Senvest Wins Big on Gamestop

Anyone following Senvest recently knows that the company made a huge bet on Gamestop (GME), and it paid off big! Management finally divulged the details in the Q1 report just released.

The company accumulated 5.05M shares of GME stock over the fall and winter of 2020. That is 7.24% ownership in GME. The company hovered below $20 for all of 2020. In January, the only positive news was that Ryan Cohen, a big investor with lots of retail creds, announced three of his people were now on the board. But then, in late January, Wallstreetbets forum and Keith Gill really got into touting the stock and the 140% of stocks short. And the rest is history. We saw an epic short squeeze that only happens once a decade.

The following chart shows the meteoric rise of GME in late January. Based on the Q1 report, Senvest sold all of its holdings between Jan 22 and Jan 28, also shown in chart. Senvest's timing was almost perfect and the company managed to sell a portion at the very top of $380. Remember they had 5M shares. Depending on their exact selling price they could have made USD$1B. That's billion, with a captial B!

Senvest really did its homework on this. They even spoke with Ryan Cohen. Well done Senvest. I had no idea all this was in the works, but I am glad to come along for the ride. Senvest stock has quadrupled from the lows around when the company was building its GME position.

Today it trades at CDN$342, which is still only 52% of the book value of CDN$647!.

A Look at Senvest Capital

Senvest Capital is a company that I've discussed many times but not recently. Many things have happened since I lost wrote about it. So, I am going to review the company here.

Senvest Capital is well-known for being home to the Senvest Master Fund and the Senvest Technology Partner fund. The Mashaal family are majority owners of the company and these two funds are hedge funds managed by Richard Mashaal. This means that Richard Mashaal (through a company he owns) is the general partner. Senvest Capital is a limited partner in this enterprise. And there are also many LPs who are outside investors. The company also owns a lot of illiquid stuff like real estate, REITs, and private companies.

So by owning Senvest Capital, a shareholder actually downs several hedge funds and investments that the public don't normally cannot access.

So the pros and cons of buying this stock is, in principle, very simple. The stock trades at a tremendous discount to equity value — more about this later. And the investment management has an exceptional track record. However, on the negative side, the employee salaries and fees are very high, and they have never paid out dividends.

Another characteristic, which can be good or bad depending how you look at it, is that Senvest Capital's financial fortunes can be wild! The company earned CDN$(51.72) and CDN$39.16 per share in 2018 and 2019, respectively. And the first quarter 2020 has been a disaster, shareholders lost CDN$(129.38) per share! These are all due to the drop in market values of equities, be it realized or unrealized.

For the reset of this document I will refer to all amounts as Canadian dollars.

Senvest Capital promptly posts its monthly hedge fund resulte online. This gives us some idea of the company's performance. The Master fund lost 53% in Q1! No wonder its earnings were so bad. However, it has come back for Q2 and gained back half of the losses by August 1. The Senvest Technology fund was up 25% in Q2 and is positive for the year.

Just like Berkshire Hathaway, the main gauge of Senvest's stock value is the company's equity.

The company's stock should rise and fall proportionally with its equity. Senvest has traditionally traded at 60%-70% of equity. But the recent market drop has increased the discount significantly.

To illustrate the company's value, I have broken down the balance sheet into five components. The first is working capital. This is the safest part of the equity. Market conditions should not affect the value. The second component is the hedge fund portion of the company. The company consolidates the entire hedge fund value onto its balance sheet. So, it must also consolidate the amounts owed to the funds other partners as liability, as well as short positions. The third component comprises the illiquid assets including a lot of real estate, investments in private REITs and private companies. The company tends to put the illiquid investments onto its own books and more liquid investments into its hedge funds. The fourth component of the balance sheet includes assets and liabilities that don't fit in the above three categories. And the last componenent is the amount owed to Richard Mashaal as minority interest.

The following table shows the equity values of the five components at the end of 2019 and Q1 2020, the most recent balance sheet data. All values are thousands of CDN dollars.

