Post-Mortem: Itasca Capital

An asset play gone wrong

 

Background

In the middle of July I began buying shares of Itasca Capital, a nano cap Canadian company whose asset value was backed by an investment in a holding company (1347 Investors LLC) which owned common shares and some warrants of the construction company Limbach Holdings. The thesis was simple. Itasca was priced at a decent discount to the net asset value (NAV) of its holdings and unless Limbach’s stock cratered the NAV would remain stable. In the middle of November I sold my shares at a 35 percent loss. Since then the stock has declined an additional 35 percentage points for a cumulative return of minus 70 percent.

In this post I take a look at the mistakes I made, what lessons I have learned and my thoughts about Itasca Capital goin forward. 

So, what went wrong? 

Well to put it simply, Limbach started running into operational issues causing profitability in one of their important business areas to plunge. This in turn, caused Limbach to violate covenants of their credit facility requiring them to refinance it lowering the principal amount and a shortening the maturity. This might not sound catastrophic until we look at the stock price which has declined to just below $4 a share from $11,65 per share in mid-July. This corresponds to a return of -66 percent, yikes. 

As I researched Itasca Capital I never bothered looking deep into Limbach instead I was satisfied the company appeared reasonably valued at a glance. There were also decent write-ups arguing Limbach was undervalued and that further strengthened my belief that it was somewhere in the range of fairly valued or undervalued. In retrospect, this sloppy assessment of value was my biggest mistake. I also felt a false sense of security because Itasca’s largest shareholders are both “Warren Buffett wannabes”. A small consolation is that Itasca was not a large holding in the portfolio, just below a 4 percent position, which means the impact on the overall portfolio is relatively limited. 

Key Takeaways 

  • It does not matter if the price is far below asset value, never compromise on analyzing the underlying businesses.
  • Just because people I think are capable own a majority stake in the company does not automatically make it less risky or more likely to pay off. 
  • Fight your confirmation bias and avoid falling in love with huge discounts.
  • Limit the size of asset-oriented investments like Itasca Capital to a small part of the portfolio when the value is supported solely by financial assets.

Going forward

I want to note there is a possibility that shares of Limbach, and by extension Itasca Capital, offer compelling value at these prices and that I was incredibly stupid to sell my shares. My response to that is: Maybe, I do not know. What I do know, is that my case for owning Itasca evaporated when Limbach’s stock price declined to the point where it impacted the NAV. I decided to sell my shares because the original investing premise no longer seemed sensible to me. 

To own shares of Itasca today means an investor needs to be very, very confident about the value of Limbach, which I am not. Also, because this was never a potential long-term position for me, I have no interest in attempting to analyze Limbach to form an appraisal value. I believe my time is better spent researching other ideas in my research pipeline.

For anyone who want to dig deeper into the whole situation surrounding Itasca Capital and why it appeared to be an interesting investment; I recommend reading this excellent piece over at the Alpha Vulture blog.

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