At the close of 2016, we wanted to provide an update on several investments that were highlighted in prior investor letters as attractive investment opportunities. In doing so, we hope to review our security selection ability and articulate how we reacted to changing stock prices and market conditions during the year.
Gulf Island Fabrication (“Gulf Island” or “GIFI”) is a leading fabricator of specialized structures and vessels for customers in the offshore oil and gas and marine industries. Following the downturn in oil prices, we began searching for companies in the energy sector that had very strong balance sheets, owned real assets, and a product or service that would be in demand when the energy markets recovered. Gulf Island satisfied all of the requirements mentioned above. We established a position in Gulf Island in late 2015 and highlighted the position in our Q4 2015 quarterly letter. Gulf Island’s share price declined in the first quarter of 2016 and hovered around $7.00/share for much of the second quarter. A $7.00 share price equated to a market capitalization of $100 million and an enterprise value of $60 million. We expected the company to generate EBITDA of approximately $30 million in 2016, implying an Enterprise Value/EBITDA ratio of only 2.0x. In addition, the company had net working capital of over $40 million and property and equipment with a book value over $210 million, providing a significant margin of safety. We added to our position during the second quarter and made Gulf Island the second largest holding. Gulf Island has since produced strong operating results, leading to profitable quarters and the generation of over $15 million in cash. The stock price ended the year at $11.90 and was one of the Fund’s top performers on the year.
Smith-Midland Corporation (“Smith-Midland” or “SMID”) develops, manufactures, and sells precast concrete products for the construction, highway, and farming industries. The company had been a long-term holding of the Fund and was first mentioned in our Q1 2016 quarterly letter. Smith-Midland’s stock price rose sharply following strong Q3 2015 results that benefitted from one-time contracts to provide concrete barriers for the Pope’s visit to the cities of Philadelphia and Washington D.C. We utilized the run-up in the stock to trim our position. The company’s stock price subsequently fell sharply after Q4 2015 results failed to meet heightened expectations. We utilized the sell-off in Smith-Midland’s share price to again build our position at prices between $2.25-$2.35/share. Smith- Midland has since reported very strong results, with the company benefitting from increased infrastructure spending and the successful acquisition of a precast plant in South Columbia at a price below liquidation value. The company’s share price ended the year at $5.35 and was our best performer in 2016.
PICO Holdings (“PICO”) owns a portfolio of water rights in the Southeastern United States and also has a 57% ownership stake in UCP Inc., a publicly-traded homebuilder. PICO was added to the portfolio during the second quarter of 2016 and was highlighted in our Q2 2016 quarterly letter. We were attracted to the company given its portfolio of valuable water rights in growing metropolitan areas such as Reno, Phoenix, and Las Vegas. In addition, PICO had been the subject of significant shareholder activism in 2015 and early 2016 which resulted in positive corporate governance changes for the company. At the time of purchase, PICO had a market capitalization of approximately $225 million, an ownership stake in UCP worth over $80 million, and a debt-free balance sheet, implying a value for the company’s water assets of under $150 million. We felt that PICO’s water assets were worth a multiple of this amount and subsequently made PICO the largest position in the portfolio. The company had several positive announcements later in 2016 including the termination of the former CEO and the modification of the prior management compensation structure that was considered to be excessive. PICO also announced the sale of their legacy energy business as well as the sale of $12.5 million of water credits in Phoenix, Arizona. The stock price ended the year $15.15, resulting in a return of approximately 50%.
Maui Land & Pineapple (“MLP”) owns over 23,000 acres of land on the island of Maui in the state of Hawaii including 21,000 acres of land in and around the Kapalua Resort. The company was added to the portfolio in 2015 and highlighted in our Q3 2016 investor letter. We were attracted to the company due to its pristine land holdings located in and around one of the best resorts in Maui. The Company’s land assets are held on the balance sheet at prices from the 1920’s and 1930’s. Maui Land & Pineapple was overextended heading into the Great Recession and suffered from excessive debt and unprofitable projects. The company has since looked to clean up its balance sheet and has reduced its debt balance below $25 million from a high of nearly $100 million in 2009. With an improved balance sheet, the company is now in a position to capitalize on its enviable land holdings. Our conversations with management suggest the company will be very cautious and risk-adverse when pursuing new projects indicating management has learned from prior mistakes. The company’s stock price increased 32% in 2016 and we remain optimistic about future prospects.
The above post has been excerpted from a recent letter of Gate City Capital Management.
Performance for the period from September 2011 through August 2014 has undergone an Examination by Spicer Jeffries LLP. Performance for the period from September 2014 through December 2015 has undergone an Audit by Spicer Jeffries LLP. Performance for 2016 is unaudited. The performance results presented above reflect the reinvestment of interest, dividends and capital gains. The Fund did not charge any fees prior to September 2014. The results shown prior to September 2014 do not reflect the deduction of costs, including management fees, that would have been payable to manage the portfolio and that would have reduced the portfolio’s returns. Actual performance results will be reduced by fees including, but not limited to, investment management fees and other costs such as custodial, reporting, evaluation and advisory services. The net compounded impact of the deduction of such fees over time will be affected by the amount of the fees, the time period and investment performance. Specific calculations of net of fees performance can be provided upon request.