	Aug 2020	Q1 2020	2019
Working Capital		29873.00	14284.00
+ Equity investments and other holdings		496424.00	818797.00
+ Real Estate and Illiquid Assets		125701.00	113107.00
+ Other assets minus liabilities		3750.00	-3533.00
- Non-controlling interests		16374.00	23265.00
= Shareholder Equity	780000 (est)	639374.00	919390.00
Shares	2630.00 (est)	2634.00	2652.00
BVPS	296.58	242.74	346.68
Price	135	110.00	172.25
PTBV	0.46	0.45	0.50

So the bulk of the Q1 loss appears to be from the second components which is mostly the hedge funds. The equity value went from $818M to $496M. And we already saw that Q2 hedge fund numbers are much better. The other assets are either liquid and safe, or are illiquid assets which I just assume didn't change in value. So then, the company has a lot of equity that are not tied to hedge funds. Therefore, the company did not do nearly as badly as the hedge funds.

But note the extreme low stock value when compared with the equity. This is not a reasonable valuation. And I don't know the reason for it considering that this was the case at the start of 2020 before the coronavirus impacted the markets. But there is a long-held perception that the company insiders do not treat the minority shareholders fairly. Company insiders are excessively compensated. The company has just 32 employees and they were paid $35 M. That is an average of over $1M per employee!

On top of this, Richard Mashaal, the vice-president of the company, is also paid his fees for running the GP of the hedge funds. The hedge fund charges 1.5% of assets plus a 20% share of profits as management fees. Senvest Capital gets 60% of that fee for providing the infrastructure and employee resources for the hedge funds. But still, 40% goes to Richard Mashaal's company.

The company does not disclose how much it owns in the hedge funds. Instead it lumps all the hedge fund holdings together with its own holdings. The company does show the the external portion of the hedge funds as "Liability for redeemable units" Based on this, I can calculate that the Senvest Capital portion of the hedge funds is about 35%.

The accounting for the hedge funds' fees can be quite confusing, so I've broken it down into a table for clarity. The following table shows who pays the fees and who receives it.

Recipient	External Partners Fees (65%)	Senvest Capital Fees (35%)
Senvest Capital Shareholder Equity (60%)	From: income, liabilities 39%
Minority Interest (40%)	From: income, liabilities 21%	From: income, shareholder equity 14%

So the Senvest Capital receives 39% from external partners and pays Richard Mashaal 14%. This means the company get a net 25% to pay employees salaries. In a down year where the only fee is the 1.5% of assets, one can see it is ony a few million, and that is only a tiny fraction of employee payroll. And even this amount is an overestimation of fees because $189M of assets owned by "employees" are exempt from fees.

On the other hand, Richard Mashaal gets 40% of the fees as minority interest, which was $5.2M in 2019!

Richard Mashaal has certainly been an incredible hedge fund manager. In his more than twenty years managing the funds, funds have grown from $5M to more than a billion under management. But Richard Mashaal and his father Victor already own more than 50% of Senvest Capital, and yet Richard still gets $1.7 M compensation from Senvest Capital, plus payments to him as minority interest.

In the end, there isn't much I can do as a tiny minority shareholder. I do not have the capital nor the time to be an activist. My cold calculation says that no matter the employee compensation, the company is a profitable enterprise in the long run. As such its assets, which are all investments, should not trade at 46% of equity, which is what it is trading at today. The current valuation is 55% off its peak a few years ago. To simply go back to 60% of equity, the shares will gain 33%. And I am confident it will happen sooner than later.

2015 Year End Results

By March every year all companies with fiscal year end on Dec 31 should have announced their annual results. Six of my holdings are summarized below. Overall all results are reasonable and make all six stocks overvalued. But I don't know why the market trades these stocks so cheap. I am not one to think too much of catalysts so I have no clue when will it end.

	EUPIC	PFHO	SEC	KCLI	Soundwill	KARE
Price (April 1)	€ 1.49	10.15	CAD$ 125.70	9.20	HK$ 9.20	€ 240.00
Marketcap M	€ 40.98 ($ 46.71)	8.12	CAD$ 354.47 ($ 270.59)	384	HK$ 2616.20 ($ 337.57)	€ 662.40 ($755.14)
PE	3.66	4.84	loss	13.15	loss	12.40
ROE	0.14	0.33	-	0.04	-	0.15
PTBV	0.51	1.58	0.53	0.58	0.16	1.89
Div Yield %	0.00	12.32 (one time)	0.00	2.70	2.17	3.54
Vol (basis)	0.51	6.89	1.06	5.52	2.41	4.13

The table summarizes the key metrics. I mostly focus on PE and PTBV. And for each company, one or the other shows the company is cheap. The last row gives the average daily volume divided by the total shares. The fraction is showed in basis points units. So PFHO daily volume, which is 6.89 basis points, is actually 0.0689% of total volume. I have found most companies with healthy volumes should trade at about 20 to 30 basis points (0.2% to 0.3%). The table shows that all the six companies trade at extremely low volumes. None are at 20 or 30 basis points. This may explain why the stocks trade so cheap, they have extremely small interest.

