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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%.
Performance 2009 Buy - Pimco Income Strategy Fund II (PFN) Buy - ProShares UltraShort 20+ Year Treasury ETF (TBT) 2010 Buy - Ocean Shore Holding Company (OSHC) Buy - Loral Space & Communications (LORL) 2011 Buy - Labranche & Co.(LAB) * Short - Lender Processing (LPS) 2012 Buy - Ocean Shore Holding Company (OSHC) Short - Direxion 20+ Year Treasury Bull 3X (TMF)
* LAB was successfully acquired by COWN on June 28, 2011 and ceased trading.
+ 76.4% + 32.2%
+ 31.0% + 142.0%
+ 6.9% + 48.0%
+ 47.1% - 0.5%
Best Ideas for 2012
OCEAN SHORE HOLDING Co. (Public, NASDAQ:OSHC) Event Categories: Mutual Conversation, Acquisition Candidate Our 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 We originally made a significant investment in this stable bank with solid credit quality by participating in the mutual conversion in which we paid $8 per share, representing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 the appreciation in its stock price, we believe it is still quite undervalued. In our view, a deal for OSHC has always been less a question of "if" then "when" and the answer to when is "probably very soon." A mutually owned bank (owned by depositors) may convert to stock ownership for several reasons, but typically it is to raise capital or prepare for an eventual sale. After converting, regulations require that the bank wait 3 years before they are allowed to sell. OSHC initially converted in December 2009 and the 3 year regulatory window ends this December. Over the last year, the bank has repurchased a significant number of shares and management appears to be totally committed to maximizing value for shareholders and themselves.
Ocean Shore Holding Com pany (OSHC)
$16 $15 $14 $13 $12 $11 $10 $9 Aug-12 May-12 Sep-12 Dec-11 Feb-12 Nov-12 Jan-12 Jun-12 Jul-12 Oct-12 Dec-12 Mar-12 Apr-12
Based on conservative estimates of the business as well as historic precedent in similar transactions, we believe the price required for a strategic buyer to get shareholder approval for a transaction is about $18 per share. This appears to be a multiple bidder scenario, which we prefer because they tend to increase the eventual sales price as well as provide protection if one of buyers walks away. "Heads we win, tails we tie." OSHC is fine now, but has some hidden value that is not fully priced in and would be attractive to a buyer. Today, EPS is stable at around $0.18 per quarter and the return on tangible equity (ROTE) is around 5%. But both the current EPS and ROTE numbers understate the case for OSHC because they are being artificially weighed down by near-dated high-cost borrowing. This borrowing, at a cost of over 4%, is a drag that will go away with time. Once that begins to mature in about a year, EPS and ROTE will both pop. In fact, EPS would be over $0.30 per share and ROTE would be around 10% without that borrowing. While a deal looks likely, there are caveats worth discussing. There appear to be numerous likely bidders with the finances and geography to make this a strategic acquisition, but one or more may ultimately decline to bid at an attractive price. Also, the stock has already performed well this year, closing around half the distance from where it began the year to the likely deal price. Shareholders might lose confidence if a deal takes longer than expected to emerge. Bidders might also want to see a full quarter of 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 their shareholders. We do not expect shareholders to have to advocate for a deal. It is clear that OSHC needs to get to a larger scale and there are not any signs that they are looking to make acquisitions. But if we are 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, overcapitalized institution with declining borrowing costs. The company repurchased over 3% of the outstanding shares during 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 Hurricane Sandy. In conclusion, this is a sound investment - whether you are looking to buy a share ... or the entire company.
Direxion Daily 20 Year Treasury Bull 3x Shares (Public, NYSEARCA:TMF) Event Categories: Alternative Investing Ideas Shorting Leveraged ETFs At Rangeley Capital, we focus on identifying individual companies with limited downside and a specific corporate 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 must remain cognizant of potential risks and paradoxes that exist in the market which can broadly increase correlations and affect the prices of all securities.
