Our material long positions (>3% of the portfolio) at the end of January were as follows (in order of size): Trex Co. (TREX), Alliance Fiber Optic Products (AFOP), Caesarstone Sdot-Yam (CSTE), American Vanguard (AVD), Core Laboratories (CLB), Mesa Laboratories (MLAB), Colfax Corp. (CFX), Eagle Materials (EXP), Trimble Navigation (TRMB), Kirby Corp. (KEX), Primoris Services Corp. (PRIM), Masonite International (DOOR), Chart Industries (GTLS), Materion Corp. (MTRN), Valmont Industries (VMI), NOW Inc. (DNOW), Hudson Technologies (HDSN), and Geospace Technologies (GEOS).
There are several newly-material names on the list: Core Laboratories (CLB), Mesa Laboratories (MLAB), Colfax Corp. (CFX), Masonite International (DOOR), and Materion Corp. (MTRN). We have been long CLB and CFX for a couple months but recently upped our positions to material status. We reloaded MLAB after having trimmed the name at much higher levels a few months ago, and we revisited DOOR (also at much lower prices) after being completely out of the stock for several months. MTRN is an altogether-new long position, but long-time readers of our letters will know this is a name we have trafficked in frequently in the past.
As for a review/update on what these companies do and why we like them… Core Laboratories provides reservoir description/management services and production enhancement services primarily to the oil and gas industry. Needless to say, CLB’s has been hit hard by crude’s freefall; however, 1) CLB dominates its markets (and as a result, earns more than 20% operating margins in better times); 2) has no debt and a sizable cash position; and 3) is somewhat of a secular growth story because it helps maximize well output/efficiency.
Mesa Laboratories has two businesses: instrumentation and biological indicators. The instrumentation business includes a variety of highly-niche equipment, such as torque testers, calibrators for dialysis machines and continuous monitoring devices (for controlled environments such as cryogenic storage). Biological indicators look like litmus test strips and are used by manufacturers to ensure sterile production environments. Like CLB, MLAB dominates its niches and earns more than 20% operating margins and returns on capital. Besides just owning good businesses/products, MLAB benefits from increased process/quality control regulations. The management team also has a solid track record of consolidating peripheral niche companies/markets under one umbrella.
Colfax is a company we have had our eyes on for a few years now. Until recently though, we always thought investors’ expectations for the company were too high. The reason expectations have come down in the past year or so is that one half of CFX’s business revolves around selling equipment to downstream oil and gas, chemical and other process facilities, and the other half entails selling welding equipment and consumables to industrial end markets. In other words, CFX’s end-market environment has been pretty awful. That said, we think CFX is managing through the cyclical headwinds as best as possible, and longer-term, we expect the company’s largest shareholders (the Rales brothers) and management team to repeat the roll-up strategy they perfected at industrial dynamo Danaher (DHR).
Masonite, as mentioned, is a stock we owned in the past and made a nice return on, but investors’ expectations got too high, so we sold the position and waited for a better re-entry point. Thankfully, the stock has pulled back significantly in recent months (from about $70 in July 2015 to about $45 currently). In our view, what has haunted DOOR recently is the same thing that haunted another long of ours, Eagle Materials (EXP)— investor fears of a slowdown in residential construction and a loss of pricing power. In both cases, we think the residential construction backdrop remains very favorable (home starts are still well below historical norms), and while pricing may not be as strong as people once hoped, the trend is still upward and the operating leverage to be provided by that pricing remains attractive.
Last but not least on the new longs list is Materion. As mentioned, we have trafficked in MTRN shares many times in the past, and to be honest, it has usually been on the short side. While we still would not describe Materion as a high-quality business, we think the stock’s decline (from $40 to the low-$20s in the past 10 months) is overdone and ignores the fact that the company’s higher-margin markets are doing well and/or are getting better— e.g., telecom equipment, auto and defense.
The only material long in December to fall off our list was Graham Corp. (GHM). Although we don’t think GHM’s fundamentals will get much worse (they sell heavy-duty capital equipment mostly to refiners and chemical facilities), we already have plenty of indirect exposure to the oil and gas market. We also worry that GHM, due its dependence on a strong capital spending environment, will be one of the last to rebound with oil and gas prices.
The above post has been excerpted from a letter of Liberty Park Capital Management.
This monthly letter, furnished on a confidential basis to the recipient, does not constitute an offer of any securities or investment advisory services. It is intended exclusively for the use of the person to whom it has been delivered by Liberty Park Fund, LP and it is not to be reproduced or redistributed to any other person without the prior written consent of the Fund.
This information has been compiled by Liberty Park Capital Management, LLC and while it has been obtained from sources deemed to be reliable, no guarantee is made with respect to its accuracy. The Fund does not represent that the information herein is accurate, true or complete, makes no warranty, express or implied, regarding the information herein and shall not be liable for any losses, damages, costs or expenses relating to its adequacy, accuracy, truth, completeness or use.
This monthly letter is subject to a more complete description and does not contain all of the information necessary to make an investment decision, including, but not limited to, the risks, fees and investment strategies of the Fund. Any offering is made only pursuant to the relevant private offering memorandum, together with the current financial statements of the Fund, if available, and a relevant subscription application, all of which must be read in their entirety. No offer to purchase interests will be made or accepted prior to receipt by an offeree of these documents and the completion of all appropriate documentation.
Liberty Park Fund, LP’s 2011 returns are audited; however, all other figures are estimated and unaudited. Net results reflect the net realized and unrealized returns to a limited partner after deduction of all operational expenses (including brokerage commissions), management fees and performance allocations. Performance data assume reinvestment of all distributions. Actual returns will vary from one limited partner to the next in accordance with the terms of the fund’s limited partnership agreement. Past performance is not indicative of future results and investors risk loss of their entire investment. Performance results are shown for the period from February 2011 through January 2015.
References in this presentation are made to the Russell 2000 Index for comparative purposes only. Liberty Park Fund, LP may be less diversified than the Russell 2000 Index. The Russell 2000 Index may reflect positions that are not within Liberty Park Fund, LP’s investment strategy.