European Reliance Insurance (ATH:EUPIC) continued its growth streak by increasing pre-tax profits by 6.6%. Even better is equity growth at 13.3%. The stock is still super cheap. I presume the reason is the ongoing crisis situation in Greece. Warren Buffett used to say he could find stocks that trade at 2 or 3 or 4 times earnings. They exist now and you just have to look. Well, I found one here trading at less than 4x earnings! On top of that it is trading at half of book. Now if only the market can cooperate.

Pacific Health Care Organization (PFHO) had a rough third and fourth quarter. The stock went from the high twenties to as low as $6.50 after announcing that they will lose their biggest customer Amtrust in Q4. But after their official annual report, the stock managed to recover to $10.15. Q4 results show that subtracting Amtrust's waning revenues in the quarter, the company still did $1.2M in business. So at that conservative trend, the company can do $4.8M for 2016. At their current profit margin of 20%, that is still more than $1 a share. The company said in the report that they employed 36 people in mid-March. That is still more employees than they've ever had except for their record year in 2014. And the company is continuing its IT expansion. I am cautiously bullish on PFHO.

Senvest Capital (SEC:TSX) reported FY15 EPS CAD$(35.39), which is pretty much expected. However, the book value per share increased because of a 19% rise in the Canadian dollar relative to the USD throughout the year. That would give per share book value of CAD$271 at year end. And also with estimated hedge fund losses from the company's 13F and its website, we can expect expect book value after Q1 to be about $237. Today it trades at $127. So the stock trades at 53% of book. That is too low even by Senvest standards. And one big reason for the huge discount is the market's view that the company charges excessive fees. This year has been kind of flat, and so there is little if any incentive bonus. The salary drawn should be all the employee expense on the books which is $12.5M. Other operating expenses, which may include costs for expanding their New York office is $16.8M. I am not thrilled about the expense. But for a company that manages about $1.4B in net money for common shareholders, minority interests and hedge fund holders. One can argue the cost is reasonable.

Kansas City Life Insurance (KCLI) reported for the first time after delisting from NASDAQ. The company revealed it bought back 1.1M shares for an average price of $51.13. The shares included normal buybacks and the odd-lot tender offer of 906,500 shares at $52.50. There are now 9.6M outstanding shares. The company earned $29.2M for the year, which is flat compared to the previous two years. However comprehensive income was $(9.0)M due to unrealized losses in fair value of securities. The comprehensive loss along with the 1.1M reduction in shares, minus the dividend, meant that the book value per share was flat from 2014 to 2015 at $68.55. I anticipate that unrealized gains will be much higher in 2016 because interest rates will be lower than expectations at late 2015. Lower interest rates mean a higher valuation on the company's stock portfolio, with the drawback that the company may receive less revenue as people avoid the company's products due to their low yield.

Soundwill Holdings (HK:878) is a real estate company that renovates and develops buildings as well as lease properties, primarily in Hong Kong. It is dirt cheap on a price to book basis. But last year it turned a small loss mainly due to fair value adjustments on its investment properties and almost no property sales.

Soundwill owns some of the best retail properties in Hong Kong. But rents were ridiculously high. I heard some of their properties were the highest retail properties in the world! But now that less tourists are coming from China, rent prices have fallen. Along with rents the fair value of Soundwill's properties have also fallen.

In 2014, the company sold HK$2.5B worth of properties for a $1B gross profit. But last year they had virtually none. But that could be a simply a quirk of timing. The following table shows the company's yearly property sales as well as the total money held as deposit on properties under development. The sales seem to oscillate every two years, with a high amount on year followed by a low. But the amount under deposit on the low years does seem to foreshadow good sales the following year. So, I expect 2016 to have significant property sales as in 2014.

