2015 was, much like 2014, a year of defense for the portfolio.

As few attractive securities

revealed themselves, cash stayed at a substantial level as compared to total fund value.
One area that did produce attractive risk/reward qualities was in the oil sector. As such,
the firm moved more assets into this industry and we are now fairly heavily weighted
towards the volatile commodity. I have no idea where oil prices will be in the short-term.
However, in the longer-term I find it extremely unlikely they wont be much higher. There
have been numerous write-ups on both the bull and bear case for the commodity. Most
excellently researched and written. One that I find most interesting is written by Cale
Smith and can be found at www.islainvest.com. Although I dont 100% agree everything in
the write-up, I agree with the overall principles.
As I sit here today I have a hard time finding assets that sell for attractive prices in relation
to their quality. This is the complete inverse of what I was finding in 2009-2011. Its a
frustrating position to be in. I enjoy spending my day researching assets and searching
the investment landscape for hidden treasures. It feels like at this time the landscape is
pretty picked over. As mentioned above, the plummet in oil prices has provided some
attractive assets, however I have allocated pretty much all I wish to this sector at this time
baring a slide in the stock prices of my favorite companies. Companies with Net Operating
Losses (NOLs) are another area of investment Ive been focusing on, which has led to the
initiation of a few of the portfolios holdings. Other than that, Ive been utilizing my time
learning new industries that may produce hidden treasures in the future.
Quarterly Review
Below is a mix of notes, bullets, and random thoughts I had while reviewing the most
recent quarters reports on some of the companies the firm owns. Some notes may not
make sense to the reader if they do not have prior knowledge of the names business.
They are not meant to be a stand-alone analysis.
Dawson
- Dawson expects demand to continue to be at reduced levels because of continuing
weakness in oil prices.
- 8-10 crews over the remainder of 2015 and into 2016, but with talks for new jobs later
in 2016 ongoing.
o Based on my model, aprox $20-$24 million in revenue per crew per year.
- Capex expected to come in below budgeted $10 million.
- Balance sheet continues to be very strong.
o End of 3Q 2015; Cash and equivalents $58 mill.
o Debt $12 mil.
o Working Capital $72.6 mill.
- Confirmed with board member that equipment is state of the art and will not be
technologically obsolete for years (Can last up to 20 years) unless some unforeseen
tech change happens
- FCF (NI+Dep-Capex)
o Annualized Previous 9 Months = $0.50/share
o Annualized Previous 3 months = $0.90/share

FCF generation shows up on balance sheet

Total Liabilities down to $45.5 million from $53 million
Current Assets up to $103.6 milion from $89 million

Overall Im very happy with Dawsons business performance during this downtown.
Balance sheet is improving while FCF remains positive. Ill be looking to add to my
position if stock price falls below $3 or stock price stays around current levels and next
quarters performance mirrors or improves upon 3Q.
Real Industry Inc
Since I never posted a write-up on Real Industry (RELY) Ill go ahead and give a brief
explanation as to why I believe it belongs in the portfolio. Recently RELY was an empty
shell with a boatload of NOLs from prior losses the previous business operations had. Sam
Zell got involved, new management got brought in, and now RELY is in the process of
acquiring businesses to take advantage of those NOLs. Its main, and pretty much only,
business at this time is the recent acquisition of Real Alloy. Real Alloy converts scrap and
dross into reusable aluminum. They make money both on the spread between cost of
scrap and rate they can sell the recycled aluminum for, and for tolling (doing other
companies recycling work for them for a fee). About 50% of their revenue is tied to
automotive. Depending on the value I give to the NOLs I get a per share valuation of
between $13 and $15. Perhaps over a longer time period, given the Six-Sigma initiatives
and excellent management, I could see this stock trade for between $17.50 and $20.
As for a review of the most recent quarter, theres not much to report. In the first full
quarter after the acquisition, Real Alloy posted $22.8 million in EBITDA, which is right on
track for my estimates. However, because of the drastic reduction in aluminum rates this
can be seen as a positive and proves how much productivity management has been able
to squeeze out to offset the reduced pricing. As for acquisitions, Id expect management
to report one major acquisition in 2016. On the most recent earnings call management
stated they are looking at 5 potential targets, 2 in the initial stages and 3 further along.
As of now Im not looking to add to the position, its already amongst my largest holdings.
However, should price continue to be driven down due to the aluminum price decline, Id
review my thoughts of adding more around the $7.00 price.
McCoy Global
McCoy is one that I have written up in the past and despite the large drop in stock price,
one I very much enjoy having in the portfolio. Whats interesting is that Im currently
experimenting with a Net/Net portfolio (discussed below) and because of McCoys recent
fall in valuation it qualifies for Net/Net status. This qualification comes despite McCoys
strong balance sheet and long track record of cash generation. These are the types of
companies Im happy to buy more of as the market devalues them further.

