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Rangeley Capital Best Ideas from 2009 through the end of 2012

Rangeley Capital Best Ideas from 2009 through the end of 2012

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Published by Chris DeMuth Jr
At the beginning of each calendar year, Rangeley Capital publishes two “Best Investment Ideas” for that year. The following chart shows each idea we have published dating back to 2009, and the simple price appreciation of that investment from January 1 – December 31 for that respective year.

Since we began publishing our best ideas, we have never had an idea fail to earn a positive return, and our average return on these ideas is over 45%.
At the beginning of each calendar year, Rangeley Capital publishes two “Best Investment Ideas” for that year. The following chart shows each idea we have published dating back to 2009, and the simple price appreciation of that investment from January 1 – December 31 for that respective year.

Since we began publishing our best ideas, we have never had an idea fail to earn a positive return, and our average return on these ideas is over 45%.

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Categories:Types, Business/Law
Published by: Chris DeMuth Jr on Jan 03, 2013
Copyright:Attribution Non-commercial

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03/30/2013

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 Best Investment Ideas
At the beginning of each calendar year, Rangeley Capital publishes two “Best Investment Ideas” for that year. Thefollowing chart shows each idea we have published dating back to 2009, and the simple price appreciation of thatinvestment from January 1 – December 31 for that respective year.Since we began publishing our best ideas, we have never had an idea fail to earn a positive return, and ouraverage return on these ideas is over 45%.
Performance2009
Buy - Pimco Income Strategy Fund II (PFN)+ 76.4%Buy - ProShares UltraShort 20+ Year Treasury ETF (TBT)+ 32.2%
2010
Buy - Ocean Shore Holding Company (OSHC)+ 31.0%Buy - Loral Space & Communications (LORL)+ 142.0%
2011
Buy - Labranche & Co.(LAB) *+ 6.9%Short - Lender Processing (LPS)+ 48.0%
2012
Buy - Ocean Shore Holding Company (OSHC)+ 47.1%Short - Direxion 20+ Year Treasury Bull 3X (TMF) - 0.5%
 
* LAB was successfully acquired by COWN on June 28, 2011 and ceased trading.
 
Best Ideas for 2012
OCEAN SHORE HOLDING Co. (Public, NASDAQ:OSHC)
Event Categories: 
Mutual Conversation,Acquisition CandidateOur favorite long idea coming into 2012 was Ocean Shore Holding Co. (OSHC) which began the year at$10 per share. As we wrote at the time:
“OSHC is a small bank that appears to be a promising acquisition candidate. We originally made a significant investment in this stable bank with solid credit quality by participating in the mutual conversion in which we paid $8 per share, representing 60% of book value. Despite a bad environment for banking,Ocean Shore has strong asset quality and steady growth. We anticipate that the bank will continue to grow book value while its market price will close some of the discount to that book value. By the end of 2012, they will be well-positioned to entertain inbound interest from strategic buyers who may be 
 