	2015	2014	2013	2012	2011	2010
Property Sales (HK$ M)	10.40	2466.00	199.00	1310.60	483.20	591.20
Deposits	735.00	421.00	1277.00	482.00	529.00	422.00

Karelia Tobacco (ATH:KARE) reported year end earnings of € 19.35 versus € 22.44 a year earlier. Revenues were up 15% and gross margins, net of excise taxes, were up to 14% from 12.7% a year ago. The difference in the bottom line is from a previously mentioned € (14M) adverse tariff decision. The appeal is ongoing which, if successful, would return € 14M to income.

Earnings on Tap: Senvest, Seaboard and Installux

Senvest 2015 Q1 earnings showed that book value per share went to CDN$312 from CDN$264 just 3 months earlier. The company attributed some of the gains to favourable currency effects. The Canadian dollar was worth USD$0.79 at Q1 period end and today it is worth about USD$0.80. On the other hand, the Senvest Israel hedge funds is up 8% in April. So I can loosely say that Senvest further gained value up to today. So, the stock today at CDN$181 trades at around 55% of book! In my experience as a DIY investor, companies with liquid assets rarely trade below 60% of book. So the 50-60% range is my floor on Senvest stock. And typically, companies that trade at those levels reside in countries that have questionable corporate governance. But I don't think Senvest has such severe corporate governance issues to warrant such a discount.

The company's funds mostly focus on small and mid-cap companies. And they have outperformed the Russel 2000 index. The company also has CDN$736M in short positions. That is 29% of the balance sheet versus 27% the quarter earlier. This partially explains how the company can outperform the market. They mentioned one successful short of a financial company. The company was exposed to the Swiss de-pegging to the Euro. The management did not take credit for predicting the Swiss de-pegging and their short was based on other factors. But to me it shows that they did their homework and put in a sufficient margin of safety, and odds are things like that will happen.

Seaboard Corp reported Q1 earnings of $28.49 per share versus $40.55 per share a year earlier. The earnings was a disappointment but not a surprise when considering that pork was one of the worst performing commodities in Q1, even worse than oil. Pork prices reached a high of $1.20 last year during the swine flu epidemic, but last quarter had fallen to $0.60. Now it is back to around $0.80. The pork segment earned an operating profit of $19.1M versus $60.5M a year earlier. But this is not an apples to apples comparison as the company sold a 50% stake in a pork subdivision to Triumph. Management also mentioned that low feed prices were helpful for the results. Corn prices are at 8 year lows and I am hopeful that it will stay that way.

Seaboard's Marine Division earned an operating profit of $7.5M versus -$7.4M a year ago. This is one area where the company's performance exceeds the performance of a commodity industry. The company hopefully will benefit from increased trade with Cuba as they operate a huge facility Miami with a new 25 year lease.

	STAL
Price	€ 233.000
Market Cap	€ 70.72 M (USD $ 80 M)
P/E TTM	8.3 x
Div yield	3.4 %
P/BV	0.99
ROE	12.0 %
ROIC	13.1 %
LT Debt/Equity	0.07

The Searboard Trading and Milling Segment had a $9.2M loss from a affiliate in Brazil. This affiliate looks to be a continuing problem. We shall see how management handles it in the coming quarters.

Installux reported year end 2014 results that shows an improvement in profits despite a difficult economic climate. Sales were basically flat. My contrarian mind tells me that Europe could be the surprise in the coming several years. With the continuing QE by the European Central Bank money will flood Europe just like it did for America. I believe this will result in multiple expansion throughout Europe. Installux at 8.3x earnings is certainly a candidate for significant expansion. An expansion to 12x is very reasonable, and that would mean a 50% rise in stock value.

Earnings on tap: McRea Industries, Senvest, EUPIC, CMH, Putprop

McRae Industries (MCRAA) recently reported H1 2015 results. Revenue in H1 was $57.31 M versus $58.26 M the previous year. And the gross margin was 28.1% versus 30.9% the previous year. This resulted in a H1 income drop of $3.80 M versus $4.55 M the previous year. Despite the slight disappointment, management tone was upbeat. They attributed the lower margin to two main factors. The first is higher costs associated with hiring and training new personnel, which is encouraging because it says they are expanding capacity. The second is due to higher import costs, which is worrying. One would expect that with the dollar getting stronger and stronger that import costs would decrease. On the other hand if most of their imports is from China then that would not apply as the Yuan is actually appreciating versus the dollar. The company did express optimism that demand remain strong in all product segments, so this year results should be on par with last year's record results.