As far as analyzing the most recent quarter for McCoy, its as bad as can be expected.
Revenues came in at just over $21 million. Middle east has remained relatively stable, as
North American sales have fallen dramatically. After-market parts, which would be
expected to help stabilize revenues in this environment, havent gone up as a percentage
of revenue as much as anticipated. The reason quoted for this is the clients depletion of
inventories as they try to conserve cash. This is a short-term solution for the clients and
Id expect after-market part to increase as a percentage of total sales in the coming
quarters. Free cash flow for the most recent quarter was basically break even
($0.01/share) and for the trailing 9 months was positive ($0.10/share).
Going forward Id like to see FCF increase, or at worst not go negative, current assets
minus all liabilities stay strong, and management to continue to manage the strong
balance sheet effectively (i.e. not go after a poor acquisition). The recent sell-off may be
increased by end of year tax loss selling, but Im a buyer of McCoy around the $2.00 price
going forward.
Net/Net Portfolio
Given the lack of attractive assets for sale in the current market environment Ive been
spending some of my time researching more quantitative based investment approaches
and their results, particularly the Benjamin Graham Net/Net approach.
For those not familiar, this is a more quantitative approach whereas one buys stocks
where the market cap has fallen to less than the current assets (cash and equivalents,
receivables, and inventories) minus all liabilities, and this would represent the liquidation
value of the company. The upside of such a method is its more robotic and quantitative,
and it has produced significant returns (most of which is right after a recession when
theres a plethora of net/nets available). The downside is the method is tough to follow.
First, the investor is buying ugly companies that usually have a very good reason to be
selling so cheap. This makes it tough to pull the trigger on the purchase when your brain
takes over and says, ew, this is crap. Second, when the market is flying at a high
valuation, like today, there are not a lot of net/nets to choose. This results in either being
highly concentrated or holding excess cash.
Ive built a model portfolio that Ive been tracking so that I may test my process before
introducing it into the actual portfolio. As of now the model portfolio has 7 stocks, 5 of
which are still at a price that makes them a true net/net. Preferably the net/net portfolio
would have about 20 stocks equal weighted, but the lack of stocks in the portfolio reflect
the lack of net/net stock available and further boost the argument that the market is on
the high-end at this time. For a stock to be included in the net/net portfolio it will have to
meet the following criteria:
- 67% of NCAV (Net Current Asset Value = Net Current Assets All Liabilities), but I may
go up to 80% of NCAV for strong companies that are operating in a momentarily
beaten down industry (McCoy Global may fall into this category)
- Low Debt/Equity (Below 25%)

Operates in a stable market

An actual business or liquidation
Not excessively selling shares
History of profits
History of selling above NCAV (in the past 3 years)
Low burn rate (NCAV hasnt shrunk significantly over the past few years/quarters)

And What Id like to see but isnt a requirement:

- Cash greater than Market Cap
- Large insider ownership
- Company buying back shares
Going forward, I plan to provide a very brief write-up (less than a page) for companies that
I add to the net/net portfolio.
Real Estate
The plan when I went into investing full-time was to put some of the portfolio into cashflow producing real estate so that the distributions would provide income for the portfolios
investors. It can be emotionally very difficult to sell stocks that have gone below what you
feel is the intrinsic value in order to pay the bills. However, being a deep value investor it
proves difficult to find attractive real estate assets in the currently heated market. It can
be argued that the Federal Reserves decision to hold interest rates artificially low has
produced areas that may be described as a bubble as investors reach on the on the yield
curve and buy riskier assets in order to find the returns they require. This drives up prices
and down yields. History has shown that even the Fed cant hold these rates at an artificial
level forever and as they rise those holding the assets whos values have been propped up
by the Feds actions will learn the true value of those assets, sometimes as a very swift
pace.
As an example, in the market I live in today, Chicago, cap rates for decent B class assets
are in the 5%-7% range or lower. If short-term rates start to rise and, as banks have been
waiting for, they can raise loan interest rates, we can expect cap rates to rise as well.
Even if loan rates remain low for some unforeseen reason, investors will have other
options for returns as the yield curve lifts. Large institutions are already figuring 1%-3%
higher cap rates for their exit valuations in their underwritings.
A $1 million property with a 6 cap now, would be work $750k at an 8 cap. If that investor
needs to refinance for whatever reason (balloon payment due, adjustable rate going up,
etc.) and put less than 25% down, hell be underwater (ignoring principle pay downs for
simplicity). If he chooses to refinance, albeit at a higher rate, hell still need to provide
another $190k in equity to get back to 25% down. If he doesnt have the cash for the
equity, hell be a forced seller, and these are the situations I look for to buy.
I dont know what the true required returns on these assets are, but I feel theyre higher
than is being offered today. So I wait. Sometimes the hardest thing about investing is

patience. Its important to remember, as Buffett says, we dont get paid for activity, just
for being right.
Going Forward
I have no idea what 2016 will bring. I feel valuations of most assets are unrealistically
high. However, one thing missing from this extended bull market is investors sense that
asset values will go up forever. Im not sure if this means the bull market still has a ways
to go, or there will be a pullback without investors first experiencing that euphoric feeling.
As for the portfolio, I will continue to monitor current holdings and may buy more if prices
slide or sell if fundamentals or my faith in management deteriorates.