As of year end, our five largest holdings are GAIA and in alphabetical order:

EZCorp (EZPW) – EZCorp was our best performing individual name in 2016, a title I suspect it will continue to hold for a long time after appreciating ~250%. I detailed the original thesis in our Q1 letter. It may be hard to believe there is still opportunity following a move of this magnitude, but the company operates in a recession proof industry and remains cheap on normalized free cash flow. Further, I believe there is still significant upside as the company has announced meaningful cost costs, and is now able to resume its focus on growth in the U.S. and Latin America, while potentially returning capital to shareholders. Lastly, EZPW has an aging controlling shareholder and in my judgement is the most attractive collection of pawn assets that could potentially be purchased by an aggressively acquisitive competitor.

Iteris (ITI) – Iteris was a top performer for us in 2016, having appreciated ~66%, and it has continued to please in the new year. I included a detailed slide deck on Iteris with the Q2 letter. The company has been executing very well with its traffic related businesses, and its “lotto ticket” agriculture business which we initially valued at $0 is reaching an inflection point, and could wind up being worth multiples of our original investment.

NOW Inc. (DNOW) – Now Inc., which appreciated ~51% during the year, requires a Darwinian perspective. The company is a leading distributor of consumable parts to oil and gas end users. As I am sure you aware, in recent years low oil prices have decimated oil drilling activity, which has in turn greatly curtailed DNOW’s business. However, with its rock-solid balance sheet and substantial liquidity DNOW is in an excellent position to mop up market share abandoned by weaker competitors and expand into more value add roles. The CEO, who left former parent-co National Oilwell Varco to go with DNOW during a 2014 spin-off, has proven his ability to grow a business through acquisitions, and DNOW is likely to be in a much stronger position when the energy markets turn once again. This may take years, but in the meantime, the company’s asset light model means that capital expenses are de minimis, and cash flows from liquidating inventories are robust.

Revlon (REV) – Revlon was essentially flat on the year for us, despite a wild ride in between. I detailed the thesis on Revlon in the Q2 letter, and recently presented a slide deck at the Manual of Ideas/Lattice Work “Best Ideas” Conference. The deck remains exclusive to conference participants at this point, but I will send it along shortly. Suffice to say that while the share price had gone nowhere through year end, my confidence has grown and I am excited to see what Revlon can do for our portfolio in 2017 and beyond.

The above post has been excerpted from a recent letter of Laughing Water Capital.


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