russell 2500® Index is an unmanaged market capitalization weighted index of the 2500 largest US companies. Russell Investments is the owner of the trademarks, service marks and copyrights related to its respective indexes. Copyright © Russell Investments. The S&P 500® Index is managed by the S&P Index Committee and represents the large cap segment of the US equities market, covering approximately 75% of the US equities market. Standard and Poor’s is the owner of the trademarks, service marks and copyrights related to its respective indexes. Copyright © Standard and Poor’s Financial Services.
The Portfolios may invest in foreign securities and will be subject to the risks of currency fluctuations and sudden economic or political developments. All market valuations and performance information are computed and reported in US dollars and include reinvestment of dividends and other earnings. Gross-of-fees performance returns are presented before management and custodial fees but after all trading expenses. Net-of-fees performance returns are presented after management and custodial fees and after all trading expenses. Unless specifically indicated, all performance is stated Net-of-fees. The standard fixed management fee for accounts with assets under management of up to USD 10 million is 1.00% per annum for Old West Large Cap, Old West Small/Mid Cap, Old West All Cap Opportunity and 2.00% for Old West Focused. Further Fee information can be obtained from Old West’s Form ADV, Part II, Schedule F and by request. A complete listing and description of all composites is available upon request. Investing in equities is speculative and involves substantial risk. None of the stock information, data and company information presented constitutes a recommendation by Old West Investment Management, LLC or a solicitation of any offer to sell any securities and should not be considered investment advice of any kind. Portfolio characteristics represent data from the respective Composite indicated as of the report date and are compiled by Old West. Individual accounts may vary due to restrictions, substitutions and other factors. Sector weightings are classified using the Global Industry Classification Standards (GICS) if applicable. The securities identified and described do not represent all of the securities purchased, sold, or recommended for client accounts. These holdings may change at any time without notice. The reader should not assume that investments in the securities listed were or will be profitable. All information contained is stated as of the report date unless otherwise indicated. Past performance is no guarantee of future results. Individual client accounts will vary.
601 S. Figueroa Street, Suite 1975 Los Angeles, California 90017 213.943.1740 www.oldwestim.com