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8th annual Springvalue investing congress
•May 6, 2013 • Las Vegas, NV
Size Matters – Smaller is BetterTim Eriksen, Eriksen Capital Management
www.ValueInvestingCongress.com
ERIKSEN CAPITAL MANAGEMENT
CEDAR CREEK PARTNERS, LLC
TIM ERIKSEN MANAGING MEMBER
MAY 2013
Size Matters: Smaller is Better!
Eriksen Capital Management - Disclaimer
NOT AN OFFER TO BUY OR SELL SECURITIES - Please note that this presentation does not constitute an offer of interests of Cedar Creek Partners, LLC. Such an offer will only be made by means of a Private Placement Memorandum to be prepared and furnished to the prospective investor at a later date. The statements in this letter are preliminary and subject to change and are qualified in their entirety by the terms of such Private Placement Memorandum. In the event of any inconsistency between this letter and the Private Placement Memorandum, the Memorandum shall control. All persons wishing to invest in Cedar Creek Partners, LLC must receive, read, and understand the Memorandum and execute the accompanying Subscription Agreements. The information contained in this presentation is confidential, has been prepared solely for the information of the persons to whom it has been delivered and should not be reproduced, distributed (except to the professional advisors of the recipient, for the purpose of rendering professional advice to the recipient) or used for any other purpose.
RISK FACTORS - An investment in Cedar Creek Partners, LLC may involve substantial risks, including the risk of loss. All of these risks are described in greater detail in the Private Placement Memorandum.
TAX RISKS - An investment in Cedar Creek Partners, LLC involves tax liability which will depend upon the limited partner’s individual circumstances. Prospective investors should read the Private Placement Memorandum and consult their own tax advisors with respect to the tax consequences arising from investment.
OTHER - The foregoing list of risk factors does not purport to be a complete examination of risks involved in the offering. Potential investors should read the entire Memorandum before deciding to invest in the partnership.
PAST PERFORMANCE MAY NOT BE INDICATIVE OF FUTURE PERFORMANCE, AND YOUR INVESTMENT RETURNS MAY VARY CONSIDERABLY FROM THOSE PRODUCED IN THE PAST. FURTHER, YOUR INDIVIDUAL RESULTS MAY VARY FROM THE FUND RESULTS DEPENDING UPON THE TIMING OF YOUR INVESTMENT.
Eriksen Capital Management – Overview
Founded firm in 2005. Based in Lynden, WA In 2010-11 Sold 25% of management firm to a group led by Zeke Ashton of Centaur Capital.
Started Cedar Creek Partners fund in January 2006. Education: M.B.A. – Texas A&M University ’97; B.A. – The Master’s College ’91
Experience: Walker’s Manual Inc. ’04-’06 - Covered unlisted,
Micro-Cap and Community Bank stocks. Peter Kiewit & Sons ’99-’04 - Administrative Engineer
on $600 MM Benicia-Martinez Bridge.
Tim Eriksen
Eriksen Capital Management – Fund Performance
Inception January 15, 2006. Through March 31, 2013. Net of fees and expenses. Nasdaq excludes dividends due to immateriality. S&P 500 returns measured by S&P 500 Depository Receipt Trust (SPDR) ticker:SPY. See Appendix A for additional information.
0.00% 2.00% 4.00% 6.00% 8.00%
10.00% 12.00% 14.00% 16.00% 18.00%
Cedar Creek DJIA Nasdaq Russell 2000 S&P 500
Average Annual Return Since Inception
Average Annual Return Since Inception
16.29%
4.92% 5.61% 4.89% 6.88%
Eriksen Capital Management - Approach
"Size is always a problem," Mr. Buffett told me last month. "With tiny sums [to invest], it's extraordinary what you can find. Most of the time, big sums are one hell of an anchor."
source: ‘Behind the Decision, a Lesson from a Mentor’, Wall Street Journal, Nov. 5, 2009
Size Matters: Smaller is Better!
Eriksen Capital Management - Approach
“If I was running $1 million today, or $10 million for that matter, I'd be fully invested. Anyone who says that size does not hurt
investment performance is selling. The highest rates of return I've ever achieved were in the 1950s. I killed the Dow. You ought to
see the numbers. But I was investing peanuts then. It's a huge structural advantage not to have a lot of money. I think I could make you 50% a year on $1 million. No, I know I could. I
guarantee that. But you can’t compound $100 million or $1 billion at anything remotely like that rate.”
source: ‘Homespun Wisdom from the Oracle of Omaha’, Business Week, June 25,1999
Conclusion: Smaller size helps performance!