10-Year Treasury Yield (Constant Maturity Rate)
18% 16% 14% 12%
10% 8% 6% 4% 2% 0% 1981 1991 2001 2011
The US 30-Year Treasury trades at its lowest yield in history. The extreme demand in the market for “safety” has created a new bubble, whereby traditionally safe and yield oriented assets have become vastly overbought and overpriced. In the event that inflation or interest rates increase, even slightly, investors who own these securities could experience dramatic reductions in the value of their principal, thus perpetuating further selling.
As such, one of the ways we have positioned for such an event, is to take a short position on a 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 the NYSE 20 Year Plus Treasury Bond Index.
Source: Federal Reserve Bank of St. Louis
Broadly, we tend to be skeptical of financial innovation, and we have been particularly interested in shorting leveraged ETFs for several years now due to their horrendous structural flaws. The mechanics used by these leveraged funds create a “constant leveraged trap” that erodes their value over time. To operate, the fund has to add or reduce leverage on a daily basis to match the index. If the underlying index goes up in value, the ETF must increase leverage; if the index goes down, the ETF must decrease leverage. Essentially, this boils down to the ETF being forced to increase leverage on up days and decrease leverage on down days (buy high/sell low). Regardless of the performance of the underlying index, all leveraged ETFs are designed to fail over the long-term. The more volatile the underlying index, the more quickly the ETF erodes. For example, in 2011 we considered taking a short position on the ProShares UltraShort Silver ETF (ZSL). ZSL provides 200% leverage over the daily inverse price movement of silver. In 2011, a basic ETF to track silver prices, returned -11% for the year. One would conclude that an investor who made an inverse bet against silver in 2011 would have made money. However, had the investor
2011 Return Comparison iShares Silver Trust (SLV) 0% -10% -20% Return -30% -40% -50% -60% -70% ProShares Ultra Short 2x Silver (ZSL)
purchased the inverse leveraged ETF and held it over the course of the year, at the end of 2011 they would have lost nearly 60% of their investment.
The Direxion Daily 20 Year Plus Treasury Bull 3x Shares ETF (TMF) suffers from the same structural decay problem described above. We like this trade because, on one hand, if we are correct, our position helps to hedge the portfolio in the event of a systematic reduction in the principal value of US Treasuries. If we’re wrong, and Treasuries continue their unprecedented climb to ever high prices, the structural inefficiency of the leveraged ETF itself should erode the value of the security anyway.
THIS LETTER SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF ANY OFFER TO BUY WHICH MAY ONLY BE MADE AT THE TIME A QUALIFIED OFFEREE RECEIVES A CONFIDENTIAL PRIVATE OFFERING MEMORANDUM DESCRIBING THE OFFERING AND RELATED SUBSCRIPTION AGREEMENT. THESE SECURITIES SHALL NOT BE OFFERED OR SOLD IN ANY JURISDICTION IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL UNTIL THE REQUIREMENTS OF THE LAWS OF SUCH JURISDICTION HAVE BEEN SATISFIED. THIS PRESENTATION IS NOT INTENDED FOR PUBLIC USE OR DISTRIBUTION. An investment in the Partnership is speculative and involves a high degree of risk. Opportunities for withdrawal and transferability of interests are restricted, so investors may not have access to capital when it is needed. There is no secondary market for the interests and none is expected to develop. The portfolio, which is under the sole trading authority of the General Partner, will not be concentrated in any particular industry or strategy, resulting in higher risk for investors. Leverage will be employed in the portfolio, which can make investment performance volatile. An investor should not make an investment, unless it is prepared to lose all or a substantial portion of its investment. The fees and expenses charged in connection with this investment may be higher than the fees and expenses of other investment alternatives and may offset profits. The information contained herein (the "Information") is confidential. By accepting the Information, the recipient (which shall include its directors, partners, officers, employees and representatives) acknowledges that it will use the Information only for authorized purposes. The recipient further agrees that the Information will not be divulged to any other party without the express written consent of Rangeley Capital LLC ("Rangeley Capital") provided, however, that the recipient may make any disclosure required by law or requested by a regulator having jurisdiction over the recipient.
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