What We Bought This Week, January 14th, 2011

This past week we added to three positions we already like. Boulder Total Return Fund (BTF) is one of the most heavily discounted closed end funds (currently 17.9%), and we’ve written about it before.

It pays no distribution and is therefore shunned by income-seeking closed end fund investors. In years past it paid quite a high distribution and used to trade at a considerable premium.

However, the manager did a secondary offering, the distribution was cut during the credit crisis, and it was abandoned by traditional income-seeking closed end fund investors. Over the past several quarters insiders have accumulated a considerable number of shares through the Ernest Horejsi Trust No. 1B and the Lola Brown Trust 1B and currently own 36% of the shares.

They stand to benefit substantially from any strategy that reduces or eliminates the discount (such as a reinstated distribution or share buyback). There is, however, no obvious catalyst and so this situation may not change in the near term.

We’ve been adding to our investment in BTF because it has a large percentage of its assets in Berkshire Hathaway (BRK-A); 27% as of last August, according to its website. BRK-A has languished while the broader equity market has rallied over the past few months, and we think BRK-A itself is offering interesting value.

Whitney Tilson has long been bullish on Berkshire, although his recent presentation is still worth reviewing. He shows that at current valuations the operating parts of the business are valued at a P/E of 8. So we’ve been adding to BTF since we think the BRK holding provides further potential upside for the stock.


Range Resources (RRC) recently presented at the Bank of Montreal Unconventional Resource Conference. We’ve liked natural gas E&P names for some time; natural gas is abundant in the U.S., cleaner than oil or coal, cheaper on a BTU-equivalent basis than oil and should be a key element in U.S. Energy Strategy (though one must concede that the U.S. doesn’t really have an energy strategy as much as a set of outcomes negotiated amongst stakeholders). The success of shale gas drilling technology has hurt drillers through depressed natural gas prices, so you have to focus on the low-cost, conservatively managed names. As we learn more about RRC we are becoming more comfortable with the quality of their management. RRC has underperformed its peer group over the past couple of years and we think represents good relative value at current prices.

Borders Group (BGP) is highly speculative and may well go bankrupt. It is a small investment for us, although we did add to it this week. Its current market cap is only 3% of revenues, and for those looking for a stock with an overwhelming consensus on its prospects, BGP is a candidate. If they can restructure their debt with publishers and other credit providers, they will gain time to restructure their business. If they can’t convince stakeholders that they have a plausible way to ultimate profitability, they will fold. But at its current price, we think the upside from survival is substantial and not correctly reflected in its valuation. We don’t think there is much company for this view – perhaps correctly, but maybe not.


Disclosure: Long BTF, RRC, BGP

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