Senvest just reported 2014 results which was as expected given the company posts the results of its funds monthly. Shareholder's equity at year end stands at CDN$738 M or CDN$264 per share. The company currently trades at 64 % of year-end book value. However, it should be even lower considering that after Q1 2015, the Senvest main funds Senvest Partners is up 7% and the Senvest Israel Partners is probably up around the same. The stock today probably trades at less than 60% of book!

Senvest	year end 2014	year end 2013	year end 2012	year end 2011
Common equity (CDN$ M)	738	565	331	263
yoy equity gain	31%	71%	26%
Employee compensation (M)	32	43	12.5
Compensation as a percentage of equity	4.3%	7.6%	3.8%

Senvest is a steal in my opinion. But, there is a lively debate in stock forums and the blogosphere whether the stock is indeed undervalued. The debate centers on whether the management deserves the compensation for the alpha, or lack of, that they generate for their portfolios. The above table shows the employee compensation (management fees) for the last 3 years and their percentages of equity. The fees are from the consolidated balance sheets which is shared by not just the common shareholders but also the outside owners of the Senvest funds and the minority interests. I estimate that the outside owners pay about 1/3 to 1/4 the management fees. And the minority interest is another 10%. So overall, the common shareholders directly pay around 60% of the total employee compensation. So, with this in mind, the fees are around 2.5% in a bad year, when incentive bonuses do not kick in, and it is around 5% in a good year, when incentive bonuses kick in. I think that is reasonable. Back in the day, when I was still buying mutual funds in Canada, the mutual fund management expense ratios could run as high as 2.5%!

I'll be watching the employee expense numbers closely in the coming quarters as the company also said it is expanding its work force in New York.

European Reliance of Greece (EUPIC:ATH) reported earnings of € 0.37 in 2014 versus € 0.35 a year ago. Equity grew to € 70M from € 58M a year ago. This means that the company is now selling for 1/2 book! No doubt the underpricing is due to the ongoing Greek debt crisis. I definitely need to think of the company's contingencies in the event of a Greek exit from the Eurozone, because if I can access the downside I can have a better gauge of whether this company should really be priced at 1/2 book.

Next up are my two South African holdings. CMH, an auto retailer, pre-announced that 2014 headline earnings would be between R2.04 and R1.88 versus R1.58 a year ago. Actual EPS would be between R1.73 and $1.57 versus R1.57 a year ago. Beyond that the company didn't give any more details. So it appears that the company has some one-time charges in the last year, which lowered earnings in a otherwise excellent year. Today the company trades at 9x earnings.

My other South Africa holding Putprop reported sales in line with last year. But a flurry of news made me just too scared and I sold. I think real estate companies are not for my style of investing and it'll be a while before I'll buy another. In the last six months Putprop reported its primary customer was in arrears with rent. It also announced it was doing a rights offer at R6.30 when the stock was trading at R7.00. However, when the rights offering time came, the stock was trading at R6.20! And several board members were replaced at around the same time. All these borderline red flags and the stock's poor performance made me give up on Putprop.

Why I Bought Senvest Capital

I've had trouble finding good values in the Canadian currency portion of my portfolio. In it I owned Andrew Peller (TSX:ADW.A) a Canadian wine producer for the last 1½ years. In that time the stock has returned 15%. However, that is still an overall loss in my "base" currency which is USD. The Canadian dollar depreciated by about 20% in the same period versus the USD.

Wine makers are in a very competitive capital intensive business anyway. I doubt ADW can have outstanding gains in the coming years. Don't get me wrong, it is a decent investment, but nowadays when I make an investment I expect to beat the market.

For this reason, I traded in my ADW for Senvest Capital (TSX:SEC). Senvest Capital is a Canadian investment firm, it owns several subsidiaries. The biggest two are basically hedge funds. One is Senvest Master Fund LP which operates out of New York, and Senvest Israel Partners which invests in Israel. Senvest is a well-known secret in the financial blogsphere. There are numerous writeups about it; I list them below. This article will mostly just summarize what has been written.