Size Matters: Smaller is Better!
Eriksen Capital Management - Approach
“It is impossible to produce superior performance unless you do something different” John Templeton as quoted in The Outsiders by William Thorndike Jr., p.1
“If you spend your energies looking for and analyzing situations not closely followed by other informed investors, your chance of finding bargains greatly increases.” Joel Greenblatt, You Can Be A Stock Market Genius, p. 23
“ample investment opportunities may exist in the securities that are excluded from consideration by most institutional investors. Picking through the crumbs left by the investment elephants can be rewarding.” Seth Klarman, Margin of Safety, p. 54
Why is Smaller Better?
Size Matters: Smaller is Better!
Primary focus on companies with little coverage - Small Caps, Micro Caps, Unlisted Stocks, Spinoffs, Stocks <$5, etc.
- 500
1,000 1,500 2,000 2,500 3,000 3,500 4,000 4,500
$0 -100 $100-250 $250-500 $500-1,000 $1,000-2,000 $2,000-5,000
Number of Companies by Market Capitalization
Source: Capital IQ 2006 Market Capitalization (in millions)
Num
ber
of Com
pan
ies
Virtually Ignored
Approximately 60% of public companies have a market cap < $100 MM
Eriksen Capital Management - Approach
Historical Performance
For the 50 Year Period ending in 2011 $1 Invested in Large Cap stocks would have grown to $83
$1 Invested in Small Cap stocks would have grown to $263
For the 10 Year Period ending in 2011 Average Annual Return for Large Caps was 5.0% Average Annual Return for Small Caps was 9.1%
Size Matters: Smaller is Better!
See Appendix B for source
Eriksen Capital Management - Approach
Conclusion: Smaller funds have a structural advantage over larger funds since the smaller fund can reap the
benefits of investing in smaller stocks!
Size Matters: Smaller is Better!
Eriksen Capital Management - Philosophy
Bottom-up, concentrated value approach looking for discount to intrinsic value
Emphasis on free cash flow and earnings capacity
Ideal company is growing its intrinsic value, has pricing power, minimal capital requirements, high margins, sales growth, capable management
Ideally the company has a near term catalyst enabling us to capture the current discount
Typically start trimming before fair value is reached
Eriksen Capital Management - Philosophy
Why I am an Early Seller $100 Portfolio XYZ Corp 10% of fund (trades at 40% of intrinsic value) It doubles in price $110 Portfolio XYZ Corp 18.2% of fund (80% of intrinsic value) While I am delighted it doubled I have no desire to have a huge
position in a stock with a small discount to intrinsic value.
Stock Selection Process
Quantitative Qualitative
Philosophy Fundamental Value Investing seeking a near term catalyst.
Net Nets Liquidation Low P/B Low P/E EPV GARP Growth
While we have used, and are comfortable using, all of the above approaches, we have found that we obtain higher returns by focusing on Low P/E and EPV (Earnings Power Value).
Eriksen Capital Management
Current Idea
Eriksen Capital Management
What They Do
• Internet based bank that strives to provide all the services of a traditional brick & mortar bank with better rates, lower fees, and real-time online account access.
• Offers personal and business banking, investments, and loans • e.g. Free checking. $500 min., pays 0.55% APY, up to $6 ATM rebate
Eriksen Capital Management
History
• Founded in 1999. Based in Indianapolis, IN
• In 2007 acquired Landmark Financial – acquisition added retail mortgage lending operation which INBK then added to its online platform
• In 2010 expanded into Commercial RE lending
• Listed on NASDAQ in Feb. 2013
Eriksen Capital Management
Symbol INBK Total Assets 651 mm
Price $ 23.50 Shares o/s 1,925,000 Market Cap 45,237,500
ttm EPS $ 3.10 P/E 7.6 Book Value $ 32.62 P/B 0.72 Div. Yield 1.0%
Avg. Daily Volume 4,000
Eriksen Capital Management
Loan Mix
Residential RE Commercial RE Commercial Consumer
24% 4%
36% 36%
Eriksen Capital Management
Loan Mix
Fixed Adjustable Total
Real estate loans:
Residential 11,049 117,766 128,815
Commercial 40,248 44,670 84,918 Total real estate loans 51,297 162,436 213,733
Commercial loans 5,430 8,841 14,271
Consumer loans 125,081 1,405 126,486
Total loans 181,808 172,682 354,490
As of 12/31/12. Figures in 000’s.
Eriksen Capital Management
Loan Growth Hurts Earnings in the Short Term
Example: $500 MM asset bank that grows loan portfolio by $10 MM in qtr.
