The Olesen Value Fund was down 6.9% in January, the majority of which was attributable to large declines in the market prices of our investments in financial services companies (which total 26% of our portfolio). I am confident there were no fundamental reasons that justified such large declines; they were caused by a weak U.S. stock market (down 3.0%), weak trading-related revenues for these companies in Q4, and generally negative/nervous market sentiment towards this sector. Our loss was further exacerbated because one of our positions in financial services companies is in a warrant, which in effect leverages our exposure to the underlying stock. We did not sell any of these investments in January, because I still think they are significantly undervalued and will eventually earn very good returns for us. These are all well-capitalized, strong, diversified businesses, generating respectable returns on capital, with earnings poised to grow if/when interest rates increase and trading revenues exit their current slump. Still, they each trade at either a discount or a very modest premium to tangible book value and around 10x current earnings, which in my opinion is too low for these companies. I think both the earnings and multiples will increase as the markets gradually come to appreciate these businesses again, which would not only erase last month’s losses but actually generate significant gains for us.
Olesen Value Fund: Objective
Our objective is to generate substantial capital appreciation over the long term. We do this by investing in businesses that are significantly undervalued by the market and have a low risk of causing a large, permanent loss for their shareholders. Note that since our objective is based on long-term capital appreciation and avoiding permanent loss of capital, avoiding short-term volatility in stock prices is not central to our investment approach. In fact, we usually view volatility as our friend, because it can give rise to attractive investment opportunities. Given the Olesen Value Fund’s objective, investors must be willing to accept that the value of their investment can decline from time to time, especially in the short term, and January was an unfortunate and extraordinary example of this. So far in February, we have recovered almost half of January’s loss, and I think investors who are patient will be rewarded over the next several months and years.
Olesen Value Fund: Portfolio activity
During January, we exited our position in Atlas Energy, Targa Resources and some related companies. This is a complex merger risk arbitrage situation involving a “stub” security that will be spun off by the target company immediately before the merger is consummated. After initiating this position in December at price levels that implied what we thought was an implausibly low post-merger stock price for the “stub,” the prices changed to what we thought were more rational levels and hence we exited the position with a decent profit.
Later in the month, we invested in a small/mid-cap company in Australia at a price that corresponds to approx. 7.5x the current annual run-rate of earnings. The Australian economy faces substantial risks due to high real estate prices as well as mining for commodities whose demand is highly dependent on construction and industrial activity in China. While this company does not operate in either real estate or mining, it can still be affected to the extent the broader economy is impacted. However, I think some of this risk is already reflected in the current run-rate of earnings, because the company’s revenues have recently been affected by the poor consumer and business confidence in Australia. In my opinion, this company is well run and operates in a very attractive industry, so I think it is worth substantially more than 7.5x earnings.
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