investing utilizing ETFs has also contributed to creating these pricing “disconnects” since it is the mechanical flow of funds rather than any reasoned assessment of company’s valuation that determines where the investment dollars wind up. Those of us who have been around for a while have seen a variant of this type of strategy employed before; in the early 2000’s it was known as momentum investing and it ended poorly for most participants.
The example above was used to illustrate how in the short-term the stock market is often inefficient and how investors who diligently research businesses can be rewarded. In the case of Calgon Carbon, we were very certain given the favorable outlook for the industry, the multiples paid for acquisitions of very similar competitors and the skilled management at the company, we were getting a bargain. Our outcome with Calgon is by no means unique; over the years we have made many investments that have resulted in takeovers at significant premiums to quoted share prices.
In 2017 we increased our position in CNX Resources and initiated a new position in United Continental Holdings. CNX Resources is principally a natural gas producer operating primarily in the Appalachian Basin. The company owns over a million net acres of land in the Marcellus and Utica shales. Other exploration companies that lease land must make royalty payments and have to drill in order to maintain rights. CNX can be patient and drill when economically warranted. The company has reduced debt, spun-off its coal business and repurchased shares advantageously. Recent transactions for companies with similarly located land affirm the value of the assets. We believe the shares are materially undervalued. United Continental, like the airline business, has undergone a remarkable change in the last few years. There are fewer competitors, planes are almost always full and passengers pay for services that used to be complimentary such as seat upgrades and free bag check. This additional airline revenue is enhanced with a new, underappreciated line of business; the airlines generate a lot of revenue selling reward miles to credit card companies. This is a steady, non-cyclical source of revenue that has become material in nature. United now generates substantial free cash flow and profits. The company has repurchased almost 25% of the outstanding shares and recently authorized a new repurchase for an additional 15%. The shares recently sold-off as investors became concerned about additional capacity and its effect on margins. We believe this was overdone. If United continues to aggressively repurchase shares, they could repurchase 50% of the outstanding shares within the next five years. Even if United’s market capitalization- now at about $20 billion- were to remain unchanged over those five years, the shares could double with half the amount of shares outstanding.
The relative lack of volatility that has characterized trading sessions over the past year maybe coming to an end. The economy is accelerating, capital spending is up, inflation is up and interest rates, stuck for the last several years in neutral, are beginning a slow rise. In early February the market suffered its first meaningful correction- a 4.1% drop for the week in the DJIA- its biggest decline since January 2016. For the uninitiated and those new to investing, corrections and meaningful price declines can and will occur with regularity throughout a long- term investor’s horizon. They are impossible to time and must be accepted as an aspect of the stock market. The Wall Street Journal recently featured a quote from the former Fidelity