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April 11, 2013
Exit Genworth (GNW)
Plus, a New Addition
We have two new recommendations today. So let’s get right to it …
As everyone knows we have a strict sell discipline. When one of our billionaire investors starts to reduce or sell their position, we immediately sell our position. With that, today we are going to exit Genworth (symbol GNW).
I’ve suspected that one, if not both, of the key investors involved in Genworth have started to scale out of their position. And I'm seeing some confirmation.
As we discussed in our live portfolio review, the event that our billionaire investors (David Einhorn of Greenlight Capital and Jonathan Jacobson of Highfields Capital) were pushing for, occurred last month. It was the sale of Genworth’s Wealth Management Group, Altegris, which netted Genworth a $412.5 million dollars in cash.
Genworth has moved up nicely since. And for us, this exit will lock in a huge gain. We initially recommended Genworth at $5.20 and it now sells for $10.00, netting us a huge 92% return in just about six months.
We could have not written a better script for Genworth. We followed our billionaire hedge fund managers into this deeply undervalued stock, and then we told you that they would create value by forcing Genworth to sell some its business units, including its wealth management group. And that is exactly what happened. So we are extremely happy with this pick as our playbook worked out perfectly.
So we suggest you sell all of your Genworth position (GNW) today.
Here are the details …
Sell all of your shares in Genworth Financial at market, symbol GNW.
Now, on to our new addition …
New Addition to the Billionaires Portfolio: STEC, Inc. (Symbol STEC)
As I’ve said in recent weeks, I have seen some very attractive opportunities but was just waiting for those stocks to fall in my sweet spot, and now we have a great one.
We are following the billionaire hedge fund, Balch Hill Capital, this time.
It’s run by the genius investor Simon J. Michael. Michael is a dual Ivy League graduate, holding an AB from Dartmouth University and an MBA from Stanford University. He has managed Balch Hill since 1998. Prior to that he was a VP at Goldman Sachs. So Mr. Michael has the top pedigree, similar to many of the other managers we have followed before. Most importantly, he has a 15-year track record of trouncing the S&P 500.
Michael is a pure activist investor. He uses a "take-no-prisoners" approach when he invests in a company and likes to go on the attack right when he acquires a stake of more than 5%. And this is exactly the scenario with his position in STEC, Inc (symbol STEC).
In the case of STEC, Balch Hill and Michael have acquired a 9% of the company, and have already written multiple letters to the management and the Board of Director of STEC. One of which was a scathing letter stating that he wanted to nominate seven new board members at their next annual meeting. He says the current management has lost the trust of its key customers, shareholders and potential employees.
Again, this is exactly what I like to see.
I am so excited about this pick. We have the classic activist situation that we like to piggyback. An aggressive hedge fund, Balch Hill Capital, has acquired a huge stake in a stock (9%) and has already started to seriously rattle cages and push its will on STEC and its management.
Furthermore we will be paying a much cheaper price for STEC than Balch Hill paid for its stake. Balch Hill paid an average price of $5.20 for its 9% stake. We are getting into STEC for almost a $1 less … around $4.15.
Here are the details on today’s new addition …
New Trade Recommendation
Important Note: For the purposes of Billionaire’s Portfolio, I’m sizing all of my recommendations on a model account of $20,000. If your portfolio is larger or smaller, you should adjust the specific recommendations accordingly. For example, if you're managing a $5,000 portfolio, divide the number of recommended shares to purchase by 4; if you're managing a $40,000 portfolio, multiply by 2; etc.
With 5% of the funds you have set aside for the Billionaire's Portfolio, I recommend buying STEC, Inc., symbol (STEC), at a price of $4.25 or better.
In our model portfolio of *$23,650 the number of shares is 278– at the current market price that equals 5% of *$23,650.
(*marked to market value of the model portfolio)
Here’s a bit more on STEC ….
STEC specializes in memory products such as flash solid-state drives (SSDs) and dynamic random access memory (DRAM) modules that are used in high-performance systems and servers. STEC also gets more than 70% of its sales from overseas. That makes STEC an attractive takeover target to companies looking for a low-cost producer of flash drives located in an emerging market region like Malaysia.
As I said, Balch Hill and Mr. Michael have already demanded seats on the board. After hearing nothing from STEC, and witnessing a poor earnings report from the company, Michael wrote another letter asking STEC cofounders Mark Moshayedi and Manouch Moshayedi to resign from the company immediately. His request is largely supported by the fact that one of STEC’s cofounders, Manouch Moshayedi, was charged with insider trading.
Next, Balch Hill and Mr. Michael wrote another letter which spelled out, in depth, why they believed STEC was so undervalued, and what the company needed to change immediately.
They said that STEC has tremendous value to be realized. And they outlined these points …
The company has:
1) A world class enterprise technology and products,
2) A strong patent portfolio [STEC currently owns 48 patents and 88 additional patents pending] which could be sold for a tremendous amount of money,
3) And a strong, but eroding, balance sheet, with cash of $158.2 million or $3.40 a share [STEC’s current share price is $4.13] with zero debt.
Balch Hill also said if they can get their own people on STEC’s board they could unlock significant value from the company by taking the following steps:
1) Replacing the company cofounders with trusted industry veterans to win back customers.
2) Refocusing the business on sales to large customers and cut expenses.
3) Exploring strategic alternatives, including a possible sale of the company.
So even with a strong balance sheet and patent portfolio, the management and Board of Directors of STEC have destroyed the company. The share price has declined more than 60% over the past year, due to poor capital allocation. The company has wasted money on poor research and development, and repurchased its stock at prices as high as $9.80. Additionally, the company’s revenues have declined over 45% from last year. And STEC has over $100 million in operating losses.
So now you understand why this war is going on. We have a super aggressive billionaire investor Balch Hill Capital that owns a 9% of STEC and is taking a no holds barred approach to turn this company around immediately.
I am very confident that Balch Hill will push on STEC until key changes are made, including the resignation of STEC’’s CEO and its board members. As we know these type of events and corporate changes act as huge positive catalysts that push stock prices higher.
STEC is extremely undervalued. It’s nearly trading for its cash per share. STEC has $3.40 in cash per share with zero debt. It's stock price is only a little higher at $4.15 per share. Also the company has a huge base of value, including a very lucrative patent portfolio and a very strategically located manufacturing headquarters located in Malaysia.
So what is STEC worth on a sale or break up? From my analysis and discussions with analysts I believe STEC could be worth as much as $10 per share. The company has more than $3.40 in cash per share, plus $5 to $6 in patents and another $1 in value for its manufacturing operations.
Remember, the management and board at STEC must also think the company is worth around $10. As I said, the management and Board of Directors approved a $55 million stock buyback program when the stock was trading $9.80.
So at STEC’s current share price of $4.15, if the company could be sold or broken up at $10, that would produce a 140% return for us.
Now remember, Balch Hill has stated in writing that it has three actions planned to unlock value. I think Balch Hill is so frustrated with STEC management, they may just force them to sell the company. Not only would a sale be the fastest way for us to get a nice return out of this stock. But it would likely be the most lucrative for us.
So we lock in one great winner today in GNW. And we add another great pick to the portfolio in STEC. That’s all for now. Please keep an eye on your email for my next note.
Editor Billionaires Portfolio
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