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The portfolio has taken a big hit today.
UHG announced it’s ending its strategic review process.
To be quite frank, it’s a bit of a mess.
Here’s what happened at the board level: After the special committee concluded its review, four independent directors told Michael Nieri (the controlling shareholder and Executive Chairman) they’d only stay if he stepped down as Executive Chairman and let the existing management team run the company.
He refused.
So now six of the seven independent directors are resigning - four citing their belief that current management is better suited to navigate the market without Nieri as Executive Chairman, one (Nikki Haley) citing other professional commitments, and another resigning immediately.
This feels more like a people problem than an issue with the economics of the thesis.
The thing about people is that they do silly things.
I estimated a 30% downside if the deal didn’t go through. It didn’t, and it ended up being -38% before I got out.
If I reflect on this trade, the key errors jump out.
While I believe I understood the company and the economics that could produce returns, this was only my second special situation investment.
Coming straight from a high after ALPH.L, which did work out earlier this year, I think I was probably slightly overconfident.
As a result, I sized the position larger than I should have.
Again, in my opinion, it failed on the people and not the thesis.
But my position sizing was too high for an event with a chance of permanent capital loss.
This was a mistake.
The second issue links to position sizing. This investment was too far of a step from the usual companies I invest in.
ALPH.L worked as a high-percentage allocation special situation because it was, in my opinion, set up to be a quality compounder if it wasn’t bought out.
UHG clearly wasn’t, hence why I exited the position as soon as I found out the news.
Oh well.
Live and learn.
And that’s what investing is all about.
I won’t be touching special situations for a while, that’s for sure. ;)
Better to stick to what I know.
And on that note, when one door closes, another opens.
This has given me an opportunity and a bit of a kick to rebalance the portfolio.
The UHG exit freed up significant cash, and I’ve used this moment to make some important changes.
I sold UBER - while it’s a solid business, I believe it has low asymmetry at current levels.
The risk-reward just isn’t compelling enough.
I also exited PYPL and CMG.
Both are solid companies, but the growth rates and hurdles in the thesis don’t compare with the other portfolio companies.
Better opportunities elsewhere.
CMG had an additional issue - it added to our oil and gas concentration. With our largest position already in that sector, holding CMG meant unintentional overexposure.
Concentration is good when it’s deliberate, not when it’s accidental sector overlap.
On the buying side, I’ve added [New Position].
The setup here is compelling: a solid core business that I believe offers roughly 100% upside to my fair value estimate.
But what really catches my attention is the optionality - potential datacenter infrastructure exposure that the market seems to be completely missing.
Below you’ll find the new portfolio.
Hope you found the transparency useful.
The mistakes are often more instructive than the winners.
Dom
Schwar Capital