Friday, 24 January 2014

Sold Blue Sky Alternative Investments

In June last year, I described the rationale behind putting 16% of my portfolio into Blue Sky Alternative Investments (BLA) at $1.25 per share. Today, I'm quite pleased to report that I have sold out at $2.15, making this stock a 70%+ gain in just over seven months. It is true that this span of time is insufficient to determine whether my thesis about the business was ultimately sound, but I'm not going to complain about making a quick buck. 

Initially, I made the case that if assets under management (AUM) could reach $1 billion in four years' time, BLA might reasonably be valued at a market capitalisation of $132 million (three times higher than the then market cap of $40.6 million). Since then, AUM has grown from around $250-$300 million to $400 million at the latest count, which is well on its way to management's target of $500 million by the end of FY14. While this is good progress, I've been less happy about the two capital raisings conducted since I purchased BLA. 

There is something suspicious about raising $6.8 million from institutional investors at $1.40 per share and then going back less than four months later for another $25.6 million at $1.50. The stated rationale was to invest the proceeds in BLA's own managed funds, which is supposed to further demonstrate to potential clients that BLA has confidence in its own investment performance and therefore drive increased AUM. This may make some sense, but why the need for two capital raisings in such a short space of time? Then one needs to weigh up the dilutive impact of issuing new shares. In this case, BLA has raised significant amounts of money, which has resulted in the number of shares on issue rising from 32.5 million to 56 million currently, and therefore the market capitalisation has leaped up from $40.6 million to $123.3 million - almost the value that I had in four years' time!

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Consequently, the primary reason for selling out is due to a dramatically reduced margin of safety, which makes me uncomfortable to hold. Even if BLA manages to achieve a more than twofold increase in AUM to $1 billion over the next four years, the returns to future shareholders are unlikely to be commensurate with that increase anymore - as share prices rise, the returns of the future are brought forward into the present. Of course, it is quite possible that BLA will live up to the ambitious $2 billion in four years that management has cited, but banking on that level of growth to justify an investment at the current share price appears a bit too optimistic for me. I'm changing my forecast from blue skies to cloudy. 

This sale brings my level of cash to almost 28% of my portfolio, so it's back to the drawing board for new stock ideas. Fortunately, there are a few companies that I'm interested in, but it is quite possible none of them will find their way into my portfolio. The last time I felt I had too much cash, I went out and bought DSB, which has turned out to be a regrettable decision, so I'll do my best to exercise more patience this time around. At least it seems the Oracle of Omaha shares my weakness: I make my mistakes when I have a lot of cash around

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