JDPI Q2 2014 Letter to Limited PartnersVW Staff
JDP Capital Management LLC is a San Diego-based hedge fund manager founded by Jeremy K. Deal in 2011. The firm is a Registered Investment Advisor that manages a private limited partnership focused on deep value, distressed, and special situations within public companies. The value oriented hedge fund was up 22% in H1. Below is their Q2 2014 letter to investors.
J. Deal Partnership I, LP (JDPI) ‘s letter to limited partners for the second quarter 2014.
For the second quarter, J. Deal Partnership I, LP was up 9.73% net versus 5.23% for the S&P 500. Year-to-date the Fund is up 16.18% net versus 7.14% for the S&P 500. Since inception in October 2011, we have earned 71.84% after all fees and expenses, or 21.76% annualized.
JDPI – Review
We began the year with the mindset to: “expect the market to continue placing a premium on sustainable growth and predictable earnings streams of credible businesses for
the foreseeable future. As a result, there is tremendous incentive for us to continue focusing on ideas where the fundamentals, catalyst—and potential upside—has not fully surfaced in the numbers.”
Our outperformance in both the second quarter and first half was driven by concentrated positions in mispriced, non-tech growth companies. Each outperformer re-rated higher based on a corporate event or improved fundamentals previously not anticipated by the market.
Looking back on the half year, our best ideas would not have shown up in a traditional value screen when we invested. On the contrary, our underperformers screened cheap initially—and stayed cheap—because they failed to overcome mediocre-?to-?weak operating performance.
Since the crisis recovery started, investible capital has steadily crawled from under mattresses and piled into every asset class imaginable with the promise of a return.
Low rates, low growth, low volatility and fully priced assets continue to herd investor return expectations towards a mentality of “lower equals safer”.
The result is an investing environment—stocks, fixed income, private equity, etc.— that swiftly corrects valuation gaps resulting from changes in cash flows, return on invested capital, growth profile, etc.
JDPI: Portfolio Update
In April we sold DIRECTV (NASDAQ:DTV) for a 75% return (30% IRR) realizing long-?term capital gains. When we purchased the stock in February 2012 the market believed that a combination of Netflix and triple play cable offerings would severely weaken the Company’s U.S. best-?in-?breed paid television product and pricing power. Our price of $45 per share represented a valuation of 3.57x 2014 EV/EBITDA and, less than half of the $95 per share that AT&T agreed to purchase the company for in May.
In April we also sold Lanxess AG (ETR:LXS) (OTCMKTS:LNXSF) for a 10% return (10.45% IRR). Although the company’s technology for passenger vehicle tires will ultimately drive long-?term growth, we decided that a successful turnaround of the broader company could be years away, and that a higher time-weighted return could be achieved elsewhere with less risk.
JDPI: Performance drivers
Biggest contributors to our Q2 performance measured in total dollar contribution:
Compelling value arbitrage between public and private equity
This year we found two highly opportunistic situations to invest in world-?class small cap operators who made, and are making, transformative acquisitions for low single digit multiples of free cash flow.
Last quarter we invested in ALJ Regional Holdings, Inc. (OTCMKTS:ALJJ) via a private placement of $1.60 per share to finance the buyout of Las Vegas flooring retailer Carpets N More. At the time, ALJ’s stock screened “fairly valued” based on trailing earnings.
We liked the idea because the rearview valuation was not taking into account the future value of marrying HoldingCo-level tax credits with the recent Faneuil buyout acquired for a mid-single-digit multiple of FY 2014 EBITDA. The effect was a stock price with a forward single-digit P/E multiple before giving credit to the Carpets acquisition, which was purchased for a very attractive price relative to0 ALJ’s public valuation.
Following this theme is our newest investment in Carrols Restaurant Group, Inc. (NASDAQ:TAST). Just prior to our ownership, TAST raised fresh capital at 8.5x 2013 EBITDA to finance the roll-up of mom-and-pop owned Burger King franchisees for 3x—4x cash flow over the next few years.