By Rupert Hargreaves. Originally published at ValueWalk.
Jason Dunn, the portfolio manager at value hedge fund White Bison Capital, writes in the firm’s full year 2016 letter to investors that he and his team seek to generate “long term average portfolio returns of 15% or higher, net of fees and expenses, while protecting against the risk of permanent capital loss”.
To outsiders this may seem like an unrealistic goal, especially considering the rest of the hedge fund industry’s lackluster returns over the past few years. However, with five years of history now behind White Bison, it’s clear that this hurdle is not too high for Dunn and his team.
For the last five year, the Colorado based firm has achieved an average gross return-on-investment of over 18% annually, and in the first three years of operation, the gross return-on-investment was approximately 37% per annum, with 2016 being the worst year with an 18% return.
In 2012 the hedge fund returned 29%
2013- 43%
2014 – 37%
2015 – 24%
Unfortunately, White Bison’s returns have dipped over the past 24 months thanks to its investment in Natural Grocers, which like the rest of the retail sector, has struggled in recent years. Dunn spends some time in his fully year letter explaining why firm still likes Natural Grocers despite its recent problems and that the “trough in fundamentals is passing.”
White Bison Capital: Value Fund With 18% Annual Returns
Natural Grocers problems began in 2014 when the company began to suffer from the oil price downturn. As many of the company’s stores are located in highly oil-dependent states, Natural Grocers became an innocent casualty of the war between OPEC and shale producers.
The group’s problems have been compounded by other retailers’ expansion of their organic offerings and food price deflation. In short, Natural Grocers has faced the perfect storm since 2014. The company has responded to these pressures by decreasing costs, slowing expansion plans and leveraging overhead costs.
White Bison’s analysts see hidden value in the group’s expansion drive. As new stores are near term cash dilutive, growth in recent years is only just showing through in cash flows. As a result, over the next six to twelve months Dunn and team believe “with re-accelerating comparable store sales growth and cost efficiencies, cash flow should grow rapidly.” By 2019, the team believes after-tax cash flow per share should be at least $2.50 to $3. It is also notable that management has recently been increasing their stakes through open market purchases and the company has recently implemented its first ever share repurchase program.
According to White Bison’s full-year 2016 letter, at year-end, the company was 74% invested in ten companies (notably the highest level of investment since inception), one of which is the above covered Natural Grocers. Dunn writes in his letter that when looking for investments, the firm will only consider buying a stock that has a minimum potential return of 15% per annum, and in most cases the equities selected have the potential to generate 20% or more through intrinsic value growth potential, valuation multiple accreditation and catalytic events for intrinsic value realization.
As well as Natural Grocers, another stock White Bison currently likes is Apache.
Apache is the firm’s only oil and gas investment. The position is a play on Apache’s oil and gas acreage in the Permian basis, specifically the company’s Alpine High play. Apache’s total net acreage in the Permian is 1.7 million net acres, making it the third-largest landowner in the region after Chevron and Occidental.
In their Q3 letter the hedge fund opined:
We recently reread Seth Klarman’s Barron’s op-ed from February 1999 (here). We found it particularly relevant today, including by illustrating the dramatic difference in the way opportunities and risks may be viewed depending on one’s time horizon.
However, White Bison Capital, is finding value in individual stocks and believes that there is plenty of value to be found here with the estimated net asset value per share for Apache of $100, nearly double where the stock is today. Even with oil at $50 to $60 per barrel the firm believes the stock can produce a return of 20% per annum going forward.
The post White Bison Hit By Natural Grocers Has Worst Year Ever (UP 18 Percent) appeared first on ValueWalk.
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