Ubiquity Networks made significant progress in its turnaround after a series of missteps in 2014-15. We presented the company at the January 2015 Manual of Ideas Best Ideas Conference; replay at Chris Crawford at Best Ideas 2015: Ubiquiti Networks (UBNT).
The company was founded by an ex-Apple engineer in his bedroom and in 10 years has been able to disrupt a number of communications hardware markets. Ubiquity is able to innovate faster than its much larger competitors and undercut them on price by crowd-sourcing its marketing and tech support functions while forging a more direct bond between its customers and R&D staff through a proprietary one-million-member community. We purchased our stake in 2014-15 when the company was out of favor and struggling with a number of problems that we thought were solvable. Most of the problems have now been addressed; momentum has returned to core product sales and new products are gaining traction. We think the company has a very bright future and believe the stock is still undervalued despite the large run. The stock remains heavily shorted; Street analysts remain almost universally skeptical and have a relationship with the CEO that resembles Trump’s relationship with the mainstream media. Continued strong execution will put more pressure on the bears.
Hallador Energy, an operator of coal mines and other energy-related assets, made a solid contribution this year. We added to this contrarian investment early in the year during the apex of bankruptcy fears for coal miners. Hallador, an Illinois basin operator, is much better positioned than most of its peers with its low-cost position, customer contracts, proximity to customers and railways, solid and improving balance sheet and superior, operationally savvy management team. The company has used the severe downturn and oversupply conditions in coal to acquire contiguous properties at very cheap prices and is poised to substantially benefit as stockpiles deplete and pricing conditions normalize. Hallador also owns a few hidden non-coal assets (to which we assign no value) that would accrete meaningfully in value if oil prices were to rise back above $60/barrel.
BioSpecifics was a repeat contributor for 2016 having also performed for us nicely in 2015. This underfollowed, unusually managed biotech owns royalty rights to injectable collagenase which is approved for treatment of two conditions and has a promising portfolio of trials for new indications. Their pipeline project with the largest end-market recently yielded excellent results in a phase-2b study. Unlike most biotechs, which burn cash, BioSpecifics has one of the lowest cost structures in medical science by outsourcing the expensive and capital-intensive activities to a strategic partner. The company is disciplined strategically and financially and is focused on maximizing long-term cash flow to shareholders. The stock has been volatile, oscillating between undervaluing the royalty streams and upside projects to valuing them reasonably.
Pegasystems continued its consistent execution in the business process software industry and became the subject of takeover rumors late in the year. This highly-innovative, lesser-known tech/services company had become an attractive bargain during the February sell-off, giving us the opportunity to add to our position; however, Pega has since rebounded so strongly that we now believe the market is valuing it reasonably.
Lending Club was our biggest detractor of 2016 and was a repeat offender from 2015. We closed out the position in Q2 and discussed our thinking in detail in that quarter’s letter, so we won’t repeat the entire history of the investment here. As an update, the company is working through its turnaround with new leadership and has made some significant steps in the right direction. Investor returns still need to be improved further via better up-front vetting of borrowers, and the platform needs to be scaled to demonstrate a healthy operating margin. The market is still large and promising, and Lending Club is still well positioned to take advantage of the opportunity to be the leading marketplace-lending platform. We eliminated our entire position in Q2 and harvested the tax loss. Later in the year we re-established a much smaller position based on an option structure with much less capital committed given the higher-risk/higher-reward nature of the investment relative to our original thesis.
Oaktree Capital Group was a moderate drag to our results this year. This credit-oriented alternative asset manager has a fantastic long-term performance track record, a culture that fosters long-term contrarian thinking and a great group of clients who share the company’s investment philosophy. The company manages $100 billion across a range of funds and holds a stake in the highly successful bond manager, Doubleline. Oaktree’s publically traded units have steadily declined in price for most of the past two years, initially because the market feared fallout from credit distress in the energy sector and then later because it feared there would not be enough credit distress to provide investment opportunity for Oaktree (damned if you have distress, damned if you don’t). If we’re undergoing a secular shift back to much higher interest rates, there will indeed be challenges for credit managers, but we believe Oaktree’s formidable investment talent, capital-raising ability and substantial dry power will allow it to navigate any transition well. The current unit price seems to be quite reasonable for a great investment franchise.
This post has been excerpted from the Crawford Capital Partners Q4 2016 Letter to Partners.
This update is for informational purposes only and should not be construed as investment, legal, tax or other advice. This letter is not intended as, and does not constitute, an offer to sell any securities or a solicitation of any person or any order to purchase any securities, which can only be made by accredited investors and qualified clients by means of the Fund’s Offering Memorandum, Limited Partnership Agreement and Subscription Documents, which describe, among other things, the risks of making an investment in the Fund. Investments in the Fund are subject to risks and uncertainties, including the risk of loss of principal as described in the Fund’s Offering Memorandum. Investors are encouraged to read the Offering Memorandum and direct any questions to management of the Fund prior to investing. There can be no assurance that the Fund’s objectives will be met or that losses will not be incurred. Past performance is no guarantee of future results. Holdings identified do not represent all of the securities purchased, sold, or recommended for advisory clients. This document is confidential and intended solely for investors and their agents.