New Loans and Deposits $ 10,000,000 Average Length of Time on books 45 days Annual Interest Rate of Loans 5.0% Interest Income $ 61,644
Annual Cost of Funds on Deposits 1.2% Interest Expense $ (14,795)
Loan Loss Reserve 1.5% Loan Loss Provision $ (150,000)
Impact to Net Income $ (103,151)
Eriksen Capital Management
Deposit Mix
Regular Savings 11,583
Non-Interest Bearing 13,187
Interest Bearing 73,660 Money Market 202,388 CD's 211,542 Brokered Deposits 18,331
Total 530,691
As of 12/31/12. Figures in 000’s.
Eriksen Capital Management
Current CD Rates
Term Interest Rate APY
3 Months 0.35% 0.35% 6 Months 0.60% 0.60% 12 Months 0.85% 0.85% 18 Months 0.90% 0.90% 24 Months 0.95% 0.95% 36 Months 1.09% 1.10% 48 Months 1.24% 1.25% 60 Months 1.59% 1.60%
Eriksen Capital Management
Why is it Cheap?
• Unknown – no institutional coverage
• Lack of liquidity • Industry is out of favor
Eriksen Capital Management
Why I think it is Attractive?
• Built up Infrastructure and Personnel to Support Growth.
• Goal to be $1 billion in Assets by end of 2015
• Capacity to Grow without Dilution
• Low Valuation – 7.5x ttm EPS, 0.7x Book. Q1 EPS up 29% Year over Year. Est. $4 EPS in ‘14; $5 in ‘15
Eriksen Capital Management
Risks?
• Economic Downturn
• Interest Rate Risk
• Disruption to Their Information System
• Fail to Properly Evaluate Risks in Lending
• Regulatory Changes
Eriksen Capital Management
Symbol INBK BOFI Total Assets 651 mm 2,874 mm
Price $ 23.50 $ 39.42 Shares o/s 1,925,000 12,815,000 Market Cap 45,237,500 505,640,000
ttm EPS $ 3.10 $ 2.56 P/E 7.6 15.4 Book Value $ 32.62 $17.08 P/B 0.72 2.31 Div. Yield 1.0% 0.0%
Avg. Daily Volume 4,000 122,000
vs
Eriksen Capital Management
Questions?
Eriksen Capital Management
Management Fees: 1.25% Incentive Fees: 20% High Water Mark: Yes Hurdle: none Minimum Investment: $100,000 Lock Up: 1 Year Withdrawals: Monthly (45 day notice) Audit – Benson & Neff Legal – Richardson & Associates Administrative – Unkar Systems Prime Broker – BTIG Custodian – Goldman Sachs Independent Representative – Tom Vance, Vance & Blair LLP * Fee schedule effective 11/09.
Cedar Creek Partners
Eriksen Capital Management
Contact Information: Tim Eriksen Eriksen Capital Management 567 Wildrose Cir. Lynden, WA 98264 Tel: 360-393-3019 [email protected]
If you have any interest in Cedar Creek Partners
Eriksen Capital Management
Appendix A The S&P 500 Returns are reported using the S&P 500 Depository Receipt Trust (SPDR) which trades under the ticker symbol SPY, as reported on Yahoo! Finance. Reinvested dividends are included in these figures. A spreadsheet showing SPY performance versus the Cedar Creek Partners Fund is available upon request.
Current year results for Cedar Creek Partners are unaudited.
Nasdaq results exclude dividends due to their immateriality.
Past results are no guarantee of future results and no representation is made that an investor will or is likely to achieve results similar to those shown. All investments involve risk including the loss of principal.
Fund trade history available upon request.
Eriksen Capital Management
Appendix B *For the 10-year period ended December 31, 2011. Source: Standard &
Poor's. Large-cap stocks are represented by Standard & Poor's Composite Index of 500 stocks, an unmanaged index considered representative of the U.S. large-cap stock market. Small-cap stocks are represented by the S&P SmallCap 600 Index, an unmanaged index. Past performance cannot guarantee future results. Individuals cannot invest directly in any index.
**For the 50-year period ended December 31, 2011. Sources: Center for Research in Securities Prices, University of Chicago 1957-1993; Standard & Poor's, 1957-2011. Large-cap stocks are represented by Standard & Poor's Composite Index of 500 stocks, an unmanaged index considered representative of the U.S. large-cap stock market. Small-cap stocks are represented by the Center for Research in Securities Prices 6th-10th Decile of New York Stock Exchange from 1957 to 1993 and the S&P SmallCap 600 Index from 1994 to 2011, unmanaged indexes.