August 2018 Covered Call Candidates

Each month, we screen for attractive “bond replacement” investment candidates by looking up the reports of investments purchased by “Superinvestors” covered by the Dataroma site. Dataroma follows 64 managers that are all using value-based strategies.

This month, we had to comb through quite a few portfolios before we found five funds that had made transactions meeting our requirements. I posted a full set of statistics about the largest positions in these five funds yesterday:

1. Dodge & Cox Value Fund (AUM = $69B)
2. Jean-Marie Eveillard’s First Eagle U.S. Value Fund (AUM = $1.4B)
3. Kahn Brothers Advisors (AUM = $628mm)
4. David Katz’s Matrix Advisors (AUM = $55mm)
5. Tweedy Brown Value Fund (AUM = $488mm)

We looked for any transactions that met the following criteria:

1. Stocks listed represented more than 2% of the portfolio’s value
2. Stocks listed were a new purchase for the fund OR the position was increased by a material amount (+20% or more)

You will see a column on the sheet labeled “Transaction”. “Buy” means a new position and “+29%” means an increase in an existing position of 29%. We believe the willingness to take a new large position or to significantly increase one’s position size has greater information content than simple “bookkeeping” transactions.

These conditions were designed to screen for the stocks in which the managers had demonstrated the most confidence (by portfolio weight) and about which they had made an active decision to invest. As we explain in our video introduction to “Bond Replacement” investments, we are using these portfolio managers’ actions as an indication of undervaluation.

There are a few stocks on the list worth making special notes:

Express Scripts ESRX. We have done a lot of valuation work on this company and have decided that it is very hard to quantify the downside risk to it. Last year about this time, the largest short-seller in the world, Jim Chanos, called Express Scripts his favorite, highest conviction short investment. I will not accept downside risk on Express Scripts in my own portfolios.

New York Community Bank NYCB. This was a company we featured in our May 2018 Covered Call Corner and we hold this in our portfolio. The option we highlighted in May expires in October and we will roll our position at that time. We will not increase our position size more than its present allocation (1.54%) before that.

CBS CBS. One of our members is a Hollywood insider. In talking through the present media landscape, CBS seems like it might be the company standing when the music stops. CBS is an old fashioned network content provider competing against disruptors like Netflix, Amazon, and Hulu, and against much more powerful content providers like Disney (especially post-21st Century Fox acquisition) and NBC. My takeaway from our conversation was that CBS may be a bad long-term bet. That said, I have not done any valuation work on the firm and it may indeed represent a good opportunity, especially in the short term.

You can find the spreadsheet here:

June 2018 Covered Call Corner Spreadsheet 

 

A PDF copy of the spreadsheet is embedded below. Please reach out if you have any questions about these materials!