interested in acquiring Ocean Shore for a significant premium to its market price. As of today, this is our largest investment.” 
As we end 2012, an update is in order. Year to date, the shares are up over 47%. Despite theappreciation in its stock price, we believe it is still quite undervalued.In our view, a deal for OSHC has always been less aquestion of "if" then "when" and the answer to whenis "probably very soon." A mutually owned bank(owned by depositors) may convert to stockownership for several reasons, but typically it is toraise capital or prepare for an eventual sale. Afterconverting, regulations require that the bank wait 3years before they are allowed to sell. OSHC initiallyconverted in December 2009 and the 3 yearregulatory window ends this December. Over the lastyear, the bank has repurchased a significant numberof shares and management appears to be totallycommitted to maximizing value for shareholders andthemselves.
Ocean Shore Holding Company (OSHC)
$9$10$11$12$13$14$15$16
     D    e    c   -     1     1     J    a    n   -     1     2     F    e     b   -     1     2     M    a    r   -     1     2     A    p    r   -     1     2     M    a    y   -     1     2     J    u    n   -     1     2     J    u     l   -     1     2     A    u    g   -     1     2     S    e    p   -     1     2     O    c     t   -     1     2     N    o    v   -     1     2     D    e    c   -     1     2
 Based on conservative estimates of the business as well as historic precedent in similar transactions, webelieve the price required for a strategic buyer to get shareholder approval for a transaction is about $18per share. This appears to be a multiple bidder scenario, which we prefer because they tend to increasethe eventual sales price as well as provide protection if one of buyers walks away. "Heads we win, tailswe tie."OSHC is fine now, but has some hidden value that is not fully priced in and would be attractive to abuyer. Today, EPS is stable at around $0.18 per quarter and the return on tangible equity (ROTE) isaround 5%. But both the current EPS and ROTE numbers understate the case for OSHC because theyare being artificially weighed down by near-dated high-cost borrowing. This borrowing, at a cost of over4%, is a drag that will go away with time. Once that begins to mature in about a year, EPS and ROTE willboth pop. In fact, EPS would be over $0.30 per share and ROTE would be around 10% without thatborrowing.While a deal looks likely, there are caveats worth discussing. There appear to be numerous likely bidderswith the finances and geography to make this a strategic acquisition, but one or more may ultimatelydecline to bid at an attractive price. Also, the stock has already performed well this year, closing aroundhalf the distance from where it began the year to the likely deal price. Shareholders might loseconfidence if a deal takes longer than expected to emerge. Bidders might also want to see a full quarterof performance after the hurricane to reassess the company.It is our contention that the board and management have acted in a way that is wholly aligned with theirshareholders. We do not expect shareholders to have to advocate for a deal. It is clear that OSHC needsto get to a larger scale and there are not any signs that they are looking to make acquisitions. But if weare wrong, it may come down to shareholders to encourage a transaction.While we await a transaction, we collect a dividend on a well run, well reserved, overcapitalizedinstitution with declining borrowing costs. The company repurchased over 3% of the outstanding sharesduring the last quarter. Non-performing assets (NPAs) are low and stable at around half of one percent.They have conservatively reserved for these NPAs. They managed to miss the worst of HurricaneSandy. In conclusion, this is a sound investment - whether you are looking to buy a share ... or the entirecompany.
 
 
Direxion Daily 20 Year Treasury Bull 3x Shares (Public, NYSEARCA:TMF)
Event Categories: 
Alternative Investing IdeasShorting Leveraged ETFsAt Rangeley Capital, we focus on identifying individual companies with limited downside and a specificcorporate event or catalyst to unlock value. This strategy reduces correlation between individual ideas,and protects the portfolio in times of stress. However, we do not operate in a bubble and we mustremain cognizant of potential risks and paradoxes that exist in the market which can broadly increasecorrelations and affect the prices of all securities.The US 30-Year Treasury trades at its lowestyield in history. The extreme demand in themarket for “safety” has created a new bubble,whereby traditionally safe and yield orientedassets have become vastly overbought andoverpriced. In the event that inflation orinterest rates increase, even slightly, investorswho own these securities could experiencedramatic reductions in the value of theirprincipal, thus perpetuating further selling.As such, one of the ways we have positionedfor such an event, is to take a short position ona levered ETF that tracks long-term Treasuries, the Direxion Daily 20 Year Plus Treasury Bull 3x (TMF).This exchange traded fund (ETF) seeks daily investment results of 300% of the price performance of theNYSE 20 Year Plus Treasury Bond Index.
10-Year Treasury Yield (Constant Maturity Rate)
0%2%4%6%8%10%12%14%16%18%1981199120012011
Source: Federal Reserve Bank of St. Louis 
      Y      i     e      l      d
 Broadly, we tend to be skeptical of financial innovation, and we have been particularly interested inshorting leveraged ETFs for several years now due to their horrendous structural flaws. The mechanicsused by these leveraged funds create a “constant leveraged trap” that erodes their value over time. Tooperate, the fund has to add or reduce leverage on a daily basis to match the index. If the underlyingindex goes up in value, the ETF must increase leverage; if the index goes down, the ETF must decreaseleverage. Essentially, this boils down to the ETF being forced to increase leverage on up days anddecrease leverage on down days (buy high/sell low). Regardless of the performance of the underlyingindex,
all
leveraged ETFs are designed to fail over the long-term. The more volatile the underlyingindex, the more quickly the ETF erodes.For example, in 2011 weconsidered taking a short positionon the ProShares UltraShort SilverETF (ZSL). ZSL provides 200%leverage over the daily inverseprice movement of silver. In 2011,a basic ETF to track silver prices,returned -11% for the year. Onewould conclude that an investorwho made an inverse bet againstsilver in 2011 would have mademoney. However, had the investor
2011 Return Comparison-70%-60%-50%-40%-30%-20%-10%0%iShares Silver Trust (SLV)ProShares Ultra Short 2x Silver (ZSL)
      R     e      t    u     r     n

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