Senvest got attention several years ago when it was having very good results and growing equity nicely. I first read the glowing reviews about it 1½ years ago. Since then the the company results have exceeded the most optimistic expectations. The company grew equity from CDN$ 358M in 2012 to CDN$ 630M in 2013. After the first 9 months of 2014 equity grew to CDN$ 684M. The company's 2014 year end results are not out yet, but the fund's results are out. The Master Fund grew by 79% and 22% in 2013 and 2014 respectively. And the Israel Fund grew by 43% and 1%. This hints that the parent company's 2014 results are at least satisfactory. Since inception more than 10 years ago both funds returned more than 20% net of fees!

The parent company Senvest Capital owns 43% of the Master Fund and 48% of the Israel fund. The Master fund is a long/short fund, with about USD$1.4B in over 100 holdings. The fund holdings are known because as a US based company it is required to report its holdings. They are an eclectic bunch of companies with a lot of exposure to tech and pharma/biotech.  SEC does not require funds to reveal short positions but it is around $300M. Whatever the fund is doing is original and excellent. And it is even better that I don't understand it, because if I did I could buy those holdings myself without a middleman.

The Senvest Israel Fund is also attractive investment to me because Israel is an growing and stable emerging market. I have looked into some Israeli companies. But nothing really attractive stood out. And even if I found something, investing in Israel is not easy. The one brokerage that I can use to invest there charges about USD$130 per transaction plus the currency exchange and spread. So, something like the Israel fund is my best way to ride with Israel at a reasonable cost.

The two funds however are still hedge funds, and as all hedge funds, they are expensive. The fee is 1.5% expenses plus 20% of gains as performance incentive fee. I don't think hedge funds in general are a good proposition for that reason. But admittedly, even with that, the Senvest funds have merit.

But there is even more reason that Senvest is a great investment. At the current price of CDN$163, it is selling for 2/3 book! Since I heard about the company, I estimate book value increased by 60% and the share price increased by the same. So in that time the company is equally mispriced. It does appear odd that such a mispricing exists. But I don't fret as to why. As a value investor my job is simply to profit off mispricing.

Seeing as Senvest is a business that makes money from capital gains and dividend income, I found it instructive to see how much of the gains flows back to the Senvest Capital shareholders. The Senvest Capital parent company owns RIMA Senvest Management which manages the investments of the hedge funds and gets the fund's 1.5% and 20% fees. However it keeps only 60% of the fees, the remaining 40% goes to Richard Mashaal whose family owns half of Senvest. So 20%*40%=8% of the investment gains goes to Richard Mashaal as a performance incentive and shareholders can claim the remaining 92% of the gains — for simplicity I ignore salaries and incentives for the other members of the management team. The previous several years report shows that the company's gains are taxed at about 10% rate. This means the shareholder keeps about 82% of the investment gains. And because the stock price is 2/3 of book value, the shareholder gets actually gets 82% ÷ ⅔ = 123% of the investment gains. The following tables compares Senvest Capital stock versus investing directly in the Senvest holdings versus someone who is able to invest in a hypothetical mutual fund that does the exact same thing as the funds and therefore gets the same performance before fees.

	Investment in Funds	Senvest Capital	Mutual Fund
Equity	100% (neglecting expenses)	150%	100%
Gains	80%	123%	100%

Admittedly there is a lot of hand-waving approximations in these calculations. But it shows that the Senvest Capital stock is so cheap that it outweighs the tax penalties of investing through a corporation and the high hedge fund fees.

The biggest risk in this investment, in my opinion, is the performance of the funds. While in theory hedge funds are suppose to hedge the upside and downside, Senvest's funds do the opposite. They are more volatile than the market; the performance will exceed the market during up years and be much worse during down years. That has served the company well in the last two decades, but I fear the funds may suffer some awful permanent loss of capital in a future downturn. But of course the company does have the margin of safety. As well, the company has other investments outside of the hedge funds. For example, it owns unlisted companies as well as REITs. These hopefully will have some uncorrelated risks to the hedge funds. In addition, the rest of my portfolio should have uncorrelated risks from Senvest. I run a relatively concentrated portfolio with about 20 main holdings. And as such I consider risk management paramount.

Below are some useful articles on Senvest.

A recent Barron's article. An earlier Barron's article.
A dated article by oddballstocks
Value Investors Club 2014 article.
Barel Karsan 2015 article.